reproduced with permission of the copyright owner. further reproduction prohibited without permission. from the editor fry, fred l journal of small business strategy; spring/summer 2005; 16, 1; abi/inform complete pg. 0_6 table of contents 1 entrepreneurial orientations as the determinant of entrepreneurial marketing behaviors pitsamorn kilenthong, university of the thai chamber of commerce claes m. hultman, ȫrebro university gerald e. hills, university of illinois at chicago and bradley university 23 customer-firm interaction and the small firm: exploring individual, firm and environmental level antecedents saurabh srivastava, university of north texas anat barnir, university of north texas 51 family business ceo succession: examining personal retirement expectations jamie d. collins, sam houston state university william j. worthington, baylor university john e. schoen, schoen family foundation 71 entrepreneurial orientation and learning in high and low performing smes timothy pett, rollins college jim a.wolff, wichita state university 87 critical success factors of sme internationalization tarun bose, khulna university strategy table of contents page title/author(s) i the search for opportunities by small business owners laurence g. weinzimmer fred l. fry paul c. nystrom 15 when wal-mart comes to town: a look at david's response to the arrival of retailing's goliath jeffrey e. mcgee troy a. festervand 29 organizational culture of small retail firms patricia m. kosters mary lynn damhorst grace i. kunz 53 export entry in small companies: effects of timing on strategy and performance candida g. brush 69 entrepreneurshipin manufacturingin kenya: characteristics,problems and sources of finance kenneth r. gray william cooley jesse lutabingwa 87 small and medium-sized firms'irst interaction with government: an exploratory study ronald g. cook dale r. fox siiiavezy table of contents 1 new strategies for inner-city economic developments initiative for a competitive inner city michael e. porter 5 initiative for a competitive inner city: the national business scltool network monica rivera dean marilyn l. taylor 14 the sntall business institute program: high impact entrepreneurship education charles h. matthews 23 exploiting the interne(: strategies and frameworks for a small business vivek choudhury dennis galletta 44 improving profitability of very small and small firms: the impact of quality practices in tire human resource area ronald cook radha chaganti cengiz haksever 57 small business solutions: building and leveraging a competitive intelligence capability lvitltout going broke john e. prescott cynthia e. miree 77 an erploration of diversity practices in small successful companies sandra powell h. lon adams brian davis 91 small business brief—how small businesses in the united states are responding to the challenges and opportunities of workforce 2000 arthur shriberg thomas d. clark sherrie e. human 97 rookrfvifiv ~ltv ki byj p.w k ro i it.j reviewed by robert a. kemp reproduced with permission of the copyright owner. further reproduction prohibited without permission. table of contents anonymous journal of small business strategy; fall 2007/winter 2008; 18, 2; abi/inform complete pg. 0_3 table of contents 1 the irifluence of pre-venture planning on new venture creation jianwen (jon) liao illinois institute of technology william b. gartner clemson university 23 the huntfor the ht:ffol.ump continues: can trait and cognitive characteristics predict entrepreneurial. orientation? eva cools vlerick leuven gent management school herman van den broeck ghent university 43 aranldng of stale governments' efficient use of expenditures to encourage smol.l firm births whitney 0. peake murray state university maria i. marshall purdue university paul v. preckel purdue university 57 examining the impact of smol.l business institute® parti.cipation on entrepreneurial. atdtudes michael l. harris east carolina university shanan g. gibson east carolina university sherrie taylor texas woman's university 77 the effects of the small business founder's needfor cognition on early stage performance john leaptrott georgia southern university 89 small business operations strategy: aligning priorities and resources william w. lawrence northern caribbean university 105 book review 100 great businesses and the minds behind them by emily ross and angus holland reviewed by: fred fry bradley university strategy table of contents i the impact of resoarces on smog firm internationalization candida g. brush boston university linda f. edelman bentley college tatiana mano lova boston university l8 imlustry effects and strategic convergence: a study of the strategies of independent pharmacists michael j. rubach university of central arkansas joseph d. cangelosi university of central arkansas don b. bradley, ill university of central arkansas jeffrey e. mcgee university of texas at arlington 32 brand loyally measurement made easy: a pr%rence-behavior model carl obermiller seattle university 4s an empirical analysis of benefits of electronic data interchange (edii implementationr lmpli ca lions for new it implementation deepak khazanchi university of nebraska at omaha 62 the impact of shopping agents on small business e-commerce strategy rajiv vaidyanathan university of minnesota duluth praveen aggarwal university of minnesota duluth small business briefs: 80 smalltown merchants are not using the recommended strategies to compete against national discount chains: a prescriptive vs. descriptive study christopher f. achua university of virginia's college, wise roben n. lussier springfield college 88 strengthening federal bankruptcy laws: implications for smog businesses matthew c. sonfield hofstra university 9s fallacies versus realities ln financial planning and management among entrepreneutsr lessons from the trenches paul dunn university of louisiana at monroe liang, chyi-lyi (kathleen) university of vermont l05 factors affecting franchise agreement terminationsr lessons for rhe franchising sector lorelle frazer griftith university andrew terry university of new south wales book review i/7 the origin and evolution ofnew businesses by amar v. bhidd. reviewed by ron cook, rider university reproduced with permission of the copyright owner. further reproduction prohibited without permission. credits anonymous journal of small business strategy; fall 2006/winter 2007; 17, 2; abi/inform complete pg. 0_4 editor fred l. fry associate editors aaron a. buchko laurence g. weinzimmer editorial assistants dexter gruber douglas luman book review editor michael goldsby editorial review board semra ascigil joe bell david brennan shawn carraher susan coleman cathleen folker eugene fregetto armand gilinsky joe geiger masoud hemmasi kirk heriot jeffrey hornsby bruce kemelgor larry klatt brian mckenzie thaddeus mcewen todd mick john e. prescott neal pruchansky c. louise sellaro matthew c. sonfield harriet stephenson joe singer leo simpson jeff shields paul stephens jude valdez howard van auken dianne welsh bradley university bradley university bradley university bradley university bradley university ball state university middle east technical university university of arkansas at little rock university of st. thomas cameron university university of hartford university of wisconsin parkside university of illinois at chicago sonoma state university university ofldaho illinois state university mercer university ball state university university of louisville florida atlantic university california state university, east bay north carolina a&t state university missouri western state university university of pittsburgh keene state university youngstown state university hofstra university university of seattle university of missouri kansas city western kentucky university university of southern maine bradley university university of texas at san antonio-downtown iowa state university university of tampa the journal of small business strategy is a joint publication of the small business institute® and the foster college of business administration, bradley university. send subscription requests to fred fry, editor, journal of small business strategy, foster college of business administration, bradley university, 1501 w. bradley ave., peoria, il, 61625 or e-mail to jsbs@bradley.edu. annual subscriptions may be ordered at $25 each (u.s. dollars only). international subscriptions add $5 annually for postage and handling. back issues may be ordered at $15 per issue. ©copyright 2007 small business institute® issn 1081-8510 editors-in-chief william c. mcdowell middle tennessee state university michael l. harris east carolina university senior editor dianne h. b. welsh university of north carolina — greensboro associate editors joshua aaron middle tennessee state university whitney o. peake western kentucky university raj mahto university of new mexico editorial assistant stacy aaron middle tennessee state university editorial review board semra ascigil middle east technical university joe r. bell university of arkansas at little rock shawn carraher university of texas at dallas phillip e. davis texas state university eugene fregetto university of illinois at chicago joseph geiger university of idaho armand gilinsky sonoma state university michael goldsby ball state university david lyn hoffman metropolitan state college of denver jeffrey hornsby university of missouri kansas city jerry kudlats jacksonville university cathleen (folker) leitch wilfrid laurier university robert lussier springfield college matthew r. marvel ball state university brian mckenzie california state university, east bay abbas nadim university of new haven john e. prescott university of pittsburgh neal pruchansky keene state college jeff shields university of north carolina at ashville leo simpson seattle university matthew c. sonfield hofstra university harriet stephenson seattle university jude valdez university of texas at san antonio © copyright 2017 small business institute® issn 1081-8510 (online) issn 2380-1751 2017-2018 sbi officers sbi small business institute ® president: john h. batchelor university of west florida jbatchelor1@uwf.edu president-elect: deborah cours california state university-northridge deborah.cours@csun.edu vice president of programs: timothy dunne boise state university timothydunne@boisestate.edu vice president of programs-elect: whitney peake western kentucky university whitney.peake@wku.edu secretary/treasurer: joshua aaron middle tennessee state university joshua.aaron@mtsu.edu vice president of marketing and communications: blake escudier entrepanalysis, llc blake@escudier.us vice president of membership: kathleen liang north carolina agriculture and technical state university cliang@ncat.edu vice president of research and publications: denise cumberland university of louisville denise.cumberland@louisville.edu vice president of development: shanan gibson east carolina university gibsons@ecu.edu immediate past president: patrick walker lindenwood university pwalker@lindenwood.edu editors, journal of small business strategy: william c. mcdowell middle tennessee state university william.mcdowell@mtsu.edu michael l. harris east carolina university harrismi@ecu.edu editor, small business institute journal troy a. volker university of houston clearlake volker@uhcl.edu mailto:blake@escudier.us mailto:%20harrismi@ecu.edu mailto:%20harrismi@ecu.edu stila teg f editor's note: a reall y important matter in memory john wallace marshall university as editor of the journal ofsmall business strategy, i try to include a small contribution in each issue that is both important and ofinierest to the readership of the journal. the choice of topic for this issue was extraordinarily clear: i asked sherrie taylor, president of the small business institute (sbi) to prepare a short piece on john wallace, a major contributor to both the sbi organization and the journal ofsmall business strategy over the past several years. steve osborne editor, jsbs there are times when we meet or work along side people who make a lasting impression on us because of their values, work ethics, and general personality. one of those special people was dr. john wallace, marshall university. john was a member of sbida for several years and a frequent contributor at conferences in both paper presentations as well as working on the sidelines to make things happen. john passed away on august 19, 2002 in his home. he was 63 years old and is survived by his wife of 43 years, elizabeth (libby) a. beris ford wallace, and his children. john was one of the two program chairs for the first joint conference we held with usasbe in 2000. he has been a reviewer for jsbs for a number of years. he had volunteered to be the proceedings editor for our 2003 conference. dr. wallace served as the sbi director for marshall university. one of the tributes written about him after his death came from a former sbi client. john grace of publishers place, inc. had this to say, "wallace was extremely generous with his time and energy in support of a host of worthwhile causes in and around huntington. we will miss his wisdom and his goodheartedness. such genial souls who spend themselves selflessly to further this or that aspect of the common good are all too rare. may his memory inspire his students and others to look around them and see where their talents may be put to use to help their communities." as an organization, we will miss his wonderful smile and sense ofhumor. as a friend, we will all miss his very presence. our sympathy is with his whole family and his peers as well as his students. in the name of the national small business institute, a donation was made to the john wallace scholarship fund at marshall university. sherrie taylor president, small business institute reproduced with permission of the copyright owner. further reproduction prohibited without permission. from the editor fry, fred l journal of small business strategy; spring/summer 2006; 17, 1; abi/inform complete pg. 0_6 from the editor the articles in this issue can be divided along two dimensions. the first is the conceptual vs. applications dimension. the mitchell/cohen and morris et. al. articles fall near the conceptual end of the continuum, while the remainder are nearer the applications end. the second dimension is the overall small business focus vs. an industry-specific focus. the first three articles are very much strategy-oriented works that apply across the board, while the last three are much more industryfocused articles. the mitchell and cohen article won the jsbs editor's choice best conceptual paper award at the 2006 usasbe/sbi meeting in tucson. the journal of small business strategy gives two editor's choice awards the best conceptual paper and the best empirical paper at usasbe/sbi conferences. we were pleased that the mitchell/ cohen article was of very high quality. the best empirical article will be in the fall/ winter issue. morris, schindehutte, richardson, and allen have an excellent article on business models, looking at them from conceptual, theoretical, and empirical perspectives. this is a very strong article, and i am happy to publish this extension of their research stream on business models. moving somewhat from theory to practice, but staying within the strategy area, allred and addams looked at inc. 500 firms to assess ceo perspectives on the importance of business plans. in addition, their article looks at which components of the plans are most useful for financial acquisition and for operational use. the remaining three articles form a rather serendipitous mini-theme on restaurants. i did not plan for this, as the journal of small business strategy does not do theme issues. yet, three different papers dealing with the restaurant industry happened to be approved by the review board during the same time frame. so it made sense to present them together. arora and singer looked at fine dining restaurants. the fine dining sector is a significant part of the $51 l billion restaurant industry. arora and singer's interest was in what makes a good dining experience. they make conclusions on determinants of satisfaction, post-consumption attitudes, and intentions. wu, kloppenborg, and walsh studied the supply chain of a single company honey baked ham, inc. using hbh as their case study, they looked at determinants of inefficiencies in distribution at a mid-sized restaurant chain. their conclusions certainly should be applicable to other restaurants and restaurant chains as well as outside the restaurant industry. this is the type of case study that is a nice fit for the journal of small business strategy. it is a theorybased look at issues dealing with a particular company or type of company. finally, shields extends his work on revenue management (see jsbs vol. 16-2) to the restaurant industry. just as airlines use variable pricing strategies to maximize their revenues per flight, restaurants can maximize revenue by adjusting their customer service strategies based on expected volume at different times. i hope you enjoy these articles. let me know. fred l. fry, editor reproduced with permission of the copyright owner. further reproduction prohibited without permission. 100 great businesses and the minds behind them fry, fred journal of small business strategy; fall 2007/winter 2008; 18, 2; abi/inform complete pg. 104 book review 100 great businesses and the minds behind them by emily ross and angus holland sourcebooks, inc.: naperville, il: 2006 reviewed by fred fry bradley university so you already know that michael dell and bill gates dropped out of their universities, and perhaps you know that phil knight sold tennis shoes out of the trunk of a plymouth valiant at athletic meets. but did you also know that warren buffet had five paper routes before school when he was thirteen and that he bought his first share of stock at age eleven? and did you know that oprah winfrey was raised on a pig farm in missi-ssippi and that her parents wanted to name her orpah after a character from the bible but misspelled her name? or how about that ikea was started in a shed that had been used to store milk churns? and clarence birdseye got the idea for frozen vegetables while working as a naturalist in the arctic circle. such is the stuff from a wonderful book, 100 great businesses and the minds behind them by emily ross and angus holland. i'm not sure the book was intended as a trivia book; it more likely was supposed to be a business history book. it is great as both. the authors break the book into 22 chapters although i am not sure what their logic was. never mind, because the chapters are then broken into the 100 vignettes about the beginnings and development of bus-inesses we all know. we find, for example, that in-line skates were invented back in the 1700s, long before scott olson perfected the idea and called them rollerblades. liquid paper was once called mistake out. play-doh had been sold for years as magic wall-paper cleaner before joe mcvicker put it in cans for use as modeling clay. now sold by hasbro, more than two billion cans have made it into the hands of eager children. 100 great businesses is a great book for a number of reasons. it is an excellent exa-mple of what i call an airplane book. that is, if you are flying from chicago to los angeles, you can pretty well finish the book in one flight. its short vignettes, each two to four pages in length, are also perfect for easy reading after finishing a day of teaching or heavy research. another excellent use of the book is for a onehour honors course in entrepreneurship. ask stud-ents to read a do-zen or so selected vignettes and then look for commonalities. are there any similarities between tupperware, home depot, ebay, and mtv? the final great use of 100 great businesses is as a source of business facts and trivia. you are bound to be the hit of the coffee shop discussions as you become an expert on little known facts about a lot of businesses. the book makes a great gift, as it was for me. as a paperback, it sells for $16.95, so it would be a nice token gift for a guest speaker, a graduation gift for a favorite student, or a holiday gift exchange. all in all, 100 great businesses and the minds behind them is a delightful book, well written, interesting, and a great source of information. i recommend it. 104 strategy editor stephen w. osborne indiana university of pennsylvania (iup) indiana, pennsylvania associate editors prashanth b. nagendra indiana university of pennsylvania (iup) joette m. wisnieski indiana university of pennsylvania (iup) editorial assistant julie dobish indiana university of pennsylvania (iup) book review editor radha chaganti rider university editorial review board ramachandra asundi university of pueno rico david brennan university of st. thomas (st. paul) radha chaganti rider university vivek choudhury florida state university richard t. dailey university of montana dale dickson mesa state college terry gaston southern oregon university masoud hemmasi illinois state university lynn hoffman university of nonhem colorado lawrence klatt florida atlantic university krish krishnan indiana university of pennsylvania (iup) thomas j. liesz mesa state college stephen lucas university of nonh carolina-greensboro steven j. maranville university of st. thomas (houston) thaddeus mcewen north carolina atkt university abbas nadim university of new haven inge nickerson barry university john e. prescott university of pittsburgh neal r. pruchansky keene state college c. louise sellaro youngstown state university herbert sherman south hampton college of long island leo simpson eastern washington university matthew c. sonfield hofstra umverstty pamela h. specht university of nebraska at omaha harriet stephenson seattle university jude valdez university of texas, san antonio john b. wallace marshall university the journal of small business siraiegv is a joint publication of the small business institute directors'ssociation (sbida) and the eberly college of business, indiana university of pennsylvania. send subscription request to stephen w. osborne, editor, journal of small business strategy, indiana university of pennsylvania, 304 eberly college of business, 664 pratt drive, indiana, pa 15705-1071. annual subscriptions may be ordered at $20 each (u.s. dollars only). international subscriptions add $5 annually for postage and handling. back issues may be ordered at $ 12 each. o copyright 1999 smal! business institute directors'ssociation issn 1081-8510 1999-2000 sbida officers i i'mall business institute directors'ssociation presrdeni vice president —core compeiiiion j. douglas frazer, ph.d., cpa sherrill r. taylor, m.ila., sphr millersvine university texas woman's university depanment of bus mess administration small business insutute millersville, pa 17551-0302 p.o. box 425738 oitice. (717) 871-5555 department of business and economics i'ax. (717) 871-2464 benton, tx 76204 e-mail. dfrazer(nmarauder.mtllersv.edu oaice (940) 898-2903 fax (940) 898-2120 e-mark f tayloritwu edu president-elect joseph j. geiger, mba, ed.d. vice preridenr-development um vers ity of idaho bruce kemelgor, ph.d. college ol'usiness and fconomics university of louisville box 3178 louisville, ky 40292-0001 moscow, id 83844-3178 oitice (502) 852-4788 oaicc (208) 885-7154 fax. (502) 852-7557 fax (208) 885-8939 e-mail. bhkemeoi qaulkyvm louisviue,edu fi-maik joegguidaho.edu vice-president-programs vice president-morheii ng and membership john walla«e, ph.d. ronald g. cook, ph.d. marshall university rider university lewis college of business college of business 400 list greer blvd. 2083 lawrencevi lie road ilunnngton, wv 25755 lawrenceville, nj 08648 oitice (304) 696-2680 onice; (609) 895-5522 fax'304) 696-6013 fax: (609) 896-5304 e-maik wallaceqamarshall edu e-mail cookr(lrtder edu vice-president —publicoiionr secretary-treasurer ed»ard g. cole, m.ila. roosevelt d. butler, ph.d. sl mary's umvcrsity the college ol'new jersey school of business administration school of business one camino santa mare box 7718 san antomo, tx 78228 ewing, n j 08628-0718 oflice. (210) 431-2039 oaice (609) 771-2868 fax. (210) 431-2115 fax. (609) 637-5129 e-mail'cole0alvin,stmarytx,edu e-mail rbutlergtcn) edu vice presidenr-program qualiry assurance lmmedraie past president gary l aitchison, ph.d. lloyd w. fernald, jr., d.b.a. lowe state university university of central florida 300 carver hall p.o. box 161400 ames, ia 50011 orlando, fl 32816-1400 oaice: (515) 294-8107 oaice (407) 823-5725 fsx. (515) 294-2534 fax: (407) 823-3725 e-mail. gaitchisinstate.edu e-mail:lloyd femaldqabus.ucf edu strategy small business brief why you should join the small business institute directors'ssociation (sbida) ronald g. cook rider university vice president marketing ik membership, sbida introduction the small business directors'ssociation (sbida) is a non-profit professional association whose mission is to strengthen the small business/entrepreneurship sector of the free enterprise system, provide entrepreneurship education, and support economic development and diversification through teaching, consulting, training, and field research. i won't go into great detail about sbida's history (over 25 years old), its impact on small businesses through its small business institute'" program (matthews, 1998), or its impact on literally thousands of students (for further information about these topics, please visit our web site: www.sbida.org). instead, i want to speak to our future. the sbi program sbida is probably best known for its premier field case student consulting program, the small business institute™(sbi). 7he sbi program takes upper-level undergraduates and graduates and out into the business community to serve as student consultants, under direct faculty supervision. this experiential learning experience results in what i call a "win'rogram," in that the following four constituencies all benefit: for faculty ~ sbi clients'roblems offer opportunities for incorporating real-life examples in lecture material. ~ sbi clients'roblems and their solutions offer substantial research opportunities which can lead to publishable articles. ~ working with sbi clients and coaching student teams provides faculty with the venue to discover and implement solutions and to serve as a vital linkage to the local business community. 70 journal ofsmall business strategy vo/. 10, no. 1 spring/summer 1999 for students ~ the sbi program offers students a chance to gain hands-on experience with small business. ~ the sbi program provides the critical experiential training to supplement textbook and classroom knowledge, leading students to greater opportunities in a large or small company. ~ participation in the sbi program helps students decide if they should start a business, and/or enhance their family firms. i for colleges and universities ~ the sbi program is an excellent means for a school to provide community service and to enhance its outreach activities. ~ the sbi program enhances the credibility of its curriculum for both existing and prospective students. ~ the sbi program enhances the recognition of the school among its constituents, which can lead to more financial contributions and grant opportunities. y for businesses/organizations ~ businesses receive low cost or free consulting. ~ businesses receive a substantial, in-depth analysis designed to enhance its operations. (source: benetits of offerin a small business institute™,sbida web site) does a sbi program sound attractive? it should be to aacsb institutions, given that part of the aacsb requirements is the ability to demonstrate relevancy and linkages to the business community. can an sbi program help you do this? absolutely. who can help you develop/run a sbi program? sbida. for this reason alone, you should join sbida. other benefits however, our benefits do not stop there. most college and university faculty operate on a triad, in that teaching, scholarly activity, and value/service are all required. a sbida membership helps you accomplish all three. sbida activities enrich classroom pedagogy, provide professional development opportunities, enhance small business/entreprenewial knowledge, and encourage publications. 71 journal ofsmall business strategy vol. /0, no. i spring/summer l999 for example, consider the journal ofsmall business strategy (jsbs), our llagship publication. the jsbs is included in a sbida membership, providing you with an invaluable resource, a possible outlet for your publications, or an opportunity for editorial board service. membership also includes sbi director and student manuals, a sbi fundraising guide, and a marketing ideas guide that culls the best practices from our hundreds of members. a sbida membership continues to be better and better. this year, we began a program that will certify our members as small business counselors. we otter a national competition for student consulting case of the year, which recognizes excellence in students and their faculty. our annual conferences (regional and national) explore issues and trends for small, entrepreneurial, and family-owned businesses. contact information if i have whetted your interest, then you should learn how sbida and you can be a perfect fit. contact me at (609) &95-5522, or cookrrider.edu, for more information. membership is currently $ 100 a year for u.s. members and $ 125 a year for international members. don't wait, you never know what you might miss! references benefits of offering a small business institute'", sbida benefits. http: //www.cba.uc.edu/cbainfo/sbida/benefits.htm (19 may 1999). matthews, c. h. (1998). the small business institute™program: high impact entrepreneurship education. journal of small business strate 9 (2), 14-22. ronald g. cook, ph. d, is an associate professor of small business/enirepreneurship at the college of business administration rider university. he is the vice president ofmarketing and membership of the small business institute directors'ssociation /sbida). his current research focuses on family business, qualitylcustomerservice, and business planning. he serves as the small business initituie™director at rider and has extensive consulting experience with small firms. 72 strategy partners in profits: small businesses move slowly into cause-related marketing nora ganim barnes university of massachusetts dartmouth abstract cause related marketing (crmj began in /98/ when american express agreed to donate s i for every new credl i cardissued to the ellis islanib'statue of libeny restoration foundation. since then, the use of ibis strategy has been widespread and rewarding. curiously, cause-related marketing has become associated with large corporations. the siudy presented here confirms the lack of use of crm among small businesses. this reluctance appears unfounded as those small businesses that have ventured into crm agreements report success in terms ofincreased sales, attracting new customers and enhancing the store's image. crm has gainedin popularity and can be a viable strategy for small businesses looking to diferent t'ate themselves. in a world ofparity products and services, this might be a key weapon in the small business arsenal. introduction in 1981 american express entered into an agreement with the not for profit statue of liberty/ellis island foundation. for every new american express card issued, money would be donated to the restoration project. this marked the first national joint venture marketing campaign of this type in the united states. the designation of this relationship as "causerelated marketing" was registered by american express with the united states patent office as a service mark (bbb, 1987). the result of the campaign was $ 1.7 million donated to the foundation and an increase in american express card usage of 28% (josephson, 1984). since then, there have been literally hundreds of these relationships including proctor 8t gamble and special olympics, burger king and the march of dimes, and campbell soup and the literacy foundation. just recently, coca-cola announced that their beverage division is adopting a cause-related marketing(crm) drive for its vendingoperationon a trial basis in england. the royal national institute for the blind will receive money for every can sold from specially labeled machines. this marks the first venture of crm campaigns into the self service arena (marshall, 1996). articles about these campaigns, have covered the pages of most leading newspapers and trade publications. leading marketing and business journals have been detailing the advantages, disadvantages, and possibilities for these relationships (see especially barnes, 1991). a definitive article on the subject offered the following definition: "cause-related marketing occurs when a company promises to make a charitable contribution contingent on a customer purchasing something from the firm" (varadarajan, 1989). the authors make it clear 47 journal ofsmall business strategy volume 9, ão. l spring /998 that cause-related marketing is a partnership that is beneficial to both parties. figure i depicts the components of a typical crm campaign. the for-profit business partner lends its promotional expertise and one or more of its products as a focal point of the campaign. the not-for-profltpartner contributes its name, image, and audience. if consumers purchase the product, both partners reap rewards. the consumer also realizes those emotional rewards of facilitating a donation to a worthy cause. figure i elements of a cause-related marketin cam ai n corporation; outcomes: lends advertising increases profits, builds support, product for corporate image, name focus of campaign recognition, and goodwill cause-related marketing campaign outcomes: not for profit organization: donation of money, lends name, audience, and image manpower, employment advocacy, recognition ln such a relationship, the businesses and not-for-profit organization are interdependent. both can incur risk and/or benefits. businesses may unknowingly become involved with not-forprofits that have internal problems, administrative conflicts or other difficulties. they must be cognizant of the "marketability" of the cause and the demographic.'f the potential audience involved. for the not for profits the concerns are equally serious. they must convince a business that they can deliver a desirable audience without compromising the integrity of their organization. despite these concerns, cause-related marketing has proliferated. to date, there is scant evidence of the strategy being risky or unproductive. on the contrary, crms appear to be one of the most successful promotional strategies in recent memory. at one time marketing research indicated consumer cynicism about these partnerships, but this appears to have abated, making crm more popular than ever (warner, 1996). studies of fortune 500 companies show wide spread awareness and use of cause related marketing. in virtually every case examined, the results of these campaigns have been very positive. the for-profit company usually enjoys image enhancement and increased sales while the not-for-profit partner receives a substantial donation. many not-for-profit organizations are hiring professional consultants to advise them on potential corporate partners. consumers are equally excited about this strategy. 48 journal ofsmail business strategy volume 9, no. l spring /998 a new survey of 2000 adults shows that 76'/e would buy a product involved in a crm campaign if the product price was competitive (cone/roper ii, 1996). the same study went on to report consumer receptivity to cause-related marketing campaigns is greatest among those likely to make key purchasing decisions: women age 18-49 and parents of young children (warner, 1996). amidst all this activity, small businesses have somehow remained untouched by cause-related marketing. a search of small business literature including the academic journals and the trade journals reveals only two articles dealing with this topic. the first appeared in small business reports in 1991 and encourages small business to try the strategy(hendricks,1991). the author reports cause-related marketing can give small business owners "name-spreading publicity, a more positive public image, and access to new markets." ironically, the second article appeared in 1993 and reiterated the discussion in the 1991 piece citing the earlier piece at length and supporting hendrick's conclusion (manager's magazine). based on the results of this literature search, and the available information on cause-related marketing, the following questions were generated and served as a guide for the research presented here: i . what is the level of awareness among small business owners of cause-related marketing? 2, to what extent have small business owners attempted to involve themselves in cause-related marketing campaigns and to what end? 3. is cause-related marketing a viable strategy for small businesses? sampling/methodology a national list of small businesses was generated from lotus i business source. using a systematic random sampling procedure, 1500 calls were made. the final sample of 940 small businesses in this study comes from completed interviews with approximately 19 small businesses in each of the ftity states in the u. s.. the response rate was an encouraging 63'/e. it is interesting to note that 38'/a of all small businesses studied employed 1-3 people full time, with three quarters of the sample having no more than 11 full time employees. the annual sales reported ranged from $ 15,000 to over $3 million. three quarters of the sample reported sales of under $ 1 million. all responses were examined to determine the effect, if any, size and annual sales had on a businesses'attitudes toward cause related marketing. all types of businesses were studied. as expected, cause-related marketing was not a factor for most wholesalers or manufacturers of industrial products. (see table i for profile of sample) each interview was conducted using a structured questionnaire focusing on the business owners familiarity and use of cause-related marketing. details of such campaigns were sought along with outcomes and assessments. all demographic data from the lotus i source were verified. the results of the 940 interviews follow. findings interviews began with two background questions relating to familiarity with the cause-related marketing strategy and participation in such a promotion. overall, 59'/a of small business owners queried were familiar with the strategy. when asked if they had ever been involved in such a campaign, the numbers plummeted to 6'/e or 59 of the 940 businesses studied. this level of 49 journal ofsmall business strategy volume 9, ão. i spring l998 involvement appears to be very low. one study of ft(ty fortune 500 firms found 52% of respondents involved in crm campaigns (barnes, 1991). regardless, the sample here of 59 small businesses actually experienced in these promotions, represents the largest study to date of business involvement. size of the business and annual sales prompted statistically significant differences between those who had been involved with crm and those who had no involvement. the larger and more aflluent a small business, the more likely it is to participate in crm. the average number of employees in firms that have done crm is 46, while the non-participants average 16 employees. the annual sales of those who have participated averaged $ 1.3 million. the non participants averaged just below $ 1 million in annual sales. it appears that the smaller businesses (i.e. 15 employees, less than $ 1 million in sales) have not engaged in crm. some indication of the viability of the strategy for small businesses might be gleaned from a closer examination of those "larger" small businesses that have had experience with crm. contractual agreements with the not for profit partner were generally not used. one third of the participating small businesses prepared a written agreement while two thirds made all arrangements and commitments verbally. none of the participants reported any problems with their not for profit partners or the logistics of the campaign. there was a sense among these respondents that their customers really enjoyed the crm campaign. over 60% reported positive customer feedback regarding the promotion. only slightly less (57%) described the campaign as "very effective". seventy-five percent indicated they would definitely or probably recommend crm to other small businesses owners. table i profile of the sam le ¹offull time em lo ees 1-3 339 37 4-7 203 22 8-11 121 13 12-15 85 9 15-30 92 10 31-100 70 8 &100 6 i annual sales ¹ $ 1 5,000-$3 74,499 208 25 $375,000-$734,499 171 21 $734,500-$ 1mil 217 27 $ 1.1mil-$2.1mil 132 16 $2.2mi1-$ 3.2mil 80 10 & $3.2mil 9 i ex erience with crm ¹ yes 59 6 no 881 94 50 journal ofsmall business strategy volume 9, //o. l spring /998 the benefits of cause-related marketing can vary. in this study, 53% cited increased sales as the primary benefit of their most recent crm campaign. almost 20% of the owners indicated the promotion yielded new customers and increased sales, while 14% mentioned image enhancement as the primary benefit. other perks cited include better public relations and increased name recognition. the diversity of the not-for-profit partners in this study is striking. they range from adopting a local school, hospital, symphony, or food kitchen, to involvement with the american cancer society, the united way, special olympics, and national aids research foundation. this is consistent with other studies which indicate education, health, crime and safety, homelessness and hunger, and the environment are the major areas of focus in crm campaigns (weisend, 1996). for a more complete list of the not for profit partners in this study see table 2 the small businesses that ran these campaigns were equally diverse. while virtually all were retailers, they included restaurants, fast food and concession stands, furniture, jewelry, clothes stores, art galleries, book, pet, and toy stores along with a resale children's clothes shop. (for a more complete list of the types of small businesses involved in crm see table 3.) all the crm campaigns reported in this study were conducted in the last twelve months (prior to the interview) and 80% of these owners reported they would be likely to use the strategy again. table 2 t es of small businesses involved in crm art gallery antique shop book store catering expresso bar furniture store flag shop grocery store graphics arts supplies ice cream shop jewelry store men's clothes store pharmacy pizza shop specialty shop toy store video rental women's clothes store table 3 not-for-profits involved with small businesses and crm american cancer society adopt a local school american heart association animal rescue aids projects big brothers/big sisters children's hospitals cystic fibrosis churches easter seals food shelters homeless projects leukemia society page educational foundation resolve reading is fundamental special olympics symphony united way university programs 51 journal ofsmall business strategy volume 9, no. l spring /998 implications and conclusions only a small percentage of small businesses have engaged in cause related marketing campaigns, even though they have proven to be more than a short term tactic. (some of the benefits for companies that have engaged in these campaigns can be see in table 4.) as the u. s. economy continues to recover slowly and small businesses fight for survival, it is imperative that new and potentially profitable strategies be considered. the climate is conducive as not for profits seek what businesses can offer: crucial new sources of revenue. in return, the small business partner gains the opportunity to enhance it's image and increase sales through association with a worthy cause (andreasen,1996). table 4 benefits of t ical cause-related marketin company charity benefit benefit name name c~i ~charit beatrice/hunt world wildlfe increased $ 50,000 wesson fund coupon redemption continental hobby airport facilitated cash airlines texas market entry donation general foods madd/mothers increased coupon cash against drunk redemption donation up driving $ 100,000 johnson bs special olympics "significant increase cash johnson in direct mail response donation coca-cola special olympics increased worldwide $ 110,000 involvement of bottlers/referral those that have tried crm report the campaigns to be effective, with over half of the businesses reporting increased sales. the experience of the small businesses in this study parallels those of fortune 500 firms that are enjoying the benefits of crm. most report increased sales, image enhancement and new customers. small businesses should be encouraged to experiment with crm on a local basis in order to develop a level of comfort with these campaigns. consumers report being the most receptive to programs aimed at improving local public schools (warner, 1996). this would be a good starting point. for example, a small coffee shop donated one cent for each cup of coffee sold to a local elementary school for the purchase of sports equipment. after a three month campaign, the school was able to buy an array of bats, balls and nets for the children. most small businesses engaging in crm are doing so without written agreements. while crm is a low risk strategy, written agreements do facilitate the promotion. it is important to record 52 journal ofsmall business ssrasegjf volume 9, lio. i spring l998 the responsibilities of both parties. interested parties should collect, research or examine sample agreements. many are now available from participating organizations. cause-related marketing is now well into its second decade. large corporations such as proctor jk gamble, coca-cola, and campbell's soup, continue to enjoy the benefits of long term relationships with not for profit partners. small businesses appear reluctant to venture into such partnerships even though those who do, have reported success. given the slow economic growth of the 90's, the daily struggle for small businesses to survive, and consumer receptivity to these promotions, it would seem prudent to look more closely at cause-related marketing. references andreasen, a. (1996). profits for nonprofits: find a corporate partner. harvard business review 4, 41-59. barnes, n. g. (1991).philanthropy, profits, and problems: the emergence of joint venture marketing. akron business and economic review, 78-86. better business bureau. (1987). charities in the marketplace. ~lnsi ht, 3, 1-5. cone research group. (1993, december 13). cone-commissioned survey verities cause marketing. consumer attitudes survey released. adweek new en land advertisin week, p. l. cone/roper ii. (1996). stud of cause-related marketin re ort of cone communications, boston, ma. hendricks,m. (1991).doing well whiledoing good. small businessre orts 16(11),28-38. josephson, n. (1984, january). american express raises corporate giving to marketing art. a~di a . id-l i . marshall, s. (1996, july 18). ccbs machines to deliver cash for blind charity. ~marketin, l. referred by association. (1993, january). mana er's ma azine 68(1),28. small business economic trends. (1996, september). small business trends, 1-23. varadarajan, p. and menon, a. (1998)cause-related marketing: a coalignment of marketing g«gy ac q phil h py. j~ffm k i,l ly,yg.yd. warner, j. (1996, december 23). doing good pays off. adweek new en land advertisin week, 4. 53 issues in managing small business lnformation systems bin-shan lin, ph.d. john a. vassar, ph. d. louisiana state university abstract this pa per addresses three issues in managing small business information systems (sbis): technical issues, organizational issues, and the approach to information systems investments. practical guidelines are provided for small business executives. introduction two approaches can be used in the way to manage computer-based information systems in organizations. one approach views the information system as a tactical and operational defensive wea pon to meet basic processing requirements and to help the firm stay on track (4). such an approach is reactive oriented. information system projects are developed on reac tions to the environment. a different a pproach views the information system as a strategic wea pon which provides companies with opportunities to become more effective and to gain a competitive advantage by lowering the company's cost to provide goods and/or services, providing information to differentiate the company and its product from the competition, and increasing the company's ability to coordinate its activities (1, 14). executives should be involved with the development of small business information systems (sbis) for three reasons. first, a computer-based information system provides a valuable tool for improving the quality of decision making within their organization (13). this is of par ticular importance as it relates to the development of a business strategy which depends on the output of the sbis. second, since sbis provide executives with the information needed to make decisions and develop effective strategies, only through their involvement with its development can executives be assured they are receiving the information needed. third, ef fective sbis development capitalizes on the investment made to automate. most small businesses use computer-based information systems only for applications such as inventory control, payroll, accounts receivable, accounts payable, and general ledger (13,18). execu tives' involvement in sbis planning enhances the likelihood the computer will be used to generate significant information for management decision making. · the role played by sbis has expanded in scope and significance, and usually outpaced efforts to manage it. this paper add resses three issues in managing sbis: technical issues, organizational issues, and the approach to information systems investments. the technical 37 38 aspect focuses on the necessity of a structural approach for control and planning. section 2 discusses the concepts of alignment and impact of sbjs. section 3 contrasts the bottom-u p control and the top-down control for sbis. the organizational issue emphasizes necessity of an integrated information systems plan and its linkage to the small business objectives. sec tion 4 addresses an integrated approach for sbis planning. section 5 states the approaches to information systems investments. finally, practical suggestions for sbis are presented in section 6. alig nment and impact strategic planning is a systematic approach by a given organization to make decisions about issues which are of fundamental and crucial importance to its long-term health and vitality (20). withou t proper strategic planning for information systems, systems projects are of ten built piecemeal, resulting in incompatible, redundant, and inflexible information systems. a major purpose of strategic planning is to provide a process for developing a strategy for infor mation systems within an organization on the basis of an overall plan (10). since small business firms must keep abreast of the dynamic environment in which they compete, effective strategic planning is the key to capitalizing on the opportunities of sbis. alignment is the state of having the information system strategy mirror organizational strategy, while impact refers to the effect that the information system strategy has on the organization (2). both have become especially crucial in today's competitive environment as executives search for ways to employ information systems to gain competitive advantages. an example of such a use would be the ability to retrieve informat ion about the effect of price changes on product demand in a company. since each strategy component has its own set of goals, actors, and cost limitations, the process is not straightforward. strategies are in constant flux, changing with the rise and fall of political fortu nes, personnel turnover, marketing change.s, government actions, etc. it must be recognized that strategic planning for sbis is a process (11), not something which is easily packaged and employed to coordinate organizational units as a guide for their planning. the sbis planning process is business-driven. the planning process should align activities with overall organizational strategy, focusing the portfolio of sbis on a company's goals. sbis planning needs identif ying the areas in which high-payoff opportunities are likely to be found. however, the most proper prescription for a small business executive is to integrate sbis into management and control processes on a daily basis, rather than depend on formal and strict procedures. ' information systems architecture refers to the overall structu re of all information systems combined (28). this structure consists of the applications for the various managerial levels of the organization and applications oriented to different management activities such as plan ning, control, and decision making. i nformation systems architecture also includes databases and supporting sof tware. an information system's architecture guides future development for an organization (26). for small busi.ness executives, information systems architecture should also allow response to diverse short-term information demands. it would appear that sbis can be aligned to organizational strategy as well as impact that strategy, by the development of a flexible resource base. a strong resource base, that includes data, network, and applications, can be used to respond quickly to change in the small business environment as opportunities and th reats present themselves. the architecture has to be u p dated as the needs of the users become better known or the business environment changes significa ntly. 37 38 bottom-up vs. top-down control planning provides a systematic framework within which executives may control. two ap proaches of the framework are bottom-up control and top-down control. the bottom-up con trol is a traditional approach in which different functional areas are employed without con sideration for integration and optimization at the organizational level. as a resut!, small business firms find that the systems developed by bottom-up control become increasingly incomprehen sible, incompatible, and redundant because of the lack of overall top direction. on the other hand, small business executives may seek a proper top-down control of dif ferent sbis strategies. a top-down control requires an organizational approach to design and evaluation of the information systems, since there are information requirements and cost-benefit criteria that must be met across the business f irm (3). a company-wide information systems pol icy provides a unified outlook and springboard for the information systems planning pro cess (4). organizational goals drive the needs of the sbis, which in turn drive the capabilities of the information fu nctions of the small business organization. more importantly, problems and feasible solutions in building sbis are usually organization-specific. the top-down a pproach is issue directed and developed in an organization-specif ic environment. it will help the small business to_ build a process tailored to fit its specific needs and method of operation for its sb!s. the iop-down control operates on the principle of functional decomposition. as a first step, the firm's current information system is reviewed in very global terms. gra phic represen tations for the processes, flows, and data stored can be employed. the preliminary document will then be decomposed process by process until the processes cannot be decomposed fur ther. the results may provide a schema of the firm's information flow. af ter carefully review ing the results, the general req uirements for flow and exchange of data should be met before any information system can be effectively used and integrated into the overall corporate framework. af ter the existing system has been decomposed, the new or modified system can be designed in a similar way. the highest level of the decomposition can be updated in the input and output information flows. the bottom level may represent modules of sof tware that will ultimately be produced in the final system. sbis need to be positioned to better support the functional areas in the small busi ness firm. in order to reveal hidden vulnerabilities and unique strengths, an assessment of the feasibility of information system's use in a particular organization is required. the top-down approach should not only identif y and manage the scope of sbis but also should develop an agenda to demonstrate how to manage the process of the sbjs. executives must be in volved in improving information systems planning· and identif ying the actions needed to respond to the critical issues in strategic planning (11). organizational issue what small business really needs is not a fragmented approach but an integrated approach that will fully integrate all the sbis functions and technologies into the organization. a major objective of sbis is to achieve a n information-based comparative advantage which is ground ed on a support of decision-making capability. sbis planning does little for the organization if the plan is not created to provide support for the overall organizational goals. 39 40 as sbis is integrated into the vital operations of the small business, such as customer and supplier systems, it is crucial that sbis planning at the strategic level become integrated with the business process. to accomplish this, a strategy set transformation (sst) method (9) can be used. the overall organizational strategy is viewed as an information set consisting of the mission, objectives, strategies, and other strategic variables (e.g., managerial sophistica tion, proclivity to accept change, important environmental constraints, etc.) strategic plann ing serves as the process of transforming the organizational strategy set into an information system strategy set consisting of information system objectives, constraints, and design strategies. in order to establish a proper linkage between the organization's strategic plan and its sbis planning, four steps need to be taken (8). these steps are adapted for small business as follows: 1. assess and evaluate the current organizational objectives and strategies of the small firm, such as how it is structured and how it functions. 2. evaluate the current state of information technology in terms of data, application, and architectures. a comparison should be made between the current state of information technology in the small business firm with the existing state of technology available. 3. forecast the organization strategic position in the future in terms of the firm's objectives a nd strategies. 4. evaluate the required state of information technology needed to support the strategic position in the future. identif y feasible opportunities and make a strong commitment ' to use sbis for increasing management's effectiveness, improving productivity, and augmenting product-service differentiation. the strategic planni ng process for sbis does not end with these four steps; it is an ongo ing procedure that small business executives will repeat over and over. with each round, ex ecutives will gain experience, and the steps become much easier. the user profiles (29)'can be used to generate and evaluate ideas during the in tegration process. the basic promise of the user profiles is to classif y users' work activities according to factors relevant to the development of information systems in the organization. these fac tors include primary activity (planning, control, operations), • primary concern (strategy, resources, tasks), • organizational support (excellent, good, poor), .• decision-making (structured, less structured, unstructured), • information resource (internal, external, or both), • time frame (short-term, long-term), · • communication (written, spoken, or both), because of their narrower product lines, smaller customer bases, and very limited resources, small businesses find that each factor is necessary for the sbis pla nning. small businesses need a different approach to the sbis planning beca use of the following characteristics: resource poverty, a less informal organizational structure, and their adaptability to change (25). small businesses may enhance their performance through the informal application of basic decision making practices (17). small business firms deemphasize formal written documen tation. to support the executive's lack of planning orientation, skill, or time allocation, robin son (16) suggested that if small businesses are to utilize strategic planning as an effective management tool, a major necessity is the comprehensive inclusion of outsiders in the planning effort. thus, while strategic planning is crucial for small firms and may be practiced informally, their unique limitations would recommend the inclusion of outside consultants to assist in the planni ng effort. 39 40 sbis investment approaches research has stressed the importance.of taking an investment approach to the planning of the information systems. mcfarlan et al. (6) suggest that there is a variety of pressures which make planning necessary. the most important are rapid changes in information technology, scarcity of skilled people and other man·agement resources. two investment approaches available to management are identified by yap (27): the tac tical approach and the strategic approach. the tactical approach is characterized by the lack of company-wide policy relating to the development of information systems which could result in an incoherent investment strategy. in many situations, small business chose a minicom puter system for its accou nting f unctions, without giving due consideration to some other related activities which could have been identified to be crucial for the company. the strategic a pproach may be viewed as a coordinated investment pla nning which will provide a sense of unified direction for the development of an information system. the strategic approach will provide the top-down guidance which is necessary for the raiional development of in tegrated sbis. a small business should produce an investment plan to provide strategic guidelines for information systems investments (24), and identif y opportunities for the applications of sbis. we suggest that the tactical approach is likely to lead to incompatible integration in sbis, whereas the strategic approach is likely to lead to a more effective exploitation of sbis through the development of integrated systems. the top-down approach, as mentioned in section 3, allows small business to focus and direct its total information assets, costs, and efforts on meeting its real information needs in a cost-effective manner. the top-down approach com mits small business executives to participate in developing sbis at all phases of investments. to effectively develop integrated sbis, the small business manager must develop an opportunity-oriented management process. this process must include a mechanism to en sure that the organization receives maximum value and return for the sbis investment. suggestions in summary, several guidelines are suggested for developing sbis as follows: 1. executives must appreciate the expanded role and diversity of sbis if they ensure that the expected benefits are being realized and that the overall application of sbis is linked to organizational goals. 2. establish an early focus on sbis planning. the sbis plans must support a number of different types of competitive strategies for the small business. they include lowering costs, creating new business, and changing scope. however, one of the most important problems in the sbis planning process is to make sure it identifies and selects sbis applications that fit the priorities established by the small business. 3. the planning horizon is the second concern. the determination of the length of the planning horizon·might be problematic, vitally impacting on organizational effectiveness anp the choice of an appropriate organizational form (7). however, the planning horizon should be two years or less for most small firms (19). 41 42 4. sbis should include both external and internal environmental information. a recent study ' indicates that small business executives received outside help in external resources form only twenty percent of the time (22). the external resources, among many others, in clude government reports, demographic studies, trade publications, marketing surveys, and community consultants. a key external issue is the analysis of the firm's communi ty. bacause small businesses usually serve a localized market, sbis must strategically cope with the external change. references 1. ben jamin, r. l., rockart, j. f., morton, m. s., and wyman, j. "information technology: a strategic opportunity," sloan management review, 25, 3 (1984) pp. 3-10. 2. benson, r. and parker, m. m. enterprise-wide information management: an introduc tion to the concepts, ibm los angeles scientific center, 1985. 3. branchea u, j. c. and weatherbe, j. "key issues in information systems management; ' mis quarterly, 11, 1 (march 1987) pp. 23-45. 4. burch, j. and grudnitski, g. information systems: theory and practice, new york: john wiley & sons, 1989. 5. ein-dor, p. a nd segev, e. "organizational context and the success of mis;' manage ment science, (j une 1978) pp. 1064-1077. 6. mcfarlan, f. w., mckenney, j. l., and pyburn, p. "the information archipelago-plotting a course;' harvard business review, (january-february 1983), pp. 145-156. 7. good ma n, r. a. "environmental knowledge and organizational time horizon: some functions and dysfunctions;' hu man relations, 26 (1973), pp. 215-226. 8. karimi, j. "strategic planning for information systems: requirements and information engineering methods;' journal of management information systems, 4, 4 (1988), pp. 5-24. 9. king, w. r. "strategic planning for management information systems;' mis quarterly, 2, 1 (1978), pp. 27-37. 10. king, w. r. "strategic planning for is: the state of practice and research;' mis quarterly, 9, 2 (j uly 1985), pp. vi-vii. 11. lederer, a. l. and mendelow, a. l. "information systems planning: top management takes control;' business horizons, (may-june 1988), pp. 73-78. 12. lees, j. and lees, d. "realities of small information system implementation;' journal of systems management, (january 1987) pp. 6-13. 41 42 13. malone, s. c. "computerizing small business information systems," journal of small business management, (april 1985) pp. 10-16. 14. porter, m. e. and millar, v. e. "how information gives you a competitive advantage," harvard business review, (j uly-august 1985) pp. 149-160. 15. raymond, l. 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"information and decision support systems: development, design, and implementation for the small businesses;' pro ceedings of sou thwest decision sciences institute, (march 1989), pp. 143-145. 23. stoner, c. r. and fry, f. l. strategic planning in the small business, cincinnati, oh: south-western, 1987. 24. strassmann, p. a. information payoff: the transformation of work in the electronic age, new york: the free press, 1985. 25. welsh, ). a. and white, ]. "a small business is not a little big business," harvard business review, (j uly-august 1981), pp. 18-32. 26. weatherbe, ]. c. systems analysis and design, st. paul, mn: west, 1988. 27. yap, c. s. "issues in managing information technology;' journal of operational research society, 40, 7 (1989) pp. 649-658. 28. zach man, ). a. "control and planning of information systems;' journal of systems management, 28 (1977) pp. 34-41. 29. zmud, r. information systems in organizations, glenview, i l: scott, foresman and company, 1983. 43 bin-shan lin, ph.d. john a. vassar, ph. d. abstract introduction alig nment and impact bottom-up vs. top-down control organizational issue sbis investment approaches suggestions journal of small business strategy vol 9, no. 2 fal!/winter /998 stk4tegy initiative for a competitive inner city: the national business school network monica rivera dean national business school network, initiative for a competitive inner city marilyn l. taylor university of missouri at kansas city the need many graduate business schools are located in economically distressed urban areas or inner cities'hat have a pressing need for economic and business development. the economic health of these communities is not only of general importance to the metropolitan area, but otten directly aitects the atmosphere and appearance of the immediate areas surrounding a school's campus. despite these circumstances, few schools have taken a prominent or even significant role in inner-city economic development. there are two reasons for urban graduate business schools to become involved in their surrounding communities and both make a great deal of sense. first, they have a responsibility to their community, and second, by engaging with their community in economic development activities they can provide their students with rich and rewarding academic and business experiences. taking on a central role in their surrounding neighborhoods can be translated into impactful and positive outcomes such as a richer curriculum for its students and faculty as well as a healthier business climate. the opportunity urban graduate business schools are powerful assets that can address the vexing problem of the inner city, and can play a leadership role in catalyzing and supporting economic and business development in central cities. business schools are an integral part of a city's business network. their competitive advantage is the knowledge of how to succeed in a market-based system. they possess vital skills and i the inner city is defined as distressed urban (zip codes) areas that have significantly lower income, higher poverty rates and unemployment rates than the metropolitan statistical area average. "urban core" and "disadvantaged group/neighborhood" is used interchangeably with the term "inner city." 5 journal ofsmall business strategy vol. 9, ão. 2 fall/winter l998 resources for economic revitalization, as well as deep relationships with the private sector that play a prominent role in any successful business and job development strategy. such a leadership role by business schools would not only benefit their neighbors and their neighborhoods, but could also create important new relationships with the local government and the corporate community. a business school's interest in community service efforts can be channeled to advance local economic and business development in a variety of ways. specifically, business schools can: ~ lead benchmark studies of their local economy (i.e. analyze the business base of the inner city and formulate strategies for growth) ~ conduct student field study courses and other student programs ~ write cases on inner-city companies to incorporate into existing entrepreneurship courses and other curriculum ~ offer training and outreach to inner-city executives and businesses (i.e., training in operations, marketing and finance and scholarships to executive education programs) ~ support faculty and student research on inner cities and inner-city companies ~ forge partnerships with local corporations, community foundations, government, and nonprofit organizations to address inner-city economic development issues obstacles there are obstacles that impede business schools from impacting the economic fabric of their surrounding communities. first and foremost, most schools lack an awareness of the fundamental needs and opportunities associated with inner-city economic revitalization. deans lack faculty champions, funding and resources for inner-city program development. faculty also lack awareness and relationships with their community and do not have the luxury of time to spend on supplementary projects due to tenure concerns. despite a real desire and commitment to address the revitalization of economically distressed areas, many schools do not offer innercity focused courses. national business school network (nbsn) the initiative for a competitive inner city (icic) formed the national business school network (nbsn) as a network of america's urban business schools which links schools to share leamings and best practices about inner-city businesses and associated business school programs (dean, 1997).nbsn believes business school students, faculty, and alumni can be important resources in assisting and starting companies that contribute to healthy inner-city economies. the program's origins are tied to professor porter's early research on inner-city economic development (porter, 1995). professor porter worked with his mba students through harvard business school's field study program to conduct research on inner-economic development. students conducted benchmark studies of several inner cities, as well as consulted to bostonbased inner-city companies. nbsn understands the needs, opportunities and obstacles that business schools face regarding inner-city economic and business development, and has developed products and services to address these voids. 6 jour nal ofsmall business strategy vol. 9, no. 2 fall/ivinrer l998 the pillars of nbsn's charter are to: i) engage america's urban business schools in directly contributing to the vitality of their surrounding communities ii) stimulate relationships between business schools and inner-city companies iii) expose the nation's future business leaders to business opportunities in inner-city areas iv) widen the research agenda to include inner-city companies and business issues. icic believes that inner-city consulting programs are an important way to educate business school students not only on the problems of the inner city, but on the business opportunities as well. to date, the primary vehicle employed in pursuance of these goals has been the field study program. through the field study program business school teams work on research projects or consult to inner-city businesses. student teams look to catalyze the growth of inner-city businesses by assisting these companies in realizing the competitive advantage of their inner-city locations and understanding their core business. nbsn focuses its efforts in the four cities where icic has inner city advisors'ffiliates: boston, baltimore, oakland, and kansas city. the inner city advisors is icic's core operating program that transforms icic's ideas into on-the-ground results. as a result of the nbsn and advisors'fforts, the field study program has grown considerably. to date, nbsn has managed 100 engagements (see page 9 for "sample client engagements" ) with 358 students. the following schools are involved with nbsn: ~cit business school boston: frank sawyer school of management, suffolk university franklin w. olin graduate school of business, babson college harvard business school, harvard university john f. kennedy school of government, harvard university sloan school of management, massachusetts institute of technology oakland: graduate school of business, golden gate university graduate school of business, san francisco state university mclaren school of business, university of san francisco school of business and economics, california state hayward university baltimore: division of management, johns hopkins university merrick school of business, university of baltimore maryland school of business, university of maryland college park sellinger school of business, loyola college kansas city: baker university henry w. bloch school of business and public administration, university of missouri, kansas city school of business, university of kansas inner city advisors act as liaisons between mba faculty/students and the respective client. advisors assist with project management, providing technical assistance, guidance and background information on an engagement. they may call on alumni or industry professionals to serve as corporate mentors to the field study teams. additionally, advisors meet on a regular basis to share best practices, pitfalls, and other information related to their projects and incorporate these lessons learned into the management process. 7 dourna/ ofsmall business strategy vo/. 9, no. 2 fall/winier /998 nbsn has developed a manual that is used to manage the field study process. additionally, at the end of each engagement, advisors conduct an evaluation of the project by administering a formal survey to interview the client, students and faculty advisors. the results of these surveys are then translated into a formal evaluation report that is shared with the entire icic organization. the best practices and lessons learned are then incorporated into the manual for future use. mba students also contribute to icic research by participating in research-based field studies. this work engages students in icic action-oriented research efforts that investigate critical business, competitive, and policy issues. these projects come in two forms: ~ benchmark studies of inner-city economies to guide economic strategies, or ~ cluster growth studies in industries that offer opportunities in major inner cities, including retail, commercial services, entertainment and tourism, logistics and warehousing, healthcare, housing and construction. another project of nbsn has been its business school inner-city leadership conference. in 1995 the conferencedrew 75 participantsrepresenting34 schools. the 1998 conferencebrought over 135 faculty, students and entrepreneurs together with representatives from the government, foundations and multinationals to share best practices about working with inner-city businesses, success stories and lessons learned. over 50 urban schools attended, including 8 of the top 10 (us news and world report) business schools and 5 historically black colleges and universities. future plans while the primary goal of n 8sn is to expand our reach, a competing and equally important goal is to enhance the level of service to clients, students, and faculty. nbsn's expansion efforts should not however diminish the quality of client work and research that field study teams are completing on behalf of our clients. to successfully implement an expansion strategy,'bsn chose to limit the number of schools it can effectively work with. in total, we are targeting over 150 schools in over 70 cities. these cities have substantial inner-city populations and were selected based on criteria for economic distress measured by median household income, unemployment rates and poverty. while nbsn works primarily with mba programs, in some cases we will also work with undergraduate schools. additionally, we have targeted several historically black colleges and universities located in our expansion cities. in many cases, these schools have a history of working with community based organizations in their neighborhoods. our goal is to influence the 150 target urban business schools to: enhance or establish field study programs, conduct research, improve/establish curricula, and engage alumni/alumnae in innercity business development. initially, nbsn plans to expand its programs and services through: direct consulting engagements in several targeted cities, the influence of business school curriculum, and various programs, i.e. the business school inner-city leadership conference, the urban business school deans'eeting, the inner city field study competition and the icic urban challenge grant program. additionally, we will strengthen and improve our lines of communications through icic's newsletter and our web site (www.nbsn.icic.org). 8 journal ofsmall business strategy vo/. 9, no. 2 fall/winter /998 sample client engagements company/ ownership/location company description business school engagement america's food basket — america's food basket (afb) two harvard business school supermarket specializing is a five-year old, cubanfield study teams have worked in ethnic foods american-owned, 12,000 with afb to survey customers, hispanic/minority owned square foot supermarket analyze the composition of the dorchester, ma located in upham's comer in local market, and develop a the dorchester neighborhood strategic marketing plan to of boston. capitalize on market niches and afb's competitive advantages. the supermarket's competitive advantage is its afb, with the help of the range of unique ethnic teams, implemented several products carefully tailored to changes and has grown from the needs of its nearby sales of roughly $4 million/year shoppers, as well as its low and 40 employees in 1994 to prices and pleasant shopping present sales of $9.5 million environment. almost all of and 95 employees. afb's employees are native spanish speakers hired from the local neighborhood. howell construction co. howell construction co., inc. an executive mba field study inc. —commercial is a commercial contracting team from the university of general contracting company specializing in new missouri, kansas city bloch woman owned facilities and remodeling of school of business worked kansas city, missouri existing office, retail and with the company to provide a industrial properties. the complete five year financial company was founded in analysis, new sottware for 1989, and has 10 full-time accounting, research and employees. assistance in selecting another cpa firm more suited to the originally located in the needs of the company. outlying suburban area adjoining overland park, additionally, the team kansas, it became apparent evaluated property the alter a few years in business company was currently leasing that the larger percentage of for possible purchase and the clientele was located in the potential new markets for inner city of kansas city, expansion. howell missouri. in 1992, howell construction is currently construction moved its working with a large client, a carpentry shop/warehouse into direct result of the team's the inner city of kansas city, eitorts. missouri to provide workmen with facilities closer to their actual working location. 9 journal ofsmall business strategy vol. 9, /to. 2 fall/winier /998 in an elfort to attain our goals, we have implemented the following programs: l. business school curriculum development nbsn will work directly with schools in their cuniculum development, particularly the writing and adoption of case studies that will showcase the inner city as a productive and lucrative environment for appropriately targeted businesses. currently, there are 275,000 (miller, 1997) students enrolled in mba programs in the united states. harvard business school publishing estimates that these students read over 4,000,000 cases each year. in order to have a wide influence, nbsn will seed core curriculum courses with content rich cases whose subject companies are situated in the inner city. rather than write these cases internally, nbsn plans to match prolific and top-selling professors with companies that will illuminate that professor's particular interests. 2. urban business school deans'eeting nbsn will organize a national meeting of america's urban business school deans to discuss inner-city economic business development programs, curricula, research and methods to engage alumni. led by harvard business school dean kim clark, and other prominent business school deans, we will also use this opportunity to promote the icic urban challenge grant program. this meeting will market the importance of the inner-city agenda for business schools, inspire deans to take action at their institutions and within local communities, and share information and best practices. 3. icic urban challenge grant program due to limited resources, urban business schools are oiien prevented from engaging in activities that promote inner-city business development. to ameliorate this situation, we will develop, fund and implement an icic urban challenge grant program. this program will offer grants to urban business schools to establish/improve field study programs, develop/improve curricula, conduct research, and support inner-city entrepreneurs. schools will have to demonstrate commitment to the program by securing matching grants from corporate partners, community foundations and/or other sources. the deans'eeting will serve as a forum to announce the icic urban challenge grant. 4. business school inner-city leadership conference nbsn will continue to sponsor an annual business school inner-city leadership conference. this conference is nbsn's major program to recognize the inner-city focused achievements of business school faculty, students and our corporate supporters. innovative research, new field study programs, community economic development programs, and inner-city entrepreneurs will be highlighted. this event will be held april 22-24, 1999 and our goal is to double last year' attendance. we have expanded the conference by one day to provide more time for working group/breakout sessions. the conference will be held in conjunction with the inc. magazine/icic inner city /00 list announcement at the initiative's inner-city entrepreneurship dinner. the inner city l00 is the first national listing of some of the fastest growing inner-city businesses in america. additionally, we will showcase the first annual nbsn inner-city field study competition. 10 journal ofsmall business strategy vol. 9, no. 2 fatvivtnter 1998 5. inner-city field study competition. nbsn is developing an inner-city field study competition that will occur at the 1999 business school inner-city leadership conference. schools will be invited to submit abstracts on innercity consulting, economic development, and field study projects. a panel of distinguishedjudges will select four teams to make student presentations at the conference. prizes will be awarded to the winning teams. 6. direct client engagements nbsn will provide direct consulting advice to 36 schools in six cities over the course of two years. our first assignment was with the district of columbia's department of housing and community development. the engagement consisted of analyzing the involvement of five urban business schools (american, georgetown, george washington, howard and southeastern universities) in their respective communities and assessing efforts of cooperation among these subject universities. the culmination of the work was a meeting of the schools and various key stakeholders to review the findings and design action steps. 7. nbsn communication we will continue to widely disseminate learnings and best practices through our nbsn web site (www.nbsn.icic.org), icic newsletter, case studies, articles, media interviews, speeches, and strategic alliances with relevant organizations such as sbida. how do nbsn and small business institute models compare? nbsn and the small business institute™ (sbi)programs are, to a great extent, complimentary (please see next article, "the small business institute™ program: high impact entrepreneurship education" by charles h. matthews for details on the sbi program). both programs are dedicated to service-learning and to delivering value to small business clients. there are, however, some interesting similarities and differences between the two programs with respect to client base, funding sources, and targeted student participants. client base both programs, as noted, target an important constituency, namely the small business community. small businesses are oiten sub-categorized into: a) life-style businesses; and b) economic growth companies. life-style businesses include family or individual enterprises focused on providing employment for the owners. such companies provide the backbone of many neighborhoods and communities. economic growth companies, by contrast, offer the potential of significant job growth and wealth creation. while sbi programs serve a broad small, entrepreneurial, and family business base (both lifestyle and economic growth companies), icic focuses on assisting companies that have significant economic growth potential in the inner city. icic's purpose is to increase the number of jobs available to inner-city residents, improve the economic climate of urban cores, and provide wealth creation opportunities preferably for urban core residents or, at least, the owners of companies located in the urban core. 11 journal ofsniall business strategy vol. 9, no. 2 fall/ivt'nter /998 ~fundin from its inception in 1972 until 1996, sbi programs benefited from financial assistance provided by the u.s. small business administration (sba). for twenty-four years, participating schools were able to facilitate and encourage university participation in the sbi program. the per case stipend paid by the sba was very modest (increasing from $200 to $500 over the 24 years), but more importantly, the stipend served to provide leverage to secure college resources, funding and encourage continuity of effort. during this time, services were provided to the small businesses at no charge. in 1995-96,with the loss of federal support, participating schools continued to offer the sbi program through a combination of college, community, foundation, and in some cases, client funding or fees. funding for icic's field study program varies by school. some regions have generous benefactor organizations. in instances where there is little or nor financial support, the client pays for all student expenses. tar eted student po ulations the sbi student audience is comprised of both senior undergraduate and graduate business students. in general, sbi programs are limited to four-year and graduate degree granting institutions. in practice, projects tend to heavily involve senior-level business students involved in small business/ entrepreneurship and business policy courses as their capstone course. in contrast, nbsn's field study program primarily targets participation by mba students. moreover, because the quality of work produced by the executive mba students at the university of missouri, kansas city's bloch school of business and loyola college of maryland's sellinger school of business has been outstanding, nbsn seeks wider participation among the growing number of executive mba programs throughout the nation (siegel, 1998).a significant impetus for business school involvement could come from the major accrediting agency for business schools, the american association of collegiate schools of business (aacsb). aacsb has begun to call for schools ofbusiness administration to demonstrate contribution to the economic development of their respective regions (aacsb, 1998). s ner ies between nbsn and sbi pro rams organizational differences between the sbi and nbsn offer significant opportunities for partnership. nbsn is comprised of a national headquarters located in boston with expanding presence in oakland, baltimore, and kansas city. sba programs in contrast boast participation from over 250 schools across the country and internationall. as the professional organization that links the directors of the many sbi programs, the annual small business institute directors'ssociation (sbida) conference brings directors and other faculty together with corporate and institutional partners. both the annual nbsn business school innercity leadership conference and the sbida annualconference have created programs to recognize outstanding student field work accomplishments (sbida's case of the year competition and nbsn's inner-city field study competition). sbi and nbsn can benefit from sharing best practices in field based learning, especially in the difficult arena of quality assurance from students who are pulled in multiple directions. further, nbsn could utilize the reach of sbida to spread success stories and lessons learned about the inner city directly to college and university students, and establish a point of presence via sbida's on-campus organizations. 12 journal ofsmall business strategy vol. 9, no. 2 fall/winter 1998 collaborating to realize the benefits available seems a viable and.worthwhile venture. first, nbsn could share with sbida our field study operations manual, currently being revised by outside consultants. secondly, both organizations can refer clients to one another and share mailing lists. finally, the two organizations could link their web sites, the most effective and efficient means of information dissemination. conclusion nbsn believes that opportunities for urban graduate business schools to advance local economic business development are significant, and these schools should view themselves as critical and vital components to their surrounding community's economic fabric. nbsn has dedicated itself to developing programs that will expose faculty, students, graduates and therefore future business leaders to the investment opportunities and successful entrepreneurial ventures in inner cities. our goals to directly impact urban business schools by supporting the expansion of field study programs, curriculum, research, advisory services and holding academic conferences are ambitious, yet attainable. we must leverage our efforts and enter into strategic partnerships with organizations such as sbida that are critical in the pursuit of these goals. such a contentious mission however is only attainable with the support of the urban graduate university business school structure. references aacsb national meeting remarks by the president and executive director, 1998. dean, monica (1997), the history of icic, national business school news, 1,1. miller, eugene (1997), barron's guide to graduate business schools 10 edition. porter, michael e. (1995, may-june) the competitive advantage of the inner city, harvard business review, 55-70. siegel, anne (1998, july-august), higher education, midwest ex ress ma azine, 38-45. monica ri vera dean, mba, is the director ofthe national business school network a program ofthe initiative for a competitive inner city basedin boston. prior tojoining the initiative, ms. dean spent six years consulting with boos, allen & hamilton in san francisco and as an engineer in both the public and private sectors in new york city. ms. dean earned her mba from the university ofcalifornia, berkley. she may be reached at the ini tiative for a com peti tive inner city at (6i 7) 292-23 72 or at mdean@icic, org. marilyn l taylor mba, dba. is gottlieb/missouri chair ofstrategic management, director, executive mba program icic-kc, director of research and coordinator of the un'rversity alliance program at the bloch school of business and public administration, university of missouri at kansas city. 13 strategy a proposed capital budgeting technique for liquidity constrained small businesses john b.white morgan p. miles georgia southern college abstract at though the advantages of capital budgeting models using discounted cash flows are welt known, small businesses continue to rely on non-discounted techniques in making capital budgeting decisions. this paper analyzes the fi'nanciat environment in which small businesses operate that makes traditional capital budgeting modelsinappropriate. a capital budgeting techniqueis developed that is sensitive to the needs of small businesses and also meets the three-fold criteria for capital budgeting methods. introduction the case for using discounted cash flow capital budgeting techniques by firms has been extensively studied in the past by business researchers (14, 8, 20, 1, 17, 13, 11,12, 6) and provides a common core in any number of financial management textbooks. a much smaller number of researchers have assessed the issue of the trial and adoption of capital budgeting techniques by small business (10, 18, 19). the rapid adoption of capital budgeting models is even more crucial for the success of small businesses in today' highly corn peti tive environment. financially sound capital investment decisions will exhibit a return to equity comparable to the projec ys risk and return profile and increase the owners'et worth, while incorrect decisions will erode the owners'ealth position (4). the adoption of the appropriate capital budgeting tools allows small business owners and managers to make more accurate and potentially profitable decisions. what is surprising is the continued reliance on non-discounted, and therefore inappropriate (non value maximizing) capital budgeting procedures used by small businesses, as is evidenced by the responses to numerous surveys (9, 18, 19). purpose this study is comprised of three distinct sections. the first section reviews the findings of past research which demonstrate that many small businesses do not employ discounted cash flow models. the second portion offers several reasons why conventional discounted cash flow models may be inappropriate for the situations often faced by small businesses, thereby explaining the reluctance of small businesses to apply these methods. the final portion of the study develops a discounted capital budgeting procedure that is theoretically appropriate and sensitive to the special constraints faced by small businesses. 36 capital budgeting capital budgeting models may be categorized into two major classifications, either nondiscounted cash flow techniques or discounted cash flow techniques. the less sophisticated nondiscounted cash flow models do not explicitly take into account the time value of money and consist of traditional payback analysis and accounting rate of return (arr) analysis (3, 4). the inability to assess the impact of the time value of money often results in an incomplete and incorrect assessment of the situation. discounted cash flow techniques include the net present value approach (npv) (16), the internal rate of return approach (irr) (4), and the discounted cash flow model (2). the common feature of all discounted cash flow models is that they all utilize only incremental cash flows resulting from the selected alternative and explicitly take into account the effect of time ignored in non-discounted cash flow capital budgeting techniques. bhandari proposes that due to liquidity limitations, the discounted payback (dpb) model is the superior capital budgeting technique for small businesses. previous research typically smaller firms have lagged behind larger firms in the utilization of the more sophisticated management technology. the adoption of capital budgeting tools is no exception (9, 18, 19).the small firms sampled in previous studies tended to utilize non-discounted cash flow techniques more often than discounted cash flow models. an early study (9) found that while a majority of small firms (53.6%) with annual sales of less than $5 million did not utilize any formal capital budgeting technique, approximately 22% utilized some form of a discounted cash flow capital budgeting model in 1976. a later study (19) found that an overwhelming ma jori ty of firms utilized some formal capital budgeting technique, withapproximately91%of the mid-sized manufacturing firmssampled usingatleastone formal capital budgeting technique. an analysis of a very limited international sample (18) found that all firms analyzed utilized some type of formal procedure for evaluating capital investment projects. however, the utilization of more sophisticated discounted cash flow models by smaller firms appears to be a different matter. it is important to note the tendency for small firms to utilize discounted cash flow techniques appears to be increasing over time. a study of small and medium sized manufacturers showed that only 14 4% of the firms sampled utilized a discounted cashflowtechnique. asimilarstudyofsmallfirms(9)foundthatover75%utilizednon discounted cash flow methods in allocating their capital budget. a subsequent study reached a similar conclusion, with approximately three quarters of the small manufacturers surveyed opting to utilize non4iscounted cash flow procedures for evaluating investment opportunities (18). why small businesses may not use discounted cash flow models the definition of what is a "small business" is not universal. some definitions refer to annual sales, others to total assets and still others to number of employees. however, there are a number of characteristics of small businesses that seem to transcend the numerical definitions, regardless of industry. a small business generally lacks ready access to well developed equity markets. therefore, it has a far greater reliance on commerdal banks as a source of external capital than do large firms. a small firm is also more reliant on a single product or outlet for its revenues than large firms are. 37 there are a number of reasons why standard capital budgeting models are not employed by small firms. one explanation is that managers of small firms are not aware of discounted cash flow techniques and the advantages these models offer. such an explanation is difficult to believe, given the fact that the net present value model has been emphasized in collegiate business schools for well over a generation. desk top computer packages and hand held calculators will now compute net present values and even internal rates of return in a few simple steps. thus, the technique and the technology are available to even the smallest of small businesses, and yet the preferred capital budgeting technique for small businesses remains payback. a second explanation for the reluctance on the part of small businesses to utilize discounted cash flow models stems from the fact that managers of these small firms perform many functions. therefore, less time is devoted to each specific task, such as capital budgeting. while a large corporation may have a sizeable staff devoted to the financial analysis, forecasting and data collection necessary for so phistica ted capital budgeting models, such resources are not typically available to the small firm. however, even payback requires some degree of cash flow forecasting. therefore, small firms typically do generate the data necessary for discounted cash flow models and yet fail to employ these techniques. a final explanation for the slow adoption of discounted cash flow models is that small firms have a shorter planning horizon. producing a single product (or at most a few products), the small business is susceptible to large changes in it cash flows if the market abandons it product. large, multi-product, multi-market firms are by nature diversified and do not have their survival tied to a specific item or service. for this reason, small firms attempt to minimize the time to recover their initial investment as a financial hedge against dynamic markets. in addition, small firms tend to be cash oriented, forcing them to focus their attention on near term cash flows in order to insure that they are able to meet their financial obligations. the result of these limitations on small businesses is that payback is often the capital budgeting technique embraced by many small businesses. (while many large firms use payback in addition to discounted cash flow techniques, small firms tend to rely on non-discounted cash flow models more exclusively than do large firms (9, p. 55).) the discounted payback model is a slight improvement over standard payback analysis because discounted payback considers the time value of money through the payback period. however, standard payback and discounted payback both suffer two serious flaws. first, both ignore the cash flows that occur after the payback period. second, both ignore the timing of the cash flows relative to the financial obligations of the firm, a weakness also shared by net present value and adjusted net present value. for the small firm such omissions could mean bankruptcy. all of these capital budgeting models implicitly assume that any loan incurred to fund a project has a flexible repayment program. such an assumption is far from accurate. while large firms typically enjoy substantial retained earnings and ready access to capital markets, small firms are more dependent on commercial banks as an external source of capital at every stage of operation. nearly 75% of all small businesses depend on commercial banks as a primary source of funding. commercial banks are the source of start-up capital as well as a continuing source of funds. commercial banks were the source of 57% of the start-up capital borrowed by small businesses, easily surpassing the 21% loaned by family members (5, p. 98). most of these loans are of an intermediate maturity (less than ten years), tied to the purchase of a specific asset and carry regular installment payments to retire the loan (10,p. 241).because these loans imply a repayment schedule, it is imperative that small businesses be acutely aware that a project generate cash flows sufficient to satisfy the installment requirements (10,p. 276). hence, current capital budgeting models are inappropriate for small firms because of the repayment schedules that accompany bank loans do not necessarily correspond to a project's cash flows. 38 consider a firm that has a three-year payback limit. a project could satisfy the three-year criteria by generating no cash flow in year one and sufficient cash flows in years two and three. the project could also produce a positive npv. however, if the project is funded by a three year annual installment loan, the firm will default on the loan in the first year when the initial payment is due. a positive net present value based on the cash flows for the entire life of the project is irrelevant if the near term cash flows generated are not sufficient to meet the loan payments during each of the first three years. hence, the need for a liquidity sensitive capital budgeting model. liquidity constrained net present value brigham suggests that capital budgeting techniques should satisfy three theoretical criteria (4, p. 354). first, it must consider all of the project's cash flows. second, it must discount the cash flows to incorporate the time value of money. finally, it must be able to select from among mutually exclusive projects the single project that maximizes the value of the firm. a proposed capital budgeting technique that is both theoretically correct and is sensitive to the special needs of the small business is the liquidity constrained net present value model (lcnpv). this technique first evaluates the cash flows and determines if they are suffident to meet the loan schedule. if that requirement is satisfied, the magnitude of lcnpv is simply the sum of the present values of the difference between the debt portion of the cash flows available from a project in a given period and the debt payment due in the corresponding period, plus the value of any tax benefits from the debt. algebraically, lcnpv = sum (pv[(d tc)(cf,) —pmt, + pv(tb,) where: d/tc = ratio of debt to total cost of the project cf = after tax cash flows in period t pmt, = loan payment due in period t tb, = tax benefit in period t the first term, (d/tc)(cf) -pmt, reflects the ability of the cash flows to meet the required debt payment. for simplicity, it is possible to assume that the project is funded entirely by debt. thus, if the cash flows generated are sufficient to repay the debt, then the project should be accepted. if 100% of the cash flows will cover the debt payments for a project funded entirely by debt, then for the same project funded using 60% debt, 60% of the cash flow will be allocated toward the payment on the debt incurred. however, it is important that the portion of the cash flows assigned to service the debt not exceed the portion of the debt used to fund the project. if a project using 70% debt funding and 30% equity requires 100%of the cash flow to service the debt, then the project should be rejected. the firm would not face default in this case but if all of the cash flow were applied to the debt, then there would be no funds available to compensate the 30% equity investment in the project. if the equity investment receives no compensation, then the equity should not be invested in the project and the project rejected. if a project's cash flows will meet only the loan payments, then the equity portion of investment will not earn the rate of return required by the owner. in this case, the value of the firm would be maximized by rejecting the project and placing the equity investment in some interest-earning security. 39 the liquidity constrained net present value model assumes that the term on a debt will not exceed the life of the cash flows. this assumption is based on the fact that commercial banks lend to small businesses for specific assets or projects. indeed, these assets, as well as other assets of theowner,oftenserveasthecollateralfor theloan(10,p.241). sincethebankwouldbeunwilling to extend the loan beyond the economic life of the collateral, the term of a project's loan must be less than or equal to life of the cash flows. lf the tax benefits are ignored, then lcnpv will generate the same result as traditional net present value if the loan is not due until the end of project's life. adding the present value of the tax benefits from debt makes lcnpv equivalent to adjusted net present value only if the loan matures and is payable in a single payment when the cash flows cease. cash flows available in a given period come from current operations as well as additional cash flows in excess of payments due in the previous periods. these extra funds should be compounded by the interest rate the firm earns on its capital. however, only the percentage of cash flows that reflect the percentage of the debt used to fund the project should be considered. lf half of the project's financing comes from debt and half of the cash flows cover the debt repayment schedule, then the project is viable. the remaining half of the cash flows would compensate the equity portion of the investment. only if the project is entirely funded by debt should all of the cash flows be assigned to debt service. the tax benefits come in the form of the traditional tax shield. however, this tax shield is of value only if the firm has a tax liability. for firms that have zero or negative earnings before taxes, there is no tax benefit from interest on debt. decision rule the dedsion rule for lcnpv is to accept any investment where the debt-to-total cost portion of the cash flows for each period is greater than the debt payments associated with the investment. for projects that satisfy this criterion and are mutually exclusive, select the project that generates the maximum lcnpv. when using lcnpv to select mutually exclusive projects, it is necessary to evaluate projects usingequivalent ratios of debt to total cost, because the lcnpv will rise as more debt is used. using a different debt ratio for one project will bias the decision toward the project using more debt. the application of the lcnpv model becomes dearer when it is applied to several examples and compared to payback, discounted payback, and net present value. hypothetical application of liquidity constrained net present value considertwoprojectsforahypotheticalfirmthatincursa10%costofcapitaland hasa three year payback limit. (for simplidty, a tax rate of 0% will be assumed in tables 1 and 3, which will allow the comparison of lcnpv to the more familiar npv. in table 2, a 40% tax rate will be assumed and the resulting effects will also be shown.) project a requires an initial investment of $1000 and produces cash flows of $300 for five years. the project is rejected using payback, since the payback period is 3.33years. the discounted payback period is 4.26 years, indicating acceptance since the dpb is less than the project's life. the npv is $137,so the project is accepted. lf the project is funded entirely with funds borrowed in a five-year loan, then the lcnpv is also $137. therefore, lcnpv, dpb, and npv all reach a conclusion that is different from payback. ln project b, the cost is $600 and the cash flows are $100, $200, $300 and $400 respectively. the payback period is three years, while the dpb is 343 years, both indicating acceptance. using 40 the npv criteria, the project is also accepted, since the npv is $154.60. however, if the project is funded using only debt and a four-year loan (the maximum term allowed), the lcnpv criterion would not accept the project. a four-year, $600 loan at 10% implies annual payments of $189.28. thus, the project would not generate a cash flow sufficient to meet this payment the first year and the firm could face default. using a different level of debt would not change the results. if the project is funded with 50% debt, a four-year loan of $300 would produce a corresponding payment of $94.64. applying 50% of the cash flows to the payment also implies default the first year, since 5($100) & $94.64. in this case, only lcnpv advises the firm to reject the project. (under certain conditions, this project may be feasible. see appendix 1.) advantages of lcnpv there are a number of reasons why lcnpv is more appropriate for small firms than any of the other capital budgeting techniques. first, the estimation of future cash is the same as is required by any capital budgeting model. however, it is superior to both payback and discounted payback models in that lcnpv looks at cash flows beyond the payback period and explicitly assesses the ability of the firm to service the project's debt. more significantly, it also removes the arbitrary payback constraint from the standard payback technique. although lcnpv is similar to adjusted npv, it is markedly superior for the debt dependent small business. both adjusted npv and lcnpv consider the beneficial side effects resulting from financing a project with debt. liquidity constrained net present value will never accept a project with a negative adjusted npv. however, adjusted npv, like the standard npv, does not consider whether the timing of the cash flows from a project will be sufficient to pay the debt liabilities. the lcnpv model satisfies the three-fold criteria of appropriate capital budgeting methods. it incorporates all of the expected cash flows produced during the life of a project, which neither payback technique does. it also acknowledges the time value of money. finally, this technique can select from a group of mutually exclusive projects that single project that produces the most additional value to the firm (4, p. 354). why lcnpv is appropriate for small businesses the lcnpv model is the capital budgeting technique tailored to the special needs of the small business. it requires no cash flow forecasts beyond those the firm is already making. if the small business is unwilling to forecast beyond a specific time horizon, then these are the cash flows that would be used whether the firm is employing the payback, npv or lcnpv capital budgeting models. the lcnpv model does not require any additional forecasts. however, the lcnpv approach does incorporate one additional piece of information, the debt payment, but this is known and certain once the loan application is made. the tax benefit aspect of lcnpv can be found from any amortization chart. thus, by using essentially the same information employed by payback, the small business is able to arrive at capital budgeting decisions that are markedly superior to payback and more appropriate for the liquidity constrained small business than either payback or npv. the lcnpv technique will al ways reject projects that have a positive net present value but an insufficient cash flow to meet their debt obligations. while the rejection of investments with positive npvs may seem to be inconsistent with value maximization, the rejection insures that the firm does not default on its debt, and therefore, the firm continues to survive. accepting a project with positive npv that leads to loan default and bankruptcy is clearly inconsistent with value maximization. 41 table 1. project a (tax rate = 0%) cfo = $1000, 10%,5-year loan for $1000, annual payment of $263.78 cash flows: $300 per year for years 1-5 payback: $1000 = $300+ $300+ $300+ 33($300) payback period = 3.33years reject discounted payback: $1000 = $300(.909)+ $300(.826) + $300(.751) + $300(.683) + 26($300)(.621) discounted payback period = 4.26 years accept npv = -$1000 + $300(.909)+ $300(.826) + $300(.751)+ $300(.683) + $300(.621) npv = $137.30 accept lcnpv year cf payment pvif (cf —pmt)pvif i $300 —$263.78 = $36.22 & 0 .909 $32.92 2 $300 —$263.78 = $36.22 & 0 .826 $29.92 3 $300 —$263.78 = $36.22 & 0 .751 $27.20 4 $300 —$263.78 = $36.22 & 0 .683 $24.74 5 $300 —$263.78 = $36.22 & 0 .621 $22.49 lcnpv = $137.27 accept 42 table 2. project a (tax rate = 40%) year payment = principal + interest 1 $263.68 = $163.68 + $100.00 2 $263.68 = $180.16 + $83.62 3 $263.68 = $198.17 + $65.61 4 $263.68 = $218.00 + $45.78 5 $263.68 = $239.79 + $23.99 adjusted npv = npv+ tax benefits $137.30+[$100(.909)+ $83.62(.823)+ $65.61(.751) + $23.99(.621)l40% $137.30+$102.16= $239.46 accept lcnpv year cf payment pvif (cf —pmt)pvif int(pvif) 1 $300 —$263.78 = $36.22 & 0 .909 $32.92 $90.90 2 $300 —$263.78 = $36.22 & 0 .826 $29.92 $69.07 3 $300-$263.78=$36.22&0 .751 $27.20 $49.27 4 $300 —$263.78 = $36.22 & 0 .683 $24.74 $31.27 5 $300 —$263.78 = $36.22 & 0 .621 ~22.4 li4.90 $147.27 $255.41 lcnpv = $137.27+($255.41) 40% = $137.30+$102.16= $239.46 accept 43 table 3. project]3 [tax rate = 0%] cfo = $600, 10%,4-year loan for $600, annual payment of $18928 cash flows: $100, $200, $300, $400 for years 1-4 respectively payback: $600 = $100+ $200+ $300 payback period = 3 years accept discounted payback: $600 = $100(.909)+ $200(.826) + $300(.751) + .43($400)(.683) discounted payback period = 3.43 years accept npv = -$600 + $100(.909)+ $200(.826) + $300(.751)+ $400(.683) npv = $154.60 accept lcnpv year cf payment pvif (cf —pmt)pvif 1 $100 —$189.28 = -$89.28 & 0 .909 reject 2 $200 —$189.28 = $10.72 & 0 .826 3 $300 —$189.28 = $110.72 & 0 .751 4 $300 —$189.28 = $211.72 & 0 .683 reject, cf, —pmt, & 0 appendix 1 if a project has a substantial npv but does not meet the initial lcnpv restriction, the firm may still be able to accept the project if one of two conditions holds. if the firm has excess cash flows from other investments, then these funds may be used to cover the difference between the project's debt payment and the project's cash flow. an alternative method would be to use the minimum cash flow to determine the maximum loan that could be serviced by the cash flows. inthiscase,theinitial$ 100istheconstrainingminimumcashflow. fourannualpaymentsof$ 100 at 10% would repay a $317loan. since the initial cost was $600, the remaining $283 would have to be supplied from equity. the debt to total cost ratio would be 52.83% ($300/$ 600=.5283). the present value of the cash flows breaks down as follows: npv = sum[pv(cf —pmt) —pv of equity investment] = [($100 —$100).909+ ($200 —$100).826 + ($300 —$100).751 + ($400 $100).683]—$283 = 0 + $82.6+ $150.2+ $204.9 —283 = $154.70 44 if the firm had sufficient equity to cover the balance of the investment, then the project is feasible. with lcnpv, the equity portion would receive its required return as the debt is being repaid. in the formulation above, the return to the equity component of the investment begins one year after the debt component begins to receive its return. however, equity does receive its return in full. references 1. aggarwal, raj (1980),"corporate use of sophisticated capital budgeting techniques: a strategic perspective and a critique of survey results," inlerfaces, 10 (april), 31-34. 2. bhandari, shyam b.(1986), "discounted payback: a criterion for capital investment decisions," journal of small business management, 24 (april), 17-22. 3. brealey, richard and stewart myers, principles of corporate finance, second edition, mcgraw-hill, 1984, 412-415. 4. brigham,eugenef.,fundamentatsoffinancialmanagement,fifthedition,drydenpress, 1990, 354-366. 5. 1982 characteristics of business oroners, u.s. department of commerce, bureau of the census. 6. cook, thomas j. and ronald j. rizzuto (1989),"capital budgeting practices for r&d: a survey and analysis of business week's r&d scoreboard," the engineering economist, 34 (summer), 291-303. 7. fremgen, james m. (1973), "capital budgeting practices: a survey," management accounting, may, 25-39. 8. gitman, lawrence j. and john r. forrester (1977), "a survey of capital budgeting techniques used by major u.s. firms," financial management, 6 (fall), 66-71. 9. grablowsky, bernie j. and william l. burns (1980), "the application of capital allocation techniques by small business," journal of small business management, 18 (july), 50-58. 10. henderson, james w., obtaining venture financing: principles and practices, lexington books, 1988, 231-299. 11. hendricks, james a. (1983), "capital budgeting practices including inflation adjustments: a survey," managerial planning, 31 (january/february), 22-28. 12. jones, colin j. (1986), "financial planning and control practices in u.k. companies: a longitudinal study," journal of business, finance, and accounting, 13 (summer), 161-185. 13. kim, suk h. and edward j. farragher (1981),"current capital budgeting practices," management accounting, 62 qune), 26-30. 14. klammer, thomas (1972), "empirical evidence of the adoption of sophisticated capital budgeting techniques," journal of business, duty), 387-397. 45 15. and michael c. walker (1984), "the continuing increase in the use of sophisticated capital budgeting techniques," california management review, 27 (fall), 137-148. 16. levy, haim and marshall sarnat (1986), capital investment and financial decisions, englewood cliffs, new jersey: prentice hall, 2-215. 17. oblak, david j. and roy j. helm (1980), "survey and analysis of capital budgeting methods used by multinationals," financial management, winter, 37 41. 18. pattillo, donald m. (1981),"capital investment practices of small manufacturers: american versus multinational," journal of small business management, 19 (april), 29-36. 19. runyon, l. r. (1983),"capital expenditure decision making in small firmsf%urnal of business research, 11 (3), 389-399. 20. schall, lawrence d., gary l.sundem and william r.geijsbeek, jr. (1978),"survey and analysis of capital budgeting methods," the journal of finance, 33 (march), 281-287. 46 strategy employee stock ownership plans: the role of employee perceptions as motivation greg filbeck university of toledo greg/ilbecka~a'uno. coni raymond gorman miami university gomnaiuf(qantuohio.ed» sandra fink the andersons, inc. .sandie jinkpoandersonsi nc. rom abstract studies indicate that the primary reason for implementing employee siock ownership plans (esops) is to increase employee motivation. however, few studies have assessed the relationship between participation in esops and employees perceiving that their efforis affect their company's value. our interest in this study is to determine whether the assumptions of management about the effectiveness of esops on employee motivation prove correct. by comparing survey responses io questions concerning employee perceptions, we can deierniine thc importance of the differences thai exist between employees of small and large corporations. we find that ihe responses of small corporation employees are usually indistinguishable from those of large corporation employees. this result is consistent with our claim that prospect theory may help in explaim'ng why company managers should consider adding esops to their benefits packages. introduction through surveys of company managers, rosen (1989) finds that "increased employee motivation" tends to be among the primary management objectives when implementing and maintaining employee stock ownership plans (esops). pendleton, wilson and wright (1998) find that higher levels of commitment and satisfaction by employees are related feelings of ownership, including opportunities for decision-making. managers believe that participating employees may feel that their individual performance will attect the value of their company's stock. these conclusions have been reached by surveying literature regarding managerial attitudes such as rosen and klein (1983) and marsh and mcallister (1981). however, little work has been done which directly surveys employee perceptions of their how their ettorts affect their company's value. in this paper, we investigate the impact that esops have on employee attitudes and performance by questioning employees how much they believe that their actions affect the value of the company's stock. 68 journo/ ofsmall business strateg)t vol. /0, no.2 eall/winter /999 motivation for esops employee stock ownership plans (esops) have dramatically increased in popularity since they were first authorized by the employee retirement income security act (erisa)of 1974. approximately 10,000 firms have esops and more than 12 million employees receive part of their compensation through esops (national center for employee ownership, 1997). esops have grown in popularity for a variety of reasons, both from financial and motivational perspectives. an overview of previous research on the subject appears in figure l. figure i results of previous studies on esops study finding managers of firms with esops ranked the performance of their employees rosen and klein higher than did managers of non-esop firms. however, these studies (1983) could not determine whether the esops caused the change in performance or whether superior companies set up such programs in the first place. general survey of managers indicated that providing a benefit to employees (91%) accounting was the most common reason for starting an esop. taking advantage of otyice (1986) tax benefits (74%) and improving productivity (70%) were ranked second and third in the survey. the adoption of an esop alone could not explain the improved rosen and performance in a firm. in those firms in which employees were given any quarrey (1987) opportunity for participating in job-level decision making, growth figures indicate a relationship seems to exist between productivity gains and a participation/ownership system. bruner and managerial control and altruism may be motivating factors in the brownlee (1990) establishment of an esop (case study of polaroid). chang (1990) announcement of esop formation results in enhanced market performance of stock when used as wage concession or leveraged buyout. rosen continued growth in esops is tied to the belief that esops improve (1990) company performance. kumbhakar and employee participation in an esop is positively associated with 13unbar(1993) productivity measures. the productivity effect increase with the age of the esop at the rate of 1.8 to 2.7 percent per annum. park and song firms that adopted esops show significant improvement in their year-end (1995) performance. esops tend to work best as employee incentive when the ownership structure of the firm serves as an etticient monitoring device. pendleton, stock ownership through esop programs is associated with higher levels wilson, and of commitment and satisfaction for employees based on a study of british wright (1998) firms. in addition to these studies of esops that focus on traditional arguments, brickley and hevert's (1991) investigation of the composition and distribution of direct employee stock ownership plans presents alternative speculation on the determinants of employee stock ownership. they argue that incentive benefits must exist for such programs since they continue to increase in popularity despite their cost and the impact of unresolved questions about productivity, tax benefits, and takeover likelihood. a summary of their discussions on the rationale for esop formation appears in figure 2. they separate their arguments into two categories, traditional (concrete, economically based) and nontraditional (abstract, psychologically based). our study focuses on one of these non-traditional arguments —that of prospect theory. 69 journal oismall business strategy vol./0, no.2 fallltyinter /999 an introduction to prospect theory imagine yourself at a carnival entering a particularly inviting looking tent. as you enter the tent, you are handed $ 1,000 and told you may leave the tent by one of two doors. if you leave by door number i, you will receive an additional $500 for certain. if you exit by door number 2, you will either receive an additional $ 1,000 or receive no additional money. there is a 50% chance for either outcome when leaving out of door number 2. which door would you choose to leave from? figure 2 summary of rationales for esop formation brickley and hevert (1991) traditional arguments increased conscientiousness fewer security leaks higher respect for property increased suggestive participation higher awareness of shirking non-traditional arguments group identification prospect theory implications better informed employees now suppose you go back to the carnival the following year and see this tent again and decide to enter. this time you are given $2,000 upon entering. you are then told that it will cost you $500 to exit from door number l. if you leave by door number 2, there a 50% chance that it will cost you nothing to leave and a 50% chance it will cost you $ 1,000 to leave. which door would you leave from? if you are like most people, you chose door number i in the first case and door number 2 in the second case. but as reported by kahneman and tversky (1979), the choice between which door to exit from is the same in both tents. in each case, you are faced with a certain $ 1,500 by going through door i or a 50-50 chance of a total of either $ 1,000 or $2,000 by going through door 2. what seems to fool most people is that the first scenario was presented in terms of an extra gain al)er receiving $ 1,000, while the second scenario was presented in terms of losses alter receiving $2,000. experiments such as these have led some researchers to conclude that people treat gains much differently from losses and people make different choices in what are essentially identical opportunities, simply because of the way the problem is presented. in prospect theory, this is called the "framing effect." 70 journal ofsmall business strategy vol./0, no.2 fall/winter l999 prospect theory is part of a burgeoning literature in behavioral economics (see e.g. thaler, l992). whereas traditional economic theory assumes that people are super rational and selfish decision makers, prospect theory observes that people do not always make choices that are consistent and predictable. prospect theory, as explained by kahneman and tversky (1979), was recently summarized in a wall street journal article on november 28, 1995. figure 3 presents some of the highlights of prospect theory. figure 3 prospect theory: observations of human behavior summary of wall street journal article (november 28, 1995) ~ ipe hate ta lose. people are more risk averse than most economic models assume. there is o(ten more pain from losing than pleasure from gain. there is evidence that people tend to sell their winning stocks too early and hold onto their losers for too long to avoid the recognition that they have lost money in the market. this also explains why some people never invest in stocks at all in spite of their superior long-term returns. ~ we (ach self-control. anyone observing the annual rite of making new year' resolutions sees evidence of our lack of self-control signing up for automatic reinvestment plans so we won't be tempted to squander this money made from our investments is seen by some as a recognition by investors of their lack of selfcontrol. ~ ipe often misread the past. many investors allen overweight recent performance as they make financial decisions. the billions of dollars currently being invested in mutual funds while the market is at an all time high with a historically high price to earnings may be evidence of this phenomenon. ~ we don't see the big picture. investors tend to divide their money into different mental accounts. they may keep large balances on their credit card accounts while maintaining a savings account earning a minuscule return. ~ ipe overweight law probability events. the popularity of lottery tickets and the purchase of accident insurance are both consistent with this assertion. motivational aspects of prospect theory applying these ideas to esops, brickley and hevert suggest "that employees might systematically overweight the likelihood that their actions will affect firm value." in other words, esop participants will be less likely to take self-serving actions that increase their personal wealth because of the possible expense such an action could have on firm value. for example, careless or inattentive work on an assembly line that might make the day pass more pleasantly for employees could result in shoddy products that eventually decrease the value of the firm. since esop participants have a direct stake in the value of the firm, they may be less likely to take such actions. however, would this assumption apply across all companies in all situations? this question may be answered by an application of prospect theory. it seems reasonable to assume that the esop is likely to be an effective motivational tool only to the extent that employees of large corporations feel that their actions affect firm performance as significantly as the actions of employees in small corporations. while the organizational behavior 71 journal ofsmall business strategy vol./0, ttto.2 fall/winter /999 literature remains relatively silent as to the relationship between company size and employee motivation, the labor economics literature indicates that based on company size and empirical observations (brown, 1990), incentive structures of companies differ, and, therefore, affect employee attitudes. brown points out that one of the critical size-related variables affecting incentive structure is monitoring costs. employees of larger firms can "hide" more easily than those in a smaller firm, so it is more diaicult to monitor them. conversely, a hard-working employee in a larger firm has a more diaicult time demonstrating superior effort and feeling rewarded for that extra effort. thus, we contend that employees of smaller corporations would be expected to perceive that they have a greater influence than employees of larger corporations on the success of the firm, and hence firm value. with the inclusion of the esop, the perceptions of the employees of larger corporation might more resemble that of the smaller corporations because they now have their personal wealth at stake. if there are no significant diiterences in the survey responses based on firm size, then this should constitute evidence that prospect theory may be part of the explanation for the success of esops as a motivational tool in a large corporation. survey characteristics to study the impact of prospect theory on incentive implications of stock ownership, we used a survey similar to that of marsh and mcallister (1981) to question the rank-and-file employees and top management concerning their attitudes toward esops. our survey sample significantly dilters from that of marsh and mcallister, since we are including rank-and-file employees. marsh and mcallister's survey was restricted only to top management perceptions of employees'nitudes toward esops, rather than directly surveying employee attitudes. specific information about the survey and methodology appears in figure 4. figure 4survey and methodology characteristics ~ 150 companies with esops were randomly selected from the national center for employee ownership data base. for each company, six survey forms were mailed: one to be completed by a company contact person, usually the ceo or owner, and five to be completed by employees designated by the contact person. pre-stamped, addressed response envelopes distributed to assure confidentiality. ~ thirty-three surveys were returned because the contact person had left the company, company had been dissolved, or company bad been purchased by another company. 14 companies returned the surveys indicating unwillingness to participate in study. ~ as a result, 103 valid mailings of type i surveys (contact person) and 515 type 2 surveys (employees) remain. a total of 16$ valid responses were received for a 27,2% response rate. ~ firms were divided by size into three categories: small, i —100 employees; medium, 101 —500 employees; and large, greater than 500 employees. 47 responses were from small iirms, 53 responses were from medium firms, and 68 responses were from large firms. participants responded on a five-point scale with "5" representing "strong agreement" with a question to "i"indicating "strong disagreement" with a question. a chi-square (x ) test of independence (e.g., winkler and hays, 1981) was used to test for differences between the firm size and level of agreement among questions. 72 journal ofsmall business strategy vok/0, no.2 fall/winter 1999 results the survey is divided into two parts. the first portion reports on issues related to the perceived reasons for implementing the esop, while the second portion reports issues about the effects of the esop on attitudes. in each case, these responses are subdivided into three categories based on firm size (small, medium, and large) for the employers (i.e., ceo or owner), employees, and the total sample. nationally, 86% of afl businesses have fewer than 20 employees, 11% have between 20 and 100 employees, 2% have between 100 and 500, while only fewer than 1% have more than 500 (u.s. bureau of the census, 1993). table i denotes those questions where statistical dilterences in the chi-square tests exist in the responses (by company size) to the survey related to perceived reasons for the esops. results are reported for both the employers and employees responses, as well as for the combined sample. among the seven questions listed, there appears to be an overwhelming difference in how both employers and employees of firms of dilyerent size perceive the rationales for the esop. while this data is interesting, our focus is on the effects of the esop on attitudes within the firms. table i statistical differences in chi-square tests for survey questions section i —perceived reasons for the esop how important was each of the following motivation in your empempcompany's decision to have an esop: loyers 1oyees total 1. to finance an employee purchase of the company? 2 to provide o private market for stock of existing shareholders? 3. to improve the productivity ofemployees? 4. to minimize the potena'al of unionization or strikes? 5. to provide a benefit for employees? 6. to finance the growth of the company? 7 io avoid a merger or shui-down? section i total significant 6 6 7 denotes significant difference exisis m responses by company size at the five percent level and that smaller jirms responded more favorably than larger firms. '+ denoies signi jicant difference exisis in responses by company size at the five percent level and that larger firms responded more favorably than smaller firms. denotes significant difference exists in responses by company size at the five percent level with no difference between larger jirms responses and smaller firm responses. we tested the hypothesis that the attitudes of survey participants toward the esop is unrelated to the size of their firm. accepting this hypothesis would be consistent with a prospect theory contention that individuals tend to overweight the importance of their actions since individual employees in large companies are likely to have less influence on the stock price. if the employee perception is unaffected by firm size, then employees of larger companies may be under the mistaken assumption that they have more influence than they really do. this similarity in response between large and small companies is consistent with prospect theory. table 2 denotes those questions where statistical differences in the chi-square tests exist in the responses (by company size) to the survey related the effects of the esop on attitudes. results are reported for both the employers and employees responses, as well as for the combined sample. note the instances in which the employees provide different answers based on company size compared to employers. figure 5 lists the areas of significant dilterences. 73 journal of small business sfrafegy vol. /0, n0.2 fajllkyi uter l 999 table 2 —statistical differences in chi-square tests for survey questions section ii —effects of the esop on attitudes questions empemployers ioyees total 9 do you think that the esop hus resulted in reduced employee obsenieeism? 10. do you think that the esop has resulted in reduced employee mrdi ness? i i. do you think that the esop hos resulted in reduced employee turnover? 18. because o the esop, how do you perceive higher employee morale? i'+ 19. what is your reaction to the ollowmg statement concerning the impact of your company's decision to have an esop —because of emplol ee ownersbip, my work is more saris/sing? 20. what is your reaction to the following statement concerning the impact of your company's 0 cci sion to have an esop —employee ownersbi p ai ibis company mares my day-io-day work more enj oyable? 21. what is your reaction to the following statement concerning the impact of your company's decision to have an esop owning siocr in ibis company makes me more interested in ihe company's jlnanciel succets? 26. what is your reaction to the following statement concerning the impact of your company's decision to have an esop ifeel thai i havej ob securiyr? 27 what is your reaction to the ollowing statement conccming the impact of your company's decision to have on esop ibe work i do on myj oh is meaningful to me? 28. what is your reaction to the oliowing statement concerning the impact of your company's decision to have an esop 4 porrion of my pay should be ' v+ based on bow iperform? 33. what is your reaction to thc ollowing statement concerning the impact of your company's decision to have an esop —coming io worr is a pleasure? 36. what is your reauion to the ollowing statement concerning the impact of your company's decision to have an esop -iji could begin working over ogain in ibe same field as i am now, i would choose the same company as a place io work? 37. what ts your reaction to thc ollowing statement concerning the impact of your company's decision to have an esop -if another company opered me v+ more money (wiib no esopi for ibe same rind ojwork, i would almost cenainiy accept? 38. what is your reaction to the ollowing statement concerning the impact of your company's decision to have an esop on occasion, i rave been angered by attempts made by ibis company io injiueuce my anirudes and bell efs? 39. please indicate the extent to which you agree with the following statement because your company has an esop i am more careful noi io have accidenu? 40. please indicate the extent to which you agree with the following statement hccuuse your company has an esop i lend ro endorse our products more? 43. please indicate the extent to which you agree with the following statement because your company hes an esop-itis more lmpononi jar mero reep upon v+ news about my company? 47. please indicate the extent to which you agree with thc following statement because your company hus on esop i am more lirely io volunteer for otviviriess onsoredb m co an? denotes signi jicani difference exisis in responses by company size ui ilie five percent level ond iboi smaller jirms responded more favorably shan larger jirms. '+ denotes signijicanl difference exists in responses by company size at the five percent level ond that larger firms responded more favorably ihan smaller jirms. denotes significant difference exists in responses by company size at ibe five percent level with no difference benveen larger firms responses and smaller firm responses 74 journal ofsmal/ business strategy vo/. /0, no.2 fa//iiv/nter /999 figure 5differences in employer and employee responses on perceived reasons for the esop based on firm size ~ employee absenteeism (question 9) ~ morale (question 18) ~ pay based on performance (question 28) ~ pleasure of working (question 33) ~ volunteer activities (question 47) of these questions, question 28 probably relates most strongly to the concept of an esop as a motivational device. however, we can see from table 2 that, for question 28, the employees from the largest firms were more in agreement with the notion that pay should be based on performance compared to employees from the smallest firms, a complete reversal from what we should expect. in fact, on 22 of the 40 questions relating to employee motivation, employees from the largest firms were more in agreement with the statements than employees from the smallest firms. this constitutes further evidence for the idea that employees tend to overweight the value of their actions. overall, 94 out of 120 statements (78%) do not have statistically significant chi-square statistics (i.e. there is no statistically significant difference between groups). for the employee surveys, 35 out of the 40 (88%) "attitude" questions do not have significant statistics. this general lack of a significant difference provides further support for a prospect theory explanation for esops. for the employer surveys, 24 out of 40 (60%) of these same questions do not have significant statistics; in the combined sample, 34 out of 40 (85%) are also not significant. perhaps surprisingly, employers may actually underestimate the degree to which employees feel that their performance affects firm value. conclusion the results from this survey have a potentially far-reaching implications for compensation managers when recommending the implementation or maintenance of an esop. it appears that companies that establish an esop as a motivational device will find it works equally well in large and small companies. figure 6 highlights some of the areas of agreement and disagreement in attitudes of employees in large and small companies. the areas of agreement far outweigh those of disagreement. however, it is interesting to note that employees of smaller firms are more agreeable to the effects of esops as a motivational tool than employees of larger firms on a number of points. in particular, employees of smaller firms believe that esops serve as a motivational tool in such direct areas of job satisfaction and performance-based pay. benefits are also observed in indirect ways. employees of smaller firms tend to find work more pleasurable and are more likely to engage in volunteer work as a result of an esop. smaller firms seeking an edge over larger firms in employee motivation might well consider the impact that an esops has in these areas. this by no means "proves" that the existence of esops can be explained entirely by prospect theory or that prospect theory is the only perspective to consider when implementing an esop. however, we do feel that prospect theory adds an important piece to the puzzle that explains esops. this research also helps to clarify and illustrate the incentive impact oi'sops. employee stock ownership plans are costly, yet firms continue to use them as a part of the employee benefits/retirement package. tax-based, takeover-based, and traditional incentive arguments 75 journal of small business strategy vol.10, iuo.2 fall/ivinter 1999 figure 6 implications for managers effects of esops on attitudes employees of smaller firms with esops have indistinguishable views from that of larger firms with esops with respect to the following points: e reduced employee grievances improved quality of work enhanced cooperation among employees improved communication between workers and management more satisfying and enjoyable work greater willingness for elfort beyond expectation recognition ofhard work well done loyalty and confidentiality e likelihood of endorsement and purchase of company products e more interested in company affairs ply f if*if * i i ii ~bl* 9 d * plyfn f larger firms regarding the effects of esops as a motivational tool. e job security performance-based pay work viewed as pleasurable increased likelihood for volunteer work may be incomplete explanations. they do not individually or collectively explain the motives for and the consequences of esops (although they certainly help to explain the popularity of esops). brickley and hevert (1991) state that "employees who are basically indifferent between alternative behaviors will tend to choose value-enhancing activity when they own stock in the firm." our research shows that whether employees actually affect stock performance or not may not be as initially essential as their perception of their inliuence on the company's success. as a non-traditional incentive explanation, prospect theory helps us to understand why these employee perceptions prove valuable to the inclusion of esops in company packages, and why they, in turn, may provide positive performance motivation across all sizes of companies. references behavior specialists put investors on the couch (1995).wall street journal november 28. brickley, j., & hevert, k. (1991). direct employee stock ownership: an empirical investigation., financial mana ement 20 (2),70-84. brown, c. (1990). firms'hoice of method of payment. industrial and labor relations 43 (3), 165-182. bruner, r. f. and brownlee, e.r. (1990), leveraged esops, wealth transfer, and shareholder neutrality, financial mana ement 19 (i) 59-74. employee ownership report, (1997), national center for employee ownership, inc., volume xv i i. chang, s. (1990). employee stock ownership plans and shareholder wealth: an empirical investigation. financial mana ement 19 (i), 48-58. kahneman, d., & tversky, a. (1979). prospect theory: an analysis of decision under risk. e ~ i (2&, 293-29(. k bbk,s,e.d b .a.(19937.79 i ( esop-9 d livllk:e(d f u.s. firm-level data. journal of public economics 52 (2), 273-283. marsh, t., & mcallister, d. (1981). esops tables: a survey of companies with esops, journal of co oration law s rin, 521-623. 76 journal ofsmall business strategy vol. /0, no.2 fall/jvinter l999 park, s., & song, m. (1995). employee stock ownership plans, firm performance, and monitoring by outside blockholders. financial mana ement 24 (4), 52-65. pendleton, a., wilson, n., & wright m. (1998). the perception and effects of share ownership: empirical evidence from employee buy-outs. british journal of industrial relations 36 (1), 99-123. rosen, c. (1989). employee stock ownership plans: myths, magic, and measures, ~em lo ee ~ri i t k 16(3),189.195 rosen, c. (1990). the record of employee ownership, financial mana ement 19 (1), 39-47. rosen. c. (1997).employee owner's page, national center for em lo ee ownershi 17 (2), 10. rosen, c. & klein, k. (1983). job generating performance of employee owned companies, monthl labor review 106 (8), 15-19. rosen, c. &. quarrey m. (1987). how well is employee ownership working? harvard business review 65 (5), 126-132. thaler, r.h. (1992). the winner's curse. princeton: princeton university press. u.s. government accounting office, (1986), em lo ee stock ownershi plans, (gaoemd-86-4br), february. winkler, r. & hayes, w. (1975) statistics robabili inference and decision. new york: holt, rinehardt and winston. greg filbeck is an associate professor of finance in the college of business at the university of toledo where he also serves as associate director for the university of toledo center for family business. his teaching and research interests include investments, corporate finance, behavioral finance, and learning styles. he earned his d.b.a. from the university of kentucky, and his b.s.pom murray state university. raymond f. gorman is the associate dean for curriculum and a professor of finance in the richard t. farmer school of business at miami university where he is also the director of the cenier for sustainable systems studies. his teaching and research interests lie in the broad area of corporate fmance and intersections offinance with public utilities, sustainable development, and human behavior. he earned a d.b.a, from indiana university, an m.b.a. pom duke university, and a b.a.pom brown university. sandra fink is benefits manager for the andersons, managing the health and welfare plans, retirement programs, and other benefits for its 3,000 employees. jvith l5 years of experience in human resource managemeni, she specializes in the benefits and compensation area. she earned her m.b.a. from the university of toledo, and her b.s. pom george mason university 77 editor-in-chief william c. mcdowell middle tennessee state university senior editor dianne h. b. welsh university of north carolina — greensboro associate editors joshua aaron middle tennessee state university whitney o. peake western kentucky university raj mahto university of new mexico editorial assistant stacy aaron middle tennessee state university editorial review board semra ascigil middle east technical university joe r. bell university of arkansas at little rock david brennan university of st. thomas shawn carraher university of texas at dallas phillip e. davis east carolina university eugene fregetto university of illinois at chicago joseph geiger university of idaho armand gilinsky sonoma state university michael goldsby ball state university michael harris east carolina university david lyn hoffman metropolitan state college of denver jeffrey hornsby kansas state university jerry kudlats middle tennessee state university cathleen (folker) leitch wilfrid laurier university robert lussier springfield college matthew r. marvel ball state university brian mckenzie california state university, east bay thaddeus mcewen north carolina a&t state university abbas nadim university of new haven john e. prescott university of pittsburgh neal pruchansky keene state college jeff shields university of north carolina at ashville leo simpson seattle university matthew c. sonfield hofstra university harriet stephenson seattle university jude valdez university of texas at san antonio © copyright 2016 small business institute® issn 1081-8510 (online) issn 2380-1751 2016-2017 sbi officers sbi small business institute ® president: patrick walker lindenwood university pwalker@lindenwood.edu president-elect: john h. batchelor university of west florida jbatchelor1@uwf.edu vice president of programs: deborah cours california state university-northridge deborah.cours@csun.edu vice president of programs-elect: timothy dunne middle tennessee state university timothy.dunne@mtsu.edu secretary/treasurer: joshua aaron middle tennessee state university joshua.aaron@mtsu.edu vice president of marketing and communications: whitney peake western kentucky university whitney.peake@wku.edu vice president of membership: kathleen liang university of vermont cliang@uvm.edu vice president of research and publications: denise cumberland university of louisville denise.cumberland@louisville.edu vice president of development: joy griffin california state university-northridge joy.griffin@csun.edu immediate past president: william c. mcdowell middle tennessee state university william.mcdowell@mtsu.edu editor, journal of small business strategy: william c. mcdowell middle tennessee state university william.mcdowell@mtsu.edu editor, small business institute® journal: michael harris east carolina university harrismi@ecu.edu mailto:%20harrismi@ecu.edu mailto:%20harrismi@ecu.edu strategy addressing the work-life interface: strategic implications for small business sarah w. jacobson harriette s. mccaul north dakota state university abstract although some research has assessed the involvement of corporate america in work-life policies and programs, little is known about the involvement ofsmall businesses in this area. the purpose of this study was to learn more about how small businesses are responding to work-lifeissues and to examine the relationship ofvarious organi aiional characteristics to the implementation of work-life policies and programs. the results indicate that small businesses have tespondedto work life issues and concerns in a piecemeal manner and have been relatively non-responsive overall, even though participating would carry linle cost. traditional economic benefits (e.g., health insurance) were most likely to be offered, even li mired care for dependents (eg., resource and referral services) least likely. further, fewer than 10% of the firms have conducted any kind offormal assessment of worklife needs and issues. (ye suggest that a lack of strategic attention by small businesses to the work-life interface is short sightedin view of quality andproductivity issues, changing demographics and the recruitment and retention of well-qualified employees. introduction organizational concern with work-life issues is a recent phenomenon, based largely on dramatic changes in the age and gender composition of the workforce and evidence that historical sex-role definitions are undergoing transformation (lobel, 1991; spence, deaux & helmreich, 1985). recognition of these shifls has led to the suggestion that, in order to remain competitive,organizationsmay need to become more accommodatingof the needs of workers who are attempting to juggle the demands of both work and increasingly complicated private lives. however, although there has been considerable popular rhetoric concerning the importance of providing work environments that address private life concerns, relatively few companies have actually moved in this direction (galinsky et al., 1991; morgan & milliken, 1992). those firms that have decided to address issues faced by employees at the interface between work and private life, have implemented a variety of policies and programs ranging from comprehensive (e.g., flexible scheduling in terms of time and/or work place, child care centers, job sharing and parenting programs) to more limited offerings (e.g., tuition reimbursement, flexible spending accounts and resource and referral services). in recent years, some research has been conducted to assess the extent of work-life responsiveness in corporate america. however, little is known about the involvement of small businesses in this area. 29 our primary goal in the research we describe here was to consider work-life support in organizations generally overlooked in previous research small businesses. since 80% of working americans are employed by companies with fewer than one thousand employees(u.s. bureau of the census, unt business patterns 19 i) work-life issues experienced by managers and employees in this group represents a substantial concern. moreover, the small business administrationhas predicted that by the year 2000 more than hal fof workers in small business will be women (bureau of national affairs, 1990), which may necessitate an even greater strategic concern with the work-life interface for small business. literature review a recent survey by the society for human resource management (1992) reported that most companies cite "expense" as the major obstacle to adopting work-life initiatives. also, companies may have been slow to take action because of the limited evidence on the economic benefit of doing so (vanderkolk & young, 1991). recent research, however, demonstrates that work-life programsand policies build employee loyalty and commitment, improve retention, and may reduce absenteeism and turnover (c.f., galinsky et al., 1991; ho(terth, bayfield, diech, & holcomb, 1991; vanderkolk & young, 1991). work-family support can also enhance productivity (friedman, 1991; katz & piotrkowski, 1983). small businesses, in particular, have been encouraged to otter more work-life programs in order to compete with larger companies for well-qualified employees (bureau of national a1tairs, 1990). finally, even if it is difficult to definitivelyshow tangible benefits of work-life policies and programs, organizations have been encouraged to consider the strategic cost of not doing so in terms of potentially increased turnover, absenteeism and lowered productivity (grover & crooker, 1994; lambert, 1990). an additional research goal in the work-life domain has been to describe differences in the degree to which selected organizations are addressing concerns in this area. based on 0 188 u 31000000 0, 0 18 30 dff 0 manufacturingcategories,the families and work institute was the first to benchmark "family friendliness"'nd to catalogue the experience of major u.s. corporations with numerous policies falling under the work-family umbrella (galinsky et al., 1991). although the study provided a better understanding of practices in larger organizations, no eltort was made to describe the relationship between various organizational characteristics and work-family support. moreover, the study neglected smaller companies altogether. morgan and milliken (1992) sought to address the first deficiency by first scoring companies on three categories of work and family policies and benefits —family leave policies, flexible work options, and dependent care benefits. all policies and benefits were assigned equal importance, although additional points were allocated to more generous versions of the ' lere we will use the term "work-life interface" to describe the juncture between work and private life experienced over the complctc life cycle by all employees. this term is broader and more inclusive than "family friendliness" as it has been generally described. this is not to say that "family friendly" programs and policies are not important but, rather, that they constitute just one area of interest in a broader domain of concern. 30 policies(e.g., a flexible work option available to afl employees versus one available only to a few). scores on the three categories were summed to produce an overall "work-family responsiveness" score. the researchers then examined the influence of various external and internal organizational factors on work-family responsiveness. the most important factors included company size, industry, geographic region of the country, and degree of managerial attention given to work-family issues. for example,companies with more than 500 employees, companies in the health care, finance, insurance and real estate businesses, and companies located in the northwest, were found to be most family responsive. the study also concluded that companies that actively assess the work-family needs of their employees are more generous in terms of work-family programs and policies than those that do not. these results, however, were based on a relatively low response (175 usable surveys from a sample of one thousand, or 18'/0). further, company size was framed as a dichotomous variable(fewer than 500 employees versus more than 500 employees), thus possibly masking importantdifferences within each group. finally, the study included only a limited number of policies and benelits (16 in all) specifically relating to issues having to do with families, omitting more traditional beneflts such as health and life insurance, programs and policies benefitting employeeswithout dependents, and aspects of organizational climate and culture. in this study, we expanded on previous research in two ways: (i) we considered work-life support in small businesses, and (2) we included a wider variety of work-life policies and programs as well as organizational characteristics in our research design. research model we conducted this research project in two phases. in phase i, we analyzed results of telephone interviews with representatives of 403 randomly selected small and medium sized firms. in phase 2, we analyzed the results of in-depth interviews with key informants in 17 firms. in the initial phase of the project, we first examined the influence of a series of macroorganizational factors: size, industry type, rural/urban location, perceived competitive strength, and independent/subsidiarystatus on the provision of various work-life policies and programs. previous research has established a connection between organizational size, industry type and work-life support. largercompanies have tended to be the leaders in the provision of family related support (morgan & m i i liken, 1992), and certain types of industries (particularly banks and insurance companies) have implemented more generous work-life policies and programs (morgan & tucker, 1991). we were unable to locate studies that examined the influence of rural/urban location, perceived competitive strength, and independent/subsidiarystatus on the presence of work-life programs and policies, but these were determined to be particularly salient issues in small 31 business'. we hypothesized that companies in urban locations would be more likely to have adopted work-life policies and programs enabling them to compete more successfully for employees in a tighter labor market. we also hypothesized that organizations that perceive themselves to be doing as well as or better than their competitors would be more likely to expend organizational resources for work-life initiatives than those organizations that see themselves as struggling for survival. finally, we hypothesized that subsidiaries of larger organizations would be more supportive of work life issues than would independent companies because subsidiaries would likely imitate their larger parent organizations in terms of benefits, including work-life initiatives. we also examined the impact of micro-organizational factors, including the percentage of(a) female employees,(b) professional, managerial,and technical employees,(c) employees under age 40, and (d) part-time employees. auerbach (1988) suggested that companies with a higher percentage of female employees will be more "family friendly," because work-life issues may be more salient to female employees. surprisingly, morgan and milliken (1992) found no evidence to support this suggestion when other factors, such as organizational size and industry type, were controlled. given the higher level of competition for upper-level employees, particularly in smaller companies and in rural communities, we predicted that companies employing a higher percentage of professional, managerial and technical employees would be more likely to offer work-life support for recruitment and retention purposes. we also hypothesized that companies with a higher percentage of employees in childbearing and child-rearingyears, no matter their gender composition, would be more likely to be aware of the potential influence of work-life policies and practices on recruitment, retention, and productivity and would, therefore, be more supportive of private life issues generally. finally, we hypothesizedthat companiesemploying a higher percentage of part time employees do so in part to avoid paying for traditional fringe benefits, and therefore, would be less likely to provide work-life support. methodology the surve in trument a revised version of the family friendly index (galinsky et al., 1991)was developed that included additional dimensions of work-life support identified by a panel of human resource managers. the instrument was pretested with 35 human resource practitioners. questions assessed organizational characteristics and work-life support in five categories: ilexibility, leave, dependent care, organizational climate, and economic benefits. we measured the degree 'our researchwasconductedat the land grant institutionsin four midwestern states -nonh and south dakota, lowe and nebraska. family science extension stafl'at each university were a part of the research team. based on extension contact with businesses in the 1'our states and requests by managers for support, we learned that location, perccivcd competitive strength and independent/subsidiarystatus were key factors in determining the degree to which a company is concerned with, and involved in, work-life issues. therefore there was solid, though anecdotal, reason to believe that these factors should be included in the study. while other issues might also be of interest (e.g., age of the company, growth rate, gender of the owner etc.) we do not consider them here. 32 of work-lifesupport based upon two factors used in the studies by galinsky et al. (1991)and morgan and milliken (1992): (i) whether or not a given benefit, program or policy was present in an organization, and (2) whether the benefit, program or policy was available to some, most, or all employees. points were assigned for each of the policies and practices currently being offered in each organizationon the following basis: no=0 points, yes=i point, and if available to all=2 points. based on input from the human resource managers, these work-life support policies and practices were then grouped in five categories: i) flexibility (e.g., job sharing, flextime, flexplace). 2) leave policies (e.g., parental leave with or without pay, bereavement leave). 3) dependent care (e.g., on-site or off-site child care centers, child care vouchers, child care referrals, elder care). 4) organizationalclimate(eg.,employeeassistanceprogram,supervisorytraining community agency referrals, parenting and lifestyle workshops, tuition reimbursement, company-sponsored family events). 5) traditional economic benefits(e g., health insurance, life insurance, sick leave). our scoring system, as did the systems used by galinsky et al. (1991), and morgan and mifliken (1992), summed the five submeasures to yield an overall work-life support score. ~th s in phase i of the project, a random sample of 525 businesses, from four midwestern states, stratified by size and sic code was obtained from a national mailing list (american business lists). letters soliciting participation were mailed to the companies three weeks in advance. a team of three telephone interviewers, trained by the research team to insure consistency, collected the data. ultimately, either the owner/managerof the firm or a designee in 403 (72%) of the firms contacted were interviewed. (a detailed description of the phase i firms and their key organizationalcharacteristicsappears in appendix 1.) reflecting business patterns in the midwest, the phase i sample included a large number of very small businesses (72% employ fewer than 50). the largest category in terms of industry type was wholesale/retail trade (42%). in phase 2, an in-depth interview was conducted with a convenience sample of 17 respondents, selected from within the various size and sic code categories, to provide a better understanding of alternative approaches to work/private life issues. three of these firms employed 20 49 people, five employed 50 99, six employed 100 249 and three employed 250 499. nine of the companies were in manufacturing, two in health services, two in transportation related businesses and four in business and professional services. control variables the measure for company size used in phase i sample construction was number of employees, as indicated above. the companies in the sample were grouped into four categories based on sic code to reflect similarity of industry and to insure adequate cell sizes. in a preliminary analysis, however, it was determined that the only significant industry 33 differences were between the finance, insurance, real estate, business and professional services category and all others (p & .001). thus, for this analysis. these data were collapsed into a dichotomous variable ( i = business and professional services, 0 = other). to measure competitive strength, respondents indicated if they perceived their company as doing better, about the same, or worse than their competitors. organizational type became a categorical variable based on answers to a question as to whether the firm was independently owned (=0) or the subsidiary or satellite of another company that determines or influences policy(=l). the rural/urbanclassificationwas determined by the researchers based on a u s. census definition (i = business located in a community with a population greater than 2500, 0 = other). questions concerning micro-organizational factors were also asked in the interviews. participants reported the percentage of their employees in the following categories: female, less than 40 years of age, part-time, and professional, technical, or managerial. lldl h i informants in phase 2 were either the owner/manager in the smallest firms, a general manager or administrator, or (in the three largest firms) the human resource manager. interviews lasted approximately one hour. initially, participants were asked the series of standard questions that had comprised the telephone interview of the larger sample. then, several additional open-ended questions were posed regarding the respondent's overall satisfaction with the manner in which existing work-life programs were working out, the perceived effect of these programs on turnover and/or absenteeism, the manner in which decisions had been made concerning establishmentof work-life programs, means the firm used to evaluate them once the programs had been implemented,and special issues faced by the firm in dealing with work-life issues. results and discussion the average score for overall work-life support in the phase i firms was 37.57 (sd= i 2 46) out of a possible 102 points. scores ranged from i i to 83. this relatively low average score for work-life support is consistent with prior research (morgan & milliken, 1992). multiple regression analysis was used to examine the isolated effect of single variables on total work-life support while controlling for the elfect of all other variables. we used a hierarchial analysis by category of variable which allowed us to test the contribution of the two sets of variables (macro-and micro organizational factors) to the explained variance in overal! work-life support arer controlling for organizational size and type. table i shows the correlationsamong independent variables in phase i of the study, and table 2 shows the results of the regression analysis. these results indicate that company size and industry type explain about 15h/dh of the variance in work-life responsiveness (p&.001; p&.001). our results are consistent with previous studies (gal insky et al., 1991; morgan and milliken, 1992) in that larger companies were more responsive. firms operating in the 34 business and financial services category and firms that are satellites or subsidiaries of larger companies were also more supportive of private life concerns in general (p&.001). however, there were no significant dilterences in overall work-life support between those companies doing business in urban versus rural locations(only 6% of the sample was designated as rural). the only micro-organizational factor that proved significant was the percentage of professional, technical, and managerial employees. this factor was positively related to worklife support (p&.01). none of the other micro factors (i.e., the percentages of women, employees under age 40, and part-time workers) was significant. in general, the respondents were most likely to offer traditional economic benefits (e.g., 97% offered bereavement leave and 86% offered health insurance coverage for full-time employees) and programs without a direct cost to the organization (e.g., 96% offer unpaid leave for the care of sick children but only 33% provide paid leave for such care). most respondents also reported that they provide flexibility in a variety of ways. for example, 95% allowed employees to take time off to attend school functions,97% allowed for flexible vacation scheduling, and 85% provided cross training and flexiblejob design. further, there was a positive relationship between flexibility and the percentage of female employees. policies relating to flexibility were usually implemented case-by-case, rather than as formal policy. support for dependent care was rarely offered, even if little organizational cost was involved. for example, only 15% of the companies offered resource and referral services concerningchild care options and just 29% offered flexible spending accounts for child care. with regard to organizational climate, the only policy offered by more than half of the firms was one allowing employees to make and accept personal phone calls at work. finally, fewer than 10% of the firms reported that they have conducted any kind of formal assessment about work-life needs and issues. in the in-depth interviews conducted in phase 2, several dominant themes emerged. first, most of the informants in the expanded interviews expressed general satisfaction with the eflicacy of their present work-life programs and policies. this was true whether the programs were generous or more limited. informants also expressed the importance of customizing the program to the particular needs of the business and its employees. for example, the establishment of cross-functional teams has enabled one flexible manufacturing company to turn over scheduling of work time and paid leave to the employees themselves. management believed that this action has encouraged the kind of empowerment and self-management required for the rapid turnaround of product perceived to be critical to the success of the company. in another example, a small nursing home located in an isolated rural community had experienced extremely high turnover among certified nursing assistants (most of whom were women) who were literally irreplaceable given the size of the existing labor pool. 35 table i correlation nal is: ke inde endent variables and total score total pctvyoaien pctprof pctlt40 pctpart orgsize total 1.00000 pctvyoialgiv 0.11693'.00000 pctprof 0.19640"' 01827 1.00000 pctlt40 -0.10817'.12474'0.12775'" 1.00000 pctpart -0.13917" 0 32092"'0.13376" 0 31815"' 00000 orgsi/e 0.31951""'.04780 0.02288 -0.16500" -0.11561'.00000 key: total= extent of organization's provision of programs and policies addressing work-life interface, pctwomen=percent women, pctprof=percent professional, pctlt40 = percent employees under age 40, pctpart=percent part-time employees, orgsize=number of employees in organization. correlations with dummy variables for business type have not been included. «p&.05 ««p&.01 «««p&.001 36 table 2 addressin the work-life interface'ierarchical re ression results variable beta f r'or step group i control variables a. organizational size 3.13 28.84ea* b. industry type 8.42 27.9*a* .149 group 2 organizational variables a. organizational health -2.13 3.23 b. independent/subsidiary 6.31 23.48~ev c. rural/urban location -3.95 2.81 .066 group 3 company demographics a. percent women .040 3.27 b. percent professional .82 7.61v~ c. percent less than 40 .011 .20 d. percent part-time .04 4.04* .034 note: r'.25, f = 3.37" ep&.05, va p&.01, *vs p&.001 tgt in an earlier anova, it was determined that the only significant distinction in industry type was between the business/financecategory and others(f=10 99, p& 0001).therefore, a categorical variable was created for the regression analysis (bus/fin, other). organizational health = company says it is doing better, about the same, or worse than competitors, organizational type = independent/subsidiary or satellite. 37 the nursing home was able to significantly reduce turnover, however, after instituting a flextime program. the administrator of the nursing home indicated that management was able to offer this program at relatively low cost, with an excellent payback. results of the in depth interviews indicate that it is in the strategic selection and implementation of work-life programs that dramatic returns can be realized. observations and recommendations i licati ns for practice most small companies can do more to assist their employees in managing their work and private lif'e responsibilities. they are not taking advantage of the many opportunities altorded by their size to be more flexible and responsive. this might be because, as other authors have noted, they view work-life issues as "competing for agenda space with an array of other issues from which companies must select the important, not the trivial, and then formulate responses to those deemed most relevant" (morgan & milliken, 1992, p. 239). in this sample with a preponderance of firms employing fewer than 250 people, issues other than work-life support may be viewed as more critical. in such settings, programs and policies relating to work-life issues have been adopted piecemeal as a given need is identified. it is our contention, reinforcedby the phase 2 interviews, that such an approach bears substantial hidden costs to the organization. first, if small businesses do not conduct a need's assessment or a cost/benefit analysis, it is easy to miss the potentially significant impact that the implementation of a work-life support perspective may have on organizational success. second, in responding piecemeal to individually identified needs rather than developing a coordinated effort, the overall eitect of work-life programs may be muted. finally, based on a well-articulated needs assessment, money spent on some traditional programs offered by a substantial number of firms (e.g., life insurance) might, in some instances, be reallocated to programs and policies more consonant with the needs of the firm's employees. therefore, a formal process of gathering information about employee work and private life needs should serve as the firm's starting point in determining overall policy in this area. in addition, evaluation against such measures as absenteeism,turnoverand/orproductivityshould be adopted after implementation. this may be even more important for smaller businesses where the margin for error in adopting such change is narrower than in larger firms with slack resources many work-life programs and policies are relatively simple to establish and carry a low cost, while at the same time encourage higher productivity. yet, based on results of this and other research projects, it is clear that a majority of small to medium sized firms are not engaged in these activities. it would be a foolish generalization, however, to suggest that all small businesses should be engaged in providing comprehensive work-life programs and policies. resultsofourin-depthinterviewssuggestthatcustomizingwork-lifeprogramsyields the greatest return. in table 3 we identify four business types and outline specific strategic justification for choosing to address the work-life interface in each case. 38 table 3 when does it ake ense for mall businesses to address the work-life interfacev ~ma ufacturin professional services to create a culture consistant with r to compete for talented employees, high quality and empowerment particularly professionals, in this particularly in flexible manufacturing sector where work-life programs and environments. policies are more common and otten relatively generous. to reallocate costs of traditional benefits to more closely meet the needs of a majority of today's workers as well as organizational objectives. to recruit and retain female employees. to attract employees in low-wage, unskilled operations. fast food and retail non-pr fessional services to set the firm apart as unique and as r to increase commitment and reduce the "employer of choice" in this arena. absenteeism and turnover. to create an image of employee support in order to enhance recruitment in low-wage unskilled positions. for example, although firms hiring professiomls may need to offer more work-life support in order to attract and retain talented employees, these programs make little sense in most retail and fast food settings, with low wages and many part-time and/or contingent workers. it is through careful strategic analysis, therefore, that firms should measure the costs and possible benefits before embarking on this kind of activity. im lication for future researc it is important to note the limitationsof this research project. one limitation is the reliance on self-reports from the owner/managers of the firms in both the initial survey and the in-depth interviews. we did not attempt to verify, through other means, the existence of the programs and policies described. further, this study did not attempt to measure tangible effects of differing configurations of work-life programs and policies; it simply documents whether or 39 not they are present. finally, our scoring system, as in previous studies, did not attempt to discriminate between difterent types of work-life programs, in terms of cost or scope, in measuring overall responsiveness. for example, the same weight was assigned to the presence of an on-site child care center as to a child care referral service. the former seems to represent a much higher level of commitment to providing work-life support by a given employer, but this difference is not reflected in our scoring scheme. further research is needed to refine the measurement of work-life responsiveness, assigning a greater value to more costly initiatives. also, in response to the apparent need of practitione rs for concrete evidence of the effects of work-life programs and policies, future research should focus on measurement of tangible improvements in organizational performance resulting from their implementation, as well as more intangible factors such as reduced stress and burnout and higher levels of employee commitment. 40 appendix i organizational characteristics of companies in phase i sample. macro size 20 49 employees 72% 50 99 employees 13% 100 249 employees 8% 250+ employees 8% industry type wholesale/retail trade 42% mining, agriculture, forest, fishing, construction, manufacturing, transportation, communication 25% finance, insurance, real estate, business gt professional services 16% health, education, other services 17% organizational type independently owned 74% subsidiary 26% organizational health doing better than competitors 64% doing same as competitors 36% micro % female 0-25 35% 2650 28% 51-75 21% 76100 16% % employees under age 40 0-25 8% 26-50 24% 51-75 28% 76 100 40% 41 '/o part-time employees 0-25 59'/o 26 50 16'lo 51-75 13'/o 76100 13'/o '/o professional, administrative or managerial 0-25 80'/o 26-50 15'/o 51-75 2'lo 76100 3'lo 42 references auerbach, j.d. (1988). in the business of child core: employer initiatives and working women. new york: praeger. bureau of national affairs, inc. (1990). work and family programs; a growing benefit for small companies, in the bna special report series on work and family. washington, d.c. (january). friedman, d. (1991). linking work-family issues to the bottom line, report number 962. new york: the conference board. galinsky, e., friedman, d., & hernandez, c. (1991). the corporate reference guide. new york: the families and work institute. hofferth, s. l., bayfield, a., deich, s., & holcomb, p. (1991). the tvational child care survey: l990. washington, d.cx the urban institute press. grover, s. l. & k. j. crooker (1995) who appreciates family responsive human resource policies: the impact of family-friendly policies on the organizational attachment of parents and non-parents. personnel psychology, 48(2), 271-288. katz, m. 8c c. piotrkowski (1983). correlates of family role strain among employed black women. family relations, 32, 331-339. lambert, s. l. (1990). processes linking work and family: a critical review and research agenda. human relations, 43, 239-257. lobel, s. a. (1991).allocation of investment in work and family roles: alternative theories and implications for research. academy ofmanagement journal, l6, 507-521. morgan, h. & f. milliken (1992). keys to action: understanding differences in organizations'esponsiveness to work and family issues. human resource mnnagement, 3i, 227-248. morgan, h. & tucker, k. (1991). companies that care: the most family friendly companies in america, what they offer ond how they got that way. new york: simon & schuster. society of human resource management. (1992) work and family survey report. alexandria, va. spence, j. t., deaux, k. & helmreich, r. l. (1985). sex roles in contemporary society. in handbook of social psychology. eds. g. lindzey & e. aronson new york: random house, 149-178. u.s. bureau of the census (1991). county business patterns, annual. u s. departmentof commerce(1993). statistical abstract ofthe united states . washington, dc: bureau of census. vanderkolk, b. s. & a. a. young (1991). the work and family revolution: how companies can keep employees happy ond business profitable. new york: fact file, inc. 43 stra teg™y top management international orientation and small business exporting performance: the moderating roles of export market & industry factors franz t. lohrke university of south florida gerslyn mcclure franklin the university of texas of the permian basin vinsy b. kothsri stephen f. austin state university abstract this snidy examined the relationship between top management teom international orientation and small business export performance. results generally supported the hypotheses that market and industry factors moderate this relationship. employing a sample of us. small business exporters, the study found that top management team international orientation had a greaier posi tive relationship with export performance for firms exporting to countries culturally digerem and geographically distantpom their home country than those exporting to countries culturally similar and geographically proximate to their home countries. in addition, international orientation had a greater positive relationship with export performance for firms competing in multi domestic industries than those competing in global industries. introduction recent advances in technology and transportation have allowed even the smallest fums to expand abroad. although these small businesses have limited resources, many have been able to successfully increase sales overseas through exporting (rose & quintanilla, 1996). this trend has prompted increased interest in key success factors influencing small business export performance (e.g., bilkey, 1982; reuber & fischer, 1997). one such key success factor is the effect a small firm's top management has on export performance. as the individuals who scan a firm's environment and make critical decisions for the firm based on their interpretation of this information, a firm's top management team (tmt) can play an important role in a small firm's performance (aaby & sister, 1989). one major stream of this research has examined the relationship between a tmt's "international orientation" (developed through managers'xperiences such as learning foreign languages or living overseas) and export performance (dichtl, koeglmayr, & mueller, 1990; lim, sharkey, & kim, 1993). these studies have generally posited that this orientation improves a tmt's ability to collect and interpret key foreign market information, which should lead to improved export performance (reid, 1983). 13 journal ofsmall business strategy vol. /0, no. 1 spring/summer 1999 findings to date, however, have been mixed. for example, studies investigating the relationship between top management language proficiency and export performance have found strong (nakos, brouthers, & johannesson, 1994), marginal (holzmuller & kaspar, 1991), and no evidence of a relationship (cavusgil & naor, 1987). one explanation for these results may be that the relationship between a tmt's characteristics and performance varies based on a firm's environmental factors (haleblian & finkelstein, 1993). for example, one might expect a tmt's foreign language skills to provide greater benefit to a small finn's exporting efforts in countries having a dilyerent language than the finn's home counny (e.g., a u.s. fum exporting to france) than in those having the same language (e.g., a u.s, firm exporting to great britain). thus, the purpose of this paper is to investigate whether the relationship between tmt international orientation and export performance varies based on different environmental factors. first, the paper reviews previous studies examining the relationship between tmt international orientation and small business export performance. next, it develops and tests hypotheses examining the impact environmental factors have on this relationship. although a firm's environment can be characterized along several dimensions, the paper focuses on two key international contingencies, export market and industry characteristics. finally, it discusses the results in terms of managerial and future research implications. tmt international orientation and export performance tmt issues constitute a major research stream in small business literature because of the critical impact that tmt decisions can have on firm performance(hambrick, 1989). studies employing this "strategic leadership" perspective generally hypothesize that different backgrounds and experiences provide managers with different skills, attitudes, and biases that they then use to interpret their firm's environment and make key decisions (cannella & monroe, 1997; gunz & jallard, 1996; hambrick & mason, 1984). in addition, studies have generally found that the better a tml"s background provides it the skills to handle a firm's situation, the better the firm performs (e.g., haleblian & finkelstein, 1993;michel & hambrick, 1992). for example, a firm competing in rapidly changing environments may perform better if its tmt has the experience necessary to process, interpret, and employ key information from its turbulent environment (bantel & finkelstein, 1995). studies in the small business export literature have examined the tmt characteristic "international orientation," measured as the percentage of a firm's managers having experiences such as living overseas, studying foreign languages, or having previous involvement in international business (e.g., axinn, 1988; dichtl et al,1990). several studies have found this orientation to be related to export performance. for example, research has found that a tmt's previous international work experience is positively related to a firm's export performance (e.g., axinn, 1988). other studies have found that tmt's international orientation discriminates among firms having different levels of export involvement (e.g., denis & depelteau, 1985; lim et al., 1993). these studies have generally concluded that an international orientation provides a tmt with a greater ability to collect and interpret key environmental information about export markets, which the tmt can then use to make critical decisions about serving these markets (reid, 1983). in contrast, some studies have found marginal or no relationship between international orientation and export performance (cavusgil & naor, 1987; holzmuller & kaspar, 1991). one reason for 14 journal ofsmall business strategy vot.10, no. i spring/summer l 999 these mixed results may be that research has yet to examine the effect of environmental factors on this relationship. as noted, however, as these factors vary, the skills needed by a firm's tmt to collect and interpret information can change (e.g., haleblian k. finkelstein, 1993; michel dt hambrick, 1992). thus, a clearer understanding of international orientation-export perfonnance relationship may be obtained by directly examining these environmental factors. two factors that can affect the amount and complexity of international information that a tmt needs to process are export market and industry characteristics. first, export markets can vary along several dimensions including cultural difference, geographic distance, and economic development (gripsrud, 1990). when a firm exports to a country that differs from its home country along these dimensions, the amount of information needed by a tmt as well as the difficulty in obtaining this information can increase (johanson tk vahlne, 1977). for example, when a fum exports to a country having a significantly ditterent culture from its home counny, its tmt may face increased uncertainty about important factors such as consumer attitudes. moreover, differences in language may complicate gathering this critical information. similarly, when a firm exports to a country that is geographically distant from its home country, its tmt may face increasing difficulty in gathering key information about the market. in addition, when a firm exports to a country having a different level of economic development, its tmt may face increased uncertainty about important factors such as local business practices. in contrast, when a firm exports to a country similar to its home country in terms of culture, geography, and economic development, its tmt may face less difficulty in gathering market information and should be able to obtain any needed information with limited obstacles. thus, the information processing benefits provided by a tmt's international orientation should become more important to export performance as the firm increasingly targets markets culturally, geographically, or economically different from its home country. in countries similar to the firm's home country, these benefits should be less pronounced. this suggests the following hypotheses: hit tmt international orientation will be more positively associated with export perfonnance for firms exporting to culturally different countries than those erporting to culturally similar counn les. hyx tmt internationalorientation will be more positively associated with erport performance for firms erportlng to geographically distant countries than those exporting to geographically proximate countriex h3t tmt internationalorientation will be more positively associated with export performance for firm exporting to economically different countries than those exporting to economically sindlar countries. second, industries vary along several dimensions including the degree to which customer needs change across countries (porter, 1986). when a firm competes in an industry characterized by different customer needs across countries (i.e., a "multidomestic" industry), a tmt needs to collect and process increased information to adapt the firm's product to local consumer needs. in contrast, when a firm competes in an industry characterized by similar customer needs across countries (i.e., a "global" industry), a tmt would require less information because the firm can sell a standardized product to all markets. 15 journal ofsmall business strategy vol. /0, no. i spring/summer l999 thus, the information processing benefits provided by a tmt's international orientation should become more important to export performance when a firm competes in an industry where different customer needs exist across markets. in industries with standardized customer needs, these benefits should be less pronounced. this suggests the following hypothesis: hdr titf t international orientation will be more positively associated with export performance for firms competing in multldomestlc industries than those competing ln global industries. methodology sample and data data for this study were collected employing a mail questionnaire sent to 1000 firms randomly selected from a dun & bradstreet database of u.s. small business exporters. the questionnaire was pretested with several university faculty members familiar with small business research to ensure content validity. following the survey method prescribed by dillman (1978), a questionnaire was sent to the top manager of each firm followed by a postcard and then a second questionnaire in the case of nonrespondents. from the initial sample, 70 surveys were returned as undeliverable. of the remaining sample, 156 surveys were returned yielding an effective response rate of 17 percent. this response rate falls well within the 10 to 20 percent expected responses for national surveys of top managers(cf. hambrick, geletkanycz, & fredrickson, 1993). forty respondents indicated that their firms no longer exported, and, thus, they were excluded from the sample. because late respondents have been shown to resemble non-respondents more than they resemble early respondents(kanuk & berenson, 1975),the correlation between response order and several survey items such as firm size and export involvement was examined. no significant correlations were found thus reducing concerns of non-response bias. each firm's tmt was defined by the top manager who responded to the survey (bantel & jackson, 1989). the survey focused on three tmt characteristics that have been used to define international orientation: ( i ) international work experience, (2) experience living abroad, and (3) foreign language proficiency. respondents indicated the number of top managers in their firm who had each characteristic. respondents also provided information about market and industry factors. for market factors, managers were asked to indicate their fums'argest export market. first, firms were then classified dichotomously(i.e., 0 or i) according to whether or not they listed an "anglo" counuy as their largest export market (ronen & shenkar, 1986). because countries within this group (e.g., canada, great britain, and australia) are culturally similar to the u.s., this distinction provides a means for testing the relationship between international orientation and export performance under different cultural conditions. anglo cultures and non-anglo cultures were coded as 0 and i, respectively. second, firms were classified dichotomously (i.e., 0 or i) according to whether or not they listed a north american country as their largest export market. because countries within this group (e.g., canada, mexico, and countries in the caribbean) are geographically proximate to the u s.,this distinction provides a means for testing the relationship 16 journal ofsmall business strategy vol./0, no. l spring/summer l999 between international orientation and export performance under different geographic proximity conditions. north american and non-north american countries were coded as 0 and i, respectively. third, firms were classified dichotomously according to whether or not they listed a developed country as their largest export market. because these countries are more economically similar than less developed countries are to the u.s., this classification provided a means for testing the relationship between international orientation and export performance under different economic conditions. developed and less developed countries were coded as 0 and i, respectively. the degree to which each firm's industry exhibited characteristics of a global industry was measured employing a scale developed by carpano, chrisman, and roth (1994). using a 5-point scale, managers were asked to rate how characteristic (loot at all characteristic, 5=extremely characteristic) each of five factors (e.g., buyer/customer needs are standardized worldwide, companies market a standardized product worldwide) was for competing in their industries. cronbach's alpha for this industry measure was .81. responses for each firm were summed to determine an overall "global industry" score with low and high scores indicating multidomestic and global industries, respectively. because export performance is a multiple dimensional construct, it was measured in three ways: (i ) export percentage (i.e., export sales/total sales), (2) three-year average export growth, and (3) three-year average export profitability. the survey prompted each respondent to report the firm's growth and profitability relative to competitors on a 5-point scale (1=much lower to 5~uch higher). this industry-relative scale was used for two reasons. first, given that the study employed a multi-industry sample, profitability measures could contain industry effects that could confound results (dess, ireland, dt hitt, 1990). second, measuring performance relative to competitors provides an indication of how successful a firm's strategy is, given the demands of the firm's particular industry environment (carpano et al., 1994). data analysis aller classifying firms according to environmental (i.e.,market and industry) factors, moderated regression analysis was employed to test the hypothesized relationships. this type of regression was appropriate because the study's hypotheses are relational (arnold, 1982; haleblian tk finkelstein, 1993). specifically, by employing moderated regression, the study can examine whether the relationship between the dependent variable, export performance, and the independent variable, tmt international orientation, changes across different environments. moderated regression involves a two-step data analysis process illustrated by the following: (i) export performance = control variables+ tmt international orientation+ environmental variable (2) export performance = control variables + tmt international orientation + environmental variable + (tmt international orientation x environmental variable) in the context of the present study, a significant increase in the amount of variance explained, measured as change in r'n equation (2) relative to equation (i), would indicate that the relationship between tmt international orientation and export performance varies in different environments. 17 journal ofsmall business strategy vol. 10, no. 1 spring/summer 1999 two control variables, tmt size and firm export experience (i.e., number of years the firm has exported), were entered first into the equation. tmt size was controlled for because larger tmts may be able to process more information (haleblian dt finkelstein, 1993), regardless of the tmt's international orientation. export experience was controlled for because it may be related to export performance (e.g., firms that have exported longer may have overcome initial start-up costs). next, international orientation and environmental variables were entered. finally, the interactions between international orientation and environmental variables were entered. results table i summarizes the regression results for hypothesis l. as shown in the table, the interaction between international orientation and cultural difference is significant (changes in r' .05 and .03, f, » = 4.50 and f, „=3.28, p & .05 and p& .10, respectively). specifically, the interaction between percentage of managers who have international work experience and cultural difference has a significant positive relationship with both export growth and export percentage. thus, tmt international work experience has a greater effect on export performance for firms exporting to culturally different countries than those exporting to culturally similar countries. these results support hypothesis l. table i regression estimates of the effects of culture on the relationship between international orientation and firm performance export growth export percentage variables i 2 i 2 intercept 2.09"'.31"'.62 7.53 export years .01 .01 .25'28'mt size .18" .16" 1.29 1.06 non-anglo culture .28 -,08 10.53" 5.43 %lived overseas .11 .20 4.49 5.77 %speak foreign language .10 -.27 2.77 -1.64 %tnt'i work experience .28 -.43 5.60 -7.14 non-anglo x %lived overseas non-anglo x %speak for. language non-anglo x %lnt'i work exp. 1.45'2.67'6, 74) (7, 73) (6, 75) (7, 74)r'16 .21 .20 .23 2.30'.71" 3.17" 3.28" change in r'05 .034.50'.37' &.10, p &.05, p &.01, p &.001 note: only significan interactions are shown. 18 journal ofsmall business strategy vol. 70, no. l spring/summer l999 table 2 summarizes the regression results for hypothesis 2. as shown in the table, the interaction between international orientation and geographic distance is significant (change in r' .08, f, » = 3.95, p & .05). specifically, the interaction between percentage of managers who have international work experience and geographic distance has a significant positive relationship with export percentage. thus, tmt international work experience has a greater effect on export performance for firms exporting to geographically distant countries than those exporting to geographically proximate countries. this result supports hypothesis 2. in contrast, the interaction between percentage of managers with foreign language proficiency and geographic proximity has a significant negative relationship with export percentage. thus, contrary to hypothesis 2, tmt foreign language proiiciency has a greater effect on export performance for firms exporting to geographically proximate countries than those exporting to geographically distant countries. table 2 regression estimates of effects of geography on relationship between international orientation dk firm performance export percentage variables i 2 intercept 2.24 4.43 export years .26'32'mt size 1.18 .73 non-north american country 11.24" 8.58i %lived overseas 7.26 4.54 v/vspeak foreign language 3.37 20.60 %1ut'i work experience 6.97 -9.27 non-north american x %lived overseas nou-north american x '/vspeak for. language -.38.20'on-north american x %1nt'i work experience 33.62'6, 75) (8, 73) ri .21 .29 3.41" 3.74 change inr'08 f 3.95'tt &.10, p &.05, ' &.0i, * p &.001 iuotet only significontinterocttons are shtnvn. table 3 summarizes the regression results for hypothesis 3. as shown in the table, none of the interactions between international orientation and economic differences is significant. thus, the main effects, international orientation and economic difference, explain the variance in export performance. these results do not support hypothesis 3. interestingly, however, these results 19 journal ofsmall business strategy val 10, no. 1 spring/summer 1999 indicate that firms in this sample that exported to less developed countries performed better than those that exported to developed countries. table 3regression estimates of the effects of economic development on the relationship between international orientation snd firm performance export profit export growth export percentage variables 1 1 1 intercept 2.38"'.13'" 5.66 export years .01 .00 23) tmt size .04 .19" 1.44 ldc .65" .27 13.11 %lived overseas .26 .22 7.02 %speak foreign language -.$0) .16 5.84 %(nt'i work experience .76'27 7.03 ldc x %lived overseas ldc x %speak foreign language ldc x %lnt'i work experience (6, 71) (6, 74) (6, 75)r'20 .15 .23 3.04" 2.23'.71" change in r' 'p &.10, p &.os, p &.01, p &.001 iuatet only significantinteractions areshawn. table 4 summarizes the regression results for hypothesis 4. as shown in the table, the interaction between international orientation and industry type is significant(changes in r' .09 and .08, fi 7) 4.74 and f, n = 3.91, p & .001 and p& .05, respectively). specifically, the interaction between percentage of managers who have overseas work experience and degree of industry globalization has a significant negative relationship with both export percentage and export growth. thus, tmt international work experience has a greater effect on export performance for firms competing in multidomestic industries than those competing in global industries. these results support hypothesis 4. in contrast, the interaction between percentage of managers who have lived overseas and degree of industry globalization has a significant positive relationship with export percentage. thus, contrary to hypothesis 4, tmt experience living overseas has a greater effect on export performance for firms competing in global than those competing in multidomestic industries. 20 journal ofsmall business strategy vo( 10, no. i spring/summer l999 table 4 regression estimates of the effects of industry type on the relationship between international orientation and firm performance export percentage export growth variables i 2 i 2 intercept -8.11 -7.74 2.30'" 1.80" export years .15 .15 .01 .00 tmt size 1.65 1.42 .19" .19" global 1.21'.15i -.01 .03 '/elived overseas 9.12 -88.00" .25 .18 %speak foreign language 2.38 -2.41 .15 -3.46'lni'1 work experience 7.41 86.86" .31 5.13" global x '/elived overseas global x %speak foreign language global x %tnt'1 work experience (6, 75) (8, 73) (6, 74) (8, 72) ri .19 .28 .14 .22 2.94 3.61'" 2.03 2.62'hange inr'09 .084.74"'.91' &.10, p &.05, p &.0l, p &.00l notet only significant interaettons ere shown. discussion and conclusion prompted by increased small business exporting, research has examined key success factors related to small business export performance. this study provides insight into one important factor by showing that a relationship exists between tmt international orientation and a firm's export performance. in particular, the results support the study's general hypothesis that this relationship will vary based on a firm's export market and industry characteristics. these findings, of course, should be interpreted in light of the study's limitations. most importantly, the survey provides a cross-sectional snapshot of the relationship between tmt international orientation and export performance. the study, however, mitigates this limitation somewhat by including three-year average performance measures as well as controlling for the number of years a firm has exported. moreover, these findings should not be interpreted to mean that tmt international orientation has no value for firms exporting to markets similar to a firm's home country or competing in global industries. indeed, one study has shown that this orientation is positively related to export 21 journal ofsmall business strategy vol.jo, no. l spring/summer l999 performance in a global (e.g., machine tool) industry(axinn, 1988). based on the results in this study, however, one could expect that the positive effect of a tmt's international orientation would be greater for firms exporting to markets dissimilar to the firm's home country or competing in multidomestic industries. for researchers, these results illustrate the importanceof includingenvironmentalvariableswhen examining a tmt's role in small business export performance. because firms face myriad environmental variables (summer et al, 1990), future studies should examine other possible contingencies. for example, studies could examine the impact of variables such as political or economic risk on the international orientation-performance relationship. future research should also further investigate the "international orientation" concept further. the results from this study illustrate the important link that this concept has with export performance, but some results were counter to those hypothesized. in addition, none of the results included all three international orientation/environment interactions. thus, continued research to further develop this concept would be useful. ln addition, future research should also investigate other tmt variables besides international orientation. for example, previous research has shown that tmt size can affect a tmt's processing routines (haleblian & finkelstein, 1993; sanders & carpenter, 1998). thus, future research could also investigate whether successful exporters adapt to increasing environmental complexity by expanding their tmt. consultants also need be cognizant of the different impact that environmentalcharacteristicsmay have on the relationship between tmt characteristics and export performance. these results show that recommendations such as hiring new managers with significant international work experience are likely to have greater impact on firms exporting to countries that differ from their home country. moreover, the impact can vary systematically by industry. increased small business exporting has prompted growing research into key success factors related to a firm's performance. this study's results provide a better understanding of top management's role as one of these critical success factors. references aaby, n. e., & slater, s. (1989). managerial inlluences on export performance: a review of empirical literature, 1978-88. international marketin review 6(4), 7-26. arnold, h. (1982). moderator variables: a classification of conceptual, analytical, and psychometric issues. or anizational behavior and human performance 29, 143-174. axinn, c. (1988). export performance: do managerial perceptions make a difference. international marketin review 5, 61-71. bantel, k., & finkelstein, s. (1995).the determinants of top management teams. advances in ~gp l2, l39.!65. bantel, k., & jackson, s. (1989). top management and innovation in banking: does the compositionofthetopteammakeadifference?strate icmana ementjournal 10,107124. bilkey, w. (1982). variables associated with export profitability. journal of international business studies 13, 39-56. 22 journal of small business strategy vol./0, no. 7 spring/summer 1999 cannella, jr., a., & monroe, m. (1997).contrasting perspectives on strategic leaders: toward a more realistic view of top managers. journal of mana ement 23, 213-237. carpano, c., chrisman, j., & roth, k. (1994). international strategy and environment: an assessment of the performance relationship. journal of international business studies, 25, 639-656. cavusgil, s.,&. naor, j. (1987).firm and management characteristicsas discriminatorsof export marketing activity. journal of business research 15, 221-235. denis, j. e., & depelteau, d. (1985).market knowledge, diversification, and export expansion. journal of international business 16(3), 77-89. dess, g., ireland, r., & hitt, m. (1990). industry effects and strategic management research. journal of mana ement 16, 7-27. dichtl, e., koeglmayr, h. g., & mueller, s. (1990).international orientation as a precondition for export success. journal of international business studies 21, 23-40. dillman, d. (1978). mail and tele hone surve s. new york: wiley. gripsrud, g. (1990). the determinants of export decisions and attitudes to a distant market: norwegian fishery exports to japan. journal of international business studies 21, 469485. g rr.,riii d.r.ii996i.m g \ dk i gf .a~df mana ement review 21, 718-756. haleblian, j., &. finkelstein, s. (1993).top management team size, ceo dominance, and firm performance: the moderating roles of environmental turbulence and discretion. academ of mana ement 36, 844-863. hambrick, d. (1989).guest editor's introduction: putting top managers back into the strategy picture. strate ic mana ement journal 10, 5-15. hambrick, d., geletkanycz, m., &. fredrickson, j. (1993).top management commitment to the status quo: some tests of its determinants. strate ic mana ement journal 14 401-418. hambrick, d., &. mason, p. (1984). upper echelons: the organization as a reflection of its top managers. academ of mana ement review 9, 193-206. holzmuller, h., & kaspar, h. (1991). on a theory of export performance: personal and organizational determinants of export trade activities observed in small and mediumsized firms. mana ement international review 31(special issue), 45-70. johanson, j., &. vahlne, j. (1977). the internationalization process of the firm: a model of knowledge development and increasing foreign commitment. journal of international business studies 8, 23-32. kanuk, l., & berenson, c. (1975).mail surveys and response rates: a literature review. journal of marketin research 22 440-453. lim, j.-s., sharkey, t., & kim, k. (1993).determinants of international marketing strategy. mana ement international review 33, 103-120. michel, j., & hambrick, d. (1992). diversification posture and top management team characteristics. academ of mana ement journal 35, 9-37. nakos, g., brouthers, k., & johannesson, j. (1994).export performance of small and medium sized firms: the importance of managerial characteristics. proceedin s of the small business institute director's association 18, 248-253. porter, m. (1986).competition in global industries: a conceptual framework. in m. porter (ed.), com etition in lobal industries. boston: harvard business school press. reid, s. (1983). firm internationalization, transaction costs and strategic choice. international mmkk i r i i 44-96 23 journal ofsmall business strategy vol.10, no. i spring/summer 1999 reuber, a., & fischer, e. (1997). the influence of the management team's internationa! experience on the internationalization behavior of smes. journal of international business studies 28, 807-825. ronen, s., & shenkar, o. (1985). clustering countries on attitudinal dimensions: a review and synthesis. academ ofmana ement review 10, 435-454, rose, r., & quintanifla, c. (1996, december 20). more small u.s. firms take up exporting, with much success. wall street journal, a 1, ag. sanders, w., & carpenter, m. (1998). internationalization and firm governance: the roles of ceo p i, p«p ii, dp d .~ae f mana ement journal 41, 158-178. summer, c., bettis, r., duhaime, 1., grant, j., hambrick, d., snow, c., & zeithaml, c. 1990. doctoral education in the field of business policy and strategy. journal of mana ement 16, 361-398. franz t. lohrke (ph.d., louisiana siate university) is a visiting professor of management at the university of south florida. dr. lohrke has published articles in a variety ofjournals including journal of international management, advances in applied business strategy, and academy of management journal. his researchinterestsincludeinternationalizationissues for small business, strategic leadership, and organizational decline and turnaround. geralyn mcclure franklin (ph.d., university of north texas) is a professor of management and dean ofthe school ofbusinessat the university of texas ofthe permian basin. dr. franklin has published numerous articles on human resource management and small business management issues in variousjournals including journal of small business management, journal of small business strategy, employee responsibilities &c rights journal, journal of individual employment rights, hospital & health services administration, labor law journal, public personnel management, and journal ofbusiness &c entrepreneurship. in addition, dr. franklin has co-authored human resource management (dame publications, 1995) and management (dame publications, 1997). she is the current director of placement for the academy of management and ireasurer for southern management association. dr. franklin is a past president of the small business institute directors'ssociation, the association for small business cc entrepreneurship (formerly the southwestern small business institute association. vinay kotharl (ph.d., university of north texas) is regents'rofessor of management, marketingandlnternationalbusinessat stephenf austinstate universityin texas. dr. kothari has published over 100 research studies in a variety ofbooks andjournals. his areas ofinterest include international business strategies, strategic marketing management, and small business and entrepreneurshi p. 24 reproduced with permission of the copyright owner. further reproduction prohibited without permission. credits anonymous journal of small business strategy; fall 2007/winter 2008; 18, 2; abi/inform complete pg. 0_4 editor fred l. fry associate editors laurence g. weinzimmer paul r. stephens editorial assistants katherine hamill douglas luman editorial review board semra ascigil joe bell david brennan aaron buchko shawn carraher susan coleman cathleen folker eugene fregetto armand gilinsky joe geiger michael harris timothy hatten masoud hemmasi kirk heriot jeffrey hornsby bruce kemelgor jill kickul brian mckenzie thaddeus mcewen matthew marvel todd mick john e. prescott neal pruchansky george puia matthew c. sonfield harriet stephenson joe singer leo simpson jeff shields jude valdez howard van auken dianne welsh book review editor michael goldsby bradley university bradley university bradley university bradley university bradley university middle east technical university university of arkansas at little rock university of st. thomas bradley university cameron university university of hartford university of wisconsin parkside university of illinois at chicago sonoma state university university of idaho east carolina university mesa state college illinois state university columbus state university ball state university university of louisville miami university of ohio california state university, east bay north carolina a&t state university western kentucky university metropolitan community college university of pittsburgh keene state university saginaw valley state university hofstra university seattle university university of missouri kansas city seattle university university of southern maine university of texas at san antonio-downtown iowa state university university of tampa ball state university the journal of small business strategy is a joint publication of the small business institute® and the foster college of business administration, bradley university. send subscription requests to fred fry, editor, journal of small business strategy, foster college of business administration, bradley university, 1501 w. bradley ave., peoria, il, 61625 or e-mail to jsbs@bradley.edu. annual subscriptions may be ordered at $25 each (u.s. dollars only). international subscriptions add $5 annually for postage and handling. back issues may be ordered at $15 per issue. ©copyright 2008 small business institute® issn 1081-8510 reproduced with permission of the copyright owner. further reproduction prohibited without permission. is informal planning the key to the success of the inc. 500? allred, anthony;addams, h lon;chakraborty, goutam journal of small business strategy; spring/summer 2007; 18, 1; abi/inform complete pg. 95 is informal planning the key to the success of the inc. soo? anthony allred weber state university aallred@weber.edu h. lon addams weber state university laddams@weber.edu goutam chakraborty oklahoma state university goutam.chakraborty@okstate.edu abstract a review of the research on planning indicated that formal planning might be unnecessary for small, fast-growing companies. many small, flourishing companies are operating with no written business plan. this study surveyed inc. 500 ceos to investigate their view on the importance of informal and formal planning practices. the ceos were asked about the time spent on formal and informal planning for the fundamental business functions (marketing, finance, human resource, operations management, supply chain management, information technology, legal issues, social responsibility, and management). the findings indicated that inc. 500 ceos spend more time on informal planning than formal planning. when involved in informal planning, ceos spend significantly more time on management, marketing, operations and finance than the other business functions. when involved in formal planning. ceos spend significantly more time on the same four business functions as informal planning (though the order is slightly different). the study concludes that both informal and formal planning are vital and necessary for small business success. knowing when and what to do in both areas of planning is essential introduction many good business schools at universities across the country have business plan competitions where students create elaborate 50-page documents. the contest winners, judged by professors and practitioners, often receive sizable cash prizes. the winners, in many cases, are not required to apply the winnings toward their plan for any existing or future business. if the goal of these contests is to teach students how to write effective business plans, then the contest may be of value. if the goal is to teach students entrepreneurship, trigger new 95 business start-up, or increase existing business success, then these contests may be ineffective. that is, several studies indicate that formal, written business plans have little influence on the success of small, fastgrowing companies. some researchers contend that in today's extremely dynamic business environment, for many companies, the formal business plan becomes obsolete before it is ever printed. others maintain that business plans are generated primarily to meet an investor's requirements, but are seldom used in day-today management of the company. further, reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy some researchers have discovered that numerous, successful companies have no business plan whatsoever. for example, bhide's (1994), harvard business review, investigation of inc. magazine's list of the 500 fastest-growing companies in the u.s. found: (i ) 41 percent of these successful entrepreneurs had no business plan, (2) 26 percent had only a rudimentary (back-of-anenvelope) plan, and (3) 5 percent constructed financial analysis only when required by investors. if fast-growing companies can succeed without formal, written business plans, then what methods, tactics, or procedures are they implementing? kiedel's (2005) study may provide part of the answer. he indicates that strategic insight often originates in informal settings. keidel explains that the conception of southwest airlines came over lunch when rollin king drew, on a cocktail napkin, a triangle connecting dallas, houston, and san antonio and suggested to herb kelleher that they could offer fares so low people would fly instead of drive. similarly, jack welch, keidel indicates, outlined the vision for ge to his wife over dinner. welch drew three intersecting circles (manufacturing, technology, and services). welch explained that any businesses that fell outside the circle were to be fixed, sold, or closed. much of ge's phenomenal success was based on that informal, back-of the-napkin drawing. a formal (50 page), detailed, written plan wasn't necessary. the purpose of this study is to survey the ceos of successful, fast-growing, small u.s. companies--the inc. 500-to investigate the allocation time spent on both formal and informal planning practices. we hope to offer new insights, identify changes that may have occurred since bhide's (1994) study, and provide valuable managerial implications. literature review a host of researchers have examined formal 96 vol. 18, no. 1spring/summer2007 planning and informal planning. previous studies cited in the following literature review have used the terms "formal" and "informal" planning, but specific definitions were not included. based on our research and discussions with managers this study defines "formal planning" as an activity associated with a method that is scheduled, orderly, written, recorded and disseminated. it often involves a prescribed meeting with at least one other company employee in attendance. "informal planning" is not associated with fixed rules and schedules. it is flexible and may be conducted anywhere, anytime-inside or outside the organization. the informal plan may be disseminated via verbal or written communication. formal planning a substantial stream of research has investigated the impact of planning on the success of the firm. fulmer and rue (1974) noted, for example, that henri fayol wrote about the value of the ten-year plan in 1916. since then, the importance of planning has grown in popularity, been widely discussed, and generally accepted. fulmer and rue suggested, however, that many firms are engaged in planning not because they wish to, but because they feel they must-due to its popularity. is formal planning based merely in tradition and corporate culture, or is it a vital component of long-term business success? the answer is complicated with research results both for and against formal planning. some researchers point toward planning as fundamental to business success. thune and house (1970) found, for example, that planning does pay. these researchers examined six industries and found that formal planners significantly out-performed informal planners. latham and saari's ( 1979) study uncovered substantial research indicating that setting goals often leads to increased performance. herter ( 1995) concluded that every business, regardless of size, needs an effective, comprehensive reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy business plan because the process of developing the plan forces the entrepreneur to think about the harsh reality of the business world rather than the more common dream world. schneider ( 1998) agreed, concluding that the business plan was the difference between success and failure. hormozi, sutton, and mcminn (2002) asserted that a business plan is an effective tool used by businesses to organize their goals and objectives into a coherent format. according to these authors, no matter the size or stage of development, companies use business plans to improve internal operations and to market the business to potential outside investors. hormozi et al. emphasize that a business plan should be written by (1) new business owners, (2) new business owners seeking outside financing for startup, (3) existing business owners seeking outside financing for expansion, and (4) business owners who want to increase the success of their businesses. some researchers take a middle of the road approach. armstrong (1982), for example, reviewed published empirical evidence on planning processes and situations where planning is most useful. armstrong noted that researchers have obtained conflicting findings regarding profit improvement and growth from formal planning processes. few conclusions could be drawn about how to plan and when to plan. ibrahim, angelidis, and parsa (2004) examined the planning practices of small firms in the u.s. and found that the planning practices of smaller businesses might be more sophisticated than generally perceived. almost 81 percent of the 663 responding firms reported that they prepare some type of written long-range plan. sixty-nine percent of these firms prepare plans covering at least the next three years. however, ibrahim et al. concluded that further research is needed to evaluate whether performance of small firms is different between planners and nonplanners. 97 vol. 18, no. 1spring/summer2007 other researchers have concluded that formal business planning is not a vital component of business success. bhide's (1994) study, for example, argued that many small companies do not bother with well-formulated plans because they work in rapidly changing industries and niches. trying to adapt quickly to changing market conditions, these business owners rely on their flexibility for success and do not take the time to write detailed business plans. sanberg, robinson, and pearce (2001) reported that at least one-half of small businesses they studied did not have a business plan. their research indicated that most small business owners contended that a business plan is important primarily for establishing a line of credit, obtaining loans, or attracting investors. once funding was received, business owners indicated that the formal business plan has minimal value. from a different perspective, but with similar conclusions, perry (200 l) investigated the influence of planning on u.s. small business failures. a failure was defined as ending in bankruptcy. failed firms and non-failed firms were analyzed from the dun & bradstreet credit-reporting database. perry concluded that very little formal planning goes on in u.s. small businesses. orser, hogarth-scott, and riding (2000), surveyed 1,004 small and medium-sized businesses and found that the presence of a business plan was highly correlated with performance (revenue increases). however, much like bhide's research, only one-third of the firms surveyed indicated that they were involved in an ongoing, formal planning process. our review of the literature identifies considerable disagreement about the value of formal, written planning on the success of the firm. there is, however, less disparity amongst researchers about the number of firms that create formal plans. many businesses had no formal, written plan or process. if there is no formal, written plan or reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy process, then what are successful business owners doing in regards to planning practices? informal planning informal planning is being utilized successfully and needs further study, according to various researchers. robinson and pearson (1983), for example, emphasizing the need for more research on the informal (or non-formal) planning practices utilized in small companies, analyzed the responses of 50 small bank presidents in south carolina. no significant differences in performance ranking were found on any of the four performance measures between formal and non-formal business planners over a three-year period. specifically, robinson and pearson found that formal planners and non-formal planners placed similar emphasis on five of six planning dimensions-the non-formal planners just did so with less formality. a major implication from their study focused on the minimal benefit that can be expected for a small firm from using a highly formal planning process. instead of emphasizing broad goals like long-term objectives, informal planners emphasized assessment of capabilities and resource evaluation, etc. they concluded that small firms appear to enhance their effectiveness through informal practices. success for informal planners does not mean less planning is necessary-just fewer formal written plans. although many past research studies have focused on the relationship of company performance and formal planning (evidenced by a formal business plan or other formal planning documents) some research findings indicated the planning process itself--formal or informal-is essential. for example, bracker, keats, and pearson (1988) surveyed 217 owner/managers of small businesses in the electronics industry. while their findings substantiated the importance of the entrepreneur's role in business plan usage, 98 vol. 18, no. 1spring/summer2007 they asserted that the process, not the plan, was a key component of performance. likewise, this line of research was evident in a study by lyles, baird, orris, and kuratko (l 993). they studied the formality of the planning process by assessing the degree of planning manual usage, emphasis on developing written plans, and existence of specific schedules for formulating plans. using this construct, they compared responses from 188 small business firms in a midwestem state, categorizing respondents as either formal planners or non-formal planners. their study indicated that there was no significant difference in terms of return on equity and return on assets between the two types of planners. due to the limitations of their study, they recommended further research on the relationship of the planning process and performance of small firms. shrader, chacko, herrmann, and mulford (2004) argued that planning is best examined in the context of both its formal and informal aspects. results from a survey of 150 manufacturing firms' top managers added support to the argument that both formal and informal planning pays. in a less-formal study, keidel (2005) found evidence that senior-level managers often utilize lessformal planning practices and generate important plans in the process. keidel offered several vivid examples of informal planning on a napkin by ceos for southwest airlines and general electric, etc. keidel recommended that every organization needs some measure of big-picture thinking in informal settings. if giant companies like these utilize informal methods, small companies may also benefit. informal planning was one aspect of a larger study on planning by french, kelly, and harrison (2004). they investigated the relationship between firm performance and four types of "planners." using a sample of small, regional professional service firms, they compared non-planners, informal reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy planners, formal planners, and sophisticated planners. although no significant relationship between the performance measures and factors was identified, a significant relationship between net profit and informal planning emerged. the authors strongly suggested that more research is needed regarding informal planning. given the implications of these research studies coupled with the persistent call for more research into informal planning practices, this study examines the extent of formal and informal planning being utilized in small successful companies. specifically, the research questions this study intends to examine are: ( l) what is the fundamental purpose of formal and informal planning? (2) how often do small, successful companies engage in formal and informal planning practices? and (3) what is the most effective formal and informal planning activity inc 500 ceos use? method the researchers in this study mailed surveys to inc. 500 ceos. the inc. 500 represent inc. magazine's annual ranking of the 500 fastest-growing companies in the u.s. to be eligible for the listing, a company must be an independent, privately-held corporation, proprietorship, or partnership; have had sales of at least $200,000; and have had a fiveyear sales history that included an increase in sales over the previous year's sales. four hundred and sixtynine surveys were sent to inc. 500 ceos (31 ceos' addresses were unobtainable). forty-two surveys were returned to sender for incorrect address or no longer at address. hence, 427 of the inc. 500 ceos were potential respondents. of those 427 ceos, 100 completed and returned the survey, generating a 23.4 percent response rate. the inc. 500 ceos responded to a one-page questionnaire that asked about the amount of time spent on formal planning for the 99 vol. 18, no. 1spring/summer2007 fundamental business functions (i.e., marketing, finance, human resource, operations management, supply chain management, information technology, legal issues, social responsibility, and management). a likert-type scale was used, anchored by "l" representing no time spent and "7" representing significant time spent. similarly, the surveys asked the ceos about the amount of time spent on informal planning for the fundamental nine business functions listed above. survey questions were anchored with ''time spent" as opposed to "importance" because the researchers felt time spent increased validity. for example, if a respondent were asked how important is family, career, and health, the respondent might give all three factors a "7" (very important). however, if you assess time spent in those three areas, the results will likely be more accurate. ceos were also asked an open-ended question: "what is the most effective formal planning activity you are involved in?" and "what is the most effective informal planning activity you are involved in?" additionally, the ceos were asked some categorical questions: (1) "do you have a formal, written plan?" (2) "how often do you participate in formal planning?" and (3) " how often do you participate in informal planning?" findings some of the key questions were: i .do the ceos spend different amounts of time on formal versus informal planning activities (considering all the different functions simultaneously)? 2. do the ceos spend different amounts of time on each business function regardless of formal versus informal planning? 3. are the patterns of time spent by the ceos on different business functions significantly different across formal versus informal planning? reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy a. if yes, then what seems to be the pattern in formal planning? what seems to be the pattern for informal planning? because each respondent answered all 18 questions (time spent on 9 business functions for each of the two planning modes), the survey data represent a fully-crossed, 2factor repeated measures design. the factors are: planning (2 levels formal versus informal) and function (9 levels management, finance, . . . supply chain). these data were analyzed with manov a repeated-measures design. the main effect of the factor "planning" is statistically significant at the multivariate level (willc's lambda = 0.887, f(l,99) = 12.62, p-value = 0.001) suggesting that the ceos spend different amounts of time on formal versus informal planning activities (considering all different functions simultaneously). the pattern of the means (shown in table 1 and 2) indicate that ceos spend significantly more time on informal planning activities than formal planning activities. the main effect of the factor "function" is statistically significant at the multivariate level (willc's lambda = 0.226, f(8,92) = 39.48, p-value = 0.001) suggesting that the ceos spend different amounts of time on each business function regardless of the type of planning as shown in tables 1 and 2. the pattern of the means indicate that regardless of the formal versus informal planning, ceos tend to spend the most time on management, marketing, operations and finance followed by human resources and information technology. the ceos tend to spend minimum time on legal, social responsibility and supply chain functions. however, both of the significant main effects reported above need to be qualified due to the presence of a statistically significant planning-by-function interaction effect (wilk's lambda = 0.693, f(8,92) = 5.1, pvalue = 0.001). this interaction effect vol. 18, no. 1spring/summer2007 (shown in figure 1) indicates that the pattern of time spent by ceos on the different business functions vary based on whether he/she is engaged in formal versus informal planning process. follow-up tests indicate that ceos spend significantly more time on management, marketing, operations, human resources and social responsibility functions while engaged in formal planning process than informal planning process. however, ceos spend about the same time on finance, information technology, legal and supply chain functions while engaged in formal or informal planning process. additionally, the ceos indicated that 68 percent of the inc. 500 has a formal written plan. this figure is much higher than that reported by bhide (1994). his study found that only 28 percent had formal written plans. of the inc. 500 who have a formal plan, 32 percent indicate that the purpose of the plan is for obtaining financing, 44 percent indicate that the purpose is for managing operations, 6 percent indicate that the plan is used for purposes other than financing and managing, and 18 percent indicate that the plan is used for a combination of obtaining financing, managing and other purposes. in response to a question concerning how often ceos participate in formal planning, 8 percent indicated daily, 27 percent indicated weekly, 33 percent indicated monthly, 27 percent indicated yearly, and 5 percent indicated other. in response to the question concerning how often ceos participate in informal planning, 54 percent indicated daily, 38 percent indicated weekly, 7 percent indicated monthly, and 1 percent indicated yearly. in response to the open-ended question, "what is the most effective formal planning activity you are involved in?" a large number of ceos' responses related to traditional business functions (marketing, finance, management, information technology, and 100 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy vol. 18, no. 1spring/summer2007 table 1formal planning 1 management 4.11· ~ finance 4.76 1 3 marketing 4_57• 4 operations 4_53• 5 information technology 4.03b 6 human resources 3.64b 7 legal 3.09° 8 social responsibility 2.90° 9 supply chain 2.86° (scale: 1 =no time and 7= significant time) note: means with different superscripts are significantly different from each other table 2 informal planning 1 management 5.47" ~ marketing 5.42" 3 operations 5.17" 4 finance 4_93• 5 human resource 4.12b 6 information technology 4.iob 7 social responsibility 3.30° 8 supply chain 3.11 c 9 legal 3.07° (scale: 1 =no time and 7= significant time) note: means with different superscripts are significantly different from each other human resource). however, a unique category that emerged related to offsite planning. one ceo, for example, said, "once per quarter we go offsite for two days to do a rolling 8 quarter strategic plan. we call them 'hatchfests.' we emerge with powerpoint documents we keep and give to stakeholders." another ceo reported, "our management team goes offsite one day per quarter to assess progress toward strategic goals and set our targets for the next 18 months." other ceos indicated simply, "offsite." in response to the open-ended question, "what is the most effective informal planning activity you are involved in?" a smaller, but consistent category of ceos' responses related to traditional business functions (marketing, finance, management, 101 information technology, and operations). in addition, thought-provoking practices were expressed by ceos, such as (a) daily to do lists, (b) informal meetings in office, weekly staff meetings, ( c) daily personal time to research, ponder and plan, personal study and informal discussion, ( d) verbal discussion and thinking which leads to bullet items and prioritizing action items, (e) social events, ( t) partners lunches, and (g) discussions with trusted advisors (spouse, parents, friends, and board members). implications the implications of this study are categorized into three areas: (1) the most critical functions of informal and formal planning, (2) business plan utilization, and (3) relative importance of informal planning reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy vol. 18, no. 1spring/summer2007 figure 1 -pattern of interaction between planning and function estimated marginal means of measure_ 1 6.0 5.5 5.0 rn c: 4.5 al cl> :::ie (ii 4.0 c: c) .... al 3.5 :::ie planning "c cl> 3.0 a 1 al e :;:::; rn 2.5 d 2 w 2 3 4 5 6 7 8 9 function figure legend: planning: i= fonnal, 2=1nformal function: i =marketing, 2=finance, 3=human resources, 4=0perations, 5=supply chain, 6=information technology, ?=legal, 8= social responsibility, 9=management practices vs. formal planning practices. most critical functions of formal and informal planning an important implication is evident in the comparison of the specific business functions within both informal and formal planning. for both informal and formal planning practices, the study indicates that ceos spend more time on four functions-management, marketing, operations, and finance-than on other business functions such as human resources, information technology, legal, social responsibility, and supply chain. small business owners interested in benchmarking the successful strategies of the inc. 500 should prioritize 102 their planning--concentrating the formal and informal planning activities and resource allocation around these four critical business functions. business plan use this research reconfirmed an earlier study by allred and addams (2006) regarding business plan use. they found that inc. 500 ceos put considerable importance on writing a business plan to obtain outside funding and to manage their operations. the present study indicated that 68 of the 100 responding firms have a formal written business plan. of those who have a formal business plan, nearly one-half of them use their plan for managing operations. thus, reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy earlier research studies by bhide and others pointing to a lack of planning by small firms do not hold up under current practices, according to this study. informal vs. formal planning in some previous studies on planning practices, a few inferences have been made that informal planning may be more important to small companies than large companies because of the need to move swiftly as opportunities arise and decisions must be made. this research study substantiates the point that ceos spend significantly more time on informal planning activities than on formal planning activities. although rated as important, formal planning clearly took a back seat to informal planning. small companies trying to progress rapidly would do well to consider the results of this study of the 500 fastest-growing companies in the u.s. the ceos of these successful firms are consistently planning informallymostly daily. having a written business plan to guide management operations also makes good business sense, according to the majority of the responding ceos. management of small firms should also take note of the significant time spent on four functional areas: management, marketing, finance, and operations-for both informal and formal planning practices. to continue growing in highly competitive, dynamic markets, small businesses must be able to adjust quickly to survive and move even more swiftly to thrive. to do so, small business management needs to understand the importance of effective informal planning practices and to determine the most viable informal planning methods that produce the results desired. similarly, small business managers must determine when to use formal planning practices-such as holding formal strategic planning management meetings twice a year offsite or writing a business plan to guide vol. 18, no. 1spring/summer2007 internal operations or to secure additional line-of-credit funding. thus, a combination of both informal planning practices and formal planning practices is recommended to small business owners and managers. managers should spend time contemplating the results of this study and then determining the planning practices most beneficial to their businesses. future studies need to look more deeply into the actual processes, tools, and techniques of informal planning practices. is informal planning the key to the success of the inc. 500? the results of this study indicate that both informal and formal practices are needed for optimum success. the combination of formal and informal planning appears to drive the success of the fastest-growing companies in the u.s. references allred, a. & addams, h. (2006). after receiving financing, do inc 500 companies continue to utilize their business plan? journal of small business strategy, 17 (1), 17-26. armstrong, j. (1982). the value of formal planning for strategic decisions: review of empirical research. strategic management journal, (3) 197-211. bhide, a. ( 1994 ). how entrepreneurs craft strategies that work. harvard 103 business review, 150-161. bracker, j., keats, b., & pearson, j. (1988). planning and financial performance among small firms in a growth industry. strategic management journal, 9(6), 591-603. french, s., kelly, s., & harrison, j. (2004). the role of strategic planning in the performance of small, professional service firms. the journal of management development, 23(118), 765. fulmer, r. & rue, l. (1974). the practice and profitability of long-range planning. managerial planning, 22, 1-7. reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy herter,g. (1995). business planning boosts your chances. accounting technology, 11(4), 20-30. hormozi, a., sutton, g., & mcminn, r. (2002). business plans for new or small businesses: paving the path to success. management decision, 40(7 /8), 755-764. ibrahim, n., angelidis, j., & parsa, f. (2004). the status of planning in small businesses. american business review, 22(2), 52-61. keidel, r. (2005). strategize on a napkin. strategy & leadership, 33(4), 58-59. latham, gary p. & saari, l. (1979). importance of supportive relationships in goal setting. journal of applied psychology, 64, 151-156. lyles, m., orris, i., burdeane, j., & kuratko, d. (1993). formalized planning in small business. journal of small business management, 31(2), 38-50. orser, b., hogarth-scott, s., & riding, a. (2000). performance, firm size, and management problem solving. journal of small business management, 38(4), 42. perry, s. (2001, july). the relationship between written business plans and the failure of small businesses in the u.s. journal of small business management, 39(3), 201-209. robinson, r. & pearce, j. (1983,). the impact of formalized strategic planning on financial performance in small organizations. strategic management journal, 4, 197-207. sanberg, w., robinson, r., &pearce, j., ii. (2001). one more time ... should small companies attempt strategic planning? the entrepreneurial executive, 46-48. schneider, t. (1998). building a business plan. journal of property management, 63(6), 30-33. shrader, c., chacko, t., hermann, p., & mulford., c. (2004). planning and firm performance: effects of multiple planning activities and technology policy. international journal of 104 vol. 18, no. 1spring/summer2007 management & decision making, 5(2,3), 171. thune, s. & house, r. (1970). where longrange planning pays off. business horizon, 13, 81-87. anthony t. allred is the goddard school of business and economics coordinator for entrepreneurial activities and professor of marketing. his research centers on service quality and entrepreneurship. h. lon addams is dee smith management fellow and professor of management at weber state university. his research centers on small business and communications in the workplace. goutam chakraborty is professor of marketing at oklahoma state university. his research interests include consumer behavior and b2b marketing. stra tegy editor's note this issue finishes out the tenth year of publication for the journal ofsmall business strategy. it will be a new decade for jsbsand a new millennium for all of us. as we enter the year 2000, i would like to remind the readership that the editorial staff and the editorial review board of jsbs continue to attempt to move the journal forward in terms of the quality and quantity of articles related to the ever growing field of small business and entrepreneurship. the usasbe/sbida joint national annual conference will be held in san antonio, february 1620 and is indicative of the efforts of sbida to move the entire organization forward as well. we would like to reiterate the scope of the content of jsbs in terms of the types of articles of interest to us. manuscripts submitted to jsbs should be related to one or more of the following: ~ assist in the formulation or implementation of small business strategy ~ be directly applicable to consulting projects and solutions ~ generate ideas and approaches to problem solving in small business et entrepreneurship ~ be presentable to a small business owner/manager for application ~ relate to small business k entrepreneurship education in addition to the wide range of topics relevant to jsbs, the scope of what constitutes a "small business" is also quite broad and very inclusive in terms of what is appropriate for jsbs. based on u.s. small business administration criteria, the following parameters define small business: maximum annual sales or t e of business number of em lo ees wholesale trade $ 9.5 22 million (varies across industries) general construction $ 17 million services $ 2.5 14.5 million (varies across industries) retail trade $ 3.5 13.5 million (varies across industries) agricultural production $ .i 3.5 million (varies across type) restaurants up to $ 10 million manufacturing maximum of either 500, 750,1000, or 1500 employees (depends on industry) clearly, there is great scope for the publication of scholarly work, we look forward to receiving your manuscripts for consideration by ebs. we hope you enjoy this issue and if you have any comments, please send us a letter or an email (osborneiup.edu). stephen osborne, editor usasbe/sbida joint annual national conference (24'nnual sbida conference and 15'nnual usasbe conference) february 16-20, 2000 sheraton four points, riverwalk, san antonio, texas theme: usasbe/sbida 2000: the entrepreneurial millennium the joint annual national conference will be held jointly by usasbe and sbida from february 16-20 at the sheraton four points, riverwalk in san antonio texas. the conference will include papers, workshops, case studies, and symposia dealing with family business, entrepreneurship, entrepreneurship education, and sbi programs and institute management. topics will focus on issues of significance as we enter the 21" century: ~ new business development 21a century style —what's changed ~ entrepreneurship in a changing world ~ global marketing in the 21" century ~ economic realities: financing small or risky ventures ~ technology and change: redefining the entrepreneur ~ focus on family: whose business is it anyway? ~ incubators and institutes: support systems for new ventures ~ challenges for small business and entrepreneurship educators ch k r i ~hidl. ~b rv' .i r or conrucr: joan gillmna, usasbe u w-madison/grainger hall 975 university ave., suite 3260 madison, wl 53706 60$-262-99$2 60$-263-0$lg (fiu) see you in san antoniot e i'mall business institute directors'ssociation the organization life cycle: integrating content and process steven h. hanks utah state university it has long been argued in organizational literature that as firms evolve, they grow through a series of recognizable stages. this process is referred to as the organization life cycle. scholars have argued that as firms move through life cycle stages, differing problems must be addressed, esulting in the need for different management skills, priorities, and structural configurations. over the years, numerous theories and models have been developed in an effort to explain he life cycle process (1). although these models dif.fer as to the specific number of stages, haracteristics studied, and names assigned each stage, there is a considerable amount of com monality among them. the models share two common themes (2): (1) they suggest that organizations grow through a series of distinct stages, each stage characterized by a unique configuration of contextual, strategic and structural characteristics; and (2) configurations ap propriate at one stage of development may be ineffective, even detrimental in subsequent life cycle stages. the.oretical development of the organization life ·cycle to date has centered on the iden ification and description of distinct "stage's" of organization growth. little concerted atten ion, however, has been paid to the "dynamics" of organization growth: the ''how's" and "why's" associated with movement between the proposed growth stages. a comprehensive model must ntegrate both the content (stages) and process (dynamics) of the organization life cycle. this paper represents an early effort to pull together literature regarding organization life cycle con tent and process into an integrative model of organization growth and decline. integrating content and process the discusssion which follows introduces .two models. the first, in tabular form (table 1), contains a brief summary description of five theorized stages of organization growth: start" up, expansion, consolidation, revival, and decline. the stages of growth are compared across dimensions of organization context, strategy and structure. this model was synthesized through a careful review of ten recent models of organization life cycle stages (3). a detailed comparison of these·ten models can be found in a literature review by hanks (4). the intent of this model is to present the general tenor of stage of growth models. the second model, in graphic form (figure 1), illustrates the processes· of organization growth and decline. the model is comprised of five cycles through which organizations are proposed to traverse as they evolve through stages of the life cycle. it has been developed by the author based on a review of literature associated with organization stages, and organiza tion change. combined, these two models, the former focusing on the content of growth stages, the latter focusing on process, provide an integrated picture of growth and decline in organizations. 1 organization birth . ! . . beginning in the top left comer of figure 1, we can chart the genesis of the organization. as illustrated in the model, the predecessor of organization formation is an idea, some niche or area of need in the-marketplace (5). as the entrepreneur begins' to act upon·the idea, transfor ming dreams into a tangible product or service, the organization is formed. once developed, the product or service is presented to the marketplace. in this model, the term marketplace is used very broadly to encompass both the general and competitive environments in which the organization operates. market acceptance means that a dema nd for the product is present and customers are willing to purchase the organizati_on's product or service. assuming growth is desirable to organization founders, the organization must now scale up to meet product demand. this means hiring additional people and increasing production capacity. . transforming an idea into a viable product and getting the basic organization up and run ning are the focal. tasks in the first stage of the organization life c:ycle, start-up. as illustrated in table 1, the start-up organization is new, or very young, has few employees, and its growth rate is inconsistent. at this stage the entrepreneur must take substantial risk, of ten mortgag ing personal assets, to obtain needed start-up capital. · mqst 'firms at thi.s stage pursue a niche strategy, presenting a very narrow product line, of ten a single product to a single market. the new venture generally undertakes major and frequent product innovations (6). major investments are made in product development, plant and equipment, and working capital (7). · formal organization structure is almost non-existent during the start,up stage. a simple organization structure is generally employed, staffed by the founder who supervises the work of a few employees. job assignments are very general. the tone is flexible, informal and per sonal. thre are few if any formal systems; planning and control occurs on an ad hoc, of ten, intui,tive basis. deision making is highly centralized in the organization founder. · key skills during the start-up stage include creativity (8), market vision, intense commit ment and the willingness to undertake risks (9), on the part of the founder. the founder must be an adept "hands-on'', results-oriented doer. the organization must be "up and running''. as quickly as possible if it is to survive. growing pains and the configuration crisis loop ' as the organization increases in size, it increases in complexity, and facesnew problems. life cyde theorists argue that increased size and complexity place new demands 'on .the organization, often rendering existing organization structures and systems ineffective. thus; if the organization wishes to continue to serve the marketplace in an efficient manner, organiza, lion structure and systems must be reconfigured to better fit the organization's current size, complexity and focal problems. how can organization managers tell when it is time for reconfiguration? flamholtz argued that as organizations outgrow their existing structure and system3, they begin to experience "growing pains" (10); these include: 1. people feel that "there are not enough hours in the day:' 2. people spend too much time "putting out fires:' 3. people are not aware of what other people are doing. 4. people lack understanding about where the firm is headed. ·. : . 2 table 1. summary of life cycle stages expansion su.ge cori.olidillion suge young . older any small. large. largest decl : inconsistent rapid positive slow growth rapid positive ks or identify niche: obtain resources; build pro totyf"."; set up task \blume production and d.istribution; capacity expansion; make business pro fitable; expense control; management systems divenificationl expansion of pro duct/market !icof"." revi miss structore of"."rating systems et niche strategy; single product & market broadened, but contained lines, limited line segmentation &. multi ple markets cons sif plant & equipment; working capital; pl.ant maintenance & acquisition of other \.\brking capital capacity expansion market position businesses : major and frequent pro duct iruiovations incremental product innowtioru few product innovations; enter new markets via acquisition nn inrn; """ : undifferentiated; simple departmentalized.; departmentalized; divisional most functional functional informal. personal. flble; policin lbrmal systems begin to emerge, but en forcement i9 lax lbrmal, bureaucratic; plannirig and control systems enhm::ed formal, bureaucratic; operating decisions decentralized exce n: highly centralized. in centralized; umited moderately centralized.; decentralized mod founder delegation zes, 1989; greiner, 1972; galbraith, 1982; baird & meshoulam, 1968; kazanjian, 1988; smith, mitchell & summer, 1985; miller & friesen, 1984b; ramholtt, ott & bruce, 198'1. . figure 1: model of organization growth and decline idea organization formed product/ service developed system overload ye$ reduced ability growth to serve cycle market yes market/environment acceptance? v proactive no ' no reoewal stagnatlone loop or decline · \ renewal downward cycle spiral realignment? yes no: adaptation innovation diversification renewal reconfiguration death 4 5 5. there are too few good managers. 6. people feel that "i have to do it myself if i want to get it done correctly:' 7. most people feel meetings are a waste of time. 8. when plans are made, there is very little follow-up, so things just don't get done. 9. some people feel insecure about their place in the firm. 10. the firm continues to grow in sales but not in profits. according to flamholtz, occurrence of these growing pains is a signal that the existing con figuration is no longer adequate. successf ul reconfiguration enables the organization to effi ciently serve the market and continue around the growth cycle. what happens when the organization fails to appropriately reconfigure? organizations which are unable to execute an appropriate reconfiguration leave the growth cycle, and follow the configuration crisis loop (see figure 1). failure to reconfigure creates an overload on existing structure and systems; which in tum inhibits the organization's ability to efficiently serve its market. initially, the system overload may be minor, having little impact u pon the firm's ability to serve the market. however, as the organization continues to increase in size and complexity, the overload becomes severe and the organization faces a major developmental crisis. unless resolved, the organization's products will become less desirable in the marketplace, perhaps due to problems with price, quality or poor service, and the organiza tion will begin to experience a period of stagnation or decline. stages and the growth cycle assuming management can successfully reconfigure, the organization continues along the growth cycle, moving into stage ii, expansion. rapid growth brings new challenges to the organization. to meet increasing product demand, production capacity must be expanded and additional people.hired. the organizaiion must devlop the ability 'to produce and distribut its products or services in volume to an increasingly diverse set of customers. existing physical, financial, human and informational resources are stretched to the limit. ensuring adequate supplies of these resources becomes a major task. some economies of scale and experience sho_uld be attained during this stage. · during the expansion stage, the product line may be broadened somewhat, but is still quite limited. product innovations tend to be incremental. to meet growing demand, major investments must be made in working capital and production capacity (11). moderately formal systems and structure begin to emerge during the expansion stage: functional departments are formed for key areas of engineering, production, marketing, and administration, and the structure changes from simple to functional. operating systems are developed in areas such as responsibility accounting, basic budgets and control reports, work standards and personnel systems (12). while these systems may be in place, enforcement is of ten inconsistent due to the frantic pace of growth. while decision processes are still quite centralized, they are less so than in the start-up stage. functional managers are now involved in some decisions. in examining differences between the start-up and expansion stages, it is apparent that a number of significant transitions must' take place. at this point in time the organization's product is fully developed and is receiving a positive acceptance in·the marketplace. contex tual changes (age, growth rate and size), may occur in the natural course of serving the marketplace. changes in strategy and structure, however, require significant managerial at tention. success in the start-up stage came from creativity, flexibility and informality. to 4 5 succeed in the expansion stage, creativity must be tempered, as the organization learns to produce in volume, flexibility must be replaced with basic operating systems and the emergence of a functional structure. while still comparatively informal, some formalization is added. it is of ten difficult to convince successful entrepreneurs of the need for reconfiguration. according to galbraith reconfiguration may seem illogical, given the firm's present success: herein lies the trap. success during the prototype stage provides energy, commit ment, confidence, esprit de corps, and a belief (which is a valid one) that success was in part due to the lack of structure and constraint. for many people, the cur rent organization, or lack thereof becomes an end in itself. the attractiveness of this venture organization is why they joined. then when the next stage begins and requires structure, these people resent the change to their eventual detriment (13). galbraith argued that venture founders must learn to think "stagewise," recognizing the need for reconfiguration as the organization grows in size and complexity. now, having made the transition from start-up to expansion, assuming (1) market con ditions remain relatively constant, (2) demand for the firm's products continues to grow, and (3) the organization continues to meet that demand, the organization will experience continued growth. more employees are hired to provide the firm's products to an increasingly diverse grou p of customers. eventually, the firm again reaches a threshold where existing structure and systems are no longer adequate. again, reconfiguration is essential if the firm is to con tinue along the growth cycle. thus, each circumvention of the growth cycle can be viewed as a stage of development in the organization life cycle. organization life cycle theorists propose that an organization evolves through several stages of development as the firm grows from inception to maturity. assuming management can make the necessary transitions and continues to effectively serve the marketplace, given our five stage model, the organization can be expected to circumvent the growth cycle twci more times: once on the consolidation stage, and once in the revival stage. " a major end-of-stage crisis which of ten inhibits transition from the expansion stage to the consolidation stage is the "founder or family trap'' (14). this occurs when the founder or founder's family is unwilling or unable to delegate responsibility effectively. this inability to "let go;' or to constantly override decisions of subordinates, results in a decision making backlog, greatly compromising the ability of functional departments to carry out their roles within the organization. the solution to this crisis is effective delegation. in some cases the founder may be able to discipline himself to do this. however, it is of ten necessary for the founder to remove himself from day to day operations, accepting a strategic "chairman of the board" type role, or perhaps chief technical officer role. at stage iii, consolidation, the organization is larger ttin during the expansion stage, but growth is occurring at a slower rate. cost control and productivity become key concerns, as the focus turns from growth to profitability. there is some consolidation of the product line, but the product is sold through multiple channels. product innovations are incremental, of ten following changes in competing products. emphasis turns from product innovation to process innovation, designed to improve production efficiency and reduce unit costs. major investments are directed toward plant maintenance and retention of market share. during the consolidation stage, the organization retains its departmentalized, functional structure; however, the structure and systems become more formal and bureaucratic than in the expansion stage. the management hierarchy consists of several levels and top manage ment is comprised of a team of professional managers (as opposed to the entrepreneurial 6 7 management in the earlier two stages). decision making becomes less centralized and a more articipative management style is employed. formal planning and control systems are stablished and enforced through careful attention to variances. rules are established and olicies institutionalized. effective leaders at this stage must be adept at formal planning, rganization and administration. end-of-stage crises which of ten occur in the later-consolidation stage include excessive ureaucracy, loss of responsiveness to environmental changes, and market saturation. the olution to these crises generally involves some combination of diversification, decentraliza ion, and o'rganization renewal. in stage iv, revival, the organization reaches its largest size as it again experiences a period f rapid positive growth, spawned by an expansion or diversification of the product market cope. expansion of product market scope can be achieved through any of several strategies ncluding market segmentation, acquisition of related or unrelated businesses, or developing ew products or services internally. as the organization begins serving multiple markets, its environment becomes dramatically more complex and heterogeneous. in response, stage iv organizations generally adopt a divi ional form of structure, granting considerable autonomy to product groups or divisions. trategic planning and control systems become increasingly more formal and sophisticated t the corporate level, but operating decisions· at the business level are decentralized to the ndividual divisions. as corporate management no longer controls day to day operations, ultural control becomes more important. a major challenge faced by firms at this stage is integration. care must be taken to ensure hat management systems are sufficiently sophisticated to oversee a diverse conglomeration f organizations. care·must be taken to avoid overcontrolling these organizations, making them neffective. yet, sufficient control must be maintained to ensure that vital synergies between usiness units occur. the first four tages of the organization life cycle have now been introduced. each stage s characterized by a unique configuration of variables related to organization context, stra.tegy nd structure, and one circumvention of the growth cycle. as the organization grows in size nd complexity, it reacl)es certain threshold points, where the existing configuration is no longer dequate and reconfiguration is necessary for the organization to continue to grow. environmental alignment our discussion of the model of organization growth and decline (figure 1) has now in luded two of the five cycles: the growth cycle and the configuration crisis loop. our atten ion now turns to the three remaining cycles: the renewal cycle, the declining spiral, and he proactive renewal loop. ·in addition to reconfiguring organization structure and systems, organization managers must caref ully watch for, and ideally, anticipate changes in the marketplace: consumer tastes may change, competitors· may provide competing products which better serve the emerging market, the market may become saturated, technologies may change, economic conditions may impact spending patterns, etc. though an organization may have an appropriate internal configuration, a firm may still find itself in a declining position due to changes in the marketplace. adjustments must also be made to retain a viable "fit" between the organization and the marketplace. 6 7 organization decline, renewal and death what ha ppens .when the organization experiences diminished acceptance in the marketplace? diminished acceptance means the organization is no longer growing, at least in terms of its level of sej"vice in the marketplace (15). the organization moves into a period of stagnation or decline. the stagnation/decline loop can also be entered from the structural crisis loop when the organization reaches the point of inefficiency that market acceptance begins to diminish. · stage v, decline, (see table 1) occurs as the orgariization experiences diminished markei acceptance. firms can enter decline from any of the preceding stages (i-iv). it is characterized by declining size and sales, and consolidation of product lines and markets. the level of product development at this stage is likely to depend on the business strategy of the organization. if the firm is pursuing a harvest strategy, or has reached a state of lethargy, little or no product development will be taking place: on the other hand if the firm is pursuing a turnaround strategy, the pace of product development may be frantic. the focal business task of declining organizations is organization renewal. ·assuming the organization has reached the consolidation stage prior to declining, the struc ture is expected· to be mostly functional, quite formal and bureaucratic. older firms may well be excessively bureaucratic, which contributes to the organization's demise (16). centraliza tion is expected to be moderate; with the locus of decision making power at the top of the organization. declining organizations need strong, directive .leadership. leaders must awaken the oigahization to a sense of urgency. the organization mission or purpose must be redefined. it is not uncommon for new leadership to be brought in to direct this reconfiguration. bureaucratic inefficiencies must be removed and the organization redirected toward better meeting the needs of the marketplace. once the firm reaches the point of stagnation and decline, it must realign (see figure 1) itself in light' of marketplace ·demands if growth is to be continued. realignment can be ac complished through activities such as adaptation, innovation, renewal, diversification, or recon figu·ration of internal structure and systems. realignment is successful if it results in increased marketplace acceptance. this places the organization back on the growth cycle again. if realign ment fails to result in greater market acceptance, the cycle may ·repeat. · · stagnant or declining organizations which do not undertake realignment find themselves in a declining spiral which results in continued decline and eventually the death of the organiza tion. the only hope for such organizations is tha.t the marketplac:e may change in such a man ner that it becomes more accepting of the organization's products or services, placing the firm back on the growth cycle. longitudinal studies at columbia (17) and mcgill universities (18) have revealed that organizations seldom change when all is going well. thus it can be expected that most firms will continue with the current configuration of priorities, systems and structure until they ex perience either an organization crisis·(system overload) and/or find themselves out of align ment with the marketplace, placing the organization involuntarily on the renewal cycle. however, it is also possible that a firm could voluntarily enter the renewal cycle as an exten sion of the growth cycle (proactive renewal loop). this is accomplished by proactively an ticipating needed realignments in its products, as well as internal configuration, thus averting stagnation and decline. 8 9 some concluding comments the reader has now been introduced to two models, one centering on the content of organization life cycle stages, the other depicting process issues. having briefly described these models, it seems appropriate to conclude with a few comments regarding the models presented and the status of organization life cycle research. what is a life cycle stage? while there are numerous models of life cycle stages, there has been very little attention paid to defining the construct. most models do, however, describe ife cycle stages in terms of contextual, strategic or structural characteristics. miller and friesen n their "quantum theory" of organizations suggest the study of "configurations;' or patterns of variables which cluster together, reflecting integral interdependencies (19). the in erdependency among variables related to context, strategy and structure is well established n organization theory (20). using this approach and drawing from the dimensions identified n table 1, a life cycle stage can be defined as a unique configuration of variables related to organization context, strategy and structure. stages of development can be verified by cluster ng organizations along these dimensions (21). if we define a growth stage in terms of con figuration, the transition between stages can be characterized as a reconfiguration along these dimensions (22). how many stages? life cycle models vary as to the number of stages. in the models reviewed in preparing table 1, the number of stages ranged from three to ten. smith, mitchell and summer (23) suggest a three-stage model; four-stage models are proposed by baird and meshoulam (24), quinn and cameron (25) and kazanjian (26); five stages are theorized by galbraith (27), greiner (28), miller & friesen (29); and scott and bruce (30); flamholtz (31) proposes a seven-stage model, though the latter three are only briefly discussed; and the most complex model, adizes (32), proposes a ten-stage model. while the models suggest a fairly consistent pattern of organization growth, there is wide variance among them as to the specific number of stages. which is correct? do all organiza tions go through the same series of stages? are there contingencies which affect the number of stages? these questions remain unanswered to date in the literature. by defining growth stages in terms of configuration, specific stages can be isolated through the use of cluster analysis or other statistical classification techniques (33). use of these techniques in large samples, coupled with longitudinal case analyses will enable organization scholars to better answer these questions. such efforts could greatly stre.ngthen the predictive utility of the life cycle model. do life cycle stages occur in numerical order? miller and friesen (34) conducted a longitudinal study of life cycle stages, based on extensive case histories of 36 organizations. one interesting finding of the miller and friesen study is that firms do not necessarily move through the stages in a linear fashion. while firms, on the whole, moved generally from birth to _decline, they may skip stages or revert back to certain stages. the growth model presented herein (figure 1) allows for this irregularity as organizations travel between the five cycle.s of growth and decline. do organizations change gradually, one dimension at a time, or all at once? the con sensus in the literature seems to be that organizations evolve gradually within the growth stages, but make dramatic multidimensional changes between stages. based on their longitudinal study of computer firms, tushman, newman and romanelli identified two 9 9 types of organization change. the first was a form of incremental change, which they labeled conveigent; the second they labeled discontinuous, or frame-breaking change, which "involves simultaneous shif ts in strategy, power, structure, and controls" (35). what causes organizations to move from one stage to the next? metamorphosis theory, which centers on the fit between the organization and the environment, seems to provide the best answer to this question. baird and meshoulam describe the process this way: metamorphosis models propose that change occurs when the fit between the organization and the environment is so bad that the organization's effectiveness and survival is threatened (36). as the organization reaches this crisis point, dramatic reconfiguration occurs. thus the organiza tion retains a given configuration (or stage) until that configuration no longer provides an ade quate fit with the environment. at this point the organization undergoes a major transition to a subsequent stage of development. in summary, a valid model of the organization life cycle must go beyond simply delineating developmental stages to incorporate process issues as well. this paper represents an early effort toward pulling these issues together into a single, integrative model. references 1. a. chandler, strategy and structure: chapters in the history of american ind ustrial enterprise (cambridge, ma: mit press, 1962). l. greiner, "evolution and revolution as organizations grow;' harvard business review, oune-july, 1972), pp. 37-46. j. kimberly & r. miles, the oiganization life cycle (san francisco: jossey-bass, 1980). i. adizes, corporate lifecycles: how and why corporations grow and die, and what to do about it (englewood cliffs, nj: prentice hall, 1989). ). galbraith, 'the stages of growth;'jour nal of business strategy (volume 3, number 4, 1982), pp. ?'0-79. n. churchill & v. lewis, 'the five stages of small business growth;' harvard business review (may-june, 1983), pp. 30-50. r. quinn & k. cameron, "organizational life cycles and shifting criteria of effectiveness: some preliminary evidence;' management science (volume 29, number 1, 1983), pp. 33-51. k. smith, t. mitchell, & c. summer, ''top level management priorities in different stages of the organizational life cycle;' academy of management journal (volume 28, number 4, 1985), pp. 799-820. e. flamholtz, managing the transition from an entrepreneurship to a professionally managed firm (san francisco: jossey-bass, 1986). b. scott & r. bruce, "five stages of growth in small business," long range planning (volume 20, number 3, 1987), pp. 45-52. r. kazanjian, "relation of dominant manage ment problems to stages of growth in high technology organizations," academy of management journal (volume 31, number 2, 1988), pp. 257-'z79. 2. quinn & cameron, "organizational life cycles and shif ting criteria of effectiveness: some preliminary evidence:' 3. adizes, corporate lifecycles: how and why corporations grow and die and what to do about it. l. baird & i. meshoulam, "managing two fits of strategic human resource management;' academy of management review (volume 13, number 1, 1988), pp. 116126. flamholtz, managing the transition from an entrepreneurship to a professionally managed firm. galbraith, "the stages of growth:' kazanjian, ''relation of dominant problems to stages of growth in technology-based new ventures:' d. miller & 10 11 p. friesen, "a longitudinal study of the corporate life cycle;' management science (volume 30, number 10, 1984), pp. 1161-1183. quinn and cameron, "organizational life cycles and shifting criteria of effectiveness: some preliminary evidence:' scott & bruce, "five stages of growth in small business:' smith, mitchell & summer, "top level management priorities in different stages of the organizational life cycle:' greiner, "evolution and revolution as organizations grow:' 4. s. hanks, ''.an empirical examination of the organization life cycle in high technology organizations," unpublished doctoral dissertation, university of utah, 1990. 5. adizes, corporate lifecycles: how and why corporations grow and die and what to do about it. flamholtz, managing the transition from an entrepreneurship to a pro fessionally managed firm. 6. miller & friesen, "a longitudinal study of the corporate life cycle:' 7. scott & bruce, "five stages of growth in small business:' 8. greiner, "evolution and revolution as organizations grow:' 9. adizes, corporate lifecycles: how and why corporations grow and die and what to do about it. 10. flamholtz, managing the transition from an entrepreneurship to a professionally managed firm. 11. scott & bruce, "five stages of growth in small business:' 12. flamholtz, managing the transition from an entrepreneurship to a professionally man aged firm. 13. galbraith, "the stages of growth;' p. 75. 14. greiner, "evolution and revolution as organizations grow:' flamholtz, managing the transition from an entrepreneurship to a professionally managed firm. adizes: cor porate lifecycles:.how and why corporations grow and die and what to do about it. 15. it may continue to grow in size, resulting in decreasing levels of productivity. 16. adizes, corporate lifecycles: how and why corporations grow and die and what to do about it. 17. m. tushman, w. newman and e. romanelli, "convergence and upheaval: managing the unsteady pace of organizational evolution;' california management review (volume 29, number 1), pp. 29-44. 18. d. miller & p. friesen, "momentum and revolution in organizational adaptation;' academy of management journal (volume 23, 1980), pp. 268-299. h. mintzberg, "craf ting strategy;' harvard business review oune-july, 1987), pp. 66-75. 19. d. miller & p. friesen, organizations: a quantum view (englewood cliffs, nj: prentice hall, 1984). 20. chandler, strategy and structure: chapters in the history of american ind ustrial enter prise. ). galbraith & r. kazan jian, strategy implementation: structure, systems and pro cess (st. paul: west, 1986). 21. miller & friesen, organizations: a quantum view. smith, mitchell & summer, ''top level management priorities in different stages of the organization life cycle:' 11 11 22. . miller & friesen, organizations: a quantum view. galbraith, "the stages of growth:' 23. smith, mitchell & summer, ''top management priorities in different stages of the organiiation life cycle:' 24. baird & meshoulam, "managing two fits of strategic human resource management:' 25. quinn & cameron, "organizational life cycles and shif ting criteria of effectiveness: some preliminary evidence:' 26. kazanjian, "relation of dominant problems to stages of growth in technology-based organizations!' v. galbraith, ''the stages of growth:' 28. greiner, "evolution and revolution as organizations grow." 29. miller & friesen, ''a longitudinal study of the corporate life cycle:' 30. scott & bruce, "five stages of growth in small business:' 31. flamholtz, "managing the transition from an entrepreneurship to a professionally managed firm:' 32. adizes, corporate lifecycles: how and why corporations grow and die and what to do about it. 33. see miller & friesen, organizations: a quantum view. 34'., miller & friesen, ''a longitudinal study of the corporate life cycle." 35. tushman, newman & romanelli, "convergence and upheaval: managing the unsteady pace of organization evolution:' 36. baird & meshoulam, "managing two fits of strategic human resource management," p. 171. 12 organization decline, renewal and death some concluding comments 23. smith, mitchell & summer, ''top management priorities in different stages of the organiiation life cycle:' v. galbraith, ''the stages of growth:' 34'., miller & friesen, ''a longitudinal study of the corporate life cycle." from the editor editorial ferran calabuig-moreno, university of valencia, spain. small businesses need to implement strategies that allow them to survive and stay in a very competitive market where they will confront small and large companies. from the academic point of view, there are not many works that address this broad theme. thus, reviewing the work published in the web of knowledge (wos) during the last five years, using small_business and strategy as key words, we find that 427 papers have been published as scientific articles. figure 1 shows that there has been a slight increase in the number of articles published and is currently close to 100 articles in 2016. figure 1. evolution of the number of articles published on small business strategy in the last 5 years. considering the number of articles published in the country of signature, it can be seen as usa is dominant and accounts for 33% of world publication. it is followed by england with 77 articles representing 18% of the total. canada and spain account for 6.1% each. table 1 country of origin of published articles on small business and strategy in the wos. countries n percentage united states of america 141 33,0% england 77 18,0% canada 26 6,1% spain 26 6,1% germany 23 5,4% australia 22 5,2% netherlands 22 5,2% france 18 4,2% scotland 18 4,2% sweden 13 3,0% moreover, if we consider the most productive universities on this matter (ie, small business strategy) that have been published in isi ranked journals, we see how the north carolina university is the one that provides more papers (n = 25) assuming the 5.9% of total production. it is followed by the university of london with 11 articles (2.6%) and erasmus university of rotterdam (n = 8). figure 2. number of articles published in the wos according to the university in the last 5 years about small business strategy. regarding the journals that publish articles in figure 3 it is found that is the international small business journal and the small business economics published the most articles with 30 each (7%). the journal of small business management follows with 19 jobs accounting for 4.5% of the total (i.e., 427). 0 5 10 15 20 25 university of north carolina university of london erasmus university rotterdam kingston university lancaster university indiana university system leuphana university luneburg university of sheffield university of strathclyde 25 11 8 7 7 6 6 6 6 figure 3. number of articles published by the journals indexed in the wos on the topic of small business strategy. finally, i would like to present the most productive authors on this topic. figure 4 shows the production ranking. i want to emphasize that the data obtained are referred to articles published during the last 5 years in journals that are included in the wos and appear related keywords as small business and strategy in the article title or keywords. it is likely that these authors, as well as others, have more articles on this topic in other databases and journals but are not the subject of this study. the most productive author is link an of the university of norh carolina, which has published 8 papers on the subject in the last 5 years. they are followed by professors bates t of wayne state university, professor cowling m of the university of brighton (also of the university of exeter) and professor frese m of the national university of singapore with 4 works. 5 9 13 17 21 25 29 33 international small business journal small business economics journal of small business management int entrepreneurship and management j. entrepreneurship and regional development journal of business venturing int j. of entrepreneurial behaviour research entrepreneurship theory and practice management decision journal of business research figure 4. most productive authors in the last 5 years on the topic small business strategy. as already mentioned, the scientific production on this subject (i.e. small business and strategy) is also carried out in journals not included in the exclusive isi ranking and in different congresses. in this regard, the global innovation and knowledge academy (gika) and its annual congress always present high quality works. the 6th gika annual conference took place at the university of valencia and one of the aims of the conference was to select high-quality papers for publication in a special issue of the journal of small business strategy. four of the papers presented at the gika conference were selected and presented in this special issue where different aspects are analyzed the first paper by lilia rekik and françois bergeron titled “green practice motivators and performance in smes: a qualitative comparative analysis” analyze smes’ motivation to implement green practices and inquire about the resulting performance. this paper uses a qualitative comparative analysis (qca) with a research model based on the theory of reasoned action to analyze fifteen smes from three countries (canada, tunisia, and morocco). the findings evidence that implementing green practices is beneficial to smes both in terms of financial and environmental performance. the study by moritz angelsberger, sascha kraus, alicia mas-tur, and norat roig titled “international opportunity recognition: an overview” perform an in-depth literature review on the international opportunity recognition concept to establish a current stateof-the-art literature review on this field. after defining the kirznerian opportunities (arbitrage opportunity) and the schumpeterian opportunities (innovation opportunity) the authors state the lack of empirical research on international opportunity recognition and 0 1 2 3 4 5 6 7 8 link an bates t cowling m frese m scott jt semrau t ullah f van der zwan p williams cc wu zy establish the necessity to develop new definitions of international opportunity and international opportunity recognition. finally, the paper suggests several avenues for future research on the international opportunity recognition. the third article by vicente prado-gascó, ismael quintanilla, and carlos pérez-campos titled “knowledge management and organizational culture in a software development enterprise” analyze knowledge management and organizational culture at a specific spanish software development enterprise using a sample of 196 employees. applying and adapting validated scale of organizational knowledge practices and organizational culture they found that the company is oriented towards a constructive organizational culture and emphasizes efficient knowledge management practices (i.e., teamwork). finally, they conclude that constructive culture is positively related to knowledge management performance, while passive–defensive and aggressive–defensive cultures are negatively related. the last contribution by ana cristina gonzalez, yeny e. rodriguez, and anibal sossa is titled “leadership and governance decisions in family business performance: an application of fuzzy sets logic”. the authors state that there is a need for deeper understanding of the relationships among leadership, governance and performance in family businesses due to results of empirical research are contradictory. they use fuzzy sets logic as a methodology to expand knowledge in family businesses and present an application to build a representation of entrepreneurial performance results based on board of directors’ composition and ceo’s ownership, from a case studies point of view. the study concludes that entrepreneurial performance is higher when outsiders’ membership in boards of directors and ceo ownership are both high as well. ferran calabuig-moreno, university of valencia, spain. ferran.calabuig@uv.es stx4tegy small business brief factors affecting franchise agreement terminations: lessons for the franchising sector lorelle frazer griaith university, logan, australia l frazermailbox.gu.edu.au andrew terry university of new south wales, sydney, australia a. terryunsw.edu.au abstract the ptaci'tce of termination of franchise agreements raises significant strategic and legal issues. this paper aims to provide descriptive information about franchise terminations in relation to which the appropriateness of regulatory responses can be measured. data were collected from surveys of australian franchisers in /998 and /999 to explore the nature, reasons and outcomes offranchise agreement terminations. a model predicting the likelihood of terminations was developed, based on franchise system maturity, support structures provided, and level of conflict experienced. the results indicate that mature franchises were more likely than younger systems to experience franchise terminations. no consistent link was found between the amount of system support or the level of conflict and the incidence of franchise terminations. tlte data lends suppon to judicial responses to termination issues which accommodate the relational aspect of panchise relationships and addresses termination issues in the context of the underlying relationship and the legitimate business expectations of the parties. introduction on the richter scale of significant events in the franchise relationship, termination is in the most extreme band. the termination by the franchiser of the franchise granted to the franchisee is the ultimate sanction which is starkly expressed in the literal, but emotive, term "disenfranchised". the need to protect the franchisee's sunk investment from opportunistic termination by the franchiser has been a constant theme in the regulatory debate but the absence of quantitative data has not assisted the quality of the debate. this paper is based on a study which aims to provide descriptive information about franchise terminations in relation to which the appropriateness of regulatory responses can be measured. 105 journal of small business strategy vol. /3, no. l spring/summer 2002 the commerciai and legal environment termination is the ultimate contractual sanction. under well established common law principles an agreement may be terminated prior to the expiration of its term if the other party commits a material breach or on reasonable notice if there is no specified term. the parties by agreement can modify the default principles by providing restrictions on the right to terminate or permitting termination without cause or for any breach. traditional freedom of contract principles also allows the parties to expressly provide for the consequences of termination by specifying particular conditions or events which arise on termination. in the case of franchise agreements, termination and its consequences are invariably provided for. in relation to termination provisions hadfield (1990), in an analysis of the frequency of contract clauses, notes that "franchisees generally must agree that any violation of a term of the contract, including, in many cases, the details of the operations manual, constitutes material breach and is a basis for termination" (p. 944). the wide contractual powers invariably reserved to a franchiser under the express terms of the franchise agreement are readily justified. the justification for the franchiser's wide termination powers was clearly expressed by the supreme court of british columbia in co-ordinated corporate services ltd v national video inc (1984): obviously it is vital to the integrity and success of the entire franchise system that the standards are uniform and that they are enforced. uniformity must be central to the identity of the system. and maintenance of identity and uniformity must be essential to continued operation of the system for the profit of all. hammond summarized the justification for the contractual provisions governing the consequences of termination in dymocks franchise systems (nswj pty ltd v bilgola enterprises ltd (1999). dymocks is an australian-based franchise that has expanded internationally to new zealand and southeast asia. "to put it shortly, if a franchiser could not protect its interests after termination, the franchising industry generally would collapse" (p. 659). this comment was made in the context of restraint of trade provisions but is of general relevance to other events and conditions arising on termination. the wide contractual powers reserved to the franchiser can nevertheless be abused in an unregulated environment. traditional common law principles leave the franchisee exposed and vulnerable. in dymocks franchise systems (1999), hammond explained that: "the application of the traditional law relating to private contracts to franchises can lead to very unhappy results. franchisers can impose onerous terms, and, in the worst kind of cases, use flimsy pretexts to terminate, thereby depriving a franchisee of a justified expectation. (p. 629). in light of these "very unhappy results" one of the key issues, which has driven the regulatory debate throughout the international franchising community, has been termination and its consequences. in introducing the federal small business franchise act in the us house of representatives in october 1998, representative howard coble commented that "i don' know of a single member of congress who would stand by while their hard-working small business owners are lefl buck naked and defenseless against bad faith tactics which have been used by a host of corporations" (wulff, 1999, p. 33). similar sentiments, albeit in the more refined language of the antipodes, have been expressed in australia in a succession of reports. 106 journal ofsmall business strategy vol. 73, no. l spring/summer 2002 the regulatory debate in australia is almost as old as business format franchising. the paint was barely dry on the first golden arches in australia in the early 1970s when the swanson committee proposed a right to compensation for "losses, not now recoverable at law, arising from the termination of the franchise by the franchiser" (trade practices review committee, 1996). a long history of petroleum dealer dissatisfaction, in particular the opportunistic termination of successful franchisees pursuant to contractual unilateral termination provisions and their conversion to company managed outlets, led to the introduction in 1980 of the australian petroleum retail marketing act of 1980 (cth.). in enacting this legislation which guaranteed minimum tenure and regulated termination within this period the government ignored the recommendation of the trade practices consultative committee that franchising law of general application dealing with the protection of franchisees in relation to prior disclosure, assignment and termination be enacted (small business and the trade practices act, 1979). since then the issue of termination has been a constant concern in a succession of government reports that have led eventually to the introduction of the mandatory franchising code of conduct prescribed by the federal government in 1998. this was to ensure, in the words of peter reith, the federal minister for small business, that "small businesses operating in this important industry are finally given a fair go" (in foreword to australian franchising code of conduct, 1998). the code was introduced to address problems associated with the perceived imbalance of power in the franchising relationship, as portrayed by anecdotal evidence and media reports. however, little empirical evidence supporting this assertion is available. in the next section of this paper, survey data about franchise agreement terminations in australia from 1995 to 1998 are reported. over this three-year period only the common law governed franchising as no dedicated regulatory regime was in place. franchise terminations in australia: empirical evidence hypotheses development in this section, hypotheses predicting franchise systems most prone to agreement terminations are developed and the constructs used in the analysis are explained. a model predicting franchise agreement terminations is displayed in figure l. figure i: proposed model of franchise agreement termination franchise system maturity + level of franchise agreement conflict terminations franchise system support structure 107 journal ofsmall business strategy vol. /3, no. l spring/summer 2002 franchise system maturity. the termination of agreements is not a desirable outcome in a franchise system. anecdotal evidence suggests that franchisers desire short-term franchise agreements that may be renewed provided the franchisee operates the outlet successfully. hence, the expiry of the agreement may provide an opportunity for the franchiser and franchisee to depart each other's company if the association has not been mutually benelicial. on the other hand, an agreement termination occurs mid-term and signifies problems that can only be rectified by ending the relationship. in the early days of a franchise system's development the franchiser is oren personally involved in the day-to-day running of the organization. as the system matures, that is, becomes larger, older and more dispersed, it becomes increasingly more complex to manage, often experiencing rapid growth and involving additional layers of management (dant, 1995). larger systems may experience greater challenges in maintaining adequate communication which may ultimately be reflected in deterioration in the relationship between franchiser and franchisee (i4athan, 1996). over time franchisees develop an increasing sense of independence (peterson &. dant, 1990) and may deviate from system procedures to demonstrate this independence. hence, despite the experience that a mature franchise system acquires in recruiting, selecting, training and supporting suitable franchisees and despite the ongoing success of the franchise, the greater complexity of the system may hinder relationships. it is hypothesized that: hi: mature franchise systems are more likely to experience franchise agreement terminations than immature systems. level of conflict. positive franchising relationships are not likely to result in agreement terminations. terminations occur because problems such as poor performance, low profitability or breaches of operating standards ultimately cannot be resolved. parties to the franchising relationship may need to turn to mediation or litigation to resolve such issues, with the franchise experiencing a negative impact due to the conflict (mcglinchey & thompson, 1991). however, it is inevitable that some disputes will never be reconciled, resulting in the termination of agreements. hence, it may be expected that franchise systems that experience high levels of conflict between the parties will also experience agreement terminations. it is hypothesized that: h2: franchise systems that have greater levels of conflict are more likely to experience franchise agreement terminations. franchise system support structure. franchisees typically rely on the established brand name, training and support of the franchiser as a mean of gaining entry to business (knight, 1984). many franchisers will accept franchisees that have no previous experience in the industry (mendelson, 1999) and some even actively recruit inexperienced franchisees because they feel they will be easier to indoctrinate into the system. of the franchisers who participated in the mail survey used in this research, fully 52 percent indicated that industry experience of potential franchisees was not essential to gain entry to their systems (mccosker & frazer, 1998). hence, franchisers must supply the necessary training and provide a supportive structure for franchisees to succeed. in addition, the franchiser's brand name is oren well established and must be maintained. one means of protecting a franchiser's reputation is by providing a system of initial and ongoing support to its network of franchisees (sherman, 1993). the greater the assistance provided to franchisees the higher the likelihood they, and the whole system, will be successful (terry, 1993). a successful system, based on a thorough support structure, is less likely to experience 108 journal ofsmall business strategy vo/ /3, no. 1 spring/summer 2002 problems in the relationship that may lead to franchise agreement terminations. hence, it is hypothesized that: h3: franchises that offer comprehensive support structures are less likely to experience franchise agreement terminations. constructs used in the analysis. the constructs used to test the hypotheses, variable names and descriptions, and descriptive statistics are reported in table l. below is a discussion of the indicators used to measure each construct. table i: constructs, variables and descriptive statistics construct variable description variable . mean min. max. name (or proportion) franchise experienced agreement agreement termination/s 1995-1998 term 48 0% terminations (dummy variable) franchise no. of years franchising age 2 32 9.59 system total no. of outlets 1998 size 4 499 76.36 maturity no. of states disperse i 7 3.57 no. of substantial disputes level of (mediation, litigation or other conflict action, such as arbitration) 19951998 no. hours start-up support startup 3 500 76.42 no. working days initial training intrain 0.5 90 13.69 no. pages in operations manual/s opsman 12 3000 245.97 franchise system no. working days ongoing training per annum ontrain i 98 10.02 support no. hours field visits per franchisee structure per month field i 40 7.5 proportion head office staff to franchised outlets propho 0 5 0.45 (n = 68) franchise agreement /erminaiians. a dummy variable was used to code firms that did or did not experience franchise agreement terminations in the three-year period from 1995 to 1998. franchise system maturity. the level of maturity of franchise systems was measured according to age, size and dispersion. age was indicated by the number of years franchising experience. size was indicated by the total number of outlets (franchised and company owned) in the system. the number of states in which franchise operations were concentrated indicated the level of dispersion. level of conflict. the level of conflict experienced by a franchise system was measured by the number of substantial disputes (that is, disputes resulting in mediation, litigation or other action) over the three-year period from 1995 to 1998. franchise system suppor/ structure. the support structure offered by a franchise was measured according to the degree of initial support and ongoing support provided. initial support was indicated by the number of hours of start-up support offered to new franchisees, the number of working days of initial training, and the number of pages in the operations 109 journal of small business strategy vol. /3, no. l spring/summer 2002 manual/s. ongoing support was indicated by the number of working days of ongoing training provided per annum, the number of hours in field visits per franchisee per month, and the proportion of head office staff to franchised outlets. data collection two stages of data collection were involved in the research. firstly, a confidential mail survey of the known population of australian franchisers was conducted in 1998 (mccosker & frazer, 1998). as no official listing of franchisers was available, a university database was updated (mccosker, 1989) resulting in a sample of 946 firms thought to be operating as franchisers. it is possible that some less visible firms were omitted from the database but most firms would have been included due to the thorough history of the database's development. the mail survey was followed up with a letter and telephone call where the status of each firm was ascertained. after excluding those not involved in franchising the eiyective sample size was 693 franchisers. a total of 186 useable responses were received, representing a response rate of 26.8 percent which is within the acceptable range for business research (neuman, 1994), in addition, a trend analysis was performed by comparing late with early responses to ascertain the presence of nonresponse bias (kervin, 1992) and it was concluded that nonresponse bias was not evident. the mail survey obtained data on a wide range of topics including franchise operations, iinancial arrangements, franchisee profile and demographic information. a specific question tracked the number of franchise agreements that had been terminated over the previous three years either at the franchiser's initiation, the franchisee's initiation, or mutually. the second stage of the research was conducted in 1999 and involved telephone interviews with the franchisers from the mail survey who had terminated franchise agreements. due to the sensitive nature of the research topic telephone interviews were used because of their personal approach and low cost. a total of 88 firms out of the 186 mail survey respondents had experienced agreement terminations. as this study occurred prior to the introduction of franchising regulation, the proportion of agreement terminations was higher than is currently experienced. it would appear that the code's introduction has significantly reduced the practice of terminations (lim 8t frazer, 2002). two of the respondents were anonymous and were unable to be contacted, reducing the sample frame to 86 firms. pre-notification letters were sent to these firms informing them of the purpose of the telephone survey. only three franchisers were uncontactable or confirmed no longer franchising and fully 68 responded, resulting in a response rate of 81.9 percent. as the data described below have been obtained directly from franchisers, there is a possibility of bias in the results as franchisee perceptions cannot be compared. descriptive statistics. due to the lack of previous quantitative research on franchise agreement terminations, an aim of this research was to provide descriptive information about the franchises involved. firstly, responses were coded according to industry type using the major categories provided under the australian and new zealand standard industrial classification coding system (australian bureau of statistics, 1993). the largest category of franchisers was the property and business services industry representing 32 percent of respondents, which included services such as domestic and commercial cleaning, accounting services, and recruitment and training. this was followed by retail non-food (27%), construction and trade services (12%) and retail food (12%), with all remaining categories having fewer than 10 percent of respondents. the industry categories of respondents are listed in table 2. 110 journal of small business strategy voh /3, no. l spring/summer 2002 table 2: industry category of respondents industry category no. of responses property and business services 22 32.4 retail non-food 18 26.5 retail food 8 11.8 construction and trade services 8 11.8 accommodation, cafes and restaurants 4 5.9 education 3 4.4 cultural and recreation services 2 2.9 manufacturing and printing i 1.5 transport and storage i 1.5 personal and other services i 1.5 total 68 100.0 note. the iotal number ofpariicipants numbered 68. (n = 68) the size of franchise systems in the sample was a median of 24 franchised and company owned outlets. firms had been franchising for a median of 7.5 years and were dispersed among a median of three states in australia. the 68 respondents reported a total of 315 franchise agreement terminations over the three-year period from 1995 to 1998. of these, 37 percent were initiated by the franchiser, 29 percent initiated by franchisees and 34 percent initiated mutually. firms terminated a median of only two franchise agreements during this time, although the number of terminations ranged from i to 70. the main reasons for terminating franchise agreements have been listed in table 3. the most commonly cited reasons were due to personal reasons affecting the lifestyle or health of the franchisee (32%), problems with the selection of suitable franchisees or location of their outlets (31%), franchisee failure to comply with the franchise system (31%), and financial problems faced by franchisees (28%). table 3: reasons for terminating franchise agreements reason for termination no. of responses personal, lifestyle or health reasons of franchisee 22 32.4 unsuitable franchisee or unsuitable location of outlet 21 30.9 noncompliance or breach of operating standards 21 30.9 franchisee financial problems or debts 19 27.9 conflict; lack of cooperation; desire for independence 13 19.1 underperformance or low profitability of franchisee outlet 9 13.2 customer complaints or poor service of franchisee 6 8.8 fraudulent, dishonest or unethical behavior by franchisee 5 7.4 understated income or non-payment of franchise fees 5 7.4 other reason for termination 9 13.2 note: multiple responses were recorded by some respondents (n = 68) ill journal ofsmall business strategy vol. /3, ttto. l spring/summer 2002 the median length of franchise agreements offered by firms in the sample was 5 years with a median of 3.3 years remaining when the agreements were terminated. most franchisers (81%) warned franchisees they were in breach of their agreements and provided an opportunity for franchisees to redress the situation before terminating the agreements. more than 30 percent of franchisers provided some form of compensation to franchisees arer termination of their agreements. a lease was involved with the franchisee's outlet in 51 percent of cases and only 30 percent of franchisers reported they were able to obtain release from their leasing responsibilities. an area that has been overlooked in the literature is the fate of franchisees that have had their agreements terminated. the current research attempted to fill this gap by gathering data on the final status of terminated outlets and is summarized in table 4. table 4: current status of outlets from franchise agreement terminations (n = 68) current status of outlets terminated 1995-1998 no. of outlets closed 91 28.9 operated by another franchisee 68 2).6 company owned and operated 49 15.6 operated independently by former franchisee 31 9.8 operated by former franchisee in another franchise 12 3.8 current status not disclosed to researcher 64 20.3 total 315 100.0 due to the sensitive nature of the topic, franchisers were unwilling to disclose the outcome of the terminated outlets in 20 percent of cases. dilution of the franchise's reputation may occur when outlets are acquired as company owned operations, or are closed or operate independently (manolis, dahlstrom, 41 nygaard, 1995). most of the outlets previously franchised were now closed (29%), indicating that they were most likely unsuitable sites or non-viable businesses as they had not continued as going concerns, whether operated by the franchiser or a new franchisee. nearly 22 percent of terminated outlets were later sold to other franchisees, but it cannot be concluded that the churning of outlets was taking place (giugni k terry, 1998). only a longitudinal study would be able to identify the practice of churning, which involves the same outlet being sold many times. franchisers retained 16 percent of the terminated outlets as company operations, but possibly only as a temporary measure until a suitable franchisee operator could be found. some 10 percent of franchisees whose agreements were terminated are currently operating the outlets independently under an alternative brand name. almost 4 percent of franchisees joined another franchise system to continue operating their outlets. in brief, the outcome of the majority of outlets was continued operation, most oren under new ownership and reflecting the stated cause of franchisee inadequacy in most agreement terminations. however, 14 percent of outlets continue to be operated by ex-franchisees suggesting that these outlets may survive beyond the confines of the franchise system. results mann-whitney u tests were used to test the three hypotheses with results shown in table 5. these tests were appropriate for examining mean differences between groups where data are not normally distributed (tabachnick & fidell, 1996) as the data prescreening revealed in this 112 journal ofsmall business strategy vol. 73, na. i spring/summer 2002 research. outliers were identified due to the presence of some older and larger franchises but were retained because they are representative of the population. table 5: mann-whitney u tests (n = 68) mean rank significant difference: without z score; firms with terminations hypothesis variable terminations; twoand without with tailed p terminations terminations (a = 0.10) age 80.10 97.70 -2.294 hi —franchise size 74.03 system 98.69 -3.256 maturity disperse 80.11 100.69 -2.710 supported disputes 25.29 29.21 -0.895 x conflict not supported startup 82.99 69.66 -1.871 intrain 87.25 77.63 -1.305 x opsman 79.00 h3 —franchise 86.18 -0.969 x system support ontrain 68.96 structure 69.05 -0.013 x field 73.70 74.31 -0.088 x proph0 88.88 70.54 -2.511 limited support hl predicted that mature franchise systems were more likely to experience agreement terminations than immature systems and this hypothesis was supported. franchisers that terminated agreements have been franchising longer, are larger and more widely dispersed than those that did not terminate agreements. support for each of the three separate constructs of franchise system maturity implies that disputes are not simply a function of large systems. it appears that as management and communication systems become more complex over time as the firm matures and expands, the franchising relationship may suffer resulting in the breaking away of some franchisees. despite the experience that mature franchises acquire, the lack of hands-on involvement in operations by franchisers may result in an incompatibility of franchisee-franchisee goals. it was proposed that franchises characterized by higher levels of conflict would also experience agreement terminations, but h2 was not supported. no significant difference occurred between the number of substantial disputes in firms that terminated agreements and those that did not. perhaps this indicates that conflict in a franchise system is not necessarily 113 journal of small business strategy val. /3, iuo. l springlsummer 2002 a negative situation and that mediation or litigation may resolve problems without resorting to terminating agreements. finally, h3 predicted that franchises providing comprehensive initial and ongoing support services were less likely to experience agreement terminations. only limited support was received for this hypothesis which overall must be rejected. whilst firms that terminated agreements offered significantly less start-up support and had a lower proportion of head office staff to support franchisees, there were no differences in other forms of initial and ongoing support. this result may indicate that constant support is not a determinant of the ability of a franchisee to stay with the system, and instead other factors such as the franchisee's willingness to adhere to the system may be a better guide. a relational approach to termination the franchising sector is characterized not only by the wide diversity of its participants but also by relationships that defy conventional contractual analysis. hadfield (1990) comments that franchising exists in a world of "contractual incompleteness and relational complexity" in which "the parties are not strangers; much of their interaction takes place 'off the contract', mediated not by visible terms enforceable by a court, but by a particular balance of cooperation and coercion, communication and strategy (p.928). in north america, the work of the law and economics school has been influential in the recognition that certain contracts of a relational character, such as franchising, fall outside the boundaries of the classic "bargain" model (for example, williamson, 1979; mcneil, 1974; goetz st scott, 1981) and require special solutions. however, classical contract law in the commonwealth jurisdictions has not been "particularly supportive" of the commercial basis of such arrangements. in this context the judgment of hammond in dymoclts franchising systems (nsw) pty ltd v bilgola enterprises ltd (1999) in relation to the lawfulness of the termination of franchise agreements under australian law, is particularly significant. hammond j included in a long judgment a discussion of the judicial nature of a franchise. his honour lends strong support for the proposition that, in relation to agreements of an ongoing and often relatively open-ended character such as franchising "it is in society's interest to accord to each party reasonable security for the protection of his or her justified expectations." the survey data lends some support to the relational approach. the diversity of motives, reasons and circumstances surrounding terminations suggests that the real and significant issues raised by termination cannot be left to what hammond referred to as the "very unhappy results" of the traditional, bilateral law of contracts". although australia's franc(a'sing code of conduct was not applicable to the termination considered by hammond j., (the events in question having occurred before its introduction) his honour noted that by its introduction the australian parliament has shown that it has not been prepared to leave franchisees to the "dubious mercy of the classical, bilateral law of contracts" (dymocks, 1999). although franchising regulation, which is now in existence in numerous countries, makes significant advances in prior disclosure and dispute resolution, the convenient legislative formula for termination is inadequate. for example, the termination provisions which apply on breach by a franchisee in australia are firmly based on the classical bilateral model albeit modified by requiring the franchiser to provide reasonable notice of termination for breach and allowing the franchisee a reasonable time (of not more than 30 days) to remedy the breach. in not requiring the breach on which termination is based to be "material" the code indeed invites unfavorable comparison with the common law. the franchisee's only protection from the provision commonly included in franchise agreements that violation of a term, including the details of the operations manual, constitutes material breach justifying 114 journal ofsmall business straiegy vol. 13, no. i spring/summer 2002 termination under normal contractual principles is the mandated opportunity to remedy within a reasonable time. future empirical research should be conducted to assess the impact of legislation on franchise agreement terminations. hadfield (1990) suggests that the doctrinal tool necessary to bring the resolution of franchise contract disputes into line with the realities of the franchise relationship exists in the covenant of good faith and fair dealing, but cautions that "relying on the good faith doctrine as a method of introducing more accurate relational consideration requires that courts routinely look beyond the written franchise contract and examine the relationship in which that contract is embedded." (1990, p. 985). such an approach accommodates the franchiser's interest in protecting the trademark and the system's goodwill as well as the franchisee's interest in protection from opportunistic use of the franchiser's control powers. the survey data analyzed in this research lends some support to the relational approach that hammond has strongly promoted in the dymocks franchise system (1999) case. the circumstances surrounding termination and its consequences defy convenient categorization and termination disputes should be resolved by the courts in the context not only of the contractual provisions but the underlying strategic relationship. a major implication for the franchising sector generated from this research is that whilst conflict and disputes are inevitable in franchising, the unique and complex nature of the franchisee-franchisee relationship requires the parties to work cooperatively beyond the confines of the contractual arrangements to achieve mutual satisfaction. references australian bureau of statistics. (1993). australian and new zealand standard industrial classification. a.b.s, catalogue (no. 1292.0).canberra, australia. co-ordinated corporate services ltd v. national video inc. 82 cpr(2d) 251 at 255. (1984) dant, r. (1995). motivation for franchising: rhetoric versus reality. international small business journal, 14 (i), 10-32. dyniocks franchise systems (nsw) pty ltd v. bilgola enterprises ltd. 8 tclr 612. (1999). franchising code of conduct. (1998). department of workplace relations and small business, canberra. giugni, d., & terry, a. (1998). factors in franchise failure: lessons from the cut price deli litigation. in f. lafontaine (ed.), franchising research: legal economic and managerial developmenis. las vegas, nevada: proceedings of the 12th conference %he society of franchising. (pp. 1-21). goetz, c.j. & scott, r. e. (1981). principles of relational contracts. 67 v l rev 1089. hadfield, g. k. (1990). problematic relations: franchising and the law of incomplete contracts. 42 stanford law review 927, p. 944. kervin, j.b. (1992). methods for business research. new york: harper collins. knight, r. m. (1984). the independence of the franchisee entrepreneur. journal of small business management. 22(2) 53-61 lim, j. & frazer, i.. (in press). introducing franchising regulation: an analysis of the australian franchising code of conduct journal of marketing channels, forthcoming. manolis, c., dahlstrom, r., & nygaard, a. (1995). a preliminary investigation of ownership conversions in franchised distribution. journal ofapplied business research, 2 (2), 1-9. mccosker, c., & frazer, l. (1998). franchising australia 1998: a survey of franchising practices and performance. toowoomba, australia: university of southern queensland. mccosker, c. (1989). the profile and performance of franchisees. accounting research study 11.armidale, australia: university of new england. 115 journal ofsmall business strategy vol /3, no. l springtsummer 2002 mcglinchey, j., & thompson, b. (1991).what went wrong? in business format franchising in australia. legal books. sydney, australia, pp. 141-153. mcneil, i. (1974). the many futures of contract. 47 s cal (rev 691. mendelsohn, m. (1999). the guide to franchising (6th ed). london: cassell. nathan, g. (1996). managing the franchiser franchisee relationship. parramatta, sydney, australia: franchisers association of australia and new zealand. neuman, w. l. (1994).social research methods (2nd ed). boston: allyn & bacon. peterson, a., & dant, r. (1990). perceived advantages of the franchise option from the franchisee perspective: empirical insights from a service franchise. journal of small business management, 28, 46-61. sherman, a. j. (1993). building a foundation for the responsible development of a franchising program. in r. dant (ed.), excellence '93: a bridge to success. minneapolis. proceedings of society of franchising 7th annual conference. 1-25 small business and trade practices act. (1979). agps canberra, australia, december. tabachnick, b.g., &. fidell, l. s. (1996). using multivariate statistics (3rd ed). new york: harper collins. terry, a. (1993).the distribution of goods and services through business format franchising(part i). curreni commercial law, i (i), pp, 18-23. trade practices act review committee report to the minister for business and consumer affairs, para 5.1, august (1976). williamson, o. e. (1979). transaction cost economics: the governance of contractual relations. journal of law and economics, 22, 233. wulff, erick b. (1999). a critical analysis of the small business franchise act of 1998. franchise law journal, 18, 33. lorelle frazer, ph.d. is an associate professor in marketing and deputy head of the school of marketing at griffith university, logan, australia. associate professor frazer's primary research inierest is in franchising and she has published in a variety of academic journals including the journal of business research, journal of consumer marketing and australasian markeiing journal. andrew terry is a professor of law and head of the school of taxation at the university of new south wales, sydney, australia. professor terry is regarded as australia's foremost franchising academic and is the founding editor of franchising law and policy review. he is widely published on legal and commercial aspects offranchising, including co-authorship of "franchising law and practice," buuerworths. 116 strategy small business drug-testing strategy: implications of pre-employment testing john m. gleason creighton university jgleasonicreighton, edu darold t. barnum university of illinois, chicago dbarnumqauic. edu abstract this paper identifies problems in drug testing accuracy that may arise in small business environments in whichj ob applicants are subjected to drug tests, and suggests a method for dealing with the problems. relevant concepts of drug-test accuracy are reviewed. these concepts are incorporated in bayesian analyses of data pom specific workplace-applicant populations, and accuracy levels to be expected in testing of applicants in sucli wvrktilaces are identified. the conclusion of this analysis is that seemingly accurate tests fvr ahustil drugs can be inaccurate to a disturbingly high degree, particularly under circitmstances likely to be present in many small business drug-testing programs. tt method by which these inaccuracies can be avoidedis suggesied. introduction in 1997, approximately 8.3 million adult drug users were employed in the united states (u.s department of health and human services [dhhs], 1998). these substance-abusing workers cost their employers an additional $ 100 billion annually due to their lower productivity, their higher health care demands, and their higher rates of absenteeism, accidents and turnover, (bahls, 1998; bates, 1998b; warner, 1996; "workplace substance abuse," 1997). small firms, in particular, suffer from the problems caused by drugabusing workers because nearly 60 percent of employees who abuse drugs work for small businesses (bahls, 1998; u.s. small business administration, 1994; warner, 1996; workplace substance abuse, 1997). in attempting to avoid problems associated with drug-abusing employees, the nation's large employers almost universally test job candidates for the presence of banned substances. for example, pre-employment drug screening is conducted by 95 percent of fortune 500 companies (bahls, 1998). unfortunately, smaller businesses have been less aggressive in efforts to avoid drug abusers (aalberts, 1991; aalberts and walker, 1988; dhhs, 1996; hartwell, steele, french, and rodman, 1996; huneycutt and wibker, 1989; martinez, 1992; national institute on drug abuse, 1989, 1991; rich, 1992; ward, 1991; warner, 1996). only three percent of small 20 journal ofsmall business strategy vol. /0, ivo. 2 fall/winter 1999 businesses have drug-testing programs, and virtually all testing is done during preemployment evaluation (bahls 1998; godefroi and mccunney, 1988; sba, 1994; warner, 1996; "workplace substance abuse," 1997). accordingly, drug abuse has become a particular problem for small businesses because drug abusers (often chronic abusers) are now gravitating to smaller businesses to avoid the testing programs at larger corporations (bahls, 1998; bates, 1998a; mangan, 1992; "workplace substance abuse," 1997). that is, since larger firms are more likely to have drug-testing programs, drug-abusing employees "flee to the small business side of the economy" ("workplace substance abuse," 1997). "word circulates about which employers test for drugs, and which ones don'. those that don't 'become the employer of choice for substance abusers' (bahls, 1998). without doubt, most small-business owners and managers recognize and wish to avoid the negative consequences of hiring drug-users. for example, in a 1998 american management association survey in which employers were questioned about actions they would take if a job applicant were to test positive, less than one percent of the small business employers (that is, those with fewer than 500 employees) indicated that they would hire such an applicant (american management association, 1998). it would seem, therefore, that in order to protect themselves against drug abusers, small businesses will soon follow their larger counterparts and increasingly conduct preemployment drug tests of all potential employees. the benefits from drug testing are obvious, but there are also less-obvious but very real costs, both to the small businesses and to potential employees who unjustly might be identified as drug users. that is, if the drug tests are not highly accurate, qualified job applicants may be unjustly denied employment. in such cases, the potential employee is not the only loser; the business that denied employment also loses a potentially well-qualified employee. in the current economic climate, where small businesses are competing more-and-more with major corporations for qualified employees, and where labor shortages have driven up wage costs for even marginal employees, it is extremely important to avoid the mistake of denying employment to a qualified applicant because of an erroneous result of a drug test. in fact, small-business owners and managers have identified "finding good workers" as their most diflicult problem (hall and tian, 1998). because the successful implementation of strategies of small businesses are oflen dependent on the presence of good employees, any procedure that inadvertently weeds out such good employees is a cause for great concern. therefore, if small businesses are to implement drug-testing programs, they must take steps to avoid false positive results that lead to rejection of truly drug-free applicants. indeed, employers who take greater care in applicant drug testing will have an edge on their competition in attracting good workers. the accuracy of routine drug tests during pre-employment screening is the subject of this paper. the focus is on the proportion of positive drug tests that are false and how this proportion can be reduced. we review the concepts of accuracy that are most relevant, and apply these concepts to data on drug usage by applicants in different types of workplaces, '.hereby identifying the potential magnitude of erroneous positive test results (which we refer to as the false accusation rate) that could occur in routine pre-employment drug-testing programs. the clearest conclusion of this analysis is that seemingly accurate tests for abused drugs can be inaccurate to a disturbingly high degree, under circumstances likely to be present in many small business testing programs. the remainder of this paper is divided into sections 21 jour nal ofsmall business strategy vol. io, no. 2 fatlllyinter /999 that discuss terminology, drug usage rates for applicants in certain workplaces, laboratory proficiency studies, bayesian analyses that incorporate proficiency-study data and drug-usage data, and a suggested method for avoiding unacceptable levels of inaccuracy. terminology when a specimen is tested for drugs, one of four outcomes must occur: a specimen with drugs tests positive for drugs (true positive) a specimen with drugs tests negative for drugs (false negative) a specimen with no drugs tests positive for drugs (false positive) a specimen with no drugs tests negative for drugs (true negative) a specimen that contains drugs must test either positive or negative. that is, the probability of a positive test result (given that drugs are present) plus the probability of a negative test result (given that drugs are present) must equal 1.0. this may be written: p(+idrugs) + p(-)drugs) = 1.0 in other words, when drugs are present in a specimen, a drug test will yield either a true positive or a false negative result, and the probabilities of a true positive and a false negative must total one. similarly, a specimen which does not contain drugs must test either positive or negative. that is, when no drugs are present, the test must yield either a false positive or a true negative. this may be written: p(+ino drugs) + p(-~no drugs) = 1.0 we are most concerned with incorrect results, that is, with false positives and false negatives. the probability of obtaining a false positive, p(+(nodrugs), is called the false positive rate, and the probability of obtaining a false negative, p(-(drugs), is called the false negative rate. drug testing procedures, therefore, should attempt to minimize false positive and false negative rates. another important concept is the false accusation rate. the false accusation rate is the probability that no drug is present in a specimen, given that the test yielded a positive result: false accusation rate = p(nodrugsl+) for example, if 90 out of every 100 people who test positive truly have drugs in their systems, and 10 do not, then the probability that persons with positive test results truly do not have drugs in their systems would be 0.10. that is, such a drug test would have a false accusation rate of 10 percent. the importance of this concept is readily apparent, because it is the key to determining whether a positive result on a drug test provides suaicient evidence of drug usage. if, for example, positive results on a test are expected to be untrue in one out of every four cases, then a positive test usually would not be considered reliable evidence of drug use. more importantly, if one wishes to protect the innocent from false accusation (and, thereby, avoid improperly rejecting a potentially good employee), then it is the false accusation rate of the test that is of prime concern. 22 journal ofsmall business strategy vol. /0, no. 2 fall/winter l999 drug usage rates not surprisingly, estimates of drug usage vary widely. many of those making pronouncements about the extent of drug abuse have strong incentives to show that drug usage is at one extreme or the other. moreover, the characteristics of the group about which the estimates are made can cause wide variations, because drug usage varies significantly based on age, geographic location, and other variables. considering these caveats, we provide several estimates of the extent of drug use in the population and in various workplaces typical of small businesses. the national household survey on drug abuse estimates that 6.1 percent of the u.s. population 12 years old and older used some illicit drug at least once during the month prior to the household survey (dhhs, 1998). another study by dhhs provides statistics regarding drug usage rates in various industries (hoffman, larison, and brittingham, 1996). in retail trade, approximately 11 percent of full-time employees admitted to having used illegal drugs within the past 30 days, and nearly 20 percent indicated that they had used illegal drugs sometime during the past year. in wholesale trade, eight percent of full-time employees admitted to having used illegal drugs in the past 30 days, and more than 15 percent indicated that they had used illegal drugs sometime during the past year. the hoffman et al. (1996) study indicates that nearly 12 percent of full-time construction workers reported illicit drug use in the past 30 days, and approximately 22 percent indicated they had used illegal drugs sometime during the past year. in the hotevmotel industry, more than nine percent of employees admitted to using illegal drugs within the past 30 days, and 17 percent indicated they had used illegal drugs sometime during the past year, approximately 15 percent of workers in the manufacturing industry admined to illegal drug use sometime during the past 12 months. on the other hand, police and detectives had the lowest reported level of illicit drug use (one percent), while administrative support staff, teachers, child care workers, computer programmers, and engineers also reported low drug usage rates. accuracy of drug testing because of the need for accurate tests, numerous studies of drug testing laboratory proficiency have been conducted in the united states and other countries. in such proficiency tests, prepared samples are sent to laboratories to determine the accuracy of the laboratory testing procedures (barnum and gleason, 1999). in this article, we use data from the most recent (published) proficiency study conducted in the united states (knight et al., 1990). in their study, proficiency tests of laboratories used by rockwell international were conducted. commercially prepared samples containing drugs of abuse were disguised as routine submissions to testing laboratories used by nine rockwell facilities. because the samples were disguised as routine submissions, these were blind tests; that is, the laboratories were not aware that they were being tested. the knight et al. (1990) study yielded a two percent false positive rate and a 20 percent false negative rate —rates which the authors indicate are similar to those found in other blind studies. the errors were not limited to a particular testing technique, to a particular drug, or to a particular laboratory. among the conclusions of the study was that there is a need for routine blind testing programs to ensure that employers can rely on the results of drug tests when making decisions about hiring and disciplinary actions. the false positive rate of two percent indicates a 0.02 probability of a false positive result, which is an estimate of p(+)nodrugs). similarly, the false negative rate of 20 percent indicates a 0.20 probability of a false negative result, which is an estimate of p(hdrugs). lt 23 journo/ ofsmall business strategy vo/. /0, no. 2 falllivinter 1999 should be emphasized that the error rates in the knight et al. (/990) study resulted from a test protocol which included conjirmation tests as fotlowups to initial screening tests that yielded positive resitlts. that is, a determination of a positive test result required both a positive result on a screening test, followed by a positive result on a confirmation test. the importance of confirmation tests, which most often are not used by small businesses, is discussed later. bayesian analysis employers should take reasonable care to ensure that qualified applicants are not eliminated from consideration for a position as a result of questionable drug-test results. as noted above, the most recently-reported laboratory proficiency study conducted in the united states (knight, et al., 1990) yielded a false positive rate of two percent, which suggests that 98 percent of drug-free applicants test negative. accordingly, many employers would conclude that there is clear and convincing evidence that an applicant who tests positive has used illegal drugs. however, these results are not what they seem. for example, consider a group of 10,000 applicants who are tested for drug usage. if 11 percent of the group are truly taking drugs, then 10,000 '.11 = 1,100 will provide urine specimens that contain drugs, and the remaining 8,900 will provide specimens that are drug-free. of the specimens containing drugs, 1,100 '.20 = 220 will test negative for drugs (based on the 20 percent false negative rate reported by knight et al. (1990)), and the remaining 880 will test positive. likewise, of the specimens not containing drugs, 8,900 '.02 = 178 will test positive for drugs (based on the two percent false positive rate reported by knight et al.), and the remaining 8,722 will test negative. thus, a total of 880+ 178 = 1,058 specimens will test positive for drugs, although 178 of these 1,058 do not actually contain drugs. therefore, 178/1,058 = 0.168 (or 16.8 percent) of those testing positive for drug usage truly will be drug free. thus. despite the low (two percent) false positive rate, one out of every six applicants who test positive will truly be drug free! it would seem illogical, from the standpoint of oud personnel practice, to eliminate an applicant on the basis of such unreliable evidence. these results, and other examples based on differing rates of drug use and of drug-test accuracy, can be developed more formally by bayesian analysis. bayesian analysis deals with problems of decision making under uncertainty by combining new information with existing information in an attempt to reduce the uncertainty (raiifa and schlaifer, 1961; winkler, 1972). bayes'heorem is used to revise initial probabilities on the basis of new information (bayes, 1763). although bayes'heorem was developed more than two centuries ago, the primary advances in the field of bayesian analysis have occurred in the last 40 years, &luring which bayes'heorem has been used extensively in support of decision-making processes in business, government, and the service sector. consider the first case in table i, which exhibits the application of bayes'heorem. as shown for case i in columns 2 and 3 of the table, a urine specimen must either contain drugs (s,) or contain no drugs (sz). for this case, it is assumed that the probability is 0.11 that a urine specimen truly contains drugs; therefore, the probability is 0.89 (i 0.11)that it does not contain drugs, as shown in column 4. these probabilities indicate that 11 percent of the target population uses drugs; recall that this is the estimated usage rate for retail workers in the hoffman et al. (1996)study of drug use in the workplace. the next column, column 5, indicates the probability of the urine specimen testing positive for drugs when there truly are drugs present (0.80), and when there truly are no drugs in the specimen (0.02). that is, p(+[drugs) = 0.80, and p(+~nodrugs) = 0.02. these probabilities 24 i journal ofsmall business strategy vol./0, no. 2 fall/winter l999 are taken from the knight et al. (1990) study regarding laboratory proficiency, which reported a 20 percent false negative rate (therefore, an 80 percent true positive rate) and a two percent false positive rate. table i application of bayesian analysis to drug test data state of initial conditional probability of revised probability state of nature probability probability positive result for the state of case nature notation p(s;) given si given si nature si i'(+is,) (+i t)* i'(s,) p(s;i+) i drugs si o.i i 0.80 0.0880 0.832 no drugs si 0 89 0.02 0.0178 0.168 1.00 p(+) = 0.1038 1.000 2 drugs s| 0.22 0.80 0.1760 0.919 no drugs si 0.78 0.02 0.0156 0.081 1.00 p(+) =0.1916 1.000 3 drugs s| 0.01 0 80 0.0080 0.288 no drugs ss 0.99 0.02 0 0198 0.712 1.00 p(+) =0.0278 1.000 the numbers in the sixth column are the products of the numbers in the two previous columns. that is, for the population being tested, the joint probability that a person truly is on drugs and tests positive for drugs is 0.0880, while the probability that a person truly is not on drugs but tests positive for drugs is 0.0178. note that the sum of these two probabilities, denoted by p(+) and equal to 0.)058, is the probability of a positive test result. dividing each of the numbers in the sixth column by p(+) yields the numbers in the seventh column, which are the probabilities of the particular states (that is, drugs and no drugs), given a positive test result, thus, the probability that specimens that test positive will truly contain drugs is 0.832. and, the probability that specimens that test positive will contain no drugs is 0.168. that is, p(drugs~+) = 0.832, and p(no drugs~+) = 0.168. accordingly, we may consider the testing process to yield a false accusation rate of 0.168; that is, approximately 17 out of 100 people who test positive will be falsely identified as drug users. the actual probability that an applicant is not on drugs, even though he/she tested positive, will vary depending on: (a) the percentage of the applicants that truly are taking drugs, (b) the test false positive rate, and (c) the test false negative rate. two additional situations are presented in cases 2 and 3 in table l. recall that in case i we assumed that i i percent of the population being tested actually had drugs in their systems. in case 2 and case 3, we use different estimates of the proportion of the target population on drugs. while case i used a drug usage rate (11 percent) equal to that for retail workers estimated by hoffman et al. (1996), case 2 uses the higher 22 percent rate hoffman et al. estimated for construction workers, and case 3 uses a lower rate (approximately i percent) similar to the hoffman et al. estimate for populations such as police, child care workers, engineers, and computer programmers. as seen in column 7 of table i, the false accusation rates are 16.8 percent in case i, 8.1 percent in case 2, and 71.2 percent in case 3. thus, for case i, approximately one out of 25 journal ofsmall business strategy vol. 70, no. 2 fallllyinter /999 every six positives represents a job applicant who has not taken drugs but yields a positive test result. for case 2, one out of every twelve positives represents a drug-free applicant who yields a positive test result; and, for case 3, more than 7 out of 10 positives represent drugfree applicants who yield positive test results. under any of these circumstances, if these results lead to the denial of employment, many drug-free applicants will experience injustices, and employers will needlessly lose the opportunity to hire valuable employees. moreover, for illustrative purposes in our bayesian analysis, we used false positive and false negative rates from the knight et al. (1990) study, and those rates were based on drug testing processes that included confirmation testing. that is, all initial positive results were confirmed by using a more accurate confirmation test. however, as noted previously, most small business drug testing occurs in the pre-employment venue, and such tests are often not confirnied. this lack of confirmation testing can prove problematic (zurer, 1997). accordingly, pre-employment screening tests can be expected to be much less accurate than confirmed tests, and the reduced level of test accuracy can be expected to yield bayesian results which are significantly worse (in terms offalse accusation rates) than those developed herein. for example, suppose that an unconfirmed testing process yields a false positive rate of five percent, rather than the two percent rate used in our analysis. then the false accusation rate for cases i, 2, and 3 will be 33.6 percent, 18.1 percent, and 86.1 percent, respectively. that is, for case i, approximately i out of 3 applicants who test positive will be falsely identified as drug users, and i out of 5 applicants who test positive will be falsely identified as drug users in case 2. in the population of applicants with low drug usage rates (case 3), nearly 9 out of 10 positive test results will be erroneous. guidelines for decreasing the false accusation rate in general, the false accusation rate will decrease for each additional confirmation of the positive specimens. therefore, the false accusation rate will be the highest if only a screening test is conducted, will be lower if a confirmation test is conducted of the specimens that screened positive, and will be lower still if a second confirmation test is conducted on the specimens that were positive on the first confirmation. thus, if a firm establishes the maximum false accusation rate that it is willing to accept, then it is possible to determine, in advance of any actual testing, how many times specimens would need to be tested in order to achieve an actual false accusation rate that is lower than that desired maximum rate. the process is described and illustrated in this section. suppose, for example, that a firm wants no more than one falsely accused job candidate out of every 100 identified as positive by the testing process, which represents a maximum false accusation rate of 0.01. for the drugs involved, the firm's laboratory has a false positive rate of 0.1 and a false negative rate of 0.2 for its screening tests. on its confirmation testing, the lab has a false positive rate of 0.001 and a false negative rate of 0.1. using data from the firm's local business council for its industry, it expects 12 percent of the job candidates tested to have drugs in their specimens. by performing the following sequence of steps, the firm can determine in advance of any actual testing whether it will need to conduct one or more confirmations in order to achieve its desired false accusation rate. once these steps are performed, then the firm can be sure that, in the actual tests of its job applicants, its desired false accusation rate will not be exceeded. 26 journal of small business strategy vol. 70, no. 2 foll/winter l999 step it determine the maximum false accusation rate deemed acceptable. this rate could be set at any rate desired, except zero which would be impossible to obtain. in order to avoid rejecting otherwise-qualified employees, the rate should be fairly low. in the hypothetical case described previously, the business involved is willing to accept a false positive drug test result from no more than one out of every 100 positive specimens reported. that is, the business is willing to accept a false accusation rate of 0.01. step 2r determine the false positive and false negative rates for the laboratory being utilized. whether these rates are provided by the laboratory itself or are based upon independent studies, they should be estimated using blind proficiency testing, to assure that the results are representative of typical testing processes. these rates should be obtained for screening tests only and for the confirmation tests only. if the laboratory is unable or unwilling to provide acceptable evidence of these rates, it should not be used. ln our hypothetical case we know that for screening tests the false positive rate is 0.1 and the false negative rate is 0.2, while for the confirmation tests the false positive rate is 0.001 and the false negative rate is 0.1. step 3t estimate the proportion of the target group of specimens that will truly contain drugs (the drug presence rate). diiyerent proportions would be expected in different situations, as discussed earlier in the section on drug usage rates. for example, for many professionals and police, the rate would be expected to be about i percent, and for retail employees the rate would be about 11 percent. a firm could get estimates from the sources we cited earlier, or check with their industry association or local chamber of commerce. in those cases where several different drug-use rates would be applicable, then, to be conservative, the lowest of the rates should be the one chosen. for our hypothetical case, the firm estimates that 12 percent of the job candidates tested will have drugs in their specimens. step dt based on the screening test accuracy rates and the expected drug presence rate, calculate the false accusation rate for the group in question. to calculate this false accusation rate, use the drug presence rate from step 3, and the false positive and false negative rates for screening testing from step 2. if the false accusation rate is less than or equal to the desired rate (from step i), then the process ends and positive test results from the screening test would provide acceptable evidence of drug usage. then, only a screening test would need to be conducted on job applicants, with any applicant specimen testing positive being assumed to contain drugs. if the false accusation rate is greater than desired, however, then proceed to step 5. for our hypothetical case, as illustrated in table 2, in column four we would use 0.12 for drugs and 0.88 for no drugs. in column five we would enter 0.8 for drugs (ifalse negative rate) and 0.1 for no drugs. column six figures are the products of the data in columns four and five, and the sum of the two products (0.096 for drugs, 0.088 for no drugs, and 0.184 as the sum of these two products). the sum of the two products is the probability of a positive test result. column seven figures are the proportions of drugs and no drugs from the previous column (0.096/0.184 = 0.522 and 0.088/0.184 = 0.478). thus, the false accusation rate (that is, the proportion of the positive reports that come from drug-free specimens) is 0.478, much greater than the desired rate of 0.01 (from step i), so we must proceed to step 5. step 5t estimate the proportion of the remaining specimens that truly contains drugs (the drug presence rate). recall that the target group of specimens at this stage consists of only 27 journal of small business strategy vol. /0, no. 2 fall/winter l999 those that tested positive in the preceding test, including both true positives and false positives, although, of course, we do not know which is which. the most accurate estimate of the proportion of those specimens containing drugs is the complement of the false accusation rate ( i false accusation rate) from the preceding test. for our hypothetical case, we can get these rates directly from column seven for the screening tests in table 2 (specifically, 0.522 for the proportion containing drugs and .478 for the proportion not containing drugs, which we place in the appropriate rows of column four for confirmation i (in table 2). table 2 determining number of re-tests to obtain desired maximum false accusation rate slate of conditional probability of revised nature initial probability positive result probability for stoic of notation probability given si given si slate of nature type of test nature s p(si) p(+isi) p(+1st)* p(si) p(sit+) screen dmgs si 0.12 0.80 0.096 0.522 no drugs s, 0.88 o.l 0,088 0.478 1.00 p(+) = 0.184 1 000 confirmation 1 drugs s, 0.522 0.9 0.4698 0.999 no drugs si 0.478 0.001 0.0005 0.001 1.00 p(+) =0.4703 1.000 step 6r conduct a confirmation test on tlie remaining specimens, and calcalate a revised false accusation rate for tire group. for the confirmation test, use the false positive rate and the complement of the false negative rate for confirmation testing (which are identified in step 2). if the revised false accusation rate (from step 6) is less than or equal to the desired rate (from step i), then the process ends and positive test results provide credible evidence of drug usage with one screening test and one confirmation test. if the revised false accusation rate still is greater than desired, then go back to step 5 with data related to those specimens that tested positive in step 6. for our hypothetical case, we enter in column five the complement of the false negative rate (0.9) and the false positive rate (0.001)for confirmation tests. after performing the remaining calculations, it can be seen that the revised false accusation rate for our hypothetical case is 0.001, or i false accusation out of every 1000 positive test results, which is far less than the firm's desired maximum of i out of 100. so, in this case, we know that our results will be sufficiently accurate with one screening test followed by one confirmation test, and the firm should instruct its lab to perform one confirmation on any specimens that screen positive, and report as positive only those specimens that are positive on the confirmation test. if however the revised false accusation rate had still been greater than 0.01, a second confirmation test would need to be conducted, again repeating steps 5 and 6 using data from step 6 of the first confirmation. if an acceptable false accusation rate were obtained aaer the second confirmation, then the firm would instruct its lab to confirm any specimens that screened positive, to reconfirm any specimens that were positive on the first confirmation, and report as positive only those specimens that tested positive on the second confirmation. carefully note that once a firm sets its maximum acceptable false accusation rate, the determination of the number of confirmations needed (if any) will be made before any tests are actually conducted on job candidates, and the laboratory simply will be notified of the required number of confirmations to be conducted on any specimens that test positive. 28 journal of small business strategy vot. io, no. 2 eall/winter l 999 conclusions and implications for small businesses the abuse of drugs by the nation's workers in both small and large businesses is a serious problem that must be addressed on many fronts. in the proper circumstances, urine testing is a valuable weapon in deterring drug use. however, as illustrated in this paper, allegedlyaccurate tests for abused drugs can be inaccurate to a disturbingly high degree, under circumstances likely to be present in many small business settings. moreover, note that the proportion of people falsely accused increases when a lower percentage of the population being tested is truly on drugs. thus, positive results of preemployment tests conducted in environments where low drug usage rates could be expected (for example, tests of applicants for child care and computer programming jobs) should be viewed with more skepticism than positive results in other environments (such as the construction industry). when testing job applicants, personal and economic costs far in excess of any potential benefits may occur if a high proportion of positive tests come from specimens that do not contain drugs. this potential problem can be avoided, however, by use of the procedure that we have suggested, which will keep the false accusation rate at or below some predetermined level. this analysis has focused on the personal and economic costs associated with denying employment on the basis of faulty test results. however, there is another important cost of faulty testing processes, and another important group that can be affected by faulty testing. the other cost is the legal cost, and the other group is current employees. in most instances, job applicants have considerably less legal protection than current employees. for example, state law in some states requires that drug tests of current employees include confirmation processes, whereas confirmation processes are not required for applicants. similarly, in many instances, union contracts require confirmation testing of current employees. moreover, applicants typically are not informed as to the reason for nonhire, whereas current employees have more legal recourse in the case of drug testing. while beyond the scope of this paper, legal issues related to drug testing range from the need to satisfy federally-mandated scientific standards regarding random testing (gleason and barnum, 1993), to issues related to tort liability (lockard, 1996). therefore, although we have limited our discussion to pre-employment drug testing, the same potential problems exist for testing of current employees. for current employees, the potential personal, economic and legal costs and obligations are substantially greater than for job applicants, so it is even more important that a procedure such as the one discussed herein be used to avoid inordinate false accusation rates, and that an even lower maximum false accusation rate be set for current employees than for job applicants. finally, there is the potential that faulty drug tests may lead to claims of racial bias. a survey in georgia indicated that firms that employ a large number of blacks are more likely to test job applicants for drugs, and are less likely to satisfy nii)a guidelines for confirmation testing (lockard, 1996; sorohan, 1994). 29 journal ofsmall business strategy vol. /0, a(o. 2 ealllwinrer l999 references aalberts, r.j. (1991). a rejoinder and update to ward; the continuing saga of employee drug testing. journal of small business mana ement 29(1), 84-87. aalberts, r.j., & walker, j.l. (1988). employee drug testing: what the small firm owner needs to know. journal of small business mana ement 26(4), 53-59. american management association (1996). 1996 ama surve on work lace dru testin and dru abuse licies. new york: ny. a m g a; i (l998) w,kpi «i g d i s.~m review 87(9), 31-42. s hl .j.e.()998). d g i h kpl .~hr m i 43(2), 8(l.87. barnum, d.t., & gleason, j.m. (1999). analyzing proficiency criteria of health technology systems: the case of drug testing. ieee transactions on en ineerin mana ement 46, 359-369. bates, s. (1998a). an expanded push for drug programs. nation's business 86(3), 51. bates, s. (1998b). house passes bill to curb workplace substance abuse. nation's business 86(8), 8. bayes, t. (1763). an essay towards solving a problem in the doctrine of chance. philoso hical transactions of the ro al socie 53, 370-418. godefroi, r., & mccunney, r.j. (1988). drug screening practices in small businesses: a survey. journal of occu ational medicine 30, 300-302. gleason, j.m., & barnum, d.t. (1993). caveats concerning the use of computer randomnumber generators to select urban transportation system employees for drug tests. com uters environment and urban s stems 17,481-489. hi( c,rti .q(1998). usa ph:s ilb i .blgp bl . ~usatd september i, p. l. hartwell, t.d., steele, p.d., french, m.tm & rodman, n.f. (1996). prevalence of drug testing in the workplace. monthl labor review 119(11),35-42. hoffman, j,pm larison, c., & brittingham, a. (1996). dru use amon u.s. workers: prevalence and trends b occu ation and indust cate pries. substance abuse and mental health services administration. (dhhs pub. no. (sma) 96-3089). rockville; md: samhsa, office of applied studies. huneycutt, a.w., & wibker; e.a. (1989). managerial responses to drug abuse in the workplace. journal of small business mana ement 27(2), 63-66. knight, s.j., freedman, td puskas, ad martel, p., & o'donnell, c.m. (1990). industrial employee drug screening; a blind study of laboratory performance using commercially prepared controls. journal of occu ational medicine 32, 715-721. lockard, d.w. (1996). protecting medical laboratories from tort liability for drug testing: the amorphous concept of duty. journal of le al medicine 17, 427-455. mangan, d. (1992). an rx for drug abuse. small business re orts 17(5), 28-38. martinez, b. (1992). a fight forsmall business. occu ational health & safe 61(9),48-49. may, d. (1999). testing by necessity. occu ational health & safe 68(4), 48-51. national institute on drug abuse (1989). dru s in the work lace: research and evaluation data (nida research monograph 91). washington d.cz u.s. government printing oitice. national institute on drug abuse (1991). dru s in the work lace: research and evaluation 4 9 i. ii (hida ii h m g ph (99). w h g d.c, u.s. g pl i sdis raiffa, h., & schlaifer, r. (1961). a lied statistical decision theo . boston: division of research, harvard business school. rich, l.a. (1992). drugs and drink: the safety connection. occu ational hazards 54(5), 69-72. sorohan, e.g. (1994). making decisions about drug testing. trainin & develo ment 48 (5), 111-116. 30 journal ofsmall business strategy vol. i0, no. 2 fall/winter 1999 u.s. department of health and human services (1996). hhs releases study of drug abuse among u.s. workers: new initiative will target industries needing prevention efforts. hhs news, april 12. u.s. department of health and human services (1998). national household surve on dru abuse. rockville, md. u.s. small business administration (1994). the state of small business: a re ort to the president. washington, dc: u.s. government printing ottice. ward, e.a. (1991). employee drug testing: alberts and walker revisited. journal of small business mana ement 29(1),77-83. warner, d. (1996). the war on drugs wants you. nation's business 84(2), 54-55. winkler, r.l. (1972). introduction to ba esian inference and decision. new york: holt, rinehart and winston. workplace substance abuse: a snapshot(1997). behavioral health mana ement 17(6), 14-15. zurer, p. (1997). drug abuse testing policy not as defensible as testing technology. chemical & en ineerin news 75(4),28. john m. gleason is professor of decision sciences in the department of information systems and technology, college of business administration, and us west technology fellow, creighton university, omaha, nebraska. he received the d.b.a. degree pom indiana university. his articles have appeared in decision sciences, european journal of operational research, ieee transactions on engineering management, interfaces, international transactions in operational research, management science, omega: the international journal of management sciences, risk analysis, socio-economic planning sciences, and a van'ety of other journals. darold t. barnum is professor of managerial studies at the university of illinois at chicago, and former head of its department of management. he is founding director of the university of illinois center for human resource management, a partnership offaculty and top business executives that conducts applied research on human resource problems. he earned a ph.d. from the wharton school, university of pennsylvania. his articles have appeared in ieee transactions on engineering management, industrial and labor relations review, interfaces, international transactions in operational research, management science, socio-economic planning sciences, and a variety of other journals. 31 strategy new strategies for inner-city economic development: initiative for a competitive inner city initiative for a competitive inner city (icic) michael e. porter harvard university founder, chairman & ceo, icic introduction the economic distress of america's inner cities is one of the most pressing issues facing the nation. the lack of businesses and jobs in inner cities fuels not only poverty but also crippling social problems such as drug abuse and crime. the time has come to recognize that revitalizing these areas requires a radically different approach. today, most efforts and public resources are targeted toward meeting residents'mmediate needs rather than generatingjobs and economic opportunity that will mitigate the need for large-scale social programs. although efforts to provide education, housing, healthcare, and other needed services are essential, they must be balanced with a concerted and realistic economic strategy focused on for-profit business and job development. the necessity —and the real opportunity —is to create income and wealth by harnessing the power of market forces, rather than trying to defy them. the private sector must play a leading role in inner-city economic development and, in many ways, is already beginning to do so. ln order to create better linkages between the private sector and the inner-city economy, harvard business school professor michael e. porter founded the initiative for a competitive inner city (icic) in 1994. with the knowledge that there is genuine economic potential in inner cities that has been largely unrecognized and untapped, we continue to pursue our mission of fostering healthy economies in america's inner cities through our research and programmatic efforts. a strategy for inner-city economic development our strategy begins with the premise that a sustainable economic base can be created in inner cities only as it has been elsewhere: through private, for-profit initiatives. investments in the inner city must be based on economic self-interest and genuine competitive advantage instead of artificial inducements, government mandates, or charity. specifically, a sustainable economic base in inner cities depends upon: private, for-profit business development and investments based on economic self-interest and genuine competitive advantage i journal ofsmall business strategy vol. 9, no. 2 fall/winter 1998 recognizing and enhancing the inherent advantages of an inner-city location, and building on the base of existing companies making inner cities competitive as business locations and integrating these areas into the regional and national economy engaging the enormous resources of the private sector in market-based activities shi iting the economic development paradigm from reducing poverty to creating income and wealth through business development economic development in inner cities will come from recognizing and enhancing the inherent advantages of an inner city location and building on the base of existing companies. as well, we must deal frontally with the present disadvantages of inner cities as business locations. currently, there are many businesses in inner cities —a surprise to those who assume that little economic activity exists because of these communities'ell-known problems. for example, chicago has approximately 15,000 inner-city companies that earn annual revenues greater than $500,000. in boston there are approximately 4,000 inner-city companies. indeed, the boston chamber of commerce nominated two inner-city companies, jet-a-way and be our guest, as the small business of the year for 1996 and 1997, respectively. competitive advantages of inner cities our analysis of major cities nationwide has found that oren-discussed advantages, such as lowcost labor and cheap real estate, are largely illusory. instead, the genuine competitive advantages of inner cities fall into four areas: strategic location, unmet local demand, human resources, and integration with regional clusters. strategic location inner cities occupy what should be some of the most valuable locations in their regions. innercity areas are oiten near high-rent business centers, entertainment complexes, and transportation and communications nodes. as a result, an inner-city location can offer a competitive edge to logistically sensitive businesses that benefit from proximity to downtown, transportation infrastructure, and concentrations of companies. the just-in-time. service-intensive modern economy is only heightening the time arid space advaniages of these locations. in our surveys of inner-city companies in twelve major metropolitan areas, strategic location was cited as the most important advantage for operating in an inner-city location. for example, in boston, 90% of the 60 companies surveyed said proximity to customers was an important advantage, 55% cited proximity to nearby highways, and 35% cited proximity to suppliers. in atlanta, 81% of the 37 companies surveyed said strategic location was an important advantage. unmet local demand inner cities represent the next retail frontier in america. despite low average incomes, high population density in many inner cities translates into a large local market with enormous buying power per square mile. america's inner cities represent approximately $85 billion in annual retail purchasing power, or approximately 7 % of total retail spending in the united states. this market alone is larger than the entire retail market of mexico. 2 journal ofsmall business strategy vol. 9, no. 2 fall/winter 1998 in many inner cities, more than 25 percent of retail demand is unmet locally. for example, in boston the average retail demand per square mile is $71 million as compared to $ 12 million per square mile for the rest of the metro area. at a time when suburban markets are saturated, innercity markets remain poorly served. because these markets are so underserved and the consumers are ethnically heterogeneous, opportunities exist for both chain and independent retailers. chain retailers offer the potential to expand the range of products and services available to local shoppers as well as offering competitive pricing. independent entrepreneurs, as one respected chain retail executive told us, "...arecapable of running circles around larger chains." by being closer to the market-place, independent entrepreneurs can better understand neighborhood demand and can more effectively tailor their offering to the specific needs of shoppers in the inner city. human resources although inner-city populations present many workforce readiness challenges, inner-city residents can also be an attractive labor pool for businesses that rely on a loyal, modestly skilled workforce. many employers report great satisfaction with their inner-city workforce. in our survey of inner-city companies in boston, 65% of businesses cited an available workforce, 60% cited a low cost workforce, and 50% cited a diverse workforce as critical or important advantages to their inner-city location. in atlanta, just 4% of companies were dissatisfied with their employees'kill level and 15% with their work ethic. importantly, the united states is facing a fundamental shia in the structure of the labor market. for the past few decades, the most pressing human resource issue facing the u.s. economy has been the creation ofjobs. for the next ten years, the critical issue will be finding workers. labor supply growth, projected to be 1.1%per annum, will fall far short of demand for labor that has averaged 2.6% over the last two years. a sustained supply shortfall will translate into an acute labor shortage. another important factor altering the labor force paradigm is the likelihood that 80% of labor force growth will come from minority communities. the fact that minorities will represent the only growing source of labor, much of which will be concentrated in cities, presents an opportunity for inner-city communities to position a ready labor force as an increasingly valuable competitive advantage. a number of companies have recently established inner city operations to better access and retain employees. for example, allen edmonds, the high end men's shoe-maker, and the call center division of sprint report lower turnover and high levels of satisfaction with their inner-city operations. integration with regional clusters longer-term development opportunities for inner cities lie in capitalizing on nearby regional clusters of firms and industries —unique concentrations of competitive companies in related fields. rather than focusing on isolated inner-city companies, an effective economic strategy for inner cities must focus on developing the clusters within inner cities and linking them more effectivelyto those in the surroundingeconomy. the ability to access competitive clusters is farreaching in its economic implications, and goes beyond the simple proximity of inner cities to downtown areas or transportation infrastructure. building on regional clusters involves tapping powerful external economies for information, skills, image, infrastructure, and markets. 3 journal ofsmall business strategy vol. 9, no. 2 fall/winier 1998 competitive disadvantages of inner cities as business locations, inner cities suffer many disadvantages: discrimination against residents and entrepreneurs, high taxes and utility costs, difficulty in finding affordable insurance, crime, poorly maintained logistical infrastructure, burdensome regulations and permitting requirements, environmental pollution, and a weak education and training system. in inner cities, taxes have risen while infrastructure has been neglected. the quality of government services has badly deteriorated, and a regulatory morass has been created which is unparalleled in the rest of the country. separation of inner cities from the rest of the economy has in many cases been accentuated by well-intentioned policies. however, these disadvantages are not economically inevitable, but rather the result of old attitudes and decades of ineffective policies and strategies. many cities are tackling these disadvantages and are showing promising results. conclusion inner cities need new, market-oriented strategies that build on their strengths, address competitive disadvantages, and engage the private sector. inner cities can, and must, compete. developing a new strategy for inner-city economic development will require an understanding of what is unique about each inner city, how to build on its advantages, and a plan to eliminate or reduce the many disadvantages to conducting business. this process will require the commitment and involvement ofbusiness, government, universities, and the nonprofit sector. f f p ii .fi iicfc'h«~. micltael e. porter is the c. roland christensen professor of business administration at the harvard business school and a leading authority on competitive strategy and international confpetitiveness. he is the author of 14 books and over 50 articles, including the competitive advantage of nations, and has served as a counselor on competitive strategy to many leading u s. and iniernati anal companies and governments. professor porter has led major national programs to foster economic competitiveness for the governments of such countries as canada, india, portugal, new zealand, and taiwan. he is currently working with the presidents of the seven central american countries to develop a regional strategy and is beginning a similar effort in the middle east. professor porter has applied his expertise in competi tive strategy to the inner city and published his first article on the topic, "the competitive advantage ofthe inner city, "in the mayifjune l995 issue ofthe harvard business review, and more recently published "new strategies for inner-city economic development" in the february /997 issue of economic development quarterly. professor porter has overseen intensive research effort that has studied the economic base ofseveral mjaor us. inner cities. 4 stra tegf small business brief one stop capital shop: providing assistance for inner-city small businesses michael c. elkin sba program manager oakland one stop capital shop "it's the economy, stupid!" and that now famous campaign slogan did not manifest itself more forcefully than the los angeles riots in 1992. many would argue that the l.a. riots (and not ross perot) was the single most important event that caused the demise of george bush's presidency and paved the way for bill clinton to claim the white house arer the november elections. more than any other single event in the last decade, the l.a. riots focused the attention of americans on the growing disparity in living standards between middle-class america and the impoverished inner city. once in office, the clinton administration immediately set out to develop an economic development strategy that would bring results to communities across the country who had longed missed out on the economic prosperity the rest the country was experiencing. thus the idea of the empowerment zone was hatched. in actuality, empowerment zones were not new ideas. the clinton administration first studied various enterprise zones and other geographically based economic enhancement programs scattered throughout the country. then ager much deliberation, the best ideas and strategies were combined to form the clinton administration's empowerment zone initiative. to select the communities that would be targets of this program, the federal government solicited proposals from around the country. requests for proposals were issued by the departments of housing and urban development, agriculture and health and human services to apply for federal assistance to help facilitate economic development in the most disadvantaged communities. communities were told that the federal government would be looking for economic development strategies that used innovative ideas, relied on local resources and most importantly, encouraged broad community participation from the targeted areas. since the project was to be narrow in focus, only the poorest communities can benefit from federal empowerment zone funds. only census tracts that met certain low-income criteria would be eligible for empowerment zone status. 73 journal ojsmall business strategy vol. io, no. l spring/summer l999 cooperation among federal agencies, both working together and with the local communities, is one of the key innovations of the empowerment zone initiative. federal agencies were directed by the president to develop programs that support the initiative. in response, the u.s. small business administration (sba) developed the one stop capital shop program. fit)ceo cities across america were designated to receive sba one stop capital shops (table i ). these shops are an innovative attempt to streamline sba services by offering all services at one convenient location in the heart of the target community. one stop capital shops are intended to foster the growth and development of small businesses in empowerment zone communities. these shops are partnerships between the local government, sba, private lending institutions, and other service providers which collectively offer an integrated network of business support and lending assistance under one roof, centrally located to each empowerment zone. table i one stop capital shops atlanta, georgia baltimore, maryland boston, massachusetts chicago, illinois detroit, michigan houston, texas kansas city, missouri kentucky highlands los angeles, california lower rio grande mississippi delta new york, new york oakland, california philadelphia, pennsylvania tacoma, washington services include: ~ a variety of business loan programs including sba guarantee loans, municipal loans and micro-enterprise loans. ~ business counseling and technical assistance provided by sba resources-the small business development center (sbdc), one stop capital shop business coaches (comprised of successful professionals and entrepreneurs who live and work in the community) and the service corps of retired executives (score). ~ a variety of training programs, including how to start and manage a small business, developing a business plan, financing your small business, marketing your small business and credit repair. ~ various private sector financial organizations including banks, factoring companies and non-profit community business development corporations provide business loans and financing to qualified small businesses. ~ for small businesses trying to sort out all of the government programs and regulations, trained staff from city, state and federal agencies provide counseling and guidance. the heart of every one stop capital shop is the sba business information center (bic). the "bic"is a high-tech business reference library that includes the latest computer hardware and software, cd-roms, more than 200 sample business plans developed by the same people that publish the entrepreneur magazine. the new and innovative center is designed to help small businesses research and develop highly effective business plans and feasibility studies. the tools of the bic also assist them in their market research, development of marketing tools and other software-based needs. the bic provides clients with free internet access. 74 journal ofsmall business strategy vol. /0, no. 1 spring/summer 1999 empowering poor communities one stop capital shop mores a difference maria baraccas owns a small retailrecord store in the fruitvale empowerment zone of oakland, california. the company called aculpulco records sells a variety of cd titles popular with the local latino community. and while the company is profitable and has been in business for several years, maria still found it difficult to get capital for her business. eventually she received a loan from the community bank of the bay and the city of oakland through the empowerment zone loan program. but before she could get financing, maria first met with a consultant provided by the east bay small business development center. the consultant helped her assemble the financial records required by the bank for a loan. all of the services provided to maria were provided through the oakland one stop capital shop. each one stop capital is designed to address the specific needs of clients based in the empowerment zones. in the case of oakland, three separate areas are designated as part of the zone and include east oakland, west oakland and san antonio/fruitvale. the zone is a community that lacks access to the most basic services. it is the goal of the oakland one stop capital shop to encourage the development of small businesses in each of these communities. the city of oakland embodies one of the most diverse populations in the san francisco bay area. in oakland, 132,941 of the population are white, 57,723 asian, 164,932 african american, and 50,110hispanic. there are 388,574 individuals and 20 763 businesses within the city of oakland. the enhanced enterprise community (eec) is made up of three separate communities within the city of oakland: west oakland, fruitvale/ san antonio and east oakland. the total population within the entire eec is 46,354. 61% of the population is black; 16% asian; 10% white; less than 1%native american and 13%other. 7he median household income in the eec averages $ 13,500. it ranges from $8,000 to $24,000. this should be compared to the median household income of the san francisco-oakland-san jose msa that is $41,459. in the eec, 6% of the households receive some source of non-farm self-employment income. in the san francisco-oakland-san jose msa 16% of households receive non-farm self-employment income. in the eec as a whole, 40% of the households receive public assistance income. as high as 60% of households in some census tracts receive public assistance income. in the san francisco-oakland-san jose msa, 8% of households receive public assistance income. results the oakland one stop capital shop has been in operation since november 1996 delivering comprehensive services to the local community. in 1998, the oakland one stop capital shop made; ~ 80 sba guaranteed loans in oakland for a total of $20 million (see figure i). ~ 12 sba guaranteed loans in the empowerment zone for $3 million. ~ $ 16.25 million in direct city of oakland empowerment zone flagship loans designed to support and improve the local infrastructure. ~ 12 direct city of oakland empowerment zone small business loans totaling $ 1.55 million. 75 journal ofsmall business strategy vol. l0, no. l spring/summer 1999 figure i -sba loans in the city of oakland 1992-1998 (one stop capital shop established 12/96) 120 100 80 ~¹ of loans 60 40 20 0 1992 1993 1994 1995 1996 1997 1998 in addition to loans, one stop capital shop clients received a wide variety of assistance: ~ one stop capital shop business coaches counseled 120 clients & trained over 1400 in a variety of basic small business management classes —business coaches is a volunteer program with no added cost to tax payers. ~ the east bay small business development center (part of the sba small business development center program) counseled 556 clients and trained another 3913 clients in the one stop capital shop. ~ score (service corps of retired executives) counseled over 906 clients and trained 193 clients. score is also a volunteer program and is provided with little costs to taxpayers. ~ oakland business development corporation operates the sba women and minority prequalification loan program. through this program, women and minority small business owners receive intensive assistance to improve their chances of receiving sba guarantee financing. in 1998, oakland business development corporation and sba packaged, prequalified and funded 22 loans for $ 1.85 million; it is likely that without our assistance these loans would never have been made. challenges ahead many of the clients that come to the one stop capital shop lack basic computer skills and may also know little or nothing about basic business management skills. this doesn't mean that they cannot be successful small business owners, in fact many do manage to run successful businesses. however, these clients need help to fill in the gaps so they can grow and expand their businesses and compete more successfully in the future global economy. since many of the clients require intense one-on-one support, especially when working in the business information center, interns from various colleges work with clients on-site. this has proven to be a successful partnership: students gain valuable experience counseling and aiding local small businesses, and the businesses themselves receive valuable assistance that they would not otherwise be able to alford. 76 journal ofsmall business strategy vol.10, no. i springjsummer l999 outreach also proves to be a great challenge. while the one stop capital shops serve a large number of clients (over 30,000 in 1998), it is still a small number when compared with the size of the communities served. conclusion small businesses are the major key to urban revitalization. they provide employment to the local communities, they provide valuable goods and services sorely needed in these communities, and most importantly, the owners of these firms, typically live in the community as active participants with a stake in the future. this last point is important. many cities are now courting large firms from out of state or internationally to invest in large-scale projects devoted to economic development and job creation. however, will these companies stick around for the long-term and what price must be paid in tax rebates and infrastructure improvement to attract these firms? small locally owned companies are usually committed to a community for the long-term. they may, in the end, be the best investment for government supported economic development programs. programs like the one stop capital shop provide an ideal mechanism to tie together federal and local small business support programs to make a more eaicient and convenient use of these precious economic development dollars. having all programs located under one roof is especially desirable to the small business owners. "finally we don't have to drive all around the county looking for someone who can help us with our problems," is a comment heard at the one stop capital shop every day. michael elkln ii the manager ofthe oakland one stop capital shop. the one stop capital shop is a major economic development initiative of the us. small business administration. in oakland, this program delivers a wide range of resources to local small business. last year alone, sba guaranteed 80 loans for over $20 million dollars to oa!dand businesses. mr. elkin has been with the small business administrationfor io years. prior to managing the oakland one stop capital shop, he was the regional manager for sba's international trade program and was responsi hiefor developing the agency�'s trade programs throughout california, arizona, nevada and hawaii. he served as a u.s. peace corps volunteer in kenyajom 1986i988 providing management consulting to small businessesin the mt. kenyo region. mr. eikin has a bachelor of science degree in business administration and a bachelor of arts in economicspom san francisco state university. ivotei michael eirin was the luncheon spearer at the 1999 sbida conference in san francisco. 77 journal of small business strategy vol. 27 ● no. 2 ● 2017 90 internet presence as a small business capability: the case of mobile optimization troy voelker university of houston clear lake voelker@uhcl.edu doug steel university of houston clear lake steel@uhcl.edu elsa shervin university of houston clear lake shervine6322@uhcl.edu abstract this study reports on the mobile optimization efforts of 376 small and mid-sized enterprises (sme’s) operating in a suburban sector of a major u.s. metropolitan area. we find that just under 50% of sme websites sampled were mobile optimized, defined as websites that render differently on a mobile browser than they do on a desktop browser. firms with a greater internet presence and firms whose websites include basic, essential design elements are far more likely to have a mobile optimized website than those who do not. multi-unit organizations, retailers, and healthcare oriented businesses are also each more likely to have a mobile optimized website. key words: internet presence, website design, search engine optimization (seo), mobile optimization mailto:voelker@uhcl.edu mailto:steel@uhcl.edu mailto:shervine6322@uhcl.edu journal of small business strategy vol. 27 ● no. 2 ● 2017 91 introduction approximately 143 million mobile phones were sold in the u.s. in 2014. many of those mobile phones were smartphones, such as those models made by apple as well as those made by various manufacturers who use google’s android operating system. the 2014 sales are a continuation of an ongoing trend in which sales of mobile devices are gradually overshadowing and replacing sales of desktop and laptop computers. many americans are now tethered to their mobile technology, using it as their primary (and in some case only) access to the internet (stewart, wettstein, & bristow, 2004). the dot-com bubble of the late 1990’s is, in effect, replaced by a mobile wave surging in this decade. americans frequently use mobile devices for web browsing, shopping, and consumption of other web-based media traditionally accessed through a desktop personal computer (iniesta-bonillo, sanchezfernandez, & cervera-taulet, 2012). one confound which manifests in this transition to mobile devices is the challenge of mobile optimization. websites and media designed for optimal viewing on the larger, desktop monitors are often difficult to view on a mobile device. smartphones typically mimic the aspect ratio and resolution potential of larger devices. however, the proportionally smaller mobile phone screen can result in web content that has been “shrunk down” far beyond easy viewability. for businesses of all size, the need to achieve mobile optimization is becoming one of increasing importance. mobile optimized content is content which has been reconfigured in such a way as to be easily viewable and consumable on a mobile device. this has taken on even greater significance with google announcing its intention to use mobile optimization as one of its indicators of website relevance for searches initiated from a mobile device (google, 2015; ohye, 2015). for large and small businesses alike, mobile optimization is now one of several critical requirements to assure optimal search results (ohye, 2015). in this study, we examine the mobile optimization patterns of business websites for small and mid-sized enterprises (sme’s) in a major southwestern metropolitan marketplace. our intent is both descriptive and explanatory. studies of internet presence and use of web based media for sme’s are rare and thus our ability to describe the characteristics of this phenomenon contributes to the field. we offer evidence that sme mobile optimization is part of an emerging body of research on internet presence (chen, shih, chen, & chen, 2011; shih, chen, & chen, 2013), demonstrating that this firmspecific capability explains mobile optimization beyond that explained by industry patterns and firm complexity. literature review search engine optimization search engine optimization consists of the practices intended to increase the number of visitors to a website by “obtaining highranking placement in the unpaid listings” of search engine result pages (thurow, 2015), p. 44). this work focuses on organic, or unpaid, results rather than paid-placement campaigns requiring firms to bid on promotion in paid ads that show up adjacent to the organic results. journal of small business strategy vol. 27 ● no. 2 ● 2017 92 while many sites vie for top ranking for a search term such as “office supplies,” there is only space in the top spot for one web page. the ensuing competition pits firms against each other for placement. those that show up on the first page of search results stand to gain the most because research suggests that users rarely look past the first page of results (killoran, 2013). benefits obtained by seo require maintenance. improving one’s rankings comes at an expense to the competition’s rank and the competitors can, in turn, respond to ranking changes by adapting their pages to move up in the rankings (stella tomasi & xiaolin li, 2015). the process of optimizing search engine placement is complex because the underlying ranking factors vary between search engines and the ranking algorithms of each engine are proprietary (ledford, 2009, p. 5). as a result, seo practitioners rely on “best practices” and advice from third-party firms (moreno & martinez, 2013). mobile optimization consumers reach for their mobile devices when looking for information. in fact, google’s internal data as well as another report suggest that more searches are initiated on mobile phones than desktop computers and that the number of mobile-initiated searches is increasing at a faster rate than desktop-based ones (dischler, 2015; merkle, 2015). to reach these consumers, businesses should make themselves available in this medium. it is not enough to simply be found by mobile users. a site must work properly on a small screen and provide a smooth experience so consumers are not frustrated. along these lines, google, the largest search engine by market share, now shows to mobile users only sites it deems “mobile friendly” (barr, 2015). ultimately, if a business wishes to be searchable on the largest internet search engine (google) by users of the most prominent and fastest growing search segment (mobile users), the business needs to mobile optimize its web resources. this is part of its “mobilegeddon” update. while this update “has no effect on searches from tablets or desktops. it affects searches from mobile devices” (ohye, 2015). the update will help ensure mobile users have an excellent mobile browsing experience using google’s search product and in turn, won’t use a bad experience as a reason to explore a competing mobile search engine. users do have an expectation that they will be guided to pages that load properly and as consistent with their search terms and this update helps ensure that experience. in summary, a mobile-friendly website should be a consideration for business owners wishing to serve those with mobile devices. this is often accomplished with a “responsive” design that adapts to the available screen space and serves mobile devices without unnecessarily shrinking font sizes to unreadable levels (matthews, 2014). mobile optimization and industry patterns a firm must choose whether or not to have a website and whether or not to mobile optimize the website. when considering reasons why businesses choose one path over another, researchers often turn to isomorphic tendencies as discussed in institutional theory (dimaggio & powell, 1983). institutional theorists suggest that three isomorphic journal of small business strategy vol. 27 ● no. 2 ● 2017 93 mechanisms, mimetic, normative, and coercive, explain the homogenization of organizations. the mimetic isomorphism path represents tendencies represent the human nature to learn socially through others and as a result make choices similar to those already present in an environment. taken further these mimicking patterns, over time, become standards of practice or ‘industry recipes.’ firms who match the pattern are considered more legitimate than those who fail to match the pattern (batchelor & burch, 2011). effectively, when confronted with ambiguity (“how should our website look?”) firms look at what close competitors and recognized leaders (best practices) suggest and imitate those practices. the commonality of practice resulting from this then becomes part of a subjective standard outsiders will use (“i can’t believe they didn’t…”) when evaluating organizations. this results in a cycle of mimicry and judgment which reinforces similarity within a system (voelker, 2011). the normative isomorphism path represents tendencies for common experiences associated with professionalization and education, to shape a common point of view within an industry. an accounting education, for example, predisposes an individual to view problems “like an accountant would,” which is reinforced through professional standards like the cpa exam. the central idea here is that common training and education predisposes groups to focus on common issues and to draw upon common tools when they approach those issues. this commoditizing force is not inherently positive or negative, although the accounting example used might suggest that it is a largely pro-social phenomenon. commoditizing, though, simply means homogenizing in that variation within a system is reduced. within small business literature it is informative to think about this normative force as present within the common, and typically unfortunate, outcomes for minority business owners. there, similarities in lack of education, lack of access to capital, and lack of supportive networks leads to similar welldocumented, unfortunate outcomes (gibson, mcdowell, harris., & voelker, 2012; hendon & bell, 2011). the coercive isomorphic force represents tendencies for legitimizing bodies to establish and enforce common standards within an industry. at the broadest level these may be governmental forces setting regulatory norms for an industry. it can also be the common standards of an accrediting professional body, consider for instance how aacsb accreditation serves to make schools of business more similar. coercive isomorphic standards can emerge from outside of the industry context. as discussed in our section on search engine optimization, search engines such as google have a significant influence on web technology deployment through their search engine ranking algorithms. for businesses to thrive they need to be web searchable, the algorithm for search thus becomes a coercive isomorphic force. firms that fail to optimize their web pages for google find themselves obscured to a late page search ranking. but google does not publish their algorithm and thus, firms are faced with great ambiguity in their approach to search engine optimization. this is most certainly also true journal of small business strategy vol. 27 ● no. 2 ● 2017 94 with the more recent phenomenon of mobile optimization as a search engine optimization decision. as with any other ambiguous activity we would expect mimetic isomorphism to manifest as “doing what the competition does.” to this end, the isomorphic forces are not competitive, but rather complementary and mutually reinforcing. this leads us to our first hypothesis. hypothesis 1: the mobile optimization behaviors of firms follows an industry recipe model. optimization is more likely to be present in some industries while being mostly absent in others. mobile optimization and firm complexity organizational theory researchers have long recognized that firms vary in their internal complexity (thompson, 2005). at the most simple level, many small firms tend to be much generalized in their organization. everybody working for the firm does everything; many hats are worn by each member of the organization. as firms increase in size and scope, though, it is typical to see greater specificity arise within the structure of the firm. tasks once done by all become jobs handled by a specialized few. processes which were once done asneeded become codified into protocols, policies, and procedures. communication patterns which were once informal become hierarchically embedded in reporting relationships and areas of responsibility. this well recognized pattern of increasing complexity is almost certainly present in small businesses and their approach to internet technology (samuel fosso wamba & lemuria carter, 2014). for the smallest of firms and for many startup firms, web media decisions are ad hoc or one-off without necessarily any attention to internal replication or consistency. lacking technical capabilities to design websites on their own, business owners may outsource the process to a consultant who themselves does not know the small business very well (chuleeporn changchit & tim klaus, 2015a). further, lacking technological sophistication, the small business owner may not have the capacity to judge the consultant and may make decisions from a basis of cost or social familiarity (“my nephew knows a lot about websites…”). the result is a haphazard and inconsistent approach to web based media. this changes though as firms grow in complexity. as the small business scales up or becomes more complex, it will typically delegate tasks to specific persons hired on for their expertise. rather than a website consultant, the firm may hire their own technology expert who manages the entire web presence of the small business. this person more likely knows the small business and also knows the technology. as a result we would expect a more complex and consistent approach to web presence. one way this can manifest is through franchising. when a small business startup opens through franchising, they buy access to an established business model. this results in access to a standardized approach to marketing and messaging, which may for example include franchisor management of (or expected standards for) internet presence. the central logic here is that mobile optimization is more likely to occur in businesses complex enough to have a designated role associated with the management of the firm's web presence. this brings us to our second hypothesis. journal of small business strategy vol. 27 ● no. 2 ● 2017 95 hypothesis 2: the mobile optimization behaviors of firms follows a firm complexity model. more complex firms are more likely to have mobile optimized websites than the websites of more simple firms. mobile optimization and internet presence while industry patterns and complexity stories offer a predictable way of thinking through our question, each suggesting that the environment affects firm behaviors while leaving vacant explanations of how firm’s affect their environment. business owners are not simply passive participants in their industries and in the market. they are active participant's making choices and charting paths. in this section we explore how a firm’s idiosyncratic choices may result in outcomes not well explained by homogenizing stories. a central assumption of both the resource based view of the firm and the dynamic capabilities perspective of the firm is that firms have an idiosyncratic allocation of resources and capabilities (barney, 1991; teece, pisano, & shuen, 1997). within the same industry, competing for similar customers, firms draw upon unique combinations of resources and capabilities in ways that differentiate them from their competitors. further, these capabilities in turn shape the learning potential or absorptive capacity of the firm leaving it easier to learn adjacent capabilities and harder to learn distant capabilities (cohen & levinthal, 1990; tzokas, 2015; voelker, niu, & miles, 2011). within the context of our research, a firm’s ability to effectively deploy web based media is quite likely a skill. while industry context and firm complexity may explain part of the story, some firms are likely to simply be better than their peers in ways not well explained by size and complexity alone (chuleeporn changchit & tim klaus, 2015b). small businesses differ in their internet presence in a way consistent with a resources and capabilities narrative (voelker & steel, 2015). some small businesses are quite comprehensive in their deployment of web based media, others are haphazard, others are barely visible, and some firms have not yet transitioned to the internet. voelker and steel (2015) refer to this as the internet presence, or “the range and depth of adoption of an internet website as well as various popular social media applications” we suggest that the decision to mobile optimize a company's website would also be consistent with a firm’s capability of managing their internet presence. getting found by prospective clients on the web is also component of a firm’s internet presence. we would expect firms who are more comprehensive in managing their other internet presence activities. they would therefore be more likely to have a mobile optimized website than would firms with a minimal internet presence. this leads us to our final hypothesis. hypothesis 3: the mobile optimization behaviors of firms follows an internet presence capability model. firms who manifest greater sophistication in their internet presence are more likely to have mobile optimized websites than are the websites of firms who demonstrate a less sophisticated internet presence. journal of small business strategy vol. 27 ● no. 2 ● 2017 96 methodology we evaluate the mobile optimization of firms using a sample of 376 small and mid-sized enterprises operating in a large suburban market adjacent to a major southwestern city. we began our data collection using a repository of sme’s involved in the chamber of commerce in this market. from there we restricted ourselves to sme’s who provide onsite location based exchange. these are businesses where the end customer was most likely to visit the business at some stage in the economic exchange. we omitted businesses where the economic exchange was most likely to happen at the end-customers location with no (or very little) likelihood of the customer ever visiting the business location. we are focused on sme’s who operate more traditional, so-called click and mortar (lahuerta otero, muñoz gallego, & pratt, 2014), businesses for whom the internet is primarily a source of promotional activity. we are not examining businesses who are primarily engaged in web commerce, nor sme’s who might typically conduct their business at a client's residence (e.g. pest control companies), nor are we looking at the activities of large corporations. we collected data directly from the company’s website and other openly accessible web based media. this included their use of social networking media (facebook, twitter, etc.), reviews from common third party websites such as yelp, and their “map pack” data from google and microsoft’s bing search engines. while some of this information includes redundant data (e.g. whether or not a phone number is listed in each media type), we track 40-different pieces of observable internet presence data for 413 organizations of which 376 are private, for-profit sme’s. we also created a demographic profile for each firm. this includes industry classification and whether the firm is franchised (if determinable) or multi-unit. we also coded for the global popularity of the company website using the sites alexa ranking. our data collection was non-invasive and represents an objective assessment of the outward facing behaviors of each of the firm’s internet presence. data was collected by a paid research assistant. the research assistant was trained in, and worked from, a 70-line data-coding protocol developed by the primary researcher. this data collection sampling took approximately three months of work and compensation was provided by a faculty research support grant from the employing university. over the course of these three months, the primary researcher met with the data coder on a weekly basis. during these meetings any conflicting or confusing results were discussed and evaluated. further, the primary researcher separately, and regularly, randomly sampled coding to determine consistency of results. in general, our coding consists of binary variables (has a profile, does not have a profile) there was little room for subjectivity in our assessment and thus little room for disagreement between the data coder and primary researcher. measures the dependent variable in the present study is whether, or not, the firm’s website is mobile optimized. since there is little agreement upon the specifics of mobile optimization and given that google does not specify how it defines “mobile friendly” in their search algorithm, we used a very basic definition for journal of small business strategy vol. 27 ● no. 2 ● 2017 97 mobile optimization. for purposes of our sample, a website is considered mobile optimized if the website is visually different when viewed on a mobile device than it is on a browser viewed from a desktop computer. a firm that has made no effort to differentiate their desktop browser and mobile browser viewability is coded with a ‘0’ for nonoptimized. firms whose websites have a different appearance in a mobile browser than they do in a desktop browser are coded as a ‘1’ for optimized. we coded for the industry of the firm using the first two-digits of the north american industry classification system (naics) which is commonly used in business research. naics uses a drill-down model for its six-digit classification where each subsequent pair of digits adds greater granularity to the classification. for example, naics 72 represents all types of accommodation and food services with 7211 differentiating lodging from 7223 food services. for purposes of this study we focused on the two-digit classification and used unique binary controls for the industry’s most commonly appearing in our sample. we coded for firm complexity using a multiunit designation. our sample are sme’s where the customer is likely to conduct some significant level of business at the businesses physical location. when that firm has a single location it is often a very small business. in general, when these firms grow they do so through additional units or branches. for example, a local pizza restaurant with three locations is treated as a more complex entity than a pizza restaurant with a single location. our data attempted to track for franchising, but this proved more difficult to authenticate. while popular franchises were easy to discern, some businesses use both a franchise and a corporate model simultaneously and it is not always clear upon viewing their internet presence which ownership model is present at a local site. however, all of the firms we were able to verify as franchised firms in our sample were also multi-unit firms. indeed most had units across multiple state lines. we have chosen, for simplicity to treat complexity as simply multiunit for this study. a firm with more than one identifiable location is coded as a “1,” while a firm for which we cannot identify multiple locations is coded as a “0.” research suggests that the presence of basic website design elements greatly improves the navigability and trustworthiness of the website (resnick & montania, 2003). following voelker and steel (2015), we used the presence or absence of three website artifacts as an indicator of the comprehensiveness of their website design. voelker and steel found that only a quarter of the websites of sme’s they examined contained a contact number or email address, operating hours, and a map or physical address. we similarly find about 1 in 4 of the firms in our sample to have all three artifacts. our results differ from theirs on those having zero of the three (10% for us, 25% for them) as well as for those having two of the three (50% for us, 25% for them), we attribute these differences to choices in sampling. we specifically focus on retailconsumer focused sme’s with a brick and mortar model while that was not their specific sme selection criteria. we coded our website variable as the count of the three design elements present allowing for a range of 0 (none present) to 3 (all present). journal of small business strategy vol. 27 ● no. 2 ● 2017 98 voelker and steel (2015) also demonstrate that the website comprehensiveness of the firm is a useful predictor of whether, and what type, of other internet presence activities of the firm. in their study, firm’s whose websites had all three design elements were also more likely to utilize multiple social networking media (facebook, twitter, etc.) while firms without the three design elements were unlikely to have any other internet presence. we coded internet presence as a count variable for the number of non-website internet presence sources. this included facebook, twitter, google+, youtube, linkedin, instagram, and pinterest. analysis we used a very low bar for mobile optimization, the website had to be visibly different on a mobile and desktop browser. even so, just over half (55%) of the firm’s websites we sampled were mobile optimized. 171 of the websites we reviewed were not different when viewed on a mobile device. our firms were nearly evenly split between single-site and multi-unit locations. 180 of the firms operated from a single location while 196 had at least a second location. many of the businesses we examined were in naics 54, with 69 of the firms listed as professional, scientific, and technical. we also found 62 financial services (naics 52) firms, 53 health care firms (naics 62), 39 construction firms (naics 23), 34 other services (naics 81), 23 administrative services (naics 56) and 22 retailers (naics 22). for each of these industries we included a dummy variable for the two-digit naics where a firm was listed as “1” if they were from that industry and a “0” if they were not. most other industries had a handful of coded firms and thus not enough to merit specific control. distribution of results for number of website elements and breadth of internet presence appears in table one below. a bit more than 10% of the firms in our sample lack all three website design elements (address, contact information, and operating hours) and a full quarter have no other internet presence than a website. 139 of the organizations have all three website design elements and about a quarter of the firms in our sample have an internet presence which includes at least four other, non-website, resources. as with voeker and steel (2015), we find substantial variation even with these relatively simplistic indicators. table 1: website design elements and internet presence 0 1 2 3 4+ website elements 42 31 201 139 n/a internet presence 101 87 63 64 97 correlations for all variables appears in table two below. supporting our broad expectations, we see numerous correlations with mobile optimization all of which manifest in our expected directions. inclusion of website elements (r=.23) and internet journal of small business strategy vol. 27 ● no. 2 ● 2017 99 presence (r=.33) each positively and significantly correlate with mobile optimization. consistent with the findings of voelker and steel, we find that internet presence is typically larger for firms who have more of the three website design elements in place (r=.12). multiunit firms are also more likely to have a mobile optimized website (r=.22). consistent with a story of firm complexity resulting in more worker specialization, we see that multi unit locations correspond with a larger internet presence (r=.30) and inclusion of more website design elements (r=.19). health care firms (r=.16) and retailers (r=.14) are each more likely to be mobile optimized while construction companies (r=-.18) were less likely to have a mobile optimized website. supporting a story of industry recipes, construction firms were also likely to have fewer website design elements (r=-15) and a narrower internet presence (r=-.12) but this pattern is not as clearly visible with other industries in our sample. examination of our hypothesis was conducted using logarithmic regression of our predictor variables onto the binary dependent variable, mobile optimization. binary logarithmic regression is a statistical technique that estimates the probability, or odds, of an observation landing in either of two outcome conditions. results of our logarithmic regression appear in table three below. our regression model explains about 27% of the variation in mobile optimization and offers useful insight into patterns of optimization, and non-optimization, in the sample. table 2 correlations of variables 1 2 3 4 5 6 7 8 9 10 1 optimized 2 multi_unit .215** 3 website .226** .188** 4 web_presence .333** .301** .115* 5 na_23 -.180** -0.093 -.152** -.123* 6 na_44 .137** -.124* .108* -0.007 -0.085 7 na_52 0.032 .211** .218** -0.009 -.151** -.111* 8 na_54 -0.091 -0.027 -.229** 0.036 -.161** -.118* -.211** 9 na_56 0.077 0 -0.043 0.042 -0.087 -0.064 -.113* -.121* 10 na_62 .155** 0.082 0.097 0.094 -.138** -0.101 -.180** -.192** -.103* 11 na_81 -0.029 -.181** 0.002 -0.099 -.107* -0.079 -.140** -.149** -0.08 -.128* ** correlation is significant at the 0.01 level (2-tailed). * correlation is significant at the 0.05 level (2-tailed). our first hypothesis suggests that mobile optimization follows an industry recipe model. in this, firms within an industry copy actions of their competitors and comply with the expectations of common thirdparties. thus behaviors, or lack of behaviors, journal of small business strategy vol. 27 ● no. 2 ● 2017 100 become common and typical of most of the firms within that industry. we find evidence supporting this in that retailers and healthcare firms are significantly more likely to be mobile optimized and that construction firms are significantly less likely to be mobile optimized. for the two more likely cases, the presence of larger competitors (major retailers) as well as coercive pressures of governance and regulation (the affordable care act) cause retailers and health care providers to devote more attention to their website and its accessibility. our second hypothesis suggests that firm complexity explains mobile optimization choices. we suggest that as firms grow in size and scale they are more likely to dedicate specific resources to recurring needs. these resources are likely to be more specialized which, in turn, suggests more professional outcomes. with the data available to us, we used multi unit as an indicator of firm complexity under the theory that managerial complexity for a single-unit sme is far less than that for a two or greater unit sme. consistent with our expectations, multi unit locations are more likely to have a mobile optimized website. our third hypothesis suggests that firms have a capability in managing their internet presence; some firms excel in managing their web presence and others are lacking. firms who are more likely to include all three website elements and firms that have a broader internet presence are more likely to be aware of the need for, and then seek out the means to, mobile optimize their website. consistent with our expectations, having more website design elements and having a broader internet presence each significantly correspond to increased likelihood of having a mobile optimized website. table 3 logarithmic regression of predictors on mobile optimization discussion we used a very low threshold for mobile optimization, simply whether or not the website appeared different in a mobile browser than it did in a desktop browser. we believe that was a reasonable standard given that mobile optimization is a new concept, there is ambiguity in what “optimal” optimization means, and it remains deeply uncertain which mobile optimization standards improve search engine rankings (ahmad ghandour, 2015). startlingly, even with the low standard we employed, almost half of the firms in our sample do not have websites that are mobile optimal. our results suggest, though, that it is not simply a coin-toss, 50-50, chance whether one will find a mobile optimized business website or not. we are able to document several situations where the odds are greatly increased and at least one where the odds are significantly decreased. companies who have β exp(β) sig. multi unit .56 1.76 * website .37 1.45 * internet presence .37 1.45 *** na_23 -.53 .59 na_44 1.78 5.92 ** na_52 .18 1.19 na_54 -.05 .96 na_56 .98 2.65 na_62 1.02 2.76 * na_81 .37 1.45 nagelkerke r2 = .27 journal of small business strategy vol. 27 ● no. 2 ● 2017 101 all three of our tracked design elements (contact information, operating hours, and physical address) are more likely to have a mobile optimized website. companies with a broader internet presence are more likely to be mobile optimized. health care companies and retailers are more likely to have a mobile optimized website while construction firms are less likely. our work with internet presence extends voelker and steel (2015). like them, we find about one in four firms have all three website design elements and those firms are indeed more likely to have a broader internet presence than firms with fewer or no website design elements. as with our measure of mobile optimization, we are using a very simplistic measure for estimating the sophistication of a firm’s internet presence. simply checking for three, frankly obvious, website design elements and counting the number of other sources of website presence is, at first glance, a seemingly basic method to evaluate sophistication of a capability. and yet, the degree of unsophistication seems so large in both our sample and theirs, that a simple measure proves surprisingly informative. perhaps at some point, the typical small business will routinely include the measures we check for. perhaps at some point, the typical small business will have a broad internet presence. but that time is not yet here and a significant number of firms are still in a very nascent stage of developing their internet presence. if were to examine an older repository, the yellow pages for example, we would expect to find contact information and location information. one might think that this would naturally extend over to business websites, but our evidence as well as prior studies, suggests that this would be an overly optimistic expectation. one might similarly expect frequent, routine mobile optimization, given the prominence of mobile devices and the frequency at which consumers use mobile devices to look up small businesses. but again, our data suggests one would be naively optimistic in such an assumption. conclusion we believe that the most significant limitation of our study lies in the simplicity of our coding. we use binary variables for many of our measures presence and absence is our primary focus. and yet, in spite of this limitation we are able to discern patterns that are predictable given our knowledge of industries, firms, and capabilities. the limitation is, we believe, less on our data and more on the state of the field. businesses are not yet well enough versed on the topic to exceed the relatively low bars we set for presence (of website elements, of breadth of internet presence, of mobile adoption). our findings and their limitations suggests an abundance of opportunity. for small businesses, small gains in these areas such as changing the layout of your website for mobile devices or simply spot checking your website for the design elements can place you in advance of a surprisingly large number of competitors. for those who teach and advise business practitioners, many improvements lie within short reach (bakeman & hanson, 2014). for researchers, this is an early glimpse into an emerging field of study. we are all still very early in the learning curve of internet presence, there is tremendous room for gain to be had. journal of small business strategy vol. 27 ● no. 2 ● 2017 102 references bakeman, m., & hanson, l. 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(2014). social media tools adoption and use by smes: an empirical study. journal of organizational and end user computing, 26(2), 1-17. doi:10.4018/joeuc.2014040101 reproduced with permission of the copyright owner. further reproduction prohibited without permission. strategy-specific decision making: a guide for executing competitive strategy fields, w calvin journal of small business strategy; spring/summer 2006; 17, 1; abi/inform complete pg. 87 book review strategy-specific decision making: a guide for executing competitive strategy by william forgang isbn: 0-7656-1288-7 reviewed by w. calvin fields wingate university cfields@nugold.wingate.edu introduction overview of the book this relatively inexpensive textbook's unique strength is that it presents the author's theoretical approach to strategic decisionmaking, but does so in such a way that helps students understand the theoretical and integrative features of the simulation. this is not one of the expensive color-laden, hardback texts that cost students dearly. it is a plain print, paperback. the conceptual and pedagogical approaches are what distinguishes this book, and more than makes up for the lack of color that is so fashionable, but expensive. in a nutshell, this textbook facilitates the teaching of practical theory that nicely complements a strategic management simulation used in some schools. forgang presents nine conceptual chapters. the opening chapter is preceded by an opening or "cohesion case" (gelle's building products). parts of this short case are then used throughout the chapters to illustrate specific conceptual material. students are asked to evaluate the opening case at the beginning of the course and to save their written evaluation. then, at the end of the course,. (appendix i) students are again asked to evaluate the case so they can 87 see for themselves just how differently they now view the case. this method provides some idea about how this important textbook encourages integrative, pragmatic thinking, but there is also much more. for example, in appendix ii, the "instructor's and student's simulation guide", lists eighteen sets of questions organized into two groups; "pre-simulation activities" and "post-simulation activities", with an introductory explanation preparing students for the simulated experience. each question area contains from two to six subordinate questions which are keyed to specific, previous in-text exercise application problems which can either be used in class as group exercises, or required as written-up homework. in addition, there are seven short most are two pages case studies each with an end-of-case exercise. these questions and cases are intended to illustrate specific concepts present in previous chapters. one of the main differences, however, is that forgang's cases and exercises are much more acutely focused than the average text, hence the term "strategy-specific". chapter-by-chapter highlights forgang begins with an expose of his model of "strategy-specific decision making" which is not very different from reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy so many stage-models in the strategic management literature. but then, forgang gets into one of the emphases of his book. his notion of strategy-specific decision making brings in two important concepts: first, his "strategic lens" concept and second, the importance the author places on decision priorities. forgang defines the important role of the strategic lens as "to evaluate decision options, to make consistent and complete decisions, and to explain the logic behind one's actions" (p. 9). in placing the emphasis upon strategic priorities, forgang sets the stage for a good discussion of how actual decisions are made in business. regarding priorities, forgang states there must be clear priorities because trade-offs are often necessary. chapter 2 is a thorough explanation of the nature of competitive strategy. the most important and useful contribution by forgang in this chapter is the notion of his theme-based weighted value proposition (p. 23). this important concept is missing in most other texts. forgang describes this as an operational procedure of identifying important values and assigning weights to each of them. weights help to clarify the mission statement to improve organizational focus and manage priorities, thus, better enabling the design and implementation of specific strategic decisions. the beauty in his scheme is the refreshing operational clarity it provides. his weighted value proposition statement helps decide what is to be done specifically to implement a mission statement. too often, the gap between theory and practice is too wide for students to learn to quickly apply. working in concert with the simulation, students' value proposition statements guide them to make specific decisions for their simulated companies that better implement their mission statements; much better than trying to guess just exactly what the mission would look like otherwise. 88 vol. 17, no. 1 spring/summer 2006 chapter 3 begins by discussing the importance of strategic decision making per se. the most important part of the chapter, however, begins on page 41 where forgang returns to the key notion of managing by competitive theme. here, he explains how strategic decision making interacts with all other parts of the organization. the best decision is one that recognizes all the various ins-and-outs of the organization. the author states: "understanding the cause-effect linkages in an organization is an essential ingredient of strategy-specific decision making" (p. 42). it is this kind of truly integrative material that makes forgang's text so strong. working through specific case examples such as a restaurant (where speed of service is a priority) and a print shop, the author does more than just explain how decisions are made; he shows how they are made. forgang then works through the case of how vera, part owner of a family-owned print shop, uses the model to conceptualize a problem (excessive customer complaints and refunds) to proceed through decision making only to find out that the problem was misdiagnosed by the owner. through what forgang calls a "cause-effect analysis," it is revealed that the print jobs that had been accepted could not have been performed with the type of printing machinery the company already had. implied is that new machinery should have been in place, or the order should not have been accepted. a complete decision was not made. the case begs the question: how would a complete decision have been made? the author puts the icing on the cake by summing up the case in a special section entitled "lessons learned: the art of decision making" which pulls together the essence of the case example in chapter 3. it should be emphasized that in this analysis, and throughout the book, forgang fully elaborates the many considerations and interactions that have to be considered in an organization to clearly illustrate how a decision in one area affects other areas of a reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy company. one problem with typical organizational perf onnance measures is they focus too much on short-tenn results without enough stress on the process that produces intennediate results. in chapter 4, forgang remedies this by focusing on the importance of intennediate measures. he again refers back to his value proposition framework, but adds the concept of intennediate perfonnance measures. what is refreshing is that he provides a dialog of continuing certain examples; not a plethora of many short examples, but a much smaller number which are continued throughout the text and referred to again and again. by the way, virtually all of these examples seem to be of small finns. this is so different from the bias of virtually all strategy texts which place big organizations as the only ones who need strategic management. small companies should use strategic management too. f organg then shows the connection of intennediate perfonnance measures with market targets, i.e., market segmentation. forgang really takes off in this chapter because this is where he begins to jump off into competitive marketing strategy with all of its dynamic considerations. one thing to show students is how the pro-fonna statement in the simulation changes after the game continues to year three or four of competitive rounds, which is about half-way through the eight-year simulation. students may experience a surprise when they find that their actual decisions do not jibe so closely with their earlier pro-forma decisions when there was little competitive pressure. the lesson is that the competitive environment is always changing, even intensifying. chapter 5 is where the preceding chapters culminate. continuing with the example of greene's grocery, forgang provides a comprehensive model of upstream and downstream analysis (p. 71) to show, by example, how a trucking company would 89 vol. 17, no. 1 spring/summer 2006 proceed from step to step. one of the more interesting concepts is that of decision completeness. one recurrent theme in students' simulated decisions is the issue of the lack of complete decisions. complete decisions, according to forgang, means thinking through all the possible outcomes to make sure that value propositions are implemented consistent with the company mission. forgang's chapter 6 continues with the discussion of upstream (i.e., marketing initiatives) and downstream (execution) analysis by expanding the focus into the area of organizational structures. this chapter is probably the closest to what would be considered a mainstream or typical discussion of how organizations must be structured and adjusted appropriately to implement proper management and control systems. forgang provides two particularly nice items in this chapter. one, he provides a summary figure of the components of a strategic planning document which a lot of businessmen and women could use, since many companies do not have a mission statement, much less a strategic plan. a great workshop that could be provided to practitioners would be for owners to bring their mission statement and work through the strategic plan checklist. two, he shows how forecasting and potential performance gaps can be identified and analyzed using his interim performance measures. the point of interim measures is so that corrections can be made before it is too late. even if companies do take long term performance measure seriously, they may be surprised if short term and intermediate term measures are not also set and assessed along the way. chapter 7 continues to build on the upstream-downstream model introduced in chapter five, to describe and explain the strategy implementation process. the author focuses on upstream analysis by taking the reader through five steps of implementing a company's value propositions. (remember that the value proposition is one of the key reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy missing links in other models). this concept helps students understand how a mission is operationally defined, or retranslated, so it can be more practically understood and implemented. forgang conceives of the integration of business operations as a triangle. his illustration (fig 7.3) shows the company in the center, with competitive strategy at the apex. buyer expectations and integrated operations share each horizontal comer. he then proceeds through the remainder of chapter 7 by discussing specific concepts that good companies use to identify and connect with their best prospects. he ends chapter seven by introducing a variety of specific outcome measures, more than one will see in a typical strategy text, for assessing organizational performance. the last full chapter is chapter 8. (chapter 9 is only three pages long). chapter 8 does what it should do; it focuses on the implementation and control of overall, corporate strategy. more than any other chapter, this one reads like a common strategy text, with explanation and description of corporate strategies, strategic business units, conglomerate diversification, and leveraging. the last chapter is a short stint on leadership. the author identifies and briefly discusses a small variety of leadership characteristics, but what is unique about this last chapter, is that the author describes what good simulation leadership is. this description helps students perform better as strategic decision making teams as they work with the strategic simulation. this last chapter should probably be lengthened, and possibly placed somewhere near the beginning of the textbook instead the end. forgang's writing style is very easy going. in fact, the whole textbook has the demeanor of a theory-based, applications guide, but not a user's manual. as the author begins each chapter, the previous chapter is summarized 90 vol. 17, no. 1spring/summer2006 and put into context to show how the present chapter builds on the previous chapter. the author also continually builds a sense of continuity since he points to the opening case (gelle's building products) as well as green's grocery, throughout the textbook. this serves to keep readers grounded as they gradually build conceptual and practical knowledge, as well as practical decision making skills. concluding remarks to conclude, whether you are interested in changing to an internet-based strategy simulation to pull everything together for your graduating seniors, or whether you just want a new textbook whose mission is more practical and applied, you owe it to yourself and your students to take a look at this one. i certainly believe it has been one important tool that has helped raise my own teaching to the next level! http://www.smallbusinessinstitute.biz development of the legitimacy threshold scale brian g. nagy1, matthew w. rutherford2, yann truong3, jeffrey m. pollack4 1tennessee technological university, bnagy@tntech.edu 2oklahoma state university, matthew.rutherford@okstate.edu 3université bourgogne franche-comté, yann.truong@bsb-education.com 4north carolina state university, jmpolla3@ncsu.edu a b s t r a c t entrepreneurship literature supports the contention that legitimacy attainment facilitates favorable judgments from key stakeholders regarding the acceptability, appropriateness, and worthiness of entrepreneurs and their efforts. theorists and empirical researchers regard these favorable judgments tied to legitimacy as important determinants of the decisions of key stakeholders as they weigh whether or not to buy from, partner with, and invest in the efforts of new venture leaders. although legitimacy attainment is a milestone that emerging venture leaders strive to reach, researchers have not developed a measure that examines whether a firm is operating pre-legitimacy attainment or post-legitimacy attainment, based on the perceptions of new venture leaders. accordingly, we develop the legitimacy threshold scale (lts) that will facilitate the understanding and assessment of activities performed preand post-legitimacy in new ventures. the scale is a measurement tool that entrepreneurs and researchers alike are able to use to assess which side of the legitimacy threshold entrepreneurial ventures are operating on and thereby aids in new venture categorization and management. keywords: journal of small business strategy 2017, vol. 27 no 03, 50-58 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2017 small business institute® apa citation information: nagy, b. g., rutherford, m. w., truong, y., & pollack, j. m. (2017). development of the legitimacy threshold scale. journal of small business strategy, 27(3), 50-58. w w w. j s b s . o rg legitimacy, scale development, legitimacy threshold, emerging ventures introduction entrepreneurship researchers agree the ability of an emerging firm to achieve legitimacy is critical for the survival and growth of the venture (e.g., delmar & shane, 2004; tornikoski & newbert, 2007). legitimacy, from an organizational point of view, refers to “…the degree of cultural support for an organization—the extent to which the array of established cultural accounts provide explanations for its existence, functioning, and jurisdiction” (meyer & scott 1983, p. 201). in the emerging venture context, legitimacy fosters, “…a social judgment of acceptance, appropriateness, and desirability, [that] enables organizations to access other resources needed to survive and grow” (zimmerman & zeitz, 2002, p. 414). overall, legitimacy attainment is a milestone needing to be reached if emerging ventures are to cross into phases of organizational development where capital, employees, and customers are accessible (aldrich & fiol, 1994; meyer & rowan, 1977; zucker, 1987). put differently, the attainment of legitimacy, in its simplest and most basic form, is instrumental in predicting whether or not a new venture is likely to remain viable (rutherford & buller, 2007; zimmerman & zeitz, 2002). therefore, the ability to detect and measure an approximate point in time when legitimacy is attained is of paramount importance for both entrepreneurship researchers and practicing entrepreneurs. no empirical study has been conducted to aid the effort to better understand the salient activities that take place before and after legitimacy attainment based on the assessments of entrepreneurs and their teams – activities that may be very important signals to entrepreneurs as well as stakeholders that the emerging venture is or is not legitimate. the crux of the issue is legitimacy has no assignable financial value, and cannot be accounted for directly as a firm asset. rather, legitimacy is an intangible asset that allows an emerging venture to access critical resources from stakeholders (zott & huy, 2007). being intangible 51 b. g. nagy, m. w. rutherford, y. truong, & j. m. pollack journal of small business strategy / vol. 27, no. 3 (2017) / 50-58 in nature, however, many entrepreneurs and new venture leaders may not even be aware they have attained it. we address this issue in the present research by approaching the assessment of legitimacy from the perspective of the business-related activities associated with preand post-legitimacy attainment, and, thus, we are able to develop and begin to validate the legitimacy threshold scale (lts). literature review to date, legitimacy research has investigated the myriad ways legitimacy can be attained, either through isomorphic firm behaviors, strategic means, or social relationships (e.g., parhankangas & ehrlich, 2014; rutherford & nagy, 2015). in addition, many studies have been conducted to investigate what are the likely antecedents to legitimacy attainment (choi & shepherd, 2005; nagy, pollack, rutherford, & lohrke, 2012; o'neil & ucbasaran, 2016; pollack, rutherford, & nagy, 2012; zimmerman & zeitz, 2002). and, overall, researchers agree that failure rates for pre-threshold firms are much higher than for post-threshold firms (jawahar & mclaughlin, 2001; singh, tucker, & house, 1986; stinchcombe, 1965). however, despite our growing depth of knowledge, we do not yet know how to measure if a company is operating preor post-legitimacy. this issue highlights the need to measure the legitimacy threshold. the legitimacy threshold a legitimacy threshold (lt) is generally accepted to exist in the context of emerging ventures (e.g., fisher, kotha, & lahiri, 2016; navis & glynn, 2010; peake & d’souza, 2015; zimmerman & zeitz, 2002). however, in almost every case, the threshold is assumed or defined as “…an undetermined legitimacy level…” (e.g., haack, pfarrer, & scherer, 2014, p. 649). the issue that eludes the field is the empirical calibration of the concept. the one exception is the work by rutherford and buller (2007). rutherford and buller (2007) explicitly sought to quantify as well as validate the notion of the lt as proposed by zimmerman and zeitz (2002). specifically, they interviewed entrepreneurs to understand if they experienced a legitimacy threshold early in the lives of their ventures. in addition, they queried the entrepreneurs on perceived differences between their pre-threshold existence and post-threshold existence. their work resulted in lists of behaviors that new venture leaders perform, both pre-legitimacy attainment, and post-legitimacy attainment. their results also suggest no one managerial activity or organizational event can signify the attainment of legitimacy by the almost countless number of organizations in existence. in accordance with this early work in the area to define and quantify activities related to the lt, recent research examines legitimacy thresholds, distinct entrepreneur behaviors, and firm identities, further lending support that firms and new venture leaders are uniquely different preand post-legitimacy attainment (fisher et al., 2016). moreover, we also hold this contention and attempt to pick up where rutherford and buller (2007) left off, and more firmly establish an lt measure that will both help researchers identify where the ventures are in terms of the threshold, and also facilitate the strategic and tactical efforts of new venture leaders as well. entrepreneurial activities and the legitimacy threshold research in the area of legitimacy threshold crossing, both conceptual theorizing and empirical investigations, has explored the differences in the various foci of pre-legitimacy constituents (e.g., potential financiers, potential customers, potential suppliers), versus post-legitimacy stakeholders (e.g., employees, repeat customers, contractually-bound suppliers) (überbacher, 2014). on this point, the extant literature is fairly unified in the notion that as a firm crosses the lt, it can and should move from being predominately externally focused (e.g., personal selling, pitching potential investors) to being predominantly internally focused (chandler, 1962; greiner, 1972; jawahar & mclaughlin, 2001; rutherford & kuratko, 2016). also, researchers have investigated the likelihood of crossing the threshold at a faster rate when the new venture is essentially an internal venture and a product of a parent company (murphy & tocher, 2011). additional findings suggest that the legitimacy threshold may be approached via a punctuated equilibrium or a staged process, where very obvious and dramatic changes in the new venture take place post-legitimacy (fisher et al., 2016; rutherford & buller, 2007). however, what has eluded researchers who have attempted to describe the process of meeting the lt is identifying the approximate point in time when a firm has reached the threshold and developing universal indicators that the threshold has been crossed. we contend that a demonstration of legitimacy should not be based solely on dramatic changes in the new venture, nor exclusively on signs that the new venture has entered a new stage based on solved problems, and not entirely on the ceasing of a dependency on one stakeholder group or another for any particular resource. in contrast, we posit that the lt can be described as crossed when the strategic behavior and operational tactics enacted by the entrepreneur and key internal stakeholders indicate the emerging venture “has made it” and engages in more post-legitimacy activities relative to pre-legitimacy activities (rutherford & buller, 2007). in sum, we believe that looking at the lt from the en52 b. g. nagy, m. w. rutherford, y. truong, & j. m. pollack journal of small business strategy / vol. 27, no. 3 (2017) / 50-58 trepreneur’s standpoint, while not without issue, is beneficial for at least two reasons—one practical and one theoretical. first, there is limited work examining legitimacy from the perspective of the entrepreneur. as noted, this leaves the key figure in this context—the entrepreneur— with limited assistance. as a dyadic construct, legitimacy can be best understood by examining both entrepreneur and stakeholder. here we complement the latter (e.g., choi & shepherd, 2005; pollack et al., 2012) by focusing upon the former. second, and related, the actions of the entrepreneur are theoretically integral to the notion of the lt (adizes, 1999; greiner, 1972; kazanjian, 1988; miles & snow, 1978; smith, mitchell, & summer, 1985; steinmetz, 1969). as rutherford and buller (2007) state: “…it is the entrepreneur’s management of distinct sets of problems that causes firms to transition from one stage to the next” (p. 82). if the entrepreneur chooses not to act on legitimacy granted from stakeholders, then crossing the lt becomes far less likely. as such, it is crucial to understand how external judgments of legitimacy be best leveraged within the firm. failure to effectively leverage could render the legitimacy attained moot (bloodgood, hornsby, rutherford, & mcfarland, 2017). method and results our process of construct operationalization and development for the lts was a multi-step process including item generation, scale development (i.e., exploratory factor analysis), and a start to the scale evaluation process (i.e., confirmatory factor analysis) (devellis, 1991; hinkin 1998). the final scale consists of six pre-legitimacy items, generally related to resource attainment, as well as three post-legitimacy items, generally related to resource management. item pool generation to begin to develop a reliable scale to measure organizations’ states related to the legitimacy threshold, we used rutherford and buller (2007) as our source of content, in order to create theoreticallyand empirically-derived scale items that represent and operationalize ‘pre-legitimacy threshold’ activities as well as ‘post-legitimacy threshold’ activities (churchill & lewis, 1983). rutherford and buller (2007) examined two general categories of behaviors and actions. one pertains to problems related to resource acquisition. the other pertains to the problems related to mainly internal resource management. the initial item generation task involving content analysis was completed by one of the principal investigators and two graduate students interested in new venture research. the content analysis used pages 88 and 89 in the rutherford and buller (2007) article, an area in the manuscript where the authors summarize their own qualitative analysis work. the principal investigator and the two graduate students compared notes and checked each other’s findings in order to complete the analysis of the content of the rutherford and buller (2007) article. drafting of the preliminary scales to measure the states of preand post-legitimacy ensued. overall, 19 preliminary items to measure pre-legitimacy threshold activities and post-legitimacy threshold activities emerged (i.e., 9 pre-legitimate, 10 post-legitimate). next, a panel of five subject matter experts in the field of new venture studies was asked to describe what they felt were appropriate definitions of ‘legitimacy attainment’ and ‘legitimacy threshold.’ the panel members were subsequently asked to write down words and phrases they thought should be used in drafting an lts that included activities needing to be completed before and after the attainment of legitimacy. after this exercise, the panel of experts was then asked to grade the face validity of the 19 preliminary items. following a procedure similar to zaichkowsky’s (1985), each panel member was asked to rate each of the 19 preliminary items as “representative,” “somewhat representative,” or “not representative” of one of the two constructs of interest. after this process, all 19 items were kept in the preliminary pool of items, as each was rated as either “representative” or “somewhat representative” of either the preliminary lts activity construct or post lts activity construct, by all five panel members. participants and procedures for scale development following the item generation portion of the study, we constructed a questionnaire containing the 19 preand post-legitimacy attainment items using a five-point likert scale with response anchors of (1) “strongly disagree” and (5) “strongly agree.” we asked 186 junioror senior-standing students enrolled in a ‘principles of management’ course at a medium-sized private university in the mid-western region of the united states to have a friend or family member who was currently a business owner complete the items. students received extra credit on their participation grade for completing this task. from this process, 151 students provided referrals and our sample of entrepreneurs was asked to complete the 19 item lts (nunnally & bernstein, 1994). our sample (n = 151) of entrepreneurs in new and emerging ventures was slightly more male (65% male), approximately 45 years old, and worked an average of 44 hours per week. exploratory factor analysis using the data collected, we analyzed the 19 items us53 b. g. nagy, m. w. rutherford, y. truong, & j. m. pollack journal of small business strategy / vol. 27, no. 3 (2017) / 50-58 ing principal axis factoring in an effort to best model the shared variance among the latent variables’ factors. we expected the latent variables to be slightly correlated, so an oblique rotation was chosen to produce a better estimate of the true factors and a better simple structure than orthogonal rotation (hair, anderson, & tatham, 1987; nunnally & bernstein 1994). a three-factor model was first estimated. items with low factor loadings (<.50), high cross loadings (>.40), or low communalities (<.30) were considered for elimination. after inspection of the questionable items, 4 items were deleted (2 cross-loading items, and 2 items with factor loadings <.50). the remaining 15 items were included in a second exploratory factor analysis attempt with the same criteria employed as the first, with one exception—a two-factor model was estimated. this second efa attempt resulted in the need to delete three more items due to cross loadings. a final two-factor solution using 11 items (7 pre-legitimacy, 4 post-legitimacy) accounted for approximately 49% of the total variance in the data, and exhibited a kmo measure of sampling adequacy of .79. all factor loadings ranged from .48 to .85. confirmatory analyses and scale refinement after completing the efa process, we constructed a survey of the remaining 11 lts items. similar to our sampling method for the data used for the efa, we asked 131 junioror senior-standing students enrolled in a ‘principles of management’ course at a medium-sized private university in the mid-western region of the united states to have a friend or family member who was currently a business owner complete the survey. our final sample (n = 124) of entrepreneurs in new and emerging ventures was predominantly male (75% male), worked an average of 50 hours per week—and, 65% of this sample were first-time entrepreneurs at the time of data collection. we then employed confirmatory factor analysis (cfa) with the goal of improving the measurement properties of the scale (anderson & gerbing 1988; maccallum 1986). we estimated an 11-item confirmatory factor model that declared the use of two latent variables. inspection of fit indices, and the measurement accuracy, of this preliminary cfa model indicated the model was likely not optimal (χ2 = 126.17, df = 43, ρ = .000, gfi = .84; agfi = .76; cfi = .86; nnfi = .82; srmr = .12; rmsea = .125). squared multiple correlations (smcs) ranged from .17 to .81. items that had inordinate amounts of modification indices related to them or did not sufficiently explain a significant amount of variance in the underlying latent variables they represented were subsequently deleted, and an additional structural equation model was computed. two items were deleted during the course of formulating a more suitable cfa model (i.e., prelegit6 and postlegit3). the resulttable 1 preliminary items stemming from content analysis of rutherford and buller (2007) pre-legitimacy activity-based items the organization is focused on networking and broadcasting its mission. the organization is focused on persistent personal selling. the organization is focused on the broadcasting the niche it serves. the organization is focused on hiring key employees. the organization is focused on receiving advice from individual like mentors and consultants. the organization’s founder and managers are likely not being paid large weekly salaries. the organization’s founder and managers are likely working out of their houses. the organization is focused on obtaining funding for operations. the organization is focused on trying to win awards it has not yet earned. post-legitimacy activity-based items the organization has hired key people in various departments. the organization has recently or could use added space to operate. the organization has formal job descriptions for its employees. the organization is focused on developing a formal information technology system. the organization’s structure (hierarchy and chain of command) has changed significantly since its beginning. the organization has not changed significantly since its beginning. the organization has established a key customer base. the organization has established a place of operation, either bricks-and-mortar, or on-line. the organization has established multiple locations where it operates. the organization has formal employee handbooks and directions for task completion. 54 b. g. nagy, m. w. rutherford, y. truong, & j. m. pollack journal of small business strategy / vol. 27, no. 3 (2017) / 50-58 ing final confirmatory model, estimated using the remaining nine items, exhibited sufficient fit (χ2 = 35.43, df = 26, ρ = .10275, gfi = .94; agfi = .90; cfi = .98; nnfi = .97; srmr = .07; rmsea = .054). noting the chi-square statistic was now not statistically significant at the ρ ≤ .10 level and the fit indices were well within ranges of acceptability (hu & bentler, 1999), we concluded that the final nine items parsimoniously represented the two dimensions of legitimizing activities that occur before and after the legitimacy threshold has been crossed by an emerging venture. we next sought to establish the independence of the two measures by employing gaski and nevin’s (1985) procedure for establishing the independence of scales. if a measure has a higher reliability estimate than the correlations with the other measure, evidence of independence among the measures is established. because the chronbach alpha statistics for each mean-centered variable representing each of the two measures (.758, p < .01, preall; .740, p < .01, postall) is greater in value than the correlation coefficient estimate between the variables representing the constructs (.-.209, p < .01, preall and postall) we concluded these items do perform as intended, representing unique constructs. discussion and implications we developed a scale that will help researchers and practitioners better identify whether or not a new venture has crossed the legitimacy threshold. by assessing the salient behaviors and tactics enacted by entrepreneurs and key internal stakeholders at one point in time, a mean score that is higher on the post-legitimacy items, relative to the pre-legitimacy items, can provide initial evidence consistent with the inference that a venture is operating post-legitimacy attainment. we feel this ability to identify where the new venture is in terms of the lt is important, as after the scale’s use, entrepreneurs and other new venture leaders will be better able to target their efforts pertaining to internal and external stakeholders. theoretical implications researchers have been undecided about when a new firm reaches and crosses the legitimacy threshold (e.g., scott & bruce, 1987; zimmerman & zeitz, 2002) as well as what the differences are between entrepreneurs’ behaviors and tactics that take place preand post-legitimacy attainment. we explore this legitimacy threshold, defined as the point in time just past when emerging ventures struggle for viability, and many times likely fail. this was clearly the next step needed in the literature to understand the phenomena and finer details associated with legitimacy attainment. in terms of theory, the lts is a large departure from the usual way of measuring legitimacy, which is through the perceptions of external stakeholders. in contrast to the table 2 remaining items after the exploratory factor analyses, reliability statistics, and loadings pre-legitimacy activities (cronbach’s alpha=.790) factor 1 loading factor 2 loading prelegit1: the organization is focused on networking and broadcasting its mission. -.105 .625 prelegit2: the organization is focused on persistent personal selling. -.200 .593 prelegit3: the organization is focused on the broadcasting the niche it serves. .219 .665 prelegit4: the organization is focused on receiving advice from individual like mentors and consultants. .222 .678 prelegit5: the organization is focused on obtaining funding for operations. -.219 .513 prelegit6: the organization is focused on hiring people for the first time. .321 .650 prelegit7: the organization is focused on trying to win awards it has not yet earned. -.037 .477 post-legitimacy activities (cronbach’s alpha = .860) postlegit1: the organization has hired key people in various departments. .854 -.011 postlegit2: the organization has formal job descriptions for its employees. .847 -.034 postlegit3: the organization is focused on developing a formal information technology system. .738 -.010 postlegit4: the organization has formal employee handbooks and directions for task completion. .780 -.075 55 b. g. nagy, m. w. rutherford, y. truong, & j. m. pollack journal of small business strategy / vol. 27, no. 3 (2017) / 50-58 norms in the literature, we focus on the behaviors and actions of the entrepreneur as a legitimacy indicator, relative to the extant literature that is almost entirely focused on legitimacy judgments via stakeholder perceptions (choi & shepherd, 2005; suchman, 1995; van werven, bouwmeester, & cornelissen, 2015). other researchers have noted the need to focus on the entrepreneur’s actions as indicators of legitimacy attainment (bhide, 2000; kelley & marram, 2004; rutherford & buller, 2007). overall, our scale aids the process of examining when a new venture has crossed the legitimacy threshold, by measuring entrepreneurs’ behaviors and tactics, and helps to mitigate the issues related to stakeholders’ cognitive limitations and inabilities to decode signals of legitimacy that may impede the legitimacy attainment process (peake & d’souza, 2015). indeed, using legitimacy perceptions as a social judgment from an external audience perspective assumes that stakeholders are willing to observe and able to understand the multiple signals of a particular emerging venture. however, organization theory scholars suggest that stakeholders form cognitive legitimacy judgment as a routine task, and as a result, are not always willing or able to invest sufficient time in collecting and processing information from a particular organization (bitektine, 2011). therefore, our focus on entrepreneurs’ behaviors and actions may be a more reliable and objective method to identify legitimacy attainment. this provides a substantial, and needed, recalibration in the literature on legitimacy in emerging ventures. practical implications this research provides entrepreneurs the ability to assess when a given firm has or may reach the legitimacy threshold, and illuminates certain means of expediting the process of reaching the threshold (adizes, 1999; greiner, 1972). this awareness may quicken access to resources from key external stakeholders, which in turn may increase the propensity of new venture survival by ways of legitimacy attainment (clarkson, 1995; pfeffer & salancik, 1978). the accurate assessment of when the legitimacy threshold is reached may provide entrepreneurs with the ability to accelerate the pace at which legitimacy is reached. for instance, overall awareness of the environmentally based activities new venture leaders must focus on in order to reach the legitimacy threshold (e.g., broadcasting the mission, persistent personal selling, broadcasting the niche served, seeking advice from mentors) is essential for legitimacy attainment. awareness and use of this study’s scale table 3 the legitimacy threshold scale (lts): a scale to measure activities performed preand postlegitimacy attainment in emerging ventures construct items cronbach alpha efa item loading cfa item loading pre-legitimacy threshold activities the organization is focused on networking and broadcasting its mission. .758 .63 .80 the organization is focused on persistent personal selling. .59 .48 the organization is focused on the broadcasting the niche it serves. .67 .56 the organization is focused on receiving advice from individuals like mentors and consultants. .68 . 67 the organization is focused on obtaining funding for operations. .51 .42 the organization is focused on trying to win awards it has not yet earned. .48 .31 post-legitimacy threshold activities the organization has formal job descriptions for its employees. .740 .85 1.05 the organization is focused on developing a formal information technology system. .74 1.23 the organization has formal employee handbooks and directions for task completion. .78 .60 56 b. g. nagy, m. w. rutherford, y. truong, & j. m. pollack journal of small business strategy / vol. 27, no. 3 (2017) / 50-58 items should help to reinforce this. in addition, knowing what entrepreneurs’ behaviors and actions must take place in order to cross the legitimacy threshold may shorten the amount of time new venture leaders spend in the realm of operating with a focus on pre-threshold activities. in addition, once the legitimacy threshold is known to have been crossed, facilitated by the use of the legitimacy threshold scale items, new venture teams can shift some of their attention, time and resources to management of internal needs, post-legitimacy attainment, to better ensure organizational success. moreover, researchers reliant on data collected from entrepreneurs who are operating their ventures on either side of the threshold will now be able to better judge the organizational development phase of any venture by adding the legitimacy threshold scale to their survey instruments. limitations and future directions for research this study, and our assertions stemming from it, has limitations. we recognize the assessment of legitimacy using our newly developed scale is only made from the viewpoint of the entrepreneur and/or her leadership team. the legitimacy threshold scale we developed is a self-assessment tool; so, even though an entrepreneur infers her new venture has attained legitimacy based on relatively high scoring on the scale’s post-legitimacy items, this legitimacy attainment cannot be validated based on external stakeholder perceptions. unless explicitly told, external stakeholders are unaware of what the managerial objectives and activities are in organizations with which they transact and interact. future research may consider incorporating a paired method of data collection, wherein entrepreneur and several of their external stakeholders are interviewed. another limitation associated with this study is the entrepreneurial activities that comprise the final list of preand post-legitimacy items are arguably focused on only two distinct aspects of managing a new venture. the pre-legitimacy activities are externally based and arguably omit activities related to specific legitimacy-seeking activities aimed at key stakeholders like customers and financiers. the post-legitimacy activities are internally based and do not consider activities performed by new venture owners and leaders that are aimed as satisfying the needs and desires of key stakeholders other than employees, post legitimacy attainment. this study’s reliance on the empirical work of rutherford and buller (2007) may have limited the overall list of activities that could have been included in the initial list of items generated during the content analysis phase of this study. further empirical validation of the lts is needed. in particular, additional data are needed from samples that are more diverse in terms of age, geography, race, ethnicity, and nationality. studies that are longitudinal in nature are especially recommended—this would help ascertain whether or not legitimacy is a stable characteristic or whether it can be attained and then lost. related, future work is needed to address the convergent and discriminant validity of the lts as compared with other measures in the domains of management and entrepreneurship. and, one additional promising line of research is to examine different types of legitimacy. here, in the present work, we focus on general legitimacy. in the future, more focused measures can explore, for example, cognitive, industry, and regulatory legitimacy among others (e.g., bitektine, 2011). conclusion the completion of the development of the lts marks the next step for empirically studying legitimacy in the emerging venture context. in terms of resource allocation, studies can now investigate where entrepreneurs’ time, efforts and money are best spent based on their ventures’ positions either as pre-legitimacy threshold or post-legitimacy threshold. in addition, the lts may serve as a guide to understanding the most appropriate times to enact certain strategies (e.g., differentiation and low-cost) to be able to increase market share without straining resources at inopportune times. in conclusion, we hope the lts will contribute to the efforts of both researchers and practitioners to create and sustain successful emerging ventures. references adizes, i. 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(609) 637-5129 e-maik ccolcalvin.stnuuytx.mlu e-maik rbutlmtcnj.edu vlcc pretld'rnt-program ftaaflty dsruranre lnuncdiate part president gary l altcbboa, pb.ik lloyd w. feraald, jr., d.la. lowe stan university univemity of central florida 300 carver hall p.o. box 161400 ames, ia 50011 orlando, fl 32816-1400 onicc: (515) 294-8107 on)ca: (407) 823-5725 fax: (515) 294-2534 fsx: (407) 823-3725 e-maik gaitchis@iaststc.edu f mail. lloyd.femald0bus.ucf edu investigating the path from firm innovativeness to financial performance: the roles of new product success, market responsiveness, and environment turbulence stella zulu-chisanga university of leeds copperbelt university bn07snz@leeds.ac.uk nathaniel boso university of leeds n.boso@leeds.ac.uk ogechi adeola pan-atlantic university oadeola@lbs.edu.ng pejvak oghazi linnaeus university pejvak.oghazi@lnu.se abstract this resource-based study investigates how a path from firm innovativeness to financial performance is channelled through new product success, and is contingent upon levels of market responsiveness and environment turbulence. using primary data from smalland medium-sized exporting firms in the united kingdom, the study finds that new product success partially mediates the path from firm innovativeness to financial performance. the study further finds that while market responsiveness strengthens links between new product success and financial performance, environment turbulence weakens the relationship. the implications of these findings for both researchers and managers of smalland mediumsize enterprises are discussed. key words: firm innovativeness, new product success, financial performance, market responsiveness, environment turbulence 51 mailto:bn07snz@leeds.ac.uk mailto:n.boso@leeds.ac.uk mailto:oadeola@lbs.edu.ng mailto:pejvak.oghazi@lnu.se journal of small business strategy vol. 26 ● no. 1 ● 2016 introduction the rapid growth in new technologies, intensifying competition, and increasingly diverse and demanding customers have increased the importance of innovativeness to the success of a firm (atalay, nilgun, & fulyan, 2013; story, boso & cadogan, 2015; tellis, prabhu, & chandy, 2009). indeed, firms that hope to compete effectively in both local and global marketplaces must develop and offer value-added products that are competitive with marketplace peers (rosenbusch, brinckmann, & bausch, 2011). a firm’s innovativeness is measured by the extent to which it is creative enough to develop not only radically new products but also novel processes and technologies (story, boso, & cadogan, 2015), and to reaffirm its position in existing markets, enter new markets, and create a differentiation advantage over competitors (boso, story, & cadogan, 2013). firm innovativeness has become a critical determinant of financial health and growth. a review of the innovation literature provides an inconclusive account of the financial performance outcomes of firm innovativeness, with scholarship suggesting both positive and negative outcomes. for example, while artz, norman, hatfield and cardinal (2010); calantone, cavusgil, and zhao (2002); günday, ulusoy, kilic, and alpkan (2011) and jimenez and sanz-valle (2011) have found that innovation is positively associated with financial performance, baum, calabrese, and silverman (2000) and vermeulen, de jong and o'shaughnessy (2005) found that innovation is a risky and costly undertaking which negatively affects financial performance. in addition, story et al.’s (2015) recent study hints at the possibility of a ushaped firm innovativeness–financial performance relationship. furthermore, the innovation literature is not so clear on how the firm innovativeness–financial performance relationship is affected by a firm’s internal and external environmental conditions. accordingly, this study examines the financial performance outcomes of firm innovativeness by taking into account the intervening roles of new product success and moderating roles of market responsiveness and environment turbulence. by so doing, this study contributes to extant product innovation literature in several ways. first, prior studies have discussed firm innovativeness as a causal antecedent fuelling financial performance (e.g., rosenbusch, brinckmann, & bausch, 2011). we extend the existing theorizing in the innovation literature by arguing that an additional causal path results from firm innovativeness that leads to new product success and improved financial performance. additionally, we suggest that this causal direction from new product success to improved financial performance is conditional upon levels of market responsiveness and environment turbulence. further, in analyzing these causal paths, we reason that contextual consideration is important if we are to make precise and accurate conclusions (whetten, 2009). contemporary innovation research acknowledges that context is important in innovation theory building as it provides scholars opportunity to reach more accurate conclusions from empirical findings (rousseau & fried, 2001). accordingly, we extend extant innovation research by examining relationships within the context of smalland medium-sized enterprises (smes). in particular, we draw insight from the resource-based view (barney, 1991) of firms to argue that variations in a sme’s financial performance are a consequence of that firm’s innovativeness efforts, and that the interplay 52 journal of small business strategy vol. 26 ● no. 1 ● 2016 of new product success, market responsiveness, and environment turbulence provides a causal link underlying the effect of the innovation(s) on financial performance. the following section presents our theoretical model and the study’s hypotheses. next, we describe the methods used to test our model and present the study findings. this is followed by a discussion of our study’s theoretical and managerial implications. the study concludes by suggesting some directions for future research. theoretical background and hypothesis development a resource-based view of a firm postulates that a firm’s resources and capabilities are a fundamental source of its competitive advantage and enhanced financial performance (teece, pisano, & shuen, 1997). story et al. (2015) define firm innovativeness as a propensity to innovate or develop new products, i.e., a receptivity to new ideas and innovations as well as a tendency to embrace creativity, novelty, and experimentation (deshpande' & farley, 2004). a firm with a high propensity for innovativeness is likely to develop new products more successfully than a firm with a low propensity for innovativeness. the product innovation literature suggests that firms with greater numbers of successful innovations generate superior financial performance (tellis, prabhu, & chandy, 2009). therefore, in line with extant firm-innovation literature and following the resource based view (rbv) logic, our conceptual model displayed in figure 1proposes that new product success mediates the impact of firm innovativeness on financial performance, and that the effects of market responsiveness and environment turbulence are contingency factors that may shape this relationship. the mediating role of new product success in following the resource based view, we suggest that new product success (i.e. a firm’s capability to successfully introduce new products to the market) mediates the relationship between firm innovativeness (a firm’s idiosyncratic resource) and financial performance. as previously argued, findings from prior studies on the firm innovativeness–financial performance relationship have been environment turbulence market responsiveness financial performance new product success controls: industry type business experience firm innovativeness figure 1. conceptual model 53 journal of small business strategy vol. 26 ● no. 1 ● 2016 ambiguous and largely inconclusive. this study argues that one possible source of this ambiguity may be that firm innovativeness is a resource that may not directly drive financial performance (barney, 1991), but that may drive financial performance when channelled through successful introduction of innovative new products that in turn influence financial performance (rubera & kirca, 2012). in other words, introduction of successful new products serves as a channel through which firm innovativeness drives financial performance. we contend that with increased successful introduction of innovative new products, a firm is able to attract new customers, sell more units of its products, and as a result generate greater returns to sales and assets. firms with greater propensity to innovate are more likely than less innovative competitors to develop radical new products to serve multiple and diverse market demands (story et al., 2015), enabling such innovative firms to increase sales revenue, enter a greater number of new and underserved markets, and strengthen their competitive positions. in other words, if a firm is highly innovative it should be more effective in developing and successfully introducing new products on the market, and with greater new product successes, it is more likely that a firm would earn higher financial returns. accordingly, we propose that: h1: new product success mediates the relationship between firm innovativeness and financial performance. the moderating effect of market responsiveness while much of the extant literature on firm innovation suggests that the successful development and introduction of new products is an important driver of financial performance (e.g., rosenbusch et al., 2011; rubera & kirca, 2012), further study is required to understand the effect of new products on financial performance. although new products could be critical assets that generate value in the marketplace and the stock market (rubera & kirca, 2012), the literature has hinted that new product innovation may be a risky and costly activity that can consume a substantial portion of firm resources (e.g., vermeulen et al., 2005). what is not clear, however, are the conditions affecting the boundaries between new product success and financial performance. to address this gap in the literature, we contend that this variation in the literature is consistent with the notion that the outcomes of new product success may depend on some contributing factors. accordingly, we draw from the rbv to investigate the impact that market responsiveness and environment turbulence as, respectively, internal and external environment factors, may have on the new product success–financial performance relationship. market responsiveness in this study is defined as a firm’s ability to react quickly to changing market demands through the application of efficiency and effectiveness strategies which allow firms to sense, interpret, and promptly act on market opportunities (bodlaj, coenders, & zabkar, 2012; narver, slater, & maclachlan, 2004). a firm that is able to quickly exploit new product opportunities and respond to changing market conditions is more likely to benefit from new product success than a firm that is less responsive. market-responsive firms stay close to customers (bodlaj et al., 2012; wei , samiee, & lee, 2014), which allows them to better identify, evaluate, and develop new products tailored to customer preferences more effectively than their competitors. also, 54 journal of small business strategy vol. 26 ● no. 1 ● 2016 because market-responsive firms monitor market trends and invest resources to understand competitive activities (narver, slater, & maclachlan, 2004), they are better prepared than their competitors to develop products that are more innovative and well received by their customers. although studies that have examined market responsiveness as a conditioning factor on the relationship between new product success and financial performance are rare in the literature, we draw from the rbv to argue that market responsiveness is a critical firm capability that conditions the relationship. thus, we hypothesize that: h2: the relationship between new product success and financial performance will be more positive in firms with high levels of market responsiveness. the moderating effect of environment turbulence environment turbulence is understood as the degree and frequency of shift in the business environment and is a condition of the relationship between new product success and financial performance. it relates to the instability and unpredictability of competitive strategies, changes in customer needs and preferences, shifts in existing technology, introduction of new technologies, and unpredictable regulatory changes (joshi & campbell, 2003). major shifts in the environment may threaten smes’ financial health and new product success rate. for instance, it can be argued that the potential weakening effect of turbulence for smes in developing economies can be traced to a lack of marketplace experience or limited valuable resources (such as skilled personnel and finances), and because such firms often lack marketplace legitimacy. moreover, smes tend to focus on narrow product lines, such that any major shift in the market is likely to be a major threat to such firms’ viability in terms of their ability to extract financial returns from those product offerings. hence, the argument can be made that increases in market environment turbulence may weaken the extent to which new product success impacts smes financial performance. in highly turbulent environments, customer preferences are constantly changing, compelling firms to engage in greater development and commercialization of an increasing number of new products to meet customers’ exigencies. firms operating in turbulent environments need lots of new products to ensure that they do not lose ground to competitors’ new offerings and changing strategies. these marketplace pressures present additional new product development and transaction costs to smes. when such costs rise above a certain threshold, any financial benefits that firms derive by commercializing innovative new products may be cancelled out. this expectation of rising costs supports the argument that high levels of turbulence may weaken the positive effect of new product success on financial performance. conversely, in low turbulence environments, new product development and transaction costs are lower as firms are able to plan for the future more accurately and are able to keep overhead cost under control. additionally, there is no or little customer, competitor, or regulatory pressure on firms to justify the development of new products. thus, in low turbulent environments the effect of new product success on smes’ financial performance is likely to be strengthened. accordingly, we argue that: h3: the relationship between new product success and financial performance will be negative when environment turbulence is strong. 55 journal of small business strategy vol. 26 ● no. 1 ● 2016 methods to test the conceptual model, data is collected from sme exporting firms in the united kingdom. to ensure consistency, all variables are conceptualized at the export level as the unit of analysis is the export unit within the firm (cadogan et al., 2003). a structured questionnaire was used targeting local exporting firms. based on work done by morgan, katsikeas, & vorhies, (2012) and wiklund and shepherd (2011) we focused on firms that met the following requirements: (1) firms that were independent entities and not part of any company group or chain; (2) firms that employed a minimum of five full-time staff; (3) manufacturers of physical products or service providers that engaged in export marketing activities; (4) firms that had a minimum of five years exporting experience; and (5) firms that had complete contact information on the chief executive officer (ceo) or someone with comparable seniority with knowledge of the firms’ strategic operations. we used the bureau van dijk database to obtain our sample. the bureau van dijk database provides a list of exporting firms in the uk including the names, addresses, and telephone numbers of senior managers. from an initial list of 1,781 smalland mediumsized exporting firms, and after removing 251 ineligible firms (firms that had ceased exporting), 1,530 firms were sent a structured questionnaire by post. after two rounds of reminders, 325 valid responses were received, an effective response rate of 21%. the firms in our sample operated in multiple industries including computer (e.g., computer hardware and software, networking, and peripherals); aviation; textiles and garments; food and beverages; crafts; agro-processing; security; professional services; and financial services. the firms employed an average of 656 fulltime employees, and average total annual sales were us$ 749 million. the mean percentage of export revenue was 40.67% of total annual revenue, which exceeds knight and cavusgil’s (2004) criteria for describing active exporting firms. we compared the responses from early and late respondents by applying armstrong and overton’s (1977) non-response test in both settings. results showed no substantial differences between the means for early and late respondents even at 10% significance levels (blair & zinkhan, 2006). thus, we concluded that non-response bias did not create a major impact on the variables assessed in the developed market samples. measures the items used to measure the theoretical constructs were derived from an extensive review of the extant literature. we adapted, where necessary, the items’ wording to reflect managers’ understanding of the constructs. each item was measured using a seven-point likert scale consistent with the literature. table 1 provides details of the measures used and information on their sources. specifically, we adapted our firm innovativeness measures from tellis et al. (2009) and wang and ahmed (2004), while new product success items are adapted from atuahene-gima et al. (2005). we took our market responsiveness items from jaworski and kohli (1993), market turbulence measures from jaworski and kohli (1993) and joshi and campbell (2003), and financial performance items from menguc and auh (2006). in line with previous studies, we also controlled for four factors: industry type, business experience, dedicated r&d function, and firm size, all of which have the potential to influence the new product success and financial performance relationship (e.g., 56 journal of small business strategy vol. 26 ● no. 1 ● 2016 rosenbusch, brinkman, & bausch, 2011; rubera & kirca, 2012). we control for industry type because innovation levels may vary with the type of industry in which a firm operates (hawawini, subramanian, & verdin, 2003). for example, innovation appears to be a critical element in high-tech industries where firms need to constantly introduce new products to meet rapidly changing consumer needs. business experience and dedicated r&d functions are controlled for in order to mitigate the effects of a firm’s establishment in an industry over time and management capability, either of which is likely to affect financial performance. firm size can be expected to influence the financial performance outcomes of new product success because larger firms are able to apply economies of scale and resource sufficiency to dominate markets and gain competitive advantage (rubera & kirca, 2012). table 1 details of measures and results of validity tests item description (cr/discriminant validity) factor loadings error variances firm innovativeness (tellis et al., 2009; wang and ahmed, 2004): 1 = not at all; 7 = to an extreme extent (α = 0.87, 0. cr = 0.88, ave = 0.71) my company is known as an innovator among businesses in our industry. 0.74(1.00) 0.45(9.59) my company provides leadership in developing new products/services. 0.83(15.32) 0.31(7.76) my company is constantly experimenting with new products/services. 0.94(18.31) 0.12(3.24) new product success (atuahene-gima et al., 2005): 1 = below expectation; 7 = above expectation (α = 0.91, cr = 0.87, ave = 0.69) number of new products 0.87(1.00) 0.24(7.33) number of new market entry. 0.92(18.17) 0.15(5.04) revenue from new products or services. 0.84(15.65) 0.30(8.53) market responsiveness (jaworski and kohli, 1993): 1 = strongly disagree; 7 = strongly agree (α = 0.838, cr = 0.84, ave = 0.64) if a major competitor were to launch an intensive campaign targeted at our customers, we would implement a response immediately. 0.72(1.00) 0.48(8.97) we are quick to respond to significant changes in our competitors’ price structures in target markets. 0.81(14.21) 0.34(7.03) we rapidly respond to competitive actions that threaten us in our target markets. 0.86(15.31) 0.26(5.51) environment turbulence (jaworski and kohli, 1993; joshi and campbell, 2003): 1 = not at all; 7 = to an extreme extent (α = 0.858, cr = 0.86, ave = 0.64) our target markets are noted for competition between companies. 0.71(1.00) 0.50(9.35) there is substantial competition among companies in our targets markets. 0.75(13.05) 0.43(8.84) competition among companies in our target markets is intense. 0.85(15.61) 0.27(6.45) there is an intense promotional war among companies in our target markets. 0.80(14.10) 0.37(8.07) financial performance (menguc et al., 2006): 1 = very dissatisfied; 7 = very satisfied (α = 0.86, cr = 0.83, ave = 0.63) return on assets 0.87(1.00) 0.25(7.09) return on sales 0.96(19.18) 0.08(2.31) profitability 0.67(11.60) 0.55(10.31) note: t-values are in parenthesis 57 journal of small business strategy vol. 26 ● no. 1 ● 2016 measure assessment and purification our measure analysis started with spss exploratory factor analysis using principal axis factoring. results show that the scale items were generally adequate for measuring the latent variables. for example, the kmo test of sample adequacy of 0.86 is a good indication that the item sample was adequate. also, commonalities for all items have scores higher than 0.4. all five factors were extracted, consistent with the number of the main variables in our theoretical model. these factors together explained 67% of the variance in the model. the regression coefficients of the variable on each of the factors of greater than 0.6 after rotation using a significant factor criterion of 0.4 were recorded. following these generally favorable exploratory factor analysis results, confirmatory factor analysis was conducted. while there are several statistical packages that can be used to analyze structural equations (e.g., amos, eqs, and mplus) we used the most longstanding and widely distributed (byrne, 1998) linear structural relationship (lisrel) statistical software to validate the study’s measures and structural relationships. the maximum likelihood estimation method was applied. we assessed the exact model fit using the chi-square difference test and relevant recommended fit heuristics. the initial model indices indicated a need for model purification (χ2 = 409.75, df =179, normed χ2 [χ2 /df] = 2.29, p<.05). in addition, all the other relevant fit heuristics were within acceptable limits. specifically, the root mean square error of approximation (rmsea) = 0.051; standardized root mean square residual (srmr) =0.049; normed fit index (nfi) = 0.93; non normed fit index (nnfi) =0.96; incremental fit index (ifi) =0.97; comparative fit index (cfi) = 0.97 and goodness of fit index = 0.93. next, we submitted all constructs to reliability and convergent and discriminant validity evaluations. as shown in table 1, the standardized factor loadings for all items were significant providing support for convergent validity. in addition, composite reliability (cr) values for all scales were higher than bagozzi and yi’s (1988) recommended benchmark of .70, confirming that the scales provided a reliable measure of the constructs in the model. the average variance extracted (ave) of greater than 0.5 for each scale provides further proof of the reliability of our measures. our measures also achieved discriminant validity as the ave for each construct was greater than the highest shared variance (hsv) between each pair of constructs. common method bias test because we used single respondents, we conducted a common method bias test to ensure data fidelity. we adopted the single latent factor approach recommended by podsakoff, mackenzie, lee, and podsakoff (2003) where all items in our model were loaded onto a single latent factor. we then compared the results to the moderation model used to test the research hypothesis. as can be seen in table 2, the fit indices for the single latent model were completely inadequate while that of the research model meets all accepted criteria. we can thus conclude that common method bias would not be a major threat to our data and findings we deduce from it. 58 journal of small business strategy vol. 26 ● no. 1 ● 2016 table 2 comparison of estimated research model and single latent test model model χ2(df) χ2/df p-value rmsea srmr nnfi cfi single latent test 1711.59(104) 16.46 0.001 0.252 0.17 0.30 0.39 research model 30.32(18) 1.68 0.034 0.053 0.020 0.92 0.98 structural model estimation we adopted the structural equation modelling (sem) approach to test our hypotheses. unlike other methods, sem is generally considered the preferred causal modelling method because it not only provides researchers a comprehensive means for assessing and modifying the theoretical model but also allows them to estimate and account for both systematic and random errors (anderson & gerbing, 1988; bagozzi & yi, 2012). in the following subsections, we explain the steps we took to estimate the different models. mediation analysis we used a series of sequential chi-square tests to test for mediation. first we estimated the direct effect of firm innovativeness on new product success and financial performance (direct effects). then we added a path between new product success and financial performance to estimate both the direct effect of innovativeness and the indirect effect through new product success (partial mediation). last, we removed the direct path between firm innovativeness and financial performance to estimate the indirect effect of firm innovativeness through new product success (full mediation). table 3 displays the results of the chi-square tests for mediation. table 3 comparisons of estimated mediation structural models test χ2(df) χ2/df p-value rmsea srmr nnfi cfi direct effects 59.27(25) 2.34 0.001 0.075 0.079 0.97 0.098 partial mediation 48.52(24) 2.02 0.002 0.065 0.044 0.97 0.98 full mediation test 95.53(25) 3.82 0.001 0.108 0.14 0.92 0.95 note: hypothesized path for a full mediation is not supported. moderation analysis to test our moderation hypotheses, the multiplicative approach was adopted where, after mean centring, each of the moderators was multiplied by the independent variable to create single indicators of new product success x market responsiveness and new product success x environment turbulence. then four models were estimated and compared using the hierarchical approach. all four models had financial performance as the dependent variable. in the first model, only the impact of the control variables was estimated. the second model was estimated in which the control variables and main effect variable (new product success), were considered. the third model estimated the impact of control variables, main effect, and direct effect of the moderators. in the last model all the variables (control, main effect, and interaction) were freely estimated. the models were compared with the last model to observe variations in the fits and r2 change. results our study argues in h1 that new product success positively mediates the relationship between firm innovativeness and financial 59 journal of small business strategy vol. 26 ● no. 1 ● 2016 performance. however, results in table 3 do not support our hypothesis of full mediation because there is a significant difference between the chi-square values of partial mediation model and full mediation model (δχ2 = 47.01, δdf = 1). in other words, the normed chi-square is worse (χ2/df from 2.02 to 3.82) when the direct path between firm innovativeness and financial performance is removed. we can thus conclude that the partial mediation model was superior to the full mediation model, and therefore full mediation is rejected. from table 4, we can see that the normed chisquare value for model 4 (χ2/df = 1.68) is significantly smaller compared with that of model 1 (2.82), model 2 (2.76), and model 3 (2.15). this indicates that model 4 provides a significant improvement in model fit compared to the other models. in addition, the fit indices for model 4 are better than those for the other models (e.g., rmsea = .053; srmr = .020; nnfi = .92; and cfi = .98). furthermore, the r2 value of 0.26 for model 4 is substantially superior compared to the r2 values for the three other models. taken together, we can say that model 4 provides a significant improvement over the other three models and as such we proceed to use model 4 to assess the study’s moderation hypotheses. table 4 comparisons of estimated moderation structural models model r2 χ2 df χ2/df p-value rmsea srmr nnfi cfi model 1 0.016 22.55 8 2.82 0.004 0.086 0.030 0.91 0.97 model 2 0.14 27.58 10 2.76 0.002 0.085 0.027 0.89 0.96 model 3 0.23 30.13 14 2.15 0.007 0.069 0.024 0.90 0.97 model 4 0.26 30.32 18 1.68 0.034 0.053 0.020 0.92 0.98 we used a one-tailed t-test to assess the magnitude and significance level of the estimated structural paths. values were considered significant at the 5% level if tvalues were greater than 1.65. table 5 displays the path estimates for model 4. in h2 we argued that the interaction between new product success and market responsiveness is positively related to financial performance. as shown in table 5, the interaction between new product success and market responsiveness is positively and significantly related to financial performance (γ = .17, t = 2.52, p < .05). consequently, we conclude that h2 is supported. our results indicate that the interaction between environment turbulence and new product success is negatively and significantly related to financial performance (γ = -.15, t =-1.89, p < .05), providing support for h3. 60 journal of small business strategy vol. 26 ● no. 1 ● 2016 table 5 path estimates for the moderating effect analysis dependent variable: financial performance (time 2) variables (time 1) standardized estimates (t-values) findings industry type .04 (.68) business experience -.06 (-1.04) r&d function .04 (.59) firm size .14 (2.33) new product success .28 (4.44) market responsiveness .4 (5.58) environment turbulence -.04 (-.69) new product success x market responsiveness .17 (2.52) supported new product success x environment turbulence -.15 (-1.89) not supported note: t-values are in parenthesis. critical t-value for hypothesized paths = 1.65 (5%; one tailed tests) in terms of the effects of the control variables, results show that while industry type, business experience and dedicated r&d function exerted no statistically significant influence on the new product success–financial performance relationship, firm size exerted a significant positive influence (γ = .14, t = 2.33, p < .05). hence, the proposed relationships were verified with regard to firm size in that the larger the firm, the more positive the new product success–financial performance relationship. discussion the two main objectives of this paper are to explain the mediating role of new product success on the firm innovativenessperformance relationship and to explain the conditions under which new product success is most or least beneficial to a firm’s financial performance. two conditioning factors – environment turbulence and market responsiveness – were examined. the study presents interesting findings in that it lends support to existing literature on the one hand, while conflicting with them on the other. we discuss both the theoretical and managerial implications that our findings highlight in the following subsections. theoretical implications this paper contributes to the literature by helping to clarify the firm innovativenessperformance studies that have advocated for a direct positive link between firm innovativeness and financial performance (e.g., calantone et al., 2002; rubera & kirca, 2012). the study adds to research on innovativeness by providing evidence that the innovativeness–performance relationship is partially mediated by new product success. this suggests that the innovativeness– financial performance relationship is more complex than has previously been postulated. besides, the finding helps expand our understanding of the beneficial consequences of firm innovativeness through new product success, which leads to superior financial success. although studies that have examined the mediating role of new product success on firm innovativeness and performance relationship are rare in the literature, our 61 journal of small business strategy vol. 26 ● no. 1 ● 2016 finding is supported in part by story et al’s (2015) study of the effect of firm innovativeness on new product performance in both the developed and emerging market settings. in that study, a curvilinear relationship between firm level product innovativeness and new product performance was found. however, because their study examined the effect of innovativeness on new product performance, it is possible that the effects of innovativeness on overall financial performance through the mediation of new product performance may show a picture that is closer to our findings. in short, our findings suggest that firms that develop and successfully commercialise new products are likely to record higher sales and profits than those firms that do not. this is because the successful introduction of new products enables firms to serve multiple and diverse market demands. this study expands existing literature by helping to clarify the boundary conditions that shape the effects of new product success on financial performance. while the new product success-performance relationship is generally understood as positive and linear, evidence from the literature points strongly to the fact that the relationship is more complex than that. for example, story et al.’s (2015) study provides evidence on a curvilinear relationship between firm innovativeness and performance, and that market orientation, access to financial resources, and environmental dynamism condition the nature of this relationship. rubera and kirca’s (2012) meta-analysis of the extant literature on the effects of innovation found a number of conditioning factors including market position, culture, advertising intensity, size, and age. to bring further understanding to the complex nature of the new product successperformance relationship, we examined market responsiveness and environment turbulence as conditioning factors. our findings indicate that market responsiveness has a significant positive moderating effect on the new product successperformance relationship. confirming our expectations, it appears that with increasing levels of market responsiveness, the success of new products becomes a value firms can leverage to boost their financial performance. greater market responsiveness enables firms not only to launch products on time but also to better target new products to customer needs and preferences. in addition, firms with greater market responsiveness are likely to benefit more from new products by serving multiple and diverse market demands, thereby capturing market share that is larger than less market-responsive competitors. these findings are noteworthy because the previous new product success research on the moderating effect of market responsiveness is quite limited (e.g., rubera & kirca, 2012; story et al., 2015). we therefore extend the literature on innovation and its benefits through new product success by showing that market responsiveness conditions the performance consequences of new innovations. the study revealed that the interaction between new product success and environment turbulence has a negative but not significant effect on financial performance. this finding is not only contrary to our expectations but also contrasts with that of the boso et al. (2013) study which found that environment turbulence had a significant positive moderating effect on the innovativeness-performance relationship. although the support that boso et al. provide for the hypothesized moderating role of environment turbulence is a valuable empirical result with important implications, 62 journal of small business strategy vol. 26 ● no. 1 ● 2016 this study proposes several explanations for this discrepancy. first, while our study examined the moderating influence of environment on the relationship between new product success and financial performance, the boso et al. study examined the relationship between firm innovativeness and export performance. thus, the differences in the variables being studied could account for the discrepancy. second, the research setting is likely to be another reason for the variance in the findings in that the moderating effect of environment turbulence could be unique to middle income economies, ghana and bosnia and herzegovina, surveyed in boso et al. this study surveyed firms in the united kingdom, and it appears that environment turbulence might not be a sensitive factor for firms operating in a single high-income economy. one possible explanation is that unlike firms in these two middle-income economies, uk firms may have the requisite skills and capabilities needed to effectively coordinate changes required to respond rapidly to turbulent environments. however, our findings also indicate that the effect of new product success on financial performance may be negative in highly turbulent environments. these results are similar to the empirical findings of yang and li (2011) that show that the curvilinear link between competence exploration and new product performance was negatively moderated by environmental dynamism. taken together, these results support the notion that when the level of environment turbulence is relatively high, firms must manage uncertainty by not only adapting their internal characteristics to the external environment but also by allocating more resources (boyne & meier, 2009; gonzálezbenito, o., gonzález-benito, j., & muñozgallego, 2014) to new product success activities such as r&d, innovative distribution, and other marketing strategies to continuously thrive in such an environment. conversely, firms can typically benefit from new product success activities when the level of environment turbulence is low and there is less pressure to spend more on adapting and responding to the environment. in short, our findings imply that high environment turbulence puts pressure on firms to devote large resources to new product success activities which then depresses financial performance. similar to rubera and kirca (2012), we found evidence that firm size has an influence on the new product success-performance relationship. the findings indicate that new product success is more beneficial to larger firms. this could be because of the large resource pool associated with larger firms which can be effectively invested to enhance the success of new products. overall, this study contributes to our understanding of the positive impact of new product success on financial performance of firms within the context of smes in a developed economy. our study extends the theory of firm innovation–financial performance and contributes to the body of existing literature by presenting an in-depth consideration of the impact of new product success. managerial implications a number of implications for managers can be drawn from these findings. first, at the most basic level, our findings indicate that if they are to achieve superior financial performance, managers should not only invest resources to increase firm innovativeness but also to enhance new product success rates. when the commercialisation of newly innovated products is unsuccessful, a firm’s financial performance will suffer from the huge losses 63 journal of small business strategy vol. 26 ● no. 1 ● 2016 associated with r&d and other resources that the firm would have spent on those innovations. second, our findings indicate that the extent to which firms pursue innovations should be dependent on the levels of market responsiveness within the firm. compared to firms with low levels of market responsiveness, a market-responsive firm will quickly respond and exploit new-product opportunities created by changing market conditions, leverage new product success activities, and subsequently benefit from that new product success. this significant mediating role of product development implies that firms should put in place strategies for product development to assure consistent superior performance and an ability to respond quickly to changing market demands, thereby exploiting new product market opportunities. third, our findings introduce contrasts to the literature, highlighting a possible moderation in the extent to which new product success should be pursued in turbulent environments. while the extant literature suggests that firms in highly turbulent environments should benefit more from new product success (e.g., story et al., 2015), our findings do not support such a notion. rather, our findings indicate that environment turbulence has a negative non-significant effect on how much firms benefit financially from new product success. by implication, firms should plan new product activities cautiously in a highly turbulent environment to minimise negative financial outcomes. managers need to know the strengths and weaknesses of their firms and put in place effective routines that will enable their firms to adapt and respond to environment turbulence without undermining financial performance. finally, our findings indicate that managers of larger firms are well-advised to invest more resources in innovative products in order to achieve superior financial performance, as firm size appears to be directly related to new product success and financial performance. hence, managers should remain cognizant of the importance of new product success to the overall financial performance of their firms and make appropriate investments to assure the success of new products. firms should invest in innovative products as they are valuable instruments in achieving competitive advantage and financial success. managers will benefit from a rich understanding and appreciation of the impact of new product success on firm innovativeness–financial performance relationships and how these can be used to their firms’ advantage. limitations and future research we conducted our study using a crosssectional research design in a specific context. this limits the generalisation of our findings and extrapolating our findings to other countries should be done with care. further empirical investigation across large numbers of emerging and developed economies would enrich our innovation knowledge. further research will contribute to empirical investigations of the applicability and generalizability of our findings in various contexts. it would also be interesting to use the measures adopted in this study to investigate how new product success increases financial performance in developing countries. this would provide a better understanding of how new product success mediates the path from firm innovativeness to financial performance, particularly in the context of larger firms in developing countries which may have high incidence of environmental turbulence. 64 journal of small business strategy vol. 26 ● no. 1 ● 2016 in addition, further research should aim at conducting a longitudinal study to replicate and extend the research scope. longitudinal data on the study constructs could provide well-grounded and better nuanced results. finally, our study focuses on only two conditioning factors and there is need for more research to explore other internal and external environmental factors. examining other performance outcomes, such as strategic 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(2011). competence exploration and exploitation in new product development. management decision, 49, 1444-1470. 67 stx4tegy an empirical analysis of benefits of electronic data interchange (edi) implementation: implications for new it implementation deepak khazanchi university of nebraska at omaha khazanchi unomaha. edu abstract this paper reports that the benefits accrued from implementing and integrating electronic data interchange (edi) within small and medium-sized enterprises (smes) can be conceptualized into two factors. first, jirms derive operationalltactical benefits by predominantly focusing on increasing internal utility of this technology. second, firms derive strategic benefits pom edi in the form of beuer external relationships and alliances with trading partners and an enhanced ability to compete in their market. among oiher significant findings, there are clear indications pom the correlation statistics reported here that experience with edi, industrial category of a jirm and the level of edi integration have a significant influence on the ability of a firm to obtain long-term (strategic) bene/its from such it projects. these results also have significant implications for sme managerslstakeholders considering new interorganizational itinitiatives. introduction according to forecasts published by giga, a private research firm, electronic data interchange (edi) transactions in the united states alone were about $2.7 billion in 1997 and are estimated to grow to $3.8 billion by 2002 (wilson, 2000). vollmer (2001), a research director of 82b integration at giga information group asserts: "during the past several years, it has been all too common to hear "experts" denigrate the potential of edi in favor of some new solutions just around the corner. however, it is no coincidence that both ebxml and biztalk serverleading xml-based initiatives to build widespread e-business functionality-are supporting existing edi transactions. alter a lengthy review of available options, the sponsoring organizations came to the same conclusionedi is the only practical e-business standard that makes sense for basic functionality at this time." the giga report challenges the popular notion that traditional edi transactions will be widely replaced by emerging web alternatives. in supporting the analysis presented in this report, 45 journal ofsmall business strategy vo/. l3, no. l spring/summer 2002 jack reich, the e-commerce director of national gypsum states: "i don't know of a single company in our industry, for all the hoopla, that's exchanging documents via the web in xml format... many of the large players have used traditional electronic data interchange for years. we'e had good success with edi over the web as a cost-saving alternative.'" clearly, though a shrinking percentage of the total business-to-business (b2b) electronic commerce pie, edi continues to be "alive and kicking" and an important element of the future landscape of global b2b e-commerce (ibid.). electronic data interchange flectronic data interchange (edi) is the computer-to-computer interchange of business transactions that conforms to specified standards over a communications network that includes at least two trading partners. these interactions include the interchange of common commercial information typically consisting of purchase orders, shipping notices, invoices, related acknowledgements, funds transfer with banks, etc. (zorfass et michel, 1992). edi automates the slow, labor-intensive exchanging of transactional documents in paper form via fax and/or regular mail. the edi enterprise is the hub of activities. hubs represent the accumulation point for transactions from multiple trading partners. for example, wal-mart is a hub with more than 5000 electronic hook ups with its vendors. the trading partners can be viewed as spokes. spokes (vendors, customers, etc.) become part of the extended edi enterprise. larger spokes can be hubs of their own supplier, customer networks. most smes tend to be spokes for large hub organizations. edi requires five key elements (arunachalam, 1995; pfeiffer, 1992): electronic mail for rapid personal (administrative) communications; on-line networks for rapid communications such as third party or value added networks (vans) and virtual private networks (vpns); at least two organizations conducting joint business transactions electronically (trading partners); standard protocols for file and message transfers. this is accomplished with trading partner agreements regarding data coding and formatting rules. standard edi message formats can be those developed by industrial organizations (e.g., tdcc/edia, vics, wins), proprietary (e.g., general motors), national (ansi x12) or international (un/edifact). data processing task(s) at both (all) organizations pertaining to a transaction are supported by independent application systems. there are three generic approaches to implementing edi links. the first approach uses a direct edi link between vendor and customer using a modem and telephone line. many large hub organizations own and operate a private network service (e.g., wal-mart, ge) that all business partners are required to use. trading partners establish communications using a dialup link to the hub's network. while a majority of these hubs do not charge for their network service, trading partners do have to pay all phone charges. the second approach revolves around indirect edi links through value-added networks (van) or "third party electronic clearing houses." these independent edi networking vendors provide all the necessary soltware and communications services and essentially perform the function of an electronic post office for numerous business partners. trading partners place their business documents in "electronic envelopes" identifying the sender and receiver. the document is mailed to the van aller setting up a dial-up link via phone lines. the van will either forward the document to the hub organization's computer automatically or place it in the receiver's mailbox for pickup at a later time. major costs associated with this edi transmission option 'edi in xml envelope", http;//www.intemetwk.corn/(apr 23', 2001). 46 journal of small business strategy vo/. /3, no. i spring/summer 2002 will include expenses relating to van setup, telephone lines, and monthly transaction fees. third, with the development of better internet browsers and compatible edi software that incorporates adequate security measures including encryption, the robust and cheaper internet has become the medium of choice for transmitting electronic documents and messages globally. this approach is essentially similar to the direct communications link except that the internet access charges are substantially lower than the other options. research rationale and questions new business practices such as lust-in-time (jit) manufacturing and quick response retailing (qr) rely on the transfer of transaction data to gain a competitive advantage in the market place. pickett and udo (1994) assert that "the numerous benefits of doing business using electronic data interchange (edi) have caused large companies to accept edi as a way of life." in a longitudinal study of chrysler's adoption of edi, mukhopadhyay, kekre, and kalathur (1995) report substantial dollar savings due to improved information exchanges between chrysler and its suppliers that result from edi. they also assert that, not unlike many major hub enterprises, chrysler made edi a necessary condition for suppliers doing business with their assembly centers. however, most small companies at the receiving end of this edi mandate do not take complete advantage of this strategic technology through appropriate consideration of costs/benefits and internal and external integration (khazanchi, 1995). furthermore, some research studies have found that businesses (small or large) that voluntarily initiate edi have better success integrating it within internal functions and consequently realizing both operational and strategic benefits (raymond & bergeron, 1996; swatman, swatman & fowler, 1994; swatman & swatman, 1991). for edi to be a successful and eiticient means of electronic trading, whatever ultimate form the technology itself takes, a better understanding of the business impact of edi and similar interorganizational information systems on smallto medium-sized enterprises (smes) is essential. impact of edi on organizations impact of ed/ refers to the actual benefits edi adopters receive from utilizing edi. edi benefits can be categorized into indirect and direct benefits (lacovou, benbasat, & dexter, 1995). the following definitions are culled from the work of pfeiffer (1992), banerjee and golhar (1993), swatman et al. (1994), lacovou et al. (1995), arunachalam (1995), and benjamin, de long, and michael, (1990). indirect benefits such as improved customer service, increased operational efiiciency, improved trading partner relationships, and increased competitiveness are obtained by organizations that are proactive, have excellent organizational support, and their business applications are seamlessly integrated with edi. essentially such organizations view edi as a strategic technology and a necessary tool for doing business. whereas, direct benefits such as higher quality of information, reduced transaction costs, improved cash flows, and reduced inventory levels are obtained by organizations in the form of financial savings as a result of edi adoption. this description of indirect and direct benefits is consistent with the conclusion reached by authors such as cash and konsynski (1985), porter (1985), porter and millar (1985), malone, vates, and benjamin (1987), johnston and vitale (1988), and benjamin, et al. (1990) that information in general and interorganizational information systems such as edi in particular have allowed some firms to improve operational eiticiency and coordination with trading partners and create and sustain a significant competitive advantage in the marketplace. 47 journal ofsmall business strategy val. /3, iva. l spring/summer 2002 table i: summary of key edi sme research studies authorlwork raymond and edi world lacovou et al. carter et al. institute (/995) (l995) ()982) assess success assess education factors research impact of edi on influencing edi factors that have & training needs obtain advantages f fdi implementation from edi organizational context (organizational support, perceived implementation benefits, research process, & organizational y 'l ( ) co trol n/a readiness, n/aprocedures), external pressure, integration level, edi adoption & imposition level, integration edi ed i advantages impact (operational, managerial, strategic) descriptive study research field multiple-case using survey & design study/survey survey study follow-up interviews 500 canadian smes from manufacturing sampling various sectors in quebec and a . small firms in 25 firms fromframe american, ontario provinces f a i canada various sectors (149 responses) vrtth & 250 employees) conclusions: use smes had &=100 pre-adoption education & training to gain employees with awareness of edi quahty of $ 1-$20 million in benefits is low; commitment of organizational edi system; annual sales; 9 of overall readiness context of edi is 10 i d f 0 f training programs10 implemented of small firms is crucial to the edi at the request low; need for should be attainment of designed to suit (e b f l of a cu st om e r; fi n an ci aibenefits; low over half technological, intended research imposition level audience; increased managerial findings (voluntary understanding revenues & support; small adoption) has a f .. f 'xpected (actual)profits; majority firms are significant impact reduced reluctant to operational on the quality impediments; document cycle integrate edi into organizational education & time, improved operations context. training must be accuracy of because of high state of the art &. information costs. begin early in the adoption process. 48 1 journal ofsmall business strategy vol. /3, /vo. l spring/summer 2002 impact of edi on smes small firms that have a favorable organizational context (i.e., top management support, personnel training, collaboration between functional areas, etc.) and are seeking to achieve high-levels of internal and external integration have a better chance of obtaining many operational and strategic benefits of edi. a summary of key research on the experience of smes with edi implementation is provided in table l. the results of edi impact studies on smes are clearly indicative of the fact that small businesses can potentially accrue the same level of benefits as large firms if the following conditions are satisfied. in addition to being proactive to the changes in the businesstechnology environment, a business must have adequate organizational support, some degree of technological sophistication, adequate planning mechanisms in place, a sustained plan for the internal and external integration of edi, and an awareness of the potential impact of edi (i.e., direct and indirect benefits). research questions based on the previous discussion, the purpose of this paper is to investigate two main questions. first, what is the nature and structure of benefits obtained by smes through edi implementation? second, what is the influence of various firm demographics and other variables (elicited from a priori research) on the edi benefits construct? to address the latter question, the influence of variables such as "extent of trading partner support", "stage of edi integration," "volume of edi documents (messages)", "nature of cost/benefit analysis", "perceived benefits of edi", etc. on edi benefits is evaluated. these variables were previously identified by various researchers (e.g., carter, monczka, clauson, & zelinski, 1987; monczka &. carter, 1988; pfeiffer, 1992; swatman & swatman, 1991; lacovou, et al., 1995) as having an impact on edi adoption and integration and in consequence on the ability to realize potential benefits of edi implementation. research method in the context of a larger study of the impact of edi on smes in the commonwealth of kentucky, the previous two research questions were also addressed. the sampling frame was limited to kentucky because this project was partially supported by a grant from the kentucky cabinet for economic development. a survey research design was used to elicit data about smes and their experiences with edi implementation. data collection in late 1997, the survey was mailed to 353 sme-capable firms identified from the 1997 ed/ yellow pages (phillips business information, lnc., 1997) and from two local hub companies and a state government agency. since high non-response rate'&60%) can dilute the ability to statistically generalize to the larger edi user population, various measures to reduce nonresponse rates were taken resulting in an effective response rate of 24.3% or 86 useful responses. however, mcdaniel and gates (1993)report that higher response rates are a means to reducing nonresponse bias. they also report that "...ofall the studies that have looked for differences between nonrespondents and respondents (or early or later respondents) of mail surveys, none has been reported that found meaningful, practical differences between 't is well established that the possibility of a high non-response rate is a major problem with questionnaires (sproull, 1988). 49 journal ofsmall business siratcgv vol. 13, na. l spring/summer 2002 respondents and the entire sample or between early respondents and respondents as a whole" (pp. 233, emphasis added). instrumentation edl impact was measured in terms of relative benefits realized by smes through edi adoption and integration. for convenience and readability of the survey instrument, edi benefits were initially categorized into indirect and direct benefits as explained in the previous section of this paper. edi benefits realized by responding firms in order to explore the nature of benefits realized by kentucky smes, responding firms were asked to assess the impact of edi implementation on their organization by indicating the extent io which each listed benefit had been obtained by the firm (refer column i, table 2 for the list of items). thus, responding firms rated the extent to which various benefits were obtained by their enterprise'. this was assessed with a 5-point likert-type scale with verbal labels ranging from a score of i, "substantially deteriorated (or decreased)," to 3 or "no change," to 5, "substantially improved (or increased)." thus checking a 5 would indicate that a firm had obtained a substantial improvement (or increase) in a specified benefit because of edi implementation, whereas checking a i would indicate that a finn had observed a substantial deterioration (or decrease) in a specified benefit item. results and discussion profile of survey participants industrial sector and range of products all 86 responding firms provided information about their industrial sector. table 2 profiles the sampled-firms by industry category. table 2: industry category (n=86) industry category frequency % of responses manufacturing 49 57% wholesale trade 23 27% retail trade 6 7% services (e.g., computer, accounting, tv repair) 2 2% transportation and public utilities i 1% mining i 1% other 4 in the manufacturing sector, participating firms make a diverse range of products including everything from industrial parts and supplies to candy and cheesecakes. in the wholesale trade sector, firms deal in products ranging from industrial parts and supplies to food and pharmaceuticals. the remaining firms are involved in retail trade such as office furniture and the exact phrasing of the question was as follows: please evaluate the impact of edi implementation in your organization by indicating the extent to which each of the following benefits have been obtained by your enterprise. select a response by assessing the ~chan e observed in the listed edi benefit. 50 journal ofsmall business strategy va/. /3, na. l spring/summer 2002 power tools, services such as health and lab analysis, and other business activities such as hauling freight, warehousing, logistics management, and computer systems value added reselling (var). respondent's position (job title) an equal number (43) of responding individuals belong to the non-technical, managerial or administrative ranks (e.g., treasurer, owner/major stakeholder/president, business manager/general manager) as those from the information systems branch (e.g., edi specialist/edi supervisor, is manager/ec manager, systems analyst) completed the survey for sample-organizations. organizational size the sample is uniformly distributed by organizational size when size is measured in terms of the "number of full-time employees" (as displayed in table 3). table 3: number of full-time employees (n=86) number of full-time employees frequency % of responses fewer than 5 employees 5 6% 5 to 10 10 12% 11 to 20 7 8% 21 to 50 9 10% 51 to 100 11 13% 101 to 250 24 28% 251 to 500 7 8% more than 500 13 15% another popular measure of organizational size is "sales volume" and is displayed in table 4 below. a large number (nearly 70%) of responding firms had gross sales over $ 1 million in 1997 with more than half (47%) generating over $ 10 million in sales. table 4: estimated 1997 gross sales (n=86) 1997 gross sales (estimated) frequency % of responses less than $ 10,000 i 1% $ 10,000 to $50,000 3 3% $50,001 to $ 100,000 4 $250,001 to $500,000 3 3% $500,001 to $ 1 million 3 3% $ 1 million to $5 million 12 14% $5 million to $ 10 million 8 9% more than $ 10 million 40 47% don't know 12 14% total 86 100% edi experience the utility a firm draws from edi can also be gauged by its relationship with the length of edi utilization or amount of experience gathered with this technology. organizations with 51 journal ofsmall business srrareqt vol. /3, no. l spring/summer 2002 edi experience of less than or equal to 12 months, make up nearly 10% of the sample, while 56% of the sampled-firms have more than one year and less than 5 years experience. finally, organizations with more than 5 years of experience make up nearly 34% of the sample. apparently, a majority of the firms in the sample report being substantially experienced with ed i. edi benellts descriptive analysis of edi benefits realized by responding firms each one of the benefits listed in table 5 is significantly different from the middle scale value of 3.00 ("no change") when a one-sample t-test was applied at the 95% confidence level. in other words, on the average, survey-respondents reported achieving a small but statistically significant positive change in each of the listed benefits due to the implementation of edi in their organization. it should be noted that "inventory levels" and "transaction costs" are reverse-coded and therefore, a deterioration (or decrease) in them has a positive influence on realized benefits. as shown in table 5, the mean scores for all the individual edi benefits clearly support this conclusion. however, it is surprising to note that none of the listed benefit categories has a mean score that falls in the slightly to substantially improved (or increased) or slightly to substantially deteriorated (or decreased) range'. of course, there are individual firms in the sample that report having achieved substantial benefits from edi, but on the average this is obviously not true. table 5: change in edi benefits-descriptive statistics (n=78) potential edi benefits realized'ean standard deviation quality of information 3.83 .93 relationship with trading partners 3.83 .80 customer service 3.61 .80 ability to compete 3.59 .70 operational efficiency 3.55 .89 cash flows 3.33 .70 transaction costs (reverse coded ) 2.69 1.04 inventory levels (reverse coded ) 2.76 .51 factor analysis of edi benefits the "edi benefits" items were further analyzed using the data reduction technique of "principal components analysis (varimax rotation with kaiser normalization)." this 'hese are equivalent to the ratings of 4 and 5 on the five point likert-type "benefits" scale. 'espondents were asked to assess the impact of edi implementation on their organization by indicating the extent to which each listed benefit had been obtained by the firm. a 5 point likert-type scale with verbal labels was used with respondents indicating whether a benefit had "substantially deteriorated or decreased" (coded as a i), "slightly deteriorated or decreased" (coded as a 2), "no change" (coded as a 3), "slightly improved or increased" (coded as a 4), and "substantially improved or increased (coded as a 5). 6 lowering transaction costs or reducing inventory levels has a positive impact on accruing benefits from edi implementation. 52 journal of small business strategy va/. /3, na. l spring/summer 2002 exploratory factor analysis was used to identify any underlying factors that constitute the "edi benefits" construct and for further understanding its relationship with previously identified variables. a two-factor structure was found, explaining nearly 58% of the sample variance. all the "edi benefits" scale items had a loading greater than 0.5 on the factor to which they were attributed. nunnally (1978) recommends a 0.5 threshold to achieve an adequate level of reliability for each factor in exploratory work. communalities for the two factors range from 0.51 to 0.69 with one exception at 0.39. this result is another strong indication of the validity of the latent factor structure. table 6: factor loadings for 'edi benefits'onstruct'perational/ strategic potential edi benefits realized tactical benefits benefits (benee/tj) (benef/t2) cash flows (e.g., improve cash flows by faster processing and .74 exchange of information between trading partners) inventory levels (e.g., reduce inventory levels by shortening -.71 order cycle, reducing ordering costs) operational efficiency (e.g., reduce lead time and costs, .64 .44 better information management, avoid re-keying of data) transaction costs (e.g., lower costs by eliminating -.62 paperwork, postage, faxing, and saving on labor) customer service (e.g., improve customer service by shorter .62 .51 lead times, timely information regarding transaction status) quality of information (e.g., improve quality by increasing .57 .44 timeliness, accuracy, and accessibility of information) ability to compete (e.g., increase ability to reach new .82 markets, provide better service at lower costs) relationship with trading partners (e.g., enhance trust by .81 sharing information, reduce errors, enable jit/qr programs) elgenvalues 2.59 2.04 % of total variance explained (cumulative) 32.41% 57 91% the two categories of potential edi benefits realized by the surveyed organizations found by the factor analysis shown in table 6 can be conceptually described as follows. factor i can be named "operational/tactical benefits," and it relates to the change in benefits associated with the impact of edi in engendering improved cash flows, reduced inventory levels, increased operational efficiency, lowering transaction costs, and improving quality of information. factor 2 can be named "strategic benefits," and it relates to the change in benefits associated with the impact of edi in increasing a firms'bility to compete and enhancing relationships with trading partners. as noted previously in the background section of this paper lacovou et al. (1995) categorized edi benefits obtained by smes into indirect and direct benefits. they supported their conceptualization with seven case studies. the factor analysis reported above is based on a 'pss/pc version 8.0 was utilized for statistical analysis. 'otation converged in 3 iterations. the extraction method used was principal component analysis and varimax rotation with kaiser normalization. cross-loadings between factors below 0.25 are not shown. 53 jottrna/ of small business stra/ei0 vo/. /3, no. / spring/summer 2002 sample size of 86" and clearly does not support their conceptualization of edi benefit categories. notwithstanding this finding, the individual benefit items identified from a priori research by lacovou et al. are useful indicants of the edi benefits construct. table 7: relationship of sme characteristics & edi benelitsnea (n=78) industry edi 1997 gross ¹ full-time ¹ temporary or part-time category experience sales (est.) employees employees operational/ tactical .120 .123 .036 .122 .098 benefits (.294) (.285) (.756) (.289) (.393) (benefit/) '""'gic 271v .348sv 055 .150 .112 (.017) (.002) (.633) (.191) (.328) relationship of sme characteristics with edi benefits table 7 summarizes the correlation statistics between variables that are useful in classifying surveyed-smes and the two edi benefit factors derived in the previous section of the paper. the data is consistent with the notion that firms with edi experience can obtain greater strategic benefits from edi implementation. on the other hand, experience with edi does not seem to have a significant relationship with operational/tactical edi benefits or benefits that accrue from improving the efficiency of internal operations and reducing cash flows. interestingly, data analysis shows that the 'edi benefits'ealized by smes are not significantly related to firm size measured in terms of either gross sales or number of employees (full or part-time). finally, although industrial sector of sample firms has no significant relationship with the ability of a firm to obtain operational/tactical benefits from edi implementation, it is significantly related with a firm's potential to realize strategic benefits from edi implementation. relationship of other key variables to 'edi benefits'actors a number of other research variables have previously been identified by various researchers (e.g., pfeiffer, 1992; swatman & swatman, 1991; premkumar, ramamurthy, & nilakanta, 1994; lacovou, et al., 1995) as having an impact on edi adoption and integration and in consequence on the ability of firms to realize potential benefits of edi implementation. table 8, 9 and 10 summarize the correlation statistics between these research variables and the two "edi benefits" factors. actually the factor model was derived using 78 cases only. the remainder where excluded because of missing values." "correlation is significant at the 0.01 level (2-tailed; 99% confidence); a correlation is significant at the 0.05 level (2-tailed; 95% confidence)." pearson correlation coeflicients with significance levels in parenthesis are shown. "these variables have previously been identified by various researchers (e.g., pfeiffer, 1992; swatman & swatman, 1993) and lacovou et al., 1995) as having an impact on edi adoption and integration and in consequence on the ability to realize potential benefits of edi implementation. 54 journal ofsmall business strategy vol. /3, no. i spring/summer 2002 table 8: relationship of key determinants of edi benefits with operationautactical benefits factor (benefitl) and strategic benefits factor (beneflt2)" /vature of volume of edi cosvbenefit analysis documents current stage of by sme prior to (messages) edi integration adopting edi exchanged'earson benefit i correlation .261* .122 .456sa sig. (2-tail) .022 .157 .000 benefit i correlation .108 200x .210*'a sig. (2-tail) .348 .020 .074 n 77 78 78 extent of trading partner support hardsoftduration d telecommuniimpiemrn-maintenance ware ware training cation casts rattail benefit ..188ass .336as .209sss .148 .127 .138 correlation 'ig.(2-tail) .103 .003 .066 .197 .268 .138 benefit m 0 026 102 055 002 017 079 correlation sig. (2-tail) .824 .374 .634 .984 .885 .491 n 76 78 78 78 78 78 nature of cost/benefit analysis conducting a cost-benefit analysis prior to edi implementation could provide firms an appreciation of whether edi would be advantageous to them while understanding its inherent costs. survey respondents were asked to identify the nature of cost/benefit analysis conducted by them prior to adopting edi. a majority of the responding firms did not conduct any cost/benefit analysis at all (73%) while nearly 12% report doing a rough estimate, 6% estimate costs only, 7% estimate tangible benefits and costs only, and the remaining estimate costs, tangible and intangible benefits. this result is consistent with other research studies on smes. apparently, either smes do not give much importance to the financial consequences associated with implementing new technologies or a majority view the need for such technologies as edi to be a foregone conclusion. the latter conclusion is also validated by the lack of influence of economic factors on the edi adoption decision and the great importance attached to customer demands with regards to this decision. as illustrated in table 8, the nature of cost/benefit analysis conducted by organizations has a significant influence on the ability of a firm to obtain operational/tactical edi benefits and " a correlation is significant at the 0.05 level (2-tailed); aa correlation is significant at the 0.01 level (2-tailed); "'correlation is significant at the 0.10 level (2-tailed). "this variable has a complex relationship (i.e., it is not linear) with the 'edi benefits'actors and in consequence the correlation coefficient shown in the table are the nonparametric kendall's tau statistic. 55 journal ofsmall business strate/0 vo/. /3, no. i spring/summer 2002 does not correlate with strategic epi benefits (benefit2). this result is partly consistent with past research findings reported by pfeiffer (1992). volume of edi communications greater the volume of messages (documents) exchanged with edi technology more likely it is for a firm to achieve substantive savings from edi implementation. the data shows that "volume" is significantly correlated with firms achieving strategic benefits and has no relationship with operational/strategic benefits. current stage of edi integration ed/ integration is the process during which a firm alters its business practices and applications so that they interface with its edi application. in this regard, the level of internal integration reflects the variety of applications interconnected with edi, such as orderentry/purchasing, accounting, production scheduling (mrp), shipping, etc. another way of defining the level of internal integration is to describe it in terms of stages of integration. swatman and swatman (1991),swatman et al. (1994) have constructed a four-stage model for edi integration and validated it for large firms. at the lowest level of integration (coded as "i") firms use edi to print out messages and documents and then re-key data into internal systems. on the other hand, at the highest level of integration (coded as "4") firms use edi as a strategic technology that links systems throughout the value chain. obviously, the greater the level of edi integration the better the opportunity to obtain long-term benefits from this type of technology. the study results (refer table 8) confirm that the stage of edi integration is positively correlated with the strategic benefits (ability to compete or forge relationships with trading partners) obtained by sampled-firms. extent of trading partner support many authors advocate the use of incentives and subsidies to entice smaller firms to begin using edi and to expand its use further. this advice has not been always heeded. the trading partners of kentucky small firms have not heeded this advice as well. respondents from the sample firms were asked to rate the level of support received from their trading partners for hardware, software, education gt training, telecommunication costs, maintenance and implementation. respondents used a 3-point likert-type interval scale to rate each of these categories, with "i" indicating that "no support was received" and "3" indicating that "substantial support was received." sampled-organizations reported receiving moderate to no support from trading partners in all support categories. the average "support received " score is the highest for edi implementation (1.76) and education and training (1.64). this is consistent with past research and with the fact that "hub" trading partners tend to provide some education/training support and also do pilot testing of new edi transactions. intuitively it can be argued that greater trading partner support would translate into higher benefits of edi implementation for firms. the study data indicates that this assertion is only partly correct. apparently, at the 95'/0 level of confidence, trading partner support for edi "software" is the only variable that had a significant positive relationship on operational/tactical edi benefits (benefltl) achieved by sampled-firms. other variables such as trading partner support for "hardware" and "education /k training" significantly influence operational/tactical benefits at the 90'lo level of confidence. all other "support" variables did not have any significant correlation with two 'edi benefits'actors (refer table 8). 56 journal ofsmall business strategy vol. 13, no. l spring/summer 2002 perceived reasons for adopting edi or edi decision criterion another set of variables that could determine the accrual of edi benefits relate to the perceived reasons why firms adopt edi (iacovou et al., 1995). two key reasons often touted as highly influential factors for the adoption of edi in firms are as follows: (influence of) customer or supplier's demand and competitive environment. the correlation results illustrated in table 9 indicate a different story. on the average, the influence of customer or supplier's demand has no significant relationship with achieving edi benefits. on the other hand competitive pressures (remaining competitive, pressure from competitors, meeting industry standards) are significantly related to the accrual of strategic benefits in small firms. table 9: relationship of 'edi adoption criterion'ith operationautactical benefits factor (benefitl) and strategic benefits factor (benefit2)' edi decision criterion" benefit i benefit 2 customer or supplier's demand -.043 (.707) .067 (.557) remain competitive .131 (.252) .435*'.000) pressure from competitors .100(.383) .287v (.011) meeting industry standards .074 (.522) .420' (.000) improves customer service .440'v (.000) .314 "(.005) makes just-in-time manufacturing possible .203'vv(.075) .079 (.494) forges strong business relationships with partners .023 (.841) 326vv ( 004) increases sales revenues/increases profits .414*v (.000) .244v (.032) decreases transaction costs .527vv (.000) 263* ( 020) decreases administrative costs .540v* (.000) .260v(.022) decreases manufacturing costs .340v'.002) -.015 (.897) decreases procurement costs .458*v (.000) .075 (.512) reduces number of employees .455vv (.000) .065 (.576) reduces inventory & carrying costs .507v* (.000) .042 (.715) quicker response and access to information .373**(.001) .337"v(.003) improves accuracy of information .33tvv (.003) .372" (.001) improves communication with trading partners .186vv (.102) .465v v ( 000) improves ability to control & coordinate data .369v v (.001) .379vv(.001) reduces paperwork .357v* (.001) .200 (.079) ease of processing for order entry .473vv (.000) .224'.049) aids in accounting, billing, production scheduling 335vv ( 003) .229v (.043) ease of tracking shipments/ease of tracking orders .441vv (.000) .217 (.056) improves efficiency of business operations .50lv* (.000) .155 (.176) pearson correlation coefficients with significance levels in parenthesis are shown. the useful sample size varies between 77-78 depending on a specific item with the majority of the items having an n of 78." 'orrelation is significant at the 0.05 level (2-tailed; 95% confidence); vv correlation is significant at the 0.01 level (2-tailed; 99% confidence)." respondents were asked to assess edi decision criterion on a 4 point likett-type scale with verbal labels. respondents indicated with a check whether a criterion had "no influence at all" (coded as a i), "minor influence" (coded as a 2), "moderate influence" (coded as 3), and "major influence" (coded as 4). 57 joirrna/ ofsmall business strategy vol. 13, no. i spring/summer 2002 table 10: relationship of key 'edi implementation impediments'ith operational/ tactical bene(its factor (benefitl) and strategic benefits factor (beneftt2)"s'di implementation impediments benefiti be/vefit? low volume or frequency of orders -.144 (.212) -.189 (.100) impersonal nature of edi -.111(.342) -.153 (.187) maintaining one system for edi capable /k another for nonfdi capable panners translating customer/supplier data for direct use in internal applications complexity of tbc technology -.177 (.122) -.156(.173) selecting means for communications with trading partners -.054 (.640) -.041 (.724) determining appropriate internal applications to apply edi -.189(.100) -.223» (.051) ability to seamlessly integrate edi with existing internal applications absence of uniform edi standards .068 (.556) .219(.054) implementing multiple trading partners -.138 (.231) -.016 (.888) integrating multiple edi systems and/or van connections -.162 (.158) .221s (.053) dealing with multiple edi formats .032 (.781) .273'.015) selecting the hardware to run edi software -.253s (.025) -.024 (.832) changing business processes -.291as (.010) -.032 (.782) small size of business -.313s'.006) -.190 (.101) increased responsibility for employees -.152 (.187) -.017 (.884) oaining management/stakeholder commitment -.024 (.835) -.178 (.121) overcoming resistance to change -.035 (.765) .010(.929) availability of managerial time to expand edi use -.155 (.180) -.063 (.587) addressing legal issues (e.g., electronic orders, signatures, legal agreements) exposure to ever-changing customer/supplier requirements about edi system managing data and transmission security and auditability .155 (.178) .097 (.401) i ligh startup costs -.078 (.499) .144 (.209) availability of financial resources -.092 (.425) .106 (.355) high cost of integration and expansion of edi use -.094 (.412) .171 (.135) availability of technological resources -.123 (.282) -.068 (.554) learning new technology and methodology -.181 (.114) -.076 (.506) end users and customers'ontinued reliance on paper-based transaction obtaining general information about edi -.226s (.047) -.222'.051) considering edi as a natural extension of pre-existing internal operations understanding potential benefits of edi -.211 (.066) -.181 (.116) " pearson correlation coefficients with significance levels in parenthesis are shown. the useful sample size varies between 77 and 78 depending on a specific item with the majority of the items having an n of 78."'orrelation is significant at the 0.05 level (2-tailed; 95% confidence); 'e correlation is significant at the 0.01 level (2-tailed; 99% confidence)." this is measured on a 3 point likert-type "seriousness of challenge" scale with verbal labels. a rating of "i" indicates that an item is "not serious at all", "2" indicates that an item is a "somewhat serious challenge", "3" indicates that an item is an "extremely serious challenge." respondents have the option of indicating that an item is "not an impediment for us" coded as a "0". 58 journal of small business strategy vo/. /3, no. l spring/summer 2002 impediments to edi adoption and integration the greater the seriousness and challenge of various impediments to edi adoption and integration, the lower the chances of increasing or improving the level of benefits afler edi implementation or integration. table 10 illustrates the correlation between most common impediments to edi adoption and integration and the two edi benefits factors, although the individual sme owners have told this author that having the "right" volume or frequency of orders is an important challenge, the data in this study indicates that on the average there is no significant relationship between low volume or frequency of orders and the edi benefits. in fact, most of the more critical challenges that negatively impact edi benefits have to do with the business process reengineering (bpr) aspect of the technology and the difficulties associated with understanding, modifying or customizing edi for the adopting firm. particularly, the difficulty of "selecting the hardware to run edi soflware", "changing business processes", "small size of business", "obtaining general information about edi", "understanding potential benefits of edi", and "considering edi as a natural extension of preexisting internal operations" have a significant negative influence on obtaining operational/tactical (direct) edi benefits. concluding remarks limitations of the study as with most research endeavors, this project has some potential limitations. since the research method used for this study is nonexperimental" in nature, study results are not necessarily generalizable to all smes. however, results could be generalized to the industries and organizational sizes represented by the sample. further, no cause and effect conclusions have been drawn; results are useful for deriving conclusions about relationships and characteristics of edi use in kentucky smes and similar firms in the larger context. even though all efforts were taken to reduce nonresponse bias and other errors, inferences, conclusions, recommendations from this type of research strategy are generally supported with lesser confidence than true experimental research (sproull, 1988). implications for practice and research the results reported in this paper have critical implications for both practice and future research. as suggested in the introduction of this paper, notwithstanding technological developments such as extensible markup language (xml) and web-based ordering systems, edi will continue to be a major technological standard for conducting b2b or business-tobusiness electronic commerce around the globe. the results reported in this study provide some useful guidance for small firms to truly realize benefits in the shortand long-tenn from investments in organization-transforming information technologies such as edi. thus, for example, this study demonstrates that regardless of firm size, it is possible to obtain strategic benefits from implementing newer information technologies (it) such as edi and that they will not occur in the immediate term (refer figure i). further, firms need to give critical consideration to the level of internal integration of the it being implemented, which has a strong bearing on accruing strategic benefits. in addition, in order to achieve operational/tactical benefits from it implementation, firms need to better prepare for and understand how they can overcome impediments relating to modifying business processes and choosing the technology itself. 'n experimental variable (e.g., edi use or non-use) is neither introduced nor controlled in non-experimental research designs. 59 journal vf small business stra/egv vo/. 13, //o. l spring/summer 2002 figure i: signilicant findings —determinants of relative impact of it on smes implications for new interoganizational it implementation" sme characteristics previous experience with it implementation industrial sector volume of messages it benefits accrued (documents) exchanged strategic benefits current stage of internal integration of it perceived reasons for it operational/tactical benefits adoption: competitive pressures nature of cost/benefit analysis conducted prior to adopting it r trading partner support impediments to it adoption/integration: selecting the hardware to run soltware changing business processes small size of business obtaining general information about it understanding potential benefits of it o'onsidering it(edi) as a natural extension of pre-existing internal operations " all relationships shown are positive unless otherwise specified. 60 journal of small business strategy vol. /3, iyo. i spring/summer 2002 finally, the results of this study provide mixed support for earlier findings by researchers on edi implementation in small and large firms. the results of this study also show that there are some important determinants and inhibitors of strategic benefits that can be realized by smes. thus, as illustrated in figure i, significant variables such as the nature of cost/benefit analysis conducted, extent of trading partner support, it adoption criterion, impediments to adoption/integration, and stage of internal integration and their relationship to strategic benefits accrued from it implementation in general, and business-to-business commerce technologies in particular, are of clearly of interest to researchers and practitioners alike and warrant further investigation. acknowledgments: the results reported in this paper were presented at the kentucky economics association (kea) meeting in louisville, ky, /999. tlie author wishes to acknowledge the kentucky cabinet for economic development for providing partial financial suppor%r this research proyect. references arunachalam, v. (1995, march/april). edi: an analysis of adoption, uses, benefits and barriers. journal ofsystems management, 46 (2), 60-64. banerjee, s., &. golhar, d. y. (1993). edi implementation in jit and non-jit manufacturing firms: a comparative study. international journal of operations & production management, l3 (3), 25-37. benjamin, r. i., de long, d. w., & michael s. s. m. (1990). electronic data interchange: how much competitive advantage? long range planning, 23 (i), 29-40. carter, j. r., monczka, r. m., clauson, k. s., & zelinski, t. p. (1987). education and training for successful edi implementation. journal of purchasing and materials management, (summer), 13-20. cash, j. i., &. konsynski, b. r. (1985). is redraws competitive boundaries. harvard business review, (march-april), 134-142. edi ivorld institute. (1995). yes, small and medium-size enterprises can do edi...-and profitably! retrieved september 4, 1997 from http: //www.ecworld.org/resource center/ediwindow/vol i-no4/feature. html. lacovou, c. l., benbasat, i., & dexter, a. s. (1995). electronic data interchange and small organizations: adoption and impact of technology. mis quarterly, /9 (4), 465-483. johnston, r. h., & vitale, m. r. (1988). creating competitive advantage with interorganizational information systems. mis (juarterly, /0 (2), 153-165. khazanchi, d. (1995, november 22-25). spoke enterprises: a preliminary assessment of expectations and performance of edi. proceedings of the 25th annual decision sciences institute meeting, boston, ma, 880-882. malone, t. w., yates, j., & benjamin, r. i. (1987). electronic markets and electronic hierarchies. communications of the acm, 30 (6), (june), 484-497. mcdaniel, c., & gates, r. (1993). contemporary marketing research. minnesota/st. paul, mn: west publishing company. monczka, r. m., & carter, j. r. (1988). implementing electronic data interchange. journal of purchasing and materials management, 25 (summer), 26-33. mukhopadhyay, t., kekre, s., & kalathur, s. (1995). business value of information technology: a study of electronic data interchange. mis quarterly, l9 (2), 137-156. nunnally, j. c. (1978). psychometric theory, (2nd edition). new york: mcgraw-hill book company. pfeiffer, h. k. c. (1992). the dtjtt'aston of electronic data interchange. heidelberg, germany: physics-verlag. 61 journal of small biisi ness strategy vol. i3, no. i spring/summer 2002 phillips 1997 edi yellow pages. (1997). potomac, maryland: phillips business information, inc. picket, g. c., & udo, g. j. (1994, march/april). edi conversion mandate: the big problem for small businesses. industrial management, 36 (2), 609. porter, m. e. (1985). technology and competitive advantage. the journal of business strategy, (winter), 5(3), 60-78. porter, m. e., & millar, v. e. (1985). flow information gives you competitive advantage. harvard business review, (july/august), 149-160. premkumar, g., ramamurthy, k., & nilakanta, s. (1994). implementation of electronic data interchange; an innovation diffusion perspective. journal of management information systems, i i (2), 157-186. raymond, l., 8c bergeron, f. (1996). the impact of electronic data interchange on smalland medium-sized enterprises. journal of organizational computing and electronic commerce, 6 (2), 161-172. sproull, n. l. (1988). handbook ofresearch methods: a guidefor practitioners andstudents in the social sciences, metuchen, new jersey: the scarecrow press, inc. swatman, p. m. c., & swatman, p. a. (1991, december 16-18). integrating edi into the organization's systems: a model of the stages of integration. proceedings of ihe i2u international conference on information systems, 141-152. swatman, p. m. c., swatman, p. a., & fowler, d. c. (1994). a model of edi integration & strategic business reengineering. journal of strategic information systems, 3 (i), 4160. vollmer, k. (2001, april 9). the growth of the internet means business needs more edi, not less. internet iyeek, 856, 25. wilson, t. (2000, february 21). edi is alive and kicking, study says. internet week, 80i, 25. zorfass, p., & michel, c. (1992). electronic data interchange international data corporation white paper supplement to computerworld. computerworld, 6(37), si-s10. deepak khazanchi is professor and chairperson of the department of information sysrems and quantitative analysis in the peter kiewit institute (pki) —college of information science &i technology (is& t) at the university of nebraska in omaha (uno). he has given seminars and advised firms on seuing up is't project management best practices and previously worked as a project/design engineer in the construction industry. his current research interests include philosophical and pedagogical issues in is, b2b ec control & assurance, and impact ofpervasive it on service quality. deepak's recent research has been published in the communications of the association of information systems (cais), journal of the association of information sysiems (jais), decision support systems, information systems management, journal of information technology management, and data basefor advances in inform ati on systems. 62 situix"~'y small business brief a note on the use of marketing research by small businesses mark c. hall minnesota state university, mankato mark. hallmankato. msus. edu introduction there is no question that timely and accurate information is as valuable to small business decision makers as it is to decision makers in large organizations. interestingly though, evidence exists that small businesses make little use of (oumlil, 1989; hall, anglin, and elliott, 1997; mcdaniel and parasuraman, 1986), and place limited value on (brush, 1992; callahan and cassar, 1995), marketing research —the very discipline capable of providing this valuable information. why this is the case has been the subject of some speculation. andreason (1983) for example, has proposed that small businesses oren avoid marketing research due to misconceptions concerning its nature. more specifically, he proposes that managers of small businesses oren operate under the myths of: 1) "big decision", 2) "survey myopia", 3) "big bucks", 4) "sophisticated researcher", and 5) "most research is not read." the primary purpose of this note is to help dispel some of these common misconceptions. specifically, this is done by identifying a number of inexpensive (misconception 3), relatively simple (misconception 4), and in some cases, non-survey based (misconception 2), marketing research approaches that can be employed by small businesses. the model marketing research, as a discipline, is very expansive. consequently, classification schemes (taxonomies) are oren helpful in understanding its scope and domain. one approach to classifying marketing research involves looking at it from an applications (subject area) perspective. using this approach, one encounters studies that involve: i) industry, 2) competitor, 3) customer (buying behavior), 4) environmental, 5) market potential, 6) forecasting, 7) pricing, 8) product, 9) distribution, and 10) promotion analyses. a second approach involves looking at marketing research from a techniques of data collection perspective. commonly used data collection approaches include: i) using secondary data (existing records or documents), 2) observation, 3) surveys, and 4) experimentation (deliberately manipulating one variable to elicit a response in another). 95 journal ofsmall business strategy vol. 10, no.2 fall/ivinter l 999 combining these two perspectives yields the table i matrix of possible application/technique combinations. identified within each cell of the matrix are user-friendly methodologies appropriate for that combination. conclusion as indicated in table i, there are a variety of simple and inexpensive methodologies available to the small business marketing researcher. each is capable of providing the decision-maker with needed insight and information. to control costs, employees can be used in the data collection process. additionally, in terms of analysis, none of the suggested approaches require much more than simple tabulation. the immediate task though would seem to be in convincing the small businessperson to give marketing research a try. once understood and sampled, marketing research is more likely to become an integral part of the organization's operation. references andreason, a. r. (1983).cost-conscious marketing research. harvard business review jul~au ust, 74-79. brush, c. g. (1992). marketplace information scanning activities of new manufacturing ventures. journal of small business mana ement october 41-53. callahan, t. j. &. cassar, m. d. (1995). small business owners'ssessments of their abilities to perform and interpret formal market studies. journal of small business hall, m. c., anglin, k. & elliott, k. m. (1997). marketing research: the small business perspective. in v. beguin (ed.), 21st national small business consultin conference proceedin s 196-199. mcdaniel, s. w. & parasuraman, a. (1986). practical guidelines for small business marketing research. journal of small business mana ement janua, 1-8. oumlil, a. b. (1989). marketing management tools for the small business consultant. ~cl«i 30ik, 293-301. mark hall is a professor of marketing at minnesota state university, mankato in mankato, mn. he earned his doctorate from the university ofarkansas. he has published research, in among others, the journal of marketing management and the marketing education review. his research interests are in tire areas ofmarketing education, marketing research, and industrial marketing. 96 table i marketing research applicationfl'echnique link ct secondary data observation surveys experimentation examine: survey/ b h industry trade publications for industry trends by phone, or at a trade show, industry cu analysis "lead-users" about industry trends patent applications within the industry suppliers about indusuy trends examine: observe/ external secondary sources (newspapers, trade journals, etc.) ior the number and location of competitor product olferings, prices, competitors competitor promotions, «tc. customer flow into a competitor's survey a sample of competitors at a trade analysis internal sales records to ascertain the place of business show to assess intentions, strategies, etc. impact of a competitor's marketing e(tort a competitor's products at a trade show patent applications of competitors a competitor's web site court records involving competitors emuniner internal complaint and/or compliment observer o~ records for insight into customer survey: customer satisfaction and/or failure points and/or video tape customer flows analysis through your store at the point of sale, a sample of customers ct return slips for trends to assess wants and needs (buying and/or video lope products considered n behavior) sales invoices for customer zip codes and/or time spent considering them a sample of customers to assess and/or addresses satisfaction and/or dissatisfaction license plates in your parking lot sales invoices to identify your best/worst customers and/or best/worst 'o products vn secondary data observation surveys erpenmentatton examine popular literature for nvjrpn taenia( environment trends (political, observe the world around you survey a naturally-formed sample of regulatory, legal, social, technological, people (old, young, etc.) to asses social economic, etc.) uends market pptential exurmue census data for insight into observe traaic flow on the street market size and/or growth and/or sidewalk analysis systematically alter assumptions porecastin examine internal sales mcords for survey a sample of your customers to and/or the marketing mix to assess general trends, seasonality, cyclical assess future purchase intentions impact on sales (test marketing, -whm-if" analysis) pricing exam/ne internal accounting records observe and/or video tape systematically alter prices to for cost and/or profit data customers —do they compare price assess elasticity of demand product exam/ue internal service and/or survey a sample (via a focus group) to sysremart catty utter produm warranty records for product failures observe scanner data for product sales generate new product ideas and/or assess versions to assess various and/or rates reaction to a new product concept concepts, names, packages distribution $&wremurtcatty a/rer hours of examine internal records for delivery observe trends in store locations, operation, methods of delivery, failures and/or damage layout, atmospherics, etc. shelf space, shelf positioning, etc. sysremar/ca//y alter: advertisements to assess media, examiner surveyr placement, timing, messages prptnptipn listener/reader/viewer characteristics a sample of the target market to assess compensation plans to assess oanalys'f various media to assess reach and observe conversations between awareness impact on sales, elfon, motivationna ysis m customers and salespeople a sample (via a focus group) to assess point of sale promotions 'z0redemption rates of coupons reaction to advertising and/or other promotional materials sales presentations and/or sales call fmquency direct mail pieces 'o 'o http://www.smallbusinessinstitute.biz innovation in small firms: does family vs. non-family matter? saurabh ahluwalia1, raj v. mahto2, steven t. walsh3 1university of new mexico, sahluwalia@unm.edu 2university of new mexico, rmahto@unm.edu 3university of new mexico, walsh@unm.edu a b s t r a c t small firms are the backbone of our economy. these firms need to innovate to thrive and compete. however, research on innovation in small firms, especially non-technology and less knowledge-intensive firms, is lacking. in this study, we explore antecedents of innovation in such firms. we build and test a theoretical model that links employee training, employee commitment, family employees, and emphasis on learning to innovation in small firms. we also argue that a small-firm owner’s perception about his firm being a family firm or a non-family firm will influence the relationship between predictors and firm innovation. keywords: journal of small business strategy 2017, vol. 27 no 03, 39-49 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2017 small business institute® apa citation information: ahluwalia, s., mahto, r. v., & walsh, s. t. (2017). innovation in small firms: does family vs. non-family matter? journal of small business strategy, 27(3), 39-49. w w w. j s b s . o rg small firm, family firm, innovation, owner’s perception, commitment introduction small firms, being a major source of employment and new job creation, make a significant contribution to the development of regional and national economies. economies with burgeoning healthy small firms reap many benefits associated with those firms, including economic development and a higher standard of living for residents in the firms’ communities. despite agreement among scholars about the benefits of small-firm economies, a consistent definition of “small firm” is absent across the world. in the united states of america, a small firm is defined as a manufacturing entity with fewer than 500 employees or a service firm with annual sales revenue lower than $7.5 million (us small business administration, 2010). these entities are the dominant form of enterprises in the us economy representing 99.7% of employer firms and are responsible for generating 64% of private sector jobs. the dominance of small firms in our economy and their critical role in maintaining the health of our economy requires small-business scholars to investigate and explain factors influencing small-firm performance and survival in an increasingly hypercompetitive environment, characterized by short product life cycles and intense competitive rivalry (wiggins & ruefli, 2005). researchers have identified innovation as a key competitive tool for firm survival and for maintenance of superior performance in an environment of intensifying competition (dess & picken, 2000; d’aveni, 2010). in this paper, we define innovation as “adoption of new idea or behavior by a firm” (daft, 1978; damanpour & evan, 1984). innovation scholarship has focused mostly on large public corporations or technology-based entrepreneurial firms (a miniscule section of the economy) while ignoring non-technology-based small firms due to the risk associated with innovative activities and endeavors (crossan & apaydin, 2010; de massis, frattini, & lichtenthaler, 2013; terziovski, 2010). innovation requires significant commitment of resources by initiators, and is, therefore, risky. small firms, susceptible to business failure and resource constrained, are perceived negatively because they lack resources to invest in innovation (chandy & tellis, 2000) and are unable to absorb the failures associated with high-risk innovative activities (yap & souder, 1994). small firms, especially firms with fewer than 60 em40 s. ahluwalia, r. v. mahto, & s. walsh journal of small business strategy / vol. 27, no. 3 (2017) / 39-49 ployees, constitute over 90% of all firms in the us economy (us small business administration, 2010). given that dominance, our limited understanding of factors influencing innovation in small firms is detrimental to ensuring development of the national economy and the well-being of its citizens. it is important to remove the gap in our understanding about factors influencing innovation undertaken by small firms to adapt to today’s hypercompetitive environment. our research goal in this paper is to address this significant gap in our understanding of innovation in small firms. given the significant overlap between family firms and small firms in our economy (e.g. shanker & astrachan, 1996), a discussion of small firms invariably includes family firms. a key distinguishing feature of the latter type is the involvement of a family or multiple members of a family who intend to maintain control of the firm over multiple generations (chrisman, chua, & litz, 2003). even though innovation research on family firms is slightly more advanced than innovation research on non-technology-based small firms (de massis et al., 2013), research on innovation in small family firms is almost non-existent. thus, it is also critical to understand factors influencing innovation in small family firms because family-firm scholars have concluded that family involvement has direct and indirect effects on firm innovation (e.g., de massis et al., 2013). in this study, we also assess the influence of family factors on innovation in the small-firm context. as employees are an important form of (human) capital and a source of competitive advantage, we assess employees’ influence on innovation in small family and non-family firms. our study complements others that have established the importance of employee involvement in firm innovation (de winne & sels, 2010). ours also appears to be the first study to test whether a firm owner’s perception about his or her firm being a family firm or a non-family firm moderates the relationship between employee-related predictors and firm innovation. more specifically, we theoretically propose and then assess how employee learning, employee training, employee commitment (to the firm), and family employees (the number of employees related to the family) influence innovation in small firms with fewer than 60 employees. we also assess the moderating effect of the owner’s perception. this is also one of the first studies to examine predictors of innovation in the dominant non-technology sectors of the economy comprising mostly small family and non-family firms with fewer than 60 employees. the structure of our paper is as follows. we provide a brief overview of the literature on innovation in small family and non-family firms in the first section. next, we sketch our theory in the following section. we then offer hypotheses and theoretical models followed by a description of our sample, variables, and results in the methods section. we conclude the paper with a discussion of our findings, offering practical implications of study findings, and listing some study limitations. literature review in the current economic environment, where firms face intense competition, there is a rush to move up the value chain by engaging in more knowledge-intensive work and by outsourcing the low-value, commoditized portion of the operation. this competitive rush has enhanced the importance of innovation, which positively impacts firm performance (christensen & raynor, 2003). literature on innovation has increased significantly over the last few decades, reflecting the increased importance of the concept among business owners and managers. in their quest to decode the black box and understand various factors associated with the concept of innovation, researchers have focused on innovation inputs (e.g., research and development expenses), activities (e.g., firm culture or organization structure) and/or innovation outcomes (e.g., performance) (de massis et al., 2013). the resource constrains faced by small firms has led to limited research on their innovation with studies focusing mainly on the human capital aspect of the firms, such as owner-managers or employee characteristics (e.g., de winne & sels, 2010). studies using the strategic view of human resource management or the knowledge-based view of a firm (i.e., knowledge is required for innovation) have demonstrated the positive influence of small-firm ceos or owner-managers on firm innovation (klaas, klimchak, semadeni, & holmes, 2010). some scholars have suggested that ceos or owners have only indirect influence on innovation because highly educated ceos or managers tend to hire talented or educated employees. these employees, in turn, contribute to firm innovation (winne & sels, 2010). studies of employee involvement have suggested that as employees are the primary repositories of knowledge (e.g., grant 1997), their involvement in enhancing firm innovation is critical (hitt, bierman, shimizu, & kochhar, 2001; lado & wilson, 1994). this supposition has been supported by small-firm studies that show the positive influence of non-managerial employees on firm innovation (andries & czarnitzki, 2014). however, our understanding of non-managerial employees’ contributions to small-firm innovation is still limited (slevin & terjesen, 2011), requiring a significant amount of future research to build our knowledge base (andries & czarnitzki, 2014). scholarship on innovation in family firms, like scholarship on small-firm innovation, is thin and underdevel41 s. ahluwalia, r. v. mahto, & s. walsh journal of small business strategy / vol. 27, no. 3 (2017) / 39-49 oped (de massis et al., 2013). still in the early stages of development, most work has focused on establishing a separate identity for the field by comparing family firms’ innovation performance to non-family firms’ performance. these studies generally agree that family involvement or embeddedness in a firm influences its innovation because of a family’s large ownership stake in a firm or their desire to preserve the family entity for the next generation (e.g., chrisman & patel, 2012; gomez-mejia, makri, & kintana, 2010; breton-miller & miller, 2009). in addition, these studies often focus on technological innovation versus adoption of new ideas or behaviors, practices more common in small family and non-family firms in traditional sectors of the economy. the significant differences in small family firms’ and large family firms’ behaviors (e.g, lussier & sonfield, 2009) creates a significant void in our understanding of factors influencing innovation in small family firms. this, combined with our limited understanding of factors influencing innovation in small firms in non-technology industries, magnifies the urgency to undertake more studies on innovation in this context, as these are the dominant entities in major economies across the globe. in this study, we attempt to address this important and critical void in the field. theory it is widely accepted that a firm’s innovation output is related to availability of resources and firm capability. the resources and capability of small firms operating in traditional non-technology sectors of an economy are dependent on the firm’s employees and managers, as these firms are resource-constrained in other aspects. this argument is consistent with two theoretical frameworks commonly utilized to study innovation, the resource-based view (barney, 1991) and the absorptive capacity theory (zahra & george, 2002). we utilize these two theoretical perspectives to build hypotheses. the resource-based view (rbv), which emerged out of strategic management scholars’ quest to search for sources of competitive advantage (possibly innovation), is based on wernerfelt (1984) and penrose’s (1959) seminal work. barney’s (1991) conceptualization of rbv attracted a significant following to this theoretical framework in many different streams of the business discipline. per rbv, resources that are valuable, rare, inimitable, and non-substitutable provide firms with a competitive advantage. for small firms, employees and the management team (founders and ceos) are the resources because of their knowledge base (about the firm, its customers, and market inter-linkages). the knowledge that employees possess is often rare and socially complex (hitt, dacin, levitas, arregle, & borza, 2000). we argue that the small firms can make this key resource more valuable by training their employees, emphasizing learning, increasing employee commitment to the firm, and having a higher composition of employees with a connection to the founder and owners (i.e. family employees). family embeddedness in firms has been identified as a resource that offers family firms a performance edge over non-family firms (habbershon & williams, 1999). absorptive capacity theory has been used extensively in the literature to explain sources of innovation in firms (e.g., zahra & george, 2002; cohen & levinthal, 1990). the multidimensional construct absorptive capacity is a firm’s ability to value, assimilate, and apply knowledge (cohen & levinthal, 1990) to create innovation. the primary focus of this theory is the utilization of knowledge to create innovation that gives firms a competitive advantage. even though this theoretical framework has been applied primarily in the context of large firms (e.g., qian & acs, 2013), it is an appropriate model for explaining innovation in small firms. for most firms, employees are the key repositories of valuable knowledge and skills (schultz, 1961). a small family firm may emphasize enhancing its absorptive capacity and the employee knowledge base to enhance the firm’s position because of its desire to preserve the family entity for future generations. hypotheses in this study, we argue that employees are the primary source of innovation for small firms. various employee characteristics may help a small firm increase its level of innovation. we focus on a small firm’s training of employees, emphasis on learning, employee commitment, and family employees as predictors of firm innovation. a small firm owner’s perception about theirs as a family firm or non-family firm may influence the relationship between employee-related variables and firm innovation. employee training and innovation knowledge residing in small-firm employees contributes to firm innovation. many small firm owners recognize the importance of employees in increasing firm innovation and competitiveness, and surveys of small firm owners/ managers confirm it (lichtenstein & brush, 2001). per absorptive capacity theory, knowledge allows employees to understand and absorb new knowledge in their daily practices. with time, however, knowledge can become obsolete, endangering a firm’s competitive position in the market. in the absence of new knowledge, a small firm’s ability to learn and solve problems will decline, resulting in lower levels of firm innovation (e.g., kim, 1998). employee training is a way to keep the employee knowledge base updated and enhance an employee’s capacity to 42 s. ahluwalia, r. v. mahto, & s. walsh journal of small business strategy / vol. 27, no. 3 (2017) / 39-49 engage in innovation. through in-firm training small firms can allow employees to continue to accumulate the latest knowledge (killingsworth, 1982) and utilize it to solve or improve a firm’s complex processes and/or product/service offerings. a higher level of employee knowledge enhances a firm’s absorptive capacity and thus its ability to gather knowledge and apply it to invent or innovate. studies have supported the benefits of employee training on firm innovation (e.g., bauernschuster, falck, & heblich, 2009). thus, we propose the following hypothesis: hypothesis 1. in small firms, employee training is positively associated with firm innovation. emphasis on learning and innovation in small firms, employees’ motivation to enhance their knowledge and firm-related expertise is dependent on a firm’s culture. a firm that hopes to maintain a competitive position in the industry by building and ensuring its capacity to innovate will not only train its employees but will also motivate employees to acquire knowledge on their own (e.g., macdonald, assimakopoulos, & anderson, 2007). conversely, firms with low emphasis on learning will emphasize efficiency, resulting in employees focusing more on doing their work efficiently. without an owner’s emphasis on learning, employees will have less incentive to acquire or accumulate new knowledge and thus build a firm’s absorptive capacity to innovate. thus, we propose: hypothesis 2. in small firms, emphasis on learning is positively associated with firm innovation. commitment and innovation employee commitment is a measure of an employee’s identification with a firm. it is among the most extensively researched organizational constructs. employee commitment toward a firm has been shown to produce firm-valued outcomes, such as lower turnover (bellou, 2008), higher employee performance (weeks, loe, chonko, & wakefield, 2004), and higher employee creativity (e.g., chang, jia, takeuchi, & cai, 2014). given the resource constrains that small firms face, employees demonstrating a higher commitment are especially important to firm innovation levels. employees with lower commitment are likely to perform at a minimum required level for continued employment (riketta, 2002), which implies that employees will not be engaging in new knowledge acquisition activities that build a small firm’s absorptive capacity. conversely, employees who are more committed feel a greater sense of responsibility (morrison & phelps, 1999) and are more likely to learn and acquire new knowledge to enhance their firm’s capability to innovate. studies have also found that employees with higher commitment support and accept change (indicators of innovation) more strongly compared to employees with lower commitment. in addition, employee commitment is shown to be an important factor in fostering innovative behavior in a firm (xerri & brunetto, 2013). therefore, we propose: hypothesis 3. in small firms, employee commitment is positively associated with firm innovation. family employees and innovation employees’ relationships to owning family (i.e., family members who are employees) or to the firm owner should influence their contribution to a firm’s innovation. family members employed in the firm have a higher stake in performance of the firm. these family employees benefit financially (profit sharing or appreciation of firm equity holding) and emotionally (their concern for family well-being). unlike non-family employees, who can terminate employment with the firm with no or negligible emotional cost, most family employees may endure significant emotional harm on terminating their employment with the firm (kellermanns & eddleston, 2006). thus, family employees are more likely to exhibit a higher level of commitment to the firm. because of their commitment and deep connection, these employees are more likely to engage in knowledge-acquisition behavior to build their firm’s capability to innovate and to achieve a higher market standing for the firm. thus, we propose: hypothesis 4. in small firms, a higher number of family employees in a firm is positively associated with firm innovation. owner perception and innovation studies on innovation have suggested that firm ownership has an influence on innovation levels (e.g., classen, carree, van gils, & peters, 2014). empirical studies comparing innovation performance of family and non-family firms have produced inconsistent results (carnes & irland, 2013). some studies find support for the superiority of family firms over non-family firms in innovation practices (e.g., gudmundson, tower, & hartman, 2003) because of these firms’ ability to stimulate learning, innovation (zellweger, 2007), and knowledge sharing (zahra, 2012). literature on innovation that supports the superiority of non-family firms is equally strong, with these studies suggesting that a family’s desire to pass the family entity to the next generation forces them to act cautiously and deter innovation (gomez-mejia et al., 2010). others studies suggest that a high degree of family ownership negatively influences a 43 s. ahluwalia, r. v. mahto, & s. walsh journal of small business strategy / vol. 27, no. 3 (2017) / 39-49 firm’s innovation output (chrisman & patel, 2012). thus, family ownership can influence a firm’s innovation output either positively or negatively. as we mentioned previously, a significant overlap exists between small firms and small family firms in our economy. not all small-firm owners consider theirs a family firm (e.g., fernández & nieto, 2005), however, because of the negative connotation associated with the term. small-firm owners who do not consider their firm to be a family firm are likely to operate it differently compared to owners who consider theirs a family firm. as family and non-family firms have different firm innovation outputs, small-firm owners’ perceptions about their firm as family or non-family operated may influence a firm’s innovation, and influence the relationship between predictors and firm innovation. thus, we propose: hypothesis 5. in small firms, owners’ perceptions about their firm (being family or non-family) will moderate the relationships between predictors and firm innovation. method we tested the proposed study hypotheses using a sample of small firms located in the southwestern part of the united states. the data was collected toward the end of 2011 through a survey instrument developed by one of the study authors. the sampled firms were selected from a database of local businesses maintained by the executive arm of a business school from a state university located in the region. the organization maintained the data to market its executive graduate and certificate programs and advertise multiple business events. the organization was in the process of developing new executive education programs targeting small-business owners in the surrounding community and the state. organization leadership approached one of the authors to develop a survey instrument to assess the suitability of those programs for the target audience. the organization allowed the author to include additional questions and items in the survey instrument in exchange for help on the survey. the organization’s original database contained a total of 3902 active firms operating in the state. the data contained the names of firms, addresses (street, city, county, state, and zip code), and title and contact information of firm insiders. given budget constraints, the author could only survey about 300 contacts from the database. to randomly select a sample of 300 firms from the 3902 firms, the author used a two-step process. in the first step, he used the randomization function available in microsoft excel to assign a random number (in format 0.xxx, xxx, xxx) to each company in the database. in the second step, he used the sort function to rearrange companies in the data from the smallest to the largest (on random number) to select the first 300 companies in the list. if any firm in the selected list was a local branch of a large corporation, he moved to the next firm on the list after removing the branch location from the selected list. he continued the sample refinement process till our final sample of firms to be contacted for the survey included only local firms. as the database lacked email addresses, the author personally called the listed contact person for each firm to extend an invitation to participate in the survey and reconfirm the firm’s address and the name and contact information for the top executive. most of the contacted firms agreed to participate in the survey due to the reputation of the associated business school. we mailed the survey questionnaire to these firms along with a letter explaining the survey instrument and the purpose of the survey. a single respondent from each targeted firm completed the mailed survey. as multiple researchers have raised concern about the reliability of organizational data obtained using a single firm respondent (e.g., bowman & ambrosini, 1997), we used only respondents who were either owners of the firm or the top officers of the firm. such respondents have been shown to be knowledgeable about organizational practices and to possess reliable information about the firm, especially if the firm is small (zahra & covin, 1995; mahto, davis, pearce, john, & robinson, 2010). we received completed surveys from 66 firms, representing a response rate of 22%. the average age of respondents in the study sample was 53.62 years with the majority of respondents being male (46 males and 20 females). on average, the sample firms had 30 full-time employees and sales revenue of about $2 million (average 2.66 with 1 represents less than $550k per year and 5 represents more than $5 million per year). employee training firm innovation owner’s perception family employee employee commitment learning emphasis h5 h1, h2 h3, h4 figure 1. proposed theoretical model. 44 s. ahluwalia, r. v. mahto, & s. walsh journal of small business strategy / vol. 27, no. 3 (2017) / 39-49 these firms represented 20 different industries (food manufacturing to medical, precision, and optical instruments) with fabricated metal and transportation equipment, aircraft etc. being the dominant group, with each constituting 12% (8 observations) in the sample. a large number of respondents (20 out of 66) left the nature-of-business question unanswered. in general, small firms in our sample were engaged primarily in manufacturing. finally, 36 respondents identified their firm as a family firm, while 29 identified their firm as a non-family firm. one respondent failed to answer the question. survey respondents’ failure to complete all survey questions (e.g., innovation and employee training) resulted in a smaller usable sample of 47 firms for the study. the average firm age in our sample was 30 years and most firms had an average of 14 employees. these firms also had average sales revenue of between $1 million and $2 million per year and an average annual growth rate of about 5%, which was higher than the state economic growth rate over the same period. study variables innovation. a review of innovation literature suggests that researchers have employed different measures of the construct, such as patents (archibugi & planta, 1996), research and development expenditure and intensity (armbruster, bikfalvi, kinkel, & lay, 2008), or number of new products and/or services introduced by the organization (e.g., nohria & gulati, 1996; damanpour, 1996; johannessen, olsen, & lumpkin, 2001). in a small-business context, however, especially among micro-firms, some measures, such as r & d intensity and patents, are inappropriate to assess innovation. resource constraints limit such measurement. as a result, we operationalized innovation in our study using the number of new products or services introduced by a sample firm (e.g., de massis, frattini et al., 2013). we asked respondents to indicate the number of new products or service families that they introduce each year to obtain innovation measure. respondents indicated their preference on a scale of 1 to 4, where 1 indicated 1 to 2 introductions and 4 indicated 10 or more new products or service families. employee training. uniformity is lacking in employee training literature on operationalizing the construct (e.g., tharenou, saks, & moore, 2007). given small-business resource constraints, it is unrealistic to utilize absolute, proportional, or content measures of training in such an environment. the emphasis measure of training, which assesses the importance of training for an organization, is a better measure of a small firm’s commitment to employee training (e.g., bassi & mcmurrer, 1998). thus, in this study we measured employee training using a single indicator that asked respondents to indicate the percentage of sales revenue their companies spent on training employees. the respondents indicated their response on a 5-item likerttype scale, with a range of 1, representing “less than 1%,” to 5, representing “more than 20%”. learning emphasis. we measured a firm’s emphasis on learning using a two-item scale that we adopted from the learning-orientation scale utilized in the marketing literature (sinkula, baker, & noordewier, 1997). the first item on the scale asked respondents about the importance of learning to the company’s competitive position. the second item of the scale assessed linkage between learning and the firm’s values. the respondents indicated their preference on both items using a 5-point likert-type scale ranging from with 1, representing “strongly disagree,” to 5, representing “strongly agree”. the scale had a reliability (cronbach’s α = .87) higher than recommended (.70) in the literature. we average the two items to obtain a single measure representing the firm’s level of learning emphasis. employee commitment. we measure employee commitment using three items of effective commitment scale developed by meyer and allen (1984). the first item of the scale assessed consensus on organizational vision. the second item of the scale assessed employee’s commitment to firm goals. finally, the third item assessed employees’ participation in the company’s strategic direction. the respondents indicated their preference for all three items using a 5-point likert-type scale ranging from 1, representing “strongly disagree,” to 5, representing “strongly agree”. the scale with a cronbach’s α = .71 satisfied the reliability requirements recommended in the literature. family employee. as the family-employee construct focuses on the presence of members of a business-owning family, we follow mahto et al. (2010) to measure the construct by counting the number of employees related to the owner(s) of the firm. we obtained this number by asking firm respondents to indicate the number of family members currently employed in the firm. owner perception. multiple definitions of family firm exist in the literature (mazzi, 2011) with the broader definition of the construct suggesting a majority of private firms being family firms (shanker & astrachan, 1996). as firms in our study sample are private small firms, they satisfy the broad definition of family firms as suggested in shanker and astrachan (1996). in this study, however, we want to assess if a firm owner’s identification of theirs as a family firm or non-family firm influences firm behavior. thus, we followed mahto et al. (2010) and kotey and folker (2007) in allowing respondents to self-classify their firm as either 45 s. ahluwalia, r. v. mahto, & s. walsh journal of small business strategy / vol. 27, no. 3 (2017) / 39-49 a family firm or a non-family firm. we operationalized this construct by asking firm respondents to respond “yes” or “no” to the question of whether theirs was a family firm or a non-family firm. gross margin. we utilized gross margin as the control variable in our model to parse out the effects of profitability in our model. the summary statistics of the variables are presented in table 1. analysis as we obtained the study data about small firms from a single firm respondent, we first assessed if our data suffered from the common method bias. we utilized herman’s single factor test, outlined in podsakoff, mackenzie, lee, and podsakoff (2003), to confirm or rule out the possibility of common method bias in our data. in the test, we conducted a factor analysis (principal component analysis) in which all study variables were allowed to load on a single factor to assess the existence of a high correlation between them. results of the component analysis suggested a five-factor solution including two factors with eigen value greater than 1. in the resulting model, the factor with the highest eigen value (1.69) explained only 34% of the variance in the sample. thus, based on the result of factor analysis we rule out the possibility of common method bias in our sample. we tested study hypotheses using linear regression using stata®. in addition, we also performed a descriptive analysis for study variable (presented in table 1) along with a correlation among study variables. the correlation among study variables and the results of the regression analysis are presented in tables 1 and 2, respectively. as can be observed in table 1, some study variables are correlated as expected, but the correlation between study variables are not too high to reach a level indicating collinearity in the data. for example, employee commitment and family employees are positively and significantly correlated with the dependent variable innovation. however, the rest of the four independent and control variables are not significantly correlated with innovation. some inter-correlation also exists between independent variables. for example, employee commitment is correlated with emphasis on learning. results the results of regression analysis are illustrated in table 1. the regression model for the study sample was significant and explained approximately 27% of variance in innovation, the dependent variable. the two sub-samples’ regression models were also significant with independent variables explaining approximately 47% and approximately 14% of variances in innovation in family firms and non-family firms sub-samples, respectively. we also obtained variance inflation factor (vif) statistics in regression analysis results for all three models to assess collinearity issues in our model. none of the vif measures reached higher than 1.5, thus ruling out the possibility of collinearity influencing our results. in hypothesis 1, we suggested a positive influence from employee training on firm innovation. however, as can be seen in the table 3, the employee training variable failed to reach the significance level, thus hypothesis 1 is not supported. similarly, hypothesis 2, which predicted a positive influence from learning on firm innovation is not supported, as the learning emphasis failed to reach significance level. in hypothesis 3 we predicted a positive influtable 1 descriptive statistics and pairwise correlations between sample variables variables innovation employee training learning emphasis employee commitment family employee owner perception gross margin innovation 1 employee training -0.005 1 learning emphasis 0.162 0.243 1 employee commitment 0.332* 0.090 0.4313** 1 family employee 0.426** 0.167 0.196 0.228 1 owner perception -0.029 0.145 -0.084 0.137 0.263 1 gross margin 0.077 -0.079 0.018 0.101 0.052 -0.156 1 mean 1.326 1.651 4.163 3.915 1.558 0.600 3.326 std. dev. 0.778 0.686 0.705 0.663 1.736 0.495 1.375 sample n = 43 significance level † p < 0.10 * p < 0.05 ** p < 0.01 *** p < .001 46 s. ahluwalia, r. v. mahto, & s. walsh journal of small business strategy / vol. 27, no. 3 (2017) / 39-49 ence from employee commitment on firm innovation. in table 3, employee commitment has a positive and significant influence on firm innovation, thus providing support for hypothesis 3. similarly, hypothesis 4, which suggested a positive influence from family employees on firm innovation, is also strongly supported. overall, among the four hypotheses predicting positive influence from independent variables on firm innovation, two hypothesis (h3 and h4) are supported, and the other two (h1 and h2) are not supported. finally, in hypothesis 5 we suggested a moderating influence from a firm owner’s perception of theirs being a family or non-family firm. to assess this hypothesis, we divided the sample into two sub-samples of family firms and non-family firms to rerun the regression analysis. we included the results of sub-sample regression analysis in table 3 with results of regression analysis for family firms and non-family firms displayed under the columns family firm and non-family firm, respectively. as can be observed in the table, the results are quite different for family and non-family firms. in the family firm sub-sample, family employees and employee commitment have positive and significant influence on firm innovation. while the results in the non-family sub-sample are quite different, with neither family employee nor employee commitment reaching significance level. the regression coefficients for the other two predictors, learning emphasis and employee training, are also quite different for both sub-samples. we also assessed for heteroscedasticity using a robust standard error regression and results largely remained the same. thus, the result offers partial support for hypothesis 5. discussion and conclusion our results are consistent with findings in the family-business literature that suggests family involvement in a firm influences firm innovation (de massis et al., 2013). our findings about innovation in family firms and non-family firms is consistent with previous findings in the literature that indicate that family firms are more likely than non-family firms to invest in innovation (e.g., classen et al., 2014). however, this is the first study to replicate those findings in the context of small family firms operating in traditional sectors of our economy. study findings suggest that family employees are the key predictor of innovation in firms, which offers support for the stewardship perspective advanced in the family-firm literature. given the multiple benefits that family employees receive from the family firms, their commitment to and ownership of innovation in such firms is understandable. in addition, the emergence of employee commitment as another predictor of innovation in the sample mirrors the effects of family employees. on a psychological basis, non-family employees with high levels of commitment to a firm may resemble family employees (e.g., mahto et al., 2010) and thus can contribute to higher level of innovation in firms. an important finding that emerged from our study is the influence of a firm owner’s perception about his firm being a family firm or a non-family firm. even though our sample comprises of only small firms, which are mostly owned by an individual or family, some owners consider their firms as family firms while others label it as non-family. in our total sample almost 60% of firm owners identifying their firm as a non-family firm reported employing at least one family member besides themselves. unlike previous studies that allowed firm owners to self-identify their firm as a family firm or a non-family firm but then imposed additional restrictions to identify a family firm (e.g., schulze, lubatkin, & dino, 2003; mahto et al., 2010), we trusted the firm owner’s decision and assessed its impact on firm innovation. it seems a firm owner’s classification of their firm as a family firm or a non-family firm not only helps in identification of family firm but also influences firm outcomes, probably indirectly. this is consistent with similar findings in the family-firm literature (mahto et al., 2010; mahto & khanin, 2015). owners who perceive their firms as a family firms operate them differently and may table 2 regression results of survey variables on innovation full sample family firm non family firm 1 2 3 employee training -0.077 0.056 -0.066 (0.167) (0.243) (0.265) learning emphasis -0.039 -0.034 -0.248 (0.182) (0.206) (0.507) employee commitment 0.329* 0.526** 0.207 (0.189) (0.211) (0.564) family employee 0.191*** 0.200** 0.148 (0.069) (0.071) (0.233) gross margin -0.003 -0.117 0.158 (0.083) (0.101) (0.170) owner perception -0.273 (0.2435) constant 0.2074 -0.763 1.003 (0.8511) (0.984) (1.603) observations 43 26 17 r-squared 0.274 0.468 0.135 standard errors in parentheses * p < 0.10 ** p < 0.05 *** p < 0.01 47 s. ahluwalia, r. v. mahto, & s. walsh journal of small business strategy / vol. 27, no. 3 (2017) / 39-49 experience different relationships between employees and firm innovation as compared to owners of small firms, who identify theirs as a non-family firms. practical implications our findings have multiple important implications for small-business owners. a key implication is that small-business owners are more likely to experience positive outcomes associated with employees when they classify their firms as family firms. small-business owners who classify their firms as non-family firms are unlikely to transform higher employee commitment to high firm innovation. a small-business owner who classifies his firm as a family firm generally has employee commitment and family employees that transmute to higher innovation output for the firm. however, owners who do not consider their firms as family firms are unable to reap the benefits of relationships between employees and firm innovation. limitations our findings have significant implications for small firms, especially for firms with fewer than 60 employees. nevertheless, we caution readers in interpreting our findings because of limitations associated with the study. sample size is a limitation of this study. limited sample size constrained our choice of statistical methods available to test our study models and hypotheses. we encourage scholars to test these relationships using a large sample of small firms to reconfirm the findings. a second limitation of the study is the geographical location of the sample firms, in the southwestern part of the united states. since all our sample firms are from a specific area of the nation, readers should be cautious in generalizing our findings to small 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(2007). time horizon, costs of equity capital, and generic investment strategies of firms. family business review, 20(1), 1-15. reproduced with permission of the copyright owner. further reproduction prohibited without permission. table of contents anonymous journal of small business strategy; spring/summer 2006; 17, 1; abi/inform complete pg. 0_3 table of contents stakeholder theory and the entrepreneurial firm ronald k. mitchell texas tech university boyd cohen university of victoria 17 after receiving financing do inc. 500 companies continue to utilize their business plan? anthony t. allred weber state university h. lon addams weber state university 27 is the business model a useful strategic concept? conceptual, theoretical and empirical insights michael morris syracuse university minet schindehutte syracuse university james richardson university of hawaii jeffery allen university of central florida 51 cognitive and affective service marketing strategies for fine dining and restaurant managers raj arora university of missouri kansas city joe singer university of missouri kansas city 63 developing a supply chain strategy for a midsize restaurant chain lifang wu xavier university timothy j. kloppenborg xavier university james p. walsh the honeybaked ham company of ohio 77 restaurant revenue management: an investigation into changing standard operating procedures to maximize revenue jeff shields university of southern maine 87 book review strategy-specific decision making: a guide for executing competitive strategy by william forgang reviewed by: w. calvin fields wingate university reproduced with permission of the copyright owner. further reproduction prohibited without permission. restaurant revenue management: an investigation into changing ... shields, jeff journal of small business strategy; spring/summer 2006; 17, 1; abi/inform complete pg. 77 sfeltegy restaurant revenue management: an investigation into changing standard opera ting procedures to maximize revenue jeff shields university of southern maine jshields@usm.maine.edu abstract changing the standard operating procedures that are used for serving customers during periods of high versus low demand is a method of revenue management employed in restaurants. this study examined the extent to which this practice is used in restaurants that are primarily small businesses and examined its effects on revenue generation. the results of a survey of 85 restaurants provide the first known evidence that changing standard operating procedures is common among these small businesses. findings support the hypothesis that greater changes in standard operating procedures between periods of high and low demand are significantly and positively associated with revenue generation. seven of every ten restaurants are small businesses (national restaurant association, 2005). an important segment of the economy, these eating establishments generate sales approaching $150 billion annually (u.s. census, 2002). revenue management is a practice employed in restaurants that involves the management of demand and price in order to maximize sales revenues from capacity (kimes & chase, 1998). within the context of revenue management, a variety of methods that restaurants can use to manage customer demand and price have been proposed (kimes, chase, choi, lee, & ngonzi, 1998). a field study of a single restaurant led to some specific guidelines that may be employed to increase the rate at which revenue is generated from a restaurant's capacity (kimes, barrash, & alexander, 1999). these recommendations include a call for restaurants to change the standard operating procedure (sop) used for serving 77 customers during periods of high demand from the sops normally in use during periods of low demand. the extent to which restaurants that are primarily small businesses engage in the recommended revenue management practice of switching sops for serving customers between periods of high and low demand is currently unknown. the results of a large sample investigation would offer empirical evidence on the prevalence of the practice and, more importantly, its effects on restaurant revenue generation. large sample empirical support for the kimes, barrash, & alexander ( 1999) recommendation would extend the literature on revenue management practices in restaurants and would provide important tested guidance to restaurant owners and managers seeking to improve their business practices. to address this need, the purpose of this research was to investigate the use and reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy results of the practice of switching sops for serving customers between periods of high and low demand in small business restaurants. the study examines the research question: to what extent is the revenue management method of changing sops between periods of high and low demand used? the research then tests the hypothesis that restaurants with higher levels of changes in sops will have higher rates of revenue generation. in the following section, the literature on restaurant revenue management is reviewed, followed by the hypothesis that guided the study. after presentation of the methods employed, the results from the survey of 85 restaurant decision-makers are presented. finally, the implications of this research are discussed. literature review revenue management is defined as "selling the right product to the right customer at the right time for the right price" (smith, leimkuhler, & darrow, 1992, p.8). it developed in the airline industry and is employed a range of industries including communications, hotels, and shipping (mcgill & van ryzin, 1999; secomandi, abbott, atan, & boyd, 2002) the central objective of revenue management is maximizing the revenue generated from capacity (mcgill & van ryzin, 1999). there are two important conditions for its practice. the first is that a business's output must be perishable (weigand. 1999). for example, an airline has a perishable product (i.e., a flight on a given date and time to a given destination flies only once). the second condition for the practice of revenue management is that a business should have a relatively fixed capacity (weatherford & bodily, 1992). continuing with the previous example, an airline has a fixed capacity in its investment in a fleet of airplanes. revenue management holds that given fixed capacity, a business 78 vol. 17, no. 1spring/summer2006 can increase its profitability by maximizing the revenue generated from that fixed capacity. restaurants have a perishable product and have relatively fixed capacity. revenue management for restaurants has also been defined as "selling the right seat to the right customer at the right price and for the right duration" (kimes, 1999, p.17). kimes et al. ( 1998) developed a framework for the application of revenue management in restaurants that involves managing demand in order to maximize the revenue that 1s generated from a restaurant's capacity. the framework for the application of revenue management in restaurants suggests that restaurants can manage demand by managing meal duration. meal duration is the length of time that a customer occupies a seat in a restaurant (kimes et al., 1998). meal duration is central to restaurant revenue management because it governs the availability of seats (i.e., seating capacity) (kimes, 1999). during periods of high demand, a shorter meal duration facilitates serving more customers. reducing variation in meal duration increases its predictability. with more predictable duration, restaurant management can make more effective reservation and seating decisions (e.g., which reservations to book in terms of the time and the number in the party, when to seat waiting customers) (kimes, 1999; kimes, et al., 1999; kimes & chase, 1998; kimes et al., 1998). during periods of high demand, effective reservation and seating decisions can reduce the amount of time that seats are empty, better utilizing capacity. standard operating procedures in a field study of restaurant revenue management, kimes et al. ( 1999) developed recommendations for the application of restaurant revenue management concepts in practice. these recommendations include changing the sop regarding how customers are served during periods of high versus low reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy demand to make meal duration more predictable. during periods of low demand, the objective is to increase customers' average check and thus increase revenue. during periods of high demand, the objective is to increase the number of customers served and, thus, increase revenue. the changes in sops that kimes et al. ( 1999) recommend include the range of the duties of the host(ess), menu variety, prices and promotions, suggestive selling, and presetting tables with snacks. each of these is discussed below. the sop of using ofa host(ess) with reduced duties during periods of high demand facilitates the more effective management of operations. during a period of high demand, a host(ess) with reduced duties will be more effective in managing those aspects of operations that affect both the length of and the variation in meal duration (e.g., greeting customers, managing the waiting list, and tracking table progress). a host(ess) with additional duties during a period of high demand (e.g., answering the telephone, filling take out orders) will be less effective in managing those areas of operations that affect revenue generation. another aspect of sop that can be changed between periods of high versus low demand is the menu. a streamlined menu will reduce the time required to fill orders and thus allow more customers to be served during periods of high demand (kimes et al., 1999). this reduces the variation in and length of meal duration. restaurants can also change their menu during high demand periods and feature a menu with higher prices. conversely, promotions in the form of discounts should only be used during periods of low demand to increase revenue by switching price sensitive customers from using the restaurant's capacity during periods of high demand to using it during periods of low demand (kimes et al., 1999). suggestive selling is another sop that can be changed between periods of high and low demand to increase revenue generation. 79 vol. i 7, no. i spring/summer 2006 suggestive selling (e.g., suggesting appetizers, dessert) will increase meal duration. during periods of low demand, suggestive selling will increase the rate of revenue generation by increasing the average check. in contrast, during periods of high demand, suggestive selling through increased meal duration will reduce the number of customers who can be served and, thus, the rate of revenue generation. the sop of presetting the table with snack items can be changed between periods of high versus low demand. customers who order appetizers and/or dessert will have a longer meal duration than customers who do not order appetizers or dessert. during periods of low demand, snacks should only be served after customers have placed their order so snacks do not reduce the demand for appetizers and, hence, revenue. during periods of high demand, snacks should be preset to reduce the demand for appetizers. this should reduce meal duration and increase the rate of revenue generation by increasing the number of customers who can be served during periods of high demand. based on the review of the literature, this study first examines the research question: to what extent is the revenue management method of changing sops between periods of high and low demand used? the field case evidence and recommendations for the revenue management practice of changing sops in restaurants that were presented by kimes et al. (l 999) then suggest the following hypothesis that was used to further guide the research. hypothesis: restaurants with higher levels of changes in sops between periods of high and low demand will have significantly higher rates of revenue generation. methodology the sample of restaurants was generated from a list of full service restaurants provided by a new england state chapter of reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy the national restaurant association. each restaurant was given a number and a sample of 589 restaurants was then drawn through the use of a table of random numbers. the data were collected by the use of a semistructured questionnaire. the questionnaire mailing methods are based on dillman (2000) total design method procedures with four timed, hand-signed mailings. five hundred and eighty-nine questionnaires were mailed to restaurant owners and managers. a total of 254 replies were received for an overall response rate of 43 percent. of the 254 responses, 85 were usable responses from full service restaurants that use hosts(esses). because the indepenpent variable, differences in sops, are predicated on the presence of a host(ess), the sample was limited to these restaurants. no evidence was found that there were any significant differences between early and late responders. measures the full service status of a restaurant was measured through a question that asked respondents if their restaurant was a full service restaurant. the question used the definition of a full service restaurant from the u.s. economic census (u.s. census bureau, 1997). the independent variable was differences in sops. measures of the sops used during periods of high and low demand were developed from kimes et al. ( 1999). these eleven items included: "servers do suggestive selling," "we decline reservations," "a host(ess) greets customers," "a host(ess) tracks the flow of tables," "a host(ess) answers the telephone," "a host(ess) fills take out orders," "a host(ess) seats customers," "we offer a streamlined menu"; "we charge higher than normal prices," "we offer promotions," and "we preset tables with snacks." respondents were asked to respond to single-item, seven-point likert-type scales, 80 vol. 17, no. 1 spring/summer 2006 with response categories for items ranging from "never" to "always." two identical sets of questions with respect to each of the eleven sops were given to respondents. the first set of questions asked respondents to respond to the extent to which a given sop was used in their restaurant during busy periods. the second set of questions asked respondents to respond to the extent to which the same sop was used in their restaurant during slow periods. difference scores for each sop were then computed by subtracting the response for the slow period from the response for the busy period. these difference scores for each sop were then summed to get a total difference score, sopdiff. sops that are done more in periods of high (low) demand than in periods of low (high) demand will have a positive (negative) value. for purposes of this study, restaurant revenue generation was operationally defined as meal duration and the number of table turns, consistent with kimes ( 1999). meal duration was measured according to the responses to the open-ended question: "during a typical weekend dinner period, how many minutes do you consider to be: a) a short meal duration, b) an average meal duration, and c) a long meal duration." a measure of the range of meal duration was defined as the difference between responses for long and short meal duration. this measure of the range of meal duration was used as a surrogate measure for the variation in meal duration. the number of table turns was measured as the response to an openended question asking, "how many times do you turn over your tables during a typical weekend dinner period?" analysis and res ul ts descriptive statistics for the dependent and independent variables are shown in table 1. sixty-one percent of the sample was male and 39% was female. the average age of the sample restaurants ranged from 11 to 15 years, with average sales revenues in 2002 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy ranging from $600,000 to $799,000. the average number of seats in the sample of restaurants was 141, serving an average of vol. 17, no. 1 spring/summer 2006 202 dinners with the average number of paid employees ranging from 16 to 30. seventy percent of the respondents reported that their restaurants take reservations. table i descriptive statistics (n = 85) variable theoretical actual range range average meal na 35 .00duration 150.00 number of na 0.506.00 table turns range of na 20.00 meal 190.00 duration sopdiff -6666 -6.00 26.00 the research question addressed by this research was, to what extent is the revenue management method of changing sops between periods of high and low demand used? two-tailed t-tests were used to assess the significance of mean differences in the extent to which individual sops are used between periods of high and low demand. a test value of zero was used to represent no difference in the extent to which sops are used between periods of high and low demand. an sop that was more extensively used during periods of high rather than low demand would have a positive difference score. as shown in table 2, the mean differences between busy and slow period sops were significantly different from zero (p<.05) for the following sops: decline reservations, host(ess) answers phone, host(ess) greets customers, host(ess) seats customers, host(ess) tracks tables, offer promotions, and suggestive selling. in addition, the mean differences for the sops preset table with snacks and streamlined menu were marginally significant (p<. i 0). all of the significant sop differences were positive except offer promotions and suggestive selling, which were negative. 81 mean median standard deviation 72.70 60.00 28 .94 2. 86 3.00 l.15 64.63 60.00 31.85 3.44 2.00 6.18 the hypothesis was tested using three simple regression analyses with the variable sopdiff as the independent variable and the measures of the rate of revenue generation as the respective dependent variables (i.e., average meal duration, range of meal duration and table turns). sopdiff was not significantly associated with average meal duration (f = 0.10, p = . 75), see table 3 panel a. however, sopdiff was a significant predictor of the range of meal duration (f = 4.03, p=.05) with an adjusted r2 = .04, see table 3 panel b. the regression coefficient was significant and negative (f = -0.24, p=.05). sopdiff also was a significant predictor of table turns (f = 6.42, p = .01) with an adjusted r2 = .07, see table 3 panel c. the regression coefficient for sopdiff was significant and positive (f= 0.29,p = .01). discussion the results of this study provide large sample empirical evidence that predominantly small business restaurants do practice reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy vol. i 7, no. i spring/summer 2006 table 2 sop differences between periods of high and low demand ( n = 85, test value= 0) variable mean t p charge higher prices 0.08 1.06 .29 decline reservations 1.79 7.71 .00 host(ess) answers phone 0.29 2.12 .04 host(ess) fills takeout orders -0. 10 -0.66 .51 host(ess) greets customers 0.57 3.79 .00 host(ess) seats customers 0.63 4.02 .00 host(ess) tracks tables 0.50 2.78 .01 offer promotions -0.29 -2.14 .04 preset tables with snacks 0.20 1.77 .08 streamlined menu 0.18 1.80 .08 suggestive selling -0.44 -3 .19 .00 table 3 regression analysis ( n = 85) panel a: dependent variable average meal duration independent regression t for variable ffor adj. r2 variable coefficient equation sopdiff -.04 -0.38 0.15 .01 panel b: dependent variable range of meal duration independent regression t for variable f for equation adj. r2 variable coefficient sop di ff -0.24 -2.15 .. 4.64 .. .04 panel c: dependent variable table turns independent regression t for variable f for equation adj.r variable coefficient sop di ff 0.29 2.69 ... 7.2° .. .07 level of significance ... = s .01; .. = s .os; and'= s .io so during periods of high demand than in periods of low demand, restaurants are declining reservations and the host(ess) is greeting customers, seating customers, and tracking the occupancy of tables. these changes in sops allow the host(ess) to better manage the flow of customers. in contrast, during periods of low demand, restaurantsare offering promotions and engaging in suggestive selling. the use of these revenue 82 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy management strategies during periods of high and low demand is consistent with the recommendations of kimes et al. ( 1999). the hypothesis that higher levels of change in sops between periods of high and low demand will be associated with higher rates of revenue generation was supported. there is a significant relationship between changes in sops and both the range of meal duration and the number of table turns even though average meal duration does not vary significantly. as expected, changes in sops are inversely related to the range of meal duration. moreover, changes in sops are positively associated with the number of table turns. the narrower range of meal duration and higher levels of table turns are indicators of the effective management of capacity among the sample restaurants. these results suggest specific actions that restaurant owners and managers can take. first, in order to change sops in response to demand, they must first track demand so that they have a systematic forecast by time of day and day of the week to guide their adjustments. tracking demand also entails tracking their reservations, both the accepted and declined reservations as well as the "no shows." in addition, they should track their walk-in customers, including walk-in customers who leave before being seated. with these measures of demand, restaurant operations can be planned to adjust to changes in that demand (sill, 1991 ). second, restaurant owners and managers can gain additional benefits by performing analysis of their existing operations with an eye to changing them to make them more efficient. this analysis would involve measuring the times required to perform the basic service processes that comprise meal duration (e.g., time to greet, seat, service drinks, serve entree, bring and settle the check, and bus and reset the table). with information on the mean and variance, the management can focus on reducing the length and variation in the time to perform 83 vol. 17, no. 1spring/summer2006 those processes, especially those with high variance relative to the mean (kimes, 2004). lastly, in order to get the most out of managing existing capacity, owners and managers can analyze their operations to insure that they maintain a balanced line during periods of high demand (sill, 1991; sill and decker, 1999). if the rate of seating customers exceeds the rate at which the wait staff and the kitchen can serve them, then bottlenecks will form and stay throughout tperiods of high demand. this may decrease the rate of revenue generation. further, it is important to manage the transition from periods of low demand to periods of high demand and then back to avoid having underutilized capacity. using flexible hours and staggered shifts for employees may assist this effort (sill and decker, 1999). the three actions suggested here (i.e., tracking demand, analyzing service processes, and maintaining a balanced line) can help restaurant decision makers more effectively manage capacity to avoid the financial difficulties that can result from its underutilization (muller, 1999). this research has several limitations which should be noted. the research was conducted in a single geographic location (i.e., region) and should be replicated to enhance the generalizability of its findings. in addition, this study employed a sample of full-service small business restaurants and the implications of the results are, therefore, limited to these restaurants. different results might be found in large chains, fast food, or limited service settings. future research should investigate other aspects of restaurant revenue management in small business restaurants. for example, restaurant revenue management may require staff training in order to be successfully implemented. future research may investigate levels of training and turnover and what effects they have on the rate of revenue generation. further, revenue reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy management is managing capacity in response to changes in levels of demand. future research might investigate if and how capacity utilization is analyzed in restaurants. do restaurant owners and managers analyze their processes? if so, what methods do they use and how do they employ information they gain from the analysis? do they try to ensure that their seating rates match the rates at which their wait staff and kitchen can serve customers in order to maintain a balanced line? finally, making adjustments to changes in demand also occurs in relation to seasonal swings in the restaurant business. what changes in capacity do restaurants make in adjusting to swings in demand associated with seasonality and how similar or different are these strategies to those of restaurant revenue management as currently formulated in the revenue management literature? the results of this research extend prior research by providing large sample empirical evidence on the practice and effects of restaurant revenue management. this evidence is consistent with the framework and recommendations of kimes et al. (1998) and kimes et al. (1999) and demonstrates its application in restaurants that have a small business rather than a corporate or large chain orientation. the revenue management methods examined in this study and restaurant revenue management in general provide small business restaurant owners and managers with a means to avoid the costly mistake of underutilizing their capacity. by adjusting sops in response to demand, they can increase revenue without increasing their restaurant's existing capacity. in conclusion, this research has provided important first evidence that restaurants that are primarily small businesses use the restaurant revenue management method of changing sops. these findings provide a basis for restaurant managers to take a systematic look at sops. in short, the findings demonstrate that small business restaurants can use the strategy of "selling 84 vol. 17, no. i spring/summer 2006 the right seat to the right customer at the right price and for the right duration" (kimes, 1999, p.17) to increase revenues. references dillman, d.a. (2000). mail and internet surveys: the tailored design method (2nd ed.). new york: john wiley & sons, inc. kimes, s.e. (2004). restaurant revenue management: implementation at chevys arrowhead. cornell hotel and restaurant administration, 45( i), 52-67. kimes, s.e. (1999). implementing restaurant revenue management: a five-step approach. cornell hotel and restaurant administration quarterly, (june), 16-21. kimes, s.e, barrash, d.i., & alexander, j.e. ( 1999). developing a restaurant revenue-management strategy. cornell hotel and restaurant administration quarterly, (october), 18-29. kimes, s.e. & chase, r.b. ( 1998). the strategic levers of yield management. journal of service research, 1(2), 156-166. kimes, s.e., chase, r.b., choi, s., lee, p.y., & ngonzi, e.n. (1998). restaurant revenue management: applying yield management to the restaurant industry. cornell hotel and restaurant administration quarterly, (june), 32-39. mcgill, j.i. & van ryzin, g.j. (1999). revenue management: research overview and prospects. transportation science, 33(2), 233-256. muller, c.c. ( 1999). a simple measure of efficiency. cornell hotel and restaurant administration, 40(3), 31-37. national restaurant association (2005). restaurant industry facts. retrieved march 28, 2005, from www.restaurant. org/research/ind _glance.cfm secomandi, n., abbott, k., atan, t., & boyd, e.a. (2002). from revenue management concepts to software reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy systems. interfaces, 32(2), 1-11. sill, b.t. (1991). capacity management: making your service delivery more productive. cornell hotel and restaurant administration, 40(3), 76-87. sill, b. t. and decker, r. ( 1999). applying capacity-management science. cornell hotel and restaurant administration, 31 ( 4 ), 22-30. smith, b.c., leimkuhler, j.f., & darrow, r.m. ( 1992). yield management at american airlines. interfaces, 22( 1 ), 8-31. u.s. census bureau 2002 economic census accommodation and food services (sector 72). retrieved august 1, 2005, from www.census.gov/econ/census 02/guide/indrpt72.htm u.s. census bureau 1997 economic census accommodations and food service (sector 72). retrieved january 9, 2003, from www.census.gov/ epcd/ec97 i def/72221.htm weatherford, l. & bodily, s. (1992). a taxonomy and research overview of perishable-asset revenue management: yield management, overbooking, and pricing. operations research, (september-october), 831-844. weigand, r.e. (1999). yield management: filling buckets, papering the house. business horizons, (septemberoctober), 55-64. vol. 17, no. 1 spring/summer 2006 85 management policy in franchising operations: a preliminary study chun-cheong wan robert t. justis paul busch louisiana state university abstract during the past few decades franchising has emerged as one of the fastest growing methods of doing business in the world. this article investigates the concept of climate in franchising stores and how that relates to the stores'erformance. worl context, participation and workgroup were identified as important climate factors influencing store performance.'roper management of the work climate should enhance franchise store performance. introduction for years, the relationship between organizational climate and human behavior has been one of the focal areas of management research because human behavior has a strong effect on organizational performance. glick indicated that the study of organizational climate and its impact, on motivation and leadership would influence the development of management theory in the future (4). obviously, organizational climate is a useful managerial tool to diagnose employees'erceptions of the work environment and its relationship with other organizational variables..however, past research on climate has mainly taken place in large business or public organizations. the concept of climate has rarely been applied in small-scaled business operations. the major objective of this paper is to explore the concept of climate and its relationship with performance in small-scaled franchising stores. also, the implications of this relationship for management policy are discussed. background the importance of perception of the work environment to organizational behavior and performance has been emphasized in past decades. generally, the perception of the work environment is referred to as the climate of the work setting. organizational climate is a global concept. lt embraces almost all organizational variables and characteristics of both physical and non-physical nature. litwin and stringer defined organizational climate as a set of measurable properties of the work environment, perceived directly or indirectly by the people who work in this environment (10). the perceived situation is considered of greater effect than what is objectively the case (1). 52 climate is significantly related to many organizational variables, including motivation (10), communication (11), job satisfaction (7; 9; 14), client satisfaction (13), and performance (6; 7; 14). also, dastmalchian suggested that the design of appropriate climate and structure in response to environmental pressures may be considered as complementary strategies in management (2). there are three different levels identified in the measurement of organizational climate. they are based on different units of analysis, namely, individual, group or subunit, and organization. however, it is clear that the construct of climate measurement is intrinsically psychological, i.e., on an individual level (6). other levels of analysis are merely aggregations of individual scores. subunit climate is the aggregate result of individuals'limate perceptions within the subunit. similarly, organizational climate is deemed as the aggregate results of individuals'limate perceptions within the organization. subunit climate allows researchers to look into the management issues at subunit level while organizational climate is investigated if organizational attributes are of interest (3). that means, the level of aggregation depends on the nature of research. aggregate climate is more appropriate than organizational climate in organizational research because multiple climates exist in an organization (3, 15). in other words, people working in different divisions of an organization may experience different climates. this would be due to different settings and/or different perceptions. therefore, the more divisions an organization has, the m're diverse subunit climates may be. hypotheses the subjects of this study were outlets of a franchising chain. in general, franchising operations are characterized by a large number'of outlets which are operated by different franchisees or store managers. there are, however, centralized policies, standardized training and consistent product quality control. because there is no past research addressing climate measured at store level, we suggest a proposition: multiple climates exist at the store level, i.e., individual stores are not of the same climate. from the previous discussion on climate, if multiple store climates exist, we hypothesize: there is a significant relationship between store climates and performance. usually, franchisors emphasize franchisee-employee and employee-customer relationships because such relationships are crucial to the success of the business. justis and judd highlighted that employees'ttitudes are very important to customer satisfaction and the perceived quality of the business (b). also, they indicated that "from the employee's perspective, the franchiseeemployee relationship revolves around sufficient training, pay, and incentives." this encourages us to formulate our second and last hypothesis: the climate factor concerning rervards and organizational characteristics has more impact on store performance than other climate factors. method sample data for this study were collected within outlets or stores of a national fast-food franchising chain. the corporate headquarters classified sales performance of stores into three categories —high, medium and low. twenty stores of each performance category, i.e., a total of sixty stores, were selected. for each store, ten employees were invited to participate in the 53 study. only stores from which more than 4 valid responses were received were included in the analysis. therefore, the final sample was made up of 270 respondents from 52 stores of which 19 were rated high, 16 medium, and 17 low in performance, respectively. measurement of climate major instruments used in past research on organizational climate were reviewed. litwin and stringer proposed nine a priori climate scales, namely, structure, responsibiility, reward, risk, warmth, support, standard, conflict and identity (10). jones and james developed a psychological climate questionnaire consisting of thirty-five a priori composites which could be grouped into four categories, namely, job and role characteristics, characteristics of leadership, workgroup characteristics, and subsystem and organizational characteristics (6). joyce and slocum found that there were six climate dimensions by factor analysis (7). these dimensions were rewards, autonomy, motivation to achieve, management insensitivity, closeness of supervision, and peer relations. after reviewing the aforementioned measures and considering the sample for this study, which was made up of employees in the fast-food industry with limited work space and spare time, a simplified climate questionnaire was designed. there were 16 items, describing the following work environment related variables: structure, rewards, peer relations, decision making, commitment, responsibility, expression of opinion, grievance handling, support, delegation, participation, innovation, work environment, standard, rules and communication hindrance. the detail of each item is shown in appendix 1. responses were measured by 7-point likert scales. factor analysis with varimax rotation was used and four factors were derived. the explained variance was 52.2%. the score of each climate factor was then calculated by taking the mean of the scores of items comprising the factor. the internal consistency reliability of each factor was estimated by coefficient alpha. the factor structure and the reliabilities of respective factors are shown in table 1. the four derived factors are: (1) work context (5 items): the way in which respondents perceive the structure, the reward system, the work environment, and the expected standard of performance of the organization; (2) workgroup (4 items): the way in which respondents perceive the attitudes of coworkers; (3) participation (4 items): the way in which respondents perceive the attitudes of the organization toward their opinion; and (4) autonomy (3 items): the way in which respondents perceive the opportunity to work independently and the possible problems encountered when working independently. all factors are of acceptable reliability except the last one. the coefficient alpha of autonomy was only .21. it is too low even for an explored factor (12). 54 table 1. factor structure of climate (only factor loadings above .40 are shown below) factor factor factor factor 1 2 3 4 structure .75 rewards .78 peer relations .59 decision making .46 commitment .81 responsibility .73 expression of opinion .49 grievance handling .78 support .68 delegation .42 participation .42 .44 innovation .59 work environment .57 .44 standard .64 rules .57 communication hindrance .70 eigenvalue 4.75 1.28 1.20 1.12 variance (88) 29.7 8.0 7.5 7.0 coeff. alpha .70 .75 .59 .21 results formation of store climates store climate factors were determined using multivariate and univariate analyses of variance. these analyses help assess the power of differentiation of climates between stores. only factors of significant differences among stores will be considered for further analysis. these results are shown in table 2. table 2. verification of store climate factors climate factor d.f. f p multivariate: 204,1234 1.747 .000 univariate: 51,313 work context 2.670 .000 workgroup 2.705 .000 participation 1.579 .011 autonomy 1.399 .046 55 according to the levels of significance found in the analyses of variance, all factors are acceptable for cross-store analysis. this supports our proposition that multiple climates exist at store level. in other words, stores are operated under different climates. however, the factor "autonomy" was dropped from further analysis because of the low reliability (.21). ~ pearson correlation and multiple regression were used to test the hypotheses in the study. the pearson correlations between store performance and climate factors are shown in table 3. table 3. pearson correlations between store performance and climate factors 1 2 3 1. work context 2. workgroup .68** 3. participation .58** .45** 4. store performance .30* .13 .24* * p & .05; ** p & .01 there was no evidence to reject the first hypothesis that there is a significant relationship between store climates and performance. two climate factors were found to be significantly correlated with performance. these two factors are work context and participation. there was no significant correlation between performance and workgroup. this indicates that store performance is associated with how the corporation designs the organization and how management deals with employees'pinions. on the other hand, the attitudes of coworkers do not affect store performance. in the multiple regression analysis, store performance was taken as the dependent variable and three climate factors as independent variables. the result of the analysis is shown in table 4. the result shows that only work context is significant in the regression model. the other two factors, which seem to be more human oriented, were not iound significant here. work context concerns the structure and the reward system of the organization. it is obvious that the second hypothesis cannot be rejected. climate factor concerning rewards and organizational characteristics, i.e., work context in this study, have more impact on store performance than other climate factors. table 4. multiple regression of climate factors on store performance beta dependent variable: store pertormance independent variable: work context .303 (p&.05) workgroup -.138 (n.s.) participation .098 (n.s.) r-square = .092 f = 5.06 (p ( .05) 56 discussion this study shows that the concept of climate can be applied to the store level, i.e. the frontier business line, of the franchising operations. three reliable climate factors were identified. these factors are work context, workgroup and participation. work context and participation were found correlated with store performance. moreover, work context was considered to have greater impact on store performance than the other climate factors. it is understandable that workgroup was not correlated to store performance because franchising operations rely more on process and product quality control than labor. therefore, peer relations and committed workforce have less impact than structure and system on store performance in this study. it is suggested that the management of franchising operations establish a clear structure and a fair reward system in the franchise system. but more important is giving'employees in the stores a clear explanation of the management practices in the system because employees'erceptions and reactions are very crucial to the success of the business. franchisees oi managers of stores should assume their roles as information conveyors. failure'to convey the information from the system to employees biases employees'erceptions of, their work environment. the result can be disastrous. therefore, franchisees or store managers'are riot only required to be good quality controllers, but also good coworkers who share information with employees promptly and correctly, and who are willing to accept employees'articipation in store management. the simplified instrument used in this study restricted the involvement of other organizational or psychological variables in the analysis. in future study, consideration of other variables in climate-performance relationship would generate more insights into store management. also, replication of the present study in other franchising operations for generalization of results is encouraged. references 1. campbell, j. p., dunnette, m. d., lawler, e. e., iii and weick, k. e., jr., managerial behavior, performance, and effectiveness, (new york: mcgraw-hill, 1970). 2. dastmalchian, a., "environmental characteristics and organizational climate: an exploratory study," journal of management studies, vol. 23, no. 6, 1986, pp. 609-633. 3. hodgetts, r. m. management: theory, process, and practices, (4th ed.), (orlando, fl: academic press, 1986). 4. glick, w. h., "conceptualization and measuring organizational and psychological climate: pitfalls in multilevel research," academy of management review, vol. 10, 1985, pp. 601-616. 5. james, l. r., "aggregation bias in estimates of perceptual agreement," journal of applied psychology, vol. 67, 1982, pp. 219-229. 6. jones, a. p. and james, l. r., "psychological climate: dimensions and relationships of individual and aggregate work environment perception," organizational behavior and human performance, vol. 23, 1979, pp. 201-250. 57 7. joyce, w. f. and slocum, j. w., jr., "collective climate: agreement as a bias for defining aggregate climates in organizations," academy of management journal, vol. 27, 1984, pp. 721-742. 8. justis, r. and judd, r., franchising, (cincinnati, ohio: south-western, 1989). 9. lafollette, w. r. and sims, h. p., jr., "is satisfaction redundant with organizational climate?", organizational behavior and human performance, vol. 13, 1975, pp. 257-278. 10. litwin, g. h. and stringer, r., motivation and organizational climate. (cambridge: harvard university, 1968). 11. muchinsky, p. m., "organizational communication relationship to organizational climate and job satisfaction," academy of management journal, vol. 20, 1977, pp. 592-607. 12. nunnally, j. c., psychometric theory, (new york: mcgraw-hill, 1978). 13. o'driscoll, m. p. and evans, r., "organizational factors and perceptions of climate in three psychiatric units," human relations, vol. 41, 1988, pp. 371-388. 14. pritchard, r. d. and karasick, b. w., "the effects of organizational climate on managerial job performance and job satisfaction," organizational behavior and human performance, vol. 9, 1973, pp. 126-146. 15. schneider, b., "organizational climates: an essay," personnel psychology, vol. 28, 1975, pp. 447-479. appendix i description of climate itf.ms 1. structure: the organizational structure is clear and the job is well defined. 2. rewards: my organization emphasizes capability and performance, and has a fair reward and promotion system. 3. peer relations: relationship between people inside my organization is good and the working atmosphere is harmonious. 4. decision making: my organization prefers making decisions smoothly and quickly to having too many different opinions. 5. commitment: employees are loyal to the company, have a sense of belonging and are willing to strive for the organization's objectives. 6. responsibility: people working inside my organization have a sense of responsibility at their work. 7. expression of opinion: my organization emphasizes personal feelings and encourages expression of opinion. 8. grievance handling; grievances are handled in an unbiased manner by the management. 9. support: employees are well developed in their jobs and receive trust and support in their work. 10. delegation: my organization has a clear delegation and encourages employees to work independently. 58 11. participation: employees are given an opportunity to participate in decisions that affect them. 12. innovation: my organization is aggressive and willing to take a risk with new ideas. 13. work environment: the working environment is good and comfortable. 14. standard: my organization demands a high standard of performance. 15. rules: there are many regulations and rules, even red-tape, in carrying out a task. 16. communication hindrance: communication between superior and subordinates is not encouraged. 59 stvkvteg y book review the origin and evolution of new businesses by amar v. bhidi oxford university press, 2000, 412 pages reviewed by ron cook, rider university the origin and evolution of new businesses uses inductive research in an exploratory study of 100 founders of inc. 500 firms to help conceptualize the field of entrepreneurship. it compares the new venture creation environment with large company circumstances. the author also incorporates findings from a mail survey of harvard alumni and from research conducted by his students. the author poses three general sets of questions that drove his research: 1. why do most entrepreneurs face capital shortages? why do individual entrepreneurs do less research on initiatives than larger firms? what problems does this create, and how are they solved? 2. what changes are needed so entrepreneurial startups can grow into large firms? what individual traits are needed for growth? what problems are faced in growing a firm that were not present in the startup phase? 3. how do economic conditions affect startups versus larger companies? what are economic consequences of the transition from a startup to a mature corporation? it is important to note that the main focus of the author's research is on what he terms "promising startups." these are firms that have growth potential and may evolve into large, mature companies. these firms are also known as gazelles (longenecker, moore dt petty, 2003), or entrepreneurial ventures (hodgetts dt kuratko, 1998). regardless of the term, they constitute a small percentage of all startups since most small firms have low growth potential. hence, his book is a study of a subset of startups, as exemplified by the inc. 500 firms, and is not indicative of the majority of companies. the author introduces a new concept —the investment requirements, irreducible uncertainty, and likely profit frameworkand uses it to explain the behavior dilferences that occur when comparing startups versus evolving businesses versus large corporations (different levels of uncertainty, investments and profit potential). the book describes how moving from a promising startup to a transitional business to a large business requires different skill sets. for example, founders of new ventures face significant capital constraints and great uncertainty. 117 journal ofsmall business strategy vol. /3, no. l springlsummer 2002 they rely on opportunistic adaptation to unexpected events to prosper. this adaptation is described as the ability to be agile and to shift focus as the marketplace changes. as a result, the firm grows, it commits more resources to less uncertain initiatives and, therefore, the opportunism strategy evolves towards more systematic planning for the future. by describing the reliance on adaptation in the early stages of startups (instead of formal planning), the author helps answer the question of why don't many startups plan. in doing so, bhidd provides a blueprint for when planning begins to make sense. his rationale is that entrepreneurs starting an uncertain business with limited funds can' afford to devote much time or money on research as the modest profit potential and high uncertainty of the venture limits the expected value of the research. he also found that entrepreneurs oaen have lower cost structure (than larger firms) and less opportunity costs relating to failure. hence, they tend to think, "heads i win, tails i don't lose much," and simply plunge in. the author then compares promising startups with large corporate initiatives, marginal startups (which have little chance of gaining significant size or profitability), venture capitalbacked start-ups, and revolutionary ventures (which utilize a large-scale innovation). these archetypes were chosen for their distinctive pattern and, by the author's admission, are not a comprehensive taxonomy. one value of this work is in understanding the process in which promising startups can become growth ventures and then ultimately, large mature companies. part of this value is understanding the parameters of each stage, and also understanding what is needed to move forward to the next stage. given that there are about 12 million fulltime ventures in the u.s., with the vast majority of them being very small, and with over 750,000 new ventures started each year (dennis, 2000), what is so different about the promising startups, as represented by the inc. 500 firms? especially when compared to marginal startups? part of the answer is the hospitable markets promising startups pursue. the most popular businesses for all startups are construction, restaurant, and retail, and they are not generally found on inc. 500 lists. the next reason is the uncertainty factor of future profits. marginal ventures and promising startups tend to have a similar low value payoff initially, but the uncertainty in promising startups'rofit potential creates a small chance that profitability will be much greater. in mature, highly competitive industries where marginal ventures are oaen found, competition has removed much of the profit uncertainty and reduced the profit potential to a relatively stable, but low level. promising startups also tend to work in turbulent or new markets where they can exploit a lack of information. in summary, promising startups tend to: 1. start ventures in adhoc way, without any systematic effort to find the best possible opportunity. 2. through adaptation, some entrepreneurs find larger opportunities but not systematically. 3. overtime, a firm gains a distinctive bundle of assets that help define their market choices. 4. as a firm grows, it develops a strategic approach. the author argues that turning a promising startu p into a large, long-lived corporation entails a radical transformation, not a simple scaling up. generally, he found an inverse relationship between the investment requirements and uncertainty of new initiatives. inexperienced, little 118 journal of small business strategy vol. l3, no. i springlsummer 2002 to lose entrepreneurs are on one end of the spectrum, and large, mature corporations are on the other end, and there are a variety of firms in between. occasionally, there are outliers (the revolutionary concepts like federal express) but they are the exception rather than the rule. he also explains how vc-backed startups tend to be more systematic in their research than promising startups. bhidb ends his book with suggestions as to new research approaches that his exploratory study has revealed. my enjoyment with this book is based on the conceptual framework developed by the author to shed some light on a segment of the startup universe, i.e., the promising startup. based on his research, he offers an explanation as to the behavior/process that these firms go through as they grow. my main problem with his book is the treatment of the "marginal firms." i believe that because a firm does not grow into a larger firm is not always a bad thing. these firms, offen called lifestyle or income substitutor companies, can provide a good living for the owner, a satisfying way of life, and can do very well while in their niche. finally, since the author focused on one segment of the startup world (promising startups), a better title for origin and evolution of new businesses would be origin and evolution of high-growth potential new firms, since he is really talking about less than 16% of the new ventures out there. however, the conceptual clarity of his research on this target group is excellent and it is worth reading for that alone. references dennis jr., w. j. (2000). nfib small business policy guide. washington, dc: nfib foundation. longenecker, j. g., moore, c. w., & petty, j. w. (2003). small business management: an enirepreneurial emphasis, (12 ed). mason, oh: south-western publishing. hodgetts, r. m., & kuratko, d. f. (1998). effective small business management, (6 ed). fort worth, tx: the dryden press. ronald g. cook is a professor of small businessyentrepreneurship at the college of business, rider university, a certified small business counselor (csbc) and the director of rider's small business institute™. his student consulting projects have won national titles, and he has extensive consulting experience with small firms. his current research interests are busmess plans, and micro-enterprise training. 119 strategy the search for opportunities by small business owners laurence g. weinzimmer fred l. fry bradley university paul c. nystrom university of wisconsin-milwaukee abstract this paperi dentifies specific factors that cause some small business owners to search for new opportunities while other owners choose to remain with the status quo. using concepts drawn pom the literaturesin decision making, entrepreneurship, organization theory, and strategy, we develop a model offactors that stimulateopportunityidentificadon. determinants include characteristics of the industry environment, intentions and personalities of small business owners, and strategic planning activities. the model is then applied to two actual small businesses m order to illustrate its potential usefiilness. implications for small business managers, consultants, and business researchers are discussed. introduction small business owners are, by deflnition, opportunists. they are more tolerant of risk and ambiguity than non-entrepreneurs and more adaptive than managers of larger firms (schere, 1982). small businessownersdifferamong themselves, however, in their propensity for opportunity identification —the search of the competitive environment for unmet needs which can be exploited by a firm. therefore, some small business owners have a very proactive, aggressive strategic orientation while other small business owners have a very reactive, passive strategic orientation. in the entreprencurship literature, the study of opportunity identification has generally been restricted to start-up situations. in particular, studies of entrepreneurial traits, backgrounds and intentions have been directed at dilterentiating between those individuals who start new ventures and those who choose not to start new ventures. the majority of research examining existing firms has been limited to the study of intrapreneurship or the rejuvenation of large and stagnant firms, with the exception of nalyziger, hornsby, and kuratko(1994). however, no integrative research exists that examines factors influencing the search for new opportunities which may allow existing small businesses to grow. opportunistic decisions are critical to growth oriented small businesses for at least two reasons. first, the types of strategies available to most small firms are limited. porter (1980) identifiedthreemajorstrategiesavailabletoorganizations:cost leadership,dilterentiaiion, and i focus. smaller firms, however, seldom have the resources necessary to achieve the economies of scale needed to succeed as cost leaders, and limited resources prevent most sm el i firms from succeeding in product differentiation. however, small firms are agile and can position themselves to adapt quickly to focus on selected target markets or niches since organizational structures of small businesses are generally simple (few divisions), flexible (few layers), and channels ofcommunicationare open (olson, 1986). therefore, small firms have the advantage that they can seize an opportunity before the "window" closes. the second reason to study opportunity search is that small business owners are relatively less risk averse and more receptive to ambiguity than are managers of large firms (schere, 1982). in their classic work, cyert and march (1963) suggested that managers tend to react to problems and avoid uncertainty rather than seek risky opportunities. small business owners, however, tend to be moderate risk takers (olson, 1986). additionally, schere (1982) has shown that small business owners have significantly greater capacity to tolerate ambiguity than do managers in large organizations. given that opportunities have been defined as a special case where decision making is risky and ambiguous(simon, 1977)and given that small firms are flexible and can adapt to change, opportunistic decision making should be of great interest to those small businesses that desire growth and change. therefore, this paper develops an integrative model of opportun istic decision making for small business owners. in particular, the focus of the model is on those factors which can stimulate the search for new opportunities. the model is comprisedofthree parts —dynamicsofthe industry environment, characteristics of the small business owner, and strategic planning activities. a model of the opportunity search decision three areas of research have occupied much of the entrepreneursh'p and small business literature in recent years. the first area examines the environment as an important factor in predictingsmall businessbehavior. the second area investigates personal characteristics and entrepreneurial intentions of those individuals who start ventures. the third area considers planning activities, including planning processes, business plans, organizational structure and venture strategies. this paper examines all three of these areas in trying to identify factors that lead to opportunity identification. the integrative model of opportunistic decision making developed in this paper can be seen in figure i. to perform an investigation of specific variables, this paper used factors found in the entrepreneurship, strategy and organization theory literatures. while the variables used in this paper are not intended to represent all possible predictors of the intensity of opportunity search activities, based on an exhaustive review of the literature from 1986-1995r, these variables represent commonly studied factors used to examine aggressive versus passive strategic orientations. 'he journals revieived include rlcademy of ltdanagement jorrrrral, rldministrative science qrrarterly, entrepreruirrship theory and practice, journal of business i'enturing, journal ofhlanugement, joirrnnl ofsmall business hlanagement, journal ofsmall business strategv, organisation science and s(rntegic thmagemenr journal. 2 figure i integrative model of opportunity identification environmental attributes growth potential change complexity owner characteristics intentions search personality for opportunities strategy factors planning formality environmental scanning networking environmental factors the first set of factors to consider when evaluating the degree to which searches for opportunitiesare actively performed by small business owners is the external environment in which a firm exists. the industry environment can play an important role in determining the need for a small business to identify opportunities. using industry growth potential, degree ofenvironmentalchange,and industrycomplexity,a frameworkcan bedevelopedtodetermire the relevance of different environments on the opportunity-search processes of small businesses. industr growth potential an environment with low growth potential contains minimal resources, constraining or thwarting organizational growth, while an environment with high growth potential is characterized by ample resources, facilitating considerable growth (tushman, 1977). when an environment is characterized by low growth potential, resource scarcity increases the risk to organizations that remain in that environment because resource scarcity 3 will cause competitionto intensify(dess & beard, 1984; porter, 1980). as resources become more scarce, increased intensity in competition leads to a zero-sum game, which means that the only way for a firm to realize growth is to take market share away from competitors (castrogiovanni, 1991). growth for individual firms becomes more difficult because firms must compete with each other for resources needed to sustain growth (porter, 1980). as resources become depleted, opportunities for growth are seldom readily available and waiting to be exploited. instead of having the luxury of acting on existing opportunities, small business owners must create opportunities by identifying new niches in a current industry, or search for opportunities outside of their original industry. conversely, when an industry has considerable growth potential, organizations within the industry can all experience growth without competing as intensively for market share or raw materials. stated differently, when growth potential is high, firms may experiencesuccess simply by being members of that industry (eisenhardt & schoonhoven, 1990). therefore, small business owners can act on existing opportunities, making it unnecessary to consider opportunities outside of their original industry. for example, during the mid-1980s, many small firms entered the video-rental business. given the tremendous growth potential at that time, it was not necessary for video-rental firms to seek out new opportunities outside of their industry in order to survive and prosper. by the 1990s, however, growth in video rental stores other than blockbuster and other major chains had stopped almost completely. small business owners in the video-rental industry were forced to consider niches or to consider totally different industries. de reeoflndustr chan e 'fhe concept of industry change has also been recognized in organization theory studies as an important dimension of an organization's environment. environmental change creates a state of disequilibrium which, in turn, creates market opportunities for firms within that industry (dean, meyer, & decastro, 1993). tushman and anderson (1986) showed that environmental change usually takes place incremental ly, sometimes punctuated by unexpected radical shifts. these environmentalchangescan be classified as eithercompetence-enhancing or competence-destroying change because they either enhance or destroy existing organizations in a given environment. competence-enhancingchanges are improvements in a product or process that build on existing know-how within an industry. these developments substitute for older technologies but do not render obsolete the skills required to master the old technologies. examples of competence-enhancing improvements would be upgrades in existing computer software and the development of intel's 286, 386, 486 and pentium microprocessors. since competenceenhancing changes build on existing technologies, they create growth opportunities for incumbent firms to modify existing products or services, therefore creating an increase in opportunities for firms in the industry. conversely, competence-destroying changes are characterized by an innovation so extreme that the new technology fundamentally alters the set of relevant competencies within an industry. examples of competence-destroy ingchanges are: steam vs. diesel locomotive, the 4 slide rule vs. calculator, and the typewriter vs, the computer. since competence-destroying changes replace existing technologies, many small firms that already have sunk costs in an industry cannot afford to incorporate a radical change. some firms search for new opportunities, other firms are replaced by new entrants. therefore, both competenceenhancing and competence-destroying changes may increase the need for opportunity identification. stated differently, environmental change creates both threats and potential opportunities. for example, many small typewriter repairs shops during the 1970s and early 1980s noticed that the need for their service was declining. some firms sought out new opportunitieg such as computer-repair, in order to survive. an example of this is more computers, a computer superstore located just outside philadelphia. elliot baretz purchased valens business machines which had begun as a typewriter repair shop in the 1970s and had evolved into a computer repair store. baretz renamed the business valens information systems, and used it as a springboard for a customer friendly computer superstore. unlike baretz, many small business owners are not proactive in opportunity identificatkm, so when a need arises to search out new opportunities because of a shrinking market, it may be too late —the small business doesn't have the resources to pursue new opportunities. in contrast to industry change, which examines the change of environmental factors over time, complexity is a static measure, which examines the differences or uniqueness of environmental factors in an industry (dess & beard, 1984). the number and uniqueness of external elements in the environment in which the small firm exists will determine the level of complexity. in a complex environment there are a large number of diverse elements affecting the firm; in a simple environment few environmental elements impact the firm (segev, 1989). in a highly complex environment, pursuit of new opportunities may be limited because scanning a diverse environment could be too costly for small firms. conversely, in a simple environment, characterized by similar elements, environmental scanning for a small business becomes much more plausible. ke considerations for environmental factors 1. small business managers should consider industry growth potential when assessing the need to proactively identify opportunities. when growth potential is high, firms can act on existing opportunities, so focus should be placed on maximizing performance in that industry. however, as growth potential begins to decrease, opportunity identification intensity may have to shir outside of the original industry. if a small business owner in a declining industry waits too long to identify new opportunities, firm survival may become threatened. 2. change creates both opportunities and threats. as an industry environment experiences change, a small business manager should examine if the change improves on existing conditions or replaces existing conditions. both scenarios create opportunities, so change should trigger an increase in opportunity identification intensity. 5 3. industries characterizedby high complexity will make it difficult for small business managers to effectively identify opportunitits. the more complex the environment, the more difficult and costly opportunity identification will be. this suggests that although environmental factors may, by themselves, increase or decrease the existence of opportunitiea seldom do they account for all the difterence in the intensity of search for opportunities. small business owner factors the prevailing area of research in entrepreneurship focuses on the intentions and characteristics of individuals who start new ventures. little research has been done on the differences between start-up small business owners and post-launch small business owners regarding either their charactcristicsor their intentions. we do not know, for example, whether the risk-taking propensity of small business owners either increases or decreases once the venture begins. nor do we know whether their entrepreneurial intentions, broadly defined, continue on or slowly atrophy if the venture is a low growth or stagnant business. the following section discusses what is known about the traits and intentions of small business owners. intentions of smab business wners an importantareaofsmall businessresearchhas focused on intentionsofsmall business owners. until recently, this stream of research had not been discussed in the small business context. bird (1988)discussedentrepreneurialintentionsas a guide to small business owners'oal setting, communication, commitment and organization. this area of research acts to direct attention to questions about how small business owners create, sustain, and transform organizations. opportunity identification can be identified as an important criteria in a small business owner's intention because opportunity exploitation can lead to organizational growth. this is an important considerationbecause empirical evidence suggests that the ambitions and skills of a small business owner will determine the size and growth potential of the venture (carland, hoy, boulton & carland, 1984; hambrick & cozier, 1985 ). entrepreneurial intentions are self limiting factors. that is, those owners who do not intend to grow will not, regardless of growth opportunities in the environment. characteristics of mall business owners h erron and sapi�enza� (1992)ofter credence that the traditional ly held beliefs about startup entrepreneursare. in fact, operable for existing small business owners. their basic model suggests that the skill levels, values, and personality, as well as the context (environment) affect the "type and level of aspirations" and the "type and level of dissatisfaction" that the potential small business owner possesses. this level of dissatisfaction, in turn, affects the information-search process (e.g., opportunity identification). we accept and appreciate the concerns of those who contend that it is dilticult to prove unequi vocal i y that small business owners: (1)are more achievement oriented; (2) are less risk averse; (3) have a higher internal locus of control; and (4) have greater tolerance for ambiguity than managers or the general public (cf., brockhaus, 1982; sexton & bowman, 1986). 6 however, we also recognize that the vast majority of studies do support at least these four constructs. we posit that the characteristics and intentions normally accepted for start-up entrepreneurs do, in fact, hold for owners of existing businesses as influences in the owners'ropensity to engage in opportunity identification activities. over a fairly broad range, increases in any of those four factors may increase propensity to grow the business. ke considerations for small business owner factors 1. the degree to which opportunity identification is pursued by a small business may be directly attributed to the strength of the small business owner's intention towards growth. if a small business manager intends to achieve growth, proactive attempts to identify new opportunities may stimulate growth. 2. the intensity of opportunity identification may be influenced by a small business owner's personalityattributes,such as propensityto accept risk, level of need for achievement, degree of internal locus of control, and tolerance for ambiguity. while a small business owner is unlikely to change his or her personality, an understanding of personality attributes may influence selection of other members of the management team. also an understanding of how personality attributes influence opportunity identification may assist a small business owner by providing a rationale for why (or why not) a small business actively pursues new opportunities. 3. interactions may exist between personal characteristics and intentions, since characteristics of a small business owner may moderate intentions toward growth. for example, since opportunities have been defined as a special case where decision making is risky and ambiguous, there may be a positive relationship between risk averseness and the intentions towards growth and a positive relationship between tolerance for ambiguity and intentions towards growth. strategic planning factors initially, researchers concluded that small firms did not use the strategic planning processes based on normative models used by larger organizations (robinson, 1982). small businesses, however, are not simply small versions of big businesses. therefore, by reframing these basic normative models to the small business context, researchers have shown empirically that small businesses actually do engage in strategic planning (rice, 1983). additionally, the planning process of an organization may influence the degree to which environmentd scanning mechanisms are used by top management. previous studies suggest that strategic planning and environmental scanning positively impact organizational growth (cf., miller & toulouse, 1986; sandberg, 1986). therefore, characteristics of the strategic planning process and implementation of environmental scanning mechanisms are considered as important factors in predicting the degree to which small businesses are involved in the search for new opportunities. 7 ~rl. i f the strategic planning process of an organization intluences the degree to which proactivesearches for opportunitiesare performedby top management(miles & snow, 1978). an important characteristic of the strategic planning process that may influence opportunity identilicationis planning formality. planning formality can be defined as the extent to which written proceduresand schedules guide the planning process(dutton & duncan, 1987). it may be argued that if this process is formalized, opportunity search will become more routinized and systematic. as the opportunity identification process becomes more sophisticated, the search for new opportunities should become more effective. environmental sea nnin environmental scanning can be defined as the gathering of pertinent information and the introduction of results to the organizational decision-making process (lenz & engledow, 1986). it is a technique used to keep the organization aware of the nature of the environment in which it exists (fahey, king, & narayanan, 1981). the more cognizant the firm is of its external environment, the better the chance that it will recognize opportunities. pearce, chapman, and david (1982)developed a taxonomy of environmental scanning techniques available to a small business owner. two sets of information sources are identified: internal sources and external sources. internal sources of information that can help to identify distinctive competenciesand opportunities for small businesses can take one of several forms. 'fhe first is production and marketing information. in attempting to identify opportunities, a small business owner can question sales staff, technical representatives, suppliers, and customers. this is a very inexpensive technique and can help the small firm identify opportunities. additionally, predicting sales and profits and assessing production, financial and resource capacity may be important internal sources. in addition to internal environmental scanning, several external scanning methods are available. the first external source is the use of publications. general business periodicals, trade journals, government publications, industry studies (e.g., standard and poor's industry survey), and local industry data (e.g., chamber of commerce reports, economic development counse i data, and microcosim) are all potentially important sources of information. pearce et al. (1982) label the use of publications as the cornerstone of any environmental scanning system. another external source of information available to the small business is consultants. given the limited resources of small businesses, non-profit consultants would be most beneficial in helping the small firm to identify opportunities. specifically, institutions such as universities, and government organizations (e.g., small business development centers) can be of benefit to a small business in trying to identify opportunities. the final source of information discussed in the taxonomy is the use of trade shows and conventions. here opportunistic decision makers can gain exposure to new technological advances in an industry, and also learn from others in the industry. 8 in addition to environmental scanning, one other source of information may help the small business in pursuing the identification of opportunities. strategic networking or establishingrelationshipswith important individuals in the industry in which a small business operates can lead to opportunity identification. more important, this may increase the possibility that the small firm becomes a recipient of an accidental opportunity. the use of bankers, accountants, lawyers, and professionals can act as advisors in helping the small firm to become proactive. empirical research has shown, however, that the use of networking by small businesses is extremely underutilized smeltzer, farm and nikolaisen (1988). in trying to increase the use of external expertise in internal opportunity identification, small firms generally establish an outside board of directors robinson (1982). ke considerations for strate factors 1. formalized planning processes encourage routine or systematic analyses for the existence of potential opportunities. 2. opportunities may exist inside the organization, as well as in the industry environment. therefore,opportunityidentificationshould consider both internal and external environmental scanning sources to ensure full coverage of information sources. 3. the process of actively networking within one's own industry may expose small business owners to sources of information otherwise not used to identify opportunities. an application of the model in order to illustrate the potential usefulness of the model, we now apply it to two actual businesses located in a midwestern city. both companies are restaurants. we have disguised their names for this paper. the first company, which we will call aggressive pizza has aggressively pursued several opportunities, resulting in significant growth. the second company, which we will call contented pizza, has never attempted to identify or pursue opportunities, resulting in no or little growth. environmental factors aggressive pizza's owner recently located the first of his pizza stores in a growing suburban community near a mid-sized city. it was the first pizza restaurant to be located in the community. it was a franchise of an upscale pizza chain which featured higher priced pizzas and a wide variety of other foods for both dine-in, carry-out, and delivery. contented pizza is an older restaurant/bar which has existed in the same location for decades. it serves a large clientele of regulars, but its owner has never expanded beyond the existing building. the type of pizza that contented sells is decidedly traditional, and this type of pizza has seen little growth in recent years. it is also located in an area of the city which is not growing. its occasional customers do come from a reasonably wide area, but the regulars are likely to travel no more than two miles to the restaurant. it is clear that contented pizza's environment is one of little growth while aggressive pizza's customer demographics and its products are in a much higher growth stature. therefore, aggressive pizza can simply pursue existing 9 opportunities in its current market, while contented pizza would have to create its own opportunities by considering additional product offerings or new geographic markets. even though environmental factors may increase or decrease the existence of opportunities, by themselves, they cannot account for all the differences in the intensity of the search for opportunities. owner factors aggressive pizza's owner is a recent graduate of a midwestern private university where he majored in management with an emphasis on entrepreneurship. after studying a new franchise of pizza restaurants headquartered less than three hours away, he decided that it was right for him. his growth intentions are illustrated by the fact that he was given the choice of buying a single franchise or paying a premium to become a master franchiser which would require him to open ten units within five years in his defined territory. thus, both his stated intentions and his low level of risk averseness pointed clearly toward growth. contented pizza's owner, by contrast, was nearing retirement. he had operated the restaurant in the same location for decades. it was known almost as much as a local bar as it was for its pizza. the owner never had intentions of growth beyond that business since it provided him and his family a comfortable living. both owners started their ventures so they could be their own boss (need for autonomy). both had an internal locus of control. but aggressive's owner had a far higher need for achievement. further since the franchise, itself, was relatively new, aggressive's owner was far less risk averse than the typical small business owner. he saw himself as taking a chance on a new concept which, if successful, could pay quite high rewards including involvement in the franchise itself in addition to his individual franchises. strate ic plannin factors in the area of strategic planning, contented pizza's owner did little strategic planning. indeed, little was needed. since little growth was desired, the area was neither growing nor becoming blighted, the restaurant was stable, and it brought in an adequate level of income, there was little need nor desire to spend considerabletime in the planning process. aggressive pizza's owner, on the other hand, spent considerable time in planning and scanning. arer he opened his first restaurant, he immediately contacted a local university for help in site selection fora second location and developmentofa strategic plan. he met frequently with the franchise owners at company headquarters to keep in touch with changes in the industry and within their franchise. in order to obtain financing, he prepared a business plan to take to his local bank. thus, his strategic planning was both in depth and formal, exposing him to potential opportunities that he may have otherwise never perceived. in summary, aggressive pizza was in a high-growth environment, and the owner had strong intentions toward growth, was willing to accept risks and tolerate ambiguity, and was actively involved in strategic planning. consequently, the owner was consistently searching for new opportunities. conversely, contented pizza was in a low-growth environment, the owner had no intentions for growth, was not willing to expose the business to risks, and did not io actively plan. therefore there was a complete absence of any opportunity searches. the two examples selected were clearly extremes regarding the search for opportunities. yet, they serve to illustrate how the model can be applied to dilferentiate between opportunity searchoriented owners and more complacent business owners. conclusions and implications opportunity search is important to small business owners because the degree of search intensity is a fundamental element to the growth of a business. the model we presented used concepts from the decision making, entrepreneurship, organizational theory, and strategy literatures to attempt to provide new insights into opportunistic decision-making behaviors of small businesses. thispapersuggestedthatsmallbusinessownercharacteristicsand intentions are self-limiting factors that reflect the desirability of growth from an owner's perspective. strategic-planningcharacteristicsare primarily under the control of the small business owner because the owner sets the tone for the business. therefore, a small business owner can influence the opportunity identification process. external factors, however, are beyond the control of the small business owner, although the small business owner can react to environmental factors at any time to take advantage of perceived envi ronmentd opportunities. im lications for owners and consultants the model we presented here suggests that two of the three factors influencing search for opportunities are under the control of the small business owner. the owner's characteristics and intentions affect opportunity search directly and also interact with the strategic planning activities. the third factor —the environment —is not under the control of the owner, but it does impact the propensity to search because of either the potential to act on existing opportunities when in a growth environment, or the need to search for new opportunities elsewhere when in a stable or declining environment. owners should consider the importance that opportunity search has for their businesses. the considerations developed in this paper may provide owners with new insights into environmental, managerial and organizational factors that may motivate them to increase opportunitysearch intensity. for example, if a small business owner is interested in pursuing new opportunities, formalized planning and scanning mechanisms should be implemented in order to provide decision makers with necessary information. small business owners should also be willing to accept risk and be tolerant of uncertainty. they should be aware that certain environmental conditions, such as high growth potential, competence-enhancingchange, and low complexity, may create new opportunities. similarly, environmental scarcity may create a need to force opportunity searches outside of the original industry. moreover, small business owners can review the key considerations identified at the end of each section of determinants to see how specific factors may impact their opportunity search. ll consultants working with owners can address all three issues. consider the case of contented pizza. suppose the owner contacts a consultant to discuss why sales are stagnant. the consultant can suggest any of the following: i. no change will occur unless the owner clearly decides that change is good. 2. change will require a shia away from risk averseness. 3. since contented pizza is in an older part of the city, growth is not likely to occur. in order to create opportunities, contented's owner will have to diversify into other areas of the city or into other cities. 4. identificationofopportunitieswill require significant strategic planning. the consultant can suggest specific techniques or offer to train contented's owner in strategic-planning processes. 5. the consultant can bring information about opportunities to the attention of the owner which might include articles on new types of pizza or contacts with developers of a new shopping center. research im lications this paper contends that to understand better why some small business owners are involved in opportunity search and others are not, researchers must know what factors have contributed to this aggressive or non-aggressive strategic orientation. the integrative model developed in this paper has attempted to provide needed insight by discussing the effects of factors supported by the entrepreneurship, organizational theory and strategy literatures. in addition to examining the main effects from the proposed model, future research opportunitiesalso lie in the interactions between factors. for example, do risk averse owners react more favorably to a highly dynamic and complex environment or will they be even more hesitant to look for opportuni ties since they may not fully understand the impact of competiticn within that environment? is planning formality more important in a dynamic environment since it provides more information or detrimental because it is more time consuming and costly? since strategic planningand diversificationrequireat least some willingness to accept risk, can the level of risk averseness be changed in small business owners? these and other interactions may provide new research opportunities for both conceptual and empirical investigation. 12 references bird, b. 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(1986). technological discontinuities and organizational environments. adhni ni strati ve science quarterly, 3 i, 439-465. 14 reproduced with permission of the copyright owner. further reproduction prohibited without permission. credits anonymous journal of small business strategy; spring/summer 2006; 17, 1; abi/inform complete pg. 0_4 editor fred l. fry associate editors aaron a. buchko laurence g. weinzimmer editorial assistants dexter gruber douglas luman editorial review board semra ascigil joe bell david brennan shawn carraher susan coleman cathleen folker eugene fregetto armand gilinsky joe geiger masoud hemmasi kirk heriot jeffrey hornsby bruce kemelgor larry klatt brian mckenzie thaddeus mcewen todd mick john e. prescott neal pruchansky c. louise sellaro matthew c. sonfield harriet stephenson joe singer leo simpson jeff shields paul stephens jude valdez howard van auken dianne welsh bradley university bradley university bradley university bradley university bradley university middle east technical university university of arkansas at little rock university of st. thomas cameron university university of hartford university of wisconsin parkside university of illinois at chicago sonoma state university university of idaho illinois state university mercer university ball state university university of louisville florida atlantic university california state university, east bay north carolina a&t state university missouri western state university university of pittsburgh keene state university youngstown state university hofstra university university of seattle university of missouri kansas city western kentucky university university of southern maine bradley university university of texas at san antonio-downtown iowa state university university of tampa the journal of small business strategy is a joint publication of the small business institute® and the foster college of business administration, bradley university. send subscription requests to fred fry, editor, journal of small business strategy, foster college of business administration, bradley university, 1501 w. bradley ave., peoria, il, 61625 or e-mail to jsbs@bradley.edu. annual subscriptions may be ordered at $25 each (u.s. dollars only). international subscriptions add $5 annually for postage and handling. back issues may be ordered at $15 per issue. ©copyright 2006 small business institute® issn 1081-8510 reproduced with permission of the copyright owner. further reproduction prohibited without permission. idea or prime opportunity? a framework for evaluating business ideas for new and small ventures human, sherrie e;clark, thomas;baucus, melissa s;eustis, andrew c journal of small business strategy; spring/summer 2004; 15, 1; abi/inform complete pg. 61 journal of'small business strategy vol. 15. no. 1 spring/summer 2004 idea or prime opportunity? a framework for ev alva ting business ideas for new and small ventures sherrie e. human xavier university human@xavier.edu thomas clark xavier university clarkt@xavier.edu melissa s. baucus xavier university baucus@xavier.edu andrew c. (sandy) eustis ohio director of new business development new heritage academies seustis@fuse.net this paper was previously presented at the usasbe/sbida joint annual national conference, february 2000. the authors wish to acknowledge sandy eustis ph.d. for his initial development of the prime analysis. abstract entrepreneurs and entrepreneurship educators recognize that only a small percentage of' venture ideas actually represent viable business opportunities. this paper addresses the important issue of opportunity recognition using a framework designed with a mnemonic stnicture for easy recall and based on the extant literature on opportunity recognition. the .fi-amework prompts users to examine producthervice, resource, individual. market, and economic start-up issues. thus. the prime ana~vsis is a heuristic designed for initial opportunity evaluation of a business concept prior to preparing a fit/i-blown business plan. we discuss and apply this framework, demonstrating its effectiveness in the classroom and in practice. introduction entrepreneurship scholars, practitioners, and educators define the field in terms of opportunity focus (brodsky, 2000; bygrave, 1989; gartner, 1985; kamm & nurick, 1993; mcgrath & hoover, 2001; stevenson & gumpert, 1985; timmons & spinelli, 2004; weinzimmer, fry & nystrom, 1996). for scholars and practitioners, an important question regarding opportunity recognition and evaluation is how do potential entrepreneurs, small business owners, or infonnal investors determine if an idea is a good business opportunity. this is particularly important given the often high uncertainty, low information, and rapid decision making 61 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal olsmall business strategy vol. 15, no. i spring/summer 2004 surrounding start-up ideas. in addition, entrepreneurship educators look for efficient and effective tools for teaching students opportunity recognition and evaluation skills. in the fonnal venture community, sources of funding such as venture capital firms, banks, and more recently, angel investor groups have access to sophisticated, often proprietary, investment analysis tools and models. they often receive thoroughly researched, even professionally prepared, business plans upon which these groups apply their analytic tools. these more fonnal sources of financing represent a relatively small percentage of new and small business funding, unless the business opportunity meets stringent growth or asset requirements. the more common sources of funds for new and smaller businesses, such as family, friends, informal investors, and the entrepreneurs themselves (shulman, 2004), often do not have access to the same level of analytic tools as formal investors and may not receive thoroughly prepared business plans early on in their discussions regarding a start-up concept. consequently, these more typical funding sources for new and small business ideas can benefit from access to systematic and easy-to-use approaches for determining initial feasibility of a business idea, short of investing the time in the full-blown business planning process. in addition, students of entrepreneurship can benefit from new pedagogical tools that allow them to easily practice opportunity evaluation and critical thinking regarding new venture concepts. scholars suggest that "simplifying heuristics may have a great deal of utility in enabling entrepreneurs to make decisions that exploit brief windows of opportunity" (e.g., ucbasaran, westhead, & wright, 200 i, pg. 59). this article describes such a simplifying heuristic designed to be a framework to examine important product/service, resource, individual, market, and economic characteristics when initially investigating a start-up concept. this framework, using the acronym prime, prompts users to ask key questions regarding a venture or growth concept's merits. in the following section we describe selected leading models for business concept assessment, illustrating how our framework builds on these models. we then explain our model for evaluating business opportunities, how it fits key criteria for such a framework, and following the format of weinzimmer et al. (1996 ), we describe applications of the model. existing tools for evaluating business opportunities while not comprehensive. our discussion of the selected models in this section provides a wide range of topics identified by entrepreneurship scholars and practitioners as important for evaluating business ideas. the timmons model of the entrepreneurial process (timmons & spinelli, 2004) continues to be a leading framework for evaluating business opportunities. it focuses attention on the fit among three elements critical for evaluating a start-up: the team, the resources, and the characteristics of the opportunity. potential entrepreneurs and investors can use this model to determine if, like a three-legged stool (timmons, 1999), the business opportunity has achieved a critical balance among the three elements. timmons further outlines a venture opportunity profile, which details multiple key topic areas and specific benchmarks and yardsticks for evaluating business opportunities such as industry and market, economics, and personal criteria. the timmons frameworks are designed to allow investors to evaluate a business idea against high potential and low potential venture criteria, with a goal of helping investors identify high potential opportunities while screening out low potential ones. with two other frameworks, the new venture decision making model and the opportunity search model (kamm & nurick, 1993; weinzimmer et al., 1996, respectively), the entrepreneur or business owner takes center stage. the new venture decision making model emphasizes idea generation and business concept evaluation as important first steps in new or 62 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy vol. 15. no. i spring/summer 2004 small venture decision making, including topics such as social networks and resource supplies available to the founding team . with the opportunity search model, the start-up entrepreneurs or small busines s owners are influenced by three sets of factors in their search for opportunities: environmental attributes, owner characteristics, and strategy factors. finally, some entrepreneurs perform an analysis of the strengths, weaknesses, opportunities, and threats, or swot analysis, for a firm, its industry,and its environment (e.g., bemrolder, 2002). however, in practice swot is more often applied to existing ventures, as it implicitly assumes an existing business looking for ways to identify new strategies (wamaby, 1999). we designed the prime framework as an extension to and integration of these and other models, specifically to help address the needs of the substantial and growing number of new and serial entrepreneurs, informal investors, students of entrepreneurship, as well as formal investors who favor an additional opportunity-screening model to recommend or use. as recent studies indicate, the environment for start-up businesses consists of heightened awareness and increasing documentation of entrepreneurial activities, increasing speed with which venture opportunities are often evaluated, growth in types and numbers of entrepreneurship education programs, and a continuing likelihood that informal funding sources such as families , friends, and the entrepreneurs, themselves, will be primary sources of start-up funding (penley, 2000; reynolds, 2000; reynolds , bygrave, autio, cox & hay, 2002). thus, the prime analysis was designed to help entrepreneurs, in vestors, and students of entrepreneurship screen and evaluate venture opportunities. further, our goal was to structure the prime analysis as an easily remembered heuristic guiding opportunity search and evaluation in the typical entrepreneurial contexts of high uncertainty and low information. figure 1 shows the overall prime analysis framework. froduct/service • superiori ty • uniqueness • protection • ethica lity • readi ness • business model markets • size • targeted • reachability • other choices • need/want figure i prime analysis framework resources indi vidual • defined • skills • accessible • tra its • minimized • aspirations • sustainable advantage • re levant experi ence • synergies i evaluation of opportunities i i l / "'.----~ / ~ economics • forgivi ng • rewarding • end uring • stability • harvest options 63 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of'smal/ business strategy vol. 15, no. i spring/summer 2004 development of the prime analysis framework we identified four key criteria for application-oriented models to help guide our development of an efficient opportunity evaluation framework, building on previous work in this area (e.g., gorry, 1971; timmons & spinelli, 2004; weinzimmer et al., 1996). the four criteria we identified stipulate that the framework be easy to recall, educative and prompting, comprehensive, and useful in helping identify personal relevance. we briefly discuss these four criteria and the importance of each. easy to recall an important characteristic of any framework is the ease with which users can remember and apply it when evaluating a potential business opportunity. as figure 1 illustrates, prime integrates key opportunity evaluation factors from prior models, using a mnemonic device to remind the user of key questions, similar to the purpose of swot analysis. thus, the prime framework was not intended to identify new characteristics for evaluating business opportunities, but was designed to help easily recall established business evaluation criteria when out in practice or in the classroom. we adopted this easy to recall design based on recent scholarly and practitioner findings that mnemonic frameworks were positively associated with user recall in training and marketing (nestor, 2000; smith & phillips, 2001 ). consistent with concerns in the literature related to memory aides (campos, gonzalez, & amor, 2003; hill & westbrook, 1997; panagiotou, 2003; ullius, 1997), the acronym prime did not drive our inclusion of particular content characteristics. rather, all of the framework's characteristics were first drawn from well-established opportunity recognition and evaluation models and literature, from which we then developed relevant acronyms. educative similar to the content in a full-blown business plan, our framework educates users regarding key information they need to obtain about the opportunity and prompts them to uncover issues that might not have been considered without the model. for instance, in figure i, the topic resources, with subtopics of defined, accessible, minimized, and sustainable advantage, reminds the user to explore whether key resources such as suppliers, advisors, and customers are defined or accessible (e.g., does the founding team have relevant industry networks?). thus, while new venture economic forecasts are understandably uncertain, identifying whether key resources have been approached or assembled by the team can be more certain-either the team has contracts, contacts or not--and reminding the prime user to ascertain this level of resource definition and accessibility can help users understand the overall timing and readiness, for instance, for a particular opportunity. comprehensive ultimately, a model for evaluating opportunities must help the user ask questions covering a full range of issues well documented as important for opportunity recognition. to be comprehensive, yet parsimonious, we identified major opportunity evaluation criteria discussed in leading entrepreneurship literature for practitioners, (e.g., abrams, 2003), educators (e.g., kuratko and hodgetts, 2003; timmons & spinelli, 2004) and scholars (shane, 1997). for instance, as figure i under economics illustrates, the prime framework uses the mnemonic fresh to prompt users to examine a wide range of economic issues including forgiving, rewarding, enduring, stability, and harvest characteristics. will the venture 64 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy vol. 15. no. i spring/summer 2004 suffer a fatal blow if an early mistake is made due to high fixed costs early on? ls this a short or long window of economic opportunity? while not a complete set of all economic factors to evaluate, this set covers a wide range of relevant and important business opportunity characteristics discussed in the literature. helps identify personal relevance by incorporating an individual rating system, the framework helps users identify important individual assumptions or personal relevance regarding prime topics (e.g., product/service), subtopics (e.g., superiority, uniqueness, etc.), and the business concept as a whole. that is, new venture success criteria may not have equal weighting for different entrepreneurs or investors, and particular aspects of business concepts may be more or less attractive to individuals or teams. the prime framework, incorporated into a worksheet provided to users, outlines a rating system of simple plus-zero-minuses that allows users to consciously consider the relevance or importance of each topic and subtopic for themselves (see table iv). thus, one user might rate the subtopic availability of resources as a zero (0), representing a "me too" aspect of the opportunity, neither positive nor negative, while another individual might rate resource availability for the same idea as a double-minus ( -), indicating this is a fatal flaw for the opportunity as far as this particular individual assumes. the prime analysis ratings also include double-plus ( + + ), indicating the user perceives that the topic or subtopic represents a major competitive advantage that could be validated and emphasized in a business plan, a single-minus ( ), suggesting potential areas to eliminate or minimize through reworking the original concept during the business planning process, and a single-plus ( + ), indicating a positive characteristic but not a major advantage over competitors. the prime analysis worksheet also prompts users to provide an overall rating for each major topic (e.g., product/service) and the business concept as a whole and to write/type in key facts known or needed to continue opportunity evaluation. thus, the prime analysis allows for an individually weighted examination of venture concept characteristics, including highlighting characteristics to be emphasized, minimized, or further investigated. for instance, answers to prime questions on the rewards of the business concept (under economics) might be overshadowed by answers to the ethicality questions (under product/service) when examining the "payday lender" industry and its attractive gross margin opportunity, which for some would not be compelling enough to overcome potential ethical or legal issues (classactionamerica.com, 2004 ). the following section describes topic areas of the prime framework and selected literature on which each topic and subtopic was based. 65 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy vol. i 5, no. i spring/summer 2004 table iv selected topic and its subtopics in a prime analysis worksheet• revi ew the following eroduct/service, _resources, !ndividual, market, and j;conomic topics and subtopics, write/type in the second column facts known or needed to determine initial feasibility, and write/type in the third column your subjective ratings for topics and subtopics (see rating description s in note below table). topic i: product/service sub-topic superiority business model facts known or needed overall produc t/service rating overall business concept rating = rating 6 ++ + 0 a complete prime analysis worksheet in microsoft word format is available from first author. b rate each topic in terms of whether it adds to , detracts from or is neutral regarding the concept's business potential. ls the topic (e.g., product/service) or subtopic (e.g., superiority) a major competitive advantage that could become the backbone concept for a business plan; if so, rate as a doubl e-plus ( + + ). ls it a highly positi ve characteristic, but not one that provides a major advantage over competitors ; if so, rate as a plus ( + ). ls the topic or subtopic a "me too" characteristic with respect to competitors with no apparent problems or advantages; if so, rate as a zero (0). is it a weakness to be minimized or eliminated through reshaping the concept; if so, rate as a minus ( ). is the topic or subtopic a potential deal killer or an overwhelming problem or disadvantage ; if so, rate as a double-minus (--). components of prime analysis the following descriptions illustrate relevant questions prime prompts users to ask within key topic and subtopic areas and highlights selected literature supporting the use of these questions . table iv illustrates one topic and selected subtopics on a prime analysis worksheet used to guide users through the opportunity evaluation thought process. product/service evaluation understanding the entrepreneur's product or service idea continues to be at the heart of the opportunity recognition process (abrams, 2003; scholhammer & kuriloff, 1979; vesper, 1990). the mnemonic for product/service evaluation is superb (see figure i). superiority. ls the product or service idea demonstrably superior in some way to competing products or services, as of the current infonnation? can the superiority be quantified on a dimension meaningful to potential customers? informal and formal investors use a number of screening criteria for evaluating the sustainable competitive advantage of an idea, including characteristics such as superiority, uniqueness, and protection (see below) of the product or service (roberts, stevenson, & morse, 2000; zider, 1998). fj_niqueness. scholars and practitioners often list uniqueness as a key characteristic for a new business concept. importantly, uniqueness can encompass a wide range of product, service, process, and systems applications (bhide, 1996; kuratko & hodgetts, 2003). moderately 66 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy vol. 15, no. 1spring/summer2004 high levels of uniqueness may be most desirable. extremely unique concepts often require massive public education, an expensive undertaking for a start up, and can tend to result in huge success or rapid failure, with failure relatively common. however, concepts without some uniqueness rarely create significant competitive advantages. f..rotection. to what extent can the product or service concept be protected from competitors who may possess better financing and market-place connections and strong motivations to copy a good idea quickly? having or creating barriers to entry such as patents, licensing abrreements, specialized knowledge, or secret formulas is not only important to strategic management scholars (e.g., fahey & randall. 2000; thompson & strickland, 2003), but is also of interest to entrepreneurship scholars and practitioners (bhide, 1994; fry, stoner, & weinzimmer, 1999). f;_thicality. does the product or service make a positive social contribution in the eyes of the entrepreneur or investor for a particular niche market, or are there ethical or even legal considerations regarding the founders' actions in the opportunity (e.g., employment contract issues)? organization and entrepreneurship scholars suggest that ethicality plays an active role in organizational decision-making (grant, 1992; dees & starr, 1992; paine, 1994 ). indeed, leading entrepreneurship textbooks include entire chapters devoted to topics such as "personal ethics and the entrepreneur" (e.g., timmons & spinelli, 2004, p. 327). b.eadiness. how long before the new venture will likely have its first customer, generate revenues, or become profitable? does a business plan exist yet, or is the idea still in the mind of the entrepreneur? kourilsky and carlson (2000) discuss the relevance of entrepreneurship readiness in curriculum development, maintaining that students need to be ready to start a business. timmons and spinelli's (2004) concept of timing in evaluating opportunities also encompasses the aspect of product or service readiness for the market. !}_usiness model. how does the overall product or service offering look to the prime user? for instance, what are the ongoing revenue generation and customer attraction processes as compared with other business models in the industry? is this explicit or can it be easily implied? while business models have received increased attention in recent years, the issue of what an idea might look like in the real world has long been of interest to those evaluating new venture opportunities (vesper, 1990; wiltbank & sarasvathy, 2002). resource evaluation the mnemonic for resource evaluation is dams (see figure 1). key resources for new venture opportunities include financial, social, human, physical, technological, and organizational (ucbasaran et al., 2001 ). resource acquisition has been a pivotal issue in evaluating opportunities for well over a decade. for instance, vesper's new venture checklist ( 1990) asked entrepreneurs to evaluate new ventures in terms of key resources such as financing, staffing, suppliers, and equipment. practitioner-oriented books on preparing business plans include extensive worksheets to help identify key resource requirements when evaluating new ventures (e.g., abrams, 2003). and, scholars have identified resources as an important component for creating organizational and new venture sustainable competitive advantage (alvarez & busenitz, 2001; barney, 1991). qefined. vesper's new venture checklist ( 1990) suggests that the evaluation of start-ups should include questions regarding who will have to be hired and when, and how will they be found and recruited. we refer to these types of questions as defining the resources for the new venture. indeed, in addition to labor, questions should also include to what extent the 67 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of"small business strategy vol. 15, no. 1 spring/summer 2004 small business owner or entrepreneur knows exactly what and how much is needed in other key resource areas such as suppliers, funding, and equipment. ,1.ccessible. does it appear that the founding entrepreneurs have not only defined the resources required, but also have access to them, such as solid relationships with important suppliers or funders, are there backup sources of supply identified, favorable trade terms available? vesper's new venture checklist ( 1990) asks these questions, in addition to kamm and nurick (1993), who discuss "resource supply decisions" (p. 20) in new venture formation, and timmons and spinelli (2004), who identify access to resources as a part of the entrepreneurial process. minimized. on the one hand, has a real effort been made to eliminate the "nice, but not necessary" expenditures, and on the other hand, have resources been minimized to a point that suggests unrealistic expectations or that might be harmful to the success of a particular opportunity? concerns over the need to minimize or bootstrap start-up resources is a common issue in the entrepreneurship literature (bhide, 1992), incorporating tools and models for bootstrapping (e.g., smith & smith, 2004) and case studies that illustrate how successful entrepreneurs initially bootstrapped their new enterprises (e.g., hofman, 1997). sustainable advantage. do the resources defined and accessible by the entrepreneur appear to help build sustainable advantage for the new venture, or do they allow an initial advantage that may be lost early on to competitors? barney ( 1991 ), alvarez and busenitz (2001 ), and others argue that organizations, in general, and entrepreneurs, in particular, must develop a sustainable competitive advantage through resources that are rare or of value to the market or competitors, are difficult to imitate, or have little to no substitutes in the market. evaluation of the individual entrepreneurs the acronym for individual evaluation is stars (see figure 1 ). this section focuses on the entrepreneur or founding team, leaving the evaluation of key employees as part of the resource evaluation. human capital resources (becker, 1964) in organizations and new ventures have been of interest to scholars for decades. studies suggest that while "person variables" (shaver & scott, 1991, p.25) are not totally predictive of entrepreneurial success, there are key personal characteristics that continue to be of interest to scholars and practitioners when evaluating new venture opportunities (mccline, bhat, & baj, 2000; robinson, stimpson, huefner, & hunt, 1991; timmons & spinelli, 2004; weinzimmer et al., 1996). skills. while not comprehensive, the following illustrate a range of skills often attributed to new venture success by scholars and practitioners (basadur, 2001; bhide, 1994; grant, 1992; pickle, 1964; zider, 1998): a) business skills including functional, technical, and persuasion/motivation skills, b) interpersonal skills, including communication, listening, conflict management and networking, and c) creative problem solving and change management skills. iraits/attributes. the literature identifying entrepreneurial traits or attributes, while not conclusive, suggests that successful entrepreneurs typically exhibit certain types of traits, including achievement and opportunity orientation (hornaday & aboud, 1971 ), a strong sense of personal responsibility and control (durand & shea, 1974 ), tolerance for risk (bhide, 1996) and ambiguity (mcmullen & shepherd, 2001; weinzimmer et al., 1996), persistence (shaver & scott, 1991), proactiveness and innovativeness (covin & slevin, 1986; miller, 1983), and resiliency, energy, and good health (adebowale, 1992; boyd & gumpert, 1983). for 68 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of'sma// business strategy vol. 15. no. 1 spring/summer 2004 instance, some people find the idea of entrepreneurship or starting one's own business appealing until they discover the personal investment, sacrifices, and other commitments necessary for success. dspirations. does the founding team communicate vision and passion for the idea? what have they done to show commitment to the success of the concept? kamm and nurick ( 1993) and ronstadt and shuman (1988) refer to this as the alignment of the founding team's interests with the start-up's mission. roberts, stevenson and morse (2000), sahlman ( 1997), and others describe commitment to the venture as a key personal attribute for new venture success. fielevant experience. for a start-up opportunity, three kinds of experience are often examined: previous entrepreneurial/leadership, industry, and educational experience (hall & hofer, 1993; macmillan, siegel, & narasimha, 1985; roberts et al., 2000). ideally, the entrepreneur or team will possess all three types of experience, since that increases the probability of success. experience in the industry, or knowledge and experience with the technology used to produce or provide the product or service, has been commonly associated with success and often builds important credibility early on. synergy. does the founding team have complementary skills that offset each member's weaknesses, and does there appear to be a clear understanding of team member roles? if an individual proposes the concept, does he or she show enough understanding to identify key roles or skills needed for a balanced founding team? this dimension incorporates our knowledge of criteria for successful founding teams used by informal and formal sources of funding for new ventures (hall & hofer, 1993; kamm & nurick, 1993; macmillan et al., 1985) and our knowledge of high performing teams (katzenbach & smith, 1993; slevin & covin, 1992). market evaluation the mnemonic for market evaluation is strong (see figure i). this segment of the prime focuses the user's attention on fundamental issues for new business concepts, market. and marketing (lodish, morgan, & kallianpur, 2001 ). (i_ize and structure. market size and stmcture are consistently of interest to scholars in evaluating new venture or growth opportunities (roberts et al., 2000; timmons, smollen, & dingee, 1977; zider, 1998). large, mature markets dominated by a few companies may be difficult for start-ups to penetrate, unless the entrepreneur can focus on a clearly defined market niche; smaller markets may be more approachable, but may have limitations in overall potential. iargeted customers. does the entrepreneur know specific customer demographics, psychographics, buying decisions, and other key market segment characteristics (hills & laforge, 1992; vesper, 1990)? when evaluating whether someone has a good venture opportunity, scholars suggest asking the entrepreneur to name specific customers or relevant market research data that can illustrate whether the idea is far enough along to start determining actual potential (bygrave & zacharakis, 2004). b.eachability. does the founding team know how it will reach targeted customers (sahlman, 1997; vesper, 1990)? can the team use niche marketing techniques to reach the primary markets, or will it have to use potentially more expensive mass marketing approaches? 69 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal olsmall business strategy vol. 15, no. 1 spring/summer 2004 targeted or niche marketing can be much more desirable for smaller companies and start-ups (abrams, 2003; hills & laforge, 1992). qthcr choices (the competition). what does the founding team appear to understand about its direct and indirect competition? can the team communicate specific strengths and weaknesses competitors possess in the marketplace and the nature of the competition's current and anticipated strategies (porter, 1980; sahlman, 1997; schollhammer & kuriloff, 1979)? the assessment of other choices should also include consideration of firms operating in different niches or markets that might move into the proposed market if it appears highly lucrative. in recent years distinctions among suppliers, distributors, customers and competitors have blurred so a firm in any of these groups could move into the firm's market (davis & meyer, 1998). fy..eeds. is the market need or want clearly identified and understandable (baty, 1974; hills & laforge, 1992)? ls the product or service a compelling purchase to the market (longenecker, moore, & petty, 2003; sahlman, 1997)? for typically resource-slim small or new ventures, identifying a product or service already perceived as a need may help avoid expensive and/or time-consuming learning curves. qrowth prospects. how much growth is occurring in the relevant market and industry (roberts et al., 2000; zider, 1998)? what major market and industry changes might impact the venture idea's marketplace (kunkel & hofer, 1993; weinzimmer et al., 1996), and could the proposed new company be ahead of the change curve? entrepreneurs entering a market experiencing rapid growth should recognize these market opportunities, even as they anticipate challenges such as larger firms entering the market. on the other hand, entering a slowing or maturing market can present serious growth problems unless the entrepreneur successfully identifies and appeals to an untapped market niche. economic evaluation the mnemonic for economic evaluation is fresh. this analysis directs the user's attention to the potential outcomes associated with the new venture (human & matthews, 2004; ucbasaran et al., 2001 ). since the prime is designed to prompt users for information they need to obtain as well as information they already have, the economic analysis used with the framework can range from sophisticated financial forecasting (smith & smith, 2004) to (more likely) back-of-the-envelope analyses to arrive at approximations for early decision making on whether to pursue the concept at all (e.g., hesseldahl, 2004 ). e.orgiving. can a few early mistakes be made without killing the business? positive indicators include a high gross margin and a high ratio of variable to fixed costs (longenecker et al., 2003; sahlman, 1984). unique technology opportunities can be less forgiving due to the market's learning curve, often requiring heavy and lengthy investment in marketing and education long before revenues occur, and capital intensive ideas (e.g., manufacturing) may also be less forgiving opportunities, unless the founding team has industry experience to help mitigate risks. fiewarding. can the prime user perform back-of-the-envelope analysis or roi estimates to obtain an early determination of economic potential? what information is needed for further economic analysis, and what is the upside potential of the idea given the risks estimated (roberts et al., 2000; sahlman, 1997)? how would forecasted economic rewards for this 70 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of'small business strategy vol. 15, no. 1spring/summer2004 venture compare to industry benchmarks or yardsticks (chandler & hanks, 1993; smith & smith, 2004)? finduring. will the window of opportunity likely remain open for some time, or does the opportunity depend on a temporary market trend that must be exploited quickly (ucbasaran et al., 200 l; vesper 1990)? an opportunity with a longer time frame or larger window may offer advantages for a new venture, as it allows the entrepreneur more time to make necessary adjustments when gearing up operations. pursuing a short-term trend (e.g., a fad) can also be an opportunity as long as the team can obtain sufficient resources and develop a clear strategy for moving in quickly, capitalizing on demand, and then exiting without getting left with expensive equipment, investments in inventory, or other resources. s.tability. how cyclical, seasonal, or uncertain is the financial pattern, and would the business generate sufficient financial resources to keep cash flow positive for a year or two if profits do not materialize (vesper, 1990; zacharakis, 2004 )? these types of instabilities in the economics of the idea can create serious cash flow problems, particularly if the individual segment of the prime indicates little industry experience for handling relevant cash flow cycles. harvest options. what are the likely exit or harvest options for the small business owner, founding entrepreneur/team, and investors, such as strategic sale, merger, or taking the company public (birley & westhead, 1993; petty, 2004; ronstadt, 1986)? is the business idea considered a potential "cash cow" to fund other ventures (timmons & spinelli, 2004) or a family business that could be passed down to successive generations? while the exact mode of harvest or exit cannot often be guaranteed, this long term look at the venture concept allows potential investors, scholars, practitioners, and students to explore the long-term thinking of the founding team. applying the prime analysis to evaluate opportunities to illustrate the application of the prime framework for evaluating venture ideas early in the process, in this section we include data and application examples. first are survey data collected from two of our mba courses on new venture creation, both of which focused on opportunity recognition and evaluation using the prime analysis and the business plan. over 95 percent of the mba students work full-time while pursuing their degree, and most have 3plus years of work experience upon entering our applied mba program. thirty-seven (77%) of the 48 mbas in the two new venture creation classes surveyed were male. assignments in both courses required students to use the business plan and the prime frameworks to evaluate new venture ideas, with all students completing one business plan on a new venture idea, four case analyses evaluating business plans, and four prime analyses evaluating new venture ideas. the survey was administered to the students at the completion of the assignments, asking questions about the use of the two frameworks, the prime and the business plan, for evaluating business concepts. when asked, "if you were presented with a start-up business idea to evaluate, to what extent do you see benefit in using both the prime analysis and the business plan to evaluate the concept (i.e., are the two frameworks different enough to use both?)." on a five point scale from 1 = to no extent to 5 = great extent, respondents' mean rating was 3.9. respondents were also asked an open-ended question regarding, "if both frameworks (the business plan and the prime analysis) were to be used to evaluate a start-up concept, how would you suggest using both frameworks for opportunity evaluation and why do you say this? for instance, would you use one before the other, or both simultaneously, or 71 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategv vol. 15, no. 1 spring/summer 2004 would you use them for different specific purposes?" thirty-eight of the 48 (78%) indicated they would likely use the prime analysis before the business plan for reasons including: "the prime analysis is good as a first pass evaluation of a business idea. the business plan would follow up as a detailed look at the business opportunity." "the prime would be first, to evaluate initial feasibility. the business plan would be to prove the case," "i would use the prime first to have a general idea of the business, and the business plan to get more in depth analysis if the general idea panned out," and "prime seems good for first blush analysis and evaluation. gives a good full picture overview of an opportunity. the business plan gives more detail to see whether an idea really holds together and whether or not it is well thought through." it is worth noting that none of the mbas responded that the business plan should be completed before the prime analysis, and several suggested that the two frameworks be used in unison due to prompting for complementary issues (e.g., ethicality, readiness). in addition, when asked, "how useful was prime as a classroom tool for learning the process of opportunity recognition and evaluation?", the mean response was 4.2 (on a 5 point scale, where 5 = extremely useful). finally, when asked, "how useful are the mnemonics (i.e., spelling out words for each set of major headings and subheadings) of the prime analysis in evaluating venture ideas?", respondents' mean rating was 4.0 consequently, the survey evidence from one application context. the mba entrepreneurship classroom, helps validate our intended use for the prime analysis as an early stage, easy-to-use, comprehensive screening tool that helps prompt users to ask key questions regarding a new venture concept. a second approach for illustrating the usefulness of the prime analysis is to briefly describe actual applications, one using prime as a teaching tool in entrepreneurship education, and one using the framework as a tool for professional consultants. below are brief applications in these two contexts, highlighting processes, outcomes, interpretations, and conclusions. using the prime as a teaching tool in entrepreneurship education process the instructor assigns a start-up business case to be read and analyzed by students using the prime analysis worksheet provided to the class as a microsoft word document into which they can type their comments, ratings, etc. (see table iv). the assignment includes students reading the case, which describes an actual start-up idea by two brand managers at an international consumer products company who learn that their employer wants to sell, within 90 days, one of its brands that does not meet the company's new strategic directions. the brand has slipped from an $80mm brand to a $6mm one in less than two years, since the company no longer markets the brand. students must review each prime topic and subtopic for its relevance to the case, and come to class with a completed prime analysis worksheet in which they have written short bullets of facts known and/or needed for each subtopic with a rating (plus, minus, etc.) for each topic and subtopic in terms of what it adds or detracts from the feasibility of the idea. finally, students must be prepared to discuss, "given your prime analysis, would you invest in this start-up idea; why or why not?" before the class in which the case analysis will be discussed, the instructor writes six column headings across the classroom board, one for each of the five prime topic headings (e.g., product/services, resources, etc.), and one for "facts needed" (see table iv). directly below each of the five prime topic headings on the board, the instructor writes the relevant 72 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of'small business strategy vol. 15, no. 1 spring/summer 2004 subheadings (e.g., below the product/service heading are rows for the subtopic headings superiority, uniqueness, etc. with space to the right of each). the instmctor's class discussion is guided by students' comments and ratings that are written on the board next to the appropriate subtopics or under the facts needed column. outcomes by the end of the class discussion, a full set of student comments, ratings, and facts needed have been posted on the board for all to consider. for instance, in a recent class discussion on the case described above, some students argued for a double plus (strong competitive advantage) for the protection of this product/service idea (e.g., trademarked brand), for the sustainable competitive advantage of the resources (e.g., valuable brand equity that could be recovered in the market), and for skills and synergies of the individuals (e.g., two managers with direct brand and industry experience and complementary business skills). on the other hand, some students viewed the company's "pulling the plug" on the brand's marketing as a fatal flaw or double-minus for the reachability in the market section (e.g., without the large corporation's supply chain the consumer product brand would never get to supermarket shelves), they viewed the 90-day timing as a double-minus for readiness in the product/service section, and they viewed the relevant experience of the individuals and accessibility of resources as single minuses or characteristics that needed re-working or improving, if a plan were developed, since the two managers had no entrepreneurial experience and while well-connected in their corporate and industry community, were not at all connected in the entrepreneurial community. also, other choices in the market segment were rated zero (neither positive nor negative), since the brand, while still having some revenues, was also considered to have "a dated image" with respect to competition. interpretation as a class, how do we interpret our prime analysis after a case discussion? a classroom board of facts known, facts needed, and student ratings allows the instructor to engage the students in a final discussion on the challenges in collecting and assessing accurate information on start-up ideas and on the potential subjectivity and therefore differences of opinion in rating new venture characteristics. the classroom discussion also allows students to hear others' perspectives on what is perceived as positive or negative in a start-up concept, which often helps clarify or even change an individual student's own perspective. for instance, in this case, after a detailed class discussion on how "the pulled marketing-plug" could be overcome through some innovative strategic partnerships within the consumer products supply chain, the double-minus rating was changed to a single-minus, meaning the issue could be reworked through further attention in a business plan. thus, given the doubleplusses described above and the potentially restorable revenues of the brand, the venture concept was rated overall as a good potential for a business plan and for investors. conclusions the final conclusion for the prime analysis class discussion is that a) if no fatal flaws (double-minuses) continue to be identified after discussion and fact finding, and b) at least one compelling major competitive advantage (double-plus) is identified, then a business plan with fully articulated financial analysis can be worth pursuing. using the prime as a tool for professional consult ants one of the co-authors frequently consults with small businesses and start-up entrepreneurs on 73 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of'small business strategv vol. 15. no. 1 spring/summer 2004 their new business ideas. indeed, the original development of the prime framework was to meet this co-author's needs for a systematic and straightforward way to walk a potential new business owner through the thought processes of evaluating a business opportunity. it allowed the co-author a means of not missing anything fundamental in the early analysis process with his clients. the process, outcomes, interpretation, and conclusions of the prime analysis when used in this context are similar to those described in the teaching tool application above, except not done in the classroom with a reading assignment. instead, the consultant provides the prime analysis worksheet to the start-up entrepreneur so that an actual business concept can be analyzed before discussing it in detail with the consultant. or, the consultant and start-up entrepreneur can walk through the prime framework together, making notes on facts needed, ratings of the prime characteristics, and overall interpretations regarding whether the idea is worth further pursuing in a business plan. indeed, instead of a classroom board full of comments, ratings, and facts needed, the entrepreneur can talk with his or her family, friends, consultants or business advisors to outline the same issues done in the classroom setting. a special case of the consulting application would incorporate the prime framework as a tool for approaching a venture capitalist requiring fully articulated financial analyses and forecasts. an initial estimate of firm valuation would likely follow from the prime analysis, which can be a useful tool for the entrepreneur prior to contacting venture capitalists. conclusions and implications the prime analysis framework builds upon the entrepreneurship and strategy literature and has benefited from use by successful entrepreneurs, small business owners, investors, and students of entrepreneurship. of course, the framework is not without its limitations, including not being inclusive of all venture opportunity evaluation criteria, not offering brand new criteria for evaluating opportunities, and using a mnemonic structure that, while shown to increase recall of important topics in practice, can raise concerns regarding structure driving content in the framework. we have attempted to minimize these limitations by emphasizing the purpose of the framework as an easy-to-recall tool using well-adopted criteria in the literature and incorporating user suggestions and survey benchmarking into the design of the framework. one of the major implications of the prime analysis involves allowing potential users to perform an initial reality check on a business idea prior to or as they develop a business plan. as some entrepreneurs resist developing a formal business plan, the prime analysis offers them a comprehensive, quick way of ensuring that the business plan "in their heads" includes consideration of major issues and problems facing the new venture. a second implication of the prime analysis is that once the prime is initially completed, users can review their subjective ratings and conclusions to identify areas for which they need more information, areas in which the concept needs to be modified, and key characteristics that can become the cornerstone of a business plan. a third implication for small business owners, entrepreneurs, and consultants is that the ratings of each subcategory can be used as a validity check across potential or practicing team members who complete and then compare their individual prime analyses. entrepreneurship educators can use the prime analysis as a framework for teaching students how to evaluate business ideas and a tool in class for evaluating business case assignments. prime has proven to be useful for introducing a comprehensive range of issues from the literature of which students should be aware when evaluating entrepreneurial ideas. 74 reproduced with permission of the copyright owner. further reproduction prohibited without permission. .journal of'small business strategy vol. 15. no. 1 spring/summer 2004 finally, the prime analysis' integration of key topic areas from the literature on new venture evaluation provides implications for scholars. for instance, the use of a simple subjective rating system provides an opportunity for scholars to examine how the backgrounds, attributes, and skills of entrepreneurs and professionals working with entrepreneurs may affect individual ratings, which can further scholars' understanding of related 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(1998, november-december). how venture capital works. harvard business review, 131-139. sherrie e. human is the castellini chair in entrepreneurial studies in the williams college of business at xavier university. she teaches undergraduate, evening mba and executive mba courses on topics including new venture startup skills, managerial skills, and venture planning. her research, including business startup processes and interorganizational networks, has been supported by the kauffman center for entrepreneurial leadership and babson college, and has been published in the handbook of entrepreneurial dynamics, the academy of management journal, administrative science quarterly, entrepreneurship theory and practice, journal of management education, and journal of small business 78 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy vol. 15, no. 1 spring/summer 2004 management.. she is an adhoc reviewer for several journals, and currently on the editorial review board of entrepreneurship theory and practice. tom clark is professor of management and entrepreneurship at xavier university and director ofthe business professions program, a career development program required of xavier business majors. melissa baucus is an associate professor of management and entrepreneurship at xavier university. she teaches creativity and innovation and small business consulting in the entrepreneurship program, emphasizing creative problem solving, development of creative new business ideas and writing professional-quality business plans for local entrepreneurs. she has also taught strategic management, business and society and leadership. melissa's current research focuses on ethics among entrepreneurs and corporate misconduct, and her work has appeared in academy of management journal, journal of management, journal of small business management, journal of business venturing and other leading journals. she currently serves as the past division chair of the social issues in management division of the academy of management, on the editorial board of business horizons and as a reviewer for several journals. andrew c. (sandy) eustis was a professor in the management and entrepreneurship department at xavier university as well as founder and director of the xavier entrepreneurial center from its inception to 1996. he was also the chair of the department of management and entrepreneurship at xavier, and developed the initial framework on which this article is based as a teaching tool. currently sandy is the ohio director of new business development for new heritage academies, a public school management company. 79 reproduced with permission of the copyright owner. further reproduction prohibited without permission. a cross-national investigation of first-generation, ... sonfield, matthew c;lussier, robert n;pfeifer, sanja;manikutty, s;et al journal of small business strategy; spring/summer 2005; 16, 1; abi/inform complete pg. 9 a cross-national investigation of first-generation, secondgeneration, and third-generation family businesses: a four country anova comparison matthew c. sonfield hofstra university matthew.sonfield@hofstra.edu robert n. lussier springfield college rlussier@sptldcol.edu sanja pfeifer university of josip juraj strossmayer osijek, croatia s. manikutty indian institute of management, india loic maherault & louis verdier ecole de management, lyon, france abstract this study compared first, second, and third-generation family businesses in the united states, croatia, france, and india countries with significant differences in cultures. economies, levels of entrepreneurial activity. and.family business demographics. contrary to much of the existing literature, the results indicate that owner-managers of all three generational categories a/family businesses, in all four countries, generally shared the same managerial characteristics and practices. implications for theory development and further research are presented. introduction family businesses constitute a highly important component of the american business setting. an estimated 80 percent of the total 15 million businesses within the american economy are family businesses (carsrud, 1994; kets de vries, 1993). family businesses contribute 50 (mccann, leonguerrero & haley, 1997) to 60 percent (bellet et al., 1995) of the total gross national product, 50 percent of employment (morris, williams, allen, & avila, 1997), and have higher annual sales than non-family 9 businesses (chaganti & schneer, i 994). estimates classify 35 percent of fortune 500 firms as family owned (carsrud, 1994). however, much of the family business literature is non-quantitative and relatively few articles have been published in broadbased business journals (dyer & sanchez, 1998; litz, 1997). this article reports on an analysis of generational issues in family businesses in four significantly different countries: the united states, croatia. france, and india. it investigates an especially limited segment of reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategv the literature, the study of similarities and differences among first, second, and thirdgeneration family businesses, as was suggested for further research by morris et al. ( 1997). furthermore, this study adds to the growing quantitative empirical body of family business literature and expands family business research beyond traditional geographical venues to global comparisons, as suggested by hoy (2003). more specifically, there are several important contributions of this study and its findings. prior family business research has rarely focused specifically on comparisons of first, second, and third-generation firms. the few investigations of this issue have generally been conceptual, or otherwise qualitative, or a tangential empirical analysis within a larger family business study (beckhard & dyer, 1983; davis & harveston, 1999; dyer, 1988; hershon, 1975; schein, 1983). perhaps the most comparable prior research has been with regard to possible stages of family firm development. however, as will be further discussed, this is a different focus than that of generations, and here too, the body of literature is small. thus, this study constitutes ground-floor empirical investigation of this specific issue and adds to the limited existing and primarily qualitative body of literature. an improved understanding of these generational similarities and differences might direct and enable entrepreneurship, small business, and family firm researchers to better focus their future investigations and theory development into these three generational categories as separate entities; might strengthen the effectiveness of advisors, consultants, and others who assist family firms by allowing them to differentiate, as needed, between their first, second, and third-generation family business clients; and also might assist family business owner-managers in their understanding and self-analyses of their businesses. a second important contribution of this study is its cross-national comparison. as will be discussed later in this article, most prior family business research has focused vol. 16, no. 1spring/summer2005 on north american firms, although family business investigations in other countries have increased in recent years. still, we have found no prior research specifically comparing family firms m different countries, especially those countries with major differences in economies and/or cultures. while, as also discussed later in this article, there has been considerable analysis of cross-national and cross-cultural issues in the broader field of entrepreneurship, crossnational and cross-cultural considerations of fami~v business topics are in their infancy. thus, in this respect too, this study constitutes ground-floor investigation and is an early step in the development of this segment of the literature. 10 finally, as will be discussed later, the findings of this study, with regard to generational comparisons, provide data that is contrary to the conclusions reached by most of the limited previous conceptual and empirical research. this raises questions about these earlier conclusions and indicates a need for further empirical research. and our cross-national comparison findings, also discussed later, also raise questions about many of the established conclusions reached in the literature on cross-national and crosscultural issues in entrepreneurship, in particular with regard to the importance of national and cultural factors on entrepreneurship. foundations in prior research family business as a field of study has grown from modest beginnings to a substantial conceptual and theoretical body of knowledge at the start of the twenty-first century. prior to 1975, a few theorists, such as christensen ( 1953 ), donnelley ( 1964 ), and levinson ( 1971 ), investigated family firms, yet the field was largely neglected (lansberg, perrow, & rogolsky, 1988). these early studies were generally conceptual rather than empirical, with a focus on the more fundamental issues, such as what makes a business a "family business" or a "family firm" (the terms are used interchangeably), the dynamics of succession, intra-family conflict, and reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal o(small business strategv consulting to such firms (handler, 1989; sharma, chrisman & chua, 1997). in 1988, with the launching of the journal fami~v business review, the first and only scholarly publication devoted specifically to family business, the field reached a level of maturity to foster a significant progression and resulting body of research and findings. dyer and sanchez' ( 1998) thorough analysis of all articles published in the first decade of family business review provides a clear picture of recent directions in family business research. in descending order, the most frequent topics of articles published during this period were: interpersonal family dynamics, succession, interpersonal business dynamics, business perfonnance and growth, consulting to family firms, gender and ethnicity issues, legal and fiscal issues, and estate issues. in terms of types of articles published, dyer and sanchez found that, over the decade analyzed, the proportion of articles involving quantitative research methodology increased, while articles specifically describing the art of helping family businesses declined. it should be noted that, even with this maturization of the field, a variety of definitions of "family business" continue to serve as the basis for the research and articles within this body of literature (littunen & hyrsky, 2000; ward, 1986; ward & dolan, 1998). for the purposes of this study, a family business is one in which family members dominate the ownership and management of a firm, and perceive their business as a "family business." furthermore, this research study recognizes all firstgeneration family firms as included in the definition. this definition is consistent with that of many prior studies (chua, chrisman & sharma, 1999; dreux & brown, 1999; gersick, davis, hampton & lansberg, 1997; litz, 1995). first, second, and third generation this article reports on research that investigates an aspect of family business. which has generally been relegated to a secondary or peripheral focus in past studies. 11 vol. 16, no. i spring/summer 2005 specifically, as family firms move beyond the first generation of family member ownership and involvement in management, do changes occur? if family firms involve a system of i) the family, 2) the individual family members, and 3) the business unit, how do generational changes in the system components impact each other? are there significant differences between firstgeneration family firms (igffs), secondgeneration family firms (2gffs), and third-generation family firms (3gffs)? and if there are significant differences, do they extend to family businesses in other countries? for this research, a igff is defined as a family-owned and managed firm, with more than one family member involved, but only of the first and founding generation of the family. a 2gff and a 3gff are defined as firms in which the second or third generations of the family are also involved in the ownership and the management of the company. in a 2gff or 3gff, the original founder(s) and/or other members of earlier generations may be retired from the firm or deceased; thus not all (two or three) generations need be currently participating. furthermore, in a 2gff or a 3gff, the locus of managerial and family primary leadership may be located at any generational level. this working definition is consistent with previous studies that dealt with generational issues in family firms (beckhard & dyer, 1983; davis & harveston, 1999; dyer, 1988; hershon, 197 5; schein, 1983) and with definitional issues (handler, 1989; kelly, athanassiou, & crittenden, 2000). the existing literature suggests a variety of possible differences between first-generation and subsequentgeneration family firms, but most studies' examinations of generational issues were only a small or tangential part of a larger focus on other or broader family firm issues, and these studies were most frequently limited to the united states or the united kingdom. this focus on generations should be compared with another focus within the family business literature a focus on developmental issues or the stages of the evolution of family business growth. for reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal o{small business strategv example, gersick et al. ( 1997) present a developmental model of four typical stages in the growth of a family business, with significant analysis of the characteristics of the firm in each stage, and the implications regarding effective management in each stage. others, such as peiser and wooten ( 1983), focus on the l!fe cycle changes in family businesses. while this developmental focus is important, these researchers admit to the complexity of this focus and the resulting models. in contrast, it is proposed that a generational focus is a less complex way to measure the development of a family business and, therefore, a valid alternative method, and it is furthermore proposed that theory and future models based on generations may be easier to use, especially for family business owner-managers and many of the consultants who assist such firms. the objective of this study was to examine 1 gffs, 2gffs, and 3gffs in a multi-factor, multi-dimensional, and multi-national analsis, building upon the more limited-focused hypotheses, propositions, and findings of previous researchers, and also to expand the empirical body of family business research. as discussed below, the existing literature occasionally specifically compares firstgeneration versus subsequent generation family firms, but very rarely differentiates between second, third, or further generations. this study extends this limited theoretical analysis further. if a 2gff may differ from a lgff, then does a 3gff differ from a 2gff in the same manner and to a further degree? thus, the following hypotheses derive from specific references in the family business literature to generations ( 1 gffs versus 2gffs, and occasionally 3gffs) and proposed similarities and differences between them. because of the relatively limited prior research specifically focusing on generational issues in family business, it is important to recognize that these hypotheses are based largely on previous findings, rather than on established theories. 12 vol. 16, no. 1spring/summer2005 generational hypotheses dyer ( 1988) found that 80 percent of 1 gffs had a "paternalistic" management culture and style, but that in succeeding generations, more than two-thirds of these firms adapted a "professional" style of management. "paternlistic" management was characterized by hierarchical relationships, top management control of power and authority, close supervision, and distrust of outsiders. "professional" management involved the inclusion, and sometimes the predominance, of non-family managers in the firm. mcconaughy and phillips ( 1999), studying large publicly-owned founding-familycontrolled compames, concluded that descendent-controlled firms were more professionally run than were foundercontrolled firms. these writers postulate that first-generation family managers are entrepreneurs with the special technical or business backgrounds necessary for the creation of the business, but the founder's descendents face different challenges to maintain and enhance the business and these tasks may be better performed in a more professional manner, often by nonfamily members. both dyer ( 1988) and mcconaughy and phillips ( 1999) found an earlier basis in schein ( 1983 ), who also suggested that subsequent generations in family firms tend to utilize more professional forms of management. it can be argued that the size of a family business grows in subsequent generations and that it is the size factor, rather than the generation factor that influences the level of "professionalism" in the management of a family firm (and similarly influences many of the other factors dealt with in the following hypotheses). clearly, as this and other studies show, the size of a family business tends to expand with subsequent generations. it is not the intention of this study to control for size, but rather to focus on generations as a possible simple, yet important measure by which to categorize family businesses. thus, the above findings lead to: reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal o[small business strategv hj: subsequent-generation family firms are more like~v than first-generation fami~v firms to include non-family members ·within top management. (for this and the following hypotheses, this phrasing means that 3gffs are more likely than 2gffs, and 2gffs are more likely than lgffs.) studying gender issues in family finns, nelton ( 1998) stated that daughters and wives are rising to leadership positions in family firms more frequently than in the past, and that the occurrence of daughters taking over businesses in traditionally maledominated industries is increasing rapidly. focusing on societal trends rather than family firm generational issues, cole ( 1997) found the number of women in family businesses increasing. more generally, u.s. census bureau data showed women-owned firms growing more rapidly than those owned by men (office of advocacy, 2001 ). while it might be argued that these societal trends would impact family businesses equally at all generational levels, nelton 's focus on daughters and succession more strongly relates to the focus of this study. thus, h2: subsequent-generation fami~v firms are more likely than first-generation family firms to have women family members working in the.firm. another aspect of family business behavior is the distribution of decision-making authority m the firm. as previously discussed, dyer ( 1988) found decisionmaking to be more centralized in firstgeneration family firms than in subsequentgeneration family firms. aronoff ( 1998) developed this suggestion further and postulated that subsequent-generation family firms are more likely to engage in team management, with parents, children, and siblings in the firm all having equality and participative involvement in important decision-making, even if one family member is still the nominal leader of the business. aronoff furthennore reported that 42 percent of family businesses are considering co13 vol. 16, no. i spring/summer 2005 presidents for the next generation. this leads to: hj: subsequent-generation family firms are more likely than first-generation family firms to use a "teammanagement" style of management. as previously noted, interpersonal dynamics, including conflict and disagreement among family members, has been a major focus of family firm research (kellermanns & eddleston, 2004). conflict can exist in firstgeneration family firms, when siblings, spouses, or other relatives participate in management and/or ownership, and conflict can also arise between members of different generations in subsequent-generation family firms. beckhard and dyer (1983) found that conflict among family members increases with the number of generations involved in the firm. conversely, davis and harveston (1999, 2001) concluded that family member conflict increased only moderately as firms moved into the second-generation stage, but there was a more sizable increase from second to third-generation. this leads to: h4: subsequent-generation family firms are more likely than first-generation family firms to have conflict and disagreement between family members. as also previously discussed, another major focus of the literature on family firms has been succession. the primary issues here involve the difficulties founders have in "letting go" and passing on the reins of control and authority, the lack of preparation for leadership next-generation family members often receive, and thus, the need for and importance of succession planning (davis, 1983; handler, 1994; upton & heck, 1997). dyer ( 1998) investigated "culture and continuity" in family firms and the need for firm founders to understand the effects of a firm's culture and that culture can either constrain or facilitate successful family succession. fiegener and prince ( 1994) compared successor planning and development in family and non-family firms, and found that family finns favor more personal reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal o(small business strategv relationship-oriented forms of successor development, while non-family finns utilize more formal and task-oriented methods. building upon these and other studies of succession in family firms, stavrou ( 1998) developed a conceptual model to explain how next-generation family members are chosen for successor management positions. this model involves four factors which define the context for succession: fami(v, business, personal, and market. while these and other studies have dealt with various aspects of succession, none have specifically investigated succession planning and practices in first-generation versus subsequent-generation family firms. still, given that the importance of succession has been well established and publicized and that family firms often experience the trials of succession as they move from one generation to the next, it would be expected that subsequent-generation family firms are more likely to recognize and respond accordingly to the importance of succession than are first-generation family firms. thus, h5: subsequent-generation fami~v firms are more likely than first-generation family firms to have .formulated specific succession plans. several researchers of family firms have postulated that as these firms age and/or move into subsequent-generation family management and ownership, they also progress from one style of management to another. informal, subjective, and paternalistic styles of leadership become more formal, objective and "professional" (aronoff, 1998; cole & wolken, 1995; coleman & carsky, 1999; dyer, 1988; filbeck & lee, 2000; mcconaughy & phillips, 1999; miller, mcleod & oh, 2001; schein, 1983 ). "professional" management may involve the following: a) the use of outside consultants, advisors and professional services, b) more time engaged in strategic management activities, and c) the use of more sophisticated financial management tools. these conclusions lead to three hypotheses: 14 vol. 16, no. 1spring/summer2005 h6: subsequent-generation family firms are more likely than first-generation family firms to use outside consultants, advisors and professional services. h7: subsequent-generation family firms spend more time engaging in strategic management activities than first-generation fami~v firms. h8: subsequent-generation family firms are more likely than first-generation fami~v firms to use sophisticated method5 offinancial management. another issue of interest in the investigation of family business is "generational shadow" (davis & harveston, 1999). in a multigeneration family firm, a generational shadow shed by the founder may be cast over the organization and the critical processes within it. in such a situation, "succession" is considered incomplete, may constrain successors, and may have dysfunctional effects on the performance of the firm. yet this "shadow" may also have positive impact by providing a clear set of values, direction, and standards for subsequent firm managers. kelly et al. (2000) similarly proposed that a family firm founder's "legacy centrality" will influence the strategic behavior of succeeding generations' family member managers with both positive and negative impact. davis and harveston ( 1999) also investigated generational shadow, but reached mixed conclusions regarding its impacts. if "generational shadow" and "legacy centrality" are valid components of the family business system, then management in both first-generation family firms (with the founder in control) and in subsequentgeneration family firms (with the founder having strong presence even if not actually there) should be influenced by the objectives and methods of the founder. thus, h9: top management s(vles and decisions in subsequent-generation family firms are neither more nor less likely than in first-generation family firms to be influenced by the original reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal o(small business strategv business objectives and methods of the founder. family firms need not always be privately owned. as they grow and/or move into subsequent generational involvement, opportunities and needs for "going public" may arise. the family may not be able, or may not choose, to provide sufficient management or financial resources for growth, and outsider ownership can resolve this situation. and even publicly owned companies can continue as "family businesses," if management or financial control is maintained by the family. mcconaughy ( 1994) found that 20 percent of the business week 1000 finns are familycontrolled, while weber and lavelle (2003) report that one-third of s & p 500 companies have founding families involved in management. thus. hi 0: subsequent-generation f amity firms are more likely than first-generation family firms to have considered "going public. " the capital structure decision is important for family business (romano, tanewski & smymios, 2001 ). following from the preceding discussion, subsequent-generation family firms may use equity financing rather than debt financing, as they grow through the sale of company stock. cole and wolken ( 1995) and coleman and carsky (1999) found that older and larger family firms use more equity financing and less debt financing than younger and smaller family firms. on the other hand, other researchers have found that family businesses. and especially first-generation ones, are reluctant to use debt financing (bork, jaffe, jane, dashew, & heisler, 1996; gersick et al.. 1997). thus, with the literature pointing m both directions: hj i: subsequent-generation family firms are neither more nor less like~i· than first-generation family firms to use equitv .financing rather than debt financing. 15 vol. 16, no. i spring/summer 2005 cross-national issues over the fifteen-year history of the family business review and in other venues for reports on family firm research, most of this research has focused on family businesses in the united states, and sometimes canada. however, in recent years about ten to twenty percent of fbr articles have been written by non-north american researchers who have drawn on examples or samples of family firms in their own countries. and although these articles have reported on family businesses in a variety of european and asian nations, there has been limited discussion as to whether family businesses in other countries may be significantly different from their north american counterparts and whether conclusions reached from such studies may not be comparable with north american-based findings and resulting theories. only very recently have a few family business researchers postulated that family businesses in other countries may be different from those in the united states. morck and yeung (2003) suggested that noneconomic benefits and rewards may be more important to family business owners outside of the united states and the united kingdom. they also propose that family firms in the formerly planned economies of central and eastern europe may be different from american and wes tern european family businesses. hoy (2003), in an analysis of the current state of family business scholarship, concluded that there is a need to globalize this body of research. although there has been only a limited number of empirical studies on the subject of individual country characteristics and culture, and their impact on entrepreneurship (hayton, george, & zahra, 2002). such characteristics and culture clearly have an influence on the nature and performance of entrepreneurship and small business in general, particularly upon family businesses (george & zahra, 2002). it has been found that entrepreneurial cognitions are distinct from other types of business cognitions and that, while such cognition universally exists, it varies significantly from one country and culture to another (mitchell et al., 2002). reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal o(small business strategv other researchers have confirmed the influence of national culture on entrepreneurial orientation and behavior, both at the individual, aggregate, and corporate levels (ahlstrom & bruton, 2002; kreiser, marino, & weaver, 2002; marino, strandholm, steensma, & weaver, 2002). the global entrepreneurship monitor (gem) summary report lists "entrepreneurial activity" for 37 countries, with india and thailand at the high end of the scale with about 18 entrepreneurial persons per 100 in the labor force, and japan and russia at the low end with about 2 persons per 100 (reynolds, bygrave, autio, cox, & hay, 2002). "culture" is generally defined as a set of shared values, beliefs, and expected behaviors (hayton, et al., 2002), while a commonly used taxonomy of cultural/ entrepreneurial dimensions involves: 1) individualism-collectivism, 2) uncertainly avoidance, 3) power-distance, and 4) masculinity-femininity (hofstede, 1980). and while "culture" and "nation" are generally used interchangeably in most of this research, tan (2002) compared mainland chinese, chinese-americans, and caucasian americans and concluded that "nation" has a greater impact on entrepreneurship than "culture." given this lack of a solid theoretical base regarding cross-national issues in family business, this null hypothesis can be added to the previously discussed generational hypotheses: hl2: the findings for hypotheses 1-11 derived from united states data will not significantly differ from findings derived from comparable data ob-tained in other countries. country comparisons data relating to hypotheses 1-1 1 was gathered in the united states, croatia, france and india. these four countries have different sized populations, different cultures, different economic characteristics and histories, and different gem rates of entrepreneurial activity (croatia = 3.6, 16 vol. 16, no. 1spring/summer2005 france = 3.2, india = 17.9, united states = i 0.5). the following information may be of value. croatia. in 1991, the republic of croatia declared its independence from yugoslavia and is today a parliamentary democracy with a population of about 4.4 million, about 57 percent of which is urban. gross domestic product was estimated to be $24.9 billion in 2000. of a total 148,000 business enterprises in croatia, about 90,000 are one-person operations, and another 54,000 are small (annual sales of 2 million u.s. dollars or less) (world almanac, 2003). familycontrolled businesses in croatia have a long history in the country, prior to the institution of a socialist yugoslavia following world war ii. today, most family firms are singlegeneration small businesses, oriented toward autonomy, self-employment and stability. only since the 1991 independence have growth-oriented family-controlled businesses become a significant factor in the economy (denona & karaman-aksentijevic, 1995; galetic, 2002). france. france has a population of about 60 million people. seventy-five percent of the population lives in urban areas. in 2000, the gross domestic product was estimated at $1.448 trillion (world almanac, 2003 ). family-owned and controlled businesses in france, called "patrimonial" businesses, play a major role in the economy: 98 percenl of companies with less than joo employees, .,_. percent of those with 100 to 30;. 1• • employees, and 20 percent of those with ovc:; 3000 employees (gattaz 2002; lyagoubi, 2002; maherault, 1999). india. home to one of the oldest civilizations in the world, britain relinquished control of the indian subcontinent following world war ii, and the republic oflndia was established in 1950. india has a population of over one billion people and had an estimated gross domestic product of $2.2 trillion in 2000 (world almanac, 2003). the economy consists of a large state sector with a number of very large state enterprises, a relatively small number of multinational companies, and a large private sector. the private sector, reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal o(small business strategy with few exceptions, is controlled by families who may or may not hold large shareholdings in their companies. thus, most of the large indian companies, though they may be publicly traded, are controlled by families, and their management succession is generally maintained within the family. members of their boards of directors also hold their positions at the pleasure of the controlling family (center for monitoring indian economy, 2003; manicutty, 2000). methods samples in the united states, survey instruments were randomly mailed or hand-delivered in 200 i to a variety of new york and massachusetts companies which had been identified as family firms (primarily in listings of "family businesses" in local business newspapers). these surveys were addressed to the presidents or ceos of these companies, with the instruction that the addressee complete the survey, but only if they were an "ownermanager" and if they viewed their firm as a "family business". there were 822 surveys mailed or delivered; of these 272 were no longer at the address or responded that they were not family firms. (the survey instrument included the question: "do you consider your company to be a family business?" and the cover letter defined "family members" as parents, children, siblings, spouses, and other close relatives.) a total of 149 usable returned surveys provided a return rate of 27.1 percent. to increase the sample size and to test for nonresponse bias in the u.s., after a few months a follow-up request for surveys was made, and 12 more questionnaires were returned and used for a total of 161, providing a final return rate of 28.6 percent. an analysis of the united states data alone was published by sonfield and lussier (2002, 2004). because of varying difficulties in identifying and contacting family businesses in the three other countries. the survey methodologies were different in each. this data collection occurred in 2003 using the sonfield and lussier (2002, 2004) survey instrument, but 17 vol. 16. no. i spring/summer 2005 it was translated into the local language by experts as needed. in france and india, large survey mailings to identified family businesses were possible (france = 800, india = 312), and net response rates for france of 14.6 percent (n=l 16) and for india of 13.6 percent (n=40) were obtained. in croatia, far fewer (70) family firms were identifiable, but an intensive contact effort by mail, telephone, and personal visit resulted in a response rate of 71.4 percent (n=50). identifying family firms from various listings is consistent with that of other family business researchers who have been constrained by the lack of national databases of family firms (chua, et al., 1999; teal, upton, & seaman, 2003). this is an acceptable sample size and response rate for family business, as it has been reported that 62 percent of prior family business studies included no sample at all or a sample with less than 100 family businesses, and 66 percent of these were convenience samples (bird, welsch, astrachan & pistrui, 2002). in the top three small business or entrepreneurship-oriented journals (entrepreneurship theory and practice, journal of business venturing, and journal of small business management), around one-third of the articles had a response rate of less than 25 percent (dennis, 2003). measures dependent variables. the dependent variables to test hypotheses 1-11 were as follows. (hi) does the firm have non-family managers?-the percentage of family to nonfamily managers. (h2) the percentage of male and female family members involved in the operation of the firm. hypotheses 3-10 were likert interval scales of: "describes our firm" 7 6 5 4 3 2 1 "does not describe our firm". (h3) full family involvement in decisions, (h4) level of family conflict, (h5) formulation of succession plans, (h6) use of outside advisors, (h7) long-range thinking and decision-making, (hs) use of sophisticated financial management tools, (h9) influence of founder, and (h 10) considering going public. (h 11) the use of reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal o(small business strateg11 debt or equity financing was a nominal measure of one or the other. descriptive statistical data included number of years the firm was in business, the number of employees, industry (product or service), and form of ownership. independent variable. the independent variable for the first 11 hypotheses was the number of generations involved in the operations of the family business. the nominal measure was one, two, or three or more generations. analysis of variance hypotheses 1-10 compared the dependent variable among the three generations using one-way anov a. hypothesis 11, having nominal measured variables, compared debt to equity by generations using chi-square. hypothesis 12 was tested by comparing the statistical results within and between the four countries' data for hypotheses 1-11. because there were virtually no significant differences within countries (as discussed below, the only differences were found in the u.s. only. and only for succession planning and for debt to equity financing) and because no other differences were found between countries, additional statistical tests were not needed. control variable analysis of covariance. analysis of covariance (ancov a) was used to test for spurious relationships, i.e. the variance in the dependent variables being explained by a variable other than generation (number of employees, service versus manufacturing, years of operation, and legal form of business). discriminant analysis in addition, discriminant analysis was nm with variables being reversed. the 11 dependent variables were used as independent variables to determine if they could predict the dependent variable generation. the descriptive statistical data was also tested for differences among generations. 18 vol. 16, no. 1spring/summer2005 results table provides descriptive statistical results for all four countries. from the descriptive statistics, it can be seen that there are both similarities and differences in the characteristics of the family businesses surveyed in the four countries. the united states, france, and india are relatively similar in the distribution of generational categories, but croatia, with its young market economy, has few 3gffs. similarly, croatia's sample family firms are younger and have fewer employees. on the other hand, in india the sample consisted mainly of large privately-owned companies with many employees, as such companies are a major component of that country's economy. the variations between the countries, with regard to legal form of ownership (corporation. partnership, sole proprietorship), reflect the differing legal contexts of the countries. because it is to be expected that i gffs, 2gffs, and 3gffs will differ in many ways within and between countries (years in business, number of employees, and form of ownership), the total sample was controlled for three other factors: all the surveyed firms (regardless of generation) were family businesses, the owner-manager company president or ceo completed the survey, and there were no significant generational differences with regard to type of business (service versus manufacturing) (p = .331 ). as discussed above and below, ancova was also run to control these variables. hypotheses anova testing see table 2 for the results of the hypotheses tests. to conserve space in this table, the 11 hypotheses are denoted by summary phrases. in the actual survey instrument. the questions or statements used to collect the data were more substantial. ancova testing. as discussed previously, to determine if spurious relationships exist, ancov a analyses were run for each hypothesis with regard to four control variables: l) number of employees, 2) years in business, 3) service versus manufacturing reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal o f small business strategy vol. 16. no. 1spring/summer2005 tabl e i descriptive st atistics (n = 367) variabl e igff u.s .a. (n = 161) generation (n/% ofn) 51 /32% years in bu siness (mean) 13 number of emp loyees (mean) 51 service(%) vs . 78% man ufactur ing 22% ownership (corporation %, 53% partnersh ip , 16% sole proprietorship) 31 % croatia (n = 50) generation (n/% ofn) 11/22% years in bu siness (mean) 8.5 n umber of employees (mean) 14 service(%) vs . 36% product(%) 64% ownership (corporation %, 0% partnership, 27% sole pro prietorship) 73% france (n = 116) generation (n/% ofn) 45139% years in business (mean) 24 n umber of employees (mean) 53 service (%)vs. 38% product(%) 62% ownership (corporation %, 80% partnership , 11 % so le proprietors hip) 9% india (n = 40) generation (n/% ofn) 9/23 % years in bus iness (mean) 18 number of empl oyees (mean) 1438 service(%) vs. 0% prod uct (%) 100% ownership (corpora tion %, 100% partnership, 0% sole proprietorshi p) 0% businesses, and 4) legal form of ownership. as expected, there was some covariance as years in business and number of employees increased with generations . however, increased years in business and number of employees are logical events in subsequent generations. but the ancoy a testing fo und no illogical or spurious relationships that were inconsi sten t with the hypotheses and 19 2gff 3gff total 60/37% 50/33% 161 / 100% 34 67 40 228 3 10 201 71 % 76% 74% 29% 24% 26% 78% 88 % 73% 10% 6% 11 % 12% 6% 16% 35/70% 4/8% 50/ 100% 12 34.5 13 15 9.5 14 .5 49% 75 % 48% 5 1% 25 % 52% 0% 0% 0% 9% 0% 22% 9 1% 100% 88% 38/33 % 33/28% 116/100% 45 78 46 103 118 88 47% 48 % 44% 53% 52% 56% 80% 72 % 78% 14% 19% 14% 6% 9% 8% 16/40% 15/37% 40/ 100% 36 56 39 5240 5396 4443 25 % 20% 17% 75 % 80% 83% 100% 100% 100% 0% 0% 0% 0% 0% 0% should not influence the results of anov a testing . discriminant analysis testing. the results of the discriminant ana lysis also indicated a lack of differences between generations, as the hypotheses variabl es could not accurately predict generation as a model in any of the four countries. reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal o(small business strategv vol. 16, no. 1spring/summer2005 table 2 one-way an ov a h ypotheses generation comparison by country (n = 367) u.s. a. croatia france india hypotheses (n=l 16) (n=50) (n=l 16) (n=40) f/p f/p f/p f/p 1. use of non-fami ly members .56/.574 .20/.818 1.93/. 149 .82/.450 within top mgt (% non-family) 2. women fami ly members 2.55/ .106 1.66/.20 1 .32 1/. 726 1.88/. 167 working in firm(% of women) 3. use of team-management style 1.82/.276 3. 16/ .05 1 .01/.990 .25/ .781 (71 )" 4. having conflict between family .72/.469 .16/ .847 .02/.979 .59/ .561 members (7-1) 5. formulation of specific l.95/ .000 2.82/.070 .98/.377 1.29/.287 succession plans (7-l) 6. use of outside consultants , 1.83/. 191 .99/.379 .55 /.576 .27/.762 ad visors , and prof. serv ices (7-1) 7. time spent in strategic mgt .09/ .984 2.66/.081 l.97/.145 . 14/.870 activity (7-1) 8. use of sophisticated methods of 2.32/ .133 .43 /.653 .9 1/.405 1.87/. 169 financial mgt (7 -1 ) 9. degree of influence by origina l business objective and methods l.66/. 171 2. 19/.1 23 .93 /.396 .26/.771 of the fo under (7-l) 10. consider going public {7 -1 ) .993/ .371 .33/.718 . 17/.842 l.51 /.233 11 . use of equi ty financing rather 28 .92/ .000 . 173/.9 17 3.37/.186 1.20/.548 than debt (proportion)b a likert scales-mean of describes our firm 7 6 5 4 3 2 i does not describe our firm b chi-square, not f value discussion clearly, much of the existing literature findings regarding possible generational differences among family firms is not supported by this study. in most respects, 1 gffs, 2gffs, and 3gffs share the same characteristics and behavior patterns in the united states and in croatia, france, and india as well. thus, these current findings do not support the previous findings and conclusions of aronoff ( 1998), beckhard and dyer ( 1983 ), cole and wolken ( 1995), coleman and carsky ( 1999), davis and harveston (l 999, 200 i), dyer ( 1988), filbeck and lee (2000), mcconaughy and phillips ( 1999), miller, et al. (200 i). and schein ( 1983 ), all of whom found and/or postul ated generational differences among 20 family businesses (as discussed in detail in the generational hypotheses section). similarly, these findings raise a question with regard to much of the prior research on cultural or national influences on entrepreneurship (ahlstrom & bruton, 2002; geore & zahra, 2002; hayton, et al., 2002; kreiser, et al., 2002 ; mitchell et al., 2002; marino, et al., 2002; morck & yeung, 2003; reynolds, et al., 2002), as discussed earlier under cross-national issues. do culture and/or nation influence entrepreneurship, and specifically family business, to the degree that has been indicated by these researchers? in support of the limited generational findings of the earlier literature, only one significant generational difference was found and only in the united states american 2gffs and 3gffs have fonnulated reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategv succession plans to a greater degree than american i gffs; however 2gffs and 3gffs in that country do not differ in this respect. an explanation for this latter finding might be that the impetus for the formulation of such plans arises as a i gff moves toward becoming a 2gff, but once such a plan has been developed (for the second generation), owner-managers see no need to expand that plan or develop further plans for the third generation the existing plan is sufficient. however, the literature generally stresses the importance of succession plans at every generational level; thus such plans for the second to third-generation transition would be as important as for the first to secondgeneration changeover. also in support of the literature, i gffs, 2gffs, and 3gffs in all four countries were all equally influenced by the original business objectives and methods of the founder(s) of the firm. "generational shadow" and "legacy centrality", as promulgated in the literature, remain in force beyond the first, and even the second generation of a family firm. this finding is consistent with the conclusions reached by davis and harveston (1999), and kelly, et al., (2000) and crittenden (2000) with regard to this issue. as for the use of debt versus equity funding, it has been noted that the literature provides mixed positions. this study found significant generational differences only in the united states. the study's findings indicated that while 40 percent of american i gffs used equity funding more than debt funding, only 11 percent of 2gffs did, and 33 percent of 3gffs did. the finding that american i gffs use the least proportion of debt financing might support bork et al. ( 1996) and gersick et al. ( 1997). yet the greater use of equity financing by american 3gffs than by 2gffs could be seen as in support of cole and wolken ( 1995) and coleman and carsky ( 1999). furthermore, no significant generational differences in debt versus equity financing were found in croatia, france, or india. clearly, further research on generational issues and debt versus equity financing is needed. 21 vol. 16, no. 1spring/summer2005 the similarities and differences in the cultures, economies, and in the descriptive statistics of the four countries have been discussed above. even though the characteristics and demographics of family businesses in these countries are at times quite different, this analysis found broad generational similarities in all four countries. perhaps the force of "familiness" and the system of the family firm are stronger, even in subsequent generations, than is the influence of "mainstream" non-family-firm forms of management thinking and behavior and the additional influence of significantly different national and cultural environments. limitations as previously discussed, most prior studies' examinations of generational issues were only a small or tangential part of a larger focus on other or broader family firm issues. thus, the hypotheses formulated for this study were based on limited research findings and conclusions. this lack of a strong existing empirical-based research literature is a limitation to this study, but it also increases the importance of this study's empirical methodology and its findings. another limitation of this study is the modest response rates and/or sample sizes in some of the countries surveyed. yet, response rates and sample sizes are generally a problem and limitation in survey studies of smaller businesses, and especially so in countries with less developed economies and/or less of an existing history of small business research. a recent study by dennis (2003) confinns this ongoing methodological limitation in small business research and concludes that varying or enhancing survey techniques does not improve response rates. thus, this is a limitation of this study that must be accepted. further research clearly, these current findings indicate a need for more focused and extensive analysis of similarities and differences among first, second, and third-generation family firms, along with their managerial implications, reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy both in the united states and in a variety of other countries. are there primarily similarities or differences between lgffs, 2gffs, and 3gffs, and can conclusions reached with regard to family businesses in the united states also be reached for other countries for those similar and for those different from the united states with regard to economy, culture, national characteristics, entrepreneurial cognition, and the nature of family businesses? further research is also needed to clarify both the differences and overlaps between issues of family firm generations versus stages and the advantages and disadvantages of each of these focuses, along with their respective potential resultant theories and models. furthermore. this issue is important because both those who research and those who assist family firms need to know whether it is necessary and/or valuable to differentiate between generational categories within the total population of such firms. are there significant differences, and do they in tum require that different forms of assistance will be most effective for first-generation versus second-generation versus third-generation family firms? and do the generational similarities or differences apply in other countries and for those who research and/or assist family firms in these countries? finally, a better understanding of the factor of generational categorization of family businesses, within and between countries, might be of benefit to the owner-managers of such businesses. while it might be difficult for an owner-manager to identify the developmental stage of his or her family business, or to analyze his or her firm with regard to some of the other issues raised in the academic literature in family business, an owner-manager can certainly categorize his or her business by generation. if future research results in a significant body of theory and managerial implications based on generation and/or by nation/culture, then this might enable family business ownermanagers in various nations to make better operational and strategic decisions on their own, when the intervention of professional assistance is not available. 22 vol. 16, no. i spring/summer 2005 references ahlstrom, d., & bruton, g. 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( 1975). the problems of succession in fami(v businesses, unpublished doctoral dissertation,: harvard university, cambridge, ma. hofstede, g. ( 1980). culture's consequences: international differences jn work related values, beverly hills, ca: sage. hoy, f. (2003). legitimizing family business scholarship in organizational rereproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategi· search and education, entrepreneurship theory and practice, 27( 4 ), 417-422. kellermann, f.w., & eddleston, k.a. (2004). feuding families: when conflict does a family firm good, entrepreneurship theory and practice, 28(3), 209-228. kelly, l.m., athanassiou, n., &. crittenden, w.f. (2000). founder centrality and strategic behavior in the familyowned firm, entrepreneurship themy and practice, 25(2), 27-42. kets de vries, m. (1993). the dynamics of family controlled firms: the good and bad news, organizational dynamics, 21(3), 59-71. kreiser, p., marino, l. & weaver, k. (2002). assessing the psychometric properties of the entrepreneurial orienttation scale: a multi-country analysis, entrepreneurship theory and practice, 26(4), 71-94. lansberg, i., perrow, e.l., & rogolsky. s. ( 1988). family business as an emerging field, family business review, 1, 1-7. levinson, h. ( 1971 ). conflicts that plague the family business, harvard business review. 49(2). 90-98. littunen, h., & hyrsky, k. (2000). the early entrepreneurial stage in finnish family and nonfamily firms, fami~v business review, 13, 41-54. litz, r. ( 1995). the family business: towards definitional clarity, fami~\' business review, 8, 71-81. litz, r. ( 1997). the family finn 's exclusion from business school research: explaining the void; addressing the opportunity, entrepreneurship themy and practice, 22( 2 ), 5 5-71. lyagoubi, m. (2002). controle, propriete et comportement de financement: etude des enterprises patrimoniales, doctoral dissertation universite paris ix, dauphine, crefuge. maherault, l. ( 1999). comportement financeier des enterprises familiales: approche empirique," economies et societes. serie siences de gestion, 26-2, 247-272. 24 vol. 16, no. 1spring/summer2005 marino, l., strandholm, k., steensma, h., & weaver, k. (2002). the moderating effect of national culture on the relationship between entrepreneurial orientation and strategic alliance portfolio extensiveness, entrepreneurship theory and practice, 26(4), 145-160. manikutty, s. (2000). family business groups in india: a resource based view of emerging trends, family business review, 13, 279-292. mccann, j., leon-guerrero, a. & haley, j. ( 1997). family business with a capital "b:" characteristics, priorities and performance of family firms, " paper presented at the academy of management meeting, boston, ma. mcconaughy, d.l. (1994). founding fami(v controlled corporations: an agency-theoretic ana(vsis of corporate ownership st111cture and its impact upon corporate efficiency, value, and capital st111cture, unpublished doctoral dissertation, university of cincinnati, oh. mcconaughy, d.l., & phillips, g.m. ( 1999). founders versus descendents: the profitability, efficiency, growth characteristics and financing in large, public, founding-familycontrolled firms, family business review, 12, 123-131. miller, n., mcleod, h., & oh, k. (2001). managing family businesses in small communities, journal of small business management, 39( i), 73-87. mitchell, r., smith, j., morse, e., seawright, k., peredo, a., & mckenzie, b. (2002). are entrepreneurial cognitions universal? assessing entrepreneurial cognitions, entrepreneurship theory and practice, 26( 4 ), 9-32. morck, r., & yeung, b. (2003). agency problems in large family business groups, entrepreneurship theory and practice, 27(4), 367-382. morris, m. h., williams, r.o., allen, j.a., & a vi la, r.a. ( 1997). correlates of success m family business reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategv transitions, journal of business venturing, 12, 385-401. nelton, s. (1998). the rise of women in family firms: a call for research now, fami~v business review, 11, 215-218. office of advocacy (2001). women-owned firms continue dramatic growth, (sba no: 01-03 advo), washington, d.c.: u.s. small business administration, april 4. peiser, r., & wooten, l. ( 1983 ). life-cycle changes in small family businesses, business horizons, may-june, 58-65. reynolds, p., bygrave, w., autio, e. & hay, m. (2002). global entrepreneurship monitor 2002 executive report, babson college, london business school, and the ewing marion kauffman foundation. romano, c.a., tanewski, g.a., & smyrnios, k.x. (2001 ). capital structure decision making: a model for family business, journal of business venturing, 16, 285-288. schein, e. (1983 ). the role of the founder in creating organizational culture, organizational dynamics, 12( 1 ), 13-28. sharma, p., chrisman, j., & chua, j. (1997). strategic management of the family business: past research and future challenges, family business review, 10, 1-35. sonfield, m.c., & lussier, r.n. (2002). first-generation and subsequentgeneration family firms: a comparison. proceedings of the national entrepreneurship and small business educators conference, 153-161. sonfield, m.c., & lussier, r.n. (2004). first, second and third-generation family firms: a comparison, family business review, 17, 189-202. stavrou, e.t. ( 1998). a four factor model: a guide to planning next generation involvement in the family finn, family business review, 11, 135142. tan, j. (2002). culture, nation, and entrepreneurial strategic orient25 vol. 16, no. 1spring/summer2005 tations: implications for an emerging economy, entrepreneur-ship theory and practice, 26(4), 95-112. teal, e., upton, n., & seaman, s. (2003). a comparative analysis of strategic marketing practices of high-growth u.s. family and non-family firms, journalol developmental entrepreneurship, 8(2), 177-195. upton, n., & heck, r. (1997). the family business dimension of entrepreneurship, in entrepreneurship 2000, sexton, d. and r. smilor (eds) chicago: upstart publishing, 243-266. ward, j. ( 1986). family ownership, business strategy and performance, paper presented at the annual academy of management meeting, chicago, il. ward, j., & dolan, c. (1998). defining and describing family business ownership configurations, family business review, 11, 305-309. weber, j., & lavelle, l. (2003). family, inc., business week, (nov. 10), 100-114. world almanac (2003). new york: world almanac books. matthew c. son field is the robert f. dall distinguished professor in business at the zarb school of business at hofstra university. he earned an a.b, m.b.a. and ph.d. from cornell, harvard and new york universities. his recent research and publications have focused on entrepreneurship, small business, family business and minority business. robert n. lussier 1s professor of management at springfield college. he is the author of many publications including a management, leadership, human relations, entrepreneurship, and small business management textbook. sanja pfeifer 1s on the faculty of the university of josip juraj strossmayer, osijek, croatia. s. manikutty is on the faculty of the indian institute of management, vastrapur, ahmedabad, india. reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategv loic maherault and louis verdier are on the faculty of the ecole de management, lyon, france. vol. 16. no. i spring/summer 2005 26 stra tegy using a prenuptial agreement to protect the small business sandra j. perry bradley university abstract a divorce or death in the small business owner y family can threaten loss ofassets andtor control of the business. a prenuptial agreement can be used to control the disrribution of assets upon divorce anth'or death in order to preserve the assets of the business and retain ownership and control ofthe business. sma/i business consultants are in a unique position to discuss this maaer with iheir clients and suggest a policy regarding prenuptial agreements. general requirements ofprenuptial agreements and possibilities for use in the small business are discussed. introduction an owner of a successful business nears retirement age and wishes to transfer ownership of the business to his adult children. he wants one main thing from the transfer: the guarantee of an income for life. but his children are all married, and he knows that in the event of one or more divorces among the children, the business he worked so hard to build could be destroyed in the litigation. what would happen to his income stream if the business were not protected? consider the real case of george lavelle, president of lavelle co., a wholesaler and distributor of building materials. although he knew it would cause hard feelings, he made transfer of stock in his company to his eleven children contingent on two things: the income stream for life and the signing of a post-nuptial agreement by all his eleven children and their spouses. although they all eventually signed against the advice of a divorce attorney, hard feelings were one of the unavoidable results. (livingston, 1997). or were they? if george had considered this problem much earlier, before any of his children were married, he could have created a policy that any future owner of the business must have a valid prenuptial agreement in existence which protects the owner's interest in the business from the claims of an in-law. those who own a small business or are contemplating one, or are involved in a familyowned business, have much to lose in the event of divorce. assets accumulated by the small business during the marriage, as well as increases in value in previously held assets, will be considered marital assets subject to division in the event of divorce. a lack of liquidity in the business may necessitate selling some or all of the business assets to pay the non-owner spouse his or her share of the marital assets. these and other considerations suggest that a prenuptial agreement, often called a premarital agreement, be contemplated by small business owners before marriage. 54 journal ofsmall business strategy volume 9, no. l spring l998 role of the small business consultant small business consultants such as attorneys, accountants, and financial planners are in a unique position to suggest the use of premarital agreements to small business owners and perhaps a policy regarding their use. small business owners with children who may become involved in the business may not have considered the impact of a child's later marriage and possible divorce. even if they have considered the use of a premarital agreement, few are actually implemented because of the hard feelings and distrust many people have when confronted with the issue. (livingston, 1997). small business consultants can suggest the use of a premarital agreement as well as ways to minimize hard feelings associated with it. the time to consider the impact of a new daughter-in-law or son-in-law is not when the engagement is announced, but long before when the discussion is not as likely to be viewed in a hostile manner. if the owners wish to preclude a future in-law from acquiring an interest in the business, the time to consider the manner of accomplishing this objective is well before any marriage is contemplated. a business could adopt a policy that all owners are expected to have a valid premarital agreement with their spouses which precludes the spouse from obtaining an ownership interest in the business. a policy applied to all owners will reduce the likelihood that anyone could be singled out later, and encourage compliance with the policy. general principles premarital agreements serve two purposes; to provide for the division of property upon divorce, and to provide for the distribution of property upon death. one agreement may provide for both situations. the idea that couples may provide for the distribution of property upon death in a premarital agreement has been long accepted by the courts. however until the 1970's, courts were reluctant to accept that couples could lawfully contemplate divorce before they were married and provide for a division of property in advance. (brandt, 1997). this was founded on the belief that such agreements fostered divorce and were against public policy. in reality, such agreements evidence the thoughtfulness of the couple before marriage and can provide for the early resolution of many issues, both financial and otherwise. financial issues dominate most premarital agreements, and suggestions for the small business owner are discussed below. however, there are other issues which the couple may choose to include in the agreement such as the religious faith and surname of future children. the understanding of the parties as to whether to have children at all may be addressed in the premarital agreement, although the enforceabi1ity of such a provision is doubtful. premarital agreements have included such unusual matters as post-marital weight gain, pet custody, frequency of sex, and other day-to-day matters, most of which are probably unenforceable and not an appropriate use of the premarital agreement. (garpstas & legalley, 1996; hoffman, 1995). premarital agreements are a matter of state law, and each state may have its own particular requirements. often these requirements are found in the case law, rather than statutory law. there is a uniform premarital agreement act [upaa, (1987)],which has been adopted by about half of the states including arizona, arkansas, california, connecticut, delaware, hawaii, idaho, 55 journal ofsma/i business strategy volume 9, no. l spring l998 illinois, indiana, iowa, kansas, maine, montana, nebraska, nevada, 'new jersey, new mexico, north carolina, north dakota, oregon, rhode island, south dakota, texas, utah, and virginia. (brendt, 1997). the following discussion includes general principle. found in many states and the upaa, and recommendations to avoid common pitfalls. formalities the premarital agreement must be in writing and signed by both parties. this is required under the statute of frauds and the upaa. witnessing and notarization are recommended but not generally required. premarital agreements are generally not enforceable unless the parties do actually marry, except to the extent necessary to avoid an inequitable result. volunta a reement the premarital agreement must be voluntarily entered into by both parties. duress and undue influence must be avoided. duress is a threat that overcomes a party's free will. undue influence is a pressure or coercion that can occur between parties in a confidential relationship with each other. courts generally recognize that parties about to marry do not deal at arms'ength with each other. "unlike a party negotiating at arm's length, who generally will view any proposal with a degree of skepticism, a party to a premarital agreement is much less likely to critically examine representations made by the other party. the mutual trust between the parties raises an expectation that each party will act in the other's best interest. the closeness of this relationship, however, also renders it particularly susceptible to abuse. parties to premarital agreements therefore are held to the highest degree of good faith, honesty, and candor in connection with the negotiation and execution of such agreements." ("in the matter of the estate of beesley," 1994). undue influence can occur if one party suggests a premarital agreement at a time close to the wedding date and threatens to back out of the marriage unless the other party agrees. at this point, wedding invitations have been sent and al! the arrangements made. one party may feel that the embarrassment and expense of calling off the wedding are too much to bear and agree to something to which he or she would not otherwise have agreed. those were the basic facts of luigeri v. luigeri (1976). the parties had known each other for quite some time, but were engaged for a period of four weeks before the wedding. each had been married before and were middle-aged at the time of the marriage. the wedding occurred suddenly. the prospective groom suggested on a monday that they be married on the following thursday if they could book passage on the ss constitution for an extended honeymoon. the prospective wife agreed. by tuesday, the passage had been arranged and the parties spent the remainder of the day purchasing expensive wedding clothes for both of them, straightening out the passports, getting blood tests, making all the official arrangemenm, and inviting family and friends. on wednesday, the wedding rings were sized and the license obtained. on thursday, while the final sizing on the rings was being done at the jewelers, the groom pulled a premarital agreement out of his pocket and asked that the bride sign it. she objected, and the groom arranged for her to speak to his attorneys on the telephone. the groom's attitude was that there would be no wedding unless the agreement was signed. the bride signed the agreement shortly afler midnight at the airport immediately before they were married. the bride was certainly aware that the groom was quite a wealthy man and the subject of a premarital agreement had been discussed before between the parties. nevertheless, the court 56 journal ofsmall business strategy volume 9. jvo. i spring l998 found that the husband "sprang the agreement upon her and demanded its execution within twenty four hours of the wedding..." therefore, the court found that the bride had not voluntarily signed the agreement and invalidated it. (lutgert v. lutgert, 1976) on remarkably similar facts, the court in the delorean case did not invalidate the premarital agreement. (delorean v. delorean, 1986). hours before the wedding, the groom presented the bride with a short premarital agreement that "...any and all property, income and earnings acquired by each before and arer the marriage shall be the separate property of the person acquiring same, without any rights, title or control vesting in the other person." the groom persuaded an attorney friend of his to advise the bride, and he advised her not to sign the agreement. at the time, the groom was a senior executive with an automobile manufacturer, in his mid-forties, and 25 years older than the 23 year old bride. nevertheless, the court found the agreement voluntary under california law. "while it may have been embarrassing to cancel the wedding only a few hours before it was to take place, she certainly was not compelled to go through with the ceremony." although the court did not invalidate the agreement, it is never wise to broach the subject of a premarital agreement close to the date of the wedding. full and fair disclosure or knowin i waiver of same the best evidence that the parties knowingly entered into a premarital agreement is an itemized list of each party's assets included in the agreement itself. each party can see what assets the other owns and may knowingly waive some or all claims to those assets. iowa, nevada, and new jersey specifically require financial disclosure as an independent requirement for validity of a premarital agreement under their version of the upaa. (brendt, 1997). in lieu of the itemized statement, the premarital agreement may include a statement that each party waives disclosure of the other's assets. of course, this must be a voluntary waiver on the part of both, and evidence that each party had access to legal counsel and adequate time to contemplate the matter are important to later enforcement of the waiver. lack of legal counsel by amy irving at the time she signed a premarital agreement on a scrap of paper with her ftanc6, steven spielberg, caused the court to invalidate the premarital agreement. spielberg then settled with irving for $ 100 million after their four-year marriage. (mcmenamin, 1996). a third possibility is that the parties already know the assets of the other. the upaa expressly includes this under its discussion on enforcement of the premarital agreement. the upaa also provides that the party seeking to avoid the agreement has the burden of establishing that there was no full and fair disclosure or waiver. there may be a time limit on raising objections to the agreement. new york limits the time to six years from the date the agreement was signed. (mcmenamin, 1996). a reement not unconscionable at the time of execution courts have traditionally had the power to decline enforcement of any agreement found to be unconscionable. under the upaa, the issue of unconscionability focuses only on the time of execution of the document, not at the time of enforcement. as such, the upaa prohibits courts from taking into consideration any change of circumstances from the time of execution to the time of enforcement. additionally, the upaa couples the unconscionabilityissue with the issue 57 journal ofsmall business strategy volume 9, tro. i spring l998 on full and fair disclosure. therefore, under the upaa, a party can avoid enforcement only if the agreement was unconscionable at the time of execution and there was no full and fair disclosure or knowing waiver. the upaa has been criticized because of this. (ladden & franco, 1990; davis, 1988). north dakota and connecticut have adopted the upaa, but retained the right of the court to refuse to enforce some or all of the agreement if it is unconscionable at the time of enforcement. (brandt, 1997; parley, 1995). use of the premarital agreement in contemp)lation of divorce in the absence of a premarital agreement, assets acquired aaer the marriage are considered "marital assets" subject to division by the court. some assets acquired during the marriage, particularly gias and bequests made to only one party, are typically excluded from the definition of marital assets. while assets owned before the marriage are non.marital assets, increases in value due to appreciation and additions to investments during the marriage are marital assets. for the small business owner, this means that the owner's assets in the business acquired aaer the marriage will be thrown into the hopper as part of the total marital assets to be divided. these assets can include inventory, business equipment, cash on hand, and accounts receivable. in order to keep the owner's interest in the business aaer the divorce, the owner-spouse may have to relinquish claims on substantially all the other marital assets. these can include an interest in the marital home, bank accounts, investments, automobiles, personal property, and the like. this can leave the owner-spouse with little other than the business aaer the divorce. in some cases, the assets of the business on paper will exceed half the total assets of the marriage and force the owner-spouse to sell some or all of the business to pay the other spouse his or her share. because of these possibilities, business owners should consider the following options. com late waiver of ri hts in each other's assets each party may completely waive the interest in the other's assets acquired during the marriage. this means that each party's earnings, additions to the business, investments, and such would remain each party's separate property. while this would protect the owner-s'pouse's interest in his or her business, the provision also cuts the other way. if the business were not particularly successful at the time of divorce, the owner-spouse would be prohibited from claiming any interest in the other spouse's assets. partial waiver of ri hts in each other's assets a partial waiver of rights can involve each party waiving an interest in certain property held by the other. for example, if each party owned a business coming into the marriage, each could waive any interest in additions or increases in value in the other's respective business, but consider all other property acquired aaer the marriage as marital property subject to equitable division. in a family business situation, the prospective in-law can be asked to waive any interest in the family business in the event of divorce. these agreements designate the family member's interest in the family business as separate, non-marital property, including any appreciation in the business'alue. the business value is not included when determining the marital assets. (sharfstein, 1998). 58 journal ofsmall business strategy volume 9, no. i spring /998 another possibility involves lessening the percentage of interest one party acquires in the other' assets acquired a(ter the marriage. for example, the typical division without a premarital agreement is one-half to each spouse. the parties could agree to a one-third share in the other' assets. this would mean that an owner-spouse could claim no more than one-third of an interest in investments, savings, and such, acquired and maintained by the other spouse during the marriage out ofhis or her employment. at the same time, the non-owner-spousecould similarly claim no more than one-third of an interest in the owner-spouse's business. this type of partial waiver reflects the fact that one spouse's employment oflen helps support the owner-spouse while getting a business started and growing. a third possibility involves protecting a future income stream that arises out of work performed before the marriage. persons who sell life, property, and casualty insurance receive residual income afler the policy is sold. similarly, persons involved in multilevel marketing businesses, such as amway, mary kay cosmetics, nuskin, and the like, oflen receive bonuses based on the safes performance of their downline distributors. some of these downline distributors may have been in place before the marriage, yet the income stream from these distributors will continue into the future. the parties involved in such a business may want to structure their agreement to exclude some or all of such income attributable to previous policyholders or distributors. satisfaction of marital ri hts out of nonbusiness assets an agreement can provide that the spouses are not waiving their marital rights, but are choosing to indicate how each spouse's rights would be satisfied. this can protect the small business assets from being transferred to the non-owner-spouse. this can also prevent the non-owner-spouse from becoming an owner in the business. this is especially important in the closely-held business. however, the parties need to plan how the marital interest of the non-owner-spouse will be satisfied. there must be enough other marital assets to cover the spouse's one-half interest. the owner-spouse, if involved in a closely-held business with others, might consider executing a buy-sell agreement with the other owners to prohibit transfers to third parties such as a soon-to-be-former spouse. (frunzi, 1990) if the business involved is a family-owned business, the parents or other relatives of the couple may have a significant interest in the couple's premarital understanding. parents otten worry that a former son-in-law or daughter in law may acquire an interest in the business they have worked so hard to build. the fact that the couple enters into a premarital agreement does not protect the parents'nterest fully because the couple can amend or revoke their own agreement alter the marriage without anyone's knowledge or consent. commentators suggest having the parents or other family members as signatories on the original premarital agreement with the requirement that they agree to any amendments or revocation. (sharfstein, 1998; frunzi, 1990) the parents'ills also may be used to control the couple by providing that the child's share in the family business is contingent on the existence of a binding premarital agreement at the time of distribution. (frunzi, 1990) 59 journal ofsmall business strategy 1'olurne 9, no. i spring l998 use of the premarital agreement in contemplation of death most states recognize a person's right to use a premarital agreement to limit one spouse's future legal interest in the estate of the other. persons in their second or later marriage oflen have children from a former marriage to whom they would prefer to give the bulk of their estate, particularly a small business nurtured by the parents during their lifetimes. in the absence of a premarital agreement, however, most state laws provide that a spouse be provided for in the event of death. this is accomplished through the law of intestate succession when a person dies without a valid will. most states provide that a surviving spouse receive between one-third and all of the estate if the other spouse dies intestate. in the event a valid will is lea without adequate provision for the surviving spouse, state law allows the spouse to take a statutory forced share of the estate, thereby diminishing all other bequests pro rata. a premarital agreement can include a waiver of the right to a statutory forced share and require that each spouse make a will providing for the other in lieu of the statutory forced share. in the event that no valid will was executed by the time of the decedent's death, a court would enforce the premarital agreement as a contract to make a will. this could have a major impact on the surviving spouse. instead of receiving a substantial part of the decedent's estate under the law of intestate succession, the surviving spouse may receive a small gifl, or none at all. in the event that a valid will and premarital agreement reflected the same understanding, the court would have two indications of the decedent's intent and enforce the terms. in the event the will and premarital agreement diitered, the court would probably determine the decedent's intent based on which document was executed last. if the premarital agreement were executed first and a will executed later that provided for a greater gia to the spouse, the court would likely view the later will as the best indicator of the decedent's intent. if the will were executed first, the premarital agreement would likely be viewed as the better indicator. it is possible that the decedent forgot to change the will in accordance with the premarital agreement. retirement benefits a premarital agreement should not be used to dispose of retirement benefits. the federal pension law precludes nonparticipant spouses from relinquishing survivor annuities before marriage. (erisa, 1988) although one court (in re estate of hopkins, 1991)has held that a premarital agreement validly waived rights under erisa, the decision has been criticized as a misreading of the statute since only ~souses can waive rights. (rose, 1991)since then, several courts have held that premarital agreements cannot waive spousal rights under erisa. (hurwitz v. sher, 1992; nellis v. boeing co., 1992; zinn v. donaldson, 1992; howar&i v. branham gt baker coal co., 1992; featherston & douthitt, 1997). unless the nonparticipant spouse voluntarily relinquishes these rights after the marriage, the spouse will be protected. additional considerations the following are additional considerations the parties and their attorneys should contemplate as part of draaing and executing the premarital agreement. 60 journal ofsmall business strategy vo/ume 9, ivo. i spring i998 use se arete le al counsel and a se gretel the party desiring the premarital agreement should not recommend or pay for the other party' attorney's fees. this helps show that neither party misunderstood the effects of the agreement. if the party refuses to do so, include a statement in the premarital agreement that the opportunity for independent counsel was altorded and declined. consider the duration of the a reement most parties assume that the agreement will last for the duration of the marriage, and it should, if no other provision is made. the parties may want to consider a duration such as fiaeen years. if a petition for divorce were filed within the fifteen year period, the agreement would be in force. if the petition were filed beyond that time, the agreement would have expired and the state law on divorce would apply. parties may desire this result under the belief that aaer fiaeen years, the marriage could be considered "long-term" and that both parties would have worked equally long in the marriage and be entitled to share equally in the division of assets. provide for full and fair disclosure itemize each party's assets and include this list in the agreement. consider using separate certified public accountants to prepare each party's financial statements for attachment to the agreement. indicate which state's law should a i . state laws vary quite a bit. what might suaice for full and fair disclosure in one state may not be enough in another. the parties may make the agreement in one state with advice from a local attorney and later move to another state. consider an esca e clause to rene otiate if federal tax laws chan e if tax considerations are an important part of the premarital agreement, provisions were likely made on the basis of the then-applicable federal tax laws. in the event of a change in law in the future that would affect the tax liability of the parties, an escape clause allowing renegotiation under current law is advisable. consider arbitration instead of court enforcement. each party should consult his/her attorney about the availability of local arbitrators. if they are available, that option should be considered. it can be quicker and less expensive than paying both divorce attorneys to litigate the matter in court. (guttman, 1996). execute the a reement ten or more da s in advance of the weddin . this helps avoid claims of duress at the time of execution. 61 journal ofsmall business strategy volume 9, llo. l spring 1998 have the a reement witnessed and notarized some states require this, and it helps establish that the parties recognized the formality of what they are doing. consider videota in the final review of the document and si ni~n. the videotape will show each party and their respective attorneys going through the document clause by clause, explaining the impact of the document. it will also show the parties indicating their understanding and signing the agreement. this will help avoid claims that the parties did not appreciate the effect of the agreement. conclusion persons considering marriage, especially those involved in a small business, have many reasons for considering a premarital agreement. a clear premarital understanding of the financial agreement between the parties can go a long way toward encouraging mutual cooperation during the marriage and, if necessary, simplifying the arrangements at the time of divorce or death. references brendt, e. (1997). the uniform premarital agreements act and the reality of premarital agreements in idaho. idaho l. r. 33, 539-565. davis, m. (1988). till death do us part: antenuptial agreements concerning wills and estates. 9 i l.j. 8,301-328. erisa.f19881. e i r i i 8 i a i'1974, 29 0 8 c. 1001.1461. featherston, t, jr. & douthitt, a. (1997). changing the rules by agreement: the new era in ca i i .m 8, sli 81111y im i ip 0 ry. ~ri l.r.49,271. 322. frunzi, s. (1990). planning ahead for the wedding bell blues. trust & estates 129, 10-22. garpstas, t. & legalley, r. (1996). unconditional love. haraier's~ma azine, 292, 24. guttman, d. (1996). for better or worse, till adr do us part: using antenuptial agreements to compel alternatives to traditional adversarial litigation. ohio state journal on dis ute resolution 12, 175-191. hoffman, j. (1995). how they keep it. new york times ma azine, 104. howard v. branham &. baker coal com 968 f. 2d 1214 (6 cir. 1992) (unpublished). hurwitz v. sher, 789 f. supp. 134 (s.d.n.y. 1992), aff d., 982 f. 2d 778 (2d cir. 1992). in re estate of hopkins, 574 n.e. 2d 230 (ill. app. 1991). in the matter of the estate of beesley, 883 p. 2d 1343 (utah 1994). ladden, r. 8: franco, r. (1990). the uniform premarital agreement act: an ill-reasoned retreat from the unconscionability analysis. american journal of famil law 4, 267-286. livingston, a. (1997). make your family business 'divorce-proof.'ation's business 85, 6465. lutgert v. lutgeit, 338 so. 2d 1111 (fla. app. 1976). mcmenamin, b. (1996). 'til divorce do us part.'orbes 158, 52-60. mulroy, t., (1996). divorcing the elderly: special issues. american journal of famil law 10, 65-70. 62 journal of small business strategy volume 9, no. l spring l998 nellis v. boeing co., 1992 wl 122773, 1992 lexis 8510 (d. kan. 1992). parley, l. (1995). premarital agreements in connecticut: where we are and where we are going. connecticut b. j. 69, 495-514. rose, m. (1991). pension plans: why antenuptial agreements cannot relinquish survivor benefits. fla. l. rev. 43, 723-737. sharfstein, fl (1998). particular prenups ensure businesses stay in the family. the national l 1 \ 29. c11-c12. u9aa, 719973. 99 u.l.a. 369 zinn v. donaldson, 799 f. supp. 69 (d. minn. 1992). 63 journal of small business strategy vol. 27 ● no. 2 ● 2017 65 the roles of knowledge and organizational form on opportunity evaluation shaun p. digan university of louisville shaun.digan@mail.com sharon kerrick bellarmine university skerrick@bellarmine.edu denise m. cumberland university of louisville denise.cumberland@louisville.edu robert garrett university of louisville robert.garrett@louisville.edu abstract what influences an individual to pursue one type of entrepreneurial opportunity versus another? knowledge is central to the concept of opportunity identification, evaluation, and exploitation. using conjoint analysis to capture underlying decision policies, we explore the roles of both knowledge and organizational form in the evaluation of entrepreneurial opportunities. our findings suggest that, among respondents who considered pursuing a franchised venture a viable alternative to founding an independent venture, franchise versus independent form alone did not play a specific and significant role in the evaluation of the attractiveness of entrepreneurial opportunities. rather, organizational form appears to influence the impact of both human capital relatedness and the inimitability of resource attributes on opportunity attractiveness. key words: opportunity evaluation, knowledge, organizational form, franchising mailto:shaun.digan@mail.com mailto:skerrick@bellarmine.edu mailto:denise.cumberland@louisville.edu mailto:robert.garrett@louisville.edu journal of small business strategy vol. 27 ● no. 2 ● 2017 66 introduction at the heart of entrepreneurship research lies the central question of “how, by whom, and with what consequences opportunities to produce future goods and services are discovered, evaluated, and exploited” (shane & venkataraman, 2000, p. 218). while the discovery and exploitation of opportunities have received much debate throughout the entrepreneurship and strategy literatures, until recently questions related to how entrepreneurs evaluate opportunities have received considerably less attention (haynie, shepherd, & mcmullen, 2009; wood & williams, 2014). in order to understand why individuals choose one type of entrepreneurial opportunity versus another, it is crucial to understand how they evaluate the attractiveness of an opportunity. within the emerging research on opportunity evaluation, knowledge has been identified as a critical factor in how entrepreneurs evaluate opportunities (haynie et al., 2009). however, many new ventures are established by entrepreneurial teams or within networks, alliances, or franchise systems where an individual’s access to knowledge may mitigate a lack of personal knowledge in the evaluation and exploitation of discovered opportunities. this paper focuses on the role of knowledge in entrepreneurs evaluations of independent vs. franchised ventures. while some empirical studies have sought to understand why individuals choose selfemployment over fixed wage employment (douglas & shepherd, 2002; kolvereid & isaksen, 2006) and why franchisors pursue franchisees (justis & judd, 1998), there have been limited attempts at understanding what factors influence individuals to pursue a franchise opportunity versus founding an independent venture. over the past decade, a growing number of studies have begun focusing on how entrepreneurs evaluate the attractiveness of first-person opportunities, finding that knowledge plays a key role in opportunity evaluations (gruber, kim, & brinckmann, 2015; haynie et al., 2009; haynie, shepherd, & patzelt, 2012; wood, mckelvie, & haynie, 2014; wood & williams, 2014). in general, entrepreneurs are more attracted to opportunities that are related to and complement their existing stock of knowledge (haynie et al., 2009). many of these studies have focused on the interrelationships between an entrepreneur’s knowledge and elements of an opportunity in evaluations of opportunity attractiveness (haynie et al., 2009; mitchell & shepherd, 2010; patzelt & shepherd, 2009). although we know that knowledge plays an important role in the discovery, evaluation, and exploitation of entrepreneurial opportunities, franchised ventures are unique in that a franchisor provides a proven business plan along with much of the knowledge necessary to establish and operate the venture. despite intense scrutiny around opportunity identification, limited investigation has been undertaken on factors which may mitigate the links between an entrepreneur’s knowledge and opportunity evaluation and exploitation. the centrality of knowledge to opportunities, limited research on the choice of organizational form, and scholars’ calls for more research to understand the relationship between an entrepreneur’s human capital and the opportunity identification and evaluation processes (ucbasaran, westhead, & wright, 2008) indicate the need for further investigation. our study advances the entrepreneurship and franchising literatures by focusing on the entrepreneur’s human journal of small business strategy vol. 27 ● no. 2 ● 2017 67 capital with respect to evaluating opportunities of independent and franchise organizational forms. thus, the aim of our research is to attend to the following research questions: “what influences an individual to pursue one type of entrepreneurial opportunity versus another?”; and more specifically, “how does knowledge influence individuals in the evaluation of an independent vs. a franchised venture.” this line of research offers several contributions to the current literature. first, we advance the literature on opportunity evaluation by expanding upon the question of “what influences are brought to bear on [entrepreneurs’ opportunity] evaluations” (haynie et al., 2009, p. 338). prior research has identified a myriad of factors that influence opportunity evaluations such as the attributes, associated risks, and uncertainty of the opportunity (haynie et al., 2009; mckelvie, haynie, & gustavsson, 2011; wood et al., 2014) as well as an entrepreneur’s knowledge (or the relatedness of the that knowledge to the exploitation of an opportunity) (haynie et al., 2009; wood & williams, 2014) and access to resources (patzelt & shepherd, 2009). this research informs this discussion by investigating how entrepreneurs evaluate entrepreneurial opportunities by focusing on the relationship between an entrepreneur’s related knowledge and organizational form in assessments of opportunity attractiveness. second, we contribute to the resource based view (rbv) literature by exploring how the entrepreneur assesses the attractiveness of pursuing an independent venture versus a franchised organizational form. prior scholars have suggested rbv can explain both why owners of a concept pursue franchisees (stanworth, stanworth, watson, purdy, & healeas, 2004) as well as why franchisees may be attracted to entering a franchise relationship (welsh, davis, desplaces, & falbe, 2011) and choose between franchising and company ownership (gillis, combs, & ketchen, 2014). we integrate these perspectives to assess the influence of knowledge and organizational form on entrepreneurial opportunity evaluations. in the proceeding manuscript, we review the existing literature on opportunity evaluation, specifically through the lens of rbv. we then summarize prior findings and explain the role of the relatedness of an entrepreneur’s knowledge on opportunity evaluations. next, we incorporate insights from the franchising literature to consider the role of organizational form on opportunity evaluations. finally, we examine the effects of knowledge on the opportunity evaluation process. analyzing 3328 evaluation decisions from 104 entrepreneurs, we test our hypotheses through conjoint analysis, allowing us to tease out the complex interrelationships between knowledge and elements of an entrepreneurial opportunity. we conclude with a discussion of findings, and review implications for theory, pedagogy, and practice. to guide the reader through the conceptual background and the development of the hypotheses, figure 1, below, illustrates our conceptual model. journal of small business strategy vol. 27 ● no. 2 ● 2017 68 figure 1. conceptual model of the relationships between opportunity attributes and entrepreneurs opportunity evaluations. literature review and hypothesis development opportunity evaluation baron (2006) describes opportunity recognition as pattern recognition, and one way opportunities may be assessed are by the patterns of the attributes of their resources (baron & ensley, 2006). opportunities, then, can be broken down into resource specific attributes and evaluated within their patterns of resource attributes. rbv posits that opportunities are evaluated not by their current value alone, but also by inferences of their future value derived from attributes that offer competitive advantage (barney, 1986, 1991). following rbv, resources that may offer sustainable competitive advantage include resources that are valuable, rare, and inimitable (barney, 1991). specifically, valuable and rare resources produce a competitive advantage which may only be sustained by the inimitability of those resources (barney, 1991; foss & knudsen, 2003). human capital theory suggests that knowledge, skills, and abilities are idiosyncratic across individuals and that individuals with more or higher quality human capital perform relevant tasks at a higher level (becker, 2009; gibbons & waldman, 2004). this idiosyncratic knowledge has been attributed to why some entrepreneurs choose to recognize and exploit specific opportunities while others do not (fiet, 1996; hayek, 1945; shane, 2000). following human capital literature, previous research has found a significant relationship between an entrepreneur’s human capital relevant to an opportunity and evaluation of the attractiveness of that opportunity for potential exploitation (haynie et al., 2009; wood et al., journal of small business strategy vol. 27 ● no. 2 ● 2017 69 2014; wood & williams, 2014). human capital is tied quite closely to rbv via experiences based on judgment, skills, and knowledge. patterns of learning curves are based on experience and the constant elasticity learning parameter (hatch & dyer, 2004) thus leading to potential competitive strategic advantages for an organization. the role of human capital and rbv are intertwined by their relationship with tacit knowledge. further, barney (1991) notes that competitive strategy, resting on individual judgment, is integral to the rbv framework. organizational form may be thought of as one aspect of competitive strategy. franchisinga contract in which the owners (a franchisor) of a product, process, service, or brand license the rights to use their brand, service, process, or product (combs & ketchen, 2003) in exchange for either initial franchise fees, royalty fees, or some combination of the two (justis, chan, & kedia, 2015). this is a popular type of organizational form with vast economic implications and unique arrangements. several streams of literature provide possible explanations for how an entrepreneur will assess independent vs. franchise opportunities. first, within the resource-based view of the firm, barney (1986, 1991) suggests that entrepreneurial opportunities are accessed, in part, through inferences of their future value. in this regard, we posit that independent ventures have a lower cost structure (the absence of royalty and advertising fees) that will influence inferences of their future value. investigating entrepreneurs’ reasons for becoming a franchisee, peterson and dant (1990) suggest that franchisees may perceive franchises to have higher operating costs than independent ventures due, in part, to royalty fees. initially a franchisor’s knowledge and resources may represent a competitive advantage; however, these features are not owned by the venture, but are leased by the entrepreneur at an ongoing cost. entrepreneurs are likely to assess these ongoing franchisee costs against the value provided by the franchisor in their evaluations of the attractiveness of an opportunity (grünhagen & dorsch, 2003; harmon & griffiths, 2008). additionally, perceptions of franchisor value are anticipated to change over time (grünhagen & dorsch, 2003; watson & stanworth, 2006). as franchisees acquire human capital through experience, the value of the franchisor’s human capital is likely to decrease over time while royalty fees remain static. therefore, in assessing opportunity attractiveness, entrepreneurs may assess the future financial value of independent businesses as more attractive than that of a franchised venture. additionally, research at the intersection of cognition and strategy suggesting that individual traits and characteristics including autonomy (independence) and locus of control, have clear implications on the attractiveness of entrepreneurship as a career path (carter, gartner, shaver, & gatewood, 2003; gatewood, shaver, & gartner, 1995; shane, kolvereid, & westhead, 1991). in fact, autonomy is one of the most often named reasons for establishing a venture or the desire to do so (hessels, van gelderen, & thurik, 2008; pruett, shinnar, toney, llopis, & fox, 2009). while independent ventures are likely to be highly autonomous, prior research has found franchisees to vary considerably in their autonomy (dant & gundlach, 1999) as well as struggle to balance dependence and autonomy (strutton, pelton, & lumpkin, 1995). therefore, in assessing opportunity attractiveness, entrepreneurs may also assess journal of small business strategy vol. 27 ● no. 2 ● 2017 70 the non-financial value of independent businesses as more attractive than that of a franchised venture, ceteris paribus. following the above logic, hypothesis 1 is as follows: hypothesis 1: entrepreneurs will evaluate independent ventures as more attractive than franchised ventures, all other factors being equal. human capital relatedness and organizational form opportunity evaluation decisions are complex phenomena influenced by a number of factors. as previously discussed, human capital relatedness, or fit, has been theorized to be a strong predictor of opportunity attention and evaluation (fiet, 1996; shane, 2000). fit has also been found to be associated with the emphasis entrepreneurs’ place on the value, rarity, and limits to competition of an opportunity (haynie et al., 2009) as well as the influence of the number of potential opportunities and the window of availability of these opportunities (mitchell & shepherd, 2010). although some scholars have theorized that the fit between the knowledge of an entrepreneur and an opportunity are imperative to discovery (fiet, 2007), the transfer of knowledge has been shown to be a crucial way for individuals and organizations to create and share knowledge (grant 1996; yong & young-ryeol 2004). this often results in competitive advantages (desouza & evaristo, 2003; penrose, 1959). following this logic, there may be some situations in which the relatedness of an individual entrepreneur’s human capital is of less importance than the specific knowledge at the venture level. one of the perceived benefits of joining a franchise system is a codified set of procedures, processes, rules, and instructions to provide the means for franchisee success. the underlying competitive advantage offered by franchisors is the perfection of this set of procedures and processes from the specific knowledge they have gained from their experience (paswan & wittmann, 2009). franchisees are essentially purchasing the partnership and access to the specific knowledge the franchisor brings to the table as a partner. lending credence to this reasoning, scholars have found that franchisees and prospective franchisees perceive business “support” (kaufmann & stanworth, 1995) and training (peterson & dant, 1990) to be key characteristics in assessing franchise systems. following the logic provided above, we theorize that entrepreneurs’ willingness to bear the costs associated with franchised organizational forms will depend upon whether the entrepreneur already possesses specific human capital relevant to an opportunity. in other words, we posit that when an entrepreneur’s prior knowledge is unrelated to an opportunity, they are likely to ascribe higher values to franchised opportunities than independent ventures. the inverse of this relationship would then also hold true. when an entrepreneur’s prior knowledge is highly related to an opportunity they are likely to ascribe higher values to independent organizational forms, as compared with franchised ventures. hypothesis 2 is summarized below: hypothesis 2: entrepreneurs with knowledge, skills, and abilities which are highly related to an opportunity will evaluate independent ventures as more attractive than franchised journal of small business strategy vol. 27 ● no. 2 ● 2017 71 ventures; however, when these knowledge, skills, and abilities are unrelated, the entrepreneur will evaluate franchised ventures as more attractive than independent ventures. knowledge of organizational forms and opportunity evaluation individuals acquire knowledge from their prior experience (hayek, 1945). this knowledge is an accumulation of understandings from an individual’s occupation, hobbies, technological knowhow, and social relations (venkataraman, 1997). an individual’s knowledge may be specific or general. specific knowledge is the decryption of personal experiences with people, places, timing, special circumstances, and technology (fiet & samuelsson 2000; hayek 1945), is costly to attain, and is not easily transferrable. general knowledge, on the other hand, is information that can be formalized into practices and procedures, typically comes with low costs of acquisition (stiglitz, 1985), and can be easily transferred to others (jensen & meckling, 1992). special circumstances are one of the distinctive subsets of specific knowledge, one of which can be franchising business strategies. franchising is a unique arrangement with its own set of special circumstances related to practices and operating procedures (bates, 1995). because we know that prior experience is one of the major sources of specific knowledge (fiet, 1996; shane, 2000, 2003), we posit that there are several ways in which an individual may acquire specific knowledge of organizational forms including work and ownership of a franchised venture. just as we hypothesized that the relatedness of an entrepreneur’s specific human capital was positively related to opportunity attractiveness, we carry that logic to hypothesize that entrepreneurs’ specific knowledge of franchises is positively related to the evaluation of franchise opportunities and will increase the emphasis entrepreneurs place on an appropriate match between form and fit. fiet (2007) suggests that general knowledge could also provide an individual a clue that a specific opportunity could exist. although specific knowledge is typically acquired through personal experience, general knowledge can be acquired through books, the internet, or educational courses, including college courses and formal education. because general knowledge of organizational forms is particularly relevant to the influence of a match or mismatch between and opportunity and the entrepreneur, we hypothesize that general knowledge of organizational forms will accentuate the importance of an appropriate match between form and fit. thus, we hypothesize 3a and 3b as follows: hypothesis 3a: entrepreneurs with specific knowledge of franchise organizational forms will place greater emphasis on the match between form and fit than entrepreneurs without specific knowledge of franchise forms. hypothesis 3b: entrepreneurs with general knowledge of franchise organizational forms will place greater emphasis on the match between form and fit than entrepreneurs without general knowledge of franchise forms. journal of small business strategy vol. 27 ● no. 2 ● 2017 72 research methods this research utilizes conjoint analysis (ca) to explore the decision policies of entrepreneurs performing opportunity evaluations. ca requires participants to make a series of assessments based on a set of profiles, in this case profiles of potential new venture opportunities. the profiles consist of combinations of attributes that could be observed by an entrepreneur and used to evaluate entrepreneurial opportunities. following metric conjoint analysis, the attributes in this experiment are presented at one of two distinct levels, either high or low (priem & harrison, 1994). from these judgments, it is possible to break down decision processes to examine the captured preferences of their underlying structures (shepherd & zacharakis 1997). because we hypothesize that the perception of opportunities is directly related to knowledge, and that perceptions will vary across groups of participants with different sets of knowledge, ca is a pertinent method to investigate these perceptions through the microanalysis of the underlying structure of decision patterns. conjoint analysis has been carried out thousands of times (green, krietger, & wind, 2001) and has been shown superior to relying on introspection to determine perceptions (fischhoff, 1982; priem & harrison, 1994). ca has shown to be an effective predictor of decision policies as they are used by individuals in real life decisions (brown, 1972; hammond & adelman, 1977). in addition to prior use in entrepreneurial opportunity evaluation (haynie et al., 2009; mitchell & shepherd, 2010; shepherd & zacharakis, 2003), ca has also been used to investigate opportunity evaluation in venture capitalists (shepherd, zacharakis, & baron, 2003; shepherd & zacharakis 1999; shepherd 1999) as well as strategic decision making (priem & harrison, 1994) and corporate venture evaluations (desarbo, macmillan, & day, 1987). conjoint analysis provides an indepth analysis into the decision criteria involved in the evaluation of entrepreneurial opportunities. sample and instrument the primary sample for this study consists of entrepreneurs and nascent entrepreneurs drawn from amazon’s mechanical turk (mturk). mturk is an online marketplace for work on “human intelligence tasks” or hits, a source of elancing suggested as a potentially useful approach to carrying out entrepreneurial experiments (aguinis & lawal, 2012). according to huff and tingley (2015), mturk participants report occupational similarities in proportion with the u.s. population, and business owners, independent contractors, and owner operators comprised 13.37% of the respondents in their mturk sample (huff & tingley, 2015). data were collected from mturk in the spring of 2014. data collected from mturk, one of several online marketplaces for hits, has been suggested to be reliable and more representative of the nonstudent population than prevalent student, internet, and traditional samples (buhrmester, kwang, & gosling, 2011; horton, rand, & zeckhauser, 2011) representing a reliable and diverse subject pool (e.g. berinsky, huber, & lenz, 2012; krupnikov & levine, 2014; mason & suri, 2012; paolacci & chandler, 2014; paolacci, chandler, & ipeirotis, 2010). journal of small business strategy vol. 27 ● no. 2 ● 2017 73 screening questions were employed to determine if participants were entrepreneurs or nascent entrepreneurs following the screening questions employed in psedi and psedii (reynolds, 2007, 2011). additionally, because conjoint analysis assumes a compensatory (vs. noncompensatory) decision process, it is important to consider weaknesses which might serve as “knock-out” criteria (franke, gruber, harhoff, & henkel, 2008; lohrke, holloway, & woolley, 2010). because there is some debate whether franchising is entrepreneurship, we screened for participants that indicated that they considered opening a franchise a viable alternative to opening an independent venture. one-hundred and fifty-three responses were collected, however examination of the ip addresses of participants revealed that three entrepreneurs (6 response sets total) had participated in both versions of our survey. to preserve the assumptions of independence of our data, these 6 response sets were dropped. of the 147 entrepreneurs who passed the screening questions, 79 percent (n=116) considered opening a franchised venture to be a viable alternative to an independent venture, indicating that our sample represented entrepreneurs qualified to participant in the experiment. to determine the decision policies in the evaluation of new venture opportunities, participants were asked to rate a series of hypothetical profiles representing opportunities that might be found in the real world. opportunities were described in combinations of resource attributes identified in resource-based theories of the firm: perceived value, rarity, inimitability, and human capital (fit), in addition to the distinction of being an independent or franchised venture. the experimental task was carried out in two parts. first, participants were provided instructions and told to assume that (1) they are searching for opportunities for investment as their next entrepreneurial venture, and (2) the factors presented were the only factors that differentiated these opportunities. they were then provided descriptions of the attributes and their levels, and encouraged to print or save these terms to refer to during the experimental task. after completing a practice profile, participants were returned to the descriptions of attribute levels once more before beginning the experimental task. the total number of possible opportunity profiles within the constraints of the attributes and design of this experiment is 32 (25). however, in order to examine internal reliability and order effects, the 32 possible profile combinations would have to be at least partially replicated. to reduce the demands and cognitive load on participants (green & srinivasan 1990), we employed a partial profile conjoint experiment reducing the number of profiles to 16 orthogonally arranged profiles, sufficient to capture both main and interaction effects (hahn & shapiro, 1966). entrepreneurs in our study were presented with the series of 16 profiles, along with instructions mitigating for unobservable effects on evaluations. after evaluating the 16 original profiles, participants were asked to evaluate a fully replicated set of profiles with the cards presented in differing orders, bringing the total number of scenarios completed to 33, including the practice scenario. the experiment concluded with a brief questionnaire capturing individual differences in human capital, knowledge, education, and demographics. journal of small business strategy vol. 27 ● no. 2 ● 2017 74 the first step of our analysis involves testing the internal reliability of participants. as previously mentioned, the experimental task was fully replicated to mediate order effects as well as examine the reliability of participants’ decision criteria. test-retest reliability was examined between the original and fully replicated profiles. pearson’s r correlations were calculated for each respondent, with a mean test-retest correlation of .71. manual examination revealed that several response sets appeared unreliable (displaying low correlations between the original and the replicated experimental task). although there is no prescribed threshold to determine unreliable response sets, we tested our data at pearson r correlation cutoffs of .30 (n=12), .45 (n=14), and .60 (n=17), following the various cutoff criteria reported in extant research (e.g. holland & shepherd, 2013; patzelt & shepherd, 2009; shepherd, patzelt, & baron, 2012; shepherd & zacharakis, 1997, 1999). we found no significant differences in our results; therefore, to preserve sample size, we adopted the more conservative cutoff of .30. twelve participants with pearson correlations below .30 were excluded from further analysis. the final sample resulted in a total of 104 participants with a sample mean test-retest correlation of .80, comparable with prior research examining entrepreneurial decision policies (cf. choi and shepherd, 2004; haynie et al., 2009; mitchell and shepherd, 2010). sample statistics, along with bivariate correlations may be found in table 1. table 1 sample statistics and bivariate correlations correlations mean median s.d. work exp mgmt exp age gender firm age work exp 12.93 10.00 9.48 mgmt exp 5.29 4.00 5.41 .605** age 34.98 32.00 10.50 .908** .551** gender 0.58 0.49 -.104** -.023 -.137** firm age 3.57 2.00 6.09 .389** .526** .403** -.042* firm size 148.88 5.00 982.90 -.105** -.032 -.085** .109** .010 n = 104, *p<05. **<01. decision criteria dependent variablethe dependent variable is participants’ rating of the attractiveness of each opportunity profile. conjoint analysis allows for the measurement of a part-worth utility for each attribute presented in the profile from the combined individual ratings of each responded. to capture utility preferences, we measured the attractiveness of each opportunity using respondent’s evaluations on an eleven-point likert-type journal of small business strategy vol. 27 ● no. 2 ● 2017 75 scale ranging from a low (1) of “not attractive at all” to a high (11) of “extremely attractive”. decision criteriathe decision criteria employed in this experiment are grounded in factors identified in resource-based theory of the firm (barney 1991, 2014) and used in similar empirical investigations on opportunity evaluation as first-person opportunities (fiet & patel, 2008; haynie et al., 2009; mitchell & shepherd, 2010). we defined and presented these decision criteria as fit, value, rarity, and inimitability at one of two levels: high and low, and piloted our survey with a student sample to ensure clarity and comprehensibility. it is important to note that a low level of any of these criteria does not mean the factor is not present, only that it is present in a lesser degree. table 2 defines these four factors at each of their levels, as well as a fifth factor employed in this study: organizational form, represented as either an independent or franchised venture opportunity. although these factors may not represent every attribute considered in entrepreneurial opportunity decisions, they are appropriate for this study because they represent the factors that are believed to be most closely associated with sustainable competitive advantage as identified by resource-based views of the firm. table 2 independent variables variables operationalization organizational form franchisethe opportunity is a franchise organizational form. independentthe opportunity is an independent organizational form. fit highthe opportunity is highly related to your specific knowledge, ability, and skills. lowthe opportunity is unrelated to your specific knowledge, ability, and skills. value highthe opportunity possesses a high potential for considerable revenues, suitable to the size of the investment. lowthe opportunity possesses a low potential for considerable revenues, suitable to the size of the investment. rarity highthe presence of current or potential competitors is low. lowthe presence of current or potential competitors is high. inimitability highthere is minimal potential for competitors to imitate or create substitutes for this opportunity. lowthere is considerable potential for competitors to imitate or create substitutes for this opportunity. predictors and controlsfollowing the experimental task, participants were asked to complete a brief questionnaire to capture predictor and control variables. entrepreneurs were first asked to report the perceived importance of each of the five decision criteria journal of small business strategy vol. 27 ● no. 2 ● 2017 76 on a seven-point likert-type scale ranging from (1) ‘not very important’ to (7) ‘very important’. at the mean, all five criteria were perceived as important, -rarity (mean = 4.92, s.d. =1.20), inimitability (mean = 4.88, s.d. =1.34), organizational form (mean = 5.24, s.d. = 1.36), fit (mean = 5.94, s.d. =1.05) and value (mean = 6.24, s.d. =1.02). because we hypothesize that knowledge will influence the relationships between form and the interaction of form and fit on opportunity attractiveness, we collect several indicators of specific and general knowledge of organizational forms. participants were asked to report number of years of work experience working for a franchisee or franchisor, whether their current venture is part of a franchised system, and whether their immediate family has franchise ownership experience. participants were also asked to report general knowledge of franchising that might have been acquired through courses on franchises or franchising, reported in the number of courses. there are several factors theorized to influence entrepreneurial decision making and the evaluation of entrepreneurial opportunities. first, entrepreneurial experience has been suggested to influence cognition and entrepreneurial decision making (baron & ensley, 2006; ucbasaran et al., 2008), therefore we control for the age and size of the current venture. second, prior knowledge has been suggested to be the main source of opportunity recognition (shane, 2000) and we expect it may play a role in the evaluation of opportunities as well, thus we control for number of years of work experience and education—whether or not the participant has a bachelor’s degree or greater. analysis and results although our final sample included 104 entrepreneurs, each entrepreneur provided 32 observations, resulting in 3,328 total observations. to account for dependence of errors due to the nested nature of the data, we used hierarchical linear modeling (hlm) to analyze this data. specifically, we used hlm 7.0 software in our analysis. in building our models, we follow best practices as outlined by aguinis, gottfredson, and culpepper (2013). model parameters are estimated using full information maximum likelihood to allow for the comparison of models. table 4, below, provides a comparison of the models examined, detailing coefficients, standard errors, and significance. model 1 is the unconditional (or null) model, which allows for the calculation of the intraclass correlation coefficient (icc) (raudenbush & bryk, 2002). the icc for the unconditional model (.02) indicates that 98 percent of the variance in the evaluation of entrepreneurial opportunities takes place at the within-person, between-decision level and two percent of the variance is due to individual differences. model 2 is a random intercepts (coefficients) model with fixed slopes (rimfs) including level-1 predictor variables (form, fit, value, rarity, inimitability, and the interaction of form*fit) as well as level-2 controls. to maximize parsimony, we examine control variables against the intercept only, and iteratively trim nonsignificant controls (p>.05). dummy variables and variables with a meaningful zero were entered in our equation uncentered. age was centered at the grand mean. nonsignificant control variables were dropped from the model by order of worst fit to identify the best possible model. analysis indicates that only age (coefficient= journal of small business strategy vol. 27 ● no. 2 ● 2017 77 0.04, s.e. = .01, p<.001), and work experience (coefficient= -0.04, s.e. = .01, p < .001) impact average valuation (the intercept). results from the rimfs model indicate support for our base model predicting the higher-level effects of the fvri framework on evaluations of resource attractiveness. however, the organizational form decision criteria, in and of itself, does not appear significant in decision-making. due to the perceived importance of form (mean= 5.24) and the statistically significant interaction of form and fit (coefficient= 0.24, s.e. = .09, p<.01), the form variable was left in the model for further analysis. before moving on to the hypothesized model, we examined whether individual differences did, in fact, exist in the perception and influence of a match between form and fit in new venture evaluations. model 3 in our model building process is a random intercept model with random slopes (rimrs). results from the rimrs model indicate, however, that the form*fit interaction slope does not vary significantly across participants. therefore, the final model is the rimrs model that includes the six level-1 predictors and interaction effect, and trimmed controls. the final model is shown mathematically in figure 2. table 3 provides a comparison of the three models. figure 2. mathematical model. dvij = γ00 + γ01*(exp_1j) + γ02*(agej – age.) + γ10* formij + γ 20*fitij + γ 30*valij + γ 40*rareij + γ 50*inimij + γ 60*formxfitij u0j + u1j*formij + u2j*fitij + u3j*valij + u4j*rareij + u5j*inimij + rij *legend dv=rating form= organizational fform exp_1=work experience fit= human capital relatedness age= entrepreneur’s age val= value rare= rarity inim= inimitability **bold italics indicate the mean score of participants, resulting in a grand-mean centered age predictor journal of small business strategy vol. 27 ● no. 2 ● 2017 78 table 3 model comparison: chi-square different test. model deviance parameters compa rison ∆ chisquare pvalue aic bic (n=104) preferred model null 15846.00 3 15859. 93 15852.00 rimfs 13182.73 11 null 71.29 <.001 13233. 82 13204.73 rimfs rimrs 11975.04 31 rimfs 19.05 <.001 12119. 02 12037.04 rimrs we also tested for additional level-one interaction effects we did not hypothesize specifically: the interactions of fit and form with value, rarity, and inimitability. concerning the interactions of fit, consistent with the findings of haynie et al. (2009), we found a significant interaction effect between fit and value (coefficient= .47, s.e.=.11, p<.001), suggesting that entrepreneurs may believe they can extract more value from opportunities that are closely related with their prior knowledge. examining the interaction of form, we find that the form*inimitability interaction is also statistically significant (coefficient= .30, s.e. =.09, p<.001). similar to the interaction between form and fit, the slope of the form*inimitability interaction does not vary across individuals. full results for all three models plus the best model as indicated through post-hoc analysis are shown in table 4, below. hypothesis testing hypotheses 1 and 2 are our baseline hypotheses predicting direct effects of organizational form and the interaction of form and fit on entrepreneurs’ evaluations of opportunity attractiveness. to test these hypotheses, we examined our final model— the rimrs model. specifically, concerning hypothesis 1, the data suggests that entrepreneurs do not consider form alone as a significant decision criterion, indicated by a nonsignificant correlation coefficient (p=.306). hypothesis 2 predicts an interaction effect between organizational form and fit. the statistical significance and positive coefficient of the interaction variable (coefficient= .24, p <.01) indicates support for hypothesis 2, a match between form and fit influences an entrepreneur’s evaluation decisions of new venture opportunities. hypothesis 3 predicts that an individual’s knowledge of franchise organizational forms would moderate the influence of a form*fit match on opportunity evaluations; however, in our sample, the variance of the form*fit slope was not statistically significant, indicating that individual differences appear to have little influence on the evaluation of match between format and fit. therefore, hypotheses 3a and 3b could not be tested. discussion in this study, we explore the roles of knowledge and organizational form on the evaluation of entrepreneurial opportunities. we investigate the evaluation of opportunities using a judgment-based procedure of entrepreneurs’ ratings of potential new journal of small business strategy vol. 27 ● no. 2 ● 2017 79 venture opportunities presented in terms of their resources attributes. contrary to our first hypothesis, we find that, in general, entrepreneurs find opportunities with independent organizational forms no more attractive than franchised ventures. one possible explanation could be the perception that ‘you get what you pay for’. although pursuing a franchised venture comes with ongoing costs, entrepreneurs are likely to expect to receive equivalent value from the franchisor, consistent with prior research suggesting that franchise fees and royalties are related to the value of the franchise (baucus, baucus, & human, 1993). despite the lack of support that the type of organizational form directly influences opportunity evaluations, entrepreneurs in our survey still indicated that they perceived the form variable as important in their opportunity evaluations (mean = 5.13, s.d. = 1.38), suggesting that the influence of form may be contingent upon the resources attributes which are present. we find that important to entrepreneurs is an appropriate match between the relatedness of their specific human capital (fit) and organizational form. the relationship between form and fit suggests that entrepreneur’s will assess opportunities as more attractive when there is a match between the form and fit of an opportunity. in other words, when an entrepreneurs skills are unrelated to a franchise opportunity or are highly related to an independent opportunity, the entrepreneur will assess an opportunity as more attractive than when there is no match between form and fit. in this study, it could be said that entrepreneurs assign a premium to related independent ventures and unrelated franchise ventures. table 4 hlm results null rimfs rimrs best model variables model 1 model 2 model 3 model 4 intercept 5.87 (.08) *** 6.39 (.18) *** 6.45 (.17)*** 5.78 (.18)*** direct effects fit 2.16 (.09)*** 2.16 (.09)*** 2.16 (.09)*** value 2.66 (.13)*** 2.66 (.13)*** 2.66 (.13)*** rarity 1.56 (.08)*** 1.56 (.08)*** 1.56 (.08)*** inimitability 0.43 (.16)** 0.43 (.16)** 0.43 (.16)** form 0.06 (.05) 0.06 (.05) 0.06 (.05) form*fit 0.24 (.09)** 0.24 (.09)** 0.24 (.09)** form*inimitability 0.30 (.09)*** fit*value 0.47 (.11)*** level-2 controls (on intercept) work experience -0.04 (.01)*** -0.05 (.01) *** -0.04 (.01)*** age 0.04 (.01)*** 0.04 (.01)*** 0.04 (.01)*** parameters 3 11 31 40 deviance 15846.00 13182.73 11975.04 11882.54 deviance difference 2663.27 1207.69 92.50 ơ^2 6.61 2.90 1.54 1.48 coefficients reported (with robust standard errors in parenthesis). n=104. , *p<.05. **p<.01. ***p<.001. journal of small business strategy vol. 27 ● no. 2 ● 2017 80 we believe these findings are especially salient in light of previous research which has found that the industry or business category decision is often made first, followed by the decision whether to open an independent venture or enter a franchise arrangement (kaufmann & stanworth, 1995). if an individual first decides on a business category, but perceives that he or she has insufficient knowledge to exploit an opportunity in that category, entering a franchise agreement may appear more attractive than ‘going it alone’ (watson & stanworth, 2006). although results indicate little variance existed due to individual differences and we were unable to find any effects of knowledge of organizational form on opportunity evaluation nor the importance entrepreneurs place on a match between form and fit, the absence of individual difference may indicate that the interaction of form and fit in entrepreneurial evaluations is generally understood among entrepreneurs in our sample. a summary of our findings is provided in table 5 below. table 5 summary of hypotheses baseline hypothesis h1: when an opportunity is an independent organizational form, the opportunity will appear to the entrepreneur, as compared with franchise organizational forms. not supported interaction hypothesis h2: when entrepreneur’s knowledge, skills, and abilities are highly related to an opportunity, independent organizational forms will appear more attractive to an entrepreneur; however, when these knowledge, skills, and abilities are unrelated, franchise organizational forms will appear more attractive. supported predictor hypotheses h3a: entrepreneurs will place greater emphasis on the match between form and fit when entrepreneurs have specific knowledge of franchise organizational forms than entrepreneurs without specific knowledge of franchise forms. not testable h3b: entrepreneurs will place greater emphasis on the match between form and fit when entrepreneurs have general knowledge of franchise organizational forms than entrepreneurs without general knowledge of franchise forms. not testable figure 3 shows our results graphically, representing the statistically significant interaction of form and fit in the predicted values for entrepreneurs of average age, with median work experience, holding value, rarity, and inimitability constant. as our results suggest, the figure indicates that when the relatedness of an individual’s human capital and the human capital required to exploit an opportunity is low, franchise journal of small business strategy vol. 27 ● no. 2 ● 2017 81 opportunities will appear more attractive than founding an independent venture. likewise, when the relatedness of an individual’s human capital and the human capital required to exploit an opportunity is high, founding an independent venture will appear more attractive than franchise opportunities. figure 3. graphical impact of a form-fit match. finally, it is important to discuss the unexpected interaction effect revealed during post-hoc analysis. although previous researchers have suggested that rbv may be an integral theory for understanding the evaluation of franchise opportunities (welsh et al., 2011), in this sample we find that the impact of inimitability is also contingent on organizational form. the positive interaction between organizational form and inimitability suggests that while entrepreneurs assess highly inimitable independent ventures as more attractive than independent ventures with low inimitability, the impact of inimitability may not be as clear in franchise opportunities. one explanation for this could be that a key implication of entering a franchise agreement is the ability to imitate or replicate the procedures and processes perfected by the franchisor (dada & watson, 2013). potential methodological limitations this research is not without its limitations. first, judgement and decision-making research utilizing conjoint analysis is subject to criticism of the artificial nature of the experiment, the external validity of conjoint analysis tasks, and the risk that participants attribute importance to decision criteria simply because they are part of the experiment. however, conjoint analysis has been employed thousands of times (green et al. 2001), and decision-making observed in conjoint analysis experiments has been shown to accurately reflect decision-making processes in the real world (brown, 1972; hammond & adelman, 1977). although we advance conjoint analysis as an appropriate tool to investigate our research question, we acknowledge and attempt to mitigate these potential limitations. hence, we pilot tested our study with a student sample to ensure low fit high fit o p p o rt u n it y a tt ra ct iv e n e ss franch indep journal of small business strategy vol. 27 ● no. 2 ● 2017 82 clarity and comprehensibility. we also carefully selected attributes strongly established in theory, extending several prior studies built on the fvri framework. finally, we collected and compared self-reported preference data with the decision policies we observed in the conjoint analysis results. a second limitation is the concern over the use of compensated, on-line participant pools, such as mturk, as reliable sources of participants in entrepreneurship research. however, within the social sciences, researchers have already begun to tap mturk participants for a variety of research in industrial psychology such as ethical leadership (lin, ma, & johnson, 2016), selfcontrol and supervisor abuse (yam, fehr, keng-highberger, klotz, & reynolds, 2016), employee voice (lin & johnson, 2015), and leader-member exchange (erdogan, bauer, & walter, 2015). further, aguinis and lawal (2013) and kraus, meier, and niemand (2016) both highlighted the mechanical turk as potentially valuable subject pools for entrepreneurship research. implications for research and practices extending the literatures on both rbv and opportunity evaluation, our findings offer insight on the complex relationships that exist between an entrepreneur’s human capital and opportunity evaluation. additionally, this research contributes to the franchising literature in several ways. first, the focus of this research is on how entrepreneurs evaluate the attractiveness of franchise vs. independent ventures as potential opportunities. a vast majority of the extant franchising literature focuses on franchisors rather than franchisees (combs, ketchen, shook, & short, 2010), providing ample opportunities for inquiry into the antecedents of franchising from the perspective of the franchisee. second, following the research call of combs et al. (2010), this research provides insights to the question of whom might be drawn to franchising and why. our findings indicate that when the relatedness between an entrepreneur’s human capital and the knowledge domain of an opportunity is low, a franchised organizational form is more appealing than attempting to exploit an opportunity independently. in short, when an entrepreneur perceives that his/her knowledge regarding an opportunity is low, it is more likely that the entrepreneur will seek to leverage the knowledge of a franchisor, rather than initiate an independent business. however, the inverse of this relationship is also true. when an entrepreneur’s human capital is highly related to a potential opportunity, an independent venture is evaluated as more attractive. these explanations merit further investigation in future research. for instance, the knowledge domain of the industry is only one relative knowledge domain that may be related to an entrepreneurial opportunity. in order to fully understand the relationship between knowledge and entrepreneurial opportunity evaluations, future research should also consider other relevant knowledge domains, such as knowledge related to customers, to markets, and to technologies. we believe this research also holds practical implications. recent research has suggested that franchisors seek and value entrepreneurial individuals as franchisees (dada, watson, & kirby, 2015). bennett, frazer and weaven (2010) suggest that independent entrepreneurs might be a fruitful avenue from which to recruit new franchisees. journal of small business strategy vol. 27 ● no. 2 ● 2017 83 our findings provide several suggestions for franchisors in recruiting, training and retaining franchisees. first, franchisors should be careful about seeking out current independent firms in their own industry. when an entrepreneur has specific knowledge relevant to an opportunity, he or she is likely to view independent ventures as more attractive than franchised ventures. if franchisors want to target entrepreneurs of existing firms, they should seek out firms in adjacent industries who may benefit from the expertise of the franchisor, but may need more industry specific training and support. second, the longer franchisees remain in a franchise system, the less they will rely on the knowledge and training of the franchisor. franchisees are exceptionally concerned with value, evidence by the complaints concerning initial franchise fees, royalties, and advertising fees as well as have difficulty perceiving and describing the value of franchise systems to which they belong (grünhagen & dorsch, 2003). in order to increase recruitment, satisfaction, motivation, and retention, franchisors may have to highlight idiosyncratic benefits to franchisees with longer tenure or industry experience, such as the benefits of structural and relational capital. references aguinis, h., gottfredson, r. k., & culpepper, s. a. 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(2004). a framework of knowledge transfer in cross-border joint ventures: an empirical test of the korean context. management international review, 44(4), 417–434. journal of small business strategy vol. 27 ● no. 2 ● 2017 89 denise m. cumberland is an assistant professor of human resources and organization development in the organizational leadership and learning program at the university of louisville. her research interests include governance, leadership, and training within global organizations, franchising firms and the nonprofit sector. she has been published in human resource development review, human resource development international, nonprofit management leadership, journal of developmental entrepreneurship, journal of marketing channels and the international journal of management education shaun paul digan is a ph.d. candidate in entrepreneurship at the university of louisville. he holds an m.b.a. from the university of cincinnati. his research focuses on entrepreneurial learning, cognition, and decision making. robert p. garrett, jr. is an associate professor of entrepreneurship and the coordinator of the undergraduate entrepreneurship minor at the university of louisville. his research interests include internal corporate venturing and family business. he has been published in organization science, journal of business venturing, entrepreneurship theory and practice, strategic entrepreneurship journal, journal of small business management, and small business economics. sharon a. kerrick is the dean for bellarmine university’s rubel school of business. previously she was the associate director of the forcht entrepreneurship center at the university of louisville’s college of business (2002-2016). she has published research in the areas of entrepreneurship, e-learning and financial literacy and her work has been cited by forbes. she is an enterprise angel investor and the creator of the “launch in louisville” $100,000 cardinal challenge package as well as founder of vetstart -an entrepreneurship startup program for military veterans (an sba awarded program). reproduced with permission of the copyright owner. further reproduction prohibited without permission. evaluating lawyer service quality in chapter 7 bankruptcies: the case of small professional busin... todd starr palmer;syed saad andaleeb;joyner, brenda e journal of small business strategy; fall 2005/winter 2006; 16, 2; abi/inform complete pg. 69 evaluating la wyer service quality in chapter 7 bankruptcies: the case of small professional businesses todd starr palmer st. bonaventure university tpalmer@sbu.edu syed saad andaleeb penn state erie ssa4@psu.edu brenda e. joyner loyola university new orleans bjoyner@loyno.edu abstract the increasingly competitive nature of the american legal environment is causing small law firms and solo practitioners to adopt many of the tools and attitudes of business. there is a potential conflict between lawyers' wishes to maximize revenue and .fulfilling their professional values in interacting with their clients. this exploratory study examines how clients evaluate their lawyers. utilizing a "procedural justice" framework, it is hypothesized that the greater the degree of trust, interpersonal respect, and competence exhibited by the lfmyer, the greater will be the level of client satisfaction. all three hypotheses are supported. introduction small law finns, those with fewer than five lawyers, constitute the bulk of american law finns and provide counsel and legal advice to their clients in situations that include transactions such as transference of real property, estate planning. family law, and personal bankruptcy (levin, 2004). small law finns and solo practitioners have been the beneficiaries of the recent explosion in bankruptcy filings. but how have their clients fared in this changed environment? are these clients satisfied with the services provided by their lawyers and firms? are clients who are served by sole practitioners and small law firms being deprived of professional safeguards as their lawyers rush to compete in a more dynamic market? no prior empirical research has addressed these questions. this study was designed to 69 explore clients' evaluations of services provided during bankruptcy proceedings. background justice sandra day o'connor distinguished professional organizations from other businesses in that membership "entails an ethical obligation to temper one's selfish pursuit of economic success by adhering to standards of conduct that could not be enforced by legal fiat or through discipline of the market" (o'connor, 1988). professional finns serve two masters: the market and their institutionally-derived ethical and professsional standards of conduct. recent changes in the professional environment have served to accentuate the difficulty of aligning these disparate interests. (zacharias, 2002). for instance, the level of competition has increased dramatically in the legal industry as law schools continue to produce record reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal o{small business strategy numbers of lawyers. this increase has been coupled with the emergence of new entrants such as accounting firms, tax preparers, paralegals, walk-in legal clinics, internet web sites, and form preparers that are now performing services that were once within the sole province of law firms (cramton, 1994 ). the result: lawyers are adopting new business-like attitudes and skills to compete effectively in this changing marketplace (nelson, 1994). in the past, state bar assoc1at1ons strictly regulated how law firms could market their services. traditionally, lawyers were prohibited from engaging in advertising except for modest signs and telephone listings. however, beginning with the supreme court's decision in bates v. state bar of arizona, many of these prohibitions have gone by the wayside. since the late 1970's, lawyers have forcefully marketed their services in such areas as personal injury, worker's compensation, family law, and bankruptcy (trilling, 1998). these commodity legal services are the routine, typically non-litigious legal matters that form the nucleus of practices for most solo practitioners and small law firms. in such a competitive market, the question of how clients assess service quality becomes very important. the public's trust of legal institutions and its representatives is essential for citizens to voluntarily accept the rulings of a government and produce a well-ordered society (tyler, 1998). in the past, the legal profession addressed the issue of providing quality service by enacting licensing requirements, i.e., barring non-certified persons from the practice of law (cramton, 1994 ). the legal profession essentially addressed the question of asymmetric power between lawyer and client by assuming that clients are simply incapable of assessing lawyer quality. the enactment of licensure requirements moved the issue of service quality from that of the individual lawyer to the legal profession (cramton, 1994). service quality measures this study adopts a procedural justice framework m assessmg client quality 70 vol. 16. no. 2 fall/winter 200512006 evaluation, as opposed to the servqual approach that attempts to assess the gap between customer expectations and their assessments of the completed service (parasuraman, et al 1985, 1988). complex services present a dilemma in that they pose, for many consumers, a "black box" in evaluating the quality of the service provided. the vulnerability of clients increases based upon their inability to assess outputs relative to inputs, thus, raising issues concerning equity (bagozzi, i 975) and perceived fairness (oliver and swan 1989). because of the complexity of evaluating the legal services received, consumers may find it difficult to set expectations, monitor service, and evaluate performance. "procedural justice" is a construct used to assess the perceived fairness and satisfaction with institutions and its representatives by examining how participants assess the procedures and criteria used to arrive at a decision. thibault and walker ( 1975) contend that the perceived fairness of a situation is related to the type of control that the client has in the legal process: decision control and process control. "decision control" refers to the input a client has in the final decision, while "process control" refers to the degree of control and participation clients have over the legal procedure (blau, 1964; adams, 1965). thibault and walker found that process control is the key to client satisfaction with legal procedures (thibault & walker, 1975). recent research establishes that people are more likely to accept negative outcomes from governmental institutions if they believe that the decision was made in a way that is procedurally fair (tyler, 1990). tyler ( 1997) states that four elements explain how participants in legal proceedings assess fairness: trustworthiness, interpersonal respect, neutrality, and voice. "trustworthiness" refers to a client's judgment about whether a third party (typically the judge or arbitrator) is concerned with their needs and is motivated to treat them fairly. "interpersonal respect" refers to being treated with dignity and honor. "neutrality" refers to the impartiality and honesty of the reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy third party who will decide the dispute. "voice" refers to the ability of the client to participate in the proceedings. our study attempts to assess client satisfaction with their attorney's services by utilizing a modified tyler framework that takes into account non-confrontational lawsuits in which the client has contact only with his or her attorney. in the case of a simple bankruptcy, although there is a thirdparty decision maker, the client almost never interacts with this party, only with his or her lawyer. the lawyer, bound by professional ethics, plays multiple roles as both a representative of the client and the legal system. although we believe that the underlying assumptions of procedural justice theory should apply, modifications reflecting either a simple bilateral relationship or a more complex multiple-player relationship should be accounted for. we believe that only two of the factors as posited by tyler, trustworthiness and interpersonal respect, would clearly apply. both of these concepts, as used in the literature, can be applied to the client's lawyer, as well as neutral third parties. these play well into what has been described as the relational concerns of the procedural fairness construct (slader, chang & tyke, 2001 ). voice is somewhat problematic. since clients are rarely involved in a formal courtroom scenario and, in fact, typically only interact with their lawyer, the authors felt that voice in bankruptcy proceedings is irrelevant, especially since clients are typically in such distressed financial circumstances that their options are extremely few; and few options translate into limited choices and consequentially limited voice and involvement. likewise, the classic definition of neutrality, as envisioned by tyler, would clearly not apply. in a confrontational courtroom setting, the lawyers act as an advocate, while the judge sits as a neutral decision maker. clients base their satisfaction as much upon the institutional constructs as upon the behavior of their attorney. an underlying assumption of procedural justice theory is that in assessing satisfaction with various 71 vol. 16. no. 2 fall/winter 200512006 legal or political institutions, people are more likely to be satisfied with decisions that they feel are "just." when assessing their lawyer who performs legal services in a nonconfrontational setting with little interaction with any third parties, the client still wishes for third-party institutional justification for the decision rendered. for example, in a bankruptcy setting, the client not only wishes to be relieved of their debt burden but also of the guilt for no longer being responsible for this debt. institution-based decisions help the client to rationalize the outcome, making it more palatable. since the lawyer acts as a representative of the client and the legal system, strict neutrality is not an available alternative. however, lawyer competence may serve, by analogy, a similar function. we posit that neutrality is still important in the eyes of the client in that if their verdict or solution is institutionally based, then this represents justice and makes the client more amenable to accepting the solution. if the attorney is perceived to be competent, then this reinforces the client's belief that the course of action and the result is institutionally based. legal ethics explicitly promotes a dual role for attorneys: advocate for the client and representative of the system (i.e., agent of the court). in their role as a representative of the court, lawyers must act neutrally, rendering counsel, not orders, to the client and acting in a nonpartisan manner. in conclusion, we believe that trustworthiness, interpersonal respect, and perceived competence should significantly explain client satisfaction with their bankruptcy attorney. hypotheses the lawyer/client relationship is one based primarily on trust, evidenced in the legal environment by such concepts as allomeyclient privilege and work product confidentiality. prior research has focused on fairness (huppertz, arenson, and evans, 1978; oliver and swan, 1989), i.e., distributive justice, which posits that the parties are satisfied with the transaction when each receives benefits that are proportional to their investments (oliver and swan, 1989). in the context of bankruptcy services, the relationship between the client reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy and lawyer are asymmetric, due to the vast difference in the level of benefits received by the parties, making an assessment of inputs and outputs in terms of benefits received indirect. clients do not concern themselves with whether the attorneys received just compensation, i.e., benefit fairness, but rather with relationship fairness in which clients assess in terms of whether the lawyers keeps their word and how they interact with the client. in other words, trustworthiness is a surrogate for assessing the fairness of outcomes and is consistent with how the construct is defined: as a's belief that b can be relied upon to produce positive outcomes or, at least, to minimize the production of negative outcomes (andaleeb and basu 1994 ). this approach is consistent with the findings of oliver and swan ( 1989) who observed a similar relationship between car dealers and their customers. therefore we propose: h 1: the greater the perceived trustworthiness of the bankruptcy attorney, the greater the level of client satisfaction with their lawyer. tyler ( 1997) suggests that being treated with dignity enhances feelings of fairness. in a study exammmg alternative forms of adjudication, lind et al. ( 1990) found that perception of dignity was crucial in explaining higher procedural fairness ratings. johnson and zinkhan ( 1991) found that courtesy accounted for close to 60 percent of the variation in how clients assessed their attorneys. in a study examining criterion and cues to evaluate service quality, courtesy or dignity was the only criterion common to four services studied (crane and clarke, 1989). the typical debtor has often gone through a humbling and degrading experience. when most debtors contact a bankruptcy lawyer, that lawyer is often the first person who may show any personal concern for the them and their plight. likewise, information exchanged between the parties, critical for both addressing the elements of the case and providing assurance, and the accompanying reciprocity enhances this interpersonal respect (coyleshapiro & kessler, 2002). therefore, it was expected that outward expressions of 72 vol. 16. no. 2 fall/winter 200512006 concern will enhance the clients' appreciation of their lawyer. it is proposed: h2: the greater the interpersonal respect perceived by the client in their interactions with their lawyer, the greater will be the level of the client satisfaction with their lawyer. in the typical bankruptcy scenario, the client never meets with a third-party adjudicator; hence, the construct of neutrality, as envisioned by tyler, does not explicitly emerge. however, we posit that neutrality is still important in the eyes of the client. if their verdict or solution is institutionally based, then this represents justice and makes the client more amenable to acceptance of the solution. if the attorney is perceived to be competent, then this reinforces the client's belief that the course of action and the result is institutionally based. in the role as a representative of the court, the lawyer must act neutrally, render counsel to the client, and act in a nonpartisan manner. thus, competence acts as a surrogate for neutrality in a professional setting. ethnographic studies reveal that clients in professional settings depend upon their lawyer's competence to put their narrative in a form that permits equitable and efficient decision making (heinz and kerstetter 1979). answering questions promptly, speaking authoritatively, and other actions by the lawyers make them appear to be competent and enhance the client's belief that the attorney is providing quality representation. hence: h3: the greater the perceived competence of the bankruptcy attorney by the client, the greater will be the level of the client satisfaction with their lawyer. methodology a preliminary version of the questionnaire was developed; items were based largely on information generated by in-depth qualitative interviews with bankruptcy attorneys and consumer debt counselors. these questionnaire items were rated on seven-point likert scales in a structured format. multiple items reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategv were used to detennine the reliability and validity of the constructs. the questionnaire was pre-tested to ensure that the wording, fonnat, length, sequencing of questions, and the range of the scale items were appropriate. the population studied. consisted of all persons obtaining a chapter 7 bankruptcy discharge from the bankruptcy court of the united states, western district of pennsylvania, erie division between the dates of april 30 and september 30, 1997 who had been represented by counsel of law finns with less than ten lawyers. a total of 530 bankruptcy filers were identified. surveys were mailed to them using a selfadministered questionnaire. two weeks later a second mailing was sent out to those who had not yet responded. a total of 89 surveys were returned for a response rate of 16. 79 percent. exploratory factor analysis with varimax rotation was used to examine the factor vol. 16. no . 2 fall/winter 200512006 structure of the measures. in regard to the sample size (89), this study meets the general rule that there should be four to five times as many observations as there are variables to be analyzed (hair, anderson & tatham, 1987). an examination of the items with their respective loadings revealed that several items loaded simultaneously on more than a single factor, while several others did not seem to belong to the group in which they were expected to load. these items were systematically removed; the final factor structure resulted in the three factors that coincided with our expected model. these factors explained 73.44 percent of the variance. the items that made up each of the factors were next factor analyzed separately. with no exception, only one factor emerged for each separate set with an eigenvalue exceeding one. using the bartlett's sphericity test, the null hypothesis of unidimensionality could not be rejected at a =.10. table i factor analysis trustworthiness did not pay enough .847 attention to me i felt that i was taken .799 advantaee of did the work promised .786 listened .759 treated me the same .715 more interested in fee .571 than me friendlv .191 polite .326 sociable .222 knows a lot about .178 bankruptcy law specializes in .128 bankruptcv law the three factors derived from the analysis clearly reflect tyler's ( 1997) model. the first six items (see appendix a) each relate to the relationship between the customers and their attorney, focusing on the balance achieved by the parties in providing the service. this factor, trustworthiness, addresses the client's beliefs about the nature 73 interpersonal respect competence .236 .0243 .058 .078 .340 .216 .327 .227 .236 .291 . 132 .085 .945 .087 .905 .182 .647 .268 .150 .902 .30 .887 of the outcome, especially given the unequal power balance between the two and because of the knowledge bases inherent in credence based services. the next three items (see appendix a) comprising the factor, interpersonal respect, address the lawyer's outward manifestation toward the client. expressing empathy reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal ofsmall business strategy toward a client who has engaged an attorney for services high in credence properties assists in the establishment of symmetry in the relationship. the final derived factor, competence, (see appendix a) relates to perceived attorney knowledge and corresponds closely to tyler's concept of neutrality. in the typical chapter 7 bankruptcy filing, the lawyer is the only party that the client will ever interact with. since the client never meets a third party, it is the lawyer who serves as a proxy for the entire system. attorneys' professsionalism, as reflected in their competence, serves notice to the clients that their problem is relevant and that the solution being offered is institutionally based and hence, represents justice. vol. 16. no. 2 fall/winter 200512006 the reliability of each multiple-item scale was assessed first, using coefficient alpha. reliability analysis indicated that the internal consistency of the constructs was reasonable. the dependent variable exceeded nunnallys's (1978) recommended value of .70, as did the values of the other constructs. several methods were used to assess validity. the results in table 2 provide support for discriminant validity, since the correlation between one scale and another is not as high as each scale's coefficient alpha (gaski and nevin 1985). the directions and strengths of the correlations in table 2 provide support for nomological validity, since the signs are in the right direction and the significant relationships are theoretically justifiable. table 2 correlation analysis variables 1 2 3 4 mean s.d. trustworthiness ( 1) .8732 t 6.02 1.23 interpersonal respect (2) .643* .8867 t 6.41 1.04 competence (3) .387* .327* .8163t 6.39 .955 satisfaction (4) .788* .850* .527* .9878t 6.25 1.37 • p<.001 t figures in diagonal represent cronbach ' s alpha for standardized variables. results multiple regression analysis was used to test the three hypotheses. with client satisfaction with their bankruptcy lawyer as the dependent variable, the full model was significant as indicated by the overall fstatistic (f = 147.4, p<.0001). the model possessed an adjusted r2 of .853. all three hypotheses were supported. the standardized betas indicate that perceived interpersonal respect shown by lawyers had the greatest impact on client satisfaction (b = .867; p = .682, p < .00 i). trustworthiness was the next significant variable influencing client satisfaction (b = .655; p = .515; p < .00 i). competence had the least impact of the three perceptual constructs (b = .458; p = .36; p < .001 ). table 3 regression analysis with client's satisfaction with the bankruptcy lawyer as the dependent variable independent unstandardized beta t-ratio sig. variables coefficients constant 6.305 113 .354 lntemersonal resoect .867 .682 15 .492 <. 001 trustworthiness .655 .515 11.701 <.001 comoetence .458 .360 8.172 <.001 r= .859, adjusted ri = .853 , f = 147.9, p<.0001 74 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy collinearity was assessed in two ways. first, the correlations between the independent variables were examined which indicated lack of collinearity since no two constructs had correlations above .8 (billings and wroten 1978). the tolerance and variance inflation factors also indicated very clearly that multicollinearity was not of any significant concern. discussion this study indicates, that in assessing the service quality of their lawyers, clients are utilizing such constructs as interpersonal respect, competence, and trustworthiness all values historically linked with professional codes of conduct. this procedural justice model of assessing service quality has an adjusted r2 of .853, indicating that these three factors explain a significant portion of the variance in the dependent variable, client satisfaction with their lawyer. this study is unique in that it applies procedural justice theory to a nonconfrontational legal setting, suggesting that, in such a scenario, the lawyer's dual roles of representing both the client and the system will be assessed and evaluated by their clients. this perspective shows that coupling marketing and professional values could have important ramifications, as the legal profession continues its transformation. traditional legal philosophy differentiates between clients' and attorneys' needs and interests. this notion provides, in part, the rationale for many of the cartel qualities of the modem legal profession. but as this industry structure comes under assault, many lawyers feel that traditional legal values limit their competitiveness by making them place client interests in front of their own. this runs counter to much of the "slash and bum" philosophy that many business people and lawyers have adopted. as competition intensifies within the legal industry, there is a tendency for some lawyers to minimize the importance of professional standards and to treat them as anachronisms, completely irrelevant in a market driven world. our research suggests the exact opposite. this is especially important for sole practitioners 75 vol. 16. no. 2 fall/winter 200512006 and lawyers practicing in small firms, as the pressures to change value sets may be more intense. when further research confirms our notion of a linkage between professional and marketing values, this could provide a useful impetus for teaching and learning. legal education, at both the law school and continuing education levels, should emphasize professional values not only for their traditional valence but also for their marketing potential. by linking "good law" with "good business" one can reinforce these important values. future research utilizing the procedural justice model should expand into other areas of non-confrontational law to assess the usefulness of the model in explaining client satisfaction. it should be noted though that such research might be difficult to conduct, given the legal concept of confidentiality between a lawyer and client. references adams, j.s. 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(1994). legitimacy and the empowerment of discretionary legal authority: the united states supreme court and abortion rights. duke university law journal, 43(fall): 703-773. u.s. department of commerce, economics and statistics administration, bureau of the census ( 1995). county business patterns 1995. visa u.s.a. inc. (1999). consumer bankruptcy: annual bankruptcy debtor survey. 77 vol. 16. no. 2 fall/winter 200512006 zacharias, f. (2002). what lawyers do when nobody's watching: legal advertising as a case study of the impact of underenforced professional rules. iowa law review, 87: 971-1007. appendix a dimensions and respective items trustworthiness • my lawyer did not pay enough attention to me. • i felt i was being taken advantage of. • my lawyer did the work promised. • my lawyer listened to me. • my lawyer treated me the same as his or her other clients. • my lawyer was more interested in his or her fee than in me. interpersonal respect • my lawyer was friendly. • my lawyer was polite. • my lawyer was sociable. competence • my lawyer knows a lot about bankruptcy law. • my lawyer specializes m bankruptcy law. client satisfaction • overall, how satisfied were you with your lawyer?* • how willing would you be to use this lawyer in the future?** note: all items with the exception of "client satisfaction" were assessed with a 7-point likert scale with 7 anchoring "strongly agree" and 1 anchoring "strongly disagree." • assessed with a 7 point likert scale with 7 anchoring "very satisfied' and 1 anchoring "very dissatisfied." •• assessed with a 7 point likert scale with 7 anchoring "very willing" and 1 anchoring "very unwilling." todd starr palmer is associate professor of management at st. bonaventure university where he teaches and conducts research in business law, ethics, entrepreneurship and strategy. his most recent research has focused on the parental reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy influence over children and their use of credit cards. syed saad andaleeb is professor of marketing at penn state erie, where his research and teaching interests include marketing management and strategy, marketing research methods, marketing channels and physical distribution, and international marketing. brenda e. joyner is assistant provost and chase minority entrepreneurship distinguished professor of management at loyola university new orleans. her teaching and research interests include business ethics and social responsibility, environmental management and reporting, new venture development, and organizational strategy. vol. 16. no. 2 fall/winter 200512006 78 sf'rate gy new venture initiation: factors influencing success val miskin jerman rose washington state university introduction the authors recognize that the definition of "entrepreneur" may still be subject to varying interpretation. for the purposes of this study, the term entrepreneur will be used to include a broad entrepreneurial behavior along the lines of hisrich and peters'efinition that "entrepreneurship is the process of creating something different with value by devoting the necessary time and effort, assuming the accompanying financial, psychic and sodal risks and receiving the resulting rewards of monetary and personal satisfaction" (5). previous research on entrepreneurial success, has explored both the cognitive and behavioral characteristics of the entrepreneur as well as the contextual variables surrounding the business venture. this study has been designed to explore specific variables relative to (a) the entrepreneur, (b) the context of the business venture and (c) the product or service itself. it is the intent of this survey to identify and confirm the impact these variables have on the initiation and eventual success of new business ventures. entrepreneurial characteristics similar to early studies in the leadership field, initial research in the field of entrepreneurship has focused on the personality and trait characteristics of those who have been successful. many such studies (i, 2, b,9) have attempted to profile the successful entrepreneurial personality but with a variety of inconsistent results. there does, however, seem to be some consensus among researchers, entrepreneurs and venture capitalists that the quality and competence of the entrepreneur is critical to a venture's success. a recent study by macmillan, siegel and narasimha (6) supports the overriding philosophy that irrespective of product, market or financial criteria; it is the entrepreneur that most determines success. this study identified several cognitive and behavioral aspects of the entrepreneur deemed as significant to the venturing dedsion. specific factors identified as most influential were the "amount and type of previous managerial or leadership experience," and "level of familiarity with relevant target markets and geographical areas." it is not expected that these should be accepted as stand alone measures of future success, but that they be considered as relevant assessments since they include many of the important entrepreneurial characteristics. potential entrepreneurs have been encouraged to develop personal skills in many related areas, but it is proposed that the above two measures capture the essence of those most related to success in the new venture. i additional factors were proposed more recently by greenberger and sexton (3) that are more internally measurable. more specifically, these are the "self-perceptions" of individuals as the type to be successful as entrepreneurs. these factors (amount and type of previous experience, familiarity with target markets and geographic area, and entrepreneur selfperceptions) are the factors used in this study as the measure of "entrepreneurial characteristics." situational variables further analysis of entrepreneurial research (3,6, 7, 10)broadens the scope by including the operating context and environment of the business venture. again, seeming to follow the pattern of studies in leadership, the search for factors influencing entrepreneurial success has led to the examination of situational variables that are related, but external to, the entrepreneur. the situational leadership literature has explored a variety of variables over the years pertaining to the complexity and structure of the task, existing relationships between leaders and followers and in the maturity levels of subordinates. the study of situational variables specific to successful entrepreneurship, however, seems to be focused more on the actual context of the proposed new venture. a commonly accepted situational model of new venture initiation seems to be emerging that proposes, in addition to the entrepreneur characteristics, a set of operationally defined situational variables that influence new venture success. this category of variables includes "salient life events" of the potential entrepreneur that provide an unusual stimulus or impetus to move an individual in the direction of self employment and "positive social support" as perceived by the potential entrepreneur. salient life events are defined as personal, professional or financial changes in the entrepreneur's life that are perceived as important (and therefore salient) to the new venture decision. divorce, death of a family member, loss of current employment, changes in technical skills, serious financial setbacks or unexpected inheritances are all examples of such salient life events. social support can be best described as favorable indications from others (to the entrepreneur) that the new venture plans are viewed as credible and/or desirable. this support must necessarily come from family, friends, colleagues and community leaders (including the favorability of local laws and regulations). an additional variable referred to in much of the situational literature and that finds support as an important contextual consideration is the entrepreneurs'erception that sufficient financing is available to them. thus, the category of "situational variables" for this study will include salient personal, business and financial life events; support from family, friends and community; and the entrepreneur's perception of available financing. product/service idea factors closest to the new venture decision are those directly related to the product or service idea itself and often have the greatest impact on the venture's eventual success. the influence of product type, service demand, and level of competition all have a strong face validity on the entrepreneur's decision to begin a new venture, but their statistical validity and integration with the situational and entrepreneurial variables have not been fully explored. in one study on corporate venturing (11) a set of intrinsic factors were shown as correlated to the successful launching of new corporate investment decisions. 2 the factors showing the highest statistical correlation to new investment success are similar to the entrepreneurial product and service elements assodated with new venture success. entrepreneurial research by hisrich and brush (4) and welsch and young (12) supported this notion of product/service related factors. from this research base come the three common elements of "type of product," "stage of product development," and "degree to which the existing markets have already been tested or proven." these are not suggested as comprehensive measures of product-related variables but are used in this study as representative of the "product/service" factors most influential in new venture decision. methodology introduction a survey questionnaire was drafted that consisted of six questions addressing the characteristics of the entrepreneur, seven questions concerning situational variables and three on the product/service elements. three additional questions were included as measures for the dependent variables; (1) whether or not a venture had actually been started, (2) whether or not it was still in operation after two years and (3) if it was still in operation, what was its reported level of profitability. all responses from returned questionnaires were input to the crosstabulations program of the sas statistical package to calculate chi square values. all data were analyzed to determine any significant relationships among the sixteen independent variables and the three dependent variables. the sample the sample for this study was drawn from the records of a regional office of the small business development center (sbdc) located in the state of washington. only those clients of the sbdc were selected who had identified themselves during the year as interested in starting a business venture. by definition, this group had not yet started a business when they contacted the sbdc. those who indicated their interest was to start a cooperative rather than a business venture were eliminated from the sample. this process eliminated 190subjects and resulted in a sample of 1,005 potential business owners included in the survey. three hundred and fortysix (346) usable questionnaires were returned, representing a 34% response rate for a reliability factor above the 95% level. the majority of those responding were male (58%), with at least a bachelor's degree (53%) and interested in the service industries (55%). additionally, 50% of the respondents were forty years old or older. thus, the respondents in this study were more dominantly male, better educated and somewhat older than the general population of the state. it is also interesting to note that over 80% of those responding had previous managerial or leadership experience and nearly 30% had owned a previous business. therefore, it may not be surprising that 58% of the respondents actually did start a new venture and that 76% were still in business two years later. results table 1 lists the independent variables used in this study and shows the response frequencies from the total sample. it also lists the dependent variables and their response frequencies from the total sample. 3 while these statistics show some interesting results and patterns, they do not address the question of significance. table 2 presents the chi-square results relevant to each of the independent variables with levels of significance noted. table 1. frequencies of reported characteristics by category entrepreneurial characteristics less than one year one year or more 1. previous mgt. experience in a small business 45% 55% 2. previous mgt. experience in a large business 72% 28% 3. previous mgt. experience tn non-profit organization 36% 64% 4. previous experience as business owner 72% 28% no yes 5. self-perception as the entrepeneurial type 29% 71% 6. familiar with geographic area and target market 27% 73% situational variables no yes 7. salient personal changes 82% 18% 8. salient business changes 49% 51% 9. salient financial changes 65% 35% 10. support of family 26% 74% 11. support of friends 32% 68% 12. support of community 26% 74% 13. financing perceived as available 41% 59% product/service idea manufacturing service retail 14. type 20% 55% 25% needs little needs much development development 15. stage of development 37% 63'/o market largely more proven untested market 16. marketing process 54'/v 46% dependent variables no yes 1. started new business venture since initial 42% 58% sbdc contact 2. business still operational after two years 24% 76% closed or below at or near highly breakeven breakeven profitable 3. level of self-reported profitability 35% 31% 34% if still in operation 4 table 2. significance of influencing factors in relation to the decision to start, still being in business after two years and level of profitability relationship relationship to the to being relationship influencing decision still in to level of factors to start business profitability entrepreneurial characteristics 1. exp: small bus. ns ns 2. exp: large bus. ns ns 3. exp: non-profit ns ns ns 4. previous owner ns ns 5. perceived ent. type ns 6. familiarity with market situation variables 7. personal life changes ns ns ns 8. business life changes ns ns ns 9. finance life changes ns ns ns 10. family support ns ns 11. friends support ns ns 12. community support ns ns ns 13. perception of available financing ns ns product/service idea 14. type ns ns ns 15. stage of development ns ns 16. proven market ns ns ns ns = no significant relationship = significant at the .05 level = significantat the.01 level discussion entrepreneurial characteristics the first area explored in this study was the characteristics of the entrepreneurs themselves. previous management experience was not an important factor in their startup decision, but was asignificantdeterminant to still being inbusinesstwoyearslateraswellasthe venture'sreported level of profitability. lt is interesting to note that previous experience in larger businesses was significant in relation to still being in business, but that previous ownership and small business experience were more influential in the venture's level of profitability. this may in part be a result of 5 experience in larger firms developing a set of expectations and perceptions that lead to the persistence and patience required to continue in the new venture. experience in small businesses and previous business ownership, on the other hand, may be more likely to develop specific small business management skills that are inclined to improve future profitability. it is unclear from our results whether this difference is likely to become less significant as these skills are developed in the current venture or if they are critical to have in the early stages of a new venture and thus are significant from the beginning. respondents in this study rating themselves as the type to be successful as entrepreneurs were impacted surprisingly little in their decision to start a new venture. belief in themselves as the entrepreneur type, however, was related both to their still being in business after two years and to their current level of success. while initially a surprise, the independence of this selfperception and the decision to start seems to imply that the start-up decision may be less threatening than has previously been supposed. it is also possible that the decision to start a new venture is often determined without a clear understanding of the requirements or consequences involved. in any event, the required level of self-confidence seems particularly important to meeting the challenges and uncertainties of continuing and succeeding in the new business venture. the final entrepreneurial characteristic measured in this study was the entrepreneur's familiarity with the geographical area and proposed target market. this was the only characteristic that was important to all three dependent variables. these results are not a surprise since it implies local knowledge, previous market experience and good working relationships in the market area. such relationships indicate that the entrepreneurial skills of local networking and establishing a working knowledge of the marketplace is, perhaps, one of the best places to begin. situation variables secondly this study explored the environment, context and situations surrounding the business venture. the first of these, salient life changes, has a common sense appeal that was supported by several individual comments from the respondents in the study. it was an unexpected result to find that such life changes were not reported as important to the entrepreneur's decision to begin. notably, most of the written comments reflected very strong feelings about such changes in their lives. examples such as '1x.ing unfairly fired," 'qx.ing left financially destitute," "having to start all over again," etc., seemed to be indications that the strength of the emotion may account for its reported level of visibility, but not in fact be a universal factor of most entrepreneurial decisions. while support from neither family, friends nor community, found support from our survey in relation to the start-up decision or to still being in business two years later, support from family and friends was shown to be significantly related to the level of venture profitability. it seems likely that the initial decision as well as persistence do not necessarily require such indications of support, but that once in business, support groups provide a valuable resource and are critical to entrepreneurial success. perhaps the reason that perceived support from local governments was found not to be a factor is a function of the degree rather than the frequency of this response. respondents who did comment were particularly vocal when they perceived any type of governmental road block. a reading of comments shows significant frustration and bitterness among some of these entrepreneurs. this may indicate the amplitude of the problem is responsible for its apparent visibility rather than any relationship to a universal reality. 6 results of this study confirm a significant relationship between the perception of available financing and the dedsion to start a business venture. there was, however, no significance to the relationship between available financing and still being in business two years later or the level of profitability. while our study admittedly did not measure the sufficiency of available startup capital, it appears that the question of financing initially influences the entrepreneur's decision but that either businesses without suffident capital are not undertaken or that once the business are launched, the capabilities and support systems of the entrepreneur are able to overshadow this concern. product/service idea as stated earlier, 20% of the respondents were in manufacturing ventures, 54% in the service industry and 26% in retail. this pattern gives a fair examination of all three business types, but in this study, business type showed no significant relationship to beginning, continuing or succeeding in the new business. previous studies have linked profitability levels as well as financing needs to the manufacturing or technical businesses. this study shows no such relationship, probably due to the subjective measure of profitability that was utilized. in this study, profitability was reported only in relation to the firm's own breakeven level rather than to any percentage or dollar level. this reduces any reported effect of larger volumes or capitalization rates and reflects a more realistic evaluation of how venture type affects future levels of "success." when asked what stage of development their idea was in, 63% responded as needing considerable development while only 37% stated little development was needed. this factor shows no relationship to either the start-up decision or future levels of profitability. it is, however, significantly related to still being in business two years later. this again raises the possibility that the decision to start is not always made from a position of clear understanding of what lies ahead. it also suggests, perhaps, that the entrepreneur is still hopeful after two years that as the product nears its final development stages it may become more profitable. since two years may not be sufficient time to bring a venture to full development and profitability, this factor may be more directly related to the decision to remain in business than in its initial inception or its potential profitability. it would be interesting to compare these results after another two years to see if this explanation is supported. the final relationship examined in this study was the extent to which the relevant advertising and sales process had been proven by others in the industry prior to the startup decision. this was a self-reported measure, after-the-fact and no significance was found in its relationship to any of the three dependent variables. a review of the written comments indicated this question was not clearly understood and we have thus discounted these results and would recommend a more clearly defined measure be used to determine the significance of this relationship. conclusions while the results of this study suggest some relationships exist between these variables and the entrepreneurial decision to start and to the venture's level of success, it is interesting to note that the decision to start is not influenced by the same factors that are related to future success. 7 start-up decision the initial decision to begin a new business venture did not show a significant relationship with most of the factors in our study. in fact, only two, familiarity with geographic market and perception of available financing were shown to significantly influence the start up decision. while it seems probable that the entrepreneur's knowledge of local markets and their perception of access to start-up funds would greatly impact their decision to give it a try, it was somewhat of a surprise that previous business experience and important life changes did not. to some extent, this maybe explained by the fact that while life changes (personal, business and financial) on occasion often do indude high emotional involvement and thus high visibility, they are not as universally prevalent as previously supposed. however, it may also be explained by looking at these variables in relation to one another. it may be that potential entrepreneurs often do not understand all that is involved in managing their own business and view their existing knowledge of the market and their perception of available funds as the major or overriding concerns when making their initial decision to actually begin. probability of success businesses still in operation after two years did not all report equal levels of success. they did, however, show significant relationships to five of our variables regardless of their reported success levels; previous business ownership, previous managerial experience, perception of self as successful entrepreneurial type, familiarity with geographic market and stage of product/ service development. the situational measures in our study showed no significant relationship to persisting after two years, perhaps due to the strong role that the entrepreneurial characteristics play in this process. these findings support the concept that the perceptions and abilities of the entrepreneur will often be the more dominant factors in continuing the business. while the authors are not so naive as to presume the situational variables are of no consequence, this study may be an indication that public policy directed toward these variables may not provide the anticipated impact on entrepreneurial decisions. it was also of note that the reported level of profitability in our survey was shown to be significantly related to as many as six factors; previous business ownership, previous managerial experience, perception of self as the successful entrepreneurial type, familiarity with geographic market, support of family, and support of friends. the product/service type, stage of development and degree to which markets had been proven all met the test of independence in our study and were not shown as significantly related to future profitability. support of family and friends as an important influence on future profitability levels may be an indication that the continued effort and enthusiasm of entrepreneurs is strengthened or enhanced by their personal support structures. while a causal affect was not proven in our study, it does support the notion that factors enhancing the professional confidence of entrepreneurs are of critical importance to the success of new business ventures. references 1. brockhaus, r.h. "the psychology of the entrepreneur." in c. kent, d.l. sexton & k. vesper (eds.). encyclopedia of entrepreneurship (new jersey: prentice hall, 1982). 2. dandridge, t.c. & ford, m.a. "use of a self-assessment profile to differentiate among professional groups on entrepreneurial characteristics." inn.c. churchill, j.a.homaday, b.a. kirchhoff, o.j. krasnes & k.h. vesper (eds.). frontiers of entrepreneurship research (wellesley, ma: babson college, 1987). 8 3. greenberger, d.b. & sexton, d.l. "an interactive model of new venture initiation," journal of small business management,26(3), (1988), pp. 1-7. 4. hisrich, r.d. & brush, c.g. "women and minority entrepreneurs: a comparative analysis." frontier's of entrepreneurial research (wellesley, ma: babson college, 1985). 5. hisrich,r.d. &peters,m.d. entrepreneurship: startingdevelopingandmanaginga new enterprise (homewood, il: b.p.i./irwin, 1989), p. 10. 6. macmillan, i.c., siegel, r. & narasimha, s. "criteria used by venture capitalists to evaluate new venture proposals," journal of business venturing, 1(1),(1985),pp. 119-128. 7. martin,m j c. managingtechnologicallnnooationand entrepreneurship (reston va: reston publishing, 1984). 8. sexton, d.l. & bowman, n.b. 'personality inventory of a personality index." in j. hornaday, f. tarpley, j. timmons & k. vesper (eds.). frontiers of entrepreneurship research (wellesley, ma: babson college, 1984). 9. sexton, d.l. & bowman, n.b. 'validation of a personality index." in r. ronstadt, j. hornaday, r. peterson & k.vesper (eds). frontiers of ent repreneurshi p research (wellesley, ma: babson college, 1986). 10. stephenson, h. & sahlman, w.a. "importance of entrepreneurship in economic development." inr. hisrich(ed.). entrepreneurship, intrapreneurshi pand venture capital (lexington, ma: d.c. heath, 1986). 11. sykes, h.b. "the anatomy of a corporate venturing program: factors influencing success," journal of business venturing, 1(3), (1986), pp. 275-293. 12. welsch.h. &young, e. "male and female entrepreneurial characteristics and behaviors: aprofileofsimilaritiesand differences,"international small business journal,2(4),(1984), pp. 11-20. 9 reproduced with permission of the copyright owner. further reproduction prohibited without permission. the effects of the small business founder's need for cognition on early stage performance leaptrott, john journal of small business strategy; fall 2007/winter 2008; 18, 2; abi/inform complete pg. 77 the effects of the small business founder's need for cognition on early stage performance john leaptrott georgia southern university jleaptrott@georgiasouthem.edu abstract this study assesses the relationship between the need for cognition and early stage organizational performance for a sample of small business owners who started new childcare ventures. their need for cognition was assessed as a predictor of performance that was measured by sales growth. the data supported a significant positive relationship between need for cognition and performance as predicted. this study suggests that the cognitive characteristics of small business owners can influence the performance of their businesses. introduction small businesses represent an appropriate research setting for investigating relationships between individual cognition and economic performance. often small businesses are owned and managed by a single individual who is assisted by a handful of employees. these smaller, single owner businesses represent a significant segment of the economy. according to a nfib poll (dimarob, 2005), single individuals own 59% of small businesses, and 85% are managed by the owner(s). firms with fewer than ten employees comprise 4.6 million businesses or 78.6% of the number of businesses in the united states (u.s. census bureau, 2004). decisions small business owners make to configure their small businesses to adequately fit the environments in which they operate are likely to affect the performance of their businesses. because assessing the environment and configuring the business to fit that environment often involves substantial cognitive activity by the owner, the cognitive characteristics of 77 the owner can affect the early stage performance of small businesses. this study assesses the relationship between need for cognition (cacioppo and petty, 1982), a cognitive attribute reflecting a stable individual tendency to engage in effortful cognitive activity, and sales growth, a metric of organizational performance, for a sample of small childcare businesses. theory and hypotheses prior research has provided evidence of a link between environmental fit and performance in established organizations. venkatraman and prescott (1990) offered a conceptual framework relying on a normative profile they hypothesized would be appropriate for a company in a given environment. using two samples drawn from the profit impact of marketing strategy (pims) research database, they offered evidence of a negative relationship between performance and misalignment from a normative strategic model. pelham (1999) found evidence to suggest alignment of both strategy and firm competencies with reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy environmental conditions are necessary to achieve good performance. beal (2000) found evidence of a relationship between the alignment of strategy and the environment, and scanning behavior. this study operationalized scanning behavior as the scope and frequency of scanning untaken by company ceos. forte, hoffman, lamont and brockmann (2000) sampled 235 shortterm acute-care hospitals in florida and found evidence supporting the relationship between organizational performance and the fit between organizational strategy, using the miles and snow (1978) typology and environmental contingencies. dobni and luffman (2003) found evidence suggesting that certain organizational structures will outperform others only in certain environmental conditions, rather than uniformly in all environmental conditions. these and other studies support the premise that greater organizational performance is the result of better strategic alignment with the environment. additionally, appropriate organizational strategy decisions and related organizational configuration stemming from both accurate scanning of the environment to acquire relevant information and correct interpretation of that information will also result in greater organizational performance (venkatraman and prescott, 1990; yeung, selen, sum, and huo, 2006). the effortful gathering and evaluation of information, along with the careful consideration of alternative courses of action reflects a logicbased reasoning process rather than simply a hasty, intuitive decision process based on little or no information. the conceptual model for this study is illustrated in figure 1 and relates to the degree a logic-based rather than intuitive decision-making process is used by the small business owner in making important decisions. the model is based on what kahneman (2003), sloman (2002), stanovich and west (2000), epstein (1994) and others have described as dual process theories of reasoning used in decisionmaking. the experiential (epstein, 1994) or system 1 (kahneman, 2003; stanovich and 78 vol. 18, no. 2 fall/winter 200712008 west, 2002) method of reasoning describes a method of reasoning that is fast, automatic, effortless and affected by emotion. in contrast, the rational (epstein, 1994) or system 2 (kahneman, 2003; stanovich and west, 2002) method of reasoning operates in a slow, controlled, effortful manner. kahneman (2003) describes interaction between the two systems as a continual operation of system 1 with continual but often lax monitoring and occasional intervention of system 2 to correct or override a system 1 decision. sloman (1996) characterizes the systems as having overlapping domains that vary as a function of the individual's knowledge, skill, and experience. he describes each system working within a single individual as " ... two experts who are working cooperatively to compute sensible answers" (p. 6). alternatively, the two systems may derive different solutions to a problem, leaving the individual with internal conflict as to which alternative course of action to pursue. system 1 reason-ing would likely result in rapid intuitive decision-making utilizing heuristics. system 2 reasoning would be more objective and logical. several factors have been found in experimental research to either facilitate or impede the use of logic-based (system 2) reasoning (kahneman, 2003). some of the fac-tors that impair an individual's ability to utilize logicbased reasoning include time pressure (finucane, alhakami, slovic, and johnson, 2000) and concurrent involvement in multiple cognitive tasks (gilbert, 1989, 1991, 2002). factors that facilitate the use of logicbased reasoning include intelligence (stanovich and west, 2002), exposure to statistical thinking (agnoli, 1991; agnoli and krantz, 1989; nisbett, kratnz, jepson, and kunda, 1983), and need for cognition (shafir and leboef, 2002; cacioppo and petty, 1982). this experimental research has typically involved having individuals attempt to solve a probabilistic reasoning problem and then measuring the effect these factors had on the extent of correct answers were given. r e p ro d u ce d w ith p e rm issio n o f th e co p yrig h t o w n e r. f u rth e r re p ro d u ctio n p ro h ib ite d w ith o u t p e rm issio n . --.j '° factors facilitating logi;-based reasoning (e.g. need for cognition) i figure i conceptual model and hypothesis hypothesis: need for cognition is positively related to sales growth .,, degree logi;-based reasoning is used ------111l-• accuracy in fitlilg the i business to the enviromrent i ..... ...... ~ ... organizational perfunnance (sales growth) i& 1 ..... reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy the "need for cognition" (cacioppo and petty, 1982) is the variable from this list of experimentally tested variables that influence system 2 reasoning used in the present study to predict the degree the small business owner is likely to engage in logic-based reasoning. they defined the variable as " ... a stable individual difference in people's tendency to engage in and enjoy effortful cognitive activity" (cacioppo, petty, feinstein, and jarvis, 1996 p. 198). cacioppo and petty (1982) developed an instrument to measure an individual's propensity to engage in such effortful cognition. researchers investigating the effect of this construct on behavior have demonstrated that individuals low in need for cognition were likely to endorse items depicting heuristic rather than vigilant or effortful information processing, whereas individuals high in need for cognition were likely to endorse items depicting effortful rather than heuristic information processing" (cacioppo et al., 1996, p. 202). cacioppo et al. note that " ... individuals high in the need for cognition are more likely to seek information about a wide range of tasks, issues and current events than are individuals that are low in need for cognition" (p. 238). this construct is particularly relevant for small business decision-making research given the preponderance of small businesses owned and managed by a single owner who usually lacks the business education and exposure to business management knowledge that such an education provides. according to a recent poll by intuit inc. (schweitzer, 2007), owner of the business software company quickbooks, approximately 77% of small business owners do not have a business degree. individuals who embrace cognitive activity rather than avoid it are more likely to be motivated to undertake the challenges of this information gathering, and to put forth the cognitive effort required to analyze the information that is obtained. this is likely to be even more difficult in the case of the small business owner lacking the formal business education that likely would have educated 80 vol. 18, no. 2 fall/winter 200712008 the owner as to what information is relevant to a logic-based decision and where that information might be found. the process of gathering information and considering alternative solutions to complex business issues is often time consuming, expensive and difficult. verplanken, hazenberg, and palenewen (1992) found evidence suggesting that subjects who rated higher in the need for cognition desired to see more information than subjects who were lower in the need for cognition. in addition, subjects with a higher need for cognition put more effort into external information search prior to making a decision (verplanken, 1993). examples of important decisions facing small business owners include specifying the basic functional aspects of the new venture and making necessary adjustments to the configuration during the initial period of operation such as changing the marketing activities or product or service offerings. the small business owner who uses system 2 reasoning will likely undertake more information gathering, make less use of heuristics in evaluation of the information that is gathered, consult more sources of information, and conduct more quantitative analysis than a small business owner who uses system 1 reasoning in making these decisions. the degree a small business owner uses system 2 reasoning should, therefore, be positively related to the correctness of the evaluation of it between the venture and the environment, and ultimately be positively related to performance. the higher level of motivation to engage in effortful cognitive activity evidenced by persons with a higher need for cognition could be the result of several factors. such individuals likely have previously developed skills in utilizing informational resources, received positive feedback from prior cognitive endeavors that increases self confidence and intrinsic motivation for future effortful cognitive endeavors, and have accumulated a greater knowledge base that facilitates that activity (cacioppo et al., reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy 1996). thus, the small business owner with a higher need for cognition would likely engage in more information search, indicative of system 2 reasoning, than his or her counterpart with a lower need for cognition. recent research in entrepreneurial cognition also supports the utility of this construct. entrepreneurial cognition affects decisionmaking related to the assessment of economic opportunities, configuration of the new venture prior to startup,· and adjustment of that configuration during the initial operating periods of the venture (mitchell, busenitz, bird, gaglio, mcmullen, morse, and smith, 2007). this cognitive research seeks to explain the differences that exist between individuals in entrepreneurial behavior (baron, 2004). some cognitive differences are attributable to the degree of entrepreneurial learning (krueger, 2007). for example, novice entrepreneurs tend to emphasize novelty in recognition of opportunities while repeat entrepreneurs tend to emphasize the expected financial returns when assessing opportunities (baron and ensley, 2006). constructionist views of entrepreneurial cognition also support an experienced-based metamorphosis in cognition as the entrepreneur gains experience and uses that experience to improve knowledge structure and content (krueger, 2007; karp, 2006). cognitive characteristics, such as the need for cognition, likely affect the rate at which this metamorphosis occurs. entrepreneurial ventures of significant size involve more than one individual. therefore, the interactions of individuals with cognitive differences influence the trajectory of the venture through the collective cognition of the management team (west, 2007). having to prepare a business plan in advance of recruiting other investors or securing substantial levels of financing usually results in more information search and analysis by the owners and their advisors (cooper, folta, and woo, 1995). unfortunately for the great numbers of single-owner small businesses, 81 vol. 18, no. 2 fall/winter 200712008 this collective cognition may be limited to brief interactions with professional advisors such as certified public accountants, sbdc personnel and bankers, or it may not occur at all. compared to the collective decisionmaking by multiple owners and managers involved together in a business, the decisionmaking by the single owner and manager of a small business will likely be more heavily influenced by the owner's cognitive characteristics. analytic activities are also characteristic of system 2 reasoning (shafir and leboeuf, 2002). there is empirical support for a relationship between the need for cognition and the degree individuals analyze information before making a decision. smith and levin (1996) found that individuals with a higher need for cognition were less susceptible to framing effects. stanovich and west (1999) reported that individuals higher in cognitive ability and the need for cognition were more likely to give a normative response to a variety of cognitive tasks. in addition, they found subjects with a higher need for cognition and cognitive ability more readily chose a normative solution after they received slightly more information. these findings provide evidence to support the existence of a relationship between analytic performance and the need for cognition. the evidence found in prior studies that support the existence of a positive relationship between an individual's need for cognition and both the amount of information search conducted and the ability to properly analyze the information should translate into higher organizational performance. therefore, a small business owner that possesses a high need for cognition should be more likely to utilize logic-based reasoning in decision-making than a small business owner with a low need for cognition. an increased use of logicbased reasoning should result in higher performance. reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy hypothesis: a small business owner's need for cognition is positively related to organizational performance. sample this study sampled the population of daycare providers licensed in florida during 2004 and 2005. a single industry was chosen to minimize possible industry effects. the childcare industry was chosen because most businesses employed fewer than 10 employees and are owned and managed by a single person. therefore, this characteristic maximizes the likelihood that a single person is involved in the decision-making process consistent with the research objective of assessing the effect on a cognitive characteristic on organizational performance. in addition, the state legal requirements mandating that all participants in the industry be licensed and the roster be deemed public information have allowed easier identification of all possible respondents. the list of licensees was obtained from the supervising state agency. licensees with an assumed business name and not obviously affiliated with a nonprofit organization were selected for the sample. nonprofit owned daycare businesses are generally subject to decision-making by a supervisory board and therefore not relevant to the individual cognition assessment objectives of this study. a small financial reward was offered for return of the completed surveys. a test study mailing was sent to 403 potential subjects. because the response rate was low (26/403 = 6.5%), the primary study included a revised protocol. in the revised protocol, potential respondents were called and only those agreeing to participate were sent a survey for completion. a total of 1,897 calls to business owners were attempted. nine hundred forty two calls were unable to be completed because of disconnected phone service, wrong numbers or repetitive busy signals, resulting in 955 calls completed. two hundred ninety three potential respondents declined to participate, and 14 identified their businesses as owned by a non-profit 82 vol. 18, no. 2 fall/winter 200712008 organization and therefore were excluded from the sample. thus, 648 childcare business owners were sent surveys. a 28. 9% response rate (187/648) was achieved using this revised protocol. substantially, all of the businesses had fewer than 10 employees. measures need for cognition the need for cognition construct stems from research by cacioppo and petty (1982) who defined the construct as " ... people's tendency to engage in and enjoy effortful cognitive activity" (cacioppo et al., 1996, p. 197). the scale has evolved over two decades and had been used in over 100 empirical studies. this study used the current short form version. this version contains 18 items and uses a five choice likert scale with "extremely uncharacteristic" and "extremely characteristic" as the anchors. the scale seeks a response to items such as, "i prefer complex to simple problems." this current scale possesses high internal consistency, with cacioppo et al. (1996) reporting a cronbach's alpha of approximately .90 and a unitary factor structure with the highest loading factor accounting for approximately 37% of the variance. the scale achieved a cronbach 's alpha of .82 in the present study. its validity in determining the extent of experiential or rational reasoning has been demonstrated: individuals low in need for cognition were likely to endorse items depicting heuristic rather than vigilant or effortful information processing, whereas individuals high in need for cognition were likely to endorse items depicting effortful rather than heuristic information processing. (cacioppo et al., 1996, p. 202). sales growth small businesses typically are privately held and somewhat unsophisticated in their accounting procedures. consequently, reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy measures of performance based directly or indirectly on net income are problematic for businesses of this size. measurements of performance that use net income are often subject to variations in how certain disbursements are treated. expenses that are somewhat personal in nature may be shown as business expenses, depreciation rates may be tax-based and not based on the economic life of the asset, and intangible assets may receive a variety of treatments. the cash method of accounting may be used for many small service businesses. this accounting method may differ materially with an accrual basis of accounting required under generally accepted accounting principles. because of the inherent lack of reliability in measuring performance based on income for small businesses, the increase in sales from the first full twelve months to the second full twelve months was used to operationalize performance. the amount of increase in sales should be reflective of the small business owner's ability to make logic-based decisions after scanning the environment and using the information that is obtained to properly configure the business. a single item scale measured the percentage increase in sales for these two time periods by asking the respondent to identify the increase or decrease in 10% increments ranging from a 91-100% decrease to a more than 100% increase. the instrument suggested respondents obtain this information from their tax returns thereby increasing the likelihood that their accountants reviewed the amounts used to compute the percentage change and the sales were calculated in a consistent manner. the scale results were converted to z-scores prior to performing analyses. amount of capital invested the inclusion of this control variable was based on prior research where cooper et al. (1995) previously found a significant relationship between this variable and entrepreneurial information search. they 83 vol. 18, no. 2 fall/winter 200712008 attributed the significance of the relationship between the amount of capital invested and the information search to a greater need to conduct more due to diligence as the requirement for capital from sources other than the owners of the business increases. these capital providers would typically require preparation of formal business plans or comprehensive loan applications. thus, in the context of the present study, an increase in logic-based decision-making could result from the need to justify a request for funding rather than the need for cognition. this study measured this control variable with a oneitem, eight choice scale with values for the amount of capital invested at the time of the first sale ranging from "under $5,000" to "$500,000 and over." years of formal education and number of business classes completed the present study's hypothesis is that an individual with a higher need for cognition would be more likely to employ logic-based reasoning resulting in higher organizational performance than an individual with a lower need for cognition. an alternate cause of logic-based reasoning in making strategic decisions that is consistent with prior experimental research is the degree of exposure to normative models of management or critical thinking skills through higher education, particularly in general and business management classes. to assess this possibility two additional control variables were included in the instrument. the highest level of education was measured on a one item, six point scale with "didn't finish high school" and "doctoral degree" as the scale anchors. the number of college level business classes completed was assessed with a one item, five point scale with "none" and "4+" as the scale anchors. results table 1 reports the correlations, means, and standard deviations for the variables in this reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy study. table 2 reports the results of a hierarchical regression conducted to predict the sales growth criterion variable that reflected organizational performance in this study. the hypothesis was tested by assessing the significance of the regression term corresponding to each control or predictor variable. the control variable representing the amount of initial capital invested was a significant predictor of the amount of sales growth (t = 2.95; p < .01). however, the control variables reflecting the amount of formal education or the number of college business classes completed were not significantly related to the sales change performance criterion variable. the hypothesis predicted that a small business owner's need for cognition would be positively related to sales growth. this study found the need for cognition waswas significantly related to sales growth (t = 2.50; p < .05). thus, the hypothesized positive relationship was supported. discussion and implications many small businesses are owned and managed by a single individual. these owner-managers make many important decisions regarding their businesses. their decision-making characteristics are likely to affect the quality of these important decisions and ultimately the performance of their businesses. future cognitive research may identify several individual cognitive characteristics of small business owners that are significantly related to the performance of their businesses. some cognitive characteristics have already been identified as significant predictors of decision-making vol. 18, no. 2 fall/winter 200712008 behavior and await evaluation of their utility in predicting behavior in an economic context such as small business management. therefore, it is appropriate to assess the significance of the relationships between these variables that have been identified by prior research as influencing decision-making behavior in other contexts and based on their effects on organizational performance. the present study assessed the relationship between organizational performance and an owner's need for cognition (cacioppo and petty, 1982) as a variable that predicts how much or how little a small business owner would be motivated to undertake effortful cognitive tasks such as information gathering and analysis prior to making significant decisions regarding their business. this effortful cognitive activity is consistent with a logic-based reasoning process, rather than an intuitive reasoning process. the small business owner's need for cognition (cacioppo and petty, 1982) was positively and significantly related to organizational performance in this study. the hypothesis was based on the premise that the small business owners would be more likely to engage in the laborious gathering and analysis of information prior to making major decisions if he or she enjoyed effortful cognitive activity. therefore, they would be more likely to utilize logic-based reasoning and less likely to rely on their intuition in decision-making related to making necessary adjustments to the operations of the small business in order to achieve a better fit with the environment. the resulting improvement in fit should result in increased organizational performance. table 1.correlations, means, and standard deviations variable mean s.d. 1 2 3 4 1 initial caoitalization 1.83 1.52 2 education level 2.84 1.04 .29** 3 no. of college business classes 2.62 1.68 .14 .30** 3 need for col!ilition 3.28 .64 .26** .33** .25** 4 percent change in sales .001 1.03 .27* .18 .07 .30** *p< .05 level (2-tailed); **p<.01 level (2-tailed) n=116 'converted to z-scores 84 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy past research has identified factors that would tend to increase the small business owner's motivation to undertake effortful cognitive activity. individuals with a higher need for cognition are more likely to be skillful in accessing information sources. for example, das, echambadi, mccardle, and luckett (2003) found that individuals with high need for cognition exhibited greater internet search activity than low need for cognition individuals that included using the web to communicate by e-mail, search for information, search for task environment related information and to read about news and current events. while the internet is only one source of information, it does represent a common, low-cost source of information for owners of smaller businesses. for these owners, it can not only provide information directly through review of vendor and customer websites, but can also serve as a portal to other sources of information such as advisors with specialized expertise, government agencies such as the sba, new products, and services that might be offered by the business. high need for cognition individuals that have developed experience in accessing impersonal sources such as books, journals, databases, and personal sources such as certified public accountants, attorneys, and other business owners would likely have more information available for decision-making than a low need for cognition individual. higher need for cognition individuals have demonstrated increased intrinsic motivation for cognitive activity in situations where any short term rewards for that activity were not expected (thompson, chaiken, and hazelwood, 1993; cacioppo et al., 1996). the extrinsic rewards for small business owners can diminish, particularly during the early stages of the business and during periods of significant change in the business environment, as refinement of the business model occurs. the higher need for cognition owner would, therefore, be expected to be more analytic during the more challenging times for the business and more successful at 85 vol. 18, no. 2 fall/winter 200712008 reconfiguring the business as needed. insights gained from this study have implications for advisors of small business owners. the ability to apply existing decision-making theory, such as the dual processes of reasoning theory, adds important insights into the actual decisionmaking behavior of small business owners that likely affect the performance and even the survival of their businesses. the increased cognitive motivation of a small business owner provided by a higher need for cognition is certainly a positive factor in improving decision-making. however, it is optimistic to expect that even a highly motivated small business owner will acquire a high degree of proficiency after using sophisticated analytic techniques commonly acquired through a college level business education. therefore, interactions with small business advisors that provide the small business owner with alternative informed viewpoints and information that he or she may have been overlooked hold great potential value for improving the quality of business decision-making. small business advisors have the capacity to expedite the information gathering and analysis by virtue of their education and experience, thereby allowing the cognitively motivated small business owner to be more comprehensive and efficient in their environmental scanning and information analysis. limitations and suggestions for future research the dual process theory of reasoning has received only modest testing in experimental studies and very little testing in field studies. consequently, methods of assessing criterion variables reflective of each system of reasoning are in the early stages of development. at some future stage of theory development intermediate variables such as normative models of environmental scanning and analytic behavior could be included as part of what is conceptualized as logic-based reasoning in this study. in the interim, relationships between individual cognitive reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy vol. 18. no. 2 fall/winter 200712008 table 2 results of hierarchical regression analysis criterion: percent change in sales predictor variables b se_b /3 -----step i constant -.32 .15 -2.21 • initial capitalization .18 .06 .27 2.95 .. ar.2 .07 step 2 years of formal education .11 .09 .11 1.15 ar.2 .01 step 3 no. of college business .02 .06 .00 .03 classes !!.r.2 .05 overall r2 .13 adjusted r2 .10 modelf 4.18** n 116 * p<.05 ** p<.01 factors that affect decision-making and organizational performance can be assessed under the assumption that these factors are likely to affect numerous important decisions made by the small business owner in a similar fashion. this assumption will likely be refined as the result of future research in this domain. collecting cognitively based data from small business owners often requires the use of self-report measures and reliance on the recollection of past behaviors or attitudes. however, busy entrepreneurs and small business owners are often reluctant to participate in survey-based data collection efforts (newby, watson, and woodliff, 2003; markman, balkin, and baron, 2002). consequently, the length and related scope of survey instruments is limited, as is the ability to assess the relationship of large numbers of variables, and often precludes the desirable 86 use of multiple measures of a single construct. although limiting this study to a single industry reduces industry effects, it also reduces the generalizability of the results. the childcare industry participants are often very small businesses with owners that vary greatly as to business experience and education. similar studies of participants in other industries will further assess the extent these variables affect small business performance. references agnoli, f. 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(2000). individual differences in reasoning: implications for the rationality debate. behavior and brain sciences, 23: 645665. stanovich, k. e., & west, r. f. (2002). individual differences in reasoning: implications for the rationality debate. in: t. gilovich, d. griffin, & d. kahneman (eds). heuristics and biases (pp. 421-440). new york: cambridge university press. schweitzer, t., (2007, january 18). not only the lonely become entrepreneurs. retrieved may 25,2007 from http://inc.com/news/articles/200701/lone rs.html. thompson, e. p., chaiken, s., & hazelwood, j. d. (1993). need for cognition and desire for control as moderators of extrinsic reward effects: a person x situation approach to the study of intrinsic motivation. journal of personality and social psychology, 64: 987-999. united states census bureau (2004) statistics of u. s. businesses: 2004: all indu-stries united states. retrieved may 25, 2007 from http://census. gov/epcd/latest/us/us--.htm. venkatraman, n., & prescott, j. e. (1990). environment-strategy coalignment: an empirical test of its performance implications. strategic management journal, 11: 1-23. verplanken, b. (1993). need for cognition and external information search: responses to time pressure during decision-making. journal of research in personality, 27: 238-252. john leaptrott is an assistant professor of management at georgia southern university. his research interests include entrepreneurship, small business management, family business and decision-making related to new venture formation. stra tegy editor's note as we go to press we are at a milestone in that this issue marks the tenth year of publication of the journal of small business strategy (jsbs). the first issue consisted of eight of the best papers that were presented at the 14a annual sbida conference. since that time, the journal has evolved to the point where we receive manuscripts from all over the country as well as receiving a number of international submissions. in addition, we feature invited articles, research notes ("small business briefs" ), and book reviews while we continue to publish the two best papers from the annual sbida conference. as we continue to expand the scope and enhance the quality of jsbs, we continue to look for manuscripts which fit our mission. based on the jsbsmission, we believe that articles published in jsbs should be of value to small business dt entrepreneurship educators/scholars, small business consultants or individuals involved in economic development in terms of or least one of the following: ~ assist in the formulation or implementation of small business strategy ~ be directly applicable to consulting projects and solutions ~ generate ideas and approaches to problem solving in small business ik entrepreneurship ~ be presentable to a small business owner/manager for application ~ relate to small business dt entrepreneurship education what is a "small business?" (u.s. sba) maximum annual sales or t e of business numberofem lo ees wholesale trade $ 9.5 22 million (varies across industries) general construction $ 17 million services $ 2.5 ~ 14.5 million (varies across industries) retail trade $ 3.5 13.5 million (varies across industries) agricultural production $ .i 3.5 million (varies across type) restaurants up to $ 10 million manufacturing maximum of either 500, 750,1000, or 1500 employees (depends on indusuy) some things wc are doing in addition to our regulsrsubscribers jsbsis being distributedto over 650 aacsb member and candidate schools once again. it is expected that this exposure will provide visibility for jsbsas well as sbida snd the small business institute (sbi) program. s the usasbe/sbida joint national annual conference will be held in san antonio, february l6-20, 2000 (see advertisement in this issue). i would like to remind our readership that a minimum of two articles, probably as many as four, will be selected from the submissions/proceedings for publication in jsbs. we have established a relationship with pricewaterhousecoopers, whereby they publish condensationsof articles from jsbsin their on-i ine execu/ac digest. we are one of a select number of journals whose work will appear from time to time. check them out at d ay ytt ght th f * dv ( li k "i igh and solutions" and then "executive digest" ). we have had an excerpt of "the classification of service providers as contract workers rather than employees: implications and guidelines for small businesses" (jsbsvolume 9, number 2, 1998) by matthew sonfield already featured on their site earlier this year. t we are developing a jsbswebsite which will feature abstracts from our previous issues as well as other information pertaining to the journal. in addition, we hope to link jsbswith some abstract services in the near future. we have an unusually high number of articles published in this issue ofjsbs. included in the issue are a number of small business briefs, something that we will continue to do in the future. this venue provides a forum for more authors to publish their work while providing our readership with a broad range of useful research. i hope you enjoy this issue of jsbs. if you have any comments, please send us a letter or an email (osbomeiiup.edu). stephen osborne, edger usa sbe/sbida joint annual nationaii conference ( 24'" annual sbida conference and 15'nnual usasbe conference) february 16-20, 2000 sheraton four points, riverwalk, san antonio, texas conference announcement atnd: cal'l for papers and 8'orkshops deadline for submissions: september 15, 1999 theme: usasbe/sbida 2000: the entrepreneurial millennium the joint annual national conference will be held jointly by usasbe and sbida from february 16-20 at the sheraton four points, riverwalk in san antonio texas. the conference will include papers, workshops, case studies, and symposia dealing with family'business, entrepreneurship, entrepreneuiship education, and sbi programs and institute management. topics will focus on issues of significance as we enter the 21" century: ~ new business development 21" century style —what's changed? ~ entrepreneurship in a changing world ~ global marketing in the 21" century ~ economic realities: financing small or risky ventures ~ technology and change: redefining the entrepreneur ~ focus on family: whose business is it anyway?~ incubators and institutes: support systems for new ventures ~ challenges for small business and entrepreneurship educators edd did ~bid. / if i,.ddii ddd'i workshopslsymposia, general submissions, instructions; and participating in the piogram as a paper reviewer, discussant, andyor session chair. conference workshops dk symposia: competitive papers: information: 'ohn wallace, program co-chair abbas nadim joan winn, program colewis college of business ' management department chair marshall university university of new haven daniels college of business 400 hal greer blvd 300 orange avenue university of denver huntington, wv 25755 west haven, ct 06516 denver, co 80208 tel: (304) 696-2680 tel'. (203) 932-7122 fax: 303-871-2294 fax: (304) 696-6013 fax: (203) 931-6092 e e~d. d see you in san antonio! we salute lori maruso & laurence weinzimmer, authors of the distinguished conceptual paper franz lohrke, geralyn mcclure franklin, & vinay kothari, authors of the distinguished empirical paper 1999sbida conference look for their articles in this issue i i'mall business institute directors'ssociation jsbswill be publishing at least two, perhaps as m'aiiy as four, of the best papers from the 2000 usasbe/sbida joint conference strategy an approach to reducing accounting costs for small businesses j. gregory bushong, ph.d., cpa, cma wright state university david w. cornell, ph.d., cpa, cma university of missouri-kansas city abstract many small privately-held businesses (referred to as small businesses henceforth) prepare financial statementsfor use by external parties such as banks. often the small businesses do not have the expertise to prepare theseftnancial statements, insiead employing independent certifiedpublicaccouniants(cpas) for the task. a cpa preparingfinancialstatementsin this manner must anach a report stating the degree of responsibility he(she is accepting for the statemenis. modification of this report results if the siatements are noi in conformance with generallyacceptedaccountingprinciples(gaap). ownersofsmallbusinessesgenerallyelect to have their financial statements produced following gaap to avoid the modification of tire report. this has become a costly decision, however, as the complexity of gaap has increased the purposeofthisarticleis to helpsmall business owners reduce the cost ofpreparing their financial statements. the article begins with a discussion of the importance ofselecting the right cpa to produce the financial statements. the article then reviews the cpa's level of association with financial statements and the reports that result therepom. finally, the article closes with possible reduction of accounting costs through the use of other bases of accounting. hiring a certified public accountant an important decision while producing financial statements is the selection of an independentcpa. the business owner can select from cpa firms ranging in size from large international firms to oneperson firms, and will be charged fees almost as varied in size. the selection of the right cpa can be diaicult because of this, but there are several questions that the business owner can ask to help with the selection process. table i lists some questions of a prospective cpa. an additional source of information is other business owners who have applied for loans previously. the lender may also provide information regarding preferred accountants. 45 table i useful uestions for selectin a cpa the following list indicates some of the questions which can be asked of a prospective cpa previous experience with sba clients? previous experience with the bank from which the loan will be obtained? previous experience in the same or a similar industry? experience level and qualifications of the staff working on the financial statements? billing rates for the individuals working on the financial statements? total anticipated bill for the services provided? how much would the bill change given different levels of association (i.e., compilation, review and audit)? will the bill for the accounting services be reduced after the first year? will tax services be provided and at what cost? fxperience in incorporating a company? will services be provided other than financial statement preparation? will the cpa provide any management advice regarding the growth of the company and the control of costs? levels of cpa association the bank will also provide the loan applicant with information regarding the level of the cpa's association with the financial statements. the american institute of certified public accountants (aicpa) recognizes three levels of cpa association with financial statements; audit, reviesv. and compilation. an audit provides the most assurance to the users of financial statements that the statements are not misstated. a review provides negative assurance, meaning that while an audit was not done, nothing came to the attention of the cpa to suggest that the financial statements are misstated. finally, a compilation provides no assurance about the balances contained in the financial statements. see wolk and wooton (1995) for a more detailed discussion of the different levels of assurances provided by the cpa's report. businesses often assume that lending institutionsrequire audited financial statements that comply with gaap. in reality, banks are oflen willing to accept financial statements that are neither audited nor in compliance with gaap. deciding factors include the loan amount, complexity of the business, competence of the owner (including business and financial knowledge) the confidence the loan oificer has in the cpa preparing the financial statements, and whether the loan is an asset-based or a cash-flow-based loan. given certain combinations of these factors, sba loans of up to one million dollars are granted based on tax returns and compiled financial statements. this would result in significantly lower accounting costs in comparison to audited financial statements. additionally, the level of cpa association with the financial statements required by the bank may change over the life of the loan as the risk profile of the company changes. 46 standard reports attached to financial statements a different report will result from the three levels of assurance that the cpa can provide. the reports have standardized format and content. tables 2, 3, and 4 contain the reports for an audit, review, and compilation of financial statements, respectively. the first paragraph of each report is general, describing the financial statements and the type of assurance the cpa is providing. the second paragraph of the reports describes the work done by the cpa in greater detail. in the compilation report the cpa says that he/she did not audit or review the financial statements and expresses no opinion or other assurance on them. both the review and the audit report contain an additional paragraph in which the cpa states the results of his/her work. for an audit the result is the expression of the cpa's opinion regarding the financial statements. for a review the result is that the cpa is not aware of any required modification to the statements in order for them to conform to gaap. the three reports show the different levels of assurance the cpa is providing about the financial statements. table 2 standard audit re ort inde endent auditor's re ort we have audited the accompanying balance sheet of small business, inc., as of december 31, 1995, and the related statements of income, retained earnings, and cash flows for the year then ended. these financial statements are the responsibility of the company's management. our responsibility is to express an opinion on these financial statements based on our audits. we conducted our audit in accordance with generally accepted auditing standards. those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. an audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. an audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. we believe that our audits provide a reasonable basis for our opinion. in our opinion, the financial statements referred to above present fairly, in all material respects, the flnancial position of small business, inc., as of december 31, 1995, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. cpa firm name 47 january 29, 1996 source american institute of certified public accountants. statement on auditing standardsno. 58, "reportson audited financial statements."new york: aicpa. 1988. table 3 standard review re ort ~at ' we have reviewed the accompanying balance sheet of small business, inc., as of december 31, 1995, and the related statements of earnings, retained earnings, and cash flows for the year then ended, in accordance with statementson standards for accounting and review services issued by the american institute of certified public accountants. all information included in these financial statements is the representation of the management of small business, inc. a review consists principally of inquiries of company personnel and analytical procedures applied to financial data. it is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. accordingly. we do not express such an opinion. based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with generally accepted accounting principles. cpa firm name january 29, 1996 source american institute of certified public accountants. statement on standards for accounting and review services no. i, "compilation and review of financial statements." new york: aicpa. 1978. 48 table 4 standard com ilation re ort ~a« ' we have compiled the accompanying balance sheet of small business, inc., as of december 31, 1995, and the related statements of earnings, retained earnings, and cash flows for the year then ended, in accordance with statements on standards for accounting and review services issued by the american institute of certified public accountants. a compilation is limited to presenting in the form of linancial statements information that is the representation of management. we have not audited or reviewed the accompanying financial statements and, accordingly, do not express an opinion or any other form of assurance on them. cpa firm name january 29, 1996 source american institute of certified public accountants. statement on standards for accountingand review servicesno. 5, "reportingon compiled financial statements." new york: aicpa. 1982. bases of accounting the reports shown in tables 2 through 4 are the standard reports issued for each level of association. modification of the reports results if financial statements do not follow gaap. just as lenders may be willing to accept less than audited financial statements, they may also be willing to accept non-gaap financial statements. it is important the loan oaicerunderstard what the departures are and why they are not important to the financial statements. therefore, the owner/manager of the small business and the independent cpa should meet with the lender and discuss any non-gaap changes made to the statements. there are two broad classificationsof departures; those classified as other comprehensive bases of accounting, and modilied gaap-basis financial statements. 49 other comprehensive basis of accounting the auditing standards board (asb) of the aicpa has identified the three comprehensivebases ofaccountingother than gaap listed in table 5. a discussion of each alternate basis follows. table 5 om rehensive bases of accountin other than aap regulatory basis a basis of accounting used to comply with the requirements or financial reporting provisions of a governmental regulatory agency to whose jurisdiction the entity is subject. income tax basis the basis of accounting the entity uses or expects to use to file its income tax return for the period covered by the financial statements. cash basis the cash receipts and disbursements basis of accounting, and modificationsof the cash basis having substantial support, such as recording depreciation on fixed assets or accruing income taxes. source american lnstituteof certified public accountants. srarentenr on auditing srartdrtrds no. 62, "special reports." new york: aicpa. 1989. r i, 8h an obvious way to reduce the cost of financial statement preparation is to produce the statements on a single basis each year. this removes the complexities of preparing different versions of the financial statements for different users. if the small business is subject to accounting principles established by a regulatory agency, then using that basis for external reporting will reduce the cost of financial reporting. consulting with external lenders as to the acceptability of these statements is an important first step taken by the owner/manager. the discussion may include an analysis of how the accounting principles d i tter between regulatory and gaap. additionally, the lender may be accustomed to receiving regulatory-basisfinancial statements for companies in the regulated industry, and may actually prefer that basis of accounting for comparison purposes. ~tax basi similar to regulatory basis financial statements, tax basis financial statements reduce accountingcosts by preparing the financial statements only once. this benefits the business, 50 and may be acceptable to many external users who are familiar with the tax laws. the primary problem with use of the tax basis of accounting is that tax laws are changing continuously. there has been a major revision of the tax code approximately every two years since the mid 1970s. changes in the tax code can result in changes in income and financial position when tax basis financial statements are prepared. these changes will cause the statements to not be comparable from year to year, and therefore not as useful to the external parties. cash basis the two primary financial statements used with the cash basis of accounting are the statement of cash receipts and disbursements and the statement of assets and liabilities resulting from cash transactions. cash basis financial statements do not reflect items such as accounts receivable, inventories, or accounts payable. they are only useful to individuals with intimate knowledge of those items or for small service-type businesses that operate on a cash basis. today, very few businesses meet these requirements and, therefore, cash basis linancial statements are not a realistic option for most small companies. cpa re ort for financial statements based on an other com rehensive basis of accountin table 6 presents a report for financial statements prepared on a comprehensive basis of accounting other than gaap. italics highlight the modification of the standard report. changes to the review and compilation report are similar in nature to the alteration of the audit report. table 6 re ort on statements pre ared on a non-gaap basis of accountin inde endent auditor's re ort we have audited the accompanying statements of assets, liabilities, and capital-incomeiax basis of small business, inc., as of december 3 i, 1995, and the related statements of revenue and expenses-income iax basis and of changes in partners'apital accounts-incame rax basis for the year then ended. these financial statements are the responsibility of the company's management. our responsibility is to express an opinion on these financial statements based on our audits. we conducted our audit in accordance with generally accepted auditing standards. those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. an audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. an audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall 51 financial statement presentation. we believe that our audits provide a reasonable basis for our opinion. as descmbed in note l, these financial staiements were prepared on the basis of accounting the compony uses for income tax purposes, which is a comprehensive basis of accounting other than generally accepted accounting principles. in our opinion, the financial statements referred to above present fairly, in all material respects, the assets, liabilities, and capital of small business, inc., as of december 31, 1995, and its revenue and expenses and changes in pariners'apital accounis for the years then ended, on the basis of accounting describedin note l. cpa firm name ianuary 29, 1996 source american institute of certified public accountants. statement on auditing standards no. 62, "special reports." new york; aicpa. 1989. italics added to indicate the changes from the standard audit report shown in table 2. modified gaap basis when a company elects to use one of the other comprehensive bases of accounting it does not attempt to follow gaap. an alternative to this is for a company to follow gaap for most of its accounting,yet omit certain disclosures due to their cost and/or complexity. the cpa report will include an additional paragraph that describes the omission and states whether its impact on the financial statements is determinable. modification of the opinion paragraph regarding the omission also results (aicpa 1988). table 7 provides an example of how an audit report is modified given the omission of the gaap requirement to capitalize certain lease obligations. 52 table 7 re ort on statements with gaap re uirements omitted inde endent auditor's re ort we have audited the accompanying balance sheet of small business, inc. as of december 31, 1995, and the related statements of income, retained earnings, and cash flows for the year then ended. these financial statements are the responsibilty of the company's management. our responsibility is to express an opinion on these financial statements based on our audits. we conducted our audit in accordance with generally accepted auditing standards. those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. an audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. an audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. we believe that our audits provide a reasonable basis for our opinion. as explained in note 5 to the financial statements, the company has excluded, pom property and debt in the accompanying balance sheets, certain lease obligations that, in our opinion, should be capitalized in order to conform with generally accepted accounting principles. the affect on financial position and net income has not been determined. in our opinion, except for the effects of not capitalizmg certain lease obligations as disc ussedin the preceding paragraph, the financial statements referred to above present fairly, in all material respects, the financial position of small business, inc., as of december 31, 1995, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. cpa firmname january 29, 1996 source american institute of certified public accountants. statement on auditing standards no. 58, "reports on audited financial statements." new york: aicpa. 1988. italics added to indicate the changes from the standard audit report shown in table 2. 53 many current gaap requirements are not useful to small businesses and are very costly to implement. omitting these requirements from the financial statements may save the business substantial accounting fees while providing external users the information they need. gaap requirementscriticized as either not relevant or not cost effective for small businesses include: accounting for long-term leases; capitalizationof interest cost; accounting for income taxes; accounting for compensated absences; and, accounting for postretirement bene(its other than pensions. a discussion of each of these items follows. accountin for lon -term leases generally accepted accounting principles often treat leased equipment as purchased and financed with long-term debt (fasb 1976). although the calculations are not too complex, they do require extensive time, particularly in the year of the lease. the independent cpa often does these calculaticns for small businesses and this directly increases accounting costs. an alternate method of treating leases is to expense the lease payment in the period incurred. the notes to the financial statements will include disclosure of the existence of the lease and the future lease payments. this alternative is appropriate for businesses that enter long-term leases on an occasional basis. ca italization of interest costs current gaap (fasb 1979) requires that the total cost of an asset constructed over time for the company's use include an allocation of any interest incurred during the construction period. allocation of interest to the asset occurs even if the debt resulted from other transactions. the calculations required to determine the amount of interest to capitalize may be very complex and time consuming thereby increasing the cost of the accounting services. an alternate treatment is to treat all interestas an expense in the period incurred with footnote disclosure of the treatment. this treatment reduces the accounting cost during the construction period. accountin for income taxes the income tax expense recorded in the income statement is oaen not equal to the amount of income tax determined on the tax return because of differences in tax laws and gaap. statement of financial accounting standards no. 109, "accounting for income taxes" (fasb 1991)requires very detailed and complex calculations to determine the income tax to be used in the income statement. this amount is rarely the same as the amount of tax determined according to irs regulations. this results in a tremendous amount of time and effort by the cpa to apply two completely different sets of complex rules (irs and gaap) to the same information. an alternate treatment is to determine the amount of tax only once using the irs regulations and use this amount in the financial statements. the company would then disclosure method of determining tax expense in the notes to the financial statements. 54 accountin for com ensated absences when employees accumulate time off for paid vacations, holidays or sick leave, currentgaap (fasb 1980) requires reportinga liability for futureabsences. even fora small business with only a few employees the calculations can be very time consuming and complex. accounting costs increase when the outside cpa does these computations. an alternate treatment for small businesses is to treat the payment for compensated time o(tas an expense in the period the employee is absent from work with footnote disclosure of the treatment. accountin for postretirement benefits ther than pensions small businesses are only now beginning to accrue a liability for postretirement benefits such as medical insurance premiums (fasb i990). the fasb delayed implementation for small businesses for two years. many small businesses provide postretirementbenefitsto employees(bushong and nichols 1996).the fasb acknowledged that the relative cost to small businesses would be high, but concluded that small businesses should not be exempted from accruing the cost of postretirement benefits. as an alternative to accruing the cost, small businesses could continue to account for postretirement benefits on a cash basis with footnote disclosure that the plans exist. the choices of accounting methods and levels of cpa assurance available to a business owner/manager can be confusing. table 8 summarizes the 15 different options available to the business owner/manager when producing financial statements for his/her company. additionally, the options available to the business owner/manager under the omission of certain gaap requirementsare as many as the principles incorporated in gaap. table 8 also includes references to the other tables containing representative cpa reports. table 8 possible ccountin methods and levels of cpa assurance bases of accounting levels of cpa other comprehensive basis of accounting assurance modified regulatory income tax cash basis basis basis audit table 2 table 6 table 7 review table 3 compilation table 4 55 the method of accounting and level of cpa assurance provides 15 different approaches a small business owner/manager can take when producing the financial statements for his/her company. this table shows what those 15 possible combinations are, and references the tables where an example of the cpa report can be found. conclusions and recommendations the small business owner/manager can begin to assert more control over external financial reporting by opening a dialogue with the company's cpa and primary external users of its financial statements. although these discussions may not lead to changes in the basis of accounting or the level of cpa involvement, they will assure both the external users and the company's cpa that the owner/manager is concerned with the most effective financial reporting at the least cost. 56 references aicpa (american institute of certified public accountants). (1978). statement on standardr for accounting and review services no. i, "compilation and review of financial statements." new york; aicpa. (1982). statement on standards for accounting and review services na. 5, "reporting on compiled financial statements." new york: aicpa. . (1988). staiement on audiiing standards no. 38, "reports on audited financial statements." new york: aicpa. . (1989). statement on auditing standards na. 62, "special reports." new york: a i cpa. bushong, j. gregory and linda m. nichols. 1996. how sfas no. 106 may impact small nonpublic companies. the small business controller 9 (winter): 32-38. fasb (financial accounting standards board). (1976). sratement offinancial accounting standards na. 73, "accounting for leases." stamford, ct: fasb. (1979). statement of financial accounting standards no. 34, "capitalization of interest cost." stamford, ct: fasb. (1980). statement of financial accounting standards no. 43, "accounting for compensated absences." stamford, ct: fasb. (1990). statement of financial accounting standards no. 706, "employers'ccounting for postretirementbenefitsother than pensions." stamford,ct: fasb. . (1991). statement offinancial accounting standards no. 707, "disclosures about financial instruments." stamford, ct: financial accounting standards board. (1992). statement of financial accounting standards na. 709, "accounting for income taxes." stamford, ct: fasb. wolk, c. m. and c. w. wooton. 1995. how accounting firms can help the small business owner. journal ofsmall business strategy. 6 (fall): 19-32. 57 reproduced with permission of the copyright owner. further reproduction prohibited without permission. sbir programs and product commercialization: kinetic art & technology an example hufft, edward m, jr;swartz, brenda journal of small business strategy; spring/summer 2005; 16, 1; abi/inform complete pg. 71 sbir programs and product commercialization: kinetic art & technology -an example edward m. hufft, jr. alcorn state university ehufft@lorrnan.alcorn.edu brenda swartz indiana university southeast bswartz@ius.edu abstract the sbir (small business innovation research) program provides a way to assist entrepreneurs in commercializing their technology, and it provides government access to new technology. there are many issues facing technology start-ups. some of the issues and possible responses are discussed. kinetic art & technology (kat) is an sbir success story. with almost four million dollars in federal grant funds, the company developed and is commercializing new electric motor technology. the issues they faced and the decisions they made are key components o_f their success. introduction stre;uns of new technolo1,,'y ;m:· unveiled each year. however, only a small percenta11;e of these prom1s111g technologies reach commercialization. true, not every invention is worth the cost im'olved in bringing a product to market. even for those technologies which offer society great promise, the path to commercialization is long, difficult, and costly. this paper discusses the challenges a technology start-up faces, and wavs the entrepreneur can meet them. a 111<\ior source of help is tl1e small business investment research (sbir) program, launched as a ten-agenn', applied research experiment bv the small business lnnm,ation den·lopment act of l ~182 (brmrn & turner, i 9~j9). recent articles demonstrate the difficulties start-ups have faced with developing technology. baron and hannan cw02) suggested that personnel issues and hrny an organiza71 tion designs its human resources are key elements of success. stewart and giagtzis (200 l) suggested iliat the entrepreneur cannot just put a product on tl1e market. but must know the needs and requirements of their potential customers. piper (2002) asserted that ?\asa's attempts at commercialization of technology result in putting technology "out iliere" with anticipation that the market will come to the pnnider of the technology, but their programs ha\'c had little success. achibald and finifter (2003) found focusing 011 pn~jects with more commercial potential led to higher rates of commercial success. sbir program the federal government recognized that useful technology was resident within small businesses, but saw no way to access it systematically for government use. in 1982, congress created the small business innovation research (sbir) grant program to address that problem. currently, ten reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategi1 federal agencies (departments of agriculture, education, transportation, commerce, energy, defense, health and human services/national institute of health, environmental protection agency, national science foundation, and national aeronautics and space administration) participate in the program and each spends 2.5 percent of their agency budget on the sbir program. the goal of the sbir program is commercialization of new technologies, which can be used by both the public and private sectors. each of the participating agencies publishes electronic solicitations seeking grant proposals from small businesses on specific, or in some cases general, topics. usually the topics are problems the agency is unable to solve internally. the sbir program has three phases. in phase i, agencies offer up to $100,000 for six months for the company to develop proof of concept. in phase ii, the agencies offer up to $750,000 to assist the company in developing a prototype. to be eligible for phase ii funding, a company must have successfully completed a phase i project. phase ill is the commercialization segment, in which no grant funds flow from the federal government. frequently, the agency that funds phase i and phase ii becomes the customer of the small business that has developed the technology. additionally, companies are encouraged to seek private sector customers. the dual use of technologies is a key feature of the sbir program. persistence, following the solicitation guidelines to the letter, and knowing the agency and what they need/want are keys to entry in all phases of the program. there has been little large-scale evaluation of the economic success of the program. brown and turner ( 1999) argued that the successes have been at the expense of other government research support for small business. lerner (2000) reported on a largescale study comparing the employment and growth of 1435 sbir firms with matching firms over a ten-year period. he stated, "sbir awardees enjoyed substantially greater employment and sales growth than 72 vol. 16. no. 1spring/summer2005 the matching firms." (lerner, 2000 p. 977). the awardees had a mean sales increase of $4.0 million and the matching firms of$ i.i million (98% increase for awardees and 27% for matching firms). lerner suggested that the awards play a certification function for the awardees. both brown and turner (1999) and lerner (2000) call for changes in the program to make it more focused on commercialization of technology. cooper (2003) discussed the commercialization obstacles faced by sbir firms. others have suggested that the successes of the program show its continued value (science, 51512000). mervis ( 1992) reported that the defense department ignores the intent of the program by insisting that most of its awards be used to make things that the military can use. however, the program is designed to provide improved technology for government use as well as for commercial use. nelton ( 1998) reported that some agencies, such as defense and energy, do make use of the technologies developed, while agencies such as education and agriculture do not tend to be end users. issues facing startups wu and young (2001 ), in a study of small firms over the period 1973-97, found financing problems increasing over the time period; marketing and human resource problems persistent over time; and liquidity, record keeping, accounting, and inventory problems decreasing over the period of study. stewart and giagtzis (200 i) suggested, " ... that new technology is not enough to ensure success, and other issues must be attended to. these include product positioning, engineering utilization, and management competence"(p.120). the given is engineering competence and the product, but they do not lead to success of a venture. gans and stern (2003) found that "sbir project perfonnance is highest for those projects in industrial segments which, themselves, receive the highest level of venture funding'' (p.382). this indicates that funding of technology by government agencies in sectors most interesting to venture capital promises the highest levels of reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal o(small business strategi' commercial success of ventures. conversely, this suggests that technology in these sectors has the highest chance of developing with private capital and that the government should focus its funding efforts in technology sectors with less venture capital interest. nicolaou and birley (2003) studied university technology spinouts. they examined "the interaction between nonredundancy and tie strength" (p.1718), the interaction of the social networks of entrepreneurs. nonredundancy m social contacts, or lack of crossover among the principals, improves success of spinouts. also, the strength of the ties to the network improves success. they called for "universities to organize networking events showcasing the technology generated at universities" (p.1719). technology transfer offices should provide a brokering role between entrepreneurs, external investors, and inventors. kinetic art and technology (kat) benefited from indiana university's setting up contacts both to advise the inventor/entrepreneur at various stages of the venture and to assist in locating opportunities for the product. spencer, murtha, and lenway (2005) argued for a framework depicting "technological innovation as an evolutionary process of variation, selection, and retention characterized by incremental advances punctuated by occasional discontinuous changes. industry evolution as a process that involves the co-development of technology and institutions via repeated interactions among a range of industry participants. as industries develop from initial breakthrough to commercialization and large scale manufacturing, the level of uncertainty inherent in the innovation process diminishes" (p.321-2). this view supports nicolaou and birley (2003), as discussed above. ka ts success appears to support this framework as well. models of new venture creation have been proposed by several authors. a problem with most is that they highlight only one aspect of formation. kaulio (2003) suggested a model looking at the process of the transition stage between initial conditions and the initial 73 vol. 16. no. 1spring/summer2005 process of evolution. the model is based on a critical incident study of swedish startups. the most critical incidents are financing the venture and then recruiting. two observations about recruiting are: (i) the entrepreneur's personal network is relied on to a large extent, thus supporting studies of the importance of networks to infant ventures; and (2) recruiting has a strategic, as well as a marketing, related dimension. attracting the right people to the startup appears to signal the market that the strategy is set, thus indicating the organization is stable and viable. two other critical incidents are the signing of the reference or first customers to contracts, indicating the venture is 'real', and the utilization of entrepreneurial service providers. the use of public, not for profit, and private sources of assistance supports the call for developing networks of service providers to assist startups to succeed. technology business models emphasize cooperative strategies and highly flexible relationship-based structures capable of responding to rapid and sometimes radical changes in the marketplace and technology (kelly, schaan, & joncas, 2002). collaborative success is elusive (see kelly, et al, 2002, for list of studies). a study of alliances finds issues centered on people/relationship issues, operations issues, strategic agenda issues, and results or problems related to the performance of the venture (kelly, schaan, & joncas, 2002). their study suggests eight items that need careful consideration in developing the relationships necessary to create successful startup alliances. the key points are: ( l) partner selection -not only hard facts but also soft issues such as potential compatibility; (2) negotiation, a win-win process of building linkages between the companies; (3) people selection, (4) learning and relationship building; (5) communication building; (6) reconciliation of cultural differences; (7) ongoing relationship management; and (8) constructive interaction. several studies, already discussed, highlight the people issues that are critical to startup success, especially a technology startup. the need for an excellent management team and reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy a board of directors with skills that supplement the management team are critical components of success (mccaffrey, 2003; preston, 2003). the use of outside advisors often spells the difference between success and failure of startups (leonard & swap, 2000). kat's recruitment of engineers, technicians, and,ultimately, of a new venture-experienced marketing executive to supervise commercialization of their technology was a key component of their success. their use of the resources of indiana university and other advisors is also critical in moving their technology to the marketplace. kat's story much has been written on the success and failure of high tech start-ups. much of it is mirrored in the challenges kinetic art & technology (ka d has faced. laplante ( 1997) wrote in computerworld the "formula for success: equal parts pain, vision, money, luck, and timing"(p.s2). kat's story shows that it is important to meet the needs of the customer; without a customer in "pain," there is no market. the initial idea was for a miniature electric motor to drive animation cameras, but kat learned that sbir funds were likely to be for larger applications. they sold the idea to the department of defense's defense advanced research projects agency (darpa) and provided a proposal that could meet their needs for shipboard motors for precise movement of large loads (nelton, 1998). the entrepreneur is a most intriguing engineer, in that from the beginning he had a "vision" for what he wanted to accomplish, and he kept the vision at the forefront of his efforts. his business card indicates he is president and "keeper of the vision". the specifics have changed, but not the vision. "money" came from meeting customers' needs for new technology, selling them on kat's ability to accomplish the task, and winning grants to fund the development of motors (berry, hill, and klompmaker, 1999). kat was "lucky" enough to be in "the right place at the right time" to gain the support to move forward time after time. 74 vol. 16, no. i spring/summer 2005 the entrepreneur has a masters of engineering (computer science) degree, did an internship with the central intelligence agency, and worked for a large aerospace company in colorado. he had a dream of making a video camera move under computer control, but he needed the time and environment in which he could develop his ideas. he left his job in 1990, moved to greenville, indiana where his family could live rent free in a house his parents fixed up for them. the family had an abrupt change in lifestyle, but they were all committed to his making improved motor technology a reality. he withdrew his funds from his retirement plan, the couple used their savings, and they pressed their credit card balances to the limit to support the family and his work. in this way kinetic arts technology (kad (a.k.a. visual computing systems) was founded. (http://www.katech.com/) navigating the sbir process as funds were dwindling, a fellow church member of the entrepreneur read about an sblr seminar at indiana university southeast, and sent him the $ l 0 registration fee. afterwards, he approached the presenters, saying he wanted to participate in the program. his indiana university sbir counselor encouraged him to write a proposal, and he responded to a navy solicitation. the proposal was rejected. he was dejected, but felt his scientific ideas were well founded. at the encouragement of his family and people familiar with the sbir program, he attended one of the three national sbir conferences held each year. attending the conference provided two benefits: (i) he learned more about the sbir program, and (2) he was able to meet with agency people and present an abbreviated form of his ideas. the entrepreneur demonstrated the advice of the small business administration to "be persistent" (nelton, 1998). at the conference, government agency after government agency indicated lack of interest in the entrepreneur's ideas. finally, he unleashed his well-planned phrases on the person from the department of defense's reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal a( small business strategv defense advanced research projects agency (darpa), who listened attentively. afterwards he was disappointed that the person had taken no notes. when the darpa solicitation was released a few months later, the entrepreneur was elated to discover that one solicitation was in his area of interest; it had the same wording he had used when chatting with the darpa representative at the national sbir conference. the entrepreneur wrote a proposal to develop general-purpose motion modules and was awarded a phase i for a bit less than the then the limit of $50,000. again, the entrepreneur was an example of following the instructions when preparing the proposal and being responsive to an agency's solicitation (nelton, 1998). the entrepreneur actually was persistent enough to have an agency solicit what he was interested in pursuing. the grant provided the entrepreneur with funding to continue his research, but it also provided new challenges. the first was the government accounting system. the entrepreneur adroitly accepted the challenge, and with the help of peachtree software, learned a new skill set. another challenge and luxury was being able to hire more engineering talent and pay them. the entrepreneur then had the challenge of becoming an effective manager (baron and hannan, 2002). between the conclusion of the six-month darpa sbir phase i and announcement of phase ii selection was a potentially devastating eight-month gap. the team of twelve stayed with the company during the lean times, choosing to work for stock in the company rather than leaving. the entrepreneur applied for and received bridge funding from indiana's business modernization and technology program, which provided a loan to be repaid as a percentage of non-research and development sales. in the course of time, the company was awarded a darpa sbir phase ii for $350,000 for a year and a half. based on the results they submitted, the company was 75 vol. 16, no. 1spring/summer2005 awarded six months "follow-on" funding of $275,000, which came from darpa sbir funds and another pool of darpa money. the company used the funding to design a new motor. the entrepreneur's interests and strengths are in research and development. at the suggestion of their attorney, kat formed a subsidiary company to do product development and commercialization. from the beginning, the entrepreneur was able to listen to advice from others, develop new skill sets, and hire and utilize excellent professionals. with the formation of lynx motion technology, kat hired, as president, someone with expertise in marketing new technology to industry, a skill set that did not exist in the firm. the sister company, lynx motion technology, built the prototype of the new motor and is commercializing the product. lynx motion technology is an investorfunded company created to build, test, and license technology developed by kat. the entrepreneur was presented with another challenge: raising funding for lynx. again working outside of his comfort zone, he made presentations to venture capital groups. his efforts were successful not only in attracting funding, but in attracting marketing and management talent. also, some local community people were very proud of him and having a high tech company in the community, and they invested in the company. this is an example of commercializing the technology and the ability to further the technology through outside financing, a key success factor of the sbir program (brown and turner, 1999; lerner, 2000). during the lean months awaiting bridge funding, the entrepreneur once again scoured the pages of sbir solicitations. indiana university's industrial research liaison program helped by creating a search profile of his interests and expertise and running it against the agency solicitations as they were released. the entrepreneur responded to a department of energy (doe) sbir "green car" solicitation on hybrid reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategv electric vehicles. he was awarded the sbir phase i for $75,000, but later his phase ii proposal was rejected. he had developed a good working relationship with a person in doe during the phase i, who became a champion of the technology in which the entrepreneur's company excelled. the entrepreneur applied for a phase i doe sttr (small business technology transfer), a sister program of sbir, which requires a percentage of involvement by a university or federal research laboratory, and was awarded $75,000 to design flywheel motor alternators. during the time the entrepreneur was working on this project, doe's interest moved away from flywheels and toward hybrid motors. the entrepreneur applied for a phase ii and received an award of $500,000 to develop high-speed segmented electro magnetic array (sema) motors. kat additionally completed a doe sbir phase i ($100,000) and phase ii ($750,000), developing traction motors for hybrid electric vehicles. beyond that they have completed two doe sbir phase i's ($100,000 each) dealing with different aspects of integrated motion module motors and controls. neither of the phase ii proposals was funded. the company also completed an air force sbir phase i ($100,000), designing flight control actuators. again the phase ii proposal was not funded. the company also submitted proposals and received funding from another doe research and development program, carat, that is similar to the sbir and sttr programs. kat received phase i ($150,000) and phase 11 ($500,000) funding to work on integrated motors and controls for hybrid motor applications. in 2000, the entrepreneur was awarded the coveted small business administration roland tibbitts award for exemplary achievement in the sbir program. at that point the company had been awarded more than $4 million from four federal agencies 76 vol. 16, no. 1spring/summer2005 and had begun commercializing the technology. conclusion examining a start-up high tech company pulls into focus both the company's internal and external needs. a person may be technically gifted, but unless the entrepreneur is able to develop or otherwise acquire other skills, an idea may never get beyond the conceptualization stage. an entrepreneur needs to be able to organize and manage a business and be willing to take a risk. writing grant proposals, administering grant funding, and managing a project are skills that need to be honed. later, the head of the company needs to capitalize upon the technical strengths of the group, identify critical weaknesses, and in some cases hire to overcome the weaknesses. putting together compensation packages that elicit the best from each worker presents a challenge. effective public speaking is imperative for one who is seeking investors. the entrepreneur/inventor continuously needs to learn or otherwise acquire new skills. another key feature is spousal, extended family, and community support, which is critical to the success of the project. "partnerships help bring innovations to the point where private actors can bring them to the market. accelerated progress in bringing the benefits of new products, new processes, and new knowledge to the market has positive consequences for economic growth and human welfare." (wessner, 2002 p. 23). by understanding the perils faced by an entrepreneur, governments may create programs to minimize their failures and increase their successes. the sbir program was instrumental in the development and commercialization of kai's technology. while changes may be necessary as the economy changes (brown & turner, 1999; lerner, 2000), the program works in its current form and provides new technology to government agencies and to the commercial sector. reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal o(small business strategv references archibald, r. b. and finifter, d. h. (2003). evaluating the nasa small business innovation research program: preliminary evidence of a trade-off between commercialization and basic research. research policy, 32 (4), 605-620. baron, j.n. and hannan, m.t. (2002). organizational blueprints for success in high-tech start-ups: lessons form the stanford project on emerging companies. california management review, 44 (3), 8-35. berry, w. l., hill, t. and klompmaker, j.e. ( 1999). aligning marketing and manufacturing strategies . with market. international journal of production research, 37 (16), 3599-619. brown, g. e., jr. and turner, j. ( 1999). reworking the federal role in small business research. issues in science & technology, 6 (4), 51-59. cooper, r. s. (2003). standing on the shoulders of midgets: the u.s. small business innovation research program (sbir). small business economics, 20 (2), 29136. gans, j. s. and stem, s. (2003). when does funding research by smaller firms bear fruit?: evidence from the sbir program. economic innovation and new technology, 12 (4), 361-384. irlp: industrial research liaison program. bloomington, indiana: indiana university, 200 i. kaulio, m. a. (2003). initial conditions or process of development? critical incidents in the early stages of new ventures. r&d management, 33 (2), 165-175. kelly, m. j., schaan, j., and joncas, h. (2002). managing alliance relationships: key challenges in the early stages of collaboration. r&d management, 32 (i), 11-22. kessinger, personal interviews. may 2002. laplante, a. ( 1997). formula for success: equal parts pain, v1s10n, money, 77 vol. i 6. no. i spring/summer 2005 luck, and timing. computerworld, 31 (39), s2-3. leonard, d. and swap, w. (2000). gurus in the garage. harvard business review, november-december 2000, 71-82. lerner, j. (2000). the problematic venture capitalist. science, 287 (5455), 97779. mccaffrey, k. (2003). steady hand for startups. management, september 2003, 68-69. mervis, j. (1992). pentagon keeps its fruits to itself. nature, 356 (6354), 4. nelton, s. ( 1998). innovative spark from uncle sam. nation's business, 86 ( 12) 50-51. nicolau, n. and birley, s. (2003). social networks in organizational emergence: the university spinout phenomenon. management science, 49 (12), 1702-1725. piper, w. s (2002). push and pull strategies in the marketing of government technology. proceedings of the 2002 atlantic marketing association, savannah, ga, vol. xviii, 80-84 preston, j. t. (2003). building success into a high-tech start-up. the industrial physicist, june/july 2003, 16-18. small business innovation research grant program. small business administration. 16 may 2002. <http//www.sba.gov/sbir/indexprog rams-otaagency .html>. spencer, j., murtha, t. p., and lenway, s. a. (2005). how do governments matter to new industry creation. academy of management review, 30 (2), 321-337. stewart, a. and giagtzis, g. (200 i). helping high-tech start-ups achieve success. america's network, i 05 (9), 120122. surveying the sbir program. science, 288 ( 546 7), 809-11. wessner, c. w. (2002). governmentindustries partnerships for the development of nev.· technologies, national research council. national academies press: washington reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategv http://books.nap.edu/books/0309085 020/html/23 .html#pagetop. wu, chunchi and young, a (200 i). critical operating problems and survival rates in small firms: a look at small business institute clients. journal of developmental entrepreneurship, 7 (!), 1-23. vol. 16, no. 1spring/summer2005 78 from the editor the journal of small business strategy is pleased to present to you another collection of high-quality research articles in the area of small business, entrepreneurship, and family business. in this issue we present five articles that cover various aspects of strategy that relate to these distinct firm types. the first contribution by kilenthong, hultman and hills, “entrepreneurial orientation as the determinant of entrepreneurial marketing behaviors,” examines how the entrepreneurial orientation of a firm drives the entrepreneurial marketing behaviors of the firm. through empirical analysis, the authors determine that innovativeness is the leading essence of entrepreneurial marketing behavior. in their article, “customer-firm interaction and the small firm: exploring individual firm, and environmental level antecedents,” srivatava and barnir examine how customer-firm interaction is used in a strategic approach to support market position. collins, worthington, and schoen take a look at retirement well-being expectations in their article, “family business ceo succession: examining personal retirement expectations.” their study of 256 family firms show a strong connection between retirement well-being expectations and firm performance. we revisit entrepreneurial orientation once again in pett and wolff’s “entrepreneurial orientation and learning in high and low performing smes.” their paper, drawing from a sample of manufacturing smes, supports the idea that small and medium sized firms with high levels of entrepreneurial orientation are able to capitalize on opportunities that yield higher levels of performance for the firm. we conclude this issue with another article focusing on the strategy of a firm for smes through the lens of internationalization. bose’s article, “critical success factors of sme internationalization” contributes towards the development of a model for a successful internationalization framework through a review of the literature in this area. we do hope that you enjoy this issue. as always, the future and success of the journal of small business strategy lies with you and your research in the areas of small business, entrepreneurship and family business. please continue to consider jsbs as an outlet for your high quality submissions. i hope to hear from you in the near future. william c. mcdowell, editor-in-chief reproduced with permission of the copyright owner. further reproduction prohibited without permission. from the editor fry, fred l journal of small business strategy; fall 2005/winter 2006; 16, 2; abi/inform complete pg. 0_6 from the editor with a journal title such as the journal of small business strategy, articles can either address strategy in a very broad sense or in a very specific sense. in the broader sense, articles can focus on a plethora of topics including start-up issues, financing, competition, or working with government regulations. some of the articles in this issue do indeed address the broader view of strategy. some, however, get to the essence of small business strategy. becherer, finch, and helms zero in on strategic decision making with their article, "the influences of entrepreneurial motivation and new business acquisition on strategic decision-making." they investigate the strategic decision-making tactics of owners and entrepreneurs compared with how the businesses were acquired. their results are interesting and worth pondering. delvecchio and anselmi look at sales strategies. in particular, they look at sales force use of information technology hardware and software as an integral part of their sales strategy. their results are somewhat surprising and provide interesting suggestions for small business owners. smith, discenza, and baker look at adaptive strategies within a specific industry art galleries. their article, "building sustainable success in art galleries: an exploratory study of adaptive strategies," is quite interesting. of particular interest is that the issues facing art gallery owners are similar to those facing small business owners in general but with some unique twists. somewhat related to the delvecchio and anselmi article, they address the use (and challenges) of information technology as a contributor to business success. shields looks at revenue management strategies in small business. he shows that small businesses do, indeed, use revenue management strategies. this means that owners use different strategies at different times to maximize revenue. owners can target customers who meet particular requirements and then tailor their strategies to reap the most benefits from each kind of customer. the final two articles address more specific issues in operating small businesses. david and rubenfeld look at how small employers deal with employees who need special accommodations to meet their short or longer-term needs. they note that small businesses do not have the staff or expertise that larger companies do, but employees do have special needs that must be met if possible. palmer, andaleeb, and joyner look at lawyer quality during bankruptcy proceedings. they test hypotheses relating overall satisfaction with attorneys to a number of different factors. check out the book review. eugene fregetto reviewed the ten faces of innovation, written by thomas kelley with jonathon littman. kelley is general manager of ideo, one of the nation's most well-known product design companies. it is a fascinating book and certainly is of value to academics and practitioners looking to enhance innovation. i.hope you enjoy these articles. let me know if you have comments. fred l. fry editor, jsbs stra tegy the small business institute™program: high impact entrepreneurship education charles h. matthews university of cincinnati abstract small, entrepreneurial andfamily bvsinesses have long been regardedas importantcontributors to the growth ofa nation 's business activity and development, as well as a significant driving force in the nation's overall economic health and stability. as such, business schools are becoming increasingly aware of the need to develop piograms which are: i) tailored to the speci)ic needs ofstudents who represent the next generati on ofsmall, entrepreneurial and family business owners; and 2) focused on the needs of the firm owners themselves. in recent years, business schools worldwide have begun to develop, refine, and implement facvlty-directed, student-based consul ti ng programs as a teachi ngltear ning tool in thei r undergraduate and mba programs to address this dual need. this paper traces the past, present andfutvre path of one such program: the highly successful faculty-guided, student-based small business institute™ (sbi) field case consultation program. the role of the small business institute directors'ssociation (sbida) is also discussed in terms of it role in facilitating the ongoing impact of entrepreneurship education as we head into the 2 lst century. "tomorrow always arrives. it is always different. even the mightiest company is in trouble if it has not worked on the future." "the best way to predict the future is to create it." peter drucker introduction for anyone who has directed a student-based, field case study, the following letter i recently received is probably very familiar: 14 journal ofsmall business strategv vol. 9, no. 2 fa///iv/nter /998 dear professor matthews, just a brief note of appreciation for the recent report and information provided by [your student team]. i feel they have given us a very positive approach and a world of information we were not aware of how to market our product. we believe with their "final report," we will be able to move forward and obtain our short and long-term goals. their attitude, appearance and professionalism were outstanding. i do not believe we could have hired a marketing group that would have been more interested or helpful as these young people were. i would recommend your program for any small business. it is an outstanding program and i personally wish to thank you for choosing [our company] for this program, this unsolicited letter brings to life the vision and mission of the small business institute directors'ssociation (sbida) and its flagship small business institute™ (sbi) program: to strengthen the small business/entrepreneurship sector of the free enterprise system. in essence, the sbi program exists to facilitate two worthy teaching/learning objectives: i) to provide a meaningful learning experience for students interested in learning about small, entrepreneurial, and family-owned businesses; and 2) to provide meaningful managerial consultation to business ventures in order to enhance firm success and survival. in brief, the sbi program is a rigorously developed, faculty-guided field case consultation course that provides a valuable role for our students from a curriculum, community, and content perspective. the sbi program's outstanding contribution to small, entrepreneurial, and family business education is why the program continues and has emerged as the preeminent studentbased, field case consultation program in the world. sbida, through its sbi program and other efforts, exists to encourage teaching, learning, consulting, training, and field research and to support a forum for publication and dissemination of information to students, small, entrepreneurial, and family-owned businesses, and local business communities. indeed, one of sbida's strengths has been its ability to facilitate a supportive, constructive, and mentoring environment for existing and new members. as business schools continue to pursue field case study options in their curricula, sbida continues to promote that nurturing environment. this is important to the development of faculty, the work of the students, and the participation of the businesses in this challenging and rewarding teaching/learning effort. it is altogether fitting and appropriate that we take a few moments to reflect on the past and present of sbida and the sbi program, as well as articulating how we will create the future. a rich past of course, sbida's history is closely linked with the conceptualization, initialization, and implementationof the small business institute™ (sbi)program. in reflectingon the past 20 plus years of the success of the sbi program in which it has become one of the premier field case study programs in the world, two key ingredients come to mind: i) the dedication of faculty and students to the teaching/learningprocess; and 2) the overwhelming support of the thousands of business owners and managers that have graciously allowed our students to thrive in this "business laboratory." 15 journal of small business strategy vo/. 9, a'o. 2 fall/winter /998 in the early 1970's, a cadre of entrepreneurially minded faculty from leading business schools from across the u s, together with the u s. small business administration(sba) worked closely in a grass roots effort to make this teaching/learning relationship available to a broad spectrum of schools and business ventures. despite early misgivings, it would be a voyage of discovery that would ultimately be a triple win situation —benefiting the students, the businesses, and the business community. by the late 1990's, many of the over 200 small, entrepreneurship, and family business centers at colleges and universities across the counny can trace their heritage directly and indirectly to the craring, implementation,and success of their sbi programs. although the sba was a key player in the past and has chosen to discontinue participationat this time, the sbi program still thrivesa testament to the pedagogical foresight those early field case pioneers. over the years, sbi programs have conducted individual case studies, industry studies, economic development studies, and participated in rural and urban initiatives, to name a few. clearly, the history of sbida and the sbi program provides an integral aspect of entrepreneurial, small, and family business education today. a valuable present as we head into the 21"century, sbida is more important than ever to the continued success of the business field case study pedagogy as a teaching/learning tool, in general, and the sbi program, in particular. one of sbida's strengths has been its ability to facilitate a supportive, constructive, and mentoring environment for existing and new sbida members. as business schools continue to pursue field case study options in their curriculum, sbida continues to promote that nurturing environment. this is important to the development of faculty, the work of the students, and the participation of the businesses in this challenging and rewarding teaching/learningeffort. as business schools continue to embrace the valuable role fieldwork plays in the curriculum, the role of sbida remains critically important. sbida offers a collegial forum for facilitating teaching enrichment; small business information; experiential learning; small, entrepreneurial, and family firm research and publication; case writing; research support; and peer recognition. in addition, sbida offers a forum for national recognition of students for outstanding case preparation in the sbida annual sbi case competition. high impact entrepreneurship education sbida, through its many members, comprises a number of supportive elements, including an annual conference, newsletter, and scholarly journal, to name a few, but perhaps it is sbida's flagship sbi program that best illustrates the impact sbida has had on entrepreneurship education overall. sbida's sbi economic impact study completed in 1994 suggests that our students and the businessesthat participate in the program continue to make a difference in many ways: creating new jobs; increasing wages; enhancing gross revenues; and generating additional tax revenues. for example, from the sample of 500 sbi companies surveyed', it is estimated that sbi clients created 10,697 net new jobs resulting in $203,000,000 in additional employee wages in 1992. sbi clients'mployee growth rate for 1992 was 30 times the national average (12.8% versus 0.42%). tables 1-3 summarize some of this data. moreover, it is estimated. that sbi clients generated $79,000,000 in additional revenues in 1992, in part because of changes resulting from sbi team recommendations. sbi clients contributed employee taxes in 1993 in excess of $ 174,000,000 and contributed $60,000,000 in additional sales, medicare, social security, and 16 journal ofsmall business strategy vol. 9, no. 2 fall/winter l998 federal income tax revenue. clearly, the students who consult with these businesses learn about small, entrepreneurial, and family business creation, development, and survival in ways that cannot be recreated in the classroom. table i: number of jobs provided by sbi clients ¹ofsbiclients full-time jobs part-time jobs total jobs* year (per client) (per client) 1990 6,225 10.92 3.36 78,435 1991 7,100 12.17 4.05 100,785 1992 5,980 13.80 4.94 97,295 1993 6,030 18.05 7.25 130,700 'in the calculation of total jobs, two part-time jobs are considered one full-time job. source: small business institute economic im act stud: 1990-93, sbida, 1994. table 2: number of net new jobs created by sbi clients ¹ of sbi net new full-time jobs net new parttotal net year clients'* (per client) time jobs new jobs* (per client) 1990-91 6,225 1.25 0.69 9,929 1991-92 7,100 1.63 0.89 14,733 1992-93 5,980 4.25 2.31 32,322 total 1990-93 19,305 56,984 aln the calculation of total jobs, two part-time jobs are considered one full-time job. as the number of clients was lagged one year for these calculations. this assumes that the clients who received counseling in 1990 are the only ones who increased jobs between 199091. this provides a conservative estimate since the sbi program operates on the fiscal year and data was collected on the calendar year basis. source: small business institute economic im act stud: 1990-93, sbida, 1994. 'urveys were sent to 475 sbi directors in may, 1994. it is estimated that 2,375 surveys were sent to clients based on the request for each director to send out five surveys. some sent more, some less. four hundred ninety-nine useable surveys were returned (385 is generally considered a reliable representation of the population.) responses were received from 45 of the 53 states and territories to which surveys were sent. (source; sbi economic im act stud: 1990-1993, sbida, 1994.) 17 journal ofsmall business strategy vol. 9, no. 2 fall/ivlnter l998 table 3: marginal differences in sales and employment growth rates: all u.s. businesses v. sbi clients u.s. growth rate sbi client growth marginal difference rate in growth rates ¹ of employees .42 % 12.80% 12 38% employee compensation 3.70 % 6.80 % 3 10% revenue i 13%a 2 00% .87 % '.s.growth rate is for 1991. the sbi client growth rate for 1991 is 3%. the lower 1992 rate was used to make the estimate as conservative as possible. source: small business institute economic im act stud; 1990-93, sbida, 1994 high impact teaching/learning as business schools continue to pursue field case study options in their curriculum, it is hard to undervalue the role of the businesses in this challenging and rewarding teaching/learning effort. for their part, businesses relish the opportunity to play an integral part in the education of our students. again, using data from the 1994 sbida economic impact study, when asked about the sbi student teams'nowledge and expertise, 99% of the clients rated the sbi team as ".average," "above average" or "excellent," with 83.5%rating them as "above average" or "excellent." also, nearly 90% of the business respondents described their overall working relationship with the team as "above average" or "excellent," with 66% indicating the working relationship with the teams as excellent. figure 1. client ratings of knowledge and expertise of sbi student teams 100 80 60 40 20 0 cl clc ch ea 00 a, rc b 0 ocl sa 0 n. cl x to ol tu 18 journal ofsmall business strategy val. 9. na. 2 falv winter l 998 figure 2. client ratings of overall working relationships with sbi student teams 100 80 60 40 20 0 cl cl om ao dct s on. q cl cl tn cl tu ct figure 3. areas in which recommended changes were made 100 80 c 60 n. 40 20 0 go e co vi ps 8 e o il ild in in terms of student impact, approximately 86 percent of the businesses indicated they made changes in their operations atter receiving the report from the sbi student team. while 76 percent of the businesses indicated that they made multiple changes in business operations as a result of the sbi experience, some individual areas in which changes were made included planning and strategy (42%); advertising (41%); sales and merchandising (36%); and business organization (30%). 19 journal of small business strategy vol. 9, no. 2 eallllvinrer 1998 an exciting future over the past decades, mounting evidence suggests that entrepreneurship and small business programs in many business schools in the u.s. and abroad have shiited from the emphasis of normal content-oriented passive learning situation to one in which the student has ownership of, and involvement in his/her learning. recently, many of the mba information brochures from institutions in various parts of the world suggest that faculty-directed, student-based consulting programs are being used increasingly as a teaching/learning tool in mba programs as a meaningful opportunity for students to put into practice what they have been learning in theory (lamond, 1995). for example, at the university of toronto, the faculty of management studies argued that to teach a program in entrepreneurship, students must "learn-by-doing" with some, if not all, instruction of a clinical nature. they found that many of the small businesses in the program surveyed indicated that the implementation of the student recommendations has led to some form of revenue increase, cost decrease, or employment increase and the process enabled the client to leam new skills and technology(haines, 1988). similarly, an australian study notes that clients found the consulting program to be valuable and that it exceeded the clients'xpectations (lamond, 1995). for faculty pursing careers of teaching, scholarship, and service, s8i da will continue to provide a necessary forum for excellence in these worthy pursuits. becoming better morc etfective teachers, scholars, and members of our communities enables us to more ably serve students, schools, and communities. small, entrepreneurial, and family owned ventures will continue to benefit and provide a positive impact on our economy. as business schools look to expand the opportunities for students to test their education in a "real world" business setting, field case study in the curriculum will grow. why will this interest grow? for several reasons: renewed interest by students interested in pursuing an entrepreneurial career, a renewed interest in colleges and universities on teaching excellence; a general movement by colleges of business toward field work for students; service to local communities; and focus on rigorous qualitative and quantitative field research. sbida is gearing up for this challenge. initiative for a competitive inner city one of the most exciting new programs recently introduced that is relying on the impact of faculty-guided, student-based field case work is michael porter's initiative for a competitive inner city (icic). a prominent part of professor porter's vision of revitalizing the economic vitality of america's inner cities includes the formation of a national business school network (nbsn) that includes an opportunity for business students under faculty supervision to serve as consultants to inner city ventures. the synergies that can be generated between the icic nbsn and sbida sbi programs will create exciting opportunities for the future: opportunities for students, businesses, and the revitalization of america's urban core. how will we create the future? people. the history and current success of both sbida and the icic rests firmly on the foundation of the hard work and dedicated efforts of our members and participating businesses. the success of our conferences, our programs, our journals and publications, our training for new members, etc. is all driven by the willingness of our membership to be actively involved in our organizations. indeed, the outstanding sbida conference coming together for san francisco in february, 1999, 20 journal ofsmall business strategy vo/. 9, no. 2 fal!iiv(urer /998 and icic's nbsn conference in boston in april, 1999, is strong testimony to the past, present and future viability of the faculty-guided, student-based field case consultation experience. sbida will be there, building the future: the sbi program; the experiential learning/field case consultation process; a supportive, constructive mentoring environment; applied scholarly activity; community/economic development; and live field case research. your ideas are actively sought and your participation is greatly encouraged. i invite you to continue on our voyage of discovery as together we create the future. references hh i,g g hh lggg. ph h g: hi g p hip. \ 8 * lh.hh-gh. lamond, d. a., 1995. using consulting projects in management education: the joys. the journal of mana ement develo men 14, 60-72. small business institute economic im act stud 1990-93. small business instit'ute director's association, july, 1994. appendix the sbi procram at-a-glance from 1972 until 1995, the small business institute™ (sbi) program was a cooperative venture between the u.s. small business administration (sba) and approximately 400 colleges and universities in the 50 states and several u.s. territories, the sba discontinued its partial financial and administrative support in 1995. despite curtailment of sba support, the sbi program continues to enjoy strong support and success on campuses and in the business community. in 1998, the small business institute directors'ssociation (sbida), reports that over 250 members nationwide operate sbi's in their campus communities, and that over 200 more schools are operating independent or generic faculty-guided, student-based field case consultationprograms. (sbida, founded in 1975, is a non-profit, all-volunteerassociationwhose mission is to foster entrepreneurial education through faculty-guided, student-based field case consultation. more information on sbi and sbida can be found at the sbida web page: http: //www.cba.uc.edu/cbainfo/sbida) the sbi program is designed to help small, entrepreneurial, and family businesses, while providing the students an experiential-learningopportunity at the same time. teams of qualified university seniors and mba students, under the supervision of faculty, provide the consulting to small businesses in the community as an integral part of their educational training at the university. the businesses requesting assistance are selected from several sources, including the sba itself, direct calls from businesses, referrals participating business owners, bankers, cpas, and faculty members who know about the program. typically, in most semesters there are more requests than can be accommodated. the clients are selected based on the anticipated benefits to the potential clients, and the learning experience for the students. potential clients may have a specific project or an overall business and industry evaluation that they want the students to undertake. this consultation service is generally provided at no cost to the businesses. in general, the sbi progsam is operated through a three credit hour course open to seniors and graduate students per quarter/semester. based on the students'ork experiences, general interests, and academic concentrations, students are assigned to each consulting team by the 21 journal ofsmall business strategy vol. 9, no. 2 fall!winter l998 faculty. typically, the student teams will meet in class to cover topics pertinent the to operation of a small, entrepreneurial, and family venture, including preparation for field case consultation. consulting teams are usually required to meet on site at least three or four times with their clients at the place of the businesses, but in most cases there are many more contacts throughout the quarter/semester. the consulting teams are responsible for making all contacts with their clients and arranging all the meeting times. each team meets regularly with the course instructor, which not only allows the instructor to be up-to-date about the group's progress but also provides the instructor with opportunities to make the appropriate and necessary suggestions on how the group should proceed and guide the classroom discussion. while the student team is generally well prepared in terms of business content and consulting procedure, the student teams are responsible for defining the problem(s), generating the analysis, and prescribing the recommended course of action. in general, each student team takes a history of the company, reviews goals and objectives, assesses the firms strengths, weaknesses, opportunities and threats (swot) and examines issues and problems confronting the business. in addition, the student team is responsible for making recommendations that are implementable by the business owner. typically, the final requirement of the sbi project is for the consulting team to make an oral presentation and a comprehensive written report including recommendations to the business owner. oiien the instructor will require an in-class presentation at the conclusion of the course. charles h. matthews ph d. is an associate professor of management and director ofthe small business institute™ (sbi) program in the depariment of management, college of business administration, university of cincinnati. he is the immediate past president of the small business institute directors 'ssociation (sbida). his teaching and research interests include: strategic management; small, entrepreneurial, and family-owned ventures; entrepreheurial career choices; strategic planning; decision-making; and leadersliip succession in familylprivately held firms. his research has been published in the journal of small business management; the journal of small business strategy; entrepreneurship & regional development, and family business review. dr. mauhews has been the sbi director at uc. since l982 and has facilitatedover 400faculty guided student-basedfield case studies. he has servedas a consultani to numerous organizations prior to entering academia, dr. matthews had experience in the automotive, movie, and photographic industries. 22 strategy small business solutions: building and leveraging a competitive intelligence capability without going broke john e. prescott cynthia e. miree university of pittsburgh abstract the interest in and use of competitive intelligence (ci) programs is increasing among small businesses. while small businesses face certain limitationsin terms ofresources, staff time, and expertise, they are still able to design and utili e a ci program that will address their unique challenges and needs. this article presents a framework and set of guidelines that can be used by small businesses interested in designing or strengthening their competitive intelligence (c/) program. introduction as a young entrepreneur, kelly scott was faced with the agonizing decision of whether to geographically expand her small uniform manufacturing business and diversify her product line in an effort to enlarge her customer base. although she was able to obtain advice from a small group of friends and other entrepreneurs, she found their inputs to be anecdotal at best. kelly knew that she needed valid data regarding industry growth, competition, and future buying trends before a quality decision could be made. but as the sole proprietor of her company, where would she and her small team of managers find the time and resources to research and compile the mass of information needed? at nine o'lock in the evening, as she tumed off the lights in her office and closed the door, she wondered if opportunities for growth would continue to allude her as her company struggled to survive, let alone expand. this scenario is typical for many small businesses. while many opportunities and threats are present, it is difficul to collect and analyze the competitive information that is so necessary in making informed business decisions. in this article, we address this issue by presenting a framework for the growing field of competitive intelligence. we illustrate how small businesses can apply the concepts of ci in a cost-elfective manner. further, we identify a host of proven practical tips and develop a resource directory that will assist the small business firm in leveraging their resources to enhance their competitive position. 57 journal ofsmall business strategy volume 9, no. 2 fall/winter 1998 competitive intelligence (see glossary in appendix for terminology) the field of competitive intelligence has grown over the past two decades to become an integral part of most large organizations (kahaner, 1996; mckinnons & burns, 1992; goshal and westney, 1991). global competition, the emphasis on quality management, and the realization by managers that actionable intelligence can be a key competitive advantage have spurred this growth (prescott & gibbons, 1993). while these same competitive issues are faced by all businesses, there has been limited attention devoted to the development of viable intelligence programs in small firms (palubiak, 1996; berger, 1997). regardless of the size of an organization, there is a set of common fundamental ci concepts. once this set is understood, the process of designing a c i program, which addresses the unique qualities of small businesses, can be developed. competitive intelligence is defined as the process of developing actionable foresight regarding competitive dynamics and non-market factors that can be used to enhance competitive advantage (prescott, 1989). competitive dynamics refers to the evolution of a firm's industry, and the moves and countermoves of competitors, suppliers, customers, alliance partners and potential competitors. non-market factors such as government regulation, tariffs, and the culture of a country impact competitive dynamics but are not suppliers of products or services in the industry. ci is concerned with developing intelligence that has actionable implications. only by developing actionable implications does a cl program have the opportunity to create a competitive advantage and truly deliver value. building on our definition, we see that the domain of competitive intelligence(ci) is quite broad (berhnardt, 1994; gilad 8c gi lad, 1988, prescott, 1989). competitive intelligence moves beyond traditional environmental scanning and market research by focusing on all aspects of the firm's environment (i.e., competitive, technological, social, political, economic, and ecological), at various levels of the firm's environment (i.e., remote, industry, and operating). competitive intelligence delineates between information and its analysis to produce intelligence. it also emphasizes the importance of intelligence use in decision making. ultimately, competitive intelligence is not only a product, but also an organizational process designed to serve several key roles including; early warning of opportunities and threats, decision making support, competitor monitoring and assessment and strategic planning support. many fortune 500 companies have made the decision to invest resources in the development and utilization of competitive intelligence processes and products. these competitive intelligence initiatives range in scope and sophistication including corporate libraries and large centralized ci staff functions. as the competitive landscape continues to change organizations are experiencing an increasing dependence on the external environment in order to access critical information. in addition, mere access to information is no longer suaicient. rather, it is the firm's ability to compile, interpret, and ensure that it reaches the hands of appropriate decision-makers that leads to an advantage. another important benefit of ci is that it identifies managerial blind-spots (gilad, 1994; zajac & bazerman, 1991). in addition to understanding what competitive intelligence is, it is equally important to understand what competitive intelligence is not. competitive intelligence is not a high stakes game of industrial espionage aimed at uncovering a competitor's trade secrets and other proprietary information (fialka, 1997). a successful competitive intelligence effort is neither haphazard nor unfocused. ci is neither a database of endless information nor does the mere investment in expensive information technology constitute a ci process. rather, a value-adding 58 journal ofsmall business strategy volume 9, no. 2 fa!iiivinter l998 competitive intelligence process is a series of systematic organizational activities that are driven by specific intelligence needs within the firm with the objective of achieving competitive advantage. the intelligence production process the most fundamental concept in the field of ci is the intelligence production process or what is otten referred to as the intelligence cycle (see figure i). the production process contains all of the elements required to produce actionable ci. while the process is intuitively simple, its operation is ojten quite complex. the ci process is initiated through a request from management. requests come in many forms. an essential aspect for any ci professional is to gain the confidence of management so that they will continuously bring requests. the sum total of these requests represents the management's key intelligence topics or, in other words, key areas of intelligence interest. oiien, key intelligence topics are broad and requests are not well articulated, thus making the second phase of the process particularly important, before the intelligence process can effectively begin, there needs to be an agreement on the parameters of the specific intelligence request in terms of exactly what is sought, the time frame, and any constraints such as budget and confidentiality. for the ci professional, interviewing skills that involve extensive probing to determine the exact needs of management enhances the chance that the request will be properly interpreted. figure i the intelligence production process intelligence requestr by manager agreement on projectparameters recommendations r collection of data from analysis secondary sources itl and information services tap into human network once the request is established, the collection of information begins. the ci professional develops a collection plan that can include secondary sources, tapping the human network and the design of primary research. the design and implementation of a collection plan involves project management skills. the collected data is transformed into intelligence through analysis. analysis permits the ci professional to draw conclusions from information. those conclusions then need to be interpreted in light of the original request leading to the production of implications and recommendations. unfortunately however, proficiency in analytical tools is 59 journal ofsmall business strategy volume 9, no. 2 fall/winter /998 often one of the weakest areas of many ci professionals. continuously strengthening one' analytical skills and the ability to utilize analytical tools is paramount to the success of a ci professional(gilad & herring, 1996). action-oriented ci is the result of producing implications and recommendations for managers. at first glance the intelligence cycle may seem to be reactive in nature based on the appearance that intelligence is only produced through the requests of managers. studies of best practice companies however, have revealed that the process is actually dynamic and interactive(american productivity and quality center, 1997). throughout the intelligence cycle, feedback and u pdates from ci professionals allow for midcourse adjustments and new issues to surface. further, the proactive ci professional brings intelligence issues to the attention of managers. this description of the intelligence cycle illustrates the variety of skills that are required for an effective ci operation. thus, best practice companies also typically have many individuals throughout the organization involved with the intelligence process. the importance of competitive intelligence for small firms small firms need to focus on their competitors and the competitive environment as much as large firms (chen & hambrick, 1995; maynard, 1993). all firms are faced with limited resources, limited access to capital, and few slack human and physical resources. these constraints ultimately affect the size of the ci operating budget and demand focus in any ci initiatives. understanding one's competitive position and being able to monitor relevant competitors is a mandatory survival skill. when these constraints are considered in tandem with the unique qualities of small businesses (e.g., duality in organizational roles, smaller pools of experts, little to no specialization in organizational activities, and unequal relationships with larger firms) they produce a need for creativity and innovation in designing, administering, and justifying a viable ci process (palubiak, 1996; berger, 1997). key differences of a small business essentially, three main differences exist for a small business in the development of a ci program: the cost of operating a ci program, the need for designated individuals devoted to ci and the required set of ci skills and tools. when the potential impact of these factors is either underestimated or unaddressed, these differences can impede the successful operation of a ci process. the costs of operating a ci program are significant. our research (prescott 8c bhardwaj, 1995), which has been confirmed by others, reveals that a minimum of $300,000 is required to fund a cl program. costs related to personnel, databases, it, travel, consultants, and purchasing customized supplies make up the bulk of the budget. some of the large multinational organizations such as kodak have been known to spend millions of dollars on ci. large firms have designated positions devoted to c i. a typical cl department has approximately two full-time equivalent employees and an administrative assistant. in many organizations ci personnel split their time between activities other than ci. this type ofjob design is commonly found in planning, marketing, and r&d departments. as a result of this specialization, ci professionals in large organizations are able to develop a set of skills that allow them to practice their erat) eitectively. in recent years the required skills for a ci professional have expanded from data collection to include analysis, interviewing, framework development, communications, it, and project management. there are a variety of professional societies and consulting firms that 60 journal of small business strategy volume 9, no. 2 fallliyinter 7998 assist firms in the development of these skills. further, many companies have recruited highly paid individuals from government agencies such as the cia and fbi, or mba programs because of the belief that they have mastered the requisite skills of ci. we believe that a small business because of its unique qualities can address the above three issues in a cost-effective manner. where to start: designing a ci process to meet the needs of small firms pre-work before embarking on the development of a ci capability there is a set of pre-work activities that need to be done. the pre-work is essential to orient your organization towards developing a ci program that will be both cost effective an achieve meaningful results. we have found that by engaging in pre-work activities, many firms are able to prevent common and often costly mistakes during implementation (prescott & smith, 1987). pre-work begins by selecting an individual in the firm who knows your industry, internal operations, has gained the respect of others and has the potential to be a champion. that selected person should join the society of competitive intelligence professionals (scip). scip is the leading nonprofit professional association devoted to the professional ization of cl. scip is comprised of over 6,000 members who practice cl. while most of the members are from large organizations, there are several benefits that will immediately assist you in developing a ci mind set. membership immediately links you into a network of individuals who have and are struggling with the same issues. scip also has a variety of other resources available to members including a practitioner journal, magazine, books, skill developing conferences, and local chapters. there are many books and articles available on the topic of cl. we recommend you begin your pre-work with the new com etitor intelli ence by leonard fuld and michael porter's book, com etitive strate ies: tools and techni ues of indus anal sis. fuld's 1995 book is an excellent resource book on how to find information. it is packed with many useful tips for locating information on a wide variety of topics. michael porter's 1980 book, competitive strategies: tools and techniques of industry analysis provides a framework for analyzing industries and competitors. together, these two books provide frameworks for finding information and converting it into actionable intelligence. in addition, they are readily available in public and university libraries, have a practitioner-orientation, and cover the essential topics of ci. once you have had an opportunity to digest the material in the books, design a ci orientation seminar and invite those individuals who will most likely champion the ci effort and those who will be involved with its operation. the seminarneeds to provide the participantswith an understandable definition and overview of the field of cl in terms of how it is conducted, and its benefits and limitations. the seminar should be no longer than an hour and one-half. either internal personnel or a consultant can deliver the seminar. at the end of the seminar the following question needs to be posed: is there sufficient enthusiasm for proceeding with the development of a ci program? the question need not be answered t the meeting but should be addressed within a two-week period in order not to lose momentum if there is interest. once the decision has been made to proceed with the development of a ci program we suggest that you adopt a decision-oriented focus to the design and implementation of the ci process. a decision-oriented approach to designing a ci program the design of a ci program requires answers to six key decision areas. while we present the decisions independently, it will be clear that the decisions are interrelated. table one provides a summary of the decision areas for your reference. 61 journal ofsmall business strategy volume 9, iuo. 2 fall/winter /998 decision area i: focus of ci efforts ci programs need to have a focus. a 1997 study by the american productivity and quality center clearly illustrated that best practice ci units developed a clear focus for their efforts. there are five generic focuses that can be developed(see table one). a focus on "early warning" centers on identifying opportunitiesand threats in the competitive landscape before they become table one decision -oriented approach to designing a ci program key decision areas ql )deaf)ttb qigy ccbtcttstiix focus of ci efforts ~ early warning of opportunities and threats ~ strategic decision making support ~ tactical decision making support ~ competitor monitoring and assessment ~ strategic planning support location and structure decision parameters: ~ where are profitable sales? ~ where do new products come from? ~ where are the largest threats? ci personnel ~ champion/manager of cl ~ human intelligence network ~ information specialists ~ analysts ci products timely, accurate, relevant (tar) (see table 3) ci projects project-based approach ~ focus on decisions ~ prioritize intelligence needs ~ virtual teams try a demonstration project ~ pitfalls ci ethics develop a code of ethics before first project economic espionage act of 1996 (eea) see table 4 obvious to all industry players. the primary efforts of this focus center on how the firm should position itself in light of a potential opportunity or threat. a second focus is providing support for "strategic decision making." these ci activities are designed to bring information and analysis to bear on important strategic thrusts. for example, deciding if a proposed expansion of operations into another country should proceed is a case where ci can deliver strategic decision making support. "tactical decision making," a third potential focus area, emphasizes the day-to-day operations of a business. oi)en when ci is linked to the sales function, we see a 62 journal ofsmall business strategy volume 9, no. 2 fall/winter l998 tactical focus. the fourth potential ci program focus would be "competitive monitoring and assessment." in this situation, developing a deep understanding of competitor's strategic and tactical intent and how to position the firm receives central attention. the fifth focus area is assistancewith the "strategicplanningprocess" ofthe organization. ci supportingthis focal area centers on the collection and analysis of information that is an essential input into the design and implementation of strategic plans. it is tempting to design a ci process that addresses multiple foci. in reality ci operations are oaen requested to assist on multiple fronts. however, if a ci operation is spread across too many foci, it is likely to be ineffective because its resources will be spread too thin. this will be especially true for small businesses. thus a central question to ask is "how should we decide on a focus?" one of the more effective methods is to conduct an intelligence audit (fuld, 1988; gilad 8t gilad, 1988). an intelligence audit is the process of identifying from mangers and other key personnel such as the sales force the intelligence needed to make informed decisions and the state of current intelligenceefforts(see table two). from this analysis, your firm will be able to make decisions related to the focus of your ci effort. in many ways, the audit process will create a mission statement for your ci undertakings. table two intelligence audit framework key questions question one what intelligence activities are currently being conducted in the firm? question two what types of intelligence do my employees and i need to do our jobs better? question three how willa cl effort assist u in our jobs? question four what role will my employees and i play in an organized intelligence effort? question five what are the current facilitators and barriers to developing an action-oriented intelligence effort? most firms engage in some type of intelligence eiyorts, even if it is on an ad hoc basis. while these efforts may be as simple as talking to customers, suppliers and distributors, reading trade magazines, or using the internet, they are all viable sources of potential intelligence. by determining the extent to which organizational members are currently conducting intelligence activities, an initial assessment can be made of the usefulness and intelligence yield associated with these activities. small businesses must oaen provide a clear cost justification for all intelligence activities undertaken(palubiak, 1996). by determining the types of intelligence that are most critical, both currently and in the future, management will begin to lay the foundation for the development of key intelligence topics and key ci needs. many small businesses may chose to focus on 63 journal ofsmall business strategy volume 9, no. 2 fall/winter l998 competitor moves, industry conditions, customer needs or pricing as key intelligence topics (oster, 1994).other key intelligence topics may stem from the firm's mission statement or longterm objectives. key intelligence topics and ci needs, regardless of their origin or focus, ultimately drive the entire ci process. an effective competitive intelligence process is as concerned with intelligence use as it is with collection and interpretation of information. decisions and decision making should drive an intelligenceeffort. thus, any intelligenceactivitiesundertakenand all desired intelligenceshould be directly tied into routine or specific decisions. by identifying how any strategic or tactical intelligence generated by a ci effort will directly impact the firm's employee's ability to be effective in their jobs, decisions can be made regarding the allocation of resources. the determination of levels of participation in the cl process by various employees is extremely important for small firms. the decisions surrounding this issue will ultimately impact the firm's ability to coordinate and leverage the intelligence effort throughout the firm. will participation in the ci effort be a part of everyone'ob, and how will said participation be measured and rewarded? will one or two individuals be dedicated to managing ci activities and ci projects? how and where will knowledge stocks be compiled, analyzed, and stored? who will be responsible for disseminating intelligence? all of these questions speak to the important decision concerning the allocation of time and resources to support the ci process. ultimately, while many people may be involved in the process, we recommend that a person be designated as manager or director of ci. as stated earlier, some of the key advantages in designating a person to lead the ci effort are that it permits specialized learning to occur and reduces ambiguity in responsibility and accountability. finally, the various barriers and facilitators of the firm's intelligence process should be identifled and addressed where possible. organizational structure or lack of structure, differing mental models among managers and between managers and employees, behavioral issues, or political issues may enhance or inhibit the success of your firm's cl effort (dugal b'c prescott, 1998).by addressing various barriers or facilitators within the design of your firm's competitive intelligence process, the potential availability of actionable intelligence increases for decisionmakers. decision area 2: location and structure a ci operation can be located virtually anywhere in the organization. we know from the study of large organizations that they locate their ci groups primarily in marketing, planning, r&d, or directly reporting to the ceo. more importantly, we have found that "location matters". in a study of over 350 intelligence unit's, prescott and bhardwaj (1995) found that the activities undertaken by the ci groups were strongly influenced by where they were located in the organizational structure. the decision for small businesses is further complicated since a clear demarcation across functional areas does not always exist, there are fewer slack resources, and oflen a separate budget for ci is not created. in this setting, the small business manager needs to answer the following three questions to determine where to locate the ci effort. where do profitable sales come from? it is a mistake to conclude that your product offerings are the source of profits. for many small businesses, location, customer service, dedicated employees, networks, and efficient operations are the source of profitability. identify'our value position and understand the ci issues surrounding that position to determine the location of your ci efforts. 64 journal of small business strategy volume 9, no. 2 fall/winter l998 where do our new products comepom? what is the real source of new products for your small business? do customers, suppliers, or alliance partners provide the impetus? does your sales force or operations provide new ideas? ci should be located near the key sources of new products. after all, your competition is probably creating their new products in a similar manner. wliere is the largest threat to our competitive position? what keeps you up at night? the answer to this question will highlight areas of your business that you feel are under competitive threat. areas of competitive vulnerability need to be identified and addressed. for example, would a new manufacturing process proposed by a competitor in the trade press undermine your cost structure? will loyal customers take their business to a competitor because of a more convenient location or new service offerings? the answers to these three questions are also linked to the decision of where to focus your ci efforts. the advantage of focusing on these questions is that the ci efforts can immediately demonstrate value by letting you sleep better at night. decision area gu ci personnel someone in the organization has to assume the role of and be recognized as the ci champion. this person is the focal point for the ci eifort. while the champion will typically have other duties, this person assumes the critical role of providing resources and moral support to others participating in the process. further, the champion must interact with mangers to determine the key decisions where cl can play a role. the responsibilities of the champion should flow from the previous two decision areas. for small businesses there are potentially three additional roles for individuals assisting in the ci effort. each of the roles requires different skills and in some cases training. in your business, you will find that the same person performs multiple roles. this occurs in large organizations as well. the first role is the one who coordinates the "human intelligence network". one of the advantages of small businesses is that there is less bureaucracy. building on this advantage, small businesses can develop an effective network of information collectors. employees have their own networks that can be tapped for intelligence without serious disruptions to their normal job responsibilities. however, someone needs to be the point person to periodically tap the overall network and be available when an employee has extremely important time-sensitive in formation. information technology can facilitate this process but is often expensive to install and operate. an example of effectively tapping the network is provided by a small museum. tour busses were a key source of revenue for the museum. one of the employees made a point of talking with the tour bus drivers to leam more about how they decided on destinations and tapped potential customers. using this information, the company was able to develop improved relationships with several tour companies and significantly increase the flow of tourists through the museum. a second role involves the collection of secondary information through information technology. there is a wealth of secondary information on databases that can be tapped through the internet and information vendors. small businesses have a variety of inexpensive ways to tap into these sources. small business associations, universities, and local access providers all allow inexpensive access to the internet. on some occasions, you may want to outsource an information search to a professional firm. however, developing skills in the use of these sources is becoming easier and if possible, someone should be designated to leam the process of secondary searching (berinstein, 1998). there are also a variety of classes and even a cd-rom 65 journal ofsmall business strategy volume 9, iuo. 2 fall/winter l 998 has been developed to teach information collection (see the resource directory). the limitations of secondary research are that it is yesterday's information, it rarely answers your question directly and the validity of the data needs to be confirmed. secondary research is good for learning about a topic area that then sets the stage for more specific ci. the third role that is fundamentally important but underutilized is the analyst. analysts convert information into intelligence. the analyst needs to develop skills in a variety of areas including forecasting, profiling, financial analysis, and statistics. above all, analysts need to have a mindset oriented toward developing implications and recommendations. there are several ways that small businesses obtain the benefits of ci without having personnel dedicated to the activity full-time. some alternatives include using local university classes to assist with projects, internships, partnering with other small businesses, utilizing government funded business organizations, and partnering with customers and suppliers. decision area 4: products like any other service area within a firm, ci programs must produce products and services of value to managers. while there are a variety of products and services (as shown in table three), it is more important that the products have certain qualities. products should be what we refer to as tar. that is they should be timely, actionable, and relevant. the products should be placed in a context that the decision-makersrelate to, formatted in a manner that users prefer, and provide and indication of missing information, sources, and what the intelligence means. table three ci products and services ~ newsletters: summary of many ~ training intelligence topics ~ participation in multifunctional teams ~ information search: secondary source ~ database management information ~ ci forums ~ intelligence report: human network ~ vendor qualifications assessment ~ best practice investigations ~ analytical alert: analysis of current ~ development of human networks "hot" topic or issue ~ competitor response modeling exercise ~ war room scenarios creativity is a very usefull guide for anyone developing ci products. for example, one firm delivered intelligence reports in a newspaper format. another firm always has a special section devoted to "implications for our company". as shown in table three, services such as training can be extremely valuable tools for companies. the study by the apqc (1997) found that training was one of the most valued services that best practice companies offer. for example, before introducing new products, one firm always conducts a competitor response modeling exercise. in the exercise, teams 66 journal ofsmall business strategy volume 9, no. 2 fall/ivinrer l998 representing the competitors develop responses to the company's new product offering. as a result of the competitor modeling exercise, many products and their positioning have been modified and some even canceled. decision area 5: systematize the process by using a project-based approach projects are the basic building blocks of an action-oriented ci program. that is, the operationalization of the intelligence production process is a project. each step in the intelligence process is not followed for every project. since each project is unique, you must utilize those steps in the production process that best fit the current demands. for example, some projects can best be handled through secondary research. in this case, involving the human intelligence network is not necessary. key intelligence needs or topics that result from the intelligence audit are also best handled through projects. key intelligence topics and ci needs must be prioritized. those topics and needs assigned the highest priority should be developed and approached as a focused ci project as opposed to ad hoc or random searches. methods for handling routine intelligence requests and intelligence intakes must be developed and institutionalized. here the development of either an intelligence request form or intelligence hot line is useful in ensuring that the intelligence needs of internal customers (e.g., sales representatives) not currently being addressed within the context of a formal project are not neglected. although many small and large firms rely heavily on informal processes to provide the impetus to their ci activities, a more formalized projectbased approach to ci has several benefits. the benefits include eitective and efficient data collection, cost effectiveness as compared to a comprehensive approach and actionable intelligence that is directly tied into decisions. in their study of project-based ci, prescott and smith (1987) found five pitfalls for firms to avoid. fuzzy objectives often lead to project outcomes that do not meet the requirements of management. a heavy emphasis on style as opposed to substance including implications weakens project deliverables. if key competitors or central non-market players are omitted from the analysis, the conclusions are likely to be suspect. most ci projects are looking for general accuracy (the competitor's market share is in the range of 27% 30%) rather than point estimates (the competitor's market share is 30.237%). if corroborating evidence is found from several sources, there are diminishing returns in trying to locate the last piece of evidence. finally, firms tend to use the same methods repeatedly. best practice firms utilize a variety of methods and often experiment. an effective way for small business to implement projects is through the use of virtual teams. virtual teams are comprised of individuals throughout the company who can be brought into the project as needed. thus, there is minimal disruption to their normal business activities. demonstration projects are an excellent way to showcase the benefits and methods of ci. since there will be skepticism when you try to introduce the concepts of ci, a demonstration project "breaks the ice" for many employees. select an important project from the outputs of the intelligence audit and use the results to illustrate the benefits of ci as well as the good and bad lessons learned from conducting the project. decision area 6: ethics ethics is one of the most important topics of our field. many firms have avoided conducting ci for fear of appearing on the front page of the wall street journal. president clinton's signing of 67 journal ofsmall business strategy volume 9, no. 2 fall/winter 1998 the economic espionage act of 1996 has further heightened this concern. the economic espionage act of 1996 defines economic espionage as the improper receipt (i.e., receipt without proper authorization) or thea of trade secrets via any means. additionally, the act has changed espionage from a civil to a federal crime and dictates that proceeds received as a result of espionage must be forfeited. the majority of ethical problems have centered on the methods used in collection of information. there are a few basic guidelines to follow that will keep you from running into ethical problems. scip has devoted a considerable amount of resources to addressing the topic of ethics and you can benefit from their work. scip has a code of ethics and a book entitled "navigating the grey zone". there have also been numerous presentations at their conferences. audio tapes from these sessions are available. scip also has a special issue of their magazine devoted to the subject of ethics. questionable collection techniques are those methods that obtain information that a firm has not disclosed, is not obligated to disclose and is not willing to disclose to the public (paine, 1991). you should develop a code of ethics for ci before beginning the first project. we recommend the following process for developing your code (table 4). a team of employees from the legal department (or external legal council), along with the ci champion and individuals from the primary human collection network should work together to create the code. develop a simple and brief code based on four principles related to deception, influencing the judgment of individuals, covert intelligence and unsolicited intelligence (see table four). once the code is developed al i employees should be trained. some companies go as far as to have employees sign a statement that they will abide by the code. we recommend that all vendors and consultants used by your firm be exposed to the code and sign a statement that they will abide by your code when working for you. one of the added benefits of exposing your employees to the ethics of ci is that they will see the value of protecting your company secrets. oflen, employees inadvertently give away key information due to a lack of awareness. training in this area is money well spent. final thoughts on developing a ci program select and iirilize rl ppropriaie tecisnologies the most important thing to remember about technology is that it should be selected to support your ci process. the mere purchase of information technology does not constitute a ci process in and of itself. therefore, when you begin to design your ci process do not run out and purchase extensive and expensive information technologies, databases, or contract long-term relationships with information vendors. as previously stated, technologies such as the internet are widely available and can be used effectively to collect a wide range of intelligence about competitors, non-market factors, industry changes, and current and future conditions. through the use of news groups, chat rooms, company web pages, and business specific data dedicated to a specific intelligence area, enterprising firms are able to collect a wide range of market-based intelligence (hise, 1996). by simply appropriating 3-5 hours per week to research on the internet, information, previously thought to be unavailable can be gathered, analyzed, and placed in the hands of decision makers. in addition, using the internet to conduct initial research on new geographical locations, new customers, or suppliers and distributors can significantly reduce the costs normally associated with scouting new locations or cold calling potential clients. as you become more familiar with your true technology needs, integrative technologies such as databases, electronic bulletin boards, lotus notes, groupware or company specific software can also be used to compile common knowledge stocks and facilitate their dissemination and use. 68 journal ofsmall business strategy volume 9, no. 2 fall/ivinter i 998 table four core principles for developing code of ethics for collection of competitive intelligence ~princi le ~di q ~exam les misrepresentation to purposely mislead or posing as a vendor falsely represent oneself or or academic when organization collecting information conducting phony job interviews improper influence to induce others to divulge promises ofjobs, information for which they promotions, gifls have an obligation to bribery keep confidential covert collection applying collection techniques electronic espionage in a manner where the observed planting a mole in a person or organization does not competitor's firm know that intelligence is being examining a rival's sought trash unsolicited information the receipt of information that strategic plan of a was not requested competitor found in a hotel conference room overhearing a conversation about new products in a bar remember, the use of technology as a part of a small firm's ci process can be extremely cost effective and time saving when properly selected. but, beware of its limitations. tap into internal and external human networks human networks can be extremely effective in assisting you in leveraging your ci eltort. networks can be either formal or informal in nature (baker, 1994). these networks can include firm employees, competitor employees, suppliers, customers, personal contacts or other ci professionals (moore & buttner, 1997). formal human networks can be established through participation in small business center activities, programs, seminars, business-related receptions, round tables, or by actively participatingon the advisory boards of other small businesses. casual networks may include other small business owners, ci professionals or personal contacts. when assessing the value or usefulness of a human network, a couple of key considerations include how often you are able to meet with the members of your network, how formalized your interactions are with other network members and how similar or dissimilar the members of your network are to you. 69 journal of small business strategy volume 9, no. 2 fall/ivinter /998 hleasuring the results and impact of your intelligence effort the use of a competitive intelligence program can lead to a competitive advantage. this advantage should be measurable and use standard performance indicators similar to those used by most service areas. in reality, actually measuring the impact of ci activities is difficult and not often done by even best practice companies. when designing your ci program you may want to initially include some methods for measuring the effectiveness of the ci program. when assessing the effectiveness of your ci program you may want to consider using: user satisfaction surveys, follow-up reports, increases in requests for products and services, or project close-out reports as indicators of the degree to which your ci program is actually meeting the needs of your organization (herring, 1996). conclusion competitive intelligence programs and initiatives are able to assist organizations by accurately depicting the nature of their unique competitive environments and addressing competitive blind spots. as they continue to make effective inputs to both small and large businesses, one must keep in mind that as with any other strategic investment, their ability to add value must be monitored and evaluated on a regular basis. in this article we have presented a framework and a set of guidelines that can be used by small businesses to begin to develop a competitive intelligence effort. by engaging in meaningful and focused pre-work activities, and following the key decision areas you should be able to develop a cost effective ci program that is able to increase both the quality and speed of your decision making process. resource directory guide —next page, 70 journal ofsmall business strategy volume 9, ivo. 2 fall/winter 1998 resource directory guide books ben gilad and jan herring (eds.) (1996) the art and science of business intelligence, in advances in a lied business strate, jai press, greenwich, ct leonard fold (1995) the new com etitor intelli ence, wiley: new york. i.arry kahaner (1996) com etitive intelli ence: from black 0 s to boardrooms how businesses gather anal ze and use information to succeed in the global market lace, simon and schuster; new york. mih ip (1988)c~ii 8« .9 p:88 9 k. john prescott (1989)(ed.) advances in com etitive intelli ence, scip: vienna virginia. john prescott and pat gibbons(eds.)(1993) global pers ectives on cpm etitive lntelli ence, scip: alexandria, va. sharon oster(1994) modern com etitive anal sis, oxford university press: new york. how to find information about com anies, washington researchers, ltd. 301-251-9550 journals and ma azines competitive intelligence review, wiley: new york. competitive intelligence magazine, wiley: new york. on-line magazine, on-line, ines wilton, ct. ci resources the fuld war room, iron horse multi-media i (888) 467-5115 www.ironhorsemultimedia.corn this resource is a comprehensive, interactive, ci training tool (includes cd-rom). navi atin throu hthegra zone: a collection geo orate codesofconductandethical guidelines, society of competitive intelligence professionals and the conference board's council on competitive analysis. jan herring (1996) measurin the effectiveness of com etitive intelli ence, scip: va 71 journal ofsmall business srraregy volume 9, /t/a. 2 fall/ivinrer /998 professional associations societ of cpm etitive lntelli ence professionals 1700 diagonal road, suite 520 alexandria, va 22314 (703) 739-0696 www.scip.org small business resource centers the small business develo ment center national number: i (800) 8-ask-sba intel's small business links http: //www.intel.co jp/businesscomputing/small/resource.htm this web site links to several other small business sites including: american express small business exchange, american productivity and quality center, bureau of labor statistics, us small business administration. entre reneurial america inc. 22500 orchard lake rd. farmington, mi 48336 http: //www.entameria.corn your minin com an 's guide to small business information http: //sbinformation.miningco.corn/ research institutes american productivity and quality center 123 north post oak lane, 3" floor houston, tx 77024-7797 (713) 681-4020 web resources learn about competitors and industries www.marketguide.corn market guide contains information on 10,000 companies. www.dol.gov department of labor provides information about a number of industries. www.nist.gov national institute of standards and technology (nist) contains information on several industries. this list was adapted from nordstrom, r.. and pinkerton, r (199b) thc advantage of internet sources to build a marketing intelligence system, competitive intelligence review (fonhcoming). 72 jour nal of small business strategy volume 9, no. 2 fall/winter l998 www.attcom/business at&t business is a source for information on industry reports and business news. www.libertynet.org/'bite ben franklin technology center contains information on markets, industries and competitors. www.databaseamerica.corn/businessprofiles.corn this site contains a number of profiles on businesses. learn about customers www.gallup.corn the gallup polls can provide you will information on consumer trends and preferences. www surveysite corn survey site will assist you in developing an on-line market research survey. www.surveybuilder.corn survey builder is another on-line service designed to assist in the development of customer surveys. appendix glossary of competitive intelligence terms actionable intelli ence intelligence that has implications for specific decisions com et itive in tell i ence the process of developing actionable foresight regarding competitive dynamics (e g., industry competition, industry changes) and non-market factors (e g., government regulation, tariffs, culture) that can be used to enhance competitive advantage. the word competitive intelligence may also be used to describe the "intelligence" products resulting from the process. com etitive intelli ence personnel the individuals who support and work within the competitive group or team. these job titles typically include: ci champion, ci manager, analyst and information specialist. ~cich i -a iigh ii gi ai id i iii h h i (.g., h high-level manager) who assumes the critical role of providing resources and moral support to those who are participating in the ci process. ~cim ~ yh i ppi dhyh p y i i, di . i implement the ci process. this person will also supervise the activities of the other member of the ci team. ~anal sts the ci analyst is responsible for converting information in the actionable intelligence. this individual should have strong analytical skills, good judgment, and enough experience in the industry or field to be able to identify and understand even subtle patterns and trends in information. information s ecialist the information specialist is responsible for the collection of information from a variety of sources. optimally, this person should have strong research or library science skills. 73 journal ofsmall business strategy volume 9, no, 2 fal//ivin/er /998 ~es iona e the unauthorized receipt or theft of trade secrets or other proprietary information. human intelli ence network an internal and external network of individuals(e.gh suppliers, customers, creditors, competitors, other employees) that can be utilized to obtain information about key intelligence topics or other intelligence interests. information data that has been generated within a specific context (i* dd h h 9 ly*d ad)\ ~ hg f igh 4« f lhg iiy ill h firm and the intelligence needed by managers and other key personnel. an intelligence audit typically has three steps: i. evaluating the level and types of intelligenceactivities(and actual intelligence)that resides within the firm. 2. identifying the gaps in intelligence needed versus available intelligence. 3. evaluating the quality of the current intelligence operation or eltorts. ke intelli ence to ics the types or areas of intelligencethat are most valued by managers and other decision makers. key intelligence topics may include (but are not limited to) competitor moves, industry conditions, customer needs and pricing. mana erial blind-s otsareas of uncertainty concerning strategic and tactical decisions. blindspots are exacerbated when managers make decisions that do not consider the actions and reactions of competitors and/or environment or industry changes. references american productivity and quality center (1997). mana in com etitive intelli ence ~ki d b k, w. ((994).n~ki n y k: m g -hill. berger, a. (1997). small but powerful: six steps for conducting competitive intelligence successfully at a medium-sized firm. com etitive intelli ence review 8 (4), 75-77. b i i, p. ((999).th 9 ih f i i .g~li m *i 22 (2). 61.66. bernhardt, d. (1994). 'i want it fast, factual, actionable,' tailoring competitive intelligence needs to executive needs. lon ran e plannin 27 (1), 12-24. chen, m. dt hambrick, d. (1995).speed, stealth, and selective attack: how small firms differ from large firms in competitive behavior. academ of mana ement journal 38 (2), 453-482. 74 journal ofsmall business strategy volume 9, no. 2 faljjwinrer 1998 dugal, m. & prescott, j. (1998).inte ratin com etitive lntelli ence in or anizations working paper, university of pittsburgh. fialka, j. (1997).war b an other means new york:ww norton company. fuld, l. (1988). monitorin the corn etition, new york;wiley fuld, l. (1995).the new com etitor intelli ence new york:wiley. gilad, b. (1994). business blind s ots re lacin our com an 's entrenched and outdated m ths beliefs and assum tions with the realities of toda 's markets., chicago: probus. gilad, b & gilad, t. (1988).the business intelli ence s stem, new york: amacon. gilad, b. & herring, j. (1996).the art and science of business intelligence analysis. advances in a lied business strate, jai: ct. goshal, s. and westney, d. (1991). organizing competitor analysis systems. ~strate ic mana ement journal 12, 17-31. herring. j. (1996).measurin the effectiveness of com etitive intelli ence, scip: va nl, p. (i 996). g i g -i( . ~l. 7 i i, 79-69. kahaner, l. (1996).com etitive intelli ence i'rom black o s to boardrooms how businesses ather anal ze and use information to succeed in the lobal market lace new york: simon and schuster. maynard, r. (1993, september 12) managing your small business. nation's business. mckinnon, s. & burns, w. (1992). the information mosaic, boston: harvard business school press. moore, d. and buttner, h. (1997). women entre reneurs: movin be ond the lass ceilin . london: sage. navi atin throu h the gra zone. (1997). society of competitive intelligence professionals and the conference board's council on competitive intelligence. oster, s. (1994). modern corn etitive anal sis. new york: oxford university press. paine, l. (1991).corporate policy and the ethics of competitor intelligence gathering. journal of business ethics 10, 423-436. p(hlk,c.((996).c 9 i ( llg f h llg:(yh i h i .c~ 6 i 7(l) i)22. p, m. ()999).c~ii . n 7 k:i' 75 journal of small business strategy volume 9, no. 2 fall/jvinter /998 prescott, j. (1989). competitive intelligence: its role and function in organizations. in j.e. prescott (ed.), advances in com etitive intelli ence, va:scip. 9 ttt.ggg d (.g.(1995)a 3 f p 11 i itlg p i .c~ii ~hlg r i 6 (2) 4-14. prescott, j. /k gibbons, p. (eds.)(1993). global ers ectives on com etitive intelli ence, alexandria, va:scip. prescott, j. 8z smith, d. (1987). a project-based approach to competitive analysis. ~strate ic mana ement journal 8, 411-423. saphia-bosch, a. 8c tancer, r. (1998). navigating through the legal/ethical gray zone,. com etitive lntelli ence ma azine,22-31. smith, d. & prescott, j. (1987, sept -oct 8-13). demytifying competitive analysis. ~plannin review,. zajac, e. and bazerman, m. (1991). blind spots in industry and competitive analysis: 96 i f -tl ( )p 91 f gl d 11 .~ad f~mr 1,16,35.56. john e. prescott is professor of business administration at the katz school, university of pitisburgh. he received his ph.d. from penn state in sirategic management in /983. john 's research and teaching i nterests center on the field ofcompetitive intelligence and networkg. he developed and teaches the first academic course in competi ti ve intelligence. professor prescou has published widely in both academic and practitioner journals including academy of management journal, strategic management journal, management science, journal of international business studies, competitive intelligence review, journal of management, journal of management studies, harvard international review, british journal of management, the journal of business strategy. he is afounder, past president and meidtorious award winner of the society of competitive intelligence professionals. currently, he is the editor of the competitive intelligence review. professor prescott can be located at 4/2-648-/573 (phone) or prescott&akatz.business. iu.edu. cynthia e mireeis a ph d candidate in strategic management at the joseph m katz graduate school of business ai the university of pittsburgh. her research focuses on the competitive i nielligence process in organizations. specifically she explores ihe link between the strategic and tactical levels of the firm and how organizations can design their ci process to facilitate the coordination ofstrategic and tactical intelligence. 76 strategy small business brief strategic planning in smali. firms: activity and process realities carolyn b. mueller douglas w. naffziger ball state umversity abstract research on small firm planning has established that small firms plan and has generally indicated that planning has value. strategic plan content research often focuses on developing a wriaen plan. little research has focused on who engages in planning and who does not. this study investigated the relationship between individual and firm differences and ihe extent to which planning takes place in the firm. owner demographics such as education, age, and years in business, had liule relationship with planning activity levels whileftrm sales and number of employees were related to several planning activity measures. introduction prior to robinson and pearce's (1984) extensive literature review, research concerning strategic planning in small firms found planning levels to be "anemic" (sexton tk van auken, 1982). in response, robinson and pearce (1984) suggested four research thrusts for future investigation on the subject: (1)to empirically confirm the presence or absence of strategic planning practices; (2) to provide empirical evidence of the value of strategic planning; (3) to examine the appropriateness of specific features of the planning process; and (4) to empirically examine the content of the strategies of small firms. several studies have been published which have attempted to follow one or more of those prescriptions. however, researchers have generally not investigated the last two thrusts specific features of the planning process, and the content of small firm strategies. a more recent review of fourteen studies (shwenck tk shrader; 1993) concludes that strategic planning is positively related to performance, though there may be other variables which moderate that relationship. literature review research strongly supports the notion that many small firm owners do plan and set goals (lyles, baird, orris, tk kuratko, 1993;naffziger tk kuratko, 1991). further, studies generally confirm that the planning process has value (gaskill, van auken, bk manning, 1993; haswell gc holmes, 1989), that strategic planning is within the domain of managerial responsibilities, and is an important factor in small business success (montagno, kuratko, dt scarcella, 1986. 78 journal ofsmall business strategy vol. 10, no. i spring/summer l999 numerous authors (e.g., lyles et al., 1993; langley, 1988; orpen, 1985; robinson & pearce, 1984) have indicated that simply engaging in a formal planning process seems to be beneficial as it leads to a better understanding of the business, and that strategic planning leads to the development of a wider range of strategic alternatives which was hypothesized to lead to better firm performance (lyles et al., 1993). the most recent survey of the literature on small firm planning is schwenk and shrader (1993). their review of the literature, prior to their own analysis, showed 13 studies that found a positive relationship between formal strategic planning and financial performance and four which found a positive relationship between the content of the strategic plan and performance. additionally, though, shwenck and shrader found ten studies that concluded there is little or no relationship between strategic planning and financial performance. in the final analysis, however, schwenk and shrader concluded from their meta-analysis of 14 studies that they were "able to provide straightforward support for the general assertion that strategic planning does have a significant positive association with performance across studies" (1993:60). they concluded there is a need for longitudinal studies on the incremental impact of strategic planning and study of any contingent relationships between contextual factors, such as environmental uncertainty, and the impact of strategic planning. most recent research on the process of strategic planning in small firms seems to deal in generalities, using some measure of "formality" to define the strategic planning process (bracker & pearson, 1985; lyles et al., 1993; olson & bokor, 1995; robinson & pearce, 1983). several studies have investigated the impact of other factors on the strategic planning process in small firms, such as owner receptivity to the use of planning tools (pelham & clayson, 1988), models of strategic choice (variyam & kraybill, 1993), and the effect of perceived environmental uncertainty on planning (matthews & scott, 1995; shrader, mulford, & blackburn, 1989). naffziger and kuratko (1991)investigated the actual process of developing plans to determine how much time managers spent on this function, whether goals were set and in what areas, and what kind of activities were included in the planning process in small organizations, such as environmental scanning and level of planning activity. if we accept the general pmposition that planning has become more widespread throughout small firms (shown in several studies) and if we acknowledge that ditferences between individuals exist, then we should also accept the proposition that not all small business owners will plan in a similar fashion or to the same extent. individuals will allocate their time differently according to their strengths, personal preferences, and time constraints, among other factors. what activities and methods lead to effective planning and what may not? as planning has been shown to have a positive benefit, it is important to understand what factors might encourage or inhibit owners from engaging in more effective strategic planning activities. this research is a preliminary step in the process of determining what individual and firm differences are related to various levels of planning activities and behaviors. methodology an initial list of 60 small firms was compiled from various midwestern chambers'f commerce membership rosters. small firms were defined as having 500 or fewer employees. potential respondents were contacted via telephone and requested to participate in an ongoing university effort to study small businesses, their owners, and the planning processes used in their companies. 79 journal ofsmall business strategy vo/. 10, no. 1 spring/summer 1999 owners were informed that participation was voluntary and all responses would be kept confidential the final sample consisted of 46 (77%) small firm owners and top managers. firms included in the study were from a cross-section of industries: banking, automobile parts manufacturing, commercial sales, consumer sales, construction, miscellaneous manufacturing (e.g., plastics fabrication, metal fabrication), and miscellaneous services (e.g., insurance, education, advertising.) the final sample was distributed among 33 (71.7%) service and 13 (28.3%) manufacturing firms. graduate research assistants, trained in survey techniques, personally delivered and administered the surveys to participants to ensure receipt and completion. the above format has been utilized in similar studies of small lirms (e.g., homsby tk kuratko, 1990; mcevoy, 1984). data were gathered using a 44-item questionnaire. thirty-four items related to the strategic planning process in small firms, and focused on both the process and the content of the strategic plans. these items were developed based on the literature review of robinson and pearce (1984) and orpen (1985). respondents indicated whether an item pertained to their respective firm's planning process, such as whether or not goals were established as part of strategic planning using a "yes/no" format, or the extent to which certain activities were included in their planning. questions of the latter nature used a seven-point likert-type scale that ranged from (1) the item "not at all," to (4) "some but not a lot," to (7) "a great deal." ten items investigated the demographic characteristics of the respondents and their firms. for owner age and company annual sales, a range of five response categories was provided. frequency analysis was used to examine the demographic characteristics to determine if the sample was representative of small businesses in general to determine whether the demographic data was distributed over a broad range of possible responses (e.g., age, college versus noncollege graduate.) t-tests were used to determine the extent to which differences in planning activity and process levels were related to firm and owner characteristics. results the demographic profile of the sample is presented in table i. forty-two respondents (91.3%) were male, a finding somewhat higher than normal. subjects ranged in age from under 21 to 56 or more years; a little more than half (n=27, 58.7%) were over 45 years old. twenty-seven (63.0%)possessed college degrees. firms had been in business between 2 and 126 years, with a mean of 29.9years. only one (2.0%)firm had annual sales under $500,000, 14 (30%)between $ 1-5 million, 11 (24%) between $5-10 million, and 18 (39%) had sales of $ 10 million or more, with the median between $5-$ 10 million. the number of employees ranged from a low of six to a maximum of 500 (one firm), with an average of 96.5 employees; 25 (54.3%)firms employed fewer than 50 people. thirty-six (78.3%)respondents were members of trade associations. for the purpose of performing t-test analyses, firm and owner demographic variables were split as close to 50/50 as possible when appropriate. "years in business" was split at 20 or fewer (n=25, 54 3%) and 21 or more (21, 45.7%). "number of employees" was split at 50 or fewer(25, 54.3%) and more than ftay (21, 45.7%). categorical responses for "annual sales" were split at $ 10,000,000 or less (29, 63.3%)and more than $ 10,000,000 (17, 36.6%). categorical responses for owner age were split at 45 and under (19,41.3%)and 46 and over (27, 58.7%). "education" was split along the division of college graduate (27, 61.3%) or not (17, 38.7%), and "trade association membership" was simply member (36, 78.3%)or not (10, 21.7%). due to the small percentage of female respondents, gender was not included as one of the independent variables. &0 journal ofsmall business strategy vol. /0, no. l spring/summer l ppp table 2sample demographics item mean med. sldev n gcadcrr 46 100 male 42 91.3 female 4 87 ager 46 100 l. 35 end under 6 13.0 2. 36-4s 13 28.3 3.46-55 17 37.0 4. 56+ 10 21.7 concge graduate: 46 100 ycc 27 619 no lr sg7 years in buciaecct 29.9 20.0 29.1 46 100 5 or fewer 6 13.0 6 to 10 7 153 i i to 20 12 26.0 21+ 21 45.7 aaaual select 46 100 1.inst than $500,000 i 2.4 2. $500.001 to $ 1,000,000 0 0.0 3. $ 1,000,001 to $5,000,000 '16 34.1 4. $5,000,001 to $ 10,000,000 12 26.8 5. $ 10,000,000 + 17 36.6 number of employers: 965 478 115.0 46 100 few«r dum 20 2 4.3 20to50 23 50.0 5 i to 100 7 15.3 101 + 14 30.4 trade aceocietioa: 46 100 yct 36 783 no 10 21.7 planning activity variables eight items measured various planning activities, owners might engage in as part of the strategic planning process. t-tests were used to determine whether subjects included these activities differently according to personal or business demographic characteristics. the items included in this category were termed "planning activity measures" because they focused on "things that are done" during the strategic planning process such as hours per month spent on planning, number of methods used to gather strategic information, and the presence of a written mission statement. eleven out of 48 combinations of planning activity and demographic variables were identified as statistically significant (p & .l0). the two size variables, number of employees and annual sales, contained eight of those eleven, all of which were significant at the p = .05 level or lower. owner age and trade association membership possessed no significant relationships with any of the planning activity measures. planning process variables eight items also measured various aspects of the proces subjects used during strategic planning. this group of variables focused more on "how things were done" and included items such as the number of top managers involved, the number of information types used, and the use of reward 81 journal ofsmall business strategy vol. io, i/o. i spring/summer 1999 systems during planning. t-tests were again used to determine whether subjects approached the process of strategic planning differently according to personal or business characteristics. table 3 presents the results of that investigation. only eight statistically significant relationships (p & .i 0) were identified out of a possible 48. as with the planning activity measures, the number of employees in a finn had the most significant relationships with the planning process variables. table 2 means for planning activity measures variable item i 2 3 4 5 6 7 8 yrs. in business v 0-20 yrs. 9.3 4.9 3.5 3.8 1.5 4.9 2.7 1.3 20+ yrs. is.1 4.9 3.6 4.8 1.6 5.0 3.2 1.6 ¹ employees ~ ~ v ~ v v ~ v vv 0-50 9.8 49 3.0 3.8 1.8 4.0 2.8 1.6 50+ 14.1 5.5 4.1 4.7 ib 5.9 3.0 1.2 annual sales vv ~ v ~ &5 i omm 13.7 4.4 3.2 4.0 1.7 4.5 2.9 1.4 &8 iomm 10.7 6.0 4.1 4.7 id 5.4 2.9 1.4 vvv &.001 ' &.01 v &.05 variables i hours/month spent planning 2 4 of methods used to gaiher strategic info. 3 = ¹ of types strategic l%. gathered 4 extent of formalization using meetings 5 presence ofa written mission statement 6 = ¹ of goals set 7 4 of outcome measures used 8 = ¹ ofstrategic management concepts used table 3 means for planning process measures variable item i i 3 4 5 6 7 8 yrs.in business 0-20yrs. 3.2 3.3 0.7 0.6 0.4 1.0 4.2 3.1 20+yrs. 3.3 4.2 0.7 0.8 0.6 0.8 5.1 3.2 ¹ employees kv 0-50 2.7 3.7 0.6 0.5 0.5 0.9 4.3 2.8 so+ 3'.7 0.8 0.9 0.5 1.0 4.9 3.6 annual sales ~ * &$ 10mm 2.4 3.8 0.6 0.6 0.4 0.8 4.3 2.9 &$ 10mm 4.1 3.6 0.7 0.8 0.5 1.3 s.i 3.6 v ~ v &.001 vv &.01 v &.05 variables i s of top managenwnt people involved in process 2 lover level employees actively involved 3 plan communicated down to mtd-inset managers 4 plan communicaud down to supervisors s plan communtcamd down to hourly persomwl 6 4 of limes rrmt information is gathered 7 reward system used to gestae employee commlnnent 8 4 of types of rewards used to motivate 82 journal ofsmall business srraregy vol. 10, no. 1 spring/summer 1999 though not formally hypothesized, it was recognized that owner satisfaction with both the process and the results of strategic planning is an important concern. however, an examination of those items across the demographics revealed that the only statistically significant relationships regarding those variables were between years in business and satisfaction with the planning process (p = .025), and trade association membership and satisfaction with the results of the planning (p = .035). in other words, it appears that the longer a firm has been in business, the more satisfied its managers are with the planning process, and managers who are members of trade associations are more satisfied with the results of their planning than managers who are not. discussion and conclusions this research continued to verify that small firm owners spend a great deal of time and effort on strategic planning. while arguments can be made that certain demographic characteristics should be related more strongly to planning activities and process management, the findings here, in general, do not support that contention. results of the analyses suggest that these variables are somewhat evenly distributed through this population. primarily, the only firm or owner characteristics which were related to differences in planning dealt with fum size. the number of employees, a measure of size, was the only independent variable with a notable number of significant relationships. another measure of size, annual sales, was the second most prolific, with four significant relationships. though these results may substantiate the hypothesis that a relationship exists, care must be taken regarding causality. for example, questions remain whether larger firms plan more simply because they are larger and more complex. do they plan more because there are more dollars at risk? did they plan less when they were smaller? conversely, are those firms larger because they planned more? owners of firms with more employees, and to a lesser extent higher sales levels, reported performing more planning activities than did owners of smaller firms. the relatively small number of significantly strong relationships could lead to the conclusion that perhaps there are few important relationships between personal and/or business characteristics and strategic planning. however, it could be that all relevant individual and finn characteristics were not included. for example, no measures of individual time management or organizational skills were measured. significant differences in strategic planning among small firms may be due to other factors, such as an individual's tendency to be better organized or have a more participatory philosophy about managing a business. it is also possible that the measures included in this study are not an accurate picture of the process of strategic firm management. finally, a larger sample, allowing for a breakdown between industries, such as service, retail, and manufacturing, is recommended. additional research needs to be done before the relationship between owner and business characteristics and strategic planning can be fully understood. for example, intuitively it is attractive to think that college educated owners will place more value on planning, yet if their degrees were in non-business areas, their education would likely not have included a course on strategic planning. similarly, when considering owner age, one could argue two ways: younger owners may approach their firms more professionallybecause of their more recent education and focus on planning or exposure to media on managing entrepreneurially. on the other hand, an argument could be made that older owners have had the time to realize the value of planning and their businesses have grown to a size where it permits them the time and other resources to plan. additionally, one would like to think that owners who have taken time to join trade associations 83 journal ofsmall business strategy vol. jo, no. i spring/summer l999 would approach management in a more "professional" manner. it is, therefore, argued that the strategic planning process in small firms continues to merit study. additional questions to gain more insight into the "whys" and "wherefores" of small firm strategic planning need to be asked. future studies should investigate such issues as the value that owners realize by allocating time to strategic planning. an important direction for such questioning would look at how planning has helped. for example: ~ what differences do owners see in their firms or their own managerial capabilities as a result of planning? ~ has planning helped managers to more clearly see future trends? ~ which aspects of the process seem most helpful? ~ are managers in firms that plan better organized or caught off guard less often? ~ have they been able to be more proactive in their business? ~ do they see differences in their employees as a result of being involved in planning? ~ can they better identify business strengths and weaknesses or external opportunities and threats as a result of planning? ~ has planning helped to clarify goals and strategies better for employees? ~ have employees been more motivated as they become more involved in strategic planning or as they are rewarded for achieving strategically relevant targets? with those questions in mind it is recommended that further research be undertaken and this study be considered exploratory. perhaps at some point in time, a model can be developed which accurately delineates the entire strategic management process in small firms. while prescriptive in nature, such a model could undoubtedly be an asset in the strategic management process of small firms. references bracker, j. s. tk pearson, j. n. (1985). the impact of consultants on small firm strategic planning. journalofsmall business mana ement 23 3 23-30. curtis, d. a. (1983). strate ic lannin for smaller businesses, lexington, ma: lexington books. gaskill, l. r., van auken, h. e., 41 manning, r. a. (1993). a factor analytic study of the perceived causes of small business failure. journal of small business mana ement ~31 3 18-31. haswell, s. ec holmes, s. (1989). estimating the small business failure rate: a reappraisal journal of small business mana ement 27 3 68-74. hornsby, j. s. dt kuratko, d. f. (1990). human resource management in small businesses: critical issues for the 90s. journal of small business mana ement 28 3 9-18. kotey, b. tk meredith, g. g. (1997). relationships among owner/managers personal values, business strategies, and enterprise performance. journal of small businessm~35 2 37-64. langley, a. (1988). the roles of formal strategic planning. lon ran e plannin 21 3 40. lyles, m. a., baird, i. s., orris, j. b. tk kuratko, d. f. (1993). formalized planning in small business: increasing strategic choices. journal of small business mana ement 31 2 38-50. matthews, c. h. 4l scott, s. g. (1995).uncertainty and planning in small and entrepreneurial ffrms:anempiricalassessment. journalofsmallbusinessmana ement 33 3 34-52. &4 jownal ofsmall business strategy vol. 10, no. 1 spring/summer 1999 mcevoy, g. m. (1984). small business personnel practices. journal of small businessm~22 4 2.4. montagno, r. v., kuratko, d. f., tk scarcella, j. fl (1986).perception of entrepreneurial success charactefistics. american journal of small business 10 3 25-32. naffziger, d. w. 8t kuratko, d. f. (1991).an investigation into the prevalence of planning in small business. journal of business and entre reneurshi 3 2 99-110. olson, p. d. 81 bokor, d. w. (1995). strategy process-content interaction: effects on growth performancein small start-upfirms. journalof small businessmana emen 33 1 3444. orpen, c. (1985). the effects of long-range planning on small firm performance: a further examination. journal of sm il business mana emen 23 1 16-23. pelham, a. m. bt clayson, d. e. (1988). receptivity to strategic planning tools in small manufacturing firms. journalofsmallbusinessmana ement 26 1 43-50. peterson, r. a., kometzky, g., dt ridgway, n. m. (1983). perceived causes of small business failure: a research note. american journal of small business 8 1 15-19. robinson, r. b. (1982).the importance of 'outsiders'n small firm strategic planning. a~eadem of mana ement journal 25 1 80-93. robinson, r. b, bt pearce, j. a. (1983). measures for small firm effectiveness for strategic planning research. journal of small business mana emen 21 2 22-29. robinson, r. b. kk pearce, j. a. (1984). research thrusts in small firm strategic planning. academ of mana ement journal 9 1 128-137. schwenk, c. r. 8t shrader, c. b. (1993)effects of formal planning on financial performance in small firms: a meta-analysis. entre reneurshi: theo and practice 17 3 53-65. sexton, d. l. 8t van auken, p. m. (1982). prevalence of strategic planning in small business. journal of small business mana emen 20 3 20-26. shrader, c. b., mulford, c. l., tk blackburn, v. l. (1989).strategic and operational planning, uncertainty, and performance in small firms. journal of small business mana emen 2~73 45-60. variyam. j. n. tk kraybill, d. s. (1993).small firms'hoice of business strategies. southern economics journal 60 i 136-145. carolyn b. mueller received her ph.d. in strategic management and international business pom the university of south carolina in 1994. her research interests include corporate restructuring, social responsibility, and various aspects ofinternational strategic management. she taught at ball state university pom 1994 to 1999 and will begin teaching at stetson university in the fall, 1999. douglas jv. naffzlger received hts d.b.a.pom the university of colorado in 1983. he has taught in the entrepreneurship program at ball state university since 1990. his research interests include strategic planning in small firms and entreprenewial ethi cs and motivation. he has papers published in journal of small business strategy, entreprenewship: theory and practice, journal ofsmall business management, journal ofbusiness and entrepreneurshi p and other relatedjournals. he has held numerous posts in usasbe and is a past president of the great lakes sblda organization. 85 the status of computerized accounting software in small american businesses michael broida dainese flora miami university (ohio) abstract a telephone survey of 123 companiesin the cincinnati smsa with 30 or less employees was taken for the purpose of determining the extent of computerization, the level ofinterest in accounting software, and the type of computerized accounting system selected for use. we were also interested in the method of selection and level of utilization of computerized accounting software. the types of accounting software are classfffed as the off-the-shelf nonmodifiable, off-the-shelf modifiable, and custom designed. this paper will examine how the companies chose their present system, how their employees were trained on that system, and the extent to which the accounting function of smaller companies is now computerized. the reality of the system vs. expectations and the level of utilization of the system will also be examined. the data will be tabulated so that trends can be identified. the result is that our body of knorvledge about accounting software usage of small companies will be increased. introduction according to a 1986 article in pc magazine, more than half of the businesses with fewer than 100 employees owned a pc or planned to buy one within the next three years (1). the first software bought by a smaller business was most often an accounting package. a recent survey of ohio cpas revealed that 50% of their clients bought their accounting software without first performing an adequate analysis of the business owner's needs (2). this survey also found that nearly 40% of these software packages will remain unused by the purchaser; that they will be set 'aside after the first attempt to implement them (3;c little research has been done dealing with how businesses choose their accounting software. relatively few published reports investigate the small business. few published reports indicate how small firms orchestrate the change from a manual to a computerized bookkeeping/accounting system. finding how the small firms attempt to implement this changeover is also of interest. this paper will deal with how small firms are handling the computerization of the accounting area. our sample consists of companies of 30 or fewer employees located in the cincinnati smsa (4). a serial sample with a random starting point was selected from a directory of all but the most recent companies in this geographical area. 44 background for a small business, the purchase of a computer and software is a major capital expenditure. failure to use that system, or ineffective use of that system results in a costly waste of the company's time and resources. an ineffective or unused system can also lead to high levels of frustration among owners, managers, and involved employees. a small business needs to be informed of the potential advantages as well as the potential pitfalls in choosing an accounting system. the small companies do not have the benefit of a management information systems department, nor do they have a consulting relationship that could lead to the purchase of or design of a system tailored specifically to their needs. consequently, they often "make do" with off-the-shelf softrvare. some smaller size firms have a bookkeeper. the duties of the bookkeeper included invoicing, timecards, and payments to vendors. the bookkeeper usually generated the routine general ledger and general journal entries. the activities of the bookkeeper are usually converted from manual to computer entry. most often an outside accountant or accounting firm was hired on a periodic basis to deal with the areas of tax including state tax and worker's compensation, inventory costing, fixed asset depreciation, and preparation of income statements and/or balance sheets. the outside accountants had software to help them serve their small business clients, but these outside accountants and their lob-related softrvare was not the focus of this study. twenty-one of 63 (33'/v) ccompanies report having an in-house accountant, while 62 of 68 (91'/o) report having an in-house bookkeeper. for the purpose of this study, the term "accounting software" will apply to all systems that allow computerization of the bookkeeping function. accounting software packages for small businesses can be purchased for under $30. the lower price range packages are nonmodifiable. at higher prices, modifiable packages are available. both types offer a large number of features. choosing s'oftware is extremely difficult. each vendor tries to sell packages he carries. since most small businessmen are without expertise in this area, the purchaser is, in many ways, at the mercy of the vendor. small business owners have difficulty knorving what type of package he needs. one visible attribute that the software has is price. a small businessman may have a dollar figure in mind before buying his software. in fact, two of three vendors interviewed, baldwin and donner, stated that price was the most important factor to small businessmen. parker added that service was another important factor. all three agreed that the availability of training was also a consideration (5). accountants who use a software package sometimes make recommendations to their clients or friends about accounting softrvare. no evidence exists that these accounting firms are knowledgeable about a wide variety of packages, nor that they know of good packages matching the softrvare's functions to the small business'eeds. generally speaking, an accounting firm should not be used as a consultant to the small businessperson seeking a softrvare package. accounting firms need software that is effective in the consolidation of records into balance sheets and income statements. in these functions the compilation process itself is paramount. however, the small business need might be for an accounts receivable module that would handle a certain volume of receivables and/or they might need an inventory module that could effectively handle frequent inventory changes. a manufacturing firm would use many inputs (accounts payable) to generate a relatively small number of finished products (accounts receivable) and rvould, therefore, want to put emphasis on accounts payable and vendor information portions of a package. 45 an idea that has merit is to seek information from similar companies that have made a successful implemntation of an accounting software package. if a company is able to receive "network" information of this type, decision making becomes much easier. in fact, studies of small business incubators show that the exchange of information among tledgling companies is the single most important factor in the eventual success of a company. the chance of similar firms exchanging information is unlikely unless the industry has frequent seminars and conferences, so that similar (and noncompetitive) companies can interact. unlike spreadsheet and word processing programs, low to moderately priced off-the-shelf accounting packages often have no supporting training classes available. a manual is provided for each software module. an often confusing tutorial is also included. some vendors offer training on selected packages, either from one of the vendor's employees or from an accountant familiar with their package. the small business'ccountant is sometimes familiar with the package. in this case the accountant may assist in the training. survey methods population: our survey sample was selected from companies reported to have 30 or less employees according to a virtually complete directory of companies in the cincinnati smsa. companies with more reported employees were not included in the sample. the sample was chosen by serial selection within this directory. the group included retail, wholesale, manufacturing, and service companies. methodology each member of the sample was sent a letter explaining the study, and informing them that they would soon receive a telephone call from a member of the research team. the survey was conducted by telephone with the business owner or with a subordinate delegated by the owner to talk with us. as stated, 101 of 123 companies provided the requested information. the telephone survey was chosen rather than a mailing because we were seeking to accumulate opinions and ideas as well as "facts." a telephone interview allows the interviewer to motivate the respondent to answer open-ended questions. rewording can be used if the question is not completely understood by the respondent. likewise, the respondent can ask the interviewer to clarify a question. also, we felt certain that a mailed interview form, while reaching a larger sample, would have resulted in a much higher non-response rate. the results twenty-two of the firms did not respond. of the remainder, 23 had no computer, and 23 additional had a computer but did not have computerized accounting software. among those who had computerized accounting software, 14 had their software custom designed, 10 had off-the-shelf but modifiable, and 14 had purchased off-the-shelf nonmodifiable. the others could not identify the type of accounting software they owned. of 23 firms without a computer, nine had plans for the acquisition of a computer and accounting software. fourteen of 23 owners of companies that had a computer but no accounting software said that they had firm plans to implement computerized accounting. 46 table 1. data tabulation type of company number percent retail 8 8% wholesale 9 9% service 32 32% manufacturing 41 41% other 10 10% unidentified 1 1% 101 average number of office employees by category mean range all companies 6.2 1-25 companies with accounting software 6.4 1-25 companies with computer 6.2 1-25 average number of total employees by category mean range all companies 19.8 3-50 companies with accounting software 21.2 4-45 companies with computer 19.8 3-50 response by computer/software availability number percentage companies with computer 78 78% companies with accounting software 56 56% companies planning purchase of accounting software 23 23% respondents by type of accounting software number percentage custom designed 13 34% modifiable 10 26% non-modifiable 14 37% lotus *1 3% *this firm has subsequently been classified as having a computer but not having accounting software. 47 the five survey forms were for: ~ firms that had no computer ~ firms that did have a computer, but no accounting package. ~ companies that now own an off-the-shelf package of the nonmodifiable variety. ~ firms who are now using an off-the-shelf modifiable type (the third and fourth were similar). ~ companies that owned a customized accounting or an industry specific package. table 1 shows the characteristics of the sample. note that 78 of the 101 companies reported having a computer available. fifty-six of the 101 companies claim to having an accounting software package. the average size of the companies was 19.8 employees, with an average of 6.3 "office" employees. table 2. functions performed by accountinq system (companies that owned computerized accounting system) number percent responding affirmative functions performed accounts receivable 46 96% accounts payable 46 93% general ledger 46 87% inventory 46 46% fixed assets 46 32% invoicing 46 52% payroll 46 33% income statement/balance sheet 46 33% general tax information 46 26% job cost '16 25% office management function '16 6% "based on preliminary sample of 29 only reported rate of implementation 100% utilization 8 44% 75%-99% utilization 6 33% 50%-74% utilization 3 17% under 50% utilization 1 6% (mean percentage reported rate of implementation: 8 i%) companies planning to purchase accounting software the sample indicated that small companies are equally divided as to which type of accounting software they purchased. companies with customized software or custom designed software indicated that they had either surveyed the market for off-the-shelf merchandise without finding a suitable package or they felt that no oft-the-shelf software program would meet their needs. 48 responses to questions on how the change from a manual to a computerized accounting system affected their jobs were too varied to summarize. the respondents most frequently cited increased accuracy and time savings as the most beneficial outcomes of the conversion. few companies indicated a reduction in personnel due to a new system. no other generalizations can be made at present. among the companies that had a computerized accounting system long enough to have an opinion as to its impact, 19% said that the computerized system exceeded their expectations. the largest group, 73%, said it met their expectations. only 8% indicated disappointment. we did not attempt to measure expectations prior to the purchase of the accounting package. expectations could have been low prior to the implementation of the computerized accounting. owners of companies that did not yet have accounting software, but planned to purchase one, did consider the functions they wished performed. these are summarized in table 3. table 3. functions desired by companies intending to buy software percent function number affirmative accounts receivable 18 93% accounts payable 18 89% general ledger 18 82% inventory 18 71% fixed assets 18 36% invoicing 18 61% payroll 18 64% income statement/balance sheet 18 50% general tax information 18 39% job cost *7 14% *based upon preliminary sample only. table 3 strongly suggests that the expectations of companies planning to buy software is not particularly different than those with working systems. no statistical test was used to support or draw inferential conclusions. even with a sample of over 100, which lead to 26 responses, little or no pattern can be seen, except that small business persons do not seem to seek out advice from people at similar companies (possible competitors) and that they do seem to be influenced by the'actual software vendors. it seems that virtually every avenue of advice is used by at least some of those who made a recent software decision. 49 table 4. methods of choosing a system number of percent reason respondents affirmative advice from a friend 26 b% advice from mis consultant 26 19% advice from software vendor 26 35% advice from person at similar company 26 0% advice from accountant '6 15% did own research 26 11 /0 one question that was not included was whether the software was the same as that used by the decision maker's former position. some managers and owners seem to buy the same software they know or learned about in their previous position. in future samples, this question will be added. business owners anticipating a change to computerized systems expect the system to make more information readily available, to decrease workloads, to increase efficiency, to eliminate some tasks, and to improve accuracy. the objectives seem realistic. a good question to ask owners of firms that are computerized would be "what percentage of your expectations or goals were met after computerization?" table 5". expected method of changeover manual to computerized 'ethod number . ,training of present employee only '6 'irepre-trained employee only 1 combine present and new employee 1 extra workload 1 parallel run 3 * this table based on preliminary sample of 29 companies although the sample used in table 5 is small, it suggests that companies with between 20 and 50 employees have expectations that current employees will "retrain" and will be the users of the new accounting system. we assume that the business owner expects to provide some training. another follow-up question not asked is "how long does it take to have the software "up and running" compared to the projected or budgeted time?" 50 concluding comments the study is in many ways preliminary in nature. the sample of slightly over 100 firms shows a rate of computerization and a rate of usage of accounting software somewhat higher than suggested in literature, which indicates that companies are still in the process of becoming computerized. we found that many firms want accounts receivable, accounts payable, and general ledger packages or features; after that the results are a bit variable. companies that do not yet have computers or companies that have computers but do not yet have accounting software plan to have packages in a similar profile to those companies that have accounting software. in terms of number of employees and in terms of number of office employees, the companies with and without computers match up very well. more research is planned along the line of type of business vs. level of computerization. references i. runndgren, charles e., "accounts affordable," pc world, may 1986, pp. 217-224. 2. seymour, jim, "analyzing your options," pc magazine, september 15, 1987, pp. 91-95. 3. ibid. 4. many firms had changed in size since the publication of the report used to select the companies. in fact, 11 of the 101 firms were of size 30-50 employees at the time of the interview. 5. interviews with chuck baldwin, chuck's software shop, union, ky; mark downer, software warehouse, cincinnati; susan parker, scot business systems, cincinnati. batcha, b., cusack, s., lawson, r., needle, s. "accounting and financial systems: spotlight," computerworld, july 15, 1987, pp. 46-51. bryan, shawn, "numbers gain new meaning," computerworid, july 15, 1987, pp. sl-s2. converse, jean m., survey research. berkeley: university of california press, 1987. donaghy, william. the interview: skills and applications. illinois: scott, foresman and company, 1984. lockhard, daniel c. making effective use of mailed questionnaires. san francisco: josseybass, inc., 1984. namboodiri, n.k. survey sampling and measurement. new york: academic press, 1978. orlich, donald c. designing sensible surveys. new york: redgrave, 1978. schaeffer, r. l., w. mendenhall, and l. ott. elementary survey sampling, 2nd ed., massachusetts: duxbury press, 1979. 51 management policy in franchising operations: a preliminary study chun-cheong wan robert t. justis paul busch louisiana state university abstract during the past few decades franchising has emerged as one of the fastest growing methods of doing business in the world. this article investigates the concept of climate in franchising stores and how that relates to the stores'erformance. worl context, participation and workgroup were identified as important climate factors influencing store performance.'roper management of the work climate should enhance franchise store performance. introduction for years, the relationship between organizational climate and human behavior has been one of the focal areas of management research because human behavior has a strong effect on organizational performance. glick indicated that the study of organizational climate and its impact, on motivation and leadership would influence the development of management theory in the future (4). obviously, organizational climate is a useful managerial tool to diagnose employees'erceptions of the work environment and its relationship with other organizational variables..however, past research on climate has mainly taken place in large business or public organizations. the concept of climate has rarely been applied in small-scaled business operations. the major objective of this paper is to explore the concept of climate and its relationship with performance in small-scaled franchising stores. also, the implications of this relationship for management policy are discussed. background the importance of perception of the work environment to organizational behavior and performance has been emphasized in past decades. generally, the perception of the work environment is referred to as the climate of the work setting. organizational climate is a global concept. lt embraces almost all organizational variables and characteristics of both physical and non-physical nature. litwin and stringer defined organizational climate as a set of measurable properties of the work environment, perceived directly or indirectly by the people who work in this environment (10). the perceived situation is considered of greater effect than what is objectively the case (1). 52 climate is significantly related to many organizational variables, including motivation (10), communication (11), job satisfaction (7; 9; 14), client satisfaction (13), and performance (6; 7; 14). also, dastmalchian suggested that the design of appropriate climate and structure in response to environmental pressures may be considered as complementary strategies in management (2). there are three different levels identified in the measurement of organizational climate. they are based on different units of analysis, namely, individual, group or subunit, and organization. however, it is clear that the construct of climate measurement is intrinsically psychological, i.e., on an individual level (6). other levels of analysis are merely aggregations of individual scores. subunit climate is the aggregate result of individuals'limate perceptions within the subunit. similarly, organizational climate is deemed as the aggregate results of individuals'limate perceptions within the organization. subunit climate allows researchers to look into the management issues at subunit level while organizational climate is investigated if organizational attributes are of interest (3). that means, the level of aggregation depends on the nature of research. aggregate climate is more appropriate than organizational climate in organizational research because multiple climates exist in an organization (3, 15). in other words, people working in different divisions of an organization may experience different climates. this would be due to different settings and/or different perceptions. therefore, the more divisions an organization has, the m're diverse subunit climates may be. hypotheses the subjects of this study were outlets of a franchising chain. in general, franchising operations are characterized by a large number'of outlets which are operated by different franchisees or store managers. there are, however, centralized policies, standardized training and consistent product quality control. because there is no past research addressing climate measured at store level, we suggest a proposition: multiple climates exist at the store level, i.e., individual stores are not of the same climate. from the previous discussion on climate, if multiple store climates exist, we hypothesize: there is a significant relationship between store climates and performance. usually, franchisors emphasize franchisee-employee and employee-customer relationships because such relationships are crucial to the success of the business. justis and judd highlighted that employees'ttitudes are very important to customer satisfaction and the perceived quality of the business (b). also, they indicated that "from the employee's perspective, the franchiseeemployee relationship revolves around sufficient training, pay, and incentives." this encourages us to formulate our second and last hypothesis: the climate factor concerning rervards and organizational characteristics has more impact on store performance than other climate factors. method sample data for this study were collected within outlets or stores of a national fast-food franchising chain. the corporate headquarters classified sales performance of stores into three categories —high, medium and low. twenty stores of each performance category, i.e., a total of sixty stores, were selected. for each store, ten employees were invited to participate in the 53 study. only stores from which more than 4 valid responses were received were included in the analysis. therefore, the final sample was made up of 270 respondents from 52 stores of which 19 were rated high, 16 medium, and 17 low in performance, respectively. measurement of climate major instruments used in past research on organizational climate were reviewed. litwin and stringer proposed nine a priori climate scales, namely, structure, responsibiility, reward, risk, warmth, support, standard, conflict and identity (10). jones and james developed a psychological climate questionnaire consisting of thirty-five a priori composites which could be grouped into four categories, namely, job and role characteristics, characteristics of leadership, workgroup characteristics, and subsystem and organizational characteristics (6). joyce and slocum found that there were six climate dimensions by factor analysis (7). these dimensions were rewards, autonomy, motivation to achieve, management insensitivity, closeness of supervision, and peer relations. after reviewing the aforementioned measures and considering the sample for this study, which was made up of employees in the fast-food industry with limited work space and spare time, a simplified climate questionnaire was designed. there were 16 items, describing the following work environment related variables: structure, rewards, peer relations, decision making, commitment, responsibility, expression of opinion, grievance handling, support, delegation, participation, innovation, work environment, standard, rules and communication hindrance. the detail of each item is shown in appendix 1. responses were measured by 7-point likert scales. factor analysis with varimax rotation was used and four factors were derived. the explained variance was 52.2%. the score of each climate factor was then calculated by taking the mean of the scores of items comprising the factor. the internal consistency reliability of each factor was estimated by coefficient alpha. the factor structure and the reliabilities of respective factors are shown in table 1. the four derived factors are: (1) work context (5 items): the way in which respondents perceive the structure, the reward system, the work environment, and the expected standard of performance of the organization; (2) workgroup (4 items): the way in which respondents perceive the attitudes of coworkers; (3) participation (4 items): the way in which respondents perceive the attitudes of the organization toward their opinion; and (4) autonomy (3 items): the way in which respondents perceive the opportunity to work independently and the possible problems encountered when working independently. all factors are of acceptable reliability except the last one. the coefficient alpha of autonomy was only .21. it is too low even for an explored factor (12). 54 table 1. factor structure of climate (only factor loadings above .40 are shown below) factor factor factor factor 1 2 3 4 structure .75 rewards .78 peer relations .59 decision making .46 commitment .81 responsibility .73 expression of opinion .49 grievance handling .78 support .68 delegation .42 participation .42 .44 innovation .59 work environment .57 .44 standard .64 rules .57 communication hindrance .70 eigenvalue 4.75 1.28 1.20 1.12 variance (88) 29.7 8.0 7.5 7.0 coeff. alpha .70 .75 .59 .21 results formation of store climates store climate factors were determined using multivariate and univariate analyses of variance. these analyses help assess the power of differentiation of climates between stores. only factors of significant differences among stores will be considered for further analysis. these results are shown in table 2. table 2. verification of store climate factors climate factor d.f. f p multivariate: 204,1234 1.747 .000 univariate: 51,313 work context 2.670 .000 workgroup 2.705 .000 participation 1.579 .011 autonomy 1.399 .046 55 according to the levels of significance found in the analyses of variance, all factors are acceptable for cross-store analysis. this supports our proposition that multiple climates exist at store level. in other words, stores are operated under different climates. however, the factor "autonomy" was dropped from further analysis because of the low reliability (.21). ~ pearson correlation and multiple regression were used to test the hypotheses in the study. the pearson correlations between store performance and climate factors are shown in table 3. table 3. pearson correlations between store performance and climate factors 1 2 3 1. work context 2. workgroup .68** 3. participation .58** .45** 4. store performance .30* .13 .24* * p & .05; ** p & .01 there was no evidence to reject the first hypothesis that there is a significant relationship between store climates and performance. two climate factors were found to be significantly correlated with performance. these two factors are work context and participation. there was no significant correlation between performance and workgroup. this indicates that store performance is associated with how the corporation designs the organization and how management deals with employees'pinions. on the other hand, the attitudes of coworkers do not affect store performance. in the multiple regression analysis, store performance was taken as the dependent variable and three climate factors as independent variables. the result of the analysis is shown in table 4. the result shows that only work context is significant in the regression model. the other two factors, which seem to be more human oriented, were not iound significant here. work context concerns the structure and the reward system of the organization. it is obvious that the second hypothesis cannot be rejected. climate factor concerning rewards and organizational characteristics, i.e., work context in this study, have more impact on store performance than other climate factors. table 4. multiple regression of climate factors on store performance beta dependent variable: store pertormance independent variable: work context .303 (p&.05) workgroup -.138 (n.s.) participation .098 (n.s.) r-square = .092 f = 5.06 (p ( .05) 56 discussion this study shows that the concept of climate can be applied to the store level, i.e. the frontier business line, of the franchising operations. three reliable climate factors were identified. these factors are work context, workgroup and participation. work context and participation were found correlated with store performance. moreover, work context was considered to have greater impact on store performance than the other climate factors. it is understandable that workgroup was not correlated to store performance because franchising operations rely more on process and product quality control than labor. therefore, peer relations and committed workforce have less impact than structure and system on store performance in this study. it is suggested that the management of franchising operations establish a clear structure and a fair reward system in the franchise system. but more important is giving'employees in the stores a clear explanation of the management practices in the system because employees'erceptions and reactions are very crucial to the success of the business. franchisees oi managers of stores should assume their roles as information conveyors. failure'to convey the information from the system to employees biases employees'erceptions of, their work environment. the result can be disastrous. therefore, franchisees or store managers'are riot only required to be good quality controllers, but also good coworkers who share information with employees promptly and correctly, and who are willing to accept employees'articipation in store management. the simplified instrument used in this study restricted the involvement of other organizational or psychological variables in the analysis. in future study, consideration of other variables in climate-performance relationship would generate more insights into store management. also, replication of the present study in other franchising operations for generalization of results is encouraged. references 1. campbell, j. p., dunnette, m. d., lawler, e. e., iii and weick, k. e., jr., managerial behavior, performance, and effectiveness, (new york: mcgraw-hill, 1970). 2. dastmalchian, a., "environmental characteristics and organizational climate: an exploratory study," journal of management studies, vol. 23, no. 6, 1986, pp. 609-633. 3. hodgetts, r. m. management: theory, process, and practices, (4th ed.), (orlando, fl: academic press, 1986). 4. glick, w. h., "conceptualization and measuring organizational and psychological climate: pitfalls in multilevel research," academy of management review, vol. 10, 1985, pp. 601-616. 5. james, l. r., "aggregation bias in estimates of perceptual agreement," journal of applied psychology, vol. 67, 1982, pp. 219-229. 6. jones, a. p. and james, l. r., "psychological climate: dimensions and relationships of individual and aggregate work environment perception," organizational behavior and human performance, vol. 23, 1979, pp. 201-250. 57 7. joyce, w. f. and slocum, j. w., jr., "collective climate: agreement as a bias for defining aggregate climates in organizations," academy of management journal, vol. 27, 1984, pp. 721-742. 8. justis, r. and judd, r., franchising, (cincinnati, ohio: south-western, 1989). 9. lafollette, w. r. and sims, h. p., jr., "is satisfaction redundant with organizational climate?", organizational behavior and human performance, vol. 13, 1975, pp. 257-278. 10. litwin, g. h. and stringer, r., motivation and organizational climate. (cambridge: harvard university, 1968). 11. muchinsky, p. m., "organizational communication relationship to organizational climate and job satisfaction," academy of management journal, vol. 20, 1977, pp. 592-607. 12. nunnally, j. c., psychometric theory, (new york: mcgraw-hill, 1978). 13. o'driscoll, m. p. and evans, r., "organizational factors and perceptions of climate in three psychiatric units," human relations, vol. 41, 1988, pp. 371-388. 14. pritchard, r. d. and karasick, b. w., "the effects of organizational climate on managerial job performance and job satisfaction," organizational behavior and human performance, vol. 9, 1973, pp. 126-146. 15. schneider, b., "organizational climates: an essay," personnel psychology, vol. 28, 1975, pp. 447-479. appendix i description of climate itf.ms 1. structure: the organizational structure is clear and the job is well defined. 2. rewards: my organization emphasizes capability and performance, and has a fair reward and promotion system. 3. peer relations: relationship between people inside my organization is good and the working atmosphere is harmonious. 4. decision making: my organization prefers making decisions smoothly and quickly to having too many different opinions. 5. commitment: employees are loyal to the company, have a sense of belonging and are willing to strive for the organization's objectives. 6. responsibility: people working inside my organization have a sense of responsibility at their work. 7. expression of opinion: my organization emphasizes personal feelings and encourages expression of opinion. 8. grievance handling; grievances are handled in an unbiased manner by the management. 9. support: employees are well developed in their jobs and receive trust and support in their work. 10. delegation: my organization has a clear delegation and encourages employees to work independently. 58 11. participation: employees are given an opportunity to participate in decisions that affect them. 12. innovation: my organization is aggressive and willing to take a risk with new ideas. 13. work environment: the working environment is good and comfortable. 14. standard: my organization demands a high standard of performance. 15. rules: there are many regulations and rules, even red-tape, in carrying out a task. 16. communication hindrance: communication between superior and subordinates is not encouraged. 59 sikimcy table of contents i developing a nornuuire fnunework to assesssmell-firm entry strmegiesr a resource. based jrtew lori c. maruso bradley university laurence g. weinzimmer bradley university is top management international orientation and small business exporting performances the moderating roles of export market r industry factors franz t. lohrke university of south florida geralyn mcclure franklin university of texas of the permian basin vinay b. kothari stephen f. austin state university 2s conventional strategy frameworks and their applicability to smesr lessons from a case study khai sheang lee national university of singapore guan hua lim national university of singapore soo jiuan tan national university of singapore ei business service firms and market share timothy l. wilson clwion university barb ro an el i umek university, sweden s4 the lmge former store vs. "mom and pop "r is suburbia a model for the inner city 7 marilyn lavin university of wisconsin —whitewater small business briefs: 70 yyhy you should join the small business institute dimctors'associarion (sbidai ronald g. cook rider university v. p. marketing tk membership, sbida 73 one stop capital shop: providing assistance for inner-city small businesses michael c. elkin sba program manager, oakland one stop capital shop 78 strruegic planning in small arms: activity and process realities carolyn b. mueller ball state university douglas w. naffziger ball state university 86 petceptions ofand responses to environments/economic incentive prograrmr an industry compmison for small and media~ized companies margaret m. tanner westminster college 9s book review: strategic planning for iuew r emerging businesses; a consulting approach by fred l. fry, charles r. stoner, dt laurence g. weinzimmer reviewed by: justin g. longcnecker sttc4 tegy noteworthy news prashanth nagendra, stephen osborne &r joette wisnieski indiana university of pennsylvania newbridge capital, a san francisco investment firm was interested in forming a joint venture with north dragon iron and steel works —the only problem was that north dragon had 12 subsidiaries with outdated accountingpractices. sounds like a problem fora consulting firm but that's not what this company chose to do. instead they hired a group of mba students from the walter a. haas school of business at the university of california, berkeley. the result was a 90-page report which broke down production costs for each subsidiary alerting the firm about some potential problems. this was just one of the many stories featured in a recent article in forbes entitled, "mckinsey 101"about the active role business schools have taken to provide their students with real-life business consultancy experiences. many business schools are recognizing the value that a hands-on experience can add to an mba program and its importance in attracting the best students to their institutions. one school taking the lead in this area is the university of pennsylvania. during this year, wharton will have 144 teams of students in the field with clients as diverse as general instrument to britain's imperial chemical industries. and, according to past b-school clients, there are few differences between professional consultants and the student consultants. student consultants are tackling a wide range of projects from researching joint ventures to international marketing plans to new product development and are achieving satisfactory results at much less cost. b-schools currently charge anywhere from "expenses only" to up to $25,000 (haynes &. setton, 1998). while "business school students consulting for real businesses" may have been newsworthy to forbes and its readership, this is pretty common stult for most small business institute directors. the forbes article suggests that over 700 business schools are jumping on the bandwagon by providing real-life consultancy experiences for their mba students, something sbi directors initiated over 20 years ago. however, business school consultancy is not limited to large clients. since 1972, the sbi program has helped over 150,000 with business planning, growth issues, cash flow management, strategic issues including advice on how to market internationally and many other projects one such example is kane manufacturing's story featured in an fnc. article. donna kane believed there was a market for her livestock products in europe and a 5-member student team from 64 journal ofsmall business strategy volume 9, //o. l spring /998 drake university operating under the sbi program provided a report that outlined the obstacles kane manufacturing would face in this new market (greco. 1993). the need for small business consultants is very real. while on the surface a mom-and-pop grocery store may not seem to have much in common with a small manufacturing firm, many small businesses have very similar needs. with few employees, owner/managers have no one to bounce ideas off or assign projects. also, small businesses can't justify hiring many permanent employees (rosso, 1993). student consultants can provide these services by working on projects covering a variety of business areas. and how do business students measure up to professional consultants? according to the articles in forbes and /nc., student consultants are able to get the job done. students bring a lot to the table. student consultants have access to business faculty in a number of fields, not just business, to assist with the project. professional consultants often have a favored bag of tricks to bring to the client whereas students have fewer preconceived notions of what will work best. also, students are interested in finishing the project within a semester and not expanding it beyond the original specifications. employees otten tend to be more open with students than professional consultants. students are oren much better at dredging information from the internet. finally, there is no doubt that the low price tag appeals to clients, especially small business clients who cannot afford huge consulting bills (greco, 1993; haynes 4 setton, 1998). as for kane manufacturing, its exports were grown to 33'/b of sales and it commissioned a second sbi study looking at brazil as a possible site (greco, 1993). the consultant business is booming. total industry revenues for business consulting grew by 17'/b to about $73 billion in 1997, according to the kennedy research group. with positive results for both students and businesses, business school consulting and the sbi will continue to provide a valuable service to the american economy. references greco, s. (1993).first-class export help. inc. 15 (10), p. 30. haynes, p. /k setton, d. (1998).mckinsey 101. forbes may 4, p. 130-135. r .c l)993) c i rc iii i ' iib i .0 i 9 61 lg) 9.)6. 65 proud to honor outstanding achievement! john kerr lynn hoffman florida state university university of northern 1997 fellow colorado 1997 fellow lowell salter leo simpson harriet university of east washington stephenson north florida university seattle university 1997 mentor 1997 mentor 1997 mentor award award award we'e singing the praises of five over the life of their careers, these individuals who have made on-going new fellow inductees have made contributions to the field of small significant contributions to our business and entrepreneurship and to the understanding of small business. continued development of the small business institute™program. lowell salter, leo simpson, and harriet stephenson were recognized as john kerr, and lynn hoffman were 1997 mentors for their outstanding inducted into the exclusive ranks of guidance to other sbi programs and sbida fellows during the 1998 sbida directors. conference in santa fe, new mexico. no more than two individuals may be all five deserve our thanks and inducted in any one year. admiration. i ~ small business institute 1998 fellows and mentor awards directors'ssociation wouldn't you and sbida be a perfect professional fit? yes ...ifyou have a strong interest in the growth and prosperity of small. entrepreneurial, and family-owned businesses. yes ...ifyou believe that collegiate business management education is strengthened by experiential learning opportunities. yes ...ifyour academic program, small business institute, sbdc, or management assistance center strives to give small business and entrepreneurship issues equal exposure to those of large business. yes ...ifyou have a strong interest in small business consulting and/or small business case writing. our publications and regional and national conferences explore issues, trends, and managerial training for small, entrepreneurial, and family-owned businesses. student development is encouraged and supported through our small business institute 'rogram, the preeminent small business iield case consulting program in the united states. for membership information contact: ronald cook shida vp-marketing & membership rider university 2083 lawrenceville rd. lawrenceville. nj 08648 voice: (609) 895-ss22: fax: (609) 896-s304 e-mail: cookr coi rider.edu 1998 dues: us, $ 100.00:international. $ 125.00 small business institute 199$ membership directors'ssociation reproduced with permission of the copyright owner. further reproduction prohibited without permission. errata anonymous journal of small business strategy; fall 2007/winter 2008; 18, 2; abi/inform complete pg. 105 errata in volume 17-1, the article by mitchell and cohen had a significant error in that we inadvertently omitted a portion of a key table. that table is printed here. if you would like a complete copy of the article, please contact me at jsbs@bradley.edu. you may also find the article on the journal of small business strategy website, www.jsbs.org. we apologize for the error. 105 r e p ro d u ce d w ith p e rm issio n o f th e co p yrig h t o w n e r. f u rth e r re p ro d u ctio n p ro h ib ite d w ith o u t p e rm issio n . theory purpose of theory the purpose of this reason for existence (~ i v. r) firms exist: scale & scope (~ b v. n) scale & scope theory is to: are determined by: a-narrow/ i incremental · agency !develop a theory of the ownership structure ias a nexus for contracting relationships, which is also the point at which the gross increment in (firm) i (jensen & bfthe firm (jensen & meckling, 1976: 305). k:haracterized by the existence of divisible residual value is just offset by the incremental loss k:laims on the assets and cash flows of the organization involved in the consumption of additional fringe i meckling, !which can generally be sold without permission of the benefits due to (managers') declining fractional 1976) bther contracting individuals (1976: 311) !interest in the firm (1976: 323) customer suggest that firms' customer value should to satisfy the customer (1997: 164; and drucker, trhe customer value strategy which dictates the value be the focus of business activities and to 1973) size of the target market and the value (slater, l>ropose a marketing based view of the proposition (1997: 164) 1997) theory of the firm (slater:, 1997: 162) ...... g evolutionary expand our understanding of economic because a set of capabilities and decision rules trhe joint action of search and selection (nelson& k:hange (nelson & winter, 1982) k;ombine and evolve based on the inheritance of 'routines" (nelson & winter, 1982) winter, acquired characteristics and the timely appearance of i 1982) !variation under the stimulus of adversity (nelson & !winter, 1982). exchange construct a classical type of macroeconomic to both exchange (where existing assets including trhe personal income distribution (pid), where (boulding, ~istribution theory to distinguish between money are circulated among various owners), and to ipid as a key determinant of output is effected by 1950) !exchange process contributions to wealth r>roduce (where assets are created, destroyed, and patentially volatile financial transfers item (t) k:reation and the processes of production "boulding, 1950; canterbery, 1994, p. 1227) accumulated) (1994: 1227) ~boulding, 1950; 1994: 1227) industrial to explain how competitive forces within an because they are portfolios of activities (porter, !market structure: " ... certain stable attributes organization mdustry shape the specific responses of 1984: 423) composed of the tangible or intangible bfthe market that influence the firm's conduct in (caves, 1980: ltirms within that industry to the small semi-fixed assets or skills necessary for the conduct lhe marketplace" including size (caves 1980: 88; porter, numbers bargaining power of rivals, of these activities in the marketplace (caves, 1980: m) 1980; porter, suppliers, buyers, imitators, and substitutes 64). 1984) porter, 1980) c ~ ~ i r e p ro d u ce d w ith p e rm issio n o f th e co p yrig h t o w n e r. f u rth e r re p ro d u ctio n p ro h ib ite d w ith o u t p e rm issio n . theory '· institutional (dimaggio & powell, 1983; meyer & rowan, 1977) 1 1 population ecology i (hannan & freeman, 1989) purpose of theory-the purpose of this theory is to: explain how institutional forces shape organizations (dimaggio & powell, 1983; meyer & rowan, 1977) explain the forces that shape the structures of organizations over long time spans, including how populations of firms forms arise and decline. population ecology theory has specific implications for the nature of firms (hannan & freeman, 1989; reason for existence (=> i v. r) firms exist: because they are isomorphic with institutions and are therefore legitimate organizations (dimaggio & powell, 1983) to produce and distribute resources (hannan & freeman, 1989: 5) scale & scope(=> b v. n)-scale & scope are determined by: the extent of coercive, memetic, and/ or normative isomorphism (dimaggio & powell, 1983) inertial nature of firms, and the nature of the resource space, including the level of resource scarcity and the tightness of niche packing (carroll &hannan, 1989:411) ii i carroll & hannan, 1989) i i i -~ i real entity (metzger & dalton, 1996) resource-based (barney, 1991; penrose, 1959; wernerfelt, 1984) strategic (liebeskind, 1996) to compare and contrast firms with humans in an attempt to depict legal and philosophical firm models (2001: 494) analyze firms from the resource side rather than from the product side (wernerfelt, 1984: 171) to extend transaction-cost theory of the firm to incorporate knowledge in explaining the relationship between organization and competitive advantage (liebeskind: 1996: 93). to represent the moral authority of its members. firms, however, are seen as naturally occurring beings with characteristics beyond those of its members. (2001: 496) because the creation of new productive services requires the collection of resources that results in a firm (penrose, 1959: 77, 85) to create isolating mechanisms (1996: 94). firms are more capable of isolating and protecting knowledge (at lower transaction costs) than are markets. the outcome of its organization and management and activities (2001: 496) the indivisibility of the resource bundles that must be collected to satisfy relevant demand for heterogeneous productive services (1959:67,68, 75, 77,83) the relative importance of knowledge components to a firm's strategy. if particular knowledge is critical, firms will expand their scope to bring the knowledge inside the firm, assuming the benefits exceed the costs (1996: 103). i~ i~ t-..j i ~ :::::::: :§ ,;::s r e p ro d u ce d w ith p e rm issio n o f th e co p yrig h t o w n e r. f u rth e r re p ro d u ctio n p ro h ib ite d w ith o u t p e rm issio n . theory i purpose of theory-the purpose of this i reason for existence (:::::> i v. r) firms exist: i scale & scope(:::::> b v. n)scale & theory is to: scope are determined by: b-broad/ incremental behavioral develop an empirically relevant, process-oriented, to form coalitions of individuals in order to attain collective temporal or functional coalitions of i (cyert & theory of economic decision making (cyert & objectives (p.28) through decision-making processes participants formed to make decisions march, 1963) march, 1963: 3) which predicts firm behavior (1963: (1963: 290) (1963: 27) ii 19) game theory to provide an alternative theory of the firm which to reduce the costs of communication and coordination of qualitative changes in the reservoir of social (kogut& accounts for ownership, incentives, and self-interest embedded social knowledge (1996: 503) knowledge available to economic agents zander, (kogut & zander, 1996: 502). (1996: 503). 11 1996) resource include the role of external control of organizations in i because bridging and buffering mechanisms around a i the effectiveness of bridging and buffering 01 dependence organization theory (pfeffer & salancik, 1978) technological core create organization (pfeffer & salancik, mechanisms (scott, 1987) 00 i (pfeffer & 1978: 106, 108; scott, 1987: 182-198). ! salancik, 1978) --stakeholder i describe how organizations operate and to help predict i to fulfill some set of their various stakeholders' needs i the structuring and choice processes of the i~ (brenner& organizational behavior (brenner & cochran, 1991: (brenner & cochran, 1991: 453) firm's management (brenner & cochran, cochran, 452) 1991:455) 1991) i ii transaction generalize and extend transaction cost economic theory because they are bundles of transactions which aggregate the size of the cumulated value networks cognition to demonstrate how entrepreneurial cognitions because together they minimize transaction costs (2001: that must be assembled to serve (mitchell, (planning, promise, and competition) create new 83) stakeholders at minimum transaction cost 2001) value at multiple levels of analysis, through the (2001: 88) reduction of cross-level transaction costs (mitchell, 2001) i l""i transaction cost explain why firms form as an alternative to the market to economize on transaction costs through substitution at the first-order economizing (williamson, 1991) economics (coase, 1937) margin (coase, 1937; williamson, 1985) (coase, 1937) r e p ro d u ce d w ith p e rm issio n o f th e co p yrig h t o w n e r. f u rth e r re p ro d u ctio n p ro h ib ite d w ith o u t p e rm issio n . ...... ~ i theory purpose of theory -the purpose of this theory is to: reason for existence(::::> iv. r) firms exist: scale & scope(::::> b v. n) scale & scope are c-narrow/ revolutio i narv determined by: entrepreneuri set out a general framework within which all the key questions in to improve coordination by structuring infonnation flow, which factors supporting entrepreneurial insight, e.g., level of al the theory of the finn can be brought together at once requires that it be endowed with legal privileges, including infonnation synthesis (to make price and production (casson, (casson, 1996: 55) indefinite life (1996: 56) decisions), necessary sunk costs to permit necessary 1996; customization, level of desire to appropriate the witt, value of profit opportunities (casson, 1996) i 1998) d-broad/ revolutio none none none i nary i non-theories of the firm competenc set out a general form alternative to contractarian (e.g., coase) nia nia e-based theories of the firm (hodgeson, 1998: 25). competence(hodgso based theories are an omnibus grouping rather than a specific n, 1998 ) theory (hodgeson, 1998) computatio present a framework for analyzing the information processing ni a: this theory assumes the existence of firms. a collection of information processing units (2002: nal (barr (learning) behavior of firms, where firms are viewed as 345). optimal firm size changes as the environment & artificial neural networks (barr, 2002: 345). changes (2002: 346). saraceno '2002) economic use business history, in particular the contractual choices made to bring together producers and investors in response to incomplete the attainment of sustained capabilities (1998: 70) develop by 19"-century entrepreneurs to organize their businesses, to contracts and market power ( 1998: 70) ment reflect on the nature of the firm ( 1998: 66) (lamore aux, 1998) 1@ ....... r e p ro d u ce d w ith p e rm issio n o f th e co p yrig h t o w n e r. f u rth e r re p ro d u ctio n p ro h ib ite d w ith o u t p e rm issio n . theory purpose of theory the purpose of this theory is to: knowledgeexplain knowledge creation, sharing and transfer within based a finn (kogut & zander, 1992: 383) (kogut & zander, 1992) managerial describe a "new" organizational fonn characterized by (bartlett & 'radical decentralization in the creation of selfghoshal, contained units and frontline entrepreneurship 1993) (bartlett & ghoshal 1993). neoinstitution to provide an explanation of management decision al making where profit maximization is not cost(furubotn, effective given transaction costs and bounded 2001) rationalitv (furubotn 2001: 143) ~i neoclassical justify laissez-faire economics (lerner, 1937: viii) with (smith, respect to finn activity that is motivated by profit 1937) seeking and is guided by an invisible hand (smith, 1937: 423). political to define the role of outside ownership in minimizing (muller & the risk of opportunistic behavior arising from wameryd, imperfect fonnal enforcement (muller & wameryd, 2001) 2001: 527) property to predict the acquisition of assets by one finn from rights another and to explain the costs and benefits of (grossman integration (1986: 695). & hart, 1986) resourceto suggest a theory that integrates constructs from learning resource-based, dynamic capabilities, and learning (mahoney, theory (1995: 91). 1995) reason for existence (~ i v. r) firms exist: knowledge-based view does not explain why finns exist in lieu of opportunism or moral hazard (foss, 1996) ni a: this theory assumes the existence of finns. to attain constrained profit maximization (2001: 151). it is only for the sake of profit that any man employs capital in the support of industry (smith, 1937: 423). however, this is a theory of markets in which finns are important actors (jensen & meckling, 1976: 306); profit maximization is one of many goals or not a goal at all (cvert & march 1963: 8) nia: this theory assumes the existence offinns (2001: 527) nia: this theory assumes the existence offinns (1986: 692) ni a: this theory assumes the existence of finns. scale & scope(~ b v. n) -scale & scope are determined by: what the finn makes and what it buys (1992: 385) the clustering of roles amongst three distinct organizational groups (front-line, middle management, and top management) which work across decentralized units (1993: 41) ni a: does not address finn boundaries. ni a: neoclassical economics has no positive theory to determine the bounds of the finn (coase, 1937; 1963: 15) ni a: inside versus outside ownership is not associated with scale and scope. the assets owned by the finn ( 1986: 692) bundles of unique resources (mahoney, 1995) 1g ....... ioo strategy avoiding litigation: the benefits of employment contracts and arbitration james j. coffey plattsburgh, state university of new york jcbri nkaasli c.corn richard a. bernardi roger williams university rabialpha.rwu. edu abstract this research reviews the current environment in employment dispuies. in an ever-increasing litigious era where it is not uncommon to see six figure seulements, the entrepreneur needs to examine the possible legal options in the event of a lawsuit involving current or former employees. ivhile many employment-oriented lawsuits are sealed through liiigation, this is a time-consuming and costly process. indeed, due to its adversarial nature, dispute resolution through litigation can take years to settle. in contrast, one business strategy that is growing in popularity includes the use of employment contracts specifying arbitration in dispute resolution. because arbitration is "almost entirely separate pom the legal system" (siegel, sect. 586), it offers many advantages to both employers and employees. introduction with the exception of one's family, there are few relationships more important than the employer-employee relationship. each day literally thousands of employment relationships 're terminated, often resulting in expensive and/or disruptive disputes. between 1971 and 1991 employment lawsuits filed in federal court have increased 430 percent compared to a 17 percent increase in personal injury suits (lusky, 1997, p. 8). in fact, employment lawsuits resulting in multimillion-dollar verdicts are now commonplace and well publicized. faj wrongful employment practices claim isj ust one piece of the litigation pie that is growing by leaps and bounds, can easily cost a company six figures to defend. (israel, 1998, p. 41). despite the highly visible and litigious nature of this environment, many employers and employees somehow feel they are better off without a contract. to some degree, it is a normal human tendency to avoid obligations and commitments. usually, when there is an employment contract, it is only because one party refuses to act without a contract. perhaps the party requesting the employment contract is seeking to obtain a commitment by making a commitment. it also seems logical that, in most situations, the party with the greatest bargaining power has the least to gain from a contract. professional sports provide an excellent example of the pros and cons of an employment contract. arer having a great year, professional athletes oren want to get out of their contracts and become free agents. 32 journal ofsmall business strategy vol./0, no.2 fall/winter /999 however, if they are injured and unable to contribute, they are relieved that they have a contract to protect them. it might seem logical that an employer would be better off not having contracts with noncritical employees who can be easily replaced. however, this may not be a prudent business practice. the focus for both employer and employee should be what the contract contains, rather than whether or not they should enter a contract. written employment contracts are not a fail-safe measure that prevents all employment disputes. however, they are effective tools for avoiding disputes by establishing a process that limits the damages following a dispute. the purpose of this article is to make the case that, in almost all situations, both employers and employees benefit from a written contract detailing the terms of employment. the article has three sections. the first section deals with the problems that can occur without employment contracts. the second section compares the processes of litigation and arbitration. the final section reviews the potential benefits of employment contracts. problems without contracts misconceptions about contracts the belief that avoiding a written contract will result in the avoiding of responsibility is dangerous for both the employer and the employee. one misconception is that the absence of a written employment contract exempts employers from responsibilities to their employees. a second misconception is that, if the employer and employee do not enter into a written employment contract, there is no basis for an employee's claim of breach of contract. in both cases, the law provides that, regardless of whether a written employment agreement exists, both employers and employees have legally enforceable responsibilities to each other. an employer might believe that it would be sensible to have written contracts only with employees who would be difflicult to replace. implicit in this line of reasoning is that, if it became necessary to terminate an employee who did not have a written contract, the terminated employee would not have a claim against the employer, however, this logic is seriously flawed. a terminated employee may successfully sue his/her employer even without a written contract. the problem may be further complicated by "siaiemen/s in supervisors 'anuals,company regulations, or employee handbook guidelines thai prescribe discipline and discharge procedures" (clark, ei al., 1998, sect. 114, 129). an employee who is discharged in violation of these types of written documents or guidelines could have a breach of contract claim against the employer. further, public policy "prohibits an employer pom firing a worker for a reason ihai violates basic social righis, duries, or responsibilities" (beatty and samuelson, 1996, p. 695). for example, an employee who is fired because he/she refused to violate the law at the request of her employer will likely be successful in a lawsuit against his/her employer. in the event of termination, the notion that not having a written contract will insulate the employer from employee lawsuits is dangerous and misleading. in certain situations, some courts also hold that "an employer 's discharge of an employee breaches an implied covenant ofgood faith and fair dealing" (business law, 1998, p. 8.001). unfortunately, part of the problem and misunderstanding stems from a misconception of the term "contract". a properly drafled contract does not add to the employer or employee's obligations. rather, it defines each party's responsibilities and exempts the parties from the obligations they do not wish to undertake. reducing their employment agreement to writing has advantages for both the employer and employee. having a written agreement in place 33 journal ofsmall business strategy vok l0, no.2 fall/ivinter l 999 provides the attorneys of both parties with concrete evidence to review prior to committing themselves to litigation, which can be a lengthy and expensive process. in fact, employment contracts may actually help an employer avoid litigation stemming from a termination. implied contracts another important consideration is that it is important to avoid implied contracts. one of the critical ingredients for the success of any business is the ability of the employer to assemble an effective workforce. the threat of a lawsuit by a terminated employee inhibits this process. lusky (1997, p. 13) maintains that personnel decisions that result in firing an employee potentially represent the greatest risk of litigation to employers. in the past, employers were protected from lawsuits brought by terminated employees by the employment-at-will doctrine. however, tobias (1997, sect. 101) notes that the protection offered by the employment-at-will doctrine eroded in the late 1970's. in an era of growing social consciousness, labor practices that gave employers complete freedom to terminate employees at will were no longer considered reasonable. currently, most states adhere to "what is commonly called the 'impliedin fact contract exception 'o the at-will rule" (tobias, 1997, sect. 4.01). a potentially dangerous aspect of an implied contract is both employers and employees may actually have obligations they never intended to assume. although these responsibilities were never agreed to, they may result from a variety of sources. examples include employee handbooks or what a supervisor/manager told an employee. these responsibilities may also arise from what a judge feels is appropriate given the nature of the relationship. the unpredictability of implied contracts creates a serious problem for both the employer and the employee. in these cases, either party could be legally punished for what they believed was acceptable behavior. a written employment contract should reduce the misunderstanding between employers and employees that give rise to lawsuits based on implied contracts. when employment contracts are written, both the employers and employees have the opportunity to discuss these contracts with their lawyers. these contracts should clearly explain the responsibilities of each party. finally, the employee and employer's signatures acknowledge their acceptance of the responsibilities stipulated in the contract. small business owners often wrongfully assume that, without a written contract with their employees, no legally enforceable contract obligation exists and that there will be no legal problems associated with terminating an employee. under the implied contract theory: /tjhe courts will find that an employee handbook or other written documents seuing out terms and conditions of employmeni including discharge and disciplinary procedures, creates an implied contract between employer and employee that the employee will not be fired except in accordance with those procedures. for example, if the handbook talks about progressive disciplinary procedures and lists certain conduct that will serve as grounds for discipline or discharge, a termination that does not follow ihe procedures set forth in the handbook, or that is for a reason other than those listed, may be considered a breach of the implied contract and, hence, wrongful. (business law, 1998, p. 8.002) 34 journal ofsmall business strategy vo/. /0, /vo.2 fall/winter /999 litigation versus arbitration litigation against officers employees who believe they have been mistreated by their employers are bringing legal actions against their employer corporation and its directors and officers individually. there are good reasons for the employee's attorney to individually name officers and directors in an employment lawsuit even though this may cause considerable discomfort to these persons. for instance, if an oaicer or director is not sued individually and it turns out that, although the suit is successful, the corporation has no assets, the judgment will be financially meaningless. another reason for suing an officer or director is that employers are not always liable for the actions of their employees, and the jury may decide that, even though a tort (i.e., civil wrong or negligence) has been committed, the corporation is not responsible. during the course of the /980's, the corporate director's job, once regarded as a comfortable symbol of business achievement without too much responsibility, became, in the slightly hyperbolic words of business week: "aj oh nobody wants." (olson and hatch, 1998, sect. 1.01) i an important consideration is the oversight function that knowledgeable directors provide investors. one of the greatest benefits that a company can provide to their oiticers and directors is to limit their exposure to lawsuits. corporate officers are no less concerned than directors because they are subj ect to much the same duties of loyalty and care as directors, and they cannot avoid liability by declining the honor ofservice: their livelihoods are at stake. (olson and hatch, 1998, sect. 1.01). today, (former) employees are suing their (former) employers at an ever-increasing rate. indeed, one survey shows that employees were involved in 25 percent of the claims against corporate officers and directors. while the charges in these claims have a wide range, chew (1998, p. 155) maintains that "allegations based on wrongful discharge laws are the single most common type of claim." an employment contract can be used to avoid litigation in two ways. first, a contract that outlines the responsibilities of both employer and employee should prevent claims that arise based upon a misunderstanding between the parties. second, the contract can specify that disputes arising from the employment must be settled by arbitration. although it is still possible to sue the corporation, its officers, and directors personally, an arbitration clause in the employment contract should dramatically reduce the likelihood of this happening. officers and directors of smaller corporations are more likely to be sued individually because in a small corporation there is a much greater likelihood of the oiticer or director being involved in an employment dispute. also, the oflicer or director may be named in the action for allowing a sexually hostile environment to exist within the company (bennett, 1996). thus, the officer or director may be liable not only for his/her own conduct but also for the conduct of employees under his/her control. avoiding litigation by requiring arbitration a mandatory arbitration clause in a contract can result in more predicable resolutions of employment disputes. one of the advantages of requiring parties to arbitrate employment disputes is that it avoids the unpredictability of litigation. the predictability of settlements in 35 dourna/ of small business strategy vo/. /0, no.2 fa///ivinter /999 disputes resolved through arbitration comes from the common practice of publishing the results of arbitration decisions. many believe that publishing arbitration settlements serves to create employment guidelines (elkouri and elkouri, 1997, p. 601). these guidelines serve as a frame of reference for employee-employer relationship. they also provide both employers and employees a basis for "resolving their grievances prior to arbitration" (elkouri and elkouri, p. 600). additionally, the publication process makes the arbitrator more accountable and creates a body of information that can be used for guidance in future decisions. the employment agreement can also stipulate the process used to select the arbitrator. one of the many options in this process is the mutual agreement of both the employer and employee. public information on arbitrators is now available from a variety of sources. this information may include education, aailiations, published awards, and experience (elkouri and elkouri, 1997, pp. 204-205). in most cases, arbitrators have experience deciding common employment issues. given similar issues, an arbitrator's "award spectrum" should be much narrower than it would be for juries. in fact, publishing past awards from arbitrators can be helpful to both employees and employers. prior awards on similar fact patterns may provide both parties with a critical heads-up, which could result in more realistic expectations concerning the eventual outcome. arbitrators are also immune from community attitudes and prejudices that can potentially influence juries (littler et a/., 1996, p. 2.003). speedy resolution of disputes it is usually to the advantage of both parties to avoid litigation and settle an employment dispute in a timely fashion. this is because: j/jitigaiion is nothing if not adversarial ...it can take years to bring an employment dispute to tria/. by that time, what may have started out as a misunderstanding or mistake that could have been remedied by reinstatement and a few thousand dollars in /ost wages has turned into a haute ofepic proportions. (13ales, 1997, p. 159-160) in arbitration, the involved parties can decide who will hear the matter, how long the arbitrator will have to decide the case, and whether to make the arbitration decision binding. these factors combine to make the process more eaicient by avoiding time consuming appeals and other variables. oflen, the arbitrator is selected because he/she is considered an expert on the disputed issue. in this case, the arbitrator can use this knowledge to resolve the dispute. contrasting arbitration with litigation, a judge with extensive personal knowledge of a case would be disqualified from hearing the case (siegel, 1997, sect. 586). additionally, the long, costly, and risky business of jury selection is avoided in arbitration. since "fajrbitration is a form of dispute resolution almost wholly independent of the court system" (siegel, sect. 586), employment contracts requiring arbitration provide a more efficient process than litigation. an employment contract allows the parties to tailor the process to avoid the aspects of the litigation process that are ineaicient in advance of a dispute. to some degree, the safeguards of litigation are traded off for the speed and economy of arbitration. however, the delays inherent in the litigation process can consume vast amounts of emotional energy. the litigation process also detracts attention of both employer and employee away from everyday critical business concerns. disputes that are settled on a timely basis through arbitration also have the advantage of quickly disabusing both parties of any unrealistic notions they may have regarding the dispute. the employee involved in the dispute (and watchful co-workers) may discover that the actions of the employer, although seemingly unfair, are not going to result in a settlement. 36 journal of small business strategy vot. /0, no.2 fall/winier 1999 on the other hand, the employer may discover that current methods are indeed actionable. employers may also come to realize that, to avoid future damages, they must immediately change how they do business. avoiding lawsuit blackmail a jury sometimes returns a verdict that is in excess of the damages demanded in the complaint. while the plaintiff could amend their complaint, the court would have to agree to allow this modification (36 ny jur 2d, 1997, sect. 191). to avoid the possibility of "under bidding" their case, attorneys oflen demand damages far in excess of what they expect to receive or would take to settle the case. therefore, the tactic of initially demanding a higher amount is a fail-safe procedure that reduces uncertainty. in light of dramatic jury awards recently made in this area, it may be a wise strategy for the plaintiff to sue for a large amount because this tactic has few, if any, disadvantages. being sued for an excessive amount can be the source of numerous problems for the defendant employer. this is because more and more businesses have their financial statements audited each year. as a normal procedure, the firm performing the audit requests a listing and analysis of pending or potential litigation from the business's attorney. pending litigation containing a large demand for damages can negatively impact the employer's ability to borrow or amact new investors. for example, an employee is suing his/her employer for $2,000,000. the employer's attorney must reflect this pending litigation in the ofl)cial report. still, what drives employers and their attorneys to settle cases that have little or no merit? to answer this, we will continue our prior example. additionally, assume that the employee otters to settle the $2,000,000 claim for $ 100,000. in this case, it may be very tempting for management to pay even if the case against the employer is very weak and not worth this amount. the reason it is tempting is that, if management refuses to pay and the maner is tried, a jury could award an amount in excess of $ 100,000. consider the reaction of the board of directors if the original settlement offer is turned down by the president and a jury awards $800,000 to the employee. in this situation, the judgment of both management and the attorney who refused to settle would be severely questioned. as a result, being sued for a substantial sum creates a climate of uneasiness. this is particularly true for the directors of the defendant employer who may not be familiar with the litigation process. an employment contract can reduce the impact of lawsuit blackmail. with an employment contract requiring binding arbitration, the amount of the award is a more predictable than would be the case with a jury (littler et al., 1998). this is because some of the arbitrator's past decisions under similar circumstances may be available for review by the parties (littler et al., 1988). because they can gauge the potential size of the award, management may be less tempted to settle a case without merit. benefits of employment contracts protecting proprietary information having an employee leave and go to work for a competitor is not something most employers want. one of the concerns employers have when an employee goes to work for a competitor is that, in addition to losing a skilled employee, the employer may also be losing proprietary information. even a relatively low-level employee who quits and joins a competitor can present serious problems if that employee had access to proprietary information. 37 journal ofsmall business strategy vol /0, no.2 fall/ivinter /999 thc general rule is that an employee is free to quit his or her job and eitherjoin a competitor or start a business unless: l. there is a valid contrac( through which the employee has agreed not todoso, or 2, the employee (akes the employer's trade secre(s and uses them to compete withit. (13usiness laws, 1998, sect. 2.002) thus, unless employer has a contract with the employee that prohibits the employee from working for a competitor, the employee is free to do so. even former employees who did not have access to trade secrets may pose a competitive threat. former employees are not legally prevented from soliciting their former customers unless they "acted wrongfidly by either pilfering or memori ing customer lists" (52 ny jur 2d, 1997, sect. 194). however, proving that a former employee memorized a customer list is problematic at best. again, an employment contract gives the employer an opportunity to address the issues regarding what the employee can and cannot do after an employee is terminat'ed. employees can, and oaen do, challenge covenants not to compete on the grounds that they are unreasonable. however, it is difficult to imagine that there is any advantage in the employer not having a contract. public versus private process an arbitration clause of the employment contract can provide that any dispute be treated in a confidential manner. the confidentiality aspect of the arbitration process can potentially benefit both employer and employee in employment disputes. privacy is an important aspect because it is something that most individuals value. indeed, a condition of many charitable donations is that the individual making the donation remains totally anonymous. while the courtroom is a valued and important institution, it does allow universal access to its proceeding. however, parties involved in employment disputes oaen prefer a non-public forum for the settlement of the dispute. in fact, it is not uncommon that both employer and employee may have behaved improperly. so that, the proceedings could damage both parties if they are not confidential. additionally, in a public forum, attorneys for both sides may be tempted to introduce evidence that is more embarrassing than relevant. witnesses and the parties themselves may also feel more comfortable about testifying in a confidential atmosphere. if the employer or the employee desire, they can structure their employment contract to provide for confidential arbitration. the american arbitration association's national rules for the resolution of employment disputes (1997, p. 19) states that: the arbitra(or shall maintain ihe confidentiality of the arbitraiion and shall have the authority to make appropriate rulings io safeguard this confidentiality, unless the parties agree otherwise or the law provides to the contrary. however, parties who desire confidentiality should explicitly require confidentiality as a supplement to the american arbitration association's general rules. the explicit requirement for confidentiality reduces the possibility of parties other than those involved in the arbitration process from gaining access to any information (sellier and shaaer, 1997). disadvantages of employment contracts enforceability of arbitration agreements like all other agreements, arbitration agreements are of little value unless they are enforceable. in general, employees and employers who enter into arbitration agreements are 38 journal of small business strategy vol./0, bto.2 fall/winter l999 bound by these agreements. the supreme court's gilmer decision in 1991 is the most dramatic case regarding the issue of enforcing arbitration agreements. (in this decisionj the court gave its imprimatur to compulsory employment arbitration agreements by dismissing and ordering to arbitration an age discrimination lawsuit brought by an employee who had agreed to arbitrate all his prospective employment disputes. (bales, 1997, p. 11) the ability of employees to pursue other remedies despite the fact they have signed an arbitration agreement has been strongly supported by the equal employment opportunities commission. however, in situations that do not involve union employees or issues involving discrimination, an arbitration agreement that has been fairly entered into by both parties will be enforced in most situations. the biggest disadvantage associated with employment contracts is the same as the biggest advantage (e.g., that they are enforceable in most cases). litigation regarding employment contracts usually involves one party who wants to enforce the contract and the other party wants to be released form the contract. when parties enter into employment contracts, they are presumably satisfied with the terms and conditions of the contract. however, a change in circumstances may render the contract burdensome for one of the parties. example: covenant not to compete for an employer to successfully defend the enforceability of a covenant not to compete the covenant must protect a legitimate business interest and the restrictions must be reasonable in terms of time, area, and type of activity (business laws, 1998). for example, a public accounting firm in a small city would likely have a legitimate interest in prevent employees who leave the firm from competing with it. however, if the restrictions attempt to prevent the employee from practicing his/her profession within the entire state for a period of ten years, it is unlikely that such restrictions would be upheld because they are unreasonable. the court could reform the contract making the restrictions reasonable if it felt that would be appropriate under the circumstances. for example, a freshly minted accounting graduate has no intention of staying with his/her employer beyond the two-year term of employment required for certification (e.g., the experience requirement for becoming a cpa). the covenant states that an employee who leaves his/her employment voluntarily may not work as a cpa in the community for a period of three years. because the accountant does not intend to remain in the area beyond qualifying for certification, he/she signs an agreement thinking this portion of the covenant not to compete is not relevant because. before the two years is completed, the new accountant marries a person who works and lives in the community and wants to stay in the community. the new cpa decides to stay in the community but there is no future with his/her current employer. in sum, employment contracts combined with an unexpected change in circumstances o(ten result in one of the parties breaching the agreement. breached agreements usually trigger litigation in which there is o(ten no real winner. a study conducted by the risk management consulting firm of tillingast-towers-perrin found that /fit were viewed as a mechanism for compensating victims for their economic losses, the tort system is extremely inefficient, returning less than 25 cents on the dollar for that purpose. viewed in this narrow sense, the system is only 25 percent efjicieni. even conceding that the tort system also provides compensation for victims'ain and suffering, the study indicates that the tort system "is stilt less than 50 percent efficient. (israel, 1998, p. 41) 39 journal of small business strategy vol. /0, no.2 fall/if(nrer )999 conclusion beatty and samuelson (l996) maintain that both individuals and businesses use contracts to make the future more predictable. written employment contracts create control and predictability for both employers and employees. these contracts can be advantageous to both parties because they help to avoid lawsuits. arbitration is usually resolved far more quickly than lawsuits, which sometimes go on for years. the speedy resolution in arbitration avoids the problem of including pending litigation on the audited financial statements year after year. employment litigation is the flip side of the win-win theory of arbitration. once the litigation begins, attorneys for each party do everything in their power to secure the most favorable result for their client. of course, each side is interested in winning. unfortunately, litigation consumes huge amounts of financial as well as human resources. in many cases, the "winner" in the litigation process is oflen the party that lost the least. avoiding lawsuits without merit benefits both employers and employees. this is especially true for the small businessperson who could have the entire workforce tied up in the litigation hearing as witnesses. employer-employee lawsuits are likely to occur when one of the parties feels the other party has acted in a way that violates their contract. if the employment contract is in writing and clearly delineates the rights and responsibilities of the parties, the process of determining if a contract violation has occurred is simplified. even without a written contract, a legal contract may still exist; however, when this occurs, it will be a composite of the verbal agreements of the parties. as previously noted, this situation also requires looking at what is stated in the employees'anual, past practices, and other indicators. if the parties do not have a written contract, the attorney representing the party (normally the employee) initiating lawsuit is forced to rely to a great extent on the client's understanding of the oral or implied employment agreement. the attorney for the party being sued (normally the employer) is similarly limited. as a result, both parties may honestly overestimate the strength of their case. in such circumstances, they are "giving birth" to a lawsuit that neither side can effectively win. written employment contracts can avoid these problems and help to avoid the time-consuming process of litigation. large corporations, whose employees belong to unions, normally have human resource departments and commonly use both employment contracts and arbitration to reduce disputes. on the other hand, smaller employers often view employment contracts and arbitration agreements as unnecessary and intrusive devices that impinge on their freedom to run their business as they see fit. the small businessperson may be correct; employment contracts and arbitration agreements do restrict how they handle employment disputes. however, the alternative of protracted litigation may be far worse. the irony is that the small businessperson, who does not have employment liability insurance, cannot afford even one excessive verdict or perhaps even one pyrrhic victory.'ther non-legal issues can also be affected by arbitration agreements. productivity can be higher because both employers and employees have taken time to consider their relationship. each party understands their individual responsibilities and what they can expect in return. during an extended litigation process, rumors about the outcome can harm what was a relatively congenial working environment. because of the relatively short settlement period offered by arbitration, morale should not sutter as it sometimes does in the case of protracted litigation. finally, because the decision of the arbitrator is final, the additional trauma caused by the appeal process is also avoided. the effects of these factors can be especially harmful in the small business environment where most employees are familiar with one another. 40 journal ofsmall business strategy vo/.10, no.2 fall/winter 1999 endnotes l. according to this firm, employment lawsuits resulted in damages of about $ 160 billion in 1994, which is about 66 percent of what the united states spent on national defense in 1994. 2. for more information on arbitration, contact the american arbitration association at: american'arbitration association; 140 west 51 street; new york, ny 10020-1203; pb : (212) 484.48(i; 9 : (212) 941-4841; b. ii: ~d 8 b. ; w b: htp://www.adr.org. references american arbitration association (1997). national rules for the resolution of em lo ment ~dis utes. new york: american arbitration association. bales, r. a. (1997).com ulso arbitration. cornell university press: ithica, ny. beatty, j. f. and samuelson, s. s. (1996). business law for a new centu . boston: little brown and co. bennett, p. (1996). insurance covera e of em lo ment dis utes. chicago, il: american bar association. business laws inc. (1998). em lo ment contracts (chap. 2). chesterland, oh: business laws inc. business laws inc. (1998). em lo ment contracts (chap. 8). chesterland, oh: business laws lnc. chew, p. k. (1998).directors'nd officers'iabili new york: practising law institute. clark, boardman, & callaghan. (1998).em lo ment discriminator coordinator. deerfield, il: west group. elkouri, f. & elkouri, e. a. (1997). how arbitration works (vol. 2). eds. volz, m. m, and goggin, e. p., national alfair lnc. israel, r. (1998).national arbitration/mediation metro olitan co orate counsel, from lexisnexis. littler, mendelson, fastiff, tichy, & mathiason. (1998). evaluating and using employerinitiated arbitration policies and agreements; preparing the workplace for the twentyfirst century, in alternative dis ute resolution in the em lo ment context. vol. 2, chap. 2, ed. hancock, w. a., chesterland, oh: business laws inc. lusky, p. m. (1997).slam the dooron em lo ee lawsuits franklin lakes, nj: career press. olson, i f. & hatch, j. o., iii. (1997). director and oificer liabili . st. paul, mn: west group. s ill .b.c.bsb fl .h.s.(1997).c fd i lllf f bl i 9 dl 8, l i 217 (48), new york: west law. siegel, d. d. (1997).new york law ractice st. paul, mn: west group. tobias, p. h. (1997).liti ation: wron ful dischar e of claims. st. paul, mn: west group. 36 ny jur 2d. (1997).~dama es. rochester, ny: lawyers cooperative publishing. 52 ny jur 2d. (1997). em lo ment relations. rochester, ny: lawyers cooperative publishing. james j. coffey is associate professor of accounting in the school of business and economics at plattsburgh, state university of new york. dr. coffey received his jd. from suffolk university law school in 1974; he also has a mba pom the university of connecticut in /96& he teaches tax and business law courses and practices law in plattsburgh. his professional membership includes the labor and employment law sections of both the new york state bar association and the american bar association. his articles have been published in the new york state bar journal, west la iv, and the monthly digest of tax articles. 41 journal ofsmall business strategy vol. 10, no.2 fall/winter /999 richard a. bernardl is professor of accounting in the gabe//i school of business at roger williams universt'ty. dr. bernardi received his ph.d. from union college in /992 and was a professor of national security affairs at the united states naval /var college during 1997/998. his primary research interests concern fraud detection, ethics, and audi tj udgment. his fraud detection research resulted in articles in auditing: a journal of practice and theory; international journal of auditing; the irish accounting review; managerial finance; and research on accounting ethics. during /996, he served as an external reviewer on kpmg peat marwick's fraud detection task force. heis currentiy the ethics editor ofthe journal ofapplied business research. 42 5tffytt teg y smai.l business brief go international gradually: advice to small businesses from companies with overseas experience sheri bridges bridgesqa wfu.edu j. kline harrison harrisj koawfu. edu wake forest university abstract tlie limited resources of small businesses ofien present unique challenges when the companies try to internationalize. this paper examines the decision to enter ihe global arena from the viewpoint offirms who already are there. the results ofa survey of such companies indicate that changes in tire external situation ofien overcome internal reservations firms might have about internationali ing. survey participants identify issues related to risk management and the assignment of responsibility for international operations as key areas of concern, and they suggest "coping strategies" for small businesses thinking abont doing business overseas. introduction increased domestic competition, coupled with innovations and advancements in transportation, telecommunications technology, converging consumer needs and wants, and the adoption of multilateral trade agreements have prompted many u.s. companies to look beyond their home borders for growth opportunities. although the united states remains the world's largest market for goods and services, 75% of total market potential now lies overseas (keegan 1999). like their larger corporate counterparts, small and medium-sized businesses are finding the call of the international marketplace increasingly dilticult to ignore. a survey of middlemarket companies conducted by yankelovich parmers for deloitte and touche revealed that the quest for expansion was one of their top two concerns (along with staff recruitment and retention), while globalization was the issue of greatest continuing concern (simon 1998). and a federal express survey of small business exporters found 52% of respondents anticipate increasing their export volume this year, with 75% planning an increase over the next five years (zelade i 998). however, the global arena —with its varied cultural, legal, political, and commercial environments —adds new levels of complexity to business. this complexity can be challenging for a firm of any size to handle, but the risks are especially high for smaller firms: because of their more modest financial and management resources, they cannot afford to make a mistake. 86 journal ofsmall business strategy vol. 10, ivo.2 eall/ivinrer 1999 the purpose of this study is to examine the internationalization decision for small businesses from the viewpoint of companies who already have made the cross-border leap. the results of a survey, "entering the global business arena: key issues in global expansion for american small businesses," suggest that firms should consider "three rs" with respect to internationalization: the rationale, risk management, and the responsibility locus. after the conceptual background is set forth and the survey method is described, each of these is discussed in turn. the article concludes with an overview of the findings. conceptual background the global fever spurred by social, technological, competitive and legislative changes of the recent past has in turn spurred a rise in the number of books, college courses, and articles devoted to global strategy and tactics. yet a review of the literature reveals a limited amount of research on the subject as it relates to small businesses. the internationalization process in their review of recent empirical research on how small firms increase their involvement in international operations, coviello and mcauley (1999) examine 16 studies. they conclude that the internationalization process among small and medium-sized companies is best understood by integrating three major theoretical frameworks: (i) foreign direct investment theory (anderson and gatignon, 1986; buckley and casson, 1993), which says that firms choose overseas structures and locations that minimize the cost of economic transactions; (2) establishment chain or stage models (iohanson and vahlne, 1990; melin, 1992), which propose that internationalization occurs incrementally as firms increase their market knowledge and commitment; and (3) the network perspective, which contends that internationalization is a function of a firm's set of inter-organizational and interpersonal relationships (axelsson and easton, 1992). all 16 of the studies reviewed by coviello and mcauley (1999) —10 of which focus on manufacturing firms —were published in the period from 1992 to 1998, indicating the inchoate state of the research. interestingly, none were based in north america, a fact that the authors attribute to the greater interest in internationalization among firms from small markets with limited domestic opportunity. (eleven were based in europe, three were from new zealand, one from hong kong and another from pakistan.) which firms go overseas? baird, lyles and orris (1994) looked at the variance in international strategies of 180 small businesses in indiana. they found that firms who perceived a higher number of changes their general or industry environments (including the regulatory, technological, competitive, and technological climate) were more likely to have overseas operations. they also found a higher level of internationalization among firms with more formal planning processes. calof (1993) examined archival data from more than 5,000 canadian manufacturing companies and found that, although large firms were more likely to export, 48 percent of the smallest firms in the database (sales of $ 1,000 $499,999) engaged in overseas business. analysis of surveys from 49 canadian soiiware firms led reuber and fischer (1997) to conclude that companies with internationally experienced management teams have a higher probability of developing foreign strategic partners and pursue foreign sales sooner alter startup than those whose management teams lack international experience. 87 journal ofsmall business strategy vol. /0, no.2 fall/winter /999 why go overseas? karagozoglu and lindell (1998) analyzed completed surveys from 34 small and mediumsized technology firms in the united states. although limited to a small number of specialized firms, their results showed that the stimuli to go global included pursuit of greater strategic opportunities, inquiries from foreign buyers, and a belief that domestic market sales were insufficient to support competitive levels of r&d spending. they also found that a lack of international management experience and limited information-gathering capabilities posed significant barriers to venturing overseas. where do firms go? the internationalization process among small and medium-sized business services in the united kingdom was the focus of a study by o'farrell, wood and zheng (1998). the results of their survey revealed a significant relationship between type of industry (engineering consulting, management consulting, market research, computer soaware, and product design) and location of the firms'irst foreign market entry. the authors attribute the finding to the internationalizing company's desire to deal with countries whose demand characteristics are similar to the home market. non-empirical literature much of the remaining literature on small business internationalization is anecdotal in nature, consisting of interviews in which the company executives or government officials offer their advice to would-be international firms. for example, ake (1993) says going global is "easier done than said." he notes that the psychological barriers to making an international move are oaen bigger than the legal or cultural barriers, and said firms who take the plunge will find that success breeds success. searing (1998) contends that companies with successful products in the u.s. are likely to find receptive markets elsewhere. she suggests that small businesses start off in the most stable markets, moving into riskier areas only aaer they have gained overseas know-how. the present research adds to the literature by examining a cross-section of u.s.-based firms who have "been there, done that" and who have advice to give those who would follow in their footsteps. it looks at three issues of importance to any firm considering a cross-border leap: first, what stimulates the decision? kotler (1997) notes that business would be easier and safer if companies could stay in their home markets and not have to deal with the risks and uncertainties associated with unfamiliar territory. however, firms oaen have no choice in the matter —they are impelled to go global by factors that threaten their domestic success or even their very survival. for example, a company's home market might come under attack by an international firm offering a superior product, lower prices, or both. or the company might need additional customers to achieve greater economies of scale or to support greater investment in rzkd. more basically, the company might believe that profit opportunities overseas are greater than those at home, or simply that it is too risky to be dependent on one market for sales and revenue. second, how can the risk associated with such a move be reduced? aharoni (1994, p. i i) uses the words "massive" and "daunting" when describing the resources that "major" players must commit to their global efforts. the resource and capability constraints of small businesses, which do not permit a full-bore approach to competitive battle in the domestic market, can be 88 journal ofsmall business strategy vol. /0, no.2 fallltvinrer /999 particularly problematic in the global marketplace, which requires efficient, effective management of oaen-unfamiliar functions and activities. finally, who should be involved in the implementation? close to 90 percent of american firms employ fewer than 20 people, and almost half the u.s, work force is employed by companies with fewer than 500 employees (aharoni 1994). while these and similar statistics are oren used to demonstrate the contributions of small businesses to the gross domestic product, they also illustrate another important fact: small businesses do not have large staffs to devote to international activities. consequently, the question of how the internationalization process will be implemented is key. method the sample for this survey was randomly selected from the membership of the north carolina world trade association, a group whose mission is to facilitate world trade through education and information exchange. the questionnaire was mailed to 141 association members, who were told that the study's purpose was to identify key issues in global expansion for small businesses. seventy-six of those surveyed returned completed questionnaires, representing a response rate of 51%. this unusually high response rate was likely due to the congruency between the association's purpose and that of the research. of the 76 respondents, 64% classified their firms as service operations, while 20% classified them as manufacturing. the remaining 16% indicated that their firms were both. the average ratio of foreign sales to total sales among the survey participants was about 38%, with 75% of respondents indicating that more than half their sales came from overseas. although more than 50% of the firms had no foreign subsidiary, more than one-third of them had at least 10. the remainder had from 12 to 100. more than 39% of the firms had export departments, with about 14% employing export managers. less than 5% engaged in overseas production, and none assembled abroad. survey participants were presented with a series of statements related to the decision by a small business to expand globally, and were asked to indicate on a five-point likert scale the extent to which they agreed or disagreed with each of the statements (1 = strongly agree, 5 = strongly disagree). the statements pertained to three general aspects of internationalization; motives for going global, steps the firm could take to manage risk, and the locus of responsibility for global eltorts. results rationale for entering international arena the results in figure 1 show that respondents believe that while psychological barriers are the biggest hurdles to overcome in entering the global arena, external factors can hasten the decision. respondents strongly agreed ( x = 2.05) with the statement that "the largest barrier an american small business will face in global expansion is an internal one (deciding whether or not they really want to sell in foreign markets), not an external one." moreover, they agreed that the decision to internationalize can produce "substantial economies of scale in production and marketing" ( x = 2.67), suggesting that the active pursuit of cost efficiencies can be an international expansion driver. 89 journal of small business srraregy vol. 10, ivo.2 fall/winier l 999 figure 1 respondents level of agreement on statements related to "going global" largest harrier is internal economies of scale 2.67 react to situational thrust only market few products staodardization in similar markets should modify products .02 willing to sacrifice price 3.57 price is most important 4.05 should raise prices 4.t2 name international gunl "gunl" vs. nlarkel researcher should avoid intermediaries should leave to experts 2.05 t 2 3 4 5 0 mean (1ustrongly agree, 5=strongly disagree) 90 journal ofsmall business strategy va/. /0, na.2 fa///ivi uter /999 the results also show strong agreement ( x = 2.08) with the statement that, "because of the risks and difficulties of entering foreign markets, most small businesses o/ten do not act until some situation or event thrusts them into the international arena, such as a domestic importer, a foreign importer, or a foreign government asking the company to sell abroad." risk management when asked to identify the countries/regions of the world in which small businesses are most likely to be successful marketing their products or services (see figure 2 for a graphical representation of mean rankings), almost 60% of respondents ranked canada as number one, while mexico placed first among 21% percent of respondents and second among 47%. figure 2 —level of perceived risk in selected regions 10 6 6 4 2 c 0 gd behind the united states'eighbors to the north and south, great britain, europe/eec and central/south america ranked third, fourth, and filth, respectively. interestingly, australia, an english-speaking country, ranked eighth behind the orient, which was sixth, and southern asia/south pacific, which was seventh, possibly because it is not as active a trading partner and hence represents a less-developed market for american products. the middle east, ninth, africa, tenth, and the former soviet republics, eleventh, were at the bonom of the list. their poor showing presumably has much to do with the instability of their political and/or economic environments. 91 journal ofsmall business strategy vol.10, no.2 falllivinier l 999 the respondents believe that, once the decision has been made regarding the country or region of the world in which the firm will do business, firms can and should take further steps to minimize their risks. the survey participants indicated strong agreement ( x = 2.22) with the statement that small businesses should begin by "marketing only a few of their products initially" as opposed to taking their entire product assortment overseas. moreover, they strongly agreed ( x = 2.22) that standardization is practical only in economically similar markets. in fact, they recommended ( x = 1.92) that small businesses consider modifying products to meet better the needs of foreign consumers, and disagreed with the statement ( x = 3.57) that "people around the world are willing to sacrifice preferences... for lower prices at high quality." on the subject of price, respondents disagreed ( x = 4.05) with a description of this decision variable as "the most important factor in determining if the product will be a success." nor did they support the suggestion ( x = 4.12) that a small business should consider raising its prices to cover exporting expenses or to send a quality signal. responsibility locus with respect to the assignment of responsibility for activities associated with the going global, the survey results suggest that firms recognize the need for expert involvement, but also understand the desire for small businesses to retain control. respondents agreed ( x = 2.41) that small businesses should appoint an "international guru" to make the global decision. however, they are unclear ( x = 3.22) about the advantages of having this guru travel overseas to meet potential agents and consumers, as opposed to hiring someone to research a particular country's market potential. respondents disagreed ( x = 3.32) with the statement that small businesses should "avoid using trade intermediaries whenever possible" and also with the opinion ( x = 3.88) that it is acceptable for the firm to leave worries and duties related to letters of credit, shipping, and documentation to the experts. discussion and conclusion taken as a whole, the advice from experienced firms to those contemplating an international move can be summed up as "think big in small ways." the survey participants seem to understand the need for small businesses to heed the siren call of the global marketplace, but to do so in ways that makes size a strength, rather than a liability. the results show that the decision to enter the global market ol)en is made reactively, rather than proactively, when an external situation or event prompts the firm to respond. proactive moves would be consistent with the entrepreneurial orientation of many small businesses. however, it may be that fear of the unknown and an awareness of the extraordinary resource demands engendered by going overseas lead to inertia on the part of small businesses. on the other hand, a reactive response to an externally generated threat or opportunity is consistent with the speed, responsiveness and flexibility that many small businesses exhibit, especially as compared to their larger counterparts. with respect to decisions regarding where to go, survey participants strongly agreed that firms should take their first steps close to home, identifying canada and mexico as the top two international markets to pursue. the high rankings for these countries are not surprising, given that they share borders with the u.s. and are nafta signatories. moreover, the result is consistent with advice from griffin and pustay (l996, p. 37), who identify the first rule of 92 journal ofsmall business strategy vol. 10, no.2 eall/winter l999 internationalization as "know the territory" and contend that many businesses fail internationally because they are ignorant of "basic geography, market characteristics, and politics." survey respondents also strongly supported suggestions that small businesses limit the number of products marketed overseas as another way of minimizing risk. selection of a few key offerings reduces marketing costs, and provides "experience curve" effects that can be applied to products that require more eitort to achieve their market potential. with respect to the products themselves, respondents apparently believe that moving away from customization toward standardization might be easier in theory (see levitt 1983) than in practice. they indicated that standardization is practical and practicable only in economically similar markets and agreed that product modifications should be considered if they are necessary to satisfy foreign consumers. the survey participants also believe that gaining expertise about the internationalization process is important, and that such expertise can be provided by a "guru" inside the company or by knowledgeable, experienced individuals and firms outside. however, they believe the small business should remain concerned about and involved in the process, even when outside experts have been engaged. in total, the responsibility-related results point to a perceived need to balance the external competence —internal control issues that confront a small business in the global arena. as the world continues to get smaller, the role of small businesses in the global economy is likely to get larger. the present research provides advice from a sample of north carolina firms regarding the global arena and the process for entering it. however, a larger-scale study of small businesses from across the united states could provide even greater insight into the unique challenges and opportunities faced by members of this vital economic sector. references aharoni, y. (1994). how small firms can achieve competitive advantage in an interdependent world. in tamir agmon and richard 13robnick, small firms in lobal com etition (pp. 9-18) new york: oxford university press. ake, j. j. (1993).easier said than done. inc. 15 (2), 96-99. anderson, e. & gatignon, h. (1986). modes of entry: a transactions cost analysis and propositions. journal of international business studies 17 (3), 1-26. axelsson, b. & easton, g. (1992). industrial networks: a new view of realit . london: routledge. baird, i. s., i.yles, m. a., & orris, j. b. (1994).the choice of international strategies by small businesses. journal of small business mana ement 32 (i), 48-59. buckley, p.j. & casson, m.a. (1993).theory of international operations. in p.j. buckley and p. ghauri, the internatiohalisation of the firm a reader (pp. 45-50) london: academic press. calof, j. (1993). the impact of size on internationalization. journal of small business~m31 141, 60-63. coviello, n. & mcauley, a. (1999). internationalisation and the smaller firm: a review of contemporary empirical research. mana ement international review 39 (3), 223232. griffin, r.w. & pustay, m. w. (1996). international business: a mana erial ers ective reading, ma: addison-wesley publishing co. 93 journal ofsmall business strategy vol. /0, no.2 fall/winter /999 johanson, j. ilk vahlne, j.e. (1977). the internationalisation process of the firm: a model of knowledge development and increasing foreign market commitments. journal of international business studies s rin summer,23-32. karagozoglu, n. bt lindell, m. (1998). internationalization of small and medium-sized technology-based fttms: an exploratory study. journal of small businessm~36 iii. 44.59. keegan, w. j. (1999).global marketin mana ement upper saddle river, nj: prentice-hall. kotler, p. (1997).marketin mana ement. upper saddle river, nj: prentice-hall. levitt, t. (1983).the globalization of markets. harvard business review 61 (3), 92-103. melin, l. (1992). internationalisation as a strategy process. strate ic mana ement journal 13, 99-118. o'farrell, p. n., wood, p.a., gc zheng, j. (1998). internationalisation by business service smes: an inter-industry analysis. international small business journal 16 (2), 1333. reuber, a.r. and fischer, e. (1997). the influence of the management team's international experience on the internationalization behaviors of smes. journal of international business studies 28 (4), 807-825. searing, m. (1998).avenues to foreign markets. nation's business 86 (8), 18-19. simon, f. (1998).a global blueprint for midsize companies. chief executive 137 74-75. zelade, r. (1998).you'e never too small for global fever. international business 11 (i), 6. sheri bridges is an assistant professor of marketing in the ivayne calloway school of business and accountancy at ivake foresi university. she received her ph.d. from stanford university and teaches courses in marketing, consumer behavior, and marketing conimunications. dr. bridges'rimary research interests are in the areas of brand equity and consumer response to marketing strategy. her mosi recent publication was in the journal of marketing. beforejoining the ivake forest faculty, dr. bridges was marketing direcior for a san diego company that manufactured residential security systems and city editor of a daily newspaper in florida. j. kline harrison is an associate professor of management in the wayne calioway school of biisiness and accountancy at wake forest university, where he also serves as associate dean for curriculum and administration. he received his ph.d. from the university of maryland and teaches courses in organi ational behavior, human resources management, and international business. dr. harrison's research primarily focuses on international human resource management. his publications include articles in the journal of applied psycliology, administrative science fjuarterly, international journal of intercultural relations, journal of social psychology, and journal of management education, as well as a book entitled, personnel/human resource skills modules. prior to assuming his position at ivake forest in l990, dr. harrison was a management training consultant in washington, d.c. working with a variety of organi ations in both the public and private sectors. his trainees ranged from corporate executives to first-time supervisors and included both american expairiates and foreign nationals. 94 http://www.smallbusinessinstitute.biz diversification in small firms: does parental influence matter? greg murphy1, neil tocher2 1idaho state university, murpgreg@isu.edu 2idaho state university, tochneil@isu.edu a b s t r a c t diversification is a common goal for many small firms, yet research examining whether small firm ownership structure influences their use of the tactic is limited. as such, this paper provides one of the first empirical investigations of the subject by examining whether the presence of a corporate parent positively influences the likelihood that small firms will utilize diversification. results indicate that small firms with corporate parents are more likely to use both related and unrelated diversification than comparable firms that are independently owned. such findings are noteworthy because diversification may be more beneficial for small, independently owned firms, yet small, subsidiary firms appear to be better able to utilize diversification. implications of these findings are discussed. introduction keywords: journal of small business strategy 2017, vol. 27 no 03, 25-38 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2017 small business institute® apa citation information: murphy, g., & tocher, n. (2017). diversification in small firms: does parental influence matter? journal of small business strategy, 27(3), 25-38. w w w. j s b s . o rg parenting, diversification, small firms, subsidiaries, agency theory “diversification is like sex: its attractions are obvious, often irresistible. yet the experience is often disappointing.” (grant, 2008: p. 409) the above quote suggests that diversification is a common goal for most businesses, despite research indicating that diversification often has negative consequences (arikan & stulz, 2016; graebner, eisenhardt, & roundy, 2010). extent research suggests that most corporate acquisitions are later divested (e.g. phelps, 2010), merger activity often leads to a loss in shareholder value (e.g. malhotra, ku, & murnighan, 2008), and firms pay irrationally large takeover premiums to acquire targets (e.g. lunnan & haugland, 2008). research also indicates that internal diversification efforts such as adding cost leader products to a differentiated product line and launching offerings in different industries tend to have limited profits and often take resources away from a firm’s main market offerings (dunlap-hinkler, kotabe, & mudambi, 2010), leading to reduced long-term profits (govindarajan & trimble, 2010). notably though, such research primarily focuses on large, established ventures, resulting in a lack of scholarly understanding of diversification patterns in small firms (deligianni, voudouris, & lioukas, 2014; diestre & rajagopalan, 2011; nippa, pidun, & rubner, 2012). this gap is particularly troubling because research indicates that diversification efforts in small firms may have more influence on profitability, growth, and survival compared to comparable efforts within large, established ventures (stern & henderson, 2004). given this, the present paper examines an important piece of the small firm diversification puzzle by studying if the product lines of small, subsidiary firms are more or less diversified than those of small, independently owned firms. interestingly, diversification efforts represent a conundrum for small firms. importantly, small, independent firms diversify for a variety of reasons such as to protect their firm’s income (e.g. rosa, 1998), enhance their chance to survive specific market downturns (e.g. sandvig & coakley, 1998), and build wealth for the firm’s owner (e.g. gutter & saleem, 2005). notably however, small, independent firms often have limited access to critical resources (zimmerman & zeitz, 2002) hindering their abilities to undertake critical diversification efforts (rutherford, tocher, pollack, & coombes, 2016). conversely, corporate parents tend to invest in small firms to add the small firm’s specific market 26 g. murphy & n. tocher journal of small business strategy / vol. 27, no. 3 (2017) / 25-38 offerings to the parent’s portfolio and thus likely want the small business to stay focused on continual improvement of such market offerings (carroll, bigelow, seidel, & tsai, 1996). that said, it must also be noted that the presence of a corporate parent will likely expand small subsidiary access to resources, enhancing small subsidiary’s chances to successfully undertake desired diversification efforts (murphy & tocher, 2011). further, while such diversification efforts are likely desired by the subsidiary’s managers for income and market protection (gutter & saleem, 2005; sandvig & coakley, 1998), they may not be desired by parent firms following a portfolio management strategy (lange, boivie, & henderson, 2009). hence, a conundrum exists whereby small, independent firms may need to diversify for their firm’s wellbeing, but are not able to; while small, subsidiary firms may possess access to resources needed for diversification, but their corporate parent may not want them to do so. perplexingly, despite this conundrum, little research has examined if the presence of a corporate parent affects diversification patterns of small firms (diestre & rajagopalan, 2011). given the above, the present paper contributes to the literature by providing one of the first studies of the diversification patterns of small, independent firms versus small, subsidiary firms. analyzing several comparable samples of small subsidiaries and small, independent firms in the retail industry, and grounding our arguments with agency theory, we posit and test the notion that the presence of a corporate parent will result in increased diversification. notably, this study focuses on withinfirm product diversification, which happens when firms extend existing product lines or move into new product lines (nippa et al., 2012). although most of the diversification literature focuses on differences between business units operating as part of a corporation, we focus on withinfirm diversification because it may be more important than between business unit diversification under a corporate umbrella to firms’ abilities to survive, grow, generate profits, and adjust to environmental changes (stern & henderson, 2004). theoretical framework agency theory agency theory arose in the 1970s and asserts that conflict will arise between a firm’s owners (known as principals) and those who operate firms on the owner’s behalf (known as agents) due to factors such as different goals, information asymmetry, and difficulty in oversight relationships (jensen & meckling, 1976). to avoid agency problems, principals attempt to create incentive systems to motivate agents to act in the principals’ interest such as pay incentives and stock ownership (jensen & murphy, 1990). however, oversight is difficult and thus certain levels of agency costs (the portion of owner returns lost due to managers acting in their own self-interest instead of maximizing shareholder returns) are expected (denis, denis, & sarin, 1999). as such, the theory predicts that agents acting on behalf of principals may often take actions that maximize the agent’s personal benefits at the expense of owner wealth maximization (bendickson, davis, cowden, & liguori, 2015; simerly & li, 2000). as noted, diversification efforts rarely increase shareholder value over time (graebner et al., 2010; phelps, 2010). however, managers often pursue diversification strategies because such strategies may help diversify the market offerings of the manager’s firm (lim, das, & das, 2009), allow the manager to negotiate a higher salary (jenson, 1986; stultz, 1990), and create a belief that the manager is irreplaceable to the company (shleifer & vishny, 1989). such efforts are in the manager’s interests but will rarely if ever maximize shareholder wealth because it is often cheaper and easier for shareholders to diversify their own personal risk by purchasing a diversified portfolio of stocks in various companies who are at the top of their specific industries than it is for one individual company to compete at a high level in many different industries (dunlap-hinkler et al., 2010; govindarajan & trimble, 2010). in the small firm context, the introduction of a parent will likely create agency costs in firms that previously did not have such costs (e.g. felício, rodrigues, & samagaio, 2016; lange et al., 2009). research suggests that agency problems are highest in firms that are completely controlled by managers and such problems are minimized as principals maintain some percentage of control (hambrick & finkelstein, 1995). in a small subsidiary, once a parent comes aboard, the once independently owned venture will transition to becoming operated by a manager acting partially, if not entirely, on behalf of the parent, which will almost certainly create agency costs (lim et al., 2009). perhaps the most common agency cost arises when managers diversify the firms’ market offerings to minimize market risk and increase their chance to keep their jobs (simerly & li, 2000). it is important to note that an independent business owner is concerned primarily, if not exclusively, with profitability because the business is likely the owner’s primary source of income and wealth (gutter & saleem, 2005). thus, owners of independent small firms will likely only diversify to increase their firm’s profitability and will not be motivated to keep managerial positions, build power empires, or move up in a parent’s other entities, but subsidiary managers working on behalf of a parent firm may likely be motivated by the above factors (denis et al., 1999), creating agency costs (jensen, 1986). therefore, agency theory suggests that diversification is more likely in 27 g. murphy & n. tocher journal of small business strategy / vol. 27, no. 3 (2017) / 25-38 small, subsidiary ventures than it is in small, independently owned ventures because the presence of a parent will create a much stronger possibility of agency costs which will not likely exist in independently owned firms (lange et al., 2009). as such, we posit that agency theory provides theoretical foundation for the notion that small, subsidiary ventures will be more likely to undertake diversification efforts than small, independent firms. given the above theoretical assertions, we next review the small firm diversification literature before positing that the presence of a parent will increase diversification in small ventures. small firms and diversification small firms attempt to diversify for a variety of reasons. in general, small firms are more likely to use diversification to survive and to exploit identified business opportunities. rosa (1998) argued that in good times, entrepreneurs are more likely to use diversification to exploit opportunities, while in bad times they adopt a more deliberate, planned approach to diversification focusing on ensuring survival. gutter and saleem (2005) offer further insight into why small business owners diversify. the authors note that compared to others, small business owners face far greater financial vulnerability since they rely on their business for both income and wealth. the result may be that small business owners need to diversify to reduce the risk that significant change in one market could hinder their firm’s profitability and thus destroy their income and largest retirement asset. additional reasons that small business owners diversify include sales stimulation, enhanced financial growth, meeting market needs, satisfying customer requests, using existing resources more effectively, providing opportunities for a spouse, and adding greater variety for the entrepreneur (lynn & reinsch, 1990; tornikoski & newbert, 2007). however, there are likely differences in the abilities of small, independent firms compared to small, subsidiary firms to diversify. due to limited access to resources, small, independent firms are often in a daily fight for survival (aldrich, 1999; choi & shepherd, 2005; williamson, 2000). notably, small, independent firms are typically constrained by smallness liabilities, a condition where emerging ventures have little market power because of a lack of access to key tangible resources possessed by potential stakeholders (morris, 2001). since small, independent firms commonly have limited debt capacity, poor cash flows, a limited product/service offering, and depend on niche markets, they are more susceptible to market forces such as aggressive competitors, demand fluctuations, and powerful suppliers (wiklund, baker, & shepherd, 2010). hence, to overcome smallness liabilities, small, independent firms must be highly focused on resource acquisition, often at the expense of focusing on other more minor issues (jawahar & mclaughlin, 2001). however, before small, independent firms will be able to gain the consistent access to resources needed to neutralize liabilities of smallness, such firms must first be deemed as viable by key stakeholders (holt & macpherson, 2010; khaire, 2010). to accomplish this, small, independent firms often bring on a powerful stakeholder in some form of long term relationship such as strategic alliances, joint ventures, and contractual relationships to signal to other potential stakeholders that the firm is viable and worthy of resources (kelly, schaan, & joncas, 2015; wright, palmer, & perkins, 2004). perhaps the strongest signal that an emerging venture has successfully shed smallness liabilities is provided by a corporate parent investing in the firm and taking it on as a subsidiary (pollack et al., 2012). since parents enter into a contractual relationship with a subsidiary that is difficult to sever, it follows that prior to entering such a relationship, a parent would perform a solid due diligence investigation to determine if the parent will quickly see a return on investment (ardichvili, cardozo, & ray, 2003; arthurs & busenitz, 2003). hence, once a parent invests in a small, emerging venture, it follows that other key stakeholders will soon jump on board, providing the emerging venture access to resources (both internally from parents and externally from other stakeholders) needed for diversification efforts. therefore, we conclude that the presence of a corporate parent will facilitate diversification in small firms. small firms and related diversification. due to a simple ownership structure and few stakeholders, owners of small, independently owned businesses have great autonomy in pursuing their objectives (e.g. mcmahon & stanger, 1995) whereas managers of small, subsidiary firms are likely restrained in decision making due to being accountable to parent firms and a variety of other powerful stakeholders (dimov, 2010). accordingly, small, independent business owners may have greater autonomy, but less ability to diversify (lange et al., 2009). further, small, independent firms are more vulnerable to the risk of market offering obsolescence (sandvig & coakley, 1998). small, independent firms are more likely to be dependent on a few key market offerings and they generally have fewer resources that can be used to generate new key products relative to small, subsidiary firms (rutherford, buller, & stebbins, 2009). the product obsolescence risk faced by small, independent businesses is heightened by the fact that they often operate in volatile market niches that can shrink or easily be entered by more powerful, low cost competitors (e.g. delmar & shane, 2004). this increased market offering obsolescence risk provides a strong motive for owners of small, independent firms to diversify as a means to increase the firm’s chances of survival (liao, kickul, & ma, 28 g. murphy & n. tocher journal of small business strategy / vol. 27, no. 3 (2017) / 25-38 2009). hence, owners of small, independent firms are likely very aware of the risks of not being diversified and that awareness may motivate the owner to diversify to reduce their risk exposure, even if doing so means sacrificing possible returns (mcmahon & stanger, 1995; witt, 2004). hence, while small, independently owned firms likely have interest in related diversification to protect themselves from product obsolescence and powerful competitors, market realities will likely result in subsidiary small businesses being better able to utilize related diversification. for example, small subsidiaries are able to obtain resources such as funding, expertise, and managerial capacity needed for market entry from a corporate parent (murphy & tocher, 2011) while independently owned firms may struggle to acquire such resources due to smallness liabilities and the resultant doubts which exist in stakeholders minds as a result of such realities (rutherford et al., 2016). further, since small, subsidiary ventures will have agency costs which do not likely exist in small, independently owned ventures, subsidiary managers will be more likely to diversify to protect the firm against market risk and thereby also protect their managerial jobs (denis et al., 1999; lim et al., 2009). conversely, independent owners will likely only diversify if they feel diversification efforts will increase their firms’ profitability and wealth (gutter & saleem, 2005). as such, we posit that all small firms will typically seek to engage in related diversification to hedge against product obsolescence and powerful competitors. however, since subsidiary ventures have access to better pools of resources and have also likely developed agency costs, subsidiary ventures will be more likely to utilize related diversification. hence, the following is advanced: hypothesis 1. small, subsidiary firms will engage in more related diversification than small, independent firms. small firms and unrelated diversification. unrelated diversification may be more common in subsidiary firms because both subsidiary managers and parent firms may be motivated to diversify a subsidiary into an activity that is unrelated to the subsidiary’s business, but is related to the parent’s line of business (lim et al., 2009; mackey, barney, & dotson, 2017). for example, subsidiary managers may be motivated to engage in such diversification to better align the subsidiary to the parent firm and/or gain recognition from the parent firm (denis et al., 1999). similarly, interdependency issues will likely lead to small, subsidiary firms being involved in more unrelated diversification than small, independent firms (stam & elfring, 2008). importantly, managers operating subsidiary ventures may make decisions that are aligned with the interdependency that is often created when a parent subsidiary relationship is created and nurtured over time (wang & barney, 2006). hence, while parent firms may purchase a subsidiary because the parent wants the subsidiary to focus on their niche and generate profits for the parent (e.g. lange et al., 2009), the parent may also want the subsidiary firm to provide other benefits to the parent in addition to profits (gomes & livdan, 2004). examples of additional benefits which the parent firm may want a subsidiary to offer include serving as a supplier to the parent, serving as a customer for a parent’s market offering, producing a market offering that is complementary or additive to a parent’s offering, and providing additional work for expert employees of the parent firm (maksimovic & phillips, 2002). notably, while subsidiary firms providing these benefits are likely beneficial for both the parent and the subsidiary, serving these roles may often involve unrelated diversification for the small subsidiary venture (mackey et al., 2017; simerly & li, 2000). given the above, it appears that small, subsidiary ventures will be more likely to engage in unrelated diversification than comparable small, independent ventures. as such, the following is advanced: hypothesis 2. small, subsidiary firms will engage in more unrelated diversification than small, independent firms. method data for the study were gathered from reference usa. reference usa claims to report data on over 14 million businesses in the united states. to identify a sample of small subsidiaries, data on non-government, non-branch and non-headquarter subsidiary retail firms with less than 500 employees were gathered. a total of 1242 such firms were identified. branch locations were excluded since they are likely to have never had independent ownership. retail firms were chosen because mcgahan and porter (1997) noted that corporate level effects (possibly including diversification) are strongest in the retail and wholesale industries. to identify a comparative sample, random names were chosen and used as street names to identify non-government, non-branch, non-headquarter, and non-subsidiary, single location independent retail firms with less than 500 employees. this process identified 2099 such firms. in general, subsidiary firms were larger and had more executives than independent firms. accordingly, firm size and number of executives were controlled for in the analysis. three measures of diversification were used. the measures all used sic codes to differentiate industries. although naics codes are newer, sic codes were used because reference usa reports up to 10 sic codes per company and only 4 naics codes per company. past research has shown little difference in industry homogeneity between samples drawn from sic and naics codes (cairney & fletcher, 2009; bhojraj, lee, & oler, 2003), and sic codes are still frequent29 g. murphy & n. tocher journal of small business strategy / vol. 27, no. 3 (2017) / 25-38 ly used to distinguish industries (c.f. mackey et al., 2017; chen & kelly, 2015; rauh & sufi, 2012; bens, berger, & monahan, 2011). the first measure of diversification used is the number of different sic codes reported. firms in the total sample reported an average of 1.9 sic codes with a standard deviation of 1.45. firms reporting more sic codes are engaged in more lines of business and can therefore be said to be more diversified. 1449 of the 3341 firms in the total sample (43.37%) reported more than one sic code. 778 of the 2099 independent firms (37.07%) reported more than one sic code while 671 of the 1242 subsidiary firms (54.03%) reported more than one sic code. the second measure of diversification is designed to capture the degree of relatedness/un-relatedness of the firm’s diversification efforts. the method of measuring relatedness/unrelatedness is similar to that employed by diestre and rajagopalan (2011), who measured relatedness as the degree of difference in sic code digits. other studies have used differences in sic codes to measure diversification, usually at the three or four digit sic code level (david, o’brien, yoshikawa, & delios, 2010; stern & henderson, 2004). to measure relatedness, each subsequent sic code was given a score of 1 if only its 6th digit differed from the firm’s stated primary sic code, a score of 2 was given if the 5th digit was different, a score of 3 was given if the 4th digit was different, a score of 4 was given if the 3d digit was different, a score of 5 was assigned if the 2d digit was different, and finally, a score of 6 was given if the 1st digit was different than the stated primary sic code. this process was repeated for each subsequently listed sic code. finally, all of the scores were summed for each firm and divided by the stated number of sic codes (-1) for that firm. consequently, firms with higher numbers on this measure engaged in business activities that were more unrelated to their stated primary sic code than firms with lower numbers on this measure. this measure makes it possible for a firm with fewer listed sic codes to have a higher diversification score than a firm with more stated sic codes. the average relatedness score for the overall sample was 1.89 with a standard deviation of 2.41. the final measure of diversification is designed to capture the impact of sic code clusters. for example, using the diversification measures used above, the following hypothetical firms would have identical scores on both measures. firm 1 sic codes (primary sic code first): 222222, 223333, 444444, 555555, 666666 firm 2 sic codes (primary sic code first): 222222, 223333, 444444, 445555, 446666 both firms have 5 different sic codes and the unrelatedness measure of each would be 4.75; however, the clustering of sic codes by firm 2 above suggests that it is less diversified than firm 1. the number of sic code clusters was therefore measured as the number of different 2 digit sic codes reported by each firm. using this measure, for example, firm 1 would be scored with a 4 while firm 2 would be scored with a 2, indicating that firm 1 is engaged in more industry clusters than firm 2. company status was measured using dummy variables. independent firms were coded with a 0 while subsidiary firms were coded with a 1. the mean for this variable was .37 and the standard deviation was .48. three control measures were used in the study: firm age, number of employees, and number of executives. firm age was included as a control since older firms will have had more time to diversify and will also likely have more legitimacy, granting them access to resources that may be used to facilitate diversification. the number of years since the company first used a yellow page ad was used as a proxy for firm age. while an imperfect measure of firm age, retail firms have a strong interest in being listed in local yellow pages. the number of employees was used as a proxy for firm size and was included as a control since larger firms are also likely to have access to more resources that can be used in diversification efforts. reference usa provides data on number of employees in size groupings: firms with 0-4 employees were coded 1, firms with 5-9 employees were coded 2, firms with 10-19 employees were coded 3, firms with 20-49 employees were coded 4, firms with 50-99 employees were coded 5, firms with 100-249 employees were coded 6, and firms with 250-499 employees were coded 7. finally, number of executives was used as a proxy for managerial capacity. managing diversified firms increases coordination demands on managers. having more executives should help alleviate the managerial capacity challenge, making diversification efforts easier and arguably, more likely. reference usa lists up to 21 executives (including the primary firm contact) for each firm. number of executives was measured as the total number of executives listed for each firm. the number of executives per firm ranged from 1 to 11 in the samples. results means, standard deviations, and correlations for the variables in the study are reported in table 1 for the full sample and in table 2 for the sample of only firms reporting more than one sic code (firms that have diversified). table 1 shows strong positive correlations between company status and all three diversification measures. table 2 shows significant positive associations between company status and the measures unrelatedness and number of sic code clusters. the insignificant relationship between company status and number of sic codes in table 2 may be due to 30 g. murphy & n. tocher journal of small business strategy / vol. 27, no. 3 (2017) / 25-38 the fact that a smaller percentage of independently owned firms listed more than one sic code compared to small subsidiary firms. these preliminary findings are further illustrated in tables 3 and 4 that show mean differences between small independent firms and small subsidiaries on the three control variables of firm age, number of employees, and number of executives; and on number of sic codes, unrelatedness, and number of sic code clusters. table 3 reports mean differences for all firms in the sample, while table 4 reports mean differences for firms reporting more than one sic code. the results of regression analysis are reported in tables 5 and 6. table 5 shows that, for the sample as a whole, subsidiary status is significantly and positively related to number of sic codes, unrelatedness, and to number of sic code clusters, when controlling for the effects of firm age, number of employees, and number of executives. table 6 shows that, for the sample of firms that are in more than one sic code, subsidiary status is significantly and positively related to unrelatedness and number of sic code clusters when controlling for firm age, number of employees, and number of executives. these results provide strong support for hypotheses 1 and 2, that small, subsidiary firms are more likely to diversify and are more likely to pursue unrelated diversification than are small, independently owned firms. the insignificant relationship between company status and number of sic codes in table 6 is consistent with the finding in table 2 that, among firms that have already diversified into at least one additional line of business, company status was no longer associated with number of sic codes. the discrepancy between the company status and number of sic codes relationships in tables 5 and 6 may be caused by the fact that fewer independent firms were found to have engaged in any diversification compared to subsidiary firms. table 1 means, standard deviations, and correlations m sd 1 2 3 4 5 6 1. firm age 11.60 7.40 2. # employees 3.62 1.90 .23** 3. # executives 2.13 1.93 .15** .52** 4. company status .37 .48 .09** .23** .22** 5. # sic codes 1.90 1.45 .37** .25** .23** .13** 6. unrelatedness 1.89 2.41 .32** .23** .22** .26** .66** 7. # sic clusters 1.48 .85 .31** .24** .25** .27** .81** .78** n = 3319 **p < .001 table 2 means, standard deviations, and correlations for firms reporting more than 1 sic code m sd 1 2 3 4 5 6 1. firm age 14.67 6.95 2. # employees 4.11 1.77 .17** 3. # executives 2.54 2.16 .12** .50** 4. company status .46 .50 -.01 .13** .17** 5. # sic codes 3.07 1.57 .27** .21** .20** .03 6. unrelatedness 4.36 1.63 -.02 .10** .15** .36** .09** 7. # sic clusters 2.10 .98 .17** .19** .23** .32** .66** .59** n = 1449 ** p < .001 31 g. murphy & n. tocher journal of small business strategy / vol. 27, no. 3 (2017) / 25-38 and analyzed for consistency of results with the findings of this study. this process was repeated five times to ensure that the results were not a function of chance. the findings that company status (independent or subsidiary) was significantly associated with the measures of unrelatedness and number of sic code clusters was strongly supported by this analysis. all of the relationships were still significant at the .001 level of significance in all five iterations of the analysis. the finding that company status was significantly associated with number of sic codes was not consistently supported given this reduced level of statistical power. the finding was only statistically significant at .05 in one iteration of the analysis. this finding indicates a smaller effect size for the company status – number of sic codes relationship. discussion the current paper sought to provide one of the first examinations of whether the presence of a corporate parent influences diversification patterns of small firms. while robustness of results multiple robustness checks were conducted. a random sample of 1200 independent firms and 1200 subsidiary firms were selected and analyzed from the larger dataset to ensure that unequal sample sizes were not skewing the results. this process yielded results very comparable to those reported above. all of the significant relationships reported in tables 1-6 were still significant for this analysis. a second set of tests used the number of naics codes instead of number of sic codes to confirm that the selection of sic codes as opposed to naics codes to measure diversification did not bias the outcomes of this study. the results of this analysis revealed equivalent results to the main findings of this study, indicating no statistically meaningful differences as a result of using sic codes versus naics codes. smaller subsamples were then drawn from the larger dataset to assess the robustness of the findings to lower levels of statistical power. specifically, random samples of 200 independent and 200 subsidiary firms were chosen table 3 means and standard deviations by firm status independent firms subsidiary firms m sd m sd f firm age 11.09 7.77 12.48 6.65 27.63** number of employees 3.28 1.98 4.20 4.00 189.61** number of executives 1.80 1.62 2.67 2.26 164.66** number of sic codes 1.75 1.36 2.14 1.57 57.11** unrelatedness 1.41 2.10 2.69 2.68 269.20** number of sic clusters 1.30 .64 1.78 1.05 237.47** n = 3341 ** p < .001 table 4 means and standard deviations by firm status for firms reporting more than one sic code independent firms subsidiary firms m sd m sd f firm age 14.72 7.50 14.61 6.26 .09 number of employees 3.90 1.88 4.36 1.60 25.30** number of executives 2.21 1.88 2.92 2.39 40.26** number of sic codes 3.03 1.56 3.11 1.58 1.06 unrelatedness 3.81 1.66 5.00 1.33 165.70** number of sic clusters 1.81 .83 2.44 1.04 219.24** n = 1449 ** p < .001 32 g. murphy & n. tocher journal of small business strategy / vol. 27, no. 3 (2017) / 25-38 much previous research suggests that diversification is a widely used yet ineffective tactic, such research rarely focuses on small firms (diestre & rajagopalan, 2011). such a gap in the literature is troubling because while diversification efforts in small ventures may be more influential on profitability and growth compared to similar efforts in larger firms (stern & henderson, 2004), scholars know little about when and if small ventures will be more likely to diversify (nippa et al., 2012). hence, the present paper makes an important contribution to current literature by beginning to examine the small firm diversification puzzle. using several comparison samples of small, independently owned firms and small, subsidiary firms in the retail industry, we find that subsidiary ventures are more likely to engage in both related and unrelated diversification. notably, these findings hold even when examining only the subset of firms that have diversified. further, it is interesting to note that while subsidiaries that have diversified engage in approximately the same number of different industries, their diversification efforts are more likely to be in unrelated industries when compared to diversified independently owned firms. collectively, such findings suggest that the presence of a corporate parent enhances the chances that small ventures will diversify. such findings are noteworthy for several reasons as follows: first, study findings indicate that parent firms need to put safeguards in place to monitor agency costs (e.g. denis et al., 1999; hoenen & kostova, 2015). the presence of a parent will likely create some agency costs as previously independent firms transition to subsidiary firms operated by managers acting on behalf of parent firms (simerly & li, 2000). while agency costs may not be as high as they are in the large, public firm sector, the introduction of a parent will still likely create some agency costs and thus a parent firm needs to take actions to prevent such costs from growing to an unacceptable level (lim et al., 2009). parents should thus consider strategies to align subsidiary managers’ interests with their interests such as pay incentable 5 regression on diversification measures # sic codes unrelatedness # sic clusters firm age .33** .27** .26** # employees .10** .07** .06** # executives .11** .09** .12** company status .05* .19** .21** f 181.01** 173.00** 183.53** adjusted r2 .18 .17 .18 n=3317 * p < .005 ** p < .001 standardized coefficients reported table 6 regression on diversification measures for firms reporting more than 1 sic code # sic codes unrelatedness # sic clusters firm age .23** -.03 .14 # employees .13** .02 .07* # executives .09** .09** .10** company status -.01 .34** .30** f 43.39** 57.65** 65.49** adjusted r2 .10 .14 .15 n=1436 * p < .01 ** p < .001 standardized coefficients reported 33 g. murphy & n. tocher journal of small business strategy / vol. 27, no. 3 (2017) / 25-38 tives, bonuses, stock options, and subsidiary performance targets (jensen & murphy, 1990). additionally, parent firms should take an active approach in management of subsidiary ventures by maintaining a strong presence on boards of directors, regularly meeting with subsidiary managers, and even developing exit strategies that could be implemented in cases of poor performance (dunlap-hinkler et al., 2010; govindarajan & trimble, 2010). at a minimum, parent firms need to be aware that subsidiary managers will potentially be motivated to take actions that will not lead to profit maximization and may make it difficult to remove managers (e.g. nippa et al., 2012). hence, agency costs are likely present in all parent subsidiary relationships and parent firms should act accordingly. similarly, parent firms should also be aware that subsidiary diversification may have diminishing returns over time. specifically, initial subsidiary diversification may indeed maximize profitability and later diversification efforts may be much less beneficial (stern & henderson, 2004). at the inception of the parent subsidiary relationship, a subsidiary firm will likely possess the access to needed resources for critical diversification efforts that it was not able to undertake as an independent firm due to smallness liabilities (rutherford et al., 2016). hence, the subsidiaries early diversification efforts likely maximize profits and are undertaken because the subsidiary possesses the access to resources it did not possess as an independent firm (wiklund et al., 2010). further, early in the parent subsidiary relationship, the parent may also want the subsidiary to diversify into areas that benefit the parent (nippa et al., 2012). for example, corporate parents may view their ownership of a subsidiary retail business as an opportunity to cross-sell their own products, thereby increasing the diversification of the subsidiary. a highly diversified parent firm may also encourage a subsidiary to diversify to align with that parent’s business practices. a small subsidiary that serves as a supplier to a parent firm may also be encouraged to offer a broader range of products that the parent needs as inputs. however, once such initial diversification efforts take place, later diversification efforts may be motivated by other concerns (e.g. lim et al., 2009). continual diversification on the part of subsidiaries may suggest that parent firms are ineffective in controlling the behavior of their corporate children. such subsidiaries may be using diversification primarily as a means to grow their business or reduce their risk, leveraging the parent association to attain resources directly or indirectly (through increased perceived market power) needed to diversify (simerly & li, 2000). future research should be undertaken to examine if indeed subsidiary diversification has diminishing benefits over time. further, study findings suggest that access to resources may significantly constrain diversification in small, independent firms. scholars suggest that small, independent firms may need to engage in limited diversification to enhance their chances to survive and grow, whereas corporate parents following a portfolio management strategy would likely discourage most subsidiary diversification efforts (carroll et al., 1996; gutter & saleem, 2005). however, study findings indicate exactly the opposite in that subsidiary firms are more likely to engage in both related and unrelated diversification. considering previous research findings that small, independent firms seek to diversify for a variety of reasons (e.g. sandvig & coakley, 1998) combined with this study’s observation that such firms are less likely to engage in the practice, it appears that small, independent firms are likely not able to access needed resources for desired diversification efforts. it would further seem that parent firms following portfolio management strategies would discourage most subsidiary diversification efforts because the parent firm would rather its small subsidiaries concentrate on maximizing returns from their existing market offerings (e.g. lange et al., 2009). however, the finding that subsidiary firms engage in more diversification suggests that the presence of a parent indicates that subsidiary ventures are able to consistently access the resources from internal capital markets needed for diversification efforts (e.g. rutherford et al., 2016). therefore, the somewhat counterintuitive findings observed here provide credence to the notion that resource constraints hinder the ability of small, independent firms to engage in diversification. finally, the retail setting of the present study may suggest that its findings may be even more observable in other industries in which diversification efforts are more difficult. retail is a far easier industry than many other industries (i.e. manufacturing, design, physical sciences) in which to diversify (dunlap-hinkler et al., 2010). thus, it is notable that even in an industry in which diversification is fairly easy and inexpensive, it was observed that small subsidiary ventures are more likely than independent small firms to engage in both related and unrelated diversification. hence, industries that are capital intensive such as design, manufacturing, or biotechnology may be far more difficult marketspaces for small, independent firms to diversify (govindarajan & trimble, 2010). therefore, while future research is needed to further validate the results observed here, it is quite likely that the diversification pattern observed in the present study may hold in validation studies in many other industries (e.g. diestre & rajagopalan, 2011). implications for small firms study findings suggest that parenting may have a sort of dual-edged sword effect for small firms. as noted above, small, independent firms will often struggle to acquire the 34 g. murphy & n. tocher journal of small business strategy / vol. 27, no. 3 (2017) / 25-38 needed resources to diversify, and this may hinder their ability to survive and grow (e.g. rutherford et al., 2016). thus, entering into a parent subsidiary relationship may be quite tempting for small, independent firms who are struggling to undertake diversification efforts (choi & shepherd, 2005). however, small firms must also understand that entering into a parent subsidiary relationship may often significantly change a small firm’s culture, decision making, and main purpose (lange et al., 2009). given that small, subsidiary firms are more likely to engage in unrelated diversification (from the perspective of the subsidiary venture), along with the idea that such diversification is likely driven by both subsidiary managers and parent firms for motives other than profitability (simerly & li, 2000), owners of small, independent firms considering parenting as a strategic option must be aware of both edges of the parenting sword (murphy & tocher, 2011). on one hand, staying independent may significantly hinder diversification and possibly even survival and growth (zimmerman & zeitz, 2002). conversely, while parenting offers increased diversification and stability (carroll et al., 1996), it may also significantly change how the firm is operated and the motivations it utilizes to make decisions (mackey et al., 2017). hence, when it comes to parenting, there may not be a right or wrong decision for small firms, but their owners do need to be aware of the pros and cons of the decision of “to take on a parent or stay free?” small firms also need to be aware of similar options to parenting such as strategic alliances, joint ventures, and long term contractual relationships with powerful partners. such options may provide many of the same benefits as parenting does, but may not be quite as constraining (kelly et al., 2015; wright et al., 2005). however, as with the parenting decision, small firms must understand that any decision to enter into a long-term relationship with a more powerful entity has both positives and negatives (lechner, dowling, & welpe, 2006; stam & elfring, 2008). finally, owners of small, independent firms must be aware that bringing a corporate parent on board will likely limit and even quite possibly eliminate their involvement with the firm they presently own (maksimovic & phillips, 2002). while all parent subsidiary relationships are different, a previous owner may be kept on in a managerial role, may be kept on in an employment role, may be kept on in a role which diminishes over time, and may not be kept on at all (gomes & livdan, 2004). thus, owners must make the parenting choice with the understanding that the above results are all possibilities once the firm transitions to a subsidiary. limitations perhaps the most notable limitation is that the present study was unable to assess owner motivations for diversification. while we observed that small, subsidiary ventures were more likely to diversify than small, independent firms, we do not know if the owners of small, independent ventures chose not to diversify even though they may have been able to do so. it is certainly reasonable in many cases that small, independent firms did not diversify because they lack the access to resources needed to do so (e.g. hoefer & green, 2016), but it would certainly substantiate study findings to assess owner motivations for diversification. similarly, while our study theorized that both subsidiary managers and parent firms may encourage subsidiary ventures to engage in unrelated diversification, it must be noted that the data analyzed do not allow us to determine if subsidiary managers or parent firms were the primary drivers of this diversification. next, the present study did not assess firm profitability. most research finds that diversification efforts often do not increase firm profitability and thus suggest that the diversified subsidiaries observed in this study may be less profitable per capita over the long term than their less diversified independent counterparts. however, the present study is only able to observe pure diversification patterns in small ventures and is unable to determine if such patterns influence firm performance. further, as noted, the present study is limited by the fact that it only examines the retail industry. while this setting has advantages in that retail is a fairly easy industry in which to diversify, validation studies in other industry settings are needed to substantiate the patterns uncovered in this paper and identify if similar patterns exist in different industries. finally, while this study’s findings that subsidiary ventures engaged in more unrelated diversification than comparable small, independent firms is notable, it is also important to clarify that unrelated diversification was studied from the perspective of the subsidiary, not the parent firm. thus, it is possible that diversification efforts may be unrelated to a subsidiary’s line of business, but are somehow related to a parent’s line of business. hence, our study only allows us to say that subsidiary ventures likely engage in unrelated diversification from the subsidiary’s perspective. despite the above limitations, the present paper makes a substantial contribution to current literature by being one of the first empirical examinations of diversification patterns of small firms. future research the present study highlights several ripe areas for future research. as noted, validation studies are needed both within the retail industry and in other settings. researchers may want to consider validating the present study’s findings with samples from such entities as the department of labor, the business census, and other sec35 g. murphy & n. tocher journal of small business strategy / vol. 27, no. 3 (2017) / 25-38 ondary data sources which may collect more details about variables such as firm ownership structure and historical financial records. it would seem that the diversification patterns observed here may hold in industries where diversification efforts are more difficult to undertake and it would also seem that validation studies in the retail industry would likely have similar findings. however, future research is needed to substantiate such claims. studies are also needed which assess owner motivation for diversification and examine the influence that small firm diversification has on profitability. further research is also needed to determine if small firm diversification has diminishing returns over time. the limited resource access faced by many small, independent firms would suggest that small, independent firms would like to diversify, but often are not able to do so. similarly, it seems logical that at the initial stages of a parent subsidiary relationship diversification would have high returns because both the subsidiary and the parent may have diversification efforts planned out that were not able to be accomplished until the parent came on board, but, over time, subsidiary managers would initiate other diversification efforts that are motivated by other factors besides profit maximization (e.g. lim et al., 1999). that said, empirical studies are needed to validate these musings. finally, research should examine other factors besides the introduction of a corporate parent which may allow small, independent firms to successfully undertake critical diversification efforts that are needed for survival. while diversification often has disappointing results over the long term when extensively used (e.g. graebner et al., 2010), it is highly likely that small firms may need to diversify into areas that may help them survive and grow, but may not be able to do so due to limited resource access (rutherford et al., 2009). further, the findings observed in this study suggest that the presence of a corporate parent is a viable strategic action which enables small firms to more frequently utilize diversification. however, taking on a parent firm is likely not the right fit for all small firms and thus research should work to identify other actions small firms may consider taking to gain the access to resources needed to undertake diversification efforts that will help them survive and grow. perhaps one significant customer or financier engaged in a long-term contract with a small firm may allow that firm to access the resources it needs to undertake critical diversification efforts. similarly, perhaps the small venture can consider arrangements such as joint ventures, strategic alliances, and contractual agreements with larger or more established partners which may have similar benefits provided by parent firms without the constraints that are associated with becoming a subsidiary (e.g. kelly et al., 2015; wright et al., 2005). previous research suggests that strategic alliances often allow firms to access needed resources (davidsson & honig, 2003; stam & elfring, 2008), but such research has not looked specifically at diversification efforts. therefore, research studying the above quandaries should help increase scholarly understanding of the small firm diversification puzzle. conclusion the present study’s findings that small subsidiary ventures are more likely to engage in diversification than comparable independent ventures contributes to the literature by providing one of the first empirical examinations of small firm diversification patterns. using several comparison samples of small, subsidiary firms and small, independently owned firms in the retail industry, we show that subsidiary ventures consistently engage in diversification and the finding holds even when the sample is reduced to compare only independent and subsidiary ventures that utilize at least some diversification. such findings are noteworthy because they (1) provide strong evidence that the presence of a corporate parent provides small firms the access to resources needed to engage in diversification, (2) advance scholarly understanding of the small firm diversification puzzle, and (3) are somewhat counter intuitive to scholarly research that suggests independent firms likely want to diversify and parent firms would likely often discourage subsidiary diversification (e.g. nippa et al., 2012). given such findings, we posit that small firm diversification is a critically important, yet poorly understood, scholarly topic. while we acknowledge that this is only one study in a single industry, we submit that its counterintuitive findings, the implications of such findings, and the rarity of other empirical examinations of the issue suggest that small firm diversification patterns likely significantly influence economic outcomes and scholars will want to continue working to comprehend such influence. references 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(2002). beyond survival: achieving new venture growth by building legitimacy. academy of management review, 27, 414431. reproduced with permission of the copyright owner. further reproduction prohibited without permission. business plans made easy, second edition klotz, kenneth r journal of small business strategy; spring/summer 2004; 15, 1; abi/inform complete pg. 93 journal of'small business strategv vol. 15, no. 1spring/summer2004 book review business plans made easy, second edition by mark henricks & john riddle entrepreneur .press, 2002, 336 pg. isbn: 1-89198443-8 reviewed by kenneth r. klotz bradley university business plans made emy it's not as hard as you think, presents an excellent, ready-louse methodology for writing a business plan and presenting it to potential funding sources. while aimed at the startup entrepreneur, even a seasoned business veteran will find it instructive. books on writing business plans, on the whole, present the same basic information. what sets them apart is the author's writing style and use of practical, how-to worksheets and tips. authors mark henricks and john riddle have done an excellent job in both respects. the conversational style used by the authors makes this book an easy read. the material is presented as if a knowledgeable mentor was speaking to proteges, guiding them through the elements necessary in a business plan and alerting them to common problems to avoid. scattered throughout every chapter are textboxes entitled "plan pitfall," "plan pointer," "plan of action," "fact or fiction," and "buzzword" which impart very practical advice on common plan errors, ways to improve a plan, sources for more assistance, straight answers to business plan questions, and definitions of terms a writer will likely encounter. chapter 2 did an excellent job of dispelling common myths regarding the use of venture capital in startup businesses. an interview with a venture capitalist in the health care industry provided an inside look at what a venture capital firm is real~v looking for and how they evaluate a proposed investment idea and management team. two useful pre-venture planning worksheets are included in chapter 4. a "goals & objectives worksheet" guides prospective entrepreneurs through a series of questions to assess their commitment to the venture and detennine their management style. so often, entrepreneurs dive into a new venture without analyzing the company's financial potential. the authors provide a very practical worksheet entitled "assessing your company's potential," which examine a potential startup from a financial and lifestyle perspective. an example is included on assessing the financial potential of a newsletter directed at owners of coffee bars. chapter 8 does a superior job in describing the importance of and exactly how a startup business determines its "unique selling proposition (usp)". the authors include a worksheet 93 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal olsmall business strategv vol. 15. no. 1 spring/summer 2004 where business owners define areas of strength/uniqueness and score them on a scale from i to i 0. also helpful are more than a dozen concrete examples of small business usps. the marketing section of the business plan is discussed primarily in chapters 9 & 10. an "industry analysis worksheet" provides a framework for entrepreneurs to assess the current and future strength of the industry an often ignored element of many start-up business plans. the authors do a nice job of explaining and providing examples of easy-to-implement primary research gathering methods. the "promotional budget worksheet," contained in chapter 10, is suitable for existing businesses as well as startups. it provides an organized way to plan annual promotional expenditures, mediums used, goals, and frequency. the section of the book describing financial projections did the usual job of explaining the elements of an income statement, balance sheet, and cash flow statement in cursory fashion. what was pleasantly unexpected, however, was the outstanding "break-even analysis worksheet," contained in chapter 12. in one page, entrepreneurs are presented with a very simple method of computing the often elusive break-even point of their business. the simplicity of its formula and plain language explanation are the keys to its usefulness. common financial ratios and their use are described in this publication. the authors did an especially nice job of providing explanations and examples of average collection period and inventory turnover. also, a methodology of preparing a monthly cash flow forecast is presented along with a sample for a sailboard rental business. both guide a prospective business owner through one of the more difficult aspects of preparing a business plan. the final four chapters and appendices inform entrepreneurs of the most common exhibits to attach to their business plan, presentation tips, sources of additional assistance available, and internet research ideas. most helpful are the five sample business plans included. samples are provided for the startup retailer, high tech company needing growth capital, service business seeking working capital, manufacturer seeking strategic partners, and the startup in need of an equipment loan. this book is highly recommended for those new to wntmg a business plan. its helpful worksheets, textbox tips, and common sense explanations make this publication an easy to use reference tool. 94 stra tegf the classification of service providers as "contract workers" rather than "employees": implications and guidelines for small businesses matthew c. sonfield hofstra university abstract small businesses can reap a variety ofbenefits by classifying some oftheir workers as "contract workers" rather than "employees." however, there are significantrisks involve as wel!. this article explains the issues and regulations involvedin such a classification gives some examples, and then provides the small business owner, manager and advisor with a series ofguidelines to increase the likelihood of correct classification, marimum benefit and minimum risk to the company. introduction about five million americans work for companies, but are not employees of those companies (uchitelle, 1996). these workers are "contract workers," also known as "independent contractors." under the law, a contract worker independently agrees with an employer to perform services for that employer for a fee. unlike an employee, the contract worker is considered self-employed, performs his or her work with minimal direction and greater flexibility, receives none of the supplementary benefits an employee might receive, and is responsible for paying his or her own income and social security taxes. largely because of this flexibility and the relief from providing benefits and from withholding and paying taxes, this alternative to employment appeals to employers, who have been using it in greater and greater numbers. the growth of contract workers has been explosive in the 1990's and is expected to continue well into the next century (wolfe, 1996). the rise of the use of contract workers is part of a larger and growing shia in the basic structure of american business and work. in recent years, in response to competitive and financial market pressures, a large number of companies have moved to make their operations more lean and efficient through downsizing and outsourcing (anderson, 1997; greising, 1998). and one specific mechanism to achieve these goals has been the use of contract workers rather than employees (braff, 1997; houseman, 1997). while downsizing most oflen leads to the outright elimination of jobs and employees, employers motivated by the potential cost savings of "contract worker" classification may also replace terminated employees with less expensive contract workers. one recent study indicates that almost thirty percent of terminated employees are being replaced by contract workers ("temps forever," 1997). 17 journal ofsmall business strategy volume 9, no. l spring 1998 the apparent advantages to the employer are clear. the costs of withholding and recording income taxes can be avoided, since this responsibility now falls on the contract worker. the employer need not contribute to social security/medicaretaxes (7.658u from the employer on the first $68,400 in wages in 1998) nor to federal and state unemployment and workers'ompensation insurance (these tax rates vary by state). minimum wages, overtime pay and erisa benefits can be ignored. medical and other benefits need not be provided. since the worker is not an employee, he or she can not join a union (as per the labor management relations act). and the worker can be released at any time with no notice or severance costs. these advantages might seem especially appealing to a small business owner, as the administrative costs of collecting taxes and providing benefits for employees are more onerous to a firm with few employees than to a large company, where these costs can be spread out over many employees. yet there are many potential dangers involved in the utilization of contract workers. as the use of such workers has grown, the internal revenue service and other federal and state agencies have moved to scrutinize such use more carefully. these agencies'oncerns are justified. the irs estimates that (i) more than half of all contract workers are misclassified, (2) one in seven employers are guilty of misclassification, and (3) such misclassification results in a loss of $4.1 billion a year in unpaid tax revenues (cohen, 1997). therefore, the irs and state income tax agencies are carefully auditing companies which utilize contract workers. when it is determined that contract workers should in fact be regular employees, these workers can be reclassified, and the employer then can be liable for the payment of the various back taxes, and sometimes for other employee benefits as well, such as health insurance and pension plan contributions (jenero & mennel, 1997). and because the i rs sees small firms as more likely to escape its routine audits, it has established a special unit to scrutinize companies with less than $3 million in net worth. most of these irs audits are the result of complaints from dissatisfied workers, and an estimated ~ninet percent of such audits result in a reclassification from "contract worker" to "employee." thus it is especially important for small business owners to understand the pros and cons of using contract workers, to understand the laws governing such use, and to have guidelines for their own personnel policies. the dollar costs resulting from a reclassification of employees can be very substantial for a small business with a minimal financial cushion to deal with unexpected major expenses. being ordered by the irs to pay several years of back social security, medicare and unemployment taxes for a number of workers can run into thousands of dollars, more than many small firms can raise (bemardi, 1997). in fact, the contact worker issue, and especially the irs governing regulations, topped small business owner concerns among those who attended the 1995 white house conference on small business (readers views, 1996). it is the purpose of this article to provide a discussion of the contract worker issue and the laws surrounding it, and to offer a series of guidelines to assist a small business owner in dealing with this issue. the laws and regulations the laws and regulationswhich determine whether a worker should 1&e classified as an employee or as a contract worker are not cut and dry. if they were, the issue would be simple, and there would not be a large percentage of misclassified contract workers. rather, there is a huge "grey 18 journal ofsmall business strategy volume 9, no. i spring l998 area" which allows companies to both willfully and unintentionally classify workers incorrectly as contract workers. basically, the irs currently relies on a twenty-factor test to determine whether the employer maintains sufficient control over a worker for an employer-employeerelationship to legally exist. sp if iiy,r~ra 8743 i ss i sydidi fih r 4 f3978 p these twenty factors. that ruling (in lengthier wording than the following) asks whether the worker or "service provider" (irs, 19g7; davis, 1993; jenero & mennel, 1997): 1. must comply with the employer's instructions about the work (and what amount and level of instructions are given) 2. receives training from or at the direction of the employer (also what amount and level) 3. provides services that are integral to the employer's business (i.e. part of the basic activities of the firm rather than peripheral support services) 4. provides services that must be rendered personally(rather than by someone else assigned or employed by the worker) 5. hires, supervises and pays workers for the employer 6. has an ongoing relationship with the employer (a permanent position rather than a shortterm or occasional one) 7. follows set hours of work (rather than hours largely of the worker's choosing) 8. works full time for the employer (rather than part-time and/or for more than one employer) 9. does the work on the employer's premises (rather than the worker's premises) 10. does the work in a sequence set by the employer (rather than one set by the worker) 11. submits regular reports to the employer (so that the employer is always aware of the worker's performance rather than being informed only occasionally) 12. receives payments of regular amounts at set intervals (rather than occasionally when billed by the worker) 13. receives payments for business and/or travel expenses from the employer (rather than the worker absorbing such expenses) 14. relies on the employer to provide tools and materials (rather than the worker providing these) 15. lacks a major investment in resources for providing services (i.e. the employer provides such resources) 16. can not make a profit or loss from the services(i.e., the employer solely takes the financial risk of profit or loss) 17. works for one employer at a time 18. does not offer the services to the general public (but rather just to the employer) 19. can be fired by the employer (as an employee, rather than working under a service provider contract with provisions for both termination by either party and recourse for non-compliance by either party) 20. may quit work at any time without incurring a liability (again, without contractual recourse) (there is no implied ranking of importance to the sequence or numbering of the factors.) these twenty factors relate to the more general question of pwho controls what work is done and h 4 8 d ."ryh h «h iyq i i di«d ~iu d of the worker, the stronger the classification as "contract worker." conversely, the more the 19 journal ofsmall business strategy volume 9, tyo. l spring l998 answers indicate that the employer has ~the ri ht of control and direction over the worker and the work's details, means and results (even if that right is not fully exercised), the more likely the correct classification of the worker should be "employee." furthermore, these twenty factors relate to the concept of a "common law employee." in other words, while there is no concrete legal definition of an "employee" (versus a "contract worker"), these twenty factors cover the range of common law meaning. not all twenty factors need indicate an "employee" or a "contract worker" classification; some factors can be more or less important, or even irrelevant, depending upon the context of the work and the company. industry norms are also a factor; if contract workers are frequently utilized in an industry, firms in that industry are more likely to have their "contract worker" classifications upheld. there are some additional regulations that alyect these irs rulings and the possible resulting financial penalties to a small business. in particular, section 530 of the revenue act of 1978 and the subsequent small business job protection act of 1996 provide more uniform standards in the classiflcation of workers and make the regulations more "user-friendly" toward employers. for example, in certain situations, when the employer makes a prima facie case for "independent contractor" status, the burden of proof shifls to the irs to prove that the workers are "employees." also, these regulations and modifications can, in some instances, offer some tax liabilityrelieftosmallbusinesseswhosecontractworkersarereclassifiedasemployees. butthe conditions under which such assistance and relief can be obtained are complex, and they provide both benefits and disadvantages to the employer. furthermore, the current agenda in congress is to make the irs itself more "client-oriented," and possible future directives and regulations may offer other benefits to employers involved in job classification issues. because of the complexity of these new regulations and modifications, it is suggesied that an interested small business owner, manager or advisor consult an accountant or attorney for further information (jackson, 1997; krawczyk, 1996; mason et brozovsky, 1997). also, there is a u.s. senate bill (105th congress, 1st session, s.473) that would amend and simplify the existing twenty-factor irs test. if this proposed amendment to the current irs regulations were to be passed, a service provider would be considered a contract worker if criteria ¹1,¹2and ¹3or ¹3and ¹4below were satisfied: 1. the service provider can realize a profit or loss from the work 2. the provider has his or her own place of business, or works with his or her own equipment 3. there is a written contract which stipulates that the provider will not be treated as an employee 4. the provider is a corporation or a limited liability company and does not receive the benefits the service recipient's employees receive. as of spring 1998, this bill was still in committee and had not reached the floor of the senate. while passage of this bill(or something similar) might reduce the current uncertainty in defining a "contract worker," and interested small business owners and advisors can monitor the progress and possible passage of this bill in congress(http //thomas loc gov/home/thomas html)¹ sizable "grey area" will still exist, as will penalties for incorrect worker classification, even if current irs guidelines are amended. 20 journal ofsmall business strategy volume 9, no. l spring /998 examples as previously noted, the vast majority of internal revenue service audits result in a reclassification from "contract worker" to "employee." this is because in most cases the facts (as evaluated by the "twenty-factor test") clearly support "employee" status. however, some job classification audits deal with more complicated situations. in these cases, the irs rulings are less predictable in advance and often not even easily comprehendible after they are issued! as an illustration, several recent internal revenue service rulings on such complicated cases are provided here. ~e¹~ ¹ 3 employer ¹iengaged workers as sales representatives selling insurance and other financial products. these workers were required to obtain and maintain all necessary licenses, were allowed to solicit sales anywhere they were licensed, and had a written contract with the employer stating that they were contract workers. the contract was not for a specific period of time and allowed for termination by either party. the workers had the right to determine hours and schedule of work activity. although the workers received extensive product and sales training, actual day-to-day instructions to the workers were minimal. furthermore, the employer required each worker to maintain an office outside his or her home and to pay all the expenses associated with maintaining that oaice. the workers were paid on a commission basis. ~ee¹3 employer ¹2hired an individual who had previously retired from the firm to review the firm's delivery of services, identify bottlenecks and recommend solutions to problems which he found. when previously an "employee" of the firm, he had engaged in similar activities. now he worked under a written contract as a "contract worker," to be paid a set amount per day for a period not to exceed 150 days. the worker received minimal training, was reimbursed for expenses, and was supervised only on an informal basis yet was directed where and when he would perform his services. also, he was required to attend staff meetings, was provided helpers when needed, was provided all equipment and supplies by the firm, and received no benefits. ~e¹¹3 employer ¹3contracted with various retailers to deliver their products to the retailers'ustomers. employer ¹3then contracted with workers to perform these delivery services, assigning each worker to a specific retailer. merchandise was loaded onto the vehicles by the retailer in the order in which it was to be delivered. the workers, who were engaged to work full-time in this capacity, received up to a week of on-thejob training prior to performing these services, and they received instructions from the employer regarding the type, size and color of the vehicle, which the workers were required to purchase or lease. the workers did not own or lease any vehicles prior to their association with the firm. furthermore, the firm provided instructions as to how to perform the delivery services, and representatives of the firm occasionally rode with the workers to insure that the workers'ervices were being performed in accordance with the firm's standards. a written contract classified the workers as "contract workers" and they were paid a percentage of the delivery charge paid by the retailers'ustomers. 21 journal ofsmall business strategy volume 9, /vo. l spring l998 ~ei ¹4 employer ¹4operated a country club comprised of two 18-hole golf courses, a golf pro shop, and other related recreational and social facilities. the worker was engaged as the director of golf, with duties delineated in a written contract. these duties included responsibility for golf cart rental services, practice range operation, golf shop operation, golf club storage and repair, golf instruction and clinics, and golf tournaments and related events. the contact required him to employ sufficient staff to conduct these operations; this staiy was paid by the employer and financial records of these activities were to be made available to the employer. the director of golf received a base salary plus a percentage of the gross receipts from the golf cart rentals, all income from any lessons and clinics he taught, and a percentage of the pro shop's net profits. the director of golf worked under the direct supervision of the employer's general manager, who was an employee of the country club. the director of golf wa. required to purchase all inventory to be sold in the pro shop, but he did not pay any rental to the employer for the shop and other golf facilities. although the club's members could pay the director of golf directly for lessons and clinics, most chose to pay to the club, which then paid those amounts over to the director of golf. if members failed to pay for these services, the director of golf received nothing. here too the written contract stipulated that the worker wa: a "contract worker." clearly, these four examples of employer-workerrelationships fall into the "grey area" discussed above. all four involve a mixture of the "twenty factors," some indicating that the worker is an "employee" and others indicating that the worker is a "contract worker" or "independent contractor." these four situations were but a few of the many in 1997 in which a worker or workers filed a complaint with the internal revenue service, claiming that they were incorrectly classified by their employers as "contract workers" or "independent contractors." in these four cases, the irs weighed the various twenty factors to determined which way the balance tilted, and ruled that in example ¹iand example ¹3the workers were correctly classified as "independent contractors¹ and that in example ¹2and example ¹4the workers were incorrectly classified and should be classified as "employees." in examples ¹2and ¹4,the workers were reclassified and entitled to a variety of prior benefits, with the employer liable for paying back taxes and some other benefits. the fact that the irs rulings in these four examples were diaicult to predict illustrates how important it is for small business owner/managers to understand this broad issue of job classification, and the need for guidelines to assist in job classification. even after several readings of these four examples, the tilt of the weight of the "twenty-factor test" toward "independent contractor" in ¹ i and ¹3,and toward "employee" in ¹2and ¹4is at best subtly comprehendible (¹i: irs tam 9736002; ¹2:irs plr 9707019;¹3:irs plr 9738015; ¹4:irs tam 9717001). non-financial issues the objective of this article has been to primarily focus on the financial risks inherent in the misclassification of workers. this is the issue raised at the 1995 white house conference on small business, and what most polls indicate to be of prime concern to small business owners/managers ("readers views," 1996). still, it is also important to consider the nonfinancial issues. in choosing to hire and/or classify workers as "contract workers," the employer risks weakening worker motivation and performance. a contract worker who believes that he or she should correctly be classified as an "employee" may still accept or remain in the contract worker position because of financial need for the job, but may at the same time perceive that the employer is taking advantage of him or her. in such situations, motivation and performance may 22 jourool ofsmall business srroregy volume 9, no. l spring l998 suffer, quality of work may be lower, and employer-worker communication and relations may deteriorate. these non-financial risks of misclassification (whether the misclassification is true or only perceived as such by the worker) must also be carefully considered and weighed when initial job classifications are being determined. guidelines for small business owners in light of the above discussion and examples, a number of guidelines are offered to small business owners or managers who either currently utilize contract workers, or who are considering the use of such workers (chvisuk, 1996; davis, 1993; jenero, 1997; robinson, 1996): l. any arrangement to use one or more contract workers should be spelled out in a written contract. such a contract should clearly delineate the responsibilities of the worker and the benefits that the position provides. the use of relevant items from the irs twenty-factor listing can strengthen the clarity of the contract worker status. however, the existence of such a written contract does not guarantee irs acceptance of the contract worker status. it is the practice which matters most, not just what is written on paper. 2. other business documents must be consistent with the contract. for example, be sure that the term "employee" is not used to describe contract workers in promotional literature aimed at the firm's customers. 3. utilize contract workers whose characteristics support this classification. for example, workers with their own business identities and with other clients are more likely to be accepted as contract workers by the irs. 4. as an employer is required to file federal w-2 forms with the irs for regular employees, federal 1099 forms are required for contract workers. failure to file promptly might jeopardize a contract worker classilication. (check with an accountant or attorney to determine the current minimum dollar requirement for filing 1099 forms.) 5. firms utilizing contract workers should periodically conduct a self audit to confirm the validity of the classification. basically, the irs twenty-factor listing can be used as the audit checklist. if few or none of the requirements for a contract worker are supported by the workers'situations, the employer should either reconsider the classification or should modify the relationships with the workers to meet the classification. conversely, in some cases, a self-audit might indicate that some workers or positions currently classified as "employees" in the firm might in fact be eligible for contract worker status. 6. employers should monitor all contract worker situations for any changes in responsibilities, supervision, work days or hours, etc. as a company grows, there may be a tendency to utilize contract workers in additional tasks, and this could lead to more work time and additional supervision from the employer, jeopardizing the contract worker status. 7. some employers and supervisors may have a tendency to increase the amount of direction and control over workers over time. to maintain contract worker status, those in supervisory positions must consciously work to avoid exercising too much direction. 23 journal ofsmall business strategy volume 9, sto. l spring l998 8. all company employee benefit plans should be designed so that those groups of employees covered and not covered are clearly identified, and so that the plan administrator has high discretionary authority to determine eligibility. if some of the company's contract workers were subsequently reclassified, this would reduce the possibility that they would be entitled to past benefits. 9. employers should recognize that the classification of workers as "contract workers" when the situation falls into the "grey area" previously discussed may lead to lower levels of morale, work quality, communication and other measures of performance by these workers. the savings in costs gained by "contract worker" classification may be more than offset by these lowered work outcomes resulting from "contract worker" classification, even if classilication is valid. 10. employers should consider the use of temporary workers rather than contract workers. temporary workers are generally considered the employees of the temporary agency, which is thus responsible for irs filing, etc. the use of temporary workers therefore shiiis the burden of classification away from the employer. 11. finally, the issue of "contract workers" versus "employees" is complex and, as discussed earlier, currently under review in a u.s. senate committee. employers would be wise to consult an expert for advice and to determine whether any modifications have been made to the laws, regulations, and the "twenty-factor test" before classifying a new group of workers, or reclassifying an existing group. conclusions the classification of some workers as "contract workers" or "independent contractors" rather than "employees" can provide a variety of financial and non-financial benefits to a small business owner/employer. yet the risks of having such a classification overturned by the irs or another agency are substantial, with the potential ofbeing highly damaging or even possibly lethal to a small firm with limited financial resources. while small business owner/managers should not rule out the utilization of contract workers, they should fully understand the requirements for contract worker classification, and should engage in management practices to support such classification if used. references anderson, m. (1997). a primer in measuring outsourcingresults. national productivi review 17 (i), 33. bemardi, l. (1997). contract workers: managing employees in the new world of work. c~di m 22 (3), 19. 0 ff,l.(1997). kg lplt'll f i fy g k . hrf 74(12),s9. cb i k 0 (1996). idp 4 « « « -by 6 6 20f .~asi ~m* 26 (2). 34. cohen, i. (1997). employee misclassification. internal auditor 54(3),40. greising, d. (1998, lan. 12). it's the best of times or is it? business week, 36. h .s(1997). fl *ibl fll g g ti 6 gs. w~rrrr 10(4)6. http: //thomas. ioc.gov/home/thomas. html. 24 journal ofsmall business strategy volume 9, no. l spring l998 irs (1987). rev. rul. 87-41, 1987-1 c.b.,296. irs plr (private letter ruling) 9707019, 1997 west law database ftx-wd ¹62181. irs plr (private letter ruling) 9738015, 1997 west law database ftx-wd ¹ 579253. irs tam (technical advice memorandum) 9717001, 1997 west law database ftx-wd ¹200902. irs tam (technical advice memorandum) 9736002, 1997 west law database ftx-wd ¹543443. jackson, w., gee, e. & knight, m. (1997). how to shift the burden of proof to the irs on ldp d 1 t .t ad) .28(19),642. ),k.&m 1,8.(1997). n tk f puy: 11 (fldn(dp d contractors" may be entitled to costly employee benefits. em lo ee relations law journal 22 (4), 5. krawczyk, k., wright, l. & sawyers, r. (1996). independent contractors: the consequences of reclassification. journal of accountanc 181 (i), 47. mason, j. & brozovsky, j. (1997). section 540 worker classification relief provisions after the small business act of 1996. ohio cpa journal 56 (2), 13. readers'iews on contractors. nation's business, july 1996, 84(7), 65. robinson, j. & hulen, m. (1996). employees or independent contractors? national public a «41(3) 28. t p f (1997,0 6 13).e 1 w k,8. uchitelle, l. (1996, dec. 8). more downsized workers are returning as rentals. the new york times, p. l. wlf,m.(1996).th 'ly,h 'dp d « t .~ci d benefits review 28 (4), 60. 25 reproduced with permission of the copyright owner. further reproduction prohibited without permission. from the editor fry, fred l, editor journal of small business strategy; fall 2007/winter 2008; 18, 2; abi/inform complete pg. 0_6 from the editor thanks for your continued interest in the journal of small business strategy. i hope this issue piques your intellectual curiosity and provides value to you in your teaching, research, or practice. we begin this issue with an invited paper. bill gartner was gracious enough to provide a variation of his previously published work with the small business administration on the role of business plans and planning on start-up activities. he and jon liao used the psed dataset to assess whether individuals who had developed business plans were more likely to start a business than those who had not. the second article, by eva cools and herman van den broeck, is an award winner. cools won the best paper award for a junior researcher at the 20th research in entrepreneurship and small business (rent) conference in november 2006 for an earlier version of this paper. it re-visits the "hunt for the heffalump" topic by adding cognitive characteristics to the trait research many of us have seen before. you should find it very interesting. peake, marshall, and preckell report on a macro study slightly unusual for jsbs. they look at the role of state policies and culture in firm births. those of you who are interested in policy issues will find this article particularly interesting. harris, gibson, and taylor look at the impact participating in sbi programs has on entrepreneurial attitudes. using pre-and post-tests, they showed a positive relationship between participating in an sbi project and entrepreneurial attitudes. since the small business institute® is a co-sponsor of the journal of small business strategy, many readers will find this interesting. john leaptrott studied the relationship between the need for cognition and early stage performance. his study suggests that the cognitive characteristics of the entrepreneur can influence performance. you may want to read this article after reading the cools and van den broeck piece above, as cognitive characteristics are key to each of the articles. finally, lawrence reports on a study of entrepreneurs in jamaican businesses to determine the relationship between operations strategy and profitability. this paper is interesting in its own right, but it also has implications for other businesses outside jamaica. i hope you find these articles interesting and valuable. i also encourage you to submit your own work to the journal of small business strategy. we look for articles that demonstrate a definite emphasis on strategy, but we are also interested in articles that break new ground in other areas of entrepreneurial research. here is a heads up notification. see the spring/summer issue for a possible special issue announcement. we are considering a special issue on social entrepreneurship. i will let you know the details and an official call for papers announcement in the next issue. fredl. fry editor journal of small business strategy vol. 27 ● no. 1 ● 2017 1 green practice motivators and performance in smes: a qualitative comparative analysis lilia rekik teluq, université du québec francois bergeron francois.bergeron@teluq.ca teluq, université du québec abstract green practices are necessary to fight global warming and save scarce resources. smes, which represent more than 90% of organizations, play a critical role in this endeavor. this research uses a qualitative comparative analysis, based on boolean mathematics, to explore smes’ motivation to implement green practices and inquire about the resulting performance. this research model is based on porter’s value chain and triandis’ theory of reasoned action. fifteen (15) smes from three countries (canada, tunisia and morocco) where interviewed for the research. various groupings of smes’ motivators associated with a high level of green practices were found. the grouping profiles involved the organizational culture, expected consequences, facilitating conditions, and socioeconomic factors. implementing green practices was found to be beneficial to smes both in terms of financial and environmental performance. the specific green practices characterizing high financial performing smes varied among firms; the grouping profiles involved the inventory practices, waste treatment and disposal and inbound logistics. green practices characterizing high environmental performing firms gathered in profiles based on the operations, waste treatment and r&d. no unique causal condition was found for green practice motivators but the culture revealed to be a sufficient condition for one of the green practice configurations, while inventory practices, operations, waste treatment and r&d appeared to be sufficient for specific configurations of high performing smes. keywords: sustainability, green practices, motivators, performance, smes, qualitative comparative analysis. journal of small business strategy vol. 27 ● no. 1 ● 2017 2 introduction the sustainable supply chain management phenomenon is gaining attention worldwide (lee, cheol & lee, 2016; lu & taylor, 2016; o’donohue & torugsa, 2016). supply chain stakeholders (i.e., investors, shareholders, employees, suppliers and customers) wonder whether their organization and the supply chain in which they participate are environmentally, economically and socially responsible (arend, 2014; cosimato & troisi, 2015; malviya & kant, 2015; seuring & müller, 2008). according to freeman and moutchnik (2013), this is a legitimate question. based on the stakeholder theory, anyone who has a stake or claim in the firm can be considered a determining factor. at the opposite end of the spectrum, friedman (1970) bases his judgment on the neo-classical theory and states that one should do what is legal but no more, unless the absence of a practice affects their market. thus, there is no consensus as to the extent to which the firm is environmentally and socially responsible, but in both cases, it should be appropriate if it contributes to benefits. the green supply chain management (gscm) paradigm (nikbakhsh, 2009) focuses on economic and environmental issues. in this context, when designing and managing supply chains, one needs to consider several environmental issues related, for example, to energy use, greenhouse gas emissions, material consumption, waste generation and the impact on biodiversity (lu & taylor, 2016). considering solely the economic impact and excluding the environmental influence can make life on earth more vulnerable to various threats such as global warming, toxic waste and natural resource depletion. thus, gscm plays a key role in the sustainability issue. gscm is an emerging field, but most research deals with large companies. while the real contribution of gscm to the bottom line is still a subject of debate (freeman & moutchnik, 2013), the question remains unanswered for smes (seuring & müller, 2008; svensson, 2007). the contribution of smes in the fight against global warming is a strategic issue since they represent more than 90% of organizations. application of the sustainability concept in smes is still at an embryonic stage (arend, 2014). smes are often unaware of what to do in terms of gscm and may face greater obstacles than larger firms (lópez, côté & marché, 2005; o’donohue & torugsa, 2016; prud’homme, 2009; tamlyn, 2007; tamri, 2008). research related to gscm for smes has great potential in promoting sustainable approaches in this field (arend, 2014; dubey, gunasekaran & ali, 2015; green, zelbst, meacham & bhadauria, 2012). going green is a value-added strategy and favors company image, which can ultimately help companies sell and export (rekik, el kamel, de santa eulalia & bergeron, 2014). other potential benefits include the reduction of costs (e.g., raw material, energy and insurance costs), the reduction of risks (e.g., waste bills and pollution fines, water and energy shortage). as well as, the improvement of productivity (e.g., by using natural light and ventilation), an increase in property value (e.g., lowering operating costs), the creation of a healthier environment (e.g., less toxins and cleaner air, less hazardous production processes) and the improvement of public image (improved public perception and community support, proving company liability) (nikbakhsh, 2009). these benefits can only occur if the sme owner-manager is determined to implement green practices. thus, favorable individual and organizational conditions should exist for that purpose; however, there journal of small business strategy vol. 27 ● no. 1 ● 2017 3 is a dearth of research on which antecedent conditions motivate sme owner-managers to implement green practices. this relationship also needs to be studied. better understanding of the individual and organizational context that induce the ownermanager to implement green practices and the financial and environmental outcome of these actions will help fill the gap in the introduction of gscm in smes. the goal of this study is to identify the antecedent conditions to the implementation of green practices and the contribution of these practices to the firm’s financial and environmental performance. conceptual foundations the building blocks in the study of green practices in smes are three-fold: green practices, motivations for adoption and performance. green practices there are various approaches to studying green practices but the supply chain approach is undoubtedly very popular. for a 15-year period, ranging from 1998 to 2013, malviya and kant (2014) found 177 articles containing the term “green supply chain”. one model of gscm is the green supply chain reference model (lmi 2010; scc 2010). this model, developed by the supply chain council, addresses the impact of sustainable activities at each stage of the product life cycle. it is a generic and has a cross-industry framework for gscm that outlines best practices and potential metrics. for rao and holt (2005), this concept is related to inbound logistics, production and outbound logistics. it is based on porter’s value chain model which states that “pollution reduction provides future cost savings by increasing efficiency, reducing compliance costs, and minimizing future liabilities” (lu & taylor 2016, p.4). like most research and relevant contributions to gscm however, it has been designed and applied mostly to large organizations. given the difference between large organizations and smes, the value chain model must be tested in the context of green smes. as for information technology, burke and gaughran (2006) explain that its use in assisting smes in the management of their environmental impacts is a key research question. despite the fact that the us environmental protection agency (lopez et al., 2005) notes that information has a key role to play in supply chain management, no comprehensive analysis of its role and impact on gscm initiatives in smes has been found. the role of it systems in the contribution to green supply chain management is unclear and therefore worth investigating. practices related to green product design have been recognized as important business practices in recent years and their influence on environmental and green performance was observed at an empirical level (hong, kwon, & roh, 2009). that said, not much is known about green research and development activities in smes and their relationship with company performance. finally, in terms of key performance indicators, rao, singh, o’ castillo, intal, and sajid (2009) reported that smes implementing adequate metrics could enhance their environmental and business performance. environmental indicators allow companies to measure their performance and identify gaps between actual performance and industry standards, norms and competitors. these authors recommend the use of environmental indicators for smes and recall journal of small business strategy vol. 27 ● no. 1 ● 2017 4 that a full-blown environmental management system is not necessary for that purpose. adoption motivations motivations for adopting green practices have not been well studied in literature (arend, 2014; o’donohue & torugsa, 2016). sarkis, shu, and lai (2011) conducted a theoretical organizational review of green supply chain management literature and identified the diffusion of innovation theory, path dependency theory, social embeddedness theory, structuration theory and agency theory as promising organizational theories for gscm research. they concluded that there is ample room for new theories examining the introduction, diffusion and management of gscm. various internal and external sources impact a company’s decision to implement green practices. external motivation may come from customers and buyers who request particular services such as recycled paper or environmental certifications. other sources of external motivation are the government, competitors, society, banks and insurance companies (tachizawa, gimenez, & sierra, 2015). adoption motivation can also be internal to the company. the ceo’s (owner) culture, beliefs and values may be a major source of motivation. the expected consequences such as a low cost of implementing green practices can also be a source of motivation. facilitating conditions such as employee and shareholder support and financial support from governments can play a role. in smes where the owner-manager plays a central decisional and managerial role, triandis’ model of reasoned action (1988, 1971), which is an extension of ajzen and fishbein’s framework (1980), can be useful in explaining an sme’s motivation to embrace green practices. in his attempts to explain user behaviors, triandis (1980) proposed a model of beliefs, attitudes and behavior that includes a network of factors that may influence behavioral intentions and behavior itself. triandis’ model includes a large number of variables that relate behavior to intentions and to other factors such as habits, relevant arousal and facilitating conditions (bergeron, raymond, rivard, & gara, 1995). in the context of gscm, triandis’ model of reasoned action helps to focus on a large number of factors that may influence behavior. for the purpose of this study, the selected factors are: culture, values, consequences, facilitating conditions and socioeconomic factors. performance the relationship between environmental responsibility and firm performance is important. ”… stricter environmental regulation will force firms to focus on technology innovation while paying attention to pollution reduction, production costs and increasing sales. we may call this a win-win approach” (lee et al., 2016, p.41). the benefits of implementing green practices can be divided into three categories: economic, social and environmental (paulraj 2011; seuring & müller, 2008; thoo, abdul hamid, rasli & zhang, 2014). the economic dimension refers to the company’s financial performance. evidence in scientific literature shows a positive financial impact resulting from the adoption and implementation of green practices. this impact comes from “two mechanisms: 1) increased revenue via improved access to existing and new markets based on enhanced products and services differentiated by their greenness; 2) improved cost management via better risk management, and reductions in cost of production, materials journal of small business strategy vol. 27 ● no. 1 ● 2017 5 and services, labor and capital” (o’donohue & torugsa, 2016, p. 243). financial performance can be measured by improved growth and profitability, and indirectly through image improvement (el kamel, rekik, taieb, & bergeron, 2015; venkatraman, 1989). the social dimension refers to the company’s social responsibility and is linked to its corporate image. environmental performance generally refers to the protection of the natural environment (prud’homme & raymond, 2013). it can be observed in improvements in pollution level, the use of scarce resources including energy, and fewer wasted resources. research model this research aims at understanding what motivates smes to implement green practices, the green practices implemented and the results in terms of environmental and economic impacts. the research model is presented in figure 1. figure 1. research model this model can be situated in a global economy perspective but in this case, it is more specifically applied to smes. green practices for smes vary but can be linked to the value chain’s primary activities (inbound logistics, production, outbound logistics, sales and marketing) and support activities (information technology, product development and green performance indicators). the adoption of green practices and its consequences on performance are studied using triandis’ model of reasoned action (triandis 1980). triandis’ model relates individual behavior to intentions while complementing it by various background factors. triandis’ model has already been used in an organizational context (bergeron et al., 1995). it is adapted here to explain an individual’s (owner-manager) intention to act within a sme organizational context. it gives journal of small business strategy vol. 27 ● no. 1 ● 2017 6 more emphasis to external and internal motivators. small companies can be influenced by external elements such as customers, suppliers, non-governmental communities and governments (arend, 2014; chie & shih, 2007; lee, 2008;). in conjunction with the institutional theory (dimaggio & powell, 1983), companies can also be influenced by green practices implemented in other organizations. attitudes and perceptions can influence the adoption of new technologies within smes (o’donohue & torugsa, 2015; perron, 2005). in this research, the background factors involved in the implementation of green practices are 1) organizational culture, 2) personal values, 3) expected consequences, 4) facilitating conditions and 5) socioeconomic factors. when applied to the behavior of introducing, disseminating and managing green practices in a sme, triandis’ model of reasoned action should allow to understand what motivates smes (through its owner-manager) to implement green practices. this rationale leads us to this first proposition: proposition #1: culture, consequences, facilitating conditions, values and socioeconomic factors are linked to the adoption of green practices. another important element in the proposed research is organizational performance. chie and shih (2007), dubey et al., (2015) and, rao and holt (2005) demonstrated that companies that adopted green practices in response to the current wave of global green issues generated favorable environmental and financial performances. the viability of achieving good balance between environmental and financial performance is a serious concern among companies implementing green practices (lee et al., 2016). financial performance is based on three elements. the first is related to costs (e.g., cost cuts due to material purchasing, energy consumption, waste processing and discharge, and the avoidance of a fine in the case of an environmental accident, for instance). the second is profitability (e.g., new products and growth of market niches for green products). the third element is the company’s social responsibility, which contributes to financial performance (e.g., through a better company image). smes have limited financial resources (arend, 2014; rao, 2002) and as such, any action ultimately has an effect on the bottom line. environmental performance is related to emissions (mainly greenhouse gases), energy consumption, resource consumptions, waste disposal and biodiversity preservation (malviya & kant, 2015). this potential link between the implementation of green practices and performance leads us to the second and third propositions: proposition #2: green practices are linked to financial performance. proposition #3: green practices are linked to environmental performance. methodology data collection a multiple-case study method was used, as proposed by linton, klassen, and jayaraman (2007) who advocate the importance of relying on different data collection approaches to study sustainable development. given a lack of research on sustainable development in smes, we used a deductive approach based on multiple-case studies. to increase the sample size, we used personal contacts and the “snowball technique" where respondents were asked to refer potential smes with similar journal of small business strategy vol. 27 ● no. 1 ● 2017 7 organizational characteristics to the researchers (brace-govan, 2004). the respondents were owner-managers of 15 smes from three countries: tunisia (6), canada (5) and morocco (4), and 2 industries: chemical (8) and agro-chemical (7). these two sectors were selected to examine areas where sustainable development is likely to occur and to limit the variability linked to different industrial sectors the number of employees was: less than 15 (4), 16 to 45 (6) and more than 45 (5). none of the smes were green certified but all had adopted some green practices. data was collected using face-to-face interviews with the owner-managers of the selected smes. semi-structured interviews with open questions were used. these questions were written in such a way as to ensure that the respondents addressed all dimensions of the research model, leaving them free to comment on their approach to sustainable development, green practices and the results obtained. the interviews were conducted at the firms and lasted between 60 and 90 minutes. the interview guide includes four themes. the first is a general introductory set of questions related to sustainable practices in smes. these questions address the existence of an explicit internal green management policy within the company and the conditions to the implementation of such practices. the second theme relates to the company’s motivations leading to the adoption of sustainable practices in the gscm process. the third theme attempts to guide the respondent toward a detailed description of its green practices in terms of the value chain. the fourth theme addresses the financial and environmental impacts of the adoption of such practices. the data collected during the interviews was coded as crisp and fuzzy sets, which were then used for data analysis. data analysis this study uses a set-theoretic approach based on a qualitative comparative analysis (qca), an analytic technique that provides suitable means to accommodate complex complementarities and nonlinear relationships among constructs (ragin, 2000, woodside, 2010). this type of analysis is based on a configurational understanding of how conditions or causes combine to produce a specific outcome. the basic intuition underlying qca is that cases are best understood as configurations of attributes resembling overall types and a comparison of cases can allow a researcher to remove attributes that are unrelated to the outcome (fiss, 2011). qca uses an approach to solve causality that investigates an outcome as the product of how conditions combine together (blackman, wistow, & byrne, 2011). qca seeks to explain why certain cases have specific outcomes. it has its roots in qualitative case study, but the method has a mathematical foundation and uses boolean algebra and algorithms that change the logical reduction of numerous complex causal conditions into a reduced set of configurations leading to the outcome. it combines the benefits of caseoriented and variable-based methods (such as regression techniques). qca is particularly suited for small (5-15) sample sizes (ragin, 2008b, 2000, 1987). the small-n aspect is one of the most significant benefits of qca. the truth tables were generated using the fs/qca software. raw coverage shows the proportion of memberships in the outcome that are accounted for by each particular combination of attributes. unique coverage is the proportion of membership in the outcome that is attributable only to the particular combination. in this study, we consider all configurations characterized by 1 or more to journal of small business strategy vol. 27 ● no. 1 ● 2017 8 be empirical observations. coverage scores are used for judging the empirical relevance of solutions (rihoux & ragin, 2009). consistency refers to the degree of conformity with necessity/sufficiency hypotheses. it equals the proportion of cases that exhibit a given configuration of attributes as well as the outcome. the solution coverage indicates the proportion of cases that are covered by all reported configurations. the solution consistency assesses the degree to which configurations are subsets of the outcome (ragin, 2008b). the following results applied to the parsimonious solutions of the three truth tables. in this study, the consistency cut-off point was set at .80 and the minimum frequency was equal to 1. all consistency values and solution consistencies met these criteria, satisfying the consistency threshold of .8 set by ragin. the solution coverage varied between .82 and .92, satisfying indicating that these configurations represent the large majority of high performing smes. measurement in the qca technique, both the causal conditions (i.e., motivators) and outcome (i.e., green practice performance) are represented using a crisp or fuzzy set of scores. the crisp set, analogous to dummy variables, codifies variable 1 when the condition is present and 0 when it is not. the fuzzy set transforms the data into an interval scale varying between 0 and 1. the variables of the current study were measured using a combination of crisp and fuzzy sets. the type of set and the calibration values were selected using ragin’s (2008b, 2008a, 2000, 1987) recommendations. culture (crisp set). the culture refers to the degree to which sustainability has characterized the organization for a long period of time. this variable is coded 1 if the culture is cited as a motivation for adopting green practices and 0 otherwise. values (crisp set). this refers to the manager’s personal values. this variable is coded 1 if the manager’s personal values are cited as a motivation for adopting sustainable practices in the company and 0 otherwise. consequences (crisp set). the consequences are the expected outcome of implementing and using green practices. this variable is coded 1 when perceived consequences of using green practices in the company’s value chain are expected and 0 otherwise. facilitating conditions (fuzzy set). this variable indicates the extent to which conditions facilitate the implementation of green practices in the value chain. facilitating conditions include employee collaboration, stakeholder collaboration and government support. the variable of facilitating conditions is calibrated as a five-value fuzzy set (support of: employee + stakeholder + government = 1; employee + government = .9; employee = .8; government = .6; none = 0). the cross-over value was set at .5. socioeconomic factors (fuzzy set). this variable considers three socioeconomic factors that can influence the company’s use of green practices: certification (i.e., iso 14000, iso 9000, emas, etc.), intentions to obtain a certification and the constraint of a certified client. the variable of socioeconomic factors is coded as a six-value fuzzy set (presence of: certification + certification intention + buyer requirement =1; certification + buyer requirement =1; certification intention + buyer requirement = .9; buyer requirement = .9; certification + certification intention = .8; journal of small business strategy vol. 27 ● no. 1 ● 2017 9 certification = .7; certification intention = .3; none = 0). the cross-over value was set at .5. green practices (crisp set). the green practices considered in our analysis are linked to two types of activities: primary and support activities. primary activities refer to inbound logistics, inventory, operations, packaging, waste treatment, waste disposal and distribution. support activities refer to research and development, internal green management procedures (like paper or plastic procedures), information technology and use of financial and environmental performance indicators. green practice level is measured by the number of primary and support activities in which green practices are implemented, as reported by the interviewees. if this number is equal to 6 or more, the green practice variable is coded 1, indicating a high level of company commitment to sustainable development activities and 0 otherwise, showing a low level of green practices. financial performance (crisp set). this variable indicates the perceived impact of using green practices on the company’s financial performance, which is measured using four items: a positive impact on company profit, improved company image, an economic impact related to waste treatment or recycling and cost saving linked to the use of recycled packaging. if the interviewee cites three or more of these items, the variable is coded 1, indicating a high performance company using green practices and 0 otherwise (if two items or less are cited). environmental performance (crisp set) this variable is coded 1 if the company perceives that using green practices in its chain value has a positive environmental impact (reduction of pollution, energy savings, or another environmental impact) and 0 if no environmental impact is perceived. results and discussion the goal of this study was to identify the motivators toward the adoption of green practices, the green practices linked to financial performance and the green practices linked to environmental performance. the results of the parsimonious solutions are presented in tables 1, 2, and 3. the intermediate solutions are in the appendix. in the solution tables, black circles indicate the presence of an element, white circles indicate the absence of an element, blank spaces indicate a “do not care” situation in which the causal element may be either present or absent (notation adapted from el sawy, malhotra, park, & pavlou, 2010; fiss, 2011; misangyi & acharya, 2014). testing of proposition #1: culture, consequences, facilitating conditions, values and socioeconomic factors are linked to the adoption of green practices. results in table 1 show that three different configurations were found to be associated with the adoption of green practices. according to the solution, smes that adopt green practices are characterized by either 1 culture, 2expected consequences, facilitating conditions and socioeconomic factors, or 3 values, expected consequences or facilitating conditions. in general, no cause is either necessary or sufficient to characterize the outcome, a high level of green practices in the supply chain, except for the causal condition culture, in one configuration. the first configuration (solution 1) indicates that 67% of smes characterized by an organizational culture promoting sustainable development have implemented green practices. journal of small business strategy vol. 27 ● no. 1 ● 2017 10 table 1 truth table of green practices motivatorsparsimonious solution frequency cut-off: 1.00 consistency cut-off: 0.83 solution coverage: 0.82 solution consistency: 0.89 table 2 truth table of high financial performance parsimonious solution frequency cut-off: 1.00 consistency cut-off: 1.00 solution coverage: 0.86 solution consistency: 1.00 table 3 truth table of environmental performance parsimonious solution frequency cut-off: 1.00 consistency cut-off: 1.00 solution coverage: 0.92 solution consistency: 1.00 solution causal conditions coverage consistency culture values consequences facilitating conditions socioeconomic factors raw unique 1 .67 .67 0.86 2 .19 .00 1.00 3 .19 .00 1.00 solution causal conditions coverage consistency inbound logistics inventory operations packaging waste treatment waste disposal distribution r&d raw unique 1 .43 .29 1.00 2 .29 .14 1.00 3 .29 .29 1.00 solution causal conditions coverage consistency inbound logistics inventory operations packaging waste treatment waste disposal distribution r&d raw unique 1 .75 .25 1.00 2 .50 .00 1.00 3 .50 .00 1.00 journal of small business strategy vol. 27 ● no. 1 ● 2017 11 the second and third configurations (solutions 2 and 3) share expected consequences and facilitating conditions as causal conditions, whereas manager values and socioeconomic factors are additional conditions exhibiting a substitutive relationship with respect to the outcome. both manager values and socioeconomic factors must be combined with expected consequences and facilitating conditions to represent groups of smes characterized by a high level of green practices (in 19% of cases). testing of proposition #2: green practices are linked to financial performance. three different configurations were found to associate the adoption of green practices with high financial performing firms (table 2). according to the solution, high financial performing smes were characterized by the adoption of green practices for either 1 inventory, 2waste treatment and waste disposal, or 3inbound logistics but no waste treatment or waste disposal. no specific green practice is either necessary or sufficient to characterize high financial performing firms, except for the inventory causal condition which is sufficient in solution 1, representing 43% of the cases. testing of proposition #3: green practices are linked to environmental performance. again, three different configurations were found to associate the adoption of green practices with high environmental performing firms (table 3). the solution indicates that high environmental performing firms are characterized by the adoption of green practices for either 1operations, 2r&d or waste treatment. in general, no specific causal condition was identified as either necessary or sufficient for all the cases but three causal condition taken separately was sufficient for some solutions: operations (75%), r&d (50%) and waste treatment (50%). the research model, based on triandis’ theory of reasoned action and the porter’s value chain, proved useful is characterizing high performing smes. the choice of culture, values, consequences, facilitating conditions and socioeconomic factors as main causal conditions of green practices implementation in smes revealed to be adequate. indeed, the high levels of solution coverage and solution consistency confirm that triandis’ behavioral theory is a powerful approach to identify the motivators of green practices implementation. another contribution of this research is to learn which configurations of green practices characterize high financial and high environmental performing organizations. there are however some limitations to these findings concerning the reliability of data obtained from interviews, the sampling method, the limited diversity of industry respondents and the need to increase the sample size to generalize the results. implications better understanding of the individual and organizational context that induce the ownermanager to implement green practices and the financial and environmental outcome of these actions will help fill the gap in the introduction of gscm in smes. the goal of this study is to identify the antecedent conditions to the implementation of green practices and the contribution of these practices to the firm’s financial and environmental performance. this research has several implications for practitioners and academics. for practitioners, various conditions may lead smes to implement green practices. on an organizational basis, sme culture is certainly an important aspect. on an individual basis, it is the values of the smes’ owner-manager that can make a difference. in financial and managerial terms, the expected consequences, journal of small business strategy vol. 27 ● no. 1 ● 2017 12 facilitating conditions and a favorable socioeconomic environment are often the drivers of green practice implementation. not all conditions need to be met simultaneously to succeed in implementing green practices. in terms of financial performance, there are very few quantifiable results and most of what is perceived is more of a qualitative type. still, owner-managers generally do not feel that they are losing money in this endeavor. they are generally more inclined to conclude in positive financial results. the same goes for environmental performance as smes admit not being able to measure the exact effect of their actions on the environment but feel that they are on the right track on several dimensions of sustainability. for academics, it is suggested to work on validated measures of the green practices implemented in smes, and on the refined measure of financial and environmental performance. it is also appropriate to continue studying the causal conditions of effective implementation of green practices in smes. future research could be conducted in various service and manufacturing industries since they should differ somewhat on various aspects of this research. research could be done on facilitating conditions and socioeconomic factors since these factors can be supported and improved by governments or industrial associations. finally, it would be useful to develop tools that smes could use to better evaluate the environmental impact of their green practices. conclusion this exploratory study on the adoption of green practices in smes and their effects on performance is a first step in understanding the dynamics of greener smes. the primary conclusion is that no unique cause is either necessary or sufficient to explain the adoption of green practices by smes and its effect on performance. there are however group of causal conditions that are sufficient to lead to the outcome. thus, the answer to the research question is in various configurations that all lead to the desired outcomes. in terms of adoption motivations, three groups of motivators have been observed linking the implementation of more green practices in firms. a first group of smes is characterized by only one motivator, the organizational culture. a second group of smes is characterized by the owner-manager’s perceived positive consequences of adopting green practices, facilitating conditions and socioeconomic factors. the third group is similar to the second except that the ownermanager’s values replace socioeconomic factors. the financial and environmental outcomes of the green practices implemented 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(2010). case study research: theory, methods and practice. bingley, uk: emerald group publishing. journal of small business strategy vol. 27 ● no. 1 ● 2017 16 appendix table a1 truth table of green practices motivatorsintermediate solution frequency cut-off: 1.00 consistency cut-off: 0.83 solution coverage: 0.82 solution consistency: 0.89 table a2 truth table of high financial performance intermediate solution frequency cut-off: 1.00 consistency cut-off: 1.00 solution coverage: 0.86 solution consistency: 1.00 solution causal conditions coverage consistency culture values consequences facilitating conditions socioeconomic factors raw unique 1 .53 .53 0.84 2 .10 .10 1.00 3 .19 .19 1.00 solution causal conditions coverage consistency inbound logistics inventory operations packaging waste treatment waste disposal distribution r&d raw unique 1 .14 .14 1.00 2 .14 .14 1.00 3 .14 .14 1.00 4 .14 .14 1.00 5 .14 .14 1.00 6 .14 .14 1.00 journal of small business strategy vol. 27 ● no. 1 ● 2017 17 table a3 truth table of environmental performance intermediate solution frequency cut-off: 1.00 consistency cut-off: 1.00 solution coverage: 0.86 solution consistency: 1.00 solution causal conditions coverage consistency inbound logistics inventory operations packaging waste treatment waste disposal distribution r&d raw unique 1 .33 .33 1.00 2 .17 .08 1.00 3 .17 .08 1.00 4 .17 .17 1.00 5 .08 .08 1.00 6 .08 .08 1.00 stra tegy editor dr. stephen w. osborne indiana university of pennsylvania (iup) indiana, pennsylvania associate editors dr. prashanth b. nagendra indiana university of pennsylvania (iup) dr. joette m. wisnieski indiana university of pennsylvania (iup) editorial assistant julie dobish indiana umverstty of pennsylvania book review editor dr. radha chaganti rider university editorial review board dr. ramachandra asundi university of puerto rico dr. david brennan university of st. thomas (st. paul) dr. radha chaganti rider university ms. sally a. charles csi cad systems, inc. dr. ronald g. cook rider university dr. richard t. dailey university of montana dr. dale dickson mesa state college dr. teny gaston southern oregon university dr. frederick d. greene manhattan college dr. masoud hemmasi illinois state university dr. lynn hotfman university of northern colorado dr. william t. jackson stephen f. austin state university dr. lawrence klatt florida atlantic university dr. kenneth j. lacho university of new orleans mr. james leda pricewaterhousecoopers dr. thomas j. liesz eastern oregon university dr. stephen lucas university of north carolina-greensboro dr. steven j. maranville university of st. thomas (houston) dr. thaddeus mcewen north carolina a&t university dr. abbas nadim university of new haven dr. inge nickerson barry university dr. neal r. pruchansky keene state college dr. c. louise sellaro youngstown state university dr. herbert sherman south hampton college of long island dr. leo simpson eastern washington university dr. matthew c. sonfield hofstra university dr. pamela h. specht university of nebraska at omaha dr. harriet stephenson seattle university dr. dillard tinsley stephen f. austin state university dr. jude valdez university of texas, san antonio dr. john b. wallace marshall umverst ty the journal of small business strategy is a joint publication of the small business institute directors'ssociation (sbida) and the eberly college of business, indiana university of pennsylvania. send subscription requests to roosevelt d. butler, ph d., sbida sec retmy-treasurer the college of new jersey, school of business, box 7718, ewing, nj 08628-0718. annual subscriptions may be ordered at $20 each (u.s. dollars only). international subscriptions add $5 annually for postage and handling. back issues may be ordered at $ 12 each. o copyright 1998 small business institute directors'ssociation issn 1081-8510 1998-1999sbida officers small business institute directors'ssociation president vice president-case competition lloyd w. fernald, jr., d.b.a. sherriu r taylor, m.b.a., sphr umversity of central florida texas woman's universtty p.o. box 161400 small busmess institute orlando, fl. 32816-1400 p o. box 425738 oaice (407) 823-5725 depanment of business and economics fax (407) 823-3725 denton, tx 76204 e-mnil: lloyd.femaldgbus ucf edu oflice (940) 898-2903 fax (940) 898-2120 president-elect e-mail f taylorgtwu.edu j. douglas frszer, ph.d., cpa miflersvtlle university vrce presideno-oevelopmenr depanment of business administration edward g. cole, m.b.a. miflersvifle. pa 17551-0302 st mary's university oflice. 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"sba auth. ¹88-1170" copyright 1990 small business institute directors'ssociation s'rrategy about the authors new venture initiation: factors influencing success jerman rose is currently college finance and administration officer for the washington state university college of business and economics and director of the small business institute. dr. rose holds a ph.d. from the university of kansas. he was an active entrepreneur and was involved in the creation and management of several service businesses, induding the establishment and operation of an international service franchise. val d. miskin is director of graduate programs in business and professor in management for the college of business and economics at washington state university. dr. miskin received his mba degree from utah state university and holds a ph.d. degree in business administration from washington state university. a one time business owner himself, dr. miskin has over fifteen years of corporate management development and consulting experience. he has served in managerial positions in the banking industry and for the national manpower development and small business development agencies. requirements and benefits of implementing just-in-time manufacturing for small-finn manufacturing stanley e. fawcett is assistant professor of logistics and international management at michigan state university. he recently completed his ph.d. in logistics and operations management from arizona state university. his research interests include logistics, manufacturing strategy, and international operations. john n. pears on is associate professor of purchasing and logistics management at arizona state university. he holds a ph.d. in business administration from georgia state university and has published articles in the strategic and operations management areas. the effect of operational and strategic planning on small firm performance larry r. watts is assistant professor of management at stephen f. austin state university. his research interests include small firm planning practices and entrepreneurship. joseph g. ormsby is an assodate professor of management at stephen f. austin state university. his research interests include small firm planning practices and operations manl agement. strategy about the authors (cont.j a proposed capital budgeting technique for liquidity constrained small businesses john b. white is assistant professor of finance at georgia southern college. he holds a ph.d. in economics from the university of virginia and is the author of several professional papers. morgan p. miles is assistant professor of marketing at georgia southern college. he was formerly a management consultant with both the mississippi small business development center and the tennessee tombigbee waterway development coundl. he received his d.b.a. in marketing from mississippi state university and has published several journal articles and professional papers. self-employment training programs for the poor steven balk in is an associate professor of economics at roosevelt university. his research interests concern poverty, criminal justice, and economic development, focusing on issues relating to self-employment and micro-enterprises. total quality management, just-in-time, and their effect on small manufacturers feraidoon (fred) raafat is associate professor of information and decision systems at san diego state university. he received his ph.d. in industrial engineering and management from oklahoma state university. dr. raafa ys current research interests are in the areas of decaying inventory modeling, new technology implementation and materials requirement planning. milton m. chen is professor of management science at the college of business administration, san diego state university. he is also an adjunct professor at the university of california, san diego. professor chen's current research focuses on total quality management (tqa), just-in-time qit) systems, japanese production management and productivity. he has consulted and lectured widely in the u.s., canada, mexico, japan, and taiwan. / small business consulting conference small business institute directors'ssociation 15th annual conference holiday inn international drive resort orlando, fl february 7-10, 1991 the 15th annual sbida conference will be held in orlando, fl, february 7-10, 1991. anyone interested in small business consulting and small business or entrepreneurshipeducationisinvited toattend. theconference willconsistofpaperpresentations, symposia, panels, and workshops on topics related to the small business institute program, small business consulting, and small business/entrepreneurship education. paper presentations are divided into the following categories: ~ small business management ~ small business marketing ~ computers in small business ~ small business/entrepreneurship education ~ management assistance and development ~ accounting and finance ~ small business management ~ small business international trade ~ small business legal environment a special computer workshop series is planned for the 1991 conference. the workshop series will include hands-on experience and will feature the computer as a tool for small business consultants. spedal conference speakers will include industry executives, small business administration personnel, and members of congress and their staff. for registration information, contact: dr. lynn hoffman vice president-programs university of northern colorado department of management greeley, co 80639 (303) 351-2088. a measuzement mod!.ej. ok t4e keozmmie empact 0$ smah 3us~ness institutes edward ward university of michigan-flint introduction the initial intent of this paper is to present a measurement model of the economic impact of an individual small business institute (sbi), with the ultimate intent being the development and use of a standard model throughout the united states. a standard model would allow the analysis of collected data from many sbis in order to encourage a review of the effectiveness as well as efficiency of the sbi program in areas such as research applications, management analysis, and program/agency comparisons (36, 40). this economic impact model involves impact evaluation, defined by patton as: these evaluations are aimed at determining porgram results and effects, especially for the purposes of making major decisions about program continuation, expansion, reduction, and funding (31). in constructing the economic impact model, the needs of the model to satisfy information requirements of diverse groups such as sbi directors, sbi clients, and government funding agencies was the paramount concern. therefore, the development of the economic impact model was guided by the following quotation from connolly, conlon, and deutsch: we argue that an answer to the question "how well is x performing?" is inevitably contingent on whom one is asking. that is, the evaluative criteria required to transform a descriptive into an evaluative statement flow from the individuals or groups to whom we are referring as "constituencies"...(10). in the economic impact model to be presented, the paramount constituency are the sbi clients; the secondary constituency consists of outside reviewers who fund the sbi program as well as sbi directors. the ordering in terms of importance of these constituencies guided the selection of economic criteria for inclusion in this model. literature review due to the diversity of general management knowledge required of small business owners, they often must turn to outside management assistance such as the management counseling services offered by an sbi (2,17). several empirical studies have looked at the overall 65 effectiveness of the sbi program in terms of assisting small business owners (44). as examples, hoy concluded sbis were more effective than sbdcs in assisting new business owners, and that instruction in financial analysis, accounting, and marketing were perceived by the clients to be particularly effective (20). this reported utility of financial analysis as a specific type of management counseling assistance was buttressed by elbert, anderson, and floyd, who surveyed sbi directors and found the sbi directors to believe the sbi teams could be of most assistance in providing help with financial analysis (11). in further support of the favorable view of financial counseling by sbi teams, solomon and weaver surveyed 166 sbi clients and found assistance in the areas of sales, accounting, and advertising were most often used (43). in contrast, khan and rocha noted sbi recommendations in the managerial functions of accounting and finance were not reported to be helpful to clients, while assistance in marketing and operations was perceived to be helpful (22). in a more general line of research, roitman, emshoff, and robinson reported survey results indicating executives of small business firms "...view external managerial assistance positively" (35). in discussing the views of small business owners who had received assistance from sbis, rocha and khan noted small business owners are often concerned about the costs and risks associated with the recommendations they receive from an sbi (34). overall, these studies indicate small business owners view sbi assistance as beneficial. although the evaluation of sbdcs is tangential to this paper, it is enlightening to review several of the evaluations of small business assistance programs involving sbdcs, primarily at the state level. chrisman, nelson, hoy, and robinson found the economic advantages of the programs, as measured by increases in the taxes paid both on sales and income, to exceed costs in the two states studied (9). using a recently developed approach called data envelopment analysis as a technique to analyze the manageria! efficiency of sbdcs, lang and golden studied three sbdcs and concluded each had been inefficient in terms of number of persons trained and number of counseling contacts at some point during the years studied (23). chrisman and leslie evaluated the financial performance of 86 firms which received consulting from sbdcs and concluded the consulting served more to reduce costs than to increase sales or revenue growth, a result which may have occurred due to the limited follow-up period of one year (8). robinson studied 101 small firms that had received managerial assistance from sbdcs and found sales and profitability were significantly higher than two matched control groups (32). in a study of client satisfaction with assistance received rather than financial measures, nahavandi and chesteen analyzed 106 surveys received from businesses that had received assistance from the university of utah sbdc (25). their results indicated business owners sought assistance more for planning for expansion than for seeking help with an existing business problem. the most implemented recommendations were those in the accounting area, and satisfaction with the assistance received was quite high. again, these studies involved sbdcs rather than sbis, yet they can serve to assist in the development of a model to evaluate the economic impact of an sbi. as an example of students assisting a small business, florin thuma and boudreau studied a frozen yogurt firm which had three full-time and eleven part-time employees. the situation in this firm was indicated by the managers having "..inaccurately estimated utility parameters, underestimated the performance problem, underestimated the potential effectiveness of performance feedback, and considered several factors not present in the utility model" (15). via utility analysis procedures, the students were able to show how they could decrease food costs by 15% and increase profits by 193%. it is this type of example of assistance by students that supports the sbi concept. 66 criterion development it is disheartening but unarguable to agree with the statement by hitt: "unfortunately, research offers no consensus on the appropriate measure(s) of organizational effectiveness" (19). in the model to be presented, the criteria which have been selected serve as standards of performance by which the economic impact of an sbi or group of sbis can be measured. each of these criteria serve as "...aunit of measurement established to serve as a criterion of program performance" (13). as previously discussed, the necessity of serving the constituencies of sbi clients, sbi directors, and reviewers from government funding agencies all were taken into account during the development of this list. the initial criteria are offered as a representative but admittedly not comprehensive list of standards. sbi directors are invited to add to or delete from the list of criteria those measures of economic impact they find to be valid in order to enhance the content validity of the list, although the ultimate intent of the model is to have a standard list of content valid criteria to be used across the united states. the call for involvement of sbi directors to modify the criteria is based on the following statement taken from patton: the stakeholder assumption is the idea that key people who have a stake in an evaluation should be actively and meaningfully involved in shaping that evaluation so as to focus the evaluation on meaningful and appropriate issues, thereby enhancing the likelihood of utilization (31). in developing criteria by which to measure the economic impact of an sbi program, the "criteria of criteria" listed by cascio (4, 5) and patton (31) are pertinent and guided the selection of the performance measures. specifically, such criteria need to be relevant, sensitive, reliable, acceptable, and practical. according to cascio; "the principal requirement of any criterion is its judged relevance (i.e., it must be logically related to the conceptual criterion)" (5). although relevance was the paramount concern during the development of the list of criteria, given the budget of the sbi program, the concept of "practical" was also given emphasis in terms of lessening whenever possible the amount of money that would be expended to collect any research data. chew also emphasized that multiple criteria are necessary in measuring productivity, thus the use of a single criterion was avoided (6). the criteria selected include a review of records of levels of output and establish performance benchmarks which can be used to set goals, as suggested by odiome (27). whenever feasible, the criteria have been selected so as to be quantitative and thus amenable to verification and statistical analysis (38). the economic impact of an sbi will be based on more than the increase in the economic value of the firm, which is a commonly used measure of economic value of such activities by authors such as steffy and maurer (45). such a measure may be seen as a necessary but insufficient criterion due to its overlooking relevant qualitative criteria (19). one possible alternative approach to the development of a list of criteria would be to use standard costing procedures; however, such procedures are both abstruse and time consuming (45). as the purpose of this paper is to present a working model which can be used by sbi directors with a variety of educational backgrounds and levels of administrative support, the use of standard costing procedures was purposely excluded. this is not to say such measures are without value, rather the point is the development of a general and practical approach to the problem of how to measure the economic, impact of the sbi program. 67 working model it is important to understand that no widely accepted model of how to evaluate servicing performance and economic impact of an organization such as an sbi is available (19, 40). however, the development of such a standard model has been advocated by elstrott (12). the economic impact model presented in this paper attempts to avoid esoteric terms due to the caution of simon: communicability of performance information may be particularly important to publicly funded and other agencies which do not charge fees. such organizations do not have the advantage of profit/loss terminology to communicate to funders and thus may be more dependent on less concrete forms of information to justify operating costs (40). using generic terminology from systems theory, this model emphasizes measures of environment, outcomes and results. although other aspects of systems theory, e.g., inputs and processes, may well be considered in an overall cost/benefit evaluation of the efficiency of the sbi program, a measure of the economic impact of sbis needs to focus on the initial three terms. the justification for these classes of measurements involves their conceptual meaning and operational measurements. for the purposes of the following discussion, the reader is referred to the conceptual model presented in figure 1. figure 1. a measurement model of the economic impact of small business institutes environment outcomes results prime interest rate self-appraisal direct: unemployment rate self-confidence financial ratios tax rates client satisfaction tax revenues factory closings enhanced realism sales growth competitors costs technology regulations indirect: employment growth income growth failure rate financial ratios tax revenues the first class of measures, environment, involves all factors which affect the economic impact of an sbi but which are not under control of the sbi director or program. examples of this class include macroand micro-economic factors such as the local unemployment rate, inflation, taxes, factory closings, and the prime interest rate. that a measure of these factors is necessary is suggested by the survey of 385 small business owners by franklin and goodwin, which reported "small business ranks external factors as the major cause of its problems" (16). these external factors have an influence on economic impact of sbi and thus must 68 be measured and reported during a case, but the maddening yet ineluctable fact remains that these environmental factors must be accepted as "givens" outside the control of the sbi program. in a quantitative sense, these variables are easily measured and reported. an intriguing line of research stemming from this model would be to determine the effect of environmental volatility as measured by snyder (41) or snyder and glueck (42) on the small businesses assisted by the sbi program. the second class of measures, outcomes, involves qualitative measures of the achieved status of a client (40). examples of this class include having a client set realistic sales goals, increased self-confidence of a client, constituency satisfaction (26), and a potential entrepreneur having a more balanced viewpoint of what level of time and effort is involved in the administration of a small business. these variables are predicted to be difficult to quantify and translate into economic terms, yet the full measure of the economic impact of the sbi program would be inadequately described without such variables (elstrott, 1987; lang & golden, 1989; patton, 1980). support for this contention comes from hitt (1988), who noted financial measures of a business and its potential problems are often unrelated. the third class of measures, results, are the final outputs of the sbi program and can be readily quantified. as these measures have high face validity to governmental reviewers as measures of the economic impact of the sbi program, two types of data, direct and indirect, need to be examined. the first type of financial data, referred to as direct financial data, involves internal financial ratios. the name direct has been selected due to these measures being more immediately affected by the management counseling provided by the sbi. the use of financial ratios is suggested due to the fact that "...executives and policy researchers rely almost solely on financial measures of effectiveness" (19). examples of this class of data emphasize financial ratios which measure liquidity, leverage, activity, and profitability (e.g., return on equity, return on sales, current ratio, debt to equity, inventory turnover, return on net worth, fixed asset turnover, debt to total assets, return on investment) as measured both at the beginning of the providing of assistance and via two follow-up measures as well. the specific operational measures of these and other financial ratios may be found in hisrich and peters. while the use of financial ratio analyses in small businesses must be done with caution (47), a lucid discussion of financial ratio analysis for small businesses may be found in patrone and dubois (29). this data is particularly valuable in the sbi programs due to financial ratios having been found to be useful predictors of insolvency by rushinek and rushinek (37). as bettis concluded, such financial performance measures as are being advocated as outputs of an sbi program are usually highly correlated, therefore data collection can be done in an economical and relatively unobtrusive manner (1). of the financial ratios, robinson has suggested return on sales is perhaps most valuable for small business research (33). although such financial data may be seen as proprietary, sbi clients need to be informed at the start of consulting activities that such information will be requested and that confidentiality will be maintained. (for a suggested consent form, see appendix a). this point was forcefully made by elstrott: no long-term counseling should be provided to clients unless they are willing to provide current financials to the counselor...aii long-term clients should be informed from the beginning that they will be requested to voluntarily furnish preand postcounseling financial data (12). 69 the collection of financial data is particularly important due to the recent research by sapienza, smith, and gannon, who found no statistically significant relationships between subjectively estimated values and objective measures of performance in small firms (39). therefore, a valid evaluation of the economic impact of an sbi should not be conducted via subjectively estimated values. by collecting such financial ratios data, perceptual approaches such as those used by nahavandi and chesteen in which sbdc clients were asked to estimate the impact of the services received, would be avoided (25). a second type of results, indirect, involves external measures taken against industry norms and thus serves as the second data set in determining the economic impact of an sbi program. this analysis is suggested as it allows the contrasting of sbi clients'mall businesses to other small businesses which have not received sbi counseling. the rationale for collection and analysis of this long-term data comes from rossi et al.: the critical issue in impact evaluation is therefore whether or not a program has produced more of an effect than would have occurred "naturally"; that is, either without the intervention or compared with alternative interventions (36). in addition, cascio (5) as well as isaac and michael (21) noted that the interrupted time series research design has the disadvantage of not controlling for history; the use of external norms as standards attenuates that disadvantage. the term indirect has been selected in that these measures are relatively less immediately affected by the sbi counseling due to their interaction with environmental factors which serve to confound any cause-effect relationships of the sbi program. this longitudinal data would be collected across groups of sbi clients at time periods following the consultation process and contrasted with norms within the relevant industries. these external measures include employment growth, change in wage and salary, business failure rates as a measure of avoiding negative outcomes, and financial ratios such as net profit to total assets and/or net profit to net sales. as simon has written, the interpretation of results based on these external standards must be done in a circumspect manner: "comparison of ratios with a standard is slightly more complex, since a benchmark must be established" (40). for the purposes of this model, the norms for these external measures are readily available in publications such as handbook of small business data 1988, osborne or the states and small business: programs and activities (18, 28, 46). the collection and interpretation of the data may well be left to students using methods listed by bruckman and iman (3) and maria and schatz (24). empirical support for this assertion comes from ettenson, shanteau, and krogstad (14), who contrasted the judgments made by professional auditors and accounting students and concluded no significant differences in the number of significant dimensions used. in addition, the model proposes collecting data on tax revenues paid to federal, state, and local governments, as this is an integral part of the economic impact of any small business assistance program (9, 7, 23). the operational measures of generation of tax revenue described by chrisman et al., could be adopted, although their use will result in conservative estimates (9). the collection of data on sales growth is also advocated by robinson (33); this is the most used performance measure in outsider impact studies (8). i would also add a measure of net operating cash flow, both as a financial measure itself and in relation to debt, as discussed by hisrich and peters (1989) and operationally delineated by osborne (28). 70 research design specifically, the sbi economic impact presented in this paper uses the direct and indirect sets of data to determine the economic impact of the sbi. the model advocates an interrupted time series design using each client as their own control via the use of difference scores of financial ratios across time. these are the previously mentioned direct data. although this is not an experimental design, due to the practical inability to have random selection and assignment of units of analysis, this method does provide a control for selection and mortality effects on internal validity (21). as epstein and tripodi noted: although the interrupted time series design does not control for all factors affecting internal validity...it does generate knowledge that is highly informative about a specific program (p. 118).rossi et al., (1979) have also suggested the use of clients as their own controls: another method of obtaining control observations is to take advantage of the fact that program participants can be used as their own controls...particularly when substantial lo'ngitudinal (time series) data exist, this can be a powerful research design (36). one value of this approach would be that it obviates the criticisms made by elstrott of prior evaluation paradigms which used statewide averages as a "control" group (12). the use of longitudinal data collection is necessary in any attempt to measure the economic impact of the sbi program due to the dynamic nature of the criteria (8). in addition, simon has suggested: "comparison over time is probably the most applicable method for most ratios" (40). although this interrupted time series approach may be criticized by an empiricist as not taking into account all environmental threats to internal validity (5), it is my contention that environmental influences must be taken as given due to the lack of control over them. the working model emphasizes criteria gleaned from the preceding literature review with allowance made for financial restraints on the ability of most sbis to collect data. the process described emphasizes both the use of preand post-counseling internal measures of financial performance as well as the use of external contrasts with industry norms. an initial example of how the model could be applied by an sbi director is shown in figure 2. the data which would be listed in figure 2 would serve both to show progress within the small business and to show comparisons with industry norms. figure 2. economic impact of case no. 17-1990 start finish one year two year return on sales inventory turnover roi 0/ income taxes business taxes sales number of employees net profit current ratio profit margin return on net worth 71 conclusions and directions for research a question which has arisen during the writing of this paper is the relationship of type as well as amount of assistance provided and the subsequent performance of the small business. for example, bracker and pearson surveyed 188 owners/managers of dry cleaning businesses and concluded strategic planning does not correlate with performance data (2). although none of the sample in the study by bracker and pearson had used s13l services, does this indicate that assistance with strategic planning would be of little economic value to a small business owner (2)? although this question is offered as a rhetorical one, the question deserves serious research. areas of research, which could support both the model which has been presented as well as the sbi program, include those discussed by steffy and maurer, namely time-related issues, dollar valuation, and system dynamics (45). if the model presented could be used throughout the sbi program using standard measures of performance and follow-up periods, the publication of collected measures of the impact of the sbis would obviate the criticisms of prior research made by bracker and pearson (1985) in regard to small sample sizes and inappropriate financial measures (2). far more research needs to be conducted on the needs of sbi clients as perceived by the clients themselves. as epstein and tripodi stated: "in the context of budgetary constraints, it is even more important that administrators be able to describe program activities in relation to client needs" (13). the validity of surveys of sbi clients as to their needs could be supported by research on the economic impact of different types of assistance provided by sbis, e.g., does providing accounting counseling have more of an effect on return on sales, net profits, or taxes paid to the federal/state/local government? a final area of research suggested by this economic impact model involves the relationship of improvement within a performance measure and the ultimate success of the small business. for example, which is more predictive of increased net profit two years from now: an increase in return on investment or an increase in inventory turnover? if we find the answers to these types of questions, the economic impact of the bsi program will not only be empirically evaluated, but enhanced. references 1. bettis, r. a., "performance differences in related and unrelated diversified firms," strategic management journal, 1981, 2, 379-393. 2. bracker, j. s. and pearson, j. n., "the impact of consultants on small firm strategic planning," journal of small business management, 1985, 23, 3, 23-30. 3. bruckman, j. c. and iman, s., "consulting with small business: a process model journal of small business management, 1980, 18, 2, 41-47. 4. cascio, w. f., "scientific, legal, and operational imperatives of workable performance appraisal systems," public personnel management journal, 1982, 11, 4, 367-375. 5. cascio, w. f., applied psychology in personnel management. 3rd ed., prentice-hall: englewood cliffs, nj, 1987. 72 6. chew, w. b., "no-nonsense guide to measuring productivity." harvard business review, 1988, 16, 1, 110-118. 7. chrisman, j. j., hoy, f., robinson, r. b. and nelson, r. r., "evaluating the impact of sbdc consulting; a reply to elstrott," journal of small business management, 1987, 25, 1, 72-75. 8. chrisman, j. j. and leslie, j., "strategic, administrative, and operating problems: the impact of outsiders on small firm performance." entrepreneurship theory and practice, 1989, 13, 3, 37-51. 9. chrisman, j. j., nelson, r. r., hoy, f. and robinson, r. b., "the impact of sbdc consulting activities," journal of small business management, 1985, 23, 3, 1-11. 10. connolly, t., conlon, e. j., and deutsch, s. j., "organizational effectiveness: a multipleconstituency approach," academy of management review, 1980, 5, 2, 211-217. 11. elbert, d. j., anderson, d. g., and floyd, j. r., score/ace volunteers and sbi programs: an evaluation of support potential," journal of small business management, 1983, 21, 2, 38-44. 12. elstrott, j. b.. "procedure for improving the evaluation of sbdc consulting activities," journal of small business managment, 1987, 25, 1, 6771. 13. epstein, i. and tripodi, t., research techniques for program planning, monitoring, and evaluation. new york: columbia university press, 1977. 14. ettenson, r., shanteau, j, and krogstad, j., "expert judgment: is more information better?", psychological reports, 1987, 60, 227-238. 15. florin-thuma, b. c. and boudreau, j. w., "performance feedback utility in a small organization: effects on organizational outcomes and managerial decision processes," personnel psychology, 1987, 40, 693-713. 16. franklin, s. g, and goodwin, j. s., "problems of small business and sources of assistance: a survey," journal of smag business management, 1983, 21, 2, 5-12. 17. hafer, j. c. and ambrose, d. m., "fit or misfit: restructuring score for effectiveness in managerial assistance," journal of small business managment, 1981, 19, 4, 15-19. 18. handbook of sma/i business data 1988. u. s. small business administration, office of advocacy. washington, dc. 19. hisrich, r. d. and peters, m. p., entrepreneurship: starting, developing, and managing a new enterprise. homewood, il: bpi/irwin, 1989. 20. hitt, m. a., "the measuring of organizational effectiveness: multiple domains and constituencies," management international review, 1988, 28, 2, 28-40. 21. hoy, f., "interventions in new ventures through the sbi versus the sbdc in k. h. vesper (ed.), frontiers of entrepreneurship research, wellesley, ma: babson college, 1982, 506-515. 22. isaac, s. and michael, w. b., handbook in research and evaluation. san diego, ca: editd publishers, 1971. 23. khan, m. r. and rocha, j. r., "recurring managerial problems in small business," american journal of small business, 1982, 7, 1, 50-58. 73 24. lang, j. r. and golden, p. a., "evaluating the efficiency of sbdcs with data envelopment analysis; a longitudinal approach journal of small business management, 1989, 27, 2, 42-49. 25. mario, a. b. and schatz, m., "expanding the sba management assistance program," journal of small business management, 1980, 18, 4, 8-12. 26. nahavandi, a. and chesteen, s., "the impact of consulting on small business; a further examination," entrepreneurship theory and practice, 1988, 13, 1, 29-40. 27. o'onnor, e. l. and rogers, j. c., "an examination of the attitudes of clients and students in the sbi case situation," proceedings of the 1988 national conference of the small business institute directors'ssociation, 1988, 311-315. 28. odiorne, g. s., "measuring the unmeasurable: setting standards for management performancey business horizons, 1987, 30, 4, 69-75. 29. osborne, e. h., user manual. startup model and comparison model. marietta college: marietta, oh, 1987. 30. patrone, f. l. and dubois, d., "financial ratio analysis for the small business," journal of small business management, 19, 1, 35-40. 31. patton, m. q., qualitative evaluation methods, london: sage publications, 1980. 32. patton, m. q., practical evaluation, london: sage publications, 1982. 33. robinson, r. b., "the importance of 'outsiders'n small firm planning and performancey academy of management journal, 1982, 25, 1, 80-93. 34. robinson, r. b., "measures of small firm effectiveness for strategic planning research journal of small business management, 1983, 21, 2, 22-29. 35. rocha, j. r. and khan, r. m., "the human resource factor in small business decision making," american journal of small business, 1985, 10, 2, 53-62. 36. roitman, d. b., emshoff, j. c., and robinson, r. b., "college-based managerial and technical assistance for small business," journal of small business management, 1984, 22, 4, 53-61. 37. rossi, p. h., freeman, h. e., and wright, s. r., evaluation: a systematic approach. london: sage publications, 1979. 38. rushinek, a. and rushinek, s. f., "using financial ratios to predict insolvency," journal of business research, 1987, 15, 93-100. 39. rutman, l., planning useful evaluations: evaluability assessment. london: sage publications, 1980. 40. sapienza, h. j., smith k. g., and gannon, m. j., "using subjective evaluations of organizational performance in small business research," american journal of small business, 1988, 12, 3, 45-53. 41. simon, s. e., "productivity, efficiency and effectiveness: simple indicators of agency performance," journal of rehabilitation administration, 1987, 11, 1, 4-10. 42. snyder, n. h., "validating measures of environmental change," journal of business research, 1987, 15, 31-43. 74 43. snyder, n. h. and glueck, w. f., "can environmental volatility be measured objectively?", academy of management journal, 1982, 25, 1, 185-192. 44. solomon, g. t. and weaver, k. m., "small business institute economic impact evaluation," american journal of small business, 1983, 8, 1, 41-51. 45. sonfield, m. c., "can student consultants really help a small business?", journal of small business management, 1981, 19, 4, 3-9. 46. steffy, b. d. and maurer, s. d., "conceptualizing and measuring the economic effectiveness of human resource activities," academy of management review, 1988, 13, 2, 271-286. 47. the states and small business: programs and activities, u. s. small business administration, office of advocacy, washington, dc, 1986. 48. welsh, j. a. and white, j. f., "small business ratio analysis: a cautionary note to consultants," journal of small business management, 1981, 19, 4, 20-23. appendix a i, (name of client), the owner and/or manager of the (name of small business), am willing to present financial information as to the financial condition of my business to the small business institute located at (name of college or university). i realize this information will be requested both at the initial contact and at follow-up periods. i understand that the small business institute team will maintain the confidentiality of this financial information and will use it to evaluate their program. (signature of client) (signature of sbi director) 75 reproduced with permission of the copyright owner. further reproduction prohibited without permission. strategic cognitive maps of small business leaders payne, g tyge;kennedy, kevin h;blair, john d;fottler, myron d journal of small business strategy; spring/summer 2005; 16, 1; abi/inform complete pg. 27 strategic cognitive maps of small business leaders g. tyge payne university of texas at arlington tpayne@uta.edu kevin h. kennedy ohio university kennedyk@ohio.edu john d. blair texas tech university jblair@ba.ttu.edu myron d. fottler university of central florida fottler@mail.ucf.edu abstract cognitive maps influence organizational strategic behaviors by guiding the perceptions of key decisions makers. this paper empiricaflv examines these maps in small business leaders who have the ability to strongzv influence an organization's attributes and actions. results demonstrate that fv.!o distinct and polar orientations develop .[i-om small business leaders' se!f identity with their organization, overall assessments of" external stakeholders, and general perceptions of the environment. the strategic implications of these findings suggest that small business leaders should be mind/id of their own viewpoints and biases since they can greatly influence organizational behaviors and subsequent performance. introduction small businesses often operate in highly turbulent and uncertain environments. in such environments, top managers and entrepreneurs leading these small businesses tend to place the complex stimuli into more simplified mental frameworks, such that interpretation and comprehension can occur (hambrick & mason, 1984; starbuck & milliken, 1988). this type of simplification process is termed sensemaking, which " ... is about such things as placement of items into frameworks, comprehending, redressing surprise, constmcting meaning. interacting in pursuit of mutual understanding. and patterning" (weick, 1995:6). cognitive maps result from sensemaking activities and aid 27 managers in understanding and coping with multiple situations in complex business environments (weick & bougon, 1986). these maps essentially guide strategic decision making concerning the actions or behaviors of their respective organizations by establishing simplified views of the organization itself, the organization's place among key stakeholders, and the state of the organization's environment (jackson, 2000; stubbart, 1989). association or identification with the organization is especially significant in the development of the strategic cognitive map. which we define here as a belief system about an organization and its approach to dealing with strategic issues. strong reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategi1 identification often occurs with organizational leaders because they tend to take ownership in the organization in which they operate (dutton, dukerich & harquail, 1994 ); this is especially true in smaller organizations. so, when an organizational member is in a strong position to impact the organization's actions and attributes, that member can influence organizational sensemaking among other organizational members and therefore impact subsequent strategic behavior. thus, small business leaders ultimately influence organizational behavior through the enactment of their cognitive maps. this relationship becomes more relevant within increasingly ambiguous and complex business settings that demand faster and more copious decisions. this paper questions if small business leaders' cognitive maps can demonstrate a discernable pattern that links different perceptions of the organization from a strategic point of view. the primary issue of interest is, therefore, concerned with the conceptual maps or frameworks that exist among small business leaders and how they relate to their overall perceptions of organizational strategic behavior. we test this by analyzing several hypotheses regarding three basic strategic conceptualizations made by leaders concerning their organizations: i) the small business leaders' view of their own organization, 2) the small business leaders' view of the key external stakeholders associated with his or her organization, and 3) the small business leaders' view of the overall task environment in which the business operates. these conceptualizations form the basis for the cognitive maps and were chosen to provide a multi-level conceptualization of the situational factors at play in determining strategic behavior. similar cognitive views of organizations have been established (e.g., weick & bougon, 1986), but little empirical work exists that focuses on the cognitive maps that leaders have of their respective organizations and their position within the environment. in response, we empirically test these perceptual components and their relationship 28 vol. 16. no. 1spring/summer2005 to the overall perceived strategic behavior of small organizations. cognitive maps small business leaders develop a strategic cognitive map concerning their organization through perceptions of three primary forces-the individuals that make up the organization, external stakeholders, and the broader industry or environment (covin & slevin, 1991; russell, 1999; zahra, 1991 ). while these influences each independently impact strategic behavior in an objective fashion, they also are subject to interpretation by the individual and tend to create reinforcing mental frameworks. the following sections focus on these cognitive map components and their relationship to externally-oriented strategic behaviors discussed as "defending" and "prospecting". we begin by establishing these strategic behavior classifications and their relevance to this study. then, we develop hypotheses regarding the relationship of each map component to the strategic behaviors. these hypotheses lead to the development and analyses of two competing models. strategic organizational behavior schendel and hofer ( 1979: 11) discussed strategic management as "[dealing] with the entrepreneurial work of the organization, with renewal and growth, and more particularly, with developing and utilizing the strategy which is to guide the organization's operations." this definition treats strategy as involving two primary problems, the concern with growth, renewal and entrepreneurial work and the concern with organizational operations. miles and snow ( 1978), in a similar fashion, consider organizational strategies, structures and processes as patterns of behaviors dealing with two confines, identified as the entrepreneurial problem and the engineering problem. of their four types, the defenders and prospectors are said to be the extremes of behaviors and traits involving engineering and entrepreneurship, respectively. defenders are those organizations that demonstrate behaviors that are low-risk, operating in a narrowly focused domain, and reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal o(small business strategv concentrating primarily on max1m1zmg efficiency. prospectors, on the other hand, are higher-risk, organic firms that actively seek new opportunities in an open domain. related studies support these two basic strategic orientations and suggest a conservative to entrepreneurial continuum that has shown to be a useful construct in understanding strategic behavior (e.g., covin & slevin, 1989; miller & friesen, 1984; porter, 1980). therefore, following this precedent, but keeping with the miles and snow ( 1978) terminology, the following hypothesized relationships between cognitive map components and organizational behaviors are discussed using the engineering and entrepreneurial terms of "defending" or "prospecting" strategic behavior. organizational strategic identity leaders establish perceptions regarding their organization's identity based on what they believe are unique and enduring about the organization in relation lo strategic decisionmaking. the traits or attributes that seem to be associated with the organization itself are identified and used to characterize it. the processing and interpretation of information, although actually done by individuals, is often observed at the organizational level, especially when convergence among members occurs or when strong leadership is present. this convergence allows the members of the organization to develop collective cognitive systems and memories (daft & weick, 1984 ). the development of these cognitive systems and memories creates strong and clear beliefs on which organizational leaders base their reasoning for the purpose of the organization and as explanations for strategic actions. once this conception of the organization has fonned, how other organizational members perceive the organizational entity-particularly the organization's top managers-is tenned identity. an organization's identity has an impact on interpretations of issues and it motivates 29 vol. 16. no. i spring/summer 2005 decision-makers to act on those interpretations. however, other members' perceptions of the organization do not always coincide, especially during turbulent, unstable, or ambiguous periods. leaders' beliefs and perceptions concerning organizational identity, although not always the same as other members or even the collective majority, are often articulated as such to ultimately become the recognized collective identity (albert & whetten, 1985; kramer, 1991 ). this is especially true in smaller organizations or when one person (i.e., the entrepreneur) is held up as the key decision maker. on this basis, we suggest that strategic identities can develop such that organizational members will largely identify with an engineering orientation and/or an entrepreneurial orientation. strategic identity is given as a comprehensive term that indicates an organization's self-identified propensity to make choices and decisions in a certain manner (els back & kramer, 1996 ). therefore, our first two hypotheses reflect this identity and its specific relationship to organizational strategic behavior. hi: an entrepreneurial identity is positively related to prospecting stra-tegic behaviors. h2: an engineering identity is positively related to defensive strategic behaviors. stakeholder perceptions the second primary influence on small business leaders' strategic cognitive maps is their perception of key external stakeholders. mason and mi troff ( 1981) and freeman ( 1984) emphasize the influence of external organizations, where due to their stake in the decisions and actions of the focal organization, may attempt to influence decisions and actions towards their own interests. similarly, pfeffer and salancik ( 1978) support the contention that organizational acceptability and its activities are "judged" by external organizations and that the focal organization may influence acceptability for itself through power and reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategr manipulation. therefore, the stakeholder perceptions that are received by key decision makers (whether they are "real" or not) will influence the strategic behavior of the organization in regards to those stakeholders. perceptions of power and control are largely derived from an organization's dependence on stakeholders with the environment to provide needed resources (freeman, 1984; pfeffer & salancik, 1978). however, perceptions of this dependence may also be shaped by the organizational categories that are most important to individuals during decision making and social interaction (kramer, 1991 ). as discussed previously, interpretation enters in as the cognitive information processing that occurs prior to action. since interpretation must take place (daft & weick, 1984), interpretation on issues of power must occur. power is the ability to affect organizational outcomes (mintz berg, 1983 ). thus, perceptions of stakeholders who have, or can potentially gain, power can have a significant impact on organizational strategic behavior. two critical assessments about stakeholder power are generally made (blair & whitehead, 1988; freeman, 1984). these include assessing the stakeholder's i) potential to threaten the organization, and 2) potential to cooperate with the organization. potential for threat is defined here as the perceived likelihood and capability of a stakeholder to act in some way that is detrimental to the organization. cooperation, on the other hand, is the perceived likelihood and capability of a stakeholder to act in a supportive manner that can enable the organization to better manage its environment. the image of both the potential for cooperation and the potential for threat are based on two primary issues: 1) the perceived dependence of the organization on that stakeholder, and 2) the relevance of an issue to both parties. thus, the following hypotheses are derived in relation to the strategic behaviors of prospecting or defensive behavior due to overall perceptions of opportunity or threat. 30 vol. 16, no. 1spring/summer2005 hj: cooperative assessments of key external stakeholders are positively related to prospecting strategic behaviors. h4: threatening assessments of key external stakeholders are positively related to defensive strategic behaviors. environmental perceptions because environmental conditions often have a large impact on organizational performance, and behaviors and strategies (dess & beard, 1984; miller & friesen, 1984 ), perceptions of the environment and the uncertainty associated with current and future states of the environment can greatly influence strategic cognitive maps. dess and beard (1984) suggested three dimensions of the environment which can have an influence on organizational strategies; these dimensions include munificence, dynamism, and complexity. however, complexity is not examined here for two reasons: 1) it is often defined according to environmental heterogeneity, which is irrelevant in a single industry study, and 2) it has shown to remain relatively constant and become salient only as an organization diversifies (sutcliffe, 1994 ). therefore, complexity only indirectly affects organizational information processing through structural mechanisms, which are controlled for in this study of small businesses only. given these arguments and following previous works regarding executive perceptions (e.g., sutcliffe, 1994 ), the two factors of munificence and dynamism will be considered here. munificence is considered to be the extent to which continued growth is supported by the industry environment (castrogiovanni, 2002). dynamism, on the other hand, is described as an issue of overall environmental change or instability. changing and dynamic environments often require adaptation, based on reevaluation of situations, to maintain or gain competitive advantage (mcgee & shook, 2000). reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategv it at first seems that perceptions of munificence will likely support growth and entrepreneurial actions, while dynamism, as an agent of instability will foster more apprehensive movements and actions. however, miller and friesen (1984) demonstrate that a positive relationship exists between innovative activities and dynamic environments, while zahra ( 1991) argues that dynamic, hostile, and heterogeneous environments intensify entrepreneurial activities. utterback (1994) also supports this outlook arguing that dynamic environments stimulate firms to take advantage of emerging market opportunities as well as to pre-empt rivals. thus, given previous studies' findings, and again in relation to strategic behavior, the following hypotheses suggest that perceptions of dynamism will support increased levels in both forms of strategic behavior (prospecting and/or defensive), while munificence will foster complacency and reduced levels of strategic activity. h5: perceptions of munificence in the environment are negatively related to more prospecting strategic behaviors. h6: perceptions of munificence in the environment are negatively related to more defensive strategic behaviors. h7: perceptions of dynamism in the environment are positive~v related to more prospecting strategic behaviors. h8: perceptions of dynamism in the environment are positive~v related to more defensive strategic behaviors. modeling based on the hypotheses addressed above, two models (i.e., cognitive maps) are proposed as parsimonious explanations for certain organizational strategic behaviors regarding the cognitive perceptions of small business leaders. control variables are included in the functions as well, although specific expectations regarding their relationship to organizational strategic behavior are not specifically addressed. the 31 vol. 16, no. 1spring/summer2005 proposed functional relationship for both forms of strategic behavior is as follows: prospecting behavior =f(jentrepreneurial identity, j cooperative stake-holders, t munificent environment, j dynamic environment, control var-iables) defending behavior = f ( j engineering identity, j threatening stakeholders, t munificent environment, j dynamic environment, control variables) dat a and methods the sample consists of 570 firms located throughout the u.s. all firms come from a single industry-the health care industrybut these data also represent a sub-segment of the industry through restriction to a single organization type. this single organization type-the physician medical group-is utilized so that a relatively homogeneous set of undiversified organizations is obtained. further, the health care industry is of particular use in this study because identity, image, and perceptions are of particular concern to knowledge-based service institutions where the services provided are the primary competitive advantage and asset. also, medical group leaders are forced to be highly discretionary in their sensemaking due to the general complexity and uncertainty of the health care industry but do have the context-specific knowledge that is considered to be a essential antecedent for successful entrepreneurship (mccline, bhat & baj, 2000). these data were originally collected with a questionnaire delivered to the single key person within the organization-the top manager or ceo, of which many were also physicians. the original response rate was 27 percent, but this secondary sample is composed of only 570 of the initial 865 respondents because of our limitations to small firms, which we define as less than or equal to i 00 physician full-time equivalents (ftes). the medical groups ranged in size from three fte physicians to i 00 ftes, with most firms being very small in size (less than io ftes). the use of fte physicians is the industry's accepted measurement of size and reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategv is more appropriate for medical groups than some of the more commonly used variables such as total employees, amount of sales, or size of capital investment used by researchers. descriptive stat1st1cs, correlations, and reliability alpha scores for the utilized variables can be seen in table 1. strategic identity variables the variables used to determine strategic identity were taken from a portion of the questionnaire arranged in scales ranging from strongly disagree ( 1) to strongly agree (5), with the exception of one question which ranges from low risk and moderate return (1) to high risk and high return (2). these questions (seen in table 2) are based on the strategic orientation dimensions utilized by tan and litschert ( 1994 ). means of five responses were each then taken to produce a single scaled variable representing an engineering or entrepreneurial identity; any missing values were replaced with the group mean. stakeholder perception variables the variable used as "threat perception" is derived from the question, "what is the potential of each stakeholder to threaten your organization?" this question was scaled from very low (1) to very high (5) and independently measures the threat potential of four different external stakeholder groups. these four key external stakeholders include 1) hospitals, 2) competitors (other medical groups), 3) managed care organizations, and 4) integrated delivery systems/ networks. one might expect that the various types of external stakeholders would elicit differentiated responses. however, as evidenced by the alpha scores shown in table 1, we find that respondents simplified their sensemaking to view external organizations rather broadly. as such, a single combined variable is used in the model testing to give an overall variable that indicates stakeholder image in terms of potential to threaten. in this way, an overall perception of key external stakeholders as more or less threatening could be tested. 32 vol. 16. no. 1spring/summer2005 a similar variable was used for "cooperation perception" and is scaled identically to the stakeholder threat construct. it independently measured the cooperative potential using the same four stakeholder groups as before and also using a mean score to give an indication of an overall perception of the stakeholders' potential to cooperate. environment variables the two categorizations used in this study for the environment include munificence and dynamism (i.e., turbulence). the dynamism variable was arranged in a 7-point scale where respondents were asked to circle the number that best characterizes the external environment of their respective organization. endpoints were labeled "stable" ( 1) and "turbulent" (7). the second variable was taken from the approximated percentage of managed care in the region, as reported by the respondent. previous work in the health care industry supports the use of managed care as a proxy for environmental munificence because increased levels of managed care alter reimbursement patterns and restrict patient care (e.g., trauner & chestnutt, 1996). because managed care in the midl 990s was often seen as undermining the ability of physician organizations to operate independently, we expect that the less managed care influenced in the region, the more munificent the perception. thus, percentage scores were inverted to give a proxy for environmental munificence. organizational strategic behavior variables the final key variables used in this study are the strategic behaviors exhibited by the organization. similar to the stakeholder perception constructs, actions regarding the four key external organizations were used to represent the overall strategic behaviors of the organization. these questions differ however, because they ask for strategic actions taken in regards to each of the four external stakeholders. r e p ro d u ce d w ith p e rm issio n o f th e co p yrig h t o w n e r. f u rth e r re p ro d u ctio n p ro h ib ite d w ith o u t p e rm issio n . table i descriptive statistics and correlation coefficients• i~ ..., ::: cl --cl variables mean stddev i 2 3 4 5 6 7 8 9 io 11 12 ~ i 1. entrepreneur l.dentity 3.000 .66 1 (.64 1) t:l ::::: i 2. engineer identity ti;, 3.514 .663 .389*** (.670) :::: "' 13 . threat perceptions ~· 2.922 .928 -.045 -.106* (. 753) 13; "' 14. cooperaton perceptions 3.128 .773 .078t .099* .063 (.721) ~ ~ is. minifecence (log of l/%mc) b 28.345 23.531 ~ .028 -.035 -.125*** -.030 16. dynamism 4.630 1.684 -.013 -0.152*** .280*** .026 -. 102* 17. prospecting behavior 2.061 .753 .094* .026 .232*** .228*** -.072t .164*** (.675) t3 i is. defending behavior 2.356 .955 .088* .078 .329*** .047 -.073t .215*** .636*** (.825) 19. size (log # ftes) b 19. 103 21.011 -.031 -0.092 * .115** -.027 -.031 .091 * .256*** .161 *** i 10. academic practice . 104 .306 -.06 1 -.201 *** .117** .091 * .024 .041 .113** .026 .141 *** ~ i 11 . gender of respondent .528 .500 .020 -.005 -.060 .071 .045 .057 .028 -.007 -.055 -.047 --:-._ °' 12 . age of respondent 45.030 7.317 -.019 .000 -.059 -.068 .024 -.045 -.095* -. 137*** .047 -.060 .009 --~ " standardized beta coefficient (2-ta iled significance) ._ i b desc ripti ve given prior to transformation vi .., ~i tp =. io c'3 :::: i *p = .os :: :: i **p = .01 ~ "-' c::> i ***p =.001 ~ reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal ol s1jj£jjj b11siness ,,'v.ro/egv table 2 questions used for strategic identity construct d evelopment entrepreneur identity construct: i. we are wi llin g to sacrifice short-term profitability for long-term goa ls. 2. in making strategic decisions , we constantly seek to introduce new services or new products . 3. whenever there is ambigui ty in government regulation, we will move proactively to try to take a lead. 4 . we search for big opportunities, and favor large, bold decisions despite the uncertainty of their o utcomes. 5. in making strategic decisions, we tend to focus on investments that have high risk and high return (rather than low risk and moderate return) . engineer identity construct: i. in making strategic decisions, we emphasize planning techniques and information systems. 2. in analyzing situations, we evaluate possib le consequences thoroughly and obtain a lternatives. 3. we seek oooortunities that have been shown to be promising. 4 . we emphasize the use of cost control systems for monitoring performance . 5. we constantly modify our operating systems and technology to achi eve effic iency. for both the prospecting strategic behav iors and the defending strategic behaviors, the mean responses from the four reference stakeholders were used . the stakeholders include i) hospitals, 2) competitors (other medical groups), 3) managed care organizations (mcos), and 4) integrated delivery systems!networks (ids!ns) . the prospecting behavior construct was taken from the question , "to what extent does your organization spend time and other resources to involve each of the following stakeholders in your decision making?" respon ses were scaled from very lillie (i) to very great (5). this variable was to represent an outgoing and opportunistic pattern of external activity . the defending behavior was utilized for its focus on defense and was similarly scored with the question slightly altered to read, 'to what extent does your organization spend time and other resources to defend itself against potentially threatening actions from each of the following stakeholders?" each of these constmcts serves as a proxy for the overall strategic behaviors of the organization. control variables before empirically testing and analyzing the hypotheses discu ssed above, additional factors that may influence the relationship 34 must be addressed . by controlling for potentially influential factors, a more accurate assessment and interpretation of the data can be done . organizational context variables and individual respondent characteristics have been known to play a significant role in many similar studies. organizational size. competitive behavioral differences between large and small organizations have shown to exist, e ven within a common industry (chen & hambrick, 1995). therefore, we include size as a control variable, even though our sample is already restricted to smaller organizations. again, the size of the organization was determined in the study by the number of full-time-equivalent (fte) physicians in the medical group. the fte measurement variable does not directly demonstrate the actual number of persons working in the medical group, which may be five to seven times as large as the total number of ftes; this is due to the administrative and support personnel (e.g .. nurses , receptionists) needed for each additional fte physician. academic practice. organizational type, independent of size, may also have an impact on perceptual differences. to examine this, we look at differences between academic practices and those not associated with an reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal o(small business strategv academic-based medical school. while most academic practices are large and exhibit similarities to large firms, academic practices exhibit differences great enough in and of themselves to warrant separation from the size characteristic. approximately 15 percent of the respondents indicated that their organization was an academic practice. respondent characteristics. two respondent characteristics are included in the analyses as control variables: gender and age. gender is included because differences exist among men and women in leading and managing behaviors. further, their choice and execution of competitive strategy may reflect differences in belief structures or cognitive maps (walsh & fahey, 1986). similarly, the age of the respondent has the potential to impact decisions and strategic orientations because values and attitudes tend to differ with age. results the hypotheses were tested using stepwise regression analyses to determine if the influencing factors proposed for each organizational strategic behavior related to the dependent variables in the expected ways. stepwise regression was used to facilitate an unbiased choice on the part of the researchers and to parsimoniously account for the possible influence of the many independent variables. the results of the stepwise regressions demonstrate that the hypotheses were generally supported; these results are shown in table 3 and discussed in the following paragraphs. we hypothesized that entrepreneurial identity (hypothesis i), cooperation potential (hypothesis 3), environmental dynamism (hypothesis 5), and environmental munificence (hypothesis 7) would serve as predictors of prospecting behavior; three of the four variables were found to support the stepwise-derived model. in addition to entrepreneurial identity, cooperation potential, and dynamism, a threat perception is also positively related, but munificence is not. perhaps when considering "involving" another organization in any alliance or joint effort, the potential for threat becomes more 35 vol. 16. no. i spring/summer 2005 prevalent and needs increased attention from organizational leaders. blindly trusting on the basis of cooperative potential may be somewhat one-sided. alternatively, increases in threat potential may force organizations to ally themselves with others for power and protection, so that collaboration with some stakeholders becomes a way of defending against others. also, the lack of significance with the munificence variable may demonstrate that active strategic behaviors are only pursued when munificence is only moderate or uncertain. in other words, if resources are not readily available, prospecting may be a way to procure those resources needed for organizational survival. for defending strategic behavior, our hypotheses were largely supported as well. engineering identity (hypothesis 2), threat potential (hypothesis 4 ), and environmental dynamism (hypothesis 8) demonstrated positive relationships. however, as with prospecting behavior, munificence showed no significant relationship. thus, hypothesis 6 is not supported. organizational size, as with many studies in management and entrepreneurship, proved to be very influential. results show that with increased organizational size, the level of strategic behavior of both types increased. this seems to suggest that larger organizations, perhaps, are more able to influence their external stakeholders and more actively pursue prospecting and defensive strategies. very small organizations may be more reactionary or selective in their strategic behaviors. similarly, the age of the respondent is negatively related to taking action. perhaps younger leaders have more risk tolerance, and thus are more open to taking strategic actions in regard to their external stakeholders. overall, the hypotheses were largely supported by the analyses. only hypotheses 5 and 6, which argued for a negative relationship between munificence and the strategic behaviors, were not supported. reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategv f--< 0 0 0 \0 n r0\ -i;)ji 0 0 0 n \0 v) m 00 ~ ~ ~ ~ ~ ""'" c"'! ~ "! ~ r0 m m 0 v) 0 ""'" rf--< n ""'" v) n m ""'" 0\ n oc? 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(1) u c c ~ r:/:) u 1-(..i..l <!'. 0 ~ 0 -<!'. uj <ii ::c = 'i:: = > i;)ji .... .5 = <ii .... -'c c.j 0 ,,-., <ii ·;; 0\ = q. -<ii "' ~ v) q. 0 .c ii <ii -<ii b q c... co discussion & conclusions a two-dimensional split in cognitive mapping by small business leaders is demonstrated. within each model, an overall pattern or cognitive map seems to exist. an entrepreneurial identity, outlook of the environment as dynamic, and perception of stakeholders in terms of their potential for cooperation are each related to more prospecting firm behaviors. essentially, this entrepreneurial dimension presents a more positive. assertive, and optimistic perspectvol. 16, no. i spring/summer 2005 0 0 n 0 m n 00 n 0 0 0 0 0 0 n r0 r""'" 00 ~ ~ ~ ~ ~ ~ oc? ~ r-"": 0 0 00 0 0 \0 n \0 0\ 0 0\ \0 m 00 m 0 rv) ~ ~ .....; "": -: c"'! 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(1) -cl 0 ro s:: '-" -cl "c "c (1) c.. ·-.s: (1) <l) s:: ·;;n (1) .s: s:: ro ..... 0 5 ..... :.... ..i:: oj) >. i:: .!:::l :.... <l) u c: 0 ..... ~ 1-<!'. 0 (..i..l r:/:) ~ 0 -<!'. li..l u :::e i;)ji = -=q 0 ,......_ ·;; 0 = n ~ ~ v) .c ii <ii <ii b q co ive. however, a perception of threat from external stakeholders is also an important aspect of this cognitive map, while munificence is not. the second model demonstrates that an engineering identity, dynamic environment perceptions, and a perception of stakeholder threat are related to more defending behaviors. this dimension exhibits a more negative, protective, and foreboding perspective by the small business leader. 36 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal o(small business strategv given these patterns, it seems that leaders of small businesses do develop cognitive maps of their organization and its place among stakeholders and the environment. additionally, these maps are related to the overall strategic behaviors of the organization. generally, small business leaders seem to be either 'negativists' or 'positivists' in their production and utilization of cognitive maps, specifically in regard to organizational strategic issues. this seems to support recent theories and empirical studies on opportunity recognition, which show that opportunity-friendly or threat-dominated cognitive structures develop based on the perceptions of constructed opportunities, or lack thereof, and perceptions of desirability and feasibility (krueger, 2000). of course, limitations in the data and methods exist, which restrict the generalizability of these findings. a key limitation in this study is the unavailability of variables that may have an impact on the dependent variables or serve as confounding variables. primarily, it is difficult to account for institutional forces or regional forces that may impact the behavior of organizations. since we are focusing on managerial perceptions, we can only sunnise that these perceptions actually impact decisions that, in tum, impact behavior. by focusing only on perceptions, we do not explicitly take into account these other forces, but we emphasize the single sector and industry as controlling for most of these external forces. additionally, since all data used here come from a single questionnaire, there may be measurement error attributable to the method rather than the constructs. despite these limitations, we feel the findings reflect real mapping styles exhibited by small business leaders. one related theoretical perspective that may lend support and insight into these findings is regulatory focus theory (higgins, i 998). regulatory focus theory (rft) has recently been suggested as a useful theory in the entrepreneurial process literature because it utilizes two key orientations-promotion and prevention-to account for entrepreneurial success (brockner, higgins & low, 2004). 37 vol. 16, no. 1spring/summer2005 promotion-focused orientations tend to produce more alternatives to problems through creativity and invention (brockner et al., 2004), be more open to change (liberman et al., 1999), and value speed and quantity of output (forster, higgins & bianco, 2003). in contrast, preventionfocused orientations value stability, feasibility assessments, quality, and diligence (brockner et al., 2004; forster et al., 2003). generally speaking, rft suggests that each orientation is more useful than the other in different situations, but that the presence of both types of focus in an entrepreneurial endeavor leads to the best chance of success. clearly, the bipolar findings of this study seem to mirror some of the postulations put forth by higgins and colleagues regarding rft (e.g., brockner et al., 2004; forster et al., 2003; higgins, 1998). so, what we previously discussed as positive or negative cognitive maps may be a direct reflection of the promotionand prevention-focused orientations of rft. however, the internalization of rft may limit such labels to the individual level, rather than the strategic perceptions of the organization. therefore, the transfer process of individual-level psychological orientations to organizational identity and environmental perceptions becomes a key area for future research. some research in this area has already taken place. crossan and colleagues have recently applied organizational learning theories and perspectives to strategic leadership and cognition (e.g., crossan & berdrow, 2003; vera & crossan, 2004). the bi-polar orientation of rft and the findings of this study are supported by previous research. however, this study extends such research in that it identifies some of the key ways cognitive orientations or maps are developed, particularly in how they view external organizations and environments. further, this study demonstrates how cognitive maps specifically relate to certain organizational behaviors, rather than specific contexts. for instance, khandualla's ( 1977) study discusses an entrepreneurial style and a conservative style. similar findings are found in covin and slevin ( 1989), where hostile and benign reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategv environments support different strategic postures-entrepreneurial verses conserveative. while these two strategic styles show to be more effective in different environments, the recognition of the orientations or maps within a common industry and task environment is the key to our study. additionally, our study extends these findings to demonstrate that this bi-polar orientation is not limited to multi-industry studies, but exists in very selective, single industries. we also see that the decisions and actions that any small business leader takes are related to these cognitive biases and may serve to hinder appropriate strategic action or appropriate levels of organizational learning (vera & crossan, 2004 ). assuming the health care industry is one of high levels of hostility, where risk and stress are high and the environment itself is compet1t1ve, political, and fraught with technological changes, firm success would likely side with the entrepreneurial orientation and more organic structures (covin & slevin, 1989). however, many firms in this study behave more defensively and are more engineering-oriented than entrepreneurial. the leaders of these small firms may not readily recognize the biases present in their perceptions and this recognition may be the first step to the identification and utilization of alternative strategic options for the finn. thus, managerial implications are that organizational leaders of smaller firms should be aware of their own propensity for polar mapping patterns and be receptive to alternative viewpoints and strategic actions. references albert, s. & whetten, d. 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(1994 ). mastering the dynamics ()f innovation: how companies can seize opportunities reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal o(small business strategi 1 in the face of technological change. boston, ma: harvard business school press. vera, d. & crossan, m. (2004). strategic leadership and organizational learning. academy of management review, 29(2): 222-240. walsh, j.p. & fahey, l. (1986). the role of negotiated belief structures in strategy making. journal of management, 12(3): 325-338. weick, k.e. (1995). sensemaking in organizations. thousand oaks, ca: sage publications, inc. weick, k.e. & bougon, m.g. (1986). organizations as cognitive maps: charting ways to success and failure. in the thinking organization. eds. h.p. sims. & d.a. gioia. san francisco: jossey-bass, 102-135. zahra, s.a. ( 1991 ). predictors and financial outcomes of corporate entrepreneurship: an exploratory study. journal o.fbusiness venturing, 6(4): 259-286. g. tyge payne is an assistant professor of management at the college of business administration at the university of texas at arlington. his current research is focused on strategic decision-making and cognitive processes, competitive dynamics, technology and knowledge transfer, and entrepreneurship through alliances or m&as. kevin h. kennedy is an assistant professor of management at the college of business at ohio university. current research interests include cross-border strategy, entrepreneurial strategies focused on firm differentiation, international entrepreneurship, the acquisition of technology via m&as, corporate strategy in highly creative industries, and the role that the institutional environment plays in corporate strategy. john d. blair is the snyder professor in management at the rawls college of business at texas tech university. he is also professor of health organization management in the school of medicine. his current research focuses on strategic thinking 40 vol. 16, no. i spring/summer 2005 and entrepreneurial action in the health care industry, bioterrorism preparedness, strategic management and leadership configurations, and the role of paradox in leadership and strategy. myron d. fottler is a professor and director of programs in health services administration at the university of central florida. his research interests include all aspects of human resources management, customer service, stakeholder management, strategic management, integrated delivery systems, and health care report cards. from the business strategy result to a source of economic development: the dual role of csr1 inmaculada carrasco university of castilla-la mancha inmaculada.carrasco@uclm.es inmaculada buendía-martínez university of castilla-la mancha inmaculada.buendia@uclm.es abstract over recent decades corporate social responsibility (csr) has become a major topic in economic literature, especially from a business perspective. this is due to the positive connection between responsible behaviour and profitability. the increasing role of csr in sustainable growth and employment generation in the world’s economies means that it is now a priority in political agendas across the globe. this work proposes a study of csr from an international comparative perspective, conducting an analysis of csr as an intermediate variable. the results confirm the role of csr as an interface between levels of internationalisation and business innovation, on one hand, and economic development and social change, on the other. keywords: corporate social responsibility, development, innovation, internationalisation, change in values 69 journal of small business strategy vol. 26 ● no. 1 ● 2016 introduction over the last two decades the relevance of corporate social responsibility (csr) has grown greatly due to the importance of sustainability and the key role of companies in solving social and environmental problems (blowfield & murray, 2011). despite the publication of numerous studies which have contributed new theories, approaches and terminology (garriga & melé, 2004) the concept continues to be somewhat diffuse, owing to the conceptual duality of ethical attitude and entrepreneurial strategy (wanjan, 2006). however, it may be stated that csr results in a proactive attitude from companies which integrate stakeholders in their business strategy, going beyond their legal obligations in an ethical and responsible manner (hopkins, 2003). the economic and social consequences of the current recession have seriously damaged our trust in companies, leading to an ever-greater demand for information about their activities and social results. the positive impact of responsible behaviour on business competitiveness has placed csr high on political agendas. within the european union the subject has become especially relevant since the publication of the green book on corporate social responsibility. this launched a debate on the content of the book with the aim of establishing an environment of promotion and support which would include not only the setting up of principles, approaches and instruments, but also processes of evaluation and validation to guarantee the effectiveness and profitability of csr (commission of the european communities, 2001). all the european studies and reports on csr coincide, from a joint perspective, in the contribution of csr in reaching the objectives proposed at the european councils of nice, lisbon and gothenburg to make the eu the world’s most competitive and dynamic knowledge-based economy, promoting social cohesion and sustainable development (council of the european union, 2003, 2002). the european commission has recently launched a new strategy where csr is central to sustainable growth and a basis for medium and long-term job creation (european commission, 2011). despite the growing development of government initiatives to promote csr (albareda, lozano, & ysa, 2007; habisch, jonker, wegner, & schmidpeter, 2005; petkoski & twose, 2003), the capacity of nation-states to regulate economic activity has been reduced by the emergence of new nonpolitical and non-public players such as nongovernmental organisations and inter/multinational organisations, thus generating a new system of world governance. in this new institutional context, csr emerges as a mechanism of self-regulation or soft regulation (scherer & palazzo, 2011) for global governance. from an academic point of view csr has become a central topic in the literature, featuring a number of very different perspectives. despite the different lines of research, the studies focus on the analysis of ethical implications (see wan-jan, 2006 for a summary) and the use of csr as a tool for business performance (schmitz & schrader, 2013). there are fewer aggregate studies which permit a global vision of the role of csr in markets. carrasco & buendíamartínez (2013) present csr as an interface between national macroeconomic levels and entrepreneurial behaviour, confirming and expanding inglehart’s theories (2003, 2006) by demonstrating that economic development leads societies towards post-materialistic 70 journal of small business strategy vol. 26 ● no. 1 ● 2016 values. this change in society’s value system impacts on the design of business strategies, which, in the space of a few years, have included csr issues as a consequence of two driving forces. on one hand we have the strategic driver, according to which, firms have a commitment to society so as to achieve certain business objectives (lantos, 2001). on the other hand, we have the development of the ethical values which are implicit in business strategies and which, in turn, reflect the transformation of the values of the people comprising the organisation and which reflect the moral evolution of the society in which they are involved. this general approach coincides with moore (2003), who sees companies as pressured by both society and the companies’ own concerns. from a more global perspective, gjolber (2009) states that companies’ implementation of csr is explained both by national inertias and global trends. in short, csr, is seen as a consequence of economic development and the change in values, but at the same time, rather than being a restriction on business performance, it is a source of competitive advantage (ashley, 2002; husted & allen, 2001; porter & kramer, 2006) in terms of innovation and internationalisation (asongu, 2007; laudal, 2011), which are key aspects in a strategy of business growth in the current globalized economic context. however, these arguments could also be considered in reverse. in other words, both the internationalization and innovation of enterprises are sources of increase in the levels of csr and in turn are factors which explain the development and evolution of values and social change. this latter aspect is particularly interesting if we consider that the formal processes of corporate responsibility differ from those of personal responsibility (bevan, corvellec & fay, 2011: 1). consequently, in order to verify these relationships, the present study is organised as follows: after this introduction, the second section reviews the different theoretical contributions. the third section presents the methodology and the data from the model used to verify the research questions proposed. the fourth section describes the model and its results, followed by a discussion of their implications. the final section presents the conclusions. review of the literature the emergence of csr is linked to the economic globalisation process (gunther, 2005). however, there is comparatively little research which relates csr with international management (egri & ralston, 2008). laudal (2011) demonstrates the existence of a positive correlation between the level of internationalisation and the implementation of csr. the literature on export strategies and profitability introduces csr as an element for product differentiation as a source of competitive advantage impacting on export volume (boehe & barin, 2010; funke & ruhwedel, 2002). in this line, bouquet & deutsch (2008) demonstrate that csr has a positive impact on the capacity of companies to increase profits in international markets and that the social responsibility of international businesses is key to recovering the cost of investment in csr. although profitability could be seen as the ultimate objective in adopting csr policies there are other reasons to consider. first, entry into the international market produces a multiplying effect in terms of pressure/relation with stakeholders, giving rise to a greater need for involvement in socially responsible activities (chapple & moon, 2005). second, 71 journal of small business strategy vol. 26 ● no. 1 ● 2016 the international dynamic confronts firms with the different regulations related to working conditions and environmental protection which have to be taken into account when designing their strategy. this acts as a starting point for the integration of socially responsible activities in business strategy (laudal, 2011). third, the adoption of csr may be the consequence of pressure from different stakeholders to adjust to certain standards beyond merely obtaining a certain level of profit (misani, 2010). this is a case of passive or imitative behaviour, classified as mimetic isomorphism by dimaggio & powell (1983). all the above, together with the absence of international regulations in social and environmental issues justifies a consolidated development of standards and codes of behaviour promoted by organisations such as the united nations, the international labour organisation or the organisation for economic co-operation and development (oecd). the aim is to solve three problematic issues facing transnational companies: environmental damage, commercial relations with dictatorial or undemocratic regimes, and the relocation of production to countries with precarious working conditions (kolk, van tulder & welters, 1999; kolk & van tulder, 2010). these instruments provide organisations with great flexibility in selfregulation (saurwein 2011, schwartz 2001) and define acceptable business practices in questions such as human rights, environmental protection, health and safety and the fight against corruption. in short, it can be said that the need to operate in a globalized world impacts on the level of csr development. consequently, in line with gjolberg (2009) countries with more globalised economies can be expected to have a larger proportion of companies active in csr. the relationship between csr and innovation has been the subject of a large body of research in recent years (among others: lewis, 2003; mcwilliams & siegel, 2000, 2011; nidumolu, prahalad, & rangaswami, 2009; porter & kramer, 2011; rexhepi, kurtishi, & bexheti, 2013). the dependence between these two variables is based on the use of social, environmental and sustainable factors as the source of creation of innovations, understood as new ways of working, new products or services and new market niches (grayson & hodges 2004; little 2006). the contribution of csr to the capacity for innovation can mainly come from three sources: engagement with stakeholders, the search for business opportunities based on social change and the creation of proactive working environments which encourage innovation (european commission, 2009: 111). the consideration of csr as a strategic tool for restoring society’s trust in companies explains its relevance as a factor for producing innovation. in this way, the integration of csr in business strategy leads to corporate social innovation as a process which identifies unsatisfied needs which create new markets (kanter, 1999). despite the fact that a large number of companies focus on csr as a tool for reducing risks and operating costs, hockerts (2008) demonstrates that not only companies with high social profitability use csr as a means to achieve innovation. mcwilliams & siegel (2011: 1482) consider that while income from innovation may be high, income from the social environment through the creation of new or improved products and processes may be higher. as is 72 journal of small business strategy vol. 26 ● no. 1 ● 2016 clear, the literature linking csr and innovation concentrates on a one direction analysis of both concepts, while there are few studies which analyse the reverse relationship. macgregor & fontrodona (2008) demonstrate that the influence of innovation on csr is linked to the creation of social processes. gallego-álvarez et al. (2011) obtain results to the contrary, suggesting that greater investment in innovation does not increase companies’ sustainable practices. internationalisation and innovation are not independent processes. different studies on export behaviour have demonstrated that innovation is an important factor for differentiation and competitiveness in developed countries (dixit & stiglitz, 1977; helpman & krugman, 1985; krugman, 1979). from a microeconomic perspective, the literature has shown that a high level of product differentiation provides a competitive advantage (porter, 1985) which facilitates an increase in exports (funke & ruhwedel, 2002; westhead, et al., 2004) and, in the case of global companies, a culture of innovation, knowledge and capabilities plays a major role (knight & cavousgil, 2004). institutional theory suggests that organisations adopt the established values of society so as to legitimise their operations (dickson et al., 2004). this implies that a culture’s values and beliefs can impact on business decisions and in the case of csr this is confirmed by a number of studies (carrasco & buendíamartínez, 2013). the view of csr as a world cultural value (shamir, 2011) allows us to consider the proposal in reverse: companies’ practices and activities have an impact at macro level with effects on development and change in values. this perspective implies that the relationship between company and society is based on ethical values and that csr is, above all, an ethical obligation (garriga & melé, 2004:53). consequently, the main objective of csr is to achieve sustainable development as a process whose goal is human development achieved in an inclusive, connective, equitable, prudent and secure manner (gladwin & kennelly, 1995: 876). due to the difficulty of measuring csr and sustainable development (nicolosi, grassi & stranghellini, 2011; united nations, 2008) from a macro perspective there is little empirical evidence which links both concepts (skare & golja, 2013). this institutional perspective allows us to broaden the focus of the analysis to consider it not only as an ethical and/or economic issue but also as a political one. in a post-materialist and post-national world context companies have become politicised for two reasons (scherer & palazzo, 2011: 918): they have extended their idea of responsibility and are increasing their collaboration with public and/or civil agents in the solution of economic, social and environmental problems. this is due to the fact that they are increasingly involved in self-regulation processes as a consequence of the regulatory errors of nation-states in a globalised economy and the shortcomings of representative democracies and greater pressure from civil society. this has all led to a greater presence of enterprises in the political environment, which must be analysed from the perspective of a model of deliberative democracy (habermas, 1998, 2001) which permits the recognition of the political role of public and private agents in global governance. this process is reinforced by the opportunities created by the improvement of the moral quality of institutions (liedtka, 2002) 73 journal of small business strategy vol. 26 ● no. 1 ● 2016 stemming from the arrival of the new economy, which is global, favours the intangible and is intensely interconnected. in this new context, the business practices needed for success require the support of alternative value systems. this leads to a new business ethic, which could surpass the previous ones from both a moral point of view and in terms of competitiveness. the new economy requires organisations to be more innovative and flexible and to react more quickly. in order to work, new business practices must be based on new value systems, which are often incompatible with those which were the basis of the old forms of business organisation. consequently, the change in the business activity organisation encourages changes in value systems, which aim to raise awareness of issues such as openmindedness, respect and trust. the change of values in organisations will be reflected in the individuals which are part of them and will thus be expanded to the rest of society. the last three decades have seen an increase in prosperity, improvements in education and breath-taking technological progress. the impact of these changes has progressively changed our codes of ethics. many of these changes are directly related to economical improvements. in a comparative study inglehart (2003; 2006) analyses the change of values in societies as a function of technological development and economic growth. the second stage of modernisation produces a shift in values from tradition and survival to those of self-expression and secular reasoning. consequently as a country becomes richer, the dominant culture shifts towards postmodern values such as solidarity, quality of life and care for the environment. if society’s adopting these qualities has a direct positive effect on companies so they behave in a socially responsible manner, it is acceptable to consider that greater levels of csr in society reinforce changes in values. this discussion leads us to propose the following research questions: do internationalisation and innovation impact on csr? does csr influence economic development and the change in values? methodology and data so as to answer the research questions proposed a partial least squares (pls) analysis was conducted. this technique was chosen since it has certain advantages when the data are heterogeneous, the sample is small and the proposed model is causal and complex (hair, anderson, tatham & black, 1998). furthermore, it requires no multivariate normality, produces consistent estimators without previous distribution assumptions and presents no multicollinearity problems (barclay, higgins & thompson, 1995, tenenhaus, 1998; fornell, 1982). consequently, it is the ideal methodology for our study. the partial least squares analysis is organised around two sub-models, the measurement model and the structural model. the measurement model is the result of applying a factor analysis to reduce the number of variables observed, summarising all the information provided in another nonobservable variable (latent or construct). this sub-model facilitates the loadings of indicators according to the construct to which they have been assigned, making it possible to establish whether this assignation is correct (eliminating them if they do not meet the standard criteria) and whether the theoretical concepts established in the constructs are adequately measured by the observable 74 journal of small business strategy vol. 26 ● no. 1 ● 2016 variables assigned. the structural sub-model establishes the dependence relationships among constructs, reflecting the hypotheses proposed based on prior theoretical developments (barclay, higgins & thompson, 1995). this sub-model evaluates the weight and magnitude of the relationships established between the non-observable variables using structural coefficients (path coefficients) which are calculated by regressing the values of the previously calculated latent variables. this study was developed using 14 indicators from 32 oecd2 countries from the year 2007. the variables were grouped in five constructs. the first two, internationalisation and innovation, were constructed using data from the global entrepreneurship monitor (gem) aps data base. innovation is measured from two perspectives; market and industry. in the first, the questionnaire asks whether the new products or services provided by the respondents are considered to be new. the answers “all” or “some” are used as indicators for the first construct. the proportion of respondents who think that few or no other businesses provide the same products or services is also factored in. the internationalisation construct was constructed using the proportion of respondents who consider their presence in international markets to be more than 25% and 75%. the csr latent variable was constructed from three indicators drawn from macgillivray, begley & zadek (2007:20): (a) “policy drivers” which measure the force with which public policies and other agents drive responsible practices in businesses; (b) “business actions” which is an indicator of the application of good environmental, social and governance practices by companies; and (c) “social enablers” which analyses the social and political environment which facilitates collaboration between government, companies and civil society in order to restructure markets. the development construct was established using three indicators: gdp per capita (measured in us dollars and provided by the united nations development programme); the human development index (undp, 2009: 210) and expenditure on education defined as the total public expenditure in the education sector as a percentage of gdp (the world bank, 2009: 80). finally the change in values construct is calculated using two indicators from world values survey (wvs). the two indicators closest to pure post-materialism were chosen. model, results and discussion figure 1 shows the measurement sub-model and the structural sub-model simultaneously. the indicators supporting the constructs and their corresponding loadings can be observed in the rectangles. any indicator not meeting the standard criteria was previously eliminated (this will be discussed later). the circles represent the latent variables. to validate the model the two sub-models need to be analysed separately. first, the validity and the confidence of the measure model indicate whether the theoretical concepts represented by the constructs were measured correctly by the observed variables or indicators. to this end, the results obtained are compared with the standard criteria established in the literature (nunnally & bernstein, 1994; barclay, higgins & thompson, 1995; fornell & larcker, 1981; fornell, 1982). 75 journal of small business strategy vol. 26 ● no. 1 ● 2016 confidence is first measured by the individual reliability of each item; loadings greater than 0.707 are accepted. the internal consistency of each item and its respective construct is measured using cronbach’s alpha, which should be greater than 0.7. the compound reliability is usually measured using the compound reliability index, which must be greater than 0.85. validity is measured using two indicators: convergent validity and discriminant validity. convergent validity is analysed using the average variance extracted from the constructs (ave), which must be greater than 0.5. communalities greater than 0.5 are also accepted. the loadings matrix and the cross loadings are used to analyse the discriminant validity. tables 1 and 2 and figure 1 summarise the results of the measurement model and show that all the specified criteria are met. figure 1. measurement and structural models table 1 measurement model: reliability and validity measurements ave composite reliability r square cronbachs alpha communality csr 0,93450 0,977169 0,269353 0,965151 0,934550 development 0,783285 0,915449 0,569557 0,864025 0,783285 innovation 0,883191 0,937921 0,874649 0,883190 internationalisation 0,742459 0,919726 0,131962 0,886588 0,742458 social change 0,833526 0,909184 0,310039 0,801553 0,8333526 76 journal of small business strategy vol. 26 ● no. 1 ● 2016 table 2 measurement model: cross loading matrix social change development innovation internationalisation csr businessactions 0,530113 0,757042 0,423098 0,346716 0,978094 ebintenexalta 0,225754 0,465439 0,276665 0,892906 0,310126 ebintenexmedia 0,198932 0,352526 0,216496 0,776333 0,217230 educ07 0,379339 0,844406 0,252250 0,471661 0,840241 gdppc07 0,443490 0,927281 0,253160 0,538610 0,589158 hdi08 0,396229 0,881466 0,275035 0,597736 0,500177 inovprod2 0,440769 0,375014 0,967242 0,393063 0,506811 inovproduct 0,333152 0,120412 0,911495 0,263557 0,295887 mixed 0,927681 0,481410 0,292242 0,313498 0,537256 policydrivers 0,512510 0,595239 0,398280 0,332955 0,953776 postmaterialist 0,898031 0,346949 0,496950 0,356598 0,468397 socialenablers 0,557444 0,811959 0,477334 0,475316 0,968140 teaintensexalta 0,404189 0,575782 0,369115 0,812625 0,414827 teaintesexmedia 0,361871 0,598834 0,344223 0,953678 0,388716 following confirmation of the validity and reliability of the measurement model, the structural model was analysed. this allowed us to confirm the dependence relationships established between variables, coinciding with previous theoretical approaches. falk & miller (1992) suggest evaluating the extent to which the dependent variable (or construct) is explained by the exogenous latent variables. in this regard, the greater the total explained variance, the better the model. this is determined by the coefficient r2 of each endogenous variable. this must be interpreted similarly to the corresponding coefficient in a linear regression model (barclay, higgins & thompson, 1995). no general value or acceptance limit was established. instead, it was concluded that the greater the value the greater the adjustment quality (ringle, sarstedt & mooi, 2010). in this case the three endogenous constructs (csr, development and change in values) present moderate r2 coefficients, coherent with the simplicity of the model. the sense of the relationship between each of the explanatory latent variables and the endogenous variables is expressed by the sign of each of the regression coefficients. bootstrapping technique was used to calculate the statistical significance of these coefficients. table 3 shows that all the structural relationships except one are significant to 99%. 77 journal of small business strategy vol. 26 ● no. 1 ● 2016 it must be noted that although some relationships could be considered predictive, we used this methodology for confirmation, so as to demonstrate the existence of these relationships. consequently, although the r2 coefficients for the endogenous constructs are not excessively high, we were able to demonstrate not only the existence of the relationships but also their causality. table 3 structural model: regression coefficients original sample (o) sample mean (m) standard deviation (stdev) standard error (sterr) t statistics (|o/sterr|) development -> social change 0,096775 0,090404 0,121762 0,121762 0,794788* innovation -> social change 0,249298 0,246442 0,056396 0,056396 4,420492 innovation -> development 0,340112 0,338198 0,061151 0,061151 5,561863 innovation -> internationalisation 0,363266 0,365806 0,070479 0,070479 5,154243 innovation -> csr 0,450665 0,443104 0,075972 0,075972 5,932010 internationalisation -> social change 0,152828 0,155597 0,030647 0,030647 4,986725 internationalisation -> development 0,208500 0,215973 0,042383 0,042383 4,919368 internationalisation -> csr 0,276272 0,283292 0,054801 0,054801 5,041358 csr -> social change 0,553180 0,552214 0,056250 0,056250 9,834308 csr -> development 0,754690 0,762611 0,020110 0,020110 37,527527 *p= 0,75; p=0,995 78 journal of small business strategy vol. 26 ● no. 1 ● 2016 table 4 measurement model: latent variable correlations social change development innovation internationalisation csr social change 1,000000 development 0,459135 1,000000 innovation 0,422528 0,293718 1,000000 internationalisation 0,364616 0,599285 0,363266 1,000000 csr 0,553180 0,754690 0,450665 0,403526 1,000000 the model allows us to answer the research questions proposed. first, it confirms that both internationalisation and innovation have a direct, positive impact on csr. the directionality of the relationships is also verified, coinciding with the results of gjolberg (2009) and macgregor and fontrodona (2008). concerning the relationship between the level of internationalisation of companies and csr, the result coincides with the findings of laudal (2011) regarding the positive relationship between both variables. coinciding with chapple and moon (2005), misani (2010) and dimaggio and powell (1983) the model demonstrates a reasonable level of causality, due to the pressure created on companies from the relationship with other stakeholders as they operate in markets which are more demanding from a social responsibility perspective. laudal (2011) also mentioned the fact that companies had to deal with more exacting regulations regarding labour or environmental issues. in line with grayson and hodges (2004) and little (2006), the positive relationship between companies’ efforts in innovation and csr can be linked to their growing exploitation of lines of research, development and innovation based on the discovery of new ways of working, new products and services and new market niches which are more sensitive to social and environmental issues. indeed, as observed by the european commission (2009), the commitment to new stakeholders can push the innovation activity of companies towards more responsible social and environmental practices. consequently, these results contradict the theory proposed by gallego-álvarez et al. (2011), who suggested that greater investment efforts are not reflected in more sustainable practices from companies. furthermore, the results demonstrate the influence of csr on development. this confirmation is highly important since it reinforces the economic foundations of csr and contradicts those such as henderson (2004) who do not consider it to be a factor of economic growth and prosperity. furthermore, coinciding with shamir (2011) we were able to demonstrate that the socially responsible practices of companies have quite a considerable macro-economic impact and 79 journal of small business strategy vol. 26 ● no. 1 ● 2016 act as a source of social development and change. the results allow us to empirically verify the hypotheses of liedtka (2002) since they demonstrate that the business practices required to operate in a highly interconnected globalised world where intangible values (creativity, training and the capacity to learn are prior conditions to innovation) play a major role previously unaccounted for requiring a new value systems as support. these value systems place individuals in a central position as there are seen as assets and not an expense. they place more value on respect, autonomy, trust and open-mindedness and thus the improved moral quality of organizations can foster a new ethic for the new economy. from this new perspective, the organisation of business activity loses hierarchy and becomes more network-based. companies can be seen as a community where trust, shared values and the sense of belonging bring them the speed, flexibility and capacity for innovation required by world markets. furthermore, in an improved economic context the values shared by members of an organisation push the general change of values in society towards those of self-expression, in other words, towards post-materialism, which confirms social change. the results also allow us to revisit the hypothesis of modernisation. in principle, socioeconomic improvements and cultural change promote the effective democratisation of society since they require an institutional framework which ensures individuals’ freedom of choice. however, as mentioned by acemouglu et al. (2009), countries may take different paths of development determined by their historical evolution. furthermore, while it can be shown that democracy and prosperity co-evolve in a virtuous circle of development, there is no evidence that the path taken has a causal effect on democracy. however, if we consider that (i) the new economy surpasses the institutional frameworks defined by nation-states, leading us to a new post-national institutional context where the political power of the authorities defined by representative democracy is undermined and limited (scherer & palazzo, 2011) and that (ii) regulatory lacunae are being filled by international organisations, groups from civil society, public agencies or private companies which regulate themselves as a result of pressure from society or their own problems (moore, 2003), we can submit that the socially responsible behaviour of companies pushes societies towards post-modernisation, characterised in this case by self-regulation and the connection between organisations and society. this, in turn, is all underpinned by deliberative democracy, which is somewhat different to liberal representative democracy. in this context, it is possible to say that there might be a causal effect of economic development on deliberative democracy through the change of values in society. from this point of view, post-modernism and postmaterialism co-evolve in a post-national context where, as a result of their social commitments, companies take on a political role. conclusion over recent decades corporate social responsibility (csr) has become a major topic in economic literature, especially from a 80 journal of small business strategy vol. 26 ● no. 1 ● 2016 microeconomic perspective. this is a consequence of the connection between socially responsible behaviours and business profitability. the increasing role of csr in lasting growth and employment generation in the world’s economies means that it is now a priority in political agendas across the globe, leading to a growing need for studies from a comparative macro-economic perspective. our findings allow us to validate the role of csr as an intermediate variable between business behaviours and the development of economies, demonstrating the existence of virtuous circles between, on one hand, innovation and internationalisation of companies, and on the other hand between economic development and social change. indeed, although much of the literature shows the finalistic character of csr, this study concludes that efforts in innovation and presence in world markets are a source of responsible business strategies. in turn, these strategies represent an explanatory factor for growth and change in values. consequently, this study allows us to shed more light on the key role of companies in society by showing their influence in the adoption of postmaterialistic values. the study also demonstrates the role of the responsible behaviour of companies in the evolution towards a post-modern society. our findings allow us to affirm that there might exist a causal effect of economic development on deliberative democracy through the change of values in society. from this point of view, post-modernism and post-materialism coevolve in a post-national context where, as a result of their social commitments, companies adopt a political role. finally, these conclusions allow us to extract a more practical corollary. from the perspective of economic policy, public policies should focus on finding new ways of integrating csr, not so much in a regulatory and coercive sense but by empowering the concept so it is the public powers themselves which facilitate and promote the adoption of csr in the business sector. references acemoglu, d., johnson, s., robinson, j.a., & yared, p. 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(2004). internationalization of private firms: environmental turbulence and organizational strategies and resources, entrepreneurship and regional development, 16 (6), 501 – 522. 1 the authors thank the chair of innovation and cooperative and business development of the university of castilla-la mancha (spain) for the financial support received to develop this work. the authors also thank the anonymous reviewers for their valuable comments and suggestions to improve the quality of the paper. 2 argentina, belgium, brazil, chile, colombia, croatia, dominican republic, finland, france, germany, guatemala, hungary, iceland, israel, italy, jamaica, lithuania, netherlands, norway, panama, perú, romania, russia, serbia, slovenia, south africa, spain, switzerland, united kingdom, usa, uruguay and venezuela. 86 reproduced with permission of the copyright owner. further reproduction prohibited without permission. from the editor fry, fred l journal of small business strategy; fall 2006/winter 2007; 17, 2; abi/inform complete pg. 0_6 from the editor i am excited about this issue of the journal of small business strategy. for the first time in several years, we have an invited article to lead off the issue. we asked mike hitt of texas a & m who is a well-known scholar in management to write a paper for us. his paper, co-authored by zhu and tihanyi, looks at differences among small and mediumsized enterprises in developing economies. it is a touch longer than most jsbs articles, but it is well worth the time to read it. the second article, by grubb, harris, and mackenzie, won the jsbs editor's choice best empirical paper at the 2006 usasbe/sbi conference in tucson. it should be of high interest to entrepreneurship academics as it looks at students' perceptions of an entrepreneurial career vs. a career in a large business. interestingly, they found that the choice between a career with an sme and one with an mnc is related to the major chosen by the student. miller, besser, and riibe studied networking among entrepreneurs in small communities. this interesting study found, as we would expect, that there are differences between male and female entrepreneurs. but they also found that both genders benefit from networking and that there were no differences between benefits gained by male and female entrepreneurs. castillo and wakefield studied the performance offamily businesses using the mass mutual financial group/raymond institute american family business survey database. their findings both what they found and did not find are interesting. perhaps even more interesting, as they suggest, are the questions that the research results generate. sudek studied angel investment criteria. an interesting aspect of sudek's study is that he is an actual member of the angel investment group he studied. thus, there is both a qualitative and quantitative dimension to his study. the results of this study show that trustworthiness of the entrepreneur, quality of the management team, enthusiasm of the lead entrepreneur, and exit opportunities for the angel are the angels' top criteria. finally, hodges and kent studied the impact of planning sophistication on small business performance. their methodology differed somewhat from traditional studies of the benefit of planning. there results, however, confirmed the conclusions of some earlier studies that knowledge of strategic planning is at least somewhat beneficial for firm performance. i hope you enjoy the articles. let me know your comments. fred l. fry editor strategy when wal-mart comes to town: a look at david's response to the arrival of retailing's goliath jeffrey e. mcgee'he university of texas at arlington troy a. festervand middle tennessee state university abstract this study examines how local retailers responded to wal-mart 's arrival. the results reveal that wal mart 's arrival disrupts existing retai ling pauerns and forces merchants to alter their competitivestrategies. small merchants tend to place greater emphasis on lower prices and increased promotional activities as a response to competitive pressure. introduction discount retailing giants like wal-mart have changed and continue to change the face of retailing. in no marketplace is this effect more pronounced than in small-town america. the increasing presence of discount superstores in these markets has cast formidable clouds of economic concern on the brows of local businesses. many small businesses have already succumbed and others wi i i follow unless existing firms introduce dramatic changes to the way they do business. in searching for these answers, perhaps there are lessons to be learned from wal-mart itself. from its humble beginnings in 1962 as a smalldiscount store in arkansas, wal-mart has become the world's largest retailer. the lory position occupied by wal-mart today did not occur by accident. wal-mart developed and implemented an aggressive expansion strategy with small-town markets as its economic and marketing backbone. new stores were located primarily in towns of 5,000 to 25,000 population and typically were greeted with open arms by both community leaders and residents. initially, most rural towns and cities enthusiastically welcomed the retailing giant, since a new wal-mart oren meant a wider selection of products and lower prices. these communities felt that the loss of-'main street" life was simply an incidental price to pay for consumer savings and expanded trade (carfagno, 1989; marsh, 1991). however, it has become increasingly apparent that the retailing giant's success oren has come at the expense of small town mainstays(smith, 1989). few local merchants can compete 'ddress all correspondence to professor mcgec. 15 against expansive 40,000-150,000 square-foot stores whose cosmetics counters alone dwarf most "mom and pop" operations. nor can many smallretailers match wal-mart's prices, which are frequently lower than the wholesale prices local merchants pay for their merchandise. as a result, downtown business districts begin to empty, hastening the erosion of most small towns'ommercial identity and 1'abric (blumenthal, 1987). while the economic and social merit of wal-mart's introduct ion and continued presence in most small towns is the topic of some debate, it is the responsive behavior of extant small businesses that is arguably most deserving of examination and discussion, as much of the social and economic well-being of this nation was and continues to be predicated on the entrepreneurial spirit of small business. this study provides an examination of how retail merchants in small towns and cities responded to the entry of wal-mart. specifically, local merchants from 5 mid-western communities were surveyed to determine the impact of walmart's arrival on their marketing decisions and the resulting adjustments in their competitive strategy. prior research despite increased scrutiny by a coalition of politicians, historic preservationists. and small shopkeepers in communitiesthroughout the country, wal-mart's impact on local retailing communities has been the focus of little scholarly research. moreover, the few empirical studies that have examined wal-mart's impact have produced inconsistent results. carusome's (1976) examination of retailers in 10 small ohio communities was one of the first studies to address how large mass-merchandisers affect local merchants. that study found that the development of shopping centers and large discount stores in rural communities had created highly competitiveenvironments. the number of independent local merchants decreased by approximatelyeight percent during the ten year study period, while the number of chain store outlets increased by nearly eleven percent. walzer and stablein's(1981) found that the growth of mass-merchandisersand regional shopping centers in general has had important impacts on existing consumption patterns and retail structures. they concluded that the most successful local merchants adapted by offering broader selections at lower prices. however, they added that many other small retailers were forced out of business. ozment and martin (1990)investigated the impact of large discount retail chain stores on the competitive environments of 164 rural counties in arkansas, missouri, and oklahoma. the results of their study revealed that the structure of retailing in areas that have large discount stores was dramatically affected. specifically, the per capita retail sales in communities containing a large discounter were significantly higher than communities without a mass-merchandiser. the authors concluded that large discount stores, such as wal-mart, generally benefit host communities by generating increased tax revenues, greater product selection for consumers, and elevating the local market's overall competitiveness. the study focusedonexistingconditions,however,so the longitudinalimpactofmass-merchandiserswas not addressed. further, no attempts were made to examine the economic conditions before and after the arrival of large discounters. 16 stone's (1988) examination of 17 rural iowa towns was the first study to explicitly address wal-mart's impact on local merchants. using census data, stone concluded that per capita sales increased faster in towns with wal-mart stores than in comparable towns across the state. stone also reported that iowa towns within a 20-mile radius felt wal-mart's pull. retail sales in these communities declined by nearly 10 percent arer five years. the retailing giant's impact was more ominous for iowa's smallest hamlets. newly opened wal-mart stores drained as much as $200,000 a year from towns under 1,000 people. moreover, stone identified clothing, drug, jewelry, auto-parts, variety, and hardware stores as being especially susceptible to severe market share losses. hardware stores, for example, typically lost over 40 percent of their market share. franz and robb (1988) examined wal-mart's impact on retail employment and wages in 14 rural missouri counties. they found no evidence of wal-mart producing a negative impact on local economies. in fact, measures of income, wages, and salaries increased for all the counties studied. while the number of retail establishmentsdeclined over the period of the study, the authors speculated that the remaining establishments were larger and had more employees and larger payrolls than previously existed. however, franz and robb failed to compare the changes in these measures to counties without a wal-mart, thus, it is not possible to tell whether the changes that occurred were directly attributable to wal-mart's arrival. furthermore, the study remains suspect because it was sponsored by wal-mart (greer, 1989). in august 1994, hearings were held before a house small business committee on whether large discount superstores, such as wal-mart, located in small towns have harmful effects on small business and local communities. based on the findings of a university of missouri study, the ultimate conclusion drawn in these hearings was that large discounters help attract new business. further just as discount stores create employment opportunitiesand keep rural residents from having to travel to stores in distant cities, discounters create jobs and shopping alternatives (verdisco, 1994). most recently, mcgee (1995) examined the retail sales and tax data from small towns to determine the effects of wal-mart stores on communities in tive midwestern states. this latter study found that per capita retail sales and taxes increased faster in towns with a walmart than those without. further, noncompeting businessesexperienced the greatest benefits, while local merchants in direct competition with wal-mart experiencedrevenue losses ranging from five to fiity percent. businesses in nearby small towns suffered as well. while existing research focusing on wal-mart's impact on local businesses consists largely of anecdotal evidence and inconclusive empirical research, there is little question that wal-mart's presence has an impact, perhaps both positive and negative, on the existing retail structure of most small towns and cities. anecdotal evidence suggests a direct link between the arrival of wal-mart and the deterioration of the central business districts of small towns (sheets, 1989; marsh, 1991). paradoxically, wal-mart's presence provides some local merchants a needed competitive jolt, forcing them to develop unique niches and services in order to survive(cockerham, 1994). unfortunately, this argument cannot be fully supported since there has been no empirical research conducted explicitly examining the response of local merchants to wal-mart's arrival. 17 given the paucity and inconclusivenessof existing research, this study was undertaken to explore the impact of wal-mart's arrival on existing small businesses and identify their competitive response(s). further, it is important to note that this research was funded totally and exclusively through a university research grant and is in no way affiliated with any commercial and/or retail insitution. specific questions addressed by the research included: 1. were existing retail businesses impacted by the arrival of wal-mart? if so, what was the nature and extent of that impact? did that impact diminish over time? i i. how did existing small businesses initially and subsequently respond to wal-mart's arrival? i ii. were there differences in how impacted versus non-impacted retailers responded to wal-mart's arrival? if so, what were those differences? methodology the data were collected from a concensus (i.e., total population) sample of 658 retail merchants in 5 rural midwestern towns where wal-mart had opened a store between 1989 and 1994. the sample focused on towns with populations of less than 25 000 inhabitants and were more than 20 miles from a metropolitan area. these sample parameters helped better elucidate wal-mart's explicit impact on the rural retail community. data were collected through a mail survey. the design and administration of the questionnairerelied heavilyon dilman'smulti-step "total design method" (1978). the initial step involved mailing a cover letter, questionnaire, and postage-paid return envelope. a reminder postcard was sent to al i potential respondents one week later. finally, a second cover letter, questionnaire, and postage-paid return envelope were sent to the nonrespondents two weeks later. the survey instrument was developed arer an extensive review of existing strategic management, marketing, and small business literature (e.g., robinson and peace, 1988; conant, smart, and solano-mendez,1993; shama, 1993) and contained questions addressing four general issues. first, the questionnaire solicited data concerning wal-mart's impact on the local retailer. next, five-point, hikert-scaled questions werc used to collect data concerning the extent to which local merchants altered their competitive tactics in response to wal-mart's pending entry into the local market (e.g., i = not at all... 5 = very much). the third area addressed the emphasis placed on various competitive methods employed by local merchants following wal-mart's arrival ( e.g., i = no emphasis... 5 major, constant emphasis). finally, the survey instrument solicited information about the local retailer's age, location, size, and level of employment. the survey instrument was pretested on six small retailers not included in the study's sample and no key informant problems were evident. in addition to descriptive statistics which were used in developing overall respondent and response profiles, the kruskal-wallis one-way analysis of variance test was used to determine whether or not significant differences existed in the responses of sample retailers. the results of these analyses are described in the following section. 18 results overall, 222 of the 658 surveys were returned in useable form, representing an effective response rate of nearly 34 percent. to detect any potential nonresponse bias, a telephone survey was conducted with 30 no nrespondents randomly selected from the original mailing list. five descriptive questions concerning the retailer's annual sales, number of full-time employees, number of part-time employees, age, and distance from the recently opened walmart store were asked. independent t-tests between the nonrespondents and respondents were insignificant indicating negligible nonresponse bias. pppi p fl table i presents the sample's summary statistics. most of the retailers were quite small in terms ofboth annual revenues and number of employees. nearly 65 percent of the sampled stores had annual sales of less than $500,000. most small firms employed fewer than 5 fulltime (78.1 percent) and part-time (84 percent) employees. less than 5 percent of the businesses had more than 15 full or part-time employees. in terms of business longevity, 28.9 percent of the respondents have been in business for ten years or less, while a similar percent (262 percent) have been in business between eleven and twenty years most of the responding businesses (44.9 percent) have been in existence for over twenty years. geographically speaking21.1 percentof the respondentswere located less than i mile from wal mart, while 45.5 percent were located between i and 5 miles. approximately a third of the responding iirms (33.4 percent) were located more than 5 miles from wal-mart. compared to industry averages, the sample's demographics correspond closely to national averages in the areas of employment and annual sales i 94 statistical abstract of the united states). in terms of business longevity, sample respondents appear to be somewhat older than the national average, as only 34.2 percent of small businesses across the nation have been in business for over twenty years. finally, locational comparisons were not possible given the study's focus. thus, while regional in scope and somewhat skewed toward more established firms (which may not be surprising given the study's focus on established small businesses in rural communities), the sample appears to be adequately reflective of small business in the vital areas of employment and sales. ~ni fl a summary of wal-mart's impact on existing small businesses in the year following its arrival is presented in table 2. a majority (72 percent) of the responding firms indicated they had been impacted by wal-mart'sarrival. of those impacted, 52.6 percent reported they had been negatively impacted, while 18.7 percent reported a positive impact. of those negatively impacted, 22 2 percent experienced a decline of less than 10 percent in their store's revenues during the 12 month period immediately following wal-mart's entry into the area. further, 30.4 percent of the negatively impacted respondents claimed annual revenue reductions of more than 10 percent. 19 table i ddd ', s„„;„;r (n = 222)~ what is your approximate annual sales level? less than $250,000 39.3% (87) $250,000 to $499,999 25.5% (57) $500,000 to $999,999 20.4% (45) more than $ 1,000,000 14.9% (33) including yourself, how many full-time employees does your business employ? (mean = 4.2 employees) fewer than 5 employees 78.1% (173) between 5 and 10 employees 13.7% (30) between 11 and 15 employees 5.0% (11) more than 15 employees 3.2% (7) including yourself, how many part-time employees does your business employ? (mean = 3.7 employees) fewer than 5 employees 84.0% (186) between 5 and 10 employees 9.6% (21) between i i and 15 employees 3.2% (7) more than 15 employees 3.2% (7) how many years has your store been open? (mean = 26 years) fewer than 5 years 7.9% (17) between 5 and 10 years 21.0% (46) between i i and 20 years 26.2% (58) more than 20 years 44.9% (100) i low many miles from you business is the recently opened wal-mart store: (mean = 9 9 miles) less than i mile 21.1% (47) between i and 5 miles 45.5% (101) more than 5 miles 33.4% (74) ~some percentage and sample size totals may not equal 100% and 222 respectively due to rounding errors and nonresponse to some questions. 20 table 2 wal-mart's im act measures (n = 222) which of the following statements about wal-mart's arrival is true? wal-mart's arrival had an impact on my retail store 72.0'/v wal-mart's arrival had no impact on my retail store 28.0'/v during the 12 month period immediately arer wal-mart arrived, your store's sales... did not change 28.8'/o decreased by less than 10'/o 22.2'/o decreased between 10'/v and 25'/v 25.3'/o decreased by more than 25'/v 5.1'/o increased by less than 10'/v 12.1'/0 increased between 10'/o and 25'/o 6.6'/o increased by more than 25'/s 0.0'/o how long did it take before the impact of wal-mart's arrival began to diminish? less than i month 2 6o/o between i and 6 months 7.7'/v between 7 and 12 months 4.6'/v more than i year 7.7'/o wal-mart's impact has not diminished 40.8'/o ln addition to the 28 percent of the respondents who indicated that wal-mart'sentry into the local market had no impact on their firm, 18.7percent of the respondents indicated they had been positively impacted by wal-mart's presence. of this latter group, 12.1 percent experienced a sales increase of less than 10 percent, while 6.6 percent of the positively impacted firms reported sales gains of 10 percent or more. ~di f i in terms of impact duration, a majority (40.8 percent) of the respondents indicated that wal-mart's impact had not yet diminished. those reporting that wal-mart's impact diminished in less than 6 months and between 6 months and a year were 10.3and 12.3 percent respectively. more profoundly,40.8 percent of the sample responded that wal-mart's impact has not diminished. no distinction in the direction of the impact (i.e.,positive or negative) was ascertained for this latter response category. preem tive cpm etitive res onses table 3 presents the preemptive responses of local merchants to wal-mart's pending arrival. as can be seen, the results provide some anticipatory insight into the competitive behavior of small firms. in most instances, the responses indicate minimal preemptive competitive behavior. rather than a statement of apathy, perhaps the absence of more 21 provocative preemptive actions on the part of existing small businesses suggests an almost passive acceptance of an erosion in their market position, as well as a "what else can i do? attitude toward available competitive responses. table 3 i.peal merchant's preem tive res ense to wal-mart's arrival (total sample, 14 = 222, responses presented as percentages' to what extent did your stare engage in eacli of the following measures prior to wal-mart 's arri val? (rmgrdse rhoigii %tnt ds(j) q}xlh& @sass(le0 eomlb qhdb added new product lines 40 24 19 12 5 altered labor force 66 17 10 6 i altered store hours 70 16 ii 2 i changed marketing strategy 34 23 25 14 4 changed advertising message 42 20 24 10 4 diversified into other businesses 54 14 15 10 7 and/or services increased promotional budget 48 21 21 7 3 increased civic involvement 57 25 12 5 i increased sales promotion 43 23 21 10 3 loosened customer credit 70 14 10 5 i modified target markets 38 18 28 13 3 pruned some product lines 37 20 22 13 8 spent relatively more on radio 49 21 17 9 4 and/or print advertising used more price incentives 34 28 23 10 5 responding firms were most active in adjusting their products lines (i.e., 21 percent of the responding firms altered their product lines significantly [much or very much] by pruning products). relatedly, 17 percent of the respondents adjusted their product mix by adding products, while a like number of firms diversified into other businesses and/or services. contrastingly the least engaged inpreemptive responses (either not at all or little) consisted of labor adjustments (83 percent), store hours (86 percent), civic involvement (83 percent), and credit practices (84 percent). while a number of tactical issues and practices were examined in this phase of the research, it is interesting to note that the two most prevalent preemptive changes engaged in by responding small businesses were strategic in nature. when measured by a composite of 22 the responses classified as either engaged in somewhat, much, or very much, changes in marketing strategy and target market were the two most pursued preemptive responses (43 percent and 44 percent respectively). these latter findings suggest that small businesses recognize that tactical responses are least effective and are short-term responses at best. further, if the small business is to survive, then repositioning via a change in overallmarketing strategy or target market olfers the greatest opportunity for continued success. not all small businesses were impacted negatively by wal-mart's entrance into the local market. as indicated earlier, 18.7 percent of the respondents experienced a sales increase, while 28 percentof the respondentsexperiencedno change in sales levels. given the presence of these three groupings, a comparative analysis of preemptive actions across groupings was conducted. these results are presented in table 4 and indicate that while significant differences in level of emphasis were found for 13 of the 14 preemptive responses across impact groups, the most potentially insightful finding dealt with the marginal preemptive emphasis given to all areas by all groups. the findings for the negatively impacted group mirror the findings for the entire sample presented and discussed earlier. the four preemptive actions taken most o(ten by this group fell in the areas of product (addition and deletion) and strategy (includes target market selection). it is interesting to note that even these action areas received mean emphasis scores below three, perhaps providing a measure of response ambiquity on the part of this respondent segment. compared to the negatively impacted group, the iindings indicate that both the positively impacted and no impact groups engaged in virtually no preemptive actions of any type as indicated by low mean emphasis scores of 2.02 (product pruning/no impact) and 1.68 (product addition/positive impact). this research did not explore underlying reasons for responding firms actions or inactions. on-goin res onses table 5 presents the results addressing the competitive methods used by small retailers since the mass-merchandiser entered the market. these findings generally were consonant with the previous findings on preemptive actions. the most emphasized (considerable and major) competitive methods used by small businesses were carrying higher quality merchandise (66 percent) and providing heightened levels of customer service (62 percent). recognizing that two of wal-mart's primary competitive weapons are low price and promotional strength(i.e., advertising expenditures), it is not surprising that the least engaged in competitive responses (composite of no and very limited emphasis) were to carry lower priced products (72 percent), pricing below competitors (65 percent), and to increase advertising (64 percent). 23 table 4 results of kruskal-wallis test of i.ocul merchant's preem tive res onse to wal-mart's arrival cgmqpkf8ke rh@mm rtqyse qb) iliitllgt.g:qhgzxo added new product lines 2.50 1.93 1.6&8 11.51"« altered labor force 1.82 1.41 1.06 14.21»»» altered store hours 1.50 1.39 1.25 1.73 changed marketing 2.76 1.97 i . 18 37.15««« strategy changed advertising 2.46 1.82 1.62 55»«» message diversified into other 2.35 1.67 1.25 15.74"«« businesses and/or services increased promotional 2.29 1.55 i . 18 32.67«*« budget increased civic 1.93 1.43 1.37 16.09"'" involvement increased sales 2.41 1.70 1.50 21.19««* promotion loosened customer credit 1.58 1.43 1.06 6.68« modified target markets 2.73 1.83 1.50 34 49»»» pruned some product 2.74 2.02 i. 13 22.62««« lines spent relatively more on 2.25 1.67 1.50 15.30««« radio and/or print advertising used more price 2.65 1.86 1.43 28.64«"« incentives 'means reflect average response based on the following five point likert scale: i = not at all; 2 = little; 3 = somewhat; 4 = much; 5 = very much «p& 05. ««p& 01 ««'p& 001 when considered on the basis of impact, significant difyerences were found for all but one of the response strategies examined. these findings are presented in table 6. in all instances, negatively impacted firms took a significantly more aggressive posture compared 24 to the two other groups. in what might be considered the most salient finding of this latter analysis, the results indicate that all three groupings emphasized the same two competitive actions(albeit with significantly different levels of emphasis), high quality merchandise and customer service, areas thought to be weaknesses for most mass merchandisers. table 5 local merchant's com etitive methods since wal-mart's arrival (total sample, n = 222, responses presented as percentages) to what extent has your retail organization emphasized each competiti ve method since walmart opened its stare (or since you opened for business)? qhdlm0 (sbtiis (qgtstggtjg buying convenience (e.g., 24 37 39 delivery) carrying higher priced items 32 40 28 carrying higher quality 15 19 66 merchandise carrying a variety of product 23 49 28 lines carrying lower priced items 49 41 10 civic involvement 32 41 27 depth of product selection 26 48 26 holding sales 30 46 24 increased use of advertising 44 37 19 monitoring competitor's 30 50 20 pricing post-purchase service 24 31 45 (e.g., liberal return policy) pre-purchase service 18 20 62 (e.g., personal attention) pricing below competitors 40 50 10 sales promotion (e.g., 37 46 17 coupons) stocking private label brands 39 32 29 stocking unique products 24 37 39 stocking highly recognized 25 41 34 brand names store layout and merchandise 20 42 38 resentation 25 table 6 results of krusksl-wallis test of merchant's com etitivc fm basis since walart'rrival iigasse rhyxfte itgtt rd}5e i ballad) ', 'liqjax6 ' tlqtt.t.g + (t,gtf 8(i buying convenience 3.17 il87 1.93 9.96»« (e.g., delivery) carrying higher priced items 2.91 2.64 1.43 20.20««« carrying higher quality 2.52 2.62 1.68 7.69« merchandise carrying a variety of product 2.16 1.74 1.43 7.59« lines carrying lower priced items 2.85 2.42 1.75 11.72«» civic involvement 2.75 2.53 1.56 13.25»«« depth of product selection 3.76 3.67 2.68 4.57 holding sales 2.69 2.29 1.93 7.33» increased use of advertising 2.40 2.34 1.56 8.31«» monitoring competitor's 2.60 2.39 1.87 5.04 pricing post-purchase service 3.13 2.92 2.00 8.34«« (c.g., liberal return policy) pre-purchase service 3.80 3.43 2.31 11.87«« (e.g., personal attention) pricing below competitors 2.27 1.97 1.62 6.49« sales promotion (e.g., 2.56 2.11 1.81 7.48» coupons) stocking private label brands 3.20 3.02 1.75 13,57«»« stocking unique products 2.81 2.83 1.87 7.80» stocking highly recognized 2.67 2.59 1.60 6.88« brand names store layout and 3.12 2.87 2.12 7.25» merchandise presentation 'means reflect average response based on the following five point likert scale: i = no emphasis; 2 = very little emphasis; 3 = some emphasis; 4 = considerable emphasis; 5 = major, constant emphasis «p&05 ««p&01 «««p&001 26 discussion and implications wal-mart's entry into local communities clearly has an impact on existing retail trade patterns. although not all small retailersare affectedadversely,the overall impact can be quite negative. the results of this study indicate that the average local merchant generally can expect stagnant revenues, if not significant declines. further, this does not appear to be a short-term phenomenon. aside from revealing the impact of wal-mart's arrival on local retailing communities, the results of this study strongly indicate that individual retailers respond differently. the manner in which the local merchants respond to wal-mart's arrival may very well be the key to their store's long-term success. competing on price, wal-mart's primary competitive weapon, may be futile. small merchants need to be more creative in addressing the competitive challenges that mass-merchandisers present. wa!-mart, other discount chains, and the so-called "category killers" are all successful because they exploit buying power, distribution power, and sophisticated technology. however, these factors facilitate success primarily because they can be deployed uniformly on a large scale with little room for customization. the latter is where the small retailer can excel. true, the local retailer must remain relatively price competitive,but the local merchant is much more likely to appreciate the nuances of the local customer. consequently, these merchants should be better able to satisfy their clientele by offering a deeper selection of higher quality products and superior customer service. in other words, the local merchant must become a much better niche marketer. successful small retailers of the next decade will elyectively compete "around" the massmerchandisers instead of trying to compete "against'hem. these small merchants will use their superior customer knowledge, intelligent stocking, and service to better ensure their continued economic vitality. 27 references blumenthal, k. 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(1991) merchants mobilize to battle wal-mart in a small community. wsj, jun 5, nat. ed., sec. i. mcgee, j. (1995) local merchants response to wal-mart, proceedings, small business institute directors'ssociation. ozment, j., & martin, g. (1990) changes in the competitive environment of rural retail trade areas. journal of business research, 21, 277-287. robinson, r,, & pearce, j. (1988) planned patterns of strategic behavior and their relationship to business-unit performance. strategic management journal, 9, 43-60. shama, a. (1993) marketing strategies during recession: a comparison of small and large firms.,lournal ofsmall business managemetit, 3i, (3), 62-72. sheets, k. (1989)how wal-mart hits main street. u.s. news d'r world report, 13 mar, 53-55. smith, d.l. (1989)ready to fight goliath: bracing for wal-mart's arrival. the detroit news, jun 12. stone, k.e. (1988) the effects of wal-mart stores on businesses in host towns and surrounding towns in iowa. unpublished paper, lowe state university, ames. statistical abstract of tire united states, bureau of labor & statistics & department of commerce, 1994. verdisco, robert j. (1994) superstores and smallness. discount merchandiser, 34, (10), october, 8. walzer n., & stablein, r. (1981)small towns and regional centers. growth and change, july, 2-8. 28 http://www.smallbusinessinstitute.biz understanding young consumers’ personal-level cultural orientation and shopping intentions: implications for small-town retailers jay sang ryu1, sally fortenberry2 1texas christian university, jay.ryu@tcu.edu 2texas christian university, s.fortenberry@tcu.edu a b s t r a c t this research compared the shopping motivations and behaviors of young consumers toward small-town retailing based on their personal-level cultural orientation: idiocentrism (personal-level individualism) or allocentrism (personal-level collectivism). a total of 493 usable data were collected from u.s. consumers under the age of 30 using an online survey. six shopping motivations (assortment-seeking, uniqueness-seeking, convenience-seeking, price comparison, social interactions, and browsing) and two shopping intentions (physical store shopping and mobile shopping) were compared between the two consumer groups. the results confirmed that idiocentric and allocentric consumers differ in motivations and intentions to shop at retailers in small towns. thus, marketing efforts to promote small-town retailing could be specific to consumers’ personal-level cultural orientations and should emphasize small-town retailing as a convenient and economic shopping option to buy unique and different kinds of products. introduction keywords: journal of small business strategy 2017, vol. 27 no 03, 1-8 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2017 small business institute® apa citation information: ryu, j. s., & fortenberry, s. (2017). understanding young consumers’ personal-level cultural orientation and shopping intentions: implications for small-town retailers. journal of small business strategy, 27(3), 1-8. w w w. j s b s . o rg small-town shopping, shopping motivations, cultural orientation, idiocentrism, allocentrism, young consumers culture shapes consumers’ decision-making behaviors through influencing their cognition, emotions, and motivations (leo, bennett, & härtel, 2005; markus & kitayama, 1991). researchers have adopted geert hofstede’s (1980) five cultural dimensions individualism/collectivism, masculinity/femininity, power distance, uncertainty avoidance, and long-term orientation – to understand consumer behaviors in various cross-cultural contexts (ndubisi, 2004; yang, 2004). while each cultural dimension is meaningful in determining consumer behaviors, the particular importance of individualism and collectivism has frequently been recognized in literature (triandis, 2001). when examining individualism and collectivism in consumer research, researchers often approach the subject with the assumption of consumer homogeneity within the same culture. that is, consumers from individualist cultures behave as individualists whereas those from collectivist cultures behave as collectivists (yang, 2004). however, as consumer heterogeneity within the same culture has become the norm, both individualists and collectivists exist in any given culture (sun & wu, 2004; triandis, 2001). the terms idiocentrism and allocentrism have been introduced as individualism and collectivism at a personal level (triandis, leung, villareal, & clark, 1985). idiocentrism is a personal orientation rooted in individualistic attributes whereby people attend to their own personal goals and independence and seek uniqueness and hedonism (sun, horn, & merritt, 2004). conversely, allocentrism is a personal orientation originated from collectivistic traits whereby people value in-group goals and interdependence (triandis et al., 1985). these distinctive personal-level cultural orientations affect individuals’ cognitions, emotions, and motivations, and in turn affect their shopping. for example, idiocentric consumers tend to be more financially confident, opinion leaders, innovators, and fashionand brand-sensitive than their counterparts (leo et al., 2005; markus & kitayama, 1991; sun et al., 2004). idiocentric consumers perceive a product and its display environment as perceptually unrelated whereas allocentric consumers perceive the two as perceptually related. these differences affect their product evaluations 2 j. s. ryu & s. fortenberry journal of small business strategy / vol. 27, no. 3 (2017) / 1-8 and purchase intentions (ryu & bringhurst, 2015). similarly, the impact of in-store marketing on idiocentric consumers becomes stronger when a product and a marketing message are perceptually-unrelated, but a perceptually-related marketing message is more effective for allocentric consumers (zhu & meyers-levy, 2009). these studies evidenced that these two consumer groups are different in making shopping and purchase decisions, and retailers must understand their customers from the perspective of their personal-level cultural orientations. the success of retail businesses in small towns depends largely on how these towns retain local consumers within and attract non-local consumers to the towns (ryu & swinney, 2011). small-town retailers should identify niche markets and serve their clientele with well-focused product, pricing, and customer service strategies (achua & lussier, 2002; rubach & mcgee, 2002). to this end, many researchers have investigated how and why consumers shop or do not shop at stores in small communities. for example, they have approached the topic from the perspective of community characteristics (runyan & huddleston, 2006), merchandise and store characteristics (lee, johnson, & gahring, 2008), retail marketing strategies (archua & lussier, 2002; rubach & mcgee, 2002), consumer-community attachment (miller & besser, 2000), and consumer demographics (singer & arora, 2000). however, consumers’ individual differences in relation to their cultural orientation, idiocentrism or allocentrism, have received little attention. the objective of this research was to compare the shopping motivations and behaviors of idiocentric consumers to those of allocentric consumers in the context of small-town retailing. since retaining young consumers is one of the important tasks for small town retailers (ashley-cotleur, gaumer, & foltos, 2009), this research primarily focused on young consumers under the age of 30. literature review shopping motivations various shopping motivations influence consumer shopping decisions (babin, darden, & griffen, 1994; childers, carr, peck, & carson, 2001; eastlick & feinberg, 1999; kim, 2006). as the importance of these motivations varies based on their cultural values and orientations (ozen & kodaz, 2012), idiocentric and allocentric consumers could utilize shopping motivations differently. the current study identifies assortment-seeking, uniqueness-seeking, convenience-seeking, price comparison, social interaction, and browsing as shopping motivations pertinent to consumers of small-town retailers (noble, griffith, & adjei, 2006). a wide selection of products and availability of unique products are important when consumers decide to shop at small-town retailers (lee et al., 2008). these factors are associated with their assortment-seeking and uniqueness-seeking behaviors (noble et al., 2006). in comparison to allocentric consumers, idiocentric consumers are characterized as more innovative (dutta-bergman & wells, 2002) and fashion-conscious consumers (sun et al., 2004). jordaan and simpson (2006) explained that consumers with a strong innovative nature tend to purchase a variety of products and express themselves through owning unique products. iyer and eastman (2010) also found that fashion-conscious consumers seek exclusivity and assortment. thus, the following hypotheses are advanced: hypothesis 1. idiocentric consumers are motivated by assortment-seeking more than allocentric consumers when shopping at small-town retailers. hypothesis 2. idiocentric consumers are motivated by uniqueness-seeking more than allocentric consumers when shopping at small-town retailers. idiocentric consumers display a stronger tendency toward convenience shopping. they tend to exchange monetary gains for hassle-free shopping, whereas allocentric consumers are likely to make a shopping list beforehand even if this process requires extra effort (dutta-bergman & wells, 2002). when it comes to price comparison for value shopping, idiocentric consumers prefer national brands to generic brands and are willing to pay more for products made by well-known brands (dutta-bergman & wells, 2002). they are also more financially satisfied and confident (sun et al., 2004). this suggests that price may not be a major factor for them when making shopping decisions. allocentric consumers, on the other hand, engage in comparison shopping to locate the products with the lowest price (dutta-bergman & wells, 2002). thus, the following hypotheses are postulated: hypothesis 3. idiocentric consumers are motivated by convenience-seeking more than allocentric consumers when shopping at small-town retailers. hypothesis 4. allocentric consumers are motivated by price comparison more than idiocentric consumers when shopping at small-town retailers. consumers of small-town retailers recognize that social interactions are significant determinants of their shopping decisions (noble et al., 2006). consumers strive for social experiences outside of home and interact with other people through shopping. this behavior is often observed among idiocentric consumers who participate in interpersonal activities more willingly and prefer to attend events 3 j. s. ryu & s. fortenberry journal of small business strategy / vol. 27, no. 3 (2017) / 1-8 that involve outgroup members (dutta-bergman & wells, 2002). exploring retail stores to experience novel and interesting items and environments can be adventurous and entertaining (arnold & reynolds, 2003). for certain consumers, going out of the house for shopping is a course of pursuing adventure and entertainment (cox, cox, & anderson, 2005). idiocentric consumers are characterized as sensation-seekers, pleasure-seekers, and adventure-seekers who participate in entertaining activities and social interactions outside home more than allocentric consumers (dutta-bergnman & wells, 2002). thus, the following hypotheses are suggested: hypothesis 5. idiocentric consumers are motivated by social interaction more than allocentric consumers when shopping at small-town retailers. hypothesis 6. idiocentric consumers are motivated by browsing more than allocentric consumers when shopping at small-town retailers. shopping intentions according to the comparative research of idiocentric and allocentric consumers’ travelling behaviors (dutta-bergman & wells, 2002; sun et al., 2004 ), the former are more interested in exploring less familiar places and they are likely to visit new places and try different experiences. the research also confirmed that idiocentric consumers are inclined to try authentic foods and crafts which are available from these places (dutta-bergman & wells, 2002; sun et al., 2004). since shopping at small-town retailers could mean that consumers travel distances to visit new places and explore different products, idiocentric consumers may be more willing to shop at retailers in small towns than allocentric consumers. thus, the following hypothesis is proposed: hypothesis 7. idiocentric consumers display stronger shopping intentions toward small-town retailers than allocentric consumers. an increasing number of small-town retailers perceive offering an online or mobile shopping option to be an opportunity to reach a broader market (amit & zott, 2001; galloway, mochrie, & deakins, 2004). compared to allocentric consumers, idiocentric consumers are tech-savvy and innovative individuals (dutta-bergman & wells, 2002). they spend more time using computers for personal purposes, use the internet to a greater extent, and are more likely to purchase computer-related products and services (dutta-bergman & wells, 2002). these technology-related behaviors could be evidence of their readiness to shop via a mobile shopping channel if this specific option is offered by retailers in small towns. thus, the following hypothesis is recommended: hypothesis 8. idiocentric consumers display stronger mobile shopping intentions toward small-town retailers than allocentric consumers. method procedure an online survey was employed to collect data. an online sample of u.s. adults was recruited via a third-party online survey company. since the focus of this study was young consumers’ shopping motivations and behaviors toward retailers in small towns, the age restriction of under 30 years was requested. the first part of the survey elicited survey participants’ demographic information. in the second part, they were asked to answer the maximum miles they were willing to travel to a small town to buy authentic food, indigenous crafts, quality products, and bargain shopping. the following set of questions was about their shopping motivations and shopping intentions at retailers in small towns located within the distance they identified in the previous questions. a total of 528 consumers participated in the survey. after excluding incomplete and questionable responses, 493 data were used for analysis. measures formerly developed scales were used to measure variables for this research. consumer idiocentrism and allocentrism were assessed with a five-item idiocentrism scale which asked respondents to what extent they describe themselves as outspoken, assertive, demanding, independent, and self-centered (dutta-bergman & wells, 2002). the scale showed acceptable reliability (α = 0.72). its mean and standard deviation values were 3.26 and 0.73, respectively. the scales used in the study of noble et al. (2006) were adopted to assess consumer motivations to shop at smalltown retailers. the reliability and descriptive statistics of each scale were as follows: assortment-seeking (2 items; m = 4.08; sd = 0.67; α = 0.71), uniqueness-seeking (3 items; m = 3.80; sd = 0.73; α = 0.77), convenience-seeking (3 items; m = 3.71; sd = 0.86; α = 0.82), price comparison (3 items; m = 4.04; sd = 0.79; α = 0.85), social interaction (3 items; m = 2.89; sd = 0.95; α = 0.76), and browsing (3 items; m = 3.49; sd = 0.89; α = 0.71). three-item shopping intention and two-item mobile shopping intention scales were modified from behavioral intention studies (ryu, 2011; ryu & murdock, 2013). the reliability for shopping intentions and mobile shopping intentions were 0.88 and 0.94. the mean and standard devia4 j. s. ryu & s. fortenberry journal of small business strategy / vol. 27, no. 3 (2017) / 1-8 tion values for shopping intentions were 4.14 and 0.75 and for mobile shopping intentions were 3.60 and 0.97, respectively. all measurement items except demographic information were measured with a five-point likert-type scale. data analysis survey respondents were divided into two groups – idiocentric consumers and allocentric consumers by a median split of the idiocentrism scores. this median split method for dividing a whole group into two sub groups has been justified in other research (dutta-bergman & wells, 2002; triandis et al., 1985). the median score used was 3.2. after the split, 243 idiocentric consumers (49.3%) and 250 allocentric consumers (50.7%) were identified. a multiple regression analysis was employed to estimate the relationship between shopping motivations and consumers’ levels of idiocentric tendency. independent-samples t-tests and two-group discriminant analysis were performed to compare idiocentric and allocentic consumers’ shopping motivations and shopping intentions toward retailers of small towns. results sample characteristics the study sample consisted of 385 females and 108 males with a mean age of 24.4 years. they were willing to travel an average of 25.2 miles to purchase authentic foods, 28.2 miles for indigenous crafts, 36.5 miles for quality products, and 30.8 miles for bargain shopping. a descriptive analysis and independent-samples t-test were conducted to compare the average miles female and male consumers were willing to travel to small towns for each shopping category (table 1). while females were more willing to travel farther for foods, crafts, and bargain shopping and males were more willing to travel farther for quality products than their respective counterparts, females’ intentions (m = 29.6, sd = 41.4) to travel for shopping of indigenous crafts was significantly farther than males (m = 23.1, sd = 35); t(491) = 2.19, p < 0.05. there was also a significant difference in miles for bargain shopping: females (m = 31.6, sd = 42.5), males (m = 28.1, sd = 51.1); t(491) = 2.14, p < 0.05. the descriptive statistics and t-test for the sample by their personal-level cultural orientation were also included in the analysis. the idiocentric consumer group (n=243) comprised 193 females and 50 males. their mean age was 24.3 years. the allocentric consumer group (n=250) included 192 females and 58 males with the mean age of 24.6 years. idiocentric consumers were generally more willing to travel farther to shop at small town retailers than allocentric consumers. specifically for bargain shopping, the table 1 average travel miles for shopping by gender shopping category female consumers (n=385) male consumers (n=108) authentic foods 25.8 23.0 indigenous crafts 29.6 23.1 quality products 36.4 37.0 bargain shopping 31.6 28.1 former (m = 35.1, sd = 57.8) reported their willingness to travel significantly more miles than the latter (m = 26.6, sd = 24.9), t(491) = 2.13, p < 0.05. the average miles they were willing to travel to small towns for each shopping category by consumers’ personal-level cultural orientation are summarized in table 2. table 2 average travel miles for shopping by personal-level cultural orientation shopping category idiocentric (n=243) allocentric (n=250) authentic foods 27.7 22.8 indigenous crafts 31.4 25.1 quality products 40.0 33.2 bargain shopping 35.1 26.6 hypotheses testing in hypothesis 1, it was advanced that idiocentric consumers are motivated by assortment-seeking more than allocentric consumers when shopping at small-town retailers. the t-test result confirmed the assortment-seeking motivation varied significantly between idiocentric consumers and allocentric consumers [t(491) = 4.57, p < 0.001]. idiocentric consumers scored higher in the assortment-seeking motivation than allocentric consumers, supporting hypothesis 1. in hypothesis 2, it was proposed that idiocentric consumers are motivated by uniqueness-seeking more than allocentric consumers when shopping at small-town retailers. the t-test result showed that the uniqueness-seeking motivation varied significantly between idiocentric consumers and allocentric consumers [t(491) = 4.91, p < 0.001]. the higher uniqueness-seeking motivation score was found among idiocentric consumers than allocentric consumers, supporting hypothesis 2. in hypothesis 3, it was postulated that idiocentric con5 j. s. ryu & s. fortenberry journal of small business strategy / vol. 27, no. 3 (2017) / 1-8 sumers are motivated by convenience-seeking more than allocentric consumers when shopping at small-town retailers. the t-test result confirmed that the convenience-seeking motivation was significantly different between idiocentric consumers and allocentric consumers [t(491) = 3.25, p < 0.01]. idiocentric consumers scored higher in the convenience-seeking motivation than allocentric consumers, supporting hypothesis 3. in hypothesis 4, it was suggested that allocentric consumers are motivated by price comparison more than idiocentric consumers when shopping at small-town retailers. according to the t-test result, the price comparison motivation varied significantly between idiocentric consumers and allocentric consumers [t(491) = 4.10, p < 0.001]. contrary to our proposition, the higher score of the price comparison motivation was confirmed among idiocentric consumers than allocentric consumers. thus, hypothesis 4 was rejected. this outcome may be due to the gender distribution in idiocentric and allocentric consumer groups in this study sample. the percentage of females in the idiocentric group was higher than that in the allocentric group. since price is a more influential factor for females than males (rudell, 1993; underhill, 1999), a higher female representation in the idiocentric group than allocentric group might have caused a higher score for price comparison motivation among idiocentric consumers than allocentric consumers. in hypothesis 5, it was asserted that idiocentric consumers are motivated by social interaction more than allocentric consumers when shopping at small-town retailers. the t-test result proved that the social interaction motivation was significantly different between idiocentric consumers and allocentric consumers [t(491) = 4.03, p < 0.001]. idiocentric consumers scored higher in the social interaction motivation than allocentric consumers, supporting hypothesis 5. in hypothesis 6, it was advanced that idiocentric consumers are motivated by browsing more than allocentric consumers when shopping at small-town retailers. according to the t-test result, the browsing motivation differed significantly between idiocentric consumers and allocentric consumers [t(491) = 3.23, p < 0.01]. the higher browsing motivation score was asserted among idiocentric consumers than allocentric consumers, supporting hypothesis 6. in hypothesis 7, it was hypothesized that idiocentric consumers display stronger shopping intentions toward small-town retailers than allocentric consumers. the t-test result confirmed that the shopping intentions varied significantly between idiocentric consumers and allocentric consumers [t(491) = 2.97, p < 0.01]. the stronger shopping intentions were confirmed among idiocentric consumers than allocentric consumers, supporting hypothesis 7. finally, hypothesis 8 focused on whether idiocentric consumers display stronger mobile shopping intentions toward small-town retailers than allocentric consumers. as evidenced by the t-test result, the mobile shopping intentions varied significantly between idiocentric consumers and allocentric consumers [t(491) = 2.74, p < 0.01]. the mobile shopping intentions among idiocentric consumers were stronger than those among allocentric consumers, supporting hypothesis 8. table 3 presents the summary of mean comparisons between idiocentric and allocentric consumers. multiple regression and two-group discriminant analysis to assess which shopping motivations significantly predict consumers’ levels of idiocentric tendency, the multiple regression analysis was performed. idiocentrism used as a dependent variable and six shopping motivations served as independent variables. the result showed that variables accounted for 24% of the variance in idiocentrism. it was found that uniqueness-seeking, convenience-seeking, browsing, and social interaction significantly predicted consumers’ levels of idiocentric tendency. consumers who seek unique merchandise, convenient shopping experiences, and shopping excitement such as browsing and interactions with others in retail settings were expected to be idiocentric consumers. table 4 summarizes the results from the regression analysis. the two-group discriminant analysis was also performed to identify which shopping motivations best differentiate idiocentric consumers from allocentric consumers concerning shopping at retailers in small towns. the group centroids confirmed that significant differences exist between the two consumer groups (idiocentric consumers = 0.33; allocentric consumers = -0.32; χ2 = 49.33; df = 6, p < 0.001). discriminant function loadings of all motivations were above the cutoff value of 0.30 (burns & burns, 2008). uniqueness-seeking was the most important motivation that distinguishes idiocentric consumers from allocentric consumers, followed by assortment-seeking, price comparison, social interaction, browsing, and convenience-seeking motivations. table 5 presents the relative importance of the shopping motivations that differentiate between the two consumer groups. discussion and implications this study scrutinized consumers’ shopping motivations and shopping intentions in relation to their personal-level cultural orientations, namely idiocentrism and allocentrism, when considering shopping at small-town retailers. the findings of this study evidenced that idiocentric and allocentric consumers differ in motivations and shopping intentions in this regard. these findings are consistent 6 j. s. ryu & s. fortenberry journal of small business strategy / vol. 27, no. 3 (2017) / 1-8 table 3 mean comparisons between idiocentric (n = 243) and allocentric consumers (n = 250) variable group mean sd t assortment-seeking idiocentric consumers 4.22 0.63 4.57*** allocentric consumers 3.94 0.70 uniqueness-seeking idiocentric consumers 3.96 0.70 4.91*** allocentric consumers 3.64 0.73 convenience-seeking idiocentric consumers 3.83 0.91 3.25** allocentric consumers 3.58 0.79 price comparison idiocentric consumers 4.18 0.73 4.10*** allocentric consumers 3.90 0.82 social interaction idiocentric consumers 3.06 1.02 4.03*** allocentric consumers 2.72 0.84 browsing idiocentric consumers 3.63 0.89 3.29** allocentric consumers 3.37 0.87 shopping intention idiocentric consumers 4.24 0.72 2.97** allocentric consumers 4.04 0.77 mobile shopping intention idiocentric consumers 3.72 0.95 2.74** allocentric consumers 3.49 0.99 ** p < 0.01; *** p < 0.001 table 4 regression analysis result variables b se b β uniqueness-seeking 0.27 0.05 0.27*** convenience-seeking 0.14 0.04 0.16*** browsing 0.16 0.04 0.19*** social interaction 0.10 0.03 0.13** r2 0.24 f(6, 486) 24.97*** ** p < 0.01; *** p < 0.001 table 5 two-group discriminant analysis result variables structure matric correlation uniqueness-seeking 0.68 assortment-seeking 0.63 price comparison 0.57 social interaction 0.56 browsing 0.46 convenience-seeking 0.45 with the previous research that confirmed their differences in various contexts including retail settings (dutta-bergman & wells, 2002; ryu & bringhurst, 2015; sun et al., 2004). the success of small town retail businesses depends largely on bringing more consumers into the town for consumption activities (ryu & swinney, 2011). town administrators and business owners should work collectively toward implementing marketing to promote their towns and businesses. this marketing could be specific to consumers’ personal-level cultural orientation for better results. since the current study confirms that idiocentric consumers are more willing to take a shopping trip to small communities, town administrators and business owners could create marketing messages that have a greater appeal to idiocentric consumers. as evidenced by this study, promoting small-town retailing as the opportunity to buy unique and different kinds of products would have a greater appeal to potential consumers. marketing should also convince consumers that small-town retailers offer a wide variety of products while allowing them to shop conveniently and economically. promoting retailers in conjunction with the events and festivals the town is hosting would be a good strategy to attract consumers who seek social interactions from shopping in small towns. these implications echo the findings of earlier research on identifying competitive strategies for small-town 7 j. s. ryu & s. fortenberry journal of small business strategy / vol. 27, no. 3 (2017) / 1-8 retailers (rubach & mcgee, 2002). some key strategies recommended in their research were offering a variety of merchandise selection and value shopping to focused customers. the findings of this study also confirmed that, even after almost 15 years, consumers still want unique and varied product options and value for their spending from small-town retailers, especially idiocentric consumers who are more willing to adopt this shopping option. therefore, retailers in small towns should continue to carry a wide selection of unique and quality products including indigenous crafts and local flavor foods while making extra efforts on advertising small-town retailing as a convenient, economical, and people-friendly shopping option. marketing with idiocentric-focused messages could effectively target allocentric consumers as well. individuals’ idiocentic or allocentric orientation can be temporarily altered to its respective counterpart by external factors like wording or graphics in advertisements (ryu & bringhurst, 2015; zhu & meyers-levy, 2009). for example, individuals expressed a stronger idiocentric tendency when they were asked to write about an event associated with self (idiocentric stimulus) whereas individuals expressed a stronger allocentric tendency when they were asked to write about an event associated with their family and friends (allocentric stimulus). thus, small-town retailers should make efforts to stimulate allocentric consumers to act as if they were idiocentric consumers. the current study is one of the first studies that investigates young consumers’ motivations and intentions to shop at retailers in small towns from the perspective of their personal-level cultural orientations. academically, these findings contribute to broadening our understanding of consumer behaviors in the context of small town retailing and small business strategies. limitations and future research a large female representation of this study sample alerts the application of the findings to larger populations with caution, as females and males display different values, orientations, and behaviors (rudell, 1993; underhill, 1999). sampling of young consumers for this study also limits the generalization of the findings. researchers should recognize this limitation and further examine the topic with a balanced male-female sample representation and participants of all age groups. generally, convenient shopping and browsing are the opposite continuum of shopping motivations. however, guiltinan and monroe (1980) argued that convenience consumers are inclined to browse for novelties. this study concurred that the idiocentric consumers are influenced by both a strong convenience-seeking motivation and browsing motivation. this finding could be the evidence of personal traits controlling shopping motivations in a certain context. future research could investigate whether other factors such as personal characteristics or cultural orientation play as moderators for consumer shopping motivations in various shopping contexts. comparing idiocentric and allocentric consumers from collectivistic cultures such as mexico and east asia and individualistic cultures such as canada and western europe could also be an interesting topic in small business research. references achua, c. f., & lussier, r. n. 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(2009). the influence of selfview on context effects: how display fixtures can affect product evaluations. journal of marketing research, 46(1), 37-45. stra tegf editor stephen w. osborne indiana university of pennsylvania (iup) associate editors prashanth nagendra bharadwaj indiana university of pennsylvania (iup) joctte m. wismeski indiana umversity of pennsylvania (iup) editorial assistants julie dobish indiana university of pennsylvania (iup) helen robinson indiana university of pennsylvania (iup) book review editor radha chaganti rider university editorial review board ramachandra asundi university of puerto rico james bradley central washington university david brennan university of st. thomas (st. paul) shawn m. carraher texas a & m university commerce radha chaganti rider university vivek choudhury florida state university richard t. dai lay university of montana j. douglas frazer millersville umversity terry gaston southern oregon university joseph geiger university of idaho masoud hemmasi illinois state university kirk heriot francis marion university lynn hoffman umversity of northern colorado lawrence klatt florida atlantic university krish knshnan indiana university of pennsylvama (iup) thomas j. liesz mesa state college stephen lucas university of north carolina-greensboro steven j. maranville university of st. thomas (houston) thaddeus mcewen north carolina a&t university abbas nadim university of new haven john e. prescott umversity of pittsburgh neal r. pruchansky keene state college james a. rodger indiana umversity of pennsylvania (iup) c. louise sell aro youngstown state university herbert sherman southhampton college of long island leo simpson western kentucky university joseph singer university of missouri —kansas city matthew c. sonfield hofstra university pamela h. specht university of nebraska at omaha harriet stephenson seattle university jude valdez university of texas, san antonio howard van auken lowe state university john b. wallace marshall umversity monica zimmerman temple university 4 the journal of small business siraregy is a joint publication of the small business insntute (formerly sbida) and the eberly college of business and information technology, indiana university of pennsylvania. send subscription request to stephen w. osborne, editor, journal of small business strategy, indiana university of pennsylvania, 304 eberly college of business and information technology, indiana, pa 15705-1071. annual subscriptions may be ordered at $20 each (u.s. dollars only). international subscriptions add $5 annually for postage and handling. back issues may be ordered at $ 12. ei copyright 2002 small business institute issn 1081-8510 2002-2003 sbi officers small business institute pri.sident vice-president —marketing d membershipsherriu r. tnylor pat mccaskey texas woman's university office: (')40) 898-2')03 fax: (940) s98-2120 fax: (717) 871-2464 e-nmih staylorqutwu.cdu email: pat mccaskcy@millctsvitlc.cdu presidrnr elect vice president —development abbns nadim stephanie huneycutt university of ncw haven newpon university office: (203) 932-7122 phone: (757) 594-7139fax; (203) 931-()092 fax: (757) 594-7808 emaik cond@charger.ncwhavcn.cdu email: huneycut@cnu.edu vice president —pro rams acting vice president —administration james brmucv cmitral washington university millersville university phone: (206) 439-1282 obice: (717) 871-5555 fax (206) 439-3s09 fax: (717) 871-2464 email. bradlcyqucwu.cdu email: dfrazer@marauder.millersv.edu vice president of conference arrangements secretary —treasurer geralyn mcclure franklin kirk c. heriot university of texas of the permian basin francis marion university phone: (915) 552-2170 phone: (843) 661-1419fax: (915) 552-2174 fax: (843) 661-1432 email: franklin sbutpb.edu email: khcriotvfmarion.edu vice president —publications immediate past president terry gnston southern oregon university office: (541) 552-6713 fax: (541) 552-6715 e-maih gaston@isou edu vice presidenr —program quality assurance bruce kemelgor indiana university of pennsylvania university of louisville oirtcc: (502) 852-4788 phone: (724) 357-5760fax. (5021852-7557 fax: (724) 357-5743e-maih bbkcmeo i qolouisville.edu email: osborne@iup.edu vice president —case comperition steven mnranvule umversity of houston —downtown visit our website at oflice: (713) 221-8524 fax: (713) 226-5226 ifww.jsbs.org e-maik maranvilleqadt.uh.edu journal of small business strategy vol. 27 ● no. 1 ● 2017 37 knowledge management and organizational culture in a software development enterprise vicente prado-gascó vicente.prado@uv.es university of valencia ismael quintanilla pardo ismael.quintanilla@uv.es university of valencia carlos pérez-campos carlos.perez@ucv.es catholic university of valencia abstract the aim of this study was to analysis knowledge management and organizational culture at a spanish software development enterprise. for this purpose, two different tasks were performed: first, analysis of knowledge management levels and organizational culture; and second, analysis of the relationship between organizational culture and knowledge management. the sample consisted of 196 employees between 21 and 45 years old, with 119 (61.3%) men. to achieve the objectives, adaptations of the organizational knowledge practices (okp) questionnaire (cortijo, & quintanilla, 2004) and the “organizational culture inventory” (oci) were used (cooke & lafferty, 1987). based on the results, it appears that the company is oriented towards a constructive organizational culture. it also seems that the company emphasizes efficient knowledge management practices, especially in regard to teamwork. finally, the link between organizational culture and knowledge management seems to be proven. as hypothesized, constructive culture is positively related to knowledge management performance, while passive–defensive and aggressive–defensive cultures are negatively related. all these results are particularly interesting considering that in the scientific literature such relationships have been proposed from a theoretical perspective, but only a few studies have explored these questions at the empirical level. keywords: knowledge management; okp, organizational knowledge practices; organizational culture, oci; software development enterprise mailto:ismael.quintanilla@uv.es mailto:carlos.perez@ucv.es journal of small business strategy vol. 27 ● no. 1 ● 2017 38 introduction in today’s knowledge-based society, knowledge is a key factor in economic systems (audretsch, 2014; bordeianu, 2015; leydesdorff, 2012; nonaka, kodama, hirose, & kohlbacher, 2014). knowledge has become an axis on which much of the policies and decisions currently being taken in both public and private sectors hinge on. (for a comprehensive development of this subject can be found, among others, the following references: chang, choi, & lee, 2004; ju, li, & lee 2006; paraponaris, 2003; quintanilla, 2003). consequently, knowledge and its creation, capture, storage, dissemination and use, will be increasingly necessary in the society towards which we advance (bell, 1976). erecting a knowledge management system is the most appropriate strategy to streamline the flow of knowledge in organizations. in this context, efficient knowledge management has become a competitive advantage and a core condition of performance (alves, 2014; al-hakim & hassan, 2016; al-qudah & altaher, 2016; bordeianu, 2015; birasnav, 2014; chang & chuang, 2011; chua & heng, 2010; grant, 1996; king & zeithaml, 2001; massa & testa, 2009; ramírez, & morales, 2011; rodríguez, 2013; sedziuviene & vveinhardt, 2010; thoene & buszko, 2014; zhuge, 2002; zieba & zieba, 2014). it can also increase innovation, promote staff motivation and involvement, improve customer service, reduce drop-out rates and staff rotation, and improve an organization’s adaptation to its environment (carnerio, 2000; choi & lee, 2003; chua & heng, 2010; king & zeithaml, 2003; massa & testa, 2009; yang & wan, 2004). overall, the benefits of knowledge management appear to create greater productivity and efficiency, reduce costs and increase revenue by providing faster and more efficient ways of solving problems, reduce some of the errors or defects in products or processes themselves, and provide more efficient ways to achieve a set of objectives (romero, 2004). despite its importance, there seems no single definition or referential framework to study knowledge and its management. on the contrary, the standard pattern has been the proliferation of both definitions and conceptual perspectives (zapata, 2004). with regard to their relationship with organizations we can find, to name just a few examples, the perspective of strategic management, based on the resources and capabilities of the company, which considers knowledge as one of those resources on which support the competitive advantage (zapata, 2004). on the other hand, from the evolutionary theory in business management perspective it is believed that the evolution of the company is based on the accumulation of knowledge (nelson & winter, 1982). another example would be the perspective of knowledge management. from all these theoretical and methodological perspectives on organizational performance, knowledge is recognized as a key element in the operation of a business (grant, 1996). in this research, we adopt the latter perspective; which converges different research areas or schools of thought and whose objective is to determine the most effective ways to manage knowledge. however, what is knowledge management? in recent years there has been a considerable interest in the knowledge management both from the academic and business point of view. they have proliferated different analytical perspectives, methodologies and practices of business management, both theoretical and journal of small business strategy vol. 27 ● no. 1 ● 2017 39 applied (ju, li & lee 2006; zapata, 2004). the knowledge management has become today a fundamental concept in the business world, becoming in a large number of companies, one of the pillars on which to develop various strategies and corporate policies. nevertheless, following a review of the concept, we have been able to conclude that far from having a commonly accepted single definition in the literature, it has been defined or addressed from different perspectives. it seems that almost all lines of thought or theoretical contributions of the knowledge management find a meeting point in trying to analysis the organizations being based on the study of knowledge (nonaka & takeuchi, 1995). however, there are for each nuances and differences that need to be clarified. one of the first definitions appeared in the literature of management information systems in 1983. this concept, by marchand (1983), was proposed as an alternative to the concept of strategic information management, and it was considered as the last phase in the evolution of the role of information management. in the early 90s, the term reappears in the literature, more akin to their current account (hedlund, 1994; hedlund & nonaka, 1993) so well skyrme (1999) considers the knowledge management as a systematic management of vital knowledge, in which processes of creation, organization, diffusion, use and exploitation thereof occur. conversely, brooking´s (1997) definition emphasizes the intangible nature of resources that must be managed from the knowledge management and its relationship with people. while wiig (1997) considers the knowledge management as a process that includes both tactical and operational guidance, and focuses on managing knowledge related activities (generation, encoding, transfer and use of knowledge). in 1998, o'dell and grayson, defining the knowledge management introduced a new element, the person-knowledge adequacy determining that the knowledge management is a conscious strategy not only to disseminate knowledge throughout the organization, but to assure that the right knowledge gets to the right people, and helps people to share it and use it in ways to improve organizational performance. whereas, andreu and sieber (1999) emphasize the importance of knowledge to improve the ability of companies to solve problems and contribute therefore to maintain their competitive advantage. current perspectives tend to consider knowledge management as a business structured and integrated process aims to link person and knowledge through technology in order to produce a competitive advantage. regarding the different stages or dimensions considered within the knowledge management there is no agreement. some authors consider processes of creation, organization, diffusion, use and exploitation thereof (skyrme, 1999). meanwhile, davenport and prusak (2000) modify the phases or elements skyrme enunciated by considering the knowledge management as a process of capture, distribution and effective use of knowledge. wiig (1997) considers that the knowledge management encompasses generation, encoding, transfer and use of knowledge), while others speak of generation, coding, refinement and transmission of knowledge (wensley & verwijk-o'sullivan, 2000), on the other hand, some authors emphasize different phases within generation (external acquisition of knowledge and the internal creation of it) and application (identification, journal of small business strategy vol. 27 ● no. 1 ● 2017 40 measurement, storage and transfer of such knowledge) (grant, 1996). in 2000, davenport and prusak reformulate stages and include coordination, so that argue that in the knowledge management the following steps are included: generation, coding, coordination and transfer of knowledge. summarizing the ideas appeared in the different definitions, we could establish that knowledge management is a structured and systematic process consisting of different phases (capture, creation, organization, storage, distribution and effective use of knowledge) in relation to knowledge (not merely information), which does not necessarily follow a chronological linearity. in this process, one should consider three key components (people, knowledge and technologies), try to find the best fit between people and knowledge (i.e., not just match any type of knowledge to anyone), use technology (ict) as a means of managing more effective procedures, and act differently during the different phases of knowledge management. thus, it involves a key element of strategy and business management by providing a means of gaining competitive advantage and maintaining it over time (prado-gascó, 2012). there is a considerable amount of literature that seems to support, in addition to the importance of knowledge management, the importance of organizational culture to the internal and external operations of enterprises, namely their productivity and performance, (e.g., corbett & rastrick 2000; denison, 1990; denison, haaland & goelzer 2003; denison & mishra, 1995; fey & denison 2003). organizational culture produces a pattern of shared values that derive certain norms that manifest themselves in certain forms of conduct (bonavía & quintanilla, 1996), all of which can have an important influence on business performance. in addition, it is worth noting the proposal of schein (1992) and rousseau (1990), among others, of the existence of different levels or layers in an organizational culture; we may thus focus our analysis on observable layers such as the "rules of conduct" or "behavior patterns” according to the typology of rousseau (1990). organizational culture affects performance, organizational effectiveness, decisionmaking, and the socialization of the members of the organization. it facilitates the adaptation of the company to its environment (schein, 1992); reduces turnover; increases the implementation of new technologies and innovations; increases the motivation, involvement and satisfaction of members; and may be crucial to attracting and retaining valuable workers (harper & utley, 2001; sheridan, 1992). likewise, as many authors suggest, the organizational culture prevailing in an organization may, among its other attributes, constitute one of the most important facilitators of or barriers to knowledge management (hong, shu, & koo, 2011; jofreh, & shirzad, 2015; mason & pauleen, 2003; mcmanus & loughridge, 2002; thoben, weber, & wunram, 2002). in general terms, it is believed that organizational culture can both promote and prevent knowledge creation, sharing and use (janz & prasarnphanich, 2003). it is therefore common to find examples that connect constructs (organizational culture and knowledge management) to other variables related to performance or satisfaction. there are also studies that have associated the two concepts (e.g., alavi, kayworth, & leidner, 2006; al-alawi, al-marzooqi, & mohammed, 2007; alrubaiee, alzubi, hanandeh, & al ali, journal of small business strategy vol. 27 ● no. 1 ● 2017 41 2015; balthazard & cooke, 2004; de long & fahey, 2000; donate, & guadamillas, 2010; gold, malhotra & segars, 2001; nguyen & mohamed, 2011; palanisamy, 2007; park, ribiere, & schulte, 2004). from this perspective, it is quite clear that knowledge management and organizational culture offer important benefits to an organization; but what types of cultures are most suitable for efficient knowledge management? in general, it seems that the cultures that best promote efficient knowledge management offer collaborative environments, have a focus on teamwork, and are more constructive than defensive (bordeianu, 2015; chen & huang, 2007; cooke & lafferty, 1987; denison & neale, 2000; janz & prasarnphanich, 2003). despite the importance of both constructs and their clear relationship, at least from a theoretical perspective, this is not a subject with a long history of scholarship, and much of the literature has been based more on theoretical than empirical approaches (chen & chen, 2006). therefore, there is a clear need for the study presented here, in which the aim was to analysis knowledge management and organizational culture in a spanish software development enterprise. for this purpose, two different tasks were performed: first, analysis of the enterprise’s levels of knowledge management and its organizational culture; and second, analysis of the relationship between organizational culture and knowledge management. to achieve these objectives, this study uses the organizational culture inventory (oci) because of its widespread use in the discipline (e.g., boglarsky, 2005; cooke & szumal, 2000; corbett, & rastrick, 2000; kwantes & boglarsky, 2004; yauch & steudel, 2003), and the process followed for validation (sample of 3939 people from different organizations and countries). on the other hand, to measure knowledge management, this study uses an adaptation of an instrument called the organizational knowledge practices questionnaire (okp) (cortijo & quintanilla, 2004). methods participants. a total of 195 employees (out of 270) from a software development enterprise participated, aged between 21 and 45, (m=30.5, sd=4.87), including 119 (61.3%) men. most workers had university education (160), a small group had secondary school studies (19) and another small group (16) had postgraduate studies (master, phd). instrument. an adaptation of the organizational knowledge practices (okp) questionnaire was used (cortijo & quintanilla, 2004). this is a questionnaire of 28 items grouped on four factors: “team work”; “information flow”; “vertical communication”, and “knowledge management influence on job”. the questionnaire uses a likert response scale with five response options from strongly disagree (1) to strongly agree (5). this instrument has adequate psychometric properties (kmo= .844; bartlett test of sphericity p< .001; four factors that explain 46.85%; α=.89; team work α= .82; information flow α= .77; vertical communication α =.78; knowledge management influence on job =.50) the ”organizational culture inventory” (oci) of cooke and lafferty (1987) is an instrument designed to evaluate the culture of journal of small business strategy vol. 27 ● no. 1 ● 2017 42 organizations in terms of behavioral norms and expectations related to the shared beliefs and values held by organizational members. it consists of 120 items (grouped into 12 culture styles) and three second-order factors, which may influence the thinking and behavior, motivation and performance, and satisfaction and stress of the organization’s members. it uses a five-point likert-scale (1 = strongly disagree to 5 = strongly agree). cronbach's alpha coefficients support the internal consistency of each of the scales, ranging from .65 to .95 (cooke & szumal, 1993). procedure. the questionnaire was administered to the sample at the organization by the same researcher during 5 sessions in january 2014. data analysis. the statistical analysis was conducted using spss 22. first, psychometric properties were evaluated. thereafter, descriptive statistics of okp and organizational culture were analysed, and finally, the relations between knowledge management and dimensions of organizational culture were examined. results organizational culture and knowledge management descriptive results based on the results, scores on the 12 dimensions of organizational culture range between medium-low and medium-high. the predominant cultures in the company, although they have only medium-high values, appear to be the affiliative, dependent, selfactualizing and achievement values, while less frequent (average scores low) are the power, oppositional, competitive and table 1 descriptive results for organizational culture (oci). mean standard deviation constructive 3.15 .45 achievement 3.14 .56 self actualizing 3.14 .52 humanistic 3.05 .63 affiliative 3.26 .62 passive defensive 2.90 .44 approval 2.89 .59 conventional 3.07 .57 dependent 3.17 .53 avoidance 2.48 .70 aggressive -defensive 2.76 .49 oppositional 2.65 .49 power 2.74 .63 competitive 2.58 .77 perfectionistic 3.07 .57 journal of small business strategy vol. 27 ● no. 1 ● 2017 43 avoidance values. additionally, considering the three cultural styles, or second-order factors, the prevailing culture seems to be constructive followed by passive or defensive, with aggressive-defensive being the least prevalent. furthermore, regarding knowledge management (table 2) in general, higher average scores were observed in all dimensions except vertical communication. team work and knowledge management influence on job had the highest values. table 2 descriptive results for knowledge management (okp) team work information flow vertical communication knowledge management influence on job mean 3.36 3.21 2.93 3.28 sd .57 .67 .65 .65 relationship between organizational culture and knowledge management the final objective pursued in this study was to test the empirical relationship between knowledge management and organizational culture. table 3 presents pearson correlations between “oci” dimensions (organizational culture measures) and the four dimensions of okp (knowledge management measures). table 3 relations between knowledge management and organizational culture. tw if vc ki constructive .55** .33** .46** .33** achievement .29** .23** .21** .13 self actualizing .56** .31** .38** .39** humanistic .55** .34** .51** .38** affiliative .39** .19** .38** .17* passive defensive -.10 -.01 -.15* -.25** approval .03 .05 .01 -.12 conventional -.13 -.02 -.17* -.24** dependent .06 .01 -.05 -.11 avoidance -.23** -.07 -.22** -.26** aggressive defensive -.08 .05 -.12 -.16* oppositional -.00 .10 -.05 .04 power -.16* .00 -.19** -.25** competitive -.08 .06 -.07 -.12 perfectionistic .03 -.00 -.08 -.15* *tw: team work, if: information flow, vc: vertical communication, ki: knowledge management influence on job. journal of small business strategy vol. 27 ● no. 1 ● 2017 44 significant positive correlations (p<.01) were observed between all dimensions of constructive styles and knowledge management dimensions, with the exception of ki and achievement. considering the dimensions of passive-defensive styles, negative significant (p<.01 and p<.05) correlations were observed between passivedefensive culture, and conventional and avoidance with vc and ki; negative significant (p<.01) correlations were also observed between avoidance and tw. finally, regarding aggressive – defensive styles, negative significant correlations were observed among aggressive – defensive styles, perfectionist, power and ki. there was also a negative significant correlation between power and tw, vc. conclusion organizational culture and knowledge management are basic elements of organizational performance and/or efficiency, both internal and external (barney, 1991; carnerio, 2000; chang & chuang, 2011; massa & testa, 2009; nonaka & takeuchi, 1995; yang & wan, 2004). in addition, the literature suggests a link between knowledge management and organizational culture, although there are just a few studies that move from a theoretical point of view to analysis this link empirically (janz & prasarnphanich, 2003; mcmanus & loughridge, 2002; mason & pauleen, 2003). considering the importance of both organizational culture and knowledge management on organizational performance, as well as the lack of studies that analysis this link empirically, there is a clear need for the study presented here, the aim of which was to analysis knowledge management and organizational culture at a spanish software development enterprise and to study the links between them. based on the results obtained, in general it appears that the company is moving towards an organizational culture of the constructive type. companies that are oriented towards this type of culture are characterized by encouraging members to interact with others and to perform their duties in a way that helps them meet their higher order needs (cooke & lafferty, 1987; cooke & szumal, 1993). in these businesses, communication, cooperation and support prevail, and these elements promote an adequate climate of knowledge management (janz & prasarnphanich, 2003). moreover, the company emphasizes efficient knowledge management practices, especially in regards to teamwork. finally, the link between organizational culture and knowledge management seems proven. as hypothesized, constructive culture is positively related to knowledge management performance, while passive– defensive and aggressive–defensive cultures are negatively related. according to the literature, and as discussed previously, cultures that demonstrate better knowledge management are those that foster collaborative environments with an orientation toward teamwork (janz & prasarnphanich, 2003), cultures of the constructive type more than defensive cultures (cooke & lafferty, 1987), and cultures where knowledge management is a prime commitment (denison & neale, 2000), as these types of cultures foster environments of trust and support that promote social interaction and enable access to information and resources. perhaps most importantly, they promote the efficient dissemination and use of knowledge (chen & huang, 2007). journal of small business strategy vol. 27 ● no. 1 ● 2017 45 all these results are especially interesting considering that in the scientific literature such relationships have been proposed from a theoretical perspective, but few studies have evaluated these questions at the empirical level. although knowledge management is currently a discipline experiencing considerable growth (chua & heng, 2010), research from an empirical perspective is important to gain greater insight into organizational performance. some of the limitations of this study relate to the sampling method; 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(2014). knowledge management critical success factors and the innovativeness of kibs companies. engineering economics, 25(4), 458-465. http://dx.doi.org/10.5755/j01.ee.24.4.2081 http://dx.doi.org/10.5755/j01.ee.24.4.2081 7strategy table of contents page title/author(s) i a model of potential entrepreneurship:profiles and educations hmplications james w. carland joaon c. carland 15 leveraging intellect in a small business: designing an infrastructure to support today's knowledge worker robert l. cross frederick l. funk 35 an examination of the relationship between strategy and human resource management practices among small businesses elyssa blanton schultz nathan bennett david j. ketchen, jr. 49 applicability of the gaps model to service quality in small firms cengiz haksever ronald g. cook radha chaganti 67 customer databases for small firms: maximizing the power of your marketing lisa d. spiller richard a. hamilton 83 does the size of the organization affect compensation strategies? an empirical analysis nancy day 97 financial management for self-employed owners youness alizadeh geoffrey g. meredith strategy small business brief perceptions of and responses to environmental economic incentive programs: an industry comparison for small and medium-sized companies margaret m. tanner westminster college abstract slate and federal regulators have turned to economic incentives, such as toxic use fees, as a means of encouraging pollution prevention. this paper examines how regulatory policies can influence environmental policy of small to medium sized firms in two particular industries. environmental managers were surveyedin order to describe responses to and perceptions ofthe various types ofregulatory policies that can be used to help eliminate or control toxic emissi ons. not surprisingly, firms are most concerned with compliance with traditional command and control regulations. however, these businesses also indicated that some economic incentive programs would provide motivation to reduce toxic emissions. implications for small and medium-sized operations are discussed introduction currently, the federal government has complex regulations that limit the amounts and types of pollutants that can be released. most federal regulations also require companies to obtain permits to emit pollutants. in the 1970's and 1980's companies responded to these regulations by treating the waste streams that were created during their manufacturing processes. this approach to pollution control has been somewhat successful in reducing toxic emissions from large, stationary sources of pollution (gao, 1992). however, further progress has required a change in tactics (occupational hazards, 1993). recognizing this need, the environmental protection agency (epa) and comparable state agencies have begun to change their focus from one of controlling emissions to encouraging prevention of toxic releases. state and federal regulators have turned to economic incentives, such as toxic use fees or tax programs, as a means of encouraging pollution prevention. theoretically, these incentive programs force oltending companies to include the costs of polluting the environment in their production processes. in order to maintain their desired profit margins, these companies are encouraged to alter their operations to avoid paying the associated fees. in the past, corporate environmental policies have focused on strict compliance with traditional regulations and control of existing waste streams (berry dt rondinelli, 1998). they contend that, more recently, some 86 journal ofsmall business strategy vol. lo, no. l spring/summer l999 corporations have shiffed their focus toward the actual elimination of waste streams. ttus prevention strategy represents a more progresslve approach. case studies, such as green ledgers (ditz, ranganathan dt banks, 1995),illustrate how some very large corporations have made these changes. however, small to medium-sized companies have not necessarily made this change to the more progressive policies. the purpose of this research is to look at small to medium sized companies and examine managers'erceptions of the types of regulation that would have the greatest impact on corporate policy. regulatory policies the federal government maintains a set of strict environmental laws designed to limit the amount of toxic material that companies can legally emit. for example, the clean air act establishes air quality standards and permitting requirements for polluters. the clean water act insures the safety of the u.s. waterways. it also establishes permitting requirements for companies that discharge waste to water. another piece of legislation, the resource conservation and recovery act covers the generation, transport, treatment, storage and disposal of hazardous waste. finally, superfund legislation (the comprehensive environmental response, compensation and liability act and the superfund amendment and reauthorization act) requires that entities be held liable for cleaning up contamination to their own and other properties regardless of when that contamination took place. it also contains provisions for companies to publish an annual inventory of all toxic releases. government enforcement efforts concentrated on those companies which had not obtained the correct permits and those which were not properly treating their waste streams (adler, 1996). these laws are still in place; however, states have been augmenting the traditional regulations with economic incentive programs to achieve greater reductions in pollution levels. economic incentives can take a variety of forms. stewart (1993)indicates there are four types of marketbased incentives that have been proposed: ~ taxes or fees that require the offending party to pay to pollute ~ transferable "permits to pollute" that a firm can sell if they emit less than the prescribed amount of the particular substance ~ a deposit on hazardous materials that can be entirely or partially returned when the material has been properly disposed of or recycled ~ public disclosure requirements that would allow consumers to shift their demand for products to more environmentally responsible fums stewart (1993) indicates that taxes and permits have been used most widely. transferable permits are used in this country; however, their use is concentrated primarily in the utility industry. this research focuses on taxes and fees as the set of incentive programs to examine. these programs can include many different types of incentives. for example, some states (massachusetts, minnesota and ohio to name a few) have levied toxic use or emissions fees on individual facilities based on the amount of materials used or released. these payments are, in effect, taxes on undesirable behavior. the goal is to change the costs incurred by these offending companies to the point where they will avoid or limit undesirable behavior. from an economic standpoint, a curative tax is the preferable solution to the problem of a market failure of this type (westin, 1993). if the tax rate can be set correctly, the tax will have the desired effect on the behavior of the producers. 87 journal ofsmall business strategy vol. /0, no. l spring/summer l999 there are other forms of tax incentive programs to consider. for example, it is possible to provide tax subsidies to encourage desirable behavior. these subsidies might include tax credits, tax exemptions or accelerated tax deductions. in granting these subsidies, states, such as oklahoma, oregon, new jersey and rhode island provide a reward for reducing pollution. these types of incentives can encourage pollution control as well as pollution prevention. the firm will consider a wide variety of alternatives with which to achieve reduction in their overall costs. from the firm's point of view, these mechanisms allow for a greater degree of corporate flexibility in meeting the desired goal (berry jk rondinelli, 199g; housman, 1996). in addition, the company has more control over its own operations. one solution to the pollution problem is not forced on all companies. each facility can determine the most cost effective means of reducing their emissions of toxic materials (hahn, 1989). the economic incentives discussed here take advantage of a flrm's propensity to maximize profits in a manner of their own choosing. on the other hand, firms wish to comply with traditional regulations in order to avoid punishment and additional cost. as indicated previously, the purpose of this research is to understand which type of approach has the greatest influence on the environmental policies of small to medium sized firms. methodolocy surveys were mailed to facilities that emit toxic materials into the environment. included were firms in the printing and wire and cable industries from among those filing toxic release inventory (tri) information for the year of 1994. these facilities were identified through the right-to-know network (rtk net) which is sponsored by omb watch and the unison institute. both industries are subject to air, land and water regulations and the flrms tend to be small to medium sized. facilities in both industries are dispersed widely throughout the country. these two industries represent different types of operations with respect to the processes and types of toxic materials used. members of both industries could potentially benefit under the types of incentive programs discussed earlier. surveys were mailed to the environmental contact person listed on the tri reports for a total of 469 separate facilities. of this total, 309 were printing facilities and the remaining 160 were wire and cable operations. the useable response rate was approximately 19%and was not statistically different between the two industries. the small business administration (sba) defines small businesses by industry classification. to limit the study to small and medium sized entities, responses from either type of facility with over 1000 employees were excluded. results the respondents provided information including their size, the toxic em issions reported on their tri filing for 1995, and the ozone attainment status of the facility location. analysis of the responses (table i) reveals some significant differences between the industries. the printing indusuy emitted significantly more toxic materials than those in the wire and cable industry. this result holds for both the absolute air emissions and the emissions scaled by size, as measured by the number of employees. the sales revenue and the number of employees, both proxies for size, were not significantly different across the two industries. 88 journal ofsmall business strategy vol. io, no. l spring/summer l 999 the survey included questions regarding general facility information, data from their tri submissions,'corporate motivating factors and state policies and incentive programs. the facilities represented in this survey were located in 31 different states with no more than seven facilities in any one state. it is apparent that the size of these facilities, as measured by sales and number of employees, varies widely. roughly 41.2% of the respondents reported having a full-time environmental specialist, and 80.2% of them had pollution prevention plans. of these plans, 64.8% included measurable goals. thirty-one, or 36.9%of the respondents, indicated that they are located in an ozone non-attainmentarea. of those filing tri data in 1994, 84% indicated that they were still required to file this information for 1995. the tri data includes reduction activities that companies have undertaken during the previous year. in this sample, 49.9'/o of facilities reported reduction activities of some type. of those facilities that actively sought to reduce emission levels, roughly half of them reported maintaining good operating procedures (51.3%),modifying raw materials (53.8%) and altering production processes (48.7%) as the means by which their reductions were achieved. table i industry comparisons of select variables v ill m v i sl d.d . n ~r. fchlt number of employees print: 285.6 302.2 58 .154 wire: 215.9 148.0 28 sales revenue (millions) print: 73.3 125.9 28 .958 wire: 75.2 59.4 15 emissions (000's lb.): air print: 107.9 240.6 34 .036 wire: 17.1 24.7 26 land print: 4.3 16.0 25 .982 wire: 4.4 8.7 23 water print: 2.0 6.1 25 .119 wire: .i 0.4 23 total emissions scaled by employee size print: 810.4 1691.7 26 .047 wire: 111.2 209.1 22 utest for the significance of the difference in means for the two groups company motivating factors given the numerous alternatives for regulatory approaches, it is important to know how much influence each method has on shaping company environmental policy. it is important to note that not all respondents would be expected to have direct experience with each type of incentive. this lack of experience does not preclude the manager from understanding the implications and judging the importance of the possible policies. table 2 is a summary of the results of this issue. 89 journal ofsmall business strategy vof l0, no. i spring/summer l 999 factors with higher mean scores can be interpreted as having a greater level of importance. minimizzuion of the cast of your operations was judged as the factor having the greatest impact on the firms'ecisions. the responses to this factor were significantly higher than those for the next ranked factor ( p = .0i). the fact that companies would be most interested in minimizing the costs of their operations is not surprising. managers are interested in maintaining and improving financial performance; a focus on cost is consistent with that end. facility environmental personnel ranked compliance with a traditional command and control regulatory requirement as the second most important factor —regulations specifying mar/mum emissions... based on the wilcoxon signed-'ranks test, the importance granted to this factor was not significantly greater than the ratings given to environmental liability minimization (third in the rankings), or to tax credits for pollution control/prevention (fourth in the ranking). maximum emission standards have been around a long time, and they carry stiff penalties for non-compliance. in essence, companies must comply with these requirements in order to continue operations. table 2 company motivating factors (level of importance in determining company's response to eavironmental issues) 5 =great deal ofimportance, 3 = neutral, / = noimportance ~ratin rank n technical assistance offered by state agency 3.48 9 84 tax credits for pollution control/prevention 3.90 4 84 property, sales or use tax exemptions 3.83 5 84 some form of toxic use or hazardous waste fee 3.5i 8 84 regulations specifying maximum emissions with specified penalties for noncompliance 4.08 2 84 minimizatioa of the cost of your operations 4.36 i 84 environmental liability minimization 4.05 3 84 state req. for pollution prevention planning 3.53 7 83 state permitting requirements for emissions of speciiic chemicals over predetermined limit 3.82 6 84 as indicated, income and property tax incentives were ranked fourth and filth respectively. they are economic incentive programs that have been tried in various states and it appears they would provide motivation to reduce toxic emissions. other prevention initiatives did not rank as highly. while the use fees and the tax reductions both offer economic incentives to reduce emissions, managers preferred the chance to reduce an existing cost (income/property tax) rather than to reduce a possible additional cost (toxic use fees). given their sensitivity to cost, this response makes sense. costs would remain the same or decrease in one case. with the use fees, costs would undoubtedly increase. there was a high degree of correlation between the rankings of the factors between the two industries. overall, the internal factors (sensitivity to cost and liability) and a traditional regulatory factor (maximum emission standards) were rated higher by members of both industries 90 journal of small business strategy vo/. /0, no. i spring/summer /999 than the economic incentives. however, some differences did appear when comparing the average responses to particular factors. for example, wire and cable firms responded more strongly to the issue of cost minimization. in addition, the importance placed on permitting requirements by the wire and cable firms made it fourth in their ranking. while economic incentive programs may offer more flexibility and a greater degree of control over the facility's environmental response, regulatory compliance is a central issue for facilities within both of these industries. this information suggests that only afler companies satisfy their legal requirements for the environment, can they consider the possible benefits of economic incentive programs. one environmental manager posited that these economic incentives represent "the icing on the cake." that is, environmental managers are ofien extremely busy monitoring compliance with emissions and permitting regulations. they may not have the time or expertise to take advantage of economic incentive programs. perceptions of state policies and incentive programs the facility personnel perceived that state regulators emphasize traditional regulatory solutions more heavily. the average perceptions for the respondents, the resulting rankings and a variety of other information related to these perceptions are included in table 3. table 3 state pollution prevention policies and incentive programs (n = 88) (relative importance placed pollution control and prevention by regulators in your state) mean didn't perception value rank know of use vs. ~lm rtance technical assistance by s state agency 3.70 4 17 218» tax credits or deductions for pollution control/prevention investments 2.98 6 37 -.837» property, sales or use tsx exemptions for pollution control/prevention investment 2.73 7 40 -1.0» toxic use or hazardous materials fee 3.61 5 16 .219 regulations specifying maximum emissions/ specified penalties for noncompliance 4.17 1 22 .035 pollution preveation planning gr reporting 3.90 3 14 .439" permitting requirements for exceeding preset limits. 4.07 2 21 .136 » the difference between the perception of use of these regulatory policies and the importance ratings given to them are statistically different at the .05 level table 3 indicates that traditional regulatory approaches were perceived to be the most important within the represented states. specifically, respondents perceived that states emphasize maximum emission standards and permitting requirements most heavily. the perceived use of economic incentive programs was low relative to other environmental policy strategies. the average level 91 journal ofsmall business strategy vol, 10, no. l spring/summer l999 of perception on afl these regulatory programs did not vary by industry. in fact, the rank order of these average perceptions was identical for both the printing and the wire and cable firms. in addition, no state was represented in the analysis by more than seven respondents, so individual state policies should not be driving the results. the perceived lack of emphasis on the economic incentive programs may either reflect actual practices or the lack of familiarity with existing state programs. that is, 42 to 45% of respondents indicated that they did not know whether these incentive programs were even available within their state. for the individuals that did record a perception, some programs may be over or under emphasized. the final column in table 3 indicates the mean value of the difference between the managers'erceptions of regulatory use (table 3) with their own level of importance placed on the individual strategies i i st ed (table 2). overall, respondents perceived that income tax credits and property, sales and/or use tax incentives were underutil ized by these states. in other words, respondents reacted more strongly to the motivating power of these policies than they did to a perception of their use. this same set of respondents indicated that pollution prevention planning and technical assistance were stressed more by the regulators than the corresponding level of importance companies placed on it would warrant. on the other hand, environmental personnel seem to have matched the level of importance placed on the more traditional policies (maximum emissions standards and permitting requirements) to their perception of the emphasis placed on these types of regulations. in other words, company practice has been adjusted to conform to the perceived level of expectation regarding regulatory compliance. limitations only printing and wire and cable companies were selected for this research. had other industries been chosen, results may have been different. in addition, other factors may need to be considered. for example, if a particular firm is or has been under the scrutiny of the regulators, then that firm's attitude towards motivating factors may also be different. a lack of data prevented meaningful analysis of this issue. examining other industries, which regulators have targeted may reveal additional information. implications for small and medium-sized firms based on the information listed in table 2, cost minimization appears to be a major concern for the responding firms regardless of the industry. typically, the environmental compliance function within a company is viewed as a cost center and, as such, controlling these costs is very important. as a first step toward lowering the costs of using toxic materials, companies should practice good housekeeping within their facilities. make sure that the equipment is in good working order and that no toxic materials are escaping the process due to poor maintenance or operating procedures. these are relatively low cost changes that can help all firms to minimize problems associated with accidental releases of toxic materials. in addition, businesses should seek out relevant recyc ling and/or waste exchange efforts within their area. these programs offer positive solutions to multiple businesses dealing with the disposal of waste streams. sensitivity to cost minimization can lead companies to understand what drives environmental costs. studies, such as those outlined in green ledgers (ditz et al., 1995), illustrate how a true understanding of costs by large firms has led to significant reductions in toxic releases as well 92 journal ofsmall business strategy vol. 10, no. 1 spring/summer 1999 as operating costs. these kinds of results are available to smaller companies as well. through their own efforts or with the help of state technical assistance programs, company managers must think beyond the bounds of their current operating procedures and systems. technical assistance programs are often geared to smaller businesses in an effort to provide them with needed environmental expertise. service providers can make assessments of current operations and provide suggestions for possible improvements in environmental performance. these suggestions may include proposed changes in the inputs or the processes used by particular businesses. in addition, the technical assistance providers should be able to help businesses identify and analyze all relevant costs to consider when making such a change. trade associations and equipment manufacturers may also provide comparative cost and quality information. in modifying inputs and the processes themselves as a result of this kind of cost analysis, managers may discover they are eligible to take advantage of economic incentive programs. technical service providers and accounting professionals should be aware of available tax incentive programs. both groups are well suited to help with cost-benefit analysis of alternative plans. if the resulting changes eliminate some waste streams, they should also eliminate time spent on monitoring and ensuring compliance with relevant regulations. for small businesses time is an important resource, and environmental managers could then devote more time to other problems. in addition, managers must question all costs and their relationship to environmental emissions. these same managers might then reevaluate the relative level of importance of the set of factors included in table 2. as company managers make progress toward societal goals of pollution reduction they can also realize additional profitability for their fums. this concept is a powerful one and can serve to motivate change in company and regulatory policy. further research into the determinants of this change should be of interest to both business managers and policy makers. in addition, effective environmental management requires a company-wide effort. top management must be committed to the idea of pollution prevention, and information systems must support this goal. furthermore, environmental managers are not necessarily in the best position to initiate efforts to take advantage of tax incentive programs. the accounting function must step in to research the potential benefits to be gained. finally, companies might consider lobbying their state legislators for change in state regulatory policies. individual efforts might go unnoticed; however, industry groups would be more effective in demanding alternative programs. trade associations, technical assistance providers and environmental groups within a local area might provide needed support for any lobbying efforts. references adler, j. (1996). markets don't fail; we fail to have markets. the environmental forum 13 30-31. berry, m. gt rondinelli, d. (1998). proactive corporate environmental management: a new industrial revolution. academ of mana ement executive 12 38-50. browner, c. (1993, fall). of green lights and golden carrots. directors and boards, 28-29. ditz, d., ranganathan, j. r banks, r. (eds.). (1995).green led ers: case studies in co rate environmental accountin . washington, dc: world resources institute. 93 journal of small business strategy vol. l0, no. l spring/summer l 999 general accounting 01tice. (1992). environmental rotection issues. washington dc: u.s. government printing 01tice. hahn, r. (1989). economic prescriptionsfor environmentalproblems: how the patient followed the doctor's orders. journal of economic pers ctives 2, 95-114. housman, r. (1996).the devil is in the exogenous variables. the environmental forum 13 32-33. g ii iii 4 g. (i993 9 ll(~gi ir d,id2. stewart, r. (1993). environmentalregulationand internationalcompetitiveness. the yale law i i id2 2d39-2i42. w ii, r. a. (i9933. g 4 dl g ' i . ~tl 46, 323.363. margaret m. tanner, ph.d., cpa, is an associate professor at 8'estmtnster college. she obtained her ph. d, in accountingjom the university ofnorth texas and has published in the journal of environmental systems, management accounting and accounting education: an international journal. the graduate college and the college of business at the university of northern iowa where she previously served on the faculty supported this research. 94 strategy entrepreneurship in manufacturing in kenya: characteristics, problems and sources of finance kenneth r. gray florida a & m university william cooley jesse lutabingwa jackson state university abstract this article examines entrepreneurship and small business manufacturer's characteristics in kenya. much literatureon small business developmentin developing world countries assume informal sector activities as homogeneous in their characteristics (morris and pitt, l995; bewayo, l995; ekpenyong and nyong, )992). thereby policy recommendations are blanket andnotofgreatassistance. the articleinvestigatesasampleof320manufacturerspom three industries. the objectives are to evaluate characteristics ofsmall-scale manufacturers that make i i difficult to be profitable and the problems faced whi ch conttdbute to poor performance introduction kenya's micro-enterprise manufacturing industry. popularly known as "jua kali," is dynamic. markets, backyards, vacant lots, and side-street workrooms, women and men supply the everyday needs of local people and a few items for export, using simple tools and manufacturingtechniques. artisanswork alone or with a few others in a productive structure more akin to cottage industries than to large factories. their hard work and ingenious use of resources are striking. the kenyan government hails these small manufacturing businesses as playing a vital role in economic growth of the country (kenya government, 1992b). until the early 1960s, many economists viewed the continued existence of small-scale industries and entrepreneurship in less developed countries as justified by scarcity of capital and administrative experience. it was often argued that with economic growth, the small, traditional type of enterprise would, in one sector arer another, be superseded by modern forms of large-scaleproduction. in order to ensure an orderly transition, small industries were seen to deserve support, but mainly in sectors where modem methods could not be immediately applied. in the mid-1960s a new approach to small to medium-scale enterprise (sme) development began to emerge due to a number of factors. first, there was growing concern over low employment elasticity of modem, large-scale production. it was claimed that even with more optimal policies, this form of industrial organization was unable to absorb a significantproportionof the rapidly expanding labor force (cherney et al., 1974; ilo, 1973). 69 second, there was widespread recognition that the benefits of economic growth were not being fairly distributed, and that the use of large-scale, capital intensive techniques was partly to blame (cherney et al., 1974). third, empirical diagnoses showed that the causes of poverty were not confined to unemployment, and that most of the poor were employed in a large variety of small-scale production (noormohamed, 1985). this suggest a new role for small industries and entrepreneurship, or what has come to be labelled "the urban informal sector". small, labor intensive industries were seen not only to increase employment, but also to increase the living standards of the poor. they were also thought to be capable of providing a new dynamic ofeconomic growth. the new objective was not just to stop to retreat, but to promote the small-scale sector (house, 1981; schmitz, 1982; giiunartino, 1991). this change in approach was accompanied by a shift of focus towards a "rurally orientated smallholder" (rosh) industrialization strategy, well articulated in kilby (1975), child (1976), house (1978),noormohamed (1985), and olofin (1990), among others. while the world bank (1992)and others have tended to favor the rosh implementation strategy by assigning the major role to the private sector, there are those who favor its implementation by assigning a major role to government (olofin, 1990, noormohamed, 1985). assigning the major role to the private sector has its appeal in the fact that the private sector has the resources needed to implement the strategy. but the proponents of assigning the role to the government are aware that in many developing economies, government is the major mover of the economy with only a small and sometimes weak private sector. thus, they argue that assigning such an important role to the private sector would not work. besides, for the strategy to produce an optimal eftect on the well-being of the people, the social environment has to be consideredsomething the private sector may not be willing to do. small scale enterprises contribute to the expansion of urban employment and are a provider of inexpensive consumer goods with little or no import content, serving an important pressure-releasingand welfare-augmentingfunction. these enterprisesalsocontributeto longrun industrial growth by producing an increasing number of firms that grow up and out of the small-sector. the emergence of wholly modern small/medium-scale kenyan industries is likely to be a prerequisite for any enduring industrialization. government efforts to support small-business development thc kenyan government's recognition of the informal sector began with the 1972 international labor organization (ilo) study entitled "employmetit, income and ertualityt strategy for increasing productive eniplo»tneni in kenya." this study examined unemployment in kenya and coined the term "informal sector." the report describes the sector as not just marginally productive but economically efficient and profit-making. the sector is small in scale and limited by simple technologies little capital and lacks links with the formal sector. categories of those employed include tailors, carpenters. metal workers, cooks, masons and others. the report discounts the belief that the informal sector is stagnant, non-dynamic and a place for those who fail to secure jobs in the formal sector. the i lo mission contended 70 that the sector was oflen ignored but was thriving and could be the source of kenya's wealth. the report made recommendations for major policy changes for the transformation of the economy. however, the recommendationswere without clear mechanism for implementation and sustained change. the ilo report was favorably received by the kenyan government, which incorporated its proposals in the planning process. although the government had come up with proposals for policy changes in the sector from the 1972 study, by 1980, not much had been implemented. this was attributed to the inability of the central government to exert control over the actions of municipal authorities, where most of the activities in the informal sector take place. through the 1980s, the government stepped up its effort for support of the informal sector. a new education system was introduced with al i sorts of subjects thought to be relevant to enterprise, self-employment,and self-reliance(achola, gray, & kerre, 1990). this was, as the ilo mission recommended, "the preparation of students for available employment opportunities, especially in the rural areas and in the informal sector" (ilo, 1972). from the mid-l980s, the kenyan government's approach toward micro-enterprise development shifted from one of interventionist to one of facilitating. interventionist is one ofinitiatinga governmentassistanceprogram or establishinga government organization to do so. facilitating refers to placing concentration on the creation of infrastructure facilities and an economic environment in which entrepreneurs can emerge, develop and grow (kenya government, 1992b). there is currently considerablesupport for small and jua kali enterprise development (krep, 1993). the sector's potential and importance have been increasingly acknowledged. this is reflected in the responsive fashion in which government policy towards the sector has changed and evolved as well as in the increased number of institutions with projects and programs in support of the sector. some of the institutions which support projects and programs focus exclusively on enterprise assistance, others conduct a variety of other development activities in addition to their projects for development. these institutions vary considerably in size, visibility, effectiveness and efficiency. the kenya rural enterprise program (krep) has identified over one hundred such programs and activities as of 1993. primary program areas include: investment incentives, infrastructural development, small scale enterprise and technology, marketing support, reform of regulation, and finance however, despite governmentefforts in kenya to promote informal sector activity, not much progress seems to have been achieved, judging by the performance of the informal sector. most previous studies throughout africa treat the informal sector as essentially homogeneous in its characteristics (morris and pitt, 1995; bewayo, 1995; ekpenyong and nyong, 1992). recent research suggest that government policy should be more narrowly targeted to subsectors within the informal sector (parker and torres, 1994). this study examines survey data in order to evaluate the characteristicsof small-scale manufacturers that make it more diflicult for them to be profitable and the particular problems that they face which may have contributed to their poor performance. objectives of the study in order to examine theses issues, the following research questions have been raised: 71 1. what are the characteristics of the small-scale manufacturers with reference to the size of the enterprise, the age distribution of firms, educational background of the operators, the site characteristics, and technology of their business operation? 2. what are their sources of funds (formal or informal institutions)? 3. are the characteristics of the various industries included in the informal sector similar enough for the industries to be treated by government policy makers as a single sector? 4. how have government policies affected the development of small-scale enterprises and entrepreneurship? characteristics of smes in kenya ~dr i me for the purposes of our discussions the terms "firm," "establishment," "business," and "enterprise" are used interchangeably. an "enterprise" is defined here as any income-earning activity that is not in primary agriculture or mineral production. there is no generally accepted definition of a small business because the clarification of businesses into large-scale is a subjectiveand qualitativejudgement. in countries such as the usa, britain, and canada, small-scale business is defined in terms of annual turnover and the number of paid employees. in britain, small-scale business is defined as that industry with an annual turnover of 2 million pounds or less with fewer than 200 paid employees. in japan, small-scale industry is defined according to the type of industry, paid-up capital and number of paid employees. consequently, small and medium-scale enterprises are defined as: those in manufacturing with 100 million yen paid-up capital and 300 employees, and those in thc retail and services trades with 10 million yen paid-up capital and 50 employees. in kenya, "micro-enterprises" are those with 10 or fewer workers, "small enterprises" have from 11 to 50 workers, and "medium enterprises" have from 51 to 100 workers. censuses indicate that micro-enterprises comprise the lion's share of enterprises in kenya while there are a few medium enterprises(parker and torres, 1994).small enterprises are almost non-existent as well, micro-enterprises are indigenous while the medium-scale and lager manufacturing enterprises are dominated by asian (indian) capital. the asian firms are very entrepreneurial but raise a different set of issues which are not covered in this study. this paper will be confined to manufacturing enterprises and takes an in-depth look at micro-enterprises. methodol jk urve e ecuti n the data for the study was collected employing face-to-face structured interviews with representatives of 320 micro-enterprises who manufacture in the kenyan towns of kisumu, eldoret and meru. a census in the industrial areas of the three towns counted 2,626 small manufacturers with 20 or fewer workers. since only i percent of this population fell between 10 and 20 workers, we are ostensibly writing about firms with 10 or fewer workers. the general category of textile work, including tailoring, dressmaking, knitting, and sewing of textile products, is the largest activity group (table i). woodworkers are the second largest 72 group and are composed of carpenters mostly making wooden furniture, supplying wooden doors and windows and doing repair work. the last category is the metalworkers producing cooking utensils, charcoal stoves, metal boxes, small hardware, metal furniture, metal door and window frames, and iron gates. table 1 po ulation data b gender activi and firm size number percent proprietor's gender male 2,124 80.88 female 502 19.12 total 2,626 100.00 type of activity textiles 1,384 52.70 woodwork 714 27.20 metalwork 528 20.10 total 2,626 100.00 firm size 1 worker 1,338 50.95 2 3 751 28.60 46 376 14.32 7 10 134 5.10 10-20 27 1.03 total 2,626 100.00 the populationofenterprisesrevealedroughly20 percent women entrepreneursbut this hides the fact that roughly 90 percent of that figure are in the textiles trade with very few women entrepreneursin carpentry or metalwork. this bias of women toward textiles plays on stereotypes of women as seamstresses who are barred from other areas of gainful employment. the businesses in the population considered were quite small. fiay percent had 1 worker and another 29 percent had 2 or 3 workers. not surprisingly, due to the youthful nature of the kenyan population, more than two-thirds of the population were under forty. the number of firms selected from each size stratum was estimated to ensure adequate representation by sampling strata as they are proportioned in the population. arer numbering firms sequentially in each size category, we used random numbers to select business owners for interview. the proportion taken from each stratum ranges from 10.69 percent of the oneperson firms to 16 42 percent of the seven-to-ten-workerfirms, with an overall sample of 12.19 percent of the population (table 2). arer administration of the questionnaire, purposeful sampling (relying on expert judgement to select units "typical" of the population) was used to select 16 cases out of the population of 320 for in-depth study. the general strategy was to 73 identify important sources of variation in the population then select a sample reflecting that variation. these cases provided additional insights into the distinguishing characteristics of entrepreneurs, differences among trade groups, and common operating problems. 'fable 2 sam lin from the po ulation of enter rises h size g of of firms g of firms percentage workers in sample population in sample 1 worker 143 1,338 10.69 23 101 751 13.45 46 50 376 13.30 7-10 22 134 16.42 10 -20 4 27 14.81 total 320 2,626 12.19 general environment description of country and industries part of the british commonwealth, kenya is an east african nation that gained its independence in 1963. like many other formercolonies, kenya inherited an underdeveloped economy at the time of independence. the economy was characterized by existence of large traditional sector, dependence on primary exports, heavy dependence on international trade, underdeveloped sector and other associated structural features. in more recent times, with a gnp per capita of $385 (1993),it is categorized by the world bank as a low income economy that is less technologically developed. modern sector employment accounts for only 16 percent of total employment in kenya, while over 80 percent of the kenyan working population are in agriculture, the rural non-farm and urban informal sector (gray, 1991). seventy-fivepercent of the country's exports are primary commodities (mainly agricultural). industrializationthrough the development of its manufacturing sector has been the goal of the nation since independence. however, extremely little foreign direct investment is targeted for the manufacturingsector with more emphasis until recently on inefficient import substitution than on production for export. kenya did better than most other sub-saharan countries over the last decade (19831993), however, it still was greatly affected by deteriorating terms of trade, mounting external debt, and decreasing net flows of public and private resources. subsequently, the country entered its own turning point in its approach to development. self employment has emerge as an important aspect in the overall development strategy. 74 textiles generally, enterprises in this industry serve the final customer rather than other business as there were found to be few backward linkages. firms tend to operate from traditional marketplaces and homesteads, relying on the proprietor'sown savings for capital. in tailoring, the largest sub grouping of this sector, a large proportion of ii rms compete head-to-head in just one or two sub-groupings. a majority of entrepreneurs in these sectors produce low quality goods meant for low income customers. product duplication is rampant. thus, input into production methods in terms of product design and man-hours of labor are cheap and low. woodwork this is a highly diversified industry. technology from this sector is acquired from the formal sector through adaptation and adoption. in recent years, many di fferent kinds of locally make woodlathes and other bench and hand-saws are available. in combination with hand tools and clamps, entrepreneurs have revolutionized the design and quality of furniture, especially in the urban areas. this sector consist largely of enterprises making wooden furniture but includes charcoal, rope or twine, and baskets. the sector produces for two separate markets. the largest market comprises 90 percent of revenues and are low quality goods made for low income consumers. the remaining 10 percent are higher quality goods for more middle income consumers. metalwork the metalwork industry is also very diversified and is made up of those firms that make, sell and repair metal products, either for households or for other businesses. earlier studies of the metalwork sector found that meta)workers produced rugged manual machine tools and simple consumer durables such as bicycle carriers and hoes as well as bolts and other basic items for the building industry (house, 1981). our study revealed production to be wide ranging including electrical machinery for the sector itself and the woodworking industry. a second group of metal workers produced a variety of steel fabrications and other building parts (e.g., steel windows, steel gates, grills, etc.) and machinery for the agricultural service sector. a third and last group of metalworking firms commonly referred to as tinsmiths, produce a range of hand tools and consumer durables (e.g., hoes, metal boxes, sufurius [cooking pots], jikos [small stoves], etc.) for low income consumers. characteristics of smes based on study findings in line with one of the objectives of the study, information was sought with respect to certain characteristicsof the smes (and their operators), including the age of the business, the educational background of the owners, and site characteristics. 75 table 3 sam le of enter rise size b industr ¹of textiles woodwork metalwork workers ¹ i worker 95 54.29 33 33.67 15 31.91 23 50 28.57 37 37.75 14 29.79 46 18 10.29 20 20.41 12 25.53 7-10 i i 6.29 5 5.10 6 12.77 10-2 i 057 3 306 0 000 total 175 100.01 98 99.99 47 100.00 the sampling is further broken down to the industries of textiles (n = 175), woodwork (n = 98), and metalwork (n = 47). as can been seen from table 3, about one-half were textile, one-third were woodworking and the remainder, one-sixth were metalwork. this is approximately the same proportion of firms found in the population. table 4 years in business of fnter rises b industr years in textiles woodwork metalwork business ¹ ¹ i ess than i i 057 5 5.10 0 0.00 i 3 44 25.14 25 25.51 8 17.02 35 38 21.71 16 16.33 10 21.28 57 25 14.29 10 10.20 4 8.51 7-10 26 14.86 16 16.33 8 17.02 10-20 30 17.14 24 24.49 15 31.91 over 20 i i 6.29 2 2.04 2 4.26 total 175 100.00 98 100.00 47 100.00 very few firms were a year old or less in terms of age of the business (see table 4). thus, the firms are not transient which is what one would find by exrunining enterprises in the servicesectorwherethe needed start-up capital is much smaller. half of the firms have been in existence over five years in all categories of industries studied. the businesses were on average six years old with 15 having been in business for more than twenty years and only 6 in business for less than one year. firms were found to be slightly older in metalwork subsector where businesses are more capital intensive. while slightly younger firms were found in the textile industry which is less capital intensive. 76 educational back round all the respondents were asked questions related to their educational background. table 5 includes data on educational attainment of the three industries studied. only i percent of the entrepreneurs in all industries having not completed primary school. about half of those interviewed had 10 years or more of formal education. the lower educational attainment in textiles reflects the high proportion of women in this industry. table 5 formal education of owners b industr years of textiles woodwork metalwork education ¹ /o ¹ '/o ¹ '/o no formal ed. 2 1.2 i 1.0 2 4.3 6 or primary 61 35.3 22 22.4 17 36.2 8 31 17.9 18 184 6 128 10 38 22.0 28 286 7 149 12 32 18.5 27 27.6 i i 23.4 14 9 52 2 2.0 4 8.5 total 173 100.0 98 100.0 47 100.0 chi square = 14.99df = 10 p = 0.1325 informal sector "site" according to most previous studies, the variables related to the site of the business establishmentare "the" defining characteristics of informal sector activity (mccormick, 1988; onyango, 1992, ouma, 1990; king and abuodha, 1991). the literature includes the nature of the physical premise as well as the business'ccess to water and electricity as key variables. in this study, a dichotomy in the nature of resources available to micro-enterprises was found (see table 6). approximately 35 percent of the entrepreneurs interviewed in each industry had workplaces which were open-air at the informal extreme or permanent physical establishmentg that is, market stalls and shops at the formal extreme of the small business sites. the remaining 30 percent had semi-permanentestablishments or worked from their homes. this dichotomy of work place site has lent validity to the concept of an informal sector distinctly separate from formal sector activities. a chi-square test on the tabulated responses reveals that it is highly unlikely that firms in the industries studied are from the same distribution. in other words, the industries should be treated separately and not as one homogeneous sector. expressed in another way, there is a systematic relationshipbetween "site" and "industry type." this finding stands in opposition 77 to the blanket "informal sector" proposals which up until now have been advocated by policy makers and others who are interested in assisting entrepreneurs in this sector. the paucity of infrastructure in terms of electricity and water available to micro-enterprises is of great concern to the government of kenya and the donor community. this concern is validated here where we find water not accessible to roughly 75 percent of the firms surveyed in all industries. this large proportion of firms without access to water rendered the chi-square test result insignificant among these industries. we find the use of electricity to be more needed and accessible particularly to the woodworkers and metalworkers and similar to our conclusions for the site of the enterprises, a chi-square test indicates that the industries studied should not be treated as one homogeneous "informal" sector. notwithstanding, the provision of basic infrastructure will surface as essential for the development of the three industries. table 6 site of business enter rises access to electrici nd water b industr textiles woodwork metalwork site ¹ '/0 ¹ '/o '/s open air 70 40.00 24 24.49 20 42.55 semi perm 22 12.57 24 24.49 2 4.26 home 10 571 3 3.06 2 4.26 market stall 28 16.00 i 102 2 426 shop 45 25.71 46 46.94 21 44.68 total 175 100.00 98 100.00 47 100.00 chi square = 39.17 df = 8 p=0 electricity no 145 82.90 64 65.30 25 53.20 lights 13 740 9 920 2 430 machines 17 9.70 25 25.50 20 42.60 total 175 100.00 98 100.00 47 100.00 chi square = 29.59 df = 4 p= 0 water none 132 75.40 75 76.50 34 72.30 outside 31 17.70 19 19.40 12 25.50 inside 12 16.90 4 410 i 2.10 total 175 100.00 98 100.00 47 100.00 chi square = 10.80 df= 4 p = 0.0943 78 ~financin 13usiness financing in terms of start-up and capital for continued operation is oren cited as the greatest problem for small business development. as such, in kenya start up capital is a barrier to entry in most entrepreneurial activities. metalwork had the greatest average amount of start-up capital requirement reported followed by woodworking. textiles had the smallest average start-up capital reported at only one-third and one-fourth of the other more capital intensive industries. the large standard deviation indicates the wide variation of responses. table 7a features these results with median figures in each category. lack of capital was cited by eighty percent of all respondentsas the greatest start-up problem. absence of machines and tools was cited by roughly half the respondents as a major start-up problem. in addition to the start-up capital amounts, the source of start-up capital is shown in table 7b. here, it is clear that personal savings dominate as the primary source of capital in all industries studied. it should be noted that no one had gained their start-up capital from a formal sector source. relatives, partners and friends were the only other responses given to inquiries about start-up capital. as the business develops and grows, additional capital is needed for expansion. it is expected that the initial sources of capital will prove to be important as sources for expansion capital. table 7a start-u ca ital b industr (in kenyan shillings) textiles woodwork metalwork (n = 174) (n = 98) (n =47) initial capital mean 4,261 11,609 17,486 standard deviation 7,881 37,906 38,912 median 2,000 2,800 2,000 table 7b start-u a ital b ource'in percentage) textiles woodwork metalwork (n = 174) (n = 98) (n = 47) source of capital own savings 72.10 86.60 80.10 relative(s) 17.00 11.50 15.40 partner(s) 8.70 6.30 11.20 friend(s) 6.40 4.20 11.20 'everal entrepreneurs had more than one source of start-up capital. at the time of the survey, the exchange rate was approximately kshs. 50.00 to u.s. $ 1.00. 79 this is underscored as approximately 92 percent of them elected not to apply for loans or had applied but were rejected. only nine percent of the firms received any external funding other than from family members. approximately half of the respondents started their businesses from meager savings. as previously stated, when entrepreneurs were asked from what sources they had requested external funds, most reported that no requests were made. most business owners "knew" that they would not be granted a loan as they did not have collateral. one owner stated that loans "were made to rich people." another entrepreneur felt that "there is a lot of discrimination in the provision of loans, particularly against small business entrepreneurs." however, most stated that a source ot'external funds would improve their businesses significantly. t~h technological machine capacity in the informal sector is very low and far below the technological capacities in light industries. house (1978) and king and abuodha (1991) document average capital stocks as a method of grasping the level of embodied technology in an industry. it would be best to look at capital labor ratios (klrs) over the sector. klrs give the amounts of capital used by units of labor in the sector. however, a study on technological change is a time series study and looks at changes over time. in table 8, relative capital stock levels of the three sectors are compared to data generated froin a previous study (king and abuodha, 1991). king and abuodha's findings corroborate this study that capital stocks are highest in metalworking followed by woodworking. our data indicate that metalwork, woodwork and textiles have a capital stock ratio of 3:2:i in terms of total capitalization. the higher numbers in the previous study are believed to derive for the urban bias in machinery cost verified in king and abuodha's study. although capital machine levels in the industries studied are dramatically higher than in the 1970s, they are still too low to develop any meaningful industrial capacity at this stage. the industries studied have only undergone a first stage industrialization process as a result of limited electrification machinery for production (see table 6). table 8 avera e a ital stock levels b lndustr (in kenyan shillings) 1990 1994 1994 rental/month textiles 26,400 8,547 360 (n =22) (n=112) (n=36) woodwork 64,886 17,752 300 (n=38) (n=69) (n= i ) metalwork 69,076 24,247 1,166 (n =26) (n=20) (n=3) 80 the study findings indicate that growth of the micro-enterprise sector is largely technologyled(particularlyin woodworkand metalwork). however, the industriesthemselves do not generate their own technological spurts, that is, moving to higher echelons of technology(juma et al, 1993). in fact, we observe the industries studied as moving toward the exhaustion of existing technological capacity. presently these industries use technology learned from the formal sector through adaptation and adoption. generally, a lack of understanding of science and engineering behind the technology used was observed. summary and conclusion while one had to search for strengths in most of the informal sector entrepreneurs, several did emerge. first, each micro-business provides an income for the owner and his family, and, in many cases, a livelihood for his/her extended family. this fact was brought home by one of the entrepreneurs in responding to the question as to why he considered his business successful. he replied: "anyone who can be able to provide the basic necessities to his family, ought to consider himselfsuccessful." indeed, experience in kenya and elsewhere in the developing countries indicates that micro-enterprises are not primarily oriented toward profit maximization. although this may be the secondary goal, their immediate goal is to create security for their families. a limitation exist in that there does not appear to be a market for existing micro-enterprisesin kenya. none of the respondents reported to have purchased their business from another small business owner. the lack of markets for existing businesses places a severe limitation on entrepreneurship prospects in kenya. a second strength is the fact that most enterprises are highly mobile in terms of location if the market becomes soii, they could at a moment's notice, move to another location. many of the entrepreneurs(86 percent) in this study reported that they rented the premises they use. as such, their money is not tied to permanent structures (mccormick, 1993). a third major strength is that firm owners have created needed products and services for the market, have kept costs competitive, and have attracted and trained people with the needed skills. the primary weakness of most members of the study group was lack of capital. as a direct result, most were unable to get the appropriate tools or expand their businesses. almost all of the respondents started their businesses from own savings or loans from relatives. approximately 92 percent of them elected not to apply for loans or had applied but were rejected. only in one case had the business owner applied for a kshs. 100,000 loan from the kenya commercial bank and was offered only kshs. 20,000, which she turned down because it was inadequate for her purposes. while many of the entrepreneurs were unaware of the ways in which they can go about applying for loans, those who knew how were equally frustrated that their applications are never accepted. the most noteworthy factor in the area ofbusiness management was the absence of an aggressive marketing strategy. moreover, most of the businesses surveyed only employed one or two components of the marketing mix: product, place, price and promotion. in most cases, the businesses produced products which were copies of others in the industry. this phenomenon was especially true of the textile businesses. one exception was the tailor who 81 said she tried to use a variety ofdesigns as a marketing tool. several of the metalworkers in the sample noted that they bought raw material in bulk and sold to several smaller operators. in a sense, they performed the production, wholesale, and retail functions in the channel of distribution. some in the woodworking industry relied on quality and craftsmanship to differentiate their products from their competitors. a number of opportunities exist for micro-enterprise owners to consolidate and enjoy economies of scale through joint ventures, partnerships, and so forth. theoretically, the entrepreneurs need each other to be able to take advantages of economies of scale. practically, however, they have to overcome gross mistrust that exists among them. moreover, a small amount ofbusiness training would put a few entrepreneurs ahead of their competitors. the opportunity exists to differentiate products and thereby create a greater demand for their products. finally government policy needs to be more targeted or industry specific. instead of having a blanket policy toward the informal sector, the government needs to develop specific policies suited to the particular characteristics of each industry. it has been shown that each industry has distinct needs that are not necessarily the same as another. for example, site infrastructureand capital stocks are not as extensive in the textile industry as was found in the metalwork industry. another observation was that, proportionately,metalworkersare securing more loans than the other two industries studied. thus, perhaps the government needs to devise programs that specifically address the concerns of the woodwork and textile industries in terms of training and loan procurement. 82 referencfs aboagye, a.a. and goze, k.m. 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(1994). world development report 7 994. new york: oxford university press. 85 critical success factors of sme internationalization tarun kanti bose khulna university, bangladesh t.bose.1@research.gla.ac.uk abstract this study was directed towards investigating the critical success factors of sme internationalization. qualitative and explorative research work have been carried out to detect the key underlying variables existing in the context. thorough review of literature reveals four important variables as key success factors. those are: the current internationalization scenario, future internationalization prospects, internationalization competencies, and strategies for internationalization. a conceptual networking model was established from the literature which describes the multidimensional and networking relationship among the main variables and underlying constructs. this study contributed toward developing a model for successful internationalization framework by covering important literature in the field of sme internationalization. keyword: sme, internationalization, success factors, model of internationalization 87 mailto:tarun84ku@yahoo.com journal of small business strategy vol. 26 ● no. 2 ● 2016 introduction internationalization has been defined as the process of going beyond domestic operation and operating internationally. sme internationalization is one of the highly discussed issues in the modern literature of international business. internationalization of sme operation is certainly not a new phenomenon and it is a quite common practice among western business organizations. the firms in third world countries are striving to put their name on that list. few firms from developing countries like china, malaysia and thailand have been successful with internationalization. as everything is becoming globalized, the traditional idea of international operation solely applicable for larger corporations is no longer valid. smaller firms particularly from the west are obtaining remarkable success beyond the conventional domestic territory. modern communication and transportation tools have further enhanced internationalization. with globalization, greater opportunities are provided internationally as the domestic market is continuing to shrink. with this trend, almost every country view domestic market as insufficient for ensuring business growth and sustainability. this scenario has opened diversified fields of research areas for exploring and thus presents numerous scopes to develop theories for the best possible method of sme internationalization. this study has tried to uncover the most important success factors for sme internationalization. to accomplish this, it has adopted the literature review method and also builds a conceptual model for describing the multidimensional relationship among different variables which plays important and determining roles for successful internationalization of small and medium sized enterprises. review of relevant recent literatures theories and approaches of sme internationalization internationalization of different types of business organizations including smes is a popular subject of research in international business (buckley & casson, 1976; buehner, 1987; geringer, beamish, & da costa, 1989; bloodgood, sapienza, & almeida, 1996; coviello & mcauley; 1999, zahra, ireland & hitt, 2000; geringer, tallman & olsen, 2000; denis, denis, & yost, 2002; bae & jain, 2003; suarez-ortega & alamo-vera, 2005; ruzzier, hisrich, & antonic, 2006, and salahuddin, kahn, & akram, 2008). different approaches have been developed over the years to explain the pattern of internationalization including the stage approach, network approach, international entrepreneurship approach, and integrated approach (suarez-ortega & alamovera, 2005). the stage based approach the stage based approach of internationalization has been defined as a linear and sequential process which constitutes a group of unique stages. there are mainly two approaches under this theory which are uppsala model (johanson & vahlne, 1977) and innovation related model (bilkey & tesar, 1977, cavusgil, 1980). the uppsala model has described internationalization as a process of gradual learning through experiences gained from foreign markets (ruzzier et al., 2006). it is comprised of two basic conceptsthe learning process and psychic distance (collinson & houlden, 2005). according to the theory 88 journal of small business strategy vol. 26 ● no. 2 ● 2016 developed by uppsala model, the internationalization is the process of acquisition, integration, and utilization of both knowledge and expertise in international operations with incremental participation in international markets. by integrating the knowledge gained from international experiences it becomes easier for the enterprises to make decisions (pett, francis, & wolff, 2004). in this way, internationalization can be regarded as the result of a series of incremental decisions. this model is also constructed on two essential elements: the amount of resources committed and the degree of commitment. the interaction between those essential elements also results in two effects known as the static effect and the dynamic effect. the static aspect refers to the resources committed to the target market and the related knowledge. the dynamic aspect is relevant with the influence of the resources on timely decision making and the decisions related to on-going activities (khayat, 2004). finally, four steps were developed by the uppsala model which serve as the main ingredients in the sequential process of internationalization: irregular export activities, export through independent agents, establishment of an overseas sales subsidiary, and overseas production or manufacturing units (collinson & houlden, 2005). the innovation-related internationalization model views internationalization as a process in which the steps are identical to new product introduction and development (dhanaraj & beamish, 2003). the foundation of this ideology is that the internationalization process requires innovation for enterprise continuously, and therefore it should be an incremental development process. i-models can be essentially catergorized into three main stages: pre-export stage, export trail stage and advanced export stage (coviello & munro, 1997). in these stages, the degree of innovation is normally higher in later stages compared to the earlier stages. network theory network theory of internationalization places importance on the intra and interorganizational networks for successful internationalization process. research on network theory is widespread and this concept touches many aspects of business. in explaining the internationalization process of smes, coviello and munro (1997) pointed out that smes show a pattern of externalizing their activities during the internationalization process by depending heavily on establishing network relationships to select the market and the entry mode. in addition, they have argued that rapid internationalization is mostly possible with building relationships and networks. on the other hand, johanson and mattson (1988) have argued that internationalization is a process which develops inside the network through commercial relationships with other countries and constitutes three steps-extension, penetration and integration. the network is defined by cook and emerson (1978) as a junction of relationships. coviello and munro (1997) have also stated that the degree as well as the form of internationalization is influenced by different types of relationships that are developed in the networks. by building financial, technological and market relationships with other members of the networks, the enterprise extends its connection with other enterprises and slowly increases its activities across national borders until they become international. the concept of international entrepreneurship 89 journal of small business strategy vol. 26 ● no. 2 ● 2016 the concept of international entrepreneurship is primarily defined as new international operational activities by newly developed enterprises (ruzzier et al., 2006). in contrast to the stage theory of internationalization, this approach focuses more on rapid internationalization. in addition, this theory asserts has described that as internationalization becomes a passion of new entrepreneurs, they possess immense inclination towards learning and adopting supportive viewpoints, such as innovative ideas, concepts, knowledge, and mechanisms (collinson & houlden, 2005). resource and competency based theories of internationalization are an important addition in this area of literature. according to this theory, resources and competency play key roles in internationalization in all kinds of firms including smes. resources and competencies play an important role in the selection of internationalization strategies. factors such as financial capability, material capability, and in relation to others, learning capability are determining factors of internationalization. eventually, the process of internationalization requires the mobilization of resources and competences in the enterprise (ruzzier et al., 2006; pantin, 2005). for smes to capture the opportunities in the international markets, the entrepreneurial resources, namely the financial and technological resources of the entrepreneur, are important (dhanaraj & beamish, 2003). important factors of sme internationalization network, alliance, clusters business linkages such as networks, joint ventures, and subsidiaries play an important role in increasing the probability of export (gumede & rasmussen, 2002). networks can be used in developing countries to encounter export-marketing problems (ghauri, lutz, & tesfom, 2003). availability of opportunities arising from globalization, availability of collaborative networks and availability of the sources of funds not only influence, but also dictate the terms in sme internationalization (zahra, korri, & yu, 2005). anderson (2006) developed a model for interpreting the importance of personal networks for collecting information for the sake of internationalization of firms. networking capability enables the identification and exploitation of market opportunities, which facilitates the development of knowledgeintensive products and firm international market performance (mort & weerawardena, 2006). the involvement of a strategicallyfocused supplier may strengthen and integrate the resources and capabilities as well as improvement with the international network development and positioning (johnsen, 2007). there is strong evidence to suggest that a cluster policy brings additional positive effect to existing sme policy in industrialized economies (karaev, koh, & szamosi, 2007). due to both internal and external constraints, smes should use partnerships or strategic alliances to overcome resource and capability deficiencies and to spread investment costs and related risks among partners (li & qian, 2007). agndal and chetty (2007) have investigated the importance of relationship in various aspects of internationalization. for manufacturing smes, building a relationship through networks and alliances is the key to growth in international markets (sinha, akoorie, miem, ding, & wu, 2011). cluster supply chain plays an important role for acheiving success in the international market (huang & xue, 2012). inter-personal networking and inter-organizational 90 journal of small business strategy vol. 26 ● no. 2 ● 2016 networking have a strong positive impacts on sme internationalization and marketing (eberhard & craig, 2012). haskell and pons (2012) explain how smaller enterprises benefit from strategic alliances when they go for internationalization. varga, vujisic, and zdravkovic (2013) have emphasized on building innovation clusters for smes to improve the competitiveness in international business. capacity building daniel and wilson (2002) recognize the importance of adopting and utilizing ecommerce for international business. four constructs (competitive scope, organizational capabilities, entrepreneurial competencies and performance orientation) have a strong influence for acheiving success in an overseas territory (man, lau, & snape, 2002).the adoptions of e-business and e-marketing have had varing impacts for countries with a different cultural, technological and social setup (fillis, johannon, & wagner, 2004). furthermore industry and sectorial factors play key roles in the development of e – business and its success for small and medium sized firms’ internationalization and overseas operations (fillis et al, 2004). financing strategies and the commensurate finance management capabilities play dominant roles in the sustainable success of international business particularly for small and medium enterprises (gabrielsson, sasi, & darling, 2004). for better performance in exporting business, companies need to provide technical and practical trainings (ko¨ksal, 2006). the decision makers of all internationally successful companies possess a better understanding of the international orientation skills needed which include language and cultural norms (knowles, mughan, & lloydreason, 2006). firms that share a common language with their international counterparts are able to internationalize faster and these geographically diverse networks contribute to superior performance in international markets (musteen, francis, & datta, 2010). kenny and fahy (2011) finds that there is a positive relationship between a firm’s network of human capital resources and international performance. sinkovics, sinkovics, and jean (2013) put forth, that online channel support positively enhances export performance for smes. policy rutashobya and jaensson (2004) articulated that export performance of developing countries’ smes need to be bolstered by their respective governments to create an environment that will stimulate small firms’ competitiveness. which in turn highlights the importance of policy prescriptions and executions. balananis, theodosiou, and katsikea (2004) place emphasis on few other factors such as standardization and customization, export development processes, rapid technological, institutional, legislative, economic and attitudinal changes for the internationalization of all kinds of firms. neupert, baughn, and dao (2006) found differences in the problems faced by the smes in transitional and developed economies. while smes from transitional economies encountered export problems related to product quality acceptance and logistics management; the smes from developed economies faced issues such as differences between countries, general business risks, and logistics. ahmed, julian, baalbaki, and hadidian (2006) measured the importance of export incentives for successful internationalization. export capabilities among small and medium-sized enterprises tend to depend on some key components of 91 journal of small business strategy vol. 26 ● no. 2 ● 2016 marketing management and also on the blending of processes, practices, and activities (doole, grimes, & demack, 2006).several factors must be addressed before the sme can achieve international growth including specifically the utilization of technology and domestic infrastructure (todd & javalgi, 2007). shamsuddoha, ali, and nbudisi (2009) found that market development-related government assistance significantly influences internationalization. altintas, vrontis, kaufmann, and alon (2011) investigated the impact of micro and macroenvironmental forces on sme internationalization. interaction of smes with the government also can be a major factor for successful internationalization particularly for the firms of developing and under developed countries (fornes, cardoza, & xu, 2012). innovations international experience, the ability to innovate, understanding growth potentiality and market-specific knowledge are the keys for successful internationalization (pinho, 2007). strategic orientations are related to a firm’s international performance. this relationship is moderated by its international growth strategy (jantunen, nummela, puumalainen, & saarenketo, 2008). in addition, international trade shows play a significant role in the internationalization process of small exporting firms (evers & knight, 2008). man, lau and snape (2008) pointed out that both direct and indirect contributions of the entrepreneur's opportunity, relationships, ability to innovate, and strategic competitiveness all affect the long-term performance of an sme via competitive scope and organizational capabilities. karra, phillips, and tracey (2008) proposed that three entrepreneurial capabilities which are particularly important for successful international new venture creation are international opportunity identification, institutional bridging, and a capacity and preference for cross-cultural collaboration. entrepreneurial orientation coupled with a strong desire to seek growth in international markets, always instigate rapid internationalization of small company (ruokonen & saarenketo, 2009). casillas, moreno, acedo, gallego, and ramos (2009) has described the role of knowledge for the successful internationalization process. organizational structure, the entrepreneurial processes adopted in creating firms, as well as marketing and learning orientations all are important elements for better internationalization of firms particularly from emerging economies (kocak & bimbola, 2009). there is an empirical relationship between organizational learning and organizational performance. in practice, this means that organizations reaching higher levels of organizational learning probably achieve higher performance (michna, 2009). the factors which dictate the performance of international smes differ from noninternational smes in terms of international entrepreneurship, organizational innovation intensity and firm size (o’cass & weerawardena, 2009). chetty and stang (2010) also find out that innovation is also a key ingredient of internationalization of smaller firms. dimitratos, plakoyiannaki, pitsoulaki and t�̈�𝑢 selmann (2010) have outlined international smes as global smaller firms and described these firms as more strongly entrepreneurial-oriented than normal ones. strategic variables for international business, such as r&d intensity have significant impacts for successful internationalization (li, qian, & qian, 2012). 92 journal of small business strategy vol. 26 ● no. 2 ● 2016 benefits and barriers altintas, tokol, and harcar (2007) measured the impact of existing impediments on internationalization. profiling and benchmarking the capabilities is an important area of competency for small and mediumsized enterprises (smes) to compete internationally (grimes, doole, and kitchen, 2007). lages and montgomery (2004) have argued that past performance plays a pivotal role in building smes’ commitment to exporting and also in determining their current marketing strategy. long-term orientations on financial export performance and strategic export performance have long term impacts on sustainable success in international business particularly for smes (ural, 2009). hutchinson, fleck, and lloyd-reason (2009) detected some internal and external barriers which create serious impediments for both internationalization and successful operations in international business. these barriers are primarily related to management and include lack of vision, fear of losing control, lack of knowledge, lack of resources, lack of consolidation in domestic market, and the external environment-legislation, currency, cultural differences and logistics. psychic distance plays an important role in the internationalization of family smes, mainly because of their general cautiousness as a result of family presence (kontinen & ojala, 2010). hewapathirana (2011) studied women entrepreneurs of srilanka and concluded that the social identity of women entrepreneurs not only enabled them to break glass ceilings but also emerge as competent entrepreneurs who have potential to be successful internationally. zthis also supported by al-hyari, al-weshah, and alnsour (2012) who identified the barriers to internationalization of smes from the evidence of jordan. future prospects cort, griffith, and white (2007) investigated the importance of motivating factors for managers for international business operation. babakus et al. (2006) focused on a few important factors for internationalization including perceived uncertainty, networking and export performance. chandra, styles, and wilkinson (2009) tried to mitigate the gap of existing internationalization theories by placing importance on the fast recognition of the international entrepreneurship opportunity for successful internationalization. cognitive complexity acts as a platform for successful processing of foreign market intelligence which is found to have a value-added impact on the sme’s export performance (miocevic & karanovic, 2011). mort, weerawardena, and liesch (2012) identified four fundamental strategies for entrepreneurial marketing and for acheiving success in international business. those are opportunity creation, customer intimacy-based innovative products, resource enhancement and legitimacy. modern internationalization patterns of smes are determined by international orientation, growth orientation, communication capability, intelligence generation capability and marketing-mix standardization. the interaction and inter linking relationship among resources availability, goal congruence, entrepreneur’s desire to internationalize seem to have a combined impact on international business performance of smes (rocha, mello, pacheco, and farias, 2012). those small firms tend to perform well in the overseas markets which have prior international business experience and networks which help building knowledge competencies (park & rhee, 2012). hitt, beamish, jackson, and mathieu (2007) identified opportunity creation as one of the 93 journal of small business strategy vol. 26 ● no. 2 ● 2016 critical success factors for sme internationalization. timing of internationalization the importance of objective and subjective characteristics of management is vital for not only the initial decision to expand and the support of overseas operations, but the subsequent path and pace of international development (hutchinson quinn, & alexander, 2006). williams (2006) articulated that only ambitious smes will gain rapid success in international market. ambitious smes are those which are active with marketing and information-gathering activities, and tend to dedicate specific financial and human resources to exporting. hermel and khayat (2011) emphasized the importance of leveraging between internal and external resources for rapid internationalization of micro-firms. clercq, sapienza, yavuz, and zhou (2012) portrayed the importance of learning and knowledge in the process of early internationalization. meanwhile, d’angelo, majocchi, zucchella, and buck (2013) measured the different geographical pathways and the applicability of those for successful international operations. success in an international set-up depends heavily upon by the process through which managers or organizations go about internationalization. sometimes reinternationalization and deinternationalizations are essential as an entry and exit should not be universal, rather should be based on situations and facts (freeman, deligonul, & cavusgil, 2013). modes of internationalization interaction and balance between the instruments of control for subsidiaries abroad are also important to success for international operations (jaussaud & schaaper, 2006). mtigwe (2005) identified four micro processes that shape the internationalization process and thus have influences on performance. those are accelerators, export barriers, selectors of intra-stage foreign market development, and foreign market outcomes. acedo and jones (2007) studied the rate of internationalization and focused on four aspects of managers in international operations. those are risk perception, proactivity, tolerance for ambiguity, and international orientation. trust based coordination and cooperative arrangements can also be major ingredients for successful exporting and international operations of different types of firms (fink & kraus, 2007). miocevic and karanovic (2012) have outlined that a global mind-set and broader attitude have a direct positive relationship with export performances. ripolle´s, blesa, and moferrer (2012) outlined that firms choose relatively low-resource commitment entry modes to operate in foreign markets, and thus have significant impact on operations. firms which presume greater risks by committing higher resources also increase their chances of getting far quicker results. destinations of internationalization managing cultural distances, a supportive local industry and positive customer response will be the key to success in international business for smes the coming century (sakarya, eckman, & hyllegard, 2007). on the other hand agndal, chetty, and wilson (2008) have detected the importance of social capital in the internationalization process. critical networks as well as actors and stakeholders in those networks play critical roles in the successful entry of foreign firms especially in the emerging markets (elg, ghauri, & tarnovskaya, 2008). opportunities exploitation and success gained in international business may be associated with 94 journal of small business strategy vol. 26 ● no. 2 ● 2016 cross-border combinations of resources and markets (gregorio, musteen, & thomas, 2008). lan and wu (2010) concluded that the degree of success in international business largely depends on the risk taking attitude, diversification capabilities and competing aggressively with the firms who are already established in the market place. management, products, experience and geographical location all have an indirect effect on the sme internationalization (su & adams, 2010). hutchinson and quinn (2012) identified five traits of small specialist international retailers. those are possession of a strong company brand image with market appeal, niche strategy, dual strategy of expansion, ownership characteristics defined by the entrepreneurs and vertical integration from manufacturing to retailing. dimitratos, voudouris, plakoyiannaki, and nakos (2012) added another dimension to the context of international entrepreneurship and business by pointing out the importance of the entrepreneurship culture among the small and medium firms when establishing successful offshore operations. sandberg (2013) highlighted the importance of accumulated societal, business network and customerspecific experiential knowledge for sme internationalization. operational decisions of internationalization corporate culture particularly in the overseas operation always enables all types of firms including smes to gain significant operational, strategic and competitive advantages as this culture is key for ensuring synergy in the organizational process (gray, densten, and sarros, 2003). ibeh (2003) has identified a number of factors that drive positive international business performances. these include: decision makers’ previous experience, international contacts and orientation, and firm-specific competencies relating to planning orientation, adoption of innovative technologies, foreign market information search, and managing channel relationships. there is also profound relationship among risk, operation characteristics and international business performance (gleason, madura, and wiggins, 2006). product quality, rationalization of operations and capital cost rationalization, and less focus on system integration are important for sme internationalization particularly for manufacturing smes (vaaland & heide, 2007). andersson and flore´n (2008) studied the importance of managerial behavior in international small firms. zeng, xie, tam, and wan (2008) have found that-technology level, cost control, and brand consciousness are the top three factors affecting the competitiveness of internationalization of manufacturing smes. the marketing capability of a firm plays the most important role in improving the performance of firms that embrace internationalization (zeng, xie, tam, and wan, 2009). maurel (2009) divided export performance into internal and external strategy related variables and concluded that business partnership, innovation, greater size, and an effective export commitment are linked to better export performance. atristain and rajagopal (2010) investigated the importance of operational efficiency for successful internationalization of mexican smes. ethnic workforce diversity plays a key role in increased internationalization of smes and also has greater impact on performance (mohr and shoobridge, 2011). the ownership structure has an important role in defining the pathway to internationalization followed by the family-owned smes (kontinen & ojala, 2012). shirokova, verga, and sokolova, (2013) identified entrepreneurial values, 95 journal of small business strategy vol. 26 ● no. 2 ● 2016 investments in internal resources, knowledge management, and developmental changes as key components for sme internationalization. research methods the evaluation of critical success factors of sme internationalization has considerable significance and is an important addition to the existing scientific literature in international business. it is important to evaluate factors comprehensively so that every important variable is covered. along with that it is vital to demonstrate the relationship among those variables and how they can contribute to reaching success in international business if utilized properly. to serve both of these purposes, i used the literature review methodology for this research. first of all, a thorough review of literature took place, and afterwards critical variables considered to be important for sme internationalization were detected. finally, a conceptual model incorporating the networking relationship among these variables was developed to show the sequencing and multi-dimensional nature of this relationship. this model is particularly applicable for smes, not for other businesses, as it is developed from the literature review on smes. the studies which were taken into consideration conducted field work and empirical research works on smes. therefore, the proposed model is only applicable for smes. critical success factors the term “critical success factors” was first introduced by john f. rockart in 1979 for helping senior executives describe the vital information they needed for successful management of their respective organization. this term, “critical success factors,” is the extension of “success factors” developed by ronald daniel in 1961. over the years the term “critical success factors” has been widely used in a variety of fields from hospitality to business and implied as important factors for gaining success in any operation. results critical success factors of sme internationalization after reviewing the literature thoroughly and evaluating the multidimensional relationship among different variables, the first thing i did was develop a conceptual networking model for showing and interpreting the relationship. in the literature the scientists in the field of international business have detected and highlighted a few factors which are the key ingredients of sme success in the international arena. my task was just to develop a model with those variables and establish a relationship for showing the sequence as well as the multi-dimensional relationship among those variables. current internationalization to future internationalization-few key lessons to learn and exploit: as shown in figure 1, the success factors and key prerequisites of sme internationalization are actually rooted in the domestic set-up where firms start their internationalization process by observing the success stories of the smes from the same territories. the current internationalization scenario triggers future internationalization as it exposes the potential benefits and impediments for the smes. i have observed that this process is similar to that of traditional marginal analysis in economics, the common process of evaluating benefits and impediments. 96 journal of small business strategy vol. 26 ● no. 2 ● 2016 “the current internationalization scenario exposes the existing spectrum for smes to do a marginal analysis for evaluating future internationalization prospects” such old-fashioned marginal analysis which exists in every human action allows the smes to see the broader picture. after seeing the broader picture, they are well informed about their potentialities in an international set-up. through that process the firms also find themselves in a suitable position of listing the existing benefits and impediments. they can make a list of different kpis (key performance indicators) that are important indicators for success. in addition they also can estimate the probabilities of those kpis occurring. sales, profits, growth, market share, risks-the scenario of every business parameters are to be evaluated. afterwards the summative picture of internationalization prospects is in the hands of the firms for decision making. now, the key point here is that the success stories of the smes depends on two factors: a. how comprehensively and flawlessly they evaluate the prospects and b. how effective and efficient their internationalization decision making is after evaluating such a scenario. the gist of the discussion is the current internationalization picture and it’s in ascertaining future internationalization prospects. the success of the smes depends on thoughtful, well-timed, and proper utilization of these variables for gaining success in international set-up, which is always more challenging than gaining success in well-known domestic business territory. internationalization prospects coupled with internationalization competencies-a deadly combination: future internationalization prospects trigger sme internationalization. but as old theories said-potentials are nothing if not explored and utilized in proper ways. for proper utilization of future internationalization it is essential to build competencies among smes. “turning potentials into reality is the keyinternationalization competencies are the important moderating variables in that context.” according to many international business as well as sme experts, competencies among smes cannot be ensured unless both administrators and sme owners act jointly. it is a dual role that can ensure successful enhancement of smes and make them competent to face the music in international business operations. in my model i have developed four key ingredients which are essential competencies for smes which are going to operate internationally. those are developed from the concepts and evaluation of relevant literatures in international business and sme internationalization. those kpis of internationalization competencies are capacity building, policy development and implementation, building cluster or strategic networking, and innovation development. capacity building means making the local smes capable of facing international competition. it also means enabling smes to progress. in this category, i envisage three categories; the exporter, the potential exporters, and the smes who have not identified exporting as an internationalization strategy. these three groups will have different needs and support with regard to capacity building. therefore, the managerial and organizational determinants will differ. utilizing the stages theory to explore the development and the need for capacity 97 journal of small business strategy vol. 26 ● no. 2 ● 2016 building as the sme progresses from a domestic operation to internationalization would be appropriate. the process of capacity building can be enhanced by government assistance. some countries directly empower their domestic firms so that they can go for early internationalization and thus can contribute to the economic development in better ways. clusters development or strategic networking among business firms is widely defined as the process by which those firms came together to form a strategic partnership in various aspects of their business (bari, heema, and haque, 2005). those include setting uniform prices, sharing important machineries, forming joint projects, creating lobbying groups, devising areas of operation, carrying out joint advertising and promotional campaign, sharing important technological and infrastructural tools, and so on (barnett & storey, 2000). such networking is widely accepted and used mostly by firms within the same industry (greenaway, girma, and kneller, 2004). business clustering, sharing, and networking helps firms to establish more competitive advantages and also minimize risks. the sme development policy can be categorized as policies that include stimulatory, supporting, and sustaining activities enacted by a policy maker to accelerate the growth and development of smes. these policies reflect the stages that the smes progress through to achieve internationalization. stimulatory activities involve acts for motivation to start a business (greenaway et al., 2004). supporting includes acts that help the smes in doing their business. finally, sustaining acts include those activities which are directed towards ensuring that smes will be able to survive in the marketplace to achieve maturity and capability for competing with larger firms and other rivals. innovation is the process of altering something from its current composition or introducing something completely new. innovation is normally of two types -radical or incremental (barnett & storey, 2000). it has its widespread application in the areas of products, processes, or services and in any organization. innovation can take place at all levels of organizations or sometimes can be in few areas where it is most important. innovations are hugely important for international firms as competition is intense and customers are demanding and educated. the term innovation is complementary with few concepts like change, creativity, design, and invention, but certainly not the same as those. now, all of these internationalization competencies not only makes smes more competitive in an international market but also increases their chances to survive. the important discussion point here is that the ultimate success of smes in an internationalization process vastly depends on how they build themselves and also how the policy makers or relevant government back them by incorporating proper policies comprising both institutional and infrastructural supports. when a large potential market is served by the smes after gaining suitable competencies success is definitely imminent. otherwise the story can be the opposite, which normally happens to large number of firms across the world. internationalization prospects coupled with internationalization competencies and backed by a viable and proper internationalization strategy-the ultimate success mantra: the last phase of my internationalization success factors model constitutes a proper strategic framework for sme internationalization. strategies are important 98 journal of small business strategy vol. 26 ● no. 2 ● 2016 both for utilizing competencies as well as for extracting prospects and turning potentials into realities in international business. strategies and also proper utilization of them along with perfect timing are the keys for international success. in the model i developed, there are four main broad categories of strategies for sme internationalization. those are modes of internationalization, timing of internationalization, destinations for internationalization and also operational decisions for internationalization. “many businesses have potentialities, many firms possess competencies, but ultimately international success goes to those who have proper strategies for implementation and control” modes of internationalization consist of different ways smes or other types of firms can go international. the common modes of internationalization are direct exports, direct imports, foreign direct investment, subcontracting, and international technical cooperation. modes of internationalization are an important consideration in the internationalization process as only appropriate modes can ensure ultimate success and not all types of modes are appropriate in every case. timing of internationalization means the time when a firm or sme should go international. it can be very early or may be after several years of domestic operation. along with modes, timing is always important as sometimes opportunities are short lived and sometimes early internationalization can be the nemesis of a firm. therefore, wise and calculative decision making for the entry is the key for gaining success in the international arena. destinations for internationalization mean the places or countries where a firm should go for international operations. finding out appropriate destinations are always important as this minimizes risk and ensures profitability and growth. destinations or country evaluation requires intense research and evaluation. there are different techniques for evaluating among different probable destinations. adopting those techniques and coming up with viable conclusion can ensure early success for a firm. operational decisions in internationalization comprises routine and regular decision making that every firm needs to do in areas, such as marketing, finance, operation, management, hrm, information system, accounting, and auditing. these are important matters as the success of firms largely depends on appropriate strategy making and implementing in the operational areas. the cases of smes or other types of firms are no different. in my model my observation is that those strategic decisions are the important final touch for sme internationalization. therefore, it is critically important to incorporate appropriate strategies to carry out the internationalization process. all the four elements of strategies are related with every sphere of international business operation. selecting appropriate modes, timing the internalization perfectly and also making correct operational decisions along with selecting destinations can turn the proper prospects into reality and utilize the competencies perfectly. 99 journal of small business strategy vol. 26 ● no. 2 ● 2016 discussion this model which outlines the critical success factors for the internationalization process of smes has strong practical implications for the operation and international expansion of smes. the utilization of this model is not limited only to theory development, but also in real life practice. as suggested in the model, current internationalization practices and experiences of sme owners will dictate their choices for future internationalization. therefore, in a practical sense it is evident that sme owners or managers should utilize their current experience for making future internationalization decisions. in the process of making such decisions they should clearly evaluate the existing benefits and impediments and thereby this model will help them to assess their position as well as for making internationalization decision. in the next phase of the model, it has suggested four competencies from the literature review for developing proper internationalization competencies. those are cluster, innovation, policy and capacity. all these traits have strong practical implications from the perspective of not only smes, but also for the policy makers. the model has suggested that for proper internationalization smes need to be innovative, need to possess appropriate capacities, need to be backed by governmental policies, and also have to get the membership of important networks or clusters. therefore, in practical sense this model is urging the sme owners to develop networking, innovation, and also capacities for internationalization. in addition it is also prescribing the government and other policy makers to make policies for surging sme internationalization. in the final phase the model has incorporated four internationalization strategies for successful internationalization. those are timing, mode, destination and operational strategies. by doing so, it is practically implying that sme owners must make effective practical decisions about those variables for making a successful entry into the international marketplace. conclusion sme internationalization is one of the most highly discussed and debated issues of modern 100 journal of small business strategy vol. 26 ● no. 2 ● 2016 international business research. evaluation of critical success factors of sme internationalization therefore is an important addition to the exiting literature in this scientific field. this article evaluated the critical factors with the help of literature and also utilized the researcher’s own conceptualization. such conceptualization was utilized in developing a model for elaborating the success factors and also building and presenting the multidimensional relationship among constructs. this article is also contributing for explaining the existing internationalization theories including stage and process based theories. further, it is also contributing to assist researchers in carrying out further research and testing of the model into different internationalization contexts and backgrounds and also in different situations. direction for further research this model represents numerous scopes for further research works utilizing this model as a basis. it also gives opportunities to develop lot of propositions for testing and carrying out research in different places of the world. first of all, several propositions which are developed in the model can be tested in different parts of the world and comparative studies also can take place for detecting the differences as far as critical success factors of the sme internationalization are concerned. for example, research can be done to test whether cluster or networking is important for sme internationalization in a same degree for smes of cambodia and germany. additional propositions such as the importance of four strategic concerns stated in the model can be tested. that means research can be done to assess whether all the four variables are of equal importance and whether such importance varied across the countries. apart from these, the model also presents several others areas for further research works. references acedo, f.j., & jones, m.v. 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(2008). competitive priorities of manufacturing firms for internationalization: an empirical research. measuring business excellence, 12 (3), 44-55. tarun kanti bose is a phd candidate in the international business and entrepreneurship cluster of adam smith business school in the university of glasgow. his research interests are mainly in the areas of international business, entrepreneurship-linked with development. he is also an assistant professor (on study leave) at business administration discipline in khulna university, bangladesh. tarun mostly enjoys teaching economics. apart from that international business, entrepreneurship, strategy is also included in his favourite teaching subjects. 108 journal of small business strategy vol. 26 ● no. 2 ● 2016 table 1: summary of critical success factors of sme internationalization from recent literatures broad success factors author/s variables covered broad success factors author/s variables covered network, alliance, clusters gumede & rasmussen, 2002 linkage, network, joint venture network, alliance, clusters li & qian, 2007 partnership, strategic alliance ghauri et al, 2003 network for export marketing agndal & chetty, 2007 relationship for various aspects zahra et al, 2005 collaboration for funding sinha et al, 2011 network, alliance for manufacturing anderson, 2006 personal network for information huang & xue, 2012 cluster in supply chain management mort & weerawardena, 2006 network for identification eberhard & craig, 2012 inter-organizational network johnsen, 2007 suppliers relationship haskell & pons, 2012 strategic alliance karaev et al, 2007 cluster in industrialized economy varga et al, 2013 innovation cluster for competitiveness capacity building daniel & wilson, 2002 e-commerce adoption capacity building ko¨ksal, 2006 technical and practical trainings man et al, 2002 four capability constructs knowles et al, 2006 language and cultural ideas fillis et al, 2004 e-business and emarketing musteen et al, 2010 geographical diversifications fillis et al, 2004 e-business for overseas operation kennyand, 2011 relationship among human capital gabrielsson et al, 2004 finance management capabilities sinkovics et al, 2013 online channel support for marketing benefits & barriers altintas et al, 2007 existing impediments benefits & barriers hutchinson et al, 2009 internal and external barriers grimes et al, 2007 profiling and benchmarking kontinen & ojala, 2010 psychic distances lages & montgomery, 2004 past performance and history hewapathira na, 2011 social identity of women sme owners ural, 2009 financial, strategic export record al-hyari et al, 2012 barriers to internationalization future prospects cort et al, 2007 motivating factors for managers future prospects mort et al, 2012 scope for innovation and enhancement babakus et al, 2006 prospects, uncertainties, risks rocha et al, 2012 inter-linkage among resource affluent chandra et al, 2009 entrepreneurship opportunity park & rhee, 2012 scope for knowledge competencies miocevic & karanovic, 2011 cognitive complexities timing of international -ization hutchinson et al, 2006 path, pace for internationalization timing of internationalization williams, 2006 ambitious internationalization hermel & khayat, 2011 leveraging internationalization clercq et al, 2012 knowledge-early internationalization d’angelo et al, 2013 geographical pathways for timing freeman et al, 2013 re and deinternationalization 109 strategy editor's note serving as editorof the journal of small business strategy has proven to be more of a challenge than i had ever expected. it has also been more rewarding than i anticipated. at the early stages of development of the journal, questions were raised by many colleagues regarding the necessity for another journal. there was some doubt as to the need or desire for another vehicle for publications in the small business area. however, the response to the journal of small business strategy has been tremendous. we have received far more manuscripts than we ever expected to receive in this short period of time. the acceptance rate has been approximately 15 percent. several papers are in the revision phase and many new manuscripts continue to be submitted. the reviewers have been inundated with manuscripts during the past six months in an effort to get this second issue of the journal published before year end. mere expression of my appreciation to the editorial reviewers seems so inadequate. each reviewer has worked within tight time constraints and with excessive work loads in order to achieve our goals for the journal. in keeping with the objectives of the journal, this issue contains articles covering a broad scope of topics. we have sought to select articles which are practical in nature and which will be beneficial to both the small business consultant and educator. it is our goal to continue publishing a quality journal which will further the knowledge base of our readership. we welcome your suggestions and comments regarding the journal. gwen f. fontenot, ph.d. stra txgy table of contents i putting your business on the maps geographic information systems for small business ronald rubin university of central florida 20 small business drug-testing strategyr implications of pre-employment testing john m. gleason creighton university darold t. barnum university of illinois, chicago 32 avoiding litigations the benefits of employment contracts and arbitration james j. coffey plattsburgh, state university of new york richard a. bemardi roger williams university 43 the business launch decision: an empirical investigation of reasons for ivot starting a new business howard e. van auken iowa state university 56 are small business owners using performance appraisals to their full potentialy an esploratory study anne m. fiedler barry university eddie daghestani barry university 68 employee slock ownership plans: the role of employee perceptions as motivation greg filbeck university of toledo raymond gorman miami university small business briefs: 18 pro-environmentalstrategiesfor small businessese factors affecting consumer trust and responsibility linda i. nowak sonoma state university kelly fucciolo sonoma county water agency brenda s. ponsford sonoma state university s6 go international gradually: advice to small businesses from companies with overseas esperience sheri bridges wake forest university j. kline harrison wake forest university 9$ a lvote on the use of marketing research by small businesses mark c. hall minnesota state university, mankato 99 book review: management consultingr a complete guide to the industry by: sugata biswas and daryl twitchell reviewed by: john quay http://www.smallbusinessinstitute.biz project-based strategic management education: a client perspective on key challenges mariano garrido-lopez1, yue c. hillon2, wendy cagle3, ed wright4 1western carolina university, usa, mglopez@email.wcu.edu 2western carolina university, usa, ycai@email.wcu.edu 3western carolina university, usa, wcagle@email.wcu.edu 4western carolina university, usa, ewwright@email.wcu.edu a b s t r a c t this paper explores the benefits of project-based learning from the small business client perspective. the reflections of a sample of small businesses were collected through a feedback survey after participating in a semester-long project-based learning process developed for the strategic management curriculum in the college of business at western carolina university (wcu). the clients that participated in projects are primarily local and regional businesses in western north carolina; they were sourced through the small business centers (sbc) located at the area community colleges and the small business and technology development center (sbtdc) located at wcu. most participating organizations are existing small businesses or start-ups with a high probability and capacity for growth that will enhance the economic development of the region. literature review of both small business and project-based pedagogy challenges demonstrated the potential for co-creation of value. this study laid out the steps we took to organize a project-based strategic management pedagogy. our analysis of both closeand open-ended client feedback revealed four key success factor themes for developing a mutually beneficial project-based pedagogy: communication and interaction, project organization and student preparation, quality of work, and co-creation of value; the specific priority actions for each theme are detailed in the paper. keywords: journal of small business strategy 2018, vol. 28, no. 02, 68-79 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2018 small business institute® apa citation information: garrido-lopez, m., hillon, y. c., cagle, w., & wright, e. (2018). project-based strategic management education: a client perspective on key challenges. journal of small business strategy, 28(2), 68-79. w w w. j s b s . o rg project-based pedagogy, small business resources, small business challenges, strategic management education project-based pedagogy with industry clients offers students practical learning opportunities linking conceptual knowledge and skills with the reality of business dynamics and complexities. to build a sustainable applied educational model, a meaningful partnership with students, faculty, local business clients, industry liaisons, and the educational institution is a must. several studies have explored ways to develop healthy pedagogical designs for applied-learning and investigated students’ reflection on their applied pedagogical experiences (e.g., kraft & goodell, 1991; thompson, & edwards, 2009; & gaumer, cotleur, & arnon, 2012). in addition, it has become critical for universities to offer students project-based learning opportunities to provide a workforce with practical experience. these opportunities are also meaningful to universities to accomplish their strategic objectives for student engagement and establishing community relationships and development activities. given this, project-based learning appears to be beneficial to the student and educational institution; however, the perspective from the small business client on the benefits derived from their experiences must also be taken into consideration (wolf, 2010). carnegie has a prestigious award that recognizes higher education’s commitment to community engagement in which project-based learning falls. building on driscoll’s (2006) defined importance of community engagement for universities, carnegie community engagement classification defined community engagement as those activities and collaborations between institutions of higher education and their larger communities (local, regional/state, national, global) for the mutually beneficial exchange of knowledge and resources in a context of partnership and reciprocity (carnegie foundation, 2013). it seems we are measuring the benefits from project-based learning introduction http://www.smallbusinessinstitute.biz http://www.jsbs.org 69 m. garrido-lopez, y. c. hillon, w. cagle, & e. wright journal of small business strategy / vol. 28, no. 2 (2018) / 68-79 but not from the client perspective; and given carnegie’s definition of community engagement, we cannot claim to have accomplished engagement without acknowledging first the benefits to all parties involved. to build on this repository of knowledge in developing project-based pedagogy with industry, this study reflects on over four years of collaborative experience with small business clients and analyzes 140 complete client survey responses to understand their experience participating in a project-based learning context as part of the strategic management capstone program at wcu. small business challenges small businesses, defined by small business administration (sba) as companies with less than 500 employees or $7.5 million in average annual receipts, have consistently served as the economic foundations creating jobs, encouraging innovation, and fostering competitiveness to stimulate economic growth. although small businesses are more flexible and adaptive to changes, global competition continues to exert pressure on them (moutray, 2008). technology advancements shifted the economic structure, innovation, governance, and trade and gave new meaning to “global village” and “global competition” (markman, devinney, pedersen, & tihanyi, 2016). thus, more than ever, strategic innovation is the driving force for sustainable competitive advantage (taneja, pryor, & hayek, 2016) demanding the integration of business knowledge and technical knowledge in small business education (penley, 2001). business strategic innovation is closely related to leveraging, securing and organizing resources (achtenhagen, ekberg, & melander, 2017). small business owners need a clear understanding of the competitive environment and organizational resources and capabilities while cultivating an internal strategic focus to improve performance (harris, gibson, & mcdowell, 2014). however, with limited marketing budgets, dated marketing techniques (jelfs & thomson, 2016), staffing, time, resources and expertise, small businesses cannot afford competitive intelligence programs for long-term strategic planning (prescott & miree, 1998). thus, a lack of a strategic plan is one of the current crucial weaknesses of small businesses, especially in family-owned businesses (ward, 1997). small business owners believe philanthropy and community social commitments positively contribute to personal or business sustainability (besser & miller, 2004); hence, they frequently align to social engagements based on enlightened self-interests (matten & crane, 2005; jenkins, 2006; & peake, harris, mcdowell, & davis, 2015). this strategic opportunism with abundant resources and capabilities allows firms to capture opportunities; however, small businesses lack the resources, which results in limited commitment, coordination, trust, and quality communication. as a result, their participation with these alliances cannot be successful or sustainable (mohr & spekman, 1994). table 1 summarizes some of the key challenges of small businesses in no particular order that emerged from the review of the literature. table 1 small business key challenges small business key challenges citations pressure of global competition moutray, 2008 family business dynamics limit innovation chang et al., 2011 difficulties in recruitment and retention mcmillan, 2016 poor knowledge of strategy and competition ward, 1997; harris et al., 2014; & taneja et al., 2016 marketing resource constraints jelfs & thomson, 2016 need to leverage, secure, and organize resources prescott & miree, 1998; & achtenhagen et al., 2017 a key leveraging resource for many small businesses is the regional economic development centers, such as america’s small business development centers (sbdc). sbdc was formed in the 1970s as a partnership among u.s. congress, sba, state government, and universities, providing free counseling and training to small businesses in business planning, marketing, compliance, capital investment and more. the very first partnership of this kind was the rutgers mba team consulting program, recognized as the inspiration behind the small business institute (sbi) program encouraging cooperation between sba and u.s. universities and colleges (cook & belliveau, 2005). in 1984, small business technology development centers (sbtdc) was established as an extension of sbdc to strengthen technical assistance. although a key resource to small businesses, many of these centers also face difficulties attracting and retaining skilled counselors and lack the resources needed from host institutions to appropriately provide extended 70 m. garrido-lopez, y. c. hillon, w. cagle, & e. wright journal of small business strategy / vol. 28, no. 2 (2018) / 68-79 service to the business community (gray & black, 2015). sbdc and sbtdc networks are usually located within a university or have a direct connection to the higher education systems within the state that they are located. this makes these centers the most logical sourcing mechanism for small businesses to identify and engage in project-based learning experiences with universities. the universities’ teaching and learning spaces complement the resources provided by the sbdc and sbtdc. therefore, project-based pedagogy appears to have the potential to contribute to the co-creation of value among participants (i.e. university students, small businesses, small business development centers). this is one of the key premises the paper is attempting to demonstrate. applied-learning in strategic management education beyond the traditional textbook-based approaches, three primary experiential methods have been adopted in strategic management education: case studies, simulations, and project-based learning (jennings, 2002). case study method was introduced by harvard’s school of business administration in 1910 and has since occupied a major role in strategic management education (alexander, o’neill, snyder, & townsend, 1986). although case studies offer students a clear contextual framework for analysis and synthesis, they are limited in representing the realities of an organization and its environment (yin, 1989). gilbert ryle (2009) distinguished applied-learning from abstract theoretical knowledge with two labels: knowing how vs. knowing what and sustainable knowledge intelligence requires the integration of the two. the use of simulations no doubt elevated the complexity of decision-making and allowed students to immediately re-strategize based on direct evaluations of previous decisions; it still only offers students confined and controlled parameters without direct interactions with the environment and the opportunities to manage uncertainty and unknown (solomon, 1993; gilgeous & d’cruz, 1996). project-based learning moves strategic management education from the confinements of a classroom and hypothetical situations to the realities of the world we live in with real problems and challenges (jennings, 2002). improving organizational performance is difficult even when challenges are clearly defined and understood (boje, hillon, & cai, 2007). project-based learning in strategic management exceeds traditional formats in achieving the desired learning outcomes (watts & jackson, 1995). it helps students develop insights into how theories translate to actions, gain a deeper understanding of organizational complexity, encourages critical reflection of assumptions and beliefs shaping practices, improves professional and interpersonal skills (hillon, cai-hillon, & brammer, 2012), and increases self and greater socio-cultural awareness (marsick & o’neil, 1999; weinstein, 1997). project-based learning, is cross-disciplinary and provides students an opportunity to link concepts taught in the classroom with real world applications and challenges (kenworthy-u’ren, 2008; & dekkers, howard, adams, & martin, 2014), reflect and learn in unfamiliar environments, and interact with diverse audiences and situations (ash & clayton, 2009). the learning is only “maximized when it is active, engaged, and collaborative” (ash & clayton, 2009: p. 25). helping students develop higher order of thinking skills such as comprehension, problem solving, and complex forms of mental processing continues to be important but also challenging for educators (glaser, 1984; & nickerson et al., 1985). since the mid-1990s, applied-learning in management education have gained attraction as exemplified by the special issues in the academy of management learning and education in 2005 and the journal of management education in 2007. project-based applied-learning, partnering with small businesses or non-profit organizations, delivers specific domains for problem solving and has shown to acclimate students to the reality and expectations of a post-graduation professional world (kramer-simpson, newmark, & ford, 2015). however, an overwhelming celebratory scholarly narrative of applied-learning resulted in a “love fest” while overlooking the critical knowledge and success factors (schwartzman & henry, 2009). in 2008, kenworthy-u’ren pointed out that a key concern in moving project-based learning forward is designing effective and sustainable university/community partnerships. to reinforce this point, the heart of this partnership is the individuals and their commitment to this co-creation of value (hillon, hillon, & bunch, 2015), a co-creation of value that would benefit all constituents: “the client, the student team, the student, and the instructor” (cook & belliveau, 2005: p.7). thus, this inspired the inquiry of this paper: how to develop a project-based applied-learning pedagogy, that not only benefits student learning but also helps address small business challenges. most of project-based learning introspective research, specifically reflecting on projects with industry in business education, has primarily focused on either the professors’ or students’ self-reported experiences (e.g., kraft & goodell, 1991; thompson, & edwards, 2009; parsons & lepkowska-white, 2009; bove & davies, 2009; gaumer et al., 2012; gray, stein, osborne, & aitken, 2013). therefore, a study from the clients’ viewpoint could add value to the repository of knowledge in developing successful applied pedagogy 71 m. garrido-lopez, y. c. hillon, w. cagle, & e. wright journal of small business strategy / vol. 28, no. 2 (2018) / 68-79 with industry that results in constructive socio-cultural impact (craig, 1999). additional key challenges behind developing project-based learning framework with clients include a time-consuming process in establishing partner relationships with businesses, the tension between meeting client needs and providing a valuable learning experience for students, and students’ tendency for quick-fix solutions instead of developing independent critical thinking (lamond, 1995). table 2 project-based pedagogy key challenges project-based pedagogy key challenges citations balancing client needs and student learning lamond, 1995 selecting appropriate clients lopez & lee, 2005; & hillon et al., 2012 sustaining long-term partnerships lamond, 1995 managing team-client interaction carvolho, 2012; & kramer-simpson, et al., 2015 managing team dynamics kotval, 2003 training students to think critically lamond, 1995 co-creating value runquist et al., 2006; & johnson & johnson, 1975 to overcome some of the key challenges of project-based pedagogy (see table 2) emerged from the review of the literature and create a mutually beneficial learning environment, the professor must monitor, coach, and sometimes provide interventions throughout the project. she or he also has the responsibility to integrate course learning objectives with project deliverables (hillon et al., 2012). this entails two main activities: one, collaborating with the industry liaison starting with exercising care when selecting clients (lopez & lee, 2005; hillon et al., 2012), and two, creating a learning framework that encourages collaborative and co-creation of value (johnson & johnson, 1975; runquist, kerns, fee, choi, & glittenbery, 2006) for students, clients, industry liaison, professors, and other community partners. wcu project-based strategic management pedagogy the strategic management curriculum at western carolina university (wcu) college of business makes an effort to facilitate project-based learning to enhance senior business students’ transferable professional skills prior to graduation. an experience that is only possible because of the collaboration and alignment of the strategic directions among all participants: • university of north carolina system • western carolina university (wcu) • wcu college of business • north carolina small business technology development center (sbtdc) • north carolina small business centers (sbcs) this symbiotic relationship aims to strengthen economic development and community engagement for a stronger state economy through building partnerships, alliances, leveraging resources, and community-based learning. the student engagement process leverages human resources, organizational development tools, and faculty expertise and leadership for the benefit of the community. through a five-step process of project-based pedagogical engagement, developed in partnership by wcu strategic management faculty and sbtdc, professors partner with the sbtdc at wcu and regional sbcs to serve the small businesses and non-profits in western north carolina: 1) determining business challenges and needs; 2) developing specific scope of work for student teams; 3) managing client projects; 4) presenting research and deliverables; and 5) feedback gathering. these steps align with cook & belliveau’s (2005) student team consulting process, with two areas of heightened emphasis in understanding client business challenges and needs (step 1) and feedback gathering at the end of the project collaboration (step 5). step 1: determining business challenges and needs before each semester, sbtdc at wcu and regional sbcs survey clients to assemble a pool of small businesses with specific challenges and needs who are interested in working with students in the strategic management course. these challenges and needs might include market expansion, new product or market development, marketing strategy improvements, and process improvements. these needs are usually large enough to require significant research but are not notably time sensitive; they are also small enough to be accomplished during a semester through student projects. these projects require a significant amount of research 72 m. garrido-lopez, y. c. hillon, w. cagle, & e. wright journal of small business strategy / vol. 28, no. 2 (2018) / 68-79 and have the ability to drive the company forward creating economic development through job creation, increased owner wealth, or capital infusion for growth. potential clients selected must also be fully aware of the time, energy and human resource investments necessary for the project and their active roles in shaping students into professionals. the selection of clients directly impacts the success of project-based learning outcomes for the students, clients, and instructors (lacho, 2009). step 2: developing specific scope of work for student teams sbtdc/sbc counselors and professors next interview the potential clients to determine best projects balancing strategic management course learning objectives and appropriate project deliverables. lacho (2009) indicated that a clear definition of the project scope of work is one of the key project-based learning success factors. the information collected during this meeting consists of the following: 1. information and history of the business 2. challenge or need creating a barrier 3. deliverable expected from the student team engagement 4. willingness of the company to provide pertinent information 5. availability of the company contact during the semester 6. ability of the company to implement recommendations 7. industry fit based on the professor’s background and knowledge once the clients are selected, professors define project scopes and appropriate number of teams allocated for each client. step 3: managing client projects the strategic management curriculum is designed as a practicum giving senior business students, close to graduation, an opportunity to apply core knowledge acquired to address a real business need using a strategic mindset and tools. project teams are formed based on best fit between project scopes and the students’ majors (management, marketing, sports management, accounting, finance, business law, computer information systems, and entrepreneurship), grade point averages, and learning and work styles. over a three-month period, the students gain strategic management knowledge, learn about the company, conduct competitive intelligence research, assess the company’s internal environment (i.e. strengths and weaknesses), work on client specific problems, and complete the project deliverables agreed upon. it is vital that students learn how to make recommendations based on facts obtained through secondary and primary research. this is accomplished through the development of a business situational analysis. some of the specific content includes: client profile, external situation analysis (e.g. environmental scan, industry analysis, market analysis, competitive benchmarking), internal situation analysis (value chain analysis, resource analysis), and summary of the key findings and recommendations from the situational analysis (wright & fowler, 2017). during the project, student-client interaction is a key motivator of students’ enthusiasm towards the project (lacho, 2009). figure 1 briefly describes the project’s investigation process from the initial company research to developing recommendations. the students are responsible for managing all aspects of the process and the client relationship. figure 1. strategic management project investigation process 73 m. garrido-lopez, y. c. hillon, w. cagle, & e. wright journal of small business strategy / vol. 28, no. 2 (2018) / 68-79 step 4: presenting research and deliverables students present and provide detailed reports of project research and actionable priorities to the clients and sbtdc/ sbc counselors at the end of the semester. the presentations generally range eight to ten minutes followed by oneon-one meetings to address specific questions. next, sbtdc/sbc counselors set up a meeting with their clients to assist in analyzing the findings and moving forward with implementing proposed action steps. this collaboration creates a seamless process and long-term business development companionship, where the client company continues to feel supported after the semester. step 5: feedback gathering the final key step in the project is gathering feedback from students, client companies, and industry liaisons at the end of each semester so the professors can reflect on continuous improvement needs. to do so, students complete a 360-peer review (hazucha, hezlett, & schneider, 1993) of member contributions and a written project reflection report, professors follow up with industry liaisons to assess impact, and client companies fill out an evaluation of team performance and overall experience. as noted by ash and clayton (2009), this critical reflection process helps students deepen sustained learning and educators overcome one of the biggest challenges of project-based learning, which is facilitating and assessing learning beyond the superficial interpretations of complex issues. the exploratory study described in the following sections helped us understand how small business partners perceive the value of a project-based strategic management program and what are some key success factors to developing a meaningful project-based pedagogy while addressing small business challenges and needs. research strategy and methods the research strategy for this study is to explore client experience participating in a project-based strategic management program. a sample of 140 client company project evaluations, collected over a four-year period, was analyzed. these participating organizations were at different stages of maturity from ideation to well-established. client companies offered feedback at the end of the semester using a nine-question survey (see table 3). the analytic interests of this study include the investigation of client experience correlations, key success indicators, and clients’ overall satisfaction. these living experiences offered insight into whether project-based pedagogy helps address small business challenges and needs (creswell, 1994). the study used a single approach design using a survey. the analysis of quantitative and qualitative feedback offered multiple viewpoints and served multiple analytic research interests (morgan, 1996; neuman, 2006; johnson, onwuegbuzie, & turner, 2007; tashakkori & teddlie, 2010; andres, 2012). researchers tell stories about the data (lyotard, 1979/1984) and even statistical work in social sciences use narrative and rhetoric to explain discoveries (gephart, 1988). this survey strategically included both closed and open-ended questions to better understand the relationship among experiences impacting client’s perceived value and provide a space for client companies to voice opinions and highlight new issues not captured in the closed-ended questions (e.g. geer, 1991; & krosnick, 1999). if open-ended questions provide value-added insight (geer, 1991; roberts, stewart, tingley, lucas, leder-luis, gadarian, albertson, & rand, 2014), the responses would afford researchers an additional perspective and reliability into the respondents’ thinking (roberts et al., 2014, krosnick, 1999). project-based strategic management education: client experience analyzed data analysis: closed-ended survey questions table 3 presents the questions included in the survey distributed to clients at the completion of the project-based learning engagement. table 3 sbtdc client project evaluation questions client survey – questions q1 did you find the team’s communication and behavior to be polite and professional? q2 how many times were you in contact with your student team over the course of this project? q3 was the content of the team’s report meaningful and of adequate depth? q4 was the content of the team’s final presentation meaningful and of adequate depth? q5 do you foresee making changes to your business based upon the recommendations by the team? q6 how likely are you to recommend a student project to another company or organization? q7 overall, how satisfied were you with the student project you participated in this semester? q8 how would you rate your satisfaction with the student team logistics this semester? (this includes communication with your lead counselor and other sbtdc counselors about the project and scheduling the initial meeting and team presentation, if applicable). q9 please add any additional comments you would like to share. 74 m. garrido-lopez, y. c. hillon, w. cagle, & e. wright journal of small business strategy / vol. 28, no. 2 (2018) / 68-79 with the research study strategy in mind, a factorial anova was performed to measure the effect of q1, q2, q3, q4, q6, q7, and q8 have on q5. q5 client’s willingness to make changes based on student recommendations was selected as the dependent variable because it best measures project-based pedagogy’s potential impact on addressing small business challenges and needs. results shown in figure 2 indicated: • a significant main effect for the client’s perceived quality of presentation (q4), f(3, 116) = 3.290, p=0.023. • a significant main effect for the client’s likelihood to recommend the program to another organization (q6), f(2,116) = 5.005, p=0.08. • a significant main effect for the sbtdc/sbc counselors’ interaction (q8), f(3,116) = 5.104, p=0.02. further, strong positive correlations were found between client’s overall project satisfaction (q7) and the following factors: • client’s likelihood to make changes based on student recommendations (q5) (r=0.427, n=140, p<0.001) figure 2. factorial anova results • client’s perceived quality of report (q3) (r=0.717, n=140, p<0.001) • client’s perceived quality of presentation (q4) (r=0.620, n=140, p<0.001) data analysis: open-ended survey questions open-ended responses are considered to be more difficult to analyze than closed questions (schuman & presser, 1996; roberts et al., 2014). however, the analysis of the responses allows researchers to identify patterns that may provide the basis to support certain conclusions. the techniques traditionally developed to analyze qualitative data are commonly used to analyze responses to open-ended survey questions (strauss & corbin, 1998). one of these techniques is content analysis, which includes coding. in this study, the following process was used to analyze open-ended responses (see figure 3). through this iterative reading, coding, and re-coding analysis process, key themes emerged that helped our understanding of clients’ perspectives of their project experience. the discovery of these themes is supported by direct quotes from the clients to minimize researcher narrative bias inhabited when telling someone else’s story (boje, 2001). first, clients appreciated students’ courteous and professional communication skills as well as the centralization of communication on one team member to reduce duplication and miscommunication. second, clients appreciated students’ breadth, depth, and thoroughness of research showcased in the presentations and reports. third, clients satisfied with the overall experience, indicated that the teams’ assessment and recommendations validated their current strategies, plan to make or consider several changes to their businesses based on the recommendations from the student teams, and would be excited to participate again and recommend the program to other suitable organizations. fourth, clients highlighted that the program is a valuable asset for the small businesses, especially for those with limited resources and business experience in certain areas such as social media marketing. fifth, clients recognized or hinted that there must be a clear definition of project objectives and a match between project deliverables expectations and course learning outcomes to build a successful partnership. while clients appreciated students’ engagement, some also pointed out opportunities for improvements, which included: more frequent and better quality communication and interaction and better site visit / meeting scheduling and punctuality; additional research and/or more elaboration on certain aspects of the project in the reports and during presentations; enhanced data-driven and originality of rec75 m. garrido-lopez, y. c. hillon, w. cagle, & e. wright journal of small business strategy / vol. 28, no. 2 (2018) / 68-79 ommendations; allocating more time for final presentations and client interaction with student teams; enhancing student training on business etiquette and professionalism; and more engagement from sbtdc/sbc counselors during the project. feedback also showed that many clients appreciated their partaking in the co-creation of value for a win-win experience for businesses and students. the clients recognized their role as mentors in shaping students as future professionals and were able to observe their growth throughout the project. how could we strengthen project-based pedagogy to address small business challenges? integrating our quantitative and qualitative analyses of client project feedback with figure 3. content analysis process of open-ended responses existing scholarly contributions on small business challenges and project-based pedagogy challenges, we compiled a list of key success factors to answer this question (see table 4). discussion and future research existing research on project-based pedagogy has largely emphasized its impact on student learning (e.g. kraft & goodell, 1991; thompson & edwards, 2009; gaumer et al., 2012; & gray et al., 2013) and program competitive advantages (rundle-thiele, bennett, & dann, 2005), and little on the impact on industry collaborators. wolf (2010) urged researchers to “pay more attention to the ‘client’ perspective in industry-integrated learning opportunities”. in fact, wolf table 4 key factors for a project-based pedagogy to address small business challenges key success factor themes theme priorities communication and interaction timely and centralized communication frequent interaction courteous, punctual, and professional quality of work thorough research with breadth and depth of content data-driven recommendations originality of ideas project organization and student preparation adequate time for presentation and follow-up learn client company story and business engagement from counselors co-creation of value clear match between project deliverables and learning outcomes client has a role in student professional development client desires new perspectives alignment of strategic priorities among all participants 76 m. garrido-lopez, y. c. hillon, w. cagle, & e. wright journal of small business strategy / vol. 28, no. 2 (2018) / 68-79 (2010) identified six types of distinctive clients through a study of 12 client-centered learning experiences over three and half years: “the social justice advocate, the lifelong learner, the indebted graduate, the self-promoter (it’s all about me!), the no budget client, the doing a favor client, and emergence of the community partner” (p.120). the analysis of a sample of 140 client company project evaluations revealed four key success factor themes for developing a mutually-beneficial project-based pedagogy that addresses small business challenges: communication and interaction, quality of work, project organization and student preparation, and co-creation of value. these key success factor themes support the thesis that project-based strategic management education directly addresses some of the small business challenges identified in the literature (ward, 1997; prescott & miree, 1998; harris et al., 2014; jelfs & thomson, 2016; taneja et al., 2016; achtenhagen et al., 2017). this study therefore deepens the understanding of the typologies of clients in client-centered projects by identifying clients’ perceived value of project-based learning engagements and their impact on addressing business challenges. clients perceived a heightened collaborative value when working with an engaged team whose members exercised professionalism and effective communication; when the project was well organized and students were well-prepared; when recommendations were well-supported, original, actionable, and relevant; and when the project process encouraged a co-creation of value for all participants involved, including alleviating the limited workforce challenges of sbdcs (gray & black, 2015). these key success factors might seem straight forward, but designing a project-based pedagogy that incorporates them requires the effective management of complex networks of collaborators. three future directions for research emerged from this study. first, utilize the key success factors in client selection (lopez & lee, 2005; hillon et al., 2012) and determine if they are effective predictors of successful outcomes. for instance, some clients were more interested in solution implementation than the necessary research to produce those deliverables. second, study the role of industry liaison in project-based pedagogy in order to determine skills and characteristics for facilitating meaningful partnerships (hillon et al., 2012; & gray & black, 2015). finally, explore whether clients implemented students’ recommendations to understand the authentic impact of project-based learning on client business success. references achtenhagen, l., ekberg, s., & melander, a. 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(1989). case study research, design and method. beverly hills, ca: sage publications. appendix a sbtdc client project evaluation form strategy how forbes 200 companies create and use mission statements h. lon addams weber state university william h. baker brigham young university brian davis weber state university abstract small publicly-held firms included on the forbes 200 list were surveyed to determine their usage of mission statements. survey results reveal ihai most of these firms have developed mission statements, which usually include main company purposes, key business objectives, companyidentity, and other guiding principles. most of the mission statements resultpom a group effort, although less than half of the firms formally seek employee input in the development process. ceos are generally pleased with the results yielded by their mission statements giving highest marks for providing direction to managers and helping employees focus. the lowest mark is given to improving employee morale, suggesting that more work is needed to help mission statements foster a sense of mission. effective mission statements include four major steps: (a) development (b) distribution (c) i ntegration and (d) evaluation. this article provides guidelines for each of these steps. introduction in today's business environment, companies of all sizes are facing diaicult challenges quite unknown to organizations in previous decades. ireland and mitt (1992) list six leading challenges of this decade: (a) complex and ambiguous decision conditions; (b) increasing levels of environmental turbulence; (c) increasing global market competition; (d) increasing numbers of hostile takeovers;(e) increasing sophisticationof manufacturing technologies; and (f) the need to constantly introduce high-quality, innovative products and services. to combat these challenges, some firms are cutting budgets, laying off employees, automating processes for greater eaiciency, and looking for new management techniques. other organizations take a more introspective, long-range approach to survival: conducting a careful self-examination and developing a mission statement for use with employees and outside constituencies. proponents of mission statements appreciate a 8'all street journal 59 ("'visioning'issions," 1994) article, indicating that more than 50 percent of big companies have mission statements. what about small companies? are they taking similar action as large companies in order to compete effectively? to determine the mission statement activity of privately held small firms in the u.s., addams, baker, and davis (1994) surveyed inc. 500 firms and found that, as with large firms, the majority of these small companies also use mission statements. but is there agreement on what should be included in mission statements,and is there evidence that mission statements are effective? or is mission-statement development just a management exercise with limited impact? the earlier study by addams, baker, and davis focused on small privately held firms, but the purpose of the current study of forbes 200 firms was to determine whether small puhiiciy held companies also use mission statements and whether the development and implementation of these statements are producing the desired results for organizations. small, growing companies comprise the majority of businesses. therefore, a study of these companies holds potential for information useful across a wide spectrum of today's business. ceos of forbes 200 surveyed each year forbes magazine selects the 200 most successful publicly held companies as their "forbes 200." in choosing these well-managed small companies, forbes uses the following factors (number of employees is not considered in the selection criteria): i. sales (latest 12 months) —must be between $5 million and $350 million 2. profits (latest 12 months) 3. return on equity (5 year average) —must be at least 10 percent 4. return on equity (latest 12 months) 5. 5-year eps growth rate 6. market value 7. year-to-date price change 8. earning per share (latest 12 months) 9. estimated earnings per share for the current year 10. price/earnings ratio (latest 12 months) i i. debt/equity ratio to enlarge the population for the study, we combined the forbes 200 for two years. eighty-three organizations were named in both lists, yielding a population of 317. from three survey mailings, sent approx i mately two weeks apart, 122 (38.4 percent) surveys were obtained (95 from the first mailing, 16 from the second, and 11 from the third). because five ceos submitted only partially completed questionnaires, 117 of the questionnaires (36.9 percent) were used. the responses taken from these questionnaires are shown in tables 1-6. the questionnaire used for this study was an identical survey instrument used by the authors to survey ceos of?nc. magazine's fastestgrowing small privately held companies in 60 the u.s. the questionnairecontained mostly multiple-choice questions, with opportunity i'o r open ended comments (the results of the inc. 500 study are included in tables 1-6 for reader interest. of the 184 responding jnc. ceos, 124 reported having mission statements.) specifically, the current study sought to investigate how small public organizations use mission statements. answers to seven important questions were sought from the ceos: i. what percentage ofthe forbes small companies prepare mission statements? 2. who participates in the process? 3. how much time is devoted to preparing the mission statement? 4. what is the content of the mission statement? 5. how do mission statements relate to the companies'trategic plans? 6. how are mission statements distributed? 7. how successful are mission statements in organizations that use them? in general business literature, questions like these are discussed in dozens of "how to" and "opinion" articles. for example, famham (1993) stresses the importance having employees internalize a iirm's values. campbell and yeung (1991) indicate that having a published mission statement does not automatically guarantee that employees will have a sense of mission. they emphasize that sense of mission is an emotional and personal feeling, not just an intellectual understanding. seid (1994) emphasizes the importance of having the mission statement as part of the business plan. calfee (1993) states that organizations take diiterent approaches to mission-statementcontent, noting that some statements describe at length what success will look like, how it will be measured, and how competitive advantages will be created and maintained. others distill their mission statement to a few words. still others incorporate a "vision" statement as an integral part of the mission. concerning the difference between mission and vision statements, cummings and davies (1994)state that a vision is more goal oriented, whereas a mission is more behavior oriented. vision refers to what a firm is trying to become. mission refers to key goals, strategies, and objectives. cummings and davies emphasize that vision and mission are both vital and should be fused. still other authors indicate the importance of a values statement within a mission statement. kate (1995) explains that a values statement reveals what the company stands for and the principles it believes in, and these principles help guide decision making. piercy and morgan (1994) observe that many claims are made about mission statement benefits but that vagueness exists concerning methodologies for creating etfective mission statements. they recommend a three-step approach: ( i ) structure the content according to internal, external, broad, and narrow dimensions; (2) acknowledge that different types of mission statements serve different interests and purposes; and (3) analyze and evaluate the information from steps i and 2 for internal consistency and external application. in spite of numerous opinion publications on mission statements, very little empirical evidence has been written concerning mission statement procedures or impact. klemm, sanderson and luffman (1991)found in a study of 59 u k. companies that mission statements are used more for internal purposes than for external purposes. the companies participating 61 in the study reported that their mission statements were distributed much more widely to their employees than to their outside audiences. rarick and vitton (1995)studied a random sample of companies listed in the business week /000 and found a positive correlation between having a mission statement and shareholder equity. for firms with a mission statement, the shareholder equity was 16.1 percent; for firms without a mission statement, the figure was only 9.7 percent. rarick and vitton's study also revealed differences in the content of organizations'ission statements, but they stated that the common elements are (a) concern for public image, (b) concern for quality, (c) commitment to survival, growth, and profitability, and (d) differentiation from competition. in contrast to the rarick and vitton study, a 463-company survey by bain & company study found no correlation between usage of a mission statement and financial performance. in fact, firms that reported using mission statements(94 percent of those responding) achieved below-average financial results. (graves, 1994) obviously, these studies suggest that many factors contribute to the success or failure of a business; a mission statement is just one of those elements. the usefulness of mission statements can be assessed in a variety of ways. to some companies, a successful mission statement might be viewed purely in profit terms. other firms may take a slightly different view and assess the value of their mission statement in terms of unifying their work force, rather than just producing better financial results. for the current study, the degree of success was assessed in terms of the ceo's perception, rather than by financial analysis. f1n di ngs-forbes 200 the findings of this study shed additional light on the widespread practice of mission statements: of the 117 responding ceos, 103 (88 percent) reported having a mission statement. this gives a strong indication that mission statements are perceived to be an important business practice. the following sections give detailed information about the development and implementation of mission statements in the target population. partici ants in the 13evelo ment process table i reveals how the firms with mission statements actually prepared these documents. in 19.6percent of the cases, only one individual prepared the mission statement. but 43 percent of the firms used management teams with input from employees —23.5 percent of the statements were prepared by management teams, an additional 10.8 percent involved consultants with management teams. in 57 percent of the cases, no employee input was sought. 62 table 1 individuals who pre ared the mission statement percent: percent: preparing team or individual forbes* inc. 500 top management wrote it with input from employees 43.1 32 top management wrote it without input from employees 23.5 32 president wrote it alone 15.7 23 outside consultant prepared it, with input from president, 10.8 6 top management, and employees one of top management (not president) wrote it alone 3.9 3 outside consultant prepared it with input from president 0 4 but no one else other 2.9 0 total 99.9 99.7 *n=102 time re uired to pre are mission tatements the next question focused on developing and updating the mission statements. the data in table 2 showthat halfof the mission statementswere written in a period of one month or less (30.7 percent plus 19.8 percent). over 85 percent were completed in a period of less than six months. fre uenc of mission statement u date alter the initial writing of a mission statement, many companies reassess their statement to make sure it continues to capture company direction and values. as table 3 reveals, this is an annual activity for nearly two-thirds of the re porting forbes 200 companies. on the other end of the scale, 5 percent said they "never update." of the "other" comments, five indicated that their statement is always under review; six mentioned a revision cycle of two or more years. 63 table 2 duration of time used for ission statement develo ment percent: percent: time period for development forbes* inc. 500 one week or less 30.7 26 more than one week but less than one month 19.8 23 more than one month but less than two months 11.9 ll more than two months but less than six months 23.8 14 more than six months but less than 12 months 5 15 more than 12 months but less than two years 3 6 other 5.9 6 total 100.1 99.7 *n=l 01 table 3 fre uenc of mission statement u date percent: percent: frequency forbes* inc. 500 as needed 9 13 monthly 0 0.8 quarterly 2 4.1 semi-annually 6 6.6 annually 61 54 never update 5 15 other 17 5.8 total 100 100 *n=l00 64 content of mission statements the most frequent content in the forbes 200 firms'ission statements is the "main purpose of the company"; 89.2 percent said their statements include this information(see table 4). fkey business objectives" was the second-most-frequent item in the mission statements, with nearly three-fourtls (72.5 percent) of the respondents including this item. although the percentage is high for these first two items, it seems surprising that not all of the companies would include this information. table 4 content of mission statements percent: percent: content forbes* inc. 500 main purpose of the company 89.2 88.7 key business objectives 72.5 53.2 company's identity (striving to become) 66.7 60.4 values held by the company 57.8 70.1 concern about employees 55.9 45.9 guiding principles 53.9 46.7 concern about being profitable 53.9 35.4 concern about the community served 18.6 25 geographic area served 18.6 12 concern about the environment 11.8 12 other 0 1 0.4 *n=102 two-thirds of the firms include "the company identity" (what the firm is striving to become). other content elements identified by the responding companies include "values held by the company" (57.8 percent); "concern about employees" (55.9 percent); "guiding principles" (53.9 percent); and "concern about being profitable" (53.9 percent). the three elements included in fewer than 20 percent of the mission statements are "concern about the 65 community served" (18.6 percent); "geographic area served" (18.6 percent); and "concern about the environment" (11.8percent). relationshi of mission statements to strate ic plans the ceos were asked how closely their mission statement is tied to their strategic plan. the respondentsansweredon a scale of 0 ("not tied in") to 6 ("closely tied"). the mean was 4.88, suggesting that most mission statements work hand in hand with the company's strategic plan. only 12 respondents answered this question with a rating lower than 4. prior research indicates that once the mission statement is developed, the strategic plan is a natural outgrowth of the mission statement. dissemination of mission tatements given the critical nature of a mission statement, it seems that this statement would be strategicallydisplayed in many places throughout the organization. survey respondents with mission statements were asked where they displayed their mission statements (see table 5). the most frequent place of publishing the mission statement is in the company's business plan, with 70.9 percent of the respondents reporting this practice. nearly two-thirds of the firms communicate the essence of the company to their employees in employee handbooks(63.1 percent). other frequent avenues for communicating mission statements to employees include new employee orientation(62.1 percent) and policy and procedure manuals (43.7 percent). in the "other" category, 11 ceos indicated that they include their mission statement in their annual report. in retrospect, this option should have been included in the original questionnaire. had it been included, this number might have been even higher. additional "other" dissemination methods included "on the back of our business cards" and "in all company slide presentations."based on these findings, it appears that most forbes 200 firms with mission statements make a significant effort to communicate the statement to their employees. e ceived uccess of ission tatements the most important aspect of a mission statement is the degree to which it achieves its intended objectives. the forbes 200 ceos were asked to indicate how well they feel their mission statements have yielded the hoped-for results. as table 6 suggests, ceos feel their mission statements have been at least moderately successful. on the 0-6 scale, with 3 being the middle rating, the averages of all the responses were above 3. 66 table 5 methods of mission statement dissemination percent: percent: location forbes* lnc. 500 in company's business plan 70.9 75.8 in employee handbook 63.1 63.7 in orientation program for new employees 62.1 51.6 in policy and procedure manuals 43.7 45.1 in proposals to potential clients 24.3 39.5 on your company's walls in your lobby of your 39.8 29.8 headquarters oaice on your company's walls in the lobbies of your 31.1 19.3 branches in video presentations to all employees 19.4 11.2 on wallet-sized cards for employees 15.5 6.4 on company marketing materials 0 4.8 on wallet-sized cards for other groups 2.9 1.6 other 0 8 *n=l03 a chi-square statistical analysis was performed on the data in an attempt to determine statistically significant correlations between perceived success of mission statements and other factors. however, the high percentage of ceos who felt that their mission statements were successful lett a very small number of ceos who felt their mission statements had been unsuccessful. therefore, the numbers of occurrences in the "unsuccessful" cells were so small that a valid statistical analysis was impossible and the findings are reported only as frequency statistics. (in spite of the small cell numbers, we were intrigued by a high correlation between the inclusion of "values held by the company" and the success factors of "helping employees focus more on... their jobs" and "improving overall employee morale." future research should investigate these correlations in larger populations.) the highest rated item was "providing direction to managers," with an average rating of 4.58. "helping employees focus" also received a rating above 4. interestingly, "improving 67 overall employee morale" came in last place. apparently, the ceos feel that their mission statements are more effective in communicating the goals of the organization to the employees than in actually increasing employee motivation. this finding adds validity to the concern of some authors who have expressed concern about the gap between creating a mission statement and fostering a sense of mission in the employees. further, because "achieving higher profitability" came in fourth place, most ceos seem to feel that mission statements produce more nonfinancial than financial benefits. table 6 perceived success of mission statement average average ratmg: rating: area of perceived success forbes* lnc. 500 providing direction to managers 4.58 4.32 helping employees focus morc on the importance of their 4.07 3.83 jobs in relation to the firm's overall mission helping external entities (other than customers) 3.9 3.66 understand the firm's mission achieving higher profitability 3.86 3.5i helping customers better understand firm's goals & 3.82 3.53 values improving overall employee morale 3.64 3.88 *n=88-99 discussion the foregoing information provides a basis for a number ofhelpful points: i. nearly 90 percent of the forbes 200 firms have mission statements. this data gives evidence that small publicly held firms are actively involved in using mission statements based on the experience of these highly successful firms, should the nonusers be encouraged to develop mission statements for their firms? the response of the ceos using mission statements is "yes," although not necessarily for financial reasons. of the six measures of success evaluated by the chiefexecutives,"achieving higherprofitability" came in fourth place. rated higher were factors related to "providing management direction," "achieving better 68 employee focus," and "helping external audiences better understand the company's goals and values." these findings suggest that many benefits grow out of developing mission statements 2. twelve percent of ceos reported not using mission statements. additional research is needed to identify why some firms do not use mission statements and to study the rationale behind their decision. 3. mission statements are largely a collaborative ettort, with over 80 percent of the ceos involving others in developing their mission statements. nearly half of the firms involve employees and top-managementteams; approximately one-fourth include a top-management team without input from employees. few outside consultants are involved in mission statement preparation in these firms. because ceos gave the employee-motivationvalue of mission statements a relatively low rating, it would seem advisable to solicit employee input, thus helping to engender a "sense of mission" throughout the organization, not just among top managers. these findings appear to correlate with the perceived major benefit of mission statements: "providing direction to managers." significant benefits can accrue to a company as a result of the process itself that is used in creating the document. for example, a manufacturing firm might place employee safety as an element in its mission statement. translating this element into specilic safety goals each year will encourage managers to direct more of their overall efforts toward employee safety. 4. most of the firms follow a pattern of updating their mission statements annually and of closely linking the strategic plans with the mission statements. this pattern of examiningand adjusting the mission statement at least annually serves as a regular reminder of the company mission, objectives, and values. also, the need for consistency between mission statementsand strategic planning is self evident. without regular, frequent discussion of a firm's mission and strategic plans, management may note only marginal impact of the mission statement on the company, employees, and operations. firms that do not revisit and discuss their mission statements periodically should do so. external opportunities and challenges constantly change, as do internal strengths and weaknesses. although most managers might agree that mission statements should represent a solid and relatively unchanging foundation, the dynamic nature of today's business environment argues for periodic re-evaluation and updating. 5. the majority of the forbes 200 firms with mission statements include seven elements in their statements: (a) company purpose, (b) key objectives, (c) company identity, (d) company values, (e) concern about employees,(f) guiding management principles, and (g) concern about profitability. 6. the majority of forbes 200 firms use three major methods to disseminate the content of mission statements: the company's business plan, the employee handbook, and employee-orientation programs. also frequently used are policy and procedure manuals, 69 framed statements on company walls, proposals to clients, video presentations, wallet and business cards, and annual reports. as an overall conclusion, mission statements are important documents in most of the forbes 200 firms; and the ceos who have mission statements seem generally pleased with the results. although research data does not show direct correlation between mission statements and company profitability, the linkage is perhaps more indirect, with other benefits being realized from both the development and the subsequent use of mission statements. implementing a successful mission statement based on the mission statement literature and the responses of ceos involved in this study, several elements emerge as being important in developing effective mission statements. eft' ~dl f h 2. carefully planned distribution of the finalized statement 3. initial and continual ~inte ration of the mission statement within the entire organization 4. planned periodic review and evaluation of the mission statement to ensure that it remains current and useful to the organization. throughout these stages of development, distribution, integration, and evaluation, top management must provide unequivocal support for these processes. without unwavering enthusiasm, the mission statement will not achieve the intended success and will be considered "a waste of time" by the naysayers in an organization. ddid two major concerns must be addressed in developing a mission statement: (a) the content of the statement, and (b) the process involved in developing the statement. mi si n tatement content. given the mission statement elements identified in this study, the content of a typical forbes 200 mission statement would include the following: l: give an umbrellastatement(approximately 25 words) that immediately states the purpose of the organization. "xyz company is in the business to...." 2: state the values or guiding principles upon which the umbrella statement is based. "the principles (or values) that guide our company are: we value... (answer who?) we value... (answer what?)" for example, consider the mission statement of franklin quest, a major time-management firm: 70 "franklin quest is in the business to help people gain control over their lives and increase their productivity. governing values: we make a positive difference in people's lives. we search for, live by, and teach correct principles. we produce quality. we serve the customer. we wisely manage corporate resources. we value our employees. we welcome innovation and adapt to change. we practice teamwork. we value our shareholders." franklin quest begins with an umbrella statement (18 words), stating their overall corporate purpose or "reason for being." next, their values clearly state what is important to them, including whom they value (customers, employees, shareholders) and what they value (the quality of product, correct principles, corporate resources, innovation). firms in the early development or contemplation of mission statements could use these helpful ingredients as a starting point to develop their unique mission statement. ission tatement develo ment process. from this study, we noted that most companies developed their mission statement in a month's time and generally used some combination of top management and employees to build the statement. we suggest the following approach: 1. the ceo meets with the human resource managerto devise a step-by-step process. 2. the hr manager sends a survey with a few key questions to all employees. possible questions include the following: what is our company's main purpose, our reason for being? what do we do best? what makes us unique? who are our prime customers? what are our strengths? what are our weaknesses? what do we value as a company? what principles should guide us into the future? what geographic area do we serve? what other concerns should be in our mission statement? the hr manager summarizes good ideas to take to the senior-management retreat. 3. the hr manager sends the survey to each member of the top management team, emphasizing the importance of completing the survey alone —no collaboration. each 71 member is asked to complete the questionnaire and bring it to the senior-managermnt retreat in one week. 4. the designated facilitator (assume the hr manager) leads a meeting olt-site with senior management. the ceo introduces the reasons for developing a mission statement. the facilitator projects on a transparency or flip-chart the best employee ideas and then conducts a session to capture the best ideas from senior managers'uestionnaires. the facilitator discusses wording for both the umbrella statement and the guiding principles. verbs are used to describe the action the company takes (e.g., "provide," "serve," "build," "satisfy"). nouns are used to identify constituents in the statements(e.g., "partnerships,""associates," "vendors," "stockholders," "investors," "customers," "community," "public" ). a consensus can probably be reached in two hours of free-flow discussion, ifhandled well. during a lunch break, the facilitator can synthesize all ideas and bring back to the group the final alternatives. to achieve general closure, the group can vote silently and anonymously on paper, after which the facilitator can quickly summarize the results and lead discussions on any needed refinements. typically, this process can be completed in an hour or less, depending on the group's teamwork. 5. the hr manager meets with the ceo, gains approval for the rough drafl mission statement,and sends the rough draft to all employees for input, giving everyone two or three days to return their comments. 6. the hr manager synthesizes the suggestions and takes them to a meeting of department representatives this employee group considers the rough-drafl mission statement, along with the suggestions, and then gives their input to the hr manager for fine-tuning the mission statement. 7. the ceo and members of senior management give final approval prior to distribution. lastly, a wise ceo will also ask for input from key stakeholders regarding the content of the mission statement. contacting board members, vendors, and investors may provide different points of view that can be valuable in wording the document. at the very least, this additional time will help to solidify support from various constituents. distribution as shown in this study's findings, several approaches are taken by the ceos to promote the mission statement, including the following: a. in the employee handbook and orientation program b. in promotional material 72 c. in the business plans and annual reports d. in the policy and procedure manual e. on walls in foyers and break rooms, and on walls throughout corporate headquarters and branches f. on business cards and wallet-size cards for employees to carry g. on individual performance-appraisal forms to be etfective, the final mission statement should be posted in conspicuous places throughout the company, distributed to all employees throughout the organization, and published in company documents as noted above. in this way, employees, suppliers, stockholders, customers, and other important stakeholders receive constant reinforcement of the mission. every company seems to have its own ideas for communicating its statement of purpose. for example, jay carlson, president of vinca, a fault-tolerance sottware firm based in orem, utah, utilizes the vinca statement in public-relations literature, press releases, and most important, in daily operations. carlson indicates that this team-managed firm meets frequently to discuss the content and context of their statement, which reads: "vinca is in the business of providing fault-tolerantcomputing solutions for networks and network mangers." with constantlyincreasingsales ofhis three-year-old company, carlson emphasizes that part of this success lies in the principle that each employee must not only know the company's reason for being but also understand how he or she impacts the customer. ti unless senior management provides integration sessions pertaining to the mission statement, employees will not receive the greatest benefit from the hours expended in the development stage. for example, if a major point in a company's mission statement is "the customer' satisfaction is most critical to our company's success," some employees may go too far with this concept and 'give away the store." but with proper orientation, employees will understand the spirit of the law and not just the letter. suppose that a customer of the company demanded a new product for a slightly damaged product (which may clearly be the customer' fault). being tactful with this customer, the employee could get the product fixed to the customer's satisfaction in a day or two, saving the vendor money while maintaining customer satisfaction. accordingly, we suggest that once the mission statement is finalized, senior management should hold an initial integration session with all employees to establish the parameters and interpretation of the key points of the mission statement. follow-up staff meetings periodically to reinforce guidelines and interpretation would keep employees in tune with the spirit of the mission statement. 73 employees want to know how their performance ties into the overall company objectives. if each employee realizes that his or her actions are important to the overall company performance, employee contributions can be sustained at a higher level. consistent with the overall company mission statement, departments, teams, and other organizational units in a company should draft their own mission statement. the resulting linkage of smaller units'ission statements to the company mission can be a powerful device in moving a company forward. concerning the creation of smaller units'ission statements, katzenbach and smith (1993, p. 49) state: the oflen-asserted assumption that a team cannot 'own'ts purpose unless management keeps completely away from the team actually confuses more potential teams than it helps. in fact, it is the exceptional case... when a team actually creates a purpose entirely on its own. most teams shape their purposes in response to a demand or opportunity put in their path, usually by management. a company's general mission statement provides the broad guidelines and principles, and smaller units'issions focus on their part of the broad mission. further, the company mission statement is more what oriented; individual organizational units address the ~hw. evaluation results of this study indicate that many ceos endorse a periodic, meaningful review of their mission statement to ensure its viability. as indicated in this study, the majority of the forbes 200 update their mission statement annually or sooner. thus, top management needs to estab lish at the outset the frequency of the mission statement review process and stick to the planned evaluation time frame. without the constant support —both in overall strategy and in daily operations —of the mission statement's usefulness, the positive impact of the document is likely to be minimal. conclusion without clear-cut mission statements, organizations may be tempted to involve themselves in a variety of activities, many of which may be unrelated to and inconsistent with what they do well. with the value-added insight gleaned from this research study, firms can use the format described above to make the mission statement "live" with their employees and other constituents by focusing on the business they know best. former chairman of the board and novell president ray noorda invests in start-up companies a significant part ofhis portfolio. one of these small companies, a high tech firm, was struggling to get its product tested and into production. investor funding was nearly depleted and the top management was in conflict as to company direction. noorda changed the management team and asked jim morgan to step in as interim president. 74 in their first meeting with the department heads, morgan recalls that noorda surprised them by asking: "does this company have a mission statement?" the managers stated that they did not. noorda indicated that without a mission statement, it would be diaicult to focus activitiesof the company. morgan reports that it took a week of meetingswith these manager to hammer out a document that all could agree upon. "we displayed it conspicuously throughout the company and held meetings with all the employees to focus all parties." as noted in findings of this forbes 200 research, the top-ranked success factor was "giving direction to managers," followed by "giving focus to employees." in the final analysis, a clearly articulated corporate mission statement can become a vital driving force for both managers and employees. 75 references addams, h. l., baker, w. h., & davis, b.(1994). how "/nc. 500" companies create and use mission srarenrenrs. unpublished manuscript. cal fee, d. l. (1993,january). get your mission statement working! managemerrr review, 5457. campbell, a. and yeung, s. (1991).creating a sense of mission. long range planning, 24, 10-20. cummings, s. and davies, j. (1994). mission, vision, and fusion. long rarrge planning, 27, 147-150. farnham, a. (1993, april 19). state your values, hold the hot air. fortune, 117-124. fuchsberg, g. (1994, january 7). 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(1994, may/june). creating and using the business plan. franchising world, 12-14. 76 stra tegy the impact of shopping agents on small business e-commerce strategy rajiv vaidyanathan university of minnesota duluth rvat dyand. umn. edu praveen aggarwal university of minnesota duluth paggarwa@d. umn. edu abstract as the amount of i%rmation available to online consumers has grown, so has the need for tools to help consumers organize that information meaningfully to help them make better decisions. one outcome of the online information explosion is the growing popularity of computer-basedintelligent shopping agents. a shopping agent is a computer-based program that facilitates decisions on behalf of the consumer. this paper provides small business owners with an introduction to intelligent shopping agents, presents examples of how these agents help consumers at various stages of the decision-making process, discusses the issues that small businesses need to address regarding agents, and ofiers recommendations for small businesses'gent usage. introduction the 1990s have seen tremendous growth in the usage of the internet. one of the most exciting areas of growth —one that could dramatically affect the very survival of many small businesses —is e-commerce. some experts forecast worldwide e-commerce spending to hit $ 1 trillion in 2002 (pastore, 2002) and business-to-business trade over the internet to hit an astounding $2.4 trillion by 2004 (cyberatlas, 2002). despite a growing amount of research in this area, there is not yet a clear understanding of how e-commerce will change consumer shopping behavior, and how small businesses will have to adapt to succeed in this modified environment. as compared to shopping in a traditional brick and mortar setting, online shopping has some unique advantages and disadvantages. one of the most prominent disadvantages to consumers shopping on the internet is that they cannot see or feel the product or interact faceto-face with a salesperson. on the other hand, consumers get instant, round-the-clock access to a large number of retailers spread throughout the country (or even worldwide). as these etailers do not face the physical constraint of limited shelf space, they olten carry a very comprehensive product assortment. for example, a virtual store like amazon.corn carries far 63 journal of small business strategy vog 13, no. 1 spring/summer 2002 more books than any traditional book retailer. not only is the variety of products available large, information available on these products also is voluminous on the web (alba et al., 1997). online shoppers have at their disposal, a large volume of information about products and features at the touch of a button. instead of driving to a few neighborhood stores and comparing prices and features of a limited number of alternatives, consumers can now simply sit at a computer and search through the vast internet information repositories and find the best deal on the best product given their needs. such a search could potentially cover dozens of stores and hundreds of alternatives available at these stores. special solbvare programs, called electronic shopping agents or shopbots, are revolutionizing the way people shop. shopping agents help customers make sense of the vast amount of product-related data available on the internet. these electronic agents can sift through and organize information to help consumers make better purchase-related decisions while shopping online. this paper examines how consumer shopping behavior is changing because of shopping agents and what small businesses need to know and do to survive in a market populated by such agents. while several researchers have examined the overall impact of the internet on strategy, the role of shopping agents in small business strategy needs further examination (see choudhury and galletta, (1998) for an analysis of the impact of e-commerce on small business strategy). the rest of the paper is organized as follows. first, an overview of shopping agents for small business owners is presented. then, the agents'ikely impact on online consumer behavior and how small businesses should evolve to adapt to these agents, is explored. next, issues that small businesses need to address pertaining to shopping agents are discussed. deriving from this discussion, a set of implications and recommendations for small businesses wanting to make the most of this growing technology is presented. it may be noted here that this paper focuses on strategic implications of shopping agents for small businesses and does not go into the technical aspect of agent installation and programming. technical discussions can be found in dasgupta, narsimhan, moser, and melliar-smith (1999), hauptmann (1999), and ciancarini, tolksdorf, vitali, rossi, and knoche (1998). shopping agents the first task for a small business owner is to understand what shopping agents are, what they can do for small businesses, and what benefits they can potentially provide to their customers. shopping agents help customers make sense of product-related data available on the internet. online availability of large amounts of product-related data is both a boon and a curse to consumers. it is nice to have access to all the data before making a purchase decision, but at the same time, it requires consumers to spend a significant amount of time and cognitive effort to convert that data into usable information. consumers first have to siii through the data to separate the relevant from the irrelevant, and then compare information about competing alternatives on various dimensions, and finally pick an alternative that meets budgetary and other constraints. this entire process could be fairly cognitive-intensive and may lead to what is commonly called an "information overload" for the consumers (malhotra, 1982). in the traditional or "non-virtual" world, consumers who were short on time or felt they lacked the expertise to process data eiticiently, had an easy way out —they could delegate their shopping decision to surrogates (aggarwal, 1998). for example, a buyer could ask a travel agent to search the available flights and purchase tickets for the best flight based on certain broad criteria supplied by him/her. similarly, instead of spending considerable time in gaining expertise, one could seek expert recommendations from a stockbroker for investment choices and an interior designer for furnishing choices. thus, in the traditional world, one 64 journal ofsmall business strategy vol. )3, no. l spring/summer 2002 could "delegate" or "subcontract" a difficult, information intensive decision to an expert, a "surrogate buyer" (hollander & rassuli, 1999; rosen & olshavsky, 1987). in an online world, however, consumers normally do not have access to such surrogate buyers. less than five years ago, consumers used to be largely on their own when it came to finding, organizing, understanding, and utilizing information available on the net. rapid and path-breaking changes have taken place in the virtual world of e-commerce since then. we have since seen an amazing emergence of digital agents that perform essentially the same functions as human surrogate buyers. called "intelligent shopping agents" (isa), these agents help consumers sort through the large amount of available data and reach an optimal purchase decision. according to bergen, dutta, and walker (1992), an agent is someone who undertakes an action on behalf of a principal. one important difference between traditional agents and computer-based isas is that the latter do not generally accept much legal or fiduciary responsibility to the consumer. they (or their makers) are not subject to the law of agency. we define an intelligent shopping agent as a computer-based program that facilitates decisions on behalf of the consumer. this definition is broader than the one used by maes (1999) who defined agents purely in terms of their ability to build profiles of consumers. while maes defines agents primarily in terms of their ability to help businesses build information on consumers, we define shopping agents from a consumers'erspective. thus, shopping agents are defined here primarily in terms of their role in helping consumers make product choices. consistent with hollander and rassuli (1999), we define the following features of a shopping agent: it is a computer-based program. it is expected to assist consumers in making choices or recommendations based on information gleaned from a variety of potential sources, and based on some consumer-defined criteria. at the very minimum, it rank orders or sorts available alternatives on some key criteria. thus, computer programs that scour a database and present information in a format that facilitates better decision-making can be considered agents. with this definition, even a search engine that gathers information from a variety of sources and presents an ordered list to the customer is a simple agent. this paper focuses on agents that assist consumers in shopping for goods and services. explicitly or implicitly, the shopping agent acts on behalf of the consumer and that the consumer's (rather than seller') welfare is its primary responsibility. table i includes a listing of some key shopping agent sites. why are shopping agents becoming popular? why should small-business owners care about shopping agents? what benefits can shopping agents provide to customers of small businesses? in order to answer these questions, let us first examine the benefits that consumers can derive by using shopping agents. shopping agents can otter consumers a variety of benefits. these benefits can be classified as individual and social (see figure i). individual benefits include physical information management and psychological burden shifting. social benefits include better market policing and a more competitive marketplace. individual benefits information mana ement. one of the primary benefits to the user of an intelligent shopping agent is the management of information overload (owen & haugtvedt, 1993). while the internet gives desktop access to a vast marketplace with widely dispersed vendors offering an incredible variety of products and product-related data, it is up to sottware front-ends to 65 journal ofsmall busmess s/raregy vo/. l3, ivo. i spring/summer 2002 table i: a summary listing of key shopping agents shopping agent url active buyer's guide http: //www.activebuyersguide.corn/ amazon recommendation services http: //www.amazon.corn/recommendationservices/ bestbookbuys http: //www.bestbookbuys.corn/ bizrate http: //www.bizrate.corn/ botspot shopping agent list http: //www.botspot.corn/search/s-shop.htm bottomdollar http: //www.bottomdollar.corn/ cdnow albumadvisor http;//www.cdnow.corn/albumadvisor/ cnet shopper http: //shopper.cnet.corn/ dealtime http: //www.dealtime.corn/ egain http: //www.egain.corn/ movielens http: //movielens.umn.edu/ mysimon http: //www.mysimon.corn/ nativeminds http: //www.nativeminds.corn/ price.com http: //www.price.corn/ pricegrabber http: //www.pricegrabber.corn/ pricewatch http: //www.pricewatch.corn/ figure i: shopping agent benefits individual social information psychologicalmanagement market policing competition organize that data into meaningful information that consumers can use to their benefit. when consumers face a volume of information that they cannot handle, they may make sub-optimal purchase decisions despite having access to the information that can improve the quality of their decision-making. an interesting study by haubl and trit)s (2000) demonstrated that computer-based agents could potentially have immense positive effects on consumer decisionmaking. subjects using a computer-based decision aid that organized information on products meaningfully made better decisions despite expending less effort in the decision process as compared to subjects who had access to the same information without the computer-based agents. it is important to note here that unlike some other tools that provide a disproportionate advantage to large firms (because of the ability of these firms to spend large sums of money on such tools), the use of shopping agents as information management tool benefits small and large firms equally. as choudhury and galletta (1998) point out, the internet has the ability to level the playing field between large and small businesses. small businesses can now make available information related to their offerings on the internet, and shopping agents will 66 journal ofsmall business strategy vol. 13, no. l spring/summer 2002 process and compile that information along with that provided by larger competitors in their overall recommendations without discriminating against small businesses. this has the potential of lowering the barriers to entry for small businesses that wish to compete in industries dominated by a few big players. ps chain ical burden-shiftin . another possible benefit of isas is psychological burden shifting. when consumers are uncertain about a product category, they can shift some of the psychological cost of making a bad decision by using a shopping agent. if the decision turns out to be sub-optimal, the shopping agent can be "blamed," thereby minimizing the psychological risk in the purchase decision. aiier the decision is made, cognitive dissonance may also be reduced because the burden of the decision has been shifted to an external entity. the positive effects of the reduced psychological risk may even result in consumers returning to isas despite the cost of past sub-optimal decisions. in other terms, the benefits of decision eiticiency may outweigh the costs of decision sub-optimality. another factor that may encourage users to return to isas is that it is often difficult to evaluate the "diligence" of the shopping agent in reaching an optimal recommendation. that is, consumers may not even be aware when the recommendation or product list ordering of the shopping agent was suboptimal. in fact, recent research suggests that irrespective of the objective recommendation quality, consumers may perceive shopping agents to make high quality decisions for certain goods (aggarwal tk vaidyanathan, 2000). again, small businesses stand to benefit, as they are more likely to have lower brand recognition and be a more risky purchase proposition for the buyer. even when buyers are not familiar with a small firm's brand, they may buy it based on a shopping agent's recommendation. social benefits ~mk pni . th fi ug g i ub fioul ly i g. th online world is notorious for being filled with misinformation and scam artists. shopping agents may be able to guide online shoppers away from such misinformation. certain isas keep archival data on activities of sellers and buyers trading online. consumers who are contemplating doing business with them can then access such data. this way, isas can help keep market fraud to a minimum. this benefit also works to the advantage of small businesses. often, because of the misdeeds of a few dishonest firms, many buyers tend to classify all small businesses as unreliable or untrustworthy. as small businesses do not have large promotional budgets that could help create a positive corporate image in the mind of consumers, people tend to be suspicious of small, relatively unknown businesses. isas can provide objective, third party assurance to buyers about the genuineness of such businesses and their track record in satisfying past customers. thus, isas can give small businesses a fighting chance by creating an environment of trust and cooperation. one price comparison agent that aggregates customer feedback to generate merchant ratings is bizrate.corn (vigoroso, 2002) com etitive market lace. by making cross-competitor comparative analyses easy for consumers, agents can increase the level of competition to the extent that it depends on asymmetry of information. consumers can thereby evaluate competitive offers on more tangible, objective criteria. also, the monopoly power of larger players will get significantly reduced as consumers get access to the expertise of isas, thereby leveling the field for small businesses. in the next section, a framework for understanding the role of shopping agents in the consumer shopping experience is developed. an understanding of how shopping agents facilitate consumer purchasing can help small businesses decide what types of agents are best 67 journal ofsmall business strategy vol. /3, no. l spring/summer 2002 suited for their businesses and how they can leverage the power of isas to compete against the bigger players in their industry. types and role of shopping agents for a vast amount of consumer behavior research, the decision-making process has proven to be a convenient framework. one can classify shopping agents by the stages in the consumer decision-making process in which they assist. this approach is similar to that taken by maes, guttman, and moukas (1999), in a similar context. the consumer decision process consists of six stages. according to engel, blackwell, and miniard (1995), the stages are as follows: need + information + alternative + purchase + consumption + outcome recognition search evaluation evaluation while maes (1999)argues that only the first four of these stages are the domain of agents, it is our belief that isas can play a role in all six stages. discussed below are each of these stages, the type of isas that affect these stages, and how their involvement changes the decision structure. ~nrr igiy: thi i h r «g i h d rx p d h the consumer recognizes a discrepancy between his or her desired state and current state. there are several sources of need recognition. a need could be aroused by external factors (such as an advertisement) or internal factors (such as a commitment to physical fitness). isa's can play a role in this stage. the giant internet bookseller amazon.corn uses a variety of isas on its web site. one such isa —amazon's "notification agent" can effectively trigger need recognition among consumers. a(ter consumers provide the notification agent with their interests, it can inform them when something of interest to them becomes available. for example, if a consumer tells amazon that she is a fan of robin cook's medical thrillers, the agent can automatically send her a message every time a new robin cook book is published. the notification agent may also drive her to action by offering her an advance order discount. amazon also uses agents to offer its customers "bundles" at a reduced price in order to increase order size. assuming that someone interested in a robin cook thriller may also be interested in a dvd of the last movie based on his book, amazon may offer a reduced-price bundle of the book and the movie to try and induce need recognition in the site visitor. small businesses can use isas very effectively at this stage. they can use shopping agents to keep their current customers abreast of new product developments that could increase customer loyalty and retention. small businesses in the mro (maintenance, repair, and overhaul) industry could program their agents to send automatic notices to clients that need to place orders to replenish their depleting inventories. information search: at this stage, the consumer, having recognized a need, searches for information on the alternatives available to satisfy that need. the use of isas is well established for this and the subsequent stage, alternative evaluation. web sites that are, in effect, nothing but shopping agents are now becoming popular. for example, mysimon.corn helps consumers with information search by claiming to be the "one-stop-shop" for all online purchases. it offers consumers the opportunity to search through a number of retailers in a number of shopping categories and even offers suggestions for gi(ts within each category. in the traditional (off-line) model, there exists a positive relationship between information search (costs) and the quality of decision (benefit). thus, one had to expend more time and effort to 68 journal of small business strategy vo/. /3, /vo. / spring/summer 2002 improve the quality of a purchase decision. however, with the advent of isas, this relationship has been significantly modified. now, consumers can improve the quality of their decision without increasing their effort input (see figure 2). isas can assist consumers in their information search by searching and organizing data on products as well as vendors. this is referred to as product brokering and merchant brokering, respectively, and is discussed in the next section. decision decision quality quality eiyort effort traditional model new model alternative evaluation: ln order to evaluate competing alternatives, consumers need two things. first, they need to establish criteria on the basis of which they would compare alternatives. second, they need to apply these criteria to evaluate available alternatives. in addition to ranking product alternatives, consumers may wish to rank merchants vending those products too. isas can help consumers in both domains. ideally, they would help consumers decide on the most appropriate decision rules (criteria) to evaluate and pick among the alternatives. some isas such as mysimon and computershopper do offer selection guides (e.g., "how do you select a camcorder that's right for you?"), but these tend to be simple text documents rather than interactive agents. computershopper also allows the user to search through its database of products and sellers either by manufacturer or by price range. in effect, it allows the consumer some (but limited) flexibility in defining the criteria that will be used to evaluate the alternatives. one very interesting example of an intelligent shopping agent that gets fairly detailed guidelines from buyers and then presents them with the best alternatives for their needs is the active buyer's guide (http: //www.activebuyersguide.corn/) that assesses buyers'references on several dimensions and then tries to evaluate their hidden trade-offs before presenting them with recommendations. however, most isas available for consumer use today are better at applying a decision rule determined by the shopper, to the collection of options gathered during the information search. hgubl and trilts (2000) examined the impact of some computer-based decision aids that allowed consumers to view product information in various organized ways and found that with a lower amount of effort, consumers were able to make higher quality decisions. isas can help consumers choose a product (product brokering) as well as merchants (merchant brokering) to buy that product from. product bro/tering refers to the ability of the agent to assist consumers in selecting from the different product options that may satisfy a need. many shopping sites offer agents that 69 journo/ of sniall business s/ra/egy vo/. /3, no. l spring/summer 2002 perform product-brokering functions. for example, a very simple product-brokering agent at greatfood.corn allows consumers to specify a price range and then displays a list of giii products that fall within that price range. this is a single-decision-rule product-brokering agent. more advanced agents allow consumers to define several criteria which the agent then tries to simultaneously optimize in its recommendation. an interesting example of product brokering is cdnow's "album advisor" agent (http: //www.cdnow.corn/albumadvisor/). using its vast database of consumer purchases and preferences, it recommends music that one may like based on what it knows about that person's general tastes and preferences. merchan/ hrokering refers to the ability of the agent to assist consumers in selecting the best merchant from whom to buy a given product. one of the earliest merchant brokering isas was anderson consulting's experimental "bargainfinder" agent, which is no longer available. in this early shopping agent, one could enter an artist and cd title and it would automatically query several online music retailers and give the lowest price on the album. interestingly, some retailers found this "price-shopping agent" to be undesirable and blocked access to the agent, not wanting to compete on price alone. on the other hand, several other retailers contacted anderson consulting expressing a desire to be included in the agent's search routine. the problem with bargainfinder was that it restricted consumers'valuative criterion simply to price. consumers interested in making a purely price-based decision found the bargainfinder agent to be extremely useful while some merchants fretted about the loss of their ability to compete on factors other than price (moukas, zacharia, guttman, gt maes, 2000). if this were the future of shopping agents, merchants worried that all their products would become commodities and only the largest of online retailers, with the greatest buying power, would survive. because a multitude of factors drive purchases, considering a variety of criteria is believed to be essential for the long-tenn survival of shopping agents (vigoroso, 2002). however, the current focus on price is not necessarily bad for small businesses. many small businesses enjoy very low overheads and enjoy cost-based competitive advantage. such small businesses stand to benefit from pure price-comparison agents. today, several sites offer merchant brokering agents. mysimon.corn is a merchant-brokering agent. some merchant-brokering agents simply offer the convenience of finding the lowest price for an item from among the vast internet marketplace while others also offer a single shopping cart and the ability to pay once for merchandise from a diversified base of retailers (e.g., yahoo! shopping at http: //shopping. yahoo.corn/). for computer hardware, pricewatch (http: //www.pricewatch.corn/) is an example of a price search agent that provides information on the lowest priced sources by product category or brand. one disadvantage is its inability to easily combine brand, model, and product criteria in a single search. other popular merchant brokering agents include pricegrabber.corn and bestbookbuys.corn, the latter even factoring in shipping cost to recommend the source with the lowest overall cost. one important key to the future development of these agents is the trust they can engender among users that they truly represent the buyer and not the seller (hansell, 1999). purchase: this is the stage at which the consumer actually makes the purchase decision. agents that guide consumers through the process of placing items in electronic shopping carts, check out, and pay via credit card, can be considered to assist in this stage. the yahoo! shopping agent is an example of how an intelligent agent can otter consumers a single "check-out counter" i'r consumers shopping at a variety of internet retailers. it is conceivable that in the future, computer-based isas negotiating and purchasing products on behalf of consumers will dominate virtual marketplaces. one experiment at creating an agentnegotiated marketplace is marketmaker at mit's media laboratory (http: //ecommerce.media.mit.edu/maker/maker.htm). here, buyers and sellers create agents that are let loose in the marketplace to negotiate on behalf of the client (either buyer or seller) to get the best deal possible. the buyer or seller simply creates an "agent profile" that 70 journal of small business strategy vo/. /3, no. i spring/summer 2002 provides guidelines for a negotiation strategy and then lets the agent negotiate with other sellers'gents to find a good deal (maes, guttman, & moukas, 1999). c~i: e y ghh p fh p rp lyi y d intelligent agents can play an important role in facilitating the consumption process. consumers can be helped with product assembly, appropriate usage, and post-consumption disposal. for example, a site vending ethnic foods (such as ethnicgrocer.corn) provides various exotic recipes and then provides the visitor with a list of ingredients that they can buy from that site to prepare that dish. companies such as nativeminds (http: //www.nativeminds.corn/) and egain (http: //www.egain.corn/) offer virtual representatives that are intelligent agents that can handle customer service questions (zhivago, 2001). small businesses can employ similar smart agents to service common customer requests without having to commit to a large customer service stalf. an agent can handle most routine service requests whereas the customer service staff can focus on the more unique or complicated service requests. outcome evaluation: finally, having purchased and consumed the product, consumers determine their satisfaction or dissatisfaction with the purchase. as with alternative evaluation, satisfaction with a purchase could be product-related or vendor-related. outcome evaluation can also be influenced by isas. in the product domain, many online vendors are now making available feedback from current users to help prospective customers. intelligent agents can sir through this information and incorporate it in their decision-making. as mentioned earlier, many shopping agent providers such as bizrate.corn and price.corn are beefing up content, especially in the area of merchant ratings, to complement their price data (vigoroso, 2002). in the vendor domain, again, the mit media laboratory is experimenting with "seller reputation systems" that take feedback provided by buyers to create an online reputation profile of the seller. future buyers can use this information to determine whether they (or their agents) want to deal with a given seller or not (maes, guttman, and moukas, 1999).at the online auction site ebay, both buyers and sellers can look at feedback profiles to determine whom they want to do business with. these feedback profiles are based on actual comments ler by satisfied and dissatisfied parties to the transactions. these types of agents can help small businesses in a significant manner. many small businesses suffer from lack of recognition or trust. instead of basing their decision on any objective criteria, customers may avoid small businesses simply because of lack of familiarity. agents that compare customer feedback and seller reputation based on past transactions can overcome this hurdle for small businesses by providing a more objective assessment of their standing vis-5-vis their larger competitors. although there are a variety of isas that assist consumers in each of these stages (for one listing of shopping agents on the internet, check out the collection of links at the "bot spot" at http;//www.botspot.corn/search/s-shop.htm), it should be remembered that many, if not most, isas assist consumers in more than one of these stages in the decision process. the ideal shopping agent would ask the consumer a series of questions once to develop a detailed profile of that consumer. then, it would use that information to generate ideas, recommend products and merchants, negotiate a price, and update its database on the transaction. such an agent is not too far in the future. issues before small business owners at the very least, it is important for small business owners to realize that issues such as the growth of isas is a strategic business issue and not a technical issue to be ler to the it department or a web site developer (finger, 1998). the power of the internet to reduce or eliminate market information imperfections that bigger companies have used to their 71 journal ofsmall business strategt vol. /3, bio. i spring/summer 2002 advantage has been cited as a reason why such businesses are, in general, hesitant to embrace the electronic marketplace (alba et al., 1997; lynch & ariely, 2000). however, strategically, small businesses considering transactions in an electronic marketplace need to consider the benefits offered by such an environment. unlike a traditional store setting, the virtual marketplace allows small businesses to customize the entire shopping environment, with the help of shopping agents, to the particular needs of each individual customer (west, et al., 1999). with regard to isas, there are two broad issues that small businesses need to be concerned with. the first is whether to provide shopping agent technologies on their web site. the second, and strategically more important issue is whether to allow web-based isas to scan their database for information to be provided to consumers using such agent. should small businesses have an agent on their sites? in-store agents have the goal of helping site visitors identify a product that meets their needs more efficiently. thus, in most cases, it would not hurt to have a shopping agent that helps customers shop more easily. instead of worrying aboutifone should have an agent on his/her site, small business owners should be pondering on what type of agent would be most beneficial to their customers. various capabilities of currently available computer-based isas were discussed above. this will allow for more informed decision-making on what types of isas to provide on a site to make life easier for customers. presumably, small businesses would be more interested in product brokering agents and other agents that do not compromise their business by leading their customers to other sellers. on the other hand, some online sellers actually use price-based agent scarc))es on their site as a demonstration of their price-based competitive advantage. for example, on locating an item on the site, half corn actually performs a real-time price search and displays competitive market prices for the product found by the consumer. this search highlights the price advantage held by half.corn on its product listings. the purpose of on-site agents would simply be to help consumers make the best decision possible. it would be extremely beneficial to first assess the steps that consumers typically undertake to make a purchase in a relevant product category, and then design an agent to help at various stages of this process. this will help build a more loyal and satisfied customer base that will return for repeat business thereby ensuring the long-term viability of the business. by providing continuously updated, detailed information on customers, agents can help small businesses better serve customer needs. agents can be used to identify cross-selling opportunities. for example, the finding that customers purchasing a wok at a kitchenware site also tend to purchase flatware can lead to a highlighted link to flatware for all future consumers shopping for a wok. today, amazon uses its infomiation on consumer site behavior to encourage site visitors to increase the size of their purchase. a consumer looking up information on a new eric clapton cd on the site is immediately given the option of purchasing the new album along with his previous album for a discounted price. amazon's agents even directs the visitor to its other "zshop" sellers who may have related items of interest (taylor, 1999). many sellers have also found that agents allow a degree of interactivity that almost replicates the functions of a knowledgeable salesperson (internet retailer, 1999). in that sense, isas could serve as virtual sales representatives that work 24/7 to assist site visitors make better purchase decisions. should small businesses let shopping agents access their sites? the second, and more difficult question to answer is whether to let independent isas browse your site for information that is then returned to potential customers. as mentioned earlier, one of the first isas for price comparison on the internet was bargainfinder. on finding that users of this agent could, with the click of a single button, find out who had the best price on the internet, many online retailers started blocking access to the agent. bargainfinder simply evaluated merchants on the basis of price and ignored all the other features that online music 72 journal of small business strategy vo/. /3, //o. l spring/summer 2002 retailers had built into their sites. understandably, many retailers did not want to compete simply on price. today, a new type of agent is popular on the internet. agents like jango are created so that each product information request originates not from the agent's server, but instead from the consumer's browser. for a merchant, the request for information sent by a consumer using jango would be indistinguishable from a single request originated by that consumer. thus, owners of small businesses have no way of blocking agents like jango from using information in their online databases and hence may be forced to interoperate with such agents (moukas et al., 2000). however, the broader question on whether access to a small business'nformation by isas is desirable or not remains. we are of the opinion that isas are here to stay and as their sophistication increases, their use by consumers in online shopping will increase. trying to avoid being cataloged by isas may cut a small business out of a large and growing market of "hot" consumers —consumers who are ready to buy online. even price focused agents may be a great source for leads as they typically bring in more experienced online shoppers who need little assistance in the transaction, navigation, or checkout process (gassmann, 2001). small businesses should see merchant-brokering agents as an opportunity, not a threat. the best strategy may be to embrace these intelligent agents and monitor their development and growth in the electronic marketplace. undoubtedly, agents of the future will provide information to consumers that encompass more than price. agents will let consumers not only pick the criteria to be used in the evaluation of alternatives, but also weight the criteria based on personal preferences (vigoroso, 2002). so how can a small business level the playing field by appearing on the list of recommended products at shopping agent sites? although each shopping agent site has its own list of requirements for getting listed, there are some general guidelines that would serve a small business going online well. following are some specific recommendations: secure transactions: most agent sites require their merchants have secure online ordering systems on their sites with electronic shopping carts and order tracking systems. this is not as difficult as it appears at first. there are many off-the shelf packages available for merchants looking to put their businesses online and most of these offer electronic shopping carts (e.g., webcart at http: //www.mountain-net.corn/ and softcart at http: //www.mercantec.corn/). for small businesses not yet online, major shopping sites allow merchants to create online storefronts in a snap. these online storefronts often include basic e-commerce functions such as electronic shopping carts and secure ordering, sometimes for a small fee. for example, amazon offers zshops for merchants to build an online presence instantly and get access to amazon's vast customer base (http: //www.amazon.corn/). it is also important for small businesses to have other off-line ordering options on their web site. for example, mysimon.corn requires merchants listed in its shopping agent database to have both secure online ordering and telephone/fax ordering capabilities. quick loading pages: in order to ensure that the shopping agent can compile data and present it to the consumer in a reasonable amount of time, many shopping agents time-out after a few seconds and do not report results from merchants who did not respond to the shopping agent request in a short period of time. thus, a site that does not respond to information requests quickly either because of a slow network connection or graphic intensive pages, is unlikely to have the opportunity to get into consumers'onsideration sets. so how quick do pages need to load? a good guideline is the one established by mysimon for its merchants —pages need to load in eight seconds or less in order to be considered by their shopping agent. taking some occasional network congestion into account, small businesses may be better off trying to achieve a page load time of five seconds or less. this may point to the importance of having an appropriate database of products. having a simple html 73 journal ofsmall business siraie gv vo/. /3, no. l spring/summer 2002 page present a complete listing of products for sale may hurt your chances of being found by search engines. prominent contact information: when a shopping agent scours the net and offers users a list of recommendations, it is, in effect, risking its brand by linking merchants with consumers. if one of mysimon's users, for example, has a bad experience with a merchant recommended by the agent, it is possible that the user will never return to mysimon even though the shopping transaction was between the user and the merchant. therefore, most agents are careful of the list of merchants they accepts into their fold. one way of protecting against fly-by-night operations is to require merchants to prominently display contact information including a physical street address and telephone numbers. small businesses serious about becoming a part of shopping agent merchants should ensure that their site demonstrates the legitimacy of its business by providing a physical contact address and a phone number manned by "real" people for any questions or complaints customers may have. wide product assortment: many agents will not consider a merchant unless it has a sufticient assortment of goods to offer their customers. it is important to remember that a shopping agent's job is to provide the best possible assortment of choices to its users. it is more efficient for the agent to compile this assortment from fewer merchants than to scan thousands of merchants who each offer only a single item of interest. therefore, in the interests of optimizing the search algorithm, agents prefer to use merchants who have a reasonable assortment of products. a small business specializing in only a single product is less likely to get databased by shopping agents than one having fiffy or a hundred products to offer. small business should try and build a good assortment of products to offer online and ensure that this complete assortment is available for sale online. clear privacy policy: a purchase transaction between a customer and a merchant is a play of trust for both parties. customers not only pay for the purchase, but also reveal private information such as credit card information, shopping preferences, address and phone number, etc. more and more online shoppers are getting concerned about the merchants'se of such information. given the growing importance of this issue, many shopping agents are expecting their listed merchants to have clear privacy policies that are easily accessible on their site. independent of agents'equirements, it is probably a good idea for merchants to develop clear privacy policies and display these prominently on their site. sites such as trust.e (http: //www.truste.corn/) and the better business bureau (http;//www.bbbonline.org/) provide several online resources for small businesses looking to establish a strong privacy policy. recommendations for small businesses'gent usage given that it is in the best interest of small businesses to embrace the emerging isa technology, let us now examine how small businesses can benefit from it and what actions they need to take to make sure they do not miss out on this opportunity. information asymmetry one of the commonly cited diaiculties of small businesses is their inability to match the sales and advertising budgets of their bigger competitors. this asymmetry in promotional expenditure creates an information asymmetry in the market where bigger competitors enjoy considerable clout because of better brand recognition and market access. shopping agents 74 journal ofsmall business su aiegy vol. 13, no. l springlsummer 2002 can work to the advantage of small businesses by eliminating, or at least substantially reducing, some of these asymmetries. by comparing brands on tangible attributes (instead of intangibles like brand or reputation), shopping agents can put the small businesses'rands in a consumer's consideration set, thereby improving the chances of purchase of such brands (gassmann, 2001). thus, small businesses stand to gain more relative to their bigger competitors, by using or cooperating with shopping agents. getting noticed in the e-market at times, small businesses may otter products with one or two unique features that even their bigger competitors do not offer. however, typically, consumers are either unaware of such features or do not care about them. as bigger competitors with their huge promotional budgets do most of the consumer education, they also get to decide which attributes of the product get highlighted. obviously, this ensures that only those attributes are made salient in such promotions that are advantageous to the larger competitors. hgubl and trifls (2000) found that consumers seem to construct preferences when using a recommendation agent for shopping. that is, the mere inclusion of a subset of attributes suggests to consumers that those attributes are more important in evaluating that product. thus, sellers can presumably influence consumer perceptions of the value of their product by using an agent that comparison shops using attributes on which their products do well, regardless of the "objective" importance of the attribute in the performance of the product. so far, it was extremely diflicult for small businesses to educate consumers about other attributes on which their products fared better. now, shopping agents make this impediment easier to overcome. if a small business provides a shopping agent at its site, it can pick which attributes get compared, and it can therefore show how its product is superior on those attributes to competitors'roducts. tagging for inclusion one historical fact that has contributed to the development of software agents is that the web has its roots in problem solving and knowledge representation. in the pre-internet world, although the use of computers in business was widespread, there was no eltort at developing a common information representation scheme. small businesses on the web across the world now share a common method for representing item information. this allows the elticient development of software agents to gather and parse data for the needs of consumers. this has two important implications for small businesses. first, small businesses need to ensure their data is "tagged" appropriately based on developing standards. of late, extensible markup language (xml) has emerged as a dominant tagging standard for web-based documents. xml is a meta-language that allows the structure of documents to be defined. in every document, say a product catalog, there are different types of information, for example, product name, product description, price, shipping weight, etc. the xml specification defines a standard way to add markup to documents (walsh, 1998). it was created so that richly structured content could be used over the web. xml tags describe the structure of a document and not simply the appearance of the document (which is what html does) (simpson, 2000). small businesses need to use xml to tag their data. many shopping agent sites such as excite merchant, require merchants to send regular "data feeds" for the agent database. these feeds have to be in the particular format needed for their systems to parse that data. xml tagged data can be rendered into any of the formats needed by agent sites. efficient tagging, on the other hand, can make sure that a business'roducts show up in comparative evaluations, even when agents use different tag identifiers. second, and a more strategic implication for small businesses is that they need to lobby with agent developers to make sure that product attributes on which their products fare better, are included in an agent's feature list. 75 journo/ ofsnui// business strategy vo/. 13, no. 1 spring/summer 2002 revenue models for inclusion it is entirely possible for a small business to tag its product database effectively, and still not get listed because relevant agents are not accessing its database. this could happen because of the different revenue models agents use. shopping agents sites range in their revenue models from listing only those sites that have made a payment (e.g., pricewatch and aol) to treating every site equally without any payment (e.g., bestbookbuys). in the middle are sites that give sellers who make a payment a preferential position in the listing (e.g., cnet shopper and mysimon). small businesses need to identify key agent sites for their product categories and their respective revenue models. if the only way to get included in a major agent's listing is by paying a small percentage of revenue to that agent, then small businesses need to include that expenditure in their costing structure to make sure their products are included in such agents'omparative listings. most shopping agent sites offer free listings to merchants but require payment for preferred positioning. the payment for preferred positioning may be worthwhile given the finding that although shoppers using mysimon have the option of reordering the recommended product list by price, most don'. the payment model may involve fixed payment for preferred positioning, payment for click-throughs, or even a bid process, by which the highest bidder gets the best placement in each category such as at bizrate.corn. some of the more widely used shopping agent sites that small businesses may want to consider getting affiliated with are: mysimon.corn (http: //www.mysimon.corn/), bizrate (http: //www.bizrate.corn/), bottom dollar (http: //www.bottomdollar.corn/), deal time (http;//www.dealtime.corn/), pricegrabber (http: //www.pricegrabber.corn/), and yahoo! shopping (http: //shopping. yahoo.corn/). getting repeat business for small businesses that enjoy a cost-advantage over bigger competitors, using an agent can work to their advantage. lynch and ariely (2000) found that facilitating between-store comparisons increases the price-sensitivity of consumers for non-unique products. thus, small businesses with lower-priced products stand to benefit from such comparisons. on the other hand, if a small business sells high quality, differentiated products, they are not disadvantaged by such comparisons. the same study found that if the cost of searching for information on product quality was high, facilitating store comparisons did noi raise the price sensitivity of consumers. also, easier search facilitates customer retention. small businesses have traditionally suffered from what is referred to as "double jeopardy." first, small businesses have fewer customers, and second, these customers are less loyal than customers of larger businesses. shopping agents can help small businesses not only in getting more customers, but easier comparisons will improve retention and loyalty of such customers. currency and speed of access shopping agents can vary in terms of how frequently they query source sites for data. some agents regularly crawl the web (e.g., once a day) to update their database, which is then used to perform the task requested by the user. other agents actually query remote sites in real time every single time a user requests information. for example, half corn tries to provide customers comparison price information for the products they sell on their site. every time a product is listed for a customer, an agent travels the web and gets comparison price information from several sites on the web. still other sites use a combination of these two methods. for example, clickthebutton.corn used stored information if it was less than two hours old. if the data requested by the user was over two hours old in its database, it got fresh data from the web. the implications of this for small businesses are twofold. if a dominant agent queries in real time, then that imposes extra load on a small business'ite. during peak 76 journal of sniall business strategy vol. 13, no. 1 spring/summer 2002 hours, network congestion or a slow server may cause timeouts thereby excluding that small business from the comparison list. small businesses therefore need to make sure that they have the necessary equipment and bandwidth to avoid such timeouts. second, small businesses should execute "dummy runs" of product comparisons on their own on a regular basis to find out how their products stack up against their competitors'. if a small change in price improves a product's ranking substantially, then such changes may more than make up any loss in revenues, because of higher turnover. conclusion it would be shortsighted to base online marketing strategy on the current state-of-the-art of shopping agents. clearly, shopping agents currently have shortcomings (quick, 1998; spring, 1999). as agent technology improves, it is likely that isas will start to consider the variety of factors that consumers in the real world use when deciding what product to buy and from whom. even the most basic of isas that operate on a simple rule like "list all products in the catalog priced between $ 10 and $20" use some boolean logic to present useful information to the consumer. undoubtedly, isas of the future will grow in their "intelligence." there is already considerable work underway on "learning" neural network systems, fuzzy logic systems, and even genetic algorithms (finger, 1998). several companies are working on systems to take into account factors besides price in helping consumers. in fact, many believe that the future of online shopping agents depend on this happening (vigoroso, 2002). unfortunately, while significant developments are inevitable, they are also likely to be slow (allen, 2000). contrary to maes (1999), we do not believe that online markets are inherently buyer-centric. that is, according to maes, the "ease of comparison shopping will make prices fall" (p. 76). while this may be true for generic products, the efficiency of online marketplaces also allows sellers to reach buyers who have the highest reservation prices. sellers on auction sites such as ebay have found that they are able to get higher prices for their merchandise because they are able to suddenly reach a vast number of buyers who have significantly higher price thresholds than those within their local, geographical markets. thus, the internet has the potential to increase the prices sellers can charge for specialized or niche products. by helping sellers build more detailed profiles of consumers, agents may also help usher in a new age of relationship marketing where the complete marketing mix is customized to the unique needs of each online shopper. thus small businesses do not necessarily have to lower their prices to compete in a market dominated by isas. they could instead diiterentiate and use isas to find customers who are willing to pay the premium price for differentiated products. the fact that many current isas are simple and overemphasize the role of price in the transaction should not prevent small business owners from embracing shopping agent technology. alter all, the continuing survival of these agents depends on the number of users of these agents. if consumers want to buy based on price only, then one does need to have the best price in order to survive. if consumers care about anything more than price, isas that compare merchants on the basis of price alone, will quickly fall into disuse. this is the essence of the marketing concept and ought to underlie any decision to embrace isas. understanding the role of isas and their development will help small businesses grow their online business. knowing how agents are developing may even allow them to strategically position their e-business and product databases to take full advantage of the global, computerbased electronic commerce 77 journal ofsmall businecs srraiegv pol. /3, iuo. i spring/summer 2002 references aggarwal, p. 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(2001). to bot or not to bot? business 2.0, (february). retrieved march 27, 2001, from http: //www.business2.corn/artices/mag/0,1640,14531,ff.html. praveen aggarwal is associate professor of marketing at the university of minnesota duluth. he received his ph.d. from syracuse university. his research interests include constrmer choice behavior, assisted decision-making, and price promotion strategies. his research has been published in several journals including the journal of consumer marketing, journal of business research, marketing management journal, and journal of product and brand management. rujiv vaidyanathan is associate professor of marketing at the university of minnesota duluth. he received his ph.d. from washington state university. his research interests include the examination of how consumers perceive prices and evaluate advertised deals as well as marketing implications of e-commerce. his research has been published in several journals including the journal of the academy of marketing science, journal of promotion management, journal of marketing education, and journal of business and psychology, as well asin the proceedings ofseveral national andinternational marketing conferences. 79 strategy editor's note some new things we are doing as we go to press with the fall/winter 1998 issue of the journal of small business siraiegy (jsbs), there are a number of dynamics which should be of great interest to our readership. t in addition to our regular subscribers, jsbs is being distributed to over 650 aacsb member and candidate schools for the next year. it is hoped that this exposure will provide visibility for jsbs as well as sbida and the small business institute (sbi) program. t we continue to work with the initiative for a competitive inner city (icic) and their national business school network (nbsn) who, like sbida, are involved in doing field consulting cases with small to medium sized businesses. in this regard, we are presenting a series of three articles in this issue beginning with new siraregiesfor inner city economic development: iniiiaiive for a competitive inner city by michael e. porter of harvard university and the founder of icic. this article lays out the foundation for the inner-city work being performed by the nbsn in urban areas. subsequent articles profile the nbsn and the small business institute (sbi) programs. t we welcome radha chaganti of rider university aboard as our book review editor. in this capacity, she will be responsible for coordinating book reviews that will be invited or solicited (or readers may initiate on their own by contacting dr. chaganti). relevant reviews may include monographs on topics related to small business or entrepreneurship including management and other disciplines, consulting related books as well educationoriented publications and textbooks, etc. she may be reached at the following address: radha chaganti college of business administration rider university lawrenceville, nj 08648 telephone: (609) 895-5529 email: chagantirider.edu journal of small business strategy volume 9, /vo. 2 fall/winter l998 as we prepare for the national small business consulting conference in san francisco february 10-13, 1999 (see advertisement in this issue), i would like to remind the attendees that a minimum of two articles, perhaps as many as four, will be selected from the submissions/proceedings for publication in jsbs. t we have established a relationship with pricewaterhousecoopers, the newly merged international accounting firm whereby they will publish condensationsof articles from jsbs in their on-line executive digest. we are one of a select number ofjournals whose work will appear from time to time. you may even find an article or two from this issue! check them t h .) «~uhu h hr yh gh h r* hhg* (click on to "insights and solutions" and then "executive digest" ). t we have converted jsbsto a microso(i word format. in the future, we ask that all accepted manuscripts be submitted in this form for publication. jn the near future some additional objectives we are planning to pursue in the near future include the following: ~ increase the number of issues from two to three per year. ~ expand the content of the journal to include appropriate book reviews, noteworthy news, insightful letters to the editor, and increase the number of invited papers from notable practitioners, scholars, and elected and appointed governmental officials. ~ solicit and/or develop shorter articles through the normal editorial process for inclusion in the journal (titled "small business briefs"). ~ expand the subscription base of jsbs. ~ expand the non-academic editorial review board of the journal. ~ maintain and increase the quality of the journal in terms of both its scholarship while focusing on application to entrepreneurship, small business, family business, education, and economic development. jvhatis jsbsababout? based on the jsbs mission, we believe that articles published in jsbs should be of value to small business & entrepreneurship educators/scholars, small business consultants or individuals involved in economic development in terms of at least one of the following: ~ assist in the formulation or implementation of small business strategy ~ be directly applicable to consulting projects and solutions ~ generate ideas and approaches to problem solving in small business ~ be presentable to a small business owner/manager for application ~ relate to small business & entrepreneurship education our "definition" of small business conforms with that of the u s. small business administration (sba) and includes quite a range of sizes of businesses. for example, the following is a brief summary of some of the criteria employed by the sba in defining "small business": journal ofsmall bnsmess strategy volume 9, no 2 f'o///winter /998'hat is a "small business?" maximum annual sales or t e of business number of em lo ees wholesale trade $ 9.5 22 million (varies across industries) general construction $ 17 million services $ 2.5 14.5 million (varies across industries) retail trade $ 3.5 13.5 million (varies across industries) agricultural production $ . i 3.5 million (varies across type) restaurants up to $ 10 million manufacturing maximum of either 500, 750,1000, or 1500 employees (depends on industry) with our readership increasing and our desire to expand the scope of the journal, we encourage you to submit your work to the journal ofsmall business strategy for consideration for publication. we are endeavoring to shorten our turnaround andincrease the number of arricles and issues of thejournal and provide opportunities for showcasing your research. in this issue new strategies for innercity economic development: initiative for a competitive inner city (icic) by michael e. porter of harvard university and the initiative for a competitive inner city, is a presentation of his economic model which describes the plight and opportunities of the innercities in this country. this article provides the foundation for the establishment of the icic and the national business school network (nbsn) discussed in the next article. initiative for ri competitive inner city: the /vational business school network by monica rivera dean of the national business school network, initiative for a competitive inner city (icic) and marilyn l. taylor of the university of missouri at kansas city, discuss the icic and national business school network (nbsn) which have been created in response to the economic model presented by michael porter. the nbsn and its member schools avail mba students the opportunity to work with inner city businesses on meaningful consulting projects for the benefit of both the students as well as their clients. the small business institute program: high impact entrepreneurship education by charles h. matthews of the university of cincinnati and immediate past president of the small business directors association (sbida), gives a concise summary of the origin, purpose and impact of the small business institute (sbi) program. exploiting the lnternetr strategiesand frameworksfor a small business by vivek choudhury florida state university and dennis galletta of the university of pittsburgh, is a very useroriented piece on the use of the internet. the article is comprehensive and may easily be implemented by small business owners/managers and can serve as an effective consulting tool. journal ofsmall business strategy volume 9, no. 2 fall/winter /998 improving proftlabililyof very small and small firms: the impact of quality practices in the human resource area by ronald cook, radha chaganti and cengiz haksever, all of rider university, was one of two distinguished papers from the 1998 sbida conference held in santa fe, new mexico. small business solulionst building and leveraging a competitive intelligence capability ivirhour going broke by john e. prescott and cynthia e. m iree of the university of pittsburgh provides a framework for small businesses to employ to meaningfully engage in the increasingly important process of competitor intelligence. the article includes a number of frameworks and a valuable appendix which contains a number of resources that a small business can effectively employ. an exploration of diversity practices in small successful companies by sandra powell, h. lon adams, and brian davis, all of weber state university, addresses the important issue of diversity as it relates to small business, an issue that has traditionally been associated with larger corporations. small business brief hoiv small businesses in the united stares are responding to rhe challenges and opportunities of ivorkforce 2000 by arthur shriberg, thomas d. clark and sherrie e. human, all of of xavier university, addresses the extent to which small firms are responding to the diversity issue. this article is an extension of their work which appeared in the journal vf small business strategy in spring, 1995. we have introduced a new feature in this issue of jsbs in the form of a book review, lean ~thinkin by james p. womack and daniel t. jones has been reviewed by robert kemp, a past president of sbida. i hope you enjoy this issue of jsbs. if you have any comments, please send us a letter or an email. stephen osborne, editor stra teg y the impact of resources on small firm internationalization candida g. brush boston university cgbrushbu. edu liada f. edelman bentley college ledelmanbentley. edu tatiaaa manolova boston university tatianam@bu. edu abstract theory posits that resource type and composition determine a firm's geographic scope. to date, few studies test this premise. this article compares resource profiles of internationalized and non-internationalized small firms, then examines the impact of five types of resources on their internationalization strategies. results show that resource profiles drjfer between internationalized and non internationalized firms, and that social and financial resources are more important than human resources for small firms pursuing an internationalization strategy. for firms selling a greater variety of international products, achieved owner founder aaributes need to be strong. small firm managers should build a solid social network and develop international competencies if they plan to internationalize. introduction recent advances in technology and changes in government policy make it easier for small firms to internationalize. the telecommunication revolution of the past twenty years has improved the access of small firms to their customers, suppliers and overseas distribution channels. widespread government assistance programs offer counseling for small firms wishing to export by providing advice on foreign trade laws, international finance, and by helping firms to identify potential customers (moini, 1998; nation's business, 1998). it was estimated that more than 30% of all us exporters are small firms, (nation's business, 1998), and that more than 96% of a small firms'otential customers are located outside the united states (nation's business, 1998). a u.s. general accounting office report states the number of exporting small to medium-sized firms doubled over the past 5 years, and estimated that firms with less than 500 employees comprised 97% of total exporters in 1997, contributing more than one third of the total dollar value of vs exports (http: //www.soho.org/advocacy). hence, policy-makers oren advocate to succeed in a global world, small firms should go global. i journal of small business strategy vot. 13, no. l spring/summer 2002 but, even with the increased opportunities and encouragement to pursue a policy of globalization, internationalization is difficult. for example, it is still hard for small firms to form partnerships or alliances, and resource scarcity remains a problem (karagozoglu & lindell, 1998). other data from a recent dun and bradstreet survey indicated that only six percent of the nation's small firms export, suggesting that even with appealing market opportunities and greater governmental assistance, selling abroad can be time consuming,, intimidating and even risky for small firms. therefore, the major challenge facing small business owners is not to determine if there are international market opportunities, but deciding whether to pursue them. in this article, it is argued that the decision to internationalize ultimately depends on the resources and capabilities the firm has, or needs to compile, in order to effectively compete in international markets. however, for small firms that are inexperienced in internationalization, it is unclear if managers know whether or not they have the right resource profile for successful globalization. that is the purpose of this article. the following sections develop and then test a set of hypotheses that examine the impact of firm resources on internationalization. findings suggest guidelines for managers that might be used when making internationalization decisions. background and hypotheses to better understand the linkage between small firms and internationalization, the entrepreneurship literature was reviewed. a limited number of studies compared internationalized and non-internationalized firms, and of those that did, more than half were based on the stage theory of internationalization. stage theory describes internationalization as a sequential and evolutionary process that involves the management of increasingly complex contingencies in progressively less similar markets (johanson & vahlne, 1977). research using stage theory focuses on firm demographics (e.g., size, age), managerial background and perceptions, market commitment, and product attributes as the factors that motivate exporting (cavusgil &. naor, 1987; miesenbock, 1988; naidu & prasad, 1994; gankema, snuif, & zwart, 2000). although the stage theory has been criticized for its determinism (melin, 1993) and overemphasis on country specific experience (barkema & drogendijk, 2001), many studies use this theory as the basis for studying small firm exporting. in their comprehensive review of export-development models leonidou and katsikeas note that: "almost all models view[ed] the firm's involvement in export operations as an evolutionary and sequential process, based on the fundamental assumption that export activity develops from a series of incremental decisions" (1996: 525). in contrast, recent work developed from case studies of global start-ups argues that some companies may be international from inception (mcdougall, shane, & oviatt, 1994). based on the resource-based view of the firm, which argues that firm strategy is a function of the firm's unique stock of resources (barney, 1991; wernerfelt, 1984), the emerging international entrepreneurship perspective posits that a key difference between internationalized and nonintemationalized new ventures lies in their resource stocks, which includes founder anributes, organizational dimensions and social contacts. while few studies have examined the influence of resources on internationalization, or compared resource profiles for domestic and internationalized firms, some recent research suggests that small and medium sized enterprises (sme's) strategies consider human resources and resource richness as factors leading to internationalization (naidu &. prasad, 1994; reuber & fisher, 1997; burgell & murray, 1998). table i compares the empirical findings of the stage theory of internationalization with the international entrepreneurship perspective. 2 journal ofsmall business strategy vol. j3, no. i spring/summer 2002 table 1 literature review summary empirical support theory variables positive jvegative or mired findings findings bijmolt & founder founder zwart, 1994; attributes are anrtbutes calof & critical in the viviers, 1995 decision to expon stage firm naidu & larger firms theory characteristics prasad, 1994; aie more likely rynning & mixed results rynning di to export; anderson, suggesting other anderson, while 1994; predictor variables size & 1994; julian older firms leonidou, or when examined age & have a greater 1998 in conjunction with castrogiovan breadth of firm resources ni, 1995 geographic expansion tmt's international experience founder reuber & positively attributes fisher, 1997 associated with speed to foreign market entry firm characteristics internatmcdougall, small size not a ion at 1989; barrier for entreprensize and calof, 1993; internationalization; eursbip age shrader, firms ovian, di internationalize at a mcdougall, young age 2000 bloodgood, levels of sapienza, & resources resource almeida, positively stocks 1996; burgell associated with & murray, degree of 1998 internationalize ilon penrose (1959, 1971) argues that, the firm's pre-disposition for growth, either in size or in geographic scope, is dependent on the firm's bundle of different and distinctive types of resources. building on penrose's argument, the entrepreneurship literature points out that resources have a crucial inliuence on firm growth and survival strategies (stevenson & gumpert, 1985), and that resource profiles are one of the principal factors explaining internationalization in new ventures (oviatt & mcdougall, 1994). therefore it is proposed than 3 journal ofsmall business strategy vo/. /3, no. / spri nglsunimer 2002 /i ypothesis 0/ve (hl) resource profiles wil/ differ between internationalized and non-internationalized firms. besides expected differences between internationalized and non-internationalized firms, logic suggests that there will be variations with regard to the importance of specific resource bundles. if a firm's internationalization strategy draws on the resources of the organization, it is reasonable to expect resource variation to be related to the internationalization strategy pursued by the firm. so, for example, if the firm's internationalization strategy is based on serving a large number of markets (e.g., a strategy based on geographic scope), or conversely if the firm is targeting a smaller number of more specialized markets (e.g., a strategy based on scale), it is plausible that these strategies will be associated with different resource profiles. therefore it is proposed that: hypothesis tivo (h2)r internationalized firms will have different resource profiles depending on their internationalization strategy. methodology data collection and respondent characteristics this research was conducted in two phases. an exploratory study of 410 small firms was conducted where firms having less than 250 employees were identified.'hese firms were randomly identified from publicly available directories, according to technology sector (buckley tk brooke, 1992)'. in the first phase, 76 completed questionnaires were received, providing a response rate of 18.5'/o. the second phase used the same questionnaire and employed the same technology-sector sampling criteria. however, to improve the response rate, we identified trade associations related to each technology sector and personally requested their assistance in obtaining a list of firms. prior to mailing, each firm was contacted to (i) identify key informants, (2) update the firm's name and address, (3) identify firms that had ceased operating, and (4) extract promises of cooperation in completing the questionnaire.'or this second phase, we mailed 1120 questionnaires and used the dillman (1978) multiple contact method. fifty-nine questionnaires were returned with bad addresses, bringing the number surveyed to 1061. two weeks a(ter the initial mailing, a reminder postcard was sent to all firms except those from one trade association (financial services) who requested we contact their members only once. this first mailing resulted in 169 responses. a second mailing was sent to all non-respondents, followed by reminder post-cards two weeks later. the second mailing resulted in 39 additional responses, providing us with 208 responses from this phase (or 19.6'/o), for the total survey, the overall response rate from both research phases was 19,3'/o, yielding 284 useable responses. t-tests were performed to determine the appropriateness of pooling the data from the two phases (n=76 and n=208). no significant differences between the two samples were found on key variables including sales, total number of employees, and age of firm. for this study and consistent with the sba definition firms with less than 250 employees are considered small, in accordance with accepted government standards for small firms (the siote ofsmall business, 1995). buckley and brooke identified three technology sectors; primary, secondary and tertiary. primary industries are considered to be environmental and agricultural businesses; secondary are food equipment and service organizations; tertiary are finance and service organizations. 3 associations included: primary sectorthe farm equipment and irrigation associations; secondary sectornational barbecue association and national poultry and food distributors association; tertiary sectornational association of personal financial advisors. 4 journal of small business strategy vo/. /3, //o. l spring/summer 2002 of a small business, only those firms which had sales of $50 million or less and 500 employees or less were included, giving us a sample size of 128 (n = 128). thus, the findings of the statistical analyses are generalizable to u.s. small businesses across primary, secondary, and tertiary industrial technology sectors. the analysis sample was almost equally split between internationalized and nonintemationalized firms and following our sample stratification; it was equally distributed across industrial technology sector. overall, the firms were small (i.e., average sales volume of usd 4.5 million or less, average number of employees 34 or less), and old (i.e., average age over 18 years). all respondents were executives (founders/ceo's), with many performing more than one managerial function. over ninety percent of the respondents owned 50 percent in their business or more, and almost one-quarter of the respondents were women. the decision-maker profile of the survey respondents gives reasonable confidence as to the external validity of the findings. measures internationalization strategy internationalization strategy is defined as the "foreign market servicing strategy of a firm" (buckley, pass, & prescott, 1992). following previous work, the degree of internationalization was chosen as the operationalization for internationalization strategy. to insure validity, respondents were asked a screening question to determine if they were engaged in international activities; "are you engaged/not engaged in any of the following international activities, import, export, joint venture, license, joint venture?" then, to assess degree of internationalization, two distinct measures, scope of internationalization and scale of internationalization were used. while other authors have measured degree as a single item measure, for conceptual clarity, this research employed two measures. the first measure scope of internationalization is similar to bloodgood, sapienza, and almeida (1996) and captures the "extent" of value chain activity in internationalization. the second measure, scale of internationalization follows the more traditional measures of internationalization and includes percent foreign sales and number of markets served, which are also measures deemed to be appropriate for small firms (reuber & fisher, 1997). consistent with vernon (1974) and mcdougall (1989),scope of internationalization was used. specifically, respondents were asked about the international location of customers, competitors, employees or facilities. this was combined with a measure of the firm's international sources (following toyne, 1989) of raw materials, physical assets, product/service ideas, employees, and funding. the measures of international location and international sources were combined to arrive at an overall indicator, with scores from zero to nine, which represented the overall scope of internationalization of the firm. next, the scale of internationalization was measured using traditional measures from the international marketing literature (e.g., cavusgil, 1984; cavusgil & naor, 1987). these included percent of international sales of overall sales of the company; percent of products sold internationally, and the number of countries served by the company. these three measures were self-reported (see appendix). resources five resource types were measured (human, social, organizational, physical and financial) following previous work done by greene, brush and brown (1997). a five point likert scale was used ranging from highly unfavorab/e to highly eavorab/e with a defined neutral 5 journal ofsmall business siraiegy vob 13, na. l spring/summer 2002 anchor. in all cases highly favorable was numerically coded at 5.0 while the highly unfavorable anchor was coded as 1.0 (i.e., large numbers denote greater favorability). resource items were identified from previous sources (chandler & hanks, 1994) as well as conceptual work in entrepreneurship (bruno & tyebjee, 1982; vesper, 1990). all multi-item scales were factor analyzed and checked for reliability (see table 2). a correlation matrix reflects the means and standard deviations of the independent, dependent and control variables and shows the cronbach's alpha for each multi-item scale (see table 3). table 2 confirmatory factor and reliability analysis: multi-item scales ~rc t ~tt i dt human resources marketing expertise .76 international work experience .68 international business education .65 explained variance 74.0'/r eigenvalues 2.22 alpha .82 organizational resources operating efficiencies .88 cost structure .85 customer service capabilities .82 unique products/services .80 employeellntemational exp .74 multilingual staff .72 strategic alliances .71 explained variance 65.2rr eigenvalues 4.40 alpha .91 financial resources access to debt .91 access to equity .91 domestic profitability .71 explained variance 72 8r/r eigen values 2.16 alpha .81 human resources following prior research, human resources comprise a broad range of aspectsthe owner-founder's achieved attributes (becker, 1964), background in family characteristics, education, and experience (cooper, 1981), as well as attitudes, motivations and goals (davidsson, 1989; birley & westhead, 1990).'uman resources were measured according to three achieved attributes: marketing expertise, international work experience and international education, which were found to be significant in previous research studying differences between exporters and non-exporters (bilkey, 1978; cavusgil & naor, 1987). one item, expertise in technology, was dropped from the scale due to low factor loadings. 6 journal of small business strategy voh /3, no. i spring/summer 2002 table 3a mean, standard deviation for each scale variable measure m sd 1. scope international single objective 1.83 i .89 2. % international sales single objective 8.86 18.39 3. %international production single objective 23.13 26.53 4. number markets single objective 11.31 11.40 5. age single objective 18.52 16.16 6. sales (smillion) single objective 4.60 9.30 7. fte single objective 34.46 63.02 8. human resources scale 2.67 1.46 9. financial resources scale 2.42 1.49 10. organizational resources scale 2.93 1.32 11. social resources single subjective 2.98 1.78 12. physical resources single subjective 3.65 1.56 table 3b correlation matrix for each scale 1 2 3 4 5 6 7 8 9 10 11 12 i 40"'35" .33 .23~ ~ .26~ v .44"'39'" .34'" .40"'38"'is 2 .82"'29'ol .04 .04 .33'" .18'i8'39"'i3 3 34" )9 l4 -.07 .38" -.20 .07 .19 -.ol 4 .32'24 .10 .14 -.04 .11 .18 i i 5 .39"'50'" .00 .13 .16 .07 .01 6 .60'" .15 .21 .23v .i6 .02 7 .i8'23" .28" .19'll 8 .47'" .75'" .65"'54'" 9 .60'" .39"'46"'0 .57"'69"'1 .35"'2 note: the higher valueindicatesa positive relationship 'easured on a l0-pomt scale. 0 = none, 9 = ai i international measured on a 5-point scale, l = highly unfavorable, 5 = highly favorable v significant at pc 05 i 'v-signi/icant at px ol; "vv significant at pc 001 7 journal of small business strategy vol. 13, no. i spring/summer 2002 social resources social resources are defined as networks and alliances (bordieu, 1983). in the international marketing literature, social resources, or personal contacts of the manager or founder are shown to motivate exporting (cavusgil ez naor, 1987). social resources of the respondent (which in this sample is the firm founder or owner) were operationalized using a single measure, personal networks and relationships.'hyslcavi'echnology resources physical resources were represented by up-to-date equipment and technology (hofer bc schendel, 1978). similarly, a multi-item measure is preferred, but this was also a single item measure. organization resources organizational resources include systems, policies, culture and the knowledge of the organization members (other than founders) as well as routines and structures (tomer, 1987; 13ollinger, 1995). following this definition, procedures, expertise of staff, and finn routines and capabilities were measured using a seven-item scale. financial resources financial resources, access to debt and equity (bygrave, 1992), were measured using a three-item scale. industrial sector industrial sector was measured as a categorical variable: coded as i (primary sector), 2 (secondary sector), and 3 (tertiary sector). two dummy variables were created; sector i and sector 2, where sector i= i if primary industry, 0 otherwise, and sector 2 = i if secondary industry, 0 otherwise; with the tertiary industry serving as a referent point. firm demographics firm rige the age of the firm was determined by subtracting the year in which the firm was founded from the survey year. firm size the size of the firm was determined by measuring the dollar sales volume and by the number of full time employees (fte). findings to test hypothesis i, a multivariate analysis of variance (manova) was run to determine if the resource profiles varied between internationalized and non-internationalized. results in table 4 show there were significant differences between internationalized and noninternationalized firms across all resource stocks. a series of univariate tests revealed that the social, organizational, financial, physical, and human resources of internationalized companies were significantly different than the resource stocks of non-internationalized companies. in all cases, the perceived favorability of all resource stocks was higher for internationalized companies. these results provide strong support for hypothesis one. hypothesis two was tested using hierarchical regression. hierarchical regression is a technique by which the researcher first specifies the regression equation with a subset of the variables in the overall model, and then respecifies the equation a second time adding the additional variables of interest. this allows the researcher to test for the added significance of 'hile multi-item measures are preferred, there is precedent for single item measures in the entrepreneurship area (cooper zk gimeno-gascon, 1992). 8 journal of small business strategy vol l3, no. l spring/summer 2002 table 4 comparisons between internationalized and non-internationalized companies internationalized univariate nonvariable internationalized (n = 55) m sd m sd age 14.50 11.90 21.75 18.53 8.26" sales 1.34 3.52 7.36 11.80 13.16"'$ million) fte 17.26 20.79 19.58 24.76 14.52e e e human res. 2.05 1.59 3.18 1.14 17.21eeet organization res. 2.42 1.57 3.41 .78 17.50"" financial res. 1.70 1.40 2.95 1.31 22.72"'t social res. 2.04 1.86 3.70 1.32 28.39"" physical res. 3.32 1.98 3.95 1.05 4.51" '-significant ai p&.05; "-significant ai pc oi; "e-stgm/icont at p5.00l t ma/(ova summary for resources pittais f (1, 50) = 6gt 7eee, r = .35; power = .99 the additional variables. as is consistent with the technique, the tests for this hypothesis were conducted in two stages. first, the regression was conducted without the effect of firm resources (see table 5, model 1). this model tested the predictive value of size, age and industrial sector alone on the dependent variable, small firm internationalization strategy. next, the regression equations were run again with size, age and industrial sector as well as all five sets of firm resources (see table 5, model 2). this test determined the predictive effects of specific resource groups on the dependent variable, small firm internationalization strategy. we used four different measures of internationalization strategy. the predictor variables were regressed on each of the four measures of degree of internationalization: scope of internationalization, percent international sales, number of markets served, and percent products sold internationally. results are presented in table 5. when comparing model one and model two using scope oi internationalization as the dependent variable, there is little improvement in the explanatory model when resources are added, indicating that the addition of resources to the model does not significantly contribute to the model's overall predictive accuracy. however, when comparing model one and model two using scale of internaiionalization as the dependent variable, there are significant changes when resources are included, indicating that the addition of resources to the equations does help to predict small firm internationalization. specifically, when scale of internationalization is operationalized as percent of international sales, the overall model changes from insignificant to significant and human and social resources are significant at the p& .05 level (see table 5.) interestingly, when scale ofinternationalization is operationalized as number of markets served, the partial f test shows there is no improvement in predictive accuracy when resources are added to the equation. 9 journal ofsmall business strategy vol. i3, no. i spring/summer 2002 table 5 hierarchical regression estimates of firm demographics and resources on small firm internationalization strategy 'cale of internationalization scope of percent of internationalization percent products sold in = 128) international sales markets served" (n = l2g) internationally 'n = 66) model i model 2 model i model 2 model i model 2 model i model 2 age -.0832 -.0656 0777 -.0270 .2446 .3126 -.2538 -.0760 sales -.0095 -.1290 .0263 -.0142 .2854 .3139 -.1427 -.1616 fte .4196" .4448'" 3 535e-05 -.0622 -.1415 -.1784 .1106 0549 sector i .2707" .2266'2242 .2840'2585 .3084 .2948 .3337 sector 2 .1099 .1213 .1261 .1865 .0350 .0510 2074 .2818 hum.res 1712 .2897i .3655 .8236'* finres .0509 0512 -.0722 1525 org res .1452 -.2753 -.0503 -.4673 soc res 1119 .3356" .0412 0225 phys res -.0939 .1559 .0261 -.0325 regression function: f 6.8631~" 6.5661i" .7616 3.0151" 2.1801t 1.6341 .7163 2.3155'dj.r .2046 3465 .0106 .1610 .1182 .1285 .0000 .2344 partial f .4366 5814 .8415 2 5421' li nternati onatized campam'es only t sigmficaai at pg i; 'ignificant ai ps 05; "u significant at pr oi; '"significant ai pc ooi finally, when scale of internationalization is operationalized as percent of products sold internationall, the partial f test suggests significant improvement when resources are added to the model. in this case, model one is insignificant, but model two which includes resources is significant. in addition, the individual resource category human resources, is highly significant at the pg .01 level. io journal of small business strategy vo/. /3, no. i spring/summer 2002 discussion and implications our objective was to examine the differences in resource profiles of internationalized and non-internationalized firms and then to assess whether internationalized firms have different sets of resources depending on their internationalization strategy. following is a discussion of our three principal findings. resource profiles differ between internationalized and non-internationalized small firms. our expectation that resource profiles would vary between internationalized and noninternationalized firms was confirmed (see table 4). all five types of resourcessocial, organizational, financial, physical and human resources differed significantly, and of these resource types, all except one (physical resources) were highly significant at the p& .001 level. this supports penrose's (1959, 1971) contention that the future expansion of a firm is influenced by the resource expectations of the owner/founder, as well as greene and brown (1997) who argue that the growth strategy of the firm will influence resource stocks. the greatest differences between internationalized and non-internationalized firms were evident in stocks of social and financial resources. while early export marketing literature examined demographic characteristics of the founder, (e.g., foreign language capability, experience, education) (miesenbock, 1988) our study found these human capital variables were less significant than social and financial resources. we interpret this to mean that for internationalized firms, the contacts and networks of the owner/founder, better known as his/her social capital as well as the owner/founder's access to financial resources, need to be relatively more favorable than achieved human capital attributes. the significance of the entrepreneur's social resources also suggests that international networking or boundaryspanning activities are important to develop if the company plans to internationalize. this finding supports network researchers'ontention that leveraging networks is a particularly useful route to internationalization for small and medium sized enterprises (axelsson & johanson, 1992; mcnaughton & bell, 1999). it also supports ovian and mcdougall (1999) who posit that in addition to human resources, it is the strength of the international networks or social capital in combination with the financial ability to leverage those networks, which are critical for small firm internationalization. in addition, oviatt and mcdougall (1999)observe that the stage model of internationalization, is inadequate in that it only considers the influence of human resources on firm internationalization. they argue that with increased globalization, the logic of a human resources only predictor for small firm internationalization seems less persuasive, therefore other resource types, especially social networks and contacts, also must be considered. similar to this logic, our research shows that both the international exposure of the owner/founder or of the top management team as well as their social and financial resources led to increased small firm internationalization. for small firm owner/managers planning to internationalize a strong resource based is required. the decision to internationalization is clearly multi-faceted, and a successful internationalization strategy draws on more resources than just experience, education and personal knowledge. therefore, owner/managers would be at a distinct disadvantage if the decision to internationalize was made solely based on their human resource stocks. age, size and industry effects although there are significant age and size differences between internationalized and non-internationalized firms (see table 4), when we ran regression analyses across all four measures of internationalization strategy, results showed that size (measured by full time employees) and industry sector were significant only when internationalization was operationalized as scope of internationalization (see table 5). in ll journal of small business strategy vo/. /3, no. l spring/summer 2002 addition, we found that adding resources to the model yielded no predictive improvement. this finding supports the stage model of internationalization which states that as firms grow in size and experience, they are more likely to internationalize (johanson & vahlne, 1977). given that our measure of scope of internationalization included location of oltices, employees, a range of sources of supply, customers, and ideas, it is reasonable to expect that larger sized companies would be more likely to have greater scope of internationa/ization (leonidou, 1998). furthermore, we expected that firm resources, especially organizational and social resources, also would be associated with scope of internationalization, but findings indicate that the addition of resources to the model failed to improve its overall predictability. this suggests that if a company plans to have international customers, oaices, and sources of supply, sheer size (measured by number of employees) is of critical importance. for managers of small firms, this finding may influence their choice of internationalization strategy. for example, if the small firm has not yet achieved a critical mass in terms of number of employees, however it still is interested in pursuing a strategy of internationalization, then owner/managers may want to consider licensing or developing agency-type relationships with other firms or individuals who could conduct the international portion of their business for them. then, when critical mass is achieved, the small firm can reassess this decision, and move to a different mode of foreign entry, if appropriate. resource profiles differ depending on internationalization strategy although our results did not yield strong support for the effect of resources in explaining differences in internationalization strategy, resource profiles do vary when measured by percent products sold intemationafly and percent international sales (see table 5). when firms sell a greater variety of products internationally, human resources, or the owner/founder achieved attributes (international work experience, marketing and international business experience) are significantly stronger. this implies that the owner/founder may have a broader international perspective, derived from experience, which decreases the perceived risk of selling products abroad and/or results in greater knowledge of the likelihood of products selling in other countries. while this finding is related to work showing that international perspective or anitudes of the manager does distinguish between exporters and non-exporters (bijmolt & zwart, 1994), our measures of achieved attributes go beyond the idea of attitudes, suggesting that owner/founders of internationalized firms may have certain "international competencies". given that entrepreneurial competencies are a composite of knowledge, skills and experience that lead to successful outcomes (bird, 1995), it is reasonable to expect that the human resource types are important to selling more products abroad, and therefore, would be associated with particular international skills, experience, or competencies. in aggregate, the results of this study suggest that for upstream value chain activities, such as the location and sources of supply, firm size is most important. conversely, for downstream value chain activities, which involve distribution and sales activities, the human and social resources of the founder are more important than firm demographics. it is possible that this reflects the depth of international commitment by a firm. it seems quite likely that firms that are newer globalizers are more likely to distribute and sell their existing products abroad, to new markets (vernon, 1974). however, when a firm has more internationalization experience, or alternatively is larger and therefore may have a wider product line, then using international sources of supply may make more sense. therefore, depending on the type of value chain activity, our findings confirm that internationalized firms have different resource profiles. 12 journal ofsmall business strategy vol. 13, no, i spring/summer 2002 future research there are a number of possible extensions to this research. first, expanded measures of financial, social, physical and technical resources should be utilized. for example, our measure of financial capital included perceived access to debt, equity and favorable domestic profits however; the actual capital structure of firms (i.e., size of bank loans, venture capital infusions and dollar profits) might yield a more extensive picture of the importance of financial resources to the internationalization effort. the same is true for social resources, which was measured using a single item. expanded measures of networks, types of contacts, frequency, location and characteristics of the relationships would provide more detail on the effects of social resources in internationalization strategy. importantly, a follow-up survey would add longitudinal depth. second, the impact of internationalization strategy and resources on competitive advantage and subsequent firm performance are important questions that remain un-addressed. for example, the extent to which resource combinations, which for small firms yield a unique advantage domestically, are transferable to larger international markets is another empirical question (hymer, 1976 [1960])left for future empirical exploration. in addition, our study only looked at small firms located in the united states. therefore, our findings are only generalizable to this population of small firms. additional research using a sample derived from an international population would both enhance the generalizability of the findings and add a much-desired comparative element to the study. conclusions this study examined the differences in resource profiles between internationalized and noninternationalized small firms. there are three main findings: resource profiles differ between internationalized and non-internationalized small firms. all five types of resources social, organizational, financial, physical and human resources differed significantly, with the greatest difference being social and financial resources. although there are significant age and size differences between internationalized and non-internationalized firms, results showed that size (measured by full time employees) and industry sector were significant only when internationalization was operationalized as scope of internationalization. resource profiles differ based on percent products sold internationally and percent international sales. when firms sell a greater variety of products internationally, human resources, or the owner/founder achieved attributes (international work experience, marketing and international business experience) are significantly stronger. this article builds on previous research from the stage theory of internationalization, and on the theory of new venture internationalization first proposed by mcdougall, shane and oviatt (1994). it adds to previous work by examining specific resources and their link to small firm internationalization (naidu 6't prasad 1994; bloodgood, sapienza & almeida, 1996; leonidou 1998; reuber6't fisher, 1998). there are important implications for managers seeking to pursue an internationalization strategy. our findings suggest that if managers plan to internationalize, they should assess 13 journal of small business strategy vol. /3, no. / spring/summer 2002 their resource base and develop a strategy for building or acquiring social, financial and organizational resources in addition to their own human resources. for managers interested in internationalizing in multiple markets, larger and more established firms have greater likelihood of success. conversely, for managers with a focused strategy, or for smaller firms, solid human, social and financial resources are essential for success. references axelsson, b., & johanson, j. 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(1984). a resource-based view of the firm. strategic management journal, 5, 171-180. linda f. edelman is assistant professor in business strategy & policy at bentley college and rescarcit fellow at ivarwick bustness school in coventry, united kmgdom. she received her dba from boston university lier current research eramines knowledge leveragmg and prjoect-based learning nt multtnational firms as well as resources and strategies in new ventures. in addttton to making numerous international conference presentations, dr. edelman has written two book chapters and has publisited articles injournals including international small business journal, organi ation development jovrnal, and frontiers of entrepreneurship. candida g. brush ts an associate professor of sirategy and policy, dtrector of the council for lynmen's entrepreneurship and leadership (cwelj, and research dtrector for the entrepreneurial management insttttrte at boston um'versity. she has a dba from boston untversity. she is ihe author of two books, fourteen book chapters, and 45 scholarly articles. dr. brush received the 200i mentor riward for the enirepreneurship division of the aom her current research investigates growth trajectones of women-owned businesses, and resource strategies of new ventures. ivith four other researchers, she was sponsored by the kaujfman center for entrepreneurial leadership (o study ihe influence ofequity ftnoncing on women led ventures, referred to as the diana project. ms. tatiana s. manalova is a doctoral candidate m strategy and policy at boston university's school of management hcr current research mterests include international enirepreneurship, competitive strategies for small multinationals, and organizational formation and transformation in transittonal economies. recent articles were published in the internotional small business journal and global focus. 16 journal ofsmall business strategy vol. 13, no. 1 spring/summer 2002 appendix: questionnaire items scope of internationalization 1. please, indicate the location and sources of the following for your business (sum of nine binary item scores, scale range = 0 (none international) to 9 (all international) location domestic international sources of ... domestic international customers raw materials competitors physical assets employees product/service ideas facilities/offices employees financing scale of internationalization (self reported) percent international sales number countries/mar/rats served number products sold abroad resources i. please rate the favorability or unfavorability of the following dimensions for your success in the global marketplace —likert scale = i (highly unfavorable) to 5 (highly favorable) human resources international work experience international business education marketing experience expertise in technology and communications (eliminated due to low factor loading) organizational resources operating efficiencies cost structure customer service capabilities unique products/services multilingual staff employees with international experience strategic alliances and linkages financial resources access to debt financing access to equity financing domestic profitability social resources personal networks and relationships abroad physical resources up-to-date equipment and computer technologies 17 summer journal employee retention in growth-oriented entrepreneurial firms: an exploratory study bruce h. kemelgor university of louisville bhkeme01@louisville.edu william r. meek university of louisville bill.meek@louisville.edu abstract this study uses a sample of 47 high-growth small firms to examine the understudied topic of employee retention. we found that firms reporting very low annual voluntary turnover (0-2%) rates engaged in creating a positive work environment, provided employees more freedom and flexibility, offered ample employee involvement and opportunities for growth; were clear about the processes associated with compensation and benefits, and frequently communicated with and provided assistance to their employees. firms reporting turnover higher than 10% for the past year described their retention practices in much diminished frequency and richness along these same dimensions. given that these firms were all part of a pool of 77 high growth small companies (over $1 million annual revenue, less than 12 years old and compound annual growth greater than 15%), retention of intellectual capital would be a prime issue. industry differences among the companies are explored and theoretical and practical implications are discussed. introduction a recent edition of entrepreneur magazine stated that the retention of key employees is the biggest problem facing entrepreneurial companies (entrepreneur, 2006). with today’s increasingly competitive global economy, the retention of intellectual capital would appear to be a prime issue for entrepreneurial companies around the world, yet it remains understudied in both the human resource (hr) and entrepreneurship literature (hayton, 2003; hornsby and kuratko, 2003). cardon and stevens (2004) suggest retention is the most overlooked factor in growth-oriented firms besides organizational culture. as scholars, we are beginning to understand how to hire, pay, and perhaps even motivate workers in small growth-oriented firms. however, there is little theory or data concerning issues of retention within evolving organizations. thus, this study seeks answers to the research question: “what hr practices appear to have positive employee retention r e s u l t s a m o n g g r o w t h o r i e n t e d entrepreneurial firms?” this is important because, to date, very few studies look at factors influencing employee retention in entrepreneurial firms, although “few imperatives are more vital to the success of young companies than retaining key personnel” (baron and hannan, 2002; 21). evolutionary economic theory (nelson and winter, 1982) and the accompanying work on strategic management of intellectual capital (winter, 1998) provide a theoretical foundation for the importance of employee retention in young firms. nelson and winter’s focal point is that organizations and accompanying organizational performance are simply a reflection of deeply engrained 74 strategyjournal of small business mailto:bhkeme01@louisville.edu mailto:bhkeme01@louisville.edu repertoires, norms, and routines. winter further elaborates that these knowledge processes are the defining characteristics of an organization and these routines are a reflection of how an organization really f u n c t i o n s a n d t u r n s k n o w l e d g e i n t o organizational memory (winter, 1998). organizational memory within a new firm is developed from the constant repetition of activities within an organization and related codifications into rules and procedures that allow for the lessons of experience to be retained and accumulated over time in routines (nelson and winter, 1982). thus, o r g a n i z a t i o n a l m e m o r y a n d t h e accompanying routines are often the way in which knowledge is exercised in a firm. yet, i n s m a l l , f a s t g r o w i n g f i r m s t h e organizational memory and routines may not be explicitly codified or recorded, but simply reside in the knowledge structures of the c u r r e n t e m p l o y e e s . t h e r e f o r e , t h e s e individuals are often the key resource for valuable ideas to bundle knowledge and resources to create incremental innovations (ireland and webb, 2007). retaining these individuals is a key requirement for m a i n t a i n i n g s u s t a i n a b l e g r o w t h a n d remaining competitive. the potential loss of organizational memory through employee turnover is a major impediment for newer firms. while voluntary employee turnover is good for established firms because it disrupts the existing patterns of communication and brings new knowledge, it is bad for new firms because individual employees take knowledge with them that is not yet part of the norms and routines of the firm (aldrich, 1999). scholarship focusing on the retention issue to which scant attention has been paid would shed light on what draws and keeps employees engaged as well as what drives their performance (cardon and stevens, 2004; rutherford, buller, and mcmullen, 2003). another important facet of this research study is its attention to some of the weaknesses of other retention studies. heneman and tansky (2002) suggest that simply extending existing retention models from large firms to small emerging firms would not be meaningful, since it has not worked well to extend other hr practices from large firms to small ones (barber, wesson, roberson, and taylor, 1999). instead, we should develop hr theories such as those dealing with retention that are specific to small growth-oriented firms and their strategic practices (heneman and tansky, 2002). further, we follow the suggestion of heneman and tansky (2003) to address gaps in the literature by conducting descriptive surveys of practices and developing new data sets that are designed to test specific hypotheses and theory. this article adds to the literature by specifically examining the frequency and extent of retention practices that high-growth entrepreneurial firms utilize. in following the above prescriptions, it has been noted that in many small emerging firms, founders do not think about hr issues as distinctly different from other issues in the firm, but rather as a flow of interrelated activities that change and fluctuate over time that they deal with concerning their employees (cardon and stevens, 2004). we used the most widely used definition of small business – the one specified by the small business administration (e.g., peterson, albaum, and kozmetzky, 1996; stewart, watson, carland, and carland, 1999) – that generally classifies a firm as small if it has less than 500 employees. in applying the “muddle through” approach, many of these founders/managers probably stumble upon ways to manage and retain personnel that do not fit into our traditional notions about hr. therefore, data should be gathered concerning what these founders/ managers are actually doing and the impact of those activities on employee retention. aldrich (1999) points out that we know very little about how hr evolves in firms until those firms reach older stages of growth and have become medium or large in size. looking at both informal as well as formal mechanisms through which small growthoriented firms manage employee retention issues while continuing to address growth, would provide a more practical and theoretical view focused upon such firms and how their retention practices develop. therefore, we first examine what we know a b o u t e m p l o y e e r e t e n t i o n . t h e n w e summarize relevant retention factors which lead to the creation of testable hypotheses. volume 19, number 1 spring/summer 2008 75 finally, we report results and discuss implications for both theory and practice. the cost of poor employee retention practices several studies suggest that the total cost of voluntary employee turnover (i.e., voluntary quits) varies between 150% (ramlall, 2003) to 250% (henricks, 2006) of the employee’s annual salary. this includes all of the recruitment and training costs, not to mention the public perception of the company, employee morale and productivity, and many other factors. of course, the more talent a person brings to the company, the more expensive that person is to replace. this may be especially true for high growth entrepreneurial companies where intellectual capital is often the competitive advantage (becker and gerhart, 1996; delaney and huselid, 1996; hayton, 2003). and the pressure to keep key employees is even greater for small companies because they usually can’t offer the same amount of salary, benefits, or opportunities for advancement that are available in large companies (henricks, 2006). losing even one key employee engenders far-reaching consequences and, at the extreme, may jeopardize efforts to attain organizational objectives. small, growthoriented firms are especially vulnerable. frazee (1996) reported on a study of 434 ceos of fast growth companies and found that 47% said their lack of skilled workers was a barrier to their companies’ growth. if we consider that entrepreneurial companies seek to grow and capture market share, employee retention becomes a critical human capital objective. retention factors most employees come to expect salaries and benefits and are therefore not motivated by them (henricks, 2006; smither, 2003). key elements in helping make any company a good place to work include: being treated fairly, flexible hours, opportunities for meaningful contributions, opportunities for growth and skill development, a positive work environment and culture, and frequent management feedback (arthur, 2001; dibble, 1999; glanz, 2002; mckeown, 2002; rye, 2002). the aforementioned elements thus provided the basis for the construction and development of our survey assessment instrument. as small, growth-oriented o r g a n i z a t i o n s e v o l v e a n d p u r s u e sustainability, many of these key elements appear relevant in providing an attractive work environment. however, heneman and tansky (2002) offer evidence suggesting that small firms have strategic human resource issues which are different than those of large firms. small firms also cannot afford to have a separate human resource department or personnel exclusively devoted to addressing these issues (cook, 1999), thus leaving responsibility to the owner or manager. additionally, many small firms do not make explicit formal hr procedures (such as an employee handbook) that are often standard in large organizations (aldrich and langton, 1997). with so many challenges associated with managing the business to address, human resource issues are often pushed to the end of the priority list or do not appear there at all (macmahon and murphy, 1999). we now discuss each of these retention factors and their perceived importance to employee retention within small, growthoriented firms. positive work environment t h i s f a c t o r i s a s s o c i a t e d w i t h t h e organization’s culture and practices of valuing employees as an asset, not a cost. companies that actively promote a positive work environment, and who also value employee contributions while achieving a true work-life balance have been found to be more successful at communicating the idea that their employees are one of their most valuable resources (hom and kinicki, 2001; mcgrath, 2006; mitchell, holtom, lee, sablynski, erez, 2001). others have suggested the aspects of the workplace as being enjoyable or fun, the organization being a special place to work, and the firm regarded as an employer of choice (butler and waldroop, 1999; kristof, 1996; saks and ashforth, 1997). taken together, these dynamics, if positive, portray a workplace that values its people and their talents. this leads us to the following hypothesis: journal of small business strategy 76 h1: companies that display greater characteristics of a positive work e n v i r o n m e n t w i l l h a v e h i g h e r employee retention than companies that display fewer characteristics of a positive work environment. freedom & flexibility in growth-oriented entrepreneurial firms, there is a high dependence upon most employees to be multi-skilled and exhibit s o m e f l e x i b i l i t y i n b o t h s k i l l s a n d scheduling. thus, in the recruitment of these employees it becomes necessary to present a realistic job preview that addresses many of the roles they will be expected to fulfill and the level of freedom they will have in conducting these roles. most people seeking to work in a start-up or small entrepreneurial firm are often attracted to it for these varied role opportunities (kickul, 2001). in addition, providing opportunities for employees to showcase special talents by working on interesting or meaningful projects is often seen as an essential attraction that small firms can provide (mitchell et al, 2001). this leads us to the second hypothesis: h2: companies that offer higher levels of flexibility and freedom will have higher levels of employee retention than companies that offer lower levels of employee flexibility and freedom. employee communication & assistance apparently, one of the most important f a c t o r s a s s o c i a t e d w i t h e m p l o y e e commitment to a firm is the extent to which clear and frequent performance feedback is provided. high performing employees are especially interested in receiving frequent, specific feedback (prewitt, 1999; smither, 1999). recent research on employee commitment and the likelihood of staying with the firm indicate a strong positive relationship (kickul, 2001; payne and huffman, 2005). in an entrepreneurial firm, it is likely that the environment is marked by turbulence and changing objectives (hayton, 2003). thus, it seems logical to assume that a need exists for clear communication of expectations along with frequent feedback. finally, adequate help and support to complete job assignments have consistently been cited as important to job satisfaction. this leads us to the next hypothesis: h3: companies that provide frequent feedback and clear expectations will have higher levels of employee retention than companies that provide infrequent feedback and unclear expectations. employee involvement & growth one of the frequently cited reasons for working in a large company is the clear path for career advancement and growth. smaller, entrepreneurial companies simply lack varied career ladders. employees seek to enhance their skills and increase their earning potential, whether the firm is large or small. if the entrepreneurial firm can provide such things as training, mentoring relative to career goals, and growth through employee empowerment the likelihood of their employees remaining loyal is significantly increased (delaney and huselid, 1996; payne and huffman, 2005). loyalty, or organizational commitment, is the relative strength of the individual’s identification with and involvement in a particular organization (mak and sockel, 2001). individuals exhibiting loyalty are not prone to leave (mitchell et al, 2001). one aspect of e n h a n c i n g l o y a l t y i s p r o v i d i n g t h e employees a stake in decision-making and the freedom to communicate throughout the organization. additionally, some people are now setting career paths based on their own values and definitions of success, thus redesigning how they contribute to their prospective organizations on their own terms (mcgrath, 2006). this leads us to the fourth hypothesis: h4: companies that offer greater options for employee involvement and growth will have higher levels of employee retention than companies that offer lower or fewer options for employee involvement and growth. compensation & benefits a recent article in harvard business review discussed the findings of two nationwide studies. the results indicate that of numerous volume 19, number 1 spring/summer 2008 77 factors associated with keeping good employees, pay was the least significant factor – money is not a prime motivator (prewitt, 1999). this is not to suggest that pay, or good benefits are not important – they are. it is just that good pay and benefits are expected and are readily available in our society (prewitt, 1999). what seems more important than pay or benefits, per se, is awareness of how such rewards are calculated or determined (mulvey, leblanc, h e n e m a n , a n d m c i n e r n e y, 2 0 0 2 ) . knowledge about compensation and benefit options impact retention. in particular, employees are more likely to remain with an organization when the rewards and actions n e c e s s a r y t o e a r n r e w a r d s a r e w e l l understood (mitchell et al, 2001; mulvey et al, 2002). aside from pay, benefits have become an even more critical factor for retaining good employees (henricks, 2006), especially for smaller firms. we could envision a scenario where the small, growthoriented company is sacrificing the costs of benefits that match larger employers and taking the savings to reinvest in growth. this is where stock options frequently are applied in entrepreneurial firms. imposing a t r a d i t i o n a l i n c e n t i v e p r o g r a m i n a n entrepreneurial venture may be the easiest thing to do, but the challenges inherent in working in a start-up or fast growth firm imply a new relational contract. in a new, growth oriented firm, traditional models (of c o m p e n s a t i o n a n d r e w a r d s ) a r e n o t embedded in a company history. thus, the possibility exists that alternative views of what is fair and equitable in that context can emerge. this leads to the final hypothesis: h5: companies that offer well-defined and varied compensation and benefits programs will have higher levels of employee retention than companies with unclear procedures or limited options regarding compensation and benefits. methodology sample the local chamber of commerce of a midwestern (u.s.) city of just over one million people provides support and mentoring for small firms they have identified as fast-growth. presently, 77 such firms are part of this portfolio. the firms range in age from just over 18 months to 12 years, with the vast majority between 4 and 8 years in business. these firms have exhibited compound growth rates of at least 15% annually and at least $1 million in revenue each year. sample firms were contacted u s i n g a m u l t i p l e m e t h o d f o r m a t . a presentation was given at a meeting comprised of founders/ceos of the fast growth firms announcing the launch of the retention study. the firms were then sent an e-mail inviting participation together with a link to an on-line survey instrument. following dillman’s (2000) multiple contact approach, all firms were contacted by e-mail after two weeks and asked to participate if the survey had not been completed. after 1 month, firms were then called and the founder/ceo reminded to complete the survey if they had not already done so. of the 77 companies that were invited to participate, 47 completed the web-based survey, resulting in a response rate of 61%. in almost all cases, company founders or one of the founding team members completed the survey instrument. in the few remaining cases, a ceo who was hired to manage the firm responded to our request. based upon the self-report of describing their company in 10 words or less, various industry profiles emerged among these fastgrowth companies. using just the brief descriptions, two senior members of the chamber of commerce who had working knowledge of the companies helped the authors sort the responses into industry groups. the five resultant groups are ( n u m b e r o f f i r m s i n p a r e n t h e s i s ) : m a n u f a c t u r i n g ( 11 ) ; b i o m e d i c a l ( 8 ) ; information technology (12); consulting and related services (9); and service (7). research instrument the survey instrument was designed after conducting relevant literature reviews and an assessment of some existing instruments (e.g., arthur, 2001; dibble, 1999; glanz, 2002). additional input was derived by holding interviews with three top executives of a world-wide human resource consulting firm. the 21 survey items plus five journal of small business strategy 78 additional firm-specific items (age of firm, size of firm, years in operation, respondent’s position with the firm, and specification as to the voluntary turnover during the past 12 months) were then compiled and a follow-up evaluation was held through a pilot test of 14 firms owners. the results of this pilot test indicated the items measure the concepts they are intended to measure. additionally, although none of the previous survey instruments (arthur, 2001; dibble, 1999; glanz, 2002) reported reliability measures, we found reliability levels that were all quite acceptable. the factor we labeled positive work environment had a cronbach’s alpha of .83. the employee freedom and flexibility factor and the employee involvement and growth factors each displayed a cronbach’s a l p h a o f . 7 2 w h i l e t h e e m p l o y e e communication and assistance factor indicated a cronbach’s alpha of .73. finally, because the compensation and benefits factor included only two items, a measure of reliability was not possible. however, the correlation between the two items (.62) was significant at the .01 level, suggesting a strong relationship between these two items. the 21 survey items were measured using a likert scale from 1 (not at all), 2 (slightly), 3 ( s o m e w h a t ) , 4 ( q u i t e a b i t ) , a n d 5 (significantly). results an analysis of the 47 companies revealed the following information. thirteen firms exhibited the highest levels of employee retention (lowest turnover) at 0 to 2% annual employee turnover. another six firms displayed turnover rates of 3-5% annually. eight firms displayed turnover rates from 6-8% annually. six firms displayed annual turnover rates of 9-10% and thirteen firms displayed turnover rates greater than 10% annually (the lowest level of retention in our survey). based on this distribution we chose to compare the 13 companies with the highest retention rate to the 13 companies with the lowest retention rate to determine if significant differences exist between the two groups’ retention practices. ttests were used to measure whether there was a significant difference between the very high retention group and the very low retention group. t-tests are a useful tool for understanding whether a difference exists between two groups in social science research. table 1 provides the t-values and significance levels of all the variables compared in our study. these variables include questions from each of the clusters in our study: creation of a positive work environment, employee freedom and flexibility, employee involvement and g r o w t h , e m p l o y e e c o m m u n i c a t i o n / assistance, and employee compensation and benefits. a total of 21 items comprise this data pool. five additional items were openended responses, seeking input relative to specific employee practices (e.g., how does the company demonstrate it trusts its employees?). an examination of the t-tests shows that all values are greater than the required score of 1.96 in order to be significant at the .05 alpha level. a closer look shows that all of the variables are significant at the .001 level as well. the first hypothesis (h1) predicted a higher level of employee retention for firms that create a more positive work environment. this hypothesis was supported. the six items reflecting a positive work environment were all significant. these items and their associated significance levels and t-scores are presented in table 1. this implies that there are statistically significant differences in the practices associated with positive work e n v i r o n m e n t s i n t h e h i g h r e t e n t i o n companies versus the practices in low retention companies. hypothesis 2 predicted a higher level of employee retention for firms that offer higher levels of employee flexibility and freedom. this hypothesis was supported. the five items reflecting the level of employee flexibility and freedom were all significant. these items and their associated significance levels and t-scores are presented in table 1. this implies that there are statistically significant differences in the extent of employee flexibility and freedom in the high retention companies versus the low retention companies. volume 19, number 1 spring/summer 2008 79 journal of small business strategy 80 table 1. factors of retention, t-scores, degrees of freedom (df), and significance levels of highest retention versus lowest retention companies in the sample¹ factors t-scores df significance positive work environment (alpha (α) = .83) 1. actively promote positive work environment 35.560 25 .001 2. insure the workplace is fun and enjoyable 19.000 24 .001 3. employees know why this is a special company 22.437 24 .001 4. strive to be an employer of choice 23.645 25 .001 5. offer a sincere work/life balance 19.403 25 .001 6. value employee contributions 29.439 25 .001 employee freedom & flexibility (alpha (α) = .72) 1. offer meaningful work for employees 21.755 25 .001 2. provide freedom to work on/choose interesting projects 15.000 24 .001 3. opportunity for employees to showcase talents 20.540 25 .001 4. offer employees flexible work schedules 15.218 25 .001 5. stock options offered as part of compensation 8.597 25 .001 employee involvement and growth (alpha (α) = .72) 1. encourage using a variety of communication channels 19.114 24 .001 2. insure employees involved in relevant decision making 27.979 25 .001 3. help employees develop career goals 13.874 25 .001 4. employee empowerment/freedom to do job 35.058 25 .001 5. paths to promotion are clearly defined 16.481 25 .001 employee communication/assistance (alpha (α) = .73) 1. managers & leaders make work expectations clear 20.482 25 .001 2. frequency of managers feedback 25.456 24 .001 3. provide employees adequate help and support 27.933 25 .001 compensation & benefits (correlation = .62**) 1. employees understand how compensation is calculated 17.000 24 .001 2. fair treatment/respect of employees 47.434 25 .001 hypothesis 3 predicted a higher level of employee retention for firms that offer more frequent performance feedback and clear expectations. this hypothesis was supported. the three items reflecting the level of performance management/feedback were all significant. these items and their associated significance levels and t-scores are presented in table 1. this implies that there are statistically significant differences in the practice of performance management and frequency of feedback in the high retention c o m p a n i e s v e r s u s t h e l o w r e t e n t i o n companies. hypothesis 4 predicted a higher level of employee retention for firms that offer options for employee involvement and growth. this hypothesis was supported. the five items reflecting the level of employee involvement and growth were all significant. these items and their associated significance levels and t-scores are presented in table 1. this implies that there are statistically s i g n i f i c a n t d i ff e r e n c e s i n e m p l o y e e involvement and growth in the high retention c o m p a n i e s v e r s u s t h e l o w r e t e n t i o n companies. hypothesis 5 predicted a higher level of employee retention for firms that offer well defined and varied employee compensation and benefits programs. this hypothesis was also supported. the two items reflecting well-defined and varied programs regarding employee compensation and benefits were all significant. these items and their associated significance levels and t-scores are presented in table 1. this implies that there are statistically significant differences in the level of knowledge about and quality of the employee compensation and benefits in the high retention companies versus the low retention companies. this category also included two items that asked for openended responses regarding benefits and perks that are part of the company’s practices. analysis is currently underway to examine specific activities and their effect upon retention within this sample. industry differences table 2 shows the differences in turnover rates among industries. in analyzing the 47 firms, the authors refrained from making conclusions about industry differences because the sample size for each industry is small. once the authors have gained a volume 19, number 1 spring/summer 2008 81 figure 1. annual turnover of growth-oriented firms over 10% turnover 28% 9-10% turnover 17% 6-8% turnover 15% 3-5% turnover 13% 0-2% turnover 28% substantial number of firms in each industry, positing some potential explanations for industry differences should be feasible. however, we felt it was necessary to briefly discuss the numbers in each industry, including the unemployment rate, to provide some initial clues about the nature of the local industry. the unemployment rate for the entire metropolitan statistical area (msa) at the time of this study was 5.2%. this was slightly higher than the national unemployment rate of 4.5% at the time. with eleven firms out of 47 in the sample, manufacturing accounted for 23.4% of the total respondents. this industry also had the highest rate of unemployment in our sample at 8.67%. eight of the 47 firms, or 17.02% in the sample, were in the biomedical research industry. the local unemployment rate in the biotech industry in the msa was 1.36%, the lowest of all the industries in our sample. the sample also included 12 firms in the information technology (it) industry, representing 25.53% of the sample. unemployment rate in the it industry was 3.16%. the consulting and related services industry accounted for nine of the 47 firms or 19.15% of the sample. the unemployment rate in the it industry was 2.88%. the service industry accounted for seven of the 47 firms in the sample (14.59%) and had an unemployment rate of 4.24%. discussion the purpose of this study was to better understand employee retention practices in high-growth entrepreneurial firms. the key research question was – “what hr practices appear to have positive employee retention r e s u l t s a m o n g g r o w t h o r i e n t e d entrepreneurial firms?” our sample provided a useful group of companies to begin exploring answers to this question. because significant differences between the high retention and low retention groups were found for every single variable used in this study, we can infer that the high retention companies do a better job of promoting a positive work environment, providing employee flexibility and freedom, giving feedback about performance and expectations, ensuring employees understand the compensation process, and providing career development guidance. the results of this study suggest that the companies with the highest level of employee retention use certain employee retention practices to a greater extent than firms with the lowest levels of employee retention. implications for research this study used evolutionary economic theory and the associated work on the strategic management of intellectual capital to build support for the differential effect that using certain practices has on employee retention in growth-oriented entrepreneurial firms. because support was advanced from this study that increased use of specific human resource practices to have a positive effect on the employee retention levels of growth-oriented firms, the field of human resources and entrepreneurship have moved one more step forward in deciphering the effects of one upon the other. journal of small business strategy 82 table 2. industry breakdown of turnover responses annual turnover % manufacturing biomedical research information technology consulting & related services service & other 0-2% 3 2 3 2 3 3-5% 1 2 0 3 0 6-8% 2 0 4 0 1 9-10% 0 3 3 1 1 over 10% 5 1 2 3 2 total # of firms/industry 11 8 12 9 7 local unemployment rate 8.67% 1.36% 3.16% 2.88% 4.24% there are additional insights to be obtained from this data. first, one might argue that some of the variables suggest that companies achieving a good work-life balance for their employees are reaping the rewards in terms of high retention. hom and kinicki (2001) report on several studies that reinforce the importance of this issue upon retention. for example, they report that job interference with off-the-job roles activated withdrawal cognitions (hom and kinicki, 2001). at least one of the survey questions used in this study implicitly addresses this issue. contained within the responses, yet not reported here, is an open-ended option asking respondents to describe various ways the companies embrace work-time flexibility. our item regarding flexible work schedules embraces this as well and the results indicate there is a statistical difference between high retention and low retention firms in this regard. a second issue to address concerns the role that changes in culture and structure within young firms have upon voluntary separation. baron, hannan, and burton (2001) report that changes in the employment models or blueprints embraced by organizational leaders increase turnover, which in turn affects subsequent performance. it would be interesting to examine how many of these firms have undergone major structural or cultural changes recently, including those encompassing leadership at the top, to discover whether they reside in the high retention or low retention group. implications for practice the practical implications of this study include the idea that firms who seek to retain their employees need to increase the extent to which they apply the practices outlined in table 1. this is possible, as witnessed by the much higher annual employee retention rates of the firms in the highest retention group versus the lowest retention group in this sample. it may be possible for growthoriented firms to increase their retention rates by ensuring that their employees are given the tools, guidance, and feedback necessary to work towards company goals. at the same time, employees need to be given the flexibility and freedom to showcase their special talents, work on projects that are interesting to them, and be allowed to work toward their own personal career goals. if employees are given this freedom, they will know that the firm they are working for is a special company. consequently, the firm’s reputation as an employer of choice will improve and it may become easier for the firm to hire additional high quality employees to fuel their growth. also, by decreasing turnover, companies can avoid the excessive costs that correspond with recruitment and training. significant implications for growth-oriented firms include these practices reinforcing the strategic implications of individual risk taking and experimentation, employee c o m m i t m e n t , s h a r e d o w n e r s h i p , communication and learning – all especially important for firms operating in uncertain or dynamic markets (hayton, 2003). part of the strategic controls necessary within such firms embrace risks and potential trade-offs (hayton, 2003), furthering the creation of a true learning organization. as knowledge b e c o m e s t r a n s f e r r e d t h r o u g h o u t t h e organization, the discretionary initiatives and innovative culture essential for growthoriented firms becomes strategically embedded. hayton (2003) found that investments in employees are an important success factor for firms seeking to promote innovation and entrepreneurship. we believe that our data further proves the importance of certain practices relating to human capital as being necessary investments by the firm’s management to encourage knowledge creation and exchange. by employing these sound retention practices, firms can avoid the turbulence associated with lowered employee morale and productivity. additionally, aside from the internal firm dynamics, the public perception of a company with low turnover is less likely to be damaged by dissatisfied former employees. as suggested by evolutionary economic theory (nelson and winter, 1982) and research on the strategic management of intellectual capital (winter, 1998), perhaps the most important aspect for high growth entrepreneurial companies is not only the retention of human capital but also the retention of highly valuable intellectual volume 19, number 1 spring/summer 2008 83 capital, which is often the competitive advantage. limitations and future research directions we would be remiss if we did not acknowledge the study’s shortcomings. the sample only tracked responses from high growth companies in one midwestern city with a population of approximately one million people. thus, our sample is not a representative sample of the general population of growth-oriented firms and our generalizability is limited. additionally, although the sample was well-defined and had a very high response rate, a larger sample size could increase the statistical power of our study. our future research will include a larger sample size from a more diverse geographic area. as an extension of this study, we plan to obtain responses regarding these retention practices from the employees of a sampling of firms used in this study. although the respondents were anonymous, we plan to seek voluntary association with a follow-up study that will provide each firm, data specific to it generated by its employees. the data, collectively, will be used for the follow-up macro-level research. this could help us better understand whether perceptions of hr practices are the same between management and employees, and would provide a more accurate description of whether or not the founders/ceos were engaged in self-report bias while completing t h e s u r v e y. we c o u l d a l s o c o l l e c t longitudinal data from these same firms to determine whether changes in their retention practices continue to have an impact on their annual retention rate over time. finally, an interesting comparative study would be between firms that have both a domestic and an international location, and the extent to which firm-specific practices affect retention practices across cultures. references aldrich, h. 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(2003). guest editor’s note: introduction to the special issue on human resource management in smes: a call for more research. human resource management, 42(4): 299–302. winter, s. (1998). knowledge and competence as strategic assets. in: david a. klein (ed). the strategic management of intellectual capital. new york: butterworth-heineman, 165–168. bruce h. kemelgor is an associate professor of management and entrepreneurship at the university of louisville. he is also the director of their small business institute and is presidentof the national association. his research interests include opportunity recognition, entrepreneurial competence, and person-role fit in organizations. william r. meek is an entrepreneurship phd candidate at the university of louisville. his research interests include nascent entrepreneurship, career motivation and expectations, and human resource problems in entrepreneurial firms. journal of small business strategy 86 reproduced with permission of the copyright owner. further reproduction prohibited without permission. stttate"ey requirements and benefits qf implementing just-in-time manufacturing for small-firm manufacturexs stanley e. fawcett michigan state university john n. pearson arizona state university abstract this study explores the applicability of just-in-time (jit) manufacturing elements for small-firm manufacturers. a survey%mall firm electronic firm roas undertaken toidentify and document the level of jit implementation already underway. integrating concepts necessary for successful jit implementation along with the benefits of jit are also discussed. it is suggested that jit manufacturing is a viable and useful strategy to enhance the competitive position of small manufacturing firms. introduction responding to the intensification of competitive pressure that has occurred in the past 10 years, many of america's top manufacturing companies have adopted just-ln-time (jit) manufacturing practices. led by the auto industry and electronics firms including hewlett packard and texas instruments, these typically large manufacturers of repetitive products have turned their attention to jit manufacturing in their efforts to raise productivity and improve their competitive position vis-a-vis world class manufacturers. although these efforts to duplicate the production practices of successful japanese manufacturers have met with mixed results, jit is now recognized as a manufacturing system with significant potential to enhance the competitiveness of manufacturers of high-volume, repetitive products (26). even as jit has become popular among many of america's largest and most progressive manufacturers, its applicability to non-repetitive manufacturing settings including those found among the majority of small-firm manufacturers has been questioned. surprisingly, despite the vast literature that has emerged in the past decade concerning jit, relatively little research has been performed on the requirements and benefits of implementing jit in the small-firm manufacturing setting (5). this tendency to overlook the small-firm setting is unfortunate not only because much of america's industrial base is made up of small-firm manufacturers but also because a large number of small manufacturers could potentially benefit from the adoption of certain jit practices. further, as implementation efforts in the large repetitive manufacturers have progressed, it has become evident that many added benefits can be achieved by promoting jit implementa10 tion throughout the logistics supply chain. this realization has led to a dramatic increase in jit purchasing and jit transportation practices. as a result, many small-firmmanufacturers that act as suppliers to the larger implementors of jit are faced with the often difficult prospect of adapting to the demands of a jit environment. ultimately, to provide the responsive customer service that is required by their jit buyers, small-firm manufacturers are forced either to carry the inventories that were previously carried by the buyer or to become jit producers themselves. the difficulties encountered by small-firm manufacturers in implementing jit begin with the nature of the small-firm manufacturing setting. small-firm manufacturers typically do not operate in the uniform-volume, repetitive manufacturing environment that is most often associated with successful jit manufacturing. this difficulty is often exacerbated by the fact that many small-firm manufacturers lack the resources that facilitate jit implementation. that is, efforts to implement any new management system are often more difficult for the small-firm manufacturerbecauseoflimited capital availability,constrained managerial and human resources, and a lack of leverage with other firms in the supply chain. thus, the issue of whether jit practices can successfully be implemented in the small-firm setting is founded both on the characteristics of jit and on the nature of the small-firm setting. fortunately, many of the elements of jit production can successfully be applied to a smallfirm manufacturing environment if the application is selective (5). however, despite the evidence supporting jit implementation, a perplexing lack of understanding pertaining to jit continues to prevail among many smaller manufacturing firms. too frequently, the failure to completely understand the role, the benefits, and the requirements of jit implementation has led smaller manufacturers to "misread" jit, resulting in two significant negative occurrences. first, many small manufacturers have attempted to implement jit without adequately planning for or supporting jit operations. this occurrence most often leads to work stoppage, frustration, and ultimately, to a return to "business as usual." second, other companies that could benefit through the implementation of jit have overlooked this approach to competitiveness because the visible benefits are not attractive enough for a company to go to the effort and expense to implement jlt in a supposedly "non-jit" environment. only when the requirements and benefits of jit implementation are jointly understood does it make sense and is it possible to successfully implement jit (see figure 1). figure 1. alternative views of jit implementation substantial benefits minimal benefits substantial benefits without foundation with foundation with foundation decision: worth doing not worth doing worth doing outcome: attempt, but fail maintain status quo attemp and succeed 11 therefore, although it is increasingly accepted that jit is an appropriate approach to attaining manufacturing excellence, the applicability of its basic precepts and practices to the small-firm environment needs to be clarified. this paper addresses this need by briefly looking at the foundations of the jit concept and by evaluating the applicability of jit's identified components to the small-firm manufacturing setting. the paper also discusses the findings of a survey of small electronic manufacturers and draws some conclusions about the underlying requirements of jit production along with the numerous benefits that small manufacturers can achieve through jit implementation. this approach will show that although the individual components of jit are not equally applicable to all manufacturing settings, the foundations of jit are readily applicable to a wide variety of manufacturing environments and many of the benefits of jit can be attained by small-firm manufacturers. the foundations of the jit concept for most of the 20th century, mass production on assembly lines was believed to be the most efficient approach to the manufacture of high-volume, repetitive products. however, as the japanese reindustrialization took hold in the 196(ys, many japanese companies, particularly toyota, realized that improvements could be made in the standard assembly-line approach to manufacturing. production in the process industries where continuous production is used was viewed to be more efficient. therefore, an attempt was made to alter the production process so that it would resemble, as closely as possible, that found in the process industries. the result was just-ln-time manufacturing (jit). although the objective of jit is the same as that of other production systems —the on-time production of low-cost, high-quality products —the jit approach to manufacturing represents a different way to think about the entire scope of manufacturing (2; 7; 20). much of the difference in the jit approach to manufacturing stems from the fact that the jit concept emerged from the experience of the japanese re-industrialization. in fact, many of the foundations on which jit is built represent the formalization of the lessons japanese manufacturers learned during the reindustrialization process (see table 1). this statement holds especially true for the two most frequently cited jit concepts —people as problem solvers and elimination of waste (24). table 1. the foundations of jit jit actively pursues an integrative approach to competition, emphasizing manufacturing competence. jit undertakes extensive training and human resource development in an effort to integrate workers more fully into all aspects of the manufacturing process. jit focuses on getting the most out of all inputs through an emphasis of waste elimination. jit is extremely dedicated to developing a competitive advantage based on superiorqualityproducts. jit relentlessly pursues continual improvement in both process and product. constantimprovement is considered fundamental to building a sustainable competitive advantage. jit emphasizes long-term considerations over short-term profitability. 12 perhaps the foremost of these '1essons of re-industrialization" is the importance of the human resource in developing a competitive edge. since japan has always been a relatively resource-poor island dependent on imports for many of its productive inputs, japanese manufacturers found that they had to take full advantage of their one major resource —the japanese worker. thus, extensive training and the integration of workers into all aspects of the manufacturing process became a fundamental aspect of jit. similarly, because critical manufacturing resources including materials, energy, and land were all relatively scarce during the reindustrialization, emphasis was naturally placed on getting the most out of all inputs. thus, the attention devoted to waste elimination. a third important lesson was the notion that the production of high-quality products is essential to competing successfully in world markets. this realization came only after initial attempts to capture world market share met resistancebecause japanese products were perceived to be of inferior quality. however, by importing quality expertise from deming and juran and striving diligently to improve quality over several years, japanese industry overcame its "quality problems" (9; 10). the emphasis on building quality into both the product and the production process has since been formalized within the concept of total quality control. a fourth closely related lesson of considerable impact, the concept of continual and endless improvement, also developed from japan's prolonged and constant effort to become competitive in world trade. success had not come easily, but had come only as a result of continued effort and an incremental approach to improvement. today, the concept of continual improvement provides jit manufacturers with one of their most potent competitive weapons. a final lesson learned during the revitalization of japanese industry is that long-term competitiveness is more important than short-term profit. not only was japan's economy forced to rely on exports in order to develop a positive balance of payments, but domestic competition in japan has always been intense, and only those companies that survive the rigor of domestic competition are around long enough to export to the u s. in this environment where the primary goal is to assure long-term survival against both tough domestic and global competitors, the focus switches from who can grow the fastest or show the highest return on equity to who is going to still be in business in a year or two. the requirements of survival therefore often dictate modest returns be accepted over several years if necessary in order to build a strong, long-term foundation for success. the important point to be made here is that none of the foundations of jit are intrinsically the domain of the large-firm, repetitive manufacturing setting (13). rather, they not only represent sound practices that play a vital role in the success of manufacturing firm but their evolution also points out many similarities between jrps early environment and that of the typical small-firm manufacturer. for example, to be successful, smaller firms must take full advantage of their limited workforce while seeking to get the most out of all productive resources. likewise, small-firm manufacturers often rely on a process of small, incremental improvements to their products and production processes since they lack the financial resources to do otherwise. an emphasis on quality is also essential for the small manufacturer to remain competitive and differentiate its products in very competitive markets. finally, small-firms typically must look to the long term, emphasizing survival over short-term profits jlt's applicability to small manufacturers in the early 19$ys, most discussions concerning jit centered on inventory reduction. in fact, the term jit was frequently considered to be synonymous with zero inventories. however, as more experience with the jit philosophy has been gained, a better understanding of the 13 elements that make jit successful has emerged. the once central issue of inventory reduction is now viewed as a catalyst in the process of continual improvement, and several components or elements have appeared in the literature as comprising the jit concept (5) (see table 2). these basic elements, by themselves and as part of jit, have recently received tremendous attention because of their perceived value in improving the manufacturing firm's competitive position. yet, their applicability to the small-firm manufacturer has received only superficial treatment. the following paragraphs discuss these elements as they apply to the small-firm manufacturer. table 2. the elements of jit cross-trained employees focused factory group technology jit purchasing reduced set-up time synchronized manufacturing total preventive maintenance total quality control uniform workloads cross-trained employees getting the most out of the manufacturing system begins with the development of the human resource. to achieve this goal the workforce must be viewed as a asset equal in value to the plant and equipment. only then does it make economic sense to train workers in the appropriate skills. as this happens, the workforce becomes a valuable competitive weapon capable of assuming greater responsibility for the success of the organization. the cross-training of employees is critical in this process and is one of the foundation elements of jit. the often cited example of general motor's joint-venture with toyota demonstrates the value of cross-trainingjob classifications were reduced from over 200 to 3 so that workers could be cross trained and more fully integrated into the manufacturing process (3; 11). cross-training allowed the role of the worker to expand from operating a single machine to performing routine maintenance, assuring quality, and becoming involved in both product and system design. similar approaches to cross-training employees have been adopted recently by ford in the development of the 1991 escortandgminitssaturnproject(25). cross-training'simpactonthefirmcomesfromitsability to allow workers to become a vital part of the manufacturing system. the small-firm manufacturer frequently has two advantages over larger firms with respect to the cross-training of employees. first, smaller manufacturing firms often do not have to deal with the restrictive work rules and narrow job descriptions that inhibit the cross training of employees in larger manufacturing settings. second, employees in small-firm settings are usually expected to be more flexible and often are already trained on more than one machine simply because small manufacturers do not have sufficient personnel for each individual to focus on a specialized job or task. further, workers in the small-firm setting frequently must operate multiple machines to compensate for erratic demand and absenteeism. in this sense, crosstraining is already common in many small firms. the challenge facing these firms is thus to 14 formalize their efforts to cross-train employees, expanding the role of the workers into assuring quality, performing routine maintenance, and participating in the continual improvement of both the product and process designs. focused factory the focused factory concept emerged in the mid 197(ys as manufacturers attempted to deal with increasing complexity on the production floor (22). the objective was to focus the facflity's resourceseitherby producinga single productora groupof similarproductsorbyusinga single production process withineach facility. byso doing,theconflictingobjectivesthatdevelopwhen multiple products are produced using more than one major process type can be eliminated. focusing the factory thus not only leads to production efficiencies but increases the facility's effectiveness by reducing confusion and allowing a more targeted set of production goals. the direction and simplicity that derives from a focused factory is very important to the implementation of jit (21). the fact that small manufacturers are small and therefore often offer a limited product line requiring only one or two major production process types is a definite advantage in developing a focused factory. indeed, many small-firm manufacturers already operate focused factories. however, a rigorous review of operating practices can often help the small firm improve its overall focus. for example, a small manufacturer of industrial vehicles reviewed its production process and found that it could separate out two types of operations: the fabrication of metal parts and the assembly of the final product. by dividing its facility into two sections —one for fabrication and one for assembly —the firm was able to enhance its focus, reducing confusion and streamlining the production process. the key for the small firm is to avoid taking focus for granted and to consciously and continuously seek to attain the benefits available from focused operations. group technology group technology (gt) seeks to take advantage of similarities among products and processing techniques to enhance firm productivity. two elements comprise the concept of group technology: 1 ) the physical arrangement of machines into manufacturing cells used to process a family of like products and 2) the development of a computerized classification and coding system capable of identifying similarities among products and processes. both aspects of group technology are designed to exploit commonalities in the production process. schonberger describes a gt layout as "...a cell with a maximum of five manned work stations arranged into a u-shaped configuration.... at the limit a single worker handles all five machines, which are conveniently grouped into a u—like an efficiency kitchen (21). the benefits of this type of layout include a reduction in setup times, simplified materials handling, decreased work-in-process inventories, reduced throughout times, simplified production control, and an enhanced ability to efficiently produce a large variety of small-volume products. additional benefits including a reduction in part numbers and improved product design accrue from the development of the computerized classification and coding system. the layout aspects of group technology often occur naturally in the small-firm setting. finch and cox note that in the absence of diversification strategies, "many small manufacturers have naturally organized their shop on the basis of similarity of parts produced rather than on the function of the machines," (5). most small manufacturers that are not organized according to gt cells possess the flexibility to rearrange the physical layout of their machines. further, the lack of shop floor unions and the natural cross training of workers in the small-firm environment have a tendency to reduce worker resistance to the behavioral modiflcations required when a gt 15 layout is adopted. however, developing the computerized data base that frequently accompanies the adoption of a gt layout can be costly and is often difficult for the small firm. fortunately, the operations in many small firms are not so complex as to require the computerized classification system allowing the small firm to take advantage of the benefits of a gt layout. jit purchasing as jit practices have increased in popularity on the production floor, many efforts have been directed toward utilizing a jit approach thmughout the entire supply chain. this systems view of jit extends the just-in-time philosophy of small lot sizes to purchased parts, requiring frequent deliveries of small order quantities directly to the area of the production floor where they are to be used. jit purchasing arrangements are typically characterized by the integration of buyer/supplier activities and require a great deal of cooperation and communication between the two. the degree of integration and the specific arrangements depend on the strength of the buyer/supplier relationship. however, the followingcharacteristicsarecommonin jitpurchasing. 1. the buyer frequently represents a large portion of the supplier's business. this assures a high level of service responsiveness. 2. the buyer often reduces its supply base utilizing sole sourcing from certified suppliers whenever possible. 3. long-term relationships are established allowing for an increased use of blanket contracts and the sharing of production schedules. 4. performance specifications replace specific design specifications allowing the supplier to better use its expertise. 5. joint problem solving efforts are undertaken to improve product quality and supply dependability. thebuyer works closely with thesupplier,providingqualitycontrol and process engineering support. 6. critical performance criteria are focused on product quality and delivery dependability. lowest ultimate cost is emphasized over low price (6). the tightly coupled buyer /supplier relationships that are established through jit purchasing practices provide many benefits to both the buyer and the supplier. buyer benefits include a reduction in administrative costs, greater responsiveness from its preferred suppliers, higher quality inputs, reduced inspection costs, improved product design, and an assured source of supply. supplier benefits include a more stable operating environment, greater production volume, lowered production costs, improved communication, access to the buyer's process engineering and quality control personnel, and the opportunity to make more definite long-term financial decisions (e.g. in r4r d). implementation of jit purchasing is often difficult for the small-firm manufacturer. because the orders placed by smaller firms are generally small in comparison to those placed by large manufacturers, smaller firms frequently lack the leverage or clout necessary to establish jit purchasing agreements. this lack of negotiating power can make it difficult for the small firm to obtain the attention, cooperation, and responsiveness from its suppliers that are typically required in order to make jit purchasing work effectively. small manufacturers also often lack the managerial resources (quality control and engineering) needed to help develop other and frequently smaller suppliers into reliable partners. even so, small-firm manufacturers should attempt to find responsive suppliers, seeking to develop cooperative relationships. as jit purchasing practices become more widely accepted, the challenges smaller manufacturers face in adopting jit purchasing will diminish. 16 set-up time reduction the use of process development to substantially reduce set-up times makes short production runs practicaland jiteconomically feasible (17;18;23). likewise, throughextensive process development, variability in the production system can be diminished (in some cases eliminated) redudng the need for inventory. process developmen ys principal ingredient is process engineering, which works to modify existing equipment so that set ups are easier and quicker and so that process yields are stabilized. the goal in jit is to achieve a "single setup" of 10 minutes or less. in many cases, complex setups have been simplified to take less than one minute —a "onetouch setup." process engineering is also used to design specialized equipment. this equipment tends to be smaller and less expensive than the large "super" machines designed by commercial equipment makers and is designed for reliability and ease of maintenance. in addition to developing specialized —often proprietary —equipment, in-house design often results in lower costs and shorter delivery lead times. those companies that have vigorously applied process engineering to set up reduction have not only experienced a good deal of success but have found that significant improvements can be achieved through relatively simple and inexpensive steps. for example, 3m's chicago fail( ty used a setup reduction program to reduce the set-up time of an old cutting machine from 222 minutes to 17 minutes. four "rules of attack" developed from this experience: eliminate unnecessary movement, eliminate nuts and bolts, use block and gauge templates for adjustment, and move mainline setup to off-line preparation (19). small firms are often quite successful in their attempts to reduce set-up times, espedally when the small manufacturer focuses its efforts on straightforward approaches such as 3m's four rules of attack. eliminating unnecessary movement and developing block and gauge templates for adjustment frequently require neither extensive or special expertise nor large capital investments. since adjustments to machines often represent 50 to 70% of the total set-up time, the use of simple ad justment devices can result in d ramatic reductions in set-up times. the small manufacturer of industrial vehicles mentioned earlier developed and used very successfully setup templates in most of its production processes. further, in many instances, small firms can successfully convert internal set ups to external set ups, redoing changeover costs even further. the greatest challenges for small firms interested in reducing set-up times occur when extensive engineering or capital investment is required. however, the increased use of tightly coupled buyer/supplier relationships often improves the small firm's financial position and provides many smaller firms access to the buyers process engineering capabilities. synchronized manufacturing operating a facility with reduced work-in-process inventory (wip) levels requires a great deal of coordination and d lsd pline to assure the proper and timely flow of materials through the facility. jit uses a pull system (often referred to as kanban) to provide this synchronization. the kanban pull system is a visual system designed to produce only the parts needed in "downstream" work stations as they are needed. using a pull system helps prevent possible production crises by carefully controlling the amount of inventory on the shop floor and by reducing expediting. abernathy et al. describe toyota's kanban system which exemplifies the workings of a pull system, the system is called "kanban" after the little cards or tickets it uses, operates much like a supermarket and its warehouse. just as a warehouse manger will forward only those products ordered by the store manager (and only in the quantity ordered), so the 17 ka nba n system requires work centers to make and send parts to each o ther only as they receive kanban cards telling them to do so. the rule of thumb for upstream units is, quite simply,makenothinguntil you getakanbanand thenonlyinthestandardamount; for downstream units, the rule is, do not order parts until you need them and then order only the standard amount (i). many small manufacturing firms operate without a formalized scheduling system, relying more on visual and intuitive systems. in this light, it is not surprising that small-firm manufacturers often view kanban as an unusual scheduling practice that is inappropriate for their operations. the high levels of discipline required for the successful application of kanban and the often difficult to follow academic discussions of kanban add to the perception that kanban is inappropriate for small manufacturers. however, kanban is successfully used by small manufacturers in japan, and in its simplest forms, kanban's visual approach to scheduling has an intuitive appeal that suggests it could easily be adopted by small-firm manufacturers in the u.s. for example, in a simple two-station system, the worker at station a produces only enough parts to fill a standardized cart and then ceases production. parts are not transferred to station b until a signal is received indicating the parts are needed. the signal can be a small card, an empty cart, or even a colored golf ball. all the signal needs to communicate is the type and quantity of part that is needed. in this example, the signal to transfer parts is the return of an empty cart and thus, the signal to renew production is the transfer of parts from station a to station b. therefore, when the parts are transferred, the worker at station a starts production and continues until the empty cart is filled. the cycle then repeats. discipline is critical since if parts are transferred early or if more than the standard number of parts are produced the system overloads and becomes inefficient. total preventive maintenance total preventive maintenance in jit manufacturing involves a program of rigorous and routinely scheduled maintenance and equipment replacement. individual machine operators also take on an active and increased responsibility for the daily maintenance of their own work centers. by becoming familiar with the machine's maintenance requirements, line operators are able to perform daily cleanings along with machine adjustments and some minor repairs. they are also able to identify and diagnose problems while they are still small, preventing machine breakdowns that lead to line downtime. in a jit environment where wip is minimal and each work center is directly dependent or the preced ing operation, avoiding unplanned downtime is essential. total preventive maintenance thus not only improves machine utilization but helps reduce production costs, enhance quality, and assure flexibility. perhaps the two greatest challenges to the small-firm manufacturer in adopting a total preventive maintenance program are i ) the lack of adequate maintenance personnel and 2) the ability to provide the process training that is required for individual workers to assume the higher levels of responsibility for maintaining their own machines. otherwise, total preventive maintenance programs are readily adoptable by small firms when preventive maintenance is emphasized as a priority by management. this is espedally true since the workers in small firms often possess relatively high levels of job flexibility and in some cases already perform some of the basic maintenance on their machines. the keys to implementing preventive maintenance programs for the small firm are to emphasize proactive maintenance over reactive, "after-thefact" maintenance and to provide maintenance training for individual workers so they can assume responsibility for the daily maintenance of their work centers. 18 total quality control the ultimate objective of total quality control (tqc) is to make the production of highquality products automatic. in many respects, the jit philosophy of continuous improvement is embodied in the tqc concept where constant improvements in quality are sought through the active application of statistical process control throughout the entire supply chain. targeting defect reduction to parts per million is achieved by shifting the responsibility for quality from the quality control department to each individual involved in the production process. in this manner, quality is controlled at the source —while the work is actually being done. further, statistical quality control techniques are combined with worker skills and process engineering to seek out and remove the causes of poor quality, which enhances the firm's ability to produce quality products the first time without rework. for tqc tobe implemented successfully, quality must be established as the preeminent priority of the firm with all other firm objectives being driven by quality. when this occurs and quality production becomes the driving force, inventories are reduced, productivity is enhanced, and customer satisfaction is typically improved. since high-quality production has been the single most important factor in determining long-term competitiveness throughout the past 10 years, the importance of tqc in any jit production system cannot be understated (15;16).fortunately, tqc practices are straightforward and equally applicable in a small-firm setting as they are for larger firms. the most substantive problem areas appear to be changing firm culture so that quality becomes the focus and providing the needed training in statistical process and quality control. intensifying competitive pressure and the trend toward longer-term buyer/seller relationships are providing the incentive for small firms to focus on quality as a necessary ingredient in their competitive positioning. further, these two trends are also providing many small manufacturing firms with access to the quality expertise of their primary buyers. indeed, as many larger firms reduce their supply bases, they are establishing supplier qualification programs which place a high emphasis on helping selected suppliers improve their process and product quality. uniform workload the concept of uniform workload refers to the reduction of demand fluctuations on the production floor. a uniform workload is achieved by matching supply to demand such that the same product mix is produced each day just in time to be sold. this requires very careful master production scheduling coupled with a flexible production system that allows variations in customer demand to be met by changing the frequency of the batches of individual products that are produced while maintaining overall resource utilization more or less stable. aggarwal has suggested that jit works best when production fluctuates less than 10% daily (2). a uniform workload maybe one of the most difficult aspects ofjit for the small manufacturer to adopt successfully. quite simply, because they lack leverage with larger buying firms, many small manufacturers have little control over demand patterns. that is, the often large orders that are received from a few large buyers come in sporadically creating a lumpy demand pattern which reduces the small firm's ability to maintain a relatively stable production flow. however, with the adoption of jit by an increasing number of large manufacturers, a greater emphasis is being placed on the production and delivery of smaller lot sizes more frequently. also, when buyers enter into sole sourcing arrangements, they frequently share vital production information with their key suppliers —often on a daily basis through the use of electronic data interchange (edi)—further helping small-firm suppliers achieve a stable production flow. in short, the problems faced by the small firm in achieving a uniform workload are often ameliorated by the overall trend toward flexible jit production. 19 integrating concepts while the preceding nine elements have been identified in the literature as keys to the jit approach to manufacturing, two other concepts should be considered by firms as they attempt to adopt jit manufacturing principles: 1) the role of the manager and 2) the need to have appropriate expectations for the implementation process. first, in jit manufacturing where worker's are expected to assume responsibility for their own work and actively participate in problem solving, the role of the manager becomes "one of facilitating a team approach" (27). in this setting, the worker-manager relationship is more important than the position of authority the manager holds. unfortunately, many managers are not comfortable in this managerial setting. therefore, extra efforts must be made to foster this type of relationship and to replace the familiar worker/management adversarial relationship with a more cooperative relationship focused on improving the company's competitive position. for example, managers must not only develop an understanding of the work that is being done throughout the production process along with the technologies required to do it but they should also become familiar with the "language" of the workers to enhance communication. by so doing, management can attain a credible position with workers from which i t can demonstrate its commitment to manufacturing excellence. second, by nature jit requires a long-term perspective. continual improvement is not achieved in one quarter or in one year, but comes from establishing a manufacturing system that facilitates incremental improvements and from developing an internal attitude of perfection. each of the jit elements described above focuses on building either the facilitating system or the attitude of perfection, and all require a constant and sustained effort by top management and worker alike over a long time period to be implemented successfully. for example, inventory cannot be reduced without undertaking the usually long process of reducing set-up times and synchronizing manufacturing. the classic example of modifying toyota's hood and fender press took five years to design and implement (24). a long-term commitment is equally important in developing the human resource base and worker involvement that are essential to attaining the full benefits of inventory reduction. findings from a survey of small-firm electronics manufacturers a survey of members of the american electronics assodation was undertaken to identify the utilization of the above discussed jit manufacturing elements. to collect data concerning the implementation status of each of these jit elements, a five-point likert scale was used with response alternatives ranging from used but later rejected to continuous or routine use. the questionnaire was sent to vice presidents of those electronic manufacturing firms with 100 to 500 employees. usable questionnaires were returned by 100 firms for a 30% response rate. the average time in operation for the responding firms was 17.5years with a range of 6 to 37 years. revenues ranged from $2 million to over $24 million per year with an average of $14.4 million. similarly, the average net income before taxes was $970,000 and the average number of employees was 210. more than half of the respondents (60%) indicated that their firms are actively involved in the implementation of a jit manufacturing system. this indicates that among this small-firm sample population, jit is viewed as an appropriate and desirable manufacturing system. in table 3, a summary mean score is used to gain insight into the appropriateness of each jit element to the small-firm electronic manufacturer as measured by the actual usage of each element. this mean score was calculated by averaging the responses of the 100 firms providing 20 usage information with a mean score of four or greater indicating a high degree of element appropriateness. as might have been expected, cross-trained employees was by far the most frequently implemented of the individual elements. total quality control, reduced set-up time, and jit purchasing also had mean scores greater than four. the relatively high score for jit purchasing indicates that jit practices are being promulgated through the entire supply chain. other jit techniques that were considered to be at least somewhat applicable to small electronics firms include group technology, uniform workloads, and focused factory. finally, two elements— total preventive maintenance and synchronized manufacturing —had low mean scores. while it was expected that synchronized manufacturing would be viewed by small firms as difficult to implement, the low score for total preventive maintenance is somewhat surprising given this technique'is frequently considered to work closely with both cross-trained employees and total quality control. table 3. appropriateness of j1t's elements to small electronics firms jit element mean score cross-trained employees 4.43 total quality control 4.12 reduced set-up time 4.11 jit purchasing 4.05 group technology 3.91 uniform workloads 3.88 focused factory 3.74 total preventive maintenance 3.50 synchronized manufacturing 3.35 table 4 breaks down the overall applicability scores for each jit element by focusing on the levels of experimental and routine usage. while these results coincide with those of table 3, they provide some additional information concerning the state of progress in implementing the various jit elements. the practice of cross training employees is the most frequently used jit element based on both routine and overall usage. group technology and reduced set-up time also have relatively high routine usage levels. this suggests that these elements are viewed as essential starting points for the implementation of jit. total quality control and jit purchasing have high experimental usage levels that when summed with their routine usage levels result in high overall usage which indicates that these two elements are also in advanced stages of implementation by small electronics manufacturers. once again, total preventive maintenance and synchronized manufacturing were the least used elements. however, total preventive maintenance had a moderately high level of experimental usage suggesting perhaps that small electronics firms are paying increased attention to this element. tables 3 and 4 confirm that jit elements are suitable for small electronic manufacturing firms. while the usage rate for the individual jit elements varies, it appears that small electronics firms are making progress in the implementation of jit manufacturing elements. 21 table 4. percent usage of j1t's elements by small electronics manufacturers experimental/ routine/ jit elements occasional use continuous use overall use cross-trained employees 41 53 94 total quality control 42 36 78 jit purchasing 41 32 73 reduced set-up time 29 43 72 group technology 25 40 65 uniform workloads 31 34 65 focused factory 28 33 61 total preventive maintenance 31 18 48 synchronized manufacturing 20 13 33 benefits of jit implementation justification for striving diligently to implement jit comes from the benefits inherent in achieving manufacturing excellence —enhanced quality both in product and process, reduced manufacturing costs, more responsive lead times and higher delivery performance, improved flexibility, and a more rapid introduction of new products. further, the interaction among these benefits creates synergies that are important but are difficult to confine to the discussion of any single benefit. by taking advantage of these jit benefits, the manufacturing firm can enhance its competitive position. these basic benefits of jit are attainable by smallmanufacturing firms and will now be briefly discussed. enhanced quality quality improves with jit because inventory is reduced and problems become visible. defects are spotted much more easily when they are not buried in a stack of inventory. more important, however, is the fact that workers downstream in the production process are motivated to communicate problems back to their source quickly, so they can be eliminated. this motivation comes from the adverse impact defective parts have on the performance of both individual workers and the entire production line. in jit, each individual's ability to be productive is greatly hindered by detective parts being passed from one work station to the next —a worker cannot produce if no good parts are available to work on. each individual depends on the previous workers for good parts. this fact, that every person on a production line is the customer of the preceding operation is vigorously stressed in jit so that each worker's goal becomes to supply the next person on the line with quality parts. extensive efforts involving statistical analysis and process engineering are also directed at finding and removing the actual 22 sources of the quality problems. thus, jit not only increases the entire organization's awareness of problems and their causes but also focuses the appropriate resources so that the causes of problems are removed from the production system. reduced manufacturing costs the combined effect of reducing inventories, along with the subsequent improvements in quality, provide many cost benefits. the most obvious of these benefits are the reduction in scrap material costs and a decrease in direct labor spent on rework. in fact, by having individual workers fix their own mistakes, rework stations can be totally eliminated. inspection costs are alsoreducedsincetheworkersareresponsibleforcheckingtheirownwork. inaddition,because inventories are reduced, less investment is needed to purchase them, less space is needed to store them, and less equipment is needed to move them. finally, the continual improvement of the manufacturing process increases productivity as down time is reduced and process yields increase. an ancillary benefit of increased productivity results when the lower manufacturing costs are combined with a desire to build market share and long-term profitability. a competitive cycle begins: as costs decrease, lower prices attract customers and market share increases causing productivity improvement to accelerate and costs to decrease further. by keeping the profit margin low enough to offer good-quality products at lower prices than the competition, even greater market share is captured and costs continue to decrease (4). this can be a very advantageous strategy for the small firm. responsive lead times lead time is roughly equivalent to the time it takes to produce the order, which depends directlyontheamountof workalreadyontheshopfloorwaiting tobeproduced. iftherearelarge wip inventories waiting at each work area, this time can be quite long and can vary greatly. it has been estimated that of the time an order is in production, up to 90% is queue or wait time. thus, for every minute of actual production, the item spends an additional nine minutes waiting to be processed. inter-operation time can represent most of the lead time and accounts for much of the uncertainty associated with lead times. by reducing production lot sizes, the amount of wip is also greatly reduced. therefore, not only is the actual processing time for any order reduced directly proportional to the decrease in lot size but inter-operation and other nonproductive times are reduced drastically. when the time-reduction benefits of a smoother flow, shorter travel distances, and less confusion on the shop floor are added, it is not hard to see why lead times are shorter and delivery performance more reliable in a jit setting. these short lead times mean better and faster market response both for orders of current products and for the introduction of new products. improved flexibility many factors work together to provide better flexibility. jit's direct impact is through the reduction of inventories and the removal of system disruptions, which combine to reduce confusion. flexibility is difficult to achieve when crises are constantly developing and orders are being expedited. however, by closely controlling the amount of inventory on the floor, stability is achieved and crises avoided. this gives managers and workers the opportunity to focus their attention on more important matters like quality and flexibility (8). other contributing factors are the use of specialized equipment, preventive maintenance, and the cross training of workers. flexibility is gained through the use of multiple copies of small, inexpensive, special-purpose 23 machinery that is often designed in-house. in addition, as setup times are reduced, it is much easier to shift production to meet changes in market demand. further, thorough preventive maintenance reduces machine breakdowns and their disruptive effects on the production process. finally, when workers are not only trained to perform many different jobs but provided the opportunity to use their training by the elimination of restrictive work rules, flexibility is greatly enhanced. conclusion implementing jit is seldom easy, especially in the small-firm setting where the production environment is often different from that typically associated with jit implementation and where financial and managerial resources are frequently limited. however, through total managerial and employee commitment combined with the selective application of jit techniques, the risks of jit implementation can be reduced dramatically. experience has shown that a great deal of time and effort on the part of every individual in a firm is needed to successfully implement jit. in most manufacturing settings, achievement of this goal requires changes be made in the actual production environment (10; 12; 14). changing the manufacturing environment rather than optimizing within the existing environment isa new approach to many managers. even so, when the proper changes in the environment are combined with changes in the role of both managers and workers, the foundation for manufacturing success is established. clearly, the successful implementation of jit elements by small firms requires careful planning and coordination along with sustained managerial and worker commitment. nevertheless, the results of the survey of small electronics manufacturing firms support the idea that jit elements are appropriate for small firm manufacturers. the survey findings also suggest that the implementation of jit by small firms is often seen as an incremental process in which smafl firms first seek to reduce inventory levels, improve quality, enhance flexibility, and in general reduce overall complexity. further, the survey data indicate that some of the jit elements, in particular the cross training of workers, are more widely applicable to a variety of manufacturing environments. given the level of competition that can be expected through the 199tys, selective adoption of the elements of jit appears to present a usable and viable strategy for small firms to enhance their competitive position. indeed, the potential benefits derived through jit manufacturing —enhanced quality, reduced manufacturing costs, more responsive lead times, improved flexibility, and a more rapid introduction of new products —provide a strong incentive for all firms to seriously consider the implementation of jit. references 1. abemathy, w. j., k. b.clark, and a. m. kantrow. industrial renaissance. new york: basicbooks, inc., publishers, 1983. 2. aggarwal, s. c. 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"setup reduction and increased effective capacity." management science, vol. 3, no. 10, october 1987, pp. 1291-1301. 25 24. sugimori, y., k. kunomkim, f. cho, and s. uchikawa. "toyota production system and kanbansystem materialization of just-ln-time and respectfor-human system." internet ional journal of production research, vol. 15, no. 6, 1977, pp. 553-564. 25. treece, j. b. "here comes gm's saturn," business week, april 9,1990, pp. 56-62. 26. vonderembse, m. a., a bibliography of just-ln-time, university of toledo: shellerglobe corporation, 1988. 27. wheelwright, s. c. "restoring the competitive edge in u.s. manufacturing." california management review, spring 1985, pp. 27&2. 26 stra tegy an exploration of diversity practices in small successful companies sandra powell h. lon addams brian davis weber state university abstract this exploraiorysiudy looks at small publicly-heldbusi nesses in the forbes 200 h'sts of l 995 and /996 to determine the extent to which they have formal praciices io promote diversity in their workforce and their success (and problems) with those practices. formal diversity practices werefoundin about one-quarter of the respondingcompam'es. while the ceosin all companies indicated satisfaction with the amount ofauention spent on diversity efforts, those witli formal practices on average gave themselves "c"grades in terms of the epectiveness of their specific programs. the most successful elements offormal diversity programs included family friendly policies and policies against prjeudice (graded b+). suggestions are niade for developing diversity programs. introduction much has been written about the importance of diversity practices in companies (comer & soliman, 1996; cox, 1991;cross, 1996; fine, 1995; gardenswartz & rowe, 1993, and joplin & daus, 1997).the workplace is becoming increasinglydiverse in terms of gender, ethnicity, race, age, disability, and many other dimensions (fine, 1995; morrison, 1992; thomas, 1991). according to gardenswartz and rowe (1993,4), the hudson institute workforce 2000 report of 1987 "stripped away the last vestiges of denial from corporate america" and convinced us that workforce diversity issues must be addressed. businesses are becoming more interested in utilizing this increasingly diverse workforce effectively. large corporations are generally implementing policies and practices to help them develop and use the various skills and viewpoints of different employees (caudron & hayes, 1997; jackson and associates, 1992; scales & emery, 1996; white 1996). programs have been implemented in larger companies to accomplish the following objectives: (i) increased recruitment through (a) targeted recruitment of managers, non-managers, and interns; and (b) partnerships with special communities and educational institutions; (2) increased retention and promotion through programs to develop and support all employees (especially those that are diverse), such as (a) skills and attitude training, (b) formation of networks and support groups, 77 journal ofsmall business strategy volume 9, iuo. 2 fall/winter 7998 (c) mentoring, and (d) career planning seminars and focus groups; and (3) accountability by (a) making diversity a part of performance evaluations, promotion decisions, compensation decisions, and succession planning; (b) setting policies (such as those that are family friendly and anti-prejudice) and (c) establishing grievance and resolution processes. further information about programs and companies that have implemented them is discussed at the end of this paper. many profit-related reasons have been offered for establishing formal diversity practices. these include reducing the costs of turnover, absenteeism, and lawsuits; they also involve attracting talented employees, improving marketplace understanding, and producing higher quality problem-solving (comer & soliman, 1996; robinson & dechant; 1997). many large, stable organizations have created systems, policies, and procedures to deal with the legal, ethical, and practical considerations of diversity(morrison, 1992). however, we reasoned if managing diversity is an important element of organizational success, then executives in smaller, successful companies will also need to address this issue. we wondered if the ceos of highly-successful, small companies perceived the issues of a diverse workforce as sufficiently important for them to use their limited resources of time and money for developing diversity programs and procedures. other questions we asked were: how do ceos of small, successful companies define diversity? what structures (programs, policies, or procedures) do they use to manage diversity, what problems have they encountered in implementing diversity structures, and how successful have those structures been? background we used the term "diversity" in our study, to signal corporate practices and programs focusing on employee differences, but a more exact phrase may have been "cultural diversity." there are many ways individualscan differ, such as the jungian types of the myers-briggs type indicator, but we are only interested in those categorizations that are defined as culturally relevant. other scholars prefer the term "multiculturalism." a multicultural organization is one that values diverse cultural modes, creates an organizational dialogue in which no cultural perspective dominates, and empowers all cultural voices (fine, 1995). while "multiculturalism" connotes a particular definition of success in utilizing different types of employees, we preferred "diversity" since it is a more neutral term. diversity can be detined many ways. a simple definition might be "the many ways in which people are different from each other." according to robinson and dechant (1997, 22), many companies (or scholars) use the equal employment opportunity commission's (eeoc) definition, which focuses on "gender, racioethnicity, and age". other scholars complain that this approach is too narrow (macy, 1996; jamieson & o'mara, 1991) and add such elements as physical abilities and sexual orientation. some definitions, like that of griggs (1995), also add religion, socioeconomic class, education, life experience, position in the family, personality, job function, and rank in the hierarchy. while many individuals in this field favor more inclusive definitions, some scholars argue that an inclusion of everything from leii-handedness to birth order dilutes the effect of diversity efforts and "takes the focus off of real oppression, including racism, sexism and homophobia" (caudron & hayes, 1997, 122). in our questionnaire we indirectly asked the respondents for their company's definition of diversity by asking what types of groups their diversity practices were aimed at benefitting. they 78 journal ofsmall business strategy volume 9, no. 2 fall/winter /998 could select as many choices as they wished from gender, race, age, or disability. in addition, there was a choice of "other" if they wished to specify some other approach. besides being difficult to define, diversity also involves issues that are sensitive, volatile and uncomfortable, as respondents are addressing their own values, stereotypes, and prejudices (kreitner & kinicki, 1995). are differences good or do they become barriers that divide us? according to cox (1994), they can be either or both, depending on how effectively they are handled. properly handled, diversity can facilitate communication, creativity, and problem solving; but without careful management increased diversity can lead to "dysfunctional outcomes such as miscommunications and lower team cohesiveness" (cox, 1994, 17). historically, american business has gone through a series of approaches to diversity which have been summarized as: affirmative action (aa), valuing differencea and managing diversity (gardenswartzand rowe, 1993;thomas, 1991). attention was first focused on diversity through the civil rights act of 1964, which created the eeoc and led to affirmative action. generally, people and companies had an incentive to be fair because if they were not fair the ensuing law suits could be costly. through the 1970s and 1980s, people were encouraged to value differences because it was the right thing to do, an approach that is ethically driven. however, employers need additional motivation to do the right thing; griggs (1995) called this impetus enlightened self-interest, and it can occur at the individual, interpersonal, or organizational level. the third approach is managing diversity. this approach is pragmaticallydriven by a company's profitability and involves adjusting "corporate cultures, values, systems, processes and climates to ensure ...all employees ...reach their potential in pursuit of company objectives" (thomas, 1996, 80). it is argued that companies need to manage their diverse employees appropriately if they expect to maximize the productivity of their human resources and increase company profits. morrison (1992) suggests that managing diversity involves paying attention to three human resource functions: recruitment, development, and accountability. arguments are made that by selecting from the broadest employee pool, developing all employees fully, and being accountable for results, companies will be perceived as being fairer, their employees will be better utilized, and the organizations will be more profitable. the rhetoric sounds good, but there has been relatively little research to support the claims that are being made (comer & soliman, 1996; cox, 1991; sanchez & brock, 1996). konrad and linnehan (1995) looked at the issue of whether eeo/aa has improved the status of protected groups. while there is some evidence of improvement, especially in women's representation in management, there is also evidence that the creation of human resource management (hrm) programs and policies may be merely symbolic gestures. morrison (1992) interviewed 196 managers in 16 organizations that were role models in developing diversity. she identified diversity practices that were classified into three categories: accountability practices, development practices, and recruitment practices. morrison's study reported the presence of various diversity practices in the companies'amples and also ranked the importance of each practice as reported by the managers interviewed. comer and soliman (1996) also interviewed executives in national or regional organizations, primarily people in human resource positions. their questions involved how organizationsassess diversity efforts. in addition to evaluating absenteeism, turnover, and patronage by non79 journal ofsmall business strategy volume 9, no. 2 fall/winter l 998 traditional customers, they also suggested polling non-traditional employees concerning their perceptions of discrimination, opportunities, and access to information. we wondered how ceos of small, successful companies approached diversity. if such leaders, with their limited resources, recognize and support issues of diversity, they must perceive that there is some benefit in doing so. ceos may be motivated by the negative, punitive approach of eeo and aa or by the more ethical approach of valuing diversity, but they could also see this as a sound economic decision. methodology sample the population sampled was the forbes 200 companies. we used this sample because of the acknowledged success of these companies and because of the accessibility of the population. while this sample differs from the traditional department of commerce and united states small business administration definition of small business, it seemed like an appropriate exemplar for other small businesses. each year forbes selects the most successful publicly-held small companies. their definition of "small" is based on revenue and involves companies with annual revenue between $5 and $350 million. the number of employees in each company is not reported. of the 5,774 companies eligible for inclusion in the list in 1996, the top 3.5% were selected as the most successful companies (kichen & hardy, 1996). a number of elements are used to rank success: profit as measured by return on equity (both 5-year average and the latest 12-month data), growth, market value, stock price change, and earnings per share. the forbes 200 companies of both 1995 and 1996 were used in order to generate a larger sample. only 89 companies on the 1995 list were also on the 19961ist(kichen & conlin, 1996). the total of 311 (200 from 1996 and 111 from 1995) was reduced to 294, because 15 questionnaires were undeliverable. three mailings of the questionnaire were sent, each approximately three weeks apart. a total of 42 usable questionnaires was returned from the three mailings. we were surprised that more companies didn't respond. a study done two years earlier (addams, baker & davis, 1996) of approximately the same number of ceos of forbes companies yielded 103 responses, more than twice as many. we believe that the subject matter of the survey had some impact on the response rate. interviews of ceos who completed our questionnaire in a pilot study indicated that diversity may be a sensitive or painful topic for some ceos. for example, one ceo in our pilot group had just completed a successful but expensive eeo lawsuit. he indicated that his response to such a survey would be to discard it. in addition, companies may be hesitant to evaluate diversity efforts, according to comer and soliman (1996). they offer several reasons why they, too, had difficulty getting cooperation with a diversity assessment project. reasons include hesitance to get beyond the superficial, to accept negative feedback, and to make the changes that are needed. although the small sample size makes statistical generalization from this study difficult, we believe the subject matter is of interest and generates insights that are useful to small business practitioners and educators alike. go journal ofsmall business strategy volume 9, no. 2 fall/winter 1998 questionnaire the questionnaire has two sections: the first section was to be completed by all ceos and the second section was to be completed only if the company had formal diversity programs in place. the first section was expanded as a result of pilot studies indicating that many small companies did not have formal programs to deal with diversity. this section included the ceos'erceptions of the importance of diversity practices, the populations they used to define diversity, and their evaluation of the adequacy of the time devoted to diversity. the second section of the questionnaire, based on items from morrison (1992),was much briefer than morrison's list but was organized around her three areas: recruitment, development, and accountability. these categories were modified based on the study by konrad & linnehan (1995). from konrad 8t linnehan, we included some items for demographic analysis: date of the first diversity programs in the company, percentage of women and non-caucasians in the workforce and in management, percent of the workforce that was unionized, whether the company is regulated by the office of federal contract compliance, and whether the company had been the subject of an aa/eeo law suit. results the questionnaire first asked general questions about (i) the ceo's perception of the importance of diversity practices, (2) the adequacy of time spent on diversity, (3) the groups who benefitted, (4) and whether the company had formal diversity practices. if the company had formal diversity programs, the ceo or a designee was invited to complete the rest of the questionnaire, evaluating the effectiveness of specific diversity practices. of those responding, 28 6 percent said they had formal practices; 71.4 percent reported that they did not have formal practices for dealing with diversity. of the questionnaires listing the title of the individual completing the second part of the questionnaire, the following breakdown of titles was given; four ceos, four vp-hr, one president, one eeo officer, and one hr representative. ceos were asked to rate the importance of diversity practices with regard to five elements in their company: profitability, competitiveness in their industry, employee morale, recruitment, and progress of women and non-caucasians. these were reported on a five-point scale from 5 (very important) to i (not important). employee morale was rated most important (with a mean of 4.00); followed by progress of women and non-caucasians (3.83); recruitment (3.71); profitability (3.27); and competitiveness (3.24). the data were also analyzed, separating the responses of those with formal programs from those without such programs. these results are given in table l. responding to whether the attention paid to diversity was adequate, 10 percent of the ceos responded it was inadequate, and 90 percent reported it was about right. none said too much time was being spent in this area. when analyzing this question based on whether the respondent had formal programs for diversity, the percent remained the same; 27 of 30 respondents without programs responded that efforts were about right, as did 9 of the 10 respondents with formal programs who completed this question. as we stated earlier, our questionnaire addressed the company's definition of diversity by allowing the ceo to select as many choices as desired from gender, race, age, or disability. in addition, there was a choice of "other" if they wished to specify some other approach. the 81 journal of small business strategy volume 9, no. 2 fat//winter /998 populations intended to be benefitted were primarily based on gender and race; this is similar to the eeoc definition. non-caucasians and women were each reported as a focus of efforts in 80.5 percent of the companies. disabled workers were intended to be helped in 58.5 percent of the responding companies; older workers in 41.5 percent. several responses were made with regard to other populations intended to be benefitted: "people of diverse personality and abilities", n[those needing] retraining", "recent hires" and pall employees." table 1 rating of importance of diversity to company achievement categories mean mean mean companies with companies without all ~cate or ~in it p ti ~in i p \i c~ profitability 2.55 3.53 3.27 competitiveness 2.82 3.40 3.24 employee morale 4.18 3.93 4.00 recruitment 4.00 3.60 3.71 progress-women dt minority 4.09 3.73 3.83 scale from 1 (not important) to 5 (very important) for the middle part of the questionnaire, respondents were asked not only to indicate if they had a specific practice in their company, but also to rate its effectiveness with a letter grade. the letters were converted to numbers (a = 4; b = 3; c = 2; d = 1; f = 0). the results from this part of the questionnaire are reported in table 2. ceos were also asked to rate the overall effectiveness of their company's diversity practices in achieving their objectives from a (4) to f (0). with 10 of the 12 companies reporting, the average rating was 1.90, or just below a c grade. when asked in an open-ended question which diversity practices were considered most successful in their company, the ceos'ost frequent responses related to recruiting and training. other answers were leadership and "valu[ing] the equality of all employees." one respondent wrote, "seeking diverse job applicants then treating everyone equally." another wrote, "we are just beginning on this journey. creating awareness through training has been the focus." respondents were asked what their biggest problems were in trying to implement diversity practices in their company. answers to this question usually involved either (1) a lack of sensitivity or support from existing employees or (2) recruiting problems-a lack of diversity or ability of individuals in the available work pool. one respondent wrote that a major problem is "getting people to really understand their own biases and the benefits of diversity-especially as it relates to the business." another said simply, "time constraints." 82 journal of small business strategy volume 9, /tio. 2 fall/winter /998 table 2 rating of effectiveness of diversity practices (companies with formal practices) ~in it p mean b* recruitment partnerships with educational institutions 2.90 10 diversity-based internships 2.75 8 targeted recruitment of non-managers 2.67 9 partnerships with diverse communities 2.13 8 targeted recruitment of managers 1.82 ll develo ment and su ort career planning for diverse employees 2.44 9 attitude or value training 2.40 10 formal mentoring for diverse employees 2.25 8 skills training 2.13 8 networks and support groups for diverse employees 1.71 7 a biiitl policies against prejudice 3.42 12 family-friendly policies 3.33 9 diversity in mission statement/code of conduct 2.91 ll top management support of diversity practices 2.83 12 internal audit or surveys about diversity 2.00 8 active eeo/aa office or committee 2.00 6 diversity as part of performance evaluations 1.86 7 diversity as part of compensation decisions 1.86 7 diversity as part of promotion decisions 1.71 7 diversity as part of succession planning 1.67 6 advocacy or advisory groups for diverse groups 1.43 7 grade of a (excellent) = 4 grade of f (unsatisfactory) = 0 'umber of responding companies using this practice the final questions of the survey involved demographic-type questions, primarily suggested by konrad and linnehan (1995). in responding to "when" formal diversity practices were first put in place in their company, one coinpany began in 1976, one in 1988i one in 1990, two in 1991, two in 1992 and two in 1996. table 3 summarizes other demographic questions involving the percentage of the workforce and management who were women or non-caucasian, the number of companies under ofccp regulation, and the number of companies having aa/eeo lawsuits. 83 journal ofsmall business strategy volume 9, no. 2 fall/winter /998 table 3 demographic data about companies c~ate or mean n= women in workforce 35 92% 12 non-caucasians in workforce 21.75 12 women in management 15.00 12 non-caucasians in management 14.08 12 ~cate or results is company regulated by of ccp 50.0% yes 35.7% no 14.3% unknown was company subject of aa/eeo lawsuit 50.0% yes 50.0% no outcome of aa/eeo lawsuit 66.7% won 16.67 settled 16.67 pending discussion two types of information arose in this study: (i) an analysis of the differences in the two populations of this study —those that had formal practices in place and those that did not and (2) insights from evaluating formal diversity programs. comparing the two populations companies with formal practices and those without such practices varied dramatically in their appraisal of the importance of diversity to their company. in evaluating the importance of diversity to the first two areas, profitability and competitiveness, companies without practices rated diversity as more important (3.53 and 3.40) than did the respondents with formal practices (2.55 and 2.82). companies implemented and maintained practices not because they perceived such practices benefitted them in terms of profitability or competitiveness, but for other reasons. the response patterns were reversed in the other three areas. those with formal practices rated the importance of employee morale (4.18),recruitment (4.00) and progress of women and noncaucasians (4.09) higher than companies without such practices (3.93, 3.60 and 3.73, respectively). 84 journal ofsmall business strategy volume 9, no. 2 fall!winter 1998 an area in which a difference migh be expected is the perception concerning the amount of time that ought to be spent dealing with diversity. clearly, the companies with formal practices were spending more time dealing with diversity that those without such practices, yet 90% of the companies in each group answered that the amount of attention paid to diversity was "about right". in other words, companies without formal practices, while indicating that dealing with diversity was important to their profitability and competitiveness, believed that they were dealing with this issue adequately. on the other hand, companies with formal practices reported concerns about the success of some practices. this is consistent with other research; a 1992 survey showed that only 5 percent of the companies responding thought they were doing a very good job with diversity (cox & blake, 1991). the respondents in this study graded themselves below a "c" in 7 of the 21 practice areas. they graded their eitorts above a "b"in only two areas: family-friendly policies and policies against prejudice. the overall grade that they gave themselves was 1.90,just below a "c". what could account for these differences in evaluation? to some extent this may be some sort of perceptual bias. it is probably easier for ceos to believe that things are going well and that time and money do not need to be diverted to additional programs or practices. it may also be in the best interest of human resource professionals to believe that additional programs and practices are needed. whether or not biases impact evaluations concerning the need for practices, another possible explanation is that respondents from companies without formal practices may not see problems that exist because they are unprepared to see them. it is possible that these forbes 200 companies are not doing as well with regard to diversity as they believe they are doing. many scholars argue that one of the most critical elements for the success of a diversity program is top management support (arrendondo, 1996;cross, 1996; fine, 1995;gardenswartzgt rowe, 1993; thomas, 1991). but what does "top management support" mean? the ceos in our sample believed that they support equal opportunity and diversity, yet most had no formal programs in place to promote these goals. in addition, they believed that the efforts that they were making were adequate; therefore, they were not motivated to make additional efforts in this area. even if improvement of managing diversity is a cost-effective strategy, it seems that paying attention to this issue is not something that small, successful companies do voluntarily; ceos have too many more pressing problems to address. analyzing the 12 companies with formal programs, we found that 50 percent of them had been involved in an aa/eeo lawsuit and 50 percent of them were regulated by the office of federal contract compliance program (ofccp). both of these situations tend to promote the establishment of diversity-oriented programs. only two companies were involved both in the ofccp regulation and in aa/eeo lawsuits; so it is fair to say that external pressure may have played a part in the decision of the companies with formal diversity practices (in our sample) to institute those practices. evaluations of formal diversity programs the evaluations made by respondents with formal practices of their diversity practices may be useful to ceos and others in companies without such practices, as they expand their efforts in diversity related areas. most companies with formal practices had policies against prejudice (12 of 12) and family-friendlypolicies (9 of 12) in place. these are also the areas that were reported 85 journal ofsmall business strategy volume 9, no. 2 fall/brinier /998 as being most successful (342 for policies against prejudice and 333 for family friendly policies-both b+). the two areas most frequently mentioned as successful by survey participants were training and recruitment; these findings agree with other research (cox, 1994; scales & emery, 1996). one respondent specifically stated that their company was "just beginning on this journey" and indicatedthat "creating awareness" seemed tobe an appropriateearly focus. another participant was pleased with the "formal training ... for all employees" (emphasis added). one of the specific goals of such training would be to value the equality of all employees. results of this study also lend support to those experts who indicate that recruitment is or can be one of the most important elements in a successful diversity program (morrison, 1992; gardenswartz & rowe, 1993; white, 1996). sending all employees to diversity training, however, may not be the answer for all companies (morrison, 1992). arrendondo (1996)reported that the majority of diversity leaders she polled believed that beginning with training was not a good idea. according to joplin and daus (1997, 35), "companies at the stage of intolerance may not yet be ready for such initiatives. if employees are forced to attend diversity training that they and/or their organizations do not support or believe in, the training can actually make the situation worse." within the three categories of "recruitment," "development and support," and "accountability," we will summarize the programs that were most widely adopted and those that were evaluated as most successful. in the "recruitment" area 11 out of 12 respondents reported efforts at recruiting managers; however, this was the area in which companies were least satisfied with their success (1.82 "c-"). companies reported 15 percent of their managers were women and 14 percent of their managers were non-caucasian. however, this was much lower than the overall percentage of workers in these two categories (women 36% and non-caucasians 21.75%). the most successful program in the recruitment category was partnerships with educational institutions (2.90—just below a "b"),with diversity-based intemships as second (2.75—about a "b-"). ln the category of "development and support" the most frequently used program was attitude training (10 of 12 using it), followed by career planning(9 of 12). these were also the programs that were rated as most successful, although this category overall ranked lowest(2.44 and 2.44—" c+"). the least utilized (7 of 12) and the least successful (1.71)were networks and support groups for diverse employees. perhaps these companies were too small to have the critical mass of diverse employees necessary to form effective networks and support groups, since these approaches have been reported as successful in larger organizations (cox, 1994; fine, 1995; thomas, 1991). the "accountability" category was the largest, and some of the successful programs in this area have already been discussed. having policies against prejudice was the most frequently used (12 of 12) and the most successful program (3.42 or a-). having top management support was also a program that was present in 12 of 12 companies; however, it was not judged to be as successful (2.83 or b-). including diversity as part of the mission statement was about as frequently (11 of 12) and as successfully(2.91) used. the least frequently used programs were having an aa/eeo office and using diversity as part of succession planning (6 of 12 in each instance). the lowest score for any program involved having advocacy or advisory groups for diverse employees (7 of 12 had such programs), and they were graded at 1.43 ("d+"). 86 journal ofsmall business srraregy volume 9, jvo. 2 fall/winier 7998 the two areas mentioned as involving the biggest problems in implementing diversity programs were persistence of biases and failures in recruitment. the most frequently mentioned problem areas are similar to the most frequently mentioned success areas: recruitment and training. yet, training is intended to dispel biases or lack of understanding. this difference may be explained with the notion that negative attitudes can be very persistent, despite training and other programs. one-time training sessions may not resolve such problems, and companies must be persistent if they are to make any headway. similarly, since efforts at recruitment are both noticeable and measurable, both the successes and failures are readily apparent, and most companies have examples of each. suggestions for application an increasingly diverse workforce will continue to impact all businesses, large and small, at an escalating rate. if, affirmative action requirements are dismantled, equal employment opportunities regulations will remain the law. any company with over 15 employees can be the target of a lawsuit claiming discrimination in this area. in addition, as it becomes harder to find qualified employees using traditional means, employers who want excellent employees will need to explore less traditional employee sources if they are to maximize their opportunities of finding the best candidates. this may include targeted recruitment of managers and employees, diversity-based internships, and partnerships with special communities and educational institutions. companies not realizing that conscious efforts are required to fully utilize the skills and abilities of more diverse employees will fall behind companies that have programs in place to better utilize and develop the abilities of their employees. coming, for example, estimates saving $5 million by developing programs to reduce the high turnover of their diverse employees (robinson 8t dechant, 1997). the costs of ignoring diversity may rise as many industries become increasingly service-oriented. smaller, successful companies, such as those in our study, seem to be lagging behind larger companies in dealing with diversity issues. perhaps this is because they have so few personnel to use to address such issues. however, an additional problem seems to be perception; 90 percent of the sampled companies without formal practices indicated that they are already "doing enough with diversity". learning from larger companies with formal programs in this paper we suggest that companies interested in developing diversity programs begin by: (i) dratting a mission statement, code of conduct, and policies that reinforce the diversityfriendly values of the organization, (2) examining their recruiting and training needs, and (3) using caution. this is an complex and sensitive area, and companies may be wise to hire a consultant to guide them in dealing with these delicate issues (cox, 1994). nevertheless, we will offer a few suggestions to small companies beginning this endeavor. readings abound concerning successful efforts that have been made to harness the power of diversity within organizations. a harvard business school case from 1991 (9-492-009) summarizes some solutions being implemented based on 25 articles from journals, and the case gives very brief highlights of seventeen companies'iversity efforts. a more recent special advertising section in black enterprise by april klimley (july, 1997) gives longer descriptions 87 journal ofsmall business strategy vo/ume 9, no. 2 ealvivinter l998 of over two dozen companies'rograms. a source for those interested in developing a comprehensive approach to diversity is developing competency to manage diversi ry: readings, cases and activities, by cox and beale (1997). conclusion this paper investigates an area that could prove very valuable in the future. as an exploratory study, it raises many questions about the usage and effectiveness of diversity practices in smaller companies. it is not surprising that just over one-quarter of the small, successful companies in this study have programs to manage diversity. it is also not surprising that companies with little involvement in specific diversity programs judge themselves to be doing fairly well in this area, while the companies with diversity programs are more pessimistic about the success of their diversity efforts. the more work that is done in this area, the more managers become aware of what still needs to be accomplished. the companies sampled are involved in many practices that other companies might want to adopt. these companies can serve as models to other companies that may choose to become involved in diversity as an approach to manage employees more effectively. references addams, h. l., w. h. baker, & b. davis. 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(1994). cultural diversity in organizations: theo research & ractice san francisco, ca: berrett-koehler publishers, inc. cox, t. c., jr., and r. l. beal (1997).develo in com etenc to mana e diversi: readin s cases & activities. san francisco, ca, berrett-koehler publishers, inc. cox, t. c., jr., & s. blake (1991). managing cultural diversity: implications for organizational effectiveness. academ of mana ement executive 3, 45-56. cross, e. y., (1996). getting started: the end is in the beginning. in e. y. cross & m. b. white (eds.), thediversi factor: ca turin thecom etitiveadvanta eofachan in workforce (pp. 4-16). chicago, il: irwin. 88 journal ofsmall business strategy volume 9, no. 2 fall/ivinrer 1998 fine, m. g. (1995). buildin successful multicultural or anizations: challen es and .w 9 .cdq 8 k. gardenswartz, ln & rowe, a. (1993). mana in diversit: a com lete desk reference and bl(i lidd. ~ y k.ny: \ griggs, l. g., (1995).valuing diversity: where from ...where to? in i.. b. griggs & l. louw (eds.) valuin diversi: new tools for a new realit . (pp, 1-14). new york, ny: mcgraw hill, inc. hardy, s. (1996, nov. 4). meet the boss. forbes, 268-296. jackson, s. e., and associates(1992). diversit in the work lace. new york, ny: the guilford press. jamieson, d.,& o'mars, j. (1991). mana in workforce2000:gainin thediversit advanta e san francisco, ca: jossey-bass publishers. i p(i,j.ii.w.,&d,c.b.(1997).ch ii g fl d g 8 kf .a~df mana ement executive 9, (3): 32-47. kichen, s., &. conlin (1996, nov. 4). fast company. forbes, 222-224. kichen, sd & hardy, e. s. (1996, nov. 4). here's looking at you. forbes, 264-266. kichen, sd and e. hardy (1995, nov. 6). sharing the wealth. forbes, 300-301. kll i y,a.(1997,j ly). dl fly p g:c i g f g .~bi kg i 27: 117-127. kreitner, rd 8c kinicki, a. (1995).or anizational behavior (3rd ed.). chicago, il, irwin. konrad, a. mm &. linnehan, f. (1995). formalized hrm structures: coordinating equal ply pp iq ilg g i p i . ~ad f mana ement journal 39 (3): 787-820. macy, g. (1996).accommodating employees with disabilities: a matter of attitude. journal of ~mi i i 8, (i)') 78 91. morrison, a. m. (1992). the new leaders: guidelines on leadershi diversit in america. san francisco, ca; jossey-bass. khl,g.,&d h,k.(1997).ggdlg 9 i f d q. ~ad f mana ement executive 9, (3); 21-31. sanchez, j. in & brock, p. (1996). outcomes of perceived discrimination among hispanic employees: is diversity management a luxury or a necessity? academ of mana ement journal 39, (3): 704-719. 89 journal of small business strategy volume 9, no. 2 falllwtnter 1998 scales, b., 8c emery, e. s. (1996). diversity at dupont: the strategic diversity plan. in e. y. crossgc m.b. white(eds.) the diversi factor. ca turin the cpm etitiveadvanta e of a chan in workforce (pp. 233-243). chicago, il: irwin. thomas, r. r., jr. (1991). be ond race and ender: unleashin the ower of our total work force b mana in diversit . new york, ny: amacom (american management association. th .r.r.,p.(19967.~gd i ~ i di i .n y k.ny:a white, m. b. (1996).leadership for workforce 2000: the corestates experience. in e. y. cross 8t. m. b. white(eds.), the diversi factor: ca turin the com etitiveadvanta e of a ~hi kp tpp. 199-2977. cn 9 . il: i sandra powell, phd is an assistant professorin the department of business administration in the college of bnsiness and economics at weber state university in ogden, utah. she holds a j.d. degree as well as an mba and phd, all from the university of utah. eon addams, ph. d is a professor of management and dee smith fellow in the department of business administration, college of business and economics at weber state universityin ogden, utah. brian davis, ph d is century institute scholar and professor of business administration in the department of bttsiness administration, college of business and economics at iveber state university, ogden, uiah. 90 strategy developing a normative framework to assess small-firm entry strategies: a resource-based view lori c. maruso laurence g. weinzimmer bradley university abstract the decision to pursue growth opportunities is often complex and multidimensional. small businesses pursuing these opportunities must consider many important criteria, such as resource requisites, timing and how to enter new markets. unfortunately, there are not many systemic tools available to make these dificult decisions. one area of literature that may assist small businesses in deciding how to enter new markets is the resource-based view of a firm the resource-based view ofa firm complements current strategic management thought by refocusing efforts on the longterm accumulations ofassets rather than short-term resource allocations. ipe synthesize concepts porn the resource-based view with the literature on alternative entry strategies to develop a normativepamework for small-business decision makers. specifically, porn ihe resource-based view, we consider: l) diferent types of distinctive competenciestangiblehntangihie resources owned by a firm and capabilitieslprocesses used by a firm; 2) the degree to which these distinctive competencies can be sustained given cemain environmental attributes, such as ease of imitation, abilities of competitors and industry dynamism. the interrelationshipsbetweendistinctivecompetenceandenvironmentalsustainabilityare then used to identify appropriate strategies to enter new markets. introduction the small business literature contains numerous studies that investigate failure rates of small firms. failure rates have ranged from as low as 34 percent (bates & nucci, 1989) to as high as 90 percent (kopf & beam, 1992) during the first five years of operations. these high failure rates have resulted in a plethora of studies investigating reasons for small business failures. otten cited reasons include poor capital budgeting, excessive inventory, lack of formalized planning, inadequate provisions for contingencies and the inability to cope with growth (laitinen, 1992; duchesneau & gartner, 1990). all of the above-mentioned causes of failure can be attributed to inadequate strategic planning. numerous studies have shown that small businesses committed to a formalized strategic planning 1 journal ofsmall business strategy vol. 10, no. 1 spring/summer 1999 process outperform firms that do not engage in strategic planning (bracker, keats, tk pearson, 1988; kopftk beam, 1992; shuman dt seager, 1986; shrader, mulford gt blackburn,1989). in one study, lyles, baird, orris and kuratko (1993) specifically found that small firms using formalized decision-making models were exposed to numerous levels of strategies, resulting in higher growth, for those firms inclined to pursue growth opportunities, pursuit of distinctive competence and competitive advantage may become critical. a growth-oriented small business can create and sustain a competitive advantage as long as customers perceive value in the products/services the business offers and it is difficult for competitors to emulate. therefore, distinctive competence and competitive advantage are a function of both the resources a firm possess and environmental attributes. unfortunately it is otten quite laborious for a small business to acquire the resources necessary to create a sustainable competitive advantage. consequently, an important decision criterion when pursuing growth opportunities is whether a firm needs to consider a strategic alliance. several levels of strategies have been identified in the strategic management literature. these include: corporate-level strategies to identify which industries a firm should operate in (e.g., diversification strategies), entry-level strategies to identify how to enter new industries (e.g., joint-venture strategies), competitive-level strategies to identify how to compete in a given industry (e.g., low-cost and differentiation strategies), and functional-level strategies to identify how to effectively allocate resources. the small-business literature contains numerous studies investigating competitiveand functional-level strategies, as well as several studies investigating diversification strategies. however, with the exception of studies on franchising (c.f.,elango & fried, 1997) and exporting (c.f.,brush, 1996), there is only a limited bibliography of research that investigates entry strategies available to small firms. specifically, based on an exhaustive review of journals publishing studies on small-business strategies', only three studies specifically considered alternative types of small-business entry strategies. one of the most noteworthy studies investigating various entry strategies available to small businesses is vesper's (1990) 14 entry wedges for new ventures trying to enter new markets with existing competition. additionally, weinzimmer, robinson and fink (1994) identified several entry strategies available to small firms based on the occurrence of technological discontinuities in a firm's environment. finally, forrest (1990) studied different strategic-alliance options for small technology-based firms, including client-sponsored research and collaborative research-and-development. given the absence of studies identifying entry strategies in the small business literature, one must ask the question "is the study of entry strategies important in trying to determine small business success?" deciding on an appropriate entry strategy is clearly important to large firms because it will impact long-term competitive position and ultimately growth and profitability. admittedly, many small firms are never faced with a decision regarding the appropriateness of a particular journals in the literature review over the last 10 years included academy of management journal, journal of business venturing, journal of management, journal of small business management, journal ofsmall business strategy, strategic management journal. 2 journal ofsmall business strategy vol /0, no. i spring/summer l999 entry strategy. for example, tlie typical small business (e.g., a local "mom-and-pop" operation) doesn't have the resources or expertise to consider aggressively pursuing growth opportunities via implementation of a specific entry strategy none the less those small businesses that are growth oriented (e.g., a small biotechnology fum), one can argue that these same entry-strategy decisions made by larger firms are even more critical to smaller firms. in addition to being concerned about competitive position and profitability, basic survival may be at stake if a small business selects an inappropriate entry strategy. moreover, it has already been demonstrated that small firms which adopt formalized strategicplanning processes improve the quality of strategic decisions, including dilferent forms of entry strategies (lyles, et al., 1993). in order to fill this apparent gap in'the extant literature and to provide entrepreneurs with additional information regarding the selection of appropriate entry strategies, we develop a normative model to provide a framework to assist small business decision makers in identifying appropriate entry strategies. to accomplish these goals, we draw heavily on the literatures examining the resource-based view (rbv) of the firm to provide new insights into the selection of small firm entry strategies. the resource-based view has recently received considerable attention in the strategy literature, where the journal of management devoted a special issue to the topic. we chose to take this approach because the resource-based view of a finn complements current strategic management thought by refocusing efforts on the long-term accumulations of assets rather than short-term resource allocations. unfortunately, given the relatively recent integration of the resource-based view of a firm into the strategy literature, our above-mentioned literature review identified only one study (greene, brush di brown, 1997) that applied this view in a small-business context. in order to develop our model, we begin with an introduction of the resource-based view of a firm to provide readers with the necessary background to apply rbv when selecting an entry strategy. we then synthesize concepts from rbv with the literature on alternative enny strategies to develop a normative framework for small-business decision makers. specifically, from the resource-based view, we consider: i) different types of distinctive competencies— tangible/intangible resources owned by a frm and capabilities/processes used by a firm; 2) the degree to which these distinctive competencies can be sustained given certain environmental attributes, such as ease of imitation, abilities of competitors and industry dynamism. as seen in figure i, the interrelationships between distinctive competence and environmental sustainability will be used to identify appropriate entry strategies for a given context. resource-based view of a firm when one thinks of strategic planning, the analysis of strengths, weaknesses, opportunities and threats (swot) comes to mind. this paradigm has been the central focus of strategic management for over a decade. recently, the strategic management literature has begun to recognize an approach developed by industrial-organization (i/o) economists to identify distinctive competence called the resource-based view. while rbv is not intended to replace current strategy thought, it does have the potential to improve strategic analysis. the key difference between traditional strategic management and rbv is the focus on chronology. strategic management focuses on transitory streams of revenues and expenses (e.g., investment in improving processes to lower cost base), while rbv focuses on enduring accumulations of assets (e.g., extent to which the cost base is lowered) (collis & montgomery, 1997). 3 journal ofsmall business strategy vol. j0, ivo. l springl'summer l 999 figure i integration of distinctive competence and enviroamental sustainability for entry strategy selection types of distiactive competeace 0 resources tangible assets intangible assets choice of entry strategies 0 capabilities and processes 0 internal development 0 joint ventures 0 acquisitions environmental attributes impacting sustainability 0 leasing (e.g., franchising 0 ease of imitation 0 competitors abilities 0 industry dynamism for example, focusing on how transitory streams of revenue allocations create a competitive advantage may reveal how a firm achieved higher profits because it was able to lower its cost base. but the reason competitors cannot replicate this success from investing in process researchand-development is because they do not have the technological expertise. therefore, it is not the streams of resource expenditures that allow the firm to sustain competitive advantage, but the accumulation of knowledge to commercialize an improvement in process knowledge. a major contribution from rbv is that it provides a helpful theoretical framework for discussing the internal resources for firms of all sizes. it attempts to describe the way in which resources drive economic performance in a dynamic competitive environment. rbv draws on both internal and external analysis to describe a competitive environment. through analyzing distinctive competencies, this view identifies abilities and strengths that may explain why some competitom are more profitable than others (collis dt montgomery, 1995). distinctive competence the resource-based view focuses on resources that are tied to a firm in a relatively permanent fashion (c.f., caves. i980; mosakowski, l993; penrose, i959; wemerfelt, 1984). the combination of resources and sequencing over time allows for the evolution of specific capabilities which optimally lead to competitive advantage (amit dt shoemaker, i 993). 4 journal ofsmall business strategy vol. /0, no. l spring/summer 1999 the most commonly used application of rbv in the stiategy literature is to use it to identify ypes of distinctive competence, where distinctive competence is defined as something a firm can do better than any of its competitors. specifically, rbv identifies two types of distinctive competence: resources and capabilities (collis tk montgomery, 1997). resources resources as a form of distinctive competence may be either tangible or intangible. tangible resources are physical assets that a firm owns, such as a unique product, plant and equipment. intangible resources, on the other hand, do not physically exist, however they provide significant value, such as brand name recognition, reputation, patents, and technological or marketing know-how (collis 4 montgomery, 1995).'~dud .cddud d t d y'dk t dhtydl 'dd id them to productive use (col 1 is tk montgomery, 1995).unlike tangible and intangible resources, capabilities of a business include multiple sets pf factors such as values, people, and processes (collis tk montgomery, 1997).capabilities specify how and where decisions are made within a company, the kind of behaviors the company rewards, and company's cultural norms and values. competitive advantage in order to turn a distinctive competence into a sustainable competitive advantage, a firm not only needs to possess a unique resource, but must also have the capabilities in place to exploit that resource. therefore, the distinction between resources and capabilities is critical to understanding what generates a competitive advantage. a company may have unique and valuable resources, but unless it has the capability to use those resources effectively, it may not be able to create or sustain a competitive advantage. for example, consider emi, ltd., the company that invented the cat scanner. emi had a distinctive competence in the form of a tangible resource. this was such a great accomplishment that the emi research engineer who invented the machine won a nobel prize for doing so. initially, em i was the only company that knew how to make cat scanners. clearly, emi, ltd. possessed a tangible resource as a source of distinctive competence, however it did not have the capabilities (manufacturing processes, service and support staff) to exploit this resource. general electric, having sophisticated manufacturing'rocesses and a sizable sales force, saw the opportunity for cat scanner sales. they manufactured a modified version of emi's invention (to work around the patent) and general electric is the company that eventually realized the most benefit from the cat scanner sales (hill tk jones, 1998). therefore, in ordbr to realize the full benefits of a distinctive competence, a firm needs both resources and capabilities to turn the distinctive competence into a long-term competitive advantage. this becomes particularly critical for entrepreneurial firms. for new ventures, achievement of a competitive advantage may be an ultimate but not immediate goal. instead, survival or success fu i acquisitions of resources may be primary objective (chbrch ill bt lewis, 1983;greene, brush tk brown, 1997). however, once a small firm develops a distinctive competence, seldom does it possess both the resources and the capabilities to exploit the resource. if this is the case, choosing an appropriate entry strategy becomes critical to maximizing the benefit from a distinctive competence. for example, if a small firm has a resource as a form of distinctive competence, but does not have the capability to exploit that resource, then it may have to consider some type of strategic alliance to overcome a potentially short-lived benefit. in the example of emi, ltd. and general electric, 5 journal ofsmall business strategy vol. 10, no. 1 spring/summer 1999 it is quite possible that if emi would have initially approached ge when it developed the cat scan machine, ge would have welcomed the opportunitynot knowing it could reverse engineer a prototype and work around the patent. instead, emi tried to exploit a tangible resource via internal development without having the capabilities. unfortunately for emi, ltd. this resulted in a very short-term benefit. model development in order to provide a strategic decision-making framework for small businesses, our model attempts to integrate the concepts of distinctive competence and sustainability of competitive advantage to select appropriate entry strategies. the model will identify appropriate entry strategies based on two dimensions: i) the degree of distinctive competence possessed by a firm, 2) the degree to which a distinctive competence can be sustained over time. the model being proposed in this study is presented in a 2x3 matrix in order to facilitate the reader's understanding of the interrelationships between distinctive competence and sustainability. specifically, levels of distinctive competence are represented on the vertical axis and the degree of sustainability is represented on the horizontal axis. levels of distinctive competence recall that two forms of distinctive competence exist: resources (both tangible and intangible) and capabilities. while many successful small businesses possess neither form of distinctive competence, having at least one form provides future growth opportunities that would otherwise not exist. moreover, by possessing both forms, distinctive competencies can further position a firm to take advantage of growth opportunities by providing potential competitive advantage. therefore, we can identify three categories of firms in terms of their level of distinctive competencies. in the first category, a firm possesses neither resources nor capabilities, potentially thwarting growth opportunities. in the second category, a firm possesses one form of distinctive competence, either resources or capabilities, but not the other. in the final category, a fum possesses both resources and capabilities. the vertical axis of our model recognizes all three of these categories. degree of sustainability to select an appropriate entry strategy, we have already contended that a small business needs to consider its forms of distinctive competencies. however, environmental context must also be considered before an appropriate entry strategy can be identi tied. even though a company may have unique and valuable resources and the capabilities to exploit these resources, the competitive environment will determine the degree to which competitive advantage can be sustained. resource-based theory provides three factors that will determine the degree of sustainability in an industry environment. the ilrst factor is barriers to imitatibility, which assesses the degree of difficulty competitors would have in imitating a distinctive competence. possessing a resource that competitors can easily copy may only genemte temporary value. while patents may thwart imitation, if a resource provides significant value, competitors will attempt to find ways to copy it. collis and montgomery (1995) identified four characteristics that impact degree of imitatibility: physical uniqueness that cannot be copied, brand reputation/brand loyalty, substantial capital investments, and dumbility of products. 6 journal ofsmall business strategy voh io,. no. l spring/summer l 999 figure 2 normative model of small business entry strategies d r o sst ubil unconstrained sustainability constrained sustainability quadrant i quadrant iv neither ty pe. of distinctive, acquisition strategy diversification strategy competeace quadrant ii quadrant v either type of distinctive competence joint venture strategy joint venture strategy quadrant iii quadrant vl both types of distinctive competeace iaternal development leasing strategy strategy a second determinant impacting the degree of sustainability in an industry environment is the ability of competitors to imitate a competence. ghemawat (199l) defined the ability of competitors to rapidly imitate distinctive competence as strategic commitment. strategic commitment refers to the intensity in which a competitor invests in certain resources. if competitors show a pattern over time of investing in resources to imitate others, the sustainability of a distinctive competence could be threatened. therefore, the willingness of competitors to aggressively invest in distinctive competencies may reduce the impact of the previously mentioned burners to imitation. the final determinant impacting degree of sustainability in an industry environment is industry dynamism. dynamism refers to the degree of industry turbulence or change (dess 4 beard, 1984). dynamic industries are characterized by high rates of product innovation and rapid product life cycles. distinctive competencies in these types of industries are often short lived due to the rapid evolution of products. while the three above-mentioned factors can independently impact the degree of sustainability, we consider their aggregate impact to identify two opposing categories. specifically, the 7 journal ofsmoll business strategy vol. /0, no. l spring/summer l999 horizontal axis of our model categorizes constrained sustainability as an environment where it is difficult to sustain competitive advantage over a long period of time. conversely, unconstrained sustainability is chatacterized by opportunities for long-term sustainability. selecting an appropriate entry strategy there are four basic categories of entry strategies available to a firm identified in the strategic management literanue: internal development -entering a new market by one's self joint venture —entering a new market through a partnership, acquisition —entering a new market by purchasing another company, and leasing —entering a new market by offering a product/service through other firms (e g., licensing and franchising). clearly, each of these strategies has its own advantages and disadvantages, and given the specific context facing a small-business ownerin terms of possession of distinctive competence and degree of sustainability —certain entry strategies become more appropriate than others to achieving long-term success. by considering the interrelationships between possession of certain distinctive competencies and opportunities to sustain competitive advantages, as seen in figure 2, contexts arise that dictate specitic entry strategies. in order to view these contingencies, strategies in each of the six quadrants of the model sre discussed. quadrant i in this instance, a firm possesses no form of distinctive competence in an industry characterizedby unconstrainedsustainabilitywhere factors like imitation and turbulence are low. since the firm hss no source of distinctive competence, the opportunity to pursue a strategic alliance would be minimized, as the firm has limited auractiveness for a strategic-alliance panner. lf the firm were able to acquire a distinctive competence, it would have the opportunity to sustain that competence over a long-term period. acquisition, an entry strategy that involves the purchase of another company to enter a new market, is more common in large firms, however numerous small firms have also successfully utilized this strategy. the major advantages of pursuing an acquisitionas an entry strategy in this context include access into unrelated markets entry and immediate results. the day the acquisition is completed, the finn is operating in a new market. if timing is a critical concern to secure competitive advantage, this may become a very important criteria in selecting an entry strategyinternal development and joint ventures may literally take years to develop before a firm enters a new market. the major disadvantages to acquisitions include initial capital outlay and potential turnover problems with existing employees of the acquires. the most prevalent reason acquisitions are more common in large firms relative to small firms is simply cost. many small companies don' have the necessary liquidity or leverage position to be able to afford the purchase of another company. quadrant ii here, a firm has s distinctive competence in the form of either a resource or a capability in an environment that would allow for long-term sustainability. as evidenced in the emi, ltd. example, trying to exploit one form of distinctive competence without the other may expose a firm to considerable risk. however, when a finn possesses a distinctive competence, it may become a potentially anractive joint-venture partner. therefore, if market timing is critical, it may be advisable to find a joint venture partner that can fill in the gapa necessary to turn the distinctive competence into a competitive advantage. note in certain instances, if the timing of market entry is not sn important issue, the firm may have the option to develop a 8 journal ofsmall business strategy vog 10, no. i spring/summer l999 distinctive competence in its area of deficiency to eventually pursue an internal-development strategy. ideally in a joint-venture partnership each partner brings a unique source of value to the partnership that other partners may be lacking. there are three major advantages of a joint venture, in this context, that make them particularly attractive to many smaller firms. first, the firm could eliminate a deficiency, such as the lack of a resource or capability. second, the initial investment is shared between the joint-venture partners, and as previously mentioned, limited financial resources may be a limiting factor to a small business desiring to pursue new markets. third, by using a joint-venture strategy, a small business can share risk. unlike many larger firms, if a small business pursues new market entry by itself and fails, it may devastate the organization. by sharing risks with a partner, the potential downside risk of unsuccessfully entering a new market is minimized. three major disadvantages inherent of joint ventures include sharing profit, control, and knowledge. when a firm enters into a joint venture, it must share its profits with partners. additionally, it must share control in the decision-making process with its partners. possibly the most serious long-term disadvantage of a joint venture is that a firm may have to share valuable knowledge with its partner(s). if the joint venture partnership is terminated while the shared knowledge still has value, the joint venture partner can use the knowledge to potentially become a competitor. quadrant iii this context provides the most opportunity for future growth, where a firm possesses both forms of distinctive competence in an environment that is supportive of long-term sustainability. in this situation, internal development allows a firm to pursue growth opportunities without having to share the benefits of valuable distinctive competencies with other firms. there are some other advantages to using internal development in this context. first, internal development gives complete control to a small-business owner, rather than sharing control with a partner. this may be extremely important for a small firm, given the influence an owner has on strategic-decision making. second, all profits go back to the firm, rather than sharing them with others. major disadvantages include requisite financial resources, possible coordination difficulties and time in which it takes the small business to implement the strategy. financial commitment for internal development may be substantial. many small businesses may not have the necessary capital to pursue such a strategy. it may also be difficult for a small business to coordinate the necessary activities to successfully enter a new market. quadrant iv when a firm is located in an environment characterized by constrained sustainability and does not possess any sources of distinctive competence,,new growth opportunities are limited. investment into resources to develop competitive advantages may not be wise given the potentially short-lived benefits inherent of constrained sustainability. moreover, the opportunity for a successful strategic alliance would be limited because the firm has no distinctive competencies to offer the partnership. if a firm is located in this quadrant and wants to pursue new growth opportunities, it may consider diversification into new markets through either geographic or product expansion. 9 journal ofsmall business strategy vol. /0, no. l spring/summer l999 quadrant v when a firm is located in a constrained market, but has a source of distinctive competence, a joint venture may be appropriate for reasons similar to discussion in quadrant ii. however, trying io develop the other form of distinctive competence over time would not be advisable, given the short-term nature of a constrained environment. quadrant vi ln a situation where a firm possesses both forms of distinctive competence in an environment characterized by constrained sustainability, rather than investing resources in a short-lived competitive advantage, the firm could pursue a leasing strategy. specifically, to realize the short-term benefits associated with a constrained environment, the firm could either a license or franchise its distinctive competence to minimize capital commitment while still benefiting from the competitive advantage. this strategy is particularlyattractiveto small firms with limited capital to invest. if a small firm wants to enter new markets, but doesn't have sufficient capital, this may be its only option. leasing allows a small finn to collect royalties from other firms for either licensing a specitic technology or knowledge base, or it can franchise by allowing other firms to use its name and sell its product/service. implications and conclusions the decision regarding how to enter a new market is complex and multidimensional. not only should a small business consider sustainability of resources, but it must also recognize constraints. for example, even though a small business may possess a potential competitive advantage in an unconstrained market, it may not have the capital to pursue an internaldevelopment strategy. similarly, a small business may possess a form of distinctive competence where the possibility of a joint venture may be beneficial however, the small-business owner may be reluctant to delegate responsibility or share control, making pursuit of a joint venture unrealistic. therefore, the model we offer in this study is not designed to be the single-source decision criteria for deciding on a particular entry strategy. arguably, most small businesses never consider entering new markets, nor do they have the expertise to critically assess the degree of sustainability in their competitive environments. rather the model we present here is intended to provide growth-oriented small-business owners with additional information to make a wellinformed decision. potential benefits associated with this model may be realized by both practitioners and researchers. although the notion that resources drive the sustainabilityof competitive advantage is simple, companies offen have a hard time identifying and evaluating their own resources, assessing whether they are strengths or weaknesses, and understanding whether they can be sources of sustainable competitive advantage (collis tk montgomery, 1997). having the ability to recognize strengths and weaknesses is essential to being able to attain a competitive advantage. being able to identify strengths and weaknesses is difficult because characteristics that seem to be one or the other may, through examination, have no significance for competitive advantage. one recent method small business owners may find useful to assess resources for a competitive advantage is offered by duncan, g inter and swayne (1998). using a four-stage model they provide a systematic technique for assessing internal resources while recognizing environmental contexts. 10 journal ofsmall business strategy vol. 10, no. i spring/summer 7999 there is also an opportunity for researchers to extend the model offered in this study. as previously mentioned, the resource-based view is seldom cited in small business literature, however its potential may be great. researchers could try to operationalize the degree of environmental sustainability or try to develop a model that auempts to operationalize the value of a specific set of resources. further, additional studies are needed to investigate other dimensions impacting entry strategies, such as financial resource constraints and high exposure to risk if an expansion elfort fails. references amit, r. jk shoemaker, p.j. 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(1959). thetheo of rowthofthe firm. new york: john wileytk sons. shrader, c., mulford, c.,k blackburn, v. (1989). strategic and operational planning, uncertainty, and performance in small fums. journal of small business mana ement 27(4),45-60. shuman, j., k seager, j. (1986). the theory and practice of strategic management in small rapid growth firms. american journal of small business i l(1), 7-18. vesper, k. (1990). new venture strate ies. englewood cliffs, n.j: prentice hall. weinzimmer, l.g., robinson, r. k., kt. fink, r.l. (1994). small business entry strategies: an integration of technological discontinuity and industry growth potential. journal of small business strate 5(1), 1-10. wernerfelt, b. (1984). a resource-based view of the firm. strate ic mana ement journal 5, 171-180. lori c. ltf aruso is a recent graduate ofthe poster college of business administrational bradley university. she currently works for a human resource consulting firm. her research interests include entrepreneurship and technology management. laurence g. welnrlnttner is an associate professor of strategic management at bradley university. he has published numerous articles in the area of strategy, small business performance and organiraiional growth. he recently co-authored a book entitled strategic planning for new and emerging businesses: a consulting approach (dearborn publishi ngl. 12 reproduced with permission of the copyright owner. further reproduction prohibited without permission. developing a supply chain strategy for a midsize restaurant chain wu, lifang;kloppenborg, timothy j;walsh, james p journal of small business strategy; spring/summer 2006; 17, 1; abi/inform complete pg. 63 developing a supply chain strategy for a midsize restaurant chain lifang wu xavier university wul@xavier.edu timothy j. kloppenborg xavier university kloppenborgt@xavier.edu james p. walsh the honey baked ham company of ohio jwalsh@honeybaked-oh.com abstract in this paper, we develop a supply chain strategy for a growing midsize restaurant chain. based on a case research of the honeybaked ham company of ohio, we propose that an integrated approach should be applied to handle the challenges presented in the midsize restaurant distribution system. specifically, we focus on action plans for mitigating inefficiencies found in the previous supply chain of hbh. as the success of supply chain management has increasingly become part of the competitive advantage of many firms, our work provides managerial insights to practitioners and researchers in the area of chain restaurant management where supply chain is often overlooked as a standard '"back-office" function. introduction supply chain management (scm) refers to a set of systematic approaches utilized to efficiently integrate supply chain parties so that merchandise is produced and distributed at the right quantities, to the right locations, and at the right time (simchi-levi, kaminsky, & simchi-levi, 2003). these parties include suppliers, distributors, transporters, and stores. a restaurant supply chain consists of all parties involved, directly or indirectly, in fulfilling a customer request at restaurant outlets. it at least partially includes business functions such as procurement, logistics, distribution, inventtory, operations, and marketing. quality, service, cleanliness, and value are the cornerstones of many successful restaurants. 63 the success of the restaurant supply chain management can be attributed to this focus (ritchie, 1990). in this paper, we will discuss the development of a supply chain strategy for a midsize restaurant chain. the research is based on a recent supply chain project conducted at the honeybaked ham company of ohio (hbh). small and mid-sized enterprises (smes) are distinctive in the sense that smes are relatively small in size and scale, and some smes are in the fast jane for growth. the size distinction is often seen as a disadvantage, as smes may not have a large supply chain work force or a sophisticated it infrastructure to support the logistics system. however, this does not necessarily mean reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy scm is not important to smes. the small size and often rapid growth of smes like hbh instead create a unique challenge in managing their supply chains. operating an effective and efficient supply chain is, in fact, vital to their overall success in the long term. the goal of scm is to maximize the supply chain profitability, which is defined as the difference between the revenue and the total cost incurred in the supply chain (chopra & meindl, 2003). clearly, there is only one source of revenue in a supply chain: the customer. all flows of information and product generate costs within the supply chain. scm is extremely important to all business owners and managers simply because it has a strong impact on both the revenue and costs for all firms in a supply chain (suppliers, distributors, and retailers). focusing on eliminating waste in both material and process, the notion of lean supply chain management has increasingly attracted attention in recent years (vitasek, manrodt, & abbott, 2005). companies, especially small ones, need to pursue innovation and focus strategies to support their growth (mcgee & shook, 2000). as small businesses continue to grow, their supply chains also need to change to accommodate the challenges from the expanded business. in this respect, supply chain strategy is essentially important in offering sustainable business competetiveness. while results have varied, evidence suggests that formal strategic planning is related to superior performance in business management (see schwenk & schrader, 1993; brews & hunt, 1999; perry, 2001). further, strategic supply management has been empirically linked to firm performance through measures of return-on-investment, profit as a percentage of sales, firm revenues, etc. (carter & narasimhan, 1996). in general, the marketing strengths for restaurant chains are consistency, convenience, and value for money (mawson & fearne, 1996). scm plays a critical role in 64 vol. i 7, no. i spring/summer 2006 offering these competitive advantages in the marketplace. for example, the fast and timely shipment of product is essential for providing high quality food. a restaurant supply chain presents many challenges that a traditional supply chain does not have. at the same time, since distribution or scm is often seen as a "standardized" or "back-office" function in the restaurant industry, many people think it does not contribute to the corporate competitive advantage. in companies that employ a centralized distribution, the reason is often to achieve better price negotiations through centralized buying rather than improving logistics (bernstein & paul, 1994 ). as a result, despite the extreme importance of managing a successful supply chain in a restaurant chain, this topic has received little attention in the scm and restaurant management literature. among the related articles, mawson and feame (1996) identify key elements of the buying process to facilitate the development of supplier-buyer strategies for a sample of uk chain restaurants. they utilized the case study method to analyze the supply chain decision-making processes in one of the largest restaurant chains in the uk. their findings suggest that chain restaurants value not only technical competence and financial stability but, also, consistency of their suppliers. samuel and hines ( 1999) use the quality function deployment method to involve inputs from a range of representatives from a major food distributor for making supply chain improvement decisions. there are also a number of papers dealing with food distribution issues in a general setting. salin and nayga (2003) examine the inter-company relationship in the cold food supply chain used for exporting frozen potatoes from the u.s. to developing countries in asia. fernie and mckinnon (2003) assess the potentials for further cost savings in the grocery distribution sector in the uk. more recently, aghazadeh (2004) explores ways of improving logistics and distribution supply chains within the food retail industry. reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy this paper will explore the topic of strategic supply chain management in the restaurant industry. through the hbh case, this paper sets out to identify key strategies of managing an efficient and responsive supply chain in the mid-size restaurant chains in the u.s., with a view to facilitating the development of strategies which are clearly focused on integration of activities, coordination, cost reduction, and information sharing throughout the entire supply chain. hbh supply chain hbh historical development the honey baked ham company of ohio (hbh) is one of five companies that comprise honey baked ham. the five companies were divided many years ago from the original honey baked ham company, which only sold hams to go. the various companies collaborate on a few things such as health care, some products offerings, and federal express contracts, yet they operate completely independently from each other regarding most of their supply chain issues. there is also a slight overlap in geography between companies. hbh of ohio and hbh of michigan cooperate in servicing on-line and catalog sales at a facility in toledo, but this facility is completely separate from the supply chain strategy for the 51 stores owned and operated by hbh of ohio. this article only concerns hbh of ohio hbh offers a holiday dinner solution as well as a casual dining experience to customers through its 51 stores located in ten markets throughout the country. ten years ago, the hbh business could be characterized as basically a ham business. hbh utilized local distributors for everything but the hams. the hams were shipped direct to each store from the producers. the district managers were responsible for the management of the local distributors and worked with them on assortment management. as a result, the stores were relatively independent and 65 vol. 17, no. 1spring/summer2006 inventory was replenished without excessive transportation delay. however, there were disadvantages such as high purchasing cost and the difficulty associated with managing the whole restaurant chain consistently. stores could carry different products for noncore items; customers could receive a different sandwich from store-to-store. this clearly created confusion. in 1999, hbh started to use a primary broadline distributor along with local distribution. the concept of this program was to minimize costs with the centralized distribution. the clear benefits were savings on inventory aggregation and the less expensive contracted prices for procurement due to the large purchase volume. since 1999, hbh has used three distribution modes for shipping products to stores: broadline distribution, direct (ham) deliveries, and local distribution. the local distribution in each market is used primarily for fresh breads, produce, and salads. the hybrid distribution program was not quite successful as explained below, especially during the important peak holiday seasons of easter, thanksgiving, and christmas, which account for a large percentage of the annual sales revenue. the unique challenges of midsize restaurant supply chains most supply chains are concerned with three distinctive flows: physical products, information, and funds (chopra & meindl, 2003). however, for mid-size chain restaurants like hbh, managing these three flows presents many unique challenges: • 51 stores in i 0 states owned and operated by hbh (see figure i) • different menus for different regions (for example, kentucky stores have a dinner roll called camelot buns, and kansas city stores have swirled dessert bread called povitica.) • short shelf-life products such as reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy bread and salads • extreme seasonal demand (see figure 2) (for example, the average sales in december is 14 times the average sales in january.) • unpredictable demand due to weather and events. vol. 17, no. 1spring/summer2006 • increasing number of stock keeping units (skus), especially due to the new cafe business. (currently there are about 250 common skus offered at all stores.) • a hybrid distribution system based on third-party logistics (3pl) figure 1 hbh of ohio store location map • 7 10 stores • 4 6 stores • 1-3 stores figure 2 demand seasonality of hbh of ohio percent of annual store sales per month jm1 feb mar apr may jun jul aug sep oct nov dec 66 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy the supply chain structure of hbh presents an efficiency obstacle since the markets are widely scattered. nine of the ten markets are within 1000 miles of the headquarters, but few are very close. one supply chain characteristic is the extreme variation in demand. peak demands occur at easter, thanksgiving, and christmas. regarding other supply chain characteristics, the hbh supply chain is responsible for delivering a wide variety of products, supplies, packaging, cleaning, and other materials, many of which have limited shelf life. there are more than 350 skus carried in its current supply chain (the number is still increasing as the company is expanding its casual dining business). furthermore, the mid-size company that still has the desire to accelerate growth presents other unique challenges. for example, some supply chain strategies that worked well for a small company may not be adequate any more; yet some supply chain economics that are appropriate for a large company are not yet realizable in midsize supply chains. due to the volume limitation, for example, companies like hbh have to use third-party logistics (3pl) providers for their distribution function. thus, many supply chain techniques developed by large companies such as cross-docking may not be applicable. within the supply chain, because of the independent ownership, many firms primarily take care of their own interests when making decisions. to worsen the situation, quite often many supply chain members have conflicting goals in running their business (narayanan & raman, 2004). there are directly conflicting goals such as one's cost being the other's revenue and indirectly conflicting goals such as when an action taken by one party does not benefit itself but does hurt its supply chain partners (walsh & wu 2006). these, in tum, add to the complexity of managing hbh's distribution system. further, hbh experienced rapid growth as it rolled out its new casual dining format to existing stores. hbh has decided to be innovative in its product 67 vol. 17. no. i spring/summer 2006 offerings-thereby, increasing the product variety and the amount of difference from store to store. these specific characteristics make the midsize restaurant supply chain very challenging to manage. specifically, the product line carried by chain restaurants like hbh usually complicates their supply chain significantly. hbh delivers a wide variety of fresh meats, cheeses, and other food products necessary to operate the business. each item has a different demand rate, demand uncertainty, temperature requirement, cost, and contribution margin. moreover, based on the temperature at which products are kept, items are classified into three categories: frozen, refrigerated, and dry products. accordingly, frozen items and dry items have longer shelf life and can be stored in the system for a minimum of several months. however, frozen items need additional freezer capacity for maintaining the required temperature while dry items do not need freezers. refrigerated products include a variety of meats, cheeses, produce, and other fresh items. their shelf life is relatively short. overall, hbh's supply chain presents a number of industry-specific supply chain characteristics shared by many midsize restaurant supply chains. because of these difficulties and the limited study of strategic supply chain management in the small and midsize restaurant industry, the hbh supply chain is an intriguing case to investigate. the supply chain needed to be aligned with the recent strategic plan of the company, which was to double both sales and the number of outlets in 10 years. the team working on the project immediately saw the following issues that hampered the effectiveness of the existing system and beyond. weaknesses of the current hbh supply chain the major weaknesses identified for the existing supply chain came from the reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy distribution system. the system's performance during the three peak holiday seasons (easter, thanksgiving, and christmas) was clearly not satisfactory in achieving corporate objectives. problems such as stockouts and overstocking take away value from the customers. the following specific operational issues have been identified in hbh's supply chain: 3. stock outages: stock outages occurred throughout the year, especially on the most important products. 4. shelf life: additionally, the stores had to contend with .shelf-life issues: products often were delivered with little remaining shelf-life, and in some cases, they were expired. 5. forced distribution problem: there was a battle between too much product and not enough product. there was often the need to force products from the distributors to the stores. some of this was the result of not ordering to historical demand, but much was due to over ordering by the distributors. for example, district managers have "driving product from store to store within their region at peak times" listed as their job description. 6. delivery capacity: the delivery system was not adequate to ship products during the fall holidays. the number of cases delivered in december was twelve times that of an average non-peak month, and the system did not have the necessary resources (trucks, trailers, drivers, and warehouse capacity) to meet the demand. 7. collaboration: in recent years, various distribution mistakes were repeated. little change was made even after some parties agreed to solve these problems. apparently, collaboration between companies within the supply chain is a tough 68 vol. i 7, no. i spring/summer 2006 issue. 8. expanding product assortment: the above problems are also complicated by an assortment that is constantly changing and increasing with new products, seasonal products, deleted products, and substituted products. without an effective distribution plan, the situation will only be exacerbated with the rollout of additional stores and new services. most of the above operational issues are fairly common to many of the mid-size restaurant supply chains as they share much of the same structure and demand characteristics in this industry. these issues are strong indicators of supply chain inefficiency. the next sections present strategic thoughts on mitigating these problems, along with the potential solutions developed under the framework of supply chain strategy. supply chain strategy nature of supply chain strategy in the restaurant industry, a supply chain strategy essentially determines the procurement, transportation, and distribution of products to the customers. the supply chain strategy specifies what the company will attempt to do particularly well regarding these functions to support the company's overall business strategy. therefore, decisions regarding inventory, transportation, operating facilities, and information flows within the supply chain are all part of the supply chain strategy. at the strategic level, the hbh scm team, using a cross-functional perspective, developed very detailed descriptions regarding the strengths and weaknesses of the existing supply chain, as well as the expectations for the new supply chain system. this was used as a foundation to develop the requirements for the new system. reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy on the other hand, the overall business strategy defines ways of creating and maintaining the competitive priorities required in the marketplace. strategy development has received continuous attention from both practitioners and scholars as markets become more competitive (bettis & hitt, 1995). the competitive strategy and all functional strategies, such as marketing and supply chain strategies, must fit together to form a coordinated overall strategy (hill, 2000). each functional strategy must support other functional strategies and help reach the corporate objectives such as profitability, growth, return-on-investment, etc. a company may fail either because of a lack of strategic fit or because its supply chain does not provide the required capabilities to support the desired strategic fit (chopra & meindl, 2003). at hbh, the scm group consisted of managers from different areas to ensure that the new supply chain system would meet all other functional expectations, fit into the existing operations system, and achieve the long-term goals of the company. functions of hbh supply chain strategy to hbh, customer service remains a top competitive advantage through hosting, educating, and anticipating and fulfilling customer needs. scm determines hbh's ability to have the right product at the right time (fill rate or cycle service level is used to indicate this capability), therefore, scm has direct and fundamental impact over the customer service offered by hbh. besides, hbh uses direct mailing and a toll-free telephone number with its customers. in the near future, hbh aims to double the number of distribution points through additional cafe conversions of existing retail outlets, additional corporate and franchise locations, and strategic partnerships, to dramatically enhance customer convenience and increase shopping frequency. along with this strategic plan, a successful supply chain strategy at hbh should serve the following purposes: 69 vol. 17, no. 1 spring/summer 2006 ( 1) support the overall corporate strategy. for example, the supply chain strategy will provide the flexibility and capability to support the anticipated growth in business volume and the increase of skus. (2) support and maintain consistency with other functional strategies. for example, improve the distribution performance such as in-stock availability while containing the total cost. the overall cost of stock-outs and markdowns must be minimized, yet the distribution plan should cost no more than the current level. the marketing functions will benefit from better forecasting that will be possible from more current and accurate information obtained by the new supply chain system. the company will also enjoy the long-term benefit of better-trained store staff with regards to the ordering, receiving, inventorying, and transferring of product. internal departments such as store operations, purchasing, and accounting at hbh were asked to identify their expectations of a successful supply chain system so that their specific needs can be understood and selection of a plan that most closely matches expectations can be facilitated. the expectations include: • account management • pricing schemes • purchasing • cost effectiveness • service level • internal operations standards • delivery accountability • supplier and distributor cooperation the expectations were incorporated into the request for quote that was sent to each prospective new supplier to hbh. quotes were evaluated on both service and cost factors to determine the best method of distribution for hbh. in the end, improved financial performance is the most frequently cited benefit to be obtained from a successful supply chain strategy. a clear, well-thoughtout supply chain strategy is the key to maximizing corporate profitability while reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy avoiding supply chain pitfalls. recommendations made to hbh supply chain management consists of firms collaborating to leverage strategic positioning and to improve operating efficiency. in some sense, a supply chain strategy is a channel arrangement based on acknowledged dependency and collaboration. supply chain operations require management processes that span functional areas within individual firms and link trading partners and customers across organizational boundaries. it is the interrelation of functions and organizations that challenges the successful implementation of integrated logistical management (bowersox, closs, & cooper,, 2007). as a response, an integrated approach is needed to handle the interrelated nature of logistical work at hbh, covering areas such as procurement, collaboration, transportation, warehousing, and facility network design. we present our supply chain planning recommendations in this section. strategic planning as the leader of the supply chain, hbh has learned to "think earlier" and "plan earlier." scm requires "early thinking" on many decisions relating to the flow of goods, information, and funds along the timeline. these decisions fall into three categories (supply chain strategy, planning, and operation), depending on the time frame over which a decision category has an impact. strategic decisions such as store additions, supplier selection, distribution system design, supply network design, etc. have a jong-lasting effect on hbh's operational performance. they must be made based on a careful systematic analysis well in advance. while the store locations of hbh are seemingly inappropriate, these location decisions are decades old, made under different circumstances by a different generation of leaders. the decisions might have looked sensible at the time, but they can present supply chain challenges in the 70 vol. i 7, no. i spring/summer 2006 present. the suggestions offered in this article present some effective tools to mitigate the negative impact of the existing store network. the supply chain strategy also needs to stay in line with the company's various functional strategies, so as to support the overall competitive strategy. customized distribution the food supply chain is characterized by a number of features, such as the associated lead-time, shelf-life, seasonality, variety, and uncertainty. as a result, a hybrid distribution system works better in meeting the needs for low cost and fast delivery than any pure method. a new system consisting of the following five distribution modes was proposed: • local distribution: local distri-bution will be utilized in each market for those items that need to be distributed weekly to each store. broadly, items with low demand or short shelf-life such as bread, produce, salads, and beef are appropriate for using this option. • direct distribution: products are shipped direct from suppliers to stores. only products with very high demand can be justified for using this method. in addition to hams, turkeys will also be distributed directly to the store. • central distribution: the hbh proprietary items will be shipped to a central warehouse and distributed five times per year to the stores. this allows for the central distributor to meet minimums on these items and to cost effectively distribute them to the stores. examples include hbh seasoning, a variety of hbh soups, and hbh logo packaging. comparatively, the central distribution can be seen as an intermediate option between direct and local shipping methods. • dray distribution: local drays will be used for frozen products during the fall reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy holiday season. this will allow for local storage and delivery of highly seasonal items such as hbh side dishes, cheesecakes, and various baked pies. • rental option: rental trucks can be leased for adding temporary storage capacity when necessary. this can be used together with all of the above four distribution options. based on the available distribution options, the key decision for implementing the new distribution system is the determination of which option must be used for which item in order to minimize the system cost while providing the required service level. the group initially selected a hybrid distribution system based on the company's experience with the old distribution system since the historical data was incomplete and of questionable accuracy. the initial hybrid plan serves as a good starting point, and the hybrid structure allows future refinement and improvement of the new system. because one item can possibly be carried through two or more distribution modes, opportunities for realigning the new distribution system develop. this potential redundancy may also provide useful information regarding backup distribution plans under some "what-if' scenarios. for example, if a central distribution item is not available through the central system, the second (least expensive) distribution method can be employed to deliver the product. furthermore, each store carries a different product assortment (meeting local demands), and their sales volume varies. thus, for the same item, different distribution options might be justified for serving different stores. at the current stage, the scm team decided to tailor the distribution options for each of the l 0 markets instead of each store. it made sense to plan at the market level because these markets represent clusters of stores in close proximity. at the same time, it is noted that store level cost and other data are not available for further analysis. 71 vol. 17, no. 1spring/summer2006 coordinating system improvements through aligning conflicting goals different participants in hbh's supply chain such as hbh, distributors, and suppliers frequently have conflicting goals. for example, in order to save ordering cost, distributors tend to place large orders, which can create shelf-life issues downstream for hbh. performance measurement, information sharing, and close collaboration between hbh and its distributors can be very effective in mitigating these problems. for example, information regarding the distributor's ordering cost and hbh's overstocking cost can be shared to facilitate efforts to reduce the overall system cost. long-term inter-company strategic partnerships also help create a win-win situation for supply chain members. overall, without the retailer's participation, no distributor can do well in achieving both effectiveness and efficiency in distributing highly seasonal and unpredictable products. generally, some conflicting goals are visible; for example, the revenue of a supplier is the cost for the downstream partner. this is a zero-sum game; what you lose, your partner gains. on the other hand, some conflicting goals are invisible. one·s cost is not necessarily the revenue for others. in other words, the action taken by one party may not benefit itself but does hurt its supply chain partners. for example, without proper inventory rotation, the product shipped by the distributor could have little remaining shelf-life, which is very costly for hbh to correct later on. the challenge is how to coordinate all of the firms in the supply chain network so that conflicting goals are realigned such that everyone can come out ahead. bowersox et al. (2007) argues that the main challenge for scm will be the management of intense relationships across enterprises that involve such issues as collaboration, information sharing, partitioning, diverse corporate cultures, shared cost and risks, and trust. we believe these issues constitute the major causes of many reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy visible and invisible operational problems we mentioned earlier. a contract-based incentive is one of the tools that can be used. a supply contract details the requirement of procurement of goods, transportation of materials, and distribution of the product to the customers. based on the visible cost and other operational information, the proper incentive can be offered to supply chain members for synchronizing their decisions. for example, some stubborn inventory stockout problems can be cured by offering financial incentives to the distributor for improving the service level such that the overall supply chain inventory cost is minimized. since operational actions are basically self-interest driven, without a monetary incentive, probably no other method can work as well in coordinating supply chain decisions. financial incentives must be properly structured and aligned to drive and sustain the behaviors of all supply chain stages. after all, a win-win situation is materialized only if everyone receives their share of revenue mcreases. with the conflicting goals, information is often not shared among supply chain members. every firm needs more timely and accurate information about its supply chain performance. when companies cannot observe another firm's actions, they find it hard to design, implement, and justify any necessary collaboration program. transparent information is an important basis for sincere cooperation. it is hard to win mutual trust if one company has information that others in the supply chain do not. in order to align interests, supply chain members' hidden actions have to be visible to every participant. under the updated distribution system, hbh is allowed to collect and analyze better information, such as cost, inventory, and delivery data, to share with other supply chain members. learning through benchmarking 72 vol. i 7, no. i spring/summer 2006 benchmarking is a systematic procedure that measures a firm's processes against those of industry leaders. companies like hbh can use benchmarking to understand better how outstanding companies plan and implement supply chain strategies so that they can improve their own supply chain performance. benchmarking focuses on setting quantitative goals for improvement. typical measures in restaurant industry include unit cost on procurement and distribution, service level, lead-time, and inventory turnover. in the logistics area, differences in managerial style and organizational culture do not affect the performance significantly, thus, benchmarking is particularly encouraged. in hbh's case, benchmarking data can be possibly collected from other similar restaurant chains that do not compete directly with hbh. integrative approach to decision making most of the companies are divided into a number of functional areas such as accounting, marketing, and operations. unfortunately, most real supply chain problems do not define themselves in this way, meaning they are cross-functional in nature. we can break down scm into various parts but one must not lose sight of the fact that scm is rooted in senior level decision making for the purpose of facilitating a cross-functional integrative approach. most efforts to improve supply chain performance fall short because they do not challenge the fundamental structure of the supply chain but, instead, attempt to improve performance within ex1stmg limitations, often by installing expensive new technologies (frozen food age, july 2003). hbh recognized the importance of this, and both the president and coo of the company were deeply involved in the scm project team. as a result, the hbh integrative approach focuses on the bottom line of the company, satisfies all functional areas' expectations, and seeks cooperation from all supporting departments such as it, as well as outside suppliers. reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy conclusions & implications hbh operates a midsize restaurant supply chain serving 51 stores in i 0 widely scattered markets. we have found that the restaurant supply chain is a complex network of facilities dispersed over a large geographical area dealing with a unique product assortment. we have shown that it is challenging to design and operate such a supply chain so that systemwide costs are minimized and service levels are maintained, considering the extreme fluctuations in demand and food item shelf-life constraints. different members in the supply chain frequently have different, conflicting objectives. under the framework of developing supply chain strategy, we have offered integrative recommendations for mitigating many of these issues. we have found that for this particular growing, midsize restaurant chain, the most appropriate distribution option is an improved hybrid model. the chain is too big to run as an individual store, yet is too small to run a proprietary distribution system. the diverse product mix dictates that, economically, various modes of distribution make sense for different skus and stores. the new system will allow more timely and accurate data to be gathered which will be useful both in optimizing distribution decisions and in sharing with supply chain partners to promote trust and collaboration. the new hybrid distribution system is very flexible, allowing for both growth and changes in product mix. ultimately, the hybrid solution is expected to provide the capability to be competitive in the marketplace and meeting various functional expectations within hbh. the suggestions presented in this paper are also consistent with the core requirements of lean supply chain management. (see lean scm attributes identified in vitasek et al. (2005) such as waste elimination, cost reduction and cross-enterprise collaboration.) based on the six attributes identified in vitasek et al. (2005), the suggestions presented in this paper are also extremely consistent with the core requirements of lean 73 vol. 17, no. 1 spring/summer 2006 supply chain management. for some areas where hbh is doing satisfactorily such as forecasting, no further discussion is offered in this paper. forecasting at hbh is quite detailed, especially for the small peak at easter and the large peak at thanksgiving and christmas. all deliveries are based upon these forecasts and they have proven to be very accurate by region, although product needs to be shipped from store to store within a region frequently. as demand forecasts form the basis of all supply chain planning, advanced forecasting technology can be still applied to further enhance demand prediction at hbh. in developing our analysis, some assumptions were made in order to facilitate the necessary cost and performance evaluation. for example, demand for each store is assumed to be deterministic and equal to average store demand. demand for each market is assumed to be the multiplication of the store number in that market and the average store demand. along with other problems, these assumptions indicate many unresolved issues. more research is needed to further improve our understanding on how to design and operate a restaurant supply chain. for example, jansen et al. ( 1998) use discrete event simulation as an effective tool to predict favorable logistics scenarios in multi-compartment distribution of the catering supply chain. simulation models clearly have the potential of being applied to the hbh supply chain for addressing many of the intricate problems we have not been able to solve. as small and mid-size restaurant chains strive to improve their operational efficiency and expand their business aggressively, we offer in this paper that strategic supply chain management can and must be part of their competitive strategy. as noted in steiner and solem ( 1988), successful small firms must seek a balance between the ends to which the organization aspires and the ways and means reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy available to them. strategic scm is such an accessible and powerful means for achieving competitive advantage in restaurant industry. without it, due to the special challenges discussed in the paper, their supply chain can be easily misaligned, and a misaligned supply chain can be the major cause of numerous operational problems as well as an inferior corporate financial performance. references aghazadeh,s-m. (2004). improving logistics operations across the food industry supply chain. international journal of contemporary hospitality management, 16 (4), 263-268. bernstein, c. &paul, r. ( 1994 ). winning the chain restaurant game: eight key strategies. new york: john wiley & sons. bettis, r. & hitt, m.l. ( 1995). the new competitive landscape. strategic management journal, 16 (summer special issue), 7-19. brews, p. & hunt, m.r. (l 999). leaming to plan and planning to learn: resolving the planning /learning school debate. strategic management journal, 20, 889-913. browersox, d.j., closs, d.j., & cooper, m.b. (2007). supply chain logistics management (2"d ed.). new york: mcgraw-hill/irwin. carter, j.r. & narasimhan, r. ( 1996). is purchasing really strategic? international journal of purchasing and materials management, 32 ( 1 ), 20-28. ceo involvement key to supply chain improve-ment. frozen food age. july 2003, vol. 51, issue 12. chopra, s. & meindl, p. (2003). supply chain management: strategy, planning, and operation (2"d ed.). upper saddle river, nj: prentice-hall. femie, j. & mckinnon, a.c. (2003). the grocery supply chain in the uk: improving efficiency in the logistics network. international review of 74 vol. i 7, no. i spring/summer 2006 retail, distribution, and consumer research, 13(2), 161-174. hill, t. (2000). manufacturing strategy: text and cases (3'd ed.). new york: mcgraw-hill. jansen, d.r., van de vorst, g.a.l., & van weert, a. (l 998). multicompartment distribution in the catering supply chain. international transaction in operations research, 5(6), 509-517. mawson, e. & fearne, a. (l 996). purchasing strategies and decision-making processes in the food service industry: a case study of uk restaurant chains. supply chain management: an international journal, 1(3), 34-41. mcgee, j.e. & shook, c.l. (2000). responding to industry consolidation in fragmented industries: the role of capabilities in small-firm survival. journal of small business strategy, 11(2), 21-32. narayanan, v.g. & raman, a. (2004). aligning incentives in supply chains. harvard business review, november 2004, 94-102. perry, s.c. (2001 ). the relationship between written business plans and the failure of small businesses in the us. journal of small business management, 39 (3), 201-208. ritchie, p. ( 1990). mcdonalds: a winner through logistics. international journal of physical distribution & logistics, 20(3 ), 21-24. salin, v. & nayga, r.m. (2003). a cold chain network for food exports to developing countries. international journal of physical distribution and logistics management, 33( l 0), 918-931. samuel, d. & hines, p. (l 999). designing a supply chain change process: a food distribution case. international journal of retail & distribution management, 27(10), 409-419. schwenk, c.r. & schrader, c.b. (1993). effects of formal strategic planning reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy on financial performance in small firms: a meta analysis. entrepreneurship theory and practice, l 7(spring), 53-64. simchi-levi, d., kaminsky, p., & simchilevi, e. (2003). designing & managing the supply chain: concepts, strategies & case studies (2°d ed.). new york: mcgraw-hill. steiner, m.p. & solem, 0. (1988). factors for success in small manufacturing firms. journal of small business management, 26(1 ), 56-56. vitasek, k., manrodt, k.b., & abbott, j. (2005). what makes a jean supply chain? supply chain management review, october 2005, 39-45. walsh, j.p. & wu, l. (in press). aligning conflicting goals. inside supply management. lifang wu is an assistant professor of operations management at xavier university, cincinnati, ohio. his current research focus includes supply chain management and small business strategies. timothy j. kloppenborg is castellini distinguished professor and a professor of operations management at xavier university, cincinnati, ohio. his current research focus is on project management and supply chain management. james p. walsh, is the director of supply chain management for the honeybaked ham company of ohio. vol. 17, no. 1 spring/summer 2006 75 strategy the business launch decision: an empirical investigation of reasons for not starting a new business howard e. van auken iowa state university vanaukeninstate. edu abstract this article presents the results ofa survey that examined the business launch decision. all of the individuals in the study aaended a workshop on how to evaluate a business idea and launch a new venture. all of the individuals who attended the workshop were interested in, bui decided against, launching a new venture. the results of the study indicate that time constraints, availability of capital, and risk tolerance are perceived as significant obstacles by potential new business owners. significant dijferences in the ranking of obstacles were found relative to whether the individuals believed that the obstacles to launch could be overcome, age of the respondent, and whether the individuals had previously owned a business. in addition, individuals who were more highly educated and had previous business ownership were less likely to launch a new business subsequent to the workshop. the results of the study can be used by service providers and consultants who develop training programs that assist individuals in the screem'ng ofbusiness ideas and launching of new firms. the results of the study also can be incorporatedinto college curriculum to provide students whh insight into obstacles impacting on business launch. introduction an important goal in public small business assistance and entrepreneurship education programs is to provide training, information assistance, and support programs that increase the survivability, profitability, and employment opportunities among new small firms. this assistance otten begins during the pre-launch phase when individuals are screening business opportunities and acquiring start-up resources. chrisman, hoy and robinson (1987) reported that public assistance programs for new firms are beneficial to geographic economic development. gatewood, shaver and gartner (1995) emphasized the importance of developing training programs that are targeted to meet specific needs of the potential new business owner. they believed that training programs that address the different reasons for business start-up and needs of the individuals will be more likely to result in the creation of a successful new venture. 43 journal ofsmall business strategy vol. /0, ivo. 2 fallltyinter l 999 the impact of small business in the u.s. economy provides an important impetus to the successful development of public assistance programs. as emphasized by chrisman et al (1987), small firms generate a disproportionate number of new jobs, contribute a large number of innovations, provide economic opportunities for women and minorities, and are the basis upon which much of the us economic system is built. reynolds (1994) reported that almost 4% of working age adults in the us are involved in the launching a new venture. timmons (1997) stated that an unprecedented number of new ventures have been created in the 1990s. providing pre-launch business assistance that increases the likelihood of success is a significant goal due to the enormous challenges facing new business ventures. while some disagreement exists about the true rate of discontinuance of new small firms, the statistics indicate that discontinuance/failure is the rule rather than the exception. kuratko and hodges (1998) report that more than 70,000 small firms failed in 1995. timmons (1997) stated that almost two-thirds of new small firms do not exist arer five years in operation. herron and robinson (1993) pointed-out that training of entrepreneurs is an important element affecting the analysis of the opportunity and performance of a new venture. despite these challenges, the rate of new business formation has been unprecedented in the 1990s. timmons (1997) reported that over i.i million new businesses were formed in 1992 and that over 20 million small businesses operate in the united states. nevertheless, some areas in the u.s. are experiencing economic development challenges that are resulting in a deterioration in regional economic vitality. kean, gaskill, i.eisstritz, jasper, shoop, jolly and sternquist (1998) noted that business vitality has an important impact on regional economic and community development through loss of employment, out-migration, and reduction in tax base. this article presents the results of an empirical examination of the business launch decision of individuals who attended a workshop on how to screen the business idea and launch the business. the specific objectives are of the study are to: (i) evaluate reasons why individuals who screened business opportunities decided against launch; (2) compare the characteristics of individuals who launched a new business relative to individuals who decided against launch; and (3) compare reasons why the business was not launched relative to respondent characteristics. no previous empirical studies have examined why individuals who are actively evaluating a business opportunity decide to not launch the business. the results of the study can be used by business service providers who are interested in developing programs that assist individuals in the screening and launching of new. identifying the challenges, obstacles and constraints confronting individuals as they explore new venture opportunities can enable service providers to develop better support programs and give better assistance. the results of the study also can be incorporated in college curriculum to provide students with insight into pre-launch decision processes. an important goal in entrepreneurship education is helping students to understand the difference between a business idea and a business opportunity. the results of this study provide empirical evidence that can otter students insight into the screening of business ideas. the entrepreneurship process previous research has provided alternative perspectives on the entrepreneurship process and individual decision-making criteria that are used in the creation of new ventures. the general themes, outlined in figure i, imply that new venture creation encompasses opportunity awareness, opportunity evaluation, and the launch decision. 44 journal ofsmall business strategy vol /0, no.2 fall/ivt'nter /999 figure i new venture creation model personal personal t h i shill ~ itee ed *** ~ ~es ik i d training iob related hobby intellectual property other unrelated interest suggestion unmet need the business idea ~ts e market demand hh, intention market niche goals vision evaluation ofthe opportunity skills the environment resource availability economic conditions poor opportunity good opportunity insugicient information do not launch launch more analysis do not launch launch opportunity awareness bird (1992) and katz (1992) believed that awareness of business opportunities occurs because of changes in an individual's environment. learned (1992) believed that opportunity awareness was predicated on the entrepreneur having the propensity and intention to launch a new venture. bhave (1996) developed a venture creation model that that described the entrepreneurship process as beginning with opportunity recognition. according to bhave, opportunity recognition may be either externally (i.e., purposeful search for business opportunities) or internally stimulated (i.e. realization of an unfilled market need). proceeding to the evaluation of the opportunity required a commitment of resources and time by the entrepreneur. hisrich and peters (1998) described the entrepreneurship process as beginning with a change in an individual's life due to either a disruptive event or the identification of an opportunity. timmons (1999) believed that opportunity awareness is the "heart" of the entrepreneurial process. 45 journal ofsmall business strategy vol. /0, no.2 fall/)viator l999 evaluation of the opportunity the business pre-launch process would be terminated at any point without the individual becoming motivated to evaluate the market opportunity. greenberger and sexton (1988) suggested that individuals pursue potential business ventures if the new venture evaluation reveals a sufficiently large market opportunity, appropriate management and technical skills of the entrepreneur, and availability of resource requirements. other issues included in the venture evaluation include personal issues, such as, a desire by the entrepreneur to become independent, have responsibility for making decisions, and have the opportunity for personal gain, (bull and willard, 1993). hansen and allen (1992) believed that potential business owners evaluate the degree to which interpersonal networks can be established prior to launch. these social networks act to support the organization formation, resource acquisition, and information processing prior to launch. the likelihood of the new business being launched is higher when these networks are more fully developed and actively used. herron and sapienza (1992) believed that the motivation and skills of the entrepreneur determine the intensity of the entrepreneur's evaluation process. herron and robinson (1993) believed that individual motivation and skills have a greater impact on evaluation of the venture opportunity than do other personal traits of the entrepreneur. timmons (1999) stated that the opportunity evaluation should include an analysis of market demand, market size, and profit margin. launch decision greenberger and sexton (1988) believed that supporting conditions must be present for an individual to launch a new venture. these conditions include (1) some event impacting on the individual, (2) certain personality characteristics, (3) social support network, and (4) individual need for control. evaluation of the opportunity results in the business idea being pursued, discarded, or further screening and evaluated (bird, 1992). campbell (1992), herron and sapienza (1992), starr and pandas (1992), bird (1992) and eisenhauer (1995) believed that the entrepreneur will launch the venture if the expected gains from launching the new venture are greater than the potential rewards that may be obtain from employment by another firm. the match between expectations and expected performance is determined as the individual collects more information and becomes more acquainted with the business opportunity. carter, gartner and reynolds (1996) identified and characterized these three groups of individuals: (1) those who decided not to launch the new venture tended to be relatively passive, and either decided that the venture was not a good idea or were inflexible in problem solving: (2) those who delayed launch were continually involved in internal activities such as saving money and planning (i.e, all talk and little action); and (3) those who launched the new venture were action oriented and doers. kuratko, hornsby and naaiziger (1997) stated that the individual will decide against launch when the potential venture will not accomplish the individual's personal goals. sample and methodology the sample consisted of all individuals who attended a pre-launch workshop in a midwestern state during a two-year period from mid-1996 to mid-1998. all of the individuals who attended the workshop were interested in launching a business. the purpose of their anendance at workshop was to explore and evaluate their business idea. the workshop covered the basics on how to screen ideas, develop business plans and acquire resources that are necessary to launch a new venture. a total of 263 individuals attended the workshop during this time period. 46 journal ofsmall business s(raregy vol./0, no.2 fallltpinrer /999 a questionnaire was developed and pre-tested during the late summer, 1998. the first and second mailings of the questionnaire occurred during september and october, 1998. a total of 126 questionnaires were returned, providing a response rate of 47.9%. the questionnaire was divided into three sections. the first section collected demographic information on the respondent, such as gender, age, whether the individual has previously owned a business, type of previously owned business, and reasons why the previously business had been discontinued. the second section asked questions related to whether the individual decided to launch a new venture subsequent to the workshop. these questions included whether the business was launched, type of business, and whether a business plan was written. the third section of the questionnaire was directed at individuals who had not yet launched a business. these individuals were asked to rank the degree to which specific factors were obstacles affecting the launch of the business using a likert scale (1=major obstacle and 5=not an obstacle). these obstacles included (1) lack of money, (2) lack of skill or knowledge, (3) too much risk, (4) impact on lifestyle, (5) lack of time to start business, (6) too complicated, (7) decided that business would not work, and (8) other. the results were initially summarized using univariate statistics (means and frequencies) to provide a better understanding of the respondents and characteristics of the data. subsequently, chi-square tests and wilcox two sample test of differences in means were used to examine differences between segments of the respondents. results respondent characteristics as shown in table 1, the respondents were almost evenly split between males and females (52% males and 48% females). approximately 61% were married, and 35% were not married (4% did not respond to this question). the majority (81%) had at least some college education, while 17% had either completed high school or obtained technical education. the mean age of the respondent (not shown in the table) was 37 years old. table 1 respondent characteristics (n= l26) res ondent characteristic ~pf s gender male 52% female 48% marital status married 61% unmarried 36% level of education no high school diploma high school 7% technical training 10% some college 22% college degree 59% 47 journal ofsmall business strategy vol. /0, no.2 fall/winter /999 approximately 37% of the respondents indicated that they had previously owned a business prior to attending the workshop (table 2). almost one-half (49%) of these businesses were service firms, 23% retail, 11% professional and 17% other (wholesale, construction, manufacturing, etc.) firms. almost two-thirds of these previously owned firms (66%) were no longer in operation. table 2 respondent characteristics: previous business ownership n ~percenta e previous business ownershi: yes 47 37% no 79 67% t e of previousl owned business retail ll 23% service 23 49% professional 5 11% other 8 17% is business still in 0 eration of 47 startu s " yes 16 34% no 31 reason previous business was discontinued'mr ~rankin other 1.8 i time demands 3.2 2 low profits 3.6 3 change in business conditions 3.8 4 low customer demand 3.9 5 migh competition 4.0 6 financial difficulties 4.0 6 became tired of business ownership 4.4 8 family issues 4.4 8 (i =significant reason; 5=not sigmficant reason) the respondents who had previously owned a business that was no longer in operation were asked to rank the importance (i = very important factor and 5 = not an important factor) of factors that caused the business to be discontinued. the category "other" was clearly the most important according to the perceptions of the former business owners. written responses explaining the "other" factors included, for example, moved, did not need income anymore, retired, developed physical disability, partner died, and sold business. the mean ranking of the remaining factors that lead to discontinuance included time demands (3.2), low profitability (3.6), changing business conditions (3.8), and low customer demand (3.9). all other factors were ranked as 4.0 or higher. according to the perceptions of the respondents, the most important factors causing discontinuance were attributed to personal issues (i.e. "other" and time demands). all of the business related factors (i.e. profitability, business conditions, customer demands) were ranked as having a less important impact on the reason for business discontinuance. 48 journal af small business strategy va/. 10, na.2 fall/ivinter 1999 the business launch decision the questionnaire asked whether the respondent had launched a business arer attending the workshop. table 3 provides information relating to the business start-up decision. approximately 58% (42%) of the respondents did not (did) launch a new business arer the workshop. of those who started a business arer the workshop, the majority launched either a service (45%) or retail firm (21%). other new business start-ups included professional (13%), other (construction, manufacturing, etc.) and 4% wholesale. all businesses launched arer the workshop were still in operation. table 3 business launch information started business arer worksho: n ~percenta e yes 53 42% no 73 58% t e of business launched: service 24 retail 11 21% professional 9 17% other 7 13% wholesale 2 4% business still in 0 eration? yes 53 i pp% no 0 0% an important objective of this study was to assess business start-up after the workshop. this issue is especially relevant since the attendees who attended the workshop where actively involved in screening a business idea. table 4, which includes only those individuals who did not launch a business arer the workshop, shows the mean responses of the obstacles preventing business launch subsequent to the workshop (i = an important obstacle and 5 = not an important obstacle). table 4reasons why business not launched: mean ranking (/ = significant obstacle and 5 = nat a significant obstacle) reason m~r ~rankin other 1.3 i lack of money 2.8 2 lack of time 3.0 3 too much risk 3.4 4 impact on lifestyle 3.7 5 too complicated 3.9 6 lack of skill/knowledge 4.0 7 business would not work 4.0 8 the category "other" was ranked as being the most significant business start-up obstacle. written responses that explain "other" included many individual specific events, such as death, still collecting information, business plan not complete, lack of income security, lack of confidence, need a mentor, etc. no pattern in the written responses for the "other" category was evident. 49 journal ofsmall business strategy vol. /0, no.2 fa///ivinter /999 the next highest mean ranking of obstacles to launching the business were lack of money (2.8) and lack of time (3.0). financial difficulties are commonly found to be one of the most important explanations for business failure. the workshop discussion about the financial requirements associated with launching a new business and impact of financial difficulties apparently raised the awareness of the participants about the capital requirements. in addition, the time commitment associated with collecting information, writing a business plan, and establishing supplier accounts, especially for the workshop participants who are already working in a full time job, was recognized as a significant obstacle to business launch. the rankings of the remaining obstacles were too much risk (3.4), impact on lifestyle (3.7), too complicated (3.9), lack of skill/knowledge (4.0), and decided the business would not work (4.0). all of these issues were discussed during the workshop. respondents, however, perceived them to be of relatively less significance as an obstacle to launch or easier to manage than money and time. differences in business launch decision the data were evaluated to identify differences between those individuals who launched a business and those who did not launch a business. table 5 shows chi-square results of three comparisons of sample subgroups. the table shows statistically significant differences relative to college education and previous business ownership. workshop participants who had attended at least some colleges were less likely to have opened a business after the workshop than those who had not attended college. in addition, individuals who had previously owned a business prior to attending the workshop were less likely to have launched a new business than those who had not previously owned a business. these results suggest that those individuals who were more highly educated and had previously owned a business were less likely to have launched (maybe more cautious) after the workshop. these individuals were, perhaps, better able to evaluate the value of the business opportunity than those individuals who were less highly educated and had not previously owned a business. the results in table 5 also showed no evidence of differences in the distribution of individuals launching a business versus not launching a business a/ter the workshop relative to marital status (married/single) and gender (female/ male). table 5percent of respondents launching business versus not launching business: chi-square tests of difference (n=/26) started did not variable business start business married yes 26.4% 37 2% no 14.0% 22 3% gender female 16.7% 31.7% male 25.4% 26.2% "attended college no 11.9% 7.1% yes 30.2% 50.8% eeprevious business ownership no 22.2% 40 5% yes 19 8% 17.5% ("'ignificant at 5% /.eve// 50 journal ofsmall business sirategy vo/. /0, /4o.2 fa//jivinter l999 the mean responses for reasons why the business was not launched arer the workshop were evaluated based on (i) whether the obstacles to business launch could be overcome, (2) whether the respondent had previously owned a business, and (3) age. table 6 shows the ttests of mean rankings for each of the respondent subgroups. the table results show that the mean rankings for "too much risk" and "business would not work" were significantly higher for those individuals who believed that they would not be able to overcome the obstacles to business launch as compared to those individuals who believed that the business launch obstacles could be overcome. all other differences between the means of obstacles to business launch between the two groups were statistically insignificant. table 6 wilcox two sample test of difference in means test: mean of reasons why business not launched vs. can overcome obstacle, previous business ownership, and age of respondent (n=/26) previous can overcome business problem ~owaersbi ~ac reason yes no yes no &37 &37 lack of money 2.6 3.3 3.2 2.6 2.4 3.2 " lack of time 2.8 3.0 3.7 2.8" 2.6 3.5 'oo much risk 3.7 2.4* 3.9 32'.4 3.4 impact on lifestyle 3.8 3.2 3.8 3.7 3.7 3.8 other 1.1 1.0 1.1 1.1 1.0 1.6 too complicated 4.0 3.6 3.8 3.8 3.8 4.0 lack of skill/knowledge 4.0 4.1 4.6 3.8'.0 3.9 business would not work 4.0 2.8 v 3.9 3.7 3.7 3.8 significant at /% 'ignificant at 5% the table also shows that the mean rankings for "lack of time", "too much risk", and "lack of skill/knowledge" were significantly higher for those individuals who had not previously owned a business relative to those individuals who had previously owned a business. in all cases, individuals who had not previously owned a business believed that lack of time, risk, and lack of skill/knowledge were significantly greater obstacles to business launch as compared to individuals who had previously owned a business. all other differences between the means of obstacles to business launch relative to previous business ownership were statistically insignificant. the mean rankings for obstacles to business ownership were also evaluated relative to mean age of the respondents. the results show that the mean rankings of "lack of money" and "lack of time" were higher for respondents over 37 years old as compared to respondents less than 37 years of age. the older age group of respondents believed that lack of money and time were significantly less of an obstacle than the younger aged group of respondents. all other differences between the means of obstacles to business launch relative to age were statistically insignificant. discussion the objective of the pre-startup workshop was to assist individuals in their screening of and provide insight into the value of their business idea. workshop attendees believed they had identified a business opportunity and were involved in the evaluation and screening of their idea. workshop material included, for example, information on market analysis, customer needs, financing, and personal goals. 51 journal ofsmall business strategy vol. /0, no.2 fal/iwinrer 1999 there are limits to what a workshop can accomplish. a pre-startup workshop can provide information on the start-up process, materials on how to screen business ideas, and offer insight into the value of and associated constraints alfecting the business opportunity. however, the workshop cannot provide financing, force attendees to (not) make decisions or implement actions. at the end of the workshop, attendees were presented with information on the evaluation of obstacles that may limit the business opportunity. an assessment of these obstacles provides the attendees with important information on whether to launch, not launch, or re-evaluate their business idea. the information in table 4 provided insight into the post-workshop screening process. the four obstacles that were ranked as being the most significant obstacles are factors that the workshop material can emphasize and assist in the evaluation process. the results show in table 4 suggest that the obstacles, lack of time and too much risk, are related to the entrepreneur's personal goals and objectives. the obstacle, lack of money, may be related to personal goals and objectives if lack money implies an unwillingness to make a personal sacrifice, such as obtaining a second mortgage on the individual's home, borrowing against life insurance, or selling a personal asset, to raise sufficient start-up capital. workshop materials and discussion can emphasize the importance of evaluating these individual-specific issues prior to start-up to can better understand the impact of business ownership on the individual and family lives. the other obstacles generally relate to the business environment and business idea. these obstacles are not seen as major impediments to business start-up. work discussion can easily provide insight into the impact, evaluation, and managerial techniques of these issues. discussion of the potential environmental and resources obstacles can assist the individuals'onfidence in being able to manage the issues, while the personal issues are viewed as being more significant obstacles. an important objective underlying this project was to understand the differences between those who decided to launch a business and those who decided not to launch a business. the results indicate that those who are better educated and had previously experienced business ownership were less likely to have launched a business subsequent to the workshop. although the results do not provide direct evidence of why greater education and experience reduced the likelihood of launch, several explanations are possible. the greater amount of education and the experience (which is a type of education) obtained from previous business ownership probably provided the individuals with a broader perspective and enhanced ability to evaluate the value of the business idea and obstacles associated with launching a business. both categories of individuals may be more likely to better understand the complexities of launching and operating a iiew business. in addition, those who were better educated may also have a higher income relative to those who had not attended at least some college. the motivations of those who are better education for launching a new business may have dictated a higher return on time and money and, thus, more stringent screening criteria, than those who are less educated. an important aspect of this study was to understand obstacles to business start-up. dilferent categories of individuals were expected to rank the severity of the obstacles differently. asking whether or not the obstacles can be overcome can provide information on how the workshop material is incorporated into the attendees'ssessment. the workshop should provide sufficient screening information to enable the participants to determine which business concepts are good opportunities and which are just ideas. the difference in mean ranking between those who believe that the obstacles could be overcome and those who did not believe that the obstacles could be overcome suggests that the workshop may have been successful in helping individuals to assess risk and quality of the business idea. both of these obstacles are likely to be related since the business may not work due to the high risk of the 52 journal of small business strategy vol.10, no.2 fall/winier l999 venture. since the data does not provide direct evidence for the difference in mean ranking, the explanations are suggestive rather than based on specific comments from the respondents. previous business ownership can also provide important background from which to assess obstacles affecting the launch and the likelihood of success of the business. this insight and experience is likely the reason why previous business owners ranked risk, time, and lack of skiiuknowledge as significantly greater obstacles to launch than individuals who had not previously owned a business. the experience of owning and operating a business is a type of "on-the-job" training that provides the individuals with a better understanding of the complexities and demands of business ownership. conclusions important goals of workshops that assist individuals in the screening process are to help individuals distinguish between good business opportunities and weak business ideas. helping individuals determine that their business idea will not work is as important as facilitating the development and launch of a good business opportunity. accomplishing the objectives of the paper provides insight into the business launch decision as individuals screen business ideas. workshop and seminars directed at assisting individuals screen the business idea are important in helping to prevent the launch of a weak business idea or in providing the individuals with a broader perspective on how to better develop the business idea. effective screening is especially important due to the well-documented and discussed high failure rate of new businesses. providing information on issues such as how to assess market potential, value of the business idea, risk, time demands, etc. is an important aspect of pre-launch workshop activities. however, the workshops that are developed to help in the screening process may need to spend proportionately more time on acquisition of capital, risk assessment and time management. workshop development may also include a specific or more intensive focus on those who are less well educated and have never owned a business. the interpretation of the results of this study is limited in several respects. the sample is relatively small (n=126) and limited to only a single state at a single point in time. replication of the study in other geographic areas would confirm whether the results are specific to the midwestern us or also typical of other regions. replication of the study in other countries would provide insight into whether the obstacles to business launch are similar between different countries. in addition, a longitudinal study could valid the findings relative to economic cycle. the longitudinal study could also follow-up on those individuals that had not launched a business at the time of the survey to determine if and how they were able to overcome their perceived obstacles. a similar study could also be completed that examined these issues more in-depth. issues such as motivations for starting the business and source of the business idea could build on previous research that examined the entrepreneurship process. finally, the nature of the sample may inject a bias into the results. the obstacles to business launch may be unique to those attending the workshop rather than being representative of the entire population of individuals who consider starting a business. business consultants, public providers of business service (i.e., small business development centers) and the academic community can use the results of the study. business consultants and public business service providers can use the results to develop better outreach programs and counseling services to pre-startup businesses. the academic community can use the results in curriculum and course development to give students better insight into the business screening process. ultimately, the type of information gained from this and similar studies otfers the potential benefit of improving the individual's likelihood of successful business screening and launch 53 journal ofsmall business siraiegy vol. /0, )vo.2 fall/winter l999 references bhave, m., (1994). a process model of entrepreneurial venture creation. journal of business~pi 9 223-242. bird, b (1992). the operation of intentions in time: the emergence of the new venture. entre reneurshi 'heo and practice 17, (i), 11-20. bull, i., &. willard, 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(2), 45-57. kuratko, d. & r. hodgetts (1998). entrepreneurship: a contemporary approach, 4th ed., dryden press, fort worth, tx. kuratko, d., homsby j. & naffziger, d. (1997). an examination of owner's goals in sustaining entrepreneuship. journal of small business mana ement 35, (i), 24-33. learned, k. (1992). what happened before the organization? a model of organizational formation. entre reneurshi theo and practice 17,(1),39-48. naffziger, dm hornsby j. & kuratko, d. (1994). a proposed research model of entrepreneurial motivation. entre reneurshi 'heo and practice 18, (3) 29-42. reynolds, p., (1994, august). reducing barriers to understanding new firm gestation: prevalence and success of nascent entrepreneurs. paper presented at the academy of management meeting, dallas, tx. starr, j. & fondas, n. (1992). a model of entrepreneurial socialization and organizational formation, entre reneurshi theo and practice 67-76. timmons, jm (1999).new venture creation 4 ed. chicago, il: irwin. 54 journal of small business strategy vol.10, bio 2 fa!i/winter 1999 howard e. van auken is an associate professor of management in the college of business at iowa state university. he was a william j. fulbright scholar and visiting professor at the instituto de technologico y de estudios superiores de monterrey (mexico) in 1989 and a william j. fulbright scholar and visiting professor at masarykova unives ity v brne (czech republic) in 1994. he his research has been published in entrepteneurship. theory and practice, entrepreneurship and regional development, journal of small business management, journal of entrepreneurial and small business finance, journal of entrepreneurship and small business, journal of entrepreneurship, and journal of portfolio management. he has lectured or developed entrepreneurship programs in mexico, russia, czech republic, slovakia, ukraine, malaysia and canada. he has served as vice-president for research, vice-president for the individual entrepteneurship division, and vicepresident for lvomen's entrepreneurship division for the united states association for small business and entrepreneurship. he has served on the editorial review boards of entrepreneurship: theory and practice, journal of small business management, and journal of small business strategy. he was selected as the most outstanding visiting professor at itesm in 1991, awarded the outstanding reviewer of the year by the journal of small business management in 1998, and received the )su international service award in 1999. 55 strategy small and medium-sized firms'irst interaction with government: an exploratory study dr. ronald g. cook rider university abstract li is well known that, by eitherincentives or consrraints, government has a substantial impact on business (marcus, kaufman, & beam, l987; buchholtz, )988; scarborough & zimmeren )993, preston, l990; epstein, )980). over time, this impact has increased to where the political success offirm is considered by some to be vital to marketplace success (marcus et al., l987). as a result, firms often found that they needed to become involved in the public policy process if they ivere to gain in/iuence with policymakers. as irving shapiro, former ceo of dupont and former charrman of the business roundtable, put it, "..you have zero chance ofscori ng points unless you get i nto the game" (7 980 p. 30). historically, large/irms were the first to get tnto the game, 'ften by investing in a washington office, hiring one or more representatives to monitor issue areas of primary concern, and engaging a law or public relations firm to pursue company interests with relevant bureaucrats (levitan & cooper, )984). introduction despite a mistrust of government and an unfamiliarity with the public policy process (cook & barry, 1993), smaller firms are also beginning to recognize the importance of 'the game,'n part because many laws and regulations apply equally to all firms, regardless of size. for example, in the area of tax withholding, smaller firms generally have the same compliance requirementsas larger companies,resulting in circumstances where the smaller companies are likely to be the most adversely affected (weidenbaum, 1979). while it is true that the overallaffect of governmenton an individual smallcompany can be limited, collectively, it is not (thompson, wartick, & smith, 1991); particularly since smaller firms are the most prevalent form of business organization in society today (cook 8c barry, 1995). for example, over 95 percent of firms in the us employ fewer than one hundred people (executive oaice of the president, 1994). collectively, this group of over twelve million full-time businesses (dennis, 1993) employs almost 54 percent of the workforce and represents over 53 percent of total us sales (executive olfice of the president, 1994). however, despite the fact that smaller firms represent a large segment of the economy and are affected by government, the political activities of these companies are relatively unknown (thompson, et al., 1991),in part due to a lack of information about small firms and a more traditional research focus on larger firms (cook & barry, 1995). 17 the notion that much remains to be learned about smaller firms'ublic policy interactions is not meant to imply that scholars have ignored the business and govermnent area altogether. researchers have examined how firms can benefit from regulation, including the idea that regulation can be used by individual firms as a competitive weapon (wood, 1986; mitnick, 1980). they have described an issue's life cycle that demonstrates how issues evolve through distinct phases (buchholtz, 1988; post, 1978; ullman, 1985), and proposed specific political interactions that focus on the most appropriate strategy given the phase or stage of an issue's life cycle (bigelow, fahey, & mahon, 1991). through the contributions of these and many other researchers considerable progress has been made towards understanding business and government interactions. further, research into the impact that government has on smaller firms is also underway, oaen by examining specific issues like employment-at-will(seidman & aalberts, 1993),waste reduction (hemmasi, graf, strong, & winchell, 1994), or public sector venture assistance (gatewood, 1993). however, even studies that offer suggestions on when small iirms should become involved in the public policy process assume that a firm has experience with government and the question is merely one of timing (cook & barry, 1993). further, these studies do not examine what triggers the firm's initial interest in public policy issues. this would appear to be an important research question given the following situation —currently, in the us there are over twelve million full-time businesses which could be considered small, regardless of the measurement used (dennis, 1993; executive office of the president, 1994) and, therefore, could potentiallybe involved in the public policy process. however, visit any trade associationor chamber of commerce-common vehicles for small firm political activity (knoke, 1990;cook & barry, 1993)—that professes to represent its membership politically and only a certain percentage of its members are politically active. given that the issues pursued by chambers and associations are often public goods —e.g., "enjoyed in common in the sense that each individual's consumption of such a good leads to no subtraction from any other individual's consumption of that good" (samuelson, 1954, p. 387), and that "they must be available to everyone if they are available to anyone" (olson, 1965, p. 14)—why do some firms become involved? it would appear that the vast majority of smaller firms, for whatever reason, can be considered free riders regarding public policy involvement. indeed, at one time, the companies in this study were not involved in the public policy process. what happened to these companies that separated them from the "silent majority?" what did they do once they became involved, and what were the outcomes? with these questions in mind, we conducted a twostage study of the public policy interactions of small and medium-sized firms (hereafter called smfs). in subsequent sections, we describe the research methods employed, the findings, and otter suggestions for future research. methods given the complexity of the phenomenon and the scant work in this area, we chose a multi-method approach, utilizing a qualitative and quantitative research design to study the initial decision to become involved in the public policy process, the strategic choices of the firms, the outcomes of their interactions,and the frequency of their involvement. the research 18 design consisted of two stages: in-depth interviews with smf ceos to define better their patterns of public policy involvement and, utilizing the findings from these interviews, surveys of other smf ceos. until now, we have used the term "smaller firm" as if it was a commonly accepted phrase. it is not (cook & barry, 1995),requiring a more detailed explanation of how we used the term. for example, the us small business administration(sba) defines a small business as "independentlyowned and operated and not dominant in its field of operations" (hodgetts & kuratko, 1995, p. 6) and has created the most oiien cited industry-specific criteria for size distinctions. of these criteria, the most common cutoff point to distinguish smaller companies from larger firms is 500 employees. smaller firms are then oiien divided into medium-sized businesses, which employ from 100-499 people and small firms, which have up to 100 employees (megginson, byrd, scott, & megginson, 1994; longenecker, moore, & petty, 1994). in this study, we used employee size as the criterion and included both small corn panic; (up to 100 employees) and medium-sized firms (100-499 employees). the highly complex nature of business and government interactions argued for qualitative techniques that can help researchers understand better the smaller firm's initial decision to become involved. given that the field is still in an exploratory stage (thompson et al., 1991),formal hypotheses were not developed-in such circumstances, hypothesis testing is not generally considered appropriate because there is little theory from which hypotheses can be developed (kelley, 1991). therefore, this study initially utilized the open-ended approach of grounded theory building (patton, 1990; strauss, 1987; glaser & strauss, 1967), and began with smf ceo interviews. ~l-d h l the initial boundingof the territory(miles & huberman, 1994) focused on small firms in the upstatenew york area who were active in the public policy process. sampling of firms was purposeful and intense, rather than random (miles & huberman, 1994; patton, 1990),and ii rms were chosen with the support of local trade associations. the in-depth interviews involved ceos of 22 smfs that were active in the public policy process, and offered understanding as to the events that prompted these firms'nitial involvement decision. the interviews uncovered a wide range of potential strategies and responses to government, which were then categorized and refined into groupings that ranged from individual, impersonal contact to interactive, group responses. based on this data, we developed preliminary questions regarding the smf's initial decision to become involved and utilized the interviewed ceos as a pretest to help ensure questionnaire clarity. specifically, the ceos helped ensure that the questions were comprehensible and that response categories were not inadvertently omitted. for example, ceos cited three possible objectives when they became involved in a specific issue: support, oppose, or provide policymakers with information/opinions. the ceos agreed that supporting or opposing a particular issue meant that they had reasonable expectations that they might succeed. that was not the case when their objective was to provide information/opirions to policymakers. in those circumstances, the firms believed that it was important to, as one interviewee termed it, "go on record." however, ceos acknowledged 19 that, in these circumstances, it was unlikely that their views would prevail and termed these efyorts "symbolic gestures." d i ~ based on the data gathered from the interviews and the subsequent pretest, we refined the questionnaire to explore smfs'nitial and subsequent public policy interactions. the survey had three components: background information about the firm and the respondent, questions about the respondent's initial public policy involvement, and questions about subsequentpublic policy involvement. the background informationensured that the firm was indeed a smf and provided data about the respondent/company. the questionnaire was sent to two groups of smf ceos: one from central new york (cny) and one from new jersey (nj). the cny group was a chamber of commerce's government relationscommittee, and the nj group consisted of firms who were also active in public policy through a statewide trade association. res onse ra e and non-res nse bias these firms were targeted because one of the findings from the in-depth interviews was that smfs often utilize trade associations for their political activities —a conclusion echoing research by knoke (1990) and lad (1991). accordingly, participating organizations (the chamber of commerce and trade association) were approached to solicit their cooperation for this study. the firms received a cover letter, the survey, and a statement of support from the president of the respective sponsoring organizations. one month later, a follow-up letter and another survey was sent to all but the known respondents (firms had the option to identify themselves and receive a copy of the results; hence those who chose to do so were not sent a second survey). overall, 375 firms received a questionnaire, resulting in 75 responses. the 75 returns yielded 62 usable responses, for a response rate of 16.5 percent. the remaining 13 were excluded because they had more than 500 employees, thus violating the criterion used for defining a smf. given the population, this response rate was anticipated based on earlier survey efforts and on the sponsoring organizations'esponse rates for their internal surveys. this response rate is also consistent with other surveys of smaller firms, which ranged from less than 10 percent (chrisman & archer, 1984) to just over 30 percent (gomolka, 1978). non-response bias is a concern in survey research (fowler, 1988), particularly given the overall response rate. using wave analysis (judge, griaiths, hill, lutkepol, & lee, 1985), characteristics of the initial respondents were compared against firms which responded after follow-up activities. in addition, using the sponsoring organizations'ata, responding firms were compared to the total sample by number of full-time employees and sales. in both cases, no significant differences were observed between the two groups. therefore, it was concluded that the respondents were representative of the sample. 20 findings the survey results provided an interesting first look at a profile of the initial public policy interaction of smfs. because these interactions occurred in relatively uncharted territory, the analysis was exploratory, rather than testing formal hypotheses (kefley, 1991). this exploratory analysis was built around the following three questions: (1) what were the characteristics of the respondents? (2) what were the characteristics of the first instance of involvement in the public policy process? (3) what factors led to a successful outcome in the first instance of involvement in the public policy process? har cteristics of the res ndents this section provided background information about the respondents and their firms (such as age, gender, education level, firm size, etc) that were, for the most part, uncontrol labb by the executives. the results indicated that an overwhelming majority of the respondents were male (84'/o). the current average age of the respondents is 51.61 (standard deviation=11.74). the average age of the respondentsat the time of first involvement in public policy was 37.56 (standard deviation=8.40). most of the respondents were highly educated with over one third possessing a graduate degree and only 8.1 percent without a bachelor's degree. of the 62 respondents 45 were at the very top of the organizational ladder with 22 being either the owner or the co-owner of the firm. the remaining 23 of the 45 had job titles such as president, ceo, and/or chairman. seventeen respondents came from the level immediately below the top. four of the 17 were government/publicaffairs directors. the remaining 13 had a wide variety ofjob titles. the responses of these 17 individuals were compared with the remaining 45 for possible differences based on position within the firm. no significant differences between the two groups were found and, therefore, the findings reflect all respondents. the mean size of the firms, measured in number of full-time equivalent employees (ftes), is 116.84 with a standard deviation of 91.87. table 1 presents a more detailed breakdown of the size of the firms. 21 table i size of firms number of ftes frequency percent &25 13 21.3 2650 9 14.8 51 100 8 13.1 101 200 20 33.8 201 300 9 14.7 & 300 2 3.2 frequency missing = i haracteristics of the initial public polic involvement the first instance of public policy involvement for the respondents spanned a period of more than three decades. the year of involvement provided a reference point for understanding the overall political climate that the firm faced at that time and provided a measure of the executive's experience in the public policy process. the median year for initial involvement was 1982, suggesting that, for the majority of firms, enough time has elapsed for them to determine if their efforts were successful or not. in characterizing the first involvemerr in the public policy process, the type of issue, the stance of the ceos (suppoit vs. oppose), the level of government involved, and the strategies chosen were examined. when characterizing the type of issue, the respondents described the spec itic issues that prompted their initial involvement. analysis of this open-ended question revealed that the responses could fall into one of live categories: general economic issues (issues related to general economic concerns that went beyond a specific firm or industry, 23 responses); industryspecilic issues (issues with a narrow focus that related to a specific firm or industry, 16 responses); workplace issues (issues that directly affected the relationship between employees and the firm, eight responses); social issues (general issues affecting society at large, like education, civil rights, etc., seven responses); and unknown (some firms were unable to recall the specific issue that prompted their involvement, eight responses). there has been a trend away from general economic issues, which dominated in the 1980s, to industry specific issues which were found in the more recent legislative agendas. this has implications for the outcome of the interaction (see discussion). a key issue regarding the first involvement in public policy process was the stance of the executives. thirty-three percent of the respondents initiated their involvement in support of an issue. a slightly higher percentage (42%) became involved because they opposed an issue. ten percent became involved as a symbolic gesture to register their opinions with the policymakers while 15 percent became involved for a variety of other reasons. a closer examination of the data revealed that issue type influenced the initial objective, as shown in table 2. 22 table 2 res onse probabilitiesissue t e vs stance stance issue type supported opposed symbolic gesture other social .429 .142 0 .429 economic .286 .476 .143 .095 industry specific .4 .467 0 .133 workplace .286 .571 .143 0 given an issue type, conditional probabilities of the firm's stance revealed that for general economic issue, a firm was about one and a half times more likely to oppose it than support it. if the issue was social, a firm was three times more likely to support it than oppose it. with industry specific issues, the chances of support or opposition were approximately the same whereas workplace issues prompted twice as much opposition as support. the next analysis examined the level of government where the initial public policy interaction occurred and many respondents indicated more than one level, particularly in the category of economic issues which oiien have implications at multiple levels (eight companies were unable to recall the level, leaving 54 respondents). as table 3 reveals, most firms had their first involvement with the public policy process at the state level. table 3 level of government involved in initial public polic process interaction government frequency percent federal 28 47.5 state 42 71.2 local 12 20.3 emote percentages do not add up to 100 and frequency does not add up to 54 firms because many issues involved more than one level of government. further, state government as the focus for the initial interaction has moved into the forefront when compared by decades, as over 90 percent of the firms whose first interaction was in the last five years had an issue that involved state government. to complete a picture of the initial public policy involvement, respondents were asked about the strategies they used during the initial interaction. these strategies included writing a letter, hiring a specialist, personal contact with a government official, participation with other 23 firms, and publicity. the most common strategy used by the respondents was writing a letter or sending a fax. interview data suggested that this occurred because of the ease with which the respondent could perform this task. personal contact with government oaicials and participation with other firms were the other two most popular strategies. most respondents used a combinationof strategies to influence the public policy process. only 13 respondents (21'/o) used a single method whereas 16 respondents (25.8'/o) used at least two different methods. eighteen respondents(29'/a) used three diiterent methods, nine respondents(14.5'/a) used four different methods, and finally, three respondents used all five different methods to influence the public policy process (three firms also had no response). utcome f he initial inv ivement in the public polic process comparing the responses where the result was known, the outcome of the first involvement in the public policy process was approximately equal, as 48 percent were successful and 52 percent failed at achieving their policy objective. an examination of the outcome according to type of issue revealed higher success rates for general economic issues (56'/o) and social issues (57'/v). on workplace issues, success rate is 37.5 percent while for industry specific issues, the success rate is a low 12.5 percent. there is a statistically significantand negative relation between opposition to an issue and the outcome (pearson r= -0.3303, p=0.0374). firms who supported an issue were more likely to be successful than firms that opposed an issue. finally, there is a statisticallysignificantand negative association between interaction with state government and outcome (pearson r=-0.2611, p=0.0542), suggesting that successful efforts more likely occurred at federal or local levels. one might expect medium-sized firms to be more effective than small companies at influenci ng the public policy process because of the amount o f resources that they can devote to the cause. the data, however, does not bear this out. there is no statistically significant relation between the outcome and the size of the firm. the pearson r between firm size, measured in terms of ftes, and outcome is 0.2242 with a p-level of 0.1031. when using another measure of size —sales —the correlation between the total sales of the firm and outcome is 0.1212 with a p-level of 0.4390. an alternate explanation for the outcome in public policy process could focus on the individual. four different characteristics of individuals were considered: age, level of education, time spent with the organization prior to the initial involvement,and gender. there is no statistical lysignificant relationship between the first three characteristicsand the outcome of the public policy process. the association between gender and the outcome is statistically significant, with males more likely to be successful. however, given the small number of female ceos in the sample, further studies with a deliberate emphasis on ceo gender would be warranted before any conclusions could be drawn. finally, we examined if certain strategies were more successful than others. of the 5 different involvement strategies, the only one with a positive and statistically signilicant relation with the outcome was using publicity strategies (pearson r=0.2538, p=0.0615). publicity was defined as eitorts by the company to use the media to promote its message to a broad audience and included holding a press conference and conducting media interviews. it 24 was one of the least chosen methods, with only 12 firms utilizing it; yet it was the only strategy correlated with a successful outcome. based on comments from the ceos, firms were oflen hesitant to risk their image when facing reporters, particularly if their position could be viewed as controversial. however, the effectivenessof utilizing the power of the press to convey smf positions suggests that this might be a more popular strategic choice in the future. discussion first, the findings reveal that over 90 percent of the respondents have at least a bachelor's degree. this suggests a population of companies run by articulate, educated individuals who undoubtedly are not daunted by interactions with government officials. although the formal education level of the overall population of business owners is higher than the general adult public (gaedeke & tootelion, i 991; longenecker et al., 1994), it does not approach the level of these public policy activists. future studies of firms who have never been active in the public policy process should offer additional insights into the significance of educational level. within the size parameters of the firms in the sample, no one group reported a statisticallysignificantdifference�in th success rates of theirinvolvementefforts. indeed, this suggests that very small lirms, i.e., with less than 25 employees (almost a quarter of the sample), did not have results significantly different from their larger cousins. given the almost equal split between success and failure of their involvement efforts, smfs obviously have enjoyed some sense of accomplishment and the lament that "small firms never win," oflen mentioned in the in-depth interviews, was greatly exaggerated. however, the type of issue, the smf's position, and the level of government all had a bearing on whether or not the outcome would be successful. if a smf's initial involvement was in support of a social or general economic issue that was predominately resolved at the federal or local governmental level, the firm was most likely to achieve its objective. conversely, if the initial involvement was to oppose an industry specific issue that was resolved primarily at the state level (i.e.,statutes of repose), the firm was most likely to fail. the interrelationships of these factors should not be underestimated. for example, when comparing support or opposition stances to success or failure only, 62 percent of the firms opposed a general economic issue. since outcome was negatively correlated to opposition, one might expect that 62 percent would lose. that was not the case as 56 percent reported success in this instance, as the strategies pursued and the level of government obviously had an impact. continuing with the level of government state government was the dominant arena for these firms'nitial influence effort and was also where the firms'uccess rate was the lowest. because the trend towards initial involvement with state government is escalating (firms that became involved later in the study indicated that state government concerns them the most), smfs beginning their involvement in the public policy process today may face more disappointmentsthan their predecessors. this finding mirrored the comments by ceo's during the in-depth interviewswhich indicated that stategovernment,and the issues normally resolved there, were most likely to affect long-term firm survival. 25 further research directions although we believe that the findings presented constitute a significant contribution to understanding public policy interactions by smfs, it is also evident that more research is needed to further test and clarify these findings. specifically, we would recommend study in the following areas: research that isolates the type of issue and firm position in order to offer a more prescriptive model for public policy interactions. research that focuses on why the most effective strategy (publicity) was the least utilized. given the firm's perception that it had a chance of a successful outcome when it pursued a public policy interaction (its efforts were not "symbolic gestures"), why did firms choose strategies that had no correlation to a successful outcome? is it inexperience? research into further public policy interactions of these firms. how frequent might these interactions be, have their objectives and/or outcomes changed over time, and does experience matter? research into other political arenas. many of the respondents believed that new york and new jersey were among the most regulated states in the country and, therefore, this belief may have in tlue need the executives'reoccupation with state-level issues. studies in states having a reputation for less government might generate different findings. research on smfs that never have been involved in the public policy process in order to understand why not. how might they be different from firms that are involved? study in these areas should facilitate the development of a more encompassing model, one which could have considerable value for smfs attempting to influence government. as government's control over the smf continues to increase, it is essential to enhance the ability of these firms to influence the public 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(1986).strategic uses ofpublic policy. ma: pitman publishing. 28 http://www.smallbusinessinstitute.biz dynamic capabilities of early-stage firms: exploring the business of renting fashion marcus adam1, jochen strähle2, matthias freise3 1reutlingen university, germany, marcus.adam@reutlingen-university.de 2reutlingen university, germany, jochen.straehle@reutlingen-university.de 3reutlingen university, germany, matthias.freise@reutlingen-university.de a b s t r a c t in recent years the share economy has gained widespread success across different industries. since small firms and new ventures obtain fewer resources, an increased focus on service allows them to differentiate and compete with cost pressure in traditionally manufacturing based industries. there still is a lack of understanding how these firms manage to successfully shift towards service-oriented business models. this paper adopts a dynamic capabilities approach to examine the particular microfoundations that underlie sensing, seizing and reconfiguring dynamic capabilities of early-stage service firms within a traditional retail market. the context of this study is the fashion industry. it is an ideal setting since it is characterized by severe competition, short life cycles, strong cost pressure and high volatility. there are few but increasing examples of entrepreneurial initiatives that try to compete by providing offers to resell, rent or swap clothes. qualitative data of five early-stage fashion ventures is analyzed. findings reveal that the ability to develop and maintain long-term relationships is essential. it has also been found crucial to acquire knowledge from external network partners, delegate tasks and share information. furthermore, skills for interacting with customers and adopting consumer feedback are critical. this study provides empirical evidence of dynamic capabilities of early-stage firms and contributes to knowledge on the factors that facilitate servitization in traditionally manufacturing based industries. for practitioners, the presented microfoundations provide a framework of critical tasks that allow them to develop and maintain a service-oriented business model. keywords: journal of small business strategy 2018, vol. 28, no. 02, 49-67 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2018 small business institute® apa citation information: adam, m., strähle, j., & freise, m. (2018). dynamic capabilities of early-stage firms: exploring the business of renting fashion. journal of small business strategy, 28(2), 49-67. w w w. j s b s . o rg dynamic capabilities, early-stage firms, business models, product service systems (pss), share economy, fashion industry, entrepreneurship, servitization in recent years the share economy has gained widespread success since it allows consumers to increase efficiency and reduce costs by sharing resources with each other (botsman & rogers, 2011). prominent examples have been successfully put into practice, i.e. in the hotel (airbnb), entertainment (netflix) and transportation (uber) industries. this has aroused interest of companies in traditionally manufacturing based industries since service-oriented concepts require fewer volumes of material for value creation and allow firms to differentiate (adrodegari & saccani, 2017; gebauer, gustafsson, & witell, 2011). therefore, some companies have commenced to augment their traditional product offerings with complementary services or develop new business models based on the logic of permitting consumers temporary access to underutilized goods (botsman & rogers, 2011; stephany, 2015). car sharing concepts are among the most prominent and well investigated examples in research literature (bardhi & eckhardt, 2012; firnkorn & müller, 2011; shaheen & cohen, 2013; shaheen, cohen, & roberts, 2006). in the mainstream fashion industry, an industry which is characterized by severe competition, short life cycles and high volatility (armstrong, niinimäki, lang & kujala, 2015a; christopher, lowson, & peck, 2004; gardetti & torres, 2013), the share economy has yet to be anchored (pedersen & netter, 2015). however, there are few but increasing examples of entrepreneurial initiatives that adapt the idea of the share economy to the fashion industry by providing offers to resell, rent or swap clothes (armstrong et al., 2015a; pedersen, & netter, 2015; perlacia, duml, & saebi, 2016). especially a mushrooming of small ventures that offer services to rent clothes can be observed (pedersen & netter, 2015). while there is an increasing number of studies that examine the attitude of fashion consumers towards particintroduction http://www.smallbusinessinstitute.biz http://www.jsbs.org 50 m. adam, j. strähle, & m. freise journal of small business strategy / vol. 28, no. 2 (2018) / 49-67 ipating in service offers (armstrong, niinimäki, kujala, karell, & lang, 2015b; armstrong et al., 2015a; lang & armstrong, 2015; lang, armstrong, & liu, 2016), little attention has so far been paid to investigating how such business models are developed at an early stage. for analytical purposes, such service-oriented business models can be assigned to the growing research field of product-service systems (pss). there still is a lack of understanding “why and how companies can have success in pss development” (tukker, 2015, p.87). this paper examines the particular skills and organizational processes that enable early-stage firms to develop and implement renting services. for this purpose, the research field of dynamic capabilities provides an ideal approach. it departs from the central idea that competitive advantage originates from a firm´s unique bundle of resources and describes firms´ ability to respond to changing business environments by creating, extending and modifying valuable resources over time (helfat, finkelstein, mitchell, peteraf, singh, teece, & winter, 2007). in order to operationalize this relatively generic approach, dynamic capabilities can be disaggregated into three distinct types: sensing market opportunities, seizing market opportunities and continuously reconfiguring resources in order to maintain competitiveness (teece, 2007). all types of dynamic capabilities are undergirded by “microfoundations” that comprise different organizational activities such as skills, processes and structures (teece, 2007). empirical studies on dynamic capabilities have so far mainly focused on established firms with mature organizational structures and a broad base of existing resources (foss, iakovleva, kickul, oftedal, & solheim, 2012; mckelvie & davidsson, 2009). in new ventures, capabilities differ from those of established firms since they have less access to resources and less rigid organizational structures (mckelvie & davidsson, 2009; wu, 2007; zahra, sapienza, & davidsson, 2006). the purpose of this research is to identify the particular microfoundations that permit new ventures to develop and maintain service-oriented business models. this is done through systematically analyzing qualitative data of five early-stage fashion firms. it contributes to research on small firms since it provides empirical evidence on how early-stage ventures manage to reconfigure their relatively scarce resource base into expedient organizational processes and routines. even though this research is focused on fashion renting, findings are applicable to small service-oriented firms of other industries since results are discussed against the background of general pss literature. findings also address the need to strengthen the empirical foundation of dynamic capabilities research (weerawardena & mavondo, 2011) and broaden its scope by applying the dynamic capabilities approach to early-stage firms. furthermore, this paper adds empirical knowledge to pss literature by illustrating the intra-organizational factors that allow firms to create and maintain a pss business model. finally, this article implies managerial implications. the identified microfoundations provide a detailed framework of critical tasks and particular skills that facilitate understanding and managing different organizational activities to leverage service-oriented business opportunities. this paper is structured as follows. following this introduction, a basic conceptual overview of dynamic capabilities and pss is provided to establish the theoretical departure point of this study. next, the particularities of renting concepts in the fashion industry – the context of this research – are explained. thereafter, the methodology of this study is presented and analyzed data are discussed. this article terminates with a conclusion and future avenues of research. dynamic capabilities dynamic capabilities describe the firm´s ability to respond appropriately and quickly to external changes (teece, pisano, & shuen, 1997). they refer to organizational activities that change a firm´s current stock of resources and capabilities, and hence emphasize the mechanism of converting this bundle into output that provides value for the customer (eisenhardt & martin, 2000; helfat et al., 2007; winter, 2003; zahra et al., 2006). in doing so, dynamic capabilities follow repeatable patterns (helfat et al., 2007; winter, 2003) and are intentionally applied for a specific purpose (helfat et al., 2007; winter, 2003; zahra et al., 2006). they are future oriented meta-processes that enable firms to response to changing business environments through purposefully creating, extending and modifying its base of resources (helfat et al., 2007). firms may simultaneously exhibit many different dynamic capabilities that vary in strength and their intended purpose and operate successively or in combination (helfat et al., 2007; zahra et al., 2006). teece (2007) categorizes dynamic capabilities into “sensing”, “seizing” and “reconfiguring”. “sensing” describes the identification and assessment of market and technology opportunities through gaining knowledge about the internal and external business ecosystem. this involves evaluating customer needs, scanning technological developments, interpreting information and tapping potential collaborators such as suppliers and complementors (teece, 2007). “seizing” refers to the ability to capture and take advantage of opportunities which implies delineating the business 51 m. adam, j. strähle, & m. freise journal of small business strategy / vol. 28, no. 2 (2018) / 49-67 model and assessing its potential to contributing to sustainable business growth. relevant skills may be acquired or honed through arranging strategic alliances. (teece, 2007). “reconfiguring” describes the continuous renewal and alignment of tangible and intangible assets to maintain competitiveness. successful firms tend to become complacent and inertial over time (leonard-barton, 1992). as the business environment underlies changes, a firm´s current successful business model may be insufficient to benefit from emerging opportunities, even though they are sensed (kindström, kowalkowski & sandberg, 2013). therefore, firms need to constantly create, modify and extend their resources and capabilities base to realign their activities with the changing environment (teece, 2007). the distinct skills, processes, procedures, organizational structures, decision rules and disciplines that underpin “sensing”, “seizing” and “reconfiguring” are called “microfoundations” of dynamic capabilities (teece, 2007). consequently, microfoundations constitute the centerpiece of understanding the creation of competitive advantage. investigating them allows conceiving the development and maintenance of organizational fitness on a detailed level (kindström et al., 2013). product-service systems (pss) pss combine marketable products and services to satisfy specific, so far unmet or even unknown customer needs (baines, lightfoot, evans, neely, greenough, peppard, & wilson, 2007; goedkoop, 1999; mont, 2002a; tukker & tischner, 2006). from a pss perspective companies cannot deliver value but only offer value propositions which are assembled by the customer with his own competencies to obtain an individual “value-in-use” (lusch, 2006; reynolds & ng, 2015; vargo & akaka, 2009). for this reason value and customer satisfaction is always co-created, underpinned by customer integration and decoupled from material consumption (grönroos, 2011; lusch, 2006; mont, 2002a). this implies that firms develop their specific value proposition by reconfiguring products and services within the broad spectrum of the sole sale of products and pure service offerings (van ostaeyen, van horenbeek, pintelon, & duflou, 2013). the degree to which products and services are proportionately combined can serve as groundwork for categorizing pss. pss that sell the use or functionality of a product are called use-oriented pss (tukker, 2004). product ownership and responsibility remain at the provider (tukker, 2015; vezzoli, kohtala & srinivasan, 2014). this means that customer satisfaction is achieved through the particular function of a product rather than through its physical possession (beuren, gomes ferreira, & cauchick miguel, 2013; tukker, 2004). use-oriented pss include renting or sharing offers. customers appreciate to save time and costs since they are exempted from administrative or monitoring tasks (baines et al., 2007). for companies, pss provide a potential source of improved competitiveness since they allow to differentiate, compete with cost pressure and enhance customer relationships (baines et al., 2007; gebauer et al., 2011; mont, 2002b; vezzoli et al., 2014). however, implementing use-oriented pss requires a radical shift of strategy, business model and infrastructure of companies in traditionally manufacturing based industries and calls for the acquisition of new competences, knowledge and skills (martinez, bastl, kingston, & evans, 2010). companies in traditionally manufacturing based industries are less receptive to use-oriented pss since this idea is incongruent with their established organizational routines (vezzoli, ceschin, diehl, & kohtala, 2015). while incumbent firms mainly perpetuate producing physical products, use-oriented pss business models are more easily adopted by new ventures that lack existing patterns of thought and business practice (cook, bhamra, & lemon, 2006). context: the fashion industry the fashion industry is a mature, highly competitive and globalized market with short life cycles, high volatility of market demand, low predictability and high impulse purchasing (bhardwaj & fairhurst, 2010; christopher et al., 2004; taplin, 2006). to expand their current product range and respond to the newness of fashion trends, retailers have started to more frequently refresh their fashion lines by adding more phases to the existing seasons in a fashion calendar which constantly floods the market with new fashion lines at a low price (black, 2010; christopher et al., 2004; fletcher, 2013; gardetti & torres, 2013). this development has further accelerated through the emergence of e-commerce which provides consumers the unrestricted ability to immediately buy clothes (joung & park-poaps, 2013). due to quickly changing consumer taste, retailers may hold large amounts of unsold products at the end of selling season (hausman & thorbeck, 2010) or have to cope with an increasing number of returns that are no longer saleable (shen & li, 2015). this linear production model is vulnerable to increasing raw material costs. use-oriented pss provide one opportunity for fashion firms to cope with these challenges since they present a way to differentiate, diminish dependence on material and allow building vigorous customer relationships (gebauer et al., 2011; vezzoli et al., 2014). in the mainstream fashion industry it has yet to be 52 m. adam, j. strähle, & m. freise journal of small business strategy / vol. 28, no. 2 (2018) / 49-67 anchored (pedersen & netter, 2015). however, an increasing number of new ventures has started to provide offers to resell, rent or swap used clothes (armstrong et al., 2015a; pedersen & netter, 2015; perlacia et al., 2016). this paper examines early-stage firms that rent clothes. renting is usually based on an agreement between two parties whereby one side obtains the right to use the rented item owned by the other side for a specific period of time (moeller & wittkowski, 2010). different types of fashion renting business models can be observed in the market that significantly differ in terms of value proposition, channels and cost-revenue streams (perlacia et al., 2016). this study solely examines firms that directly rent clothes to customers for a certain period of time either for a fixed fee or a membership fee (e.g. monthly) via an online store. fashion libraries that only rent clothes through a permanent physical store are not part of this study. furthermore peer-to-peer renting (e.g. providers of online platforms) and b2b offers (e.g. renting providers of working clothes) are excluded. research on companies that offer fashion renting is so far limited to screening and analyzing business model archetypes (pedersen & netter, 2015; perlacia et al., 2016). a sole business model analysis is, however, not sufficient to understand why and how companies can have success in developing such concepts. a dynamic capabilities approach appears appropriate to find out more about the factors that influence growth of entrepreneurial firms since it emphasizes activities and processes rather than the possession of resources (ambrosini & bowman, 2009). empirical studies have so far mainly focused on established firms with a mature base of existing resources and structures (foss et al., 2012; mckelvie & davidsson, 2009). in new ventures, capabilities differ from those of already established firms since young firms have fewer resources and more flexible organizational structures (mckelvie & davidsson, 2009; wu, 2007; zahra et al., 2006). at the beginning, capabilities are generated from individuals who possess particular knowledge or experience and combine these capitals with financial or technological resources (helfat & peteraf, 2003). capabilities may allow firms at an early stage to grow despite their scarce resource base since they can extract value from generally useless resources (baker & nelson, 2005). a dynamic capabilities approach can therefore allow a deeper understanding of the factors that influence growth of early-stage enterprises. this is of special interest regarding service-oriented business models in traditionally manufacturing based industries. they significantly differ from the traditional way of producing and selling and therefore require distinct capabilities (gebauer et al., 2011; martinez et al., 2010). in order to better understand how small firms manage servitization in traditionally manufacturing based industries, this paper identifies the specific microfoundations that underlie dynamic capabilities of early-stage fashion renting firms. method qualitative research design a qualitative research design is applied since the purpose of this study is to achieve a deeper understanding of a contemporary phenomenon at an early phase in its real life setting (eisenhardt, 1989; meredith, 1998; yin, 2013). this approach is considered useful since dynamic capabilities are embedded in organizational routines and processes (eisenhardt & martin, 2000) which makes them difficult to identify and examine through quantitative research. multiple case study methodology is chosen since this allows gaining insights from diverse perspectives and can lead to the development of new management theories (eisenhardt & graebner, 2007; voss, tsikriktsis, & frohlich, 2002). furthermore, multiple cases are considered to provide more reliable and testable results than single cases and hence increase generalizability of the research findings (eisenhardt, 1989; yin, 2013). as case studies are typically conducted in close interaction with practitioners, they present an ideal approach to investigate and gain managerially relevant knowledge (gibbert, ruigrok, & wicki, 2008; leonard-barton, 1990). data sample and data collection homogeneous purposive sampling technique was applied. this means that cases were not randomly but systematically and deliberately selected based on similar characteristics or traits to achieve relative homogeneity of the sample (maxwell, 2012). this provides more representativeness and comparability of the findings than a sample of the same size that comprises random or accidental variation (gibbert et al., 2008; maxwell, 2012). cases were selected from companies that particularly provide fashion renting as their only business model. first of all, a list of fashion renting companies was compiled based on internet research. google research was used with searching words “fashion”, “renting” and “clothing” in english and german. in total, we detected 63 companies that rent clothes to customers through an online store. in a next step, we contacted all companies via email, phone and/or social media channel. in sum, eight replied and five offered to give us an anonymous interview. all of them are located in europe, have less than 20 employees and are between two and five years in business. they provide renting 53 m. adam, j. strähle, & m. freise journal of small business strategy / vol. 28, no. 2 (2018) / 49-67 as only business model and are focused on an online shop. however, all companies have a small stationary store that serves a showroom. clothes are not manufactured but purchased from third parties. the descriptive data of the five sample firms are illustrated in table 1. table1 descriptive data of case companies company major scope of business target customer employees country role of respondent a vintage; premium females; age 17-55+ 1-10 europe co-founder b baby clothes parents (mothers) 1-10 europe founder c vintage: premium females; age 25-35 1-10 europe founder d premium females; age 20-45 10-20 europe co-founder e premium; high-end females; age 20-40 10-20 europe co-founder given the exploratory nature of this study, five case studies may provide a substantial basis for analytical generalization (eisenhardt, 1989). semi-structured interviews were conducted to increase reliability of findings and ensure consistency across interviews (gibbert et al., 2008; yin, 2013). the interviews were held between march and june 2017. they were guided by a case study protocol to ensure reliability of this study (yin, 2013). open questions were posed driven by the necessity to explore a new field. the interviews lasted between 40 minutes and two hours and were held in english or german, dependent on the origin of the respective case company. all interview partners were founder or co-founder of the respective case company with three to four years in business. three interviews were held by phone and two were conducted face-to-face at the case company´s headquarters. all interviews were recorded and transcribed. teece´s (2007) classification of dynamic capabilities into sensing, seizing and reconfiguring served as departure point for preparing the basic structure of the questionnaire. interviewees were asked about their particular sensing, seizing and reconfiguring activities. when elaborating the questions, input from theoretical dynamic capabilities literature and measuring scales of dynamic capabilities was used. since previous literature on firms´ different sensing, seizing and reconfiguring processes points out a broad range of potential activities (wilden, gudergan, nielsen, & lings, 2013), literature on pss was furthermore consulted to better attune questions to the particular nature of renting models. the questionnaire framework was furthermore supplemented by input from interdisciplinary scholars and practitioners (gibbons, limoges, nowotny, schwartzman, scott, & trow, 1994; van de ven & johnson, 2006) in order to obtain complementary perspectives on the topic and construct validity of this study (yin, 2013). since the way in which questions are worded is crucial for extracting the desired information (merriam, 1998), the gathered input was converted into appropriate questions in an iterative processes between the research team and associated practitioners. this procedure ensured that questions were articulated in respondents´ familiar language which helps to avoid misunderstandings among interviewees and improve quality of data (patton, 1990; van de ven & johnson, 2006). even though identical questions were posed to all companies, the interviewees were given the possibility to freely add further explanations on their business activities. to avoid a potential informant bias and enhance construct validity through triangulation, additional data were analyzed. the stationary store of three case companies were visited on site to get a better understanding of their daily business activities and to get in touch with their customers. furthermore, websites of the companies and reports or mentions in the print and online media were consulted. data analysis after collecting all data, each data set was analyzed following an abductive logic by departing from a theoretical pre-understanding that is further empirically elaborated. the aim of this process was to develop a deeper understanding of the new observed phenomenon and extent theory (kovács & spens, 2005). abductive research refers to a process of developing typologies, social scientific descriptions and explanations from the way social actors describe their way of life (ong, 2012). instead of moving from data to theory or from theory to data, abductive research combines deduction and induction by moving back and forth between empirical data and literature (suddaby, 2006). while deduction is an inference to a particular observation and induction is an inference to a generalization, abduction is an inference to an explanation (ketokivi & mantere, 2010). the research departs from an existing theoretical framework but is not necessarily constrained by having to adhere to the previously developed theory (dubois & gadde, 54 m. adam, j. strähle, & m. freise journal of small business strategy / vol. 28, no. 2 (2018) / 49-67 1999). even though it is important to enter into the research with knowledge of the basic literature, it is not needed to review all of the literature beforehand (strauss & corbin, 1990). this rather hinders the research process since the researcher is constrained by previously studied literature when explaining new phenomena (dubois & gadde, 1999). instead, the need for literature is created during an iterative research process that constantly shifts between the empirical and theoretical dimension. theory is thus not invented at the beginning of the research nor is it just generated at the end (blakie, 2010). empirical data and existing literature are simultaneously evaluated and matched to select the best explanation (ketokivi & mantere 2010). this research process is illustrated in figure 1. in a first step, data from each firm were independently analyzed by systematically grouping the answers to questions on sensing, seizing and reconfiguring dynamic capabilities into individual themes. this procedure helped to become familiar with each sample firm as a stand-alone case and to identify the particular microfoundations of each firm. it also facilitated the subsequent cross-case comparison (eisenhardt, 1989). a process of pattern matching across cases was applied next to extract similar and recurring microfoundations. this procedure furthermore increases internal validity (eisenhardt, 1989; yin, 2013). in a next step, an iterative process of theory matching was applied by sequentially switching between the empirical data and theoretical contribution (dubois & gadde, 2002; kovács & spens, 2005). it turned out that literature on pss, the sharing economy and dynamic capabilities is insufficient to fully explain the identified microfoundations. for this reason, literature on entrepreneurship and early-stage firms was additionally utilized to match with the empirical findings and give explanations for them. to further understand and enrich the preliminary framework of microfoundations, the stationary stores of three case companies were visited on-site. this particularly helped to get a deeper understanding of how company and customers interact. customers were involved into informal conservations to become familiar with their perspective on the case firms and their offers. additionally, a thorough investigation of all case companies´ websites, reports about the companies in print and online media and consumer review websites was carried out and confirmed our findings. the particular microfoundations that underlie sensing, seizing and reconfiguring capabilities of all sample firms are summarized in table 2. discussion analysis revealed particular microfoundations that underlie sensing, seizing and reconfiguring capabilities of all sample firms (summarized in table 2). the determined microfoundations are only meaningful for the purpose of this study if investigated firms are successful in their business activities. for this reason, all firms were asked if they are successful and what successful means for them. all respondents stated that their business is successful since they had run it for at least two years at the time of the interfigure 1. abductive research approach. adopted from kovács & spens (2005). 55 m. adam, j. strähle, & m. freise journal of small business strategy / vol. 28, no. 2 (2018) / 49-67 table 2 microfoundations of sensing, seizing and reconfiguring dynamic capabilities microfoundations of sensing dynamic capabilities network development capability ability to develop and utilize relationships with entities outside the firm sharing ideas openness for improvement suggestions from external parties discussing and reflecting ideas with close social contacts conveying enthusiasm for the idea to close contacts network governance capability establishing contacts with fashion bloggers, artist, consultants, designers etc. to learn about the feasibility of the idea relational skills to build up high-trust and amicable relationships initial contacts through face-to-face meetings asking openly and directly for advices, illustrating their idea in greater details and explaining the reason for the visit exchange with competitors uncomplicated straightforward demeanor empathic capabilities empathically observing consumers: demonstrate a deep understanding of customers´ specific feelings, every day practices, desires and lifestyles exchanging with consumers on a personal and amicable basis encouraging consumers to disclose personal feelings and behavior creating a relaxed atmosphere that makes customers feel comfortable sharing similar values, needs and problems with customers evaluating and incorporating gained knowledge on customers microfoundations of seizing dynamic capabilities ability to collaborate delegating specific tasks to third parties: focusing on core competencies efficiently coordinating partnerships to obtain and assemble resources purposefully selecting required partners required and establishing reliable and long-term cooperations repeatedly working together on informal relationships with little bureaucratic administration and implicit, open-ended contracts creating trust customer-focused communication finding the right words and ways to address skepticism quickness, ability to interact promptly reducing uncertainties: presenting motives, liabilities and benefits transparently establishing and maintaining reciprocal lines of communication customer integration capabilities understanding existing consumer habits, influential factors of consumer satisfaction and major barriers for adopting novel solutions close supplier-customer interaction and an early involvement of customers continually seeking customer feedback: customer interaction as a natural and every day task. absorbing, systematically evaluating and testing customer feedback for feasibility relaxed and open-minded interaction with customers to gain honest feedback microfoundations of reconfiguring dynamic capabilities network learning capabilities creating new knowledge from external networks and sharing information accepting knowledge spillovers acquisition of knowledge through collaboration with universities governance and orchestrating of pss maintaining flat hierarchies to remain flexible corporate culture based on a shared open-minded and passionate mindset client-focused learning capabilities episodic learning capabilities ability to unlearn familiar routines long-term orientation and promoting responsible fashion consumption 56 m. adam, j. strähle, & m. freise journal of small business strategy / vol. 28, no. 2 (2018) / 49-67 view. furthermore, all firms are constantly growing and all respondents assume that their business has a great growth potential over the next few years. in the following, the particular microfoundations that underpin sensing, seizing and reconfiguring capabilities of the case firms are elaborated in greater detail. sensing network development capabilities. developing a broad and supportive network has been determined as one of the most crucial activities of the investigated firms for sensing their business opportunity. literature gives evidence that an entrepreneur´s network is an essential factor for new ventures´ likelihood to succeed (greve & salaff, 2003; hite, 2005; smith & lohrke, 2008). entrepreneurial firms at an early stage are constrained by limited resources, smallness and the liability of newness (hite, 2005; stinchcombe & march, 1965). network ties with entities outside of the firm´s boundaries may offset these constraints. they present important conduits of information and know-how and provide entrepreneurial firms access to useful information and resources (hite, 2005; hoang & antoncic, 2003; smith & lohrke, 2008). all case companies started their entrepreneurial activities with a small stock of resources, little market knowledge and only a vague idea of their future business model. network ties served as avenues through which case companies could get ideas, information and recognize entrepreneurial opportunities. b: “i had this idea but was unsure how good it was and if it was feasible at all. it was actually the discussion with externals that showed me that i was on the right track and what else i could focus on. their input at the very beginning was especially essential.” case companies demonstrate a strong ability to develop and utilize relationships with entities outside the firm. this “networking capability” (walter, auer, & ritter, 2006) allowed them to develop a network that continuously evolved over time. research on how early-stage firms develop their network suggests that networking activities are an evolutionary process with exchange relationships transforming from essential dyadic ties into socioeconomic exchanges and multidimensional clusters of exchange processes (hite, 2005; hoang & antoncic, 2003; smith & lohrke, 2008). evidence from the case companies of this study confirms that entrepreneurs first explore business opportunities within a small circle of social contacts like family and close friends (greve & salaff, 2003; hite & hesterly, 2001; hite, 2005; larson & starr, 1993). entrepreneurial firms face the risk of limited protection of their initial ideas and frequently feel uncomfortable committing themselves publicly to a particular endeavor (greve & salaff, 2003; smith & lohrke, 2008). close, social ties served as an initial and safe platform for the case companies to gain new ideas. b: “at the beginning i hesitated and was unsure. family and friends encouraged me to proceed and also came up with their own suggestions for improvement. this broadened my view.” close contacts furthermore served as departure point to expand the network and gather valuable insights (hite, 2005). case companies reported that discussions within their social circle triggered a snowball effect that allowed them tapping into the right partners whose expertise was crucial for exploring their business idea. c: “when i talked to a close friend about my idea, he introduced me to a software developer he knows with whom i discussed the feasibility and costs for it. this guy knew a fashion blogger who was extremely interested in the concept and well connected to designers. she invited me to a party where i got in touch with the first designers i started working with.” entrepreneurs talk with more people during the early stage of their business development than in other phases (greve & salaff, 2003). this is especially significant regarding fashion renting since such business models break with the traditional industry practice of producing and selling. exploring related market opportunities therefore requires competences, knowledge and skills that are not only new to the entrepreneurial firms but also to the industry as a whole. for this reason, literature on pss highlights the importance of overcoming the reluctance of sharing information (mont, 2002a). case companies did not express concern about sharing their ideas and were open for improvement suggestions from external parties. they demonstrated strong abilities to discuss and reflect their ideas at an initial stage and conveyed their enthusiasm for their idea to their close contacts. as a result, received suggestions could be utilized to specify their initial ideas. network governance capabilities. case companies demonstrate a specific ability to govern their network. they started with establishing contacts with fashion bloggers, artists, business consultants, designers and universities to find out more about the feasibility of their idea and to better attune their concept to market needs. creating the willingness of outside parties to share their knowledge was a difficult but crucial challenge. in general, potential resource provid57 m. adam, j. strähle, & m. freise journal of small business strategy / vol. 28, no. 2 (2018) / 49-67 ers hesitate to transfer information or knowledge to entrepreneurial firms. they face risks resulting from information asymmetry and the absence of evidence of the entrepreneurial firm`s activities and intention (venkataraman, 1997; tsai & ghoshal, 1998; smith & lohrke, 2008). moreover they demonstrate less awareness of potential advantages arising from collaborations since there are low immediate returns of invested time and resources (bannerjee, bielli, & haley, 2016). however, when trust exists, uncertainty is reduced and individuals are more willing to share resources (smith & lohrke, 2008). creating trust between partners is therefore a distinctive governance mechanisms that undergirds the establishment of network ties (hite, 2005; hoang & antoncic, 2003). trust may evolve from an cognitive or emotional direction (johnson & grayson, 2005). cognitive trust arises from an accumulated knowledge that allows predictability and reliability that the partner will meet his obligations (lewis & weigert, 2012). trust that is rooted in human emotions is called “affective trust” (johnson & grayson, 2005; mcallister, 1995). this occurs if individuals feel genuinely concerned for their partners´ welfare and are personally and emotionally involved into the relationship (lewis & weigert, 2012; mcallister, 1995; smith & lohrke, 2008). it implies that network ties are “relationally embedded” which means that they are embedded within social relationships (hite, 2005; uzzi, 1997). due to the lack of history and reputation, cognitive trust of potential partners was hardly achievable for the case companies. therefore, affective trust was created through establishing initial face-to-face meetings with auspicious contacts during on-site visits of stores or through attendance at particular events. relational skills imply openly explaining the purpose of the visit, illustrating the intended business idea in greater detail and genuinely expressing need for advices, input and first-hand experience. uncomplicated and straightforward demeanor helped in building high-trust relationships on an amicable basis. many of the initial relationships last until today and evolved into personal friendships. e: “i believe that it is impossible to be happy in life when you completely separate business from personal life. i could not disguise myself and live most of my life with a mask. you spend so much time of your life with business – especially as an entrepreneur – that the lines between business and friendship become blurry. for us, it has always paid off to act naturally, be open-minded and respectful – and to talk a lot. when we get in touch with partners for the first time, they acknowledge not only our idea but see that there are some exciting and enthusiastic personalities behind our business. this helps them to better understand our motivation and realize that we are trustworthy and honest. we are still in contact with most of our first contacts – even if we are not doing business together. but some have turned into friends and i am always happy to see or talk to them.” competitors also serve as important source for sensing new service related offers (johne & storey, 1998; pöppelbuß et al., 2011). four case companies reached out to their national and international competitors to discuss the market, customer preference, financial and logistic processes. the fashion renting market is still in its infancy with moderate consumer interest (armstrong et al., 2015a) and with only few firms considering implementation of fashion renting offers (adam, strähle, & freise, 2017). c: “i do not see them as competitors; the market should become big enough for all of us to remain in business.” case companies agreed that more companies are actually needed to further develop and create the market. more and diverse renting offers could raise the awareness, stimulate the interest in fashion renting and contribute to overcoming consumers´ uncertainties related to renting such as hygiene and quality of used clothing (armstrong et al., 2015a; armstrong et al., 2015b; lang & armstrong, 2015; rexfelt & hiort af ornäs, 2009). empathic capabilities. customer integration into the innovation process is important to minimize market risks (enkel, perez-freije, & gassmann, 2005). this is especially significant in the case of pss since pss place consumer needs in the center of value creation and aim on satisfying ultimate, so far unmet or even unknown customer needs (baines et al., 2007; tukker & tischner, 2006). in a pss context, companies only offer value propositions that are assembled by the customer with his own competencies to create an individual “value-in-use” (lusch, 2006; reynolds & ng, 2015; vargo & akaka, 2009). it requires providers to inherently take the final functionality that fulfils customers´ needs as the departure point of business development (tukker & tischner, 2006). case companies empathically observe consumers to sense their business opportunity. they demonstrate a deep understanding of customers´ context specific feelings, every day practices, desires and lifestyles. exchange on a personal and amicable basis allows gather58 m. adam, j. strähle, & m. freise journal of small business strategy / vol. 28, no. 2 (2018) / 49-67 ing consumer information that go beyond their fashion preferences. a: “we want to know what they do in their free time, what job they have, what lifestyle they live this always gives us some idea of what they could like.” case companies demonstrate specific relational skills that encourage consumers to disclose personal feelings and behavior. when talking to customers, they create a relaxed atmosphere that makes customers feel comfortable and that their information is in safe hands. this is facilitated by the personal enthusiasm case company representatives attribute to their business idea. their original idea stems from their personal desires and needs. accordingly, their individual lifestyle is largely reflected in the preliminary value proposition presented to the customer. for this reason, customers and case company representatives share many similar values, needs and problems. e: “we are at the same age as most of our customers, we watch similar tv series, visit the same places for vacation, have similar dreams, problems etc. this creates, of course, something like a bond. many, many customers love to talk, have fun and laugh together with us. but i don´t mainly regard them as customers. i rather see some fascinating personalities who i would love to get to know better. one customer just told me: `you do exactly what i had always wanted to do.´ i think this really shows that we are on the same page with our customers.” this makes it easier to find common topics of conversation and discuss on an intimate basis. as a result, close, friendly and partially long-standing relationships with customers are maintained and an understanding of the particular customer needs is developed. standardized and it-supported processes support systematic analysis of gained information. the new knowledge is incorporated into the development of value propositions that addresses final customer needs. seizing ability to collaborate. collaboration capabilities enable firms to supplement their own resources with those of other firms by building and utilizing network relationships (walter et al., 2006). they ensure state-of-the art material and information flows that enable the firm to put their business opportunity into practice. this is especially important in a pss context since pss are the result of a value co-creation process within a collaborative partnership network (cavalieri & pezzotta, 2012; maussang, zwolinski, & brissaud, 2009). co-creating value for the costumer is based on longterm cooperation and integration of partners, suppliers and customers into the development process (gronroos, 2011; prahalad & ramaswamy, 2004). hence, cooperative partnerships serve as decisive inputs for designing the entire service system (lockett, johnson, evans, & bastl, 2011). case companies do not usurp all function but relinquish specific tasks to third parties which helps them to focus on their core competencies, reduce costs, save time and enhance quality. they purposefully delegate tasks to i.e. delivery, it and accounting service providers. partnerships are efficiently coordinated to obtain and assemble required resources. d: “we do not have any programming knowledge or experience in how to develop a high-quality online shop. of course, i could learn it and do it myself – it is probably not rocket science. but it would probably take me months to do it in a way that meets our quality standards. and who would run the business during that time? that does not make sense. we therefore asked an expert to do it and are super happy with his work. […] furthermore, we get assistance in accounting and help with legal questions and taxation. i want everything to be legally permissible and not have sleepless nights and be afraid of going to jail. this leaves us a lot of time and power that we need to further develop our business.” most case companies determine a broad assortment of high quality fashion items as key success factor for renting clothes. fashion renting consumers prefer a wide variety of clothes and creative choices in their apparel selection that allows them keeping up with fashion trends at reasonable costs (lang et al., 2016). it is therefore essential to permanently receive cheap and extraordinary clothes in order to constantly provide customers the experience of novelty, uniqueness and newness. this is achieved through reliable and long-term cooperations with various retailers and designers. literature suggests that pss networks are more easily operated through relational rather than transactional exchange between network partners (lockett et al., 2011). case companies are skilled in purposefully selecting partners they need for establishing their business. they are repeatedly working together on rather informal relationships with little bureaucratic administration and conclude mostly implicit and open-ended contracts with their partners. this implies that their network mainly relies on relationships based on cognitive trust (smith & lohrke, 2008) which 59 m. adam, j. strähle, & m. freise journal of small business strategy / vol. 28, no. 2 (2018) / 49-67 makes creating trust among partners a substantial seizing activity. when trust exists, partners rely on the fulfillment of exchange obligations and that actions taken by each party are mutually acceptable. this reduces transactions costs for negotiation or monitoring (jones, hesterly, & borgatti, 1997) which is relevant for entrepreneurial firms since they mostly do not dispose of substantial financial means. e: “we are small and do neither have the financial means or knowledge to elaborate extensive contracts nor do we have the time for constantly monitoring the offers of our suppliers. therefore, we try to handle business with our partners in the most unbureaucratic way possible.” this requires relational skills such as communication ability, extraversion, conflict management skills, empathy, emotional stability, self-reflection, sense of justice and cooperativeness (marshall, goebel, & moncrief, 2003). our analysis furthermore reveals that case companies possess profound partner knowledge. a: “i think we know all of our partners very well. we know their business but also the individuals behind it since we talk a lot with them and ask many questions. we try to simply be ourselves but always respect the particularities of each of our partner.” this enables situation-specific management with each partner such as solution-oriented conflict management and stabilizes a firm’s position within the network (walter et al., 2006). customer-focused communication. the success of fashion renting business models depends on consumer acceptance. solution-based offers such as renting clothes contradict the prevalent norm of ownership and existing societal habits (rexfelt & hiort af ornäs, 2009; vezzoli, ceschin, diehl, & kohtala, 2015). self-identity, fashion trends and low costs are the major drivers for purchasing new clothes (fisher, cooper, woodward, hiller, & goworek, 2008; niinimäki, 2010). consumers who have become habitual with frequent consumption may balk at the absence of ownership instead of appreciating the benefits of convenience, financial savings and higher quality (behrendt, jasch, kortman, hrauda, pfitzner, & velte, 2003; armstrong et al., 2015a; vezzoli et al., 2015). furthermore the hygiene of used products may become problematic (catulli, 2012) which is particularly salient in the context of clothing that is worn close to the skin (armstrong et al., 2015a). consumers may be skeptical about the provider´s motivation and lack confidence in the company to fully deliver the service (armstrong et al., 2015a; mont, 2004; rexfelt & hiort af ornäs, 2009). therefore, clarity of the entire service provision is important to reduce uncertainty. this implies clearly outlining liabilities and risks of each party and gain customers´ trust (reim, parida, & örtqvist, 2015; armstrong et al., 2015a). consumer trust to rely on a service provider´s competence and reliability results from accumulated knowledge that allows predictions on the likelihood that the provider will meet his obligations (johnson & grayson, 2005). case companies demonstrate the ability to understand and reduce customers´ uncertainty. they transparently outline their motives, liabilities and benefits for the customer. reciprocal lines of communication are carried out via social media and personally. b: “communication works best through social media. but we also try to answer as many phone calls as possible. talking with each other is still something different than writing digitally – still in times of social media. when people get to know us and the persons behind our business, they feel confident and trust us.” quickness and the ability to promptly interact with customers is an essential activity to reduce the complexity of the offer. e: “we are living in a fast world; our customers live a fast life and want an immediate response. waiting is not in line with their lifestyle. also, renting of clothes is new and many people do not fully understand how that works and why they should do it. of course, they have a lot of questions and want to know who we are – they are used to live fast and it would be inimical to our business, if we do not quickly respond to their inquiries.” customer integration. customer integration has been recognized as critical factor for service innovation (alam, 2006; carbonell, rodríguez-escudero & pujari, 2009; cooper, 2001; matthing, sandén, & edvardsson, 2004). understanding existing consumer habits, influential factors of consumer satisfaction and major barriers for adopting novel solutions are substantial for successful pss implementation (grönroos, 2008; rexfelt & hiort af ornäs, 2009; vezzoli et al., 2015). this requires close supplier-customer interaction and an early involvement of customers into development, design and delivery of pss (baines et al., 2007). case companies are seeking continual customer feed60 m. adam, j. strähle, & m. freise journal of small business strategy / vol. 28, no. 2 (2018) / 49-67 back during the development and implementation stage. customer interaction (alam, 2006) is a natural and every day task for them. they are skilled in absorbing customer feedback which is mostly gained through their websites or social media. input is systematically evaluated and tested for feasibility. customers appreciate the feeling that they can actually contribute to the offer. case companies with a physical store report that they create a relaxed atmosphere in their store that allows customers to have casual conversations, feel comfortable and enjoy a good time. if individuals perceive others to have values similar to their own, an environment conducive to trust development is given (johnson & grayson, 2005). the laid-back and open-minded interaction with customers allows gaining honest and meaningful suggestions. e: “we all know the situation that we visit a restaurant, did not like the meal, politely say `yes, it was delicious, thank you and see you again´ but never show up again. we insistently seek to avoid that our customers behave like that. we do not want to seem arrogant or pretend to be perfect but create a climate that encourages consumers to directly provide us their honest feedback. and customers appreciate that their voice is heard. their honest suggestions are vital for our business because otherwise we will have an offer or an assortment that nobody likes but everybody is telling us that we are doing a great job.” even though the idea may be initiated within the company, customer integration serves as catalysts of service innovation processes (kuusisto & riepula, 2011). it improves consumer acceptance and can lead to superior quality (alam, 2002). case companies confirm that adjustments that have been made jointly with the customers resulted in increased sales and client loyalty. positive customer response furthermore encourages providers to proceed with the development and obtain the required resources (kuusisto & riepula, 2011). c: “collaborating with customers makes us personally feel more confident and shows us that we are on the right track. it is not only time but also a lot of money that we invest. of course, there are still a lot of risks remaining but it gives us confidence to know that the idea is approved and supported by our clients. this considerably reduces our risk. and it also helps us to promote our business and attract other partners – because we can refer to strong customer commitment and claim that this is exactly what the market demands for.” the ability to integrate customers into development validates and internally confirms the business idea (cooper, 2001). reconfiguring network learning capabilities. the reliance on network partners is not constrained to early stage activities (johannisson, alexanderson, nowicki, & senneseth, 1994) but also essential for learning and gaining knowledge. while sensing implies learning about the environment and market opportunities, creating, sharing and integrating knowledge are considered key activities to maintain success (teece, 2007). for this purpose, companies expose themselves to a variety of external knowledge sources to reshape their competencies (salunke, weerawardena, & mccoll-kennedy, 2011; weerawardena & mccoll-kennedy, 2002). particularly in the context of pss, effective information sharing across the pss supply network with open innovation structures is required (laperche & picard, 2013; lockett et al., 2011; mont, 2004; mont, 2002a). a: “when we started we knew little about business and needed much support, especially in accounting, logistics and it. interestingly, very often the most valuable knowledge is offered for free. when we ask people, show interest and demonstrate high respect for their work, they often enjoy talking about it and explain everything in detail. it is the focal point of their lives and of course they feel flattered if you are interested in what they are doing all day long.” case companies also accept that their own know-how may leak out. d: “we are even in exchange with our competitors. if we can avoid making the same mistakes they did and prevent others from making the same mistakes we did, it is beneficial for everybody. the market should become big enough for all of us.” knowledge is also acquired through collaboration with universities which are assumed to be important sources for corporate innovation (johnson & johnston, 2004; ponds, van oort, & frenken, 2010). case companies have permanent linkages to universities. collaborations comprise joint research projects, seminars, dissertations, student papers, lec61 m. adam, j. strähle, & m. freise journal of small business strategy / vol. 28, no. 2 (2018) / 49-67 tures and academic initiatives that allow students applying their knowledge in a real-life context. prospect for success of new firms tend to be higher in locations with geographic proximity to universities since this reduces knowledge acquisition cost (audretsch, lehmann, & warning, 2005; del barrio castro & quevedo, 2004). case companies are connected to universities within their nearby environment with one company also attending an online study program. c: “knowledge is essential. we have enjoyed our studies and, in my opinion, there are no places with a higher accumulation of knowledge than universities. for us, as a small company that is somehow innovative, we are dependent on gaining new knowledge from outside because there is no blueprint that we can copy. and for universities, particularly for students, it is interesting to study a company that embarks upon new paths and apply the theory they learn to a real-life case. our recent marketing campaign was completely developed by a group of students in the context of a seminar at their university.” governance and orchestrating of pss. pss implementation require service oriented mental model and a creative environment with unconstrained handling of mistakes (den hertog, van der aa, & de jong, 2010; kindström et al., 2013). case companies are still small with very flat hierarchies and report that their culture is open-minded and friendly. employees are described as friends who share a common mindset and are encouraged to bring in their ideas and talents which is general considered conducive to knowledge creation and sustainable competitive advantage (sharkie, 2003). however, passion, staunchness and ego may prevent them from listening to customers and adjusting the offer to their particular needs (onyemah, pesquera, & ali, 2013). founders and employees are highly passionate about their jobs and tasks but do not feel omniscient. instead of putting the main focus on convincing prospective clients of their offer, business activities are built around customer feedback. this “client-focused learning” (onyemah et al., 2013; salunke et al., 2011) is utilized to purposefully reshape the offer to fit what clients actually want. all case companies have frequently modified their business model, i.e. in terms of payment conditions and membership, assortment or delivery service. this indicates the presence of episodic learning capabilities which allow companies to learn from past activities and subsequently adapt this knowledge to future activities (salunke et al., 2011). b: “we soon realized that there is so much useful knowledge out there and it is impossible to capture all the knowledge at one time. but we learn more and more over time, especially when we apply things. looking back, i am a bit embarrassed of how naïve we were when we started.” all founders of the case companies have a fashion background. since renting contradicts the dominating fashion industry recipes, case companies also had to incorporate the ability to unlearn familiar routines (matthyssens, vandenbempt, & berghman, 2006; kindström et al., 2013). in order to quickly respond to fast changes of the environment, decisions need to be made quickly but remain coordinated (teece, 2007). decision-making is facilitated through the smallness of case companies but the final decision clearly assigned to particular persons. some companies, however, express concerns that this may become more complicated to handle with future growth. pss implementation also requires long-term planning (mont, 2004). case companies are not focused on short-term profit and are aware that the mainstream market for renting fashion has yet to be developed. four case companies mention sustainability as the major driver for their business activities and are engaged in different initiatives that promote responsible fashion consumption. b: “with more knowledge on sustainability, acceptance of renting clothes will definitely increase. it will become the new normal but we have to work for that.” conclusion and future research the objective of this paper was to enhance our understanding of microfoundations that underlie sensing, seizing and reconfiguring dynamic capabilities of early-stage service-oriented firms. findings contribute to closing the academic gap of empirical knowledge on how companies manage to successfully implement pss. empirical studies on dynamic capabilities have so far mainly focused on established firms with a broad base of existing resources. by applying the dynamic capabilities approach to early-stage firms, this study strengthens the empirical foundation of dynamic capabilities research. it sheds light on particular microfoundations that allow new ventures to reconfigure their relatively scarce resource base into expedient organizational processes and routines. for practitioners, the presented microfoundations provide a framework of critical tasks and skills that facilitate understanding and managing different organizational activities to leverage a service-oriented business model. this is 62 m. adam, j. strähle, & m. freise journal of small business strategy / vol. 28, no. 2 (2018) / 49-67 particularly important for small firms since they possess a smaller stock of resources than established firms. findings highlight that appropriate skills for interacting with customers are essential. it requires the ability to listen to customers and understand their particular needs and it is vital to systematically absorb and adopt customer feedback. companies should proactively and continually seek customer feedback and make customer interaction a natural and every day task. practitioners should be empathic and demonstrate a deep understanding of customers´ specific feelings, every day practices, desires and lifestyles. for this reason, it is helpful to live a similar lifestyle and share similar values with customers and implement a quick and reciprocal communication with customers via social media. furthermore, creating trust is essential to gain honest feedback and reduce consumer uncertainty. solution-based offers contradict the prevalent norm of ownership and existing societal habits. consumers may be skeptical about the new offer. practitioners should therefore try to exchange with customers on a personal and amicable basis and create a relaxed atmosphere that makes customers feel comfortable. this facilitates finding the right ways and word to address consumer skepticism. furthermore, practitioners should focus on purposefully selecting partners and delegating specific tasks to focus on their core competences. at the beginning, practitioners should discuss and reflect their initial ideas with close social contacts and be open for improvement suggestions. an uncomplicated and open mindset is conducive to getting in touch with valuable network partners and create informal, long-term and amicable relationships with little bureaucratic administration and implicit, open-ended contracts. it is furthermore critical to unlearn familiar routines, absorb new know-how and create an open-minded corporate culture. relational capabilities and the willingness to learn are essential to acquire knowledge from external networks. practitioners should not be afraid of spillovers and open to share information with network partners. it is helpful to acquire knowledge through collaboration with universities and exchange with competitors. this research is limited to data of five cases. future research could include more companies to provide quantitative evidence. even though findings may be generalized since they are matched with general pss literature, it would be helpful to investigate other industries and determine similarities or differences of the microfoundations. this study uses mainly data provided by the case companies. a potential informant bias can therefore not fully be excluded. more primary data from network partners or customers would enrich the findings of this study. a long-term observation of how customers and company interact could shed more light on how exactly firms manage to co-create value and incorporate customer needs into the offer. finally, it would be interesting to investigate how established companies in traditionally manufacturing based industries manage to innovate their business model towards solution-based offers since this requires a severe transformation of their existing corporate structure. this would be also interesting since they depart with a greater stock of resources. references adam, m., strähle, j., & freise, m. 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(2006). entrepreneurship and dynamic capabilities: a review, model and research agenda. journal of management studies, 43(4), 917–955. reproduced with permission of the copyright owner. further reproduction prohibited without permission. table of contents anonymous journal of small business strategy; fall 2006/winter 2007; 17, 2; abi/inform complete pg. 0_3 table of contents the internalization of smes in emerging economies: institutional embeddedness and absorptive capacities hong zhu texas a&m university michael a. hitt texas a&m university laszlo tihanyi texas a&m university 27 business students' perceptions of employment in small and medium-sized enterprises versus multinational corporations: investigating the moderating effects of academic major, gender, and personality w. lee grubb iii east carolina university michael l. harris east carolina university william i. mackenzie, jr. university of south carolina 37 an exploration of firm performance factors in family businesses: do families value only the "bottom line"? jose castillo the university of texas of the permian basin michael w. wakefield colorado state university-pueblo 53 do strategic business networks benefit maleand female-owned smallcommunity businesses? nancy j. miller university of nebraskalincoln terry l. besser iowa state university jennifer v. riibe bj industries 75 impact of planning and control sophistication in small business 89 harland e. hodges college of charleston thomas w. kent college of charleston angel investment criteria richard sudek claremont graduate university l 05 book review startups that work by joel kurzman and glen rifkin reviewed by: thomas nelson university of louisville http://www.smallbusinessinstitute.biz social proactiveness and innovation: the impact of stakeholder salience on corporate entrepreneurship michael g. goldsby1, donald f. kuratko2, james w. bishop3, patrick m. kreiser4, jeffrey s. hornsby5 1ball state university, usa, mgoldsby@bsu.edu 2indiana university, usa, dkuratko@indiana.edu 3new mexico state university, usa, jbishop@nmsu.edu 4iowa state university, usa, pkreiser@iastate.edu 5university of missouri-kansas city, usa, hornsbyj@umkc.edu a b s t r a c t innovation has become a major strategic component of corporate entrepreneurship. managerial decisions regarding innovative activity are complex and can be affected by numerous factors. in this study, we draw upon the tenets of stakeholder theory to examine how stakeholder salience (consisting of stockholders, employees, and customers) is integral to the decisions made by senior level managers related to social proactiveness within a corporate innovation strategy. in doing so, we introduce a social proactiveness scale that examines a manager’s priorities toward internal and external social issues. examining 200 senior-level managers, we find that companies which place salience on employees are more proactive on both internal and external social issues, while those placing salience on stockholders are more proactive on internal social issues but not external social issues. surprisingly, placing salience on customers is associated with neither internal nor external social issues. finally, the data suggests that proactiveness related to internal social issues leads to greater internal innovation with external innovation mediating the relationship, whereas proactiveness on external social issues is not related to innovation. keywords: journal of small business strategy 2018, vol. 28, no. 02, 1-15 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2018 small business institute® apa citation information: goldsby, m. g., kuratko, d. f., bishop, j. w., kreiser, p. m., & hornsby, j. s. (2018). social proactiveness and innovation: the impact of stakeholder salience on corporate entrepreneurship. journal of small business strategy, 28(2), 1-15. w w w. j s b s . o rg social proactiveness, stakeholder theory, stakeholder salience, corporate entrepreneurship, innovation conditions in the global business environment demand that established firms pursue innovation and relevancy in their markets if they are to stay in business (morris, kuratko, & covin, 2011). the strategic approach of supporting innovation and revitalization within forward-thinking companies is better known as corporate entrepreneurship or corporate innovation and has become a prime area of research in the strategic management and entrepreneurship fields. more specifically, corporate entrepreneurship refers to the pursuit of innovation by established organizations and is a vital component in facilitating the exploitation of existing company resources or exploration of new opportunities (kuratko & audretsch, 2013). corporate entrepreneurship has been initiated in established organizations for a host of purposes, including profitability (vozikis, bruton, prasad, & merikas, 1999; zahra, 1993), strategic renewal (guth & ginsberg, 1990), innovativeness (baden-fuller, 1995), gaining knowledge to develop future revenue streams (mcgrath, venkataraman, & macmillan, 1994), international success (birkinshaw, 1997), growth (zahra, kuratko, & jennings, 1999), and the effective configuration of resources as the pathway to developing competitive advantages (borch, huse, & senneseth, 1999; covin & miles, 1999; covin, slevin, & heeley, 2000; kuratko, covin, & garrett, 2009). regardless of the reason that firms decide to engage in corporate entrepreneurship, it has become a major strategy (morris et al., 2011; narayanan, yang, & zahra, 2009). for the purposes of this paper, we have chosen to focus on innovation, a subject that drives many of the other aforementioned purposes. as more companies seek to embrace corporate entrepreneurship as the framework for the firm’s future innovative goals and activities (ireland, covin & kuratko, 2009; morris et al., 2011), a greater understanding of phenomena that affect and potentially foster a strategy for corporate innovation would serve academics and pracintroduction http://www.smallbusinessinstitute.biz http://www.jsbs.org 2 m. g. goldsby, d. f. kuratko, j. w. bishop, p. m. kreiser, & j. s. hornsby journal of small business strategy / vol. 28, no. 2 (2018) / 1-15 titioners well. while most people think of changing consumer tastes and evolving technologies as drivers of new business development, problems and challenges can also serve as the impetus for innovation (zahra, filatochev, & wright, 2009). addressing problems and challenges in unique ways can differentiate companies from their competitors. one complex set of challenges that companies often face is social issues (hemingway, 2005; ozmoyer, calantone, & dibonetto, 1997). we contend that companies pursuing more proactive approaches to social issues often discover opportunities for innovation (shepherd & patzelt, 2011). consistent with the findings of boesso and kumar (2016), we expect that a definite stance toward these issues will impact innovation pursued by its managers. therefore, the purpose of this research is to develop and test a model in which proactiveness towards social issues mediates the relationships between the salience placed upon certain stakeholder groups and innovation. see figure 1. in order to accomplish this purpose, we first provide a discussion of stakeholder theory--a dominant strategic approach in the social issues literature--and its application to corporate innovation. we then develop the hypotheses which, taken together, constitute our model and detail the relationships among stakeholder salience, social proactiveness, and innovation. we then explain the study’s results and conclude with a discussion of the theoretical and practical implications of our findings. a major contribution of this paper is the development of a scale based on the seminal corporate social responsibility (csr) work of clarkson (1991). clarkson developed categories of socially responsible activity, which he used to score company social performance via the examination of archival data. our scale, however, allows managers inside the firms to score what they believe their companies’ posture towards these possible activities are. the modified social proactiveness scale offers researchers an instrument to include in future surveys of company postures toward csr. more scales are needed to better assess the role csr plays in a variety of business activity (alvaredo-herrera, bigne, aldas-manzano, & curras-perez, 2017). the focus of entrepreneurial activity in this paper is innovation, for which we also developed a scale in order to study the internal and external sources of the behavior. literature review stakeholder theory freeman (1984) defines a stakeholders group as any group that affects or is affected by the decisions managers make in achieving their goals. thus, stakeholder management is the manner in which an organization manages and relates to its diverse group of stakeholders. a key challenge in stakeholder research is determining how much priority managers should give to different groups. clarkson (1988) recognized that different stakeholder groups occupy different levels of importance to different firms. primary stakeholders are those “without whose continuing participation the corporation cannot survive” and secondary stakeholders are those “who influence or affect, or are influenced or affected by, the corporation” (clarkson, 1988: 259). in the relevant literature, this is often referred to as stakeholder salience; i.e., how salient is a specific group to the organization’s decisions? it is unlikely that an organization would give each stakeholder equal attention, so researchers have sought methodological approaches to capture stakeholder salience. increased understanding of the roles that stakeholders play in opportunity development provides the potential for enhancing innovation efforts. specifically, by maintaining relationships with multiple stakeholders, managers are more aware of the needs of their constituencies, whereas those organizations that take a more reactive stance are less likely to be aware of these entrepreneurial opportunities. introduced by carroll (1979) and modified by wartick and cochran (1985), the most commonly employed corporate social responsibility (csr) categorization is reactive, defensive, accommodative, and proactive. reactive means that, with regard to social issues, less is done than is required; defensive means that the least required actions are done; accommodative means that all that is required is done; and proactive means that doing more than is required is accomplished. companies using a reactive posture deny responsibility on social issues; defensive companies admit responsibility but fight it; accommodative companies accept responsibilities on issues; and proactive companies anticipate responsibility and search for ways to be leaders on social issues. clarkson (1988; 1991) employed this rdap (reactive, defensive, accommodative, and proactive) typology to study firm-level approaches to social issues and stakeholders. he identified four principal areas for analysis (human resources, environmental issues, community relations, and ethics) and made use of historical information obtained in a case study approach to rate the companies in the study. while positively received in the social issues field, the methodology has limitations. for instance, clarkson did not contact the companies but rather assessed them by reading archival accounts about them. since we focused upon social proactiveness, it was chosen as the construct label in our survey. this avoids clarkson’s somewhat ambiguous classification scheme as well as captures the desired 3 m. g. goldsby, d. f. kuratko, j. w. bishop, p. m. kreiser, & j. s. hornsby journal of small business strategy / vol. 28, no. 2 (2018) / 1-15 phenomenon; i.e., social proactiveness, whose definition is consistent with our theory. also, we believe that for our purposes a self-report survey instrument is the better way to go. first, we were more interested in the behavior of the organizations rather than in the labels they could apply to themselves or be applied by others. second, we believe that a well-designed survey would be more finely grained and, therefore, more descriptive and accurate. third, we also believe that this approach would allow respondents to more accurately assess and rate their organizations on the specific dimensions germane to our research. fourth, and finally, the survey methodology allows for a large sample to be gathered concurrently and, therefore, faster. hence, we developed what we called a social proactiveness scale, based on clarkson’s original typology. more details of the scale development process are presented in the method section. in this study, social proactiveness is utilized to conceptualize and measure the response companies have on ethical issues. jones (1995), waddock and graves (1997), and agle, mitchell, and sonnenfeld (1999) state that corporate social performance is directly affected by a company’s relationship with its stakeholders. kuratko, hornsby, and goldsby (2007) found that, in the context of entrepreneurial activity, the firm’s primary stakeholders are its stockholders/investors, employees, and customers. therefore, these are the stakeholders we address in our study. in the following sections, we develop and test theory as to the degree that stakeholder salience affects social proactiveness, which in turn influences innovation. stockholder salience and social proactiveness in our study, we first examine the relationship between the salience executives place on their stockholders and their level of social proactiveness. given that the literature on csp and firm financial performance is mixed at best, we believe that investigation of other organizationally valued outcomes associated with social proactiveness may provide new insights into the phenomenon. as a result of the scale development process that was based upon clarkson’s rdap typology, we identified two types of social proactiveness: (1) the internal issues of human resource (hr) ethics and (2) the external issues of community/environmental ethics. we first examine the relationship between stockholder salience and human resource ethics. regarding companies that place salience on stockholders’ interests, we expect companies to institute policies that would enhance stock prices, company value and, therefore, shareholder wealth. prior research has shown that proactive human resource initiatives are positively related to the firm’s stock price (wright, ferris, hiller, & kroll, 1995). the mechanism for such a relationship may be that fair treatment and collaboration enhance corporate reputation, and that a favorable corporate reputation in turn has a positive influence on stock prices (friedman, 2009). additionally, high performance human resource systems are often considered a source of competitive advantage for a company (becker & huselid, 1998, 1999). based upon these findings, we expect that there is a positive relationship between the salience placed upon stockholders and the extent a firm is proactive on internal social issues. that is, if a company is concerned about its stockholders and its responsibility to increase their wealth, then it will attempt to enhance its corporate reputation. one way to do this is to be proactive with respect to hr policies and programs. we therefore propose: hypothesis 1a. stockholder salience is positively associated with proactive hr ethics. research also suggests that proactive environmental initiatives have a positive effect on stock price (darnall, henriques, & sadorsky, 2010; hamilton, 1995; klassen & mclaughlin, 1996; konar & cohen, 1997; muoghalu, robison, & glascock, 1990). socially proactive firms are also perceived by the market as being less risky, whereas “socially irresponsible firms may face uncertain future claims” (el ghoul, guedhami, kwok, & mishra, 2011: 8). more environmentally proactive firms face substantially less litigation than irresponsible ones, and are therefore perceived as safer choices by investors (frederick, 1995). with regard to smaller firms, becherer and helms (2014) found that companies that achieve their green goals have better financial and business outcomes in earnings, marketing share, sales, and cash flow. consequently, we would expect that companies whose stockholders are highly salient will be concerned about what is important to them; particularly share prices. that is, similar to proactive hr ethics, proactive environmental initiatives should enhance corporate reputation and, in turn, share price. therefore, by similar reasoning to that above, we propose: hypothesis 1b. stockholder salience is positively associated with proactive community/ environmental ethics. employee salience and social proactiveness in one of the few studies that explores the relationship between employee salience and ethics, backhaus, stone, and heiner (2002) found that companies can attract top talent if they signal high corporate social performance. apparently potential employees view firms with high corporate social performance as an employer of choice, and there is a 4 m. g. goldsby, d. f. kuratko, j. w. bishop, p. m. kreiser, & j. s. hornsby journal of small business strategy / vol. 28, no. 2 (2018) / 1-15 positive relationship between corporate social responsibility performance signaling and the ability to attract top talent to the firm. once recruited, employees are more likely to be retained and perform better if they perceive that the company takes their interests in mind when adopting hr policies and practices (nishii & mayer, 2009), as well as being more ethical in their decision making (tang & liu, 2012). for example, batt (2002) found call center representatives quit less and make more sales when the company emphasizes employee participation in decision making and the development of work skills. in fact, some employees will work for less pay for a company they respect than one they find irresponsible (branco & rodrigues, 2006). at the same time, organizations who place high salience on their employees want to be recognized as desirable places to work (brammer & pavelin, 2006; melo & garrido-morgado, 2012). hence, they will be proactive with their hr ethics policies and practices. consequently, we expect that companies that place salience on employees are more likely to be proactive on internal human resource issues. therefore, we propose: hypothesis 1c. employee salience is positively associated with proactive hr ethics. corporate image is an issue that is normally examined from an external perspective. indeed, as stated earlier, companies may take part in volunteer activities to garner goodwill in the community. sen and cowley (2013), for example, found that proximity to stakeholders, such as those in the local community, influences managerial behavior. however, external image also has internal consequences (hatch & schultz, 1997). herrbach and mignonac (2004) found that perceived external prestige had positive relationships with job satisfaction, affective organizational commitment, and affective well-being at work. since employees devote significant individual resources in pursuing their careers, their sense of identity becomes intertwined with that of their company. furthermore, proactive community/environmental ethics signal that the organization is a desirable entity to be a member of and to deal with. alt, diez-de-castro, and lloréns-montes (2014) discovered that a shared vision between employees and management on environmental issues translates into better employee stakeholder integration into a company’s operations. also, when employees recognize supportive behaviors from their managers, they are more likely to take an interest in environmental initiatives (ramus, 2001). consequently, we expect that companies that place salience on employees are more likely to be proactive on external social issues. we therefore propose: hypothesis 1d. employee salience is positively associated with proactive community/ environmental ethics. customer salience and social proactiveness with regard to the relationship between placing priority on customers and the degree of proactiveness on hr ethics, one can imagine a company making a decision on whether to primarily support the interests of its customers or its employees. one could also imagine that some companies who place the customer first send a signal to its employees that they are not a significant concern of management. furthermore, placing high priority on the customer may divert the managers’ attention from the needs of their employees. however, this ultimatum need not happen, as each initiative can support the other. companies with this perspective operate under the belief that if customers are salient, they must ensure they are treating their employees well in order to provide exceptional service (batt, 2002). for example, the gallup organization studied over one million employees over a 25-year period and discovered that companies that build trust through engagement and individualized attention through the ranks generate more customer satisfaction and productivity (clifton, 2011). since placing importance on customers necessitates ethical human resource practices, we expect that companies that place salience on customers are more likely to be proactive on internal human resource issues. therefore, we propose: hypothesis 1e. customer salience is positively associated with proactive hr ethics. with regard to the relationship between customer salience and community/ environmental ethics, one must consider the fact that customers are members of the community and operate within the company’s external environment. if a company places importance on the well-being of its customers, it would make sense that it would be a good steward of issues related to their community and external environment (schlange, 2009). by visibly supporting community causes, firms display the values they deem important and, in the process, create identifiable personalities (agarwal, kumar, swati, & tyagi, 2010). with regard to family businesses, peake, davis, and cox (2015) found that entrepreneurs followed an enlightened self-interest approach toward engaging in small business responsibility; i.e., what is good for the community and environment is good for the company. their findings build on wilson’s (1980) work that small businesses are socially responsible in order to increase profit, improve reputation, and retain customers and employees. as a result of these insights regarding community involvement, environmental awareness, and customer 5 m. g. goldsby, d. f. kuratko, j. w. bishop, p. m. kreiser, & j. s. hornsby journal of small business strategy / vol. 28, no. 2 (2018) / 1-15 loyalty, we expect that companies that place salience on customers are more likely to be proactive on external social issues. we therefore propose: hypothesis 1f. customer salience is positively associated with proactive community/ environmental ethics. social proactiveness and innovation many factors encourage innovation, but perhaps the most important facilitator is proactiveness. proactiveness has come into popular usage as a term to describe an action-based orientation. at the company level, miller (1987) associates proactiveness with assertiveness, which he in turn views as a dimension of strategy-making. he argues that entrepreneurial firms act on rather than react to their environments. proactiveness is also concerned with implementation, with taking responsibility, and doing whatever is necessary to bring an innovative concept to fruition. a proactive orientation usually involves considerable perseverance, adaptability, and a willingness to assume responsibility for failure. in his study of the strategic orientation of business enterprises, venkatraman (1989) uses the term “proactiveness” to refer to a continuous search for market opportunities and experimentation with potential responses to changing environmental trends. he suggests that it is manifested in three key ways: (1) seeking new opportunities that may or may not be related to the present line of operations; (2) introducing new products and brands ahead of competition; and (3) strategically eliminating operations that are in the mature or declining stages of the life cycle. proactive behavior has also been viewed as one’s disposition to take actions to influence one’s environment (bateman & crant, 1993). this perspective holds that the behavior of people is both internally and externally controlled, and that situations are as much a function of individuals as individuals are themselves functions of their environment. as buss (1987) suggests, people are not “passive recipients of environmental pressures”; they influence their own environments. this approach to proactiveness is one which fits very well with the ideals of corporate entrepreneurship— namely, that people can intentionally and directly influence their organizations to enact change in their current circumstances, including aspects of their work environment. further, proactive organizations can seek to influence and change their environment rather than responding to their environment out of necessity or survival. jauch and glueck (1980) define a proactive strategy as “one in which strategists act before they are forced to react to environmental threats and opportunities.” while proactiveness can be resource intensive due to the costs of monitoring customers and competitors, scanning markets and technologies, and lobbying, such proactiveness aids significantly in maintaining competitiveness (sandberg, 2002). these types of proactive firm-level behaviors include identifying opportunities, challenging the status quo, and creating favorable conditions. we expect entrepreneurial firms to find increased opportunities for innovation through exhibiting proactiveness on social issues. internally, innovative hr programs that recruit and reward the ingenuity of employees are likely to lead to the creation of new products as these forward thinking employees enact new solutions to existing problems. by staying abreast on the latest sustainable materials, technologies, and practices, it will build an expansive network of experts for triggering new business ideas and strategies. we therefore propose: hypothesis 2a. proactiveness on hr issues is positively associated with externally directed innovation. hypothesis 2b. proactiveness on community/environmental issues is positively related to externally directed innovation. we also posit that externally directed innovation predicts internally directed innovation and not the other way around. the external innovation construct is focused directly upon goods and services customers may want or require and/or innovations that can be used to thwart various efforts by competitors. that is, they are customer and/or competitor focused; involving innovative activities that directly affect customers and/or competitors. it may be argued that such innovations are the most important since they affect customers directly. in order to implement such external innovations and deliver the associated goods and services, it may be necessary to make innovative internal changes. these could be known as internal innovations and the genesis of many of them, as described above, may be driven or made necessary by external innovations. although this may seem counterintuitive, we believe this relationship is a salient point of interest for this paper. once an opportunity in the market is identified, managers must then adapt their units internally to achieve the new entrepreneurial goal. in other words, the external innovation instructs what internal adjustments must be made in processes and technological adaptions. for example, consider the invention of the iphone by apple. once the market opportunity was identified and the product design established, steve jobs and tim cook modified the supply chain of the company to source the materials and manufacturing required to produce it. these internal company changes eventually became a source of competitive advantage for the company, allowing 6 m. g. goldsby, d. f. kuratko, j. w. bishop, p. m. kreiser, & j. s. hornsby journal of small business strategy / vol. 28, no. 2 (2018) / 1-15 it to scale production, deliver record sales in the product category, and attain a market cap of $876 billion (merchant, 2017). we therefore propose: hypothesis 3. externally directed innovation is positively related to internally directed innovation. method procedure the data utilized for this study was part of a larger research effort aimed at examining corporate entrepreneurship issues. initially, we used a sample of 310 managers from different organizations participating in executive education programs conducted by a large midwestern public university that focused on general management development. because of the high response rate (approximately 80%), no tests for non-respondent biases or self-selection into/out of the sample were conducted. no incentives were given for survey completion. we believe that this sample is highly appropriate for our study because the managers were at a senior level, there was a wide range of companies and industries represented, and we had a good opportunity for a high response rate. this follows hayton’s (2005) study of first line managers and hornsby, kuratko and zahra’s (2002) study described earlier. senior level managers were selected based on floyd and lane’s (2000) contention that senior level managers have ratifying, recognizing, and directing roles in strategy implementation. furthermore, this level of manager was chosen because they were in positions likely to influence stakeholder relationships and to make decisions regarding innovation activity within their companies (delgado-ceballos, aragon-correa, ortiz-de-mandojana, & rueda-manzanares, 2012). senior managers essentially operate as entrepreneurs of their own businesses inside the larger organization, often being held accountable to the results of their units as if they owned them. eleven surveys were discarded due to missing data, resulting in a usable sample size of 299 respondents. nine respondents who identified themselves as professional or “other” with no managerial responsibilities were removed. only those participants who identified themselves as senior-level management were retained for analysis resulting in a research sample of 290 respondents. since we developed some of the scales used in this study, we randomly split the overall sample of 290 respondents into two subsamples; one of 90 respondents and another of 200 respondents. the 90 observation data set was used to test and, in some cases, help us develop our scales. the 200 observation data set was used to test our hypotheses. measures salience. stockholder, employee, and customer salience were each measured by one item using the measure developed by agle et al. (1999). tests for construct validity of these measures were demonstrated by prior research. although the scales for salience were single item measures, we did not assume that they were measured without error. since we had no reliable estimates for these measurement errors, we assigned to each single item factor the average errors of the multiple item factors as calculated using their coefficient alphas and standard deviations (jöreskog & sörbom, 1993). the instruction for the items was, “using the following descriptions, please circle the number in the boxes following each statement that corresponds most closely to your observations.” thus, for example, the statement used to measure stockholder salience was, “stockholders are highly salient to our organization (definition: receive high priority from our management team).” the response choices for salience were 1 = strongly disagree; 2 = disagree; 3 = slightly disagree; 4 = neither agree nor disagree; 5 = slightly agree; 6 = agree; 7 = strongly agree. proactiveness. to measure proactiveness we used the social proactiveness scale, which was developed by us based upon clarkson’s (1991) research. as mentioned earlier clarkson did not survey members of the organizations he studied to measure proactiveness; rather he examined published materials about them. for our purposes we believe that a self-report survey instrument is the better way to go. first, we were more interested in behavior than in labels that could be applied. we see this as a possible limitation of clarkson’s data source. second, we believe that the survey methodology would be more accurate since the respondents were senior management and we received responses directly from them rather than information that has been filtered and prepped for a non-anonymous public forum. third, the survey method was more fine grained and faster. fourth, we also believe that this approach allows respondents to more candidly and accurately assess and rate their organizations on the specific dimensions germane to our research. fifth, and finally, with the survey method it is possible to measure variables on a large sample of firms concurrently. based upon clarkson’s work, we developed 14 items designed to score organizations on social proactiveness. we submitted these to an exploratory factor analysis (efa) and extracted two primary factors measured by 8 items. based upon their content we labeled them human resource ethics and community/environmental ethics. the hr ethics factor addressed internal issues related to employees (equal treatment of employees, employee empowerment, legal/ 7 m. g. goldsby, d. f. kuratko, j. w. bishop, p. m. kreiser, & j. s. hornsby journal of small business strategy / vol. 28, no. 2 (2018) / 1-15 ethical problems, code of conduct/ethics, and diversity). the community/environmental ethics factor addressed external issues such as environmental policies and community groups. the items were scored on a five point scale (1 = no involvement, 2 = little involvement, 3 = moderately involved, 4 = very involved, 5 = completely involved). the factors made methodological and theoretical sense. table 1 shows the final items for the proactive variables. innovation. innovation was measured by asking the respondents to rate the importance of several dimensions of innovation as they pertained to the development, delivery, and application of new products, services, and processes. the scale was scored on a one to seven scale with 1 being “not important at all” and 7 being “extremely important.” table 2 shows the final items for innovation and the response choices. by asking respondents how important they table 1 social proactiveness scale please indicate the degree to which your company is involved with the following items. no involvement moderately involved extremely involved hr ethics 1 2 3 4 5 equal treatment of employees 1 2 3 4 5 employee empowerment 1 2 3 4 5 legal/ethical problems 1 2 3 4 5 code of conduct/ethics 1 2 3 4 5 valuing diversity 1 2 3 4 5 community/environmental ethics external environmental policies 1 2 3 4 5 community relations 1 2 3 4 5 employee involvement in community groups and functions 1 2 3 4 5 deemed new products, services, and processes that are developed each year, this scale holds a number of advantages over other scales that ask for the specific number of innovations developed. first, we contend that it may be difficult for managers to accurately assess the actual number of new products, services, and processes developed, particularly in large companies. however, they will have a good sense of the attention and importance that the company places on innovation. second, such cardinal number counts are difficult to standardize across companies of different sizes and in different industries. third, cardinal number counts may belie the actual importance a company places on innovation. hence, we believe that the items of the importance of innovation scale captures a company’s overall approach to new product, service, and process innovation and thereby accurately reflects the definition of our construct. results construct validation we employed the split sample method to test our scales for evidence of discriminant and convergent validity. we selected at random 90 observations from our final usable sample of 290. we then subjected the 8 “importance of innovation” items and the 14 “social proactiveness” items to an exploratory factor analysis (efa). we subsequently retained 16 items representing the 4 latent factors. six of the initial “social proactiveness” items cross-loaded or failed to load on any factor and, consequently, being uninterpretable, were dropped from further analysis. table 3 shows all of the remaining items that were used in hypothesis testing as well as their factor loadings. confirmatory factor analysis (cfa) having settled on the manifest indicators for our latent variables, our “set aside” data set of 200 observations was used for all subsequent analyses by using lisrel 9.2. prior to testing our hypotheses, we performed a cfa on the 19 items used to measure our constructs (see table 3). as shown, the hypothesized measurement model fit the data well (c2 (n = 200), = 290.47, df = 134; root mean square error of approximation (rmsea) = .075; comparative fit index (cfi) = .95; tucker-lewis index (tli) = .94; standardized root mean square residual (srmr) = .060). the descriptive statistics for our scales, along with their intercorrelations and reliability coefficient alphas are reported in table 4. against this base line model, we tested two alternative 8 m. g. goldsby, d. f. kuratko, j. w. bishop, p. m. kreiser, & j. s. hornsby journal of small business strategy / vol. 28, no. 2 (2018) / 1-15 table 2 importance of innovation scale please indicate the degree of importance your company attaches to each of the following performance criteria by circling the appropriate number. innovation performance criteria not at all important moderately important extremely important externally oriented innovation number of new products or services developed 1 2 3 4 5 6 7 number of new products or services brought to market 1 2 3 4 5 6 7 speed with which new products or services are developed 1 2 3 4 5 6 7 speed with which new products or services are brought to market 1 2 3 4 5 6 7 internally oriented innovation ability to respond quickly to market or technological developments 1 2 3 4 5 6 7 ability to pre-empt competitors in responding to market or technological developments 1 2 3 4 5 6 7 incorporation of technological innovations into product/ service offerings 1 2 3 4 5 6 7 incorporation of technological innovations into internal operations 1 2 3 4 5 6 7 models. in model 2, we tested the possibility that our instrument could not differentiate between internal and external proactiveness. hence, we allowed all proactiveness items to load onto a single factor. the χ2 difference test (bollen, 1989) was used to compare this model with the hypothesized one. the results (δχ2 (n = 200) = 17.02, df = 6) were significant, demonstrating that the hypothesized model fit the data better than the alternative one. we also tested the possibility that our instrument could not differentiate between internal and external innovation. to do so we allowed all innovation items to load on a single factor and applied the δχ2 test (δχ2 (n = 200) = 194.62, df = 6). again the hypothesized model fit the data better than the alternative. as summarized in table 5, the baseline model proved to be a better representation of the data than either of the alternative models. hence, we concluded that our hypothesized model was preferred and appropriate for hypothesis testing. hypotheses testing we estimated the hypothesized structural model shown in figure 1. the model fit the data well (c2 (n = 200) = 296.24, df = 142; rmsea = .073, cfi = .95; tli = .94; srmr = .065). see figure 2. support for the hypotheses were determined by the significance or non-significance of the associated path. based upon the criterion, hypotheses 1a, 1c, and 1d were supported, but h1b, h1e, and h1f were not. hypothesis 2a was supported by the data, but hypothesis 2b was not. hypothesis 3 was supported. we were somewhat surprised that customer salience was not significantly associated with either form of proactiveness. however, a further and closer examination of the data led us to what we believe is a reasonable explanation of this outcome. a frequency table and distribution analysis for the customer salience variable revealed that over 80% of the responses were concentrated in the ‘agree’ or ‘strongly agree’ choices. hence, there was very little variance available in the customer salience variable to form a statistically significant relationship with other variables, certainly not the proactive variables. for customers to be given consistently high salience across the board should not surprise us. in fact, it may be considered more of a surprise if it was not this way. that is, customer salience must be high and remain high for the organization to continue to exist. in other words, customer salience will behave more like a (high scoring) constant and not covary with much of anything. an important implication of this finding is that if researchers wish to uncover independent variables associated with innovation or other organizationally valued outcomes, then they will likely have to look elsewhere besides customer salience. on the other hand, future researchers may want to conduct longitudinal studies on organizations whose customer salience varies over time. it may be that over time those organizations with low customer salience may tend to fall by the wayside and, therefore, be unlikely to be represented in a survey population of this type. 9 m. g. goldsby, d. f. kuratko, j. w. bishop, p. m. kreiser, & j. s. hornsby journal of small business strategy / vol. 28, no. 2 (2018) / 1-15 table 3 scale items and factor loadings salience salient: stockholders .98 salient: employees .96 salient: customers .96 hr ethics equal treatment of employees .71 employee empowerment .67 legal/ethical problems .71 code of conduct/ethics .88 valuing diversity .74 community / environmental ethics external environmental policies .58 community relations .45 employee involvement in community groups and functions .63 externally oriented innovation importance: number of new products or services developed .66 importance: number of new products or services brought to market .66 importance: speed with which new products or services are developed .87 importance: speed with which new products or services are brought to market .80 internally oriented innovation importance: ability to respond quickly to market or technological developments .84 importance: ability to pre-empt competitors in responding to market or technological developments .93 importance: incorporation of technological innovations into product/service offerings .90 importance: incorporation of technological innovations into internal operations .82 table 4 means, standard deviations, coefficient alphas, and correlations construct means sd 1 2 3 4 5 6 7 salient: stockholders 5.13 1.82 n/a salient: employees 5.41 1.16 .23** n/a salient: customers 6.05 1.09 .19* .52*** n/a hr ethics 5.36 1.15 .27*** .38*** .24** (.86) community environment 4.63 1.73 .11 .24** .16* .42*** (.73) externally oriented innovation 5.19 1.08 .15 .03 .03 .31*** .14 (.93) internally oriented innovation 4.29 1.45 .07 -.01 -.03 .20** .14* .52*** (.83) coefficient alphas are on the diagonal. * p <.05, ** p <.01, *** p <.001. discussion and implications innovation is one of the key organizational outcomes associated with corporate entrepreneurship and competitiveness. therefore, research that uncovers factors that influence innovation is very pertinent to entrepreneurship research. this paper examined the relationships between three types of stakeholder salience (stockholders, employees, and customers) and social proactiveness, as well as the relationship between social proactiveness and innovation. we posited that maintaining positive stakeholder relationships leads to more proactiveness with regard to social issues. our reasoning is that adopting a proactive posture leads to a firm taking more risks and being more entrepreneurial. our findings, however, were mixed. our results suggest that companies that focus on employees tend to be more proactive with regards to internal and external social issues. this in itself is not too surprising, because firms that treat their employees well have an orientation that would lead to social responsiveness in other domains in society; i.e., the company does not focus on the bottom line over the wellbeing of its employees and the community. given this statement, it may not be overly surprising that placing salience on stockholders did not lead to socially proactive behavior with regard to the community and external environment. this is consistent with many business ethicists’ views on the relationship between stockholder salience and corporate social performance. however, one might expect to find a relationship between placing priority on customer salience and community/environmental ethics, but this was not supported by the data. perhaps these findings support the southwest airlines approach to business. companies that take care of their employees tend to meet internal and external expectations well. we hypothesized that companies that are more proactive with regards to social issues may adapt a posture that leads to more innovation. since corporate social responsi10 m. g. goldsby, d. f. kuratko, j. w. bishop, p. m. kreiser, & j. s. hornsby journal of small business strategy / vol. 28, no. 2 (2018) / 1-15 table 5 comparison of measurement models model c2 df dc2 δ df rmsea cfi nnfi srmr model 1: hypothesized (baseline) model 290.47 134 n/a n/a .075 .95 .94 .060 model 2: social proactive model 307.49 140 17.02** 6 .077 .95 .93 .062 model 3: innovation model 485.09 140 194.62** 6 .116 .89 .86 .089 ** p < .01 employee salience customer salience com env external innovation internal innovation + + + + hr ethics + stock salience + + + + figure 1. hypothesized model employee salience customer salience com env external innovation internal innovation hr ethics stock salience .22** .02 ns .32** .38** .34** .05 ns .01 ns .00 ns .54** figure 2. standardized coefficients χ2 (n = 200) = 296.24, df = 142, rmsea = .073, cfi = .95, tli = .94, srmr = .065 11 m. g. goldsby, d. f. kuratko, j. w. bishop, p. m. kreiser, & j. s. hornsby journal of small business strategy / vol. 28, no. 2 (2018) / 1-15 bility is often a discretionary decision, we argued that firms that deal in an open and creative fashion in those domains may approach opportunities and problems in a more proactive way and thus be more innovative. additionally, social issues may provide avenues for business opportunities as well. for example, the green movement is ripe with business opportunity according to current business thought. however, our data suggests that proactiveness in internal social issues (i.e., hr ethics) leads to innovation, but external social issues do not influence it. this finding does not warrant evading community and environmental ethics (i.e., community/environmental ethics), since innovation is only one performance outcome for a company. however, if a company is looking for sources of new business opportunity, it may find internal social issues a better avenue for innovation. but perhaps most importantly, the results of the study offer interesting insights into the impact of stakeholder management on innovative activity. while researchers have proposed the link between stakeholder management on entrepreneurship, no empirical research has examined this link. this study’s findings suggest that making employees a priority leads to a more proactive approach to hr and community/environmental issues. a somewhat surprising, but potentially intriguing, finding was that proactive hr management leads to more focus on externally directed innovation, but that there was not a link between proactive community/environmental ethics and externally directed innovation. research on corporate entrepreneurship, such as kuratko, ireland, covin, and hornsby (2005) and hornsby, kuratko, shepherd, and bott (2009), that focuses on the internal environment as a source of innovation seems to support our findings. our findings indicate the importance of placing salience on employees as a major stakeholder in the company’s entrepreneurial strategy. companies that do so will tend to be more ethical in hr practices, which creates a supportive environment for employees to share their ideas for improving organizational competitiveness in the marketplace. additionally, our findings indicate that once market opportunities are identified, companies that place salience on their employees and operate in an ethically proactive way with regard to hr practices are then able to make needed internal changes to capitalize on new external innovations. research on social exchange theory supports this finding, suggesting that employees will match commitment toward their organization based on the level of support their employing organizations have for them, referred to as perceived organizational support (pos) (bishop, scott, goldsby, & cropanzano, 2005; eisenberger, huntington, hutchison, & sowa, 1986). we can imagine that with regard to innovation, organizations that place salience on employees would create a supportive environment for generating new market ideas, and, in turn, employees would be more amenable to making the needed changes inside the company to deliver on the opportunities (senge, 2006; schein, 2010). again, although our findings did not show a significant relationship between community/environmental ethics and external innovation, it must be kept in mind that there are other performance measures such as profit, market share, and growth where it may play a role, especially with regard to reputational issues. however, the results do indicate that if a company seeks to be more innovative, it should strongly consider the interests of its employees in its strategy and operations. one of the primary contributions of our study is the development of two new measures that can be employed in future organizational research. we modified clarkson’s (1991) measure to develop a new social proactiveness scale, and we also developed an eight item importance of innovation scale to measure perceived innovation activity in the responding companies. the social proactiveness scale provides a reliable and valid measure that can be utilized in future entrepreneurship and business ethics research. this scale offers researchers a valid measure in assessing the proclivity of organizations to draw upon social issues when making strategic decisions, and thus we believe that future entrepreneurship research efforts would be wise to account for the influence of such effects. further, there is a great need for valid measures in innovation research, and such measures can be gainfully used to further the inferences drawn from future studies related to innovation and its many positive outcomes. scales such as entrepreneurial orientation (covin & slevin, 1989), entrepreneurial intensity (ireland, kuratko, & morris, 2006), and the corporate entrepreneurship assessment instrument (hornsby et al., 2002; kuratko, hornsby & covin, 2014) have helped to increase the importance of understanding the role of antecedents, elements, and outcomes when implementing innovation as a strategic initiative. the results of the current study offer continued evidence related to the importance of such initiatives. in this regard, our study prompts several directions for future research. first, we examined the influence of social proactiveness on innovation performance. there may be other non-financial performance metrics that are also worthwhile for organizations to pursue. future studies should examine such outcomes. for example, the influence of social proactiveness on organizational learning would be an interesting area to examine. second, we used survey data to test our hypotheses. studies using objective data to test 12 m. g. goldsby, d. f. kuratko, j. w. bishop, p. m. kreiser, & j. s. hornsby journal of small business strategy / vol. 28, no. 2 (2018) / 1-15 the relationship between stakeholder salience, social proactiveness, and innovation performance would help to provide stronger generalizability to our primary findings. third, we acknowledge that the influence of social proactiveness on innovation performance may strengthen over time. future research using longitudinal data would provide more robust evidence of the findings discussed in this research. our study is intended to serve the entrepreneurship field in examining whether proactiveness toward internal and external social issues affects innovation, and also to offer guidance on how corporate entrepreneurs can find new sources for creating products, services, and processes. many companies today are expecting senior managers to behave more like owners of their own small businesses inside a larger organization. for example, the magic kingdom theme park inside walt disney world restructured the responsibilities of its general managers to be in charge of the attractions, food and beverage, and merchandise within the geographic area they supervise. previously attractions, food beverage, and merchandise had their own respective general managers, but, with the restructuring, responsibilities in these areas are now more localized. essentially the five areas of the theme park are assessed as individual business units with a bottom line assessed to each general manager. the goal of the restructuring was to spur more entrepreneurial behavior inside the parks and resorts division with general managers viewing their company roles as small business owners of their own “land” (fantasyland, tomorrowland, adventureland, frontierland, or liberty square) rather than as generic managers within the larger corporation (pedicini, 2016). as business becomes increasingly competitive and dynamic with the advent of new technologies and developing markets, we can expect more corporations to operate with this outlook (kuratko, hornsby, & hayton, 2015). while this study does not provide unequivocal evidence to focus on internal social issues as sources of innovation, it does provide a starting point for future researchers to empirically test the nature of stakeholder relationships, social issues, and innovative activity. references agarwal, p. k., kumar, p., swati, g., & tyagi, a. k. 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(2009). how do threshold firms sustain corporate entrepreneurship? the role of boards and absorptive capacity. journal of business venturing, 24(3), 248-260. stra tegy conventional strategy frameworks and their applicability to smes: lessons from a case study khai sheang lee gunn hua lim soo jiuan tan national university of singapore abstract two of the most popular strategy pameworks in the literature are the portfolio approach in strategy decision-making and porter's (l980) pamework of 3 generic strategies. this paper exomines in depth the applicability of these strategy approaches io small and medium size enterprises (smes) and complements this with a diagnosis of an actual case study of a sme competing against a bigger firm. smes are generally definedat businesses having not more than 500 employees (cox, hooley and lynch, l994). in our diagnosis, we highlight the hidden assumptions and flaws of these popular strategy approaches, which made them unsuitable for smes, who faced resource comnaints and disadvantages. ln doing so, we demonstrate the importance of adopting a diferent perspective in sme strategy formulation, one that could explicitly consider the impact ofsmes'esource constraints and competitive reactions of bigger firms in the market. lee, lim and tan's (l999) model is then extended and used to show that there are alternative strategies to niching for smes. introduction an extensive literature can be found that provides guidance to small and medium size enterprises (smes) in their strategy formulation. smes are generally defined as businesses having not more than 500 employees(cox, hooley ik lynch, 1994). in the literatureon smes'trategydecisionmaking, the studies can be categorised into three areas. the first category involves studies such as moore and longenecker (1987) and cook (1992) which set out to identify the factors that make smes successful. the other two categories are the prescription of strategic planning processes (e.g., waterworth, 1987; scarborough tk zimmer, 1991; bhide, 1994), and the derivation of heuristics for day-to-day operations of smes (e.g., bennett, 1989; tarkenton lk boyett, 1991). in the marketing literature, studies have looked into the marketing mix strategy formulation of smes. for instance, waterworth (1987)and paley (1989)discussed how the 4 p's of marketing and the product life cycle concept, respectively, should be adapted for smes. in addition, williams (1990)and gerson (1994)identified a set of new "p's" to assist smes in their marketing planning elforts. 25 journal ofsmall business strategy volume /0, no. l spring/summer 1999 however, there are two critical limitations that are common to the current literature on smes'trategies.first of all, although the focus of this literature is on the smes, in their prescriptions to smes on strategy decision-making most of these works fail to take into account explicitly the resource limitations faced by smes. instead, strategy frameworks implicitly designed for bigger firms with plentiful resources are liberally borrowed and sold as solutions to smes, with little regards that resource constraint affects the letters'ompetitive strategy formulation. another limitation is that the existing literature on sm es contains strategy recommendations that do not take into explicit account competitive reactions, especially those from the bigger firms, although it generallyacknowledgesthat this is an important consideration. competitivereactions from bigger firms are crucial in determining the survival of smes in the market place. this is because the smes'argin of error is narrow by virtue of their resource limitations, and the fact remains that the bigger firms with their deep pockets can easily launch aggressive attacks on the smes market niches. in short, the extant literature does not adequately address the issue of how resource-scrapped smes can anticipate and react to competition from the bigger firms. given this lack of literature on competitive strategy for smes, and in the face of competition from bigger firms, most smes have turned to popular strategy approaches for directions, without realising the hidden dangers in doing so. two of the more popular strategy frameworks in the literature are the portfolio approach in strategy decision-making (e.g., kotler, 1996) and porter's (1980) framework of 3 generic strategies. in this paper, we shall examine in depth the applicability of these conventional strategy approaches to smes. we study an actual case of a sme (chun king which was under the ownership of yeo hiap sang —a medium-sized singapore-based company) competing against a bigger firm (la choy which was owned by con-agraa large american-based multinational corporation). the case is adapted from one written by kerrin and peterson (1993). by doing so, we hope to uncover and highlight the hidden assumptions and ilaws of the popular strategy approaches, which made them unsuitable for smes with resource constraints. we will also extend lee, lim and tan's (1999) game theoretic model on generic strategies for resourcestrapped smes and apply it to the case of chun king. the case study chun king had been a household name associated with chinese shelf-stable foods since jeno paulucci, who started and incorporated the company, single-handedly introduced chow mein to americans in the early 1960's. sales increased every year, bolstered by award-winingconsumer advertisements, and exceeded 950 million in 1965. the following year, the company was sold to rj reynolds industries. in 1984, nabisco assumed control over the company. nabisco followed the portfolio approach, specifically the bcg approach, in managing its businesses. under this approach, the business strategy and objectives of nabisco's various business units (of which chun king was one) were designed to complement each other and to provide an acceptable mix of profit and risk for the entire corporation. in the bcg approach, each business unit was classified into one of 4 categories, namely question marks, stars, cows, and dogs, depending on its relative market share and growth rate. in the case of chun king, it was the market leader in its field, while the market was a mature one with little growth potential. hence, chun king was regarded as a typical cash cow by nabisco's management. it was therefore managed for short-term profits, while sacrificing market share and sales volume. in fact, its line of frozen food marketed under the chun king's brand was sold to a major competitor con-agre, when it was decided that chun king should not be in frozen foods, as its market growth rate appeared to be in decline. 26 journal ofsmall business siraiegy volume l0, no. i spring/summer l 999 in 1988 iur nabisco, chun king's parent company became private through a leveraged buyout (lbo), chun king was sold to yeo hiap seng for about $52 million, to satisfy antitrust regulations. yeo hiap seng, a singapore based company, was relatively new to the u.s. market. financially, it was also not as strong as con-agre who owned la choy, the major competitor of chun king. con-agra paid us$ 1.36billion in cash and stock for beatrice company, which owned la choy, in 1990. at the time of its sale to yeo haip seng, chun king was making profits of between us$2-3 million on the back of sales estimated at some us$45 million. sales and before tax profits for yeo hiap seng in 1989 were s$248 million and s$13 million respectively. in comparison, con-agra was much bigger. its 1989 sales reached us$ 11,340 million. during the period of uncertainty created by the lbo, la choy mounted an aggressive campaign to increase its market share. bolstered by the resources of its rich parent, con-agre, la choy was able to erode chun king's distribution base with its intense marketing eiforts. chun king estimated that it lost about 230,000 cases in sales to la choy during this period. besides la choy, chun king faced competition from other competitors. these included kikkoman in sauces, general mills in packaged dinners, china boy in noodles, and geisha in vegetables. together, la choy, kikkoman and chun king accounted for 85% of the chinese shelf-stable foods market in the u.s. the new owner, yeo hiap seng, not wanting to rock the boat, leii the operations of chun king to the existing management (at least in the initial stage), which was inherited from nabisco's days. when faced with the challenge of providing strategic directions to guide chun king into the future, chun king's management proposed two alternatives: (a) the conservativestrategy, and (b) the aggressive strategy. the conservative strategy entailed maintaining the status quo, which was basically to continue managing chun king as before: to generate some cash and profits while making some incremental adjustments to its operations in the process. however, this might not be consistent with the objectives and goals that the new owner yeo hiap seng might have for the newly acquired business. the aggressive strategy called for heavy investments, and attempted to gain some lost grounds from la choy, through increased efforts in promotions, new product developments, and other marketing support. this would also mean that short-term profits would suffer, but with the hope that long-term profitability would be improved. chun king' management was unsure as to which of these two alternatives was the best one to follow. analysis in this section, we shall evaluate the effectivenessand appropriatenessof the strategy alternatives identified by chun king's management, taking into explicit account the fact that yeo hiap seng is a much smaller firm, and hence is resource disadvantaged, compared to con agra. yeo hiap seng's sales, for example, in 1989 was a mere $248 million compared to us$ 11,340 million in sales for con agre. in addition, we explicitly consider the competitive reactions from chun king's key competitor la choy, in evaluating the proposed strategy alternatives for chun king. chun king's portfolio strategy to understand chun king's current position, we need to examine how it was managed previously. as stated in the case, nabisco followed the "portfolio approach" to strategy formation, which was made famous by the boston consulting group (bcg approach) and general electric(ge multifactorportfolioapproach). thus, chun king was managed as a typical 27 journal ofsmall business strategy volume /0, ato. i spring/summer /999 cash cow by nabisco's management. in accordance with standard bcg prescriptions, there were two possible strategies for a cow type portfolio —to "maintain" the status quo, or to "harvest." nabisco chose to harvest, perhaps in anticipation that the chun king portfolio would move from the mature to the decline stage of its life cycle, hence becoming a dog portfolio, as the bcg approach suggested. chun king was thus milked for short-term profits and cash, with little attention being paid to its market share and sales volume. in addition, advertising expenditures were reduced and chun king was maintained to be "lean." in this case, there were two fatal problems with following such a harvest strategy. first, harvesting led to a self-fulfilling prophecy that the cow portfolio eventually became a dog. second, harvesting weakened chun king, which created opportunities for its main competitor, la choy. as a result of reduced advertising and marketing support for chun king, its sales fell and its brand equity suffered. these in turn reinforced nabisco's prior beliefs that chun king was moving from a mature to a decline stage. in response, harvesting activities were further accelerated to maximize short term profits, which in turn aggravated the situation, until chun king truly became a "dog." hence, the suggestion based on the bcg approach that a portfolio would evolve from a cow to a dog was seemingly confirmed, and the prescription for the harvesting strategy appeared validated. we contend that the transformation of chun king from a cow to a dog portfolio was not due to some "natural forces" like the life cycle phenomenon as suggested by the bcg approach. instead, it was due to the adherence to the harvest strategy, which led to a self-fulfilling prophecy. harvesting weakened chun king, making it vulnerable to competitors'ssaults. for a sunset industry this would not be a serious problem, as there would be few, if any, competitors who would be prepared to invest heavily into such markets. nor would it be an issue in an industry where there were no competitors at all. however, this was not the case for chun king, as the market still had some growth potential and a few major competitors existed such as la choy, kikkoman, and china boy. chun king's weakened state thus created opportunities for these existing competitors. this was especially so for its key competitor la choy, who exploited the situation to transform its supposedly dog portfolio into a cow. our analysis here thus raised serious questions about the validity of portfolio type strategy prescriptions in competitive situations, and the applicability of the portfolio approach in general, as tools for competitive strategy formulation. in particular, strategy prescriptions based on portfolio type approaches are simplistic in that they do not take into explicit account competitors'eactions. strategic reactions by la choy la choy, chun king's key competitor, was a late entrant to the market. therefore according to the bcg approach, the la choy business unit would be classified as a dog type portfolio. this was because, being new, its market share was small, and the market was mature, with little growth expected. if the reasoning based on the bcg approach were correct, then la choy's management would be irrational for investing in a dog. in the views of the portfolio advocates, la choy's market entry was certainly doomed to fail. however, against conventional wisdom as advanced by the advocates of the portfolio approach, la choy not only entered the market, it also invested heavily to aggressively penetrate the market. it eventually succeeded in becoming the market leader in the chinese shelf-stable foods market. therefore, the obvious question was how did la choy manage to transform a supposedly dog portfolio into a cow, or even better, into 28 journal ofsmall business strategy volume 10, no. 1 spring/summer 1999 a star? one thing was certain, they did not follow the portfolio approach. instead, they seemed to have defied it, and had done the opposite to what was prescribed by the portfolio approach. la choy's success could be attributed to a number of reasons. first and foremost, they recognized the opportunities presented by a weakened chun king, as a result of the latter's adherence to the harvest strategy. hence, as nabisco milked chun king, la choy embarked on aggressive marketing actions to make inroads into the market, financing such aggressive campaigns by exploiting the deep pockets of its parent, con-agre. in doing so, la choy effectively accelerated chun king's decline, and strengthened nabisco's prior beliefs that chun king would become a dog over time. given such beliefs, nabisco would also not have contemplated countering la choy's offensiv. in addition, la choy also took advantage of chun king's internal problems created by the leveraged buy out by rir-nabisco in 1988. with the management of chun king thus distracted, la choy mounted an aggressive campaign that successfully gained distribution and shelf space at chun king's expense. in short, la choy's management was much more adept in devising competitive strategies against chun king, as exhibited by their readiness to seize the opportunities created by chun king's own actions. while chun king planned to exit, la choy planned to increase its hold on the market. their competence in devising competitive strategies is also reflected by their use of con-agra's deep pockets to maximize its market gains against chun king by investing aggressively, while chun king harvested. finally, the timing of their marketing actions is excellent. when chun king was weak and distracted, la choy seized the opportunity to attack. these actions suggested that la choy's management understood the importance of incorporating the competitor's actions/reactions into their competitive strategies. unlike the case of chun king's management, whose adherence to the portfolio approach in strategy decision making, led it to overlook this fundamental perspective. a critical limitation of the portfolio approach is thus the ignorance of competitive interactions in its strategy prescriptions, which calls into question its relevance in the real world where markets are becoming increasingly competitive. consequences of ignoring resource disadvantages when yeo hiap geng bought over chun king, it was probable that they thought they had bought a cash cow, as suggested by the premium they paid for the purchase of the company. to the new owner, chun king's management (which was the same as that under nabisco) proposed two alternatives: (a) the conservative strategy, and (b) the aggressive strategy, in their attempt to provide future strategic directions for chun king. it appeared that these alternatives suggested were taken directly from the menu of standard portfolio strategy prescriptions, which were namely to maintain (or the conservative strategy), to invest (or the aggressive strategy), to harvest, and to divest. one thus wonders if these portfolio type strategy prescriptions would work this time around, given that they had failed the last time. we contend that both the strategy alternatives proposed were doomed to fail, if adopted. following the conservative strategy, which was essentially status quo, would only lead to further erosion of chun king's fast declining market share by la choy. the ultimate outcome would therefore be the eventual demise of chun king. on the other hand, following the aggressive strategy to compete head-on with la choy would be equally disastrous, if not even worse. this is because it would provoke an equally or even more aggressive counter response from la choy which would accelerate profits erosion. an aggressive strategy would also require vast financial resources to sustain. this was where la choy would have the upper hand, given the deep pockets of its parent con-agre. chun king, backed by yeo hiap seng, which was a much 29 journo! ofsmall business strategy volume l0, no. i spring/summer l 999 smaller finn compared to con-agra, would be disadvantaged, and hence it would be suicidal for it to follow the aggressive strategy. obviously the strategy alternatives suggested by chun king's management had failed to take into consideration la choy's likely reactions. this was of no surprise, as they seemed to have been adopted directly from the menu of standard portfolio strategy prescriptions. equally critical was the fact that these suggestions also failed to recognize the resource disadvantage faced by chun king under its new owner, and how this would impact competitive strategy formulation. while an aggressive strategy might be suitable for a firm with resources comparable to that of conagra's, it would be suicidal for a much smaller firm like yeo hiap seng. as such, for chun king to take on la choy in this manner would be tantamount to one wearing a hat much too big for one's head. it is, therefore, our contention that it is purely wishful thinking that by following such portfolio type strategy prescriptions, chun king could have survived the competitive assaults from la choy. limitations of the portfolio approach as a strategy prescription tool our analyses thus far have raised serious questions about the applicability of the portfolio approach as a strategy tool for smes. we shall now examine in-depth the various limitations of the portfolio approach in general, and when applied to smes in particular. conceptually, the portfolio approach (both the bcg and the ge approaches) prescribes strategies based on two constructs, namely the market's attractiveness (of which market growth rate is one factor) and one's business strengths(of which relative market share is one factor). any strategy prescription based merely on these two constructs is overly simplistic and questionable. in the bcg approach, the implicit assumptions are that high growth markets are more profitable than low growth ones, and that profits increase with increasing market shares. both these assumptions become highly questionable in a competitive environment. that la choy succeeded in turning a supposedly dog portfolio into a cow, refutes the assumption that high growth markets are surely more profitable than low growth ones. cases of successful businesses following the niching strategy (such as kikkoman, general mills, china boy, and geisha in the case), which implies that the market shares of these businesses will be small, refute the other assumption that profits increases with increasing market shares. an alternative portfolio approach to the bcg is the ge approach, which is more sophisticated, as it requires a multi-factor analysis of the market attractiveness and one's business strengths. however, the multi-factor analysis itself is subjective, as the process requires one to collapse the multitude of factors identified into two main constructs by assigning the appropriate weights and ratings. it is also not clear what the appropriate weights and ratings ought to be, given that there is no objective criteria for their assignment. both the bcg and ge approaches also suffer from subjectivityof another sort. in the bcg (ge) approach, each portfolio is to be classified into one of 4 (6) types, which results from dividing the portfolio matrix into 2x2 (3x3) cells. this presumes that one can objectively define what constitute high or low relative market shares and market growth rates in the case of the bcg approach, and what constitute high, medium, or low market attractiveness and business strengths in the case of the ge approach. an accurate determination of the type of portfolio is important in these approaches precisely because the strategy prescriptions are portfolio type-specific. imagine the consequences of a dog portfolio wrongly classified as a cow, and hence milked or harvested as prescribed by the portfolio approach. thus, it was probable that chun king, which was regarded as a cow portfolio by nabisco, was a dog under yeo hiap seng. 30 journal ofsmall business strategy volume 10, no. i spring/summer l 999 even if one is able to determine correctly and objectively the type of portfolio for the business unit of interest, one quickly encounters yet another problem, that is, the vagueness of the portfolio strategy prescriptions. these consist of a set menu of four standard prescriptions, namely to maintain, to invest, to harvest, and to divest, depending on the type of portfolio identified. although these provide a guide to resource allocations among portfolios, they do not provide details as to how the resources ought to be utilized in competing for markets. for instance, it is one thing to say one needs to invest to create star portfolios, but yet another to be precise as to how one goes about doing it. a scrutiny of the strategy proposals put forth by chun king' management revealed that they were expenditures-driven. the proposals essentially call for either to hold expenditures (as in the conservative strategy) or to increase expenditures (as in the aggressive strategy), without regards as to how these actions could succeed in competing against la choy. in short, the portfolio type strategy prescriptions merely directs one to invest more (or less) in a particular portfolio, given its type, instead of providing strategic directions as to how one should compete for markets, given one's resource position. underlying the portfolio prescriptions on resource allocations is the implicit assumption that funds for investments in the various portfolios of a corporation are internally generated. hence, the portfolio approach focuses solely on seeking a balance in the internally generated cash flows in its prescriptions. this is overly restrictive and is unrealistic. a firm could optimally be in a short cash position if it has many stars, but this should not pose a problem if these business units are financed with funds raised through new external equity, new debt, and/or bank borrowings. as long as the financing is long term and there is no debt maturity mismatch, there is no reason why a firm should restrict itself to making use of only internally generated funds to support new ventures. we acknowledge that firms sometimes intentionally under invest fearing that the release of proprietary information needed to secure external financing may undermine their competitive positions. however, such problems can be minimized through appropriate controls using incentive and monitoring contracts (jensen & meckling, 1976). as a tool for strategy decision making, the most severe limitation of the portfolio approach is its lack of explicit consideration of competitive interactions. this greatly restricts its applicability, as it either suggests that businesses operate in environments devoid of competition, or that competitors are native in that they do not react to actions taken against them. in real life, this is clearly not true for most markets. in fact, markets are becoming increasingly interactive and competitive. the dangers of ignoring competitors'eactions are sufficiently clear and evident from the analysis of the case on chun king. finally, given that the portfolio approach lacks explicit consideration of competitive interactions, it therefore also overlooks the importance of resources, or the lack of it, in its strategy prescriptions. in the case of chun king, whose management appeared to be adherents of the portfolio approach, competitive interactions were completely overlooked in its competitive strategy formulation. hence, when its management proposed the two portfolio type strategy alternatives, little did they realize that these alternatives were not appropriate, given that yeo hiap seng was a firm with much smaller resources than con-agre. for several years after yeo hiap seng bought over chun king, they tried desperately to turn around chun king, incurring severe loses in the process. finally, unable to sustain further losses, yeo hiap seng decided to sell chun king. initially, yeo hiap seng tried to sell chun king as an on-going concern, however there were no takers. eventually, chun king was salvaged for its assets. most of chun king's assets were bought by a subsidiary of con-agre. 31 journal ofsmall business strategy volume 10, no. l spring/summer /999 table i on this page summarizes the limitations of the portfolio approach, which we have discussed thus far. table i limitations of the portfolio approach as a strategy tool limitations issues i questionable ~ do profits increase with increasing market shares? premise ~ are high growth markets more profitable than low growth ones? ~ need funds for investments be wholly internally generated? 2 subjective ~ what constitutes high or low market shares and growth rates? analysis ~ what constitutes high, medium, or low market attractiveness and business strengths? ~ what are the appropriate weights and ratings to apply in the multi-factor analysis? 3 vague ~ how to create stars? prescriptions ~ how to transform dogs into cows and question marks into stars? 4 ignores ~ how do competitors'eactions impact strategy formulation? competitive interactions 5 ignores impact of ~ how do resource constraints impact strategy formulation? resource constraints applicability of porter's three generic strategies to smes returning to the case of chun king, an obvious question was how should it have competed against la choy and its other competitors, given that yeo hiap seng was much smaller than conagra? more generally, how can a sme who is disadvantaged in resources compete against its bigger rivals? following porter's framework of three generic strategies (namely differentiation, cost leadership, and focus strategies), it appears that only the focus strategy concentrating on select market segment(s), is applicable for smes, given their lack of resources. what is known as the focus strategy is also commonly referred to as the niching strategy. smes have been advised to market niche by identifying an unmet need in markets where big firms find it unsuitable to cater to (perry, 1987). in the marketing literature, niching also seems to be the only strategy recommended by researchers for smes (e.g., waterworth, 1987; paley, 1989;tk kotler, 1996). hence, a question that arises is whether the niching strategy is the only option available to smes. 32 journal ofsmall business strategy volume l0, no. i spring/summer l999 in fact, lauenstein (1986) did raise the possibility that niching may not be the only strategy option available to the smes. recognizing this, greenfield(1989) suggested the use of porter' (1980) three generic strategies by smes in competing for markets. however, the wholesale adoption of porter's framework for smes fails to recognise that smes have their own unique characteristics and are not mere miniature versions of bigger firms. thus, the liberal borrowing by smes of strategy prescriptions meant for bigger firms may be inappropriate, if not flawed. as table 2 shows, the smes'esource disadvantages make it difficult or even infeasible for them to follow an industry-wide differentiationstrategy, and the cost leadership strategy, as prescribed by porter. even the smes'bility to niche successfully is questionable, as it is uncertain if the niching strategy is sustainable against aggressive assaults by bigger firms. this is because the focus strategy as prescribed by porter requires smes to acquire differential advantages and/or cost advantages over the bigger firms in the madtet niches served. we thus need to examine the ease with which such advantages can be acquired, and the feasibility of doing so, by smes. table 2 limitations of the porter's 3 generic strategies when applied to smes generic strategy limitations i cost ~ ability of smes to achieve economies of scale and scope? leadership ~ wou idn't bigger rivals be better positioned to acquire economies strategy of scale and scope, and to sustain a low price strategy, using their deep pockets? 2 differentiation ~ ability of smes to gain industry wide differential advantages over strategy bigger rivals? ~ wouldn't bigger rivals be better positioned to acquire differential advantages, using its deep pockets to finance rdtd and market promotions? 3 focus strategy ~ ability of smes to fend off aggressive entries by bigger firms? (niching) ~ what prevents the bigger fums from adopting aggressive entry strategies into niches shown to be profitable? in order to carry out porter's cost leadership strategy, a firm needs to enjoy cost advantages over others in the industry. however, it is doubtful how smes can achieve cost advantages as these are oiien based on economies of scale or scope, given the smes'ostly limited scale of operations (pelham lk wilson, 1996). hence, a sme's cost advantages can only accrue from either the lowering of operating costs and/or having better cost control because of its size. this means that, for the smes, the sustainability of the low cost strategy over time is suspect, as it becomes vulnerable to technological obsolescence and price competition. in the face of aggressive assaults by bigger firms with deeper pockets and superior resource efliciency, the bigger firms are most likely to outlast the smes pursuing a low cost strategy. this seemed to be the case in the competition between lachoy and chun king. lachoy seized the opportunity to expand aggressively, using its deep pockets, upon the take over of chun king by yeo hiap sang. by doing so, lachoy could benefit from even greater economies of scale, which made it a serious threat to chun king. 33 ~ r journal ofsmall business strategy volume /0, no. i spring/summer l 999 similarly, the ability of smes to follow an industry-wide differentiation strategy is questionable. some of the commonly required skills and resources for the use of porter's "differentiation" strategy are not easily satisfied by smes. for instance, the smes may not have the corporate reputation for quality or technological leadership, a long tradition in the industry, or enjoy strong cooperation from channel-members. these were the problems faced by yeo hiap seng in its attempt to enter the u.s. market through the acquisition of chun king. in addition, an industry-wide differentiation strategy oaen requires heavy investments in research and development in product innovation or adaptation. substantial investments in marketing support and promotions are also required to communicate successfully to the whole market the uniqueness of the products developed. only then can the sme achieve the industry-wide competitive advantage of creating a unique consumer perception of its product. it is precisely the lack of resources faced by the sme that this industry-wide differentiation strategy is beyond its reach. here again we question the ability of yeo hiap seng to bear such heavy investments to achieve meaningful differentiation in the u.s. market. based on porter's framework, it does appear that the focus strategy is the only strategy option lea for smes. more specifically, smes have oaen been advised to focus or market niche by offering differentiated products. this is because by focusing on a few select market segments, the investment demands in terms of marketing support and promotions can be significantly reduced to the extent that they are within the smes'esource capabilities. in following a niching strategy, smes could adopt a marketing orientation to build brand equity (pelham ik wilson, 1 996). in the case of chun king, it had a unique product in the form of shelf-stable authentic chinese foods, which was also the competitive advantage of its parent company yeo hiap seng. the company's unique product and its size disadvantage would therefore suggest that chun king follow the niching strategy by targeting at select segments and supplying a differentiated product. limitations of the niching strategy even if we concede that niching is the only strategy option for smes, it is by no means a strategy exclusive to smes. in a fortune magazine survey, more than 75% of the 500 firms surveyed were found to practice market niching for at least some of their products (linneman &. stanton, 1991).this implies that the success of smes in following the n iching strategy must be contingent upon the bigger firms'ontinued neglect or ignorance of certain segments of the market that are targeted by the smes. however, this begs the question of why would the bigger firms choose to ignore these segments if the latter could be served profitably by the smes? several explanations have been advanced by various researchers as to why some market segments are ignored by the bigger firms (e.g., cooper & kleinschmidt, 1987; waterman, 1987; and ghemawat, 1991),as table 3 on the next page shows. what the above popular explanations have in common is a reliance on an irrational or naive behavior on the part of the bigger firms. for example, if being small is advantageous, then why do bigger firms not decentralizeto form smaller business units, so as to compete more effectively in the market niches of interest? some may argue that bigger firms would not want to decentralize because they are locked into inefficientpractices and hence, find it difficult to adapt and change. however, this implicitly assumes that the bigger firms are irrational in that they do not leam to overcome such inefficiencies in the long run. 34 journal ofsmall business strategy volume 10, no. i spring/summer l999 table 3 common explanations of why some market segments are ignored by bigger firms reason rationale i segment too ~ advantages of smallness: flexibility and ability to response small promptly. 2 ignorance of niche ~ bigger firms make mistakes in investments, not realising the profitability profitability of some market segments. ~ bigger firms uncertain about the profitability of some market segments, hence take a "wait and see" attitude. 3 fear of self'igger firms intentionally avoid serving some market cannibalisation segments for fear of self-cannibalisation on current market segments served. in addition, if the smallness of the market niches is the reason for the bigger firms'eglect, then what happens when these markets eventually grow to a substantial size? would not the growth of these segments attract the entry of the bigger firms, given the increasing attractiveness of these markets? similarly, although the bigger firms may be ignorant or uncertain about the profitability of the market niches initially, once these niches are seen to be profitable, would not the bigger firms be attracted to enter these markets? the suggestion that the bigger firms'ear of self-cannibalization is one reason why bigger firms ignore certain market segments (ghemawat, 1991) also lacks credibility. this is because the extent of self cannibalizationdepends on whether there is sufficient product differentiation in the market niches served or to be served. when one compares the extent of losses due to selfcannibalization with that due to conceding of an entire market segment to the sme, surely it makes more sense for the bigger firm to pre-empt the sme's entry by entering these previously ignored market segments? in conclusion, if all the explanations given in table 3 are adequate, then it can be inferred that, short of mistakes and irrational responses by bigger firms, the survival of smes's solely dependent on the altruism of the bigger firms. all the questions and issues raised in this paper, including the sustainability of the niching strategy when adopted by smes, have not been satisfactorily addressed in the extant marketing and sme literature. neither has the issue of whether there are other alternative strategies available to smes, besides niche marketing, been examined. alternative framework to sme strategy formulation chun king should have taken into account both its resource limitations and the possible competitive reactions when formulating its strategies. in this regard, it could apply lee, lim and tan's (1999)model in formulating its strategy. lee et al. (1999)used a game theoretic approach to derive three generic competitive strategies for smes, taking into specific consideration that they oflen face competitors who are well endowed with resources in the markets of entry. we 35 journal ofsmall business strategy volume l0, no. i spring/summer l999 extend lee et all s (1999)model here and use it to show that there are alternative strategies (other than niching) that chun king could have adopted. the revised and extended model is discussed below. in lee et al js framework of generic strategies for smes, the sme's choice of strategy depends on two key dimensions (table 4), the market targeted and the anticipated behavior of these bigger rivals. in particular, the sme has to consider whether the market targeted is an initially ignored market segment or one that is currently being served by the bigger firms, and whether the incumbents will react aggressively against or accommodate its entry. if the sme chooses to target an initially ignored market segment, by following the niching strategy of supplying a differentiated product, then it is important that the sme is able to acquire sustainable competitive advantages. this is important for the sme in order to deter and/or defend against market entry by bigger firms who may be tempted to follow suit. however, given the difficultie faced by many smes in acquiring sustainable competitive advantages against the bigger firms, other strategy options that depend on the anticipated reactions of the bigger firms may be more appropriate for such smes. table 4 generic competitive strategies for smes to successfully penetrate markets the bigger firm's the bigger firm reactions the sme's strategic target 4k accommodates fights degree of product substitutability new market [i] segments differentiated niching strategy ignored by bigger firm the sme [2) substitutable substitution strategy established [4] market served deterrence by bigger firm [3l strategy identical free-riding strategy we expand lee et elis (i 999) model to include also the substitution strategy in addition to the free-riding strategy. in contrast to the niching strategy, in which firms are advised to differentiate their products away from their competitors', in the substitution strategy, firms are advised to position their products as close substitutes of their competitors'. hence, at the limit of substitutability, the firms'roducts become identical to that of their competitors', which is what lee et al. referred to as the free-riding strategy. 36 journal ofsmoll business strategy volume 10, no. i spring/summer l 999 including the substitution strategy in lee et al.'s framework, smes should therefore apply a substitution and/or a free-riding strategy and target the market served by the bigger firm, if it is anticipated that the latter is accommodating in that it will not react aggressively to fight the sme's entry. however, if it is anticipated that the bigger finn will be aggressive (in that it will "act crazy" by choosing to compete aggressively despite the high. costs of doing so), then the sme should adopt a deterrence strategy in entering the market that is served by the bigger firm. in using the deterrence strategy, the sme pre-empts the anticipated aggression from the incumbent bigger firm by credibly signaling to the latter its commitment to stay in the market. lee et al. (1999)suggested that this commitment could be credibly conveyed by the sme via the formation of a strategic alliance. we propose here that a strategic move of committing to high sunk-investments in the market can also serve as a signal of credible commitment and hence deters the bigger firm from undertaking aggressive actions. given that both the formation of strategic alliances and the use of strategic moves share the common objective of deterring the bigger firm from reacting aggressively, we therefore generalize these strategies as a deterrence strategy as shown in table 3. the substitution and the free-riding strategies are effective in forcing the bigger firm to accommodate because the latter finds aggressive actions against the sme too costly in terms of reduced profits in the other segments served by the former. the deterrence strategy is effective because of the threat of costly protracted competition. the successful use of the substitution, free-riding, and deterrence strategies proposed for smes thus results in the accommodation of smes'arket entry by the bigger firms. this suggests that whether smes can penetrate markets dominated by bigger firms and compete successfully against the latter, depending on their ability to devise strategies that force the bigger firms to accommodate their market entry. this applies even if smes lack resources and sustainable competitive advantages compared to their bigger rivals. it is, therefore, not essential for the sme to have a cost advantage in order to apply any of the three generic strategies proposed. hence, given the sme's lack of resources to embark on market developmental elforts and its difficulty in acquiring competitive advantages, it is also proposed that the sme is better off exploiting marketing development efforts by the bigger incumbent firms and avoid being the first-mover in developing new markets. it has been suggested that smes should always follow a niche strategy beginning with market development first before product development, the reason being that it is less risky to develop new customers than new products (perry, 1987). however, even if the smes succeed in developing the market targeted, they may not be able to keep it. smes risk losing the market that they have developed, especially to bigger firms who may be attracted by the smes'nitial successes and therefore decide to enter the market aggressively by exploiting their deep pockets against the smes. this is because to market niche successfully, it is important that smes possess sustainable competitive advantages. given the smes'ack of resources and difficulty in acquiring competitive advantages against the bigger firms, the niching strategy in which smes target new market niches, may not always be suitable to smes. in fact, given the feasibility of smes successfully penetrating markets dominated by incumbent bigger firms even though they lack resources and are disadvantaged, smes should avoid being the first movers into new markets niches that require substantial market development efforts. the exception is when smes can acquire sustainable competitive advantages against bigger firms who may enter the market, and if the cost of entry can be kept small such that it is within the means of the smes without impacting the latter's chances of success in market entry (mascarenhas, 1997). short of these conditions, smes may be better off targeting markets that are already well developed by larger firms, aiming to take a small slice of the developed market. 37 journal ofsmall business strategy volume /0, no. l spring/summer /999 smes should always exploit the larger firms'ilemma in deciding whether to fight or accommodate the smes'arket entry. the larger firm must weigh the cost of fighting versus the benefit of accommodating the sme'sentry. hence, it is not necessarily true that each market entry attempt by the sme will always be met with retaliatory actions by the bigger incumbent firm. cooper, willard, and woo (1984) have also observed that bigger firms do not always compete aggressively against the entry of smes into their markets, and have challenged the conventional thinking that smes should not meet their larger competitors head-on. they therefore raised the possibility of successful direct competition by smes against the bigger firms. complementing their study, lee et al. (1999) provided an economic rationale for the behavior of the bigger firms when faced with entry by smes into their markets, and identified the conditions for successful market penetration by smes. the authors showed that, when incumbents are faced with entry into their markets by sme entrants following the substitution, freeriding, and/or deterrence strategies, the incumbents'ational response is to accommodate entry. the dominant firm chooses not to react because it is in its best interest to accommodate the entry of the new venture. this is because the cost of accommodation is much lower then that of aggressive counter-actions. in fact, the cost of aggressive actions to the dominant incumbent is higher the larger its market share. hence, a dominant fum with a larger market share is less likely to react aggressively to entry into its market. it is also important for smes to explicitly consider the competitive reactions of the bigger firms in market entry. it is through accommodation, however reluctant, by the bigger rivals that smes can profitably penetrate an existing market despite the latter's lack of resources and competitive advantages. how do the strategies for smes identified here compare with porter's (1980) three generic strategies? the most important difference is that our analyses explicitly take into account the resource limitations faced by smes while this issue is not addressed in porter's (1980)prescriptions. based on porter' (1980)framework, it would appear that the only strategy option for smes is to focus or to market niche. however, by explicitly taking into account the resource limitations faced by a sme and the competitive interactions between a sme and a bigger firm, we are able to identify several strategy options(other than the niching strategy) for smes. as implied by our framework of generic strategies for sme (table 3), smes need not always focus on ignored market niches for successfully market entry. nor do they always need to possess sustainable competitive advantages for successful market entry. this is important given the difficulties oren faced by smes in acquiring competitive advantages against the bigger firms. lee et al (1999)illustrated the feastl&ility to smes of targeting markets already well established and served by bigger fiims by following the substitution, free-riding, and/or deterrence strategies. in addition, the authors also showed that in order for the substitution and free-riding strategies to work, the sme does not necessarily need to possess any of the two strategic advantageslow cost position and uniqueness perceived by the customer, identified by porter (1980). what chun king could have done in the case of chun king, it had a unique product in the form of shelf-stable authentic chinese foods, which was also the competitive advantage of its parent company yeo hiap seng. the company's unique product and its size disadvantage would suggest that chun king should follow the niching strategy by targeting at select segments and supplying a differentiated product. the marketing mix strategies should then be tailored accordingly to support the niching strategy thus adopted. chun king's competitive advantage in its authentic chinese foods was sustainable, as it could not be easily imitated by its bigger competitors due to their lack of technological knowhow and experience. continuous innovations by yeo hiap seng would further ensure that its competitive advantage in authentic chinese foods would be sustained. 38 journal ofsmall business strategy volume l0, no. 1 spring/summer l999 however, in following the niching strategy described, chun king might still need to incur substantial investments even if it targeted select segments only, as its operations extended across the whole of u.s. the investments were required to re-position its products and to undertake a major restructuring of its existing distribution structure. this was because of the resulting inconsistency between its new positioning based on authentic chinese foods, which appealed to select market segments, and its existing distribution structure, which reached out to the masses. if it was not feasible or too costly for chun king to undertake a major change in its positioning and distribution strategy, then the niching strategy would not be suitable for chun king. alternatively then, chun king should look into the possibility of using one or a combination of the generic strategies proposed. given that la choy was known for its aggression, this immediately ruled out the possibility of chun king following the substitution and the free-riding strategies. hence, the only viable option lefl for chun king was the deterrence strategy to force la choy to accommodate. this could be achieved if chun king was able to identify and strike a strategic alliance with a party who was comparable in strength to con-agre. this would not only neutralize con-agre's competitive advantage in its size, but also signaled chun king' commitment and ability to defend its market share. these strategy prescriptions are made taking into explicit account chun king's resource disadvantage and the competitive reactions of la choy, and are in contrast to the bgc-type strategy alternatives considered by chun king' management at that time. conclusions in this paper we examined the applicability of the two more popular strategy frameworks in the literature —the portfolio approach in strategy decision-making and porter's (1980) framework of three generic strategies, to smes. this was complemented with a diagnosis of an actual case study of a sme competing against a bigger finn. in doing so, we uncover and highlight the hidden assumptions and flaws of these popular strategy approaches, which made them unsuitable for resource-constrained smes. in addition, we show the importance of explicitly considering the competitive reactions of bigger firms to smes'arket entries. we further propose an extension of lee, lim and tan's (1999)model and illustrate its application to the case examined. references bennett, r. (1989).small business survival london: pitman. bhide, a. (1994). how entrepreneur craft strategies that wotk. harvard business review march~ail, 150-161. cook, k. (1992).ama com late uide to small b iness marketin . lincolnwood: ntc business books. cooper, r.g. gt kleinschmidt, e. (1987).new products: what separates winners from losers. journal of product innovation mana emen 4 169-184. cooper a, willard g., gt woo c. (1984).strategies of high perform ingnew and small firms: a reexaminationof the niche concept. journal of business venturin i 247-260. cox, a., hooley, g., dt lynch, j. (1994).matketing in small and medium-sized companies in john saunders(ed.)themarketin initiative london: prenticehall international,. gerson, r. (1994). marketin strate ies for small business practical marketin techni uesdt tactics menlo park: ntc business books. gi ~9619922mm ' m 6~ igim'm~mw ' i itt2i, 26i171. greenfield, w. m. (1989),devela in new ventures. new york: harper 66k row. 39 journal ofsmall business strategy volume /0, no. i spring/summer /999 jensen, and meckling, (1976). theory of the firm: managerial behaviour, agency costs and ownership structure. journal of financial economics 305-360. kerrin, r. a., /k peterson, r. a. (1993).strate ic marketin roblems: cases and comments 6/e, a 1lyn and bacon, massachusetts. kotler, p. (1996).marketin mana ament anal sis lannin im lementation and control 9/e, prentice hall, upper saddle river. lauenstein, m. c. (1986). what's our arne lano creatin business strate ies that work homewood: dow jones-irwin,. lee, khai s., lim, guan h., gt tan, soo j. (1999).dealing with resource disadvantage: generic strategies for smes, small business economics. linneman, )l,95k j. stanton(1991). makin niche marketin work: how to row bi b actin smaller new york: mcgraw hill mascarenhas, b.(1997).the order and size of entry into international markets, journal of business ~vl 5 12,297.299. moore, c., /k longenecker, j. g. (1987).small business mana ement 7/e cincinnati: southwestern publishing company. paley, n. (1989).'ihe mana er's ide to com titive marketin strata ies. new york: amacom. pelham, a. m., gt wilson, d. t. (1996).a longitudinal study of the impact of market structure, firm structure, strategy, and market orientation culture on dimensions of small-firm performance. journal of the academ of marketin science 24 perry, c. (1987).growth strategies for small firms: principles/k case studies. international small ~bi 5 \ 5 2 l7-25. porter,m.e.(1980).com etitiveadvan e creatin andsustainin su crier rformanc new york: free press. scarborough, n. m., /k zimmer, t. w. (1991). effective small business mana ement 3/e columbus: merrill publishing company. tarkenton, f., gt boyett, j. h. (1991). the com etitive ed e. essential business skills for b 7 995 waterworth, d. (1987).marketin for small busin basinstoke: macmillian. waterman, r. h., jr. (1987).the renewal factor, new york: bantam. williams, lee d. (1990).marketing programs, strategies gc tactics for small and medium size enterprises. international conference of small k. medium scale ente rises. part 2, langkawai, malaysia. ghat sheang lee (ph d.. university of toronto) is an assistant professor of marketing at ihe national university ofsingapore. where he teaches courses in straiegic markeung and entrepreneurial marketing. prior tojoining academia, dr lee practised as a marketing manager with several major corporations. his current research interests include applications ofgame theory to marketing, service marketing strategies, entrepreneurshi p, small business strategies, and strategic management offamily businesses. gunn hua llm(phd., university of pennsylvania) is an assistant professorin ihe department of finance and accounting, national university ofsingapore where he teaches courses in financial management and financial markeis. his current research interests include small business strategies, gray marketing. efficiency and performance of banks and other financial institutions, and the asian financial crisis. soo jiuan tan (ph.d., lyashington university) is an associate professor of marketing at the naiional university ofsingapore, prior tojoining academia, dr tan was with the monetary authority ofsingapore and the eeport credit insurance corporation ofsingapore. her curreni research i nterests are in the arear ofinternational market entry strategies, consumer values and lifestyles, parallel importing, game-theoretic applications in marketing, global product management. 40 strategy publication staff editor dr. joe singer university of missouri kansas city, missouri associate editor gary r. hazeltine professional support services olathe, kansas editorial assistant david k. hensley university of missouri kansas city, missouri editorial advisory board dr. david m. ambrose university of nebraska-omaha dr. chi anyansi-archibong north carolina ajit state university dr. robert brockhaus st. louis university dr. sam j. bruno university of houston-clear lake dr. james j. carroll georgian court college ms. sally a. charles purchasers representative dr. ron cook rider university dr. richard t. dailey university of montana dr. dale dickson mesa state college dr. gwen fontenot marketing solutions dr. fred l. fry bradley university dr. joseph j. geiger university of idaho dr. frederick d. greene manhattan college dr. lynn hoffman university of northern colorado dr. billjackson stephen f. austin state university dr. lawrence klan florida atlantic university dr. kenneth j. lacho university of new orleans dr. thomas j. liesz western state college dr. stephen lucas university of north carolina-greensboro dr. inge nickerson barry university dr. neal r. pruchansky keene state college dr. peter rainsford cornell university dr. matthew c. sonfield hofstra university dr. richard j. stapleton georgia southern university dr. harriet stephenson seattle university dr. di liard tinsley stephen f. austin state university dr. howard e. van auken iowa state university dr. george vozikis the citadel dr. john wallace marshall university a joint publication of the small business institute directors'ssociation and the henry w. bloch school of business and public administration. send subscription requests to randalei ellis, c.p.a., sbida secretary-treasurer, black hills state univetsity, 1200 university, usb 9006, spearfish, sd 57799-9006. annual subscriptions may be ordered at $20 each (u.s. dollars only). international subscriptions add $5 annually for postage and handling. back issues may be ordered at $ 12 each. copyright 1996 small business institute directors'ssociation issn 1081-8510 strategy editor's note as the new vocabulary of competition, with its emphasis on agility, holistically, and synergisticallyresponsive operations begins to shape the way we think about small business, we are increasingly challenged to find new systems for adapting to change and working along with employees, customers, suppliers, and competitors. in this issue, we examine the impact of in formation technology, small business tax legislation and modern valuation while exploring the ethical orientation of small business owners and their resource allocation decision-making. in this age of "information intensification" where gateway 2000 is just a label stuck on other companies'omponents and i-800-flowers floats freely in cyberspace, our lead article by albert l.ederer and donna maupin provides a foundation for small business use of the world wide web. in the following article,the degree and type of information technologie; currently accepted and utilized by small retail and service businesses is documented by dr. alev efendioglu in an exploratory study of sixty-five firms. in another exploratory study, professors patricia greene, candida brush and terrence brown examine the unique distinctions in resource types and usage by small business lirms, finding physical and organizational resources more critical than the acquisition of financial resources. an additional preliminarily specific implication showed that human capital is perceived to be less valuable than what is owned. such a result may very well be related to the growing number of ethics violations in the workplace being reported. this is the focus of drs. welsh and birch's article exploring the ethical orientation of u.s. small business decisionmakers. small business managers can gain considerable insight into strategies directed toward optimizing revenue per employee, growth and investment, from reading dr. timothy wilson's research study of business service sector profitability. similarly, professors baril, marshalland sartelle help us understand the implications of employing the conceptual foundation of "economic value added" in small, privately-held firms. wealth creating strategies are examined and specific operating, investing and flexible financing actions are clearly described this focus on profitability and wealth creation has its sequel in the impact of 1996 tax reform on the small business firm. the technical issues associated with this recent tax legislation are examined and explained by drs. james williamson, gerald whittenburg and howard toole. joe singer, ph.d. editor simmgy entrepreneurship awareness education: an example in an elementary school rebecca w. ball fred m. beasley northern kentucky university abstract issues ofentre preneurshi p and small business development have become increasingly important as the worldwi de economy depends more and more on new firms for tire production ofthe world' products and services and employment of the world's populatiori. this research examines entrepreneurship awareness education in the elementary curriculum. rln example of how enirepreneurshipawarenesscan be introduced to elementaryschool studentsis described. the results of an assessment that sought to measure student knowledge of entrepreneurship and economics and constructs related to new venture creation prior to and following entrepreneurshi pand economics instruction are offered. findings suggest that entiepreneurship instruction and parental role models may influence positi ve attitudes toward and an awareness of entrepreneurship at the elementary school level. introduction issues of entrepreneurship and small business development have become increasingly important as the worldwide economy depends more and more on new firms for the production of the world's products and services and employment of the world's population. the first step in the process of new venture creation and success is awareness of entrepreneurship. when potential entrepreneurs become aware of the process of new venture creation, they will be open to information from the environment concerning such opportunities (ashmore, 1992). indeed, research has begun to show that in the absence of awareness about entrepreneurship, new venture creation becomes extremely difficult (marchigiano-monroy, 1993). ln the context of entrepreneurshipeducation, mcmullan and long (1987) suggest that the focus of the entrepreneurship awareness stage should be to inform students about the skills, abilities, and knowledge required to create a new venture in an effort to moderate their attitudes and intentions about the possibilities for the creation of a new business. in addition, even students who do not pursue entrepreneurial careers can benefit. entrepreneurship education can allow students to make better career decisions and provide a greater understanding of the entrepreneurs that might employ them some day. 26 journol ofsmall business strategy volume 9, 1vo. i spring l998 however, the value of entrepreneurship education is often challenged. there is some evidence that entrepreneurial success is more dependent, not on education, but on psychological attributes such as the need for achievement (mccelland, 1961), internal locus of control (brockhaus & nord, 1979), risk-taking propensity and tolerance for ambiguity (begley & boyd, 1987), and personality(begley &. boyd, 1985), as well as on the presence of family role models(matthews and moser, 1996). studies of entrepreneurial executives (hood and young, 1993)and college professors (vesper, 1982) find some support for the notion that successful entrepreneurs are "born." in fact, some researchers have argued against the educational development of entrepreneurs, because they believe it can inhibit the creative nature of those individuals (shapero, 1975). yet, entrepreneurship education programs continue to increase (gartner & vesper, 1986),and authors attribute this increase to a belief that entrepreneurshipeducation aids in entrepreneurial development (kuratko & lafollette, 1986). in recent years, entrepreneurship education has become a part of the elementary school curriculum in many states. one example can be found in the state of ohio. in an effort to assure adequate instruction in its public schools, the state of ohio recently introduced proficiency exams for grades 4, 6, and 9. these exams cover a wide range of topics, including a social studies component, which covers economics and entrepreneurship. thus, increased classroom instruction is being devoted to entrepreneurship education in ohio's public schools during the elementary years. this research has three goals. two immediate objectives are to provide an example of how entrepreneurship awareness can be introduced to elementary school students, and to see what these students have learned about entrepreneurshipand economics. in addition,a third long-term objective of this research is to provide a baseline of information about participating students that can offer the opportunity to examine the effects of early introduction to entrepreneurship awareness. introducing entrepreneurship awareness vast differences exist in the delivery of entrepreneurship education, however, all programs could be classified in terms of inputs, process, and outputs (marchigiano-monroy, 1993), inputs include the issues of student population, instructors, and objectives. the process component involves such issues as pedagogics, materials used, and location. outputs can include intentions, attitudes, skills, start-ups, satisfaction, and success. the remainder of the paper is organized around these three components. inputs four classes of fifth graders at an ohio public school participated in a specialized program designed to introduce young people to entrepreneurship awareness. a team-teaching approach was used to introduce the students to the concepts of entrepreneurship and economics that were deemed most important. one of the instructors was a university professor of entrepreneurship and management and the other was the homeroom teacher. the two primary objectives of the program were to create awareness of entrepreneurship as a career option, and to introduce the students to the economics and entrepreneurship terminology that would be included in the 6th grade proficiency exam. 27 journal ofsmall business strategy volume 9, no. l spr(ng 1998 process the program included l0 segments that were approximately l hour in length and were spread over a two-week time period. the program included lectures as well as in-class and home assignments. the primary project that students were involved in was the development of a simplified business plan. during the first session, students were introduced to the basic factors of production and the concept of how an entrepreneurcreates profit. as homework on the first night, each student was asked to create a list of five products or services that they believed could be produced for a profit. at the start of the second session, the homeroom teacher placed the students into groups of four and five students. prior to the start of classroom instruction, each student group was asked to choose three of the products or services from the lists generated by each group member and to draw picturesoftheproductsorwritedescriptionsoftheservices. a homeworkassignmentwas then made which required each student to conduct three consumer surveys on each of the three products. these surveys asked potential purchasers of the product or service whether they would buy the product or service and how many they would buy during a specified period at three price levels determined by the student group. based on the consumer feedback, each student group then chose one of the three products or services as a group product development project. the third homework assignment attempted to illustrate the concept of specialization within groups. the students were informed that they would each be assigned one of four "jobs" within their group. these four jobs were ceo, vice president of research and development, vice president of marketing, and vice president of accounting and finance. the role of each in the development of the business plan was explained and each student was asked to complete a job application and indicate their first and second "job" choice. the teacher then made work assignments based upon these applications. students were given a packet and asked to work, as a group, and individually on the development of their group business plan. throughout the two-week period students were given assistance on their individual projects and mini-lectures on concepts that they needed to use in the development of the business plan. the primary elements of the business plan were a drawing and/or description of the product or service, a list of requirements for production, a financial plan, a marketing plan, and a summary argument outlining the benefits of the product or service and its expected marketability. students were motivated by the fact that they were competing with the other student groups for the best business plan. a panel of university business professors read each of the proposals and the "winning" plan received a reward and recognition. each group received written feedback on their submission. 28 journal ofsmall business strategy volume 9, no. i spring l998 outputs assessment method in order to meet the goals of this research a two-part assessment instrument was used. the first tested student knowledge of the concepts covered by the program. the second assessment component examined constructs which have been linked to entrepreneurial success, such as need for achievement (mcclelland, 1961), internal locus of control (brockhaus lk nord, 1979), and risk taking propensity (begley tfc boyd, 1987). a multiple choice exam and a survey of constructs related to new venture creation, both developed by the national council on economic education(choices bc changes, 1992) were used to meet the two assessment objectives. student was also asked to indicate if a) their mother owned her own business, and if b) their father owned his own business. in order to obtain accurate responses to these two questions, students received assistance from the test administrator regarding whether their parents could be classified as business owners. each of the four classes of 5th grade students in the elementary school participated in the research by completing the multiple-choice exam and the attitude survey. two of the four classes completed the exam and the survey prior to receiving the educational program in entrepreneurship and economics and two groups completed the exam and the survey aller receiving the educational program. the classes were randomly assigned to the "assessment-before-education" and the "assessment-alter-education" groups. the use of treatment and control groups permits a fuller appraisal of the impact of the educational program. the class sizes were approximately equal in size, academic ability, and gender composition. one hundred six (106) children participated in the assessment. of those, 54 were boys and 52 were girls. assessment results section i: knowledge of concepts a majority of the students answered most of the 20 economics questions correctly. a summary of the questions and the percentage of correct responses is found in the appendix . the most dilticult questions for students were those that examined the concepts of capital resources (question 8, 27 percent correct), the productivity of capital resources (question 17, 41 percent correct), opportunity costs (question 4, 49 percent correct), and production (question 18, 51 percent correct). on the other hand, nearly all students correctly understood the relationship between effort and outcome (question i, 97 percent correct), the relationship between attending school and obtaining a higher paying job (question 6, 96 percent correct), and the relationship between price and demand (question 9, 93 percent correct and question 15, 92 percent correct). for many of the test questions, there were only small dilterences in the responses of the treatment and control groups of students. however, there were significant dilterences (p& .05) in the responses of the two student groups to several questions. as indicated in table i, students that received instruction were more likely to understand the concepts of human capital (22 ye vs 4 yo 29 journal ofsmall business strategy volume 9, no. l spring 1998 correct responses), human resources(73% vs 43% correct responses), and entrepreneurship(69% vs 51% correct responses). they also were more likely to correctly answer questions about opportunity costs (59% vs. 40% correct response to question 4) and capital resources (37% vs. 17% correct response to question 8). table i si nificant differences in the knowled e test res onses of the students that did/did not receive instruction percenta e of correct res onses students receiving students not receiving conce t uestion number instruction instruction human capital (¹5) 22%'%'uman resources (¹7) 73% 43%'ntrepreneur(¹11) 69%'1% 'hi-square =10.31 (df=3, p&.02) 'hi-square =11.93(df=3, p&.01) 'hi-square = 8.30 (df=3, p&.04) on only one question was there a significant difference(p & .05) in the answers of boys and girls. boys were more likely than girls to correctly answer that a house painter's skills are a human resource (69% vs. 46%). section 2: survey of selected constructs the results from the survey of constructs(see table 2) indicate that students strongly believe that education improves skills (95 percent) and can help one to achieve their personal goals (91 percent). the vast majority of students also believe that they can make plans (87 percent) and make choices (85 percent), and believe that they are impottant(88 percent), creative (84 percent), and can work with other people (85 percent). the students were less sure that they were part of the economy (45 percent). there were only small differences in the responses of the treatment and control groups of students, and on only one question was there a significant difference in the answers of the two groups. those that had received instruction in economics were less likely to believe that they were workers ("i am a worker") (t = 2.80, p &.01). there were some differences in the responses of girls and boys on the survey of selected constructs, however there was a significant difference (p & .05) in the answers of boys and girls on only one of the questions. girls were more likely than boys to feel that they were important. as mentioned previously, the fti)h grade students were also asketl to identify if their mother owned her own business and if their father owned his own business. twenty-nine of the 106 students indicated that at least one of their parents owned a business. there were some 30 journal ofsmall business strategy volume 9, no. i spring /998 table 2 results of surve of selected constructs disagree or not agree or strongly sure strongly agree disagree i can make choices 2 13 85 i am a worker 6 33 61 i am not part 45 27 28 of the economy education improves i 4 95 my skills gs knowledge i am important 4 8 88 i do not have 63 21 17 control over my life success in life 67 26 8 usually comes from being lucky i can make plans 5 9 87 and set goals i can be productive 5 25 71 cooperation 10 15 76 increases productivity i am not creative 84 4 12 i can contribute 9 31 60 to the economy i cannot work 85 7 9 with other people education can help 6 4 91 me reach my goals 31 journal ofsmall business strategy volume 9, no. l spring 1998 differences between the responses of these children and the answers of other students on the survey of selected constructs. the children of small business owners felt more positively about the benefits of education and their own importance and value to society. furthermore, on all positively worded items (e.g., "i am important"), students with parents that owned a business were more likely than other students to agree with the statements (see table 3). discussion this research has examined the introduction of entrepreneurship awareness education in an elementary school. based on the program assessment described, arer receiving instruction in entrepreneurship and economics, students more clearly understood the concept of entrepreneurship, human capital, and human resources. thus, students illustrated a higher level of awareness regarding entrepreneurship. ln addition, student and teacher comments indicated not only a higher level of awareness of entrepreneurship, but a sense of truly enjoying being involved in the program. students became increasingly excited as they began to compete for the winning business plan. in fact, some students indicated to the guest instructor that they have plans to begin a small part-time venture during the upcoming summer months as a result of their increased understanding of entrepreneurial efforts. both the classroom teacher and principal were also quite satisfied with the program. it could be argued that there might have been more striking differences between the students that had and had not received the educational program if the examination questions were more difficult. a number of the questions were quite easy for students to answer even if they had not yet received the instruction in economics and entrepreneurship. for example, one question asks, "what will happen if the price of hot dogs goes up?" more than 93% of the children chose the correct response, "consumers will buy fewer hot dogs" (see appendix). there was only one statement where the responses of those students receiving entrepreneurship awareness instruction prior to the assessment were significantly different from the responses of the students who had not yet received instruction. in response to the statement, "i am a worker," students who had received instruction were more unsure about whether or not they agreed with the statement. this uncertainty could have been a function of their understanding of the term "worker." during the entrepreneurship awareness program students discussed the concepts of management and leadership. each student was assigned a leadership role for the purposes of completing the business plan project. thus, based on this assignment the students may have defined worker as a laborer and may have viewed themselves more in a management or leadership role than a "worker" role. there were few striking differences between boys and girls on both the knowledge test and the survey of selected constructs. however, on one construct, the responses of girls were significantly different from the responses of boys. girls were found to have a higher perception of their importance than boys. this finding may be attributed to the age of the girls participating in this research. participating girls were 10 or i i years of age. they may have been experiencing a period of peak self-esteem prior to the teenage years when perceptions of self-worth typically plummet. 32 journal ofsmall business strategy volume 9, iro. l spring /998 table 3 results ofsurve of selected constructs percent of students that a ree/stron i a ree ~inch s t students with students with parents that own parents that a business do not own a a business i can make choices 90% 83% i am a worker 69 58 i am not part 31 26 of the economy education improves 100 93 my skills and knowledge i am important 93 87 i do not have 24 13 control over my life success in life 10 7 usually comes from being lucky i can make plans 96 83 and set goals i can be productive 83 66 cooperation 90 70 increases productivity i am not creative 11 12 i can contribute 62 59 to the economy i cannot work 4 10 with other people education can help 97 88 me reach my goals 33 journal ofsmall business strategy volume 9, no. i spring l998 another important finding of this research is the influence of parental role models. students whose parents were entrepreneurs felt more positively about the benefits of education and felt more positively about their own productivity, goal-setting capabilities, importance and value to society. although this study can only provide correlational and not causal results, this finding suggests that entrepreneurial parents can have an influence on the attitudes and self-perceptions of their children. the finding also tends to reinforce the results of previous studies (e.g., matthews & moser, 1996; scott & twomey, 1988) which have found that a family role model is an important determinant of entrepreneurial behavior. further research should attempt to validate this finding and begin to examine the underlying factors that might cause children of entrepreneurs to form attitudes that are different from other children. an important long-term objective of this research is to provide a baseline of information about participating students that can provide the opportunity to examine the effects of early introduction to entrepreneurship awareness. a majority of these students will continue their education together through the local middle and high schools. thus, those that continue on this expected educational path provide unique longitudinal research opportunities. on an alternating years basis, students remaining in this population can be tested and their awareness and understanding of entrepreneurship can be examined. the findings will be subject to the limitations of this type of research, primarily subject mortality and dilferences in teaching styles and content presented to participating students. references ashmore, c. (1992).model entre reneurshi ro rams in the u s pre-conference presentation at the seventh annual national conference of the united states association for small business and entrepreneurship, chicago, il. begley, t.m. and d.p. boyd. (1985). the relationship of the jenkins activity survey to type a behavior among business executives. journal of vocational behavior 27, 316-328. begley, t.m. and d.p. boyd. (1987). psychologicalcharacteristicsassociated with performance in entrepreneurial firms and smaller businesses. journal of business venturin 2(1), 79-93. brockhaus, r. h. and w.r. nord. (1979). an exploration of factors affecting the entrepreneurial d 3: 9 i 9 3 3 pl dff .~ndi ~ f 9 national academ of mana ement, 364-368. gartner, w.b. and k.h. vesper. (1986). experiments in entrepreneurship education: successes and failures, journal of business venturin 9 (3), 179-187. hood, j e. and j.e young. (1993). entrepreneurship'srequisite areas ofdevelopment: a survey of top executives in successful entrepreneurial firms. journal of business venturin 8 (2); 115-135. kuratko, d.f. & w.r. lafollette. (1986). a small business management/entrepreneurship curriculum: a dual progression experience. journal of business education, 267-271. marchigiano-monroy, t. (1993). epilogue: toward a descriptive national model of entrepreneurship education. in frank hoy, thomas g. monroy, and jay reichert (eds.) the art and science of entre reneurshi education volume i, berea, oh: project for excellence in entrepreneurship education. matthews, c.h. and s.b moser. (1996). a longitudinal investigation of the impact of family background and gender on interest in small firm ownership. journal of small business~m, 29m 3. 34 journal ofsmall business strategy volume 9, no. l spring l998 mcclelland, d. c. (1961). the achievin socie . princeton, nj: van nostrand. mcmullan, w.e. and w.a. long. (1987). entrepreneurship education in the nineties. journal of business venturin 2, 261-275. n 1 (c 9 e 1 ed 1 .(1992).c~hi dch .n y&, scott, m.g. and twomey, d.f. (1988).the long-term supply of entrepreneurs: students'areer aspirations in relation to entrepreneurship. journal of small business mana ement, 5-13. eh p a.(1977). th d( ph d, 1 h( p . p~h( t d, 9.12. vesper k.h. (1982). research on education for entrepreneurship. in c.a. kent, d.l. sexton, and k.h. vesper (eds.), enc clo dia of entre reneurshi, 321-343. appendix economics and entrepreneurship exam percent correct (correct answer) question 97% ( c ) 1. instead of going out with her friends, jane chose to stay at home to study for her math test. jane got a high score on the test. why did she earn a high score on the test? a. because jane is smart b. because jane doesn't like going out with her friends c. because jane chose to study d. because jane's teacher likes her 7lo/ (c) 2. a teacher has five movie tickets to give her ten students. what is most scarce? a. teachers b. movies c. tickets d. students 75'/o (d) 3. on your way to the shopping mall, a friend asks you to play basketball. another friend wants you to go to his house to play video games. what must you do first? a. play basketball b. go to the mall c. play video games d. make a choice 35 journal ofsmall business strategy volume 9, no. i spring l998 49% (c) 4. on saturdays alicia usually goes to see a movie with her friends. however, last saturday she chose to visit her grandmother instead. what was the opportunity cost of alicia's decision? a. visiting her grandmother b. the price of a movie ticket c. seeing the movie d. staying home with her parents and watching tv i2ulo (b) 5. jim wants to be a good cook. he is taking cooking lessons. jim is improving his ? a. opportunity costs b. human capital c. work habits d. alternative choices 96% (c ) 6. ai)er graduating from high school, marcus found a better paying job than his sister who dropped out of school. why? a. marcus was luckier than his sister was b. men are always paid more to work than women are c. finishing school made marcus a more productive worker d. marcus's sister had no choice 58% (b) 7. identify which of the following is a human resource. a. a hammer b. a house painter's skills c. a school building d. a computer 27% (c ) 8. what do we call a manufactured good that is used to produce other goods or services? a. a human resource b. a natural resource c. a capital resource d. an economic want 93% (a) 9. what will happen if the price of hot dogs goes up? a. consumers will buy fewer hot dogs b. consumers will buy more hot dogs c. consumers will stop buying hot dogs d. consumers will buy fewer hamburgers 36 journal ofsmall business srrasegy volume 9, no. i spring 1998 53% (b) 10. a video game company produced 10,000 copies of its most popular game, "econ whiz." before the holidays, the company received orders for 20,000 copies. what is this a sign of? a. a surplus of "econ whiz" b. a shortage of "econ whiz" c. high prices for "econ whiz" d. a shortage of video game players 60% (d) i i. what do we call a person who organizes resources to make goods and services for a profit? a. an inventor b. a consumer c. a buyer d. an entrepreneur 68% (a) 12. which of the following is a result of limited resources? a. we cannot have everything we want b. we can always have everything we want c. producers can always make more goods and services d. entrepreneurs earn lower profits g9% (c ) 13. when buyers exchange their money to sellers for goods and services, we call this a a. school b. factory c. market d. street corner 32% (c ) 14. thomas edison created the first electric light bulb. over several years, he found ways to improve his light bulbs and began selling them to people. what was thomas edison? a. an innovator b. an inventor c. both an inventor and an innovator d. a capital resource 92e/o (a) 15. the grocery store cannot sell all of its apples. what can the grocer do to get people to buy more apples? a. lower the price of apples b. increase the price of apples c. lower the price of oranges d. open a new store 37 journal ofsmall business strategy volume 9, lvo. l spring l998 80% (b) 16. john works for mr. stevens selling newspapers aller school. yesterday, mr. stevens had $ 15 in sales revenue from john's route. the papers cost mr. stevens $7, and he paid john $3 for his work. what did mr. stevens earn? a. a capital resource b. a profit c. a loss d. an innovation 41% (d) 17. it takes george one hour to wash his family's dishes by hand. when george uses the dishwasher, it takes him only 30 minutes. why does it take less time when george uses the dishwasher? a. george is a slow worker b. george is not using his human resources productively c. george is not a productive worker d. george is a more productive worker when he uses capital resources 51% (b) 18. what do we call combining resources to make goods and services? a. financing b. production c. consuming d. marketing 57% (a) 19. mr. jones pays sally one dollar every day to walk his dog. what does sally earn for her work? a. wages b. debts c. costs d. sales 65%( d) 20. why do workers in a factory each perform ditferent tasks? a. because the boss tells them what to do b. in order to receive wages c. to charge a higher price d. because specialization increases their productivity. from: choices and changeses joint council on economic education, new york, n.y. 38 reproduced with permission of the copyright owner. further reproduction prohibited without permission. from the editor journal of small business strategy; spring/summer 2007; 18, 1; abi/inform complete pg. 0_6 from the editor in this issue, we continue moving toward our goal of gently nudging up the quality of the papers published in the journal of small business strategy while keeping the overall thrust of the papers applied. in this issue, for example, you will see some articles in which the authors have used somewhat more advanced statistical analysis in reaching their conclusions while ending the articles with an applications focus. while the use of factor analysis or structural equation modeling is certainly not required for articles, we encourage authors to do more than simple data description. do keep in mind, however, that jsbs is an applied research journal. so while we look for quality research, we also insist on an applications focus. i might note, too, that we accept empirical, conceptual, and theory building papers. perhaps above all, the papers need to be interesting to our readers academics, consultants, and practitioners. speaking of interesting and high quality, the papers in this issue fit both descriptors. two of the papers are award winners. the paper by pett and wolff, "sme performance: a case for internal consistency," won the jsbs editor's choice award for best empirical paper at the 2007 usasbe conference. the paper by fiore and lussier, "the development and statistical testing of a nascent organizational structure sequence model," won the coleman foundation best empirical paper award at the 2006 usasbe conference. an excellent article by morris, kocak, and ozer, is "coopetition as a business strategy: implications for performance". for those thinking coopetition was a typographical error, strategies for smaller companies that combine competition and cooperation hence coopetition are shown to have high potential for success. murphy, celluch, and callaway looked at internet use and strategic flexibility and found quite interesting results. they concluded that the internet is much more valuable in a dynamic environment than in a more static one. one of the most interesting papers in this issue is by burpitt and fowler. in "entrepreneurial strategies in a declining industry," they study the furniture industry, which has been hard hit by foreign competition. he shows that even in a hostile environment entrepreneurial strategies can lead to success. tower, gudmundson, schierstedt, and hartman delve into a topic of interest to many and show that who is included in family business meetings is more important than simply having the meetings. finally, allred, addams, and chakraborty look at inc. 500 firms' use of informal versus formal planning. all in all, i am pleased with this lineup of articles. i offer my thanks to the authors and to the reviewers for bringing this collection of research to you. some of you reading this issue may be reading the journal of small business strategy for the first time. members of the small business institute® receive the journal as part of their membership. we are also sending this issue gratis to all members of the u.s. association of small business and entrepreneurship (usasbe). in addition, we are making jsbs available to all icsb members, domestic and international, at a 400/o discount off the cover price. we hope you find value in the journal of small business strategy and include it as an outlet for your high quality applied research work. fred l. fry turner chair of entrepreneurship editor reproduced with permission of the copyright owner. further reproduction prohibited without permission. the internationalization of smes in emerging economies: institutional ... zhu, hong;hitt, michael a;tihanyi, laszlo journal of small business strategy; fall 2006/winter 2007; 17, 2; abi/inform complete pg. 1 the internationalization of smes in emerging economies: institutional embeddedness and absorptive capacities hong zhu texas a&m university hzhu@mays.tamu.edu michael a. hitt texas a&m university mhitt@mays.tamu.edu laszlo tihanyi texas a&m university ltihanyi@mays.tamu.edu abstract we examine the importance of institutional embeddedness and dynamic capabilities in the internationalization strategies of small and medium-sized enterprises (smes) in emerging economies. we focus on two types of smes incumbent smes and entrepreneurial start-ups. we argue that incumbent smes can increase their internationalization capabilities by using their embedded networks with local governments and business groups. entrepreneurial startups in emerging economies may develop new capabilities by learning from foreign firms and business groups. therefore, entrepreneurial start-ups identify, create, and exploit new opportunities continuously in foreign markets. this work contributes to our knowledge of how incumbent smes and entrepreneurial ventures in emerging markets build knowledge and capabilities to enter and compete successfally in international markets. introduction firms from emerging economies are accelerating their efforts to integrate into the global economy (hoskisson, eden, lau, & wright, 2000; khanna & palepu, 1997). the conventional foreign direct investment (fdi) pattern has changed in the last two decades. although developed economy firms remain the dominant source of fdi, emerging economy firms have started to invest aboard in increasing numbers in recent years. in recent years, the increase in outward flow of fdi from emerging economies (from $16.3 billion to $469 billion from 1980 to 2002) has tripled the increase from developed countries (from $507 billion to $4.3 trillion) (henisz, 2003). a recent study further showed that small and medium-sized enterprises (smes) in emerging markets are increasingly internationalizing to capitalize on opportunities in foreign markets (organization for economic co-operation and development [oecd], 1997). for example, smes accounted for roughly 40 percent of manufacturing exports in korea in 1999 (oecd, 2002). emerging economies are moving away from inward-oriented import substitution policies toward outwardoriented export-led growth (aulakh, kotabe, & teegen, 2000). traditional internationalization theories focus on how multinational enterprises reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy (mnes) in developed economies capitalize their competitive advantages and gain rents in foreign markets (dunning, 1988; hymer, 1976; johanson & vahlne, 1977; vernon, 1966). yet, these internationalization theories are less pertinent when applied to explain smes' internationalization behavior from emerging markets because these firms are generally less resource endowed and less competitive compared to firms from developed economies (aulakh et al., 2000). further, traditional internationalization theories have paid less attention to the institutions that have been commonly accepted as support for firms to compete fairly in the developed markets, yet rarely exist in emerging economies (khanna & palepu, 1997). institutional transition fundamental and comprehensive changes introduced to the formal and informal "rules of the game" in emerging economies is a critical characteristic of emerging markets (peng, 2003; tan, 2002). emerging economies also exhibit a greater institutional variance relative to the institutions of developed economies often featured in the literature (peng & heath, 1996). recent research on emerging economies has adopted institutional theory suggesting how institutional environments in these economies facilitate or constrain emerging market firm strategies (peng, 2003; peng, & heath, 1996; hitt, ahlstrom, dacin, levitas & svobodina, 2004). institutional theory suggests that "economic action is embedded in structures of social relations" (granovetter, 1985, p. 481; oliver, 1996). as a result, the strategies employed by firms, such as internationalization, are affected by the institutional framework in their home country and in the country entered (scott, 1995; peng & heath, 1996). the massive infusion of capital, technology, and managerial expertise from developed economies into major emerging markets has intensified competition for local firms in emerging markets. thus, smes in emerging 2 vol. 17, no. 2 fall/winter 200612007 markets are no longer able to operate independently in relatively protected environments. smes in emerging economies need to compete with larger and more established rivals (e.g., domestic firms and mnes) on the basis of resourcefulness that is, doing more with less (peng, 2001; peng, lee, & wang, 2005; hitt, li, & worthington, 2005). because of the intense competition in their home market, internationalization provides emerging country smes an important opportunity for growth and wealth creation. however, to succeed in international markets, they need to build competitive capabilities. global competition by established mnes makes it difficult for them to compete solely on the basis of comparative cost advantages in labor and natural resources (shrader, oviatt, & mcdougall, 2000). emerging market smes are often constrained by scarce resources including financial, managerial, and technological resources, established brands and innovative products (aulakh et al., 2000; filatotchev, hoskisson, buck, & wright, 1996). additionally, they face high barriers to access these resources because of "institutional voids" such as the lack of financial intermediaries in emerging markets. emerging economies provide a natural setting to study the role of institutional embeddedness and dynamic capabilities (granovetter, 1985; oliver, 1996; kale, singh, & perlmutter, 2000; uzzi, 1997; zahra & george, 2002b) in the internationalization process of local smes. we argue that smes in emerging economies are embedded in structures of institutional relations (granovetter, 1985) that confer resources to and increase the legitimacy of the smes (granovetter, 1985; oliver, 1997; powell & dimaggio, 1991). smes identify, create, and exploit opportunities in foreign markets by leveraging resources and by learning from connected institutions to develop their competitive capabilities (peng et al, 2005). thus, we contribute to reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy internationalization theory by exploring how smes in emerging markets internationalize, given their constraints in resources and capabilities. we also contribute to institutional theory by arguing that institutional embeddedness not only confers resources but also helps to develop dynamic capabilities that can sustain firms' global competitiveness in the long term. time horizon as zaheer, albert, and zaheer (1999) emphasized, a necessary and critical first step in the development of a theory is to define the time horizon over which the theory holds. it is also important to note that "the rules of the game" are changing as emerging countries liberalize their economies and adopt a free-market system (hoskisson et al., 2000; north, 1990; nee, 1992). a central and consequential feature of institutional development in emerging economies is the change from heavily regulated economies to market-supporting institutions (khanna & palepu, 1997). although researchers studying emerging economies have noted this turning period, researchers predominantly emphasize one aspect of institutional environments in emerging economies (e.g., institutional voids; the construction of market-supporting institutions), and debate which strategy is more appropriate to gain a competitive advantage in these economies (white, 2000; peng & health, 1996; spicer, mcdermott, & kogut, 2000). for example, peng (2003) proposed a two-phase model of institutional transition, and argued that strategic choices to gain competitive advantages differ in the early and late stages of transition. specifically, firms compete using the network-based strategy, emphasizing intangible assets embodied in managers' interpersonal ties and firms' interorganizational relationships with various players in the earlier stages of transition; and they compete using their own resources and capabilities in the later stages of transition. 3 vol. 17, no. 2 fall/winter 200612007 however, as market transition is rarely linear and often displays a mixture of progress and regress, focusing on one aspect of transition may provide limited help in explaining the behaviors of different firms in emerging economies (peng, 2003; nee, 1992). market transition is also likely to occur over a protracted period as institutional barriers are dismantled and market supporting institutions are developed (nee, 1992; williamson, 2000). according to williamson's (2000) classification, it may take from one to one hundred years to establish a complete market-supporting institutional infrastructure. further, although many researchers suggest that economic growth typically occurs in developed economies, the rapid pace of economic development of emerging economies and their underdeveloped institutional structures is contrary to conventional wisdom (e.g., north, 1990). the rapid growth, especially in some emerging markets (e.g., china), also places in doubt the ability of organization theories suggesting the necessity of transparent market-supporting institutions to account for the emerging market firms' behavior and economic growth (boisot & child, 1996; north, 1990). hence, theoretical development to explain how institutional environments affect firms' behavior in emerging markets is needed and important. we limit our predictions to the transition period when institutional environments are characterized by dismantling institutional barriers in heavily regulated economies and constructing the market-supporting institutions. the theoretical model is depicted in figure 1. institutional embeddedness emerging economies are "low income, rapid-growth countries using economic liberalization as their primary engine of growth" (hoskisson et al., 2000). although the phenomena of "fast follower, emerging economies" puzzled economists, sociologists r e p ro d u ce d w ith p e rm issio n o f th e co p yrig h t o w n e r. f u rth e r re p ro d u ctio n p ro h ib ite d w ith o u t p e rm issio n . .j:>. figure 1 theoretical model of the internationalization ofsmes in fmerging economies: institutional ejnbe~mess and abiorptiw capacities ci>vemrrents r > institutional errbeddness .... realized absorptive oflncurrbent smfs .... capability to intemationaliz.e h institutional errbeddedness k business group ..... > institutional errbeddness of potential absorptive capability .... foreign furn; fntrepreneurial start-ups .... to internationalize \. (fdi) _, ~ s:: ~ ~ ~ ~ b:l ~ ::;· ~ "' ~ ts .~ ~ :--.. ..... :'.j ~ "" ~ ~ ~ ~ "" g ~ ....,, g 'i reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy have provided part of the answer in that institutions may affect economic outcomes through their impact on firms' strategic responses (granovetter, 1985; oliver, 1991, 1997). research on emerging economies has emphasized the importance of networks and connections (peng, 2003; peng & heath, 1996; peng et al., 2005). researchers have used transaction cost economics to argue that relational contracting decreases transaction costs such as monitoring costs, costs of opportunism, and information costs when rule-based institutions are limited in emerging economies (north, 1990; peng, 2003). further, although firms are constrained by resources available from markets because of institutional voids in financial, labor, and product markets, researchers have argued that firms can gain legitimacy and resources by becoming embe9ded in the dominant institutions that control resources in emerging market (peng, 2003; peng & heath, 1996; peng et al., 2005). a large number of smes has been established as a result of institutional transition involving privatization and market liberalization in emerging economies (brezinski & fritsch, 1995). in the early stage of transitions, smes face high barriers to gain legitimacy because large firms are dominant and have been recognized as legitimate. smes also face the hazards of liability of smallness. barriers to the access of financial and human resources and to the ability to allocate products further constrain smes growth. the institutional intermediaries tend to not exist or, if they exist, they are controlled by governments, state-owned enterprises (soes), or business groups in emerging economies (khanna & palepu, 2000a). thus, smes need to develop connections with resource controllers (e.g., governments, business groups) to access needed resources. further, competition may increase as more foreign firms invest in emerging markets. the entry of mnes from 5 vol. 17, no. 2 fall/winter 200612007 developed countries may motivate smes to build their capabilities and, thus, to seek connections with firms that possess advanced knowledge (e.g., business groups, foreign firms) (hitt, dacin, levitas, arregle, & borza, 2000; zahra, ireland, & hitt, 2000). as a result, they tend to be embedded in networks (e.g., government, business groups, foreign firms), and their strategic actions are likely influenced by these relations (granovetter, 1985). government governments in emerging economies often have considerable power in the resource allocation process. as a result of the legacy of bureaucracy in planned economies, officials are likely to arbitrarily intervene in the markets to make specific resource allocations, thus, creating unfair competition for firms (nee, 1992; peng, 1996). although these governments often try to emulate developed economies to establish marketsupporting institutions, such institutions require time to develop. governments in emerging economies use more than purely economic criteria to design their policies. the implications of government policies for social issues such as employment rates and social stability matter greatly in emerging economies, especially in those with former central planning. thus, during the transition periods, governments design, experiment, revise, and implement new policies as they gain feedback on the various economic and social institutions. therefore, the interaction between the firms and governments can have substantial influence on the policies. the policies and the institutions are in the process of development and remain somewhat flexible. the new policies are often biased toward specific interested groups. meanwhile, from the government's point of view, these new policies are intended to benefit economic growth as well. as a result, it is not surprising that the newly established smes are likely to establish and maintain their reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy contacts with government officials, given that governments are influential in resource allocation and in determining the rules of the game. business groups resources business groups refer to "a set of firms which, though legally independent, are bound together by a constellation of formal and informal ties and are accustomed to taking coordinated action" (khanna & rivkin: 2001, pp. 47-48). research on emerging economies suggests that business groups are a response to market imperfections and replace weak institutions in capital, labor, and product markets (leff, 1978; khanna & palepu, 1997; khanna & rivkin, 2001 ). membership in business groups allows firms to appropriate quasirents by accessing scarce and imperfectly marketed inputs such as capital and information (chang & hong, 2000; leff, 1978). for example, smes in emerging markets need reliable information about the inputs they purchase and the investments they make. without reliable information, smes are unlikely to invest in unfamiliar ventures. therefore, smes can overcome their resource liability and reduce their investment uncertainty by building relationships with business groups. further, consumers in emerging economies lack information about the quality of the products made by smes. smes may need the group brand to signal the quality of their products to the consumers. thus, connection to a well-known business group provides legitimacy in the marketplace for smes (khanna & palepu, 1997). additionally, because governments in emerging economies have significant discretion, business groups maintain extensive relationships with the government to reduce the uncertainty of the regulatory system and to obtain tangible benefits such 6 vol. 17, no. 2 fall/winter 200612007 as priority access to inward fdi (hoskisson et al., 2000; khanna & palepu, 1997). smes operating as members of business groups can reduce their costs of maintaining a relationship with government officials, increase their legitimacy in the eyes of government officials and facilitate their access to government resources. studies on emerging economies have demonstrated that firms affiliated with business groups tend to exhibit higher profitability than independent firms do (chang & hong, 2000; khanna & palepu, 2000a, 2000b ). the research by khanna and palepu (1997) has shown that the business group is an efficient governance structure in the early stage of transition in emerging economies. capabilities competition has become increasingly fierce in emerging economies where more resource-rich foreign firms enter to exploit the new market opportunities. as peng (2003) noted, firms compete on the basis of their resources and capabilities in the late stage of transition when market-supporting institutions are established and stabilized. yet, smes in emerging economies are resource poor and thus unable to compete with rivals by solely relying on their internal resources (hitt et al., 2005; uhlenbruck, meyer, & hitt, 2003). however, they can add to their capabilities by building a strong relationship with a large diversified business group. further, the rapid globalization of markets and increasing competition are dramatically reducing the time horizon required to build capabilities needed for survival, much less to develop competitive advantages. in this circumstance, smes have a short time horizon to acquire the necessary capabilities (etemad, wright, & dana, 2001 ). symbiotic collaboration between two or more firms is intended to improve the value of the output by leveraging their network capabilities to shorten the time span to market. business groups in emerging economies possess reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy various resources and capabilities, and they can create synergy across member firms within the business group (chang & hong, 2000). therefore, smes in emerging markets are enticed to become a member of a business group or to build important relationships with them. in so doing, they can often utilize the resources and capabilities of the group to enrich their own competitiveness in a shorter time period. alternatively, through the sharing of knowledge, smes may be able to develop their own capabilities that they in turn share with other businesses within the group. these capabilities also enhance their independent competitiveness in their markets served. foreign firms attracted by prospective market opportunities and reinforced by the potential profits first-movers can earn in emerging economies, the number of foreign firms investing in emerging economies has increased exponentially in recent years (henisz, 2003). however, foreign firms often bring value to emerging markets as well. meyer (2004) emphasized that foreign firms introduce new technologies and new management techniques to emerging economies. emerging market firms can learn from foreign firms, especially when they partner with them in strategic alliances (hitt et al., 2005). as we argued previously, smes facing substantial competition have to develop competitive capabilities and/or differentiate themselves in order to compete against their rivals as more firms enter emerging economies. establishing relationships with foreign firms provides opportunities to enhance their technological and innovative capabilities and, hence, to increase their competitiveness (meyer, 2004; hitt et al., 2005). further, a result of competition in the developing global competitive landscape, 7 vol. 17, no. 2 fa/i/winter 200612007 firms more regularly introduce new products and processes to the markets to build and maintain competitive advantages, thereby continuously reducing product life cycles (bettis & hitt, 1995; hitt, hoskisson, & kim, 1997). hence, smes in emerging economies need to develop a series of temporary competitive advantages to sustain their competitiveness (sirmon, hitt, & ireland, in press). thus, smes need to scan their environments to identify and obtain timely information about new products and technologies in the markets; in so doing, they are able to constantly learn and innovate to sustain their competitive advantage (hitt, tyler, hardee, & park, 1995). because foreign firms provide a store of global information and knowledge including market standards, marketing opportunities, and innovative technologies, smes need to develop relationships with foreign firms to access this information and knowledge (meyer, 2004; hitt et al., 2005). therefore, as emerging economies are changing to the rule-based market transactions, firms compete on the basis of resources and capabilities (peng, 2003; peng & luo, 2000). smes in emerging economies are likely to build their connections with foreign firms to access timely information and knowledge about markets, products, and services. institutional embeddedness of incumbent smes in the early stage of the transition in many emerging economies, a large number of smes are established as a part of government policies to liberalize their economies, to promote economic development, and to support social progress (zahra, ireland, gutierrez, & hitt, 2000). we define these smes as incumbent smes because the focus is on the middle of the transition period. however, smes entering the markets in the middle of the transition are considered as entrepreneurial start-ups. reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy in the early stage of the transition, these newly established smes often experience several barriers to growth. financial barriers have been the most important because the banking system focuses on financing large state-owned firms and business groups (peng, 2003; walder, 1991). banlcs rarely offer loans to smes, because these firms do not have legitimacy in the early stage of the transition and, thus, are perceived as high risks (peng, 2003). another equally critical barrier is the underdeveloped institutions (bartlett, 2001 ). because property rights often are not well defined and governments still have substantial discretion in resource allocation in the early stage of transition, governments impose unreasonably high taxes and enforce regulations in a manner that discriminate against smes. governments also restrict smes' access to resources (bartlett, 2001; nee {k yong, 1990). government officials often engage in individual rent-seeking and corruption (e.g., collection of bribes) that creates uncertainty for smes and increase their transaction costs. therefore, smes are encouraged to cultivate networks with government officials to acquire the goodwill of the government agencies and reduce the arbitrary intervention, thus, decreasing the transaction costs (boddewyn & brewer, 1994; rodriguez, uhlenbruck, & eden, 2005). further, according to the resource dependence perspective, smes can gain legitimacy and mobilize resources by maintammg relations with government agencies and the members thereof that control resource allocation in the early stage of transaction (pfeffer & salancik, 1978; boddewyn & brewer, 1994). therefore, smes can overcome the financial and institutional barriers by gaining support from the government. smes also can overcome these barriers by gaining external legitimacy. rodriguez et al. (2005) suggested that social networks can be important sources of external legitimacy. business groups in emerging economies 8 vol. 17, no. 2 fall/winter 200612007 indeed provide such social networks linking independent firms under the tight control of headquarters (chang & hong, 2000), because business groups have been recognized as a legitimate organizational form (khanna & rivkin, 2001 ). therefore, smes could attain external legitimacy by joining to a business group (khanna & rivkin, 1997). additionally, smes can access scarce resources and obtain lower costs because members in business groups share their resources and capabilities (chang & hong, 2000; khanna & rivkin, 2001). in the early stage of transition, a limited number of large mnes invest in emerging economies to exploit their special capabilities that provide them competitive advantages in developed markets. however, in the early stages, these mnes are often unfamiliar with the local markets such as the preferences of local consumers, thus, they experience high risks with their investment decisions. linlcages with local governments and business groups can confer legitimacy and decrease uncertainty resulting from arbitrary interventions from local governments. furthermore, foreign firms may also obtain advantages such as tax deferrals from relations with government (hoskisson et al., 2000). relations with governments may provide foreign firms with potential competitive advantages in emerging markets because acts of governments can create individual winners and losers in marketplace (boddewyn & brewer, 1994; leone, 1986). yet, such relationships do not guarantee positive outcomes for the foreign firms (hitt et al., in press). according to density dependence theory, legitimacy dominates competition when smes are born in the early stage of transition (hannan & freeman, 1989). thus, smes are less likely to build linkages with foreign firms because foreign firms have not been identified as legitimate organizational forms when they first enter emerging economies (hannan & freeman, 1989). furthermore, reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy because of legitimacy needs, foreign firms desire to build relationships with firms having legitimacy in local markets and, thus, are unlikely to seek alliances with new smes. organizational ecology theory assumes that inertia is a prevailing property of organizational evolution and, consequently, smes retain their basic attributes (e.g., type of relations) of their early forms (freeman, carroll, & hannan, 1983). incumbent smes establish organizational routines and accumulate experiential knowledge in product manufacturing and marketing over time as the transition progresses. their profits in early stage of transition reinforce existing organizational routines. organizational knowledge is also reinforced in all firm activities and, over time, becomes increasingly calcified in organizational practices (cohen & levinthal, 1990). as such, these firms are likely to exploit the established routines along with the experiential knowledge and capabilities developed (grant, 1996; gersick, & hackman, 1990). thus, incumbent smes are likely to maintain their relations with governments and business groups as the transition progresses over time. however, incumbent smes have problems in changing the capabilities they have developed earlier due to path dependence (levitt & march, 1988). the development of new capabilities often involves not merely the learning of new knowledge but also the unlearning of existing knowledge held. eliminating established organizational practices becomes more difficult as firms institutionalize these practices (autio, sapienza, & almeida, 2000). therefore, they are less likely to contact foreign firms to learn new technologies and managerial techniques in later stages of the transition. proposition 1: incumbent smes are likely to have relations with governments and business groups and are less likely to have relations with foreign firms in the mid-range 9 vol. 17, no. 2 fall/winter 200612007 of the transition. institutional embeddedness of entrepreneurial st art-ups incumbent smes play important roles in the early stage of transition by helping to develop economies through job creation, innovation, improvement of the living standards, etc. (bartlett, 2001; brezinski & fritsch, 1996). reinforced by the wealth creation of the incumbent smes in the early stage of transition, entrepreneurs during the mid-range of the transition are enticed to start new businesses to exploit the opportunities in more liberalized markets (bartlett, 2001 ). according to density dependence theory, at this stage in the transition, smes have been recognized as a legitimate organizational form; a large proportion of firms in emerging economy transitions are smes (hannan & freeman, 1989). by the middle of the trans1t10n, the institutional environments have changed, often significantly. as smes steadily become a major source of economic development in emerging economies, governments change their policies to promote the development of smes (e.g., decreasing the costs of start-up). formerly centralized state-run banks that were controlled by the government primarily to offer loans to soes in which the state (central, provisional, or local government) retains a dominant ownership stake begin to offer loans to the smes to stimulate economic development (boisot & child, 1996). research has shown that the state often provides soes access to rare and valuable domestic and foreign economic resources in the pre-transition and the early transition stages (keister, 1998). yet, in later stages of the transition, the government reduces its ownership and, thereby, places pressure on the former soe to become competitive and earn profits (zahra et al, 2000). further, as governments gradually open financial markets, state-run banks reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy transform to commercial banks, competing on the basis of their capabilities and financial performance. so, smes that have demonstrated good financial performance are likely to access financial resources from the banks. foreign banks also enter emerging economies, providing more channels to obtain financial resources. the developing financial institutions such as ipo markets also provide smes with alternatives to obtain financial resources. thus, it is less important to establish relations with government officials as the transition progresses (peng, 2003; peng & luo, 1996). finns compete more on the basis of resources and capabilities rather than relations that have provided competitive advantages in the early stage of transition (peng, 2003). further, as the trans1t1on progresses, the number of foreign firms entering emerging markets grows at an exponential rate (peng, 2000, 1999). the rents that first-movers receive in the emerging economies signal that substantial latent values exist in the emerging market. because of this, foreign firms are motivated to invest in emerging economies (haveman, 1993). as we argued previously, inflow fdi leads to competition on capabilities in emerging markets. thus, smes in emerging markets need to build their capabilities in order to grow. strategy scholars have proposed the notion of syncretic rent-seeking behavior that has been defined as "a firm's strategic orientation to achieve a dynamic balance between competitive and cooperative strategies" (lado, boyd, & hanlon, 1997: 122). although entrepreneurial start-ups and foreign firms compete with each other, syncretic rent-seeking behavior leads to a collaborate advantage (lado et al., 1997). access to financial, technological, and managerial capabilities is valuable to entrepreneurial start-ups in emerging economies to pursue promising market opportunities (hitt et al., 2004; zahra et al., 2000). in turn, local market knowledge, 10 vol. 17, no. 2 fall/winter 200612007 strategic and operational flexibility, innovation, entrepreneurial spirit, and the advantage of "newness to learn" are valuable to foreign firms operating in highly dynamic environments (autio et al., 2000; park & luo, 2001). as sirmon et al. (in press) suggested, "merely possessing resources does not guarantee the development of competitive advantages" management of resources (i.e., structuring the resource portfolio, bundling resources into capabilities, leveraging the capabilities to create value for customers) contributes to the development and maintenance of competitive advantage. meanwhile, competition often stimulates innovation necessary to compete in the global competitive landscape (bettis & hitt, 1995; hitt et al., 1997). many western firms, including powerful mnes, have penetrated emerging markets. luo and peng ( 1999) indicated that mnes prefer to have alliances with a diverse set of local partners in order to effectively learn how to compete in the unfamiliar environment. in the same logic of "syncretic rent-seeking behavior" and resource management, entrepreneurial start-ups and business groups can also benefit from "the positive-sum efficiency-enhancing effects of competition and cooperation" (lado et al., 1997; sirmon et al., in press). business groups hold intangible resources such as the group brand and the know-how to set up a plant and absorb foreign technology. these intangible resources are highly valuable to entrepreneurial start-ups to build their own capabilities (barney, 1991; hoskisson & hitt, 1990). flexibility, innovation, and advantage of newness to learn provided by the entrepreneurial start-up are valuable for business groups to overcome their rigidities and lack of access to new ideas (mahmood & mitchell, 2004). proposition 2: entrepreneurial start-ups are more likely to have relations with business groups and foreign firms than government officials in the mid-range of the transition. reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy institutional embeddedness and internationalization of incumubent smes exposed to competitive pressures within their emerging economies in the mid-range of the transition, incumbent smes are disadvantaged in competing with resourceful rivals in the local market because the network-based strategy they formed in the early stage of the transition can potentially require too much of their attention and resources. this dilutes their investment in activities (e.g., developing new competitive capabilities) that are beneficial for their longterm performance (keister, 1998). thus, they need to find new ways to utilize their current capabilities and to create value. internationalization offers emerging market incumbent smes a way to create value by exploiting opportunities that exist outside their domestic markets (zahra & george, 2002b ). the aggressive and export-oriented development policies often followed by emerging market governments further induce smes to expand into foreign markets (aulakh et al., 2000; chang & hong, 2000). these incumbent emerging market smes can also test the knowledge they have learned from partners when they enter international markets. they build experiential and, thus, tacit knowledge in doing so (hitt et al., 2005). scholars highlight the importance of entrepreneurial opportunities (i.e., existence, discovery, and exploitation) for firms to create value in new markets (shane & v enkataraman, 2000; zahra & george, 2002b ). firms can exploit the information asymmetry that occurs due to differential time and geography to earn entrepreneurial profits. yet, smes alone may find it difficult to identify foreign opportunities that they can exploit. strategic management researchers emphasize the importance of environmental scanning to facilitate internationalization (autio, yli-renko, & salonen, 1997; zahra 11 vol. 17, no. 2 fall/winter 200612007 & george, 2002b ). evidence indicates that events in the environment generate informational clues that can help firms to expand to foreign markets (miner & haunschild, 1995). firms discover the entrepreneurial opportunities in foreign markets from their environmental scanning. further, social network theory suggests that networks, such as alliances and interlocking boards, can facilitate environmental scanning through the diffusion of information (e.g., entrepreneurial opportunities in foreign markets) (galaskiewicz, & burt, 1991; haunschild, 1993; haunschild & beckman, 1998; palmer, jennings, & zhou, 1993). smes in emerging economies have inherent disadvantages, such as financial resource constraints and the difficulty in obtaining adequate capital. limited financial resources may hinder smes' ability to identify opportunities in foreign markets, and inadequate financial resources also restrict the exploitation of identified opportunities. further, internationalizing firms are subject to the so-called "liability of foreignness" (hymer, 1976; zaheer, 1995; eden & miller, 2004). yet, a substantial number of studies have demonstrated that firms can mobilize resources from their networks to scan the environments for internationalization opporturuties (coleman, 1990). thus, emerging market firms can overcome the liability of foreignness using their networks to learn from their partners' experiences (guillen, 2002; hitt et al., 2005). as a result, smes increase their capability to exploit the opportunities that have been identified using their linkages to other firms. accordingly, smes transform their domestic operational routines by incorporating new routines to exploit foreign market opportunities. zahra and george (2002a) referred to "realized absorptive capacity" (racap) as the function of transformation and exploitation. thus, as smes transform their routines to exploit foreign opportunities, they increase their racap. related to internationalization of incumbent reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy smes in emerging economies, relations with governments and business groups play important roles in opportunity discovery and exploitation to facilitate the expansion to foreign markets. international entrepreneurship researchers have indeed found that extensive networks significantly influence the speed and degree of internationalization (oviatt & mcdougall, 1995; zahra & george, 2002b). realized absorptive capacity -the existence, discovery and exploitation of opportunity governments opportunity identification government may act as a means of institutionally bridging across markets. incumbent smes and foreign firms not linked by the market, may develop relationships with government entities. in the early stage of transition, governments control foreign trade and investment, and they accumulate information and knowledge about foreign markets through their interaction with foreign firms. thus, smes may obtain relevant information about foreign market opportunities through their relations with governments. relying on governments to identify foreign market opportunities is also more cost-effective than using a random search model. opportunity exploitation although smes may have financial constraints that hinder their ability to exploit opportunities in foreign markets, they can overcome this liability by obtaining resources from the government. government officials in emerging economies have discretion in resource allocation through procurement programs, tax incentives, business development assistance, and export assistance (spencer & gomez, 2004) and may exercise preferences in the absence of clear property rights. smes having effective 12 vol. 17, no. 2 fall/winter 200612007 relations with government officials are more likely to increase their legitimacy and visibility (oliver, 1996), thus, allowing them to mobilize resources through governmentsponsored programs and enjoy privileges stemming from government policies. as smes exploit the identified opportunities in foreign markets, they need to refine their routines to seize new market opportunities. in the process of exploiting opportunities in foreign markets, smes accumulate knowledge, partly about new capabilities developed from knowledge learned from various sources (hitt et al., 2005). applying the acquired knowledge in new markets yields further tacit knowledge. venturing into new markets also yields new insights about foreign markets and facilitates identification of additional foreign opportunities. the new knowledge alters the firm and the way it approaches the global competitive landscape (zahra et al., 2000). zahra and george (2002a) defined the ability to generate new competencies based on the refined routines as transformation and exploitation, two dimensions ofracap. proposition 3: allying with governments in emerging markets increases incumbent smes' realized absorptive capacity facilitating their expansion into foreign markets. business groups opportunity identification business groups in emerging economies act as hubs of resources for foreign firms in the early stage of transition when emerging market governments permit only certain business groups to access foreign resources and markets through their trade and investment policies (guillen, 2002). having little reliable information about emerging economies in the early stage of transition, foreign investors prefer to invest only in the large and established business groups (khanna & palepu, 1997). as the market reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy trans1t1on progresses, business groups accumulate knowledge and information about foreign firms and markets. therefore, smes are likely to learn about foreign market opportunities through their linkages with business groups (guillen, 2002). smes may also expand into foreign markets indirectly, by providing factors, interim products, or services to their business group affiliates that establish operations in foreign markets (khanna & palepu, 2000b; shrader, oviatt, & mcdougall, 2000). for example, samsung corporation, a general trading company within the samsung business group, serves as the export window to overseas markets for manufacturing affiliates in the group (chang & hong, 2000). opportunity exploitation incumbent smes can also overcome the barriers to access necessary financial, technological, and managerial resources to internationalize by allying with business groups. incumbent smes benefit from cost reductions in acquiring these resources from business groups' internal capital, labor, managerial, and technological markets. while smes may not have the capabilities to exploit foreign opportunities, business groups often have experience in foreign market expansion and can share their knowledge of how to exploit those opportunities with affiliated smes. sharing information indicates relational embeddedness (uzzi, 1997). business groups also off er their unique group reputation to affiliated smes (khanna & palepu, 2000b ). reputation has been viewed as an intangible asset that contributes to a firm's competitive advantage (barney, 1991; hall, 1992). first, this reputation facilitates smes entry into foreign markets by providing legitimacy and, perhaps, brand recognition. for example, many south korean firms attempted to access foreign markets using their own resources and brand names. discovering that they lacked the brand recognition and other internal 13 vol. 17, no. 2 fall/winter 200612007 resources required for rapid internationalization, they formed alliances with large and well-established firms and marketed their products globally under the brand names of the larger firms. second, reputation provides cost-efficiencies in internationalization. according to a statusbased model of market competition (podolny, 1993), smes linked with business groups can reduce their advertising costs and transaction costs necessary to convince consumers in foreign markets of the quality of their products and services. thus, smes allied with business groups are more likely to exploit their foreign expansion opportunities successfully. in the process of foreign expansion, such smes may be able to transform their domestic operation routines, thereby, adapting to their new businesses in foreign markets. smes also learn by doing, accumulating knowledge, and developing their capabilities to implement an international strategy. reinforced by successful foreign expansion, smes are more likely to utilize their refined routines, accumulated knowledge, and capabilities to further exploit opportunities in foreign markets (e.g., other emerging economies or under-developed economies) (hitt et al., 2005; yli-renko, autio, & tontti, 2002). zahra and george (2002a) defined this ability as realized absorptive capability, a capability to leverage the knowledge that has been absorbed. proposition 4: alliances with business groups in emerging markets increase incumbent smes' realized absorptive capacity facilitating their expansion into foreign markets. reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy potential absorptive capacity and internationalization of entrepreneurial start-ups as emerging economies achieve higher levels of economic development, firms tend to compete on the basis of resources and capabilities (luo, 2003). yet, although many emerging economies are transitioning to a market system, incumbent smes may be less able to operate under free market conditions as they are embedded in their existing business networks (uzzi, 1996). reinforced by their success in domestic and foreign markets, incumbent smes become committed to these existing operations, persist in using the same routines, and, thus, become inertial and fail to acquire new knowledge. in other words, as their learning becomes more path dependent, especially because of their success, the path dependency jeopardizes their competitive advantage (lei, hitt, & bettis, 1996; guillen, 2002). furthermore, incumbent smes may find it difficult and costly to discontinue their institutionalized routines and to change their strategy or behavior. knowledge acquisition and assimilation are two dimensions of potential absorptive capacity that "play an important role in renewing the firm's knowledge base and the skills necessary to compete in changing markets" {zahra & george, 2002a: p. 196). potential absorptive capacity is defined as firm's capability to value, acquire, and assimilate external knowledge (cohen & levinthal, 1990; lane & lubatkin, 1998; zahra & george, 2002a). thus, incumbent smes are likely to continue utilizing established routines to exploit foreign market opportunities. however, new entrepreneurial start-ups do not have "structural inertia" because of their newness. instead, they have strategic and operational flexibility and enjoy the advantages of newly acquired knowledge (autio et al., 2000). as latecomers in emerging economies, entrepreneurial startups need to prove that they are legitimate players with high-quality products and 14 vol. 17, no. 2 fall/winter 200612007 services and also need to differentiate themselves to gain a competitive advantage (peng, 2003). thus, they are more intent on learning and have an entrepreneurial mindset unlike incumbent smes (ireland, hitt, & sirmon, 2003) and concentrate on developing their distinctive competences (peng, 2001 ). as discussed earlier, embedded relationships can provide firms with opportunities to internationalize and gain rents in foreign markets. more importantly, embedded relationships provide entrepreneurial startups the opportunity to acquire and assimilate new knowledge (i.e. potential absorptive capacity) and, thus, to transform and exploit the knowledge (i.e., realized absorptive capacity) to develop a competitive advantage in domestic and foreign markets. while learning may facilitate the development of core competencies (lei et al., 1996), sirmon et al. (in press) argued that continuous learning is necessary for firms to establish a series of temporary competitive advantages in order to sustain a competitive advantage overtime. in sum, entrepreneurial firms not only exploit foreign market opportunities offered by their allied business groups and foreign firms but, also, create opportunities to expand into foreign markets through their entrepreneurial efforts of offering new products and services. potential absorptive capacity relations with foreign firms knowledge acquisition and assimilation capability (potential absorptive capacity) as entrepreneurial start-ups need to develop advanced technology and managerial capabilities to gain a competitive advantage, they are more likely to establish relations with prestigious foreign firms that offer cutting-edge technologies. accumulating advanced technology in the early stage broadens the entrepreneurial start-ups' reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy knowledge base and increases their capability to assimilate new knowledge. according to zahra and george (2002a), knowledge accwnulation and assimilation are two dimensions of potential absorptive capacity. as emerging markets become more open, their investment potential attracts many competitive foreign firms. foreign firms are not only competing against the increasingly strong local firms (e.g., soes, business groups) but also against other foreign firms (hitt et al., 2005). as a result, foreign firms need to continuously offer innovative solutions to local customers in order to gain a competitive advantage in emerging markets and the global market. thus, they are likely to engage in exploratory learning in addition to exploitive learning in emerging markets to provide new products or services that cater to the idiosyncratic preferences and needs of local conswners (hitt et al., 2005). indeed, many foreign firms have started to develop r&d centers in emerging economies (li, holmes, & hitt, 2005). additionally, foreign firms have begun to explore the business opportunities that had not been tapped at the base of the economic pyramid in emerging markets (london & hart, 2004; hitt et al., 2005). accordingly, foreign firms tend to focus more of their attention on an innovative orientation and/or capabilities, in addition to market knowledge and social capital, when seeking appropriate local partners (hitt et al., 2000; li & atuahenegima, 2001). compared to business groups and incumbent smes, entrepreneurial start-ups are more flexible and innovative because of their entrepreneurial mindsets (ireland et al., 2003). they are better able to recognize entrepreneurial opportunities in local markets in which new goods and services can be introduced to create or satisfy customer demand. large firms and incwnbent smes are strongly influenced by institutionalized routines, accwnulated resources, and capabilities that contribute to 15 vol. 17, no. 2 fall/winter 200612007 core rigidities. "core rigidities are inflexible capabilities that in part disallow acquiring new resources that can be bundled into value-creating capabilities" (ireland et al., 2003: 978). as such, core rigidities stifle innovation and lead to organizational inertia (leonard-barton, 1995). therefore, it is expected that foreign firms will tend to establish linkages with entrepreneurial startups to seek collaborative rents because resources (e.g., technologies, managerial skills, financial capital) from one party cannot generate rents in emerging economies without utilizing the resources from the other party (lado et al., 1997). because foreign firms are generally concerned that their knowledge will be expropriated by local partners, they are generally unwilling to share their core competences with local firms in the early stages of cooperation. however, as firms gain more knowledge about each other and establish trust and reciprocity over time, foreign firms and entrepreneurial start-ups are more willing to share valuable resources and cooperate closely to achieve collective benefits. these efforts facilitate effective knowledge transfer between them. although entrepreneurial start-ups may not have significant absorptive capacity, foreign firms accwnulate considerable experience in transferring their knowledge and capacities to their partners and may devise a formal means for transferring that knowledge (hitt et al., 2005). close working relationships (i.e., relational capital) further facilitate the knowledge transfer between them (hitt et al., 2005; lane & lubatkin, 1998). as a result, entrepreneurial start-ups expand their knowledge bases (i.e., potential absorptive capacity) that increase their capability to comprehend new information, knowledge, and capabilities (cohen & levinthal, 1990). their entrepreneurial mindsets help them to identify new opportunities that will contribute to value creation (ireland et al., 2003). additionally, entrepreneurial start-ups also accwnulate knowledge acquisition and reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy assimilation experiences and, thus, formalize a developed and refined routine or process to acquire and assimilate external knowledge, which increases potential absorptive capacity continuously (zahra and george, 2002a). hitt et al. (in press) found that relational capital with prestigious clients did not help a firm enter foreign markets unless the firm had strong resources (e.g., human capital). thus, we expect that as entrepreneurial startups develop their absorptive capability by acquiring and assimilating knowledge from foreign firms (knowledge held by their human capital), they are able to exploit or explore opportunities in foreign markets. further, perrow (1961) indicates that if a firm is well regarded, it more easily attracts other firms to invest in it. entrepreneurial start-ups establishing a close relationship with prestigious foreign firms are likely to enter a diverse knowledge network because prestigious foreign firms tend to occupy the hub of the networked firms and knowledge diffuses throughout the network (peng & heath, 1996). zahra & george (2002a) suggested that diverse and complementary knowledge is the antecedent of potential absorptive capacity. because of the diverse knowledge possessed by prestigious foreign firms, entrepreneurial start-ups are likely to increase their potential absorptive capacity as well. proposition 5: alliances with foreign firms increase entrepreneurial start-ups' potential absorptive capacity. relations with business group-knowledge acquisition and assimilation capability (potential absorptive capacity). in the early stage of transition, foreign firms invest in emerging markets to gain rents but are fearful that their advanced technology will be expropriated (khanna & palepu, 1997). as a result, foreign firms are more 16 vol. 17, no. 2 fall/winter 200612007 likely to invest in business groups because the groups are less likely to put their reputation at risk to expropriate advanced technologies. therefore, business groups in emerging markets play a major role in acqumng and assimilating advanced technology from foreign firms. thus, business groups form their technological bases (amsden & hikino, 1994). accordingly, business groups tend to use these technologies and their rich internal resources (e.g., internal capital markets, distribution channels) to develop innovative products and services to cater to local consumer tastes. over time, they may build the routines and skills necessary to produce innovations and to gain rents. however, these routines engender organizational inertia that is detrimental to business groups' competitiveness in the increasingly competitive emerging markets. studies have shown that new firms contribute to the generation of new ideas and radical breakthroughs (shan, walker, & kogut, 1994). as a result, these new firms are likely to enjoy transient monopoly advantages and gain abnormal profits, thus, challenging business groups' market power through exploiting new ideas and radical breakthroughs (ireland et al., 2003). perceiving the potential business opportunities in the entrepreneurial start-ups, business groups are likely to develop ties with them. furthermore, although entrepreneurial start-ups can produce innovative ideas, they often do not have the resources to commercialize their ideas (teece, 1996). to access needed capital, entrepreneurial start-ups may be willing to transfer partial ownership to or even be acquired by business groups. by doing so, entrepreneurial start-ups and business groups can share the rents of innovations. because business groups frequently include a range of firms operating in a variety of industries (guillen, 2000), entrepreneurial start-ups, as members of business groups, reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy can mobilize resources from the business groups' networks. thus, entrepreneurial start-ups can enhance their capability to acquire and assimilate new knowledge from the broad knowledge base available in the business group network (cohen & levinthal, 1990; ireland et al., 2003; zahra & george, 2002a). according to social identity theory, business group members tend to cooperate with each other, providing support for and commitment to the business group. loyal, committed, and trustworthy group members facilitate the knowledge transfer, which increases entrepreneurial start-ups' absorptive capacity (kane, argote, & levine, 2005). proposition 6: alliances with business groups increase entrepreneurial start-ups' potential absorptive capacity. potential absorptive capacity ~nd realized absorptive capability to internationalize. zahra and george (2002a: 190) defined knowledge transformation as "the ability to recognize two apparently incongruous sets of information and then combine them to arrive at a new schema". acquired and assimilated knowledge expands the entrepreneurial startups' knowledge base, enhancing their capability to combine previously unconnected elements to create new knowledge (nahapiet & ghoshal, 1998). although entrepreneurial start-ups may not need resources and capabilities to exploit new knowledge, their allied firms (e.g., foreign firms and business groups) have the capabilities to do so. moreover, their allied firms have international networks and, thus, may have the ability to exploit entrepreneurial opportunities in other markets, thereby, gaining transient monopoly rents (ireland et al., 2003). additionally, entrepreneurial start-ups are likely to identify opportunities in foreign markets of which allied firms are unaware 17 vol. 17, no. 2 fall/winter 200612007 because of their size and lack of entrepreneurial thinking (cohen, & levinthal, 1990; ireland et al., 2003). because entrepreneurial start-ups tend to excel at opportunity-seeking, allied firms may pay attention to entrepreneurship startups' actions. moreover, some entrepreneurial start-ups with limited resources can exploit foreign market opportunities independently. for example, they may exploit the opportunities in other emerging or under-developed economies where fewer resources are needed. their home market experiences are transferable to these institutional similar environments (wright et al., 2005). alternatively, entrepreneurial start-ups can increase their visibility and reliability to consumers in foreign markets, particularly in developed markets when the start-ups are allied with prestigious foreign firms and business groups. the prestige of foreign firms and business groups spills over into the inter-organizational networks (podolny & phillips, 1996). sociologists have argued that firm performance in markets is affected by the status levels of their close associates (podolny, 1994; baum & oliver, 1991). as a result, the possibility to export their products to or establish an international alliance in foreign markets increases when entrepreneurship startpups are allied with prestigious foreign firms and business groups (podolny, 1993). entrepreneurial start-ups' networks with foreign firms and business groups can provide them with the knowledge necessary to pursue foreign market opportunities and, thus, reduce uncertainty surrounding foreign expansion (guillen, 2002). entrepreneurial start-ups can obtain timely, useful, and reliable information and know-how to solve the problems in the process of foreign expansion (beckman & haunschild, 2002). therefore, entrepreneurial start-ups allied with foreign firms and business groups increase their own capabilities to exploit identified opportunities in foreign markets. reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy additionally, given that potential absorptive capacities are captured in entrepreneurial start-ups' unique network capabilities, these flexible entrepreneurial start-ups are likely to transfer this domestic network capability to foreign markets (i.e. emerging markets, under-developed markets). in so doing, they develop international networks to acquire resources and capabilities in these foreign markets over time, thereby, increasing their realized absorptive capacity (i.e., transformation and exploitation) in foreign markets (barkema, shenkar, vermeulen, & bell, 1997). proposition 7: entrepreneurial start-ups' potential absorptive capacity is positively related to their realized absorptive capacity to expand to foreign markets. discussion contribution and implications traditional internationalization theories have provided useful frameworks to explain why and how resourceful and competitive mnes, based in developed economies, exploit their capabilities in foreign markets (dunning, 1988; hymer, 1976; johanson & vahlne, 1977; vernon, 1966). traditional theories, however, assume that firms moving into international markets are resource-endowed and technologically advanced. under these theories, mnes can overcome their liability of foreignness by exploiting their capabilities to establish a competitive advantage and gaining rents in foreign markets (eden & miller, 2004; hymer, 1976). counter to the assumptions in traditional internationalization theories, firms in emerging economies generally are less resource-endowed and technologically advanced. therefore, the traditional theories do not effectively explain how firms based in emerging economies internationalize successfully. the theoretical arguments presented herein complement the traditional internationalization theories that dominate in 18 vol. 17, no. 2 fall/winter 200612007 the field of advanced economies by exploring how smes in emerging economies expand into foreign markets. we make several contributions in this work. first, we have argued that institutional environments are critical to understanding how smes in emerging economies can expand to foreign markets. we adopted an institutional embeddedness perspective to explain how smes in emerging economies internationalize to grow and to gain rents in global markets. the institutional perspective is especially important in understanding these firms given their liability of smallness and difficulty in accessing resources in emerging economies (granovetter, 1985; oliver, 1996; uzzi, 1996). we discussed the differences between the internationalization of incumbent smes and entrepreneurial start-ups. according to organizational ecologists, organizations' survival chances are sensitive to the population density levels at the time of their founding (baum, 1996). we propose that incumbent smes are likely to imprint their established institutional relations in the early stage of transition that, in turn, affects their strategic behavior (e.g., internationalization) in the middle stage of transition. yet, entrepreneurial start-ups tend to be embedded in different institutional relations that focus on developing competitiveness; competition in the middle stage of transition is based on resources and capabilities rather than on networks, as in the early stage (peng, 2003). additionally, uzzi (1996) argued that firms increase their survival capability by tapping the opportunities in their embedded exchange networks, but that the benefits decrease beyond a threshold where embedded networks are inertial and create path dependencies that disallow acquisition of new knowledge and support a strong commitment among embedded firms to the status quo. we employ ecological thinking to extend the embeddedness perspective and reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy propose that whether firms become trapped by their embedded networks depends on their founding environments. although incumbent smes are likely to be constrained by the opportunities available in their embedded relationships, entrepreneurial start-ups develop their potential absorptive capability. because of this, start-ups have the ability to continually revamp their knowledge base to create and exploit new opportunities in global markets. second, our model complements internationalization theory. the approach presented herein suggests that competitive capabilities are necessary for firms to create value in international markets. however, firms' strategic actions in emerging economies are influenced by an institutional reality that is uncertain and biased in favor of special interest groups (hoskisson et al., 2000). institutional relations determine whet4er firms are able to access rare and valuable resources and advanced knowledge to develop their competitive capabilities. therefore, our model emphasizes the important role of institutional embeddedness in firms' internationalization. third, we extend our understanding of absorptive capacity by emphasizing its importance for internationalization. in particular, we adopted the potential and realized absorptive capacity constructs (zahra & george, 2002a) to explore how different types of institutional embeddedness can lead to potential or realized absorptive capacity. in our model, institutional embeddedness of incumbent smes helps to build realized absorptive capacity; institutional embeddedness of entrepreneurial start-ups helps to build potential absorptive capacity. potential absorptive capacity is critical for firms to gain and sustain competitive advantages in international markets because it allows firms to enrich their capabilities (zahra & george, 2002b). f ourtb, our research contributes to the 19 vol. 17, no. 2 fall/winter 200612007 entrepreneurship and sme research streams. entrepreneurial researchers have suggested that an international network is critically important for new smes to internationalize (oviatt & mcdougall, 1995). however, our framework suggests that domestic institutional networks in emerging economies also play an important role for smes to internationalize. smes in emerging economies are likely to identify opportunities to internationalize from their embedded institutional networks (cohen & levinthal, 1990). although researchers argue that embedded institutional networks may constrain firms' strategic actions, we suggest that sme's embedded institutional networks facilitate their internationalization by providing resources and opportunities. future research directions as sirmon et al. (in press) emphasize, value creation depends not merely on holding valuable resources but also on the effective management of those resources. although incumbent smes and entrepreneurial startups have relations with business groups, our model shows that they develop realized and potential absorptive capacities, respectively. future research is needed to understand how incumbent smes and entrepreneurial startups manage their institutionally embedded relations, thereby, allowing them to develop different types of absorptive capacity. it is also worthwhile to investigate whether incumbent smes are likely to be constrained by familiarity traps based on their current competencies and how they restructure their resources to overcome inertia to sustain their competitive advantage in the long run. as sirmon et al. (in press) proposed, firms need to create a series of temporary competitive advantages to sustain an advantage over the long term. this requires firms to continuously create new value for their customers and, in tum, create value for the firm's owners. finally, it is important to empirically test the reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy propositions presented herein. we suggest that researchers conduct empirical research in diverse emerging economy countries because institutional environments in emerging economies are not homogenous as exemplified by countries undergoing massive privatization and countries experiencing gradual transition (hitt et al., 2004). such studies can provide a richer understanding of how various institutional environments in emerging economies influence the internationalization of smes. in conclusion, we have presented an integrated model to show how smes in emerging economies internationalize. we suggest that embedded institutional relations are critical resources for smes in emerging economies. smes can utilize this resource to overcome their liabilities in the process of internationalization and to identify, create, and exploit opportunities to internationalize. our work provides a value-added contribution to research on internationalization of smes in emerging economies. references amsden, a. & hikino, t. 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(2000). international expansion by new venture firms: international diversify, mode of market entry, technological learning, and performance. academy of management journal, 43, 925-950. vol. 17, no. 2 fall/winter 200612007 · 26 stra tegy book review strategic planning for new dr emerging businesses: a consulting approach fred l fry charles r. stoner laurence g. weinzimmer dearborn financial publishing, second edition, l 999 reviewed by: justin g. longenecker professor emeritus, baylor university strategic planning for new and emerging burinessest a consulting approach is well described by its title. it is, first and foremost, a business strategy textbook. its focus is the world of small business with a particular emphasis on growing businesses, what the authors term "emerging" businesses. and throughout the book, the authors examine strategic planning through the eyes of a consultant. the book is well organized in its coverage of strategic planning, even though the table of contents fails to provide clues as to its overall organization. chapters 1-3 are basically an introductory section. this section is followed by chapters 4-7, which treat the analytical steps needed to provide the foundation for a strategic plan. the final section, chapters 8-11,presents the action stage of formulating company strategy. the heart of the text is the second section, the chapters on strategic analysis and development, that cover processes common to that field. two chapters explain analysis of the environment-the general environment and the industry environment. the other two chapters look internally at the firm as it faces the challenges and opportunities of that environment. one part of the internal analysis considers the firm's resources as they relate to environmental factors. the discussion also highlights the distinctive competencies and competitive weaknesses that emerge from the internal analysis. the objective of the entire process, of course, is to match competencies with environmental opportunities while recognizing dangers that may stem from competitive weaknesses. following the section on strategic analysis, the authors proceed to the application or action stage of formulating a strategic plan. in this, the final section of the book, readers would apply the tools of strategic analysis to specific business situations. prospective entrepreneurs would develop strategies for new ventures. consultants would critique and/or assist in modifying or developing strategic plans of client companies. included for consideration are such strategies as focus strategies, market development strategies,and product developmentstrategies. other 95 journal ofsmall business so ategy vol./0, no. i spring/summer 1999 chapters cover goal setting and unit strategies. the final chapter recaps the strategy development process in the context of preparing a business plan. a sample plan follows the final chapter. most chapters of the book conclude with a section entitled "the consultant's viewpoint." in these parts, the authors alert consultants to the crux or primary focus of the topic under discussion and provide hints for getting on well with business clients. in chapter 9 (setting goals), for example, they explain to consultants that goal setting is not easy, that the process should not be rushed, that consultants should communicate extensively with clients, and that they should focus on the characteristics of "good" goals. such commentary is probably most helpful to student consulting teams. most chapters of the book also include two or three oneor two-page wellchosen protiles of real businesses whose characteristics or strategy illustrate the chapter topic. the book as a whole deals with the issues of strategy and planning at a relatively elementary level. (it could hardly do otherwise in view of its brevity-242 pages.) its sample business plan, for example, includes the broad statements related to mission and environment but does not contain financials. the textbook would be relevant for courses that are intended to focus on the basics of business strategy and then apply those concepts to new, small, and/or growing firms. the consulting emphasis makes it particularly appropriate for the use of student consulting teams. the roles of consultant and potential entrepreneur would merge in the case of students who prepare their own new venture plans. the authors write from their areas of academic specialization in management and strategy and from backgrounds of consulting with business firms. they are members of the faculty of bradley university and are known for their work in small business and entrepreneurship. justin g. longenecker, a pioneer in the field ofsmall business and entrepreneurship, received his ph d porn the university of ivashington. he authoredseveral books on the subject including the popular small business management text small business management. he has also published numerous articles in such journals as academy of management review, journal of small business management, and business horizons. 96 strategy table of contents page title/author 1 "new venture initiation: factors influencing success" val miskin jerman rose 10 "requirements and benefits of implementing just-in-time manufacturing for small-firm manufacturers" stanley e. fawcett john n. pearson 27 "the effect of operational and strategic planning on small firm perfonnance" larry r. watts joseph g. ormsby 36 "a proposed capital budgeting technique for liquidity constrained small businesses" john b.white morgan p. miles 47 "self-employment training programs for the poor" steven balkin 58 "total quality management, just-in-time, and their effect on small manufacturers" feraidoon (fred) raafat milton chen sitan'"g y editor stephen w. osborne indiana university of pennsylvania (iup) associate editors prashanth b. nagendra indiana universtty of pennsylvania (iup) joette m. wtsnieski indiana university of pennsylvania (iup) editorial assistants julie dobish indiana university of pennsylvania (iup) helen robinson indiana university of pennsylvania (iup) book review editor radha chaganti rider university editorial review board ramachandra asundi university of puerto rico james bradley central washington university david brennan university of st. thomas (st. paul) shawn m. carraher texas a & m vniversity commerce radha chaganti rider university vivek choudhury florida state university richard t. dailey universtty of montana j. douglas frazer millersville university terry gaston southern oregon university joseph geiger university of idaho masoud hemmasi llltnois state university kirk heriot francis marion university lynn hoffman umversity of northern colorado lawrence klatt florida atlantic university krish krishnan indiana university of pennsylvania (iup) thomas j. liesz mesa state college stephen lucas university of north carolina-greensboro steven j. maranville university of st. thomas (houston) thaddeus mcewen north carolina a&t university abbas nadim vniversity of new haven john e. prescott universtty of pittsburgh neal r. pruchansky keene state college james a. rodger indiana university of pennsylvania (iup) c. louise sellaro youngstown state vniversity herbert sherman southhampton college of long island leo simpson western kentucky university joseph singer university of missouri —kansas city matthew c. sonfield hofstra university pamela h. specht university of nebraska at omaha harriet stephenson seattle university jude valdez universtty of texas, san antonio howard van auken iowa state university john b. wallace marshall vniversity monica zimmerman temple university at the journal of small busrness strategy is a joint publication of the small business institute (formerly sbida) and the eberly college of business and information technology, indiana university of pennsylvania. send subscription request to stephen w. osborne, editor, journal of small business strategy, indiana university of pennsylvanta, 304 eberly college of business and information technology, indiana, pa 15705-1071. annual subscriptions may be ordered at $20 each (u.s, dollars only). international subscriptions add $5 annually for postage and handling. back issues may be ordered at $ 12. @ copyright 2002 small business institute at issn 1081-8510 2002-2003 sbi officers small business institute presidenl vi ce-presi dent —marketing 41 membershipshcrrill r. 'fsylor texas woman's university ol'lice: (940) 898-2903 fax: (940) 898-2120 fax: (717) 871-2464e-maik staylorqatwu.edu emsik pat.mccaskeyrmillersville.edu president elecl vice president -developmenthbbss nsdim stephanie huneycutt university of new haven newport university oflice: (203) 932-7122 phone: (757) 594-7139fax: (203) 911-6092 fax: (757) 594-7808 email: anadqacharger.newhaven.edu email: huneycutrcnu.edu acling vice president —administration vice presi dern —pmgrann james 8radley j. douglas frazer central washington university mi1lersvi lie university phone; (206) 439-1282 fax (206) 439-3809 fax: (717) 871-2464 email: brsdleylacwu.edu email: dfrazerqamarauder.millersv.edu vice presi dent of conference a rrang emeute secretary —treasurer ceralyn mcclure franklin university of texas of the permian basin francis marion university phone: (915) 552-2170 phone: (843) 661-1419fax: (915) 552-2174 fax: (843) 661-1432 email: franklin gqautpb.edu email: kheriotgu~fmarion.edu vice presi dent -publications immediate past president terry gsston roosevelt d. butler southern oregon university oflice: (541) 552-6713 fax; (541) 552-6715 e-maih gsstonqaisou.edu vice president -program quality assurance ed'l,l i fs bb 'tilor, ourna of ma i business lralegy stephen w. osborne indiana university of pennsylvania university of louisville oftice: (502) 852-4788 phone (724) 357 5760 fax: (724) 357-5743e-maih bhkemeo i qalouisville.edu email: osbomeqaiup.edu vice president -case competition steven maranville university of houston —downtown visit our website at oflice: (713) 221-8524 fax. (713) 226-5226 www. jsbs.fyrge-maih maranvilleqadt.uh.edu reproduced with permission of the copyright owner. further reproduction prohibited without permission. startups that work nelson, thomas journal of small business strategy; fall 2006/winter 2007; 17, 2; abi/inform complete pg. 105 book review startups that work by joel kurzman and glen rifkin penguin group: new york, 2005 reviewed by thomas nelson university of louisville startups that work (penguin group: new york, 2005) by joel kurtzman and glen rifkin offers a thorough and instructive analysis of 350 startup companies that were tracked from 2001 to 2003. specifically, the authors analyze "the ten critical factors that will make or break a new company." they are, in brief: planning, management, the board, cash flow, the market, competition, the business model, the product, customers, and alliances. this is a pretty straightforward list and it is easy to see how excellence in each area would lead a company to success. the title of chapter 2 is "to get where you're going you've got to have a map." one of the key findings is that for a company to create value, it must have (and follow) a plan. to create this plan, the authors determined that, first, everyone in the company must be a marketer and, second, the plan, or map if you will, should be built on nine drivers: market size, competitive position, business model, cash flow, investor value contributed, strength of the management team, product development, channel/alliances, and customer acquisition. for a startup to progress, there needs to be growth along all of these axes simultaneously. the authors point out that what typically happens is that some areas are focused on for a time then, other areas receive emphasis later. in startups, the squeaky wheel gets the oil, just as in life. the next topic covered is management. great people are the key to funding and eventually success. the authors state that the first rule for business might be summed up as "it's the people, stupid." this is the conventional wisdom as well. kurtzman and rifkin depart from the conventional wisdom, however, by warning against putting together a high powered and, thus, highly compensated team too early. in the early stages, the benefit of having all the pieces of a great management team in place is far outweighed by the increase in the burn rate necessitated by paying for all that talent. that talent will be needed later on to develop the company and to bolster the chances of obtaining additional financing. so entrepreneurs should have the talent identified but not necessarily hired in the earliest stages. 105 what is most important, both early on and later is to have a team. it is suggested that the best teams work well together and have successfully worked well together before, perhaps at a previous employer. teams should have a leader, the members should have diverse skill sets, and all should understand the marketing function. two observations about the management team seemed particularly instructive. first, reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy being smart does nothing other than open the door. the management team must have value adding skills in addition to intelligence or they are wasting their time and money. second, the decision about when to bring in a professional management team is one of the most critical decisions a company can make. too early and the company wastes money; too late and the company wastes opportunity. the management team consists of the entrepreneurs, the financers, the eventual professional management staff, and the board. in addition to their traditional role as watchdogs, the authors suggest that, if a person doesn't bring something of value to the company other than oversight, they have no reason to be on the board. the author's research indicates that the role of the board in startups is evolving towards being part of the value creation equation. a good board can provide strategic assistance, customer introduction, help in forming strategic alliances, and (whether it is desired by the founding entrepreneurs or not) hands-on assistance. kurtzman and rifkin also found that companies that had angel investors on their boards had more-developed strategies than those that did not, or those that had venture capitalists on their boards. however, the 'vc-backed companies had slightly better management teams[.]' this expanded role for boards blurs the line between oversight and management, which could cause friction. the opportunity for friction increase as a company moves from the seed stage into the growth stage. at this point, the goals of the company's management and the goals of the board, especially vc's and other investors, may be in conflict. managing cash flow is one of the most difficult things that startups have to contend with. the idea for a typical startup is to borrow some money and use that money to create products and services and, then to begin to sell. if necessary, the process of borrowing is repeated as sales increase, vol. 17, no. 2 fall/winter 200612007 driving up the value of the company until the company no longer needs to borrow money to support itself. at this point the money previously borrowed is paid back and investors have stock that is, presumably, worth more than the money invested. the authors' research shows that the more successful companies have better cash flows, and a better understanding of their cash flows, than their less successful counterparts. a strong correlation between cash flow and customer acquisition was found as well. less successful companies had higher cash flow in the seed round of financing which declined as time went on. this is attributed to having too much high cost staff early in the company life cycle. according to interviewee yuchun lee, no successful software startup that reached a billion dollars in sales ever lost money after its revenue hit $15 million. from this, we can infer that most that most successful companies are profitable very early on. knowing market size is important to a startup. however, bigger is not always better when it comes to market size. the authors point out that companies targeting smaller markets were better "able to manage growth and add more value over time." as counterintuitive as it seems, going after a market that is too large or having too much startup capital causes companies to be unsuccessful. companies that require less money and move in on smaller markets become profitable more quickly. hand-in-hand with knowing the market size is understanding the target customer. using the example of captivate, a company that places televisions in elevators to deliver information and advertising, the authors demonstrate how to know the target customer and how to leverage that knowledge into revenue. to understand a company's position in the market, the authors suggest analyzing its cost structure, sales cycle, value proposition, 106 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy patents, efficiencies, partnerships/channels, and analysts' and consultants' responses to the company. sometimes the entrepreneur's vision creates the market position a priori. when this works well you get market defining companies like microsoft or nike. when the entrepreneur's vision does not mesh with the consumer's reality you get the equivalent of startup roadkill, such as pets.com or rosie magazine. the authors suggest that a thorough understanding of the market and customers is in itself a competitive advantage. niche marketing and discounting also provide powerful advantages. investing the time to identify the market, the company's competitive advantages, its customers, and then to validate that market makes the business model development go much more smoothly. while the marketing plan focuses on delivering value, the business model is essentially how the business captures value for itself. "the business model determines the viability of the company" say the authors. it is an "inward facing" model of how the company does business and how that business leads to growth and profit. the first step in business model creation is to understand what business the company is in. this is where previous work in competitive and customer analysis factors in. for example the authors discuss virgin atlantic as a company that understands what business they're in. according to kurtzman and rifkin, richard branson decided that virgin atlantic was in the entertainment business not the transportation business, and that decision has been a key factor in its success. as a result, virgin atlantic offers a very unique flying experience for world travelers. a business model must include pricing, manufacturing, distribution, and all the other aspects of commerce in a combination that is scalable, sustainable, and nimble. if this is achieved growth will not be interrupted, and vol. 17, no. 2 fall/winter 200612007 customers and suppliers won't be inconvenienced, thereby creating drag on the company. successful product development involves the actual product, the customers' involvement in the development process, the manufacturing process, financial inputs, and other decisions. one interesting finding was that "a more developed product is not always better." if a company spends too much time or too many resources getting the product right, the market may already be captured by another company. even if it has not, the company may have squandered the resources allocated to penetrate the market. because many products have an iterative nature (for example a new cell phone comes out every week), getting to market quickly is more important than getting to market with a perfect product. this does imply that there will be a continuing budget for product • development, and it may be larger than some companies anticipate. four keys to product development are mentioned: product development must be market focused, prioritization is key, product development can not be linear, and cash flow is king. three are obvious or have been previously explained. however, product development can not be linear is an interesting point, and the authors state that "startups must extrapolate product development out into the future, making the difficult but necessary decisions about where technology is going to be." this appears to be a daunting task without a crystal ball, but companies like apple do an amazing job of it. this book has some solid findings for companies in search of customers. "lighthouse customers," i.e., customers that believe in the company and its products and who are willing to provide references, are crucial to success of most startups. shorter sales cycles are better for startups because 107 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy vol. 17, no. 2 fa/i/winter 200612007 being able to generate more sales means a quicker path to economies of scale and. market penetration. it is also re-noted that a quicker product is preferable to a more developed one. are: one often used strategy for ramping up sales is to hire a "gunslinger." this is a person (usually brought in as a vp of sales) who has been responsible at various companies for generating five million dollars in sales for one product after another. sung park, one of the interviewees claims that "every startup needs a gunslinger. they're wild and impossible to manage, but to get past the gatekeepers you need those kind of guys[.]" another strategy is to get a champion inside a company's first key account. that way the product is sold from the inside out. the startup company should seek direct customers first, channels second, and allian~es last according to kurtzman and rifkin. that being said, a channel partner like microsoft if your company is in the computer industry or sony if it sells an electronic device or component, can be a valuable ally, lending their credibility and aid in deflecting troubling questions such as 'will you be here in a year?' or 'can you support your product?' the more successful companies reviewed showed a good mix of direct sales, channels, and alliances. companies that had successfully negotiated channel deals had significant advantages over those who had not. of course, this might not be causal in nature. angel invested companies had a significant leg up on channel sales development, presumably due to the nature of assistance that angels bring to a company. however, the most successful companies focused directly on customers and less on channels and alliances. in conclusion, ten tips are given. they summarize the book well and are good touchstones for future reference for entrepreneurs, scholars, and students. they 108 1) start with a large group of three or four founders 2) make certain a marketing or sales person is a member of the founding team 3) it's all about teams 4) when building the business, don't worry about your exit 5) manage your cash 6) start with a market 7) find a great first customer 8) build a board that's a great "sounding board," not just a good watchdog 9) make your product or service high quality and unique, then brand it in a way people won't forget l 0) enjoy the ride i think these rules, combined with the rest of the book, are good reading for any potential entrepreneur. s'tmn"gy exploiting the internet: strategies and frameworks for a small business vivek choudhury florida state university dennis galletta university of pittsburgh abstract the internet represents one of the most dramatic, widespread innovations of recent times. for the small businessperson, i t can be both a tremendous opportunity as well as a potential threat. this paper presents a series offrameworks and examples to help a small businessperson recognize, and develop a strategy to cope with, the electronic commerce opportunities and threats posed by the web. potential uses ofthe web wi th respect to five diferent stakeholders are presented: customers, intermediaries, suppliers, competitors, and employees. introdijct ion it is virtually impossible these days to pick up a magazine or journal, read a newspaper, or watch a news program on television, without hearing about the internet. consider the statistics. nielsen (the same firm famous for measuring television ratings) has repeatedly conducted telephone surveys of the extent of usage of the internet. while definitive results are a moving target-the number of internet users continues to double each year, and there seems to be no end to this trend —the most recent large nielsen survey (june 1998, www.commerce.net) indicates that approximately 79 million adults (34%) in the u.s. and canada use the internet. eighty-three percent use the world-wide web. idc (www.idc.corn) predicts that the number of devices accessing the web will grow to over 300 million world-wide by yearend 2001. much of the growth will be international; the united states will go from 65% of the world market last year to 54% in december 2001. an earlier nielsen study (december, 1997) found that about 21% of web users had used it to make on-line purchases. idc predicts the percent of users buying goods on-line will go from 2125% today to 39% in december 2001. this is partly because as users gain experience with the web, they are increasingly likely to respond to on-line advertising, and make purchases over the w b. a dy by pi dippy 9999 ~dd . i 9 9 *9 l d ii999 d earlier) users are 50% more likely to look at ads and click on them to make purchases than new (1996-97) users. further, the demographics of the typical internet user are very appealing to potential marketers. according to a survey conducted by the georgia institute of technology, the average income of 23 journal ofsmall business srraregy volume 9, no. 2 fall/ivinrer /998 internet users is $58,000, and 54% of users have completed college. combining the factors of a greater number of users, increased willingness to make on-line purchases, and larger average transaction size, idc predicts that the amount of web commerce will rise from $2.6 billion in 1996 to over $220 billion in 2001. forrester (www.forrester.corn) estimates that us businesses will exchange an estimated $ 17 billion in goods and services this year over the net, more than double the amount in 1997. they predict that number will rise to $327 billion by 2002, about 3% of gnp. combined with the cost savings to businesses and online consumer buying, the internet could add an estimated $ 10 billion to $20 billion to gross domestic product in 4 years (business week, 1998). clearly, the potential for electronic commerce over the web is vast. there are numerous stories of entrepreneurs who have generated significant revenues with successful web-based businesses. examples include amazon.corn (a retailer of books and music on the web), open market www.o enmarket.corn, which sells internet commerce solutions), auction web 8 i i i i ), da by-t i~|i.«ri quote site). while many established businesses, such as dell and cisco, have leveraged the web very successfully, the opportunities on the web may be particularly significant for small businesses competing with more established rivals. as shikhar ghosh, founder and chairman of open market (see above), has stated, "ultimately, the risk of internet commerce for established businesses is not from digital tornadoes but from digital termites" (ghosh, 1998). yet, it is striking that only 8% of firms surveyed in early 1998 by dun & bradstreet reported marketing through a web site (henricks, 1998). in fact, the survey showed that small businesses have been counting on less technological means such as walk-in retail traaic (44%), telephone sales (22%), and field sales (18%). one impediment that prevents large firms from engaging in on-line sales is the large investment in "face-to-face meetings, handshakes, and product demonstrations (that) have built strong customer relationships" (anders, 1998, p. i). jeopardizing these relationships could cause con!lict in traditional sales channels. furthermore, some very large firms would prefer to sell large quantities to a distributor rather than fulfill large numbers of small orders. thus, barriers to entry for small businesses are fewer and weaker than one might have guessed. in many cases, small businesses are finding that they are able to compete on a global scale that would have been impossible before. for instance, network associates in santa clara, ca makes anti-virus software that it has traditionally not marketed outside the us because (he distribution channels would be too expensive. they do, however, have a web site. recently, a bank in spain downloaded the soaware from their web site and ordered a 30 seat license! as division manager zach nelson noted "instant sale. no cost." (business week, 1998) many of the web-based businesses discussed earlier began as very small enterprises and worked their way up very quickly thanks to the global reach of the internet. an excellent example is auto-by-tel, which allows customers to specify their needs and obtain price quotes from particular local dealers. at the beginning of auto-by-tel's operations on prodigy in march, 1995, about 500 purchase requests were expected per week, but 1,348 requests were received on thefounh day alone (welles, 1997). by late 1998, auto-by-tel was receiving about 25,000 requests per week, and threatens to reshape the automobile sales industry. 24 journal ofsmall business strategy volume 9, no. 2 fall/ivinrer 7998 likewise, amazon.corn began as a small business, opening in 1995 with i million titles for sale but only 2,000 volumes in stock. amazon.corn's model still focuses on stocking very little inventory and ordering from quickly-responding distributors on demand, but amazoncom now stocks over 1.4 million volumes in two large warehouses to take advantage of bulk purchases directly from publishers (macht, 1998).the model has prompted legions of "copycat" imitators in other product groups such as toys, groceries, cooking, sporting goods, stationery, flowers (macht, 1998),and even scientific instruments(wagner, 1998).for instance, etoys corn, hoping to emulate amazon.corn in the toy industry, enjoyed a 10-month lead on toys 'r's, and made deals with portal sites such as aol and yahoo!. today etoys.corn has over 3,000 toys in its web-based catalog. while toys 'r's is now investing in similar deals, etoys has a significant advantage: it has no investments in bricks and mortar, and very small inventories (macht, 1998). very small firms can make use of the web for reshaping their own businesses. auto-by-tel was a reincarnation of a failed automobile dealership (welles, 1997). one oregon firm, sapient health network (shn), faced bankruptcy because its health subscription service failed to generate enough customers. however, the web allowed it to move the service on line and experiment with approaches until it finally settled on a very successful sponsorship, rather than subscription, business model. this demonstrates that, at least for some, "a web-based business can reinvent itself in a matter of weeks" and can change direction about as easily as its founder changes his or her mind about what the business should be (raths, p. 52). as the quote from mr. ghosh indicates, however, the internet is not an unmitigated blessing. as with any reshuffling of the competitive landscape, there are winners and losers. consider the following two examples (business week, 1998). mike dobres, general sales manager of royal motor sales in san francisco, has seen his profits fall by more than 25% over the past couple of years. auto-by-tel, as well as other car buying services, offer consumers an alternative purchase channel. also, consumers are now much better informed about such things as invoice prices and are, therefore, able to negotiate better. on the other hand, jeff peters, manager of byers chrysler plymouth dodge in columbus, oh, hooked up with autoweb.corn and increased his monthly sales from 160 to 172 cars, at a cost ofjust $29 per internet referral. the article cites an example of mr. peters selling a car to an on-line buyer in kentucky! what this example points out in no uncertain terms is that the internet itself is an equal opportunity resource —all who wish to have access can probably do so without jeopardy. thus, whether it turns out to be an opportunity or a threat will depend largely on how well a business understands the capabilities and limitations of the web in relation to its own specific needs, and how effective it is in designing a web strategy. one approach that is not likely to be viable is to do nothing. consider the following numbers. 93% of purchasing managers had internet access and another 5% planned to get it soon, according to a survey by the national association of purchasing management. 34% of the respondents used the web 5 to 10 times a week to do their jobs, while 19% used it 20 times a week, many as a research tool when switching suppliers or purchasing a product for the first time (southwick, 1998). in the words of shikhar ghosh, "companies that do not want to participate in internet commerce may be forced to do so by competitors or customers" (ghosh, hbr, 1998). the purpose of this article is to present a series of frameworks and considerations to help the small business owner identify opportunities and threats posed by the internet and develop an 25 journal ofsmall business strategy volume 9, no. 2 fallllyinter /998 appropriate strategy for coping with them. five generic sets of stakeholders can be affected by the use of the internet: customers, brokers and intermediaries in the marketing channel, suppliers, competitors, and employees. next, we consider each of these in detail. customers much of the interest in electronic commerce comes from the unique potency of interaction with customers afforded by the internet. large businesses have always had the option of establishing direct on-line links with their customers —particularly large industrial customers —via their own proprietary networks. the internet has now made it economically feasible for even the smallest business to establish such electronic linkages. depending on the nature of the application, the link may be established over the internet, which is accessible to all, or over an "extranet." extranets are private networks that typically use the communications infrastructure of the internet (and web browsers as the user interface) but access to an extranet is restricted to users explicitly authorized by the operators of the extranet (through passwords and other security devices collectively referred to as a firewall). for instance, a travel agent may use the internet to communicate with any customer looking to buy an airplane ticket. on the other hand, a stock analyst may use an extranet to provide access to his investment analyses reports to subscribers only. an example of a successful extranet is the case of silver platter information, inc., a $72 million company that licenses huge bibliographies from publishers such as elsevier, converts them into searchable databases, and then ships them, typically on cd roms, to its global network of 176 independent distributors. in the past, a considerable portion of silver platter's employees'ime was spent responding to routine questions from distributors such as the status of their shipments. so, silver platter developed an extranet that made its customer information database accessible to its distributors. while the system cost $30,000 to develop, silver platter feels the money was very well spent, based on the reactions from distributors and their satisfaction with the system. the generic question that a business needs to answer is how best to exploit the potential of electronic linkages with customers. a common mistake to avoid is to evaluate the potential for electronic commerce for a business based strictly on the likelihood of on-line sales. this is an easy error to make in light of the focus in the popular press on on-line purchases, as reilected in the surveys above. consider, however, that a recent survey by the georgia institute of technology www. vu. atech.edu/user surve s/surve -1997-04 found that the most popular reasons for using the web were: gathering information (86%), searching (63%), and browsing (61).the least popular reason was shopping (19%).these numbers highlight an important point: even if an actual purchase is not made on-line, much of the decision-making by consumers may be supported by collecting information on the web before the purchase. to the extent this is true, not having an effective web presence may be a significant competitive drawback. one framework that can be of great value to businesses hoping to develop a comprehensive strategy is the customer resource life cycle (ives tk learmonth, 1984). this framework reminds us that a customer goes through multiple stages in acquiring and using a product: (i) requirements, (2) acquisition, (3) stewardship, and (4) retirement. each of these stages represents a possible point of contact with customers. anything that a business can do, through a web site, to help a customer with any of these stages is likely to be a source of value added for the customer and can help the business differentiate its product or service. in addition, the business may also be able to reduce costs, for instance, by of(loading some data entry to customers, or by allowing customers the opportunity to find relevant information directly on the 26 journal ofsmall business strategy volume 9, no. 2 fall/ivinter 1998 web, rather than having to interact with employees of the business. below, we will discuss the generic stages in the customer resource life cycle and some examples of applications in each stage. first, however, we begin with a stage that is not included in the formal definition of the customer resource life cycle but is nevertheless important for any business —creating product awareness. product awareness in this stage, the seller's challenge is the same as in most advertising —making buyers aware of its product and service offerings. what, then, is the advantage of the web? cronin (1994, p. 119) offers an interesting view in the table below, where the amount of information is plotted against the potential interaction with customers. traditional advertisements have low customer interaction and low information content. the amount of content can be boosted in long print advertisements or half-hour "infomercials," but the interaction is still quite low. interaction with customers low high high ~ infomercials ~ personal visits information ~ print ~ electronic information distribution content low ~ traditional ads ~ phone sales telemarketing can boost the amount of interaction with customers but it is difficult to provide a large amount of information content; not only is the telephone medium unable to demonstrate the physical characteristics of products, a(ten the callers are not deeply knowledgeable about the products or services. the goal of high information and high interaction is very interesting; that cell contains both the most and least expensive approaches of all. firms who would obtain great advantage from very high interaction with customers along with high information content have historically needed to employ a very expensive door-to-door sales strategy. some of these same firms are now finding that a great deal of tailored information can be distributed electron ical ly for a fraction of the cost. furthermore, the interaction element does not imply that only the information requested is given to the customer, but also that information can be collected from the customer to open up two-way communication or to store for future use. a key assumption in the discussion above, of course, is that the business is, in fact, able to attract customers to its web site. given the millions of web sites on the internet, this is not an insignificant challenge for a business, particularly a small business without the name recognition of a microsoit or an ibm. what strategies are available to a small business to attract potential customers to its web site? one way is by placing prominent ads on some well known and frequently visited web sites (see the table below, from www.relevantknowledge.corn). rates for placing so-called "banner" ads 27 journal ofsmall business strategy volume 9, no. 2 fall/winter l 998 range widely by site, but sites such as yahool, infoseek, lycos, and excite charge about $20 to $30 per thousand visitors who see the banner (voetsch, 1998).their minimum monthly charges of $ 1,000 to $6,000 are easily covered by the millions of visitors each month, and a small business advertiser can elect to limit the number of exposures to contain costs. so far, there are relatively few sites that attract such traffic; such sites are usually those that provide the ability to navigate the internet (such as yahoo!, hotbot, and infoseek), or those that were set up as the "starting page" when the browser was installed by the computer manufacturer or the user. such web sites have recently added directories, search engines, news, and other services to position themselves as web "portals." that is, they provide a wide range of services with the expectation that a user looking for virtually any kind of a web site can start off at the portal and then, by following a series of well structured links, arrive at the destination web site. the key is finding a way to make sure that interested parties will stumble across your site. 1. yahoo.corn 6. excite.corn 2. aol.corn 7. iycos.corn 3. microsoa.corn 8. msn.corn 4. netscape.corn 9. infoseek.corn 5. geocities.corn 10. altavista.digital.corn one important consideration to make users'ccess less of a random event is targeting, where you place advertisements on portals in strategic locations. for instance, if a person does a search or otherwise arrives at a page having followed a set of insurance links in yahoo!, he or she will almost always be presented with a banner ad for insurance, gaining instant global exposure for the business displayed. thus, one possible strategy for a business is, in fact, to "purchase a word" from yahoo! such that every time a user searches on, or follows links based on, that word, the ad displayed to the user is for this business. very small businesses that find the rates for placing ads on portals too high can try to identify specific sites that their customers are most likely to visit. that is, "go where your potential customers are" (southwick, 1998). in general, customers are likely to consult on-line versions of the same references they used in print form. for instance, the thomas register of american manufacturers is a frequently used source by many procurement manufacturers. plastics technology group, a $ 16-million manufacturer of flexible plastic tubing, paid thomas register $ 7,000 for links to its site under 100 di!terent categories. now, marketing manager donald warner states that "...the link from thomas 's is consistently in the top 6 out of about 40 different places where people find us." requirements in the requirements phase, customers oaen seek information about the product to clarify the purchase. this may involve one or more of the following steps: (a) determine product appearance: customers may need to ask how the product looks. for instance, a product that customers oaen buy over the phone is flowers. rather than having to trust the salesperson to select the appropriate bouquet for the occasion, a customer can now visit ftd's web site (www.ad.corn) to see the various flower arrangements that he or she can purchase. this reduces the 28 journal ofsmall business strategy volume 9, no. 2 fall/iyinier 1998 possibility of a dissatisfied customer. another example is the web site of bmw. visitors to the site can look not just at still images of the car but can actually take a "test drive" (using "shockwave" technology). while bmw is of course a large car company, it would not be difficult for an individual car dealer to develop such an application, or for any small business to develop a similarly interactive application. (b) determine prices: clearly, a buyer needs to know how much a product costs before he/she makes a purchase decision. there are three ways a seller can provide this information. the most obvious one, of course, is to list prices on its own web site. however, this assumes that the buyer can, in fact, be induced to visit the business's web site. as we noted above, this is not a trivial challenge for a small business. another possible avenue for a business is to participate in alternative web-based distribution channels, such as electronic markets, that are designed specifically for the purpose of helping buyers compare prices across multiple sellers. we discuss these again later in the paper. finally, simple electronic mail can be a powerful and e!ticient means to communicate with both new and existing customers, although it can present some interesting challenges. for instance, james kantor of eastern avionics international used to delete most of his e-mail without reading it simply because he could not understand it, being in a foreign language. he began to subscribe to comprende, a real-time internet based service that translates e-mail ($250 set-up fee plus $ 100 a month for a corporate account). in the first ten weeks he used comprende, his international sales went up by 60%! (esterson, 1998). (c) determine what quantities or variations are available: sometimes, a buyer may know that he/she needs a product in a general category but may not know exactly which product. in that case, the seller may be able to help the buyer by presenting a set of choices. for instance, a visitor to amazon.corn can enter a general subject area or author and get a list of books, along with published and reader reviews and possibly, a table of contents for each book. in some cases, the web site can be used to create or to surface latent demand. for instance, once a buyer has purchased books through amazon.corn, the next time he/she returns to the web site, amazon displays a personalized message with specific recommendations of books the buyer may like, based on his/her previous purchases. in some cases, this may point the buyer to purchase a book that he/she may have been completely unaware of before. it serves several needs of the seller to provide this kind of information electronically. first, sellers without a web site often need to employ many telephone representatives to answer these highly repetitive questions, for instance, on product specifications or prices. further, if a buyer is more fully aware what he or she is going to receive, the levels of returns will decrease. finally, as noted, an awareness of the kinds of options available in some products can serve to increase sales. acquisition the acquisition phase is the one that is most often associated with electronic commerce because it includes on-line ordering. however, even within the acquisition phase, there are different activities that may be supported. thus, customers need to know the following: 29 journo/ ofsmall business srraregy vo/arne 9, no. 2 fall/ivinier /998 (a) where to go to find ororder the item: this can include such simple information as relevant phone numbers and mailing addresses that the customer can use to find a hotel location (wwwhiltoncom), on-line forms that the customer can use to request a call from a salesperson (www.autobytel.corn), or even on-line ordering capabilities (for instance, www.llbean.corn, or making reservations at wwwhilton.corn), depending on the nature of the product and the sophistication of the site. (b) specify or configure the product: a pioneer in this respect has been dell computers (www.dell.corn) (as well as other pc vendors such as gateway (www.gw2k.corn) and quantex (www.quantex.corn)). customers looking to buy dell computers can visit its.web site and configure computers to their exact needs, assembling the specific components they would like (within certain boundaries, of course). this has given dell a competitive edge over vendors using traditional retail outlets where customers are forced to accept pre-configured machines. 25% of dell's customers say they would not have purchased their computers without the web site. (c) check the status of their order: the visionary in this has clearly been federal express (www.fedex.corn). anyone using fedex to mail a package can later enter the tracking number on the package and get accurate, up-to-the minute information on where the package is. customers can also check the status of their orders for pcs at some mail order computer vendors such as dell and quantex. some sellers have found tremendous cost savings; a recent department of commerce study (1998, http: //www.ecommerce.gov/emerging.htm) reports that 20,000 dell customers check the status of their orders every week. if 10% of these customers were to make phone calls, costs would increase $6,000 to $ 10,000 per week. similarly, fedex supports the tracking of a million packages each month. without the tracking system, fedex would need to hire 20,000 additional employees to handle the paperwork, phone, and data entry activities. (d) how to (or even simply to) take possession of the item: particularly for information-based products, it is even possible for the customer to take delivery of the item over the web. this has clearly become quite common for many software companies, which routinely release software, including updates and patches, on the web (for example, www.microsoft.corn). in some cases, customers are even offered a discount if they are willing to take delivery of the software over the web rather than having a cd or disk shipped to them. stewardship customers also need to be supported while they own the product. for instance, they may need help with assembly. bush furniture (www.bushfumiture.corn) makes available assembly instructions for their furniture over the web. some products may need maintenance and upgrading. thus, as noted above, software vendors routinely deliver updates over the web. dell has saved a great deal in this area, with users downloading 30,000 files every week. without the web site, dell estimates it would need to spend $ 150,000 weekly on phone and diskette mailing costs. also, because each troubleshooting call costs dell $ 15, if 2-3% of the 30,000 to 40,000 troubleshooting queries each week reached phone representatives, costs would rise by $9,000$ 18,000 per week. 30 journal ofsmall business strategy volume 9, no. 2 fall/winter /998 retirement finally, there are even rewards in helping customers retire the product or otherwise complete their involvement with the service. including these functions on commercial web sites can increase efficiency (for example, when removing urls from search engine sites at www.altavista.corn) or increase revenues (for example, when reselling unused hotel rooms at www.hoteldiscount.corn/hotels. html). failing to allow customers to remove their urls automatically would be a potential nightmare of phone calls and/or electronic mail messages. unused hotel room re-sales can help three parties: the hotel loses a "no-show," the customer obtains a discount, and the third party earns a commission. while many of the examples cited above are from large firms, primarily because they have been the leaders in exploiting the potential of the web for established businesses, the underlying principles and possibilities apply equally well to small businesses. as the discussion above has pointed out, the important thing is to move away from a narrow focus on on-line sales only, and recognize that businesses of all sizes can benefit by making use of the internet in all phases of the customer resource life cycle, either to enhance customer service or to reduce costs by avoiding repetitive and unrewarding customer contact. in fact, as noted above, the primary advantage of the web over more traditional telecommunications technologies is the low fixed cost of access which makes it available to even the smallest firms. marketing channels: distributors and brokers one of the important impacts of the web has been to create a whole new set of possibilities with respect to the structure of distribution channels, specifically, the role of the intermediary/broker. on the one hand, as it becomes eaicient for sellers to establish direct electronic links with customers, even those in geographically dispersed locations, in many cases there may no longer be a need for a broker or an intermediary. at the same time, a whole new class of cybermediaries is starting to emerge that could provide useful alternate or additional means for a small business to reach its customers. for the small businessperson, this represents both an opportunity and a threat. specifically, it raises three sets of questions: 1. evaluate the role of brokers in its own channel structure and consider establishingdirect links with the customer. some factors to consider in making this decision are: a) to what extent is the intermediary or broker merely dispensing information on behalf of the seller and to what extent is the intermediary actually selling and promoting the business's products? the former case may be an opportunity to use the web to bypass the intermediary but not necessarily the latter. b) is the intermediary providing technical assistance to the customer that can now be delivered through the web? c) is the intermediary assembling the business's product with those of other complementary sellers into packets that buyers purchase together in bundled purchases? in this case, it will not be prudent for the seller to discontinue using the intermediary because buyers may not be willing to unbundle the purchase and buy each item independently directly from the seller. d) can the product be delivered over the web? if not, the business may still need the services of a physical distributor even if the information-based functions provided by the 31 journal of small business strategy volume 9, no. 2 fa/iiivinrer /998 intermediary can be replaced by the web. here, the business may want to consider alliances with such companies as federal express that offer complete logistics management services including warehouse management and shipping. 2. consider using the services of the new cybermediaries as noted, although traditional intermediaries are being challenged by the web, a whole new set of web-based intermediaries, called cybermediaries,are emerging that have the potential, in many cases, to significantly restructure the distribution channel. specifically, three options are useful to consider: a) electronic markets an electronic market is formally defined as "an electronic intermediary over which multiple buyers and sellers do business" (malone et al., 1987). in effect, it is a shopping service that is designed to make it easy for buyers to locate and compare a set of sellers offering a specific p d .p i, by hhkig~h. p dy y p p d«b he/she is interested in purchasing (e.g., hp laser printer) and the system will retrieve a list of vendors offering the product, along with their prices and such information as stock availability and shipping and handling charges. for a small business, this represents an additional, inexpensive sales channel to reach customers it may otherwise have difficulty reaching, as well as a way to highlight its low prices (assuming, of course, that it has low prices —these services are not as useful for businesses competing on the basis of exclusive product features or strong customer service, attributes that are difficult to convey in a simple comparison table). some electronic markets will only list prices from vendors with whom they have explicit arrangements. others, particularly "intelligent agents," are designed to locate vendors'eb sites and retrieve information without any explicit agreement with the vendor. an example of an intelligent agent, which is essentially a sofhvare program that acts as a buyer's shopping assistant, is bargain finder (http: //bf cstar.ac.corn/bf/), which helps buyers shop for music cds. a buyer looking for a specific music cd can type in the title and bargain finder will retrieve for the buyer the prices of the cd from the sites of a number of web-based vendors (some web-based vendors consciously choose to block the intelligent agent's access to their sites). in either case, a small business interested in participating in such an electronic market should be sure to have its offering listed when a buyer conducts a search. b) electronic catalogs another kind of shopping service, which we can generically refer to as an electronic catalog pgigdbybnmk i .k.idyl d www.valueamerica.corn . a visitor to the netmarket site will find a large number of items for sale, from televisions to office supplies. the difference between this service and an electronic market as described above is that a buyer gets a single price for an item (assuming the service carries the item), not a comparative list of multiple vendors'rices. in addition, the transaction is directly between net market and the customer, whereas an electronic market typically presents the comparative information but the transaction is between the customer and a selected vendor from the list presented by the electronic market. net market itself, however, does not carry any of the items in its catalog. each item is shipped directly from an independent vendor (with whom net market has an agreement and whose name the final customer may never know) to the customer. one possibility for a small business is to enter into an agreement with services like net market and value america to be their chosen supplier for a selected set of products. note once again, however, that net market competes largely on its ability to offer lower prices than anyone 32 journal ofsmall business strategy volume 9, no. 2 fall/winter /998 else so that this is usually a viable strategy only for those small businesses that are competing on a price-based strategy. c) electronic auctions one potential channel that has gained considerable momentum recently is the electronic auction ( h a i wb ~b. ~ bid .bid. i, h by et thi identity and/or credit card information and then bid on items that become available. the bidding is conducted in real time, with current prices that change from moment to moment and an electronic "gavel" that closes at a particular time unless continued bidding pushes the process into "overtime." of course, this fundamentally changes the pricing process —instead of a predetermined price, the seller is essentially letting market demand determine prices (within certain parameters, of course). this may be a particularly attractive outlet for sellers to consider in disposing of surplus or overstocked items, refurbished items that do not otherwise have a ready retail outlet, or items that are difficult to price ex-ante, for instance collectibles that are in limited supply but in high demand. 3. evaluate the threat to its own brokerage/distributionbusiness: form alliances if necessary the potential to bypass brokers may be an opportunity for some, but if a small firm is in the brokering or intermediation business, this represents a threat to its very survival. for instance, as an increasing number of web-based travel services become available to the average consumer (for example, microsoft expedia at expedia.msn.corn, preview travel at www. reviewtravel.corn, or itn at www.itn.corn), many travel agents are suffering reduced business volumes. vanita louie, president of san-francisco based south pacific express travels, a $25 million dollar travel agency, claims that they have lost io-i 5% of their volume to the internet over the last year (business week, 1998). unfortunately, there is no easy solution. a small business that is in a strictly brokerage role must confront the hard reality that its valueadded may be replaced by the web. it must, therefore, search for alternate means of adding value to the customer. for instance, some travel agents act as consolidators and negotiate special fares with airlines or cruise lines (not available directly to the final passenger) by consolidating purchases across multiple customers on specific routes. a second threat to the small distributor/broker is that, with electronic commerce, many buyers are consolidating their sources of supply and moving towards sole source contracts for a category of products. consider, for instance, the case of the maintenance, repair, and overhaul (mro) industry. an important recent trend in the industry has been the movement towards "integrated supply," that is, exclusive contracts by buyers with single suppliers for all their mro needs. the movement towards integrated supply places a premium on breadth of product line coverage, which favors the largest distributors, and puts smaller, regional firms at a significant competitive disadvantage. many of these smaller distributors have responded by forming strategic alliances that give them the necessaty product coverage to compete for exclusive, integrated supply contracts. one example is the new england ipower distribution group (idg/ne), an alliance among a group of small distributors of complementary mro products (e.g., fasteners, electrical goods, fluid connectors, and pipe valve fittings) in the new england region. from the customer' point of view, the consortium functions as a single supplier. each seller in the consortium maintains its independent identity and continues to do business as usual with customers not interested in moving towards an integrated, exclusive supply arrangement. however, as part of the alliance, each distributor is also completely responsible for the supply of its product group to customers who have signed exclusive contracts with idg/ne for all their mro needs. 33 journal of small business strategy volume 9, /vo. 2 fall/jvinier /998 the engine behind idg/ne is a hub —a central computer that runs the ipower software. purchase orders are sent by the customer electronically to the hub which then splits the order, based on product groups, and transmits each resulting "sub-order" to the idg member responsible for the product group. each individual idg member ships the product independently to the buyer, and sends its invoice to the hub. the hub, in turn, consolidates the information and forwards a single electronic invoice to the customer every month for all transactions for the month from all the idg members. as far as the customer is concerned, it is dealing with a single supplier. this results in a significant reduction in the transaction costs (ipower estimates the savings at 20-40%). the most important benefit to the franchise members themselves, all small businesses, is that it allows them to compete effectively for integrated supply contracts against large distributors, which they could not have done on their own. suppliers the web can also be a powerful tool in streamlining the upstream value chain and the procurement process. there are two principal choices. the first is to increase the efficiency of communication with a select set of suppliers through the use of electronic data interchange (edi)—the objective of this approach is to reduce transaction costs and, possibly, inventory levels. the second option is to try to reduce the price paid for a product by using an electronic market or an electronic bidding service to expand the range of suppliers searched before making a purchase. edi edi is inter-company, computer-to-computer communication of standard business transactions in a standard format that permits the receiver to perform the intended transaction (sokol, 1989). according to the department of commerce (1998), procurement is a complex, multi-step process where a firm must ~ iind suppliers who meet volume, delivery, quality, price requirements, ~ send detailed drawings and specifications to the suppliers, ~ send a purchase order to the chosen supplier for a specified quantity, ~ receive a confirmation of the order, ~ receive a notice and invoice that indicates when the product was shipped, and ~ try to match the invoice to the purchase order. virtually all of these stages can be made more efficien through the use of edi to exchange documents electronically to avoid delays, printing costs, mailing costs, and, in some cases, redundant data entry costs. the principal objective of edi is to reduce the transaction costs of established procurement relationships. edi is most useful when there are large volumes of stock items bought/sold, easily-identifiable products (by a product code), requirements for careful tracking and reporting, abundant paperwork, and when there is a need for rapid processing and delivery. historically, edi was performed using a private network, but more recently firms have tumed to the use of internet technologies and communications linkages. use of the public internet has opened edi to smaller suppliers and buyers. without the internet, adding a single additional trading partner to an edi network can cost up to $50,000. now, many large vendors offer web ed i services that convert purchase orders from big buyers into web forms that smaller suppliers can get over the net. general electric's trade web costs a firm less than $ 1,000 a year to joinas a result, more than 3,000 small suppliers have signed up (bw, june 22, 1998).ec co., based in silicon valley, is constructing an internet service that converts edi data into formats that small companies can import directly into their pc-based business systems. 34 journal ofsmall business srraiegy volume 9, no. 2 fall/)vinrer 1998 typically, edi is conducted over what we described earlier as an extranet, that is a restricted access network to which only business partners have access. an example of a successful extranet is ge's trading process network (department of commerce, 1998). the trading process network allows requisitions to be sent and received electronically, bid packages to be sent to suppliers around the world via the internet, and engineering drawings to be found and attached to requisitions electronically. within 2 hours, suppliers are notified of incoming requests for quotation (rfqs) by e-mail, fax, and edi. bids can be evaluated and awarded on the same day they are received. ge has found procurement labor costs to diminish by 30%, and material costs to diminish by 20% (due to enhanced competition between suppliers). ge has redeployed 60% of their procurement staff in other areas. the sourcing department now has 6-8 additional days per month for strategic activities. as of october 1997, 8 divisions of ge used the tpn for a grand total of $ 1 billion of transactions. by 2000, it is expected that all 12 of ge's business units will use it for a total of $5 billion of transactions. over the next 3 years, savings of $500-$700 million are expected. electronic markets and electronic bidding systems we referred earlier to electronic markets and their ability to facilitate efficient market search and comparison among multiple sellers. we also discussed how an electronic market can be an eaicient means for a small business competing on low prices to reach large numbers of scattered customers that it would not otherwise reach. the same is also true on the supply side. a small business can use an electronic market to search among a much larger number of suppliers than it would normally be able to justify. this increases the firm's chances of finding a better price. for instance, in the aircraii parts industry, an electronic market called inventory locator service (ils) allows even an individual plane owner or a small hangar facility to search a large number of used parts vendors to locate a needed part and try to obtain a better price. another internet based service that a business can use to try to expand its reach and compare prices across a larger set of suppliers is an electronic bidding service such as the one operated by free markets online. when contacted by a firm looking to buy certain parts (such as injection molds, their earliest specialty), free markets identifies and screens a large number of suppliers worldwide and then conducts an electronic bidding process among them (similar to an electronic auction in reverse) to arrive at a final price. typically, free markets is able to procure a lower price for the buyer than the firm could have achieved on its own. competitors one of the most common arguments given for developing a web site is to keep up with, or surpass, the competition. in some cases, there is certainly merit to these arguments, but it is important to understand more specifically the competitive forces identified by porter (1980)and expanded and applied to computer-based systems by cash et al. (1988). seven useful and interesting goals for achieving competitive advantage include: ~ building barriers to entry (against new competitors) ~ increasing switching costs (making it more difficult for customers to change vendors) ~ increasing responsiveness to market changes ~ creating new products or services 35 journal ofsmall business strategy volume 9, no. 2 fall/winier /998 ~ creating specialized products (a market niche) ~ reducing costs dramatically (increasing profit and/or reducing prices) ~ achieving bargaining power against suppliers all seven goals can be potent either separately or in combination, and the internet can be a powerful enabler in each case. barriers to entry often, innovations can be copied by other firms rather quickly. in some cases, however, investments required to imitate a product or service are prohibitively high. the most common barriers are legal (patents, copyrights, trademarks, exclusive contracts), technical (requiring research and development or other specific knowledge), or economic (capital investments in equipment, or promotion). for example, it would be difficult for most people to attempt to start a company to produce and sell copies of popular vehicles because all three barriers stand in their way. however, building and selling personal computers might be feasible because hardware and software components, as well as directions for building them, are readily available. in the domain of the internet, barriers to entry might be attained by ~ entering into exclusive contracts with other firms for providing a link to your site at their popular portal (e.g., yahoo!), ~ heavily investing in programming to create a site that offers advanced features (such as bmw's "test drive" or federal express'ackage tracking), ~ creating a particularly creative site to generate early publicity (such as amazon.corn), or even ~ reserving domain names that customers can easily "guess." some firms discovered early on the importance of using an appropriate domain name. in 1995, procter 8c gamble registered over 1,400 domain names htt://www idbnet com/ -a html) such as indicated in the table on the following page: switching costs customer loyalty is based not only on the quality of the product or service, but also on the time, effort, and/or cost of switching to another supplier. one way a web site can build switching costs is by storing and making good use of information about the purchases of customers. for example, the on-line bookstore amazon corn stores address and credit card information for each customer, and electronic "cookies" stored on the customer's hard disk reveal-only to amazon.cornthe customer's identity. this allows the customer to avoid the time required to enter his or her address and credit card number for each subsequent purchase, making it very convenient to shop there repeatedly. in addition, as noted earlier, amazon.corn tracks and even analyzes the purchases of each customer to suggest other books that he or she may like. switching costs in a business-to-business context a(ten involves an application developed by a firm, which provides several services that the customer would otherwise have to cover in some way. for example, a vendor might link to the customer's inventory database and provide suggestions for anticipatory shipping, or provide analysis tools to evaluate inventory levels. 36 journal ojsmall business strategy volume 9, no. 2 fall/winter 1998 switching to a new vendor could result in higher inventory costs, or could require training to make use of the new vendor's system. a sample of domain names reserved by procter tk gamble antiperspirant.com dry.com bacteria.com freshness.com badbreath.com germs.com beautiful.com gums.com brighten.com gum-care.com brightening.com headache.com brightens.com hygiene.com cavities.com nails.com cleans.com pimples.com complexion.com romantic. com conditioner.com scalp.com cough.com sensitive.com dandruff.com sensual2.com dentalcare.com stains.com dentures.com thirst.com deoderant.com (sic) tissues.com diarrhea.com toiletpaper.com dishes.com underarm.com disinfect.com underarms.com responsiveness some firms find today's market to be very fickle with respect to quantities demanded at any given moment, or with respect to styles offered. it is therefore often very diaicult to respond to changes in demand; this difficulty is primarily based on the lack of adequate information at the correct time. the internet could provide early clues about market trends in several ways. one example is the vast arena of newsgroups, an area of the internet that allows "threaded" discussions to take place. these discussions are sorted into thousands of different groups, and address nearly every imaginable product, hobby, or interest. several groups are likely to hold discussions about products or services nearly any firm offers. threading allows responses to be sorted along with their questions, so that a person can review entire discussion topics within each group. for example, a pet store should pay attention to opinions on groups such as rec.pets. cats, and rec.pets. birds; an electronics dealer should pay attention to groups such as rec.video, rec.audio.car, etc. it might be very instructive to read comments from groups of people comparing their experiences on available products or services. another way in which market trends could be collected is by providing an avenue for two-way communication on a firm's site. such communication can range from the formal to the informal, from structured feedback forms to simply providing an e-mail address for customer comments. 37 journal of small business strategy volume 9, no. 2 fahyivi urer /998 finally, because information on the internet is available for all to see, it is quite easy to monitor what the competition is doing. such monitoring can range from a highly formal competitive intelligence effort to simple informal awareness. new products or services some products or services could not exist without the internet. certainly, the portal site yahoo! created an entirely new market simply by collecting, examining, and screening sites to include in their directory. their current market capitalization (at $ 12 billion dollars in late 1998) far exceeds their physical net assets; furthermore, their capitalization even exceeds that of american airlines (reed, 1998). other new internet services include search engines and internet service providers. many other new products and services are related to the sale of more traditional products. a site such as auto-by-tel can use the power of the internet to extend the reach of automobile dealers farther beyond their own neighborhoods than ever before. e-bay brings together buyers and sellers, making it possible to conduct international auctions for thousands of products. and www.shopper.corn(referenced earlier) allows computer product customers to compare the prices of dozens of on-line retailers easily and quickly. there seems to be no shortage of ideas for new products and services on the internet. market niche businesses that are limited by physical boundaries o(ten cannot offer highly specialized products unless the nearby population is very large and diverse. for example, very small american towns often offer only a small number of restaurants, usually american, many of them franchises. only larger cities can support a variety of familiar ethnic restaurants (for example, italian and chinese), and only the largest cities can support less familiar varieties (such as burmese and tibetan). the internet breaks down physical location barriers, effectively widening the customer base beyond the ability of a physical store. therefore, it becomes feasible to offer highly specialized products. for example, satellite dish accessory dealers, high-end hi-fi dealers, and novelty pet accessory dealers can now thrive in remote rural areas that include inadequate customer bases for their products. the internet can enable a small business to compete in a global market. cost reduction some firms have found ways to reduce costs dramatically, thus increasing their profit margins and/or reducing prices. reducing prices significantly can dramatically and quickly change the balance of power, and market share, in an industry. several examples of internet-enabled cost reductions have already been described above, in areas such as lower inventory levels, automated ordering, and solving repetitive customer problems. bargaining power by increasing its bargaining power with suppliers, a firm can uncover significant cost reductions. as discussed earlier in the case of free markets online, the internet can help open up competition among suppliers. while it is not always necessary to go to the extreme of developing real-time auctions to achieve significant power with suppliers, the reward can be high. free markets online has been able to achieve an average of 17% cost reductions in prices paid by their 3g journal ofsmall business strategy volume 9, no. 2 ealllg'inter /998 customers. their effectiveness has been highest in inefficient markets such as custom-produced injection molding subassemblies, and lowest in efficient markets such as sucrose and other commodities. without the efficient communications infrastructure provided by the internet, locating and comparing among such a large number of suppliers would be highly inefficient and infeasible for most buyers. the use of the internet to increase the base of suppliers is much easier for commodities than for specialized products. deploying investments to increase competitiveness whatever the competitive strategy chosen, it is important to decide the extent to which the investment should be deployed, and the time frame for such investments. such investments can include personnel and equipment needed to develop a web presence, communicate with customers, monitor the competitive environment, develop new products or niche, and/or expand the supplier base. a useful capital investment framework is that of kester (1984), who asserted that two important factors in deriving a competitive strategy are the strength of the firm's competitive position and the replicability of the benefit derived from the investment. not replicable replicable strong competitive ~ aggressive, creative stance ~ let others take big risks. position ~ take time to implement. ~ take time to "polish" the approach weak competitive ~ aggressive, creative stance ~ invest small amount quickly; position ~ implement quickly o continue to innovate in general, a strong competitive position buys a firm time in implementation of the investment. if the benefit from the investment can be replicated quickly by others, it might make sense to postpone the investment while other firms take the risks. alter a while, the strong firm can invest in what works best and avoid less promising approaches. if the benefit from the investment is not replicable, a more aggressive and creative approach can be useful, but as stated above, there is no rush to implement that approach. a weak competitive position creates the need for quick action. once again, replicability is a key factor in determining the aggressiveness of the investment. an investment that is easily replicated by others should be made quickly, however, at levels that do not jeopardize the firm's already weak position. continuing innovation is needed because other firms will quickly adopt the best of what has already been done. on the other hand, if the investment is not easily replicated, then it might represent a rare chance for the weak firm to strengthen its position. small businesses appear to most often postpone their investments, according to a study by the u.s. small business administration and ibm (buchanan, 1998). when asked when small business owners purchase technology,61% wait until it is "proven." furthermore,54% wait until they leam about the experiences of others. although the common practice for small business owners is to postpone investments, kester's framework as well as the experience of firms such as of etoys.corn (macht, 1998) would suggest that there are ways to improve substantially the 39 journal ofsmall business strategy volume 9, no. 2 fall/winter l998 competitive position of a small business, and gain meaningful advantage over a firm with a large market presence. employees finally, the internet can also be an excellent tool for communication and information retrieval among the employees within a business. this is generally done over an "intranet." an intranet is an internal-only network, that is, access to information on the intranet is available only to employees of the company, typically controlled by passwords and other security mechanisms that erect a "firewall" between the intranet and the broader, public-access internet. typically, an intranet uses a web browser as the user interface. one of the most interesting aspects of intranets is that they oaen show the largest and fastest returns on investment but are quite mundane in their content. many provide access to corporate databases, corporate systems, employee personnel files, documentation, reports, purchase requisitions, reimbursement requests, and correspondence. pc week's (paul, 1997) survey showed the average cost of an intranet per thousand users to be just over $35,000 annually, including help desk costs ($9,500) and solving hardware and soaware problems ($6,700). accounts that have been reported widely show returns on intranet investments to very often be many times the investment itself, oaen because the firms already have the required equipment and communications connections. one example is that of nissan's site (mulich, 1998), built at a cost of $ 178,500. in its site, nissan included such items as press releases, employee anniversaries, company fitness center schedules, up-to-the-minute internal news, management tips, and databases of stories on competitors. in its first year, nissan's intranet saved $750,000 in staff time and $72,000 in printing costs, giving a first-year return on investment of 661%. printing savings have recently grown to $210,000, so returns are expected to grow substantially. the 2,500 nissan employees average 34 hits apiece per week. oaen internal communication paths are made quicker by deploying an intranet, resulting in dramatic, strategic savings. one ripe target is to reduce inventory levels. ibm's advanced planning system (aps) allows the marketing department to transmit their monthly estimates of how many pcs will be sold immediately to the production planning and purchasing areas (department of commerce, 1998).capacities in each factory can then be assessed and production schedules can be adjusted to best meet the demand. fine-tuning can be performed on a weekly basis with the real-time information furnished by the system. once again, while the above examples and figures are based on large corporations, a small firm can build an intranet at a cost ofjust a few thousand dollars that can yield percentage returns that are comparable to those described above. conclusion this paper laid out some basic strategies and frameworks for a small business to consider in developing appropriate strategies for exploiting the web. the web represents a particularly exciting opportunity for small businesses because it breaks down entry barriers, allowing them to compete with established large businesses on a scale that may not have been possible before. at the same time, the potential for such changes as disintermediation can be a threat to small businesses. 40 journal ofsmall business strategy volume 9, no. 2 falvivinter 1998 the specific recommendations offered in this paper can be summarized in the following points: 1. consider opportunities for electronic commerce that go beyond just the sales transaction, including: t building customer awareness, through targeted advertisements and a well designed web site, t allowing customers to determine specifically which products or services they need, giving them instructions for purchasing or allowing them to check their order status, t helping them assemble, repair, or upgrade their products, and making it easier to retire the product or complete their service encounter. 2. web portals such as yahoo! can help attract users to a firm's web site. if the rates for such portals prove to be too high for a small business, target your advertisements to those sites your customers are likely to use most oflen, such as the thomas register or other industry specific sites. 3. consider whether it may be possible to establish direct customer links and eliminate intermediaries. on the flip side, if you are an intermediary, evaluate whether the web can replace your current functionality. what additional sources of value can you add? 4. several alternative channels, or "cybermediaries," can be used to reach customers. such channels include electronic markets, electronic catalogs, and electronic auctions. these are particularly useful for small businesses because they level the playing field, presenting information on a single unbiased screen, and highlighting any price advantage a firm has. 5. electronic markets and auctions can also be used to reduce costs by expanding the base of suppliers from whom a business purchases products. 6. alliances can be used to counterthreats from larger competitors,especially in competing for exclusive supply contracts that require breadth of product line supply beyond that possessed by most small businesses. 7. internet-based edi is accessible to all businesses, and effective in reducing the transaction costs of working with customers and suppliers. g. in identifying web-based services to be offered, it is beneficial to keep in mind seven competitive targets; building barriers to entry, increasing switching costs of customers, increasing responsiveness to market changes, creating new products or services, emphasizing a market niche, reducing costs dramatically, or achieving bargaining power with suppliers. 9. the speed at which investments should be made depend on a finn's competitive position and replicability of the innovation. 10. internal communications through an intranet can lower costs and speed communication within a firm. 41 journal of small business strategy volume 9, no. 2 fall/winter j998 a small business that is run with adequate planning and vision, and with knowledge of what is possible, can capitalize on the abundant opportunities on the information highway, and indeed gain substantial advantage over large, well-established, competitors. awareness of strategies and frameworks such as those described in this article can help direct a small business owner toward improved planning and vision to achieve that advantage. references anders, george, (1998, no'vember 4). discomfort zone: some big companies long to embrace web but settle for flirtation. wall street journal pp. i, 14. 8 h,k lgh. ((998).sh kby i t h 3,39. cash, j.l., mcfarlan, f.wn & mckinney, j.l., (1988). co orate information s stems mana ement: text and cases, (2"'d.). homewood, il: irwin. cronin, mary j., (1994). doin business on the internet. new york: van nostrand reinhold. doing business on the internet, special report. (1998, june 22). business week, 121-172. e .e lly.(1998).u i 4 .i .t h2. 88. ghosh, shikhar. (1998, march-april). making business sense of the internet. harvard business review, 126-135. h i k, m k,(1998, s p b ). s fl ii. ~e 139-)44. ives, b. & learmonth, g.p. (1984, december). the information system as a competitive weapon. communications of the acm 27, 1193-1201. kester, (1984, march-april). today's options for tomorrow's growth. harvard business review, 153-160. macht, j. (1998, october). toy seller plays internet hardball. ines 17-19. m h i (1998) h id( gp .i . t h 3 4332. mulich, j. (1998, march 9). enjoying the intranet ride. pc week, 31, 39. paul, l.g. (1997, april 28). it's payback time, folks. pc week, 141, 144-145. i porter, michael e. (1980). com et'tive strate: techni ues for anal zin industries and .n 9 k',th i' raths, d. (1998). reversal of fortune. inc. tech . 2, 52-60. reed, s. (1998, november 2). internet companies are rewriting the accepted rules of the "old" economy. infoworld 67. sokol, m. (1989) edi: the corn etitiveed e mcgraw-hill. 42 journal of small business strategy volume 9, no. 2 fall/winter 1998 southwick, k. (1998) found in the crowd. inc. tech 3, 54-56. wagner, m. (1998, june 8) sciquest; one-stop shopping. internetweek, 33. welles, e, (1977, august) burning down the house. inc., 67-73. voetsch, fred, banner ad rates comparison. http: //www.onlinebusiness.corn/onlinebusiness/ad rates.shtml vivek choudhury is on the faculty of the information and management sciences department at the college ofbusiness, florida state university. before this, he was on the faculty at the joseph m. katz graduate school of business, university of piusburgh. he received his ph.d. pom ucla. his research interests include: electronic commerce, the role ofinformation technology in organizational design, and knowledge management. his publications have appearedin such outlets as information systems research, mis quarterly, international conference on information systems, european management journal, and competitive intelligence review. dennis galletta is an associate professor ofbusiness admi m'strarion at the katz graduate school of business, university of pittsburgh. he obtained his doctorate in 1985 at the university of minnesota. his specific researchinterests lie in the areas of electronic commerce and end-user attitudes, beliavior, and performance. he has published articles in information systems research; journal of mis; communications of the acm, decision sciences; accounting, management, and information technologies; data base; and information ck management; and also published a textbook. he is on the editorial boards of threejournals, including the mis quarterly, data base, and cycle time research, and he served as editor ofsigois bulletin, the newsletter of the a cm special interest group on ~ice information systems. he is also an active reviewer for 10 otherjournals and several conferences. he has been the icis treasurer since january 1994, chai red the inaugural a isamericas conference on information systems in 1995, and was a member ofais council representing the americas in 1996 and /997. 43 planning in small vs. large businesses: do managers prefer dif ferent tools? sandra j . hartman olof lundberg university of new orleans michael white university of tulsa abstract evidence that large and small businesses approach problems differently has raised ques tions concerning the validity of applying large business prescriptions to small businesses. this issue was addressed by presenting both large and small business planners with planning prob lems differing in environmental volatility, system adaptation and nature of planning re quirements. dif ferent combinations of these factors were used to generate twelve distinct plan ning situations. eight information processing aids were identified that have been described in the literature as planning tools. each aid has been prescribed to be more appropriate for use in some planning situations than in others. the research tested hypotheses that planners in specific situations would use planning aids prescr ibed for those situations and that large and small business planners would approach the problems differently. results are interpreted as indicating that use of planning aids does not correspond closely to the theoretical prescrip tions but that other implicit theories may be operating and the implicit theories used in small businesses may be different than those used in large organizations. planning in small vs. large businesses: do managers prefer different tools? there has been continuing discussion in the literature about management in large vs. small businesses, and an increasing recognition that there are differences in kind. managing a small business does not necessarily involve doing the same things as in a large business (2, 7, 8, 12). among the key factors which have been suggested as contributing to differences are need for managers of small business to become involved in all aspects of the business rather than to specialize (8), concentration on short-run, rather than long-run thinking (12), and the sense that the small firm is to a large extent at the mercy of an increasingly turbulent environment (15, 18). 13 a review of these differences leads to questions about how several traditional manageri functions should be performed in the small business, and it calls attention to the role of pla ning in the small business. specifically, it seems reasonable to ask whether and/or what kin of planning is of value in a situation where there are no planning specialists, where the orie tation is short-run, and where the environment is turbulent and perhaps unpredictable. two distinct and very different approaches have emerged in the small business plannin literature. the first of these literature streams reviews the problems facing the small busines and concludes that there is need for more, and more extensive, planning in the small busine environment. managers are told that they need to become deeply and personally involve in the process, using advisors as necessary to handle specialized functions (18). furthermor they are told that formal planning and control procedures should be developed and inco porated into the everyday management of the organization (16). in general, this literature strea calls for planning in equal detail and scope as in a large business, and that ". . .in small firm specialized skills are usually in shortest supply. as a result, executives of small businesse should expect to invest more time than their counterparts in large firms to achieve the sam amount and quality of planning output:' (4) the second literature stream draws different conclusions. it suggests that the differenc which separate small businesses from large ones are major enough to question the applicabilit of planning as it is practiced in the large business environment. cohn and lindberg, whi calling for increased emphasis on planning, point out that many small business manage would disagree with their ideas (4). these managers, they find, believe that the small firm susceptibility to rapid market fluctuations make anything beyond short-range, operational pla ning infeasible. thurston attempts to maintain a balanced view and holds that the best pla ning a pproach for any given small business depends upon the style and abilities of the to manager(s), the degree to which others are involved in managerial decisions, and the com plexity of the business, as well as other considerations (19). he points out that to managers/owners in small businesses will, in many cases, have a more in-depth, "gut-leve understanding of market conditions, product, and customers than their counterparts in larg organizations and that this knowledge can of ten preclude need for formal planning. furthe more, the length of the planning cycle may need to be substantially reduced in the sma business. however, more formal approaches to planning may be needed in cases technological complexity (16, 19), or where uncertainty is of the type where planning can serv to provide enough data to permit at least partial control over the company's f uture (19). overall, the literature raises questions about the role of planning in the small busines it is apparent that considerable research will be required if the role of planning is to b understood. unfortunately, as cohn and lindberg point out, there has been very little researc devoted to the small firm. instead, the attempt has been made to extrapolate from large fir findings to the small business (4). as the previous discussion suggests, this is risky. this stud represents an initial attempt to begin to examine one of the questions about planning in th small business which was raised by the literature. the question considered in this study whether planning is different in large versus small businesses. in this study, the primary focus is on what available theory suggests decision makers shoul do to process information. available theory, however, deals implicitly with large firms rathe than with small ones. the assumption, which the previous discussion suggests may be inco rect, is that small businesses operate similarly to large ones except in terms of scale. thu principles developed for large businesses should apply to small ones as well. 14 this study deals with planning and with the information processing aids which are available to assist the planner. while research, even for large businesses, is limited, theory suggests that decision quality can be improved to the extent that planners are able to call upon and use appropriate aids to information processing. thus, it is necessary to examine the literature to determine what aids are available and how they should be used and then to ex amine actual use of the aids in specified situations. the prescriptive ·literature: planning environments and aids to planning recent theory development by hartman et al. will form an important part of the basis for this study (9). in examining the prescriptive planning and decision making literature, hart man et al. identified a number of information processing aids which are..available to the plan ner. however, little theoretical work had been done to specify and hypothesize the cir cumstances under which any given technique should be used. the hartman et al. article pro posed a contingency model in which three sets of factors are used to determine the most ap propriate aid. the three factors are: (1) environmental volatility, (2) system adaptation, and (3) level of planning. the environmental volatility dimension was dichotomized into two sources of environmental uncertainty. the first is market volatility, in which uncertainty arises from market conditions and in which the problem is relatively more structured in emery and trist's (1965) terms in that linkages are too observable, concrete factors in the market environment. the second is technological volatility, a less structured situation where uncertainty arises from less concrete and observable societal, cultural, or technological changes. the second dimension suggested by hartman et al. is system adaptation. based on work by miles and snow (11) and chakravarthy (3), this dimension deals with whether internal conditions in the organization permit it to function in a prospector-like role and actively seek out environmental information (dichotomized as stable/neutral adaptation) or whether inter nal conditions are such that the organization functions in a reactor-like role, screening out environmental information and directing attention to internal problems (dichotomized as unstable adaptation). jauch and kraf t (10) point to the close link between perceptions of inter nal strengths and weaknesses and environmental perceptions. bourgeois (1) points out that in cases corresponding to unstable adaptation, management tends to look inward and seek consensus. the third dimension is type and level of planning. three possibilities are considered: high level, long range, strategic planning; middle level, mid-range, tactical planning; and low level, short range, operational planning. when the three dimensionsenvironmental volatility, system adaptation, and type of planningare considered simultaneously, twelve distinct plan ning situations result and it is possible to hypothesize that one or more of the available infor mation processing aids would be most appropriate, from a contingency standpoint, in each situation. hartman et al. provide a decision tree format, shown as figure 1, as an aid in visualiz ing the linkages. figure 1shows that combinations of the three factors lead to twelve possible planning situations. in each of the twelve situations, at least one of eight aids to planning is suggested as most appropriate. this study focuses on the eight aids shown in table 1and attempts to examine whether decision makers believe the aids would be useful in given situations. 15 191 fig u re 1 linkages a mong e nviromen tal volatility, system adaptation, pla nning requ irements, and informat ion-processing strategies. l volatility as a ! uncertainty system adaptation type of planning information-processing strategy hig\1 le"el l'' stakeholder analysis ...le r neutral middle level (2) scenarios stau low level (3) ready-made solution/linear compensatory m 4 social judgmen1 analysis unstable ---4...;;;:::::===mniiad9 ten1 el•e•vlell (lsj te11pand inlormation:-'p.:ro:cessing capability w le..,e1 f6j 4--: r . e = a .: d . y . : m ::. a :: d :. e :.: s .: o .. l : u .: t . i : o .: n .: /l : i . n .. e .: a .:. r ... c : ompe . n . sa . i . or : y : m _ delphi stanle r neutral..::=:=::.-::--:-:;:;m5li;o;oowlelelvee'lell b jl tlscnee an ra 'c'oosml pn eomnsian rao1ryg' mou ood1e•licnngnique=== high \e"el {10) m1adle level (11) low 1e"el fl2j social judgment analysis scenarios linear compensatory modeling table 1. planning aids ready-made solution (mintzberg et at., 1976): in this case, you decide to look for a n a p proac h w h ic h has been used i n the past a nd w hich cou ld be used or applied in the current situation. nominal group technique (5): there are people available who could suggest ap proaches, but you are concerned that they will not contribute freely in an unstructured group discussion. you set up "nominal groups," where participants work independently in proposing solutions. af ter participants have listed their ideas, they are posted. limited and controlled discussion follows, and a final decision is made through a ballot of group members. linear compensatory modeling (13): you feel the situation is one where there are only a few alternatives to consider and only a few factors which need to be considered. you weigh each factor for each alternative (either in writing or mentally) and select the strongest alternative. expa nd information processing capability (6): you feel the situation is one where the number of possible approaches and factors to consider is greater than the number which you can deal with given your current resources. to come up with a solution, ·you believe you will need to expand your computer data processing capa bility to deal wi th the information to be processed. stakeholder analysis (nutt, 1982): you feel the situation is one where demands from groups outside the firm must receive attention. you identif y representatives from the "stakeholder" groups and work with them to surface their assumptions and open a dialogue which permits their recommendations to be heard. scenarios (14): you are in a situation where you can specify most of the possible approaches which the firm could take. you consider each likely condition (i.e., state of the economy or degree of customer acceptance) and look for the a pproach which would work best under most or the most likely set of circu mstances. delphi (dalky et al., 1972; delbecq et al., 1975): you feel the situation is one where outside experts could make a substantial contribution. you ask several key experts, on an in divid ual basis, how to approach the problem. next, you assemble the recommenda tions of all the experts and ask each expert to comment and respond to the total list of ideas. you repeat this proced ure as necessary until you feel you have an acceptable solution. socia l j udgment a nalysis (17): you feel the situation is one where acceptance within the organization will be a critical factor. you also feel that those involved use differing rationales or differ in the importance that they assign to the factors involved. therefore, you feel that primary attention needs to be directed toward getting those involved to reconsider how they approach the problem. you ask them to discuss and come to consensus on the a pproach to be used and the factors which are most important in the decision making process. 17 a review of figure 1 and the hartman et al. discussion of the rationale used to develo the linkages indicates that, first, there is little experimental evidence in the literature to sho where any given aid would be best used. therefore, in suggesting linkages, hartman et a were guided by several more general prescriptive planning pri nciples. it was assumed th the higher the level of planning, the more need to obtain information from outside the organiz tion. however, where organizational adaptation does not permit significant attention to th environment, primary attention must be given to obtaining consensus from within the organiz tion. as planning becomes more short range, internal factors, generating alternatives and read made solutions become more important. finally, more and higher quality information is neede where the problem is less structured, as is the case with tech r10logical volatility. applied to small business, these ideas could require mod ification. if, as rice (15) an stevenson and sahlman (18) point out, the small firm is more at the mercy of the enviro ment than t he large firm, environmental factors may be especially important in the proces greene finds that in the small business, there are relatively few managers, and they are mo of ten generalists than specialists (8). where this is the case, internal adaptation may be relative unimportant to the small business. finally, if, as m urphy suggests, planning is predomi na n ly short run, longer-range planning approaches may be seen as irrelevant (12). this study involves simulated planning situations, using twelve variations of a case co responding to the twelve situations outlined in figure 1. the first hypothesis is: all pla nner presented with case situations corresponding to the twelve situations given by hartman al., will select planning aids generally in line with the prescriptions advanced by hartma et al. the second hypothesis deals with differences between planners in large and sma businesses. the second hypothesis is: pla nners in large businesses will conform more close to the prescriptions than those in small businesses. for example, the hartma n et al. prescri tions suggest that in situations involving high level strategic planning, internal consensus w be sought in cases of internal instability. hypothesis 1 suggests that all planners will sho evidence of doing this, but hypothesis 2 indicates that the tendency will be most marke in the case of planners from large businesses. methodology this study examines the idea that decision makers will make use of different informat io processing aids in different situations and that they will select aids in line with the hartma et al. rationale and theory. it f urther examines the differences in preferences of small vs. lar business planners. subjects subjects in this study were 165 plan ners from a wide variety of organizations throughou the united states. forty-nine reported working in manufacturing and eighty-three in servi organizations, with the balance reporting "other:' one hundred fifteen reported that they we in staff jobs, with the balance being li ne managers. there was considerable range in the si of their organizations: 35 over 5,000 employees; 22 between 2,500 and 5,000; 26 between 1,0 a nd 2,500; 25 between 500 and 1,000; and 57 under 500. this study, usi ng criteria suggeste by rinholm anbd boag (16) and greene (8) considers size to be based on number of employe a nd considers firms with fewer than 500 to be small businesses. based on this criterion, of the ma nagers were in small and 108 were in large businesses. 18 nstru ment and study design hartman et al. hypothesized that planning could be seen as falling into twelve planning ituations, as shown in figure 1, and that in each situation, some information processing aids re more appropriate than others. the authors developed twelve versions of a case by ystematically varying the three hartman et al. factors-environmental volatility, system adap ation, and planning level. the appendix shows one version of the case. each subject received only one version of the case. subjects were asked to read the case and then to indicate how ikely they would be to use each of the eight information processing aids, using a five-point liker! scale ranging from "very likely" to "very unlikely:' subjects also received a definition heet similar to table 1 which briefly described each technique. assignment was random and made so that approximately equal numbers of planners would eceive each of the twelve cases. the case data was analyzed using a 2 x 2 x 3 factorial design epresenting the two volatility situations, the two kinds of ada ptation, and the three levels f planning. pretest /manipulation check before the study was begun, it was necessary to insure that the twelve versions of the case which had been prepared would act ually be recognized by subjects as corresponding o the twelve environmental volatility/system adaptation/planning level combinations suggeste.d y hartman et al. roughly 100 student subjects from a large southern university participated n pretesting the twelve cases. each student subject was given one version of the case and l ist of definitons of technological versus market volatility, stable/neutral vs. unstable adapta" ion, and strategic vs. tactical vs. operational planning. subjects were then asked to classify he case they had been given in terms of the three dimensiions. nearly 98 percent of the cases were correctly categorized. results a nd discussion several methods were used to analyze the data. first, the data were examined by developing 8 x 12 level multiple analyses of variance (manovas) for the large vs. small business plan-. ners. i n this design, variations among the eight information processing aids were examined or the 12 situations. table 2 below reports tests of significance for the overall design for the wo groups. table 2 indicates that the tests were significant for the planners in large, but not in small businesses. these results suggest that the model for planners in the large f irms showed signifi cant differences in use of the planning aids w hile no such differences were shown for the planners from the small firms. to permit understanding of this phenomenon, the next step was to break the design do\vn into individual one-way analyses of variance for each informa ion processing aid in each of the 12 situations. table 3 reports means and significance for the large versus small business sa mples. table 2. multivariate tests of signif icance significa nce level test pi llais large firms .036* sma ll firms .248 hotelli ngs .040* .292 wi lks .038* .268 * p <.05 ** p < .01 19 examination of table 3 provides several interesting findings. for large businesses, results are signi cant for one of the eight information processing aids, linear compensatory modeling. this finding su gests that large business planners did, in fact, make differing use of this aid in different situations. howev a comparison to the hartman et al. prescriptions, indicated by the asterisks, does not provide eviden that these planners were conforming to the prescriptions. the most likely conclusion is that the pla ners were making different use of the aids but were apparently doing so according to some logic heuristics of their own, not in line with the prescriptions advanced by the hartman et al. theory. review of the corresponding breakdowns for the small business planners shows little variation with the columns and therefore little evidence that this group of planners is making different use of ai among situations. thus, hypothesis 1is rejected for both groups of planners. planners in large business give evidence of making differential use of one planning aid, but not in line with hartman et al., a small business planners do not show evidence of making differing use of aids in different situation table 3. use of planning aids in twelve situations large firms rms ngt lcm ipc sa scen delp s)a msh 3.75 3.50 3.83 3.33 2.42. 2.42 2.58 2.83 msm 3.45 3.36 2.55 3.45 2.82 2.00 • 3.45 2.27 msl 2.50 . 3.50 1.75• 2.50 4.25 1.50 3.75 3.25 muh 3.44 2.78 3.67 3.78 2.67 2.00 2.89 2.33" mum 3.88 3.13 2.63 2.50 . 2.38 2.13 2.38 1.38 mul 3.90 . 3.20 3.40• 3.70 2.60 1.70 2.60 2.20 tsh 2.80 3.20 3.40 3.80 1.60 1.60 2.60 • 3.40 tsm 3.20 3.00• 3.90 3.00 2.40 2.30 • 2.30 2.60 tsl 2.56 3.33 2.78• 3.22 3.11 2.22 2.67 2.78 tuh 3.33 2.50 3.50 3.17 2.83 1.83 2.67 1.50" tum 3.40 3.10 3.10 3.60 3.10 2.20 * 2.20 2.30 tul 2.63 3.25 3.13* 2.50 2.25 1.75 3.13 1.88 mean 3.31 3.17 3.21 3.25 2.67 2.03 2.73 2.36 sig. 0.18 0.89 0.01 .. 0.27 0.23 0.59 0.34 0.06 small fi rms msh 3.00 3.33 2.50 2.50 2.67" 1.50 2.17 1.67 msm 3.00 2.00 2.00 3.50 3.00 2.00 • 2.00 3.00 msl 3.50 . 2.75 3.25. 2.25 2.00 1.75 2.50 2.75 m uh 3.13 2.75 3.00 3.50 2.13 1.63 3.38 1.50" m um 3.33 3.33 3.33 3.17 . 3.17 1.50 3.00 2.00 mul 3.00 . 3.33 2.67 " 3.00 2.67 2.00 1.33 3.67 tsh 3.20 3.40 3.80 2.40 2.20 2.00 2.20 * 2.40 tsm 3.00 3.71• 3.43 3.43 2.86 1.86• 3.00 2.86 tsl 2.00 4.00 4.00 " 2.00 5.00 1.00 5.00 1.00 tuh 3.50 2.00 4.25 2.50 2.50 2.50 1.50 1.75* tum 4.33 4.00 3.33 3.33 2.00 3.oo· 2.00 1.00 tul 3.00 4.00 2.25 * 2.75 3.25 1.25 3.25 2.50 mean 3.21 3.21 3.15 2.94 2.62 1.81 2.60 2.17 sig. 0.98 0.43 0.36 0.68 0.34 0.49 0.06 0.11 note 1 • the columns are the pla nning aids described i n table 1. note 2 the rows are the twelve situations indicated in figure 1. m market volatilit t ·technological volatility, s stable/ neutral adaptation, u unstable ada tation, h high level, m middle level, l low leve l. note 3 the cell entries are the mea ns of responses rang i ng from 1 (very likely to u the pla nning aid i n the situation) to 5 (very unlikely to use the planni ng aid note 4 the asterisks are the hartma n et al. prescrll'tions. note s # and ## i ndicate statistically significa nt vari ation among mean responses fo the planni ng aid (1 ·significant at the .05 level, #i significant at the .01 leve 20 further examii1ation of the grand means for each aid for the t\vo groups of planners, in table 3, provides another finding of interest. while the small business planners show little variation of means among situations for any one aid, there is considerable variation in means from aid to aid. the range s from 1..81 for scenarios, indicating a marked preference for this aid, to 3.21 for nominal grou p tech nique and ready-made solutions, indicating much less preference for these aids. one possible reason or the preference for scenarios is that this grou p of planners may have seen them as a familiar, "doable" echnique. generally, more exotic techniques such as the nominal group technique \vere not preferred by this grou p of planners. perhaps, in line with greene's views, 'the control exerted by top managers/owners and the degree of consensus among managers in the small firm, who are often in a situation of having o work closely together, make techniques such as nominal group technique which are aimed at gaining nternal consensus largely irrelevant in the small business (8). the use·of ready-made solutions was re ected as \veil, a finding which seems to contrast \vith the general preference of this grou p of decision makers for less exotic, more practical techniques. possibly, they believed the case itself was too complex or this technique. one additional possibility discussed previously is that environmental volatility, internal stability, and planning type, the three factors incorporated into the hartman et al. model, may operate differently for large vs. small businesses. to consider this question, a series of 2 x 2 x 3 factorial designs \vere developed for each information processing aid, with technological vs. market volatility, stable/neutral vs. unstable ada ptation, and long, medium or short-range planning as the levels. table 4 belo\v provides the results. table 4 offers some support for the idea that hartman et al. factors may not be equally a pplicable to large and small businesses. all of the differences \nith p< .05 involve the large business planners. planners in large firms preferred ready-made solutions in cases of technological volatility (mean = 3.00 for technological compared to 3.59 for market volatility), social judgment analysis was preferred for unstable ada ptaton (mean = 1.98 for unstable, compared to 2.75 for stable/neutral ada ptation), linear compen satory modeling \vas preferred for lov.·er level planning (mean = 2.94 for low, 3.05 for middle and 3.66 for high level planning). taken together, these findings indicate that the planning specialists found in large firms tend to apply specific techniques to specific situations more than the small business generalists, a finding supporting hypothesis 2. the small business plan ners showed preferences for specific aids and tended to use them across situations. table 4. comparison of signficance levels from factorial design analyses of volatility/stability/ planning level for each of eight planning aids for large firms and small firms sources of variation main effects rms ngt lcm ipc sa scen delp sja vol large firms 0.020· 0.384 0.184 0.781 0.578 0.830 0.163 0.703 small firms 0.827 0.261 0.091 0.623 0.744 0.204 0.856 0.936 sta large firms 0.185 0.152 0.636 0.935 0.784 0.393 0.339 0.001.. small firms 0.502 0.787 0.825 0.277 0.934 0.559 0.808 0.143 plan large firms 0.242 0.559 0.007* * 0.432 0.344 0.367 0.468 0.347 small firms 0.879 0.392 0.573 0.167 0.323 0.644 0.759 0.054 • p < .05 •• p < .01 note 1 the columns are the pla nni ng aids described i n table 1 note 2 the rows are the variables i ndicated i n fig ure 1. vol volatility, sta stability, plan pla nning level. 21 summary and conclusions the results of the study are interpreted to suggest that there are differences in kind be tween planning as it is done in large vs. small businesses. small business planning may no simply be large business planning on a reduced scale. the small business planners appea to approach planning somewhat differently from the large business planners. rather than us ing different aids in different situations, they appear to have overall preferences for certai aids and the aids they select appear to be less complex and ones which reflect the specifi needs of the small business. further study will be required to determine whether these initial findings can be replicate in other situations. for example, this study did not consider factors such as type of busines or ownershi p which could potentially affect results. even if future study replicates these in itial findings, a number of issues and questions remain. assuming that large and small busines pla nners approach the planning process differently, a major una nswered question is whethe their approaches should differ. both large and small businesses appear to be departing fro theoretical prescriptions, as offered by hartman et al., and it is possible that their plannin processes a nd/or effectiveness could be substantially improved if they were to follow th guidelines established by the theory. alternatively, perhaps the theory itself needs to be recon sidered in light of what planners actually do. finally, questions need to be asked about whethe there is need for theory development which deals specifically with the small busines environment. references 1. bourgeois, l. j. lli (1985) strategic goals, perceived u ncertainty, a nd economic perfor mance in volatile environments. academy of management journal, 28, 548-573. 2. brannen, w. h. (1983) marketing for the small and/or new enterprise: different marketing and small business/entrepreneurship: concept ual and research directions hills, g. e., barnabu, d. j. and duff us, l. r . (eds.). international cou ncil for sma business, 51-62. 3. chakravarthy, b. (1982) adaptation: a promising meta phor for strategic management academy of management journal, 7, 35-44. 4. cohn, t. and lindberg, r. a. (1972) how management is different in small companies an ama management briefing. dalky, n. c., rourke, d. l., lewis, r. and snyder, d (1972) studies in the quality of life. lexington books, lexington, mass. delbecq, a l. and van de ven, a. h . (1971) a group process model for problem identification a n program planning. journal of applied behavioral sciences, 1971, 7:4, 28-36. 5. delbecq, a. l., van de ven, a. h., and gustafson, d. h. (1975) g roup techniques fo program planning. lexington books, lexington, mass. dysart, j. a. 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(1987) controlling product development in the small tech nology-based f irm. american journal of small business, 37-47. 17. rohrbaugh, ). (1983) improving the quality of group judgment: social judgment analysis and the nominal grou p technique. organizational behavior and human performance, 28, 272-288. 18. stevenson, h. h. and sahlman, a. w. (1988) how small companies should handle ad visors. harvard business review, 66, 28-34. 19. thurston, h. p. (1983) should smaller companies make formal plans? harvard business review, 61, 162-188. case a appendix you are a consultant hired by a large locally-owned audiovisual retailer. the organization esembles sound trek bu t is only local. it has a main office in the largest retail store and, n addition, there are three branch locations. management has told you that the organization has been successf ul in past years and that it is showing steady growth. however, manage ment feels that they need special assistance with planning and have brought you on as a con ulta nt to head u p the planning process. management gives you the following information which they feel is most important to the planning process: the company has been competing successfully on a price basis, but large national firms uch as sound trek, which have greater economies of scale, are moving into the market area. unfortunately, the customer base is extremely fickle and price conscious, and management ears disru ption of the customer base. i n addition, many of the customers are fickle in that 23 they are extremely "fad conscious" and it is difficult to predict the lines and brands they wi prefer at any given point. management is also concerned because the low price strategy the have pursued has led to reliance on japanese and other foreign imports. with frequent change in both import regulation and the government's tarif f policy, the future availability and co of supplies are uncertain. these appear to be the major problems to deal with in planning other changes are not expected in the immediate future. another set of factors to consider relates to the company's ability to ada pt to change. yo talk to top management as well as to a broad group of employees and outsiders. there substantial agreement that the company is in a good position. specifically, the company a p pears to be "on top of things": contacts with national trade orga nizations and similar group leave them feeling that they have a good handle on what's going on, and these same ind ustr trade grou ps have strong effective lobbyists to protect their interests. management an employees at various levels work well together and feel it is important to anticipate and re spond to change. the company also has solid supplier relationships which should provid flexibility in dealing with u ncertainties. your task is to formulate a strategic, long-range plan for the company. your plan will guid the company's overall activities over a period of several years. 24 sandra j. hartman olof lundberg planning in small vs. large businesses: do managers prefer different tools? 14 the prescriptive literature: planning environments and aids to planning fig u re 1 table 1. planning aids table 3. use of planning aids in twelve situations large firms small fi rms 21 appendix 24 strategy small business brief responding to the challenges and opportunities of workforce 2000 arthur shriberg thomas d. clark sherrie e. human xavier university abstract jpe report resuits of a national study examining the impact of demographic changes in the american workforce on small business management practices. telephone interviews with a national random sample of 94 small business owners explored a) ifsmall business owners are aware of changing workforce demographics, and b) if these small business owners are proactiveiy responding to these changes by modifying their personnel practices. findings indicate that while small business managers are aware of changing workforce demographics, only a minority have changed their practices to take advantage of the new population available to them. introduction we report the results of a national study examining the impact of u.s. workforce demographic changes on small business management practices. an earlier pilot study (clark, shriberg & wester, 1995) found that while us small business owners were aware of workforce demographic changes, few had active programs for recruiting and retaining diverse employees. given the predictions from the hudson institute's landmark study, workforce 2000 (johnston & packer, 1987), and its sequel, workforce 2020 (judy & d'amico, 1997), we would expect us business owners to perceive increases in mature, female, and non-white workers, and to change their employment practices accordingly. the current study investigates these expectations, drawing on a national random sample of u.s. small business owners, to ask two primary research questions; 1) do small business owners perceive that demographic changes are occurring in the workforce? 2) are small business owners implementing employment practices implied by demographic projections? methodology 204 small businesses were randomly selected from ward's business directo of us private and p~bl c i iw d' di «n.1996). t business," sample firms were private companies with no more than 100 employees and annual sales less than $4 million. respondents were owners of the selected firms. we developed a structured 12-item telephone interview protocol. respondents were first presented with seven statements regarding their perceptions of the workforce general environment, such as "there are 91 journal ofsmall business strategy volume 9, no. 2 falll)vinrer /998 fewer entry level workers today," to which they responded on a range from "strongly agree" to "strongly disagree." following the same format as in the pilot study (clark, et al. 1995). these statements were designed to test the major assumptions from tower-perrin's (1990) report on the employment practices of u s. firms, an important indicator of whether demographic changes are impacting business practices. in addition, telephone respondants were asked five companyspecific questions, such as "have you noticed a change in the number of women in your company?," requiring dichotomous hyes/noh responses. these five questions were designed to determine if u.s, small business owners were adapting their own personnel practices to an increasingly diverse workforce. the telephone interview was administered in 1997. 94 of the 204 companies in the sample completed the interview for a 46% response rate. results the twelve items in the telephone interview can be categorized into four issues important for understandingworkforceperceptionsandpracticesamongsmallu s. firms. these issues include labor shortage, age, women and minorities, and personnel practices, and correspond to workforce related themes suggested as important for "the future of small business and entrepreneurship" (u.s. small business administration, 1995: 3). table i presents our interview questions and findings. labor shortage q ltl:th f i i k d q i ilk:th i i lib h 4 finding: small business owners do not perceive increased difficulty in locating entry level workers or the existence of a national labor shortage. over half of small business owners interviewed do not believe that there are fewer entry level workers in the workforce today or that a national labor shortage exists (51.1%and 64.9%, respectively; table i). age q «i ¹i:th id k i h kf d q i lld:h i d h i h fh i i ~ finding: while most small business owners recognize the aging of the work force in general, they do not perceive the same pattern within their own companies, and, in fact, some perceive a decrease in employee age in their own firms. 53.2% (table i) of the respondents agreed that, in general, there are more older workers today, while 33% disagreed. responses were nearly split between those who have seen employee age change in their own companies (47.9%) and those who have not (52.1%). 40.5% of those who have seen an age change in their companies perceived a decrease in employee age. women and minorities q ¹ith i h kf dq«'¹6wh i llhi kf q i ¹im b i tk db «h h i d hl f the workforce. 92 journal ofsmall business strategy volume 9, no. 2 fall/ivrnrer 1998 table i workforce demographic changes: perceptions 8t practices of u.s. small business owners strongly agree don't disagree strongly interview questions agree somewhat know somewhat disagree n=94 ~lb sr 1. there are fewer entry level 4 3% 35 1% 9 5% 44.7% 6.4% 100% workers today. 2. there is a national labor 2. 1% 24.5% 8.5% 53.2% i 1.7% 100% shortage today. ~ae: 5.3% 47.9% 13.8% 30.9/o 2.1% 100% 3. there are more older workers in the workforce today. 4. there are more older workers in 47.9'/v=yes if yes, in what direction? 59.5% increase; the workforce today. 40.5% decrease 52.1b=n women and minorities: 5. there are more older workers in 34.0% 58.5% 2.2% 3.2% 2.1% 100% the workforce today. 6. we have a more culturally 17.1% 73.4% 3.2% 6.4% 0.0% 100% diverse workforce. 7. business owners are concerned 12.8% 60.6% 9.6% 14.9% 2.1% 100% about the changing demographics of the workforce. 8. have you noticed a change in 37.2'/v=yes if yes, in what direction? 94.3% increase; the number of women in your 5.7% decrease company? 62.8v/v=no 9. have you noticed a change in 36.6'/a=yes if yes, in what direction? 93.9'/v increase; the number of minorities in 6.1%decrease your company? 63.4'/o=no personnel practices: 10. many business owners i know are formulating new ways to 10.6% 46.8% 11.7% 27.7% 3.2% 100% recruit minorities, women, older employees, & disabled. workers 11. is your company implementing new strategies for recruiting 26.1%= yes minorities? 73.9'/o=no 12. is your company implementing 26.9'/a=yes new strategies for training 73.1'/a=no managers in diversity? 93 journal ofsmall business strategtf volume 9, no. 2 fall/winter /998 u i ¹¹h l 9 9 i~ lb b f ki l ¹9h 9 9 i 9 b f finding: while small business owners recognize increased workforce diversity, this recognition is reflected in the workforce demographics of only a minority of the companies surveyed. 92.5% and 90.5%of respondents perceive more women and more cultural diversity, respectively, in the workforce. 73.4% perceive that business owners in general are concerned about changing workforce demographics. significantly, when asked about their own companies, a majority (62.8% and 63.4%) have not seen general workforce panems regarding women and minorities translate to their own companies. personnel practices u lllb: m b i ik f i i 9 ii ~ ethnic minorities women olderem lo ees andhandica edworkers. q «i ¹ii:i l i i i f q i ¹ik:i i i i « i f ii i dl finding: small businesses are just beginning to adapt to the changing demographics of the workforce by formulating new personnel practices. while 57.4%of the respondents perceive that other businesses are implementing new personnel recruiting practices, 73.9% are not implementing new recruiting strategy and 73.1%do not have diversity training strategies in their own companies. implications and conclusions our findings suggest that, while u.s, small business owners are aware of rapid changes in workforce composition, building a diverse work force has not yet become an action priority within their own firms. these results have three significant implications. first, a gap may exist between small business owners'wareness of the external environment and the specific actions that need to take place internally to adapt to changes in the environment. indeed, our findings of 20-30% difference between small business owners'erceptions and actions with regard to recruiting women and minorities —suggest this interpretation. second, what is being labeled "inaction" may actually be the result of small businesses not yet experiencing the difficulties in workforce recruitment and training implied by predicted demographic changes. for instance, previous authors suggest that, due to widespread corporate downsizing and the proliferation of entrepreneurshi pand small business educational programs, the "relative attractiveness" of careers in the smaller firm sector has increased in the recent decade (kuratko and hodgetts, 1995; u.s. small business administration, 1995:5). indeed, our findings that a substantial number (40.5%) of small business owners perceive a younger workforce in place, while contrary to demographic projections, lends support to a conclusion that small businesses are not yet experiencing the predicted workforce demographic changes. as research indicates that shortages encourage owners to create more welcoming environments for the increasingly multicultural workforce (cox, 1993; jamieson and o'mars, 1991), if no shortages are perceived in the small business sector, then these firms may not incorporate new practices to encourage diversity within their companies. third, contrary to the tower-perrin (1990) report indicating that businesses that demonstrated a strong awareness of, and interest in, the changing demographics of the workforce were likely to actively respond to this work force trend, our findings show that only a minority of small 94 journal of small business strategy volume 9, no. 2 fall/winter 1998 business owners have changed their personnel practices regarding a diverse work force. this implies that future employment practices of most small business owners will be more "reactive," or driven by demands made by new employees, than "proactive," or implemented to attract multicultural talent by making small business workplaces more welcoming for minorities, females, and mature employees. references clark, t., shriberg, a., & wester, s. (spring 1995). preparing small business for workforce 2000:apilotstudy. journalofsmallbusinessstrate . 6 (1),1-20. cox jr., t. (1993). cultural diversit in or anizations theo research & ractice. san francisco: berrett-koehler inc. jamieson, d., &. o'mara, j. (1991).mana in workforce 2000. san francisco: jossey-bass. johnston, w. & packer, a. (1987). workforce 2000: work and workers for the twen -first centum, indianapolis: hudson institute. judy, r., &. d'amico, c. (1997).workforce 2020: work and workers in the twen -firstcentu indianapolis: hudson institute. kuratko, d., ec hodgetts, r. (1995). entre reneurshi: a contem ora a roach fort worth: the dryden press. naisbitt, j. (1982). me atrends ten new directions transformin our lives. new york: warner books. tower-perrin. (1990).workforce2000: a surve re ortonco orateres onsesto demo ra hic and labor force trends. new york: tower-perrin. us small business administration. (1995). the third millennium small business and entre reneurshi in the 21st centu: a s ecial ublication re ared for dele ates to the 1995 white house conference on small business washington, dc: office of advocacy. ward's business directo of us rivate and ublic com anies. (1996).detroit: gale research. 95 i journal ofsmall business strategy volume 9, no. 2 fail(ivinter 1998 arthur j. shri berg is an associate professor of management ofxavier university (cincinnati). he received his ed d from columbia university and his m b a. from xavier. he has served as dean andior vice-president at four um'versities. he co-writes a weekly syndicated column entitled, "ivorld of difference." he is currently on the editorial board of three professional journals, and has made several presentations concerning diversity and small business. his primary teaching and research interests are leadership and diversity. thomas d. clark is a professor of management ai xavier university and president of communiski its, a training company. he received his ph d from indiana university. he directed xavier 's s.b. i. program from 198ii 989, served as an associate edi tor of the journal of small business management, and has made several presentations concerning diversity and small business. his primary teaching and research inierests are interpersonal communication and legalissues. sherrie human teaches management and entrepreneurship at the graduate and undergraduate levels. prior to receiving her ph. d. in 1995from ihe university of kentucky she worked as a consultant to industry on quality and manufacturi ng design prjoects, and founded and managed businesses in the hospitality and technology industries. her scholarly research interests focus on new ventureinitiation, andentrepreneurialandinterorganizationalnetworks. dr. human has published artilces ofher researchfindingsin the academy of management journal, journal of business venturing, entrepreneurship theory and practice, frontiers of entrepreneurship research, and the journal ofsmall business management. 96 strategy small business brief small-town merchants are not using the recommended strategies to compete against national discount chains: a prescriptive vs. descriptive study christopher f. achua university of virginia's college, wise cfa2dqamail. wise. virginia.edu robert n. i.ussier springfield college rtussierqaspflldcol. edu abstract the research question wast do small retailers use the strategies prescribed in the literature for them to compete with the large retail chains? descriptive survey results of 62 small business owner personal interviews indicate that ihey do not use three of the four prescribed marketing strategies to compete with the large general merchandise discount store chains. respondents were asked if they adjusted strategies %er the major retailer moved in; 52% did not ajd ust product, 42% maintained the same price strategy, 21% did increase service strategy, and 50% did not alter promotion strategv. the findings revealed that 34% expanded their product line, with only /0% reducing their product line. although not recommended, 37% actually dropped prices to compete. however, 77% did place a greater emphasis on service. assessing the impact of these changes on financial performance, 58% indicated that their sales and profit margins had remained satisfactory over a 5-year period of measurement and a third (32%) had mixed results during the same time period. introduction there are over 24 million businesses in the united states. half are part-time businesses and the other half consists of those whose primary occupation is self-employment (nfib, 2000). one in 15 adults (7%) invest in a start-up business (zacharakis, bygrave, & shepherd, 2000); however, there is a 50% chance that a new business will fail in the first 36 months (meyer, 2001). around 1.3 million businesses cease operation each year (dennis, 1999). thus, the important role of business suggests that an understanding of why firms fail and succeed is crucial to the economy (lussier & pfeifer, 2000). a discount chain entry into a local community clearly has an impact on existing local retailers (mcgee 8c peterson, 2000). although not all small retailers are affected adversely, the overall 80 journal of small business strategy vol. /3, no. i spn'nglsummer 2002 impact can be quite negative (catusome, 1976; marsh, 1991; sheets, 1989; stone 1988). according to mcgee and festervand (1996), on average, local merchants can expect stagnant revenues, if not significant declines both in the short and long term. the "big three" general merchandise discount store chains, wal-mart, kman, and target have continued to grow at the expense of smaller retailers (levy & weitz, 1998). as discount chains continue their expansion into small-town communities in america, the survival of local merchants remains in question (mcgee, 1995).thus, the findings that massmerchandisers contribute to the demise of local independent merchants deserve serious consideration; particularly in small town communities where they are needed the most. finding the right formula for co-existence between discount chains and small local businesses is crucial to the future of small independent merchants (mcgee & festervand, 1996). this study contributes to the literature by aiding in the explanation of the small business owners strategies used, or the lack of adapting strategies, to compete when a major chain store comes to town. also, according to mcgee and peterson (2000) and mcgee and festervand (1996), consultants, business writers, and other "experts" argue that small retailers need to adjust their marketing strategies to survive the big retail competitors. they prescribe strategies to compete. however, there is little empirical research to support these prescribed strategies. there is need for further research. thus, this study further contributes to the literature by determining if the strategies prescribed in the literature are actually used by small retailers to compete with the major chain stores. literature review in a study examining wal-mart's effect on small town merchants in five mid-western communities, it was revealed that per capita retail sales and taxes increase faster in towns with a wal-mart than those without (mcgee & festervand, 1996). however, it was also noted that while non-competing businesses experienced the greatest benefit, local merchants in direct competition with a wal-mart experienced revenue losses ranging from 5% to 50%. mcgee and festervand (1996) examined how local retailers responded to wal-mart's arrival. walmart's arrival disrupts existing retailing patterns and forces merchants to alter their competitive strategies. small merchants incorrectly placed greater emphasis on lower prices and increased promotional activities as a response to competitive pressure. this current investigation is based more on mcgee and festervand (1996)than any other study; thus, there is much comparison throughout this article. in a follow-up longitudinal study affer three years, mcgee and peterson (2000) found that merchants responded to wal-mart's arrival by giving noticeable, but modest, levels of increased emphasis to a variety of marketing efforts. the primary discriminator in relative performance among these merchants remained to be the nature of wal-mart's original impact on them. winninger (1995) investigated, what happens when wal-mart comes into a small community, and which of the small guys stay in business...and why? findings indicated that those that tried to beat or meet wal-mart's prices were the ones that failed. those that succeeded were those that were able to exploit their small size and offer the types of customer service that wal-marts around the world are unable or unwilling to give (winninger, 1995). stone (1988) examined 17 rural iowa towns as the first to focus on a particular discount chain —wal-mart and its impact on local merchants. though per capita sales increased faster in towns with wal-mart stores than in comparable towns across the state, the study also reported that iowa towns within a 20-mile radius felt wal-mart's presence. retail sales in these communities decline by nearly 10% alter five years. the outcome was much worse for 81 ./ournal ofsmall business siraiegv vol. /3, /t/o. l spring/summer 2002 iowa's smallest businesses. a newly opened wal-mart store, drained as much as $200,000 a year from towns with fcwcr than 1000 people. some store types most susceptible to severe market losses included clothing, drug, jewelry, auto-parts, variety and hardware stores. all these retailers deal in merchandise varieties typically found in a wal-mart store (stone, 1988). carusome (1976) investigated retailers in 10 small ohio communities as one of the first studies to address how large mass-merchandisers affect local merchants. results indicated that thc number of independent local merchants decreased by approximately 8% during the tenyear study period, while the number of chain store outlets increased by nearly 11% (carusome, 1976). purpose of the study the purpose of this study was to determine the strategies used by small retailer to compete with large retailers when they move into their local community. this study examines marketing strategies related to the retail marketing mix of product, pricing, service, and promotion strategies. the descriptive research question was: do small retailers use the strategies prescribed in the literature to compete with the large chains? 13ascd on the literature, the small retailers need to adjust their marketing strategies to reduce the competitive pressures created by the arrival of wal-mart and other large chain retailers. 'i'he prescribed strategies include: cutting products and adding new lines of products, increasing service and promotional efforts, and/or diversifying into other lines of business. conversely, cuttin prices to compete with large retailers is discouraged (mcgee /k peterson, 2000). mf.thods design and sample in this descriptive study, 100 small independent merchant business owners were contacted by telephone to participate in survey. ot'his number, 62 owners accepted our request and the rest indicated a lack ol'ime as an excuse to not participate. the survey was conducted through personal interviews. participant stores were from four small towns within the southwest virginia region. these towns are within a half-hour driving distance from each other. one of thc towns has a wal-man, kmart, and lowe's store chains. these chains attract customers lrom within a as-mile radius. all the other towns have supermarkets associated with the major chains. the survey instrument the survey instrument was developed based on an extensive review, of the retail management literature. it had three sections: a biographical section from which descriptive statistics were gathered, a section dealing with the merchant's retail mix (the questions in this section were open and closed-ended), and a third section dealing with evaluation and performance measures (a mix of open and closed-ended questions). the open-ended questions in section two on the retail mix dealt with three key issues: ( i) has competition from the discount chains affected your retail strategy? (2) what if any changes have you made to each retail mix element (product variety and assortment, price, promotion, and customer service) in response to competition from discount chains? (3) what effect have any of these changes had on your sales and profitability? the survey instrument was improved through a panel of experts and pilot testing to increase its reliability and validity. 82 journal of small business strategy vol. /3, no. l spring/summer 2002 descriptive statistics this study was descriptive, thus only descriptive statistics are reported. participant merchants were 81% male; about half high school graduates and half had some college; about 25% had 0-4, 5-10, 11-20, and ) 20 years in business; 52% had business experience prior to starting their business; and 85% were family owned businesses. the frequencies and percentages are reported for product, price, service, and promotion strategies of small retailers. retail mix results and discussion product strategy a retailer's product strategy is revealed in the variety and assortment of products it chooses to carry out. a discount store chain and a local independent retailer may offer similar merchandise, but the discount store will tend to offer more variety but limited assortment of merchandise. these elements of product variety and assortment form an integral part of the retail market structure, since it is the retail offering that ultimately distinguishes between discounters, department and specialty stores. the question asked of respondents was: how did competition from major chains affect your product offerings? when asked to describe what responsive actions they had instituted to stay competitive, respondents'nswers varied as follows: no change 52% expand product line 34% decreased product line 10% complete new line 3% changed retail format 2% of the 62 merchants who responded to this question, about a third of them (34%) indicated that they expanded their product line otterings rather than contracting or eliminating some lines. only 10% (6) indicated that they took this line of action. half (52%) did nothing to adjust their product offerings. very few (3%) offered a completely new product line or changed store format as a competitive response (2%). these results do not support the use of prescribed strategies (mcgee & festervand, 1996; mcgee & peterson, 2000; winninger, 1995) being used by small retailers as over half of the respondents made no product strategy adjustment despite acknowledging that competition from discount chains had affected their business, and few decreased their product offerings. pricing strategy today's consumer is more price-sensitive than ever. they want value and to many consumers that means a low price. others are willing to pay premium prices as long as they believe they are getting a differentiated product/service. retailers have responded to these market pressures by creating retail formats that emphasize low prices as means of creating a differential advantage. national discount store chains that offer everyday low prices (edlp)— such as wal-mart, target, and kmart dominate many markets in many product categories. a close competitor in this price-driven market is the membership-only warehouse club, such as sam's wholesale club and price/costco. another retail type is the off-price retailer (e.g. loehmann's, t.j. maxx, and marshalls), which purchases closeout and end-of-season merchandise at lower-than-normal prices and passes the savings on to the customer. 83 journal ofsmall business strategy vol. /3, no. i spring/summer 2002 in the middle of this price war among national chains are smaller independent retailers. typically unable to purchase in large quantities to receive lower prices like their larger competitors, "ma-and-pa" retailers have either learned to use other strategies to compete or gone out of business. for instance, to compete with wal-mart's low prices, small retailers have developed niche strategies by providing a broader assortment of merchandise within a given product category and better service. wal-mart may have the lowest average price on the few athletics shoes and clothing that it carries. a good sporting goods specialty store, however, might have a larger assortment than wal-mart and would be willing to special-order merchandise so that its customers could get exactly the shoes they'e looking for. it could also give advice on the product itself as well as local sporting information. to determine how local merchants were dealing with intense price competition from the discount chains such as walmart, kmart, and lowe's respondents from the local market area were asked to: describe what pricing actions, if any, you employed to stay competitive. responses were as follows: no change in pricing strategy 42% lowered price to match discount chains 37% did not make major changes in original pricing strategy i 6% consciously moved away from price competition 3% brought in new product lines for price conscious consumers 2% over a third of independent retailers (37%) engaged in head-to-head price competition with discount chains by cutting their prices. a respectable number (i 6%) made only minor changes from time to time and 42% left their pricing strategy unchanged. contrary to the prescribed notion that small retailers need to adjust marketing strategies and avoid decreasing prices (mcgee &, festervand, 1996; mcgee & peterson, 2000; winninger, 1995) many respondents made no strategy changes and many did cut prices. thus, participants are not using the prescribed strategies. customer service strategy customer service is the set of activities and programs undertaken by retailers to make the shopping experience more rewarding for their customers. these activities increase the value customers receive from the merchandise and services they purchase. in a broad sense, all elements of the retailing mix provide services that increase, the value of merchandise. for example, location, in-stock position, and assortments all increase customer convenience. small, independent retailers often attempt to develop a strategic advantage over large, national chains by providing customized customer service. large chains can use their purchasing power to buy merchandise at lower prices than small local stores can. but small retailers can overcome this cost disadvantage by providing better customer service than a large, bureaucratic chain. local merchants were asked: how has your service strategy been affected by competition from discount chains? results were: greater emphasis on service 77% no change 21% match competitor's level of service 2% less emphasis on service 0% 84 journal ofsmall business strategy vol. /3,?to. i spring/summer 2002 the majority of the respondents (77%) indicated that they place increased emphasis on services. just one indicated trying to match the level of service provided by the major chains. no one decreased service as a responsive strategy. thus, respondent are using the prescribed increased customer service strategy (mcgee & festervand, 1996; mcgee &. peterson, 2000; winninger, 1995). promotion strategy a retailer's promotion program informs customers about the store as well as the merchandise and services it offers. in addition, retailers are using promotion programs to build repeat business and store loyalty. retailers communicate with customers through five vehicles also referred to as the promotion mix elements: advertising, sales promotion, publicity, store atmosphere and visual merchandising, and personal selling. in large retail firms, the promotion strategy is managed by the firm's marketing or advertising department and the buying organization. small independent retailers are often at a disadvantage in the area of promotion because of limited resources. also, the vehicles or promotion mix they employ differs from those used by large retailers. most large retailers employ an integrated promotion campaign where they make use of all the promotion mix elements-advertising, personal selling, sales promotion, and public relations. small independent retailers mostly rely on word-of-mouth, some local events sponsorship, and limited radio/newspaper advertising. respondents were asked: did your promotionai activities change after the maj or chain entered your market? results on how small town retailers accomplish their promotion tasks include: no change 50% increased promotion activities 50% there is an equal split between those who promote aggressively using multiple media sources and promotion elements and those who did not promote at all preferring to rely on word-of-mouth from satisfied customers. half of respondents increased their promotional activities, which is consistent with the prescribed strategy to increase promotional efforts (mcgee & festervand, 1996; mcgee & peterson, 2000; winninger, 1995) aimed at informing the market of the local merchant's unique offerings and service. local radio, newspapers, billboards, and cable t.v. were the most frequently mentioned media sources. performance outcomes ultimately, the effects of any adjustments to product, pricing, promotion and customer service strategies are revealed in the firm's financial performance. the prevailing assumption has been that small independent merchants who adjust their marketing strategies to reflect a narrower but unique product mix, provide valued services to their customers and put out a focused, yet aggressive and informative promotional campai~, will out perform those that try to mimic the strategies of discount chains like wal-mart (winninger, 1995). respondents were asked: iyhat effect have any of these changes had on your sales and profitability? maintained satisfactory profits over the past 5 years 58% mixed results over the past 5 years 32% mostly losing sales and profits over the past 5 years 10% 85 journal of small business strategv vol /3, no. i springlsummer 2002 over half of the firms claimed to have maintained satisfactory sales and profit margins over a five year period. a third had a mix of losing years and profitable years. only 10 percent reported loses in sales and profits during the entire five years or during four out of the five years. given the fact that these local merchants are most often the surviving candidates in the local market after most of their peers have closed down, it is no surprise that over half reported to be doing well. also, these were the firms that had adjusted their marketing mix away from the discount chain strategy. those with mixed results are the marginal firms that have not yet fully adjusted their strategies away from the discount chain format. they have changed certain things and ignored others. as revealed earlier, small independent merchants that are able to exploit their small size and offer the types of customer service and product categories that wal-marts around the world are unable or unwilling to offer are the ones for will stay profitable (winninger, 1995). implications as researchers have studied this topic, there is a growing consensus that to succeed, the local independent merchant must pursue a focused (niched) differentiation strategy, rather than try to compete against mass merchandisers on the basis of price (hamilton, zimmerman, mill, dunlap-minkler, & chapman, 2001). results indicate that a large percentage of small local independent retailers failed to adopt this course of action. most local merchants expanded rather than contract and focus their product lines. there did not seem to be a conscious attempt to vary the product variety and assortment away from the discount chain's offerings. on pricing, a significant number of respondents lowered their prices to match those of the discount chains. this seems illogical or unrealistic of a move to take. mcgee and festervand (1996) concluded that competing on price may be futile. there is no denying that the small independent retailer must remain price competitive, but success is much more likely if the local merchants are able to satisfy their customers by offering a deeper selection of higher quality products and superior customer service at a premium price. winninger (1995), suggests that targeting a particular customer type or unsatisfied niche is the better course of action than trying to appeal to the mass market. an overwhelming number of local merchants indicated that they have expanded their level of customer service in order to keep their customers happy. mowever, these same merchants revealed that they had lowered their prices to stay competitive. except for the very best companies, these two strategies may work against each other. increasing customer service, expanding product offerings, and promoting the store are all spending activities that need to be matched by higher prices to cover such costs. this may explain why many local merchants fail to make a profit or simply go out of business. although prescriptive strategies to compete with the giants were concluded in this journal back in 1996 (mcgee & festervand), and others, this study reveals that local merchants still do not have a consistent strategy of competing against discount merchandisers. instead of trying to compete head-to-head with discount chains, successful small retailers will be those who effectively compete "around" them, most small businesses are not following this advice. also, there must be an explicit strategy that is based on the external market situation (opportunity & threats) and the internal firm situation (strengths & weaknesses). in conclusion, this study revels that many small retailers are still not using the prescribed marketing strategies to successfully compete with the large discount chains. this may be due to the fact that the small retailers are not aware of the prescribed strategies or convinced of the effectiveness of these strategies if implemented. there is a need to educate the small retailers to adopt the prescribe strategies to help decrease the number of small businesses that fail. 86 journal ofsmall business strategy vol. i3, no. i spring/summer 2002 references carusome, p. s. (1976). institutional change and adaptive behavior in small city retailing. in e.m. rams (ed.) analysis and valuation of retail locations, restin, virginia: restin publishing. dennis, w. j. (1999). business starts and stops. washington, dc: national federation of independent businesses (nfib). hamilton, r. d., zimmerman, m., hill, t. l., dunlap-hinkler, d., & chapman, e. a. (2001). david versus goliath: explaining small firm survival. proceedings of the united states association small business education and small business institute directors'ssociation national conference, 99. levy m., & weitz b. (1998). retail management (3 ed.). boston; irwin/mcgraw-hill. lussier, r. n., & pfeifer, s. (2000). a comparison of business success versus failure variables between u.s. and central eastern europe croatian entrepreneurs. entrepreneurship theory and practice, 24 (4), 59-67. marsh, b. (1991, june 5). merchants mobilize to battle wal-mart in a small community. wall street journal, sec. l. mcgee, j. e. & festervand, t. a. (1996). when wal-mart comes to town: a look at david's response to the arrival of retailing's goliath. journal ofstnall business strategy, 7 (3), 15-28. mcgee, j. e. & peterson, m. (2000). surviving "w-day": an assessment of the impact of wal-mart's invasion of small town retailing communities. proceeditigs of the united states association small business education and small business institute directors'ssociation national conference, 131-135. myer, g. d. (2001, february 8). major unresolved issues and opportunities in entrepreneurship education. featured speaker at the united states association small business education and small business institute directors'ssociation national conference. national federation of independent businesses. (2000). small business policy guide. washington, dc: nfib. sheets, k. (1989, march). how wal-mart hits main street. us. news & world report, l3, 53-55. stone, k. e. (1988). the effects of wal-mart stores on businesses in host towns and surrounding towns in iowa. unpublished paper, iowa state university, ames. winninger, j. t. (1995, february). price wars: how to win the battle for your customer. success magazine. zacharakis, a. l., bygrave, w.d., & shepherd, d.a. (2000). global entrepreneursliip monitor (gem). washington, dc: kauffman center for entrepreneurial leadership at the ewing marion kauffman foundation. christopher f. achua is associate pr%ssor of management at the university of virginia's college at wise. he co-author (with lussier) of leadership: theory, application, and skill development published by southwestern. robert iv. lussier is pr%ssor of management and director of israel programs at springjield college. he is the president of the sbida region i (new england) and author of more than 200 publications. dr. lussier is the co-author (with j. corman) of entrepreneurial new ventures published by dame-south-lvestern, 2001. he is also the author of human relations in organizationst applications and skill building published by irwinlmcgraw-hill and management fundamentals: concepts, applications, and skill development published by southwestern. 87 journal of small business strategy vol. 27 ● no. 1 ● 2017 19 international opportunity recognition: an overview moritz angelsberger university of liechtenstein sascha kraus kraus@strategic-entrepreneurship.de university of liechtenstein alicia mas-tur alicia.mas@uv.es university of valencia norat roig-tierno norat.roig@campusviu.es valencian international university abstract since 2006, the role of international opportunity recognition became an emergent research stream in international entrepreneurship. following the definition of international opportunity recognition, the initial international opportunity recognition is defined as follows: the way an entrepreneur discovers the opportunity to exchange products and services with a new or existing partner in a new international market for the first time. in this study, we perform an in-depth literature review on the international opportunity recognition concept, and we suggest future lines of research in this topic. keywords: international opportunity recognition, international entrepreneurship, literature review mailto:kraus@strategic-entrepreneurship.de mailto:norat.roig@esic.edu journal of small business strategy vol. 27 ● no. 1 ● 2017 20 introduction an increasing number of studies on entrepreneurial opportunities have emerged on the entrepreneurship landscape in recent decades (busenitz, plummer, klotz, shahzad, & rhoads, 2014). according to the trend analysis of busenitz et al. (2014), research on entrepreneurial opportunities will continue to increase, and will, therefore, become the most important topic in the field of entrepreneurship. likewise, it has been observed that research on opportunity recognition has gained more attention in the past few years, as it has been perceived as a central element of the entrepreneurial process (busenitz et al., 2014; george, parida, lahti, & wincent, 2014; kontinen & ojala, 2011a; harms, schulz, kraus, & fink, 2009). particularly, scholars have been driven by the question of when, how, and why some individuals can recognize opportunities – while others cannot. one way to answer this question is to examine the nexus between entrepreneurial opportunities and individuals or groups (baron, 2004; busenitz et al., 2014; shane & venkataraman, 2000). studies have shown that only a handful of people are able to recognize entrepreneurial opportunities because they have superior cognitive abilities and better access to information (kirzner, 1973; shane, 2003; shane & venkataraman, 2000). in this context, influencing factors play a crucial role, as they affect the way that entrepreneurs discover and develop opportunities (ardichvili & cardozo, 2000; ardichvili, cardozo, & ray, 2003). hence, social capital, personality traits or cognition, environmental conditions, entrepreneurial alertness, systematic search, and prior knowledge are recognized as major factors which have an impact on the opportunity recognition process (ardichvili et al., 2003; george et al., 2014; shane, 2003). starting in 2006, the role of international opportunity recognition has become an emergent research stream in international entrepreneurship (peiris, akoorie, & sinha, 2012). the increasing interest in this topic was most likely triggered by scholars who asked for further research (e.g., dimitratos & jones, 2005; styles & seymour, 2006; zahra, korri, & yu, 2005) or by scholars who perceived that the notion of entrepreneurial opportunities had rarely been developed in their previous studies (e.g., johanson & vahlne, 2006). the work of kontinen and ojala (2011a) has laid an important foundation stone. although their study delivers valuable insights into international opportunity recognition and the influencing factors network ties, prior knowledge, entrepreneurial alertness, and activeness (systematic search) further examinations are needed. the research is structured as follow. the following section (literature review) focuses on the analysis of the entrepreneurial opportunities and, specifically, the opportunity recognition and the international opportunity recognition. in this sense, we analyze all the studies in this field by distinguishing between the qualitative and the quantitative approaches. in the final section, we finish with our conclusion. literature review the field of entrepreneurship is the study “of how, by whom, and with what effects opportunities to create future goods and services are discovered, evaluated, and exploited” (shane & venkataraman, 2000, p. 218; venkataraman, 1997). therefore, entrepreneurship contains the “processes of discovery, evaluation, and exploitation of opportunities; the individuals who discover, evaluate, and exploit them and the journal of small business strategy vol. 27 ● no. 1 ● 2017 21 examination of sources of opportunities” (shane & venkataraman, 2000, p. 218). given this definition, it can be stated that entrepreneurship consists of entrepreneurial opportunities and individuals who try to benefit from them (oviatt & mcdougall, 2005). we recognized different types of entrepreneurs in the literature. for example, macmillan (1986) differentiates between one-shot entrepreneur, drop-out entrepreneur, and business generator. while a one-shot entrepreneur is someone who successfully builds a company and becomes its ceo, a drop-out entrepreneur is someone who establishes a business, but sells it to others or is forced to get out of it. an entrepreneur that establishes more than one venture is known as a business generator or also as a habitual entrepreneur (morrish, 2009). other types of entrepreneurs are nascent, novice, serial, and portfolio entrepreneurs (delmar & davidsson, 2000; ucbasaran, westhead, & wright, 2001; westhead & wright, 1998). hence, nascent entrepreneurs are individuals who consider creating a business, and novice entrepreneurs are individuals with no prior entrepreneurial experience who create a business for the first time. serial and portfolio entrepreneurs can be seen as two different types of habitual entrepreneurs. the serial entrepreneur sequentially owns businesses, but just one company at a time. the portfolio entrepreneur owns several businesses at the same time (hall, 1995; morrish, 2009; westhead & wright, 1998). entrepreneurial opportunities the analysis of 56 articles by hansen, shrader and monllor (2011) shows that scholars have defined the term entrepreneurial opportunities from different viewpoints, which led to inconsistent operational definitions and conceptual definitions. despite this, they were able to give a better overview by composing the different definitions of entrepreneurial opportunities into six conceptual definitions (cf. hansen, et al., 2011, p. 292). thus, they show that the term of entrepreneurial opportunity cannot be simply unified, as scholars define it from different perspectives (hansen, et al., 2011). similarly, davidsson (2015) argues that scholars do not share the same idea about entrepreneurial opportunities, as they characterize them in various ways. whereas some describe them as external conditions, some see them as social constructions, and others characterize them as individual cognitions (davidsson, 2015). mainela, puhakka, & servais, (2014) argue that two major types of entrepreneurial opportunity exist in the literature. the first type is the innovation opportunity, also known as schumpeterian opportunity (schumpeter, 1934), and the second type is the arbitrage opportunity, also known as a kirznerian opportunity (kirzner, 1973). these two different approaches describe entrepreneurship as the creation of a new economic activity and explain the source and presence of entrepreneurial opportunities (mainela et al., 2014; shane, 2003). for a better understanding, these two types will be further explained. kirznerian opportunities (arbitrage opportunity) according to this view, the existence of entrepreneurial opportunities does not depend on new information, but needs differential access to already available information (kirzner, 1973; shane, 2003). these opportunities exist because people sometimes make incorrect decisions based on the information they possess, which in this case, inaccurate or wrong. this situation leads to journal of small business strategy vol. 27 ● no. 1 ● 2017 22 errors that create shortages, surpluses, and misallocated resources. individuals can benefit from these errors and gain profit from them by buying, recombining, and reselling resources (kirzner, 1973; shane, 2003; shane & venkataraman, 2000). as a consequence, these errors create a market disequilibrium which enables individuals to take advantage of it by gaining extra profit. as these individuals exploit the market disequilibrium, they drive the economy back to an equilibrium state (chandra, styles, & wilkinson, 2009; kirzner, 1973; mainela et al., 2014; shane & venkataraman, 2000). kirznerian opportunities are mainly recognized through a discovery process, in which entrepreneurial alertness and search play a crucial role (alvarez & barney, 2007; chandra et al., 2009; shane, 2003). moreover, these opportunities can be acknowledged as less innovative as they just strengthen/imitate the status quo. consequently, the exploitation of kirznerian opportunities is less risky compared to schumpeterian opportunities (shane, 2003). finally, in this type of opportunity, value generation is based on unmet market needs (mainela et al., 2014). schumpeterian opportunities (innovation opportunity) in contrast to kirznerian opportunities, schumpeterian opportunities exist because of disequilibrating forces. hence, political, regulatory, social, demographic, and technological changes offer a constant flow of new information which entrepreneurs can use to find out how to transform resources into a more valuable form. as these changes allow to recombine resources into a more valuable form, the new information modifies the value of resources and the equilibrium price (price approaches the equilibrium). if individuals possess the new information first, they have the possibility to buy resources when prices are low, transform them into a more valuable form, and sell them with the aim to generate an entrepreneurial profit (schumpeter, 1934; shane, 2003; shane & venkataraman, 2000). these individuals benefit from a “temporary monopoly power”. however, as imitators appear in the market, they also want to gain an entrepreneurial profit. hence, they exploit the profit and drive the economy back to its normal conditions (baumol, 1993, p. 6; chandra et al., 2009). as schumpeterian opportunities occur due to disequilibrating forces, they disrupt the existing market system. in this context, they are more valuable and innovative than kirznerian opportunities (mainela, puhakka, & servais, 2014; shane, 2003). according to schumpeter (1934), there are five different types of opportunities: new organizational structures, new markets, new products or services, new production methods, and new raw materials (chandra et al., 2009; shane, 2003). in addition to the schumpeterian and kirznerian perspective, there also exists the knightian view (f. h. knight, 1921) which describes entrepreneurship as an uncertaintybearing process (chandra et al., 2009). mainela et al. (2014) point out that even though the terms innovation and arbitrage opportunity may seem similar to the concepts of opportunity discovery and creation, they must be distinguished from one another. while innovation and arbitrage opportunity is about the formation of new market activities, opportunity discovery and creation are about entrepreneurial behavior and therefore explain how opportunities are formatted. opportunity recognition even though an entrepreneurial opportunity may exist, it can only be successfully exploited, if an individual recognizes the existence of the opportunity and its value journal of small business strategy vol. 27 ● no. 1 ● 2017 23 (shane & venkataraman, 2000). the recognition of an entrepreneurial opportunity requires the creation of a new mean-ends framework (brown & kraus, 2009; casson, 1982; shane, 2003). eckhardt and shane (2003) describe the discovery of entrepreneurial opportunities as a process where individuals recognize unnoticed or unknown ways to form a new means-ends framework. the new means-ends relationship leads individuals to believe that they can introduce a new method of profit generation by combining resources in a novel way and selling the output for a higher price than its cost (shane, 2003). eckhardt and shane (2003) and shane (2003) characterized entrepreneurial opportunities as something new and innovative, where entrepreneurs have to make assumptions (conjectures) about future events on the basis of unknown information and therefore have to develop different beliefs about the value of the opportunity. opportunity discovery vs. opportunity creation although the focus of this study lies on the discovery point of view, the creation view will also be discussed. ardichvili et al. (2003) believe that opportunities are created and not discovered. however, two main theories exist which explain the formation of opportunities through entrepreneurial actions/behaviors (alvarez & barney, 2007; mainela et al., 2014; short et al., 2010, p. 55). the first theory claims that opportunities are generated through a discovery process (discovery theory), and the second states that opportunities are formatted through a creation process (creation theory). as both theories are built on teleological theory, they have some similarities. for example, both of them try to explain the actions, which entrepreneurs perform for the creation and utilization of opportunities. furthermore, both theories assume that the occurrence of opportunities can be explained prior to a competitive deficiency in the market (alvarez & barney, 2007; kirzner, 1973). although both theories have much in common, a distinction must be drawn between them (alvarez & barney, 2007; mainela et al., 2014). we outline some of the most important differences in table 1. international opportunity recognition and international opportunity whereas entrepreneurship research is more concerned with the formation of new ventures, the development of start-ups, and the management of small and medium-sized enterprises (smes) within the national market, international entrepreneurship research focuses on entrepreneurial internationalization or international comparisons of entrepreneurship (jones, coviello, & tang, 2011; kraus, 2011; mcdougall, 1989; mcdougall & oviatt, 2000) oyson and whittaker (2010), as illustrated in figure 1, describe that entrepreneurial opportunities are linked with domestic entrepreneurship and that international opportunities are associated with international entrepreneurship. in this context, karra et al. (2008) note that opportunity recognition and international opportunity recognition must also be distinguished from each other. journal of small business strategy vol. 27 ● no. 1 ● 2017 24 table 1 opportunity discovery vs. opportunity creation category opportunity discovery opportunity creation nature of opportunities opportunities are created through exogenous shocks in pre-existing industries triggered through endogenous actions of individuals to generate new services or products existence of opportunities opportunities exist regardless of entrepreneurs are conscious of them or not (discovering mountains) opportunities only exist because of the actions performed by the entrepreneurs (building mountains) entrepreneurial behavior -more passive -alertness and search -more active: through action, observation and interaction with the environment -causation and effectuation nature of entrepreneurs -entrepreneurs and nonentrepreneurs differ in their capabilities -thus, not everyone is able to perceive the opportunity -entrepreneurs may or may not differ from non-entrepreneurs -even small differences can determine whether someone can form an opportunity or not (luck plays a crucial role) nature of decisionmaking context -entrepreneurs make decisions under risky terms (unknowability) -risk can partly be estimated -entrepreneur make decision under uncertain terms (uncontrollability) -difficult to estimate outcome source: based on alvarez and barney (2007); davidsson (2015); mainela et al. (2014); miller (2007); sarasvathy et al. (2003). figure 1. domestic entrepreneurship vs. international entrepreneurship journal of small business strategy vol. 27 ● no. 1 ● 2017 25 while opportunity recognition occurs within the domestic market (chandra et al., 2009; mcdougall & oviatt, 2000), international opportunity recognition relates to the discovery of opportunities in foreign markets and requires a specific set of international skills and knowledge (karra et al., 2008; zahra et al., 2005). thus, this type of opportunity recognition occurs across national borders and plays an important role in the firm’s internationalization process (chandra et al., 2009). in summary, in domestic entrepreneurship, an entrepreneurial opportunity located in the domestic market is recognized by an entrepreneur, who is also located in the domestic market. in international entrepreneurship, an international opportunity located in the foreign market is recognized by an entrepreneur, who is located in the domestic market (e.g., recognition through networks) or international market (e.g., recognition during a business travel). to get a better understanding of the terms (initial) international opportunity recognition and (initial) international opportunity, we will go into further detail later in the study. defining international opportunity recognition and international opportunity table 4 lists some of the existing definitions identified in the literature. same as with the definitions of entrepreneurial opportunity and opportunity recognition. definitions of international opportunity recognition and international opportunity can vary as scholars examine it from different theoretical approaches. for instance, whereas the international opportunity recognition definition of zahra et al. (2005) makes references to the cognitive abilities of the entrepreneur, the definition of muzychenko and liesch (2015) focuses on exchange in new international markets. building on the definition of international opportunity and the definition of chandra et al. (2009), we define international opportunity recognition as the way an entrepreneur discovers the opportunity to exchange products and services with a new or existing partner in a new international market. according to shane (2003), entrepreneurial opportunities are discovered by individuals rather than by organizations or groups. hence, entrepreneur rather than groups or firms was added to the definition. moreover, as this study is based on the theoretical streams of entrepreneurship, entrepreneur rather than people was included in the definition. it is not a person, but the entrepreneur who recognizes an entrepreneurial opportunity (filion, 2011; shane & venkataraman, 2000). based on the definition of international opportunity recognition, the initial international opportunity recognition is defined as follows: the way an entrepreneur discovers the opportunity to exchange products and services with a new or existing partner in a new international market for the first time. international opportunity recognition to gain deep a deeper insight into the thematic field, the literature review is not only limited to the first-time international opportunity recognition or a specific firm type. studies including empirical results are of main interest for the review. we focused on studies that have emerged between 2005 and 2015 and that have been published in academic journals (following, e.g., gast, filser, gundolf, & kraus, 2015). we excluded from the review studies that investigated international opportunity recognition from a psychological and cognitive point of view (e.g., muzychenko & liesch, 2015) as well as an environmental perspective (e.g., faroque, 2015) and focused only on the creation view. journal of small business strategy vol. 27 ● no. 1 ● 2017 26 table 2 definitions of international opportunity recognition and international opportunity zahra et al. (2005) no definition “in an iterative process, where the entrepreneur revises her (his) concept several times” (p.139) author international opportunity recognition international opportunity casulli (2009) no definition “an opportunity to create value in organizations through a combination of innovative, proactive and risk-seeking behaviour that crosses national borders” (p. 22) chandra et al. (2009) “the way people and firms discover opportunities to enter international markets for the first time, or to go into other international markets” (p. 31) no definition ciravegna, majano, and zhan (2014) no definition “the first finalized contract for the sale of products to a client based in a foreign market where the firm had not previously operated” (p. 1084) ellis (2011) no definition “the chance to conduct exchange with new partners in new foreign markets” (p. 101) hurmerinta et al. (2015) no definition “the potential the decision-maker sees for exchanging goods and services in selected markets” (p.1084) mainela et al. (2014) no definition “is a situation that both spans and integrates elements from multiple national contexts in which entrepreneurial action and interaction transform the manifestations of economic activity” (p. 120) muzychenko and liesch (2015) “the emergence of the situational condition which immediately precedes formation of a commitment to proceed with an exchange in a new international market” (p.705) “the likelihood of conducting exchange with new or existing partners, such as foreign intermediaries or foreign customers, in new international markets” (p.705) peris et al. (2015) no definition “a situation in which new goods and services are introduced across national borders through formation of meansends relationships that delivers superior value! (p.196) journal of small business strategy vol. 27 ● no. 1 ● 2017 27 we searched appropriate articles with the aid of the systematic reviews of mainela et al. (2014), jones et al. (2011), and peiris et al. (2012). according to the literature review of jones et al. (2011), only five studies that were concerned with international opportunity recognition existed before 2009. however, only two of them were empirical studies (cf. chandra et al., 2009; nordman & melén, 2008). interestingly, this literature review shows that the majority of the studies (n = 13) have been published after 2009. this fact reflects the increasing interest of scholars to close this research gap. moreover, most of the empirical studies were conducted in europe (n = 9), followed by australia (n = 6), asia (n = 4), and north america (n = 1). finally, a clear majority of the empirical studies have used a qualitative (n = 18) rather than a quantitative (n = 2) approach. the empirical results on international opportunity recognition are divided into qualitative and quantitative findings. qualitative findings on international opportunity recognition regarding the qualitative analysis of eight family smes, kontinen and ojala (2011a) found out that these firms discover international opportunities through formal and new network ties, which developed at international trade exhibitions. trade exhibitions and other forums are important sources to find new business partners who can help sense international opportunities. moreover, family firms discover international opportunities through alertness rather than activeness, and the small size of the management team improves the flexibility, which in turn positively affects entrepreneurial alertness. finally, within these firms’ prior knowledge consisting of internationalization, market-specific and industry-specific knowledge does not have a significant impact on the recognition of international opportunities. in line with these findings, kontinen and ojala (2011b) highlight that family smes that do not have access to existing ties, compensate by developing new weak ties formed at international exhibitions (intermediary ties). thus, informal family ties are not supportive for the international opportunity recognition. nonetheless, those weak ties are rapidly converted into strong ties, as family smes aim to have strong relationships with their partners. in this context, trustfulness, underlying the tie, plays an important role (kontinen & ojala, 2011b). concisely, social capital is a crucial influencing factor that enables the family firm’s recognition of international opportunities (kontinen & ojala, 2011c). the study of zaefarian, eng., t. y.and tasavori (2015) not only examines international opportunity recognition among family smes, but differentiates between the first and subsequent international opportunity identification. as family firms are characterized by their long-term orientation and risk aversion, they tend to recognize the first international opportunity through accidental discovery and the following international opportunities through purposeful search. however, to reduce the risk, family smes tend to integrate systematic search in the accidental discovery. likewise, the firsttime international opportunity is discovered through social networks (family member or close friends), and the later international opportunities are identified through business networks (competitors, customers, suppliers, etc.). the support of the government or participation at trade exhibitions also enables the international opportunity recognition. journal of small business strategy vol. 27 ● no. 1 ● 2017 28 consequently, the more knowledge that exists in social networks, the more positive the correlation is between social networks and international opportunity recognition. in contrast to kontinen and ojala (2011a), prior knowledge (market-specific knowledge, internationalization knowledge, and industry knowledge) positively affects the international opportunity identification. even if an entrepreneur does not possess the necessary knowledge, he can bridge this missing knowledge through his business or social networks and therefore is still able to identify the international opportunity (zaefarian et al., 2015). piantoni, baronchelli, and cortesi (2012) examined the international opportunity recognition of italian smes, which internationalized in distant (china) and close markets (eu). smes that internationalize in close markets show the following pattern: if they have extensive prior knowledge and experiences, they recognize international opportunities through a systematic search, active networking, and range from strong to small ties. if they have little or no prior knowledge and experiences, they recognize international opportunities through accidental discovery, passive networking, and strong ties. in contrast, smes that internationalize in distant markets recognize international opportunities, regardless of their level of prior knowledge and experience, through a systematic search, active networking, and weak ties. the article of santos-álvarez and garcíamerino (2010) investigates the international opportunity recognition of spanish firms, which operate in the natural stone industry. the findings reveal that even though entrepreneurs are interested in internationalizing their business, they spend little time to gather the relevant information for the international opportunity recognition. thus, entrepreneurs receive the information by chance rather than through a systematic search. however, their prior experiences have a positive influence on the search for information and their awareness towards international opportunities. moreover, entrepreneurial alertness, causal logic, and the center of attention are important cognitive abilities that aid the recognition of international opportunities. finally, social networks, institutional support, the interest in internationalization, and the will to search for information are additional factors that help entrepreneurs recognize international opportunities. vasilchenko and morrish (2011) reveal that entrepreneurs inside born global firms explore international opportunities through the active use of existing or new social networks (personal contacts). their findings show that entrepreneurs within these firms use their personal contacts or create new ones when deliberately searching for international opportunities. however, social networks can also arise from serendipitous encounters (e.g., holiday encounters, inbound inquiries) which facilitate the exploration of international opportunities. in this connection, international opportunities are not always explored prior to a systematic search or strategic plan, but also through accidental discovery. entrepreneurs also take advantage of specialized events, for example, trade fairs or competitions to develop new networks (cf. kontinen & ojala, 2011a), or hire external partners such as consultants or government agencies who assist them in exploring international opportunities. mort and weerawardena (2006) also reveal that networking capabilities of born globals support the identification of international opportunities. their findings show that small journal of small business strategy vol. 27 ● no. 1 ● 2017 29 born global firms do not have the necessary human or financial resources to undertake a systematic search, such as market research or direct market visit. to cope with this problem, they use network relationships that provide them with the necessary experiential knowledge important for the international opportunity recognition. however, the use of networks is not always beneficial as it restricts the strategic possibilities (network rigidity). styles and genua (2008), who observed the early internationalization of high technology smes, also show the positive influence of network relationships on international opportunity recognition. the results of the empirical research indicate that the academic fundamental (existing) networks established in conferences and trade fairs aid the discovery of initial international opportunities. another study examines the identification of initial international opportunities of smes in knowledge-based industries, such as high-tech manufacturing, biotechnology, or it (chandra et al., 2009). the findings illustrate that most initial international opportunities are accidentally discovered rather than purposefully sought out. moreover, the results of the case studies outline that organizations with a low stock of prior international experience and knowledge tend to recognize first-time international opportunities through serendipitous discovery. on the other hand, when firms possess a great stock of prior international experience and knowledge they identify initial international opportunities with the aid of systematic search and entrepreneurial alertness (chandra et al., 2009). these findings are also shared by zaefarian et al. (2015). prior technical knowledge is also of significance for the recognition of initial international opportunities. additionally, weak ties are of importance for the accidental discovery of first-time international opportunities. nevertheless, it is quality that matters, not the number of weak ties (chandra et al., 2009). the study of crick and spence (2005) shows that initial international opportunities in hightech smes can be identified through planned (active search) and unplanned (serendipitous discovery) strategies. in contrast to chandra et al. (2009), their results show that through active search by means of planned strategies, entrepreneurs can discover most first-time international opportunities. moreover, entrepreneurs within these firms use their existing networks or ask for government support when actively searching for the initial international opportunities (cf. spence & crick, 2006). the empirical work of nordman and melén (2008) explores how technological and international knowledge of managers and founders of born global firms are connected to the international opportunity recognition. they categorize the case firms into two types, namely born industrial and born academics. while managers and founders of born industrial firms have a great stock of both technical and international knowledge, managers and founders of born academic firms have only a high level of technical and a shortage of international knowledge. as a result, born industrial firms follow a clear internationalization strategy and discover international opportunities through active search, as they possess international knowledge. in contrast, born academic firms do not follow a strict and planned strategy and therefore recognize international opportunities through accidental discovery. however, as born academics do not follow a strict and planned strategy, they are more flexible regarding unexpected opportunities that could emerge. the importance of international knowledge is also shown by karra et al. (2008) who state that international journal of small business strategy vol. 27 ● no. 1 ● 2017 30 opportunity identification requires a specific set of international knowledge and experiences, skills as well as creative insights. furthermore, they reveal that both active (systematic search) and passive search (entrepreneurial alertness) are relevant for the recognition of international opportunities and that one mode of search can lead to the other. hilmersson and papaioannou (2015) demonstrate that the scouting behavior of smes depends on the level of international experience and the structure of the network. therefore, the higher the level of international experiences, the more systematically smes will scout for international opportunities. moreover, the more cohesive the networks (characterized by long-term and strong relationships) they are embedded in are, the more systematically smes will scout for international opportunities. however, a negative correlation between international opportunity scouting and the novelty of opportunities exists. thus, the more systematically they scout for international opportunities, the lower the novelty of the discovered international opportunities. ciravegna, majano, and zhan (2014) reveal that experienced entrepreneurs who actively search for the initial international opportunity do not use networks to do so they favor other methods. on the other hand, the entrepreneur’s international experience positively affects the initial export into foreign countries. if an entrepreneur possesses many experiences, he searches actively for new international opportunities. the findings also show that the active search for the initial international opportunity has a positive association with the scope (number of foreign market entries) and intensity (percentage of sales export) of internationalization. however, the proactive search for the first-time international opportunity does not have any connection with the speed of internationalization. thus, the inception of internationalization is not only affected by proactiveness, but also by fortuitous events. oyson and whittaker (2015) provide another empirical study by investigating traditional and new venture firms located in new zealand. one of the examination areas considers how these firms identify the firsttime and subsequent international opportunities. in general, entrepreneurs recognize international opportunities through their knowledge gained from networks and knowledge about international markets. in this context, the knowledge for the discovery of first-time international opportunities mainly derives from local customers, partners, acquaintances, and the entrepreneur’s knowledge about foreign markets. some of the initial international opportunities are also accidentally discovered by means of serendipitous encounters. as entrepreneurs continue to internationalize, they can benefit from the knowledge acquired in the course of the first internationalization. thus, this gained knowledge enables the identification of new international opportunities. moreover, queries from foreign customers or suppliers also lead to the recognition of subsequent international opportunities. chandra et al. (2012) also deliver some important insights on international opportunity recognition among early internationalizing firms. according to their findings, internationalization is only rapid when an opportunity-based view is not considered. they indicate that behind the incremental or accelerated internationalization process lies a “path-dependent process of opportunity development and cross-border venturing activities” (chandra et al., 2012, p. 74) in which the context matters. thus, they journal of small business strategy vol. 27 ● no. 1 ● 2017 31 prove that born globals and traditional firms have much more in common than first assumed in the literature and that born globals cannot simply be defined by their characteristics, but rather by the context (history, networks, and learning process) in which they are embedded. further, their results highlight that most initial international opportunities are accidentally discovered rather than purposefully searched and that entrepreneurs use different network types for the identification of international opportunities. quantitative findings on international opportunity recognition ellis (2011) carried out a survey focusing on the identification of international exchange opportunities through the social networks of the entrepreneurs. he differentiates between two methods for international opportunity recognition. first, tie-based refers to previous social ties with close friends, acquaintance, and relatives. second, non-tie-based relates to formal search, meetings at international fairs (e.g., exhibitions), and reactions to advertisement. the results reveal that most of the international opportunities are recognized through discovery rather than deliberate search. however, these discoveries are not based on pure luck and are therefore not accidental. also, the findings show that international opportunities are identified through social ties of entrepreneurs located in open economies rather than closed economies, that the use of social ties grows with international experience, but only slightly, and that international opportunities discovered through tie-based methods result in more valuable exchanges than international opportunities identified through non-tie-based methods. although social ties can help to identify international opportunities, they are restricted by communication horizons, such as linguistic, geographic, and psychic distance. thus, an entrepreneur who uses social ties will not recognize international opportunities that lie outside these communication horizons. the study of hurmerinta et al. (2015) focuses on the entrepreneur’s linguistic knowledge (language) which also enables the international opportunity recognition. hence, entrepreneurs who speak english are able to recognize foreign market opportunities. nonetheless, speaking a local language rather than just english results in more success. moreover, the more languages an entrepreneur speaks, the higher the number of recognized international opportunities because the focus lies on more than just one potential market. although an entrepreneur possesses a high level of linguistic knowledge, he also needs to understand the specific cultures. thus, possessing cultural knowledge acquired through international experience is also of importance for the international opportunity recognition. conclusions the main objective of this study is to establish a current state-of-the-art literature review on the field of entrepreneurial opportunities recognition and, specifically, on international entrepreneurial opportunities recognition. in this sense, we have begun defining the kirznerian opportunities (arbitrage opportunity) and the schumpeterian opportunities (innovation opportunity). we continued by stating the difference between opportunity recognition and international opportunity recognition to focus on the main point of the study: to reveal what are the main findings on international opportunity recognition in qualitative and quantitative published research. journal of small business strategy vol. 27 ● no. 1 ● 2017 32 as previously stated, there is a lack of empirical research on international opportunity recognition (chandra et al., 2009; kontinen & ojala, 2011a; zahra et al., 2005). since scholars have mostly applied a qualitative research method when analyzing the international opportunity recognition (e.g., chandra et al., 2009; kontinen & ojala, 2011a; piantoni et al., 2012; zaefarian et al., 2015), there is a need for more quantitative research. although some scholars have applied quantitative research (e.g., ellis, 2011; hurmerinta et al., 2015), there is still potential for further research. the fact that most scholars fail to theorize about the notions of international opportunity and international opportunity recognition constitutes an additional research gap. either both terms are not defined, or it is presumed that international opportunity is the same as international opportunity recognition (muzychenko & liesch, 2015). this issue also occurs in the entrepreneurship literature as a clear majority of the articles do not provide any definitions for entrepreneurial opportunity or opportunity recognition (davidsson, 2015; hansen, shrader, & monllor, 2011). moreover, studies simply determine that international opportunities are the cause for the firm’s internationalization, but do not characterize them as international entrepreneurial opportunities (mainela et al., 2014). for these reasons, it seems important to develop new definitions of international opportunity and international opportunity recognition. this study suggests several avenues for future research on the international opportunity recognition. first, there is a need for more quantitative studies in this field to test the qualitative research already done. second, research on international opportunity recognition would also benefit from studies which take both the discovery and creation view into account (e.g., oyson & whittaker, 2015) by building on the work of alvarez and barney (2007). third, it might be worthwhile to link the growing research on born globals and international new ventures (e.g., schüssler et al., 2016; cesinger et al., 2012) with the question of how these specific firm types recognize their international opportunities, since this is likely to differ from traditionally internationalizing firm. fourth, since this study has revealed that opportunities can be discovered through a combination of entrepreneurial alertness and systematic search, further examinations are needed in this specific area. hence, scholars may investigate opportunity recognition by using different measurement models for the variable international opportunity recognition or by applying both quantitative and qualitative research. references alvarez, s. a., & barney, j. b. 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"zy" fox rider university abstract this stiidy examined the initial public policy interactions between small and medium-sized firms and government. using qualitative and quantitative methodologies, characteristics of the initial involvement decision andits outcome were uncovered. the initial position ofthe firm was more likely to be opposed, with issue type influencing that stance. there was an even splitbetweensuccessandfailure, withasignificantcorrelationbetweenoppositionto anissue and failure. firms were also most likely to lose if their issue was primarily resolved at the state level. introduction it is well known that, by either incentives or constraints, government has a substantial impact on business (marcus, kaufman, & beam, 1987; buchholtz, 1988; scarborough & zimmerer, 1993;preston, 1990; epstein, 1980). over time, this impact has increased to where the political success of firm is considered by some to be vital to marketplace success (marcus et al., 1987). as a result, firms oflen found that they needed to become involved in the public policy process if they were to gain influence with policymakers. as irving shapiro, former ceo of dupont and former chairman of the business roundtable, put it, "..you have zero chance of scoring points unless you get into the game" (1980, p. 30). historically, large firms were the first to get 'into the game,'flen by investing in a washington office, hiring one or more representativesto monitor issue areas of primary concern, and engaging a law or public relations firm to pursue company interests with relevant bureaucrats(levitan & cooper, 1984). despite a mistrust of government and an unfamiliarity with the public policy process (cook & barry, 1993), smaller firms are also beginning to recognize the importance of 'the game,'n part because many laws and regulations apply equally to al i firms, regardless of size. for example, in the area of tax withholding, smaller firms generally have the same compliance requirements as larger companies, resulting in circumstances where the smaller companies are likely to be the most adversely affected (weidenbaum, 1979). while it is true that the overallaffect of governmenton an individual small company can be limited, collectively, it is not (thompson, wartick, & smith, 1991); particularly since smaller firms are the most prevalent form of business organization in society today (cook & barry, 1995). for example, over 95 percent of firms in the us employ fewer than one hundred people (executive oflice of the president, 1994). collectively, this group of over twelve 87 million full-time businesses (dennis, 1993) employs almost 54 percent of the workforce and represents over 53 percent of total us sales (executive office of the president, 1994). however, despite the fact that smaller firms represent a large segment of the economy and are affected by government, the political activities of ihese companies are relatively unknown(thompson, et al., 1991),in part due to a lack of information about small firms and a more traditional research focus on larger firms (cook & barry, 1995). the notion that much remains to be learned about smaller firms'ublic policy interactions is not meant to imply that scholars have ignored the business and government area altogether. researchers have examined how firms can benefit from regulation, including the idea that regulation can be used by individual firms as a competitive weapon (wood, 1986; mitnick,1980). they havedescribedan issue'slifecyclethatdemonstrateshowissuesevolve through distinct phases (buchholtz, 1988; post, 1978; ullman, 1985), and proposed specific political interactions that focus on the most appropriate strategy given the phase or stage of an issue's life cycle (bigelow, fahey, & mahon, 1991), through the contributions of these and many other researchers, considerable progress has been made towards understanding business and government interactions. further, research into the impact that government has on smaller firms is also underway, oaen by examining specific issues like employment-at-will(seid man & aalberts, 1993),waste reduction (hemmasi, graf, strong, & winchell, 1994), or public sector venture assistance (gatewood, 1993). however, even studies that offer suggestions on when small firms should become involved in the public policy process assume that a firm has experience with government and the question is merely one of timing (cook & barry, 1993). further, these studies do not examine what triggers the firm's initial interest in public policy issues. this would appear to be an important research question given the following situationcurrently, in the us there are over twelve million full-time businesses which could be considered small, regardless of the measurement used (dennis, 1993; executive office of the president, 1994) and, therefore, could potentially be involved in the public policy process. however, visit any trade association or chamber of commerce —common vehicles for small firm political activity (knoke, 1990;cook & barry, 1993)—that professes to represent its membership politically and only a certain percentage of its members are politically active. given that the issues pursued by chambers and associations are oaen public goods —e.g., "enjoyed in common in the sense that each individual's consumption of such a good leads to no subtraction from any other individual's consumption of that good" (samuelson, 1954, p. 387), and that "they must be available to everyone if they are available to anyone" (olson, 1965, p. 14)—why do some firms become involved? it would appear that the vast majority of smaller firms, for whatever reason, can be considered free riders regarding public policy involvement. indeed, at one time, the companies in this study were not involved in the public policy process. what happened to these companiesthat separatedthem from the "silent majority?" what did they do once they became involved, and what were the outcomes? with these questions in mind, we conducted a twostage study of the public policy interactionsof small and medium-sized firms (hereaaer called 88 smfs). in subsequent sections, we describe the research methods employed, the findings, and offer suggestions for future research. methods given the complexity of the phenomenon and the scant work in this area, we chose a multi-method approach, utilizing a qualitative and quantitative research design to study the initial decision to become involved in the public policy process, the strategic choices of the firms, the outcomes of their interactions, and the frequency of their involvement. the research design consisted of two stages: in-depth interviews with smf ceos to define better their patterns of public policy involvement and, utilizing the findings from these interviews, surveys of other smf ceos. until now, we have used the term "smaller firm" as if it was a commonly accepted phrase. it is not (cook & barry, 1995),requiring a more detailed explanation of how we used the term. for example, the us small business administration(sba) defines a small business as "independentlyowned and operated and not dominant in its field of operations" (hodgetts & kuratko, 1995, p. 6) and has created the most ofien cited industry-specific criteria for size distinctions. of these criteria, the most common cutoff point to distinguish smaller companies from larger firms is 500 employees. smaller firms are then ofien divided into medium-sized businesses, which employ from 100-499 people and small firms, which have up to 100 employees (megginson, byrd, scott, & megginson, 1994; longenecker, moore, & petty, 1994). in this study, we used employee size as the criterion and included both small companies (up to 100 employees) and medium-sized firms (100-499 employees). the highly complex nature of business and government interactions argued for qualitative techniques that can help researchers understand better the smaller firm's initial decision to become involved. given that the field is still in an exploratory stage (thompson et al., 1991),formal hypotheses were not developed —in such circumstances,hypothesis testing is not generally considered appropriate because there is little theory from which hypotheses can be developed (kelley, 1991). therefore, this study initially utilized the open-ended approach of grounded theory building (patton, 1990; strauss, 1987; glaser & strauss, 1967), and began with smf ceo interviews. ~l-d h i the initial bounding of the territory(miles & huberman, 1994) focused on small firms in the upstate new york area who were active in the public policy process. sampling of firms was purposeful and intense, rather than random(miles & huberman, 1994; patton, 1990), and firms were chosen with the support of local trade associations. the in-depth interviews involved ceos of 22 smfs that were active in the public policy process, and offered understanding as to the events that prompted these firms'nitial involvement decision. the interviews uncovered a wide range of potential strategies and responses to government, which were then categorized and refined into groupings that ranged from individual, impersonal contact to interactive, group responses. based on this data, we developed preliminary survey questions regarding the smf's initial decision to become involved and utilized the interviewed 89 ceos as a pretest to help ensure questionnaire clarity. specifically, the ceos helped ensure that the questions were comprehensible and that response categories were not inadvertently omitted. for example, ceos cited three possible objectives when they became involved in a specific issue: support, oppose, or provide policymakers with information/opinions. the ceos agreed that supporting or opposing a particular issue meant that they had reasonable expectations that they might succeed. that was not the case when their objective was to provide information/opinionsto policymakers. ln those circumstances, the firms believed that it was important to, as one interviewee termed it, "go on record." however, ceos acknowledgedthat, in these circumstances, it was unlikely that their views would prevail and termed these efforts "symbolic gestures." d based on the data gathered from the interviews and the subsequent pretest, we refined the questionnaire to explore smfs'nitial and subsequent public policy interactions. the survey had three components: background information about the firm and the respondent, questions about the respondent's initial public policy involvement, and questions about subsequent public policy involvement. the background informationensured that the firm was indeed a smf and provided data about the respondent/company. the questionnaire was sent to two groups of smf ceos: one from central new york (cny) and one from new jersey (nj). the cny group was a chamberof commerce'sgovernmentrelationscommittee,and the nj group consisted of firms who were also active in public policy through a statewide trade association. res onse rates and non-res ense bias these firms were targeted because one of the findings from the in-depth interviews was that smfs et)en utilize trade associations for their political activities —a conclusion echoing research by knoke (1990) and lad (1991). accordingly, participating organizations (the chamber of commerce and trade association) were approached to solicit their cooperation for this study. the firms received a cover letter, the survey, and a statement of support from the president of the respective sponsoring organizations. one month later, a follow-up letter and another survey was sent to all but the known respondents (firms had the option to identify themselves and receive a copy of the results; hence those who chose to do so were not sent a second survey). overall, 375 firms received a questionnaire, resulting in 75 responses. the 75 returns yielded 62 usable responses, for a response rate of i ti.5 percent. the remaining 13 were excluded because they had more than 500 employees, thus violating the criterion used for defining a smf. given the population, this response rate was anticipated based on earlier survey efforts and on the sponsoring organizations'esponse rates for their internal surveys. this response rate is also consistent with other surveys of smaller firms, which ranged from less than 10 percent (chrisman & archer, 1984) to just over 30 percent (gomolka, 1978). non-response bias is a concern in survey research (fowler, 1988), particularly given the overall response rate. using wave analysis (judge, griaiths, hill, lutkepol, & lee, 1985), 90 characteristics of the initial respondents were compared against firms which responded after follow-up activities. in addition, using the sponsoring organizations'ata, responding firms were compared to the total sample by number of full-time employees and sales. in both cases, no significant differenceswere observed between the two groups. therefore, it was concluded that the respondents were representative of the sample. findings the survey results provided an interesting first look at a profile of the initial public policy interaction of smfs. because these interactions occurred in relatively uncharted territory, the analysis was exploratory, rather than testing formal hypotheses (kelley, 1991). this exploratory analysis was built around the following three questions: (i ) what were the characteristics of the respondents? (2) what were the characteristics of the first instance of involvement in the public policy process? (3) what factors led to a successful outcome in the first instance of involvement in the public policy process? characteristics of the res ondent this section provided background information about the respondents and their firms (such as age, gender, education level, firm size, etc.) that were, for the most part, uncontrol tabb by the executives. the results indicated that an overwhelming majority of the respondents were male (84''0). the current average age of the respondents is 51.61 (standard deviation=11.74). the average age of the respondents at the time of iirst involvement in public policy was 37.56 (standard deviation=8.40). most of the respondents were highly educated with over one third possessing a graduate degree and only 8.1 percent without a bachelor' degree. of the 62 respondents,45 were at the very top of the organizational ladder with 22 being either the owner or the co-owner of the firm. the remaining 23 of the 45 had job titles such as president, ceo, and/or chairman. seventeen respondents came from the level immediately below the top. four of the 17 were government/publicaffairs directors. the remaining 13 had a wide variety of job titles. the responses of these 17 individuals were compared with the remaining 45 for possible differences based on position within the firm. no significant differences between the two groups were found and, therefore, the findings reflect all respondents. the mean size of the iirms, measured in number of full-time equivalent employees (ftes), is 116.84 with a standard deviation of 91.87. table i presents a more detailed breakdown of the size of the firms. 91 table i si% fr number ol'ftes frequency percent &25 13 21.3 26-50 9 14.8 51 100 8 13.1 101 200 20 33.8 201 300 9 14.7 & 300 2 3.2 frequency missing = i characteristics of the initial public polic involvement the first instance of public policy involvement for the respondents spanned a period of more than three decades. the year of involvement provided a reference point for understanding the overall political climate that the firm faced at that time and provided a measure of the executive's experience in the public policy process. the median year for initial involvement was 1982, suggesting that, for the majority of firms, enough time has elapsed for them to determine if their efforts were successful or not. in characterizing the first involvemetz in the public policy process, the type of issue, the stance of the ceos (support vs. oppose), the level of government involved, and the strategies chosen were examined. when characterizing the type of issue, the respondents described the specific issues that prompted their initial involvement. analysis of this open-ended question revealed that the responses could fall into one of five categories: general economic issues (issues related to general economic concerns that went beyond a specific firm or industry, 23 responses); industryspecific issues (issues with a narrow focus that related to a specific firm or industry, 16 responses); workplace issues (issues that directly affected the relationship between employees and the firm, eight responses); social issues (general issues affecting society at large, like education, civil rights, etc., seven responses); and unknown (some firms were unable to recall the specific issue that prompted their involvement, eight responses). there has been a trend away from general economic issues, which dominated in the 1980s, to industry specific issues which were found in the more recent legislative agendas. this has implications for the outcome of the interaction (see discussion). a key issue regarding the first involvement in public policy process was the stance of the executives. thirty-three percent of the respondents initiated their involvement in support of an issue. a slightly higher percentage (42%) became involved because they opposed an issue. ten percent became involved as a symbolic gesture to register their opinions with the policymakers while 15 percent became involved for a variety of other reasons. a closer examination of the data revealed that issue type influenced the initial objective, as shown in table 2. 92 table 2 res onse probabilitiesissue t e vs. tance stance issue type supported opposed symbolic gesture other social .429 .142 0 .429 economic .286 .476 .143 .095 industry specific .4 .467 0 .133 workplace .286 .571 .143 0 given an issue type, conditional probabilities of the firm's stance revealed that for general economic issue, a lirm was about one and a half times more likely to oppose it than support it. if the issue was social, a firm was three times more likely to support it than oppose it. with industry specific issues, the chances of support or opposition were approximately the same whereas workplace issues prompted twice as much opposition as support. the next analysis examined the level of government where the initial public policy interaction occurred and many respondents indicated more than one level, particularly in the category of economic issues which olten have implications at multiple levels (eight companies were unable to recall the level, leaving 54 respondents). as table 3 reveals, most firms had their first involvement with the public policy process at the state level. table 3 level of government involved in initial public polic process interaction government frequency percent federal 28 47.5 state 42 71.2 local 12 20.3 note. percentages do not add up to 100 and frequency does not add up to 54 firms because many issues involved more than one level of government. further, state government as the focus for the initial interaction has moved into the forefront when compared by decades, as over 90 percent of the firms whose first interaction was in the last five years had an issue that involved state government. to complete a picture of the initial public policy involvement, respondents were asked about the strategies they used during the initial interaction. these strategies included writing a letter, hiring a specialist, personal contact with a government official, participation with other firms, and publicity. the most common strategy used by the respondents was writing a letter 93 or sending a fax. interview data suggested that this occurred because of the ease with which the respondent could perform this task. personal contact with government officials and participation with other firms were the other two most popular strategies. most respondents used a combinationof strategies to influence the public policy process. only 13 respondents (21'/v) used a single method whereas 16 respondents (25.8') used at least two different methods. eighteen respondents(29'/d) used three different methods, nine respondents(14,5'/a) used four different methods, and finally, three respondents used all five different methods to influence the public policy process (three firms also had no response). outcome of the initial involvement in the public polic process comparing the responses where the result was known, the outcome of the first involvement in the public policy process was approximately equal, as 48 percent were successful and 52 percent failed at achieving their policy objective. an examination of the outcome according to type of issue revealed higher success rates for general economic issues (56'/o) and social issues (57'/o). on workplace issues, success rate is 37.5 percent while for industry specific issues, the success rate is a low 12.5 percent. there is a statistically significant and negative relation between opposition to an issue and the outcome (pearson r= -0.3303, p=0.0374). firms who supported an issue were more likely to be successful than firms that opposed an issue. finally, there is a statistically sign ificant and negative association between interaction with state government and outcome (pearson r=-0.2611, p=0.0542), suggesting that successful efforts more likely occurred at federal or local levels. one might expect medium-sized firms to be more effective than small companies at influencing the public policy process because of the amount of resources that they can devote to the cause. the data, however, does not bear this out. there is no statistically significant relation between the outcome and the size of the firm. the pearson r between firm size, measured in terms of ftes, and outcome is 0.2242 with a p-level of 0.1031. when using another measure of size —sales —the correlation between the total sales of the firm and outcome is 0.1212 with a p-level of 0.4390. an alternate explanation for the outcome in public policy process could focus on the individual. four different characteristics of individuals were considered: age, level of education, time spent with the organization prior to the initial involvement,and gender. there is no statistically significant relationship between the first three characteristicsand the outcome of the public policy process. the association between gender and the outcome is statistically significant, with males more likely to be successful. however, given the small number of female ceos in the sample, further studies with a deliberate emphasis on ceo gender would be warranted before any conclusions could be drawn. finally, we examined if certain strategies were more successful than others. of the 5 different involvement strategies, the only one with a positive and statistically significant relation with the outcome was using publicity strategies (pearson r=0.2538, p=0.0615). publicity was defined as efforts by the company to use the media to promote its message to a broad audienceand included holding a press conference and conducting media interviews. it was one of the least chosen methods, with only 12 firms utilizing it; yet it was the only strategy 94 correlated with a successful outcome. based on comments from the ceos, firms were oren hesitant to risk their image when facing reporters, particularly if their position could be viewed as controversial. however, the elfectivenessof utilizing the power of the press to convey smf positions suggests that this might be a more popular strategic choice in the future. discussion first, the findings reveal that over 90 percent of the respondents have at least a bachelor's degree. this suggests a population of companies run by articulate, educated individuals who undoubtedly are not daunted by interactions with government officials. although the formal education level of the overall population of business owners is higher than the general adult public (gaedeke & tootelion, l 991; longenecker et al., 1994), it does not approach the level of these public policy activists. future studies of firms who have never been active in the public policy process should otter additional insights into the significance of educational level. within the size parameters of the firms in the sample, no one group reported a statistically significant dilterence in the success rates of their involvement eltorts. indeed, this suggests that very small firms, i.e., with less than 25 employees (almost a quarter of the sample), did not have results significantly different from their larger cousins. given the almost equal split between success and failure of their involvement efforts, smfs obviously have enjoyed some sense of accomplishment and the lament that "small firms never win," oren mentioned in the in-depth interviews, was greatly exaggerated. however, the type of issue, the smf's position, and the level of government all had a bearing on whether or not the outcome would be successful. if a smf's initial involvement was in support of a social or general economic issue that was predominately resolved at the federal or local governmental level, the firm was most likely to achieve its objective. conversely, if the initial involvement was to oppose an industry specific issue that was resolved primarily at the state level (i.e.,statutes of repose), the firm was most likely to fail. the interrelationships of these factors should not be underestimated. for example, when comparing support or opposition stances to success or failure only, 62 percent of the firms opposed a general economic issue. sinceoutcomewasnegativelycorrelatedtoopposition,onemightexpectthat62 percentwould lose. that was not the case as 56 percent reported success in this instance, as the strategies pursued and the level of government obviously had an impact. continuing with the level of government, state government was the dominant arena for these firms'nitial intluence effort and was also where the firms'uccess rate was the lowest. because the trend towards initial involvement with state government is escalating (firms that became involved later in the study indicated that state government concerns them the most), smfs beginning their involvement in the public policy process today may face more disappointmentsthan their predecessors. this finding mirrored the comments by ceo's during the in-depth interviews which indicated that state government, and the issues normally resolved there, were most likely to affect long-term lirm survival. 95 further research directions although we believe that the findings presented constitute a significant contribution to understanding public policy interactions by smfs, it is also evident that more research is needed to further test and clarify these findings. specifically, we would recommend study in the following areas: research that isolates the type of issue and firm position in order to offer a more prescriptive model for public policy interactions. research that focuses on why the most effective strategy (publicity) was the least utilized. given the firm's perception that it had a chance of a successful outcome when it pursued a public policy interaction (its efforts were not "symbolic gestures"), why did firms choose strategies that had no correlation to a successful outcome? is it inexperience? research into further public policy interactions of these firms. how frequent might these interactions be, have their objectives and/or outcomes changed over time, and does experience matter? research into other political arenas. ~ many of the respondents believed that new york and new jersey were among the most regulated states in the country and, therefore, this belief may have influenced th executives'preoccupationwith state-level issues. studies in states having a reputation for less government might generate different findings. research on smfs that never have been involved in the public policy process in order to understand why not. how might they be different from firms that are involved? study in these areas should facilitate the development of a more encompassing model, one which could have considerable value for smfs attempting to influence government. as government's control over the smf continues to increase, it is essential to enhance the ability of these firms to influence the public policy 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(1986).strategic uses ofpnbllc policy. ma: pitman publishing. 98 t strategy a model of potential entrepreneurship: profiles and educational implications james w. carland joann c. carland western carolina university abstract ln an effort to determine the propensity for entrepreneurship of potential entrepreneurs, students enrolledin small business management classes at the graduate and undergraduate level were examined. a series of surveys including jackson's personality inventory for innovation and risk taking, and jackson 's prf for need for achievement as well as the carland entrepreneurship index were completed the results supported the empimcal developmentofa model ofpotentialentrepreneurship that model was testedpom theoretica( statisti cal and visual perspectives. finally, the model was used to develop implications for entrepreneurship education introduction who is an entrepreneur? how does one draw the lines? how does one give distinction to the profile? such are the questions which are being asked by the researchers. when surveying the literature, the term entrepreneur is ubiquitous. it describes individuals who own businesses of every shape and size. it is used in the literature of small business and in the literature of large corporations. how can such diversity describe, detail or delineate the true entrepreneur? is s/he male or female, black or white or brown? is s/he found in the halls of corporateamericaor in the corner hardware store? what is it that researchers and educators are seeking and how can it be defined? definitions of entrepreneur ln the united states, ely (1912) was one of the first to explain the term, entrepreneur. interestingly, el y (1912)explained that economists were forced to choose a term, entrepreneur, from the french language because the earlier terms dealing with individuals who started businesses had become corrupted. these earlier terms included undertaker, which ely explained had been appropriated by a single group of business owners, and adventurer which had come to imply a level of rashness which was undesirable (ely, 1912). schumpeter(1934) credited mill (1848) with bringing the term, entrepreneurship, into general use among economists. mill (1848) believed that the key factor in distinguishing a manager from an entrepreneur was the bearing of risk. the idea of risk bearing has been i i integral as far back as cantillon, circa 1700, who described an entrepreneur as a rational decision maker who assumes the risk and manages the finn (kilby, 1971). perhaps the most important aspect of entrepreneurship from a societal perspective is innovation (brockhaus, 1982). mcclelland (1961) was a champion of that concept. drucker (1985) posits that entrepreneurship is innovation in a business setting. entrepreneurship education for some time researchers have looked to education as the means to spur entrepreneur id activity. entrepreneurshipand small business classes are gaining popularity in many large and regional institutions today, often with high enrollments. after all, is not starting one's own business the american dream? entrepreneurial education and student potential for entrepreneurial activities have been examined by such authors as birley, gross, & saunders (1986);hills & welsch (1986);miller(1987); sexton & bowman(1983, 1984, 1986); barbato & durlabhji (1989); solomon & fernald (1990);and robinson, huefner, & hunt (1991). various instruments and hypotheses have been tested and the results have varied greatly. many authors have created their own instruments(e.g., sexton & bowman, 1983, 1984, 1986; robinson, huefner, & hunt, 1991; carland, carland & hoy, 1992) and others have used existing instruments to test their theories (e.g., hoy & boulton, 1983; solomon & fernald, 1990; barbato & durlabhji, 1989). yet because of the various methodologies, different instruments and samples used, there is no universal portrait of an entrepreneur, much less a profile of potential entrepreneurs. it has long been established that owners of small businesses are not homogeneous and yet terms for various sets of owners are used interchangeably. many definitions have been posited but none seems comfortable enough to most entrepreneurship researchers to become generally accepted. some seem to follow the more generic approach of identifying anyone who starts a business (gartner, 1988) or more than one business (robinson et al., 1991)as an entrepreneur. others tend to follow the more di fferentiatingapproach posited by carland, hoy, boulton and carland (1984) which suggests that small business owners are more family oriented in their focus and entrepreneurs are more growth and profit oriented in their perceptions. still others posit a series of different groups of business owners, each of whom displays unique characteristics (vesper, 1990). nevertheless, there has been no clear cut distinction or definition universally accepted in the literature. process versus behavior arguments still rage as to what initiates the starting of a business and determ ines an entrepreneur. the process of opening one's doors (gartner, 1988)or making the first sale (gatewood, shaver and gartner, 1992) are argued by some as the only viable definition of entrepreneurship without regard to potential for success or goals. others argue that personality traits have a major impact on the process (carland, hoy & carland, 1988). there have been empirical studies which imply that the process of launching a business and the personality traits which drive that process are inextricably entwined (carland, carland & dye, 1991). the search continues. 2 r ltr, n,i"'i '~,.i t methodol'ogy of the research two groups of students enrolled in small business classes at a regional university in the southeast at the graduate (n = 55) and undergraduate levels (n = 50) were surveyed to determine their propensity for entrepreneurship. since the courses were elective in nature, the inference was that an interest in the subject existed. several survey instruments were administered to the students over the period of the semester. the survey results were examined empirically and the insights which the analysis provided were utilized to develop a model of potential entrepreneurshi pand to draw conclusions with regard to the educational implications inherent in the model. several instruments were employed with establishedreliability and validity to determine the level of entrepreneurial drive and other key characteristics displayed by students. the purpose was to attempt to draw a profile of potential entrepreneurs. the instruments measured the need for achievement, preference for innovation, risk taking propensity and entre preneurid drive. the achievement scale of the personality research form (jackson, 1974) was used to measure the need for achievement. jackson (1974) reported that the test-retest reliability (n=135) was .80. and odd-even reliability (n=192) was reported to be .77. jackson and guthrie(1968), testing for validity, reported correlations with self ratings and peer ratings of .65 and .46, respectively. these findings support the conclusion that the instrument contains convergent and discriminant validity. risk taking propensity was measured using the risk taking scale of the jackson personality inventory (jackson, 1976). for risk taking propensity, jackson (1976) tested the internal consistency reliability with two samples (n=82 and n=307), and reported values of .93 and .91 using bentler's coefticient theta, and .81 and .84 using coefficient alpha. testing for validity(n=70), jackson(1976) reported correlations with the completion ofan adjective checklist, with self rating and peer rating of .75, .77, and .20 respectively. innovation was measured using the innovation scale of the jackson personality inventory (jackson, 1976). the internal consistency reliability of the innovation scale produced values of .94 and .93 using bentler's coefficient theta, and .83 and .87 using coefficient alpha. validity was checked using the completion of an adjective checklist, with self rating, and peer rating of .79, .73, and .37, respectively. reliability for the instruments pertaining to risk taking propensity, preference for innovation, and need for achievement were analyzed in a study by stewart, carland and carland (1996) using cronbach's alpha. the alphas were .76, .77. and .72, respectively. these scores suggested that the instrument accurately measured the above characteristics, and that the individual items on the test produced comparable patterns of responses over all cases. 'fhe entrepreneurship index administered in the research is the 33 item forced choice form of the carland entrepreneurship index. the index measures the strength of an individual's entrepreneurial drive and it was shown to have high validity and reliability in a 3 i variety of statistical evaluations(carland, carland & i-loy, 1992). in a sample of 209 business owners, the index produced split-half, odd-even reliability of .73. the index also produced a kuder-richardsonor cronbach alpha score of.73. with dichotomous questions, the kuderrichardson produces the same score as the cronbach alpha test for validity (bruning and kintz, 1987). a reliability coefficient of.70 or higher means that the test was accumtely measuring some characteristic of the people taking it and that the individual items in the test were producing similar patterns of response in different people. the statistics of .73 indicate that the indexproducesvalidresults(bruningd'c kintz,1987). in atest retestcorrelationusing 40 business owners retested at least two months aaer the original test date, there was a statisticallysignificantcorrelationof.80 indicating that the index was consistent over time in producing unique scores for respondents. analysis of the data the followingtabledisplaysthe make up of the sample by academic level and sex. as the table indicates, the 105 respondents were almost evenly divided between graduate and undergraduate students, although there were more females than males in the graduate group. undergraduate graduate total male 24 16 40 female 26 39 65 total 50 55 105 the first step in the analysis was an examination of correlationsamong the scores on the various instruments. a pearson correlation was conducted on the scores for the need for achievement (ach), preference for innovation (inn), and risk taking propensity (risk) instruments, and the carland entrepreneurship index (cei). the results are displayed in the following exhibit. pearson correlation matrix ac h inn risk ce i need for achievement 1.000 preference for innovation 0.274 1.000 risk taking propensity 0.325 0.374 1.000 carland entrepreneurship index 0.451 0.439 0.492 1.000 probabilities ach inn risk cei need for achievement .000 preference for innovation .005 .000 risk taking propensity .001 .000 .000 carland entrepreneurship index .000 .000 .000 .000 4 9'in i as the exhibit shows, there is a significant relationship between the scores on all of the instruments. the highest correlations are between scores on the cei and the scores on the other instruments. 'fhe correlation analysis suggests that there is a potential for the development of a model of entrepreneurial drive, as measured by the cei, among these potential entrepreneurs. to that end, the relationships between instrument scores were examined in more detail. first, the direction of the relationships between the cei and the other scores was determined. the researchersemployed the quadratic smoothing technique (wilkenson. 1990) in preparation of a graph ofentrepreneurialdrive as a function of the need for achievement. the graph showed an upward sloping line of best fit, supporting the existence of an appropriate relationship. the quadratic smoothing analysis was repeated with entrepreneurial drive as a function of risk taking. again, the trend line supported the existence of an appropriate relationship. finally, entrepreneurial drive as a function of the preference for innovation was examined. that graph also supported additional analysis. noting that the graphical analyses and quadratic smoothing techniques supported appropriate relationships between entrepreneurial drive and the other characteristics, group diversity and its potential impact on the data were considered. first, there was an investigation of whether the involvement of both undergraduate and graduate students in the data set has any influence on the relationships among the variables. to consider this question, a group of independent t tests were performed. first, t-tests were calculated on the cei, risk, innovation and achievement scores grouped by status of the respondent: undergraduate or graduate student. the results are displayed in the following exhibit. t-tests between graduate and undergraduate students carland entrepreneurship index group n mean sd t p graduate students 55 21.273 4.057 2.047 .043 undergraduate students 50 19.440 5.011 preference for innovation group n mean sd t p graduate students 55 13.709 4.545 1.404 .164 undergraduate students 50 12.327 5.398 need for achievement group n mean sd t p graduate students 55 11 545 2 911 i 601 .113 undergraduate students 50 10.571 3.253 risk taking propensity group n mean sd t p graduate students 55 11.655 4.904 1.046 .298 undergraduate students 50 10.592 5.400 5 i 'fhe exhibit shows that there were differences in entrepreneurial drive as measured by the cei between the two groups, but there were no difterences in the other instrument scores. graduate students displayed stronger entrepreneurial drive, as measured by the cei, than undergraduate students. clearly, there are characteristics displayed by the graduate students in this study which influence the index. these factors do not include the need for achievement, preference for innovation, or risk taking propensity. this suggeststhat any model which might evolve will be underdefined. nevertheless given the fact that academic standing had no effect on the key variables of innovation, risk and achievement, the possibilityofa model employing those factors as predictors of entrepreneurship can be investigated. next, an investigation of sex was considered as a factor in the model. again, t-tests were conducted, this time between males and females. the results are displayed below. t-tests between male and female students carland entrepreneurship index group n mean sd t p males 65 21.369 3.955 2.666 .010 females 40 18.825 5.178 preference for innovation group n mean sd t p males 65 14.531 3.932 3.777 .000 females 40 10.700 5.612 need for achievement group n mean sd t p males 65 11.516 2.600 1.667 .100 females 40 10.400 3.699 risk taking propensity group n mean sd t p males 65 13.016 4.474 5.151 .000 females 40 8.175 4.779 as the exhibit reveals, males produced higher scores on entrepreneu rial drive, preference for innovation, and risk taking propensity. this finding suggests that sex may well have a bearing on a model of potential entrepreneurship. nevertheless, the fact that the females were consistently lower in all three areas in which differences exist, suggests that such differences may not prevent the development of a model. since the preliminary examination disclosed a strong relationship between entrepreneurial drive and the other three characteristics, the analysis was continued by examining the value of those three factors as predictors of entrepreneurship. to identify relationships in the data, a stepwise regression using the cei as the dependent variable and 6 preference for innovation, risk taking propensity, and need for achievement as the independent variables was conducted. the results are displayed in the following exhibit. as the exhibit shows, the stepwise regression indicated that al i three factors, innovation, risk and achievement affected entrepreneurial drive as measured by the cei. the linal r's a respectable 39%. clearly, the independent variables do not explain entrepreneurial drive fully, but they do contribute to the function in significant ways. stepwise regression analyses dependent variable: entrepreneurial drive step ¹ i r square: 0.242 variable coefficient std error std coef tolerance f p risk 0.442 0.078 0.492 . i e+.01 32.558 .000 step ¹ 2 r square: .337 risk 0.347 0.007 0.386 0.89457 20.319 .000 achievement 0.486 0.128 0.325 0.89457 14.431 .000 step ¹ 3 r square: .388 innovation 0.229 0.229 0.247 0.83434 8.290 .005 risk 0.277 0.277 0.308 0.80694 12.474 .001 achievement 0.423 0.423 0.283 0.86750 11.375 .001 in developing any model, it is a valuable exercise to visualize the relationships being proposed. to that end, three dimensional plots of the independent variables against entrepreneurialdrive were drawn. since one cannot visualize in four dimensions, two sets of analyses were prepared to ensure that all three independent variables were included. to make the data points in three dimensional space more comprehensible, a surface displaying the interaction was constructed. the first construction featured negative exponential smoothing which produces a three dimensional topographical map (wilkenson, 1990). the results, dis.iu played to e 4 the right, g i'sii contrast so risk taking and innotit w vation against entrepreneurial drive. shading proceeds from lighter shades at lower levels to progressively darker shades at 7 higher levels. the surface suggests that higher levels of risk combined with higher levels of innovation produce higher levels of entrepreneurial drive. the overall shape of the surtace suggests that, although the relationships are not perfect, they generally move in the right directions. a second graph, employing a quadratic smoothing technique, is displayed to the ler. this technique smooths the data into a much ratter surface (wilkenson, l990), making the relationships easier to examine visually. this graph shows a remarkably well established relationship. the visual analysis continued, substituting ~p achievement for risk taking in the graph. using g~ negative exponential smoothing, the resulting surface pp shown in ,iii the graph a pp to the right, is not as pp 0 well developed as the earlier zi display. the surface climbs appropriately, but its shape is more rugged. when quadratic smoothing is applied, the result is much more pleasing. the ler graph displays the resulting surface. this surface climbs appropriately to support the existence of a model. t 0 ip complete ~g pp v i s u a 1 p ip analysis, yone must ap contrast achieveme p nt and risk i ccf''', against + entreprene g4 'c urial drive. the right graph displays negative exponential smoothing, while the ler displays quadratic smoothing. the first surface is the most rugged yet, but the ler supports the model. the foregoing visualization suggests that a model of entrepreneurial drive based on achievement, innovation, and risk is a viable prospect. to proceed with construction of the model, the results of the stepwise regression were tested with an analysis of variance on the final regression model. the results, displayed below, show a high probability of the existence 8 i i'i i of a relationship and the r'hows that the model explains 39% of the variance in the cei score. further. the individual t tests show that every independent variable is significantly related to the dependent variable. regression analysis n= i 05 dependent variable: entrepreneurial drive r square: 0.388 variable coefficient std coef tolerance t p constant 9.65 i error 0.000 . 6.466 .000 innovation 0.229 i a93 0.247 0.83434 2.879 .005 risk 0.277 0.229 0.308 0.80694 3.532 .001 achievement oa23 0.277 0.283 0.86750 3.373 .001 oa23 analysis of variance source sum of squares df mean square f p regression 854.535 3 284.845 ratio .000 residual 1350.686 100 13.507 21.089 the levels of correlation between the independent variables which were discovered by the pearson correlation suggest that there may be multicollinearity in the model. consequently. the independent variables were collapsed into a single number by adding the individual scores together, and another analysis was conducted. this process allows one to remove any multicol linearity. the results of this regression are shown in the following exhibit regression anai.ysis n=105 dependent variable: entrepreneurship drive r square: 0.378 variable coefficient std coef tolerance t p constant 10.316 error 0.000 . 7.452 .000 inn+risk+ac 0.286 1.331 0.615 .i ooe+01 7.880 .000 h 0.036 analysis of variance source sum of squares df mean square f p regression 834.493 i 834.493 ratio .000 residual 1370.729 102 13.439 62.097 as the exhibit reveals, the new regression has a virtually identical r'. but the f ratio for the entire model is much higher, almost three times as high, as for the earlier regression. further, the t statistic for the combined variable is also much higher, twice as high, as the highest t statistic produced in the previous regression. if multicol linearity exists in the model, it does not aflect the validity of the model, nor does it reduce the proportion of variance which the model explains. 9 ofcourse,the model is not without problems. first, the r'f the model leaves a great deal of variance in the dependent variable unexplained. earlier investigations into the diversity of the data set demonstrated that other factors influence entrepreneurial drive. graduate students in this study displayed higher entrepreneurial drives than undergraduates. that may have been a function of a higher level of self confidence or some other, unknown reason. males displayed higher entrepreneurial drive, higher preference for innovation, and higher risk taking propensity than females. that may result from cultural or other factors, but it does suggest that sex will play a role in the entrepreneurship model. there may be other limiting factors in the eaicacy of this model. among these are measurement problems relating to the appropriateness of entrepreneurial drive as a proxy for potential entrepreneurship. conclusions and implications of the research in conclusion, the model of potential entrepreneurship developed in this paper paints a valid and useful portrait of the student participants. that model can be expressed as follows: potential entrepreneurship = f(achievement, innovation, risk taking) the iindings of this study are not generalizable to the greater population of potential entrepreneurs due to sample size and potential sample bias. nevertheless, the findings show an interesting relationship which merits further study. using the students in this study, the authors were able to construct a model of potential entrepreneurship which was simultaneously appealing from a classical perspective, from a visual perspective, and from a statistical perspective. this model suggests that potential entrepreneurship as forecast by the strength of one' entrepreneurial drive, is a function of the interaction between the need for achievement, risk taking propensity and preference for innovation. all of these characteristics have strong appeal as classical descriptors of entrepreneurship and they performed well from a statistical and visual perspective. if the results of this investigation are supported by future research, the findings will suggest that need for achievement is a necessary, but not a sufficient requirement to explain entrepreneurship. the same is true for preference for innovation and risk taking potential. in fact, there are other, as yet undisclosed, factors which are necessary but not sufficient in explaining potential entrepreneurship. by far the most valuable implication of this finding has to do with entrepreneurship education. entrepreneurship students must develop an intrinsic achievement motivation in order to do well. that is well known and is one of the underlying supports for the academic grading system. however, the idea that potential entrepreneurs may display a higher risk taking propensity suggests that educators need to incorporate risk taking into the entrepreneurshipcurriculum. a potential act ofentrepreneurship does not guarantee success. ifentrepreneu ship students are more prone to risk taking behavior than their counterparts in other majors, we, as educators, must ensure that we impress upon them the need to carefully evaluate entrepreneurial actions. if we teach risk assessment and we emphasize the need for rational and calculated behavior, we may prevent a hasty and ill advised decision in the future. 10 perhaps the most exciting aspect of the model derived in this study is the role of innovation. entrepreneurship researchers have long recognized the role of innovation in entrepreneursand entrepremurial acts. this model suggests that the same role exists even in potential entrepreneurs. further, as educators, we know that techniques for enhancing and cultivating one's creativity and innovative posture are well established. these techniques have been practiced in psychology and education for more than 30 years (ke., lowenfeld, 1958; fromm, 1959; maltzman, 1960; hallman, 1963; torrance, 1966; torrance k myers, 1970; parnes, 1 982). clearly, we need to incorporatecreativity into the entrepreneurshipcurriculunt we can design educational experiences which will help to protect our potential entrepreneursfrom their risk taking propensities. we can also design educational experiences which will help them to enhance their individual creativity. as entrepreneurship educators, we need to invest the time and energy in a personal program of study which will help us to design and implement both types of educational experiences. the former can help protect our students from failure; the latter can help propel our students to success. ll references barbato, rj. & durlabhj i, s. 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(1990), systat evanston, il: systat inc. 13 reproduced with permission of the copyright owner. further reproduction prohibited without permission. cognitive and affective service marketing strategies for fine dining restaurant managers arora, raj;singer, joe journal of small business strategy; spring/summer 2006; 17, 1; abi/inform complete pg. 51 cognitive and affective service marketing strategies for fine dining restaurant managers raj arora, ph.d. university of missouri-kansas city joe singer, ph.d. university of missouri-kansas city abstract this study extends the research on the importance of attitudes and emotions related to consumption experience at fine dining establishments. prior research suggests that emotions are a primary source of human motivation; for small business restaurant managers the role of emotions is critical in influencing satisfaction, attitudes, and intention of customers to return. estimated coefficients from causal models show the relative impact of prior attitudes and emotion on satisfaction, post-consumption attitudes and intentions. introduction in the restaurant business today, it is no longer enough to be "close to your customer" through attentive quality service alone. customer loyalty results from positive emotions aroused during the dining experience. the dining experience includes not just the entree (product}, but also the surprise and delight from a meticulously garnished and artistically presented meal unique to each person's differing tastes and desires. for example, pine and gilmore ( 1999), provide compelling examples indicating that product is not just a product, in that a coffee in a five star restaurant is different than coffee elsewhere. the former embodies a heightened sense of theater (presentation and service), enticing a customer to willingly pay $2 or more for the coffee. destination restaurants strive to provide an entertainment experience. fine dining is a major component of the national economy. it is a healthy and growing market. restaurant industry sales 51 are expected to reach a record $511 billion in 2006 (national restaurant association). the projected annual sales would mean a 5.1 percent increase over last year and a total economic impact of over $1.3 trillion. it is the first time the industry's sales will cross the half-trillion dollar mark. this equates to more than $1.4 billion a day in sales. the restaurant industry's share of the consumer food dollar is nearly 48 percent. as one of the nation's most aggressive job creators, the industry employs 12.5 million people in 925,000 locations. after years of "fast-track" eating, the baby boomer generation is now seeking a "connoisseur experience" when dining out. they are seeking a "time-using" (a socialemotional experience) rather than "timesaving" (eat on the run) philosophy when it comes to dining. being better educated and knowledgeable about proper diet and the importance of ingredients, fine dining customers expect a quality experience of finecuisine artistically presented to create a "wow factor" through dazzling improvireproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy sation. for service marketing such as fine dining, emotional benefits must be included along side the economic view of consumption, especially in an industry that relies on forty-five percent word-of-mouth promotion and has one of the highest failure rates (50% within four years) in studies by the u.s. small business administration. parsa, self, njite, and king (2005) tracked the failure rates of restaurants from 1996 to 1999. in the first year, 26 percent closed. another 19 percent closed in the second year and another 14 percent closed in the third year. collectively, 59 percent of restaurants that opened in 1996 closed in three years. the study also showed that the failure rate was the same for franchised and independent restaurants, 61 percent. several researchers have stressed the importance of consumption emotions in marketing strategy (holbrook & hirschman, 1982; westbrook, l 980b; westbrook, 1987). consumption emotions refer to the set of emotional responses (for example, joy3, anger, interest, etc.) elicited specifically during product usage. for some products, emotional benefits are a superior choice criterion than instrumental performance (economic view of consumption). for example, a person buys an automobile for utilitarian reasons such as price, miles per gallon, safety, etc. in addition, a person may also buy a specific make of a car for hedonic reasons those related to conspicuous consumption such as status. similarly, one may choose to patronize a particular restaurant for cognitive reasons such as the quality of food, quality of service, or location or one may choose to dine at a restaurant for emotional experiences such as the excitement and enjoyment while dining. in most consumption situations, both hedonic and utilitarian factors play a role in satisfaction and attitude toward the product. in some situations one factor may play a more dominant role than another factor. the study of emotions is important in 3 joy and enjoyme~t are used synony-mously in this paper. 52 vol. 17, no. 1 spring/summer 2006 marketing. emotions constitute a primary source of human motivation and also influence memory and information processing (kuhl, 1986). cohen and areni (1991) in their review of affective processing mechanisms, indicate that consumption emotions leave strong affective traces or "markers" in episodic memory. these memory elements are highly accessible to cognitive operations. that is, these experiences can be readily retrieved and integrated into current evaluative judgments. thus, it is imperative for marketing professionals to understand the influence of consumption emotions and satisfaction on attitude change and how these factors influence repeat purchase. since services are intangible, the role of experience may be very prominent in attitude development. thus, above mentioned variables are particularly important in the context of a service. this paper explores the relationship between emotional experiences, attitudes, satisfaction, and intentions in the context of a fine dining experience. the next section contains a review of literature on major constructs in the study followed by the method, results, and discussion of findings for restaurant managers/owners. we first describe the role of emotions, satisfaction, and attitude in services marketing. this is followed by specific literature and models related to the role of emotions, satisfaction, and attitude in fine dining setting. emotions (the affective side of consumption) satisfaction and attitudes examination of marketing practices reveals motives/appeals in marketing. these range from products to services. for example, consider the pontiac slogan, "we build excitement" or starbucks' proclamation that it does not just sell coffee but provides the ambiance to savor the coffee. phillips and baumgartner (2002) tested the influence of emotional experiences on satisfaction. they reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy hypothesized that positive consumption emotions will exert a positive impact on satisfaction and negative consumption emotions will exert a negative impact on satisfaction. their interest was in determining the incremental effects of emotions on satisfaction when other variables, such as expectations and performance, were included in the model. the findings supported the influence of positive and negative emotions on satisfaction. while it is in the interest of marketers to enhance positive emotions, there may be situations where negative emotions.also need to be carefully managed. yi and baumgartner (2004) focused on the negative emotions during purchase situations. some of the undesirable consequences of these outcomes are negative consumer emotions such as anger, disappointment, regret, and worry. westbrook (i 987) used izard's (i 977) des ii scale (jo emotions). the findings revealed that positive and negative emotions were correlated with satisfaction. the positive affect emotions included joy and interest, while the negative emotions were anger, contempt, surprise, and disgust. the product setting for the study was automobiles and cable tv in a later study, westbrook and oliver (i 991) showed that satisfaction was related to pleasant surprise and interest. mano and oliver (i 993) further investigated the impact of emotions on satisfaction. their findings showed that satisfaction was positively correlated with pleasure and negatively correlated with displeasure. emotions result from exposure to specific stimuli. surprise, for example, may be caused from an exposure to unexpected attributes of a product or situation such as unusually high or unusually low quality. one may experience a feeling of being relaxed in a restaurant with appropriate ambiance and music. attitudes, in contrast to emotions, are also directed toward specific objects. 53 vol. i 7, no. i spring/summer 2006 however, they are more enduring and may be based on knowledge and/or consumption experience (including cognitive as well as emotional judgments). furthermore, attitudes can be developed without consumption of a product or service and may be modified after further information or trial of the product or service. attitudes, in this sense, may precede as well as follow consumption experience. another construct that deserves attention is satisfaction. customer satisfaction is considered to be the core of marketing strategy. customer satisfaction refers to the ability of a business to serve its customers according to their expectations and to maintain a jong term relationship with each customer. perceived satisfaction is believed to be an important variable in explaining complaints, and repeat purchase behavior (howard, 1989). like emotions, satisfaction is also conceptualized as transaction-specific. a consumer may feel satisfied or dissatisfied with a specific product or service experience. the findings of westbrook (1987) revealed significant impact of positive as well as negative affect on satisfaction. major contstructs related to fine dining and pa tron age models do people go out to "eat" or to "dine"? the answer may depend on a number of factors including, but not limited to, goals of the customer and type of restaurant chosen (fast food, family style, fine dining, etc). the success of restaurant managers/owners depends on their understanding and serving to their customers' wants and expectations better than their competitors. the major constructs in this study are discussed next. satisfaction customer satisfaction has generated considerable interest and research in marketing. it has become a central concept in marketing as reflected by the frequent reference to the j. d. power survey of reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy customer satisfaction. "satisfaction" is usually referred to as a post-consumption evaluation based upon a judgment continuum that may range from dissatisfaction to satisfaction. moreover, customers evaluate service encounters based on prior expectations of service. that is, the actual performance during a service encounter depends not only on actual performance but, also, on prior expectations before receiving and experiencing the service. customer satisfaction, or dissatisfaction, results from experiencing a service encounter (oliver, 1980). satisfaction studies reveal three distinct constructs related to satisfaction. these are expectations, performance, and disconfirmation. "disconfirmation" reflects the degree of discrepancy between expectation and performance. disconfirmation may be close to zero (a customer received what was expected), positive (performance exceeds expectations), or negative (performance falls short of expectations). the variables affecting satisfaction are expectations, perceived performance, perceived disconfirmation of expectations and attitudes. consequences of satisfaction are word-ofmouth activity, attitude, and intention to repeat purchase (churchill & suprenant, 1982; oliver, 1980; oliver & desarbo,1988; yi,1990). dube et al. (1994) focused on the elements of customer satisfaction that may explain return visits to a restaurant. the elements included food quality, menu variety, restaurant environment, waiting time, etc. the findings revealed that all variables were significant; however, the relative importance of these variables varied depending on whether the purpose of the visit was business, leisure, or a special occasion. oh (2000) urged restaurant managers to use caution in interpreting satisfaction scores. oh investigated the role of pre-purchase and post-purchase (after the meal consumption) satisfaction on intention. the findings 54 vol. 17, no. 1 spring/summer 2006 revealed that the influence of satisfaction was stronger in the post-purchase survey. satisfaction is important shortly after consumption while customers are feeling the afterglow of their dining experience. thus, we anticipate that variables that influence customer satisfaction are customers' confirmation (disconfirmation) of expectations compared with actual performance or service level encountered. we also hypothesize that satisfaction will have a significant influence on intention to return. oliver (1993) developed a model relating satisfaction to cognitions, emotions, and product's attributes. the model posited that satisfaction depends on positive as well as negative emotions, satisfaction on various attributes (performance dimensions), and disconfirmation (expectations). the estimated model revealed that the largest coefficients were for the emotion of enjoyment and disconfirmation. performance dimensions/ attributes of a restaurant common wisdom indicates that fine food served with flair or good service in an elegant ambiance determines the outcome of a fine dining experience. sulek and hensley (2004) investigated the influence of several attributes of a restaurant on customer satisfaction. their research focused on seating order, wait time, staff politeness, dining atmosphere, server attentiveness, food quality, and presentation, amongst others. of these variables, only three were statistically significant: food quality, dining atmosphere, and seating-order fairness. intention to visit kivela et al. (2000) tested several propos1t10ns related to dining satisfaction and return patronage. the specific areas investigated were: influence of satisfaction on return visit, variation in satisfaction by demographic characteristics, and difference in intention to return to that restaurant based on prior frequency of visit. several reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy significant findings emerged from their study. the variables having significant impact on intentions were: first and last impressions (composite factor), service excellence, food excellence, ambiance excellence, reservation, and parking, followed by occupation and dining frequency. the composite factor first and last impression was measured by dining privacy, restaurant's appearance, temperature, and consistent standard. while it may be argued that a restaurant's appearance would probably be a better indicator of ambiance, the factor analysis results indicated that ambiance was measured by level of comfort, noise in the restaurant, and view from the restaurant. methodology models to be tested we develop and test two models of emotions, satisfaction, disconfirmation, etc., related to restaurant patronage. the first model is a representation of the model tested by oliver (1993 ). this model posits that performance, expectations ( disconfirmation ), and emotions influence satisfaction. this is a basic model with limited number of variables and the goal of modeling satisfaction responses. this model is shown in figure 1. we also develop a more comprehensive model that shows the role of emotions in influencing satisfaction and postconsumption attitudes and intentions. this model is based on the review of literature and collective findings cited earlier. the conceptual model is shown in figure 2. questionnaire the scale used to measure emotions in this research is des-ii (izard, 1970). other scales have been used in earlier studies for example, pad (pleasure, arousal, and dominance) by mehrabian and russell (1974), and panas and circumplex (mano & oliver, 1993). the des-ii is widely used. moreover, oliver ( 1993) also 55 vol. 17, no. 1spring/summer2006 used des-ii in his study. as this research replicates and extends oliver's findings, it was desirable to use des-ii scale. this scale comprises of 10 sub-scales corresponding to 10 discrete emotions (joy, interest, anger, disgust, etc.). oliver ( 1993) developed a model relating satisfaction to its antecedents. the emotions were measured using des ii scale. however, surprise was not used by oliver because of its dual direction. surprise may have a favorable or unfavorable impact depending on whether the surprise was pleasant or unpleasant. the des ii scale was used to measure the select group of emotions in this study. the following emotions were measured: interest, joy, anger, disgust, fear, shame/shyness, and guilt. based on oliver's (1993) reasoning, surprise was not included in this study as well. other major constructs investigated in this paper included two measures of attitude: a pre-visit attitude (attitude toward dining at the restaurant before they visited the restaurant) and a post-visit attitude (after experiencing the recent visit). each of these attitudes was measured using a three item, nine point scale with end points as good (poor) idea, worthwhile (worthless), and pleasant (unpleasant). respondents were also asked to indicate their satisfaction and the importance attached to each of the following variables of the restaurant atmosphere/ ambiance, service, food quality, choice of table, and location of the restaurant. these variables will be referred to as the attributes of the restaurant. overall satisfaction with the dining experience and the intention to visit the restaurant again were measured, each on a nine point semantic differential scale. the end points of satisfaction item were very satisfied and very dissatisfied. the end points for intention to visit the restaurant were very likely and very unlikely. a bipolar disconfirmation statement was used to measure the dining experience compared to reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategv expectations. the end points for the disconfirmation statement were "better than expected" and "worse than expected." sample and data collection vol. 17. no. 1 spring/summer 2006 fine dining establishments. judgmental sampling was used in selecting respondents for the study. this method was helpful in selecting individuals who had visited a fine dining restaurant within the last month. for the purpose of this study a fine dining respondents were selected from a large restaurant may have the following midwestern metropolitan area. the characteristics : where one "goes out" for metropolitan area has a significant nµml:>~r 9f gining1 ~ g~.stimlti!m re.staurant, recommemf§ figure 1 basic model of restaurant based on oliver .56 dis confirmation .48 enjoyment .26 figure 2 conceptual model of restaurant patronage enjoyment interest prior attitude performance 56 satisfaction post-consumption attitude intention reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy median price range, and the staff is attentive to the customer's dining experience. a total of 148 residents who had been to a fine dining restaurant in the last month agreed to participate in the survey. approximately 17 percent of the respondents indicated that they visit a fine dining restaurant once in three months, almost 14 percent stated that they visit a fine dining restaurant every two months, 30 percent indicated they visit a fine dining restaurant once a month, and 35 percent stated that they visit a fine dining restaurant more than once a month. respondents were almost equally distributed in terms of gender, with a slightly higher percentage of male respondents (54%). less than seven percent of the respondents had only a high school education. thirty-one percent were college graduates and 36 percent had postgraduate education. approximately 40 percent of the respondents were below the age of 34. fourty-four percent were between 35 to 49 years of age. the remaining 16 percent were 50 years of age and older. results before proceeding with the full analyses, it is necessary to assess the reliabilities of the major emotion constructs used in the study. the major constructs, their measures, their mean values, and their reliabilities are shown in table l. the scale ranged from zero to five. the reliabilities levels of all items are satisfactory. it is evident that the respondents experienced significantly greater levels of positive emotions. the negative emotions were at near zero levels, indicating that these emotions were weak and or not experience by a significant number of customers. for example, consider the emotion disgust: 87 percent of the respondents indicated that they did not experience this emotion at all, five percent stated they felt disgusted very slightly, another five percent stating they felt the emotion a little, and only three percent 57 vol. 17, no. i spring/summer 2006 stating they felt it moderately. interest and enjoyment appeared to be strong emotions aroused during the fine dining experience and are investigated in the causal model. next, the models in figure l are estimated using lisrel 8.7. the model results in a chi-square value of 15.53 with l degree of freedom, a p-value of .0001, and root mean square residual of .07. the goodness of fit index is .95. comparing this with an independence model, (indicating no relationship amongst variables), chi-square for independence model with 6 degrees of freedom is 393.91, indicating the significance of the model. the path leading from overall performance to disconfirmation has a coefficient of .66, with a t-value of .44. the r-squared for this subsection of the model is .44. similarly, the path leading from disconfirmation to satisfaction shows a coefficient of .42 with a t-value of 7.97; from enjoyment to satisfaction, the coefficient is . i 0 with a t-value of 2.13; and from overall performance to satisfaction, the coefficient is .48, t-value of 8.83. the r-squared with satisfaction as the dependent variable is .76. the extended conceptual model is shown in figure 2. this model is also estimated using lisrel 8.7. the initial estimates revealed that the emotion interest was not significant. in the interest of parsimony, the model is reestimated without interest. the revised model resulted in a chi-square of 8.56 with 4 degrees of freedom, a p-value of .073, and root mean squared residual of .022. the goodness of fit index is .98. for comparison with an independence model, the chi-square for independence model with 15 degrees of freedom equals 839.37. the difference in the chi-square values of the two models is 830.81 with 11 degrees of freedom is statistically significant, indicating the significance of the estimated model. the path coefficients are all shown in figure 3. the coefficients of the paths leading to reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy vol. 17, no. i spring/summer 2006 table 1 table 1 descriptive statistics for measures construct measures mean reliabilitv interest attentive concentratin11: and alert 2 .75 .82 joy delighted, haoov and joyful 3 . 12 .80 fear a fraid, fearful and scared .12 .72 shy shy, bashful and sleepy .23 .77 dis11:ust dis11usted revulsion and distaste .17 .72 enjoyment are .30 (prior attitude) with a tvalue of 3.96 and .35 for overall performance with a t-value of 4.64 and an r-squared value of .31. the equation for satisfaction as a dependent variable has an r-squared value of .68. the coefficients for enjoyment, prior attitude, and overall performance are .17, .13, and .66. respectively. the corresponding t-values of these coefficients are 3.09, 2.46, and 12.10. the t-values for the path coefficients leading to post-consumption attitudes are .36 (satisfaction), .29 (prior attitudes), and .32 (overall performance). the corresponding tvalues are 5.11, 6.1 l, and 4.93. the rsquared value is .74. for the equation with intention (to visit) as the dependent variable, the t-values for the coefficients are 4.30 (prior attitude) and 9. 81 (overall performance). the r-squared value is .47. discussion every restaurant manager and small business owner knows that the key to survival and evolving viability of their business depends on customer satisfaction and repeat business. this is especially true where attitudes and satisfaction are influenced by consumption experience. the findings of this study can help marketers gain greater leverage from appreciating the role that managing customer expectations (experience) and emotions play in the fine dining experience. marketing literature has shown that performance has a direct impact on satisfaction. oliver ( 1993) postulated and showed that satisfaction is influenced directly by performance and indirectly through disconfirmation. this is important in 58 that for a restaurant business, it is not only essential to provide superior performance (customer service, food quality, etc), it is also important to mange the expectations of the customers. according to figure l, overall performance has a direct influence of .48 (standardized coefficient), and also an indirect (through disconfirmation) influence of .28 (.66* .42). in addition, oliver also postulated and showed performance has an indirect impact on satisfaction through emotions. for the restaurant model , performance has a large impact (.49) on enjoyment. restaurant owners try to create an atmosphere where customers have an enjoyable "evening out" and are not just eating out. enjoyment, in tum, influences satisfaction. thus , the total influence of overall performance on satisfaction is .81. this impact is large and significant statistically, as well as managerially. the incorporation of emotions and disconfirmation to the performance dimensions not only helps our understanding of the consumption dining experience but, also, helps in formulating an effective marketing strategy to influence satisfaction. performance, attitudes and emotions the final extended model (figure 3) includes additional variables that should help in formulating a superior marketing strategy. the path estimates reveal that, consistent with the earlier model, overall performance has a large and significant impact on satisfaction. satisfaction, in turn, is known to influence post-consumption attitudes. the coefficient is relatively large and significant (.36). the development of post-consumption reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategv attitudes is important because customers (new as well as repeat) generally visit a restaurant with prior attitudes (figure 3) or with prior expectations ( disconfinnation in figure 1). a favorable post-consumption attitude is found to have a direct impact on future intentions (.46). the goal of every restaurant owner/manager is to increase the likelihood that the customers will visit again. the findings in this study show that while future intention is influenced directly by overall performance and post-consumption attitudes, post consumption attitudes have a much greater impact. intentions are also indirectly influenced by satisfaction, prior attitudes, and emotions during the consumption experience. marketing literature indicates that although customers may expect certain level of service and enjoyment during their dining experience, they may be willing to overlook some deficiencies in service level. this study focuses on aspects designed to enhance their dining experience and finds that satisfaction is experientially determined by the impact of overall perfonnance on their overall dining experience. vol. 17, no. i spring/summer 2006 restaurant owner/managers need to influence attitudes and intentions by impressing their guests by bringing drama to the table, the enjoyment from playing up flavor, style, and presentation awakening consumer enjoyment and satisfaction. carbone (2004) stresses that restaurant managers may want to incorporate consumption experience as a value proposition in their planning and delivery efforts. writing on the history of starbucks, carbone describes how a 3-cent cup of a commodity (coffee) is converted into a $2 emotionally vested consumption experience. moreover, this factor is not confined to high end restaurants; other restaurants managers can also benefit by providing a delightful experience within their business category. marketing strategy that recognizes and monitors emotional as well as performance dimensions is critical to developing favorable post-consumption attitudes and intentions to visit. restaurant managers are advised to amaze their patrons by exceeding their expectations with an enjoyable experience that fully excites and delights their senses. this may figure 3 path estimates of extended model enjoyment .30 prior attitude .46 overall performance .17 59 satisfaction i.--.32 post-consumption attitude intention .46 .26 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy this may include "tasting menu" and attention to tailoring the presentation of each plate to suit a particular guest, providing entertaining variations to affect postconsumption attitudes. references arora, r. & singer, j. 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( 1990). delivering quality service. new york: the free press. raj arora is the schutte professor of marketing in the bloch school of busness at the university of missouri kansas city. his research interests are in marketing, consumer behavior, and entrepreneurship. joe singer is a professor of business operations and analysis at in the bloch school of business at the university of missouri kansas city. his research interests are operations management and business analysis. strategy customer databases for small firms: maximizing the power of your marketing lisa d. spiller christopher newport university richard a. hamilton university of missouri-kansas city abstract this articledescribeshoiv and why a small businesscan take advantage of ilie benefits whicli will accruefrom the creation and use ofa custonier database what information may be usefid to capture (or buyj about your ciistomer, and how that information can be used toimprove your marketing efforts and subsequent "bottom line "is presented how to create (or evaluate for purchase oj) a database, and how to mainiain your daiabase to preserve its accuracy and value is explained. infoivnation technologyis transforming tlie business game for small firms today. the importance ofdatabase marketing as a cost-effecnve tool which small firms should be utilizing cannot be understated or overlooked. introduction marketing intelligence has long overlooked the greatest asset of a firm, its customers. peter f. drucker stated long ago that "companies are not in business to make things, but to make customers" (drucker, 1959). firms have always had accounting data from which they can calculate total sales by geographical area or product line, or the value of an average sale. but since the time of neighborhood mom and pop stores, when store owners knew their customers on a first name basis, they haven't known what customers are their best customers (let alone who they are). hence, they have typically treated all customers as equal. enter customer level databases. knowing who your customers are, how profitable each is, and how to reach them with tailored offers has transformed the nature and eaiciency of marketing power. information technology is transforming the business game for small lirms today. in the past, most computerization efforts of both large and small companies concentrated on the automation of routine business activities, especially in areas such as accounting, payroll, inventory management, and manufacturing. the problem with these traditional databases is that they are usually not useful for marketing purposes. for example, most bank databases are set up on a product basis. as a result of not being set up on a customer basis, for many banks it would be diaicult to determine the other services their checking account customers may also be purchasing from them. 67 'foday, however, much of the focus of information technology is centered around the creation and use of customer level databases for business and marketing purposes. these computerized databasesallow companies to gather, store, and analyze customer information, such as demographics and purchase information. this information can enable a better understandingof an organization'scustomers and then be used for future marketing purposes. marketing has long suffered from a dearth of sophisticated tools, especially when compared to most other management functions despite the rapid increase in the sheer volume of marketing data available(loewe & hanssens, 1994). in the past, most marketing data was only obtained from sophisticated and oren expensive marketing research (primarily survey) activities. today, this data comes from a variety of sources. in fact, many firms are centering their marketing efforts around information collected for and analyzed in their database. many marketing decisions are being based on what customers actually do (their actual buying behavior), not on predictions about their behavior which are garnered from traditional marketing research activities. actual past customer buyer behavior is then used to predict future behavior and tailor marketing efforts. the value of a database marketing is paramount, and the uses of a database are virtually endless. however, you must first create a database before you can begin to utilize and reap its benefits. the following guidelines will provide you with the information you need in order to create, maintain and utilize your database for business and marketing purposes. what is database marketing and why should small firms use it? database marketing has been defined as the gathering, storage, enhancement, manipulation and analysis of customer files in order to provide additional intelligence to the marketingorganizationbeyond simplyresponse to promotional offers(schultz& wang, 1993). based on previous research, small firms are often not employing marketing activities due to concern about cost effectiveness (stevens, mcconkey, loudon & dunn, 1994). database marketing can be used to improve customer loyalty and to reduce long-term marketing expenses through greater precision (francese & renagban, 1991). consumer markets have become fragmented with each consumer segment needing a marketing plan tailored to each specificgroupofconsumers. while the development of multiple marketing plans may be far too costly for small firms to undertake, these firms can st i i i analyze potential market ni ches and determine which one(s) to target, and how, using database marketing. a survey of small businesses'use of marketing tools found that yellow page ads, direct mail, newspaper ads/inserts and brochures or catalogs were the four most frequently used marketing tools (stevens, mcconkey, loudon & dunn, 1994). each of these marketing tools can be used more effectively in combination with database marketing activities. it is easy and relatively inexpensive to target specific audiences with highly targeted messages using targeted media and relatively unsophisticatedmarket research. combining a database-a list of names and addresses with information attached —with direct marketing media, measurable direct response advertising, and direct marketing strategies have proven to be extremely powerful and profitable for achieving sales and profits (cross, 1991). 68 with database marketing, a company zeros in on various narrowly targeted groups of buyers and finds ways to craft otters that will appeal very strongly to their needs (hendricks, 1993). small firms are in unique positions to target consumers and microconsumer segments with database marketing. in fact, the concept of database marketing actually originated with small firms and their philosophy of knowing and staying close to customers, understanding their needs, and treating them well after the sale to cultivate repeat business (stone & shaw, 1987). dent (1991)contends that the goal of this kind of "indi vidualizedmarketing" is to treat every customer as a separate market segment, matching products and services precisely to individual needs. to accomplish this, products and services, as well as marketing and communication efforts must be customized. the key to be able to execute this customizat ion lies in your customer database. table i provides a list of ways you can interact with your customers through database marketing elforts. table i wa s you can interact with your customers via database marketin send customized offers (creating offers that will elicit the greatest response from your customers.) send personalized letters (personalizingeach customer contact will demonstrate the value you place on each individual customer.) cross sell products (offering new or related products. or even unrelated products to existing customers.) up sell products (offering additional items that compliment the current products being offered to existing customers.) announce a sale mail a survey report on changes introduce new products/services introduce new employees mail a newsletter solicit complaints mail a free giii send a "thank you" note 69 i finally, small firms are in a prime position to be utilizing database marketing activities because it gives them a competitive parity with or perhaps even a competitive advantage over their larger competitors. small firms need not have big budgets in order to compete effectively with these larger lirms. many large firms attempt to market to all segments of a market. as such, their total marketing budgets, expertise, and commitment to a specific market segment are fragmented. while a small firm may still be "out-budgeted" by an larger firm in a particular market, it can segment the market segment into an even smaller, more sharply defined segment. it can become known as the expert providing the best product(s) in that subsegment. at some point, because the subsegment becomes too small for the larger company to devote more investment and/or expertise to it, the smaller company becomes the primary provider ol'that/those product(s) in that subsegment. such a strategy is greatly enhanced with the use of a custoiner level database. why should you focus on customers and which customers should you focus on? everyone knows that the era of mass marketing is over. businesses are now scrambling to focus more narrowly on their customers (one-onane) like never before. peppers & rogers (1995)contend that genuine one onone marketing is founded not just on mail, phone, and fax, but also on an increasingly powerful array of much more eflicient, individually interactive vehicles. these marketing tools include on-site interactivity,on-line connections, e-mail, and (coming soon) interactive television. focussing on your customers is a cost-efticient strategy. in fact, those firms who believe in "creating a customer" (as opposed to just "making a sale" ) will be wildly successful as we approach the 21st century. one of the fundamental principles upon which direct marketing is based is that current customers (and knowing who they are and how to reach them) are the most valuable "asset" of a firm. the "principle of success" is to find out what the customer wants and give it to them. unfortunately, most businesses are so busy looking for new customers that they forget the customers they already have. a few more marketing axioms include: it costs only one-firh as much to keep your current customers as it does to replace them. many businesses in the u.s. spend tive times as much money for new customers as they do to keep the customers they presently have! thus, your firm should place emphasis and importance on a customer retention strategy as opposed to a customer acquisition strategy (raphael, 1991). a happy customer will tell 5-7 people, while an unhappy customer will tell 7-15 people. the most important customer information is that which comes arer the first sale. your future customers will resemble your current customers. 70 in summary, not focussing on your customers can be a fatal mistake in business today...one that database marketing will not permit you to make. in fact. the foundation of database marketing stems from that "principle of success". however, even if you begin to focus on your customers, the i'act is that all customers are not created equal. a well-known axiom in marketing is the 80/20 rule, whereas, 80 percent of your business comes from 20 percent of your customers (zikmund k, (yamico, 1994). this narrow group (the 20 percent) of your customers have become more valuable to you over time. these are the customers to which you should target your marketing efforts and relationship building. one of the best measures to evaluate the value of your customers lies the following rrfmr rating: (r) recency = the date of last purchase (f) frequency = the total number of purchases (m) monetary = net sales to date in its simplest form, the r-f-m formula calls for the establishment of a point system with purchases broken down by quarter-years. stone (1994 p. 41) presents the following typical formula: ~r 24 points current quarter 12 points last 6 months 6 points last 9 months 3 points last 12 months ~ ~p:n i fph*gpl m~i: i ~ p f4ll p h ih ill g fgpl«.ffh ceiling avoids distortion by an unusually large purchase.) the number of points allotted by each firm using the r-f-m formula may vary, but the principle is the same. once the r-f-m point system is programed for your database, a monthly or quarterly update is used for tracking the value of your customers and for enhancing relationshipswith your most valuable ones. brierley (1994) contends that making customers feel special, needed, wanted —not just as "consumers" or "prospects", but as individuals is the key to relationship marketing. this can be achieved by database marketing efforts. how do you start a database marketing system? creating a customer database can be easy and very inexpensive. a database doesn' have to be computerized, just organized. a small firm with very limited resources could begin database marketing by using a simple index card file. each index card should contain customer name, address and telephone number. additional information, type of product purchased, amount of purchase and dates of purchases, and other information helpful to refresh the salespersons memory of the customers needs, can be collected. 71 if your active customer base is less than 250 and your products are low markup consumables sold to individuals and households, then a customer level database would most likely be difficult to cost justil'y. companies selling customized products or products requiring personal selling to close a sale that have fewer than 250 active customers would probably be better served by starting with a customer contact information system to grow its profitability to levels that could better cost justify a customer level database (newberg and marcus, 1996). a customer contact information system is a systematic process which reminds the iirm when to contact which customers for what purpose. this system requires the firm to maintain a data file which includes the names of all customers to be contacted on specific dates. then, each day the firm knows which customers to contact and by crossreferencing each customers card file, knows the objective of that contact. the following four steps provide an overview of the process of starting a database marketing system. step i: determine what data to collect. the first decision is to determine what data to collect and store in your database. data included in a database record should depend on how the firm plans to use and analyze the data for specific purposes. if you do not plan to specifically use the data, then do not collect, input, and store it as a part of your customer database. it will only increase the cost of maintaining your database and will not yield any benefits. listed in table 2 are some of the types of data collected, inputed, stored, and used by many customer database managers. table 2 data that can be included in a database record a. transactions capturable data 1. customer account number 2. customer name a. position/title, decision maker status 3. customer address a. street and number b. city, state, zip code 4. area code and telephone number a. time zone/time availability b. extension 5. individual order information a. response media code b. response order placement code c. order product code (sku ¹) d. order date e. order entry keyer f. order dollar amount g. order payment method i. cash 2. charge account (number, expiration date) 72 b. customer evaluation data i. recency score (periodically updated) 2. frequency score (periodically updated) 3. monetary score (periodically updated) 4. rfm score (periodically updated) 5. customer status (active/inactive/other) a. regular customer/purchaser b. gia sender c. gift receiver d. inquirer e. sweepstakes only c. personal customer data i. customer age/age range 2. head of household naine and gender 3. second individual name, gender, & relation number of adults in household 5. marital status 6. presence of children 7. children in age ranges 8. occupation ofhead ofhousehold 9. occupation of spouse 10. working woman (number present in household) i i. estimated income code (9 increments from less than $ 15,000 to $ 125,000) 12. known number of vehicles owned 13. dominant vehicle lifestyle indicator (classification includes luxury car, truck/passenger utility vehicle, station wagon, import, specialty, etc.) 14. home owner or renter 15. length of residence (in one year increments) 16. dwelling size (single or multi-family) 17. birthday d. customer research data i. match code (for merge-purge) 2. primary research data a. customer surveys b. customer interviews c. customer focus groups d. other interactions with customers 3. secondary research data (database enhancement data) note: adapted from m. baier(1996),how io find and crr/rivare customers through direct marketing lincolnwood, il: ntc business books, p. 48; h. katzenstein & sachs (1992), direct marketing (2nd ed.), new york, ny: macmillian publishing company, pp. 157-161; and b, stone (1994), successfirl direct markering/v/e/hods(5th ed ), lincolnwood, il: ntc business books, pp. 38-39, 48. 73 'i'his set of potential data does not define the optimal customer database. it is only given to indicate the types of data a business may consider for inclusion in the creation of its database. a smaller firm must be careful to collect only that information which will be of use and importance in future marketing efforts with their customers. step 2: determine what database software to use. if you have decided to computerize your database, then next decision is what sorware you will utilize to help organize your database. the cost and configuration of database software can range from less than one-hundred dollars for off-the-shelf sorware to over a million dollars for customized database sorware. a small business (small with respect to the number of customers it has) is probably better off starting with database sorware which can be purchased off-the-shelf and is completely self contained. some examples of these less expensive list management sorwaie packages are presented in table 3. 'fable 3 database software available for list mana ement software package: developer: list price: arclist group i sorware $ 635.00 fastmail vertical solutions 49.95 list & mail avery label 49.95 magicmailer artsci, inc. 69.95 mail lt caddylak systems, inc. 59.00 m ail it!!! computer service micro applications n/a mail list 4.0 dynacomp, inc. 34.95 m a i i base promark sorware, inc. 299.00 mailing list i alphanetics 49.95 mail l.ist artworx sorware, inc. 24.95 mailmiser kestrel enterprises 139.00 mailtrak tci software 100.00 mass mailer alternative sorware, inc. 199.95 maximizer lite richmond technologies & n/a sorware, inc. omnimailer3 janac enterprises 84.95 pace mailing list pace software & systems system 50.001 pc customer call back columbia systems 95.00 postmark promark sorware, inc. n/a postsave accurate software, inc. 499.00 postsa ve ii i accurate sorware, inc. 499.00 professional mail arc tangent, inc. 695.00 professional post promark sorware, lnc. n/a sbdml mailing list sbd sorware systems manager n/a note: 1994 sorware guide: a new look. direct marketing, june, (1994), 52-63. 74 it is important to evaluate the software based on what your business needs are and how you intend to use your database. in addition, be sure to consider what amount of customization (if any) will be required to make the off-the-shelf software meet your business needs. if some customization is required, does your firm have the manpower and expertise necessary to complete this task? if not, you may have to factor the additional costs ofhiring a vendor into the price of the oft-the-shelf software package. in determining whether or not you need to build a customized database, the following considerations should be weighed carefully: (a) functions of a database. what will the system be used for? what reports will be standardized, who/how many persons will have on-line access? will the system be used to track sales and media responses, to calculate rfm, for customer services uses. for shippingor trackingshipments, for financial accountingpurposes, for inventory control, for inbound or outbound telemarketing, for customer profiling, etc. (b) data requirements. the functions will dictate the data that must be captured or purchased to provide for the above functions. (c) statistics/modeling requirements. while the functions will also dictate the types of analytical software required, it does not define the specific analytical package that should be included with the package or needs to be purchased separately. (d) timeliness of the data. what is the need and frequency of data updates —which will differ for different analyses. what data will require immediate/on-line entry, and what data may be batch entered? how frequently? (e) turnaround times/usage priorities. what will be the capacity required to provide adequate turnaround times to maintain department efficiency? what is adequate turnaround? (i) outside vendors. outside vendors may be needed to fulfill all the requirements that in-house personnel would need. of utmost importance is not only an understanding of hardware and software, but also an understanding of database marketing and statistics. most important for the evaluation of an outside vendor is a list of previous clients for whom they built or customized customer database systems. obtain these clients'ames and contact them. finally, whether you purchase an off-the-shelf software package or have a customized software system designed for your firm, don't forget to plan for business growth in your software selection decisions. at some point in the future you may want to expand your database to include not only your current customers, but qualified prospects, as well. make sure your sorware will support your database growth. step 3: lnputing data into your database. if list information (name, address, and telephone number) is not captured. the marketer has lost the bridge to communicate future 75 targeted advertisements to his best prospects (current customers and second, qualified prospects). inputing data into your database is relatively simple, once you have determined what information to collect and store. however don't be mislead into thinking that your database is complete once the information has been entered. databases must be continually updated to be kept accurate. this is true even if your database in contained in a simple index card file. step 4: database maintenance. seventeen to twenty percent of u.s, households change addresses (move) each year. thus, without updating addresses frequently, correcting them and removing "nixies" (bad, undeliverable addresses), a list, its value to your firm, and its usefulnesscan deterioraterapidly. the united states postal service (usps) contracts with over twenty national change of address companies (ncoa) who keep and maintain the address changes of individuals and households, against which business and customer lists can be merge-purged to keep customer addresses current. ln summary, beginning list building doesn't have to be complicated. the most important aspect is obtaining and maintaining customer lists with accurate information. wheaton (1990) believes that there are four important nontechnical skills needed when creating a database: communication, common sense, creativity, and attention to detail. what can you do with a customer database? the uses of your database are virtually endless! some of the primary uses mentioned by experts in the field (baier, 1996, 33-34, 57-72; katzenstein & sachs, 1992, 149-156, 161; stone, 1994, 43-46, 50-57) include the following: profiling current customers. demographic and lifestyle profiles can be collected by survey or purchased from many ncoa companies to describe current customers. "enhancement data" can be added to customer records to provide a more detailed profile of your current customers. there are several "national household database" companies that collect data which describes individuals and their households demographically,psychographically,and on the basis oflifestylcs(morris& pharr, 1992). those include, among others, axion, behavior bank, claritis, donnelly, infobase, metromail, mri, national demographics,r l. polk, simmons,and vals. the typeofcustomerinformaticn that can be purchased and appended to your customer list has been previously identified in table i (under "personal customer data" ). for example, infobase charges a minimum of $2,000 for appending a certain set of this data to small databases. for larger databases (5 million customer records, for example), it charges $21.25 per 1000 input files plus $3.50 per 1000 processing, or a total of $ 123,750. there are also a variety of other variables available for an additional $3.00-20.00 cost per thousand per additional data item (infobase, 1995). identifying "best" customers this is accomplished by calculating the length of the average customer's life and customer lifetime value. by analyzing the total contributionmargin generated by the "average" customer over time, a company 76 can calculate how much it can afford to spend (promotional costs) to acquire new customers and still meet long run profit objectives. direct marketers consider promotional expenditures as investments in customers, not as expenses which must be immediately recovered. segmenting current customers. with finite advertising budgets, small firms should spend their dollars efficiently. rfm analysis can be helpful in this regard. a customer list can be deciled, by dividing it into ten groups of customers based on rfm. average customer values can then be calculated for each decile. the advertising budget for current customers can then be allocated across deci les on the basis of decile customer value. a firm should be willing to spend more to maintain and cultivate relationships with its more valuable customers, and less for its less valuable customers. developing a customer communication program. communicating with your customers to send them customized offers; announce a sale; report on changes in your firm; solicit customersuggestions and/or complaints can easily be executed with your customer database. in fact, you can tailor your communications program to communicate with subsegments of your customers or on an individual customer by customer basis. conducting marketing research. in the past small companies did not make significant use of market research. however, now with the use of computers and databases, the usefulness of market research for small firms has increased. much of the market research that is carried out by smaller companies is comprised of customer information obtained from purchase histories and interests which can be stored and easily retrieved using a customer database (frigstad, 1995). list rental income. customer lists are valuable not only to the firms that dev'clop, maintain, and own them, but to other companies who have an interest in renting them for their own business uses. see baier(1983) for a review of list rental procedures. continuityselling/increasingrepeatbusiness. continuitysellinginvolvesthe selling of more of the same or very similar products over time (e.g., book and music clubs, magazines and insurance renewals, updated versions of computer software, additional purchases from future catalogues, etc.). without knowing who your customers are, and without maintaining list and transactional data about them, a company cannot etfectively cultivate customer relationships by selling them more of what they want/need (based on known, stored purchase data). cross-selling with a knowledge of product interest areas which customers have expressed through past purchases, complementary or other logically inferred product offers may be targeted to select groups of current customers...music club buyers could be offered cd storage racks, camera film processing customers 77 i could be offered camera cases, scroll saw buyers could be ol'fered project patters, ctc. in summary, while the uses of your database may be endless, they will be limited by your budget and creativity. don't lose track of your database marketing objectives: to maximize customer purchases and satisfaction, while minimizing your marketing costs. how to evaluate the effectiveness of your database marketing activities evaluating the effectiveness of a database is simply the comparison of pre-database versus database contribution margins to promotional cost ratios. the difference between total contribution margin less promotional costs is the money which pays for the cost of the database. if that difference does not increase at a rate fast enough to cover the costs of acquiring, building and maintaining the database —then either the capabilities of the database exceed your business needs, or the database is not being utilized to its fullest capabilities. this is why the proper planning, designing, acquiring and building of a database is so important. don't overlook the ethical issues while it may be universally agreed upon that databases are wonderful tools for marketers, how wonderful are they for customers? schultz (1994) believes that databases should improveeach consumers'personal life by eliminatingunwantedofferingsand ridiculous solicitations. 13ut is this actually the case? there is a growing public concern about the information stored in databases. with the rapid growth of on-line databases, concerns about privacy invasion are on the rise. the number of on-line databases has grown from about 400 in 1980 to 4,465 in 1990, of which nearly 70 percent are u.s. based (morris & pharr, 1992). dowling (1993)contends that although it is generally acceptable to keep past purchase data in your database and use it to market to your own customers, some consumers may not appreciateyou sharing this information with another company. therefore, in regard to privacy, the database itself is typically not the real threat —it is the use of'his database that worries customers. dentino (1994)believes that people feel annoyed because they believe they get too much direct mail and/or too tnany telemarketing solicitations. in addition, people feel violated because they believe too much information about their lives and personal preferences is being exchanged without their knowledge. dentino (1994) presents a nine step privacy action plan that all marketers should undertake. in summary, database technology will continue to improve and at each stage there will be new social and ethical dimensions to explore (morris & pharr, 1992). while there is no easy solution to the invasion of privacy issue, solutions will be generated through compromises that both the marketer and the customer must make. conclusion as summarizedby cross(1991), database marketing is really nothing more than using information about buyers and prospects to interact with them. it takes advantage of computer 78 technologyto do old-fashioned marketing in newfashioned ways. there is no blueprint for creating a database. the main objective is to meet the needs of your customers and your business in a way that is most costeffective for you. information technology is only getting better —sodon't wait to start marketing more effectively and el'ficientlywith your database. the pennies that you save today will become dollars tomorrow! 79 references baier, m. (1983). eletnetrtsof direct marketiiig. new york, ny: mcgraw-hill, lnc. baier, m. (1996). how to find and cidtivate custottiersthrough direct marketing. lincolnwood, il: ntc business books. brierley, i i.m. (1994). the art of relationship management. direct marketing, may, 25-26. cross, r. (1991). profiting from database marketing. direci marketing, september, 24-26. dent, i-i. (1991). individualized marketing. small business reporis, 16(4) april, 36-45. dentino, k. (1994). taking privacy into our own hands. direct markeiing, september, 38-40, 42, 72. direct marketing. (1994). 1994 software guide: a new look. june, 52-63. dowling, m. (1993). when you know too much. catalog age, october,73-75. drucker, p.f. (1959). tire practice ofmanagement, new york, ny: harper. francese, p. & renagban, l. (1991). finding the customer —database marketing can give you a critical edge in customer service. american demographics, 13(l), january, 48-51. frigstad, d.b. (1995). know your market: how to do low cost market research, grants pass, oregon: oasis press/ps i research. hendricks, m. (1993). it's all who you know. small business reporrs, 18(2), february, 21-25. lnfobase (1995). consumer infobase spring /995 data catalog. conway, arkansas. katzenstein & sacks (1992). direct marketing. (2nd ed.) new york, ny; macmillan publishing company. kerwin, a m. (1990). starting a database marketing system: don't let the cotnplexity deter you. editor re publisher, (december 29), 25, 31. loewe, p.m. & hanssens, d.m. (1994). taking the mystery out of marketing. managemets review, august, 32-34. morris, l. & pharr, s. (1992). invasion of privacy: a dilemma for marketing research and database technology. journal ofsystems management october, 10-11,30-31, 42-43. newberg, j. & marcus, c. (1996). target smart: database marketing for ihe small firm. grants pass, oregon: the oasis press/psi research. peppers, d. & rogers, m. (1995). the end of mass marketing. american demographics marketing tools, march/april, 4247. raphael, m. (1991). stop mailing to everyone. direct marketing, february, 53. schultz, d.e. (1994). some comments on the absolute value of the database. journal of direct marketing, 8(4), 4-5. schultz, d.e.& wang, p. (1993). database marketing applications: an industry survey of traditional direct marketers in the u.s. the journal of database marketing, l(2), 113-129. stevens, r., mcconkey, c.w., loudon, d. & dunn, p. (1994). a survey of small businesses'se of marketing tools. the /8th /ttational small business conference proceediirgs. february, san antonio, tx, 65-70. stone, b. (1994). successfid direct marketing methods (5th ed.) lincolnwood, il: ntc business books. stone, m. & shaw, r. (1987). database marketing for competitive advantage. long range planning, 20(2), april, 12-20. 80 wheaton, c.b.(1990). how to create a customer database. direct marketing, 52(10), 34. zikmund, w.g. & d'm(co, m. (1994). effecrivehlarkering. st. paul, mn: west publishing company. 81 strategy the ethical orientation of u.s. small business decision makers: a preliminary study dianne h. b. welsh nancy j. birch eastern washington university abstract recent news reports ofescalating ethics violations in the workplace has produced growing concern. this study surveyed small business decision makers concerning their ethical otdentation. these results were then compared to general responses as reflected in the norms for validating the threeinstruments. small business decision makers perceived themselves as less likely to engage in exploitative power behavior and perceived their organizations as fostering a more collective and procedurally oriented climate ihat might be inierpreted as attempting to institutionalizemorality. additionally small businessdecision makers had lower idealism and relativism scores, suggesting that they were more likely to use power to adj ust personalinj usticesor to protect oneselffrom potential exploitation. furtherimplicaiionofthis preliminary study are discussed. introduction the airwaves are being permeated with heated discussions of family values. values are being equated, in part, with ethics. almost every discipline has examined ethics. indeed, ethical considerationsaffect all forms of human activity, including business organizations. in 1978, katz and kahn determined that individual and organization values are important in determining behavior. since then, a number of authors have expounded on the importance of ethical considerations in business decision making (andrews, 1989; berenbeim, 1987; beversluis, 1987; evans, 1991; frederick, 1988; goddard, 1988; hector, 1989; henderson, 1982; longenecker, mckinney, & moore, 1988; payne & duhon, 1990; shostack, 1990; stead, worrell, & stead 1990; von der embse & wagley, 1988; and wemer, 1992). the kellogg foundation published a working paper series examining ethics and leadership (1996). recently, proposed frameworks or models of ethical decision making in business have been introduced(gatewood & carol, 1991;payne & giacalone,1990; and jones, 1991). likewise, unethical behavior has been studied in terms of the cost of employee dishonesty (clark & hollinger, 1983; walls, 1988); in addition to its causes and solutions (bauman, 1988; bernstein, 1985; buckley, 1986; and carter, 1987). in 1992, dees and starr reviewed the existing articles on ethics and small business and concluded that there were few studies that explicitly examined this issue. the vast majority of businesses in the united states are classified as small businesses. the number of companies with fewer than one hundred employees has increased nearly fitly 41 percent since the early 1980s. according to the small business administration, there are 20 million small businesses that account for more than half of all u.s. employment and contribute more than a third to the gross domestic product (dugan, 1996). the reasons for the monumental growth of small business include the downsizing of corporations,disenchantment of college-age students with long term career development, greater desire for independence and self determination, increased outsourcing, an increased population starting their second career atter retirement or to supplement their income, and an increased population of protected group members desiring economic stability. concerning the last point, women entrepreneurs are formingsmall businesses at twice the rate of men. one in ten workers is now employed by a woman-owned company (zellner, king, byrd, degeorge, & birnbaum, 1994). the bureau of the census reports that in 1992, 6.4 million women-owned firms were counted ("highlights,"1996). as of 1996, women-owned firms is estimated to be 8 million ("through a glass," 1996). there have been a comparatively few number of studies that have examined the ethics of small business owners and decision makers. most of these studies have focused on the differences in ethical considerations and attitudes between large and small business decision-makers (brown & king, 1982; chrisman & fry, 1982; hills & narayana, 1989; longenecker, mckinney, & moore, 1988, 1989a, 1989b; timmons & stevenson, 1983; ward, 1987 and wilson, 1980; among others). a much larger body of research has focused on large businesses and executives exclusively (andrews, 1989; bamett & karson, 1987; cadbury, 1987; enz, dol linger & daily, 1990;gel lerman, 1989;giaca lone & ashworth, 1988;goddard, 1988; kirrane, 1990; reilly & kyj, 1990; and thompson & smith, 1991). there have been a few noteworthy exceptions of studies focusing only on small business. smith and oakley (1994)compared small business owners in urban and non-urbanareas in one state. they found that non-urban small business owners deemed ethicalbehavior more important than their urban counterparts. they also found that ethical values were negatively correlated with formal education. in other words, the higher the education level, the lower the ethical values. other studies have compared the ethics of small business owners and decision makers to the ethics oftheircustomers. humphreys, robin, reidenbach, and moak (1993) used four scenarios of ethical business dilemmas and concluded that as long as the manager is telling the truth, it is the customer's responsibility to determine what is the meaning behind the communication. h b,h *h y«b ~hi* i fh ti i «i f small business decision-makers and workplace climate. the importance of a supportive climate is well documented, beginning with schneider(1973, 1975). victor and cullen(1988) called for such additional research concerning specific types of organizations. in particular, is there adifferencebetweenindividualattitudesofsmall businessdecision-makerstoward the use of power and individual ethics, and perceptions of ethical climate and behavior in the work place? this article reports the results of a preliminary national survey of small business decision-makersusing three measuresofethicalorientation. implications for further research are discussed. 42 methodology the data for this study involved a nationwide survey of small business owners. two hundred small businesses were randomly selected from dun 's electronic business directory of small businesses. this sample consisted of various types of businesses, all classified as small according to 1)un's criteria, from all fitty states. in addition to sending postcard reminders two follow up mailings of the survey were used to increase response rate. several questionnaires were returned because the small businesses no longer existed. as reported in the literature, this group is particularly difficult to sample because of their low response rate (thompson and smith, 1991). mobility, failure rate, and the owner's limited time are some of the factors that contributeto this problem. additionally, the length of this survey may have contributed to a lower response rate. ~sam le the subjects of this study were 26 owners and/or managers of small businesses in the united states. twenty-one, or sl percent, were owners. seventy-three percent of the respondents were male, 77 percent were married, and 85 percent had completed a college degree. the respondents had been involved in their company for an average of 5.2 years with 'a standard deviation of 5.3 years. thirty-five percent of the companies had been in existence for five years or less; 65 percent for six or more years. the subjects were asked to complete a series of instruments and a demographic section. three specific instruments of interest for this study were: the mach v attitude inventory, the ethical position questionnaire (epq), and the ethical climate questionnaire (ecq). mach v attitude invento the mach v attitude inventory consists of 20 items involving a choice among three responses. respondentsrank order the three items by indicating the item they most and least agree with. the instrument measures individual attitudes towards power and the use/abuse of power —particularly in the machiavellian tradition of "the ends justify the means." the instrument is validated (christie and geis, 1970). scores range from a low of 40 (low machiavellianism) to a high of 160 (high machiavellianism). using the mach v attitude inventory score key, each question is given a score of either i, 3, 5, or 7. the scores are then summed. ethical position uestionnaire the ethical position questionnaire (forsyth, 1980) measures individual ethical perspectives along two dimensions. one —relativism —indicates the extent to which the respondent engages in situational-based evaluations of ethical behavior. the other-idealism —measures an individual's belief in the existence of universal principles prescribing moral behavior. the instrument presents 20 statements (10 each scale) to which respondents rate their agreement on a 9-point liken-type scale. the idealism score is obtained 43 by finding the mean of the ten questions relating to idealism. the relativism score is found by computing the mean of the other ten questions. the ethical perspective, relativism is the extent to which the individual rejects universal moral rules in favor of relativism. some individuals reject the possibility of formulating or relying on universal moral rules when drawing conclusion about moral questions, whereas others believe in and make use of moral absolutes when making judgments. the other ethical perspective focuses on idealism in one's moral attitudes. some individuals idealistically assume that desirable consequences can, with the "right" action, always be obtained. those with a less idealistic orientation, on the other hand, admit that undesirable consequences will oren be mixed in with desired ones. ethical climate uestionnaire the ethical climate questionnaire was developed by victor and cullen (1987, 1988) to measure perceptions of the ethical climate, and resulting behavior, within an individual's organization. the instrument presents 26 items measuring 5 dimensions of ethical climate. respondents rank their agreement with these items on a 6-point likert-type scale. the five dimensions are: professionalism, caring, rules, instrumentality, and independence. c~ig as an initial step it is appropriate to compare this sample of small business owners to the general population before conducting sub-group comparisons. therefore, the normative statistics generated through the original development activities of each instrument were used. the comparison group for the mach v is the original sample used in the scale development and validation procedures. this comparison group consists of responses from 764 male and 832 female respondents(christie & geis, 1970). the comparison group for the epq are the 241 subjects used to validate the instrument (forsyth, 1980). the comparison group for the ecq are the 75 mba students used in the original validation study (victor & cullen, 1987). results descriptive statistics for the u s. sample were presented in the methods section. table i presents the correlation matrix for the mach v and ethical position variables. table 2 presents the intercorrleations for the ethical climate variables. table i correlations for small business am le mach v and ethical position item mach v idealism relativism mach v 1.000 idealism -0.146 1.000 relativism -0.151 0.054 1.000 44 no significant correlations were found between mach v, idealism, relativism and the following demographicvariables: age of respondent, number of employees, number of years in current position, and company age. that is there is no relationship between the use and abuse of power or between ethical position and age of respondent, size of the organization, experience of respondent or company age. no significant differences were found in the mach v, relativism, and idealism scores between males and females. in addition, there were no significantdifferences in the mach v, idealism, and relativism scores by company age (5 years or less versus more than 5 years). table 2 correlations for mall business sam le ethical climate item professionalism carin rules instrumental inde endence professionalism 1.000 caring 0.618 1.000 rules 0.140 0.093 1.000 instrumental -0.465 -0.265 0.251 1.000 independence 0.450 0.415 -0.231 -0.429 1.000 for the ethical climate scale, a moderate positive correlation between caring and professionalism was found. weak positive correlations were detected for independence and professionalism, and independence and caring. instrumental and professionalism, and instrumental and independence produced weak negative correlations. table 3 provides the results of the t-tests investigating the differences in ethical orientation between small business owners and the norms. mach v attitude invento a score of!00 is the center-point on the scale and represents a neutral perspective on the philosophy that the use of power can be justified by the objective for which it is used. our analysis included a comparison by gender as reported in the original research. there was no significant difference between male and female levels of machiavellian orientation. that is, there is no difference in how male and female small business owners use or abuse power. however, both male and female small business owners/managers had significantly lower orientation toward the use and abuse of power (mean for males = 76.18,t = 2.71,p & .01,mean for females = 81.71,t = 3.81,p & .01)than the v.s. norms. this means that the self-perceptitn among these small business owners is that they do not use or abuse power to obtain personal or organizational objectives. 45 table 3 anal sis of differences in sam le means for u s small business owner mana ers versus u.s. norms small bus. owners u.s. norms t -value mach v attitude invento male 76.18 99.27 2.71 0.0000«» (16.04) (11.17) female 81.71 95.60 3.81 0.0003*» (6.87) (10.09) ethical position uestionnaire relativism 4.74 6.18 -6.39 0.0000»« (1.50) (1.13) idealism 6.24 6.35 -0.49 0.63 (1.08) (1.17) ethical climate uestionnaire professionalism 3.66 3.60 0.32 0.7500 (0.84) (0.86) caring 3.27 2.40 4.76 0.0000«* (0.62) (0.89) rules 3.35 3.00 1.87 0.062» (0.83) (0.93) instrumental 2.09 2.00 0.42 0.67 (0.71) (1.03) independence 2.75 2.10 3.22 0.0013«» (1.18) (0.99) ««significant at the .01 level «significant at the .10 level 46 ethical position uestionnaire no significant differences were found between small business owners and the u.s. norms for the level of idealism they held regarding ethical behavior(t = -0 49, p & .60). in fact, small business owners expressed a slightly higher adherence to behavioral standards that protected the well-being and dignity of their employees. the difference in relativism scores was significant(t = -6 39,p &.01). these results reflect a perspective in which ethical values are considered to be somewhat universal in their relevance, and rigid in their application. no significant differences in relativism or idealism scores were found between male and female small business owners. ethical climate uestionnaire the final results illustrate the perception that these small business owners have concerning the climate in which they work. in general, these respondents perceive a low level of moral independence and instrumental (self-serving) behavior. that is, the ability to determine right from wrong and to develop a personal code seems to be stifled. at the same time, there is a strong perception that their organizations place a high emphasis on professionalism, caring, and rules. when compared to u.s. norms, there are significant (or marginally significant) diiterences in 3 of the 5 ecq dimensions. both small business owners and u.s. norms reported low perceived levels of instrumentalism. that is, small business owners are not any more likely than the general u.s. population to place their own interests above the organizations'. small business owners and u.s. norms are not significantly different in their perception of professionalism in their organizations. that is, there is no difference in legal, professional, or customer based expectations or regulations in guiding behavior. in terms of differences, small business owners perceived higher levels of caring, independence,and rules. specifically, small business respondents reported a greater sense of employee concern among organizational members. these respondents reported a greater sense of independence. that is, definitions of right and wrong were not totally explicated by the organization. finally, small business owners reported a greater emphasis on the extent to which behavior was dictated by company rules, and other formal specifications of individual activities. conclusion this study's purpose was to explore potential differences in ethical orientation between small business owners and general u.s. responses as reflected in the norms used for validating each instrument. in general, small business decision makers perceived themselves as less likely to engage in exploitative power behavior in order to meet personal or organizational objectives. this, however, may be attributed to the fact that, because of their size and their relatively weak bargaining power, they may not be ~ca a le of exercising exploitative power, therefore they may perceive this as proof of their ethical behavior compared to their larger business counterparts. small business owners, in addition, perceived their organizations as 47 fostering a more collectively and procedurally oriented climate that might be interpreted as attempting to institutionalize morality. we found it interesting that higher mach v scores corresponded with lower idealism and relativism scores. one who is numbed in terms of their belief in a "just and fair society" may be more likely to view the use of power as a way to adjust personal injustices, or to protect oneself from potential exploitation. in conclusion, this study provides a preliminary view of the ethical orientation of a sample of small business owners. an obvious limitation of this study was its limited sample size, thus the results should not be generalized to the entire population of small business owners in the united states. as the environment in which small businesses operate changes, both demographical lyand technologically, future research should consider longitudinal studies on ethics and possible changes in ethical orientation. further research should also include comparisons of small business owners to other distinct groups such as mid-size and large business owners or managers, home-based business owners, franchisees and franchisors and familybusinessowners. withincreasedaccesstothelnternetandwebpages,thesepopulatiora should be easier to reach. 48 references andrews, k. r. 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(1994, april 18). women entrepreneurs. business weer, no. 3367, pp. 104-107. 51 what can you contribute to build on the success of small business and entrepreneurship? ant fe lms announcement and call for papers: national small business consulting conference february 4-7, 1998 santa fe, nm will play host to the 22nd annual sbida conference, where history and tradition merge with new ideas. we'e picked the perfect place for a conference focusing on "building on success" of the past. the conference will include an assortment of activities related to small business, entrepreneurship, learning and consulting, with a program including competitive paper presentations, workshops, symposia, panels, poster and plenary sessions. conference tracks include theme papers; case writing and development; accounting and finance;entrepreneurshipand sbpm education; franchising, home-based and family businesses;global issues; legal, environmental and social issues; marketing issues; mis and computer issues; professional development; small business strategy; and poster sessions. track chairs will be announced in momentum and on our world wide web site (www.cba.uc.edu/cbainfo/sbida/welcome.htm). competitive papers, symposia, panels, and workshop proposals are now being solicited on topics related to the conference tracks. submission date for papers and proposals is september 15, 1997. the best papers in each of four tracks (empirical, theoretical, applied, small business case) will be reviewed as candidates for the distinguished paper award and for possible publication in the journal of small business strategy. for program information, contact: j. douglas frazer sbida, vice president-programs millersville university millersville, pa 17551 voice: (717) 871-5555 fax:(717) 871-2464 e-mail: dfrazer@marauder.millersv.edu i small business institute directors'ssociation strategy are small business owners using performance appraisals to their full potential? an exploratory study anne m. fiedler barry university aftedlerqu) n tail. harry. edu eddie daghestani barry university odog hestani gruntai t. barty. edit abstract recent articles have discussed the importance of the effective use of performance appraisals and creative ways that corporate america is using these tools to increase their managerial effectiveness. however, the study of the actual use of performance appraisals in small businesses has received linle auention. this exploratory study examines the appraisal process within these organi ations. small business owners were randomly surveyed to discover who did the appraisals, how frequently they were done, what dimensions werc deemed important, and what corrective actions were taken by the employer. findings suggest that while small business owners reali e that they should conduct some type of employee evaluation, they do not see the importance ofincorporating a formal evaluation process into their management strategy. guidelines are proposed for small business owners for the effective use ofperformance appraisals. introduction in today's competitive environment, companies are continually looking for ways to increase their competitive advantage. one of the major ways to accomplish this task is through increasing productivity. alter adopting and achieving the benefits of new technology, the only way to increase output is by increasing the productivity of the human resources, the employees. small business owners at)en lack the cash flow to even purchase the latest technology. therefore, if they want to remain competitive, increasing worker productivity should be an important part of their overall management strategy. the unemployment rate is currently at 4.3%, the lowest rate since 1970 (bureau of labor statistics, 1999). this means that good employees are harder to find and to keep. it is important that current employees are retained, developed, and motivated. feedback can be one of the most effective motivational tools available to organizations (moss and martinko, 1998). therefore, performance appraisals can be an effective tool in increasing productivity. researchers have been studying ways to make performance appraisals more effective. findings in recent years have shown that sources, frequency, and objectivity of the ratings can 56 journal ofsmall business strategy vol. /0, no.2 fall/winter l999 all have an impact on the eifectiveness of the performance appraisals. it is also important to use the performance appraisal as a developmental tool as well as a judgmental evaluation. background rating sources an important issue facing management involved the decision regarding who should do the employee evaluation. today, this responsibility still belongs primarily to the immediate supervisor. however, this reliance on the supervisor as the sole evaluator may not be a good idea (bhote, 1994). today, organizations are embracing alternative information inputs for employee evaluations. two of these alternatives involve the use of outside evaluators or consultants and the gathering of information from multiple stakeholders. outside consultants. one of the reasons that appraisal systems are oflen ineffective is because managers dislike doing them, and therefore, they oflen avoid doing them unless forced. an alternative is to outsource this task to an outside consultant. there are pros and cons to this method as suggested in a study of science systems, ltd. by howell and cameron (1996). on the positive side, this system takes up less management time, and employees are o(ten more open regarding their future career plans with an outside consultant. also, it is easier for a third party to give honest, straightforward feedback, because direct supervisors oflen feel that criticism may cause demotivation or unwanted turnover. however, there is also suggest a downside. bringing in an outside agent will put an added burden on what might already be a tight budget. there is also the fear that such a system might result in managers no longer discussing performance issues with their employees. finally, howell and cameron questioned whether the employees would take third party feedback seriously. whatever the pros and cons, one advantage that is alien apparent in using an outside agent in the employee appraisal process is that the agent usually seeks multiple sources of information on the employee's progress. the use of multiple information sources in becoming a growing trend in organizations whether or not an outside agent is employed. multi-source ratings. one of the newer trends being embraced by larger companies such as general electric is the "360'evaluation." this procedure involves the participation of various stakeholders in the appraisal process. this can include supervisors, peers, direct-reports, customers, and the employee. various studies have examined the efficacy of each type of evaluator and found mixed results (roberts, 1995; lathan and wexley, 1994). for example, kane and lawler (1978) did a review of peer assessment literature and found that peer ratings tend to be reliable and accurate due to their access to unique information on the job performance. however, these co-workers oflen will not give honest appraisals, because they fear possible retaliation. other researchers found that self-information is oflen inflated but can provide a good starting point in a feedback session (bassett and meyer, 1968). the 360 evaluation has shown positive outcomes. a recent study (deleon and ewen, 1997) found that the change from the use of supervisor evaluations to a process using multiple sources of information increased employees'erceptions of fairness. it also positively impacted the eifectiveness of the appraisals. this was particularly true among protected classes such as females, non-whites, and the youngest and the oldest workers. 57 journal ofsmall business strategy vol. /0, no.2 fall/winter 1999 frequency employers dislike doing performance appraisals and employees dread receiving them. for this reason many managers fail to evaluate the employee, even on a yearly basis (laumeyer and beche, 1988). however, not only is feedback important for a smooth running operation, but also research has shown that employees believe that feedback on their performance is very important. one study (ludeman, 1991) found that employees ranked performance evaluation as one of their top five priorities. sixty-five percent of the employees studied believed that they did not get adequate feedback, and many of them believed that the feedback should be given more than once a year. however, the employees did indicate that they preferred that these interim evaluations be informal. this would eliminate unwanted surprises while taking the pressure off both the manager and the employee. quinton stutter, president of baptist hospital, inc., instituted a feedback system where supervisors and managers receive "report cards" every 90 days. as a result, in the past two years turnover has decreased significantly (lyons, 1999). documentation documentation of employee behavior has been shown to be significant for a variety of reasons. first, it allows the manager to objectively evaluate the employee over the entire appraisal period. the manager has concrete examples to justify a given rating and to discuss areas of needed improvement. this objectivity allows the small business manager to focus on behavior rather that personality. this is important because focusing on objective results rather than on personal traits tends to protect a worker's self-esteem. an investigation on employee evaluations conducted by renn and prien (1995) found that a worker's self-esteem impacted an employee's job performance, general job satisfaction, absenteeism, and job search intentions. second, documentation protects the manager in cases filed with the equal employment opportunity commission (eeoc) by employees. the possibility of judicial and agency review of performance appraisals continues to expand in the united states (carrell, elbert, and hatfield, 1995). performance appraisals ot)en become an integral part of a discrimination case, and thorough documentation helps to protect the employer. small businesses with 15 or more part-time or full-time employees are subject to eeoc guidelines under the civil rights act of 1964, american with disabilities act, and the equal pay act. employers with 20 workers or more are also subject to enforcement of the age discrimination in employment act. lawsuits filed under these laws can be very costly and may even lead to bankruptcy (eeoc). the advent of the personal computer has made this documentation much easier for the small business owner or manager. new information technology even allows the small business manager to keep records and do a 360 evaluation over the internet (bracken, summers, and fleenor, 1998). outcomes of effective performance appraisals there have been several studies regarding the outcomes of performance appraisals. for example, pooyan and eberhardt (1989) found that the supervisor's goal setting behavior and the supervisor's relations with the subordinate accounted for 53% of the variance in appraisal satisfaction. an examination of 113 empirical studies on performance appraisals published between 1980 and 1990 found that not only are multiple raters more etfective than single raters, but that performance feedback is positively correlated with ratee job satisfaction 58 journal ofsmall business strategy vol.10, ivo.2 fall/winter /999 (wanguri, 1995). further, employees that were assessed in an objective goal setting system were significantly more satisfied than those evaluated under the more subjective trait approach. another meta-analysis of previous studies (cawley, keeping, and levy, 1998) looked at the effects of employee participation in the appraisal process. they found that worker participation in the appraisal process was directly related to employees'atisfaction with, and acceptance of, the appraisal system. also, participation was positively related to four outcomes: perceived fairness of the appraisal, perceived utility of the appraisal, motivation to improve affer the appraisal, and positive employee reactions to others. small business appraisal practices many practitioners make suggestions as to what small business owners should do in reference to performance appraisals. svatko (1989) discussed the benefits of simplifying the performance appraisal, suggesting that this made the performance review process more acceptable to both managers and employees. he pointed out that at paychex, a payroll processing firm, the performance evaluation was more effective when the bulk of the evaluation session was spent on objective goal setting. alexander (1989) discussed the importance of using the performance appraisal to focus the employee's attention on long-term objectives rather than day-to-day output, and as protection from wrongful discharge lawsuits. jacobs (1993) suggests that performance evaluations can be used to help employees improve both their performance and productivity, resulting in greater success for the firm. however, there has been very little empirical research done on how small business owners actually handle performance appraisals. the purpose of this study is to present the results of an exploratory study performed in the south florida small business community. lt examines how small business owners/mangers actually apply the concepts discussed above. this study attempted to investigate how the evaluation of their employees is actually handled. methodology sample a questionnaire was developed specifically for this study. the survey was mailed to a randomly selected sample of 200 small business owners in the south florida area obtained from membership directories from local chambers of commerce. of those surveyed, 98 (49%) responded. eighty-eight (90%) of the respondents were men and ten (10%) were women. whites accounted for 91 (92%) responses, while blacks accounted for seven responses (8%). eighty of the respondents had five or more employees, while eighteen had less than five employees. all of the respondents were small business owners. questionnaire the questions centered on who performed the evaluation, how information on performance was gathered, which dimensions were used, and the evaluation outcomes. the respondents were asked to rate eleven dimensions chosen from an overview of the perfonnance appraisal literature. these dimensions included: quality of work positive attitude, required skills, creativity, accountability, pleasant personality, quantity of work, good communication skills, dependability, cooperativeness, and regular auendance. 59 journal ofsmall business strategy vot. 10, no.2 eall/winter l999 the efficacy of most of these dimensions was confirmed in a study on etfective performance dimension carried out on 1,725 employees at arco transportation co., a division of atlantic richfield co. (rollins & fruge, 1992). the present study also investigated some outcomes of the evaluation process. findings information gathering systems many employees in small businesses never receive a formal evaluation. their compensation and length of employment are at the whim of their employer. all of the organizations with less than five employees indicated that they did not do any performance evaluation, formal or informal. the remaining eighty were asked whether the performance of employees was evaluated formally or informally. seventeen (21%) of (he owners evaluated their employees formally, while sixty-three (79%) evaluated the employees informally. the authors also sought to determine who in the organization actually did the evaluation. as shown in table i, most of the evaluations were done by the small business owners, approximately 12% were done by a manager that worked for the owner, and 10% were outsourced to an agency specializing in human resource functions. table i: who does the evaluation? evaluator number percentage owner 62 77.5% manager 10 12 5% agency 8 10% it was also of interest to investigate the frequency with which the appraisals were performed. table 2 shows that for the owners that did employee evaluations, the majority of the evaluations were done once a year, but 36% were done more frequently. table 2: frequency of performance appraisals frequency number percentage yearly 51 63.8 six months 18 22.5 more oren 11 13.7 the authors wanted to know not just how oren the evaluation was done with the employee, but also whether the accumulation of appraisal information was an ongoing process throughout the evaluation period. to investigate this question we asked the following,?do you keep regular notes and documents on employees'erformance?" 49 (61%) responded positively, while 31 (39%) responded negatively. source of information is oren as important as the frequency. most information for appraisals is gathered through direct contact and impressions from the immediate supervisor. the owner was asked where he or she gathered most of his or her information. table 3 shows the three most prevalent sources of performance information. as can be seen from this table, the 60 journal ofsmall business strategy vol. /0, no.2 faivivinter /999 majority of owners (60%) relied on their personal observations. however, 40% relied on other sources of information. table 3. the major source of employee information source of informait'on number percentage observation 48 60% peers 11 13 7% employee 21 26 3% performance dimensions there are many different types of performance appraisal systems; i.e., graphic rating scales, alternation ranking, and paired comparisons, among others. for the purpose of this study it was decided that the type of evaluation was relatively unimportant for two reasons. first, graphic rating scales are the most commonly used system in performance appraisal. the majority of organizations use this type of evaluation. due to the simplicity of this method this usually holds true for small businesses. second, since many small business owners/managers have not had a course in human resource management, the authors believed that the jargon might be too confusing and too hard to explain. therefore, rather than dwelling on the structure of the evaluations, the decision was made to investigate which dimensions small businesspersons believed were the most important when they did an evaluation. they were asked to use the following four point scale: 4 = most important, 3 = important, 2 = somewhat important, and i = not important. the results are presented in table 4. table 4: perceived importance of rating dimensions importance of dimensions'ost somewhat not dimensions important important important imponant uali of work 100% 0% p% p% positive attitude 100 0 0 0 re uired skills 74 14 12 0 creativi 85 11 4 0 accountabi1 i 100 0 0 0 pleasant personali 94 5 i 0 uanti of work 95 2.5 2.5 0 good communication 100 0 0 0 de endabili 100 0 0 0 coo erativeness 89 ii 0 0 re ular attendance 100 0 0 0 'scores given by percentage giving each response. 61 journal ofsmall business strategy vol. i0, ivo.2 fallltpinter i999 as shown in table 4, all of the dimensions were fairly important parts of the evaluation process. it is interesting to note that the questions regarding actual work output, such as accountability, quantity and quality of work, dependability and attendance were of the utmost importance. while still taken into consideration, other dimensions such as creativity, personality, and cooperativeness were not quite as important. the most surprising results were that the level of skills received the lowest overall rating. as expected, the owners rated all the dimensions as fairly important. to attempt to investigate relative importance, two questions were asked involving the interactions of the dimensions. this was done as an attempt to determine the importance of personality if the employee exhibited low productivity. under this scenario, personality became less important dropping from a 94% rating on 4 (most important) on the rating scale, to 84% on most important. the second question asked respondents to rate the importance of attitude in the face of poor performance. here the difference was most dramatic. as is evident in table 4 when asked whether attitude is important as a free-standing measure, 100% of the respondents replied that attitude was very important. however, when asked to rate attitude in the face of poor performance no respondent said that attitude was important or very important (table 5). table 5. importance of interaction of performance dimensions. interaction of dimensions* most somewhat not important important important important personality if productivity low 84 10 5 i attitude if performance poor 0 0 14 86 'scores given by percentage response for each category. outcomes of performance evaluations the importance of performance evaluations does not lie in the evaluation itself, but rather the outcome of that evaluation. for an employee to meet expectations it is very important that he or she be aware of the expectations of the owner/manager. to help determine this, the employers were asked whether employees have well-defined jobs on which they can be evaluated. sixty-one (76.3%) believed that they did, and 19 (23.7%) said that they did not. the respondents were also asked whether they explained to their employees the basis on which the evaluations were made. of those who replied, 71 (89%) said 'yes'nd 9 (11%) said 'no'. finally, the authors attempted to investigate the consequences of the performance appraisal. respondents were asked, "when an employee receives a low rating, what action do you take?" none of the respondents replied that they would fire the employee. forty-two (52%) indicated that the employee would be given one more chance, while 38 (47.5%) indicated that the employee would be encouraged, and the owner would discuss methods of performance improvement with the employee. discussion this study has given some insight into the use of the performance appraisal in the small business environment. the study found that most of the evaluations are done by the owner, 62 journal ofsmall business stratefp vol.)0, ttto.2 fall/winter l999 and that they evaluate the employees at least annually and sometimes more offen. while there are not any hard guidelines on how oren these evaluations should be conducted, saal and knight (1988) suggest that formal evaluations should be conducted at least every six months to prevent the cognitive overload of the raters. however, they also suggest that informal feedback should be given on a frequent basis. the results on the importance of the rating dimensions have shown that the small business owners prescribe to a more present orientation than a future orientation. the responses showed that getting the job done was much more important than how it got done. overall, productivity, dependability, attendance, and accountability were more important than creativity, personality and attitude. this is logical considering that many small businesses survive on a day to day basis, and with a very small workforce, dependability and attendance become crucial. however, if these organizations are to grow and prosper, creativity and cooperation become very important dimensions. it would be interesting to investigate whether a company's profitability, size, and maturity have an impact on the owner's perceived importance of the dimensions. the finding that skill level is the least important dimension may be attributed to the fact that small business owners see it as a function of initial employee selection rather than employee evaluation. however, skill level should be an important part of continuing employee development, and therefore, should be considered an important dimension. as mentioned in the introduction, this study is only a preliminary investigation. many other questions need to be answered. some of these questions may be related to demographics. it would be interesting to investigate the effects of the gender and the ethnic background of the rater and the ratee on the evaluation process in the small business environment. landy and parr (1983) looked at the uses of resultant evaluation information, and suggested that three uses should be made of the information. first, the information should be used to make administrative decisions regarding compensation, promotions, and dismissals. second, it should help in employee development by providing feedback on an employee's strengths and weaknesses. third, it will provide support information that might be useful in strategic planning and compliance with eeoc regulations. it would be interesting to discover what the small business owner is actually doing with the information that he or she is gathering in the performance appraisal process. finally, our study showed that 10% of those responding to the survey outsourced the performance appraisal function. outsourcing is a growing trend in the area of human resource management (stewart, 1996). therefore, it would be interesting to study the small businesses that are currently using outside agencies to perform their human resource functions and to analyze how this relates to the cost effectiveness and usefulness. guidelines for effective use of performance evaluations a review of the results of our survey suggest that although most small business managers grasp the importance of doing performance appraisals, many do not realize the importance of them as a developmental tool that can be used to increase employee productivity. the process shown in figure i can be adapted by small business managers to make the performance appraisal process more effective and efficient. this can help to increase the employee's satisfaction and perceptions of fairness, and also help to protect the small business from legal repercussions based on poor evaluation practices. 63 journal ofsmall business strategy vol.)0, no.2 falll)yinrer l999 the first step is for the owner (manager) to define the job requirements for each employee. the question must be asked, "what is this employee supposed to do?" the time frame for this job analysis depends on whether the company is in a survival mode or in an expansion mode. if the company is concentrating on staying afloat (survival mode), the job analysis should concentrate on the employee's job today. in this mode, the manager should write all of the tasks that the employee is expected to perform, and attach objective levels of performance to the tasks whenever possible. for example, rather than saying "make sales calls", the description should say, "make 10 sales calls a day, making a sales on at least 50% of the calls, selling a minimum of 1,000 widgets a week." figure 1. guidelines for an affective performance appraisal process survival expansion mode mode participatively document observations of set objectives employee performance with employees performance interview ~ evaluate prepare expectations performance ~ reward employee evaluation ~ fmployee improvement ~ sct new goals and expectations self peer customer review review input increasederceive employee motivationfairness satisfaction 64 journal of small business stra/egy vo/. /0, no.2 fa///8'inter l999 if the company is in a growth phase (expansion mode), the job analysis should not only focus on today, but also two to five years into the future. for example, take a business which is currently doing all of its sales by telephone or in-person. however, within the next two years the company plans to begin selling its products over the internet. to write a job description for a clerical worker who would be doing the company's computer work, you could write the job description to include "works with word processing, spreadsheets, database inputs, and web page updates." the second step begins the development phase. the owner/manager meets with the employee to not only setup goals, but also to discuss how they are to be achieved, what the supervisor can do to assist the employee, and possible roadblocks the employee may face. for example, the owner would not just tell the salesperson how many units he/she is expected to sell, but he/she might also suggest effective selling techniques, and good times to contact prospects. the owner should accompany the salesperson on some sales calls and give feedback. when a prospective customer who will not return phone calls becomes a roadblock, the owner/manager may suggest other approaches to contacting the customer such as approaching someone else within that company or using e-mail. time frames must be setup so that the manager can evaluate the progress and give the employee feedback on interim performance. this can be done informally, but at specific checkpoints. an owner/manager may set up a six-month goal of selling 6,000 widgets. however, he could say to the employee, "let's meet in a month and check your progress. by that time, you should have sold at least 1,000 widgets using the techniques that we discussed." it is very important that the owner/manager does check the accomplishment of the goals at the end of the specified time, otherwise the employee will not take the goals seriously. also, interim feedback sessions should aid in this process by reducing anxiety levels in the employee. if the employee is doing well and has sold 1,000 widgets by the end of the month, positive feedback can be very motivational. however, if the employee is not doing as well as expected, this is the best time to straighten out the problem with specific suggestions. it is important that the owner/manager inspects what he/she expects. this is important because it ensures that the manager and the employee are on the same wavelength; that is, the are striving for the same goals. it will minimize the possibilities of misinterpretations on the part of the employee of what he/she needs to accomplish to receive a positive evaluation. throughout the entire process the supervisor should be objectively documenting the employee's progress while coaching him/her to help meet the desired expectations. this documentation can take several forms. some managers periodically write informal observations and keep them in the employee's file. it is best to use a more formal process. this will be especially helpful when faced with lawsuits regarding employment. a simple, yet eaicient process is to use a weekly log for each employee. in this log, the owner/manager notes observations of the employee's work related behavior over the past week. the information should focus on the work, not the personality of the worker. the comments should be objective and specific. therefore, rather than stating that the worker was lazy, the manager might record, "on thursday, july 12, mr. smith had to be asked three times to shelve the product that had been delivered that day." rather than noting, "john is always late," the owner/manager should write, "on june 6, john was 30 minutes late, on june 8, john was 20 minutes late, and on june 9, john was 40 minutes late." it would also be wise to note the corrective actions taken as well as the time period given to improve behavior. before preparing the formal evaluation, the supervisor should carefully examine all documentation on performance, review all interim evaluation sessions, and solicit input from other sources (peers, customers, etc.) the supervisor should mentally review what he/she wants to convey, so as to assess the possible reaction of the employee. by preparing several 65 journo/ ofsmall business strategy vo/. /0, no.2 fall/winter l999 scenarios, one for each possible reaction, the owner/manager is not caught off guard, and therefore, will remain in control of the situation. finally, the manager should meet with the employee to evaluate whether the expectations originally set forth were met. if interim feedback sessions were conducted prior to the formal evaluation, the appraisal should not be a surprise to the employee. the more important part of this session is to discuss with the employee where the owner/manager wants him/her to go from here and to set a course of action for the employee to follow. this course of action and the new goals that are participatively established will become the basis for the next performance appraisal. conclusion this paper explores an area that is crucial to the effective management of one of our most important resources, people. as an exploratory study, it raises many questions regarding the current human resources practices in small businesses, and the lack of the effective use of performance appraisals. it is not surprising that eighty-two percent of the companies studied realize that some type of performance evaluation is necessary; however, it was surprising to find that that only seventeen percent of the total sample had a formal appraisal process. more research needs to be done to determine if these findings hold true in different industries and whether they are consistent across various geographic regions. nevertheless, the findings do seem to indicate that while small business owners/managers realize that they should do some kind of employee evaluation, they do not understand the strategic importance of implementing an eltective employee appraisal process. a formal employee evaluation process, as suggested in this paper, will take time out of a manager' already busy day, but such a commitment is well worth the ettort. the results could include higher worker productivity, legal protection, and more satisfied employees. references alexander, f. (1989, march). performance appraisals. small business re orts 20-29. bassett, g.a., & meyer, h.h. (1968). performance appraisal based on self-review. personnel ~90 i 21, 421.430. b fh 0 g«i i (1999). ~h:// .01 . bh,k.(1994). b 9 f pp i i:a i h h g . ~e ~ri i t d 21(l), 1-9. 0 i, b.w., 0, h., & pl, j. (1990). highh 300. ~fi d ~01 32 0, 42. carrell, m.r., elbert, n.f. & hatfield, r.d. (1995). human resource mana ement global strate ies for mana in a diverse work force 5 ed . englewood cliffs, nj: prentice hall. cawley, b.d., keeping, l. m., and levy, p.e. (1998). participation in the performance appraisal process and employee reactions; a meta-analytic review of field investigations review of field investigations. journal of a lied ps cholo, august. deleon, l, and ewen, a.j. (1997). multi-source performance appraisals. review of public personnel administration 17 i, 22. howell, k. and cameron, e. (1996, aug 8). the benefits of an outsider's opinion. ~peo le~mi,e 4 jacobs, h. (1993). the ratings game. small business re orts october, 21-22. kane, j.s., & lawler, e.e., iii (1978). methods of peer assessment. ps cholo ical bulletin 85, 555-586. 66 journal ofsmall business strategy vol. l0, no.2 fall/ivinter l999 i.andy, f.j., & parr, j.l. (1983). the measurement of work erformance: methods theo dddd ih,kd 9 k:6 d i 9 lathan, g.p., & wesley, k.n. (1994 . increasin roductivi throu h erformance a raisal ~2nd ed.. reading, ma: addison-wesley. laumeyer, j., & beebe, t. (1988). employees and their appraisal. personnel administrator, 76-80. 6 d,k.(59915c i*d kill . h~rm *,65-95. i.yons, n.j. (1999). the 90-daycheckup. inc. march. moss, s.e., & martinko, m.j. (1998). the effects of performance attributions and outcome dependence on leader feedback behavior following poor subordinate performance. joumal ofor anizational behavior ma . pooyan, a., & eberhardt, b.j.(1989). correlates of performance appraisal satisfaction among supervisory and non-supervisory employees. journal of business research, november. renn, r.w., & prien, k.o. (1995). employee responses to employee feedback from the task. grou and or anization mana ement 20 3, 337-352. roberts, g.e. (1995). municipal government performance appraisal practices: is the whole less than the sum of its parts? public personnel mana ement 24 (2). rollins, t., & fruge, m. (1992). performance dimension: competencies with a twist. ~trainin, january, 47-51. saal, f.e., & knight, p.a. (1988). industrial/or anizational s chain . pacific grove: brooks/cole. stewart, t.a. (1996). taking on the last bureaucracy, fortune, january 15, 105-106. svatko, j.e. (1989). simplifying the performance appraisal. small business re orts, march, 30-33. wanguri, d. m. (1995) a review, an integration, and a critique of cross-discipline research on performance appraisal, evaluations, and feedback. the journal of business communication, july. anne m. fiedler is an associate professor of management in the andreas school of business at barry university. she has worked as a consultant for fortune 500 companies and small businesses. her research interests lie in human resources, organizational behavior, and international management. she co-authored a book on practices of small business owners in mexico. eddie daghestani is an associate professor of economics and finance in the school of business at barry university. his research interests and publications include issues relating to regional economic growth, capital budgeting, security analysis, small business, and entrepreneurshi p. 67 strategy editor's note the articles in this issue reflect an opportunistic focus in helping our readers come to grips with both desirable and undesirable change. from both an internal organizational cultural point-of-view and the fast-second threat of major competition, the growth management challenges are afl to familiar to entrepreneurs and small business owners. in our lead article, laurence weinzimmer, fred fry and paul nystrom set the tone by emphasizing the critical role of opportunistic decision-making. the cutting edge integrative research model developed in their paper provides needed insight into why successful small business owners are involved in opportunity search efforts. such efforts may be especially critical when "wal-mart comes to town", as discussed by jeffrey mcgee and troy festervand. their paper reviews in great detail the rebalancing and reformationof competitive strategies by small business merchants in response to the arrival of the discount retailing giants. an oflen overlooked source of competitive advantage for the small business firm is organizational culture. patricia kosters, mary lynn damhorst and grace kunz provide a comprehensive case study approach that investigates and identifies the organizational cultural determinants of successful performance. of special interest to small business consultants, is the well designed survey questionnaire used in their study and the specific recommendations offered. in a well researched and very patiently revised research study, candida brush examines the competitive effects of early and late export entry by small business firms. quite remarkably, dr. brush demonstrates how the significance of the visionary perspective or international business view held by the entrepreneurial leader is a critical key to success. this international business theme continues with an examination of the financial-economic characteristics of micro-enterprise manufacturing in kenya by professors gary, cooley and lutabingwa. finally, in an effort to correct editorial problems and solve communication issues, we have corrected and reprinted an article by ron cook and dale fox that appeared in our summer 1996 issue. nevertheless, their findings emphasize the importance of proactive public policy interaction by small and medium-sized firms. in looking ahead to volume 8, we hope to address some of the contemporary issues and trends in telecommuting and small home-based business success. your continuing contributions in this area will be appreciated. joseph f. singer, ph.d. editor reproduced with permission of the copyright owner. further reproduction prohibited without permission. credits anonymous journal of small business strategy; spring/summer 2007; 18, 1; abi/inform complete pg. 0_4 editor fred l. fry associate editors aaron a. buchko laurence g. weinzimmer editorial assistants douglas luman allison camp editorial review board semra ascigil joe bell david brennan shawn carraher susan coleman cathleen folker eugene fregetto armand gilinsky joe geiger michael harris timothy hatten masoud hemmasi kirk heriot jeffrey hornsby bruce kemelgor jill kickul larry klatt matthew marvel brian mckenzie thaddeus mcewen todd mick john e. prescott neal pruchansky george puia matthew c. sonfield jeff shields joe singer paul stephens harriet stephenson jude valdez howard van auken dianne welsh bradley university bradley university bradley university bradley university bradley university middle east technical university university of arkansas at little rock university of st. thomas cameron university university of hartford university of wisconsin parkside university of illinois at chicago sonoma state university university of idaho east carolina university mesa state college illinois state university columbus state university ball state university university of louisville miami university of ohio florida atlantic university western kentucky university california state university, east bay north carolina a&t state university missouri western state university university of pittsburgh keene state university saginaw valley state university hofstra university university of southern maine university of missouri kansas city bradley university university of seattle university of texas at san antonio-downtown iowa state university university of tampa the journal of small business strategy is a joint publication of the small business institute® and the foster college of business administration, bradley university. send subscription requests to fred fry, editor, journal of small business strategy, foster college of business administration, bradley university, 1501 w. bradley ave., peoria, il, 61625 or e-mail to jsbs@bradley.edu. annual subscriptions may be ordered at $25 each (u.s. dollars only). international subscriptions add $5 annually for postage and handling. back issues may be ordered at $15 per issue. ©copyright 2007 small business institute® issn 1081-8510 strategy editor's note publishing and other scholarly growth opportunities notwithstanding the recognition by aacsb international of endeavors such as field case consulting (see jsbs, val. i l, iva. l spring/summer 2000), there has been a broad-based and increasing emphasis on publishing and other scholarly activities at the traditional "teaching" colleges and universities. the pressures have been created not only by the desire of many institutions to achieve accreditation under the newer, mission driven criteria of the aacsb, but by the large number of newer faculty who have been armed with a research oriented ph d. and the current criteria of the tenure and promotion policies of the universities who have been employing these candidates. although not always of a "publish or perish" nature, this phenomenon is influencing faculty and administration alike. in this regard, the editorial staff of jsbswould like to remind the readership of the myriad opportunities to engage in scholarly activities related to the small business institutee and the journal ofsmall business srraiegy: the publication of an article in jsbsas either a traditional article or as a "small business brief'hich is a shorter piece, often of a narrower scope than a typical article. the publication of a book review that can be focus on a recent text or practitioner book that would be of interest to the readership of jsbs. there are opportunities to serve as a reviewer for jsbs. given the wide range of topics of the manuscripts submitted to jsbs, we utilize reviewers from all business disciplines. the annual small business institutee conferences (formerly sbida). the next one will be held in new orleans february 13 —is, 2003). the scholarly opportunities associated with the annual conference are numerous(please see the call for papers in this issue): paper presentation and publication in the proceedings (up to 5 "best papers" will be published in jsbs) discussant reviewer track chair these numerous opportunities are, of course, in addition to those many others associated with the small business institutee (field case consulting, case of the year competition, organizational leadership positions, etc). please consider these possibilities as you develop your scholarly agendas in the future. visit our website at editor, jsbs www. jsbs,arg editors' note we are pleased to introduce our new special section which we expect will be used for diverse and worthwhile purposes. for this issue, don bradley iii, sbida national center director, was invited to submit his article dealing with the activities and services of the national center. in addition, the section contains the second and third place papers selected by the sbida 1992 national conference reviewers. finally, we have chosen to begin a "letters to the editors" section with an interesting exchange involving a new subscriber in eastern europe. in addition to the submission of articles intended for the regular review process, we would appreciate hearing from you with your commentary on articles already published or anything of general interest to our readership. we hope to print a selection of such correspondence and materials in future special sections. please remember when submitting an essay to jsbs for review that sbida intends this to be a practically-oriented journal. lloyd d. elgart editor ..(~:...~..j e,..?..,;. --/-·:. .(, ,,,_,, lillian schanfield associate editor the small business institute directors' association sbida 1992-93 officers president lynn hoffman department of management university of northern colorado greeley, co 80639 (303) 351-1224 office (303) 455-7814 home fax (303) 351-2500 president-elect robert a. kemp department of management drake university des moines, ia 50311 (515) 271-2807 office (5i5) 223-6504 home fax (515) 271-2001 vice-president programs joseph c. latona college of business administration university of akron akron, oh 44325 (216) 972-7337 office (216) 666-4419 home fax (216) 972-6588 vice-president publications pamela s. schindler business administration wittenberg university springfield, oh 45501 (513) 327-7904 office (513) 864-7693 home fax (513) 327-6340 secretary-treasurer geralyn mcclure franklin department of management and · marketing· stephenf. austin state university nacogdoches, tx 75962 (409) 563-1730 office ( 409) 569-7267 home fax (409) 568-1117 past president gwen f. fontenot texas women's university i 0030 glenrio lane dallas, tx 75229 (817) 898-2113 office (214) 358-2234 home fax (817) 898-3198 sbida national center center director don b. bradley iii college of business administration university of central arkansas u.c.a. p.o. box 4983 conway, ar 72035 (501) 450-5300 office fax (501) 450-5360 journal of small business strategy vol. 27 ● no. 2 ● 2017 1 high performance work systems: a necessity for startups josh bendickson university of louisiana at lafayette josh.bendickson@gmail.com jeffery muldoon emporia state university jmuldoon@emporia.edu eric ligouri university of tampa eliguori@ut.edu chelsea midgett east carolina university midgettc15@students.ecu.edu abstract new businesses are an important part of any economy, yet the key elements to achieve startup success are often unclear or up for debate. attracting, selecting, and training employees are often critical activities for most startups. research suggests that high performance work systems (i.e., a bundle of human resource practices) enhance organizational performance. however, we posit that most startups lack these systems at the onset, yet with minimal effort can establish a system to improve their likelihood of meeting their goals, enhancing capabilities, and ensuring long-term survival. keywords: startups; human capital; high performance work systems (hpws) mailto:jmuldoon@emporia.edu mailto:eliguori@ut.edu mailto:midgettc15@students.ecu.edu journal of small business strategy vol. 27 ● no. 2 ● 2017 2 introduction human capital and human resources are valuable not only to established organizations, but also to startups and new ventures (hornsby & kuratko, 1990). the primary growth mechanism of the firm is the human capital that the firm possesses, which resides in the individual workers in the firm as well as the joint relationships they form (nahapiet & ghoshal, 1998). human capital determines the quality of the products and services that a firm offers (nahapiet & ghoshal, 1998). the primary focus of human resource management is on the development, selection, compensation, and performance management of workers. over the last 20 years scholars have gone beyond traditional human resource management and began to analyze the strategic value of human resources. the primary focus of this approach has been the study of the bundling together of various practices. when bundled, human resource practices can create synergies among the practices deploying human capital. despite the various differences and contextual factors in play, there is agreement among scholars on what are considered to be best practices and how well those best practices are determined by contextual factors (becker & huselid, 2006). we seek to extend this literature by proposing a set of propositions about the role of strategic human resource management in developing startups. such an approach is important because startups, new ventures, and new businesses are an important part of the economy and are often the source of job creation and new economic growth (baumol & strom, 2007; birch, 1987; mazzarol, volery, doss & thein, 1999). yet startups face a wide set of problems including lack of both financial and human resources. we believe that startups can utilize superior human resource management to experience higher rates of growth and survival. accordingly, we seek to address two research questions in order to better understand the use of human resources, particularly high performance work systems (hpws), as a necessary aid and component to startups. the first research question addressed is: do startups simply address various human resource practices on as needed bases or do they more holistically develop hpws? secondly, might more emphasis on hpws ensure greater outcomes for startups and new ventures? prior research has investigated related issues, yet not specifically addressed our questions. for instance, cardon & stevens (2004) review what we know about human resources in small businesses. other scholars suggest human resources can enhance innovation in startups (de winne & sels, 2010). in addition, research has demonstrated the need for human resource practices in small and medium sized enterprises (bendickson, liguori, muldoon, newport & weaver, 2013) but only looks at individual practices instead of an integrated system (i.e., hpws) and does not identify the role of startups. furthermore, other research contemplates whether these practices matter at all since high-tech startups are often built to flip (baron & hannan, 2002). in some ways, the debate contingency factors and best practices in startups mirrors the debate in established companies regarding hpws. the initial research performed by huselid and becker argued that regardless of company size or industry, hpws would lead to superior performance (purcell, 1999). other researchers were more skeptical regarding the use of hpws and suggested that contingent factors (such as size or industry) limited the efficiency of the hpws (purcell, 1999). while these scholars accept the general notions of huselid and becker’s argument, journal of small business strategy vol. 27 ● no. 2 ● 2017 3 they rejected what they consider to be huselid’s naïve arguments regarding hpws (kaufman, 2010). for instance, would an industry in food service have the same need for hpws as would a company in the technology industry (wright & mcmahon, 1992)? there is some evidence that companies in which a focused or differentiation strategy is applied are more likely to use hpws than companies that use cost leadership (buller & mcevoy, 2012). this is an issue in small business research as well (e.g., bamberger, bacharach & dyer, 1989). what scholars have examined regarding hpws in startups have been narrow studies that focused on industries (e.g., banking, bamford, dean & mcdougall, 2000). more definite and generalized conclusions have not been drawn. some scholars have suggested that startups lack the resources needed to possess hpws whereas others have suggested the opposite (becker & huselid, 2006) for these reasons, we find it necessary to describe why we believe hpws can enhance outcomes in startups and/or new ventures, in an effort to address our questions and contribute to the literature. the purpose of the paper is to develop propositions regarding the relationship between hpws and various types of outcomes for startup businesses. our argument is that hpws are an important part of the organization during the startup process. those organizations that possess hpws will grow more quickly, have higher rates of goal achievement, be more likely to survive, and more likely to develop capabilities than startups in which hpws are not used. high performance work systems high performance work systems (hpws) are a bundle of human resource management (hrm) practices that typically include the following emphases: staffing, selfmanagement teams, decentralized decision making, training, flexible work assignments, communication, and compensation (evans & davis 2005). staffing includes the processes whereby abilities for job fit and organization fit are evaluated. there are different levels to the extensiveness of this procedure. these evaluations are based on knowledge, skills, and abilities (ksas), which result in then selecting the best candidate for the position. startups cannot wait until there is more time to conduct more rigorous staffing procedures and we argue staffing is a fundamental portion of hpws that can give startups a competitive advantage. examples of staffing procedures include selective screening of employees and assessment of technical and interpersonal skills. attitudes and personality may provide other measurements for desired characteristics. additionally, performancebased promotions represent internal candidates (evans & davis, 2005). though ksas are mentioned, more specific findings support selection based on general mental ability (schmidt & hunter, 1998). relatedly, lepak and snell (1999) provide a quadrant of the hr architecture implying appropriate uniqueness and value vary across an organization. this is a useful consideration for selective staffing. upmost, ksa value and uniqueness is perhaps not necessary for every position, but the importance is in finding the appropriate job fit and organization fit to enhance individual and organizational performance. lastly, as a prelude to selective staffing, attention to attracting applicants from an organizational level (rynes & barber, 1990) may be an important and intertwined aspect to ensure selection from the best talent pools. self-managed teams address a power relationship at an individual level. with selfmanaged teams, power is shifted down the chain of command granting many different teams authority over their decision making. journal of small business strategy vol. 27 ● no. 2 ● 2017 4 while startup owners may fear relinquishing control, allowing employees to work autonomously often leads to positive outcomes as well as increasingly motived employees (pink, 2011). examples of selfmanaged teams include employee participation programs, teams with task and decision-making authority, and extensive use of teams in general throughout the organization (evans & davis, 2005). teams provide success in various ways. for example, gibson, porath, benson and lawler (2007) demonstrated that team-enabling practices significantly predicted quality. delegation to self-managed teams not only provides empowerment for employees, but also gives employees a chance to demonstrate initiative and achieve personal growth and development (heimovies, herman & jurkiewicz, 1993). similar to self-managed teams, decentralized decision making offers employees more control and power in the decision making process. employees gain autonomy under this practice and also gain access to resources. this is accomplished in numerous ways, some of which include: creating tasks for employees that aren’t as clearly defined, granting employees the authority to make decisions, involving employees in the decision making process, and through participative management which essentially grants employees access as a collaborator rather than a subordinate (evans & davis, 2005). eisenhardt and bourgeois (1988) determined that top management teams overly engaged in centralization and internal politicking, and that power games were likely to decrease firm performance. this helps create the case for decentralized decision making and also explains a unique internal power relationship. startup owners need to rely on others to ensure the success of their business and hence realize the importance of decentralized decision making at early stages of inception. training and development are programs designed to help employees increase ksas. these are generally formalized procedures that are pertinent for current and/or future necessary skills and knowledge. different outcomes of training may include the enhancement of technical skills or the development of interpersonal skills. cross training allows for employee growth as well as internal dependency reduction. though training is often designed for new employees, it’s an imperative component for experienced employees as well (evans & davis, 2005). of course there are many considerations. some of these are at the individual level such as personality characteristics (major, turner & fletcher, 2006) or differences between passive and active learners (bell & kozlowski, 2008). some training is carried out at a more organizational level such as training design and effectiveness (arthur, bennett, edens & bell, 2003). training has gone through dramatic changes (salas & cannon-bowers, 2001) but remains an important feature for improving individuals, organizations, and society (aguinis & kraiger, 2009) and is beneficial for startups as well as established corporations. advances in ksas again appear in flexible work assignments. here, individuals often have the opportunity to broaden ksas. this may occur through job rotation, which may happen in a team, or with counterparts of an individual’s position. while larger teams may not be present in startups, another example of a flexible work assignment includes job enrichment allowing for employees to use the array of ksas in their repertoire (evans & davis, 2005), something startups can more likely participate in. as mentioned, these work practices are highly interconnected. flexible work assignments can improve work-related attitudes, organizational commitment, job and organizational satisfaction, reduce journal of small business strategy vol. 27 ● no. 2 ● 2017 5 absenteeism, and reduce turnover; many of which are items thought to impact performance (scandura & lankau, 1997). communication within organizations is on a spectrum between closed and open. open communication provides opportunities for employees to express their opinions, concerns, and suggestions whereas closed communication does not. beyond the open/closed spectrum, open communication can be both horizontal and vertical within an organization. when horizontal and vertical communication are both open, the greatest amount of information will be shared and the greatest number of viewpoints will be represented. this occurs through relatively simple initiatives such as explaining business strategy throughout the organization. open communication may also occur through available access to information and/or an employee suggestion system (evans & davis, 2005). employees involved in the open system have a better understanding of the competitive position and are able to participate which creates environments where employees can identify with the organization and will have the desire to help it succeed (wright, gardner & moynihan, 2003). because startups typically have fewer channels, not only is this important, but it also is more feasible than in larger established organizations. compensation is addressed in a few different ways. pay and compensation structures all provide opportunities for organizations to use compensation as a mechanism to steer employees. more specifically, these compensation initiatives may occur through profit sharing, employee ownership, a comparatively high level of pay, performancecontingent pay, and/or team-based pay (evans & davis, 2005). compensation has many elements but clearly impacts satisfaction, fairness, and turnover (tekleab, bartol & liu, 2005). brown, sturman and simmering (2003) found that pay level practices and pay structures interact to affect financial performance as well. pay for performance (i.e., performance-contingent compensation) has also shown the ability to increase productivity (cadsby, song & tapon, 2007). startups may be limited in cash but can take part in better compensating individuals through equity options, a powerful incentive with a large upside if the company is successful. this can also help align the goals between owners and employees. in total, these seven human resource practice categories are commonly found in high performance work systems (hpws) and are critical and interdependent. although most companies use some, if not all of the best practices, the real benefit of hpws comes when there is synergy between the various practices (subramony, 2009). in fact, delery and doty (1996) suggested that the best performance comes through an interaction between strategy and practice. it is important to note that many scholars accept the fact that best practices provide a basic ground level for performance (becker & huselid, 2006). they help explain why and how human resources can positively impact organizational performance, and help enhance startup performance in a variety of ways. one problem is that hpws research has a lack of theoretical development between hpws and firm performance—treating it as if it is a black box (becker & huselid, 2006). yet scholars also seem to have an understanding that firms that use hpws will have a better time recruiting high quality workers; selecting workers that actually fit both the organization and job; have more skills through training; be more likely to stay in the organization; have higher levels of commitment and satisfaction; and be more likely to be engaged with journal of small business strategy vol. 27 ● no. 2 ● 2017 6 organizational goals (pfeffer, 2007; gong, chang & cheung, 2010). in addition, the general combination of those practices will lead to an increased level of human capital in the organization (i.e. through training and selective hiring) and also the social capital of the organization (i.e. through proper incentives) will combine to produce intellectual capital. intellectual capital is the ability to develop new products and services that create greater value than competitors. we argue that hpws will have the same effect on startups as they do on large companies. many of the practices provide for advancement in ksas and allow for greater flexibility in employee decision making. further, these practices that are part of the system enhance aspects for the individual (i.e., compensation, internal promotion, and job enrichment) and in turn provide positive outcomes for startups. accordingly, all else equal, we believe that startups with hpws in place will experience better outcomes. these outcomes are similar to other outcomes in the hpws literature including: higher goal accomplishment, enhanced capabilities, and long-term survival. goal accomplishment goals are an extremely important consideration in strategic performance (teece, pisano & shuen, 1997). as goals determine the focus, effort and intensity that individuals will display and are not only important for firm performance (locke & latham, 1990). yet, goals are often not completed either due to worker disengagement or a lack of skills (pfeffer, 2007). hpws can lead to higher levels of goal completion for several reasons. firstly, improved selection should allow the organization to identify workers who have a higher fit to the organization’s culture and have a better fit to the job (becker & huselid, 2006). secondly, increased and improved communication would increase goal commitment, since workers would have a greater understanding of what needs to be done (pfeffer & veiga, 1999). thirdly, compensation would align worker behavior to firm goals, providing incentives for workers to maintain goal alignment (pfeffer & veiga, 1999). finally, the synergistic interplay of those practices should lead to higher goal accomplishment. thus we propose: hypothesis 1: new ventures with highperformance work systems in place will be more likely to meet their goals than startups without highperformance work systems. capabilities capabilities are those characteristics which allow the organization to comfort and adapt to changing outside environments (teece, et al, 1997). capabilities are unique resources that the organization could deploy that are difficult to imitate, substitute for, have value, and are rare (barney, 1991). capabilities consist of knowledge, routines, and competencies which allow the organization to produce greater value than the organization’s competitors. hpws create capabilities through superior selection of workers, increasing human capital (pfeffer & veiga, 1999). status reduction, increasing training, and incentives create superior social networks throughout the organization providing motives for workers and management to share important information, which is an important consideration in the development of capabilities (nahapiet & ghoshal, 1998). the improved social networks and information will lead to the development of social capital in the firm (nahapiet & ghoshal, 1998). the combined relationship between human capital and social capital will produce intellectual capital—meaning that the firm will now will journal of small business strategy vol. 27 ● no. 2 ● 2017 7 have higher degrees of flexibility in dealing with environmental factors—such as new products and innovative methods (wright, dunford & shell, 2001). thus, startups that use hpws should have a more fluid experience in creating capabilities. accordingly we propose: hypothesis 2: new ventures with highperformance work systems in place will grow capabilities better than startups without high-performance work systems. survival resources are necessary for the survival of the firm (pfeffer & salancik, 1978). they are also are necessary for growth (barney, 1991). through superior selection, development, compensation and sharing of information, firms that use hpws are more likely to develop internal resources that are difficult to replicate by outside organizations (barney, 1991). hpws will develop these resources through superior selection of workers; improved training and skill development; improved commitment and motivation; and through the synergistic effects of each of the best practices (becker & huselid, 2006).these internal resources will provide the basis for the startup to produce superior products and services, enabling the firm improved survival and growth potential (barney, 1991). these internal resources are able to promote organizational survival and create added growth. thus, based on the findings from the hpws literature, we propose the following propositions related to startups: hypothesis 3: new ventures with highperformance work systems in place will have a better chance of survival than startups without highperformance work systems. discussion based on previous research regarding major corporations we developed a series of propositions regarding the role of hpws for startup companies. the propositions state that startups that use hpws will be more likely to experience higher levels of growth, survival, development of capabilities, and goal achievement. the reason for this higher level of performance in startups is the same in larger more established firms. namely that superior human capital and social capital is the accelerator of the firm’s growth as better human capital leads to products that create more value for customers than competitors. as established firms will have a greater chance of meeting certain desirable organizational outcomes. such a proposal is significant because it suggests that hpws are universal, rather than one based on contingency. such a statement should be taken broadly rather than in depth. nevertheless, based on the development of the propositions in the paper, generally speaking, there are best practices. there are several important aspects to note rewarding the hpws. firstly, although scholars have a strong idea that there are universal practices, how those practices are implemented and the various contingencies that exist may make the implementation of hpws very different in startups than more established companies. for instance, incentives, such as stock options—designed to eliminate agency problems, may have greater salience and influence in startups than they would have in larger companies due to the fact that workers have more control in a startup. another potential difference would be in status reduction. it is difficult to have a great deal of status in a smaller firm with fewer employees than a larger one with multiple layers of bureaucracy and regulations. yet there could still be status in a smaller firm (i.e. journal of small business strategy vol. 27 ● no. 2 ● 2017 8 a family-owned firm) and how a startup handles status differences issues could vary when compared to an established firm. one particular thing to note is that many aspects of hpws—such as status reduction and sharing of information—speak to company culture. although culture can be changed, it is often difficult to do so. therefore, startups that use hpws may have an easier time implementing and continuing to use them when they mature than companies that did not use them during the initial phase. another important issue is that hpws requires trust between workers and management. it is especially difficult to create trust where none had existed previously. thus it is also possible that firms that use hpws early in their tenure should have an easier time deploying them in the future as the firm goes from a startup to an established company. for that reason alone it would make sense to maintain a set of best practices from the commencement of the firm. it would be interesting to note how the hpws change as the size of the company changes. one of the primary problems within hpws research is that scholars have often argued there is a gap between hpws and firm performance (kaufman, 2010). to the point that some scholars have suggested that firms embrace hpws for institutional factors—namely that having hpws is a sign of legitimacy rather than higher performance (wright and mcmahan, 1992). hence it may be hpws leads to higher performance in firms only when they are young rather than when they are older. our limitation is that we developed hypotheses for best practices but did not examine potential moderators. nor did we discuss a precise mechanism for superior research. future research—both empirical and theoretical—is needed to develop the contingencies that exist in the formation and deployment of hpws in startups. it is clear that while there are best practices, how they are implemented and their exact nature remains an unknown (becker & huselid, 2006) in the general literature of hpws, as well as in the literature on startups. there are several reasons for this. firstly, what configurations do hpws take in startups? for example, in terms of selective screening—is this a formal process or an informal process? does the startup have an inhouse program or do they outsource? would there be a potential difference between who takes different types of implementation? these would be interesting theoretical questions that warrant further development and analysis. secondly, does the type of strategy selected by the company play a role in the development of hpws? for example, firms that pursue a cost leadership strategy probably would not spend a tremendous amount of time on selection of certain employees (wright & mcmahon, 1992). how would a generic strategy influence the selection in startups that pursue in terms of hpws configuration? such work is needed for hpws in established firms and will certainly be needed for startups (kaufman, 2010). a final potential area of research is to examine if there are industry differences in the use of hpws and the various outcomes predicted. there are three potential findings here. one potential finding is that hpws may not make a difference in certain industries. for instance, companies in technology or bio-tech may not invest in hpws since they would be selling to company soon. however, another argument could be made that they may need to invest in hpws to produce new technology (nahapiet & ghoshal, 1998). research could produce answers to that question. journal of small business strategy vol. 27 ● no. 2 ● 2017 9 the major practical implication gleaned for this paper is the need for startups to consider hr as a strategic component. generally speaking, a great many companies do not look to hr for value creation within the organization; rather they view hr as a means of controlling costs or maintaining legal requirement. the biggest take away from the paper is that firms should, from the start of inception, use hpws as a means of growing the firm. despite our limitations such as a lack of empirical evidence, we believe our review of common human resource practices that make up hpws helps to answer our questions and demonstrates the following: human 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(2001). human resources and the resource based view of the firm. journal of management, 27(6), 701-721. wright, p. m., & mcmahan, g. c. (1992). theoretical perspectives for strategic human resource management. journal of management, 18(2), 295-320. wright, p.m., gardner, t.m., moynihan, l.m. (2003). the impact of hr practices on the performance of business units. human resource management journal, 13(3), 21-36. josh bendickson earned his ph.d. in strategic management from louisiana state university. josh’s research interests include strategic human capital, small business/ entrepreneurship, and international strategy and he is a member of multiple professional organizations including the academy of management, southern management association, and the united states association for small business and entrepreneurship, among others. josh is an assistant professor of management at the university of louisiana at lafayette. jeffrey muldoon is an assistant professor of management at emporia state university. he received his doctorate from the louisiana state university. he researches organizational behavior, leadership, management history and entrepreneurship. his work has appeared in the journal of management history, leadership and organizational journal of small business strategy vol. 27 ● no. 2 ● 2017 12 journal and career development international. dr. eric liguori is an entrepreneurial advocate, researcher, and educator on faculty in the university of tampa’s sykes college of business. dr. liguori researches primarily on the topics of entrepreneurial self-efficacy, entrepreneurship education, and entrepreneurial ecosystems. chelsea midgett received her undergraduate degree from nc state. she is currently a m.s. candidate in sustainable tourism and mba student at east carolina university where she is also a graduate teaching/research assistant. chelsea’s research interests include small businesses sustainability, entrepreneurship, and organizational culture. chelsea is also a member of the small business institute and the international ecotourism society. stra tegy industry effects and strategic convergence: a study of the strategies of independent pharmacists michael j. rubach university of central arkansas mrubachimail. uca.edu joseph d. cangelosi university of central arkansas joecmail. uca. edu don b. bradley, hi university of central arkansas donb@mail, uca,edu jeffrey e. mcgee university of texas at arlington jmcgeeuta.edu abstract the pharmacy industry is experiencing significant change. with the increasing presence of regional discounters, ihe appearance of mail service and internet pharmacies, the continuing ascendancy of managed care (including hmos and pposj, third party reimbursement plans, anil pharmacy benefit managers (pbmsj, the strategic options for independent pharmacies are dwindling. this exploratory study examines the relationships among geneiqc business level strategies of independent pharmacies, industry effects —in terms of consequences of third party reimbursement plans —and performance outcomes. it seems that the impact of managed care reimbursements more than offsets tiie various strategic efforts by pharmacies. the evidence indicates that different generic strategy approaches are not producing significant differences in performance. the findings suggest that industry effects may be creating a situation of ctraiegic convergence. the practical implications for theindependent pharmacists and future research are addressed. introduction the changing face of the pharmacy industry independent pharmacies, like many other businesses, are faced with a rapidly changing competitive environment, which could be classified as very turbulent (harrison & ortmeier, 1997). the increasing presence of regional discounters, the availability of mail service and internet pharmacies, the continued ascendancy of managed care (including hmos and ppos), lg journal of small business strategy vol. 13, lto. l spring/summer 2002 third party reimbursement plans, and pharmacy benefit managers (pbms) are reshaping the pharmacy industry. these environmental changes are placing intense demands on independent pharmacies, those privately held, usually owner-operated, pharmacies that are not affiliated with any chain (beliveau & bernstein, 1997). industry context continues to be a major determinant of a firm's success and survival (sandberg &. hofer, 1987). using a deterministic perspective, a pharmacy's strategy and performance may be primarily determined by industry effects, those attributes common to an industry (stratton &. martens, 1994). in particular, third party reimbursement plans are an element which has had long-term detrimental eitects on pharmacy profits (frederick, 2001b; carroll, 1991). while independent pharmacists have seen increases in gross sales revenues and in the numbers of prescriptions filled (west, 2001), third party plans are depressing the profitability of independent pharmacies. this study examines the relationships of the generic business strategies of independent pharmacies, industry effects, in terms of consequences of third party reimbursement plans, and performance outcomes. performance is measured in terms of self-reported financial returns and a composite measure of overall success. the evidence suggests that diiterent generic strategies are not producing significant differences in perceived performance. not surprising is the finding that third party reimbursement plans significantly and negatively affect independent pharmacies'erceived performances. the research supports the argument that industry eitects may be creating a situation of strategic convergence where pharmacies are copying the strategies of their competitors in order to succeed. the implications for both practitioners and future research are discussed. strategic options under upper-echelons theory, managers matter a great deal, depending upon how much discretion or latitude of action they possess (cannella, 2001; finkelstein & hambrick, 1996: hambrick & mason, 1984). independent pharmacists who are usually owner/operators should possess considerable discretion in setting the strategy and course for their firms. however, discretion exists only in the absence of constraint; it emanates from the business's environment, the organization itself, and from the executives. for an independent pharmacy, the industry environment is a likely constraint upon the choices available to the owner/operator in craiting strategies. where managers are constrained and their choices restricted, the economic differences among them may not be so great (cannella). generic strategic options while recent research, particularly the resource based view, has concentrated on firm-level attributes, generic business strategies remain useful in characterizing strategic positions of firms at the simplest and broadest level (porter, 1996). the generic strategies framework continues to highlight the inherent contradictions of different strategies and the tradeoffs which must be made by managers in implementing their strategic choices (hodgetts, 1999; porter). the generic business strategies, as identified by porter (1980), include overall low cost leadership and differentiation (see figure i). a low cost leadership strategy comprises an internal orientation on product efficiencies and cost control. cost savings can be achieved by minimizing expenditures on innovation and advertising and offering no-frills rather than concentrating on image and brand name products. differentiation strategies endeavor to offer customers unique products or services. miller (1988) identified two distinct types of 19 journal ofsmall business strategy vob l3, no. 7 spring/summer 2002 differentiation: marketing and innovation. extensive advertising and image management and intensive marketing, such as offering attractive features, convenience, and service guarantees characterize marketing differentiation. innovative differentiators are characterized by creativity in product offerings, application of new technologies or products, and current innovations (dess, lumpkin & covin, 1997). in the past, smaller firms, with limited resources, skills, and capabilities, were advised to adopt narrower differentiation strategies, or niche strategies, which focus on specialized products or services for targeted markets (broom & longnecker, 1979). figure 1 generic competitive strategies type of compettive advantage low cost differentiation overall broad low-cost differentiation of buyers leadership -—strategy hybrid a narrow ralegies buyer segment 0 focused focused (or market niche) low-cost differentiation strategy strategy historically, independent pharmacists have adopted differentiation strategies to gain competitive advantage. pharmaceutical care generally incorporates three components of cognitive services: dispensing services, dispensing-related services, and non-dispensing valueadded services (christensen, fassett & andrews, 1993). differentiation was previously gained by offering non-dispensing value-added services (bouldin, bentley, huffman & garner, 1996). most pharmacists now offer a wide variety of non-dispensing value-added services, which have blurred the distinctiveness and uniqueness amongst pharmacies (frederick, 2001a, 2001b). the wide ranges of services which pharmacists can provide are changing their roles and providing opportunities for competitive advantage and commensurate improved performance. pressure is placed upon pharmacists to involve consumers in their pharmaceutical care (holdford & watrous, 1997). pressure to inform consumers of price and cost differences among products originated in part as a result of third party reimbursement plans'ttempts to control rising costs (szeinbach, bames, summers & banahan, 1995). further, for the individual consumer, co-payment policies of third party plans have removed price as a competitive weapon. as the expansion of third party reimbursements creates greater competition in the pharmacy industry (genuardi, stiller, & trapnell, 1996), pharmacists in order to be successful in this new environment must position their businesses to meet or satisfy most or all of the needs of their customers. 20 journal ofsmall business siraregy vol. 13, no. l spring/summer 2002 industry constraints industrial organization economics (i/o economics) posits that strategy and performance are determined primarily by membership in an industry. industry effects pertain to the attributes customary to an industry. the dominance of industry effects within an industry demonstrates the similarities by which companies in that industry respond to industry conditions and their imitation of successful strategies (mauri & michaels, 1998). regardless of the school of i/o economics (bain/mason, schumpeterian, or chicago), the i/o economics literature generally assumes that firms within an industry will be homogeneous in terms of their patterns of competitive behavior (mauri & michaels). the rapid growth of third party prescription reimbursement plans is changing the dynamics of the pharmacy industry. third party reimbursement programs play an increasing role in the prescription drug market, now accounting for over 80% of the prescriptions dispensed in the entire retail setting (frederick, 200lb). as a result of cost containment efforts and the preeminence of third party plans, independent pharmacies have experienced decreases in dispensing fees and corresponding decreases in gross profit margins. third parties (managed care groups and pbms) are offering pharmacies contracts with smaller dispensing fees, and some have even closed their networks, effectively excluding some pharmacies. consequently, independent pharmacies can either accept decreasing levels of reimbursement for services or be excluded from some plans. although third party reimbursement programs appear to have a detrimental effect on profit margins, retail pharmacists continue to provide these prescription services for fear of losing business to competitors (szeinbach et al. 1990). a previous study by carroll (1991)predicted that third party reimbursement programs would have a detrimental effect on the profits of independent pharmacies. anecdotal evidence from discussions with independent pharmacists indicates that performance is negatively affected by third party reimbursements. third party reimbursement plans have effectively eliminated price as a competitive weapon. the consumer has become price indifferent because the out of pocket cost of a prescription is offen the same regardless of the pharmacy. for example, under a typical employer drug plan, the consumer pays $30.00 for a name-brand prescription, $20 for a generic. regardless of which pharmacy she chooses, she will be responsible for only the co-payment. what the pharmacist receives is determined by the contract between the pharmacist and the third party payor. this arrangement removes price as a strategic option, leaving only diiterentiation of services to the pharmacist's discretion. where managers are constrained and their choices restricted, the economic differences among them may not be so great (cannella, 2001). we hypothesize that faced with an external environment which restricts pharmacists'pportunities by limiting their strategic choices (szeinbach, et al., 1995), and with the limitations imposed by their size, the performances among independent pharmacies will not be appreciably different. methodology survey procedures the data concerning the operations of the independent pharmacies was collected by a questionnaire. the questionnaire was adapted from earlier works on the strategies, marketing decisions, and competitive methods of small independent retailers (mcgee & peterson, 2000; conant, smart, & solano-mendez, 1993). the questionnaire was pre-tested by three independent pharmacists (not included in the final sample) to determine if there were 21 journal ofsmall business srrareg3 val. 73, na. l spring/summer 2002 problems interpreting any of the questions. no problems were detected by the pre-test participants who had no difficulty answering the questions or rating the performance of their pharmacies. the comments of the pre-test participants were incorporated into the questionnaire. the sample of independent pharmacies was compiled from a list of all licensed pharmacies supplied by a southwestern state's pharmacy board. an independent pharmacy is defined as privately held, usually owner-operated, and not affiliated with any chain (beliveau & bernstein, 1997). pharmacies identified with national or regional chains (108) were deleted, and the survey instrument was mailed to a final sample of 528 pharmacies. the questionnaire, along with a stamped return envelope, was addressed to the licensed pharmacist at each location. reminder postcards were sent approximately three weeks later. a total of 88 responses were returned, for a response rate of 16.67'/o.'he responses indicated that qualified informants answered 97.4'/n of the survey instruments: 81.7'/a were answered by the owners of the establishments, and 15.7'/o by the pharmacist in charge of the pharmacy. the respondents, the owners or pharmacists in charge, should be aware of the operations and performances of the pharmacies. the responses of 13 pharmacies provided incomplete performance information and were deleted from the final analysis. non-response bias occurs when the opinions and perceptions of the survey respondents do not accurately represent the overall sample to which the survey was sent. one test for nonresponse bias is to compare the answers of early versus late respondents to the survey. the idea is that late respondents are more likely to answer the questionnaire like non-respondents than are early respondents (armstrong & overton, 1977). a multivariate t test was computed using the key study variables in order to examine whether significant differences existed between early and late respondents. the results indicated that early respondents do not display statistically significant differences from late respondents (p&.05)(miles &. arnold, 1991). definition of variables one section of the questionnaire asked what generic business strategies the pharmacies emphasized. previous research (dess, et al., 1997; miller, 1988) has identified three distinct generic business strategies (cost leadership, innovative differentiation and marketing differentiation). the measure of the generic business strategies was conducted using a scale similar to the scale developed by miller (1988) in studies of manufacturing firms. the scale was developed from questions regarding the importance of specific business strategic tactics and included two cost leadership items, two innovative differentiation items and three marketing differentiation items. respondents were asked to indicate the degree to which they emphasized certain strategic tactics on a likert-type scale from i = "very unimportant" to 7 = "very important." factor analysis was used to identify the particular strategies of the pharmacists. the seven strategy items were factor analyzed using a principal components analysis with varimax rotation. all factor loadings were greater than .50 which indicates that they are very significant (hair, anderson, & tatham, 1987). the performance of the independent pharmacies is operationalized using subjective self-report measures. phaimacists were asked to compare their pharmacies'erformances against their competitors along four dimensions: gross profit [gross profit], net income after taxes [net income), total sales growth over the past 3 years [sales growth], and overall pharmacy performance/success [overall success]. previous research has shown that subjective measures of performance are consistent with objective measures, thus enhancing the reliability and validity of these measures (dess, et al., 1997; venkatraman & ramanujam, 1987; dess &. robinson, 1984). the questionnaire sought objective measures of performance, 22 journal ofsmall business strategy vol. /3, no. i spring/summer 2002 but fewer than half of the respondents provided any of the requested information. financial measures of performance may be inappropriate for small businesses and family-owned businesses, because the roles and objectives of small business owners make the attribution of success for small businesses complex, dynamic, and problematic (jennings & beaver, 1997). small business success may, indeed, be the sustained satisfaction of the principal stakeholders'spirations (jennings & beaver). therefore, success in the perception of the owner/operator is an appropriate measure, as well as the use of a composite score. previous research has suggested that traditional measures of performance may not be appropriate for pharmacies, and that a "benchmarking" performance measure should be used as another nonfinancial performance measure (stratton & martens, 1994). comparing a business'erformance against the performances of its competitors is the basis for an additional measure. a comparative measure was adduced by adding together the responses of the four dimensions described previously. a scale which sums the four performance perceptions supplied an appropriate benchmark measure [sustainability], cronbach's alpha = .8225, which is an acceptable measure of internal consistency. the industry context is dominated by third party reimbursement plans and this was used as a proxy for the industry effects in the regression equations. third party reimbursements are the percentage of prescriptions paid for by third party managed care payors [third party %]. size has also been identified as a factor in pharmacy operations and performance (beliveau & bernstein, 1997), and was controlled for in this study. size was operationalized by using the weekly average number of prescriptions filled [size]. a description of the variables and their sources are set forth in table i. table i —variables name source independent variables marketing differentiation factor analysis innovation differentiation factor analysis l.ow cost leadership factor analysis control variables third party reimbursements questionnaire answer: percentage of prescriptions paid by third-parties size questionnaire answer: number of prescriptions filled weekly dependent variables gross profit self-report measure likert-type answer net income atter taxes self-report measure likert-type answer total sales growth atter 3 years self-report measure likert-type answer overall pharmacy performance/success self-report measure likert-type answer scale measure created by combining sustainability responses to 4 prior performance measures 23 journal ofsinai( btrsiness strulcgy vol. /3, no. i spring/summer 2002 methods of analysis the research consisted of two phases. first, the responses concerning generic business strategies were factor analyzed. in the next phase, regression analyses were used to test the hypotheses concerning the performance implications of the business strategies and the industry effects. the basic form of the regression equation model is: y=a+bx+cz,+dz, where y = the performance variable [gross profits, net income, sales growth, overall success, and sustainability] +a = intercept + x = business strategy + zi = third party reimbursement [third party %] + zs = size [size] results table 2 sets forth the descriptive statistics and the correlation matrix for the pharmacies that responded to the questionnaire. included in the correlation matrix are the factor scores generated by spss for the three generic business strategies. the average pharmacy in the study has; 1.77 pharmacists; 1.50 technicians; 5.83 employees; is 16.61 years old; and has a total square footage of 2316 of which 648 square feet (39%) is devoted to the prescription department. the average pharmacy fills 698 prescriptions weekly. third party plans constitute a large percentage of business done by independent pharmacies (57.10%),a finding which corresponds to national trends at the time of the survey (fleming, 1998). average annual sales are $ 1.145 million. table 2 —descriptive statistics and correlations hlean s.o. cross nei saler overall success/ profit income crowrb performance abilio gross profit 4.26 1.39 1.000 net income (at) 4.00 1.42 .794"'.000 totnl sales growlh over 5 00 147 357rr ~ 439v ~ ~ i 000 past 3 years overnll perf./success 5.03 1.40 .462vv .523vv ~ .745 ~ v ~ 1.000 survivability 18.25 4.63 .789"'847"'769vvv .826v'v 1.000 innovative strategy '.061 .137 .005 .014 .028 low cost strategy '.075 .072 -.052 .044 .000 differentiation strategy'001 -.111 .222 .043 .064 690.3 448.6 .041 .162 .107 .123 .133 prescriptions filled/week) third pany .56 .14 -.346vv'.369vvv -.200v -.181 -.319r mreimbursements (%) 5('ol'es golicl"iteil i'rom lector aiudysis —signilic uit oo .ol '* —sist titic utt (p .05 ' siguificani 4b .10 24 journal ofsmall business strategy vol 13, iuo. i springlsummer 2002 business strategy results as expected, the factor analysis yielded three patterns of strategic behavior: marketing differentiation, innovative differentiation and cost leadership, each with eigenvalues greater than one (see table 3). factor one most closely aligns with a marketing differentiation strategy. historically, independent pharmacists have attempted to create a competitive advantage through the services they offer. factor one identifies pharmacies which attempt to best their competitors by extensive use of advertising and lowering their prices. the second factor closely aligns with an innovation differentiation strategy, where the pharmacists'trategy is to offer innovative products and services. factor three encompasses strategies for cutting costs, coexisting with competitors, and not spending excessively to differentiate their businesses. this strategy does not stress innovation or trying to compete with methods identified with factors one and two. all of the seven items loaded (factor loadings & .50). table 3 factor analysis of business strategies of independent pharmacists (n=85) factor loadings business strategies marketing differentiation try to beat competitors .737 cut prices to remain competitive .743 extensively use advertising .708 innovation differentiation favor growth and innovation .860 use service innovations .839 low cost leadership coexist with competitors .862 cut costs .757 eigenvalues 1.664 1.492 1.474 cumulative percent of variance explained 23.769 45.089 66.145 cronbach's alpha '9.44 65.33 57.71 kaiser-mayer-olkin measure of sampling adequacy = .636 the regression analysis revealed that three of the models were significant: gross profit, net income, and sustainability. however, none of the strategies were found to contribute to the explanation of pharmacy performance. interactions between the identified generic business strategies and third party reimbursements (generic strategy x third party %) were also tested, and none of the interactions were significant predictors in any of the five regression models. 3 in addition, the strategies did not significantly correlate with any of the performance 25 joiirnal vf small business strategy vol. /3, no. l spring/summer 2002 measures. these findings support the study's hypothesis that performance differences among independent pharmacies are not significantly different. as expected, in explaining pharmacy performance, third party reimbursement programs were the only significant predictor. the percentage of third party reimbursements is negatively associated with gross profits, net income, and sustainability, the benchmark performance measure (p &= .ol). further, the third party reimbursement coefficient was statistically significant (p &= .05) and negative in all five regression equations. these findings are consistent with the prediction of prior research (carroll, 199i). these results also support the anecdotal claims of the pharmacists in the pre-test who bemoaned the negative influence of third party arrangements on their operations, strategies, and profitability. the regression results were similar to the output for the correlation analysis; that the only significant relationships were between third party reimbursements and the dependent measures of performance. discussion and implications in exploring the performance of independent pharmacies, this research finds that despite differences in the generic business strategies which were followed, the differences in their performances were not statistically significant. in the past, pharmacies relied upon differentiation strategies to gain competitive advantage (bouldin, et al., l 996). however, none of the differentiation strategies used by the responding pharmacies was effective in creating competitive advantage, i.e., superiority in performance outcomes. the challenge for the independent pharmacist in a dynamic and turbulent environment is to operate more efficiently, while offering differentiated or unique services in order to compete against the powerful chains and drug discounters. prior research has shown that combination or hybrid strategies of low cost and differentiation may be successful for retailers (rubach & mcgee, 2002). the factor analysis suggests that pharmacies may be pursuing combination strategies. the findings also suggest a convergence or homogeneity of strategic behaviors: regardless of the strategy, there are no significant differences in performance outcomes. industry elfects, not firm-level strategies, determine a pharmacy's performance. industrial organizational economics and the resource-based view of the flrm are complementary, not contradictory, theories (mauri & michaels, 1998). while other theories, such as the resource-based view of the firm, may offer explanations for the performance differences among pharmacies, the examination of industry effects is still relevant. industry effects are a complement to other theories and aid in explaining why some firms succeed and others fail. the models of competitive advantage that measure particular resources, capabilities, routines, and processes may impact the explanation of the differences in pharmacy performance. however, industry effects cannot be ignored. it is clear that independent pharmacies are adversely affected by third party reimbursements. in order to prosper, independent pharmacists will have to change their operations and strategies, increase their skills and knowledge, and better serve their customers. given the changing face of the pharmacy industry, the operations of independent pharmacies will likely be quite different in the near term. the pharmacy business is a needs-based industry, similar to needs-based industries such as hardware stores and automobile parts stores. all of these industries are facing pressures from their changing industry environments. in response to these changes, we do not wish to suggest that the owner/operator is without strategic recourse. the challenge faced, however, is to operate more efficiently, while offering differentiated or unique services in order to compete against the powerful chains and category discounters service will continue to be the keystone which can make pharmacies unique. offering personalized services can differentiate 26 journal ofsmall business strategy vol. 13, no. l spring/summer 2002 the independent pharmacist from the chain store. benchmarking services and performance not only against other pharmacists, but also against other needs-based industries may be a necessity. there are alternatives for pharmacists: creating strategic alliances with other independents to gain buyer power (e.g., buying cooperatives), and with care providers (e.g., nursing homes); reducing staffing costs by utilizing pharmacy technicians, and providing, and charging for, drug therapy and counseling services, especially disease management services (frederick, 2001a, 2001b). this study is not without limitations. the method used to measure performance was financial in its scope. perhaps survival by an independent pharmacy is a better measure. an average of 1,884 independent pharmacies closed yearly during the period of 1990 to 1993 (frederick, 2001a), but it appears the precipitous decline in independent pharmacies nationwide had finally subsided by the close of the millennium. there were increases in the number of independent pharmacies during the year 2000 (frederick, 2000). future research should examine this change and its causes. the low response rate and consequent small sample could conceivably limit the interpretability of findings because of the increased probability of not detecting a relationship between variables where one actually exists. although we provided evidence that nonresponse bias was not a major problem in the study, we cannot be assured that the nonrespondents did not differ in important ways from the respondents. although it is unlikely that sample selection bias drove these results, they should be replicated for more confident generalization. further, the study is limited in its scope and analyses. it studies only one industry, and industry dynamics that may be peculiar to only the health care industry. the methodology used financial measures. there are disadvantages in using self-report subjective measures, which have been addressed elsewhere in the literature. the study also is crosssectional, as opposed to a longitudinal study, which may be better suited to studying the eitects of the issue of pharmacy performance, especially if survivability is an appropriate measure. lastly, this study is exploratory in nature. there are additional issues that may affect pharmacy performance, including the study and analysis of more finely grained constructs such as marketing strategies, competitive methods, distinctive competencies, and the perceptions of customers of these services. conclusion as the health care industry becomes more bureaucratized through managed care, third party insurance contracts, and pharmacy benefit managers, the demands on pharmacists will increase. there is growing pressure on pharmacists to be customer-focused and to keep better-educated consumers informed of all alternatives. third party reimbursement plans, in turn, are foreclosing price as a strategic alternative. it is unlikely that the industry will back away from cost-containment, and in fact, independent pharmacists expect new measures to further contain costs (fleming, 1998). within this mature industry, pharmacists are pressured to provide unique customer-focused services (beliveau, bernstein, & o'eill, 1994). this will likely entail a reevaluation and modification of the roles of pharmacists toward more involvement in patient care, education, and counseling (reda, 1997). with the changing roles will come changes in operations and strategies. references agle, b. r., mitchell, r. k. & sonnenfeld, j. a. 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(1990). variables affecting pharmacists'illingness to accept third-party prescription contracts: a conjoint analysis. journal of health care marketing, /0 (3), 45-50. szeinbach, s. l., bames, j. h., summers, k. h. & banahan, b. f., ill. (1995). the changing retail environment: its influence on professionalism in chain and independently owned pharmacies. journal ofapplied business research, i i (i), 5-14. venkatraman, n. & ramanujam, v. (1987). measurement of business economic performance: an examination of method convergence. journal of management, /3, 109-122. west, d. (2001). independents back on track in number and sales, ncpa says. drug store news, 23 (9), 15-16. 29 journal ofsmall birsiness strategv vol. i3, no. i spring/summer 2002 endnotes while the response rate is not optimal, it does represent 16.67% of the total population of independent pharmacies located in one state. the questionnaire sought responses from the owner/operators of the pharmacies. this research is similar to other research concerning top managers and company executives where response rates are notoriously low. responses rates of less than 20% are acceptable in this type of research; a 18% response rate (milliken, martins, & morgan, 1998), a 13.6 % response rate (agle, mitchell, & sonnenfeld, 1999); and even a 6% response rate (simons, pelled, &. smith, 1999)were acceptable. further, where lengthy questionnaires are used, such as in this study, response rates can be typically quite low. studies with response rates of 22% (mirani & lederer, 1998), 11.2% (carter, 2000), and 17 % (martin, beaumont & staines, 1998) have been acceptable under these circumstances. to test the reliability of the strategy constructs, coefficient alphas were calculated for the items loading on each factor. they were as follows: innovative differentiation strategy (.6533); marketing differentiation strategy (.5944); and low cost leadership strategy (.5771). these reliability measures are marginally below desired levels (nunnally 1978). the coexistent environmental pressures to lower costs and be more efficient, and simultaneously be unique may be the cause of these less than optimal reliabilities. local merchants often find it difficult to articulate their strategies and in dynamic environments they have been found to adopt hybrid or combination strategies (rubach & mcgee, 2002). while the reliabilities are less than optimal, they are useful in measuring a pharmacist's generic business strategy in exploratory research of this nature. 'n order to save space and because the findings are insignificant, they are not reported. the results of this analysis are available upon request of the lead author. michael j. rubaclt is an assistant professor of management at the university of central arkansas with a ph. d. in management (business policy and strategv) from the university of nebraska at lincoln, j.d. from creighton university, and mba. pom the university of nebraska at omaha. he teaches courses in strategic management international business and sniall business management. his current research interests include small business management and corporate governance. his work has appeared in the journal of world business, journal of business ethics, journal of applied business research, international journal of organisational analysis, and journal of business d'c entrepreneurship. joe cangelosi is an associate professor of marketing and department chair at the university of central arkansas. he teaches marketing research. his articles have appearedinjournals such as the journal of health care marketing, journal of hospital marketing, health marketing quarterly, health care supervisor, training and development journal, central business review, southwestern business administration journal, delta business review, international journal of business disciplines, journal of non-profit and public sector marketing, journal of accounting, ethics and pubh'c policy, journal of product and brand management, academy of educational leadership journal, and journal of small business stt ategy. 30 journal of small business strategy vol. 13, no. i spring/summer 2002 don bradley is a professor of marketing and executive director of the small business advancement national center at the university of central arkansas. he teaches courses in entrepreneurship, retailing, fashion merchandising, and small business management. his articles have appeared in journals such as: journal of small business strategy, journal of business and entrepreneurship, journal of pharmaceutical marketing and management, journal for small business and enterprise development (uk), american business perspectives, industrial management, arkansas business small business journal, the journal for quality and participation, nebraska business development center report, journal of applied business research, and the business advisors journal (uk). he is the chief editor ofthe sbanc weekly small business newsletter. jeffrey e. mcgee is the chair of the management department of the university of texas at arlington. he teaches courses in small business management and entrepreneurship. his research interests include new business development and the strategic management of small businesses. dr. mcgee holds a phd. in entrepreneurshippom the university of georgia. his work has been published in the management science, journal of business venturing, strategic management journal, entrepreneurship theory and practice, journal of small business management, journal of applied business research, journal of small business strategy, and journal of business & entrepreneurship. 31 strategy table of contents page title/author(s) i a world wide web primer for small business albert l. lederer donna j. maupin 13 state of information technology in small retail and service businesses: an exploratory study alev m. efendioglu 25 resources in small firms: an exploratory study patricia g. greene candida g. brush terrence e. brown 41 the ethical orientation of u.s. small business decision makers: a preliminary study dianne h. b. welsh nancy j. birch 53 a cross-sectional study of business service profitability some implications for strategy timothy l. wilson 67 economic value added and small businesses charles p. baril s. brooks marshall robert f. sartelle 79 impact of recent tax legislatioa on small businesses howard r. toole james e. williamson gerald e. whittenburg table of contents 1 green practice motivators and performance in smes: a qualitative comparative analysis lilia rekik, universite du quebec francois bergeron, universite du quebec 21 international opportunity recognition: an overview moritz angelsberger, university of liechtenstein sascha kraus, univerity of liechtenstein alicia mas-tur, university of valencia norat roig-tierno, esic business and marketing school 41 knowledge management and organizational culture in a software development enterprise vicente prado-gascó, university of valencia ismael quintanilla pardo, university of valencia carlos pérez-campos, catholic university of valencia 55 leadership and governance decisions in family business performance: an application of fuzzy sets logic ana cristina gonzalez, l., universidad icesi, colombia yeny e. rodriguez, universidad icesi, colombia anibal sossa, universidad icesi, colombia stra tegf publication staff editor dr. stephen w. osborne indiana university of pennsylvania indiana, pennsylvania associate editors dr. prashanth b. nagendra indiana university of pennsylvania dr. joette m. wisnieski indiana university of pennsylvania editorial assistaat julie dobish indiana university of pennsylvania editorial review board dr. ramachandra asundi university of peurto rico dr. david brennan university of st. thomas (st. paul) dr. radha chaganti rider university ms. sally a. charles csi cad systems, inc. dr. ronald g. cook rider university dr. richard t. dailey university of montana dr. dale dickson mesa state college dr. terry gaston southern oregon university dr. frederick d. greene manhattan college dr. masoud hemmasi illinois state university dr. lynn hottman university of northern colorado dr. william t. jackson stephen f. austin state university dr. lawrence klatt florida atlantic university dr. kenneth j. lacho university of new orleans dr. thomas j. liesz eastern oregon university dr. stephen lucas university of north carolina-greensboro dr. steven j. maranville university of st. thomas (houston) dr. thaddeus mcewen north 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(717) 871-5555 school of business administration fax: (717) 871-2464 one camino santa maria e-maik dfrazergmarauder,minersv,edu san antonio, tx 78228 oitice: (210) 431-2039 vice-president-programs fax (210) 431-2115 joseph j. geiger, ph.d. e-mail:ecole(a)alvin.stmarytx.edu university of idaho college of business and fconomics vice president-brorberi ng ond membership box 3178 ronald g. cook, ph.d. moscow, id 83844-3178 rider university oalce: (208) 885-7154 college of busine: s fnx; (208) 885-8939 2083 lawrenceviile road e-mail joegquuidaho.edu lawrencevine, nl 08648 oalce: (609) 895-5522 vice-preridenr-publications fax. (609) 896.5304 gary l aitchinson, ph.d. e-maik cookrgrider edu lowe state university 300 carver hall secretory-treosurer ames, ia 50011 roosevelt d. butler, ph.d. office (515)294-8107 the college of new jersey fax. (515) 294.2534 school of business e-maik gaitchisgiastnte edu box 7718 ewing, nl 08628-0718 vice presideni-progrom ftuolrryassurance ottice: (609) 771-2868 ronald s. rubln, ph.d. fax'609) 637-5129 university of centrnl florida e-maik rbutlergtcnj edu 4000 cenual florida boulevard orlando, fl 32816-1400 immediate port president oaice. (407) 823.2682 charles h. matthews, ph.d. fax: (407) 823.3891 university of cincinnati e-maik rubinqupegasus.cc.ucf edu college of business administration department of management 504 lindner hall cincinnati, oh 45221-0165 ottice: (513) 556-7123 fax: (513) 556-4891 e-maib charles.manhewsguc.edu what can you contribute to build on the success of small business and entrepreneurship? announcement and call for papers: national small business consulting conference february 10-13, 1999 san francisco, ca will play host to the 23" annual sbida conference, and help us emphasize becoming a true "gateway" to the workt we'e picked an excellent city to showcase our theme, "globalizing the small business insutute™program," as san fransisco's international focus is evident in almost everything in the city. we will celebrate the success of our individual programs, the success we offer small business clients, and most importantly, the success of our students as they complete our program and move into their careers. we will emphasize how these successes can be transferred to thc global arena conference tracks include accounung and finance; entrepreneurship and sbp'ducation; franchising and home-based issues; global issues; marketing issues; professional development; small business strategy; management issues; and information systems/internet issues. track chairs are listed in momentum and on our world wide web site (www.cbauc.edu/cbainfo/sbida). competitive papers, symposia. panels, and workshop proposals are now being solidted on topics related to the conference tracks. submission date for papers and proposals is september 15, 1998. 'ihe best papers in each of four tracks (empirical, theoredcal, applied. small business case) will be reviewed as candidates for the distinguished paper award and for possible publication in the journal of small business strategy. i'or program information, contact: joseph j. geiger, sbida pmgram chair university of idaho college of business and economics box 3178 moscow, id 83844-3178 voice: (208) 885-7154 fax: (208) 885-8939 e-mail: joegceuidaho.edu small business institute directors'ssociation strategy publication staff editor dr. joe singer university of missouri kansas city, missouri associate editor gary r. hazeltine professional support services olathe, kansas editoria i assistant tom barlow university of missouri kansas city, missouri editorial advisory board dr. chi anyansi-archibong north carolina a&t state university dr. sam j. bruno university of houston-clear lake dr. james j. carroll georgian court college ms. sally a. charles charles consulting dr. ron cook rider university dr. richard t. dailey university of montana dr. dale dickson mesa state college dr. gwen fontenot marketing solutions dr. fred l. fry bradley university dr. joseph j. geiger university of idaho dr. frederick d. greene manhattan college dr. masoud hemmasi illinois state university dr. lynn hoffman university of northern colorado dr. billlackson stephen f. austin state university dr. lawrence klatt florida atlantic university dr. kenneth j. lacho university of new orleans dr. thomas j. liesz western state college dr. stephen lucas university of nonh carolina-greensboro dr. inge nickerson barry university dr. neal r. pruchansky keene state college dr. peter rainsford cornell university dr. herbert sherman southamptoncollegeof long island univ. dr. matthew c. sonfield hofstra university dr. richard j. stapleton georgia southern university dr. harriet stephenson seattle university dr. dil lard tinsley stephen f. austin state university dr. howard e. van auken lowe state university dr. george vozikis the university of tulsa dr. john wallace marshall universtty a joint publication of the small business institute directors'ssociation and the henry w. bloch school of business and public administration. send subscription requests to roosevelt d. butler, ph.d., sbida secretary-treasurer, the college of new jersey, school of business, box 4700 hillwood lakes, trenton, nj 08650-4700. annual subscriptions may be ordered at $20 each (u.s. dollars only). international subscriptions add $ 5 annually for postage and handling. back issues may be ordered at $ 12 each. copyright 1997 small business institute directors'ssociation issn 1081-8510 wouldn't you and sbida be a perfect professional fit? yes ...ifyou have a strong interest in the growth and prosperity of small, entrepreneurial, and family-owned businesses. yes ...ifyou believe that collegiate business management education is strengthened by experiential learning opportunities. yes ...ifyour academic program, small business institute™, sbdc, or management assistance center strives to give small business and entrepreneurship issues equal exposure to those of large business. yes ...ifyou have a strong interest in small business consulting and/or small business case writing. our publications and regional and national conferences explore issues, trends, and managerial training for small, entrepreneurial, and family-owned businesses. student development is encouraged and supported through our small business institute™ program, the preeminent small business field case consulting program in the united states. for membership information contact: pamela s. schindler sbida vp-marketing & membership voice: (937) 327-7904; fax: (937) 327-6143 email: pschin@wittenberg.edu 1997 dues: us, $ 100.00; international, $ 125.00 i'mall business institute 1997 membership directors'ssociation 1997-1998sbida officers small business institute directors'ssociation president vice president —case compennon chnrles tl. matthews, ph.d. michael d. ames, ph.d. um vers ity of c mcinnau cahfornia state umversity, full enon college of business admtmstration depanmentof management department of management fuflenon, ca 92634 cmcinnati, oh 45221-0165 oitice (714) 644-4541 oflice (513)556-7123 fax (714)644-1259 fax (513)556-4891 e-mail sbtamestnfultenon edu e-mail charles mattheusqauc edu vice presideni-deve(opmem presidenti elect edward g. cole, ivi.b.a. lloyd w. fernald,jr., d b a. st mary's umversity umversity of central floods school of business administration 4000 central florida boulevard one camino santa maria orlando, fl 32816-1400 san antomo, tx 78228 oflice (407)823-5727 ottice (210) 431-2039 fax (407)823-3725 fax (210) 431-2115 e-mail lloyd femaldtlbus ucf edu f.-mail ecole(tlalvtn stmarytx edu eveciai vs vice president-adnamsiranon vice president-markenngand membership gwen f. fontenot, ph.d. pamela s. schindler, m.b.a. iii st andrewsdnve wittenberguniversity mabank, tx 75147 p 0 box 720 oflice (903)451-9339 spnng iield, oh 45501 fax (903) 451-9156 office (937) 327-7904 e-mail fontenotgaol.com fax (937) 327-6143 l-mail pschmgiwntenberg edu vice-president —programs j. douglas frazer, ph.d., cpa secretarytreasurer miflersvifleumversity roosevelt d. butler, ph.n. busmess administrauon the college of new jersey p o. box 1007 school of business miflersvifle, pa 17551-0302 box 4700 htl livood lakes oflice (717)871-5555 trenton, nj 08650-4700 fax (717) 871-2464 office (609) 771-2868 e-mail dfrazertlmarauder miflersv edu fax (609) 771-2845 e-mail rbutlertcnj edu vice-presrdeni-pnblicanons sherrin r. taylor, 61.ba., sphr immediate past presidenr texas woman's university geralyn mcclure frnnklin, ph.d. small busmesslnsutute stephen f. austm state university p 0 box 425738 depanmcnt of management and marketing denton, tx 76204 nacogdoches,tx 75962-9070 oitice'817) 898-2903 oflice (409) 468-4103 fax (817) 898-2120 fax (409) 468-1600 e-mail f taylor(titwu edu e-mail gfrankltngisfasu edu vice president-f)ttaito'assurance ronald s. rubin, ph.d. university of central florida 4000 central flonda boulevard orlando, fl 32816-1400 oitice (407) 823-2682 fax (407) 823-3891 e-mail rubmtlpegasus cc ucf'edu stx4tegy putting your business on the map: geographic information systems for small business ronald rubin university of central florida ronald robinbusucfedu abstract geographic l%rmation systems (gis) are a specialized type of computer information system that allows users to display a wide range of data on a map. the increasing availability of demographic and other information in computerized form has lead to an expansion of the use of g/s into the business world. the increasing power of relatively inexpensive personal computers, improvements in user interfaces for gis, and falling prices for an increasingly diverse range ofgis data products have all contributed to a situation where small businesses can take advantage of capabilities that were previously the exclusive domain of the large corporarion. this article provides an introduction to gis capabilities for the small business end-user and provides i%rmation to aid the reader in deciding whether gis may be applicable to their business decision making needs. introduction geographic information systems (gis) are changing the view of business computing. from multinational corporations to entrepreneurial start-ups, companies of every kind are bringing geographic analysis to bear on their business problems. by relating information to specific locations, like street addresses, zip codes, and census tracts and blocks, they are creating business maps that help them to identify patterns and understand relationships not apparent from traditional computerized data. decision makers in these businesses are able to make better decisions; serve their customers better, and, at times, find new and better market opportunities. gis are essentially database programs like microsott access or paradox that can store the locations of map features along with conventional data such as names, quantities, dates, etc. further, a gis can use the data's location information to display the data on a map. finally, the gis 'knows'here its records are located and can query records based on their location. gis began as a tool of geographers, cartographers, and scientists. it has evolved over time, though, and moved from the research center to the corporate environment, from the scientist's workstation to the businessman's desktop. recently, the development of powerful personal computers, coupled with easy-to-use gis software packages and widely available data, has created a new breed of gis practitioner, the small business decision maker. 1 journal ofsmall business strategy voh l0, no.2 fall/ivinrer l999 this article provides an overview of the capabilities of gis software and shows how they can be put to use in the day-to-day operations of small and medium sized businesses. overall, the article provides information to enable a small business manager to decide if gis capabilities can be profitably employed and provides a starting point for determining what type of software best suits the business'eeds. the next section of the article provides a brief overview of the technical capabilities that provide the specific business value inherent in a gis. this overview is followed by an even briefer summary of the history of the technology leading to an understanding of why g is may now be an appropriate technology for smaller businesses when they have not previously been widely used in this area. the following section covers specific business problems such as target marketing, site selection, and delivery routing, and highlights the role gis can play in addressing these problems. the final section discusses the options and resources needed for small-scale gis implementation. we will see that these requirements are becoming very affordable from both a dollar cost and time perspective. gis overview this section presents key information on the technological capabilities of gis software and lays the foundation for the business value discussion that follows later in the article. the discussion here does not emphasize the syntax or interface of any particular gis software product, but instead presents principles that are implemented in most gis packages. spatial data maps are a graphic representation of the real world that all of us have used. city street maps, for example, depict natural objects, such as rivers and lakes; man-made objects such as roads and buildings; and abstract objects such as city or county boundaries. these objects, whether natural or man-made, are called map features (harder, 1997). each map feature has a location, a representative shape, and a symbol that represents one or more of its characteristics. for example, a blue line may represent a river. green areas may represent forests. a brown area may represent a building and may have a label saying "school." dark red lines may mark highways, with smaller roads marked by thin black lines. features on maps are organized according to their locations relative to each other and to an underlying grid representing the earth's surface. these relationships, called spatial relationships, are important because understanding them helps us solve problems (harder, 1997). for example, in order to plan a delivery route, you need to know which streets connect, which part of the city they traverse, and their relationships to other locations of interest (e.g., customer and store locations). all map features have auribure information, descriptive data about each individual feature (harder, 1997). the attributes of a shopping mall, for example, might include its name, its type, size, the names of the anchor stores, a list of tenants, and the number of parking spaces available. unfortunately, paper maps can only display a limited amount of attribute information using the map symbols. the width and color of the symbol used to depict a road, for example, can discriminate between roads, highways, freeways, and interstate highways. unlike paper maps though, gis are capable of storing, manipulating, and displaying a much richer set of attribute information. further, gis can create maps 'on the fly'ased on the features and attributes of interest to the decision maker. if the current decision requires customer locations, demographic data by census block, and store locations then the city streets 2 journal oismall business strategv vol. 10, no.2 falllivinter l999 and major buildings can be omitted from the map. a gis can also use attribute information to affect the display of the map. symbols for stores can be colored according the store's sales volume and sized according to square feet on the sales floor. a gis links sets of features and their attributes and manages them together in units called themes'harder, 1997). one theme contains a set of similar features, such as all of the roads in the area of interest. a different theme might contain all of the shopping centers, along with the attributes for those features. a city map, for example, may contain many themes, interstate highways, surface streets, public buildings, schools, parks, etc. each theme has its own set of attributes that make sense for the features represented in the theme. all the themes for a geographic area taken together make up a gis database (environmental system research institute, 1996). furthermore, a collection of themes viewed together forms a map and each theme is a layer in this map (harder, 1997). gis are specialized database management systems (dbms) that permit the manipulation of themes. in particular, they allow for diverse themes to be overlaid with others so that every location on one theme is precisely matched to the same location on the other themes. figure i illustrates the data relationships for three sample themes in a gis database. on the lett of each theme is the attribute data that can include most types of fields normally found in a relational database management system (rdbms) including numeric, text, date, boolean, etc. on the right is a depiction of the location occupied by each object, record, or occurrence. these locations can be polygons (figure i-a), such as city, county, or sales territory boundaries; point features (figure.l-b), such as customer street addresses, building locations, or vending machine locations; or linear features (figure i-c), such as roads, rivers, or railroads. displaying spatial locations one of the most obvious characteristics of gis solbvare is the ability of the program to visually display the locations of geographic objects on the computer's monitor and to print these displays. further, the computer is capable of displaying multiple layers simultaneously with the locations of features in the various layers being precisely displayed relative to each other based on their locations. consider the three themes depicted in figure l. if theme i-a depicts sales territory boundaries and theme i-b represents retail outlets then the gis can display the themes superimposed (figure 2). it instantly becomes apparent which locations belong to each territory, even if there is no common field in the attribute data. the ability to display computer system data graphically has been shown to be an important decision making aid in any information system'nd gis have been particularly well suited to this purpose when the data of interest has a geographic component (crossland, 1995). 'his paper uses the term "theme" to represent one layer in a gis map. other works may use the terms "coverage" or "layer" to represent the same concept. benbasat & dexter, 1985; benbasat & dexter, 1986; benbasat, et al., 1986; davis, 1989; hoadley, 1990; lauer, 1986; liberatore, et al., 1988; yoo, 1985. 3 journal ofsmall business str ategy vol. /0, no.2 fall/winter /999 figure i: multiple gis themes 8 i 2 5 ~ ~ 6 ~ ~ c e: w l x i y figure 2: intersecting gis themes a. provinces ~ 81 b: resource location 7/ d d e f ~ ~ tt5e j ~ 4 journal of small business strategy vol. l0, no.2 ea!i/winter 1999 determining spatial proximity a second powerful capability of gis sorware is also inherent in the sofbvare's ability to store the spatial locations of objects. the solhvare can easily compare the location of two objects (in the same or different themes) and determine if: ~ the two objects intersect in any way (e.g., a sales territory contains any part of a city boundary or vice-versa), ~ one object completely contains or is completely contained by the other (e.g., a prospective customer address falls within a particular sales territory), or ~ one object is within a specified distance of the other (e.g., find all customer addresses within ten miles of a prospective franchise office location). further, gis can find the closest object in a theme to another specified location. that is, if a customer address location is specified, the system can easily find the closest atm machine, service center, or branch office. geocoding recall that gis data consists of both spatial locations (expressed in some coordinate system) and attribute data. unfortunately, specifying the geographic coordinates of objects of interest (customers, sales territories, delivery routes, etc.) can be both time consuming and expensive. geoeoding is the process that converts a regular street address to a latitude-longitude (x, y) coordinate used by the gis. once a latitude-longitude coordinate has been assigned, the address is then georeferenced and can be displayed on a map or used in a spatial search (harder, 1997), figure 3: address matching 472 elm street xre''-:e4a'e pine ash 'lm 44p 'p hickory consider the situation illustrated in figure 3. the address "472 elm street" might come from a table of customer records. the gis soaware is able to take the information from the address field and a special matchable address layer to find the street segment that contains the address. through the application of some simple trigonometry, an x, y map coordinate for the address is calculated. these coordinates are saved with the database table which then becomes a point theme such as the one illustrated in figure i-i3. modern gis software is able to geocode records one-at-a-time in an interactive system or can process thousands of records per hour in batch mode. 5 journal ofsmall business s/raregy vol. l0, no. 2 fallyivinier /999 this section has presented some of the basic capabilities of gis software. while interesting in their own right, these capabilities become especially important as determinants of the business use and value of gis. following a brief discussion of the history and availability of gis soaware and data, the article will return to these capabilities in a discussion of specific applications for the small business'user. a brief history of gis technology a complete gis system requires computer hardware, computer software, data, and trained users. in the past, however, gis required special hardware, software, and data that was just not available to any but the largest companies or those with specific requirements warranting the appropriate investment. this section discusses how advances in hardware and software have radically changed the feasibility of small business implementation of giss. further, while it is possible to construct gis-based applications from just an organization's internal data, we will soon see how internal data combined with externally produced gis data creates a special value for businesses. this section therefore contains a special discussion of data availability as a determinant of the usefulness of gis to small businesses. hardware and software by 2000, a $2000 personal computer provided processing power and graphical display capabilities rivaling the performance of mainframe computers twenty years earlier. further, improvements in processing speed (and math processing), graphical display, memory, and data storage are all directly applicable to the performance of g is software. the bottom line is that the cost of hardware for running gis has dropped dramatically since the capability was first introduced. what used to require an expensive mainframe computer can now be accomplished adequately on a $ 1,000 pc and a $2,000 machine provides superb results. these price/performance improvements have some important market implications. the massive base of computers with the capability of efficiently managing gis processing has led to an increase in the potential market for gis software. this increase has lead to the ability to spread development costs over more units, leading to both lower software costs, more userfriendly interfaces, and improved user support. in summary, user-friendly gis can now be delivered to the decision maker's desktop without investments in expensive task-specific hardware. by the mid 1990s, gis software for pcs had become widely available with entirely new products, niche-oriented enhancements, and version upgrades being released on an almost monthly basis. the range of gis products will be further discussed at the end of this article. data as with any information system, the availability of quality data is a key determinant of gis effectiveness for supporting business decisions. unfortunately, producing some gis data is an incredibly expensive proposition. consider, for example, data used by a county deed recorder to store the legal boundaries of propeny (as is being done in many counties). each of thousands of property parcels must have each corner meticulously plotted to ensure that there is no chance for error in the records. precision measured in fractions of an inch is required. other records need not be nearly as precise, of course.' precision is a relative term. digitized maps are used as the basis of the computer navigation systems being fielded in some new automobiles. an intoxicated man in germany was following directions from his computer navigation system which, unfortunately, wasn' precise enough to record that a particular road crossed a river by means of a ferry, not a bridge. he and his new mercedes ended up in the river. 6 journal ofsmall business strategy vol. /0, no.2 falll)v(urer f999 businesses are oflen interested in combining traditional map data, such as city limits, or streets and highways, with their internal data, such as customer or supplier locations. it is clear that most companies, and certainly small businesses, are unable to produce street maps for their own use. in the absence of this data, much of the business value of gis is also absent. fortunately, firms and government agencies have been producing gis data for public resale or use for several decades. as discussed, however, this data is incredibly expensive to produce and carried a hefty price tag for the few users with the equipment to use the data. further, there were (and are) several competing data formats and publicly available data was not guaranteed to be compatible with the potential user's system. the same factors that lowered the price of gis soflware also served to drastically lower the price and increase the availability of second party gis data. with installed gis users numbering in the tens of thousands instead of in the hundreds, data vendors were willing to invest in new data products, data products created in multiple formats, and in enhancements to existing products. further, they were able to radically lower prices by spreading development costs among more users. at the same time, more and more governments were adopting gis technology for vital record keeping, and many of these records are available to the public under various freedom of information acts. while some gis users obtained copies of government datasets for their own use, others obtained them for the purpose of enhancing the data, converting it to multiple formats, and then reselling it. some government agencies themselves have become quite entrepreneurial in their efforts to satisfy demand for their g is data. the end result of this trend is that, in the past five years, there has been an explosion in the availability of inexpensive, second party g is data for use by businesses of all sizes. consider the polygon and point themes in figures i and 2 again. assume that the point theme was derived by geocoding customer addresses in a company's existing database. now assume that each record in the polygon theme is a us census block. each block has as attribute data statistics (mean and measures of dispersion) on income, age, number of children, gender, ethnic background, etc., for the households in the block. with a total investment of under $5000 (including the cost of the computer —less if the computer is already available), the business now has access to a wealth of information about its customers. this example is just one of the ways that large businesses have been using gis data for years. in the next section we will examine how this, and a number of additional techniques, are also available to small businesses using a relatively small investment in gis technology and data. business process support turban (i 995) synthesized definitions of decision support systems (dss) from several authors to define dss as interactive, flexible, and adaptive computer-based information systems (cbis). dss use models'or improving managerial decision making or to support the solution of ill-structured problems. finally, turban writes that dss provide an easy user interface and allow for the decision maker's own insights. the previous discussions of g is in this context, "model" means an algorithmic or data structuring tool that helps to organize otherwise loosely related data. a statistical regression problem, for example, is a model that relates values for decision variables, constraints, and their coefficients into a representation of a decision that can then be solved with the appropriate algorithm. 7 journal ofsmall business strateg)t vol. 10, no. 2 fall/winter /999 capability have illustrated their ability to use both spatial and attribute data and highlighted the use of a map as a unifying model to relate otherwise disparate data. the brief examples centered on figures i and 2 have hinted at how these capabilities can be used to support decision making and how they involve managerial insights. this section examines specific decision making opportunities centered on gis in more detail. each example focuses on a specific decision and the types of data needed to support the decision. some involve the creation of additional modeling capabilities, while others rely more heavily on managerial insight. an important additional distinction is between ad hoc and more formal dss. an ad hoe system is one that may be developed for one-time use to solve an important semistructured problem. more formal systems will be used for solving recurring problems or in other circumstances when the investment in a more complete system is warranted. readers considering adopting gis technologies should be alert for these distinctions in the examples below so that they can incorporate appropriate technologies in their own gis. finding your customers (and more like them) any organization that sells faces the problem of directing its selling efforts to the audience that is most likely to respond to those efforts and make a purchase. advertising to an audience that is unlikely to buy is a wasted expenditure, while failing to advertise to a likely audience is a wasted opportunity. one of the most widely used capabilities of gis in business is the ability to perform market analysis to determine the characteristics of current customers and to find concentrations of potential customers with the same characteristics. assume (for the moment) that the business has a database of customer addresses. geocoding these addresses can easily produce a map with each customer's location plotted as a point (as in figure 1-8). now assume that the business has a polygon map of neighborhoods where each neighborhood has the demographic attributes listed in table i available. a map showing customer locations overlaying neighborhoods makes it easy to see if there are clusters of customers in certain neighborhoods. if so, examining the demographic characteristics of the neighborhood makes it easy to infer characteristics of the customer base without the expense or intrusion of a survey. table i: sample demographic characteristics multiple age ranges household type (family, nonfamily, etc.) race marital status number in household age of head of household number of vehicles in household median and per capita incomes employment by industry and educational attainment occupation armed with customer characteristics, it is then possible to pursue three important aspects of an advertising campaign. first, the demographic information of existing customers can be matched to the target demographics of possible media outlets. if the customers live in predominantly upper middle-class neighborhoods with two income earners in their thirties and forties then radio stations and tv programs targeting this audience can be selected as advertising outlets. 8 journal ofsmall business strategy vo/. /0, /tro.2 fall/winter 1999 second, demographic information on existing customers can be used to locate additional clusters of customers with similar characteristics. the demographic coverage can be displayed with neighborhoods color coded by values of a demographic characteristic (e.g., median income), or more complex multi attribute analysis can be performed. these potential customers can be targeted with direct mail campaigns, neighborhood newspapers, or even billboards. finally, demographic information on existing customers can be used as the starting point when designing advertising campaigns seeking to expand the customer base into new demographic niches. what if customer addresses are not available? the techniques described above may still be applicable. if customer phone numbers are available a theme of telephone exchange boundaries may be used to show concentrations of customer locations, though not nearly as precisely as with street addresses. even if the locations of customers cannot be inferred, observation may yield information on the ages, races, and sexes of existing customers. this information can then be used to locate neighborhoods for target marketing. these techniques were used in one case to develop a marketing program for a small family restaurant in ohio (medvedkov, 1999). the researcher recorded license plate numbers in the parking lot of the restaurant as well as those of nearby competitors. the state's department of motor vehicles provided the owners'treet addresses and these were then geocoded. the addresses were then overlaid on demographic data. the analysis determined that many customers came from areas that contained mostly middle-aged, white, empty-nesters with incomes between $30,000-$45,000. this linding was used to design a targeted advertising campaign that increased patronage markedly. table 2 summarizes the system requirements needed to implement a market analysis system. table 2: market analysis system requirements comcost ponent description (approx.) hardware pentium-class pc. $ 1,500 soltware professional quality desktop gis soliware.',500 simple demographic analysis may be performed on lower end software packages. these themes do not support address matching. gis data address matching theme if customer street addresses will be 400 georeferenced, telephone exchange theme, or some other theme that enables existing customers to be mapped. demographic theme(s). " other customer database with addresses, phone numbers, or both. richer internal data data, such as purchase histories, can enhance the ability to correlate demographic data with buying patterns. 'ee descriptions in table 5. total:"many vendors provide a wide range of demographic products. $3,400 see the data products listing at the direcrions magazine web site for an up to date listing (http: //www.directionsmag.corn). 9 journal of small business strategy vok/0, ivo.2 fall/ivinter 1999 delivery and service routing many businesses face the problem of getting a product or service (e.g., repair technician) from one point to another during a period of time. the simplest case requires the generation of directions from one place to another, while more complex problems require a vehicle to visit a series of points, sometimes in a particular order. a business with a delivery truck, for example, would like to have the truck reach as many customer sites as possible during the day (to minimize the number of trucks needed), during either the shortest period of time (to minimize driver expenses), or following the shortest route. these problems are often solved by the dispatcher or driver but with no great guarantee of efficiency. there are many algorithmic solutions to routing problems but they become very cumbersome to solve as the complexity of the problem (number of customers, number of possible routes, restrictions on arrival times, etc.) increases. when the new problems must be solved repeatedly (new destinations each day, multiple vehicles to route), the problem can be quite burdensome. one of the most difficult aspects of this problem in a large city is just specifying all of the possible routes in the network needed for the computerized solution.'is can help with this problem in several ways (keenan, 1998). first, certain gis packages, such as esri's arcview, may be purchased with network analyst add-on modules. these modules contain the special management science network algorithms needed to solve network problems. second, gis that can solve network problems can use linear themes (see figure ic) as the network on which to operate. in particular, the street maps available for many gis packages can be used as the network. third, these gis packages make it easy to integrate existing data on customers or other destinations into the analysis. delivery locations can be added from a point theme, from a conventional database of customer addresses, by geocoding individual addresses through an interactive dialog, or by indicating locations on the map with a mouse. when ready, the gis can use the network analysis capabilities to select the best route to take for visiting each customer. esri's network analyst add-in, for example, can select routes to minimize travel distance between all destinations, to visit destinations in a certain order, or to minimize some other cost factor (e.g., time), if this factor is an attribute of the linear network theme (esri, 1996). a typical use of this capability could be to have delivery or service orders for the next day entered in a database. the gis soflware can georeference the addresses of the destinations and include them as destinations in the analysis. based on the user's desires, the system can present the route on a map as well as print out directions between each point along the route. the system supports interactive decision making by allowing the user to update travel factors along routes (e.g., with information on road construction or rush hour congestion), by blocking routes from use (e.g., because of speed traps or load restrictions), or by removing points from consideration in a what-if analysis. further, the soflware supports on-the-fly modification of schedules. if an urgent call comes in afler a route has been started, the vehicle's current location can be indicated as the new start point, the new destination can be added, and the routing recalculated. similar techniques can be applied to the problem of finding the closest unoccupied vehicle (e.g., taxi cab, emergency vehicle, or repair truck) to a customer location. 'ven a brief overview of the management science algorithms for vehicle routing is beyond the scope of this paper. readers may refer to almost any introductory management science textbook for an overview of network algorithms. the shortest route or traveling salesman problem algorithms are most likely to be pertinent to vehicle routing. 10 journal of small business srraregy vol. /0, no.2 falllivinier l999 one medical laboratory used these techniques to reduce costs by nearly $250,000 in the first full year of operation (bob, 1997). the laboratory uses a fleet of couriers to provide pickup and delivery services for physicians and hospitals. the gis service routing application reduced the number of vehicles in the fleet, reduced courier hours by 52%, and increased ontime delivery performance. table 3 summarizes the system requirements needed to implement a vehicle routing system. table 3: vehicle routing system requirements comcost ponent description (approx.) hardware pentium-class pc. $ 1,500 sofhvare professional quality desktop g is soflware.'ay require 2,000 separately priced network analysis module. gis data street map with streets represented as a line theme where each 400 street can be treated as an arc in the network. the most flexible results will come when the attribute data for the street map can be modified to include cost factors other than distance to account for congestion, construction, etc. also requires address matching theme if street addresses for destination will be georeferenced. (the same street map theme may support both the network specification and the geocoding.) other delivery point locations with street addresses. may be kept in a internal data separate database tied to a transaction processing system or may be added to the map graphically. total: 'ee descriptions in table 5. $3,900 site selection site selection is the process of deciding between a number of alternatives for the location of a business activity such as a store, restaurant, medical office, or warehouse. in contrast with the advertising or vehicle routing problems, site selection, especially for the small business, is likely to be an infrequent (or one-time) decision with enormous long-term consequences. as such, it is more likely to use an ad hoc dss instead of a formal system, but the decision is all the more deserving of management attention because of its consequences. the criteria for choosing an optimal business site can vary widely depending on the type of business, the business'arket strategy, and the activity to be performed, but gis can assist in many kinds of site selection problems. of particular interest is the ability of a gis to display multiple themes in layers for simultaneous analysis. the discussion that follows assumes that the small business in question is concerned with a relatively small area (a county or metropolitan area), but the same principles can also be applied in larger scale operations in a larger area. retail site selection (stores, restaurants, medical clinics, etc.) will often use analysis similar to diat discussed for market analysis as discussed above (see "finding your customers" earlier in this section). other factors may include size of the market, competition, site availability and zoning, traffic flow, and real estate costs. consider the information to be had from adding the following themes to an analysis: ii journal ofsmall business strategy vo/. /0, no.2 fall/winter /999 ~ a street map theme as this is the most common metaphor for analyzing urban real estate. ~ a point theme of available sites created by either geocoding street addresses or by adding specific points to the theme with the mouse. attributes of the available site theme may include the asking price, square footage, number of parking spaces, etc. ~ a zoning theme from the city/county zoning commission. this theme can indicate the suitability of existing zoning of candidate sites or the need to apply for zoning variances or rezoning. ~ a tra/tic volume theme. this theme categorizes roads by the volume of traaic they convey and can add incredibly powerful insights for site selection analysis. ~ a theme of existing competitor sites. this theme may need to be created locally but can be as simple as a point theme showing existing competitor locations. with the above themes, as well as demographic data, some interesting analysis can be performed. while it is usually desirable to locate a business near customer locations, having dispersed concentrations of potential customers can make this task problematic. the traffic volume analysis theme lets businesses determine which locations are along high-volume routes, even if the location is not near specific concentrations of customers. an ideal site, for example, may be along a route that connects multiple concentrations of desirable customers with the downtown area and which is conveniently accessed by other customers, even though it does not lie on their commuting route. the ability to plot competitor locations also enhances the site selection analysis. this theme, in conjunction with demographic information, may serve to identify underserved markets. this analysis can be especially useful if the company targets a particular market niche. if competitors are differentiated by the market segment they serve, a visual analysis may serve to show where the desired segment is inadequately covered. many of these techniques were applied by a growing chain of california restaurants (specht, 1996). the company uses census data, specialized site selection so/tware from scan/us, and current-year and five-year projections from urban decision systems. the analysts plot areas with annual incomes greater than $50,000, population density, median housing prices and rental rates, and total existing establishments, employment, and payroll. the major advantage this company has realized is the ability to prescreen sites. they save considerable time and effort on inspection trips and are able to devote more of this time to the negotiating process. table 4 summarizes the system requirements needed to implement a site selection system. assembi.ing a small business gis unfortunately, the extensive choices available in gis capable computer hardware, gis software, and gis data make it difficult to cra/i a simple prescription for assembling a small business gis. the same system that will satisfactorily display basic street data and customer locations may not suit the user seeking to implement a delivery routing system. as with any system construction effort, the starting point needs to be the business decision maker's needs. in general, the nature of the spatially oriented decisions will determine the system's components. 12 journal ofsmall business strategy vo/. /0, no.2 fall/ivinier l999 table 4: site selection system requirements comcost ponent description (approx.) hardware pentium-class pc. $ 1,500 soaware professional quality desktop gis soaware.~ 1,500 simple demographic analysis may be performed on lower end solbvare packages. these themes may not support all of the capabilities described in this section.. gis data address matching theme if candidate sites or competitor locations l,000 will be georeferenced demographic theme(s). " traaic volume theme. zoning theme. other customer database with addresses, phone numbers, or both. internal data competitor locations and information. see descriptions in table 5. total: many vendors provide a wide range of demographic products. see the data $4,000 products listing at the directions magazine web site for an up to date listing (hnp;//www.directionsmag.corn). a specific business decision involving spatial analysis has implications for four system components: the gis solbvare and its processing capabilities, the spatial data, non-spatial data, and computer hardware. of the four issues, the gis soaware and data are coequal as the most important components of the system. the best starting point for the system assembly process is to determine what commercial or government gis themes will (or may in the future) be needed to support the business'ecision making needs. an excellent source of up-to-date information on available gis data is the data products page at the online directions magazine web site.'ince not all gis sofbvare will process each third party data source, the need to use a particular data product may help to determine which gis soaware is needed. the second major decision pertains to the gis soaware to adopt. table 5 provides a taxonomy of gis solbvare along with example products in each category. while there are six spec igc categories in the table, for most small businesses the main decision will hinge around whether the soaware needs to simply display spatial data or whether it needs to manipulate and/or search the spatial component of the data. the products in the spreadsheets, application add-lns, and entry level business mapping solbvare categories are generally suitable for data viewing while the desktop mapping system products are the most suitable for use by a small business for spatial data manipulation and/or searching. http: //www.directionsmag.corn l3 journal ofsmall business strategy val. /0, na.2 fall/winter 1999 table 5: geographic information systems: a comparative taxonomy classilication software examples features * route planners street atlas plots directions from one city to (free to $50.00) map quest another. does not provide viewing of third-party or organizational data. spreadsheet excel microso0 wordperfect data works with existing applications. add-ins map maps allows use of organizational data but lotus 1-2-3 lotus supported formats for external map map data is limited application visio maps mapland (for excel) similar to above. add-ins first map (for excel) entry level businessmap pro mappoint 2000 provide a much richer access to both business maplinx express proviewer organizational data and to third-party mapping maplinx pro map sets. will often include maps ($ 100$ i50) such as state and county boundaries, though at low resolutions. some products in this range allow limited spatial querying and summarizing. desktop arcview gis business map pro provide access to a much richer set of mapping atlas gis san/us for windows map data formats and to a wider systems geomedia spatial vision range of corporate database formats. $350 $ 1,500) maplnfo pro power map usually providing programming or at maptitude tactician 4 least scripting capabilities. maplnfo desktop professional arcview business arclnfo these products are for serious gis high end analyst gcomedia pro data creation and management and (cost & $3,000) er mapper generally provide far more first st. capabilities than the small business user is likely to need. these features are broad generalizations. details of specific products must be obtained from the manufacturer (see appendix a). technology advances are guaranteed (o change these characteristics over time. the author recommends that five factors be considered when selecting a gis soaware package. 1. does the software support a wide range of both spatial and conventional data formats. more robust software provides the most flexibility for using in-house conventional data and third party spatial data. 2. does the soaware support a higher level of use than is initially expected? experience has shown that once end-user oriented soltware is adopted in an organization it is usually put to many more uses than originally anticipated. 3. is the soaware truly an end-user product with appropriate documentation, technical support, and even training classes. some soflware (including gis) products are so specialized that the documentation and support material are just not suitable for the average end-user. unless the business is large enough to support a full-time gis professional, such products should be avoided. 4. what data comes with the soaware. some soaware comes bundled with a large set of valuable data that can save money on the purchase of third party data later. 14 journal ofsmall business strategy vol. /0, no.2 fall/winier l999 5. some gis vendors offer a complete range of data conversion, training, and consulting services (or have relationships with third party groups to provide these services). it may be possible to put together a package of so(tware and related services for a company making its first step into gis. appendix a gives contact and product information for many companies that provide gis sotbvare as well as information on two excellent sources of information on other gis products and data. fortunately, the computer hardware component of a small business gis is relatively easy to specify. most gis will run on a standard pentium-class pc operating microsoft windows or nt. some, though, may require a macintosh computer or a variation of the unix operating system. if the organization already has a rich collection of relatively modem personal computers, it is likely that these machines will support the gis products without modification or upgrade. gis does benefit appreciably from faster processors, better graphics cards, and higher bus or network speeds. conclusions a 1995 study of several small businesses over an eight year period determined that, as with their large-firm counterparts, small business computing elforts are becoming increasingly sophisticated (cragg k zinatelli, 1995) and demanding. traditional dss research has also shown that individual decision makers, regardless of the size firm that they serve, require assistance in organizing, formatting, and analyzing information in support of their decision making efforts. this article has shown that gis may be a suitable technology for many small businesses to adopt. from a general point of view, gis are excellent decision support tools. all gis provide some ability to display business data in the familiar format of a map. most gis provide the ability to superimpose multiple map themes to visually display relationships between otherwise disjointed data. high-end (but still affordable) gis provide all of the database management, graphical display, and many of the reporting capabilities of sophisticated dbms, and they provide the mapping and spatial analysis capabilities that provide particular value in certain circumstances. further, all of these systems will operate on widely available personal computers. more specifically, this article gave three examples of situations in which a business can apply the capabilities of gis to common business problems. appendix b provides a list of readings that include additional examples of the application of gis to small (and large) business problem solving. one of the major common themes in the three examples is the value of secondor third-party produced spatial data for solving business problems. demographic data, street maps, zoning themes, and traffic data are just a few of the themes used in the examples. the increasing availability and decreasing costs of these products will be of particular importance to the small business end-user. the most important conclusion to be drawn from this article is that gis are becoming more and more appropriate as end-user tools for business problem solving. because they will operate on common pc-class computers, because their prices are coming down while features are going up, and because of the increasing availability of valuable spatial data, this technology is also becoming increasingly appropriate as a tool for the small business user. 15 journal ofsmall business strategy vol. /0, //o 2 fall/winter /999 references aronoff, s. (1989). geo ra hic information s stems a mana ement ers ective. ottawa, canada: wdl publications benbasat, i, & dexter, a. (1985). an experimental evaluation of graphical and colourenhanced information presentation. mana ement science 31(1), 1348-1364. . (1986). an investigation of the effectiveness of colour and graphical information 9 «i d bi g i . ~mis i 9ii),59-83. benbasat, i., dexter, a., & todd, p. (1986).the inbuence of colour and graphical information presentation in a managerial decision simulation. human-com uter interaction 2, 65-92. bob, k. (1997). why automate? business geo ra hics 5(11),22-23. cragg, p. g. & zinatelli, n. (1995). the evolution of information systems in small firms. information & mana ement 29, 1-8. crossland, m. d., wynne, b. e., & perkins, w. c. (1995). spatial decision support systems: an overview of technology and a test of efficacy. decision su ort s stems 14, 219-235. davis, l. r. (1989). report format and the decision-maker's task: an experimental investigation. accountin or anizations and socie 14(5/6), 495-508. environmental system research institute (esri) (1990).understandin gis the arc/info method redlands, california: environmental systems research institute. (1996). arcview network anal st 0 timum routin closest facilit and service area ~anal sis. redlands, california: environmental systems research institute,. harder, c. (1997). gis means business. redlands, california: environmental systems research institute. hoadley, e. d. (1990). investigation the effects of colour. communications of the acm 33(2), 120-139. k,p.b.i)998).sp i)d ii pp 3 i iii ig.~)uii s ~sstems 22, 65-71. lauer, t. w. (1986). the effects of variations in information com lexit and form of resentation on erformance for an information extraction task. unpublished doctoral dissertation, indiana university, bloomington. i.iberatore, m. j., titus, g. j., & dixon, p. w. (1988). the effects of display formats on information systems design. journal of mana ement information s stems 5(3), 8599. medvedkov, o. (1999). targeting the customers patronizing a family restaurant: urbana, oh. proceedin s of the 1999 esri user's conference. esri, redlands, ca. specht, j. (1996). live, love, eat! business geo ra hics 4(7), 25-27. turban, e. (1995). decision su ort and ex ert s stems. englewood cliffs, nj: prentice hall. 16 journal ofsmall business strategy vok/0, no.2 fallltvinter l999 ronald s. rubin is professor of marketing and director of the small business institute at the university of central florida. dr. rubin's educational background includes a ph.d. in business administration with a specialty in marketingpom the university of massachuseus. dr. rubin has consulted for various companies in the areas of consumer analysis, marketing research, and litigation research. he has worked in marketing research for an engineering company and the marketing science institute. he has presented papers at academic and professional meetings and has contributed articles in various academic journals on such subj ects as: small business management, spreadsheet analysis, marketing research, expert systems, data analysis, simulations, and educational methodology. he is the co-author of marketing research, 7th edition, experiential exercises in marketing research, and authored the rubin and luck data analysis disk and pc marketer: computer applications using lotus /-2-3, all published by prentice-hall. he is co-author of strategy and competition, a marketing simulation published by allyn & bacon. he has also authored a guide to management consulting. his current interests include small business management development, social and environmental concerns of marketing, marketing and litigation research, expert systems, and simulations. dr. rubin was a co founder of the consumer credit counseling service of central florida, a united lvay agency, on which he holds membership on the board of directors and was president. dr. rubin is a fellow of the small business institute directors'ssociation, and a 197l fellow of the american marketing association's doctoral consortium. 17 journal ofsmall business strategy vol. /0, no.2 fall/winier l999 appendix a: gis software developers and vendors for more information on specific o(t-the-shelf gis packages, all of which come with basic maps and databases (you can contact the application developers). here are some leading players and products: ~com an tel. number url ~xi p d caliper 617-5274700 hnp://www.caliper.corn maptitude 3.0 ($395) delorme 207.846-8900 hnp://www.delorme.corn street atlas usa 6.0 ($54.95) eanh resource mapping 619-558-4709 hnp://wwwermapper.corn e r mapper ($4,300) fnvironmental systems research institute 800m7-9778 http: //www.cari corn arcvtew 3.1 ($ 1,195) atlas gis($795) businessmap pro ($ 149) business mappro corporate ($499.95) business analyst ($ 11,995) arc/! n fo ($ 10,000) intergraph co. 256-730-2000 hnp://www.intergraph.corn geo media ($ 1,500) geomedia pro ($7,500) i maplnfo 800-327-8627 hnp://www.mapinfo.corn mapinfo deskto ($349) mapinfo professional ($ 1,295) proviewer ($99) mapl.inx 800-352-3414 http: //www.maplim,corn mapl.inx express ($89.95) maplinx professional (149.95) mapquest 888-627-7837 http: //www.mapquest.corn mapquest microsor corp. 425-882-8080 hnp://www.microsor microfosg map (within excel) mappoint 2000 ($ 109) scan/us inc. 310-820-1581 http: //scanus.corn scan/us for windows ($495) sedona geoservices 877-sedona2 http: //www.sedonageo.corn spatialvision ($495) sogware illustrated 209-833-9898 hnp://sogwareillustrated.corn mapland ($59.95) tactlctalt 978-475m75 hnp://www.tactician.corn powermap ($349) tactician 4 ($ 1295) wessex, inc. 800-24visio http: //www.wessex.corn first st. ($2,995) first map (excel add-in) ($69) there are dozens of suppliers of customized products to beef up the database and mapmaking capabilities of off-the-shelf gis packages. for a comprehensive list, see the buyer's guide published each december by business ceograptrics magazine (155 east boardwalk dr., 8250, fort collins, co 80525-9945), and dimensions magazine at url: www.directionsmag.corn/products.asp. lg journal ofsmall business strategy vol. io, ilo.2 fall/winter l999 appendix b: a gis reading list this appendix lists a few selected references that the author feels will benefit the reader seeking to find additional information on gis use in business before deciding if gis is an appropriate investment. these readings will not help the reader choose a specific gis product. researching vendor web sites and talking with sales representatives (see appendix a) should be used for this purpose. entries in this list are not listed in the references section of the article unless they support material in the body of the article. reference authors'omments christian harder. gis means business. a compact and rich overview of environmental systems research institute, examples of real-world g is use in inc., redlands, ca, 1997. business situations. includes many color isbn: i-879102-51-x plates of maps. the specific problems illustrated in the book will be valuable to readers who share these situations but will also spark imaginations. comes with a tutorial disk for arcview gis. keith clark. geuing started wirh geographic a comprehensive overview of gis but information systems. prentice hall, upper not too technical. a good follow-up to saddle river, nj, 1997. this article for those interested in finding isbn: 0-13-294786-2 more about gis without actually making the purchase. not specifically nriemcd for business users but a good ref'erence all the same. stanley amoff. geographic information this classic reference is somewhat dated systems: d management perspective. wdl but provides an excellent (and timeless) publications, ottawa, canada, 1989. background in the principles of gis, isbn: 0-921804-91-1 though at a more technical level than what the average end user might prefer. paul longley dr grahm clarke, eds. gisfor this book is actually a set of readings business and service planning. wiley, new from multiple contributors, with each york, 1995. reading illustrating the application of isbn: 0-470-23510-1 gis to a business situation. most of the examples are european and refer to data that would not be available to other users, but the business cases that are illustrated will be common everywhere and similar data should be available. 19 entrepreneurial orientation and learning in high and lowperforming smes timothy pett rollins college tpett@rollins.edu jim a. wolff wichita state university jim.wolff@wichita.edu abstract this paper examines the relationship between an organization’s learning orientation, its information technology competency and entrepreneurial orientation. it is proposed that a commitment to learning and a culture of learning coupled with the tools and capabilities to gather and compile information and knowledge from outside organizational boundaries facilitates the identification of opportunities. small and medium-sized firms with high levels of an entrepreneurial orientation in turn are able to capitalize on opportunities yielding higher performance levels for the firm. data from a sample of manufacturing smes tends to support these propositions. conclusions and recommendations for sme management practice is discussed. key words: small and medium-sized enterprises; entrepreneurial orientation; learning orientation; information technology competency 71 mailto:tpett@rollins.edu mailto:jim.wolff@wichita.edu journal of small business strategy vol. 26 ● no. 2 ● 2016 introduction small firms when compared to their larger counterparts have been described as resource constrained (acs & audretsch, 2003). the liability of smallness (freeman, carroll, & hannan, 1983) presents unique challenges with which small firms must cope to survive, grow, and prosper. yet every year we are provided evidence from various sources (for example the deloitte technology fast 500) that small firms and start-ups are able to overcome the liability of smallness and grow at amazing rates. since the inception of the deloitte technology fast 500 the average growth rate of these high performing firms exceeds 4000%. clearly these are exceptional firms that perform well beyond the expectations for the average small and medium-sized enterprises (smes) that make up the vast majority of firms. however, these exceptional firms give rise to the question about what factors might distinguish higher performing smes from those with lower performance levels. academic researchers (e.g., covin & slevin, 1991) and the popular press (e.g., peters & waterman, 1982) have argued that an essential element for the presence of high performing firms is entrepreneurship or entrepreneurial behavior. it is a self-evident premise that high performing firms of the nature discussed above are able to exploit significant opportunities in the marketplace to achieve such levels of growth. if one accepts that the recognition and exploitation of opportunities represent essential acts of entrepreneurship (shane & venkataraman, 2000), then following the logic of lumpkin & dess (1996) high performing smes will exhibit the characteristics of an entrepreneurial orientation (eo). the eo construct is a multidimensional notion consisting of innovativeness, risk taking, and proactiveness on the part of firms (covin & slevin, 1991; miller, 1983). “an eo refers to the processes, practices, and decision-making activities that lead to new entry” (lumpkin & dess, 1996: 136). the notion of a high performing firm having an orientation toward acting entrepreneurially is likely a necessary condition, however, an eo may not be the only characteristic related to high performance (brettel & rottenberger, 2013). the willingness and capability of a firm to be proactive, risk taking and innovative to exploit opportunities in the marketplace may require the firm and its decision makers be able to gather information about potential opportunities and translate information into new knowledge (i.e., to learn) about potential opportunities(vora, vora, & polley, 2012). hence, two additional characteristics may work with eo to contribute to high performance levels in smes: information technology competency (itc) (tippins & sohi, 2003) and a learning orientation (lo) (lonial & carter, 2013; sinkula, baker & noordewier, 1997). the purpose of this paper is to examine the relationship between eo, lo, and itc in the context of smes to provide managers suggestions and guidance in balancing these dimensions within their firms to yield higher levels of firm performance. specifically the paper presents arguments for the presence of a positive relationship among the constructs of interest and the performance levels of smes. through this examination and the analysis of data derived from a sample of sme manufacturing firms the paper adds to the understanding of the entrepreneurial process in higher performing smes. the organization 72 journal of small business strategy vol. 26 ● no. 2 ● 2016 of the paper is as follows. the first section discusses the background of the constructs used in this study and develops the arguments for the hypothesized relationships that are ultimately tested. next is discussed the research methodology and analytical method employed to test the hypotheses. the third section presents the results of the data analysis and the last section provides a discussion of the study’s outcomes, the practical implications for high-level sme managers, and conclusions and recommendations that can be drawn from this study. background and hypothses entrepreneurial orientation the fundamental proposition that underpins entrepreneurial orientation (eo) as a significant theoretical construct is that entrepreneurial firms behave in ways different from other types of firms. within the field of entrepreneurship and, to a somewhat lesser extent, strategic management research, eo has come to be an important construct in the study of entrepreneurial firms or corporate entrepreneurship and performance (wang, 2008). miller’s (1983) conceptualization of eo was operationalized (covin & slevin, 1989), refined and developed (lumpkin & dess, 1996) and has a substantial literature taking shape around the construct (e.g., covin, green, & slevin, 2006; lumpkin & dess, 2001; wiklund & shepherd 2003; 2005; entrepreneurship theory and practice 2011 dedicated issue). indeed, the eo notion and its component dimensions has been one of the most researched theoretical and empirical topics within entrepreneurship over the past 30 years. the dimensions most closely associated with the eo construct—those at the heart of miller’s (1983) original conceptualization of the notion of entrepreneurial firms—are risk taking, innovativeness, and being proactive. risk taking. entrepreneurs are generally regarded as risk takers in terms of their decision-making and business activities. brockhaus (1980) described entrepreneurs as willing to take calculated business risks that non-entrepreneurs viewed as higher risk. later research on risk taking proposes that entrepreneurs view certain business situations more optimistically and with more confidence than do non-entrepreneurs (busenitz, 1999) leading to the contention that entrepreneurs may view risk differently than nonentrepreneurs. however, consistent with miller (1983) and covin and slevin (1989), firm-level entrepreneurial characteristics are exhibited by a pioneering pattern of decision making under uncertainty reflective of risk at a level greater than that exhibited by a conservative, follower pattern. innovativeness. a fundamental element of entrepreneurship is innovation which is captured in the form of creating new products or processes (covin & miles, 1999; schumpeter, 1934). lumpkin and dess (2001) define entrepreneurial innovation as “. . . creativity and experimentation in introducing new products/services, and novelty, technological leadership and r&d in developing new processes” (p.431). with respect to corporate entrepreneurship, covin and miles (1999) argue that innovation is central without which the notion does not exist. hence, to be entrepreneurial or exhibit an eo, firms must exhibit behavioral actions that are exemplars of innovation irrespective the presence of other dimensions of entrepreneurial behavior. proactiveness. being proactive implies behaviors that can be interpreted as taking the 73 journal of small business strategy vol. 26 ● no. 2 ● 2016 lead vis-a-vis competitors and perceived business opportunities. covin and slevin (1989) related proactiveness to aggressive action toward competitors when trying to gain or maintain competitive advantage. they compared this stance to that of a passive and reactive approach that might be taken by a more conservative firm. in a similar way lumpkin and dess (2001) articulated that proactiveness exhibits characteristics of leadership in the market place working to influence the task environment. venkatraman (1989) defined proactiveness as opportunity seeking related or not to existing business activity, new product or brand introductions before competitors, and strategic discontinuance of operations in the face of declining markets. entrepreneurs act ahead of non-entrepreneurs and entrepreneurial firms are similarly proactive. this paper adopts the notion that eo is a behavioral action construct (wolff, pett, & ring, 2015). miller’s (1983) seminal work on eo proposed that specific firm-level behaviors captured the essence of entrepreneurship within established firms. extending and building on miller’s work, covin & slevin (1986, 1989, and 1991) developed and refined a survey scale with which to measure a firm’s eo. the covin and slevin scale has been used by researchers to examine eo in the context of a varied set of firm-level objectives including performance. the relationship to performance (brettel & rottenberger, 2013) will be discussed further in the development of the hypotheses in a subsequent section. learning orientation organizational scholars have devoted significant attention to the topic of learning at the organization level during the last several decades. since the seminal work of argyris and shön (1978) research into organizational learning has grown exponentially with many significant contributions occurring in the latter half of this period. one of the key beliefs driving this interest is the importance that learning has to a firm’s adaptability in dynamic environmental or competitive conditions (moingeon & edmundson, 1996). “organizational learning occurs when members of the organization act as learning agents for the organization, responding to changes in the internal and external environments of the organization by detecting and correcting errors in organizational theory in use, and embedding the results of their inquiry in private images and shared maps of the organization” (argyris & shön, 1978: 23). conceptually, organizational learning is a meta-construct comprised of three constituent elements: a pre-disposition to learn; learning facilitation; and exploitation of learning through organizational adaptation (sinkula et al., 1997). a pre-disposition to learn at the organization level is expressed by the philosophy-in-use and culture regarding learning (lonial & carter, 2013). sinkula et al. (1997) articulated this predisposition as a values-based cultural construct and termed it a ‘learning orientation’ (lo). in this paper the pre-disposition to learn is the focal notion of the research. organization-level learning begins with the commonly held firm values of open-mindedness and commitment to learning that sinkula, et al. (1997) articulated as the elements of lo. open-mindedness is a precondition to the learning process because firms must be willing to question routines and assumptions that comprise mental models (senge, 1990) driving thought and action. the willingness to question deeply held assumptions and beliefs may facilitate 74 journal of small business strategy vol. 26 ● no. 2 ● 2016 heuristics and non-routine mechanisms to divine insights and counter-intuitive patterns that solve ambiguous challenges, i.e., doubleloop learning (lei, hitt, & bettis, 1996). concomitant with open-mindedness is the value that the collective of individuals comprising a firm places on learning, in other words a commitment to learning (sinkula, et al., 1997). just as firms are not homogeneous with respect to structural organization they are likely to have very different views with respect to learning. morgan (1986) conceptualized the culture dimension as a continuum anchored by hierarchical mechanistic organizations on one end and heterarchical network organizations at the other. the cultural values with respect to learning in a machine organization are likely much weaker than in the more organic network organization. absent the values that reflect a commitment to learning, learning and adaptation is not likely. hence, lo, at minimum, requires the elements of openmindedness and a commitment to learning as a precursor for organizational learning and ultimately successful adaptation. information technology competency itc is a multidimensional construct comprised of three co-varying measures—it knowledge, it operations and it objects (tippins & sohi, 2003). previous research suggests that appropriate application of information technology promotes collaboration and information sharing both inside the organization and across organizational boundaries that ultimately may improve firm performance (celuch, bourdeau, saxby & ehlen, 2014; (pett, wolff, & perry, 2010); pickering & king, 1995). thornhill (2006) proposes that the understanding and implementation of knowledge assets (e.g., technologies) are critical elements that can assist management in disseminating the information flows for the firm. from these perspectives it can be concluded that the creation and use of an itc (tippins & sohi, 2003) may facilitate information gathering, analysis, and dissemination crucial for sme growth and performance success. it knowledge. knowledge, as a concept, implies knowing about something. some types of knowledge can be articulated and codified as the content of documents. other types of knowledge are tacit, difficult to articulate and, hence, difficult to measure (davenport, delong & beers, 1998). it knowledge is relatively context specific and implies knowledge of and about information technology, its tools and processes; or as tippins and sohi (2003) articulate, it knowledge is “contextually based know-how” (p. 748). therefore, this paper adopts the tippins and sohi (2003) conceptualization of it knowledge as the technical knowledge that a firm possesses with respect to its computerbased systems. it operations. while it knowledge represents the know-how that resides in firms, it operations represent the processes that a firm uses in the application of its know-how. it operations are the firm’s techniques, systems and/or processes undertaken to complete a task to achieve a desired outcome (granstrand, 1982). tippins and sohi (2003) articulate it operations “as the extent to which a firm utilizes it to manage market and customer information” (p. 748). as such, it operations represent the capability to manage external and internal information flows, analyze information, and direct information to the appropriate decision makers in a form that generates effective action. 75 journal of small business strategy vol. 26 ● no. 2 ● 2016 smes are resource constrained and so must make effective choices with regard to the processes they develop. in turn they may have a difficult time pursuing all the systematic approaches available that are related to it operations. however, working to capture or possess only the critical elements for the firm based on a specific industry’s related needs, given the limited resources and budget, may prove to be an effective strategy for smes to reap the benefits of it operations. it objects. the final dimension of an itc is referred to as it objects. it objects are the tools with which it knowledge is processed through it operations. minus the appropriate tools, a knowledge-based system will accomplish little. tools are enablers used to acquire, process, store, disseminate, and use information (martin, 1988) coming into a firm. tippins and sohi (2003) specified it objects as a firm’s computer-based hardware, software, and the associated technical personnel necessary to complete information processing and knowledge creation through the firms it operations. hypotheses as was indicated above a recurring theme in the research literature is eo’s relationship to various dimensions of firm performance (lee, lee & pennings, 2001; wiklund, 1999; zahra & covin, 1995). the expectation of a positive link between eo and performance derives primarily from the recognition that globalization, technological change, shortened product life-cycles and competitive dynamics have driven firms to be more creative, innovative, and entrepreneurial in their approach to markets (ireland & hitt, 1999). therefore, firms that undertake the actions represented by eo may be able to negotiate environmental dynamics more successfully which should yield higher levels of firm performance. following this logic and the results of many studies that have empirically examined the relationship between eo and performance (brettel & rottenberger, 2013; covin, green, & slevin, 2006), this paper assumes a positive relationship between eo and performance. this assumption is tested in our data analysis by dividing the sample along the dimensions of high performing firms and low performing firms. there is an expectation that higher levels of eo will be positively associated with performance in that the subset of higher performing firms will exhibit higher levels of eo. however, the primary hypotheses that we seek to test are the relationships between eo, lo, and a firm’s itc. the premise of this examination is that learning is a prerequisite for opportunity recognition and lo in conjunction with itc represent elements of learning in the organizational setting. in the presence of opportunity an eo is necessary to act on the opportunity which in turn may yield higher levels of performance (brettel & rottenberger, 2013). in the following discussion we develop this underlying rationale. given the globalization of markets and the pace of technological change (ireland & hitt 1999), firms face the very real prospect of trying to outpace, keep abreast of, or fall behind competitors. in the strategic management literature environmental scanning or understanding industry dynamics (porter, 1980) has been part of the foundation of research in the field. the process of information gathering, analysis and gaining insight into changing conditions is organization learning (fiol & lyles, 1985). researchers propose that organization learning in various configurations is an 76 journal of small business strategy vol. 26 ● no. 2 ● 2016 essential antecedent to opportunity recognition (e.g., dutta & crossan 2005; lumpkin & lichtenstein 2005) by entrepreneurs or entrepreneurial firms. recognized opportunities provide options for strategic renewal or growth (lumpkin & lichtenstein 2005), both of which may provide a firm the path to enhanced performance (wang, 2008). therefore, sme firms exhibiting an active orientation to learning (sinkula et al., 1997) will likely reveal and recognize opportunities. because smes in general may be more susceptible to the liability of smallness (freeman et al., 1983) they may be open to learning. the “razor’s edge” analogy applies requiring smes to absorb information and knowledge quickly to reasonably assure continued survival if not growth. due to resource constraints in smes, knowledge acquisition through learning may be a critical element in their continued existence (vora, vora, & polley, 2012). further, smes must be able to act on the learning that they experience (wang, 2008). to act requires a willingness to take risks, innovate by thinking differently, and be proactive in the face of daunting competition. thus, learning may require an orientation to act entrepreneurially. hypothesis 1: a learning orientation will be positively related to an entrepreneurial orientation in smes. information technology is viewed as a crucial resource useful to gather, store, and analyze information helpful to the strategic management of firms (bharadwaj, 2000). implicit in this view of information technology, as a crucial resource—and consistent with the resource-based view of the firm (barney, 1991)—is that the gathering, storing and processing of information will yield some contribution to a firm’s competitive effectiveness and potentially to competitive advantage. a firm’s ability to use information technology effectively to obtain, store, analyze and convey meaningful information necessary for effective decision making has implications for the performance of the firm (pett, wolff, & perry, 2010). as discussed above tippins and sohi (2003) termed this ability itc. though theoretically appealing, the connection between it activities and enhanced performance outcomes may be weakened by what lucas (1999) termed the technology productivity paradox. tippins and sohi (2003) hypothesized and found support for the proposition that the connection between itc and performance was indirect through organizational learning. in other words the mechanisms and capabilities to gather and analyze information require gaining a different perspective concerning the actions necessary for moving an organization forward. like the idea expressed above with respect to lo, information gathering and analysis need action or a willingness to take action to affect the prospects of an organization. thus, a capability to gather information may require and orientation to act entrepreneurially. hypothesis 2: information technology competency will be positively related to entrepreneurially orientated smes. it is apparent from the discussion above that lo and itc may be complementary elements that together are necessary for learning to take place in an organization. each of these requisite elements for learning in an organization may be mutually reinforcing. in 77 journal of small business strategy vol. 26 ● no. 2 ● 2016 other words the presence of these dimensions in greater amounts within a firm may exhibit a multiplier effect for each other. this multiplier effect can be demonstrated as an interaction of the two elements. hypothesis 3: the interaction between learning orientation and information technology competency will be positively related to entrepreneurial orientation in smes. methodology research design the research design employed the survey method for data gathering in this study. a random sample of 700 smalland mediumsized manufacturing firms were identified and selected, all from a mid-western state. the random sample represented a broad crosssection of firms from a wide array of industries. a cover letter soliciting a response to an enclosed questionnaire was addressed to the owner, ceo or president from each firm in the sample. a total of 138 key-informants responded to the survey, 117 of which provided complete information. this provided an approximate overall usable response rate of 17 percent, which is consistent with similar studies that survey top management (hambrick, geletkanycz, & fredrickson, 1993). measures performance. with respect to the performance measures in this study we followed the caution of lumpkin and dess (1996) regarding the multidimensionality of the performance construct. “in investigating the eo-performance relationship, it is essential to recognize the multidimensional nature of the performance construct (cameron, 1978; chakravarthy, 1986). that is, entrepreneurial activity or processes may, at times, lead to favorable outcomes on one performance dimension and unfavorable outcomes on a different performance dimension (p. 153). smalland medium-sized private firms are often reluctant to provide specific information regarding performance. because of the sensitive nature of the performance construct and following prior research (e.g. chandler & hanks 1994; zahra & george 2000) in this area, we employed a categorical approach to assess firm performance. we asked respondents to answer three questions each on two performance dimensions (growth and profitability) concerning their firm’s performance level when compared to similar firms in their industry. each item used a fivepoint likert scale format ranging from 1 ‘lowest 20 percent’ to a 5 representing the ‘highest 20 percent’ which was used as a measure of relative performance levels. the profit dimension questions asked respondents to compare their firm to the industry for growth in gross profit over the past three years, average gross profit over the past three years, and average after-tax return on sales over the past three years. we labeled this construct “profitability” and deemed it a valid measure because of the single factor loading from a confirmatory factor analysis and because it had a high degree of reliability (α = .93). the growth dimension questions asked respondents to compare their firm to the industry for growth in sales during the past three years, growth in assets over the last three years, and growth in number of employees during the last three years. this construct was labeled “growth” and deemed it a valid measure because of the single factor loading 78 journal of small business strategy vol. 26 ● no. 2 ● 2016 from a confirmatory factor analysis and because of the high coefficient alpha (α = .82). entrepreneurial orientation. entrepreneurial orientation was measured using a modified version from covin and slevin (1991) and based on prior works of miller (1983) and covin and slevin (1989). the construct was measured by asking respondents twelve (12) questions relating to each dimension proactiveness, innovativeness and risk-taking. each dimension included four items. for example in the case of the innovativeness dimension, we asked respondents ‘compared to others in the industry our company emphasizes’: ‘being first to the market with innovative new products/services’; ‘developing new processes’; ‘recognizing and developing new markets’; and ‘being at the leading edge of technology.’ each of the twelve items used a seven-point likert scale with 1 representing ‘strongly disagree’ to 7 representing ‘strongly agree’. a confirmatory factor analysis was utilized to establish the presence of the multidimensionality of the construct. as expected and similar to past research (e.g. covin & slevin 1991) three dimensions emerged from the analysis with an overall scale reliability of α = 0.86. this construct was labeled “entrepreneurial orientation.” learning orientation. similar to baker and sinkula (1999), we measured two dimensions of the learning orientation construct, commitment to learning and openmindedness. the respondents were asked whether they either agreed or disagreed with eight (each of the two dimensions had four) response items each. for example ‘commitment to learning’ was composed of the following: ‘the ability to learn is the key to our competitive advantage’; ‘learning is a basic value throughout our organization’; ‘employee learning is viewed as investment, not an expense’; and ‘learning is seen as a necessity to guarantee the firm’s survival.’ a seven-point licker scale ranging from 1 – ‘strongly disagree’ to a 7 ‘strongly agree’ was used. confirmatory factor analysis yielded two dimensions as expected with an overall reliability of α = 0.93. we labeled this construct “learning orientation.” information technology competency. respondents were asked fourteen (14) questions concerning the computer-based technology used in their firms following the approach used by tippins and sohi (2003). itc is based on three dimensions: knowledge (4 items), operations (6 items) and objectives (4 items). each item used a seven-point likert type scale ranging from 1 representing ‘strongly disagree’ to a 7 ‘strongly agree.’ respondents were asked how each statement applied to their firm’s use of computer-based information technology. for example the knowledge dimension was comprised of the following four statements: ‘our technical support staff is knowledgeable about computer-based systems’; ‘our firm has a high degree of computer-based technical expertise’; ‘we are knowledgeable about new computer-based innovations’; and ‘we have the knowledge to develop and maintain computer-based communication links.’ a confirmatory factor analysis provided the expected three-factor solution with a high degree of reliability (α = 0.93). we labeled this construct “information technology competency.” firm size. firm size was measured by asking the number of employees currently employed by the firm and the log was used as a control variable. 79 journal of small business strategy vol. 26 ● no. 2 ● 2016 results the means, standard deviations and correlations are reported in table 1. analysis of the data with respect to skewness and kurtosis in the dependent variables fall within the boundaries of normality (shapiro & wilk, 1965) and thus allow for parametric tests of significance. the hypotheses in this study were analyzed using hierarchical regression analysis because an interaction effect exists only if the interaction term yields a significant explanation of variance over and above the direct effects of the independent variables. table 1 means, standard deviations and correlations of variables variable (number of items) mean s.d. 1 2 3 4 5 size (log emp) 3.99 1.04 growth 3.63 0.85 0.18* profitability 3.53 1.01 0.23** 0.57** entrepreneurial orientation 4.75 0.88 0.15 0.28** 0.12 learning orientation 5.73 0.97 0.01 0.26** 0.08 0.51** it competency 4.80 1.31 0.34** 0.21* 0.11 0.44** 0.43** n = 115. *p < .05; **p < .01. to test the above hypotheses a mean split for both the growth and profitability performance measures were calculated. the results are reported in table 2, this process resulted in the creation of low and high groups for growth as well as a low and high groups for profitability. these groupings were used for further analysis and are displayed in tables 2 and 3. table 2 provides the results concerning the assumption of a positive relationship between eo and the performance of smes. interesting and as cautioned by lumpkin and dess (1996) analysis may sometimes yield different results on different dimensions of the performance construct. in this study there is a strong positive relationship between eo and the growth dimension and no evidence for a relationship between eo and profitability. further analysis reveals, with respect to the growth dimension that proactiveness and innovation are the significant contributors to the eo construct. on the profitability dimension of performance there is not a significant difference between low and high profitability firms for the eo construct or any of its dimensions. our assumption of an overall positive relationship on the performance dimension is only partially substantiated by the data. the hierarchical regression results displayed in table 3 provide the results of the hypotheses tests in this study. all three hypotheses are generally supported by the data, though there are some unexpected outcomes that can be considered interesting. on average the lo construct is directly and positively related to eo in a significant way in all analyses with varying levels of significance (p < .05 .001). 80 journal of small business strategy vol. 26 ● no. 2 ● 2016 table 2 comparison of sme performance measures on entrepreneurial orientation dimension low growth (n=51) high growth (n=66) f entrepreneurial orientation 4.26 4.76 8.17** proactiveness 4.46 4.92 19.21** risk taking 3.83 4.13 1.02 innovation 4.32 4.85 4.94* dimension low profitability (n=55) high profitability (n=62) f entrepreneurial orientation 4.66 4.87 1.19 proactiveness 4.94 5.21 2.67 risk taking 4.22 4.34 0.32 innovation 4.83 4.98 0.48 *p < .05; ** p < .01. the direct effects for the relationship between itc and eo are also positive and significant except in the case of low growth firms and high profit firms. when the interaction effect is entered into the analysis the direct effects of lo and itc disappear (except in the case of high profit firms) confirming hypothesis 3. the increase in r2 is significant (p < .05) in all cases (except low growth firms). notable also the variance explained in each of the models. most of the results explain 30-40% of the variance in the eo construct. discussion and implications the primary contribution of this article is to illustrate the relationship between eo and the elements of organization learning that were examined in this study: lo and itc. wiklund and shepherd (2003) effectively linked the eo construct with knowledge based resources. this study further examines and links the notion of learning (closely related to knowledge resources) through lo and itc with eo. in addition this study adds to the evidence of a relationship between eo and firm performance in smes (brettel & rottenberger, 2013). these outcomes are consistent with barney’s (1991) articulation of the resource-based view of the firm. itc, lo, and eo are organizationally embedded constructs having to do with the philosophies in use, values, and culture of small and medium-sized firms (vora, vora, & polley, 2012). such resources that are organizationally embedded lend themselves to the possibility of creating competitive advantage and higher levels of performance. for sme managers the findings indicate that attention devoted to espoused positive values regarding learning, supported by information processing tools and infrastructure and combined with entrepreneurial behaviors higher levels of sme performance are likely to be the result. 81 journal of small business strategy vol. 26 ● no. 2 ● 2016 table 3 regression results for learning orientation and it competency on entrepreneurial orientation while any one of the elements of this study may enhance organizational performance independently, the combination adds a significant level of organization-level social complexity that competitors find difficult to imitate or for which they may find effective substitutes. thus, the combination of eo, lo, and itc fulfill conditions for barney’s (1991) resource-based sustainable competitive advantage. another contribution made concerns the direct relationship to eo of each of the constructs considered. the idea that lo and itc are complementary is demonstrated. when examined independently there seems to be a relationship but when considered together the direct relationship disappears. the implication of this for research and practice is that it takes both lo and itc in conjunction combined with eo within the firm. simply having an orientation to learning is insufficient without the tools to facilitate that learning. conversely, having the tools to provide information to decision makers in the firm without the concomitant philosophy, values and culture may be a poor investment. the third contribution from this study is that the elements of learning embodied in itc and lo are linked in a significant fashion to the orientation of a firm to act entrepreneurially. the link to higher levels of performance demonstrates that the learning elements complement entrepreneurial action yielding higher levels of performance. it is hoped that this will further encourage research into the linkage of organizational learning, entrepreneurial action and the ultimate performance of firms. in the case of this study there is evidence to support this linkage in small and medium-sized firms. the findings of this study offer a number of practical implications for owners or leaders of smes with respect to the entrepreneurial orientation, learning orientation and information technology competencies as these relate to performance. the findings suggest leaders can certainly implement any one of these activities and experience some improvement in performance. however taken together, when leaders of smes take a holistic variables eo eo (low growth) eo (high growth) eo (low profit) eo (high profit) constant 1.66*** 3.94*** 1.69** 3.16* 2.01*** 4.16*** 1.17 6.99 2.27*** 4.61*** log of employees .05 .06 .19 .18 -.09 -.06 .11 .17 -.03 -.01 learning orientation .35** -.03 .26*** .02 .37** .01 .25* -.77 -.41*** .01 it competency .18* -.49 .14 -.31 .22* -.43 .35** -.08 .07 -.68* learning orientation x it comp. .12* .08 .11* .23* .14** f 18.29*** 16.04*** 5.10** 4.15* 13.91*** 11.58*** 10.65*** 9.04*** 10.73*** 11.14*** adjusted r2 .31 .35 .20 .20 .37 .40 .35 .38 .33 .40 change in r2 .04* .001 .03* .03* .07** 82 journal of small business strategy vol. 26 ● no. 2 ● 2016 approach with decision-making and enhancing firm’s learning culture, the findings suggest improvement in performance in a multiple areas. in this study, both growth and profitability improved when leader’s actions were broadly implemented (eo, lo, and itc). further, our findings suggest for those who work with small business not only is it important to create a risk-taking, innovative and proactive environment (eo) but they should also focus on creating an environment of shared learning (lo) and embraces technology know-how (itc). these approaches will result in improved performance levels for the businesses over time. the limitations of this study must be noted. conclusions drawn are valid if the conditions at the time of data collection persist through time. also a variety of different industry segments are represented in our response group but the sample was limited to small manufacturing firms. this restricts generalizability of our results and their interpretation. lastly, the data is self-reported questionnaire responses from a key informant. careful attention was given to the selection of the key informants from which responses were solicited. owners and ceos that are very knowledgeable about the issues in the survey and directly involved in operations of the firm received the solicitation. our checks of the data revealed similar reliabilities and factor loadings to those of previous published research on which our instrument was based. though this is the currently accepted standard methodology in sme and entrepreneurial firm research, common method variance may be an issue that cannot be ruled out. however, beyond the limitations noted we believe the paper makes several important contributions as described above. references acs, z.j. and audretsch, d.b. 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(2003). knowledge-based resources, entrepreneurial orientation, and the performance of small and medium sized businesses. strategic management journal, 24: 1307-1314. wolff, j. and pett, t. and ring, k. (2015) small firm growth as a function of both learning orientation and entrepreneurial orientation: an empirical analysis. international journal of entrepreneurial behavior & research, 21(5): 709 – 730. zahra, s. and covin, j. (1995). contextual influences on the corporate entrepreneurship-performance relationship: a longitudinal analysis. journal of business venturing, 10:4358. zahra, s.a. and george, g. (2000). manufacturing strategy and new venture performance: a comparison of independent and corporate ventures in the biotechnology industry. the journal of high technology management research, 10(2): 313-345. timothy l. pett is an associate professor and chair of the department of business at rollins college. his teaching and research interest deal with small and medium-sized businesses, family businesses, high performance organizations as well as entrepreneurship. he has published in numerous journal articles and presented at international conferences. james wolff is a professor in the management department at wichita state university. his research interests include inter-firm cooperation (joint ventures and strategic alliances), organizational learning and adaptation, small and medium-sized business internationalization, international entrepreneurship, and international competitiveness of small firms in manufacturing supply chains. 86 stravegy book review leaiv thiinkijvg by james p. womack and daniel t. jones simon ec schuster, new york, ny, 1996 reviewed by: robert a. kemp businessmen and women everywhere, owners or managers of businesses of every kind and size must worry constantly about their competitors and the level of competition. the competitors all otter our increasingly astute and demanding customers more ways to satisfy rising expectations. similarly, managers are bombarded daily by arguments that we must be better. we have "right sized", "down sized", "re-engineered" and taken other actions to cut costs and be more effective, but for many firms the situation has not improved. indeed, for many the business situation, in terms of competition and cost control, has not improved; and even worse, for some it has actually deteriorated. every businessperson worth his or her salt understands that operations have to improve to create more customer satisfaction, better support for those who contribute their lives to the business, build more wealth for the owners, and make a better contribution to society. the search is for sustainable growth and success. the question is how do we lead and manage organizations to make this happen? womack and jones brilliantly answer this important question in their book, lean thinking. in the landmark book, the machine thar changed ihe world, the authors explained how companiess could dramatically improve operations through the "lean production" approach developed by toyota. this book, lean thinking extends those ideas and provides new opportunities for the business leaders of today. currently, much of managerial focus is on organizational structure, outdated concepts of value, and processes that continue to waste important human and material resources. it is critical that managers focus on processes that create value for the customer. the authors demonstrate that they believe and practice what they preach. lean thinking is a succinct book. it has three parts with l3 short chapters requiring only 300 pages. there are no wasted words here. even so, this book belongs on every manager's reading list. similarly, it should be required reading for every professor of business —regardlessof discipline. every one must be challenged to understand what value is to the customer and how value is created in the business process. in this book, womack and jones take us by the hand for a trek along the value stream of serving the customer. this book is not just theory; rather it is the theory demonstrated by practice and process in companies that have made the leap to lean thinking. with separate examples, they show how the process of lean thinking works in big and small firms in the united states, the united kingdom, japan, and germany. 97 journal ofsmall business strategy volume 9, no. 2 falllivinrer j998 womack and jones are two of the top industrial researchers in the world. womack maintains a research affiliation with the japan program at the massachusetts institute of technol-ogy and is an adviser to north american firms making the change to lean operations. daniel jones is director of the lean enterprise research center at the cardiff business school, university of cardiff, wales, uk. he is an adviser to european firms making the lean leap. this book, lean thinking, is their second major book as a team. professor eberhard scheuing has noted that professor richard lamming, university of bath, united kingdom, points out that innovation requires destruction; "this is a daunting and exciting challenge for managers —to plan and organize the self destruction of the system, and its renaissance, to ensure long-term survival." on a similar vein, albert einstein once noted that, "we cannot solve problems with the same thinking we used to create the problem." womack and jones have maximized the impact of these thoughts in lean thinking. what professor lamming calls destruction and renaissance, womack and jones call a "leap to the new organization." in lean thinking, womack and jones show us step by step how to destroy the old hierarchical, departmentalized,and inefficient organization to prepare to leap to the new efficient organization that creates value as a stream along the supply chain and manages flow —the lean enierprise. part one defines the value stream and how traditional business practices waste value along the acquisition and production process by wasting time, materials, and human resources. waste caused by traditional practices is the absolute antithesis to value. waste is defined as any activity that uses resources but creates no value for the customer. the value stream that provides customers more than they expect includes all activities from product concept and launch, through order and delivery of materials, transformation and delivery, and the final service. as value is created along the entire supply chain, it is imperative that the managers think and manage along the entire supply chain. it is this flow of activities that create value. the five principles of lean thinking are introduced and carefully defined in part one. in order, the principles are; i, precisely specify value by specific product, 2. identify the value stream for each product, 3. make value flow without interruptions, 4. iet the customer pull value from the producer, and 5. pursue perfection. when we undertake lean thinking, we have to tie the principles together to make full use of lean thinking. it is important to note that any manager dedicated to radical change can understand and apply these principles to the firm —large or small. to apply lean thinking requires that managers first prepare the organization for radical reform. often times the firm is in or near crisis so the actual recognition that radical reform is needed comes from recognizing that the crisis is at hand. historically, we have designed our organizations with boundaries and our conceptual processes are guided by these boundaries. boundaries hinder resource flow and nearly always restrict the use of information up and down the value stream. similarly, the traditional organization is typically built around functional departments that fail to communicate openly and freely. information, if it flows at all, flows up and down the hierarchy. time is wasted. for lean thinking, a key element in defining value and breaking from the antiquated mind sets of traditional organizations is the need to develop and promote organizational transparency. transparency, internally and externally, means that information is shared to support and enhance the flow of value toward the customer. 9g journal ofsmall business strategy volume 9, no. 2 fall/winter 1998 doyle wilson, owner and manager of doyle wilson homebuilder in austin, texas, knows that lean thinking works. he discovered in! 991 that waiting used 83 percent of the six months it took to build a new home. they were waiting for the next process to begin or to redo something that had been done wrong. he decided that the process had to be more efficient. over the next three years wilson personally taught his workforce the principles of tqm, and collected and analyzed enormous amounts of information on every part of his operation and the market. he eliminated sales commissions and "builder bonuses" for his superintendents, downsized the contractor base by two-thirds, and required those remaining to pay'or and complete his monthly quality seminars. construction time for a new home was reduced from six months to 30 days. customer surveys showed a steady increase in customer satisfaction and sales increased, even in a flat market. wilson continued to improve the operations. they added a one-stop sales center where the customer can see, discuss, and choose every option available for a new home. this process includes standard options as well as options to customize the new home. when the design is selected, the exact price is calculated, the mortgage is prepared, the title searched, and insurance is arranged. it is a one-stop process for the new homeowner. in 1995, doyle wilson homebuilder won the national quality housing award. it is oflen called the baldridge award for the construction industry. he aspires to winning the baldridge award in 1998. part one ends with five rules of thumb that are the carefully drawn results created by organizationsthat have made the leap to lean thinking. first, organizationsthat convert from the classic batch and queue production systems to continuous flow, based on pull, will double labor productivity while cutting production times and inventories by 90 percent. second, errors reaching the customer, production scrap, and production injuries will be reduced by half. third, time-to-market will be cut in half and a wider product family can be offered. fourth, capital investmentsare typically quite small and indeed may be negative. fiflh, these improvementscan typically be doubled again in three years by incremental improvements to the lean enterprise. these achievements are astounding, and benchmarking and observation verify the results. as i noted earlier, this book provides both the theory and the process. part two of the book takes the reader to and through the trials and tribulations of eight companies making the leap to lean thinking. the companies are american, english, german, and japanese. different industries are included as well as large and small firms. the case examples include a house builder, a british grocery chain, two smaller u.s. manufacturers, a very large aircrafl engine company, a classic german automobile company, and two japanese manufacturing firms. it is clear from the detailed examples that lean thinking can be accomplished by anyone dedicated to radically transforming the organization for long-term survival. having said that, we must also note that lean thinking is not for the faint of heart or the misguided manager searching for the "quick fix" to cook the books for the next quarter. lean thinking means radical transformation of the firm. making these changes takes time and requires great commitment to the objective. both the theory and process that womack and jones present are exciting. it is even more exciting to see that what they say about lean thinking closely supports and enhances other research. the theory and processes of supply chain management developed over the last few years are enriched by the work of womack and jones. similarly, michael porter, writing in harvard business review (nov.-dec. 1998), defines the new economics of competition based on regional clusters with knowledge, relationships, and motivation that distant competitors cannot hope to match. porter's definition of clusters includes much of what we call supply chain management. much of what womack and jones call the value stream and transparency is needed if the cluster is to be truly effective. it all fits together and it means that we must change our organizational processes and the policies that guide the acquisition and use of resources. 99 journal ofsmall business strategy volume 9, no. 2 fall/winter 1998 part two ends with an "action plan" for the radical transformation of any organization. it includes detailed procedural and process discussions that include research, recognizing or creating a crisis, getting started, dealing with people, and training. these discussions include an idealized timeframe that shows managers that we are in this for the long haul. the final challenge is that the change process is never complete —it is just extended. part three provides a philosophical discussion concerning how lean thinking fits to different cultures. it challenges the reader to come to grips with why things are as they are. most things are not founded on irrefutable law, rather it is the way our predecessors laid them out and it has never been changed. we are challenged to ask why. womack and jones have provided us all, professor and practitioner, a great service. their book challenges us to rethink our work, our communication,our use of resources, our concept of value for our customers, and, most of afl, our innate drive to create a firm that can survive in the world of tomorrow. for businesses, this means radical reorganization based on the supply chain (value streams). it means destroying the old hierarchical, department-dominated structure to reorganize around the flow of value in the family of products provided. for professors and col-leges of business, lean thinking challenges us to consider the same factors and process. our narrowly defined departments which are based on disciplines established years ago, are, distinctively obsolete and do little to help the flow of knowledge to the customer. even worse, in many cases, the desires and traditions of senior professors narrowly define many courses. colleges and departments that have not been drastically reorganized to create a value stream should study lean thinking and benefit from its merits. as professors who take pride in teaching students to be consultants to help others, we need to understand and apply lean thinking in our work. we may never lead a firm to be a totally lean enterprise, but if our students help smaller firms reduce waste, significantly reduce inventories, create pull based on customer needs, and understand that the firm must be transparent in its supply chain (value stream) we will have made a great contribution. equally important, if we instill our students with the ideas of lean thinking we will achieve results through them far beyond our expectations. the question is, "are we willing to make the radical transformation?" lean thinking is a book for all of us, and we ought to use it. robert a. kemp is president of kemp enierprises in des moines, iowa. he is professor emeritus, management, at drake university. he received his ph.d. from arizona state university. for 12 years, professor kemp published a widely-read quarterly report titled the mid-american survey of business conditions based on a survey ofpurchasing managers from eleven mid-western states, he has published several articles and papers on topics concerning militarypreparednessandplanning, purchasingproceduresininternationalbusiness, ethics, and innovation by small businesses. more recently, he and two colleagues have published articles concerning research on ethicsin the purchasing profession ihat cover the us., europe, canada, and india. in his business, dr. kemp consults and leads seminars for purchasing personnel on topics sucli strategic management for purchasing, ethics and change, edi and procurement cards, international purchasing, purchasing image, current issues of purchasing, reverse marketing, and advanced techniques for purchasing. a iong-time member ofsbida, dr. kemp was the 1993-1994 president ofthe national small business insti tute directors 'association. dr. kemp was the 1997-1998president of the national association of purchasing management, a professional organization with over 43,000 members. 100 http://www.smallbusinessinstitute.biz should family firms internationalize? evidence from the survey of business owners mark d. heileman1, timothy l. pett2 1rollins college, mheileman@rollins.edu 2rollins college, tpett@rollins.edu a b s t r a c t the purpose of this study was to explore the characteristics and performance of family-owned firms with internationalization. we were motivated to determine if there were significant differences between family-owned firms with internationalization and other firm types, specifically, family-owned firms without internationalization and non-family-owned firms. the study draws on the census bureau’s survey of business owners (sbo) public use microdata sample (pums). sbo response variables regarding owner demographics, business acquisition, business context, and a number of business performance outcome measures were the outcome variables of interest in this study. a comparison of means was applied to test whether or not there were differences in response variables across the family-owned and non-family-owned firm types. the results indicated that family-owned firms with internationalization, on average, had lower business closures and higher sales than the other firm types, and that firms with internationalization were more efficient in terms of sales per employee and sales per payroll. this study contributes to understanding the characteristics and performance between family-owned and non-family-owned firms in conjunction with those that internationalize and those that did not internationalize. a novel feature of the study experimental design was the incorporation of primary owner characteristics and whether there were any business acquisition, attribute, and performance correlations. the findings suggest practical implications for business growth strategy with regards to exporting, establishing international operations, or outsourcing business functions out of the usa. the study concludes with a discussion of the findings and offers potential future research directions. keywords: journal of small business strategy 2018, vol. 28, no. 01, 1-13 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2018 small business institute® apa citation information: heileman, m. d., & pett, t. l. (2018). should family firms internationalize?: evidence from the survey of business owners. journal of small business strategy, 28(1), 1-13. w w w. j s b s . o rg family-owned firm, internationalization, performance introduction family-owned firms make important contributions to today’s businesses in the form of job creation and growth in the economy. there is widespread agreement that family-owned firms will eventually consider internationalization as one strategy for business growth (kontinen & ojala, 2010; patel, pieper, & hair, 2012). understanding the characteristics of these firms and their business owners may shed light on the importance in measuring the economy’s overall well-being (lichtenstein, 2014). a number of studies have examined the relationships between smalland medium-sized enterprises (smes), which are often family businesses (patel et al., 2012), and owner demographics (blackburn, hart, & wainwright, 2013), business acquisition (fairlie & robb, 2009), and performance (mittelstaedt, harben, & ward, 2003; wincent, 2005; wolff & pett, 2000). however, few studies have explored the relationship between owner demographics, business acquisition, and business context using efficiency measures of performance as demonstrated by sales per employee and sales per payroll (blackburn, hart, & wainwright, 2013; heileman, pett, & mayer, 2016; pett & wolff, 2016). furthermore, few studies have examined these performance outcomes using a holistic measure of internationalization as it relates to family firms (kontinen & ojala, 2010; pukall & calabrò, 2014). there is an increasing interest in ascertaining whether family-owned firms achieve superior performance when compared with their non-family counterparts. further research is needed to understand the determinants of family firm performance (graves & shan, 2014). the motivation for this research was to determine if there were significant differences between family-owned firms with internationalization and other firm types, specifically, family-owned firms without internationalization and non-family-owned firms. theoretical framework and hypotheses today’s global markets and environment play an important role in the growth and success of family-owned firms. growth is a major strategic decision for all business enterprises, and global expansion is one available option for firms to consider. however, internationalization is a http://www.smallbusinessinstitute.biz http://www.jsbs.org 2 m. d. heileman, & t. l. pett journal of small business strategy / vol. 28, no. 1 (2018) / 1-13 complex pathway not often chosen by family firms. without timely and productive responses to global shifts, many family businesses potentially face decline or failure (patel et al., 2012). the intention of this study was to explore family-owned firms with internationalization in conjunction with the business characteristics and performance. the central research question we sought to investigate was: do different firm types—that is family-owned firms with internationalization, family-owned firms without internationalization, not family-owned firms with internationalization, and not family-owned firms without internationalization—have different characteristics such as owner demographics, business acquisition, and business context, as well as different business performance? numerous studies have examined smes relative to size and characteristics such as owner demographics and business acquisition methods (blackburn et al., 2013; fairlie & robb, 2009; mittelstaedt et al., 2003; wincent, 2005; wolff & pett, 2000). on the other hand, few studies have explored the relationship between owner demographics, business acquisition, and business context with measures of performance as demonstrated by sales and employee efficiency with regards to sales (blackburn et al., 2013; heileman et al., 2016; pett & wolff, 2016). family firms family firms represent a significant economic force, yet no clear consensus exists regarding the definition of what constitutes a family business (abdellatif, amann, & jaussaud, 2010; kontinen & ojala, 2010). chua, chrisman, and sharma (1999) provided a comprehensive review of the literature on the definition of family business. several observations were made about these definitions. first, with few exceptions, the definitions did not differentiate between governance and management. second, some required controlling ownership or family management alone while others required both ownership and management. thus, the generally accepted definitions were placed into three different groups: (i) family owned and family managed, (ii) family owned but not family managed, and (iii) family managed but not family owned firm. the census bureau (2012) approach could follow chua et al.’s (1999) first two forms of a family business, defining family business firms as having two or more members of the same family owning the majority of the business (where family refers to spouses, parents/guardians, children, siblings, or close relatives). this research uses this definition as presented in the report provided by the census bureau’s characterization of a family firm. overall, previous research found that family businesses generally perform better and enjoy a sounder financial structure than do non-family businesses (abdellatif, amann, & jaussaud, 2010). on the other hand, research findings indicate that while the extent of innovation positively influences the long-term sales growth of entrepreneurial firms, it is negatively moderated by family involvement (chang, memili, chrisman, & welsh, 2011). internationalization internationalization is an ambiguous term in the family business literature. internationalization is the process of increasing involvement of firms in international markets, although there is no agreed definition of internationalization (kontinen & ojala, 2010). bose (2016) identified four critical success factors for sme internationalization—current scenario, future prospects, competencies, and strategies— along with a framework for presenting the relationship among these factors. however, cieślik, kaciak, and welsh (2010) found that early involvement in international activities negatively affected the survival and regularity of sales of small exporters but positively impacted larger exporters. the internationalization of large multinational enterprises has numerous theories of how firms internationalize including the eclectic theory, uppsala model, and internationalization theory (reuber, 2016). nonetheless, these theories have provided little support for understanding or explaining the internationalization of either smes or family firms. many studies implicitly or explicitly assume that sales generated outside the home country (or exports) is referred to as internationalization (pukall & calabrò, 2014). however, there are other dimensions to internationalization involving the firm’s exploitation of opportunities across national borders in order to create goods and services (kontinen & ojala, 2010; patel et al., 2012; pukall & calabrò, 2014). which component of internationalization should be analyzed depends on the research question asked. to achieve a more comprehensive grasp of this multidimensionality, in this study internationalization was defined as firms that (i) have exports or (ii) have established operations outside the usa or (iii) have outsourced business functions out of the usa. business acquisition the business owner may have acquired the business by founding it, purchasing it, inheriting it, or receiving it as a transfer or gift. family firms tend to avoid external ownership to stay independent, and may be willing to accept negative outcomes such as poorer performance than that of non-family firms (kraus, mensching, calabrò, cheng, & filser, 2016). family firm owners accumulate economic and noneconomic wealth they may wish to transfer to the next generation (carr, chrisman, chua, & steier, 2016). in general, owners of inherited businesses have less involvement with decision-making than owners of founded or purchased businesses (becherer, finch, & helms, 2006). fairlie and robb, (2009) found inherited businesses are more successful and larger than non-inherited businesses. however, because inheritances only made up 1.6 percent of all sme businesses in fairlie and robb’s (2009) dataset, the importance in determining broad business outcomes was slight. the findings suggest that management experience 3 m. d. heileman, & t. l. pett journal of small business strategy / vol. 28, no. 1 (2018) / 1-13 prior to starting or acquiring a business generally improves business outcomes. how the business was acquired by the owner led to our first set of hypotheses: hypothesis 1a. family firms that internationalize are more likely to inherit (or receive by transfer) the business compared to either family firms with no internationalization or non-family owned firms. hypothesis 1b. non-family firms are more likely to buy or found a business compared to family firms. business context the business context seeks to provide a description of the environment in which the business operates (porter, 2004). research has shown that larger businesses tend to survive for a longer time (are older) than smaller companies. according to bercovitz and mitchell (2007), this is because these firms have a greater business scale and business scope that enhances long-term survival, independent of baseline profitability, owing to greater availability of financial resources, organizational routines, and external ties. while new ventures tend to quickly exhaust the limited financial resources of founders, family, and friends, they often pursue external startup capital. plummer, allison, and connelly’s (2016) findings imply that a startup firm's characteristics and actions are signals that remain relatively unnoticed unless the firm combines them with a third-party affiliation which enhances the signal, consequently increasing the likelihood of receiving external startup capital. the context of the franchise industry differs from other industries, for example, a franchisor/franchisee are legally separate entities, professionally and economically dependent (symbiotic), and operationally indistinguishable from each other from the viewpoint of the consumer (parsa, 1996). contextual constructs in this study included the year the business was established, amount of startup capital, and whether or not the firm was a franchise. the above discussions led to our second hypothesis: hypothesis 2. family firms that internationalize tend to be more established (older) and better (higher) funded compared to either family firms with no internationalization or non-family-owned firms. business performance the relationship between business activities and performance of smes has long been investigated (lu & beamish, 2001). pett and wolff (2007) developed the theoretical arguments for a contingent path relationship among variables representing the environment, capabilities, strategic orientation, and firm performance. the proposition underpinning their study is that internal consistency (or fit) among these contingent relationships yields higher performance levels. their findings support the belief that internally consistent resources lead to higher levels of performance. mittelstaedt et al. (2003) examined whether there is a minimum size that firms must achieve in order to take advantage of the benefits of exporting. their argument was built on the contributions of previous research in the areas of smes and export success and smes in the export development process (wolff & pett, 2000). analysis of manufacturing exports indicated that firm size was a necessary and sufficient condition for export success among small manufacturing firms. wincent (2005) developed and empirically tested a framework on how firm size can matter for firm behavior and performance in strategic networks of smes. the author’s research considered statistical analysis of standardized questionnaires as well as analysis from face-to-face interviews with managers in sme networks. the findings suggest that firm size can be an important determinant for firm performance. in addition, the study found that networking inside and outside the sme network plays a role. the study suggests that different networking behaviors can have different roles for pursuing corporate entrepreneurship. blackburn et al. (2013) contributed to the understanding of the factors that influence sme performance, in particular, growth. their study utilized smes employing less than 250 employees, which may or may not be similar to family firms. the results suggest that size and age of an enterprise significantly explain more of performance and they are more important than strategy and the entrepreneurial characteristics of the owner. heileman et al. (2016) explored the relationship of sme characteristics and performance taking into account the firm size based on number of employees. the results suggest that smaller smes have different characteristics and performance regarding owner demographics, business acquisition methods, and business performance metrics compared to larger smes. how a business performed in terms of closures, sales, and sales efficiency metrics led to the final set of hypotheses: hypothesis 3a. family firms that internationalize tend to have higher performance outcomes than family firms with no internationalization. hypothesis 3b. firms that internationalize tend to have higher performance outcomes than firms with no internationalization. method this current study draws on the us census bureau’s survey of business owners (sbo) public use microdata sample (pums). the census bureau’s sbo provides a comprehensive source of information, which is regularly collected, on selected economic and demographic characteristics for businesses and business owners by gender, ethnicity, race, and veteran status. the sbo pums file includes nationaland state-level data as well as detailed characteristics of businesses and their owners, although protecting 4 m. d. heileman, & t. l. pett journal of small business strategy / vol. 28, no. 1 (2018) / 1-13 the confidentiality of survey respondents. the sbo is part of the economic census which is collected every five years in years ending in “2” and “7” (us census bureau, 2012). the sbo pums for this study contains 2,165,680 data observations from the most recent publicly available 2007 survey. the study experimental design involved classifying firms into one of four different categories based on family-owned firm internationalization. data the census bureau’s pums file was created for the 2007 sbo. the sbo collected information on a number of variables related to family and non-family firms regarding gender, ethnicity, race, and veteran status of business owners, to name a few. the sbo furthermore collected characteristics of businesses and business owners, such as the sources of capital used to start the business and the age of the business owner. the sbo produced estimates for a variety of industry classifications and geographic levels (us census bureau, 2012). the sbo included all nonfarm businesses filing internal revenue service tax return forms for individual proprietorships, partnerships, or any type of corporation, having receipts of $1,000 or more. the sbo included firms with paid employees and firms with no paid employees. the sbo was conducted on a company or firm basis, rather than on an establishment basis, where a company or firm is a business consisting of one or more domestic establishments that the reporting firm specified under its ownership or control (us census bureau, 2012). design for the purposes of this study, internationalization was defined as firms that have exports or have established operations outside the usa or have outsourced business functions out of the usa, as reported to the sbo. this approach provides a broader understanding of internationalization as suggested by patel et al. (2012). furthermore, family-owned businesses were indicated in the sbo by the respondents. each firm in the dataset was positioned into one of four categories: (i) family-owned firms with internationalization, (ii) family-owned firms without internationalization, (iii) not family-owned firms with internationalization, or (iv) not family-owned firms without internationalization. these four categories were used as the predictor variables for this study. the sample used for our analysis included firms that meet a minimum business activity expectation to rule out business activities that were deemed casual or side-businesses owned by wage/salary workers, as suggested by other researchers (fairlie & robb, 2007; fairlie & robb, 2009). specifically, the business must have operated for at least twelve months and not be a seasonal or occasional business. these criteria resulted in the exclusion of 42.3 percent of the firms in the original dataset. the final dataset used in this study excluded the sbo responses for firms deemed to be casual or side-businesses. the study dataset consisted of 1,096,923 survey observations. descriptive characteristics and performance measures of the four firm types in our sample are presented in table 1. the sample size is the number of firms identified in each of the four categories. the average employment, payroll, and sales for each firm category are provided. the sbo provides responses for up to four owners of a business, but for consistency purposes, only characteristics for the first owner, that is owner 1, were used in this study. demographic information about the representative owner 1 (or primary owner of the business) is provided along with how that owner acquired the business. business context including the year the business was established, the amount of startup capital used, and operated as a franchise for each firm type group is presented. the number of businesses which closed (that is, no longer operating at the time of the survey) is reported in each firm category. two efficiency metrics in regards to sales per employee and sales per payroll were calculated and are provided in the table. the sales per employee metric was calculated as the firm’s receipts divided by the number of employees in 2007 and the sales per payroll metric was calculated as the firm’s receipts divided by the firm’s payroll in 2007. the final dataset used in this study included all sbo responses for firms reporting as either family-owned or not family-owned, excluding casual or side-businesses. the study dataset contained a total of 1,096,923 survey observations. each firm in the study was placed into one of four categories based on whether or not it was family-owned and whether or not it had internationalized. there were 59,995 family-owned firms with internationalization, 318,885 family-owned firms with no internationalization, 89,995 not family-owned firms with internationalization, and 628,088 not family-owned firms with no internationalization. the demographic and business acquisition data is analyzed as reported for the first (or primary) owner in the survey. the gender, education, and age averages by firm type are also presented in table 1. the data indicate that the primary owner tended to be most often male, and that the proportion of male ownership tended to increase as firms internationalize. the data illustrates that the education level for the primary owner of a firm averaged between some college and an associate’s degree. the data also indicates that the primary owner age for firms averaged between 45 and 64 years old. table 1 contains measures relating to business acquisition statistics showing whether the owner founded, purchased, inherited, or received the business via a transfer or gift, respectively, by firm type. the data indicates all types of firms were primarily founded by the owner. however, non-family-owned firms were more often founded by the primary owner than family-owned firms. contextual constructs are presented, which include the year the business was established, amount of startup capital, and whether or not the firm was a franchise. the year 5 m. d. heileman, & t. l. pett journal of small business strategy / vol. 28, no. 1 (2018) / 1-13 the business was established used a categorical approach which indicates an average between 1980 and 1999 for family-owned firms with internationalization, while family-owned firms with no internationalization averaged between 1990 and 2002. as for non-family-owned firms with internationalization it was from 1990 to 2002 on average, and for not family-owned firms with no internationalization it averaged from 2000 to 2003. the amount of startup capital averaged between $50,000 and $249,999 for firms with internationalization, while firms with no internationalization averaged between $25,000 and $99,999 respectively. very few firms operated as a franchise, but family-owned firms with no internationalization were more likely to operate as a franchise than the other firm types as presented in table 1. the sbo pums data contain information on four major business performance outcomes: operating, employment, payroll, and sales. although none of these measures alone represents a universally agreed upon measure of success, taken together they provide a better view of what it means to be successful in business. the key performance indicators for this study included currently operating business and the firm’s sales, as well as the relative efficiency of the firm types in terms of sales per employee and sales per payroll. results for these four performance measurements across the groups are provided in table 1. the performance results indicate that family-owned firms with internationalization are less likely to have closed and have higher average sales than any other firm type. the results also suggest that firms with internationalization are generally more efficient in regards to sales per employee and sales per payroll than firms without internationalization. results the sbo response variables regarding owner demographics (that is, gender, education level, and age), business acquisition (that is, founded, purchased, inherited, or transferred/gifted), and business context (that is, year established, amount of startup capital, and operated as a franchise) are outcome variables in this study. the coding for the sbo response variables is provided in appendix i. the key performance indicators for this study were business currently operating and the firm’s receipts in 2007, or fundamentally “sales.” in order to consider the relative efficiency of the firm, sales per payroll and sales per table 1 firm type group characteristics and performance family-owned firms non family-owned firms internationalization no internationalization internationalization no internationalization sample size 59,995 318,885 89,955 628,088 mean employment 38.51 21.59 29.58 15.42 mean payroll $1,698,960 $712,820 $1,476,070 $574,240 mean receipts $11,692,610 $4,067,960 $9,000,790 $2,694,080 female owner 10,676 67,199 18,075 177,033 male owner 46,993 251,570 70,703 451,016 owner founded the business 34,217 218,993 60,182 484,465 owner purchased the business 13,607 68,809 20,032 105,258 owner inherited the business 6,494 13,900 3,130 10,331 owner received transfer/gift of business 5,787 16,541 2,651 12,012 mean owner education level some college to associate's degree some college to associate's degree some college to associate's degree some college to associate's degree mean owner age 45 to 64 45 to 64 45 to 64 45 to 64 mean year business established 1980 to 1999 1990 to 2002 1990 to 2002 2000 to 2003 mean amount of startup capital $50,000 to $249,999 $25,000 to $99,999 $50,000 to $249,999 $25,000 to $99,999 operated as a franchise 2,000 16,203 2,247 18,616 business closed (not operating) 2,812 (5%) 20,314 (6%) 7,742 (9%) 65,856 (10%) sales per employee $388,612 $232,609 $440,199 $227,746 sales per payroll $8.75 $7.29 $8.99 $6.45 the samples are based on the 2007 survey of business owners (sbo) as described by the public use microdata sample (pums) provided by the us census bureau. the data used in this study are the first owner responses only, the business operated at least 12 months, and was not a seasonal or occasional business. 6 m. d. heileman, & t. l. pett journal of small business strategy / vol. 28, no. 1 (2018) / 1-13 employee were also calculated for performance measures. a data transformation using the natural logarithm function was applied to ratio-level performance measurements (that is, sales, sales per payroll, and sales per employee) in order to improve the interpretability of the results. these four performance measurements provide the principal outcome variables for the study. the outcome variables including the sbo response variables and the calculated performance measures are provided in table 2. the outcome variable descriptive statistics and correlations for all firms included in the study dataset are presented in table 2. for example, the mode of the first variable, gender, was 1 (male), the mean was 0.73, and the standard deviation was 0.44. this result can be interpreted as more male verses female respondents or about 3 to 1 male to female. the noticeable gap between the mode and the mean for the outcome variables startup capital and sales indicate a positively skewed probability distribution for those outcome variables. comparison of means in this study we gathered characteristic and performance information about four firm types, or populations, in order to compare if any differences existed across the four groups. we compared the means across each business characteristic or performance measure for the four firm types listed in table 3. we calculated a 95 percent confidence interval for the population mean for each business characteristic and performance measure for each firm type shown in table 3. the confidence intervals were computed as follows: lower confidence limit (lcl) = upper confidence limit (ucl) = n s tx + this approach allowed us to determine if there was a statistically significant difference in population means for any two confidence intervals across a particular business characteristic or performance measure when the confidence intervals had no overlapping ranges. if the two confidence intervals being compared did not have overlapping ranges, then we had evidence there was a statistically significant difference in the population means at p < 0.05. (an independent samples t-test was used to confirm the statistically significant differences in means.) owner demographics, that is gender, education, and age, were examined to determine if any differences existed across the four groups (see table 3). differences between the groups were found on most of the demographic characteristics. however, there were some instances when no table 2 sbo response variables, descriptive statistics, and correlations variable mode mean std. dev. 1 2 3 4 5 6 7 8 9 10 11 12 13 gender 1 0.73 0.44 education 6 4.08 2.41 0.09 age 4 3.68 1.77 0.13 0.51 founded 1 1.09 0.59 0.11 0.43 0.54 purchased 2 1.57 0.71 0.07 0.53 0.62 0.32 inherited 2 1.71 0.68 0.11 0.59 0.70 0.65 0.82 transferred/ gifted 2 1.71 0.68 0.11 0.59 0.71 0.63 0.82 0.94 established 3 3.87 2.74 -0.16 -0.12 -0.34 -0.24 -0.08 -0.14 -0.15 startup$ 1 5.09 3.48 0.02 -0.02 -0.01 0.08 -0.12 -0.10 -0.10 0.00 franchise 2 1.95 0.28 -0.01 0.00 -0.02 -0.05 0.04 0.00 0.00* 0.01 0.00* closure 2 1.89 0.31 0.10 0.15 0.15 0.09 0.11 0.12 0.11 -0.23 -0.01 0.02 ln(sales) 2.3 8.27 10.69 0.03 0.02 0.03 0.04 0.00 0.00 0.00 -0.06 0.05 -0.01 0.03 ln(sales/ employee) 4.6 5.56 7.03 0.03 0.02 0.01 0.01 0.00* 0.00 0.00* -0.03 0.03 0.01 0.02 0.25 ln(sales/ payroll) 1.1 1.96 3.11 0.02 -0.02 0.00 0.01 -0.01 -0.01 0.00 0.00* 0.02 -0.01 0.00 0.13 0.58 *not significant at p < 0.05 (2-tailed). 7 m. d. heileman, & t. l. pett journal of small business strategy / vol. 28, no. 1 (2018) / 1-13 ta bl e 3 pr od uc tio n of 9 5% c on fid en ce in te rv al s fo r t he m ea ns o f b us in es s ch ar ac te ri sti cs a nd p er fo rm an ce fa m ily -o w ne d fi rm s n ot f am ily -o w ne d fi rm s in te rn ati on al iz ati on n o in te rn ati on al iz ati on in te rn ati on al iz ati on n o in te rn ati on al iz ati on m ea n st d. d ev . va lid o bs . lc l u cl m ea n st d. d ev . va lid o bs . lc l u cl m ea n st d. d ev . va lid o bs . lc l u cl m ea n st d. d ev . va lid o bs . lc l u cl o w ne r d em og ra ph ic s: g en de r 0. 81 0. 39 57 ,6 69 0. 81 0. 82 0. 79 0. 41 31 8, 76 9 0. 79 0. 79 0. 80 0. 40 88 ,7 78 0. 79 0. 80 0. 72 0. 45 62 8, 04 9 0. 72 0. 72 ed uc ati on 4. 67 2. 02 59 ,9 95 4. 66 4. 69 4. 43 1. 97 31 8, 88 5 4. 43 4. 44 4. 72 2. 14 89 ,9 55 4. 70 4. 73 4. 66 2. 07 62 8, 08 8 4. 65 4. 66 a ge 4. 35 1. 32 59 ,9 95 4. 34 4. 36 4. 31 1. 21 31 8, 88 5 4. 30 4. 31 4. 05 1. 40 89 ,9 55 4. 04 4. 05 4. 03 1. 30 62 8, 08 8 4. 03 4. 04 bu si ne ss a cq ui si tio n: fo un de d 1. 34 0. 56 59 ,9 93 1. 34 1. 34 1. 30 0. 47 31 8, 88 5 1. 29 1. 30 1. 21 0. 53 89 ,9 19 1. 21 1. 22 1. 17 0. 45 62 8, 08 8 1. 17 1. 18 pu rc ha se d 1. 70 0. 53 59 ,9 93 1. 70 1. 71 1. 77 0. 44 31 8, 88 5 1. 77 1. 77 1. 67 0. 57 89 ,9 19 1. 67 1. 68 1. 78 0. 48 62 8, 08 8 1. 78 1. 78 in he ri te d 1. 86 0. 38 59 ,9 93 1. 86 1. 87 1. 94 0. 27 31 8, 88 5 1. 94 1. 94 1. 87 0. 46 89 ,9 35 1. 86 1. 87 1. 93 0. 35 62 8, 08 8 1. 93 1. 93 tr ns fr d/ g ift ed 1. 88 0. 37 59 ,9 93 1. 87 1. 88 1. 93 0. 28 31 8, 88 5 1. 93 1. 93 1. 87 0. 46 89 ,9 36 1. 87 1. 88 1. 93 0. 35 62 8, 08 8 1. 93 1. 93 bu si ne ss co nt ex t: es ta bl is he d 2. 56 2. 19 59 ,9 95 2. 54 2. 58 3. 37 2. 44 31 8, 88 5 3. 36 3. 38 3. 63 2. 78 89 ,9 55 3. 62 3. 65 4. 03 2. 68 62 8, 08 8 4. 02 4. 03 st ar tu p$ 5. 63 3. 21 59 ,9 95 5. 60 5. 65 4. 98 3. 19 31 8, 88 5 4. 97 4. 99 5. 66 3. 32 89 ,9 55 5. 64 5. 69 4. 90 3. 52 62 8, 08 8 4. 89 4. 91 fr an ch is e 2. 01 0. 56 59 ,7 28 2. 00 2. 01 1. 94 0. 28 31 8, 87 6 1. 94 1. 94 1. 97 0. 28 89 ,7 92 1. 97 1. 97 1. 96 0. 24 62 8, 08 0 1. 96 1. 96 bu si ne ss pe rf or m an ce : cl os ur e 1. 95 0. 21 59 ,8 44 1. 95 1. 95 1. 94 0. 24 31 8, 10 0 1. 94 1. 94 1. 91 0. 28 89 ,5 81 1. 91 1. 92 1. 89 0. 31 62 6, 21 0 1. 89 1. 90 ln (s al es ) 16 .2 7 18 .0 6 59 ,9 95 16 .2 3 16 .3 2 15 .2 2 17 .1 0 31 8, 88 5 15 .2 0 15 .2 4 16 .0 1 18 .0 2 89 ,9 55 15 .9 6 16 .0 6 14 .8 1 17 .2 2 62 8, 08 8 14 .7 8 14 .8 3 ln (s al es /e m pl y) 12 .8 7 14 .2 1 44 ,4 80 12 .8 3 12 .9 1 12 .3 6 13 .6 4 19 5, 00 5 12 .3 4 12 .3 7 12 .9 9 14 .4 4 56 ,9 76 12 .9 6 13 .0 3 12 .3 4 13 .8 4 31 8, 87 8 12 .3 2 12 .3 5 ln (s al es /p ay ro ll) 2. 17 2. 99 46 ,2 94 2. 15 2. 19 1. 99 3. 01 20 7, 79 4 1. 98 2. 00 2. 20 3. 31 60 ,2 42 2. 17 2. 22 1. 86 3. 11 34 7, 21 2 1. 85 1. 88 8 m. d. heileman, & t. l. pett journal of small business strategy / vol. 28, no. 1 (2018) / 1-13 difference between the groups was found. for example, by examining the confidence intervals for gender between family firms with no internationalization and non-family firms with internationalization, the results suggest no significant differences as indicated by the overlap of the confidence limits between the two groups. overall, the results suggest owners of family firms that internationalized tended to be more male, better educated, and older; while owners of non-family firms with no internationalization had the lowest values for gender (less male), education, and age (youngest) across the four groups. business acquisition was next examined by examining the differences for the variables founded, purchased, inherited, and transferred/gifted across the four groups—those results are presented in table 3. a mean lower score indicates agreement. as an example, for the variable, founded the business, non-family firms with no internationalization had the lowest mean score (1.17). likewise, non-family firms with internationalization had the lowest mean score (1.67) for purchased. family firms with internationalization had the lowest score for inherited (1.86) and similar low score for transfer/gifted (1.88) with non-family firms with internationalization when examining the confidence intervals for the two groups. these results support both hypothesis 1a and 1b. hypothesis 1a suggests that family firms that internationalize would be more likely to inherit or receive by transfer/ gift the business compared to either family firms with no internationalization or non-family owned firms. because internationalization often takes resources, organizational commitment, and time to carryout, these businesses we suggest would more likely be transferred from generation to generation. the results support this hypothesis. hypothesis 1b suggests that non-family firms are more likely to buy or start a business compared to family firms. these results also support this hypothesis. business context was examined in terms of when established (year), amount of startup capital, and whether or not the business was a franchise. these contextual variables help to understand how these firms operate. family firms with internationalization scored significantly lower on established (2.56) than the other three groups. this suggests that family firms that internationalize are the oldest firms. firms that had internationalized, either family (5.63) or not family (5.66), had significantly more startup capital than firms with no internationalization presence. finally, family firms that internationalized tended to have fewer franchisees (2.01) compared to all groups. these results partially support hypothesis 2 which states family firms that internationalize are more established (older) and better (higher) funded compared to either family firms with no internationalization or non-family firms. the results suggest that all firms that internationalized had more startup capital compared to those that did not internationalize. finally, we wanted to examine the difference in performance across the four groups; with performance being characterized beyond just financial performance to include business survival. survival of the firm, which is the inverse of closure, is significantly healthier for family firms (1.95) compared to other groups. a line chart of the means for the business closure performance measure is given in figure 1. the data point markers indicate the mean business closures reported (that is, yes or no) for each firm group. the business closure means are significantly different for each firm group. the data suggests that family-owned firms with internationalization go out of business less frequently than any other firm group, and that family-owned businesses generally go out of business less often than not family-owned businesses. family firms with internationalization sales (transformed by the natural logarithm) were significantly higher (16.27) than any other group. a line chart for the means for the natural logarithm of sales performance measure is provided in figure 2. the data point markers illustrate the mean receipts for each firm group. the means for the natural logarithm of sales are significantly different for each firm group. the data suggests that family-owned firms with internationalization have the highest sales on average, and that firms with internationalization generally have higher sales than firms without internationalization. sales per employee was measured for each of the four groups; here non-family firms that internationalized scored the highest (12.99) followed by family firms that internationalized (12.87). a line chart illustrates the means for the natural logarithm of sales per employee performance measure in figure 3. the data point markers indicate the mean sales per employee for each firm group. the means for the sales per employee are not significantly different for family-owned firms with no internationalization and not family-owned firms with no internationalization (which is indicated in figure 3 with the circle around the data point markers). while the data suggests that not family-owned firms with internationalization have the most efficient sales per employee, and that firms with internationalization generally have more efficient sales per employee than firms without internationalization. the results illustrate the significant differences between those firms that internationalize compared to firms that do not internationalize. finally, the means for the natural logarithm of sales per payroll performance measure suggest that again, internationalization matters. non-family firms with internationalization scored the highest (2.20) and family firms with internationalization scored (2.17) with the confidence interval suggesting no difference between these two groups. these results are also illustrated in figure 4. the data point markers indicate the mean sales per payroll for each firm group. again, the means for the sales per payroll are not significantly different for family-owned firms with internationalization and not family-owned firms with internationalization (which is indicated in figure 4 with the circle around the data point markers). this suggests that firms with internationalization have the most efficient sales per payroll, and that not family-owned firms with no internationalization generally have the least efficient sales per 9 m. d. heileman, & t. l. pett journal of small business strategy / vol. 28, no. 1 (2018) / 1-13 1.89 1.90 1.91 1.92 1.93 1.94 1.95 1.96 means plot for business closure family-owned firm w/ internationalization family-owned firm w/o internationalization not family-owned firm w/ internationalization not family-owned firm w/o internationalization figure 1. means plot for the business closure performance measure. payroll. these results taken together suggest that overall family firms that internationalize have better performance outcomes than other firms. these results support hypothesis 3a which suggests when family firms internationalize they will experience higher performance outcomes than family firms with no internationalization. the results also suggest those firms that internationalize have better performance outcomes than firms that do not internationalize, regardless of whether or not the firms are family-owned or non-family-owned. these results support hypothesis 3b which states that any firms that internationalize will have higher performance than those firms that do not internationalize. implications and conclusion the limitations of this study are the constraints on the generalizability, the applications to practice, and the utility of findings that result from the ways in which we principally chose to design the study. the survey data for this study was obtained from the census bureau’s 2007 sbo pums. we excluded data from firms that did not meet a minimum business activity expectation. to be included, the business must have operated for at least twelve months and must not be a seasonal business or an occasional business. the sbo collected demographic information for at least one owner and up to four owners of each business firm. we designated owner 1 as the primary owner of interest for this study, thus excluding data and analyses for owner 2, owner 3, and owner 4 if that data were reported. the sbo covers both firms with paid employees and firms with no paid employees. for business performance evaluation purposes, we excluded data from firms with no employees or with no payroll in order to determine finite values for the business efficiency metrics (that is, sales per employee and sales per payroll). this study contributes to understanding the characteristics and performance between family-owned firms and non-family-owned firms, both with internationalization and without internationalization. a novel feature of the study experimental design was the incorporation of primary owner characteristics and whether there were any business acquisition and business performance correlations. the findings suggest that internationalization (as defined in this study) of family businesses improves performance on a number of fronts, including reduced closures and increased 10 m. d. heileman, & t. l. pett journal of small business strategy / vol. 28, no. 1 (2018) / 1-13 14.5 15.0 15.5 16.0 16.5 means plot for ln(sales) family-owned firm w/ internationalization family-owned firm w/o internationalization not family-owned firm w/ internationalization not family-owned firm w/o internationalization figure 2. means plot for the natural logarithm of sales performance measure. sales. the research implications indicate opportunity for future research using the sbo pums data. for instance, we could extend the research to include all reported owners of a firm, as well as to estimate the effect of each business characteristic on the business performance differences between family-owned businesses with internationalization, family-owned firms without internationalization, non-family-owned firms with internationalization, and non-family-owned firms without internationalization. furthermore, we could examine the industries of the different firms and test for significant differences among the industries. the sbo is part of the economic census program, which the census bureau is legally required to conduct every five years (us congress, 2009), in the years ending in “2” and “7.” the census bureau combines data from the sbo with data from other sources, including economic surveys, economic censuses, and administrative records. the sbo is the primary source of statistics about the demographic characteristics of the owners of approximately 28 million american businesses, together with how the business is organized and its activities. many economic and social researchers routinely use the sbo statistics (us census bureau, 2012). understanding the characteristics of family-owned firms and internationalization is essential to better understand the competitive nature of today’s businesses as well as for policymakers. this study is policy relevant given the importance of successful family business ownership for job creation, economic growth, income generation, and wealth accumulation. the findings suggest practical implications for business growth strategy with regards to exporting, establishing operations outside the usa, or outsourcing business functions out of the usa. although these results are based on what could be described as a unique measure of a family business, that is, two family members owning more than fifty percent of the business, other measures along this line may provide additional insight on defining a family firm. likewise, we used 11 m. d. heileman, & t. l. pett journal of small business strategy / vol. 28, no. 1 (2018) / 1-13 12.3 12.4 12.5 12.6 12.7 12.8 12.9 13.0 means plot for ln(sales/employee) family-owned firm w/ internationalization family-owned firm w/o internationalization not family-owned firm w/ internationalization not family-owned firm w/o internationalization figure 3. means plot for the natural logarithm of sales per employee performance measure. 1.8 1.9 2.0 2.1 2.2 means plot for ln(sales/payroll) family-owned firm w/ internationalization family-owned firm w/o internationalization not family-owned firm w/ internationalization not family-owned firm w/o internationalization figure 4. means plot for the natural logarithm of sales per payroll performance measure. 12 m. d. heileman, & t. l. pett journal of small business strategy / vol. 28, no. 1 (2018) / 1-13 a more holistic view of internationalization of the family firm including have exports or have established operations outside the usa or have outsourced business functions to define internationalization. future research could examine the generalizability of these findings in other settings and countries. references abdellatif, m., amann, b., & jaussaud, j. (2010). family versus nonfamily business: a comparison of international strategies. journal of family business strategy, 1(2), 108–116. becherer, r. c., finch, j. h., & helms, m. m. (2006). the influences of entrepreneurial motivation and new business acquisition on strategic decision making. journal of small business strategy, 16(2), 1–13. bercovitz, j., & mitchell, w. (2007). when is more better? the impact of business scale and scope on longterm business survival, while controlling for profitability. strategic management journal, 28(1), 61–79. blackburn, r. a., hart, m., and wainwright, t. (2013). small business performance: business, strategy and owner-manager characteristics. journal of small business and enterprise development, 20(1), 8–27. bose, t. k. (2016). critical success factors of sme internationalization. journal of small business strategy, 26(2), 87–109. carr, j. c., chrisman, j. j., chua, j. h., & steier, l. p. (2016). family firm challenges in intergenerational wealth transfer. entrepreneurship theory and practice, 40(6), 1197–1208. chang, e. p. c., memili, e., chrisman, j. j., & welsh, d. h. b. (2011). what can drive successful entrepreneurial firms? an analysis of inc. 500 companies. journal of small business strategy, 22(2), 27–49. chua, j. h., chrisman, j. j., & sharma, p. (1999). defining the family business by behavior. entrepreneurship theory and practice, 23(4), 19–39. cieślik, j., kaciak, e., & welsh, d. h. b. (2010). the effect of early internationalization on survival, consistency, and growth of export sales. journal of small business strategy, 21(1), 39–64. fairlie, r. w., & robb, a. m. (2007). why are black-owned businesses less successful than white-owned businesses: the role of families, inheritances, and business human capital. journal of labor economics, 25(2), 289–323. fairlie, r. w., & robb, a. m. (2009). gender differences in business performance: evidence from the characteristics of business owners survey. small business economics, 33, 375–395. graves, c., & shan, y. g. (2014). an empirical analysis of the effect of internationalization on the performance of unlisted family and nonfamily firms in australia. family business review, 27(2), 142–160. heileman, m. d., pett, t. l., & mayer, a. j. (2016). smallto medium-sized enterprise characteristics and performance: an exploratory examination of the census bureau’s survey of business owners. journal of business and entrepreneurship, 28(1), 145–164. kontinen, t., & ojala, a. (2010). the internationalization of family businesses: a review of extant research. journal of family business strategy, 1(2), 97–107. kraus, s., mensching, h., calabrò, a., cheng, c. f., & filser, m. (2016). family firm internationalization: a configurational approach. journal of business research, 69(11), 5473–5478. lichtenstein, j. (2014). demographic characteristics of business owners. small business administration office of advocacy, issue brief, (2). lu, j. w., & beamish, p. w. (2001). the internationalization and performance of smes. strategic management journal, 22(6–7), 565–586. mittelstaedt, j., harben, g., & ward, w. (2003). how small is too small? firm size as a barrier to exporting from the united states. journal of small business management, 14(1), 68–84. parsa, h. g. (1996). franchisor-franchisee relationships in quick-service-restaurant systems. cornell hotel and restaurant administration quarterly, 37(3), 42–49. patel, v. k., pieper, t. m., & hair, j. f. (2012). the global family business: challenges and drivers for cross-border growth. business horizons, 55(3), 231–239. pett, t. l., & wolff, j. a. (2007). sme performance: a case for internal consistency. journal of small business strategy, 18(1), 1–16. pett, t. l., & wolff, j. a. (2016). entrepreneurial orientation and learning in high and low-performing smes. journal of small business strategy, 26(2), 71–86. plummer, l., allison, t., & connelly, b. (2016). better together? signaling interactions in new venture pursuit of initial external capital. academy of management journal, 59(5), 1585–1604. porter, m. e. (2004). competitive strategy: techniques for analyzing industries and competitors. new york, ny: free press. pukall, t. j., & calabrò, a. (2014). the internationalization of family firms: a critical review and integrative model. family business review, 27(2), 103–125. reuber, a. r. (2016). an assemblage-theoretic perspective on the internationalization processes of family 13 m. d. heileman, & t. l. pett journal of small business strategy / vol. 28, no. 1 (2018) / 1-13 firms. entrepreneurship theory and practice, 40(6), 1269–1286. us census bureau. (2012). survey of business owners (sbo). retrieved from www.census.gov/programs-surveys/sbo.html. us congress. (2009). title 13, united states code—census. retrieved from www.gpo.gov/fdsys/pkg/uscode-2009-title13/html/uscode-2009-title13. htm. wincent, j. (2005). does size matter?: a study of firm behavior and outcomes in strategic sme networks. journal of small business and enterprise development, 12(3), 437–453. wolff, j. a., & pett, t. l. (2000). internationalization of small firms: an examination of export competitive patterns, firm size, and export performance. journal of small business management, 38(2), 34–47. appendix i sbo response variable coding. name code gender 0 = female 1 = male education 0 = not reported 1 = less than high school 2 = high school 3 = technical school 4 = some college 5 = associate's 6 = bachelor's 7 = master's + age 0 = not reported 1 = under 25 2 = 25 to 34 3 = 35 to 44 4 = 45 to 54 5 = 55 to 64 6 = 65 or over founded 0 = not reported 1 = yes 2 = no purchased 0 = not reported 1 = yes 2 = no inherited 0 = not reported 1 = yes 2 = no transferred/gifted 0 = not reported 1 = yes 2 = no established 0 = not reported 1 = before 1980 2 = 1980 to 1989 3 = 1990 to 1999 4 = 2000 to 2002 5 = 2003 6 = 2004 7 = 2005 8 = 2006 9 = 2007 10 = don't know startup$ 0 = not reported 1 = less than $5,000 2 = $5,000 to $9,999 3 = $10,000 to $24,999 4 = $25,000 to $49,999 5 = $50,000 to $99,999 6 = $100,000 to $249,999 7 = $250,000 to $999,999 8 = $1,000,000 or more 9 = don't know 10 = not applicable franchise 0 = not reported 1 = yes 2 = no 3 = franchiser owned portion closure 0 = not reported 1 = yes 2 = no name code stra tegf an analysis of small business hiring of seniors robin t. peterson andreas w. stratemeyer new mexico state university abstract this study investigated small business hiring ofsenior citizens. lt found that older persons make up a moderate percentage of the small business work force. the respondents reported dependability, possession of the work ethic, respect for authority, experience, and company loyalty as advantages ofseniors. the mjaor disadvantages were physical limitations illness, slow work, and costs of medical benefits. most respondents plan to hire larger numbers ofseniors in future periods. introduction the united states population is steadily growing older and many small and large companies are finding profitable markets in the senior citizen segment (peterson, 1995).they are discovering that older consumers represent a desirable target market (lee, 1997; wolfe, 1994). by the same token, they are finding that seniors are becoming an increasingly important component of the labor force (gayle, 1990). advances in medical care, exercise habits, and eating patterns have led to a situation where there are large numbers of older persons, many of whom enjoy superior mental and physical health than their predecessors (wolfe, 1994). many of these individuals like the idea of extending their working lives beyond normal retirement ages, either in a full or part time capacity. seniors do not always experience success in obtaining jobs. in fact, some find that managers are reluctant to hire them. it is possible that united states cultural attitudes and norms may account for some of the neglect of older individuals as potential employees. seniors in the united states do not enjoy the status that they do in many other societies. in this country seniors are otten perceived as lacking mental and physical competence, status, and power (kluckhohn,1987). hiring decisions may be mirroring this cultural norm, whether or not it is accurate. firms can sometimes benefit, of course, because seniors will often accept employment at lower wages than younger workers. this allows the firm to obtain valuable expertise, at a lower cost. 39 journal ofsmall business strategy volume 9, no. l spring /998 it is possible, of course, that small businesses avoid hiring older persons because of perceived weaknesses of these individuals as participants in the labor force. some managers may have discovered or believe for other reasons that seniors are not physically or mentally able to carry on duties as ably as younger persons. medical and insurance costs may be substantial for the elderly. they may lack critical computer skills or insist upon inflexible hours. one of the purposes of this study was to uncover views of small business managers regarding these and other possible shortcomings of older individuals as employees. specifically, the current study was undertaken to address four objectives: 1. to measure the degree to which small firms in the united states hire seniors. 2. to ascertain the advantages which small firms perceive in older employees. 3. to determine the problems which small companies perceive in including older workers on the payroll. 4. to derive estimates by small firm managers as to anticipated hiring of seniors in the future. the study the researcher mailed 20 questionnaires to a randomly-chosen set of 50 college and university small business institute directors located in 50 states. therefore, the total number of questionnaires mailed was 1,000 (50 x 20). the geographic dispersion of the sample was undertaken in order to produce results that were reasonably representative of the population of small businesses at large. accompanying the questionnaires was a letter explaining the purpose of the study and asking that the sbi director distribute the questionnaires to 20 past and present sbi clients and to collect the questionnaires once they were completed and forward them back to the researcher. follow-up letters were sent to non-respondents. the effort yielded a sample size of 368 usable returned questionnaires-aresponse rate of 36.8%. the questionnaires had previously been pretested on a sample of 20 small business managers located in the city where the researcher worked. since the managers making up the final sample were all past or present sbi clients, they satisfied the requirements for classification as a small business, according to the criteria set forth by the small business administration. the respondents were asked if they hired seniors (defined as individuals 65 years of age and older) and, if they did, for the proportion of the work force that were seniors. they were also asked for perceived (a) advantages and (b) disadvantages of hiring older workers. further, they were requested to forecast if they would hire more or less or about the same proportion of seniors in the future as they had to date. demographic data (sales revenues and industry specification) were also solicited. the respondents were asked to specify their 1995 sales revenues. the median figure was $643,200, reflecting the fact that the study focused only upon small firms. since the survey covered only small business, its findings and conclusions cannot be extended to encompass the entire universe of firms. research results the industry makeup of the sample was examined. table i sets forth the results. retailing makes up the largest grouping, followed by manufacturing, service, wholesaling, and "other" category. in this case, the percentage of service firms was lower than is sometimes encountered in studies 40 journal of small business strategy volume 9, no. i spring /998 of small business. chi square tests were employed for table i and the following tables, since comparisons between frequencies were sought. the chi square tests indicate cases where frequencies exceed those of others. in all cases, .05 levels of significance were employed. table i indust com osition of the sam le industrn ~fre uenc n s ~pt manufacturing 85 23./u ivholesaling 22 6.0 retailing /89 5/. 4'ervice43 i/.6 other 29 7.9 total 368 /000% ssigniftes a frequency that is significantly larger than the column frequency, according to a chi-square test at the .05 level. the questionnaire asked the respondents if their companies hired senior citizens. the results appear in table 2. by far the greatest percentage is in the "none" category, followed by the i4.9% and the 5-9.9% groupings. it is evident that most work forces contain a relatively small proportion of older workers. in contrast, over eleven percent of the u.s. population is of age 65 and older. table 2 percenta e of res ondents'orkforces made u of seniors percenta e of workforce ~fre uenc n s p~uf none /68 45. 7u l-4 9% 84 22.8u 5-9.9% 48 l3. i io-/4. 9% 36 9. 7 /5-/9. 9% 22 6.0 20% and over /0 27 total 368 /00. 0% *signifies a frequency that is significantly larger than the average frequency for the column according to a chi-square test at the .05 level. 41 journal ofsmall business strategy volume 9, no. i spring i998 the members of the sample were asked to specify the advantages of employing seniors, based upon their experience. table 3 sets forth the frequencies associated with each category of response. the total frequencies exceed the sample size, because most respondents cited more than one advantage. those advantages which received the greatest frequencies were that seniors were dependable, possessed the work ethic, respected authority, were experienced, and were loyal to the company. other important advantages were flexible schedules, mature behavior, stability, punctuality, and willingness to train. less frequently reported were responsibility, honesty, character, customer orientation, trustworthiness, and limited family. as the columns in the table indicate, there are some differences between industries. in retailing, for example, the work ethic was reported more frequently than dependability. the reverse is true in the other industries examined. the "experience" advantage received more frequencies than respect for authority in retailing and in the "other" industry. in manufacturing and service, however, respect for authority was mentioned more oflen. a flexible schedule was reported as an advantage by a large number of retailers. these differences between industries reflect desired characteristics and behaviors of employees in these industries, as well as the performance of seniors in these roles. further, the differences between industries suggest different rationale for hiring older persons, from one industry to another. a retailer who sought to employ those with the work ethic might be especially highly motivated to hire seniors, for example. conversely, a service firm desiring dependable employees might find seniors to be especially useful. when the data in table 3 are converted from frequencies to ranks (based upon the number of frequencies in each cell), it is possible to measure the degree to which the respondents in the five smail business industries agreed upon the importance of particular advantages. with ranked data, it is possible to perform a kendall coefficient of concordance test, designed to assess the degree to which members of a set of (m) distinct ranks offerings of (n) things tend to be similar. basically, this indicates the extent to which the rankings agree with each other. the coefficient which was computed in this case was .79. this indicates a high degree of concordance between the industries, since the variance of the rank sums is 79 percent of the maximum possible. table 4 presents the disadvantages of hiring seniors which the respondents reported. in terms of raw numbers, the advantages outweigh the disadvantages-sixteen advantages and twelve disadvantages were cited. further the frequencies associated with the advantages were 1,476, while those mentioned for disadvantages were 381, furnishing some evidence that small businesses are satisfied with the performance of these individuals. disadvantages which have frequencies significantly higher than those in their columns, according to chi square tests at the .05 level of significance are labeled with asterisks. for the sample at large, the significant disadvantages are physical limitations, illness, "too slow", and cost of medical benefits. other frequently-mentioned disadvantages were diflicult to train, opinionated, forgetful, and "only part time". finally, some respondents mentioned inflexible hours, unsociable, complain, lack computer skills, and other topics. 42 table 3 industry g ~o retail manufacturing service wholesale other total hdxantgge number % ivumber % number % number % ivumber % ivumber dependable 74 /0. 4'6 12.6'6 14.9' l 11.5'2 /0. i v 169 i l. 5* work ethic 82 11.5'3 i /.8' 4.6 7 7.3 6 5.0 146 10.0v respect for authority 54 7.6v 37 10.2v 12 6.9 13 /3.5v /6 /3,4v 132 9 ov experienced 56 7.9'6 9.9'2 6.9 9 9.4'8 15.1'31 8.9v loyal to company 68 9.5" 27 7.4 /5 8.5v ll i/.5v 8 6.7* 129 8.8* scheduleis flexibl 65 9.1v 22 6.0 15 8.5v 4 4.2 5 4.2v iii 7.5 w mature behavior 51 72 24 66 13 7.4v 9 94 10 84v /07 73 stable 50 7.0 23 6.3 /i 6.3 7 7.3 6 5.0 97 6.6 punctual 38 5.2 2/ 5.9 9 5./ 6 6.2 9 7.6 83 5.7 willing to train 3/ 4.4 22 6.0 8 4.6 7 7.3 8 6.7 76 5.2 responsible 26 3.7 /7 4.7 8 4.6 5 5.2 5 4.2 61 4.2 honest 34 4.8 9 2.5 9 5./ 3 3.1 2 1.7 57 3.9 high character /8 2.5 /6 4.4 7 4.0 i 1.0 4 3.4 46 3.2 4! customer oriented 22 3.i 4 l. i 8 4. 6 i l. 0 3 2.5 38 2.6 trustworthy 19 2.7 6 1.6 7 4.0 0 0.0 3 2.5 35 2.4 limited family 17 2.4 6 /.6 5 2.9 2 2.1 3 2.5 33 2.2 other 7 1.0 5 /.4 2 /. i 0 0.0 i 0.8 15 1.0 total 712 100.0 364 100.0 175 100.0 96 /00.0 119 100.0 1466 100.0 *signifies a proportion that is significantly greater than the average proportion for the row, according to a chi-square test at the .05 level table 4. o 0 industry retail manufacturing service wholesale other total 9lsttdy/tntttge ivumber % ivumber % number % number % number % number physical limitations 24 14.5a 23 19.8a 5 i i. iv 4 il. /v 7 2/.2'3 /5.9v to illness 32 19.3a ll 95v 7 /5.7* 6 lb.7a 2 6.1 58 /4.6* too slow 19 11.4a 16 13.7' 178' /4.0' 3.0 49 12.5'ost of medical benefits /4 8.5a 16 /3.7v 2 4.4 4 ii. /e 6 /8.3v 42 10.7a dificult to trai n 9 5.4 14 /2.1' 13.3' 5.6 4 12.1'5 8.8 opinionated 20 /2.1' 5.2 2 4.4 2 5.6 5 15.1'5 8.8 forgetful /3 7.8 8 6.9 5 i i.l' 8.3 3 9.2'2 8.1 only part time ii 6.6 9 7.8 4 8.9' 16.7v i 3.0 31 7.8 inflexible hours 7 4.2 6 5.2 4 8.9' 0.0 i 3.0 18 4.5 unsociable 4 2.4 3 2.6 0 0.0 3 8.3 i 3.0 /i 2.8 complain 3 /.8 0 0.0 i 2.2 i 2.8 i 3.0 6 1.5 lack computer skills 3 1.8 i 0.9 0 0.0 0 0.0 0 0.0 4 l0 other 7 42 3 26 i 22 0 00 i 30 /2 30 e+ total 166 100 116 100 45 100 36 100 33 100 396 100 'signifies a proportion that is significantly greater than the average proportion for the row, according to a chi-square test at the .05 level journal ofsmall business strategy volume 9, no. l spring /998 the disadvantages for each industry that have frequencies significantly larger than their columns, according to chi square tests of frequencies at the .05 level are identified with asterisks. the kendall coefficient of concordance for the disadvantages was .73, slightly less than that for advantages, but still substantial. there were some interesting differences between industry categories. for instance, manufacturers and "others" found seniors difficult to train, while retail, service, and wholesale firms did not. retail and other companies reported "opinionated" as a significant disadvantage, while the other categories did not. "other" was the only industry citing significant numbers in the forgetful category. service and wholesale companies found that only part time was a significant disadvantage. finally, only service firms found inflexible hours to be a significant disadvantage. the respondents were requested to specify if they planned to hire different percentages of seniors in their work forces in the future than they had in the past. fifly two percent indicated that they did plan to hire a larger percentage, thirty eight percent that they planned to hire about the same percentage, four percent that they planned to hire a smaller percentage, and six percent that they did not know. discussion this study was designed to measure the degree to which a sample of small firm managers hired senior citizens, their perceived advantages and disadvantages of hiring these individuals, and their future employment plans for seniors. many sample members hire seniors, although the percentage of the work force is moderate. when queried about advantages, the members of the sample set forth a number of these, emphasizing dependability, the work ethic, respecting authority, experience, and loyalty to the company. there was substantial agreement among industries on the ranking of the importance of the advantages. the major disadvantage mentioned by the sample was physical limitations, followed by illness, being too slow, and the cost of medical benefits. as in the case of advantages, concordance between industries was high. finally, a large proportion of the sample plan to hire larger percentages of their work force from the senior group in the future. implications certain implications for small business managers emerge from this study. it appears that these companies should experience a number of advantages, as well as some disadvantages, as a consequence of hiring the elderly. they can be expected to hire even larger numbers in the future than they have in the past. for some this will mean continuing to use current employees past normal retirement ages. for others it will mean recruiting new employees from the ranks of the elderly. the large number of advantages set forth by the respondents suggests that small businesses who are not recruiting and retaining seniors may be failing to take advantage of a high potential pool of managerial and operative talent. this is particularly the case for those small businesses which are currently experiencing high caliber personnel shortages and shortcomings in the abilities of current employees. recruitment programs targeted at elderly job seekers may hold considerable promise for them. 45 journal ofsmall business strategy volume 9, no. i spring l998 small business managers who are considering the employment of seniors should take into consideration the advantages and disadvantages uncovered by the study. if, for instance, dependability, possession of the work ethic, respect for authority, experience, and company loyalty are of substantial importance to the recruiter, seniors may be a very good source of applicants. conversely, if the job in question would not be appropriate for those with physical limitations, those unable to work because of illness, those who work slowly, or those with considerable medical problems, the employer may be well-advised to approach the senior applicant pool with caution, unless modifications, such as changes in the nature of the work, can be accomplished. recruiting seniors sometimes necessitates different sources of job applicants than recruiting younger persons. there are organizations, such as aging in america, that specialize in placing older job applicants. some senior citizen centers are active in placing members who seek employment. various employment agencies are active in this field. employers who seek older employees may be well-advised to consider these alternative sources. conclusions when seniors are hired, small businesses may find it advisable to make certain changes in methods of supervising employees and arranging their work. since seniors are dependable, experienced, and have the work ethic, they may require less close supervision. it may be necessary to convert some jobs to part time or job sharing and to employ flextime, if this is not already available. certain job responsibilities may have to be redesigned, so they are less physically demanding. training methods and procedures may, of necessity, require deviations from those used for younger employees. since many seniors are experienced, their desired training may be less extensive. in some cases, adjustments may be needed in the training format, as by presenting ideas at a slower pace. a positive phenomenon is that the training benefits to the firm may accrue for a long time period for seniors, since their turnover is less and they are less likely to move on to other companies afler they have been trained by the current employer. references g tl .m(199d) t d h 21mc b~ad i 6 i .30(l)566d. kluckhohn, c. (1987). mirror for man. greenwich, conn.: premier books, 189-192.6, 0 a (1997) th 7 h bl i ad 11 g a~ig mu . 1)99(l)465d. peterson, robin t. (1995). the depiction of senior citizens by banks in newspaper advertisements: a content analysis. journal of professional services marketin 12 (2), 95-106. w ib.g idb.()994). t g i g h m ml d. a i 0 ~hi6(2),32.36. 46 strategy organizational culture of small retail firms patricia m. kosters small business owner mary lynn damhorst grace i. kunz iowa state university abstract tt case study approach was used to examine organi ational culture dimensions of small apparel retail firms located m small towns within the trading area of a regional shopping center. a long interview schedule was developed to obtain information from owners and employees. contentanalysisofthequalitativeresponses revealed that l2culturedimensions identifed in previous research could be applied to the small firms. in addition, a dimension not clearly identified in previous research emerged in relation to influence of employees'amily relationships on organizational culture. suggestions for further research and application of the findings to management consultation are provided. introduction in today' complicated marketplace, having a good product or service and a well planned strategy for marketing to the final consumer is oaen no longer sufficient for companies to survive and prosper. tremendous changes in the economic environment and the enormous increase in competition in recent years in the united states have resulted in a major search for new models for ettective business management. understanding and managing organizational culture is proposed by some authors to be crucial for optimizing a firm's performance (deal & kennedy, 1982; kotter & heskett, 1992). however, management and marketing scholars have concentrated their research efforts on cultures of large companies; as a result, a sizable and important segment of the business population across the u.s. has been notably neglected. the potential significance of this neglect becomes apparent when trends related to small business and, in particular, small retailers are examined. robinson and pearce (1984) reported that small business firms dominate the united states'ervice, construction, and retailing sectors; approximately 82% of all retailing outlets are sole proprietorships. a small retailer is usually defined as a store having fewer than 100 employees. in the state of iowa, where the present study was conducted, approximately 90% of all businesses have gross sales of less than $250,000 (iowa dept. of revenue, 1989) and employ an average of less than 12 persons (stone, 1989). the significance of small business in terms of employment and total state revenues for iowa is much greater than for the country as a whole. 29 the current situation of increased competition from giant retailers such as wal-mart, outshopping in regional mails, and increased competition from catalog and mail-order retailing makes survival difficult for small apparel firms in any state. there is tremendous pressure on retailers, panicularly small retailers, to find pertinent and current strategies to help them develop effective ways to compete in today's marketplace. r inization culture conce t each human group and organization, regardless of size, whether it is a family, school, church, civic association, or business, has a particular way of functioning-i.e., culture —that distinguishes it from other organizations. according to spradley (1980), culture is "the acquired knowledge that people use to interpret experience and generate social behavior" (p. 6). this knowledge is reflected in how the cultural group thinks and organizes itself, in what it makes or produces, and in the processes used to produce goods and services (cf. spradley, 1980). culture includes physical artifacts and behavioral patterns that provide visible manifestation of and support the beliefs and meanings socially constructed by organization meinbers (rousseau, 1990). any organization has systems or patterns of values, symbols, rituals, myths, and practices that have been developed over time since it was founded (enz, 1986; smi reich, 1983). an organization's particular way of functioning is the manitestation of underlying values, be i ie fs, and attitudes concerning what is important to that group and what behavior is expected from its members (schein, 1989). these underlying elements give meaning to and confer identity on the organization; collectively the elements define the organization's culture. culture, as applied to the businessorganization,has been called "corporate culture". we prefer the term "organizational culture" to emphasize that culture is not solely handed down and imposed by the corporation leadership; it is shaped and constructed by all members of the organization (hofstede, neuijen, ohayv, & sanders, 1990). culture, expressed as "shared values" in the mckinsey framework for manageinent, is central to the business organization and has impact on all functions and activity in the organization(see peters & waterman, 1982). pascale and athos (1981)suggested that shared values in the framework are superordinate goals that provide the glue holding the other six elements —strategy, structure, systems, style, staff, and skills —together. the central role of organizational culture is to provide consistency of meaning for the primary activity of a business organization. all corporate practices, structures,and behaviors are made sense of and shaped within the context of culture (deal & kennedy, 1982). deal and kennedy (1982) contended that the rational aspects of organizational functioning, such as structure, strategy, budgeting, and operations, are not as ultimately important to the firm's performance as the shared understandings of employees. however, hofstede et al. (1990)clarified that it is shartxl understanding of organizational practices, shaped of course by top executive values, that identifies organizational culture as it is understood by employees. while critics of corporate culture suggest that the concept of organizational values is too abstract and global and prefer to use more tangible concepts as management tools, posner, 30 kouzes, and schmidt(1985) were convinced that shared values make a significant difference in the lives of employees as well as in the performance of the firm. kotter and heskett (1992) presented evidence that in the long run organizational culture can have a significant impact on economic performance of a firm. according to schein (1989), "there is no such thing as a culture-free concept of management" (p. 315). culture is analogous to a script; it is normative in that it sets forth general and specific rules and guidelines, written and unwritten, that guide the firm's members in their daily activities and routines(schein, 1989). the shared meanings supplied by a culture are typically applied to needs and problems commonly faced by managers and employees as they carry out everyday business activities. schein further suggested that a firm's culture helps determine i ) the way business strategy is carried out, 2) the nature of interaction with external publics such as customers, suppliers and financial advisors, 3) the kinds of people hired, how they are trained, and how they are compensated, and 4) the nature of internal interaction between management and employees that influences both atmosphere and climate of the workplace. culture constrains choices by conveying to employees which behavior and practices are acceptable and unacceptable in the firm; formal and informal manifestations of culture provide rules and norms for behavior in the organization (davis, 1984; deshpande & webster, 1989; robbins, 1988). profilin or anizational culture a number of attempts have been made to identify and categorize dimensions of organization culture in an effort to develop a system for measurement and evaluation. while organizational cultures vary widely according to factors such as company size, industry, strategy,and financial performance, cultural dimensions that have been identilied by various authors as common to all business environments were summarized by robbins (1988) to include individual initiative, risk tolerance, direction, integration, management support, control, identity, reward system, conflict tolerance, and communication patterns. reynolds (1986)classifiedorganizationalculturedimensionsand isolated dimensions similar in overall content to those summarized by robbins. in addition, reynolds identified external vs. internal emphasisoforganizationeffort,an importantdimensionin the study of retail lirms with strong customer service missions. robbins'ummary of dimensions as well as reynolds'ontributions served as a point of departure for the present study. we used their dimensions for development of qualitative measures of organizational culture. purpose as no research has focusedonorganizationalcultureofsmall businesses in general and on apparel retailing businesses specifically the present research was exploratory: i ) to identify common cultural dimensions across small apparel retail firms, 2) to develop hypotheses that can be tested further for understanding of small business culture profiles, and 3) to assess the eitectiveness of applying existing corporate culture theory to small apparel retail flrms. the procedure and findings can be used for for making recommendations about developing or refining a small firm's business strategies. 31 method the case study approach was selected to facilitate investigation of a small number of firms on a large number of variables. the long interview(mccracken, 1988) was the primary method of eliciting information related to previously identified dimensions of corporate culture. the open-ended response format allowed for the potential emergence of cultural dimensions unique to small apparel retail firms. the qualitative data were analyzed for thematic content and synthesized to form a cultural composite of each firm investigated. it was expected that each situation of proprietorship might manifest itself in a distinctive organizational culture profile. similarities and differences across firms were examined. rousseau (1990) outlined the benefits of qualitative methods that afford a flexible, interactive approach to exploring the social constructionsof business cultures. the case study approach(yin, 1984) facilitated in-depth study of the multifaceted concept of organizational culture. lack of previous study of cultures of small apparel retail firms warranted the use of qualitative exploratory techniques. however, the small sample inherent in case study approaches limits general izeabilityof the findings. we use the findings to generate hypotheses for testing in further research of small businesses and apparel retail firms. ~c. s 8 p a multiple case study protocol was prepared according to procedures outlined by yin (1984). four sources of data were collected; i) the long interview, 2) a short personal data questionnaire, 3) non-obtrusive observations of employee/customer interactions, and 4) photographs of the physical aspects of the linns. only the first two sources of data are reported for this analysis. the observations and photographic evidence facilitated description of the firms and informally confirmed some findings from the interview data. robbins'(1988) summary of corporate cultural dimensions provided the initial basis for developing the interview schedules for owners and employees. however, his "control" and "direction" dimensions were highly overlapping and merged as one direction dimension for this study. while robbins'dimensions incorporate internal factors that have impact on values and behavior in the business organization,he does not include external dimensions which may be important factors influencing the overall culture of a firm. retailing, which involves the primary activities ofbuying goods from suppliers and selling them to the ultimate consumer, implies a strong focus on external publics. therefore, reynolds (1986) dimension of external vs. internal emphasis was expanded into two dimensions labelled as firm image and orien/a/ivrr/o external prriilicx the final list of twelve organization cultural dimensions (see table i) was used as the basis for developing the interview schedules. 37 table i summa of or anizational culture dimensions identifled in previous research dimension description direction leadership, supervision; written or implied rules, regulations, or expectations for behavior identity characteristics of owner personified in firm; employees'dentification with organization or specific role within the firm individual initiative employees'erceived freedom to act independently firm image image and market positioning in terms of product quality, price, and styling; what firm represents through physical structure, location, and services offered communication patterns freedom in interpersonal communications conflict tolerance tolerance for differences of opinion or human characteristics integration cooperation and team spirit management support assistance, support, concern for employees provided by manager orientation to external quality and characteristics of interactions with customers, publics community, suppliers, and others reward system type and manner of reward allocations as salary, etc. risk tolerance innovativeness in behavior and toleration of risk taking a list of potential questions which might be used to elicit information related to each cultural dimension was prepared. these questions were refined by four scholars of merchandising and organizational communication. other questions were designed to glean information on a broad scope of management operations of the firm. the organizational culture and management operations questions were integrated into two structured, open-ended interview schedules, one for owner/managers and one for employees. (see appendix a and 33 b for interview schedules.) in addition, techniques for developing interviewer/interviewee rapport,objectivedistanceof the interviewer,and probing fordepth ofthinkingwere included. res ondents and data ollection agreeing to participate in the study were the owners of three firms in towns with populations less than 15,000 and situated within the trading area of a regional mall in iowa. as the three towns were at least 30 miles in distance from each other, the three stores were not close competitors. however, the regional mall was perceived by each owner to offer substantial competition. the three owners were sole proprietors and managers of their respective iirms. each owner (40 to 55 years old) and all employees (14 to 67 years old) interviewed were women. business ownership by women, particularly small business, comprises one of the fastest growing segments of the u s. economy (aburdene & naisbitt, 1992; gaskill et al., 1996; u s. small business administration, 1993). study of women-owned businesses is therefore timely and pertinent. female owners and employees are common among small apparel retailers in particular (bowen & kisrich, 1986). at the time of this investigation, each firm had been under its current management in its current location between three and seven years. none of the stores was in the initial start-up phase of the retail 1 ifecycle. in addition, each owner alleged that her business was a profitable operation at the time. previous net earnings reported by two of the owners were $450 000 and $275,000 in 1989. the three firms all employed five to nine full and part-time workers. one store stocked men', women', and children's apparel; the two other stores carried only women' apparel. initial data collection took place over a 12-week period during which time the owners and four to five employees from each of the three firms were interviewed, each at the place of business but one at a time and in a private room. all interviews were carrifxl out by one of the researchers who has had considerable retailing experience. each interviewee completed the personal data form first; then the interviews, ranging from thirty minutes to three hours, were recorded on audiotape with permission of the respondents. all staff respondents knew that their employers had approved participation in the study. a~l. l f o. approximately 20 hours of audiotaped interviews were transcribed verbatim onto a computer sol'tware word filing system (file maker plus) for managing qualitative data. the twelve dimensions of organization culture identified in table i were developed as coding themes for content analysis of the interview data. two researchers, with diverse backgrounds in business practice and communication theory, coded all transcripts and negotiated all differences in category assignments. throughout the negotiation process, understanding of the categories evolved, and the corporate culture dimensions were refined to arrive at the final version of the coding guide and assignment of data to themes. this process of continued code refinement and negotiation by coders borrows procedures from the constant comparative 34 technique of qualitative data analysis (strauss & corbin, 1990). a miscellaneous category was included to contain responses not iitting previously identified corporate culture dimensions. new dimensions were formulated from some of the miscellaneous information. before negotiation, reliability between coders was measured using a calculation of percent agreement recommended by holsti (1969). ten pages of transcripts were randomly selected for three checks —at the beginning of coding, at the middle half, and at the end of all coding. percent agreements for content assignment were 60%, 74.4%, and 76.6% respectively. a descriptive overview ofeach individual firm was shaped from the data. findings were also compared across firms, resulting in identificationof characteristicsof the cultures common and varied across the three firms. the comparisons across firms are focused upon in this analysis. results and discussion general descri tion of stores firm a. firm a was a family business in a small city, population 6,009 (bureau of the census, 1990). the firm was recently taken over by the retiring founder's daughter who had some college education and nearly 30 years of sporadic experience with the firm. the store was the largest in physical size of the three studied but, from all evidence, generated the lowest volume of sales of the three firms investigated. the owner declined specific report of earnings, but indicated that the business had both declining sales and declining profits. firm a carried apparel for women, men, and children in budget to moderate price lines. basics rather than current fashion trends were emphasized. inventory on the tables and racks was in many instancesseveral years old. services such as home delivery, free gir wrapping, liberal return policy, and store charge accounts were offered. observation and photographs yielded a general description of the physical environment of the store as haphazard in organization and cluttered with merchandise. several employees expressed frustration with the clutter. old tables, racks, and other iixtures gave a dated appearance to the store; the fixtures did not appear to have been strategically managed to give a decorative theme of "old fashioned" or trendy antique restoration. all employees dressed casually in pants, jeans, shorts, and t-shirts or sweatshirts. in 1995 firm a went out of business arer 46 years in operation. the owner claimed that she could no longer afford to keep the business open. close-out business advertisements heralded the final opportunity to experience "a most unique old-fashioned department store". firm b. firm b had been purchased from the retiring founder by the current owner who was a former employee of the firm. the current owner had a university degree in business and 25 years of experience in retailing, 18 of those in apparel. 35 firm b was the smallest in physical size but the largest in sales staff(9 employees) and the largest in sales volume, generating approximately $450 000 in 1989. the owner indicated that her business was growing and profitable. by 1996 the store had expanded its operation by purchasing a nearby, locally owned shoe store. the small city where the store was located had a population of 12,392 (bureau of the census, 1990). the specialty store for women carried moderateto better-priced apparel with an emphasis on better quality and conservative but updated styling. while the bulk of the merchandise was career and better apparel and accessories, some lloor space was allocated to casual wear for high school and college, junior sized, younger women. services such as wardrobe consultation, customer profiles for gift advice, free gift wrapping, liberal returns, and on-approval take home of merchadise were offered. firm b was the only store of the three studied that employed a part-time staff member responsible for visual merchandising and display. merchandise in the windows and on the interior walls was well displayed. floor displays were neat and organized. all employees wore dresses, skirts, or suits similar in style to the merchandise carried in the store. firm b had the highest paid retail employees in the community. its employees had more formal education and apparel retail experience prior to working for firm b than did employees in the other two firms. ~firm . the owner of store c was a civic minded individual who purchased the store in the late 1980s to prevent the loss of a business in her small town. the owner had no previous business experience, but had extensive experience in charitable and civic volunteer work. although the small town had a population of less than 1300 (bureau of the census, 1990),the firm generated approximately$ 275,000 in sales in 1989. the owner indicated that the business was growing and profitable. by 1995 the store relocated in a larger town (population 25,178 in 1990) within 30 miles from its original location to expand the retail operation. the firm targeted its moderateto better-priced apparel to women over 35 years old. this was the only store of the three that did not currently employ any sales person under 34. only a limited amount of merchandise that tended to attract younger women was offered. services offered included garments in a wide array of sizes, free gia wrapping, liberal returns policy, and store charge. firm c had high ceilings and a bright, open space. wall displays and merchandise were neatly arranged. employees were dressed in skirts, dresses, or suits in conservative yet contemporary styling. anal sis of or anizational culture dimensions su art of a priori dimensions all the organizationalculturedimensionspreviously identified in large firms applied to the small apparel retail firms studied. table 2 reports incidence of dimensions across the three firms. frequencies merely illustrate incidence and 36 cannot be interpreted to indicate relative importance of the dimensions. loquacity and individual interests of respondentsaffects frequencies of themes. in addition, some dimensions may be important, but the nature of questions asked and the lack of tendency for some dimensions to be verbalized extensively influences occurrence. frequently occurring themes as well as minor or infrequent themes were deemed important for understanding apparel retail culture. table 2 fre uenc of or anizational cuture dimensions across stores dimension store a'tore b'tore c'll stores direction 37 38 21 96 identity 43 60 38 141 individual initiative 27 22 24 73 firm image 66 84 72 222 communication patterns 25 33 21 79 conflict tolerance 9 4 5 18 integration 32 50 26 108 management support 21 31 21 73 orientation to external 79 102 86 267 publics reward system 6 21 ll 38 risk tolerance 10 4 3 17 miscellaneous ll 20 16 47 'ummed across owner and 4 employees 'summed across owner and 5 employees 'summed across owner and 5 employees 37 three cultural dimensions —direction, identity, and indi vir/rra/ in//ia/ive —reflected the personal characteristics, knowledge, beliefs, and values of owners of these firms. these dimensions related respectively to clarity of leadership, attitude of employees toward ownermanagers, and degree of independence accorded to employees by the manager. findings related to these three dimensions were considerably diverse across firms. this diversity was directly associated with differences in owners'ersonal management styles; in knowledge, experience, and beliefs that each brought to their businesses; and in owners'ersonal aspirations and visions for their firms. an interesting finding related to vision and values was that these owner/managers were not necessarily in business to maximize profit. i don't require big money.... i don't allow myself to put in all my time to earn money for which i have no time left to spend it on to enjoy my life. (owner, store a) as described previously, firm c was purchased by a civic-minded individual who had no previous business education or experience. she purchased the small town retail firm in an explicit attempt to prevent the loss of another of her community's businesses. she stated a further advantage in achieving autonomy: ...one of the reasons i went into business, i guess, is that i never thought anybody'd pay me what i thought i was worth... if you are your own boss, you make your own destiny. what i really would like to do now is go around as a consultant to some of these people who would like to do what i'e done... these findings of personal growth through ownership and community altruism suggest that traditional economic theory which emphasizes profitability of the firm may not be completely adequate for explaining firm behavior or for measuring firm success in small businesses in small towns. intangible rewards were just as or more important than monetary rewards of the finn. flumphreys and mcclung (1981) found low emphasis on business growth and more emphasis on feeling of personal achievement and responsibility among female entrepreneurs. the female retailers in this study were consistent with that trend, but owners of firms b and c were clearly committed to making a reasonable profit in addition to less tangible benefits. the owners of firms a and c had similar directional styles. they had no written rules and regulations for employee performance or for procedures. little or no formal training was given when a new person began employment. the owner of firm a would show new employees each department and train them on running the cash register and reading merchandise tickets. "then the most important thing i say is to move out and straighten so you learn where stuff is." the owner of firm c gave no formal training. you don't have to train 'em cause they'e all customers. i do not hire anybody that's never shopped here. i don't hire them if they don't know what this store is all about... 38 by contrast, firm b was the only firm with a store manual which outlined expectations for behavior on the floor, dress rules, and procedures for customer transactions and running the cash register. the owner spent an average of four hours each day on the sales floor where she felt she was always involved in training. on-going training occurred regularly at saturday morning store meetings for all employees. training might include hands-on practice in selling techniques or practice at coordinating clothing and accessories for the season. despite the structure, employees felt the rules were flexible. one employee stated, "...if we find a better way to go about it, we usually change it." employees at afl three stores felt that the owners were flexible in considering changes when suggested. potential for taking initiative to make substantial organizational changes or learn advanced skills such as buying was limited, however, a factor that disappointed a few employees. at all three stores, employee activities were focused primarily on selling merchandise or specific clerical tasks. positive feelings expressed by employees reflected a strong identification with the owners. employees described their boss's with phrases such as "easy going", "friendly and outgoing", "personable",and "fun to work for". unique identity traits of the owners also were clearly reflected. the owner of firm a was consistently described as disorganized and limited in business management skills. she described herself as not energetic enough to put in extra time to get organized or to upgrade her business knowledge. nevertheless, employees liked her and accepted her idiosyncrasies. "she's crazy, but she knows it. it's a good crazy." the owner of firm b was perceived as well-organized, a skilled businessperson, energetic, and committed to her business. while highly motivating and demanding of good work from afl employees, she was seen as considerate and fair. some employees thought of her as a mentor. firm c's owner was also considered skilled at building a stable business. however, she was frequently absent from the store in pursuit of new goals and accomplishments for herself, leaving some employees wishing for more ofher presence and guidance. firm image was a complex dimension which was descriptive of the physical surroundings, services, and more tangible aspects of the business procedures of the apparel retail firm. organizationalcultureshapesselectionofbusinessprocedures,serviceclimate,and atmosphere projected by employees and physical features of the firm. of particular interest were the findings related to marketing communications and promotions management. the two owners of firms 8 and c recognized that, because of the small sizes of their towns, local customers alone could not sustain their businesses. these two owners did not focus their promotion and advertising efforts solely on local customers but used a variety of marketing techniques, such as fashion shows in surrounding communities and creative in-store promotions, to draw customers from a large area outside their own towns. firm b mailed promotional information to about 2300 customers within a 75 mile radius of the store. the firm now advertises to the regional market via television. firm c sent a newsletter to about 2000 customers in a 60-mile radius. a continuous elfort to reach out to and expand the base of customers was characteristic of firms b and c. the owner of firm a, in contrast, 39 complained that her advertising efforts placed solely in the local newspaper never seemed to generate much business. the owners of firms b and c and their employees had clear knowledge of their target inarkets and commitment to customer service beyond what the mass merchandisers and mall stores offered. as dcshpande, farley, and webster (1993) pointed out, customer orientation is a fundamental component of organization culture. for these small apparel firms off the beaten path from major trade centers, customer service may be the orientation that keeps customers coming to them. firm a, in contrast, did not clearly differentiate its merchandise from nearby mass merchandisers and could not offer items at competitive prices. the owner had a broad and imprecise definition of its clientele. firm a's most loyal customers were elderly individualswho frequented the store for items diaicult to find elsewhere, such as house dresses and nursing gowns. the store offered services such as horne delivery that were attractive to the elder clientele. five of the cultural dimensions —communication pauerns, conflict tolerance, integration, management support, and orientation to external pubfics-were similar across the three stores and may be related to the small size of the firms and their location in small towns. in all three firms interpersonal communication patterns were unrestricted by hierarchical barriers. there were strong efforts on the part of all employees and owners to readily resolve minor conf)icts and tolerate difyerences of opinion or personal characteristics, and quirks of individual workers. an overall spirit of cooperation and integration prevailed. management was unanimously perceived as highly supportive in all three firms. a personal and personable orientation to customers and community on the part of owners and employees helped to anchor these firms as establishments integral to their towns. in addition, personal relationships with local and repeat customers seemed to be an enjoyable component of the work role and an intangible benefit of employment in a local apparel retail firm. these five dimensions common across the three firms are similar to characteristics of healthy, nurturing families identified by lewis and beavers (1976), stinnett, chesser and defrain(l 979), and curran (1983). the fact that most of the owners and employees of these firms had known each other or their families all of their lives suggests a sense of community and shared history which carried over into and could not be separated from the organizational culture. employee comments such as, we get along great. everybody just helps everybody. we all basically do everything... if things need to be done, you just kind of pitch in and get it done. and we'e all known each other for a long time, and we all seem to get along really well, and we all work with each other one day or another... we'e like family around here. were common across all three firms. without exception, owners and employees talked of confiding in each other frequently, sharing family and personal information, as well as openly 40 discussing the general financial, merchandising, and customer aspects of the business. firm b used its weekly meetings of all employees for sharing reports of problems and of successful sales techniques as well as for report from the owner of current sales and inventory status. in general, all three firms were found to have owners who were very supportive of their employees. all owners were perceived as open and easy to talk with when there was a personal or family matter that required time oiyor juggling of schedules. in return, employees of all three iirms gave back substantial support to management. this support from employees did not go unnoticed. one owner, referring to her employees, said, "...they'l look out for me and the business." overall, each owner/manager, regardless of earnings of the firm, exhibited characteristics of managers in what kotter and heskett (1992) called "adaptive" (vs. "unadaptive") corporate cultures. adaptive managers care deeply about customers and employees. they pay close attention to employees and customers and readily initiate changes to serve these constituencies. unadaptive managers remain somewhat insular from their employees and are more comfortable with order and risk-reducing policies. reward system related to methods of compensation for work performed. because of the small size and owner management of these firms, there were few opportunities for promotion and limited resources for salary differential. in firm b, the benefits accrued from use of a commission pay system were tempered by the interpersonal conflicts created by it. an employee of that firm commented that, lf i had a choice, i would rather just be paid by the hour. sometimes the competition [for sales] is obvious... it's kind of tense on the floor. strong management support, integration, and identity could be incentive enough for strong employee performance. the conflict resulting from employee competitivenessmay ultimately be unproductive or unnecessary in small firms in small towns. dubinsky and levy (1989) proposed that salary rather than commission pay may attenuate retail salespersons concerns about job security and fairness of organizational policy and supervisors; commission pay may increase quality of performance in larger firms, however. the data related to the theme of risk tolerance were not substantial in number. risk taking may not be a relevant engrossment on the part of employees primarily involved in sales work. only in one instance did an employee of firm a describe problems that arose when a young protege of the manager was allowed to make line decisions for children's wear and purchased stock too highly priced for the store's clientele. owners were the risk takers when making financial and buying decisions, and indeed did most of the decision making for their small firms. however, they did not describe their business ventures as risky. this may be related to previous findings of avoidance of innovation in products and services on the part of female entrepreneurs (bowen ec hisrich, 1986). fincham and minshall (1995) also found a fairly low level of risk taking on the part small town independent apparel retailers in kansas. further development of measures of risk taking and comparisons between large and small retail establishments would be required before any clear interpretations of the data can be made. 41 substantial financial risk was involved in the eventual business expansion and movement of firms b and c (after this data collection). these two owners may have become more comfortable with financial risk taking after their businesses had been successful for a number of years, a trend found by fincham and minshall (1995). emer ent or anizational culture dimension a dimension of culture that was not emphasized in previous research of larger firms emerged from the data in relation to the significance of family relationships and the firm's proximity to home. emphasis placed on family considerationsaffected not only an employee's decision to work, but oflen the conditions under which she would work. as long as many of these female employees could work part-time in a business located near home and had flexible schedules and an accommodatingowner, they found little difficulty managing work and family demands and were able to experience personal enrichment derived from working outside their homes. one employee suggested that she could work other places for greater pay but "...this is handy for me because i live just up the street." another employee said, it' just a job and it's in town. my family time... that's why i choose to work in town. like i said, my kids are here, my husband is here... i'm in town, you know. apparel retail owners operating in small towns must recognize that their likely labor pool is female and that female employees in small towns oflen have strong family demands that must be flexibly accommodated in maintaining a productive and loyal work force. these accommodations substitute, to some extent, for larger salaries. the family orientation dimension might be categorized by other researchers with the orientaiion to external publics, management suppori, or possibly reward systems dimensions. we prefer to conceptualize this organizational cultural component as related to, but distinct from, other dimensions. the family is not an external public for the respective employee nor an entity that management accommodates merely as a reward to employees. the family was intricately involved in these small town apparel retail organizations as a source of personal identity for the employees and a primary motivation for the employees in choosing to work for the particular firm. as described for the integration dimension, discussions of family matters and inter-employee knowingof family members is an interpersonal glue that helps to bind the firm together. in a sense, the work staff becomes an extension of the family for employees and management. perhaps with increasing demands in the u. s, for employer-assisted child care, family health plans, and parental leaves, the family relations dimensions will become a more apparent component of larger corporations'ultures (hanks & sussman, 1990). contribution of gender as becomes apparent in the discussion of the family orientaiian dimension, gender of the owners and employees must be considered as a potential determinant of the direction of findings. fischer, reuber, and dyke (1993)make use of social feminist theory to propose that women have been socialized differently than men and therefore approach business development differently in some ways. the owners of the stores in this study were al i female, 42 which may have contributed to the nurturing personal climate of the small organizations. the nurturing approach to management may reflect traditional female socialization patterns (hood & koberg, 1994; shively, rudolph, & de cecco, 1978; spence, deaux, & helmreich, 1985) or may be a characteristic present in all successful small town small businesses. bowen and hisrich (1986)review conflicting evidence that female managers emphasize feminine values of cooperation, support, and concern in leadership style. the impact of gender versus community size requires further research. comparative study of small apparel firms headed by male owners could facilitate understanding of underlying reasons for the organizational cultures of stores run by women. regardless of causation, the focus on collaborative and constructive social relations among employees and with customers may be a highly functional strategy for small town service businesses such as apparel firms. the service orientation fits with the more gemeinshafiorientationofsmall communitiesand rural areas in which familiarity and family orientation are emphasized and expected (see redfield, 1930). emphasis on personal service also helps to differentiate the store from larger retail competitors and bring in customers that value excellence in service. ln addition, the female employees, socialized to develop many traditional female role norm attitudes and orientations, may also prefer adaptive organizational cultures in which interpersonal relationships are of primary importance. it is highly likely that the emergence of the family orientation dimension and findings related to iniegruiion, communication parterns, and conflict tolerance occurred due to the prevalence of female employees and owners of the firms. summary and implications in summary, the interpersonalcommunicationpatternsunrestrictedby rigid hierarchical divisions, high degree of conflict minimization through open communication, highly supportive management, a high degree of work team integration, low recognition of risk as a problem, and the committment to personal orientation to customers that characterized these small apparel retail firms probably facilitated the strong employee identity, which resulted in loyalty and support given back to management and the firm. despite very low wages, every one of the interviewed employees said they definitely liked their jobs. recognition of and support for the importance of family relationships and employee cooperation and friendships with staff and customers appeared to be significant factors in employee satisfaction with the reward system in these small businesses. emergence of the dimension of family orientation adds significantly to understanding of the culture of small retail firms, which have not been previously studied using an organizational culture framework. the dimensional themes common across the firms help in understanding and building a model of corporate culture in small apparel retail firms. h othesis generation this investigation generated a considerable amount of meaningful data related to cultural dimensions of small apparel retail firms located in small towns. the sample of firms 43 and employees was small, however, and prevents generalization beyond the three firms. nevertheless, the exploratory nature of this research provides a foundation for further research of a much larger scope. several pertinent research questions have emerged. a series of hypotheses can be generated from the findings for testing in further inferential research of apparel stores and other types of retailers. hypotheses are formulated for tests of "success" of small firms. the operational definition of success we tentatively adopt refers to ability to remain in business for a number of years and to earn a reasonable profit. future researchers of these hypotheses would need to clarify the number of years distinguishing viability and what constitutes a "reasonable profit". we propose hypotheses for the study of small retailers in small towns (srst), but also propose that the hypotheses are applicable to the study of any small retailers, not only apparel firms. a significant portion of the findings pointed to the specialized character that may be required of the owner/managers of small town retailers. h,: managers of more successful srst's are higher on adaptive rather than unadaptive characteristics of managers than are managers of less successful retailers. h,: managers of more successful srst's are more attentive to family needs and other issues of concern to employees than are managers of less successful srst's. h,: managers of more successful srst's are more involved in community organizatiors and activities than are managers of less successful srst's. h,: managers of more successful srst's are less interested in maximizing profit than are managers of retailers in larger communities. adaptive characteristics are discussed previously in this paper and outlined by rotter and lteskett(1992). in summary, adaptive managers care deeply about customers and employees (i e., are high on management supportdimension),readily initiate changes and flexible policie to serve these constituencies, and are not high on risk-avoidance while implementing these changes. furthermore, managers of srst's may need to hold intrinsic goals beyond maximizing profit to feel satisfied as a business person in a small town community. intrinsic rewards from involvement in the community and closeness to extended families of employees may shape ultimate success of the small retail firm. among the three organizations in this case study, firm a did not focus promotional efforts toward surrounding counties whereas firms b and c promoted beyond their local towns. we have only intangible evidence that the locally focused firm (unwilling to report earnings) was not as profitable as the other two firms; ultimately, the locally focused store closed in 1995. we tentatively propose the following directional hypothesis: h,: more successful srst's target promotional efforts to reach beyond the customer base of their local towns; less successful srst's have a narrower local customer base. 44 a number of findings defined the communication climate and hierarchical structure of the small firms. these cultural dimensions may be crucial to small retail firms, in that: h,: employeesandmanagersofmoresuccessfulsrst'sarehigheronconflicttolerance than are employees and managers of less successful srst's. h,: a high level of integration permeates staff of more successful srst's. h,: hierarchicalboundariesdo not impede iiowofcommunicationsin more successful srst's; more rigid communication boundaries contribute to lesser success of srst's. h,: employees of more successful srst's report higher degree of intangible reward from interaction with customers. further research could clarify other questions arising from the findings. an investigation of the effects of a commission pay system on other dimensions of corporate culture is needed to determine if commission is necessary or effective in a small town small firm. is strong management support, integration, and identity in such firms self motivatingand perhaps degraded by emphasis on inter-employee competitiveness? or does the competitive environment increase prestige of and motivation to work in a profitable retail organization, regardless of size? other research questions generated through the findings suggest the need for further studies that i ) increase the scope of this research to develop a model of organizational culture for existing versus new apparel retail firms and for firms of varying sizes and 2) examine differences, if any, between firms owned by men versus those owned by women. ~ci i p of specific interest for small business consultants is the usefulness of the data collection instruments developed to profile small apparel retail firms. an analysis of a firm's culture profile can be used as a basis for making recommendations for refining the firm's management systems. understandinga small store'sculture may provide a basis for management action to reinforce those dimensions identified as productive and to change those dimensions identified as counterproductive to the overall objectives of the firm. recommendationssuch as modifying personal communication style between a manager and employees; adding or improving employee training programs related to selling, product knowledge, or customerservice; providing merchandisingsuggestions for improving the firm's image; focusing buying strategies for a defined target customer; and suggesting eitective promotion management strategies to external publics are just some examples of possibilities for diagnostic profiling. while this investigation involved only three retail firms, the iindings were somewhat consistent across firms. replication of this study on a larger and more representative number of firms and in other geographic locations is necessary before generalizations of results and implications for managers of small apparel retail firms as a whole can be confidently 45 undertaken. nevertheless, the iindings of this research provided insight into the culture and operation of small apparel retail businesses and, possibly, other types of retail businesses. organizational culture is not the only determinant of successful performance of a small apparel retailer. we suspect that lack of financial planning and inventory control (i.e., excessive inventory accumulation)along with focus on local rather than regional customer base (the errernal publics dimension) were strong factors forcing firm a to eventually fail and close. lack of strategic planning has been identified as characteristic of small businesses that fail (gask ill. van auken, & manning, 1993). however, a positive and adaptive organizational culture can help a well planned business to thrive and do better in the long run (kotter & heskett, l 992). based on our data, we specifically propose that small retailers attentive to employee concerns and scheduling needs will develop a loyal and supportive workforce. owner and employee commitment to customer service and identification of target customer tastes and needs will develop a loyal customer base. recognition that a regional rather than local target market must be attracted can expand the customer base and increase sales and resultant longevity of the small firm. in summary, this approach to studying a business organization has both scholarly and practical iinplicationsas a point of departure for further research and in providing a means to qualitatively profile organizational culture for consultation purposes. analysis of a firm's cultural profile can be used to make recommendations for refinement or change in inanagement systems and to help owner/managers better achieve the overall objectives they have set for their small businesses. q6 references aburdene, p., & naisbitt, j. 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(1984). case siudy research. beverly hills, ca: sage. 48 appendix a (probe cues or prompts to ask for information not inn/ally covered by respondent are /tali ci sad in parentheses) interview schedule for owner/mana ers l. i'd like to begin by having you tell me about your typical day/week.... what kinds of things are you likely to be doing? (time with customers, with employees, in business activity, in travel, at market) 2. tell me about your background... what kind of experience, jobs, education or training do you have? 3. how did you get involved with this firm? 4. what do you like most about being in the apparel business? (special apparel expertise or inrerest?) 5. apparel retailing is a little different in that fashions change radically and otten rapidly....how do you deal with this aspect of the business? (sources of fashion information used) 6. what do you think are your personal strengths in terms of running this business?...any areas you might like to improve on? 7. what have been some of your greatestsatisfactions/achievement/triumphs from having this business? 8. what are your greatestchallenges/problems/frustrationgn running this business today? target market/ community relations: 9. does your store have a typical/usual customer?.....can you describe her/him for me? (does your target customer differ from the typical customer? do you have regnlarlrepeat customers? from what distance do your customers come?) 10. why do you think your customers come here to shop? 11. what kind of strategies do you use to attract your customers? 12. can you tell me about your customer service policies? (returns, charge(checks/credit, alterations, personal calls) 13. what do you think of the statement: " the customer is always right"? 14. do you think the people in this community support your business? 15. are you involved in any community activities, organizations, etc? 16. are you a member of any professional/trade organizations? 17. do you network with/know other apparel retailers in small towns or cities in this area?....is this helpful for you in running this business? buying practices: 18. how do you do your buying?.....do you go to market or do vendors come to you? 19. what kind of relationships do you have with your vendors? 49 staff relations: 20. how many employees do you have?....what are their responsibilities? (iurnover, who handles merchandising, bookkeeping, displays) 2 i. what type of pay system do you use?....hourly, salary, other? (coinmissions, quotas, bonuses, discoimts, other benefits or incentives) 22. do you talk to your employees about your business operations? (sales voliime achievetl financial, inerchandise ordered) 23. do your employees help with information about customer requests, new merchandise, suggestions to improve sales, markdowns, best sellers, etc? 24. do your employees receive training for their job?....what kind of training do they get? (new or ongoinss wlio (rains?) 25. what kind of things do your einployees do well/are they good at?....what, if any, would you like to see them improve? 26, do any of your employees ever ask to take on new responsibilities?........how do you feel about that? 27. do you have any rules and regulations, written or unwritten, for employee behavior at work? (dress code, lateness; casli liandling, food on sales floor, personal phone calls) 28. do you ever have problems with any of these things?....how do you deal with these employee problems? 29. what kind of relationships do you have with your employees? (personal confidences, social interaction) 30. i'd like you to try to imagine how your employees might describe you as "the boss".....how do you think they would describe you? 3i. how well do you think your employee get along with each other?....do they support/help each other?....the business? personal vision: 32. i'd like you to tell me, if you can, about your vision for where you see your business going from here? 33. in thinking back over the topics we have touched today, is there anything you might like to add or comment on? 50 appendix b interview schedule for em lo ees 1. i'd like to begin by having you tell me about your typical day/week.... what kinds of things are you likely to be doing? (iime with customers/selling, owner/manager, handling merchandisejdisplay, paper work or bookkeeping, house-keeping) 2. tell me about your background. what kinds of experience, jobs, education or training have you had? (special apparel expertise or inieresij 3. how did you get involved with this firm? (personal connections, newspaper ad, help wanted sign) 4. how do you feel about working here?....do you like it or do you not like it? (why? problemslfrusiraiions, good aspecis, personal goals, other demands on your time) 5. how do you think your family/friends feel about your working here? customer relations: 6. does your store have a typical/usual customer?.....can you describe her/him for me? (do you have regulailrepeaicusiomers? from what distance do your customers come?) 7. why do you think your customers come here to shop? do you do anything special to attract/bring these customers here? 8. can you tell me about your store's customer service policies? (rearms, charge/ checkslcredii, alieraiioiis, personal calls) 9. what kinds of problems, if any, do you generally have with customers? 10. what do you think of the statement: "the customer is always right"? 11. do you think the people in this community support this business? 12. how do you think your family/friends feel about this firm?....do they shop here? vendors: 13. do suppliers/vendorsever come into the store?....whatdo you think of them? (how do /hey ireai you? how do you gei along with them?) reward system and relationship with owner: 14. how do you get paid?....hourly, salary?,...how do you feel about this? (commissions, sales quotas, discounts, bonuses, other system you would prefer?) 15. does your owner/managertalk to you about the business? (howii is doing, sales volume goals and achievemenis, financial health, new merchandise on order) 16. does the owner/manager ever ask for suggestions for or your opinion about business operations? (customer requesis, bestsellers, merchandise direciions, promoiion ideas, display ideas) 17. did you receive or are you receiving any kind of training for this job?....what kind of training did/do you do? (new or ongoing, who trains?) 18. what kind of things do you do well/are you good at?....what. if any, would you like to learn more about or improve on? 51 19. does the owner/manager encourage you or complement you when you do something well/do a good gob? 20. i-lave you ever been asked to take on new responsibilities?....how do you feel about that? 21. have you ever asked the owner/manager if you could learn about some new business procedures or to take on new responsibilities? 22. do you or some employees have more management or supervisory responsibility than others'?.... what are they? 23. are there any rules and regulations, written or unwritten, for employee behavior at work? (dress code, luteness, cash handli irg, food on sales floor, personal phone calls, caslr handling) 24. have you or another employee ever had problems with any of these rules?....how did the owner/manager deal with these problems? 25. what kind of relationships do you have with the owner?....the manager (if different)? (persoiral confidences, social inieraciion, business only relatioirship) 26. how would you describe the owner as "boss"?....the manager (if different)? (personality, likesldislikes, business management abilities) employee relations: 27. how do you get along with the other employees?....how do you think they feel about you? (support eaclr otlier, work as a team, conjlicts) 28. how do think the other employees get along with each other? 29. how do you think the other employees get along with or think about the owner? future plans: 30. i'd like you to tell me, if you can. about your plans for the future or where you see yourself going from here?....do you plan to stay with this firm? 31. in thinking back over the topics we have touched today, is there anything you might like to add or comment on? 52 st%4 tegy small business brief strengthening federal bankruptcy laws: implications for small businesses matthew c. sonfield hofstra university matthew.c. son/ieldhofstra. edu abstract significant changes in the american bankruptcy laws have recently been passed by both houses of congress. although the terrorist attacks of september ll, 2001 have temporarily delayed final approval by president bush, he has indicated his endorsement of these modifications to the law, and eventual reali ation is expected. while most of the publicity regarding these proposed changes has focused on their impact upon individuals and their ability to erase personal debts, small businesses are also extensively impacted by these changes. this article first explains bankruptcy law in general as it a4fects small companies, then discusses the expected changes in the law and their small business implications, and finally suggests appropriate responses for small business owners, managers and their consultants. introduction federal bankruptcy law preempts state laws, and therefore, title 11 of the united states code governs bankruptcy proceedings in all states. in march of 2001, both the u.s. senate and house of representatives each passed a significant set of revisions in the bankruptcy code which would have major impact upon america's small businesses. in july of that year, a joint house-senate committee was formed to work out the minor differences in the two bills so that final legislation could be submitted to president bush for signing. while the president indicated his endorsement of the proposed changes in the bankruptcy laws, and quick implementation of the changes had been expected, the terrorist attacks of september 11, 2001 placed many federal legislative initiatives on hold, including this one. therefore, while final passage of this legislation is expected, the timing is currently unclear. most of the focus on these expected modifications to the bankruptcy code has centered on how it will become more difficult for people to erase their debts. more than 1.2 million americans have tumed to bankruptcy in each of the past few years (american bankruptcy institute, 2002). these proposed changes in the law will end individuals'bility to use the bankruptcy system to wipe out credit card bills and other loans that are not secured by personal assets, such as homes and automobiles. much of the impetus for these changes in the law came from intense lobbying to both parties from the credit industry, especially credit card 88 journal of small business strategy vot. 73, no. l springtsummer2002 companies, and the votes in both houses of congress were largely bipartisan. consumer groups have strongly criticized the bills. what has gone largely unnoticed is that the same bankruptcy laws that govern individuals also govern small businesses and their owners, regardless of whether the small business is organized as a sole proprietorship, partnership, limited liability company (llc) or corporation. although the number of business bankruptcies each year (about 35,000 in 2000) is far less than the number of personal bankruptcies, the option of bankruptcy is something a small business owner or manager should understand, and these proposed changes in the bankruptcy law should be of particular interest to small business owners and managers, and to those who assist them. this article first explains bankruptcy law in general as it affects small companies, then discusses the proposed changes in the law and their small business implications, and finally suggests appropriate responses for small business owners, managers and their consultants. bankruptcy law the purpose of the american bankruptcy law is to provide benefits to both debtors and creditors in a bankruptcy situation. in other words, the law is designed to give relief to debtors from debts they can not pay, and at the same time insure that creditors get paid from whatever assets of the debtor are reasonably available (moran law group, 2002). bankruptcy proceedings are categorized into "chapters" which govern different situations in a bankruptcy proceeding. chapter 7 is the most common form of bankruptcy and is available to both individuals and all types of businesses. it is a liquidation proceeding in which most of the debtor's assets are sold by a trustee, with the proceeds then distributed to the creditors. however, most earnings of the debtor after the case is begun are exempt from the creditors. thus, chapter 7 within the current bankruptcy law is popular with individuals (rather than businesses) because it allows these individuals to declare bankruptcy, go through the procedure, and then largely make a "fresh start" to their lives. for businesses, chapter 7 may be a less desirable option, because it generally forces the liquidation of the company. but certain other forms of bankruptcy may be employed instead of chapter 7 liquidation. chapter /3 is a repayment plan for individuals (not businesses) in which the debtor keeps his or her property and makes regular payments to a trustee, who then pays the creditors over a period of time. in chapter 13 some personal income received afler the filing of bankruptcy is also subject to payment to creditors. primarily for corporations, limited liability companies and some partnerships, chapter l l allows a business to remain in control of its assets and maintain operations under the supervision of the bankruptcy court, oflen with considerable flexibility in the details and schedule of the payments to the company's creditors. it is the usual choice of businesses that wish to restructure their debt and continue as an ongoing entity. chapter 11 is central to the issues raised in this article. see figure i for a summary of the fundamentals of chapters 7, 11 and 13. the changes in the law most of the publicity about the changes approved by congress focuses on the impact upon individuals. under the proposed revisions in the law, it would become harder for individuals 89 journal ofsmall business srraregy vol. 33, iyo. l spring/sumnrer2002 to erase debts under chapter 7, and it would force more people to file under chapter 13, thus requiring them to repay a portion of their debts from future income over a number of years (day, 2001; shenon, 2001). for businesses, and small businesses in particular, the revised law would give faltering firms less time to settle their debts and reorganize. and some small business owners would be required to pay more of their personal debts to creditors over a longer period of time. figure i federal bankruptcy code chapters 7, 11 & 13 chapter 7 chapter 11 chapter 13 * the most common form 'ess common 'ess common of bankruptcy 'enerally for 'or individuals with 'vailable to individuals, corporations, limited regular income (including married couples, liability companies and sole proprietorships and corporations, limited some partnerships general partners of small liability companies and businesses) partnerships ' liquidation proceeding ' reorganization ' repayment plan for proceeding individuals 'he debtor's non-exempt 'he debtor usually n the debtor keeps assets are sold by the retains possession of property and makes trustee assets and continues regular payments to the to operate the business trustee out of future 'he sale proceeds are under the supervision of income distributed to the the court creditors according to 'he trustee pays the priorities established in 'he debtor proposes a creditors over time the code plan of reorganization, which must be accepted 'he debtor is protected 'ndividual debtors get a by the creditors and the from collection action discharge within 4-6 court dunng the case months of filing the case n creditors may be paid 'ost of the debtor's from future earnings, earnings arer the case is some assets, and future begun are beyond the re-capitalization reach of creditors 90 journal of small business strategy vol. 13, no. l spring/summer2002 businesses that are taxable legal entities (corporations, limited liability companies and limited parmerships) would be defined as "small businesses" under the bankruptcy law if they have debts of $3 million or less. such companies accounted for more than 80 percent of the nine thousand businesses that filed for bankruptcy under chapter 11 in 2000. the new law would set a strict timetable for small companies to reorganize; for most small businesses the time limit would be 175 days within chapter 11. atter that time limit, such companies would be required to move into chapter 7, where they would be required to liquidate their assets (atlas, 2001). thus, the basic impact of the proposed changes in the law would be to force many small businesses into closure and liquidation sooner than under the current bankruptcy law. for small businesses that are legally organized as sole proprietorships or general partnerships, the company's income and debts pass directly to the owner or owners. thus the company's income is taxed as personal income to the owner(s) rather than as the business'ncome; and similarly the company's debt is considered the personal debt of the owner(s). thus, any bankruptcy derived from the business'ailure would be a personal bankruptcy and not a business bankruptcy. as explained above, for these types of small businesses, the new law would more frequently force the small business owner(s) into chapter 13 (with future income subject to debt repayment) rather than into chapter 7 bankruptcy. thus, for small businesses with these types of legal structure (oiten the smallest of small businesses), the impact of the new law would be to reduce the financial protection of bankruptcy for the owners. thus, for all small businesses, regardless of the legal form of ownership, their creditors will be more strongly protected under a revised bankruptcy law. as with most laws, there are exceptions to the above generalizations regarding movement from chapter 11 to 7, and from chapter 7 to 13. while this discussion covers most typical business situations, a more complex explanation is beyond the appropriate scope of this article, and business owners and managers should seek legal or other expert assistance to determine their specific situation within the law. with regard to business bankruptcies, proponents of the changes say they will preserve the rights of creditors, by speeding up the payment of debts. furthermore, it is argued that some bankrupt businesses should not be allowed to linger on, but rather should be liquidated sooner than under the current law. but opponents to the proposed changes in the law are concerned not only for the small businesses that would be affected, but are also concerned about the employees of these companies. while 1.2 million individuals filed for bankruptcy in 2000, the number of employees in companies filing for bankruptcy was estimated at two million. thus the small business implications of the proposed changes to the law would be greater than has been acknowledged. not only may many small firms that might previously been able to reorganize under chapter 11 now be forced to liquidate under chapter 7, but many more employees of small businesses may become unemployed because of these proposed changes. with the american economy currently weak, and the prospects and timing of an economic turnaround unclear, such an increase in unemployment would be especially harmful. as for personal bankruptcies (for sole proprietorships and general partnerships), proponents of the changes have largely ignored the fact that a business may be involved. instead, the arguments deal with improving protection of creditors, as discussed earlier in this article. issues of business continuity and the protection of employees are peripheral at best. 91 journal %$ma// //us/ness stra/egy vo/. /3, no. l spring/summer2002 national bankruptcy review commission report the national bankruptcy review commission was an independent commission appointed by the president, congress and the chief justice in 1994 to study issues relating to the bankruptcy code and to make recommendations for change. its report, submitted in 1997, stressed the importance of chapter 11 for small businesses, and cited this chapter as a tool for saving jobs and protecting creditors. for financially troubled small firms that have the potential for turnaround, the commission's recommendations are thus in opposition to the proposed new bankruptcy code (national bankruptcy review commission, 2001). as discussed above, the focus was on individuals, and not businesses, when congress developed these modifications to the law in response to intensive lobbying. implications for some small business owners and managers, and for those who consult to them, a number of implications arise from these proposed legislative changes. obviously, it is those small companies which are having financial troubles that should be most interested in these issues. such troubled companies fall into two groups: those that have the potential for successful reorganization and those that do not. as the national bankruptcy review commission pointed out, only a minority of small businesses currently in chapter 11 have a reasonable chance of succeeding as a viable enterprise. the majority of chapter 11 firms have no realistic prospect of revitalization (national bankruptcy review commission, 2001). for the former group of mortally weak companies, chapter 11 will benefit their employees (by keeping them employed) but only prolong the firms'nsuccessful business activities. for the latter group of salvageable businesses, the benefits of chapter i i are clearly greater, providing these firms with extra time that may be needed for a successful turnaround and reorganization. in either case, financially troubled companies should closely review these proposed bankruptcy law changes and the status of the legislation, as they apply to small businesses. although the advice of an attorney or other expert may be best, the text of the proposed new law is readily available on the internet (at http: //thomas.loc.gov/cgibin/bdquery/z?d 107;s.00420 for the senate version and at http: //thomas.loc.gov/cgibin/bdquery/z?d 1 07:hr00333 for the house version), and much useful information is available in small business assistance books and on the internet (for example, at http: //www.moranlaw.net). understanding the law, and especially the differences between chapters 7, 11 and 13, can be of great value to a small business owner or manager with financial problems and contemplating the filing of bankruptcy. in general, such owners and managers should consider the decision to file for bankruptcy more carefully in the future, as the impact of bankruptcy may become greater. in particular, an owner or manager of a corporation, limited liability company or limited partnership in such a situation should fully understand the advantages and disadvantages of these two alternative bankruptcy chapters 7 and 11, in terms of their company's specific situation. what is the realistic chance of viable reorganization? would it be better to proceed with liquidation quickly? how important is the prolongation of the employment of the firm's workers? such questions should be carefully answered prior to any bankruptcy decision. 92 journal ofsmall business strategy vo/. /3, no. l spring/summer2002 owners of financially troubled sole proprietorships and general partnerships should similarly understand the proposed personal bankruptcy law changes (chapters 7 and 13), and then relate these changes to the implications for their small businesses and for themselves as individuals. if future income to the individual owner(s), and not just past business income, may be subject to creditors'laims, the decision to file for bankruptcy becomes an even more serious one. and here too the issue of the firms'mployees becomes a matter of consideration within the broader decision. finally, it should be noted that these modifications to the bankruptcy code would not become effective until 180 days alter the enactment of the law. thus, if and when this legislation is finalized and signed into law, the owner or manager of a small business contemplating bankruptcy will still have another half-year in which to reach a decision and initiate filing for bankruptcy prior to the deadline, if the current provisions of the code seem to be more beneficial to the company and/or the owners than the new provisions would be. yet the decision to file for bankruptcy should not be based primarily on a time factor criterion. certainly expert legal advice would be appropriate in this situation. while this article can provide small business owners, managers and consultants with questions and issues to consider with regard to these proposed changes in the bankruptcy law, it would be inappropriate to suggest answers to these questions or to recommend specific courses of action. as each small business'ituation is at least somewhat unique, the advice of an attorney or other expert advisor should be sought. conclusions the impact and implications of the proposed changes in the united states bankruptcy code upon small businesses have been largely ignored, as the focus has centered on individual personal bankruptcy. this article has summarized general aspects of bankruptcy law, has highlighted the small business issues raised by the proposed changes in the law, and has presented some appropriate matters to be considered by owners and managers of small businesses that may be affected. all small business owners and managers, and those who assist and consult to them, are advised to make themselves aware of these proposed changes to the law. references american bankruptcy institute. (2002). retrieved feb. 15, 2002, from hup://www.abiworld.org/stats/newstats front.htm i. atlas, r. (2001, march 16). big impact seen from new bankruptcy rules for small business. the new york times, p. cl. day, k. (2001, march 16). senate votes to toughen bankruptcy. the iyashington post, p. a01. moran law group. (2002). bankruptcy law in brief retrieved feb. 15, 2002 from http: //www.moran law.net. national bankruptcy review commission. (2001). retrieved may 30, 2001, from http: //www.nbrc.gov/facts. html shenon, p. (2001, march 16). senators vote to toughen federal bankruptcy laws. the new york times, p. al. 93 journal ofsmall business strateg3 vok /3, no. l spring/summer2002 matthew c. sotifteld is the robert f. dali distinguished professor in the zarb school of business at hofstra university. he earned the a b, mba. and ph d. degrees from cornell, harvard und new york universities respectively. dr. sonfield's primary areas of research atrd pttblication are itr etrtrepreneurship, small business, minority business and automotive business history. 94 reproduced with permission of the copyright owner. further reproduction prohibited without permission. types of product innovations and small business performance in hostile and benign environments wright, robert e;palmer, john c;perkins, debra journal of small business strategy; fall 2004/winter 2005; 15, 2; abi/inform complete pg. 33 types of product innovations and small business performance in hostile and benign environments robert e. wright university of illinois at springfield wright.robert@uis.edu john c. palmer university of illinois at springfield palmer.john@uis.edu debra perkins customer relationship metrics abstract the relationship between innovation and performance has been wide~v studied. in addition, many studies have examined moderating effects of types of competitive environments on this relationship. however, little work has been done to examine how specific types of product innovation strategies are related to performance in hostile and benign environments. using results from a survey of a sample of small businesses, this paper used regression ana~vsis to examine how degree of change in new product offerings and number of new product lines were related to satisfaction with financial performance. while neither type of innovation was related to satisfaction with performance in benign environments, the number of new lines developed was positively related to satisfaction with financial peiformance in hostile environments. the results from this sample indicate that the strategy of innovation through development of more new product lines may be preferable to developing dramatic innovations for small businesses in a hostile external environment. introduction innovation has been identified as a key source of competitive advantage for small firms (changhanti & changhanti, 1983; figenbaum & kamani, 1991; meredith. 1987). innovation has the potential to create new markets or change existing markets to create new patterns of competition and consumer behavior (brown, 1992). through innovation, small firms may gain first mover advantages in good or service markets (carpenter & nakamoto, 1989; kallenberg, 1986 ), create markets and customers (berth on, mac hulbert, & pitt, 2004 ), respond in a timely manner to moves by competitors (covin & slevin, 1989), or more effectively differentiate goods or services on offer (miller & toulouse, 1986). thus, innovation may contribute directly to profitability and long term viability of businesses. 33 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal o(sma// business strategy i 'of. l 5, no. 2 winter 2005 innovation by finns has been widely examined. studies have typically focused on a general innovation strategy, where innovation is seen as a complex set of interacting factors which together affect financial perfonnance (e.g., covin & slevin. 1989). however, little work has been done to evaluate how specific types of product innovation strategies affect financial performance in small businesses. innovation in small finns is different than innovation in large finns (verbees & meulenberg, 2004 ). unlike larger firms, small businesses typically have limited resources and may have to choose to pursue a limited number of innovative tactics rather than pursuing a broadbased, multi-faceted innovative strategy (firth & narayan, 1996). after choosing a product innovation strategy, firms may choose to focus their efforts on developing a large number of product innovations, or they can focus their efforts on developing innovations that differ a great deal from present product offerings of the finn. debrentani (200 i) noted that many studies have overlooked the fact that degree of innovativeness of a product may be a key variable in the relationship between innovation and a firm's financial performance. product innovations may be dramatic, or they may be incremental (garcia & calantone, 2002). dramatic product innovations vary greatly from current products; may be very costly to produce, requiring new equipment and technology (garcia & calantone, 2002); and typically require businesses to educate consumers as to the differential advantage of the new product, as well as how the product should be used. dramatic product innovations may therefore require a substantial investment in promotional support ( debrentani, 2001 ). substantial customer resistance may result in product failure and devastating losses for a small business. incremental product innovations may differ only slightly from ex1stmg products (garcia & calanatone, 2002). cost of production tends to be much lower than for dramatic product innovations. marketers need only convince the customer that the product is better than its competitors, rather than educate the customer on how to use the product, lowering the cost of promotional efforts. dramatic innovations therefore tend to be high-risk, high-reward innovations, whereas more incremental innovations have lower risk. new products may increase costs significantly over an imitative product, as well as increasing average time to market dramatically (e.g., robinson, 1990). in addition, the failure rate of those products that are the first to sell in a new product category (market pioneers) is 47 percent (tellis & golder, 1996, p. 1). dramatic innovations are typically very costly and risky. incremental innovations are most often much less costly, with a corresponding decrease in risk. however, it is not clear from the literature which strategy should be undertaken by a small business owner and under what conditions. while studies have shown that the relationship between an overall innovative strategy and performance is impacted by the type of competitive environment a firm operates in, little work has been done to examine how the relationship between different product innovation strategies and performance in small businesses is affected by the type of environment. this study seeks to provide small business owners with insight into the potential impact of different types of innovative product strategies on performance. specifically, the purpose of this study is to examine the relationship between the type of innovative strategy (i.e., degree of innovation or number of new product lines) and satisfaction with performance in competitive and benign environments. product innovation and financial performance studies examining relationships between product innovation and financial performance have generally yielded inconsistent findings. for example, in a study of 260 high tech firms, pearce and carland ( 1996) found that finns that placed a strong emphasis on new product introductions 34 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal o{small business strateg1· vol. i 5, no. 2 winter 2005 reported higher levels of sales 1:,rrowth, profitability, and roi than finns that placed a lesser emphasis on new product introductions. likewise, in a study of 97 manufacturing firms, robinson and pearce ( 1988) found that finns that placed a major emphasis on product innovation, including development of new products and adaptations to existing product lines, were among the highest perfonning firms in the sample. however. this situation was only tme for those finns that also possessed an adequate level of planning sophistication. similarly, dess, lumpkin, and covin ( 1997) found that innovative differentiation was a positive predictor of firm performance. hsueh and tu (2004) found that innovation was positively related to both profits and sales growth. keller (2004) also found that new product development was related to profitability for a variety of new products, with key variables being time to market and ability to achieve first mover advantage. mcmillan, mauri, and hamilton iii (2003) found that the number of new products (as measured by new molecular entities approved) was significantly related to company performance, as measured by the market to book ratio for firms in the pharmaceutical industry in the united states. in a study of entrepreneurial activity in 102 manufacturing firms, zahra ( 1993) reported positive associations between product innovation, as measured by the emphasis that firms placed on developing new products; rates of new product introductions, levels of spending on product development; number of new products added by companies; and both return on sales and sales growth. however, the author also reported non-significant relationships between these variables for those firms operating in benign competitive settings. contrary to many of the previous findings, mishra, kim, & lee (1996) found that increased frequency ofnew product introductions was associated with failure of new products. these studies show that, in general, it appears that innovation is positively related to performance. however, these studies do not differentiate between types of innovation strategy in order to determine if the strategies affect firm performance in different ways. degree of innovation and performance in terms of innovation, firms may pursue a strategy of numerous, incremental innovations (as discussed above) or fewer, more dramatic innovations (garcia & calantone, 2002). different strategies, in terms of degree of innovation, may have differing impacts on financial performance of the firm. the uncertainty associated with dramatic innovations is much higher than that associated with incremental innovations (avlonitis, papastathopolou, & gounaris; 2001). for example, in a study offmns that provided business to business services, debrentani (2001) found that incremental adaptations to service offerings tended to be more successful than more radical adaptations to offerings. the author explained that the fit of service offerings with current customer needs, level of employee expertise in providing services, and the ability of fmns to readily translate to customers the features and benefits of incremental service offerings contributed to this finding. similarly, goldenberg, lehmann, & mazursky (2001) found that radical innovations were associated with new product failure. yap and souder (1994) found that customers in some markets were not seeking unique product solutions touting superior performance. garcia & calantone (2002) proposed that the degree of innovation may affect both the speed of adoption of an innovation and the marketing strategy required for communication efforts concerning the innovation. some authors (e.g., dhebar, 1996; mick & fournier, 1998) note that increasing levels of innovation may create hesitancy in a consumer, in terms of innovation adoption, due to fear of buying products that may quickly be superceded by lower cost, higher performing versions, or for fear of adopting unproven technology (lee & o'connor, 2003). 35 reproduced with permission of the copyright owner. further reproduction prohibited without permission. jo11mal of'small b11si11css strategy vol. i 5, no. 2 winter 2005 however, as mascitelli (2000) stated, firms creating a continuing stream of radical new products can gain a sustainable competitive advantage in the market. mcdennott & o'connor (2002) suggested that radical innovation is critical to long term success of firms. goldenberg, lehmann, & mazursky (200 i) found that low levels of newness to the market were associated with failure. mishra, kirn, & lee ( 1996) also found that increased levels of innovativeness were associated with success of new products across countries. hultinik, hart, robben, & griffin (2000) found that finns with higher levels of product innovativeness were more successful, while cooper & de brentani ( 1991) found that highly innovative services were marginally more successful than less innovative services. in addition, atuahene-girna (1995) noted that firms are likely to face less competition for radical products than for less innovative products, and keller (2004) suggested that radical new products might be more difficult to imitate, leading to a higher long-term revenue stream than incremental innovations. in one of the few studies to examine potentially differential effects of different types of innovations, freel and robson (2005) found no association between either incremental or novel innovations and profits in a study of small firms in scotland and northern england. however, they did not take into account the type of environment in which the firms were operating, or the number of innovations undertaken. while innovation has been shown to be related to performance in many firms, the results of previous studies provide little guidance as to whether small firms should pursue a strategy of developing many new lines or focus on developing radical innovations. in fact, berthon, mac, huber, and pitt (2004) noted that empirical research has so far not differentiated between strategies focusing on incremental (develop many new lines, with small changes) versus discontinuous (develop fewer, more radical innovations) research and development. with small firms typically possessing limited resources, they may be unable to pursue both strategies. environment al hostility in one of the few studies explicitly examining predictors of innovation in small firms, covin and slevin ( 1989) found that businesses operating in hostile competitive environments, characterized by intense rivalry among firms and weak or diminishing competitive opportunities, tended to adopt innovations with greater frequency than firms operating in more benign competitive settings. innovations leading to the creation of a differential product or service advantage were crucial to the success of these firms. in a study of small to medium enterprises, salavou, baltas, and liokas (2004) also found that those firms operating in an environment that was very competitive had a higher level of product innovation. utilizing samples consisting of large firms, studies by flaherty (1983) and miller and freisen ( 1982) also reported positive associations between environmental hostility and innovation. serious challenges by competitors forced firms to undertake efforts that enabled them to more effectively serve markets through innovative adaptations to product lines. in contrast, innovation was of less importance to those firms operating in environments where competitive pressures were not as intense. however, souder, & song ( 1997) found that in competitive markets, product failure was likely when radical innovation was stressed. this may occur when firms commit early to a new technology, market, or product process that does not become dominant (calantone, schmidt, & di benedetto; 1997). in addition, as friar ( 1995) postulated, it may be difficult to establish a differential advantage over competitors in consumers' minds in a market where there is constant innovation by participants. as a market becomes inundated with new product introductions, failure of new products may become much more likely (redmond, 1995). thus, 36 reproduced with permission of the copyright owner. further reproduction prohibited without permission. .jo11mal of'small business strategy vol. 15. no. 2 l·vinter 2005 finns that reduce costs through a strategy of limiting introduction of innovations may increase financial perfonnance in such highly competitive markets. surprisingly. cooper and de brentanni ( 1991) found that new service products were equally successful in highly competitive and less competitive markets. previous research has provided small business owners with guidance on how an overall innovative strategy is related to performance in different environments. however, studies on innovation and perfonnance have typically combined many elements of innovation in their analysis. little research has focused on precisely how the degree of innovation and the number of innovations are related to perfonnance in hostile or benign environments. hypotheses based on the preceding discussion, it seems clear that innovation is likely to have a positive impact on financial performance in a hostile environment. this leads to the following hypotheses: h 1: innovation in terms al number of new product lines or services will be positive(v related to satisfaction withjinancial pelformance in a hostile environment. h2: innovation in terms al degree of change in product or service lines will be positive(v related to satisfaction with financial peiformance in a hostile environment. previous authors have typically found no relationship between innovation and performance in a benign environment. it would seem logical that the type of innovation would not affect this relationship. therefore, the following hypotheses are proposed: h3: innovation in terms of number of new product lines or services will not be related to satisfaction withjinancial peiformance in a benign environment. h4: innovation in terms of degree of change in product or service lines will not be related to satisfaction with financial pelformance in a benign environment. method to examine this issue, the relationship among degree of innovation, number of innovations, type of environment, and financial performance was examined in a sample of small businesses. names and addresses of 1293 small businesses in the indianapolis, indiana metropolitan area were obtained from a business communication database. of these establishments, 721 were confinned to still be in operation in the area. out of the questionnaires sent to these businesses, 183 were returned, for a response rate of 25.4 percent. 178 of those returned had complete data for the purposes of this study. of those businesses responding, 11.5 percent listed manufacturing as the primary nature of the business, while 7.7 percent listed retailing, 11.5 percent listed wholesaling, 11.5 percent listed constmction, 42.6 percent listed service as the primary nature of their business, and 15.3 percent listed "other." these statistics show that the businesses in the study encompassed a wide range of industries. the average number of employees for the firms in the sample was 9.5, indicating the generally small size of the firms. in terms of sales revenue for the most recent full year, 55.5 percent of the sample reported revenues of $300,000 or less. the firms were well distributed among the sales 37 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal o(sma// 811si11ess stratcg_r vol. 15. no. 2 wi/1/er 2005 revenue categories. businesses that repo11ed sales al less than $i 00.000 amounted lo 25.5 percent. while 18.6 percent of the businesses reported sales between $i 00,000 and $200,000, i 0. 9 percent of the businesses reported sales of between s200.00 i and $300.000, 12 percent of the businesses reported sales of between $300.00 i and s400,000. 4.9 percent of the businesses reported sales of $400.00 i to $500,000, and 27 .3 percent of firms reported sales of over $500,000. the average number of years of operation for the firms was 17.4 years, indicating that the finns were. in general, fairly well established. the nature of competitive environments was measured utilizing an environmental hostility scale first developed by khandwalla ( 1976/77) and later adopted by covin and slevin ( 1989). respondents were asked to report levels of agreement with a statement indicating the degree to which the external environment in which the finn operated was risky, using a seven point scale. the endpoints of the scale were "very safe, little threat to survival, and well-being of my firm" and "very risky, a false step can mean my firm's undoing." those organizations with a rating of four or above on the seven point hostility scale were categorized as operating in a hostile environment. those with a rating of three or less were categorized as operating in a benign environment. innovation was measured using two items developed by miller and freisen ( 1982). one question asked how many new lines of products or services had been developed in the past five years. a seven point scale was used to allow responses ranging from "no new lines developed" to "many new lines developed." a second question asked respondents whether changes have been "mostly minor" or "changes have usually been quite dramatic" (also on a seven point scale). to determine profitability, respondents were asked their level of satisfaction with net profit on operations on a seven point scale from highly dissatisfied to highly satisfied, based on a performance scale developed by gupta and govindarajan (1984) and adapted by covin and slevin ( 1989). covin and slevin ( 1989) note that small firms are reluctant to provide objective profit information, which may lead to incorrect or missing data when objective measures are asked for. in addition, they state that even if firms report accurate profit information, it may be difficult to interpret, depending on the firm's strategy. finally, covin and slevin point out that objective scores on financial performance may differ due to industry related factors, making objective data acquired across industries misleading. given these factors, especially the fact that data was collected from firms in a variety of industries, it was therefore decided to use this subjective measure of performance for this study. those businesses categorized as being in a benign environment had an average satisfaction with a profitability rating of 3.20, with a standard deviation of 1.02. those classified as being in a hostile environment had an average satisfaction rating of 2.89, with a standard deviation of 1.01. the averages for satisfaction with profits are not statistically significantly different at the .05 level between firms in the two different groups. results levels of product innovation as indicated by the number of new lines of products or services developed were a positive predictor of satisfaction with profitability in firms operating in a hostile environment (p<.05) (see table l.) this result supports hypothesis one. innovation as measured by the degree of change in products or services was not related to satisfaction with profitability in hostile environments (see table 1 ). this result is counter to hypothesis two. 38 reproduced with permission of the copyright owner. further reproduction prohibited without permission. ./011mal of"sma// business strateg_i' vol. i 5. no. 2 winter 2005 for this sample of firms operating in a hostile environment, those with more lines of new products or services were more satisfied with their level of profitability than those with fewer lines of new products or services. however, the degree of change in products or services was not related to level of satisfaction with profits for finns in this sample. for this sample, innovation in terms of new lines of products developed was a more satisfactory strategy than innovation in terms of de1:,tfee of change. table i -summary of simultaneous regression equation predicting profits in a hostile environment (n= l08) variables b se b b innovation (new .15 .06 .26** lines developed) innovation .06 .06 .09 (degree of change) r" (total) .1 1 r2 (adj usted) .09 f 6.18** * 12 < .05 ** 12 < .01 b is the coefficient estimate for each of the two variables, as estimated by the regression equation. se b is the standard error associated with each coefficient estimate. b is the standardized estimate of the coefficient. the positive sign on the coefficient indicates that the more new lines developed, the higher the satisfaction level with profits. the p value indicates that the coefficient is statistically significantly different from 0 at the .05 level. in other words, there is a greater than 95% probability that innovation in terms of new lines developed is positively related to satisfaction with profits. the equation predicting satisfaction with profits in a hostile environment using the two measures of innovation was a statistically significant predictor of satisfaction with performance, with an f statistic of 6.18 (p<.05 .) the regression equation explained 11 percent of the variance in satisfaction with profits. there was no relationship between either measure of innovation and profitability for firms operating in benign environments. these results support hypotheses three and four and are in line with much of the research in innovation and performance. the f statistic for the regression equation predicting satisfaction with profits in a benign environment was .05 (p> .10). the amount of variance explained by the equation was zero (see table 2). these results indicate that, for the firms in this sample operating in a benign environment, neither type of innovation was related to satisfaction with profitability. discussion product innovation is often viewed as an essential element of success for a business. small businesses, in particular, are in the forefront of innovation (karlsson & olson, 1998; scarborough & zimmerer, 2000; tether, 1998). however, this study makes clear that innovation is not always a viable strategy. neither type of innovation examined in this study was related to satisfaction with financial performance in benign environments. this finding reinforces the previous work of covin and slevin and others, who found that innovation was not necessarily a desirable strategy in benign environments. in such an environment, with a low level of competition, resources that 39 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of'sma// business s1ra1egr vol. 15, no. 2 f1/i111cr 2005 otherwise might be allocated for research and development lo support innovation might better be allocated to such efforts as increasing promotional efforts or increasing levels of customer service. table 2 -summary of simultaneous regression equation predicting profits in a benign environment (n=70) variab les ~ se ~ b lnnovation (new -.01 .09 -.02 lines developed) innovation -.oj . i i -.02 <degree of change) r 2 (total) .00 r 2 (adjusted) .00 f 0.05 * 12 <. 05 **12 < .0l !! is the coefficient estimate for each of the two variables. se !! is the standard error associated with the coefficient estimate.11. is the standardized estimate of the coefficient. the lack of statistically significant coefficient estimates indicates that neither of the variables had a statistically significant impact on satisfaction with profits. ln a hostile environment, number of new product lines was positively related to satisfaction with financial performance, but the degree of change in existing lines was not. this finding contradicts both debrentani (200 l ), who suggests that both highly illilovative and incremental new products are necessary for long term performance, and garcia and calantone (2001), who suggest that a clear definition of type of innovation (in terms of difference from existing products) is critical in examining performance due to the differential effect of different types of illilovation on firm performance. however, our results are consistent with calantone, et al. ( l 994 ), who found no evidence that major product innovations or more minor product illilovations differed in their effects on firm performance. findings from this study may also help explain the lack of any relationship between illilovation and profitability for either novel or incremental innovations found by freel and robson (2005). the lack of relationship they observed may have resulted from not including the level of environmental hostility as a factor in their analysis. implications small business owners typically operate with significant resource constraints. given these constraints, guidance is needed in how to most efficiently allocate limited resources to achieve firm goals. lllilovation is frequently recommended as "the" key strategy for small businesses. however, little guidance is given to the small business owner on the particulars of innovation. innovation can range from extremely costly, long-term product development that produces a totally new and different product (the segway scooter) to the relatively simple (adding raisins to bran flakes). each of these strategies may have a very different risk/reward potential. this research provides some insight into the potential success of illilovation, depending on the type of innovation pursued and the environment a firm is operating in. for those firms operating in a benign environment, there is no clear difference between the two innovation strategies. neither was related to satisfaction with performance of the firms in this study. this implies that firms in a benign environment should be very careful about undertaking an innovation strategy. such a strategy could be counterproductive, requiring substantial 40 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of'small bu~inl'ss stratl'g_l' vol. 15. no. 2 wintff 2005 investment with little guarantee of an adequate return. available funds might better be used on promotional activities designed to increase sales of present products. the results of this study. along with those of many other authors in the field, clearly demonstrate that a critical success factor for small finns operating in hostile environments is the development of new product offerings lo meet consumer needs. however, the results of this research study make clear that ii is not necessary for small finns to develop discontinuous product innovations (major changes from existing products) that are extremely costly in terms of research and development. in addition to their development costs, such innovations may require a significant amount of promotional dollars spent on consumer education as to use and differential advantage over the old product. such costs increase the probability of a negative result for the firm introducing such an innovation. in contrast, development of many new lines of products was shown in this study to be associated with an increase in satisfaction with profitability in a hostile environment. small firms may reduce their risk by constantly improving upon existing products in an incremental fashion, rather than attempting major changes in products. such incremental improvements would typically be much less costly in terms of research and development. however, they would show the firm's customers that the firm was constantly improving its products to meet customers' needs. this strategy might be necessary to retain customers in a competitive environment. such product development could also be used to target new market segments, thereby increasing sales and profits. conclusion while a broad body of research has examined relationships among innovation, environment, and financial performance of firms, little work has been done providing insight for small business owners into the proper innovative strategy to follow in benign and hostile environments. is a strategy to attempt to develop a number of new product lines preferable, or is it preferable to develop fewer new products, with major changes in the product? how does the appropriate strategy change depending on the level of hostility in the environment? based on the results of this study, small business owners appear to be more likely to achieve a higher level of financial performance through product innovation in hostile environments. however, even in hostile environments, findings suggest that an innovative strategy based on degree of change to existing product lines was not related to financial performance. results from this study suggest that innovative efforts of small businesses in a hostile environment should focus on developing a number of new product lines in order to maximize the likelihood of enhancing financial performance. references atuahene-gima, k. 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( 1994). factors influencing new product success and failure in small entrepreneurial high-technology electronics finns. the journal al product l1111ovatio11 management. i i, 418-432. zahra, s. ( 1993 ). environment, corporate entrepreneurship, and financial perfonnance: a taxonomic approach. journal o/business venturing. 8, 319-340. dr. john palmer is associate professor of management and business research in the business administration department at the university of illinois at springfield. he has served as chair of the sba program at uis and director of the mba program at uis. his research interests are in the areas of small business strategy and performance, performance predictors for mba students, and student evaluations of professors. dr. robert wright is professor of marketing and business research in the department of business administration at the university of illinois at springfield. his research interests are in the areas of non-profit marketing, small business strategy and performance, performance predictors for potential mba students, and student evaluations of professors. dr. debra perkins in an independent consultant, who also works at the firm customer relationship metrics, specializing in a variety of management related issues, particularly applications of statistics to topics such as customer satisfaction. she also has taught at purdue university in the department of consumer sciences and retailing. her research interests are in the areas of customer satisfaction and business management, as well as small business management issues. 44 journal of small business strategy vol. 27 ● no. 2 ● 2017 13 do high performance work systems pay for small firms? an intellectual capital building perspective leanne coder western kentucky university leanne.coder@wku.edu whitney peake western kentucky university whitney.peake@wku.edu shane spiller western kentucky university shane.spiller@wku.edu abstract prior research suggests that small firms often struggle with human resource management, and limited research indicates that high performance work systems (hpws) may assist firms in boosting their level of performance via the construction of intellectual resources for the firm. however, exploration of these phenomena in the small firm context is limited. we examine the mediating role of intellectual capital on the relationship between hpws implementation levels and firm performance and find that a mediating impact is present for sales growth, profit growth, and perceived performance. results suggest that hpws implementation enhances small firm performance via intellectual capital building. mailto:leanne.coder@wku.edu mailto:whitney.peake@wku.edu mailto:shane.spiller@wku.edu journal of small business strategy vol. 27 ● no. 2 ● 2017 14 introduction despite their established importance to the economy through both employment and innovation, small businesses face many challenges; one of the most pressing of which is the ability to develop and retain their workforce (kemelgor & meek, 2008) with limited resources (hornsby & kuratko, 2003). the resource-based view (barney, 1991), supports the importance of high performance work systems (hpws), particularly in the large and emerging firm context, as a way for firms to develop their human resource systems to promote performance and advantage longterm. researchers agree that hpws are comprised of separate, yet interrelated human resource practices, which incorporate the dimensions of human resource management such as selection, training, performance, management, compensation, and information sharing (pfeffer & veiga, 1999). firms craft and implement such systems to recruit, improve, retain, and guide employees (messersmith & guthrie, 2010; pfeffer & veiga, 1999; schuler & jackson, 1987; way, 2002), and the combinations of these elements are often imperfectly inimitable by competitors due to the intricacy of day-to-day human resource decisions stemming from hpws implementation (barney & wright, 1998; messersmith & guthrie, 2010; wright, dunford, & snell, 2001). these practices, integrated into human resource management by firm leaders, may build human, social, and organizational capital (messersmith & guthrie, 2010; patel & conklin, 2012; youndt & snell, 2004), yielding an augmented level of intellectual capital for the firm. although human resource practices generally have been shown to yield performance advantages for firms (boselie, dietz, & boon, 2005; huselid, 1995; huselid & becker, 1997; way, 2002), prior researchers acknowledge that the linking mechanisms between human resource management via hpws and performance are underexplored (nyberg, moliterno, hale, & lepak, 2014; jiang & liu, 2015). in previous explorations of these phenomena, researchers generally meld human resources and strategic management views under the theoretical concepts of capital and the resource-based view (rbv) of the firm. for example, youndt and snell (2004) argue for the role of intellectual capital, comprised of human capital, social capital, and organizational capital, as a mediator of the relationship between hr configurations and performance of the organization. employing the resource-based view, messersmith and guthrie (2010) conceptually argue that human capital and social capital mediate the relationship between hpws integration and emerging firm performance. they suggest that hpws serve as a dynamic capability (teece & pisano, 1994) of the firm that influences the development of human and social capital. messersmith and guthrie (2010) purport that the combining and recombining of such resources allow firms to heighten performance via both comparative and competitive advantages, but do not empirically examine the conceptualized mediating effect via their analyses of small firms. although the relationship between hpws and firm performance has been explored in the large firm and emergent firm contexts (huselid, 1995; tregaskis, daniels, glover, butler, & meyer, 2013; way, 2002), to our knowledge, the relationships between hpws, intellectual capital, and firm performance remain largely journal of small business strategy vol. 27 ● no. 2 ● 2017 15 unexplained, particularly in the domain of small firms. generally, scholars suggest that small firms may not receive the same payouts for implementation of hpws that larger firms receive (patel & conklin, 2012; way, 2002). as such, the purpose of this study is to examine the mediating role of intellectual capital (subramaniam & youndt, 2005; youndt & snell, 2004), when represented by combinations of human, social, and organizational capital, on the relationship between hpws and small firm performance. we examine these relationships for 196 small, employer firms (i.e., between 1 and 250 employees) in the southern united states using established measures. further, we analyze the proposed direct and indirect effects for three performance measures: sales growth, profit growth and perceived success. hpws appear to support a host of capitalbuilding functions, such as innovation (messersmith & guthrie, 2010), production and safety measures (kroon, van de voorde, & timmers, 2013), and lower turnover (way, 2002). further, they heighten small firm performance (kotey & slade, 2005; maes, sels, & roodhoft, 2005; messersmith & guthrie, 2010), as well as improve the survivability rate of small firms (welbourne & andrews, 1996). we work to move this literature forward by probing the indirect effects of hpws through intellectual capital building on the relationship with small firm performance. the remainder of our manuscript proceeds as follows. in the subsequent section, we address the importance of the resource-based view as a stimulator of competitive advantage through hpws. next, we hypothesize the effect for hpws and performance and the mediating role of intellectual capital on this relationship. then, we address the sample and methods utilized in our analyses, and report the results of our analyses. finally, we raise the implications of our study, both academic and practical, followed by the acknowledgment of limitations that may inform future research. theory and hypothesis resource-based view of the firm and competitive advantage the resource-based view (rbv) of the firm, developed by barney (1991), posits that a firm’s resources include all assets, capabilities, organizational processes, and information in its control. these internal resources include physical capital, human capital, social capital, financial capital, and organizational capital (barney & wright, 1998; greene, brush, & brown, 1997), which can be used to create a sustained competitive advantage. to provide a sustained competitive advantage, the resources must be valuable, rare, imperfectly imitable, and cannot have strategically equivalent substitutes (barney, 1991; wernerfelt, 1984). for many organizations, it is difficult to create a sustained competitive advantage using only product, so they must look inside their organization to create an edge over the competition. this internal view led strategic human resource management (shrm) scholars to examine the viability of using an organization’s workforce to create a sustained competitive advantage (barney & wright, 1998; wright, dunford, & snell, 2001). barney and wright (1998) describe a method whereby an organization can use its human journal of small business strategy vol. 27 ● no. 2 ● 2017 16 resource management practices to turn its workforce into something that creates value, is rare, and cannot be imitated. such practices make it possible for employees to foster the elusive competitive advantage (barney, 1991; barney & wright, 1998; patel & conklin, 2012; way, 2002; wright, mcmahan, & mcwilliams, 1994) a firm’s competitive advantage lies in the thousands of small decisions made by employees every day in an organization (barney, 1995). these daily decisions are difficult, if not impossible, for competitors to see or imitate because they are based on the socially complex resources of teamwork, trust, and friendship that exist among employees and are formed within the culture of an organization (barney, 1995; nelson & winter, 1982; teece, pisano & shuen, 1997). in addition, many of a firm’s routines are tacit in nature, which makes them very difficult to imitate (teece & pisano, 1994). all of these decisions and specific knowledge combine to result in a firm’s employees and its organizational processes serving as a source of sustained competitive advantage (wright, et al., 2001). because the impact of human resources is more salient in smaller firms (bendickson, ligion, muldoon, newport, & weaver, 2013), small firms that have highly integrated human resource management systems may find ways to leverage people and processes to create sources of sustained competitive advantage (barney & wright, 1998; mcclean & collins, 2011) by using hpws to reduce the costs associated with turnover (sels, de winne, maes, delmotte, faems, & forrier, 2006). the use of hpws may also lead to an increase in the productivity, ambidexterity and flexibility needed for small firm survival (patel & conklin, 2012; patel, messersmith, & lepak, 2013). in the following section, we hypothesize the role of hpws in facilitating heightened performance in small firms. high performance work systems hpws are separate, yet interconnected, human resource management practices, such as selective staffing practices, high compensation based on organizational performance, reduction of status differences, and sharing of information (pfeffer & veiga, 1999). together these practices help an organization to hire, develop, keep, and motivate a workforce that possesses superior abilities and encourages employees to apply those abilities to their work assignments (huselid, 1995; way, 2002). sparham and sung (2008) suggest that hpws have two key objectives, which are increasing employees’ control over their jobs and improving employee welfare through greater involvement and reward practices. these practices work together to give employees the knowledge, skills, abilities, motivation, and opportunity to do their jobs well (combs, liu, hall, & ketchen, 2006; delery & shaw, 2001). the key to effective hpws is finding a combination that allows the practices to work together so that the sum is greater than the individual parts (huselid & becker, 1997). hpws have many positive impacts on organizations such as decreased turnover, increased sales, higher market value, and greater profits (bendickson, et al, 2013; huselid, 1995; huselid & becker, 1997; messersmith & guthrie, 2010; way, 2002). further, researchers credit hpws with yielding increased organizational journal of small business strategy vol. 27 ● no. 2 ● 2017 17 ambidexterity (patel, et al 2013), improved employee attitudes (wu & chaturvedi, 2009), heightened job satisfaction and affective commitment (takeuchi, chen, & lepak, 2009; kroon, et al., 2013), increased innovation (messersmith & guthrie, 2010), and increased productivity (shin & konrad, 2014). human resources are even more valuable in small firms where each employee termination (voluntary or involuntary) has a more significant impact on the firms’ performance (bendickson et al., 2013). therefore, practices that empower employees and reduce turnover will have a significant, positive impact on firm performance. in short, hpws may be the key source of competitive advantage for small firms (way, 2002). using this view of the rbv and hpws, we predict: hypothesis 1: the use of hpws increases small firm performance. intellectual capital scholars suggest one way in which hpws affect firm performance is by increasing the intellectual capital in a firm (youndt & snell, 2004). intellectual capital is the sum of all knowledge firms utilize for competitive advantage (subramaniam & youndt, 2005; nahapiet & ghoshal, 1998). it is an intangible asset (bosworth & rogers, 2001) and is proposed to have three aspects: human, social, and organizational (youndt & snell, 2004). human capital refers to the unit level resource created from individuals’ knowledge, skills, abilities and other characteristics (ksaos) that are relevant for achieving economic outcomes (becker, 1962; ployhart & moliterno, 2011; ployhart, nyberg, reilly, & maltarich, 2014). studies looking at the impact of human capital argue it as a key resource in developing superior products and services (youndt, & snell, 2004), unique employee knowledge (staniewski, 2016), and has a positive relationship with firm performance (carmeli & tishler, 2004; hitt, bierman, shimizu, & kochhar, 2001; lubatkin, & srinivasan, 2006; reed, oh, kim, & iddekinge, 2015; & youndt & snell, 2004). the second aspect of intellectual capital, social capital, represents the strength of relationships inside the firm and the ability to facilitate knowledge sharing and employee interaction (guthrie, flood, wenchuan, maccurtain, & armstrong, 2011; youndt & snell, 2004). high levels of social capital have been found to result in increased levels of teamwork, collaboration, and organizational citizenship behaviors (macduffie, 1995), increased knowledge acquisition and new product development (yli-renko, autio, & sapeiza, 2001), incremental and radical innovation capabilities (subraimaniam & youndt, 2005) and overall firm performance (youndt & snell, 2004). finally, organizational capital represents the institutional knowledge and codified experience stored in databases, routines, patents, manuals, and organizational structures (youndt & snell, 2004). organizational capital is positively related with incremental innovative capability (subramaniam & youndt, 2005). while these types of capital are conceptually different, it is difficult to identify them individually in organizations as they are intertwined (cross & funk, 1997) through the day-to-day activities of a business (subramaniam & youndt, 2005). for example, individual ksaos (human capital) journal of small business strategy vol. 27 ● no. 2 ● 2017 18 are often recorded in manuals or developed into computer programs and become institutionalized (organizational capital). this codified knowledge, or institutional capital, transfers throughout the organization via networks and social exchanges among employees (social capital) (subramaniam & youndt, 2005). similar to the process used by youndt, subramaniam, and snell (2004), we combine these three forms of capital into a single construct, intellectual capital. the strategic human resource management literature often states that hpws, in themselves, do not create the positive performance effects previously discussed (applebaum, bailey, berg, & kallerberg, 2000; patel et al., 2013; wright, et al., 1994). the transformation process between the use of hpws and heightened firm performance has been referred to as a “black box’ because the mechanisms through which hpws affect firm performance have been underexplored (banks & kepes, 2015; boselie et al., 2005; nyberg et al., 2014). through the rbv lens, the shrm literature posits that by using hpws, organizations can create a competitive advantage through selecting the right employees, motivating them to use their knowledge, skills, and abilities for the good of the organization, and providing an organizational structure that allows for a free flow of information and production (increasing intellectual capital) in order to improve firm performance. the intellectual capital literature suggests that increases in intellectual capital result in improved firm performance. thus, we offer the following hypothesis: hypothesis 2: intellectual capital will fully mediate the relationship between hpws and small firm performance. methods sample data were collected over a two-month period in 2012 from businesses in a five county region of a southeastern state. researchers obtained a list of business owners from five local chambers of commerce, and surveys were mailed to 2,332 businesses based on the chamber of commerce member lists, excluding publicly traded and large, privately held corporations. an introduction letter was sent, followed by the survey and reminder cards. of the 2,332 surveys distributed, 216 were returned, yielding a response rate of approximately 9.3 percent. respondents were provided the option to either mail in the completed hard copy survey with a postagepaid envelope, or take the survey online via a qualtrics link provided with the hard-copy survey. of the surveys returned, 191 were completed in hard copy form and 25 were completed via qualtrics. since the primary focus of this study is the effect of hpws on small firm performance via the development of intellectual capital, we limit our sample to small, employer firms, using the threshold of 250 or fewer employees (e.g., acs & aldrich, 1989; bell, crick, & young, 2004). using this filter, our sample comprises 196 small firms with 1 to 235 employees. firm age is 29 years, on average, but ranges from start-up to 150 years. respondents represent owners, general managers, or other human resources supervisors. the sample consists of approximately 64 percent business owners, 26 journal of small business strategy vol. 27 ● no. 2 ● 2017 19 percent general managers, and 10 percent other human resources supervisors. respondents report, on average, more than 13 years of experience with the firm, but range from 1 year to 55 years. approximately 57.7 percent of the respondents are male and 42.3 percent are female. all respondents have at least a high school education (19 percent), with 19 percent holding associate’s degrees, nearly 46 percent holding bachelor’s degrees, 9 percent holding master’s degrees, and 6 percent having professional or doctoral degrees. descriptive statistics and correlations for the variables utilized in the analyses are reported in table 1. several respondents failed to answer items throughout the survey; thus, to examine missing data, we calculated little’s mcar for the sample data (groza & ryan, 2002). our data were not missing completely at random; thus, we used regression techniques through spss to replace missing data points. missing item analysis suggested that 95 percent of the data points overall were complete, with twothirds of cases being fully completed for the variables utilized in our analyses. with the use of these techniques, all 196 responses were retained for analysis. measures dependent variables. we analyze three performance measures in our study: sales growth, profit growth, and perceived business success. we use these three measures to examine the top line effects, bottom line effects, and perceived effects of integrating hpws into human resource practices. to measure growth of sales, respondents were asked, “over the last two years, what is your average rate of growth of sales,” with the following reporting options, “negative,” “flat, approximately 0,” “1-2 percent,” “3-5 percent,” “5-10 percent,” and “over 10 percent.” these categories were then coded from 1 to 6, with 1 being the lowest and 6 representing the highest percentages of sales growth, respectively. table 1 descriptive statistics and correlations for the sample mean std. dev. 1 2 3 4 5 6 7 8 1. sales growth 3.71 1.53 1.00 2. profit growth 3.30 1.53 0.78* 1.00 3. perceived success 3.72 0.72 0.37* 0.34* 1.00 4. tenure in position 13.47 11.08 -0.30* -0.27* -0.07 1.00 5. education level 3.62 1.08 0.07 0.07 0.06 -0.11 1.00 6. total employees 21.14 34.65 -0.06 -0.08 0.10 -0.07 -0.01 1.00 7. intellectual capital 49.73 8.71 0.35* 0.31* 0.35* -0.11 0.10 0.06 1.00 8. high performance work systems 59.62 12.21 0.20* 0.12 0.34* -0.07 0.12 0.31* 0.42* 1.00 n = 196, *p<0.05 journal of small business strategy vol. 27 ● no. 2 ● 2017 20 profit is measured in the same way, with the same percentage categories, according to the question, “over the last two years, what is your average rate of growth in profits?” sales growth and profit growth are traditional empirical measures of performance for small firms (e.g., delmar, davidsson, & gartner, 2003; wolff & pett, 2006), and are intended to reflect more objective performance measures for the firms. to measure the perceived effects of hpws, respondents were asked, “relative to your competitors, how would you describe your business success?” on a 5-point likert scale, where 1 = unsuccessful, 2 = below average, 3 = average, 4 = very successful, and 5 = extremely successful. prior researchers argue that perceived performance is an important consideration in fully understanding firm performance, and that more subjective measures tend to follow actual performance (wall michie, patterson, wood, sheehan, clegg, & west, 2004). we believe both objective and subjective reports of success provide a well-rounded view of how hpws and intellectual capital are related, both directly and indirectly to firm performance. independent variable. our hpws measure is an adaptation of the 21 human-resource oriented items examined by messersmith and guthrie (2010). like messersmith and guthrie (2010), our items range from inquiries regarding interviewing procedures to promotion and merit to team composition. for the full text presentation of these questions, see appendix a. however, rather than using a sum of binary responses, we asked respondents to indicate how often their employees and/or management team participate in the 21 activities, based on a 5point likert scale, where 1 = never and 5 = always. the responses to the 21 items for each respondent were then summed to create a single measure indicative of the relative level of hpws implementation. the cronbach’s α for the hpws measures is 0.809, which suggests an adequate level of inter-item agreement, given both general thresholds and the cronbach’s α of 0.724 reported by messersmith and guthrie (2010). mediating variable. we examine intellectual capital (ic) as a mediator of the hpws and performance relationship, based on both the conceptual model of messersmith and guthrie (2010) and the specification of ic provided by youndt and snell (2004). in their work examining hr configurations and large firm performance, youndt and snell (2004) propose that intellectual capital serves as a mediator of this relationship, and measure intellectual capital as the configurations of human, social, and organizational capital utilized by the firm. we construct our organizational capital measure modeled after the items employed by youndt and snell (2004). our human, social, and organizational capital measures exhibit a cronbach’s α of 0.876, 0.852, 0.741, respectively. the intellectual capital measure, comprised of the human, social, and organizational capital measures displays acceptable fit as a single construct (rmsea = 0.082; cfi = 0.97; ifi = 0.97) via confirmatory factor analysis using lisrel 8.80 (jöreskog and sörbom, 2001). further, cronbach’s α for the unitary measure of intellectual capital is 0.889, indicating sufficient inter-item agreement to be considered as a single construct. given these results, we average the human, social, and journal of small business strategy vol. 27 ● no. 2 ● 2017 21 organizational capital items for each respondent to create the intellectual capital measure. for a full text presentation of these items, see appendix b. control variables. to control for contextual factors, we consider three additional measures. we control for the size of the firm via the total number of employees reported by the respondent. additionally, we control for the education level of the respondent, as well as respondent tenure (years) in his/her current position. results prior to testing our hypotheses, we examine our data for its suitability to be employed in such analyses via multicollinearity and common method variance tests using spss v.21. first, we examined the data for multicollinearity using both variance inflation factors (vif) and the condition index values. results suggest that no vif was greater than 1.36, and the condition index was 19.075, which are both well within acceptable thresholds (fox, 1997; pedhazur, 1997). to examine our data for common method variance, we employed the harman one-factor test (podsakoff, mackenzie, lee, & podsakoff, 2003). the study variables were entered into an exploratory factor analysis, where 11 factors emerged with eigenvalues greater than 1. the first factor comprises only 21.21 percent of the variance; thus, no single factor emerges or appears to dominate (gerasymenko & arthurs, 2014). the results of these analyses suggest that neither multicollinearity nor common method variance appear to serve as limiting forces for our tests of hypotheses. to examine our hypotheses, we utilize the process syntax developed by hayes (2013) in spss v.21, which employs regression analyses to examine both the direct and indirect effects. we rely on both bootstrapping and the sobel test provided via the process analysis to confirm the direct and indirect effects of the models. results of the regression analyses are provided in table 2, and results related to further examinations of the direct, indirect, and total effects are provided in table 3. hypothesis 1 proposes a direct relationship between hpws and performance. we examine this relationship with three models, in which we test the direct effect of hpws without the presence of intellectual capital in the model. the three models suggest that hpws is significantly associated with sales growth (β=0.03, p<0.01), marginally associated with profit growth (β =0.02, p< 0.10), and significantly associated with perceived performance (β=0.02, p<0.001). given these results, we find support for hypothesis 1, suggesting that higher levels of hpws are directly associated with heightened small firm performance. hypothesis 2 proposes that intellectual capital will fully mediate the relationship between hpws and small firm performance. the results of both the bootstrapping confidence intervals generated via the process model (hayes, 2013), in addition to the sobel tests, suggest that intellectual capital fully mediates the relationship between hpws and sales growth (sobel: β = 0.02, p<0.001) and hpws and profit growth (sobel: β = 0.02, p<0.01). table 3 further highlights this result with the journal of small business strategy vol. 27 ● no. 2 ● 2017 22 lack of the direct effect when intellectual capital enters the models (baron and kenny, 1986). the process model results for the bootstrapped confidence intervals (hayes, 2013) and sobel tests indicate that intellectual capital partially mediates the relationship between hpws and perceived success (sobel: β=0.01, p<0.01). these results suggest partial support for h2, since for more objective measures of small firm success (i.e., sales and profit growth), intellectual capital fully mediates the model, while for subjective measures of small firm success, intellectual capital partially mediates the model. thus, our results suggest that hpws, through the development of intellectual capital, facilitates growth of both the top and bottom lines for small businesses. table 2 results for mediation analysis for sales growth, profit growth, and perceived success model 1 sales growth model 2 profit growth model 3 perceived success dependent variable dependent variable dependent variable intellectual capital sales growth sales growth profit growth profit growth perceived success perceived success respondent tenure -0.06 (0.05) -0.04*** (0.01) -0.04*** (0.01) -0.04*** (0.01) -0.03*** (0.01) -0.00 (0.00) -0.00 (0.00) respondent education 0.35 (0.53) 0.01 (0.10) -0.00 (0.09) 0.04і (0.10) 0.02 (0.10) 0.01 (0.05) (0.00) (0.04) no. of employees -0.02 (0.02) -0.01і (0.00) -0.00 (0.00) -0.00 (0.00) -0.00 (0.00) -0.00 (0.00) (0.00) (0.00) intellectual capital 0.05*** (0.01) 0.05*** (0.01) 0.02*** (0.01) hpws 0.31*** (0.05) 0.03** (0.01) 0.01 (0.01) 0.02 і (0.01) 0.00 (0.01) 0.02*** (0.00) 0.01** (0.00) r2 0.19 0.14 0.20 0.10 0.16 0.12 0.17 f 11.29*** 7.48*** 9.78*** 5.05*** 7.35*** 6.25*** 7.68*** n = 196 і p<0.10; *p<0.05; **p<0.01; ***p<0.001 robustness tests we examined the robustness of our sample first by confining our analyses to firms with 5 or more employees to ensure that the firm faced sufficient human resource management challenges. although this restricted the sample to 143 observations, we believe these analyses highlight the robustness of the results within our sample. all results described in the previous analyses held when the number of employees was restricted between 5 and 250 employees, suggesting our results were not skewed by smaller employers. further, the robustness check indicates that the effects of hpws through intellectual capital are universal among employer small firms. additionally, industry has been determined as an important factor in small business success and growth (e.g., gadenne, 1998) and is often credited as an important controlling factor in small business and human resources studies alike (batt & colvin, 2011; patel & conklin, 2012). journal of small business strategy vol. 27 ● no. 2 ● 2017 23 table 3 total, direct, and indirect effects for mediation analysis model 1 model 2 model 3 effect se llci ulci effect se llci ulci effect se llci ulci total effect 0.027** 0.090 0.009 0.044 0.0176 0.009 -0.002 0.035 0.020*** 0.004 0.011 0.028 direct effect 0.011 0.009 -0.008 0.030 0.001 0.010 -0.018 0.020 0.013** 0.005 0.004 0.022 indirect effect 0.016* 0.005 0.008 0.027 0.016* 0.005 0.007 0.026 0.007* 0.002 0.003 0.011 sobel test 0.016*** 0.005 0.016** 0.005 0.007** 0.002 mediation full full partial note: number of bootstraps, 10,000; confidence level 95% as such, we examine the robustness of our results when industry controls were included in the analyses. service, retail, and healthcare firms were included in the analyses, with all other industries serving as the reference. no significant results were determined for industry across the analyses, and all prior results held. thus, the robustness check indicates that our results are likewise universal across industry for small firms in our sample. discussion the resource-based view supports that hpws should improve firm performance (barney, 1991; barney & wright, 1998), and research has consistently demonstrated this direct link (guest, 2011; messersmith & guthrie, 2010; shin & konrad, 2014; youndt & snell, 2004). however, researchers suggest that the benefits of careful hpws implementation in small firms may not truly outweigh their costs (patel & conklin, 2012); thus, limiting any performance advantages from their integration into firm operations. using rbv as a theoretical base, nyberg et al. (2014) indicate that unit level human capital serves as an important mediator between hpws and firm performance. after a comprehensive review of the literature, nyberg and colleagues suggest that to fully understand its role as a mediator, researchers must better address unit level human capital in terms of ksaos. utilizing the youndt and snell (2004) intellectual capital construct allows us to examine both knowledge stocks (human capital), as well as how small firms leverage this capital through networks (social capital) and codification of knowledge (organizational capital). as such, our research more fully considers the relative ksaos of the organization through this construct. youndt and snell (2004) purport a mediating effect for intellectual capital between the hr configurations and organizational performance relationship in large firms with an average of approximately 4,000 employees. messersmith and guthrie journal of small business strategy vol. 27 ● no. 2 ● 2017 24 (2010) conceptualize the mediating role for human and social capital between the hpws and performance relationship, but provide no empirical examination for such a relationship with their sample of small firms. prior work in the small business context suggests that hpws does enhance small firm performance when defined as sales growth (messersmith & guthrie, 2010), average sales and employee growth (patel et al., 2013), product innovation (messersmith & guthrie, 2010), organizational innovation (messersmith & guthrie, 2010), organizational ambidexterity (patel et al., 2013) and labor productivity (patel & conklin, 2012). we build on this literature by examining the role of intellectual capital as the mechanisms via which hpws lead to a configuration of rare, imperfectly inimitable, valuable ksaos that enhance small firm performance. such operational advantages via human resources allow small firms an advantage that is difficult for competitors to pinpoint and imitate (barney & wright, 1998; messersmith & guthrie, 2010). given our results of full mediation of intellectual capital between hpws integration and objective firm performance and partial mediation for subjective firm performance, these hpws may have a more significant influence on the top and bottom lines than small business owners and managers realize. as such, we believe this work makes several academic and practical implications to both the small business and human resources literatures. academic implications although hpws have been noted for their importance in the entrepreneurship and emerging firm contexts (e.g., messersmith & guthrie, 2010; patel & conklin, 2012), scholars argue that small firms may not obtain the same “bang for their buck” that larger companies reap from the integration of hpws (way, 2002, patel & conklin, 2012). thus, exploring hpws implementation in the small firm context, and obtaining robust results within our sample provides important implications for academics in proceeding with this vein of research. under the resource-based view of the firm, researchers argue that hpws heighten organizational performance, since they yield day-to-day practices that create value for the firm, are difficult to imitate, costly to implement by competitors (i.e., rare), and build soundness for the organization (barney, 1991; barney & wright, 1998; way, 2002). as such, when implemented at higher levels, our results suggest these hpws build intellectual capital for the firm through heightening elements of human, social, and organizational capital, which yields higher performance in both revenue and profit growth. these results are robust, even with tighter specifications for the “small” employer firm definition, suggesting these results are universal to small firms in our sample. our examination of intellectual capital as a mediator of this relationships uncovers an important linking mechanism for the hpws-firm performance relationship. prior researchers have conceptualized this journal of small business strategy vol. 27 ● no. 2 ● 2017 25 link, but to our knowledge, this has not yet been examined in the small firm context. intellectual capital is an intangible (bosworth & rogers, 2001), yet critical resource for the firm. prior research has generally examined these human, social, and organizational capital factors separately. however, as prior researchers argue (e.g., subramaniam & youndt, 2005), our analyses suggest that perhaps they are best considered within our sample as a single construct. researchers suggest there is an important linking mechanism between hpws and performance (boselie et al., 2005), but the linking mechanism is rarely specified (nyberg et al., 2014). based on the resource-based view, which is often used to support such relationships, hpws should build resource stocks, including intangible ones; thus, our results suggest that through these intangible resources developed through the integration of hpws, small firms can enhance performance. we believe this to be an important contribution to the literature, since hpws have been recognized to lack the ability to directly influence performance in themselves (e.g., wright et al, 1994; patel et al., 2013). although other constructs may exist which also mediate this relationship, the intellectual capital developed through the incorporation of hpws appear to serve as an important link and allows researchers to explore this relationship in other contexts. our results likewise highlight the robustness of the mediating role of intellectual capital on the hpws and performance relationship, since we view this relationship across three different performance elements. intellectual capital fully mediates the models for both revenue and profit growth, suggesting the capital built by such practices has important top and bottom line performance implications. additionally, we examine these relationships on perceived success, which yields a partial mediation effect. interestingly, the full mediation effects for more objective measures suggests that small business performance improves even when the emotional aspect of feeling success for the business is less apparent from these relationships. our performance measures were self-reported in percentage growth terms. as such, studies examining actual growth levels could add to this literature and further validate (or challenge) the results of our sample. practical implications the relationship between hpws, intellectual capital, and firm performance is interesting for academics but it is likewise very important for business owners and practitioners since implementation of such practices is relatively straightforward. by using practices such as hiring the best employees, compensating employees based on organizational performance, extensive training, and sharing information, small businesses can see top and bottom line improvements. our study shows that hpws helps an organization to achieve increases in sales growth, profit growth, and perceived success by journal of small business strategy vol. 27 ● no. 2 ● 2017 26 improving the intellectual capital within the firm. given the consistent link shown between hpws and performance in the literature, both academics and small business development specialists must work to assist small business owners and managers in recognizing, choosing, and developing hpws that can yield advantages for the small business given its context. given that hpws help both micro and small firms universally in our analyses, such activities appear to provide a solid return through intellectual capital growth and development. understanding the mechanism through which hpws affect an organization’s performance helps provide guidance on the types of activities organizations can undertake to help build intellectual capital. hpws can serve as part of a toolkit that small business owners and managers, as well as business consultants can use to improve the top and bottom line metrics for a firm. it is important for small business owners and managers to understand that since this is a capital building process, the effects for hpws implementation may take some time to yield bottom line impacts. small business development training workshops targeted at further educating business owners on the benefits of hpws via intellectual capital building of the firm can both raise awareness and implementation levels. further, employees may benefit and exhibit higher levels of satisfaction through the building of organizational culture and an improved work environment. finally, using hpws often leads to a formalization of hr practices in a firm which can provide many benefits for a small business. having routine processes and procedures for dealing with employee issues can lead to more accurate documentation of employment decisions in case of litigation, more fair treatment of employees, increased job satisfaction, and increased productivity of workers (kotey & slade, 2005). these benefits not only help small businesses improve chances of survival (welbourne & andrews, 1996), they also promote growth and profitability. limitations and future research although we believe our results to be both interesting and robust there are some important limitations that must be recognized and considered moving forward. first, we view our conceptual model and subsequent analyses through the rbv lens (barney & wright, 1998). following in other researchers’ footsteps, we believe this is a pertinent and appropriate lens through which to view such effects, given our performanceoriented dependent variable. however, current research in this area suggests that other theories may provide useful lenses through which to view these phenomena, such as behavioral theory and general systems theory (shin & konrad, 2014). perhaps general systems theory is the most useful potential alternative theory moving forward, particularly when paired with rbv, as it allows for greater exploration of any reverse causality or feedback that may occur in the firm (as a unit) due to the integration of hpws, development of intellectual capital, and journal of small business strategy vol. 27 ● no. 2 ● 2017 27 subsequent effects on performance. given the interconnectedness of activities within small firms, general systems theory, in conjunction with rbv, may provide a more holistic view of these complex relationships over time. like most research in this vein, our data are cross-sectional (e.g., messersmith and guthrie, 2010; patel & conklin, 2012); thus, caution should be undertaken in generalizing our results beyond our sample. further, since the data were collected via a single instrument at one point in time, the potential exists for reverse causality and common method bias. reverse regressions were run in an attempt to mitigate the reverse causality concern, and these analyses yielded no significant effects. throughout both data collection and our statistical analyses processes, the researchers attempted to mitigate the common method bias issue to the extent possible. based on the recommendations of podsakoff et al. (2003), prior to administering the survey, respondents were assured of their confidentiality and the researchers attempted to ensure all items were concisely worded and addressed only one measure. further, a harman one-factor analysis indicates that common method bias does not statistically limit our data. additionally, researchers argue that even when common method bias does exist within data of this nature; it does not severely limit results or their subsequent interpretations (doty & glick, 1998). although we believe this sample to be an interesting and timely one, examining our results with subsequent samples and longitudinal data would assist in better understanding these relationships. additionally, we find limitation with some of our measures. although we request information related to objective measures, both revenue and profit growth, these are self-reported measures in percentage terms. prior research on subjective versus objective performance suggest that reported performance reflects actual performance for firms (e.g., wall et al., 2004); thus, we believe these measures to accurately reflect the firm’s performance. however, more objective performance measures and actual quantified levels of revenue or profit over time would assist in confirming whether these results are robust to differing performance specifications. further, our intellectual capital measure combines three sources of capital (subramaniam & youndt, 2005). although we believe we provide sufficient evidence that the single measure is parsimonious and reliable, future researchers may benefit from further exploring the individual roles of these capital measures if data allow. even with our limitations in mind, we believe our study and the associated findings pave the way for future research on hpws, intellectual capital, and performance in small firms. further exploration of the items comprising hpws to determine which activities provide the most return for investment would provide benefit to both researchers and practitioners. greater understanding related to which hpws measures or factors from those measures influence greater levels of capital-building and journal of small business strategy vol. 27 ● no. 2 ● 2017 28 performance would yield more targeted recommendations for human resource managers in building an organizational structure conducive to capital building and performance growth for the firm. further, it would be helpful to take a step back from the mediating role of intellectual capital, and examine how hpws influence capital building for the firm, the time period in which this occurs, and whether particular activities accrue capital-building rewards for small businesses. conclusion previous research links the use of hpws to increased firm performance, sales, market share, and profits (huselid, 1995; huselid & becker, 1997; guthrie & messersmith, 2010; way, 2002) and, via the resource-based view of the firm theoretical lens has been posited as one way that a firm can achieve a competitive advantage (barney, 1991; barney & wright, 1998). researchers argue that due to limited resources, investments in hpws for small businesses may not yield sufficient return due to the unique resource configurations they possess and utilize (way, 2002; patel & conklin, 2012). as such, our study examines both the direct relationship between hpws and small firm performance, as well as the mediating influence of intellectual capital development has on this relationship. our results suggest that the use of hpws in small firms does positively impact revenue, profitability, and perceived performance via the development of intellectual capital; thus, highlighting the unique resource advantages the integration of such valuable and imperfectly inimitable practices yield for small firms. these results have important implications for both academics and practitioners as we try to better understand the relationship between hpws, intellectual capital, and the performance of small firms. using a capital-building resourcebased perspective, small firms do experience positive benefits by using hpws via the development of intellectual capital. as such, practitioners and small business owners can use this information to develop an hpws configuration that will increase intellectual capital within the firm and boost firm performance. references acs, z.j., & aldrich, d.b. 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(2004). intellectual capital profiles: an examination of investments and returns. journal of management studies, 41(2), 335-361. journal of small business strategy vol. 27 ● no. 2 ● 2017 34 appendix a: hpws items (adapted from messersmith and guthrie, 2010) 1. when interviewing job candidates, interview questions are prepared ahead of time. 2. when interviewing job candidates, all candidates are asked the exact same questions in the exact same order. 3. job candidates are required to pass one or more employment tests prior to hiring (e.g. skills tests, intelligence tests, personality tests, honesty tests) 4. job candidates are required to pass a drug test prior to hiring. 5. employees are offered extensive training in generic skills such as problem solving, communication skills, and decision making. 6. employees are offered extensive training in company specific skills. 7. employees are asked to evaluate the training they have received. 8. performance appraisals and feedback are given on a routine basis. 9. promotions are based primarily on merit. 10. evaluations of job performance or merit are used in compensation decisions (e.g. salary, bonuses, benefits) 11. employees share in the financial ownership of the company via stock options or other means. 12. compensation is partially contingent upon group and/or company performance (e.g. profit sharing, team based pay, gain sharing). 13. employees are provided relevant operating performance information. 14. employees are provided relevant financial performance information. 15. employees are provided relevant strategic information (e.g. strategic mission, goals, tactics, competitors’ performance). 16. employees hold non-entry level jobs as a result of entry-level position (as opposed to hiring from outside the organization for higher level jobs). 17. employees are given the option of telecommuting. 18. employees have the flexibility in the hours that they work. 19. employees have job security. employment with the firm is almost guaranteed if performance is satisfactory. 20. non-managerial employees are involved in self-managed teams. 21. non-managerial employees are involved in programs designed to elicit participation and employee input (quality circles, problem solving, or similar groups). journal of small business strategy vol. 27 ● no. 2 ● 2017 35 appendix b: intellectual capital items (subramanian and youndt, 2005) 1. our employees are highly skilled 2. our employees are widely considered the best in our industry. 3. our employees are bright and creative. 4. our employees are experts in their particular job and functions. 5. our employees develop new ideas and knowledge. 6. our employees are highly skilled at collaborating with each other to diagnose and solve problems. 7. our employees share information and learn from each other. 8. our employees interact and exchange ideas with people from different areas of the company. 9. our employees partner with customers, suppliers, alliance partners, etc. to develop solutions to problems. 10. our employees apply knowledge from one area of the company to problems and opportunities that arise in another. 11. our employees develop new ideas and knowledge. 12. our organization uses patents and licenses as a way to store knowledge. 13. much of our organization’s knowledge is contained in manuals, databases, etc. 14. our organization’s culture (stories, rituals) contain valuable ideas, ways of doing business. 15. our organization embeds much of its knowledge and information in structures, systems, and processes. reproduced with permission of the copyright owner. further reproduction prohibited without permission. business students' perceptions of employment in small and ... grubb, w lee, iii;harris, michael l;mackenzie, william i, jr journal of small business strategy; fall 2006/winter 2007; 17, 2; abi/inform complete pg. 27 business students' perceptions of employment in small and medium-sized enterprises versus multinational corporations: investigating the moderating effects of academic major, gender, and personality w. lee grubb iii east carolina university grubbw@mail.ecu.edu michael l. harris east carolina university harrismi@mail.ecu.edu william i. mackenzie, jr. university of south carolina ivey _ mackenzie@moore.sc.edu abstract research suggests that students are likely to seek out employment opportunities within large organizations first and often view small businesses as a second choice (teo & poon, 1994; moy & lee, 2002). the purpose of this paper was to compare u.s. undergraduate business students' perceptions towards employment with small and medium-sized enterprises (smes) and multinational corporations (mncs) and to determine if academic major, gender, or personality influenced these perceptions. the results indicated that accounting, finance, and marketing students prefe"ed employment with mncs, while the primary employment choice for management students was smes. in addition, males preferred employment with smes and females favored mncs. no significant relationships were found between personality dimensions and employment preference. findings did, however, indicate that several of job factors were significantly related to gender. introduction recent research by the small business administration office of advocacy shows that more than 99 percent of all current employers are classified as small businesses, and they employ 51 percent of private-sector workers (sba office of advocacy, may 2002). the small business administration defines a small business as one with fewer than 500 employees. however, approximately 90 percent of these businesses employ less than 20 people, and around half have fewer than 5 employees (perry, 2001). 27 even though the number of small businesses operating the u.s. is much greater than that of large corporations, the majority of college students prefer to accept employment with a large firm upon graduation (hollingsworth, klatt & zimmerer, 1974; teo & poon, 1994; moy & lee, 2002). the ability to attract key personnel is necessary in order to become a successful business of any size. the preference of college graduates to work for a large business over a small business is an obstacle that small businesses must be able to overcome in order to succeed. reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy while all businesses are faced with critical issues, small businesses are especially susceptible to closure because employees often lack the necessary skills and resources to ensure long term survival (harris, grubb & hebert, 2005). vesper (1990) suggests that employees in small businesses must possess capabilities in the areas of planning, product development, marketing, personnel management, general management, and finance. other research has shown that managerial and technical incompetence are two of the most significant challenges facing small businesses (robinson, 1982; luke, v entriss, reed, & reed, 1988; zimmerer & scarborough, 1998). luke et al. (1988) argue that a lack of managerial and technical expertise is often the "missing link" that ensures small businesses get their products or service into the marketplace. it is paramount to the success of small businesses that they are able to attract and keep skilled employees to help manage and grow the enterprise. the purpose of this study was to investigate differences in students' perceptions of employment in small and medium-sized enterprises (smes) versus large multinational corporations (mncs) based on their academic major, gender, and personality type. previous research has investigated student perceptions of employment with different sized organizations (moy & lee, 2002; teo & poon, 1994), but these studies have not investigated students' perceptions from the united states. this study will help determine what the perceptions of business undergraduates in the united states are towards employment preferences based on ten job factors identified by teo and poon (1994). it also explores the differences in perceptions towards small businesses that are held by students in different academic departments by using an undergraduate sample of students majoring in accounting, finance, management and marketing. finally, the current research uses gender and personality as moderators to investigate the 28 vol. 17, no. 2 fall/winter 200612007 potential for other characteristics to influence students' perceptions of employment in small and large organizations. literature review a study conducted by teo and poon (1994) investigated the perceptions of undergraduates in singapore towards smes and mncs. two hundred seventy students enrolled in the accounting and business programs were surveyed to determine their perceptions of smes and mncs on the basis of ten job factors. mncs were perceived to be more favorable than smes on six of the job factors: pay, fringe benefits, working conditions, long-term career prospects, marketability and job security. smes were considered to be more favorable than mncs on the remaining four job factors: managerial quality and relationships, responsibility given, authority given and involvement in decision making. overall, employment in mncs was preferred to employment in smes. the findings of teo and poon showed that perceptions are slightly different between business and accounting undergraduates. both groups viewed the differences between smes and mncs similarly, however when assessing the values assigned to the smes' ten job factors individually, business majors viewed smes less favorably than accounting majors. teo and poon's research also indicated that male and female students' perceptions of smes and mncs were similar among the ten job factors. in addition to preferring employment in mncs, both males and females perceived mncs more favorably than smes in the following six job factors: pay, fringe benefits, working conditions, long-term career prospects, marketability and job security. smes were viewed as more favorable in the factors of managerial quality and relationships, responsibility given, authority given, and involvement in decision making. in a later study, moy and lee (2002) also examined the perceptions of undergraduate reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy students towards smes and mncs. a survey was given to 200 students enrolled in a strategic management class at a university in hong kong. the students were asked to rank nine job factors to determine their relative importance in making a career decision. students were then asked to score smes and mncs on the basis of each job factor. the study found that recent business graduates placed a stronger emphasis on the importance of extrinsic rewards when assessing employment packages offered by mncs as compared to packages offered by smes. students perceived that smes were less favorable than mncs in five of the factors: pay, fringe benefits, working conditions, long-term career prospects and marketability. smes were viewed to be more favorable in terms of managerial relationship and responsibility given. job security and involvement in decision making were viewed similarly at firms of all sizes. these results were similar to the findings of teo and poon. while these studies reported that students perceive that mncs offer greater benefits than smes, making it more advantageous to begin their careers in a large mnc, they did not investigate potential individual moderators that could be targeted to help understand or explain the students' perceptions. a replication of teo and poon's (1994) study will help advance our understanding of american students' perceptions of smes and mncs. in addition, the use of academic major, gender, and personality dimensions may help elucidate and differentiate the perceptions of different types of students and their preferences for future employment. the results in turn can assist organizations, both large and small, in marketing themselves to future graduates. teo and poon (1994) found that most undergraduate accounting and business students do not view employment with a sme as an attractive option after graduation. their results also showed that male and 29 vol. 17, no. 2 fall/winter 200612007 female students had similar perceptions of the various job factors. recent business graduates, regardless of gender, often look for extrinsic rewards in their initial jobs and view mncs as a more attractive alternative because of better pay and fringe benefits (moy and lee, 2002). based on these prior findings, we offer the following hypotheses. hypothesis 1: undergraduate accounting, finance, management, and marketing majors will prefer working for mncs than smes. hypothesis 2: both male and female students will prefer working ·for mncs than smes. in addition to replicating the works of teo and poon ( 1994) with a sample from the u.s., the current study investigated the potential link between dimensions of personality and employment preferences as a means to help explain why students prefer different employment settings. in order to proceed, a brief overview of the big five dimensions of personality is warranted. the five traits, openness to experience, agreeableness, conscientiousness, emotional stability, and extroversion are known as the big five dimensions of personality (goldberg, 1981). openness to experience refers to the extent that an individual is intellectually curious, creative, and flexible (watson & clark, 1997). agreeableness refers to the degree that individuals are agreeable, friendly, cooperative, and seek satisfying personal relationships (mccrae and costa, 1991). conscientiousness can be described as the extent that individuals are dependable, reliable, and organized. conscientious individuals may be referred to as being orderly, loyal, and persistent. it is also believed to be associated with a harder work ethic that leads to greater rewards such as higher pay and promotions (organ & lingl, 1995). emotional stability, or neuroticism, refers to an individual's level of anxiety and how secure or insecure they are. emotionally unstable individuals may reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy demonstrate a lack of ability to adjust to and deal effectively with negative life events (suls, green, & hillis, 1998). finally, extroversion refers to the degree that individuals are assertive, outgoing, and fond of being in the company of others. traits that are associated with being extroverted include being talkative and gregarious. the personality dimension agreeableness has long been associated with friendly, cooperative relationship oriented individuals. according to teo and poon (1994) students from singapore believe that smes offer higher managerial relationships. given the aforementioned information we offer the following hypothesis. hypothesis 3: agreeableness will be positively associated with preference for employment in smes. in addition, high levels of openness to experience have been associated with individuals that are creative and intellectually curious. teo and poon (1994) noted that individuals in their study reported that employment in smes offered greater responsibility, authority and involvement in decision making. based on the belief that creative and intellectually curious individuals would prefer to work for an organization that allows them to be creative and more involved with decision making, it is hypothesized that high openness to experience people will prefer smes. hypothesis 4: openness to experience will be positively associated with the preference for employment with smes. conscientious individuals are perceived to be more loyal and persistent and have a higher work ethic that can lead to greater success, higher pay and promotions. teo and poon ( 1994) noted that students believed there were greater opportunities for pay and longterm career prospects at a mnc. therefore, we posit that individuals that score high on the dimension of conscientiousness may 30 vol. 17, no. 2 fall/winter 200612007 prefer to work for mncs that offer greater pay and advancement opportunities. hypothesis s: conscientiousness will be positively associated with the preference for employment with mncs. emotional stability refers to one's level of anxiety and how secure they are. less emotionally stable individuals may find it more reassuring to work for a mnc where the perception is that mncs offer more job security and better working conditions than smes. hypothesis 6: emotional stability will be positively associated with the preference for employment with mncs. finally, extroversion refers to the degree that individuals are outgoing and assertive. individuals with high extroversion scores are believed to find work related interaction and relationships rewarding. although smes are perceived to have higher quality managerial relationships, the attractiveness of the sme to an extrovert may be offset by the sheer size and potential for increased interaction at mncs. because we believe that extroverts may be equally successful at smes and mncs extroversion may not be a predictor of preference for employment in either smes or mncs. hypothesis 7: there will be no significant relationship between extroversion and preference for employment in a sme or mnc. methodology the questionnaire from teo and poon's ( 1994) was used to determine employment preferences and, then, assess what the students believed working for smes and mn cs would be like based on 10 job attributes. questions regarding the employment factors were anchored at 1 (excellent) and 5 (poor). dimensions of personality were investigated using reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy goldberg's big five personality inventory taken from the international personality item pool website (2001). data was collected during the fall and spring semesters of the 2004-2005 academic year from a large southeastern university. a sample of 395 undergraduate business students was used, including 78 (21.0%) accounting students, 91 (24.5%) marketing students, 111 (30.0%) management students, and 91 (24.5%) finance students. the average age of the students was 22.04 and 56.7 percent were male. caucasian students accounted for 83.5 percent of the sample, followed by african-american (10.l %), asian and pacific islander (l.8%), hispanic (1.5%), other (1.3%), and american indian (.5%). descriptive statistics were used to highlight the central tendency and variability within the s~ple. binary logistic regression was used to determine if significance exists between employment preferences and personality dimensions. the findings were used to test hypotheses, draw conclusions, and offer avenues for future research. results frequency counts were used to test the first three hypotheses. hypothesis i concerning the preferences of students with certain majors was not supported. although the majority of the sample (51.3%) preferred employment with smes, because three of the fours majors favored mncs the hypothesis was not fully supported. accounting (54.0%), marketing (55.8%), and finance (54.4%) majors all preferred future employment with mncs over smes. contrarily, 65.7 percent of management majors favored employment with smes. hypothesis 2 examined the role of gender in determining employment preferences. contrary to hypothesis 2, we found that preferences differed between males and females. the results showed that 56.6 31 vol. 17, no. 2 fall/winter 200612007 percent of female students preferred employment in mncs while 54.9 percent of male students preferred employment in smes. no significant relationships were found to support hypotheses three, four, five, and six. neither agreeableness nor openness to experience was positively associated with preference for employment with smes and conscientiousness and emotional stability were not positively associated with an employment preference for mncs. hypothesis 7 was, however, supported, as no significant relationship existed between extroversion and preference for employment with either smes or mncs. descriptive statistics were used to determine how students, based on academic major and gender, ranked the ten factors identified by teo and poon (1994). the five factors perceived most favorably among all students surveyed regarding employment with smes included working conditions (wc), managerial quality and relationships (mqr), responsibility given (rg), authority given (ag), and involvement in decision making (idm). the five factors perceived most favorably regarding employment with mncs include pay, fringe benefits (fb), long-term career prospects (l tc), marketability (m), and job security (js). table i offers a view of the job factors mean values for smes and mncs based on academic major. interestingly, although management majors had a more favorable view of employment with smes, their mean scores for the various job factors were similar to their counterparts in accounting, marketing, and finance (see table i). all majors ranked employment with smes more favorably in terms of working conditions, managerial quality and relationships, responsibility given, authority given, and involvement with decision making. when analyzing job factor means by gender, our findings indicated that both male and female undergraduates perceived that smes reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy vol. 17, no. 2 fall/winter 200612007 table 1 job factors means by academic major accounting pay fb wc mqr ltc rg ag idm m js mnc 1.7564 1.9231 2.8182 3.1282 2.1410 2.7532 3.0000 3.4231 2.1282 2.6923 sme 2.7949 2.9103 2.0921 1.9481 2.7821 2.1667 2.38% 2.3077 2.9487 2.8077 marketing pay fb wc mqr ltc rg ag idm m js mnc 1.9667 1.9667 2.6044 3.1319 2.1209 2.8571 3.0333 3.4719 1.9560 2.5604 sme 2.9780 3.0549 2.1889 1.8571 2.8462 2.1538 2.3778 2.1538 2.8111 2.7778 management pay fb wc mqr ltc rg ag idm m js mnc 1.8378 1.9099 2.7027 3.0455 2.1171 2.8108 2.8288 3.2883 2.1712 2.7000 sme 2.8739 2.8559 2.0185 1.9820 2.8288 2.1532 2.3874 2.2342 2.8108 2.7207 finance pay fb wc mqr ltc rg ag idm m js mnc 1.9670 2.0222 2.7033 3.1648 2.1667 3.0000 2.9890 3.6000 2.1111 2.7912 sme 2.9231 3.0659 2.0989 2.1429 2.8222 2.1111 2.3077 2.2222 3.0674 2.8242 were preferable to mncs in the job factors of working conditions, managerial quality of relationships, responsibility given, authority given, and independent decision making (see table 2). however, females felt that job security was better in mncs while males perceived that job security was better in smes. using analysis of variance, we found that several of the job factors were significant for males in their perception of employment with smes and females in their perceptions of mn cs (see table 3). the job factors that significantly shaped male students' perceptions ofsmes included: pay, fringe benefits, working conditions, longterm career prospects, involvement with decision making, marketability, and job security. for females, the following factors were significant in shaping their perceptions 32 of mncs: fringe benefits, working conditions, managerial quality and relationships, long-term career prospects, responsibility given, authority given, marketability, and job security. in addition, females' perception of smes was significantly affected by pay, fringe benefits, and long-term career prospects. discussion the results of this study indicated that accounting, marketing, and finance students preferred future employment with mncs and management students preferred careers with smes. this differs from the findings of teo and poon (1994 ), in that they found that all business students prefer future employment with mncs. interestingly, teo and poon reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy vol. 17. no. 2 fall/winter 200612007 table 2 job f~ctors m~ans by gender male pay fb wc mqr ltc rg ag idm m js mnc 2.25 2.02 2.78 3. 13 1.94 2.97 3.09 3.50 2.21 2.88 sme 2.88 2.98 2.15 2.05 2.89 2.15 2.41 2.28 2 .93 2.78 female pay fb wc mqr ltc rg ag idm m js mnc 1.77 1.84 2.60 3.08 1.95 2.64 2.75 3 .38 1.95 2.46 sme 2.90 2.93 2.05 1.90 2.74 2.11 2.33 2.17 2.86 2.81 table 3 annov a results femalemnc preference pay fb* wc** mqr* ltc** rg* ag** idm m* js** mnc 2.2464 1.9855 2.8088 3.2319 1.8841 2.7794 3.0147 3.5147 2.1014 2.7681 smc 1.7079 1.7444 2.4667 2.9438 1.6778 2.5056 2.5281 3.2556 1.8000 2.2222 femalesme preference pay fb* wc** mqr* ltc** rg* ag** idm m* js** mnc 2.7941 2.7971 1.9265 1.8116 2.4058 2.0870 2.2899 2.2059 2.7612 2.7647 smc 2.9667 3.0667 2.1250 1.9213 2.9667 2.1000 2.3483 2.1222 2.9111 2.8111 malesme preference pay fb* wc** mnc 2.7946 2.7768 1.9459 smc 2.9783 3.1957 2.3778 *indicates a significance level of s.05 **indicates a significance level of s.o i mqr* 1.9375 2.1196 observed that accounting students seemed to perceive employment with smes more favorably than other business majors, while our findings indicated that management students have a much stronger desire for future employment with smes. in regards to gender, female students ltc** rg* ag** idm m* js* 2.7321 2.0982 2.2973 2.1161 2.7946 2.5536 3.0549 2.1538 2.5109 2.4348 3.0543 3.0326 preferred employment in mncs while male students preferred employment in smes. this finding is interesting because much of the recent literature indicates that females are turning to small businesses and selfemployment opportunities for career advancement. with the number of women moving into the small business arena, and 33 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy the presence of the so-called "glass ceiling" in corporate america, it was somewhat surprising to find that more females preferred employment with mncs. a review of the job factors by gender also leads to some interesting findings. the results from our sample indicated that both male and female students viewed working conditions more favorably with smes than mncs, which differs from the conclusions of teo and poon (1994) and moy and lee (2002). a second contradiction was that males in our study felt smes offered more job security, although females still viewed mncs as having more job security. one other notable difference between males and females was the significance of job factors in shaping their perceptions of employment with smes and mncs. whereas seven of the job factors were significantly related to the employment perception of males for smes, eight factors were significantly related to the female perception of employment with mncs. interestingly, pay was a significant factor for both males and females in regard to their perceptions of employment with smes, but not for mncs. since males preferred employment with smes, this may indicate that other factors such as working conditions, managerial quality and relationships, and involvement in decision making are more attractive than immediate financial rewards from their employers. this may also indicate that job security, a significant factor in females' perception of mncs, plays a more critical role in the employment decision of young female professionals. hornsby and kuratko (2003) suggest that the human resource practices of smes have stagnated and declined over the past decade, making it even more difficulty to attract talented employees. smes must continue to improve in the areas of compensation and fringe benefits, job security, and long term career opportunities if they are to attract competent employees, especially females. as indicated by moy and lee (2002), recent 34 vol. 17, no. 2 fall/winter 200612007 business graduates often place an emphasis on extrinsic rewards such as pay and advancement opportunities when making an employment decision. our findings indicated that females are particularly concerned about these issues and view mncs as a much more viable option for career development. though somewhat of a contradiction, female students perceived that smes offer better working conditions and more job responsibilities and authority but did not provide them a chance to improve their marketability. when recruiting recent business graduates, smes would be wise to emphasize the diverse job responsibilities offered within the organization and how these experiences can help them grow professionally and develop new marketable skills. without an influx of new talent, many promising smes will fail to overcome their technical and managerial challenges and successfully compete against larger competitors in the marketplace. future research we believe that three other areas should be addressed in future research. first, we suggest that this study be replicated at other universities with business programs to allow for the comparison of results from different regions in the united states. next, it would be of interest to incorporate samples of students from other academic disciplines, as well as students at the graduate level, to compare their preferences with that of undergraduate business students. involving different student groups can only add to our understanding of employment preferences. finally, additional research should continue to examine the relationship between personality and employment choice to determine if any significant relationships exist. references goldberg, l. r. 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(1998). essentials of entrepreneurship and small business management (2°d ed.). upper saddle river, nj: prenticehall. reproduced with permission of the copyright owner. further reproduction prohibited without permission. small business internet use and strategic flexibility murphy, gregory b;celuch, kevin;callaway, stephen k journal of small business strategy; spring/summer 2007; 18, 1; abi/inform complete pg. 57 small business internet use and strategic flexibility gregory b. murphy university of southern indiana gbmurphy@usi.edu kevin celuch university of southern indiana kceluch@usi.edu stephen k. callaway university of tampa abstract research on sme internet use has focused almost exclusively on factors leading to the adoption of internet technologies. in this study, we focus on the potentially valuable connection between internet use and strategic flexibility. specifically, we propose that internet use for communications will promote greater strategic flexibility for the small firm, but only in a dynamic environment. the results, based on a sample of 160 small midwest companies, largely support this hypothesis. environmental dynamism was found to moderate the relationship between internet use for communications and strategic flexibility. use of the internet for communications was found to be positively and significantly related to strategic flexibility in a dynamic environment. as expected, dynamism did not moderate the relationship between internet use for transactions and strategic flexibility. these findings hold implications for future research and for managers of small firms attempting to effectively leverage the internet for competitive advantage. there is a strong consensus that the internet holds the potential to change business. the information systems, supply chain, human resource, organizational design, and marketing literatures are replete with examples of firms leveraging the internet for enhanced competitive advantage. for instance, flexible electronic partnering options, applicant tracking and recruitment and benefits communication, enterprise management (the integration of information, processes, and people), and customer relationship management are a small sample of examples across diverse disciplines of initiatives with the overarching objectives of achieving greater coordination at reduced costs (cf., chatterjee, segars, & watson, 2006; schram, 2006; applegate, austin, & 57 collins 2005; kalakota & robinson, 1999). research on internet applications and related topics has been mainly focused on large organizations. recently, however, increasing attention related to understanding the effective use of the internet has shifted to smaller firms. research on sme internet use in the entrepreneurship literature has focused almost exclusively on factors leading to the adoption of internet technologies (c.f. barnir, gallaugher, & auger, 2003; dandridge & levenburg, 2000; dholakia & ksetri, 2004; lohrke, franklin, & frownfelter-lohrke, 2006; wright & ralston, 2002; zacharakis, shepherd, & coombs, 2003). we take a different approach in this paper and focus on the reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy relationship between sme internet use and strategic flexibility, a potentially important source of competitive advantage for smes (hatch & zweig, 2001 ). the internet is supposed to be the great equalizer allowing small and medium-sized enterprises (smes) to compete on a more equal footing with larger firms (choudhury & galletta, 1998; kleindl, 2000; pflughoeft, ramamurthy, soofi, yasai-ardekani, & zahedi, 2003). as a public resource, the internet offers all companies, large and small, a greatly expanded body of available information as well as the potential to reach a larger audience and more closely coordinate business activities (poon & swatman, 1997). the evidence to date, however, suggests that smes (firms with 500 or fewer employees) (c.f. gilley, mcgee, & rasheed, 2004; kleindl, 2000; liao, welsh, & stocia, 2003) have largely not availed themselves of this opportunity (bernadas & verville, 2005; kleindl, 2000; robeiro & love, 2003; van beveren & thomson, 2002). this shortfall has been understudied (pflugheft et al., 2003) and is disturbing in light of the strategic importance of effective information technology (it) use in general (broadbent & weill, 1997) and internet use in particular. smes have been labeled by some as technological laggards (bernadas & verville, 2005). several possible reasons have been advanced to explain why smes have been slow to adopt internet technologies. smes may lack the required financial resources to adopt internet technologies (robeiro & love, 2003). understanding how and where to invest resources to support internet technologies is another problem. bharadwaj, bharadwaj, and konsynski (1999) used tobin's q to discover that information technologies clearly provide intangible benefits to firms that help the firm provide better value. the authors noted, however, that more research is needed to unbundle and better understand the sources of intangible benefits. tallon and kraemer (2003) offer 58 vol. 18, no. i spring/summer 2007 some possible insight as to this need. the authors noted that for information technologies to create value, they need to be strategically aligned with the firm's capabilities. there is great need, as a result, to improve understanding of the limits and boundary conditions that impact effective alignment of information technology resources, such as use of internet technologies. facing uncertainty, it is not surprising that many sme owners do not believe the adoption of internet technologies will help them build or sustain a competitive advantage (levy & powell, 2003). clearly, understanding how to integrate internet technologies with important firm strategies is critical to understanding effective information system implementation. without a solid understanding of effective integration strategies, many sme owners lack confidence in their ability to implement and use internet technologies (lee, 2004). this study partially addresses important issues raised by bharadwaj et al. (1999) and tallon and kraemer (2003) by investigating the conditions under which internet use (an important information technology) affects strategic flexibility, an important intangible benefit for smes. strategic flexibility has been identified as a critical intangible benefit for small businesses, allowing them to quickly reposition themselves and gain a competitive advantage vis-a-vis their larger competitors (hatch & zweig, 2001). it is possible that, incorrectly applied, the adoption of advanced internet technologies may not provide the strategic flexibility needed by smes to succeed in a dynamic business environment. we investigate this possibility by examining the relationship between the use of internet technology in smes and strategic flexibility across various environments. specifically, we propose that the relationship between internet use and strategic flexibility will depend on the competitive environment, whether it is static or dynamic, and on the type of internet activities used (communications versus transactions). reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy strategic flexibility strategic flexibility has been defined as the ability to precipitate and adapt to external and internal environmental changes by altering strategies (bierly & chakrabarti, 1996; nadkarni & narayanan, 2004). strategic flexibility helps firms better manage risks by quickly responding in a proactive or reactive manner (grewal & tansuhaj, 200 l ). the concept of strategic flexibility has emerged primarily from the strategic management and marketing literatures and is related, yet clearly distinct from concepts more frequently used in the existing entrepreneurship literature. most notably, strategic flexibility bears similarity to important elements of entrepreneurial orientation (lumpkin & dess, 1996; dess & lumpkin, 2005) in that both concepts can be tied to organizational change efforts and are proposed to impact firm level performance. lumpkin and dess ( 1996) identified autonomy, innovativeness, proactiveness, competitive aggressiveness, and risk-taking as elements of entrepreneurial orientation. of these, proactiveness is conceptually closest to strategic flexibility. dess and lumpkin (2005: 148) defined proactiveness as "a forward-looking perspective characteristic of a marketplace leader that has the foresight to seize opportunities in anticipation of future demand." there are, however, some critical differences between the concepts of strategic flexibility and proactiveness, especially as they apply to smes. first, proactiveness and the other elements of entrepreneurial orientation have been described as being part of a mindset (lumpkin & dess, 1996) or personal disposition (becherer & maurer, 1999). strategic flexibility, on the other hand, focuses more on behavior than personality and is a firm, rather than individual, level variable. a second and more important difference is that proactiveness, as part of the entrepreneurial orientation, assumes that entrepreneurs will have a significant role in shaping their 59 vol. 18, no. 1spring/summer2007 environment (lumpkin & dess, 1996) while strategic flexibility neither requires the sme to assume an industry driving nor pioneering influence. likewise, the prospector type proposed by miles and snow (1978) requires that firms be engaged in a constant search for new products or markets (liao et al., 2003). this difference is significant given vesper's (1989) observation that most ventures pursue what he calls parallel competition, meaning they follow tried and proven business models. strategic flexibility allows smes to move from one proven business model to another: proactiveness and prospecting, by definition, do not. grewal and tansuhaj (2001) consider strategic flexibility a polymorphous construct. a review of the literature suggests that strategic flexibility is likely achieved by small firms in a different way than it is in large firms. large firms attain strategic flexibility through over-investment in strategic options that are not presently being fully exploited by the organization (bierly & chakrabarti, 1996; broadbent & weill, 1996; grewal & tansuhaj, 2001 ). small firms are more likely to achieve strategic flexibility through developing options as a result of entrepreneurial alertness and faster response and implementation times (hatch & zweig, 2001; liao et al., 2003; yu, 2001). aligned internet technology capabilities should assist the entrepreneurial venture in attaining these important attributes, thereby improving their ability to capitalize on strategic flexibility. hatch and zweig (2001) noted that the ability of small firms to survive and flourish is defined by their "ability to quickly adapt by modifying their competitive positioning, adjusting their value propositions, and targeting different customer segments," and to "quickly perceive the need for change and make it happen" (p. 45). ironically, the importance of using aligned internet capabilities to help achieve strategic flexibility may be heightened by large firms' use of the internet to encroach on smes' niche markets (kleindl, 2000). reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy sme internet use for communications and transactions while the strategic alignment of a firm's it capabilities has been related to enhanced firm performance, questions have been raised as to the limiting conditions of such effects (tallon & kraemer, 2003). a potentially relevant factor is the nature of internet usage. internet use, for example, may facilitate the external knowledge acquisition and intra-firm knowledge dissemination needs to improve a firm's absorptive capacity (liao et al., 2003). it is for this reason that we examine internet usage for both communications and transactions. internet use encompasses a range of behaviors. we focus on communication and transactions, as these are discrete behavioral domains which we believe hold different implications for a firm's ability to operate flexibly in response to changing environmental conditions. internet usage for communication (with both customers and suppliers) is one potentially important component of a small firm's market-sensing activity or market orientation. note that the marketing strategy literature places the notion of gathering, disseminating, and responding to market information at the center of a firm's market orientation (cf., kohli & jaworski, 1990; narver & slater, 1990). further, market orientation has been found to be positively related to firm performance (jaworski & kohli, 1993; baker & sinkula, 1999). the strategy literature also suggests that communications are important in developing and sustaining effective knowledge management (bhandari, bliemel, & hassanein, 2004). of relevance to the present research, firms responding to market information may generate strategic options such as adjusting product/service offerings and anticipating customers' future needs and wants (evans, 1991; achrol & kotler, 1999; day, 1999). these options allow firms to operate more flexibly in response to market dynamics. 60 vol. 18, no. 1spring/summer2007 in contrast to internet usage for communication, using the internet for transactions is not as likely to serve as a critical market-sensing activity for the small firm. while the internet can certainly link a firm to market stakeholders, we view the typical order-taking and order-processing of small firms as more routine and static in nature. while large firms may convert this relatively static transaction process into a more dynamic process of discovery through data mining, small firms typically lack the resources and capabilities required to transform transaction information into a more dynamic market-sensing ability. acquiring resources and capabilities needed to convert routine transaction data into dynamic information entails at least two substantial and potentially prohibitive costs. first, development and maintenance costs are much higher if carefully detailed and formatted back-end database management features are required. the second major cost is greater than the first. acquiring the human resource expertise needed to effectively use and interpret advanced data-mining software can be very expensive. as a result of these costs, we believe that the more dynamic internet communication function (i.e., facilitating dialogues regarding current and future scenarios) is more likely than internet transactions to be implicated in strategic flexibility for small firms. environmental dynamism environmental dynamism should moderate the relationship between internet use and strategic flexibility for smes. strategic flexibility is more important in a dynamic environment than in a static environment (bierly & chakrabarti, 1996; johnson, lee, & saini, 2003; luo, 1999; nadkarni & narayanan, 2004; shi & daniels, 2003; tallon & kraemer, 2003). in fact, strategic flexibility has been defined by some as the ability to ant1c1pate and react to environmental changes (johnson et al., 2003). information technology investments, including internet-based systems, are usually reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy best employed to deepen an organization's existing core competency in a static environment. in a static environment, large firms in particular have been known to spend great amounts of money developing specific, costly-to-imitate, idiosyncratic information technology capabilities to increase efficiency (tallon & kraemer, 2003; tippins & sohi, 2003). these specific, idiosyncratic investments, however, may have the effect of limiting rather than enhancing strategic flexibility. as nadkarni and narayanan (2004) noted, strategic persistence is usually superior to strategic flexibility in a static industry. spending money to promote strategic flexibility may be unnecessary and wasteful if the sme has no need to respond or react to environmental changes (johnson et al., 2003; nadkarni & narayanan, 2004). the exception would be firms seeking to drive radical change in a static industry (johnson et al., 2003). however, in contrast to large firms which may try to drive radical industry change, the majority of smes follow tried and proven business models (vesper, 1989) and are not trying to drive radical industry change. therefore, we do not expect smes' internet technology use to be significantly related to strategic flexibility in a static environment. the ability to employ strategic flexibility by effectively responding to changes in a dynamic environment should be of considerable benefit to firms in general (bhandari, bliemel, harold, & hassanein, 2004; johnson et al., 2003; karin, 2004) and to smes in particular (y offie & cusumano, 1999). whether the use of internet technology in a dynamic environment results in increased strategic flexibility or not should depend on the nature of internet activities used. johnson et al. (2003) posit that in a highly turbulent environment, market-focused strategic flexibility should be important to allow firms to develop the most balanced near-term and future-oriented options portfolio. while large firms have a number 61 vol. 18, no. i spring/summer 2007 of market-sensing avenues through which to develop strategic options (e.g., market research and competitive intelligence), small firms are unlikely to have these formal functions available. therefore, we expect that dynamism will moderate the relationship between using the internet for communicating with important market stakeholders (i.e., customers and suppliers) and strategic flexibility. owing to its important market-sensing role in dynamic environments, using the internet for communications should be positively related to strategic flexibility. conversely, to the extent that small firms are technological laggards (bemadas & verville, 2005) and do not invest in costly systems that would allow them to tum static transaction data into dynamic market information, we do not expect dynamism to moderate the relationship between internet use for transactions and strategic flexibility. formally, we propose that: h 1: dynamism will moderate the relationship between the use of internet technology for communications and strategic flexibility. specifically, use of internet technology for communications will be positively and significantly related to strategic flexibility for firms in more dynamic environments. h2: dynamism will not moderate the relationship between the use of internet technology for transactions and strategic flexibility. methods sample and questionnaire reference usa was used to identify a list of 1,300 midwest firms with 500 employees or fewer in a variety of industry groups such as retail, construction, and financial services. a letter addressed to top management was sent to each company with a questionnaire and a postage-paid return envelope. 160 surveys were returned for a response rate of 12.3 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy percent. the response rate of this study is similar to rates commonly encountered in similar and related research. tests for nonresponse bias between early and late respondents on the variables used in this research revealed no statistically significant differences (malhotra, 1999). most of the respondents were male and were the owner-operator or top manager. 36 percent of the companies in the sample had between 20-49 employees while another 33 percent had between 50-99 employees. most companies in the sample reported only domestic sales (77%). typical sales ranges were $2.5-5 million (21%), $5-10 million (21%), and >$10-20 million (21%). approximately half of the sample reported that some of their it function was outsourced, most of which reported domestic outsourcing (96%). literature reviews and knowledge of regional firms guided the development of measures used in this study. the questionnaire was carefully reviewed and edited for readability and understandability. the questionnaire included measures of internet use, environmental dynamism, and strategic flexibility. the measures focused on capturing perceptions of top managers about their companies. executive cognitions are assumed to define reality for their organizations, especially in the context of small businesses. this approach is consistent with day and nedungadi (1994) and others who note the significance of perceptual aspects of managerial decisionmaking in the competitive strategy domain. hierarchical regression analysis was used to test the hypotheses. for the strategic flexibility criterion variable, either the use of internet technology for communications or for transactions was entered in the first step. in step two, dynamism was then entered. finally, as a means of testing the moderating effect of dynamism on either the use of internet technology for communications or transactions, the interaction terms 62 vol. 18, no. i spring/summer 2007 (communications x dynamism or transactions x dynamism) were entered in step three. the results of the regression analyses are presented in table 2. hypothesis l, that dynamism will moderate the relationship between the use of internet technology for communications and strategic flexibility, is supported by the data. after controlling for the direct effects of communications and dynamism, the communications x dynamism interaction significantly explained an additional amount of variance in strategic flexibility (r2 change significant at the p< .05 level). such effects (r2 changes .02 .03) are within typical ranges reported for moderator effects in non-experimental studies (champoux and peters, 1987). in order to identify the nature of the interaction, we plotted slopes for companies identified in the upper third for dynamism (mean= 5.44) and lower third for dynamism (mean = 3.10 ). figure 1 displays the interaction effect on strategic flexibility. consistent with expectations, for firms in more dynamic environments, the use of internet technology for communications positively influenced strategic flexibility. subgroup analysis also confirms these findings with the correlation between the use of the internet for communications and strategic flexibility much higher for the high dynamism group (r =.52, p<.01) than for the low dynamism group (r=.16). hypothesis 2, that dynamism will not moderate the relationship between the use of the internet for transactions and strategic flexibility, is also supported by the data. after controlling for the direct effects of transactions and dynamism, the transactions x dynamism interaction did not explain any additional amount of variance in strategic flexibility (r2 change was not significant). discussion the present study extends prior it-strategy reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy vol. 18, no. 1spring/summer2007 table 1 means, standard deviations and correlations variable mean s.d. 1 2 3 1. internet use for communications 2. internet use for transactions 3. stratecic flexibility 4. environmental ~ sm • = statistically significant at .05 •• = statistically significant at .01 3.65 3.40 4.69 4.26 1.66 1.67 **.66 .98 **.32 *.18 l.13 ••.21 **.35 ••.21 table 2 hierarchical regression results for the influence of internet use variables and dynamism on strategic flexibility l jse of internet for commupicatjon strategic flexibility= (.32**) communications strategic flexibility= (.26**) communications+ (.20*) dynamism r1 .10•• .14* f-value 16.57** 11.51 ** strategic flexibility= (-.35) communications+ (-.13) dynamism+ (.78*) communications x dynamism .16* 9.30** use of the internet for transactions strategic flexibility= (.18*) transactions strategic flexibility= (.09) transactions+ (.24**) dynamism strategic flexibility= (.15) transactions+ (.26) dynamism+ .03* .08** 4.98* 6.34** (-.08) transactions x dynamism .08 4.21** note: standardized coefficients are in parentheses. • p<.05 •• p<.01 research which raised questions concerning the nature of benefits as well as limiting conditions, which are particularly relevant for small businesses as they struggle to integrate internet technology into their strategy to achieve or sustain competitive advantage. this research effort begins to address this issue by assessing the effects of internet use for b2b and b2c transactions and communications on strategic flexibility in static and dynamic environments. strategic flexibility has been identified as being essential for small businesses in 63 general and small, growth-oriented businesses in particular (hatch & zweig, 2001). this paper contributes to the literature by addressing the issues of how and when internet use promotes strategic flexibility. the results suggest that small businesses can best improve their strategic flexibility in dynamic environments by focusing on internet applications that improve communications. zack (1999) identified what be termed a strategic gap, or the difference between what reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy vol. 18, no. 1spring/summer2007 figure 1 the interactive effects of the use of the internet for conmunlcatlons and dynamism on strategic flexibility 6 llgh dynam ism 3 0 1 2 3 4 5 6 7 use of internet for communications a firm "must do" and what it "can do ." what a firm must do dictates what a firm "must know," a concept clearly related to that of a knowledge gap, or the difference between what a firm must know and what it presently knows. bridging the strategy gap is only possible by first bridging the knowledge gap (zack, 1999). zach's (1999) concepts of strategy gap and knowledge gap clearly relate to strategic flexibility. a firm cannot proactively anticipate needed changes if it doesn't know what it needs to know and it cannot react to needed changes if it is unable to do what it must do. internet applications offer tools to small businesses that can be used to close the knowledge gap. bhandari et al. (2004) add that a close focus on customers should clearly help small businesses close the knowledge gap. consistent with this recommendation, we find in this study that internet use of communications offer the greatest benefit to strategic flexibility, but only in dynamic environments. significant knowledge gaps are more likely to occur in dynamic than static environments, given obvious differences in rates of change. accordingly, our recommendation to small business owners and managers facing dynamic environments is to seek to bridge 64 the knowledge gap by using internet communication tools, especially those that significantly improve market-sensing capabilities. recall that we did not expect dynamism to moderate the relationship between using the internet for transactions and strategic flexibility . results supported this expectation. our reasoning for the expectation of no significant relationship between internet transactions and strategic flexibility under dynamic conditions was that, in contrast to internet usage for communication, using the internet for transactions is not as likely to serve as a critical market-sensing activity for the small firm. that is, the typical order-taking, orderprocessing of small firms is more routine and static in nature in comparison to the more dynamic internet communication function, and therefore not as likely to be implicated in strategic flexibility. research implications this study employed cross-sectional, selfreport measures of small business managers' perceptions of measured constructs. although the appropriateness of examining managerial representations m the reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy competitive strategy area is well accepted, particularly in the small business arena where the owner/manager's perceptual reality typically defines the reality of the firm, future research could address design and measurement issues. for example, longitudinal designs employing additional objective measures beyond the ones employed in the present study would prove useful. specifically, employing firm performance indicators would allow for an examination of the more extended "chain" of constructs from internet use to strategic flexibility to performance. the integration of additional strategy constructs such as aspects of market orientation (i.e., competitive information orientation) and learning orientation with internet use and strategic flexibility could prove fruitful as these constructs have been implicated in organizational change in turbulent environments. further, what other technologies beyond using the internet might impact a small businesses' ability to adjust to a changing environment? taking a more fine-grained approach by explicating internet-based information to communicate with customers and suppliers as well as how the information is used would also be interesting. in conclusion, understanding the benefits and limiting conditions of internet use will continue to be a significant topic within the small business sector. it is hoped that the present study, which considers the affect of internet use on strategic flexibility under different environmental conditions, will contribute to future efforts aimed at increasing understanding of the dynamics of competitive advantage for small businesses. references achrol, r.s. & kotler, p. 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(1999). judo strategy: the competitive dynamics of internet time. harvard business review, 77(1): 70-81 zacharakis, a.l., shepherd, d.a., & coombs, j.e. (2003). the development of venture-capitalbacked internet companies: an ecosystem perspective. journal of business venturing,_18(2): 217-231 zack, m. (1999). developing a knowledge strategy. california management review, 41(3): 125-145. gregory b. murphy is an associate professor of management at the university of southern indiana. his research interests are in the areas of entrepreneurship, strategic management, and electronic commerce. kevin celuch is a professor of marketing and holder of the blair chair of business science at the university of southern indiana. his research interests include marketing communication, market information, and organizational partneringrelated research stephen k. callaway is an assistant professor at the university of tampa. he received his ph.d. in business administration from temple university in may 2003. his research interests include international entrepreneurship and management of technology. vol. 18, no. 1spring/summer2007 68 stra tegy business service firms and market share timothy l. wilson clarion university barbro i. anefi umeb university, sweden abstract traditional thinking suggests that profitability is linearly dependent upon market share, an assumption not carefully tested for services. 77us assumption is ezaminedin this study for bminess services in light ofthe apparent opportunity in this sector for entrepreneurs. crosr-sectional data pom secondary sources suggest that a v-shaped relationship may be a better description of variation up to nine times average finn size in this sector. this i nterpretation ofresults is imponmu to the strategy of small business managers because it relates to the plans they might make in growing their businesses. normative recommendati ons promise i mprovements for firms entering the critical intermediate share stage. these include focusing on revenue per employee as an obj ective, developing professional management assistance formal proj ecification of work (thus utilizing "virtual organizations" ), and paying aaention to organization while growing. introduction it has been suggested that the business service sector has represented opportunity for potential entrepreneurs (wilson, 1997). average fum sales in this sector have been assessed to be about $900 thousand ($896,723) with about 18 employees (wilson dt smith, 1996) —a seemingly comfortable size for a sole proprietorship. making matters even more interesting for entrepreneurs has been the favorable supply and demand characteristics of this sector. because of the tendency to be small businesses, competitive firms could be structured around the capabilities of as few as a single person; on the demand side, there has been a steadily growing market of industrial customers —fueled in part by tendencies of large firms to downsize. a previous study of market share's impact on profitability in the business service sector suggested a linear dependence of profitability on market share (wilson, 1997). that is, it appeared firms could improve their profitability by increasing market share. the nature of the approach used in that study, however, virtually forced a linear dependence. a subsequent review of the data suggested that a simple linear variation might not be the most appropriate interpretation of profitability/market share results. this behavior is important because growth tends to be an objective of businesses, especially small ones. it has been observed, however, that businesses tend to have problems in growing. many 41 journal ofsmall business srraregy vol./0, no. i spring/summer l999 organizational life cycle theorists believe that organizations encounter a predictable series of problems that must be managed if organizations are to grow and survive in a competitive environment(jones, 1995). these observations may be especially relevant in the business service sector. that is, these problems would appear to be particularly severe in businesses that are dependent not only upon the performance expertise of the principal, but his/her management guidance as well as tends to be the case for the average business service firm. in fact, a subsequent review of cross-sectional market share data indicated some problems in profitability may occur as these service organizations grow. the purpose of this paper is, therefore, threefold. first, the dependence of profitability upon market share for firms in the business service sector is reanalyzed. second, the probable cause of this observed behavior is discussed. third, in light of the observed behavior and probable cause, recommendations are made for managers of small, growing business service firms. results should be interestihg to practitioners who must develop strategies and subsequently organize to implement them. the same results may be important to academics interested in performance in growing firms, especially business service firms. background business services business services are those services provided for business customers. "business customers" in this case refers to industrial, commercial, institutional, and government organizations that purchase certain services to sustain their ongoing activities. the u.s. census of services lists eight production categories that constitute approximately 80 percent of services in this sector —computer and data processing, management consulting, advertising, imtd laboratories, personnel supply services, detective and security agencies, building services, and equipment rentals. usually accounting services, engineering and architectural services, and at least some portion of legal services have been added to this listing to define the business service sector from a production standpoint. to some extent, these businesses may be ideal for creative, inde pendent professionals. they tend to be built around a key individual, or individuals(quinn, 1992),and the industrial customer base tends to be easier to target than consumer-orientedbusinesses(haas, 1995). further, downsizing may provide continued growth in this sector in the future under current economic conditions. on the one hand, this practice provides insecurity for employees of the downsizing firm. on the other, it provides opportunities for private vendors. it has been suggested that outsourcing would grow 23 percent over a recent twelve month period (ozanne, 1997). in other words, the work of a downsized staff does not go away. rather surprisingly, sometimes it is done by the same people except under dilferent employment conditions —it was reported that when dupont reduced its labor force over a seven year period, approximately 30 percent of "downsized" exemployees returned as independent vendors or contractors (clark, 1997). g~iip i i -i g i,p ilgggi 9 dd iii g i ii d ini not always completely rational, it is "choiceful." that is, a number of design alternatives may exist for an organization. actual organizations of course starts with firm formation and evolves over time. it was suggested that "often the intuition of the founders leads them to arbitrary choices of what markets to enter, what technology to use in producing goods, who to hire and how to organize." earlier lindblom (1959)characterized such a decision process as a successive limited comparison, or a "scientific muddling through," approach —essentially proposing that normal decisions tend to be made from simple usage of relatively available information. to the extent that evolution reflects conformity with the environmental demands of a firm, the resultant organization might be expected to represent some optimal structure for the available resources, competition and opportunity that presented themselves. normann (19g3, i g4) was perhaps the 42 journal ofsmall business strategy vof. 10, itto. 1 spring/summer 1999 first to dwell on effective service organizations and their management. he reportedly observed two types of effective managers in service organizationsthose who grew up with, or founded, the organization and those who could motivate employees. in his opinion, the "best was a combination" of these characteristics. in perhaps an alternate approach, a formalization of role specialization has been suggested for professional service organizations(kotler dt bloom, 1984). quinn (1992, 73-74) noted a company could achieve dominance using fewer resources by leveraging the intellect of key people by using them in different adhocracies specifically focused on customer needs. in this regard, mintzberg (1983,261) indicated that in adhocracies, managers are functioning members of project teams, with special responsibility to affect coordination among both team members and with other teams. distinction between line and staff blurs, and the support staff plays a key role. daft (1992, 479), in interpreting mintzberg, suggested adhocracies develop to survive in complex, dynamic environments. team-based structures typically emerge, and although there may be an elaborate division of labor, it is not formalized. coxe (1980), in fact, described such teams and their management in architectural firms. quinn (1992, 262) further suggested that leveraging upon key personnel could be a general strategy. that is, most of the "great" laboratories, consulting firms, business schools, or even universities grew to prominence around the skills and personalities of only a few —two to five —key people. virtually all the value-added contributions of these organizations reportedly came from deep professional knowledge, reliability and precision delivered with unswerving dedication (270). employees with trained intellect and skills were seen as the true value producing capabilities of a firm. they and their customers, along with the codified knowledge that bound them together, were the true assets of these organizations (271). projects appeared important in these businesses, and the concept of the project as both an organizational unit and as a work unit in business services was suggested as applicable (wilson, 1996). for example, harvey and rupert (1988)identified the "test" project as being an essential element of final selection of an advertising agency. day and barksdale (1992) also cited "satisfaction with previous projects" and "has worked on similar projects in the past" (emphasis added) as an indication of quality used by clients in supplier selection. lundin et al, have noted the increased tendency to utilize projects in industry (lundin dt midler, 1998) and the use of temporary (virtual) organizations in them (lundin gt soderholm, 1995). peters (1992), in his discourse on efyective organizations, went so far as to say "the project is everything." nevertheless, wheelwright and clark (1992) indicated that project portfolios must be managed to the degree that they maintain a strategic focus. that is, both the organization and its projects must serve the purpose for which they were created. a long-term goal of this portfolio management approach was the development of critical capabilities for the organization. profitabili and market share market share's association with profitability and the attendant impact on strategy have provided for some interesting discussions in the marketing literature. in the pims description of market share's effect on strategy this attention catching observation was made, "on the average, a difference of 10 percentage points in market share is accompanied by a difterenceof about 5 points in pre-tax roi" (buzzell, gale fk sultan, 1975). at about the same time, however, day (1975)indicated that such an association was not automatic and indeed share gains could be "pyrrhic victories" if financial resoumes were inadequate to take advantage of gains. from another perspective, porter (1980)reasoned that perhaps linear market share dependency was not to be expected. rather, low share businesses might be expected to do well because they were focused, difyerentiated firms and high share firms might do well because they were cost leadership 43 journal ofsmoll business strategy vol. 10, no. 1 spri nglsummer 1999 lirms. firms in the middle, on the other hand, might not do well because they were neither, thus leading to "v'haped behavior. the strategic implication, therefore, was not to get stuck in the middle, but rather to pursue one strategy or the other —a view endorsed by peters (1988). kotler (1995,382), citing both the wodi of porter (1980)and roach (1981)described a "v-shaped" profit v. market share curve that related to agricultural equipment firms. high profitability at low share was associated with focus, while similar profitability at high share was linked to specialized production, as well as marketing skills and distribution in the segment. in their discussion of profitability/market share as it related to pims and other observations, buzzell and gale (1987)did not assert small share businesses could not be profitable. indeed, they cited references that tended to indicate the contrary (hammermesh et al., 1978, woo gt cooper, 1982). nevertheless, on one item there appeared to be little give —the relationship between market share and profitabilityuncovered in the pims study was the most likely existing relationship(92 ). these discussions, of course, were primarily for manufacturing firms and for primarily large fums at that'. it is not clear where service firms lay in share considerations. shostack's(1977) seminal article suggested that services were "different" and a break away from product marketing theory was in order. thus, some consideration to share growth strategy would naturally seem to be in order. ln this regard, heskett's (1987)observations on services seemed to indicate there were no automatic advantages to getting large. managers of large service businesses appeared to have even more problems than managers of small businesses"bigger is not better in those situations in which the factory must be taken into the marketplace... " cross-sectional studies cross-sectional studies have become a rather accepted approach for making comparative assessments of approaches to strategic management. possibly the best known use of this approach has been the pims studies conducted at harvard (buzzell dt gale, 1987). consequently, these observations have become a rather standard inclusion in texts on strategy (see, for instance, kotler, 1995). wilson (1997) has recently used this same methodology to make observations on marketing strategy in small businesses —employee productivity, as well as market share, were found to be statistically significant in determining profitability levels. methodology an ordinary least squares approach was used to examine the relationship between profitability and market share, especially at low multiples of average share for firms in the business service sector. a simple regression expression in which pre tax profitability's dependence on market share was constructed as was done in the previous study (wilson, 1997). the data base used in this study came from two sources —census of service industries (1992) and rma annual statement studies (1993). although the latter source carries a disclaimer, it has been used previously in research studies with apparent successful results (wilson, 1997; davidson 4 dutia, 1991)and is a standard reference in small business centers and loan departments in banks. the dates of the data used in the study were fixed by the availability of census information —1992 was the latest 'here is much material written about market share and strategic advantage that has not been covered in this selective coverage of the literature. one of the reviewers, for instance, suggested that the paper by prescott, kohli and venkatraman (1986), strate ic mana ement journal be included. that research found that the relationship between market share and profitability was dependent upon the structure'of the industry. 44 journal ofsmall business strategy vol. l0, no. i spring/summer l999 year for which information was available. the rma compendium of 1993 was for 1992 annual reports and thus reflected the same timeliness. the census information was used to determine average firm size for the respective segments and rma data to determine profitability of various sized firms'. that is, one aspect of the rma information was a compilation of income information into six size ranges, $0 —i mm to &$25 mm. thus, the combination of profitability v. firm size and average firm size could be used to develop a profitability v. relative market share profile for business service segments as reflected in table l. "relative market share" was used as an independent variable and should be discussed within the context of this study. usually market share is measured as a percent of total market. relative share, which appears to have current attraction (see, for instance, kotler, 1995), is measured as a percent of largest firm's share. neither data source presented data on largest firm size, but average firm size was available. "relative market share," therefore, is presented here as a multiple of average size. this approach facilitated normalization of data to a single scale while capturing relative size and was consistent with the earlier study (wilson, 1997). the sample characteristics also need to be clarified because intermodal averages can be skewed by several large firms. that possibility seems unlikely here where at least 190 firms determined the average (please see table i, where the median for the number of firms in each size range is 242). profit before tax was used as a dependent variable both because it was consistent with previous studies (wilson, 1997; wilson & smith, 1996) and because of its dependence upon marketing effortas opposed to return on investment, which tends to be more financially oriented. a major question about these data tends to be related to internal consistency and comparability. in other words, were the figures digested from legal services, for instance, comparable to those for engineering and architectural services? in this regard, a significant consideration is firm organization and treatment of salaries. the preface to rma suggests equivalent treatment in this regard, so financial data and ratios should be comparable. finally, simple regression was used to test behavior because of its precedence. that is, from a theoretical (buzzell & gale, 1987; kotler, 1995: porter, 1980; peters, 1988) and empirical (buzzell, gale & sultan, 1975; kotler, 1995, wilson, 1997)standpoint, a simple profitability/marketshare analysis has been used. 7his work can thus be compared directly with previous studies. results ~di i fdi —6'if iggidgi, 6 i'g if li df ii ig from 2908 rma firms, were compiled and analyzed. these sixty-eight cases were comprised of information availability in individual sics representing the eleven business service segments referred to previously —computer and data processing, management consulting, advertising, etc. the 2908 rma firms were the total number of firms that contributed to these sixty-eight cases. relative market shares in the range zero to ten were studied with midpoints in range were used to 'ata from robert morris and associates'rma) annual statement studies used with prior authorization. as a condition of use the following disclaimer, which appears in each publication of rma studies, is included. "rma cautions that the studies be regarded only as a general guideline and not as an absolute industry norm. this is due to limited samples within categories, the categorization of companies by their primary standard industrial classification(sic) number only, and different methods of operations by companies within the same industry. for these reasons, rma recommends that the figures be used only as general guidelines in addition to other methods of financial analysis." copyright robert morris associates 1997. the authors of course are responsible for interpretation of the information used in this study. 45 journal ofsmall business strategy vol, /0, no. i spring/summer f999 analyze results. t-tests on the point estimates of average values of profitability versus trend values for the best straight line through the points established the level of significance for the individual points. a fairly obvious conclusion in perusing the data was that a significant variation from linearity was involved. table i shows five of seven points had statistically significant variations from the trend line. further, the groupingstwo plus, two minus, and three plus suggest curvilinear, perhaps u or v-shaped, variation. this relationship was thus explored further. it is important to note in passing, however, that these results relate to profitability and not profit. in this regard, two points in table i might be analyzed. an average size business service finn has sales of $896,726 (census of services 1992, table 2a). thus, a finn of 0.5 times average size with a pretax return on sales of 6.57% would have pre-tax profits of about $29,600. a firm of 1.5 times average size with a pre-tax return on sales of 5.16%on the other hand would have a pre-tax profit of about $69,400. a typical firm growing by this amount therefore would generate 135 % higher pre-tax profit dollars even though profittability ha decreased 21 percent. the overall results thus suggest that the apparent egiclency in generating profit decreases at intermediate share and not that the firms generate a lower amount of profit dollars. table i sector profitability for small relative share range in no. firms mean trend t -value ave. co. rel. share represented pbt(%) value(%) profit (000) 0i 640 6.57 4.63 3.18'29.5 i2 862 5.16 4.86 0.49 69.4 23 242 4.03 5.09 1.74s 90.3 34 273 3.96 5.32 2.23s 124.3 45 317 6.80 5.49 2.15s 274.4 575 384 7.58 5.95 2.67'24.8 7.5 -10.5 190 6.19 6.58 0.64 499.5 definition of terms: range in rel. share range in relative share used as the independent variable in analyzing data. no. firms represented number of firms in rma data base whose profitability is reflected. meanpbt(%) average of profit before tax for all firms within the size range. trend value value of profit before tax taken from best straight line through data as percent. ave. co. profit calculated average profit for average size firm within size range. 46 journal ofsmall business strategy vol. 10, no. i spring/summer 1999 figure i has been constructed for the complete range of data and profit for this study. it is seen to be a monotonously increasing function of share. in general, firms would, therefore, have an incentive to continue growing even though their apparent efficiency in generating profit dollars might decrease as suggested here. figure i —average company profit for small relative share average firm profit ($000, log scale) 600 + 400 + + 200 + 100 + + 60 40 + r 20 10 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 relative market share market share —linear or v-sha ed? —nevertheless, it was firm efficiency that was of interest in this study. it has been suggested there are two schools of thought on market share's impact on profitability. on the one hand, pims advocates (buzzell & gale, 1987) suggested rather strongly that linear variation should be observed. that is, there should be a continuous increase in profitability with increasing market share. porter (1980)and kotler (1995),on the other hand, suggested that the variation may be u or v-shaped. that is, both small specialists and dominating firms may be profitable, but for firms in between profitability may suffer. kotler (1995)has published data that support both arguments and reconciled observations. essentially, it appeared to be a matter of how "markets" were measuredeither in total or by segment served (383). if total market was used as a measure, v-shaped behavior seemed likely; if segment served was used as a base, it was reasoned that linear behavior might be expected. 47 journal ofsmall business strategy vol. /0, into. i spring/summer l999 figure 2 —profitability for small relative share profit before taxes (%) 9.0 8.0 + 7.0 + trend line 6.0 + 5.0 .... ---"" '" segment 2 pbt = 4.48+ 0.28 rms 4.0 + segment i 3.0 pbt = 7.16—1.27 rms 2.0 1.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 relative market share in this regard, the share measurements of this study were most closely associated with the total market. in accordance with theory, the results suggested indeed that there were statistically significant deviations from linear variation. the trend line is shown in figure 2 along with the original data and sample standard deviations. clearly, the best straight line fit was not good (as suggested above) and as can be seen from examination of figure 2. in terms of usual statistical measures, the overall trend line had an r' 0.13, which indicated 13% of variation could be explained by the trend relationship. non-linear behavior was tested and an attempt was made to fit two straight lines (a "v"behavior) to the data. a number of combinations were tried. virtually any division of points that broke the trend line into two segments improved goodness of fit as measured by r'f the segments compared to the trend line. for instance, the two lines of figure 2 had r's respectively of 0 996 and 0.195. this particular treatment produced the best overall combination of r's for the available information. it was thus concluded that although there might be some question about 48 journal ofsmall business strategy vol.10, no. 1 spring/summer 1999 how important market share might be in overall variation, it is virtually certain that share addition initially was associated with a decrease in profitability before increasing monotonously. further, because the original information had a cross-sectional base of business services, it was suggested that this behavior may be common in individual segments. that is, it may just as likely occur in law firms, for example, as it does in engineering and architectural firms. clearly the ability to fit the data in the initial portion of the curve with a straight line was better than with larger market share data. it is not obvious why this occurred. perhaps the behavior was associated with the points at which organizationsbecame effective again. these points of course would be blurred in cross-sectional results. rationalization, however, was beyond the scope of the present research. nevertheless, it might be noted that even the r'n the second segment is better than that for the overall trend line. thus, using two segments to describe the data was obviously better than using one. discussion the results clearly suggested that initially there is a profitability decrease with market share for business service firms at low market share. that is, a v-shaped variation best described the profitability v, market share relationship of business service firms at market shares under 10x average market share. these results are important because of the general definition of "small firms". if a size of 200 employees is taken as an upper limit for a small business, then virtually all the data used in this study related to small firms and thus small business service firm behavior. these observations should be relevant in assisting in the formation and implementation of small business strategy and providing benefit to small business and entrepreneurship education. further, because of the role of business services in the u.s. economy (wilson & smith, 1996) and their likely continuation due to present corporate practices (clark, 1997; ozanne, 1997),these results are important because of their magnitude of impact. actual profit dollars, on the other hand, tended to increase monotonously with share. thus, there could be an insidious tendency for firms to grow without regard to their efficiency in growing profit dollars. that is, because profitable firms tend to increase profit dollars, there may be a tendency to disregard profitability in its growth. table 1 suggests, for instance, that brrofit ma 1 133 1 trggg 3ll g 1 g 1* gtl ~gtugd~23 these results are important for two reasons. first, the tendency for business service firms to become less efficient as they grow should be recognized by managers. second, the decrease in profitability at low relative market shares (0.5 to 3.5)should be regarded as opportunity costs by managers. that is, if growth could be handled constructively, there may be no reason for the profitability to decrease. this topic is not incidental —the business service sector, in addition to providing opportunities for entrepreneurs, represents 5.6%of gross domestic product (wilson & smith, 1996). there are precedents, of course, for expecting this type variation in the industry, so results are consistent with at least part of the literature. at the macro-level, v-shaped share curves have been postulated (porter, 1980; peters, 1988; kotler 1995). in terms of factors mentioned in the pims study, there is reason to suspect that two items generally associated with share effects would be weaker for service businesses due to their labor intensity —economies of scale probably would be much weaker and market power at least somewhat weaker. that would leave a third factor, quality of management, as a factor to associate with high market share businesses. if larger service 49 journal ofsmall business strategy vol. /0, no, i spring/summer 1999 businesses had better managers, then positive share observations should be obtained. that association would not appear to be automatic —if twenty years of literature on marketing and managing service businesses has taught anything, it is that service businesses may indeed be different and a real challenge to manage as shostack's(1977) article suggested. thus, growth of these business services organizations needs to be considered. at the micro-level, organizations are known to go through turmoil as they grow (see, for instance, jones, 1995). jelinek (1979), in a longitudinal study of texas instruments, in fact found transitional stages were required in the evolution of this firm. it is likewise known that transitions in business service organizations occur, and that they may relate to organization size. coxe (1980), for instance, studied architectural firms; he recognized three stages that went from "no management" for firms of less than five people, to "shared management" by principals in the fifteen to twenty people range, and "formal management" by firms of over 100 people. promotion, of course, tended to be associated with qualitative performance. these observations would appear to relate to the present study; share growth from 0.5 average size to 3-4x average size tended to produce decreased profitability. using an average business firm size of eighteen employees (wilson and smith, 1996), calculations would suggest that firm sizes of nine to 63 people would be in a precarious profitability position. this size range fits into the middle segment of coxe's observations and thus, would appear an area of organizational concern. although individual business service organizational situations would require individual attention, it is likely that the literature provides some guidance in this respect. it would appear that organizations might be quite individual ized both because of the nature of services (heskett, 1987; shostack, 1977) and the importance of key individuals in these organizations (quinn, 1992). further, it might seem that these organizations might need to evolve over time (passmore, 1988; lindblom, 1959). that might not be the case, however, in a normative sense. normann (1983) suggested there are preferences for the management style of effective service organizations, i.e., "combination" founder-motivators were found effective in his observations. mintzberg (1983), in fact, recognized adhocracies as an organization approach would seem to fit the nature of these businesses at their start up stage. subsequent development apparently would depend upon the accepted mission of the organization (mintzberg, 1989). recommendations for managers small business managers may not be so much interested in these general observation, but what might be done more specifically about this problem. the question becomes, "can something be done to prevent a profitability decline in my business service business as the iirm grows?" three premises might be established. first, as the firm grows, the ability of the organization's founder to let go and adapt is crucial in an organization's survival (jones, 1995). second, individuals are important in the formation and conduct of these businesses(quinn, 1992). third, many professional service iirms have designated people as (kotler & bloom, 1984): "finders": those who find business, "minders": those who take care of and develop the account, "grinders": those who service the account, "binders": those who hold the firm together and lead it' original reference, david h. maister (1982). balancing the professional service firm. sloanm~ri, f il n.29. 50 dour nal ofsmall business srraregy vol /0, no. i spring/summer l999 initially, it is the founder who plays all these roles, but as the firm grows the combined responsibilities become great. this inability to efficiently function in all these roles is thought to be associated with the probable cause of the observed decrease in profitability. there are four contributions management might make that could assist in sustaining prolitability during the critical low share period. first, and perhaps most important, the firm should focus on sustaining revenue per employee. this focus must be a primary objective during growth. it has been suggested that a 10,000 thousand dollar increase in revenue per employee could be associated with more than one-half point increase in pre-tax profitability (wilson, 1997). thus, as people are added to a firm, efforts must be made to cover their salaries, which infers significant efyort in this area by key people, the finder function. second, professional management, the binder function, might be sought earlier in the growth.'his suggestion might seem contradictory to the first recommendation, but addition of professional assistance early in the growth curve would permit more time for key people to find and implement work. third, it has been recognized that projects are becoming more important in society (lundin & midler, 1998). greater use might be used of this organizational form to implement tasks. peters (1992)has noted, "the project is everything." it is unlikely, however, that formal management around projects is yet used to full advantage in small businesses. 1hus, greater formal use of this approach —its management (wheelwright & clark, 1992) and the virtual organizations that go with it (lundin & saderhoim, 1995) could do much to not only improve the grinder, but also the minder, function of the organization. finally, there remains the formal form of the organization. dafl's (1992, 479) observations on adhocracies developing to survive in complex, dynamic environments would seem to make them a preferred form. team-based structures typically emerge, and although there may be an elaborate division of labor, it is not formalized, which is essential in projects and virtual organizations. mintzberg (1989, 218), however, in his original observations on this organizational form noted it did not lend itself well to efficiency. that is, adhocracies handle the extraordinary and not the ordinary, he suggested firms, therefore, might do one of two things. either they might find their specialties and move on to a professional organizational form, or remain problem-solvers and (supposedly) charge accordingly for that specialty. the binder function would, thus, be enhanced with this appropriate form of organization. there were, of course, limitations to this study. the information was "macro" in scope and cross-sectional. the nature of the data thus did not lend itself to studying variations in individual sectors, nor in individual markets. neither was it possible to reflect upon firms who might have made conscious efforts to grow their businesses in an effective manner. such studies would require detailed, survey research and thus remains as a future project. nevertheless, the general observations of this study should be of use in strategy formulation and implementation as well as in entrepreneurshipeducation as have tended to be the case in the past (buzzell & gale, 1987). conclusions cross-sectional results suggest that a decline in profitability, as measured by pbt, occurs in the range 0.5 to 3.5xaverage firm size for business service firms. such a decline is not unexpected, but represents opportunity costs to firms in this size range. in order to escape this trap, owner 'note added in proof —storey (1994, 10) cites observations that british firms do indeed tend to add professional managers when the reach the size of 10-20 employees. 51 journal ofsmall business strategy vo/. l0, no. i spring/summer /999 managers need to overcome the tendency to be all things in a finder-minder-grinder-binder description of activities. nonnative recommendations for improvement centered on four themes from the literaturefocusing on revenue per employee as an objective, developing professional management assistance, formal projectfication, and leaning toward either an adhocracy or professional model of organization for the firm —depending upon the specialization of the business. references buzzell, robert d. 6t gale, b. t. (1987).the pims rinci les: linkin strate to rformance. new york: free press. buzzell, robert d., gale, b.t., gt sultan, r. (1975). market share —a key to profitability. harvard business review, january-february,97-106. censusofservice industries-geo ra hicarea series u.s.de artmentofcommerce —bureauof the census, washington, dc, 1982, 1987, 1992. clark, k. (1997). manufacturing'shidden asset: temp workers. fortune, (november 10), 28-29. coxe, w. (1980).mana in architectural and en ineerin ractice. new york: van nostrand reinhold. dai), r. l. (1992). or anization theo and desi n 4ued. st. paul, mn: west publishing. day, e. &. barksdale, jr., h. c. (1992). how firms select professional services. industrial marketin mana ement 21,85-91. day, g. s. (1975).a strategic perspective on product planning,. journal of contem business, 1-34. haas, r. w. (1995).business marketin: a mana erial a roach 6u ed. cincinnati, oh: southwestern college publishing. hammermesh, r. g., anderson, jr., m. j.,dt harris, j.e.(1978). strategies for low market share businesses. harvard business re iew (may-june),95-102. harvey, m. g. & rupert, j.p. (1988). selecting and industrial advertising agency. industrial marketin mana ement 17, 119-127. heskett, j. l. (1987).lessons in the service sector. harvard business review, (march-april). jelinek,m. (1979).lnstitutionalizin innovation:a stud ofor anizationallearnin s stems, new york: praeger publishers. jones, g. r. (1995).or anizationaltheo: text and cases. reading, ma: addison-wesley,433 450. kotler, p. (1995).marketin mana ement gu ed. englewood cliffs, nj; prentice-hall. kotler, p. 8t bloom, p. (1984).marketin rofessionalservices.englewoodclitts, nj: prenticehall. lindblom,c. e. (1959).thescienceofmuddlingthrough. publicadministrationreview xix, 79-88: lundin, r. jk midler, c. (1998).pro'ectsas arenas for leamin . london: kluwer publishing in press. lundin r. tk soderholm. a. (1995). a theory of the temporary organization. scandinavian mmm r h, llew,4374u. mintzberg, h. (1983). structure in fives: desi nin effective or anizations. london: prenticehall international. mintzberg, h. (1989). mintzber on mana ement. new york: the free press. normann, r. (1983). service mana ement; lednin och strate i i tgnste roduktion. stockholm, liber fbrlag in swedish. see also normann, richard (1989), service mana ement: strate and leadershi in service businesses. new york: john wiley. 52 journal ofsmall business strategy vol. jo, pto. l spring/summer l999 ozanne, m. r. (september 29, 1997).managing strategic partnerships for the virtual enterprise. fortune, si-s48. pasmore, w. a. (1988). desi in effective or anizations: the sociotechnical s stems beers )ective. new york: john wiley tk sons. peters, t. j. (1992).liberation man ament. new york: alfred a. knopf. p ,ml 0 ie.()980).c~ii i . el y k:i' ). q ' i. (1992). i~t ie « ' n y k: 9 p rma annual statement studies 1993. (1993). philadelphia, pa: robert morris associates. roach, j. d. c. (1981).from strategic planning to strategic performance: closing the achievement gap. outlook. (new york: booz, allen and hamilton) 21. shostack, g. l. (1977).breaking free from product marketing. journal of marketin 41, 73-80. storey, d. j. (1994). understandin the small business s(x:tor. london: international thomson business press. wheelwright, s. c. bt clark, k. b.(1992). creating project plans to focus product development. harvard business review, 70-82. wilson, t. l. (1997).an exploratory study of business service profitability: some implications for strategy. journal of small business strate 8-2, 53-66. wilson, t. l. (1996). business services, profitability, projects and pre-projects conceptual lyl d *pl ic 9.) cdyd 8 id(00.)~ai i m k association proceedin s xii, 77-83. wilson, t. l. gc smith, f. e. (1996).business services 1982-1992:growth, industry characteristics, financial performance. industrial marketin mana ement 25, 163-171. woo, c. y. 4 cooper, a. (1982).the surprising case for low market share. harvard business review, 106-113. dr. jvltson is professor of marketing at clarion university where he specializes in teaching industrial and service marketing. he has had two other articles publishedin thisjournal. this article was originally written while he was visi ti ng professor at umea university in sweden. dr. a nell is professor ofmanagement at umed university. she received her doctoratefrom the stockholm school ofeconomics and has pursued research interests in the areas oforganizational structure, management turnaroundi, inter firm competition, public service, and prjoect management. she serves on several boards of directors in sweden and consults in the areas of public service and public service evaluation. 53 linking market orientation, innovation and performance: an empirical study on small industrial enterprises in spain antonio l. leal-rodríguez universidad loyola andalucía alleal@uloyola.es gema albort-morant universitat de valència gema.albort@uv.es abstract many studies uphold market orientation as a key factor in creating and sustaining a firm’s competitive advantage. the present research model explores this topic further by including within the model the links between organizations’ innovation outcomes and business performance. in particular, the model empirically tests the mediating role of innovation outcomes in the relationship between market orientation and business performance. the present study uses a sample of 145 firms belonging to the spanish automotive components manufacturing sector, which is essentially composed of small and medium sized enterprises (smes). in order to test and validate our research model and hypotheses, this study and employs partial least squares (pls). keywords: market orientation, innovation outcomes, business performance, smes, partial least squares. 37 mailto:alleal@uloyola.es mailto:gema.albort@uv.es journal of small business strategy vol. 26 ● no. 1 ● 2016 introduction firms are currently competing within an extremely turbulent and dynamic context. under such conditions, firms are forced to constantly renew their products and services, as these quickly become obsolete. in this sense, the organizations’ ability to renew its knowledge bases would provide them an advantage over its competitors in the innovation contest, and hence make them improve its performance (sanz-valle, naranjo-valencia, jiménez-jiménez, & perezcaballero, 2011). innovation enhances the firms’ capacity to face the uncertainty that characterizes the current competing fields. this capability enhances the firm’s ability of seeking new opportunities and exploiting the existing ones more efficiently (matzler, abfalter, mooradian, & bailom, 2013). moreover, innovation also constitutes a key factor in the creation and sustaining of competitive advantages, which in turn expands business performance. being innovative involves making the firm’s structures more flexible. by virtue of such flexibility, firms find easier to adapt to their business environment, thus enabling them to leverage opportunities better than their competitors (damanpour & gopalakrishnan, 2001). market orientation is defined as the firm’s response to the needs and tastes of the customers (narver & slater, 1990). market orientation places the customer at the very core of its strategy. therefore mo is linked to an organizational culture typology that emphasizes the customer as the cornerstone of management. market orientation deals with three main aspects: customer, competitor orientation and coordination between different functions and departments within the firm (laforet, 2009). it seems clear that in order to succeed within the new hypercompetitive manufacturing environment, firms ought to be more innovative. to this end, they need to remain up to date of the multiple changes and fluctuations that constantly appear in the market. this involves staying oriented to their customers, proactively adopting a market orientation (mo) strategy (laforet, 2009). the ultimate aim of developing a market orientation strategy deals with enhancing the firm’s innovativeness and performance. there is plenty of literature positing that market orientation and firm innovativeness are both antecedents and influencers of business performance (march, 1991; vijande, pérez, gonzález, & casielles, 2005). however, few studies assess the indirect effect of mo on bp through innovation outcomes. therefore, the present paper proposes that and innovation is a mediator of the direct relationship between market orientation and business performance. the paper proceeds as follows. the next section presents the theoretical background together with the research model and hypotheses arising from the literature review. the third section comprises a description of the research methodology followed in order to test these hypotheses. the forth section presents the results of the data analyses using partial least squares (pls) path-modeling technique. finally, the fifth section brings together the discussion, implications, limitations, and directions for future research. theoretical background within this section we develop the theoretical foundations concerning the distinct variables and hypotheses included in the research model. 38 journal of small business strategy vol. 26 ● no. 1 ● 2016 the link between market orientation and performance market orientation is defined by narver and slater (1990) as a second order multidimensional construct shaped by three dimensions: (i) customer orientation: organizational actions oriented to identify the customers’ perceptions, needs and desires and trying to satisfy them through their adapted supply. (ii) competitors orientation: organizational actions oriented to know the competitors’ weaknesses, strengths, opportunities and strategies and being able to react and design the proper response. (iii) inter-functional coordination: joint and efficient use of the firm’s resources and capacities in order to provide greater value to its customers. plenty of empirical works have analyzed the role of market orientation as an antecedent of business performance. however, the assessment of the link between market orientation and performance has aroused inconclusive results, as some research studies failed to find support for this direct relationship (noble, sinha & kumar, 2002). other studies obtain mixed results (jaworski & kohli, 1993). nevertheless, the literature in this field widely suggests the existence of a positive relationship between the firms’ market orientation, new products success and overall performance (narver & slater, 1990; desphande et al., 1993; appiah-adu & singh, 1998). this positive relationship is explained because market orientation enables firms to generate long-term greater value for its customers (morgan & strong, 1998). the market orientation strategy helps firms to obtain vital information about the market needs and trends, and hence, enables them to enhance their decision-making capability and adjust their offer (jiménez-jiménez, sanzvalle & hernández-espallardo, 2008). consequently the firm is more connected to the customers’ requirements, who will correspond arising higher doses of satisfaction and loyalty (kohli & jaworski, 1990). some empirical studies such as the one developed by pelham (2000) that have found a positive relationship between market orientation and financial performance (e.g. growth in sales, gross profit enhancement, etc.). this author argues that organizations will increase their profits when they rely on certain actions and behaviors related with satisfying the customers’ needs. therefore, we posit the following hypothesis (figure 1): h1: market orientation relates positively to business performance. the mediating role of innovation outcomes on the market orientation-performance link market orientation has been extensively assessed with regard to its relation with innovation outcomes. there are several research studies that reveal a positive impact of mo on new products development – especially at the early stages of the product life cycle– and incremental innovations (atuahene-gima, 1996; laforet, 2009). the organizational innovation process is to a large extent dependent of the amount of information obtained from the market. in this vein, the firm needs to be oriented to the market, this is to be aware of the changes in the customers’ needs and behaviors, as well as carefully monitoring what competitors and suppliers are doing (kohli & jaworski, 1990).strong evidence supports the impact of market orientation on firm innovativeness both in manufacturing and service companies (harryson, 1997; lukas & ferrell, 2000). 39 journal of small business strategy vol. 26 ● no. 1 ● 2016 smes continually attempt to attain sustainable competitive advantages over competitors (palmer, wright & powers, 2001). innovation always encompasses a degree of risk, however, and its implementation never assures successful results. nonetheless, the literature and most empirical studies posit the existence of a positive link between the firm’s innovativeness and business performance. one possible source of competitive advantage may he through either product or process innovations. it is widely accepted that firms that innovate are more efficient, attain higher performance, and are more likely to survive (damanpour & schneider, 2006; lealrodríguez et al., 2014). organizations that promote creativity and innovation are more likely to identify and attract opportunities that might lead to valuable results. innovation always encompasses a certain degree of risk and its success in never guaranteed. most empirical research studies posit the existence of a positive relationship between innovation and performance (roberts, 1999; hansen, nohria & tierney, 1999).an innovative approach enables firms to deal with a turbulent and dynamic environment and helps them to achieve and sustain long-term competitive advantages (leal-rodriguez, eldridge, roldán, leal-millán & ortega-gutiérrez, 2014). in this vein, the proactive embracing of an innovation strategy, can be interpreted as a response to changes within the sector, technological advancements, or the anticipation of customers’ trends needs and demands, with the aim of differentiating the organization from its competitors, hence improving its performance (jansen, van den bosch, & volberda, 2006). accordingly, we propose the following hypothesis (figure 1): h2: innovation outcomes positively mediate the relationship between market orientation and business performance. figure 1. research model and hypotheses methods data collection and sample this research identifies as study population the whole sector of spanish firms belonging to the automotive components manufacturing industry. the sample was selected on the basis of a directory that was obtained from sernauto, the spanish association of manufacturers of equipment and components for the automotive industry. from this sector’s 906 companies, 418 fulfil the selection criteria (i.e., being knowledge-intensive firms that are 40 journal of small business strategy vol. 26 ● no. 1 ● 2016 innovation and learning oriented). after two mailing efforts, the outcome is 145 usable surveys (a 34.7% response rate). questionnaires were answered by top managers. measures the literature review in section 2 provides the basis for the survey design. this study adapts scales from previous works in which the items and responses appear on a seven-point likert scale ranging from 1 (completely disagree) to 7 (completely agree). mo is assessed through the scale developed by narver and slater (1990). this scale comprises 14 items (five to measure customer orientation, four to measure competitors orientation, and five to measure inter-functional coordination). building on the previous work of powell (1995), five items compose the scale for business performance (bp). for the innovation outcomes (io) variable, this work adapts the eight items that prajogo and ahmed (2006) use in their study. questionnaire items fully appear listed at the appendix section. data analysis in order to test the research model and hypothesis proposed in this study, we have used partial least squares, a structural equations modeling (sem) technique. accordingly with pearl (2000) structural equations models were developed to enable that qualitative information on cause-effect relationships can be combined with statistical data, and hence, these causal relationships among the variables considered could become evaluated from a quantitative point of view. according to chin (1998), the origin of structural equations models is in the coupling of the psychometric and the econometric approaches. on the one hand, the first is responsible for the modeling of concepts such as latent or unobserved variables, indirectly inferred by using indicators or manifest variables, while the second has a predictive approach. latent variables cannot be observed directly, but they are inferred by means of items, indicators or manifest variables that are directly observable. sem are essentially multivariate techniques that combine aspects of multiple regression with factorial analysis (barroso et al., 2007). to test the research model, the present study uses partial least squares (pls), a variancebased structural equation modeling (sem) method. pls is a suitable technique for use in this study due to the following reasons (roldán & sánchez-franco, 2012): (1) the sample (n = 145) is small; (2) the focus of the study is the prediction of the dependent variables; (3) the research model entails considerable complexity with regard to the type of relationships in the hypotheses; and (4) this study uses latent variables’ scores in the subsequent analysis for predictive purposes. the present work uses the smartpls software (ringle, wende, & will, 2005) for the simultaneous assessment of the measurement model and the structural model. results the analysis of a pls model comprises two phases: (1) assessment of reliability and validity of measurement model, and (2) evaluation of structural model. measurement model the assessment of reflective measurement model evaluates model’s reliability and validity. results show that measurement model meets all common requirements. first, reflective individual items are reliable because all standardized loadings are greater than 0.7 41 journal of small business strategy vol. 26 ● no. 1 ● 2016 (table 1). consequently, the individual item reliability is adequate (carmines & zeller, 1979). second, all reflective constructs meet the requirement of construct reliability, since their composite reliabilities (ρc) are greater than 0.7 (nunnally & bernstein, 1994) (table 1). third, these latent variables achieve convergent validity because their average variance extracted (ave) surpasses 0.5 level (fornell & larcker, 1981) (table 1). finally, all variables meet discriminant validity requirements. confirmation of this validity comes from comparison of the square root of ave versus the corresponding latent variable correlations (table 2). for satisfactory discriminant validity, diagonal elements should be significantly greater than offdiagonal elements in the corresponding rows and columns (roldán & sánchez-franco, 2012). table 1 measurement model construct/dimension/indicator loading composite average variance reliability (cr) extracted (ave) market orientation 0.955 0.876 customer orientation 0.904 competitors orientation 0.963 inter-functional coordination 0.940 innovation outcomes 0.970 0.803 business performance 0.920 0.697 table 2 discriminant validity io mo bp io 0.896 0 0 mo 0.628 0.936 0 bp 0.711 0.870 0.935 diagonal elements (bold) are the square root of variance shared between the constructs and their measures (ave). off-diagonal elements are the correlations among constructs. for discriminant validity, the diagonal elements should be larger than the off-diagonal elements. 4.2. structural model table 3 shows the explained variance (r2) in the endogenous variables and the path coefficients for the three models under study. bootstrapping (5000 samples) provides tvalues that enable the evaluation of relationships’ statistical significance in the research model (roldán & sánchez-franco, 2012). 42 journal of small business strategy vol. 26 ● no. 1 ● 2016 table 3 structural model results relationships model 1 support model 2 support r2bp = 0.759 r2bp = 0.161 r2io = 0.394 mobp 0.871*** (44.773) yes 0.161ns (1.509) no moio 0.628*** (13.316) yes iobp 0.337*** (7.608) yes notes: mo: market orientation; io: innovation outcomes; bp: business performance t values in parentheses *** p < 0.001; ** p < 0.01; * p < 0.05; ns: not significant (based on t(4999), one-tailed test). t(0.05, 4999) = 1.645; t(0.01, 4999) = 2.327; t(0.001, 4999) = 3.092 table 3 includes the direct paths for both models 1 and 2. model 1 solely comprises the mo-bp direct link. in such scenario, results support h1, which describes the direct relationship between market orientation (mo) and business performance (bp) (a = 0.871; t = 44.773). in addition, model 2 encompasses the indirect relationship once included the io variable within the model. results reveal thatb1, andc1are significant as direct effects. this is a first step to demonstrate the existence of an indirect effect of mo on bp via io (h2). table 4 summary of mediating effect tests we have followed the methodological approach proposed by preacher & hayes (2008) and taylor et al. (2008) in order to verify our mediation hypothesis (h2). such mediating effects are quantified and contrasted (table 4). following williams & mackinnon´s (2008) proposals, we used the bootstrapping technique to test the mediation effect. chin (2010) suggests a two-step procedure for assessing indirect effects on pls. the first step deals with using the specific model in question including both direct and indirect paths, performing nbootstrap resampling and finally multiplying the direct paths that make up the indirect path under evaluation. the second step is the estimation of significance and the size of the indirect effects in relation to the total effect, through the assessment of the variance accounted for (vaf). thereby, it is possible to determine the extent to which the variance of the dependent variable is indirectly explained via the mediator variables. vaf = (b1*c1)/(b1*c1+a). vaf values under 20% total effect of mo on bp direct effect of mo on bp indirect effects of mo on bp coef. t-value coef. t-value point est. percentile 95% ci vaf lower upper 0.87*** 44.77 h1 = a' 0.16ns 1.51 h2 = b2c2 0.50 0.30 0.67 57.06% 43 journal of small business strategy vol. 26 ● no. 1 ● 2016 imply the direct effect is very strong and there is no mediation. values among 20% and 80% reveal the existence of partial mediation, whereas when vaf reaches values over 20% 80% we can affirm the existence of a full mediation (hair et al., 2014). as table 4 reveals that there exists partial mediation, as vaf values are within the 20-80% interval. this means that io partially mediate the influence of mo on bp. this study's 5000 resamples also generate95% confidence intervals (percentile) for the mediators as shown in table 4 (picón, castro & roldán, 2014). figure 2. structural model discussion the literature traditionally highlights the role of firm innovativeness as a source of competitive advantages for organizations. recently, variables such as organizational learning and market orientation are also being studied as drivers of business performance. besides, some studies sustains that they are key antecedents of innovation and that they affect performance by means of their effect on this variable (jiménez-jiménez et al., 2008; leal-rodríguez et al., 2015). however, there is a scarcity of empirical studies that include the impact of firm innovativeness on such relationship. therefore, this work simultaneously assesses the direct link between market orientation and performance as well as the mediating role of innovation outcomes and on this tie. this study contributes to enhancing the recent research on the firm’s strategic efforts on market orientation, and innovativeness, in their attempt to improve business performance. firstly, we find support for the direct relationship between mo and bp. this result is in line with prior related studies (narver & slater, 1990; desphande et al., 1993; kohli & jaworski, 1990) and provides additional evidence to sustain the relevance of 44 journal of small business strategy vol. 26 ● no. 1 ● 2016 market orientation as a driver of business performance enhancement and hence as a source of competitive advantage. secondly, our results support the hypothesis of considering mo as an antecedent of firm innovativeness. this finding is consistent with previous studies (weerawardenaa & o’cassb, 2004; jiménez-jiménez et al., 2008) that argue that firms, in order to be innovative, must rely on mechanisms of acquisition and leveraging of external knowledge –knowledge from customers, competitors, suppliers, etc.– as well as on the firm’s internal knowledge. finally, our results provide evidence to support the direct effects of io and on bp. the io-bp link was previously posited in research studies (narver & slater, 1990; jaworski & kohli, 1993). however, few studies posit a mediation link. this work brings some important academic implications. first, it should be noted that prior related works have examined in a single research model the relationships between market orientation, innovation outcomes and business performance, but failed to include the firm’s innovation outcomes as a mediating variable on the mo-bp link. second, our results are in line with the theory as they prove the influence exerted by mo as an antecedent of bp. furthermore, according to our results, we conclude that this influence of mo on performance is through its effect on io, since when such variable is introduced within the model, the direct mo-bp relationship becomes unsupported. this means that io plays a mediating role on the mo-bp tie. this study presents as well clear practical implications. first, our findings enable a better understanding of the mechanisms through which mo impacts on bp, and leads us to reflect about the necessity of jointly assessing the complementarities of managerial and marketing topics, with the aim of reaching lasting competitive advantages. second, our results reveal that in order to enhance business performance, organizations ought to be more innovative. although the importance of innovation as for improving organizational performance has gradually gained recognition both among practitioners and academics, how to develop and to take it into practice still remains uncertain. our paper suggests that in order to be more innovative, firms must initially rely on a market orientation strategy that will enable them to detect and anticipate to market changes and trends –customers’ needs; suppliers and competitors strategies, etc.–, and hence correspond with a more enhanced and customized offer. despite its contribution, this study presents several limitations. first, although this study provides evidence of causality, it cannot test causality, since it is the researcher who always assumes the direction of causal relationships among variables. second, this research relies on the perceptions of survey respondents, and to elicit such insights we only relied on a single method. finally, this research is focused on a specific economic sector (automotive components manufacturing industry) and geographical scenario (spain). therefore, researchers must be careful when generalizing these conclusions to other contexts. taking into account such limitations, future research might be oriented to conducting this study in a different sector or geographical context and to develop comparative and longitudinal studies. as a further line of research it might also be interesting to assess the moderating roles played by the distinct organizational culture 45 journal of small business strategy vol. 26 ● no. 1 ● 2016 typologies within the links explored in the present paper. references appiah-adu, k., & singh, s. 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(2008). resampling and distribution of the product methods for testing indirect effects in complex models. structural equation modeling: a multidisciplinary journal, 15(1), 23–51. 49 journal of small business strategy vol. 26 ● no. 1 ● 2016 appendix: questionnaire items. a. market orientation (narver & slater, 1990) mo1. customer orientation: in my company… • we regularly analyze and take track of the needs of customers. • objectives are determined by customers’ satisfaction. • the strategy to obtain a competitive advantage is based on the understanding of the customers’ needs. • we regularly measure customers’ satisfaction. • corporate strategy aims to create value for the customer. mo2. competitors orientation: in my company… • we react very quickly to our competitors’ actions. • the commercial department usually shares information about the competence. • we approach a market segment that allows us to better leverage our competitive advantages over other companies. • we regularly analyze the strengths and weaknesses of the firms that offer products similar to ours. mo3. inter-functional coordination: in my company… • information about our clients flows freely along the whole company. • there is coordination between the different functions and departments in order to achieve our goals. • the managers know how the staff of all the departments can help to generate value for the customer. • resources are shared through employees and departments. • customers are regularly visited by executives from various functions in the company. b. business performance (powell, 1995) op1. in comparison to its main competitors, my company… • is more successful. • posses higher market share. • grows faster. • is more profitable. • is more innovative. c. innovation outcomes (prajogo and ahmed, 2006) • the level of novelty (innovation) of the new products is very high • we use the latest technological innovations in our new products • we are very quickly in the development of new products • we have a large number of new products introduced into the market • we possess a high technological competitiveness in everything we do (greater than all our competitors) • we are very quickly in the adoption of the latest technological innovations in our processes • actuality and novelty of the technology used in our processes are high • we possess a high rate of change and renewal in our processes, procedures and techniques 50 sfi'4'i'e'gy improving profitability of very small and small firms: the impact of quality practices in the human resources area ronald g. cook radha chaganti cengiz haksever rider university abstract this study compared the quality practices of very small and small firms in the human resources area. nypotheses relating to empowerment, work teams, and traim'ng were developed and tested. an analysis revealed that there was a significant difference in empowerment practices between the two groups offirms, but no significant differences in team utilization or employee training. profitability correlations divulged that team usage and certain aspects of employee training could improve profitability, depending on the size of the firm. introduction delivering quality to customers has long been recognized as being paramount to a company's well-being because it results in more new customers, more business with existing customers, fewer lost customers, etc. (albrecht & zemke, 1985). as the millennium approaches, an increasingly competitive world economy has expanded the importance of quality from improving a firm's competitiveness to being necessary for survival (haksever, 1996). large firms, like motorola or ass universal card division (both baldrige quality award winners), have obviously established quality practices. what is less clear is the current practices of small companies, particularly the very small firms, a population that has not received a great deal of research attention. how do these firms approach quality, how do they train their people to handle customer complaints or problems, etc? questions like these are particularly relevant since work teams, employee empowerment and involvement, employee training, and top management commitment have been noted as critical factors to the delivery of quality service (lewis, 1989). however, it is unknown whether there are size-based differences in the use of quality practices in the very small and small firms, and whether these practices contribute to firm performance. this paper seeks to explore these questions. specifically, it attempts to identify the quality practices of very small and small firms in the human resources area, and explore linkages of these practices to firm performance. 44 journal ofsmall business strategy volume 9, no. 2 falllivinter 1998 background historically, quality assurance practices and the concept of continuous improvement were generally first utilized in manufacturing. with the assistance of statistical techniques, companies could benchmark their current quality level and begin to eliminate defects. as quality improvement became fairly common in manufacturing firms and companies strived for "zero defects" in their products, quality improvement moved out of the production realm and into all facets of a business (schonberger, 1992). as the quality movement is not new, researchers have focused on quality implementation in all types of industries and all sizes of firms, often with mixed results (ahire & golhar, 1996). in fact, many quality improvement disappointmentshave been attributed to the failure to recognize the value of organizational context, e.g., firm size, etc. (cole, 1993; ahire & golhar, 1996). however, some of the principles of quality practices, like employee involvement and empowerment, should be easier to implement in a small firm, given the relative flexibility and informality of these companies (manoochehri, 1988; sonfield, 1984). indeed, small firms should only suffer a disadvantage, when compared to larger firms, when it comes to resource-intensive quality practices, e.g., training programs (haksever, cook, & chaganti, 1997; newman, 1988). however, that assumes management corn petency, or the fact that "knowledgeable and committed management is essential for successfully implementing tom" (ahire & golhar, 1996:2). this commitment is oflen diiticult to obtain, as small firms can lack managerial expertise which prevents them from focusing on the necessary human resource aspects of quality practices, e.g., the need for employee involvementand training(ahire & golhar, 1996). this can result in some of these firms viewing their workforce as a cost, not an investment. berry (1995) cites the lack of management's ability in formulating good hiring practices as leading to wrong hires, excessive turnover and to what schlesinger and heskett (1991:17-18)call the "cycle of failure... high turnover leads to management's unwillingness to invest much in hiring, training, ...because people are going to quit anyway." this overall lack of professional management expertise for smaller firms (sironopolis, 1997) can reduce the level of commitment of management to quality practices. given the aforementioned circumstances, coupled with a relative scarcity of resources for very small and small firms —hereafter called vs&sfs—one might expect that quality improvement practices would be lacking in vs&sfs. before we continue, however, we first need to clarify what we mean by the term "very small/small firm" as there is not a common definition (cook & barry, 1995). of the different definitions, the most common cutoff point to distinguish smaller companies from large corporations is 500 employees. smaller firms are then often divided into medium-sized businesses, which employ 100-499 people and small firms, which employ less than 100 (megginson, byrd, scott, & megginson, 1994; longenecker, moore, & petty, 1997). small firms can be divided further into a very small (vsf) category -20 or fewer employeesand a small (sf) category -21-99 employees (haksever, et al., 1997). we focused on the vs&sfs. our interest was to compare the quality practices of vs&sfs along the commonly-accepted quality constructs of employee empowerment, training, and teamwork (ahire & golhar, 1996; oliver, 1988; stamatis, 1996; greising, 1994). all of these quality dimensions would be applicable regardless of industry and are internally-based structures, i.e., top management can eriact these practices without the need for outside cooperation (e.g., involving suppliers, etc.). 45 journal of small business strategy volume 9, no. 2 fa///iv/nter /998 we posit that the differences in the characteristicsof the vs&sfs would result in advantages and disadvantages with respect to quality. for example, consider resources. understandably, there is a dilference in resources between a five employee firm and a 1000 employee corporation, or even a 300 employee corporation. however, a reasonably-sized small firm (e.g., 90 employees) can also marshal substantially more resources than a five employee firm. how might these resource differences alter the quality practices of these firms, if at all? specifically, we were interested if firm size (and associated resource availability) at the vs&sf level influenced a firm's quality practices, and if these practices influenced firm performance. in the subsequent sections, we discuss the hypotheses, methodology, and findings. hypotheses generation ~e-thq luu«pp p 4 it big ui p to quality,particularlywhereemployeestake initiative, solve problems,resolve complaints,offer improvements, etc. (haksever, 1996; cusimano, 1993; merron, 1994). employees do so with the backing of top management and with the realization that outstanding customer service involves everybody at the firm. while in theory empowerment can unlock the employee's potential, in reality some employees can be uncomfortable with too much freedom and would rather operate within specific parameters (aeppel, 1997; cusimano, 1993). therefore, empowerment can be viewed from two perspectives. the first is where empowerment enables people to do their work, make decisions within some prescribed limits, and operate with little supervision. although sometimes referred to as partial empowerment (or empowerment with a "small e" -stamatis, 1996), we will call this level of empowerment "employee involvement". the second perspective on empowerment describes situations (like self-managed work teams) where the employees determine not only how to do something, but what needs to be done (merron, 1994). this requires a greater commitment on the part of management and the employees, and is what we mean when we use term "employee empowerment". we would expect employee involvement to be equally prevalent in both vs&sfs. the informality and flexibilityoften found in the vs&sfs would be balanced by the need for the owner/manager to be in control. even the reduction in informality that occurs when firms grow would likely be offset by the owner/manager becoming more disengaged from operations, which puts some distance between her/himself and the customer, and increasing the need for employee autonomy in handling problems. we postulate that employee empowerment would likely be different between vs8csfs in that it involves the owner/manager giving up a measure of control as to the nature of the work environment. haksever and colleagues (1997)suggest that a small firm would more likely be in a position to allow employees to initiate improvements in their work environments than a very small firm. finally, given that involvement and empowerment offer the opportunity for a more productive and satisfied workforce (oliver, 1988; davenport; 1993), empowered companies would be more profitable than non-empowered firms. therefore, we otter the following hypotheses: h i a: the degree of employee involvement will be similar between very small firms and small firms . h i b: the degree of employee empowerment in very small firms will be lower than in small firms. 46 journal ofsmall business strategy volume 9, lvo. 2 fall/winter l998 h i c: employee involvement and empowerment will each be positively related to profitability in very small and small firms. work teams the use of teams to improve quality is common in continuous improvement processes. for the purposes of our study, we defined a team as a group of employees designated by management to work together towards a specific purpose, either for a limited time or on an ongoing basis. this cooperation/collaboration is oaen considered a necessary component to the holistic environment needed for enhancing quality practices (scholtes, 1989; stamatis, 1992). in our survey, we included only the firms with a minimum of five employees (see the methods section for further explanation) in order to provide the opportunity for teams to exist in all companies. given the nature of vs&sfs, we were interested in how oaen teams were utilized, how they were rewarded, whether the owner/manager viewed them as eltective, and if team usage impacted profitability. since small firms (compared to very small firms) would in general employ a larger workforce, we posited that team usage would be greater in those firms. team effectiveness is a function of team objectives/expectations, norms, organizational philosophy, and measurement/rewards(stamatis, 1996; hoevemeyer, 1993). further, rewarding teams based on their performance improves the likelihood that teams are more effective (curley, 1994). overall, since very small firms generally have less structure than small firms, they likely have less established reward systems. this, in turn, increases the likelihood of very small firms not rewarding team performance. further, very small firms generally have fewer resources than small firms and, therefore, less capacity to invest in these teams. finally, we posited that regardless of whether the firms are very small or small in size, the cooperative/ collaborative work environment induced by use of work teams would enhance firms'rofitability. h2a: use of employee teams in very small firms will be lower than in small firms. h2b: rewards in very small firms will be tied less to team performance than in small firms. h2c: teams in very small firms will be less ettective than in small firms. h2d: use of teams will be positively related to profitability in very small and small firms. ~eb t ii .aky p f q qlyp g i h g k idg tt workforce. training regarding the tasks to be performed and clarifications about outcome expectations is an important element in creating this workforce. this training can vary from a few minutes of having someone explaining how the job is done (employees then lea to their own devices), to formal training programs that the employees attend during normal working hours. the two aforementioned attributes of quality hr programs (empowerment and teams) implicitly recognize that employees have to be trained to handle problems or circumstances, to work effectively in teams, or to understand quality concepts/tools that are needed to benchmark performance levels (haksever, 1996;ahire tk golhar, 1996; berry, 1995). very smalland small firms have a disadvantage (compared to larger firms) because the level of resources necessary to provide this training restricts many vsdtsfs to what can be offered in-house (sironopolis, 1997). accordingly, since small firms tend to have more resources than very small firms, we would expect to see a greater commitment to training in small firms. 47 journal ofsmall business strategy volume 9, //o. 2 fall/winter /998 next, given the resource differences, we would also expect that small firms would provide different types of training (e.g., using outside materials/experts, etc.) than the very small firms. finally, we were interested if the benefits of higher levels of employee training more than offset its cost. if so, we would expect that vs&sfs with a more knowledgeable workforce would be more profitable than a less-trained workforce. h3a: the amount of employee training in very small firms will be lower than in small firms. h3b: the types of employee training offered in very small firms will differ from the types offered in small firms. h3c: employee training will be positively related to profitability in very small and small firms. method uestionnaire develo ment we were interested in understanding the quality practices of vs&sfs. during a review of the literature, human resource-related quality practices that are common to small businesses were identified as training, teamwork, and empowerment. owner/managers of six vs&sfs were interviewed to better understand how they viewed quality and how they responded to their customers. we then developed a questionnaire to assess the current quality assurance practices of vs&sfs. the questionnaire was pretested and sent to a random sample of 1000 vs&sfs. measures employee involvement and empowerment were measured through a series of questions asking about the degree of freedom employees have to make decisions concerning their workplace or customer interactions. responses were coded on a binary scale where yes= 1 and no=0. work teams usage, effectiveness and rewards were measured on a seven point scale where 7= all the time and 1= never. training was measured through 28 questions across four distinct types of training (on the job, use of audio/video tapes, apprenticeship with an experienced employee, and formal training programs). moderate to heavy training and formal training were measured by subsets of these 28 questions. responses were also coded on a binary scale where yes= 1 and no=0. ~ot 0 i -wf 4vs&sfvadkr ply.wp employee� "floor" on our sample to ensure that a firm might have the opportunity to utilize teams, and that the customer contact person might be someone other than an owner/manager, thereby making questions about empowerment relevant. we developed our database of vs&sfs through the random selection of 1000 firms from an industrial directory in the delaware valley. the directory had over 20,000 firms listed from al i sectors, which gave us a robust sample (even with the geographical limitations). res onse rates and non-res onse bias we randomly selected an additional 200 firms and sent them the pretest to measure response rates and determine if the questionnaire was appropriate. we then randomly selected pretest non respondents and conducted phone interviews. t-tests were conducted to test for dissimilarity of replies between respondents and non-respondents. no significant differences were found between respondents and non-respondents. 48 journal of small business srraiegy volume 9, no. 2 fall/winter 1998 however, based on the phone calls, we determined that approximately 19 percent of the firms in our database were not usable, because they were either branch offices of much larger corporations (14%) or had moved/failed (5%). this impacted our sample size. we sent three mailings to 1000 firms which, after adjusting for large finn branch oltices and undeliverables (19%), gave us a sample population of approximately 810 companies. as a further bias check, using wave analysis (judge, griffiths, hill, lutkepol, dc lee, 1985), we compared surveys from respondents who initially replied with respondents that replied atter follow-up. no differences were found using wave analysis or the previous technique and, therefore, we concluded that the respondents were representative of the sample. we received 130 usable questionnaires (16 percent response rate). findings and discussion ~sam le the large majority of the respondents were male (81%), and 71.5 percent of the respondents were the owner (with the rest being the general manager). sales were generally regional, with two-thirds of total sales to customers within 100 miles. exporting was not a major factor, as international sales accounted for less than five percent of total sales. most sales were to the end users. table 1 presents descriptive statistics on some of the background characteristics of the very small and small firms. table i: descriptive statistics on background characteristics of very small and small firms very small firms small firms variable mean s.d. mean s. d. age (years) 30.17 20.03 46.23 38.47 percent of local sales 70.90 33.70 62.29 35.82 percent of direct sales 79.88 31.44 82.45 29.31 ¹ of employees 10.31 4.89 49.83 20.60 percent return on sales 12.86 10.99 10.50 7.10 the mean size of the very small firms in the sample, measured in number of full-time equivalent employees, was ten employees. the mean size of the small firms was 50 employees. therefore, the small firms were approximately five times larger than the very small firms. overall, these were established companies, as the mean age of the small firm was 46 years versus 30 years for the very small firm. over 70 percent of the total companies in both groups were profitable, and interestingly, their profitability (as measured by reported return on sales) did not significantly differ between the very small and small firms (p & .21). 49 journal of small business strategy volume 9, /i/o. 2 fa/iiiyinter l 998 comparisons of human resource-related quality practices table 2 presents the results of comparisons between the very small and small firms on the use of the selected quality practices. table 2: comparisons of human resource-related quality practices between very small and small firms very small firms small firms chisquare all firms n = 77 n = 53 & t-tests n = 130 variable mean s.d. mean s.d. values mean s.d. employee involvement 0.64 0.49 0.82 0.39 4.27'.42 0.50 employee empowerment 0.95 0.20 0.83 0.33 6.18* 0.40 0.49 usage of teams 3.53 2.21 3.37 2.05 0.41 3.47 2.41 effecti veness of teams 5.35 1,27 4.97 1,20 1.42 5,21 i 23 team-based rewards 3.89 2.25 3.37 2.15 i.22 3.65 2.21 use of training .35 .17 .38 .17 0.90 0.33 0.15 mod/heavy use of training .37 .41 .41 .19 0.92 0.49 0.26 use of formal training .23 .27 .32 .29 1.84+ 026 028 italics = t-tests, other variables compared using chi-square + = p & .10 ' p & .05 em owermenth otheseson the survey, we asked respondents ifemployees can fix a problem without going to a supervisor. our objective was to identify a work environment that did not require permission in order to correct a problem and where the employees would be involved (partial empowerment). we postulated that there would be no difference in employee involvement between vs&sfs. using a chi-square test, the involvement level was compared across the size groups. we found that employee involvement was significantly higher in small firms than in very small firms, thereby rejecting our hypothesis. we next considered employees'bility to make significant changes in their work environments. our objective was to identify an empowered work environment, one where employees have the freedom to enact changes beyond simply solving customers'r other problems. with the need for control paramount in vsfs, we anticipated that vsfs would be less likely to allow these changes than sfs. using a chi-square test, we found that size does influence empowerment but not in the way that we hypothesized. it was the vsf employees who had significantly greater freedom to improve their work environment than did sf employees. one reason for this higher level of employee involvement among the small firms compared to the very small firms could be that, in the interest of expeditious completion of tasks like customer 50 journal ofsmall business strategy volume 9, no. 2 fall/winter /998 service, small firms found it necessary to delegate responsibilities to individual personnel rather than require referral to supervisors. conversely, since the owner/supervisor is likely to be always on site, vsf employees may normally route problems to him/her. an interesting contrast between the very small and small firms was that while employee involvement was lower in the very small relative to the small firms, employees were more likely to be empowered in the very small firms. one explanation could be that the limited size of workforce meant that employees in very small firms were not only quite familiar with diverse tasks, but also had close contact with the owner/top manager. this may engender a high degree of trust and, therefore, freedom for workers to modify work conditions and to take actions on their own initiative as situations warranted. we then considered (regardless of firm size) whether employee involvement and empowerment made a difference in profitability. specifically, we grouped the entire sample into firms with high versus low involvement/empowerment using the median value as the cutoff point. after selecting vs&sfs which were profitable during the previous year, we used the chi-square test to examine whether profitability (in percent return on sales) differed based on presence of employee involvement/empowerment. the chi-square was non-significant (p=.965), thereby causing us to reject h 1 c. t~hr-rpd«dhfgy f g,f dd based on team performance, and the effectiveness of the teams on a seven point scale. hypothesis h2a postulates that vsfs use teams less frequently than sfs. as seen in table 2, a comparison of the t-test computed means of their reported team usage showed no significant differences between vs&sfs. respondents were asked if the firm rewarded employees based on team performance. hypothesis h2b postulates that small firms'eward structure would reward team performance more than the very small firms'tructure. using a t-test to compare the means, there was no significant difference in rewards based on team performance between vs&sfs. results for team ettectiveness were similar. therefore, firm size did not attect team utilization. we then compared profitability based on team usage. atter dividing the total sample of 130 firms into the two groups of high and low users of teams (using a median-based split), a t-test was run to compare profitability means. there was no significant difference in firm profitability based on team usage (p = .337). ttii th h -r p d kdffhy d fh f fhd train their employees: on the job, use of audio/video tapes, apprenticeship with an experienced employee, and formal training programs. respondents could indicate that they used any or all types across seven job functions, which ranged from understanding technical aspects of the job to selling techniques to quality concepts. as mentioned, training is an investment in the workforce, and we were interested if firms providing substantial training had better profitability. given this investment, and the resources needed to offer out-of-house training, we were also interested in the overall training types and levels utilized by vs&sfs. hypothesis h3a postulates that very small firms provide less training overall than small firms. we developed two measures to determine high and low levels of overall training. the first summarized each firm's scores for all 28 items on training and this number was divided by 28 to obtain the aggregate training score. firms were then classified as high users of training if their score was above the median for the sample of 130 firms, and as low if their score was below this 51 journal ofsmall business strategy volume 9, tv o. 2 fall/winter /998 median. the second measure eliminated the "on the job" category, as this category was designed to identify circumstances of minimal training, where employees were basically lett on their own to learn the tasks. the aggregate training score for this was calculated the same as the above, except for using 21 items (vs. 28). we computed the median again for the 130 firms and classified firms as moderate and heavy users of training if their total score was above the median, and as low users if the score was below the median. a chi-square test indicated that there was no significant difference in training techniques between vs8zsfs when considering all four techniques (pin 306) or by excluding on the job training (p=.429). therefore, the hypothesis was rejected. hypothesis h3b postulated that there would be differences in the types of training offered to very small firm employees when compared to small firm employees. we believed that the resourceintensive nature of out-of-house training would preclude this from being a viable alternative for the very small firm. we compared vs8tsfs individually with respect to each of the four types of training (on the job, use of audio/video tapes, apprenticeship with an experienced employee, and formal training programs). as reported in table 2, the only significant difference between the two sizes of firms was with respect to formal training programs, with small firms providing significantly more formal training. there were no significant differences in terms of the other three types of training. therefore, h3b was partially supported as the most resource-intensive training was where differences were found. hypothesis h3c postulated that regardless of size, firms with a higher trained workforce would be more profitable. we grouped all firms into high versus low training levels based on the median for firms'otal scores across all four categories of training. using a t-test to compare the means on profitability levels, there were no significant differences between profitability of the high versus low users of training (p=.742). therefore, this hypothesis was rejected. profitabilit correlations to further examine the impact of these hr quality practices on profitability of the firms within each size group, we ran bivariate correlations for firm profitability separately with each individual practice for the very small and small firms. table 3 presents the results. table 3: correlations of human resource-related quality practices with profitability as percent return on sales: for very small, small, and all firms very small firms small firms all firms variables n = 77 n = 53 n = 130 employee involvement -.18 .19 -.09 employee empowerment -. 13 .19 -.01 usage of teams . 04 44uu .17 effectiveness of teams .10 .15 .11 team-based rewards .09 .15 .10 use of employee training .15 3 le .19'oderate and heavy use of training .14 .29e .17+ use of formal training .24'23 .22u* note: + = p &.10, ' p & 05 "=p &.01 52 journal ofsmall business strategy volume 9, no. 2 fa!i/winter 1998 results showed some interesting difference. usage of teams was most helpful to the profitability of small firms, as was the use of training in general. however, training did not prove to be automatically more helpful. in fact, use of formal training, which was considered the most resource-intensive form of training, did not have a significant influence on small firms'rofits. in contrast, for the very small firms, only use of formal training was associated with profitability. implications of these correlations are discussed in the next section. implications for small businesses some of the key implications for companies relate to which quality practices contribute positively to profitability. the first is team usage in small firms. this implies that in firms employing 50 workers on average, it helped to formally designate work teams and assign tasks. coordination of tasks was perhaps more diflicult if these firms did not use formal work teams. since our analysis revealed that team usage was not significantly different between vs&sfs, we suggest that small firms be educated regarding the benefits of work teams and encouraged to use them more extensively. with respect to training, a 1995 us labor department study indicated that employees in smaller companies (50-99 workers) received an average of 5.7 hours of training over a six month period. larger firms (over 500 workers) received 12 hours of training over the same time frame ("employer-provided worker training", 1998). the labor data indicates a difference in training levels between large and smaller firms. however, that difference does not continue into the very small versus small firm categories, except with respect to formal training. however, training did contribute to profitability much more significantly among the small firms. therefore, small firms have much to gain when they offer training to their employees. it is also noteworthy that very small firms'rofitability was higher when their employees received formal training. accordingly, very small firms should specifically examine their use of formal training whereas small firms should examine their overall training activities. this is particularly relevant given the notion that if employees are worth hiring and keeping, they are worth training ("why and how of training," 1998). overall, the fact that profitability of the very smalland small firms was not significantly differen indicates that each group of firms achieved similar results through the use of slightly different practices. the mix of quality practices that firms adopted kept them relatively equal to each other. however, the results of the profitability correlations do suggest that greater emphasis on the use of teams and training would improve the profitability of small firms (obviously dependent on the costs associated with that increased activity). conclusions and future research directions this study sought to identify patterns among very small and small firms in the use of selected hr-related quality practices. analysis of data showed that in general, the overall patterns were not significantly differen between the two categories of firms. however, having said that, some interesting observations can be made. team usage was similar, despite the size differences between the two groups of firms. further, formal training was used by small firms to a greater extent than their very small counterparts. finally, profitability (as measured by return on sales) did not significantly vary between those vs&sfs which utilized these quality practices at a higher level vis-8-vis the vs&sfs which utilized them at a lower level. 53 journal ofsmall business strategy volume 9, no. 2 fall/iv(urer 7998 while the levels of quality practices adopted by vs&sfs have helped them obtain comparable levels of profitability, it is likely that overall improvements in quality practices are possible since firms were tested against each other, and not against an absolute standard of quality. there may also be industry-wide differences in the extent to which these practices can be implemented. for example, in certain industries (communications, finance, etc.), substantially more training is provided than in the retail trades (mwhy and how of training," 1998). finally, profitability may not be the only measure of effectiveness of quality practices like empowerment, training, and teams. rather, service quality (zeithaml, parasuraman & berry, 1990; berry, 1995) may be a more pertinent criterion. thus, further research is needed to establish the degree to which quality practices determine firm success, and we offer the following suggestions: ~ develop an overall quality practices index using other common quality practices and compare differences across firm size, age, industry type, etc.. ~ compare quality differences among firms relative to levels in competitors. ~ link quality practices with other outcome measures such as sales growth and customer satisfaction. references aeppel, t., (1997, september 8). missing the boss. wall street journal, p. al. ahire, s. l., & golhar, d. y. (1996). quality management in large vs. small firms: an empirical investigation. journal of small business mana ement 34 (2), 1-13. albrecht, k., & zemke, r. (1985). service america: dain business in the new econom . homewood, il: dow jones-irwin. berry, l. l. (1995).on reat service: a framework for action new york, ny: the free press. cole, r. e. (1993).introduction to the special issue on total quality management. california mana ement review 32 (3),7-11. cook, r. g., & barry, d. (1995). shaping the external environment: a study of small firms'ttempts to influence public policy. business & socie 34 (3), 317-344. c 1 y,).p.(1994).4 41 gq lily ihq l«y. ~li di . 14(1) 6163. c i,).m.(1993).c i gl 4 h gh pl y p . ~(i d/,13 (3), 65-68. davenport, t. h. (1993). need radical innovation and continuous improvement? ~plannin review 21 (3), 6-12. e pl y .p id d 3 1 1 g.y f eer(h 9://~hk. /h /9497f .h (ijune 1998). 54 journal ofsmall business strategy volume 9, (yo. 2 fallllyinter 7998 greising, d. (1994, august 8). quality: how to make it pay. business week. 54-59. haksever, c. (1996). total quality management in the small business environment. business h i* 39(2).33-49. haksever, cg cook, r. g., & chaganti, r. (1997). applicability of the gaps model to service quality in small firms. journal of small business strate 8 (i), 49-66. hoevemeyer, v. a. (september 1993). how effective is your team? trainin & develo ment journal 47 (9), 67-71. 3 dg .g. g, g i(fig, w. e., hill, r. c., l 8 9 i, h., & l, t. ()985). t~kk d ractice of econometrics (2nd. ed.). new york: john wiley and sons. lewis, b. r. (1989).quality in the service sector: a review. international journal of business~mt (5). 4-)3. longenecker, j. g., moore, c. wm & petty, j. w. (1997). small business mana ement: an entre reneurial em basis (10th ed.). cincinnati, oh: south-western. manoochehri, g. (1988). jit for small manufacturers. journal of small business mana ement 26 (4), 22-30. megginson, w. l., byrd, m. j., scott, c. r., & megginson, l. c. (1994). small business mana ement'n entre reneur's uide to success burr ridge, il: irwin. m .k.()994).c i g tqmgg . ~)i 9 27(i),5)-54. newman, r. (1988). the buyer-supplier relationship under just-in-time. production and invento mana ement 29(3),45-49. oliver, n. (1988). employee commitment and total quality control. international journal of uali and reliabili mana ement 7(1),21-29. schlesinger, l. a., & heskett, j. l. (1991). breaking the cycle of failure in service. sloan mana ement review 32 (3), 17-28. scholtes, p. r. (1989). the team handbook. madison, wl: joiner associates. schonberger, r. j. (1992).is strategy strategic? impact of total quality management on strategy. academ of mana ement executive 6 (3), 80-87. sironopolis, n. (1997). small business mana ement: a uide to entre reneurshi 6th ~ed.. boston, ma: houghton mifflin. smith, k. g., mitchell, t. rh & summer, c. e. (1985).top management priorities in different stagesoforganizationallife-cycle.academ ofmana ementjoumal 28, 799-820. sonfield, m. (1984). can japanese management techniques be applied to american small businesses? journal of small business mana ement 22 (3), 18-23. 55 journal ofsmall business strategy volume 9, no. 2 fall/winter /998 stamatis, d. h. (1992). team buildin and develo ment southgate, ml: contemporary consultants. the why and how of training in your business, hewlett-packard small business tools. ht://intercontent.com/h /sbnc,cfm?articleid=90 (2 june 1998). zeithaml, v. a., parasuraman, a., gc berry, l. l. (1990).deliverin uali service; balancin customer erce tions and ex ectations. new york: the free press. ronald g. cook, ph.d. is an associate professor of small business/entrepreneurship ai the college of business administration, ride~ university. his current research focuses on small firm public policy activh'ies and quality/customer service issues. he serves as a small business institute director at rider and has extensive consulting experience with small firms. radha chaganti ph d is an associate professor of strategic management and entrepreneurship at the college of businessadministration, rider university. herresearchinterestsincludesmall business strategies, women entrepreneurs, and the resources and performance in new and small firms. cengir haksever, ph. d is a professor of management sciences at the college of business administration, rider university. his research interests include data envelopment analysis, manufacturing and service operations management, and quality and continuous improvement. 56 journal of small business strategy vol. 27 ● no. 1 ● 2017 51 leadership and governance decisions in family business performance: an application of fuzzy sets logic ana cristina gonzalez acgonzalez@icesi.edu.co universidad icesi, colombia yeny e. rodriguez yerodriguez@icesi.edu.co universidad icesi, colombia anibal sossa uasosa@icesi.edu.co universidad icesi, colombia abstract leadership, governance and performance in family businesses are broadly studied, but results are contradictory. there is a need for deeper understanding of these relationships since emotional and behavioral aspects are complex in these types businesses. questions on the how and the why of board functioning and ownership, and their influences on performance are scarce, given lack of data or a focus on quantitative data. to find a balance between qualitative and quantitative methods, we explore fuzzy sets logic as a methodology to expand knowledge in family businesses and present an application to build a representation of entrepreneurial performance results based on board of directors’ composition and ceo’s ownership, using case studies. results indicate that the methodology offers alternative explanations to governance, leadership and performance dimensions in these businesses. using fuzzy sets logic, we find that entrepreneurial performance is higher when outsiders’ membership in boards of directors and ceo ownership are both high as well. keywords: leadership, governance, family business, fuzzy set logic, business performance journal of small business strategy vol. 27 ● no. 1 ● 2017 52 introduction leadership and governance are topics broadly addressed and discussed in family businesses. leadership deals mainly with succession and business continuity, governance deals with agency or stewardship theories, as antecedents of business performance. strategic leadership focuses on what top executives do, how they do it and their effects on the organization (finkelstein, hambrick, & cannella, 2009, p. 4). the subject of strategic leadership research not only includes the executive leaders of organizations (i.e. the ceos), but also other groups that have governance responsibilities and important influence. these include governing bodies like boards of directors. it is important to study strategic leaders because “the few people at the top of an enterprise have a major influence – through decisions and indecisions, boldness and timidity – on its form and fate” (finkelstein, et al., 2009, p. 9). moreover, if the unit of analysis is family businesses, it is necessary to include the family as a group that would influence decisions, as well. leadership, governance and performance in family businesses have been broadly studied, but results have been contradictory. therefore, there is a need for deeper understanding of this relationship in family businesses since emotional, behavioral and organizational aspects are complex in these types of businesses. in addition, research on board process and functioning research is scarce, mainly due to lack of data or a focus on quantitative data. thus, a balance between qualitative and quantitative methodologies is needed (gersick and feliu, 2014). therefore, the purpose of this article is to explore fuzzy sets logic as an alternative methodology to examine the effects of board of directors and ownership on family business entrepreneurial performance. fuzzy-sets analysis is an analytic theory and method that extends on the concept of property space to bridge quantitative and qualitative approaches to measurement (ragin, 2008, p. 82); it allows different configurations of cases conceived as combinations of qualitative attributes (ragin, 2000, p. 181); and accounts for contingency and complex antecedent conditions (woodside, 2010). while some researchers view cases with extreme values as outliers in conventional statistical methods such as regression, fuzzy-set analysis views these extreme cases as important and highly representative of the phenomenon under investigation (sereikhuoch & woodside, 2012, p.1). given that fuzzy set theory is case-oriented research, it contributes to explore feelings, and behaviors involved in decision-making. therefore, it is a useful tool for family business literature, in particular, that related to leadership, governance, and their relationship to firm performance. the data we use in this article comes from the step project (2016) for family enterprising, a global research project about entrepreneurial families’ transgenerational entrepreneurship. we have access to an important amount of cases around the world that explores in detail, leadership and governance decisions and the outcomes in terms of entrepreneurial performance. specifically in this work, we ask the following research question: how can fuzzy sets theory contribute to the understanding of family businesses’ governance decisions and their relationship with entrepreneurial performance? although we only use four of the step cases for the purpose of this paper, we suggest for future research to increase our sample and expand knowledge in the corporate governance and leadership fields in family businesses. journal of small business strategy vol. 27 ● no. 1 ● 2017 53 in this article, we review the literature, followed by the methodology and the illustration of the application of fuzzy sets on governance decisions and its discussion. we offer conclusions and suggest different venues for future research to take advantage of this methodological approach’s potential in explaining family business managerial phenomena. literature review we begin the review with an introduction to fuzzy sets theory, followed by the literature on board of directorsperformance relationship in family businesses and ceo’s ownership level and its relationship with entrepreneurial performance. fuzzy sets theory the meaning of the “fuzzy” term is unclear, however, in fuzzy set theory this term presents a new usage that is not related to its original meaning (grint 1997; kosko, 1993). in this context, “fuzzy” is applied to a set, whose objects can have different degrees of membership in it (zadeh, 1995). it means that the object of study presents an ambiguous status with respect to the class in the set. according to zadeh (1995), this ambiguity in the classes plays an important role in human thinking, in topics such as pattern recognition, communication of information, and abstraction. the main advantage of fuzzy technique is that “researchers can analyze evidence in ways that directly reflect their theoretical arguments” (ragin, 2000; p. 4), given that, fuzzy sets are based on theoretical and substantive knowledge. unlike conventional quantitative approaches, whose focus is to explain variation in one or more dependent variables, not matter whether an independent variable is a subset of the outcome or a dependent variable. that is why ragin (2000) states that conventional approaches have little use for set-theoretic relations. moreover, fuzzy sets and conventional quantitative approaches present different starting points. in fuzzy sets the research is case-oriented, while in conventional approaches the research is variable-oriented. in a case study, the goal is to examine many case’s aspects in order to build a representation of each individual case from the interconnections among the aspects in each one of them. in other words, the variableoriented study analyzes a small number of variables across a very large number of cases in order to construct a generic representation, based on patterns observed across many cases, using correlation among variables (ragin, 2000, p.23). therefore, the inverse relationship between the number of cases and the number of variables is evident. in this way, it is important to note that the case-study approach is a good research strategy for studying “how” something takes place, but it does not provide a basis of generalization and of causation, as the variable-study can do. however, the indepth study of a single case becomes relevant because this may be chosen given it is unique, extreme, or special in some way. the next step up, is then the investigation of multiple instances of the same outcome, from a single case study, in the way proposed by mill (1843, 1967) with his “method of agreement.” fuzzy sets is a technique of analysis of casestudies useful as tool of discovery. this technique injects new sophistication into the interrelation between theory and data, because it combines qualitative and quantitative assessment in a single instrument (ragin, 2000). currently, fuzzy sets are used in many journal of small business strategy vol. 27 ● no. 1 ● 2017 54 different fields, such as social sciences (ragin, 2000), and business, finance and management (bojadziev & bojadziev, 2007). in particular, jackson (2005) has studied an application of fuzzy sets in corporate governance. this author finds that employees have rights to representation within corporate boards in some countries explained by both union coordination and consensual political systems. the analysis covers 22 oecd countries, using cross-sectional and longitudinal data, and employs qualitative comparative analysis, and the application of fuzzy sets following ragin (2000). fuzzy logic models present five steps in its analysis: i) definition of linguistic variables, ii) definition of decision rules, iii) evaluation of decision rules, iv) development of aggregation process, and v) development of defuzzification process. as follows, we explain each one of these steps. i) definition of linguistic process fuzzy logic models use linguistic variables classified as inputs and outputs. examples of linguistic variables in business contexts are risk investment, confidence, income and profitability, among others. these variables present different categories. the categories of linguistic variables are words. in the case of the linguistic variable risk investment, the categories can be low, medium low, medium, moderate, and high. each linguistic variable presents a definition of universal sets called operating domain (bojadziev & bojadziev, 2007). in addition, each category is defined by a membership function (𝜇𝐴(𝑥)). in this case, a membership function is a curve that defines how each point in the input space is mapped to a membership value (or degree of membership) between 0 and 1. it is assumed that the membership function (𝜇𝐴(𝑥)) is either piecewise continuous or discrete (bojadziev & bojadziev, 2007). following the notation of bojadziev & bojadziev (2007) the membership rule that characterizes the elements (members) of a set 𝐴 ⊂ 𝑈 can be established using the concept of membership function (𝜇𝐴(𝑥)) taking only two values, 1 and 0, indicating whether or not 𝑥 ∈ 𝑈 is a member of a: 𝜇𝐴(𝑥) = { 1 𝑓𝑜𝑟 𝑥 ∈ 𝐴 0 𝑓𝑜𝑟 𝑥 ∉ 𝐴 hence 𝜇𝐴(𝑥) ∈ 0,1. the simplest membership functions are formed using straight lines. of these, the most common are the triangular and the trapezoidal membership functions. triangular function is a collection of three points forming a triangle. the trapezoidal membership function has a flat top. figure 1 presents these membership functions. this membership helps to define the risk investment of a person. for example, one person with a risk investment of 45 is medium low in terms of risk to degree 0.25, and medium for the degree 0.75. the degrees are found by substituting 45 for x into the second equation of 𝜇𝑚𝑒𝑑𝑖𝑢𝑚 𝑙𝑜𝑤(𝑥) and the first equation of 𝜇𝑚𝑒𝑑𝑖𝑢𝑚(𝑥). ii) decision rules categories of input variables are related by means of decision rules, because the number of decision rules is calculated as the product of the number of categories of each input. the construction of these rules is where this approach demands researchers’ theoretical clarity. journal of small business strategy vol. 27 ● no. 1 ● 2017 55 figure 1. trapezoidal and triangular membership functions figure 2 presents an example of the linguistic variable risk investment on the universal set 𝑈 = 0,100 by triangular numbers that specify the terms low, medium low, medium, moderate, and high. figure 2. terms of the linguistic variable risk investment in this example, the terms’ membership functions are as follows: 𝜇𝑙𝑜𝑤(𝑥) = { 1 𝑓𝑜𝑟 0 ≤ 𝑥 ≤ 5 30−𝑥 25 𝑓𝑜𝑟 5 ≤ 𝑥 ≤ 30 , 𝜇𝑚𝑒𝑑𝑖𝑢𝑚 𝑙𝑜𝑤(𝑥) = { 𝑥−5 25 𝑓𝑜𝑟 5 ≤ 𝑥 ≤ 30 50−𝑥 20 𝑓𝑜𝑟 30 ≤ 𝑥 ≤ 50 𝜇𝑚𝑒𝑑𝑖𝑢𝑚(𝑥) = { 𝑥−30 20 𝑓𝑜𝑟 30 ≤ 𝑥 ≤ 50 70−𝑥 20 𝑓𝑜𝑟 50 ≤ 𝑥 ≤ 70 , 𝜇𝑚𝑜𝑑𝑒𝑟𝑎𝑡𝑒(𝑥) = { 𝑥−50 20 𝑓𝑜𝑟 50 ≤ 𝑥 ≤ 70 95−𝑥 25 𝑓𝑜𝑟 70 ≤ 𝑥 ≤ 95 𝜇ℎ𝑖𝑔ℎ(𝑥) = { 𝑥 − 70 25 𝑓𝑜𝑟 70 ≤ 𝑥 ≤ 95 1 𝑓𝑜𝑟 95 ≤ 𝑥 ≤ 100 iii) rules evaluation low medium low moderate high 1 0 5 30 50 70 95 100 medium journal of small business strategy vol. 27 ● no. 1 ● 2017 56 the rules are evaluated to define specific values for all inputs. these values are called readings, which can be obtained by measurement, observation or estimation. each reading must be matched against the appropriate membership function representing the categories of each linguistic variable, producing induced decision table. iv) aggregation process aggregation process refers to finding the membership function image 𝜇𝐴(⋅) of fuzzy readings. these fuzzy terms are reduced to crisp values or singletons that are the actual intersection points between membership functions. v) defuzzification process in the defuzzification process, often called fuzzy average, an estimation of the output is produced, which represents the membership function of an aggregated fuzzy term. there is no unique way to perform the operation of defuzzification. for the purpose of this paper, we apply two methods: centroid and bisector, using the matlab toolbox. centroid represents the center of area under the curve. bisector is the vertical line that will divide the region into two sub-regions of equal area. governance decisions and performance in family businesses we want to apply fuzzy sets logic to understand how the presence of outsiders in the board of family businesses and ceo’s level of ownership affect entrepreneurial performance. governance systems pay the role of keeping the firm’s goals and actions in line with the expectations of the firm’s critical stakeholders via providing advice to and networking (service role), monitoring and aligning incentives of firm leadership (control role) (hillman & daziel, 2003). given that firms are not similar in terms of who the critical stakeholders are, governance mechanisms, processes, motivations and results vary as much as firms. family firms as well are rather heterogeneous; therefore, corporate governance issues in family firms differ widely (goel, jussila & ikaheimonen, 2014). literature about family firm’s corporate governance has mainly two theoretical perspectives: agency theory and stewardship theory. agency perspective views family business leadership as selfish and driven by expropriating benefits for the family, i.e. family owners are self-serving at the expense of minority shareholders (morck, & yeung, 2003). stewardship perspective views family business leadership driven by altruism towards all stakeholders and family in particular in pursuit of filial duty to provide for the next generation. leaders under this perspective are characterized by selfactualization to the benefit of all stakeholders (miller & le breton-miller, 2006). in the family business field, it is important to understand that if we choose a particular perspective, it could change results or relationships, particularly the governance structure-performance one. contradictory results are present and contingencies are being studied related to the family structure, leadership and ownership, board of directors’ strategic participation, composition and processes. however, there is contradictory evidence on this point. there are several questions directly related to governance decisions in family businesses. the first question we consider is why a private family-owned business would elect to establish a board of directors, particularly with outsiders, if it is not mandated by law. one potential answer to this question would be that any business has some need for external advice and counsel to better deal with ongoing business challenges. providing advice and journal of small business strategy vol. 27 ● no. 1 ● 2017 57 counsel and even new ideas is a very important role of regular corporate boards (hillman, cannella, & paetzold, 2000), even if it means some discomfort when executives have to justify their decisions to outsiders (westphal, 1999). in addition, many business owners seek for resources (pfeffer & salancik, 1978, p. 145). therefore, they choose to invite outsiders to participate in their boards of directors and that is why we choose this as the first input in our illustration. having advice and counsel from outside directors can serve two purposes. first, it can improve the decisions made by executives, as mcdonald and westphal (2003) and others have shown. in this case, the advice and counsel extends to situations of significant family conflict or disagreement (lester & cannella, 2006). here, outside directors are likely to be linked to other family businesses and to have extensive family business experience to draw upon. second, when decisions are made, the presence and support of outside directors may placate remaining family members, especially those who are not involved in the business, as they are more confident of the value of the decisions and trust that their interests have been considered (lester & cannella, 2006). family firm boards of directors have direct responsibilities in strategic choices like innovation, venturing or renewal and in monitoring and control, both of which could be reflected in performance (daily, dalton, & cannella, 2003). these responsibilities will be easier to fulfill for outsiders than for insiders, especially if the insiders are not family members who are hesitant to challenge their boss or are concerned about keeping their jobs. as well, outsiders are more likely to ask questions not already considered by company managers or the ceo. these questions then could lead to better strategic choices for the company (blumentritt, 2006). hence, boards of directors that include outside members contribute expertise and objectivity, alternative perspectives, farsighted investment, on-the job learning and core skill development (miller & le breton-miller, 2006) that may eventually explains performance, in particular, entrepreneurial performance, the output in our application. the definition of entrepreneurial performance that we use is the following: “the sum of an organization's innovation, renewal, and venturing efforts where innovation involves creating and introducing products, production processes and organizational systems[…] renewal means revitalizing the company’s operations by changing the scope of its business, its competitive approaches, and acquiring new capabilities and then creatively leveraging them to add value to shareholders[…] venturing means the [organization] will enter new businesses by expanding operations in existing or new markets”. (zahra, 1995): 227 in nordqvist, marzano, brenes, jimenez and fonseca, 2011, p. 14). specifically, we expect that once a family opens its doors to outsiders in decisionmaking positions, this opening will lead to improved entrepreneurial performance given that the effects that are usually expected from boards with different views, such us innovativeness, and creativity will arise and their resource dependence role will be more successful (miller & le breton-miller, 2006). at the end, the presence of outsiders in family businesses boards is expected to increase their entrepreneurial performance, but that depends on the role of the ceo, which is affected by his/her ownership level. accordingly, in our analysis with fuzzy sets, we expect outsiders’ presence on the board to have a medium to journal of small business strategy vol. 27 ● no. 1 ● 2017 58 high impact on family firms’ entrepreneurial performance, which tend to be higher as ceo’s level of ownership increases. ceo’s ownership level and family business entrepreneurial performance our argument regarding the role of ownership dispersion as an input that affects entrepreneurial performance – the output –in our application of fuzzy sets theory has to do with the generation in charge of the business. as the generation in charge, the relationship between the composition of the board of directors and the role of the ceo and firm entrepreneurial performance changes, as well. we predict that when there is less ownership concentration (second and subsequent generations), the behavior of the family business is more like a non-family business and as this happens, entrepreneurial performance varies depending on the composition of both the board of directors and the ceo’s ownership. studies focused on public companies have found that when founders are in charge as ceos –which is usually in first generation businesses-or board chairs, firm financial performance is higher than when a non-family member is ceo or board chairusually in subsequent generations (villalonga & amit, 2006). moreover, these same authors found that when a second generation family member is the ceo, performance is the lowest. in this illustration, we argue that ceo’s level of ownership can affect entrepreneurial performance for two reasons. first, ceos with high ownership stakes have little fear of losing their jobs by introducing new ideas or challenging the owners (virtually always a relative), and this provides at least the potential for them to contribute to strategy, innovation and change more effectively than would be the case in a non-family ceo (miller & le breton-miller, 2006). second, we use the socioemotional wealth concept. gómezmejía, haynes, núñez-nickel, jacobson, and moyano-fuentes (2007, p. 106) define it as “non-financial aspects of the firm that meet the family’s affective needs, such as identity, the ability to exercise family influence, and the perpetuation of the family dynasty”. these authors use the socioemotional wealth concept to explain how family businesses are less riskaverse and more willing to accept performance hazards when socioemotional wealth loss is at stake. because family members have significant socioemotional wealth invested in the company, they are highly committed to the companies and to the continuity of the companies (gomez-mejia, et al., 2007). family business owners may choose to take significant risks and accept short run lower performance in order to retain control over their businesses. this motivates them to provide a long term vision for the firm, which can contribute positively to entrepreneurial performance. moreover, anderson and reeb (2003) found that family businesses are better performers and that when family members serve as ceo, financial performance is better than with non-family ceos, suggesting that this is an effective organizational form. we think fuzzy sets theory could help as expand this argument to entrepreneurial performance as well. however, miller, le breton-miller, lester, and cannella (2007) found that family businesses do not outperform non-family businesses when lone founder firms are taken out of the family business group. miller et al. (2007) concluded that some founders are not interested in involving other family members, and therefore are not particularly interested in passing the business along to heirs. goel, jussila, and ikaheimonen (2014) point out the need to understand family businesses governance from an evolutionary focus, meaning that family business governance and the business itself evolve across generations journal of small business strategy vol. 27 ● no. 1 ● 2017 59 and one way to understand the changes and its results is to understand the reasons behind them. the point here is that it is important to differentiate the type of family business when performance is the output and the different governance configurations. in our case, we are interested in applying fuzzy sets to study the interrelation of outsiders in the board of directors and ceo ownership on family business (fb) in the firm entrepreneurial performance. as mentioned earlier, the application will be done using four case studies from the step project for family enterprising from colombia, which are research cases about transgenerational entrepreneurship in family businesses. lastly, gersick and feliu (2014) state that an integration of theories and understanding the antecedents of contingencies and outcomes such as ownership dispersion and continuity, stakeholders benefits and satisfaction, leadership development and entrepreneurship are necessary to interpret governance systems successes and failures. therefore, structure and process of board, as well as the relationship between family control and organization performance in private family businesses. in table 1, we summarize our expected results from the leadership and governance relationship with entrepreneurial performance, based on the underlying theoretical discussion presented above, after applying fuzzy sets logic. as is explained later, these expected outputs are the decision rules that we use on our model. we apply fuzzy sets theory as follows. table 1 expected output for entrepreneurial performance from leadership and governance decisions output : entrepreneurial performance input 1: ceo’s ownership (leadership) low medium low medium high input 2: presence of outsiders in board (governance) low low low medium low medium medium low low medium low medium high medium medium low medium low medium high high medium medium high high application of fuzzy sets in leadership and governance decisions in family business performance in this section, we use fuzzy sets theory to evaluate qualitative criteria in leadership and governance decisions in family business entrepreneurial performance. we want to explore if the inclusion of outsiders in boards of directors and ceo’s ownership in the firm explain firm entrepreneurial performance. we use four step cases in order to apply our fuzzy set approach. the companies in the cases belong to four different industries: food, financial services, cargo and logistics, and newspaper. all these companies are in second generation. the food and financial services’ companies present a high participation of outsiders in the board, while the companies of cargo and logistics and newspaper do not have board of directors. regarding to ceo’s ownership, the newspaper company ceo possess 5%, while in the others companies the journal of small business strategy vol. 27 ● no. 1 ● 2017 60 ceos have values of ownership lower than 33%. finally, concerning to entrepreneurial activities, the food company have developed activities such as new ventures, consulting and advisory initiatives for family members, and changes in family protocol and governance structures. in addition, the financial services company has been dedicated to activities related to technological change, new products and services, strategic alliances, and family protocol and governance structures. the activities that represent the entrepreneurial performance of cargo and logistics company are focused on brand structure and entrepreneurial first and second generations, while the newspaper company developed activities related to: diversification of products, technological change, new ventures, and family protocol and governance structures. the objective of our model is to estimate an entrepreneurial performance level as output, for any given values of inputs variables (presence of outsiders in boards and ceo’s ownership). for this model, we follow five steps: i) definition of linguistic variables, ii) definition of decision rules, iii) rule evaluation, iv) development of aggregation process, and v) development of defuzzification process. i) linguistic variables definition in this leadership and governance model for family firms we have defined two inputs and one output. the inputs are inclusion of outsiders in boards of directors and ceo’s ownership level. the output variable is entrepreneurial performance level. each one of the linguistic variables included has four categories. following bojadziev and bojadziev (2007) we denote these linguistic variables and its categories as: presence of outsiders in board ≜ a = {a1, a2,a3,a4} = {l,ml,m,h} ceo′s ownership ≜ b = {b1, b2,b3,b4} = {l,ml,m,h} entreprenerial performance ≜ c = {c1, c2,c3,c4} = {l,ml,m,h} where l ≜ low, 𝑀l ≜ medium low, m ≜ medium, and h ≜ high. the ai, bj, and ck are fuzzy sets defined as: ai = {(x,μai(x))|x ∈ ai∁ u1} , i = 1,2,3,4. bj = {(y,μbj(y))|y ∈ bj∁ u2} , j = 1,2,3,4. ck = {(z,μck(z))|z ∈ ck∁ u3} ,k = 1,2,3,4, where u1 = {x|0 ≤ x ≤ 100}, u2 = {y|0 ≤ y ≤ 100} and u3 = {z|0 ≤ z ≤ 100}, and the real numbers x, y and z represent values on a scale from 0 to 100 that measure the presence of outsiders in board, the ceos ownership and the entrepreneurial performance. the terms of all linguistic variables presence of outsiders, ceos ownership and entrepreneurial performance are described by a triangular membership function and have the same membership functions. their analytical expressions are: journal of small business strategy vol. 27 ● no. 1 ● 2017 61 𝜇𝐿(𝜐) = { 1 𝑓𝑜𝑟 0 ≤ 𝜐 ≤ 8 30−𝜐 22 𝑓𝑜𝑟 8 ≤ 𝜐 ≤ 30 , 𝜇𝑀𝐿(𝜐) = { 𝑣−8 22 𝑓𝑜𝑟 8 ≤ 𝜐 ≤ 30 50−𝜐 20 𝑓𝑜𝑟 30 ≤ 𝜐 ≤ 50 𝜇𝑀(𝜐) = { 𝑣−30 20 𝑓𝑜𝑟 30 ≤ 𝜐 ≤ 50 70−𝜐 20 𝑓𝑜𝑟 50 ≤ 𝜐 ≤ 70 , 𝜇𝐻(𝜐) = { 𝑣−50 20 𝑓𝑜𝑟 50 ≤ 𝜐 ≤ 70 1 𝑓𝑜𝑟 70 ≤ 𝜐 ≤ 100 . these expressions are presented in figure 3. figure 3. terms of the inputs and output ii) decision rules as presented in table 1 above, in our study the total number of rules is 16 derived of the product of the number of categories of inputs analyzed (ceo’s ownership and presence of outsiders in board). these rules have a conclusion in terms of the output (entrepreneurial performance), which was derived based on underlying theoretical constructs. iii) rules evaluation in each one of the four step cases, the rules are evaluated in order to define specific values for all inputs. for that, we estimate the readings for each case by observation, doing the exhaustive study of each case as follows. the food industry readings are 60 and 66, for ceo ownership and presence of outsiders in the board, respectively. in the case of financial services, the readings are 60 and 40, respectively. the cargo and logistics case presents 10 and 50 as readings, and lastly, the newspaper case presents 10 and 10. table 2 presents the induced decision table, which contains the readings for each case substituted in the corresponding membership functions for each case. discussion in general, our results show that the higher the ceo’s ownership stakes and the higher presence of outsiders in the board of directors, the higher output, i.e. family business entrepreneurial performance. these results concur with miller and le breton-miller (2006) and blumentritt (2006), but for entrepreneurial performance. journal of small business strategy vol. 27 ● no. 1 ● 2017 62 table 2 induced decision table by sector case food industry financial services input2 input 1 µh(66)= 4/5 µm(66)=1/5 µm(40)=1/2 µml(40)= 1/2 µh(60)=1/2 µh(z) µh(z) µh(z) µh(z) µm(60)=1/2 µh(z) µm(z) µm(z) µm(z) case cargo and logistics newspaper input2 input 1 µh(50)=0 µm(50)=1 µm(10)=10/11 µml(10)=1/11 µl(10)=10/11 µm(z) µml(z) µl(z) µl(z) µml(10)=1/11 µm(z) µml(z) µl(z) µml(z) for each case only four cells contain nonzero terms. the result of this process will be used in next step. iv) aggregation process the following analytic expression presents the membership function image μa(⋅) of fuzzy readings for each case (see table 3). table 3 membership function image 𝜇𝐴(⋅) of fuzzy readings food industry 𝜇𝑎𝑔𝑔(𝜐) = { 𝑣 − 30 20 𝑓𝑜𝑟 30 ≤ 𝜐 ≤ 34 1 5 𝑓𝑜𝑟 34 ≤ 𝜐 ≤ 64 𝑣 − 50 20 𝑓𝑜𝑟 64 ≤ 𝜐 ≤ 71 1 2 𝑓𝑜𝑟 71 ≤ 𝜐 ≤ 100 financial services 𝜇𝑎𝑔𝑔(𝜐) = { 𝑣 − 30 20 𝑓𝑜𝑟 30 ≤ 𝜐 ≤ 40 1 2 𝑓𝑜𝑟 40 ≤ 𝜐 ≤ 100 cargo and logistics 𝜇𝑎𝑔𝑔(𝜐) = { 𝑣 − 8 22 𝑓𝑜𝑟 8 ≤ 𝜐 ≤ 28 10 11 𝑓𝑜𝑟 28 ≤ 𝜐 ≤ 31,8 50 − 𝑣 20 𝑓𝑜𝑟 31,8 ≤ 𝜐 ≤ 50 newspaper 𝜇𝑎𝑔𝑔(𝜐) = { 10 11 𝑓𝑜𝑟 0 ≤ 𝜐 ≤ 8 30 − 𝑣 22 𝑓𝑜𝑟 8 ≤ 𝜐 ≤ 28 1 11 𝑓𝑜𝑟 28 ≤ 𝜐 ≤ 48,2 50 − 𝑣 20 𝑓𝑜𝑟 48,2 ≤ 𝜐 ≤ 50 the graphic representation of these functions for each case is presented in figure 4. it is important to note in the graphs below that the area under the curve of the darker lines is used to estimate the fuzzy average, which represents the output, in our case entrepreneurial performance. journal of small business strategy vol. 27 ● no. 1 ● 2017 63 food industry financial services cargo and logistics newspaper figure 4. functions graphic representation by case v) defuzzification process we apply centroid and bisector methods to estimate the output for each case. in table 4 we present these estimations’ results using the two methods mentioned. it is observed that the estimations of entrepreneurial performance are very close for each case, regardless of the method used. table 4 entrepreneurial performance for each case case centroid method bisector method food industry 72.3 74 financial services 67.7 68 cargo and logistics 29.3 29 newspaper 13.1 11 30 1 8 50 v70 1/2 1/5 µ mll m h 30 1 8 50 v70 1/2 µ mll m h 30 1 8 50 v70 10/11 1/5 µ mll m h 30 1 8 50 v70 1/11 µ mll m h 10/11 journal of small business strategy vol. 27 ● no. 1 ● 2017 64 in addition, we find that socioemotional wealth arguments (gómez-mejía, et al., 2007) serve to explain that ceo higher level of ownership can contribute to entrepreneurial performance, given that he/she will have a long run perspective on performance, in spite of having short-term expectations. specifically, the food industry case present the highest level of entrepreneurial performance, which coincides with the predictions, presented in table 1, i.e. they have high level outsiders in the board and, the ceo has a high level of ownership. in contrast, the newspaper case presents a low level of entrepreneurial performance, a low participation of outsiders in the board and a low ceo’s ownership level. in comparison, the food industry case entrepreneurial performance is 6.7 times higher than the newspaper case. as for the other two family businesses (cargo and logistics and financial services), they present a medium level of entrepreneurial performance. the cargo and logistics case has a low level of ceo’s ownership and a medium level of outsiders’ participation in the board. in the financial services case, has a high level of ceo’s ownership and a medium level of outsiders’ participation in the board. the main difference between this methodology and conventional methods is that fuzzy sets theory allows an estimation of a value for an output, which is a qualitative variable, difficult to measure. fuzzy sets, permits researchers to explore deeper and directly on constructs otherwise measured by proxies. given that we have found satisfactory and rational results with this approach, we expect to generalize by adding more cases. as a result, we offer an explanation of predict a considerable impact on how family business as a research field could apply this methodology to help family businesses generate value across generations. conclusions for future venues, we think that the potential of this methodology is endless in family business research and practices. case studies offer in-depth understanding on how and why questions behind other potential inputs in family businesses such as, generations in charge, historical perspectives, culture, socioemotional wealth, that could change the level of the output chosen. moreover, different key performance indicators of these types of businesses like business continuity and/or longevity, social and financial performance, succession success, among others, can be explained using fuzzy sets theory. as ragin (2000) states, we hope this work opens more possibilities of research by offering a new tool in the family business field. references anderson, r., & reeb, d. 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(1995). corporate entrepreneurship and financial performance: the case of management leveraged buyouts. journal of business venturing, 10(3), 225–247. http://www.babson.edu/academics/centers/blank-center/global-research/step/pages/home.aspx http://www.babson.edu/academics/centers/blank-center/global-research/step/pages/home.aspx http://www.babson.edu/academics/centers/blank-center/global-research/step/pages/home.aspx the eximbank state/city pilot lnitiative for small business exporte rs: goals, achievements and the path ahead for export-finance support at the local level alfred c. holden fordham university abstract the export-import ban·k of the united states (eximbank) operated a pilot program with sei'en state and city agencies d uring 1988. that institution sought to determine if a partner ship with such local agencies could assist small firms to acquire export-finance support need ed to secure international marketing transactions. this pa per evaluates achievements and re quirements as the pilot effort is converted into a permanent cooperative program in 1989. introduction on june 30, 1987, the export-import bank of the united states (eximbank) was sufficient ly concerned about its marketing and delivery systems for small business exporters to pro pose a pilot marketing program to its ad visory board (8). the stated intention was to test a means·of systematically utilizing state and city agencies as marketing channels for. exim bank programs. this test marketing effort, undertaken during 1988, complemented an existing network of bank, trade association, and federal and state agencies also being used both to distribute eximbank information and to educate the business community about official export-finance su pport. i n addition, those agencies in the pilot program that were already operating export finance windows were extended special flexibility. on march 21, 1989, a final report of the pilot project initiative (6) was submitted to eximbank by the local coordinators of the three states and four cities that participated. the needs of such agencies and their small exporters were as varied as the program being test marketed. simultaneously, eximbank's effectiveness i n delivering services was critically evaluated. overall, there is now additional incentive for small businesses arou nd the country to become familiar with appropriate state/local export agencies. with the formal conversion 25 1 of the 1988 pilot project into a new cooperation program (5) on february 'z7, 1989, eximbank has guaranteed that agencies around the nation exhibiting a "serious" dedication to promoting exports can count u pon effective assistance. this pa per evaluates the 1988 eximbank pilot program in terms of its goals and achievements, and conclusions are drawn about the path ahead for the export-finance needs of small business exporters. eximbank in the literature eximbank (headquartered in washington) was established in 1934 as the official export finance institution to support u. 5. exporters. its activity in the 1983-89 era when eximbank has been required to "set aside" a proportion of its lending authority for small business con sists of three complementary export-finance su pport services: provision of loans; issuance of financial guarantees; and extension of export-credit insurance against political and commer cial risks. in 54 years of operation, eximbank claims to have supported more than $193 billion of exports under its loan, guarantee, and insurance programs. the marketing literature has only yielded one large-scale, systematic assessment of the effectiveness of export-import bank programs (15). what is u nusual about this situation is that washington has documented (29;33) that trade finance affects exporter pricing and so is a vital element in the international marketing mix of successf ul firms. as such, an overview of eximbank programs including those of its agent, foreign credit insurance association ( fcia) is provided in the pricing cha pter in virtually every standard international ma rketing text. fortunately, the u. 5. government does provide an ongoing self-review of its chief export finance institution. since 1977, in compliance with section 2b1a of the export-import"bank act of 1945, as amended (27), eximbank has been required to prepare and issue a regular (9) report to congress (hereaf ter called "competitiveness report"). these competitiveness reports are structured to enable congress to evaluate eximbank performance of the basic objective assigned under regular re-authorizations: assisting to meet the policy of the nation to foster expansion of exports of manufactured goods, agricult ural products, and other goods and services. for undertaking this task, eximbank is directed to provide financial guarantees, insurance against political and com mercial risks, and extensions of credit at rates and on terms and conditions which are f ully competitive with those rates, terms, and conditions available to our major international competitors within the paris-based organization of economic cooperation and development (oecd). moreover, eximbank is directed to seek methods of minimizing international official competition in export financing and to reach international agreements to reduce official subsidies. to facilitate congressional determination of whether eximbank is meeting such comprehen sive directives, the annual competitiveness report incorporates a survey of u: 5. exporters and fina ncial instit utions. this records "customer" reaction about how well eximbank is meeting/matching financial support offered by other oecd competitors. in addition to these congressionally-mandated annual competitiveness reports, eximbank prepares a formal annual report to survey its activity and issues a variety of marketing documents to describe its programs. fcia also published a formal annual report during 1976-81, and it contin ues to issue a variety of marketing documents. 25 2 four notable recent official surveys (10;30;31;32) also describe and evaluate this nation's overall export-finance effort. the 1989 report on tied aid is proving to be one of the most shock ing items to reach congress in years, as it reveals how u. s. exporters in five key sectors are losing foreign sales of at least $400-800 million annually because of eximbank's inability to match agency offerings of other oecd nations. the two reviews of 1987 were the first to evaluate the internal workings of fcia within its post-1983 role as solely agent for eximbank. each provides considerably more historical data about fcia'.s fcia/eximbank annual reports, or earlier studies of that institution (16;19;20) the 1985 brazilian study investigates a major u.s. export market as a case study for spotlighting the role of export finance within america's relative lack of international competitiveness. several non-official sources have provided timely reviews of export-finance inadequacy over a time horizon when exports became increasingly vital. for example, as early as 1971, a presidential commission (26) summarized the crux of the issue: u. s. exporters would be disadvantaged in the 1970s if eximbank was not made f ully competitive with its counterparts. that study concluded that eximbank was not fully competitive and recommended immediate improvements. surveys of eximbank effectiveness have also been undertaken by several trade associa tions. a 1977 study by the national association of manufacturers (24) is of landmark significance: it documented export sales lost because of eximbank shortcomings. equally discouraging was the study of the machinery and allied products institute· (22) regarding ex ports lost and business not bid upon because of inadequate export financing. during 1981, a sample of just 39 member companies reported over $4 billion of such reduced exports. the oecd is the pre-eminent international organization collecting information for assessing export-finance comparability and adequacy. the oecd periodically updates its guide (25) to the official services offered by each member nation, and it compiles the aggregate totals of export-finance support provided by national agencies. in addition, oecd collects and releases export-finance data about export agency exposures in the less developed countries in con junction with the bank for international settlements (1). the international monetary fund (imf) has also completed three surveys of official export finance policies by major creditor nations (4). while the objective was to document readjust ment and restructuring obstacles and opportunities confronting heavily-indebted ldcs, a useful picture emerges. it highlights fundamental differences among national goals of support programs. it is significant to note a variety of analytical studies by private institutions and individuals, who question the basic rationale of eximbank·. this criticism is pointed primarily toward pro vision of interest rate subsidies on loans or guarantees to the export sector by any government agency, presumably when export-finance services could be provided by the private sector. among those of the rand corporation, which has turned out a series of elaborations in the 1980s to show that export-credit subsidies are unsatisfactory for both welfare and. strategic reasons, one claims (13) that eximbank's cost to u.s. taxpayers during 1934-86 is between $3.2 and $4 billion. an academic attack of equal weight was a critique of eximbank lending (3) introduced by senator jesse helms. 27 3 finally, during the mid-1980s, various academic studies have reaffirmed the importance of export finance within the overall international marketing mix of firms. one of the most comprehensive was undertaken for the new york/ new jersey port authority in 1984, when 600 u.s. firms exporting to western europe were systematically surveyed (18), and a signifi cant 20% of the small business respondents pinpointed export-finance (including eximbank) inadequacy as a "very adverse" obstacle to profitable exporting. this reaffirms earlier findings (2) that small businesses find insufficient financing to be the most serious obstacle to export ing. more recent studies (14;21) confirm that the export-finance issue remains a major obstacle. a recent statement by a federal reserve governor (12) succinctly sums up the problem: 85% of small american manufacturers finance their own foreign trade. eximbank and small business while there are generally no restrictions on a small exporter's use of any of the 12 ma jor policies offered, eximbank spells out (7) liberalized provisions for such businesses within the direct loan program, the intermediary loan program, the working capital g uarantee pro gram, the fcia short-term single-buyer insurance policy, the fcia new-to-export insurance policy, and the fcia umbrella insurance policy. to reach the small exporter, eximbank has relied upon several traditional marketing infor mation channels: the f ive offices of fcia, regional banks, various trade and industry associa tions, and several federal and state export-promotion agencies. specif ic techniques for export finance education include: 1 4-day seminar at eximbank (and another at fcia); a selected calling program by eximbank / fcia officers; a variety of market ing literature; and coordina tion with the network of national association of state development agencies. following congressional pressure during the 1986 re-authorization hearings, eximbank saw advantages in focusing more on small business, and this was incorporated into the in stitution's wide-ranging 1987 changes in programs (28). washington was aware from com petitiveness reports that all categories of program users had registered disa ppointment about lack of competitiveness and responsiveness. so while the pilot proposal for states/cities of june 1987 was not the first test marketing of an eximbank initiative at the local level that ha ppened in mid-1984 for the fcia umbrella policy in four midwestern states it is an impor tant example of response to customer needs. pilot project goals and participants as has been documented and summarized (23), virtually all states had one or more elements of an export-promotion program in place by 1987. for several governors reasoned in the mid-1980s that washington alone was not going to be a ble to reverse the decline in u.s. competitiveness and that effective cooperation could be decentralized to the state level (11). but by 1987, only half of the states possessed some form of export-finance support, and eximbank discovered that just ten had both active export-promotion and funded export-finance programs in place. eximbank judged in its june 1987 "presentatin to the advisory board" that the appropriate means to foster export expansion would be ed ucation and/or export-finance support. that is, eximbank wanted its pilot effort to complement services offered at state/local levels. specific objectives were to assure that: a) state/city agencies authorized to provide only promotion would continue to enjoy accessibility to loan and guarantee support through either direct applica tion to eximbank or a local bank; b) state/city agencies authorized to promote and to issue 27 4 guarantees would have an opportu nity to ada pt an fcia/eximbank agreement similar to um brella policies held by lllinois (17) and other qualified export-support institutions; and c) state/ci ty agencies possessing both guarantee and lending authority would be candidates for this umbrella scheme along with possibly gaini ng some "delegated a uthority;' i.e., to make credit decisions and commitments. ·· california and massachusetts a nd the cities of columbus and tucson were initially pro posed for testing the ". . .interfaci ng of eximbank programs and services with the needs of states and municipalities." maryland and los angeles were added to the list in september 1987, and louisville managed to be included as an "associate" participant during 1988. thus, the pilot effort comprised a reasonable geographical spread and entities at various levels of export-promotion expertise and export-finance authority. for each of the seven, eximbank spelled out the goal: to assist current and potential small exporters in acquiring the financing necessary to culminate export transactions. the pilot effort: seven tailored prog rams given the different needs regarding export-promotion and/or export-finance support, each agency would design a test program tailored to local requirements and capacity. a brief review of objectives and achievements of each agency is instructive, as taken from the "final report" of eximbank and personal interviews by the author with agency coordinators and eximbank officers during 1989. 1. columbus, ohio columbus sought to resolve perceived exporter problems within a 7-county central ohio region, the responsible agency, the columbus export network (cen), was an umbrella grou p ing of public and private sector organizations formed under the a uspices of mayor rinehart. the -approach was heavily oriented to promoting exporter education and related services, whether provided by eximbank, cen, or other institutions. following a targeted introductory letter mailing in january 1988 and distribution of cen brochures, the agency began promoting export-financing opportunities and related services, primarily through 18 conferences and seminars held around the state. eximbank officers par ticipated in several, including a 3-day eximbank "training seminar for ce.rtification" and three popular presentations devoted to obtain working capital. local newspapers publicized these events. small business contacts so developed were encouraged to approach the four cen teams: transport, accounting, legal, and finance. most inquiries concerned inadequacy of export finance: the need to obtain information about financing options or to see if "bridge" finance was available via back-to-back letters of credit. overall, cen was geared to export promotion, with no authority to process eximbank loan or guarantee applications, much less to issue guarantees or loans to exporters. the agen cy's mandate was to educate small exporters and direct them to appropriate banks o'r others that could provide export finance or related support. while several export transactions were consummated during the pilot program, cen believes that a loan packaging service, perhaps by columbus countrywide development corporation, could be a lasting gain of the pilot effort. 29 30 2. state of maryland maryland sought to develop a system, using eximbank/fcia resources, to resolve a primary roadblock to small exporters: lack of working capital. the goal of the pilot effort was to create an organization that would screen borrowers, assure that applications were adequately documented, prepare a written credit proposal, and then forward this package for expeditious consideration at eximbank. ideally, this would augment an existing state loan program. several tasks were undertaken to meet this tailored effort, including coordination of six export-education seminars around the state. simultaneously, following a consolidation of diverse international business programs, an integrated maryland international division (mid) emerged, and its director of export finance completed a 117-page user's manual (maryland exporter's guide) of all programs available to the export community. the state's i ndustrial development financing authority (midfa) continued to run the loan progra m for state exporters (where u p to $1 million can be guaranteed per borrower). meanwhile, midfa actively promoted export-credit insurance utilization during the pilot pro gram as "admi nistrator" of fcia'.s umbrella policy (one of several such state/regional entities so designated); six transactions worth $1.3 million were so approved during the pilot perio.d. overall, one logical culmination of maryland's pilot project occurred on january 6, 1989, when midfa was assured that, henceforth, applications that it had screened, documented, and found creditworthy under the working ca pital guarantee program for example, eight during 1988 would be given special consideration at eximbank. 3. state of massachusetts eximbank and the massachusetts industrial finance agency (mifa) created an "export partnership" in january 1988. the pilot project was designed to test how successf ully mifa (in collaboration with the state's office of international trade and investment) could both market eximbank's working capital g uarantee program and package applications for eximbank a pproval. following training at eximbank, the agency coordinator understood the application stan dards demanded of an exporter. and to obtain a pool of small business exporters, she utilized a variety of tech niques: preparation of brochures, use of direct mailings, placement of adver tisements in business publications, and presentations around t he state. working on a one-to-one basis, mifa then assisted each ap plicant to prepare necessary financial, product, and management information. however, mifa had no further participa tion in the transaction af ter it was submitted to eximbank. since mifa is an independent, self-sustaining public agency, it charged a nominal fee on the loan after a final commitment was signed. overall, mifa'.s success during the pilot effort was admired by other test market agencies. fou r worki ng ca pital gua rantees of $1.4 million were approved, but the extent of mifa'.s in tervention was remarkable. each of the four applications was processed by eximba nk in less than 12 working days! for the small exporter seeking foreign business, such a swif t turnaround is of considerable advantage. 29 30 4. louisville, kentucky the louisville/jefferson county office for economic development, the agency administer ing the eximbank pilot program, viewed its objectives as a) developing county expertise in packaging loan applications for working capital guarantees and b) encouraging local banks to extend export finance to small firms. in advancing toward those objectives, the louisville coordinator spent several weeks in washington undergoing training in eximbank programs and procedures. the county then · hosted several seminars, with eximbank participation, directed at louisville's manufacturing and serv_ice sectors. at the same time, marketing calls were made upon loan off icers at local financial institutions. some business was generated during the pilot effort. of 75 companies called upon and given followup information, two transactions seemed to be moving through the process of getting working capital approval. but louisville eventually reported that those applications were withdrawn, although several are "in the pipeline:' overall, louisville authorities were taken aback by the degree of export education and export-finance support needed to assure an exporter's success. in large measure, this was because local financial institutions had not been active users of eximbank's programs and local · manufacturers had been unaware of eximbank's existence. louisville concluded that the tasks are formidable when public au thorities confront such a lack of export-orientation; in turn, results can be measured only over the longer term. 5. tucson, arizona tucson entered the pilot program by viewing eximbank's resources as a logical comple ment to the lending activity of the local coordinator, tucson's local development corpora tion (tldc). tldc positioned itself as a lending source for small f irms, and it had secured an initial appropriation of $150,000 from the city for its new "eximbank guaranteed working cpital loan fund:' with a delegation of officials from eximbank, the u. s. department of commerce, and state and local agencies in attendance, tldc formally announced the pilot effort on world trade day. tldc also assured that program details would be disseminated to 125 local com mercial lenders and to 500 other local firms while including discussion of the initiative in all community presentations. early in the pilot progra m, tldc engaged in a screening effort to confirm that small business exporters would be eligible for eximbank support. when it became a pparent that many lacked reasonable assurance of repayment capability required by eximbank, tldc acknowledged t hat addi tiona l effort must be devoted to marketing and export-ed ucation. overall, two appli ations under the working capital guarantee program were completed in tucson and submitted to eximbank during the pilot period. but tldc's enthusiasm about its washington partner cooled in light of results. instead of the twoto three-week turnaround and approval that mifa enjoyed, tldc reported that its applications had not been acted upon af ter one to two months. 6. los angeles, california operating perha ps the largest export-support effort of any u.s. municipality, los angeles sought to utilize the pilot project to integrate eximbank and fcia programs into a major trade development effort, "l.a. xport." the city thereby hoped to fill the export-finance gap con fronted by small firms and to centralize and maximize resources within a one-stop center. 31 31 first priority was given to establishing technical ca pacity and to funding facilities for direct loans. tasks during the pilot effort included: negotiation of a $15 million line of credit for short term credits offered through los angeles ldc (laldc), a private, non-profit corporation under contract to los angeles; designation of laldc as "eligible lender" under the in termediary loan program; pursuit of additional resources for l.a . xport, primarily through the california export finance program; sponsorship of export-education seminars, including meeting a trade delegation from prc; and engagement in a direct mail and joint calling pro gram to 1500 targeted companies. this flurry generated 35 loan applications requesting $31.2 million of financial support. twelve transactions for nearly $9 million were approved by laldc: ten for direct funding from laldc a nd two for eximbank guarantee. meanwhile, la ldc's designation as eligible lender on april 28, 1988, pushed policy parameters for city/state entities into new ground, albeit the proposed "master" loan and guarantee agreements with eximbank were not finalized by the end of the pilot program period. overall, l.a. xport is now operated by the city economic development office and staffed by fou r f ull-t ime export professionals. the pilot program, boosted by eximbank stationing in los a ngeles its first-ever liaison officer outside of washington, was skillfully used by the city to inove closer to a full-service export-assistance effort with direct funding capability. 7. state of california as a state that was operating a working capital guarantee program similar to that of exim bank, california sought to develop advanced export-finance flexibility from eximbank resources during the pilot project. the california export finance office (cefo) has a two-fold objec tive: a) to im prove the size and delivery of its pre-shipment working ca pital program and b) to try to devleop specialized eximbank/fcia policies to improve post-shipment financing. cefo achieved selective enhancement of pre-shipment and working ca pital resources dur ing "phase i" of the pilot project: control over exporter approval; political/commercial risk cover during preshipment; inclusion of attractive "hold harmless" provisions for lenders; and a 25% surcharge. the result was that a "california custom umbrella policy" became effective in oc tober 1988. · i n turning to "phase ii" or a post-shipment accounts receivable financing facility, cefo sought to engineer a second customized policy with eximbank/ fcia. the wish list incl uded: a short-term multi-buyer policy, with cefo as administrator; premiu ms similar to a "master policy"; a hold harmless assign ment agreement; and no first deductible provision. california exporters would benefit from lower financing costs if eximbank /fcia finally accepts such proposals. overall, california built upon its export-finance authority a nd expertise to seek modif ica tions in eximbank/ fcia programs. while pilot results did not meet all expectations, cefo's pre-shipment support before and during the pilot period is impressive: between august 1985 and january 1989, 135 guarantees of some $25 million were accepted and d isbursed, suppor ting $100 million of california exports. reactions to the eximbank pilot prog ram af ter a year of high initial enthusiasm and earnest cooperation, reactions and recom mendations emerged. some dealt with test marketing technicalit ies a nd others focused u pon suggested improvements within eximbank. all are useful as small business evaluates the 1989 conversion of the pilot project into a city/state agency cooperation program. 32 32 of interest to the seven agencies and to eximbank were such technicalities as total ad ministrative costs, decisions about continuance of sites, a need for clear goals, and emphasis on particular elements. not surprisingly, the seven agencies felt that the $23.1 miilion in ap pra.ved transactions ($9.7 million under the working capital program; $7.2 million for exim bank medium-term; and $6.3 miilion with fcia) was a satisfactory return on eximbank's overall marketing efforts. there was equal unanimity that eximbank should clearly differentiate among goals at each test site: education/training; loan packaging/facilitation; or loan and guarantee activity. in turning to a critique by the seven site coordinators of eximbank capacity to service state/city needs, three fundamental issues were raised. each goes to the heart of official export finance support. first, there is the question of adequately manning an eximbank marketing effort, given eximbank's budgetary constraints. agency administrators believed that more could have been accomplished if eximbank had ". . .adequately and consistently staffed both the marketing and u. s. divisions." second, coordinators expressed considerable disappointment with the slow pace of ex imbank's processing of working capital applications. initial enthusiasm was tempered by the realization that, despite the priority nominally given to the pilot program, there was limited capacity to move packages quickly. agencies were also shocked to discover that credit criteria can be applied very unevenly. third, coordinators suggested that agencies should be granted delegated authority to com mit eximbank in working capital transactions. participants stated that, with a specified degree of such authority, delays at eximbank would be minimized. conclusions and recommendations clearly, eximbank gained important marketing exposure by test marketing innovations in state/local sites, and over $23 million in approved transactions materialized during the pilot period. eximbank also certified its intention to maintain this special linkage by instituting a cooperation program in february 1989, electing an eximbank vice president as small business officer in march, and monitoring the progress of the seven pilot sites and another 23 states and cities that signed up in the first half of 1989 to try to exploit an apparent opportunity. the first recommendation by this author is for small business. they should carefully track this 1989 cooperation effort. by september, for example, four states (michigan, nevada, texas, and washington) and xport of the ny/ nj port authority were selected for a second round of training to join the initial seven pilot sites. that means a wider geogra phical net is being cast. but small exporters should also recognize that obtaining working capital requires that they be deemed "qualified:'°the faster the small business executives can master the presenta tion of financial, product, and company data, the more effectively a state/local agency can package a transaction. the second recommendation is for state/local agencies. to maximize the flexibility of an export partnership, local administrators must become thoroughly familiar with eximbank guidelines and procedures. the pilot program demonstrates that good relationships and en thusiasm do not alone guarantee a flow of export finance. nonetheless, mifa and california illustrate that skilled coordinators can tailor applications and eximbank/fcia policies to meet local needs. 33 33 a third recommendation is for eximbank. in an era of tightened budgets, it makes sense to utilize state/local agencies as marketing channels for both export education and delivery of export-finance services. but a more rapid "graduation" in delegating authority to qualified agencies would accomplish several objectives: provide an incentive for local coordinators to master eximbank programs; assure quicker response time to small business needs; and enhance the prestige of "seriously dedicated" state/local agencies. there is no excuse for well-packaged, small transactions to sit for months at eximbank. a final recommendation is for the broader community of small business support institu tions. pilot project results highlight why small business exporters are discouraged (34). notably, agency coordinators confirm that, because of inadequacies in the private sector (such as few banks willing to finance exports of small business), the most difficult job is to educate and market "exporting" as an activity. that initial task cannot be accomplished by just eximbank and state/local agencies. · references 1. bank for international settlements·and the organization for economic cooperation and development, statistics on external indebtedness: banks and trade-related non-bank external claims on individ ual borrowing countries and territories. (paris: bis and oecd, 1989). 2. bilkey, w. )., "an attempted integration of the literature on the export behavior for firms;' journal of international business studies. spring/summer 1978, pp. 33-46. 3. boyd, j. h., "eximbank lending: a federal program that costs too m uch," congres sional record , may 26, 1982. 4. brau, e. h. and c. puckahtikem, export credit cover policies and payments dif ficulties. (washington: imf, august 1985); brau, e. h. et al., export credits: developments and prospects. (washington: imf, july 1986); and dillon, k. b. et al., officially supported export credits: developments and prospects. (washington: imf, february 1988.) 5. export-import bank of the united states, "eximbank announces city/state agency cooperation program;' february 27, 1989. 6. , "final report: export-i mport bank of the united states 1988 state/city pilot project initiative;' march 21, 1989. 7. , financing and insuring exports: a user's guide to eximbank and fcia programs . (washington: eximbank, n.d.). 8. , "presentation to the advisory board: eximbank state and mu nicipality pilot marketing program;' june 30, 1987. 9. , report to the u. s. congress on export credit competition and the export-import bank of the united states, (washington: eximbank, 1978-89). 10. , report to the u s. government on tied aid credit practices, (washington: eximbank, 1989). 11. heenan, d. a. "congress rethinks america's competitiveness;' business horizons, may june 1989, pp. 11-16. 34 34 12. heller, h. r., "improving america's competitiveness; ' economic review of the federal reserve bank of richmond , march/april 1989, pp. 17-20. 13. henry, d. p., the financial cost of export credit guarantee programs .. (santa monica: rand corporation, 1987). 14. hester, s. b., "export trading com panies: a marketing vehicle for small textile and apparel firms?" journal of small business management. january 1989, pp. 53-59. 15. hoiden, a. c., "a report card on u.s. official export-finance support: can american exporters ever expect a competitive eximbank to emerge?" columbia journal of world business, fall 1989, forthcoming. 16. , "export credit insurance and the fcia;' uniform commercial code law journal, fall 1981, pp. 140-145. 17. , "the illinois export loan initiative: state support for international marketing," review of business, fall 1986, pp. 16-17. 18. , "small business can market in europe: results from a survey of u.s. exporters;' journal of small business management. january 1986, pp. 22-29. 19. huszagh, s. m. and m. r. greene, "fcia: help or hindrance to exports?" journal of risk and insurance. june 1982, pp. 256-268. 20. , "how exporters view credit risk and fcia insurance: the georgia experience,'' journal of risk and insurance, march 1985, pp. 117-132. 21. kathawala, y. et al., "exporting practices and problems of lllinois firms,"journal of small business management, january 1989, pp. 53-59. 22. machinery and allied products institute, "survey of selected member companies con cerning export financing," march 1982. 23. mcniven, j. d., "challenge and response: the rise of state development policies in the u.s." paper presented at the international symposium on export promotion and pu bl ic organizations, october 1988. 24. national association of manufacturers, nam export credit survey report, (washington: nam, 1977). 25. organization for economic cooperation and development, export credit financing systems in oecd member countries, (paris: oecd, 1987). 26. presidential commission on international economic policy, u.s. international economic policy in an interdependent world, (washington: u. s. government printing office, ju ly 1971). 27. pu blic law 99-472, "export-import bank amendments of october 15, 1986:' 28. rodes, s., "u.s. export-import bank changes with world trading environment," business america , november 9, 1987, pp. 2-12. 35 36 29. u.s. department of commerce, trade finance: current issues and developments, (washington: u. s. government printing office, 1988). 30. u.s. general accounting office, emerging issues in export competition: a case study of the brazilian market, (washington: u.s. government printing office, 1985). 31. , export credit insurance: assessment of export-import bank's role, (washington: u. s. government printing office, 1987). 32. u.s. office of management and budget and the export-import bank, report of u. s. government invol vement in export credit insurance, (washington: u.s. government printing of fice, 1987). ' 33. u.s. small business administration, annual report on small business and competi tion, (washington: u. s. government printing office, 1984). 34. , annual report on small business and competition , (washington: u.s. government printing off ice, 1988). 35 36 the eximbank state/city pilot lnitiative for small business alfred c. holden fordham university introduction eximbank and small business pilot project goals and participants the pilot effort: seven tailored prog rams 1. columbus, ohio 7. state of california reactions to the eximbank pilot prog ram conclusions and recommendations reproduced with permission of the copyright owner. further reproduction prohibited without permission. table of contents anonymous journal of small business strategy; spring/summer 2005; 16, 1; abi/inform complete pg. 0_3 stx47egy editor stephen w. osborne indiana university of i'ennsylvania (iup) indiana, pennsylvania associate editors prashanth b. nagendra indiana university of pennsylvania (iup) joette m. wisnieski indiana university of pennsylvania (i up) editorial assistant julie dobish indiana university of pennsylvania (iup) book review editor radha chaganti rider university editorial review board ramachandra asundi university of puerto rico david brennan university of st. thomas (st. paul) radha chaganti rider university vivek choudhury florida state university richard t. dailey university of montana dale dickson mesa state college terry gaston southern oregon university masoud hemmasi illinois state university lynn hoffman university of northern colorado lawrence klatt florida atlantic university krish krishnan indiana university of pennsylvania (iup) thomas j. liesz mesa state college stephen lucas university of north carolina-greensboro steven j. maranville university of st. thomas (houston) thaddeus mcewen north carolina a&t university abbas nadim university of new haven john e. prescott university of pittsburgh neal r. pruchansky keene state college james a. rodgers indiana university of pennsylvania (iup) c. louise sellaro youngstown state university herbert sherman southhampton college of long island leo simpson eastern washington university joseoh singer university of missouri —kansas city matthew c. sonfield hofstra university pamela h. specht university of nebraska at omaha harriet stephenson seattle university jude valdez university of texas, san antonio howard van auken iowa state university john b. wallace marshall university monica zimmerman temple university the journal of small business siraiegy is a joint publication of the small business institute directors'ssociation (sbida) and the eberly college of business & information technology, indiana university of pennsylvania. send subscription requests to stephen w. osborne, editor, journal of small business strategy, indiana university of pennsylvania, 304 eberly college of business & information technology, 664 pran drive, indiana, pa 15705-1071. annual subscriptions may be ordered at $20 each (u.s. dollars only). international subscriptions add $5 annually for postage and handling. back issues may be ordered at $ 12. u copyright 2000 small business institute directors'ssociation issn 1081-8510 2000-2001 sbida officers small business institute directors'ssociation president vice-president —h for he i tag dl,l is at be rsinp joseph j. i'eiger, aiba, ed.d. htichael broids, ph.n. university ol'idaho miami university of ohio ollicc: (208) 885-7154 phone: (513) 529-4841 fax: (208) 885-8939 fax: (513) 529-9689 ft-maih joegqauidaho.cdu email: broidamsqamuohio.edu president-elect i'ice prestdeni —deveiopmeni roosevelt d. butler, ph.d. the college ol'new )cracy university of louisville oflice: (609) 771-2868 otttce: (502) 852-4788 fax: (609) 637-5129 fax: (502) 852-7557 e-maik rbutlerqatcnj.edu e-maih bhkemeo iqalouisville.cdu vice-prestdeni-programs vree president..adminisrraiian sherrin r. taylor, m.b.a.,sphr ronald g. cook, ph.n. texas woman's university rider university otlice: (940) 898-2903 onicc: (609) 895-5522 fax: (940) 898-2120 fax: (609) 896-5304 e-maih staylorqatwu.edu e-maih cookrqarider,cdu i'ice president-ca%renee coordinaior secreiaryi rrearvrer gerslyn meclure franklin, ph.d. radha chagsnti, ph.d. university of texas of thc permian basin rider university phone. '(915) 552-2170 phone: (609) 895-5529 fax: (915) 552-2174 fax. (609) 896-5304 email; franklin~qautpb.edu email: chagantiqarider.edu hce president-p«bltcaiions immedtate pasr prestdent stephsnie huneycutt, j.d., l.l.m. j. douglas frszer, ph.d., cpa christopher ncwpon university millersvillc university phone: (757) 594-7139 oittce: (717) 871-5555 fax: (757) 594-7808 fax: (717) 871-2464 email: huncycutqacnu.edu e-main dfrnzerqamarauder.millersv.edu vice president-program quality assurance ediiori journal of small business strategy gary l. aitchison, ph.d. stephen w. osborne, ph.d. lowe state univcmity indiana university of pennsylvania office: (515) 294-8107 phone: (724) 357-5760 fnx: (515) 294-2534 fnx: (724) 357-5743 e-mail; gaitchisqaisstatc.edu email: osbomeqaiup.edu vice prestdeni-case competition james bradley, ph.d. central washington university phone: (206) 439-1282 fax (206) 439-3809 email: brndleycwu edu special section letters to the editor we thought the following correspondence would be of interest to the readers of the journal. dr. lloyd elgart editor journal of small business strategy andreas school of business barry university 11300 northeast second avenue miami shores, fl. 33161-6695 dear dr. elgart: december 9, 1991 recently i returned from a visit to russia during which i was gathering information regarding 1he status of small business enterprises in that country. as you might sunnise, there is much struggling by a number of individuals and organizations to establish conditions whereby independent businesses might flourish. there is much to be done: their resources are limited; .and foreign currency is extremely scarce. that leads me to the request i will pose to you. would it be possible for you or the small business institute directors association to authorize two, gratis one-year journal subscriptions for a group in that country which clearly is in the forefront of the effort to stimulate independent business formations via a more favorable social, legal and financial climate. the group is the federation for support and development of small business. fsdsb is a non-government organization that serves as an umbrella for about 30 unions, associations and societies all having members engaged in small, independent (nongovernment) enterprises. currently it is headed by dr. eugene smirnov, who is reported to be the first independent business owner in moscow. i believe they would find your journal contains information most useful in this early stage while they are wrestling with new concepts, roles and understandings concerning family businesses operations. i honectly do noi know whether this action on your part will lead to firm future subscriptions or other advantages in the future, but it will put your journal in the hands of a group dedicated to positive action in this area. please consider it a long-short investment which might produce useful connections in the long-run. perhaps ii is a way of reaffirming our view that successful small businesses are important. perhaps it is a small action that may add some weight to a direction of world history. letters continued on next page 56 regular airmail to russia takes about six weeks. their address is : federation for support and development of small business, p.o. box 831, moscow, 105484, ussr. copies of the journal may be sent to this address via regular airmail. if you would like to write to dr. smirnov to tell him the good news, you may fax it directly. as you may know, moscow is the one city in russia that can be dialed directly. their country code is 7, moscow city code is 095 and their fax number is 254 8972. as an alternative, you may send the letter to me and i will include it in my next correspondence with dr. smimov or deliver it directly as i am returning to russia for another visit on january 11. please let me know of your decision when it is possible. to assist you in evaluating this request and since we are not personally acquainted (at least i don't remember), i have enclosed a biographical sketch. as you will see from it, i can empathize with you regarding your journal editing responsibilities. i am using my home address because i am on sabbatical leave this semester. sincerely, bruce g. whiting editor's response: dr. bruce g. whiting 823 s. cedar crest boulevard allentown, pa 18103-3613 dear dr. whiting: december 23, 1991 in response to yours of december 9, 1991, i would be happy to forward two copies of the journal of small business strategy lo dr. smimov beginning with the november 1991 issue. this is not a subscription, which would be handled through the small business institute directors' association, but a service of the andreas school of business at barry university. kindly send our best wishes for a happy and successful year to dr. smimov and the federation. sincerely, lloyd d. elgart, d.b.a., j.d. editor dr. whiting is a professor of management at kutztown university of pennsylvania. he teaches courses in strategy and policy. small business management, organizational behavior and innovation & entrepreneurship. he is editor of the journal of creative behavior, which is a professional journal distributed in 47 countries. previously. he served on the immediate staff of the administrator of the u.s. small business administration, where he directed the management assistance program of the agency. editor's note: i would guess that dr. smimov would appreciate hearing from our readers. if you decide to contact him, please keep us informed. 57 strategy editor's note as some of you are already aware, indiana university of pennsylvania (iup) has taken over sponsorship of the journal of small business strategy (jsbs). i have assumed the position of editor for jsbs, assisted by two associate editors, dr. prashanth nagendra & dr. joette wisnieski. we are very excited to be editing and publishing the journal and are very interested in receiving manuscripts in a wide range of topics related to small business, entre preneurship and economic development. the journal ofsmall business srraregv, small business directors association (sbida) and the readership of the journal owe a debt of gratitude to dr. joe singer and the henry w. bloch school of business and public administration of the university of missouri-kansas city for their editorial tenure the past three years. we at i up appreciate their assistance during this transition period. based on the jsbs mission (back cover), we believe that articles published in jsbs should be of value to small business & entrepreneurship educators, small business consultants or individuals involved in economic development in terms of ar least one of the following: ~ assist in the formulation or implementation of small business strategy ~ be directly applicable to consulting projects ~ generate ideas and approaches to problem solving in small business ~ could be presented to a small business owner/manager for application ~ relate to small business & entrepreneurship education some thoughts for the future as we get our feet on the ground, we will be attempting to achieve a number of objectives related to the journal: ~ increase publication to three issues per year ~ expand the content of the journal to include appropriate book reviews, noteworthy news, insightful letters to the editor and increase the level of invited papers from notable practitioners, scholars, elected and appointed governmental oaicials journal ofsmall business strategy volume 9, no. l spring /998 ~ solicit and/or develop shorter articles through the normal editorial process for inclusion in the journal (tentatively titled "briefs") ~ expand the subscription base of the journal ~ expand the non-academic editorial review board ~ maintain and increase the quality of the journal in terms of both its scholarship and its application to the areas of entrepreneurship, small business, family business, and education & economic development related to these areas. in this issue this issue is characterized by a number of diverse and topical articles. in "transforming consultants'ecommendations into business improvement: a model and action agenda" by michael d. ames, we leam of a methodology which could be considered by the vast majority of our readership since it pertains to an activity that most of us are involved in. the appendix provides an application of his framework to the small business institute. in an era of downsizing, rightsizing, and outsourcing, "the classification of service providers as "contract workers" rather than "employees": implications and guidelines for small businesses" by matthew c. sonfield addresses a very important alternative that merits consideration by small business owners. notwithstanding the "kinder, more gentle, irs," there are a number of potential pitfalls that employers need to be aware of. can entrepreneurship be taught? that question has been asked more than once. at what age can entrepreneurship be introduced to students? "entrepreneurship awareness education: an example in an elementary school" by rebecca w. ball & fred beasley gives some interesting insights on rhis topic. "an analysis of small business hiring of seniors" by robin t. peterson & andreas w. stratemeyer is a topic that will become increasingly important as our longevity continues to increase and social security benefits become more problematic in the future. in "partners in profits: small businesses move slowly into cause-related marketing," nora ganim bames looks into how marketing programs can be developed which can be mutually beneficial to the small business firm as well as social service agencies or other types of not-forprofit organizations. in a society where marriages fail at an alarming rate, sandra perry's article titled "using a prenuptial agreement to protect the small business" would seem to be of use to a great many small business owners. we also initiated a new column titled "noteworthy news." readers are encouraged to submit brief pieces (1-2 pages) that would be of interest to the readership. for example, a recent forbes article titled "mckinsey 101"points out that student consulting is not only on the rise, but they present evidence that such work is of very high quality and generally very inexpensive, oren "for expenses only." while this may not be particularly headline news for sbida, we found it interesting to learn that what sbida has been doing for 26 years is now a "new trend." steve osborne, ph.d., editor strategy editor's note as governments worldwide show increasing interest in the power of entrepreneurism to successfully address the demands for economic growth, the process of small business formation and sustainedinnovation have come to dominate our current research thinking. in this issue, we examine the critical role of entrepreneurial drive, organizational architecture and the necessary tangible mechanisms for successful growth management in infrastructure design. our lead article (the i 997 sbida distinguished empirical research award winner) by james and joann carland demonstrates an exploratory model of potential entrepreneurship and develops the implications for entrepreneurship education. their challenge to incorporate creativity into the entrepreneurship curriculum is further documented by robert cross and frederick funk who show why leveraging employee knowledge is a critical source of competitive advantage for the small business firm. lf small business firms truly are the "keepers of capitalistic virtue," then professors schultz, bennett and ketchen's examination of the nature and extent of the relationship between competitivestrategy and human resource management practices in small businesses offers a key to building future competitive advantage. similarly, drs. haksever, cook, and chaganti find that the human resources and organizational arrangements of very small and small firms affects the types of service quality gaps. this paper received the 1997 sbida distinguished applied research award for illustrating how a popular service quality model can be utilized by very small/small firms interested in understanding and improving service quality. certainly, service quality begins with understanding actual customer buying behavior. lisa spiller and rich hamilton provide timely information showing how small firms can maximize the power of their marketing expenditures by building and utilizing customer databases. small firms financial management and compensation issues are the focus of our last two articles. dr. nancy day contrasts pay strategies, levels, and structures in 148 small and large growth companies. her findings will both surprise and encourage small business decision makers in their design ofcompensation systems. the same fundamental differences between 'theory" and "practice" are uncovered by youness alizadeh and geoffrey meredith in their researchoffinancialmanagementinformationsystemsutilized in self employmententerprises the study illustrates how unsatisfactory systems are further restricting the link between selfemployed small business owners and professional financial advisors. joe singer, ph.d. editor v strategy leveraging intellect in a small business: designing an infrastructure to support today's knowledge worker robert l. cross boston university frederick l. funk arthur andersen small business consulting abstract thefntensttyofcompetitionandpace with which knowledge becomes obsoleie are heralding an era where leadership, structure and control systems musi increasingly focus on tiianagement of knowledge and skills. such an environnient requires managemeni to sysieniatically design an infrastmcture that is iai lored to the needs of an increasingly mobile knotv ledge worker and supports organizational learning iti areas ofstrategic concern. small businesses face a unique challenge in this environment as they ofteti do not have the time or a sufficieni "mass" of employees to sustain sopinsticated recntiting, development or performance management programs. in the folio wi rig arri cle, the authors argue the real world imperative ofcrafiing an infrastructure that supports organi ational learm'ng from the very ittception ofa business, and provide some manageable approaches to tiiis task for any small bnsiness. introduction many management theorists have paid tribute to today's knowledge worker and the dramatic paradigm shift that managing such an employee has brought to our society(crawford, 1991; naisbitt kt aburdene, 1990; and toffler, 1990). as well articulated by peter drucker (1993), we are entering a "knowledge society" where knowledge is quickly eclipsing traditional factors of production such as labor, capital and land. nowhere is this more true than in high end knowledge work sectors such as professional services, software development, financial services and technical product development —areas where an organization's ability to tap the intangiblesofemployeejudgment and creativity are critical. to thrive and grow in today's dynamic business environment, it is increasingly important that small businesses in such knowledge intensive industries organize to i eve rage the collective i ntel lect and creati vi ty of its entire employee base. yet organizing in such an environment poses unique problems for small business leaders. as charles handy and james brian quinn have recognized, today's knowledge workers are truly volunteers, presenting numerous challenges to managers who grew up in the 15 "command and control" environment of the mass production age. further, the management of intellect as a source of strategic advantage requires new approaches to planning, organization and perl'ormance measurement. in a mass production environment, employees were interchangeable and could often be managed as little more than inventory. today' knowledge worker, by contrast, must exhibit judgment, creativity, technical expertise. and interpersonal skills that promote knowledge creation —intang ib i esthat often cannot be -'forced" like a labor standard on an assembly line (nonaka & takeuchi, 1995). a knowledge based organization creates value on the intangibles of employee judgment and creativity, which often are only maximized when employees are actively engaged in their work. in such an environment, conditions of safety and a personal sense of return for effort expended (kahn, 1990) in tandem with challenging goals and deadlines can facilitate engagement; however, coercion, which can occur in many forms, will often result in employee disengagement from the task at hand. while it is often easy to assess how an assembly line' going down impacts organizational productivity; it is a fundamentally different management challenge to recognize when and why the intangibles of judgment and creativity are not being properly or fully applied. further, the creation of organizational knowledge requires unique cognitive and social skills as it is oflen both an individual and interpersonal act (fiol and lyles, 1985). for small business leaders in knowledge-based sectors, the management challenge is creatingan environmentconduciveto non-defensive interactionamong knowledgespecialists, who by virtue of personality, education and prior career success are oflen highly individualistic. while much has been written about the importance of leadership style and culture in crafling a learning environment, we find that there is less emphasis in practice or in the literature on development of organizational infrastructure to support knowledge creation and sharing —es pecial ly for small business operations. discussion in the small business literature is often restricted to large scale assessments of strategic fit between strategy, leadership approach, technology and structure (see for example: randolph, et. al., 1991; bates, 1990; nwachukwu & tsalikis, 1990-91; fombrun & wally, 1989 and miller & toulouse, 1986). however, the bulk of such studies provide little useful guidance in aspects of infrastructure design important for emerging knowledge sector organizations. we argue that infrastructure can not be overlooked, as any successful small company quickly outstrips the oversight ability ofeven the most charismatic leader. besides, as systems theory indicates, management style alone is not the answer (senge, 1990). behavior within an organization is the product of a whole host of influencing factors, only part of which is related to leadership style. leveraging employee knowledge as a source of competitive advantage is a strategic decision that must be made at the highest levels of an organization and then consistently worked into its architecture (pfeffer, 1994; collins and porras, 1994). often, leaders of small organizations clearly recognize the importance of meeting the objectives of financial stakeholders —an emphasis that is then driven home to the rest of the organization through budgeting and planning processes. while financial stakeholders are vital to the success of any organization, attention to these constituents alone does not guarantee success. companies maintaining viability over a longer timeframe have been shown to create cultures (kotter & i-leskett, 1992) and control systems (simons, 1995) that value three 16 "'&'iv 'l. e' 'mportant constituents: customers, employees and financial stakeholders. we argue that companies in knowledge sectors would be well advised to position the development of their employeesat a level of at least equal importanceto financial stal eholdersand customers. the leadership imperative is making the time early on to develop a vision of organizational design elements that are well integrated, and also rellective of leadership values (miles and snow, 1994; nadler, 1992; and galbraith, 1995). mismatch between design elements or between infrastructure and leadership intent results in little more than dissipated organizational energy. as a result, it is important that small business leaders begin considering how to leverage effective organizational design from the very inception of an enterprise. the focus on attracting, developing and retaining the right people in a knowledge-based business is critical. unfortunately, the hectic demands of day-to-day survival and the lack of management sophistication at many entrepreneurial firms often result in the neglect of organizational design considerations. paradoxically, not establishing an infrastructure that helps employees plan and coordinate their own activities and concerns soon results in management finding its time increasinglyconsumed by employee grievances. the result is that leadership has even less time to commit to crucial activities such as negotiating supplier relationships, securing necessary financingor locating additional sources of revenue. further, without structures in place to help guide behavior, employee output and creativity will oiten falter. as leaders increasingly withdraw from the day to day operation of a small business, mechanisms need to be established that allow employees to understand and revitalize a sense of direction and mission to which their work is contributing. ultimately, successful knowledge-based environments seem to develop a culture combining rigorous performance expectationswith a concern for the individual (von glinlow, 1985). maintaining the balance of these two objectives can be an important guide in organizational design for any small business. rigorous performance expectations can serve to create a positive source of goal related tension that facilitates employee output and engagement in work. a concern for the individual, be it shown in material or non-material forms, helps align employee and organizational interests, and also often serves to allow higher levels of goal-related tension to be employed than in organizations where a concern clearly does not exist. in the following sections, the authors have outlined how a fledgling company can support its knowledge objectives by holistically and systematically advancing the recruiting, retaining, developing, promoting, and rewarding objectives of the enterprise —using rigorous perfonnance expectations and a concern for the individual as guiding values. quite often in small business operations, very important human resource processes are overlooked given the hectic day to day demands of survival. we propose the following model in an effort to orient small business leaders on these human resource issues holistically and in an integrated fashion when considering organizational design. our main objective is developingstrategicconsistency and integration of several important processes that are oren discussed in isolation in the literature and in practice. further, we will also offer several tools to facilitate many of these processes that require minimal eitort to develop and have proven effective in small business environments. such tools and approaches require little additional effort on the part of personnel, but can be very eitective structures in ensuring consistency in such processes as recruiting and performance management. 17 the discussion that follows will serve to elaborate on each component of the model and provide practical tools based on findings from our analysis of eight small business operations ranging in size from 24 to 117 full time equivalent employees(lttes). our sample ofbusiness operations reviewed includes two regional investment banking firms, three software development firms, one engineering firm, one technical consulting firm and two high technology firms. data was collected by interviews and review of archival data. strategtcntty lcvcraging knowledge through organicattonat design recruiting rewarding rclnining performnnce expectations nnd concern for ihe individuni promoting developing recruiting the recruiting process is where it all starts. knowledge-basedbusinesses will live or die by their ability to recognize and attract individuals with the right mixture of technical and interpersonal skills. bringing in people with poor technical or mismatched interpersonal skills has enormous costs for a knowledge-based business'roductivity through the overall intellectual drain that can occur when having to conduct remedial training or smooth over conflicts. however, in a start up or small company environment, the recruiting process is most often handled by the founders, head of hr or one or two other favorites of senior management quite ollen, the assessment of a recruit comes down to factors of personality rather than technical and interpersonal fit with the "ranks" —the people who the new hire must actually work with. some relatively simple practices and tools can help bring more objectivity and structure into this process. is standardize recruit evaluation a standardized recruit evaluation process should be established early, as it yields two significant benefits. first, it forces management to identify the capabilities crucial to the organization's future success —a clarification process that not only helps recruiting efforts but also strategic resource allocation(schoemaker, 1992 and i lammel & prahalad, 1994). second, an agreed on standardized approach allows interviewers to capture consistent information during the interview process on a series of items strategically important to the organization. for example, the small (59 ftes) engineering services firm that we reviewed adopted the following format to ensure consistency in its recruiting process. the firm employed this tool to focus interviewers on attributes of each candidate that were of strategic importance to the business. this was particularly important for this specific organization as it was attempting to move to a more participatoryenvironmentand increasingly involving front line employees in the interviewing process. standardized recruitin process a standardized approach to each recruiting visit allows an organization to structure the interview process from the candidate's perspective. requiring each interviewer to ask specific types of questions and sell specific points of the company to the recruit avoids unwarranted repetition. at least two significant benefits can be derived from standardizing each recruiting visit: i) the organization obtains a consistent and well rounded view of each candidate's abilities; and 2) a non-duplicative and professional image is portrayed to the recruit. the second point can not be overemphasized for a small firm, as the office visit is usually the most salient of points that a recruit uses to evaluate an offer of employment. quite otten, high caliber employees have competing offers from more established institutions. while the appeal of a small firm lies in the entrepreneurial spirit, disorganization may unnecessarily lead to questions of ongoing operational viability. the same engineering firm found the following interviewing process effective in ensuring that a professional image was portrayed to the recruit. as the firm was making a participatory eftort to involve more people in the interviewing process, this tool became important in ensuring consistency. while there are a number of sophisticated tools that can be introduced in the recruiting process, down to psychological tests or behavioral interviewing, these are often overkill for the needs of a small business. the above tools are fairly simple to develop and serve to quickly provide focus and consistency in a process that is of key importance to the organization. in addition, some of the questions that a start up should attempt to address over time include: ~ does the company have a clearly defined core group of recruiters? ~ does the company ensure that all recruiters are trained in and practice effective recruiting techniques? ~ does the company ensure that all recruiters are trained to comply with recruiting and hiring regulations? 19 figure 2 recruit evaluation form name ol'applicant current employer specialty arear does not above below meet reoutstanding average average average quirements i. personal quai.ifications a. personality 'fit'. verbal communication skills c. interpersonal/i'eamwork skills d. i udgment, business dt common scnsc e. professional demeanor f. organizational skills 2. professional qualifications a. technical expertise b. industry knowledge c. managerial/leadership potential d. project management skills e. understanding of services lines f overall "fit" with company g. growth potential with company 3. inti'.rest in career witi i our company comments: (strengths, weaknesses, general observations): at what level do you believe this candidate should be hired? 20 1 ovi rali i valuation: docs not above below meet reoutstanding average average average quirements interviewer: figure 3 recruitin process form name date interviewer i greeting administration objective: to make each recruit feel at ease, and to provide a consistent forum to answer all administrative questions. ~ explain interview schedule to recruit explain history of the company current status ~ explain benefits complete and take evaluation form to final interviewer interviewer 2 first interview behavior interview objective: to identify and verify relevant behaviors exhibited in past work or educational experiences. focus on 3 past relevant experiences the recruit wants to highlight complete and take evaluation i'orm to final interviewer. interviewer 3 second interview technical interview objective: to verify technical skills in the area of interest. ~ use pre-established technical questions relevant to area of interest complete and give evaluation to final interviewer. peer(s) of lunch recruit objective: give both the recruit and the people he/she will be working with an opportunity to evaluate how the recruit would fit in with the work team. recruit is given opportunity to talk to peers about what it is really like to work at the company alter lunch, peer(s) takes evaluation form to final interviewer final third interview interviewer objective: identify and follow up on open issues or concerns from prior (senior evaluations. member of ~ sell the company and vision management) complete evaluation and schedule other interviewers for round table meeting. 21 retaining once in the door, it is increasingly the company's job to retain highly skilled employees never before have knowledge workers had the breadth of opportunities to switch employment than they currently enjoy. while turnover always represents a cost to an organization's productivityas well as a drain of intellectual capital, this can be cripp!ing to a small or start up firm. some things that a small knowledge-based enterprise can do to help ensure retention include: provide intellectual challen e quite often, the draw for a knowledge worker lies in the intrinsic satisfaction of challenging or thought provoking work and the ability to be around others with similar tastes (leonard-barton, 1995). opportunities to work with, or at least have access to, challenging work in a selected field can be a strong motivational factor. to provide this opportunity, some of the companies that we spoke with were experimenting with a structural element called by various names (i.e., competence center, center of excellence, knowledge labs, etc.) to help generate organizational knowledge as well as provide an opportunity for employees to work, for at least a part of their time, on tasks of interest to them. the competence center concept can be a means both to ensure that new knowledge is being generated in areas critical to the organization and to help employees develop professionally in areas of particular interest to them. obviously, smaller companies can not afford to dedicate groups of people to solely sit around and "think big thoughts." however, an effective competence center�ca be built if approached pragmatically. initially, individuals assigned competence center responsibility may spend only io to 20 percent of their time developing and sharing knowledge in the area of interest. the responsibilities in this role could involve such things as providing technical guidance to others in the organization, monitoring an electronic discussion data base and advising senior management on key trends in their area ofspecialization. the amount of time allocated to these activities could increase for a given competence center, if and when a specific area grows in strategic importance to the organization. in general, the competence center concept allows the start-up, with limited investment, to explore potential areas of interest and technical advancements when they are in formation. the center also allows the organization to establish clear accountability for developing specialized knowledge and sharing it with the rest of the organization, so that this very important task does not get lost among the many day-to-day crises. finally, the center can provide a source of non-traditional reward to employees. provide echanisms for em lo ee su estions establishingsuggestion systems and using interactive forums during periodic meetings are effective ways to gather input from employees. these mechanisms help maintain a "small company feel" by ensuring that employees have a voice and an opportunity to make a difference in the success of the firm. suggestion systems(i e. an e-tv(ail box, an old fashioned 22 suggestion box, etc.) can build on a small company's culture of openness and free-thinking attitudes. some problems that can hamper suggestion systems include lack of urgency from employees involved in the process, lack of incentive to participate,too much time between the offering of the suggestion and the giving of feedback (or simply giving no feedback at all), and lack of action regarding suggestions. the cardinal rules with a suggestion system are: l) do not implement one if you do not have tire ability to respondin a timely manner or ifyou cannot commit to take actioii wlien necessary, and 2) answer all suggestions and pay particular to )itstifying why a suggestion is not accepted. creation of such a process raises employee expectationofaction,and managementshould be prepared for "nit-picking" suggestionsin the beginning, as employees test the system for authenticity. utilize task forces to create or modif hr policies establishing task forces to develop human resource policies is another means of enabling employees to provide valuable input to the future direction of any small business organization. further, transitioning such responsibilities to employees removes a large time burden from management, providing more opportunity to focus on important boundary management tasks. finally, the use of cross-functional task forces can also dramatically speed the acceptance of new policies and procedures as they are not simply pushed down from above. management teams in small businesses are often reluctant to give autonomy of decision making to task forces based on fear of a poor decision (which oaen translates into a more fundamental issue of not wanting to give up control). paradoxically, if such an event does take place, the organizational problem of incompetent employees should far outweigh any concerns with a poor human resource policy. provided with sufficient vision and one or two check points, most employees will craft procedures that serve the needs of the organization, and, in the process, gain an improved perspective on the difficulty of craaing and implementing administrative proceduresthat often seem so patently obvious from an employee perspective. developing with the evolution of skill and competence-based pay schemes has come literature declaring the necessity of recognizing and measuring an increasingly wide body of supposedly core skills. of course, many of these models are based on experiences of fortune 500 companies and are oaen insupportableand unnecessaryin a small business environment. we are increasinglyconvinced that a knowledge-basal firm should focus on developing skill sets along three critical dimensions: technical/job specific, business, and interpersonal skill sets. it is this balanced combination of skills and perspectives that helps to build a flexible and integrative organization over time. while frederick taylor's idea of narrowing task specialization worked in a mass production society, it is the reverse focus that will provide flexibility and learning in a highly dynamic and fast moving information age. the nature of skills identified to lit into each of these three categories must be tailored to the specific core competenchs of an organization (tovey, 1993); however, these three categories can provide a valuable framework for linking employee and organizational skill development. 23 personal develo ment plans personal development plans allow employees to introduce their own goals and aspirations into the development process as well as work on improving skills integral to the organization'sstrategy. many studies indicate the power of'goal setting" in improving task performance (latham and locke, 1979). we are only suggesting that the use of personal development plans begin to focus employees on knowledge acquisition as a task they are held accountable for. to ensure ownership and take the burden off the organization, development plans should become the employees'esponsibility to implement, the results of which are assessed in the annual review process. figure 4 personal develo ment plan key success goals action steps dates criteria demonstrate take ownership of 12/9x reduce time expanded consulting recommendation creation for both required by project skills on next assignment manager by 50% identify follow-on sell 2 follow-on opportunity and work engagements with project manager to sell an additional engagement leam microsoft take 1 company 4/9x course completion access sponsored training class use access on i project 12/9x appropriate application of access on project continue to develop work on two projects 12/9x complete two expertise in cost involving cost projects involving management management cost management development items that we have seen in small organizations have ranged from working for a week with a competence center leader, to publishing a white paper on a potential strategic direction for an organization, to a short rotation through another department or project. these ideas, in addition to meeting employee needs, place minimal burden on the company and can serve to help create valuable organizational knowledge from both a strategic and a process coordination perspective. for example, the technical services consulting firm (44 ftes) that we reviewed provided complex systems consulting services in the next programming 24 language to a fairly small universe of sophisticated buyers. given the tenuous future of this programming language, management needed a development process that could serve to broaden skills across languages (i.e. java) as well as service line offerings (i.e. training services) and adopted the following plan template to ensure a balanced approach to skill development among its employees. this firm used the personal development plan as part of an annual goal setting process, and ensured that these plans became salient to employees by making achievement of these goals part of both the employee's and their supervisor's evaluations. however, it is very important that a personal development process be tied to organizational objectives, otherwise a company will begin to evolve to a form of liberal arts education. one approach to developing personal development plans is first to identify five to ten core "skill sets" that are needed by the company to meet its business objectives. then. each employee should: i. conduct a self-assessment for each of the core skills by using annual performance appraisals, project manager appraisals or team member evaluations as appropriate. 2. select two or three skills to improve in the next twelve months. 3. fill out a 'goals/action steps/key dates/success criteria/" matrix for each targeted skill area. action steps might include self-study, company-sponsored training or selfinitiated projects. 4. schedule a mid year follow-up meeting with a senior adviser to discuss progress on the plan. performance evaluation performance evaluations based on dimensions of strategic importance provide a consistent means of identifying, tracking, and ultimately recognizing superior performance. effective evaluation processes are usually put on a timeline that provides feedback to employees more frequently than the typical annual review cycle —thereby providing more opportunitiesfor correctiveaction. the important point here is to identify key dimensions of performance that are tied to the organization's strategic objectives and then communicate these objectives very clearly to an employee base prior to the evaluation period. this approach helps to reduce the inherent subjectivity of the performance evaluation process in that employees know what they are being evaluated on. attached is a composite of dimensions measured in five small knowledge-based enterprises; however, here more than in any other element of organizational design, it is critical that management determine the correct dimensions of measurement for their specific business'. the axiom: "you get what you measure" has enormous power. 'hese competencies were drawn from five of the firms in our sample (two software development firms, one of the regional investment banking firms, the technical consulting firm and onc technical products firm). we took the competencies(or cntical success factors as two tinns called them) that could be applied to a ivide range of small business operations and offer them as a potential starting point for other small business leaders to consider. 25 figure 5 common performance dimensions relevant to small business customer service ~ accepts personal responsibility for customer service develops an understanding of the customer's industry ~ gains confidence of'customer personnel ~ suggests ways for the project team to be innovative in serving the customer communication skills ~ applies effective listening skills ~ maintains confidentiality demonstrates good written communication skills ~ demonstrates good verbal communication skills facilitating teamwork ~ exhibits positive attitude ~ volunteers for more work when possible works well with other members of the team ~ i.eads team efforts to achieve shared objectives technical competence ~ develops realistic timelines and budgets ~ demonstrates the ability to analyze and define project requirements ~ leads project implementation ~ contributes to overall knowledge of the organization self-development ~ takes responsibility for improving own business and technical skills ~ continues to develop verbal and written communication skills ~ seeks specific feedback on performance and acts on it organizational skills ~ manages own time effectively ~ delivers quality products and services on time ~ uses resources effectively and eaiciently peer feedback processes, despite potential shortcomings (denisi and mitchell, 1978), can often be very effective means of providing informal performance feedback (see for example: fedor & bettenhausen, i 989; mcevoy and buller, 1987). while a full discussion of peer feedback design and implementation is beyond the scope of this article, the successful practices that we have seen tend to; i) be relatively non-complicated; 2) not be a part of the formal evaluation or incentive process (at least initially); 3) be craaed with input from employees and 4) be focused on interpersonal skills oiten overlooked in traditional supervisor performance evaluations. in addition to its strength of credibility in shaping behavior, peer 26 1 feedback helps employees improve "soft" teamwork skills such as active listening —skills that are often overlooked but that have tremendous impact on productivity in knowledge-based settings. following are items created by the employees of one of the small regional investment banking firms we reviewed (24 ftes). according to interviews with employees of the firm, these simple items have been used very effectivelyto help the firin's "deal" teams, which temporarily and continuously form and disband, work successfully together. ~ the individual exhibits a positive attitude for work assignments and team discussions ~ the individual completes assignments as agreed. the individual exhibits a respect for other people's ideas and opinions that is conducive to an open discussion. ~ the individual is able to clearly communicate ideas and exhibits an appropriate blend of the skills of inquiry and advocacy. ~ the individual comes forward as a -leader" at the appropriate times. but is also willing to take a "follower" role at the appropriate junctures. promoting the organizational structure employed by a small business often dictates how management thinks about promotion. however, the notion of promotion as a lockstep climb up a hierarchy is not sustainable in small business environments or even in larger organizatiora given the de-layering currently taking place. a flatter hierarchy is a necessity today as it provides such advantages as: i) quicker organizational response to a dynamic environment; 2) increased accountability for results (not simply action) among lower levels in the organization; and 3) there is some evidence that structures diffusing decision processes promote greater organizational learning (meyer, 1982). a streamlined approach to hierarchy has a well known disadvantage in that it reduces the potential for career advancement in the traditional sense of the word. however, it is here where alternative structural mechanisms such as a competence center or personal development plan can serve to keep a career engaging from an employee's perspective. for example, one of the small (36 ftes) software development firms in our sample used the competence center idea to provide high performing employees with an opportunity to investigate specific internet applications and share the results with the company. for example, one of the projects involved investigation into the potential of providing updated releases of their software directly over the internet. this project provided at least three benefits to the organization: i) the report advanced the organizations knowledge of potential market opportunities and threats; 2) it provided an opportunity i or high-per form ingemployees to work on matters of personal interest —an opportunity that the employees did not believe they would get in other similar small start up environments; and 3) the sharing of these results with the organization provided a form of informal recognition of these employees'kills. rewarding clearly, any organization must provide adequate compensation to induce an employee to not only stay with the organization,but also to engage mentally and physically in their work. 27 however, we also argue that management of a small firm should become adept at identifying and leveraging the unique inducements they have to offer beyond simply salary and benefits. we do not mean to suggest that parity with the market in terms of compensation can be ignored. rather, that smal i business owners take the time to recognize that there are many noncompensation-based reasons that people come to work each day, and that quite oren these reasons provide an alternative means for management to influence employee commitment. frequently, there are innovative ways that small organizations can work with employees on more of a partnership basis than is feasible in large companies where standardization is demanded to manage complexity. for example, providing employees an opportunity to explore an area of technical interest or providing flexible work arrangements as long as certain performance targets are met can be very effective sources of inducement for valued knowledge workers. in small business environmentsthere are also myriad opportunitiesto institute incentive pay and bonus schemes (see for example: pederson & lidgerding, 1995). however, in practice, the change management and administrative burdens of such systems rarely seems fully appreciated prior to implementation. additionally, aside from the calculation, distribution and communication issues that always present challenges with organization-wide incentive schemes, there are at least two inherent difficulties with administering bonus pay. first, to be effective, employees must believe that their performance can feasibly have an impact on attaining the incentive. as a result, some small organizations have introduced bonuses by division or service line which has the effect of creating enormous dissatisfaction when one area gets a payout due to good fortune while another does not despite putting in the same amount of effort. in addition to behavioral problems, research has illustrated the difficulty, cost and political battles that oflen accompany internal transfer pricing and overhead allocation models required to calculate bonus payments for dilterent departments (eccles, 1985). second, monetary rewards oren have a backlash effect in that each payout sets the baseline for the next one. employee expectations are raised, and anything less than the previous payout is oflen deemed as a failure. communication —the key to putting it all together while we hate to overuse a sticky analogy, communication truly is the glue that holds an organization together. however, leadership teams oflen fail to recognize the power and importanceofcommunicationin mobilizing the energy and commitmentof the employee base. oren, the problem is that communication is never an issue in the genesis of a start up —usually a group of founders talk daily and use a variety of informal channels to ensure agreement on what needs to be done and where the organization is going. at some point, during rapid growth, this informal mode of communication does not work anymore. the difficulty for entrepreneurial leaders is to identify exactly where that point is. the analogy of a small company as moving from a speedboat(i.e. very maneuverableand able to respond quickly) to a cruise liner (i.e. more sluggish in maneuverability, but more powerful once momentum is built in any given direction) is often very effective in illustrating the power of communication and shared vision as a steering mechanism. 28 improving communication to maintain a "small company" feel is very important to employees as a small company or start-up expands. oaen, it was the small company environment that attracted employees to the organization to begin with. it is important that leaders take the time to develop a communication strategy with numerous channels of information to which various audience segments within the organization can turn. the design and continuous updating of a communication strategy serves to support many objectives: i) supporting day-to-day communication; 2) communication of special issues; and 3) periodic interactive meeting forums to discuss results and vision. for example, the other smal i software development firm that we reviewed (48 ftes) had several key development efforts working concurrently and was finding it increasingly difficult to keep all employees informed. with teams of developers working on new releases and others on an entirely new oitering at the same time that management was attempting to diversify into offering consulting services and relocate to a more suitable environment there was oaen a great deal of confusion on the part of the employees. the finn adopted the following strategy in an attempt to maintain a small company feel while at the same time keeping all employees informed. conclusion this article has taken a holistic approach to considering an employee base as the fundamental source of strategic advantage in knowledge-based work. we believe the importance of consideringorganizational design holisticallycan not be overstated. very often, we found that small business leaders would isolate a current human resource crisis as "only" a recruiting or development problem when in fact the two issues were intricately interrelated. for example, one of the companies in our sample was having trouble promoting teamwork amongst its soaware developers. their specific remedy was to emphasize the importance of teams in every forum possible and to look for ways to measure and reward for demonstrated team performance. however, they neverconsidered the fact that their interviewingprocesswas based exclusively on technical merit, and so they were bringing people into the firm without screening for either a desire to develop or proven ability at team skills. while different tools and processes have been introduced to stimulate thinking, it is important that each organization put the thought and effort into developing potential tools that meet their unique circumstances. each organizational design element should be addressed in some fashion with guiding principles of: rigorous performance expectations —put in place through mechanisms such as: (i) a performance evaluation program with feedback from peers and superiors on a balanced range of objectives, (2) development plans focused on linking company and personal goals, (3) an organizational structure focused on developing technical excellence through a competence center approach and (4) recruiting based on strategically important performance metrics. concern for the individual is demonstrated —put in place, in addition to values-based leadership through mechanismssuch as: (i) improved communication(2) seeking input from employees on topics of importance to them (e.g., suggestion systems, cross-functional task forces to define important hr policies, interactive sessions in quarterly meetings); (3) using personal development plans to help employees build expertise based on their own interests and 29 figure 6 communication strate matrix audience media communication intent feedback ~fre uenc all employees technical groups capture threads on suggestion on going groups on technical issues, various technical issues, customer system/periodic revietv current customers or database captures call reports and by database moderator prospects and new product new service line ideas. development usage (i.e. // hits) all employees attendance to allow people to get together other month, meet at periodically. 3 pm all employees captures happenings within usage (i.e. // hits) group on company xx company xx. celebrates victories rumors and captures personal items. all employees facilitated sessions quarterly future strategic direction and during meetings and company happenings questionnaire feedback on effectiveness all employees suggestion system sections on technical issues from each of the competence centers and a passage from the president (4) looking for unique ways to "partner'with each etnployee and attempt to identify alternative reward opportunities. ln a knowledge-based enterprise, the employees are the business. in today's market, technical skills seemingly become obsolete almost every year, and the labor force is becoming more and more transient. employees are demanding more control over what they do and how they do it. an integratedapproachto organizational design, balancing rigorous performance expectations with a concern for the individual, establishes a strong foundation that can align the any small business'uman resource processes with its strategy. 31 references bates, titnothy, "entrepreneur human capital inputs and small business longevity," review vf econontics and statistics, 72, november, 1990, pp. 551-559. collins, james c. and porras, jerry i., "built to last; 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knowledge, wealth, and violence at the edge of the 21st century," bantam, 1990. tovey, l.e.a., "meeting business and management training and development needs through competency assessment," joumtal ofstrategic change, vol. 3 1994. von glinlow, mary ann, "reward strategies for attracting, evaluating and retaining professional," human resource management, 24 (2), 1985, 191-206. 33 corporate governance and the performance of commercial banks: a fuzzy-set qca approach j. augusto felício university of lisbon jaufeli@iseg.ulisboa.pt ricardo rodrigues university of lisbon centre for management studies cege@iseg.ulisboa.pt antónio samagaio university of lisbon antonio.samagaio@iseg.ulisboa.pt abstract this paper examines the role of commercial banks’ governance mechanisms in financial performance and loan quality. the research draws upon corporate governance theory, agency theory, and information asymmetry. fuzzy-set qca was used to analyze a sample of 32 commercial banks listed in the uk. data referred to the pre-crisis period. results confirm that different combinations of governance mechanisms can yield similar financial performance and loan quality. this research contributes to a better understanding of the relationships among banking governance mechanisms, financial performance, and loan quality. the paper also has practical implications because it identifies alternative governance solutions for the commercial banking sector. keywords: corporate governance, agency theory, financial performance, loan quality, commercial banks, fuzzy-set qca 87 mailto:jaufeli@iseg.ulisboa.pt mailto:cege@iseg.ulisboa.pt mailto:antonio.samagaio@iseg.ulisboa.pt journal of small business strategy vol. 26 ● no. 1 ● 2016 introduction according to beck, demirgüç-kunt, & peria (2011), sme financing is an attractive topic, given the importance of smes and the financial constraints they face. in most countries, banks are the main source of external financing for smes (beck, demirgüç-kunt, & maksimovic, 2008). the 2007–2009 international financial crisis led to the credit crunch, causing financing difficulties for smes. small firms were the worst affected because they struggled to find alternative financing sources (iver, pedydro, da-rocha-lopes, & schoar, 2013). the intervention of central banks and governments (friedman, 2011) was required to protect the financial system and restore confidence in the market (zingales, 2008). evidence suggests that financial institutions report neither high risks—especially in terms of lending (loan type and volume)—nor the effects of these risks on their activities. hence, the corporate governance system, which should guarantee providers of finance a return on their investment (shleifer & vishny, 1997), has been compromised. this failure to report risk, together with other high-level governance shortcomings, has brought into question the corporate governance models adopted by financial institutions. a strong corporate governance system reduces agency problems that arise from information asymmetry between managers and shareholders (walkner, 2004). these issues are addressed by the corporate governance view and are covered by agency theory and information asymmetry. despite the importance of commercial banks, especially regarding sme financing, research on banks’ corporate governance is scarce. a better understanding of banking activity is necessary. this means applying specific and generic performance indicators to banking activity. empirical governance studies still fail to explain the performance of banks (adams & mehran, 2003; grove, patelli, victoravich, & xu, 2011; felício, ivashkovskaya, rodrigues, & stepanova, 2014). in a study of us banks before the financial crisis, grove et al. (2011) found that weak governance practices led to risky lending decisions. this finding is consistent with the literature on weak corporate governance (e.g., black, jang, kim, & mark, 2002). this research evaluates how well different governance mechanisms achieve strong financial performance and ensure high-quality lending by commercial banks listed in the united kingdom. the objectives of this study are as follows: (1) to examine the relationships among governance mechanisms, financial performance, and loan quality; (2) to verify if strong financial performance may be associated with several alternative governance mechanisms; (3) to understand if the quality of loans issued by commercial banks may be associated with several alternative governance mechanisms. we answer the following research questions: are commercial banks’ governance mechanisms related to financial performance and risky lending practices? if such a relationship exists, is there a unique solution or do alternative solutions exist? to explore these issues, we focused on commercial banks listed in the uk (london stock exchange) before the sub-prime crisis. the sample consisted of 32 commercial banks. analysis was conducted using fuzzy-set qca. section 2 describes the theoretical background and propositions. section 3 explains the method. section 4 presents the empirical results and analysis. section 5 discusses these results. finally, section 6 offers conclusions 88 journal of small business strategy vol. 26 ● no. 1 ● 2016 and contributions, and section 7 discusses limitations and future research opportunities. theoretical background and propositions corporate governance corporate governance refers to “the set of mechanisms that influence the decisions made by managers when there is a separation between ownership and control” (larcker, richardson, & tuna, 2007). governance mechanisms are indirect control instruments that shareholders use to reduce agency problems between shareholders (principals) and managers (agents) by influencing managers’ behavior (deshmukh, 2005; chen, chung, lee, & liao, 2007). mcnulty, florackis, & ormrod (2013) report that “corporate governance is designed to reduce asymmetric information, control managerial opportunism, and redirect management toward optimal behavior.” typically, the research on corporate governance “examines whether different corporate governance structures impact or limit the behavior of executives and/or have an impact on organizational performance” (larcker et al., 2007). corporate governance studies typically use agency theory to describe the relationship between shareholders and managers (finegold, benson, & hecht, 2007; renders & gaeremynck, 2012). according to agency theory, managers use salaries and other forms of compensation to control corporate earnings to the detriment of shareholders (shleifer & vishny, 1997; miller, wiseman, & gomezmejia, 2002). information asymmetry (diamond & verrecchia, 1991; kennedy, sivakumar, & vetzal, 2006) refers to situations where managers, shareholders, or other agents gain access to valuable, privileged information and use it for their own advantage or in the interests of others. the asymmetry of information in a firm greatly affects that firm’s governance mechanisms. size, composition, and functioning of the board of directors are important corporate governance mechanisms. we analyzed the governance factors of blockholders, board size, affiliated directors, and busy directors and formulated the following propositions: proposition 1: different combinations of governance factors (blockholders, board size, affiliated directors, and busy directors) lead to strong financial performance. proposition 2: different combinations of governance factors (blockholders, board size, affiliated directors, and busy directors) lead to high loan quality. blockholders the presence of blockholders can mitigate agency problems (pawlina & renneboog, 2005). the presence of large shareholders reduces information asymmetry and improves long-term performance (pawlina & renneboog, 2005; florackis & ozkan, 2009). large shareholders supervise the management effectively (gul, kim, & qiu, 2010; lin, ma, malatesta, & xuan, 2011; jiang, habib, & hu, 2011). institutional investors (pension funds, investment trusts, and mutual funds) often play an active role in management control (daily and dalton, 1994; shleifer & vishny, 1997). blockholders often agree on decisions such as hiring managers, influencing vote initiatives, obtaining higher returns for shareholders (smith, 1996), aligning shareholders’ and managers’ interests (e.g., through remuneration) (hartzell & starks, 2004; core et al., 1999), influencing financial reporting (rajgopal & venkatachalam, 1997; 89 journal of small business strategy vol. 26 ● no. 1 ● 2016 shang, 2003), and improving future operational performance (larcker et al., 2007). elyasiani and jia (2008) report that the ownership stability of institutional investors is positively associated with financial performance and that institutional participation promotes good performance. this is even more important in commercial banks considering that depositors can reduce the influence of institutional investors through deposit insurance, which makes institutional investors a factor in strong corporate governance. we thus formulate the following proposition: proposition 1a / proposition 2a: the presence of blockholders in a commercial bank’s ownership structure leads to strong financial performance and high loan quality. board size a large board of directors is beneficial in the sense that it makes expertise and resources more readily accessible to firms (dalton, johnson, & ellstrand, 1999). nonetheless, other authors argue that large boards impair firm performance (hermalin & weisbach, 2003). large boards make it more difficult to effectively monitor the management because they offer greater opportunities for shirking and delay decision-making (jensen, 1993). harris and raviv (2008) stress that, unlike outsiders, board members have valuable information that can affect corporate governance choices. larger firms may face fewer information asymmetry problems than smaller firms because larger firms tend to be more mature when adopting disclosure policies and actions (diamond & verrecchia, 1991; harris, 1994). dermine (2013) highlights the importance of the relationship between the quality of governance mechanisms and the size of boards in the banking sector. banks have larger boards than manufacturing firms, and the larger boards in banks are positively associated with return on assets (roa) and tobin’s q (adams & mehran, 2003; belkhir, 2009). we thus formulate the following proposition: proposition 1b / proposition 2b: a large board at a commercial bank leads to strong financial performance and high loan quality. affiliated directors literature and corporate governance recommendations often focus on the role of independent directors. van essen, engelen, & carney (2013) report the importance of directors’ independence, claiming that the clear separation between these directors and insiders or major shareholders ensures that directors can independently assess the management. following this reasoning, a higher percentage of independent directors would be beneficial. however, there are several definitions of independence, and access to reliable data on independence is often limited. hence, several authors propose alternative variables to assess board members’ ties to the firm. larcker et al. (2007) overcame problems arising from defining independence and accessing data on independence by studying affiliated directors. daily and dalton (1994) highlight the importance of outside directors and their contribution toward holding active discussions, giving critical assessment, and sharing expertise and advice with the ceo. valenti, mayfield, and luce (2010) stress the importance of outside board members, focusing on access to valuable resources. director independence is important not only for the board of directors itself, but also for the 90 journal of small business strategy vol. 26 ● no. 1 ● 2016 committees within the board (e.g., the audit committee and the compensation committee). a greater percentage of affiliated or inside directors on the audit committee is associated with a lower likelihood of an auditor issuing a going concern report (carcello & neal, 2000) and a low quality of earnings (klein, 2002; vafeas, 2005). zhou and chen (2009) report that an independent audit committee is important for constraining earnings management with respect to banks’ loan loss reserves. given the discretionary nature of several items on banks’ financial statements, an independent audit committee is crucial. compensation committees are impartial delegations that establish executives’ and directors’ compensation. klein (2002) found a positive relation between earnings management and the presence of the ceo on the compensation committee. newman and mozes (1999) found that ceos receive preferential treatment when insiders are members of the compensation committee. affiliated directors on the compensation committee may be under the influence of top executives and may thus seek to establish a compensation package that favors these executives. this argument applies to banks, too, according to recent claims that executive compensation was a key factor underlying the subprime crisis (bicksler, 2008; colvin, 2008). we thus formulate the following proposition: proposition 1c / proposition 2c – the absence of affiliated directors on the board of a commercial bank leads to strong financial performance and high loan quality. busy directors supposedly, busy directors monitor the management less actively than directors who sit on few boards do. nevertheless, cashman, gillan, and jun (2012) point out the lack of consensus regarding the effect of busy directors on performance. in fact, the relationship between busy directors and performance may be non-linear (jiraporn, singh, & lee, 2009) because of reputational effects. core, holthausen, and larcker (1999) found that the number of busy directors correlates positively with ceo pay. ferris, springenberg, & hutter (2003) found that serving on multiple boards fails to affect the director’s ability to carry out board member responsibilities. harris and shimizu (2004) found that busy directors are important sources of knowledge and improve acquisition performance. cashman et al. (2012) report that whether or not busy directors affect performance may owe to firm size, highlighting the importance of controlling for firm fixed effects. after including fixed effects in the analysis, cashman et al. (2012) found a negative relationship between busy directors and performance. we thus formulate the following proposition: proposition 1d / proposition 2d: the absence of busy directors on the board of a commercial bank leads to strong financial performance and high loan quality. methods research model and propositions the research model (figure 1) was used to explore how different combinations of governance factors affect financial performance (larcker et al., 2007; grove et al., 2011; felício et al., 2014) and loan quality (grove et al., 2011). 91 journal of small business strategy vol. 26 ● no. 1 ● 2016 figure 1. research model and propositions attributes and variables the governance factors (attributes) chosen for this research were based on factors discussed by larcker et al. (2007), grove et al. (2011), and felício et al. (2014). the research model had four attributes (resulting from 13 observable variables) and two outcomes. the attributes were blockholders, board size, affiliated directors, and busy directors. the outcomes were financial performance, measured by return on assets (roa), and loan quality, measured by non-performing assets ratio (npar). the governance data were gathered manually from annual reports, and the outcome variables were collected from the bankscope database. blockholders we defined a blockholder as a shareholder with 5% or more of the company’s shares (larcker et al., 2007). concentration of shareholdings is potentially related to strong governance as larger shareholders may have the necessary resources and incentives to monitor the management. this factor comprised the variables percentage of shares owned by blockholders, number of blockholders, and percentage held by largest blockholder (institutional). board size board size comprised the number of members on the compensation committee, the number of members on the audit committee, and the number of members on the board of directors (larcker et al., 2007). the size of boards and committees may increase diversity, knowledge, and experience but may hinder coordination. affiliated directors affiliated directors comprised the variables percentage of affiliated members of the audit committee, percentage of affiliated members of the compensation committee, affiliated audit committee chair, and affiliated compensation committee chair (in the latter two variables, the dummy variables were equal to 1 if the chairperson was affiliated, and 0 otherwise) (larcker et al., 2007). we assumed that affiliated members were under the influence of the executive members of the board. busy directors busy directors comprised the variables percentage of busy outside directors, percentage of busy affiliated directors, and 92 journal of small business strategy vol. 26 ● no. 1 ● 2016 percentage of busy inside directors. a busy director was defined as a director sitting on four or more boards simultaneously (larcker et al., 2007). although this greater experience may be useful, it may limit the time the director can dedicate to duties on each board. outcomes as per grove et al. (2011), we considered two outcome variables for the year 2006. return on assets (roa) was the proxy for financial performance, and non-performing assets ratio (npar) was the proxy for loan quality. roa represents the ratio of operating income to total assets, and it reflects overall firm performance. npar is the ratio of loans already in default to total assets. sample, data collection, and analysis method the sample consisted of banks listed on the london stock exchange (uk listed and overseas listed) as of december 31, 2005. the list, consisting of 44 banks, was obtained from historical data published on the lse website (www.londonstockexchange.com). the list was cross-referenced with the corresponding list as of december 31, 2006. five banks were excluded because they were unlisted. in addition, two banks were inactive, and five others were excluded because of difficulty collecting data. the final sample therefore consisted of 32 banks. data on financial variables (2006) came from the bankscope database. corporate governance variables came directly from bank reports and accounts for 2005. as per larcker et al. (2007), we standardized the governance variables. we then calculated the attributes by taking the average of the standardized variables. we used fuzzy-set qca to identify the causal conditions that lead to good financial performance and high loan quality. settheoretic analysis identifies causal patterns by examining the relationships between subsets. this method uses boolean algebra and algorithms to reduce a high number of complex causal conditions to a small group of configurations that lead to a certain outcome. the software used in this analysis was fsqca 2.5, which provided an output listing the complex, parsimonious, and intermediate solutions. rioux and ragin (2009) argue that the intermediate solution has considerable benefits over the other solutions. we calibrated the original variables and factors by taking the average as the point of maximum ambiguity (cross-over point) and the percentiles 0.05 and 0.95 as the thresholds for full non-membership and full membership, respectively. after calibration (crilly et al., 2012), we replaced the 0.5 value of maximum ambiguity with 0.499. findings by larcker et al. (2007), grove et al. (2011), and felício et al. (2014) support the validity of the corporate governance factors in the model. empirical results and analysis different combinations of attributes led to strong financial performance and high loan quality. based on the four governance attributes, the maximum number of combinations was 16, although some of these combinations may not have been covered by empirical cases in this sample—these were the logical remainders excluded from the analysis (feurer et al., 2015; fiss, 2011; ragin, 2008). the results also confirm the presence (or 93 http://www.londonstockexchange.com/ journal of small business strategy vol. 26 ● no. 1 ● 2016 absence) of core and peripheral conditions in the combinations that led to the outcomes. financial performance: return on assets (roa)the consistency cutoff for roa was 0.84. this value was used to separate cases belonging to the solution from those not belonging to the solution. the parsimonious and intermediate solutions (table 1) are presented using the notation employed by crilly et al. (2012) and ragin and fiss (2008). table 1 configurations leading to strong financial performance solution 1a 1b 1c 2 3 block ● ● ● board size ○ ○ ○ affiliated ○ ○ ● busy directors ○ ● ○ consistency 0.86 0.81 0.84 0.85 0.93 raw coverage 0.54 0.54 0.58 0.43 0.33 unique coverage 0.00 0.02 0.04 0.08 0.03 overall solution coverage 0.84 overall solution consistency 0.80 note: ● = core causal condition present; ● = peripheral causal condition present; ○ = core causal condition absent; ○ = peripheral causal condition absent. table 1 reports three solutions. the first solution had three neutral permutations. therefore, results show the equifinality of first-order (or across-type) and second-order (or within-type) solutions. the overall solution coverage was 0.84, and the solution consistency was 0.80. solution 1a shows that the combination between small boards (core condition) and less busy directors led to strong financial performance (i.e., roa). similarly, small boards (core condition) consisting of nonaffiliated members (solution 1b) also led to strong financial performance. finally, the absence of large boards (core condition) combined with the presence of blockholders (solution 1c) yielded strong financial performance. solution 2 shows that the presence of blockholders (core condition) and busy directors (core condition) combined with the absence of affiliated directors led to strong financial performance. finally, solution 3 shows that the combination of presence of blockholders, presence of affiliated directors 94 journal of small business strategy vol. 26 ● no. 1 ● 2016 (both core conditions), and absence of busy directors yielded strong financial performance. loan quality: non-performing assets ratio unlike for financial performance, we used the negation of the non-performing assets ratio to imply a high loan quality. this approach was similar to that employed by grove et al. (2011), who used the inverse of the nonperforming assets ratio. the consistency cutoff in the truth table was 0.84. table 2 shows the parsimonious and intermediate solutions. table 2 configurations for loan quality note: ● = core causal condition present; ● = peripheral causal condition present; ○ = core causal condition absent; ○ = peripheral causal condition absent. table 2 shows the existence of three solutions, the last of which had two neutral permutations. table 2 therefore shows the equifinality of first-order (or across-type) and second-order (or within-type) solutions. the overall solution coverage was 0.63, and the solution consistency was 0.80. the consistency values for the financial performance and loan quality solutions were similar, but the lower solution coverage of the loan quality solution implies that the percentage of member contribution to the outcome (63%) was lower. therefore, the financial performance solution is empirically more powerful (crilly et al., 2012). solution 1 shows that the presence of blockholders combined with the absence of busy directors (both core conditions) led to high loan quality. solution 2 shows that the combination of the absence of blockholders, a small board (core conditions), and the absence of affiliated directors led to high loan quality. finally, solution 3a shows that the core condition of presence of affiliated directors combined with the absence of busy directors led to high loan quality. solution 3b shows that the presence of affiliated directors (core condition) combined with the presence of blockholders and a small board led to high loan quality. solution 1 2 3a 3b block ● ○ ● board size ○ ○ affiliated ○ ● ● busy directors ○ ○ consistency 0.82 0.88 0.83 0.83 raw coverage 0.46 0.32 0.31 0.25 unique coverage 0.12 0.03 0.02 0.03 overall solution coverage 0.63 overall solution consistency 0.80 95 journal of small business strategy vol. 26 ● no. 1 ● 2016 discussion our findings highlight the importance of corporate governance attributes in achieving strong financial performance and ensuring high loan quality. different solutions yielded similar results, a finding which implies that effects vary according to context or complementarities between attributes. the effect of certain attributes was enhanced or suppressed by the presence of another attribute. this finding highlights the importance of tailoring the governance model to each bank. results confirm propositions 1 and 2. the presence of large shareholders may mitigate the agency problem associated with shareholder dispersion and collective action problems. the results highlight the presence of blockholders in banks with the best financial performance. high loan quality, however, can be obtained through the presence or absence of blockholders. for high loan quality in the absence of blockholders, the bank must have a small board without affiliated members. results support propositions 1a and 2a because strong financial performance and high loan quality can be achieved if blockholders are present. in addition, high loan quality can be obtained if blockholders are absent. according to the literature, the actions of blockholders increases shareholder wealth (smith, 1996), operational performance (larcker et al., 2007) and financial performance (elyasiani & jia, 2008). larger boards and board committees have a broader skillset, which can aid decisionmaking, especially in banking, where products and services are complex and require specialist knowledge. conversely, however, larger boards and board committees prevent coordination and may therefore hinder decision-making. our findings show that banks achieve strong performance and high loan quality when large boards and committees are absent, thereby supporting the arguments highlighting the difficulties in coordinating large boards and committees. results fail to support propositions 1b and 2b. hermalin and weisbach (2003) argue that a large board impairs firm performance. conversely, adams and mehran (2003) report that, in banking, large boards are positively associated with roa and tobin’s q. affiliated directors are expected to be aligned with managers. hence, having affiliated directors may aggravate agency problems. accordingly, both financial performance and loan quality should benefit from the absence of affiliated directors. results provide conflicting evidence regarding the effect of affiliated directors on both financial performance and loan quality. depending on other attributes, the presence and absence of affiliated directors may lead to positive outcomes. propositions 1c and 2c are confirmed. in certain conditions, the absence of affiliated directors was associated with better performance and loan quality. nevertheless, when combined with the presence or absence of other attributes, the presence of affiliated directors was associated with better performance and loan quality. a greater percentage of affiliated or inside directors on the audit committee was associated with a lower likelihood of an auditor issuing a going concern report (carcello & neal, 2000) and a lower quality of earnings (klein, 2002; vafeas, 2005). zhou and chen (2009) report that an independent audit committee is important for constraining earnings management with respect to banks’ loan loss reserves. the presence of affiliated 96 journal of small business strategy vol. 26 ● no. 1 ● 2016 directors indicates the importance of specific banking industry knowledge. busy directors have additional experience but may lack the time they need to perform their duties. results reveal that the presence and absence of busy directors may be associated with strong financial performance, depending on other attributes. in contrast, the absence of busy directors was associated with high loan quality. results support propositions 1d and 2d, although, depending on other attributes, strongly performing banks may have busy directors. the loan quality solution had lower solution coverage than the financial performance solution. hence, the financial performance solution had a higher percentage of cases that contributed to the outcome, which implies that this solution has greater empirical power. grove et al. (2011) verified that corporate governance factors explain financial performance better than they explain loan quality, although they studied more governance factors than we did in this research. conclusions and contributions in this study, we analyzed how different combinations of governance attributes led to strong financial performance and high loan quality in commercial banks in the period prior to the sub-prime crisis. for this analysis, we used the innovative fsqca method, which identifies different configurations of attributes that lead to the desired outcome. results show that the same outcomes can be achieved through different configurations of attributes. this finding challenges traditional approaches to the study of corporate governance, which yield blanket recommendations regarding the adoption of corporate governance practices. furthermore, these findings explain why different authors have been reaching contradictory conclusions regarding the effect of different governance variables on performance. these findings contribute to the literature by showing the existence of different combinations of attributes and by highlighting the importance of combined effects that enhance or suppress the effect of a certain variable on performance and risk. findings are thus helpful for practitioners because they show that different combinations can lead to strong performance, depending on the bank’s characteristics (e.g., shareholder structure and board set-up). finally, for regulators, these results may challenge some recommendations on good governance practices. hence, findings may encourage regulators to study the joint effect of some recommendations, thus helping to prevent unexpected outcomes. the benefits of these conclusions extend to other sectors because banks play a crucial role in financing firms, especially smes. avoiding new financial crises and their implications is a major challenge for governments, regulators, and other stakeholders. limitations and future research these results are encouraging in so far as they support the use of fsqca to corporate governance research and offer new insight in response to unanswered research questions. further research opportunities nevertheless remain. these include enlarging the sample and applying fsqca to other sectors and governance variables. this method may have similar potential in corporate governance research on smes. in this study, we used governance factors adopted by other researchers, yet the same 97 journal of small business strategy vol. 26 ● no. 1 ● 2016 approach may be applied to specific individual variables. we recommend, however, that researchers analyze non-linear relationships— such as those discussed by grove et al. (2011)—and seek the most suitable approach to address this issue using fsqca. this study is rooted in agency theory and information asymmetry theory. fsqca may also be useful for analysis within other theoretical frameworks such as stewardship theory or resource dependency theory (valenti et al., 2010). such analysis may provide a better understanding of the effect of governance mechanisms on performance and risk. furthermore, it would be interesting to study other commercial banking governance mechanisms in different contexts. references adams, r., & mehran, h. (2003). is corporate governance different for bank holding companies? economic policy review, federal reserve bank of new york, april, 123-142. allen, f. (1993). stock markets and resource allocation. in c. mayer & x. vives (eds.), capital markets and financial intermediation, (81-108). cambridge, u.k.: cambridge university press. beck, t., demirgüç-kunt, a., & maksimovic, v. 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(2004). audit committee, board characteristics and earnings management by commercial banks. working paper. suny at binghamton. 101 http://www.smallbusinessinstitute.biz the relationship between a comprehensive strategic approach and small business performance ralph i. williams jr.1, scott c. manley2, joshua r. aaron3, francis daniel4 1middle tennessee state university, usa, ralph.williams@mtsu.edu 2midwestern state university, usa, scott.manley@mwsu.edu 3middle tennessee state university, usa, joshua.aaron@mtsu.edu 4belmont university, usa, francis.daniel@belmont.edu a b s t r a c t leaders of small firms often lack support staff to whom they can delegate managerial tasks. related to the small business management paradigm, these leaders need insight into what management practices to employ as they simultaneously balance operations, administration, and human resource duties. strategic planning has been the focus of much scholarly attention. however, the effect of strategic planning on small business performance is unclear. we attempt to provide clarity by establishing a higher-order component construct, comprehensive strategic approach, which includes three related management practices: goal setting, strategic planning, and financial ratio analysis. we find evidence that a comprehensive strategic approach enhances small business performance. keywords: journal of small business strategy 2018, vol. 28, no. 02, 33-48 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2018 small business institute® apa citation information: williams jr., r. i., manley, s. c., aaron, j. r., & daniel, f. (2018). the relationship between a comprehensive strategic approach and small business performance. journal of small business strategy, 28(2), 33-48. w w w. j s b s . o rg small business, strategic planning, goal setting, financial ratio annalysis small businesses contribute much to economies around the world (halabi, barrett, & dyt, 2010), generating jobs, tax revenues, functional products, and charitable donations (chaganti, brush, haksever, & cook, 2002). in addition, entrepreneurial small businesses play a key role in capturing market opportunities, developing product niches, and leveraging new technological developments (pinho & de sá, 2013). small businesses may also make cultural and social contributions to their communities (halabi et al., 2010; sharir & lerner, 2006; thompson, smith, & hood, 1993). given the contributions small firms make on several fronts, it is appropriate that researchers seek to provide small business leaders guidance as to what management practices positively impact their firms’ performance. as small business leaders typically lack a comprehensive support staff and are heavily involved in day-to-day operations (ensley, carland, & carland, 2003; robinson & pearce, 1984; tell, 2012), utilizing effective management practices is especially important for small firms. in that context, small business leaders must make vital decisions regarding the most useful management activities in which to engage and the undertakings that provide the greatest potential for performance improvement (brinckmann, grichnik, & kapsa, 2010). yet, given small business heterogeneity, the diversity of small business contexts, and the dynamic nature of small businesses, identifying “best practices” is a difficult task (tell, 2012). as traditional planning activities include a rational and structured evaluation of alternatives (gibson & cassar, 2002), instinctively, one would assume strategic planning is an effective small business management practice, positively affecting performance (pearce, freeman, & robinson, 1987). nevertheless, research considering the relationship between strategic planning and small business performance has produced mixed results (ensley et al., 2003; heriot & loughman, 2009; honig & samuelsson, 2012; robinson & pearce, 1983; robinson & pearce, 1984; pearce et al., 1987; powell 1992; schwenk & shrader, 1993). consequently, small business leaders face a decision: should they engage in strategic planning (brinckmann et al., 2010), a practice often taught and promoted in business introduction http://www.smallbusinessinstitute.biz http://www.jsbs.org 34 r. i. williams jr., s. c. manley, j. r. aaron, & f. daniel journal of small business strategy / vol. 28, no. 2 (2018) / 33-48 classes (heriot & loughman, 2009; honig & samuelsson, 2012; miller & cardinal, 1994; pearce et al., 1987), or should those leaders simply rely on entrepreneurial instincts? as “the relationship between strategic planning and company performance lies at the very heart of the [strategic management] discipline” (schwenk & shrader, 1993, p. 55), the question of whether strategic planning affects small business performance has deep implications for the strategic management field. given previous mixed results, and the importance of equipping small business leaders with effective management practices, strategy scholars should continue to inductively investigate the relationship between strategic management practices and performance, seeking to develop theories utilizing evidence harvested from the small business arena (ensley et al., 2003; powell, 1992; tell, 2012). in the present study, we make several contributions to small business research. first, using a sample of small firms, we explore the relationship between strategic planning and business performance. in addition, we explore the effect of two other management practices (goal setting and financial ratio analysis) on small business performance. therefore, we contribute to the knowledge of the relationships between three management activities (strategic planning, financial ratio analysis, and goal setting) and small firm performance. more importantly, we build a hierarchical component model with three lower-order components (goal setting, strategic planning, and financial ratio analysis) that captures a higher-order component (comprehensive strategic approach). higher-order components involve more than one dimension (exogenous construct or lower-order component) (hair, hult, ringle, & sarstedt, 2017; wetzels, odekerken-schröder, & van oppen, 2009). by forming a higher-order component consisting of three exogenous lower-order components, we contribute to the discussion of how small business leaders might approach strategic planning, employing a comprehensive strategic approach. accordingly, we label our higher-order component a “comprehensive strategic approach.” we then explore the relationship between a comprehensive strategic approach and small business performance. hypotheses development to develop our five hypotheses, we first discuss the three management practices considered in the present study: strategic planning, goal setting, and financial ratio analysis. we then discuss the higher-order component developed herein, a comprehensive strategic approach. strategic planning as previously stated, business researchers have conducted countless studies of strategic planning, seeking to explore strategic planning’s effect on firm performance. in the early years of strategic planning research, from 1970 until 1990, approximately 40 empirical studies produced inconclusive or inconsistent results (powell, 1992). shrader, taylor, and dalton (1984) reviewed over sixty studies and concluded that there is no readily apparent systematic relationship between formal planning and performance. indeed, pearce and colleagues (1987) published an article titled “the tenuous link between formal strategic planning and financial performance” in the strategic management journal. since 1990, studies exploring the relationship between strategic planning and performance continue to produce mixed results (falshaw, glaister, & tatoglu, 2006). research finding a positive relationship include the following: andersen (2000), elbanna (2008), and song, im, bij, and song (2011). research finding no relationship includes the following: falshaw and colleagues (2006) and ouakouak and ouedraogo (2013). it appears researchers have recently focused on what affects the relationship between strategic planning and performance. for example, although ouakouak and ouedraogo (2013) found no direct relationship between strategic planning and firm performance, yet they did find a positive relationship between strategic planning and employee strategic alignment, and they found a positive relationship between employee strategic alignment and firm performance, thus employee strategic alignment mediated the relationship between strategic planning and firm performance. furthermore, given the findings of no direct effect between strategic planning and firm performance, ouakouak and ouedraogo’s (2013) findings indicate employee strategic alignment fully mediates the relationship between strategic planning and firm performance. similarly, sarason and tegarden (2003) found no relationship between strategic planning and performance when considering all the firms in their sample, but the authors did find strategic planning positively affects performance of firms in early stages of development. related to small business research, studies finding a positive relationship between small business strategic planning and performance include the following: bracker and pearson (1986), brinckmann et al. (2010), gibson and cassar (2005), robinson (1982), sandada, pooe, and dhurup (2014), shrader, mulford, and blackburn (1989), and watts and ormsby (1990). in a meta-analysis of small business studies, schwenk and shrader (1993) did find a positive 35 r. i. williams jr., s. c. manley, j. r. aaron, & f. daniel journal of small business strategy / vol. 28, no. 2 (2018) / 33-48 relationship between planning and performance. yet, the authors commented that in light of the small effect sizes, small business leaders should consider whether planning was worth the time invested. multiple other studies have failed to find a positive correlation between planning and small business performance (e.g., ensley et al., 2003; honig & samuelsson, 2012; mckicrnan & morris, 1994; risseeuw & masurel, 1994; robinson, logan, & salem, 1986). moreover, robinson and pearce (1984) concluded from a comprehensive literature review that research on the effectiveness of formal planning in small business was unsettled. given the intuitive notion that strategic planning provides direction in managing and leading a business, the mixed results are a bit surprising. from general strategic planning research (studies not specifically directed at small businesses), scholars have offered multiple explanations for the inconsistent results produced from planning/performance research. for instance, researchers have proposed that planning might produce inflexibility and excessive bureaucracy (brinckmann et al., 2010; miller & cardinal, 1994; mintzberg, 1987; pearce et al., 1987). in addition, the potential inflexibility and bureaucracy from strategic planning may limit innovative thinking, which is important in a dynamic environment (risseeuw & masurel, 1994). as mintzberg (1987) argued that “[s]etting oneself on a predetermined course in unknown waters is the perfect way to sail straight into an iceberg. sometimes it is better to move slowly, a little bit at a time, looking not too far ahead, but very carefully, so that behavior can be shifted on a moment’s notice” (p. 27). hamel and prahalad (1989) proposed the absence of a plan may actually provide benefit in a dynamic or turbulent environment. other aspects may influence the inconsistency between strategic planning and firm performance found in research. for example, benefits from strategic planning may not transpire immediately, requiring a longitudinal approach to appropriately research the topic (brinckmann et al., 2010; ensley et al., 2003; schwenk & shrader, 1993). in addition, researchers typically make an assumption that all strategic plans are good plans (pearce et al., 1987), but not all leaders have managerial planning skills (ensley et al., 2003; heriot & loughman, 2009). furthermore, for a good strategic plan to positively influence performance, leaders must effectively and efficiently execute the plan (mintzberg, 1987). additionally, researchers rarely examine causality between planning and performance – does planning enhance performance, or does good performance provide resources that allow leaders to engage in strategic planning (gibson & cassar, 2002; schwenk and shrader, 1993)? another possible reason for the contradictory results is the variance researchers apply in operationalizing strategic planning, obfuscating understanding of what strategic planning involves (miller & cardinal, 1994; pearce et al., 1987). generally, strategic planning is considered a rational process uncovering the threats and opportunities posed by the business’s operating environment, identifying the business’s strengths and weaknesses, and then using that information to formulate a plan creating alignment between the firm and its environment in order to enhance firm performance (ensley et al., 2003; risseeuw & masurel, 1994; tell, 2012). nonetheless, some researchers consider strategic planning to have occurred only if a formal written plan was developed (e.g., gibson & cassar, 2005; pearce et al., 1987). in contrast, more recent research applies a less stringent definition, merely asking survey participants whether they engaged in strategic planning (e.g., eddleston, kellermanns, & sarathy 2008; honig & samuelsson, 2012; kellermanns & eddleston, 2006). as a small business owner or manager might have a great plan, yet that plan may exist in unwritten form, implicit and abstract, the different approaches are especially relevant to small business (brinckmann et al., 2010). in a study of small businesses, brinckmann and colleagues (2010) found a positive relationship between the presence of unwritten plans and firm performance, yet they failed to find a relationship between written business plans and firm performance. as in other research (e.g., matthews & scott, 1995; shrader et al., 1989; watts & ormsby, 1990), we apply a simple definition of strategic planning, inquiring if a plan exists and not if a formal written plan exists. although previous results are mixed, we follow the brinckmann and colleagues’ (2010) findings indicating strategic planning positively affects small business performance. thus, we hypothesize that: hypothesis 1. strategic planning positively affects small business performance. goal setting the relationship between goal setting and performance has been extensively researched at the individual, group and organizational levels, with more than 1000 studies having been conducted over the past four decades (seijts & latham, 2012). goals affect performance through multiple mechanisms: they provide direction; they energize; they affect persistence (locke & latham, 2002); and they “affect action indirectly by leading to the arousal, discovery, and/or use of task-related knowledge and strategies” (wood & locke, 1990, p. 707). this goal related energy is best generated by specific and challenging goals. research 36 r. i. williams jr., s. c. manley, j. r. aaron, & f. daniel journal of small business strategy / vol. 28, no. 2 (2018) / 33-48 has consistently shown that specific and difficult goals yield greater motivation and better performance than do vague, easy goals (locke & latham, 1984; kleingeld, mierlo, & arends, 2011). most studies have posited a linear relationship between the difficulty of the goal and the level of performance, a trajectory that breaks down only when the goal is perceived to be impossible to achieve (latham & steele, 1983; locke & latham, 2002). the goal setting-performance relationship is moderated by several factors, including the needs for goal acceptance and commitment (locke, latham, & erez, 1988; klein, wesson, hollenbeck, & alge, 1999) and timely feedback on progress, particularly for difficult goals (bandura & cervone, 1983). task complexity (latham & yukl, 1975; wood, mento, & locke, 1987), task novelty (earley, connolly, & ekegren, 1989), situational constraints, and/or ability (locke & latham, 1984; seijts, latham, tasa, & latham, 2004) can make setting more difficult goals less effective. participation in goal development has long been theorized to enhance the relationship between difficult goals and performance by increasing buy-in and commitment, but research findings have been inconsistent (chacko, stone, & brief, 1979; latham & locke, 1979; latham & steele, 1983; shalley, oldham, & porac, 1987). the goal setting-performance relationship is mediated by the self-efficacy and self-set goals of the individuals doing the work (lock & latham, 2002) as well as the strategy developed to achieve the goals (mitchell & silver, 1990). moving from the individual to group level of analysis adds factors for consideration, including the following: multi-level goals, degrees of goal and task interdependence, and the impact of group efficacy (mitchell & silver, 1990). looking at interdependent group tasks, mitchell and silver (1990) unsurprisingly found that setting difficult individual goals resulted in significantly poorer performance than when difficult group goals, or a combination of individual and group goals, were set. however, against prevailing theory, the authors found no significant difference between the performance of teams with group goals and those with no goals at all. a meta-analysis by kleingeld, mierlo, and arends (2011) of the effect goal setting has on group performance offered similarly perplexing results. while the meta-analysis did find a significant advantage for specific difficult goals over nonspecific goals, it found no moderating effect for task interdependence, task complexity, or participation. the relative efficacy of individual and group level goals was found to be contingent on the focus of the individual goals, with “groupcentric” individual goal resulting in positive group performance and “egocentric” individual goals leading to poor group performance. this would seem to indicate that level of analysis is also an important factor in the goal-performance relationship. related to organizational goals, quinn (1977) posited, “the benefits of effective goal setting are greatest when people throughout the organization genuinely internalize the goals and “make them their own” (p. 29). as group level tasks require multilevel goals to unify effort effectively, it has been suggested that organizations need multi-dimensional goals to provide a mechanism for internalization and buy-in at the strategic organizational level (lindley & wheeler, 2000). multi-dimensional goals are defined as strategic reference points that simultaneously reflect internal (such as building competencies) and external (benchmarking) aspirations, as well as the organization’s past and its shortand long-term future (fiegenbaum, hart, & schendel, 1996; lindley & wheeler, 2000). to be effective, these multi-dimensional goals must be multi-level and generate “. . . high levels of agreement among top managers and organizational members regarding the content of their strategic reference points. . . ” (fiegenbaum, hart & schendel, 1996, p. 231). at every level, to be successful, setting specific difficult goals must be accompanied by goal acceptance and commitment. ordóñez, schweitzer, galinsky, and bazerman (2009) suggest that the efficacy of goal setting has been overstated, and that the potential harms of overemphasizing goals has been largely ignored by researchers. these include a narrowing of focus that reduces a company’s ability to detect and respond to unanticipated threats and opportunities, a culture-sapping increase in internal competition, a propensity towards riskier decisions and behaviors when goals are not met, and an increased probability of unethical behavior when firms desperately strive to close the gap between reality and aspiration, and higher turnover of managers (schweitzer, ordóñez, & douma, 2004; barsky, 2008; ordóñez et al., 2009). the inexorable link between goal setting and the strategic planning process is well-established in the literature. brinkmann and colleagues (2010) assert that by its very nature, “planning implies the specification of goals and fosters the identification of effective steps to achieve these goals” (p. 27). quinn (1977) adds, “[e]ffective strategic goals do more than provide a basis for direction setting and performance measurement. they are essential to establishing and maintaining freedom, morale, and timely problem sensing in an enterprise” (p. 29). quinn’s observations are consistent with studies that have shown goal setting improves strategy implementation, enhances performance in complex settings (chesney & locke, 1991), and increases the speed and efficiency of internal decision making in both strate37 r. i. williams jr., s. c. manley, j. r. aaron, & f. daniel journal of small business strategy / vol. 28, no. 2 (2018) / 33-48 gic business units (kownatzki, walter, floyd, & lechner, 2013) and small businesses (brinkmann et al., 2010). given the potential positive effects of goal setting on the strategic planning process, and the aforementioned studies supporting a link between goal setting and performance, we hypothesize that: hypothesis 2. goal setting positively affects small business performance. financial ratio analysis when managers use financial ratios, they express financial results as proportions or multiples, potentially revealing more information than is typically available from balance sheets, income statements, or cash-flow statements (delen, kuzey, & uyar, 2013; thomas, & evanson, 1987). examples of financial ratios include the following: cost of goods sold to sales, inventory turnover, gross margin to sales, net profit to net sales, net profit to inventory, current assets to current liabilities, net sales to inventory, total liabilities to net worth, return on equity, return on investment, days accounts receivable outstanding, days accounts payable outstanding, and inventory to net working capital (delen et al., 2013; edmister, 1972; isberg, 1998; thomas & evanson, 1987). financial ratio analysis can enhance business managers’ grasp of liquidity, leverage, operating efficiency, and profitability (isberg, 1998). for business owners, managers, and executives, effective decision making is vital. leaders making important decisions are often aided by accounting numbers, data that may signal the need for change (delen et al., 2013; thomas & evanson, 1987). financial ratios supplement information gleaned from financial statements, enhancing leaders’ ability to improve the efficiency and profitability of their operations, providing more accurate assessment than subjective evaluations often utilized (delen et al., 2013). financial ratios help small business owner-operators understand these important viewpoints: where the business has been, where the business is now, and where the business is going (patrone, 1981). in addition, the use of financial ratios facilitates the monitoring of decision outcomes, developing strategies and related performance targets, and assessing potential capital investments (isberg, 1998). therefore, it is reasonable to expect that firms with leaders who analyze financial ratios would outperform firms with leaders who do not analyze financial ratios (thomas & evanson, 1987). nonetheless, researchers suggest that few small business owner-managers engage in financial ratio analysis (e.g., dethomas & fredenberger, 1985; halabi et al., 2010). based upon qualitative research, patrone (1981) learned that most small business owner-managers take the position: “ . . . don’t need to know about financial ratio analysis – i leave that up to my financial accountant” (p. 35). however, patrone (1981) countered that “ratios may be . . . [the] tip of an iceberg. a ratio has little meaning by itself. it only becomes meaningful when compared to a budgetary expectation, past ratios, ratios of competitors, or published industry averages” (p. 37), implying that for small business owner-managers to really gain from financial ratio analysis, they must dig deeper into the numbers as opposed to simply viewing an accountant’s report. patrone’s suggestion of a general lack of interest in analyzing financial ratios is consistent with later findings by halabi and colleagues (2010). mcmahon and holmes (1991) suggested that reactive and shortsighted small business owner-managers may not invest time and effort into learning how to use financial ratios, much less expend the time required to regularly analyze the ratios. research results regarding the relationship between financial ratio analysis and small business performance is mixed. thomas and evanson (1987) did not find a correlation between financial ratio analysis and profitability in small businesses, and they proposed two possible explanations: the inability of the managers represented in the survey to accurately interpret financial ratios, and the inability of the managers to make effective decisions based upon the financial ratios. through qualitative exploratory study of 102 small businesses, mcmahon and davies (1994) found no evident association between financial ratio analysis and performance. although most small business owner-managers can acquire the ability to analyze financial ratios, apparently, few do so. nevertheless, in recent decades a change has occurred which may facilitate the analysis of financial ratios in small business: available hardware and software that facilitates the generation of useable financial data in small businesses (halabi et al., 2010). nonetheless, dahmen and rodríguez (2014) found a positive relationship between small business owner-manager financial evaluation, including financial ratio analysis, and firm performance. in the context of the potential advantage financial ratio analysis may provide small businesses, the increased availability of financial data in small businesses, and dahmen and rodríguez’s (2014) results, we hypothesize that: hypothesis 3. financial ratio analysis positively affects small business performance. the three hypotheses described above are illustrated in the following model: 38 r. i. williams jr., s. c. manley, j. r. aaron, & f. daniel journal of small business strategy / vol. 28, no. 2 (2018) / 33-48 comprehensive strategic approach: the higher-order component hierarchical component models encompass two layers of constructs. in hierarchical component models, higher-order components capture abstract constructs, and lower-order components capture subdimensions of higher-order components (hair et al., 2017; wetzels et al., 2009). below we discuss the higher-order component developed and tested in the present study, a comprehensive strategic approach. schwenk and shrader (1993) suggested, “the question then no longer is ‘does strategic planning affect small firm performance?’ rather, it is ‘under what conditions is performance enhanced by small firm strategic planning’” (p. 61)? we alter schwenk and shrader’s question a bit, turning from the antecedents of performance enhancing strategic planning to explore what combination of management activities related to strategic planning may positively affect small business performance. strategic planning provides a roadmap of steps for the path of accomplishing organizational goals by facilitating thorough consideration of feasible options and enhancing internal communication and interaction (powell, 1992). strategic planning is a facilitating process (kellermanns & eddleston, 2006), integrating a firm’s goals with a road map of actions directed at achieving those goals. meaningful financial ratio analysis also includes setting business goals and articulating a strategy for obtaining those goals (isberg, 1998). brinckmann and colleagues (2010) recount that early planning scholars (e.g., andrews, 1971; ansoff, 1965; armstrong, 1982; porter, 1985) included in their description of business planning the following components: designation of goals, generation of a plan to reach these those goals, and evaluation as well as implementation control. figure 1. a comprehensive strategic approach. related, the three lower-order components measured in the present study represent small business leaders’ attention to three questions: 1. what goals do we want to accomplish? 2. what is our plan for accomplishing our goals? 3. are we making progress toward accomplishing our goals? from this literature, we propose the three lower-order components in our model (goal setting, strategic planning, and financial ratio analysis) fit well together, forming a higher-order component, a comprehensive strategic approach; thus, we hypothesize that: hypothesis 4. goal setting, strategic planning, and financial ratio analysis form a higher-order component (comprehensive strategic approach). also from the literature, given the potential positive operational effect on small business performance by combining goal setting, strategic planning, and financial ratio analysis we propose this hypothesis: hypothesis 5. a comprehensive strategic approach positively affects small business performance. figure 2 illustrates hypotheses 4 and 5. figure 2. a higher-order model of a comprehensive strategic approach. research methods and sample the purpose of this study is to examine the relationship between strategic planning and firm performance. consistent with prior research (e.g., eddleston & kellermanns, 2007), we used a self-reported perceptual measure of firm performance. such self-reported measures typically are highly correlated with absolute measures of firm performance (shepherd & wiklund, 2009; honig & samuelsson, 39 r. i. williams jr., s. c. manley, j. r. aaron, & f. daniel journal of small business strategy / vol. 28, no. 2 (2018) / 33-48 2012). using a 7-point likert scale, we asked respondents to assess their firms’ performance relative to their competitors in eight areas representing overall firm financial performance. these items are included in the appendix, as are all our measurement items. cronbach’s alpha for our firm performance construct was 0.933. to measure the extent of strategic planning, we employed three survey items utilized by eddleston, kellermanns, and sarathy (2008) and kellermanns and eddleston (2006) as modified from gould (1979) (see appendix). cronbach’s alpha for our strategic planning construct items was 0.859. we asked respondents to assess their firms’ goal setting on three items that were adopted from prior research (robinson & pearce, 1983; powell, 1992) (see appendix). cronbach’s alpha for our goal setting construct was 0.828. we asked respondents to assess their firms’ participation in and utilization of their industry trade association’s annual financial statement studies and ratios report (see appendix). such self-reported utilization of financial ratios is consistent with prior research (e.g., mcmahon & davies, 1994; thomas & evanson, 1987). cronbach’s alpha for our ratio analysis construct was 0.780. our second theoretical model (see figure 2) integrates three lower-order components: strategic planning, goal setting, and ratio analysis. these three lower-order components are combined into a higher-order component (comprehensive strategic approach). the result is a parsimonious framework that is consistent with prior conceptualizations of strategic planning as a higher-order component (e.g., batra, sharma, dixit, & vohra, 2016). cronbach’s alpha for our comprehensive strategic approach construct was 0.812. in small business studies, research has shown that strategic planning is related to firm size, with smaller firms typically exerting less effort (gibson & cassar, 2002; risseeuw & masurel, 1994). thus, we controlled for firm size in both sales and employment levels. the path coefficient for sales was 0.034 (t = 0.535, p = 0.594), while the path coefficient for employment was -0.004 (t = 0.057, p = 0.955). therefore, neither control was statistically significant. data collection the questionnaire was administered online by qualtrics® to members of a trade association for printing companies, printing industries of america. multiple attributes of the printing industry make it an appropriate sample for this study. first, the average pia member firm has 47 employees; thus, most printing firms are small businesses. second, although we draw data from one industry, given recent technological advances printing companies are quite diverse, with companies offering a range of products and services unique to each firm. and third, a wide range of performance exists among pia member firms; 25% of pia member firms earn a net profit of 10% of revenue or greater, yet the other 75% operate at breakeven or just below. two hundred and thirty-one (231) responses were obtained from the 3,238 pia members who received an invitation to participate, a 7.13% response rate. respondents were ceo/c-level executives and senior management above the level of vice-president. in our sample, the average number of full-time employees was 44, while sales averaged $9,347,189. the sample size in this study exceeded the minimum recommended level of 189 for this research, assuming a statistical power of 0.80 and considering the model specification, significance level, and anticipated r2 value (hair, et al., 2017). methodology, results, and analysis because the scope of this research is exploratory and the focus of the structural model is predictive, partial least squares structural equations modeling (pls-sem) was chosen based upon hierarchical modeling constraints (hair, et al., 2017). pls-sem is better suited for studies in which the phenomenon under consideration is evolving or in which the theoretical framework is not well developed (hair et al., 2017; hair, ringle, & sarstedt, 2011; patel, manley, hair, ferrell, & pieper, 2016). pls-sem is commonly used in international business (henseler, ringle, & sinkovics, 2009), strategic management (hair, sarstedt, pieper, & ringle, 2012), and marketing (hair, sarstedt, ringle, and mena, 2012). finally, pls-sem is the preferred approach when the purpose is theory development or extension and when researchers are examining composite-based measurement models such as in this study (astrachan, patel, & wanzenried, 2014). model one: hypotheses one, two, and three the first model, testing hypotheses one, two, and three, was examined using smartpls (ringle, wende, & becker, 2015). guidelines for assessment of the model and sample size were applied according to hair and colleagues (2017). the measurement model included nine measures of the three exogenous constructs (strategic planning, goal setting, and ratio analysis), eight measures of overall firm performance, and two control variables. the measurement model, including the measurement and structural model results, is shown in figure 3. the outer model was examined first. composite reliability ranged from 0.847 to 0.945, exceeding the minimum requirement of 0.70 (hair, black, babin, & anderson, 2013). the outer loading for the variables pia_1 and rel_ 40 r. i. williams jr., s. c. manley, j. r. aaron, & f. daniel journal of small business strategy / vol. 28, no. 2 (2018) / 33-48 perf_4 were 0.684 and 0.636, respectively. furthermore, loadings for the other 15 indicators exceeded the minimum standard of 0.70 (hair et al., 2013). the average variance extracted (ave) for the constructs ranged from 0.653 to 0.781, thus demonstrating convergent validity by exceeding the minimum standard of 0.50 (hair et al., 2013). finally, the constructs were evaluated using confirmatory tetrad analysis (cta) in accordance with the recommendations of hair and colleagues (2017). cta results confirmed that all of the indicators in the measurement model are appropriately specified as reflective (table 1). figure 3. measurement and structural model with results for hypotheses 1, 2, & 3. based upon the guidelines established by hair and colleagues (2017), discriminant validity was evaluated using two approaches. all of the square roots of the aves for the four constructs were higher than the inter-construct correlations, thus demonstrating initial discriminant validity according to the criterion established by fornell and larcker (1981). the heterotrait-monotrait (htmt) criterion (henseler, ringle, & sarstedt, 2015) also demonstrated discriminant validity, with all of the constructs exhibiting ratios of less than 0.85. thus, discriminant validity was demonstrated for all of the constructs under consideration. with all of the constructs confirmed as reliable and valid, the structural model results were assessed. to obtain the significance levels of the various path coefficients, the bootstrapping option was run using 5,000 subsamples (hair et al., 2017). table 2 shows the coefficients and significance levels, as well as summarizes the results of the hypotheses tests. an analysis of the path coefficients and levels of significance shows that hypothesis two was supported; hypotheses one and three were both rejected. hierarchical component model: hypotheses four and five next, the hierarchical component model testing hypotheses four and five was examined, also using smartpls (ringle et al., 2015). as with the first model, guidelines for assessment of the hierarchical component model and sample size were applied according to hair and colleagues (2017). the measurement model included nine measures of the three exogenous constructs (strategic planning, goal setting, and ratio analysis), eight measures of overall firm table 1 reliability and average variance extracted composite reliability average variance extracted (ave) firm performance 0.945 0.686 strategic planning 0.914 0.781 goal setting 0.896 0.741 ratio analysis 0.847 0.653 41 r. i. williams jr., s. c. manley, j. r. aaron, & f. daniel journal of small business strategy / vol. 28, no. 2 (2018) / 33-48 performance, and two control variables. the measurement model, including the measurement and structural model results, is shown in figure 4. the outer model was examined first. composite reliability ranged from 0.853 to 0.945, exceeding the minimum requirement of 0.70 (hair et al., 2013). the outer loading for the variable and rel_perf_4 was 0.646. however, indicator loadings for the other 16 indicators exceeded the minimum standard of 0.708 established by hair and colleagues (2013). the average variance extracted (ave) for the constructs ranged from 0.685 to 0.781, thus demonstrating convergent validity by exceeding the minimum stanfigure 4. measurement and structural model with results for hypotheses 4 & 5 dard of 0.50 (hair et al., 2013). finally, the constructs were evaluated using confirmatory tetrad analysis (cta) in accordance with the recommendations of hair and colleagues (2017). cta results confirmed that all of the indicators in the measurement model are appropriately specified as reflective. discriminant validity was again evaluated based upon the guidelines established by hair and colleagues (2017), using the fornell & larcker (1981) criterion as well as the htmt criterion (henseler et al., 2009). similar to the first model, discriminant validity was demonstrated for all of the constructs under consideration. with all of the constructs confirmed as reliable and valid, the structural model results were assessed. to obtain the significance levels of the various path coefficients, the bootstrapping option was run using 5,000 subsamples (hair et al., 2017). table 2 shows the coefficients and significance levels, as well as summarizes the results of the hypotheses tests. an analysis of the path coefficients and levels of significance shows that both hypotheses four and five were supported. to better understand the relationship between the various constructs under consideration, the f2 effect size and q2 blindfolding were examined. the effect sizes of the predictive constructs (strategic planning, goal setting, and ratio analysis) of 0.022, 0.057, and 0.040, respectively, are small (cohen, 1992). at the same time, the q2 of 0.077 indicates a small to medium predictive relevance for the model (hair et al., 2017). table 3 shows the means, standard deviations, and pearson’s correlations for all of the constructs included in this study. discussion small business managers are stretched thin. there are many tasks to do and limited resources with which to do them. consequently, optimizing limited time and resources is of utmost importance to a small business manager. we have explored three commonly researched constructs in the strategic management literature: goal setting, strategic planning and financial ratio analysis. at the core, all three constructs involve gathering relevant information, making 42 r. i. williams jr., s. c. manley, j. r. aaron, & f. daniel journal of small business strategy / vol. 28, no. 2 (2018) / 33-48 sense of it, and utilizing it for the future betterment of the firm. such behaviors certainly would seem beneficial; but surprisingly, nearly 50 years of research has failed to prove that they are. as previously mentioned, while hypotheses one and three were rejected, hypotheses two, four and five were supported. we will begin by examining the two unsupported hypotheses. the finding that strategic planning (h1) and financial ratio analysis (h3) are not significantly associated with firm performance is unsurprising in light of the mixed results found in prior research. with regard to hypothesis one, it is worth noting that the coefficient of the relationship between strategic planning and firm performance is positive and has a p-value of .14. despite a lack of statistical significance, there may be some practical significance revealed. strategic planning is likely a necessary but not sufficient component of a firm’s strategic approach. the lack of support for hypothesis three (financial ratio analysis) is more striking. there seems to be very little valtable 2 structural model results and hypotheses structural relationships path coefficient t statistic p value hypothesis strategic planning  firm performance 0.130 1.468 0.142 h1 goal setting  firm performance 0.272 3.036 0.002 h2 ratio analysis  firm performance 0.014 0.164 0.869 h3 strat. planning  comp. strat. approach 0.546 22.827 0.000 h4a goal setting  comp. strat. approach 0.513 20.582 0.000 h4b ratio analysis  comp. strat. approach 0.175 3.183 0.001 h4c comp. strat. approach  firm performance 0.354 6.239 0.000 h5 size employees  firm performance -0.004 0.058 0.954 control size sales  firm performance 0.034 0.530 0.596 control table 3 descriptive statistics and pearson’s correlations of study variables mean sd 1 2 3 4 1 strategic planning 5.09 6.95 2 goal setting 4.94 1.25 -0.02 3 ratio analysis 0.39 0.40 -0.07 0.11 4 comprehensive strategic approach 10.41 7.02 0.98** 0.16* 0.01 5 firm performance 3.879 5.62 -0.01 -0.04 0.03 -0.01 ** correlation is significant at the 0.01 level (2-tailed) * correlation is significant at the 0.05 level (2-tailed) ue (p=.87) to only analyzing financial ratios. one potential reason for this finding is the context from which the sample was drawn. the pia publishes a yearly report referred to in the industry as the “ratio studies.” most printing companies will be aware of the studies and likely use them to some degree. so if good, mediocre and bad printing companies are all using an industry supplied group of financial ratios, it will be difficult to explain much variance in performance with this construct. now we examine our three hypotheses that were supported. hypothesis two suggested goal setting will have a positive impact on firm performance. we found strong support (p<.01) for this hypothesis, highlighting the importance of establishing performance targets to keep a firm on track financially. this is an interesting finding in itself, but the results of hypotheses four and five are more informative and intriguing. the finding that strategic planning, goal setting, and financial ratio analysis together comprise a comprehensive 43 r. i. williams jr., s. c. manley, j. r. aaron, & f. daniel journal of small business strategy / vol. 28, no. 2 (2018) / 33-48 strategic approach (h4) that is positively correlated with firm performance (h5) suggests that a comprehensive strategic approach is an important predictor of firm financial performance. the results of the first three hypotheses suggest only goal setting, in isolation, is an important predictor of firm performance. we believe the results from hypotheses four and five shed important light. strategic thinking and financial ratio analysis are not, by themselves, important predictors of firm performance but are key components of an overall strategic orientation of the firm. it would not make sense for a firm to analyze financial ratios without supplementing that action with goal setting to improve its current standing as related to those ratios. as an example, consider a small retail business operating from one location, the owner-managers may develop the goal of expanding into another community by opening a second location. further, the owner-managers develop a strategy to address the needs of customers close to the new location. after opening the second location, the owner-managers analyze their firm’s financial ratios, seeking to identify needed adjustments in their strategic and tactical plans. from the research findings presented here, we propose the owner-managers’ application of goal setting, strategic planning, and financial ratio analysis enhances their probability of success. given our findings, small business owner-managers might consider seeking training in goal setting, strategic planning, and financial ratio analysis through small business development centers, universities, or local colleges. furthermore, small business owner-managers might proactively seek industry financial ratio averages to which they can benchmark their firms. from a prescriptive standpoint, our results suggest a possible solution to the confusing and contradictory past findings. the true benefit for a firm appears to lie not in any one particular action but in a conglomeration of strategic thinking approaches. despite the concern of “paralysis by analysis” that may characterize small business managers’ views of goal setting, strategic planning and/or financial ratio analysis, the results presented above suggest the three components should be viewed as component parts of a higher component (for research) and as useful endeavors (for practice). limitations and future research we next recognize certain limitations to our research and provide suggestions for future research. first, our sample consists of primarily small printing companies. thus, our findings are limited to one industry, which may limit the generalizability of the results. future research should examine the degree to which our findings, particularly the emergence of the second order construct, apply in other contexts. second, despite the well validated subjective performance measures utilized in this study, they are still subjective in nature and susceptible to respondent bias. we believe the degree of exposure to bias is limited due to the c-level respondents in this study. ceos are likely the best informed to assess subjective performance. because there is the possibility of respondent bias, it would be helpful to assess changes in firm performance over a period of time utilizing a longitudinal study design. ideally, such a longitudinal design would utilize more objective and absolute performance measures such as growth in sales and growth in employment. although such measures are considered ideal (shepherd & wiklund, 2009; wiklund & shepherd, 2003), small business owners are quite reluctant to report sensitive financial information and objective performance data from small businesses are often obscured by accounting irregularities (dess & robinson, 1984; love, priem, & lumpkin, 2002; venkatraman & ramanujaum, 1986). nonetheless, both dess and robinson (1984) and venkatraman and ramanujam (1987) found strong correlations between objective and subjective financial performance measures. third, and likely most important, is the static nature of the study. benefits from strategic planning may not transpire immediately, requiring a longitudinal approach to research the topic appropriately (brinckmann et al., 2010; ensley et al., 2003; schwenk & shrader, 1993). finally, researchers typically make an assumption that all strategic plans are good plans (pearce et al., 1987). we know some executives are naturally better at the strategic planning 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(1987). task complexity as a moderator of goal effects: a meta-analysis. journal of applied psychology, 72(3), 416-425. appendix – survey items financial performance on a 7-point likert scale where 1 = much worse, 2 = worse, 3 = slightly worse, 4 = about the same, 5 = slightly better, 6 = better, and 7 = much better, respondents were asked to rate the performance of their businesses on each of the following items over the last year: 1. relative to my competitors, my business’ growth in sales is... 2. relative to my competitors, my business’ growth in profitability is... 3. relative to my competitors, my business’ growth in market share is... 4. relative to my competitors, my business’ growth in number of employees is... 5. relative to my competitors, my business’ return on equity is... 6. relative to my competitors, my business’ return on total assets is... 7. relative to my competitors, my business’ net profit margin (return on sales) is... 8. relative to my competitors, my business’ ability to fund growth from profit is... strategic planning one a 7-point likert scale where 1 = strongly disagree, 2 = disagree, 3 = somewhat disagree, 4 = neither agree nor disagree, 5 = somewhat agree, 6 = agree, and 7 = strongly agree, respondents were asked to respond to the following statements: 48 r. i. williams jr., s. c. manley, j. r. aaron, & f. daniel journal of small business strategy / vol. 28, no. 2 (2018) / 33-48 1. we have a strategy for achieving our business goals. 2. we have a plan for our business. 3. we know what we need to do to reach our business goals. goal setting on a 7-point likert scale where 1 = strongly disagree, 2 = disagree, 3 = somewhat disagree, 4 = neither agree nor disagree, 5 = somewhat agree, 6 = agree, and 7 = strongly agree, respondents were asked to respond to the following statements: 1. we have broad, long-range goals known to all managers. 2. we have specific, short-term goals known to all managers. 3. in our company’s strategic process, we emphasize formulating goals and targets to be achieved in the competitive environment. ratio analysis using a categorical measure where 0 = no and 1 = yes, respondents were asked to respond to three statements: 1. each year, we participate in the pia ratio studies. 2. each year, we benchmark our performance to the pia ratio studies results. 3. each year, we use the pia ratio studies in making strategic decisions. st%4 tegy small business brief pro-environmental strategies for small businesses: factors affecting consumer trust and responsibility linda i. nowak sonoma state university linda. nowak(a iso noma, edu kelly fucciolo sonoma county water agency mkfuccioloqaaol, corn brenda s. ponsford sonoma state university brenda ponsfordqasonoma. edu abstract consumer reactions to environmental protection policies adopted by small and large retailers were compared and analyzed for differences. trust in the retai ler and expectations of the policy successfully affecting change in the environment were signi jicant predictors of customer loyalty, regardless of retailer size. however, consumers had higher levels of trust and expected to be more loyal to small retailers adopting these policies, even though consumers predicted the larger jirms would be in a position to achieve greater results for the environment. introduction how can a small business differentiate itself from large business in a manner that matters to the customer? one method may be to adopt organizational strategies which support environmental protection. surveys reveal an increasing number of consumers who either reward or intend to reward firms that are proactive regarding environmental issues in their business and marketing practices (carlson, grove and kangun, 1993). according to a recent gallup survey, 75% of americans consider themselves to be environmentalists (mackoy, calantone and droge, 1995). well conceived and implemented pro-environmental strategies can positively affect a business's image and customer loyalty (menon and menon, 1997). adopting environmental business and marketing strategies do not guarantee customer loyalty, however. sales can be negatively impacted if customers perceive that environmental claims are exaggerated or less than credible (ottman, 1992; polonsky, 1995; stisser, 1994). in addition,'ocial norms do not translate directly into behavioral shiits in customerchoice. price, quality, and convenience are still important decision factors (ouman, 1992; roberts, 1996a). therefore, the market share gains from implementing a pro-environmental marketing strategy may not justify the small business's additional costs (osterhus, 1997). it is imperative that managers identify key factors motivating customer behavior in successful pro-environmental strategies. 78 journal ofsmall business stratel)r vol /0, no.2 fall/winter l999 the value of a firm's overall positive image is seen in its relationship to revenues. reputation is one facet of a business's overall image. according to shapiro (1982), as a firm's reputation improves, so do its sales. a business with a good overall reputation owns valuable assets such as goodwill, customer loyalty (herbig, milewicz and golden, 1994), and increased advertising credibility(goldberg and hartwick, 1990). in establishing a positive image, a business needs to go beyond providing quality products and services(mason, 1993). one of the major goals of pro-environmental marketing is to enhance the firm's reputation as a corporate good citizen. including pro-environmental decisions in the marketing mix can lead to trust and commitment on the part of afl its stakeholders (hosmer, 1994). 7)terefore, if the recent reports of increased consumer awareness about environmental issues and their stated intentions of rewarding firms that are socially responsible are accurate, then pro-environmental behavior on the part of the firm may be a method for developing customer loyalty (menon and menon, 1997). according to reichheld (1993), customer loyalty may be a more elyective method for predicting long-term company perfonnance than current sales. the objective of this study was to determine whether the size of the retailer adopting proenvironmental behavior has an impact on the consumer's trust and feelings of responsibility to patronize that firm. adopting pro-environmental behavior oflen involves a serious commitment of resources for the small firm. is it worth it? previous literature suggests large retailers are more likely to be accused of cause-exploitative marketing when they adopt pro-environmental policies (garrett, 1987). does this mean small firms have higher levels of consumer trust? on the other hand, are environmentally conscious consumers more apt to feel a responsibility to patronize chain stores with environmental policies because they believe the larger retailer will have a greater impact on the environmental cause? consumertrust and personal responsibility osterhus (1997) has demonstrated that normative influences do not automatically translate into pro-environmental consumption behavior. he discovered two important modemting variables, consumer (personal) responsibility attributions and trust in the firm. when consumers maintain high levels of both trust and responsibility, they are more apt to allow their personal norms to influence their behavior. combined with economic factors, responsibility and trust play an important part in the consumers'ecision process. movies, television, and the press have perpetuated the popular image of large corporations as unfeeling behemoths, interested only in the "bottom line". because of their national or global recognition, large corporations are more likely to be targeted by special interest groups because public boycotts can provide greater exposure for the issue (garrett, 1987). in fact, some corporations have chosen to keep a low profile regarding their environmental programs because they do not want to be perceived as abusers of cause-exploitative marketing. most small firms do not have the resources large firms have, but many are trying to do their part for environmental causes. small businesses have a history of becoming intimately involved with community service as an inexpensive means of building a positive image with the local market. consumers may trust the small retailer's pro-environmental intentions more than they do the larger chains. consumers targeted with pro-environmental marketing strategies may feel that the costs of changing their consumption behaviors exceed the benefits either to themselves or to society as a whole (rangan, karim, and sandberg, 1996). consumers are sophisticated enough to realize that benefits accrue for a social cause when a large segment of the population supports it through their behaviors. a study conducted by roberts (1996b), indicated that perceived consumer effectiveness (the ability of individual consumers to alyect environmental resource problems) 79 journal ofsmail business strategy vol. /0, no.2 fallltyinrer l999 explained 33% of the variation in ecologically conscious consumer behavior. consumers may perceive large chains who adopt pro-environmental behavior as having more impact on environmental causes than small retailers. if this is the case, environmentally responsible consumers might feel more personal responsibility to patronize large chains who are supporting social causes because of the perceived greater impact. a poll conducted by the roper organization (1992) found that socially responsible consumers are likely to be more educated, earn more money, and be female. however, roberts (1996b) found that demographics could explain only 6 percent of the variation in the consumers'cologically conscious behaviors. roberts found that the best predictor of the ecologically conscious consumer was the consumers'elief that they, as individuals, could help successfully solve environmental problems. osterhus (1997) found that economic factors, combined with feelings of personal responsibility and trust in the firm adopting the policy, were important factors in the consumers'decision process involving pro-environmental consumption behavior. consumers are wise enough to realize that the large retail chains are able to offer better prices because of economies of scale. therefore, customers may expect less impact on prices in larger stores adopting environmental policies. methodology a questionnaire was developed with six short scenarios describing the adoption of environmental protection policies by small and large retailers. three of these policies were described as being adopted by national chains. the other three scenarios were exactly like the national chain scenarios except they were described as being adopted by small, privately owned stores (see table i). table i scenarios ~ effective january i, 1998 a large, fortune 500 officesupply storechain will carry 100% recycled paper, plastic, and glass products. ~ effective january i, 1998 a small, pri rarely owned office supply store will carry 100%recycled paper, plastic, and glass products. ~ effective january i, 1998 a large narionalgrocery store cliain will implement a policy in which only fresh produce that is grown without the use of pest ic ides harmful to the environment will be sold in their stores. ~ effective january i, 1998 a small, privately owned grocery store will implement a policy in which only fresh produce that is grown without the use of pestic ides harmful to the environment will be sold in the store. ~ effective january i, 1998 a large, narionalloy store cliain will implement a policy in which 20% of its net profits willbe donated to environmental protection. ~ effective january i, 1998 a small, locally owned ioy store will implement a policy in which 20% of its net profits will be donated to environmental protection. the three major categories for the six scenarios (grocery store, office supply store, and toy store) were selected in order to appeal to a broad range of respondents. for example, the grocery store 80 journal ofsmall business srralegy val. 70, no.2 fall/winter 7999 was selected because most people, at one time or another, have to shop in a grocery store. the office supply store scenario was created to relate to clerical and professional staff. the toy store was selected to gain affect and cognition from parents. respondents were asked to what extent they predicted these retailer policies would affect product prices, trust in the retailer, personal responsibility to patronize the retailer, and the overall impact on the environmental cause. their responses were measured using a five point scale with 1 indicating the policy would cause a "decrease", 3 indicating "no change", and 5 indicating an "increase" in the variable being measured. demographic questions were included in the study because they are commonly used for market segmentation purposes, although past research has contradicting evidence on the viability of using demographics to segment environmentally conscious consumers (spiller & hamilton, 1995; roberts, 1996a; roberts, 1996b). respondents answered questions relating to age, gender, marital status, employment status, education level, ethnicity, number of children, and income. the questionnaire was pre-tested on 77 undergraduate students at a northern california public university. in addition to filling out the survey, respondents were asked to give feedback on the questions and the scenarios. minor clarity revisions were made to the questionnaire before it was distributed to the sample population. the surveys were then distributed to a sample of 200 public agency workers in northern california. a total of 136 useable questionnaires were returned, for a response rate of 68 percent. the respondents represented a broad range of ages, education levels, incomes, and marital status (see table 2). table 2 sample characteristics frequencies gender female male 63.2% 36.8% marital status single hlarried divorced 41.2% 50.0'/ 8.8% employmcni employed employed not missing status full-time part-time employed retired values 75ip/ iiip/ 103% 7% 29% income $20,000$40,001$60,001& $20,000 $40,000 $60,000 $75,000 &$75,000 11% 30.9'/ 14.7% 14.0/o 27.9/o children in none i 2 3 4 5+ household 63.2% 14 7% 15.4% 2.9/v 1.5% 2.2% caucasion asian ethnicity (nonpaciric missing hispanic) black hispanic islander other values 83.1% o.ip/o 3.7% 4 4% 8.1% 0.7% age groups under is is-24 25-34 3544 45-54 5564 65+ .7% 9.6% 45.6% 23 5% 16.2% 4 4% ip/ education some high graduated some graduate post-grad school high school college college credits .7% 2.9'/ 22.1% 43.4% 30.9'/o 81 journal ofsmall business strategy vol. /0, a'o.2 fall/ ggnrer 1999 results consumer reactions to small versus large retailers adopting pro-environmental strategies were compared. paired sample t-tests were used to compare the mean scores in each category (see table 3). (noteworthy differences in responses by the consumers to the small and large retailers would be indicated by a significance score of .01 or less. these scores are listed in the far right column of table 3.) in fact, there were significantly different consumer ratings in all four categories: level of trust in the retailer, potential for the retailer to successfully impact environmental protection, expectations of price increases accompanying the pro-environmental policies, and feelings of personal responsibility to patronize the retailer adopting these policies. respondents indicated they would have a higher level of trust in small retailers adopting environmental protection policies than in large retailers adopting the same policies. however, respondents predicted that the larger retailers would have a greater impact on environmental protection by adopting pro-environmental policies. table 3 ttests: small retailers versus large retailers (v means: i =decrease, 3=no change, 5=increase) small retailer large retailer ~lm act on: 'mean 'mean t-value p trust in retailer 3.7328 3.5980 -3.72 .000 success of env. cause 4.1961 4.2868 3.08 .002 personal responsibility 3.8995 3.7892 -3.23 .002 product prices 4.4167 4.1471 -2.60 .010 the ability of individual consumers to affect environmental change positively impacts their ecologically conscious behavior (osterhus, 1997; roberts, 1996b). consumers realize that benefits accrue for a cause when a large segment of the population supports it through their behaviors. due to the potential for large retailers to have greater impact on environmental protection, would customers feel a greater personal responsibility to patronize the large retailers adopting these policies? results of this study suggest this is not the case. respondents indicated greater personal responsibility to patronize the small retailers adopting the same policies even though they expected to see greater price increases by small retailers adopting environmental protection policies than by large retailers adopting the same policies. multiple regression was used to look for significant predictors of customer behavior towards the retailers. the two dependent variables were "personal responsibility to patronize large retailers supporting environmental protection causes" and "personal responsibility to patronize small retailers supporting environmental protection causes". based on previous studies (roberts 1996a; roberts, 1996b), the authors expected that demographics would not be significant predictors of the customers'eelings of personal responsibility to patronize small or large retailers adopting environmental protection policies. regression results indicated that this was true for age, education, and income, but gender was a significantpredictor in the case of small retailers(see table 5). personal responsibility to patronize both small and large retailers adopting environmental protection policies was explained by two additional independent variables, trust for the retailer and predictions of successful changes in environmental protection (see tables 4 and 5). product price was not a significant predictor for small or large retailer patronage. 82 journal ofsmall business strategy vol /0, no.2 fall/winter l999 in the case of large firms, trust in the retailer and predictions of successful changes to the environment explained approximately 83 percent of the variation in personal responsibility to patronize (see table 4). in the analysis of small retailers, trust, gender, and success explained approximately 81 percent of the variation (see table 5). table 4 —regression: predictors of personal responsibility to patronize large retailers variable b se b beta t ~si .t trust in large retailers by consumers .653472 .053017 .693311 12.326 .0000 predicted success of retailers by consumers .242060 .061408 .221725 3.942 .0001 f stat. = 142.13154 significant f = .0000 multiple r = .82538 table 5 —regression: predictors of personal responsibility to patronize small retailers variable b seb beta t ~si .t gender -.197883 .075264 -.135444 -2.629 .0096 trust in small retailers by consumers .737011 .054048 .735509 13.636 .0000 predicted success of retailers by consumers .144255 .060159 .130076 2.398 .0179 f sian = 83.76314 significant f = .0000 multiple r = .80970 discussion do consumers trust the small business's pro-environmental intentions more than they do the larger chains? the answer appears to be "yes". are consumers more apt to support the small retailer or the large retail chain that is making an effort to do its part for the environment? again, it appears the small business has the edge. consumers who participated in this study predicted large chains who adopted pro-environmental policies would have more impact on social causes than small retailers. however, their responses indicated a belief that even small retailers can have an impact. would socially responsible consumers feel more personal responsibility to patronize large chains who are supporting environmental causes because of their perceived greater impact? results 83 journal ofsmall business strategy vol. /0, no. 2 fa!i/winter 1999 from this study do not indicate this even though the respondents expected greater changes to be effected by the larger retailers. trust and expectations of success appear to have a significant impact on consumers'eelings of personal responsibility to patronize a pro-environmental retailer, whether the retailer is large or small. females are more apt to support the small retailer. gender dilterences appear to have interesting strategic implications for the retailer and should be investigated in more depth. the sample used for this study, while having some preliminary implications for small businesses, is not a representative sample and should not be relied upon for developing marketing strategy. the majority of this study's participants were employed full-time, had moderate to high incomes, were ages 25 to 54, and caucasian. the respondents were from northern california where consumers may be, on average, more environmentally conscious than in other regions of the u s. this research should be replicated with larger and more diverse population samples. variations may arise by age, ethnicity, income level, geographic area, or past consumption experiences. despite these limitations, this exploratory research paves the way for more in-depth study of these issues. more research needs to be conducted in the area of corporate image and trust as it relates to social responsibility and the small business. future research might look at types of environmental protection issues that are most important to consumers and the accompanying strategicopportunities for marketets. conclusion environmental concerns increasingly affect consumption behaviors. many u.s. consumers are patronizing businesses which donate part of their revenues to local or national causes. a successfulenvironmental marketing strategy will be predicated on an increased understanding of what motivates the behavior of the environmentally conscious consumer. the results of this study suggest that trust in the retailer, potential to successfully effect change, and, in the case of small retailers, gender, are the most important predictors of a consumer' feelings of responsibility to patronize a business adopting pro-environmental policies. consumers are more trusting of small businesses adopting environmental policies and feel stronger personal responsibility to patronize these firms. this is exciting news for the small business. becoming actively involved in community social and environmental causes could provide the small business with effective opportunities for building a positive local image and customer loyalty. references carlson, l., grove, s., dt kangun, n. (1993). a content analysis of environmental advertising claims: a matrix method approach. journal of advertisin 22 (3), 27-39. garrett, d. e. (1987).the effectiveness of marketing policy boycotts: environmental opposition to marketing. journal of marketin 51 (2), 46-57. goldberg, m. e., 2k hartwick, j. (1990). the effects of advertiser reputation and extremity of advertising claim on advertising effectiveness. journal of consumer research 17 (3), 172-185. herbig, p., milewicz, j., dt golden, j. (1994). a model of reputation building and destruction. journal of business research 31, 23-31. hosmer, l. t. (1994). strategic planning as if ethics mattered. strate ic mana ement journal 15 (3), 17-34. 84 journal of small business strategy vol. /0, ivo.2 fall/winter /999 mackoy, r. dh calantone, rh & droge, c. (1995). environmental marketing: bridging the divide between the consumption culture and environmentalism. in michael j. polonsky & alma t. mintu-wimsatt (eds.), environmental marketin (pp. 37-54). binghamton, ny; the haworth press, inc. mason, j. c. (1993). what image do you project? mana ement review 82 (11), 10-11. menon, a., & menon, a. (1997). enviropreneurial marketing strategy: the emergence of corporate environmentalism as market strategy. journal of marketin 61 ( i ), 51-67. osterhus, t. l. (1997). pro-social consumer influence strategies: when and how do they work? journal of marketin 61 (4), 16-29.0,1 a (1992). g~ki .0 \ m(l ntcb i b k . polonsky, m. j. (1995). cleaning up green marketing claims: a practical checklist. environmental matketin (pp. 199-223). in michael j. polonsky & alma t. mintuwimsatt (eds.), binghamton, ny: the haworth press, inc. rangan, v. k., karim, s., & sandberg, s.k. (1996). do better at doing good. harvard business r 1 74(3).42.54. r 1 kkdd 9 9 (1993). l y lly b dm 3 . h d& 1 li 71(2) 44 73. roberts, j. a. (1996a). will the real socially responsible consumer please step forward? business horizons 39 (i), 79-83. roberts, j. a. (1996b). green consumers in the 1990s: profile and implications for advertising. journal of business research 36, 217-231. roper organization (1992 . environmental behavior north america: canada mexico united states. commissionedby s.c.johnson and son, inc. shapiro, c. (1982). consumer information, product quality, and seller reputation. bell journal of e 1 13 (\), 29-35. spill, l. 0, & h il, r. a. (1995). e 'ly u dly: 9 ill d marketingimplications. journal of non rofit& public sector marketin 3 (3/4),3749. stisser, p. (1994). a deepershadeof green. american demo ra hics 16 (3),24-29. linda i. /voivak, ph.d. is assistant professor of marketing at sonoma state university in rohnert park, ca/%rnia. /felly l fucciolo, pe., m ba. is an engineer at the sonoma county water agency in california brenda j. ponsfonl, ph.d. is associate professor of marketing at sonoma state university. 85 reproduced with permission of the copyright owner. further reproduction prohibited without permission. an examination of the accuracy of small manufacturer chief executive ... peterson, robin t journal of small business strategy; spring/summer 2005; 16, 1; abi/inform complete pg. 41 an examination of the accuracy of small manufacturer chief executive officers in assessing the legality of selected actions robin t. peterson new mexico state university ropeters@nmsu.edu abstract this inquiry investigated the degree offamiliarity of ce.os of small manufacturing .firms with federal regulations. important findings were that the managers, especially those employed by firms producing industrial goods, were deficient in their familiarity with the terms of government regulations and could benefit from the acquisition ofji1rther insights. implications and suggestions/or the c.e. os. are provided. introduction top managers of small manufacturing firms should be cognizant of the major federal laws which impact them. research suggests that they perceive their organizations as less law abiding than do lower-level managers (petrick, scherer, wendt, & cox, 1994). however, it is possible that some c.e.o.s mistakenly perceive the depth of their knowledge of this subject and incorrectly assume that they can assess which actions are congruent with the law and which are not. if this condition exists, these managers are placing themselves in a position of exposure to potential prosecution with all of the associated ramifications (debbie, 200 i). given these circumstances, top managers of small manufacturing companies may benefit through becoming aware of the level of their legal knowledge of federal laws. small manufacturers face a formidable and continually shifting body of federal law which influences their actions. the laws exert an effect on a wide range of company activities (hamel, 2003; posner, 1997). 41 there are constraints on hiring, promoting employees, supervisory practices, safety, raising capital, accounting methods, financial reporting, advertising, pricing, dealing with suppliers, dealing with competitors, and numerous other activities (black, 2003; stanley, 2003; peritz, 2002; ballam, 2000; moorhouse, morris, & whiples, 1999). modifications in the laws and the manner in which they are interpreted over time can insert ambiguity in the perceptions of small manufacturing company c.e.o.s. these changes can be very difficult to predict (stock, 2003). those who do research in this area often discover that their predictions must be continually updated (audretsch, baumol, & burke, 200 i). experience indicates that shifts in the regulations may necessitate continual surveillance of the federal level legal processes. some fields that have witnessed recent modifications in the regulations include restrictions on price offers and promotions (sinha, chandra, & srinvasan, 1999), bribes in international transactions (mccubbins, 200 i), wage and hour regulations (thompson, 2003), overtime regulations (nicolai, 2003), reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal o[small business stratef!)' deception of consumers (waterson, 2003), and communications among competitors (gilliland & manning, 2002). executives who are employed by small manufacturers must contend with a formidable burden imposed by legal matters. regional and local managers who have positions with larger enterprises are not directly responsible for many of the actions that the federal government monitors. accountability for these is centered at the corporate or division level. however, managers in smaller companies tend to be charged with a wider range of responsibilities since there are fewer numbers of specialized personnel on the payroll. further, large manufacturing company executives often have access to specialized attorneys who are employed or retained by the employer. this favorable circumstance is less common in smaller enterprises. the various regulations impact many different business actjv1ties, are occasionally vague, and may have formidable ramifications for the company. (edlin, 2002). thus, managers should stay acquainted with these restraints and the manner in which federal officials administer them. manufacturers should understand the law in order to preclude consequences such as fines, damages, injunctions, undesirable out-of-court settlements, and legal fees. top managers of small manufacturing firms cannot be charged with the responsibility of being familiar with all of the federal laws, of course (zane, 2002). instead, attorneys who are under the employ of, or are retained by the firm, should be accountable for this function. conversely, managers are well advised to possess a general knowledge of the more fundamental laws and legal precedents and to be aware of conditions where it is necessary to consult attorneys (delaney, 1999). the study described herein assessed the degree to which a sample of chief executive officers of small manufacturing companies could accurately discriminate between a number of legal and illegal activities. it also examined differences in cognizance of legality between managers employed by 42 vol. 16, no. 1spring/summer2005 producers of industrial and consumer goods. evidence has shown that federal authorities are more likely to prosecute consumer than industrial goods marketers (lashgari, 2003). it follows that managers in this sector would go to further lengths to become aware of the law than industrial goods producers. a sample of ceo's of small manufacturing firms received a listing of activities and was requested to assess the list and to indicate the degree to which they perceived each one to be legal or illegal. the analysis also assessed the extent to which these perceptions were accurate or not. the study was directed at two hypotheses. these were as follows: h 1: chief executive ofjicers of small manufacturing companies will be able to accurate~v ident!fj1, as legal or illegal, fifty percent or more of a list of activities that are potentially illegal. it is reasonable to expect that numerous c.e.0.s of small manufacturers are aware of the fact that federal regulations impact many of the actions they undertake in performing their work (debbie, 2001) and that failure to comply with the regulations can result in undesirable consequences (joyner, payne, & raiborn, 2002; williams & barrett, 2000). hence, there is considerable incentive for the c.e.0.s to familiarize themselves with and to act in conformity with these regulations (petty, 1999; gilliland & manning, 2002). the more than fifty-percent accuracy criterions specified in the hypothesis derives from the proposition that this proportion is the most neutral percentage available and, by default, demarks the mid-point between what might be construed as "naive" on the one hand and "knowledgeable" on the other. this criterion has also been employed in previous studies of the ability of managers to assess the legality of business activities (peterson, 1998). h2: chief executive officers ofsmall manufacturing companies selling consumer goods will be more accurate than their counterparts that sell reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal o(small business strategv industrial goods in assessing the legality of a set of activities that are potentially illegal. research studies have identified differences in managerial practices and learning insights among managers of firms producing consumer versus industrial goods (lilien, 1987). these suggest that business markets are different from consumer markets in terms of their characteristics and influences, decision processes, and relationships (a vlonitis & gounaris, 1997). these findings also suggest that inter-industry differences could arise in the knowledge of federal law. industrial goods companies deal with a smaller number of customers, suppliers, intermediaries, and other parties than do consumer goods firms (gummesson, 1999). in turn, the industrial goods firms rely heavily upon developing relationships with their constituencies, where reliance is upon trust and focus on constituency needs, and are less upon involvement in interactions that depend upon legal enforcement (gounaris & avlonitis, 2001 ). these concerns focus less on individual transactions and more upon developing permanent relationships. it is logical to expect that industrial goods firms will show greater responsiveness to longterm orientations of existing and potential constituencies by adopting a long term perspective in handling and dealing with them. research indicates that regulation tends to be more extensive and intensive for industries which are associated with a high level of public concern ((banerjee, lyer, & kashyap, 2003). consumer goods industries, of course, are comprised of companies that provide products to and interact with members of the public through functions such as promotion, pricing, and merchandising. in addition, industrial goods finns place less reliance upon advertising a highly regulated function in their marketing strategies than do consumer goods producers (simkin, 2000). thus, it can be expected that public concern is substantial for this sector. taking these various factors into account, it becomes apparent that there is substantial 43 vol. 16, no. 1spring/summer2005 inducement for c.e.o.s of firms in the consumer goods sector to become cognizant of legislation which might affect them. the study cover letters and accompanying questionnaires were forwarded to fifty randomly selected professors, one in each state, who taught a small business institute or similar course. the sample frame was the membership directory: international councilfor small business (2002). the professors were selected from the directory, and if they taught a relevant course and elected to participate in the survey, they received a packet of 10 questionnaires to be distributed to c.e.o.'s of small manufacturing firms five industrial and five consumer goods producers in their geographical area. many of these were past or present clients of small business institute or similar programs. one week prior to receiving the questionnaire, each manager was mailed a postcard that asked for participation in the study and announced that a professor would soon deliver a questionnaire. the instructions were to complete the questionnaire and to mail or fax it back to the professor. this effort yielded a total of one hundred and sixty-five returned questionnaires. a follow-up postcard and a second questionnaire were sent to managers who did not respond. this second wave yielded seventy-nine additional usable completed questionnaires. hence, the final sample size was 244 a response rate of 48.8 percent. the manufacturers were asked to indicate if fifty percent or more or their revenues emanated from (a) consumer or (8) industrial goods in order to allocate the respondent to the appropriate industry grouping. the sampling efforts yielded 162 consumer and 82 industrial goods producers. the questionnaire employed in the study outlined twenty activities that managers employed by small manufacturing companies might undertake in their daily activities. these activities emanated from a prior study of retailer perceptions of legality (peterson, 1998) and from a content analysis of chapters relating to regulation, social reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategv responsibility, and ethics in five top-selling management policy textbooks. half of the activities are violations of federal laws or have been so interpreted by the courts. these activities are defined in the appendix. in tum, the definitions were provided to the respondents, so that they might comprehend the exact meaning of each one. the second half of the activities were not violations of federal laws, although some small manufacturer c.e.o.'s might perceive them as being unethical. these legal activities are also described in the appendix. the instructions requested that the sample members indicate their opinion of the legality of each activity on a five-point scale that was anchored by the descriptors "obviously illegal", "probably illegal", "gray area", "probably legal", and "obviously legal" assessed against federal legislation. the sample members were only requested to respond to the legality issue. they were not required to assess the extent to which the activities were ethical or socially responsible. the first hypothesis held that the c.e.o. 's, as a group. could accurately assess the legal status of fifty percent or more of the twenty activities. fifty percent was selected because it is the most neutral proportion available and, by default, marks the mid-point between what might be construed as "naive" on the one hand and "knowledgeable" on the other. this percentage has been utilized in other studies of perceptions of the legality of business activities (peterson, 1998 ). quantitative values were assigned to each of the five portions of the scale, and these values ranged from five (for "obviously illegal") to one (for "obviously legal"). the values which were allocated to each class were multiplied by their frequencies and divided by the number of respondents to yield arithmetic means for each of the twenty activities. thus, a mean value of four for a particular activity signaled that the sample members believed the activity was "probably illegal." the mean values for each of the twenty activities are set forth in table 1. 44 vol. 16. no. i spring/summer 2005 the data in the table indicate that the respondents, as a group, misclassified the legality of eight activities: • predatory pricing • agreeing to divide market with rivals • exercising surveillance over who supports a union formation • telling customers they are getting a price break when this is untrue • agreeing with distributors on the prices they will charge • pre-empting potential competition with prices below costs • inducing price discrimination • making sales forecasts based upon managerial judgment seven of the inaccurately-evaluated activities are illegal, but the members of the sample classified them as legal. on the other hand, only one was legal but was categorized as illegal. it appears that the primary distortion is in the nature of being unaware of federal prohibitions, rather than inaccurately concluding that certain activities are not in conformity. the c.e.o. 's were able to make accurate classifications for twelve activities. hence, they correctly categorized sixty percent of the legality relationships, which furnishes a measure of defense for hypothesis one. however, their collective response was inaccurate in forty percent of the cases, and most of these inaccurate perceptions are in the domain of regulations that are associated with strong penalties, including substantial fines, restnct1ve injunctions, and even possible imprisonment. all but two of the inaccurate perceptions relate to antitrust legislation, assuming that the federal trade commission act is included in that assortment. since antitrust laws can dictate substantial penalties, inaccuracies pertaining to these statutes can be extremely expensive to the firm. five of the activities which the members of the sample perceived inaccurately pertain to pricing. this suggests that the c.~.o:'s are less than fully cognizant on the leg1slatjon reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategv vol. 16. no. 1spring/summer2005 table i respondent belief of the legality of specified activities mean actual activity* scale legal value status refusing to hire job applicants who are over age 45 3.7 illegal price collusion with competitors 4.0 illegal charging higher prices than rivals 2.4 legal hiring only experienced help 1.8 legal predatory pricing 2.2** lllegal informing a debtor that legal action may be pursued 1.9 legal discharging an employee for filing an osha complaint 4.1 illegal charging the same price to similar buyers 2.2 legal suggesting that customers buy an item now 3.1 legal agreeing to divide market with rivals 2.4** illegal exercising surveillance over who supports a union formation 2.0** illegal telling customers they are getting a price break when this is untrue 2.3 ** illegal selling a low quality product 3.1 legal aiming the marketing effort only on larger customers 2.5 legal selling products in throw-away non-degradable containers 2.3 legal agreeing with distributors on the prices they will charge 2.2** lllegal preempting potential competition with prices below costs 2.0** illegal inducing price discrimination 2.3** illegal promoting only experienced people into management jobs 3.1 legal making sa les forecasts based upon managerial judgment 3.8** legal *the actions were described in detail in the questionnaires **signifies that respondents' mean scale value on an activity was in error, as regards legal status . significant differences between mean scale values and 3.0 were assessed by tukey k tests at the .05 level. which relates to this function . yet, pncmg serves as an important ingredient in the marketing strategies of numerous small business manufacturers (busch & tincher, 1998). a second portion of the study involved assessing the dependent variable by the nature of the offerings of the firm industrial and consumer goods . it was hypothesized that managers employed by consumer goods firms would be more accurate in assessing legality than producers of industrial goods. table 2 presents the relevant data. as in the case of table 1, tukey k tests were employed to assess the data among the columns. a similar test was utilized to measure the significance of the differences between mean scale values of producers of consumer and industrial goods. 45 the data in table 2 provide support for the second hypothesis. both consumer and industrial good c.e.o. 's were incorrect in judging eight activities. in five of these, however, the difference between the mean scale values of the two groups is statistically significant. and, in each of these, the consumer goods c.e.o. 's mean scale values are closer to the actual legal status value than are the industrial goods c.e.o.s. further, there are two activities for which both groups of executives made correct legal judgments, but there is a statistically significant difference between the mean scale values of both groups. in both of these cases, the consumer goods mean scale value is closer to the actual legal status value. based upon this data, it is reasonable lo conclude that the consumer goods c.e.o. possessed the highest degree of knowledge of the federal laws. reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategv vol. 16, no. 1spring/summer2005 table 2 respondent belief of the legality of specified activities, by type of firm activity* mean scale actual value legal status cons. lndust. goods goods refusing to hire iob aoolicants who are over age 45 3.9 3.6 illegal price collusion with competitors 4.3 3.4" illegal charging higher prices than rivals 2.3 2.6 legal hiring only experienced help 2.0 1.7 legal predatory pricing 2.4** 1. 8**" illegal informing a debtor that legal action may be pursued 1.9 1.9 legal discharging an emp loyee for filing an osha complaint 4.3 4.0 illegal charging the same price to similar buyers 2.1 2.4 legal suggesting that customers buy an item now 3.0 3.3 legal agreeing to divide market with rivals 2.6** 2.0**" lllegal exercising survei llance over who su ooorts a union formation 1.9** 2.3** illegal telling customers they are getting a price break when this is 2.4** 2.1 ** lllegal untrue selling a low quality product 3. 1 3.1 legal aiming the marketing effort only on larger customers 2.2 2.8" le!!al selling products in throw-away non-degradable contai ners 2.0 2.5 le!!al agreein g with distributors on the prices they wi ll charge 2.5** 1.5**" llle!!al preempting potential competition with prices below costs 2.2** 1.6**" illegal inducin g price discrimination 2.5** i. 7**" illegal promoting only experienced people into management iobs 3. 1 3.2 legal making sales forecasts based upon managerial iudgment 3.8** 3.8** legal *the actions were described in detail in the questionnaires **signifies that respondents ' mean scale va lue on an activity was in error, as regards legal status. significant differences between mean scale values and 3.0 were assess by tukey k tests at the .05 leve l. " signifies that action mean sca le values for consumer and industrial goods producers are significantly different. discussion the objective of this study was to assess the extent to which a sample of small manufacturing company c.e.o.'s were able to accurately distinguish legal and illegal activities, as they are set forth in federal legislation. for the sample at large, the managers were able to accurately designate the legality of the activities in sixty percent of the cases. a contrast between the c.e.o. 's of industrial goods and consumer goods small manufacturing fim1s suggested that consumer goods managers were more accurate in classifying legal and illegal activities than were industrial goods managers. 46 the results of the inquiry signify that some c.e.o. 's of small manufacturing firms, especially those producing industrial goods, may be in need of further training and education in federal supervision of their practices. if these companies do not acquire further knowledge, they and their top administrators are vulnerable to prosecution by the government and lawsuits imposed by competitors, customers, suppliers, distributors, unions, employees, and others. the present inquiry concentrated on federal regulation. it is highly possible, however, that the managers are just as ill-informed on the legitimacy of business activities, relative to state and local laws. additional studies reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy that assess the degree of managerial comprehension of these restraints could be of value. c.e.o.'s in these companies could benefit through assessing the extent to which they are familiar with federal, state, and local law. other regulations, beyond those examined in this study, could be evaluated through the measurement endeavor, depending on the specific legal environment which the company faces. if the measurement effort uncovers gaps in knowledge, remedial efforts can be instigated to improve upon the state of knowledge. these efforts could include consultations with well-informed attorneys, enrolling in classes and management development seminars, and reviewing business law literature. the outcome of carefully planned measures could be business decisions that are more compatible with the inevitable accretion m the intensity and latitude of regulation. in addition to acquainting themselves about pertinent regulation, c.e.o. 's of small manufacturing firms can benefit through initiating procedures designed to familiarize key employees with this subject matter. key employees may pursue strategies and tactics that are not congruent with the law, thereby placing the firm in a vulnerable position. hence, they should have knowledge of the laws and be cognizant that top management is heavily motivated to comply with the law. management is well advised to assess the degree of legal knowledge possessed by key employees and to consider means of edifying these individuals, should they be deficient in legal knowledge. if they are not wellinformed, their performance may have to be carefully monitored and corrected, and this can be a time consuming activity that is nonnally beyond the province of top management responsibility. experience indicates that formal legal compliance management programs can be very useful in directing the behavior of employees. these focus on awareness of legal issues. regardless of their values, employees cannot be expected to be intimately familiar with all of the laws and regulations that influence their work. 47 vol. 16, no. 1 spring/summer 2005 however, if employees are aware of relevant legal issues, they are more likely to raise the right questions and ultimately do the right thing when faced with a dilemma. often, employees do the wrong thing simply because they are unaware they do not know that they should be concerned or ask for help. effective legal compliance management can increase employee legal issue awareness (pruzan, 1998). legal compliance programs can be designed with different orientations. one orientation is a compliance-based approach, which focuses mainly on preventing, detecting, and punishing violations of the law. another orientation the values-based approach attempts to define company values and encourage employee commitment to ethical aspirations. the values based approach can be advantageous since it is based on personal self-governance and is more likely to motivate employees to behave in accordance with shared values rather than avoiding punishment (paine, 1994 ). under a value-based approach, the spirit of the law is a more stringent standard than the letter of the law (one does not seek to exploit potential loopholes discovered in the law). first management clearly and fully communicates the guiding values and commitments of the firm. all employees are urged to take these guidelines seriously and be comfortable with dialogue surrounding them. management is personally committed to these values and is willing to act accordingly. in tum, managers are willing to review and assess their own behavior. consistency in decision-making is essential to avoid employee cynicism and rejection of the compliance program (joyner, payne, & raibom, 2002). when employees realize that they are facing a legal compliance issue, effective compliance management should make it more likely that the employees would ask for help and guidance within the finn. many compliance managers devote much of their time responding to questions regarding company policy and the law. providing good advice early can solve problems early and provide employees with accurate guidance reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal o(small business strategi· on company policies and the law. it can also furnish input that may be employed to plan future training needs or revisions in ethical codes (gaumnitz & lere, 2002; emmelhainz & adams). ideally, the legal compliance program is perceived by employees as concentrating on shared organizational values and guiding employees to act on their aspirations. such programs motivate employees to be aware of legal issues, report bad news to management, and refrain from engaging in illegal conduct. this can reduce illegal behavior, enhance employee commitment, and generate employee perceptions that decision making in the company is better because of the legal compliance program. the program can be supplemented with an orientation toward satisfying external constituencies. valuing external stakeholders, such as customers and the public at large can exert a positive impact on all outcomes (trevino, weaver, binson, & toffler, 1999). references audretsch, david b.,william j. baumol, & andrew e. burke (200 i). competitive policy in dynamic markets, international journal of industrial organization, 19 (5), 613-634. avlonitis, george & spiros p. gounaris ( 1997). marketing orientation and company performance: industrial vs. consumer goods companies, industrial marketing management, 26 (5),385-402. ballam, deborah a. 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(2002). the glass ceiling is the floor my boss walks on, the journal al applied behavioral sciences, 38 (3),334-354. appendix description of the activities covered i. refusing to hire job applicants who are over age 45. extending a policy where no individual who is 45 years of age are older will be hired for a given job category. reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal o(small business strategi1 2. price collusion with competitors. making agreements with rival manufacturers which stipulate the prices each competitor will charge to its customers. 3. charging higher prices than rivals. assessing company customers higher prices than those assessed by competitors to their customers. 4. hiring only experienced help. hiring only those job applicants who have personal experience in manufacturing work. 5. predatory pricing. setting company prices at low levels in order to drive competitors out of business. 6. informing a debtor that legal action may be pursued. telling a debtor, by telephone or letter, that if a past-due account is not settled, legal proceedings may be put into motion. 7. discharging an employee for filing an osha complaint. firing an employee because that individual has filed a complaint with the occupational safety and health administration regarding an unsafe practice or facility at work. 8. charging the same price to similar buyers. charging identical prices to different company customers when these customers are essentially alike in terms of the cost of serving them. 9. suggesting that customers buy an item now. urging immediate purchase as prices may rise sometime in the future. 10. agreeing to divide the market with rivals. reach an agreement whereby you will not compete for certain customers reserved for competitors and they will not compete for certain markets reserved for your finn. 11. exercising surveillance over who supports a union formation. when efforts are being made to form a union in your plant, undertaking to discover which employees are in favor of the um on. 50 vol. 16, no. 1spring/summer2005 12. telling customers they are getting a price break when this is untrue. falsely informing customers that they are receiving a price that is lower than that charged to other customers. 13. selling a low quality product. sell a product that is inferior in performance, materials, or workmanship to products sold by competitors. 14. aiming the marketing effort only on larger customers. concentrating your marketing personnel and activities on satisfying the needs of your larger customers. 15. selling products in throw-away nondegradable containers. selling goods in packages that will not break down into natural commodities in a reasonable period of time. 16. agreeing with distributors on the prices they will charge. entering into contracts with distributors whereby the distributor agrees to sell your items at the prices you have specified. 17. prempting potential competition with prices below costs. keeping new firms from entering your market by pricing below costs, making it impossible for new firms to make a profit. 18. inducing price discrimination. persuading a supplier to sell goods to you at a lower price than that paid by a similarly situated competitor. 19. promoting only experienced people into managerial jobs. promoting into managerial level jobs only those who have extensive experience with the company. 20. making sales forecasts based upon managerial judgment. preparing sales forecasts that are based upon the experience and judgment of management, rather than upon mathematical calculations. strategy a cross-sectional study of business service profitability'ome implications for strategy timothy l. wilson clarion university abstract 2 cross-sectional study has been made of the business service sector in the us. relative market share, revenuejemployee and perhapsinvestment werefound to be contributors to pretax profitability in this sector. consequently, strategies directed toward optimizing revenuelemployee, growth, and investment may be effecti ve in determim'ng firm performance. the oppoi tunitiesprovided to small business in this sector, theimportanceof this sector in the economy, and the importanceofstrategy to small businesses would appear to make the study ofinterest to small business managers. introduction business services have been important in the us. economy —they accounted for 59% of gdp in 1992, the most recent year of a us. business census. in the decade 1982-1992, this sector exceeded gdp growth and was supported in large part by new firm formation. wilson and smith (1996)studied a sample of 11 segments in this sector and found the overall growth of business services in the sample was 11.7%per annum (p.a.) for the 10 year period 19821992, and everv segment outperformed the gdp growth of 6.7% p.a. of that period. further, 3.748 million net, new jobs were created, which were accommodated, in part, by the formation of 200,500 new firms. six of the 11 segments carried average salaries greater than average u.s. salaries for the period, which rejected the notion that service jobs have to be low paying jobs. small business managers should be interested in this sector because it tends to be served by smal i firms. in the wilson and smith (1996)cross-sectional study from census information, average sized firms were in the $ 0.3 to 1.7 million range (average $896,723), with about 18 employees (18.08) per establishment. rather surprisingly, services in general and business services in particular have been relatively neglected until recently in the business literature. shostack's (1977) seminal paper on the marketing of services is less than 20 years old, and a paper addressing the quality of 'he author appreciates the comments of three anonymous reviewers that contributed tu this paper. 53 business services has only recently been published (holmlund & kock, 1995). nevertheless, shostack's suggestion that services were "different" has produced a stream of literature that has stressed the importance of quality for services in general (see lovelock, 1992, or cravens et al., 1988 for summaries of some relevant literature) and relationships (see holmlund & kock, 1995) in service management. consequently. gronroos (1990) has developed five rules of service that he suggests should drive service management, and quinn (1992) has written a comprehensivetext concerned with the management of "new" service enterprises. there have also been industry specific studies, eg., management consulting (dawes, dowling & peterson, 1992), cpa services (woodside, wilson & milner, 1992), advertising (harvey & rupert, 1988), architecture and engineering services (day & barksdale, 1992), mro services (jackson et al., 1995). the conclusion that might be reached from these studies is that there appear to be business routines specific to these industries, which must be understood in order to be successful in these segments. i.acking in this literature has been the type of study that has contributed to strategic successes in "goods" businesses. specifically, matrix type approaches appear to be totally lacking and there appears to be little approaching a market-based, broad-based study in either specific segments or the sector in general. kotler (1994, 74) has suggested that "managers(are helped to) think more futuristically and strategically, to understand the economics of their businesses better, to improve communication between business and corporate management, to pinpoint information gaps and important issues, and to eliminate weaker businesses and strengthen the investment in more promising businesses" by using these tools. this attention may be especially important in small businesses because two criteria identified as indicators of small business performance have been strategic direction and strategy implementation (cook & wolverton, 1995). the purpose of this paper is to report on a cross-sectional study that has been made of the business service sector. it identifies several factors that appear to be important in pre-tax profitability to business services. because of the opportunities provided to small business in this sector and the importance of strategy to small businesses, it would appear that such a paper would be of interest to small business managers and/or the consultants who advise them. furthermore, the importance of this sector in the economy may make this study interesting to academics. model and hypotheses normann(1989, 122 ff) has suggested that successful service management necessarily requires three levels (circles) of attention —micro-, internal-, and macro-levels as shown in figure i. in what has appeared to be a "bottoms-up" approach to understanding service management, the two lower levels of service management have tended to receive most attention to date. at the micro-level, a necessity for service supplier and client to form a mutually reinforcing system was recognized. studies devoted to "moments of truth" (albrecht & zemke, 1985; gronroos, 1990) as well as individual industry studies (dawes, dowling &. paterson, 1992; woodside, wilson & milner, 1992; harvey & rupert, 1988; day & barksdale, 1992; jackson et al., 1995) and those devoted to relationships (johnston & lewin, 1996; holmlund & koch, 1995; wilson, 1995; hall & rao, 1994) have established the importance 54 of developing this level of management and control. likewise, internal marketing has been recognized as an essential element of success in service businesses (gronroos, 1983; peters, 1988). figure 1 three levels of service mana ement ormann 1 89 126 strong service management strong the macrocircle system market position economic results motivated staff with self-esteem satisfied customers superior/subordinate and interfunctional interaction according to service circle 'good service'orms personnel internalize 'good service'orms the microcircle precision anduplifted (mom ent of truth) service consistency uplifted of service customersuppiied delivery the positive circles of the service company 55 at the macro-, or strategic, level normann's (1989) suggestion was that management system, market position and economic results were inter-related. certainly, service manageinent systems have been described and discussed (see, for instance, fitzsimmons & fitzsimmons, 1994; gronroos, 1990; lovelock, 1992) and quality, as an indicator of market position, has been recognized as being a strong contributor to economic results (see holm lund & koch, 1995;lovelock, 1992; cravens et al., 1988 for reviews). nevertheless, definition of "strong market position" and its association with economic results have been relatively unstudied for services. in comparison, "product" marketing, has had the pims study (schoeffleret al., 1974; buzzell et al., 1977; buzzell & gale, 1987) available as a foundation from which managers have been able to develop strategies. that study, which established a link between strategic planning and profit performance, developed linkages between profitability and "key" profit influences from cross-sectional, pooled, industrial data. its major conclusion was factors such as market share, investment intensity, and corporate diversity, as well as productquality,were intricatelyassociatedwith profitability. for instance,a difference of 10 percentage points in market share appeared associated with a difference of about five points in pre-tax return on investment. consequently, it was suggested the results could be applied to profit forecasting, management performance measurement, and new business opportunity appraisal. the present study uses a sector cross-sectional analysis to test the normann (1989) macro-level model that suggests market position and iinancial performance should be related for services. an analysis has been made of available secondarycross-sectionaldata that relates to business services. four factors were identified as being related to market position —market share, investment intensity,market growth rate and sales per employee. these, in turn, could be associated with economic results (profitability) as defined by pre-tax, return on sales. a return on sales was used for this study in contrast to the return on investment emphasis in the pims study because services are normally considered to be low investment businesses. it might be noted further in support of a ros approach that the pi ms study used a return on sales to calculate roi's and actually reported some ros's. the four factors selected for study were consistent with previous cross-sectional studies of primarily manufacturing business, which suggested they did indeed define the competitive position of firms. the particular measures used were determined by information that could be obtained from secondary data. four hypotheses associated with the independent variables used in the analyses guided the research: h(l): profitability will be positively associated with increased market share. buzzell et al (1975, 1987) have summarized observations made in the pims study, which suggested both return on investment (roi) and return on sales (ros) tend to be positively related to market share. apparently, economies of scale, market power, and/or quality of management contribute to profitability among high share firms. although suggestions have been made that market share should be pursued carefully in search of profitability(day, 1975), especially in services (lovelock 1992, heskett 1987), market share and profitability are generally associated with one another. 56 h(2)i profitability will be negatively associated with increased investment intensity. in the original pims study, apart from market share and product quality, the most important determinantof profitability was investment intensity, i.e. the ratio of investment to sales (schoeffler et al., 1974). the explanation given in that study was that larger investment would be required to offset volume production in investment-intensive industries. that may prove to be true in manufacturing businesses, but is less likely to be the case in services, which tend to "people" businesses and thus require less investment. further, unlike the larger manufacturing businesses that tended to be studied in the pims study, which could serve as their own financiers from internal funds, the business service firms studied here would tend to need external funding. thus, carrying charges in the form of interest for the investments made are thought likely to affect service businesses. the interest on these funds would likely serve as a drain on profits. h(3): profitability will be positively associated with increased industry growth rate. it should be noted that it is not obvious that high growth will necessarily bring higher profitability. wensley (1981)has observed that there is little empirical and theoretical work to justify a preference for high market growth businesses associated with portfolio approaches. nevertheless, czepiel (1992) has outlined the advantages of entry into rapidly growing markets. among the arguments for early entry were ease in gaining share, the iong-term value of share gain, lower price pressure, experience advantage, and deterrence of potential competitors. arguments against entry included high needs for resources and the fact that factors for success may change. additionally, in assessing consideration of industry growth in marketing strategy formulation, haas (1995) suggested that growth is generally favorable to dollar measures of profit, indifferent to percentage increases, but negative to measures of cash flow. pims results suggested a significant positive association between both roi and ros and real market growth (buzzell & gale, 1987). day (1975) warned that company growth in a product line should not lag market growth unless the product was being harvested. with regard to the specific cases of services, norman n (1989)has indicated that there were two times in the life cycle of a service business where operational elficiencies were of concemright after the introduction stage and again during the transition from growth to early maturity. depending upon how growth tends to occur, the latter stage may be critical. quinn (1992), for instance, indicated that firms that tend to grow by branch formation tend to incorporate learning rather effectively. if this were the dominant form of industry growth, one would expect higher industry growth to lead to higher profitability. h(4): profitability will be positively associated with increased revenuelemployee. mclaughlin and coffey (1990)have discussed the problems associated with measuring productivityin services. nevertheless, they also observe that manufacturing measures should not be overlooked in making productivity assessments. one measure that tends to correlate with higher profitability across industries is a sales per employee measure, where high sales per employeetend to be associated with high profitability. this measure would reflect better coverage to fixed costs and perhaps less competition and thus greater flexibility in pricing in a segment, which should produce higher pbt's. 57 methodology the data base used in this study came from a combination of census information and a commercially, private sources. beginning with the 1967 census, legislation provided for a census to be conducted every 5 years (for years ending in 929 and 979) by the u.s. bureau of census in specific areas of economic activity. the census of service industries compiles informationon number of establishments,number of employees, total payroll size, total sales, and other industry-specific statistics by standard industrial classification (sic) nuinber. primarily, information at the three digit sic level was digested from table 3a comparative statistics for firms subject to federal income tax in the u s. geographical area statistics for h 8 yy 1 yh 1 d d —1982,1987 dl992. 8 h~a. i 1 1 h«d census of services have sections that discuss the sampling frames and statistical significance of the material reported by the bureau of census. information on profitability came from an annual compendium published by robert morris associates, an association of lending and credit risk professionals. the 1993 compendium, which reported 1992 annual results, was used to coincide with the last year of the census information. the private source typically gave performance data for six separate sized categories —$0-1mm, $ 1-3mm, $3-5mm, $5-10mm, $ 10-25mm, $25mm and over, but did not report results when fewer than 10 firms reported'in a category; this practice meant results for larger firms were somewhat lacking. although rma carries a disclaimer suggesting results be used only as general guidelines and not as absolute industry norms, results do, however, tend to get rather broad application among bankers as suggestive of performance levels among loan applicants.'he eight industries comprising the 80 percent of revenues in the 1982 department of commerce listing ofbusiness serviceswere selected for study. at the time, this sector was the largest and most rapidlygrowingofall service sectors —including healthcare. an 80 percent coverage was selected to focus on the more important activities in this sector. this selection eliminated ten industries at the four digit sic level and one at the three digit level. to this listing were added accounting-auditing-bookkeepingaervices, legal services and engineeringarchitectural-surveyingservices because of the large portion ofbusiness service they provide. this addition appeared to be consistent with past practices in this general sector (day & barksdale 1992; woodside et al., 1992; weiler, 1987). financial information was available at the three-digit sic level from census information. the commercially available, private source of financial results, however, used a four-digit sic level to compile their information. thus, some selection of industries was necessary in the compilation of return on sales and sales to assets. the four-digit industries that were selected to characterizethe three-digit counterpart were: 7374, 8742, 7361, 8731, 8734, 7351, 7353, 7311, 7342, 7381, 7382, 8111, 8711,2,3 (combined), and 8721. the six separate sizes —$0-1 m m, $ 1-3m m, $3-5m m, $5-10mm, $ 1025mm, $25 mm and over were used as a measure of market share in this analysis. information used in this study were for multiples of the average sized firms in the industry using mid-points 'his information was used with prior authorization of rma. 58 as an indicator of size. this measure of relative share was used because of the general association of share with portfolio approaches, market power and strategic desirability. sixty-eight(68) cases, representingcensus information and financial results from 4006 firms, were compiled and analyzed. some explanation may be necessary to explain what a "case" was in this study —especially the relationship between cases and firms. case is used in an spss sense, i.e., as a data unit, and not as an individual company result. that is, the 26 7374 rma firms (computer processingilc data preparation& processing) in the $0 to i mm range reporting information had an average pbt of 7.4%; similarly, the 44 firms in the $ 1 to 3 mm range had an average pbt of 4.8%, etc. these average data made up the individual cases analyzed in this study. data base averages are shown in table l. an ordinary least squares approach was used to test the hypotheses. a multiple regression expression was developed in which the information available from the compendia was used to develop a linear relationship between pre-tax profitabilityand the independentvariablesmarketshare, investmentintensity, industry growth rate, and sales per employee. t-tests on the coeaicients established the level of significance for the individual terms. the correlation matrix of the independent and dependent variables was examined to see if there were any inter-relational correlations. there was some slight inter-relation between investment intensity and revenue per employee (0.33,significance 0.01) as might be expected. otherwise, there appeared no other elfects and the signs of the coeaicients were consistent with conclusions of the study. for this study, a measure of relative market share was used. this share was calculated as a multiple of average firm size. unlike the pims study, which tended to concern itself with market dominance, it was thought more relevant to consider for small businesses the impact that might occur as the firm grew in relationship to an average sized firm. thus, "relative market share" was expressed in terms of multiples of average firm size as determined from census information,e g., ifan average sized firm from census information had sales of $ 1 mm, then a firm with sales of $3.5 mm would have a relative market share of 3.5. "investment intensity" came directly from rma information, which compiles sales to total assets as one of its ratios. mid-range data were used for each of the separate sized firms categories. a ten year, compound growth in sales calculated from the census information was used as an indication of industry growth rate; dollar sales were used for internal consistency, primarily because company sizes were also expressed in terms of dollar sales. revenue per employee was calculated from the 1992 census information. 59 table i data base avera es in stud pbt size inv/ industry rev/emp ~se ment ~/o ~mm sales gr rate ~lc computer & 3.9 1.71 0.42 16.6 114.1 data processing management, consulting 4.2 0.79 0.34 13.6 89.0 & public relations equipment rental 6.0 0.88 0.81 7.7 108.9 & leasing personnel 2.7 1.23 0.20 15.0 19.3 supply services advertising 3.1 1.03 029 89 993 dwelling & 28 033 031 97 232 building services detective agencies 2.2 0.87 0.32 8.8 23.6 & protection r&d, testing 3.5 1.68 0.48 15.4 80.3 laboratories legal services 17.9 0.67 0.26 11.4 109.4 engineering & 3.0 1.16 0.38 8.7 95.5 architectural services accounting, auditing 14 7 0.43 0.44 & bookkeeping services column averages 5.9 0.98 0.40 11.7 79.2 60 results results suggest that a statistically significant correlation between pre-tax profitability and the independent variables(significanceof f = 0.0001 and adjusted r' 0.2680).'wo of the hypotheses could be supported, whereas two could not within the range of usually accepted statisticalsignificance. further, one expected dependency carried the "wrong" sign from that which had been hypothesized. regression results are shown in table 2. table 2 multi le re ression results 68 cases variable coefficient ~u ~id relative market share 0.2287 0.0001 (0.0546)" investment intensity -3.2353 0.3042 (3.1230) industry growth rate -0.3014 0.1210 (0.1918) revenue/employee 0.0524 0.0097 (0.0197) constant 4.5215 0.1463 (3.0740) adjusted r = 0.2680 f = 9.1312 significance of f = 0.0001 ~mk dk ..m k k y d k idiii iy \ d iky . y y udly as anticipated. it might be noted, however, that the dependency was not as large as found in other studies. here, results suggest that an average sized firm that doubled in size would gain about 023 points in pre tax return on sales. table i indicates that an average sized firm in the sector might have a pre-tax margin of about 5.8oyw thus, effects were much less than the "five 'or comparison purposes, r'or ros in the pims study was 0.31. the difference between the two studies could be totally accommodated by sample size. 'umbers in parentheses represent standard error in the coefficient. 61 point increase in roi for a ten point ditterence in market share" found for manufacturing industries (schoeffler et al., 1974). -tht«tl llylgltl i h i i hip d nothing definitive can be said about its eiyect on profitability. the sign was negative, however, as hypothesized which suggests that it may have a negative intluence. the investment to sales ratio for these businesses was surprisingly high (average = 038). although this figure was less than similar ratio in the original pims study of largely manufacturingbusinesses(0.65), it may reflect the fact that some of these costs are truly hlixedh and common across business lines. d g hg —th ftll fhl i «i»i ily lgid again nothing definitive can be said about its effect on profitability. it might be noted, however, that the sign of this term was also negative, which was the opposite of that hypothesized. this observation could be associated with the relative difliculty in organizing for early growth as suggested by normann (1989), or with the tendency to accommodate growth by new firm formation as suggested by wilson and smith (1996). nevertheless, it should lead managers to approach apparent rapid growth situations with some concern. revenue er em lo eethis term was positive and statisticallysignificant. further, it carried a rather large apparent weight in determining profitability. a 10 thousand dollar increase in revenue per employee thus could be associated with more than one-halfpoint (0.524) increase in pre-tax profitability. discussion the central theme of the pims study was that business strategies can be related to performance by studying past experience. this study followed that approach and is important because there has been little work in the past linking performance and strategy for business services. the observations made in this study thus may be used by small business managers in this sector to guide their activities. in this regard, these conclusions might be reached: i. em hasisshouldbe iven too timizin revenue/em lo ee. the revenue/employee term suggests the most important strategy a business service manager might take in attempts to increase profitability. because of uncertainties associated with growth, this area deserves the focus of managers. focus on quality (and charging for it), specialization,and establishment of relationships are items that immediately come to mind as a means of implementing this strategy. quinn (1990, 72 ff) discussed an "activity" share approach as a means of dominance. by this he apparently meant the use of key people focused on meeting customer needs as an approach that small firms may use to surmount apparent obstacles of size. further, using part-time workers where possible as clerical assistants and/or associates in professional situations would appear to also work well in implementing this approach. heskett (1988) apparently shared this view. it was indicated (55 fl) that a service strategy centered on hard-to-replicate elements would be more difficult to emulate than one based on standard one. thus, his human resource "wheel" was focused on providing higher value-added services. in general, it has been suggested that firms should focus generally on 62 generating profits instead of becoming overly concerned with competitors (armstrong & col lopy, 1994). 2. growth is im ortant and indeed can be rofitable. the fact that the coeflicient of the share growth term was positive and significant suggests that share growth can positively affect profitability of business service firms. it is clear, however, that growth must be approached with some caution. the industry growth term, although not statistically significant, was negative which might suggest that management be forewarned in how industry growth is accommodated. the relative magnitude of the share coefficient (0.0546 increase for doubling of share) suggested that this focus should be secondary to increasing individual efficiencies. there is guidance for profitablegrowth in the literature. normann(1989) suggested that the nature of top management may be important, so growth may need to be consistent with the comfort factors of these managers. jelinek's (1979) observations tended to support this approach. she noted that in growth there appeared to be a stage where a transition from an informal organization to a more formal one. this transition may be especially important in service businesses. heskett(1986, 118 ff) provided examples of service businesses that started out very much associated with one individual, but whose successful growth was associated with development of a "lean" team management approach. peters (1988), of course, has been an advocate of proactive, horizontal management and empowerment of people in achieving effective service organizations. 3. be careful with investments. the sign of the investment/sales term suggested that heavier investment sectors performed more poorly than lighter segments, which supported the hypothesis in this area. the magnitudeofthe coefficient,however,was notstatisticallysignificant. nevertheless, one must use a certain amount of common sense in interpreting results (see, for instance, buzzell and gale 1987, 3). some observations can be made on the basis ofexaminationof the data. if one considers the equipment rental & leasing segment (table 2), it is seen to have the highest investment to sales ratio, but is about mid-way in profitability. comparison with the r&d, testing laboratories segment, which is second highest in investment to sales but one of the lowest in pbt, suggests something peculiar may be occurring. one might expect that equipment rental & leasing managers find it relatively easy to anticipate usage of equipment and price accordingly on a value-added basis. r&d, testing laboratories managers, on the other hand, may find it more diflicult. equipment tends to be used in job'performance and there may be some attraction to having the latest equipment available to do a job. this equipment availability may not be accurately reflected in pricing. therefore, to what use and how to incorporate that value into price may be more difficult to appreciate and assess. thus, in any segment there must be more to purchase than "latest thing" and "tax deductible" considerations in making purchases. considerations such as, "will it make operations more efficient? will it bring more business? will it pay for itself?" are important. the negative sign suggests that many times investment do not make these contributions, so investment must be carefully considered in these businesses. 63 conclusions a cross-sectional study has been made of some of the factors that apparently affect profitability in the business service sector. these factors may be academically interesting in themselves. as a consequence of this study, however, some observations are made that relate to strategies for small business service businesses. these observations may have an impact on how managers may grow these businesses in the same way the pims study has contributed to developing strategies for larger manufacturing businesses. 64 references albrecht, k. & zempke, r. 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(1992). buying and marketing cpa services. industrial marketing management, 2i-4, 265-272. 66 becoming a small business owner: the hispanic experience howard d. feldman university of portland julio de castro university of colorado thomas dean university of tennessee karen vaught-alexander university of portland abstract this study examined the paths to ownership, demographic characteristics, incubator organizations, motivations and attitudes, and start-up experiences of a sample of 92 hispanic business owners. results were compared with cooper, dunkelberg. woo and dennis' s 1990 study examining alternative paths to ownership of a predominantly non-minority sample of owner-managers. the results indicate 85.7o/o of hispanic business owners started their o~nfirm, as opposed to 63.6% in the cooper, et al. study. several differences were also found in their ownership profile including: the availability of parents as role models, the age when they became owners, industry representation, education, and the sources of funding available to them. introduction small business ownership has been shown to be an important factor in the development of economically depressed populations {birch, 1979, 1987). as such, it is important for researchers to ascertain the conditions determining minority small business ownership and the career paths enabling such groups to reach this status. a search of the business literature reveals relatively little infonnation on the career paths to ownership of minority populations. cooper and dunkelberg (1986) have argued that there has been very little systematic, broad-based research examining people who have become business owners--in different ways, in different industries, and in different time periods and geographic areas (p. 53). hisrich and brush (1986) state that, given the growth in minority entrepreneurship and its increasing impact on the business community, it is important to understand ~e backgrounds, management skills, type of businesses and business problems of minority entrepreneurs. (p. 3). there appears to be a consensus that the development of an economically stro~~ minority business segment has been recognized as a major policy initiative by a number of different constituencies, both within the government and out. a variety of programs--set-asides, subsidies, minority purchasing and other economic assistance efforts--have been developed and are currently operating at various levels of success. however, we believe that further research on the start-up process can help to improve the sel'vices and support mechanisms currently provided to the minority community. in addition, research should enhance our understanding and knowledge of the entrepreneurial process among peoples of different ethnic and cultural backgrounds. this research attempts to fill part of the gap noted above. it examines the paths to ownership followed by hispanic small business owners (hsbo's). using a sample of 92 hsbo's, the study examines (a) the characteristics and paths to ownership of hsbo's, (b) compares these characteristics with a predominantly non-minority sample of nfib (national federation of independent business) owners, and (c) discusses the implications of these results for both aspiring hsbo's . and academic researchers. hispanic small business owners hispanic-owned businesses represent an increasing segment of the u.s. economy. based on the latest data available ( 1982 survey of minority-owned business enterprises), there are approximately 250,000 hispanic-owned businesses in the united states, representing 29% of all minorityowned firms. ave.rage annual revenues per hispanic-owned firm were $60,400, slightly above the average of all minority-owned companies ($53,800) but well below the average of all u.s. businesses ($473,500). average revenues have increased by almost 27% from the 1977 figure of $47 ,574, and early indications from the 1987 census suggest that a similar or greater increase can be expected over the last census period. previous research on hsbo's has typically been conducted in one of three research settings. the first area encompasses research on "generic" minority businesses and/or business people. in these studies the results are reported in the context of a "minority" sample in order to compare them with a non-minority sample (dadzie & cho, 1989; hisrich & brush, 1986; scott, 1983). hsbo's as well as other minority populations are only mentioned in the sense that they constituted some percentage of an overall minority sample. such studies provide virtually no information specific to hsbo's, concentrating instead on the overall minority experience: the second research area deals with studies of specific types of minority businesses and business people of which the hsbo is one (feld.man, koberg & dean, 1991; kirchoff, 1982; young & sontz, 1988). these studies are frequently conducted in an effort to illustrate racial or cultural differences but often provide mixed results. very little evidence demonstrating that such differences play an integral role in the entrepreneurial process has been found. in the few instances in which differences have been found, they have been isolated to studies of attitudinal profiles and little else. a third area of research has focused primarily on hsbo's (brarda, 1979: kizilbash & garman, 1975; young, welsch, & triana, 1984). these studies have typically been conducted by researchers interested specifically in the hispanic business experience. while these exploratory studies have been of value, there is little evidence of any systematic and sophisticated research agenda currently being pursued in this area. this may change, however, with the continuing growth of programs like the hispanic business and economy symposiums, which actively seek to develop a dialogue about the need for such a research agenda. 2 overlaying the above research settings are two themes specific to hsbo's: (a) the attempt to identify a psychological or sociological profile of the hsbo (brarda, 1979; welsch, young & triana. 1984). and (b) an examination of the problems/opportunities confronting hsbo's (kizilbash & garman, 1975: young & sontz. 1988; young, welsch & triana, 1984). despite differing cultural and ethnic backgrounds, previous research has found relatively few differences of note between hsbo's and other minority sample groups. feldman, koberg, and dean (1991) found no significant race differences among hispanic, black, asian, and native american small business owners according to a variety of dimensions including need for achievement, internal locus of control, external locus of control, and sense of competency. on other attitudinal and behavioral scales, the results were mixed but with no discernible patterns of racial differences. furthermore, this research showed that minority small business owners in general appeared to possess similar ownership profiles regardless of their particular race. young, welsch and triana (1984) found that hsbo's utilized professional and institutional sources of information more than non-hispanic entrepreneurs and the reverse was true for written sources of information. kizilbash and garman's (1975) study of grocery retailing in spanish neighborhoods found that inadequate management and insufficient financing were critical problems for hsbo's and that ethnicity played a role in the success of this type of store. that is, success or failure was related to the popularity of the store owners and their expertise at satisfying their customers lotal needs (p. 17). another study of grocery stores compared korean and hispanic owners (young & sontz, 1988). this study found both ethnic groups w~rked. equally hard, were equally satisfied with their business careers and could both be viewed as successful, depending on whether financial or nonfinancial indicators were used (p. 28). however, some differences were noted between the two groups including (a) hsbo's provided more external benefits to their neighborhoods, (b) hsbo's had less formal schooling and less family help (labor and capital), (c) nonfinancial concerns such as independence and personal satisfaction were less important to the koreans than they were to the hispanics, and (d) financial success was more prevalent among koreans than hispanics. finally, furino, rodriguez, and scott ( 1980) found that hsbo's experienced greater difficulty in obtaining bank loans than non-hispanic businesses and that those they did receive were frequently smaller. in summary, the research on hsbo's is limited. business school researchers have typically concentrated on the "minority" experience to the exclusion of specific groups such as hsbo's. further research is needed to illuminate the concerns and issues surrounding the rapidly-growing hsbo segment. we cannot simply assume that they are the same as other minorities, nor can we assume they encounter the same experiences, obstacles, and challenges as the non-minority sector since hsbo's as well as other minorities look through the filter of their own unique cultural and ethnic heritage. as scott ( 1983) asserts: ethnic firms may sometimes appear to be different from nonethnic firms, since business in the minority community often reflects the customs and value systems which are unique to it. many ethnic firms have operated under special cultural patterns, providing ethnic products and services to ethnic neighborhoods. in fact, minority-owned firms are found to exhibit different operating and financial patterns from non-minority finns, in tenns of the manner in which they develop their profitability. (p. 43) business researchers must expand their efforts to consider interdisciplinary concerns and cultural and ethnic characteristics and how they affect the minority business experience. this might help 3 to identify some of the uniqueness of hsbo's as well as other minority groups. the richness of the hispanic business community must be captured in future studies. this study helps to bridge some of the gaps in ownership literature because of its focus on a single minority group-hispanics. method questionnaires and measures as part of a larger minority business study, questionnaires consisting of previously standardized measures were mailed to 424 minority small business owners in a western state. the state has a significant hispanic presence relative to both population and business ownership. demographic figures for 1990 project hispanics as representing almost 13% of the state population. additionally, 6,000 hsbo's were operating in 1982 (approximately 3% of all businesses in the state), generating a little over $250 million in annual revenues. a check of the state's minority business population versus national statistics indicated an overrepresentation of hispanic business owners among the hsbo sample, but it was in line with comparable state population statistics. the sample group was obtained from a local minority business development center mailing list and consisted of firms that had contact~d the center for either information or consulting help. a total of 181 usable questionnaires were returned (43% response rate) of which 92 were hispanic small business owners (50.8% of total minority responses). seventy-nine per cent of those respond.ing were male, and twenty:one per cent were female. approximately 92% of the owners were from a metropolitan rather than a -rural area. a chi-square test indicated that responding owners did not differ from non-responding owners in terms of urban vs. rural orientation (x' = 3.68, df= i, ns). the research analyzed the characteristics of the sample relative to the types of industries in which hsbo's competed, the numbcrof employees per startup, and the owners' years ofownership. it examined the reasons that hsbo's left their prior jobs, how they al',hieved their ownership roles and the motivations and attitudes that got them there, growth expectations, sources of financing, and a number of additional personal characteristics including the availability of family role models, level of education, and previous job experiences. the primary purposes of this research were to (a) form a profile of ownership characteristics, and (b) to examine the various paths to ownership used by the hispanic business community. ownership measures the cooper and dunkelberg ( 1986) questionnaire was used for this study. it contains a variety ' of questions pertaining to the owners' (a) backgrounds, (b) motivations and attitudes, and (c) previous careers, incubator organizations, and their start-up experiences. using this instrument allowed us to compare the hsbo results with a later study by cooper et al. ( 1990), which consisted primarily of a non-minority sample of nfib (national federation of independent businesses) owners (n = 2994).' where appropriate, chi-square tests of significance were performed to see if the nfib sample group differed from the present sample group. the chi-square tests indicate whether differences exist between the proportions of the responses of each group. thus, a significant chi-square value shows that the proportions are not the same across the two sample groups. 4 results and discussion owners, businesses and industries tables la-le list the industries represented, the size of the firms with respect to their number of employees, and the year in which these hsbo's became owners. for comparative purposes the results from the nfib study ( 1990) are presented alongside those of the current study. table la shows that the majority of these hsbo's were concentrated in four industries: construction, miscellaneous services, professional careers and manufacturing and mining. over 80% of the hsbo sample fell into these four categories versus only 39.7% of the nfib sample. major differences in industry representation (more than 10%) were found in construction and professional services, where hsbo's were far more prevalent. alternatively, 46% of the nfib sample were in retailing as compared with only 4.4% of the hsbo's in this study. employment levels (table lb) were rather similar among the two sample groups. both were heavily populated by small firms, as measured by low employment levels. for example, 79% of the hsbo's and 91% of the nfib companies had fewer than 11 employees although statistics were not available for the nfib firms, only two hsbo's had employment levels above 50. the 1990 nfib study did not provide data on when the initial ownership role occurred. the study, however, 'demonstrated the recency of the ownership event for hsbo's; 81.5% of the sample became owners within a 13 year period, 1976-1988, and 57.6% over the eight years from 1981-1988. an earlier nfib study by cooper and dunkelberg (1986), although not directly comparable due to different time periods, found a smaller percentage, 48%, (n = 1756) had become owners during a slightly longer time period, the nine years previous to their study (19711979). personal characteristics table 2 lists the personal characteristics of the hsbo's examined. almost 39% of hsbo's had parents who owned their own business. this result is consistent with the 41% found in young and sontz's (1988) research, and it is not significantly lower than the 45.1 % found among the nfib respondents (x' = 1.57, ns). thus, it would appear that a fairly substantial number of hsbo's have ownership role models. with regard to the 61 % of hsbo's without ownership role models, these individuals appear to have embarked on careers different from those of their parents and prior generations and may be the vanguard of a new era of hispanic entrepreneurs. this conclusion seems to be borne out by the latest statistics showing the continuing increases in the number of hispanic-owned businesses (1982 survey of minority-owned business enterprises). in most studies of entrepreneurs/small business owners, sizable percentages of entrepreneurs are either foreign-born or the children of at least one foreign-born parent. the authors expected, with the growing hispanic immigration into the u.s., to find the same pattern in their sample group. thus, it was not surprising to find 26.4% of the hsbo's fit this characteristic. this was considerably more than the 15.2% found in the cooper and dunkelberg (1986) study of nfib owners. (cooper et al.[1990) did not provide data on this issue). 5 table la-le sample characteristics nfib hispanic owners owners i a) industries represented(%) (n=2994) (n=91) construction 7.3% 31.9% miscellaneous service 19.2 19.8 professional 5.4 15.4 manufacturing and mining 7.8 13.2 wholesale 4.2 8.8 transportation & comm. 2.4 2.2 retail 45.9 4.4 agriculture 2.1 i. i financial 4.9 0 others or unknown 0.7 3.3 nfib hispanic owners owners lb) number of (n=2988) (n=90) employees % cufn.% % cum.% <2 26.0% 26.0% 26.1% 26.1% 2~3 23.2 49.2 17.4 43.5 4-6 .31.6 80.8 20.7 64.2 7-10 9.9 90.8 15.2 79.4 >io 9.2 100% 20.7 100.1% hispanic owners(n=92) i c) year became owner % cum.% before 1941 0% 0% 1941-1950 i. i i. i 1951-1955 0 i. i 1956-1960 0 i. i 1961-1965 i. i 2.2 1966-1970 4.3 6.5 1971-1975 12.0 ,18.5 1976-1980 23.9 42.4 1981-1985 43.5 85.9 1986-1988 14.1 100% 6 table 2 personal characteristics of business owners characteristics parents owned business: yes no foreign-stock: yes no education: less than college degree number of full-time jobs more than 3 jobs ave. #of full-time jobs before ownership age when became owner: <30 30-39 ,39 ave. age when became owner nfibowners (n = 2994) 45.1% 54.~ nia nia 67.2% 51.8% nia 26.5% 38.8 34.8 nia hispanic owners (n = 92) chi-square 38.5% 61.5 1.57 26.4% 73.6 nia 48.4% 14.16** 53.4% 0.08 4.4jobs nia 14.3% 54.9 30.8 11.22** 36. l yrs. note. number of full-time jobs held between leaving school and becoming owner of this bi.isiiless, cou.nting military service as one job. nia = not available *p0.05 ** p0.0l another interesting aspect of these hsbo's was their relatively high levels of educational achievement. chrisman and carsrud (l 990) argue that education is one of the major sources of information available to entrepreneurs regardless of race, and this sample of individuals availed themselves of this opportunity. approximately 51 % of these hsbo's had a college degree compared with only 33% of the nfib sample. these results are not only significantly different (x' = 14.16, p<.01), but also consistent with gomolka's (1977) and hisrich and brush's (1986) findings that minority entrepreneurs frequently have a college education, regardless of the fact that they tend to come from lower or middle class families. minority entrepreneurs appear to couple achievement in education with achievement in business. with regard to the other personal characteristics examined, several similarities were noticed between the two groups. for example, significant percentages from both groups of respondents held more than three full-time jobs before embarking on their current careers as owners. in fact, 52% of the nfib sample and 53% of the hsbo's fit this category. furthermore, the sample of hsbo's averaged 4.4 full-time jobs before engaging in their current ownership role. the sample groups did differ (x'= 11.22, p<.01), however, with regard to the age at which they became owners. hispanics tended to become owners at a later date in their life. it would appear that hsbo's serve a longer "apprenticeship" period before embarking on their entrepreneurial careers than non-minority small business owners. 7 table 3 paths to business ownership started the business purchased the business (not from family) inherited the business, or purchased from member of family promoted or brought in by other owners other paths • p~.05 paths to ownership nfib hispanic owners owners (nz= 2994) (n=91) chi-square 63.6% 85.7% 27.76** 29.7 7.7 2.2 4.4 3.5 0 1.0 2.2 a significant difference (x' .=27.76, p<.01) was found in the pathways to business ownership by hsbo's and nfib owners (see table 3). this result was due primarily to the heavy reliance by hsbo's on starting their businesses (85.7%), whereas the nfib sample either started (63.6%) or purchased their businesses (29.7%). while a fairly large number of owners from the nfib sample followed the latter ownership path, only 7.7% of hispanics did so. the small number of hsbo's purchasing businesses may be symptomatic of a lack of knowledge of the purchasing process and/or a lack of financial resources. alternative paths to ownership (inheritance, promotion. etc.) were followed infrequently by both groups. the increasingly rapid growth of minority businesses (and hispanic businesses in particular) is likely to highlight the need for further knowledge of the purchasing path to ownership along with the other paths to owning a business. far more family businesses are likely to be handed down to succeeding generations, requiring an increased understanding of the inheritance path to ownership. topics such as succession and estate planning will probably become more relevant to hsbos than they are today. training and support programs may need to be revised and revamped to accommodate these changes in the minority business sector. career characteristics and the start-up process table 4 examines a variety of career characteristics including infonnation on the owners' incubator (previous) organizations and several key aspects of the start-up process. a significant difference (x' = 8.69, p<.05) was found among the supervisory backgrounds of our two sample groups. on the one hand, previous supervisory experience of hsbo's was primarily with workers (52. 7%) rather than managers (13.2%); however, a full third (34.1 %) had absolutely no supervisory background. on the other hand, nfib owners also had more experience supervising workers (39 .3%) than manager's (i i. i%), but in both cases their supervisory experience was less than that 8 of hsbo's. almost half of the nfib group (49.6%) had no prior supervisory experience. as indicated by the numbers above, both groups had very little experience in higher-level positions requiring them to "manage" managers. the results show about one out of four (27 .6%) of the hsbo sample left their prior organization due to negative "pushes," (i.e .. their job was discontinued, they were fired, they quit with no specific plans, or they would have quit even if they had not become an owner). unfortunately, cooper et al. ( 1990) provided no data on this issue. however, an earlier study by cooper and dunkelberg (1986) found 19.8% of that nfib sample experiencing the same negative pushes. alternatively. 51. 7% of the hsbo's left their prior jobs to start their new ventures, suggesting at least some form of preplanning. the above figures appear to support partially cooper and dunkelberg's (1986) argument that entrepreneurs are less likely to accept authority and to "succeed" in larger organizations (when success is measured by supervisory experience). however, it should be recognized that the relative youth of these owners (average age of 36.1 when they became owners) may also have contributed to their lack of experience in managing and supervision. the two groups were similar in their use of partners or investors. that is, 38.5o/o of the hsbo's and 29.8% of the nfib sample had full-time partners or investors· at start-up. hsbo's averaged 2.3 full-time partners or investors at start-up. in addition, both groups were similar in that comparable percentages (52.8% of the hsbo's and 44% of the nfib group) started new ventures servicing the same or similar customer groups as those dealt with in their previous organizations (incubators). however, a significant difference (x' = 16.24, p~.01) was found among the groups when examining the types of products/services provided their customers. thal is, almost two-thirds (65.5%) of all hsbo's provided products/services similar to those of their respective incubator organizations. only 43.7% of the nfib sample did the same. many experts believe that smaller firms provide better training for future entrepreneurs than larger firms because their employees have the opportunity lo participate in a wider variety of activities relevant to the entrepreneurial experience. alternatively, career training in large firms is often characterized as in-depth but lacking in the breadth needed for a well-rounded entrepreneurial apprenticeship. yet, only 38.5% of the hsbo's worked in organizations with fewer than 100 employees, compared to the nfib sample of 46. 9%. although no significant difference was found, we need to ask whether hispanics perceive better career opportunities with larger firms than smaller firms. do larger businesses provide a superior "incubator" experience in readying hsbo's for their entrepreneurial endeavors? are hispanics pursuing the kind of business career paths that will prepare them for future entrepreneurial success? and are hispanics themselves doing what is necessary lo encourage the "apprenticeship" function among aspiring hsbo's? are they doing "enough" in the way of training their own kind for future small business careers? these appear to be topics worthy of future research. sample groups differed in their proclivity to move when starting their new businesses (x'z= 10.70, p~.01). only 6.7% of hsbo's set up their business away from where they lived, whereas 20.8% of the nfib sample did so. this suggests that hsbo's recognize the importance of their local market knowledge; not moving offers fewer family disruptions, and it allows them to take advantage of their personal contacts. it also supports scott's ( 1983) contention that ethnic firms frequently operate in ethnic neighborhoods. moving away from such areas would remove them from their prime market segments and the neighborhoods and people they know best. 9 table 4 characteristics of careers, incubator organizations and the process of starting prior supervisory level: supervised workers supervised managers no supervisory experience prior organization: d 00 employees ~iooemployees major reasons for leaving prior organization (negative pushes) job discontinued fired quiuno plans quit anyway quit for business other reasons similarity of business to that of incubator: cuslomers same/similar: yes no products/services same or similar: had full-time panners or investors pres~nt at start-up: ave. #of full-lime panners . ' or investors at start-up mc?ved when became owner: ni a = not available motivations and attitudes yes no yes no yes no •• p~.01 nfjb owners 39.3% 11. i 46.9% 53.1 nia nia nia nia nia nia nia 44.0% 56.0 43.7% 56.3 29.8% 70.2 nia 20.8% 79.2 hispanic owners 52.7% 13.2 49.6 38.5% 61.5 27.6% 20.7% i. i 0 5.7 51.7 20.7 52.8% 47.1 65.5% 34.5 38.5% 61.5 2.3 6.7% 93.3 chi-square 8.69* 34.1 2.53 nia 2.71 16.24** 3.17 nia 10.70** previous research (cooper & dunkelberg, 1986; smith, 1967; smith & miner, 1983) suggests there are two primary types of entrepreneurs-managerial and craftsman. managerial entrepreneurs possess a desire to achieve economic gain and to build a successful organization. they attempt 10 to do so by puuing controls in writing and by spending a large amount of their time in administrative duties. they frequently have higher rates of organizational change. craftsman entrepreneurs tend to be very different. they prefer to do the work they want to do and not to work for others. they favor selling and technical activities, their firms are less formalized (fewer controls in writing), and they experience less organizational change. lifestyle concerns tend to be emphasized over economic concerns. given the general ownership demographics of hsbo's mentioned earlier in the paper, it was expected that the hsbo sample would be predominantly craftsman entrepreneurs. the questionnaire allowed us to test this hypothesis and compare the hsbo results to those of the nfib study. interestingly, hsbo's placed greater importance on the managerial goal of building a successful organization (43.2%) than the respondents in the nfib study (32.2%), but this along with the results of the other categories was not statistically significant (x' = 5.00, n.s). this was a somewhat surprising result since we had anticipated having far more craftsman than managerial types in the hsbo sample. however, the educational achievements of this group may help to explain their higher aspirations and managerial orientation. the fact that business ownership is seen as an important path to financial and social success for hispanics may also help to account for this result. substantial differences were found between this study and one by young and sontz (1988) in terms of independence and what owners are seeking from their ventures. only 17 .0% of hsbo's responded that they began their businesses in order lo avoid having to work for others (independence), and 21.6% answered that they were looking for personal satisfaction. alternatively, 84. 7% of the hispanic respondents in young and sontz's research said they wanted independence, and 39. 9% said they were looking for personal satisfaction. these differences may be due to the fact that the sample group in young and sonlz was comprised of hispanic immigrants as opposed to this study's group, which was primarily born and raised in the u.s. independence may represent the ultimate 'dream' to those who had been restricted or limited from business ownership in their native countries. 0\yning a successful business and economic self-sufficiency may be the way to achieve part of this dream and the independence and satisfaction that comes with it. further differences were found among the motivational and attitudinal scales examined (see table 5). for example, both the nfib sample and the hsbo's generally agreed (strongly or somewhat strongly) that t~eir businesses were changing rapidly, but a statistically significant difference was found in terms of the numbers within each group that felt this way (x' = 4. 90, p.>.05). that is, a smaller portion of nfib owners (64.2%) than hsbo's (75.5%) felt their company was changing rapidly. an even more substantial difference was found in their attitude toward making a comfortable living (x' = 18.65, p<.01). only 35% of hsbo's felt that making a comfortable living constituted "enough" success than the much larger percentage (57.9%) of the nfib sample. significant differences also were found as to the extent to which hsbo's were more apt to put operating controls and methods in writing (54.5%·vs. 42.2%; x' = 5.36, p.>.05). both groups were more comfortable working on management issues than technical or selling problems. in summary, hsbo's were motivated primarily by their desire to build a successful organization but not to the exclusion of quality-of-life issues. to some extent there appeared to be a stronger orientation toward the managerial entrepreneur, but it was not absolutely clear from the data. ii table s motivations and allitudes nfib hispanic owners owners chi-square primary motivation (most important goal): craftsman goals: to let you do the kind of work you wanted to do 28.4% 21.6% to avoid having to work for others 19.9% 17.0% 5.00 managerial goals: to make more money than would otherwise 19.5% 18.2% to build a successful organization 32.2% 43.2% attitudes and perceptions (agree strongly or somewhat) your business is changing rapidly 64.2% 75.5% 4:90• making a comfortable living is enough success 57.9% 35.2% 18.65** in your business, operating controls & methods are in writing 42.2% 54.5% 5.36* you are most comfortable in selling or handling technical problems rather than in working on management issues 38.8% 33.4% i. ii * p~.05 ** p~.01 sources of funding finally, the study examined sources of funding used by hsbo's (see table 6). unfortunately, the 1990 nfib study by cooper et al. reported only the percentage of firms using various sources .of capital and did not ask the owners to identify their most important source of business funding. the earlier cooper and dunkel berg ( 1986) study. however, did ask this question and found personal savings to be the most important source of business funding for 48.4% of their sample. this study also found personal savings to be the most important source by far of initial financing for hsbo's (65.2%). although difficult to compare. such a sizable difference between the samples seems to suggest that hsbo's have fewer alternative sources of start-up funding available to 'them at the inception of their businesses. because the nfib study does not discuss this issue, we cannot state whether hispanics had more trouble finding alternative sources of financing, but certainly these results are not encouraging. only one statistically significant difference was evident in table &-the use of government funds. almost 10% of hsbo's had obtained some form of government funding. whereas nfib owners were less dependent, using this source in only 3.2% of their start-ups (x'= 11.63, p~.01). the results also indicate that beyond personal savings, lending institutions and friends and relatives 12 table 6 sources of financing most important source of initial financing: personal savings lending institutions (banks, insurance co's, others) friends or relatives individual investors (not friends or relatives) venture capital government sources other sources* %of firms using this category as a source of capital: personal savings lending institutions friends or relatives individual investors venture capital government sources other sources 1979 nfib study hispanic owners n= 1756 (n=88) 48.4% 65.2% nia 16.9% nia 10.1% nia 0 nia 1.1% nia 3.4% nia 3.4% nia 82.1% nia 40.5% nia 30.3% nia 7.8% nia 2.2% nia 10.1% nia 5.6% note. *"other sources" were typically considered internally generated funds. nia = not available were the next two most popular sources of capital used by both groups. contrary to popular opinion, venture capital was virtually non-existent among both groups. individual investors acted as a funding source for both sample groups in only about 7% of their start-ups. in summary, the results highlighted the heavy reliance on personal savings as the most important initial source of capital for hsbo's. the issue of funding to hispanic businesses (and minority businesses in general) is a critical area for further research. many questions remain that were beyond the scope of this study. for example, does the low percentage of firms able to obtain funds from individual investors (not friends or relatives) suggest that hsbo's have not yet been able to penetrate their own hispanic business community for investment capital? are hispanics being discriminated against by banksj some banks have expressed an attitude that they do not have time to teach the hispanic business person what is necessary to qualify for the 1ype of financing available. also, the funding community itself. often dominated by caucasians. may suffer from a lack of knowledge and understanding 13 of the hispanic community. a cultural wall may separate the communities. hispanic businesses are frequently located in hispanic neighborhoods where there may be few. if any. banks or other funding sources. hispanics may not have sufficient material wealth-such as their own home or money borrowed from relatives-to meet a bank's stiff collateral requirements. difficulty in getting small-business loans can disrupt the bootstrapping process for without loans and other sources of investment the start-up process becon1es inherently more difficult. fewer businesses mean fewer jobs and role model..;. further research on these issues is critical in order to extend our knowledge of the minority and. in particular, lhc hispanic approach to entrepreneurship. conclusions the results of this study tend to correspond with the profiles of owners found in previous studies of minority business people. that is. founders were relatively young (although somewhat older than their non-minority counterparts). often started a company in an area in which they had prior experience with products or customers. almost always started their own finn. left prior jobs to start their own businesses, often were college educated with higher educational levels than the general minority population, and started their businesses because they wanted to launch their own successful organization. at the san1c time. however, there were some obvious differences between the hsbo experience and that encountered by the nfib ownership group. most noticeably hsbo's take a different path to ownership. their approach 10 ownership is almost entirely starting from scralch. they use their education and substantial experience in incubator firms to start businesses which are often reflective of their past work experiences. for exampl~. customers arc often similar. but the producvscrvice delivered is even n1ore representative of their previous finn(s). their business is most often located within their own minority neighborhood, where they are more comfortable and knowledgeable about the cultural mores and attitudes of their potential customers. their businesses arc predominantly financed through personal savings. if other funds are needed. 1hcy are most often obtained from lending instilutions. friends or relatives. self-employment is often pje-planned, but about a a quarter of the time they receive negative pushes that provide the impetus for starting their own businesses. they possess son1c attitudes that are more managerial than crafts111anlike in orientation: that is, they are prone to putting controls and methods in writing and their primary motivation is to build a successful organization. the results suggest that education is an important factor in an hispanic's career path to ownership. higher education is not a necessity. but it appears to be a characteristic possessed by many hsbo's. we speculate that such education enhances the opportunities for hispanic entrepreneurs. for instance, education may be important because hispanics do not have an abundance of entrepreneurial role models. thus. their business acumen comes from experience and education. as hispanics enter the business world in ever greater numbers, it is likely that education will continue to play ap important role in their ability to achieve an ownership role, whether it occurs through their own start-up, the purchase of a business, or a promotion to ownership. as they succeed in this effort, more and more hsbo's will ultimately transfer their businesses to their next generation .. today, however, training and support programs designed to increase the number of hsbo's focus almost entirely on lhe start-up option as the sole path to ownership. these programs will need to be broadened in the future to accommodate the expected increase in the use of alternative paths lo ownership. future studies should be helpful in identifying such trends over time and in providing · 14 suggestions about how support groups can shift their strategies and programs in order to meet the changing needs of the hispanic small business community. the results show that upper-level management (in which one manages other managers) is not an experience shared by most hsbo's on their path to small business ownership. many hsbo's in this study had supervised workers before becoming business owners, but over a third had never before been in any type of supervisory role. while supervisory experience may be important in fostering new ownership, the lack of it does not appear to be a major impediment to achieving an ownership role. there is a need for research that examines the funding process for hispanics. more alternatives for initial funding must be made available to aspiring hsbo's in order to promote the entrepreneurial process as an alternative career path, or at the very least we must find out what ttie impediments are that keep these alternatives limited. ls it that the bu.~inesses being started are not candidates for such investments or is it something else? further research should also be performed on "career" issues. is there such a thing as a better incubator experience--the large or small firm--to prepare hispanics for a future business ownership role? are hispanics doing enough on their own to encourage business ownership as an alternate career path? finally, there is a problem in terms of the set-up of this and other studies utilizing hispanic sample groups. this study as well as a number of prior studies of hispanics has treated them as a homogeneous group. mescon ( 1987) has alluded to the lack of homogeneity among hispanics, while others have argued for a view of diversity. for example, they can be grouped into cuban americans, mexican americans, and puerto ricans, all possibly warranting different approaches in terms of marketing and management. by grouping them as a homogeneous population, the possible differences between these hispanic groups may be lost and with it a better understanding of the differences in their business practices. it may well be that differences among different groups of hispanics may cause variations in their approaches to the ownership role. this study may also be limited in terms of its generalizability. the hsbo population. responding to our survey had in common the fact that they had all contacted their local minority business development center for information or help, but to what extent they reflect the larger hispanic business community is unknown. thus, generalizing our results to a larger hispanic business population must be considered questionable and suggests the need for larger and broader sample studies. footnotes 'cooper and dunkelberg did not identify the racial composition of their sample. it is assumed, therefore, that their sample was representative of the racial make-up of the u.s. business community, that is, approximately 95% non-minority and 5% minority-owned businesses according t~ the state of small business: a report of the president, (washington, d.c.: u.s. government printing office, 1986), pp. 192-194. 15 references birch, d. (1979). the job generation process. cambridge, ma.: mit program on neighborhood and· regional change. birch, d. (1987). job creation in america: how our smallest companies put the most people to work. new york: the free press. brarda, r .. h. (1979). personal traits and values contributing to the success of spanish-surname entrepreneurs in the united states. d.b.a. dissertation, golden gate university. chrisman, j., & carsrud, a. ( 1990). outside assistance need of pre-ventures and established small business: a comparison of minority and non-minority clients. paper presented at the international conference on small business. cooper, a.c .. & dunkelberg, w.c. (1986). entrepreneurship and paths to business ownership. strategic management journal, 7 (i), 53-68. cooper, a.c .. dunkelberg, w.c .. woo, c., & dennis, jr., w.j. ( 1990). new business in america: the firms and their owners. washington, d.c.: nfib foundation. dadzie, k., & cho, y. (1989). determinants of minority business formation and survival: an empirical assessment. journal of small business management, 27 (3), 56-61. feldman, h., koberg, c., & dean, t. (1991 ). minority small business owners and their paths to ownership. journal of small business management, 29 (4), 12-27. furino, a., rodriguez, e., & scott, ·w. ( 1980). minorities in small business. texas business review, (july-august), 12-27. gomolka, g. (1977). characteristics of minority international and small business enterprises. american journal of small business, 4 (3), 178-184. hisrich r., & brush, c. (1986). characteristics of the minority entrepreneur. journal of small business management, 24 (4), 1-8. kirchoff, b. (1982). factors underlying increases in minority entrepreneurship: 1972 through 1977. in karl vesper (ed.), frontier.1· of entrepreneurship research, 2 (pp. 39-53). kizilbash, a.h., & garman, f.t. (1975). grocery retailing in spanish neighborhoods. journal of retailing, 51 (4), 15-21. mescon, t. (1987). the entrepreneurial institute. journal of small business management, 25 (i), 61-67. scott, w.l. (1983). financial performance of minority-versus nonminority-owned businesses. journal of small business management, 21 (i), 42-48. smith, n.r. (1967). the entrepreneur and his firm: the relationship between type of man and type of company. east lansing, ml.: michigan state university press. smith, n.r., & miner, j.b. ( 1983). type ofcntrepreneur, type offirm, and managerial motivation: implications for organizational life cycle theory. strategic management journal, 4 (6), 325-340. welsch, h., young, e., & triana, a. (1984). a cross cultural comparison of hispanic and non-hispanic entrepreneurs: an analysis of attitudinal and behavioral differences. paper presented to the small business institute directors association, denver. young, e., & sontz, a. (1988). is hard work the key to success: a socioeconomic analysis of immigrant enterprise. the review of black political economy, (i), 11-31. young, e., welsch, h., & triana, a. ( 1984). comparison of hispanic and non-hispanic entrepreneurs on perceived problems and information sources used. paper presented ro the annual meeting of th-e academy ·af management, boston. 1982 survey of minority-owned business enterprises. u.s. department of commerce, bureau of the census. washington, d.c.: government printing office. 16 reproduced with permission of the copyright owner. further reproduction prohibited without permission. credits anonymous journal of small business strategy; spring/summer 2004; 15, 1; abi/inform complete pg. 0_4 strategf editor's note the world has dramatically changed since jsbs was last published. the events of september i in coupled with the slowdown in the u.s. economy have taken atoll on many corporations, small businesses and individuals. the stories, their meaning and the implications of all of this have been articulated by far more qualified people than this editor. however, it is worth noting that these events have further underscored the necessity of the significant contributions of those who are involved in the field of small business and entrepreneurship including teaching, field case consulting, and applied research (and the dissemination of this knowledge). here are a few anecdotal examples: although overshadowed by the collapse of enron and bankruptcy of k-mart, there are a large number of small businesses who are experiencing significant downturns. i spoke with a client today who is having his worst winter in twenty years and has had to lay off much of his workforce. as you are aware, allan greenspan and the federal reserve reduced interest rates throughout 200 i. however, many small businesses and entrepreneurshave had difficulty accessing what would appear to be low cost capital due to fears on the part of lenders regarding the risks associated with an economic slowdown. at the same time, the u.s. sba continues to expand its "lowdoc" lending activities according to the sba pittsburgh district office. many of us also work in the area of not-for-profit organizations. the generosity of corporations and individuals to contribute to the red cross and a number of other high profile charitable/social service agencies has lefl many other smaller, less visible not-for-profits in a difficult position as they have been lost in the shuffle. a large number of cutbacks in the corporate sector (including "hi tech") are channeling larger numbers of professionals into "entrepreneurial" directions. we are seeing this in our self employment assistance program (seap) where recently unemployed persons are offered a program whereby classes, training and counseling are provided to them to assist in starting up their own business. i recently spoke with the executive director of a community development financial institution (cdfi) on whose board and loan committee i serve. when i casually asked him how things were going, he responded, "when times get bad, we get busy." let us hope that the economy turns around and our small businesses and entrepreneurs enjoy expanded opportunities in the future. visit our website at stephen ik osborne, editor www.jsbs. org s'tm tei y editor's note as we begin the second decade of publication of the journal of small business strategy (jsbs) and prepare to celebrate the twenty-fifth anniversary of the small business institute directors association (sbida) in disney world in orlando (february 7 —10, 2001), it seems appropriate to briefly reflect on the past and the future of the journal. volume i, number i was published in february, 1990 and included eight articles which were selected as the best articles from the 14u annual sbida conference. the editor was gwen fontenot who played an important role in sbida for a number of years. today, jsbs is a nationally recognized journal with an editorial review board consisting of 30 dedicated individuals employing a blind review process. afler ten years of publication, jsbshas expanded in several ways and has published articles on a broad range of topics related to small business and entrepreneurism for the practitioner, the consultant and the educator. a profile of the articles that have appeared in jsbsappears on the next page. as we enter the year 2000, we would like to remind the readership that the editorial staff and the editorial review board of jsbscontinue to attempt to move the journal forward in terms of the quality and quantity of articles related to the ever growing field of small business management and entrepreneurship. notwithstanding the profile of the articles previously published inisbs, the scope and content of articles of interest to us is quite broad: u assist in the formulation or implementation of small business strategy u be directly applicable to consulting projects and solutions u generate ideas and approaches to problem solving in small business & entrepreneurship u be presentable to a small business owner/manager for application u relate to small business dc entrepreneurship education correction to volume 10, number 2: the last issue of jsbs included an article titled "putting your business on the map: geographic information systems for small business" authored by ronald rubin of the university of central florida and lawrence a. west, jr., also of the university of central florida. lawrence west's name was inadvertently omitted from the article. the editorial staff of jsbsextends its sincere apology to dr. west. stephen osborne, editor content summary: journul of small business s/ra/egy (1990-99) topic topic as % of t~oic ~rii !urer t i ~/r ii ~i* v accounting financial 2 5 7 29% 71% 5% 'i'aration 0 i i p% 100% 1% 'system/software i p i ipp% 0% entrepreneurship 13 2 15 87% 13% 10% ethics/environment 5 i 6 83% 17% 4% finance techniques i 4 5 20% gp% 3% financing 2 2 4 50% 50% 3% legal/govt. /mediation 4 4 8 50% 5p% 5% mnnagement bods/governance 2 p 2 ipp% 0% i '/ l3us. i'lan/planning 6 i 7 86% 14% crisis mgmt 0 i i p% 100% 1% culture i q i i qq'/ q'/ iirm/diversity 14 7 21 67% 33% 14% pom/i'qm 2 2 4 50% 50% 3% strategy 7 8 15 47% 53% 10% marketing advertising/promotion i 2 3 33% 67% strategy i 5 6 17% 83% 4% mis/info. technology systems i 2 3 33% 67% internet/web 0 2 2 p% 100% data base 0 2 2 p% i qtl'/ miscellaneous case study/notes i i 2 sp% sp% export/global 5 4 9 56% 44% firm performance 3 i 4 75% 3% franchising i 2 3 33% 67% innovation/i'echnology 2 i 3 67% 33% minority ownership i 0 i ipp% p% 1% sba i 2 3 33% 67% 2% sbi 4 4 8 50% 50% 5% consulting 0 2 2 p% ipp% economic development 0 i i p% 100% book reviews 0 3 3 p% 100% total 81 72 153 53% 47% i pp% srmtegf editor stephen w. osborne indiana university of pennsylvania (iup) associate editors prashanth b. nagendra indiana university of pennsylvania (iup) joette m. wisnieski indiana university of pennsylvania (i up) editorial assistant julia dobish indiana university of pennsylvania (i up) book review editor radha chaganti rider university editorial review board ramachandra asundi university of puerto rico james bradley central washington university david brennan university of st. thomas (st. paul) shawn m. carraher texas a & m university commerce radha chaganu rider university vivek choudhury florida state university richard t. dailey university of montana dale dickson mesa state college terry gaston southern oregon university masoud hemmasi illinois state university lynn hoffman university of northern colorado lawrence klan florida atlantic university krish krishnan indiana university of pennsylvania (iup) thomas j. liesz mesa state college stephen lucas university of north carolina-greensboro steven j. maranville university of st. thomas (houston) thaddeus mcewen north carolina a&t university abbas nadim university of new haven john e. prescott university of pittsburgh neal r. pruchansky keene state college james a. rodger indiana university of pennsylvania (iup) c. louise sellaro youngstown state university herbert sherman southhampton college of long island leo simpson eastern washington university joseph singer university of missouri —kansas city matthew c. sonfield hofstra university pamela kl. specht university of nebraska at omaha i-larriet stephenson seattle university jude valdez university of texas, san antonio howard van auken iowa state university john b. wallace marshall university momca zimmerman temple university the journal of small business strategy is a joint publication of the small business institute directors'ssociation (sbida) and the eberly college of business and informauon technology, indiana university of pennsylvania. send subscription request to stephen w. osborne, editor, journal of small business strategy, indiana university of pennsylvania, 304 eberly college of business and information technology, indiana, pa 15705-1071. annual subscriptions may be ordered at $20 each (u.s. dollars only). international subscriptions add $ 5 annually for postage and handling. back issues may be ordered at $ 12. 4'opyright 2001 small business institute directors'ssociation issn 1081-8510 2001-2002 sbida officers i ~ small business institute directors'ssociation president vice-president btarketing di membership ruosevelt d. butler, ph.d. michael broida, ph.d. thc college of new jersey miami university of ohio oaic». (609) 771-2868 phone: (513)529-4841 fax: (609) 637-5129 fax: (513) 529-9689e-maih rbutlerrii tcn'duq )ed email: broidamsqamuohio.edu president-elect sherrin r. taylor, m.b.a., sphr vice president-development bruce kemelgor, ph.d.texas woman's university onice: (940) 898-2903 fax: (940) 898-2120 fax (502) 852-7557e-maih staylorpatwu.edu f.-maik bhkemcolpalouisviue.edu i'ice-president —programs acting i'ice president-administration j. douglas frazer, ph.d. university of new haven oitice: (203) 932-7122 fax: (203) 931-6092 email anadlncharger.newhaven.edu i'ice preiideni of conference arrangements gerab n hlcclure franklin, ph.d. university of texas of the permian basin nonh georgia college r state university phone: (915) 552-2170 phone: (706) 876-2723 fax: (915) 552-2174 fax: (706) 864-1668 email franklin~pautpb.edu email: kcheriotpangcsu.edu immediote post presideni lice presideni —pnblicoiions joseph j. geiger, mba, ed.d. gory l. aitchison, ph.d. university of idaho loiia stale university office: (208) 885-7154 oitice: (515) 294-8107 fax: (208) 885-8939 fax (515) 294-2534 e-maih joegqauidaho.edu ei-maik gaitchisqaiastate.edu eduor jonrnal ofsmall business strotegy i'ice presnlent-program (inattyy assnrance stephen w. osborne, ph.d. stephanie huneycutt, j.d., ll.hi. indiana university of pennsylvania christopher newpon university phone: (724) 357-5760 phone: (757) 594-7139 fax: (724) 357-5743 fax: (757) 594-7808 email: osbomepaiup.edu email: huneycutqacnu.edu l)ice president-case competition visit our website at jaines bradley, ph.d. central washington university www.jsbs. orgphone: (206) 439-1282 fax (206) 439-3809 email: biadleyqacwu edu stk4tegy book review mana gemeiv t coivsul tingt a complete guide to the jndustr y sugata biswas and beryl twitchell john wiley & sons, inc., new york, 1999 ($34.95) reviewed by john quay management consulting: a complete guide to ihe industry is a very useful compilation for students considering consulting careers. it contains an overview of the industry (drawing largely on the kennedy information research group); some thoughts about the nature of consulting work and lifestyle; ? i pages contributed by consultants from firms in the private, public and nonprofit sectors; advice on planning your consulting career, writing resumes, getting through the screening process and negotiating optimum compensation agreements; and finally some very useful appendices including 59 pages of "cases" used by firms to test applicants'roblem solving abilities, and 15 "frameworks" for handling these cases —e.g., using porter's five forces industry analysis, bcg's growth-share matrix, swot (strengths, weaknesses, opportunities, threats), etc. sprinkled throughout the book are lots of good tips and ideas. for example, "consultants need to differentiate between what clients are asking for and what they truly need." or, "certain people are just not built for the work and lifestyle of a consultant. only those that can thrive, under the pressure of hard work, can perform multiple tasks simultaneously, can cope with ambiguity and uncertainty, and can remain calm and collected when stressed or tired will be able to maintain a positive perspective on consulting and stick with it." and, in an interview situation even simple questions "are actually invitations for you to provide a richer, more impressive description of your skills and abilities." this advice is followed by a list of commonly asked questions to practice on, such as, "what are your three greatest achievements?" and,?how would you describe your ideal job?" for good measure, the . authors also include a sample interviewer's evaluation form showing the performance factors, traits and skills on which they rate applicants. in short, the book offers students the full array of "to dos" when approaching firms for a consulting position. even the appendices cover a broad spectrum of cases ranging from brain teasers (why are manhole covers round?) to pricing (how is the retail price of a bottle of red wine determined?). as a former recruiter of consultants, i have a few suggestions. the book could be improved by some examples of successful letters and resumes. the authors give general advice (e.g., don't make it too long or too short) but annotated examples would be more helpful. also, in connection with negotiating a better compensation package, they provide charts and numbers 99 journal ofsmall business strategy vol. /0, no.2 tvinter(fall 1999 for calculating the applicant's best deal, but offer no examples of letters or discussions showing how to conduct these negotiations without alienating the offeror or blowing the opportunity. finally, this book is about "big consulting." the contributors-a plurality from harvardare with big firms. their presentations are puff pieces for their practices. engagements are usually several hundred thousand to several million dollars in size. consultants work in teams on assigned pieces of the project. and while some consultants will rise to the top to become multi-millionaires, many won'. instead they will find the life bureaucratic, highly political and very pressured. fortunately, there are many small firms and sole proprietorships which still offer some flavor of the early days where individual consultants developed creative and collaborative relationships with client ceos. for their clients, these smaller firms can do reasonably well with jobs under $50,000 or $ 100,000-engagements which most big firms don't bother with. reproduced by permission from the journal of management consulting, volume l0, bhimbcr 4, november l999. mr. john quay heads the management consulting firm, quay associates, since t976. his clients included coopers 6'i lybrand, arthur young, ge, new york times, and a wide variety of other large corporate and non-profit organizations. his prior work experience includes executive poshions in personnel management at general electric, curtiss-tvright, and american airlines. mr. quay graduated pom princeton university and union theological seniinary. he is also a cemified management consultant. he is an active score the (senior core of retired executives) member. one of his responsibilities under this program is grading reports from students who conduct consulting engagements in their local conmiunities as part of the small business institute program. 100 stra tegy table of contents page title/author(s) 1 transforming consultants 'ecommendations into business improvements a model and action agenda michael d. ames 17 the classificatio of service providers as "contract 8'orkers v rather than "employees ":implications and guidelines for small businesses matthew c. songield 26 entrepreneurship awareness education: an example in an elementary school rebecca w. ball & fred beasley 39 an analysis of smoll business hiring ofseniors robin t. peterson & andreas w. stratemeyer 47 partners in profitsi small businesses move slowly into cause-related marketing nora ganim bames 54 using a prenuptial agreement to protect the small business sandra j. perry 64 noteworthy news reproduced with permission of the copyright owner. further reproduction prohibited without permission. credits anonymous journal of small business strategy; spring/summer 2005; 16, 1; abi/inform complete pg. 0_4 table of contents page title/author 17 31 45 56 59 67 73 becoming a small business owner: the hispanic experience howard d. feldman julio 0. de castro thomas j. dean karen vaught-alexander small business consulting: a 10-region analysis of small business institute programs, 1990 marilyn young george joyce small businesses as captive companies: business strategy and firm performance among u.s. auto suppliers aaron a. buchko effect of professional background on venture capital proposal evaluation richard b. carter howard e. van auken special section: letters to the editor preparing decision useful financial reports: a challenge for small businesses larry g. singleton bruce swindle the new kid on the block for small business success: ethics? harriet buckman stephenson deborah kahle research and development of small business and entrepreneurship: the small business advancement national center don b. bradley ill strategy small business brief field case consulting: ten keys for success michael d. ames california state university, fullerton sbi aines o ifullemon. edu paul hugstad california state university, fullerton phugstadq~aullerton. edu abstract one aacsb accredited college of business and economics believes so sirongly in the value of student consultmg that it requires all of its graduating mba students to consult. for ten years, iis mba student consulting ieams have achieved consistently high ratings in national field case competitions. this business brief explains why and how this curriculum component was instituied, and identifies ten keys for success. lt also offers useful background informaiion for those interested in launching a similar program. the authors note that they have also applied the ten keys successfully to undergraduate student consulting. introduction student field case consulting is an important way for business schools to provide practical training to its students, expose faculty to current issues facing small business, and to introduce new, technology, resources and strategies to small business owners. it is a win-win process where all those involved gain a better appreciation of what it takes to succeed. students work like apprentices, closely supervised by faculty, and are graded on the practical results they achieve for the client company. the college had been using written comprehensive examinations to meet its mba "terminal integrative experience" requirement. these exams were prepared and graded by professors from all business school departments. students were prepared for the exams in an integrative, capstone course. the capstone course combined team involvement in a business simulation game with topical reviews of the various business disciplines. student's class work was graded by the professor. thinking about a better way on the surface, this process seemed to work fairly well. students appeared to gain insight from the capstone course and the pass rate on the comprehensive exams was high. even so, the common perception concerning the terminal experience was there was considerable room for improvement. four reasons for this perception were: u the increasing preoccupation of the students with the comprehensive examination as its date approached 85 joiirnal ofsniall business so aiegy vol. i l, no. l spring/summer 2000 ~ professors found it difficult to draft questions that allowed students to demonstrate their mastery ofbusiness administration, as opposed to specific business tools ~ assessing mastery based on the student's written responses proved troublesome ~ students had difficulty exhibiting mastery of the subject matter during the time allowed to take the exam, leaving the examination rooms feeling frustrated, questioning the relevancy of the exam, and disappointed by the limited leeway it allowed for them to "show their stuff' review defined the ideal experience as one which would achieve seven objectives: ~ maximize the retention of essential analytical tools ~ permit students to develop mastery (learn by doing) ~ allow students to apply their newly learned business skills to realistic, dynamic business environments at the company level, as opposed to the department level ~ give students the additional motivation and satisfaction that comes from using what one knows to help others ~ channel the tremendous review effort made by the students into results that made an immediate and useful impact on the productivity of the small business community ~ assure timely completion of degree requirements by degree candidates ~ allow for efficient utilization of faculty resources using these benchmarks to define the desired, or ideal experience, it became apparent that the traditional masters thesis would also fall short as a solution. previous experience suggested that most students would be unable to complete a thesis in a timely manner. second, implementation of a thesis requirement was viewed as a costly administrative alternativ. finally, many questioned the thesis as an effective learning medium for an mba degree. mechanics of the new program the college saw utilizing student consulting ("live" field casework) in the capstone course as a better fit to the above mentioned benchmarks. working on student consulting, following small business institute (sbi) guidelines, seemed to be a nearly perfect solution. the critical assumption was that consulting could be integrated appropriately into the terminal experience. as it tumed out, the only significant changes required in the usual sbi consulting process were in final reporting and the grading procedure. the normal sbi report is a group report in which the contributions of individual students are blended together seamlessly for presentation to the client. this is very desirable for presentation purposes, but does not facilitate evaluation of each team member's mastery of all business disciplines. in addition to the group report, we require individual student reports (not seen by the clients) that evaluate the entire consulting experience. also, we require more than a grade assigned by the course professor. other faculty independently review the reports to confirm mastery. our experience shows that an approach to mba terminal experience requirements, utilizing student consulting, enhances learning and opens a floodgate of valuable consulting to small businesses. for those interested in following such an approach, we offer ten keys for success. ten keys to success i. prepare a well laid out course structure. four structural elements must be in place to assure the field consulting experience consistently goes well; 86 .iournal vf small business strategy vol. ii, rtro. i spring/summer 2000 u a clear and detailed course syllabus u an explicit packet of consulting project guidelines prearranged communication networks u prepared handouts 2. guide team selection, but leave the final choice of members to the students. attempt to build student teams that are both balanced and cohesive. the best teams are those that have the diversity of student skills and experiences necessary to carry out a comprehensive client analysis. this includes expertise in not only various business functional and technical areas, but also other skills useful in case consulting such as leadership, formal and interpersonal communication skills, and creativity. 3. mal e a strung effort, year round, to identify, qualify and update the client pool. to consistently provide meaningful learning, it is critical that a high quality pool of potential consulting clients be developed and managed. set minimum criteria and stick to them. five criteria we use are: ten employees; $ 1,000,000 in sales; openness by the owner to a comprehensive review of the company; up to date, monthly financial statements; and permission by the owner to review and analyze financial statements. allow students to make the final choice of clients. freedom of choice pays dividends later on in the consulting process in terms of team interest and motivation. 4. manage client expectations. prior to selection, educate potential clients about live case consulting and prepare them for working with student teams. have students present their resumes during the first meeting with the client. ensure that students share details of the field case consulting process with their clients during the first interview (structural deadlines, resource needs, forecasted consulting deliverables). have teams write up a formal letter of engagement detailing the scope of work, time line, and tangible output of the project. insist students communicate frequently with the client (both oral and written), and if possible, deliver preliminary work product to the client early in the engagement. once the client samples the quality of the team's work, greater client cooperation follows. 5. manage student teams. encourage teams to practice what they have learned in their mba courses in regards to managing groups, leadership, teamwork, communication skills, and project management. request each team to plan and schedule the consulting project using some form of project management sorware. ask teams to structure tasks so that each student has both a primary and secondary area of functional responsibility. this helps smooth the overall quality of the final work product, leads to better integration of functional plans, and provides students with an opportunity to leam from each other's expertise. finally, establish a formal structure of reporting team progress to the professor. have each consulting team designate one member to be the primary liaison with the client and the professor. this helps minimize inefftciencies and redundancies in the communication process, and leads to better management of client relationships. 87 .journal ofsoiall business stratagem vol. l l, jio. l spriirg/sumiuer 2000 6. as supervising professor, be a facilitator and coach. as i'acilitator, the professor provides supporting functions. the professor identifies key areas of focus for the projects and reinforces the need to tie theory and practice together throu hout the consulting engagement. the professor also identifies key resources helpful in completing the projects, and provides students with background on the role of small business consultant. thc profi:ssor should stress the need to provide clients with practical,su gestions and solutions that will actually be used. as coach, the professor is both a motivator and guide. it is important to be available to provide support, but it is also important to make it clear, to both thc consulting teams and the clients, that the primary consulting responsibilities lie with the students. 7. fnsure that outputs are of consistent high quality. make available a library of the best previous reports, but limit distribution so that each new team has to develop its own "product" that "raises the bar." give short lectures that focus teams on kcy functional elements of the work project. and on important content frameworks to be used in the consulting assignment. hold progress report meetings. at mid term, make teains responsible for formally presenting their work to the entire class for critique and help. build in several levels of review and evaluation. in addition to preliminary and final evaluation of the projects by the supervising professor, submit reports to faculty review. also, submit case reports to judging by independent experts. competing locally and nationally serves as an external quality check. 8. use technology to improve the efficiency of student-consulting management and the quality of output. make pervasive use of e-mail and fax to communicate. use the supervising professor's home page as an efficient vehicle to disseminate course related information quickly and easily. use interactive, wcb-based software, such as blackboard and webct, to support efticient collaboration allowing students to share ideas and issues across teams. provide on-line access to other university and internet resources including library materials, search engines, and computer databases such as lexis nexis. 9. celebrate success and protect the culture. when a program extracts a tremendous amount of high quality work from student consulting teams, there is a strong need to reinforce and reward. since there is no direct financial reward to the students, celebrate their efforts and accomplishments in other ways. many students find the student consulting experience to be the highlight of their mba program. they appreciate the variety of types of learning and enjoy the peer group interaction. spread this spirit by sharing the results of the capstone experience with incoming and current students. over time, mba's will come to look forward to the student consulting experience and elevate their commitment to carry on the tradition of excellence established by their predecessors. 10. as a school, commit to success and allocate the necessary funding. if one wants a sustainable mba student consulting experience, one cannot expect the supervising professor to do everything. faculty and functional departments must help. faculty who teach student consulting courses will certainly find the workload involved heavy. all departments need to cooperate in providing advisors to student teams when needed. academic departments, in addition to providing advisors, also need to assign faculty to help evaluate the final work products of the consulting teams. such school wide commitment does 88 journal of small business strategt vol. i i, no i spring/summer 2000 not just happen. someone at the top has to take the lead and continually remind all concerned about the benefits of student consulting. in addition to commitment, building a successful mba student consulting program requires funding to pay for staff members that recruit clients, perform client screening, maintain resource libraries, reimburse student out-of-pocket expenses, and conduct case competitions and award ceremonies. however, this does not mean that student consulting need be a drain on financial resources, for example, at our college, student consulting has become self sufficient by charging clients small fixed fees based on company size. conclusion we conclude from our ten years of experience that business programs using student consulting in the mba terminal experience will be improving their mba program. at the same time, they will improve their ability to help local small businesses. following the ten keys given in this article, one can create a high energy, effective learning experience that is also efficient to administer and cost effective. from the student's perspective, the stakes are high (it's their mba), and the activity is real! they have the opportunity to "show their stuff." it's tremendously motivating. from the college's perspective, the students develop mastery ("learn by doing') and make an immediate and useful impact on local business. at the same time, the "safety net" provided by the course structure assures timely completion of degree requirements and allows for efficient utilization of faculty resources. undergraduate program application we note that the ten keys given in this article also work well in undergraduate courses. student consulting is available as an option in our undergraduate business policy course, and is required in our entrepreneurial management emphasis. to achieve good results, only minor adjustments need to be made in the ten keys. for key 3, we select smaller companies for the undergraduate client pool (three to nine employees and/or less than $ 1,000,000 in sales). for key 7, we require each undergraduate team member to submit two rough drafts of their portion of the consulting report. the professor edits the drafts and makes specific requests for more work. finally, for key 10, we charge a smaller fixed fee based on the smaller size of the client firm. please e-mail the authors to receive free copies of an information packet thatincludes indepth discussion of the ten keys, the course syllabus for tlie college's capstone course, and tire consulting report guidelines. michael d. ames is a professor of management at california state university, fullerton and has been the university's small business institute director for over 20 years. during his tenure as director, the small business institute has provided student consuliing to over 850 profit and non-profit organi aiions. dr. ames is also the faculry advisor of the management department's entrepreneurial management emphasis. dr. ames holds a ph.d. in business and economics from claremont graduate school. he was recently named a sbida fellow. paul hugstad is a professor of marketing at california state university fullerton. while serving as associate dean of the college of business and economics, dr. hugstad guided the redesign of the college's integrative capstone course to include required student consulting. he has taught the mba capstone course for the last five years. in i997 dr. hugstad was named outstanding professor of the college of business and economics. he holds a ph.d. from the university of wisconsin, madison. 89 st%4 tegy table of contents i 8'ltere everybody knows your ivamet estraorganizational clan-building as small firm strategy for home field advantage reginald a. litz university of manitoba alice c. stewart ohio state university 14 knowledge ivetworksr differences and performance effects emeric solymossy western illinois university quad cities 26 antecedents of job burnout among small company presidents richard c. becherer university of tennessee at chattanooga diane halstead university of tennessee at chattanooga john maurer wayne state university 39 the impact of empowerment in small manufacturing firms bruce h. kemelgor university of louisville 50 hi v/aids employees, the americans witl& disabilities act, and their impact on small business d. lynn hoffman university of northern colorado sharon clinebell university of northern colorado 64 critical business problems and advisors james r. lowry ball state university joseph d. chapman ball state university 74 tapping the benefrts of the living case melhodologyr a case study janet bear wolverton southern oregon university roy a. cook fort lewis college ss smoll business brief: field case consultingr ten keys for success michael d. ames california state university, fullerton paul hugstad california state university, fullerton 90 book review: field casework: metis ods for consulting to small and startup businesses lisa k. gundry & aaron a. buchko reviewer: reginald litz university of manitoba reproduced with permission of the copyright owner. further reproduction prohibited without permission. the old girls' network kickul, jill;vasquez, maureen journal of small business strategy; spring/summer 2005; 16, 1; abi/inform complete pg. 79 book review the old girls' network by sharon whiteley, kathy elliott, and connie duckworth reviewed by jill kickul and maureen vasquez, simmons college the old girls' network should be firmly strapped to the tool belt of women of all ages who are dreaming about becoming an entrepreneur. and, it should especially become required reading for women pursuing degrees in entrepreneurship. this book is well organized and easy to read & comprehend. it's not designed to wow you with academic prose and technical analysis. rather, the authors chose to provide basic, but sound advice to women contemplating a new venture. each chapter is filled with vignettes from female entrepreneurs who have come before us and who happily share their stories so that the reader will experience the realities (the good, the bad and the truly ugly) of running a business. the chapters conclude by providing summarizing bullet points that outline the chapter highlights. in fact, this writer identified a business opportunity albeit a small one for these authors. the summarizing points, from the end of each chapter, would make an excellent executive summary marketed on a brochure or pamphlet platform. and, lastly, the book concludes with a tool kit including exercises, worksheets, and sample templates that directly relate to the learnings of each individual chapter. the book was written to encourage women to pursue their dreams by inspiring women to ignite their untapped entrepreneurial spirit. 79 having been around the block a number of times, the authors seek not only to provide role models for women entrepreneurs but to provide a counter attack to the old boys' network. it's a unique opportunity to give something back by educating and supporting aspiring women entrepreneurs. the book brings the reader through a business' life cycle including crafting an idea, identifying its feasibility, understanding sources of funding, identifying the need and timing for additional funding, the necessity of networking, leadership, the need to manage growth and the need to plan and document an exit strategy. their approach to a business life cycle is innovative and fresh. the authors guide us along the business life cycle by characterizing six essential elements that women need to possess. each step of the business life cycle is attributed to one of the following psychic capital characteristics: • passion: the undying entrepreneurial spirit that aspmng entrepreneurs possess. • vision: the ability to effectively articulate the passion. the art of establishing legitimacy. • pioneering spirit: driven by passion and vision is the ability to break new ground. • tenacity: it's the motivation to continue when your tank is empty. reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategv • focus: provides the impetus to move from vision to execution. • leadership: the ability to create an environment that mspjres and motivates. passion is the nucleus of the business. without passion, an idea remains an unfertilized egg. passion does not necessarily mean that your idea is feasible. the authors urge entrepreneurs to "distinguish between an actionable dream and a fleeting fantasy". passion breeds stamina. however, you must remain true to yourself because your business will reflect who you are. find mentors who can willingly and honestly assist you in determining whether or not you have that "actionable dream". vision can best be described as the execution of your passion. vision is the ability to see an idea, develop it and effectively communicate it to others. the authors challenge women to answer three basic questions: • is it a real business opportunity? the point the authors are making is that a business must be sustainable. sustainable business can be boiled down to a few basics points; is there a market for your product? can you attract and retain customers? and most importantly, will someone pay you for it? if the answers to these questions are a resounding no!, then you have a hobby or a fleeting fantasy. • can i win? the authors caution women not to underestimate this question. determining the market and its competition is a grueling and lengthy process. the chapter refers the reader to complete the market analysis exercises in the tool kit provided at the end of the book to guide them in answering the question, can i win? the market analysis provided includes a textual version of porter's five forces and an industry's key success factors. 80 vol. 16, no. 1spring/summer2005 • is it worth it? the authors do a great job of urging women to sit back and truly consider whether or not pursuing a business is worth it to them personally. will your proi (personal return on investment) exceed the blood, sweat, tears and risk associated with running a business? the point is that women more so than men have a strong sense of balancing work life obligations. though running a business may sound sexy, the personal capital that it requires may exceed the personal return on investment. it is therefore imperative for women to determine their proi and more importantly, they must honestly assess whether or not it's obtainable. the book continues along the path of a business's life cycle. the authors warn the reader that once you've hung the proverbial "open for business" sign, uncertainty will rear its ugly head and often times paralyze the entrepreneur. to pre-plan for this likely event, the authors suggest that entrepreneurs build a strong network of support, establish obtainable milestones to serve as a clear road back and provide focus. in addition, they urge women trust their innate intuition and celebrate successes. women, for a variety of societal reasons, don't believe that they deserve success or to win. the authors recognize this fact and urge women to overcome this perception by celebrating their successes as they would punish themselves for their failures. there's a definable difference between tenacity and obstinacy. tenacity comes from believing in your vision and tirelessly pursuing your passion by listening, identifying things that aren't working and changing them, asking for help and turning no into know. tenacity drives continuous process improvement via vision not ego. obstinacy, on the other hand, is counter productive. it's the inability to listen to what's going wrong, constantly objecting ideas by claiming that it just won't work, it's making excuses and refusing to back down in fear of looking weak. reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal o(small business strategy raising capital is a thorny issue for all aspiring entrepreneurs but especially women. the statistics show that less than 7% of all venture capital is provided to women. the authors provide a comprehensive laundry list of available financing sources and associate the size of the business with the appropriate financing vehicle via their funding food chain chart. the fact of the matter is that most aspiring entrepreneurs need to be realistic and face that fact that the funds necessary to launch their business will most likely be derived from the accumulation of personal wealth and friends and family. though the advice provided is common sense, it's a good reminder to hear it from women who have crossed the chasm before us. for instance, just because your family or friends have money and are willing to invest in your new venture doesn't necessarily mean you should jump at the opportunity if they are the kind of people who will be more work for you then the benefit of their money. accept money from those individuals who truly understand the risk that they may lose their investment. obviously, entrepreneurs that possess pioneering spirit and tenacity will drive them to tirelessly pursue a successful venture. however, many businesses do indeed fail and investors must understand that risk. raising capital for women is particularly difficult but not impossible. the authors point to a number of factors that may inhibit women from obtaining capital including: • no role models or mentors • the good old boys network • no established networks • women internalize criticism; men deflect it • investors believe myths about women strategic networking involves two key elements. the strategic element involves identifying "the who" and the tactical element involves identifying 'the how". a study of 700 businesses suggests that having social capital from experts leads lo perception of high legitimacy, procurement 81 vol. 16, no. i spring/summer 2005 of venture capital and higher net worth for women entrepreneurs. the book supports bootstrapping and provides advice on how to stretch those limited resources by minimizing costs. and, it details the importance of networking. an entrepreneur needs to get out and get noticed. build relationships and contacts before you need them and develop a contact list of everyone you know; that means everyone including your hair dresser, lawn service, etc. each of these people know more people and so the spiral continues until you find the right people to connect you with sources of financing. remember, without money, you have no product, with no product you have no customers, with no customers you have no business. it is imperative for newly minted entrepreneurs to understand the lingo and the sources of available funding. this will be a long and arduous process that will require networking and the ability to sell your v1s1on. "understand that all money is not the same color green" is most notably the best advice the authors provide. fight the urge to accept money from investors who will prove more work for you than the money is worth. and remember that the larger the investment, the more requirements will be placed upon you. this section of the book ends with sound advice of what not to say to potential investors including my personal favorite, "we have no competition". it's worthwhile advice to have in your tool belt so that it can be referred to when documenting your vision . once your venture is up and running, the authors note that an entrepreneur needs focus, feedback and flexibility in order to sustain the business. this section of the book focuses on the importance of an advisory board. it details the necessity for one, how to develop one, the qualities that the members need to possess and the differences between a board of directors and an advisory board. the ability to listen to negative feedback, without becoming defensive, allows you to unpack the valuable information that lies reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategv within the negativity espoused by particular stakeholders. continuous process improvement can be realized more quickly and effectively with a mentor and advisory board. the remaining chapters provide a pleasant twist that isn't often discussed in entrepreneurial "how to" books; company culture and leadership. culture, a function of your core values, beliefs and intentions, is as important to the success of a business as any other factor. leaders set the example and can be the defining moment in times of crisis. it's the difference between people who, because of the culture and leadership qualities that the business possess, work tirelessly to meet the mission of the company and those people just show up for work. being a leader and a manager are two very different roles. a manager is executing the strategy. a leader builds a culture that empowers employees and recognizes the efforts of every member of the team regardless of position. a leader welcomes feedback and makes changes that will motivate people to drive the business forward. a leader tells the trnth and communicates openly within the organization. the authors so succinctly capture their point by indicating that "culture is the manifestation of the values you live by". the book concludes by advising the entrepreneur to take time to review the current status of the business including the employees, the business plan, the capitalization, technology, reporting strnctures, and network. these are the necessary steps to be taken after having survived the first stages of your venture. the point being conveyed is to take advantage of the calm in order to plan for the storm. complacency can be the achilles heel of your business. anticipate issues and plan for them before they happen by assessing every component of your business. and most importantly, the authors suggest that the entrepreneur engage in a personal reality check to assess whether or not you are 82 vol. 16, no. 1spring/summer2005 the right person to ensure the long term viability of the organization. your business may have grown to the point where hiring a new ceo that possesses the necessary skills to move the company forward will be in the best interest of you and your company. the book provides a tool kit that includes sample legal forms, business plan templates, competitive analysis, an outline for an executive summary, milestone setting, an advisory agreement, investor presentation, non-disclosure agreements as well as many others. it is very well organized soup to nuts approach to a business life cycle and the necessary steps needed to execute your vision. if we want to trnly shatter the glass & green ceiling as well as the self proclaimed selfefficacy issues that women face, we need to target and mentor our younger generation to enable them to break the existing selffulfilling prophecy and provide them the tools they'll need to create a powerful selffulfilling prophecy that demonstrates equality and leadership m all people regardless of gender. sharon whiteley, kathy elliott, and connie duckworth, through their years of experience, have provided an excellent tool for aspiring women entrepreneurs. they provide the cold hard facts about women entrepreneurs and the difficulties that face them. rather than discouraging women from pursuing their passion, the authors don't dwell upon the difficulties facing women. rather, they provide sound advice for women to overcome these issues and succeed in today's marketplace. i challenge these talented female authors to continue to give back; continue to inspire and encourage by looking to the needs of those who come after us. the greatest gift we can leave the next generation is the gift of knowledge, experience and inspiration. our children's future and the american dream are looking for a few good mentors. now that's a book worth reading. stra tegf table of contents i does size mutter? an empiricul investigation into the competitive strategies of tire small firm armand gilinsky, jr. sonoma state university elizabeth stanny sonoma state university richard l. mccline san francisco state university robert eyler sonoma state university 14 /vew teclmology-bused firnns'ursuit ofsbir fends lloward e. van aukcn lowe state university marcene s. sonncborn central new york tdo tk onandoga sbdc/ny 26 clraracteristics of mergers and acquisitions hy small manufacturing firms david j. flanagan western michigan university 41 economic value added for /vew ventures and small business sidney j. baxendalc university of louisville leigh bowen owner campus quilt company 52 strategic reseurch und performance ofsmes theo j. b. m. postma university of groningen peti:r s. ewart university of groningen 65 the competitive behaviors of small retailers: examining the strategies of local merchantsin rural america michael j. rubach university of central arkansas jeffrey e. mcgec university of texas at arlington 82 puymll tax incidence on small businesses: an empirical investigation of sltifting tire payroll tax burden ted d. fnglebrecht louisiana tech university lauric j. i icnry old dominion university govind s. iyer arizona state university 99 u.s. trade association internationalization activities as collective strategy stefan wally chapman university vinod k. jain bowling cireen state university small business brief/ 112 component depreciation: a tax planning strategy for small businesses nathan oestreich san diego state university lloward r. toolc san diego state university james e. williamson san diego state university book reviews: 119 low risk, high reward: starting and crowing your business with minimal risk by bob reiss with jelfrey l. cruikshank. reviewed by thomas r. taylor, ii 123 fast grow(hr how to attain lt, how to sustain it by lawrence g. weinzimmer. reviewed by joette wisnieski publication staff editor dr. lloyd d. elgart associate editor dr. lillian schanfield editorial advisory board dr. joseph singer dr. joann carland dr. james carland dr. peng s. chan dr. john pearson dr. james paradiso dr. david ambrose dr. pamela schindler dr. herbert sherman dr. matthew sonfield dr. saul diamond dr. stephen brown dr. homer saunders dr. fred fry dr. robert brockhaus dr. steven hanks dr. john wallace dr. rudy kagerer dr. paul dunn dr. s~mbruno dr. joseph latona dr. lawrence klatt dr. louisg. pol dr. howard van auken dr. donald clause dr. binshan lin dr. harriet stephenson dr. howard rudd dr. richard daily dr. inge nickerson dr. don bradley barry university barry university university of missouri western carolina university western carolina university california state universityfullerton arizona state university national-louis university university of nebraska-omaha wittenberg university hofstra university university of northern iowa university of central arkansas bradley university st. louis university utah state university marshall university university of georgia northeast louisiana university university of houston-clear lake university of akron florida atlantic university university of nebraska at omaha iowa state university university of west florida louisiana state universityshreveport seattle university college of charleston university of montana barry university university of central arkansas a publication of barry university and the small business institute directors' association. send subscription requests to the national sbida center, college of business administration, university of central arkansas, conway, ar 72032. annual subscriptions and back issues may be ordered al $15 each. ©copyright i 992 small business institute directors' association what can you contribute? sbida's 17th annual s!llall business consulting conference, february 3-7, 1993, san diego, offers you a special opportunity to share your expertise and your ideas. this year's theme, adapting to changing global economic conditions, explores the impact of changing economic conditions, worldwide, on small businesses. as one who guides small businesses, you are obligated to help them cope with continued recession, slow growth, political unrest abroad and domestic dissatisfaction, new trading partners, and new market partnerships. that these changes occur in an environment of social and cultural upheaval, rapidly advancing technology, and sweeping demographic population shifts further complicates your recommendations and your implementation approaches. so, what can you contribute to the discussion and the search for new approaches and ideas? joseph.latona, vp-programs is now accepting papers and proposals for symposia, workshops and panel discussions. call, fax, or write now for a brochure detailing program tracks and participation guidelines. joseph c. latona, dba university of akron college of business administration akron, oh 44325-4801 office: (216) 972-7337 fax (216) 972-6588 small business institute directoks' association stay informed register now for access to the small business advancement network • download databases of sbi program information • access online database of grant opportunities • send electronic mail to others involved in sbi • have access to bulletins of timely information call us now to sign up small business advancement network university of central arkansas uca p.o. box 5018 conway, arkansas 72032 phone: (501) 450-5377 fax: (501) 450-5360 st%4 tegy small business brief fallacies versus realities in financial planning and management among entrepreneurs: lessons from the trenches paul dunn university of louisiana at monroe escdtmnw ulm. edu liang, chyi-lyi (kathleen) university of vermont cliang iso o. uvm. edu abstract this paper summarizes fallacious thinking about financial planning and management among entrepreneurs and small business owners. this thinking often continues from start-up through initial liquidity and beyond and creates problems for the venture. these problems can usually be avoided with an understanding of the realities associated with fallacious thinking and following some fairly simple "rules" enunciated by the authors. introduction entrepreneurs often make mistakes in financial planning as they start and manage new ventures that result in cash flow problems ranging from minor to fatal. these mistakes oflen occur because of the fallacious thinking that entrepreneurs use in the stanup, early growth, and the early excess liquidity time frames of new ventures. problems arise from a failure to be specific and deliberate in planning and managing finances. for example, pre-start up expenses are ignored or underestimated, startup costs are underestimated and/or improperly financed, sales are overestimated and expenses are underestimated, cash flow is poorly estimated, business growth is assumed to be strong and self-financing, and early liquidity is oflen mismanaged. unfortunately, most entrepreneurs and many advisors, formal and wellmeaning friends, have not had the benefit of formal education in business or finance (adelman tk marks, 2000). this article distills 40 years of experience counseling thousands of entrepreneurs and small business owners in financial planning and management from pre-business planning through initial prosperity. entrepreneurs, counselors, students and teachers may benefit from understanding common financial planning and management fallacies in entrepreneurial thinking and the realities learned in the trenches. 95 journal of small business strategy val. !3, !vo. i sptqng!summer 2002 fallacies and realities of financial planning and management fallacy i: "idon't neerl a business plan! i have a good location that needs some fixing up and a linle money! " in their haste to get started entrepreneurs often do not do any formal business or financial planning. there is a tendency for entrepreneurs to ignore or underestimate pre-business expenses. pre-business expenses include market and marketing research, business planning assistance, licenses, permits, repair and renovation of facilities, utility deposits, grand opening, and other expenses associated with expenditures incurred in preparation to start a businesses. in their haste to open, limited attention is given to these, oflen substantial, expenses. failure to prepare for such expenditures can create cash flow problems from the very beginning of business operations. proper planning requires that these expenses be thoroughly considered and anticipated (adelman k. marks, 2000). reality from i: haste leads to a lack of or inadequate business plan. rt good business plan lays a proper foundation for a successful business. prebusiness expenses must be part of that plan. fallacy 2r "i have a greatidea and need to get started! rtll i needis $50000 to $!00000 for the building and a few pieces of equipment" startup costs, basic fixed asset financing, present a challenge for entrepreneurs. the most common error in financing fixed assets is the tendency to do rough estimates of a few "important" assets. in determining startup costs, entrepreneurs need to determine all the assets that will be needed to run the business and how those assets will be financed. if a building and land are required, realtors and contractors can provide estimates. purchasing buildings and land involve very long-term commitments and can result in problems whether or not the business succeeds. in startup situations, it is usually better to rent or lease than buy. it will be easier and more graceful to get out of a lease than a mortgage if the business fails to develop as expected. of course, if the needed facilities are not available, purchasing may be necessary. equipment, furniture, and fixtures required to operate the business can be determined by talking to vendors. however, many entrepreneurs do only rough estimates of these costs instead of doing the necessary research. failure to determine actual costs of fixed assets often leads to financing gaps that create critical cash flow shortages that may threaten the viability of the firm. many protest that they will determine these costs later. they have to be reminded that if they are going into business, "later" is now. financing fixed assets is usually equated with long-term sources of funds, long-term debt or equity. the source of funds matches the useful life of the asset. this equation is reasonable and most entrepreneurs get it right. it is unreasonable to expect that new ventures will generate sufficient cash flow to pay for these assets in a short period of time. for example, financing a building using a 180-day note (not for interim financing) presents a real problem for the few who make the mistake. similarly, financing equipment, furniture, and fixtures is usually done using long-term sources of funds. most entrepreneurs properly associate fixed assets with long-term sources of funds. a few, however, do not (lewellen, halloran, &. lanser, 2000; keown, martin, peny, gt scott, 2002; brigham bt houston, 1999; kuratko gc hodgetts, 1995). 96 journal ofsmall business strategy vol. l3, no. i spring/summer 2002 reality from 2( a complete list of all fixed assets needed must be determined and financed with long-term sources offunds. fallacy 3( i have enough money and savings (o get started and buy the equipment so i can own my assets. i need to borrow a linle, but no(for too long! i want new equipment for my business. " one of the biggest problems the authors encounter with entrepreneurs in fixed asset financing is the use personal funds to finance them. entrepreneurs seem to have a desire to own fixed assets. this desire olten leads them to use their own, usually limited, funds to buy fixed assets. entrepreneurs need to understand that they do not need to own assets, just control them. leasing or renting is olten a better option. leasing and renting involves shorter time commitments than buying and, if the business is not successful, it is usually easier to terminate contractual arrangements. personal resources used to purchase fixed assets may be better used for working capital and for survival cash. liquidity is important to entrepreneurs. a good financial plan involves finding the costs of fixed assets and financing them appropriately. lenders are much more inclined to loan money for fixed assets than for working capital and to cover expenses before the firm reaches break even. another common error is to buy fixed assets from vendors on terms. this approach also creates problems for lenders since the vendor will have the first lien on these assets. lt is usually bener for entrepreneurs to use savings accounts and other time deposits as collateral for loans rather than cashing them in to use in the business. borrowing against those personal resources will increase liquidity. the logic is that borrowing against such savings imposes "fiscal discipline" on the entrepreneur. entrepreneurs will use borrowed funds more judiciously and typically repay such loans. cashing and using savings accounts and other securities often result in spending and not resaving. the cash from savings olten leads to another common error made in acquiring fixed assets, the purchase of new "first class" equipment, fixtures, and furniture rather than good used items. suppliers of these assets typically sell and/or lease good, refurbished assets that will do the job. in addition, new equipment, furniture, and fixtures depreciate in the broader market place much faster than good used ones. early liquidation may lead to higher losses if it is necessary to get out. reality from 3( i( is not necessary to own fixed assets, just control (henx conserve personal resources for working capital and survival needs. savings and other time deposits are good collateral( avoid using these to buy fixed esse(s. good used equipment will often do the job. avoid (rying (o go first class. fallacy 0i "suppliers will provide me with inventory. 8'hy do i need to finance accounts receivables? ifi run short of money, i can go back to my banker for more." financing current assets is an often-misunderstood proposition. many entrepreneurs and some small business advisors relate current assets to short-term sources of funds. because of this association of current assets (uses of funds side of the balance sheet) and short-term sources of funds (sources of funds side of the balance sheet) many entrepreneurs assume that current assets can be financed using short-term sources of funds. it is important to distinguish between "permanent" current assets (such as accounts receivables and inventory) that will be 97 journal ofsinai/ business strategi'al. /3, /t/v. i spring/sumnier 2002 on the balance sheet as long as the business exists, and "variable" current assets (such as receivables and inventory needed to cover seasonal and/or cyclical changes) that vary over time. the use of short-term sources of funds-trade credit or short-term loans for inventory, for example —to finance permanent current assets during startup usually results in an almost immediate cash flow problem. while inventory turnover converts inventory to accounts receivables and back to cash, initial sales may be slow to develop and inventory that is sold is quickly replaced and the cash intlow generated may be needed to meet operating expenses. additionally, terms of purchase for startup companies are typically cash-on-delivery or very short term. some entrepreneurs underestimate permanent inventory requirements based on the inventory-turnover idea. if the new venture extends credit to its customers, the problem is compounded by the length of time it takes to collect receivables. generally, entrepreneurs should not extend credit in their own name. it is better to arrange to accept credit cards from customers and avoid having to manage a credit business on the side. the fees charged by credit card companies are small compared to maintaining a credit department. if it is necessary to extend credit-and it sometimes is—entrepreneurs must get adequate funds to support such credit. it is not uncommon for business customers to expect or take 30-90 day terms for their credit. extending credit can create a cash flow problem for entrepreneurs who have not arranged for the resources to support those accounts receivables. "permanent" current assets should be financed using equity or longer-term debt (ranging from 180 days up to three to five years). "longer" is used to convey the notion that time must bei.allowed for the entrepreneur to convert debt to equity through cash flow in an orderly way. the reason for the use of longer is that many lenders do not want to lend long-term to finance current assets. lenders will often consider longer term, however, when the need for such terms is properly documented and explained. vendors, for example, have been known to finance basic inventory for up to three years in new ventures about which they felt confident. short-term sources can be used to finance "variable" current assets, but proper attention to length is also important. using too short-term sources to flnance these "variable" current assets can still result in cash flow difliculties. for example, a small manufacturer ofhunting equipment must remember that financing seasonal inventory and receivables may involve the period from one season to the next, perhaps nine months to a year, not just one or two months (lewellen et al., 2000; keown et al., 2002; 1)righam gc houston, 1999; emery, 1998; kuratko 8: hodgetts, 1995). some entrepreneurs think that if they run short of funds, they can go back "back to the well" for more. lenders usually find it very diiticult to provide more funds to entrepreneurs who, by requesting additional funds shortly after the initial loan, indicate that they failed to plan and/or manage well in the first instance. reality from et finance "permanent" current assets with longer-term equiry or debt. "variable" current assets can be financed with short-term sources of funds. fallacy 5t "lfpush comes to sltove, i can use credit cards for emergencies." entrepreneurs sometimes attempt to finance business startups, survival, or growth with credit cards. the authors have had clients with as much as $ 170,000 in credit card debt (oflen off 98 journal of small business strategy vol. !3,no. i spring!summer 2002 the balance sheet) incurred to finance staitup, survival, or growth in their business. needless to say, this approach leads to cash flow problems. credit card interest rates are extremely high and terms are short, both of which are undesirable. even though the debt is off balance sheet, it will be shown on the credit report and impact the personal cash flow of the entrepreneur. of course, using credit cards to purchase efficiently if the debt can be paid off monthly is appropriate. reality from 5r credit cards should be used only for efficient purchasing and paid monthly. fallacy 6r "my friends tell me they would buy my product. everybody needs this product. my inventory will turn, and l can replace it as l sell it!" cash flow problems result when new venture entrepreneurs underestimate the time it takes for sales and cash flow to develop. high estimates of quick profits and cash flows that do not materialize within the time frame estimated lead to cash deficits that may last for some time. survival cash, enough to cover operating expenses through cash flow breakeven is reached, must be determined. marketing takes time! sales grow over time from building a customer base. sales, profits, and cash flow, therefore, do not usually come in the amounts expected or as fast as many entrepreneurs expect. the result can be cash flow problems from mild to severe. cutting price to increase sales, which cuts per unit gross margin, and/or increasing promotion expenditures to increase sales do not necessarily improve sales, profit, and cash flow. realistic forecasting should consider that potential customers do not even know the firm exists initially. initial sales are typically low and grow slowly for several months or a year or more for many businesses. while new ventures in smaller markets oflen develop fairly quickly, if they are going to develop, those in larger markets usually take longer. in smaller markets, potential customers are likely to become aware of the business quicker. operating expenses can consume a good gross margin until sufficient sales and cash flow develop. while it is more difficult to forecast sales than expenses, a good sales forecast should anticipate the time needed to develop the required customer base and allow for the estimation of survival cash needs. negotiating survival cash when financing startup is important since the lender will be aware of this future potential need for funds and may well finance such needs with a line of credit. most loan officers view the anticipation of survival cash needs as good planning. if the loan i officer changes, the line of credit will still exist. reality from 6r survival cash needs must be determined and arranged for when planning and financing startup. fallacy 7: "sales aregoing to be really good and pick up fast. my rentis fairly low and my ocher expenses are not going to be that much! " entrepreneurs tend to overestimate sales and underestimate, or miss, some operating expenses for new ventures. most operating expenses can be determined by asking someone in a similar business or by asking suppliers. many entrepreneurs do rough estimates that are oflen too low. in addition, they do not think of or know how to estimate all expenses they will incur. depreciation, with its cash flow and tax implications, is a mystery to most entrepreneurs, and 99 journal of smull business strategy vol. 13, no. l spring/summer 2002 interest expense is not always easy to determine. if the total funds needed are underestimated, interest expense and note payments also will be underestimated. overly optimistic estimates of sales and the time required to achieve them, combined with low or overlooked estimates of expenses results in the overestimation of profits and cash flow. this situation quickly leads many entrepreneurs "down the primrose path toward disaster." breakeven analysis, on both income statements and cash flow, oflen overlooked and relatively easy to do, can help entrepreneurs understand that it is important to keep fixed expenses down and can be used to help determine how much and how long money will be needed to cover operating expenses before breakeven. the question becomes: "how much do i have to sell? not "how much can i sell?" reulity fiom 7t sales und evpense estimates must be realistic with respect to atnount and timing. breukeven analysis, income statement and cash flow, is a very useful tool for entrepreneuru l'ullacy sr "l will make 50 cents nn every dollar sold. cashflow will not be a problem!" converting overestimated sales and underestimated operating expenses into cash flow estimates will hide potential problems. losses on the income statement are one thing, cash flow deficits are quite another. underestimating the length of time it takes to reach cash flow breakeven can result in problems ranging from sweaty palms to failure. most entrepreneurs get just enough cash to open their business, but not enough to allow them to reach cash flow breakeven in an orderly way. good cash flow estimates require a realistic monthly cash flow projection, including the lag in collecting receivables, prepaid expenses, and other temporal issues associated with cash flow, to determine how much cash is needed for how long. estimates should be made for is-36 months particularly if the business is subject to substantial seasonality. such estimates will show when cash flow deficits are likely to occur and how large they are likely to be. once the deficits have been estimated, the entrepreneur can see how much additional cash is needed to reach cash flow breakeven. ideally, the entrepreneur should have adequate equity to cover these deficits. that is a major reason the authors earlier suggested conserving personal resources. if debt is to be used to cover cash deficits, there should be a written commitment when startup funds are negotiated. it is very difficult to go back to the lender to ask for more money to cover cash flow deficits since they are typically needed to cover working capital or operating expenses that do not represent good collateral. equity, lines-of-credit or appropriate-length term loans can be used to flnance survival cash. terms on these sources should be long enough to allow the entrepreneur to convert any debt to equity in an orderly fashion (lewellen et al., 2000; brigham gc. houston, 1999; emery, 1998). reality from gr the amount and timing of cash receipts and cash disbursements mast be realistically estimated to avoid cash flow problems. fallacy 9t "kty family likes the idea of me being my own boss —l can make money for myself i nstead offor someone else." particular problems arise when entrepreneurs expect to be paid as much from their new venture as they were in their previous employment. entrepreneurs are the last persons paid from profits and cash flow. in startup ventures, owner's compensation may oflen be low or nonexistent for a substantial time period. this may make it necessary for the entrepreneur to 100 journal of small business strategy vol. !3, no. 1 spring/summer 2002 start the new venture on a part-time basis while retaining a full-time job or letting their spouse work until the venture can provide an adequate proflt and cash flow to provide a family income. many entrepreneurs, in their haste to get started, fail to determine their personal and family survival cash needs as they plan their venture. determining personal needs is a fundamental issue that must be considered in business planning. reality from 9r personal and family needs must be included in financial planning for new ventures. "don 't quit your day joby'allacy 10: "1expect my sales and profits to double the first year! we'e on our way! " many entrepreneurs think that sales growth is good and will lead to increased profits and cash flow, if a new venture grows in a deliberate, orderly way, increased sales, profits and cash flow can be expected and it may be possible to finance growth from internally generated funds. if the business grows at a faster rate than can be supported by intemafly generated funds, it will be necessary to manage growth carefully. rapid growth in sales will mean more cash flowing into fixed assets, "permanent" current assets (inventory, receivables), and perhaps operating expenses. such uncontrolled growth often creates cash flow problems for entrepreneurs. if internal funds can be generated or if borrowed funds can be acquired at affordable rates, these may be used. such funds should be obtained for an appropriate length of time. additional funds required for fixed and "permanent" current assets should be financed from long or longer-term sources of funds, such as internally generated funds, additional equity injections, or long-term debt (lewellen, et al., 2000; keown et al., 2002; brigham tc houston, 1999). if additional funds are not available from equity or debt, the entrepreneur can use price strategy to control growth. many entrepreneurs recoil at the suggestion that they raise prices because 'customers will stop buying." that is actually the goal of controlling growth. while some customers will stop buying, all will not and raising prices will generate additional profit and cash flow from each unit sold. of course, price increases should be judicious and incremental. raising price is a quick way to control growth. reality from 10r finonce fixed and "permanent" current assets for growth with long-term sources offunds. price can be used to control growth. fallacy 1!i "honey, the business is doing great, this house is too small for people like us. i can buy that new equipment too." the entrepreneur, their spouse, children, and others will have sacrificed, sometimes substantially, to get the new venture going. afler entrepreneurs have gotten through startup, survival, and growth successfully, one additional area requires attention. when the business is up-to-speed and cash flow exceeds normal business requirements including an income for the entrepreneur, there is a strong temptation to use any excess liquidity for business or personal "life style" changes. business "life style" changes typically show up as the purchase of newer, fancier buildings and other better (first-class) fixed assets, changes in wages and benefits to employees, and various business perks. personal life style changes show up as new cars, a family boat, ioi lourna/ ofsmall business strategy vol. 13, no. l spring/summer 2002 extraordinary vacations, or a new, larger home in a better section of town. such business and personal uses of initial extra liquidity neglect the changes that inevitably occur in the economy. if the extra liquidity is used for life style changes, particularly permanent changes that require long-term commitments, a downturn in the economy or other set back requiring resources to keep the business going can result in cash flow problems for the entrepreneur. before any permanent business or personal lifestyle changes are made, future business conditions and plans should be considered. some initial liquidity should be used to purchase marketable securities. these securities are a buffer against changes in the economy and/or additional growth that may occur (lewellen et al., 2000; keown et al., 2002; emery, 1998). once the entrepreneur has created this buffer, business and personal life style changes may be possible. reality from i lr conserve initial liquidity, in margetable securities, to insure long-lerm survival. the reality of financial planning and management for new ventures many entrepreneurs are in a hurry and oflen engage in fallacious thinking. this fallacious thinking can, and often does, result in poor financial planning and management with the related cash flow problems ranging from mild to severe. entrepreneurs and their advisors should avoid fallacious thinking and consider the reality of financial planning and management of new, growing enterprises outlined by this article. several "rules" flow from the reality of the situations posed by the fallacies discussed in this article. these "rules" are summarized in table i. proper financial planning requires entrepreneurs and those who advise them to understand and plan and manage new venture startup, survival, growth, initial liquidity, and changes that will occur. proper attention to the issues presented here should result in fewer financial problems and more success for new ventures. (continued on next page) 102 journal ofsmall business strategy vol. 13, ivo. i spring/summer 2002 table i realities of financial planning and management for entrepreneurs reality from fallacy lr ~ haste leads to poor business planning. ~ a good business plan lays a proper foundation for a successful business. ~ pre-business expenses must be part of that plan. reality from fallacy 2: u a complete list of all fixed assets needed must be determined and financed with longterm sources of funds. reality from fallacy 3r ~ it is not necessary to own fixed assets, just control them. ~ conserve personal resources for working capital and survival needs. ~ savings and other time deposits are good collateral; avoid using these to buy fixed assets. ~ good used equipment will often do the job. avoid trying to go first class. reality from fallacy 4r ~ finance "permanent" current assets with longer-term equity or debt. ~ "variable" current assets can be financed with short-term sources of funds. reality from fallacy 5t ~ credit cards should be used only for efficient purchasing and paid monthly. reality from fallacy 6r ~ survival cash needs must be determined and arranged for when financing startup. reality front fallacy 7r ~ sales and expense estimates must be realistic in amount and timing. ~ breakeven analysis (income and cash flow) is a very useful tool for entrepreneurs. reality from fallacy gc u cash receipts and cash disbursements must be realistically estimated in amount and timing to avoid cash flow problems. reality from fallacy 9: ~ personal and family needs must be included in financial planning new ventures. u "don't quit your day job." reality from fallacy 10r ~ finance fixed and "permanent" current assets for growth with long-term sources of funds. ~ price can be used to control growth. reality from fallacy lit ~ conserve initial liquidity in marketable securities to insure long-term survival. 103 dournal ofsmall business strategy vol. /3, no. l spring/summer 2002 references adelina, p. j., &. marks, a.m. (2000). entrepreneurial financer finance for small business, (2"'d). upper saddle river, nj: prentice hall. brigham, e. f., & houston, j. f. (1999).fundamentals offinancial management. fort worth: the dryden press. emery, g. w. (1998). corporate finance principles and practice. reading, massachusetts: addison-wesley. keown, a. p., martin, j. d., petty, j. w., & scott, jr., d. f. (2002). financial management: principles and applications, (9th ed). upper saddle river, nj: prentice hall. kuratko, d. f., & hodgetts, r. m. (1995). entrepreneurship, (3 ed). orlando, florida: the dryden press. lewellen, w. g., halloran, j. a., &. lanser, h. p. (2000). financial management. usa: south-western college publishing. paul dunn is distinguished professor of entrepreneurship and small business and director of the entrepreneurship studies/small business development center, university of louisiana at monroe. be has provided counseling for tiiousands of entrepreneurs and small business owners during the last 4l years. be counsels between 350 and 400 entrepreneurs and small business people each year. kathleen liang is assistant professor, department of community development and applied economics, college of agriculture, university of vermont. she teaches small business planning and advises many rural and agriculture related entrepreneurs and other small business owners in business planning and management. 104 strategy a world wide web primer for small business albert l. lederer donna j. maupin university of kentucky abstract the world wide web is growing very quickly. it offers small businesses the opportunity to reach a wider customer base. however, before deciding to launclt a web site, a small business manager needs an understanding of the web and how to use it to achieve business goals. this article provides a foundation for using the web to achieve them. it includes a brief history ofthe web, its commercial demographics, and reasons for building a web site. it also explains the key issues and steps for developing a web site and assessing its success. introduction beyond a doubt, the growth of the world wide web has been dramatically accelerating the appearance of"http //" and "www" in magazine, newspaper, radio, and tv ads and stories has become an ordinary, daily occurrence. in fact, the web has become so visible that many observers believe that small to mid sized businesses will miss significant opportunities if they fail to use it to promote their products and services. however, before a business decides to develop a web presence, it must face some important issues. first, it needs some knowledge of the web and its foundation, the internet.'t also needs to understand the demographics of the web users who might become its customers. it must develop business strategies for its presence on the web. finally, the business has to face such mechanical issues as to whether it or a service provider will furnish its hardware, so aware, and expertise. many small business managers lack the knowledge and time to leam about how the web works. understanding the mechanical issues can be challenging but it is still essential before a manager begins listening to the offers of vendors and consultants. 'he internet is a global network comprised of regional networks of hardware and soltware connected by cables and other media. the web is a body of information stored on and distributed by the internet. i using a web site to achieve business goals the most important issue in the decision to use the web is its role in the competitive strategy of the business. a competitive strategy includes a broad formula for how the business will compete, the goals of the business, and the means whereby the business will achieve the goals(porter, 1980). the decision to develop a www site is an element in that formula and can be an important means for achieving the goals. in other words, small businesses need to decide why they want a web site before investing the time and resources needed to create one. some possible goals the business may want to achieve by using the web are to: increase product awareness expand their audience improve customer service, and generate sales thus, the primary concern of the small business is the motivation of a web appearance. the key motivator is the need to be more competitive by creating synergies in marketing and distribution. in addition to developing its own competitive strategy, the small business must also assess competitors'trategies and use of the web so it can either overcome its competitors or at least stay even. in conjunction with this, the business must understand how its customers might use the web to learn about and buy its products. in any case, each of the four goals above requires knowledge of business management and marketing techniques for the web. businesses can develop a web awareness by studying the web to see how it operates and how other businesses have created successful sites. without knowledge of how the web works, businesses will be unable to make informed decisions about building their own site. increase product wareness more than half of the companies on the web are there with the intention ofbuilding product awareness (dellecave, i 996). using the web to educate potential customers on the qualities of the company's product differs from traditional methods of advertising. web visitors have their own unique agendas and succinct, meaningful information will attract them. one business that increased its brand awareness was ben and jerry's. its site has used unique graphics to lead visitors to product and company information. it also has had contests to create an awareness of its product and company values. ~e* ea dd by providing value-added benefits, a business can improve its brand awareness, expand its audience, and thus gain market share. federal express developed a site to lure customers by providing them the ability to track their packages on-line. fedex's site enabled it to attract as many as 18,000 people each day (dellecave, 1996). marketing efforts at the site have included special offers, fedex news, and information on new services. the company spent 2 under $ 100,000 for its site because much of the necessary hardware and soitware was already in place. im rove customer service good customer service provides more than just a product. on the web, providing additionalinformationforcustomersaddsservice. virtualvineyards,abusinessstart-up,used the strategy of making wine purchasing user-friendly on its web site. its site has had links to (i e., immediate displays of) wine descriptions, special otters, and a question and answer page (resnick and sterne, 1996). to encourage the customer to order online, each page on the site has had a link to the order form. generate sales although generating sales on the web may not be a primary strategy for some businesses, others are already obtaining a good return for their investment. a site can provide a small business with increased distribution nationally and internationally. traditional selling methods could not achieve that. thus, the spindler family's chocolate factory added 40 percent to its annual sales through a web site by including clever descriptions and tantalizing pictures of its products (resnick and sterne, 1996). holiday inn closed the sales loop by using the demographics of web users to develop its site (dellecave, 1996). the company's customer profile matched the profile of the web user. holiday inn saw the opportunity for a new distribution channel, a low-cost advertising medium, and an information source. its site has let potential guests check availability and price, and book rooms at any of its hotels. the site also has provided its visitors with a travel trivia game. thus holiday inn has viewed the web as a long-term selling tool. origins understarding such examples ofhow organizations have used the web to accomplish their goals is useful. a brief history of it can also help the small business manager understand its workings and possibilities. in the late 1960s, the internet was launched when the u.s. defense department commissioned a group of stanford university researchers to study computer networking with a project named arpanet. its designers originally intended it to facilitate tactical military operations and academic research. in 1986, the national science foundation created the nsfnet fiber-optic backbone on arpanet to establish supercomputingcenters with high-speed computing power for all u.s. users. also in 1986, the cleveland freenet came online as one of these supercomputing centers to offer free, public access to the network of computers. in 1990, arpanet ceased to exist and the network of computers became oaicially known as the internet. today the internet's physical foundation has grown to a supranational 3 collection of interconnected computers governed by a set of a communications rules called transmission control protocol/internetprotocol (commonly referred to simply as tcp/ip). the internet's technical parameters are set by the internet engineering task force, a small group of technical experts who have insisted on making openness its main attribute (o'flaherty, 1996). communication on the internet was always difficult. in response, scientists at cern (centre european pour la recherche nucleaire), the european particle physics laboratory in switzerland, created the web. its purpose was to communicate on the internet more easily and efficiently with other researchers around the world. the scientists'oal was to make all information accessible in a simpler and more consistent way (ayre and reichard, 1995).their effort led to the release in late 1990 of a web prototype with the ability to index and search all information (applegate and gogan, 1996b). by 1992, over a million computers were linked to the internet. the end of an nsf stricture against commercial activity on the internet also occurred that year. hence, the dawn of commercial use began on the web. in 1994, the clinton administration approved a $6 million grant to form commercenet, a consortium of computer and communicationscompanies,to explore the commercial potential of the web (wilder, 1995). commercenet was created as a non-profit corporation partially funded by the u.s. government's technology reinvestment project. the consortium is comprised of founding, sponsoring, and associate members. the founding members are responsible for consortiummanagement and technical programs. the sponsoring and associate members include organizations from the electronics, computer, information service, telecommunications,and financial service industries, and other companies and organizations committed to electronic commerce (commercenet, 1996a). commercenet working groups meet to discuss issues, field pilot applications, and document experiences to help define best business practices and new interorganizational processes. the world-wide web consortium(w3c) is another important body. it consists of more than 100 high-powered corporate members who also promote the web. an industry driven group, the w3c focuses on the commercialization of the web (o'flaherty, 1996). thus by 1996, the web, consisting of internet-connected computers with multimedia databases, became the internet's fastest growing "business district" (applegate and gogan, 1996b).thanks to use of the hypertext markup language (html) for displaying information on web pages and to the development of browser sot)ware such as netscape navigator and microsoft internet explorerusers can view material located around the world as easily as they can peruse a cd-rom on their own pc. the material is simply designated with a site location called universal resource locator (url) such as www.company-name.corn and the user finds it there. 4 brief history of the web the web is reshaping the business environment because of its ability to facilitate the global sharing of information and resources. with its eflicient channel characteristics, it provides businesses with an interface to market and distribute goods and services. this opportunity for business growth generates the need to know the size and composition of the market being created by the web. business weeks november 14, 1994 cover story on the web thus concluded that it will become one of the world's busiest business districts (verity and hof, 1994). and indeed, that appears to be happening. many statistics on web usage, user demogmphics, and the number of commercial sites are available. however, the rapid growth of commercial activity on the web and flaws in research procedures make these demographicsuseful only in predicting a partial picture of the use and opportunities of the web. the size of the web is impressive and businesses are beginning to flock to it as an untapped market. its size and growth prospects make it an attractive commercial medium. it grew by 1,758 percent in 1994 and has been doubling in size about every two or three months (hoffman and chatterjee, 1995). in july 1985 over 80,000 web servers were estimated to exist. in fact, this number may have been low by as much as 20 percent due to measurement problems. by 1996, the number of such names was growing at a rate of 2,000 per week (american demo ra hie~ 1996). as of march 1997, the internic, which maintains internet addresses, listed 1,178,886 registered, commercial domain names (i.e, the ".corn" portion of an e-mail address afler the 1sign). the number of internet-connectednetworks of computers of potential customers has also shown an impressive growth rate in the u.s. and internationally. by january 1995, there were 26,681 u.s. based networks and 19,637 international networks connected to it (martin, february 5, 1996). these numbers illustrate the global potential of business on the web. on the other hand, the statistics of retail sales are minor given the "gold rush" mentality of the web. jupiter communications,a new york research firm, reported that in 1995, on-line sales totaled $ 132 million in the u.s. some analysts have predicted sales to reach $4 billion by the year 2000 (martin, february 5, 1996). commercenet, in partnershipwith nielsen media research,conducted several surveys of north american users from 1994 through 1996. the section of the survey that focused on web usage and demographics revealed that the users of the web are affluent, well-educated, and professional(commercenet, 1996b). the nielsen study showed that over 76 percent of internet users 16 years and older in the u.s. and canada also used the web. international data corporation said that there were over 8 million active web users at the end of 1995 with that number continually growing (sandberg and ziegler, 1996). a tenagra corporation report stated that by 1996, internet usage was increasing by over 10 percent of its total user base each month, with business users being the largest growth segment(tenagra, 1996a). 5 as the price of a pc to access the web continues to drop, the surge in household web usage will probably transform many major industries(american demo a hica 1996). thirtytwo percent of u.s. households had a pc and only 9 percent of them had online access by 1996 (martin, march 18, 1996). even so, the size of the market is one for businesses to see as a growing opportunity. figure i total online households 1996-2002 60 50 7 5007.7 ~ 00 -40— 0i i n i~ 0 7g , iirr & so20.7 ( i:„') n 0l i/i z 620 l52 i !' '1, 10'i 0— 1996 1997 1996 1999 2000 2001 2002 copyright 1997 jupiter communications/internet appliance report small business opportunities of the world wide web with the changes in the business world produced by the web, small and mid-sized businesses may have access to the same capabilities as large businesses. the web provides new ways of cementing alliances, obtaining customer feedback, and developing informationrelated revenue streams (graef, 1996). yet, utilizing the web as a revenue stream has been slowly developing. the yankee group indicated that of the businesses on the web, 35 percent showed a limited roi while only 12 percent showed a reasonable and strong roi(dellecave, 1996). businesses that provide consumer products do well in the areas of software and cds, clothing, food products, and hard to find products. the best opportunities for business to business marketers are for reaching small to mid-sized companies. fortune 500 companies have increasingly been becoming involved as vendors to these companies (fried-cassorla, 6 1995). the tenagra corporation has identified these products as selling well on the web (tenagra, 1996b): products appealing to the technologically savvy computer related products products appealing to broad segment of the web user base products appealing to wide geographic audience specialty or collector items, and informed purchases attracting visitors to a site attracting visitors is a major concern for any business setting up a web site (dearth and kling, 1995). a knowledge of the how the web operates is imperative to attracting visitors. registering with such search engines (i.e.,programs for customers to search the web based on keywords in the url, name, and site description) as infoseek, excite, lycos, alta vista, and yahoo! will attract visitors. in addition, a company can advertise its site on directories and yellow page sources. newsgroups (i.e., electronic forums where members leave messages for all other members) offer another place to advertise a web site. also, some web sites will help promulgate a business site by forwarding its url and description to lists, databases, and indexes. in addition, business directories are becoming available. another way a business can attract visitors is to have other web sites that attract similar customers link to its own site. some sites charge to provide such a link to their page while others do not. using traditional promotional methods will draw visitors to the site. these methods include print ads, brochures, radio and tv ads. measuring success measuring the success of a web site provides valuable information to help a business reach more customers. data on how visitors use a site, what attracts them, and why they return may allow a business to manage and expand its site. such data is otten available in electronic documents known as access logs. an access log typically includes the name of each visitor's main host computer, the date and time of each request, and other pertinent data. despite limitationsto the accuracyofsuch information, several tools and servicespermit its analysis. they provide reports about the number of accesses for each page, breakdowns of requestsbased on host name, serverload and performancestatistics,averagetime spent on each page, paths a visitor takes through a site, urls of users, and correlations between these data. a business can use off-site or on-site methods for data collection. off-site analysis through companies such as i/pro or netcount saves time and system resources, especially for 7 small businesses with limited resources. on-site analysis with software such as interse's market force or openmarket's webreporter makes analysis available upon demand and provides a higher level of interactivity. to determine which is better, a business should consider who will use the data, how much flexibility the business wants in its reports, and how interactive the tool needs to be. decision to launch a site when a business decides to open a site on the web, it needs to determine if it will operate the site or hire an internet service provider (isp) (richardson, 1996). isps are not afl alike. some offer ditterent services,speed, and technical support. by locating in a cybermall with similar types ofbusiness, a small business can benefit from the collective traffic. if the site will be small with light trafflc, renting space with an isp may be preferable. if the site is to be large and will generateconsiderabletraffic, it may be more advantageous to set up a server in-house. although the expected traitic is an important determinant, a business still needs to evaluate other pros and cons of building a site or paying an isp for space. the pros ofbuilding a site include: full control over site management, ease of information collection, ability to choose security tools, maximum ability for content changes, and maximum creativity for page design. the pros of renting isp space on the web include: no system maintenance or setup expenses, lower expense to the business, no internal management of the server, and requirement of a smaller, dedicated stalt. before building a permanent site, a business would benefit by setting up a test page through a host service to evaluate the types of visitors and interactivity that will generate return visits. the business should develop a sound business plan for developing a web site. by hiring a consultant experienced in creating sites, a business can be guided through the process ofsettingup itsown server. the best consultants are those who have general knowledge and will bring in specialists for specific work. in addition, registering a domain name, choosing hardware and soflware, and building an in-house lan will be required. the process of setting up a web site may be done quickly but can also take several months. registering a domain name the first step in building a site is to register a domain name. doing so requires up to two months to accomplish. it is done through the internic's registration process at 8 http: //www.inumic.net (gerwig, 1996). the registration requires the number of the primary and secondary servers where the site will reside. applicants must verify that the name they are registeringdoes not violate any federal copyrights. an annual fee for the first two years holds a domain name. aller the first two years, the company is billed annually for the domain name. assembling the hardware and software for a web site web sites can reside on unix, macintosh, or windows nt but the majority now run on unix (richardson, 1996). unix workstations have had the most internet-ready applications, but windows nt has had cost, benefit, and familiarity advantages. a direct connection between the internet and the server provides a faster and more continuous link than a telephone line. the most common direct lines are referred to as tl, t2, and t3 lines (where the "t"abbreviates tariff an the number designates a particular tarifi). l,ines based on the isdn (integrated services digital network) a relatively new standard for combining voice, data, text, and image transmission are becoming available in some areas (verity and hof, 1994). to attach the direct line to the computer requires a lan or other connecting device. a lan is the best option because it allows sharing the data, printers, and other resources. setting up such a system has been costing between $ 10,000 and $35,000 depending on the power of the computer and the speed of the connection. choosing an internet service provider for a web site ifthe business chooses to use an isp rather than to build its own site, it should select one that meets its needs. many businesses would benefit by choosing an isp with access to storing its sites on electronic mails, kiosks, villages, markets, or plazas. extra serv ices include cl ickable image maps, forms, tracking, searchable indexes, secure financial transactions, and data publishing. not all isps will provide each of these services. if it chooses an isp, the business will need to know the cost of service, the speed of the connection, traffic data, information on extra services, services covered by the setup fee, the cost of a domain name, and the type of server. the cost of the service will include a setup fee and monthly rental charge. most setup fees are negotiable if the business is willing to create the site and register, promote, and maintain it. rent varies depending on the number of pages and complexity of the site, but a business can rent raw space if it is willing to maintain the site itself. the cost of using an isp will vary. most charge a monthly rate and additional one time setup fees. costs for developing the actual web documents can vary too. 9 the business will also need to consider the architecture of the server because the amount of traaic will be partly determined by the quality of the connection. the preferable connecticn has been tl. an alternative to having one's own domain name is to use the isp's. some isps otter their own domain name. they charge on a per-page basis, offer fewer extras, and stress their value-added services such as marketing, design, and consulting. although less expensive, this approach will reduce the visibility of the business and its name recognition on the web. conclusion the web's skyrocketing use and the growing frequency of references to web sites with their specific locations in tv, radio, newspapers, magazines suggest it is moving from a passive marketing and distribution tool to one that is becoming increasingly proactive. nevertheless the web may not be for all small businesses. thus a small business can benefit by first learning about the potential contribution of the web to the realization of its business goals and then considering a plan for its own web site. to succeed on the web, it needs to evaluate its expectations and be realistic in its goals. knowledge of the web and its users will help a business make the best decisions for its site. continuing to educate itself of the developments in software and technology may allow it to gain an advantage in the rapidly growing web marketplace. 10 references american demographics. (1996, february). pg. 8. applegate, l. and gogan, j. (1996a, march 22). open market, ines managing in a turbulent environment. harvard business school working paper n9-196-097. applegate, l. and gogan, j. (1996b, march 26). paving the information superhighway: introduction to the internet. harvard business school working paper, 9-195-202. ayre, r. and reichard, k. (1995, february 7). the web untangled. pc magazine, 173-196. commercenet. (1996a, february 26). http: //www. commerce.net/. commercenet. (1996b, february 26). executive summary. http: //www.commerce.net/. dearth, j. and kling, a.(1995,january 9) negotiating the internet. http: //techweb.cmp.corn/. dellecave, jr., t. (1996, april) big business gets interactive. sales and marketing management, 86. fried-cassorla, a. (1995, february) successful marketing on the internet: a user's guide. direct marketing, 23-26. gerwig, k. (1996, february). putting your mark on the web. iietguide, 87-88. graef, j.l. (1996, february 26). using the internet for competitive intelligence. http: //www.cio.corn/. hoffman, d., novak, t., and chatterjee, p. (1995). commercial scenarios for the web: opportunitiesand challenges.http://shum.cc.huji.ac.il/jcmc/vol 1/issue3/hoffman.html. martin, m. (1996, february 5). why the web is still a no-shop zone. fortune, 127. martin, m. (1996, march 18). online services, now on their own. fortune, 142. o'flaherty, d. (1996, march). gerstner's vision. internet world, 44-50. porter, m.e. (1980). competitive strategy, new york: the free press. resnick, r. and sterne, j., "at home on the web", small business computing, 14(4), april 1996, pp. 64-70. richardson, e. (1996, april) site construction. internet world, 62-66. sandberg, j. and ziegler, b. (1996, january 18). web trap: internet's popularity threatens to swamp the on-line services. the wall street journal, al. tenagra. (1996a april 21). how big is the internet and who uses it? http: //arganet.tenagra.corn/. tenagra. (1996b, april 21). what sells on the internet. http: //arganet.tenagra.corn/. verity, j.w. and hof, r.d. () 994, november 14). the internet. business week, 80-87. wilder, c. (1996, january 16) an electronic bridge to customers. http: //techweb.cmp.corn/iw/510/10mton.htm. ll stra tegf small business brief starting new small business institute programs: a survey of new programs begun since 1996 kirk c. hcriot francis marion umversity khet totgajinarion.edu noel d. campbell north georgia college & state university ndcampl&cll@ngcsu edn abstract in l996 the u.s governincnt eliminated federal funding for small business institutes, i'ienilting in a significant loss offormal sbi membership. a poll of small business institute directors association members identified five schools that had started new sbi programs since l996, ilespite the inck offederal fumling. the authors conducted a survey of these five new sbi programs. the authors concluile that startiiig new sbi programs is a viable means of of luring students hands-on business experience despite the lack offederal funding. introduction'he u.s. small business administration began the small business institute™(sbi) in 1973 (sbida, 2000). the purpose of the program was to provide counseling services at no charge to small businesses in the areas surrounding member schools. at its peak, more than 500 schools participated in the sbi program, spending approximately $3 million in federal monies alone and assisting 6,000 businesses per year. however, the federal government discontinued funding the sbi program in 1996, and since then no federal funds have been allocated. presently, the sbi program is administered by the small business institute director's association (sbida). since the elimination of federal funding, sbida has seen a tremendous decrease in membership to approximately 115 schools (sbida, 2001), as many schools chose not to continue their sbi programs (brennan, hoffman, & vishwanathan, 1997). i 7'he autlrors would like ro thank the attendees of the 7999 southern management association conference, track 4i management education, learning systems, and organizational developnient for their helpful comments. tlie authors would also like to thank professor christine borycki for her helpful comments. all remaining errors are the authors'esponsibility. 90 journal of smnll business strategy vo/. l3, no. 2 fall/winter 2002 the sbi program received considerable attention for the positive impact it can have on student learning, (brennan, 1995b; schindler & stockstill, 1995; hedberg & brennan, 1996; and elbert & harmeson, 1999) as well as benefits for the clients (brennan, 1995a). given the pedagogical and consulting benefits this study seeks to evaluate the viability of starting a formal sbi program in an era without federal funding. despite the absence of federal funding, a small number of colleges and universities have created new small business institute (sbi) programs by january 1999. this paper describes the issues associated with starting a new sbi program based upon a survey of the five new sbi programs started since 1996, including the authors'wn. selected sbi program literature several studies look at benefits of sbi to the student (brennan, 1995b), the client (brennan, 1995a), or the impact of loss of federal funding (brennan, et. al. 1996). however, none of these studies investigate creating an entirely new sbi program in the post-federal funding era. brennan, hoffman, and vishwanathan (1997) and brennan, hoffman, and vishwanathan (1996) are of particular interest with regard to the loss of federal funding. the authors initially predict (brennan, hoffman, & vishwanathan, 1996) that a large percentage of schools would eliminate their sbi program due to the loss of federal funding. the second study, conducted approximately one year later, (brennan, hoffman, & vishwanathan, 1997) reveals that almost 80 percent of the common respondents between their first and second studies continued to operate sbi programs. however, only 62 percent planned to continue the sbi program. of those who planned to discontinue their sbi program, 79 percent cited lack of funding as the primary reason for discontinuing their programs. thus, these studies reflect the importance of federal funding in continuing formal sbi programs. this study seeks to assess the importance of federal funding in creating new, formal sbi programs, defining a formal sbi program as a program that was a current member of the small business institute director's association as of 1999. research method the authors attempted to identify all formal sbi programs created since january 1996 by contacting the membership director of sbida. the authors found more than 40 new sbi directors. after eliminating new directors of existing programs, the authors identified only five new sbi programs, including their own. a later attempt identified no additional new programs. of course, other programs may have been started, but chose not to affiliate with sbida. this survey method would not discover such programs. the authors surveyed each of these five directors of new sbi programs. the near-uniqueness of starting a new sbi program since 1996 is a controlling element of the authors'esearch method. the extremely small population size made it impossible to formally test hypothesis. however, the surveys offered perspectives on the experience of establishing a small business institute without federal funding. the authors believe these perspectives, as well as the more basic pointthat one can successfully launch a sbi program without federal fundsmade this research effort worthwhile. though this research effort employs a survey, the limited population required the results to be interpreted as a case study, rather than an experimental study (yin, 1994). each respondent was an sbi director and a member of sbida, which administers the sbi program and controls the copyrights to the small business institute name. the authors asked each director to answer a series of questions regarding the development and subsequent implementation of his new sbi program. the questions were based on the personal experience gained by developing the authors'bi program. table i provides a list of the questions used in the survey instrument, and the survey responses. the questions were open91 ju urdu/ of smidl bru/ n xi su'arri/nt i'al. /3, /s(u. 2 / u(i?ivv i(ci'(iv2 cntled. ilue to the exploratory nature of this research anil in nn effort to avoid restricting the respondents'esponses. table i question alpha bravo charlie delta echo wh i'li/ i mr text application, outreach, suggestion of provide consulting decide ia star( ex-sbi director at professional exp, . entrepreneurdean /k scrvicc lo ail .ivi previous school bus. planning ship, class advisory community prrigriau? exp., outreach basis council .'(choo/'ii suuth-east upper midmassachusens florida pennsylvama locations west l)cscr(hc i) pci varmus, non-ofcascs manufacturing, ivlamifacturing, . '' manufacturing manufacturing, prunt and quasicamplered i(ms service, retml service, retail . mostly scivicc pubhc clients far. i/oiv i s fiiiuli irg donateil and budgeted paid iiecs uncertain donated iirurdled? budgeted du/ iviii /in re ia seek approval ini'ormal approval none i'orms l approval none none hy schoo/ adniia (sr rrui au? ivhar isaac(s/ m erg in g sbiestabhsh formal locating program with i.nesting funds ex revenue sharing ui'i'i conic none willing existing ante plan among before program functional unitsf i 'irector business oppravcd b) cumculum adurini srrarion? usc sbi whar icssoiis seek broad buy-in manual in generatetake yourtime were learned early rrurkeiing ot'etting up the by all con/unction student stakeholders, with kaufman enthusiasm, as ii (rile start/rig program program and concentrate on foundation's sbi is ro ram? conducting cavesprograni. consulting quahty fast tree extracurricular malerials whar lessons continuous need for close need for close do fewer cases,icarncd shlcc markcnng to supervision ol'upervision of same as above but do them progranl ivas students students, faculty, students very well started? cnmmunily svrvey findings table i presents the information gathered from each of the five programs. the un-edited survey response data is available from the authors upon request. all of the new programs except one were located in states east of the mississippi river; unsurprising given the concentration of business schools in the united states. all five schools have assisted businesses in manufacturing; four schools have assisted service industries, while three schools also assisted retail businesses. only one of the schools required formal approval from an administrative body; the remainder were instituted under informal processes. there did not appear to be a common motivation for starting a new sbi program. two of the five schools indicated their motivation was to provide students an opportunity to work closely with a real business. program funding came from a variety of sources including private donations, business prograni or departmental budgets, and client fees. this variety of funding sources is typical of existing sbi programs (sbida, 1998). interestingly, most schools did not identify 92 journal of small business strategy vol. /3, no. 2 fall/winter 2002 funding as a problem facing their programs. in fact, many of the schools suggested the programs were started without any real assurance of sources of funding. the authors asked the sbi directors to state both lessons learned while starting the program and lessons learned after the program was in place, which generated the greatest variation in answers. for alpha, the primary lesson learned while starting their sbi related to the viability of entering the market as a consulting service. based upon the director's prior sbi experience at another school, he was confident that financial issues could be addressed and students could be motivated to perform; however, the school's rural location limited the number of possible clients, requiring continuous marketing of the new sbi. for bravo, the primary lesson related to timing the initial cases: the need "to take [one's] time" when starting a new sbi and when doing cases. for charlie, the lesson related to splitting revenue between administrative units at the school. charlie's program started as a consulting outreach program. nonetheless, they chose to align themselves with sbida, although small businesses compose only a minor portion of their total consulting cases. for delta, the director believed that formal appointment of a director was critical to getting the program started: "[we] needed some fool to try to make it work, with no funding." echo's director indicated his primary concern was the difficulty fitting the sbi program into the present curriculum. the surveys reveal much less variety regarding the lessons learned after the programs had begun. directors from alpha, charlie, and delta all expressed concern over operating details, specifically close supervision of students during the consulting process. delta's director specifically noted the benefits of using the sbi manual (sbida, 1998) and the kauffman foundation's fasttrac program to guide student consulting and student analysis, respectively. as sbi programs are no longer federally funded, financial needs must be a major consideration. for some programs it may be the primary consideration. historically, many schools used the sbi as a revenue generator. for example, anecdotal evidence reveals some sbis, because they generated $ 500 per case while costing much less per case, created total revenues of thousands of dollars. the monies remaining after sbi expenses helped fund travel and other faculty expenses which otherwise were insufficiently funded through typical budgetary channels (rose & wong, 1991). highlighting the importance of federal funding, membership in sbida, the sbi program's sponsoring organization, has dropped over fifty percent since the cessation of federal funds. with the elimination of federal funding, alternatives to sba funding had to be developed. yet, despite funding challenges and a lack of previous experience, these five schools were able to start formal small business institute programs. as previously noted, each of the schools in this study indicated that their present program funding comes from a variety of sources including donations, school budgets, and client fees. these responses concerning funding are typical of the sources of funding indicated by existing sbi programs (sbida, 1998). interestingly, lack of institutional funding is not identified in the survey as an insurmountable barrier, or even a serious deterrent. three of the five schools indicate that their sbi program was undertaken without any assurance of school budgetary support. summary this research provides early evidence of the viability of starting new sbi programs or revitalizing sbi programs that were eliminated after the loss of federal funding. the information from a survey of five new sbi programs created since 1996 suggests that loss of federal funding is not an insurmountable hurdle in creating a new, formal sbi program. this based on an author's conversations with numerous sb/ directors at an sba-sponsored ttteeting ofsbi directors in south carolina in the early l990s. 93 journal of seta?? business strntegv vol. /3, nn. 2 fall/ivinter 2002 small-sample, case study finding in no way minimizes the undeniable effect of losing federal funds. many schools have discontinued sbi-like work; many programs have dropped out of sbida, but may persist as "ghost" programs; many schools anticipating joining sbida may have shelved their plans. this case study finding should be of particular interest to those schools who have delayed beginning an sbi program. this study presents evidence that at least five schools were able to begin their programs absent federal funding. is it easy? no, but not too ninny worthwhile endeavors are. starting a new sbi program represents an opportunity to introduce 'action learning'raelin, 1995) into the curriculum of business schools using a proven method that affords students an opportunity to exercise their newlylearned business theory. while sbi programs are not the only practical business education programs available to schools of business, they may be distinguished from some other options because they require interaction between a team of students and a real business owner faced with a real problem or issue that needs to be resolved. what does it take to start an sbi program'? the five directors of newly-created sbi programs indicate that marketing the program, supcrvismg student teams, and funding the program, are some, but not all of the issues that are the nxist critical for starting a new sbi program. the real key to success may simply be persistence and a genuine desire to succeed, rather than assured governmental or institutional funding. further research is needed to help us better understand the many issues associated with starting, promoting, and nurturing new sbi programs. why have only five schools started sbi programs since 1996? the sbi program developed a large following as evidenced by sbida's one-time membership of 200-plus. yet, the authors identified only five new programs according to the membership records of sbida (1998). perhaps the sponsoring agency is at fault. maybe sbida needs to do a better job 'selling'hemselves to schools and colleges of business, and convincing potential members that they can establish an sbi absent federal funding. another possibility is the existence of 'ghost'bi programs. a ghost program, for lack of another descriptor, is a former sbi program that no longer maintains membership with sbida. one author's doctoral-granting school continues to require student participation on small business consulting projects that were previously administered as part of the federally funded sbi program. in addition, according to a regional sbdc director, at least one public school in the authors'tate does the same thing. thus, it is possible that former sbi programs are continuing to operate independent of sbida, and that new small business consulting projects are starting that cannot be tracked because they lack affiliation with a sponsoring agency. this may indicate a need on the part of sbida to better publicize the benefits of formal membership, even in the absence of federal funding. further research is called for to identify these programs, remind them of the benefits of sbida membership, and spread the message that sbis can effectively continue despite losing federal funding. many management educators doubt the rigor of programs like sbi, feeling they lack the academic integrity of more traditional programs (raelin, 1995). yet the authors'tudy identifies students'xperiential learning as a primary reason for establishing new programs, and continual oversight and advisement of students as the key to implementing a new program. these results anecdotally indicate the educational validity of sbis. importantly, this study does not identify the lack of federal funding as the "make or break" issue for instituting an sbi program, followed by affiliation with sbida. perhaps sbida and the remaining sbi directors should concentrate energies into communicating their perceived educational benefits of sbi programs to others. 94 journal of small business strategy vol. /3, no. 2 fall/iv/nter 2002 references brennan, d. p. (1995a). what is the value of an sbi program: clients'erceptions. proceedings of /lie national small business consulting conference, retrieved may 14, 2000 from small business advancement national center website http: //www.sbaer.uca.edu/research/1995/sbida/95sbi051.txt brennan, d. p. (1995b). what is the value of an sbi program: students'erceptions. proceedings of/lie nationo/ small business consulting conference, retrieved may 14, 2000 from small business advancement national center website. http: //www.sbaer.uca.edu/research/1995/sbida/95sbi054.txt brennan, d. p., hoffman, l., &. vishwanathan, r. (1996). what would sbis do without federal funding? proceeth'ngs of the 20th annual sinai/ business director's associotion conference. retrieved june 3, 2000 from small business advancement national center website http: //www.sbaer.uca.edu/research/1996/sbida/96sbi067.htm brennan, d. p., hoffman, l,, & vishwanathan, r. (1997).assessing the impact of the loss of federal funding on sbi programs. proceedings of the 2/st annual small business director's association cotiference. retrieved june 3, 2000 from small business advancement national center website http: //www.sbaer.uca.edu/research/1997/sbida/97sbi059.txt elbert, d. j. & harmeson, p. a. (1999). developing sbi student competencies: the final presentation as key." proceedings of the 23rd annual small business institute direcror's association. retrieved may 14, 2000 from small business advancement national center website http: //www.sbaer.uca.edu/research/1999/sbida/99sbi034.htm hedberg, p. r. & brennan, d. p. (1996).the sbi experience from the students'erspective: implications for student learning. proceedings of the southwest small business institute annual conference. retrieved may 14, 2000 from small business advancement national center website http: //www.sbaer.uca.edu/research/1996/sbida/96sbi029. htm raelin, j. a. (1995). reformulating management education: professional education, action learning, and beyond. selections. autumn, 20—30. rose, r. e. & wong, c. (1991). use and control of sbi case funds. proceedings of the national small biisiness consulting conference. retrieved may 14, 2000 from small business advancement national center website http: //www.sbaer.uca.edu/research/1991/sbida/91sbi328.htm schindler, p. s. & stockstill, l. e. (1995). beyond client satisfaction: sbi's educational impact. proceedings of the small business institute director 's association conference. retrieved may 14, 2000 from small business advancement national center website http: //www.sbaer.uca.edu/research/1995/sbida/95sbi057.txt small business institute membership portfolio (1998). small business institute director's association. small business institute membership portfolio (1999).(trenton, nj: small business institute director's association). small business institute membership portfolio (2000). (trenton, nj: small business institute director's association). small business institute membership portfolio (2001). (trenton, nj: small business institute director's association). yin, r. k. (1994). case study research: design and methods, 2nd edition, thousand oaks, ca: sage publications. 95 journnl of smnll business stro&egv vol. /j, n&c 2 falltlvin&er 2002 kirk c. //eriot (ph.d., clcmson um'versity) is an associate professor of managen&ent at frnncis mnrion university. he is the director of their new s&nail business institute progrnm. /lis cnrrent research focuses on operations strategies in small f&nns as wel/ as the growth of entrepreneurship education in south america. hi» &vork has nppenred in the journnl of supply chnin management (for&bean&ing), the /nternational journnl of purchasing nnd materinls hlanagement. ond a&nericnn business review. nnel d. can&phell (ph.d., george mason univers&'ty) is an assistant professor of business rid&ninistn&&ion (econmnics) at north georgia college d'c state university. his current research interests inchule s&nnll business entrepreneursln'p, stnte loueries, educational f&nance, aml campaign f&nance. his work has appeared in the pennsylvanin journal of business mul econo&nics @or&i&corning), review nf austrinn economics, and the journal of real estnte econo&nics aml finance. 96 strategy about the authors transforming consultants 'recommendationsinto business improvement: a model and action agenda michael d. ames is a professor oi'management at california state university fullerton. he directs the university's small business institute. the institute, recipient of sbida's showcase award in 1994, has helped csuf students successfully complete over 750 field case projects. the classification of service providers as "contract ivorkers" rather than "employees": implications and guidelines for small businesses matthew c. sonfield is the robert f. dali distinguished professor in business at hofstra university in hempstead, new york. he received the a. b., m.b.a., and ph.d. degrees from cornell, harvard, and new york universities respectively. dr. sonfield has approximately one hundred publications to his name, with articles in such general business journals as the harvard business review and business horizons, and such small business journals as the journal of small business and the journal of small business strate entrepreneurship awareness education: an example in an elementary school dr. rebecca w. ball is assistant professor of management, northern kentucky university. she received her phd. from virginia polytechnic institute and state university. dr. ball's research interests are in small business and entrepreneurship education and strategic change and she teaches graduate and undergraduate courses in strategic management and entrepreneurship. dr. fred beasley is assistant professor of marketing, northern kentucky university. he received his ph.d. from the university of maryland. he teaches principles of marketing, marketing research, and marketing strategy, and his research interests are in the areas of consumer price promotions and marketing education. stra tegy an analysis ofsmall business hiring of seniors robin t. peterson is sunwest financial services distinguished professor at new mexico state university in las cruces. he is a graduate of the university of washington (seattle) and has published a number of articles pertaining to small business and entrepreneurship. andreas w. stratemeyer is a doctoral student at new mexico state university. he received a b.s. in advertising from the university of texas at austin and an m.b.a. from new mexico state university. partners in profits: small businesses move slowly into cause-related marketing nora ganim barnes is a chancellor professor in the department of marketing/business information systems at the university of massachusetts dartmouth. she earned a ph.d, in consumer behavior from the university of connecticut. she has previously taught at the university of connecticut and boston college. dr. bames has authored over sixty articles in business-related journals including journal of health care marketin, journal of professional e~mr it,ar b i re i r h,k i b i*,d k a lied research and public polic journal of small business mana ement, and the american business review. using a prenuptial agreement to protect the small business sandra i. perry, b.s.bradley university, 1976, j.d., southern illinois university school of law, 1979, is an associate professor teaching law and real estate in the department of business management and administration at bradley university, peoria, illinois. she has taught law at the undergraduate level for 16 years, following two years as a private practitioner. she has had articles on various law topics published in the labor law journal, illinois bar journal, the cpa journal, trial, and the journal of a lied social ps cholo sttg tegy we salute ron cook, radha chaganti and cengiz haksever authors of the distinguished empirical paper & michael ames author of the distinguished applied paper 1998 sbida conference look for their articles in this issue and the fall 1998 issue. i'mall business institute directors'ssociation stk4 tetf' editor's note sbida celebrated its twenty-filth anniversary at the usasbe/sbida joint national conference february 7-10, 2001 in orlando, florida. the featured speaker at the luncheon that recognized this milestone was dr. larry penley, dean of the college of business of arizona state university. he also was chair of aacsb —international and spoke at length about issues from the perspectives of both positions. we are leading off this issue ofjsbswith his remarks. i am sure the readership will find his comments to be both interesting and useful for communicating the perspectivesof aacsb with respect to small business, entrepreneurship and education, including sbida and the small business institute™program. the second article is very timely with respect to the comments in dean penley's remarks. the role of field-based business consulting experiences in aacsb business education: an exploratory survey and study by martha doran, don sciglimpaglia and howard toole examines field-based consulting programs such as the sbi program and coincidently relies on the input of a number of deans of schools of business. strategic implications of data gathering activities in small firms: a comparison between family and /iionfamily firms by donald gudmundson, c. burk tower and e. alan hartman was the recipient of the journal of small business strategy best applied research paper award presented at the usasbe/sbida conference. there are a number of other interesting articles contained in this issue including a book review of creating value throughskill-basedstrategyand entrepreneurialleadership by william c. schulz iii and charles w. hofer. james j. chrisman reviewed the book. the jsbswebsite is up and running and features a searchable database ofjsbsabstracts. the abstracts are searchable by keyword, author, issue or title. in addition, information regarding submission guidelines and subscription information is available on-line. we hope you enjoy this issue and hope to hear from you in the future. visit our website at stephen w. osborne, editor www. jsbs.org reproduced with permission of the copyright owner. further reproduction prohibited without permission. do family meetings really matter? their relationship to planning and ... tower, c burk;gudmundson, donald;schierstedt, susan;hartman, e alan journal of small business strategy; spring/summer 2007; 18, 1; abi/inform complete pg. 85 do family meetings really matier? their relationship to planning and performance outcomes in small family businesses c.bmktower university of wisconsin oshkosh tower@uwosh.edu donald gudmundson university of wisconsin oshkosh gudmund@uwosh.edu susan schierstedt university of wisconsin oshkosh shierss@uwosh.edu e. alan hartman university of wisconsin oshkosh hartman@uwosh.edu abstract this empirical research focused on examining the relationship between family meetings and the characteristics of those family meetings (who participated and issues discussed), planning processes (succession planning, estate planning, family mission and business mission) and performance measures (revenues and number of generations survived). small family businesses in a midwestem state were surveyed with 241 useable responses. significant differences were found in the planning processes between businesses that held family meetings and those that did not. no differences were found for the performance measures. significant relationships between family meetings and both planning processes and performance measures were found when comparing family businesses based on who participated in the family meetings just holding meetings does not matter, but inclusiveness of those meetings does matter. family meetings are " ... periodic gatherings (that) bring the family together to share goals and decisions, discuss common problems, learn about the business, and preserve family identity, values and traditions" (aronoff & ward, 1992, p.3). in the 1992 monograph entitled family meetings: how to build a stronger family and a stronger business, the authors stated that family gatherings can help build both a stronger family and a stronger business, and that the researcher believed, " ... family meetings are one of the two most 85 important steps a business owner can take to ensure the continuity of the family business (p.3)." in an earlier publication, ward ( 1987) also identified three principles that appeared to guide such companies. the three principles were a commitment to the future, the existence of a system of extensive communication, and conscientious planning. the family meeting was viewed as the key vehicle for implementing these principles. reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy since the late l 980's, numerous books and articles regarding how to manage family businesses have discussed the significance of family meetings (or their more formal form, the family council) in creating healthy, successful family businesses. educational programs on how to build family businesses virtually always mention family meetings as a key to success. in fact, family business forums and centers offer specific programs on how to establish successful family meetings. while there is logic to claiming that family meetings are a key to family business success, there has been little empirical research that demonstrates the value of family meetings or that identifies under what conditions they are valuable. only one of the three most comprehensive empirical data gathering surveys (arthur anderson & co., 1995, arthur anderson/mass mutual, 1997; mass mutual financial group/raymond institute, 2003) in the series entitled the "american family business survey" included questions regarding family meetings. that 1995 study found 32% of family businesses held formal family meetings. of those that held such meetings, 91.4% reported discussing business, 52% ownership, and 49% nonbusiness topics. those were the limited findings. outcomes related to having a family meeting, or those related to the issues discussed in family meetings, were not examined in the study. a more limited study by astrachan and korendo (1994) found 51 % of the family businesses surveyed held regularlyscheduled family meetings limited to family members in the business. further, the research found that those firms with governance practices that included strategic plans, boards of directors, and family meetings were " ... correlated with business longevity over multiple generations" (p.119), and to a lesser degree, with firm revenues. family meetings were not broken out as a 86 vol. 18, no. 1spring/summer2007 separate item in the correlations, so it is not possible to determine if any one of these practices, or some combination, are related to longevity. in a more focused study on the way family meetings impact family business, habbershon and astrachan (1997) built a model to show how family meetings develop family unity through the creation of perceived shared beliefs. these beliefs relate to goals that may be an important stimulant of collective family activity, which is focused on actions to achieve those goals. the study focused on the theoretical model and on the ability of instruments to measure perceived agreement, and not on empirical measurements of relating family meetings to outcomes. empirical studies prior to 1997 did not demonstrate a relationship between family meetings and family business success. since 1997, empirical research relating to family meetings doesn't appear to exist. despite the lack of empirical findings, advisors continue to discuss the merits of family meetings. thus, in moving family business research forward, there appears to be a significant need for empirical research focused on the relationship between family meetings and outcome measures. the results of this research can then be used to provide a firmer foundation for advocating that families engage in such meetings, and depending on how the research is structured, possibly provide advice on how to structure these meetings. method this research project is intended to help fill the family meetings research gap described above. two performance and four planning outcomes were identified for consideration in the study. the two performance outcomes were level of revenues and number of generations of the family managing the business. both were measurable and obtainable, and are generally considered to reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy be measures of success in family businesses over time. the research also included gathering information relating to who participates in the meetings and topics discussed in the meetings. recognizing the importance of planning to the successful completion of engaging in directed activities to accomplish goals (blumentritt, 2006), completed key family business planning documents were also looked at as possible positive outcomes related to family meetings. the specific planning outcomes examined are the existence of business mission statements, succession plans, estate plans, and family mission statements. in structuring the study, the focus was on the following three questions: 1. are family meetings related to specific performance and planning activities? 2. are characteristics of family meetings (i.e., who participates and issues discussed) related to performance and planning activities? 3. can family meetings be grouped in a meaningful way based on who participates in meetings and if so, do these groups differ in their performance and planning activities? the first question focuses on the fundamental issue underlying the project, which is identifying the relationship between family meetings and specific outcomes. questions 2 and 3 are intended to assist family businesses in structuring family meetings to increase their impact. the inclusion of information regarding who participates in meetings and what items are typically discussed are intended to examine possible mitigating variables. sample a database of family businesses in a 87 vol. 18, no. 1spring/summer2007 midwestern state was developed over a ten year period by combining a mailing list of businesses receiving a family business magazine with known family businesses. of the 926 businesses sent a survey, 244 returned a completed survey. respondents were asked if the business was a family business, and if not, they were dropped from the sample. only three such businesses were identified; thus reducing the sample to 241 for a response rate of 26%. the first set of questions was comprised of general characteristics of the business that could be viewed as outcome measures, including the generation currently in control of the business and revenues of the business. the second set focused on planning, with questions asking if the organization had a mission statement, if the family had a mission statement, if there was a succession plan, and if there was an estate plan. table 1 summarizes the descriptive statistics for these variables. as is shown in the table, the mean generation in control was the second, with revenues between five and twenty-four million dollars. most businesses responding had estate plans ( 66% ), and business missions ( 61 % ), but fewer businesses had succession plans (33%) or family mission statements (12%). governance of the family business was assessed by asking if it held family meetings, who participated in those meetings, and what issues were discussed. table 2 summarizes the descriptive statistics for these variables. of the family businesses, 35% held family meetings. as the table shows, 95% of those that held family meetings included family members employed in the business, and only 6% included family members under 18. the final variable is the number of topics discussed in the family meeting for each family that held formal family meetings. items most frequently discussed were business roles and responsibilities of members in the business, succession, stock ownership, and community involvement. reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy vol. 18, no. i spring/summer 2007 table 1 descriptive statistics for planning and performance variables variable definition mean std. valid n deviation performance variables generation controlling the business 1 2.15 0.907 222 revenue 2 3.50 l.759 219 plannine variables, have a written estate olan 0.66 0.474 216 have a fonnal business mission statement 0.61 0.489 222 have a written succession plan 0.33 0.472 217 have written family mission statement 0. 12 0.325 218 hold formal family meetini?:s 0.35 0.477 223 1 coded 1 = first, 2=second, etc 2 coded 1=$0-$999,999, 2=$1mil $4mil, 3=$5mil $9mil, 4=$10mil $24mil, 5=$25mil $49mil, 6=$50mil $99mil, 7=$1 oomil $199mil, 8 = $200mil or more 3 coded 1 = yes, and 0 = no table 2 descriptive statistics for family meeting variables variable definition1 mean std. deviation valid n who participates in family meetines2 family members emoloyed in business 0.95 0.223 77 adult family members not emoloyed in bus 0.53 0.502 77 in-laws 0.22 0.417 77 family members under 18 0.06 0.248 77 others 0.08 0.270 77 what is discussed at familv meetine:s business roles and resoonsibilities of family 0.72 0.454 74 succession 0.64 0.485 74 stock ownership 0.61 0.492 74 community involvement 0.54 0.502 74 code of conduct family/business relationshio 0.49 0.503 74 compensation oolicies for family members 0.46 0.502 74 voting stock control 0.35 0.481 74 which family members can be employed 0.34 0.476 74 dividend nolicy 0.32 0.471 74 qualifications of family to be managers 0.31 0.466 74 methods of family conflict management 0.24 0.432 74 other discussion tooics 0.10 0.296 73 number of discussion topics chosen 5.11 2.662 74 1 for all questions except "number of discussion topics chosen" a l =yes, and 0 =no. 2 data for following variables are only from businesses that reported holding family meetings. 88 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy data analyses the analyses were conducted in three steps. first, a multivariate analysis of variance (manova) was used to determine if just holding family meetings was related to the existence of planning (succession plan, estate plan, family mission, business mission) and/or performance outcomes (revenue and number of generations the organization has survived). second, to determine if it was possible to group family businesses in a meaningful way based on who was allowed to participate in family meetings, a cluster analysis was performed. if the clustering process resulted in identifiable groups, the final step was to determine if these groups differed on issues discussed, existence of an active planning process and performance measures. this was done by performing a second manov a. results in order to determine whether holding family meetings was related to a planning process and performance measures, two multivariate analyses of variance were conducted comparing family businesses that held family meetings with those that did not. results from the analysis using the four planning variables indicated that the overall multivariate f was significant [f(4,214) = 167.87, p < .001]. the univariate f ratios for existence of a family mission [f( 1,217) = 9.74, p < .003] and existence of a succession plan [f(l ,217)=6.07, p < .02] were significant. the other two variables had f ratios with a probability of p < .06. not surprisingly, family businesses that held formal family meetings were more likely to have a family mission statement (21 % versus 7%) and more likely to have a succession plan (44% versus 28%) than those that did not. for the other two variables, the pattern was the same, but less pronounced. results for the performance measures indicated no significant differences between family businesses that held family meetings and those that did not. 89 vol. 18, no. i spring/summer 2007 correlations were calculated between number of discussion topics and the planning and performance variables. results showed that there were no significant relationships between comprehensiveness of family meetings (number of different discussion topics in family meetings) and these variables. to determine if there were types of family meetings based on who participated in them, a cluster analysis was performed using just those organizations that held family meetings (n = 77). results of this analysis indicated a three group solution. table 3 presents a summary of the three groups that held family meetings. a manov a was performed to determine which of the family meeting participant variables differentiated among the three groups of businesses that held family meetings. the results indicated that three variables differentiated between the groups, with children participating generating a significant f ratio (f(2,74) = 5.91, p < .005). the other two differentiating variables (those not employed in the business and in-laws) did not produce an f ratio because the within-group-variance was zero. table 3 presents the percentage of businesses in the group that allowed each type of family or work relationship to participate in a family meeting. the first group is labeled inclusive (virtually everyone is at the meeting with only children and "other" having less than 500/o of the businesses allowing participation), the second group is labeled blood (blood relatives 18 years and older participated), and the third group is labeled employed/blood (only blood relatives employed in the business participated). in effect, the inclusive group is most inclusive and the employed/blood group the least inclusive. the three groups of family businesses that held family meetings were then compared based on the kinds of issues discussed. a manov a was performed using the three types of family meeting participants as the reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy vol. 18, no. 1spring/summer2007 table 3 percentage of family member type who participates in family meetings in each group inclusive tvne of familv member group emo loved 100% not emoloved 100% under 18 24% in-laws 100% other 18% the independent variable and issues discussed at these meetings as the dependent variable. the multivariate f ratio was not significant. the only univariate ratio that was significant was for stock ownership (f(2, 70)=3.97, p < .03). of the family businesses in the inclusive group 87% discussed stock ownership in comparison to 61 % of those in the blood group and 47% of those in the employed/blood group. two other manov as were conducted using the three groups of family meeting types, plus the group that held no family meetings as the independent variable and planning activities as dependent variables in blood employed/blood group group 87% 97% 100% 00% 00% 03% 00% 00% 04% 06% one analysis and performance outcomes as dependent variables in the other. the multivariate f ratio for planning was significant (f(l2,609)=2.95, p < .001) as were the univariate effects for three of the four planning variables [estate plan (f(3,204) = 3.74, p < .02), family mission (f(3,204) = 3.66, p < .02) and business mission (f(3,204) = 3.28, p < .03)]. table 4 shows that the inclusive group had the lowest percentage (i.e., 50%) of family businesses with an estate plan. this group, in contrast, had the highest percentage with a business mission, and the blood group had the highest percentage with a family mission statement. table 4 prevalence of planning process elements, revenue and family generation leading the business by family meeting group group planning process revenue1 and elements generations2 no family meetings 60% estate plan 2.21 generation n=l51 7% family mission 3.39 revenue 55% business mission inclusive 50% estate plan 2.47 generation n=l7 19% family mission 4.88 revenue 94% business mission blood 86% estate plan 1.76 generation n=24 27% family mission 3.19 revenue 68% business mission employed/blood 79% estate plan 1.99 generation n=36 18% family mission 3.51 revenue 59% business mission 1 coded 1 = first, 2=second, etc 2 coded 1=$0-$999,999, 2=$1mil $4mil, 3=$5mil $9mil, 4=$10mil $24mil, 5=$25mil $49mil, 6=$50mil $99mil, 7=$1 oomil $ l 99mil, 8 = $200mil or more reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy the manov a on performance measures resulted in a significant multivariate f ratio (6, 428) = 3.004, p < .01) with a univariate f ratio for revenue [f(3,214) = 4.05, p < .01] being significant, but for generation in control not quite reaching the .05 level [f(3,214) = 2.60, p < .06]. given the exploratory nature of this study, the results for generation in control are included with the caveat that they did not reach the preset significance level. overall, the results indicated that inclusive companies were in later generations of ownership (m=2.47) and had more revenue with the no meeting companies being in the second latest generation, but third in revenue. while there were no significant effects when just comparing family businesses that had family meetings with those that did not, there were significant effects when comparing family businesses based on who participated in family meetings. family meetings matter, but how they matter depends on who is · allowed to participate in the meetings. discussion as the results of this study show, the analysis was unable to find significant differences for outcome variables between family businesses that utilized family meetings and those that did not utilize family meetings. in addition, no relationship was found between the comprehensiveness of the discussions in the family meetings and any of the outcome variables in the study. significant differences were found in the planning processes between family businesses that hold family meetings and those that do not. however, these differences were not significantly related to the performance measures used in the study. this seems to run counter to the prevailing thought in family business literature as presented in the introduction. previous research (astrachan & kolenko, 1995) found a relationship between a combination of governance practices including family meetings and generations and revenues. while not conclusive, this suggests that if a relationship 91 vol. 18, no. 1spring/summer2007 exists, it is a more complex relationship, than has been previously examined. the complexity of the relationship became more evident when we examined family meetings on the basis of who participates in the meetings. when grouping the family firms on the basis of who participates in the family meetings, we found significant relationships between the different groups and the firm performance measures. overall, the results indicate that the inclusive group companies, those that include the largest percentage of family members, regardless of age, in-laws and others, have survived for more generations and generate the most revenue. however, this group of firms had the lowest percentage of firms reporting a formal estate plan. possibly because distribution of stock ownership is discussed most frequently in this group, it has reduced the need for estate plans. the group of family businesses excluding family members under 18 years of age and in-laws had the lowest levels of revenues and had been in existence for the fewest number of generations. these values were even lower than the values for family businesses without family meetings. however, this group does have the highest percentage of firms with estate plans and a family mission statement. possibly they focus more on business process than on the performance measures or maybe it is a function of the age of the business. this is interesting because it suggests that just having family meetings doesn't necessarily lead to a higher level of performance. to add greater value to the family businesses, it appears that family firms need to focus on the composition of family meetings, not just on having them. the data seems to tell us that the more inclusive the family meeting membership is, the greater the positive effect on the firm; what is discussed is not as important as who participates in the process. this makes sense if we think about how the inclusion of all reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy family perspectives and interests has the potential to have a positive effect on the quality of decisions made in the firm. the improved quality and quantity of communication, the inclusion of more perspectives and skill-sets in discussions, and the increased probability of having all of the key stakeholders in the business agreeing on the goals and direction for the business are all potential positive outcomes of inclusive family meetings. when all of these elements are combined, they lead to better decisions, which can lead to better performance of the firm. in addition, if younger family members are included, it may encourage them to become a part of the business when they grow up. this could be an important factor in assuring the continuity of the family business. the results also imply that just creating a mission statement and having an estate plan do not guarantee better performance for the family business. the group with the highest percentage of firms with these plans performed at the lowest level. as suggested in the planning literature, these plans must be communicated and implemented to have a positive impact on the business. this is more likely to occur in businesses where all family members are included in the family meetings. the study is limited in its generalizability; specifically, the sample comes from one state in the midwest. future research could be conducted with samples from other geographic regions to improve the generalizability of the research. another limitation involves the measures of performance used. in the future, using other measures of performance would improve the applicability of the findings. however, we do recognize the difficultly in getting any financial data from non-publicly traded firms. future research should continue to examine the importance of family meetings to the family business. research should include other measures of financial performance if possible. it should also look at the value of 92 vol. 18, no. 1spring/summer2007 the family meetings to family itself. perhaps these meetings assist the family in providing family management and leadership for successive generations in the business, thereby increasing the probability of successful transition from generation to generation. this would provide a valuable contribution to our understanding of family businesses. references aronoff, c. & ward, j. (1992). family meetings: how to build a stronger family and a stronger business. family business leadership series, no. 2. marietta, georgia. arthur andersen & co. (1995). american family business survey 1995. st charles, il. arthur andersen center for family business. arthur andersen/mass mutual (1997). arthur andersen/mass mutual american family business survey '97. arthur andersen center for family business and mass mutual: the blue chip company. astrachan j. & kolenko, t. (1994). a neglected factor explaining family business success: human resource practices. family business review, 7 (3), 251-262. blumentritt, t. (2006). the relationship between boards and planning in family businesses. family business review, 19 (1), 65-73. habbershon, t. & astrachan, j. (1997). perceptions are reality: how family business meetings lead to collective action. family business review, jo (1), 37-51. mass mutual financial group/raymond institute (2003). american family business survey, massachusetts mutual life insurance company and robin raymond family business institute. ward, j (1987). keeping the family business healthy. jossey-bass. san francisco. reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy c. burk tower is professor of management and entrepreneurship at the university of wisconsin oshkosh. his current research interests include small business management, entrepreneurship, and family business. donald gudmundson is a senior associate dean of the college of business at the university of wisconsin oshkosh. his current research interests include topics related to family business, small business, strategic management, and business ethics. e. alan hartman is dean of the college of business at the university of wisconsin oshkosh. his current research interests include family business, entrepreneurship, small business management, and performance management. susan schierstedt is director of the wisconsin family business forum at the university of wisconsin oshkosh. her current research interests include family business and management information systems. vol. 18, no. i spring/summer 2007 93 sr'm"ix"i i'est paper axvard recipien'f 2002 natiooal entrepreneurship and small business educators conference desktop mapping: a tool for improving small business imarketing analysis and customer prospecting ronald rubin university of central florida ronald. rabin@bus. ucf edu abstract moilerately pricetl persontil computer based spatinl analysis systems consisting of linked ilatabasc, sprenilsheet, and ilesktiip ntappinglgis pri&grams can now niore effectively turn consumer and census data into useful inforniation. this paper describes tlie operation of one such sysiem —microsofi map —ii feature einbeddedin microsoft's excel spreadshci.t. excel's ilntu-nuipping capabilities let yoii plot .spreadsheets on thematic inaps, making it eosier to see relationships in your data. this paper implements a systematic approacli for applying cnnsuiner data anil spatial marketing techniques to a small business, a photo studio, for trade nreo growth and custoiner inining. spotting points and densities of sales for tlie sampled customers provide a fouiidatioii for unilerstanding the spatial extent of the customer base. for tlie small business, the mapping exercise identified purchasing patterns for their services, shrnving those orerci were major custoiiiers reside. using those areas identified for their seivices, the conipany can begin to plan their strategy to tap into those markets and hopefully increase their tales. it is important to note that excel's mapping abilities provide a powerful nml fertile new ground for data analysis experimentation. small business manager'se of .spreadsheet analysis, combined with the enhanced presentation mapping feature, enable rhe smnll busiiiessperson to conduct analyses with even greater derail. introduction small businesses owners have traditionally thought through the years that, as long as they had the right location, the customers would come to them. such a limited business plan may indeed have been sufficient for success in the "old" days. but in today's highly complex and competitive environment, waiting for the customer is not always enough. increasingly, small businesses must find new ways to reach their customers, realizing that doing so can increase customer share and expand the market trade area. in today's real world of tight budgets and high competition, it is more important than ever for small businesses to maximize their resources. it is important to identify and focus on high priority prospects, analyze sales activities, and plot key demographic data, which will provide a foundation for establishing effective sales efforts. 16 jourttal of small business strategy vol. /3, no. 2 fall/winter 2002 this paper will present an emerging application of a geographic information system (gis) to help meet this small business challenges-and others. desktop mapping solutions can take the guesswork out of data analysis by mapping and analyzing the geographical distribution of data. it lias the ability to display queries geographically in such a way as to present relationships and trends in an accessible and attractive format that are beyond the scope of traditional databases. the paper utilizes a case study approach for a small photography studio to illustrate how effective customer analysis and prospecting can be undertaken using a pc based, easy to use gis system embedded within microsoft excel. why desktop mapping? desktop mapping offers an innovative approach to data analysis and decision making for the small business manager. desktop mapping uses the geographic component in most business data to visually illustrate relationships between various sources of information. according to maplnfo, one of the leading vendors of desktop software, nearly 90 percent of all business communications involves location data that can be mapped (phelps, 1997). by enabling users to analyze and visually compare data such as customer locations, population trends, and geographic boundaries, desktop mapping brings patterns and trends to life that might otherwise go unnoticed in data. geocoding the heart of a gis consists of the "engines" that manage spatial databases. geographic information systems allow new large-scale databases to be geocoded. the ability to enhance these databases with additional information is particularly important. geocoding is the process of assigning latitude and longitude coordinates to data (harder, 1997). most business data contains a geographic component, such as an address or a zip code, and a geocoder simply codifies that component to allow spatial analysis or visual display of the information on a map. for example, consider a list of customers whose name and addresses are known. a gis can geo-code those customers onto a computer map of that city. a small business can then locate each customer with a dot on the map. if the amount of money each customer spends were also known, customers would be represented by dots sized according to that amount. in short, gis can sort and present any part of a geocoded database. the value of the analysis can be increased by adding information such as average household income in various areas of the city. at the core: a database in its present form, gis technology integrates spatial modeling, database management, and computer graphics in a hardware/software system for managing and manipulating geographic data (berry, 1987; koshkariov,tikunov. & trofimov, 1989; smith, menon, starr, & estes, 1987). typical gis software, therefore, will provide the mechanisms to capture, encode, edit, analyze, and display spatial data organized as map layers in a gis database (bun'ough, 1986). in effect, these functions are characterized as the four major components of a gis: data input, data analysis, data management, and data output (aronoff, 1989; star & estes, 1990).figure i diagrams the relationship between the software and data in this setup. while, databases suit the storage and management of information, busy small business managers spend a great deal of time trying to make sense out of the rows and columns of reports and spreadsheets. because this process lacks precision and a visual component, critical relationships between companies and their customers or competition go unnoticed or unexplored (maplnfo, 1996). 17 ./vuruu/ trfamii// buxiuuix snrttct,v pti/. /.i, atv. 2 fu///ll'inter 2002 data files raw data pl'occsscd dais graphic output excel sprcadshcct program data m oil ital input piiutcr data a aalysis excel mapping module figure i: gis coupled program therefore, small businesses that implement desktop niapping solutions can benefit. in the process, they will make better decisions, better serve their customers, and find new and better market opportunities. mapping software overview until recently, gis software tended to be expensive ($ 1,000 and up). many of these packages required geographic and gis expertise and were not particularly user friendly. that has changed. now low-priced ($ 150-$400) gis packages are available from a variety of specialty software developers (rubin k. west, 1999, p.6). among these entry-level gis packages are bttxitterx/vltip pro, from environmental systems research institute (esri); maplinx's maplinx fxprcss ond profess/carr/; microsoa's mappoint 2002; and maplnfo's desktop. in addition to the mapping sol'tware that usually includes databases of boundary maps, offthc-shelf gis packages oaen supply some demographic data. they may include population density by location, population by age, and other similar public census information. most also offer additional map and demographic databases as options and accept third party demographic databases. many can import proprietary user data, such as customer and prospect information (rubin & west, 1999, pp. 6-7). some companies, such as geographic data technology and claritas, specialize in developing highly accurate and refined geographic databases such as, zip code boundaries, current and comprehensive nationwide street and address coverage for spatial analysis of business data, and highway connectivity for improved routing performance. these databases are subsequently licensed to gis software application developers. they also sell these databases directly to end users to incorporate into gis application software that they use. among the applications that include gis features are the windows 95/97/2000 version of microsoft's excel spreadsheet. microsoft map is a feature in excel that lets the user create maps from database information in a spreadsheet as easily as you can produce bar and pie 18 jourmil of small business s(raregt vol. /3, ivo. 2 fafl/ivinter 2002 charts from the same data. microsoft excel's mapping feature is a scaled down version of maplnfo, one of today's best-known geographic information systems applications. although microsofi map lacks several of maplnfo's advanced features, its strength lies in its ease of use and it does do an admirable job for basic mapping. the easiest software to use is the software you already know. since many small business managers'lready know how to use microsoft excel, they already know almost everything they need to know to make a map with microsofi map. the best feature of microsofi map is its easy-to-use dialog boxes that make defining chart and thematic maps easy. whenever you need a map, microsoft map is ready to use immediately. microsofi map is inside your spreadsheet, so the ability to map your data is there when you need it. you simply choose a microsoft excel spreadsheet or microsoft access table, and microsoft map automatically creates a map for you. then you customize it to suit your needs just by dragging and dropping various map features. the new capabilities allow a fairly large number of features to be customized to meet managers'eeds. as examples, it is possible to color code states by sales to determine whether sales regions are meeting their goals. concurrently, it is also possible to plot demographic data such as median income or population on a map to help form marketing goals. these applications move spreadsheet users forward from using the standard bar and pie charts. the areas of spreadsheet presentation and, more importantly, of performance tracking of geographically based results are becoming revolutionized. any small business trying to survive in today's business climate seeks to operate as effectively as possible in a highly competitive environment. analyzing pertinent market data and then displaying it in an easy-to-comprehend map can provide a competitive edge. market analysis and representation with visual maps are a giant leap in the evolution of spreadsheet technology. a small business case study a local small photography studio presented us with a unique set of problems. the studio has been in business for two years. it began as a residential fine portrait photographer's studio. in may of 2000, it relocated to a professional office suite in a shopping plaza. the owners believe they have three main competitive advantages. first, they have a mentor in the form of a very successful photographer. this mentor has guided the business into an exceptionally well organized, proven business model. successful strategic alliances represent the second competitive advantage. until recently these alliances have been mainly with ob/gyn physicians. the alliance entailed the physicians giving their patients gift certificates for a baby photo sitting. the parents would receive a free i i x 14 photograph from that session with no other obligation to the studio. this alliance gave the physicians an opportunity to give a gift to their patients, and at no cost to them. at the same time it introduced the photography studio to new parents. the owners expanded the scope of this program to include other partners such as banks and high-end auto dealers. the owners indicated they have the ability to quickly establish a bond with their clients. they demonstrate a genuine concern for the clients and communicate a desire to please. they believe this combined with their uncommon attention to detail sets them apart from the competition and thus represents a third competitive advantage. the owners define their target market in very broad terms. basically people with incomes greater than $50,000, with at least one child of any age are included. they also believe their potential clients probably live in more affluent areas, and range in age from the mid 20's to 19 jo fll'llll/ of slluli/ /i iii iiil'xe sllrllc're''o/. / a /i/o. 2 fuii/iv/n(er 2//02 thc mill 50's. the business has an aci'2000 database, which gave us an opportunity to analyze the collected data. the photo studio uses a point-of-sale (pos) computer system that captures customer information and maintains it in their database. thc database, evith over eight hundred data records, which includes customer names, addresses, and purchase history, provided an abundance of data i'or the mapping project. the photo studio's owners believe they understand the basic demographics of a photography prospect, but they want to more accurately define its best customers and identify potential c ii si 0 111e'.i s. mapping expeditioen data used to understand the best customers one type of data that can help companies hetter understand their customers are actual transaction or response information. such data are preferable to survey information because it infomis a company what people are doing (purchasing), rather than what they say they are doing. it rcflects actual customer history, which is a truer reflection of a company's distribution, niarketing, sales, brand iinage, et cetera. the photography studio study is a good example of the effective application of desktop mapping technology to a small business. customer trade area in recent years, much effort has been put into creating detailed spatial databases. for this purpose, zip code maps are becoming more popular. raper et al. (1992, pp. 26-7) name a number of advantages of using postal code areas as an entity for research. most important advantages are that the system: covers a whole country; is mamtained by one organization; is linked to a mailing address; is linked to the 'perceived structure of geography', such as buildings and streets; provides a fixed hierarchy of areas; is easy to handle by computer (in a g is). today, u.s. five-digit zip codes are widely used in business and marketing applications (jones eye pearce, 1999). figure 2 shows a detailed map of the study area broken into zip code bounds ries. these zip code areas will be referred to later in identifying the appropriate spatial categories developed from the maps. a complete map file of these zip code boundaries is included in an add-in used in this project, first map, created by wessex (http: //www.wessex.corn), for use with microsoft excel's map feature. this add-in gives you the opportunity to further your understanding of the map's functionality by allowing you to examine your data at a more detailed level. the add-in, if needed, also includes county and census track boundaries and census int'ormation, such as, age, gender, race, household income, employment, and industry. customer spotting the first step in analyzing the data was to display all customers by zip code. this was accomplished through a customer spotting routine. the process took the geocoded customers and applied the latitude and longitude coordinates to display them as points in each zip code area. figure 3 shows the distribution of sampled customers. the map clearly shows that the photo studio's customers are located in several key zip code areas, which make up their primary trade area. 20 journnl nf srnnil business srrntegy vol. /3, no. 2 fnllltyt'nrer 2002 fi ure 2: view of trade area 8 zi code 32726 32713 3277 1 32746 32712 32776'32 32766)-*~nh32 70 32732763 714 32763 327663273'i 327 3 1 i 32 3 34711 32619 32 trade area revealed trade area analysis provides a means of determining the performance of a store in relation to the geographical area in which it operates (davies & rogers, 1984). the resulting customerspotting map is used as a base map for trade area analysis (kohsaka, 1992). customer spotting facilitates the delineation of the primary trade area and the subsequent evaluation of penetration rates within it (jones & simmions, 1990). the addition of zip code boundaries to the map was of particular interest to the owners of the photo studio because it revealed that 45 percent of the sampled customers came from one of twelve zip codes (32707, 32709, 32714, 32746, 32765, 32792, 32708, 32817, 32822, 32825, 32828, and 34761) —a trade area considerably smaller than had been previously assumed. until this time, the photo studio had been concentrating its promotional efforts on a much wider area. the owners will now consider restricting promotional efforts to several of the twelve zip code areas delineated by the mapping analysis. customer revenue the next step was to determine the revenue generated by the clients by their zip code. figure 4 shows the revenue categories generated by the gis map. 21 jnnrnnl nf bnn1b bnsiness sno teg& heal. /.i, 1vn. 2 fob/iivnter 2vv2 i fi ure 3: customer s ttin b zi code r co(rk 0) c lien(6 r ~ 10ol 2 ~fi ure4: total revenue 8 zip code "i i 2 ãi 10,400 to 11,600 (\) 8 9,100 lo 10.48 (1) ) ..:,.!s...'3 j 55 6,500 lo 7.603 (3) & 5,200lo 6.503 (2) 3,900 lo 5,203 (10) ) ' ng / 0 1,300(o 2,5o3 p) 0 to 1",3(ru (40)t', ' 22 journal of smnll bnsiness strategy val. 13, no. 2 fall/)vi nter 2002 once again, higher revenue figures were generated in several key zip code areas (32708, 32746 32752. 32765, 32779, 32792, and 32803). by viewing the geographic information of customers (from the spotting map), along with the variable total revenue, the owners of the photo studio can begin to make decisions on where their promotional efforts can be most efficiently utilized to elicit the best response (32765 and 32793 zip codes). the art of prospecting for customers the photography studio's goal is to enlarge its customer base to enhance profits for their business. arthur hughes (2000), author of strategic database marketing, writes about "...finding prospects that match the profile ol'profitable customers, resulting in expanding the customer base in a cost-effective way," here is a brief look at how the photo studio can expand their customer base by following hughes'ogic. marketing consultants generally infer that individuals who earn higher incomes have higher spending habits. more economic resources co-occur with higher levels of discretionary spending. therefore, the first step is to flnd an income profile for the appropriate zip code areas representing the photo studio's trade area. ids on-the-web, using data provided by caci (caci, 2000) offers free zip code reports that present demographic data for a particular zip code of interest. figure 5 shows the median household income level for each zip code within the photo studio's trade area. fi ure 5: median household income 8 zi codes d mod)an househattt meoma 5 72(t)0 lo 61,700 (i) s62 stu to 72,000 (t) o 18 szem lo 62,000 (6) 13 ozsoa to 62,660 (11) i d aatm to oz000 (it) an initial analysis of the map indicates that eight zip code areas have a median household income level greater than $ 50,000 (32708, 32746, 32750, 32765, 32779, 32819, 32836 and 32837) which was the photo studio's original target market income level further analysis reveals that four areas (32708, 32746, 32765 and 32779) that had the greatest sales success (from figure 4) appear on the new map. that leaves four remaining zip code areas of high household incomes that may be prospective clients (32750, 32819, 32836 and 32837). now that we know about the near concentration of affluent households, the photo studio owners are 23 t ./n urn n i nf sic ceil/ liu si ness stri it c gt i't. /3, no. 2 lrallllyinter 2002 now able to quantit'y their success potential in the necv markets, estimate revenue potential, and more cfticiently reach the new prospective customers who arr. most likely to respond and purchase photo services. si/mmary ani) conclusions demographic data has long been available to help small businesses understand their markets. hciwever, geographic data is the last missing piece in the information chain that can lead to an improvecl understamling of a company's customers, sales, and productivity. it can contribute signiticantly to increased revenues, lower costs, and higher profits. to date, the use of geographic infomiation systems in small businesses have only scratched the surface of possible applications. the evolution of personal computing liardware and software have created tlw potential for demographic data analysis to be a much more effective tool for spatial analysis. spreadsheets, once the domain of number crunchers, have become a useful tool for perl'orming a variety of tasks, including data mapping capabilities. given today' competitive environment, thc growth of niche markets, and the emergence of online marketing, desktop mapping has become an indispensable information management ally because it gives rise to operating efficiencies, competitive advantage, and proactive decisionniaking in all applications areas of sales and marketing. as more challenges are placed on the technology to analyze markets, the developers of gis will generate new capabilities. the iesult will be that small businesses like the photo studio will be able to make more informed decisions about opportunities. they will move from a mass-marketing approach to a paradigm that emphasizes businesses built upon the quality of customers, rather than quantity. references aronoff, s. (1989). geographic information systeinsc 4 manngeinent perspective. ottawa, canada wdl publications, 294. berry, j. (1987). computer-assisted map analysis: potential and pitfalls. photogrammetric engt'nearing aiul reinote sans/rig, 52(10), 1405-1410. burrough, p. a. (1996). principles of geographic inforination systems for lond resoiirces assessment. clarendon: oxford. caci marketing systems: http: //www.demographic.caci.corn claritas: http: //www.claritas.corn davies, r.l. & rogers, d. s. (1984). store location and store assessment researcli. chichester: wiley. esri: http;//www.esri.corn first map (1998).wessex, lebanon, new hampshire. http: //www.wessex.corn harder, c. (1997). g/s inetms business. redlands, california: environmental systems rcscarch institute. hughes, arthur (2000). strategic database marketing: the innster plan for starting and inanngl ng a profiiable, customer-based marketing program. 2nd edition, mcgraw-hill professional publishing, new york. 400 pp. ids (information decision system): http: //www.infods.corn jones, ken and michael pearce (1999). the geography of mnrketsi spatial analysis for retallerin lvey business journal, 63(3),pp.66-70. jones, k. & simmons, j. (1990). tice remi/ eiivironment. london: routledge, pp.284-376. kohsaka, h. (1992). three-dimensional representation and estimation of retail store demand by bicubic splines. journal ofretailing, 68(2), 221-37. koshkariov, a.v., tikunov, v.s., & trofimov a.m. (1989). the current state and the main trends in the development of geographical information systems in the ussr. lnteivintional jouriuil of geographical systems, 5(4), 257-272. 24 journal of small business strategy vo/. /3, no. 2 fa/ll/yinter 2002 maplnfo (1996). des/top mapping solutions for sales arul rnarkeu'ng: a maplnfo white paper. troy, new york: maplnfo. p. 4. maplnfo: http: //www.mapinfo.corn maplinx: http: //www.maplinx.corn microsoft: http: //www.microsoft.corn phelps, alan (1997). a map to business success: plotting information right on the desktop. smart computing. http: //www.smartcomputing.corn raper, j.r, rhind, d. w. & shephard, j. w. (1992). postcodes: a new geography. harlow, u.k: longman group. rubin, r. &, west, l. (1999). putting your business on the map: geographic information systems for small business. journal of small business straregy, /0 (2), 1-17. smith, t.r., menon, s., starr, j., & estes, j. (1987). requirements and principles for the implementation and construction of large-scale geographic information systems. internntional journal of geographical information systems, l(1), 13-31. star, j. & estes, j. (1990). geographic infomnation system: an introducrion. englewoodcliffs, new jersey: prentice-hall, 303. ronald s. rubin is prrifessor of marketing and director of the small business institute ut the university of central florida. dr. rubin's background includes a ph.d. in business admiiiistration wit/i a specialty in marketing from the university of massachusetts. he iras presented papers at academic and professional meetings and has contributed articles in vnrious acatlemicjournals on such subjects as: sniall business nianagement, spreadsheet mialysis, tnarketing resenrch, expen sysrems, data analysis, simulations, geographical information sysrems and educational methodology. he is the co-author of marketing research, t" edition, experiential exercises in marketing research, and authored the rubin and luck data analysis disk and pc marketer: computer applications using lotus /-2-3, nil published by prentice-hall. heis the co-author of strategy and competition, a marketing sitiiularion publisher/ by allyn & bacon. dr. rubin is a fellow and a homer l. saunders mentor, both of the smoll business institute directors 'ssociation. 25 sii4''t'e'8'y small business brief ethical perspectives in home-based business stuart dawson victoria university stuart.dawsonfa optusnet.att john breen victoria university john breen(u)'v u. edu. au abstract this paper reports the findings ofan inauguralinvestigationinto the ethical outlook ofhomebased business operators in rt ttstralia. rttthough generally overlooked in acadeniic research, liame-based businesses are internaiionally recognizable and economically significant. their operators r.sercisr a high levi'l i&f control over the values that they enact. the study suggests that ethical i onsiderations are importani to r( ustralian homebased business operators. while no one ethical perspective was donunant, non-religious beliejs and principles were found to be tlic niost iniponant deierniinant vf their ethical values. some variation was discovered in vpeiutors'uitudes based on their age, sex, and whether or not they were employers. introduction the importance ol ethical behavior in business operation has been emphasized in recent work (de george, 1999). but while there has been a growth in the study of ethical issues in the general business environment, there has been relatively little attention paid to these questions in the small business sector (quinn. 1997; spence, 1999). an extensive literature search idcntilied only a small number of studies that addressed ethical issues in small business, and no investigations into ethical considerations in home-based business. it was considered important to initiate the study of ethics in this area because home-based business constitutes a significant part of the small business sector. it is economically significant, strongly entrepreneurial, and its operators exercise a high level of control over the values that their businesses enact. home-based businesses may be de(mad as businesses conducted from or at home, whether as main or second jobs (peacock, 1999; foster & orser 1993). this definition is similar to that used by the australian bureau of statistics since 1997, and includes both people who work only a limited number of hours and moonlighters working a second job. these two latter categories of business operator had been excluded from previous otticial small business 70 journal of smrill busmess srraregt vol. /2, iuo. i spring/summer 2001 surveys (australian bureau of statistics 1998). employment size is not a factor in defining home-based business —for example, a secretarial service or a master plumber could work from a home base and employ any number of employees or subcontractors in turn. home-based businesses are an important though generally overlooked part of the economy. they exist in approximately 12 percent of australian households, a figure comparable to the us and canada (peacock, 1999), and comprise 58 percent of all australian non-agricultural small businesses (australian bureau of statistics, 1998). overall, small business produces approximately one third of gross domestic product and accounts for just over half of total private sector non-agricultural employment in australia (department of employment, workplace relations and small business, 1999). while home-based businesses represent a diverse range of activity, the property, financial and business services areas predominate (40%), followed by construction (15%), wholesale and retail trade (15%), and manufacturing (13%) (australian bureau of statistics, 1998). they are highly entrepreneurial and often function as incubators for new businesses which may or may not expand from a home base into commercial premises (peacock 1999). further, home-based business operators exercise a high level of personal control over the operation of their businesses. as vyakarnain et al. (1997) observed with respect to small business generally, personal ethics and business ethics are likely to be closely aligned in this situation. the business ethics literature identifies four dominant ethical perspectives idealist, utilitarian, deontological, and virtue ethics. idealism involves following a set of religious or spiritual beliefs, utilitarianism is concerned to obtain the greatest good for the greatest number of people from any action, deontology concerns the following of rules, and virtue ethics is concerned with the development of one's innate potential and character (de george, 1999). quinn (1997) has argued that the most influential factor determining an actor's behavior when faced with an ethically sensitive business issue will be their personal ethics. in order to understand why an individual resolves an issue in a particular way, however, one must determine the predominant ethical perspective that guides his or her thought. the objective of the present study was to examine the relative importance of different ethical values in running a business, and to explore home-based business owners'iews about key small business issues from an ethical standpoint. although a recent national inquiry by the micro business consultative group (mbcg) addresses perceptions of fair trading by australian small businesses (mbcg, 1998), wider ethical questions were not examined. this study represents an initial exploration of the ethical outlook of home-based business operators. methodology the study involved a survey conducted with the active support of a micro and home based business networking organization. a total of 500 questionnaires were distributed to victorian business operators via this database. a reply-paid envelope was included, and the project was given editorial support in the organization's newsletter. a total of 103 useable surveys were returned. of these responses, one was rejected as the person was not currently operating a business, and a further 21 were excluded as they indicated that their business was not home-based. this occurred because the range of businesses on the network mailing list was wider than strictly home-based business. a final sample of 81 responses resulted, a response rate of 16.2 percent. the survey instrument was based upon previous work in business ethics research, in particular the work of baumhan (1961), grtinbaum (1997), and quinn (1997), and focused on owner 71 journal ofsmall business strategy vol. /2, no. i spring/summer 200/ attitudes, not organizational mechanisms. as spence (1999) has observed, institutionalized control mechanisms are uncommon in small firms and so are not likely to provide a useful indicator of ethical values in this sector. the study therefore sought to explore the underlying values of home-based business operators as the best starting point for further work on how attitudes might affect behavior. previous work has not examined the area of underpinning values, but has mostly considered the responses of small business owners to sets of scenarios (e.g. longnecker, mckinney, e; moore 1989, 1995, 1998; humphreys et al., 1993; homsby et al., 1994), or has focused more on social responsibility (wilson, 1980; brown gt king, 1982). thc questionnaire comprised two sets of questions. the first aimed to determine whether there is any recognizably dominant set of values that apply within the australian home-based business sector. it asked respondents to indicate the importance of nine factors in influencing the way they ran their business using a five-point scale where i represented unimportant and 5 represented highly imponant. the items were developed from work by grunbaum (1997), and reflect the principal streams of thought in the business ethics literature.'s humphreys et al. (1993) observed, it is one thing to know the degree to which small business owners believe that an action is ethical, and another to understand why they hold these beliefs. these questions represent an attempt to capture the rationale behind the beliefs of a particular sefpnent of australian business people. the second set of questions sought to ascertain home-based business operators'iews on a range of issues that have an ethical focus and that have been identified as significant in the small business and ethics literature. it asked respondents to rate six statements using a likert scale from i (strongly disagree) to 5 (strongly agree), where 3 was neutral. the phrasing of some of the questions was modified afler pilot testing. the questionnaire concluded with the collection of demographic data that would enable the sample to be compared with national data. this comparison was regarded as essential to the validation of the study. as orser (1991) cautioned, any relatively small sample risks exaggerating the profile of one or other characteristics of home-based firms. it was therefore necessary to determine the extent to which our sample could be regarded as typical of australian home-based business operators, or in what respects it was atypical. the comparison between the demographic characteristics ot'he sample and national australian small business data is shown in table l. there has been relatively little data published on home-based business in australia, and the national picture has been developed from a combination of sources. the majority of the data is from the australian bureau of statistics small business in australia (abs 1998). small business statistics provide a reasonable approximation to home-based business because homebascd businesses comprise almost 58 percent of all private non-agricultural small business and the general characteristics of australian small businesses are nationally consistent (australian bureau of statistics 1998). the sex of home-based business operators was obtained from data published by the australian bureau of statistics and oaice of the status of women (1997), and data as to length ofbusiness ownership was obtained from an analysis by peacock (1999). the sample approximated national average small business statistics in respect of sex, age, and whether or not the business had employees. it was atypical in respect of education, business ownership, and length of business operation. in summary, it consisted primarily of homebased business operators over 30 years of age (93%), who held a degree or diploma (65%), and who had been in business for less than five years (67%). there were 39 male and 41 i'emale respondents, plus one respondent who did not indicate his or her sex. more respondents were involved in a business that comprised only the owner/s (56%) than in a 'hree of the survey items are indicative of idealism, two reflect a deontological orientation, two are utilitarian, and two are virtue-based. for the items see table 2. 72 journal of small business strategy val. 72, na. l spring/summer 200/ business which employed staff (44%). the principal activity of half of the sample (51%) was providing services to other businesses. table 1: comparative demographic data demographic national data sample sex male 5 30/ 49% female 47% 51% age under 30 11% 7% 30 —50 64% 62% over 50 7 5 0/ 31% employing or not employing 36% 44% non-employing 64% 56% education level year i i or less 4% 6% year 12 33% 14% vocational certificate 38% 13% degree/diploma "3% 67% ownership sole 41% 64% co-owner 59% 36% length of operation less than 1 year 15% 14% 1 —5 years 35% 53% 5 —10 years 25% 19% more than 10 years 25% 15% results the presence of dominant ethical factors was determined by comparing means of the items that are representative of the different ethical perspectives. this comparison is illustrated in table 2. the survey item that captured personal non-religious or spiritual beliefs and principles, which is reflective of idealism, appeared as the most dominant factor, having the highest mean (m= 4.67). three quarters of the respondents gave this item the maximum rating of five. the second and third highest rated factors were the consequences of the respondents'ctions for his or her own business (m = 4.63), and the consequences of his or her business actions for others (m = 4.50). together these constitute the utilitarian perspective. the least dominant factor was respondents'eligious or spiritual beliefs (m = 2.88), which is also reflective of idealism. one third of the respondents deemed this to be quite unimportant to the running of their businesses, rating it with a 1 on the five-point scale. 73 .a&rrrnal rtf sinaii busi nets srraregt vvl. 12, ivo. i spring/summer 2001 table 2: items that constitute principal ethical perspectives, arranged by mean score. survey how impurrunr are each of the following in f thical item no. influencing the way you run your business? perspective score 2 my other [= non-religious or spiritual] personal idealist 4.67 beliefs and principles about how to act 6 the consequences of my actions for my own business utilitarian 4.63 5 the consequences of my business actions for others utilitarian 4.50 3 'i'he law, which sets out what is right and wrong deontological 4.30 7 'i'he personal values of a potential employee virtue 4. 19 9 my general ideas about human rights idealist 4.09 other rules and regulations deontological 3.96 8 thc personal values of my customers and clients virtue 3.79 my religious or spiritual beliefs idealist 2.88 a series of'-tests were conducted in order to investigate whether there were any differences in ethical outlook based upon demographic variables. the findings are presented in table 3. table 3: fthicsl influence mean scores by gender mean meanethical influences n females males slg. my religious ur spiritual beliefs 81 2 88 2 85 .926 tvty other personal bclictc and principles about how to act 81 4.85 4.49 .014 'i'he imv w'hich sets out cvhat is nght and cvrong 81 4.37 4.28 .646 other rules and rcgulatinns 81 4.10 3.82 .180 thc conscqucnccs ut'hoiv my business actions affect others 81 4 76 4.26 .003 'i'hc consequences ol'hoiv my actions affect my own business 80 4.78 4.49 .021 thc personal valucc of a potential employee 79 4.38 4.05 .163 'i'llc pcrsiillill villllcs ol lily cllsiolilcl's or clients 81 3.76 3.87 .635 sty general ideas about human nghts 80 4.35 3.82 .028 the t-tests indicated that most of the significant differences in ethical values were sex-based. 'fhere were significant differences between males and females in respect of their non-religious personal beliefs and principles about how to act [r(78) = -2.524, p & .05], the consequences of their business actions i'or others [r(78) = -3.081,p & .01],the consequences of their actions for their ocvn business [i(77) = -2.338, p & .05], and their general ideas about human rights [r(77) = -2.242, p & .05]. females had a higher mean than males in respect of these four differences. 'i'here was also a signiflcant dif1'erence between employing and non-employing businesses in respect of their general ideas about human rights [r(76) = -2.232, p & .05], with employing businesses scoring a higher mean. 'fhe second set of questions reflected issues that were identified as important to small business operators in the small business and business ethics literature. the frequencies and means for these items are shown in table 4. 74 journal of sniall busmess strategv vol. 12, no. i spring/summer 200/ table 4: frequencies nf response to home-based business ethical issues. how do you rate eacli of tlie strongly strongly following statetnents? disagree disagree neutral agree agree when a business acts according to the law it cannot acl ivrong morally 31% 41% 16% 9% 3% large businesses arc mostly fmr m their dealings with small businesses 18 39 37 6 ethical behavior is more important to small than to large businesses 21 16 23 25 15 13usincss decisions arc usually separate from personal moral 21 44 21 14 decisions in business. one cannot afford much deliberation on moral issues 38 41 14 6 i people in business either have integrity or the&'on' 11 12 18 31 28 the only item with which more than half the number of respondents either agreed or strongly agreed was the statement that 'people in business either have integrity or they don''. no respondent strongly agreed with the proposition that 'business decisions are usually separate from personal moral decisions', and over three quarters of the respondents disagreed or strongly disagreed with the proposition that 'in business, one cannot afford much deliberation on moral issues'. a series of t-tests were conducted to ascertain whether there were any significant diiterences in the responses to these six items based on demographic variables. these revealed a significant difference (t(74) = -2.145, p & .05] in respect of the statement that 'large businesses are mostly fair in their dealings with small businesses', based upon the number of employees. single operator businesses with no employees had a higher mean (m = 2.53) than businesses involving more than one person (m = 2.12). t-tests also identified a significant difference based on age in response to one of the six propositions. there was a dilference regarding the statement 'when a business acts according to the law, it cannot act wrong morally't(78) = -3.969,p & .0l], with those over fifty years of age having the highest mean (m = 2.72). in comparison to this, respondents under 50 years had a mean score of 1.82. discussion overall, there is support for the belief that home-based business operators are ethical in the way they conduct their businesses, as they rated items that were representative of all four principal ethical perspectives as being important to them. although there was no single dominant perspective, the item 'personal (non-religious) beliefs and principles about how to act', an indicator of the idealistic perspective, was rated highest. interestingly, the item 'religious or spiritual beliefs', which is also partly constitutive of the idealistic perspective, was rated as the least important influence on the way operators ran their businesses. this finding is in marked contrast to empirical american small business research, which has suggested that religious belief is an important factor in the construction of business values 75 journal vf smell biixi iies» strategy& vol. /2, /i/n. i spring/summer 200/ (longnecker et al., 1998: barnett et al. 1996). it also contrasts with the findings of quinn (1997), who suggested on the basis of his empirical british research that only members of religious groups had explicit ethical concerns with their business. it was to be expecied that a primary concern of home-based business operators would be with thc consequences of their actions for their own business, an&i indeed the items that reflect a utilitarian outlook were ranked highly. it is noteworthy, however, that the current sample rated the influence of an idealistic perspective even higher. this response casts doubt on a prominent view which suggests that people are driven primarily by utilitarian considerations (slote 1995). while self-interest is obviously a factor in establishing a business or in choosing any other line of work, it does not appear to dominate to the exclusion of other considerations. females recorded a significantly higher score than males on four items (non-religious beliefs and principles about how to act, general ideas about human rights, the consequences of their actions for their own business, and the consequences of their business actions for others). the question of the extent to which the sex of subjects may indicate predictable differences in ethical attitudes has been explored inconclusively by others. as has been observed, numerous studies have produced conflicting results on this issue (serwinek 1992), and further work would be required to determine whether there is a consistent difference between male and female business operators in respect of the values examined in this study. none of the four ethical perspectives was dominant by sex. the beliel'hat when a business acts according to the law it cannot act wrong morally was nuirc strongly rejected by respondents less than fifty years of age. it is possible that the greater lilb experience ol'older persons has led them to an awareness of the consequences of actions (and perhaps also of failure to act) of which younger persons are less aware. quinn (1997: 121) suggested that 'i'or the owner/manager of a small business the need to ... look i'or approval of relerent others may well not exist or be less important'. the present study asked whether the respondent was a sole or co-owner/director in order to determine whether there werc any measurable differences in ethical outlook based upon the locus of decisionmaking power. sole ownership or directorship would imply sole responsibility for the policies and practices of the business, while co-ownership might suggest that policies and practices have to bc negotiated ivith one or more others. t-tests revealed one significant difference in responses between businesses with a sole owner and those that were co-owned, in respect of general ideas about human rights. businesses with a sole owner had a lower mean (m = 3.84) than those that were co-owned (it/= 4.37). the simple fact of having other people involved in the business may reinforce the necessity of wider concern about others. within the second set of questions, the survey asked about perceptions of fair trading due to indications of concern about the treatment of small businesses by large companies expressed in a government-sponsored inquiry conducted by, the micro business consultative group (1998). according to its report, many small businesses were concerned about unconscionable conduct, in which disparities of power between businesses of different sizes might lead to significant harsh and unjust conditions being imposed by large businesses upon small ones. this view was reflected in the present findings: only six percent of the sample agreed with the proposition tha( large businesses are mostly fair in their dealings with small businesses. this is especially noteworthy given that the principal activity of half the respondents was providing services to other businesses. in an american study that considered ethics and fair trading, arbuthnot (1997) observed that small retail buyers often lack leverage both because they buy in small quantities and because the buyer —who is often also the owner has to deal with a diverse range of product vendors. 76 journal of small business strategy vol. 12. no 1 spring/summer 2001 he found. however, that while many buyers had experienced problems that would be classified as ethical problems on any of several commonly accepted systems of value, only about 25 percent regarded these problems as ethically troublesome. further work would be needed in order to determine whether australian business operators consider fair trading issues to be an ethical as opposed to a legal or general business problem. conclusion this study has attempted to ascertain the underpinning or motivating values of australian home-based business operators. it aimed to examine the relative importance of difterent ethical perspectives in running a business, and to explore operators'iews about business issues from an ethical standpoint. the findings show that there is no single dominant ethical perspective. non-religious personal beliefs and principles were found to be the predominant influence on operators'usiness ethics, followed by the consequence of operators'ctions both for themselves and for other people. this suggests that while self-interest is a factor in establishing a business, it does not dominate to the exclusion of other considerations. eight of the nine factors associated with the principal ethical perspectives addressed by this study were rated highly by respondents. the one exception was religious and spiritual beliefs, a finding that contrasts sharply with american and british small business research and invites further investigation as to the extent and influence of this apparent cultural difference. the study indicates that home-based business operators consider ethical considerations to be important to the conduct of their businesses, and provides reason for confidence in the integrity of australian home-based business. such a finding is important and should be promoted by home-based businesses. it is a potential competitive advantage for such businesses to market to their customers. the fact that these businesses see ethics as important is a positive message and adds value to the services offered. educators and advisors need to counsel small businesses to identify such competitive advantages and acknowledge them wherever possible. in an environment ot'ncreasing competition, it is important to differentiate one business from another and a reference to business integrity can provide such a point of difference. two limitations of the present study were that the sample was relatively small and that the survey was able to contact only operators who had listed themselves on a networking database. comparison of the demographics of the sample with national data showed that it approximated national small business operator characteristics in respect to the sex, age, and employing or non-employing categories, although it was atypical in respect to education, ownership, and length of operation. these differences are explicable in that the database came from an organization that is likely to attract people with a higher level of education who can see the advantages of networking, and sole operators and new businesses that need to network. a more extensive study would be desirable in order to validate the results within the australian home-based business context. ideally this would be accompanied by personal or focused group interviews to permit a deeper understanding of the elements that comprise the ethical outlook of home-based business operators, and of how these are translated into practice. references arbuthnot. j.j. (1997). identifying ethical problems confronting small retail buyers during the merchandise buying process. journal of business ethics 16, 745-55. australian bureau of statistics (1997). characteristics of small business australia. (cat. no. 8127.0). canberra: agps. 77 journo/ ofsinu/i business s/rofegv vo/. /2, no. / spring/summer 200/ australian bureau of statistics (1997-98).small and medium ente rises business rowth and erformance surve, australia. (cat. no. 8141.0).canberra: agps. australian bureau of statistics (1998). small business in australia 1997. (cat. no. 1321.0). canberra: agps. australian bureau of statistics and office of the status of women (1997). australian women's ear book 1997. canberra: agps. barnett, t., bass, k., & brown, g. (1996). religiosity, ethical ideology, and intentions to report a peer's wrongdoing. journal of business ethics i 5, 1161-1174. baumhart, r.c. (1961). how ethical are businessmen? harvard business review 39, 6-19, 156-76. brown, d.j., & king, j. b. (1982). small business ethics: influences and perceptions. journal of small business manauement 20( i), 11-13. b ski( pi«d (1996).~tr i fll d i d fh h 6 6 business. melbourne: state training board (office of training and further education). conroy, d k. (1999)a proposal for a study of the underestimation of home based businesses/workers in australia. proceedings of the small enterprise association of australia and new zealand 12'" annual conference, melbourne, australia. de george, r.t. (1999). business ethics. (5th ed.). upper saddle river, ndo prentice hall. bp fe pl) .w kpl r i ds iib i (1999).~a 1998-99. canberra: dewrsb. foster, m.k., & orser, b. j. (1993). home-based work: marginal activity of evolving work norm? journal of small business and entre reneurshi 10, 81-89. grbnbaum, l. (1997).attitudes of future managers towards business ethics: a comparison of finnish and american business students. journal of business ethics 16, 451-63. handy, c. (1984). the futureofwork; a uidetoachan in societ . london: blackwell. l-lornsby, j.s., kuratko, d.f., naffziger, d. f., lafolletter, w. r., & hodgetts, r. m. (1994). the ethical perceptions of small business owners: a factor analytic study. journal of small business mana ement 32(4), 9-16. llumphreys, n., robin, d. p., reidenbach, e. & moak, d. l. (1993). the ethical decision making process of small business owners/managers and their customers. journal of small business mana ement 31, 9-22. id tc 11 ibp fld w.hi dt i (1997)~ai f australian business: the results of the 1995 lon itudinal surve . canberra: agps. longnecker, j.g., mckinney, j. a., & moore, c. w. (1989). ethics in small business. journal of small business mana ement 27, 27-31. longnecker, j.g., mckinney, j. a., & moore, c. w. (1995). ethical attitudes, issues and pressures in small business. proceedings of the international council for small business 40" world conference, sydney, australia. lon necker, j.g., mckinney, j.a., & moore, c.w. (1998). entrepreneurship, religion and business ethics. proceedings of the united states association for small business and entrepreneurship 13'nnual national conference, clearwater, florida. micro business consultative group (1998). under the microsco e: micro business in australia. report of the micro business consultative group, canberra: agps. orser, b.j. (1991). methodological and theoretical issues of research on home-based business. journal of small business and entre reneurshi 8, 21-38. peacock, r.w. (1999). small business: practice theo and research. adelaide: bookshelf pubnet. quinn, j.j. (1997). personal attitudes and business ethics: the ethical attitudes of owner/managers of small business. journal of business ethics 16, 119-27. serwinek, p.j. (1992). demographic and related differences in ethical views among small businesses. journal of business ethics 11, 555-66. slote, m. (1995). "utilitarianism" the oxford com anion to hiloso h . oxford: oxford university press. 78 journal ofsmall business strategv vol. /2, tvo. l spmng/summer 200/ spence, l.j. (1999). does size matter? the state of the art in small business ethics. business ethics: a euro ean review 8(3), 163-74. vyakarnam, s., bailey, a., myers, a., & burnett, d.(1997). towards an ethical understanding of small firms. journal of business ethics 16, 1625-36. wilson, e. (1980). social responsibility of business: what are the small business perspectives? journal of small business mana ement 18(3), 17-24. dr stuart dawson is a lecturer in busmess ethics at victoria university in melbourne, australia. he has a particular intereit in sniall business issiies. dr jolin breen is thc head of the sinall business research unit at victoria university. he has research interests in entrepreneurrhip education and grouth issues in small business. 79 reproduced with permission of the copyright owner. further reproduction prohibited without permission. felt fair pay of small to medium-sized enterprise owners in finland ... carraher, shawn m;carraher, sarah c journal of small business strategy; spring/summer 2005; 16, 1; abi/inform complete pg. 1 felt fair pay of small to medium-sized enterprise owners in finland and latvia: an examination of jaques' equity construct" shawn m. carraher cameron university scarraher@cameron.edu sarah c. carraher consolidation enterprises abstract this study tests a portion of jaques' theory of equitable payment, using nvo samples of small to medium-sized business owners in finland and latvia. results support jaques' proposition about who would be satisfied with their pay level and who would be dissati.~fied. introduction compensation has long been a topic of interest to employees and employers alike. in fact, the use of compensation as a motivator has been traced to antiquity (peach & wren, 1992). the concept of an employment relationship implies that employees work in exchange for some reward, and this reward is often monetary compensation (brockner, 2002). thus, pay satisfaction has emerged as a popular variable for use in organizational research (for reviews, see carraher, buckley, & carraher, 2002; heneman, 1985; heneman & schwab, 1979; lawler, 1971, 1981; miceli & lane, 1991; rynes & gerhart, 2003). pay satisfaction exhibits significant relationships with organizationally important outcomes such as absenteeism (weiner, 1980), turnover intentions (griffeth gaertner, 200 i), perceived organizational attractiveness for job seekers (heneman & berkley, 1999), organizational citizenship behaviors (lambert, 2000), and job performance (mulvey, leblanc, heneman, & mcinerney, 2002; werner & mero, 1999). as noted by rice, phillips, and mcfarlin ( 1990), one of the most intriguing findings with respect to pay satisfaction is the modest strength of the relationship between how much an individual is actually paid and that individual's pay satisfaction. although this relationship typically has been positive and statistically significant, it has generally explained well under 25 percent of the variance in pay satisfaction. these findings have led others to examine the prediction of pay satisfaction based upon multiple discrepancies or multiple monetary standards of comparison for the individual employee (law & wong, 1998), along with demographic and psychological variables (berkowitz, fraser, treasure, & cochran, 1987; carraher & buckley, 1995). scholars have noted that comparatively little research advances models of pay and their predictors (cox, 2000; heneman, 1985; miceli & lane, 1991; rynes & gerhart, *this paper won the sbi best paper award at the 2005 usasbe/sbi conference in palm springs, california reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal o[small business strate[!)' 2003; shaw & gupta, 2001; williams & brower, 1996). this could be due to the assertions of some researchers that it is clearly "too early to offer a precise theoretical model of the determinants of income satisfaction" (berkowitz et al., 1987, p. 546), yet such model development is still needed (shaw & gupta, 2001). heneman's ( 1985) review of the pay-satisfaction literature discussed two major models of pay satisfaction: the equity model of adams (1965) and the discrepancy model of lawler ( 1971 ). a third model, the theory of equitable payment, developed by jaques (1961, 1964) in the united kingdom, has generally been overlooked by theorists due to difficulties in measuring some of its concepts (belcher, 1974; hellriegel & french, 1969) but is making a comeback (allison & morfitt, 1996; brookes, 1994; carraher, carraher, & whitely, 2003; lipbluman & leavitt, 1999), and it may be useful in the examination of the antecedents of satisfaction with pay. both adams ( 1965) and lawler ( 1971) also cited jaques' work in their own. jaques' theory of equitable payment ( 1961, 1964) postulates that individuals have an intuitive knowledge of: ( 1) their capacity for work, (2) the level of their work in terms of responsibility and performance, and (3) the appropriateness of their pay. further, with respect to individual capacity to work, jaques has hypothesized that capacities for work develop in regular and predictable patterns over time; that it is necessary that one work in a role equivalent to one's capacity for work in order for him or her to experience psychological equilibrium in their job and with their pay; and that employees seek jobs that will match their level of work with their current capacity for work. he also postulates that one's level of work can be measured by determining an individual's time-span of discretion with respect to decision making on the job, and that an individual's perception of being fairly paid for a certain level of work can be successfully measured either directly or by examining their time-span of discretion and current capacity for work (jaques, 1964 ). unfortunately, although jaques ( 1961, 1962; 1964; 1968; 1970), richardson ( 1971 ), and 2 vol. 16, no. i spring/summer 2005 allison and morfitl ( 1996) have reported success at measuring both time-span of discretion and felt fair pay, others have not found these concepts easy to measure (hellriegel & french, 1969) and, therefore, the application of jaques' work has been limited (belcher, 1974). most of the work on, and problems encountered with, jaques' theory have focused on the time-span of discretion construct (for examples, see brookes, 1994; bushe & havlovic, 1996; gordon, 1969; milkovich & campbell, 1972; nystrom, 1973; wintermans, 1994) while in the current study felt fair pay is assessed directly. when addressing issues of equity, particularly felt fair pay, jaques ( 1961) believed that unrecognized norms of fair pay existed for any given level of work, and therefore, he postulated that if actual salary were not less than 90 percent or greater than 120 percent of deserved salary (as perceived by the individual), then equity would be experienced. as with adams equity theory, jaques believed that the greater the discrepancy between felt fair pay and actual pay, the stronger would be the psychological disequilibrium. richardson ( 1971) reported high correlations between time-span of discretion and felt fair pay (r = .86, !! = 180). the present study addresses the question: ( l) does jaques' equity construct accurately predict who will be satisfied and who will be dissatisfied with their pay levels among business owners in finland and latvia? method measures pay satisfaction. the measure of pay satisfaction used was the "pay level" subscale of the pay satisfaction questionnaire that contains four items (heneman & schwab, 1985). these items are rated on a 5point likert-like scale with scale anchor points from i (very dissatisfied) to 5 (very satisfied). ash, dreher, and bretz ( 1987) report a one-month test-retest reliability estimate of .73 for this scale. the coefficient alphas for these two samples indicate high levels of internal consistency with alphas reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy equal to .978 for sample 1 and .982 for sample 2. equity. the measure of jaques' equity construct of felt fair pay comes from jaques ( 1961) although it has been adapted for assessment by survey questionnaire rather than assessment through face-to-face interview as has generally been done by jaques and his associates. the actual measure is the fraction of (actual salary deserved salary) i deserved salary. jaques did agree that this is a good measure of his felt fair pay construct (personal communications, sept. 1996; august 2002). dividing the discrepancy by deserved salary serves to standardize the measure, which was suggested by jaques ( 1961) and katzell ( 1964) and was based on weber's law. it is important that the information for jaques' felt fair pay construct be collected within a social-analytic relationship (amado, 1995; jaques, 1962; 1961 ). in other words, information should be kept confidential, no executive action should be taken as a result of the data collection, and the participants should not be pressured to participate in the assessments. the violation of any of these requirements can result in respondents not providing accurate information (jaques, 1962). demographics. three demographic or workrelated variables suggested by rice et al. ( 1990) were measured. these included the following: gender, age, and current annual salary. samples this article reports on data from two samples. the first sample consisted of 182 owners of small to medium-sized businesses in finland; 119 (65.4%) were males. on average, they were 41.2 years of age and received an annual salary of $88,802 from their organization. the second sample consisted of 210 owners of small to mediumsized businesses in latvia; 138 (65.7%) were males. on average, they were 34.07 years of age and received an average annual salary of $77,410 from their organization. 3 vol. 16, no. 1spring/summer2005 results table presents the means, standard deviations, and intercorrelations of the variables for the samples. three points deserve mention. first, the subjects generally earned slightly less than they believed that they should. on average, the small to medium-sized business owners earned 12 percent less than they believed that they should in finland and 15 percent in latvia. second, the mean values on pay satisfaction (psq) indicate that, on average, the owners were satisfied with their pay in both countries. third, among the set of independent variables, the felt-fair-pay measure advanced by jaques exhibits the largest correlations with the dependent variable of pay satisfaction (psq) in both of the samples explaining 53 to 58 percent of the variance in pay level satisfaction as opposed to 17 to 19 percent for actual salary level based upon the coefficient of determination. in order to ascertain whether jaques' equity proposition concerning who will be satisfied and who will be dissatisfied is correct, the samples were each split into two groups. one group consisted of those people who believed that they were paid between 90 and 120 percent of what they actually deserved (the "satisfied" group), whereas the other group consisted of those people who were paid less than 90 percent or more than 120 percent of what they thought they deserved (the "dissatisfied" group). no person in these samples felt that they were overpaid according to the 120 percent parameter, so all "dissatisfied" individuals felt underpaid here. two ! tests were then performed between the two groups, yielding the results shown in table 2. results from both samples are significant beyond the .000000 l level, so it appears that jaques' proposition does accurately predict different degrees of satisfaction with pay levels. additionally, in order to examine the likelihood that these findings were due to common method bias, harman's one-factor ( 1967) test was performed on the full, 18-item psq for each of the samples and found that in no case was a one-factor solution deemed to be optimal. with harman's one-factor test, all variables under examination are entered into an exploratory factor analysis. reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal o(small business stratef!\-' vol. 16 no . i spring/summer 2005 table 1 descripti ve statistics for two samples va riable m sd 1 2 3 4 sample 1• i. gender 1.35 .48 2. age 41 .2 1 8.92 .04 3 . actua l salary($000) 88 ,802 92 . 11 -.06 .46* 4. felt fair pay -.12 . 16 -. 11 . 17 .27*** 5. pay satisf(psq) 3.32 .94 -. 13 .31 *** .41 *** .76*** sample 2b 1. gender 1.34 .49 2 . age 34.07 5.1 8 .07 3. actua l salarv($000) 77.41 76 .36 -.17 .41 *** 4 . felt fair pay -. 15 . 19 -.07 .26*** .36*** 5 . pay satisf(pso) 3.17 .97 -.07 .37*** .44*** .73*** 0 n = 182 business owners in f inl and. b n = 2 10 bu siness owners in latvia .. p < .01. . .. p <. 001. table 2 comparisons of average pay satisfaction scores from satisfied and dissatisfied owners as classified b y felt fair pay satisfied dissatisfied sample m m t p 1. bus. owners 4 .069 2.371 17 .96 .0000001 • ( 102)b (80) 2 . bus. owners 4. 11 2 2 .353 17.07 .0000001 (98) (112) a significance level from federighi (1959) . b number of people (ss) in subgroup. it is assumed that if only one factor emerges from the unrotated factor solution, it is reasonably likely that common method bias may be the primary source of systematic variance observed within a data set. conversely, the greater the number of dimensions extracted, the less likely that common method bias is the source of systematic variance within a data set (podsakoff & organ, 1986). the eigenvalue greater than one criterion indicated that three to four dimensions were appropriate for each sample, thus indicating that it is unlikely that common method bias is causing the observed result s. to examine the predictive ability of the measure , two hierarchical multipleregression analyses were performed using the data . three steps were involved in each of the multiple regressions. the first step 4 entered the demographic variables of gender and age, as suggested by rice et al. ( 1990). the second step entered actual salary, as heneman ( 1985) has prescribed that actual salary should always be controlled when testing models of pay satisfaction. the third step entered felt fair pay. results of these analyses appear in table 3. in general, these findings provide strong support for the assertion that felt fair pay does an excellent job of predicting pay satisfaction in both finland and latvia with the owners of small to medium-sized bus inesses, with the contribution of each being significant beyond the .00 i level. discussion results from two samples of the owners of small to mediumsized businesses indicate reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal o[small business strategv vol. 16. no. 1spring/summer2005 table 3 multiple regressions comparing felt fair pay in finland and latvia as predictors of pay satisfaction (psq) predictor r, )r, finland step i demographics .117 .117*** step 2 -actual salary .203 .086** step 3 workplace-referent .639 .436*** latvia step 1 demographics . 144 . 144*** step 2 actual salary .235 .091 *** step 3 workplace-referent .584 .349*** .. p < .01. p < .001. n's= 182 business owners from finland and 210 from latvia. that jaques' ( 1961, 1964) construct of felt fair pay deserves more attention from researchers. jaques' construct accurately predicted who would be satisfied and who would be dissatisfied with their pay levels. jaques' construct appears to be an excellent predictor of pay satisfaction. past thinking about pay satisfaction (for instance, heneman, 1985; rice et al., 1990) might lead one to expect that actual salary would serve as a strong predictor of pay satisfaction. however, multivariate analyses revealed that jaques' measure explained more of the variance in pay satisfaction than did their actual salaries. the findings of this study suggest at least three veins for future research. the first vein could examine what variables might influence the relationship between salary and pay satisfaction. for instance rice et al found that salary level could explain 25 percent of the variance in pay satisfaction, while in the current samples salary levels could explain 17 to 19 percent of the variance in pay satisfaction, and carraher and buckley ( 1996) found no relationship between salary and pay satisfaction ( r's = .0 i, .00, & .0 i). some possible variables to examine include the use of family income rather than personal salary, reasons for working (economic vs. non-economic; carraher et al. 2003), number of levels of organizational hierarchy included in the sample (jaques, 1962; 1996), and various demographic differences within samples, such as gender composition, age, and 5 educational attainment (carraher & buckley, 1995; miceli & mulvey, 2000). the relationships may also differ between owners and employees of small to medium-sized businesses. a second vein for research would focus on examining how similar or different the results found here might be across cultures (carraher, 2003; carraher et al. 2003). for instance, in the current study the two samples were carefully chosen so that they were from similar cultures with the business owners doing similar work. how might the results be different or similar if chinese, south korean, japanese, or mexican samples were added (eshima, 2003; zapalska & edwards, 200 i)? a third vein for research could involve examining jaques' equity construct in other domains. initially, this study should be replicated with other samples. next, jaques' general theory could be tested for applicability with dependent variables such as general job satisfaction, satisfaction with benefits, and perceptions of the fairness of organizational pay systems. finally, it might be possible to extend jaques' theories beyond felt fair pay and examine the concepts of felt fair benefits and felt fair raises (carraher, hart, & carraher, 2003; heneman & schwab, 1985). in summary, this study has used two samples of business owners in order to examine the efficacy of jaques' felt fair pay construct as reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategv it relates to pay satisfaction. it appears that felt fair pay is strongly related to pay satisfaction for these samples from finland and latvia. based upon these findings it appears that jaques' construct of felt fair pay merits inclusion in future studies of pay satisfaction among business owners, and additional research is suggested. references adams, j.s. 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(1999). fair or foul?: the effects of external, internal, and employee equity on changes in performance of major league baseball players. human relations, 52 (10), 1291-1310. williams, m.l. & brower, h.h. (1996). a comparative model and measure ol pay satisfaction. paper presented at the annual meeting of the society for industrial and organizational psychology, san diego. ca. 8 vol. 16, no. 1spring/summer2005 wintermans, j. ( 1994 ). the problem of 'articulate incompetence.' canadian business review, 21 (i), 42-43. zapalska, a. & edwards, w. (2001). chinese entrepreneurship in a cultural and economic perspective. journal of small business management, 39 (3), 286-292. shawn m. carraher is the brewczynski endowed chair in entrepreneurial studies, director of the center for emerging technology & entrepreneurial studies, and head of entrepreneurial studies at cameron university. his research focuses on customer service, performance enhancement, and compensation/motivation in cross-cultural entrepreneurial organizations. sarah c. carraher is the president of consolidation enterprises. her research has focused on performance enhancement and compensation/motivation in cross-cultural entrepreneurial organizations. prior to opening her own business she previously worked for the state senate in texas. stra tegf usasbe/sbida 2001 conference best applied research paper awarded by journal of small business strategy strategic implications of data gathering activities in small firms: a comparison between family and nonfamily firms donald gudmundson university of wisconsin oshkosh godmioidlaiuiiiosh.edu c. burk tower university of wisconsin oshkosh toii ertatlniiiosh.edu e. alan hartman university of wisconsin oshkosh hortmatr..'ttgttuvish edu abstract the empirical research presented in this ariicle examines data gathering activities and processes of small businesses and compares ihose activities and processes in family and nonfamily firms. manova and t-test analyses were used in analyzing questionnaire data from /245 respondents in 89 sniall businesses for these small firnis, the results indicated differences in the relative use of types of infomnation gathered and processes used. further, ihe study found differences between family and nonfamily firm data gathering activities and processes used. finally, the study indicated that the type of customer to whom a firm sold had an impaci on the data gathering activities of a small business and impacted family and nonfamily firm daia gathering differeniially introduction as we enter the 21st century, knowledge management is becoming increasingly important competitive issue for businesses. rastogi (2000) argues that since we have moved out of the industrial age and into the information age, management of information and knowledge is key to developing and sustaining competitiveness. "new knowledge provides the basis for organizational renewal and sustainable competitive advantage... strategic management researchers have begun to identify knowledge as the key resource that managers need to 19 journal of small brtsiness strategy vol. /2, no. i spring/summer 200l appreciate and understand if they are to create sustainable competitive advantages" (inkpen, 1998, p.69). it has been argued that information management "has become an important tool that helps build organizational competitive advantage in today's globalized and turbulent environments" (arnand, manz, &. glick, 1998, p.796). rastogi states that "competitive edge today, more than ever, resides in creativity and capabilities, expertise and skills, improvement and innovation. all of them have their source and locus in the pursuit of learning and the cultivation and use of knowledge" (rastogi, 2000, p.39). researchers have begun to develop conceptual models of knowledge management. one such model suggests that knowledge management consists of a set of activities, including "creating knowledge, discovering knowledge, borrowing or buying knowledge, capturing knowledge, distributing knowledge, adding value to knowledge, information or data, retrieving knoivledge, information or data, and measuring and updating knowledge" (kirrane, 1999, p.31). this model suggests that knowledge, which may be useful to the firm, is gathered from both internal and external sources. these data are then processed within the firm and distributed to organizational members. other researchers also have recognized that managers gather and use both internal and external data when attempting to align their organizations with the external environment (beal, 2000; pineada, i.emer, miller, & phillips, 1998; arbuthnot, slams, & sisler, 1993; smeltzer, faun, & nikolaisen, 1988). this emphasis on the acquisition and management of knowledge by organizational members suggests that the processes these organizational members use to gain more knowledge are crucial to keeping their firms competitive. while much of the knowledge management literature focuses on the manipulation and use of data once it has entered an organization, the literature on environmental scanning suggests that the gathering of data by the firm is a key element in this process. without the data, managers in the firm have little new knowledge to manage. in addition, organization theorists have asserted that relationships between an organization and its external environments have a direct bearing on performance (culnan, 1983; bourgeois, 1985; pfeffer & salancik, 1978). data gathering also has been depicted as a key component in the strategic management process (hambrick, 1982; da(1 & weick, 1984; dollinger, 1985; daft, sormunen. & parks, 1988; beal, 2000). these data gathering activities are commonly labeled "scanning" in the strategic management literature. while scanning is not well defined, it often is used to refer to external data gathering activities (dollinger, 1985; johnson & kuehn, 1987; hambrick, 1981; hambrick, 1982). it is suggested that organizations gather external data in an attempt to align strategies with the demands of external environments. knowledge management is, therefore, a crucial part of the strategic management process. this study examines data gathering activities of owners/managers in small firms to determine if they focus more heavily on internal or external sources when engaging in data gathering activities. the research also studies the relationship between ownership structure (family vs. nonfamily) and data gathering activities. data acquisition in small business while much of the research in knowledge management has focused on large organizations, several studies have examined the scanning activities of small businesses (dollinger, 1985; lang, calantone, & gudmundson, 1997; beal, 2000). much of this research has focused on the data gathering activities of the small business owner/manager. this research suggests that small firms differ from large firms in their data gathering activities. 20 journal ofsmall busmess straiegy voh /2, no. 7 spring/summer 200l other research found that small firms rely on informal information sources (biney, 1985), prefer information sources that are rich, informal, and accessible (farm & smeltzer, 1989), and that managers of small firms with an entrepreneurial orientation prefer human rather than written information sources (schafer, 1990). beal's (2000) study attempted to identify relationships between data gathering activities and the strategic alignment of small businesses. significant positive relationships between frequency of scanning indices and external alignments were not found. one explanation for this that beal posited was that "ceos of small manufacturing firms, constrained by their involvement in daily operations, may not have time for frequent scanning of their external environments" (beal, 2000, p.44). this suggests that owners/mangers in small firms may focus more on internal data acquisition activities than on external data gathering activities. hl: ownerslmanagers of.small firms will utilize internal data gathering activiuei niore frequently than exiernal data gathering activities. data acquisition in family business several theorists have identified the importance of the role played by family business in the u. s, economy (gersick, davis, mccollom, hampton & lansberg, 1997; ward, 1987). statistics suggest that 80% of all businesses in the v. s. are family-owned firms and that approximately 50% of thc gnp of the u.s. is generated by family firms (ward & arnoff, 1990; kirchhoff & kirchhoff, 1987). yet, little empirical research has examined the data gathering and processing activities of family businesses. theorists have argued repeatedly that strategic planning processes and related activities of family businesses would likely differ significantly from strategic planning processes and related activities of nonfamily firms (ward, 1988; harris, martinez & ward, 1994; gudmundson, hartman, & tower, 1999; beal, 2000). it has been stated that these differences exist because of the contradictions that arise between the family system and the business system. ward (1987) states that "the very nature of business o(ten seems to contradict the nature of the family. families tend to be emotional; businesses are objective. families are protective of their members; businesses, much less so. families grant acceptance unconditionally. businesses grant it according to one's contribution" (p. 54). these differences between family and nonfamily firms are not necessarily positive or negative for family businesses, but, it is argued, they do have the potential to significantly impact the strategic decision making processes and outcomes in these organizations. this line of reasoning suggests that these differences between family and nonfamily firms also should impact knowledge management activities. researchers also have argued that a general lack of strategic planning in family businesses has contributed to the high failure rate among family businesses as they attempt to survive from one generation to the next (ward, 1988). the inward orientation of family businesses has been discussed as affecting family members'erceptions of the business environment (davis, 1983). it is suggested that the family system attempts to create and maintain a cohesiveness that supports the family "paradigm." this paradigm is described as the core assumptions, beliefs and convictions that the family holds relative to its environment. information that is not consistent with this paradigm is resisted or ignored. davis suggests that this resistance to information that runs counter to the family paradigm results in less change by family businesses than by nonfamily businesses. this seems to suggest that family businesses may differ from nonfamily businesses in the amount, and possibly the type, of data that is gathered. family businesses may focus more on gathering data from internal sources than from external sources and may be less interested in gathering data about the internal or external 21 journal ofsmall bus/tress strategv vo/. /2, no. / spring/suntmer 200/ environments that runs counter to their organizational reality. the following two studies provide indirect support for this contention. an empirical study comparing the adoption of tqm practices of family and nonfamily firms found that family firms are more likely to be non-adopters of tqm than nonfamily firms (ellington, jones &. deane, 1996). the authors state that this is due to family flrms'status quo attitude", greater emphasis on short-term decision making, centralized decision making processes, and the lack of formal training programs that are a key element of tqm programs. the results of another empirical study suggest that family businesses grow more slowly than nonfamily businesses (gallo, 1995). the researchers also concluded that family businesses function with less risk than nonfamily firms, they function with a higher level of equity control, and they are more closed to outsiders, thus less likely to use them as sources of information. it is argued that these differences lead to the lower growth rates of family businesses. the results of these studies suggest that a relationship may exist between the ownership structure of businesses (family vs. nonfamily) and data acquisition activities. other support for the relationship between ownership structure and data gathering comes from harris, martinez, and ward (1994). in their review of the strategy literature related to family business, they provided a list of family business characteristics that, previous research suggests, influence strategy and related activities. these include: "inward" orientation (cohen & lindberg, 1974) slower growth and less participation in global markets (gallo 1993) long-term commitment (danco, 1975) importance of family harmony (trostel & nichols, 1982) employee care and loyalty (ward, 1988) lower costs (mcgonaughy, walker & henderson, 1993) generations of leadership (ward, 1988) although the authors identified these characteristics as affecting strategy in family businesses, they did not postulate specific impacts on the actual strategies. their conclusion was that "the assessment of these family business characteristics and their influence on strategy leaves more questions than answers" (p. 171). since knowledge management plays such a crucial role in the strategic planning process, we suggest that these characteristics also will impact knowledge management activities. research cited above suggests that family firms are inwardly oriented, are closed to outsiders, are resistant to new ideas, are risk averse, have a status quo attitude and have centralized decision making processes when compared to nonfamily firms. these characteristics suggest that managers in a family firm will tend to consider as unimportant much of what goes on in the external environment. as a result, these managers will gather less external data than managers in nonfamily firms. family businesses are resistant to change because the family element wants to preserve the organization as it is. data running counter to this mindset is ignored. even the internal data gathering activities will concentrate on utilizing processes that gather data from sources that will provide the acceptable data. this suggests that family businesses also will gather less internal data than nonfamily firms. h2t owners/managers in family firms utilize internal data gathering activities less fi equently than owners/mangers in nonfamily firms. h3. owners/managers in family firms utilize external data gathering activities less frequently i/ian ownerslmanagers in nonfamilyftrms. 22 journal ofsyne/i business srraregt vo/. /2, iyo i spring/summer 200/ metfiods sample selection and data collection the family and nonfamily small businesses were selected from directories of manufacturing and service organizations within a midwestern state. those businesses employing fewer than 250 employees but more than 25 employees were sent a letter requesting participation in a research project. a follow-up telephone call requested an appointment to meet with the ceos/owners. if they agreed to be interviewed and to participate, the logistics of questionnaire distribution and return were agreed upon to ensure confidentiality. of those ceos interviewed, 89 of 90 allowed data collection from their managerial employees. either questionnaires were distributed by company mail, with completed questionnaires returned to the researchers by u.s. mail; or, questionnaires were distributed and collected on site by a member of the research team. using these procedures, 1476 questionnaires were returned. of those, 1245 provided complete data on all variables. organizational variables to determine which of the organizations were family businesses, a three-step process was employed. first, each ceo/owner was interviewed about various aspects of the business including ownership (publicly held, privately held, partnership) and characteristics of the leadership team. second, a research assistant called each organization and asked to speak with someone familiar with the organization's ownership (this was always someone different than the ceo). this person was then asked if the organization was family owned or considered a family business, if it was owned primarily by a single family and if there were family members in leadership roles in the organization. third, the researchers reviewed the interview and telephone questionnaires and then classified each organization as either a family business or not. it was classified as a family business if the data from the interview and survey indicated that a single family controlled the business and was active in the management of the business. this corresponds to the base definition used by westhead and cowling (1998). westhead and cowling (1998) also showed that differences between family and nonfamily businesses a(ten did not appear until organizational variables such as type of customer were included in the analysis. to understand more fully the potential relationship between family and nonfamily businesses with respect to use of data to manage the organization, another organizational level variable was studied. that variable being customer type (business versus consumer). based on information obtained from the ceo/owner, two researchers classified each organization into one of the two customer types. if there was disagreement about the classification, a third researcher reviewed the information and determined the classifications to be used. table i displays the number of respondents and number of organizations by type of customer, and ownership. table i distribution of organizations by customer type and ownership structure ~ct ~fily organizations respondents business no 37 728 ~n.27 379~c~n 15 250 ~c ~ ~ ~v. 10 119 23 journal of suiali business strategv vo/. /2, /vo. i spring/summer 200/ data utilization variables the questionnaire included 24 questions that focused on the extent to which various types of data were gathered by the organization. 1he questions emanated from the strategic planning, marketing and organizational design literatures (e.g., lawrence k lorsch, 1969). responses to these items were on a likert scale, with "i"being "never used to gather data" to "5" being "used very frequently to gather data". these items were factor analyzed (principle components), which indicated four factors (using an eigen value of 1.0). cronbach reliability analysis of'hese factors revealed that all four factors had acceptable levels of reliability. for each respondent, four factor scores were calculated. each factor score was formed by summing the responses to the items defining the factor and dividing by the number of items in the i'actor. 'fable 2 summarizes the items and internal reliability for each factor, while descriptive statistics for these factors can be found in 1'able 3. table 2 items comprising each factor and scale reliability ofacturs speci ali zed analytical tools external data performanceprucesses measures variables task forces statistics track short term (less competitors than i yrs) liaison personnel cost control survey clients intermediate committees than 5 yrs) staff specialists to information market research individual obtain data for systems performance decisions appraisalqd term (1-5 yrs) interdepartmental budget variances forecasting long term (more operations costs assigned to systematic formal review of research techniques units searches for department goal opportunities achievement stafy specialists to profits assigned to study problems units~cg ~ri i bile y ~iiv ~81 ~79 ~76 data analyses the data analyses were designed to test the three hypotheses. the first hypothesis proposed that owners/managers of small firms utilize internal data gathering activities more frequently than external data gathering activities. to determine this, t-tests were computed between the four factors (specialized processes, analytical tools, external data and performance /vleasures). only the external data factor is an external activity while the other three are internal activities. the second and third hypotheses (owners/managers in family firms utilize internal data gathering activities less frequently than owners/mangers in nonfamily firms and owners/managers in family firms utilize external data gathering activities less frequently than owners/managers in nonfamily firms) are organizational level questions. to appropriately test these hypotheses, it was necessary to aggregate the data for each firm, resulting in one score 24 journal of small busmess strategv vof /2, iyo. i spring(summer 2001 for each factor per firm. to determine the effect of ownership and customer type on these factors, a multivariate analysis of variance (manova) analysis was performed using a 2 (customer) x 2 (ownership) factorial design. rf.sults results from the t-tests revealed that all four factors were used at different frequencies. rlnalytical tools were used most frequently to gather data, with performance measures second, external data third, and finally specialized processes. two of the internal activities were used more often than external while, speciali ed processes were used less often. in general, hypothesis i was supported. table 3 summarizes these t-test results. table 3 t-tests between the four factors and descriptive statistics for each factor factors specializerl analytical external data performance ~f i d ~13 78 .~917. ~pf ~19.38" ~2.84'7.14" p& ol 99p& 001 the manova revealed a significant (p & .05) multivariate main effect for ownership (f(4,82)=2.84, p & .03), and a significant multivariate interaction effect for ownership x customer (f(4,82)=3.09, p & .03). the multivariate main effect for family was generated by significant univariate main effects for specialized processes, external data and performance measures (only analytical did not show a significant difference between family and nonfamily organizations). the univariate analysis of variance showed that for all three main effects nonfamily businesses reported greater frequency of use of data gathering techniques than family businesses, which partially supports hypotheses 2 and 3. table 4 displays those means and significance level of the differences. table 4 means and anova results for family and nonfamily businesses ownersltip specialized analytical external data performance prucesses tools measures nonfamily 2.58 3.35 2.99 3.27 family 2.35 3.28 2.82 3.07 difference p & .01 ns .01 .003 to explore the significant multivariate ownership x customer interaction, a univariate anova was performed for each dependent measure separately. these results indicated that one of the measures, performance measures, produced a significant interaction (f(1,85)=8.62, p & .005), while for a second measure, external data, the effects were marginal (f(1,85)=3.74, p & .06). these interactions were explored using simple main effects 25 .lournal rrfsmall business strategy va!. /2, na. l spring/summer 200/ comparisons. figure i shows the results for external data, while figure 2 shows the results for parfum&ance measures. as figure i shows, there were no differences between family and nonfamily businesses when selling to businesses, however, nonfamily businesses selling to consumers gathered external data more frequently than family businesses. figure i ownership x customer for external data 3 'i :i 3 --. cr p &,o52.9 ~non family rd family 2 tr 2.5 business consumer customer the interaction for perfarmarrce measures was a little more complex. again there were no differences between family and nonfamily businesses selling to businesses, and a significant difterence when selling to consumers where nonfamily businesses used performance measures more frequently to gather data than did family businesses. in addition, nonfamily businesses discriminated between types of customer while family businesses did not. in summary, all three hypotheses were at least partially supported. for hypothesis i, most internal methods of data gathering are used more frequently than external but one of three internal methods (specialised prvcesses) was not. the effect of ownership was complex. for hypothesis 2, nonfamily businesses used specialised processes and performance measures more frequently than family businesses with no difference between family and nonfamily in use of analytical tools. although overall performance measures were used more frequently by nonfamily businesses than family businesses, closer inspection revealed that this occurred only when selling to consumers. hypothesis 3 was also partially supported with family businesses differing from nonfamily businesses in their frequency of use of external data, but again only when selling to consumers. discussion the overall results of this exploratory, empirically based study relating aspects of knowledge management and ownership structure in small businesses add interesting new insights to both knowledge management and family business research. the results clearly support prior research that suggests that family and nonfamily businesses differ in some significant ways in their approach to strategic planning, particularly with respect to data gathering and processing. because of these differences, ownership structure appears to be a unique variable to be considered in knowledge management studies, and thus, should be considered as such in research designs. for all the small businesses taken together, the frequency of use data regarding data types (analytical tools, external data and performance measures) and frequency of use of specialised processes is interesting and important in and of itself. the fact that the frequency 26 journal ofsmall business strata gv vol. /2, no l spring/suntmer 200l of use of speciali=ed processes had the lowest absolute level of use is most likely related to the study's focus on small businesses. specialized processes require resources and a suaicient organizational size to support and justify their use. small business managers likely do not perceive a need for such processes in their restricted environments, particularly with only limited resources to support them. the results showed that internal data acquisition (analytical tools and performance measures) had higher frequency of use than external data acquisition, and that internal speciali=ed processes for sharing and using information in decision making were limited in usage, are not surprising, but should be of concern to small business managers as they move forward in the information age. with quickly changing external environments, rapid recognition and understanding of these changes becomes increasingly important in adjusting competitive strategies and tactics in order to maintain and improve market positions. one would hope, therefore, that the use of external data gathering would increase over time, both absolutely and relative to internal data gathering. in addition, the use of specialized processes that focus on sharing the growing body of information gathered from the internal and external sources should increase in order to make better, and more creative use of this information in strategic planning and decision making. thus, this study serves as an indication of concern for small business owners/managers to alter their data gathering behaviors, and as a useful baseline for future research in examining the relationships between small business internal and external data gathering and processing. the study's finding that family businesses reported lower levels of use for all three types of information (statistically lower for external data and performance measures) and for use of organizational specialized processes, has not been empirically measured in prior research. this is consistent with what might be anticipated from prior family business research as discussed in the introduction section of the paper. this ought to be of particular concern to family business owners as they deal with their specific competitive environments. while family businesses might have been quite successful in the past, their future levels of success will depend on their ability to more efficiently gather and process information to assist in more rapidly responding to their changing environments when the type of customer to whom small businesses were selling is considered in the analysis, the differences found between family and nonfamily businesses were more complex than initially expected, and these differences need also to be noted and considered by small business owners/managers. the key results were the differences found in the use of the gathering of external data and performance measures (see figure land figure 2) in selling in consumer markets. marketing literature suggests the more rapidly changing and dynamic nature of consumer markets, combined with the typically more distant relationship with customers in consumer markets, requires more focused attention to the formal gathering and processing of information for decision making. while that appears to be the case for nonfamily firms, that clearly does not appear to be the case for family firms. this suggests that family businesses might well be operating at a less then optimal level when dealing in consumer markets, and could benefit from taking a more proactive approach in gathering internal and external information. conclusion this study is intended to add to the developing research in the small business, knowledge management and family business arenas. the study's key contribution is its use of multiple respondents from each organization to develop an empirical database relating data acquisition to ownership structure in small businesses. as we move forward in the information age, business academicians and managers are placing increasing levels of attention on the 27 journal ofsmall business srrategt vol. l2, no. l spring/summer 200/ importance of managing information and knowledge in assisting firms in their strategic planning to maintain competitive advantages. thus, empirical research into aspects of data acquisition and use is necessary and a key ingredient in gaining an understanding of how firms manage information and factors that impact the knowledge management process. the study also provides results that have managerial implications for both nonfamily and family business managers. the study suggests managers in all small firms might want to consider increasing both the acquisition of more external information and the use of various processes for gathering and sharing information. further, the study indicates family businesses could possibly benefit from additional focus on all forms of data gathering and use, patticularly when competing in consumer markets. given that the study was based on a limited sample of small businesses and on the growing body of literature suggesting the increasing level of importance of knowledge management to maintain competitive advantage in the marketplace of the information age, additional research is necessary. the key focus of that research should be on relating information gathering and use to actual competitive performance in rapidly changing markets. given the historically conservative, internally focused nature of family business managers, results of the research are even more critical in keeping family firms healthy. referencfs arbuthnot, j., slama, j., & sisler, g. 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(1978).the external control of o anizations. new york: harper & row. pineada, r., lemcr, l., miller, mh & phillips, s. (1998).an investigation of factors affecting the information-search activities of small business managers. journal of small business~m. 3 6(1), 60-7 1. rastogi, p. (2000). knowledge management and intellectual capital the new virtuous reality of competitiveness. human s stems mana ement 19 39-48. smeltzer, l. r., farm, g. lh & nikolaisen, v. n. (1988). environmental scanning practices in small business. journal of small business mana ement jul 55-62. trostel, a.l & nichols, m. (1982). privately-held and publicly-held companies: a comparison of strategic choices and management processes. academ of mana ement journal 25(1), 47-62. ward, j. (1987). kee in the famil business health, san francisco: jossey-bass publishers. ward, j. (1988). the special role of strategic planning for family businesses. ~famil 0 i 0 i i 105-117 w d.l.&a ff,c. ((9901. h f ly f&«gy. 5 iib f f i(05. 90. westhead, p., 8: cowling, m. (1998). family firm research: the need for a methodological rethink. entre reneurshi theo and practice 10(3), 31-56. donald gudmundson is an associate professor of management m the college of business itdministration at the umversity of ivisconsin oslikosh research interests include family business, workforce dfversiry and organfsauonal cuhure. e alan hartman fs a professor of 'ilanagement and dean of the college of business administration ai the uni versiry of ii'isconsin oshkosh. research in(eras(s include organisational innovation and family businesses c. burk tower is professor of,'iianagement in the college of business admi mstration at the university of iviscoiisin oshkosl) lie also serves as familty l.iaison to the wisconsin family business forum. 29 strategy export entry in small companies: effects of timing on strategy and performance candida g. brush boston university abstract new and small companies are increasingly active in exporting, but liule is known about relationshipsbetweentimingofthisdecisionandinternationalstrategv,orperfonnance. this exploratory study examines effects ofearly and late export entry on international strategy and performancein a sample ofl34 exporting us. manufacturers, results show diferent pauerns ofinternationalstrategy are associated with early versus late export entry, and that depending an timing of this eniry, certam strategies result in improved performance. introduction new ventures face an array of market entry choices as they develop and grow. "windows" of market opportunity are presented, or created and, depending on a company's age, strategic choices can have highly beneficial or detrimental effects (romanelli, 1989). for instance, market entry at a young age may result in valuable long term contacts, allow earlier learning experiences, and increase chances of survival. conversely, early entry may constrain resources, fragment management time, or lock a new company into a particular strategy (romanelli, 1989). similarly, late market entry may be beneficial, allowing more time to collect information, avoid risk and build networks. however, if a company waits too long to enter a market, it may miss opportunities or be constrained by previous strategic investments (eisenhardt, 1990). hence timing of market entry in the life cycle of a small company can have important implications (day, 1993). one entry choice increasingly open to young companies is the decision to enter foreign markets by exporting. anecdotal evidence shows that companies are selling abroad early in their life cycle. rapid technological and telecommunications innovations, global political changes, and the implementation of trade agreements have created a favorable climate and new opportunities for young companies to export (maynard, 1994; holziger, 1990).a national survey of small businesses found that 20 percent of companies with less than 500 employees exported in 1994, up from 16 percent in 1993 and 11 percent in 1992 (barrett, 1995). for instance, brooklyn brewery was founded in 1988 and exported 10 percent of its product to japan within the first year of operations(wall street journal, oct, 13, 1990). quantum epitaxial designs, inc. sold its crystallized wafers outside the u s. within a year of start up (nation�'s business, july 1991) as did barnyard babies, a toy manufacturer. explosive economic growth and the lowering of trade barriers in asia encouraged ellicott machine company to sell drilling equipment 53 overseas. next year more than 50 percent of its sales will be from overseas (business week, april, 1995). in spite of this increasing evidence of early exporting, the majority export studies have focused almost exclusively on mature small companies. scores of studies in international marketing that examined exporting in small companies (miesenbock, 1988), have followed the stage theory of internationalization (johanson & vahlne, 1977) which assumes that the decision to export will occur only after the company has opemting experience, and is therefore not young. attention to company age at the time of exporting is considered only descriptively as a factor in differentiating between exporters and non-exporters (ijrsic & czinkota, 1984; kirplani & mclntosh, 1980), often leading to inconclusive results (miesenbock, 1988). similarly, extensive work examines factors contributing to export success. with more recent work concentrating on interrelationships between export strategies and performance (aaby & slater, 1988). major influences on performance vary from study to study, but generally firm characteristics, competencies, market strategy (product, price, distribution, promotion) are deemed important(dominguez & sequiera, 1993). absent from the export marketing literature is the consideration of possible differences in strategies that may be associated with age at foreign market entry and any effects of early or late entry on performance. literature on the life cycle of small organizations recognizesdifferences in strategies of between new and established companies. in particular, goals, structure, systems and role of the owner founder are areas that differ depending on age of small company (churchill & lewis, 1983;grenier, 1972). studies in entrepreneurshipshow new ventures employ strategies different from mature companies in terms of scope of segmentation, product and marketing (mcdougall & robinson, 1987; carter, et al, 1994). in particular, degrees of differentiation and factors influencing these were signficantly different from those of large mature organizations. therefore, it is expected that strategies of exporters will vary depending on timing in the life cycle of this decision. this exploratorystudy investigates three questions; (i) is timing of export entry (early or late) related to different patterns of international strategy? (2) does timing of export entry affect performance?(3) are certain patterns of strategy related to performance given early or late entry? if patterns of international strategy are not significantly associated with age at entry, this may suggest strategic approaches are not dependent on company age. likewise, if no relationship is found between entry age and performance, this will suggest that success in exporting is contingent on other dimensions, and that age at entry is not a consideration. on the other hand, if variations are found, this will imply that different strategies may be more appropriate depending on age of export entry. background competing theories explain reasons why small companies will export. one perspective derives from behavioral stream of international business and assumes that experiential learning precedes the decision to sell products abroad (johanson & vahlne, 1977). the choice to export is motivated by perceived threats or opportunities in the environment where companies avoid risk by seeking markets cognitively and geographically close (johanson & vahlne, 1977). 54 referred to as a stage model, it is argued that exporting is a consequence of the incremental adjustmentsa company will make to its environment as it learns and accumulates experience. this perspective excludes internationalization from start-up, instead positing international market entry decisions by small companies take place in a deliberate manner affer the business established. on the other hand, the stage model has been criticized recently by theorists proposing businesses may not internationalize in sequential steps (welch & loustarinen, 1988) and arguing that it is too deterministic (melin, 1992). relatedly, entrepreneurship scholars have posited that international business theories are limited in their ability to explain why new companies will internationalize(mcdougall, shane & oviatt, 1994). these authors argue that firms may "leapfrog" and skip exporting stages (melin, 1992), or may be "global" from the start (oviatt & mcdougall, 1994).there is emerging empirical support for these ideas; oviatt, et al (1994) in an exploratory study found that global start-ups sourced and sold products in multiple countries from inception, finding that their owners were more alert to opportunities, or that the companies had unique assets. relatedly, brush (1992), in her examination of motives for internationalization, found that nearly half of the companies in her sample sold products abroad within the first six years of operations. while this research implies that young and mature companies will have different reasons for internationalizing, possible differences in strategies have not been investigated. literature from the life cycle on small businesses is helpful in suggesting variations in strategies that might be associated with age. in general, due to "newness", young companies are less likely to have administrative structures or formal systems in place (churchill & lewis, 1983; eggers, leahy & churchill, 1994). further, young companies dilfer from established companies in terms of goals and strategies. strategies of young companies are guided by the vision of the owner/founder (feeser & willard, 1990) and more oaen focused on survival (churchill &. lewis, 1983; eggers, leahy & churchill, 1994). these companies frequently have goals to seek opportunities and resources, rather than control and allocate them (stevenson & gumpert, 1985), and otten behave in an innovative and creative manner, adopting "riskier" strategies under certain environmental conditions (covin & covin, 1989). greater aggressiveness in terms of number of product lines offered and number of market segments served is characteristic of new firms (romanelli, 1989). conversely, mature small companies are characterized by established patterns of decision-making, and identifiable systems and structures (churchill & lewis, 1983; eggers, leahy & churchill, 1994). by virtue of their age, these companies have a track record of experience and operating performance. strategies for these companies are more likely to be the result of planning, market analysis and outsider input (robinson & pearce, 1984), and frequently reflec incremental commitmentsto technologies, products and markets (bijmolt & zwart, 1991).established small companies more o(ten have goals of growth or expansion and design strategies around competitive dimensions (churchill & lewis, 1983). moreover they may be more likely to adopt conservative strategies characterized by modest innovations that did not challenge strong competitors in key markets (covin & slevin, 1989). these small companies are often constrained by previous strategic choices, and have planning systems built in to assess potential risk of future strategies. 55 although strategies of young versus mature exporters have not been compared in any single study, two recent studies suggest there are difterences depending on age. oviatt, et al (1993) found that international new ventures pursued a broad geographic scope (multiple countries), possess a unique intangible asset (competitive advantage), and had strong connections abroad. in contrast, namiki (1988) in a study of sample of established small companies described export strategies as differentiation (products, markets or service), competitive pricing, technological superiority, and customer service. while operationalizations of strategy differ, these studies considered together suggest patterns of international strategy may be associated with age at export entry. further, it is expected early exporting would be more likely to follow theory proposed by entrepreneurial researchers (oviatt & mcdougall, 1994) and late exporting would support stage theory from international marketing (johanson & vahlne, 1977). methodology following questionnaire pre-testing, a national mail survey of a random sample of 1,076 internationalizedsmall ((500 employees) uxk manufacturers was conducted. to supplement this data, in-depth field interviews were conducted with five companies; three that exported early and two that exported late. as in other preliminary studies of international strategy and performance, this investigation was not restricted to a single industry, but included multiple industries (baird, lyles & orris, 1994).given that there is no single comprehensive listing of evporting small companies, the sample was randomly identified from six published lists, consistent with other studies from the field of entrepreneurship. the response rate was 13 percent (n=134), lower than expected or desired, but similar to the modal response rate for mail surveys(erdos, 1970). questionscovered firm demographics, reasons for internationalization types of international business strategies, and performance measures. there are three main dimensions of "international strategy" believed to be inlluenced by early/late export entry. "international strategy" is arguably related to the overall strategy of a company. this study is not examining the overall strategy, rather only the international aspects which are composed of exchange activities involving resources and skills to serve international markets (morrison & roth, 1989). these activities include mode of entry (exporting, licensing, direct investment) (buckley, 1989), degree of internationalization (geographic scope and commitment) (cavusgil, 1984; mcdougall, 1989); goals (namiki, 1988); and perspective of owner/founder on internationalization (ursic & czinkota, 1984; oviatt, et al, 1993). these dimensions operationalized by objective measures of geographic scopenumber of countries, closeness of countries (eramilli & rao, 1991)and commitmentemployees,percentageof total products manufactured sold abroad(cavusgil, 1984). goals are operationalized by a five-point likert scale derived from previous measures of international strategy(piercy, 1981;namiki, 1988). perspective on internationalization is measured using a five-point scale: agreement/disagreement similar to measures used by ursic and czinkota, (1984)and oviatt, et al (1993). following other studies of international strategy, performance was measured using sales year one, (ursic & czinkota, 1984), percent of sales from internationalmarkets year one, and average growth in sales and employees (baird, et al, 1994). growth in sales and employees was a computed variable that determined average growth over the age of the company. 56 several steps were taken to deal with reliability and validity issues. first, chronbach's alpha tests showed reliability coefficients ranging from .6036 to .9418, and item to item correlations of .5 or better, satisfactory results for exploratory research (nunnally, 1970). second, to guard against non-response bias possibly resulting from a low response rate, statistical tests were conducted. these included x'ests for differences in key variables (size, age, number of countries) among a random sample of 30 companies surveyed, 30 companies not surveyed, and 30 companies not responding. no significant differences were found, decreasing threats to external validity. third, test and re-test by telephone of some respondents were made to determine temporal stability of answers (nunnally, 1970). these efforts showed no significant change in responses. results ~bi d respondents were from 48 states, indicating geographical representation. while 18 two digit sic codes were reported, the most frequently mentioned industries of operations were electronics and electronic products, metal fabrication and products, chemicals and pharmaceuticals,instruments and gauges, fashion, and construction. in year one of exporting, 68 percent exported directly, and 32 percent exported indirectly through an agent. most frequently mentioned regions of export were europe (42%), north americacanada and mexico(25%) and asia (10%). canada was the first country served by 21 percent, followed by england (16%). sixty-seven percent sold products in two or fewer countries, 12 percent sold in 3 to 10 countries, and the average was three countries. the mean percentage of total manufactured products exported was 15 percent, with companies less than 6 years old averaging 20 percent and companies more than 6 years old averaging 8 percent. size of business was controlled for in that all those surveyed had fewer than 500 employees, however 80 percent of the respondents indicated they currently had fewer than 100 employees. this is consistent with small business administration (sba) statistics which h h«h j y i iib plyh h idp ply i~iib the american econom, 1988).sales in year one of exporting for these businesses ranged from $2,000 to $ 100,000,000, with the average being $4,607,089, the median $500,000 and the mode, $5,000,000. percentage of revenues from export sales in year one of exporting ranged from i to 99 percent, the mean being 15 percent. in 1990, gross sales ranged from a low of $ 1,000 to $210,000,000;with the median being $2,250,000. eighty percent of the businesses had gross sales of less than $ 10,000,000. the average percentage of revenues from export sales in 1990 was 23 percent. the current average age of businesses responding was 30 years old, and 23 companies were less than six years old at the time of the survey. the average age at first export was 12 years and the mode was one year. 57 exhibit i ~e. d p fl n=l34 industries n= electronics 24 18% metal fabrication/products 19 14% chemicals/pharmaceuticals ii 8% instruments/gauges ll 8% construction products 9 7% means of ex ort entr direct export 90 68% indirect export (through agent) 44 32% re li n of fi st ex ort europe 56 42% canada/mexico 34 25% asia 13 10% number of countries erved y ll fe* i to2 90 67% 3 or 10 16 12% & 10 28 21% size in year ¹ i of ex rt mean sales $ 4,607,089 employees 70 percent revenues from abroad 15% ~anal is 'fo address the first research question regarding strategy patterns associated with early or late export entry, pearsons correlations were run to examine the relationship of all variables of international strategy (n= 25 variables) and age at international entry (intlage). ten of the twenty 5 correlations were significant, five significant at p &.05, and five at p&.l lending support to speculation that different strategy patterns are associated with timing of entry (see 58 exhibit 2). even though the coefiicient values were low, the results do suggest dilferences in strategy depending on age at entry. exhibit 2 results of pearsons correlations examinin relationshi s between a e at ex ort ent and international strate variables ~value coefficient degree of internationalization percent total manufactured products .060 -.1417 sold year one* employees abroad year one .302 .1204 number of countries sold to year one .107 -.1117 country closeness to u.s markets .094 .1161 entry mode (direct, indirect export) .143 .0951 goals and focus obtain new sources of capital .085 -.1317 overcome problems in domestic market .094 -.1251 reciprocate with suppliers abroad .173 -.0994 fill customer orders .237 -.0672 keep up with industry competition .343 -.0386 to survive .009 -.2214 produce high technology product .457 -.0146 develop new markets .186 .0830 establish long term relationships .085 .1298 be first u.s. company in market .447 -.0127 increase sales and profits .384 -.0273 obtain long term stability .117 -.1121 gain large market share .244 -.0655 capitalize on domestic competitive advantage .291 -.0528 international perspective small business should be geographically unlimited .054 -.1585 foreign markets offer unlimited opportunity for small businesses .304 -.0500 small businesses should be quick to take advantage of international opportunities .006 -.2417 internationalization should be planned 054 .1570 selling abroad is risky for small businesses .048 .1618 small businesses should sell abroad only alter selling in u.s. .285 -.0556 '= year one refers to the first year of international activity -= associated with early export entry += associated with late export entry 59 early entry was associated with greater percent of total products sold abroad year one (or breadth of market scope), goals of survival, overcoming problems and obtaining new sources of capital. further, early entrants held a broad international perspective, or view that small companies were geographically unlimited and needed to be quick to take advantage of international opportunities. in contrast, late entry was associated with greater service to markets geographically close, a goal of establishing long term l&usi ness relationships, and held a narrow international perspectiveor view that selling abroad is risky for small businesses, and therefore must be planned increinentally. to address the second question, regarding relationship between timing of export entry and performance, additional correlations were run between age at entry and the performance measures, sales and percent of total sales froin international markets year one of exporting; and average growth in sales and average growth in employees. exhibit 3 results of pearsons correlations examinin relationshi s between e at e ort entr and performance variables p-value coefficient year one total sales .406 .0276 year one % of total sales from international markets .010 -.2613 growth in sales .464 -.0106 growth in employees .207 -.0799 -= associated with early export entry += associated with late export entry these analyses showed no significant relationshipbetween age and sales year one, or age and growth in sales or employees. the only significant correlation was percentage of sales from international markets year one (p. 010, -.2613)but the relationship was negative. this suggests age at international izationhas only a minor effect on performance, only with regard to a greater percentage of total sales derived from international markets. the third research question investigated patterns of strategy and their association with perfonnance relative to timing of entry. to answer this question, the data set was split into two approximately equal sized groups; the first exporting at 7 years of less of age (n=69) and the second; exporting at 8 years or more of age (n=65). this age break is consistent with previous studies in entrepreneurship(fredricksen,et al, 1987;small busi&ressin the american economy, 1988). for each group, correlations were run separately between all strategy variables and two 60 performance variables, growth in sales and growth in employees. the results are shown in exhibit 4. exhibit 4 pearsons correlations between strate variables and performance* late entry early entry growth sales growth emp. growth sales growth emp. variables ff. iii cff -" i lf lli "ff degree of iatcrnaiionaiizatian '/o total products sold yr. ill employees abroad yr. g i no. of countries sold to yr. it i country closeness to u.s markets .014 467 goals and focus ff. fi ii. fi if new sources of capital .050 -.359 .039 -.367 overcome problems in domestic market .012 -.459 reciprocate with suppliers abroad fill customer orders keep up with industry competition .077 .315 to survive produce high technology product develop new markets establish long term relationships be first u.s. company in market increase sales and profits obtain long term stability gain large market share .020 -.420 capitalize on domestic competitive advantage .022 -.415 international perspective *ff. « if. *ff ~f sm. bus. geographically unlimited .071 .323 foreign markets unlimited opportunity .040 .381 sm. bus. be quick to internationalize 043 .375 .054 .351 .025 .422 internationalization should be planned .058 -.344 selling abroad is risky sm. bus. .090 -.297 sm. bus. go abroad ager selling in u.s eonly correlations significant at &. i are shown. 61 this analysis showed distinctly difterent results for the early and late groups. for the early group, six significant relationships emerged between strategy and growth in sales, and one between strategy and growth in employees. significantrelationshipswere foundbetween goals growth in sales, but these were negative. for the late group, four significant relationshipswere found between strategy variables-all of which were international perspectivesand growth in employees,and two for growth in sales. these results suggest that depending on age at entry. different strategies are associated with better or worse performance. discussion and conclusions this study finds that different patterns of international strategy are related to age at export entry. in other words, alternative international strategies are employed depending on the age that the company exports. international strategies of early exporters might be characterized as more "aggressive" in the sense that they are committed to selling a greater percentage of total manufactured products abroad, and are seeking new sources of capital. they have a broad international perspective, agreeing that small businesses are more geographically unliinited and quick to take advantage of opportunities, without concern for resources controlled (stevenson & gumpert, 1985). these characteristics generally support previous empirical research (romanelli, 1989; covin & covin, 1989) on entrepreneurial strategy. one of the field studies provides a contextual example. the president of a golf club manufacturingcompany founded in 1987 stated that the company sold abroad within the first year of operations because the "opportunity presented itself. vt couple of japanese businessmen liter ally knocked on the door and asked if i couhl sell niy clubs in japan." more than 20 percent of this company's $ 1 million in sales were derived from export in the first year. the company planned to further explore sales to other parts of asia. in the words of the founder, "hly vision was world-widepom the start". internationalstrategiesoflate exportersarecharacterizedas more "conservative" in that selling abroad was viewed as risky, planning was important, and goals in exporting were to establish long term relationships. this strategic approach is consistent with stage theory of internationalizationand supports findings from export marketing about mature companies. a manufacturer of microfiche products offers an illustration. this $9 million company with 80 employees sold abroad after 8 years of operations. the founder noted "the industry was internaiionali ingand for us to mainiain relationships, we had to sell products overseas." the processofexportingwasdeliberateand planned,dueto requirementsforgovernmentapprovals and endorsements in foreign countries. this study did not reveal any significant relationships between age at entry and perfonnance, implying age of the business alone at the time of export has no consequence or benefit to performance. these results suggest mcdougall and oviatt's (1994) arguments that competencies and expertise gained by the owner/founder in previous activities may compensate for a lack of business operating experience. the ability of the owner/founder to transfer previous learnings and experiences may have the effect of reducing the perceived "risk" of exporting leading to a more aggressive export strategy. similarly, the 1990's experienced rapid technological changes creating easier access to information sources, 62 customers, and distribution, different from previous decades. hence, the stage theory (johanson & vahlne, 1977), which assumed that young companies lacked the requisite operating experience to export and therefore would suffer a greater risk or penalty than established companies if they exported early, needs to be updated as argued by melin (1992). while performance benefits or detriments were not apparent in the analysis of the overall sample, when the sample was split by age at entry, and relationships between strategy and performance analyzed, certain patterns of strategy were related to growth in sales or employees. three findings emerged: 1. overall, better performance for both early and late entrants was associated with a broad international perspective. specifically, the view that internationalization should occur swialy was positively associated with better growth in sales and employees. three correlations were signilicant, all at.&05 and with correlation coeflicients at .351 or above indicating moderately strong relationships. 2. for late exporters, international perspectives were positively associated with growth, however, goals, scope and commitment of strategy were not significantly related. in particular, views regarding fast internationalization and unlimited geographic scope were related to growth, but a cautious view that selling abroad is risky, or should be planned over time resulted in lower growth. 3. for early exporters, growth was associated with international perspectives that small business should be quick to internationalize,and that foreign markets were unlimited. in contrast, goals in seeking a competitive advantage, market share, new capital, overcoming problems were associated with lower growth. these findings imply that international perspective or view held by the owner/manager of a small business in the internationalcontext has a more powerful effect on performancethan stated goals, or degree of internationalization (scope and commitment). the association between being "quick to internationalize" and growth in sales or employees suggests given the decision to export, expansion should be quick. for late exporters, conservative perspectivesdeliberate planning, perceived riskcan be detrimental to growth. for early exporters, unachievable goalsgaining large market share, capitalizing on domestic competitive advantagecan result slower growth. therefore the fit of international perspectives of the owner founder and organizational goals consistent with company size are important aspects of the decision about timing of export entry. although this study was limited by a lower than expected response rate, a potential threat to external validity, several steps were taken to insure representativeness. this research was not intended to be comprehensive, or to suggest causality, but was exploratory. despite these limitations, this investigation does show distinctions in international strategies and relationshipsto performance of small manufacturers based on timing of export entry. while it might be expected that type of products would impact these findings, evaluation of these findings by technology level of manufacturers(high or low technology) revealed no significars relationships across any variables. further investigation of this is needed. additionally, 63 regional variations might similarly be expected, although the sample size did not permit this type of analysis. these findings have implications for future research which should study contingent effects of environment (industry, home country and host country), and aspects of strategic competencies (firm specific assets). this may offer additional insights into differences in strategies depending on entry age. further, the u.s. domestic base of companies in this sample calls for replication of this study in other countries to determine if similar international strategy patterns exist for early/late exporters. for educators of s mal i business owners, this study implies a need to include perspectives on international market opportunities. the view that internationalization of young or mature small businesses is "risky", is not supported by this research. entrepreneurshipcourses should include a segment on international market opportunities, assessment, and techniques for gathering data to help students develop a broader international perspective. for small manufacturers facing strategic choices and opportunities in the changing global marketplace the begging question 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(1988) internationalization: evolution of a concept. journal of general management.(14)2: 34-55 67 strategy does the size of the organization affect compensation strategies? an empirical analysis nancy e. day university of missouri kansas city abstract little is known about how compensation sirategies in sniail businesses differ pom ihose in large firms. based on past research involving orgamsational characteristics and pay strategies, assumptions were initially made that sniall firms would exhibit more flexible, egalitarian and non tradittbnal pay strategies, serving to maximize pay at risk and minimi e pay levels to reduce the fixed costs of employment. consettuently, data on compensation policies were analyzed from l48 successfiil small and large businesses. contrary to predictions, there were no differences benveen small and large organisationsin pay level, pay structure, emphasis on market competitiveness or emphasis on paying for performaiice. implications of these findings are discussed in terms of tlieir relevance to the small business decision maker introduction increased national and global competition have pressured american businesses to revamp key pay practices to ensure that workforce productivity is maximized while fixed costs of the workforce are minimized. whether successful organizations use more innovative approaches to pay seems to depend to some degree on the characteristics of the organization (balkin & gomez-mejia, 1984; balkin & gomez-mejia, 1987; gerhart & milkovich, 1990; gomez-mejia, 1992; gomez-mejia & balkin, 1992; lawler & jenkins, 1992). for example, successful organizations in start-up and growth stages tend to adopt 'experiential" (balkin & gomez-mejia, 1987; gomez-mejia, 1992; gomez-mejia & balkin, 1992) compensation strategies that put more emphasis on variable pay that is linked to the achievement of specific long-termindividual,grouporcorporategoals. sincegrowingorganizationstendto have fewer resources and need to respond more quickly to competitors and the environment to succeed, they use pay strategies that lower the fixed costs of base pay and increase "variable pay" leveraged by long-term, strategic goal accomplishment. these growth management strategies (or-experiential strategies," as gomez-mejia calls them) are both decentralized and flexible in order to meet the unique requirements of individual business units. successful mature organizations tend to use more traditional "algorithmic" pay (balkin & gomez-mejia, 1987; gomez-mejia, 1992; gomez-mejia& balkin, 1992) which emphasizes base pay, hierarchical relationships seniority or short term individual performance results (such as typical merit pay programs). these mature businesses are in less volatile competitive environments and generally have more resources as well as a large employee base that may utilize and benefit from extensive hierarchies. thus they are able to provide higher base salaries that permit a 83 i long-term, stable workforcc. these algorithmic plans tend to be uniform throughout the organization'sbusiness units, designed and supported by a centralized compensation function. although some research exists regarding how pay strategies are used by organizations at di f1'erent growth stages, sales levels and degrees of diversification (balkin & gomez-mejia, 1984; bat kin & gomez-mej ia, 1987; gomez-mejia,1992; gomez-mejia& balkin, 1992),very little is known about differences in compensation strategy between small and large organizations, except that larger organizations usually pay at higher levels than smaller comparable organization (gerhart & milkovich, 1992). there are several reasons why differences in compensation strategieswould be expected between small and large businesses. first, small businesses usually lack extensive hierarchies and multiple business units, and thus it could be expected that small business compensation programs would be more experiential than algorithmic. second, small businesses usually have lower sales and hence are less likely to want to spend many financial resources in high fixed salary costs, preferring to link variable pay to the accomplishment of key organizational objectives. third, since small businesses are often faced with competitive and environmental pressures that are more pronounced and challenging than those found in large organizations, it would be expected that their employees would be paid so that strategic business goals would be met through the use of incentive systems and a large amount of "pay at risk." fourth, since small firms are less likely to have internal labor markets from which to choose labor (doeringer & piore, 1971),we would assume they would be more likely to have pay systems more closely aligned with competing in the external labor market. fit)h, smaller organizations have fewer institutionalizedcultural characteristicsthat are usually reinforced by compensation practices in larger firms. althoughthesepredictionsmake sense,no researchcurrentlyexiststhat includesthe size of the organization as a dilterentiating factor in compensation strategies. understanding the differences between the pay strategies of successful small and large organizations would be useful to the small business human resource manager or consultant in prescribing optimum compensation policies. thus, this paper presents data comparing four key compensation policy decisions between successful small and large organizations from a sample of midwestern employers. ~p: i i p organizationstypicallydevelop policies, formally or informally, about the level of pay in relationshipto pay for similarjobs in the broader labor market. smaller organizations often will be less able to lead the market in salaries due to more limited resources. although traditional compensation philosophy has asserted that higher pay levels will attract, retain and motivate higher quality employees, which in turn will lead to enhanced organizational effectiveness this idea has been called into question in today's more innovative compensation climate (i awler & jenkins, 1992). our assumptions about smaller organizations lead to the conclusion that they would offer lower base salaries in favor of higher "pay-at-risk." since smaller organizations must exist in more competitive and rapidly changing environments where fixed costs must be controlled, we would anticipate they would offer lower base salaries 84 so that they could drive key behaviors through some type of incentive pay. thus, we would expect smaller organizations to adopt lower fixed pay policies than larger organizations. additionally, base pay and benefit levels, particularly for managers and professionals, will be higher in organizations with higher sales levels (balkin & gomez-mejia, 1984). since higher sales are usually associated with organizational size and success, it could be expected that smaller organizations would exhibit lower pay levels. ~pr « a very limited amount of'research has been published on how pay structures are related to organizational characteristics as gerhart and m i 1kovich (1992)point out, the pay structures found across organizationsoften differ in both type and number, and little is known about the impact of such differences on organizational eltectiveness. pay systems can be found on a continuum from egalitarian to hierarchical (gerhart & milkovich, 1992; milkovich & newman, 1996), with egalitarian pay systems having fewer levels and narrower differentials between levels than found in hierarchical structures. the popular notion is that more egalitarian structures lead to increased teamwork, cooperation and trust, more creativity, innovation and commitment. egalitarian structures are also associated with experiential pay strategies, since they reject the large hierarchies that are typical of algorithmic pay plans. however, egalitarian structures are more likely to cause salary compression and diaiculty in recruitment, problems which would be minimized in small organizations since fewer employees are involved. hierarchical structures, while efficient, emphasize status, lower initiative, creativity and risk-taking (milkovich & newman, 1996). since small businesses by definition have fewer employees and thus usually fewer jobs, they will be less likely to have hierarchical pay structures featuring many salary grades. additionally, the smaller number of employees oflen require workers to "wear more than one hat" and thus be flexible an team-oriented in working relationships in order to respond to competitive pressures, qualities that an egalitarian structure would be more likely to support. thus we would expect small firms to have more egalitarian pay structures, including fewer grades and smaller differences between the grades. em hasis on internal versus external e ui traditional salary plans have incorporated both internal equity and external competitiveness(or external equity). these plans have sought to balance market pressures with the strategic, unique job values of each organization. while external equity is established through market surveys and analysis, internal equity has typically been established through complicatedjob evaluation plans. these plans oflen use "compensable factors" (such education or experience required, supervisory responsibility,decision making requirements, etc.) divided into degrees which are worth varying numbers of points and a hierarchy is created based on the total point values of each job across a number of compensable factors. contemporary literature and progressive compensation consultants often state that an emphasison internal equity inappropriatelyaccentuatesstatus differences, focusing employee attention on irrelevant objectives (lawler, 1990) and emphasizing power and resource acquisition instead of the accomplishment of organizational objectives (emerson, 1991; 85 schuster &. zingheim, 1992). job evaluation is often considered to be an administrative dinosaur in contemporary businesses. alternatively, emphasizing market pay rates when determiningsalary programs is seen as more complementary to current competitive pressures and more cost-effective in attracting and retaining productive workers. however, it is acknowledgedthat all organizationsmust take both internal and external equity into account, in varying degrees, to create effective pay systems. since smaller organizationsare less likely to develop extensive hierarchies and are more impacted by external competitive pressures, an emphasis on internal equity through job evaluation is more likely to be found in large, hierarchical organizations. additionally, we would assume that sinaller businesses would be more likely to emphasize market-based pay over internal equity concerns (although the actual pay level may be set at below market rates to achieve optimum flexibility through incentives), given that their more limited resources would restrict the amount of time and money available for extensive job evaluation procedures ~pa mix traditional compensation strategies have emphasized base pay for the majority of employees, providing variable pay (through incentive payments, bonuses, etc.) based on goal accomplishments only for top executives. although there are large variations in how organizationsdeliver pay to individuals(gerhart & milkovich, 1990),there has been a general trend for businesses to put more pay "at risk" for employees at all levels. these pay systems usually offer a base salary that is at or below market rates, and allow employees to earn lump-sum bonuses if and when certain predetermined objectives are achieved. since these bonuses do not increase base salary, such pay systems are seen not only as motivational tools, but as methods to hold down the fixed costs of employment, sort of an "economic insurance" against harder times. according to some contemporary compensation theorists, larger organizations will be less likely to have incentive systems, since the administration of incentives in large organizations becomes problematic due to the importance ofextensive checks and balances needed to achieve procedural and distributive justice across a broad variety of jobs and employees(balkin& gomezmejia,1987; gerhaa & milkovich,1990).additionallybecause some large organizations generally have more financial resources, they are less concerned with holdingdown fixed coststhan are smallbusinesses.conversely,since small organizationsmust ensure that business objectives are accomplished in a volatile competitive environment, they will be more likely to encourage goal accomplishment through variable pay systems. there are four research questions that emerge from this discussion. since organizational maturity and sales have previously shown relationships with a number of characteristics of pay policies as well as organizational size (balkin & gomez-mejia, 1987; gomez-mejia, 1992; gomez-mejia & balkin, 1992), these variables will be considered in the analyses. 86 p.« l after controlling for organi ational maturity and sales, successful small businesses will be more likely to express lower pay level strategies than will larger busiiiesses. ~2pu. a. afier controlling for organi ational maturity and sales, successful small businesses will be more likely to have fewer salary grades than larger busmesses b. afier controlling for organi ational matumty and sales, successfiil small busmesses ivill be more likely to have smaller differentials betweeti salary grades than hlrger busmeises. 3. internal versns ertermil e ui afier controlling for organizational matutdty and sales, successfitl small organi=.ations will be snore likely to emphasi=e market rates over internal equity considerations titan will larger organizations. ~4. pa mixt a. after controlling for organizational niaturity and sales, successful small businesses will be niore likely to offer incentive pay than ivill larger businesses. b. afier controlling for organizational maturity and sales, successfiil small businesses ivill be niore likely to emphasisea pav for-performance strategy tlian will larger businesses. method a questionnaire was sent to 1,121 organizations, taken from two samples, a dun & bradstreet database and the membership roster of a local hr manager's professional organization. there were no significant differences in the major variables between the two samples in sales or whether they were publicly or privately owned. respondents did represent slightly larger companies (about 225 more employees) and longer business tenure (about 10 years longer). however, these differences are to be expected, since larger, more established companies probably have more staff available to complete such questionnaires. since this study is interestedonly in companies that are considered to be successful, organizations were selected from the sample for which the respondent reported that they were "very successful" or "somewhat successful" in achieving both profitability and operational goals (see table i). measures compensation managers completing the survey were asked a number of questions describingthestructuresand policies associated with their pay programs. to assess pay level policy, respondents were presented with an item from gomez-mejia and balkin's (1992) compensation strategy scale, "over most of our jobs, the preferred position of our organization'ssalary levels with respect to competitors is:," with five possible responses from 'substantially below the market" to "substantially above the market.'o assess the pay structure, respondents were asked to indicate the number of salary grades they had, and to 87 table 1 descri tion of sam les sample number in sample respondents response rate dun k bradstreet 866 121 14% hr manager assn. 255 52 20% total 1121 173 15% of 148 firms that reported themselves to be at least "somewhat successful" in meeting profitability and operational goals: industry: full-time employees: sales: maturity stage: health care 30% fewer than 100 10% under $50 million 30% start-up 2% manufacturing 25% 100 to 499 40% $51 to $500 million 37% growth 31% service 18% 500 to 999 20% over $500 million 34% mature 62% banking, finance 16% 1000 to 499 24% decline 5% wholesale/retail trade 6% 5,000 or more 6% transportation, utilities 5% report their average midpoint differential, or the average difl'erence between the midpoints of the salary grades, expressed as a percentage of the minimum. this "midpoint differential's a commonly accepted measure of pay level differences. internal versus external equity emphasis was assessed through the question, "in general, if you had a job where market data and job evaluation points each indicated different pay levels, which would you do?'o which respondents could answer, "rely totally on the job evaluation point score," "rely mostly on the job evaluation point score," "compromise equally between job evaluation results and market data," "rely mostly on market data'r "rely totally on the market data." policies toward pay mix were measured in two ways. first, respondents were asked if they offered employees annual incentives or bonuses based on specific performance standards. second, eight items were taken i'rom gomez mejia and balkin's(1992) compensationstrategy survey that are listed in table 2. these items were analyzed using principal component analysis and loaded on one factor (eigenvalue = 4.00) which account for 50 percent of the variance. a scale was summed from these items which exhibited adequate reliability (a = .85). table 2 items in pa mix scale'. we have a strong commitment to distribute rewards based upon contributions to the organization. 2. in this organization, a portion of an employee's earnings is contingent upon group or organization performance goals being achieved. 3. we designed our compensationsystem so that a substantial portion of our compensaticn costs is variable pay in the form of incentives, bonuses or related rewards. 4. we believe that employees should be risk-takers with some of their pay. 5. corporate performance is used as a criterion for pay decisions and aggregate incentive programs (e.g. gainsharing, profit sharing) for employees. 6. pay incentives such as a bonus or profit sharing are an important part of the compensation strategy of this organization. 7. pay incentives are designed to provide a significant amount of an employee's total earnings in this organization. 8. bonuses are provided often; the frequencyofbonuses is viewed at least as importnat as their magnitude. responses were on a five-point scale from "strongly disagree" to "strongly agree" 'tems arc taken from gomez-metis and balktn's (1992) compensation strategy scale. 89 'fo assess the independent measure, size of the organization, respondents were asked to indicate the number of full-time employees at their firms. the control variable of organizational maturity stage was determined by an item, "how would you characterize the stage your organizationis in?" with the responsesof "start up: a new company five or fewer years old that is small in size and run by an entrepreneur; anticipates most growth in the future," "growth: sales are growing rapidly at about 20% or more annually, in real terms. technology and company structure is changing due to rapid growth," 'mature: growth is stable and slow. products or services are familiar to the vast majority of prospective users" and "decline: growth is declining. the company is competing in declining markets" (balkin & gomez mejia,1990; gomez-mejia,1992; gomez mejia& balkin, 1992; rumelt, 1974).sales was assessed by the item, 'what were your firm's sales or revenues last year?" with five choices from under $50 million to $501 million or more. ~anal ses the independent variable, size of the organization in number of employees, was split into two groups, small organizations (having fewer than 500 full-time employees) and large organizations (500 or more employees). although this variable was continuous, because the primary focus of this study is differences between small and large businesses, we believe this split was justifiable. we tested these differences by conducting an analysis of covariance for each of the dependent variables (for research questions 1, 2a, 2b, 3 and 4b) in which organizational stage and sales were covariates. however, since the size variable was continuous, supplementary regression analyses were conducted to ensure that splitting this continuous variable into a categorical variable did not significantly alter the results (aguinis, 1995; pedhazur, 1982).the control variables(organizationalstage and sales) were entered first and the independent variable, number of full-time employees, was entered second. question 4a, which investigated differences in the frequency that small versus large organizations offered incentives above base salary, was analyzed using a simple chi-square statistic. results means, standard deviations and the correlation matrix can be found in table 3. table 4 shows the analyses of covariance. as can be seen, none of the propositions was supported by these data. there were no significant differencesbetween small and large companies in their pay level policy, number of salary grades, average size of midpoint differentials between grades, the emphasis on internal versus external equity, or pay for performance emphasis. the supplementaryregression analyses revealed the same results. the chi-square analysis testing proposition 4a, which predicted that small organizations would be more likely to offer incentives than large organizations, also was not supported. forty (54%) small businesses reported offering incentives, and 46 (62%) of large businesses offered them, a difference that was not statistically significant (c'999; p = .319). 90 table 3 means standard deviations and correlation matrix mean sd i 2 3 4 5 6 7 i size of organization 1327.69 2612.55 1.00 2 organizational growth stage '.70 .59 .04 1.00 3 company sales '.87 1.47 .46 *** .19* 1.00 pay level policy " 3.25 .66 .19 a .02 .20 * 1.00 5 number of salary grades 28.98 20.39 .09 -.05 .03 .23 " 1.00 6 size of salary grade differentials 10.21 4.02 .08 -.18 .03 -.23 " -.12 1.00 7 emphasis on ext. or int. equity '.36 .93 .05 .20" -.04 .16 .09 -.09 1.00 8 emphasis on pay for perf. strategy 20.96 7.13 .25 a* —.15 .23 * .26 ** -.09 .11 -.15 + p & .10 ~ p & .05 '*p & .01 '**p & .001 number of full-time employees i = start-up; 2 = growth; 3 = mature; 4 = decline i = up to $50 million; 2 = $51 to $ 100 million; 3 = $ 101 to $ 150 million; 4 = $ 151 to $500 million; 5 = $501 million or more i = substantially below the market; 2 = somewhat below the market; 3 = generally equal to the market; 4 = somewhat above the market; 5 = substantially above the market i = rely totally on job evaluation; 2 = rely mostly on job evaluation; 3 = compromise; 4 = rely mostly on market data; 5 = rely totally on market data table 4 anal scs of covariance small large organizations organizations n = 74 n = 74 mean std. dev. mean std. dev. f pro . i: pa level policy main effect: org size 3.08 .72 3.42 .55 2.649 .106covariates'826 .440 pro . 2a: number of solar grades main effect: org size 26.79 24.94 30.55 16.42 .136 .714covariates'080 .924 pro . 2b: avera e mid oint differential main effect: org size 10 79 5 44 9 87 2 93 .404 .527covariates'.345 .267 pro . 3: internal versus external e ui main effect: org size 3.25 1.05 3.45 .83 .250 .618covariates'.170 .315 pro . 4b: pa mix main effect: org size 20.19 6.71 21.75 7.51 .290 .591covariatcs'.779 .004 since some organizations adopt a "total compensation" strategy in which the competitive level of benefits is used to balance the level of pay policy, an analysis of the benefit levels offered was conducted, again using analysis of covariance and multiple regression. these results were also not significant, indicating that small and large business also do not differ in the competitive level of either the pay or benefits they offer. indeed, the similarity in compensation strategies between these successful small and large organizations is striking. of note is that beiore controlling for organizational growth stage and sales, smaller organizations were significantly lower in pay level policy than larger organizations(f = 10.598,p = .001).thus, differences between small and large firms in level 'ncludes organizational growth stage and company sales 92 of pay seen in previous research (gerhart & milkovich, 1992) may be due to the differences in sales and maturity rather than size itself. however, there were no differences between small and large firms in the other dependent variables before controlling for maturity and sales. also of interest is that the control variables showed little ef1'ect on the dependent variables. however, as can be seen in table 4, a pay for performance emphasis was predicted by the control variables. the supplementary regression analysis for this dependent variable showed that organizational growth stage was significantly related to a pay for performance strategy (b = -.184,t = -2 044, p = .043) although sales was only marginally related (b = .173. t = 1.705, p = .091). discussion contradicting contemporary assumptions about how compensation strategies relate to organizational characteristics, this study has found that there are very few differences between small and large organizations in salary structures emphasis on internal versus external equity, emphasis on pay for performanceor frequencyof incentivesoffered. surprisingly, differences in pay levels between small and larger employers disappeared afler controlling for sales and organizational maturity, indicating that pay level may be more associated with sales and maturity than with size of the organization. thus, this study shows that the organizational characteristic of firm size is not related to compensation strategy. at least among these successful companies. there are several issues worth developing when interpreting these results. first, on average, the organizations represented in this sample seem to exhibit fairly traditional pay systems. the mean of pay level policy across the sample was 3.25, reflecting a level that is "generally equal to the market" or a little higher. additionally, salary structures were generally descriptive of hierarchical rather than egalitarian strategies. there were on average a large number of salary grades (28.98 was the overall mean) and the average midpoint differential (10.21 percent) was reflective of a traditional salary structure. the average response to balancing internal and external equity was also typical of traditional systems: compromise between the two, with a slight tendency to focus on the market (mean across the sample was 3.36). similarly, the tendency to focus on pay for performance was moderately low, with an overall mean of 20.96 (a total dependence on pay for performance would be 40; total non-dependence on pay for performance would total 8; the middle ground would total about 24). thus, the organizations in this sample seem to be fairly conservative in their compensation strategies, regardless of number of employees. why did we find no differences in compensation policy and practice between small and larger employers? one possible explanation is that our sample may not represent the scope of all american businesses. first, we were interested in midwestern employers,and thus sampled only databases from missouri, nebraska, iowa, arkansas and kansas. a larger sample from across the nation may have provided data that would have shown differences based on firm size. since the popular thinking is that the midwest lags the coasts in adopting new business strategies, it may be that afl midwestern firms, both small and large, tend to be more conservative in pay practices. second, our sampling method may have selected employers who 93 1 tend toward more conservative pay. using the dun ec bradstreet database may have selected employerswho use pay policies that historically have been successful for themselves or other organizations. third, because the completion of this questionnaire required someone who was fairly knowledgeableabout compensation issues, it may have been that organizations that did not have a compensation staffdid not complete the survey. if compensation professionals are more "comfortable" with traditional pay practices, it may be that they have designed pay policies that reflect more conservativestrategies. finally, both databases used may be skewed toward larger organizations, for some of the reasons just mentioned. organizations with 100 employees or fewer made up only 10% of the analyzed sample. it may be that the smallest organizations would contrast more distinctly from larger firms. a further concern about this study lies in the method of measuring organizational success. the self-report method is open to the subjective opinions and tendencies toward impression management of the respondents. however, since these hr managers were responding to a university researcher the motivation to "look good" was probably minimal. nevertheless, further study into compensation strategies of successful organizations should seek to devise a more objective measure. im lications for mall business wners ana ers and consultants the results of this study, although possibly somewhat limited by the sampling method, show that small organizationsthat have been identified as successful in both profitability and operational goal achievement did not differ from their larger competitors in pay level, salary structure design, focus on internal versus external equity or pay mix. thus, prudent professionals who find themselves in the role of making pay decisions for small organizations should be cautious when considering discarding traditional pay practices. both small and large employers in this study were successful, and both groups used very similar pay strategies. thus differences in compensation strategies based on size should not be assumed. rather, small business decision makers should carefully evaluate the strategic needs of their organizations and design pay systems that can effectively support the behaviors and motivations needed to accomplish these strategic needs. some suggestions that these policy makers should consider are: i. do not assume that the only relevant competitors for labor are other small employers. since small firm pay strategies are quite similar to large firm pay strategies, competitive pressures may demand looking beyond the small firm labor market. similarly, professionals who have experienced job losses at larger organizations should not eliminate themselves from the small business job market. 2. do not try to design a compensation structure that is too simple to be effective. the successful small employers in this study did not differ from larger employets in the number of grades and degree of differential between them. while simpler structures can be effective, they inust provide adequate differentiation for effective promotional, career and supervisory needs. 94 3. a pay system that incorporates a significant amount of emphasis on internal equity is not necessarily a "organizational dinosaur." the successful organizations in this study, both large and small, on average made fairly even compromises between balancing internal equity and external competitiveness. 4. offer variable pay only if it achieves the goals of the business strategy. only a little over one-half(54'/0) of the successful small businesses in this study offered some kind of incentive, not statistical lydilterent from the incidence of incentives ottered by larger firms. incentive programs are effective only when performance can be adequately identified and measured, when the time dimension within which the results are achieved coincides with the incentive pay-out and the incentive pay out is meaningful to participants. 95 references aguinis, h. 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(1992). employee compensation. in m.d. dunnette and i..m. hough (eds.), handbook of industrial and organi ational psychology (pp. 481-569). palo alto, ca: consulting psychologists press. gomezmejia,l r. (1992).structure and process of diversification compensationstrategy and firm performance. straiegic managemetrt journal, ?3, 381-397. gomez-mejia, l.r.,& balkin, d.b.(1992). compensation, organizational strategy andftrm performance. cincinnati: south-western publishing co. lawler, e.e. (1990).strategic pays aligning orgamzational strategies and pay systems. san francisco, ca: jossey-bass publishers. lawler, e.e., & jenkins, g.d. (1992). strategic reward systems. in m.d. dunnette & l.m. i lough (eds.), handbookof industrial and organizational psychology(pp. 1009-1055) palo alto, ca: consulting psychologists press. miceli, m.p., jung, i., near, j.p., & greenberger, d.b. (1991).predictors and outcomes of reactions to pay-for-performance plans. journal ofapplied psycliology, 76, 508-521. milkovich, g.t., & newman, j.m. (1996).compensation (5a ed.). homewood, il: irwin. pedhazur, e.j.(1982).multiple regression in behavioral research (2" ed.). new york: holt, rinehart and winston. podsakoff, p.m., & organ, d.w. (1986).self reports in organizational research: problems and prospects. journal ofmanagement, ?2, 531-544. rumelt, r.p. (1974). strategy, structure and economic performance. boston: division of research, harvard business school. schuster, j.r.,& zingheim, p.k. (1992). the new pays linking employee and organi ational performance. new york: lexington books. 96 strategy antecedents of job burnout among small company presidents richard c. becherer the university of tennessee at chattanooga richard-t3echerer(tdiac. edu diane halstead the university of tennessee at chattanooga diane-halsteadqautc. edu john maurer emeritus professor of management wayne state university jgm/93 7aol. corn abstract several studies suggest that small business presidents may be especially susceptible toj ob burnout because of their personality traits and the unique organi aiional demands of their position. this issue has not been directly tested in small business research, however. this exploratory study examined the relationship of several personal, work, and environmental characteristics toj oh burnout among 215 small company presidents. a series of regression analyses found that five variables explained 44 percent of the variation in burnout levels among small business presidents. each of the five predictor variables was individually significantly related to burnout. the results of this study suggest that effective coping straiegies for job burnout among small company presidents may be both individualand situation-specific. introduction small businesses represent most of the economic growth in the united states today, accounting for over 99 percent of all employers (sba, 2000). furthermore, small entrepreneurial firms have created the majority of net new jobs in the past twenty years (timmons, 1999). these businesses are expected to continue growing rapidly through 2005 in terms of output as well as employment. clearly, the small business sector is vital to real economic expansion. the growth associated with small business development extracts a very serious price from one of its primary participants, however, the small business president. that price is job burnout. burnout has been linked to mental and physical health problems as well as interpersonal problems. the organizational effects of burnout include turnover, absenteeism, and reduced job performance (see kahill, 1988 for a review). several studies suggest that small business presidents may be especially susceptible to burnout because of their personal traits (cordes & dougherty, 1993) and the unique organizational demands of small businesses (kuratko & hodgetts, 1995: 471-481). while 26 journal ofsmall business strategy vol. j i, no. l spring/summer 2000 there is considerable anecdotal and impressionistic evidence about job stress among small business presidents, the determinants of job burnout for this occupational category have not been the subject of systematic, empirical research. over the past twenty years, burnout research has focused almost exclusively on care-giving professionals, e.g., nurses, teachers, social workers, etc. (burke & greenglass, 1995). a literature search produced no research on burnout for small company presidents despite evidence that this group may be as susceptible to burnout as employees in the typical "helping" professions (jackson, 1984; jackson & schuler 1983). given the importance of the small business sector, the critical role of the small president within that sector, and the extreme negative consequences of job burnout, a study of burnout within this population is warranted. perhaps an understanding of the correlates and antecedents of burnout among small company presidents can suggest ways to avoid or cope with this debilitating condition. while the research reported here is early and exploratory, it is important to identify directions for future research and some issues that require further investigation. the research builds on previous studies in a systematic way by using the conceptualization of job burnout first established by maslach (1982). burnout is a particular type of prolonged job stress characterized by feelings of emotional exhaustion, depersonalization (treatment of people as objects), and reduced personal accomplishment. this multidimensional framework continues to be used by the major researchers in the field (e.g., cordes &. dougherty, 1993; lee & ashforth, 1996; maslach & jackson, 1981, 1986; wolpin et al., 1991). in an attempt to extend their findings, this research specifically looks at gender issues. a comparison of male versus female small business presidents is necessary due to the large number of conflicting findings related to job stress among women managers and entrepreneurs (see beatty, 1996 for a review). the article is organized as follows. first, previous job burnout research is discussed, with emphasis on the personal, work and environmental demands of small firm presidents. research hypotheses are presented, followed by a discussion of the study methodology. next, the results of several regression analyses are provided, and implications of the research for small company presidents and management research are presented. theoretical background job burnout represents a particular type of job stress —specifically a series of chronic, emotional responses to prolonged, stressful work demands and conditions (ganster & schaubroeck, 1991). the conservation of resources theory of stress (hobfoll, 1989; hobfoll & freedy, 1993) suggests that burnout occurs when "certain valued resources are lost, are inadequate to meet demands, or do not yield the anticipated returns" (lee & ashforth, 1996: 123). these resources include job enhancement opportunities, control and autonomy, participation in decision making, and social support from various sources (cordes & dougherty, 1993; lee & ashforth, 1996). the major work demands include role conflict, role ambiguity, stressful events, heavy workload, and pressure (lee & ashforth, 1996). burnout has been differentiated from job stress in that the former may be a possible response to prolonged stress (quick, 1987). consequences of burnout the consequences of job burnout can be costly and damaging to both the individuals and organizations involved. job burnout has been linked to a variety of physical consequences including fatigue, insomnia, headaches, and gastrointestinal disturbances (kahill, 1988), as 27 journal of small business strategy vol. l l, no. l spring/snmmer 2000 well as chest pains and appetite problems (burke & deszca, 1986). emotional effects include depression, irritability, decreases in self-esteem, and anxiety (jackson & maslach, 1982; kahill, 1988). interpersonal problems associated with burnout include the deterioration of social and family relationships (burke & deszca, 1986; jackson & maslach, 1982) and increased drug, alcohol, and tobacco use. negative attitudes develop (kahill, 1988), and organizational commitment decreases as well (jackson, turner &. brief, 1987; leiter & maslach, 1988). behavioral changes of burnout victims which directly affect organizational performance include higher levels of job turnover (jackson et al., 1986) and absenteeism (firth & britton, i989) and decreases in the quality and quantity of job performance (maslach & jackson, 1985). clearly, burnout can have damaging effects on the individual employee, the employee's family, friends, and co-workers, as well as the organization. burnout propensity among small business presidents despite the lack of research on job burnout among small company presidents, related studies suggest that this occupational group should be investigated. small business presidents appear to be highly susceptible to burnout due to their personal characteristics, their unique job roles, and the organizational demands of small businesses. for example, several studies have documented that managerial work is inherently more stressful than other occupations due to higher levels of role overload, role conflict, and role ambiguity (caplan et al., 1980; french & caplan, 1972). frequent interaction with others also increases the propensity for stressful conflict (cordes & dougherty, 1993; french &. caplan, 1972). empirical studies of managerial activity show that a very high proportion of time is spent in interaction with others (e.g., mintzberg, 1973; guest, 1956). in addition to the frequency of interaction, certain kinds of interpersonal contacts can cause strain as well. jackson and schuler (1983) and jackson (1984) speculated that managers and supervisors, because they are required to help their employees resolve both job-related and personal difliculties, may experience burnout in the same way that those in the "helping" professions do. also, top-level managers who perform "boundary-spanning" functions have a high frequency and intensity of interpersonal contact which increases their burnout propensity (cordes & dougherty, 1993). boundary-spanning personnel operate at the periphery of the organization, interacting with a myriad of people both inside and outside the organization (behrman, bigoness, & perreault, 1981; singh, 1993; singh & rhoads, 1991; singh, goolsby & rhoads, 1994). as such, they experience a high degree of role conflict that is associated with higher levels of burnout (cordes & dougherty, 1993:628). individuals who hold work as a central life interest (e.g., dubin, 1956) are also more likely candidates for emotional exhaustion because they view their work as being of extreme importance. furthermore, high expectations in terms of achievement, work challenge, rewards, recognition, and career development create stress (cordes & dougherty, 1993) which may lead to burnout. overachievers, in particular, are more vulnerable to burnout than other individuals (maslach, 1982). all of the above characteristics could be said to describe many small company presidents, indicating that burnout could be one negative consequence of their occupational success. in order to determine the possible nature and extent of burnout among small company presidents, determinants of burnout are examined next. 28 journal ofsmall business strategy vol. i i, /vo. l spring/summer 2000 antecedents of burnout among small business presidents overview. cordes and dougherty (1993) originally categorized the antecedents of job burnout into three areas: personal characteristics, job and role characteristics, and organizational characteristics. we theorize that both personal and job/role characteristics (what we term "work" characteristics) will be significant contributors to job burnout among small company presidents. organizational characteristics are not likely to be significant predictors of burnout for this group, however. this is for two reasons. first, when jackson, et al. (1986) investigated the impact of organizational characteristics on burnout, no significant relationships were found. second, small business presidents enjoy much more organizational control as a group than managers or other workers due to their status. therefore, organizational traits such as work shifls, reward systems, and psychological work environment are less likely to significantly impact presidents'urnout levels. alternatively, it is more likely that the external environment faced by the small firm will aitect the ceo's burnout potential. the small business ceo is directly impacted by multiple facets of the environment and is less buffered from the environment than his/her larger business counterparts. accordingly, we defined a third area, environmental characteristics, as a predictor of burnout for this group. the external environment captures the important effects of industry structure such as the degree of environmental uncertainty, turbulence, and hostility (covin & slevin, 1989; neman & slevin, 1993). small firms are especially vulnerable to hostile environmental effects because of their limited resources (covin & slevin, 1989). each of these three categories of burnout variables, personal, work, and environmental characteristics, is discussed next in the context of this study. personal characteristics. age, gender, and the proactive personality trait were selected as key personal characteristics impacting burnout. age has been shown to be inversely related to burnout by several researchers (anderson & iwanicki, 1984; gold, 1985; maslach & jackson, 1981; schwab &. iwanicki, 1982). one explanation for this relationship is that older persons have developed more experience in coping with job stressors and thus exhibit less burnout (lee & ashforth, 1993). hi: for small company presidents, age will be inversely related to burnout. in research on gender and job-related stresses, females oflen report more burnout than males (cordes & dougherty, 1993). some researchers have speculated that entering maledominated fields such as management makes women more vulnerable to stress. this is due to the unique combination of pressures, conflicts, prejudices, and isolation women encounter when they do not restrict themselves to traditionally 'female'obs (davidson &. cooper, 1988; scase, goffee, & mann, 1987). at the same time, several competing arguments have been offered. female managers report lower levels of stress than both blue-collar workers and people with lower occupational status (karasek & theorell, 1990), and some managerial women experience less stress than other groups of working women, even those in female-oriented professions (e.g., harlan & jensen, 1987). women in male-dominated professions have also reported lower levels of depression, fewer symptoms of illness and medication use, and higher job satisfaction (beatty, 1996; harlan & jensen, 1987). some empirical studies found a greater degree of depersonalization among men than among women, but the same studies found no relationship between gender and either emotional exhaustion or reduced personal accomplishment, two components of burnout (maslach & jackson, 1985; russell, altmaier & van velzen, 1987; schwab & iwanicki, 1982b). thus, the question of gender and job burnout has not been definitively answered. we postulate that female presidents will experience higher levels of burnout than 29 jourttat of soiall business strategy val. l i, no. i spring/summer 2000 males. h2; female small company presidents will report higher levels of burnout than their male counterparts. proactivity was selected as the third personal variable. it is defined as "...the relatively stable tendency to effect environmental change" (bateman & crant, 1993). to the extent that small company presidents perceive some level of control over their environment and organization, as well as their ability to take positive'ction, their burnout levels should be lower. loss of control has been associated with higher levels of stress, occupational strain (deviation from normal work responses including psychiatric symptoms such as anger, depression, memory loss), and job burnout (cordes & dougherty, 1993; lee & ashforth, 1996; rahim, 1996). h3: proactivity will be inversely related to burnout. work characteristics. according to cordes and dougherty (1993),job or role characteristics (i.e., work characteristics) can affect burnout levels as well. these include variables such as the degree of interpersonal interaction, role conflict,'ole ambiguity, and others. organizational structure (i.e., organicity) is highly likely to impact burnout among small company presidents. organicity refers to "the extent to which organizations are structured in an organic versus a mechanistic manner" (covin & slevin, 1989). it is proposed here that a more organic structure, i.e., one that is characterized by open channels of communication, an emphasis on expertise rather than authority, inforinal control, etc., would reduce the demand on the small company president'and thus reduce felt burnout. since various work demands contribute to job burnout, it is proposed that a structure which reduces these demands will have a positive impact on burnout levels. accordingly, h4: organicity will be inversely related to burnout. role conflict has been found to be a significant factor in both job stress and job burnout (and one or mor6 of its components) in a number of studies (see cordes and dougherty, 1993 and lee and ashforth, 1996 for reviews). role conflict is defined as incompatible expectations directed to a role incumbent by his or her role senders (kahn, 1978). incongruent role demands and commitments are especially common in boundary spanning positions (cordes & dougherty, 1993; singh et al., 1994). the findings regarding role conflict have been consistent across studies and for a variety of groups in care-giving professions. according to,, cordes and dougherty, the relationship between role conflict and burnout "...would be expected to be equivalent in corporate and industrial settings as well" (1993: 631). we propose that role conflict will therefore affect burnout levels of small firm presidents. hs; role conflict will be positively related to burnout. environmental characteristics. covin and slevin (1989) found that the external environment faced by small firms had substantial impact on their performance. the external environment consists of a variety of competitive, technological, and other uncontrollable variables that have a strong impact on small firm viability and growth. given the small company president's typical role as the prominent, if not sole, boundary spanner for the firm, burnout may be caused by individuals and organizations in the firm's external environment. this study examines two aspects of the environment which are known to be relevant for small firms-hostility and turbulence, as interpreted and perceived by the president. hostile environments are "...characterized by precarious industry settings, intense competition, harsh, overwhelming business climates, and the relative lack of exploitable 30 journal ofsmall business siraregy vol. l l, no. l spring/summer 2000 opportunities" (covin gc slevin, 1989: 75). they found that the adverse impact of perceived environmental hostility presented an even greater threat to small businesses "due to their limited resource bases and relative inabilities to survive the consequences of poor managerial decisions" (1989: 75). as the perceived threat to a small firm's viability increases, the likelihood of burnout should increase as well. accordingly: h6: perceived environmental hostility will be positively related to burnout. the second environmental characteristic, perceived environmental turbulence, is defined as environmental dynamism, or the unpredictability of competitors'nd customers'ehaviors, the rate of product and technological obsolescence, and the required rate of change in a firm's marketing practices (naman & slevin, 1993). since unpredictable change is inherently stressful, the higher the rate of perceived turbulence in a small business'nvironment, the higher the likelihood of burnout for the small company president. 7)tus; h7: perceived environmental turbulence will be positively related to burnout. methodology sample and procedure questionnaires were mailed to 683 small business presidents located in a large midwestern metropolitan area. using the small business administration's classification, small businesses were defined as firms having total annual sales less than $ 10 million. these presidents represented a combination of previous participants in a university small business institute program over a thirteen year period and a few others identified in newspapers and business periodicals as businesses meeting the criteria of privately held with sales of less than $ 10 million. while industry type for each respondent was not identified in the data, the geographical area was primarily noted for manufacturing prowess. hence, as compared with other regions, manufacturing companies most likely predominate in the sample the response rate was 31 percent. of the 215 respondents, 79 percent were male. the average respondent was 48 years old, had a four-year college degree and had been with the company for 11 years. forty-nine percent of the sample started the business, 20 percent purchased the business, and 13 percent inherited the business. the remaining presidents did not own the businesses they managed. the average business was 15 years old, had 22 fulltime employees, and enjoyed annual sales of $3,590,000. measures the independent variables in this study include the three categories of personal (age, gender, and proactivity), work (organicity and role conflict), and perceived environmental characteristics (hostility and turbulence). the relationship between these predictor variables and job burnout is examined. job burnout. burnout was measured using the widely-adopted mbi (maslach burnout inventory) 22-item scale originally established by maslach (1982). the favorable measurement properties of this scale have been extensively documented (cordes ec dougherty, 1993). a seven-point likert scale was used, anchored at i ("very much like me") and at 7 ("very much unlike me"). examples of individual items include: "i am at the end of my rope," "work is hardening me emotionally," and "i accomplish worthwhile things." this scale demonstrated an alpha reliability of .89, indicating that the items are consistent measures of burnout. 31 journal of small business strategy vol. i i, lito. i spring/summer 2000 personal characteristics. the personal characteristics examined in this study were age, gender, and proactivity. age and gender were self-report items. proactivity was measured using a seven-point likert scale anchored at i ("very much like me") and at 7 ("very much unlike me"). this 17-item measure has evidenced strong criterion validity (e.g., crant, 1995). one sample item includes, "if i believe in an idea, no obstacle will prevent me from making it happen." reliability of this scale was very high at alpha =.91. work characteristics. two job/role characteristics were included in this research: organicity and role conflict, organization structure was measured using a seven-item scale measuring organicity (i.e., the extent to which organizations are structured in an organic vs. a mechanistic mode). first developed by khandwalla (1977), it uses a semantic differential scale, anchored at i ("a strong emphasis on always getting personnel to follow the formally laid down procedures" ) and at 7 ("a strong emphasis on getting things done even if it means disregarding formal procedures"). reliability for the organicity scale was alpha =.86. role conflict was measured with four items adapted from the rizzo, house, and linzman (1970) scale. a seven-point likert scale was used, anchored like the proactivity scale (e.g., "very much like me" and "very much unlike me"). a sample item includes, "i receive incompatible or contradictory requests from two or more people." reliability of the role conflict measure was marginal at .61, but the exploratory nature of this study makes this acceptable. environmental characteristics. perceived environmental hostility and turbulence were the two variables included in this category because they seem most relevant to small businesses (covin 6't slevin, 1989; naman 4't slevin, 1993). hostility was measured using khandwalla's (1977) original three-item, seven-point scale, later adapted by naman and slevin (1993) to four items. a semantic differential scale was used in which bipolar descriptions of the external environment facing the firm were provided. for example, one of the hostility measures includes, "hospitable and low-stress environment," anchored at i, while "very stressful and hostile environment" represented the opposite end. for the turbulence scale, miller and friesen's (1982) five-item, seven-point scale of environmental dynamism was used, also used later by covin and slevin (1989) and naman and slevin (1993). a sample item includes, "actions of competitors are quite easy to predict," anchored at i while "actions of competitors are unpredictable" was anchored at 7. the reliability of the environmental hostility scale was alpha = .59, while the reliability of the environmental turbulence scale was alpha = .73. data analysis correlations between the variables were analyzed in order to determine the nature and strength of their relationships. analysis of variance was conducted to determine differences in job burnout levels based on gender. next, multiple regressions were performed in which each of the three categories of burnout antecedents was related to the overall job burnout measure. a series of stepwise multiple regression analyses using all predictor variables was then performed to determine whether different sets of the independent variables contributed specifically to burnout among the small company presidents. results table i provides the means, standard deviations, reliabilities, and intercorrelations of the research variables. the data provide support for hypothesis l. age is moderately and inversely related to burnout (-0.17). with respect to h2, an analysis of variance revealed that females reported a statistically significant higher average score (66.70) than males (59.46) on 32 journal ofsmall business strategy val. ll, na. l springysttmmer 2000 burnout (between group f=4.46; p=0.03). thus, h2 is supported. hypothesis 3 is supported by the data in table l. proactivity is strongly and inversely related to burnout (-0.54). hypotheses 4 and 5 are also supported in that organicity is inversely related to burnout (-0.26) and role conflict is strongly related to burnout (0.42). h6 is supported, but not h7. environmental hostility is related to burnout (0.29), but environmental turbulence is not. table i variable means, standard deviations, reliabilities tlk intercorrelations proorganrole turbvariable mean sd burnout age activity icity conflict hostility ulence alpha burnout 62 52 19.25 0 89 personal characteristics age 47.9 11 04 -0.17'roactivity 91 14 14 03 -0 54»» -0 05 0.91 work characteristics t3rganicity 35.17 7.34 -0.26" -0 07 0.30'» 0.06 0.86 role conflict 14.51 4.32 0.42" 41.1 4i.is»» -o.l 41.09 0.61 environmental characteristics ilosti1ity 12 61 3 43 0.29" 0.01 -0.22" -0.02 0.02 0.11 0.59 turbulence 2037 5.66 0.02 o.l 0.07 o.l o.l i o.l o.ib" 0.73 'p&0 5 "p& ol because of the significant zero-order correlations for almost all the individual predictor variables, multiple regressions were performed within each of the three categories of predictor variables: personal, work, and perceived environmental characteristics. table 2 reports the multiple correlation coefficients. a comparison of the zero-order (i) with the multiple correlation coefficients for the predictor categories produces two important findings: i ) in combination, multiple variables in each category are significant predictors of burnout; and 2) the multiple regression model for the personal characteristics and the work characteristics categories provides better explanatory power than either of the independent variables within these categories taken alone. because of both the high and significant zero-order correlations and the improvement evidenced with the multiple regressions, stepwise multiple regressions (p s .05) using all six predictor variables were performed. this analysis was designed to determine whether different sets of predictor variables contributed specifically to burnout. table 3 presents the stepwise regressions. the most important finding is that 44 percent of the variation in burnout is accounted for by five of the six predictor variables. perceived environmental turbulence was not included as a significant regression variable. 33 journal ofsmall business strategy vol. 7 7, na. 7 spring/summer 2000 table 2 multiple regression: personal characteristics, work characteristics, dtr environmental characteristics as determinants of burnout dependent overall variable regression variable beta 1 sist. p value f sist. sig. r adjusted r'ersonal rumour age -0.20 -3.21 0.00 41.92 0.00 0 57 0.32 prosciiviiy -0 55 -8.73 0.00 work rumour organiciiy -0.22 -3.19 0.00 24.27 0 00 0.48 0.22 role conllict 0.40 5.88 0.00 environmental rumour envimnmentai hostility 0.29 3.98 0.00 7.96 000 0.29 0,07 environmental turbulence -0.03 -0 42 ns 'p&0.5; vvp&.01 table 3 stepwise regression: burnout against all variables dependent overall variable regression variable beta 1 stat. p value f stat. sig. r adjusted rs rumour organicity -0.12 -1.95 0 05 proaciiviiy -0.42 -6 69 0.00 role conflict 0.30 5.07 0.00 27.76 0 00 0.68 0.44 age -0.18 -3.01 0.00 environmental hostility 0 16 2.75 0.01 discussion and implications this study has identified important determinants of job burnout for a sample of small company presidents. the results support some of the previous job burnout research, but some new findings emerged. for example, the finding that environmental hostility, but not environmental turbulence, is strongly related to burnout is noteworthy. perhaps the uncertainty created by a turbulent environment does not take its toll on the small firm president the way the stress of a hostile environment does. this finding may be unique to small company leaders, however, and not business leaders in general. entrepreneurs may be accustomed to a great deal of uncertainty in the external environment. since 49 percent of our sample consisted of small company presidents who had started their businesses, the entrepreneurial orientation explanation has merit. the results regarding age confirm the notion that younger small business leaders are more susceptible to burnout than their older counterparts. this suggests that organizational practices with respect to hiring, training, and providing employee assistance programs may be affected. for example, younger presidents may need a greater variety of experiences earlier in their careers in order to improve their coping abilities quickly. alternatively, they may require job and/or personal counseling in order to deal with burnout effects. 34 journal ofsmall business siraregy voi. ii, no. i spring/summer 2000 the finding that women reported significantly higher burnout levels than men is important because of the conflicting results of previous research. it is possible that earlier research which found equal or lower burnout levels among women (as compared to men) may have been due to female subjects'nwillingness to report higher burnout levels. this may be true for women in male-dominated professions or in higher level supervisory positions especially. as women assume more traditional male roles, they may fail to acknowledge their burnout in attempts to be "more professional" or more like their male counterparts. alternatively, they may actually experience less emotional anxiety or have learned how to subsume, limit, or somehow resolve their stress-related responses on the job. regarding the final stepwise analysis, it is also significant that proactivity, role conflict, and organicity all play an important role in understanding burnout. how a proactive personality predisposition permits a small company president to minimize burnout, and the specific types and amounts of role conflict which are more closely associated with burnout, should be subjects of future research. the findings on personality could lead to better hiring practices or even the use of personality tests in recruiting ifhigh burnout is anticipated. managerial implications an important implication of job burnout among small business presidents concerns firm performance. to the extent that burnout leads to poorer managerial decision making, the firm's viability and growth potential may be endangered. for example, one behavioral response of burnout victims is withdrawal from colleagues, coworkers, clients, and others. withdrawal from others is likely to decrease the amount of participation in an organization. participation is usually defined as joint decision making in which employees are invited to help solve organizational problems (tjosvold, 1987). participation has been shown to improve problem solving in organizations, increase job satisfaction, and, to a lesser extent, increase individual and organizational productivity (miller & monge, 1986). if small business presidents suffer from job burnout and subsequently withdraw, the consequences could be poorer performance and morale not only at the top but throughout the organization. in this respect, burnout can act as a sort of virus which spreads to different areas and levels within the company (i.e., a "contagion" effect; lee & ash forth, ) 993). small business presidents identified as prone to or suffering from burnout may need intervention from close colleagues or family members. ideally, this intervention would occur before firm performance is negatively impacted and, for humanistic reasons, before burnout seriously affects the ceo's physical and emotional health. addressing burnout should not be limited to just managerial practice, however. educators in small business management must include burnout-related research and topics in their curricula. often this topic is restricted to psychology courses or, in business programs, to human resource management courses. as university programs in small business management and entrepreneurship grow due to their increased economic importance, the issue of burnout as a topic of interest in entrepreneurship education should grow as well. a second performance issue concerns the life cycle stages of business ventures (the phases documenting the activities and evolutionary process of business organizations from start-up to eventual decline). following kuratko and hodgett's model, these stages consist of: i) newventure development, 2) start-up activities, 3) growth, 4) stabilization, and 5) innovation or decline (1995:472). it is in the later aspects of the growth stage and in the stabilization stage where burnout effects are most critical. during the growth stage, major changes in organizational strategy are required in that businesses need to become more manageriallyor administratively-oriented in order to handle rapid growth. as a result, organicity is likely to 35 journal ofsmall business srraregy vol. l l, aro. l spring/summer 2000 decline as formal policies and procedures are developed and implemented. as organicity declines, burnout increases. in addition, role conflict is likely to increase for the small business president as the organization evolves. more and more demands are placed on the president's time as the business evolves from a one-leader, entrepreneurially-managed firm to a multi-level, administratively-managed firm. as role conflicts increase, burnout propensity increases as well. thus, the evolutionary stage of the small business may be a likely factor in burnout tendency among small company presidents. future research should address several areas. first, additional data on the type of industry in which small businesses operate would be helpful. some industries (e.g., healthcare) are undergoing volatile change, and others are expanding rapidly into new areas (technology industries and entrepreneurial "dot corn" ventures). including samples of small businesses from these industries could bias results if included with other industries that have radically different environmental profiles. for example, as an independent variable, industry type could explain the differing environmental hostility/turbulence results in this study (hostility was significantly related to burnout, but turbulence was not). clearly, the next step for research in this area is to examine industry type. second, other predictor variables within the three categories should be examined. in the personal characteristics category, for example, personality type (e.g., "type ab), attitudes toward risk, locus of control, and religiosity could be investigated. for work characteristics, we propose the following: extent of slack in the firm, quantitative and qualitative role overload (cordes & dougherty, 1993), and the extent of delegation of authority. for the environment, industry type, uncertainty, work-family conflict, and social support mechanisms need to be examined as well as objective measures of hostility and turbulence. third, moderating and mediating variables need to be introduced. with regard to the latter, for example, how does environmental hostility "play through" as a correlate of burnout? of course, longitudinal research designs may be useful to explain causal relationships. further theoretical development will depend partially on identifying specific antecedents for specific occupational (or other) groups. a more detailed understanding of how burnout predictors vary across occupations, situations, and/or individuals will allow researchers in job burnout to develop and test models that exhibit greater predictability and parsimony. references anderson, m. b. g., & iwanicki, e. f. 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(1991). is job satisfaction an antecedent or a consequence of psychological burnout? human relations 44, 193-209. dr. ricltard beclierer is tlie clarence e. harris chair of excellence in business and entrepreneurship at the university of tennessee at chauanooga. his research interests are in entrepreneurship and marketing issues in the health care delivery system. dr. diane halstead is the uc foundation associate professor of marketing at the university of tennessee at chattanooga. her research interests include customer satisfaction and loyalty, customer service, marketing strategy, and entrepreneurship. dr. john maurer is emeritus professor of management and former dean and director of the small business institute of the school of business administration at wayne state university. his research interests are small business, organizational theory, and strategy. 38 about the authors becoming a small business owner: the hispanic experience howard d. feldman is an associate professor at the university of portland. his research interests are in the fields of entrepreneurship, si:nall business, venture capital, and entrepreneurship education. julio 0. de casini is an assistant professor at the university of colorado. his teaching and research focus on strategy and entrepreneurship topics. thomas j. dean is an assistant professor at the university of tennessee. he teaches in the strategic rnanagcment field and performs research in the areas of strategic management and entrepreneurship. karen vaught-alexander is an assistant professor at the univt:rsi1y of portland-and director of the integrated writing program. she teaches linguistics and business as well as professional writing with a special emphasis on' writing across disciplines. small business consulting: a jo-region analysis of sm11// business institute progroms, 1990 marilyn young is professor of business administration and director of the small business institute at the university of texas at tyler. george joyce is a professor of marketing at the university of texas at tyler and has served as director of the small business institute. small businesses as captive companies: business strotegy and firm performance among u.s. auto suppliers aaron a. buchko is assistant professor of management at bradley university. his research interests include the nature of competitive strategy and strategy in interorganizational systems. effect of professional background on venture capital proposal evaluation. richard b. carter is a member of the finance department at iowa state university. his research includes capital acquisition, particularly for small or fledgling firms. and investment banking. howard e. van auken is associate professor of finance at iowa state university. during 1989 he was a fulbright scholar in mexico. his research interests are in the area of small business finance. stra tegy brand loyalty measurement made easy: a preference-behavior model carl obermiller seanle university carl oqaseattleu. edu abstract tt new method for assessing and interpreting brand loyalty is proposed that should be well suited for small business managers because it is easy and inexpensive to implement, the results are easy to interpret, and it offers insights into competiiion that are superior to alternative approaches. the method is based on a modification of a brand switching model. rather than two brand purchases, the measures of the new model are one brand purchase and brand preference. the resulting mixed model combines the conceptual advantages of behavioral and auitudinal approaches to brand loyalty. it matrix of the two measures can be analyzed in terms of each brand's gravity, or power to convert brand preference into sales, and focus, which relates to its ability to auract sales pom preferences for other brands. implications are drawn for small business strategy. introduction to a large extent, the success of most small businesses depends on their ability to create and maintain customer loyalty. in the first place, selling to brand loyal'ustomers is far less costly than converting new customers (reichheld, 1996; rosenberg tk czepiel 1983). in addition, brand loyalty provides firms with tremendous competitive weapons. brand loyal consumers are less price sensitive (krishnamurthi gz raj, 1991). a strong consumer franchise gives manufacturers leverage with retailers (aaker 1991). and, loyalty reduces the sensitivity of consumers to marketplace offerings, which gives the firm time to respond to competitive moves (aaker, 1991). in general, brand loyalty is a reflection of brand equity, which for many businesses is the largest single asset. brand equity reflects the value added (or subtracted) to a product that results from brand knowledge —for example, the value added to a cola drink, when the drinker knows it is coca cola. brand loyal consumers who purchase coke time afler time illustrate the brand's high equity. arguably, for small businesses, with relatively fewer resources, a loyal customer franchise is the most important source of competitive advantage. for retailers, who, of course, sell many brands, the concept of brand loyalty may apply specifically to the store's brand if there is one; but, it can also generalizes to store loyalty. thus, retailers with high store loyalty enjoy similar competitive advantages, including less price sensitivity and leverage relative to suppliers. 32 journal ofsmall business strategy vol. 13, no. i spring/summer 2002 despite the importance of brand loyalty, many small business managers may give it insufficient consideration because the typical measures are expensive, cumbersome, and difficult to communicate or understand. this paper presents a simple operationalization of brand loyalty, based on measures of brand preference and previous purchase. the two measures can be taken in a single data collection. the results can be interpreted directly from the resulting matrix, with additional statistical analysis available. the data collection tasks are relatively simple, the concept is fairly clear, it has the advantages of both attitudinal and behavior measures, and it offers insights into competition that can benefit marketing strategy. loyalty concepts and measures perhaps the most cited conceptual definition of brand loyalty comes from jacoby and chestnut (1978, p. so): "the biased, behavioral response, expressed over time, by some decision-making unit, with respect to one or more alternative brands out of a set of such brands, and is a function of psychological (decision-making, evaluative) processes." consistent with this definition are two broad categories of operational definitions. the first stresses the "behavioral response, expressed over time" —typically a series of purchases. (for example: the purchase pattern, "coke, coke, coke, pepsi, coke" suggests higher loyalty than "coke, pepsi, store brand, pepsi, coke.") the advantages of the behavioral measure include the focus on the most relevant criterion for managers —purchase, the avoidance of situational effects by measuring over time across several incidents, and the relatively straightforward nature of the data. as day (1969) observed, however, the major limitation of behavioral measures is the failure to identify motive and the resulting confusion between brand loyalty and other forms of repeat buying. for example, repeat purchases may result from either low involvement or distribution limits. two consumers may regularly purchase morning doughnuts from jan's bakery. one does so because he loves jan's doughnuts; he would drive across town to get them. the other buys them because he catches the bus outside the bakery. although he likes doughnuts, he actually prefers other brands to jan's, just not enough to go out of his way to buy them. clearly, the baker should value the ability to distinguish between these types of consumers. purchase behavior alone is insufficient. the major alternative operational definition is based on consumer attitudes, preferences, and purchase intentions. these measures stress the cognitive "bias," and the "psychological (decision-making evaluative) processes" underlying loyalty. also, because attitudinal measures are typically collected from surveys, they can more accurately be directed to the "decision-making unit" than can behavioral measures, which may come from anonymous sales data. other advantages of attitudinal measures may include identification of the reasons underlying loyalty and greater protection against the ettects of temporary conditions, such as stock-outs or short-run competitive promotions. the limitations of attitudinal measures of loyalty are similar to those of any measure of attitudeconcems for the specificity of the attitude object (particularly attitude toward the brand versus attitude toward buying the brand), the possibility of demand effects resulting in the construction of a false attitude (usually from a poorly worded questionnaire), and the possibility of attitude change (especially since attitude measures are typically one-shot measures). in a recent review of the concept, oliver (1999) proposed four categories of brand loyalty. the four are based on the classic hierarchy of effects notion that consumers first process information to form beliefs, use those beliefs as the basis for attitudes, then make behavioral decisions based on relative attitude strengths. oliver argues that the value to the firm of loyalty increases as the basis moves from attribute beliefs, to auitudes, to behavioral intentions, and, in the fourth category he adds, to a behavior pattern that is strong enough to resist most obstacles. the additional insight provided by oliver's framework is valuable, but 33 journal of suiall business strategy vol. 13, iuo. 1 spring/summer 2002 it does not contradict the basic distinction between the attitudinal and behavioral conceptualizations. he elaborates by proposing two levels of each —relatively weak and strong attitudes and relatively weak and strong behavioral tendencies. in fact, even the latter pair, the two strongest forms of loyalty are distinguished essentially by strength of attitude. what oliver calls "ultimate loyalty" is driven by behavioral intentions based on very strong attitudinal preference. given the attitude and behavior dimensions of brand loyalty, the business manager has several options for assessing or monitoring it. since attitudes are typically fairly stable, inferences may be drawn from a one-time measure of attitudes, which could be measured in a survey. because the behavior dimension requires multiple measures, assessments based on behavior generally require multiple contacts. (the biases and error inherent in asking subjects to recall their previous purchases outweigh the benefit of trying to measure several purchases in one contact.) three techniques are commonly used to collect data on multiple purchases; scanner data can track purchases, but the technology is expensive, and few small businesses are in a position to use it. a second method is to use a panel whose members record their purchases over time. the third approach is to conduct a wave of surveys. the major disadvantage to behavior-based measures of loyalty is the inability to identify the strength or qualitative nature of the consumer's relationship to the brand. multiple purchases may reflect a weak preference based on limited knowledge. or, no preference but mere habit. or, no preference but limited availability of better-liked alternatives. this conceptual limitation, when coupled with the additional expense of data collection, should impel managers to include some attitudinal measure in order to qualify brand loyalty. the preference-behavior model combines simple measures of purchase and preference for an estimate of brand loyalty that is rich enough to avoid the limitations of using either concept alone without incurring the additional costs or complexities of many other approaches. the preference-behavior model and measures the preference-behavior model is based on a simple change in a brand switching model developed by colombo and morrison (1989). the colombo and morrison model was derived from a classification of consumers as either hard core loyal (hcl) or potential switchers (ps). thus, after any given purchase, a consumer will either be sufficiently satisfied that he will consider no other brands and automatically repurchase the last brand purchased (hcl), or he will consider alternatives and have some probability of buying each (ps). the simplifying assumption of the model is that hard core loyals do not switch; potential switchers may or may not switch. these categories generalize loosely to those consumers who are very brand loyal and unlikely to switch at a given point and those who are not brand loyal and, therefore, likely to switch from brand to brand. (see appendix for details of the colombo and morrison model.) the proposed preference-behavior model is mathematically equivalent to the simplified mover-stayer model of colombo and morrison (1989). the key change is the substitution of preference for the first behavior measure. the resulting 2 x 2 matrix consists of "most preferred brand" and "last brand purchased." the model redefines hard core loyals as those who always buy their most preferred brand. (analogs of the consumer who would drive across town to get his favorite doughnut.) the other consumers are potential switchers. thus, the likelihood of purchasing a given brand is the sum of the proportion of that brand's hard core loyals and some fraction of the remainder. that fraction is a measure of the brand's ability to attract potential switchers. thus, the two important parameters of the model reflect a brand's reliance on highly loyal customers and its success in attracting brand switchers. the 34 journal of small business strategy vol. 13, luo. i spring/summer 2002 first group is those who have a positive attitude toward the brand (prefer it) and who buy it. the second group is those who buy it on a given purchase but who may prefer another brand. an assumption of the model is that every consumer has a preferred brand. if these consumers have a preference, why are they "switching?" although all consumers have a preferred brand, some preferences are stronger than others. weak preferences characterize potential switchers. potential switchers may be variety seekers; or, they may be responding to sales promotions or other situational factors. by considering the relative preferences and purchases, the model computes an ability of each brand to attract consumers from each other brand. the measures and concepts of the preference-behavior model are illustrated in table 1. the diagonal entries represent the number of consumers who last bought the brand they preferred, which would consist of the hard core loyals and those potential switchers who decided to stay with the brand one more time. the off-diagonal entries represent those consumers who last bought something other than their preferred brand. table i preferred brand by last brand purchased matrix preferred brand last brand purchased brand i brand 2 brand 3 brand 4 brand i x brand 2 x brand 3 y x brand 4 z x x: hard core loyals who bought the brand they preferred. y: switcher who prefers brand 3 but last bought brand l. 22 switcher who prefers brand 4 but last bought brand 2. the preference-behavior model presents some important advantages over the two-behavior model of colombo and morrison (1989) while retaining its principle advantages: (i) it is based on the same fundamental assumption that the market can be characterized with two categories —hard core loyals and potential switchers. (2) the output can be easily illustrated in two dimensions. (3) data collection, while reduced by colombo and morrison (relative to more extreme time series approaches), is reduced still further. both preference and last purchase data can be collected in a single survey. (4) the preference measure, "what is your favorite brand of " is simple and clear (unlike some multi-item attitude scales). (5) data can be collected by mail or telephone. further important advantages result from the substitution of preference for a second behavioral measure. because it is based on purchase only, a two-purchase model does not diiterentiate between loyalty and repeat purchase. in the colombo and morrison model, the only requirement for hard core loyal status is two consecutive purchases. in the proposed model, hcls state that the brand is their favorite brand and they last purchased it. also, because a two-purchase model can be used with panel data, it introduces error that may result from reports of multiple purchasers. such error is avoided by the preference-behavior model because both questions are asked of the household's principle product purchaser. illustrative case and discussion in order to discuss the analytic and normative usefulness of the model, an illustrative case is presented. these data came from a survey of packaged ice cream consumers and represent 35 luurna/ of stria/i business srrareg/'ul. /3, //u. l spring/summer 2002 responses to the preference and last purchase questions covering the leading eight brands of packaged ice cream in a major metropolitan area (with other brands collapsed). the packaged ice cream market is an interesting application. the market has had a long history of relative stability, with strong regional brands and several important but not dominant national brands. in the late 1990s, two major national brands, breyers and dreyers, were purchased in part by companies that planned on aggressive marketing strategies aimed at developing positions of national prominence if not dominance. independent regional brands with premium positions and limited marketing budgets have had to pay close attention to maintaining their loyalty and to specific competitive comparisons to determine if their past strategies could withstand an influx of marketing muscle. the brands that were included in this study, with some relevant description are presented in table 2. (some brand names have been disguised.) table 2 packaged lce cream brands brand position distribution price haagen dazs super premium national high ben /k jerry's super premium national high stove rs premium regional medium dreyers premium national medium richards premium regional high neers premium regional medium 8reyers premium national medium smiths regular regional low other mostly regular regional low/medium respondents werc 180 people randomly selected by a professional marketing research company, pre-screened for packaged ice cream consumption and identification of the principal ice cream purchaser in the household. the 10-minute phone survey was an image analysis sponsored by one of the firms; it covered attitudes, knowledge, and use of ice cream. thc data were responses to two specific questions, "what is your favorite brand of packaged ice cream?" and "what is the brand of packaged ice cream you purchased last?" which appeared in separate parts of the survey. results are presented in table 3. table 3 preferred brand by last purchased brand last purchased brand preferred hd lj st dr ri ne br sm other total haagen dazs 5 i 0 0 i 2 2 2 12 25 bends jerry's i 16 i 0 2 0 0 4 7 31 stovers 0 0 9 i 0 0 i i 9 21 dreyers 0 0 i 5 0 0 2 0 2 10 richards i i 3 3 23 3 0 10 12 56 neers 0 0 2 0 0 4 0 0 4 10 breyers 0 i 0 0 i 0 7 i 2 12 smiths 0 0 0 0 i 0 0 12 2 15 total 7 19 16 9 28 9 12 30 50 180 the right hand column of table 3 indicates the number of respondents who identified each of the eight brands as the preferred brand —25 for haagen dazs, 31 for ben/k jerry's, etc.. the eight brands had been identified by management as the set of close competitors. the columns of table 3 indicate the last purchased brand for each preferred brand. for example, of the 25 36 journal of small business strategy vol. /3, no. l spring/summer 2002 who identified haagen dazs as their favorite brand, only 5 had last purchased haagen dazs, i had purchased ben & jerry's, and so on, with 12 having most recently purchased a brand from the "other" category. the diagonal entries in the table indicate consumers who last purchased their preferred brands. the data in table 3 can provide considerable insight into the competition of the market. the preference measures indicate perceptions of brand quality or brand equity. alone, they may not be good indicators of competitive strength, because they fail to capture some aspects of value —particularly price and availability. just as a positive attitude toward rolls royce may not predict purchase of a rolls, a preference for haagen dazs, by itself, may not identify a haagen dazs consumer. nonetheless, a brand with strong consumer preference has a competitive advantage. in this case, richards had about 31% of the expressed preferences for the set of eight brands (56/180, from the far right column) and was, in fact, the region's leading selling brand. on the other hand, the second leading selling brand of the eight was smiths, which had only an 8% share of preference (15/180). this simple result indicates that smiths must have something else going for it, and, indeed, smiths was by far the most 3 aggressive price-promoting brand in the region. another insight into the loyalty of consumers comes from an examination of the diagonals. the diagonal entries are the number of consumers who last bought their preferred brands. if we compare those to the total number of consumers who preferred the brand, we get the proportion of the preferences that were converted into sales. for haagen dazs, this proportion is .20—5 preferred and bought (on the diagonal) versus 25 total preferred (from the right-most column). this proportion is termed gravity —the power of the brand to maintain consumers who prefer it. a brand with high gravity has consumers who are very loyal to their favorite brand. for these eight brands, the gravity proportions all fall within a range of .40 to .58 except for one very low score, haagen dazs (.20) and one high, smiths (.80). thus, haagen dazs was able to convert only 20% of its preferred customers into sales; whereas, smiths converted a full 80%. brand preference is built up over time, based on fairly stable attitudes, but preference alone does not reflect reactions to price or to temporary promotions or stock-outs. a high gravity ratio, however, indicates that consumers regard the brand as desirable, available, and a good value, a brand that is relatively resistant to competitive prices or promotions. these data suggest that haagen dazs had established preference but may have been priced too high or distributed too selectively to convert those preferences to sales. smiths had much lower preference but did more with what it had. a different perspective on the market is revealed by comparing the diagonals with the total of last purchased. this ratio represents the proportion of sales that come from consumers who identify the brand as most preferred and is termed focus. for example, haagen dazs has a focus of .71—5 preferred and bought (on the diagonal) versus 7 total purchased (from the bottom row). a brand with high focus gets sales mostly from consumers who prefer it. brands with low focus "steal" customers from other brands. of the eight brands, the two with highest focus ratios were ben & jerry's (.84) and richards (.82). the other brands range around .60, except smiths, with sales to its own first preference consumers of only .40. firms can succeed with either high or low focus. these data suggest that ben & jerry's and richards were succeeding by leveraging strong loyalty (high focus); whereas, smiths relied on the ability to attract consumers who preferred other brands, capturing deal-prone consumers and brand switchers. this interpretation is consistent with the observation that smiths was the most active price promoter and that ben & jerry's and richards were among 37 journal of small business strategy vol. /3, ivo. i spring/sunimer 2002 the highest priced and least frequently promoted. (gravity and focus ratios for the eight brands are presented in table 4.) table 4 gravity and focus ratios brand gravity focus haagen dazs .20 .71 ben & jerry's .52 .84 stovers .43 .56 dreyers .50 .56 richards .41 .82 neers .40 .44 breyers .58 .58 smiths .80 .40 inter-brand competition and threats to loyalty can be analyzed by examining the individual off-diagonal entries. each off-diagonal represents the number of consumers who preferred one brand but purchased another. (in this case, sample size makes inferences somewhat risky, but the data still serve as an illustration of the usefulness of the method.) these results suggest, for example, that both ben & jerry's and richards are threatened by smiths. smiths has stolen 4 of ben & jerry's 31 and 10 of richards 56 preference customers. these ratios (5/31 and 10/56) are indicators of the weakness of these two brands to smiths. smiths, in turn, can consider those sales relative to their own total as instances of competitor-specific focus. smiths gets 13% (4/30) of its sales from people who prefer ben & jerry's and 33% (10/30) from people who prefer richards. (note that smiths own brand focus is only .40.) for another example, consider the off-diagonal for neers and "other." neers is losing as many of its loyal customers to the set of "other" brands (4) as it is keeping for itself, which suggests both that it is perceived as a low-end entry and that it competes only peripherally with the other seven brands in this group. a limitation of the analysis of the preference-behavior matrix in most cases will be the uneven sales levels across brands. to overcome that problem and to examine loyalty from a slightly different perspective, maximum likelihood estimations of the parameters of the colombo and morrison (1989) equations can be calculated. (the results for the illustrative case are in the appendix. the modest attractive powers of breyers and dreyers deserve comment. these data were collected just before those brands were purchased. in the following year, the marketing budgets and strategies of those brands changed dramatically. a subsequent round of data collection would likely reveal increased ability of those brands to attract brand switchers. the key for regional brand managers is whether they will be able to continue success through their strategies based on low focus (smiths), gravity (stovers), or both (richards), given the increased pressure from the national brands. discussion, implications, and limitations the purpose of this paper was to propose a new and improved method for examining brand loyalty. a major benefit of the proposed model is its simplicity. it requires two direct questions of consumers, regarding preferred brand and last purchase. these questions could be added to virtually any planned research study or could be the focus of an independent study 38 journal of small business strategy voi. )3, no. i spring/summer 2002 that most firms could undertake at far less cost than the more elaborate data collection methods required for alternative methods (panel studies, multiple surveys, or single source time series). further, the method assures distinction between loyalty and mere repeat purchase by inclusion of the preference measure. and, it reduces error by addressing the decision maker rather than relying on household sales reports. using the preference-behavior model is both easy and inexpensive. the bulk of the interpretation can be done by analyzing the preference-behavior matrix, which does not require any statistical analysis and can be done with any basic spreadsheet sofbvare. the key indicators are the gravity and focus ratios, calculated from proportions of the diagonals to row and column totals. specific inter-brand competitions can be analyzed by examining the appropriate off-diagonals —a firm could identify its most direct competitors as those with the highest firm-specific focus scores. ideally, these analyses would be conducted over time, so that firms could track their performances 'on the relevant dimensions in light of changes in marketing strategy. but, in any respect, the interpretation of the data from this method is neither complex nor cumbersome. the additional analyses required for the parameter estimations, of course, do require quantitative skill. but, these estimations are not necessary for interpretation of the data. thus, small business owners or marketing managers who do not have the support of marketing research staff may still make use of the tool. the parameter estimations are, nonetheless, useful and important because they make possible both statistical tests and simple standardized values for comparison purposes. for most small businesses, the cost of doing marketing research is a significant impediment. a major advantage of this method is that the costs are minimal. in fact, the marginal costs may be virtually zero. the data presented here were collected as part of a brand repositioning study that focused on a change in packaging. the preference and purchase measures were two of the thirty or so items in a telephone questionnaire. any firm could include these measures in any study aimed at satisfaction monitoring or brand attitudes, which small business would be wise to conduct periodically. a true guerrilla marketer might even bargain to have the relevant questions included on some other questionnaire conducted by a local research firm. the preference-behavior model has important implications for small business strategy. gravity can be thought of as a measure of general marketing efficiency —the ability of a firm to convert preference to sales. if a firm is doing enough (usually through its offering) to establish preference, its marketing (usually the other 3 ps—pricing, distribution, and promotion) must be able to capitalize on that basic advantage. although a high gravity ratio is not a requirement for success (since widespread preference will lower it), firms should constantly attempt to increase it. for example, consider a local restaurant that conducted a simple study as part of an effort to increase profitability. the owner was looking for ways to increase the store's appeal. what he discovered was that most potential customers already preferred him. but, his gravity ratio was very low. the problem, he learned, was his pricing, which was perceived as too high. by lowering his prices, he converted many of those preferences to sales and increased his overall profitability. the focus ratio tends to reflect targeting. a high focus score indicates a firm that is relying on sales to customers who prefer it. it results from a successful targeting strategy that produces a group of loyal consumers who buy what they most want. conversely, a low focus score indicates that the firm is relying on sales to customers who prefer some other brand, which corresponds to an unfocused strategy. (one might suggest that the focus could be on brand switchers, but that group is both ill-defined and, for a given brand, by definition, constantly 39 journal of small business srrarekn vol. i3, no. i spring/suntmer 2002 changing.) the clearest strategy for attracting consumers away from other brands is through regular sales promotions. price cuts offer enough economic incentive to offset the additional value of competitive brands. few small businesses, however, enjoy the cost advantages necessary to support such a strategy. typically, only large firms enjoy the economies of scale that make cost-based strategies feasible. it should be noted, however, that frequent price promotion may also be a desperation strategy for failing or marginal brands. thus, for most small businesses, a low focus score is not likely an objective. they should aim for a high focus score; such a strategy would conserve resources and simplify management. for example, consider a tutoring firm, testsuccess. after three years, with three locations, testsuccess was merely limping along. analysis of their strategy suggested that their focus ratio was too low. their advertising in newspaper and on radio, which was a major expense, was creating awareness and preference among students all over the region. but, students in only about 20% of the area had reasonable access to one of the locations. testsuccess changed to a more targeted promotion campaign, emphasizing referrals and focusing on schools near their locations. they expect a lower level of preference but a higher focus, lower expenses, and more profit. gravity and focus scores broadly reflect whether firms compete by focusing on their target segments (high gravity) or by appealing loosely to several segments or to frequent switchers (low focus). generally, firms will invest relatively more in brand strengthening actions (e.g., quality improvements or image advertising) and more targeted marketing to increase or maintain high gravity. conversely, firms will invest relatively more in sales promotions and broader marketing to reduce or maintain a low focus. an interesting application of the model might be to assess the proportion of hard-core loyals versus potential switchers before a firm enters the market. markets with more potential switchers may be more attractive and involve less head-to-head competition with established firms. a final implication of the model comes from a consideration of the off-diagonal entries. these entries indicate specific firm-to-firm competition. managers should identify weaknesses —firms to whom they lose their own preference customers —and strengths —sales they steal (customers with preference for other brands). relatively high scores indicate specific firms that are potential threats or targets, and management should determine the basis for the competition and act upon it. often, this means matching competitive promotions or using comparative advertising —"more people who prefer brand x buy our brand, because we taste just as good and we cost less!" although there are significant advantages to the preference-behavior approach to assessing brand loyalty, the method is not without its limitations. because it is likely to rely on survey methods for data collection, it shares the usual limits and concerns about sample size, sample representativeness, and questionnaire design, but other limitations and questions relate more directly to the specific conceptualization of brand loyalty. these include the stability of the statistics, the nature and meaning of the preference measure, and the meaning of the loyalty operationalization. estimation stability is a question with any model. the issues are the stability of the two factors —preference and purchase and the reliability of the their measures. since preference is an attitudinal construct, we should expect it to be more stable than any specific behavior, which may be responsive to situational pressures. in this respect, we should expect the preference-behavior model to exhibit better stability than models based solely on purchases. as has been argued throughout, purchases will vary more than preferences. 40 journal ofsmall business strategy vol 13, no. i spring/summer 2002 the measures themselves should be highly reliable. they are unambiguous and have the advantage of being directed at the specific individual in the household who most typically purchases the product. thus, just as with models based solely on purchases, the estimates will change over time if consumers switch brands, but their inherent instability should be less. anchoring loyalty in preference should also increase the validity of the estimates. consider, for example, a consumer who prefers brand a with the following four-time purchase pattern: a, a, b, a. a repeat purchase approach to loyalty will characterize this consumer as loyal to brand a only one time in three (a-a versus a-b and b-a). by contrast, the preferencebehavior approach would not only identify the preference component correctly all four times, but would show an a-a correspondence three times out of four. further, the preferencebehavior approach distinguishes loyalty based on brand equity from loyalty based on habit or situational inducements. if a consumer buys brand b only because brand a is not available, the model will categorize him appropriately and not mistake him for a brand 8 hcl. one remaining question is the potential bias of last purchase on stated preference. if respondents feel some social desirability pressure toward consistency, they might indicate that their preferred brand was the brand last purchased. such a bias would inflate the estimates of hcl and gravity. the competitive insights drawn from the results should not be affected, however, since any bias is unlikely to aiyect brands differentially'. nonetheless, two cautions might be taken. first, as was done in the current illustrative case, the preference question should be asked first, and the two questions should be separated in the questionnaire. (although respondents could "lie" about their last purchases in order to appear consistent, to do so is much less likely than "fudging" on their preferences.) second, the preference question can be designed to reduce bias. for example, the question might be "although people may not always buy their favorite brands, most people do have a favorite brand. which brand is your favorite?" a related possible source of bias is that respondents who do not have a strong preference may report their last purchase as their favorite. although it is not altogether clear that such an instance constitutes a true bias, its effect could be mitigated by screening subjects with a question such as?do you have a favorite brand?" and excluding those who do not. in general, the advantages of the preference-behavior approach outweigh the limitations. most of its limitations are inherent in any survey methodology. on the other hand, its advantages of low cost, ease and speed of data collection, ease of interpretation, and insight into the nature of brand loyalty and competition should make it a useful tool for small business managers. by collecting the appropriate data and examining the outputs of the preference-behavior model, small business managers can assess their progress toward the relevant aspects of their chosen strategies —extend of preference, success in converting preference, reliance on preference customers, and success in attracting customers who prefer competitors. a final note: managers should be encouraged not only to use this tool, but to use it repeatedly. the best use of the preference-behavior model is probably monitoring changes in the marketplace over time, both to evaluate the firm's marketing and as a way to keep current on the marketplace. endnotes the discussion in this paper draws principally from brand loyalty research, but the concepts and implications generalize to store loyalty and firm loyalty. thus, the term "customer loyalty" refers generally to loyalty to any of those levels. 4l journal ofsmall business strategy vol /3, no. i spring/summer 2002 'i am indebted in this discussion to an excellent review of brand loyalty measures, mellens, dekimpe, and steenkamp (1996). 'note that the purchase proportions from these data do not necessarily reflect actual market shares, since the data were limited to respondents who indicated one of the eight brands of interest as the preferred brand. they should, and do, reflect relative sales levels. in the sample, smiths had a .17 share (30/180) and richards a .16 share (28/180). in actual market shares, smiths trailed richards slightly. 'estimates of brand loyalty for the brands were not available beyond one brand manager' estimate of "at least 50%". alsop (1989)reported measures of brand loyalty for a number of products, excluding, unfortunately, ice cream. because of the strong images of brands and because the category is not characterized by constant and heavy sales promotion, we should expect to see brand loyalty higher than for canned tuna (44%), soft drinks (44%), or beer (48%); probably closer to the 58% level observed for coffee. 'the data in the illustrative case cannot offer a formal test of this potential bias, but they do not appear to exhibit it. there is not a close association between preference and last purchase. references aaker, d. (1991). managing brand equity. the free press: new york city. alsop, r. (1989, october 19). brand loyalty is rarely blind loyalty. the ivall stree/ journal, p. bl. colombo, r. a., & morrison, d. g. (1989). a brand switching model with implications for marketing strategies. marketing science, 8 (i), 89-106. day, g. s. (1969). a two-dimensional concept of brand loyalty. journal of advcrristng research (september), 29-35. jacoby, j., & chestnut, r. w. (1978). brand loyalty: measurement and management. john wiley and sons: new york city. krishnamurthi, l., & raj, s. p. (1991). an empirical analysis of the relationship between brand loyalty and consumer price elasticity. marketing science, /0 (2), 172-183. mellens, m., dekimpe, m. g., & steenkamp, j. b. (1996). a review of brand loyalty measures in markeiing. working paper ¹nr9516, department of applied economics, katholic university leuven, belgium. oliver, r. (1999). whence consumer loyalty? journal of marketing, 63, 33-44. reichheld, f. (1966). the loyalty effect. boston, ma: harvard business school press. rosenberg, l. j., & czepiel, j. a. (1983). a marketing approach to customer retention. journal of consumer marketing, 2, 45-51. (appendix on following page) 42 journal of small business strategy vol. l3, no. l spring/summer 2002 appendix: details of the colombo and morrison model. given a 2 x 2 matrix of purchases, colombo and morrison estimated a model based on two equations: 1) pa= a,+(i-ct,) n; 2) pe=(l-a,) n, where p„was the probability of repurchase, pu was the probability of switching from brand i to brand j, a, was the proportion of hard core loyals for brand i, and x; is the proportion of potential switchers who next buy brand i. thus, the probability of buying brand i was decomposed into the proportion of hard core loyals who were loyal to brand i and brand i' share of the potential switchers. switchers from brand i to a given brand, j, resulted from the proportion who were not loyal to brand i in proportion to brand j's ability to convert potential switchers. (details are available in colombo and morrison 1989). colombo and morrison provided an analysis of a sw'itching matrix for new cars and illustrated the effectiveness of their model for identifying the success or failure of marketing strategies not only in maintaining loyal customers but also in converting potential switchers and, further, which switchers are vulnerable to which brands. the colombo and morrison parameters were estimated for the ice cream case and are presented in table 5. the parameter estimates, a, and n;, are direct estimates of the extent of hard core loyalty and ability to attract potential switchers. (recall that cq is the likelihood of a brand's retaining customers who prefer that brand and x; is the likelihood of attracting customers who prefer other brands.) these estimates are similar to but not the same as the gravity and focus ratios defined above. gravity is the proportion of preferred sales that are converted to sales. preferred sales can be decomposed into those who will always buy that brand (hcls) and those who prefer the brand but might have switched (pss). thus, a brand could have high gravity because of inherently high hard core loyalty or because it does a good job of keeping those potential switchers who like it best. the distinction maybe subtle, but it is important; hcls are more valuable to a firm than retained pss. a comparison of the gravity ratios from table 4 and the eq scores from table 5 shows that the two are in fairly close agreement in this case, but the levels of hcls show less range. although haagen dazs converts only 20% of its preferences to sales, relative to smiths 80%, the differences in hcl are less extreme (.357 versus .885). table 5 parameter estimates for ice cream brands brand ah ttl haagen dazs .357 .042 ben & jerry's .644 .064 stovers .711 .134 dreyers .594 .076 richards .430 .163 neers .632 .093 breyers .668 095 smiths .885 .417 eq is the estimate of the proportion of buyers of brand i who are hard core loyals. x; is the estimate of the proportion of potential switchers that will switch to brand i. 'the x, figures sum to over 1.0 due to errors in the estimates. 43 journal of small business strategy vok i3, no. i spring/summer 2002 for focus and nu the ps indicator, the differences are more significant. focus is the proportion of a brand's sales that come from its own preferences. thus, i-focus is the proportion of a brand's sales that came from preferences for other brands. the ps indicator, nu is a measure of the power of a brand to attract other-brand preferences. thus, i-focus is an indicator of eitect; whereas, n; is an indicator of cause. the difference is clearly sensitive to sales volume. note that richards has a relatively low i-focus score (.18, which is the second lowest), but its ability to attract potential switchers is relatively high, as indicated by its it, of .163, which is the second highest. because richards is the leading selling brand, its strong attractive force still results in only a small proportion of its total sales. the results in table 5 afford several other specific insights into competition. first, the parameter estimates indicate both a high proportion of hcls (.885) and strong attraction to other-brand preferences (.417) for smiths. bear in mind that smiths begins with a small number of first preference consumers, so the high oq does not result in so many sales. its sales volume comes from its ability to attract customers away from other brands. smiths succeeds with a strategy of aggressive price promotions supported by newspaper advertising and retail displays. stovers, on the other hand, has moderately good attractive power (n; =.134) but excellent hcl (a, =.711),which suggests that it succeeds in keeping its own loyal customers. in fact, stovers had modest sales in the region but a strong niche based on freshness. that distinction may be important to the customers who prefer it; important enough to maintain loyalty. next, richards, the leading selling brand of this group, has moderate hcl but strong attractive power (.163). the significance of richards's attractive power is evident by comparison. generally, the higher rqs are held by brands with lower prices or more frequent promotions. the high-end brands, haagen dazs and ben & jerry's, have the two lowest tt,s. richards has the second highest despite its high-end price. a final noteworthy observation is the tenuous position of haagen dazs, which has by far the lowest parameter estimates in table 5. despite its position as a national brand and its presumed high quality perception, haagen dazs is neither maintaining the customers who prefer it, nor successful in stealing customers from other brands. carl obermiller earned a ph.d. in marketing at ohio state university. he is currently a professor of marketing at the albers school of business, seatile university. carl has conducted most of his research in consumer behavior, much of ii in information processing. he has published in various outlets, including the journal of marketing research, journal of consumer research, journal of consumer psychology, journal of advertising, and psychology and marketing. carl does most of his teaching in consumer behavior, new product development, and new venture marketing. 44 strategy an examination of the relationship between strategy and human resource management practices among small businesses elyssa blanton schultz nathan bennett david j. ketchen, jr. louisiana state university abstract although it has been asserted that an organization's strategy is, or should be, a major determinant of its truman resource managenient practices, little empirical research has addressedthis linkagein small businesses. therefore, we do not know whether managers of small firms have devoted resources to design, implement, and support human resource management practices that are aligned with firm strategy. accordingly, the purpose of this paper is to examine the nature and extent of the relationship, if any, between strategy and human resource management practices among small businesses. the results offer liale evidence of a consistent relationship. this suggests that an opportunity to build fiuure competitive advantage may be reah ed through strategically managing human resources. introduction over a decade ago, articles encouraging managers to tailor human resource practices to match business strategies began to appear (e.g., fombrun, tichy & devanna, 1984; schuler & macmillan, 1984).this approach to human resource management(hrm), labeled strategic human resource management (shrm), details the mechanisms by which human resource managers can positively influence the "fit" between a firm's strategy and the environment (jennings, 1994). beginning with a flurry of activity in the mid-l980s, both conceptual and empirical investigations of hrm have explored its strategic potential (e.g., dyer, 1985; fombrun et al. 1984; lengnick-hall & lengnick-hall, 1988; schuler & jackson, 1987a; schuler & macmillan, 1984; wright & mcmahan, 1992).collectively, these articles propose that organizations can and should use human resources strategically, that organizations operating under different strategies require different hrm practices, and that organizations creating an alignment between strategy and human resource management will enjoy a competitive advantage over those that do not. over the past several years, scholars have studied the role that human resource management practices can play in enhancing the performance of larger firms. until recently (e g., watts & ormsby, 1990), however, the potential strategic importance ofhuman resources to the overall success of small businesses has been ignored. although small businesses are a 35 major employer in the united states and a source of most of the nation's recent job growth, little is known about the role of strategically-managed human resources in small businesses. this is troublesome because small firms are more likely than their larger counterparts to face unique human resource challenges, while at the same time they often lack the staff to support a formal hrm function (little, 1987). furthermore, because of their limited human resources, small firms, even more than their larger counterparts, cannot altord even one ineitectively managed employee (cf., gatewood & field, 1987). further, given the espoused benefits of strategically managed human resources(eg., improved profitability,better employee attitudes, lower accident rates, reduced labor costs, increased productivity —walker & bechet, 1991; wright & mcmahan, 1992), small firms could benefit greatly from the synergies associated with the integration of human resource management into the strategic management process. until now, however, there has not been a systeinatic study of the degree to which small businesses have tried to develop human resource systems that are supportive of strategy. the purpose of this paper is to explore the extent to which small businesses are tailoring their hrm practices to support their strategy, as has been encouraged for over a decade. if this message has been heard by managers in small firms, we would expect variation in hrm practices in these firms to be explained by strategy. if not, this would suggest an important area for strategic development in small firms —at least to the extent that academic prescription; are appropriate (cf. fairfield-sonn, 1987). background and hypotheses much of the literature examining the strategic potential of hrm has taken a "behavioral perspective" (e.g.,jackson, schuler, & rivero, 1989; schuler & jackson, 1987a, 1987b). the basic premise of this perspective is that employets use hrm practices as a means of eliciting employee attitudes and behaviors that support the strategic intentions of the firm (fisher, 1989; jackson et al. 1989). in general, this perspective argues that firms attempt to design human resource management practices that wi i i elicit employee behavior supportive of their particular strategy. perhaps the most widely cited work from the behavioral perspective is that of miles and snow (1978). a key assumption inherent in this work is that knowledge about strategy in particular, and organizations in general, is best developed by identifying groups of firms (strategic types) that share important characteristics, rather than focusing on the idiosyncratic aspects of each firm (miles & snow, 1978). later, miles and snow (1984) argued that hrm practices should differ across strategic types. specifically, they discuss different human resource practices required by organizations characterized as defenders, prospectors, or analyzers(cf. miles & snow, 1978). defenders attempt to "seal off' stable market domain. they do not appeal to all potential buyers. preferring instead to cultivate a set of repeat customers that desire a steady, consistent set of products. this emphasis on stability over time suggeststhat the basic human resourcestrategy for the defender is to build human resources, in other words, to create a set of dedicated, long-tenured employees with a particular array of organization-specific skills. in contrast, prospectors consistently seek out new market opportunities and later abandon them as they become less lucrative. this "hit and run" approach means that the set of human skills needed is subject to rapid shigs. accordingly, 36 prospectors should focus on ace'cuiring those hbman resources demanded by their present businessemphasis. as suggested elsewhere(miles & snow, 1978), analyzers take a dualistic approach; operating as a defender in some markets and as a prospector in others. i.ikewise, analyzers'rm practices reflect those of both defenders and prospectors. several researchers have relied on the miles and snow (1978) typology to illustrate potential linkages between strategy and hrm. olian and rynes (1984), for example, use the miles and snow typology to develop tentative propositions about the likely compatibility of staffing practices and strategy. more recently, wright and snell (1991) present a series of alternative integrative approaches to the human resource system in organizations. wright and snell then develop propositions to address how these integrative approaches fit into the miles and snow strategic type framework. to date, no studies have examined such propositions in the context of small businesses, despite the fact that the miles and snow typology has been viewed as valuable for studying small firms (e.g., davig, 1986). to address this gap in the literature, we empirically examine a number of hrm practices that have been linked to strategy in conceptual articles. given our focus, we examine practicis which are clearly important in small firms (hornsby & kuratko, 1990; gatewood & field, 1987). specifically, we consider aspects of employee selection, compensation, and benefits because these practices are fundamental in determining the degree to which firms ~ac uire and retain their human resources. selection based on previous literature, we expect the selection practices in small firms to vary by strategic type. defender organizationsare expected to focus selection efforts on selecting out undesirable employees (miles & snow, 1984). the stability associated with defenders affords the time to invest in skill building and succession planning for internal candidates (olian & rynes, 1984); thus, complex selection efforts are deemed to be less important. defenders are more likely to focus on identifying individuals who will have long tenures with the organization; individuals typically enter defenders at low levels and then receive considerable on-the-job training to develop the skills that help the organization maintain a stable market niche. in contrast, prospectors, given the dynamic nature of their approach to the market and their consequent human resource needs, are more likely to focus on more sophisticated selection in order to bring desired competencies into the organization, rather than developing these knowledge, skills, and abilities once the employee has been selected. for example, prospectors'frequent incursions into novel markets" increase their need to identify individuals with unique characteristics (olian & rynes, 1984: 175). a prospector's selection system, then, will likely be designed to carefully identify individuals with required competencies. accordingly, we expect that prospectors,due to their need for flexibility in job requirements, are likely to use initial screening services to assess initial criteria. in this investigation, the focal selection tools are, respectively, pre-employment drug screening and employment agencies. thus, the first and second hypotheses are: 37 ~hh ': f p g df d «gy ilk ly«p employment drug& screening than are other organizations. ~gh 3: h p g ~ p p ««gy* ilk ly employment agencies than are other organizations. ~c strategy has been postulated to be a primary determinant of compensation strategy(e gp balkin & gomez-mejia, 1987; milkovich, 1988). based upon the arguments of miles and snow (1984), we expect that compensation in defender organizations will concentrate on internal equity. because defenders are thought to emphasize the development of firm-specific skills, they might be expected to be less concerned about employee mobility than prospectors. instead, the focus will be on pay associated with position in the organization hierarchy and seniority; both reward longevity. prospectors, on the other hand, are thought to emphasize "acquiring" human resources. as a result, we expect that their compensation packages will be oriented toward external competitiveness; prospector lirms should be more concerned about the market and what other firms are paying. in addition, prospectors should focus reward systems on short term behavior, rather than seniority, leading us to expect prospector firms to emphasize incentive-based pay programs. thus, the third and fourth hypotheses are: ~hh ly: h p ig p p gy *llkly ly g* surveys in developing compensation practices than are other organizations. ~hh i 4: fl p i g p p «gy ilk ly incentive pay plans than are other organizations. benefits we expect prospectors to focus heavily on employee benefits with immediate value. this is consistent with both prospector firms'ocus on 'buying" human resources, as well as their short-term, dynamic approach to the market. as noted, defenders focus more on employees'ong term commitment to the organization. we expect, therefore, that defenders focus benefitstowardrewardinglong-termemployeecommitment. in other words, we expect that prospectorsdesign benefits with immediate payoff, such as stock ownership, so that they play a role in the acquisition of individuals with desired competencies, whereas defenders support employee benefits that reward longer tenure, such as pension plans. thus, we predict that: ~hh i: h p ig df 4 «gy» llk*ly fh pension plans that reward seniority than are other organizations. ~hh i 6: h p g p p «gy 1kly ff employees stock ownership than are other organizations. 38 17 method sam le and data collection for our sample, we relied on a list of 400 work sites with between 15 and 250 employeesdrawn randomly from the population of employers in louisiana the data base from which this list was created represents the population of employers in the state. during 1992, 211 of the 243 organizations contacted (87%) agreed to participate in our research. given our focus on strategic human resource management, we eliminated 34 organizations that did not, according to the top manager. have primary responsibility for either their human resource management policies or their strategic decision making because they were part of a larger corporate structure. as a result, 177 organizations representing 51 different four-digit sic codes are represented in our data. eighty percent of the organizations in the sample employed between 15 and 50 individuals. face-to-face interviews were conducted at each organization with the person most responsible for the site's hrm practices. in all, 51% of the respondents held the position of human resource manager, and 49% held 'general'anager positions. in addition, two mailback questionnaires were left at each site: the 'human resource manager'uestionnaire was completed by the interview respondent, the 'top manager'uestionnaire by the highest level manager at the site (e g., owner, ceo, president, plant manager). surveys were returned by 104 (73%) of the human resource managers and 78 (55%) of the top managers. these response rates compare favorably to those usually reported, particularly as response rates on surveys of top managers are typically in the range of 10 to 12 percent (hambrick, geletkanycz & fredrickson, 1993). measures d 8 9, bl. tp g kd d b h g g — 7 =.78) d i 9 dby 8 g 81989). th addressed the degree that the site was "innovative in the way products / services are delivered," "offers a wide variety of products / services," "has a diverse customer group," "is innovative in terms of the number of new products / services offered," "is innovative in terms of the novelty of new products / services offered," and "allots a large amount of resources to marketing." the scale was trichotomized using equal intervals to classify those with low scores as defenders(n=18; 23%), those with mid-range scores as analyzers (n=34; 44%), and those with high scores as prospectors(n=22; 28%). as is typical when using nominal variables in multivariate analysis, three strategic type variables are represented in our analysis by two dummy-coded(0,1) variables. the first dummy variable is coded such that a 'i'ndicates the firm is classi fied as a defender. in essence, this variable describes how de fenders and analyzers compare while controlling for prospectors. the second variable is coded such that a 'i'ndicates the firm is classified as a prospector. this describes how prospectors and analyzers compare, while controlling for defenders. by including both of these variables in the logistic regressionanalysis, we are able to identify the role that strategic type plays in relationship to the focal human resource practices. 39 ~pd v i,bl . th p b f ihrmp determined through the interview with the human resource inanager. for each practice, we created dummy variables (0,1) coded so that a 'i'ndicates the practice was present at that organization. in the area of selection, two variables werc used to examine predictions that selection practices should vary by strategic type. pre-em lo ment dru testin was used to address those selection systems aimed at selecting out undesimb le employees. pre-em pl oym crt drug testing has been used with increasing frequency in workplaces to screen out potentially unreliable employees(e.g., normand, salyard, & mahoney, 1990). we expect that defenders, which typically treat employees as longterm investments, have a special interest in screening out unreliable employees. we should note that those firms who performed drug testing as a part of a compliance agreement were not included in the analysis. this was done so that we considered only those firms where drug testing was a strategic choice. next, to address selectivity, we used the presence or absence of the use of a private h b gg dh d «hl df fi ibiliy,p p are more likely to use initial screeningservices(e gholian& rynes, 1984). more specifically, it would oiten be more efficient for prospectorsto use a private employment agency to screen for specific, changing skills, rather than to develop and continually revise such routines internally. in contrast, defenders'tability should offer them the luxury of routinizing and internalizing screening procedures. next, in the area of compensation,two kinds of compensation systems were considered. we predicted that prospectors would be prone to use compensation practices focusing on fulfilling recruitmentneeds (i.e..by offering wages that are competitive with other iirms) anddbyl i .tp. i*hpd,*f d~f h ii d h f~i.bz d . p .p p 'f hbyighh resources suggests that compensation surveys of other firms play an important role in remaining externally competitive. second, prospectors depend on creativity and the generaticn of new ideas; incentive based pay encourages these activities. finally, in the area ofbenefits,two practices were examined. given prospectors'ocus on changing situations and short-term results, coupled with their frequent need to attract employees to their firm, it is likely that these firms will focus benefits on short-tenn pay-offs. accordingly, the use of em i ee stock ownershi lans was assessed. because such programs reflect day to day variations in performance, we expect prospectorsto use them more frequentlythan other firms. on the other hand, given that defenders typically focus on longterm employee participation, we expect them to offer benefits that reward such behavior. thus, h h d ply* i g r. iikly b f d g defenders. op iv ibl .alh ghh pi hf fhi dyl *pl l h hrm practices vary by strategic type, we recognize the potential importance of alternate, nonstrategic determinants ofhuman resource management practices (cf. dyer, 1985; wright & mcmahan, 1992). therefore, we include in our analyses two variables that past research points p« lly p d i fhrmp i:i, d~d 40 size, the number of employees and managers at the worksite, was gathered from company records. the view that size is an important constraint on the activities of an organizationhas long-standingroots in the organizational literature (e.g., blau & schoenherr, 1971; hall, haas, & johnson, 1967). the general consensus seems to be that the potential role of size needs to be accounted for in empirical analyses of the relations among other organizationalvariables(e.g., finklestein & hambrick, 1990; keats & hitt. 1988). previous research has also found size to be an important correlate of hrm practices (jackson et al. 1989). empirical research has found size to be positively related to the early adoption of a variety of hr programs (e g., tol bert & zucker, 1983),as well as with the quality of employee benefits offered by firms (e.g., villlemez & bridges, 1988). although our focus on a set of small firms might mitigate these concerns, the variation in size across members of the sample could still be important. in addition, industry type has a bearing on the adoption of a variety of hr programs. specifically, the distinction between manufacturing and service firms has important implications for personnel practices (jackson et al. 1989). first, the intangible nature of services means that employee performance is difficult for supervisors to monitor directly. also, the simultaneous nature of production and consumption make it necessary to control the process of service production, rather than the outputs. firms were classified as either manufacturing (n =30, 17'/0) or service (n =147, 83'/v) based on their four-digit standard industrial classification. this variable is coded such that a '0'ndicates the firm is engaged in manufacturing, a ' 'n service. ~anal ses because each of our dependent variables is dichotomous, a series of logistic regression analyses were conducted. the dependent variables in these analyses were the presence or absence of specific hr practices that were proposed to vary with strategic type, controlling for size and industry type. results a correlation matrix and descriptive statistics for all study variables appear in table i. this research set out to consider whether variations in human resource management practices across small firms are predictably associated with variations in strategic type. logistic regression analysis was used to estimate the relationship between the independent variables (intended strategy) and the dependent variables (presence or absence of specific hrm practices, proposed to vary with strategic type). results of the logistic regression analyses conducted to examine our hypotheses are reported in table 2. hypothesis i proposed that firms pursuing a defender strategy are more likely than other firms to use selection devices that screen out undesirable employees. in support, a defender strategy was associated with the presence of pre-employment drug testing (b = .52, p & .05). support was also found for hypothesis3, which proposed that firms pursuinga prospector strategy are more likely to use wage surveys as a compensation practice. a prospector strategy was associated with the use of wage surveys (b =.73, 0 & .ol). the regression coefficients (b) shown in table 2 for both defender strategy (hypothesis i) and prospector strategy (hypothesis 3) indicate that the presence of drug testing and wage surveys are significantly influenced by the firm's intended strategy. 41 table i descri tive statistics x 8d i 2 3 4 5 6 7 8 9 10 11 selection 1. pre-employment drug screening .34 .48 2. employment agency .35 .48 .12 compensation 3. wage survey .51 .50 .06 .22»» 4. incentive pay .51 .50 .09 .02 .12 w benefits 5. employee stock ownership plan .10 .30 .11 .07 .10 -.04 6. pension .47 .50 .14 .14 .13 -.02 .17» strategic type 7. defender .21 .41 —.13 .25» .25» .09 .06 .10 8. prospector .29 .46 .05 -.07 .06 -.18 -.01 -.04 -.33»» control variables 9. core sector .51 .50 -.17» -.06 -.10 .18» .22»'28»» .09 -.18 10. number of employees (iog) 4.18 1.33 -.45»» -.12 -.21»» -.09 -.39»» -.23»» -.16 .12 .12 11. service industry .83 .38 .18» .06 .01 -.04 .10 -.01 -.01 .13 -,29»» —,23»» n = 177. » 0 &.05; »» p &.01. table 2 results of lo istic re ression anal ses dependent variables selection ccc benefits pre-employment employment wage incentive pension employee stock drug screening agency survey pay plan ownership plan b se b se b se b se b se b se control variables service industry .21 .35 .07 32 .41 .32 .29 .31 .80 .56 .39 .31 j core sector .27 .27 .15 .24 .27 .23 -.53 .23 1.70** .69 .69** .24 number of employees (log) 1.38*** .35 .00 .15 .33* .19 .49** .20 .93 .29 .26 .17 strategic type prospector -.29 .34 .00 .25 .73vv .29 .24 .25 .02 .45 .06 .26 defender .52" .32 —.89* .40 .42* .25 .07 .28 .il .50 -.31 .28 model it'0.19"v v 7.64 14.48* 14.66* 29.89*** 15.06*pseudo-r'19 .04 .08 .08 .15 .08 n = 177. *ds & .05, '* 0 & .01, **0 &.001;one-tailed tests are reported. i we were unable to find support for the remaining hypotheses. the independent effects of the intended strategy variables (listed under b for each equation) were not significant in any of the remainingregressionequations. specifically, we found that prospectors were not more likely than other firms to use (a) employment agencies (hypothesis 2), (b) incentive-htsed pay (hypothesis 4), or (c) stock ownership plans (hypothesis 6). additionally, we did not find that defenders were more likely than other firms to offer pension plans (hypothesis 5). two significanteffects for which hypotheses were not offered indicate that defenders were (a) less likely than other firms to use employment agencies (b = -.89, 0 & .05) and (b) more likely to use wage surveys (b = .42, p & .05). discussion our results indicate that small businesses are failing to capitalize on the purported opportunities for competitive advantage provided through an alignment of hrm with firm strategy. althoughmanyresearchersandconsultantshavetoutedthe importanceofdeveloping practicesthat support strategy, our results indicate that this message has not been heard, or at least that it has not been translated into practice. these results may strike some as disconcerting, given the suggested benefits of the strategic design of hrm practices, as well as the potential problems that may arise when these practices are not aligned with strategy. using employee compensation as an example, a mismatch between a firm's reward system and its strategy may have a variety of negative consequences. as documented by kerr (1975, 1995), examples of reward systems that elicit one behavior while hoping for another abound. a small firm that is dependent on innovation, for example, should be interested in encouraging team work and a long-term orientation toward performance. a compensation system that is designed to reward cooperative behavior and process (e.g., team-based incentives), rather than independent behavior and results, would support such a strategic need. in fact, the latter system is likely to encourage employees to act in their own interests —an outcome that may well be counter to that firm's strategic needs. failure to match selection practices to strategic type may also lead to problems. firms that implementstaffingpracticeswithoutconsiderationof future organizationalobjectives and direction are less likely to capitalize on hrm advantages. trends in the internal and external environment,and subsequent changes in strategic direction, dictate differences in the types and numbers of employees needed. firms in their early stages, for example, may require employees with entrepreneurial flair, financing, and research skills; over time, marketing and even cost control skills may become more important(e g., dyer, 1983).integrating staffing and strategy will reduce both the chances of hiring employees with obsolescent skills and the likelihood of situations in which there are employee shortages / surpluses. recognizing the costs associated with the recruitment of new talent and the displacement of those employees who are no longer needed, it is becomes more important for managers to integrate the staaing function with the goals and directions of their firms. overall, small businesses are forced to confront a variety of complex challenges, including market changes, scarce financing, and changes in access to distribution channels. any of these can cause changes in the composition, quantity, and quality of human resources 44 n needed (dyer, 1983). despite this, across the majority of firms in our study, there was no consistent link between strategic type and human resource management practices. interestingly, follow-up conversations with hr executives in our sample suggest that the main influenceon any single firm's human resource management practices is often those practices used by other employers in the area. it seems that many small firms pay close attention to what others in the area are doing and then adopt those practices. this approach may seem eflicient for a busy small business manager because it involves a low front-end cost. it does, however, beg the question of why so many small business managers believe that what works "across the street" should also work for them, especially given the likely differences in strategy between the firms. it appears that for now, small business managers have tried to cope with human resource management problems by looking to other firms for guidance. if, however, these managers look more carefully at their own firms, they will likely find the strategic management ofhuman resourcesto be an important, overlooked source of competitive advantage for their businesses. additionally, researchers interested in this relationship should be encouraged to develop a more refined understanding of the particular organizational circumstances most likely to produce a benefit from strategic management of human resources. of particular value would be carefully grounded case studies that explore the experiences of small businesses in integrating human resource practices and strategy. conclusion this study examined the relationship between strategic type and hrm practices in a sample of small firms. by empiricallytesting the extent to which small businesses strategically manage their human resources, this study provides one of the first pieces of empirical evidence which evaluates prescriptions in the shrm literature in a sample of small businesses. in general, we found little support for our hypotheses, which focused on the relationship between intended strategy and specific human resource management practices. overall, there was little evidence of a relationship betweenstrategic type and the presence of hrm practices, with only two of six hypotheses receiving support. though we did not detect a consistent relationship between strategy and hrm, we cannot say conclusively whether these results necessarily generalize to all small businesses. that is, it may be that this sample is, though representative of small business in louisiana, somehow different than small businesses elsewhere. if in fact, our results indicate that small businesses are not taking advantage of an alignment between strategy and hrm, it is important for future research to more closely examine the benefits associated with this alignment. typically, literature in shrm has been based on the notion that organizations which strategically manage their human resources will enjoy superior performance (e.g., delery k doty, 1996). this question has not yet received attention in the small business literature. specilically, future research could benefit from an empirical examination of other parts of the human resource strategy model in samples of small businesses. for example, what are the benefits or the performance eltects of strategically managed human resources in small businesses? it is also important to recognize that current academic expectations of the relationship between strategy and human resource management may be incorrect. certainly, small firms 45 face many unique huinan resource issues, and it is possible that these firms match strategy and human resources in ways that have not yet been identified. overall, more research is required be fore any de finitive conc lusion scan be reached regarding the strategic management of human resources in small businesses. this research provides a base on which a better understanding of shrm in small businesses may be developed. the extent to which small businesses strategically manage their human resources and the benefits associated with this process is an 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(1991).toward an integrative view of strategic human resource management. human resource management review, l, 203-225. 48 szj'&ie'g'y book review field casework: methods for consulting to small and startup businesses by lisa k. gundry and aaron a. buchko sage publications, l996, 138 pages reviewed by reginald litz, university of manitoba ediuir's /voter althougli this book lies been in print for four years, it has been selected for review by our book review editor since it is a popular book still in wide use and it addresses issues whicli are central to sbida «nd its primary mission of engaging in field casework. this hook and review fit nicely with tire two previous articles on student consulting. in praise of fieldwork: integrating theory and practice about two years ago i began teaching the course in small business management offered at our university. from the start, one of my core objectives was to integrate an element of experiential learning into the course experience. over the past five temis i have attempted and, with varying degrees, succeeded in doing exactly that. each term i have had my students study a local small business; to date the set includes a garden center, a specialty wild blueberry jam producer, an importer of crafts from developing nations, and most recently, a hydroponics operation specializing in sweet basil. the experience has generally gone well. students have learned a great deal. so have i, particularly as it relates to structuring the assignment. however, while i have learned much over the past two years, i nonetheless wish i had read eield casework: methods for consulting to small and siartup businesses earlier in the game. the book provides instructors and students alike, with a basic framework for undertaking the nature of fieldwork assignments. in a nutshell, the book presents a rationale for fieldwork, identifies key elements of the task process, addresses the ever-present possibility of dysfunctional small group dynamics, and outlines the key tasks necessary for successfully completing a fieldwork project. in the review that follows, i will summarize the authors'houghts on each of these elements, and include my own reflections, based on the past two years of fieldwork experience. 90 journal of small business strategy vol. ll, no. i spring/summer 2000 fieldwork —why bother? the pedagogy's distinctive advantages a fieldwork-based assignment offers students several important advantages. first, it involves students directly with the real-life challenges faced by an actual business enterprise. compared to other pedagogics, it seeks to facilitate a holistic encounter between student and subject, and thereby instill a deeper, more profound understanding. done well, such efforts can be an invaluable learning experience. as one of gundry and buchko's students testified, "this project taught me more than all of my other business classes combined through four years of college" (1996: 112). the underlying rationale for such reactions are perhaps best encapsulated in an age old chinese proverb: "i hear and i forget, i see and i remember, i do and i understand." like oliver cromwell's admonition to his portrait painter, fieldwork demands that students engage, and 'paint'he organization, "warts and all." one of these warts arises out of the resource constrained nature of the small firm (welsh gc white, 1981), particularly as it relates to information. over the past two years i have watched students appear somewhat stunned as they come to realize the inaccurate and incomplete informational limitations faced by the typical small business manager. suffice it to say, such realizations come more slowly, if at all, when students engage the enterprise only in classroom and library. if they study it, will they learn? understanding the limitations of fieldwork while fieldwork experiences can offer much to participants, it is important that its inherent limitations also be recognized. in chapter 2 authors gundry and buchko offer their thoughts on the nature of such limits. they observe that "certain cases just don't lead to good fieldwork experience. among these are cases that are primarily clerical tasks or ones that require a highly sophisticated set of skills not normally provided by student consultants" (p. 17). however, an additional distinction is also necessary —namely, between assignments where the task is inherently unsuitable, and those where the task is inherently unfocused, owing in large part to a company's indecisiveness. my own experience confirms the authors'dmonition. during at least one term, i observed a firm's managers being almost overwhelmed with their own operational concerns; these could easily have spelled student frustration had i as instructor not initiated a satisfactory resolution. having described the misfits, the authors also identify those tasks that more readily fit a field project. these include performing a feasibility analysis, developing a business plan, conducting a location analysis, testing a market for a new product or service, developing a new advertising strategy, and identifying possible sources of funding for growth or expansion. what is common to all is boundary definition; in each of these cases the student team has a relatively bounded task that lends itself to a focused team effort. as gundry and buchko assert, "do more work on fewer problems" (p. 23). getting down to work: managing the fieldwork project in chapter 3 the authors discuss the practical steps involved in completing a fieldwork assignment. typically the project involves three basic phases: assessment, implementation, and presentation of results. assessment involves determining exactly what is to be done. in my experience, i have found that students need to be given broad, but explicit, boundaries in defining the assignment. this is important, as gundry and buchko note, because one of the most frustrating parts of the fieldwork assignment is its comparatively unstructured format. "fieldwork projects," they note, "do not generally come in a 'ready-to-be-written'ormat. by nature, projects are oiien vague and ambiguous" (p.31). for some students this means nothing less than outright frustration. but sometimes such frustration can also be redeemed, as 91 journal oj'small business strategy vol. ll, no. l spring/summer 2000 students come to a deeper appreciation for how such vagueness and ambiguity is the de facto experience of many small business managers. in terms of making first contact with the client, the authors recommend that the instructor not be present. i agree with their recommendation. perhaps the most effective way to send students the message that this project is their project is to let them first encounter the firm on their own. in terms of defining the task, the authors recommend that the group work directly in identifying exactly what they will do. my own experience suggests that many times, particularly with undergraduates, it may be prudent for instructors to be slightly more directive. more specitically, what i have often done is identify a set of possible questions groups can address, and then permit each group to define their project's domain from the set. however, regardless of whether the students or instructor determine the assignment's boundaries three basic definitional parameters must be established early on: what the team intends to do, how it intends to do it, and what the team intends to provide to the client. this is essential if the project is to stay on track and also provide a basic standard against which the final output can be evaluated. the group from hell: thoughts on managing the project team one of the potential drawbacks of the field work pedagogy can be the student's small group experience. in reflecting back on the dozens of small groups i have supervised over the past two years, and in particular the handful containing members that did not report a positive small group experience, i wish i had read chapter 4 earlier. whether it arises from role conflict, lack of motivation, or lack of assertiveness, instructors and students alike need to be forewarned of the possibility of intragroup conflict. including this chapter, therefore, certainly strengthens the book's validity. what i found especially helpful was the authors'ecommendationto appoint specific group members to fulfill specific task responsibilities; these include project manager, chief editor, financial analyst, and presentation coordinator. reflecting back on one particularly confrontational group experience i witnessed, i found encouragement in their recommendation that instructors early on emphasize to participants the extent to which the project is also an exercise in social learning. virtually all students will eventually be working in some variant of a group setting; for this reason, if no other, it is essential that people understand the importance of prompt attendance, initiative in volunteering, and timely completion of assigned duties. searching for information, developing recommendations, presenting findings in the book's last two chapters the authors move on to discuss several practical tasks. the first is determining, and then locating, the information necessary for completing the assigned task. gundry and buchko provide a list of well targeted questions students are advised to review as they undertake this task. they also review some rudimentary elements of primary and secondary data, and survey-, questionnaireand interview-based data collection; for marketing majors the chapter will be largely review. i found their advice on how to present a client with unfavorable findings among the most valuable elements of chapter 5. the sixth and final chapter provides a basic review on how to prepare the final presentation. here the authors appropriately stress the importance of a well conceived implementation plan, for if one fails to ask how the team's recommendations can become the firm's realities, the project essentially falls short of its desired effect. critique in a nutshell, this book is a concise and generally well written statement on the rationale and process of a fieldwork assignment. it is the kind of book i would consider including as a 92 journal of small business strategy vok i i, ho. i spring/summer 2000 optional reference text for students. however, i would also recommend it as required reading for all instructors thinking of including a fieldwork assignment in their small business or new venture course. i felt the coverage of the topic set was adequate and the writing style was accessible for the average undergraduate. in short, the book left me only more convinced of the value of fieldwork projects as this mode of learning facilitates a hands-on experience that may be otherwise inaccessible. as john m. mason observed, "the aim of education should be to convert the mind into a living fountain, and not a reservoir. that which is filled by merely pumping in, will be emptied by pumping out." lf we as entrepreneurship educators are intent on facilitating the formation offomitains, rather than resen oirs, competence in the pedagogy of fieldwork is near essential. simply stated, the "bottled waters" of textbook and classroom centered learning can satisfy basic thirst; however, if an effective education is about more than just satisfying basic thirst, and ultimately about transforming students into their own teachers, "living springs" strategies. such as fieldwork, have much to otter. reference welsh, j. a. and white, j. f. (1981) a small business is not a little big business. harvard business review 59(4), 18-32. reginald a. lite is associate professor in the department of marketing at the university of manitoba in 8'inntpeg, canada. he received his ph. d. in strategic planm'ng & polic& pom the university of pittsburgh his research interests focus on business strategy, small and family business, and social issues in management. 93 str4tegy the large format store vs. "mom and pop:" is suburbia a model for the inner city? marilyn lavin university of wisconsin —whitewater abstract in small towns and suburbs, the arrival of the large format store has had an almost uniformly negative impact on its smaller scale competitors. the present paper examines whether this is also the likely outcome when a large format store enters an inner city area. an analysis of the experience of one such large store suggests the possibility that small towntsuburban model may not be applicable to the inner city. in urban areas, population growth, the shopping behaviors of residents, and the ability of small stores to provide specialized product assortments and services may be factors that contribute to the viability of small retailers, who compete against large format stores. small stores'se of legal technicalities, such as requiring special use permits or enforcing decades-old zoning restrictions, to block the entry of large competitors into major us. cites, however, appears to be less effective. introduction ln the 1990s, large format stores, whose development has been traditionally tied to suburban locations, have rediscovered american cities. such operations bring the promise of wider product assortments and competitive prices to the large lower-income populations that inhabit many inner city areas. small existing stores that currently serve urban customers, however, see the so-called "big boxes" as unfair competitors, while many residents argue that presence of large retail chains with their uniform product offerings and undistinguished store layouts threaten the unique cultural identity of their neighborhoods. ln large measure, the experience of large format stores in the suburbs and in the small towns of the united states has served as the model for predictions about the impact of such retailers in the city. critics of large stores cite numerous examples of corporate-owned chains that have drawn trade from main street businesses and that have eventually brought about the closing of small, independently-owned competitors. those occurrences which have, in fact, taken place in many localities across the nation, are put forth as likely outcomes in urban areas. according to such scenarios, city residents like suburbanites before them, will be attracted by the selection and prices of larger operators, and will shia their patronage to the chain retailers. as a consequence, existing small retailers will be driven out of business, and, as large format stores proliferate, city shopping streets will be transformed into the urban equivalents of a strip mall. 54 journal ofsmall business strategy vol. jo, no. l spring/summer l999 the present paper considers the question of whether or not the suburban experience with large format stores presents a valid model for urban inner city areas. the study first reviews literature related to objections to "superstore sprawl," to the shopping habits and preferences of urban residents, and to the demographic shifls that have occurred in many urban areas. next, it describes the collection of data that was undertaken for the current study and that is related to the competitive and consumer impact of a pathmark supermarket that has done business on the lower east side of new york city for more than 15 years. the paper then proceeds to consider how the pathmark findings suggest ways in which large store influence in urban areas may differ from that in suburban locations. it concludes with a discussion of the implications of this research for small urban retailers who compete against large format operators. the 42,000 square-foot pathmark store, which is the focus of this study, is somewhat smaller than those operators traditionally considered "large format." three circumstances, however, justify the choice of this supermarket for the present research. first, the store is far larger than its trading area competitors, whose average size is substantially below 10,000 square feet. second, it is a member of a large regional grocery chain, and thus enjoys considerable market power in the sourcing of goods and in promotional efforts. and third, the supermarket, unlike other large format stores that have only recently entered inner city locations, has operated at its present urban location for long period of time; this circumstance permits a reasonable assessment of its long-term impact on local independent retailers'iability and on local consumers'hopping behaviors. literature review recent decades have witnessed a proliferation of superstores in the united states as large format retailers have gained increasing market shares in the sales of such diverse goods as groceries, books, home improvement products, appliances and electronics, toys, and general merchandise. in most areas, large retailers have encountered little resistance to their growth, but in the 1990s some opposition has arisen to the big stores. citizen groups such as the massachusetts-based "sprawl-busters" have been formed to "defend their hometowns," and the national trust for historic preservation has begun a campaign against superstore sprawl ("in wal-mart's battle...," 1995). in addition, the u.s. house of representatives small business committee has conducted hearings related to the impact of large format stores on small businesses and on communities (conlan, 1994). the battle against large format stores in many areas has brought into existence an unlikely alliance between small independent storeowners, who fear the big chain competition, and more upscale residents, who consider such operations to be "sprawling, ugly, impersonal and cheap." the former group points to the boarded-up storefronts that line the main streets of many small localities where wal-marts and other large-scale retailers have located. they also agree with the head of the small town institute, who has argued: "sam walton's perverse genius was to recognize that you don't need to generate new markets when you build a store. local retailers simply can't compete. they'l go out of business. and wal-mart will just take the whole market" (walters, 1995). for their part, residents, who oppose the large retailers argue that such stores threaten the social fabric of their communities. this feeling has found voice in small communities such as lake placid, new york and old sturbridge village, massachusetts (walters, 1995); it was also echoed by a new york city resident, who lamenting the impending opening of a kmart store, stated: "astor place can be a mad scene but it has so much character. i hate the thought of stepping over kmart shoppers on my way to buy bagels on sunday morning" (jacobs, 1996). 55 journal ofsmall business strategy vol. 10, no. 1 spring/summer 1999 the negative impact that large-scale stores may have on small town local business has been well documented. stone (1993)studied the effect that wal-mart has had on iowa towns with populations ranging from 5,000 to 30,000. he found that following the opening of a mass merchandiser, the trading area of a small-to-medium size town initially expanded as customers traveled longer distances to shop at the new store. during that time, local businesses with product offerings that did not compete with the large format store temporarily gained sales, while those selling similar goods lost customers. as time passed, stone found that the mass merchandisers were likely to saturate a region with stores, and this circumstance, in turn, caused the trading areas of many towns to become smaller than their original sizes. during the ten-year period of his study, he concluded that the smallest towns suffered sales losses that ranged from 16 to 46 percent. stone, however, limited the degree to which his work could be generalized. noting that iowa has had static population growth, he argued that "the size of the retail 'pie's relatively fixed;" by contrast, where the population was growing, he conceded that the effects he found might be 'diluted considerably." stone found that large stores in small towns draw customers from surrounding rural locations as well as from the town itself; similarly, a report issued by the department of city planning of the city of new york indicates that the suburban big boxes that surround that city attract urban customers. (the establishment of such retail operations in new york itself has been limited by legislation passed in the 1970s which requires many large stores —including supermarkets bigger than 10,000 square feet —to have special use that are both expensive and take years to obtain.) a gallup survey of 1,000 new york households found that 32 percent of the respondents had shopped in a large format store outside the city limits during the past year. the study also reported that respondents averaged 22 shopping trips outside the city per year, and that they spent an average of $ 154 on each trip. such out-shopping resulted in an approximate loss of $3.1 billion loss in city sales each year. the consulting firm of coopers and lybrand, however, estimated that $ 1.5 billion of this amount could be recaptured if large format stores were available within the city (department of city planning, 1995). the new york report found that the disparity between the number of large format stores present in the suburbs and the city was greatest for the supermarket category (department of city planning, 1995). that result is in keeping with the fact that during the 1970s and 1980s almost half of the supermarkets in the major urban areas of the united states were closed. the departure of large food stores —particularly from poorer neighborhoods —ieii small "mom and pop" outlets as the principal grocery providers for many city residents. those stores offer very limited product assortments, but their prices tend to be high. in fact, a 1991 study found that residents in new york neighborhoods without a major supermarket had food costs approximately nine percent higher than those living in areas with a supermarket (alwitt and donley, 1996). in 1997, the consulting iirm of pricewaterhousecoopers and the initiative for a competitive inner city, a national, non-profit organization committed to the development and growth of inner city businesses, surveyed 1,205 inner city households. the data collected in that effort offer important insights related to the ways the shopping attitudes and behaviors of lower income residents differ from other u.s. households. those findings, in turn, have implications for the likely impact that a large format urban store such as a supermarket may have on neighboring small stores. when considering specifically grocery shopping, the researchers found that hispanic, african-american, and white inner city shoppers enjoy that particular activity more than do shoppers in general. they also found that hispanic and africanamerican inner-city residents are more likely to shop at more than one grocery store, and, are more likely to "shop at more grocery stores today than two years ago" than are other u.s. consumers. in addition, the survey revealed that african-american and hispanic inner-city shoppers, as compared with the general population have a number of distinct characteristics: 56 journal ofsmall business strategy vol. /0, no. i springtsummer l 999 they are more price sensitive, less likely to believe "store brands" otfer good value, and more interested in the availability of high quality meat, fresh seafood, and a fresh food section such as a deli-bakery. when choosing a store for groceries, the hispanics and african-americans in the study were also more likely to rate as "very important" such factors as store cleanliness; friendly, helpful salespeople; convenient location to other stores; 24 hour, seven day a week operations, frequent shopper programs, and credit card acceptance. (the inner-city shopper, n.d.) of course, an important contributor to the distinctive shopping behaviors of inner-city residents may be the existing built environments in which they currently conduct business. zukin (1995) has argued that urban shopping districts with their street vendors, imported ethnic goods, and music are closely linked to community identity, and she has warned that the middle-class disruption of shopping streets can have a negative impact on the low income neighborhoods. nonetheless, she, too acknowledges that immigrant entrepreneurial eflorts have not been able to compensate for decades of mainstream disinvestment in inner-city areas. in fact, she has written: "every major shopping street in american ghettos looks the same, with cheap shoe stores next to discount drugstores next to liquor stores next to vacant lots next to burned out and boarded up stores next to local low price chain stores next to more vacant lots and more burned out stores." as noted in the previous paragraphs, the population most likely to live in the inner city and to its patronize retailers may be composed of large numbers of immigrants and racial minority members. since 1970, the amval of new immigrants in such cities as new york, boston, san francisco, and los angeles has, in large measure, compensated for the population losses those cities have suffered as city residents moved to the suburbs. during the 1980s, for example, new york received 856,000 newcomers and reversed the decrease in the city' population that had been occurring in earlier decades. in the period 1990 to 1994, the new york gained another 563,000 documented immigrants, a flow that was 32 percent greater than that of the 1980s (department of city planning, 1996). the consumption needs of these new residents have the potential to enlarge the size of the existing "retail pie." equally important, because immigrants have a tendency to move into areas with high concentrations of co-ethnics and have product tastes and preferences not shared by mainstream customers, they may exert strong influences on retail development in the areas in which they settle. scholars have noted the importance of immigrant populations in sustaining small retail operations. waldinger, aldrich and ward (1990) have modeled the interaction between opportunity structure and immigrant group characteristics as a means of explaining ethnic entrepreneurial activity . likewise, porter (1995)has argued that the ability of ethnic minority members to identify and serve the needs of their c~thnics in major urban areas of the united states provides a "focused strategy [that] is one way to gain a clear competitive advantage." method the foregoing discussion suggests the likelihood that a large format store in an inner-city area may operate in an environment that is quite different from that found in a small town or suburban location. inner-city regions are "understored," they have large numbers of small, independently-owned competitors, they are home to consumers with distinctive shopping attitudes and behaviors, and they may be the centers of ethnic culture. this nexus of circumstances must be considered in attempting to assess the impact of a large format store. the pathmark store, which is the focus of the present research, opened on the lower east side of new york city in 1983. to attempt to understand the influence of this supermarket 57 journal ofsmall business strategy vol. io, no. i spring/summer l999 on its competitors and on the neighborhood, the author made daily visits to the pathmark trading area during the summers of 1996, 1997, and 1998. those visits provided the opportunity to identify the location and size of the smaller food retailers that compete with the large supermarket; to examine the product and service assortments olfered by those operators; to assess the ethnic background of store employees; and to determine whether a non-english language was used in business transactions, store flyers, and signage. in addition, many of the retail operations were photographed to create a lasting record of the observations. observation, rather than mail or phone surveys, served as a primary data collection method because many of the stores appear to be owned and/or operated by recent immigrants, who may have limited knowledge of english and little willingness to participate in surveys. the extended visits to the lower east side neighborhood also permitted observation of the shopping behaviors of consumers in the pathmark trading area. in particular, the author examined whether supermarket's patrons traveled to the store by car or by foot, and, if by foot, whether they used a shopping cart or individual bags to carry their purchases. she also noted whether riders boarding subway trains near the pathmark carried shopping bags that could be identified with that store or with any of its smaller competitors. to supplement the information obtained through observation, the author relied on data collected for the u.s. census of 1990 and u.s. economic census of 1987 and 1992, as well as on the new york city department of city planning's analysis of data collected by the immigration and naturalization services. those materials offered insights regarding the impact of recent immigration on the ethnic composition of new york's lower east side and on changes in the numbers of grocery stores in the area. in addition, unpublished research conducted by the non-profit community food resource center and by professor david rachman of baruch college, city university of new york provided information regarding the survival rates of small and mid-size retailers in the years immediately following the opening of the lower east side pathmark supermarket. finally, interviews with harvey gutman, the vice-president of retail development for pathmark, offered insight related to the supermarket's operations and to the results obtained from in-store surveys of patrons. the impact of pathmark on small neighboring stores during the 1980s, pathmark stores, inc., a regional supermarket chain based in suburban woodbridge, new jersey, expanded its operations into new york city. as a part of this effort, pathmark, in 1983, established a 42,000 square foot store on the city's lower east side. exhibit i depicts new york's borough of manhattan; the darkened region of the map, which includes those streets extending east-west from lafayette street to the east river and north-south from delancey street to the brooklyn bridge, shows the trading area of the pathmark store. prior to the coming of pathmark, this densely populated neighborhood lacked a full-service supermarket; instead, residents relied on large numbers of small and mid-size retailers to satisfy their grocery needs. during the months preceding the pathmark opening, the small lower east side storeownerslike their suburban and small town counterparts, who have faced the arrival of a large format operator —opposed the new store. their spokesperson, richard lipsky, the director of the neighborhood economic stabilization association, argued that the supermarket would disrupt neighborhood trade by diverting "people off the main strips," and reorienting their shopping patterns toward the large store. under such circumstances, the small grocers anticipated that they would have to make dramatic changes in their operations in order to survive. one owner, for example, reported that he would have to expand his hours of operation from 7:00 a.m. to midnight, but even with added hours, he also expected to lay off two of his four employees (wolff, 1984). 58 journal ofsmall business strategy vol. 10, no. i springtsummer 1999 kxbtblt 3 map sf mabsttaa zlp code areas 10000 10n0 tmt on1 10n1 10010 100n 0000 1n10 10nt 101 10000 10001 1ni0 10n0 0017 10n1 10014 10011 1un 1nn 1nn 10010 10n0 1n00 1 1 10n0 59 journal ofsmall business strategy vol. /0, luo. i spring/summer l 999 a mid-size chain supermarket led the resistance to pathmark, and its tactics even included an effort to delay the larger store's opening by attempting to limit the availability of parking. the same chain store also purchased the lease of another mid-size supermarket in the area, and closed that store as means of lessening local competition. the community food resource center, a non-profit organization committed to increasing access to food, branded both actions as "simply self serving." the center argued that the controversy over parking, which forced the store to operate with only 11 legal parking spaces until a special permit was issued in 1984, "manipulated a public land review process... as a means of protecting a single chain's market share." in addition, the non-profit organization reported that, afler strong community protest, the closed store was re-opened under another name (community food resource center, 1992). the high level of concern about the potentially negative impact of the new supermarket on the lower east side neighborhood led to two competitive analyses. pathmark commissioned david rachman, a professor at baruch college of the city university of new york to conduct the first study. during the three years immediately following the opening of the supermarket, rachman tracked the viability of the 66 small specialty stores closest to the pathmark. he concluded that the impact of the supermarket on those operations was insignificant. over the course of his study, rachman found that ten stores were sold. five of the new owners continued to sell the same kinds of goods as had the former owners, while the remaining fiveincluding a laundromat, which became a grocery, and a bakery, which became a video rental store —reoriented operations. during the first three years of pathmark's operations, however, the number of small grocery stores in the area remained the same (rachman, 1987). the second research effort was conducted by the community food resource center. this study monitored the status of the eight largest stores —ranging from 3,700 to 15,000 square feet-within a one-mile radius of the pathmark store. for the period 1983 to 1995, the center reported that one grocery, an 11,800 square foot operation, had been converted to a drug and health aid retailer, while the remaining seven supermarkets continued to operate as grocery stores. moreover, the center noted that the 7,000 square foot hong kong supermarket, which is located only a few blocks from pathmark, opened in the early 1990s, almost a decade afler pathmark had entered the neighborhood (community food resource center, 1995). in addition to data collected by private individuals and agencies, the u.s. collects information on retail trade government every five years. exhibit 2 presents the recent statistics related to food retailers in zip codes 10002, 10013, and 10038. these data show that zip code area 10002, the area in which the pathmark store is located and which witnessed an influx of more than 10,000 new immigrants in the early 1990s (department of city planning, 1996), added 25 retail food outlets between 1987 and 1992. meanwhile, zip codes 10013 and 10038, which each took in between 5,500 newcomers from 1990 to 1994 (department of city planning, 1996), gained 15 stores and one store respectively. many of the food retailers in the three zip code areas were small. in 1992, 19 of the grocers in area 10002 reported annual sales of less than $500,000 and 32 had fewer than ten employees; similarly, in area 10013, 24 had sales below $500,000 and 18 had fewer than ten employees (u.s. bureau of the census, 1992 and 1995). despite the initial fears of small and mid-size grocers, the results of the rachman and the community food resource center surveys, as well as the data gathered by the u.s. government, all point to the same conclusion: the presence of the large, full-service supermarket did not undermine the viability of the smaller size food stores in its trading area. instead, during the years following the opening of the pathmark, the number of small competitors increased. that result is quite different from the impact of similar large format 60 journal ofsmall business strategy vol. jo, no. l spri a+summer l999 stores in suburban and small town locations. the remainder of the paper will explore some reasons for this disparity. exhibit 2 comparison of number of food retailers between 1987 aad 1992 in zip codes 10002, 10013,and 10038 1987 1992 zip code 10002 total food retailers 95 118 grocery 55 59 meat and fish 15 25 bakeries 11 17 fruit and vegetable 4 8 other 10 9 zip code 10013 total food retailers 146 161 grocery 71 71 meat and fish 33 28 bakeries 20 24 fruit and vegetable 4 10 other 18 28 zip code 10038 total food retailers 52 53 grocery 24 26 meat and fish 6 5 bakeries 8 8 fruit and vegetable 3 3 other 11 11 population composition of the pathmark trading area pathmark located its store in the two bridges urban renewal area. this is a region of new york city that gained more than 1,000 new housing units during the decade preceding the opening of the supermarket (community food resource center, 1992). that circumstance, in itself, suggests the likelihood that the new supermarket entered a locale experiencing population growth. in addition, an examination demographic shifts occurring in the store's trading area during recent years points not only to a greater demand for food in general, but also to a need for highly specialized product offerings. the area served by the pathmark store is composed of three neighborhoods. the extreme eastern portion of the trading area has traditionally been known as the lower east side, the central region as chinatown, and the most westerly part as little italy. during the late 19 and early 20 centuries, jewish immigrants settled on the lower east side, chinese newcomers inhabited chinatown, and italians located in little italy. in more recent decades, most of the descendants of the jewish and italian migrations have resettled in other areas; however, a fairly large population of orthodox jews continues to live at the extreme eastern 61 journal ofsmall business strategy vol. jo, no. l spring/summer 1999 end of the lower east side. in addition to those inhabitants descended from earlier migrants, the area has, during the past two decades, received large numbers of new immigrants. these include chinese immigrants, who have overflowed the historic boundaries of chinatown, and hispanic newcomers, who have taken up residence in the lower east side neighborhood. the u.s. immigration and naturalization service compiles data on immigrants'lace of residence according to zip code areas, which, unfortunately, are not exactly coterminous with neighborhood boundaries. the new york city department of city planning's analysis of the ins data, however, grouped zip code areas 10002, 10013, and 10038 together as "chinatown and vicinity," and that neighborhood roughly approximates the pathmark trading area. in 1990, the u.s. census counted 120,136 inhabitants, 48,000 of whom were chinese in the "chinatown and vicinity" neighborhood. in addition, analysis of the ins data indicates that the chinatown and vicinity" area gained more than 19,000 immigrants between 1990 and 1994, and was the second largest immigrant receiving neighborhood in new york city during those years (department of city planning, 1996). of the more than 19,000 newcomers who took up residence in the area between 1990 and 1994, 14,600 or 76.3 percent were chinese (the newcomers account for 30 percent of the area's total chinese population). in addition, 2,300 or 12.1 percent of the immigrants were from the dominican republic. immigrants from more than eight other nations constituted the remaining 11.6percent of the newcomers, but none of those groups accounted for more than 2.3 percent of the area's new residents (department of city planning, 1996). given the patterns of historic and recent immigrant settlement, several separate ethnic areas seem to be present in the pathmark trading area. at the extreme eastern region is the remnant of the much larger jewish community that once dominated the lower east side. in the 1990s, this jewish population is relatively small, but many of the remaining jews are orthodox, adhere to strict kosher diets, and are ideologically as well as spatially isolated from more liberal jewish communities. immediately west of the jewish enclave is an area inhabited by more recently-arrived hispanics. that population is younger, may have limited knowledge of english, and prefers foods such as tropical fruits and vegetables associated with the caribbean. finally, spilling over the traditional boundaries of chinatown in all directions is the growing chinese population. during the past quarter century, the number of new chinese immigrants to the area has steadily risen, and this growing population together with other newcomers and long-time residents appears capable of sustaining a large number of food retailers. pathmark and its competitors in the years since its establishment, the lower prices and wider product assortments provided by the lower east side pathmark have attracted many grocery shoppers within its trading area. in addition, consumers, who drive and use its easy highway access, and a few shoppers, who rely on subway transportation, also patronize the store. the supermarket has not, however, met the needs of all area residents, and, most particularly, members of different ethnic groups have shown varying degrees of willingness to patronize the store. census data indicate that the population of the pathmark trading area is 30 percent hispanic, 6 percent african-american, and 42 percent asian; the remnants of the earlier jewish and italian settlements that remain in the neighborhood are not explicitly counted by the census. harvey gutman (1997),the vice president for retail development for pathmark has indicated that in-store surveys reveal that the number of hispanic shoppers is proportionate to the area's population, and that pathmark attracts disproportionately high numbers of african-americans 62 journal ofsmall business srraregy vol. 10, no. 1 spring/summer 1999 and possibly also jews and italians. by contrast, the in-store survey results suggest that asian consumers account for a disproportionately low percentage of tlie supermarket's patrons. the map shown in exhibit 3 indicates the food shopping options available to consumers in the pathmark trading area during the summers of 1996 and 1997. in addition to the large format pathmark store, the area supported six mid-size chain supermarkets, the 7,000 square foot hong kong supermarket, 107 stores that catered to chinese shoppers, ten grocery outlets with an hispanic orientation, six selling exclusively kosher foods, four with an italian orientation, and 25 small food retailers that lacked a distinct ethnic focus. (the total number of stores is somewhat dissimilar to the statistics obtained from the 1992 retail census because the neighborhoods under consideration do not include the complete areas of zip codes 10002, 10013, and 10038.) the map also shows some rather substantial regions that have no grocery outlets; large public and private housing developments occupy those areas. exhibit 3 map of store locations showing ethnic focus rtiandh lip ornnac marsh oann " llrtlrarnc scull srpcnc ~ hat nn stu lcnnh i)wnnnd ~ srndl gcncr d i'rrth i arm('nnrd i.nrc strut parhrant lj dc ~ ~ p „.':sjj'-" 63 journal ofsmall business strategy vol. 10, no. i spring/summer l999 the number and locations of the various food stores reflect the ethnic composition of the various sectors of the pathmark trading area. only a handful of jewish and italian stores remain in the lower east side and little italy neighborhoods. this finding is in keeping with the fact that most of the descendants of the jewish and italian immigrants have moved from the area, while those who remain are sufficiently assimilated to patronize chain supermarkets and other mainstream stores. there are ten stores with distinctive hispanic appeal. those operations suggest the influence of a growing population of caribbean immigrants, and their locations are proximate to areas that have recently witnessed an influx of immigrants from the dominican republic. stores with a chinese focus, however, account for by far the largest number of food outlets in the area. those retailers are clustered in the traditional chinatown neighborhood, and are also concentrated in the adjoining areas of little italy and the lower east side, which have become points of settlement for recent chinese immigrants. the proximity of the various food retailers to the place of residence of their patrons appears related to the finding of the pricewaterhousecoopers survey that inner city residents are likely to shop at several food stores each week. repeated observations of shoppers at the small and mid-size groceries in the pathmark trading area indicate that, on each shopping trip, customers generally buy only a bag or two of foodstuits that can be easily transported to their nearby apartments. a somewhat similar pattern of food procurement even seems to be present at the supermarket itself. at the pathmark location, observations made over six one-hour periods provided information related to whether shoppers used cars, shopping carts, or bags to carry their purchases from the store. that research found that 5 i percent of the shoppers carried their purchases in bags, i 5 percent used shopping carts, and 34 percent (some of whom may live outside the immediate neighborhood) relied on cars. those results suggest that the majority of the grocery purchases at the supermarket were relatively small. this grocery shopping behavior is quite different from found small town and suburban locations where customers who have easy access to cars, may satisfy their weekly food needs with a single visit to the supermarket. the highly specialized product assortments attracted some shoppers from outside the area, but such assortments also require local shoppers to patronize more than one grocery store. in the pathmark trading area, many outlets sell only fresh fruits and vegetables, while others offer only seafood or poultry. bakeries and butcher shops are also present in the neighborhood, and large numbers of "mom and pop" food outlets sell limited selections of convenience foods, beer, and sofl drinks. many of those kinds of stores offer their patrons a wide selection of goods within specific a product category, but none of these individual operations offers a onestop shopping option. small store survival and ethnic focus the community food resource center (1992) has argued that the coexistence of pathmark with its small and mid-size competitors suggests a "purchasing segmentation" of urban grocery shoppers. the center further noted that "mom and pop" stores may provide convenience, social and cultural networking, [and] certain ethnic foods, while mid-size supermarkets may serve "the local shopper who doesn't want to travel more than a few blocks from home." the observations of the various stories that were conducted for this paper support those conclusions, and are considered in detail in the paragraphs that follow. product assortment the pathmark store offers a wide and deep assortment of the foods, health and beauty, aids, and cleaning products that are generally associated with mainstream supermarkets. it also has 64 journal ofsmall business strategy vol. /0; no. l spring/summer 1999 reasonably large assortments of kosher packaged foods that are required by orthodox jewish consumers and of brands such as goya and vitarroz that are demanded by hispanic shoppers. the store, however,.has only limited selections of those fresh fruits and vegetables that are peculiar to caribbean diets, and offers virtually no products that are targeted specifically to chinese patrons. by contrast, pathmark's ethnic and, in some cases, mainstream competitors have tailored their product assortments to their ethnic patrons. the mid-size fine fare supermarket, that is located in the heart of jewish and hispanic settlement, has a sign over one aisle that identifies the products on one side as "kosher foods" and on the other as "spanish foods." the smaller stores in the area tend to cater to even more limited segments. moishe's kosher bakery and maury's kosher meats, for example, sell only foods that meet special dietary requirements of orthodox jews. retailers oriented toward hispanic customers place fruits and vegetables of interest to those consumers in outdoor displays, advertise "tropical products" on window signs, and display announcements that they send "valores documentos a republica dominica." in a similar manner, the italian establishments feature "fresh pasta daily," ricotta and mozzarella cheeses, and other "italian specialties." ranging in size from the hong kong supermarket's 7,000 square feet to a more typical 300 to 500 square feet, the large number of stores that serve chinese consumers have the most distinctive product assortments. many of those retailers offer fruit and vegetable assortments that are either exclusively or partially of asian origin. they also sell a wide variety of fresh fish and shellfish; crabs and other shellfish are generally offered live, and, in some cases, larger fish swim in special tanks until the time of sale. in addition, many stores feature wide arrays of packaged goods from the orient. while the hong kong supermarket has an extensive assortment of asian frozen foods, and features in-store cooking demonstrations of those products as well as samples of prepared foods. employees at the pathmark and mid-size chain supermarkets, business is generally conducted in english and in-store services are those typically found in mainstream grocery outlets. nonetheless, the composition of the workforce of those stores is roughly proportionate to the ethnic and racial representation in the surrounding neighborhood. there is, however, one very notable exception to this employment pattern. chinese workers are very underrepresented in the workforce of pathmark and the other mid-size mainstream supermarkets. by contrast, at the hong kong supermarket and at the other stores with chinese focus, virtually all employees were chinese, and most often store employees and customers conducted business in chinese. by employing ethnic workers, smaller store owners accomplish two important objectives: they assure the presence of employees, who are able to tailor retail services to the specific needs of their co-ethnics, and they provide job opportunities for newly-arrived immigrants and others, who may have limited employment options. the employees of the small stores considered in this study closely match the customer markets they served. chinese stores, as noted above, almost exclusively employ chinese workers, and they conduct business with coethnic patrons in their native language. the stores with distinctive jewish orientation likewise hire ethnic workers, who have first-hand knowledge of kosher dietary rules. hispanic workers staff bodegas, where business is often conducted in spanish, and they are also employed by small retailers that lack an apparent ethnic affiliation, such as the william bridge deli and broome grocery. 65 journal ofsmall business strategy vol. /0, no. l spring/summer l999 signage even without entering stores, potential customers received important information from exterior signage. pathmark and the mid-size mainstream supermarkets on the lower east side use signage to convey the expectation that their stores are similar to others in their respective chains. all of these stores use only english-language signs, and logos and other external symbols are identical to those used by chain members in other locations. store signs bearing a language other than english signal the ethnic orientation of the establishment, may serve to attract co-ethnic patrons, and perhaps discourage shoppers of other ethnictracial backgrounds. of all the stores visited, chinese retailers, who serve the largest proportion of recently-arrived co-ethnics, are most likely to display signs or awnings bearing non-english messages. in some cases, only chinese characters identify the store; in other cases, signage carries a chinese name written in western lettering and also in chinese characters; and in a few situations, including the hong kong supermarket and ocean star seafood market, signs bear both english identification and chinese characters. given the relatively large influx of dominican immigrants to the lower east side during the early 1990s, stores with hispanic orientations frequently use exclusively spanish language signage or combined spanish-english signs. in several instances, those stores also place spanish language signs in their windows to advise patrons that they accept food stamps. the stores serving jewish and italian patrons, who are members of ethnic groups long resident in the united states, do not rely on non-english signage. the jewish retailers do, however, use their signs to indicate that their foodstuffs are kosher. store speciale large format supermarkets such as pathmark have extensive buying power and buy in large quantities; these factors allow them to offer products at prices that are considerably lower than their smaller competitors. the lower east side pathmark, like other members of the chain, olyers an assortment of weekly "specials" that are promoted in an in-store flyer. the flyer is part of an umbrella program designed for multiple stores in the new york metropolitan area (gutman, 1996). during the week of july 21 to july 27, 1996, for example, the flyer featured such items as perdue chicken, mardi gras paper towels, and diet pepsi; none of the products, which were also promoted on large signs in the store's windows, had special interest for the ethnic populations that inhabit the trading area. the numerous, ethnically oriented, small retailers in the pathmark trading area generally offered few, in any, specially priced items. by contrast, all of the mid-size chain supermarkets in the neighborhood advertised an assortment of specially priced goods in their weekly in-store flyers and on large signs posted in their windows. the majority of products with lowered prices were mainstream grocery items such as hot dogs, strawberries, and ivory soap. the stores, however, also featured a number of foods with special hispanic appeal including ten-pound bags of rice, vitarroz malta, goya beans, and green plantains at reduced prices. in addition, the two mid-size stores in area with the highest proportion of jewish residents also used signs in their front windows to promote gefilte fish, rattner's knishes and seltzer water. implications small urban storeowners, who face the entry of a large format competitor, should be cognizant of the differences between small town/suburban locations and inner city areas. the 66 journal ofsmall business srraregy vol. /0, no. i spring/summer l999 experience of pathmark and its competitors points to the importance of identifying the current state of retailing in a given inner city. unlike many small town/suburban areas, which witnessed the construction of many new stores in the mid-twentieth century, many inner cities failed to gain or perhaps even lost retailers during that same period. as a consequence, many inner city neighborhoods presently are "understored" and are able to support larger numbers of retailers than currently exist. population trends in urban areas should also be considered when assessing the likelihood of retailer survival. in recent years, the population of some u.s. cities has grown, and that fact may signal a larger retail "pie" in locations such as that served by pathmark. under this circumstance, a new large format store or its smaller competitors may serve new customers, rather than merely divide existing business among a larger number of stores. small retailers, facing the entry of a large format competitor into their neighborhood, must also be cautious about using obstructionist tactics to resist the building or operation of the new store. many local consumers may welcome the lower prices and product assortments associated with such retailers, and make special efforts to limit patronage of those stores that 're seen as blocking access to those perceived advantages. in addition, non-profit organizations groups such as the locally-based community food resource center or those with broader focus such as the initiative for a competitive inner city have become increasingly vocal in working for improved shopping opportunities for lower income urban residents. those organizations have undertaken important data collection efforts to support their positions, and they are using that information to assist private and public agencies who are joining together to bring large stores to urban areas. small storeowners should also recognize that recourse to legal technicalities, such as special use permits or zoning restrictions, may only temporarily slow the progress of constructing or operating a large urban store. municipal governments in the 1990s have become increasingly aware of the loss of revenues that occurs when urban residents shop in the suburbs. as a consequence, leaders of cities such as new york have shown increasing willingness to ease existing legal restrictions against large retailers, and may even provide incentives to encourage their location within city boundaries. at present, many urban areas with their large, under-served populations may represent more attractive opportunities for some large scale retailers than do suburban markets that have become saturated with various types of superstores (cohen, 1999). that circumstance suggests the likelihood that, during the coming decade, large format stores will continue to expand their presence in major cities. niche strategies, however, are viable options for small operators facing large competitors in urban locations. one shopkeeper, for example, has successfully competed against a pathmark supermarket for more than ten years by offering greater convenience. when interviewed by a new yorr times reporter, she stated: "people shop differently here than they do at pathmark. they come here for the quick shopping. that's what we offer, and we'e doing o.k." another small storeowner has found that the freshness of his fruits and vegetables has been a source of sustainable advantage in maintaining market share (hicks, 1995). "ethnic focus," however, may offer small urban retailers, who do business in areas with growing immigrant populations, the most effective means of attracting and keeping customers. newcomers to the united states are likely to seek out those goods and services that enable them to maintain ties to their homeland and its traditions. they may also appreciate co-ethnic employees, who are able to understand their needs and who can conduct business in a non-english language. moreover, the strategy of "ethnic focus" may be uniquely suited to the small retail operation. the individual storeowner is likely to be a 67 journal ofsmall business strategy vo/. /r no. 1 spring/summer /999 member of the ethnic group resident in the neighborhood, and to be highly knowledgeable about the products, employee services, signage, and promotions favored by a respective populace. by contrast, large chain operations profit by capturing economies of scale, and their mass market strategies may preclude attending to the highly specific needs of a particular ethnic group. conclusion the foregoing discussion of the circumstances of pathmark and its competitors on the lower east side of new york city suggests the possibility that the small town/suburban experience, which has associated the arrival of large format stores with the closing of existing small and mid-size stores, may not be an appropriate model for inner city locations. that is not to say that bigger retailers offer no competitive threat to smaller operators, or that the viability of truly marginal stores in urban areas is assured. but the entry of a large format store into an urban neighborhood does not necessarily signal the demise of the existing retailers. the inner city population is not as homogeneous as its small town or suburban counterparts. thus, urban residents are likely to require a wider variety of goods and services than are demanded by patrons in other locales. moreover, as supermarkets, mass merchandisers, and category killers, open stores in city, they eliminate the need for urban residents to travel to neighboring suburbs to meet their shopping needs. this circumstance will produce highly positive operating results for the urban locations, but that success, at least in part, may be the result of city consumers shilling their spending from suburban large format stores to those closer to their homes. however, small retailers in the inner city, both before and after the coming of the larger competitor, may meet particular product and service needs that are quite distinct from those offered by more mainstream stores, and this fact appears to lessen the competitive threat of the bigger operator. references alwitt, l. f. ((k donley t. d. (1996). the low-income consumer. thousand oaks: sage publications. community food resource center (1992). super-marketing: the im act of new su ermarket develo ment on existin stores in new york ci nei hborhoods unpublished manuscript. community food resource center (1995). su rmarket develo ment and new york ci unpublished manuscript. cohen, c. (1999). densi dollars and demand seize the inner-ci urban o rtuni speech at 88" annual convention of the national retail federation. new york city. c n,m.b.(19941.5 nl . i 3 .~dt 1 .14. department of city planning/city of new york (1995), com rehensive retail strate for y bcity, department of city planning/city of new york (1996), the newest new yorkers 19901994, dcp-96-19. gutman, h. (1996,1997), personal and telephone interviews. hicks, j. p. (1995, august 4). pathmark's little neighbors have learned to compete. the n y it( 93. mw (.m ' «1 m 4 1 ' ...((995(.c~(m 9 5 919-911. jacobs, a. (1996, july 21). kaleidoscopic astor place: will the funk go?" the new york times sec. 13, 6. 68 journal ofsmall business strategy vok 10, no. l spring/summer 1999 r porter, m. (1995). the competitive advantage of the inner city, harvard business review 73 (may-luna), 55-71. pricewaterhousecoopers llp and the initiative for a competitive inner city (n.d.). the 9 rachman, d. (1987). summary: pathmar store re arch. unpublished manuscript. stone, k. (1993). impact of wal-mart stores on iowa communities: 1893-1993.economic develo ment review 13 60. waldinger, r., aldrich, h., & ward r. (1990). opportunities, group characteristics, and tgt .~eu ' n b~p ksg pbb wr . j. ((9953, s .~gj ~ 2s.33 wolff, c. (1984, january 26). new supermarket sharpens lower east side debate. new ~ys i bi. u.s. bureau of the census data user services division (1992). 1987 economic census: volume 2: zi code statistics. cd-rom, release 2b. washington: the bureau. u.s. bureau of the census data user services division (1995), 1992 economic census: zi cd-rom, d' 2a. wmmsn: tb b enm, s. (f9953. t~hf i i . c b 'gg, ma.: bl k il marflyn lavin is an associate professor of marken'ng at the university of wisconsinwhitewater. her research ituerests include retail management, consumer behavior, diren marken'ng, and marken'ng strategy. she has published in a number ofjournals including the journal of consumer research, the journal of retailing services, 77te journal of consumer markedng, and the journal of direct markenng. 69 strategy international strategic alliances: a tale of two firms john hadjimarcou university of texas at el paso j hadjimawutep.edu john w. barnes loyola university new orleans j wbarnesqaloyno. edu somnath bhattacharya florida atlantic university sbhattifau. edu patrick traichal epicentric, inc. ptraichalgepi centric. corn frank hoy university of texas at el paso jhayutep. edu abstract firms seeking to enter internaiional markers have increasingly opted for cooperative relationships with business partners as a mode of easing and promoting marker entry. this study examines the expansion of two smalllmedium-sized enterprises (smes), organizations with 30 to 500 employees, in the us, and in mexico. the study compares and contrasts the nearly simultaneous expansion of a u.s.-based franchisor into mexico and thar of a mexican firm into rhe us. in addition ro its implications regarding strategic alliance as an international entry mode for smes, this study also contributes toward rhe quest for longitudinal theory building. given that this was the first international expansion for both principal entities, a maj or outcome of rhe study is documentation of rhe importance of both partnership and planning for successful internati onal activities. introduction and conceptual foundations cooperative relationships between and among firms have grown into a mature and stilldeveloping stream of research. these relationships have become the focus of even more attention as they are formed to facilitate expansion into and development of international markets, particularly when the firms are entrepreneurial in nature (e.g., hoy &. hoy, 1994; mcdougall & oviatt, 1997). increasingly, firms on an international scale are opting for 77 jonrnal of sniall 0usi riess strategy vol. i i, no.2 fahywinrer 2000 cooperation and negotiation in pursuit of global expansion rather than relying on the traditional mode of competition with other entering firms (e.g., mcdougall & oviatt, 1997). strategic alliances generally refer to partnerships among firms in which cooperation occurs in the pursuit of a common strategic goal (harrigan, 1988; ulrich, von glinow, & jick, 1993). although clear goal delineation is an important element of successful inter-partner relationships, alliances may yield other far-reaching, long-term benefits such as learning the other partner's skills and alliance experience per se (tsang, 1999). in fact, johanson and vahlne (1990) argue that knowledge developed through strategic alliances plays a major role in the internationalization process of firms. preference for alliance-based growth in international markets is attested to by the dramatic increase in the formation of strategic alliances in the international community over the past two decades (contractor & lorange, 1988; lynch, 1989; lorange & roos, 1992; ohmae, 1995; tsang, 1999). this growth in alliance activity has resulted in a transformation of international commerce, which researchers are only now beginning to grapple with (tsang 1999; cullen, johnson, & sakano, 2000). the traditional competitive model of firms entering the international arena has led to a view of strategic alliances as a strategic option of "last resort," to be turned to only when the firm is beset by pressure from competitors, the need to avail itself of venture capital, or simply when it is no longer possible for it to cross international boundaries on its own (hamel & prahalad, 1989). as more companies come face-to-face with the intimidating factors that accompany the "global marketplace" (e.g., increased costs of research and development, technology costs, etc.), they are learning, in the words of ohmae (1989),"what nations have always known: in a complex, uncertain world filled with dangerous opponents, it is best not to go it alone" (p. 143). figure i a continuum of strategic alliances'utside long-term franchising/ joint contracting export technology cooperative licensing ventures (long term) management alliance agreements short time long none ownership full low risk i ligh low control high ep dr i ~ urgh adapted from weaver and dickson 1995. strategic alliances can take on an array of forms, as illustrated in figure i (adapted from weaver & dickson, 1995). the continuum in the figure highlights those strategic factors across which forms of strategic alliance activity may be differentiated, ranging from simple import/export relationships (in which the alliance is more likely to assume the nature of an "arm's length" transaction) to fully-developed joint ventures. the length of time required to achieve the strategic goal and the degree of both risk and return inherent in the alliance, for example, will be greater for a franchise agreement and joint venture than for a buyer-seller relationship or simple marketing agreement. in each instance of alliance activity, however, the general characteristic of cooperative behavior in pursuit of a common strategic goal is found. 78 journal ofsmall business strategy vol l i, no.2 fall/winter 2000 as suggested in figure i, a strategic alliance niay imply full commitment in terms of resources, financial and human, as well as effective management and operational control as exemplified by joint ventures. in the services industry, strategic alliances seem to be the most dominant modes of entry in the experimental and active involvement stages of the internationalization process (cavusgil & nevin, 1980; root, 1987). strategic alliances may also be designed to overcome resource constraints and at the same time allow the partners to retain some management control in the new venture. the form of inter-firm cooperation allows partners to benefit from market, business, and operational know-how exchanges (tsang 1999). within the developing corpus of alliance literature, a secondary stream is emerging, with its focus on alliance activity among small to medium-sized enterprises ("smes"), or those with 30 to 500 employees (larson, 1992; weaver & dickson, 1995; weaver, dickson, &. davies, 1995). currently, the general state of research concerning inter-firm cooperative relationships exhibits either a bias in favor of larger firms, or fails to distinguish among firms regarding size and resource base (weaver & dickson, 1995). this tendency to focus on larger firms in alliances exists in spite of the rapid growth of alliances among smes, and evidence that smebased strategic alliances are unique in a variety of ways (mcgee, dowling, & megginson, 1995). purpose of the study in the international business community, various global and regional trade agreements (e.g., wto, the european union, the north american free trade agreement ntt ftrl, mercado comun del sur mercosur, etc.) have encouraged the expansion of international trade and have highlighted the need for more research into the role of and opportunities for small and entrepreneurial ventures. this study is a qualitative analysis comparing and contrasting the entry strategies adopted by the owner/founders of two smes, "silver streak restaurant corporation" and "chihuahua charlie's restaurants" and their venture teams in pursuing international entrepreneurial expansion. these expansions were planned and executed across the united states-mexico border during the initial implementation of the north american free trade agreement. the study examines how an american firm and a mexican firm responded to differences in social, individual, and economic conditions in their eltorts to penetrate a foreign market. in the case of silver streak, the firm entered the fast-food restaurant market in mexico by venturing with a larger mexican partner, an alliance that has eased international entry in a variety of ways. by contrast, chihuahua charlie's opted for the more traditional direct market entry mode, considering alliance with a partner perhaps too risky (in terms of relinquishment of control and/or know-how, two key dimensions of alliance activity see figure i), or believing in the company's competitive strengths as justification for "going it alone" in a foreign market. the cases are contrasted to determine whether environmental conditions and venture activities can be identified to distinguish successful from unsuccessful cross-border ventures, and to examine the role played by strategic alliance activity. the two firms also allow an assessment of how venture teams manage the risks of newness, small size, and international activity. nafi'a and other reforms in facilitating alliances in mexico the climate for alliances in the business culture in mexico and the desirability of entry into the mexican market have been aided significantly by the liberalization of regulations for foreign investment in mexico (winsor, 1994). this liberalization, along with the reformation of the "law to promote mexican investment and regulate foreign investment" in 1989, has 79 journal of small business strategy vol. ll, no.2 fall/ivinrer 2000 stimulated business activity in that country by opening over two-thirds of mexico's total gross domestic product to foreign participation and investment in business ventures (winsor, 1994). these reforms have created significant opportunities for foreign firms desiring partnership with mexican businesses. a great example of the positive outcome of these reforms is the tremendous growth witnessed in the mexican franchise industry over the passed decade. the franchising boom in mexico begun in 1990 when the mexican government realized the potential economic benefits of franchising and enacted a new industrial property law. this particular law established the first legal definition of franchises in mexico and eliminated some of the major franchising obstacles. along with this, the development of trademark protection legislation helped franchising become one of the major growth sectors of the mexican economy during the last few years. although some of the big international franchises have appeared in mexico since the 1960's, changes in the law have made it possible for small players in the mexican franchise industry to enjoy the same protection as the large chains without having to invest the majority of their profits to hire expensive attorneys. in 1994, mexico went even further in the establishment of franchising as a viable business enterprise by also establishing basic legal guidelines for the provision of information prior to the signing of franchise contracts. undoubtedly, the signing of nafta further enhanced the image of the mexican market in the eyes of potential franchisors and other investors, even though the agreement itself did not essentially alter the ample protection already offered by mexican law. interest in mexico as an investment market and growing business culture has been highlighted by the passage of nafta, facilitating trade between the u.s., canada, and mexico through the removal of tariff and most non-tariff barriers. with the goal of opening world markets to the free movement of products, the u.s, pursuit of free trade has led to an increased interest by american firms to partner with mexican enterprises (o'driscoll, gruben, & welch, 1993). nations have come to a growing realization that economic self-sufficiency has become increasingly difficult, thereby making the importance of access to crucial markets that much more critical (o'driscoll, jr., et al., 1993). a common misconception about nafta is that the agreement opens up the u.s. market to cheap mexican products and labor. in reality, however, u.s. firms enjoy competitive advantages in mexican trade. this phenomenon is partly due to the high financing and communication costs for mexican firms vis-6-vis their american counterparts. coupled with the cost issue for mexican companies, is a vastly inferior (compared to the u.s.) business infrastructure in mexico (o'driscoll, jr., et al., 1993). a by-product of this situation is that mexican firms are becoming ever more aware of the advantages of developed markets through partnerships with u.s. and other global firms, rather than going it alone. the evolving pro-business environment in mexico encourages an entrepreneurial orientation, particularly among smes, which have the most to gain from alliances with other firms (e.g., the case of silver streak). a commonly recurring theme among u.s.-mexico alliances has been the need of u.s, firms to adapt to mexican trading methods and business cultures (alston, 1994; jones bc anderton, 1995). method this study takes its cue from prior studies such as hills and laforge (1992) who have stated the need for more longitudinal studies that trace firms through all stages of development and market evolution. such studies are essential for adequate theory-building and the subsequent testing of such theories. hills and laforge (1992) also call for "significant efforts" directed at qualitative theory generation and caution against premature movement to the hypothesisgeneration stage. this study traces the entrepreneurial venturing of two contemporary firms, and attempts to fit the firms'ctions against established market entry characteristics. the 80 journal of small business strategy vol. /l, no.2 fall/wnrer 2000 "compare and contrast" methodology adopted here pits the firms'ndividual actions against established paradigms. this allows for a detailed examination of the applicability (and validity) of the paradigms themselves, while suggesting modifications that may be necessary for the paradigms to extend their generalizability and applicability across international domains. yin (1989) further notes that evidence for case studies can originate from six different sources: documents, archival records, interviews, direct observation, participant-observation, and physical artifacts. evidence to support the silver streak case study came from three of these sources: documents (articles, published materials concerning franchising and the restaurant industry), interviews (with the owners and managers of the chain), and direct observation of the restaurant, its environments, operations, and management. chihuahua charlie's involved interviews with the principals and direct observation of the restaurant's operations in dallas, texas, usa, and ciudad juarez, chihuahua, mexico. firm profiles silver streak corporation the first silver streak restaurant opened its doors in 1988 in the southwestern u.s. city of e! paso, texas. el paso, a city of approximately 650,000 people, is located on the u.s. side of the texas border with mexico. alan simpson and jerry malachkowski, with several years of management experience at mcdonald's and burger king restaurants, decided to open silver streak. they intended to take advantage of the many opportunities offered by "drive-through only" fast-food restaurants. these include substantially reduced costs and simple operational procedures. having successfully established three restaurants in el paso, silver streak was approached in 1994 by a large mexican corporation for its franchise rights in mexico. alter carefully reviewing their operations and with the help of franchising attorneys, the silver streak owners drew up a master franchise agreement that would serve as the blueprint for future franchise operations. they also signed a country development agreement with the mexican corporation. currently, silver streak operates four restaurants in el paso and two in the city of juarez, located just across the border from el paso in the northern mexico state of chihuahua. there are plans for two additional restaurants in juarez, with further expansion into other mexican cities over the next few years, depending on the success of the first three restaurants in juarez. at the same time, silver streak has adapted its concept to convenience store operations. the new, smaller version of silver streak, coined "silver streak express," is currently in two convenience stores in el paso. an agreement is pending for four more outlets with a similar chain. chihuahua charlie's opening its first restaurant in mexico in 1983, the chihuahua charlie's chain has always distinguished itself by offering family-style mexican cuisine, as well as unique service and entertainment value to its customers. chihuahua charlie's draws its inspiration from the rich culinary culture of southern-mexico and traditional mexican home-cooking recipes. the restaurant serves beef, fish, poultry, homemade cheese breads, and baked-on-site tortillas. the owner, jose luis gutierrez, often points out that "it does not have to be hor to be mexican." taste is the credo of the chain and is institutionalized as part of the company's logo "taste the fun." adaptation and openness have played major roles in the chain's growth. gutierrez is convinced that to succeed in a new market, it is necessary to adapt to the specific cultural and economic characteristics of the locale. this has been one of the chain's mainstays throughout 81 journal of small biisiness 5lraregy vo/. /l, no.2 fall/ifinrer 2000 its growth. for example, early in the planning process for a restaurant in monterrey, mexico, gutierrez felt that it would be inappropriate to have the word "chihuahua" in the name for a new restaurant located in monterrey. hence, gutierrez coined the name "setior frog's" for the restaurant in that city. another strategy employed successfully by gutierrez was to invite local entrepreneurs as partners of a new restaurant. this practice has two immediate advantages. first, it is a convenient source of funds needed to finance the new project. second, it provides the business a partner with local know-how and savvy. as a result of this practice, every restaurant in the chain operates as an independent entity under the general supervision of gutierrez. mode of entry choice chihuahua charlie's growth in the domestic mexican market has been bolstered by strong familial and kinship networks (cf. broehl, 1982), as well as a strong sense of identity with the mexican business culture translated into the integration of business values and ethics traditional to that culture. by contrast, silver streak's choice of a partnering strategy was likely influenced by the increased pro-business environment in mexico. franchising and other forms of strategic alliances have become increasingly popular ways for mexican firms to compete against u.s. and other global firms (norris 1993), reflected in the decision of silver streak's mexican partner to enter into the alliance. chihuahua charlie's decision not to partner with a u.s. firm in entering the american market appears contrary to the advantages in strategic partnering encouraged by the passage of nafta and similar legislation protecting trade. chihuahua charlie's domestic success in mexico has occurred in spite of the many competitive disadvantages faced by local mexican firms in that market, including financing and communication costs that are significantly higher than in the u.s., along with the comparatively under-developed business infrastructure in mexico (o'driscoll, jr., et al., 1993). silver streak, by contrast, has recognized the difficulties facing small businesses in mexicoparticularly higher costs and being able to successfully deal with a less-developed infrastructure. the firm's solution was to exploit the learning curve advantages of the larger mexican firm with respect to the mexican business culture, capitalizing on this partnership to take'advantage of the increasing pro-business climate in mexico (fueled by nafta and deregulation reforms) and to let the mexican firm deal with the high cost of doing business in mexico. in return, silver streak agreed to relinquish some control over their franchise format, by allowing the firm to use the "silver streak concept." the "control" versus "cost and risk" issue was obviously resolved differently in the case of chihuahua charlie's. gutierrez decided to maintain control of the firm, its business format and concept, encouraged by his earlier successes in a higher-cost/less-developed business environment. table i compares and contrasts silver streak and chihuahua charlie's on several salient dimensions. opportunity identification and sensitivity to the market silver streak corporation from his initiation of the silver streak concept in 1988, alan simpson has reacted to his target market in a proactive manner. both simpson and malachkowski, the two principal protagonists of the silver streak story, have relied on their considerable experience in restaurant management to put in place those design and strategic characteristics, which their collective experience suggests are critical for leadership in their sector of the industry. although attracted early by the notion of franchising, neither party considered the company to be ready for such a venture, owing to a lack of preparation and necessary support. 82 journal of small business strategy vok l l, no.2 fall/winter 2000 table i a comparison of the two firms on salient dimensions silver streak chihuahua charlie's dimension restaurant corp. restaurants size 6 outlets (u.s.); 6 outlets (mexico) 2 outlets (mexico) menu flame-broiled hamburgers authentic mexican cuisine service format fast-food; convenience full-service: fine dining primary market el paso-)uarez border zone nonhem mexico expansion direction u.s. to mexico mexico io u.s. status of expansion io date successful unsuccessful mode %tfarket entry franchise (development) direct market entry; no strategic agreement with host country lirm alliance hlarkei growth concept the silver streak concept: family-style cuisine: unique quality burgers, low price, cost service and entenainment value, control, convenience, driveauthentic mexican dining through or walk up windows experience control philosophy relinquish some control of maintain total control of concept; concept to developer/subdevelop and grow own market franchisor to gain advantage in market development mode of market adaptation market creation market filling however, when a large mexican corporation approached silver streak in 1994 for its franchise rights into mexico, simpson and malachkowski decided that the opportune moment for international franchising had come. the franchise master plan provided an avenue for a country development agreement signed with the larger mexican corporation shortly therea()er. in this manner, the firm entered the new market, while the larger partner underwrote operations and "cleared the path" by dealing with the business and political/legal culture of mexico (e.g., how to approach and deal with franchisees, mexican leasing laws, etc.). an immediate result of the modification of simpson and malachkowski's original concept was "silver streak express," a newer and smaller version of the original restaurant. the "express" currently exists in two u.s. convenience stores, with a tentative agreement for additional restaurants in both the u.s. and mexico. consistent with broehl's (1982) argument, silver streak's entry into the mexican market has been fostered by the willingness of the larger mexican partner to take on the attendant financial risk of such a move. the partner's cultural affinity (both with the business and national culture of mexico) and larger capital base have freed silver streak as an "agent of change," to deal directly with the risks of entrepreneurship itself. chief among these risks, from which silver streak has been freed, is that of introducing an untried, unique, and 83 journal af siiiall jjasiness siraiegv val. l l, ltra.2 fall!ivinrar 2000 unproven concept into a new (international) market. silver streak's strategic move thus counters i-lisrich and peters'1995) arguments that entrepreneurship necessarily entails financial risk, lending credence to broehl's (1982) and stevenson, roberts, and grousbech's (1989) propositions that entrepreneurship is not necessarily characterized by the assumption of linancial risk, but by the entrepreneur's serving as an ageni ofcltange. chihuahua charlie's restaurants the bank of mexico reported in july 1996 that the domestic economy had started to grow again in the second quarter of 1996; inflation was decreasing; and the peso/dollar exchangerate seemed to have finally stabilized. gutierrez believed that the time had come to cross the u.s. border. a market study further convinced gutierrez that it was time to leave the domestic market and cross the border to the north. mexico had a population of 93 million and an annual gdp per capita of around $3,000. the u.s., conversely, presented a far greater market opportunitywith a population of 263 million and an annual gdp per capita of $23,000. as far as gutierrez and his associate oscar guevara were concerned, their expansion into the u.s, was a foregone conclusion. in early august 1996, a u.s. federal trade commission team came to the el paso/juarez area to perform a review of nafta on the border. on the agenda was dinner at chihuahua charlie's in juarez, mexico, where gutierrez gave a presentation on the impact of nafta on the region. during his talk, he mentioned the desire of many mexican entrepreneurs (including himself) to enter the u.s. market, and also referred to the many difficulties that such a venture would face. at the conclusion of the meeting, the then director of the texas department of commerce suggested that gutierrez go to dallas to explore the possibilities of opening a restaurant there. the director indicated that mexican entrepreneurs could take advantage of flexible investment regulations established under the auspices of nafta in the u.s. two days later, gutierrez and two of his advisors flew to dallas to gather as much information as they could on the feasibility of establishing a restaurant there. chihuahua charlie's entry into the u.s. market stands in stark contrast to that of silver streak. chihuahua charlie's entered the market essentially alone, without the help of an american partner. gutierrez elected to enter headlong into the venture, believing in the firm's distinctive competencies (family-style mexican cuisine and unique service and entertainment value) as evidenced by its successes in mexico. american restaurant statistics, however, indicate that the chances of survival for restaurants after one year are about one in nine. this fact apparently did not daunt gutierrez. chihuahua charlie's had also experienced a small successful international venture with the el paso trolley company, financed 50-50 with u.s. and mexican capital. possibly driven by this initial success, gutierrez believed that he could make the changes necessary to adopt the chihuahua charlie's concept to the expectations of the american restaurant environment. consequently, unlike silver streak, he did not feel that he needed the support of partnership with an american firm to compete and gain share in the dallas (u.s.) market. lessons from successful and unsuccessful entries the critical importance of a local partner as discussed earlier, silver streak's decision to enter the mexican market via franchising was predicated on its partnering with a larger firm that could, in essence, deliver two critical competencies. these were (i) the necessary financial capital to assume the financial risks of 84 journal ofsmall business strategy vol. ll, no.2 fall/winter 2000 market entry, and (2) experience with the mexican business culture. the latter included seemingly mundane, yet crucial issues such as who to "talk to" in order to expedite the construction phase of the new restaurants in mexico, and other political and legal issues unique to mexican business. although silver streak could build its own "drive-through" restaurants (typically consisting of kitchen, equipment, and land) for approximately $350,000, whereas competitors such as mcdonald's would typically spend close to three times that amount, the mexican partner's ability to provide financial support is of particular value to a small business firm such as silver streak. the financial support provided by the mexican partner allows silver streak to retain corporate earnings in a way that may not be possible for larger corporate franchisees (e.g., mcdonald's), in which a sizable percentage of sales is paid by the franchisee in the form of royalties, rent, advertising, and the like. in addition to its financial leverage and organizational structure, the larger mexican firm also has considerable experience in doing business in mexico. the firm has a history of success in retailing ventures such as restaurants and drive-through dry-cleaning establishments throughout mexico, and can thus also serve as a potential information broker to silver streak. when the 1994 devaluation of the mexican peso hit, shortly after silver streak and their mexican partner had signed the country development agreement, there was a forced delay in the implementation of the franchise plans until the economy stabilized. nevertheless, the initial two restaurants in juarez, mexico, have been in operation for more than two years, with the expectation that two more restaurants are to open (as per the country development agreement) in the near future. the mexican partner is well positioned to capitalize on advantages inherent in the mexican business and legal environment, thus enhancing silver streak's chances of success by eliminating many of the major franchise obstacles. still in the early stages of the implementation of their franchising strategy, the protagonists of silver streak have learned valuable lessons regarding the mexican market, which they hope to translate into a long-term vision for continued success. for example, the firm has learned that despite its distinctive competitive advantage in the mexican market i.e., cost containment, product quality, and low prices, market differences still prevail. succinctly put by simpson, "one needs to know people to get things done there." the details of negotiation (e.g., for land) and the intricacies of construction and other policies in mexico have taught simpson and malachkowski the importance of having a mexican partner particularly one with large financial leverage, an established organizational structure, and local contacts. that this partner could deal directly with business and operational issues e.g., obtaining land and negotiating with mexican contractors, as well as developing relationships with vendors was further enhanced by its ability to procure and provide information, consistent with its role as an information broker (liebenstein, 1973). in a developing country in which demographic information necessary for analyzing a trade area is not readily available, the presence of a mexican partner who is able to determine desirable locations helps to compensate for the lack of objective data procurement methods prevalent in the u.s. both simpson and malachkowski have acknowledged that silver streak's continued growth is closely tied to franchising. while the company has been successful in procuring outside capital (thanks to its mexican partner), other issues remain to be addressed. one concern is whether silver streak has enough human resources to reach rapid growth in the mexican market or will it need to draw upon talent from outside the firm. as silver streak plans for future expansion, this issue becomes more critical. lack of planning and weak execution of direct market entry chihuahua charlie's management viewed their northward expansion into the united states as a natural extension of their previous success with restaurants in mexico. the dallas expansion was to be a first step toward a nationwide chain of franchised outlets in the u.s. 85 lottrnal of smail bttst'nets siraiegv vol. i i, no 2 fahywinrer 2000 unlike silver streak, however, the management of chihuahua charlie's decided to implement the international expansion by retaining complete control over the new operation. the venture was financed by equity and managed as an extension of the existing and profitable mexican operations. unfortunately, this effort failed due to several factors, some of which are analyzed below. first, chihuahua charlie's management had previously acknowledged the vital role that local partnerships had played in their success in the mexican market. however, despite the past successes in teaming up with local partners for their mexican expansion, the dallas expansion used very limited local (u.s.) resources. previously, the local partners in mexico have brought both capital and knowledge to the ventures, and thereby had served as motivated information brokers to them. for the dallas venture, however, chihuahua charlie's retained a local lawyer to aid in compliance with legal requirements and joined the dallas chamber of commerce in order to establish contacts in the community. unknown to gutierrez, the local lawyer also owned some business interests in the dallas area that put him in a position of conflict of interest with chihuahua charlie's. this unfortunate situation was further exacerbated by gutierrez and his team's undue reliance on an accountant trained only in mexican accounting standards and totally unfamiliar with u.s. conventions. thus, the dallas establishment was only partially provided the necessary information for the successful conduct of business. further compounding the problem was a lack of continuous, motivated, and experienced on-site management, since the principals (gutierrez and guevara) commuted between the restaurants in dallas and juarez (approximately a two-hour air commute) on an irregular basis. second, and partially as a result of a lack of continuous local oversight, the timing of both strategic and operational business decisions was externally-driven, amounting to a perennial exercise in crisis management. for example, the initial opening of the dallas operation was hurried due to the potential loss of the registered logo of the company. ex-post, management conceded that had they had the time, they would have accomplished a more thorough siteselection process and would have probably located the restaurant in the dallas suburbs rather than the highly competitive downtown area. thus, once the dallas management had fallen into a reactive mode, it was unable to ever become proactive. ln a further reflection of chihuahua charlie's limited u.s. management expertise, the dallas menu had only been about 60 percent finalized before the operation was sold. further, throughout the dallas restaurant's ten-month long operation, management was unable to refer to either ad-hoc or regular financial statements for performance measurement and evaluation. the ten months of operation with high employee turnover, coupled with intermittent oversight by management, led to missed opportunities and inept problem resolution. these included: (i) inadequate representation by the local attorney when chihuahua charlie's was wrongly charged with a liquor license violation; (2) inadequate legal representation against repeated raids on the restaurant by agents of the u.s. immigration and naturalization service; (3) failure to screen miscreants (supposedly dispatched by more established local competition) who harassed customers and destroyed the restaurant's ambiance; and (4) management's inability to develop and maintain internal controls over inventory and provisions within the restaurant. third, chihuahua charlie's did not make effective use of the restaurant space mostly due to lack of an effective advertising strategy. although the restaurant was seated to capacity during peak hours, there were long periods of low occupancy that could have been addressed by target marketing and pricing changes during off-peak hours. management had expected that the eating habits of u.s. customers would vary from their mexican counterparts. however, they were unprepared for the magnitude of the necessar'y changes. reliance on 86 journal ofsmall business strategy vol. i i, no.2 fall/8'inter 2000 word-of-mouth advertising worsened the seating problem since, in essence, the referral customers were similar in proflle to the existing customers and attempted to patronize the establishment during the same (capacity) hours. management had planned to market the restaurant through local publications, but these plans were not realized in time to help the venture survive. although the venture failed, the principals behind chihuahua charlie's are convinced that the concept itself is valid. first, they note that the restaurant was purchased, albeit at a loss, as a going-concern by a local dallas businessman. second, the restaurant did generate substantial cash flow during the ten months of its operation. it is important to note here that there is no exact measure of such cash flows, or income, due to the lack of financial statements. as is oflen common among erstwhile managers of unsuccessful ventures, management of the nowdefunct chihuahua charlie's has frequently opined that had they been able to sustain the operation for a few more months, they could have tumed things around. unlike many failed ventures, however, we believe that had there been sufficient accounting controls and dedicated local management in place from inception, provided by strategic alliance with an american partner, chihuahua charlie's of dallas, texas, would have remained operational and profitable under gutierrez and his team. discussion chihuahua charlie's and silver streak provide valuable lessons regarding success and failure in cross-border venturing. in the case of silver streak, a small american fast-food restaurant was able to successfully enter the mexican franchise market by partnering with a larger mexican firm. the latter could effectively compensate for silver streak's potential weaknesses in the venture. this allowed silver streak to capitalize on its chief strength and distinctive competency the silver streak concept. the strategic foresight of the owners made them realize that their lack of financial leverage, organizational structure, experience with both the mexican retail and franchise markets, and unfamiliarity with mexican business culture (and a lack of knowledge of the political-legal environment in mexico) had the potential to put the franchising venture in peril. the price for gaining these necessary insights was the forfeiture of some control over the concept. while this decision was probably not a very easy one, the owners recognized that they could not succeed in mexico by "going it alone." conversely, chihuahua charlie's illustrates the dangers of falling headlong into a crossborder venture. gutierrez and guevara were armed with the belief that their earlier successes in mexico and the firm's distinctive competence in their own country were enough to insure success in a leading market such as the united states. according to johansson and roehl (1994), leading markets are strong at the high end of the product line and are also characterized by the intense nature of competition and the high sophistication of their customers. nonetheless, the failure of chihuahua charlie's is attributable to a number of causes beyond those inherent to leading markets. some of these are: management beliefs and attitudes concerning the host country's (u.s.) market and business culture, unwillingness to relinquish control over any part of the firm's distinctive concept even in order to attract leverage and other assistance from a host country firm, and perhaps simply the belief that problems in the host country's market could be overcome without external resistance. one may even suggest that the potential success of such a venture blinded the players from a realistic view of the problems of operating in a wholly different business culture and relatively unpredictable market. thus, it may be argued that chihuahua charlie's myopic strategic perspective led to a lack of acculturation, along with a number of business-related obstacles, leading to the venture's ultimate demise. 87 journal ofsmall business sirategy vol. i i, no.2 fall/winter 2000 there are several important implications for smes interested in international expansion that derive from silver streak's and chihuahua charlie's vastly contradictory experiences. first, is the importance of alliance with a partner from the host culture, and the issue of partner selection. as previously discussed, silver streak's management did not feel that the firm was in a position to enter a cross-border franchise market on its own. significant deficiencies that the firm faced, not only the lack of financial leverage and organizational structure, but also lack of knowledge of the mexican business culture, inexperience with the mexican market and the unique political-legal environment in mexico, were overcome through partnership agreement with the larger host country firm. silver streak's partner was thus not only able to provide the organizational and underwriting support needed for the franchise venture, but also "greased the wheels" of market entry by negotiating with local developers and contractors, and by dealing with the host country's business cultural assumptions and expectations. on the contrary, chihuahua charlie's management appeared to be over-confident about the success of the company in the u.s, based on previous success in mexico. what the principals of that company failed to realize is the fact that previous success in an entirely different market is no guarantee for success in a more sophisticated, vastly intricate business environment such as the one present in the u.s. in fact, the series of missteps exhibited by the chihuahua charlie's principals showed a lack of adequate preparation and commitment regarding their u.s. venture. needless to say, a local partner may have provided gutierrez and his team adequate support including proper representation (compared to the problematic arrangement with the local attorney), market research, and resources. another important implication is adaptability of the business concept to international markets. in silver streak's case, for example, the basic concept remained unchanged, with only operational modifications required to fit the expectations of the local market. these modifications included development of a mexican breakfast menu (developed by the partnering firm), and additional attention to patio seating areas at the expense of the drivethrough business. even in the case of the drive-through business, which had to be scaled back to accommodate larger patio dining areas for local customers, silver streak has seen an increase in sales of 250 percent in the mexican market, attesting to the viability of the "silver streak" concept. on the other hand, chihuahua charlie's was less forthcoming in second guessing the concept's apparent success in the mexican market. despite the fact that they had anticipated differences between the u.s. and mexico, the lack of adequate preparation prior to market entry led to costly mistakes early on, which then exacerbated the issue of lack of commitment evinced through the limited financial resources. additionally, the gutierrez team failed to perform one of the fundamental elements of direct market entry: careful analysis of market conditions and planning prior to expansion in the international marketplace. a final implication for managers considering international expansion is respect for and workable knowledge of business cultural differences between the host country and country of origin. both silver streak managers alluded to the importance of "knowing who to talk to" and "knowing the right people" as key components of doing business in mexico. also, the art of negotiation is significantly different in that country (e.g., swapping land to acquire a retail site), and demographic information for trade analysis, essentially taken for granted in the u.s., is extremely difficult to come by in mexico. in each of these cases, the mexican partner was able to facilitate development of the franchise market through its knowledge and experience with the local business culture. silver streak's management was astute enough to recognize this —a major reason for selection of the partner in the first place, because of their respect for the cultural ditferences they were facing. silver streal and chihuahua charlie's allow future researchers to study the role played by meta innovation in international market entry. in both cases, the firms had to adapt to environments very different from the original. movement across the innovation boundary 88 journal ofsmall business strategy vol. ii, no.2 fabiwinrer 2000 (slevin 1971) entailed actions of "market filling" for chihuahua charlie's as it entered the developed-world of the u.s. franchise market. silver streak, conversely, embarked on new "market creation," entering the developing mexican franchise market. many unknowns still await silver streak. for instance, the acceptance of the "silver streak concept" by markets in the interior of mexico is by no means certain. as is the case with the majority of both qualitative and quantitative studies, the findings of this study must be viewed from a proper perspective. the current study does not delve into a systematic examination of the underlying causes of the success and failure factors surrounding either of the two firms'entures outside their own markets. 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(1989). case stud research; desi n and methods. newbury park, ca: sage publications. 90 journal ofsmall business strategy vol. i i, no.2 fal!/winier 2000 john hadjimarcou is an assistant professor of marketing at the university of texas at el paso. his research interests are in international marketing, consumer behavior and electronic marketing. his research has been published in various journals including the journal of consumer marketing, journal of marketing management, journal of marketing communications, journal of global marketing, psychology and marketing, and international marketing review. jolin barnes is an assistant professor of marketing at loyola university, new orleans. his research interests are in the areas of strategic marketing, cross-border marketing, orgam'tional cultures, and strategic alliances. his research has been publishedin journals such as the journal of international business studies, journal of retailing, journal of personal selling dc sales management, journal of global marketing, and journal of business research iforthcomingl. somnath bhattacharya is an assistant professor of accounting at florida arlaniic uni versi ty. his research interests encompass the behovi oral impact of accounti ng information systems, the value and organizational impact of accounting information systems, the impact of asps and maps on adoptee organi ations, erp systems, and the growing area of business valuations. his research has been published in a number ofjournals including advances in accounting information systems, issues in accounting education, critical perspectives in accounting, and internal auditing. patrick traichal is currently a manager in epicentric inc., an e-business solutions provider. his research interests include corporate finance and agency theory. his research has been published in the journal of economics and finance, managerial finance, the global finance journal, today's cpa, psychology and marketing, frontiers of entrepreneurship research, aicpa professor/practitioner cases, transpomation research part e: the logistics and transportation review, and advances in accounting information systems. frank hoy is professor of management and director of the centers for entrepreneurial development, advancement, research and support at the university of texas at el paso. his research interests include small business management and entrepreneurship. his research has been published in variousjournals including the journal of business veniuring, family business review, entrepreneurship: theory and practice, journal of small business management, american journal of small business, academy of management review, and academy of management journal. 9i small business consulting: a 10-region analysis of small business institute programs, 1990* marilyn young george joyce university of texas at tyler abstract small business institute programs have operated in the u.s. for almost two decades. this particular i 1ehicle for small business consulting has been the focus of many studies. hott1ever, a comparative analysis of the programs of the 10 sba geographical regions has yet to be undertaken. thi.~ study examines similarities and differences in the sb/ programs in all jo regions and at the same thne provides a database upon which other hypotheses may be developed. the benefits anticipated from the results of the research may be used in public policy decisions and in evaluating contributions by sb is to the private sector. introduction in spite of many positive characteristics associated with small business activity in the u.s., the failure rate remains high. typically, publications reporting on this situation, such as dun and bradstreet, express the reasons for small business failure in general terms such as ''bad management'' and categorize weaknesses as external and internal (anderson & dunkelberg, 1990; kuratko & hodgetts, 1989). external weaknesses included competition and those economic factors which normally have a significant impact. moreover, researchers have determined that important internal factors, such as lack of business experience and the inability to handle operating aspects of the finn, had the greatest impact on the rate of small business failure (bracker & pearson, j 985; solomon & weaver, 1983; sonfield, 1981; ward, 1990). in response ro this economic reality, the small business administration (sba) has supported several management consulting programs. such assistance is provided by the following organizations: (i) service corps of retired executives (score); (2) active corps of executives (ace); (3) small business development centers (sbdc);and (4) small business institute (sbi) programs. a number of studies which deal with planning, implementing, and evaluating these programs have been undertaken, and the results have l:ieen disseminated through journals and presentations at professional meetings (bruckman & imon, 1980; franklin & goodwin, 1983; matthews, 1990; o'conner & rogers, 1988; roitman, emshoff, & robinson, 1984). *recipient of first place in the distinguished paper awards, presented at the national sbida conference in washington, d.c. l7 figure i. small business institutes in the united states, 1990. ....... compiled lrom the small bijlinen lnst11uta diracior'1 msoc:iat1on mamberlhip roster· 1989 ii virgin islands ii rico this paper examines pertinent information which is characteristic of sbi programs in each of the 10 sba regions. such programs have been implemented through the cooperative efforts of colleges and universities with financial and technical support of the sba. typically. an sbi program consists of the director and a team of students who meet with a small businesses to discuss the client's problems. each business requesting assistance is referred to as a case. the number of cases varies among the different universities and is dependent upon the expressed needs of the businesses within the community through a request for assistance. next, the students analyze the client's situation and make recommendations designed to relieve or solve the concerns of the small businesses. the students' recommendations are presented to the client in an oral and written presentation with a copy of the report submitted to the appropriate sba district office. the small business institute director is normally a faculty member at the participating university and is responsible for the management and accountability of the sbi activities. at present. approximately 500 sbi programs operate from the campuses of colleges and universities within the u.s .. including guam, puerto rico, and the virgin islands. figure i shows the geographic location of region i through x and the number of sbi programs in each region. for instance, region v has the largest number, 98 and 20%, of the active programs, while region x, the northwestern region, has 25 programs and 5% of the total programs. the number of programs in each region appears to reflect, to some degree, the amount of commercial and industrial activity, population density. and participation and availability of colleges and universities in the area. 18 purpose of the study sbi programs receive requests from a variety of businesses, and diverse problem areas arise during a school semester. directors have reported counselling requests in the areas of marketing, finance, production, personnel, marketing research, and management. in addition, management assistance is requested for start-ups, location problems, legal difficulties, and international trade concerns (joyce & young, 1991; young & joyce 1991). sbi cases become increasingly extensive in that different industries receive sbi counselling. it is typical to provide client assistance to manufacturers, wholesalers, and retailers. the sbi program is provided to financial, professional, and service organizations as well as to the agricultural and mining industry. the major purpose of this study was to determine the current status of operating sbi programs in each region. additionally, the study provided specific information regarding the differences and similarities of these programs in each of the ten sba regions. some of the research questions regarding each region were as follows: i. did the sbi programs have an sbdc nearby? 2. what percentage of sbi directors had interaction with the service corps of retired executives (score)? 3. what was the normal teaching assignment of directors, and what percentage of sbi directors received reduced assignments? 4. what was the median number of cases completed by region? what percentage of directors conducted more cases than funded by the sba? 5. what percentage of directors had control over the sbi budget? 6. what was the background of directors by gender, highest academic degree, and length of time served as director? 7. what were the sizes of colleges and universities having sbi programs according to enrollment? methodology fhe population consisted of 501 sbi directors located in the ten regions throughout the u.s. a four-page questionnaire was developed, pretested, and mailed with the cover letter requesting that the questionnaire be given to the appropriate sbi director in anticipation of normal leadership changes. the original mailing and follow-up resulted in 327 completed questionnaires (a response rate of 65%). this percentage, which was computed after the follow-up analysis, is somewhat larger than previous studies presented at professional meetings (joyce & young, 1991; young & joyce 1991). a wide cross section of sbi programs was included in the study. the percentage of sbi programs in the io regions and the percentage of sample respondents are shown in figure 2. for instance. region i. containing 8% of all 50! sbi programs, accounted for 4% of the total research sample (327). 19 ~lgure 2. percentage of sbi prograrns hy regions: (sba universe and snmplc). percentage 25%~~~~~~~~~~~~~~~.~~~~~~~--, 20% 15% 10% 5% 0% 1 % universe 8% % sample 4% 2 3 4 5 6 7 6 7% 10% 12% 20% 16% 8% 8% 5% 12% 13% 22% 16% 10% 7% sba regions 9 7% 6% 10 5% 5% m % universe -% sample i (universe and sample) the universe has 501 sbi programs. the sample has 327 sbi programs. a description of each of the 10 regions, which allowed for a comparative analysis. was undertaken in order to provide a current data base to be used for entrepreneurial planning. educational development, and public policy decisions. selective chi-square (x') analyses were utilized to detect significant differences among the regions at the .05 level of significance. (specific computations are shown as footnotes within the tables and figures). findings the following findings contain pertinent descriptive inforn1ation as well as national totals. obtained fron1 the regions. while the accompanying tables and figures provide a regional cornparison of similarities and differences. geographic proximity of sbdc other sba·sponsored rnanagen1ent consulting appears to be widespread within the 10 regions since all regions contain sbdcs. when directors were asked if they had an sbdc in their community, region iv and x directors reported having the greatest proportion. approximately 95%, as shown in figure 3. however. only 36% of the directors from region ix reported an sbdc nearby. a definite significant difference existed among the 10 regions with respect to their proximity to a sbdc. 20 figure 3. percentage of sh j's with s1nall business development centers in close proximity by region. percentage 100% 80% 80% 40% 20% 1 2 3 4 x(2)=44.9; d.l.=9. critical value=16. a significant difference exists. 5 6 7 8 m sba regions l l'i'gure 4. percentage of sbi directors who utilized score by region. percentage 100% 80% 1 2 3 4 5 6 7 8 m sba regions l 21 g 10 total 9 10 nat'i table i teaching load of sb/ directors by region semester hours region three six nine twelve fifteen no. % no. % no. % no. % no. % i 0 0 3 4% 5 5% 4 4% 0 0% 2 i 5% 2 3% 6 6% 6 6% i 33% 3 2 11% 9 12% 10 10% 12 12% 0 0% 4 5 26% i i 15% i i 11% 6 6% 0 0% 5 3 16% 16 22% 23 23% 18 19% i 33% 6 2 11% 11 15% 16 16% 17 18% i 33% 7 4 21% 8 11% 10 10% 9 9% 0 0% 8 0 0% 6 8% 4 4% 12 12% 0 0% 9 0 0% 4 5% 10 io% 8 8% 0 0% ' 10 2 11% 3 4% 5 5% 5 5% 0 0% national totals 19 6% 73 25% 100 34% 97 33% 3 1% note. the computed chi-square= 29.67; d.f. = 36.' no significant difference exists. probability of chance of no difference= .75. management assistance from score of the 327 directors, 33% stated they utilized score. the greatest interaction with score came from regions ix with 55% and region x with 50%. less score utilization was reponed by regions i and iv, as shown in figure 4. these data reflect the possibility that available human resources are not being utilized extensively in all regions and that perhaps an opportunity exists for an important cooperative effort. teaching assignment the majority of directors taught either 9 or 12 semester hours, as shown in table i. no significant difference existed among the regions as far as semester hours taught. however, only 6% cf directors from all regions taught only 3 hours, while one-third taught i 2 semester hours. some 26% of the total directors had reduced teaching assignments. region iii had more directors, 59%, with a reduced teaching assignment, as depicted by figure 5. a significant difference existed among the regions when compared according to a reduced teaching assignment. 22 figure 5. percentage of sbi directors with reduced teaching assignments by region. percentage 100% 80% 59% 1 2 3 4 computed chi-square= 26.9; d.f. = 9. critical value= 16.9. a significant difference exists. completed cases 5 6 7 8 9 10 nat'i re sba regions i sbi directors completed an average (median) of 12 cases per rear. the median number of completed cases in the io regions ranged from 7 17. regions ix, x, and vi completed the largest number of cases with medians of 17, 16, 15 respectively. the smallest median number of cases, 7 and 8, were completed by regions i and iii during the study period. nationally, 53% of the total directors reported they had conducted more cases than those funded by the sba. therefore, the total costs for the non-sba funded cases were absorbed by the colleges or universities. it appears iinportant that directors become aware of the economic and political implications of this situation. when analyzed by region, a range of 31 % to 68% of the directors indicated they had conducted more cases than funded. funhennore, directors who conducted fewer non-sba funded cases were in regions i. iv, vii, and x. a comparison of all regions is presented in figure 7. 23 figure 6. median nun1ber of cases con1plctcd by region (academic year, 1989-1990). number 16 11 6 1 1 2 3 4 5 6 7 6 9 r sba regions ,, figure 7. percentage of sbi directors conducting non-sba funded cases by region. percentage 100% 80% 60% 40% 20% 1 2 chi square=16.4; d.f.=9 critical value= 16.9. 3 no difference exists at .05 level. 68% 68% 4 5 6 7 8 9 b sba regions i 24 10 nat'i 10 nat'i figure s. percentage of sbi directors with budgetary control by region. percentage 100% 2 3 4 5 6 7 8 9 10 nat'i m sba regions i budgetary control nationally, 53% of the total directors stated they have authority for the implementation of the sbj budget. regionally, director control ranged from approximately 40% to 72%, as indicated in figure 8. regions vii, i, and jv had the largest percentage of directors with control over their budgets with 72%, 67%, and 61 % respectively. background of sb! directors gender. the majority (85%) of the responding sbi directors were male. the largest number of female directors were in region vii and x with 31 % and 28% respectively. also, only 2% of the directors from region ii were female, representing the smallest percentage. however, no significant differences existed in the regions regarding gender of the director. academic achievement. in response to a request about the highest completed degree, 57% of all reporting directors indicated that they had attained a doctoral degree. college and university . administrations appeared willing to assign professionals of this quality to the growth and development of this entrepreneurial activity. in addition. it seems important that they are interested in providing service to the private sector of the economy. regions ix and x had the largest percentages of sbi directors (77%), whereas the smallest ?percentages were found in regions ii and vii (35% and 31% respectively). however, as shown in table 2, the differences by region and highest degree held were not significant. 25 figure 9. gender of sbi directors by region. percentage 1 2 chi-square= 12.7; d.f. =9. critical value= 16.9. no difference exists. table 2 3 4 5 6 region 7 8 ~ male id female i level of academic achievement of sb/ directors by region region i 2 3 4 5 6 7 8 9 10 national totals advanced degree bachelor's no. 0 2 2 i 0 i 0 9 % 0% 6% 3% 2% 3% 4% 3% 0% 5% 0% 3% master's no. % 3 25% 10 59% 16 42% 17 43% 27 37% 23 44% 21 66% 5 24% 4 18% 4 23% 130 40% 9 10 nat'i doctorate no. % 9 75% 6 35% 21 55% 22 55% 43 60% 27 52% 10 31% 16 76% 17 77% 13 77% 184 57% note. chi-square=25.67; d.f. = 18. critical value=28.9. therefore, no significant difference exists. · 26 table 3 length of service as sb/ director of region years region d year 1-4 5-8 >8 years i 17% 33% 25% 25% 2 12% 41% 29% 18% 3 13% 38% 30% 19% 4 17% 29% 22% 32% 5 12% 31% 28% 29% 6 15% 31% 33% 21% 7 12% 38% 25% 25% 8 18% 18% 18% 46% 9 0% 23% 32% 45% 10 33% 39% 11% 17% national totals 14% 32% 27% 27% note. chi-square=24.5, d.f. =27; critical value=40.i. therefore, no significant. difference exists. length of service. when asked how many years the directors served, a wide range of answers were reported. nationally, 27% of the directors had served over five years; another 27% had served over eight years. table 3 illustrates that regions viii and region ix had the largest percentages of directors (45%) who had served over eight years. no significant difference existed according to region and length of service by the sbi directors. size of academic institution table 4 provides a regional breakdown by region of the operating sbj programs by size of their college or university student enrollment. some 62% of the programs were housed at institutions with enrollments of fewer than i0,000. generally, the majority of sbi programs were in educational institutions with smaller enrollments (under 10,000) with the exception of region ix, which had 64% of the directors in universities with student enrollment over 15,000. a chi-square value of 70.4 denotes a significant difference existed between the sba regions and size of academic institution. 27 table 4 size of university by region student enrollment region <4,999 5,000-9,999 10,000-14,000 15 ,000-19' 999 > 20,000 i 58% 0% 17% 25% 0% 2 58% 6% 24% 12% 0% 3 45% 29% 16% 2% 8% 4 31% 27% 20% 7% 15% 5 39% 22% 10% 11% 18% 6 42% 23% 11% 12% 12% 7 44% 19% 15% 9% 13% 8 48% 13% 26% 0% 13% 9 14% 18% 4% 9% 55% 10 50% 17% 5% 28% 0% national totals 41% 21% 14% 10% 14% note. the computed chi-square= 70.4; d.f. = 36. probability of change of no difference= .0003. a significant difference exists between the regions and size of the university. summary this study, covering 10 sba regions in the u.s., was quite extensive. in addition to this current data base, information was gathered to compare and denote similarities and differences among the programs by region. the following summary indicates the existence or absence of significant differences as to program characteristics among the regions based on statistical analysis: characteristie proximity of sbdc non-funded cases budgetary control teaching load reduced teaching assignment gender length of time served highest degree held size of university statistical measurement. significant difference no significant difference no significant difference no significant difference significant difference no significant difference no significant difference no significant difference significant difference regardless of geographical location, a basic consistency of operation appeared to exist among the programs. although a high degree of standardization may result, variations were also recognized within the profiles. for example, regions iv and x had the greatest concentration of sbdcs in 28 close proximity to operating sbi programs. a significant difference also existed among the regions when the variable of reduced teaching load for sb! directors was measured. approximately 60% of the directors in region iii have a reduced teaching load compared to i 3% in regions if and vi. in addition, differences were evident among the regions regarding size of institution housing sb! programs. smaller universities with fewer than 5,000 students were represented by 41 % of the programs, whereas larger universities with over 20,000 students were represented by only 14% of the programs. future research that includes a program evaluation of each region would seem worthwhile in order to examine national and regional differences. for instance, the realization that a region conducts fewer cases than the national average might cause concern among those affected. moreover, future research might assess the underlying reasons for the differences among regions. for example, academic accounting policies could be responsible for ihe differences in budgetary control maintained by sbi directors, and the differences in size of academic institutions might be cross-classified by the number of cases completed. since a database is now available on selected characteristics for each region, it is possible for regions to compare themselves with others. where there are deviations. explanations may be found, and needed changes may be made to strengthen the sbi programs. furthermore, the small business administration could use the results of the study in implementing improvements on a national level, and it is quite likely that some public policy issues could be influenced by reliance upon this data. colleges and universities could benefit from the results of the study regarding teaching loads of sbi directors as well as those dealing with the issues of budgetary authority and its proper control. in particular, the degree to which sbi programs and sbdcs coordinate their efforts should be important to the sba regional offices. because of the high response rate (65%) inferences made at a national level may be undertaken with considerable confidence. this study yielded a current profile of the operating sbi programs, which should be useful in decision-making for both the public and private sector. furthermore, these research findings reflect the current operational activities of the sbi programs. this database provides information for future research and for the development of hypotheses and their subsequent testing. references anderson, r. l., & dunkelberg, j. s. (1990). entrepreneurship: starting a new business. new york: harper and row. bracker, j. s., & pearson, j. n. ( 1985). the impact of consultants on small firm strategic planning. journal of small business management, 23, 23-30. bruckman, j.c., & imon, s. (1980). consulting with small business: a process model. journal of small business management, 18, 41-47. franklin, s.g., & goodwin, j.s. (1983). problems of small business and sources of assistance: a survey. journal of small business management, 21, 5-12. joyce, g., & young, m. (199i). a contemporary profile of small business institute programs: a regional analysis. proceedings of the annual conference of the southwestern small business institute association. houston, tx, 27-36. kuratko, d. f., & hodgetts, r. m. (1989). entrepreneurship: a contemporary approach. chicago: the dryden press. matthews, c.h. (1990). small business consultation: issues for the sb! case experience. proceed, ings of annual conference of small business institute directors' association. houston, tx, 55-60. 29 o'conner, e., & rogers, j. ( 1988). an examination of the attitudes of clients and students in the sbi case situations. proceedings of annual conference of small business institute directors' association. san francisco, ca. 311-315. roitman, d. b., emshoff, j. c., & robinson, r. b. (1984). college-based managerial and technical assistance for small business. journal of small busirle.vs management, 22. 53-61. solomon, g. t. & weaver, k. m. (1983). small business institute economic impact evaluation, american journal of small business, 8, 41-51. sonfield, m. c. (1981). can student consultants really help a small business? journal of small business management, 19, 3-9. ward, e. (1990). a measurement model of the economic impact of small business institutes. journal of small business strategy, i, 65-75. young, m., & joyce, g. (1991). organizational structure and operational behavior of small business institute programs. proceedings of the annual conference of small business institute directors' association. orlando, fl, 343-353. 30 1 entrepreneurial orientation as the determinant of entrepreneurial marketing behaviors pitsamorn kilenthong university of the thai chamber of commerce bangkok, thailand pitsamornk@riped.utcc.ac.th claes m. hultman ȫrebro university ȫrebro, sweden claes.hultman@oru.se gerald e. hills university of illinois at chicago and bradley university ghills@fsmail.bradley.edu abstract although entrepreneurial marketing (em) behaviors are widely reported, there is little discussion on what determines the level of a firm’s behaviors. this study contributes to the knowledge in the fields of entrepreneurship and entrepreneurial marketing by proposing eo, entrepreneurial orientation, as an antecedent of em behaviors and arguing that eo acts as a multidimensional construct when affecting em behaviors. the relationships between eo and em behaviors are empirically investigated using multi-group confirmatory factor analysis and structural equation modeling techniques. results from the analyses support the hypothesis that em behaviors are driven by eo. firms with a higher level of eo engaged in em behaviors more than firms with a lower level of eo. at the dimension level, innovativeness, proactiveness, and risk-taking are found to independently affect em behaviors. with innovativeness having the strongest impact, this study concludes that innovativeness is the leading essence of em behaviors. the results support a new consensus among entrepreneurship research scholars who suggest a direction toward multidimensional eo. keywords: entrepreneurial orientation, entrepreneurial marketing, marketing behavior, structural equation model, multi-group confirmatory factor analysis, multidimensional mailto:pitsamornk@riped.utcc.ac.th mailto:claes.hultman@oru.se mailto:ghills@fsmail.bradley.edu journal of small business strategy vol. 26 ● no. 2 ● 2016 2 introduction firms today operate in a rapidly changing environment with fierce competition and increasingly demanding customers. firms have a limited ability to forecast customer demand and their market boundaries are hard to define (day & montgomery, 1999). entrepreneurial marketing (em), an interface between marketing and entrepreneurship, has emerged as a marketing practice for firms operating in highly dynamic environments. entrepreneurial marketing integrates marketing and entrepreneurship through the concepts shared by the two fields (morris, schindehutte, & laforge, 2002). those concepts are innovativeness in their approach to management, having customers as an intense focal point, and a requirement to cope with risk and uncertainty (hills & laforge, 1992). accordingly, researchers suggest that em can help firms to cope with change, identify viable opportunities, and develop their innovative skills (collinson, 2002). prior research identified several characteristics of em behaviors, such as calculated risk-taking (carson & grant, 1998), decisions based on intuition and experience (siu & kirby, 1999), inherent focus on recognition of opportunities (hills & singh, 1998), flexible approaches to markets (sashittal & jassawalla, 2001; shaw, 1999), and exploitation of smaller market niches (stasch, 1999). although em behaviors are widely reported, there is little discussion on what determines the level of firms’ em behaviors and why em behaviors are more evident in one firm than another. evidence from prior literature seems to suggest that em behaviors are more evident in smaller firms than in larger firms and in younger firms than in older firms. researchers have identified several differences between marketing practices in small firms and large firms (bjerke & hultman, 2002; carson, cromie, mcgowan & hill, 1995; coviello, brodie, & munro, 2000) and claimed that firm age is an important factor in firms’ marketing strategy and practices (schwartz, teach, & tarpley, 1993). therefore, the researchers seem to suggest that firm size and age are determinants of em. results from a recent study, nonetheless, have shown that firms' characteristics alone may not be a good measure for identifying the level of a firm's em behaviors (kilenthong, hultman, & hills, 2016). this study argues that em behaviors were evident in small or young firms (as reported in extant research) because those firms have a high level of entrepreneurship. the argument is based on the findings from prior studies illustrating that the level of firms’ entrepreneurship (represented by entrepreneurial orientation, or eo) is not only correlated to firms' general business activities, but also to specific marketing activities. researchers find that eo affects firms' capacity to innovate (carrillat, jaramillo, & locander, 2004), ability to create new product applications (covin & slevin, 1991), marketing strategy making process (menon, bharadwaj, adidam & edison, 1999), intention to enter new markets (atuahenegima & ko, 2001), and ability to cope with complex market environments (knight, 2000). as a result, it is an aim of this study to examine a systematic relationship between the level of firms’ entrepreneurship, represented by eo, and em behaviors. in particular, this study proposes that firms with a higher level of eo are expected to engage more in em behaviors than firms with a lower level of eo. in addition to the systematic relationship between eo and em behaviors, this study also investigates the relationship at the level of the eo dimensions. prior entrepreneurship literature does not always have a consensus on journal of small business strategy vol. 26 ● no. 2 ● 2016 3 the dimensionality of eo when examining the relationships of interest. some studies treat eo as a unidimensional concept (covin, 1991; covin & slevin, 1989; miller, 1983), while others treat eo as a multidimensional concept (dai, maksimov, gilbert, & fernhaber, 2014; kreiser, marino, kuratko, & weaver, 2013; venkatraman, 1989; zahra, 1996). this study investigates in detail whether eo acts as a multidimensional construct, where all three dimensions of eo can independently affect em behaviors, or as a unidimensional construct, where all three dimensions of eo simultaneously affect em behaviors. to our knowledge, this study is the first to empirically investigate the relationship between eo and em behaviors at the dimension level. this study proceeds as follows. the next section briefly elaborates on the em and eo constructs. then the models illustrating relationships between eo and em are proposed. in the methodology section, we introduce our data source and measurements and then conduct the analysis. in testing our hypotheses, the relationship between eo and em is initially investigated using multi-group confirmatory factor analysis by treating eo dimensions as observed variables. then, structural equation modeling (sem) is used to investigate the relationship by treating eo dimensions as latent variables. in examining the dimensionality of eo, the sem model depicting eo as a multidimensional construct is compared with sem model depicting eo as a unidimensional construct. this study determined the best model by comparing how they fit with the empirical data. in the final section, we discuss our findings and their implications. theoretical background and hypotheses entrepreneurial marketing: marketing at the interface entrepreneurial marketing (em) originates from an interface between marketing and entrepreneurship. the em concept has evolved significantly over the past three decades. in the early days, em primarily focused on marketing practice in small firms, young firms, and entrepreneur-operated firms. later on, the em concept was expanded to cover several types of marketing activities, such as marketing that deviates from mainstream marketing (morris et al. 2002), marketing activities in firms aiming toward growth (bjerke & hultman, 2002), marketing activities in highly successful firms (buskirk & lavik, 2004), and entrepreneurial marketing activities in larger firms (miles & darroh, 2006). with these developments, hills and hultman (2006) proposed that em should be viewed as an umbrella strategy which acknowledges three broad areas of research including marketing in new ventures or smes, entrepreneurship activities within larger organizations, and innovative and costeffective marketing strategies that provoke market change. in recent years, there has been an increasing number of studies empirically investigating em dimensions and the literature can be categorized into two research streams. studies in the first stream of research have focused on confirming the seven dimensions of em proposed by morris et al.’s 2002 study (fiore, niehm, hurst, son, & sadachar, 2013; kocak, 2004; schmid, 2012). to date, however, no study has confirmed a construct that fully corresponds with morris et al.’s framework. the em dimensions confirmed by the researchers varied across studies. while kocak (2004) confirmed five dimensions of em in a study of small firms in turkey, schmid (2012) confirmed four dimensions in a study of smes in austria, and fiore et al. (2013) confirmed four dimensions in a study of the us firms, respectively. journal of small business strategy vol. 26 ● no. 2 ● 2016 4 studies in the second stream of research have developed new em frameworks by analyzing data from various contexts such as born global firms (mort, weerawardena & liesch, 2012), and smes (jones & rowley, 2009). the em dimensions identified in this research stream also differ in terms of number and content. while jones and rowley (2009) developed a framework called "emico", which comprises fifteen em dimensions based on firms' levels of entrepreneurial orientation (eo), innovation orientation (io), market orientation (mo), and customer orientation (co), mort et al. (2012) identified four dimensions of em in australian firms that are not categorized by such orientations. with the lack of consensus on the number of em dimensions and an increasing number of studies suggesting that a firm’s level of entrepreneurship can affect the firm’s marketing activities, this study does not include eo as an em dimension. this study investigates the impact of eo on the six dimensions of em behaviors that were conceptually identified based on a review of empirical studies published in marketing and entrepreneurship journals, and were then empirically tested using a large survey data set (kilenthong, hills, & hultman, 2015). the dimensions include growth orientation, opportunity orientation, total customer focus, value creation through networks, informal market analysis, and closeness to the market. all dimensions are closely related and they encompass all important elements that were suggested in prior research as essential elements of em behaviors. entrepreneurial orientation and its relationship with entrepreneurial marketing behaviors entrepreneurial orientation (eo) originates from the literature in strategic management as strategic postures that explain a firm’s behavior (khandwalla, 1977; mintzberg, 1973). researchers categorize firms according to their strategic postures by placing them along a continuum ranging from conservative to entrepreneurial (covin, 1991; covin & slevin, 1989; miller, 1983). miller (1983) defined an entrepreneurial firm as the “one that engages in product-market innovation, undertakes somewhat risky ventures, and is first to come up with proactive innovations, beating competitors to the punch.” (p.771) according to this definition, an entrepreneurial firm can be described using three strategic postures: innovativeness, risktaking, and proactiveness. these three strategic postures have become important dimensions of eo. in the literature, researchers usually use the level of firm’s eo to represent the level of firms’ entrepreneurship. prior research suggested that eo could have an influence on how firms perform their general business and marketing activities. firms with different strategic types were reported to have different views regarding the marketing mix and market research (mcdaniel & kolari, 1987). researchers acknowledged that an organization culture with a high level of eo could encourage the flow of innovative ideas in the firm’s marketing strategy-making process (menon, bharadwaj, adidam, & edison, 1999) and enable firms to adopt a proactive marketing practice during times of recession (srinivasan, rangaswamy, & lilien, 2005). specifically to marketing activities, extant research have both empirically and conceptually identified that the marketing behaviors of firms with a higher level of eo are different from the marketing behaviors of firms with a lower level of eo. empirically, researchers reported that a higher level of eo is related to a higher intention to enter new journal of small business strategy vol. 26 ● no. 2 ● 2016 5 markets (atuahene-gima & ko, 2001) and a higher level of marketing capabilities, such as marketing research and promotion (qureshi & kratzer, 2011).while morris and paul (1987) and davis, morris, and allen (1991) found that a higher level of firm’s eo was correlated with a higher level of firms’ marketing orientation, knight (2000) also found that firms with a higher level of eo emphasized more on innovative marketing techniques in their marketing strategy. conceptually, covin and slevin (1991) proposed that eo is positively correlated with the firm's ability to bring new products to market, identify opportunities for productmarket development, and create new product applications from generic technologies (p.16). in a framework developed by carrillat et al., (2004), a high level of eo was projected to increase firms’ ability to create market-driving innovation. covin (1991) had reported that several em behaviors were evident in entrepreneurial firms than in nonentrepreneurial firms. those behaviors includes offering more extensive customer support, paying more attention to product quality, and being more concerned with industry and market trends (p.451). accordingly, hills and hultman (2006) had explicitly proposed that em behaviors are driven by eo. based on the above mentioned empirical and conceptual evidence, this study proposes that a higher level of eo leads to a higher level of engagement of em behaviors. that is, em behaviors are driven by eo. therefore, the first hypothesis is as follows. hypothesis 1: firms with a higher level of entrepreneurial orientation are more likely to engage in entrepreneurial marketing than firms with a lower level of entrepreneurial orientation. entrepreneurial orientation: unidimensional or multidimensional entrepreneurship literature has no consensus regarding how researchers should operate the eo construct at its dimension level. some studies treat eo as a unidimensional concept (covin, 1991; naman & slevin, 1993), while some studies treat it as a multidimensional concept (venkatraman, 1989; zahra, 1996). on the one hand, researchers followed the idea of miller (1983), who suggested that an entrepreneurial firm needs to have a high level of all the dimensions of eo at one time, and they used an aggregated or average score of sub-dimensions of eo to measure eo. the examples of such studies were a study by covin (1991) who used an average scores of innovativeness, risk-taking, and proactiveness to measure eo when examining a firm’s strategies and performance, and a study by naman and slevin (1993) who used an aggregated score of innovativeness, risktaking, and proactiveness to investigate entrepreneurship and the concept of fit in small and medium high-tech firms. in addition, rauch, wiklund, lumpkin, and frese (2009) had also suggested that an aggregated score of eo dimensions could be reasonably used to explain firm performance, because they did not find the difference in the magnitude of the relationship between eo and performance, whether eo was measured as an aggregated measure or by its sub-dimensions. on the other hand, researchers have indicated that the sub-dimensions of eo may vary independently (lumpkin & dess, 1996; stetz, howell, stewart, blair, & fottler, 2000; kreiser, marino, kuratko, & weaver, 2002). lumpkin and dess (1996) suggested that the idea that entrepreneurial behaviors should be restricted to reflect only the case in which all dimensions of eo are high may prevent researchers from being able to explain types of journal of small business strategy vol. 26 ● no. 2 ● 2016 6 entrepreneurship. they suggested that entrepreneurial orientation dimensions may occur in different combinations depending on the environment and organizational context, and the type of entrepreneurial opportunities a firm pursues. empirical results from prior studies also suggested that firms do not necessarily have all dimensions of eo high (or low) at one time. brockhaus (1980) found that a firm’s risktaking tendency may vary depending on the duration it has been in business. a study by santos and eisenhardt (2009) showed firms using a proactive but non-innovative marketing strategy to define their market boundaries. researchers also reported that innovativeness, proactiveness, and risk-taking had different effects on sme performance (kreiser et al., 2013) and on the ability of firms to broaden its scope across international markets (dai et al., 2014). moreover, morris et al. (2002) suggested that innovativeness, proactiveness, and risk-taking can occur in different combinations and indicate that “not all the dimensions of entrepreneurial marketing need to be operating at once for entrepreneurial marketing to occur.” more recently, researchers have increasingly recognized a need for alternative approach to measuring eo (covin, green, & slevin, 2006; dai et al., 2014; rauch, wiklund, lumpkin, & frese, 2009). in his 2011 article, miller (2011) also suggested that researchers should not always treat eo as an aggregated construct, but may treat it as a multidimensional construct because different dimensions of eo may have different relationships with variables that the researchers examine. in addition, rauch et al. (2009) indicated that a multi-dimensional measure of eo might be more appropriate in a study examining antecedences and consequences of eo. since this study focuses on em as an outcome of eo, we believe that it is appropriate to treat eo as a multidimensional construct. accordingly, based on prior empirical and conceptual evidence, we set up the next hypothesis as follows. hypothesis 2: proactiveness, innovativeness, and risk-taking can independently affect entrepreneurial marketing behavior. methods data this study is from a sample developed under the direction of the authors. the dataset collected was sponsored by the national federation of independent business (nfib) research foundation, by the executive interviewing group of the gallup organization. individual interviews were conducted from a national sample of 752 business owners in the us. business owners were defined as those that employed at least one individual in addition to the owner(s) and no more than 249. a sampling frame was drawn for the survey from the files of the dun and bradstreet corporation (not nfib members). a random stratified sample was used to compensate for the highly skewed distribution of business owners by employee size of firm. using a list-wise (casewise) missing data deletion, 545 observations remained for our analysis. key characteristics of the sample are shown in table 1. journal of small business strategy vol. 26 ● no. 2 ● 2016 7 table 1 key characteristics of the sample. item category percentage a. size 1 9 employees 43.9 10 250 employees 56.1 b. age < 1 year old 1.3 16 years old 23.4 > 6 years old 74.9 c. growth rate decreased 10.2 (change in sales over 3 years) 110 percent growth 18.7 years) > 10 percent growth 66.2 d. sector commodity/construction/transportation 17.1 wholesale/ retail 17.8 professional services 12.1 accommodation/food 11.4 manufacturing 9.5 financial/ insurance/ real estate 9.3 other services 22.4 note: the percentage is based on the sample of 545 observations and may not sum up to 100 due to missing values. measures dependent variable. entrepreneurial marketing behaviors are dependent variables in this study. they are measured by 20 variables. five-point likert scales anchored by “strongly disagree” (1) and “strongly agree” (5) were used for these variables. each question was framed as follows: “please tell me if you strongly agree, somewhat agree, neither agree nor disagree, somewhat disagree, or strongly disagree with the following statements about marketing as it is done in your business.” the variables are categorized according to the em dimensions that they measure. growth orientation, closeness to the market, value creation through networks, and informal market analysis are each measured by 3 variables, while opportunity orientation and total customer focus are each measured by 4 variables. independent variable. entrepreneurial orientation is an independent variable in this study. it is measured by variables that have been extensively validated in prior research. innovativeness is measured by two items, asking how much firms place an emphasis on innovative products and how much they make drastic changes to their products. proactiveness is measured by two items, asking how often firms initiate actions to which competitors respond and how often they are the first to introduce their products. risk taking is measured by two items, asking how inclined firms are toward behaving cautiously and how inclined they are toward taking high-risk projects. the response options for each item range from 1(low level) to 3 (high level). a complete list of the variables measuring all em and eo dimensions is given in the appendix. journal of small business strategy vol. 26 ● no. 2 ● 2016 8 data analysis relationships between each dimension of eo and each dimension of em behaviors are investigated in two steps. in the first step, we investigate the relationships by conducting three multi-group confirmatory factor analyses (multi-group cfa), treating eo as an observed variable. in the second step, we investigate the relationships using structural equation modeling (sem), treating eo as an unobserved variable. since conceptually eo should be treated as a latent variable, we expect results from the second step of the analysis will give a clearer picture of the relationship between eo and em behaviors. in the first step of the analysis, firms are categorized into two groups according to the summated scores of the two measurement items measuring the same eo dimension. for each eo dimension, firms with a summated score of 2 or 3 are considered to be firms with a low level of eo, while firms with a summated score of 4, 5, or 6 are considered to be firms with a high level of eo. with this categorization, we obtain 221 more innovative firms versus 324 less innovative firms, 202 more risk-taking firms versus 343 less risktaking firms, and 371 more proactive firms versus 174 less proactive firms. in the second step of the analysis, the relationships are examined under two models including a model examining eo as a unidimensional construct, and a model examining eo as a multidimensional construct. the fit indices from both models are later compared in order to determine which model fits better with the data. results entrepreneurial orientation’s impact on entrepreneurial marketing: the first look this section is a preliminary investigation of the impact of eo on em behaviors. three multi-group confirmatory factor analyses are conducted to test whether the latent means for factors underlying em behaviors in the group of firms with a higher level of innovativeness, proactiveness, or risk-taking are higher than the latent means for factors underlying em behaviors in the group of firms with a lower level of innovativeness, proactiveness, or risktaking. results from the analyses are shown in table 2 below. table 2 mean differences in two-group confirmatory factor analysis by eo dimension, using a group of firms with a lower level of eo as a reference a em dimension eo dimension innovativeness risk-taking proactiveness growth orientation 0.18*** 0.14*** 0.18** opportunity orientation 0.35*** 0.31*** 0.36*** total customer focus 0.04** 0.07 0.18** value creation through networks 0.05 0.10* -0.13** informal market analysis -0.24*** -0.05 -0.11 closeness to the market -0.02 0.03 0.07 a note: *** =p < 0.01, ** = p < 0.05, * = p < 0.10. journal of small business strategy vol. 26 ● no. 2 ● 2016 9 what we know now. results from our multi-group cfa analysis suggest that there is a systematic relationship between the level of a firm’s eo and the level of a firm’s em behaviors. out of the five dimensions of em behaviors investigated, firms with higher levels of innovativeness, proactiveness, or risk-taking behaviors are found to have higher means for the factors underlying two dimensions of em behaviors, including growth orientation and opportunity orientation. the results show that all three dimensions of eo have a positive relationship with the growth orientation and opportunity orientation dimensions of em behaviors. this is empirical evidence confirming a proposal in the previous literature that entrepreneurial firms aim to grow and expand their customer base rather than starting out small and staying small (bjerke & hultman, 2002). the results also confirmed the suggestion that entrepreneurial firms look to exploiting opportunities and lead customers through their innovations (christensen, johnson, & rigby, 2002; hamel & prahalad, 1991). in more detail, the group of more innovative firms scores 0.35 units higher in factor underlying opportunity orientation, and 0.18 units higher in factor underlying growth orientation dimension than the group of less innovative firms. the group of more risktaking firms scores 0.31 units higher in the factor underlying opportunity orientation, and 0.14 units higher in the factor underlying growth orientation dimension than the group of less risk-taking firms. similarly, the group of more proactive firms scores 0.36 units higher in the factor underlying opportunity orientation, and 0.18 units higher in the factor underlying growth orientation dimension than the group of less proactive firms. nonetheless, results also show that the group of more innovative firms scores 0.24 units lower than the group of less innovative firms in factor underlying informal market analysis dimension of em behaviors. in a similar manner, the group of more proactive firms also scores 0.13 units lower than the group of less proactive firms in factor underlying value creation through networks dimension. based on these results, we concluded that hypothesis 1 is supported. in addition, the results above show that not all dimensions of eo affect the same em behaviors in the same direction. while more risk-taking firms were found to utilize their networks and alliances more than less risktaking firms (the difference between the two groups is 0.10 units), it is the opposite in the case of more proactive firms versus less proactive firms (the difference between the two groups is 0.13 units). this implies that each eo dimension can affect em behaviors differently and that eo may be treated as a multidimensional construct. in the next section, we investigate further whether eo should be treated as a multidimensional construct when affecting em behaviors. relationship between entrepreneurial orientation and entrepreneurial marketing: unidimensional or multidimensional with the results from the preliminary analysis suggesting that there is a systematic relationship between the level of a firm’s eo and the level of a firm’s em behaviors, this study further analyzes the relationship between eo and em behaviors by treating eo as an unobservable construct. in this section, we test whether eo acts as a multidimensional or unidimensional construct affecting em behaviors. the analysis is conducted using two structural equational sem models. journal of small business strategy vol. 26 ● no. 2 ● 2016 10 figure 1. structural equation model with eo as a unidimensional construct in the first sem model, eo is treated as a unidimensional construct in which risk taking, innovativeness, and proactiveness are projected to simultaneously affect em behaviors. in this model, six items measuring the three eo dimensions are designed to affect all dimensions of em behaviors through one latent factor called “eo”. figure 1 displays the schematic representation of the model. in the second sem model, eo is treated as a multi-dimensional construct, in which innovativeness, risk-taking, and proactiveness are projected to independently affect each dimension of em behavior. in this model, six items measuring eo are designed to affect all dimensions of em behaviors through three latent factors called “innovativeness”, “proactiveness”, and “risk-taking”, respectively. the schematic representation of the model is shown in figure 2. the objective of sem analysis is to determine the extent to which the hypothesized model is supported by the sample data. the proposed sem models are estimated using the maximum likelihood procedure, which is the most widely used. amos reports several goodness-of-fit indices which are used to determine the model’s fit; these include the chi-square statistic, the tucker lewis fit index (tli), the root mean square error of approximation (rmsea), and the comparative fit index (cfi). the models also allow for an assessment of path loadings and whether or not they are significantly different from zero. the multidimensional eo will be supported if the goodness-of-fit indices indicate that the sem model depicting three sub-dimensions of eo has a better fit with the data than the sem model with one eo dimension. conversely, the unidimensional eo will be supported if the goodness-of-fit indices indicate that the sem model depicting eo as an aggregate measure has a better fit with the data. journal of small business strategy vol. 26 ● no. 2 ● 2016 11 figure 2. structural equation model with eo as a multidimensional construct unidimensional entrepreneurial orientation and entrepreneurial marketing behaviors. the path coefficients from the sem model with unidimensional eo are shown in table 3. the results show that eo, as a latent variable, has a statistically significant positive impact on all dimensions of em behaviors. this confirms the argument that firms with a higher level of eo engage more in em behaviors that firms with a lower level of eo. table 3 path coefficients in the structural equation model with unidimensional eo a a note: *** =p < 0.01, ** = p < 0.05, * = p < 0.10 em dimension coefficient growth orientation 1.78*** opportunity orientation 2.76*** total customer focus 0.96*** value creation through networks 1.17*** informal market analysis 0.36* closeness to the market 1.56*** journal of small business strategy vol. 26 ● no. 2 ● 2016 12 multidimensional entrepreneurial orientation and entrepreneurial marketing behaviors. treating eo as a multidimensional construct gives a clearer picture of how eo affects em behaviors. results in table 4 shows that innovativeness dominates the other eo dimensions in terms of its effects on em behaviors. the argument that eo is a multidimensional construct seems to be supported by the path coefficients in this model. the path coefficients illustrating the impact of innovativeness, proactiveness and risk-taking on em behaviors do not always follow the same direction. while all the path coefficients from innovativeness to em behaviors are positive, this is not the case for risk-taking and proactiveness. the two eo dimensions have both positive and negative path coefficients to em behaviors. table 4 path coefficients in the structural equation model with multidimensional eo (all) a em dimension eo dimension innovativeness risk-taking proactiveness growth orientation 3.33*** 0.11 0.64*** opportunity orientation 4.93*** 0.29** 0.68*** total customer focus 2.51** -0.07 -0.08 value creation through networks 3.06** 0.08 -0.32* informal market analysis 1.38** -0.12 -0.33 closeness to the market 4.18** -0.05 -0.38 a note: *** =p < 0.01, ** = p < 0.05, * = p < 0.10. although the majority of these negative path coefficients are not statistically significant, the fact that the multidimensional model gives both positive and negative path coefficients is evidence suggesting that each dimension of eo can independently affect em behaviors. that is, all dimensions of eo do not always have to affect em behaviors simultaneously. note also that the size of the impact of innovativeness dimension of eo on em behaviors is larger than the impact of the risktaking and proactiveness. the average size of the coefficients for innovativeness dimension is 3.23, while it is 0.12 for the risk-taking dimension and 0.40 for the proactiveness dimension. this underscores the importance of innovativeness on em behaviors. by treating eo as a latent factor, we can also see the impact of eo dimensions on em behaviors more clearly. innovativeness was shown to give mixed results when it was examined in the cfa analysis, but it was shown to have statistically significant and positive impact on all dimensions of em behaviors under the sem analysis. this may imply that the treatment of the variable and the use of different statistical techniques can significantly affect the results. models comparison. the fit indices of the two sem models are shown in table 5. the majority of the fit indices suggest that the journal of small business strategy vol. 26 ● no. 2 ● 2016 13 model with multidimensional eo fits the data better than the model with unidimensional eo. the cfi index for the multidimensional model was 0.77, while it was 0.74 for the unidimensional model. the rmsea index for the multidimensional model was 0.044, while it was 0.047 for the unidimensional model. in addition, the tli index for the multidimensional model was 0.74, while it was 0.71 for the unidimensional model. nonetheless, the bic index is found to favor the unidimensional model (with a value of 1003.68) rather than the multidimensional model (with a value of 1015.99). the standard rmr (srmr) values for both models are also equal. based on the results, a clear-cut conclusion cannot be made whether eo acts as a multidimensional construct or a unidimensional construct when it affects em behaviors. it is widely claimed that the bic index gives larger penalties to models with more parameters, meaning that models with more parameters get higher values of bic. this may be the reason why the bic value is lower for the unidimensional eo model. in order to justify the eo dimensionality in regards to em behaviors, therefore, a third sem model called partial multidimensional eo is created. table 5 fit indices of sem models with multidimensional eo versus unidimensional eo a fit index structural equation model with multidimensional eo all unidimensional eo multidimensional eo partial cfi 0.77 0.74 0.78 rmsea 0.04 0.05 0.04 srmr 0.06 0.06 0.06 tli 0.74 0.71 0.75 bic 1015.99 1003.68 967.09 a note: n = 545. the model is based on the significant relationships between some eo dimensions and some dimensions of em behaviors in the original multidimensional model. the schematic representation of the third model is shown in figure 3. with fewer numbers of parameters to be estimated, the partial multidimensional model should win over the unidimensional model according to the bic criteria. if that is the case, the argument that eo should be treated as a multidimensional construct will be supported. the goodness-of-fit indices identifying the fit of the third sem model with the data are shown in the fourth column of table 5. the indices show that this partial multidimensional model fits best with the data, compared to the original multidimensional model (where each eo is anticipated to affect all em behaviors) and the sem model with unidimensional eo. as a result, the argument that researchers should treat eo as a multidimensional construct when they investigate eo’s impact on em behaviors is supported. as a result, this study concludes that hypothesis 2 is supported. that is, eo acts as a multidimensional construct, where all three dimensions of eo can independently affect em behaviors. journal of small business strategy vol. 26 ● no. 2 ● 2016 14 figure 3. structural equation model with eo as a multidimensional construct (partial) discussion and conclusions although entrepreneurial marketing (em) behaviors are frequently reported, there is little evidence of research identifying factors influencing firms’ adoption of em behaviors. this study closes the gap in the literature by empirically examining the relationship between entrepreneurial orientation (eo) and em behaviors and testing the hypothesis stating that firms’ em behaviors are driven by eo. relationships between three dimensions of eo and em behaviors are investigated using multi-group confirmatory factor analysis (cfa) and structural equation modeling (sem). results from both analyses supported the hypothesis that em behaviors are driven by eo. firms with a higher level of eo were found to engage in em behaviors more than firms with a lower level of eo. based on the results, this study concludes that firms’ em behaviors do not just happen randomly, but they are systematically related to the level of firms’ eo. in addition, this study test the relationship between eo and em behaviours at the dimension level and found that innovativeness, proactiveness, and risk-taking dimensions of eo can independently affect em behaviors at different magnitudes. accordingly, this study concludes that eo acts as a multidimensional construct when affecting em behaviors. that is, firms do not have to have higher level of all eo dimensions in order to adopt em behaviors. our findings support a seemingly new consensus among entrepreneurship research scholars who seem to suggest a new movement toward multidimensional eo when researchers want to clarify relationships between each eo dimension and the variables of interest (covin & wales, 2012; miller, 2011). this study also finds that innovativeness dimension of the eo has the strongest impact journal of small business strategy vol. 26 ● no. 2 ● 2016 15 on em behaviors, compared to proactiveness and risk-taking. this result implies that innovativeness is a leading essence of em behaviors and may also be a justification for why this dimension of eo receives so much attention from marketing scholars. prior studies have suggested that innovativeness is a source of growth (christensen et al., 2002) and it makes firms search for new innovative product concepts (hamel & prahalad, 1991). accordingly, this study concludes that innovativeness is a factor distinguishing entrepreneurial marketing from nonentrepreneurial marketing. the fact that em behaviors are largely driven by innovativeness also suggests that em is inherently innovative. the result has a significant implication for non-innovative firms who want to establish em behaviors in their organizations. an optimum strategy for those firms might be to foster innovativeness in their firms. this suggestion is in line with a prior study stating that innovativeness could help firms to form a foundation for success in a market-driving strategy, and the marketingdriving process could be started by several activities, such as establishing competitive teams to develop innovative ideas, and offering multiple channels for approval of new ideas (kumar, scheer, & kotler, 2000). this study is not without limitations. firstly, due to limited availability of the data, this study investigates only three dimensions of eo. since the results show that different eo dimensions can have different effects on different dimensions of em behaviors, future research might want to investigate the impacts of competitive aggressiveness and autonomy dimensions as well. secondly, this study focuses only on firms in the us. since it is often suggested that marketing practice is affected by national differences (clark, 1990; nakata & sivakumar, 1996), firms in different countries may behave differently than us firms. future research should expand the scope of this study to replicate the results found in this study using cross-national data. such a study would benefit the field of entrepreneurial marketing substantially. thirdly, this study does not take into account the impact of firms' environmental conditions on the relationship between eo and em behaviors. prior studies had reported that environmental changes can have a major impact on firms marketing activities (deleersnyder, 2003), and that different levels of environmental hostility can have different impact on firms’ use of marketing research (khandwalla, 1977). as a result, moderating factors, such as the level of environment hostility, could be taken into account when examining the relationship between eo and em behaviors in the future. despite the limitations, this study contributes to the knowledge in the field of entrepreneurship and entrepreneurial marketing by linking eo, a widely used construct of entrepreneurship, to em behaviors and identifies eo as an antecedent of em behaviors. to our knowledge, this study is the first attempt to explicitly address and quantify the impact of eo on em behaviors. also, by suggesting that eo should be treated as a multidimensional construct when affecting em, this study expands the knowledge about the eo construct in the field of entrepreneurship. since this study investigates the hypotheses using a large survey dataset, the results from this study should be able to confirm the robustness of findings in prior empirical studies, which usually examine em behaviors using qualitative methods. we believe that this study contributes important new knowledge regarding the entrepreneurship and marketing interface. journal of small business strategy vol. 26 ● no. 2 ● 2016 16 references atuahene-gima, k., & ko, a. 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(1996). technology strategy and new venture performance: a study of corporate-sponsored and independent biotechnology ventures. journal of business venturing, 11(4), 289-321. pitsamorn kilenthong is a lecturer at the department of marketing, school of business, university of the thai chamber of commerce in thailand. she holds a ph.d. in business administration from university of illinois at chicago. her research interests include entrepreneurial marketing, marketing in small business and family business, and entrepreneurship education. claes m. hultman is senior professor of marketing at örebro university school of business in sweden. he holds a ph.d. in business administration. he is the author of many books and articles in marketing, entrepreneurship as well as distribution and is currently on the editorial board of several scholarly us and uk journals. claes hultman also serves on the board of director for several companies. his special interest is commercial processes in early business stages. most of his research today is in the interface of marketing, entrepreneurship and innovation with a special focus on theory development within entrepreneurial marketing. gerald e. hills is professor emeritus at the university of illinois at chicago and at bradley university. he is a pioneer in the development of the entrepreneurship discipline, having hosted a research symposium on marketing and entrepreneurship annually since 1987. he also carried out some of the earliest research regarding opportunity recognition and published more than 100 refereed articles. he also served as cofounder and first president of usasbe, and president of the international council for small business. he developed highly ranked entrepreneurship programs at uic and bradley university. journal of small business strategy vol. 26 ● no. 2 ● 2016 20 appendix: questionnaire items. a. entrepreneurial marketing behavior. growth orientation (g1) long-term growth is more important than immediate profit. (g2) our primary objective is to grow the business. (g3) we try to expand our present customer base aggressively. opportunity orientation (o1) we constantly look for new business opportunities. (o2) our marketing efforts lead customers, rather than respond to them. (o3) adding innovative products or services is important to our success. (o4) creativity stimulates good marketing decisions. total customer focus (t1) most of our marketing decisions are based on what we learn from day-to-day customer contact. (t2) our customers require us to be very flexible and adapt to their special requirements. (t3) everyone in this firm makes customers a top priority. (t4) we adjust quickly to meet changing customer expectations value creation through networks (v1) we learn from our competitors. (v2) we use our key industry friends and partners extensively to help us develop and market our products and services. (v3) most of our marketing decisions are based on exchanging information with those in our personal and professional networks. informal market analysis (i1) introducing new products or services usually involves little formal market research and analysis. (i2) our marketing decisions are based more on informal customer feedback than on formal market research. (i3) it is important to rely on gut feeling when making marketing decisions. closeness to the market (c1) customer demand is usually the reason we introduce a new product and/or service. (c2) we usually introduce new products and services based on the recommendations of our suppliers. (c3) we rely heavily on experience when making marketing decisions. journal of small business strategy vol. 26 ● no. 2 ● 2016 21 b. entrepreneurial orientation (recoding scores are in parentheses) innovativeness (in1) my business places a strong emphasis on tried and tested practice, equipment, and products/services (1) innovation, technological leadership, and r&d (3) equally, the same (2) (in2) in the last 3 years, changes in my products/services have been mostly of a minor nature (1) usually quite dramatic (3) equally, the same (2) risk-taking (rt1) my business is inclined toward low risk projects with certain and normal rate of return (1) high risk projects with chance of very high returns (3) equally, the same (2) (rt2) due to the nature of my business environment, it is best to explore potential opportunities gradually, through cautious behavior (1) take wide-ranging bold actions to achieve the firm’s objectives (3) equally, the same (2) proactiveness (pro1) my business typically responds to initiative my competitors take (1) initiates action to which my competitors respond (3) equally, the same (2) (pro2) my business is—the first to introduce new products/services often (3) seldom (1) equally, the same (2) reproduced with permission of the copyright owner. further reproduction prohibited without permission. sme performance: a case for internal consistency pett, timothy l;wolff, james a journal of small business strategy; spring/summer 2007; 18, 1; abi/inform complete pg. 1 sme performance: a case for internal consistency timothy l. pett wichita state university tim.pett@wichita.edu james a. wolff wichita state university jim. wolff@wichita.edu abstract we develop the theoretical arguments for a contingent path relationship among variables representing the environment, capabilities, strategic orientation, and firm peiformance. the premise underpinning our study is that internal consistency or fit among contingent relationships yields higher peiformance levels. structural equation modeling allows for the statistical examination of multiple relationships simultaneously to test our hypotheses. we find support for the notion that internally consistent paths lead to higher levels of peiformancefor a sample of 181 mid-western small and medium-sized manufacturing firms. a discussion of the implications for these findings with respect to managerial practice and future research is provided. understanding organization performance is the cornerstone on which the field of strategic management has been built. the ultimate question of interest to strategic management researchers is "what yields higher performance levels for firms?" a large portion of our collective effort over the past three-plus decades has sought to identify and explain the various antecedent factors and conditions that may lead to higher levels of performance. an important and growing subset of the strategic management literature is research on small and medium-sized enterprises (smes) and entrepreneurial ventures. while performance is critical for all firms in a very general sense, sme and entrepreneurial venture survival in the very short term may depend upon the performance levels that managers (owners) may generate from their firm. hence, understanding the 'what and how' of higher performance is also critically important for sme managers and entrepreneurs. many recent research studies (e.g., chandler and hanks, 1994; covin, 1991; covin and covin, 1990; qian and li, 2003; wolff and pett, 2006; zahra and george, 1999) provide clues and insights into the understanding of sme performance. to illustrate: covin and covin (1990) examined the effects of environmental context and competitive orientation on sme performance; chandler and hanks (1994) looked at the association between performance, market attractiveness, resource-based capabilities, and strategy; wolff and pett (2006) modeled the influence of product and process improvement on the growth and ultimate profitability of smes; and zahra and george (1999) compared the performance outcomes of the manufacturing strategy enacted by corporate new ventures versus independent new ventures in the each of these studies contributes to the body of reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy knowledge regarding the sme strategic processes that may yield higher performance levels. however, our understanding is far from complete. there are many antecedent variables and pathways through which the variables may work. additionally, the variables may interact or suppress relationships in ways such that counterintuitive results may be revealed by sophisticated data analysis methods. in this research we propose logical arguments for two divergent pathways through which smes may realize greater profitability. in the sections that follow, we propose a path diagram for smes that relates environmental conditions, organizational capabilities, and strategic orientation to profit performance. we begin with a review of the literature and the development of our hypothesized relationships. next, we discuss the data and research method used to test our propos1t1ons. following the methods section, we present an analysis of the results of statistical methodology and last, we present a discussion of our findings with implications for research and managerial practice, and discuss the limitations of this research. literature review and hypotheses one of the early theoretical frames proposed in strategic management was environmental determinism. for example, the industrial organization economics view articulated by porter (1980) proposed that industry structure (i.e., the industry environment) exerts major influence on the profitability of firms within the industry's bounds. the structure-conduct-performance (scp) paradigm with environmental determinism (astley and van de ven, 1983) at its heart represented the core of the strategic management field until the early 1990s when the resource-based view (barney, 1991 and the special issue of journal of management) 2 vol. 18, no. 1 spring/summer 2007 gained considerable traction. the resourcebased view (rbv) is firmly rooted in the strategic choice tradition and argues, very generally, that firm performance is the result of appropriate strategies enacted with the proper resources and capabilities present in the firm. in the organization theory literature, hrebiniak and joyce ( 1985) proposed the existence of an orthogonal relationship between environmental determinism and strategic choice. again, very generally, the thrust of the argument is that the external environment and internal choices (strategic decisions) made by managers interact to yield predictable outcomes regarding organizational performance. empirical tests of the hrebiniak and joyce (1985) propositions were undertaken by lawless and finch ( 1989) and marlin, lamont, and hoffman ( 1994) with the latter providing significant support. bedeian ( 1990) articulated " .. .it makes little sense to speak of an organization apart from its environment" because of the reciprocal nature of the relationship between organization and environment. it is with this backdrop of research tradition that we begin building a case for our research model. we argue that the environment (perceived environmental uncertainty) elicits an assessment of opportunity and the firm's ability to capitalize by means of its capabilities. further, it is the firm's capabilities that drive the selection of an externally-oriented or an internally-oriented strategy. it is the subsequent consistency with which these paths are implemented that yield higher firm performance levels. figure 1 illustrates the path model that we propose and test. environment uncertain, unstable, or hostile business environments may yield difficult conditions for all business firms. however, for smes, the margin for error can be particularly thin. r e p ro d u ce d w ith p e rm issio n o f th e co p yrig h t o w n e r. f u rth e r re p ro d u ctio n p ro h ib ite d w ith o u t p e rm issio n . flgure 1 llyp>thesized research model vj ~ l ~ ~ ~ b:i ~ :;· ~ "' ~ ti .~ ~ :--.. ....... .?o ~ ....... ~ s· ~ ~ § ~ "" 8 'j reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy larger firms may be able to exert relatively greater influence over their environment than small firms. thus, the impact of externalities might be minimized by the actions of large firms whereas small firms are less likely to successfully shape environmental contingencies. therefore small firms will likely turn inward and rely on internal characteristics to cope with uncertain or hostile business environments. organizational flexibility and entrepreneurial posture (i.e., innovation, proactiveness, and risk-taking) can mitigate the effects of hostile environments for smes (covin and slevin, 1989; lau, man, and chow, 2004; swierczek and ha, 2003). small firms may also be characterized as aggressive in difficult environments (covin and covin, 1990). many smes are owner-controlled and managed with owner interests closely aligned with those of the firm (zahra and george, 1999). given this characteristic and the thin margin for error confronting smes, flexibility and proactiveness with respect to environmental conditions may be critical elements of the managerial repertoire. indeed empirical evidence suggests that entrepreneurially-oriented firms seem to perform best in hostile environments (covin and slevin 1989). for the purpose of this research study, we propose that uncertain environments lead managers to examine the resources and capabilities of the firm to pursue various courses of action in response to environmental conditions. two divergent capability sets that sme managers may consider regarding performance growth are to either expand the geographic space of markets served or capture a greater proportion of existing markets. geographic market expansion may take a variety of forms that require different levels of capabilities. sme expansion into international markets, whether an initial foray or movement into additional international markets, represents a very significant step by managers. such a step 4 vol. 18, no. 1spring/summer2007 likely requires possession of a distinctive capability set different from that required for geographic expansion within the firm's domestic country setting. for this reason, we state our first hypothesis in terms of internationalization capability. ht: environmental uncertainty is positively related to internationalization capability. the ability of an sme to accomplish greater market penetration may be dependent upon a very different capability from that of entering new markets. what smes lack in resource endowments may be compensated for by flexibility, agility, and their capability to innovate (acs and yeung, 1999; buckley and mirza, 1997; qian and li, 2003). innovation and proactiveness as a response to environmental uncertainty may lead smes to process improvements to lower costs, or product improvements to better meet customer needs. new products and product modifications allow business firms to achieve market leadership and grow market share (lansiti, 1995). for example, innovative products facilitate market share growth by attracting customers from rivals (zahra and nielsen, 2002). h2: environmental uncertainty is positively related to innovation capability. internationalization sme internationalization has a jong and rich history in the research literature (e.g., johansen and vahlne, 1977; mcdougal, shane, and oviatt, 1994; wolff and pett, 2000). the "stage theory" of internationalization (johansen and vahlne, 1977) has been the dominant research frame for much of the history. mcdougal, shane, and oviatt ( 1994) articulated effectively that some firms are international at founding. although stage theory has empirical support (anderson, 1993; barkema, bell, and pennings, 1996; bilkey and tesar, 1977), not all smes follow an orderly pattern (wolff reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy and pett, 2000) and some are international at inception (mcdougal, shane, and oviatt, 1994). however, a common thread to sme internationalization is the necessity for the firm to strategically look externally beyond firm boundaries to successfully expand its market size and thereby enhance its performance levels. a common step in the internationalization process for many smes is responding to foreign customer inqumes. sme internationalization in the form of sporadic or experimental activity is categorized as an initial phase in the process (leonidou and katsikeas, 1996). following the initial phase and the relative success of efforts during this phase, many sme firms progress to an advanced phase (leonidou and katsikeas, 1996) in which they actively engage internationalization activities ranging from simple exporting to foreign direct investment. sme internationalization capability is related to the knowledge, experience, and attitude possessed by the firm's top management team (reuber and fischer, 1997). given a penchant for internationalization, smes are likely to adopt strategies that will facilitate the process of internationalization for the firm. such strategies are likely to be relationbuilding activities directed at gaining cooperation or access to the targeted new market. as such, we argue that the strategies are externally (focus is external to the boundaries of the firm) oriented. hj: internationalization is positively related to externally oriented strategy. innovation typically smes are characterized as resource constrained when comparison is made to large-sized firms. therefore, to effectively compete in the marketplace, smes must either neutralize the disadvantage that size may create or tum a resource constraint to their advantage. while smes may lack resources vis-a-vis their 5 vol. 18, no. 1spring/summer2007 large-firm counterparts, there is general agreement that smes are more flexible, agile, and innovative (acs and yeung, 1999; buckley and mirza, 1997; qian and li, 2003). innovation for smes may generally be categorized into either of two forms: product-oriented or process-oriented innovation. v erhees and meulenberg (2004) found that many times sme innovation is manifested in the form of product modification while romano (1990) argued that the internal drivers for sme growth from innovation were technology, r&d, and the ability to generate a competitive edge in the firm's product market. the capability to innovate and adapt new technology to make product and process modifications is likely due to the greater creativity and innovativeness of small-firm employees (acs and yeung, 1999). new products and product modifications allow business firms to achieve market leadership, growth, and improve profitability (iansiti, 1995). innovative products may facilitate market share growth by attracting customers from rivals or open new markets to the firm thereby attracting new customers (zahra and nielsen, 2002). kyriakopoulos and de ruyter (2004) found that the effective use of a firm's stock of innovation knowhow combined with new information inflows allowed smes to create new products yielding improved firm performance. the thrust of our arguments lead us to the conclusion that innovation capability is focused on strategies that deal with products and processes within the firm's boundaries and are therefore internally-oriented strategies. h4: innovation is positively related to internally-oriented strategy. in making our arguments for the distinction between externally-oriented and internallyoriented strategy, we do not imply that the firm's focus is exclusive in either direction. reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy what we wish to convey in our arguments and the resulting hypotheses above is that the preponderance of strategic effort and outlook by the sme is external to new markets or internal to products and processes. performance the arguments we have presented thus far lay out two distinct paths. one associative path argues the case for the relationship between environmental uncertainty, internationalization capability, and externally-oriented strategy. another path argues the case for the relationship between environmental uncertainty, innovation capability, and internally-oriented strategy. if these relationships hold under empirical scrutiny, each path may be interpreted to have a high level of internal consistency with respect to the management decisions and actions taken by smes. with capabilities, decisions, and strategies that are internally consistent, each path may lead the firm to higher levels of performance. in other words, firms may take dissimilar paths to achieve similar outcomes (galbraith and kazanjian, 1986). however, at this point in our discussion, we make no conjecture that smes choose one or pursue both. we argue that both paths may lead to higher performance as long as there is internal consistency or fit among the contingent actions managers may enact. in the discussion above, we presented the notion that many (though not all) smes progress through stages (johansen and v ahlne, 1977) in the development of their internationalization capability. effective implementation of strategies to utilize internationalization capability is a significant undertaking for smes. under the premises of stage theory, smes operate from an established base of business activity in their domestic market while implementing strategies to successfully expand their geographic markets. researchers report certain internal firm conditions that help to successfully carry out the firm's strategies 6 vol. 18, no. 1spring/summer2007 including experience among the top management team (bilkey and tesar, 1977; garnier, 1982; moon and lee, 1980), special competitive advantages (jaffe, pasternak, and nebenzahl, 1988), the possession of unique products, profit advantage, and technological competence (koh, 1989) and excess production capacity (kaynak, ghauri, and olofssonbredenlow, 1987). each of these conditions aids the firm in successful implementation of its strategies and may lead to higher performance. hs: externally-oriented strategy is positively related to performance. in a recent study, verhees and meulenberg (2004) linked market orientation, market intelligence, and product innovation to performance. information-gathering, market understanding, and sense-making are necessary precursors for sme performance. such a market orientation is likely to elicit development of the internal resources and capabilities commensurate with adequately meeting the markets needs with appropriate products. chandler and hanks found that "[f]irms with higher levels and broader varieties of resource-based capabilities grew faster and had higher levels of business volume" (1994: 343). performance growth is related to r&d, product innovation, and the ability to gain competitive advantage in the product market (romano, 1990). product improvements and new products provide firms the momentum for market leadership and growth (lansiti, 1995). product innovation opens firms to market share growth and hence sales growth by increasing the customer base in current markets or attracting new customers by opening new markets to the firm (zahra and nielsen, 2002). covin ( 1991) contrasted an entrepreneurial strategic posture with conservative strategic posture in business firms. several important differences emerged in covin's analysis. however, an important similarity in the contrast was the emphasis on operating reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy efficiency by both the entrepreneurial and conservative smes. hence attention to organizational process improvements to affect operating efficiencies may be relatively universal among sme firms. resource-constrained firms must get maximum productivity from the resources they possess. we postulate that all of the above are illustrative of inwardly-oriented strategic positions which yield higher performance levels for smes. 86: internally-oriented strategy is positively related to performance. we have chosen to articulate the hypotheses in our model strictly along the paths discussed. obviously there can be arguments made and hypothetical relationships proposed between environment and internalor external-oriented strategy, and between innovation capability and external-oriented strategy and internationalization capability and intemaloriented strategy. however, such relationships, if present, would undermine our contention that each path represents an internally consistent pattern within the sme. since we will be employing structural equation modeling (sem) analytical procedure as specified below, we will test a saturated model and report on these relationships regarding how they either do or do not support our premises regarding internal consistency. methodology design the survey questionnaire method was employed to examine the above hypothesized relationships in our proposed model. from a directory of business firms published by the largest newspaper in a midwestem state, we compiled a list of all firms self-reporting their market scope as national or international. secondly, we eliminated all firms from the list that were large (those with 500 employees or more) and non7 vol. 18, no. 1spring/summer2007 manufacturing. the resulting database comprised 4,614 businesses, from which 855 firms were randomly selected for our survey administration. our selection process yielded a sample that was all small or medium-size firms (fewer than 500 employees) and representative of manufacturing firms from a cross-section of industries. a letter and survey questionnaire with a self-addressed return envelope was sent directly to the president (owner) of the business soliciting a response to the questionnaire. postcard reminders were also mailed out three weeks after the initial questionnaires. this technique resulted in 198 responses, of which 182 provided complete information needed for this study. the overall response rate was 21 percent, which is consistent with similar studies that survey top management or owners (hambrick, geletkanycz, & fredrickson, 1993). measurement performance performance is a multidimensional construct, and managers/owners of sme firms are often reluctant to provide objective information regarding the dimensions of sales, asset utilization profitability, or changes along any of these dimensions. this reality makes it extremely difficult to gain objective measures for the construct. following other researchers that have examined sme performance (e.g., chandler and hanks, 1994; zahra and george, 2000) we asked respondents to answer questions concerning their performance level in comparison to the overall industry. the categorical performance scale used for each item was based on a five-point likert scale format ( 1 lowest 20 percent to 5 highest 20 percent) asked in relation to their firm's performance level compared to the industry average. because of the aforementioned multidimensionality, respondents were asked their firm's performance levels relative to the industry for return on sales (ros), sales reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy growth, and return on assets (roa). we believe this process adequately measured the multiple dimensions of sme performance. although we expected that sme firms employed these multiple dimensions of performance consistent with our thinking, research results have been very limited when dealing with the phenomena of sme performance (chandler & hanks, 1994). therefore, we undertook an exploratory assessment through a principal component factor analysis with a varimax rotation to determine if the different performance dimensions adequately represented the construct. the result from this analysis suggests the presence of a single solution representing sme performance. the performance measure was determined reliable (cronbach a = .77). for analysis purposes we labeled the measure 'performance.' · environmental uncertainty the environmental uncertainty construct was measured using five distinct items similar to covin and slevin's (1989) approach used to asses the environment. respondents were asked how they perceived general environment conditions over the next few years for their businesses. the five-items they responded to included the economic; demographic; political/legal/regulatory; international/global; and societal issues facing their firm. the scale used was based on a five-point scale which ranged from l indicating highly unfavorable to 5 indicating highly favorably. the five-items were then analyzed using an exploratory principal component factor analysis with a varimax rotation. a single construct emerged, which also proved highly reliable (a= .75), this we labeled 'environment.' internationalization respondents were asked five questions concerning the firm's current international activities and their intentions regarding 8 vol. 18, no. i spring/summer 2007 future international activities. these items were based on campbell's ( 1996) research, which suggest actions may impact managerial decisions, especially when it comes to exporting. therefore, we asked a series of questions dealing with internationalization intentions centered on a firm's desire to either continue or develop such capabilities. the focus of these questions was to get a better grasp or understanding of a firm's degree of interest concerning internationalization. the items were scaled on a five-point likert type scale (1 strongly disagree to 5 strongly agree). the five questions were exporting is a desirable task for my firm; my firm is planning to export; my firm is planning to export to new markets; to fulfill a need in an international market; and production capacity to meet international demand. the factor analysis provided a single solution and yielded a high degree of reliability (a = 0.90). the underlying construct was labeled 'internationalization capability'. innovation capability innovation capability was determined by using an adaptation of qian and li's (2003) measure. r&d expenditures are an indicator of how innovative a firm may be, e.g. higher expenditures signify more commitment and hence more innovation. qian and li (2003) employed objective measures of year-overyear change in r&d expenditures as their measure. since we are dealing with private firms, as noted above objective measures are difficult to obtain. therefore, we measured innovation capability with a single measure asking the respondents how their firm's r&d expenditures changed relative to the industry as a percent of sales when compared to the previous year (qian and li, 2003). the scale for this item was based on a five-point lickert type scale (1 =lowest 20 percent to 5 = highest 20 percent). this construct was labeled 'innovation capability.' reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy externally-oriented strategy externally-directed strategy was measured by asking respondents three questions dealing with the strategic growth activities they would be taking over the next few years to improve their firm's competitive position in the industry. the three items included: making an acquisition; exploring a joint venture; seek a cooperative strategic alliance. for each of these items we used a five-item response scale ranging from 1 = not at all important to 5 = very important. principal component factor analysis with a varimax rotation resulted in a single underlying construct represented by the three questions. the reliability of the scale was acceptable (a = 0. 79) and we labeled the construct 'external strategy.' internally-oriented strategy to measure internally-oriented strategy, respondents were asked four questions relating to internal strategic growth options. respondents were asked these questions relative to likely actions they would be taking over the next few years to improve their firm's competitive position in the industry. the four items included: initiate a new product line; undertake new product development; acquire new production technology; and creation of new products/services. we used a likert type five-item measure (1 not at all important to 5 very important). again, a principal component factor analysis with a varimax rotation was utilized. the resulting single construct was found to be reliable (a= .84) and we labeled this construct 'internal strategy.' analysis and results measurement validation we used a multistage process to examine the construct validity as outlined by anderson and gerbing (1988). as stated above, for each construct, we examined the item to total 9 vol. 18, no. 1spring/summer2007 correlations and performed exploratory principal component factor analysis. we did this because the scales we employed were somewhat different from other studies in the field. we then conducted a confirmatory factor analysis to test for the multidimensionality and convergent validity of the constructs. the results of the confirmatory factor analysis suggest that all composite constructs were adequate and could be used in the analysis. the scale items, factor loadings, reliability, and fit statistics are all in the acceptable range. the results suggest that the standardized loadings are highly significant for all items and the underlying constructs are valid. in addition, the fit indices for the analytical model suggest that the model fits the data very well (i/df = 2.29, rmsea = .05, nfi = .96, nnfi = .97, cfi .98). this confirmed the dimensionality and convergent validity of the constructs in the model (anderson and gerbing, 1988; fornell and larcker, 1981 ). table 1 reports the means, standard deviations, and correlations for the constructs. these findings provide further evidence for discriminant validity of the measures employed in this study. research model testing the original data was used as the input to test the proposed research model as represented in figure 1. we employed the amos software package in spss. following anderson and gerbing's (1988) recommendations, the error variances of the composite scores representing the underlying latent variables were set for each composite indicator. the complete research model results from this analysis are reported in table 2. the findings show a good fit based on the various fit measures (:x2/df = 2.45, rmsea = .06, nfi = .96, nnfi = .97, cfi = .98). the results reported in table 2 present the results of the structural equation modeling reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal o!small business strate~ vol. 18! no. 1s£!..rin8(summer2007 table 1 correlations, means and standard deviations of study variables• variables mean s.d. 1 2 3 4 s environment 3.32 .56 international 3.53 .99 .365** innovation 2.92 l.81 .314* .259* external 2.75 l.12 .280* .438** .236* internal 3.47 .74 .287* .334* .382** .399** profit growth 3.31 .83 .402** .384* .429** .413** .460** *p < .01; ••p < .001; table 2 results model parameter estimates and fit statistics estimates and standardized critical ratios r1 fit statistics estimate mwld l1r1md1:r1: environment -+ innovation .510 6.26 .26 environment -+ international .488 5.64 innovation -+ international .125 os l.43 .31 environment -+ external .159 os l.56 innovation -+ external .121 ns 1.32 international -+ external .395 4.48 .34 environment -+ internal .136 ns 1.37 innovation -+ internal .299 3.11 international -+ internal .268 3.10 .32 external -+ profit growth .260 3.03 internal -+ profit growth .262 3.17 .18 goodp1:15-of-fjt st1tj5tics; :l!df= 2.45 rmsea = (.06) ecvi = 3.281 (ecvi for saturated model= 2.785) nfi= .96 nnfi= .97 cfi = .98 rz indicates the proportion of variance accounted for each of the constructs. lu reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy (sem) analysis used in this effort. as shown, the analysis illustrates a significant positive relationship between environment and international capability (support for hypothesis l ); a significant positive relationship between environment and innovation capability (support for hypothesis 2); a significant positive relationship between international capability and external strategy (support for hypothesis 3); a significant positive relationship between innovation capability and internal strategy (support for hypothesis 4); and significant positive associations between both external and internal strategy and performance (support for hypotheses 5 & 6). in sum, all of the hypotheses stated above were supported by the results of the analysis. in addition, recall that we wanted to examine the level of internal consistency with respect to each of the paths proposed. also presented in table 2 are the levels of assoc1atj.on between environment and external and internal strategy (both relationships are non-significant), the level of association between innovation capability and international capability (not significant), and the association between innovation capability and external strategy (not significant) and international capability and internal strategy (significant). to summarize this additional analysis beyond the relationships proposed in our model, the only significant association found was between international capability and internallyoriented strategy. in total, these results suggest that the path of relationships proposed are internally consistent with the ability of smes to achieve a relatively high level of performance (approximately 18% of the variance in performance is accounted for in this research model). we will discuss this in more detail in the discussion and conclusions section below. figure 2 presents the results of our analysis in graphic form. discussion and conclusion at the beginning of this paper we set forth 11 vol. 18, no. 1spring/summer2007 the goal to examine two alternate paths that sme firms might follow to achieve higher levels of firm performance. we presented the theoretical underpinnings for specific hypotheses relating the various constructs examined and found considerable empirical support for the model we proposed. however, there are certain limitations to this research report that need to be factored into the discussion about the managerial implications and generalizability of the findings to sme firms. first, the current study examined a crosssectional sample of businesses competing in a range of industries. the cross-sectional nature of this study is somewhat mitigated by the fact that only sme manufacturing firms were included in the sample this approach allowed for us to generalize the study's results somewhat; however, it would be beneficial to examine firms in specific industries or, even more narrowly, industry groups. such research would help managers to understand where the relationships hold and where they may not hold. second, the measures we employed reflect the objectives of this study; however, the measures are not all-inclusive of the various conceptualizations in the sme literature. alternate conceptualization may indeed yield very different outcomes from what we have found in this study. such results could be very beneficial in better refining the concepts researchers use, but managerial application could yield less than fruitful outcomes. we believe this to not be the case, but would like to err on the side of conservative application and raise the possibility. finally, the study's use of self-reported, subjective measures as provided by key respondents to capture the constructs may yield biased results. unfortunately, the nature of the firms studied (i.e., smes) severely inhibits the collection of secondary objective data with which to compare and corroborate key informant responses. this is particularly true with respect to the performance data, which is a key dependent variable in our study. all of these issues remain to be addressed by future r e p ro d u ce d w ith p e rm issio n o f th e co p yrig h t o w n e r. f u rth e r re p ro d u ctio n p ro h ib ite d w ith o u t p e rm issio n . flgure 2 research l\-hlel results (hypothesized relations solid lines; exploratory relations dotted lines; significant relations black; non-significant relations grey) n ~ l q, ~ ~ ~ s· ~ ~ .~ ~ :--.. ..... ?o ~ ..... ~ ..., s· ;:;:._ ~ :! :! ~ ...... 8 'j reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy studies. as we presented in the results section above, the outcomes of this research project generally support the path model that we have specified with respect to sme performance and research-based antecedents to performance. the most significant contribution this research makes is the internal consistency, or "fit" (venkatraman, 1989) that the theoretically derived and empirically supported path relationship represents with respect to sme performance. our results suggest that consistency between environmental conditions, international capabilities, and external strategic orientation yield higher levels of performance for smes. at the same time it supports the contention that consistency between environmental conditions, innovation capability, and internal strategic orientation yield higher levels of performance. the lack of significant relationships between constructs outside the path also lends credence to the notion of fit and internal consistency. in other words, innovative smes may not be well served by a strategic orientation that leads them to consider acquisitions, alliances, or joint ventures. the one exception to a clean model was the significant relationship between international capability and an internal strategic orientation. this may be explained by the proposition that an international capability is more universally applicable than is innovative capability. in other words, international capability may be useful in both opening new markets and penetrating existing markets to gain greater overall market share. in a recent study, verhees and meulenberg (2004) argued that internationalization capability represents openness to learning and capability development with respect to product and process improvements. efforts to internationalize an sme may provide the impetus to improve internal processes for efficiency, adapt products for foreign markets, or develop new lines of products for 13 vol. 18, no. 1spring/summer2007 international customers. sme internationalization and the relationship to strategy and performance may be very fruitful areas for future research. as bedeian (1990) implied, firms are embedded within their environment, they adjust to their environment, and they help to shape their environment. our results indicate that environmental factors play a significant role with respect to the capability set and strategic orientation alignment to achieve higher levels of performance. though our study was cross sectional, a reasonable extrapolation of the study's implications regarding successive time periods is a recursive sme growth-model. in such a model (for both paths illustrated above) the feedback loop would extend from performance outcomes back to managerial interpretations of environmental conditions with subsequent adjustment to capabilities and strategies. absent longitudinal studies and data, a recursive sme growth-model is conjecture, but would add greatly to our understanding of the sme growth process. our goal in this study was to propose logical and theoretical arguments for a path model of environment-capability-strategyperformance and empirically test its appropriateness and viability with data from a sample of sme managers. the outcomes reported above support the notion that internally-consistent capabilities and strategies are important for sme performance. implications for practice practicing managers are consistently on the lookout for ideas that will help them manage their firms more effectively for better profitability and growth. in this study we provide support for the notion that internal consistency between environment, organizational capability, and strategy may yield higher levels of profit growth in small and medium-sized firms. in our terminology, internal consistency is reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy synonymous with the concept of fit. very simply stated, when conditions, resources and capabilities, and strategic actions "fit" together, the yield is a positive, superior outcome for managers and their organizations. absent such a fit among these business contingencies, the firm may not be able to maximize performance relative to organizational effort. given the arguments we provide in the paper and the results of our data analysis, we suggest that managers seek to understand the paths of decisions and actions relative to their organization's environmental context, organizational capabilities, and strategic actions. strategic consistency seems to be rewarded. references acs, z.j. &yeung, b. 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(1989). the concept of fit in strategy research: toward verbal and statistical correspondence. academy of management review, 14(3), 423-444. verhees, f.j.h.m. & meulenberg, m.t.g. (2004). market orientation, innovativeness, product innovation, and performance in small firms. journal of small business management, 2(2), 134-154. wolff, j.a. & pett, t.l. (2000). internationalization of small firms: an examination of export competitive patterns, firm size and export performance. journal of small business management, 38(2), 34-47. wolff, j.a. & pett, t.l. (2006). small firm performance: modeling the role of product and process improvement. journal of small business management, 44(2), 268-284. zahra, s.a. & george, g. (1999). manufacturing strategy and new venture performance: a comparison of independent and corporate ventures in the biotechnology industry. the journal of high technology management research, i 0(2), 313-345. zahra, s.a. & nielsen, a. (2002). sources of capabilities, integration and technology commercialization. strategic management journal, 23, 377-398. timothy l. pett is director of the center for entrepreneurship at wichita state university and associate professor of strategic management in the w. f. barton school of business at wichita state university. james a. wolff is associate professor of strategic management and kincaid faculty fellow in the w.f. barton school of business at wichita state university. vol. 18, no. i spring/summer 2007 16 summer journal environmental turbulence and scanning behavior: the moderating effects of organizational maturity jianwen liao illinois institute of technology liao@iit.edu harold welsch depaul university hwelsch@depaul.edu michael stoica washburn university michael.stoica@washburn.edu abstract this paper examines the relationship between environmental turbulence and information scanning behavior in a sample of 242 small and medium-sized enterprises (smes), and the moderating effects of organizational age. our results suggest that sme decision makers utilize a selective, cognitive simplification process in their information search activities. scanning behavior of smes is highly differentiated and very selective in the face of turbulent task environments. in general, our sampled smes seem to be more attuned to technological and competitive turbulence. additionally, young and mature smes also exhibit different scanning behaviors. while young smes prefer a search mode of proactive continuous internal gathering, mature smes opt for a mode of reactive internal and external information gathering. implications of this study are discussed. introduction the environmental conditions facing today’s businesses are increasingly fraught with complexity, turbulence, and uncertainty. scanning and interpreting environmental changes are the first step in strategic formulation and implementation (hofer and schendel, 1978; hambrick, 1981; may, stewart, and sweo, 2000). to date, most studies on environmental scanning and information search activities have centered on large organizations. however, timely and relevant environmental information is equally important for small and mediumsized enterprises (smes). gudmundson, tower, and hartman et al. (2001) have stated that management of information and knowledge is the key to developing and sustaining competitiveness for companies big and small. the few studies with a focus on the environmental scanning behavior of smes are far from conclusive (i.e., beal, 2000). for example, pineda, lerner, miller, and philips (1998) found that managers of smes are less willing to seek and accept advice from others, which can be attributed to their high internal locus of control. by contrast, several other researchers contended that small business decision makers lack sufficient resources to create a formal system to conduct environmental scanning; therefore, they must rely more heavily on externally focused scanning activities (churchill and lewis, 1983; mohan-neill, 1995). matthews and scott (1995) also noted that smes typically lack the infrastructure necessary to adequately search and collect information n e e d e d t o d e a l w i t h e n v i r o n m e n t a l turbulence and uncertainty. this study examines the relationships between environmental turbulence and environmental scanning activities in the context of smes. specifically, this study focuses on two research questions. first, as 15 strategyjournal of small business compared to large companies, do smes exhibit a different pattern of scanning behavior when facing environmental turbulence? second, does sme maturity make a difference in the relationship between environmental turbulence and smes’ scanning behavior, i.e., do younger start-up firms behave differently from more established firms? theoretical background and hypotheses development environmental turbulence duncan (1972) defined the environment as the relevant physical and social factors outside the organizational boundaries that are t a k e n i n t o c o n s i d e r a t i o n d u r i n g o r g a n i z a t i o n a l d e c i s i o n m a k i n g . environment can be conceptualized as task environment and general environment. task e n v i r o n m e n t i n v o l v e s e n v i r o n m e n t a l elements that have direct impact on the c o m p e t i t i v e s i t u a t i o n o f i n d i v i d u a l organizations. these elements are commonly d e f i n e d a s t e c h n o l o g y, c o m p e t i t o r s , customers, suppliers, and regulatory bodies. general environment refers to factors that affect organizations indirectly, including political, economic and social/demographic elements. palmer, wright,and powers (2001) suggested that the nature of competitive environments may play a critical role in the frequency and success of innovation by firms. starbuck (1976) performed an e x c e l l e n t l i t e r a t u r e r e v i e w o n t h e organization-environment relationship and provided a classification of organizational and industrial task environments. dess and beard (1984) built on starbuck’s seminal w o r k ( 1 9 7 6 ) a n d i d e n t i f i e d t h r e e environmental dimensions: munificence (capacity), complexity, and dynamism. their work represents an excellent operational guide for classifying organizational task environments in terms of accepted industrial classification. it is widely accepted in the strategy literature that the external environment is a primary s o u r c e o f u n c e r t a i n t y f o r m a n a g e r s responsible for identifying opportunities and threats (duncan, 1972). duncan proposed t h a t e n v i r o n m e n t a l c o m p l e x i t y a n d variability are the two dimensions of uncertainty. out of the two, environmental variability or turbulence is most important to organizational adaptation. turbulence is generally defined by high levels of interperiod changes of key environmental variables (glazer and weiss, 1993; sinkula, 1994). the environment, including both task and general environment, is perceived as turbulent if the number of events per period of time is high for key characteristics such as: consumer preferences, number of new customers, new products, number, and position of competitors (jaworski, wee, and macinnis, 1995), size of the market, use of technology and regulations (glazer et al., 1993). botchway, goodall, noon, and lemon (2002) provided an overview of the literature o n t u r b u l e n t e n v i r o n m e n t s a n d t h e appropriate managerial approaches. they suggested the necessity of studying the impact of environment turbulence on firms’ scanning activities, giving as an example the coventry case, and developing an emergence conceptual model. that study focused mainly on the impact of task environment turbulence on sme environmental scanning activities, excluding general environmental turbulence for the following reasons. first, since task environment refers to forces that may have an immediate or direct impact on an organization, decision makers at smes may focus more of their scanning efforts on these immediate forces compared to those in the general environment (johnson and kuehn, 1987). for example, empirical research by brush (1992) indicated that more than half of sme managers participating in her study “never” collected information about the general environment. she observed that sme managers perceived information about “immediate” marketplace environment as more important than information about the “remote” environment. second, in terms of variability, forces in the task environment may change more frequently and rapidly than those in the general environment such as regulatory, social and cultural changes. third, decision makers in smes often feel they have more direct control of task e n v i r o n m e n t s e c t o r s t h a n g e n e r a l environmental sectors. journal of small business strategy 16 the environment described by achrol (1991), glazer (1991), and glazer and weiss (1993) is characterized by its turbulence primarily due to the information, knowledge accumulation and dissemination that changes frequently. achrol and stern (1988) provided a complex and comprehensive framework by i n t e g r a t i n g m u l t i p l e d i m e n s i o n s o f environmental conditions to analyze the challenges facing channel management. beinhocken (1999) and later botchway, goodall, noon, and lemon (2002) adopted the same approach. botchway et al. (2002) constructed a model to explore the issues related to regional economic development. in their study, levels of inter-period changes of variables defining the environment were used to measure turbulence. environmental scanning behavior researchers have developed a number of models to describe the ways managers and organizations deal with environmental turbulence (e.g., dutton and duncan, 1987). daft and weick (1984) proposed that organizational adaptation entails three key activities: scanning, interpreting, and responding. scanning refers to as the activities and processes associated with acquisition of information about events, trends, and relationships potentially affecting the supplies of resources (pfeffer and salancik, 1978) or protecting the core organization from uncertainty (thompson, 1967). aguilar (1967) defined scanning as “the way in which top management gains information about relevant events occurring outside the company in order to guide the company’s future course of action.” the terms information, intelligence, and k n o w l e d g e a r e s o m e t i m e s u s e d interchangeably. glazer (1991) defined information as data that have been given structure (i.e., placed in a context). in terms of organizational performance, the most important context can be seen as a function of information's role in facilitating exchange. jaworski, wee, and macinnis (1995) defined competitive intelligence as the ethical gathering and use of publicly or semipublicly available information about trends, activities, or strategies of competitors. narver and slater (1990) and later, kohli, jaworski, and kumar (1993) developed scales to measure the concept of market o r i e n t a t i o n . t h e c o n c e p t o f m a r k e t orientation was one-dimensional for narver and slater (1990) and three-dimensional for kohli et al. (1993), integrating intelligence generation, intelligence dissemination, and responsiveness. these studies all used information processing as a key element for their scales. information search represents the ‘generator’ of information for the organization. market signals are identified and information on those signals is gathered and transmitted to the organizational filter. the more information that can be collected over a given period, the better the information search works. information is critical for both the formulation of the strategy and for the daily operation of a company. information search represents a construct that is referred to as ‘active listening.’ in searching for information, the organization uses more than the usual data collection sources from customers and competition. the more information the organization can gather through the search for information, the more options exist for identifying changes in the environment, and therefore, the better it can respond and perform. for example, gavetti and levinthal (2000) found that, in a dynamic business environment, strategies containing elements of information search and learning enhance long-term success. barkema and piaskowska (2002) and barkema, baum, and mannix (2002) also demonstrated that information search along with experiential learning are critical for market entry and market location decisions. information search is also recognized as a difficult organizational process because of environmental complexity and dynamism, a n d m a n a g e r i a l b o u n d e d r a t i o n a l i t y. managers typically cannot fully and c o m p r e h e n s i v e l y u n d e r s t a n d t h e environment (cyert and march, 1963). moreover, given the constraints of resources, time and capacity, managers often have to select from a range of scanning alternatives, such as the frequency of information search, the extent of internal search, and external search. volume 19, number 1 spring/summer 2008 17 research on smes’ environmental scanning behaviors numerous attempts have been made to extrapolate research on environment scanning behaviors from large organizational settings to small firms, but with limited success (i.e., pearce, chapman, and david, 1982). smes differ from large firms in several important ways that may affect their environmental scanning behaviors. overall, environmental scanning activities are expected to be low for smes (smeltzer, fann, and nikolaisen, 1988). this is primarily because smes usually have: (1) little presence of formal organization structure and processes geared toward environmental scanning; (2) lack of extensive external contacts and sophisticated internal management information systems (kagan, lau and nusgart, 1990) and relative inability to influence external events; (3) the low levels of resources available for information search (golde, 1964); and (4) lack of specialization of scanning activities among top management and the dependence of information search on one or two individuals (hambrick, 1981). although conflicting demands of boundary-spanning roles and internal operation roles are pervasive in any size organization, the problem is particularly acute for smes. the individuals who are responsible for environmental scanning activities usually are the entrepreneurs themselves. they often have a high degree of internal locus of control and self-efficacy. due to these contextual features, sme environmental scanning behavior may be unique in many areas, as compared to large companies, even between young smes and mature smes. most prior research always assumes a rational perspective that sme managers would conduct extensive search and make the “best” decision. it fails to consider how bounded rationality affects the search efforts of sme decision makers and how they make decisions heuristically. in this sense, managers in smes and large companies share similar human cognitive limitations when facing a task of complexity, ambiguity and uncertainty, such as environmental scanning. given the constraints of smes (i.e., resources, degree of specialization), sme managers may be more apt to use perceptual processes to simplify scanning activities. cognitive psychologists and behavioral scientists have identified a wide range of cognitive processes, which serve to simplify decision-makers’ perceptions of external environments (schwenk, 1984). these processes suggest that sme scanning activities may be more complicated than what normative, rational decision theories would imply. p r i o r h y p o t h e s i s b i a s . c o g n i t i v e psychologists found that decision makers who formed beliefs or hypotheses about the relationship between variables tend to seek and use information consistent with these hypotheses rather than disconfirming information (i.e., kozielecki, 1981). this process may lead decision makers to ignore certain information (beinhocken, 1999). reasoning by analogy. this involves the application of simple analogies and images to guide problem definition (steinbruner, 1974). this process helps to reduce the uncertainty perceived in the external environment without resorting to extensive scanning and search efforts. single outcome calculation. cyert and march’s (1963) concept of problemistic search suggested that decision making involves a single valued problem and a single preferred alternative to which decision makers are committed from the outset of the decision process, rather than attempting to specify all relevant values and goals and generate a number of alternative courses of action as normative decision theory would suggest. this is an extremely powerful simplification process and is probably more likely to occur in highly complex and uncertain decision environments. environmental turbulence and the frequency of information search information search frequency is referred to as the number of times managers receive data about the environment (hambrick, 1981). fahey, king and narayanan (1981) o b s e r v e d t h a t m a n a g e r s c a n o b t a i n information along a continuum ranging from irregular to continuous gathering. the irregular approach is a reactive, spot journal of small business strategy 18 behavior that involves external cues to force management into action. by contrast, c o n t i n u o u s s c a n n i n g i s a p e r p e t u a l , systematic, and proactive approach to search relevant environmental information. some researchers suggest that the level of e n v i r o n m e n t a l u n c e r t a i n t y a n d t h e a v a i l a b i l i t y o f r e s o u r c e s w i t h i n a n organization affect the extent of scanning activities undertaken by managers (boyd and fulk, 1996; milliken, 1987). managers routinely use information search to reduce uncertainty. when the environment remains relatively stable or changed in slow cycle, managers at smes would commit fewer resources to information search, lengthening cycle time. higher environmental turbulence generally elicits more frequent scanning efforts (chakravarthy, 1997). under such conditions, sme decision makers need more information to define problems and generate and evaluate alternative solutions (elenkov, 1997). b a s e d o n t h e a b o v e a r g u m e n t , w e hypothesize: h1: in general, the greater the degree of environmental turbulence, the greater the frequency of information search in smes. firm age is frequently treated as a m o d e r a t i n g v a r i a b l e i n s m e s a n d entrepreneurship research (e.g., smallbone and north, 1995). research findings generally support the importance of environmental scanning for the survival of new ventures (brush, 1992; chrisman and leslie, 1989). new ventures, as compared to more established small businesses, face a higher level of uncertainty because of their “newness” and lack of legitimacy in the marketplace. younger firms are also at a disadvantage in terms of contacts established in the marketplace and amount of historical or internal data from which to draw. they are probably still learning the “rules of the game.” when facing the same level of environmental turbulence, younger smes may require more frequent and intense information search than mature smes to r e d u c e t h e u n c e r t a i n t y t h e y f a c e . consequently we hypothesize: h1a: environmental turbulence has greater positive impact on the information search frequency of young smes than mature smes. environmental turbulence and sources of information search aguilar (1967) distinguishes two major sources of search, namely internal and external. internal search mode pertains to reports, memos, and discussion with internal partners, managers, and employees about the external environment. external sources of s e a r c h i n c l u d e d i r e c t c o n t a c t s w i t h government officials, customers, trade magazines, and attendants of association. gudmundson et al. (2001) analyzed the internal and external information search for small businesses. their findings suggest that managers in small firms might want to consider increasing both the acquisition of more external information and the use of various processes for gathering and sharing information, especially present in turbulent environments. however, several studies suggested that while sme managers use a variety of information, they are usually apt to rely heavily on their own experience and internal sources of information when making decisions, even in situations where seeking external sources of information would be more appropriate and beneficial (i.e., pineda and lerner, 1998; brush, 1992). there are several possible explanations for the types of search behavior by smes. first, sme decision makers tend to place a high value on their personal judgments due to their high levels of internal locus of control and selfefficacy. people with an internal locus of control tend to believe that what happens to them is the consequence of their own actions and that rewards are contingent upon their own behavior, as opposed to being controlled by outside factors (robbins, 1994). second, sme decision makers are likely to use more accessible sources even if the quality of the sources used may be lower than other alternative (o’reilly, 1982). third, even when sme managers seek external sources of information, there is an issue of trust, which is perhaps the most significant factor in influencing the choice of various sources. volume 19, number 1 spring/summer 2008 19 who can be trusted to see issues in the same context as the managers of a sme? who has a vested interest in dealing with issues in a way that sme decision makers would find acceptable and maintain confidence? sme managers tend to look for advice and information from those with whom they share a common bond, often within an organization. finally, due to limited time and resource constraints for information search activities, sme managers are always conscious of social and economic costs associated with obtaining such information. in most of the cases, external sources of information are usually more expensive than internal ones. therefore, rather than searching extensively for optimal sources of information and incurring the additional costs, they prefer to use the most readily available information sources, usually internal – a characteristic of bounded rationality (march and simon, 1958). as the overall environmental conditions become more turbulent, sme managers may increasingly depend on the internal sources of information due to low search costs and high level of trust. based on the above arguments, we propose: h2: in general, the greater the degree of environmental turbulence, the greater the extent of internal search in smes. as covin and covin (1990) adroitly argued, “the simple fact that researchers study new ventures implies that the age effect can be significant.” entrepreneurship research generally supports the importance of external e n v i r o n m e n t a l c o n t a c t a n d s c a n n i n g activities, and frequently points out that the lack of information is a primary problem for new ventures (chrisman et al., 1989). the typical organizational challenges, such as time and resource constraints, are especially greater for young smes compared to their mature counterparts due to the liability of newness and smallness. for mature smes, as they become experienced over time in terms of where to find internal and external sources of information, they may have developed, or be in the process of developing, formal organization structures and processes for information search. additionally, these mature smes may have to overcome the liability of newness and establish a network of relationships upon which they can draw resources and information. when facing environmental turbulence, mature smes may have an internal organization routine to upon which to rely. however, this may not be the case for young smes. consequently, we argue: h2a: environmental turbulence has greater positive impact on the internal search of mature smes than young smes. internal search and external search may not be the two extremes on a continuum, rather two different sources of search. the preference of one source of information search does not preclude sme managers to use the alternative sources at the same time. for example, there may be incidences when smes use both sources of information extensively. however, given the time and resource constraints, the lack of personnel specialized in environmental scanning, coupled with a high degree of dependence on one or few individuals, there could be a trade-off relationship between internal and external sources of information search. therefore, in conjunction with hypothesis 2, we hypothesize the following corollary: h3: in general, the greater the degree of environmental turbulence, the less the extent of external search in smes. young smes have to overcome the “liability of newness.” survival remains a major concern for young smes as compared with mature smes. as johannisson (1990) argued, entrepreneurs should use their personal relationships with individuals outside their respective organizations to collect relevant environmental information. such external search would not only serve the purpose of reducing organizational uncertainty, but would also increase organizational legitimacy in the marketplace. therefore, in conjunction with hypothesis 3, we expect the following corollary: h3a: environmental turbulence has a greater positive impact on the external search of young smes than that of mature smes. journal of small business strategy 20 methods sampling a random sample of 1,000 smes in wa s h i n g t o n s t a t e w a s b o u g h t f r o m sampling, inc. to test the hypotheses. res pons es w ere collected from 284 companies (28.4 % response rate) and 242 usable questionnaires were obtained. nineteen were incomplete, 12 belonged to companies having fewer than 30 employees, and 11 were not-for-profit organizations. almost half of the respondents, 43.4 %, represent businesses in the manufacturing sectors and 22.3 % were businesses in the service sector. retailers and wholesalers come next, each with 8.7%; the rest were f i n a n c e b u s i n e s s e s , t r a n s p o r t a t i o n companies, construction, and agriculture businesses. the questionnaire was mailed to businesses having between 50 and 500 employees. nevertheless, responses were obtained from companies with both large numbers of employees and very small number of employees; there are 13 respondents under 50 employees and 11 over 500. companies having at least 40 employees and those having less than 900 employees were retained in the study. more than 85% of the respondents had between 50 and 400 employees. only 12% had between 400 and 500 employees. eighty-one percent are corporations and all are privately held. almost half of the businesses were in manufacturing (see table 1). the overall response rate was of 28.4% but some of the questionnaires were either incomplete or the companies were not-forprofit. we test for the non-response bias using chi-square. table 2 shows the distribution of respondents and nonrespondents for the eight types of industries used to classify businesses in u.s. the χ2 test was statistically insignificant, suggesting that there is no difference in the industry distribution between our sample and nonrespondents. measures task environmental turbulence. it was measured by managers’ perception of number and extent of changes for a given period of time (bourgeois, 1980). the study adopted a 14-item scale validated in stoica (1995), glazer et al. (1993), and sinkula (1994). participants were asked to rate the degree of change for various characteristics of task environment, including technology, competition, market/customers, suppliers, and regulations. the answers were measured on 5-point scales, with a rating of “1” indicating that environmental element has the least change and a “5” indicating many changes. the scale is reliable with a cronbach alpha of 0.84. information search. market signals are identified and information on those signals is gathered and transmitted to the filter. how well the company does on this scale should be judged on the amount of information that is detected. the more information that can be collected over a given period of time, the better the detector operates. the major p r o b l e m f o r a n y r e s e a r c h i n v o l v i n g i n f o r m a t i o n i s r e p r e s e n t e d b y i t s measurement. kholi, jaworski, and kumar (1993), narver and slater (1990), and slater and narver (1994) measured information generation by the number of signals gathered in a given period of time. it can be assessed by how often the responsible entities in the business unit meet with clients, competitors, etc. multiple departments (within the organization) should engage in this activity because each has a unique market lens (kholi, jaworski, and kumar 1993). consistent with previous research by glazer and weiss (1993) and sinkula (1994), we a d o p t e d a t w e l v e i t e m i n t e l l i g e n c e generation markor scale to measure the construct of information search. an additional two items were added after indepth interviews. our measure has a cronbach-alpha 0.77, suggesting good reliability. frequency of information search was measured by asking participants the frequency with which the managers scan the task environment. this construct was measured using a five-point ordinal scale anchored by extremely infrequent to extremely frequent. volume 19, number 1 spring/summer 2008 21 table 1 firms’ characteristics type of business primary sic code (adjusted to one digit) number % agriculture 1 3 1.2 construction 2 3 1.2 manufacturing 3 105 43.4 transportation 4 16 6.6 wholesale 5 21 8.7 retail 6 21 8.7 finance & investment 7 19 7.9 services 8 54 22.3 total 242 100.0 characteristic range businesses% (n = 242) number of years in business less than 5 from 5 to 25 from 25 to 50 more than 50 4.1 37.3 38.2 20.4 number of employees less than 50 from 50 to 100 from 101 to 400 from 401 to 500 more than 500 5.7 39.5 37.9 11.9 5.0 type of business sole proprietorship and partnership limited liability company corporation other 10.2 0.0 80.6 9.2 marketing budget zero less than 1 % from 1 to 4 % more than 4 % 2.0 31.0 29.6 37.4 journal of small business strategy 22 table 2 the analysis of non-response bias type of industry respondents non-respondents χ2 number % number % agriculture 3 1.2 12 1.5 2.7 construction 3 1.2 21 2.7 manufacturing 105 43.4 313 41.2 transportation 16 6.6 53 6.9 wholesale 21 8.7 62 8.1 retail 21 8.7 78 10.3 finance 19 7.9 66 8.6 services 54 22.3 153 20.1 p < .01 internal search was measured by a list of items related to internal sources of information, such as “we consider every employee in the business as a possible source of information,” or “in this business, we do a lot of in-house market research.” respondents were requested to rate the statement on a five-point scale, with a rating of 1 indicating strongly disagree and 5 indicating strongly agree. external search was measured by a list of items related to external sources of information. respondents were requested to rate statements—e.g., “we poll end users at least once a year to assess the quality of products/services”—on a 5-point scale. a rating of “1” indicates strongly disagree and a “5” indicates strongly agree. statistical procedures multiple regression analysis was utilized to test the formulated hypotheses. the statistical testing procedures are as follows. first, three full regression models using frequency of information processing, internal search, and external search as the dependent variables, and different types of task environmental turbulence as the independent variables were tested. second, the sample was divided into two subsamples using smes’ median age, yielding young and mature smes. third, the same regression models were tested for each of the two sub-samples. results descriptive statistics and correlation matrix for the independent and dependent variables are reported in table 3. the first hypothesis (h1) stated that environmental turbulence overall will lead to more frequent information search activities in smes. the full model i indicates a strong significant relationship exists between environmental turbulence and information search frequency (r2 = . 061, f = 3.018, p < 0.05). the individual standardized regression coefficients suggest that technological turbulence increases the frequency of information search activities significantly (β = .155; p < 0.05), however, competitive changes were found to be negatively associated with information search frequency (β = -.164; p < 0.05). thus, h1 was partially supported (see table 4). t h e h y p o t h e s i s ( h 1 a ) , s t a t i n g t h a t environmental turbulence will have greater positive impact on information search frequency of young smes than mature smes, was strongly supported. as presented in table 4, a regression model for the young sme subgroup yielded an r-square of .097 (f = 3.236; p < 0.1), with technological turbulence as the leading predictor (β = . 238; p < 0.05). volume 19, number 1 spring/summer 2008 23 journal of small business strategy 24 m ea n st d f re qu en cy o f e nv ir on m en t sc an ni ng in te rn al se ar ch e xt er na l se ar ch te ch no lo gi ca l c ha ng e m ar ke t tu rb ul en ce c om pe ti ti ve tu rb ul en ce su pp lie r tu rb ul en ce r eg ul at or y tu rb ul en ce fr eq ue nc y o f e nv ir on m en ta l sc an ni ng 3. 55 79 1. 01 38 1. 00 0 in te rn al s ea rc h 3. 09 79 0. 58 38 .3 83 ** * 1. 00 0 e xt er na l s ea rc h 3. 62 29 0. 84 65 .3 16 ** * .4 36 ** * 1. 00 0 te ch no lo gi ca l c ha ng e 3. 44 17 0. 96 20 0. 08 9 .2 50 ** * .1 61 ** 1. 00 0 m ar ke t t ur bu le nc e 2. 93 67 0. 69 83 -0 .0 55 0. 08 0 0. 02 8 .4 34 ** * 1. 00 0 c om pe tit iv e tu rb ul en ce 2. 86 25 0. 94 17 -.1 36 ** 0. 01 5 -0 .1 14 .2 47 ** * .4 44 ** * 1. 00 0 su pp lie r t ur bu le nc e 2. 84 58 0. 96 22 -0 .0 40 .1 50 ** 0. 02 3 0. 08 5 .1 99 ** * .1 63 * 1. 00 0 r eg ul at or y tu rb ul en ce 3. 06 88 1. 05 32 -0 .0 13 0. 04 4 -0 .1 06 0. 12 0 .2 85 ** * .3 06 ** * .1 47 * 1. 00 0 ta bl e 3. d es cr ip ti ve s ta ti st ic s an d c or re la ti on s m at ri x *p < 0 .1 , * * p < 0. 05 , * ** p < 0. 01 (l is tw is e n =2 37 ) table 4. regression analysis: environmental turbulence and information scanning activities frequency of information search/scanning internal search/scanning activities external search/scanning activities full model i young mature full model ii young mature full model iii young mature technologi cal change .155** .238** 0.060 .258*** 2.41** .269*** .191*** 0.107 .269*** market turbulence 0.008 -0.178 0.066 -0.052 -0.129 0.039 0.063 0.107 -0.016 competitive turbulence -.164** -0.069 -.273** 0.028 -0.118 -0.042 -0.057 -.244** -0.054 supplier turbulence -0.120 -.185* 0.149 -0.093 -0.035 .268*** -.230*** 0.046 -0.017 regulatory turbulence 0.066 0.047 0.019 0.048 0.055 -0.018 -0.055 -.172* -0.024 r square 0.061 0.097 0.071 0.063 0.058 0.164 0.093 0.102 0.064 f 3.018** 2.236* 1.862 3.142*** 1.283 4.679*** 4.764*** 2.368** 1.635 *p< 0.1, ** p< 0.05, ***p< 0.01 however, we did not find an overall s i g n i f i c a n t r e l a t i o n s h i p b e t w e e n environmental turbulence and search frequency for the mature group. also, competitive turbulence, which leads to decreasing search frequency for mature smes, showed no impact on the young smes. hypothesis 2 (h2), stating that the usage of internal search will increase as the environmental turbulence increases, was supported. as indicated in table 4, the full model with internal search as the dependent variables yielded an r-square of .063 (f = 3.142; p < 0.01) was also found. a strong significant positive relationship between turbulence and internal search activities of mature smes (r2 = .164; f = 4.679, p < 0.01) was also found. among the significant predictors were turbulence in the sectors of technology (β = .269; p < 0.01) and suppliers (β = .268; p < 0.01). however, the analysis failed to detect the overall relationship between turbulence and internal search for young smes (r2 = .058; f = 1.283), although the model indicates internal search activities in young smes increase as the task environments become more turbulent. these findings lend support for hypothesis h2a in predicting that environmental turbulence will have a greater positive impact on mature smes than young smes. the third hypothesis (h3) stated that the greater environmental turbulence, the less likely smes would resort to external search. as presented in table 4, overall turbulence is a significant predictor of external search (r2 = .093; f = 4.764; p < 0.01). however, we f o u n d m i x e d r e s u l t s f o r i n d i v i d u a l environmental factors. technological turbulence tended to intensify the usage of external search (β = .191; p < 0.01) but that was not the case for supplier turbulence (β = -.230; p < 0.01). thus, we only found partial support for h3. h y p o t h e s i s h 3 a ’s p r e d i c t i o n t h a t environmental turbulence will lead to greater usage of external search in young smes rather than mature smes was supported, but in the opposite direction. as indicated in table 4, regression analysis for the young smes subgroup uncovered significant negative relationship between turbulence and external search (r2 = .102; f = 2.368; p < 0.05), with competitive turbulence (β = -.244; p < 0.05) and regulatory turbulence (β = -.172; p < 0.1) as the significant predictors.the findings suggested that decision makers in young smes tend to decrease, rather than increase, volume 19, number 1 spring/summer 2008 25 the external search activities, as the regulatory and supplier environment become more turbulent. however, for the mature smes sub-sample we failed to detect an overall relationship between turbulences and external search. yet, technological changes were positively related to the external search activities (β = .269; p < 0.01). this finding suggests that mature smes were more g e a r e d t o w a r d e x t e r n a l s e a r c h a s technological changes increase. discussion the results of this study shed insightful light into the relationship between environmental turbulence and smes’ environmental scanning activities, and the moderating role played by firm age in the context of smes. these findings can be explained if the specificity of smes and the decision makers’ cognitive limitations are taken into consideration. this study shows that smes overall are very selective and prudent, or somewhat biased in their search efforts when facing increasing task environmental turbulence. as table 3 indicates, our sampled smes were very attuned to technological and competitive turbulence, but surprisingly not to market turbulence. there are several p o s s i b l e e x p l a n a t i o n s . f i r s t , a s environmental conditions become more uncertain, ambiguous and turbulent, smes may experience information overload. given the limited times and resources and lack of specialization in scanning activities within smes and individual cognitive limitations, sme decision makers may therefore resort to a series of cognitive simplification techniques such as prior hypothesis bias and single outcome calculations. consequently, they will not be equally (rather than selectively) responsive to all environmental signals. second, environmental turbulence by itself does not lead to scanning activities unless the external events are perceived to be salient to sme decision makers. sme decision makers may even choose to ignore certain environmental changes that do not fit with their schematic preference. there were approximately 45% manufacturing firms in the sampled smes, which points to the possibility of a bias regarding technological environmental factors. the lack of response and some ignorance of market signals may also well be attributed to the phenomena of single outcome calculations and prior hypothesis bias. smes in the sample may have strong preference to be “prospectors”, instead of “defenders” (miles and snow, 1978). therefore the perceived market, regulatory and supplier turbulence may be less salient for sme managers than technological turbulence and competitive turbulence. results suggest different search modes for young and mature smes in the face of a turbulent task environment, which support the presence of an age effect on the r e l a t i o n s h i p b e t w e e n e n v i r o n m e n t a l turbulence and smes’ search behavior. first, as technological turbulence increases, decision makers in young smes prefer to increase their search frequency and more extensive utilization of internal sources of information. by contrast, their counterparts in mature smes are apt to engage in more extensive internal and external searches, but will not necessarily increase their search frequency. external search is usually an expensive choice as compared with an internal one (pearce, chapman, and david, 1982). this is due to the fact that young smes compared with mature smes may have fewer resources available for search a n d f e w e r c o n t a c t s i n t h e e x t e r n a l environment, among other disadvantages. therefore, they tend to make up the shortage of external search with more frequent internal search in face of technological t u r b u l e n c e . s e c o n d , a s c o m p e t i t i v e turbulence increases, managers in young smes are apt to decrease their external search activities, while managers in mature smes will decrease their search frequency. these counter-intuitive findings challenge the widely held rational notion that in order to reduce organizational uncertainty, sme managers would increase their search activities with the increase in competitive dynamics. it is speculated that smes might place different emphases on their search efforts. young smes’ search efforts may be u n d e r s t a n d a b l y m o r e g e a r e d t o w a r d efficiency and timeliness, given the resource constraints. frequency takes precedence journal of small business strategy 26 over search breadth. for mature smes, effectiveness is more important than efficiency. therefore, search scope and breadth may be valued more importantly than frequency. the results suggested that young smes prefer a search mode of proactive internal gathering (high frequency, continuous) and mature smes a mode of reactive internal and external gathering (low frequency, irregular). these findings offer some cautions on the conventional wisdom of improving problem solving through planning and increasing search frequency and range of information provided to managers. when facing environmental conditions with a high degree of complexity, ambiguity, and turbulence, managers quickly reach the point of i n f o r m a t i o n o v e r l o a d a n d e r r o r s o f attribution and selective perception are likely to occur. although there may be good noncognitive reasons for advocating more timely and broader information, increasing the rate and the range of information scanning does not alter the kinds of cognitive errors (kiesler and sproull, 1982). in reality, it may simply increase the opportunity for constructing illusory correlations, erroneous causal explanations or false analogies, given total cognitive limits on their information processing capacity. the results are somewhat consistent with bhide’s (1994 ) observation that entrepreneurs typically lack the time and resources to conduct extensive information search. in fact, he found that compared with typical corporate practice, successful entrepreneurs use a more timely, selective, and economic approach that represents a middle ground between planning paralysis and no planning at all (bhide, 1994; 2000). conclusions and future research opportunities this paper contributes to the smes’ research in the following ways. first, it may sensitize sme managers and researchers to the role of cognitive limitation and selective p e r c e p t i o n p l a y e d i n s m e s ’ s e a r c h behaviors. we found that sme managers are n o t e q u a l l y r e c e p t i v e t o a l l t a s k environmental changes. instead, their search behaviors are highly differentiated and very s e l e c t i v e i n f a c e o f t u r b u l e n t t a s k e n v i r o n m e n t s . a d d i t i o n a l l y, i t w a s discovered that age does make a difference in smes’ search activities. young and mature smes exhibit different search behaviors in the face of a wide range of environmental turbulence. in understanding smes’ information search behavior, a model that integrates both a r a t i o n a l p e r s p e c t i v e a n d c o g n i t i v e psychology theory is called for. also, there are a variety of additional factors that should be considered in understanding the relationships between the environment of sme search behaviors, such as individual parameters and competitive strategy, and organizational structure and processes. differences in sme decision makers’ cognitive capabilities, predispositions, and inclinations, to a large extent may determine the choices and uses of sources. which i n d i v i d u a l f a c t o r s d e t e r m i n e t h e entrepreneur’s selection of information sources (welsch and young, 1982)? the d o m i n a n t c o m p e t i t i v e s t r a t e g y m a y determine the types of external stimuli to which sme manager may be responsive. structural parameters such as formal and informal positions for scanning activities and the importance placed on these functions should be also incorporated when building a comprehensive model. i n d y n a m i c b u s i n e s s e n v i r o n m e n t s , strategies containing elements of learning theory will enhance long-term success. both external and internal information search will help foresight (karp, 2004). organizational foresight will augment the organization’s ability to envision the future and then actively shape the future. however, new information will very often be denied unless, through effective foresight, there exists a balance between the amount of t h r e a t ( g e n e r a t e d b y a t u r b u l e n t e n v i r o n m e n t , w e s a y ) a n d e n o u g h psychological safety (gavetti and levinthal, 2000) to allow the change target (the business) to accept and disseminate the new data. organizations that want to enrich their foresight abilities need to become learners, in order to expose themselves to 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(1982). the information source selection decision: the role of entrepreneurial personality characteristics. journal of small business management, 20 (october): 49–57. journal of small business strategy 30 jianwen (jon) liao is an associate professor of strategy and entrepreneurship in the stuart school of business at illinois institute of technology. his research interest include venture gestation process, business planning and growth strategies. harold welsch is the coleman chair of entrepreneurship in the department of management at depaul university. his research interest is in the area of venture growth strategies and small business management. michael stoica is an associate professor with washburn university school of business and director of the center for entrepreneurship. his present research i n t e r e s t i s i n s m a l l b u s i n e s s , e n t r e p r e n e u r s h i p a n d i n t e r n a t i o n a l marketing. volume 19, number 1 spring/summer 2008 31 reproduced with permission of the copyright owner. further reproduction prohibited without permission. strategy economic value added and small businesses charles p. baril s. brooks marshall james madison university robert f. sartelle virginia corporation commission abstract economic value added (eva), a tool for creating wealth, is a leading idea in corporate finance today. highly regarded companies like coca-cola and csx have seen their market value soar since adopting eva. the concept is straightforward; value is created when earnings exceed the cost ofinvested capital. thus, eva is rapidly gaining acceptance among large, publicly-tradedcorporations. however, eva can be applied effectively to create value in small, privately-held firms, too. this article illustrates eva's application in small, privately-heldfirms, examines e va 's strengths and weaknesses, discusses ways to overcome those weaknesses, and describes specijic operating, investing and fmancing actions small business managers can take to create wealth. introduction today, small businesses operate in an increasingly competitive environment. the combination of rising global competition, saturated traditional metropolitan markets, and advances in computer technology has prompted many large corporations to seek growth through expansion into smaller, less developed communities. walmart's incredible success story is a case in point. over the past thirty years, in one small town aaer another, the opening of a walmart store has signaled the death knell for dozens of locally-run businesses. the secret to walmart's success has been its unrelenting drive to create value, for its customers and itself, in the form of a state-of-the-art purchasing, distribution, and merchandising system which allows it to provide swia, convenient service and low prices. for small companies facing the challenge of powerful, new competitors entering their markets, the normal "business as usual" response will not suaice. rather, to survive these companies must operate more elfectively and eaiciently. in short, they must act to create value. to create value, a firm, division, or project must earn more than its capital charge. this fundamental financial concept is the comerstoneof free enterprise. yet, managers oaen violate this premise, taking actions that destroy rather than create wealth. a primary reason for management's value-destroying behavior is that the traditional earnings-based measure of 67 performance does not include the cost of equity capital. consequently, managers who focus on accounting earnings frequently understate or ignore the cost of equity capital in their decisions, since the early 1980's, this key to creating wealth, earning more than capital costs, has resurfaced as a driver of management decisions, particularly among large, publicly-traded companies. while a number ofbusiness consulting firms have developed their own systems incorporating this value-creating principle, stern, stewart & co. popularized the concept calling it economic value added (eva). focused on enhancing the value of a firm, eva-based systems are useful for setting goals, making operating, capital investing and financing decisions, assessing firm and sub-unit performance, designing incentive compensation plans, and communicating with business investors and creditors. although the best known adopters are large, publicly-tradedcompanies including coca-cola, at&t, csx, tenneco, and briggs-stratton, the eva concept is equally applicable to small, closely-held businesses. this article illustrates eva's fundamental components and its application for small, privately-held companies. we describe specific operating, investing and financing actions promoted by eva's discipline which create firm wealth. in addition, we discuss the potential limitations of adopting eva and suggest ways to overcome these weaknesses. the components of economic value added economic value added (eva) measures a company's, division's, or project's incremental change in value of its base investment over time. specifically, eva is the unit's after-tax operating profit minus its capital charges(the cost of its debt and equity capital.) the eva formula for a single period is presented below. eva = nopat (cost of capital x total capital) where nopat = net operating profit ai)er taxes, cost of capital = weighted average cost of debt and equity financing, and total capital = total cash investment in the firm, division, or project. to illustrate, assume that value add, inc. (value add hereafter) has total capital invested of $ 1 million, composed of $400,000 debt outstanding and $600,000 invested by owners. also assume that the weighted-average cost of this invested capital is 12.2%, and value add's net operating profit atter taxes, nopat, is $ 122,000. value add's eva calculation is shown below: eva = nopat (cost of capital x total capital) = $ 122,000 ( 12.2% x $ 1,000,000) = $ 122,000 $ 122,000 =$0. 68 because value add's earnings equal its capital charges, an eva of $0 results. with a return on investment just covering its cost of capital, value add's managers created no change in value or wealth for the period. nopat, eva's measure of earnings, differs from traditional accounting measures due to eva's focus on value creation. to calculate nopat, two fundamental adjustments are made to net income. first, all expenditures generating benefits for more than one period are capitalized and amortized as expenses over the multiple periods benefited. second, interest costs are removed from the income statement and reclassified as a part of the capital charge. figure i 0 i add income statement eva sales $ 1,200,000 sales $ 1,200,000 costs and expenses: costs and expenses: cost of goods sold 700,000 cost of goods sold 700,000 selling & administration 360,000 eva considers te dt 0 an selling ec administration 360,000 investmentratherthan an r&d 60 000~ expense of the period. 0 *0 4d odd * '* t * 18 000 i 180 000 i 078 000 122,000 income before taxes 50,000 capital charges: t i 8207~10 000 interest expense (net ot32,000 n a s 40 000 $8,000 tax savings) equity charge ~000 122,000 eva s 00 figure i presents value add's nopat and eva measures compared to its income statement. as discussed, two adjustments are made to value add's net income to determine nopat, eva's measure of operating performance. first, consistent with management's intent research and development(r& d) expenditures are considered an investment benefiting future 69 periods. thus, in the period of the r&d cash outlay, value add's nopat is unattected by the $50,000 expenditure. instead, for nopat measurement purposes, value add will amortize r& d expenditures over the periods benefited, rather than expensing them in the current period as required under generally accepted accounting principles. similarly, value add would capitalize and amortize marketing, employee hiring and employee training expenditures that have a recognizable future benefit over the periods benefited for nopat measurement purposes. value add's second adjustment to traditional net income reclassifies interest expense, net of $8 000 in tax savings. eva excludes all financing charges from its measure ofoperating performance, nopat. instead, the cost ofboth debt and owners'quity are captured in eva's capital charges component. by separating operating results from financing costs, value add's managers can better identify and remedy problems in new capital projects and on-going operations. in summary, to measure nopat and provide an improved operating performance measure, value add treats the period's r&d expenditures as an investment and classifies interest expense as a capital charge. while nopat reflects the results of operations, capital charges reflect the cost of financing those operations. the capital charges component of eva explicitly incorporates the cost of all capital employed, both debt and equity. value add's capital charges for the period total $ 122,000, with borrowed capital costing $32,000 and equity capital costing $90,000. with a $ 1,000,000 total capital investment, $400,000 in outstanding debt and $600,000 in equity, value add's cost of capital averages 12.2% ($ 122,000/$ 1,000,000). value add's cost of debt financing is its interest expense adjusted to reflect its tax deductibility. the income statement for value add shows $40,000 in interest expense, indicating an average before-tax cost of 10% based on $400,000 in borrowed capital. value add's 20% marginal tax rate creates a tax savings of $8,000, and results in an afler-tax cost of borrowing of $32,000. value add's equity charge is the return its owners could be getting if they put their money in an alternative investment of similar risk. over the lifetime of the company, value add's owners have invested cash totaling $600,000. value add's owners demand a 15% return on their invested capital. therefore, value add's capital charge for equity totals $90,000 (15% x $600,000). frequently, the rate of return required by owners is computed by adding a risk premium to the cost of debt. because equity capital carries greater risk than does debt, the owners'equired return is somewhat higher than the return lenders demand. value add's 15% equity cost represents a 5% risk premium added to its 10% cost of borrowing. much of the capital invested by owners is captured in conventional accounting's valuation of net assets, including the cost of land, plant and equipment, and working capital. however, value add's r&d expenditure points to another distinguishing feature of eva. consistent with management intentions, r&d is treated as a capital investment benefiting future periods. however, by classifying r&d cash outlays as an equity capital investment, 70 value add recognizes an additional equity charge, the cost of the $50,000 incremental cash investment by owners. thus, to determine the equity capital tied up in value add's operations, start with the cost of its land, plant and equipment, and working capital reported on its balance sheet. then, add the $50,000 cash invested in the rkd project. value add's total capital investment of $ 1,000,000 results. of this amount, $400,000 is provided by lenders, leaving $600,000 provided by owners. the components of eva have the advantage of resembling the conventional earnings measure. however, eva and other value creation tools modify these conventional measures to better capture the economic substance of the firm's operations. in addition, eva separates a company into three functional categories: operating, investing, and financing activities this categorization allows the drivers of value creation to be more easily identified. in the next section we describe specific wealth-creating strategies promoted by eva's discipline. creating value with eva according to eva, there are but four ways to create economic value. the first is to improve the company's operating performance. the second is to reduce the cost of capital. the third is to eliminate investments in projects earning less than their capital charges. the last is to invest in future projects that are projected to earn more than their capital charges. eva's primary virtue is that it clearly shows and measures how each strategy creates value. while the small business owner may find these suggested actions consistent with what he or she is already doing, some may provide insights into value-creating opportunities. increasin 0 eratin profits nopat the first way to create value is the most obvious. companies can create value simply by increasing operating profits, while adding no new capital. for example, a manufacturing firm may find a way to operate an existing machine more efficiently by performing routine maintenance less frequently or during idle time. or, a service firm may find that lower-cost employees provided with additional training can perform certain tasks assigned previously to more senior, higher-cost employees. increasing operating efficiencies is a strategy familiar to most small businesses. traditional financial systems support this type of value-creatingactivity. however, traditional systems that focus on enhancing periodic earnings can destroy a firm's long-term value. examples include slashing advertising or r&d expenditures to meet quarterly profit goals. eva offers the advantage of focusing management attention on long-term value creation through an improved measure of operating performance that is more closely aligned with the economic substance of a firm's operating decisions. 7l reducin the cost of ca ital value is created when a firm's capital charges decrease. the most effective means of cutting capital charges is to reduce the cost of capital. the cost of capital is composed of two parts, the after-tax cost of debt and the rate of return owners require on their investment. management approaches to reducing a firm's cost of capital can include shiiting from equity to debt financing, shrinking the cost of debt financing or slashing the cost of equity financing. most small businesses are financed initially with equity capital which is cash invested by owners. frequently, lenders are reluctant to extend credit to small, start-up companies because they are viewed as poor credit risks. however, an extended period of successful operations can "open doors" for a small business, providing access to debt financing. once debt financing becomes available, managers should consider using it in lieu of equity capital. value can be created through the use of additional debt because equity is a more costly form ofcapital. from an investor'sstandpointequity capital is a scarcer resource and it lacks a regular repayment feature. from the firm's perspective equity charges, unlike interest payments, are not deductible for tax purposes. a second means of reducing capital charges is to retire higher-cost debt and re-issue new debt at a lower cost. for example, a small business manager may be able to negotiate lower interest rates with existing lenders by demonstrating a reduction in risk once again financial statements documenting successful performance over an extended period can facilitate the bargaining effort. in negotiating reduced interest rates, small businesses need to show lenders how expenditures for rikd or employee training can be viewed as investments benefiting future periods. while conventional earnings measures expense these items as incurred, many financiers now think such discretionary expenditures enhance rather than diminish the firm's future operations and its potential for servicing its loans. keith wells, vice president of first union mortgage in richmond, virginia, states that "in evaluating loan proposals, we ask if some of the items expensed actually provide future, long-term benefits. if so, we capitalize those expenditures." eva performancemeasures aid a lender's efforts to capture the economic substance of a firm's operations by isolating expenditures that benefit future operations. eva's popularity can help the manager market this view of operating performance. in addition, if lenders perceive the company as being less risky, so too should owners. as a result, owners can lower their required rate of return, thereby trimming equity charges. a short-hand method used by many small firms to determine their cost of equity is to add approximately5% to their cost of debt (brigham, 1995). with this method, reductions in the cost of debt lead to similar reductions in the measured cost of equity capital. 72 reducin investments in pro'ects earnin less than their ca ital char es firms with substantial equity financing seldom give adequate attention to minimizing uneconomicworking capital and capital assets (birchard, 1994). by focusing management's attention on the value produced by individual capital projects, product lines or business segments, an eva system highlights the value-creating possibilities of eliminating unproductive capital investments. csx, the large railroad company, provides a well-known example of creating value through a strategy of eliminating investments with negative eva's. with the discipline provided by an eva system, csx managers determined that three locomotives could do the job where it once used four on certain routes (tufly, 1993). while slower, they still arrived in time for unloading. as a result csx was able to reduce its locomotive fleet by one-third, eliminating $70 million in under-productive invested capital. in addition, the decrease in locomotives generated a 25% savings in fuel costs. thus, csx decreased capital charges by reducing total capital and enhanced the company's cash operating earnings. another class of assets that tends to absorb the invested capital of small businesses is working capital. managers who can sustain their firm's operating performance while decreasing cash, short-term receivables, or inventory will create value for their company by eliminating unnecessary debt and equity financing and their capital charges. for instance, the establishment of an eva system enabled management at quaker oats to recognize the substantial capital costs associated with carrying sizable inventories (tully, 1993). by eliminating quarter-end sales promotions, they smoothed sales and reduced their need for huge stocks of inventory. further, by reducing inventories, the company could close tive of 15 warehouses, saving both capital costs and salaries. traditional performance measures frequently fail to show the impact of holding unproductive assets. based on conventional earnings measures, a business segment with operating profits in excess of its interest costs is viewed as "profitable." however, if the business segment's equity charges are not also covered by its operating profits, the eva system will identify the business segment as a value destroyer. eva-focused companies will sell or liquidate this unprofitable unit, and either re-deploy the cash proceeds in more profitable ventures or return the capital to the firm's owners through higher dividends or stock buybacks. likewise, small business owners can examine carefully the contribution of each asset group or segment of their businesses to determine whether the capital invested is being used effectively. increasin a ital investment in pro'ects earnin more than their ca ital char es an eva system encourages managers to invest in all value-creating projects, those for which operating profits are projected to exceed capital charges. in contrast to the strategies previously discussed, the capital investment strategy focuses on the effective management of growth rather than of existing operations. not only does it provide a structure for evaluating 73 the ongoing effectiveness of capital investments, an eva system measures effectiveness in a manner consistent with the analysis used for accepting or rejecting proposed projects. for most firms capital investments at the proposal stage are subjected to structured, discounted cash flow analyses. however, once accepted, a project is typically monitored, if monitored at all, using traditional earnings-based measures such as return-on-investment. eva attempts to correct this inconsistency between the evaluation criterion and the monitoring measure in two ways. first, eva considers all expenditures intended to benefit future periods as investments. second, eva performancemeasuresremind small business managers that the investments of owners in any project require a return. john sherwood, partner at warren, whitney and sherwood, a contract management finn in richmond, virginia,agrees that small businesses need to incorporate a return on the owners'nvestments into their investment and divestment decisions. "small businesses are not contractually obligated to compensate owners for the use of their money. as a result, equity costs are oflen ignored in business decisions. any system which considers such costs is a step forward." mechanisms to promote value creation these four strategies for creating value provide a framework for thinking about the whole firm's performance and identifying areas for improvement. however, as most small business owners will attest, conceptualizing value creation is only part of a manager's task. motivating its implementation is the other. one mechanism available to companies adopting eva systems is a restructuring of their management compensation packages to reflect the importance of creating value. for small firm owners seeking to transfer managerial responsibilitiesto non-owners, value-based compensation arrangements can be an integral part of the solution. the eva system includes an executive compensation plan that rewards managers for eva wealth creation, thereby simulating the risks and rewards of ownership (stewart, i 991: p.249). incentive plans promoting the creation of value make the ultimate payout contingent on continued, long-term success. these plans place golden handcuffs on the best performers by smoothing the annual payout for cyclical ups-and-downs. and, they provide for the potential of both unlimited bonuses and unlimited losses. stern, stewart gc co. suggest another mechanism for promoting entrepreneurial, value-creating, behavior among managers, increased debt levels. sometimes sustained prosperity, a temporary lull in competition, or stable markets can produce a sense of complacency, resulting in unfocused management and "flabby" business operations. when economic conditions worsen, these unprepared firms lose market share, are bought out, or even fail. to avoid this fate, stern, stewart & co. recommend a regular cycle of higher debt levels to put companies through the equivalent of boot camp. the discipline of servicing debt forces management to continually squeeze operating efficiencies out of the business and shed unproductive assets, focusing its attention on the remaining core businesses. 74 thus far we have presented the components of eva and four strategies for creating value encouraged by an eva-based system. because eva was not widely publicized until 1991, much of what we know has been provided by the consultants selling the system (peterson & peterson, 1996). more valuable insights can be gained from the experiences of firms adopting eva systems in the early 1990's. next. we discuss some of the limitations experienced by firms implementing eva systems, consider how these limitations apply to small businesses, and suggest some remedies small business managers may find effective. eva limitations and remedies eva's popularity is based in large part on its alleged (boston consulting group, inc., 1996) relationship with market valuation. "investors who know about eva, and know which companies are employing it, have grown rich" (tully, 1993). however, while "the theory is compelling, the evidence is abysmal" (lowenstein, 1997). yet, market value relationships should not drive the adoption decisions of closely-held, small businesses. small businesses should emphasize value creation, not valuation by an external constituency. in deciding whether to adopt an eva system, small business owners should examine the experiences of publicly-traded companies and consider the applicability of these experiences to their own firms. further, these owners should reflect on additional limitations which may be encountered by small-firm adopters and possible remedies. then, using their common sense small business owners must weigh the potential benefits and costs. finally, if convinced that adopting an eva system will increase the value of their companies, they must carefully develop plans for its implementation. for the implementation of an eva system to be successful, experience has shown that management must embrace the concept. as with any new performance measurement system, managers are likely to meet the adoption of an eva-based system with apprehension. despite all of the arguments in favor of performance metrics that reward capital productivity, many managers will continue to prefer retaining traditional, earnings-based measures. an eva system's implementation is seriously handicapped if management is not deeply committed to enhancing value and if the existing corporate culture is too rigid to accept a program that aims to affect how people behave (stern, 1994). to get managers to buy into an eva system, they must understand the system and its performancemeasures. ochsner(1995) advises adoptingcompaniesto implementan extensive education program for managers. of course, management education programs are costly. but, stewart (1995) wams'that scrimping on training is one of the main ways business people err in applying eva. one avenue for controlling training costs and facilitating understanding is to simplify the system, reducing complexity. facing substantial write-offs, valmont industries, inc., a small, mid-western manufacturer of metal structures, needed to get a firm grip on managing existing capital. in response, valmont's management adopted a bare-bones version of eva. they chose a simple performance measure, net operating profit minus a ten percent charge for invested capital. valmont found that the nature of its financial position and operations made 75 adjustments for intangibleassets, off balance sheet financing and inflation unnecessary. the impact of these adjustments on val mont's performance measure was minimal (birchard, 1996). many small businesses can alleviate the dual problems of management apprehension and added cost by adopting such a simplified system of measurement which retains eva's value-creating strengths. by employing a measure of operating performance available from its conventional income statement, valmont minimized training costs and spared itself the cost of creating two sets of books. however, before adopting a similarly simple system it is imperative that small businesses ensure that the simplifications do not sacrifice important information. ultimately, the system adopted must promote managerial attention to creating value. additionally, a simple measure of operating performance like valmont's helps focus management on the costs of using equity capital. this is paramount when working to create value. and, to measure its charges for equity capital valmont applied a straightforward, ten percent rate. while publicly-traded firms may face difficulties in estimating their cost of capital (peterson ec peterson, 1996), small business owners need only answer the question, " what expected retumdo you require on your investment?" ifconsensus is too hard to reach, brigham (1995) recommends adding approximately 5% to the firm's cost of debt. small businesses can start there and revise if deemed appropriate. the point is not to fine-tune the estimate, but to ensure that the costs associated with investments by owners are incorporated into the decisions of the business. beyond the hurdles of added implementation costs for new systems and gaining managementacceptance.small businessesmay find it unrealistic to adopt stem and stewart's suggestion to increase debt financing. many small businesses have limited sources for added borrowing, making increasedborrowingdifficultto obtain. compoundingthis problem, small businesses otten lack diversity as to products and customer base. higher debt levels magnify this operating risk. with greater variation in cash flows, some of these businesses may be subjected to unacceptable levels of risk (brigham, 1995). moreover, increased debt levels can diminish a iirm's financial tlexibility. the ability to respond quickly to investment opportunities, a competitive advantage of many small businesses, depends on having ready access to additional funds. rising debt levels magnify the difliculties of securing borrowed capital. nevertheless, small firms can overcome these constraints. instead of employing high debt levels to align the interests of managers with owners, they can introduce effective incentive compensation arrangements. or, consistent with the limited scope of their firms'perations, small business owners can control management behavior through effective oversight. finally, for the small business introducing an eva based system, some of the problems of conventional accountingsystems remain. economic profit is still subject to manipulation. and, periodic performance measures may encourage management to reject promising projects 76 due to negative, short-termimpactson eva(boston consulting group, 1996; birchard, 1996). once again active participation by owners can mitigate these problems for many small businesses. conclusion touted as today's hottest financial idea, eva commun ic ates in a straightforward manner the message that most firms can become more competitive and valuable by shiring management's perspective from profit enhancement to value creation. eva systems are grounded in the fundamental principle that value is created when operating earnings exceed the cost of rnancing those operations. accordingly, eva's performance measures take into account the cost of the money owners have provided, as well as the cost of borrowed capital. with no contractuallyspecified cash payments, many small business managers resist the idea that real costs are incurred when they employ equity capital. by restructuring management compensation plans, eva systems encourage managers to consider the total cost of their operations'capital when making operating, investing and financing decisions. eva systems direct managers to create value. however, eva is no panacea. while the fundamental concepts are broadly accepted, successful eva system implementations have been limited generally to publicly-traded companies with substantial resources. in addition, some of the problems of conventional systems remain. bearing in mind the competitive importanceof fostering a concern for capital efficiency among managers, small businesses should examine the experiences of eva adopters, and tailor any implementation of value-based measurement systems to their unique business settings. 77 references birchard, b. (1994). mastering the new metrics. cfo: the magazine for senior financial executives, 10 (10), 30-38. birchard, b. (1996). how valmont industries implemented eva. cfo the magazine for senior financial executives, 12 (3), 34-40. boston consulting group, inc. (1996, october). shareholder value management. brigham, e. (1995). fundamentals of financial management, 7a edition. fort worth, tx: dryden press. lowenstein, r. (1997, february 13). testing the latest economic elixir. the ivall street journal, c l. ochsner, r. c. (1995, march/april). welcome to the new world of economic value added. compensation &k benefits review, 30-32. peterson, p. p. & peterson, d. r. (1996). company performance and measures of value added. charlottesville,va: researchfoundationofthe lnstituteofcharteredfinancial analysts. stem, j. (1994, march). no incentive for bad management. corporate finance, 43-44. stewart, g.b., iii (1991). the ques/for value. harper collins publishers, lnc. stewart g b.,iii (1995).eva works but not if you make these common mistakes. fortune, 117-118. tully, s.(1993,september 20). the real key to creating wealth. fortune, 38-50. 78 preparing idecision useful financial reports: a challenge for small businesses* larry g. singleton the george washington university bruce swindle mcneese state university abstract small business owners and managers want financial reports which are useful for their own decision-making purposes as well as for fairly presenting their business to others. accountants and auditors consistently state that financial reports are the product of management. these statements being true, small business administrators should know whnt constitutes fair and useful financial presentation and how to achieve those characteristics. accounting offers many alternatives for the treatment of financial events (e.g., fifo/ufo; straight-line/declining balance). alternatives are available in order to allow management most fairly and most usefully to present its financial reports. the characteristics which contribute to the decision usefulness of accounting information has been provided by the financial accounting standards board (fasb). and the fasb expects these characteristics to be considered in all financial statement preparations. however, the fash has given no guidance for the consideration of the characteristics. this paper offers small business administrators a rational process for systematicajly·choosing between accounting alternative methods. the procedure is easy to understand and simple to execute. ft incorporates and utilizes the characteristics which the fl\sb states contribute to the decision usefulness of accounting information. accountants and auditors consistently state that financial staten1ents are the product of management and that an organization's management is responsible for its financial statements' contents. this being true, small business managers should know what they are doing and how they are presenting the business to others. management also wants financial reports which are useful for its own decision making purposes. in the preparation of financial statements, accountants routinely face choices among accounting alternatives. accounting for inventory costs (afo, lifo, etc.) and accounting for depreciation *recipient of second place in the distinguished paper. awards, presented at the 1992 national sbida cr,nference in washington. d.c. it was not reviewed by the jsbs editorial advisory board. 59 (straight line, declining. balance, etc.) are two classic examples of this dilemma. not only are accountants faced with choices such as these but also on occasion they must decide on the most appropriate treatment for a transaction or economic event for which no specific standard currently exists. during the 1970's the accounting profession wrestled with the concept of a framework for decision making and quality financial reporting. this process was referred to as the "conceptual framework project." accounting literature was filled with articles and discussions about these issues (langenderfer, 1973; norby. 1977, 1978). out of this project came the statement of financial accounting concepts (sfac) no. 2, "qualitative characteristics of accounting information" as well as other concept statements. concept no. 2 states: accounting choices arc rnadc at two levels at lcasl. at one level they arc rnade by the board or other agencies that have the power to require business enterprises to report in some particular way ... (fasb. 1980). sfac no. 2 further states: accounting choices arc also 1nadc at 1hc level of the individual cnterprisc ... thcrc are now and will always be 1nany accounting decisions to be n1adc by reporting enterprises involving a choice between alternatives for which no standard has been promulgnted ... (fasb. 1980). in the early 1980's the accounting literature appeared to center on the conceptual framework project's accomplishments and speculation about the future of such tasks (miller, 1985; puxty & laughlin, 1983; mccaslin & stanga, 1983; pacter, 1983: lowenberg. 1983; sterling. 1982). recently articles have used the sfacs to evaluate accounting standards promulgated by the fasb (daley & tronter, 1990; tyson & jacobs, 1987; foran & foran, 1987). however. the appearance in accounting literature is that little, if any, guidance has been provided to the preparer of financial reports (i.e., management) in selecting accounting treatment for a fair presentation of the data. this paper offers small business 1nanagcmcnt and its accountants a rational process for systematically choosing between alternative rnethods. the procedure incorporates and utilizes the characteristics which contribute to the decision usefulness of accounting infonnation. these characteristics are provided by the financial accounting standards board (fasb, the accounting i"ule-making body) in its statement of financial accountinx concepts no. 2 (sfac no. 2). how accounting choices are made historically, accounting alternatives have been allowed so individual businesses could present their.activities in the fairest manner. if ,only one method of accounting for an economic event had been permitted, the essence of the event could be lost. additionally, companies are often faced with transactions for which the standard setting bodies have yet to promulgate standards. how does management select the most appropriate accounting method and how do cpas guide their clients in maki~g these choices? one approach is an ahalysis of the particular organization's operations. 60 table i. glossary of terms (fash. 1980) con1parability consistency feedback value neutrality predictive value relevance reliability representational faithfulness timeliness verifiability the quality of infonnation that enables users to identify similarities in and differences between two sets of economic phenon1ena. confonnity from period to period with unchanging policies and procedures. the quality of infonnation that enables use~ to confinn or correct prior expectations. absence in reported information of bias-intended to attain a predeter111incd result or to induce a particular mode of behavior. the quality of information that helps users to increase the likelihood of correctly forecasting the outcon1c of past or present events. the capacity of information to make a difference in a decision by helping users to form predictions about the outcomes of past, present. and future events or to confirm or correct prior expectations. the quality of information that assures that information is reasonably free from error and bias and faithfully represents what it purpons to represent. correspondence or agreement between a measure or description and the phenomenon that it purpons to represent (sometimes called validity). having information available to a decision 1naker before it loses its capacity to influence decisions. the ability through consensus among measures to ensure that information represents what it purports to represent or that the chosen method of measurement has been used without error or bias. simplicity of the accounting method's calculations and the procedure used for tax purposes are two other approaches. an analysis of the organization's o~rations (the former) may appear ideal, but that process could result in little financial statement benefit for the cost of a valid effon. the management of a small business organization could be more confident about the fairness of the presentation of its choices if a guide was available to help choose an accounting method. this guide should incorporate the characteristics that make accounting information useful. the characteristics that make accqllnting information useful the fasb 's sfac no. 2, "qualitative characteristics of accounting information," sets forth the characterislics which make accounting information useful. these characteristics are comparability, feedback value, neutrality, predictive value, relevance, reliability, representational faithful. 61 figure i. a partial display of statement no. 2's hierachy of accounting qualities (fasb), 1980). predictive value relevance feedback value decision usefulness timeliness verifiability compllrabi 1 ity (including consistency) reliability ne.utrality representational faithfulness ness, timeliness, and' verifiability. these characteristics are expressed in a hierarchy, the goal being usefulness for decision-making. contributing to decision usefulness are the two primary decisionspecific qualities--relevance and reliability. table i is a glossary of tenns prepared by the fasb and used in its hierarchy. a ponion of the statement's "hierarchy of accounting. qualities" is shown in figure i. relevance refers to the infonnation's ability to make a difference in a decision-making context. the qualities which make accounting infonnation relevant are feedback value, predictive value, and timeliness. reliability is the quality which assures that the infonnation presented is reasonably free from error and bias. accounting infonnation is reliable to the extent that it can ~ depended on to represent the economic events and conditions that it intends to represent. the qualities that make accounting infonnation reliable are neutrality, representational faithfulness, and verifiability. also included in the hierarchy is the quality of comparability (including consistency). comparability is not a quality in the same sense as relevance and reliability. rather, comparability is a quality of the relationship between two or more pieces of information. the decision usefulness of accounting information is greatly enhanced if that information can be compared with similar information about the same enterprise for a different period or point in time. comparability interacts with relevance and reliability. the nine qualitative characteristics just discussed are the qualities which, according to sfac no. 2, contribute to the decision usefulness of accounting information. these qualities can be used to r~te alternative accounting method treatments. in order to obtain the choice of accounting method which contributes the most to decision usefulness, the qualitative characteristics can be used in a ranking process. such a procedure is easy to use, may be perfonned quickly, and should accomplish the goals of sfac no. 2. 62 figure 2. a form for choosing between alternative accounting methods. using the seven-point scale, indicate which accounting method alternative contains more of the stated qualitative characteristic. alternative 1 alternative 2 i i i i i i 1 2 3 4 5 6 does not more much much more more distinguish between methods comparability feedback value neutrality predictive value relevance reliability representational faithfulness timeliness verifiability sum average rating score 9 a score between 1 and 4 indicates a preference for alternative 1. a score between 4 and 7 indicates a preference for alternative 2. a score of 4 indicates no preference: procedure for choosing between accounting alternatives i 7 more the procedure described here enables two accounting method alternatives to be compared simultaneously. the goal of this procedure is to help the small business manager choose the accounting method which contributes the most to decision usefulness. that method, according to the fasb, is the method which contains the greatest number of the qualitative characteristics. assume, for example, that a small business's accounting staff is trying to choose between the afo and lifo inventory cost methods. management would want to choose the method which contained more relevance, reliability and neutrality. the chosen alternative would be the one which, on the whole, contained the most of these qualitative characteristics. figure 2 illustrates a fonn which may be used to implement this procedure. using a seven point scale, management evaluates the accounting methods by deciding which method contains more of the stated qualitative characteristic. a rating of 1, 2, or 3 would indicate a belief by the rater 63 figure j. an example of the procedure. using the seven-point scale, indicate which accounting method alternative contains more of the stated qualitative characteristic. fifo lifo alternative 1 alternative 2 i i i i i i 1 2 3 4 5 6 i 7 does not more much more much more comparability feedback value neutrality predictive value relevance reliability more distinguish between methods representational faithfulness timeliness verifiability sum + average rating score 6 4 4 7 3 5 5 4 4 39 9 4. 67 a score between 1 and 4 indicates a preference for alternative 1. a score between 4 and 7 indicates a preference for alternative 2. a score of 4 indicates no preference. that alternative i contains more of the stated qualitative characteristic than does alternative 2. similarly, a rating of 5. 6, or 7 would indicate a belief thal altemalive 2 contains more of !he stated qualitative characteristic. a rating of"4" would indicate that the stated qualitative characteristic does not distinguish between the accounting methods being evaluated. this rating procedure would be done nine times. once for each of the qualitative characteristics. these ratings are then summed, and the sum is divided by nine to obtain an average rating or score, which indicates management's accounting method preference. this score represenls the accounting method !hat, in !he rater's judgment, contains the greatest number of !he characteristics 1ha1 make accounting information useful. a score less than 4 indicates a preference for alternative i. a score greater lhan 4 indicates a preference for altemalive 2. a score of exactly 4 indicales that neither accounting method alternative contributes more than !he other 10 decision usefulness. 64 figure 3 provides a complete example of this procedure. assume a small business organization's accounting staff is trying to decide whether inventories should be accounted for with fifo or lifo. jn this example fifo is designated as alternative i and lifo as alternative 2. the 6 shown next to comparability indicates that the rater believes that lifo provides infonnation that is more comparable than docs fifo. the 4 next to feedback value indicates that the feedback value does not distinguish between the two 1ncthods. the other ratings arc interpreted in a similar fashion. the sum of these ratings is then calculated and divided by nine, the number of qualitative characteristics, to obtain a score of 4.67. since this score is greater than 4, this 1neans that the rater believes that lifo provides information that is more useful than that provided by fifo. this example assumed that management was interested in choosing between only two accounting methods. however, this procedure may also be used in decision contexts where more than two accounting methods are under consideration. the procedure is simply perfonned more than once. for example, assume that, in addition to comparing fifo with lifo, the weighted average method is to be considered. a comparison is first made for fifo and lifo. the recommended alternative from that comparison is then compared against the weighted average method. the procedure illustrated here makes an accounting method decision by assigning equal weights to each of the qualitative characteristics. should management not agree with the equal weights given the qualitative characteristics in this example, different weights could be assigned by the rater. concluding statements the primary reason for accounting alternatives is for individual organizations to provide fair, decision-useful financial infonnation. therefore, careful, conscientious consideration should be given to the alternative decision making process. the fasb did not provide a quantitative method for choosing between accounting methods when it issued sfac no. 2. the fasb does, however, expect the qualitative characteristics to be useful when making such choices. the procedure described here incorporate~ the characteristics espoused by the fasb and also is relatively easy to use. decision usefulness is, however, in "the eye of the user," and the small business manager should know how to generate the financial infonnation which is fair in its presentation and useful for decision making. references daley. l.a .. & tronter. t. (1990, march). limitations on the value of the conceptual framework in evaluating extant accounting standards. accounting horizons, 4 (i), 15-20. financial accounting standards board. (1980). qualitative characteristics of accounting information: statement of financial accounting concepts no. 2. stamford, ct: author. foran. n.j., & foran, m.f. (1987. december). sfas 12 and the conceptual framework. accounting horizons. i. (4). 43-50. langenderfer. h. (1973. july). conceptual framework for financial reporting. journal of accountancy, 58-65. lowenberg, i. (1983, july). the conceptual framework. journal of accountancy, 99-100. mccaslin, t.e., & stanga, k.g. (winter, 1983). related qualities of useful accounting information. accounting and business research, 12 (4), 66-78. 65 miller, p.b. w. (march, 1985). the conceptual framework: myths and realities. journal of accountancy, 35-43. norby, w.c. (september, 1971 march, 1978). conceptual framework for financial accounting and reporting. financial analysts' journal, 33 (5), 18-20. 34 (2), 22-23. pacter, p.a. (july, 1983). the conceptual framework: make no mystique about it. journal of accountancy, 76-88. puxty, a.g. & laughlin, r.c. (winter, 1983). a rational reconstruction of the decision-usefulness criterion. journal of business finance and accounting, 14 (4), 88-96. sterling, r.r. (november, 1982). the conceptual framework: an assessment, journal of accountancy, 103-108. tyson, t.n. & jacobs, f.a. (decem!jer, 1987). segment reporting in the banking industry: does it meet the criteria of the conceptual framework? accounting horizons, i (4), 35-41. 66 stra tegy classification as a factor in the scientific evolution of entrepreneurship minet schindehutte miami university sebi ndm imuohi o.edu michael h. morris miami university m arri sm 3@muohi o.edu donald f. kuratko ball state university dkuratkogw. bsu. edu abstract taxonomy, or the establishment of meaningful classi/ication schemes, is examined as a major stage in the development of disciplines. the role of classification in the advancement of entrepreneurship is established. approaches to developing classification schemes, and criteria for assessing them, are discussed. key classification schemes in five different areas within entrepreneurship are evaluated. shortcomings are noted, and priorities are established for taxonomic development. a framework is proposed for developing an integrative classification for the discipline of entrepreneurship. introduction knowledge about entrepreneurship is growing. arguably, entrepreneurship is the fastest growth area not only in business schools, but in academe, today (katz, 1999; timmons, 1999; vesper k. gartner, 1999). over 500 colleges and universities offer courses in entrepreneurship, and at least 100 offer minors, concentrations or majors in the area. programs exist at the undergraduate, mba and ph.d. levels, and better than half of those having programs focus on both the graduate and undergraduate education. the number of endowed professorships in entrepreneurship now exceeds 170. at least 40 academic journals have an editorial focus that is entrepreneurship-related, and a number of others regularly feature articles on entrepreneurship topics. globally, more than twenty major academic research conferences devoted exclusively to entrepreneurship are organized each year. while the size and scope of the field is apparent, the extent to which entrepreneurship has matured as a scientific discipline remains subject to question. despite the growing volume of research in the field, there still remains the quest for cohesive theory building. amit, glosten and muller (1993, p. 815) explain; "why do some new ventures succeed while others fail? what is the essence of entrepreneurship? who is most likely to become a successful i jottrnal of small business strategy vol. l l, rvo.2 fall&'inter 2000 entrepreneur and why? how do entrepreneurs make decisions? what market, regulatory and organizational environments foster the most successful entrepreneurial activities? entrepreneurship research is plagued by these and other fundamental, unanswered questions, for which there does not exist a cohesive explanatory, predictive, or normative theory". in a related vein. ratnatunga and romano (1997) conducted an analysis of 725 articles, and 16,720 of the literature citations within these articles, in six leading entrepreneurship journals during the 1986-1992 time frame. although able to identify the main topical areas of research, they characterized the entrepreneurship field in terms of a "garbage can model", where these topical areas reflect a loose collection of ideas rather than a coherent structure with a shared intellectual paradigm. many isolated facts have been uncovered, but few principles or generalizations have been produced. one of the clear signs of development within any area of study is the classification of the phenomena of interest. the design and general acceptance of taxonomies, or classification schemes, is fundamental to the advancement of a discipline. they are the primary means for organizing phenomena into groups or categories that lend themselves to systematic investigation and theory development (hunt, 1991). more fundamentally, classification brings order to a complex and diverse set of objects (e.g., people, products, organizations, activities, situations) by grouping them in a logical and meaningful manner. a number of classification schemes exist within entrepreneurship. efforts have been made to classify types of entrepreneurs, types of ventures, forms of financing, forces that produce entrepreneurial events, stages in venture evolution, and activities in the entrepreneurial process, among others. at the same time, a thorough analysis of these typologies and the surrounding literature failed to uncover any systematic identification and critique of classification schemes within the discipline. the purpose of this paper is to assess the progress to date in terms of classification within entrepreneurship, and the extent to which taxonomies are contributing to the advancement of theory-building and the general development of the field. theory in entrepreneurship: where are we? entrepreneurship remains a young discipline. arguably, one has to distinguish its development within the field of economics from its development in business schools. these two paths of progress have rarely converged, and neither has made much contribution to the furtherance of the other. in economics, the treatment of entrepreneurship extends to the early 19w century. yet, entrepreneurial behavior represents a dynamic that fundamentally challenges the very precepts of most economic theory. as a result, it is not surprising that the theoretical contributions of economics over two hundred years are relatively paltry (hebert & link, 1988; baumol, 1996). quite separately, entrepreneurship has developed as a business discipline by borrowing, building upon, and adapting theoretical and conceptual work from other fields. it is as a business discipline that the vast majority of published re'search in entrepreneurship has originated, almost all of it in the second half of the twentieth century. bull and thomas (1993, p. 181) note, "it is appropriate that any discipline, whether embryonic or mature, should take stock of its theoretical progress once in a while —and entrepreneurship is no exception." interest in the nature of theory in entrepreneurship, as opposed to the nature of entrepreneurship, really began to develop in the 1990's. a major theory-building conference was held in 1991 at the university of illinois, where scholars convened to discuss the field of entrepreneurship (see bull & thomas, 1993). since then, the growth in published research has been nothing short of dramatic. academic papers relating to entrepreneurship from fields such as anthropology, economics, engineering, finance, history, marketing, organizational behavior, psychology, and sociology have appeared in at least 50 2 journal ofsmall business strategy vol. l l, no,2 fallltyinter 2000 separate academic journals. and yet, the majority of what continues to be published is neither explicitly positioned within a particular theoretical paradigm, nor does it propose new theory or advancements in existing theory (macmillan & katz, 1993; ratnatunga & romano, 1997; vesper & gartner, 1997). is there theory in entrepreneurship? the answer is clearly "yes", but with some caveats. while research methodology has progressed from empirical surveys of entrepreneurs toward more contextual and process-oriented research, progress in establishing a theory base has clearly lagged (amit, glosten & muller, 1993; shane & venkataraman, 2000). similarly, there has been no emergence of a generally accepted theory of entrepreneurship. a theory of entrepreneurship is defined as a verifiable and logically coherent formulation of relationships, or underlying principles, that either explain entrepreneurship, predict entrepreneurial activity (e.g. characterize conditions that are likely to lead to new profit opportunities and to the formation of new enterprises), or provide normative guidance (i.e. prescribe the right action in particular circumstances). at the same time, hundreds of pieces of entrepreneurship research exist with potential theoretical significance or having an implicit or explicit theoretical foundation. in practice, these theory pieces stand independently, isolated from other pieces of theory and from other disciplines (kuratko & hornsby, 1996). what is now needed is for researchers to begin to forge intellectual alliances with compatible theory pieces outside their own narrow interests, so that more comprehensive and more realistic theories of entrepreneurship can emerge. only when isolated theoretical pieces can be fitted into competing theory sets will we be able to make strides toward the identification of superior ways of understanding the complex process of entrepreneurship (macmillan & katz, 1992, venkataraman, 1997). inadequate theoretical progress undermines the discipline itself. there are at least five ways in which entrepreneurship as a discipline is adversely affected: ~ we fail to reach closure on the fundamental definitions, phenomena of interest, units of analysis, and disciplinary boundaries in the field of entrepreneurship, leading to a state of confusion, incoherence and frustration; ~ lt is difficult to establish the priorities in terms of the major research questions that require attention, or a logical order and agenda for addressing these questions; ~ research is published without establishing sound theoretical underpinnings, making it more difficult not only to judge the contribution of the research, but also to establish its relationship to other research; ~ because much published research is not part of a clear theoretical stream in which standards for rigor are established and evolve over time, there is inconsistency in the level of rigor applied to the development of hypotheses, the construction of research designs, and the selection of analytical approaches; ~ the lack of theoretical progress is directly responsible for our limited ability to explain and predict developments in entrepreneurial practice. classification as part of the evolution of a discipline disciplines evolve in differing ways and at dilfering rates. although it is not clear if there are any consistent patterns in evolution across disciplines, stages of development can be identified within a given discipline. for instance, bartels (1970) discusses an evolution within the field of marketing through periods of discovery, conceptualization, integration, development, reappraisal, and reconceptualization. as disciplines evolve, agreement is reached regarding the subject matter of interest. the relevant phenomena are described and classifications are produced. attempts are made to discover underlying uniformities or patterns among the 3 journal of small business strategy vol. ll, no.2 fall/)yinrer 2000 phenomena which comprise the subject matter. empirical regularities are established and generalizations are made. from these generalizations emerge laws, principles and theories, which are subject to ongoing validation, enhancement and modification. new theories emerge, some of which are competing, and existing theories are occasionally degraded or abandoned. similarly, paradigms, or traditions of scientific research consisting of laws, theories, applications, and instrumentation, emerge and are periodically displaced by new paradigms (kuhn, 1970). the discussion above suggests that an important step in disciplinary evolution is the achievement of some consensus regarding how the various phenomena of interest should be categorized or grouped (doty & g lick, 1994). classification plays an especially instrumental role in the early stages of a discipline. as a case in point, carolus linnaeus, the father of the classification of plants and animals, published his system in 1735, and it is still universally used today with relatively minor modifications. the importance of classification in most fields of study can be seen both in the amount of effort devoted to generating schemes and the amount of subsequent work that is based upon those schemes. a diversity of modern examples illustrates this point, ranging from bloom's taxonomy of levels of intellectual behavior (1956) to flynn's classification of parallel machines (1984) to the classification of concepts in consumer education developed by bannister and monsma (1980). classification is, of course, an ongoing activity within a discipline, where certain schemes are improved, others are abandoned, and still others are introduced. the study of the general principles of scientific classification is called taxonomy. it serves a number of purposes. classification enables researchers to reduce the vast number of possibilities regarding some phenomenon in the natural world to proportions that can be intelligently grasped and manipulated. specifically, the researcher is attempting to partition some universe of objects, activities or other phenomena into categories or sets that are homogeneous with regard to selected categorical properties. blalock (1969) refers to this process as a reduction of what he calls a "property space". by reducing diversity, researchers can identify patterns in complex phenomena. classification enables the researcher to know which units of analysis to include or exclude in a particular study or analysis. moreover, without a shared view of the domain of some phenomena and the conceptual architecture of a hierarchy, researchers will classify concepts according to their own viewpoint, and it becomes difficult to cross-validate findings of different studies. because a taxonomy is designed around major diiterences among categories of some phenomenon (and similarities within), the intluence of confounding factors in one' research is reduced, allowing the researcher to more clearly identify relationships. relationships can be found in relevant sub-groups that are not present in larger, pooled samples. also, a taxonomy that specifies relationships among categories enables prediction of the categories to which the findings of a particular study can be generalized. in the process of clarifying overall and sub-group relationships, the ability to build theory is enhanced. in a related vein, a classification scheme can lend itself to the generation of propositions and hypotheses, and is an important step in the establishment of scientific laws. finally, classification can help improve the teaching of entrepreneurship. schemes can serve as useful pedagogical frameworks for breaking down a complex phenomenon into broad sub-categories that then allow the instructor to explore the complex nuances of a given category. little attention has been devoted to the state of classification in entrepreneurship, further, the contributions of effective classification have not been realized in the field of entrepreneurship, as it is diiticult to identify any generally accepted classification scheme (shane ec venkataraman, 2000). take, as an example, the classification of types of entrepreneurs. while various writers have noted the existence of two dominant categories, namely craftsmen 4 journal of small business strategy vol. l l, ttto.2 fall/winter 2000 and opportunists, woo, et al., (1991) have provided evidence that raises serious questions regarding the applicability of this distinction to the general population of entrepreneurs. as a result, while the entrepreneur is clearly an important phenomenon within entrepreneurship, the inability to properly establish categories of entrepreneurs holds back the advancement of the discipline. research gets conducted on broad samples of entrepreneurs (e.g., on their psychological traits, attitudes, and behaviors) and attempts are made to identify patterns or relationships without a clear sense of how the subjects should be grouped. relationships in relevant sub-groups are missed because of the focus on broader pools. different researchers examine sub-groupings of their own choosing. findings of studies cannot be generalized to a given group or category of entrepreneur. in the final analysis, our explanatory and predictive abilities when it comes to entrepreneurs are severely limited. approaches & criteria for effective phenomena classification classification can be approached deductively or inductively. the deductive approach, sometimes referred to as 'logical partitioning', involves a priori determination of categories (hunt, 1991). the researcher first specifies the phenomena to be categorized, then determines the properties or characteristics (and combinations thereof) to be used to define groups or categories, then labels the categories, and only then attempts to analyze actual data using the schema. the categories that are produced via logical partitioning are most often defined by one or only a few properties or characteristics. further, while the schemes produced with the deductive approach can exist at a single level (e.g., classifying entrepreneurs as either craasmen or opportunists), this method also facilitates the generation of multi-level schemes (e.g., classifying entrepreneurial activities first as either being independent or corporate, and then further classifying the corporate activities as initiating new businesses versus transforming/renewing the existing business). deductive classification can also produce cells or categories in which no cases currently exist, raising the possibility of future discovery. with the inductive or empirical approach, which is also called 'grouping', the researcher does not impose the categories (hunt, 1991). rather, he/she starts with data, from which the classification system is derived. typically, a statistical method such as factor analysis, cluster analysis or multidimensional scaling is used to generate the categories. not only does the researcher need less a priori knowledge regarding the relevance of various properties in defining categories, but the statistical tools employed allow for the consideration of large numbers of properties or characteristics in defining categories. the resultant schemes are most oaen single-level. a related distinction is drawn between special and general classifications (mckelvey, 1982, woo, et al., 1991). in the former instance, categories are defined by a small number of attributes that rellect the primary interest of the researcher. an example would be the growth orientation of the individual as a factor in classifying entrepreneurs, where the researcher is specifically interested in how growth orientation may account for differences in other variables, such as educational background or failure rates. with general classifications, a more comprehensive set of attributes is employed, and the researcher is attempting to identify generic types that reflect the underlying population. classification in entrepreneurship has tended to be deductive, in part reflecting the lack of sophistication in research methodologies found in much of the research. an exception is the work of woo, cooper, and dunkleberg (1991), in which they empirically produce a number of different classifications of entrepreneurs, principally to demonstrate the inadequacies of the craasman-opportunist distinction. classification efforts also tend to rely on relatively few attributes or characteristics to define categories and to focus on single-level rather than hierarchical schemes. in addition, approaches in entrepreneurship tend to assume that 5 journal ofsmall business strategy vol. /l, no.2 fall/)yinrer 2000 members of a given category must share all of the characteristics that describe that category, rather than having niany but not necessarily all of the characteristics in common. this may again be related to the reliance on one or relatively few variables when defining categories. apart from the methodology employed, many different kinds of classification are possible for virtually any phenomenon. thus, entrepreneurial ventures can be classified based on growth orientation, innovativeness, technological sophistication, the reasons for which they were started, the form of ownership, and a large number of other criteria. the issue becomes one of determining what is a "good" classification scheme. some useful criteria for evaluating alternative classification schemes include the following (dickinson, 1986; woo, et al., 1991): ~ adequate specification of the phenomenon to be classified; ~ adequate specification of the properties or characteristics on which the classes will be defined, and the selection of properties that explain similarities and differences between gl'oops: ~ mutually exclusive categories; ~ collectively exhaustive categories; ~ meaningfulness, or informativeness of the scheme; ~ applicability of the scheme as the phenomenon of interest evolves over time. the nature of these criteria again makes it clear why classification in entrepreneurship has not advanced all that far. consider the classification of types of entrepreneurial ventures. while the phenomenon to be classified might seem obvious, what constitutes a venture is not necessarily apparent. are there general parameters that should be applied in terms of when something becomes a venture (e.g., formal registration of the business, first sale, established premises), how large the organization can be, or the age of the venture? determination of the properties that define the classes or categories of ventures is especially problematic. any number of the thousands of variables that characterize a venture may be significant, depending on the purpose of the classification effort. thus, while the small business administration relies on classification based on size for public policy purposes, a scheme based on technology, labor intensity, what is being sold, and market potential might be relevant for explaining or predicting resource requirements, operational problems encountered, or performance. alternatively, it is possible to find different categories of ventures defined by different sets of variables. mutual exclusivity for organizations is a separate challenge, especially when moving beyond a single classificatory variable. thus, growth orientation as a single variable might be used to distinguish lifestyle businesses from rapid growth (or 'gazelle') businesses. however, mutual exclusivity becomes d(aicult as additional variables are introduced. a rapid growth business is often not a high-tech business, may not be a high-risk business, and may be family or non-family controlled. the collectively exhaustive criterion also tends to encourage a reliance on fewer and simpler variables in classification efforts. growth orientation represents a case in point. even with growth, one must be careful, in that there is a need to ensure the scheme is based on the correct measure of growth (e.g., growth in assets, employment, revenues, or profits), while also recognizing that the categories may need to allow for negative growth, zero growth, and different rates of positive growth in order to capture all firms. the meaningfulness of the scheme raises an additional set of concerns. for example, to what extent does a distinction between microenterprises and small businesses help us to formulate theory or derive law-like generalizations about the phenomenon of entrepreneurship? alternatively, does this distinction aid the practicing entrepreneur or the investor in some way? does it provide guidance to the public policy-maker? the answer to all of these questions is that the distinction could conceivable make contributions in these areas, but only if empirical research 6 journal ofsmall business strategy vol. /l, ivo.2 fall/winter 2000 efforts are predicated on the distinction, allowing researchers to test hypotheses regarding dilterences in needs, requirements, problems encountered, common errors, strategic and operational approaches and performance outcomes between microenterprises and small businesses. assessing ways phenomena are classified in entrepreneurship while little consensus has emerged around virtually any form of classification in entrepreneurship, there are actually a number of different classification schemes to be found in the literature. classification efforts have been applied to entrepreneurs, ventures, venture strategies, and a variety of other phenomena. in an attempt to evaluate progress to date, the discussion below considers efforts at classification in five areas. rather than listing out every scheme that has been proposed or implied in these five areas, a representative range of schemes has been identified. beginning with the entrepreneur, classification is critical, in that it moves the field away from the narrow historical use of trait theory. roughly forty years of research on psychological traits and sociological descriptors has produced a tendency to think in terms of a standard prototype of the entrepreneur (e.g., individualistic, achievement motivated, calculated risktaker, tolerant of ambiguity, with an internal locus of control). alternatively, classification implies that there are multiple types of entrepreneurs, some of whom may not be strong on all of the traits traditionally associated with the entrepreneur. thus, miner's (1996) scheme allows for 'expert idea generators'ho are more risk averse, and 'real managers'ho have a more positive attitude towards authority. unfortunately, in this particular instance, the scheme uses different properties to define the various categories. table i summarizes a number of the classifications of entrepreneurs proposed to date. these schemes have primarily involved deductive classification, although some of the later studies employed an inductive methodology. most prevalent among these is the crattsman/opportunist dichotomy, although some have noted that these two categories represent end-points, between which we must allow for an intermediate category. the underlying characteristics used to define these categories have included the entrepreneur's goals, attitudes, motivations, background, and management style. ironically, many of the psychological traits emphasized in the literature on entrepreneurs are ignored in this classification. woo, et al. (1991) demonstrate that the same entrepreneur can be grouped as a craitsman or as an opportunist depending on which underlying characteristics are emphasized, and that the ability of the scheme to differentiate becomes more problematic as the number of characteristics is expanded. their work raises serious questions as to the robustness of the schema, and whether it truly represents the population of entrepreneurs. thus, it should not be surprising that there has been no general acceptance among scholars of a categorization of entrepreneurs. the distinction between craftsmen and opportunists is not a major factor guiding contemporary research agendas, and in fact is ignored in most of the research addressing aspects of the entrepreneur. while classification should serve to reduce the vast number of possibilities regarding entrepreneurs to more manageable proportions, it would appear that the research has moved too far in the direction of over-simplification. our inability to identify theoretically or managerially meaningful patterns among groups of entrepreneurs suggests a need for schemas that allow for more diversity, and produce polythetic classes. an example is the work of miner (1996), who emphasizes both trait theory and the entrepreneur's operational approach (e.g., salesmanship and networking versus innovating) to produce four categories of entrepreneurs. 7 journal ofsmul/ business stra/egv vol. 1 i, //o.2 fa///ifi nrer 2000 table i: classifications of entrepreneurs smith (1967); smith & craftsmen/opportunists miner (1983) braden (1977) caretakers/ managers kets de vries (1977) addition of r&d-inventor-technical entrepreneur webster (1977) cantillon/ industry-maker/ administrative/small business owner-operator/ independent dunkelberg & cooper craftsmen/ independent/ growth (1982) stewart, watson, carland small business owners/ entrepreneurs & carland (1999) lafuente & salas (1989) craftsmen/ managerial/ security/ family/ risk vesper (1990) solo self-employed/ team builders/independent innovators/ pattern multipliers/ economy of scale exploiters/ acquirers/ buy-sell artists/ conglomerators/ apparent value manipulators kao (1991) creative-charismatic/ conventional miner (2000) personal achievers/ super salespeople/ real managers/ expert idea generators classification efforts directed at entrepreneurial ventures have also wrought a number of schemes, but with perhaps more convergence. vesper (1990) discusses classification based on growth level, capitalization level, industrial sector, technological type and degree of innovation. however, as illustrated in table 2, the prevalent schemes focus almost exclusively on the growth propensity and personal objectives of the entrepreneur, and the realized or potential growth rate of the venture. table 2: classifications of entrepreneurial ventures webster (1977) large payoff-many principals/ small payoff-few principals/ large payoff-few principals filley & aldag (1978) craft firm/ promotion firm/ administrative cooper & dunkelberg (1981) industry sector: retail, construction, manufacturing, mining, professional, financial, wholesale, service, agricultural carland, hoy, boulton, & low growth/ growth/ very high growth carland (1984) u.s. small business microenterprise/ small business/ medium-sized business/ administration (1996) large business ronstadt (1984) lifestyle/ small-profitable/ high growth carland &. carland (1998) small business/ entrepreneurial firm vesper (1990) low-pay, stably small/ high-pay, stably small/ highgrowth sexton & bowman-upton marginal/lifestyle/successful/high growth (1991) roberts (1991) high tech/ non-high tech kunkel (1996) independent/ corporate hisrich & peters (1998) lifestyle/ foundation/ high potential-gazelle 8 journal of small business strategy vo/. /i, iuo.2 fait/lyinter 2000 other schemes exist, such as characterizing firms in terms of dominant strategy (e.g., prospectors, analyzers, reactors, defenders), but these approaches are not unique to entrepreneurial ventures. moreover, they are better examples of the earlier-noted 'special's opposed to 'general'lassifications. the more prevalent general approaches tend towards a three-category distinction, including the marginal enterprise, the small and reasonably profitable firm, and the rapid-growth company. implicit in and consistent with these distinctions, is the crarsman/opportunist categorization of entrepreneurs discussed above. of all attempts at classification in entrepreneurship, this growth-based categorization of ventures is perhaps the most widely accepted. it meets the basic criteria for classification relatively well. however, its popularity may principally be due to empirical evidence of significant differences on key performance variables (e.g., job creation, inventions, financial performance) across the three types. yet, while the fact that rapid growth firms (gazelles) contribute disproportionately to economic growth is noteworthy, the real theoretical and practical value of this scheme can be realized only if researchers can relate it to a variety of managerial variables. examples of such variables might include resource requirements, key operational problems encountered, strategies employed, appropriate structures, methods by which returns are extracted, harvesting approaches, critical indicators of impending problems, and survival rates over time. the fact that this value has not been realized may rellect the limitations of the schema. most notable among these limitations is the fact that firms are being classified using at most two characteristics, both of which are concerned with growth. a third area in which attempts at classification have been made is concerned with the business concept, or what the entrepreneur actually does. entrepreneurs seek to achieve unique combinations of resources that create value in the marketplace. the nature of the valuecreating concept can take many forms, and can be grouped in many ways (see table 3). table 3: classifications of what the entrepreneur does: business concept or approach subgroup ar hoiv the entrepreneur gets into business olm & eddy (1985) start new business/ take over-assume leadership/purchase or acquire existing business/license or franchise business rights vesper (1990) primary: new product or service/ parallel competition/ franchising/ acquisition of going concern stevenson, roberts, grousbeck, solo contracting/niche marketing/ speed/networking or bhide (1999) syndication/ institutionalized hustle/ trading or speculating/ revolutionary initiatives schendel & hofer (1979) self-employment/ building workforce/ product innovation/ exploitation of underutilized resources/ economies of scale/ pattern multiplication/ takeover/ capital aggregation/ speculation maidique & patch (1978); enter as leader-first to market/ fast follower/ cost covin, slevin & heeley, 2000 minimizer-late to market/ market segmenter or specialist sub-group br the degree ofinnovativenessin the concept marquis (1969) product innovation/service innovation/process innovation booz-allen and hamilton new to the world/ new to the market/new (1979); crawford & di improvements/ new application/ repositioning/ cost benedetto (2000) reduction rogers (1983); tidd, bessant & discontinuous innovation/ dynamically continuous/ pavitt(1997) continuous/ imitation 9 journal ofsniall business strategy vol. /l, iuo.2 fall/winrer 2000 it could be argued that these schemes are actually additional types of entrepreneurial ventures. however, there would appear to be a distinction between the organizational context and the business concept. distinctions such as this serve to reinforce the importance of adequately specifying the phenomenon to be classified. the classifications presented in table 3 are generally related to whether the entrepreneur initiates something new (and the degree of newness or uniqueness) or pursues something that already exists. it is further suggested that there are actually two sets of schemes, with the second being a subset of the first. the first sub-group explores ways in which the entrepreneur gets into business, while the second sub-group focuses more on the degree of innovativeness in the concept, assuming the entrepreneur is starting his/her own business rather than purchasing, taking over, inheriting, franchising, or licensing. while there is considerable overlap among the schemes presented in table 3, it would seem that the first group can be simplified as follows: a) new business-product line defined by self, b) new business-product line defined by others, and c) existing business. similarly, the second group consists of products, services and processes that are a) radical innovations, b) continuous innovations, and c) imitations. another important issue concerns the need to distinguish between what the entrepreneur does to achieve initial success (or failure) versus what they do to sustain the enterprise over time. a number of the classification schemes in table 3 are applicable to the entrepreneurial venture as it evolves over time. thus, a venture begun around a new product may engage in parallel competition or acquisitions over time, and product innovation may be followed by process innovation. classifications of what the entrepreneur does have largely been ignored when it comes to the design of research. one exception is the tendency in some of the published research to distinguish, and occasionally test for differences, depending on whether the entrepreneur started the business, took over a family business, purchased an established business, or acquired franchise rights. yet, this would seem to be an area that holds considerable promise for moving the field forward. what the entrepreneur does would seem to have major implications for the type of entrepreneur, the type of venture, the environmental conditions under which the entrepreneur operates, resources that are critical for success, venture performance, and harvesting approaches, among other variables. the fourth area in which there has been some progress in terms of classification involves the life cycle stages a venture moves through over time. intuitively, this is also an area rich with theoretical potential, as the managerial competencies and styles, organizational strategies, resource requirements, structural approaches, rewards and controls required for venture success are likely to change with time. table 4 summarizes eight of the various perspectives on the stages through which a venture evolves. the value of this type of classification from a managerial vantage point is reflected in two of the derivative schemes presented in table 4, those of tyebjee, bruno, and mclntyre (1983) and of wetzel (1979). respectively, these authors demonstrate how marketing needs and approaches, and financing needs and approaches, can be expected to vary over the stages of a venture. at the same time, these schemes suffer from a number of limitations when it comes to classification, most notably the ability to clearly delimit one stage from the next. the underlying characteristics used to define the stages or categories differ from size and age to internal managerial variables such as administrative controls, structure and performance orientation. where multiple characteristics are employed, classification may be hindered because a given company falls into one category or stage based on certain of the defining characteristics, and another stage based on other characteristics. a more fundamental concern 10 journo/ ofsmall business s/raregy vo/. /l, iuo.2 fa///winter 2000 with these schemes is their deterministic nature. not only do firms not necessarily progress in a completely linear fashion, but many seem to survive at an arrested state of organic development (child & kieser, 1980). arguably, however, these schemes are more descriptive of the types of stages encountered in the start-up and development of an entrepreneurial venture than of a larger conglomerate or inultinational organization. table 4: classifications of life cycle stages greiner (1971) creativity/ direction/ delegation/coordination/ collaboration kroeger (1974) initiation/ development/ growth/maturity/ decline adizes (1999) courtship/ infancy/ go-go/ adolescence/prime organization/ maturity/ aristocracy/early bureaucracy/ bureaucracy/ death schendel & hofer (1979) pre-start-up/ start-up/ profitability/ i.ater growth/ disposition wetze i (1979) financing stages: research and development/ start-up/ early growth/rapid growth/ exit robidoiux (1980) start-up/ liquidity/ delegation/ leadership/financing/ prosperity/ continuity churchill & lewis (1983) existence/ survival/ success-disengage/ success-growth/ take-olt/ resource maturity tyebjee et al. (1983) innovation/ implementation/ growth/stabilization/ renewal tropman & momingstar innovation/ implementation/growth/ stabilization/ renewal (1989) timmons (1999) pre-start-up/ start-up and survival/ early growth/ maturity/ harvest-stability a final example of classification efforts can be found in the area of financial resources (see table 5). this area provides an interesting contrast to the others, in that types of financing do not represent a behavioral phenomenon, and have fewer idiosyncracies and variability than entrepreneurs or entrepreneurial ventures. not surprisingly, the resulting categories are less controversial, have been generally accepted by scholars, and play a clear role in guiding teaching and research. while the classification schemes in table 5 are relatively simple, and typically dichotomous, most of the schemes are actually hierarchical, unlike those presented above. thus, equity can be subdivided into private and public, and private equity can be subdivided into angels/informal, venture capital firms and private offerings. private offerings could be further subdivided into initial and subsequent. unfortunately, the categories are not all mutually exclusive. table 5: classifying financing sources for entrepreneurial ventures internal financing/ external financing formal/ informal risk capital/ venture capital individual/ institutional seed capital/ growth capital debt/ equity active/ passive microfinance/ small business finance/ rapid growth finance ii journal vf small btrshtess stra/egy vol. / l, /t/o.2 fall/ivinrer 2000 a summary evaluation of the schemes the general inadequacy of our progress in classifying phenomena can be seen if a representative classification scheme from each of the five areas identified above is evaluated using the five criteria for effective classification discussed earlier (see blaylock, 1969; hunt, 1991).table 6 summarizes the application of these criteria to the schemes. as can be seen, all of the schemes violate at least one of the criteria. the most common shortcomings concern the mutual exclusivity of categories and the meaningfulness of the scheme for research and managerial practice. to illustrate the application of the evaluative criteria, consider the distinction between types of entrepreneurs. the craftsman/opportunist scheme suffers in at least four fundamental ways. the phenomenon to be classified is ostensibly entrepreneurs, but the lack of consensus over what constitutes an entrepreneur raises problems in classifying them. by inference, corporate and social entrepreneurs are not included here. it is also less clear whether the scheme should be applied to individuals who take over a family business or acquire a firm. in addition, an r8;d-inventor could fit into either of the two categories in this scheme, although less clearly as a craftsman, or could represent a third category. a second problem concerns the underlying attributes (e.g., motivation, background, management style, social orientation) used to define categories. different researchers might employ the same scheme, but define the categories using their own sets of attributes. further, where the same criteria are not used to differentiate across categories, mutual exclusivity becomes problematic. finally, the usefulness of this classification scheme is unclear. on one level, it might be hypothesized that these groupings could tell us something about how the entrepreneur operates, the nature of his/her needs, or the success rates or outcomes of his/her venture. yet, little in the way of conclusive findings exists in these areas, and addressing these questions conclusively does not appear to be a priority in contemporary research efforts. on another level, it might be argued that this grouping helps to simplify a complex universe and so represents a building block that can be further developed (i.e., sub-categorized) in ways that ultimately help us understand the complexities of the universe. i-lowever, the failure to achieve progress in further classifying opportunists may be more reflective of the perceived inadequacy of the basic schema. perhaps the biggest challenge in each of these areas concerns the selection of attributes or charbcteristics for use in defining groupings that have theoretical and managerial value. the relevant attributes are not always the most obvious. consider birds as an example, a class of warm-blooded vertebrates. while it would seem straightforward to have grouped them because of their ability to fly, there are mammals that fly and birds that do not. in fact, the property that ties them together is the ability to produce feathers. there has been a tendency to rely on more obvious properties in entrepreneurship research. it may be that deeper insights can be realized from classifying ventures based on less obvious variables such as ownership structure, operating leverage or market orientation. it is also important that we rely on a consistent set of properties for defining all the categories in a scheme, rather than "switching horses in midstream" (bunge, 1967). prioritizing classification needs in entrepreneurship lt is important that the considerable ambiguity surrounding most attempts at classification in entrepreneurship be removed. priorities must first be established in terms of what is classified. the ultimate criterion for evaluating classification schemes is usefulness. does the scheme help entrepreneurs solve problems? is it theoretically productive, in the sense that it helps researchers develop principles or law-like generalizations about aspects of entrepreneurship? the priorities for classification can thus be linked to the great questions in 12 journal ofsmall business srrategy vo/. /l, na.2 fall/winter 2000 table 6: evaluating a classification scheme in each of five areas spec/ jrearlan phenomenon categatiet fram specificatiaa of mutually ca/leer/ vely meaningfulneu being a repteseutarive of classification exclusive exhautdug classified scheme phenomenon propert/ er categories categories iufataurtivenesr the cransmeo entrepreneur opportonists 4 li estyte the venture small profitable high growth pnmary new product/service the parallel entrepreneur's competition approach or franchising/ 0+ 0+ concept licensing acquire/take over going concern existence survival success/ the stage of witbdrawat or venture success/growth development take-o/r resource maturity the fioaooat risk capital + + resources venture capital key: 0+ = scheme clearly satisfies the evaluative criterion = scheme generally satisfies the evaluative criterion with some limitations 0 = scheme seriously violates the evaluative criterion entrepreneurship. consider examples of six such questions, and the resulting classification needs in each of these areas: ~ both as a field of study and a practical pursuit, what is entrepreneurship? the need here is for classification of knowledge areas in the discipline as a whole. such an integrative hierarchical scheme would combine the different classification schemes that have been proposed and that have achieved some acceptance. it will help to explain what entrepreneurship is about in its totality (i.e., the whole picture and its patterns) as well as in its specifics. ~ when does the "actu of entrepreneurship actually start and when does it end? the acceptance of entrepreneurship as a process suggests that it can be ongoing or continuous, while there can be multiple entrepreneurial events initiated by a given entrepreneur or in a given venture. however, it must begin at some point, and it must be possible for it to end at another point. critical classification needs in this regard include types of triggering events, methods for initiating a venture or entrepreneurial event, types of models of the venture, and types of harvesting or exit methods. 13 journal of small business strategy vol. ll, no.2 fall/ivinter 2000 ~ who is responsible for entrepreneurship? what is the nature of the entrepreneur or the entrepreneurial team? entrepreneurship does not happen without individuals and teams to drive the process, persevere, adapt, and find creative ways around obstacles. l-lowever, there is a need to move beyond classification based on traits to identifying the types of entrepreneurs and entrepreneurial teams based on what they do, the number of things they do, their entrepreneurial approaches or styles, and the roles that they play. ~ what is the entrepreneurial context and how does this context change over time? the issue here concerns where entrepreneurship happens, and how it differs in various contexts. classilication should address different types of organizational settings (e.g., start-up, corporate, social) and types of ventures from the vantage point of what makes that context different, and what are the requirements for success in that context. lust as important is the need to classify changes in the context over time, and how these changes impact on the entrepreneur's needs and requirements. ~ why do various outcomes derive from entrepreneurial behavior, and what is the nature of those outcomes? issues here exist at two levels: micro and macro. at the micro level, the principal concern is with the actions of the entrepreneur that impact on success or failure in the venture. classification issues include types of resource acquisition approaches, types of managerial approaches, types of growth strategies, and types of failures and successes. at the macro level, the concern is with the societal or community impact of entrepreneurial activity. the corresponding classification needs include types of societal costs, types of benefits, and types of entities impacted. ~ what is the nature of the environmental conditions that facilitate entrepreneurial activity". the desire to foster entrepreneurial attitudes and behaviors at the levels of the individual, organization, community and society gives rise to a host of classification needs. examples include relevant types of societal infrastructures (i.e., economic, political, regulatory, financial), types of family, social, cultural and work contexts, types of role models, and types of entrepreneurial networks. clearly, these are not independent questions, and the development of classification schemes that facilitate our ability to address any given question has implications for all of them. moreover, as some closure is reached in these areas, the more robust schemes may be helpful in identifying the subsequent questions deserving focus. towards a systematic classification of the field what should be the conceptual architecture of entrepreneurship? in this article, classification in some of the more critical areas of the discipline has been considered. of the six questions raised above, the first may be the most profoundly important in terms of scientific progress, in that it requires us to look at the discipline as a whole. in essence, is it possib!e to develop a comprehensive, multi-level classification scheme that integrates contemporary knowledge in the field? this is an ambitious task, and represents the next step in an ongoing research program. the phenomena in entrepreneurship are typically not fixed or pre-existing, such as with the classification of plants and animals. they are dynamic, evolve relatively quickly, and hybrid forms continually appear. thus, a microenterprise at the close of the 20 century is different in fundamental ways from one at the close of the 19w century. as a result, it is important that any attempt at a taxonomy for the discipline as a whole allow for dynamism and discipline evolution. 14 journo/ ofsmall business strategy vo/. / i, /i/o. 2 fall/wi nter 2000 as a first step toward such an integrating taxonomy, it is necessary to establish broad parameters that capture the main body of work in the contemporary field of entrepreneurship. this can be accomplished by making four distinctions in summarizing the extant work in the iield: elements or focal points of analysis, stages of analysis, levels of analysis, and purposes of analysis. consider the framework proposed in figure i. figure i: a framework for organizing knowledge and research in entrepreneurship the the the strategic and entrepreneur organizational environment resources functional processes context s~i* a i *i* ~li a.i *i startup initiation the body of acquisition knowledge macro management of constituting a existing venture discipiine oi intermediate innovation and growth entrepreneurship of existing venture harvesting/ succession/ micro exit from venture ~p ai *. description explanation prediction prescripton first, research in entrepreneurship tends to concentrate on five major elements: the entrepreneur (or entrepreneurial team), the organizational context, the environment, resources, and strategic and functional processes. the entrepreneur is assessed in terms of background, traits and characteristics, attitudes and perceptions, intentions and behaviors, and outcomes. research on organizational context addresses such issues as start-up versus corporate or nonprofit contexts, high versus low-tech contexts, franchising, family businesses, and home-based businesses, among others. examples of environmental issues include sources and windows of opportunity, as well as aspects of the external environment that facilitate or hinder entrepreneurial activity. in the resource area, the research tends to examine types (what is needed), timing (when it is needed), and acquisition (how it is obtained). strategic and 15 journal of small business strategy vali i, no.2 fall/winter 2000 functional processes include types of business strategies as well as the interface between the entrepreneurial venture and such functional process activities as marketing, research and development, and information systems. second, work in the field of entrepreneurship is generally conducted around particular points in the evolution of a venture. thus, studies will either focus on issues surrounding the initiation of venture, approaches to managing a small business, challenges in accomplishing innovation and growth in a small business, or considerations in harvesting or exiting from a venture. next, entrepreneurship research tends to be conducted at one of three levels of analysis: macro, intermediate and micro. macro-level research concentrates on aggregate economic and social patterns and outcomes, such as the impact of bankruptcy laws on birth rates and death rates of minority versus non-minority-owned ventures in the u.s. economy. intermediate-level research is concerned with sectors, industries, clusters, and networks, as with a study of the venture capital industry in the boston highway 128 corridor. micro-level research focuses on the venture itself, such as effective approaches to leveraging marketing resources in start-up firms. finally, while research frequently has multiple purposes, work in the field can be categorized based on whether its principal purpose is descriptive, explanatory, predictive, or prescriptive. thus, a study may merely seek to describe (e.g., characteristics of immigrant entrepreneurs), it may attempt to explain (e.g., why family businesses do or do not make successful intergenerational transfers), the purpose may be to predict (e.g., failure rates of firms based on key financial ratios), or its principal purpose may be prescriptive (e.g., what to do to lower the firm's tax liability). the framework proposed in figure i seeks to capture the diversity and complexity of the field of entrepreneurship in relatively simple form. any study or research initiative in the field can be characterized based on where it principally falls on each of the four axes of the diagram. in a real sense, each of these axes represents a type of classification. moreover, it is the position of this article that an integrative classification of the field of entrepreneurship must accommodate elements, stages, levels, and purposes of analysis. there is also significant potential for sub-classifications within each of these four areas, with little progress made at such sub-classification (e.g., types of harvesting approaches, relevant ways to classify resources, categories of macro-level research issues, major forms of prescriptions). accordingly, the framework can be helpful in guiding future research on classification. summary and conclusions while disciplines evolve at different rates, modern information and communications technology has greatly accelerated the pace of research and knowledge development in virtually all fields. thus, entrepreneurship, in spite of its relative youth as a major area of research, can be expected to mature quite rapidly in the coming years. it is our belief that the development of entrepreneurship requires that it be approached as an independent field of study that incorporates insights from other disciplines, rather than as an entirely "borrowed" field. moreover, classification will play a key role in either facilitating or impeding this development. with exponential growth in the volume of published research, classification can bring order and help prioritize areas of focus, ultimately contributing to a theory of entrepreneurship. however, to the extent that there is no agreement on basic classification schemes, researchers feel free to identify their own groupings, and little attempt is made to look for commonalities in findings based on overlapping groupings. 16 journal ofsmall business strategy vol. i i, no.2 fall/ivinrer 2000 as a given phenomenon in entrepreneurship can be classified in many ways, the selection of any one classification approach shapes our conceptual thinking. grouping entrepreneurial ventures based on growth orientation or growth rates affects how researchers approach a particular question, and even the questions they choose to address. our inability to establish consensus on the ways to classify the basic elements of entrepreneurship (the entrepreneur, the venture, the business concept or approach) is a serious shortcoming that is constraining the conceptual richness of the discipline. it leads to a sort of randomness in terms of research questions that get addressed and the methodologies employed. it also results in a shallow understanding of any one category of some phenomenon. thus, the tendency to distinguish microenterprises from small businesses is beginning to produce a rich body of research on the former, with entire journals and conferences devoted to the unique issues affecting microenterprises. there is also an important caveat. classification can also serve to limit the field by establishing boundaries that effectively leave certain issues and phenomena outside the realm of study. although this would seem advantageous given the current state of the discipline, it is important that efforts at delimiting the field be achieved in a rational and systematic fashion. examples of such boundary-setting might include the classification of entrepreneurs in such a way as to eliminate social entrepreneurs, or the classification of ventures in a manner that ignores non-profits, or the classification of life-cycle stages in a way that does not allow for joint ventures or acquisitions. while it could simply be argued that the corresponding schemes fail to satisfy the collectively exhaustive criterion, in fact the explicit intention may be to delimit the field. thus, some of those who define entrepreneurship in terms of innovation and growth would explicitly eliminate management of the conventional small business as an area of interest in the discipline. just as important is the need to recognize that, while classifications are not completely valuefree, they should not be an argument for certain values or beliefs. thus, while conceptual thinking is influenced by classification, there must be objectivity to the schemes that are employed. consider the classification of ventures based on growth rates. apart from the other shortcomings of this scheme, there may be a tendency, when research is conducted and implications are drawn, to view high growth firms as inherently better or more desirable than low growth or lifestyle ventures. ultimately, classification represents a systematic and explicit approach to grouping together similar and ostensibly dissimilar objects and subjecting them to rational and critical examination. with classification come rules. for instance, "if" a phenomenon has certain characteristics, "then" it must be placed in a certain category. some might argue that most of the phenomena in entrepreneurship are not sufficiently fixed or stable so as to allow for such definitive decision rules. however, stability does not really seem to be a problem when it comes to identifying and assessing the core elements that constitute an entrepreneurial event (shane ec venkataraman, 2000). the real issue lies with the inadequacies of the existing schemes, not with the phenomena of entrepreneurship. a venture can clearly be classified based on its stage of development, as can an entrepreneur be classified based on any number of descriptors. the challenge is, first, to agree on the decision rules, and second, to recognize the need for modification over time. thus, as a scheme of things changes over time, it must be in response to changing goals and interests of the research community. there is a need for schemes that are robust in terms of cross-cultural classification, but also a need for flexibility in the design of schemes to reflect environmental context. consider the question of whether entrepreneurship as a phenomenon is essentially the same in different countries, cultures, political dispensations and economic systems. if the researcher is concerned with entrepreneurs operating in the informal sector within the black townships of 17 journal ofsmall business stratei0f vol. i i, no.2 fall/winter 2000 south africa, he/she may find a given scheme for classifying ventures to be meaningless, or at least not especially enlightening, even though that scheme is quite useful when applied to silicon valley ventures. as we move forward, researchers should be encouraged to both create and discover classification schemes that are generalizable. the discovery of schemes through empirical work (i.e., the inductive or grouping approach) would appear to be the priority. published work should explicitly identify how the phenomena being studied have been classified in the past, and which categories from which scheme apply to a given study. where possible, researchers should base their work on accepted classifications, or identify why existing classilications do not apply to or aid the research design. editors of the journals and organizers of our leading conferences must make it a priority to cross-validate schemes, and encourage the achievement of consensus around schemes that appear to hold 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(1978). corporate strategy and technological policy. in m. l. tushman and w. l. moore (eds.), readin s in the mana ement of innovation (pp. 236-248). cambridge, ma: ballinger. m 9(,d.(l969). th 9 f fl i .i ~m ~ 6 i ~~ht . 9 i. i. tpp. 33-48). ~ 9 8: a i m g a miner, j. (1996). the four routes to entre reneurial success. san francisco: berrett-koehler publishers. miner, j. (2000). testing a psychological typology of entrepreneurship using business founders. journal of a lied behavioral science 36(1), 43-70. olm, k., & eddy, g. (1985). entre reneurshi and venture mana ement, columbus: charles merrel i publishing. ratnatunga, jh & romano, c. (1997). a citation classics analysis of articles in contemporary small enterprise research. journal of business venturin 12(2), 197-212. roberts, e. (1991). entre reneurs in hi h technolo: lessons from mit and be ond. oxford: oxford university press. rogers, e. (1983). diffusion of innovations. new york: free press. ronstadt, r. 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(1999). the entre reneurial mind. andover, massachusetts: brick house publishing. tropman, jh & morningstar, g. (1989). entre reneurial s stems for the 1990's. westport, ct: quorum books. tyebjee, t., bruno, a., & mclntyre, s. (1983). growing ventures can anticipate marketing stages. harvard business review 52(january-february), 62-66. u.s. small business administration(1996). the state of small business: a re ort of the president, report 0735-1437. washington, d.ca u.s. government printing oaice, 1011. vesper, k., gartner, w., & mitchell, t. (1989). a taxonomy of new business ventures. journal of business venturin 4(3), 175-187. y 9 .k. f1999). n~i. e gl dcgff, ~j: p i -h ii vesper k., & gartner, w. (1999). universi entre reneurshi ro rams-1999. los angeles; lloyd grief center for entrepreneurial studies, university of southern california. vesper, kh & gartner, w. (1997). measuring progress in entrepreneurship education. journal of business venturin 12(5), 403-421. webster, f. (1977). entrepreneurs and ventures: an attempt at classification and clarification. academ of mana ement review 3(l), 54-61. wetzel, w. (1979). the cost and availability of credit and risk capital in new england. in j. a. timmons & d. e. gumpert (eds.). a re ion'sstru lin savior; small business in n~hi d.w ih,ma:s iib i 9 d i fa woo, ch cooper, a., &. dunkelberg, w. (1991). the development and interpretation of entrepreneurial typologies. journal of business venturin 6(2), 93-114. mine( scltindehutte is assistau( professor of euirepreuelirship at miami university. a former brand mouager with shell oil, she has been a principal (n iwo venture start-ups. dr. schiodehune's research interests include values aud eu(fepreaeurship, euirepreneurship under conditions of adversity, and prodiict ioaovouoa. i michael morris holds the cia(as chair in eh(repreucurship at miami university aud is director ofthe thoulas c. page center for eutrepreneurship at miami. tlfe author of three books and over one liuudred journal articles, his research focuses on entrepreneurehip and strategy, entrepreneurial mar(le(i ag, aud corporate venturing. dr. morris is a former fulbmght scholar. donald f. knratko is the stoops distinguished pj ofessor iu business and director of the midwest entrepreneurship center at bal( state university. in addi iion (o a large volume ofpub(is(fed research. dr. kuratko is the author of seven books, including eatrepreueurshipf a contemporary approach, one of the leading texts in ihe entrepreueurship field. he also is the execu(i ve direcior of the consortium of enirepreneurship centers. 20 sik4rxvf best applied paper award recipient 2003 small business institute conference growing pains: an employment compliance primer for small employers robert k. robinson the university of mississippi brobinson~bus.olemtss edit geralyn mcclure franklin the umversity of texas of the permian basin frankti n~@utpb. edu a. m. nunley iii the university of texas of the permian basin nunley a@utpb.edu abstract stnatl employers often have an advantage over their larger counterparts in that they are not subject to certain regulatory compliance requirements. however, as small employers'vorkforces expand, the organizations become subj ect to various federal employment statutes. this paper reviews tlie primary federal employment laws that are likely to impact small firms as tliey grow. lt also provides suggestions for dealing with these mandates. i introduction there is a distinct advantage to being a small organization, especially in the realm of regulatory compliance. most federal employment statutes apply only when an employer's workforce reaches a minimum threshold. those who operate below that threshold are not under the lurisdiction of the statutes and, therefore, are not legally obligated to comply with. their provisions. most small businesses begin below this threshold (and as will be seen, this threshold does vary from law to law). however, as many small businesses prosper and grow, expanding workforces (sometimes as few as four employees) often cross the invisible line into regulatory compliance obligations. figure i provides a list of the major federal employment laws and the minimum number of employees that identifies employers who are covered under them. the purpose of this paper is to address the range of employment laws that are likely to affect successful small businesses as they grow in doing so, the employer size requirements that impose compliance obligations under each specific act and the act's major provisions are 1 journal ofstnall t)usmess strategy vol. /4, no. i spring/summer 2003 outlined. additionally, the penalties for noncompliance authorized under each statute are discussed. although our review of these laws is extensive, it is only cursory. figure i major conipliance laws affecting small employers age discrimination in & 20 employees for each working day in each of 20 or employment act (adea) of 1976 more calendar weeks in the current or preceding (as aniended) calendar year americans with disabilities act & 15 employees for each working day in each of 20 or (ada) of 1990 more calendar weeks in the current or preceding calendar year civil rights act of 1964, title vll & 15 employees for each working day in each of 20 or (as amended) more calendar weeks in the current or preceding calendar year civil rights act of 1991 & 15 employees for each working day in each of 20 or more calendar weeks in the current or preceding calendar year fair labor standards act (flsa) employers who engage in interstate commerce, of 193$ (as amended) produce goods for interstate commerce, or handle, sell or work on goods or materials that have been moved in or produced for interstate commerce. for most firms, a test of not less than $500,000 in annual dollar volume of business applies family and medical leave act & 50 full'-time employees within 75 miles of facility (fmla) of 1993 immigration reform and control all employers regardless of size act (irca) of 1986 immigration reform and control employers & 4 employees act (irca) of 1986 nondiscrimination provision worker adjustment and & 100 full-time employees who have worked at least 6 retraining notification act months in the previous 12 months (warn) of 198$ fair labor standards act the lirst body of employment law of importance to small employers is the fair labor standards act (flsa). enacted in 1938, the flsa governs three aspects of employeremployee relations: (1) the federal minimum wage, (2) overtime, and (3) child labor. minimum wage the flsa requires all covered employers (includes most employers) to pay nonexempt employees at least $5.15 per hour. nonexempt employees are those employees who are 2 jounral of sniall busiti ess strategy vol, l4, no. l spring/sunmier 2003 covered by the flsa's minimum wage and/or overtime provisions. failure to provide minimum wages and overtime payments to nonexempt employees will result in a flsa violation shortly, erempt employees, those for whom minimum wage and overtime do not apply, will be discussed. first, however, two variants of minimum wage for nonexempt employees are addressed: (1) tipped employees and (2) compensatory time.. tipped employees since many small employers are in the hospitality industry and employ tipped employ'ees (like wait staff), it is important to understand the employer responsibilities under the flsa for such employees. under the flsa, tipped employees are entitled to the federal minimum wage. though employers may credit a certain amount of the tips received by employees against the minimum ivage'bligation, an employer's obligated to pay tipped employees not less than $2.13 per hour in wages (u.s: employment standards administration, fact sheet no. j5, '002).provided that the $2.13 per hour wage plus tips equals or exceeds the federal minnnum wage, the employer is not required to provide any additio'nal wkge to tipped employees. in the'event that an employee's cash wage combinett with tips 'does not equal the minimum'ourly wage, the employer must make up the difference (u.s. employment 'tandardkadmmistration, fact sheet no: 002, 2001). compensatory time compeiisatory'titne is time off in lieu of overtime comp'ensation. if an employer offers 'orn'pensatorytime to einployees, there are two issues of concern. first, any compensatory time off must be calculated at a'ate not less than one and one-half hours for each hour of employment for which overtime compensation would have been paid (fair labor standard act, 29 v.s.c. ij 201 et seq.(2001). for example, if an employee worked 46 hours in a'168 consecutive hour work week, that employee would be entitled to 9 hours compensatory time (46 hours — 40 hours of standard work week = 6 hours overtime; 6 hours * i'/~ = 9 hours compensatory time). th'e second conceni'relates to the limits'tion currently pla'ced on private sector employers that 'he compensatory time must be used within the pay period it was accrued. for example, assume that an employee is paid twice monthly (the first and fifteenth of each month). during the week of june 1-7, the employee worked 50 hours. the employee would be entitled to 15'ours compensatory time (50 hours 40 hours of standard work week = 10 hours overtime 10 hours * i '/. = 15 hours compensatory time) but would have to use the compensatory time the following week because the pay period expires on june 15. the compensatory time cannot be accrued (like it is in the public sector) and used at a 'time that is convenient for either the employer or employee. this also means that compensatory time is not a viable option for employees who are private sector employees and paid on a weekly basis. interestingly, there is currently a bill in congress to remedy this situation, but it has yet to be enacted. overtime the flsa establishes the standard employee's workweek at a fixed period of 168 corisecutive hours, or 7 consecutive 24-ho'ur periods. note that in the health care industry for certain health care professions this has been extended to a fixed period of 336 consecutive hours, 'or 14 consecutive 24-hour periods. in most instances, any overtime pay accrued in a particular workweek must be paid on the regular payday for the pay period in which the wages were earned. whatever the employee's regular rate of pay is, it cannot be less than the minimum wage. the regular rate (straight-time rate) does not include reimbursement for expenses incurred on the employer's behalf, premium payments for overtime work, special premiums 3 journal of small business siraiegv vol. 14, no. l sprhtg/summer 2003 paid for work on weekends and holidays, discretionary bonuses, gifts and payments in the nature of gifts on special occasions, and payments for occasional periods when no work is performed due to vacation, holidays, or illness (u.s. department of labor, fact slicer iuo. 23, 2002). once the employee's regular rate or straight-time rate has been determined, nonexempt employees are entitled to one and one-half times that rate for each hour worked in excess of 40 (80 in healthcare professions) during the 168 consecutive hour (336 in healthcare) work week. however, no overtime is required for exempt employees. exempt employees erempr empkryees are those employees who are specifically excluded from the flsa's protection for minimum wage and overtime. the fact of the matter is that so many classes of employees are covered by the flsa (nonexempt employees), that it was easier for congress to identify those who were not protected under it (exempt employees). the flsa provides exemptions from minimum wage and overtime payments as well as some partial exemptions from overtime only. the most common exemptions are as follows: (i) commissioned sales employees of retail or service establishments are exempt from overtime provided that more than half of their earnings come from commissions and these earnings average at least onehalf times the minimum wage for each hour worked; (2) computer professionals who are paid at least $27.63 per hour are exempt; (3) salesmen, partsmen, and mechanics employed by automobile dealerships are exempt; (4) seasonal and recreational establishnients are exempt from both the minimum wage and overtime pay provisions of the flsa; and (5) white collar employees employed in executive, administrative, professional, or outside sales positions (as defined by the department of labor (dol)) who are paid on a salary basis are exempt from both the minimum wage and overtime. note that, particularly regarding white-collar employees, it is not what the employer calls an employee that counts. calling an employee an "executive" does not make that employee a bona fide executive. the only operative definition is the dol's definition. for example, a bona fide executive is one who spends no more than 20 percent of his or her time in nonmanagerial activities (no more than 40 percent of his or her time in the retail and service industries), supervises at least two employees, and receives a salary of not less than $345 per week (fair labor standard act 29 c.f.r. ij 541.1). if these three conditions cannot be met, the dol will not consider the employee in question to be a nonexempt employee, and that individual will be entitled to overtime compensation under the flsa. child labor limitations employers may assign employees who are 18 years or older to any position in the workplace, to work at any time, and to work in virtually any context (provided that the working conditions are in compliance with the occupational safety and health act). but, applicants or employees under age 18 are restricted in some or all of these categories. workers 16 and 17 years old may work for unlimited hours, but only in nonhazardous jobs. hazardous jobs are enumerated by the secretary of labor and are off limits to all workers younger than 18 years of age (fair labor standard act, 29 u.s.c. tj 212). among the jobs identified as hazardous are: manufacturing or storing explosives, driving a motor vehicle, operating 4 journal of sntalf business strata'ol. /4, no. l spring/sumtner. 2003 power-driven wood-workmg machines, meat packing or processing, wrecking, demolition, nd ship-breakmg operations, and roofing operations (fair labor standard act 29 c.f.r 6 570.33).'or workers between 14 and 15 years, there are also limitations on both the hours that can be worked and the time of day that the work may occur. during periods when school is in session, these workers are permitted to work outside school in nonmanufacturing, nonmining, and nonhazardous jobs within specific hourly and time limits. for example, on school days, 14 and 15 year-olds are restricted to working no more than 3 hours per day and may only work within a time frame between 7 a.m. and 7 p.m. furthermore, the total number of hours that can be worked m a school week is capped at 15 (fair labor standard act,29'u.s.c. 6 212.). during nonschool days, the 14 or 15 year-old employee may work up to 8 hours, and during the nonschool week, he or she may accrue up to 40 total hours (fair labor standard act,29 u.s.c. ij 212). dunng the period june 1 to labor day, the time frame during which 14 and 15 year-olds may work is expanded from 7 a.m. to 9 p.m. again, 14 and 15 year-olds are excluded from hazardous jobs even during the summer months. there is encouragement for small employers trying to give their own children an early start in the family business. individuals who work for their parents or spouses are exempt under the flsa. commonly held myths about the flsa there are many misconceptions, especially among employees, about pay and benefits mandated by the flsa. beyond the previously discussed minimum wage, overtime, and child labor restnctions, the flsa imposes no other requirements on covered employers. since there are so many misconceptions arising from the flsa's requirements, here are just a few examples of compensation requirements that the act does not really mandate. nothing in the flsa imposes any obligation on employers to provide employees with vacation, holiday, severance, or sick pay. the flsa does not require an employer to furnish employees with meal or rest periods, holidays off, or vacations, paid or not. these are strictly at the option bf the employer, unless otherwise required under state law. neither does the act obligate employers to provide premium pay for working on weekends, at night, or on holidays. employers are not required to offer pay raises or fringe benefits. finally, the flsa does not impose any obligation to provide terminated employees with a discharge notice, reason for discharge, or immediate payment of final wages. many employees believe that they must be paid in full all accrued wages immediately upon discharge. in most instances, final payment can be made at the next normally scheduled pay period, unless required under state law or local ordinance. immigration reform and control act because it applies to all employers, even small employers should have knowledge of the immigration reform and control act (irca) of 1986. irca was enacted for the expressed purpose of curbing illegal immigration into the united states. the rationale behind its enactment was simple —remove the incentive for illegal immigrants to come to the united states by making it illegal to hire them. prior to 1986, it had been illegal for undocumented aliens to be in the united states, but it was not against the law to hire them, now, this has 'for a complete list of hazardous occupations, consult the department of labor regulations, occupations particularly hazardous for the employment of minors between /6 and i 8 years ofage or detritnental to their health or well-being, 29 c.f.r. ()tj 570.50-570.68. 5 jottrnal of sinoll business strategy vol. /4, tvo. l spring/sornrner 2003 been corrected. any employer who knowingly hires an illegal immigrant may be subject to a schedule of fines rangmg from $275 to $ 10,000for each ttnatttttorized alien depending on the severity of the offense and number of previous offenses (8 c.f.r. tj 274a.10(b)(1)). there are even criminal penalties authonzed under irca that carry imprisonment for up to 6 months for any person who engages in a pattern or practice of violations (8 c.f.r. tj 274a.10(a)). figure 2 details the penalties for noncompliance under irca. figure 2 penalties for noncompliance under the immigration reform and control act knowingly recruiting and hiring an failure to comply with documentation/ undocumented workers verification requirements i offense $ 275 — $2,200 $ 110 $ 1,100 2" offense $2,200$3,300 3 of'fense $3,300 $ 11,000 pattern of offenses $3,000 and 6 mo. imprisonment sotrrce tt c.fr. i 274a.to interestingly, most violations connected with irca do not arise from hiring undocumented workers. most violations arise from failing to comply with the act's employment verification procedures. fines for failure to prove that an employee's employment status was done in accordance with the immigration and naturalization service (ins) regulations may range from $ 110 to $ 1,100 for each employee for whom verification was not performed (8 c.f.r. i) 274a.10(b)(2)) (see figure 2). since 1986, all employers, regardless of size, are required to verify the employment eligibility of all applicants by requiring the applicant to complete the form 1-9, "employee information and verification" (8 c.f.r. t3 274a.2(b)). in addition to having the applicant complete the 1-9, the employer is required to request documentation from the applicant to establish his or her identity and employment eligibility, this verification must be accomplished within three days of the hire. employers are encouraged to keep on file photostatic copies of the employee's form 1-9 in order to prove that the documents were physically examined. the documents that the ins accepts for verification purposes are listed in figure 3. in addition to prohibiting the hiring of illegal aliens, irca also prohibits discrimination in hiring and discharge based on national origin (as does title vii of the civil rights act of 1964 (addressed in the next section of this paper)) and on citizenship status. these antidiscrimination provisions are intended to prevent employers from attempting to comply with the act's work authorization requirements by discriminating against foreign-looking or foreign-sounding job applicants. of particular concern for smaller organizations is that irca's antidiscrimination provisions apply to even smaller employers than those covered by equal employment opportunity commission-enforced laws (discussed later in this paper). irca's national origin discrimination provisions apply to employers with between 4 and 14 employees (those employers who would not be covered by title vii) (8 u.s.c. 1324b(a)(2)(b)). irca's citizenship discrimination provisions effectively extend protection against discrimination based on national origin to all workplaces with at least 4 employees. 6 journal of sinall rosiness strategy vo(. /4, no. i springlsumrner 2003 figure 3 verillcation requirements under the immigration reform and control act documents establishing documents establishing only documents establishingboth employment employment authorization only identityauthorization and identity u.s. passport social security card state driver's license certificate of u.s. citizenship u.s. birth certificate state identification for those under age 16 certificate of naturalization other documentation authorizing employment in the resident alien card (if card u.s. approved by the attorney contains photo of individual) general foreign passport with the authonzation of the attorney general to work in the u.s. source 8 u.s.c. g 1324a(b)(l)((3). because lawmakers were concerned that the verification process and penalties for hiring undocumented workers might cause employers to be reluctant to hire applicants of hispanic origin, irca contains provisions making an unfair immigration-related employment practice for: ...a person or other entity to discriminate against any individual (other than an unauthorized alien) with respect to the hiring, or recruitment or referral for a fee, of the individual for employment or the discharging of the individual from employment —"(a) because of such individual's national origin, or (b) in the case of a citizen or intending citizen (as defined in paragraph (3)) because of such individual's citizenship status (g u.s.c. (l 1324b(a)). civil rights act of 1964 the civil rights act of 1964's title vii is the foundation of most of the laws and regulations that affect equal employment opportunity (eeo) in the workplace. it applies to a small business once that business employs 15 or more employees during any 20 weeks during the preceding year. title vll is enforced by the equal employment opportunity commission (eeoc). specifically in section 703 of the act: it shall be an unlawful employment practice for an employer '(i) to fail or refuse to hire or to discharge any individual or otherwise to discriminate against any individual with respect to his compensation, terms, conditions, or privileges of employment, because of such individual's race, color, religion, sex, or national origin (42 u.s.c. () 2000e-2(a)). this section forbids a covered employer from taking into consideration any applicant's race, color, religion, sex, or national origin when making any employment-related decision. for example, if an employer considered an applicant's ethnicity in making a decision, then title vll is violated. if the fact that an applicant is a female affects a promotion decision, title vii 7 journal of stnall business strategv vol l4, tuo. l springtsumnter 2003 is violated. title vll's purpose is to get employers to make employment decisions based only on an individual's qualifications. figure 4 provides a hst of typical employment decisions that may result in title vii violations. in short, different treatment of anyone in the workplace because of race, color, religion, sex, or national origin is an unlawful activity. figure 4 employment practices that may result in vnlawful discrimination ~ recruiting ~ training ~ working conditions ~ selection ~ wages ~ apprenticeships ~ promotion ~ benefits ~ performance ~ transfers ~ terminations appraisal ~ layoffs ~ work assignments there are two basic theones of unlawful discrimination under title vll: (i) disparate treatment and (2) disparate impact. disparate treattnent results from treating individuals in the workplace differently because of their membership in a protected class. it is intentional and is characterized by imposing different standards on different people. the other theory, titsparnte impact, focuses the small employer's concerns to statistical imbalances in the workforce. quite often it is unintentional and is characterized by imposing the same standards on all people with different outcomes for different groups. although a discussion of the legal proofs for each of these theories is beyond the scope of this paper, it is important for small employers to understand that there are differences. if charges of unlawful discrimination arise, small employers should consult appropriate legal counsel. national origin as a protected class much has been written about race, color, religion, and sex as protected classes. however, as a result of the events of september 11, 2001, significant attention has been focused on national origin as a protected class. it is for this reason that we are devoting specific attention to this issue. though title vii prohibits employers from considering a candidate's national origin when making any employment decision, there are some employment discnmination issues that are unique to national origin that must now be addressed. because members of some ethnic groups often display nationality-specific characteristics (religious affiliation, speech patterns, languages, surnames, e.g.), title vii can be violated when a connection can be made between those characteristics and unfavorable treatment in the workplace. three specific areas related to n'ational origin discrimination are: (i) irca-related issues, (2) language, and (3) englishonly work rules. irca-related issues title vii may be violated during the irca verification process (discussed in the previous section of this paper) if individuals of one national origin group (like hispanics) are subjected to greater scrutiny than individuals from other groups. for example, an applicant with a hispanic surname is given a thorough background investigation while a candidate with a western european surname only has her driver's license and social security card photocopied. this would be a title vii violation because the individual with the hispanic surname was subjected to different treatment (a more rigorous application process) because of his national origin. in complying with irca's verification requirements, it is important to treat all employees the same. if thorough background checks are initiated, they must be initiated on all applicants, 8 dournat of small business strategv vol. 74, no. l spring/summer 2003 not just those of one particular national origin. it should be noted that irca does permit employers to gwe preference in hiung and recruiting of american citizens over foreign nationalsif tlie»vo intl»itlnnls nre equally qualified (8 u.s.c. tj 1324b(a)(4)). interestmgly, national ongin discrimination is not merely limited to members of the ethntc group against whom discrimination is directed. if an employer punishes nonethnic employees for associating or fraternizing with members of an ethnic group whom the employer finds distasteful, title vii has been violated. if an employee is subjected to adverse employment outcomes because he or she is married to a member of an ethnic group the employer finds offensive, title vii is again violated on the basis of national origin. to illustrate, assume that a white nonkhspanic male employee has a wife who is of cuban ancestry. also assume that his employer disapproves of mixed marriages between "anglos" and hispanics. as a result of this attitude, the employee is continually passed over for promotion and receives no merit pay raises. the white male employee is being discriminated against on the basis of the nationahty of his wife. this is unlawful discrimination under title vii. language a potential problem related to ethnicity is language proficiency. a substantial proportion of the workforce's projected growth is from immigration (bowman, 1997). many newlyarrived legal immigrants to the united states have limited language proficiency. in some parts of the nation, languages other than english are spoken. the language of preference for the local population may be spanish, russian, vietnamese, or a combination thereof. as the united states is becoming increasingly diverse, it is also becoming increasingly multilingual. employers who base employment decisions on language proficiency (whether it is english, spanish, russian, mandarin, etc.) must be able to justify such preferences as being related to job performance. this language requirement also encompasses accents. to illustrate this point, assume that an apphcant is applying for a position as a driver for a small parcel delivery service. the female applicant speaks conversational english but with a thick french accent. can she be denied the job based upon her accent? what information would you have to possess to make that call? how critical is speaking english without an accent to the performance of the essential job functions of a parcel delivery person? if your job analysis'hows that it has little, if any, impact on job performance, then rejecting the applicant based on her accent could be unlawful discrimination based on national origin. now assume that the position for which the heavily accented job candidate has applied is that of a dispatcher for a small ambulance service. based upon job analysis that may indicate that clearly enunciated communications between the dispatcher and ambulance personnel is an essential component of the job, can the employer now disqualify the applicant because of her accent? if the employer can demonstrate that her accent is so heavy it affects comprehension then she is being denied employment based on a job-related reason rather than her nationality. english-only work rules english-only work rules require employees to speak english during work hours as a condition of employment. this creates a problem for employers as the eeoc's guidelines'n. discrimination because of national origin (2000) currently declare that employer policies prohibiting employees from speaking their primary language at all times may create an "atmosphere of inferiority, isolation and intimidation which could result in a dischminatory for a thorough discussion ofiob analysis, see gatewood, r. d. and feild, h. s. (2001), human resource selection (5 ed.), fort worth, tx: harcourt college publishers. 9 journal of small bust tress strategy vok l4, no. l spring/sumtner 2003 ivorkmg environment". consequently, any language policy that creates a complete bar to speaking languages other than english is likely to be interpreted by the eeoc as a potential title vii violation and, therefore, is subject to very strict scrutiny. while the eeoc has created disincentives to drive employers away from english-only policies, except where business necessity can be demonstrated, the eeoc also requires employers to maintam a workmg environment free from harassment on the basis of race (u.s. eeoc, 2000, tj 1603), sex (u.s. eeoc, 2000, tj 1604.11),and national origin (u.s. eeoc, 2000, t) 1606.8(a)). here arises the dilemma for the small employer. what happens when an employer implements an english-only rule in response to a racial or sexual harassment complaint? will the federal government conclude that the employer is merely meeting its obligation to maintain a harassment-free workplace, or will it conclude that the employer is discriminating against nonenghsh speakers on the basis of nationahty? the apparent solution to this dilemma was offered in the ninth circuit case, garcia v. spun steak company (1993). spun steak company, a california poultry and meat processor, implemented an english-only rule for the expressed purpose of promoting racial harmony in the workplace. the company's policy had been initiated in response to complaints that some hispanic workers were using their bilingual capabilities to make "derogatory, racist" comments about an african american coworker in spanish. as a repercussion of perceived racial harassment, the employer imposed a new policy that only english would be spoken in the company dunng work penods. it is important to note that this policy was not an all inclusive prohibition; spanish could still be spoken during lunch breaks and on the employees'wn time. however, no language but english could be spoken in work areas during work times. the spanish-speaking employees then argued that the language policy was discriminatory on two points: (i) it denied them a privilege enjoyed by english-only speakers: the ability to talk in the language with which they felt most comfortable and (2) it created an atmosphere of inferiority and intimidation (garcia v. spun steak company, 1993). the ninth circuit observed that title vii is not intended to protect employees from policies that "merely inconvenience" them, rather it exists to protect them only against practices that have a significant impact. because the employees in this case were bilingual, the ninth circuit concluded that the english-only rule did not preclude conversation on the job, merely spanish conversation while engaged in normal work activities. bilingual employees could still converse in english. because there was substantial evidence that the policy was a business necessity, it was justified in order to prevent certain employees from using their fluency in a language other than english to intimidate monolingual coworkers who were members of other ethnic groups. thus, the ninth circuit concluded that the policy did not violate title vii. when language restrictions are necessitated in the workplace, it becomes incumbent upon the employer to ensure that the following general guidelines are observed. first, and foremost, is there any alternative to resolving the problem without resorting to limiting use of a given language (piatt, 1993)? if not, then the employer must ensure that the english-only policy is justified by "business necessity" (u.s. eeoc, 2000, t) 1606.7(b)). this means ensuring that this rationale is documented and that the policy is implemented with the expectation that the offended employees will challenge it. if it cannot be readily and reasonably justified, you should not have an english-only policy. in addition, care must be taken to ensure that the policy does not create a universal prohibition throughout the place of employment. rather, the english-only provisions should be limited to 10 journal of small business strategy voh /4, lvo. l spring/summer 2003 those activities and during those times that are mandated by the previously established business necessity (u.s. eeoc, 2000, ss 1606.7(b)) invariably, this means limiting the language restrictions to work-related communications and work settings. requiring employees to speak english only in conversations in nonwork areas during nonwork times should be avoided. finally, before any enghsh-only policy is enforced, it is absolutely'mperative that the employer first makes the affected employees aware of the policy and the consequences for not obeying it. in its guirlelhres on diseraniiiaiion because of national origni (2000), the eeoc asserts that any employer's failure to notify its employees of the consequences of violating the english-only requirement would result in the commission concluding "the employer's application of the [enghsh-only] rule as evidence of discrimination" if it then took disciplinary action. as always, documentation of both the busmess justification for the policy and the specific notification process are highly recommended. civil rights act of 1991 the civil rights act of 1991 was signed into law on november 17, 1991.this act not only provided for punitive and compensatory damages in specific cases of intentional employment discrimination (42 u.s.c. ls 1981(a)), it also permitted employment discrimination cases to be heard by a jury. prior to the civil rights act of 1991, victuns of intentional digcrimination were not entitled to punitive and compensatory damages, and all title vii suits were heard before a federal judge only. interestingly, whenever punitive and compensatory damages are imposed, they are limited by ceilings (maximum amounts that can be imposed). the ceilings are based on the number of workers an employer employs and arc provided in figure 5. these cedings are the maximum monetary awards that federal judges may impose for punitive and compensatory damages for each victim of discrimination. figure 5maximum awards for punitive and compensatory damages under the civil rights act of 1991 maximum combined punitive andsize of employer's compensatory damages perwork force complaining party 15-200 $50,000 201-300 $ 100,000 301-500 $200,000 &500 $300,000 source: 29 u.s c. 8'98la. to demonstrate how this works, assume that a company which employs 43 workers has been found to have intentionally violated title vii by terminating two employees because of their, national origin. based on the evidence, the judge has decided that the employer's actions violated title vii and were callous enough to justify punitive and compensatory damages. the judge may award any amount up to $50,000 in damages to each of the two employees. the judge also has the discretion to award different amounts to each party (i.e., $50,000 to one worker and $ 25,000 to the other). the maximum penalty that the employer could face is $ 100,000 if the judge determined that both employees could be entitled individually to the maximum penalty. if the employer had 213 employees, then the highest potential penalty ll journal of sinall business strategy vol. l4, ato. i spring/smniner 2003 would be $ 200,000 because each aggrieved employee could be awarded individually the $ 100,000 maximum by the court. newspaper stories sometimes report multimillion-dollar punitive and/or compensatory damages awarded by juries. such awards are often misleading if the charge, as it was in this case, was exclusively a title vll violation. the maximum amount that can be awarded by a court for such a violation is $300,000 (42 u.s.c. i) 1981(b)(3)(d)). it is a pecuhanty of the system that when a jury is requested to hear a title vll case, the court is required not to inform the jury of the limitations of the compensatory and punitive damages (42 u.s.c. tj 1981(c)(2)). because of this oddity, juries may award substantial damage awards that the judges must then reduce to the maximum limits shown in figure 5. this civil rights act of 1991 also expanded the jurisdiction of title vii to the overseas plants, offices, and facilities of american-owned companies. previously, title vii only had the force of law within the united states and its territories. age discrimination in employment an employer is required to conform to the provisions of the age discrimination in employment act (adea) once the workforce reaches 20 or more employees for at least 20 weeks during the previous year. under the adea, an employer cannot discriminate against any employee in the terms and conditions of the individual's employment on the basis of his or her age, provided that the individual is 40 years of age or older. in order for an employee to establish the possibility that he or she is a victim of age discrimination, the employee must satisfy four preestablished conditions or proofs. first, he or she was a member of the class of employees protected under the adea. thus, the applicant or employee must show that he or she is 40 years of age or older. second, the applicant or employee must be minimally qualified for the job in question, meet minimum job requirements. third, the employee must have suffered an adverse employment action (i.e., discharge, demotion, denial of a pay raise, not hired, etc). fourth, it must be shown that younger employees were treated more favorably (meziere v. dearborn crane real engineering ca., 1998). in regard to this fourth factor, it is important to understand that the term favorably treated "younger employee" is not restricted to employees who are outside the protected age group, those under the age of 40. a "younger employee" may also be an individual who is over 40 but substantially younger than the complaining party (kralman v. illinois dept. of veteran 's affairs, 1994; o'onnor, v. consolidated coin catering, 1996). americans with disabilities act the americans with disabilities act (ada) of 1990 was enacted to prevent discnmination in employment against a qualified individual on the basis of a real or perceived disability (title i), prohibit discrimination against individuals with disabilities in public transportation (title ii), and provide for public accommodation and access for persons with a disability (title iii). in regard to employment, the most important thing to remember is that the ada only protects qualified individuals with a disability from discrimination. it does not protect unqualified individuals with a disability any more than the other eeo laws protect such individuals. to fall under the provisions of the ada, a small business must have 15 or more employees. if covered, the act states that no entity shall discriminate against a qualified individual with a disability because of the disability of such individual in regard to job application procedures, 12 journal of small business strategy val. /4. nv l sprung/sutiitncr 2003 the hiring, advancement, or discharge of employees, employee compensation, job traming, and other terms, conditions, and pnvileges of employment (42 u.s.c. tj 12112(a)). to determine whether an applicant or current employee is protected under the ada, two basic questions must be answered: (i) is the individual disabled? and, if so, (2) is the individual qualified" .the ada defines the term "disability" to mean: a physical or mental impairment that substantially hmits one or more of the major life activities of an individual, a record of such impairment, or regarding an individual as having such an impaimient. this means that those who currently are disabled are protected under the ada. additionally, those who were disabled but have since recovered or have been rehabilitated are covered. surprisingly, applicants or employees who are not now, nor have they ever been, afflicted with a mental or'hysicaldisability covered under the ada may still be protected if the employer thought that they had a disability and discriminated against them because of the imagined disability. as strange as thts may sound, an employer may violate the ada by erroneously assuming a nondisabled individual is disabled. an employer runs the nsk of triggering an ada claim any time an employment decision is determmed based on an individual's perceived disability. in one case, an employer refused to hire an applicant for the position of electrician because a drug test indicated that his blood sugar was high, and it was assumed he was diabetic. the employer's action was based on the assumption that the applicant had an impairment that would substantially restrict his ability to perform the essential functions of the job. however, this was a false assumption, and the applicant, who was not disabled as defined under the ada, was able to perform all essential functions of an electrician. because the applicant was perceived to be disabled and the decision not to hire him was based on that perceived disability, the employer violated the ada (robinson, franklin, &wayland, 2002). the meaning of "disability" under the ada entails having a physical or mental impairment that substantially limits one or more of the major life activities. major life activities include such activities as: caring for one's self, performing manual tasks, walking, seeing, hearing,'peaking, breathing, learning, and working (29 c.f.r. (j 1630.2(l) (1997)). as for physical impairment, this can be any physiological condition, disfigurement, or loss of one of eleven body systems. in a recent supreme court decision, suaon v. united airlines, lac., (527 u.s. 471 (1999)) it was concluded that individuals with impairments which are corrected by medical or other measures to normal functional levels are not "disabled" under the ada. for example, individuals who have their eyesight corrected by glasses or persons with high blood pressure that is controllable with medication would not be considered as disabled under the ada. in both instances, the physical impairment, because it was corrected, no longer substantially affects the individual's major life function. though the individuals are impaired, they are not suaiciently impaired to be disabled as defined by the ada. mental impairment encompasses any mental or psychological disorder that results in: mental retardation, organic brain syndrome, emotional illness, mental illness, or specific learning disabilities. these are very broad areas and encompass an extremely wide range of conditions. once the individual's "disability" has been established, the next question must be asked: is the individual with the disability qualified? if the individual can perfoim the essential job functions without any accommodation, he or she is qualified. if not, then what is the appropriate reasonable accommodation that would permit performance of these functions? reasonable accommodation refers to modifications that would permit the individual with a . 13 jt&a&vial of so&all business st&r&teg) vol. i4, no. i spring/smnmer 2003 disability to perform the essential functions, provided that these modifications do not create an undue hardship for the employer. in determining reasonable accommodation, the employer may ask the md&vidual for reasonable documentation about the disability and functional limitations. but, employers should be careful. the ada prohibits the employer from requestmg medical information which is not pertinent to the accommodation (u.s. equal employment opportunity commission, 1999). this usually precludes employers from requesting complete medical records on the indwidual in question because such records would include a good deal of information not related to the accommodation. the eeoc recommends that when requesting medical information, employers should specify what types of information they need regarding the disability and the functional limitations it imposes (u.s. equal employment opportunity commission, 1999). remember, once this information is obtained, the employer is responsible for keeping it confidential. as for making accommodation under the ada, the eeoc has developed 3 categories of "reasonable accommodation." when attempting to accommodate an apphcant or employee, an employer should consider: (i) modifying the job application process (i e., providmg readers for applications or employment exams), (2) modifying the work environment (i.e., flexible or part-time scheduling, job restructuring, reconfiguring work areas, etc.) or (3) modifying the benefits and privileges of employment (i.e., allowing employees to use vacation or personal leave to attend therapy sessions) (u.s. equal employment opportunity commission, 1999). employers, particularly small employers, are not required to provide any of these accommodations if they cause an un&lac t&arttship. if they create an undue hardship for the employer the applicant is not considered to be a qualified individual with a disalniiry. for example, a paraplegic applies for the position of truck driver at a small delivery company. but, technology is not currently available that would permit the applicant to perform the essential functions of the job (stone v mount vernon, 1996). in determimng undue hardship, the ada requires that four factors must be considered. first, what is the overall cost of the accommodation compared to the overall financial resources of the business, number of persons employed at the place of business, and its projected effect on the operating expenses of the facility? second, the overall financial resources, number of employees, and number and location of all the facilities owned by the employer are considered in regard to the cost of the accommodation. third, the accommodation must be considered in light of the type of operation in which the employer is engaged. this includes considering the organizational structure, the functions of the workforce, the geographic separateness of facilities, and the degree of administrative or fiscal interdependence between the facility and other operations of the employer. fourth, the impact that the accommodation will have on the operation of the facility in question must be considered. all of these considerations are extremely broad and make developing viable human resource policies difficult. finally, provided proper job analysis was performed on the job in question, the employer is not required to change the essential job functions. unfortunately for small business owners, undue hardship is determined too often on a case-by-case basis. family and medical leave act some small employers may have crossed the employee number "line" where they must comply with the family and medical leave act (fmla) of 1993. those small businesses subject to the fmla must be engaged in commerce, or industries or activities affecting commerce, and employ 50 or more full-time employees working 20 or more weeks during the current or preceding calendar year (29 u.s.c. 13 2611(4)(a)). furthermore, in order for employees to be eligible for the fmla leave benefit, they must work at a facility where the 14 journal of small bust'ness strategy vol. /4, no. l spring/sumtner 2003 employer has at least 50 employees within a 75-mile radius (29 u.s.c. ij 2611(2)(b)(ii)). eligible employees can receive a total of 12 weeks of unpaid leave in a 12-month period for the following reasons (29 u.s.c. ij 2612(a)(1)): (i) the birth and care of the employee's newborn child, (2) the adoption or foster care of the employee's son or daughter, (3) a serious. health condition of the employee's spouse, child, or parent, or (4) the employee's own serious health condition. in order to qualify for the above mentioned benefit, the employee requesting the fmla leave must have worked for a covered employer for at least 12 months and must have worked for that employer for at least 1,250 hours during the previous 12 months (29 u.s.c. tj 2611(2)(a)). during the fmla leave period, the small business would be required to maintain the employee's group health insurance coverage just as though the employee was still in a working status. it is important to note that if the group health insurance is a contributory plan (the employee shares the benefit cost with the employer), the employee is still responsible for paying his or her share of the benefit costs during the leave period. upon returning from fmla leave, the employer is obligated to ensure that the employee is returned to the same or an equivalent job (29 u.s.c. tj 2614(a)(1)). furthermore, the fmla provides the employee with a complaint process (through the dol wage and hour division) in the event that the employer fails to do so. there are two additional fmla-related concerns with which small employers should be acquainted. first, dol regulations governing fmla leave require employers to provide individual written notices to individual employees (29 c.f.r. ij 825.301). second, should the employer fail to provide such individual notices, that employer may not count any leave the employee has taken as fmla leave (29 c.f.r. ij 825.700). in other words, if an employer failed to notify an employee that the amount of leave that he or she was granted was being counted as fmla leaye, the employee could then turn around and request up to his or her full 12 week entitlement under the act. on march 19, 2002, the supreme court of the united states ruled in ragsdale v. wolverine ivorldwide, lnc. that the dol's penalties for failing to notify the employee that sick leave will be designated as part of the fmla entitlement were disproportionate and inconsistent with congress'ntent. unfortunately, the ragsdale decision only limits the penalty, imposed by the dol to not exceed a total of 12 weeks leave combined with previously granted leaves such as sick leave or personal time. to illustrate this distinction, assume that an employee had previously exhausted 6 weeks of his or her company sick leave, because the employer failed to notify her that the previous 6 weeks of leave was to be used against her 12-week entitlement. as a result, the employer could only be required to provide up to a maximum of an additional 6 weeks of unpaid fmla leave. the ragsdale decision only limits the dol from imposing a leave penalty that would exceed the 12 weeks mandated by law. consequently, small employers who are covered under the fmla should develop policies for notification of individual employees when leave is taken. it is important that such notification be made even when the medical leave is part of a preexisting benefit program (i.e., sick leave, maternity leave, vacation, personal leave, etc.). there should be no doubt in the employee's mind that the leave will be considered part of the employee's fmla entitlement. worker adjustment and retraining notification act the worker adjustment and retraining notification act (warn) of 1988 applies to any business that employs 100 or more employees, excluding part-time employees, or 100 or more 15 journal of sinall business strategy vol. i 4, no. i spring/sumtncr 2003 employees who in the aggregate work at least 4,000 hours per week, exclusive of hours of overtime (29 u.s.c. tj 2101(a)(1)). covered employers are required to provide a 60-day written notice to employees in the event of a plant closing or mass layoff. no employees may be laid off until the end of this 60-day period following the written notice. in addition to this employee notification requirement, the employer must notify the state dislocated worker unit (designated under title iii of the job training partnership act) (29 u.s.c. tj 1651 et sett.). additionally, a written 60-day notice must be given to the chief elected official of the unit of local government to which the employer pays the highest taxes (29 u.s.c. () 2102(a)). for the purpose of warn, the term plant closing means the permanent or temporary shutdown of a single site of employment or one or more facilities or operating units within a single site of employment, provided that the shutdown results in an employment loss of 50 or more employees (excluding part-time employees) at the single site during any 30-day period (29 u.s.c. tj 2101(9)(2)). assume that a company employs 200 workers at two plants. due to financial demands, one plant employing 70 workers will be closed permanently. since the closing involved 50 or more full-time employees, the written 60-day notification would have to be given. if, on the other hand, the plant designated for closing only employed 35 employees, warn's notification provisions would not apply. be cautious, as there may be state laws that would impose a state requirement to provide notification. employers are responsible for knowing state laws that relate to plant closings as well. a mass layoff occurs when a reduction in force is not the result of a plant closing but involves at least one-third (33 percent) of the employees (excluding part-time employees), and at least 50 employees are laid off for at least a 30-day period. under this provision, an employer with 120 full-time employees who had to lay off one-third of its employees would not be required to provide the 60-day notification. yes, the employer would be covered under warn (more than 100 workers were employed). yes, at least one-third of the workforce was laid off. however, this would require 40 employees being laid off which is 10 short of the 50 established in the act to meet the definition of tnass layoff. there is one more circumstance under which a mass layoff would be established. in any instance in which at least 500 employees (excluding any part-time employees) are laid off, regardless of the percentage of the workforce, a mass layoff is considered to have occurred, and the employer is required to provide a 60-day notice. therefore, a plant employing 2,000 workers would be required to provide notice if it laid off 500 employees within a 30-day period, even though this would result in a 25 percent reduction in force (a proportion less than the 33 percent specified for smaller employers). an exception to the 60-day notification is permitted when the closing or layoff is the result of the relocation or consolidation of part or all of the business. however, prior to the closing or layolf, the employer must offer to transfer the affected employees to a different site of employment within a reasonable commuting distance. furthermore, such transfers cannot result in more than a 6-month break in employment (29 u.s.c. 13 2101(b)(2)). additionally, the employer is not required to give notice when it offers to transfer employees to any other site of employment regardless of distance provided that there is no more than a 6-month break in employment and the employee accepts within 30 days of the offer or by the date of the closing or layoff, whichever is later (29 u.s.c. tj 2101(b)(2). to illustrate this point, assume that a plant was to be closed on april i, 2003, and an employee was given the option to transfer to another plant on march 15, 2003. that employee would have until april 14, 2003, to accept or reject the transfer offer. regardless of the 16 journal of sino/i business strategy vo/. /4, no. l spring/summer 2003 employee's decision, the employer would not have to give a 60-day notice of the plant closure. the 60-day notification period may also be reduced under circumstances that necessitate a plant closing or mass layoff resulting from business circumstances that were not reasonably foreseeable to afford the 60-day notification. for example, no notice would be required if the plant closing or mass layoff resulted from a natural disaster such as a flood, earthquake, or drought. concluding remarks small business is the backbone of the american economy. most businesses begin with only a few employees and either expand to meet consumer demand for their goods and/or services or fail as a result of poor management or poor planning. successful small businesses are confronted with additional external legal and regulatory factors as revenues, capital investment, and business operations expand and increase. not surprising, federal and state taxation and capital formation issues generally are the primary focus of owners and managers. however, employment, safety, and environmental issues often are as important in the successful transition from a small, closely held enterprise to a larger organization with more duties and responsibilities to its employees, the public, and the government. proper planning m these three areas allows a small business to grow without incurring burdensome remedial expenses to bring itself into compliance with statutes and regulations. although most federal employment laws apply only to small employers when they meet a minimum threshold of employees, some apply regardless of size while the minimum threshold vanes from law to law. therefore, it is imperative that small employers are aware of the provisions and requirements of key federal legislation. specifically, this paper suggests that small employers should have general knowledge of the fair labor standards act, the immigration reform and control act, the civil rights act of 1964, the civil rights act of 1991, the age discrimination in employment act, the americans with disabilities act, the family and medical leave act, and the worker adjustment and retraining notification act. by understanding their comphance obligations, small employers will be able to make employment decisions that will allow their businesses to prosper and grow and avoid costly and time consuming remedial efforts to bring their businesses into compliance with applicable laws and regulations. references age discrimination in employment act, 29 u.s.c. t) 623 et seq. (2001). americans with disabilities act, 42 u.s.c. 1)t) 1201 etseq. (2001). bowman, c. (1997).bls projections to 2006—a summary. monthly labor review, 120 (11), 3-5. civil rights act of 1964, 42 u.s.c. t) 2000e et seq. (2001). civil rights act of 1991, 42 u.s.c. t) 1981(b) (2001). fair labor standards act, 29 u.s.c. t5 201 et seq. (2001). family and medical leave act, 29 u.s.c. tj 2601 et seq. (2001). garcia v. spun steak company, 998 f.2d 1480 (9th cir.1993) immigration reform and control act, 1986, 8 u.s.c. tj 1324a et seq. (2001). kralman v. illinois dept, of veteran's affairs, 23 f.3d 150 (7th cir. 1994). meziere v. dearborn crane & engineering co, 1998 u.s. dist. lexis 12081 (n.d. ind. 1998). o'onnor, v. consolidated coin catering, 519 u.s. 1040 (1996). 17 journal of small business strategy vol i4, rvo. i spri ng/suminer 2003 piatt, 13. (1993). language on ihe job: balancing business needs and employee rights. albuquerque, nm: university of new mexico press. ragsdale v. wolverine world wide, inc., 122 s. ct. 1155 (2002). robinson, r.k., frankhn, g.m., & wayland, r. (2002). the regulatory environment of human resource management. fort worth, tx: harcourt college publishers. stone v. mount vernon, 118 f.3d. 92, 101 (2d cir. 1996). u.s. department of labor, wage and hour division. (2002). compliance guide to the family and medical leave act of 1993 (fmla). http: //www.dovesa/regs/compliance/ whd/1421.htm u.s. department of labor, wage and hour division. (2002). fact sheet no. 23: overtime pay requirements of the fair labor standards act (flsa). u.s. employment standards administration, wage and hour division (2002). fact sheet no. 002: restaurants and fast food establishments under the fair labor standards act (flsa). u.s. employment standards administration, wage and hour division (2002). fact sheet no. 15: tipped employees under the fair labor standards act (flsa). u.s. equal employment opportunity commission (2001). guidelines on discrimination because of sex, 29 c.f.r. )1604. u.s. equal employment opportunity commission (2000). guidelines on discrimination because of national origin, 29 c.f.r. i) 1606. u.s. equal employment opportunity commission (1999). enforcement guidance. reasonable accommodation under the americans with disabilities act. washington, dc: government printing office. u.s. equal employment opportunity commission (1995). theories of discrimination: intentionol and unintentional discnmination. washington, dc: government printing oaice. u.s. immigration and naturalization service (2001). control of employment of aliens. 8 c.f.r. $ 274a (2001). worker adjustment and retraining notification act, 29 u.s.c. i) 2101 et seq. (2001). robert il robinson, ph.d. (university of north texas) is professor of management in the school of business administration at the university of mississippi. professor robinson 's research interests involve federal regulation of the work place, agirmative action policies, sexual harassment. business ethics, and employee recruiting and selection. he has written over 90 articles which have appeared in such professional and academicjournals as business horizons, employee responsibilities and rights journal, hospital and health services administration, human resource planning, issues in accounting education, journal of psychology, journal of small business strategy, labor law journal, personnel administrator, public adminisnation quarterly, public personnel management, and many other business and government journals. professor robinson has also coauthored the book the regulatory environment of human resource management (2002). geralyn mcclure franklin, ph.d. (university of north texas) is dean of the school of business and professor of management at the university of texas of the permian basin. dr. franklin has published numerous articles on human resource management, employment law, and small business management/entrepreneurship issues in vahousjournals. in addition, she has co-authored human resource management (dame publications, l995), management (dame publications, 1997), and the regulatory environment of human resource management (the dryden press/harcourt publications, 2002). (continued) 18 journal of smoll business strategy vol. i4, no. i springlsummer 2003 vinay kothari is a regents'rofessor (retiredl in the college of business at stephen f. austin state university. he is a graduate of the university of north texas, tire university of missouri and the university of kansas. his areas of research interest and specialization include: internattonal business, strategic management, strategic marketing, small business management, entrepreneurship, and e-business. he has published over one hundred 'esearchstudies in venous academt'c books andjournals, such as the journal of e-business, management international review, the journal ofasian business, the journal of the academy of marketing science, the journal of hospital marketing, and the journal of small business strategy. he serves on the editorial boards of the journal of e-business and the international journal of e-business strategy management, and reviews articles for several professional grottps in the u.s. and across the world. he has presented numerous research studies at, prestigious nat'tonal and international conferences. 19 stra tegf usasbe/sbida 2000 conference best applied research paper awarded by journal of small business strategy where everybody knows your name: extraorganizational clan-building as small firm strategy for home field advantage'eginald a. litz university of manitoba rfitzgms. umanitoba.ca alice c. stewart ohio state university stewari.333iosu. edu abstract small firnis are comparatively resource disadvantaged when it comes to competing against scale-oriented competitors. however, one area where small firms may have a digerential advantage is in building and nurturing highly personalized cusiomer relationships. drawing on extant work in external market, internal hierarchical, and internal clan coordinating mechanisms, we conceptualize an additional coordinating mechanism — the extraorganizational clan, and hypothesize iis relationship to small firm performance. we test our hypothesis, linking extraorganizational clan-building and firm performance, on a sample of over 300 sniall retail firms. our findings show that selected aspecis of clan-building behaviors have a positive effect on small firm performance. we conclude by reflecting on what our findings suggest for sustainable small firm competitive advantage. although the impression policy makers [of large retail chains] may wish to instill is one of a "friendly neighborhood store where the workers know the customers names," the reality is that safeway and wal-mart are not small corner stores... s. schnoor(1998) small firms are resource impoverished entities (welsh & white, 1981). this reality is not necessarily problematic, however, unless they compete against larger, resource-advantaged competitors. but what if this is the case? what can small firms do to create market otterings that are perceived by customers as sufficiently rare, valuable, inimitable and nonsubstitutable '~k* *: h* g g fiiy i idg h f dfgg iddhyu*u(dg small business administration-oaice of advocacy (contract i/sba-8124-oa-94) and the university of pittsburgh central research development fund (grant t/5-3 1 883) for this research project. i journal of stnall busi tress strategy vol. l l, no. l spring/sumnter 2000 (barney, 1991)? schoor's opening quotation suggests one point of contrast —personal relationships. such social capital (burt, 1997) qualifies as neither a physical nor organizational resource, but can nonetheless be an important point for interfirm differentiation (goodwin & bremler, 1996). given the unique conditions under which such friendshipenriched relationships evolve, they can also be highly resistant to superficial imitation. however, could such personalized relationships be a basis for superior small firm performance? this article considers this possibility. it begins by exploring how nurturing personal relationships contributes to a small firm's legitimacy and thereby contributes to its perfomiance. we then report our study testing this hypothesis. after describing our instrument development and data collection methodologies, we explain the operationalizations of the variable set used in our regression analysis. we then report results from our analysis. we conclude with a discussion of what our findings suggest for small business researchers and practitioners alike. theoretical framework dimensions of organization: technical, managerial, institutional in 1960, talcott parsons proposed a tri-dimensional conceptualization of organization. he asserted that every organization operates in no less than three dimensions: technical, managerial, and institutional. whereas the first two dimensions are concerned with the advantages accruing from intraorganizational expertise and interorganizational resource flows, the institutional level's focus is on the underlying legitimacy of the organization in its particular societal context. parsons proposes that the institutional level is qualitatively different from both of the previous dimensions in two important ways. first, it operates at a more basic and fundamental level than either the technical or managerial. he writes, ...just as a technical organization (at a suriciently high division of labor) is controlled and 'serviced'y a managerial organization, so, in turn, is the managerial organization controlled by the 'institutional'tructure and agencies of the community. (parsons, 1960: 64) this suggests that the institutional dimension is foundational in nature; while the firm may be able to achieve temporary advantage based on technical expertise or managerial alliances, without adequate societal assent the firm will be unable to secure sustainable advantage. the second distinctive characteristic concerns the nature of the firm's accountability to its stakeholders (freeman, 1984). compared to the two previous dimensions, the institutional dimension is measured by far more implicit and subtle criteria. while the technical dimension is measured by the criterion of accuracy, and the managerial dimension is assessed by the standards relevant to resource procurement, institutional effectiveness is evaluated by the often less explicit, but potentially no less significant, criteria governing social exchange. while these include such concrete codifications as the rules of law, they are also heavily influenced by "standards of 'good practice'nformally accepted" (parsons, 1960: 65). the small firm and community nichemanship all businesses must satisfy institutional demands. while these have been shown to vary across different industry settings (hirsch, 1975), all firms remain accountable within their particular environmental context. the context of the small firm is distinctive, however, because of its oren more localized geographic domain. this suggests that the institutional challenge facing small firms consists of securing the support and approval of its immediate surrounding community. while such support may be secured by satisfying the nonrelational 2 journal ofsmall business strategy voh l l, no. l spring/summer 2000 needs of its community through offering technical expertise and realizing efficiencyenhancing network involvements, the consent of the local community of customers may also be fueled as much or more by social considerations. thompson, smith and hood (1993) provide empirical support for this assertion. their study documents the extent to which small firms seek to gain community approval through cash and in-kind charitable contributions and local involvements. however, there is at present a discernible gap concerning the nature of community-based niche creation. overlooking this aspect of a small firm's existence is understandable; compared to the more observable and codifiable dimensions of expert service and formal network alliances, social involvement seems comparatively vague and ill-defined. however it may be that small firm performance is determined as much, or more, by extraorganizational relationships than the impersonal attributes of iniraorganizational expertise or inierorganizational efficiency. more specifically, to the extent the small firm has effectively institutionalized its vital interests in the social fabric of its surrounding community it has successfully realized a community-based niche from which to operate. conceptualizing community nichemanship as extraorganizational clan building granovetter's work (1985) on social embeddedness focuses on the nature and importance of relational dimensions in interfirm transacting behavior. according to granovetter, relationships aid in interfirm purchasing decisions because they provide cost-effective, trustbased information that is "richer, more detailed, and known to be accurate" (granovetter, 1985: 490). the phenomenon of social embeddedness suggests that continuing economic transactions often become overlaid with social content that carries strong expectations of trust and abstention from opportunism" (granovetter, 1985: 490). integration of granovetter's insight with williamson's (1975, 1985) work on the pursuit of transactional efficiency suggests the possibility of relationally enriched market transactions requiring more modal variation than allowed by simple spot contracting. commenting on the inadequacies of traditional economic theory, williamson notes that it "...misses such [relational] considerations because it assumes that individuals regard transactions in a strictly neutral, instrumental manner" (1975: 38). lending further support to the need for variation in market contracting modes, williamson also observed that: ...it may be more accurate, and sometimes even essential, to regard the exchange process itself as an object of value. concern for atmosphere tends to raise such systems issues; supplying a satisfying exchange relarion is made part of the economic problem, broadly construed. (williamson, 1975: 38) clearly, a more inclusive perspective, more appreciative of the relational nuances inherent in market transacting, appears justified. a suitable cornerstone upon which to conceptualize such a relationally-enriched contracting alternative comes from ouchi's (1980) work on organizational clans. his effort extended williamson's (1975) markets and hierarchies framework by proposing a third coordinating mechanism, the intraorganizational clan. according to ouchi, clans are notably different from both markets and hierarchies in several important ways. whereas markets rely on hard and formal spot contracting, the contracting process of the intraorganizational clan can be characterized as soft, informal, and perpetual. collaborating with williamson, ouchi noted that: 3 journal ofsmall business strategy vol. li, no. i spring/summer 2000 under hard contracting, the parties remain relatively autonomous, each is expected to press his or her interests vigorously, and contracting is relatively complete. sor contracting, by contrast, presumes much closer identity of interest between the parties, and formal contracts are much less complete. (williamson and ouchi, 1981:361) a second distinctive characteristic of the clan is its reduced emphasis on specific knowledge and procedure and a concomitant increase in emphasis on shared value orientations. as alvesson and lindkvist's (1993) conceptualization of economic cooperative, socialintegrative, and blood-kinship clans suggests, clans provide qualitatively different valueoriented payoffs for its participants than impersonal bureaucratic structures. rather, as bernard (1938) has argued, clan compensation comes in the form of relational aairmation akin to comradeship and communion: the most intangible and subtle of incentives is that which i have called the condition of communion. it is related to social compatibility, but is essentially different. it is the feeling of personal comfort in social relations that is sometimes called solidarity, social integration, the gregarious instinct, or social security...it is the opportunity for comradeship, for mutual support in personal attitudes. (barnard, 1938: 148) if internal organizational structures can be more completely understood by the inclusion of a relational component, examination of that component in the external linkages of organizations may be equally illuminating. more specifically, by integrating a bi-modal conceptualization of transaction mode (as relational or non-relational) with a correspondingly coarse-grained conceptualization of transaction arena (as either internal or external to the organization) four types of transactions emerge. three of the four are readily familiar: the external market, the internal hierarchy and the internal clan. however, a fourth, namely the external, or extraorganizational, clan, also emerges (figure i). the extraorganizational clan results from integration of ouchi's appreciation for the soft, informal, interactions motivated by subtle, but powerful, payoffs of intraorganizational comradeship, with granovetter's insights into interfirm relationship-based transacting occurring outside the borders of the formal organization. the extraorganizational clan represents transactions that occur between parties for whom trust is maximized and opportunism is minimized. conceptual support for the extraorganizational clan social theory on community (weber, 1964; bender, 1978) provides conceptual support for the extraorganizational clan construct. while there is a substantial lack of definitional consensus on the precise meaning of community, there is general agreement that it concerns "a network of social relations marked by mutuality and emotional bonds" (bender, 1978: 7). in addition, there is also consensus that community is not inherently site-specific. rather, as bender has written, community is better understood "as an experience than as a place" (1978:6). community arises to provide social texture to the lives of those that participate in its formation and ongoing maintenance. community's conceptual distance from the impersonal spirit of neo-classical spot market contracting was clarified by weber (1964) who considered a relationship communal if its orientation was predicated on "a subjective feeling of the parties, whether affectual or traditional, that they belong together" (1964: 136). communal relationships stand in stark contrast to what weber defined as associative relationships, that 4 journal of small business strategy vol. i l, no. l spring/summer 2000 figure i: the extraorganizational clan intraorganizational extraorganizational relational clan clan (ouchi, 1980) (eoc) transaction mode hierarchy market ivon-relational (williamson, 1975) (williamson, 1975) internal external transaction arena were motivated by rational self-interest rather than mutuality and sentiment, the concept of community is relevant to the extraorganizational clan because the two share similar purposes and motivations, except that the latter realizes these aspirations in a firm-specific context. integration of the literature on clans and communities therefore suggests the following definition for the extraorganizational clan: an extraorganizational clan is a firm-specific network of informal extraorganizational relationships that result pom the past and ongoing panern of interactions between a firm and its members wiih its external social environment. freeman's (1984) work on stakeholder theory suggests that the extraorganizational clan encompasses a wide and diverse array of external relationships that includes suppliers, regulators, competitors and customers. while this range of stakeholding groups may be inherent in the nature of the previous definition, it should be noted that the primary focus of this study is on the extraorganizational clan relationships that a firm proactively develops between itself and its customers. these theoretical perspectives also suggest the possibility of observable performance differences existing between those small firms that proactively engage in extraorganizational clan-building and those that do not. by recognizing and addressing the relational potential of the transacting experience the small firm is able to realize superior performance. therefore, our study's central hypothesis: extraorganizational clan-building is positively related with small firm performance. 5 journal ofsniall business strategy vol. l l, no. l spring/summer 2000 methodology industry selection the retail hardware industry (s.i.c. 5251) was selected for this study for two reasons: first, because of the fragmented nature of the industry (miller, 1992); second, because of entry of several giant firms into this industry (ehrenfeld, 1995); and third, because of a demonstrated tendency for small firms to get involved in the local community context (thompson, et. al., 1993). instrument development, data collection and response rates we contacted 1,169 small hardware stores in seven major u.s. metropolitan areas (including atlanta, miami, long island, san diego, chicago, minneapolis-st. paul, and kansas city). after participating in a short qualifying telephone interview, respondents completed a mailadministered survey that had been pre-tested and validated on a sample of canadian hardware stores. the survey was designed in accordance with dillman's total design method (dillman, 1978). of the total sample of 1,169 stores, 340 (29.1%)were inaccessible (i.e., they had either ceased operations or were unavailable to answer the initial telephone call); 62 (5,3%) were incorrectly categorized as retail hardware stores; 110 (9.4%) were in operation and correctly classified as retail hardware stores but nonetheless refused to participate in the study. of the 677 that were correctly classified as retail hardware stores, 370 (31.65%of the total sample) agreed to cooperate but failed to follow through by returning their completed survey, while 307 (26.3% of the total sample) followed through by sending back their completed surveys. in terms of the toial sample, the 307 respondents represented a response rate of 26.3%; in terms of the 787 stores eligible to participate in the study, the 307 represented a 39.0% participation rate; in terms of the 677 stores that agreed to participate in the study, the 307 responses represented a response rate of 45.3%. dependent variable: operationalizing small firm performance given the predominant focus on sales volume, the retail productivity measure of sales per square foot (mason, mayer & ezell, 1988) was chosen as the dependent variable measure. to compute sales per square foot 1994 sales was divided by the store's inside selling space using scaled data. scales on both measures were developed with the assistance of a cotter true value canada retailing industry expert. since exact sales and store square footage were only approximated from scaled responses the resulting distribution's skewness was exacerbated. in an effort to more closely approximate a normal distribution, we employed a logarithmic transformation (glass & hopkins, 1984). independent variable: operationalizing extraorganizational clan-building. building on insights gained during the exploratory interviews, and subsequently refined during the pretest, the extraorganizational clan-building construct was operationalized in two basic ways that included both transacting behaviors and community involvements (figure 2). transacting behaviors: pre-, intra-, postand extra-transactional. the first major operationalization of extraorganizational clan-building focused on different aspects of sale transacting. these aspects included behaviors before, during, and alter regular transacting which encouraged firm-specific relational allegiance. in addition, given the "beyond the call of normal duty" nature of extraorganizational clan building, operationalization also considered extra-transactional behaviors, that is, behaviors occurring outside normal business hours (a full listing of all 14 items is found in table i). a1114 items, representing pre(3 items), intra6 journal ofsmall business strategy vo/./i, no. i sprin(j'summer 2000 (5 items), post(3 items), and extra-transactional (3 items) behaviors, employed a five point likert scale; a score of one meant the behavior never occurred, while a score of five meant the behavior always occurred, given appropriate opportunity. in an effort to reduce the 14 items into a more parsimonious offering, factor analysis was utilized. in keeping with the advice of kleinbaum, kupper and muller (1988) several different rotational techniques were considered in attempting to minimize factor misfit. quartimax rotation was eventually selected as the most appropriate method of rotation given this technique's tendency to encourage individual items to load mainly on one factor (stevens, 1992). using the criterion of eigenvalues of at least one (kaiser, 1960), three factors were identified (table 1). inclusion of individual items in a particular factor required the item to satisfy guadagnoli and velicer's (1988) loading criterion of .60 (excepting item 1 in factor 3 which loaded at .590). the three factors (accounting for 21.8%, 13.5%and 9.8%, respectively) together explained 45.1%of the items'otal variance. figure 2: operationalizing extraorganizational clan-building: transactional behaviors 41 extraorganizational involvements fxtraorganizational clan-building through transacting behaviors i. pre-transactional 2. intra-transactional 3. post-transactional 4. extra-transactional extraorganizational extraorganizational clan-building clan formation through extraorganizational involvements l. local networks 2. local volunteerism 3. local philanthropy community involvements: networks, volunteerism, snd philanthropy. a second major operational ization of extraorganizational clan-building focused on extraorganizational behaviors undertaken by the firm's members that encouraged the formation of relational ties between the firm and its surrounding community. as figure 2 shows, operationalization included three dilyerent extraorganizational behaviors. these included involvement in local networks, such as business (such as the local chamber of commerce) and service (kiwanis, rotary and lions) associations, and local philanthropies (thompson, et. al, 1993) such as charitable (united way), youth (community clubs and sport teams), and religious (church auctions) groups. a final operationalization of the extraorganizational clan-building construct involved local volunteerism with each respondent being asked to estimate the average number of hours spent during an average week on community involvements. respondents were asked to estimate their store's degree of involvement in each of the five areas using a five point likert scale; a score of one represented no involvement whatsoever and a score of five represented high involvement. scores out of five were summed across the five areas to generate each respondent's score out of a maximum of 25. integrating the extraorganizational clan-building operationslizstions. in the interests of parsimony, a principle components analysis was carried out of the five sub-operationalizations of extraorganizational clan-building (i.e., the three transactional factor scores, the network/philanthropy involvement score, and the number of hours spent each week on 7 journal of small business slraregy vol. ii, no. i spring/summer 2000 community involvements). by combining the factor loadings (of 0.694 for the extratransactional factor, 0.270 for the post-transactional factor score, 0.398 for the pretransactional factor score, 0.709 for the average number of hours spent per week on community work, and 0.699 for the community involvement score) we generated s single score for each respondent in the extraorganizationsl clan-building niche dimension. table i: extraorganizational clan-building behaviors: quarti max factor analysis of 14 pre-, intra-, postand extra-transactional behaviors factor i: factor 2: factor 3: extrapostprevarisble transactional transactional transactional behaviors behaviors behaviors open the store up in the middle of the night in 0.831 0.006 0 052 order to help customers with an emergency (farra-trnnssctionni) give out your orna phone number to customers 0.710 -0.006 0.121 just in case they hnve an oner hours emergency (extra-trnnsncfionnl) loan customers produas to try out before they 0.707 0.115 -0.034 buy them so they get exactly what they need (intra-trnnsnctionnl) keep the store open past oaicisl store hours to 0.613 0.)89 0.162 help out customers (extra-transnational) let customers rent equipment without putting 0.580 0.143 0.010 down s deposit (/nira-transactional) take back products even if they'e opened (pari0.182 0.868 0.009 trnnssctionnl) toke back products even if they'e used (pasi0.156 0.696 -0. 147 trnnsnctionsl) take back products even if customers don't have 0.238 0.69$ 0.056 s receipt (parr-trnnssctionnl) txy to develop friendships with customers while 0.086 0.033 0.699 they'rc shopping in the store (pre-transactional) mnke it s pnority to be around the store dunng 0.059 -0.031 0.672 regular hours in order to get to know customers (pre-trsnssclionsl) greet your customers by name ss they enter the 0.212 -0. 102 0.590 store (pre-transactional) hold merchandise for longer-then-norms! lengths 0.366 0.142 0. 106 of time (/nira-trsnssctionnl) extend credit to customers because ofhow well 0.363 0.145 0.097 you know them (intra-transactional) place spemsl orders for customers without 0.456 0.210 -0.006 requiring deposits from them (intra-transactional) environmental control variables: customer affluence, competitive density, residence age we also incorporated three external environmental control variables in our design. in recognition of the dimension of environmental munificence (castrogiovanni, )99l) we included measures for both customer affluence (operstionalized as median per capita income) and competitor density (operationalized as number of retail competitors identifying themselves under the md2" s.i.c. category). in respect of potential industry-specific effects related to neighborhood age, we also controlled for average house age. to define each respondents'elevant geographic domain, we asked all respondents (during the qualifying telephone interview) to identify the zip codes accounting for the critical mass of their 8 journal ofsmall business strategy vol. l l, no. l spring/summer 2000 establishment's trading area. we then integrated data for each of the zip codes from the most recent u.s. census on each of the three dimensions to generate weighted values, with each zip code area weighted by its respective population. organizational control variables: firm size and customer service in an effort to account for the possibility of different internal factors influencing the respondent's operations, two key intra-organizational dimensions were also controlled for. the first, firm size, was predicated on aldrich and auster's (1990) observation of size being a significant predictor of organizational strategy and performance. while the operationalization of size has included a variety of measures, including natural logarithm of sales, net assets, and number of employees in the organization (singh, 1986), for the purposes of this study size was operationalized as the standardized log of each store's square footage (using scaled data). this selection was motivated by three considerations: the basic validity of square footage as a size control (mason, meyer, & ezell, 1988), data collection limitations, and minimization of multicollinearity (pedhazur, 1982). regression diagnostics were carried out in order to assess whether the size measure's correlation with the dependent variable was problematic; no multicollinearity problem was observed. in an effort to establish the discriminant validity of the extraorganizational clan-building construct from the more generic construct of "customer service," twenty-two items from the parasuraman, zeithaml and barry (1988) servqual survey instrument were included in the survey. reverse-scored items were reconverted by subtracting the reported score from eight. all twenty-two items were then summed and averaged for a mean customer service score. while direct customer involvement in the measurement process would have increased the measure's validity (parasuraman, zeithaml & berry, 1985; parasuraman, et. al., 1988; nel & pitt, 1993), resource limitations constrained the choice of data providers to only include store owner/managers. results and discussion a summary matrix of the correlation coefficients of the variable set is found in table 2. our study's hypothesis proposed that extraorganizational clan-building was positively related to firm performance. table 3 presents results from multiple regression models testing this assertion. in terms of descriptive statistics, respondents'ean 1994 sales were approximately $900,000. the mean establishment age was just under 38 years. three models form the crux of our analysis; model i reports the results of our basic model including control variables only; model 2 adds the aggregated extraorganizational clan-building factor score; model 3, utilizes the factor score's disaggregated data (that is, the three transactional factor scores, the number of hours spent per week on community involvements, and the community involvement score). our flrst model shows sales per square foot being positively related to resident affluence and competitive density. this suggests that small firm performance is influenced by environment; however, a finer-grained examination tells a somewhat different story. as model 3 shows, further investigation of the role of the strategy's composite parts shows all five of the elements achieving statistical significance, albeit in two distinct patterns. two of the three transaction factor scores (the extra-transactional and pre-transactional factors) and one of the extraorganizational involvement variables (number of hours spent each week on community involvements) were negatively related to firm performance, while the other two elements (post-transactional factor and total community involvement score) were positive predictors of firm performance. 9 journal of smog business srraregy vol l l, no. l spring/summer 2000 table 2: summary statistics and correlation coefficients (probabilities) of performance, extraorganizational clan-building factor score, and sub-components ( i) dl d l l4[ vl (6) dl mean perforextraorg. extrapostprecomm. comm. (s.d.) mance clan score trans. trans, trans, hours involve i i ( perfurmance 0.205 1.0 (0 162) (') (2[ extraorganizationai 20.553 -0.088 1.0 clan-building score (6.455) (.1673) (~ ) [3[ extra-transactional) 7.278 -0.099 0.569 1.0 (2.880) (.0856) (&.0001) (~ ) [4] post. transactional) 7.875 0.039 0.173 0.271 1.0 (2.082) (.5043) (.0055) (&.0001) ( ) [5[pre-transactional) 7.592 -0.084 0.235 0.216 -0.024 i 0 (1.424) (.1476) (.0001) (.0001) (.6744) ( ) [6 community hours 3.310 -0.055 0.812 0.190 0.021 0.098 1,0 (4 790) (3621) (&.0001) (.0014) (.7282) (.1043) ( ) (7[ community 11.610 0.011 0.774 0.228 0.022 0.069 0.443 1.0 involvements (4 411) (.8518) (& 0001) .0001 (.7085) (2486) (& 0001) ( ) what might these findings mean? at the very least, they provide support, albeit limited, for our hypothesis. the bifurcated pattern of predictors also suggests that all forms of extraorganizational clan-building should not be seen as equally beneficial. indeed, undiscerning and unfocused actions appear a rather unwise use of the scarce resource of management time. rather, effective extraorganizational clan-building appears to involve focusing on those aspects of clan-building that do not detract from the core activities of the firm. this is suggested by the distinction between indirect, behind the-counter, versus direct, outside-the-store involvement; the former permits store managers to connect with their respective communities while remaining engaged in their firm's core activities, while the latter require an explicit tradeoff. a second assertion is also hinted at in these results. extraorganizational clan-building's linkage to performance may be most readily observed in those transactional behaviors that are most trust-intensive. this is apparent from the post-transactional factor score's positive test result. given our earlier definition of the extraorganizational clan as "a firm-specific network of informal extra-organizational relationships that result from the pass and ongoing pattern of interactions," giving customers the benefit of the doubt through a generous and unquestioning return policy may be an important and necessary route to encouraging their practice of social reciprocity (gouldner, i 960). conclusion: if you know them, they will come the small firm must find some way to compete that alleviates its chronic condition of resource impoverishment (welsh & white, l98(). building on work in institutional legitimacy, we have argued that one strategy small firms can pursue is to develop deep and enduring clan-like linkages with customers. our study offers preliminary support for this assertion with managers reporting selected efforts to foster and nurture customer friendship as enhancing their respective establishments'rospects for survival. (0 journal ofsmall business strategy vol. ll, iua. i spring/summer 2000 table 3: summary of regression analysis for extraorganizational clan-building dependent variable: sales per square foot (standardized betas reported with t-ratio) model i model 2 model 3 control variables: store size -0.416 -0.431 -0.490 (-7.483"') (-7.165ass) (-7.988"v") customer service 0.004 0.046 0.057 (0.075) (0.790) (0.993) affluence 0.145 0.126 0.083 (2.574&) (2.042s) (1.327) house age -0.002 0.048 0.071 (-0.041) (0.748) (1.145) competition 0.091 0.133 0.097 (1.697t) (2.271&) (1.687t) independent variables: extraorgaoizatiooal clan-building -0.083 (-1.411) extra-transactional factor -0.143 (-2.262&) post-transactional factor 0.098 (1.654t) pre-transactional factor -0.100 (-1.661t) number of hours spent per week on -0. 168 community work (-2.537') total community involvement score 0.175 (2.688s s) constant -0.408 -0.394 -0.268 (-1.726'v') (-1.529) (-1.017) r 0.188 0.216 0.272 adjusted r 0.174 0.196 0.241 df 288 238 234 f 13 3ptuv 10.91'u'.731s's t p &.10 sp& (15 v' &.01 us ~ p & pot however, notwithstanding our study's results, several caveats warrant mention. a first limitation concerns our exclusive reliance on store managers. due to methodological limitations, we were unable to include customer input to validate the extent to which the transactional behaviors actually occurred. likewise, no community social agencies were solicited on respondents'ctual involvements. clearly, an important next step could involve expanding the circle of data points to include a more diverse set of stakeholders. likewise, in consideration of parsons'onceptualization of the technical, managerial and institutional dimensions of organization, additional work could explore the extent to which relational initiatives demonstrate an interactive effect with either technical and managerial actions. in summary, small firms are fundamentally disadvantaged when competing against large competitors. however, the large competitor is not without its own achilles'eel. one point of apparent vulnerability arises from scale-oriented operations often being accompanied by 11 journal ofsmall business strategy vol. i l, no. i spring/summer 2000 increasingly impersonal transacting behaviors. to reverse paraphrase welsh and white (1981), while "a small business is not a little big business," neither is a large business a big small business. and at exactly this point a relational opportunity emerges for the alert small firm. by deliberately enriching its transactions with a relational overlay, small firms can foster personalized loyalty largely inaccessible to scale-advantaged players. while large firms may, as schnoor's opening statement observed, attempt to instill a superficial veneer of friendly service as "a friendly neighborhood store where the workers know the customers'ames" the reality remains otherwise. references aldrich, h. &. auster, e. (1990). even dwarfs started small: liabilities of age and size and their strategic implications. in b. staw and l. cummings (eds.), the evolution and ada tation ofor anizations. greenwich, ct: jai press inc. alvesson, m. & lindkvist, l. (1993).transaction costs, clans, and corporate culture. journal of mana ement studies 30(3), 427-452. bernard, c. (1938). the functions of the executive. cambridge, ma: harvard university press. barney, j. (1991). firm resources and sustained competitive advantage. journal of m~i7t i),99-129. bender, t. (1978). communi and social chan e in america. baltimore: the johns hopkins university press. burt, r. s. (1997). the contingent value of social capital. administrative science uarterl 42, 339-365. castrogiovanni, g. j. (1991). environmental munificence: a theoretical assessment. academ of mana ement review 16(3), 542-565. dillman, d. a. (1978). mail and tele hone surve s: the total desi n method. new york: john wiley & sons. ehrenfeld, t. 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(1964). the theo of social and economic or anization. trans. t. parsons. new york: the free press. welsh, j. a. & white, j. (1981). a small business is not a little big business. harvard business review 59(4), 18-32. williamson, o. (1975). markets and hierarchies. anal sis and antitrust im lications. new york: free press. williamson, o. (1985). the economic institutions of ca italism. new york: the free press. williamson, o. & ouchi, w. (1981). the markets and hierarchies program of research: 0 s,l ps,p 9 t.l w.t) da.v d 9 (du)o~i ~desi n. new york: wiley. reginald a. litz is associate professor in the department of marketing at the university of manitoba in winnipeg, canada. he received his ph. d. in strategic planning & policy fiom the university of pittsburgh. his research interests focus on business strategy, small and family business, and social issues in management. alice c. stewart is director of strategic analysis and assistani professor of management at the ohio state university in columbus. she received her ph.d. in strategic management pom the university of north carolina at chapel hill. her research interests include corporate strategy, international management, and organizational learning. 13 http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2018, vol. 28, no. 03, 48-68 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2018 small business institute® w w w. j s b s . o rg information seeking or environmental scanning enables decision makers to reach high-quality decisions (denison, dutton, kahn, & hart, 1996; dahlin, weingart, & hinds, 2005; thomas, clark, & gioia, 1993). given the importance of information seeking, past research has explored various information search behaviors such as the types of sources used and how often these sources are accessed to resolve the perceptions of environmental uncertainty (mcgee & sawyerr, 2003; milliken, 1987). the uncertainty about the environment is addressed by acquisition of information from sources within (internal sources) and outside (external sources) the boundary of the firm, commonly referred to as generalized scanning (daft, sormunen, & parks, 1988; elenkov, 1997; may, stewart, & sweo, 2000; pett & wolff, 2016). while this line of inquiry has produced a steady stream of research in the management literature, there are at least two factors that complicate a straightforward implementation of this reasoning to small businesses. first, instead of giving equal importance to external and internal sources of information, research in small businesses has focused largely into internal sources because of the assumption that small businesses managers may lack sophisticated management information systems making them less likely to engage in external scanning behaviors (brush, 1992; smeltzer, fann, & nikolaisen, 1988). while this may be partially true, increasingly external sources of business information are found to be invaluable for small business owners in determining appropriate courses of action and plan for the future (angelsberger, kraus, mas-tur, & roig-tierno, 2017; lang, calantone, & gudmundson, 1997; mcgee & sawyerr, 2003; pett & wolff, 2016). but as a result of exclusive focus on the internal sources in the literature, there is limited consensus on what the external sources are and specifically what contributes to small business decision makers’ accessing one source over another. second, while perceived uncertainty about their environment is clearly a powerful antecedent to information seeking, we posit that the organizational context is also introduction mahendra joshi1, vikas anand2 1grand valley state university, usa, joshim@gvsu.edu 2university of arkansas, usa, vanand@walton.uark.edu small business owners’ external information-seeking behaviors: the role of perceived uncertainty and organizational identity complexity perceived uncertainty, organizational identity, information seeking this study examines how small business owners’ perceived uncertainty about their environment interacts with the complexity of their organization’s identity to explain their information seeking from external sources. we hypothesize that perceived uncertainty is positively related to external information seeking, and, organizational complexity, in the form of different organizational identities, complicates this relationship and reduces the information seeking in certain conditions while increases in others. the results extend evidence to prior established relationships between perceived uncertainty and information seeking and also suggest that organizational complexity plays an equally important role as a critical moderator. additionally, we propose a different classification scheme for the external sources and use this to test our hypotheses. apa citation information: joshi, m., anand, v. (2018). small business owners’ external information-seeking behaviors: the role of perceived uncertainty and organizational identity complexity. journal of small business strategy, 28(3), 48-68. 49 m. joshi, v. anand journal of small business strategy / vol. 28, no. 3 (2018) / 48-68 important especially for small business. the lack of adequate resources to influence or change the external environment could tilt small business managers’ attention heavily towards organizational cues—signals coming from the business itself instead of the environment—in guiding their information seeking. even in the mainstream management research the explanatory power of these firm-specific circumstances, over and beyond perceptions of uncertainty, is rarely researched. highlighting this fact garg, walters, and priem (2003, p. 726) argued that “a firm’s internal circumstances also produce important and changeable data that compete for executive time and attention, yet this aspect of executive scanning has been relatively ignored.” in this paper we bring these two issues together to propose the following: first, we argue that external information seeking at the level of small businesses should be viewed not just as generalized scanning of the environment but in a more practical manner that is actually adopted by small business decision makers. while many researchers in small business management research have used the dichotomy of internal and external or formal and informal sources to established relationships between perceptions of uncertainty and the use of these sources (brush, 1992; mcgee & sawyerr, 2003), we believe these dichotomies are too simplistic in building a realistic understanding of the use of external information sources. accordingly, we propose a different classification scheme for the external sources and use this to test our hypotheses. second, we evaluate the widely tested relationships between perceived uncertainty and external information seeking in small businesses in light of the moderating effects of the organizational context. we focus on one specific context that has been proven to heavily influence managerial information search—the identity of the organization. identity of a firm is an important firm-specific factor that drives managers’ assumptions and interpretations about their environment (anand, joshi, & o’leary-kelly, 2013). organizational identity (oi), at a very basic level, is the theory of the organizational members about “who are we as an organization?” (albert & whetten, 1985; corley & gioia, 2004). beliefs about oi are powerful forces that guide managerial sensemaking and interpretation of issues (anand, et al., 2013; porac, thomas, & baden-fuller, 1989; weick, 1995). studies on managerial cognition have also shown that top managers’ perceptions of their organization’s identity had strong impact on strategic information seeking and choices they make (anand et al., 2013; porac et al., 1989). given that research has found that oi shapes executives’ beliefs about their environments (dutton & dukerich, 1991; porac et al., 1989), it is surprising that previous research in general has overlooked oi in assessing executives’ information seeking behaviors. we develop and test our hypotheses through data collected in the u.s. lodging industry. this is a great setting to test the proposed theory because of multiple reasons: first, this is a highly fragmented industry involving intense competition and uncertainty which makes it ideal to explore the variables of interest. second, most organizations in the industry are franchises where decision makers are typically also the owners of these franchises and they confront a variety of identity issues. for instance, while a large number of franchisees are quite interestingly owned by people of indian origin with limited ties to the mainstream culture, they have been extremely successful in this business. thus, the ethnic identities along with their business identities are likely to influence where and how they source their information. the rest of the paper is structured as follows: first, we review the literatures of perceived uncertainty, information seeking and organizational identity. then we offer theoretical arguments and develop testable hypotheses. subsequently, in the results section we discuss the results and findings and finally conclude the paper with discussions, limitations, and future research opportunities. internal and external information seeking in small businesses information seeking is a necessary and important stage of the strategic decision making and is essential to determine industry trends and to reveal potential threats and opportunities. it has been related to effective decision making, and firm performance (auster & choo, 1993; ghoshal, 1988). scanning enhances perceived competence and inspires confidence in the manager’s ability to deal with strategic issues. a higher level of information use among managers is related to their interpretation of strategic issues in positive-gain terms (thomas et al., 1993). managers also interpret a situation as controllable when they use higher levels of information (denison et al., 1996; kuvaas, 2002). a prominent line of research has linked decision makers’ information search activities to their perceptions of environmental uncertainty (milliken, 1987). decision makers feel uncertain about their environments when they do not feel confident about what the major trends in the environment are; or they are unsure about what effect an environmental event will have on their firm; or when managers are not confident about how to respond to some environmental changes (milliken, 1987). the uncertainty about the environment is resolved by the acquisition of information from sources both within and outside the firm and the sources are classified as internal and external sources (elenkov, 1997). studies in small business management have discovered that information search activities of owner-managers 50 m. joshi, v. anand journal of small business strategy / vol. 28, no. 3 (2018) / 48-68 of small firms rely more on internal sources (e.g., family members) for information as against external sources (e.g., consumers and suppliers) (brush, 1992; smeltzer et al., 1988). small firms’ owner-managers prefer internal sources because their firms lack organizational structure and processes needed for effective environmental scanning (mcgee & sawyerr, 2003). in addition, small business owner-managers may have fewer external linkages that could help them in effective boundary spanning. indeed, in an empirical test, sawyerr, mcgee, and peterson (2003) found that under high levels of perceived environmental uncertainty, owner-managers of start-up firms were more likely to seek information from personal networks inside the organization than from outsiders. a case can be made however, that small business owners ought to seek information from outside sources almost equally (if not more) compared to their larger counterparts. this is especially true for situations bringing uncertainty such as strategic change or pursuing growth opportunities where small businesses may find themselves unequipped with adequate resources or knowledge base within the firm to guide them. under these conditions exclusive reliance on internal sources may run the risk of the businesses remaining uninformed about important industry trends and opportunities. in fact, researchers have argued that small business owners “must gather data outside the organization” precisely because they often do not have the same ability as larger organizations for internal expert consultation or elaborate internal information systems (lang et al., 1997, p. 20). the external sources that management researchers have traditionally examined are sources outside the firm such as consumers, colleagues, suppliers, media and even competitors or sources such as trade journals, newspapers, and government reports (e.g. brush, 1992; daft et al., 1988; mcgee & sawyerr, 2003). most of the research combines all these sources to represent a singular construct of external sources. we believe this aggregation is too simplistic because small business managers may tap into some of these external sources quite reflexively pretty much on a daily basis simply because diving into these sources is part of their daily established routine. for example, the use of sources such as watching or reading reports in the media or collecting information from attending trade shows can be considered routine sources of information because information from these can be acquired in a very stable repetitive manner. however, acquisition of information from certain other sources (e.g., consumer data, competitor information) is not so straightforward. to account for varying scanning patterns, we propose a different classification scheme for the external sources and label these categories as routine and non-routine sources. a routine is a pattern of activity that is repeatedly invoked. information seeking is routine when the results of past searches become natural starting points for initiating new searches. routine external sources are likely to be sources such as trade magazines, sales brochures, advertising, national newspapers, general magazines, journals, local newspapers, manufacturer materials, catalogues, annual reports and government publications (cf. sawyerr, mcgee, & peterson, 2003). on the other hand, the information sourced from consumers, networks with other industry participants and competitors can be combined into a category of non-routine sources. previous research suggests that these sources are used to seek information when the answers to the questions aren’t very obvious. for example, auster and choo (1993) found that decision makers sought information from their consumers and competitors in the industry to address unexpected issues. in many instances, in-depth conversations with their competitors led to acquisition of information that wasn’t available through routine methods. having argued for the separation of external sources into two different categories, we now propose specific hypotheses between perceived uncertainty and these sources of information. perceived uncertainty and routine and non-routine information seeking perceived uncertainty is a function of two critical variables—the importance of environmental domains and the changes happening in those domains (daft et al., 1988). domains of knowledge refer to a sphere of activity, concern, or function (tenkasi & boland, 1996). in the physical sciences, for example, different knowledge domains may consist of areas such as molecular biology, physiology, biochemistry, molecular kinetics, etc. in order to develop a pharmaceutical product r&d scientists need to seek information about many of these domains in order to achieve a complex synthesis of multidisciplinary ideas. similarly, top managers seek information about multiple domains in order to make strategic decisions (hambrick, 1981, 1982). researchers have evaluated top executive information seeking about several external environmental domains such as customer needs, marketing, technological, regulatory, and government sectors (auster & choo, 1996; daft et al., 1988; garg et al., 2003). research shows that information about a wide variety of domains helps executives address the prevailing uncertainty in the environment (huber, 1984). when a large number of environmental domains are perceived important and when these domains are also perceived to be undergoing changes, executives are likely to engage in wider search efforts with greater frequency of information seeking (boyd & fulk, 1996). indeed, perceived 51 m. joshi, v. anand journal of small business strategy / vol. 28, no. 3 (2018) / 48-68 uncertainty has been repeatedly found to be positively related to both the scope and frequency of information seeking (daft et al., 1988; yasai-ardekani & nystrom, 1996). while the overall scope and frequency of information has already been discussed previously, we propose that perceived uncertainty will also be positively related to both routine and non-routine information seeking; although as perceived uncertainty increases it will be more strongly related to non-routine information search rather than the routine sources. increasing perceptions of uncertainty in the environment occur when small business owners/managers perceive a larger number of domains are undergoing changes that they don’t adequately understand (cf. yasai-ardekani & nystrom, 1996). in these conditions, routine information sources are perhaps the first easily accessible avenues that decision makers tap into because they help them achieve higher degrees of control and manageability in the decision-making process (boyd & fulk, 1996, daft et al., 1988; elenkov, 1997). however, the higher level of perceived uncertainty is likely to set higher bars for information needs. consequently, it is likely that these routine sources prove to be limited in providing a satisfying solution that addresses the large amount of changes perceived by the decision makers. with increasing uncertainty, managers are also unlikely to accurately assign probabilities to how particular events or changes in the environment affect their organization. this is likely to prompt them to access non-routine sources because routine sources are only good for issues that they have previously confronted. indeed, boyd and fulk (1996) argued that “information search in analyzable situations is routinized and primarily involves existing procedures and programs. if the situation is unanalyzable, however, the search is of a different kind.(p. 6)” this information seeking will involve scanning sources that are not usually accessed. based on these arguments we propose the following hypotheses: hypothesis 1. perceived uncertainty is positively related to routine information seeking. hypothesis 2. perceived uncertainty is positively related to non-routine information seeking. organizational identity complexity having examined the more traditional antecedent of information seeking, we now shift our attention to the independent and interactive effects of organizational identity complexity on information seeking. organizational identity (oi) reflects answers to questions such as “who are we as an organization?” the answers to such questions probe organizational values and goals and provide organizational members with a sense of stability. research on organizational identity has focused on understanding an organization’s central, distinctive, and enduring characteristics (albert & whetten, 1985). this central character reflects the most essential features of the organization; the distinctive character points to features that distinguish the organization from others with which it may be compared, and the enduring aspect refers to the features that exhibit continuity over time (albert & whetten, 1985). an important identity related factor is that organizations, like individuals, can assume multiple identities. firms develop multiple identities when there are several different views about the central, distinctive and enduring characteristics of the organization. like other organizations many small businesses in today’s complex worlds increasingly exhibit multiple identities to address the varied demands of their diverse stakeholders (pratt & foreman, 2000). scholars have argued that multiple identities are increasingly common and need to be managed effectively (pratt & foreman, 2000). managing multiple identities can create complexity for top executives especially for small business owner/managers because they encounter a large number of variables (for e.g., diverse stakeholder demands) during decision making and they may not have enough resources to process these demands (cf. dess & beard, 1984). we refer the complexity these multiple identities present as organizational identity complexity and propose how it acts as an important variable in predicting business owners/managers information seeking behaviors. a continued increase in the perceptions of identity complexity will likely demotivate decision makers from their search efforts because additional information is unlikely to yield viable solutions to the intricate problem at hand. illustrating this issue, boyd and fulk (1996, p. 6) argue that a situation is analyzable “if there are known ways of solving it, and little reflection or judgment is required after one has some experience with it….information search in analyzable situations is routinized and primarily involves existing procedures and programs. if the situation is unanalyzable, however, the search is of a different kind. individuals rely on introspective (“experience, judgment, wisdom, knack, intuition”) rather than regular search procedures.” early organization theorists also suggested that under high complexity decisions are often made when a sufficient option is encountered (called satisficing) rather than after a prolonged search for the best option. this is because under high complexity executives are cognitively limited to understand the cause-effect relationships and are unable to assess which information will resolve the problem at hand (cyert & march, 1963). moreover, as complexity continues to increase, executives will invest fewer efforts to collect 52 m. joshi, v. anand journal of small business strategy / vol. 28, no. 3 (2018) / 48-68 information because “unanalyzable environments may contain fewer useful information cues, and that because stimuli are less familiar individuals may favor past experience and intuition over external data” (boyd & fulk, 1996, p. 7). based on these arguments we hypothesize: hypothesis 3. perceived organizational identity complexity is negatively related to routine information seeking. hypothesis 4. perceived organizational identity complexity is negatively related to non-routine information seeking. interactive effects of perceived uncertainty and oi complexity on information seeking under low identity complexity small business owners are likely to compartmentalize different identities (pratt & foreman, 2000). compartmentalization allows the conflicting identities to co-exist by inhibiting direct or explicit interaction among them. as a result owners/managers are likely to structure their information processing activities viewed only through specific identity lenses and not necessarily worry about the overlaps and integrative effects of the information sought. add to this a weak perception of uncertainty, the overall situation amounts to be relatively innocuous where the search for information is rather mundane. however, as perceived uncertainty rises owner/managers are likely to not only seek information from routine as well as non-routine sources they will also need to assess how the different environmental elements are interconnected. it implies that when the perceived uncertainty is high and organizational complexity is low the information seeking takes place through both routine and non-routine sources; although the information sought from routine sources will likely be higher because there is hardly any incentive to seek non-routine sources in this situation. as identity complexity increases managers need to integrate a number of views which are often contradictory and/or difficult to understand (griffin & griffin, 1997). the perceived complexity, in turn, is likely to suppress information seeking from both routine and non-routine sources about the different environmental constituencies because it is not likely to address the complex nature of decision making in such firms (miller & friesen, 1983). when the tasks are complex more information does not necessarily resolve problems (boyd & fulk, 1996). decision-makers need new and unorthodox ways to seek solutions to resolve the complexity. accordingly, we hypothesize: hypothesis 5. organizational complexity moderates the relationship between perceived uncertainty and non-routine information seeking such that perceived uncertainty will have a weaker positive relationship with non-routine information seeking when organizational complexity is high than when it is low. method setting we test the hypotheses by surveying the owners of properties in the u.s. lodging industry. according to the north american industry classification system (naics) this industry is comprised of establishments primarily engaged in providing short-term lodging in facilities known as hotels, motor hotels, resort hotels, and motels. according to the naics data the industry also primarily consists of small businesses with over 80% of businesses with fewer than 200 employees. before survey design, we interviewed 15 hotel and motel owners to identify the various ways in which they view their business (to explore their organizational identity) and their information seeking behaviors (sources they use, domains they tap into). these interviews lasted from 30 minutes to 1 hour and were semi-structured and highlighted at least three avenues for identity complexity. hotel owners ran their properties either as independent units or franchises but several had a combination of franchise and independent properties. this makes the setting ideal to test identity complexity related to management of multiple types of establishments. another avenue for identity complexity arose from the ethnic backgrounds of the business owners. a number of business owners were ethnic gujaratis from western india and were active members of the asian american hotel owners association (aaoha). according to the association’s website—aahoa is one of the leading forces in the hospitality industry and one of the most powerful asian american advocacy groups. together the members own more than 22,000 hotels, which have 1 million rooms representing over 50 percent of the economy lodging properties and nearly 37 percent of all hotel properties in the us. the financial success of many of these business owners indicates that they understand the business requirements of the lodging industry in the u.s. very well. on the other hand there is plenty of evidence that these small business owners also maintain very strong ties to their ethnic community which bleeds into their business practices and can be a source of an additional identity (e.g. kalnins & chung, 2004, 2006; light & gold, 2000). another factor that could contribute to identity-multiplicity would be the type of business strategy being pursued by a hotel/motel owner. this industry can be categorized into establishments ranging from a low-cost focus offering minimal services to serving luxurious accommodation. pri53 m. joshi, v. anand journal of small business strategy / vol. 28, no. 3 (2018) / 48-68 or research indicates that the expertise needed to manage low-cost business is drastically different from running a luxury hotel or motel (simon, 2005). while the several ways of categorizing themselves opens the possibility for the owners in this industry to assume multiple identities, several industry characteristics also expose them to the uncertainty prevailing in the environment. the hotel industry is a highly fragmented industry which undergoes rapid and ongoing changes in room rates, services, technology and regulations. for instance, room rates in this industry vary from under $30 to over $100 and they are generally driven by several factors such as location (suburban, highway, airport, resort or town), seasonal changes, types of consumers served and competitors’ pricing. combine these changes with the constant change owners experience in the service requirements or regulatory changes (for e.g., making the establishment more environment friendly or changes in the hygiene standards)—the situation can easily become highly uncertain and may require constant environmental scanning to address the relevant issues. to understand where they externally seek information from, we asked the owners about the sources they use while making decisions. owners were active in seeking information from internal sources such as their family, friends, relatives and several external sources such as chamber of commerce, business media, competitors, consumers and professional lodging associations such as american hotel and lodging association. data and sample based on the interviews we created a survey that captured the variables of interest. we pre-tested the survey with another 12 owners seeking their response on the face validity of the questions asked and made appropriate changes. after the pre-test, we randomly selected 1250 owners from the dunn and bradstreet data set. we called the owners of these firms to appraise them of the background and nature of the survey and requesting their response for the same. of these 1250 firms 269 hotels or motels were unreachable, closed, or had changed their businesses. the rest of the lodging owners were sent the survey with a personalized letter outlining the agreement to participate and assuring them confidentiality. if no questionnaire was returned after approximately four weeks then a reminder telephone call was made and, if necessary, a replacement questionnaire sent to the respondent. out of 981 surveys a total of 103 completed questionnaires were returned with the response rate of 10.5%. response rates of mail surveys from top executives even in other industries typically generate 10% to 12% of response rates (hambrick, geletkanycz, & fredrickson, 1993). many studies have received similar response rates that have targeted top executives, business owners or ceos as respondents (e.g. cruz, gomez-mejia, & becerra, 2010). further, in our interactions with the owners, we found that several of them owned multiple properties and some of these properties were listed in the names of relatives, thus giving the appearance of being distinct organizations when actually they were not. because of the difficulty of determining the number of such properties, we did not factor this into the response rate—needless to say, given the prevalence of this practice the response rate was likely to be higher than what we report. we addressed the issue of non-response bias by checking if there was a difference in respondents and non-respondents’ firm size (number of rooms and employees in their hotels/motels). no significant difference was found among the respondents and non-respondents. we also checked whether non-respondents owned more franchises or independent hotels/motels compared to respondents. no significant differences were found when we compared 30 randomly selected non-respondents with the respondents. the average age of respondents is 53 (sd = 13). the average time they have been working in the lodging industry is 20.5 years (sd = 12.5) and the average time they have been working as an owner of a lodging establishment is 16.5 years (sd = 11.4). measures appendix 1 highlights the survey instrument used in this study. perceived uncertainty is measured by using daft et al., (1988) scale. perceived uncertainty is a function of two components: perceived importance of a domain and the perceived change experienced in that domain. in order to capture perceived importance of a domain, owners were asked about the surety with which a domain affected their decision making. an example of a sample item is: how sure you are about the effects of the following factors on the decisions you make? (anchors range from 1 = completely sure to 5 = completely unsure). similarly, perceived change was captured through a sample item of—how frequently do you experience change in the following factors?(anchors range from 1 = very infrequently to 5 = very frequently). cronbach’s-alpha for perceived importance is 0.86 and for perceived change is 0.78. since perceived uncertainty is a function of these two variables, we multiplied the two factors to create a measure of perceived uncertainty (m = 13.64; sd = 4.02). we captured identity complexity using three variables: the complexity they face due to the management of their business strategy identity (low-cost vs. luxury accommodation; termed identity complexity low-cost and luxury accommodation (ic cost/luxury), complexity due to the 54 m. joshi, v. anand journal of small business strategy / vol. 28, no. 3 (2018) / 48-68 management of franchise and independent set of properties (termed: identity complexity franchise and self-owned accommodation (ic franchise/independent) , and, finally, complexity arising due to management of their ethnic and business identities (termed: identity complexity ethnic and business identity (ic ethnic/business)). the respondent (owner-managers) were asked to answer questions about their perceptions of the extent to which they had to manage these identities at the same time (on a 5-point likert-type scale). for instance, a high value on the five point scale for ethnic and business identities suggested that the owners managed both the ethnic and american business identities at the same time to a large extent (a sample question was-“across my business enterprise, i manage the following identities (ethnic and american business owner) at the same time”) to a large extent. the sources of external information were based on previous research and our interviews. we capture the seven most relevant domains about which hotel/motel owners gather information. these domains are: (1) competitor pricing (room rates offered by competitors); (2) services offered by competitors; (3) legal information that concerns hotel/ motel owners; (4) customer needs; (5) technological changes affecting the industry; (6) new ways to manage hotel/ motels; (7) economic growth. respondents were asked to indicate the frequency with which they sought information from the following five external sources for each of the seven domains described above. these sources are: network with other owners, consumers, competitors, professional associations, and business media. once again, these sources were consistently identified as important by owners in the interviews. a typical item, for example, is “how frequently do you seek information regarding room rates offered by competitors (a domain) from each of the six sources.” the respondents were requested to indicate on a scale of 1-5 (1 = very infrequently; 5 = very frequently) how frequently they sought information from these sources. the respondents filled out similar questions for the rest of the domains. among the external sources of information we had argued that these sources should ideally be seen as routine and non-routine sources. our a-priori hypotheses about these sources were that customers, competitors and network with other hotel/motel owners are likely to fall into one factor while more readily accessible sources such as professional associations and business media will factor into routine sources. such classifications of external sources into separate categories is rare but there is ample theoretical evidence that suggests that these sources should not be combined since they are accessed for different purposes by business owners (e.g. anand & gomez-mejia, 2014). in order to confirm whether all the sources fell into the above mentioned two categories, we performed a confirmatory factor analysis (cfa) in which the 2-factor solution were subjected to a cfa using amos software, producing the following fit indices: χ2(4) = 13.87 (p < .01), cfi = .99, ifi = .99, nfi = .89, and srmsr = .05. although the χ2 is significant, all other fit indices are well within their recommended parameters (kelloway, 1998; kline, 1998). moreover, the 2-factor model represents a superior fit over a 1-factor model, which implicitly assesses a common method factor (podsakoff & organ, 1986), δχ2(1) = 45.78, p < .01. the significant chi-square difference indicates discriminant validity and confirms that these factors are indeed two different factors. several control variables were included in the study. scholars positing a contingency effect for the degree of managerial information seeking (cheng & van de ven, 1996; tushman & o’reilly, 1996) and firm age argue that new firms lack an established base of cause and effect understanding. the newness generates a tendency to seek information from a wide variety of sources. also, older firms tend to become more insulated from the environment—they often develop highly developed information search and decision mechanisms (boyd & fulk, 1996). apart from firm characteristics, owners’ characteristics and differences among them have also emerged as a topic of considerable interest in both the academic and practitioner’s literature rajagopalan, rasheed, & datta, (1993). for instance, in the top executive literature the observable characteristics of ceo’s such as their educational levels, firm and industry tenure represent key proxies for a ceo’s cognitive orientation and knowledge base and have significant implications for strategic decision making (hambrick & mason, 1984). we measured owners’ education levels, gender, industry tenure and tenure as an owner in the industry. we also controlled for country of birth and years in u.s. since many hotel and motel owners in the u.s. are immigrant indian owners belonging to a particular region of gujarat. several of these owners have strong network ties with other similar owners which helps them acquire resources unavailable to outsiders. many studies, especially in sociology (aldrich & waldinger, 1990; light & gold, 2000), highlight that the increase in concentration and continued success of these ethnic firms results from the cooperation and coordination of different business activities among the member firms of these communities. results the means, standard deviations and correlations of the variables are presented in table 1. as expected perceived uncertainty is positively correlated with routine and non-routine sources of information. m. joshi, v. anand journal of small business strategy / vol. 28, no. 3 (2018) / 48-68 55 table 1 descriptive statistics and correlationsa variables mean s.d. 1 2 3 4 5 6 7 8 9 10 11 12 controls 1. genderb 1.21 .41 2. age 53.18 12.96 -.13 3. education 4.11 1.12 -.22* -.25* 4. industry tenure 20.54 12.50 -.09 .49** -.09 5. ownership tenure 16.45 11.39 -.01 .63** -.09 .79** 6. country of birth c 1.76 .62 .11 .14 -.08 .07 .09 7. time in us 42.80 20.67 .12 .71** -.25* .55** .55** .35* antecedents 8. perceived uncertainty (pu) 13.65 4.01 .08 -.05 .14 -.02 -.02 -.13 -.11 9. identity complexity lowcost/luxury accommodation 2.78 1.23 -.19 .13 .13 .10 .16 -.28 -.14 .29** 10. identity complexity franchise and self-owned accommodation (ic franchise/independent) 2.98 1.41 -.34** .04 .17 .18 .22* -.24 -.22* .29** .47** 11. identity complexity ethnic and business identity (ic ethnic/business 2.44 1.34 -.25* -.01 .11 -.04 .08 -.33 -.43** .25* .24* .40** outcome variables 12. routine sources 3.25 .89 .15 -.01 -.01 .19* .05 -.04 -.01 .35** .13 -.04 -.13 13. non-routine sources 3.38 .71 .04 .01 -.15 -.07 -.11 .03 .02 .37** .03 .07 -.16 .33** an = 81-102. b1 = male; 0 = female c 1 = india; 0 = any other country *p < .05 (two-tailed); **p < .01 (two-tailed) 56 m. joshi, v. anand journal of small business strategy / vol. 28, no. 3 (2018) / 48-68 uncertainly is also positively related to the three measures of identity complexity but identity complexity (all the three measures) are non-significant in their relationships with routine and non-routine information seeking. this is quite consistent with the literature suggesting that while complexity and uncertainty are likely to be correlated they have substantively different implications for information seeking behaviors. to test the hypotheses we used stepwise regression technique. results of the regression analysis are displayed in table 2. in models 1, 2, and 3, we regressed non-routine sources on the controls, independent variables and the interaction terms. model 1 includes all the controls in step 1, indepen table 2 results of regression analysis of the sources of information a non-routine sources routine sources model 1 model 2 model 3 model 4 model 5 model 6 first block (controls) gender b -.12 -.04 -.18 .22* .07 .14 age .08 .14 .18 .14 .13 .22 education -.15 -.21* -.15 -.09 -.08 -.13 industry tenure -.05 .05 -.10 .63** .57** .60** ownership tenure -.18 -.23 .02 -.39* -.28+ -.21 country of birth c .10 .09 .06 .04 .04 -.01 time in us .07 -.06 -.20 -.32* -.36* -.59** δr2 .05 .05 .05 .12 .11 .12 second block (independents) perceived uncertainty (pu) .41** .42** .57** .25* .45** .37** identity complexity low-cost and luxury accommodation (ic cost/ luxury) -.03 .06 identity complexity franchise and self-owned accommodation (ic franchise/independent) -.03 -.24* identity complexity ethnic and business identity (ic ethnic/business) -.40** -.37** δr2 .11 .10 .14* .13* .13* .18** third block (interactions) pu x ic cost/luxury -.18+ .15 pu x ic franchise/independent -.22* -.18* pu x ic ethnic/business -.29* .09 δr2 .02+ .03+ .06* .01* .02* .01** total r2 .18 .18 .25 .26 .27 .31 total adjusted r2 .06 .08 .14 .15 .17 .23 total f 1.45+ 1.46+ 2.23* 2.25* 2.43* 3.09** a entries represent standardized beta coefficients.. bold items represent formally hypothesized relationships. +p ≤ .10; *p ≤ .05; **p ≤ .01 b 1 = male; 0 = female c 1 = india; 0 = any other country 57 m. joshi, v. anand journal of small business strategy / vol. 28, no. 3 (2018) / 48-68 dent variables including perceived uncertainty and identity complexity related to low-cost/luxury accommodation in step 2 and the interaction between these independent variables in step 3. similarly model 2 and 3 include all the aforementioned variables with the exception of changing the identity complexity variable to the franchise and independent set of properties (model 2) and ethnic/business identity (model 3). these steps were repeated for routine information seeking as well and the results are shown in models 4, 5, and 6. the first two hypotheses proposed relationships between perceived uncertainty and routine and non-routine information seeking. the significant positive relationships between perceived uncertainty and routine information sources (β = .25, p < .05 model 4; β = .45, p < .01 model 5; β = .37, p < .05 model 6) and non-routine information seeking (β = .41, p < .01 model 1; β = .42, p < .01 model 2; β = .57, p < .05 model 3) suggests that hypotheses 1 and 2 were supported. all the models confirm that perceived uncertainty has a very strong positive impact on decision makers’ scanning behaviors. we found partial support for hypotheses 3 and 4. for hypothesis 3 (identity complexity is negatively related to routine and non-routine information seeking), two out of the three complexity variables were negatively related to routine information seeking (β = -.24, p < .05 model 5; β = -.37 p < .05 model 6), while the complexity variable related to business strategies (low-cost/luxury accommodation) was not significant. on the other hand, for non-routine information seeking (hypothesis 4), only the complexity arising out of managing ethnic and business identities had a negative relationship (β = -.40, p < .01 model 3) while the other two variables were not related. finally, there was strong support for hypothesis 5. all the interaction terms for non-routine sources were negative and significant. this implies that the effects of perceived uncertainty on non-routine search behavior decreased as organizational complexity increased (β= -.18, p <.10 model 1; β = -.22, p < .05 model 2; β = -.29, p < .05 model 3). in order to address multicollinearity issues, we standardized all the independent variables before creating the interaction terms. the interaction plots are shown in figure 1, 2 and 3. figure 1. interactive plots for cost and luxury 1 1.5 2 2.5 3 3.5 4 4.5 5 low perceived uncertainty high perceived uncertainty n on -r ou ti ne in fo rm at io n se ek in g low identity complexity lowcost and luxury accommodation (ic cost/luxury) high identity complexity lowcost and luxury accommodation (ic cost/luxury) 58 m. joshi, v. anand journal of small business strategy / vol. 28, no. 3 (2018) / 48-68 figure 2. interactive plots for franchise and selfounded accomodations 1 1.5 2 2.5 3 3.5 4 4.5 5 low perceived uncertainty high perceived uncertainty n on -r ou ti ne in fo rm at io n se ek in g low identity complexity franchise and self-owned accommodation (ic franchise/indepen dent) high identity complexity franchise and self-owned accommodation (ic franchise/indepen dent) figure 3. interactive plots for the ethnic and business identity 1 1.5 2 2.5 3 3.5 4 4.5 5 low perceived uncertainty high perceived uncertainty n on -r ou ti ne in fo rm at io n se ek in g low identity complexity ethnic and business identity (ic ethnic/business) high identity complexity ethnic and business identity (ic ethnic/business) 59 m. joshi, v. anand journal of small business strategy / vol. 28, no. 3 (2018) / 48-68 discussion this study extends the literature on the relationship between perceived uncertainty experienced by small business owner/manager decision makers and their information seeking behaviors. several findings in this study inform the current literature: first, examining external information seeking into routine and non-routine sources has not been done previously. the confirmatory factor analysis clearly suggests that these sources need to be viewed as separate and not a singular entity. second, results pertaining to hypotheses 1 and 2 testing the relationships between perceived uncertainty and information seeking confirm findings from prior studies that decision-makers’ perceived uncertainty increases both routine and non-routine information seeking (milliken, 1987). yet another implication of the study lies in demonstrating the importance of organizational complexity in executive information seeking. while prior research has mostly focused on the environmental uncertainty as a predictor of managerial scanning, we proposed that organizational complexity arising due to management of multiple identities is likely to complicate the matters. although the direct relationships between organizational identity complexity and routine and non-routine information seeking were only partially supported (hypotheses 3 and 4), the moderating effects of organizational identity complexity on perceived uncertainty and information seeking were very strong (hypothesis 5). this clearly indicates that environmental uncertainty in and of itself is not enough to explain the true nature of scanning behaviors. indeed, the moderating effects of identity complexity suggests the importance of internal firm characteristics that can play a significant role in understanding executive scanning. managers and practitioners may also benefit from this study in several ways. managers aren’t usually groomed to understand identity dynamics as they develop firm strategies. they are much more likely to be conscious of their business strategies than the identity of their organization. however, this research indicates that the perceptions of who you are (as an organization) and the complexities around these identities affect the ways in which executives seek information about crucial issues. we suggest organizational leaders be observant of these identity complexities that very often are not very obvious during decision making but are extremely powerful forces working in the background guiding strategic decisions. limitations and future research the limitations of this study must be noted. first, it is a cross-sectional study and the causality of arguments is questionable. future research needs to further explore these issues in longitudinal studies. one area of interest could be to explore how identity multiplicity increases over time and affects executives’ information seeking behaviors. the best way to study this would be to start with in-depth interviews of top executives over a few years immediately after an organization is founded. this line of research can also be highly informative to the growing area of entrepreneurship. future research can explore whether entrepreneurs’ differ in their perceptions of legitimacy of their organization as various identity beliefs are cemented overtime (nagy, rutherford, truong, & pollack, 2017). another limitation is that this study solely focuses on respondents from a single industry. organizational identities may vary across industries which may result in different ways of managing those identities. moreover, executives perceive uncertainties about their environments in varying degrees in different industries. in a multi-industry sample future research needs to also explore whether industry effect causes more uncertainty or do identities explain additional variance over and above the industry effects. common method variance resulting from self-reported data can be another issue with this study. common method variance has been found to inflate and suppress the magnitude of relationships (ganster, hennessey, & luthans, 1983). however, there are several reasons why method variance may not substantially affect these results. first, self-report data is most problematic with topics involving strong sentiments. information seeking is much more unobtrusive activity and hence is less likely to be distorted by self-reports. the low response rate of this study is another issue. while we have tried to address this issue by comparing non-respondents and respondents’ firm size and by including a variety of control variables future research should highlight if they find anomalous findings compared to this study. other future research possibilities also arise when crucial variables such as small business owners’ overconfidence on their ability and eagerness to process information interacts with identity variables in predicting the sources they trust. for instance, simon and kim (2017) found that entrepreneurs who are overconfident due to their ability to process additional information are more likely to revise their beliefs when faced with discomforting expert opinion than those entrepreneurs who are naturally overconfident. 60 m. joshi, v. anand journal of small business strategy / vol. 28, no. 3 (2018) / 48-68 given how strong identity beliefs are, future research can explore how organizational identity impacts entrepreneurs’ overconfidence and how these beliefs moderate the flexibility or rigidity in information search. finally, the impact of identity complexity on information seeking is interesting and provides a fertile avenue for further research. given the strong relationship of identity complexity with routine information seeking while relatively weaker relationships (only 1 out of 3 measures of complexity was significant) with non-routine sources suggests that complexity about certain identity dimensions might be more pronounced than others. future research needs to distinguish between those identities that have greater implications than the ones that are relatively peripheral for the decision makers (whetten & mackey, 2002). in this study, the strong impact of the complexities arising out of management of ethnic and business identities seemingly has more impact in information seeking than the identities based on strategy or the franchising options. future studies should not only be mindful of identifying the core dimensions, they can also study what it is about these identities that increases complexity for the executives. conclusion this study breaks new ground in operationalizing the construct of organizational identity complexity, linking identity complexity to critical top executive information seeking outcomes and providing strong evidence that identity complexity moderates relationships between perceived uncertainty and executive information seeking. in doing so, the study also adds identity complexity as another important variable to a rich line of prior work exploring key antecedents to executive information seeking (garg et al., 2003; yasai-ardekani & nystrom, 1996). references albert, s., & whetten, d. a. 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(2) second, please keep your entire business establishment in mind while answering these questions. for example many hotel and motel owners own more than one motel/hotel but choose to operate from just one place. while this one motel/hotel may be important, we request you to consider all the hotels/motels you own in answering these questions. (3) please mark an x or circle your choice. room rates offered by your competitors infrequent neither infrequent or frequent frequent very some what some what very family sources 1 2 3 4 5 your network with other hotel/motel owners 1 2 3 4 5 consumers 1 2 3 4 5 government sources 1 2 3 4 5 competitors 1 2 3 4 5 franchisors 1 2 3 4 5 professional associations 1 2 3 4 5 business media (business publications and/ or business programming) 1 2 3 4 5 section 1 how frequently do you seek information regarding the following factors from each of the following sources? how frequently do you seek information regarding the following factors from each of the following sources? services offered by your competitors infrequent neither infrequent or frequent frequent very some what some what very family sources 1 2 3 4 5 your network with other hotel/motel owners 1 2 3 4 5 consumers 1 2 3 4 5 government sources 1 2 3 4 5 competitors 1 2 3 4 5 franchisors 1 2 3 4 5 professional associations 1 2 3 4 5 business media (business publications and/ or business programming) 1 2 3 4 5 63 m. joshi, v. anand journal of small business strategy / vol. 28, no. 3 (2018) / 48-68 legal information that concerns hotel/ motel owners infrequent neither infrequent or frequent frequent very some what some what very family sources 1 2 3 4 5 your network with other hotel/motel owners 1 2 3 4 5 consumers 1 2 3 4 5 government sources 1 2 3 4 5 competitors 1 2 3 4 5 franchisors 1 2 3 4 5 professional associations 1 2 3 4 5 business media (business publications and/ or business programming) 1 2 3 4 5 changing needs of customers infrequent neither infrequent or frequent frequent very some what some what very family sources 1 2 3 4 5 your network with other hotel/motel owners 1 2 3 4 5 consumers 1 2 3 4 5 government sources 1 2 3 4 5 competitors 1 2 3 4 5 franchisors 1 2 3 4 5 professional associations 1 2 3 4 5 business media (business publications and/ or business programming) 1 2 3 4 5 how frequently do you seek information regarding the following factors from each of the following sources? expected economic growth of your hotel’s/motel’s location infrequent neither infrequent or frequent frequent very some what some what very family sources 1 2 3 4 5 your network with other hotel/motel owners 1 2 3 4 5 consumers 1 2 3 4 5 government sources 1 2 3 4 5 competitors 1 2 3 4 5 franchisors 1 2 3 4 5 professional associations 1 2 3 4 5 business media (business publications and/ or business programming) 1 2 3 4 5 64 m. joshi, v. anand journal of small business strategy / vol. 28, no. 3 (2018) / 48-68 how frequently do you seek information regarding the following factors from each of the following sources? technological changes affecting your industry infrequent neither infrequent or frequent frequent very some what some what very family sources 1 2 3 4 5 your network with other hotel/motel owners 1 2 3 4 5 consumers 1 2 3 4 5 government sources 1 2 3 4 5 competitors 1 2 3 4 5 franchisors 1 2 3 4 5 professional associations 1 2 3 4 5 business media (business publications and/ or business programming) 1 2 3 4 5 new ways to manage your hotels/motels infrequent neither infrequent or frequent frequent very some what some what very family sources 1 2 3 4 5 your network with other hotel/motel owners 1 2 3 4 5 consumers 1 2 3 4 5 government sources 1 2 3 4 5 competitors 1 2 3 4 5 franchisors 1 2 3 4 5 professional associations 1 2 3 4 5 section 2 in this section we inquire about your perceptions of your business environment: how often do you believe that the information you have about the following factors is adequate for decision making? inadequate sometimes inadequate sometimes adequate inadequate always sometimes sometimes always room rates offered by your competitors 1 2 3 4 5 services offered by your competitors 1 2 3 4 5 legal information that concerns hotel/ motel owners 1 2 3 4 5 changing needs of consumer 1 2 3 4 5 expected economic growth of your hotel’s/motel’s location 1 2 3 4 5 technological changes affecting your industry 1 2 3 4 5 new ways to manage your hotels/motels 1 2 3 4 5 65 m. joshi, v. anand journal of small business strategy / vol. 28, no. 3 (2018) / 48-68 how sure are you about the effects of the following factors on the strategic decisions you make? for example, if you are completely certain that the room rates offered by your competitors affect your strategic decisions, then you mark an x on 5 in the first row. unsure neither unsure or sure sure completely some what some what completely room rates offered by your competitors 1 2 3 4 5 services offered by your competitors 1 2 3 4 5 legal information that concerns hotel/ motel owners 1 2 3 4 5 changing needs of consumer 1 2 3 4 5 expected economic growth of your hotel’s/motel’s location 1 2 3 4 5 technological changes affecting your industry 1 2 3 4 5 new ways to manage your hotels/motels 1 2 3 4 5 how frequently do you experience change in the following factors? infrequent neither infrequent or frequent frequent very some what some what very room rates offered by your competitors 1 2 3 4 5 services offered by your competitors 1 2 3 4 5 legal information that concerns hotel/ motel owners 1 2 3 4 5 consumer needs 1 2 3 4 5 expected economic growth of your hotel’s/motel’s location 1 2 3 4 5 technological changes affecting your industry 1 2 3 4 5 new ways to manage your hotels/motels 1 2 3 4 5 section 3 in this section we ask you questions regarding how you view your business. please note that we want your views of how “you” view your business and not how “others” may view it. thinking across my entire business enterprise, i view my business as being: strongly disagree disagree neutral agree strongly agree a self-run business 1 2 3 4 5 a family-run business 1 2 3 4 5 a professional manager-run business 1 2 3 4 5 66 m. joshi, v. anand journal of small business strategy / vol. 28, no. 3 (2018) / 48-68 to what extent do you have to manage the following identities at the same time? not at all a little to some extent to a large extent to a very large extent 1. being a self-run business 2. being a family-run business 3. being a professional manager-run business. 1 2 3 4 5 thinking across my entire business enterprise, i view my business as being: strongly disagree disagree neutral agree strongly agree an independent set of hotels/motels 1 2 3 4 5 a franchise operated establishment 1 2 3 4 5 to what extent do you have to manage the following identities at the same time? not at all a little to some extent to a large extent to a very large extent 1. being an independent set of hotels/motels 2. being a franchise operated establishment. 1 2 3 4 5 thinking across my entire business enterprise, i view my business as an enterprise that: strongly disagree disagree neutral agree strongly agree offers the lowest prices 1 2 3 4 5 offers minimum services 1 2 3 4 5 caters to customers looking for cheap accommodation 1 2 3 4 5 offers extremely good services 1 2 3 4 5 caters to those customers who are willing to pay the highest prices 1 2 3 4 5 caters to customers looking for luxurious accommodation 1 2 3 4 5 to what extent do you have to manage the following identities at the same time? not at all a little to some extent to a large extent to a very large extent 1. being a low cost establishment 2. being a set of hotels/motels providing luxurious accommodation 1 2 3 4 5 if not a threat to my business, i am willing to help the following parties to start their own hotel/motel business or expanding their current business: strongly disagree disagree neutral agree strongly agree my family members 1 2 3 4 5 my relatives 1 2 3 4 5 my friends 1 2 3 4 5 other business owners not related to me 1 2 3 4 5 to what extent do you have to manage the following identities at the same time? not at all a little to some extent to a large extent to a very large extent 1. being a business owner competing with other businesses 2. being a business owner that shares resources and information with other similar owners 1 2 3 4 5 67 m. joshi, v. anand journal of small business strategy / vol. 28, no. 3 (2018) / 48-68 as a hotel/motel owner i view myself as: strongly disagree disagree neutral agree strongly agree an american business person 1 2 3 4 5 an ethnic business person 1 2 3 4 5 a business person regardless of my ethnicity 1 2 3 4 5 other business owners not related to me 1 2 3 4 5 to what extent do you have to manage the following identities at the same time? not at all a little to some extent to a large extent to a very large extent 1. your ethnic identity as a business person 2. your identity of being an american business owner 3. your identity as a business person regardless of your ethnicity 1 2 3 4 5 section 4 in this section we ask you to provide us some information about yourself and your business: the following questions are regarding yourself: how long have you been in the us lodging industry? _______[years] how long have you been working as an owner of a motel/hotel or motels/hotels? ________[years] gender ____ male _____ female how old were you on your last birthday? ________[years] please indicate your country of birth __________ how long have you been in the united states _______[years] what is your highest education level? grade school [ ] high school [ ] some college [ ] college (undergraduate) [ ] college (graduate) [ ] the following questions are regarding your business: how many motels/hotels do you own? ___________ do your family members work with you in your business? ____[yes] _______[no] do you hire professionals to run your hotels/motels? ____[yes] _______[no] do you own franchises? ____[yes] _______[no] how many franchises do you own? __________ how many rooms do you have in your four largest motels/hotels? motel/hotel 1 ____ (rooms) motel/hotel 2 ____ (rooms) motel/hotel 3 ____ (rooms) motel/hotel 4 ____ (rooms) how many employees do you have in your four largest hotels/motels? motel/hotel 1 _______ motel/hotel 2 _______ motel/hotel 3 _______ motel/hotel 4 _______ 68 m. joshi, v. anand journal of small business strategy / vol. 28, no. 3 (2018) / 48-68 compared to your competitors, how has your business fared in the last 5 year in terms of the following factors: much worse somewhat worse same as competitors somewhat better much better profitability 1 2 3 4 5 growth of business 1 2 3 4 5 si'm"ixvf book review jack: straight from the gut by jack welch and john byrne warner books, inc. 2001, 479 pages reviewed by: prashanth nagendra bharadwaj this is an autobiography of dr. jack welch, one of the most celebrated ceos and business leaders of the 20'entury. as jack welch acknowledges, this is neither a management handbook nor a perfect business story. however, it is a personal story written in a straightforward manner by a man with a great memory. the detailed way in which jack recounts his personal and professional lives provides excellent tips for anyone remotely interested in business and management. although he spent forty years in one of the world' biggest corporations, his management style offers interesting and useful insights for entrepreneurs and small business managers. the story of his life was a see-saw to a great extent and while reading his book, you go from thinking that he is machiavellian to realizing that he is one of the most straightforward people; and when you think he is narcissistic, you lind out that he is a highly self-effacing individual. he was involved in numerous mergers that resulted in business closures and job losses while he attributes everything he has accomplished to other people. his recent highly publicized personal problems do not take anything away from his story or his incomparable success in leading ge for two decades. if you have not already read this book, i recommend that you read it. it is better to read the book sequentially since it is written in the form of a story. if you are looking just for serious business tips, i recommend that you skip to sections iv and v of the book. chapter 24 (in section v) especially provides interesting tips for business leaders. i will highlight some aspects of the book that may be of specific interest to small business and entrepreneurship constituents. "my objective was to put a small-company spirit in a big-company body, to build an organization....that would be more high-spirited, more adaptable, and more agile than companies that are one-fiftieth our size...where people dare to try new things —where people feel assured in knowing that only the limits of their creativity and drive, their own standards of personal excellence, will be the ceiling on how far and how fast they move" declares jack in the prologue of the book. this can be an objective for companies of any size including small businesses. jack was obsessive about getting rid of the "damn" bureaucracy and instilling a "small business" mentality at ge. 97 jimlvtill 0/ snl(ill biislllcss slirllet, i'of /3, no. 2 fall!innrer 2002 jack has several short stories and episodes from his life to drive home some important lessons. he recounts how his mother, the most influential person in his life, walked into his high school locker room right after he flung his hockey stick in i'rustration after losing a game. she grabbed him by his uniform and shouted in his face in front of all his friends, "you punk! if you don't know how to lose, you'l never know how to win. if you don't know this, you shouldn't be playing." he attributes many of his basic management beliefs to her lessons— setting stretch goals, competing hard to win, facing reality, motivating people by alternately hugging and kicking them, etc. ln another story, right after he became ceo of ge, he challenged the members of a highly reputed internal management club, elfun. the club was considered a "right of passage" into management and had thousands of aspiring members who in jack's words practiced "superficial congeniality" when some one influential showed up at their meetings. it had become an elitist group. in his first speech to thc club as the ceo, which the members expected to be a congratulatory speech, he shocked everyone by saying that "i can't find any value to what you'e doing. you'e a hierarchical social and political club. i'm not going to tell you what you should do or be. it's your job to figure out a role that makes sense for you and ge." within a month the club self-engineered into a volunteer club getting involved in inner-city schools, building parks, playgrounds and libraries, repairing tape players for the blind to name a few activities. jack attributes ge's success to people. he does not have a recipe for identifying and hiring the right kind of talent. he has stories of how one female v.p. impressed him with her immense knowledge of baseball trivia during her job interview and how he hired a mechanic off new jersey turnpike who impressed jack with his gutsy determination. of course, these individuals had other business skills that made them successful. he was big on passion (with rigor), intensity, energy, "fresh-thinking", 360-degree evaluations, performance, and differentiating employees into a, b, and c players (and letting c players go). ge, under jack, did not assure lifetime employment for anyone but assured that they will make each employee employable for life. to highlight that, two of the three unsuccessful contenders to succeed him as ceo, were immediately picked up as the ceos of 3m and home depot. jack was the evangelist of the term "boundarylessness" and what it stands for. he personally wanted to break through the hierarchy and connect directly with all layers of the organization, without his message being interpreted by layers of bosses. he created several opportunities that promoted openness in the organizations among union workers in the manufacturing floor to individuals in the boardroom. his idea of boundaryless went beyond breaking down the barriers between suppliers, customers and internal departments. it included breaking down the subtle barriers of race, gender and individual ego, the last one being an almost spiritual effort. in one year, he let go of several managers who were autocrats —who forced performance out of people, rather than inspiring it. it is important to note that these were high performing managers who made their numbers. boundaryless attitude helped many ordinary folks in the organization to achieve extraordinary things. in one of his annual speeches to the top executives, he said "we can't be talking about reality, candor, globalization, boundaryless, speed, and empowerment and have people who don' embrace these values. every one of us must walk the talk." this is a great lesson for any manager in any organization. he called major initiatives as game changers and four such initiatives at ge under him were globalization, services, six sigma, and e-business. these initiatives can be ideal for any small business also. as an example of his globalization focus, he identified a budding entrepreneur from india as ge's partner in 1989 who went on to become one of the world's richest businessmen and the poster child of india's high-tech revolution of the 1990s. he focused on the services aspect of ge's business and grew it from 98 journal of snrall business strategy vok /3, no. 2 fall/winter 2002 $ 8 billion in 1995 to $ 19 billion in 2001. he championed the six sigma concept that not only minimizes variation in manufacturing processes (and consequently improves product quality) but also enables managers in all functional areas to reduce waste, improve decision making and enhance productivity. for a man who had not used e-mail on his own until 1999, it was commendable that he recognized and pushed e-business as the right tool to reinvent and transform ge in the 21u century. his effective management style and solid character was apparent during his ceo succession process that spanned almost five years. all the contenders acknowledged it to be highly open and devoid of any politics. he wanted the best person to lead ge into its future and not necessarily his favorite lieutenant to succeed him. he got the entire board into confidence during the process and their unanimous approval of his successor. he flew during thanksgiving holiday in turbulent weather to cincinnati and albany to personally communicate his final decision to both the unsuccessful candidates before others came to know about it. jack says in the last page of his book that his successor jeff immelt's able performance on his first big day as the ceo-elect with company big wigs triggered one of his happiest memories —the birth of his first child 39 years prior to that. that is the mark of a true mentor, a true steward, and a true leader. for the reader interested in learning about jack welch, the ceo, and how he viewed his job, i refer them to chapter 24 "what this ceo thing is all about." there jack shares the ideas that worked for him that include concepts such as integrity, people first/strategy second, maximizing organization's intellect (creating a learning organization), informality (not bureaucracy), passion, self-confidence (not arrogance), stretching, celebrations (to have fun while being productive), differentiation of people, aligning rewards with measurements, etc. he humbly says at the end that these are things that worked for him, along with luck. that reminds me of a dale carnegie quote on luck, which i paraphrase —"luck is the meeting place of opportunities passing by and a person's alertness." jack was indeed lucky! even if you are not keen on learning about jack's management approaches, this book is recommended to any entrepreneur to read as an inspirational story of a kid born into a working-class family of a railroad conductor, a college student who initially found math and physics very hard, a man with speech impediment, who went on to earn a ph.d. and become one of the most respected ceos of modem business. 99 str4tegf does size matter? an empirical investigation into the competitive strategies of the small firm armand gilinsky, jr. sonoma state university armandgilinsky~~ai onoma.edu elizabeth stormy sonoma state university elizabeth.stannyi~a~l anomo. edu richard l. mccline san francisco state university rniccline&~fsu. edu robert eyler sonoma state university eylerationoma. edu abstract this paper examines whether diferent strategies are associated with different sized firms in a focal industry dominated by small family-owned businesses. in an effori to shed light on how strategic clioice is determined, a well-defined and geographically concentrated industry, i.e., the northern cal%rnia wine industry, is selected to minimize environmental noise. factor analysis is applied to fourteen strategic elements to extract a parsimonious set offive primary competitive strategies: new product/market development, consolidation, niche focus, proprietary processes, and flexibility. the factors, new productlmarket development and consolidation as well as the control variable, age, are found to be signijicantly associated with firm size. introduction entrepreneurship theory suggests that a preoccupation with growth distinguishes entrepreneurial firms from other small firms (baumol, 1967; carland, hoy, boulton, bt carland, 1984; dollinger, 1999; penrose, 1959). differences in size can be explained by a smaller firm's agility amidst uncontrollable external forces, e,gz social/demographic, economic, political/regulatory, industry/competition, and technology (miller, 1998). some mature industries, such as women's hairdressers or agricultural commodity producing industries, are very homogeneous in terms of marketing efforts, r&d expenses, or capital intensity (as measured by the ratio of assets to sales). other industries tend to be very 1 journal ofsmall bnsi ness srrarei0 vol. /2, no. 2 fall/ivlnrer 2001 heterogeneous with respect to firm size, comprising multiple strategic groups or tiers, such as accounting, pharmaceuticals, and automobile parts (miller, 1998). mature industries are characterized by slowing growth, diminishing innovation, more product and process improvements, more sophisticated customers, and increasing concentration of producers (baden-fuller & stopford, 1992; porter, 1980). in a mature industry, defensible growth niches exist for firms that are successful in differentiating a commodity product or support service. famous examples of this strategy in consumer products include: starbucks coffee, perdue chicken, and orville redenbacher popcorn. these firms succeeded in "branding" commodity products and achieving leading positions in their respective markets. they hold differentiated positions, enjoying the higher margins derived from the premium prices that they charge (miller, 1998). prior researchers in the fields of strategy and entrepreneurship suggest that small firms in a mature industry pursue growth strategies that result in consolidation of a fragmented industry and economies of scale (miles, snow, & sharfman, 1993; porter, 1985, 1996).others suggest that growing firms pursue innovation and focus strategies (maruso & weinzimmer, 1999; mcgee & shook, 2000). for small, entrepreneurial firms, when cost-effectiveness and maintenance of coalitions, particularly among family or founding team members who are still owners/managers of the firm, are key objectives, other responses to change may emerge (1)ollinger, 1999). these include: (i) contracting out those services rather than relying on internal capabilities (miller, 1998); (2) contracting with special intermediaries (birley, 1985); or (3) relying on networks such as trade associations to suggest tried and tested implementations of industry best practices (falemo, 1989). the latter alternative may be desirable if change occurs infrequently and firm and industry perspectives on the issues involved tend to converge (aldrich, 1979). this paper seeks to address a gap in previous small firm research regarding how size is associated with strategic choice. the research question for this study is: to what extent is there an association between size and the strategy followed, i.e., do larger firms adopt different strategies than smaller ones in a mature industry? the next section examines prior perspectives regarding strategy and firm size. procedures for constructing a sample and survey instrument are developed. results from analysis of the association between size and strategy are presented. implications for researchers of small firms and practitioners are given, culminating in suggestions for future research. strategy and firm size successful small firms "must seek a balance between the ends to which the organization aspires and the ways and means available to them" (steiner & solem, 1988). prior researchers have suggested that there is no all-encompassing theoretical framework capable of explaining and guiding the strategic management of small firms, although several researchers have attempted to form such a theory (churchill & lewis, 1989; flamholtz, 1986; greiner, 1972; scott & bruce, 1984). building on the approach developed by d'amboise and muldowney (1988), two strategic perspectives can be drawn from the literature: (i) specialization in the firm's task environment and (2) new product/market development to overcome barriers to growth. taken together, these perspectives provide a useful taxonomy for organizing the competitive strategies of the small firm. specialization in the task environment the task environment refers to those key factors that directly affect and are affected by a firm's competitive strategies. among these factors are competitors, suppliers, stockholders, 2 journal ofsmall business strategy vol. /2, no. 2 fall/winter 200/ local communities, governments, labor unions, special interest groups, and employees (wheelen & hunger, 1986). scott and bruce (1987) identified the entry of larger competitors as an important barrier to growth as the small firm attempts to grow. yet, because of its narrower scope or specialization, a small firm can develop a competitive advantage using its flexibility to provide products and services or to perform activities better than its larger, more broadly-based competitors (lau, 1996; porter, 1985). sources of advantage could include: (i) serving a market niche and defending that market segment (clifford & cavanagh, 1985; porter, 1980; taylor, gilinsky, hilmi, hahn, & grab, 1990); (2) following a path of least resistance relative to the industry's competitive forces (miller, 1988; porter, 1980); (3) leveraging a distinctive competence, i.e., a special skill or unique product that could be protected by a trade secret, brand name or copyright (barney, 1991;hamel & prahalad, 1993; porter, 1980); (4) investing and applying new technology to develop proprietary processes (churchill & lewis, 1989). specialization of production or innovation in operations would develop a capability to support and defend the market niche. staking out a niche or focus position, e.g. via serving a well-defined customer group and investing in new technology, should be negatively related to firm size. pursuing a broad-based strategy, i.e. developing a wide range of commodity-type products, should be positively related to firm size. new product/market development a small firm could pursue a new product/market development strategy involving the following elements: (i) diversifying into new products (porter, 1980); (2) entering early into new markets or product/service applications (biggadike, 1979); (3) expanding overseas (brush, 1996; lohrke, franklin, & kothari, 1999); or (4) diversifying via acquisition (maruso & weinzimmer, 1999). inability to pursue at least one of the above strategic elements poses a barrier to growth. if small firms stake out positions or niches that make them less vulnerable to attack from competitors, then the niche may become a restriction on further growth. lumpkin and dess (1995: 1404) argue that, "excessive simplicity in the later stages of development affects an organization's ability to exploit existing or new product-market opportunities more than its ability to efficiently allocate and utilize resources." pressures towards increasing complexity would indicate that new product/market development, e.g. via creating new product concepts or innovation in processes, should be positively related to firm size. retrenchment, e.g. via decreasing the number of markets served or consolidation, should be negatively related to firm size. methodology sample one means of examining the testing the real world strategy making processes of small businesses would be to ask them directly. in this regard we selected a focal industry that was regional and identifiable (to hopefully minimize environmental noise in the investigation) and sought to identify and evaluate sources of competitive advantages as noted by small business owners. the industry selected was the northern california wine industry, concentrated in napa and sonoma counties. the northern california wine industry is coping with an environment characterized by high growth in premium price segments, offset by declining domestic consumption of wine and industry consolidation in low-end price segments (shapiro 1998; tesconi 1998). in 1999, over 900 small california wineries produced 149 million cases of wine, accounting for 85% of the total u.s. wine market (wine business monthly, 1999). offsetting declining per capita consumption in the u.s. and flat export sales, northern california premium wine sales and production have grown over 20% per year, leading to the entry of new wineries into the market and to the expansion of existing wineries. however, nearly all of this growth occurred in high-end market segments, while the lower-priced 3 journal of small business strategy vol. 12, ltto. 2 fallltyt'uter 2001 segments experienced accelerating maturity and consolidation. this situation has raised the importance of exports, foreign subsidiaries, strategic alliances, all in the face of increasing competition from other "new world" wine producers (namely australia, chile, and south africa, not to mention wineries in 49 other states). predominantly family-owned, wine businesses provide the backbone for job creation and growth in northern california's agricultural economy, yet relatively little is known about them. there is sparse rigorous research that captures the strategic issues faced by this important industry. prior empirical research into the behavior of firms in this industry has focused on documenting the frequency of organizational entry and exit (delacroix & swaminathan, 1991; stoeberl, parker, &, loo, 1998), the creation of inter-organizational networks (brown & butler, 1995) and the evolution of specialist organizations (swaminathan, 1995). studies specifically addressing wine industry strategic management are needed (brown & butler, 1995; hartley, 1997). data an initial database of 568 wineries in northern california (primarily napa, sonoma, and mendocino counties) was built from ivines ck vines (1999) and ivine business montltly's ivine industry directory and tllmanac (1996) and verified hy a panel of experts from the wine industry. the initial database of 568 firms was then scrubbed to eliminate duplications (i.e., of firms owned by another winery or part of a consortium), or for no longer participating in the industry; at this point 200 firms were eliminated for a universe of 368 firms. a pilot version of the questionnaire was sent to 12 owners and/or ceos of wineries and wine-support businesses, equally divided among small, medium and large wineries and between napa and sonoma counties, dominant in the northern california wine industry. results of the pilot test indicated that the questionnaire was too lengthy and a section asking respondents for anecdotal information was cut from the final version. the resulting questionnaire booklet sent to the owners/ceos of the remaining 356 wineries consisted entirely of liken-scale questions. respondents were asked to describe their business and to rate the importance of fourteen competitive strategies that they were currently using. survey response the historically private nature of the wine industry (only six firms in the sample were public firms, representing the entire universe of public firms in the industry) posed a major obstacle to gathering data about competitive strategy. in an attempt to increase response rates, we adhered to the dillman (1991)mail survey methodology. initial response was 59 firms with completed surveys; four responded by a letter of inability to participate rather than a completed survey; and 34 surveys were returned partially completed and discarded. on a second mailing, postcards were sent to remind the remaining 263 firms that they had been sent the survey and to ask again if they would participate, and 12 completed surveys were returned. aaer a third reminder mailing, 12 more completed surveys were received. no statistically significant differences were found between surveys completed by early respondents and later respondents. we received 118 surveys: 83 complete and 34 incomplete and one unidentifiable, for a total response rate of 32.0'lo. al)er elimination of incomplete or unidentifiable surveys, the response rate was 83 out of 368 or 22,6uo. questionnaire length was deemed to be the major cause of non-response. neither size nor ownership (public vs. private) appeared to cause significant differences in response rates of sample firms. consistent with the fact that firms in the northern california wine industry are predominately privately-held (tesconi, 1998), our sample of 83 firms consisted of 77 firms that were sole proprietorships or partnerships and seven firms that were publicly-owned. consistent with journal ofsmall business siraiegy vol. /2, no. 2 fall/winter 200l industry segment sizes reported in wines ttl vines, over half of the respondent wineries in the sample sold one brand only (57%), reflecting the small size of the preponderance of respondents. twenty-one percent sold two or three brands, 16% four or more brands, and four percent no branded products, presumably subcontracting to larger wineries. data on production output for 1999 and age of the winery (based on self-reporting) for 67 wineries in the sample were available from wine today's web site. data on the remaining 16 wineries were unavailable. production output was considered more reliable a measure of firm size than was sales for two reasons. first, we caught these firms during a period of rapidly rising wholesale and retail demand for premium wines, causing upward pressure on prices. second, because of the nature of the wine product itself, firms could generally charge and receive higher prices for older inventory (as unit and case wine prices typically rise with bottle age). results table i provides descriptive statistics about the 67 wineries that have production data. panel a indicates that the majority of the wineries are private (94%), are organized by function (68%), distribute and sell only one brand (56%), are estate wineries (54%) and produce wine at their own facilities (71%). panel b of table 1 shows that most of the wineries compete in the deluxe and over $25 price categories, 38% and 23%, respectively. on average, the wineries sell 53% of their product in the u.s. (excluding california), 38% in california and 7% internationally. on average, the most popular method of distribution is brokerslagents (29%), followed by sales force (23%), external sales and marketing company (23%). customer segments we divided the sample with production data into two approximately equal sized groups as a starting point in our investigation of the relation between size and strategy. thirty-three wineries produced output greater than 20,000 cases and were labeled "high volume" and 34 wineries produced 20,000 or fewer cases and were labeled "low volume." all of the low volume and all but four of the high volume wineries are privately owned. we examined the high and low volume groups to determine what, if any differences there are in competitive strategies deployed. competitive strategies table 2 lists the mean and median importance scores of competitive strategies divided for high and low volume wineries. for the high volume wineries the most important competitive strategies were: rapidly responding to customers'eeds, attracting and hiring high quality statt, investing in new technology and serving a well defined customer group. several strategies were significantly more important to high volume than to low volume wineries. these strategies included: rapidly investing in new technology, rapidly responding to customer needs, developing exclusive processes, acquiring other companies, and selling to customers in new overseas markets, for the low volume wineries the most important factors were: serving a well-defined customer group and attracting and holding high quality stalt. "serving a local market or markets" was significantly more important to low volume than to high volume wineries as a competitive strategy. we continue to investigate the relation between size and strategy by evaluating the association between changes in strategies used and changes in size using a linear regression. we perform a regression so that we can assess which strategies are significant in explaining size. because 5 jottrnul ofsinoll business sll'utrip vo!. /2, no. 2 fall/ivinter 200 l we have a limited data set including all the strategies in a linear regression would reduce the degrees of freedom in the regression and our ability to assess the incremental contributions of individual strategies on size. we address this data limitation by performing a factor analysis on the strategies (o sec if we could summarize 14 the strategies into fewer strategic factors. finding a morc parsimonious representation of the factors would allow us to increase the power of regression tests. table i: descriptive statistics (n = 67) panel a number of percentage of attribute of business wineries wineries ownership pubic 4 6 .0% private 63 94.0 organized by function 45 68.2% product 13 19.7 region 2 3.0 not specified 6 9.1 number of separute brunds distributed and sold i brand 37 56.1% 2-3 brand 16 24.2 4+ brands 10 15.2 no branded products i 1.5 did not specify 2 3.0 nature of business bulk producer 2 3.0% custom crush facility 2 3.0 grower 2 3.0 estate winery 36 53.7 negotiant 2 3.0 winery 21 31.8 other i 1.5 where wine produced own facility 47 71.2% both types of facilities 9 13.6 custom crush facility (exclusively) other 0 0.0 did not specify i 1.5 6 journal ofsmall business strategy vol. 72, no. 2 fall/winter 200/ panel b percentage min. i"quartile mean median 3 quartile max.u al of respondents price categories wines compete jn economy (& $3) 0 00% 0 00% 0 00% 0.00% 0 00% 0% subpremium ($3 7) 0.00 0.00 2.20 0.00 0.00 60 premium ($7 10) 0.00 0.00 8.45 0.00 0.00 90 ultrapremium ($ 1014) 0.00 0.00 11.52 0.00 15.00 80 deluxe ($ 1425) 0.00 0.25 38.29 25.00 75.75 100 $25 50 0.00 0.00 23.23 7.50 31.00 100 $ &50 0.00 0.00 6.65 0.00 1.00 100 geographic sales california 0.00% 25.00% 38.25% 35.00% 50.00% 100% national 0.00 41.25 53.31 57.50 69.50 95 international 0.00 1.00 6.61 5.00 10.00 75 rlge (years) 5.00 14.50 28.51 20.00 25.00 144 sales and distribution of products brokers/agon'ts 0.00% 0.00% 28.50% 15.50% 50.00% 100% sales force 0.00 0.00 22.79 0.00 36.50 100 own retail outlets, tasting p pp p 25 11 98 10 pp 15 pp 9 rooms(s) sales gc marketing compariy 0 00 0.00 22.56 0.00 60.00 95 (external) direct mail, telemarketing, wine club outside services (internet 0.00 stores, other wine clubs) other 0.00 0.00 3.14 0.00 0.00 77 table 3 presents the results of factor analysis on the competitive strategies for the entire sample (n= 83). we used the varimax orthogonal rotation to estimate the factor loadings so that the factors would be easier to interpret. because we have strategy data for 83 firms we included all firms in the factor analysis'. each of the estimated factors is labeled according to the competitive construct that we interpreted the factor to represent. the first factor was labeled "new product/markets," because it loaded heavily on selling of new ranges of products, creating new product concepts, investing in new technology and entering early into growth markets. the second factor was called "consolidation," because it loaded heavily on decreasing the number of markets served and adjusting sales goals and profit goals the factor analysis and regression results using the production data sample (n=67) do not differ materially from the results presented. 7 jorirno/ vf sma// brtsincss stratcgv vol. /2, no. 2 fall/winter 200/ downward. the third factor loaded most heavily on serving a well-defined customer group and investing in new technology and captured the notion of a "niche" strategy. the fourth factor was labeled "proprietary," because it loaded heavily only on "developing exclusive processes." the fifth factor was labeled "flexibility,"because it loaded heavily only on the strategy of rapidly responding to customer needs. the percent of variance explained by the five factors is 51%. 'fhe test chi-square statistic, 33.1 with a p-value of 0.36, demonstrated that above five factors were sufficient to represent the fourteen competitive strategy variables. table 2 competitive strategies of the sample firms (n=83) /scales i = lowest impiirtance, 7 = higliest importance) high volume low volume () 20,000 cases) (&= 20,000 cases) statistical tests competitive strategies n=33 n=34 wilcoxon mean median mean median t s .. p-value test statistic kapidly responding to 5.5 6.0 4.3 5.0 2.75 0.01 customer needs attracting and holding high 5 5 6 p 5 3 6 p 0.21 0.83 quality staff investing in ncw technology 5.4 6.0 4.4 5.0 2.5 0.01 serving a well-dcfincd 5.3 6.0 5.6 6.0 -1.38 0.17 customer group selling to customers in new 5.1 6.0 3.9 4.0 2.46 0.01 markets ovcrscas creating new produci concepts 4.6 5.0 4.2 5.0 0.77 0.44 entering carly into growth 4.5 4.0 4.4 4.0 0.17 0.87 inafkcis selling new ranges ot'products 4.5 5.0 3.8 4.0 1.28 0.20 serving a local market or 4.1 4.0 4.8 5.0 -1.67 0.09 ili ark cw developing a exclusive 4.1 4.0 3.2 4.0 1.92 0.05 proccsscs becoming a smaller, morc 2.8 3.0 3.2 3.0 -0.62 0.53 tlcxible organization acquiring other companies 2.7 2.0 1.9 1.0 2.09 0.04 decreasing thc number of 2.2 2.0 2.0 2.0 0.64 0.52 markets scrvcd ad)usting sales goals and profit 2 2 s p 0.36 0.72 goals dowmvard competitive strategies and size using the scores for each of the factors, we constructed variables labeled, "new product/markets", "consolidation", "niche", "proprietary" "flexibility", which were used as independent explanatory variables in a regression analysis. we included age of the winery as an independent variable to control for the ettect of length of time in business on size. table 4 reports the estimates from the regression of the natural logarithm output on the five strategic factors for the 67 of the 83 sample wineries that 8 journal ofsmall business strategy vo/. /2, no. 2 fall/winter 200/ we have production data for. we took the natural logarithm of output so that a few large or small producers did not drive the results. the factor new products/markets and the control age were positively associated with the level of output. the factor consolidation was negative and significantly associated with the level of output. together the variation in these independent variables explained 41% of the variation in outpun table 3 factor loading using varimax orthogonal rotation of competitive strategies factor 5factor t . factor 2 factor 3 factor 4 strategy "new deduct/ttfarket "consolidation "/viche "proprietary "flexi hi llty" , development" 'strategy" strategy" process".entering early into 0 495 0.317 growth markets serving a welldefined customer 0.632 0.138 grolip -0.200 0.330 0.324 0.301 0.113 investing in new 0.522 -0.153 0.496 technology creating new 0.660 0.131 0.259 product concepts becoming n smaller, more flexible 0.129 0.445 0.304 organization rapidly responding 0.283 0.280 0.218 0.889 to customer needs 0.328 0.156 0.916 0.165 exclusive processes selling new ranges 0.709 0.124 0.358 0.189 ofproducts acquiring other 0.392 -0. 175 companies decreasing number 0.778 0.127 of markets served ztdjasting sales goals ik profit goals 0.680 downward selling to customers in new markets 0.311 -0.235 0.212 overseas ztnracting ik holding high quality 0.173 0.606 0.147 staff 14.25 % 10.88 % 9.62 % 8.26 % '%u explained by factor 9 journo/ of sniall business strategy vol. /2. /vv. 2 fa///ifi uter 200/ table 4 regression analysis of strategic factors on size independent variables c ff regression std. t-value pr()[tl)coefficients error (intercept) 9.39 0.22 41.86 0.00 new product/market 0.38 development 0.21 1.74 0.09 consolidation strategy -0.37 0.19 -1.98 0.05 niche strategy 0.10 0.20 0.54 0.59 proprietary process 0.16 0. 17 0.95 0.35 flexibility 0.26 0.16 1.60 0.11 age 0.02 0.01 4.23 0.00 residual standard error: l. 29 on 60 degrees offreedom mu/tip/a r-squaredt 0.4/ f statistic: 688 on 6 and 60 degrees offreedom, the p-value is 0 00 discussion this exploratory research has several implications for the entrepreneur. the most important is that small firms do not necessarily have to increase the variety of the strategies pursued in order to become larger. consistent with prior research on strategic simplicity, there appears to be a salutory association of two strategies with firm size, namely entry into new product/markets and flexibility (lumpkin & dess, 1995; miller & chen, 1996). the maxim that, "less is more," applies here. in industries that have several large, well-established competitors, smaller firms that desire expansion have to evaluate carefully their repertoire of competitive strategies to develop market learning and innovative techniques. prior studies have shown that a minimum output of 50,000 cases per year is considered the minimum to capture any economies of scale in this industry (brown & butler, 1995; swaminathan, 1995). still, it may well be that these entrepreneurs were concentrating more on staying small and preserving their uniqueness, considered vital for "branding" and differentiating a commodity product like wine. regarding the leadership and strategic profile results, it appears that risk-taking, innovative, and proactive (entrepreneurial) entry strategies may be instrumental to achieving initial growth for smaller firms. new entrants in this industry should consider pursuing an "aggressive" strategy aimed at niche market definition and penetration via "entrepreneurial" behaviors. established, growing businesses in this industry tend to experience diminishing eaicacy of entrepreneurial behavior and during the transition phase, need to pay greater attention to building management systems and market share. for mature, slower growth firms in the wine industry, building more "administrative" processes to improve operating eaiciency and cost competitiveness may lead to increased performance. while among the sample respondents there are several examples of larger firms that had successfully pursued innovation, sometimes revolutionizing the industry, this proved to be the exception rather than the rule. leaders of wine business eventually best served their interests by emphasizing the establishment of centralized control, standardized operations, formal rules and procedures, or other "mechanistic" tools designed to promote internal efliciency in an uncertain environment. 10 journal of small business strategy vol. /2, no. 2 fallllyinter 200l the changing dynamics of the wine industry in recent years have generated a desperate need for a comprehensive understanding of wine business best practices. in the words of several wine business leaders who responded anecdotally to our survey, the following seem to apply to all wine businesses, regardless of size or situation: each management group must look to parallel industries to examine reasons for success. leaders need to develop long-term financial and marketing planning tools (surprisingly this is not being done). stay tuned with cutting-edge technology. understand viticulture as a mkeym component in marketing. winery principals that are production oriented need to "learn" how to develop promotional skills. the results should be interpreted with caution in terms of their applicability to other mature industries. because the study was exploratory in nature, no causal relationships are implied. further research should explore the differential impact of competitive strategies on growth rates. future research should also be designed to overcome some of the limitations of this study. the relatively small sample of firms and executives included in the field study may have led to some instability in the factor loadings obtained. for example, the negative loading of consolidation was somewhat surprising, in that one would expect that since the industry is highly fragmented and mature, merger and acquisition or retrenchment activities would have been more prevalent, particularly among those smaller wineries seeking greater scale economies while preserving their uniqueness as "brands." longitudinal research with larger sample sizes is needed to determine the nature and impact of consolidation strategies on firm size. the northern california wine industry was selected in order to eliminate industry differences and because it has a growing but identifiable membership, many of who are new entrepreneurial entrants competing against a few well-established corporate competitors. rapid strategic shi(ts are difficult since the wine industry is highly regulated, capitalintensive, and has long lead times between planting grapes and selling wine. despite the fact that very strong rate of growth in premium segments is the result of its current strategic mix, compared with firms in other wine producing countries, its players exhibit some significant weaknesses with respect to their longer-term competitive strategies (orr, 1999).if the industry could work in concert to help smaller producers to develop strategies to enter new product/markets, particularly in export markets, it would further secure its position as a worldcompetitive manufacturer. references aldrich, h. 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(1996, nov-dec.). what is strategy? harvard business review. s,m.&.b,r.()987). fi g fg 0 i ~ 0 . ~lit ~pi i 20(3). 45-52. sh pi,l.()998).hgh h if piy.n k (0 0 5),74-76. mi .m.p.&s i .o. ()988). f f i ll f igh .i of small business mana ement 26(1), 56. stoeberl, p.a., parker, g.e. & joo, s.j. (1998). relationship between organizational change and failure in the wine industry: an event history analysis. journal of mana ement studies 35(4), 537-56. swaminathan, a. (1995). the proliferation of specialist organizations in the american wine industry, 1941-1990. administrative science uarterl 40(4), 653-81. taylor, b., gilinsky, a., hilmi, a., hahn, d., & grab, u. (1990). strategy and leadership in growth companies. lon ran e plannin 23(3), 66-75. tesconi, t. (1998).vineyards face half-baked harvest. santa rosa press-democrat, (september 6), a17. wheelen, t.l. & hunger, j.d. (1986). strate ic mana ement and business polic 2/e, reading, ma: addison wesley, lb. wine business monthl . (1996). wine industry directoryandalmanac —1996. sonoma,ca: wine business publications. wines & vines. (1999). 1999 directory & buyer's guide. 79:12-a. san rafael, ca: the hiring company. armand tgi/insky is associate professor ofstrategy and entrepreneurship and director of the entrepreneurship center at sonoma state university. his ph.d. ispom henley management co/leg/brunel university in england, and his current research focus is on e-commerce adoption rates by small firms. elizabeth stanny is associate professor ofaccounting at sonoma state university. her ph.d. ispom the university of chicago, and her current research focus is on marketing practices of accounting firms. richard l mccline is assistant professor of entrepreneurship and co-director of the ohrenschall center for entrepreneurial studies at san francisco state university. his ph.d. is from tulane university, and his curreni research focus is into the behavioral dimensions of entrepreneurship along the life cycle. robert eyler is assistant professor of economics at sonoma state university. his ph.d. is pom uc davis, and his current research interests include comparative studies of the macroeconomic impacts ofihe wine industry in new world countries. 13 journal of small business strategy vol. 27 ● no. 2 ● 2017 36 analyzing non-linear dynamics of organic growth: evidence from small german new ventures harald harbermann leuphana university of lueneburg harald.harbermann@leuphana.de reinhard schuilte leuphana university of lueneburg reinhard.schulte@leuphana.de abstract this paper links theories of growth models with the literature on serial autocorrelation of growth. we study the serial autocorrelation of tendencies of growth trajectories of employment and sales for german new ventures over a nine-year period using mosaic plots as a conceptual framework. the autocorrelation of growth tendencies provides important information on firms growth processes. we find that growing new ventures are subject to negative autocorrelation of tendencies of growth trajectories making sustained growth a very rare occurrence. this indicates that the growth of new ventures is non-linear, prone to interruptions, amplifying forces, and setbacks. therefore, we interpret the commonly used term ‘stages of growth model’ in a different manner. a stage cannot be defined as a time span but rather as a sort of conditions of circumstances that are all present at a point in time and that are conditionally linked to a preceding sort of circumstances. mailto:reinhard.schulte@leuphana.de journal of small business strategy vol. 27 ● no. 2 ● 2017 37 introduction growth of businesses is one of the central topics of entrepreneurship research (mckelvie & wiklund, 2010). stages of growth models dominate this literature on the growth of businesses and are based on three main assumptions (greiner, 1972; levie & lichtenstein, 2010). first, distinctively different stages of development can be identified. second, the sequence and order of development is predetermined and thus predictable. third, all ventures develop according to prefigured rules. in recent years, scholars began to criticize the linear models of business growth (levie & lichtenstein, 2010) and suggest replacing assumptions of these models with principles from complexity science, such as complex adaptive systems (anderson, meyer, eisenhardt, carley, & pettigrew., 1999; holland, 1995; mckelvey, 2004) and the non-linear dynamics of economics and management (chiles, bluedorn, a., & gupta, 2007; meyer, gaba, & colwell, 2005;). by drawing on these studies criticizing stages of growth models and the resource-based view, we examine the serial correlation of growth for small new ventures that do not have neither innovative nor technology-based business concepts and are run as full-time businesses. we chose to study the relationship between measures of growth of this type of new venture for the following reasons. first, this type of new venture is typical of many entrepreneurial activities in germany in terms of size, business model, or legal type (lambertz & schulte, 2013). second, so far the focus has been on research of new ventures in the manufacturing sector (bottazzi, coad, jacoby, & secchi, 2009; coad & hölzl, 2009; daunfeldt & halvarsson, 2015). to validate the theory of negative autocorrelation of growth other sectors than the manufacturing sector need to be investigated. third, established theories originating from economics, sociology or management may be well suited for explaining the creation of innovative ventures. however, empirical results show that for imitative new ventures a different conceptual framework is required to build models that have the same explanatory power than models that include innovative new ventures (samuelsson & davidsson, 2009). we suggest that small firms typically are subject to negative serial correlation of annual growth rates (daunfeldt & halvarsson, 2015). put differently, we theorize that recent growth is more likely to lead to negative growth, and conversely, that a recent negative growth raises the probability of a subsequent growth. the findings of our analyses based on longitudinal data obtained from the start-up panel of the german state of north rhinewestphalia support our hypotheses. our study contributes to the literature in the following ways. first, our findings provide new insights concerning growth measures by focusing on tendencies of growth trajectories instead of average growth rates. empirical analysis often prefers a method that measures trajectories in terms of average size or average growth rates for prolonged periods. however, this approach says little about the individual economic growth over time. second, we add to the literature that shows that measures of growth are not interchangeable. growth of sales and the growth of employment are not equivalent measures of the performance of new ventures and lead to different results (chandler, mckelvie, & davidsson, 2009). third, our results support the findings of journal of small business strategy vol. 27 ● no. 2 ● 2017 38 critics of stages of growth models. we show that recent growth is more likely to lead to negative growth, and conversely, that a recent negative growth raises the probability of a subsequent growth. therefore, traditional growth models that assume a linear development over time cannot be validated by our data. fourth, we add to the literature on drivers of the successful establishment of imitative, subsistence-oriented businesses. similar to other new ventures, imitative, subsistence-oriented new ventures have negative serial correlation of growth. thus, growth in period t can be a rather good predictor for growth in period t+1. in the remainder of this paper, we present our theory, hypotheses, methodology, and results, followed by a discussion of the implications and limitations of our study. existing theories of growth models business growth theories can be classified into four groups (o’farrell & hitchens, 1988) and are summarized in table 1: (1) industrial economics, (2) stochastic models, (3) management perspective and (4) stages of growth models. the group of industrial economics research is represented by penrose (1959) who argues that unused productive services facilitate the introduction of new combinations of resources in a firm: ‘‘the new combinations may be combinations of services for the production of new products, new processes for the production of old products, new organization of administrative functions’’ (penrose, 1959:85). this approach recognizes the importance of periods of stability because growth is seen as episodic and occurring in spurts (derbyshire & garnsey, 2014). second, stochastic models of business growth explain that the process of random growth leads to a skewed size distributions of companies, which means that few large and many small companies exist (gibrat, 1931). however, the view that business growth is predominately random is criticized because if this were the case entrepreneurs would not be able to influence the outcomes of new ventures (derbyshire & garnsey, e., 2014). thus, there would be little room for government policy stimulating business growth. empirical evidence shows mixed results if gibrat’s law can be rejected or not. the industry context matters for whether gibrat’s law holds or not (daunfeldt & elert, 2013). third, the management perspective argues that the growth and development of businesses depend on the internal and external environment of entrepreneurs and how quickly they can adapt to these circumstances (milne & thompson, 1982). fourth, there are stages of growth models. these models distinguish different stages of venture growth (tatikonda, terjesen, patel, & parida, 2013), and the change from one phase to another depends mainly on time. greiner (1972), christensen and scot (1964), lippitt and schmidt (1967) and norman (1977) are foundational theoretical sources for the literature on stages of growth models (levie & lichtenstein, 2010). the core assumption of these stages of growth models is that ‘organizations grow as if they are developing organisms’ (tsoukas, 1991, p. 575). from this basic statement, three assumptions are made about the growth of ventures (kimberly & miles, 1980): first, distinctively different stages of development can be identified. second, the sequence and order of journal of small business strategy vol. 27 ● no. 2 ● 2017 39 development is predetermined and thus predictable. third, all ventures develop according to prefigured rules. taken together, there is a need for models of growth that reflect the non-linearity dynamic of development over time. table 1 existing theories of growth models (o’farrell & hitchens, 1988) theory of growth definition author name (year) industrial economics unused productive services facilitate the introduction of new combinations of resources in a firm. penrose (1959) stochastic models the process of random growth leads to a skewed size distributions of companies, which means that few large and many small companies exist. gibrat (1931) management perspective the growth and development of businesses depend on the internal and external environment of entrepreneurs and how quickly they can adapt to these circumstances. milne & thompson (1982) stages of growth models three assumptions are made about the growth of ventures: first, distinctively different stages of development can be identified. second, the sequence and order of development is predetermined and thus predictable. third, all ventures develop according to prefigured rules. greiner (1972), christensen & scot (1964), lippitt & schmidt (1967), norman (1977) theory development and hypotheses non-linearity of growth of new ventures although stages of growth theories have different shortcomings, it could be empirically shown that businesses tend to operate in some definable state for some period of time (levie & lichtenstein, 2010) and then change. this change is sometimes gradual (churchill & lewis, 1983) and sometimes dramatic (romanelli & tushman, 1994). in their ‘terminal assessment of stages theory’ levie and lichtenstein (2010) develop a framework that pays attention to this empirical outcome but is not limited by the assumptions of stages of growth models. they suggest replacing assumptions of these models with principles from complexity science, such as complex adaptive systems (anderson, meyer, eisenhardt, carley, & pettigrew, 1999; holland, 1995; lichtenstein, 2010; mckelvey, 2004) and the non-linear dynamics of economics and management (chiles, bluedorn, & gupta, 2007; meyer, gaba, & colwell, 2005). this so-called dynamic states approach is also influenced by penrose (1959) who argue that new combinations of resources need to be introduced into the company, and by milne and thompson (1982) who define journal of small business strategy vol. 27 ● no. 2 ● 2017 40 success of a new venture as its ability to adopt quickly to the internal and external environment of the entrepreneur. businesses are not predetermined by an unchangeable genetic program, and there is no way to predict how many stages a company will go through during its lifecycle. the main assumption of the dynamic states approach is that each state represents an entrepreneur’s attempt to most efficiently and effectively match internal resources with external ones. the dynamic states approach focuses on the growth of new ventures without accepting assumptions of life cycle models (furlan, grandinetti, r., & paggiaro, 2014), for example continuous or linear growth (brännback, carsrud, & kiviluoto, 2014; davidsson, achtenhagen, & naldi, 2010; hamilton, 2011). stages of growth models link the age and size of a firm to its stage of development. however, not all ventures grow and multiple potential stages for ventures of all ages and sizes exist (wales, monson, & mckelvie, 2011). storm (2011), as one of the few scholars to do so, empirically operationalizes the dynamic states approach to establish a link between drivers of individual behavior and complexity theory. his results validate the use of complexity theory in entrepreneurship research. these alternatives to the stages of growth models show theoretically and empirically the non-linear dynamics of growth trajectories and are summarized in table 2. autocorrelation of growth rates of new ventures the growth of new ventures is considered to depend on past events (barney & zajac, 1994; dierckx & cool, 1989). heterogeneity of findings regarding the serial correlation of growth rates can be found in the literature. positive autocorrelation has been found in studies for uk quoted firms (chesher, 1979; geroski, machin, & walters, 1997), for manufacturing firms in germany (wagner, 1992), for austrian farms (weiss, 1998) or for us manufacturing firms (bottazzi & secchi, 2003). negative serial correlation has been shown for german firms (boeri & cramer, 1992), for quoted japanese firms (goddard, wilson, & blandon, 2002) for italian and french manufacturing firms (bottazzi, cefis, dosi, & secchi; 2009). other studies failed to find any significant autocorrelation in growth rates, e.g. for selected italian manufacturing sectors (bottazzi, cefis, & dosi, 2002) or for the us automobile industry (geroski & mazzucato, 2002). therefore, it seems that overall there is no clear pattern emerging regarding the autocorrelation of firm growth rates. however, this changed with the findings of coad (2007) and coad and hölzl (2009). they show that small firms typically are subject to negative serial correlation of annual growth rates (daunfeldt & halvarsson, 2015), whereas larger firms exhibit positive serial correlation. consequently, the inconclusive results of the research on serial correlation of growth rates can be explained that previous studies have used databases that include both small and large companies. in addition, serial correlation is strongly negative for small firms that have just experienced a large growth event in the recent past (coad, 2013). journal of small business strategy vol. 27 ● no. 2 ● 2017 41 table 2 alternative theories of growth models theory of growth definition author name (year) dynamic states approach the main assumption is that each state represents an entrepreneur’s attempt to most efficiently and effectively match internal resources with external ones. growth is defined as a convergence to a resource stock that fits to market optimally. levie & lichtenstein (2012) trigger points bursts of rapid growth of new ventures often occur after important events, so called trigger points. they have the potential to turn moderately performing businesses into highperforming ones. brown & mawson (2013) complexity science agent models explain order creation, i.e. non-linear outcomes resulting from (1) rapid phase transitions caused by adaptive tensions and (2) coevolutionary processes. mckelvey (2004), derbyshire & garnsey (2014), dooley & van de ven (1999) in line with this empirical finding, we hypothesize that employment growth proceeds in batches, where expansion follows contraction, and contraction follows expansion. a positive incremental, point-topoint growth is rather followed by zero or negative growth and a negative or zero incremental growth is rather followed by positive growth. employment growth in new ventures proceeds in batches because of indivisibilities, uncertainty and adjustment costs. in contrast, fine-grained adjustment to actual capacity needs are made for instance by temporal work overtime of given staff, contract workers, outsourcing to freelance staff, etc. indivisibilities of employment result from individual employment contracts. in germany, these contracts need to be scaled or portioned in a given frame of regulatory boundaries, set by law. moreover, some responsibilities are subject to inseparability. staff-related measures require regularity of capacity needs and a well predictable increase in demand. because termination options are limited, careful restraint caused by uncertainty guides implementation of an additional unit. therefore, new ventures need to align additional capacity and increase in demand step-by-step. staff recruitment and termination cause cost of information and search, cost of reorganization, cost of contract design, etc. (hall, 2004; hamermesh & pfann 1996, cooper & haltiwanger 2003). journal of small business strategy vol. 27 ● no. 2 ● 2017 42 therefore, oscillating fluctuations in growth of new ventures can be expected, independent from the assumption that long term growth is subject to certain stages, consistent trajectories or development trends. that means incremental growth of new ventures is lumpy and batch-like. after an initial growth spurt, there is little expectation of an immediate subsequent further growth but rather remaining the level yielded, or even a decrease. this applies in reverse as well: after decrease or stagnation growth can be expected to follow. concerning sales, although being an output measure, contrarily to employment as an input measure of new ventures, there is a corresponding argumentation not only because of the interrelation of sales and workforce. change of sales structures calls for adjustment costs, such as personnel training in or recruitment for new distribution channels, new customers or change in the service range. moreover, sales processes are subject to indivisibilities caused by product range or sales personnel because sales directly depend on the value chain, which in turn is subject to indivisibilities given by production and procurement. therefore, sales of new ventures are not supposed to change continuously but in incremental batches as well as employment. following these argumentation line and in line with the findings that growth rate autocorrelation varies with firm size we propose the following hypotheses 1 and 2. hypothesis 1: after a period of positive growth, a given small venture is more likely to enter a period of negative growth in a subsequent period. hypothesis 2: after a period of negative growth, a given small venture is more likely to enter a period of positive growth in a subsequent period. derbyshire and garnsey (2014) consider stable periods in the growth trajectories of new ventures. they show that the typical state for a firm is neither growth nor decline but stability. 99.5% of all uk firms included in their dataset have at least one period of stability over the period under analysis. penrose (1959) explains stable periods with adjustment costs. these costs of growth consist of the time and effort required to adapt managers and operations to the expansion of activities of a given venture. the development of managerial resources takes time, which influences the growth of new ventures (lockett, wiklund, davidsson, & girma, 2011). to address the importance of stable periods in the growth process of new ventures we propose the following hypothesis hypothesis 3: a given small venture experiencing zero growth is more likely to experience more zero growth than either negative or positive growth in a subsequent period. towards a new measure of growth employment and sales are the most commonly used indicators to measure average business growth (delmar, 2006; gilbert, mcdougall, & audretsch, 2006). in our study, we compare the growth of sales to employment. employment data offers standardized, comparable data on the rate and direction in which new ventures have been expanding (garnsey, stam, heffernan, & hugo, 2006). in contrast, sales are influenced by price effects, productivity effects, exchange rate effects, and taxes (brenner & schimke, 2014). for further discussion of the advantages and disadvantages of each indicator we refer to coad (2009). so far, growth measures have journal of small business strategy vol. 27 ● no. 2 ● 2017 43 been used interchangeably, although correlations between the indicators growth of sales and growth of employment are relatively small. delmar, davidsson, & gartner (2003) find a very weak correlation of .09 between absolute growth of sales and employment, and weinzimmer, nystrom, & freeman (1998) show a correlation of .57 between the relative growth of sales and employment. thus, the growth of sales and the growth of employment are not equivalent measures of the performance of new ventures (chandler, mckelvie, & davidsson, 2009; coad & guenther, 2014). empirical analysis often prefers a method that measures trajectories in terms of average size or average growth rates for prolonged periods. however, we define the growth of new ventures as the comparison of date-related tendencies of growth indicators between two consecutive periods. our understanding of constant growth is that the total number of employees or the total amount of sales did not change from one year to the other. we will explain this approach in more detail in the following chapters. measuring growth in terms of average size says little about the individual economic growth over time. first, static comparisons cannot explain whether a particular development was achieved with constant, decreasing, or increasing growth rates. different growth trajectories can lead to the same average trajectory. second, assuming that a cohort includes both fast-growing ventures and ventures that are close to market exit due to stagnation (garnsey, stam, heffernan, & hugo, 2006) one could argue, the average growth rate masks tremendous differences between these two groups. we argue that the average trajectory cannot be used especially when it comes to the earlydevelopment of new ventures. therefore, we will provide a conceptual framework to overcome these shortcomings. cross-sectional data ‘little evidence is available on the growth paths of firms over time’ (garnsey, stam, heffernan, & hugo, 2006, p. 9). crosssectional designs may be able to identify some of the variables of growth trajectories of new ventures. a meta-analysis of studies of firm growth published between 1992 and 2006 shows that ‘rarely did a study use two or more time spans for calculating growth’ (shepherd & wiklund 2009, p. 108). after 2006, only few longitudinal studies on dynamics of new ventures in general (federico & capelleras, 2015; lejárraga & oberhofer, 2015; triguero, córcoles, & cuerva, 2014) and particular on growth trajectories (anyadike-danes, 2015) were published. this shows that the literature on growth trajectories of new ventures is quite sparse (brenner & schimke, 2014). however, more robust empirical studies to develop theories for entrepreneurial growth (blackburn, hart, & wainwright, 2013) or to explain how internal and external factors contribute to sustainable growth in smes are necessary (gupta, guha, & krishnaswami, 2013). we argue that a longitudinal research design is crucial to trace growth trajectories of new ventures. research and methodology data one limitation of the existing literature about new ventures is that much of it focuses on the manufacturing sector (neumark, wall, & zhang, 2011). we use data from the start-up panel of the german state of north rhinewestphalia (nrw) which annually monitors young enterprises in the skilled crafts sector. we define a new venture as an economic enterprise that is eight years or younger journal of small business strategy vol. 27 ● no. 2 ● 2017 44 (fackler, schnabel, & wagner, 2013; jennings, jennings, & greenwood, 2009; miller & camp, 1985; pellegrino, piva, & vivarelli, 2012; short, mckelvie, ketchen, & chandler, 2009). we only use data from the skilled crafts sector, which is typical of many entrepreneurial activities in germany in terms of size, business model, or legal type (lambertz & schulte, 2013). furthermore, this sub-sample adheres to davidsson and gordon’s (2012, p. 19) call for ‘better theorizing and modeling of the drivers of the successful establishment of imitative, subsistence-oriented businesses.’ hence, we focus on ‘ordinary entrepreneurs’ that do not have neither innovative nor technology-based business concepts (lambertz & schulte, 2013). table 3 provides response rates ranging from 39.5 to 52.7 percent, which correspond to rates which allow valid and reliable results (baruch, 1999). in addition to start-ups, the panel covers successions as well as active participations. the data set is not biased by part-time businesses because it contains data solely on full time entrepreneurship (lambertz & schulte, 2013). in general, part-time businesses cannot be compared with full-time ventures because they are often created only for auxiliary income. thus, single-person enterprises, which have become a very important part of contemporary’s economies (kessler, 2009), are only covered as far as they are run as a full-time business. table 3 response rates panel wave survey period number of questionnaires distributed number of responses response rate 5 summer 2004 6,881 3,627 0.527 6 summer 2005 8,153 3,978 0.488 7 summer 2006 9,149 3,610 0.395 8 summer 2007 9,751 4,014 0.412 9 summer 2008 7,265 3,231 0.445 10 summer 2009 7,322 3,316 0.453 11 summer 2010 7,880 3,272 0.415 12 summer 2011 8,443 3,447 0.408 13 summer 2012 8,805 3,653 0.415 the conceptual cornerstone of the start-up panel nrw is a periodical survey based on standardized questionnaires that pave the way for the long-term monitoring of a large number of young entrepreneurs and their enterprises, which are either newly created or acquired. this survey has no survivorship bias: as all new ventures in our data set are required to report to a governmental authority (landes-gewerbeförderungsstelle), we can monitor and control for the survival of these new ventures within the first two years after journal of small business strategy vol. 27 ● no. 2 ● 2017 45 foundation. therefore, we can exclude survivorship bias for first this time span (lambertz & schulte, 2013). for a longer time period, literature shows that the mortality of new ventures in the craft sector is much lower than in other sectors (paulini 1999, albach & hunsdiek, 1987). the questionnaires of the annual panel wave always contain the same questions with regard to corporate development (sales volume, number of employees, investment volume, expected corporate earnings, corporate profits, utilization, and achievement of profit goals) as well as questions focusing on specific topics that differ from panel wave to panel wave (counseling, entrepreneurial marketing, motivation, etc.) (lambertz & schulte, 2013). our study is based on data that includes nine waves of the start-up panel nrw, and begins with wave 5. the first four waves are excluded because the survey period changed from six months to one year. the survey is conducted once a year in summer, and if the business is established in spring of the same year, it still does not have one complete year in business. for this reason, the time span between the establishment of the new venture and the first survey is defined as year 0. this time span, therefore, is shorter than twelve months. year 1, therefore, marks the first full year of business activities within the panel waves. we assume that the total number of employees of a given new venture in year 0 equals the total number of employees at the foundation of a given venture. because this study investigates up to eight years of a given new venture, it covers year 0 and eight years, which are numbered 1 to 8 and are equal to an entire year of business activity following year 0. for example, 1 refers to the age of a given new venture, e.g. this new venture is at least one year (min.) and up to one year and eleven months (max.) old. it is important to mention that we distinguish between periods and point in time. in general, we relate absolute numbers of employment or sales from one date to absolute numbers in the preceding date. for period 0, we relate the total number of employees or the total amount of sales of year 0 to year 1. this allows us to define state changes, e.g. if the total number of employees or the total amount of sales increases, decreases or grows constantly in a given period. we will explain the concept of state changes in more detail below. we merge the data into one set of pooled cross-sectional data. utilizing pooled data, we reduce potential biasing effects of different economic business cycles, cohorts, and outliers. as it is important to distinguish growth through acquisition (burghardt & helm, 2015; gilbert, mcdougall, & audretsch, 2006; lockett, wiklund, davidsson, & girma, 2011) from organic growth (delmar, davidsson, & gartner, 2003), we do not analyze acquisition or active participation. our dataset contains information on 4,880 newly established ventures between 2003 and 2012 (table 4). 78 percent are sole proprietorships, and 79 percent are owned by men. the dataset contains information about the sector for 3,977 new ventures. out of these 3,977, 1,465 (37 percent) new ventures work in the building and interior finishing trades, 1,178 (30 percent) in the electrical and metalworking trades, 953 (24 percent) in the health and body care trades as well as the chemical and cleaning sector, 250 (6 percent) in the woodcrafts and plastic trades, and 55 (1 percent) in the food crafts and trades. there are 76 (1 percent) new ventures representing other trades. on average, the new ventures start up with 2.77 employees (including the journal of small business strategy vol. 27 ● no. 2 ● 2017 46 entrepreneur). we compare these data with official data from the register of craftsmen (müller, 2014) to analyze if our data set is representative for new ventures in the german craftsman sector. this analysis shows that the numbers are comparable, for example in 2009 the average size of german new ventures was 2.1 employees (including the entrepreneur), 85 percent of all new ventures were sole proprietorships, and 79 percent were male. data-related tendencies our literature review shows that the field of new venture growth is still fragmented. however, more and more researchers agree that the stages of growth models do not adequately describe the growth trajectories of new ventures. we enter the debate by focusing on the empirical analysis of growth trajectories, and not on an empirical test for a specific model. to do so, we analyze the growth of new ventures by focusing on what we call date-related tendencies. based on the work on the development of new ventures in terms of development tendencies, we examine long-term developments divided into state changes between time points. table 4 descriptives variable mean standard deviation number of employees (including entrepreneur, at foundation) 2,77 3.140 gender: male 0.79 0.407 form of organization unlimited private company 0.08 0.270 sole proprietorship 0.78 0.414 limited liability company 0.14 0.348 age (in years) age of new venture (in 2012) 5,80 2.489 age of entrepreneur (in 2012) 41,79 8.332 sector building and interior finishes trades 0.37 0.482 electrical and metalworking trades 0.30 0.457 woodcrafts and plastic trades 0.06 0.243 clothing, textiles and leather crafts and trades 0.01 0.107 food crafts and trades 0.01 0.117 health & body care trades and chemical & cleaning 0.24 0.427 others 0.01 0.087 this approach allows us to define state changes, e.g. date-related tendencies, and to identify the trajectory of a given venture’s development. we exemplify this approach in figure 1: vi represents different new ventures with individually specific growth trajectories journal of small business strategy vol. 27 ● no. 2 ● 2017 47 over time. in our example, we explain the approach of state changes by four different new ventures (v1 to 4). the transition from year 1 to year 2 is in this case for all v1 to 4 non-negative. during the transition from year 4 to year 5, half of v1 to 4 have a positive rate of change, while the other half has a negative or stable one. it is possible to consider individual temporal interdependencies of development and to discern patterns of growth. in line with derbyshire and garnsey (2014), we argue in favor of an empirical model that also considers stable periods in the growth trajectories of new ventures. we define the growth of new ventures as the comparison of date-related tendencies of growth indicators between two consecutive periods. residual analysis and mosaic plots we apply a residual analysis to test our hypotheses. we identify categories relevant for a significant chi-square statistic. this approach involves calculating the standardized residual for each cell of the contingency table of date-related tendencies and adjusting it for its variance (haberman 1973): 𝑑 = e √(1 − 𝑛(row) 𝑛(𝑡𝑜𝑡𝑎𝑙) )(1 − 𝑛(𝑐𝑜𝑙) 𝑛(𝑡𝑜𝑡𝑎𝑙) ) where d is an adjusted residual and e a standardized residual corrected for expected cell size (tredoux & durrheim 2002 p. 375). figure 1. individual growth trajectories of four new ventures (v1 to v4) the normal distribution is used to find the probability of the adjusted residual using a two-tailed test of significance. a significant adjusted residual indicates that the cell made a y e a r 0 y e a r 1 y e a r 2 y e a r 3 y e a r 4 y e a r 5 g ro w th v1 y e a r 0 y e a r 1 y e a r 2 y e a r 3 y e a r 4 y e a r 5 g ro w th v2 y e a r 0 y e a r 1 y e a r 2 y e a r 3 y e a r 4 y e a r 5 g ro w th v3 y e a r 0 y e a r 1 y e a r 2 y e a r 3 y e a r 4 y e a r 5 g ro w th v4 journal of small business strategy vol. 27 ● no. 2 ● 2017 48 significant contribution to the chi-square statistic (agresti, 2013). under the null hypothesis that is the assumption that variables are independent, the adjusted residuals will have a standard normal distribution. an adjusted residual larger than 1.96 indicates that the number of cases in that cell is significantly larger than would be expected if the null hypothesis were true, with a significance level of .05. an adjusted residual less than -1.96 indicates that the number of cases in that cell is significantly smaller than would be expected if the null hypothesis were true (agresti, 2013). to illustrate the results of our residual analysis we use mosaic plots, which graphically show percentages of cross-classified categorical variables (friendly, 2002; hofmann, 2000). the areas of rectangular tiles are proportional to the percentages in the cells of the contingency table (cox, 2008). results descriptives of non-linear growth table 4 briefly describes the merged data of the 4,880 new ventures between 2003 and 2012. we use date-related tendencies regarding employment and sales to explain how these newly established ventures grow within the first eight periods. all results of the chi-square test are significant throughout the bivariate analysis. in period 8, more than twenty percent of the expected counts are less than five for both growth measures and, thus, the chi-square test may be invalid (wildemuth, 2009). therefore, we focus on date-related tendencies for periods 0 to 7. the numbers given on the horizontal axis at the very bottom of figures 2 to 4 refer to the periods explained above. ‘0 and 1’ means that we compare the date-related tendencies in period 0 with the ones in period 1. thus, the columns of figures 2 to 4 show growth trajectories considering the conditionality of date-related tendencies of preceding periods. in figure 2, the 33 per cent of periods ‘0 and 1’ of the left table about employment can be read as follows: 33 percent of all new ventures that increased their employment in period 0 reversed their decision and decreased their total number of employees in period 1. from our analysis we derive the following results: first, the growth of new ventures is not as positive, as suggested by the stages of growth models. for both growth measures, the probability that a new venture continues to grow in a period following an earlier period of growth varies between 29 and 53 percent (figure 2). second, the growth of new ventures is uneven, and distinct stages cannot be identified as claimed by stages of growth models. third, different measures of growth lead to different results. the tendency that sales or employment of new venture increases in period t+1 after it decreased in period t is, for the sales measure, between 3 and 14 percentage points higher than for the employment measure (figure 3). the probability of a new venture to remain at the same size after a period of constant growth is between eleven and thirty percentage points higher for the employment measure than for the sales measure (figure 4). to highlight the differences in the measurement of growth of new ventures, we define increase-decrease-ratios (idrs). let idr be the increase-decrease-ratio of a given part of the growth trajectory with: idr = date-related tendency of positive growth / date-related tendency of negative growth for the left table of figure 2, we journal of small business strategy vol. 27 ● no. 2 ● 2017 49 exemplify this ratio. we relate the 42 percent to the 33 percent to receive an idr of 1.27. after an increase in period t (figure 2), at period t+1 four out of seven idrs of employment are less than 1 indicating that the percentage of negative growth is larger than the percentage of growth in these periods (figure 2, table on the left side). in contrast, for sales in period t+1 all periods, except the comparison between period 3 and 4, show a idr value larger than 1 indicating that the percentage of growth is larger than the percentage of negative growth (figure 2, table on the right side). after zero growth in period t (figure 4), in period t+1 idrs of sales range from 1.34 to 3.24, which means that the percentage of increase is always larger than the percentage of decrease. constant growth in period t is followed by a range of fluctuating sales figures throughout the periods (figure 4, table on the right side). in period t+1, the idrs of employment vary even more between 1.05 and 5.25 (figure 4, table on the left side). figure 2. date-related tendencies regarding employment (left figure) and sales (right figure) conditional on positive growth in period t. figure 3. date-related tendencies regarding employment and sales conditional on negative growth in period t. 33% 35% 34% 38% 40% 42% 41% 25% 29% 28% 25% 32% 21% 22% 42% 36% 38% 37% 29% 37% 38% 0 and 1 1 and 2 2 and 3 3 and 4 4 and 5 5 and 6 6 and 7 date-related tendencies regarding employment decreasing constant increasing 37% 35% 36% 45% 39% 40% 36% 15% 14% 18% 13% 16% 16% 11% 48% 50% 46% 42% 45% 44% 53% 0 and 1 1 and 2 2 and 3 3 and 4 4 and 5 5 and 6 6 and 7 date-related tendencies regarding sales decrasing constant increasing 13% 12% 21% 18% 19% 18% 20% 29% 36% 32% 47% 30% 35% 38% 58% 52% 47% 35% 52% 48% 42% 0 and 1 1 and 2 2 and 3 3 and 4 4 and 5 5 and 6 6 and 7 date-related tendencies regarding employment decreasing constant increasing 15% 19% 26% 22% 24% 22% 30% 20% 14% 13% 23% 15% 17% 19% 65% 66% 61% 55% 61% 61% 52% 0 and 1 1 and 2 2 and 3 3 and 4 4 and 5 5 and 6 6 and 7 date-related tendencies regarding sales decrasing constant increasing journal of small business strategy vol. 27 ● no. 2 ● 2017 50 figure 4. date-related tendencies regarding employment and sales conditional on zero growth in period t. mosaic plots as we introduce mosaic plots as a new approach to test hypotheses of growth trajectories, we exemplify how to read mosaic plot 1 regarding employment (figure 5, first table on the left side). the percentages on the horizontal axis refer to the percentages of new ventures that decreased, increased, or hold their number of employees constant in period 0. similarly, the numbers on the left side (0, 25, 50, etc.) refer to the percentage of new ventures and its change in employment in period 1. as date-related tendencies in period 1 are conditional on date related-tendencies in period 0, the results can be read as follows: out of all new ventures that decreased their number of employees in period 0, 12.9 percent continue to decline their total number of employees in period 1. the number in parenthesis and the colors refer to the residual analysis. white refers to adjusted residuals larger than 1.96, grey to the ones between -1.96 and 1.96, and black to adjusted residuals smaller than -1.96. in our example, the adjusted residuals have a value of -1.2 and the cell is, therefore, grey. this means that the number of cases in this cell is not significantly larger or smaller than expected and, thus, this result does not provide evidence for our hypotheses. as illustrated in figure 5, mosaic plots show evidence for hypothesis 1. the value of adjusted residuals shows that observations for growth of employment in period t and decline in period t+1 are, as shown in the bottom right corner of the mosaic plots in figure 5, overrepresented within the entire period under observation. in addition, all periods which see an increase in period t and constant development in period t+1 are underrepresented. we find a similar result for growth of sales. as shown in figure 5, mosaic plots show partly evidence for hypothesis 2. the value of adjusted residuals shows that observations for decline of employment in period t and increase in period t+1 are, as shown in the upper left corner of the mosaic plots in figure 5, overrepresented for mosaic plots 2, 3, 5, and 6. for mosaic plots 1, 4 and 7 we do not find evidence that the number of cases in that cell is significantly larger than would be expected. for growth of sales we find statistical 8% 9% 16% 13% 21% 13% 14% 50% 58% 51% 58% 57% 62% 52% 42% 33% 33% 30% 22% 25% 35% 0 and 1 1 and 2 2 and 3 3 and 4 4 and 5 5 and 6 6 and 7 date-related tendencies regarding employment decreasing constant increasing 19% 17% 22% 25% 22% 19% 29% 25% 28% 31% 37% 41% 39% 32% 56% 55% 46% 39% 37% 43% 39% 0 and 1 1 and 2 2 and 3 3 and 4 4 and 5 5 and 6 6 and 7 date-related tendencies regarding sales decrasing constant increasing journal of small business strategy vol. 27 ● no. 2 ● 2017 51 evidence for our hypothesis for mosaic plots 2, 3, and 5. as presented in figure 5, mosaic plots provide evidence for hypothesis 3. the value of adjusted residuals shows that observations for constant growth of employment in period t and constant growth in period t+1 are, as shown in the rectangle in the middle of the mosaic plots in figure 5, overrepresented within the entire period under observation. except mosaic plot 1, we find a similar result for growth of sales. multivariate analyses we run a pooled ols regression to support our findings of the residual analysis and show which variables influence the growth of new ventures. to facilitate comparability with other studies related to growth of new ventures (bottazzi, coad, jacoby, & secchi, coad 2009; federico & capelleras 2015), our measure of growth rates is calculated by taking the differences of the logarithms of size, exemplified on employment: growthit=log(sizei,t)−log(sizei,t−1) where sizeit is measured by employment for firm i at time t. journal of small business strategy vol. 27 ● no. 2 ● 2017 52 figure 5. mosaic plots regarding growth of employment and sales (please refer to p. 50 left side for the explanation of the colors). figure 5 continued journal of small business strategy vol. 27 ● no. 2 ● 2017 53 figure 5 continued in order to analyse the autocorrelation between growth of new ventures, we estimate the following equation with cluster-robust huber/white standard errors (rogers 1993; williams 2000). it allows controlling for intraclass correlation between the new ventures in the data set: (log(empli,t)-log(empli,t-1) = α0+α11lagloggrowthempl + α22lagloggrowthempl + α3legalform + α4age + α5sex + α6performance + α7-8industrydummy+ ε this equation represents our growth model, where current growth is estimated using a set of lagged values of growth of employment to test for the autocorrelation of growth rates. table 5 shows that the serial correlation of the growth of new ventures is consistently significant for t-1 and t-2. adding further lags will also reduce critically the number of observations and may not imply an improvement in the explanatory power of the model. the approach of lagged variables is different to our analysis of the mosaic plots, where we compare t and t+1 instead of focusing on all past growth rates. journal of small business strategy vol. 27 ● no. 2 ● 2017 54 as control variables we add firm age, legal form of new ventures, sex and industry dummies. in addition, we add the total number of employees and profit achievement as independent variables. firm age is observed to have a negative effect on growth, as a large number of studies have shown, for example evans (1987a,b) for us manufacturing firms, variyam and kraybill (1992) for us manufacturing and services firms, liu, j, m., tsou, j., & hammitt, k. (1999) for taiwanese electronics plants, geroski and gugler (2004) for large european companies, and yasuda (2005) for japanese manufacturing firms. harhoff, d., stahl, k., & woywode, m. (1998) examine the growth of west german firms and observe that firms with limited liability have significantly higher growth rates in comparison to other ventures. however, these firms also have significantly higher exit hazards. these results are in line with theoretical contributions that emphasize that the limited liability legal form provides incentives for managers to pursue projects that are characterized by both a relatively high expected return and a relatively high risk of failure (stiglitz & weiss, 1981). table 5 correlation between growth of employment (p-values in parentheses) firms in mature industries are likely to have lower average growth rates because of the lower level of opportunity in mature industries. in contrast, firms in new sectors may have high growth rates due to the rapid pace of technological progress and the emergence of new products (coad, 2009). to address these industry-related differences we add industry dummies to the equation. current total number of employment and performance of a new venture are supposed to log_empllag_log_ empl 2lag_log _empl 3lag_log _empl 4lag_log _empl 5lag_log _empl 6lag_log _empl 7lag_log _empl log_empl 1 lag_log_empl -0.2806 (0.0000) 1 2lag_log_empl -0.0620 (0.0000) -0.2775 (0.0000) 1 3lag_log_empl -0.0049 (0.8016) -0.0502 (0.0019) -0.2814 (0.0000) 1 4lag_log_empl 0.0041 (0.8654) -0.0090 (0.6525) -0.0546 (0.0012) -0.2801 (0.0000) 1 5lag_log_empl 0.0160 (0.6080) 0.0070 (0.7783) -0.0205 (0.3346) -0.0630 (0.0005) -0.2785 (0.0000) 1 6lag_log_empl -0.0001 (0.9981) 0.0210 (0.5160) 0.0307 (0.2601) -0.0173 (0.4615) -0.0839 (0.0000) -0.3046 (0.0000) 1 7lag_log_empl -0.0347 (0.5994) -0.0113 (0.8017) -0.044 (0.9077) 0.0250 (0.4421) -0.0127 (0.6540) -0.1104 (0.0000) -0.3532 (0.0000) 1 journal of small business strategy vol. 27 ● no. 2 ● 2017 55 be a major influence for incremental growth. a top performing business is much more able to add size than an underachieving one, because profit enables the new firm to fund additional staff. therefore, the profit situation is a major prerequisite for incremental growth. for this reason, we add ‘profit situation’, proxied by profit achievement as an independent variable for performance into the regression. regression results are reported in table 6. we observe a negative autocorrelation for the first lag and a smaller autocorrelation for the second lag. these results highlight some important features. first, the results of the pooled ols regression support the results of the mosaic plots that firm growth rates are not random and non-linear. second, in line with coad and hölzl 2009, coad 2007, fotopoulos and giotopoulos 2010 and, hölzl 2014, we show that small firms are subject to negative serial correlation of growth rates. for new ventures experiencing high dismissal of employees at time t, the negative coefficient implies that in the previous period t-1 these new ventures were probably experiencing positive above-average growth. similarly, for those fastest-growing firms at time t, the negative coefficient indicates that these firms probably performed relatively poorly in the previous period t-1. an explanation for the negative autocorrelation could be that new ventures hire more than the required number of employees with the expectation of keeping only top performers. this may lead to a mechanical effect of negative autocorrelation. we analyze micro and small new ventures, thus these types of firms do not have the necessary resources to apply such a forwardlooking strategy. table 6 ols regression results for growth of employment with industry dummies, taking 2 lags (standard errors in parentheses) *p ≤0.1, **p ≤0.05, ***p ≤0.01 the significance and the positive sign of the founding year mean that the younger the firm the higher the growth rate of employment. this negative dependence of growth rate on age appears to be a robust feature of industrial dynamics in our data set. sole proprietorships have the expected negative sign but the results are not significant. in addition, total number of employment and profit achievement are positive and significant. journal of small business strategy vol. 27 ● no. 2 ● 2017 56 discussion and conclusion our study of german new venture development over time highlights the importance of longitudinal data to trace the growth of new ventures. growth is non-linear, prone to interruptions, amplifying forces, and setbacks (garnsey, stam, heffernan, & hugo, 2006). therefore, our results support penrose’s (1959) view that growth is episodic and occurs in spurts. however, the literature so far seldom focuses on non-linear phenomena. instead, the growth of new ventures is modeled as if it were linear. dynamic processes, such as resource problems or shifts in terms of opportunities, result in variations in the timing, magnitude, duration, and rate of change of growth (derbyshire & garnsey, 2014). our article supports scholars such as levie and lichtenstein (2010), brown and mawson (2013) or davidsson, steffens, & fitzsimmons, (2009) who have challenged traditional stages of growth models. in line with scholars who introduce complexity science to the literature on growth of new ventures (derbyshire & garnsey, 2014; dooley & van de ven, 1999; mckelvey, 2004), we argue for theoretical models that capture complex and non-linear dynamics of growth (steffens, davidsson, & fitzsimmons, 2009). future research on new venture growth should focus on a more flexible approach, such as the dynamic states approach, to understand the dynamics of hyper-growth companies (cassia & minola, 2012). this study also seeks to complement the existing literature on growth rate autocorrelation by focusing on the dynamics of new ventures. after a period of growth, more than 29 percent of the new ventures investigated here seem to enter a phase of consolidation because they may not want to grow further or even decide to reverse their decisions. these results are in line with penrose’s focus on the adjustment costs of further growth. consecutive periods of constancy or negative growth can be explained by the need of a new venture for consolidation. indivisibility, potential sunk costs, and size adjustment costs prevent firms from growth at certain stages of development (lockett, wiklund, davidsson, & girma, 2011). even growing firms devote more than 65 percent of their time to consolidation (hamilton, 2011). in contrast to coad, frankish, roberts, & storey, (2013), who do not consider stable periods, our results show that stable periods exist and, therefore, need to be considered. this is indicates that periods of growth are not necessarily followed by periods of growth, as suggested by the findings by garnsey, stam, heffernan, and hugo (2006) for the uk, netherlands, and germany. we agree with garnsey, stam, heffernan, and hugo (2006), however, that an important determinant of year-to-year growth seems to be the growth in the preceding year. data and findings add a new and different view to the assumption of a staged development of new ventures. when creating new combinations of resources and adapting to their environment, new ventures do not generally contradict staged development presumptions. but stages, if existent, are not constant or steady. development is not continuously incrementing but intermitted, lumpy and not always in line with a steady state stages assumption. moreover, findings question the determination and inevitability of stage sequences in a typical new venture setting. consistent with other work on growth measures (delmar, 2006; shepherd & journal of small business strategy vol. 27 ● no. 2 ● 2017 57 wiklund, 2009), we argue that it is important that scholars clearly explain why they use a certain growth measure because results depend on this decision. standard cross sectional measures and average growth rates fail to describe important dimensions of the course of growth of firms (garnsey, stam, heffernan, & hugo, 2006). our findings have the five following implications: first, it makes sense to study growth trajectories in a non-linear way and not constrained by the concept of stages, highlighting point-to-point changes to identify development patterns. we introduce mosaic plots as a new approach to visualize growth tendencies and evidence for our hypotheses. second, our data shows that recent positive growth is more likely to lead to negative growth, and conversely, that a recent negative growth raises the probability of a subsequent positive growth. therefore, traditional growth models cannot be validated by our data. to put it differently, the commonly used term ‘stage model’ has to be interpreted in a different manner. stage would not be defined as a time span, but rather as a sort of conditions of circumstances that are all present at a point in time and that are conditionally linked to a preceding sort of circumstances. in this sense, our understanding of stages reveals the opportunity tension between stability and change identified by levie and lichtenstein (2010). third, growth in period t can be a rather good predictor for growth in period t+1. this suggests that variables for growth need to be included as lagged variables in models predicting growth. our suggestion implies further research on growth determinants. while the vast majority of previous findings have relied on cross-sectional designs, our longitudinal design leads to more nuanced results. it also shows that large-scale longitudinal data is crucial for future research because it can generate more reliable results. fourth, the different findings concerning sales and employment growth call for some reflections on their distinctions. business founders have an effect on the growth of their firms due to their intentional behavior, but do not affect employment and sales in the same manner. while growth in terms of employment is directly affected by the intentional behavior (bingham, eisenhardt, & furr, 2007), growth in terms of sales depends on market demand. as delmar and wiklund (2008) point out, the latter reflects marketdriven output gains while the former is related to adjustments of the resources available for a firm (penrose, 1959). fifth, a more practical implication of this paper’s findings is that the management of new ventures and consultants need to consider growth trajectories in terms of the extent and timing. because growth is subject to indivisibility, potential sunk costs, and size adjustment costs, options of continuous, incremental growth are limited, and this situation may lead to dramatic changes. this challenge, in turn, may lead to a loss of crucial resources. in light of these potential dangers, new ventures have to respond to internal and external changes in a measured manner. new venture management and consultants can help entrepreneurs to achieve this difficult balancing act. this article has some limitations. we do not have data on growth intensions, and, therefore, we cannot distinguish between ventures that cannot grow, do not have to grow, or do not want to grow (autio & acs, 2010). we analyze new ventures predominately in the journal of small business strategy vol. 27 ● no. 2 ● 2017 58 skilled crafts sector. these new ventures cover different occupations and sectors but a precise breakdown into certain sectors (for example as defined by nace code) is not possible. a more panel-specific limitation results from decreasing case numbers with longer periods. as shown above, the case number of ventures analyzable decreases with venture age. therefore, the period of observation is limited to the first eight years of early development. because consolidation periods of new ventures go up to five years on average (lambertz & schulte 2013), this is supposed to be an adequate period of time. however, as panel mortality can lead to successor bias, meaning that more successful ventures are more likely to report their development, later period estimations might be overestimated because of underperforming non-respondents. however, this issue seems to be negligible as respondents do not report growth but current size. another problem in this respect can be survivorship bias because only ventures still in business can be surveyed. however, the data set allows controlling for exits for at least the first two years of business activity of each firm because of respective notations in the central state government data base. afterwards, exit rate of these full-time businesses is demonstrably lower than average. the results of the mosaic plots focus on the sign of the autocorrelation. future research could shed light on attractive alternatives to organic growth of new ventures. one of these alternatives to discuss may be acquisitions because it may enable a firm to take advantage of growth opportunities by accessing resources that are complementary in nature to the resources that the new venture already controls (lockett, wiklund, davidsson, & girma, 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(2005). firm growth, size, age and behavior in japanese manufacturing. small business economics, 24(1), 1–15. http://www.smallbusinessinstitute.biz two sources of overconfidence: incorporating disconfirming feedback in an entrepreneurial context* mark simon1, john kim2 1university of michigan flint, marksimo@umflint.edu 2oakland university, kim@oakland.edu a b s t r a c t the prevalence of overconfidence when making entrepreneurial decisions has led some scholars to argue that it has positive ramifications while others to disagree. the question is: will highly overconfident individuals who consider starting a venture be willing to correct initial misconceptions? we found that it depends upon the source of overconfidence. even at equally high overconfidence levels, individuals who reached that level by intentionally processing additional evidence were less likely to revise erroneous beliefs when compared to those with a natural tendency toward high overconfidence. in contrast to the overconfidence source, overconfidence level was not associated with changing incorrect beliefs. introduction keywords: journal of small business strategy 2017, vol. 27 no 03, 9-24 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2017 small business institute® apa citation information: simon, m. & kim, j. (2017). two sources of overconfidence: incorporating disconfirming feedback in an entrepreneurial context. journal of small business strategy, 27(3), 9-24. w w w. j s b s . o rg overconfidence, belief revision, entrepreneur, information processing *this project was funded in part by the hagerman center for entrepreneurship and innovation. the contents of this publication are solely the responsibility of the authors. “… the thing that scares me most is someone who is convinced they are right, because they will never change.” (furr, cavarretta, & garg, 2012) many might agree with the statement above, especially when it refers to someone who is highly confident about incorrect information. this paper, however, introduces a crucial but overlooked distinction that may strongly influence whether highly overconfident individuals will persist with mistaken beliefs. overconfidence is a cognitive bias that occurs when individuals express a degree of certainty in their judgments that exceeds the accuracy of those judgments (klayman, soll, gonzález-vallej, & barlas, 1999). overconfidence occurs at different levels. high overconfidence refers to being extremely certain of an incorrect answer, such as being 99% sure one is correct. mild overconfidence happens when an individual believes an incorrect fact is correct but may be only 51% certain that he or she has the right answer. being highly confident (i.e., 95% confident) of a correct answer is not considered overconfidence. since the answer is correct, the individual’s confidence does not exceed his or her accuracy. high overconfidence plays a critical role in entrepreneurship (forbes, 2005; zacharackis & shepherd, 2001). this bias has been associated with a slew of entrepreneurial decisions, such as whether to introduce pioneering products (simon & houghton, 2003), to acquire funding (forbes, 2005), or to commercialize inventions (astebro, jeffrey, & adomdza, 2007). the current study focuses on whether or not to start a new company, a decision that has been associated with overconfidence (robinson & marino, 2015). although high overconfidence is associated with entrepreneurial actions, scholars disagree about its performance ramifications (hayward, shepherd & griffin, 2006; trevelyan, 2008). some (e.g., simon & houghton, 2003) claim this bias will lead to poorer results, arguing it is linked to over-entry into new markets, to excessive investments, and to commitment to risky projects with disappointing results. researchers have even asserted that overconfidence is “pernicious” (barnes, 1984), “the single most catastrophic judgment error one can make” (griffin & varey, 1996). they fear that this bias will lead people to fail to react to new information if it contradicts their current beliefs (forbes, 2005). this, in turn, might cause individuals to become rig10 m. simon & j. kim journal of small business strategy / vol. 27, no. 3 (2017) / 9-24 id, hampering their ventures long after founding (forbes, 2005). in contrast to the above scholars, busenitz and barney (1997) argue that overconfidence may be beneficial in entrepreneurial settings. likewise, simon, kim, houghton, and deng (2011) have asserted that more confident managers of small firms achieve greater success when introducing products. these scholars maintain that this bias launches individuals into actions that will generate needed, real-time feedback, which is salient enough to correct initial misconceptions. at the core of the debate about the consequences of overconfidence is a crucial, unresolved question (furr et al., 2012). will highly overconfident individuals revise their initial beliefs after receiving disconfirming feedback? our answer is complex, depending, in part, upon how these people became highly overconfident. high overconfidence arises from one of two very general sources (forbes, 2005). first, individuals “naturally” may be more prone to high overconfidence (klayman et al., 1999). this suggests that as soon as they consider assumptions regarding a proposed new venture, they will be highly, but erroneously, confident that their assumptions are correct. these naturally overconfident people are unlikely to intentionally process additional information because they are already certain they are correct. in contrast, some individuals initially may be mildly overconfident. to increase their confidence before proceeding, they may intentionally process additional information (e.g., studying secondary data) (simon et al., 2011). yet, for a host of reasons (barnes, 1984; kahneman & lovallo, 1993), the information they seek may make them more confident of their incorrect assumptions rather than leading them to the correct answer. as such, they could reach as high a level of overconfidence as that of the “naturally” overconfident group. different types of searches for evidence influence cognitive flexibility (mcmillan & white, 1993), suggesting a person’s path to high overconfidence may affect how open she or he is to revising beliefs after encountering disconfirming feedback. our research question, therefore, asks: at equal levels of overconfidence, are individuals who intentionally and recently process additional information less likely to change their beliefs when compared to those who have not? the importance of answering this question is bolstered by an editorial in journal of business venturing that marked its 30-year anniversary (shepherd, 2015). in the article, editor dean shepherd argued that examining how initial entrepreneurial beliefs are refined when exposed to stakeholders represents a major future direction that can expand the boundaries of entrepreneurship research. this is the exact goal of the current study. literature review research has suggested multiple potential causes of high overconfidence. for example, people may engage in wishful thinking, overestimate their abilities, rely on misleading cues, double-count redundant information, and reach firm conclusions from samples that are too small (barnes, 1984; oskamp, 1965; robinson & marino, 2015; simon &houghton, 2003). additionally, some people just may be predisposed to such bias (soll, 1996). at a broader level, high overconfidence develops through one of two sources. those following the first path are “naturally” more overconfident than others (forbes, 2005; klayman et al., 1999). this may occur because overconfidence has trait-like tendencies (forbes, 2005; klayman et al., 1999; soll, 1996); certain people consistently express greater overconfidence in their information, regardless of the topic or question. this tendency is reasonably stable across time and situation and may stem from relatively unchanging factors, such as long-standing habits (yates, lee, shinotsuka, patalano, & sieck, 1998), firmly established cognitive customs (yates et al., 1998), and established personality types (soll, 1996). in multiple studies (e.g., klayman et al., 1999; mahajan, 1992), highly overconfident subjects who answered dozens of questions spent only seconds providing answers to each question. these findings suggest that their overconfidence was automatic. given that naturally overconfident individuals start the process certain they are correct, they have little reason to invest effort into revisiting their answers (tan, tan, & teo, 2012). they do not engage in processing additional information; they just know. overconfidence via this path is a relatively effortless, immediate, top-of-the-mind subconscious phenomenon. we refer to overconfidence arising in this way as natural overconfidence (noc). those following the second route initially may be mildly overconfident about facts that are critical to the success of an entrepreneurial endeavor (hayward et al., 2006). however, in situations where people are not very confident, they may strive to become more confident by employing more complex and thorough judgment processes that require greater cognitive effort (anderson & maletta, 1999). in other words, they begin processing additional evidence (brinckmann, grichnik, & kapsa, 2010). they might analyze information, develop plans, scrutinize secondary data, and perform surveys (brinckmann et al., 2010; simon et al., 2011). as they examine more data, their confidence grows (jonas, schulz-hardt, frey, & thelen, 2001). all else being equal, this increased confidence is probably appropriate. there are many reasons, however, why processing additional evidence may not result in a better understanding 11 m. simon & j. kim journal of small business strategy / vol. 27, no. 3 (2017) / 9-24 of the topic, especially in entrepreneurial settings where available information is often irrelevant or inaccurate (kahneman & lovallo, 1993). making important decisions in “murky” environments not only causes individuals to search more but also to search in biased ways (davidsson & wahlund, 1992). kahneman and lovallo (1993) suggest that extensive planning effort can lead individuals to pay too much attention to a plan’s hypothetical conclusions and too little attention to what usually occurs. in a similar vein, a seminal study by oskamp (1965) found that psychologists became more confident in their incorrect clinical decisions when they expended more effort studying redundant patient information. furthermore, kiesler and sproull (1982) have argued that given total limits on cognitive capacity, processing more evidence may lead to constructing illusory correlations and false analogies. collectively, these findings suggest that the entrepreneurs’ intense efforts to process more information may lead to a high level of overconfidence because it boosts confidence without increasing accuracy. ultimately, the overconfidence level of those processing more information may equal the overconfidence level of the noc group. we refer to overconfidence arising from intentionally processing additional information as processing-evidence overconfidence (poc). there are, of course, other patterns related to search and confidence. instead of initial overconfidence, individuals may be confident of the correct conclusions. also, mildly overconfident individuals may abandon their venture idea or conduct a search that corrects their initial misperceptions. but with that said, a multitude of scholars (e.g., busenitz & barney, 1997; forbes, 2005; houghton, simon, aquino, & goldberg, 2000; kahneman & lovallo, 1993; mahajan, 1992; robinson & marino, 2015) have argued that patterns associated with poc and noc occur frequently and have important implications for startups, making poc and noc worthy of study. despite the distinct nature of poc and noc, no one has examined whether the two differentially influence the extent to which individuals will revise their beliefs when faced with feedback that indicates their high overconfidence is incorrect. while many studies have examined the general tendency for overconfidence to persist in the face of new questions (e.g., mahajan, 1992), no overconfidence research has explored the likelihood of changing an initial conclusion, even though flexibility is critical to entrepreneurial success (blank, 2013). changing an initial conclusion is often referred to as belief revision (nickerson, 1998). one’s ability to adjust his or her belief after encountering disconfirming feedback is not only crucial to success but also difficult to achieve (nickerson, 1998). the ability to do so tends to vary greatly depending upon a number of factors (haynie, shepherd, & patzelt, 2012). one factor in particular that may influence belief persistence is confirmation bias (nickerson, 1998). confirmation bias occurs when people seek or interpret evidence in ways that support existing beliefs and is perhaps the best known and most widely accepted inferential error to come out of the literature on human reasoning (nickerson, 1998). some (e.g., haynie et al., 2012) argue that in select situations, confirmation bias may be helpful. however, in many other situations, it may be the single most problematic aspect of human reasoning (nickerson, 1998). we are particularly interested in the tendency for individuals to persist in a belief when faced with a disconfirming expert opinion. the tendency to listen to or ignore experts is one of life’s basic decisions (soll & larrick, 2009). furthermore, several scholars (e.g., mannes, 2009; yaniv, 2004) have asserted that people do not give as much weight to expert opinion as is appropriate and have called for more research in this area. confirmation bias is especially likely to occur when considering facts related to deciding whether or not to start a venture (comegys, 1976). we argue that a multitude of interrelated characteristics of poc, as compared to noc, may increase confirmation bias during the new venture decision. this decreases one’s willingness to revise beliefs even in the face of disconfirming expert opinion. figure 1 displays underlying black-boxed dynamics that reflect the progression of confirmation bias and belief revision for poc and noc. the paragraphs that follow explain the figure and develop our hypotheses. most typically, individuals seeking to build their confidence in a fact gradually add subsequent pieces of evidence to previous ones (jonas et al., 2001). as such, poc individuals will gather evidence sequentially over time (anderson & maletta, 1999), whereas noc individuals demonstrate natural high overconfidence, suggesting they will not intentionally process additional evidence (soll, 1996). anderson and maletta (1999) as well as nickerson (1998) have argued that a sequential process increases confirmation bias. as figure 1 indicates, individuals start the search by seeking and finding one piece of supporting evidence (nickerson, 1998). but after finding one piece of support, the tendency to look for others is exacerbated, increasing the confirmation bias. in other words, their belief that their original assumption is correct grows as does their tendency to ignore a disconfirming expert opinion (mcmillan & white, 1993). in this way, the confirmation bias snowballs and strengthens. also, sequential search increases the amount of time one spends evaluating the decision (higgins, 1996). this fosters readiness to view information in a way that is con12 m. simon & j. kim journal of small business strategy / vol. 27, no. 3 (2017) / 9-24 sistent with prior beliefs, recalling attention to the original hypothesis (nickerson, 1998). repeatedly thinking about a hypothesis increases commitment to the prior decision, causing individuals to feel like they no longer need more information to make the decision (jonas et al., 2001). in addition to gathering evidence sequentially, poc individuals will have gathered it recently, suggesting they will recall not only their conclusion but also their specific reasons for reaching it (anderson & maletta, 1999). in contrast, when noc individuals recall past conclusions, even ones about which they are still highly confident, they are unlikely to remember the original reasons for those conclusions (ashton & ashton, 1990). given this shakier foundation, decision makers are more likely to revise their beliefs should they be presented with a disconfirming expert opinion. alternatively, individuals who are highly confident and remember the reasons for their confidence are much less likely to change their beliefs. the poc individual’s intentional information processing through action involves more effort than the noc individual expends. effort makes information more salient and accessible, that is, easier to retrieve from memory (wyer, 2008). furthermore, the accessibility of the original information will hinder the retrieval and evaluation of alternative information (wyer, 2008) even if the alternative information is more appropriate. similarly, exerting effort increases the individual’s belief in the diagnosticity and validity of evidence (kardes, kim, & lim, 1994). these characteristics often lead decision makers to ignore or downplay disconfirming feedback. given the above, anderson and maletta’s (1999) argument that effort increases confirmation bias and reduces willingness to alter a conclusion is not surprising. interestingly, lau and coiera’s (2006) research has indicated that information search patterns have an effect independent of, and as strong as, confidence level on belief revision. similarly, jonas and colleagues (2001) have determined that commitment to a choice was distinct from confidence in a choice and that the former had the greater effect on belief revision. in the context of the current study, revising one’s belief entails lowering confidence in a wrong conclusion or increasing the likelihood of changing an incorrect conclusion to a correct one. thus, hypotheses 1 and 2 follow. hypothesis 1. even at equal levels of overconfidence, when faced with a disconfirming expert opinion, individuals exhibiting poc are less likely to change their incorrect answers than those exhibiting noc. hypothesis 2. even at equal levels of overconfidence, when faced with a disconfirming expert opinion, individuals exhibiting poc lower their confidence in incorrect answers by smaller increments than those exhibiting noc. the next hypothesis explores the relationship between individuals’ initial overconfidence level and the decrease in that level after being told they are wrong by an expert. some scholars (e.g., fischhoff, slovic, & lichtenstein, 1977; hayward et al., 2006) assume that the higher the initial overconfidence level, the less it will drop. scholars have not empirically tested this assumption and may have overlooked other factors (astebro et al., 2007). we believe the figure 1. model of progression for poc and noc. *this represents a possible, but likely, progression. processing additi onal evidence available informati on irrelevant/inaccurate att enti on to hypotheti cal outcomes redundant informati on illusory correlati ons, erroneous causal explanati ons false analogies. mild oc lesser willingness to revise beliefs disconfi rming expert opinion higher oc level/lower prob right answer high oc high oc greater willingness to revise beliefs disconfi rming expert opinion lower oc level/higher prob right answer poc * noc strength ? 13 m. simon & j. kim journal of small business strategy / vol. 27, no. 3 (2017) / 9-24 higher the initial overconfidence level, the greater the drop, which is the opposite of what they assume. russo and schoemaker’s (1992) study of overconfidence tentatively supports our assertion. although the study’s participants were highly confident (90%) that each of their incorrect answers was correct, they paradoxically expected, in the aggregate, to get over half the questions they answered wrong, but did not know which ones. given their recognition that many of the answers about which they were highly confident were wrong, it follows that if faced with evidence contradicting an individual conclusion, their confidence in it may drop. at the other end of the spectrum, a finding by astebro and colleagues (2007) provides insight about mildly overconfident individuals. the study found that these individuals did not significantly change their positive conclusion even after receiving a negative assessment by experts. this may suggest that they did not substantially decrease their initial mild overconfidence level. we believe two dynamics support our belief that higher initial levels of overconfidence are associated with a greater decrease in that overconfidence when faced with disconfirming feedback. the first relates to the salience of evidence. the more salient the disconfirming evidence, the more likely it will be used to revise decisions (dane, 2010). we argue that higher initial overconfidence levels make disconfirming feedback more salient. for example, 99% overconfident individuals will be quite surprised to later encounter any disconfirming feedback. thus, the feedback will be salient and likely to dramatically lower their confidence. in contrast, those who are 51% confident are almost expecting to find contradictory evidence and are unlikely to make a large adjustment. the second dynamic relates to the idea that some individuals have a greater tendency to easily and strongly react to evidence that led to their higher initial overconfidence (klayman et al., 1999). this tendency to significantly respond to information may also affect them when they later receive a disconfirming expert opinion, thereby resulting in a large adjustment (ashton & ashton, 1990). in contrast, it may be that some individuals are initially only mildly overconfident because of a tendency to treat evidence with skepticism (klayman et al., 1999). these individuals may, therefore, make smaller adjustments when they encounter disconfirming expert opinion. collectively, these arguments lead to hypothesis 3: hypothesis 3. the higher an individual’s level of confidence in an incorrect answer, the greater the degree the individual will lower that confidence after encountering a disconfirming expert opinion. the dynamics supporting hypothesis 3 may apply less for poc than for noc. the first dynamic is that the greater one’s overconfidence level, the more salient the disconfirming expert opinion. however, the information poc individuals used to increase their confidence before a disconfirming expert opinion was quite salient because they expended effort and engaged in a sequential process (higgins, 1996; nickerson, 1998). using the saliency of that information as a base line, the later disconfirming expert opinion might seem less salient even if one is at a high level of confidence. therefore, the disconfirming expert opinion may have a lesser tendency to decrease one’s confidence level. the second dynamic indicates that individuals tend to become highly overconfident because they strongly react to information (ashton & ashton, 1990), suggesting that their high confidence level will drop substantially after a disconfirming expert opinion. this dynamic may, however, apply much less to poc individuals. by definition, they do not reach high levels of confidence by strongly reacting to information but instead increase their confidence only after seeking multiple pieces of evidence and building a case (ashton & ashton, 1990; nickerson, 1998). as such, they may be less likely to react strongly when they come across one piece of evidence in the form of a disconfirming expert opinion. therefore: hypothesis 4. when faced with disconfirming expert opinion, the relationship between higher levels of confidence and greater decreases in that level will be less in magnitude for poc individuals than for noc individuals. method we tested these hypotheses using 163 master of business administration (mba) students and executive mbas who attend a midwestern university. similar to research by haynie et al. (2012) and simon, houghton, & aquino (2000), we asked subjects to “assume the role” of an entrepreneur. in response to information from a teaching case, students had to decide whether or not to start a new venture. the new venture constituted entering a market by introducing an internet marketing software. students were provided information about the industry, risk, and potential of the new venture. critical components in the decision to start a new venture were the development cost and the size of the current and future market, which were not presented in the case. scholars have used teaching cases to study issues in entrepreneurship similar to those in the current paper, including examining confirmation bias when investing in a developing country (jonas et al., 2001) and capturing simplified information processes used to cope with problematic product lines (walsh, 1995). 14 m. simon & j. kim journal of small business strategy / vol. 27, no. 3 (2017) / 9-24 mirroring the approach of houghton et al. (2000), simon et al. (2000), and robinson and marino (2015) among others, we conducted a correlation study in a tightly controlled setting rather than an experiment or a field study to examine biases and the decision to start a venture. consistent with other studies of the confirmation bias (e.g., anderson & maletta, 1999; lau & coiera, 2006), we captured belief revision by comparing answers and confidence level before receiving disconfirming feedback with final answers and confidence level after receiving the feedback. we also followed the lead of others (e.g., harvey & fischer, 1997; yaniv, 2004) by measuring disconfirming feedback in the form of a disconfirming expert opinion. broadly speaking, our approach was to separate individuals into two groups, the first of which (the noc group) was instantly and effortlessly highly confident of its incorrect answers (i.e., 99% confident). in contrast, the second group (the poc group) was initially only mildly confident of its incorrect answers (i.e., 55% confident). we then had the poc group process misleading evidence that increased its confidence in the incorrect answer to equal that of the noc group. both groups then read that an expert told them their answer was incorrect. finally, we compared the extent to which each group changed its answer based upon that statement. importantly, while we required mildly overconfident individuals to process additional information, processing additional information was not an experimental treatment. in other words, we were not testing whether processing increased confidence. we took this as a given (and were correct). instead, we had mildly overconfident individuals process information to raise their overconfidence, so we could compare their reaction to that of the noc group. we did not start the process with similar groups, as required in an experimental design, because doing so would not relate to our research question. our question examined whether two initially different groups would differ in their reaction to a stimulus, namely a disconfirming expert opinion. we discuss each of the study’s steps in more detail below and capture them in table 1. steps in study step 1: measure oc. in step one, participants logged on to a website, provided background information, and read a teaching case that focused on whether to launch a new venture that would sell self-service internet marketing software. the decision to start a new venture is fundamental to entrepreneurship research (simon et al., 2000). we captured subjects’ overconfidence after they read the case. student responses to cases about startup have been used to uncover important findings related to entrepreneurship, especially findings related to cognitive biases (houghton et al., 2000; robinson & marino, 2015; simon et al., 2000). in our study, subjects answered three questions and indicated how confident they were in their answers. for instance, we asked them whether the international internet growth rate from march of 2007 to march of 2008 was less than 300 million new users worldwide or more than 350 million new users. by way of example, a respondent might have answered the question by selecting more than 350 million new users (the wrong answer) and indicated he or she was 90% confident in this choice. the correct answer was not contained in the case, and at this point, none of the subjects processed additional evidence before responding, literally providing answers within seconds of reading the questions. step 2: form noc and poc groups. to form groups, we first discarded answers that were correct, as they did not reflect overconfidence. we then divided the subjects into a noc and a poc group for each of the three questions. we split the responses for each question at the median, based on the subjects’ level of confidence in an incorrect answer. the noc group was composed of individuals who answered incorrectly and displayed higher levels of initial confidence. for example, noc subjects may have been 98% certain of their incorrect belief that the internet grew by more than 350 million new users. to form the poc group, we selected those individuals who answered incorrectly and initially displayed only mild confidence in their incorrect answer about internet growth (e.g., 53% overconfidence). step 3: measure oc before a disconfirming expert opinion. for the noc group, we used the measure of initial overconfidence developed in step one to capture the group’s overconfidence before a disconfirming expert opinion. this group’s initial overconfidence level met the study’s requirements in that group members had high overconfidence without engaging in processing additional information, so we did not need to make any adjustments. we did, however, need to take an additional step to form the poc group because it had not yet considered new evidence that would boost overconfidence and had a lower level of overconfidence than that of the noc group. as such, we could not examine the hypotheses that, at equal levels of overconfidence, the two groups would react differently to a disconfirming expert opinion. to make the subjects in the poc group consider additional evidence that would raise their overconfidence, we had them read and/or analyze additional information related to the questions they previously answered. although we provided accurate data, we selected data and required analysis that would generate misleading results and make the subjects more confident of their initial incorrect answer. take, for example, poc subjects who initially were only 15 m. simon & j. kim journal of small business strategy / vol. 27, no. 3 (2017) / 9-24 53% confident in their incorrect answer that the internet grew by more than 350 million people. we had them read that internet traffic more than doubled every four months during some periods in the ‘90s and that from 2006 to 2008 internet usage grew by over 80% within china’s population of 1.2 billion people. after reading this type of accurate but misleading information and performing some related calculations, we asked subjects their new conclusion about internet growth and their confidence in that conclusion. the exercise caused many of the initially mildly overconfident subjects to become highly overconfident, often ultimately equaling the overconfidence level of the noc subjects. we labeled their new conclusions and confidence level as their overconfidence before disconfirming expert opinion. step 4: form matched pairs and provide a disconfirming expert opinion. next, we placed subjects into matched pairs. we formed the pairs to include one member of the noc group and one member of the poc group who were at equal levels of overconfidence before a disconfirming expert opinion for a given answer. but in some cases, more than one member of the poc group matched the confidence level of a member of the noc group or vice versa. in these cases, we formed the pairs by probing deeper. we developed the final matches to make sure they were closest on, not just level of overconfidence but also optimism and experience, as both could also influence belief revision (astebro et al., 2007; dane, 2010). this procedure ensured that the poc group, as compared to the noc group, processed additional evidence and that both groups ultimately were at equal levels of overconfidence. after forming the pairs, we provided both groups with a disconfirming expert opinion by having them read that a knowledgeable individual suggested their answer was incorrect. for example, after answering the internet-related question, subjects read, “you launched the web marketing software, and sales were less than expected. you mention to a friend whom you consider quite knowledgeable in this area that you are surprised by the low sales, especially considering that you believe there were over 350 million new users of the internet from march 2007 to march 2008. your friend mentions that a year ago he conducted research on internet usage and is almost sure that there were fewer than 300 million new users during that period.” table 1 steps in design steps noc: task poc: task step 1: measure oc subjects indicate answers and confidence in those answers to fact-based questions. step 2: form noc & poc groups we split sample at median, placing those with high initial overconfidence in noc group. we split sample at median, placing those with mild initial overconfidence in poc group. step 3: measure oc before a disconfirming expert opinion. not relevant. we used the data from step 1. subjects search by completing a series of tasks that makes them more confident of their incorrect conclusion. after completing the tasks, they give new answers and assign confidence levels for the questions asked in step 1. step 4: form matched pairs & subjects read a disconfirming expert opinion we placed subjects into pairs, comprised of one member of the noc group and one member of the poc group. we formed the pairs to make sure the two subjects’ overconfidence levels (before a disconfirming expert opinion) were equal. then subjects from both groups read that an expert had indicated their answer was incorrect. step 5: after disconfirming opinion, capture overconfidence & change in answer and confidence level after subjects have received a disconfirming opinion, they give new answers and confidence to the questions asked in step 1. we compare overconfidence before a disconfirming expert opinion (step 3) to overconfidence after a disconfirming expert opinion. 16 m. simon & j. kim journal of small business strategy / vol. 27, no. 3 (2017) / 9-24 step 5: after a disconfirming opinion, capture overconfidence and change. immediately after receiving a disconfirming opinion from an expert, we gave the subjects the opportunity to change their answers and/or their confidence in their answers to develop the respondents’ final overconfidence level. we then compared these answers and confidence levels to their answers and confidence levels before they read the disconfirming expert’s opinion. because each member of a matched pair had identical confidence levels before the expert opinion, we knew differences in the two groups’ confidence level could not generate the results. measures we collected data reflecting overconfidence, processing evidence, and four control variables. we present the specific measures in appendix a. overconfidence. there are several types of overconfidence, including overconfidence in skills, in current knowledge, and in predictions of the future (astebro et al., 2007; simon & shrader, 2012). each, however, has different underlying dynamics, antecedents, occurrence rates, and/or performance ramifications (griffin & varey, 1996; simon & shrader, 2012). this study focused on one type of overconfidence, namely knowledge overconfidence (busenitz & barney, 1997). knowledge overconfidence occurs when individuals express a degree of certainty in their judgments about current objective information that exceeds the accuracy of those judgments (simon & shrader, 2012). it is important to research this form of overconfidence because it is especially relevant to entrepreneurship (busenitz & barney, 1997; forbes, 2005), ubiquitous (russo & schoemaker, 1992), studied by researchers more than any other form (klayman et al., 1999), and critical for decision making (klayman et al., 1999). entrepreneurship, of course, involves more than assessing current objective information. entrepreneurs often enact their environments and may need information that becomes available only through marketplace actions. however, being correct about objective information is also important (sykes & dunham, 1995). it seems reasonable to contend that all things being equal, more often than not entrepreneurs’ successes depend upon their ability to race for a viable opportunity before depleting their resources (blank, 2013). given this, we believe one can make a compelling case that entrepreneurs usually are better off relying on initially correct information, rather than initially incorrect information. therefore, like many entrepreneurship scholars (e.g., busenitz & barney, 1997; forbes, 2005; keh, foo, & lim, 2002; robinson & marino, 2015) who have studied overconfidence, our measures reflect factual information. consistent with other research (e.g., busenitz & barney, 1997; forbes, 2005), we measured knowledge overconfidence by asking subjects to respond to questions that had clear-cut right and wrong answers, but the answers were not contained in the case. for each of the three questions we posed, we provided two possible responses and informed subjects that one of the two was correct. overconfidence has two components: confidence level and accuracy. after choosing one answer for each question, the subjects recorded how confident they were that their answers were correct on a scale ranging from 50% to 100%. they would not put down less than 50% because that would suggest they should have selected the other choice. a response of 50% indicated that they thought their response was a total guess, while 80% would indicate that they believed there was an eight-in-ten chance they chose the correct answer. we then measured “accuracy” for each question, coding answers as “100%” correct if the answer was right and “0%” correct if it was wrong. finally, to determine the extent to which the person was overconfident (or underconfident) for each question, we subtracted the accuracy score from his or her confidence level score; the greater the difference, the greater the overconfidence. for example, someone who was 99% confident in an incorrect answer (0% correct) would have been 99% overconfident. noc vs poc membership. for members of the poc group, we measured oc three times: 1) immediately after they read the case, 2) after they processed new evidence but before the disconfirming expert opinion, and 3) after the disconfirming expert opinion (i.e., final oc). for the noc groups, we measured oc only twice because the measure after reading the case was that same as before the disconfirming expert opinion. in other words, they did not process new evidence to change it. we assigned a “0” to the noc group to indicate that its members did not process additional information before receiving the disconfirming expert opinion, and a “1” to the poc group to indicate that its members did. dependent variables. the first dependent variable in the study was change in choice. we assigned “0” to individuals who did not change their erroneous answer before an expert opinion to the correct answer after an expert opinion (their final answer) and “1” to individuals who shifted to the correct answer. the second dependent variable, change in confidence level in the incorrect answer, indicated the degree to which subjects’ confidence level in the incorrect answer before the disconfirming expert opinion changed after they received the disconfirming expert opinion. change in confidence level equaled their confidence level in the incorrect 17 m. simon & j. kim journal of small business strategy / vol. 27, no. 3 (2017) / 9-24 answer before the disconfirming opinion minus their confidence level in the incorrect answer after the opinion. control variables. the study also included four control variables. the first was optimism, given that it might influence willingness to change conclusions (astebro et al., 2007). we measured optimism by taking the average score of six items. cronbach’s alpha for this scale was .79. we also controlled for experience because it can affect one’s level of overconfidence (mahajan, 1992) and willingness to change conclusions (astebro et al., 2007; dane, 2010). we captured experience in two different ways. first, we asked subjects the extent to which they had work experience related to new product introductions or web marketing. they responded on a 1 to 5 likert scale, ranging from “none” to “an extremely large extent.” the second question asked how many college-level courses they took related either to new product development or to web marketing. given that the questions reflected two different domains, work and educational experience, we did not combine responses but instead included each separately in our analysis. finally, we examined the subjects’ entrepreneurial intent. specifically, we first instructed subjects to assume they were the entrepreneur considering launching the venture. to measure entrepreneurial intent, we next asked whether anduro marketing should launch, using a scale ranging from 1 = “definitely not” to 5 = “definitely yes.” it was important to control for entrepreneurial intent given that individuals who consider starting a venture generally display greater overconfidence than others (robinson & marino, 2015). more specifically, scholars (e.g., robinson & marino, 2015) found that students who decided to start the venture described in a teaching case exhibited greater levels of overconfidence. analysis to rule out sources of extraneous variation, we checked to ensure that the two groups were not different on several variables, such as confidence before expert opinion, optimism, experience, management level, time in the master’s program, educational concentration, gender, and desire to start a venture. all p values fell between .50 and .80, indicating that the groups were not significantly different on these variables. each subject responded to three questions, but we excluded correct responses from our analysis as these did not reflect overconfidence. given these exclusions, each participant generated from one to three usable responses. for overconfidence question one, which asked about growth in use of the internet, there were 68 subjects, 34 in each group. for the second question, which addressed budget overruns, there were 82 subjects, with 41 each in the poc and noc groups. the final question related to percentage of companies with websites. there were 54 subjects, 27 in each group. since overconfidence level may depend upon the specific question asked, we did not combine the subjects’ overconfidence on each question but instead allowed the distinct effect of each to influence our results. hypothesis 1 posits that individuals exhibiting poc versus noc less frequently will change to the correct answer when faced with a disconfirming expert opinion. we conducted a logistical regression to test the hypothesis, using a model that included the source of overconfidence (poc and noc), the overconfidence before expert opinion, and the four control variables (i.e., work experience, course experience, optimism and entrepreneurial intent). in conducting the regression analysis, we first corrected for intragroup correlation because multiple observations existed from the same respondent. for example, he or she may have answered all three questions. multiple observations from the same respondent may bias the standard errors and lead to spurious findings for variables of interest (moulton, 1990). we accounted for the intragroup correlation using the moulton correction method (moulton, 1990) by clustering respondents who provided multiple responses and running a regression model. there were 202 observations with 134 clusters. the standard error was adjusted for the clusters. hypotheses 2, 3, and 4 propose that change in level of confidence after expert opinion is a function of the source of overconfidence (poc versus noc), the level of overconfidence before an expert opinion, and the interaction between the source of overconfidence and the level of overconfidence before the opinion, respectively. we analyzed these hypotheses using regression, again correcting for the intragroup correlation using the moulton correction method. results table 2 presents the means, standard deviations, and correlations among the study variables. the number of observations was 202, and the standard error was adjusted for 134 clusters in the observations. the correlations in the table among independent variables all have an absolute value well under .50, suggesting a relative absence of multicollinearity (mcnamara & bromiley, 1997). all vif scores were within acceptable parameters, never exceeding 2.00. hypothesis 1, which posits that individuals exhibiting poc versus noc will less frequently change to the correct answer when faced with a disconfirming expert opinion, was supported. results presented in table 3 indicate that the overall model was significant (wald value = 47.43; p <.001) as was the effect of the overconfidence source (β = -2.67; p < .001). the control variables were not significant. 18 m. simon & j. kim journal of small business strategy / vol. 27, no. 3 (2017) / 9-24 results for hypotheses 2, 3, and 4 are shown in table 4. the equation was significant (f = 10.71, p <.001). in support of hypothesis 2, we found that individuals exhibiting poc, as compared to those exhibiting noc, lowered their confidence less (β = -28.06; p < .001). consistent with hypothesis 3, individuals with a higher initial level of overconfidence lowered their confidence level more after encountering a disconfirming expert opinion (β = .43, p <.05). finally, as predicted in hypothesis 4, the interaction of the source of overconfidence and the overconfidence before the opinion was significant (p < .05) and in the hypothesized direction (β = -.80). in other words, the overconfidence level before the disconfirming expert opinion had less of an influence on the change in overconfidence level for poc individuals than for noc individuals. the four control variables were not significant. discussion the prevalence and controversial nature of overconfidence has led entrepreneurship scholars to theorize about its consequences (e.g., busenitz & barney, 1997; hayward et al., 2006). some argue that its ramifications may be positive, speculating that those who consider starting a new venture will be able to correct early misconceptions (e.g., busenitz & barney, 1997). others, however, believe the opposite (hayward et al., 2006). to shed light on this debate, we empirically explored the connection between overconfidence and belief revision. in so doing, we contributed to the literature in four ways. first, this study provides insight into what facilitates belief revision. researchers (e.g., nicholls-nixon, cooper, & woo, 2000; parker, 2006) assert that many entrepreneurial tasks, including starting companies and launching innovative products, require modifying initial conclusions. yet adjusting beliefs is often difficult, and the failure to do so is ubiquitous, leading scholars to call for more research in this area (nicholls-nixon et al., 2000; parker, 2006). more specifically, subbotin (1996) has suggested that scholars need to study the link between confidence and belief revision, asserting that this relationship is understudied. in response, the current study focused on one form of confidence, namely overconfidence. researchers have argued, but have not tested, the belief that the higher the overconfidence, the less individuals will revise their beliefs if they receive disconfirming feedback (fischhoff et al., 1977; simon et al., 2003). our study’s results not only suggest that this is not the case but also indicate that the reverse may be true. we found that the higher the individual’s overconfidence level, the more (not less) they will lower that level when faced with a disconfirming expert opinion. we also found that highly overconfident individuals, as opposed to mildly overconfident individuals, were not significantly less likely to change initial answers. the current study also contributed to the literature by identifying factors that might influence whether overconfidence has positive or negative ramifications. several studies have theorized that the environment (simon & shrader, 2012), stage of venture (busenitz & barney, 1997), or type of initiative (simon & houghton, 2003) might influence the consequences of overconfidence. we introduced a new factor, processing information. equally important, our study, unlike previous ones, empirically examined these proposed relationships. the remaining contributions expand our understanding of several theories, such as clarifying the relationship between the escalation of commitment to a failing course of action and belief revision. escalating commitment retable 2 means, standard deviations and correlations mean s.d. 1 2 3 4 5 6 7 1. change in con. level 22.50 (29.22) 2. change in choice .32 (.47) .90** 3. processed evidence .50 (.50) -.48** -.50** 4. oc before exp. opinion .86 (7.62) .10* -.06 .00 5. optimism 3.87 (.83) .00 .02 .08 -.03 6. ent. intention 3.42 (.94) .09 .09t -.10t .02 -.02 7. work experience 2.29 (1.06) .06 .04 -.08 .14* -.24** .07 8. course experience 1.07 (1.15) .05 .03 -.04 .10t .19** .09t .18 ** t p < .10, * p < .05, ** p < .01 number of observations = 202 (standard error adjusted for 134 clusters in observations) all probabilities are one-tailed given that the hypotheses were directional 19 m. simon & j. kim journal of small business strategy / vol. 27, no. 3 (2017) / 9-24 flects a behavior, namely continuing an action, whereas belief revision captures a cognitive process. poc might lead to belief rigidity, which in turn leads to continued failing actions. this research provides a deeper grasp of overconfidence. research has determined that there are different types of overconfidence, each which has different antecedents and consequences (trevelyan, 2008). no other study, however, has examined whether the process by which an individual becomes overconfident matters. this omission is critical because studies focus on one process yet implicitly assume their findings will generalize to overconfidence reached through a different process. our results suggest this may not be the case. limitations despite these novel contributions, the reader should recognize the study’s limitations. first, we utilized master of business administration (mba) students, although this choice is justifiable because mbas frequently have maturity in business situations (schwenk, 1995). limitations also stemmed from the project’s design. we conducted a correlation study in a tightly controlled setting rather than a field study because field studies are more prone to sources of extraneous variation and noise (schwenk, 1995). foregotable 3 logistic regression results using moulton correction method for change in answer coefficient dependent variable changed in choice independent variables: source of overconfidence -2.67*** overconfidence before expert opinion -.02 work experience .06 educational experience .00 optimism .24 entrepreneurial intent .16 wald value 47.43*** * p < .05, *** p < .001 number of observations = 202 (standard error adjusted for 134 clusters in observations). all probabilities are one-tailed given that the hypotheses were directional. table 4 regression results using moulton correction method for change in overconfidence level variables coefficient dependent variable changed in overconfidence level independent variables: source of overconfidence -28.06*** overconfidence before expert opinion .43* interaction of source of overconfidence & overconfidence before expert opinion -.80* work experience .34 educational experience .07 optimism 2.01 entrepreneurial intention .78 f-value 10.71*** * p < .05, *** p < .001 number of observations = 202 (standard error adjusted for 134 clusters in observations) all probabilities are one-tailed given that the hypotheses were directional. 20 m. simon & j. kim journal of small business strategy / vol. 27, no. 3 (2017) / 9-24 ing a field study, however, could limit the extent to which findings apply to the natural environment. we minimized this potential pitfall by using a teaching case that reflected the complexity of an entrepreneur’s decision context (zacharackis & shepherd, 2001) and measured overconfidence on the type of facts that individuals actually use when deciding whether to start a new venture (mahajan, 1992). implications for future research this study could potentially spur intriguing future research. scholars may wish to examine the extent to which the relationships among entrepreneurial passion, search, and rigidity might have dynamics similar to the ones among overconfidence, search, and rigidity. examining passion in this context can be especially beneficial given its central role in entrepreneurship, its similarity to overconfidence, its relationship to increased effort, and its potential to generate the confirmation bias (gielnik, spitzmuller, schmitt, klemann, & frese, 2015). overconfidence research may also benefit by examining cases where individuals were initially correct or cases in which decision makers started with incorrect beliefs that they corrected through study. it also could focus on cases in which individuals are mildly, rather than highly, overconfident immediately before receiving an expert opinion. perhaps the most controversial aspect of either noc or soc is whether individuals who process additional evidence will become more overconfident. we fully realize that sometimes they won’t. this said, there are many reasons why they might. for example, information in entrepreneurial settings is often misleading, and processing more evidence can lead to illusory correlations (kiesler & sproull, 1982), erroneous causal explanations (kiesler & sproull, 1982) and redundant evidence (oskamp, 1965), all of which can increase overconfidence. most importantly, confirmation bias suggests that after forming a tentative incorrect hypothesis about a fact, individuals will seek out information to validate rather than to refute it. implications for practice this study’s findings have several implications. for decades, educators, consultants, and scholars have told entrepreneurs to formulate a detailed plan based upon their study of multiple factors. our results, however, suggest this process could enhance confirmation bias, making it difficult for entrepreneurs to later make much needed adjustments. thus, one implication of the study is that this practice may have a counterproductive result, suggesting it be modified. our study’s results suggest entrepreneurs might use modified forms of planning, such as customer development (blank, 2013). customer development utilizes the business model canvas (bmc), which contains nine sections including, but not limited to, value proposition, customer segment, venture activities, and revenue stream. these parts come together to form a tentative startup idea. most importantly, entrepreneurs explicitly state their assumptions about each part in the form of hypotheses. then, the entrepreneurs talk to a large number of people to explore assumptions and form new hypotheses based upon feedback. the system is likely to increase flexibility for two reasons. first, it emphasizes that initial hypotheses are more likely to be wrong than right, creating the expectation that they will be disconfirmed. second, the system stresses that the entrepreneur is likely to uncover new information that is more likely to lead to success. this removes much of the motivation to confirm the current hypothesis. other methods, including the lean startup process (ries, 2011), critical assumption planning (sykes & dunham, 1995), and real options planning (mcgrath, 1999), encourage entrepreneurs to delay developing detailed plans until they have made assumptions explicit, tested them and, when needed, modified them. unlike customer discovery, though, the methods test the veracity of their assumptions by trying to get potential customers to take actions that reflect some part of the buying process. by quickly and inexpensively getting an early market reaction, entrepreneurs may generate disconfirming feedback that is too salient to ignore. in addition to indicating that these multi-step planning systems might be appropriate, this study’s findings also suggest that entrepreneurs might benefit by using stand-alone techniques to minimize confirmation bias and overconfidence (simon et al., 2011). one such technique is devil’s advocacy (russo & schoemaker, 1992). to implement devil’s advocacy, one person, regardless of his or her true beliefs, advocates for one side of an argument, whereas another person takes the other side. this process generates debate, which, in turn, might lead to more accurate beliefs. another recommended technique is counterfactual thinking (trevelyan, 2007). counterfactual thinking requires entrepreneurs to actively envision ways in which their assumptions might be incorrect. they strive to answer questions such as: in what way might i be wrong? what information contradicts my beliefs? do i need more data to be sure of my conclusion? by asking these questions, entrepreneurs are encouraged to lower overconfidence and increase flexibility. other techniques to reduce overconfidence are simple. for example, entrepreneurs can list every reason they can think of that supports their conclusions as well as every rea21 m. simon & j. kim journal of small business strategy / vol. 27, no. 3 (2017) / 9-24 son that refutes it (chen, simon, kim, & poploskie, 2015). having entrepreneurs explain their beliefs to others also can be an effective tool (arkes, christensen, lai, & blumer, 1987). finally, if entrepreneurs explicitly recall times when they were incorrect, they will be more responsive to disconfirming evidence (zacharakis & shepherd, 2001). we believe external organizations can help spur entrepreneurs to use these techniques (simon et al., 2000). for example, small business development centers can guide entrepreneurs through these new planning processes, and entrepreneurship teachers can devote semester-long courses to them. furthermore, the government can fund programs that incorporate these approaches (blank, 2013). outsiders also can facilitate the use of specific stand-alone techniques. funders can dictate that entrepreneurs use them, or even actively participate, for example, by playing devil’s advocate. instructors can teach the techniques and have student use them often enough that the techniques become second nature. some scholars (e.g., sharma & shakeeel, 2015) even suggest semester-long foundation courses entirely devoted to instilling these tools. while many questions remain about the relationship among overconfidence, decision making processes and flexibility, we believe this paper represents a valuable first step. references anderson, b. h., & maletta, m. j. 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(2001). the nature of information and overconfidence on venture capitalists’ decision making. journal of business venturing, 16(4), 311-333. appendix a: measures overconfidence 1) in 2008, what percent of software development projects were over budget? a) less than 55% b) more than 60% how confident were you of your previous answer? ______________ (write a number between 50 and 100) 2) what percent of u.s. small businesses had a website in september of 2008? a) less than 50% b) more than 60% how confident were you of your previous answer? ______________ (write a number between 50 and 100) 3) what was the international internet growth (in total number of users) from march of 2007 to march of 2008? a) less than 300 million new users worldwide b) more than 350 million new users how confident were you of your previous answer? ______________ (write a number between 50 and 100) controls optimism. (scale ranges from 1 = strongly agree to 5 = strongly disagree). 1. in uncertain times, i usually expect the best. 2. if something can go wrong for me, it will. reverse coded. 3. i'm always optimistic about my future. 4. i hardly ever expect things to go my way. reverse coded. 5. i rarely count on good things happening to me. reverse coded. 6. overall, i expect more good things to happen to me than bad. 24 m. simon & j. kim journal of small business strategy / vol. 27, no. 3 (2017) / 9-24 domain expertise. 1. how many college-level courses have you taken that related to either new product introductions or web marketing? 2. to what extent do you have work experience related to either new product introduction and/or web marketing? (scale ranges from 1 = none to 5 = to an extremely large extent) entrepreneurial intent. should anduro marketing launch their new product? (scale ranges from 1 = definitely not to 5 = definitely yes) stra tegf top management team heterogeneity and sme export performance: investigating the role of environmental uncertainty franz t. lohrke university of alabama ftohrl'e@cba.ua.edu geralyn mcclure franklin the university of texas of the permian basin franklin goautpb.edu vinay b. kothari stephen f. austin state university vkothari@sfasu. edu abstract researcli has generally ftiuml that firms cotnpeting in high uncertainty environments gain advantages from liuving tli verse (heterogeneous) management teams (tmtsj employing a national survey of 70 smalland medi'um-st'zed enterprises (smes), the present study exatnined whether tmt heterogeneity m functional background, international work experience, and foreign language proficiency had a stronger relationship with export perfonnance for firms competing in high than those competing in low uncertainty environments. results were generally weak when market and industry factors contributing to uncertainty were examined separately; however, additional analysis showed tliat the hypothesized relationship did exist when uncertainty was measured employing both factors siinultaneously. introduction smalland medium-sized enterprises (smes) are increasingly exporting to overseas markets to sell products developed in their home markets or to find growing markets abroad (barrett, 1995; rose & quintanilta, 1996). this increased international involvement has prompted substantial research examining whether managerial characteristics and backgrounds are related to both sme export decisions and performance (aaby & slater, 1989; axinn, 1988; lim, sharkey, & kim, 1993;reuber & fischer, 1997). as the individuals that monitor a firm's environment and make critical decisions to respond to this environment, a firm's top management team (tmt) can play a critical role in the firm's actions and, ultimately, its performance (hambrick, 1989; weinzimmer, 1997). research has generally hypothesized that different backgrounds and experiences provide managers with different skills, attitudes, and biases that they then use to interpret experience and make 86 juurnrrl of smrrll business srrrrregv vol. /4, no. l spring/surrrmer 2003 decisions (klambrick & mason, 1984). consequently, studies have examined both average characteristics (e.g., percentage of managers with marketmg backgrounds) and distributional properties (e.g., a tmt's functional heterogeneity) when examining timt decision making and its resulting outcomes (bantel &: finkelstein, 1995). research examining tmt distributional properties has generally concluded that the diverse backgrounds within tmt can affect decision making, which, in turn, may impact a lirm's performance in two possible ways (simons, pelled, & smith, 1999). on one hand, increasing heterogeneity can increase conllict and decrease communication within a tmt, which can reduce a finn's performance. on the other hand, when a firm competes in a highly variable and changing environment, increasing tmt heterogeneity may result in more complex and creative decision making, which can improve a firm's performance (hambrick, cho, &: chen, 1996). given the increased environmental uncertainty faced by smes as they internationalize their operations (johanson &: vahlne, 1977; hart & tzokas, 1999), we expect tmt heterogeneity should be related to sme export performance. previous research has examined tmt average charactenstics impact international business outcomes given different environmental uncertainty levels (fletcher & bohn, 1998), but with limited exception (carpenter & frednckson, 2001), little work to date has examined these relationships for tmt heterogeneity. thus, this study examines the relationship between tmt heterogeneity and sme export performance given different levels of environmental uncertainty ausing from both export market and industry characteristics. top management team heterogeneity and exporting studying tmt issues constitutes a major research stream in organizational literature because top managers must make decisions that align a firm's strengths and weaknesses with environmental opportunities and threats to enhance a firm's performance (andrews, 1971). because these decisions are often ambiguous and unstructured (mintzberg, raisinghani, & theoret, 1976), a tmt's skills and abilities play a critical role in creating and sustaining a firm's alignment with its environment (wiersema & bantel, 1992). research based on the "strategic leadership" perspective (cannella & monroe, 1997; cyert & march, 1963; hambrick & mason, 1984) has focused on tmt background characteristics as a way to study tmt processes. according to this perspective, managers will make decisions based to some extent on their career experiences including functional background and other work experience (bantel & jackson, 1989).consequently, by studying both a tmt's average characteristics and distributional properties, researchers may gain insight into tmt decision processes (bantel & finkelstein, 1995). although several studies have examined the relationship between average tmt characteristics and sme exporting (dichtl, leibold, koglmayr, & muller, 1984; lim et al., 1998; reid, 1983), few have investigated tmt heterogeneity. results from previous domestic and international heterogeneity studies, however, are instructive. research employing domestic (u.s.) samples (e.g., eisenhardt & schoonhooven, 1990; hambrick et al., 1996) has found that tmt heterogeneity has a positive relationship with performance when a firm competes in an industry having a large number of highly variable factors (a "high uncertainty" environment, dess & beard, 1984; duncan, 1972). these studies concluded that the diversity of perspectives and skill variety within a heterogeneous tmt prompts members to consider more alternatives and produce more creative decisions. in turn, this decision making process can enhance a firm's performance in high uncertainty environments because the tmt can make better decisions regarding myriad factors affecting the firm. previous 87 jourrtnl ojsmnll busi uess sirniegy vol. l4, no l spring/sunnner 2003 research has also found that tmt heterogeneity had little or no relationship with performance in low uncertainty environments such as the food industry (murray, 1989). recent international research has found tmt heterogeneity to be similarly valuable in high uncertainty environments. in particular, carpenter and fredrickson (2001) found that environmental uncertainty positively moderated the relationship between educational heterogeneity and the scope a firm's global operations. similar to domestic studies, they suggest that heterogeneity may help a tmt better handle environmental uncertainty encountered overseas. in general, then, previous studies suggests that the increased decision making complexity and creativity resulting from tmt heterogeneity may be positively related to organizational performance when a firm competes in a high uncertainty environment. accordingly, given that smes can face different environmental uncertainty levels as they internationalize (hart & 'fzokas, 1999), we expected tmt heterogeneity should also be related to sme export performance. in particular, we expected that tmt heterogeneity would have a stronger relationship with exporting performance for smes competing in high uncertainty environments than those competmg in low uncertainty environments. this relationship is conceptually modeled in figure l. figure 1 model of relationships between tmt heterogeneity, export performance, and environmental uncertainty tmt export heterogeneity performance + environmental uncertainty (market and industry) uncertainty in international environments environmental uncertainty is critical for explaining how firms interact with their respective environments (milliken, 1987). smes competing internationally face varying degrees of uncertainty based on two factors, export market and industry characteristics. export markets can vary in uncertainty depending on their "psychological" or "psychic" distance from a firm's home country, defined as the sum of factors impeding the flow of information about a market and, thus, increase managers'ncertainty about a given market (johanson & vahlne, 1977; o'rady & lane, 1996). in addition, industries can vary based on how much firms must adapt products across different markets. thus, the present study investigated two market (geographic distance and cultural difference from a firm's home country) and one industry characteristic (the degree of industry "globalization" ) that can impact environmental uncertainty. 88 journal of stnall business strategy vol. /4. lvo. i spring/surntner 2003 market characteristics research has long proposed that geographic distance between an smf's home and overseas market impacts environmental uncertainty (carlson, 1974). several studies have noted that when a firm conducts business in a country located far from home, its tmt may encounter higher uncertainty stemming from increased ditticulty in collecting information about the country or controlling a geographically distant subsidiary (see dow, 2000 for a recent review). organizational scholars have noted that the importance of this variable may be'declining with advances in transportation and communication, but studies continue to find that operating over greater geographic distance can increase a firm's environmental uncertainty (gripsrud, 1990; grosse & trevino, 1996). recent research has also shown that this factor impacts environmental uncertainty independently from other factors such as cultural differences (dow, 2000). research has also long hypothesized that cultural differences between an sme's home country and its overseas markets impact environmental uncertainty (lohanson & yah(ne, 1977). studies have noted that when an sme conducts business in a country having a different culture from its home country, its tmt may encounter higher uncertainty stemming from the increased difficulty in interpreting local culture or perceiving customer needs. although some studies have found little or no support for cultural impact on international decision making (benito & gripsrud, 1992; sullivan & bauerschmidt, 1990), a majority have found evidence that cultural differences do impact a firm's environmental uncertainty, and, in turn, its international business operations (dow, 2000; erramilli, 1991; kim & hwang, 1992; k'ogut &: smgh, 1988; shane, 1994). in contrast, when an sme exports to markets proximate in geography or similar in culture to its home country, its tmt should face lower uncertainty. for example, given the ease of travel as well as the cultural similarity between the u.s. and canada, u.s. smes often face lower uncertainty when exporting to canada relative to other countries. thus, the decision making benefits provided by increased tmt heterogeneity should become more important to export performance as an sme targets countries that differ geographically and culturally from its home country. in countries similar to the sme's home country along these dimensions, these benefits should be less pronounced. stated formally, hl: tmt heterogeneity will be more positively related to export performance for smes exporting to geographically distant countries than those exporting to geographically proximate countries. h2: tmt heterogeneity will be more positively related to export performance for smes exporting to culturally different countries than those exporting to culturally similar countries. industry characteristics the present study also investigated industry characteristics such as how much buyer needs vary across countries to measure environmental uncertainty. when an sme competes in an industry characterized by dilterent buyer needs across countries (a "multidomestic" industry, porter, 1986), its tmt faces increased uncertainty because it must determine when and how to adapt the sme's product to local buyer needs. in contrast, when an sme competes in an industry characterized by more standardized buyer needs across countries (a "global" industry, roth, schweiger, & morrison, 1991), a tmt should face less uncertainty because the sme can sell a standardized product worldwide. 89 journal rif smnll business strategy vol. 14, nv. i spri nglsummer 2003 thus, the benefits provided by increased tmt heterogeneity should become more important to export performance when an slvle competes in an industry where different buyer needs exist across markets. in industries with standardized consumer needs. these benefits should be less pronounced. stated formally, h3: tmt heterogeneity will be more positively related with export performance ior smes competing in multidomestic than those competing in global industries. methods data collection data for this study were collected employing a mail questionnaire sent to 1,000 smes randomly selected from a dun &, bradstreet database of u.s. small business exporters. smes were defined as manufacturers having fewer than 200 employees. the questionnaire was pretested with several university faculty members familiar with small business research to ensure content validity. following the survey method prescribed by dillman (1978), a questionnaire was sent to the top manager of each sme followed by a postcard and then a second questionnaire in the case of non-respondents. from the initial sample, 70 surveys were returned as undeliverable. of the remaining sample, 156 surveys were returned yielding a response rate of 17 percent. this response rate falls well within response rates expected for national sme surveys (alpar & spitzer, 1989). of the 156 respondents, 40 indicated that they no longer exported and 25 provided insuaicient information about tmt characteristics or export performance to permit analysis. additionally, because heterogeneity constituted the primary construct of interest, 21 smes having single-ntanager tmts were excluded because by definition these tmts had no heterogeneity. including these smes would have confounded the analysis of tmts having more that one member and no heterogeneity. thus, a final sample of 70 smes was employed in the analysis. table i profiles these respondents. because late respondents have been shown to resemble non-respondents more than they resemble early respondents (kanuk & berenson, 1975), correlations between response order and several survey items such as sme size and export involvement were examined. no significant correlations were found thus reducing concerns of non-response bias. dependent variable the multidimensional nature of export performance was measured employing three variables provided by respondents: ( i) export sales as a percentage of total sales, (2) three-year average industry-relative export profitability, and (3) three-year average industry-relative export growth. the industry-relative scales were used for three reasons. first, given that the study employed a multi-industry sample, absolute performance measures could contain industry effects that could confound results (dess, ireland, & hitt, 1990). second, previous research has found that small business managers are often unable or unwilling to respond to surveys with absolute measures (madsen, 1988). third, measuring performance relative to competitors provides an indication of how successful an sme's strategy is, given the demands of its particular industry (carpano, chrisman, & roth, 1994). 90 3aurnal of small busmess srraregy vak /4, na. l spring/summer 2003 table l sample profile ~pf r total sales less than $250,000 43 $250,000-$499,999 8.7, $ 500,000-$999,999 10.2 $ 1-$9 milhon 49.3 over $9 million 27.5 export percentage 10% or less 31.7 11-20% 25.0 s 1-30% 16.6 3 1-40% 84 41% or more i 8.3 firm export experience less than 5 years 7.0 5-10 years 28.2 11-15 years 14.1 16-20 years 9.9 over 20 years 40.8 three largest export markets are mostly... north amencan countries 32.9 non-north american countries 67.1 anglo cultures 300 non-anglo cultures 70.0 industry type global 58.6 multidomestic 41.4 control variables the study included five control variables: company size, tmt size, export age (i.e., number of years an sme has exported), organizational exporting mode, and tmt international orientation in each equation. company size was included because larger firms may have more resources to contend with environmental uncertainty than smaller ones. similarly, tmt size was controlled for because larger tmts have more members to help cope with environmental uncertainty than smaller ones, independent of tmt heterogeneity. export age was controlled for because firms that have been exporting longer may have overcome initial startup costs, and, in turn, have better performance than firms that have only recently begun exporting. exporting mode was controlled for because smes that export their own products and have to determine how best to market these products overseas ("direct exporters") would face greater uncertainty than those that delegate these responsibilities to another firm ("indirect exporters"). to control for the possibility that top management knowledge represented by average tmt characteristics might impact export performance (aaby & sister, 1989; lim et al., 1993), a variable to control for tmt "international orientation" was included in the equation. this orientation was measured by summmg the percentage of managers in each sme who had 91 journal oj small business srrate)0 vol i4, lhio i spring/summer 2003 lived overseas, spoke a foreign language, and liad mternational work experience (dichtl et al, 19841. diagnostics indicated that no nnilticollinearity problems existed between this variable and the tmt heterogeneity variables.' h«hlr. tl h h h p hh ~ h yhh h hhme'mt (bantel & jackson, 1989). this method was deemed more appropriate than other methods used in tmt studies lor identifying tmt members (e.g., including all vice presidents and above), especially for smes. respondents also provided information about each 'fmt member's background charactenstics. the study focused on heterogeneity m three tmt characteristics that have been found to be related to export performance when exammed in percentage terms: (1) 1'unctional background, (2) international work experience, and (3) foreign language proflciency. functional heterogeneity represents the degree of differences across tmt members in terms of their professional backgrounds, which may aft'ect each tmt member's vocabulary and world view (hambrick et al., 1996). heterogeneity in the other two variables reflects differences across tmt members in terms of their education or international experiences, which could affect each member's perception of international environmental uncertainty (carpenter & fredrickson, 2001). thus, we expected that these different heterogeneity types would have a complementary relationship with exporting performance. kleterogenetty was measured by employing blau's (1977) index of heterogeneity, beierogenei iy= i-z(pj where p equals the proportion of tmt members m the ith category. respondents also provided information about market and industry factors. for market factors, respondents were asked to indicate their smes'hree largest export markets. smes were then classified dichotomously according to whether or not they primarily exported to (a) north american and (b) anglo countnes (ronen & shenkar, 1985). because countries in this group are geographically proximate and culturally similar to the u.s., respectively, these classifications provide a means for testing the relationship between tmt heterogeneity and export performance based on both geographic distance and cultural difference. for industry factors, respondents indicated the degree to which their smes'ndustries exhibited characteristics of a global industry based on roth et ak (1991)measure. responses for each sme were summed to determine an overall "global industry" score with low and high scores indicating global and multidomestic industries, respectively (qa= .78).' list of all variables and their operationalizations is included in table 2. data analysis to examine the relationship between heterogeneity and export performance based on different levels of environmental uncertainty, we employed moderated regression. this type of regression is appropriate given that the slope (i.e., "form") of the relationship was expected to vary based on market and industry characteristics (arnold, 1982; cohen & cohen, 1983). for the present study, moderated regression analysis involved a two-step data analysis process employing the following equations: (1) export performance = control variables + tmt heterogeneity variables + environmental variable (2) export performance = control variables + tmt heterogeneity variables + environmental variable + (tmt heterogeneity variables x environmental variable) 92 journo/ of snuill business striuegy vo/. /4, /to. i spring/suinmer 2003 table 2 questionnaire items variables /tieas urer dependent export percentage "what percent of total sales is derived from exporting?" export profit "over the past three years, how does your company's profitability from export sales compare to other companies'ithin the industry?" (i=much lower, 5=much higher) export growth "over the past three years, how does your company's growth in export sales compare to other companies'ithin the industry'i" (li much lower, 5=much higher) cotttrot export age "in what year did your company begin exporting'!" tmt size "how many managers take part in major company decisions, both domestic and global?" international orientation sum of percentages for three questions: "which managers hsted above have global work experience?" which managers listed above have hved in other countries?" and "which managers hsted above speak a foreign language fluently enough to conduct business in that language?" export mode what method of exporting does your company use most often? ( i =company has export unit, 2=marketing department handles exports, 3= another firm handles our exports, 4=other (explain)) total sales what were your company's total sales last year? ( i=less than $ 100,000, 10=$250 million or more) independent functional heterogeneity blau's heterogeneity measure for managers having functional/specialty areas in marketing, production, research/engineering, finance/accounting, other) language heterogeneity blau's heterogeneity measure for "which managers listed above speak a foreign language fluently enough to conduct business in that language?" international work bleu's heterogeneity measure for "which managers listed experience heterogeneity above have global work experience?" non-anglo culture majority of top three export markets were australia, new zealand, canada, united kingdom, and ireland = 0, otherwise = i non-north american majority of top three export markets were canada, mexico, country and caribbean countries = 0, otherwise = i industry globalization "please indicate how characteristic each of the following (reverse scored from ruth factors is in describing your industry" (i=extremely, 5= not et al., 1991) at all) (i) buyer/customer needs are standardized worldwide, (2) product awareness/ information exists worldwide, (3) standardized product technology exists worldwide, (4) companies exist that compete in all key markets worldwide, and (5) companies market a standardized product worldwide 93 journal nf sinall biismers sirarepv vol. i4, no. l spring/sununer 2003 a significant increase in the amount ot'ariance explained, measured as change in r in equation (2) relative to equation (i), would indicate that the relationship between tmt heterogeneity and export perfomiance varies under different environmental uncertainty levels (see cohen & cohen, 1983). results surprisingly, regression results (available from the first author) provide no support for hypothesis i or 2, which predicted that tmt heterogeneity would have a more positive relationship with export performance for smes exporting to higher uncertainty (geographically distant or culturally different) markets than those exporting to lower uncertainty (geographically proximate or culmrally similar) markets, respectively. in addition, results provide only weak support (p & .10) for hypothesis 3, which predicted that tmt heterogeneity would have a inure positive relationship with export performance for smes competing in higher uncertainty (multidomestic) than those competing in lower uncertainty (global) industries. these findings may result from one of two causes. first, as suggested by dow (2000) and others, the importance of environmental uncertainty variables may be declining with advances in transportation and communication. as noted, however, most recent research continues to support the impact of both geography and culture on environmental uncertainty. second, international environmental uncertainty may require a more complex measure. to investigate this latter possibility, we conducted additional analysis. upon further review of previous psychic distance studies, we noted that samples in studies that failed to support the importance of psychic distance often employed either global (sullivan & bauerschmidt, 1990) or cross-industry samples that may have included both multidomestic and global industries (benito & gripsrud, 1992). in contrast, studies finding support often used multidomestic industry samples (gripsrud, 1990; o'rady & lane, 1996). these results make intuitive sense because smes in global industries can offer standardized products worldwide; thus, the impact of cultural differences and geographic distance may be reduced. for example, an sme exporting to either a geographically distant or culturally different country could still face relatively low uncertainty in a global industry because its tmt would not have to gather local information to adapt the product. environmental uncertainty, thus, may result from a combination of market and industry factors. to investigate this possibility, we reanalyzed our data with new measures created by combining industry globalization with geographic distance and cultural difference, respectively. tables 3 and 4 summarize the regression results for this additional analysis. as shown in these tables, results generally support our additional analysis. table 3 shows the interaction between environmental uncertainty (geographic distance x global industry) and tmt heterogeneity produces a significant (p &. 05) change in r'or both export percentage and profit. functional heterogeneity produces the strongest support for the hypothesized relationship having a positive effect for both performance measures. in contrast, the language proficiency and work experience heterogeneity have a negative relationship with export percentage and profit, respectively, contrary to expectations. these contrary results will be discussed below. 94 journal of small business siraregv vol. 14, ato. l spring/suiiuner 2003 table 3 the effects of geographic distance and industry type on the relationship between tmt heterogeneity and export performance export percentage export growth export profit variables i 2 i 2 i 2 ilrteici:pt 12.41 40.64'.30 3.28 3.69 5.09 export age .28'21 .01 .01 .01 .01 tmt size .82 .57 .18'19 .02 .02 international 12.14 15.50 .52 .51'21 .24 orientation export mode -1.15 1.52 .12 .15 -.321 -.31 total sales -1.67 -1.48 -.03 -.03 .10 .12 non-north american 39 -2.64i .03i -.06 -.00 -.11 country x global heterog in function 7.26 -37.44 -.77 -2.36 -1.25 -4.03 heterog in speaking -19.29 1.22 -.42 .17 -.62 -.60 foreign language heterog in int'i work 2 12 38 82i 71 g9 10 i 13 experience non-na x global 4.20'14 .22'eterogin function non-na x global heterog in foreign -2.89'.06 -.02 language non-na x global heterog in int'! work 3.82 .03 -.11 exp df (9, 59) (12, 56) (9, 57) (12, 54) (9, 57) (12, 54)r'14 .27 .18 .20 .15 .29 f 1.05 1.72 1.39 1.14 1.14 1.80 change in r .13 .02 .14 f 3.36* .50 3.34 p &.10, p &.05, p &.ol, p &.00/ table 4 shows the interaction between environmental uncertainty (cultural difference x global industry) and tmt heterogeneity produces a significant (e&.oi) change in r'or export profit. again, functional heterogeneity produces support for the hypothesized relationship. 95 journal of suroll business sirnief0 vol. i4, ao. l spring/suiuiuer 2003 table 4the fffects of cultural differences and industry type on the relationship betiveen tmt heterogeneity and export performance export percentage export growth export profit variables i 2 i 2 i 2 intercept 18.63 32.48'.70 3.46 3.58 4.71 export age .28'29'01 01 .01 .01 tmt size 1.05 .86 .19 .19 .02 .03 international 12.39 12.93 .53'58 .18 .21 one ntation export mode -1.89 -2.12 .07 .08 -.31 -.35 total sales -1.71 -1.91 -.03 -.07 .08 -.01 non-anglo country 32 79 02 08 01 07 x global heterog in function -.11 -19.75 -1.10 -2.21'1.09 -2.91 heterog in speaking 19 57 19 17 39 25 63 4 foreign language -4.50 -32.25 -.77 -1.13 -.18 .84 work experience non-anglo x global heterog in 1.79 .15 .19 function non-anglo x global heterog in -3.22 -.05 -.09 foreign language non-anglo x global heterog in 2.26 .04 -.08 int'i work exp df (9, 59) (12, 56) (9, 57) (12, 54) (9, 56) (12, 53) r .13 .19 .15 .18 .16 .31 f .99 1.09 1.15 1.15 1.14 1.96 change in r'06 .03 .15 f 1.35 .66 3.89 p & .10, p & .05, p & .ol, p & .00l discussion and conclusion prompted by increased small business exporting, research has examined the relationship that tmt characteristics have with export performance. building on this research, the present 96 journal of sinall busi riess strategy vol 14, no. i springlsunuuer 2003 results show the relationship between tmt heterogeneity and export perfomiance vanes across smes depending on environmental uncertainty. the results provide both interesting managerial and theoretical implications. for managers, they s'uggest that functional heterogeneity provides performance benefits to smes competing in high uncertainty international environments. these findings are consistent with previous research suggesting that the skill variety resulting from this heterogeneity has value for tmts, especially those contending with diverse, changing environments (hambrick et al., 1996). interestingly, however, the results also suggest that other forms of tmt heterogeneity (e.g., language proficiency or work experience) do not unequivocally provide performance benefits given the negative coefficients for some heterogeneity/environmental uncertainty interactions. these mixed flndings suggest that whereas having tmt members who have foreign language proficiency or overseas work experience may be valuable for smes that export (as demonstrated by the positive significant relationship between "international orientation" and export performance), increasing heterogeneity in these tmt attributes may impede communication among members and, thus, have negative effects on tmt decision making (wiersema & bird, 1993). for theory, the results shed some light on a possible reason for mixed results in previous research examiriing environmental uncertainty factors such as geographic and cultural distance. the weak results for individual factors coupled with stronger results for the combination of market and industry factors provide evidence that conflicting results in previous research examining environmental uncertainty may result from sampling firms in different types of industries. accordingly, these findings show that future studies should consider both factors when examining environmental uncertainty's impact on international business operations. these results coincide with other recent research showing how examining multidimensional aspects of international risks can impact managerial decisions (e.g., brouthers & brouthers, 2001). limitations these results should, of course, be interpreted in light of the study's limitations. most importantly, this research provides a cross-sectional view of the relationship between tmt heterogeneity and export performance. thus, the resulting significant relationships cannot be assumed to be causal; that is, increased tmt functional heterogeneity helps smes improve performance more in high uncertainty than in low uncertainty environments. the relationship, in fact, may be driven by reverse causality; that is, exporting to markets with higher environmental uncertainty may prompt smes to hire tmt members with diverse functional backgrounds to help the firm contend with this uncertainty. tlie study mitigates the cross-sectional limitation somewhat by using 3-year average performance measures as well as controlling for an sme's export experience. however, future research should employ a longitudinal research design to further examine the direction of the tmt heterogeneityperformance relationship. future research the results suggest possible three future research avenues. first, future research could examine whether tmt heterogeneity affects other organizational outcomes such as propensity to export (axinn, savitt, sinkula, & thach, 1995). specifically, previous research has shown that some types of heterogeneity are associated with both the g'eographic dispersion of a firm's foreign operations and its dependence on foreign sales (carpentek & fredrickson, 2001). 97 jom nal of sntali business srraregy vol. i4, into. i spring/summer 2003 second, future research could move beyond heterogeneity measures to examine the underlying constructs associated with heterogeneity. this study represents an initial attempt to examine this relationship in small business international context and using heterogeneity as a measure of tmt decision-making complexity. as noted in recent studies, however, heterogeneity only serves as a surrogate for these tmt processes; thus, future research should attempt to move beyond the "black box" of heterogeneity measures and examine tmt decision making directly (kilduff, angelmar, & mehra, 2000). third, future research could examine other sources of environmental uncertainty that could affect the relationship between tmt heterogeneity and export performance. for example, brouthers and brouthers (2001) recently found that the stability managers perceive in an overseas market's social, economic, and political environment can also impact business decisions. thus, future studies could examine these and other market factors that, along with cultural and geographic distance, may interact with industry factors to affect sme exporting outcomes. in conclusion, investigating key success factors in small business exporting remains a critical area for research. results from this study indicate that tmt functional heterogeneity is related to higher export performance when an sme competes in a high uncertainty environment. results also indicate that environmental uncertainty can vary based on both market and industry characteristics. overall, these results provide evidence for the important role tmt decision processes play in small business exporting. they also present possible explanation for mixed results in 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(universi(y of nor(h texas) is dean of the school of business and professor of managenien( at the university of texas of (he permian basin. dr. franklin has published mimerous articles on human resource management, employment law, and small business managemen(/en(repreneurship issues in variousjournals. in addition, she has co-au(bored human resource managemeni (dame publications, /995), management (dame publica(ions, /997/, and the regulatory environment of human resource managemen((the dryden pressiharcour(publications, 2002/. 100 journal of small business strategy vol. /4, no. i spring/surnnier 2003 fran'. lolirke (ph. d., louisiana state university) is nn assisiont professor ofm'anagement iir tlie depariiirent of management aml marketing, college of cumnierce and business at/ministration, uriiversity of alabama. he teaches courses iir sino/i birsiness, enirepreneurslrip, and strategic rnanagerneni. /ilc research has appeared in suchjournals as journal of business researcli, journal of sara/i business strategy, joumial of applied busiiiess sirategv, joui'nal of international maiiagenrem, aml acaileniy of mnnagement journal. his research interests mcluile sources aml uses offinanciol slack resources, sniall business mterimtionali ation, aml strategic alliance issues for new business ventures. vinay kotliari is a regents'rofessor (retired) iir the college of business at stephen f. austin state university. he is a gradunie of the university of north teats, the university of missouri and ihe university of kansas. his areas of iesearch interest and specialization include: in terna rona l business, stra tegic tl fa nag em en t, strotegi c marketing, smnll business maimgement, enirepreneurship, and e-business. he has published over one hundred research studies in various academic books and journals, such ns ihe journal of, e-business, manageineni international review, the journnl of asian business, the journal of the acadeiiry of marketing science, the journal of hospital marketing, and the journal of small business strategy. he zen es on the editoriul boards oft/re journal of ebusiness and the international joumral of e-business strategy managenrent, and reviews articles for several professional groups in the u.s. and ncross ihe world. he has presented numerous research studies at prestigious national andinternational conferences. (appendix on folloh'ing page) 101 jorrrnal of snrall rosiness slrntrgv frrl. i4, no i sprirrg/surrrnrer 2003 appendix means, standard deviations, and lntcrcorrelations of study variables variable mean sd. i 2 3 4 5 6 7 8 9 10 11 12 13 2.23 t 7.89 per'cent 2. fx on— ex pon 3,00 82 29 profit !.04 .96 .48 47 growth 4. total sales 43/3 1.17 .82 .17 .08 5. trit size 3.55 1.54 .82 .11 22 49 g. export ugc i').28 14.28 .i i .12 .06 .14 .06 "p'n 2,03 58 05,19,86 id,2d ol mode 8 international .59 .61 .33 . i i 24 .00 .85 .ol ./5 onenlnlion 9 hctcro in .61 .13 .83 ./3 .ol .23 .49 .ii .88 .86 function o. h ' 8 '" ,13 20 04 ,oi 08 .07 06 .09 ./6 .60 .08 language i i. hcterug in int'i work .21 .22 .14 .09 .06 .16 .17 .ol ./4,45,8d 31 exp 12. iton.gl 49 .31 .23 .31 .10 .10 .ol ./7 .ii .i3 .19 .82 american country .67 .47 .30 .28 .23 16 .13 .03 .ol .12 .13 .13 .oz .35 anglo culture 1605 4.01 ./4 .34 .88 .2/ .io ./8 .07 au ./4 .84 .id .88 .2/ gloholization correlatiorrs gretrter /herr .22 are sign frcant at ir(.05. nose that industry glohulization is r'i.'vc'r i'crl .cert/'crl. 102 stra teg y table of contents i ctiallenges alreadfor small business education larry edward penley immediate past chair of aacsb international arizona state university g the role of field-based business consulting experiences in aacsb business frlucationr an exploratory survey and study martha doran san diego state university don sciglimpaglia san diego state university i-loward toole san diego state university 19 strategic implications of data gathering activitiesin small firmsr a comparison between family and nonfumily firms donald gudmundson university of wisconsin oshkosh c. burk tower university of wisconsin oshkosh e. alan hartman university of wisconsin oshkosh 30 innovation and competitive advantage in small businesses: effects of environments and business strategy john c. palmer university of illinois at springfield roben e. wright university of illinois at springfield joshua b. powers indiana state university 42 sexual harassment of females by males in the workplace: small businesses contrasted witlt large businesses rebecca gatlin-watts university of central arkansas joc cangelosi university of central arkansas scon markham university of central arkansas small busijvess briefs: 52 modeling a successful e-business using essential principles from netscape robert j. mills utah state university david paper utah state university james rodger indiana university of pennsylvania 62 the hitegration of computer technologyin small businesses leanne c. mccirath university of south carolina aiken richard a. heiens university of south carolina aiken 70 ethical perspectives in home-based business stuart dawson victoria university john breen victoria university 80 strategic decision making in small family firms: an empirical investigation bakr ibrahim concordia university colette dumas suffolk university jean mcguire concordia university 9i book review creating value through skill-based strategy and entrepreneurial leudershlp by w.c. schulz ill and c.w. hofer. reviewed by james j. chrisman. state'"gy editor stephen w. osborne indiana university of pennsylvania (i up) associate editors prashanth b. nagendra indiana university of pennsylvania (iup) joette m. wisnieski indiana university of pennsylvania (iup) editorial assistant julie dobish indiana university of pennsylvania (i up) book review editor radha chaganti rider university editorial review board ramachandra asundi university of puerto rico james bradley central washington university david brennan university of st. thomas (st. paul) shawn m. carraher texas a & m university commerce radha chaganti rider university vivek choudhury florida state university richard t. dai icy university of montana dale dtckson mesa state college terry gaston southern oregon university masoud hemmasi illinois state university lynn hoffman university of northern colorado lawrence klatt florida atlantic university krish krishnan 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(717) 871-5555 fax: (757) 594-7808 fnx: (717) 871-2464 email: huncycutpucnu.edu e-mail:dfrazerpumarauder.millersv.edu i'&ce pres&den&-program quality assurance editorjournal ofsmall business strategy gary i.. aitchisun, ph.d. stephen w. osborne, ph.d. lowe state university indiana university of pennsylvania oaice: (515) 294-8107 phone: (724) 357-5760 f&1%: (515) 294-2534 e-mail. gaitchispaiastate.edu \'ice preadent-case competition james bradley, ph.d. central washington university phone; (206) 439-1282 fax (206) 439-3809 email; brndley&bcwu.edu strategy state of information technology in small retail and service businesses: an exploratory study alev m. efendioglu university of san francisco abstract during the recent years, there have been major changes in the availability and use of information technology by large businesses to gain efficiencies and competitive advantage over rivals. some of the earlier research shows that this is not necessarily the case in small businesses. this study tries to identify the degree and the type of information technologies currently accepted and used by the small retail and service businesses. introduction the role of it in strate ic pur uits in recent years, there has been an increasing implementation of new computerized technologies in all sizes of organizations these trends have been accelerated by international competition and changes in the local business conditions that demand a higher degree of eaiciencyof operations,and attempts by businessesto gain competitiveadvantage over rivals. the incredible growth of internet (both access to and usage of by a sophisticated group of consumers) have made incorporation of information technology (it) into daily operations a necessity. large organizations have recognized this for a long time and have made extensive use of it in their activities and decision processes and there are many excellent examples of this (adcock, et al, 1993; mcfarlan, 1984; porter and miller, 1985; donnelly, 1994). the benefits oflt for small businesses have also been recognized and demonstrated, both through studies and examples in the popular press. in fact, examples of companies such as amazon's (a privately owned book retailer) successful competition against barnes tk noble, a megastore chain, (martin, 1996) and hot hot hot's (a retailer of hot sauces and recipes) successful generation of 25% of their sales, and franklin square (ny) italian market's (a privately owned deli) successful expansion into mail order delivery system are powerful examples of possibilitiesoflt for small businessesthatcannototherwise easily expand their operations or compete against well established large competitors (rebello, 1996). even the united states government has recognized the possibilities. the u.s. house of representatives introduced h.r. 820 on may 24, 1993 with the purpose of improving the competitiveness of small businesses through a nationwide technology outreach program aimed at improving access to information, expertise, technology and management practices. 13 c uisi ion and use of itin small businesses in most cases, small businesses have met some of their it needs through outsourcing. this outsourcing has provided them opportunities and advantages in meeting regulatory requirements, increasing their efficiency, avoiding incurring high costs associated with technology and it skill requirements. most of the it activities that have been outsourced by small companies have primarily been specific applications such as payroll or credit card processing. the vendors who have provided these services have been able to develop skills and achieve production cost advantages (hardware and software) that would otherwise not be available to the small business and the small businesses have benefited from the vendors'conomies of scale, smoother production runs, and access to and investment in the new technology. in fact, in most cases, these businesses have never started their internal data processing for the outsourced application(s) and never developed the expertise internally. recently, some significant changes took place that might change the previous approaches in acquisition and use of it by small businesses. in fact research indicates that, small manufacturing enterprises have been implementing new computerized technologies at an increasing rate (acs and audretsch, 1990). however, the same urgency was not observed among the small retailersand service providers. there have been some possible reasons as to why this was the case. prevalent among these reasons is the retailers'elief that they have a profound and accurate understanding of their products and services, their customers, and customers'eeds and expectations(iulien and raymond, 1994). if this is the primary reason, this lack of urgency might even be more acute among the independent retailers that have an advantage in terms of location, a true knowledge of their clients and their merchandise, or niches created by high market segmentation(eg. specialty stores, high fashion clothing stores, gourmet food stores, etc.). even though some small businesses might have felt, with or without a through understanding of the possibilities of it, that the new information technologies are not very useful, many other small retailers, whose ability to differentiate themselves from their competitors is limited, might have been more aggressive in embracing the new technologies. two additional trends also have a bearing on this issue. first one is an increased growth of chains and warehouse stores which have limited most of the smaller retailers'bility to differentiate themselves and have forced them to operate in an increasingly competitive environment. second one is the changes associated with it, among which are: a significant decrease in the cost of acquisition of it assets (hardware and sot)ware), ease of use of these assets (plug 8r play systems, friendly hardware and sorware), and increased exposure and familiarity of the managers and employees with computers and computer based systems (computerized phone answering systems, automated teller machines, extensive exposure to technology during college, continuing news stories on technology and associated issues, etc). one would expect to find that these changing conditions, increasingly competitive business environments, decreasing costs of it assets, and familiarity with technology and its various uses, would prompt a greater degree of acquisitionand assimilation of it in the small retail and service establishments. therefore, this study is designed to determine whether this 14 is the case and to what extent the changes above have impacted the acquisition and use of it in these organizations. there are two easily identifiable benelits of institutionalizing it in small businesses. they are: ~ improving service quality —it is critical in creating better customized or individualized services(personalizedshoppingor insurance services), improving reliabilityof the service provided (delivery services), ensuring consistency of delivered product (fast food), and freeing store personnel to increase their contact with customers (retail checkout). generally, the benefits should show up as improved customer loyalty and lower marketing costs. these are the pillars of "customer intimacy" strategy. ~ increasing predictability and decreasing the cost of operations —it is essential in predicting sales, controlling inventories, and reducing fluctuations in revenues, profitability and cash flows. these are the pillars of "operational excellence" strategy. two studies have thoroughly discussed how small businesses can attain these benefits in small retail and service organizations. according to quinn and baily, there are benefits from it that increase productivity in service organizations that cannot be associated with tangible monetary benefits but, never the less, contribute to the overall success of these firms (quinn and baily, 1994).in another study by raymond and bergeron (1996),the authors the discuss significant benefits of electronic data interchange (edi) use in small businesses that lead to decreased administrative costs, increased transaction speed and information quality. they further state that, the small businesses have been reluctant in implementing the edi and most have been forced to do so by their business partners (raymond and bergeron, 1996; blili and raymond, 1993).are the small retail and service organizations aware of these benefits? have they done anything to take advantage of this knowledge and understanding? according to thorn blischok, vice president of the at&t global information solutions (a retail industry consulting group), there are 10 technologies that, in one way or another, will change the retailers relationships with their customers and help create "customer intimacy". he identifiesthese technologiesas virtual retailing, retail as entertainment,shopper id systems, advanced checkout,personal shopping assistant,relational retailing, intelligentlabeling,supply chain reinvention,electronic wallet, and decision transformation(robins, 1994).even though, some of these technologies may not be appropriate or feasible for the small retail operations others, however, are. however, unless small businesses acquire and use it, they neither can attain "customer intimacy" nor decrease their operational costs. in an earlier study, greek (1996) found out that only 25'/0 of the small firms in united kingdom (uk) had pcs and those that did very few used the internet and its associated services and facilities. is this also the case in united states? another study tried to identify the trends associated with computerization in small businesses in greece over a five year period (pre-and post-studies) (doukidis, and et al, 1994). what are these trends in the united states? once again, no similar survey was done to identify the trends in small businesses in the united states. 15 research methodology and findings research desi n and ethodolo this study examines the application of the microcomputer based information systems, in small retail and service businesses the details of the companies'ystems and the way they utilize it were collected through interviews with the owner-manager or manager (if owner is not actively involved in operations). the interviews concentrated on the various components (types) of information technology that is currently in use in the establishment. the primary objective of the study was to develop a base line to determine how pervasive the it is, how widely it is used in small retail and service businesses, and to see how much and what kind of computerization exists in these businesses. the study was conducted through individual interviews of 65 small businesses in the city of san francisco. because of the proximity of the area to the world famous "silicon valley" and the extensive urbanizatiort it was expected that there will be a significant amount of acceptance of it in these businesses. the businesses in the study were randomly selected through a two stage selection process. at the first level, three geographic locations were selected from the multiple small business clusters(there are eight such clusters in the city) in different neighborhoodsof the city of san francisco. at the second level, twenty-five business establishments were randomly selected from each selected cluster and targeted for interviews. ten of the selected businesses declined to participate in the study and the total sample size was reduced to 65. 82% of these businesses(53 out of 65) were owner operated and they had an average of 5 employees. 86% of the businesses(56 out of 65) employed additional non-owner managers and 11%(7 out of 65) had management committees. some of the businesses in the study had stores in different locations of the city or different parts of the country. of these types of businesses, only one of the store locations was included in the study. a summary of organizational characteristics can be found in table l. table i com an haractcristics n =65 umber o owner yours in number of number of non-owner msnsgement opcruted frnncbisc business? stores/iocutions employees? msnsgcrs committee i 2 3 number 53 12 175 299 56 in saiilple percent 82% 18% 86% 11% o sahfple vera ge 16 2.69 4.60 (i ) some businesses had more than one store (business location). only one was included in the study. (2) indicates total number employees in all locations. (3) some businesses employed non-owner managers to manage during different hours of operation or different business locations. 16 table 2 t es of businesses n = 65 retail business repair service other service food/restaurant establishments establishments establishments establishments total i 2 3 umberin the 38 3 16 8 63 sa ie (i) retail businessestablishmentsincluded apparel, auto parts, bakeries, bookstores, cigar store, department store, drapery, drug store, electronics, florist, gifl shops, hardware store, home decoration, liquor stores, office products, opticians, pet supplies, shoe store, sports, and toy store. (2) repair service establishments included shore repair and vacuum repair. (3) other service establishments included beauty salons, film processing, fitness and health, laundries, real estate, and travel agent. ~rhn di first set of questions looked at the availability and usage of traditional methods of communication. as can be seen from table 3, only a fraction of the businesses take advantage of some of the extended services associated with a telephone (e g. caller id, 800 number, etc ) and use it in their business. these are the characteristicsthat can be used for various marketing activities and to build a client base. table 3 availabili and usa e of traditional methods of communication n=65 tele hone lines caller id 800 number fax machine call waitin umberin 148 2 10 30 12 ample percentof 100% 3% 15% 46% 18% ample vera ge 2.28 over the past few years there has been a significant decrease in the cost of hardware. this has caused a proliferation of computers in business and even home environments. however, as can be seen from table 4, this is not the case in small retail and service establishments.a total of 39 (60%) of the sample businesses had computers and 15 (23%) of them had more than one computer. in the businesses where there was more than one computer, the average number of computers were 5, they were all networked, and 38% had their registers linked to the computer system. 77 percent of the businesses with computers had modems connected to their computers. it was also interesting to see that 97.3%of the computers were pcs (dos/windows based). 17 table 4 availabilit and t es of com uter hardware and peri herals n = 65 eg&ster egisters computer linked linked total dos/ modems cash (central (computer number of windows nct/fas re isters re later s stem com uters hlacintosh pcs worked modems umber i 6 i 7 7 i 3 n sample percent zb% sample table 5 shows the usage of various soaware among the businesses that had computers. the most widely used so()ware was database sottware(95%). accounting (85%) and inventory management (82%) packages followed closely behind. there was also significant usage of word processing and approx imatelyone-hei fof the businesses did their own payroll. there was minimal use of communication, spreadsheet, and sales forecasting packages. table 5 availabili and usa e of com uter software n=65 general usa e a lications: s ecial usa ea lications: word datalnventory sales comm. processing s readshec present, base acct. m mt. pa roll forecast other umber 26 3 33 3 i i i ercentof /5% 67% 2/% /3% 95% b5% s25'9% 36% 31'sinesseswith com uien as can be seen from table 6, the internet revolution has not yet reached the businesses in the sample. given the geographical area where the study was conducted and the daily barrage of news and promotion about "the iqet" and "the world wide web", this was a very surprising finding. the home pages were associated with the franchised businesses and the internet usage was not institutional but individual. unfortunately, there was no inquiry as to whether the individuals interviewed had heard about the internet, what their thoughts were on the matter, or why they were not a part of this 'revolution". these questions will be a part of the follow-up study that is intended to broaden the sample size, the geographical area, and the scope of the questions. 18 table 6 usa e of and access to internet and world wide web related services n = 65 use the home employee manager' internet a e accounts account com userve aol prodi other number 6 4 2 0 0 1 0 0 percent of 15% 10% 5% 0% 0% 3% 0% 0% businesses with co uiers electronic data interchange (edi) is required by some large businesses as a condition of doing business with them (primarily required of businesses supplying to large businesses) and is considered to be a very efficient way of conducting supplier/custsmer communications. it is also considered to decrease operational costs. the study by raymond and bergeron (1996),showed that there were significant benefits of electronic data interchange (edi) use in small businesses they were realized in the form of decreased administrative costs, increased transactionspeed and information quality. this study was designed to determine whether the small businesses'ere aware of these benefits or whether they had installed edi to realize these benefits. as can be seen from table 7, the businesses in my sample do not seem to be aware of these benefits or at least, they have not overwhelmingly instituted edi in their businesses(only 15%all businesses in the study and 26% of the businesses that had computers had edi). raymond and bergeron (1996) further state that, the small businesses have been reluctant in implementing the edi and most have been forced to do so by their business partners. in this study, only 40% of the businesses that had edi had done so because their suppliers required edi. table 7 means of communication with su liers n = 65 supplier regular edi re uired e-mall tele hone fax mail su lier visit number 10 4 1 56 21 1 31 ercentof 26% 3% usi n esses with co uters percent o total 15% 40.0% 06% 32% 22% 40% success of most small service and retail businesses depend on their ability to provide superior customer service and maintain reasonable cost containment. information technology (it) can help and play an important role in attainment of both of these objectives. however, as the tables above showed, the businesses in the sample did use it for attaining some operational efficiencies (82% of businesses with computers used inventory management sottware). the following table (table 8) shows that the small retail and service businesses that were interviewed did not use it to its fullest capabilities to attain superior customer service. 19 only 36% of the businesses with computem used sales forecasting sot)ware (see table 5) and 5% had an internet home page. however, a significant number of the businesses with computers(56%) have computerizedcustomer lists and use them for mailers. this is only 34% of the total sample of businesses. most of the businesses in the sample still relied on printed advertisements(86%) and signs (78%).these signs were being prepared outside the business and not by using the in-house technology, even in the businesses that had this capability. only 13%of the businesses with computers used presentations packages(see table 5). we also have to remind ourselves that, 40% of the sample businesses did not even have any computers on the premises. table s means of communication with customers n = 65 nternci ailers electronhome computerized printed (purchased walk icall pa e customer list e-sigil tele hone ads. lists si ns in onl number 0 2 22 i 52 56 26 si i perceivt o 59'6% 3% businesses uc'tit com ulers percento 0% 3% 34% 2% 80% 86% 40% 78% 2% total discussion of research findin s and conclusions this was an exploratory study, conducted in a specific market and had a sample size of 65. therefore, the findings are suggestive and major conclusions cannot be drawn. however, these preliminary findings shows that, in spite of the significant decreases in the cost of it and all the publicity surrounding its prevalence in large businesses, small retail and service businesses have not jumped on to the band wagon and are still somewhat reluctant to use technology in their business operations. in fact, majority of the technology was found to be used primarily by the franchise businesses in the sample. this is somewhat disturbing and have significant implications for the long term survival of small retail and service organizations. when one realizes the degree of increased competition in the market place and further infringementof large businesses into providingservices and productstypicallythat were in the domain of small retail and service businesses, and identified benefits of institutionalizing it, one can see how significant these implications are. the previous fragmented research (see earlier discussions) and popularized anecdotal evidence have consistently shown that small businesses can become very efficient and effective through the use of it. a case in point is the cyber bookstore named amazon.corn. this company, within two years, have grown to employ 300 people and boasts 2.5 million book titles in its catalog. it is one of the world wide web's most successful small businesses and would not have existed or succeeded if not for the opportunities created by changes in it and this company's willingness to incorporate these changes into their business operations. 20 implications for small business long-time survival and success of any organization depends on the appropriateness of its strategy and the design and performance of its business processes in achieving its strategic intent. there are three primary strategic options that can be pursued by organizations: product leadership, customer service, or operational excellence(treacy and wiersema, 1995). because of their size and limited resources, it is very hard for smail businesses to develop and pursue a "product leadership" strategy. however, they can easily pursue effective "customer service" (customer intimacy) and "operational excellence" strategies. it can play a key role in both of these strategic pursuits by streamlining all communications with customers, collecting and distributing valuable information on customers'references and buying patterns. it assets can enable the organization to obtain the information it needs for its operational and management requirements and compress time in its business processes. the findings of the study have significant implications that primarily revolve around the missed opportunities in attaining "operational excellence" (opportunity to decrease operating costs and gain efficiencies, and enhancing business skills of the managers and employees by accessing valuable public and private information) and/or "customer intimacy" (opportunities to broaden market coverage and extend customer base, and provide new services and products) these opportunities are missed because small businesses have been reluctant to acquire and utilize it in their business operations. if the small retail and service establishments hope to survive and prosper in these increasingly competitive times, they cannot afford to miss any opportunities to enhance the efficiency and effectiveness of their operations. it is also important to note that a fairly eifective computer based information system, given the current cost of technology and associated services, can be attained for an approximate initial investment of $3,000 $4,000 (including the hardware, software and basic training) and an average monthly cost of $ 100 (including charges associated with internet services and communicationcharges). this is a relatively small price to pay for increased profitability and business survival rates. even though this study did not address the question of relationships between it usage and profitabilityof the business(this will be addressed in a follow-up study), a positive correlation is expected to exist between the two. this observation is based on the inherent inefftciencies associated with small businesses, and the experiences of the author while consulting with small retail and service establishments. 0 ortunities to decrease costs first implication of the findings of this study is that these companies are missing the operational benefits of it in managing their businesses. among these benefits are managing cash and finances, inventory management and stocking (including inventory turn and sales analysis), customer tracking and analysis, and more efficient and effective communication with their customers and suppliers while decreasing communication costs and mistakes. these are significant operational issues and it can provide major cost saving benefits. 21 0 ortunities to extend customer base and provide new services and products the second implication is associated with market coverage and extending the customer base. and taking advantage of opportunities to provide new products and services. quite a few number of small businesses have either extended their market coverage (customer base), or expanded their businesses into new areas, or have started brand new businesses using it. there are many success stories. some of these were discussed in earlier sections of this paper. other examples include northern digital classics (www.ndcnorth.corn), a one-stop shop for discussion, buying and selling cars by car enthusiasts; j&d resources(www jdresourcescom) a temporaryemploymentand permanentplacementpersonnelservices company; all one tribe (www.alloretribedrum.corn), a retailer of drums, decorative drum hangers, etc.. the primary issues here are the missed opportunities to make the most of marketing and advertising dollars, maintaining top-rate customers service, and exploiting some opportunities before others take advantage of them. it is estimated that by year 2000, some 80 million people will be spending more than $4 billion a year on buying goods and services using internet and it (hogan, 1997). given this estimation, it is easy to imagine the extent of opportuni ties that can be exploited and the benefits that can be attained by using it in small businesses. 0 ortunities to access public and private information finally, the lack of acquisition and use of it by small business establishments prohibits them from using numerous valuableresources available for small business. various private and public organizationsprovide significant amount information free of charge. however, most of this information is not available or accessible unless the organization uses it, has computers, modems, and account at an isp (internet service provider). some examples of the types of services available are idea cafe (www.ideacafe.corn),a cyber coffeehouse for aspiring business people; austin publishing co. (www.virtualplex.corn/vplex/austinpub/), a virtual bookstore offering small business and legal guides; bureau of national affairs (www.bna.corn), providing information on tax management and human resources; entrepreneurs on the web (www.eotw.corn),a collection of links to national and regional small-business organizations; d~l.m *i i .. i.th i g i g i h provide information and act as resource centers, among which are census bureau (www.census.gov), providing demographic and economic information; export information (www.stat-usa.gov/itabems.htm); small business administration (www.sbaonline.sba.gov); and small business resource (www.business.gov/howto.html). therefore, small businesses that have not joined the technological age and that are not utilizing it in their operations are missing out on these valuable resources. further research as indicated earlier, this was an exploratory study and the primary objective was to determine the degree of acquisition and assimilation of it in the small retail and service establishments. as a result, there are still many unanswered questions. to develop a more comprehens ive understanding of the role of it in small retail and service businesses, more studies that deal with the role of it in small businesses are needed. by surveying the small retail and service organizations, we can find out the answers to questions such as 22 ~ whether any of the above technologies is currently being used, ~ if so, for how long has it been in use, ~ circumstances associated with acquisition, ~ problems associated with implementation and continued use, and ~ other issues related to it in these establishments. the answers to these and other related questions will provide us with a better understanding of the pervasiveness of it in small retail and service establishments. the author intends to conduct follow-up studies that will address these questions and focus on two major areas. one, is to find out if there are any regional differences (broaden the sample size and the geographic coverage) and two, if there are any profitability differences among the businesses that have incorporated it into their operations vs. the ones that have not. a preliminary study done on large businesses has shown no significant relationship between the it expenditures/employeeand company profitability(roi) (strassmann, 1997). however, the focus of the study was large businesses in the banking and the food industries. since these large businesses might already have other systems in place that improve their eaiciencies and effectiveness, findings of these studies might not be applicable to small retail and service businesses. further, the follow-up study will also explore the underlying forces and connections between variables such as company history, major products, market factors (including whether the enterprise is located on a shopping strip or in a shopping mall), company performance,owner's background (innovativeness, attitude towards technology, it knowledge, advice received,and staffinvolvementin information systems development), and computeruse and impacts(whether the benefits identified above has been also identified and accepted by the establishment,and the ways which technology is used, expected and realized benefits associated with acquisition and implementation). 23 references acs, z. and d. b. audretsch. innovation and small firms. 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(addison wesley. 1995). 24 stra tegy sexual harassment of femalfs by males in the workplace: small businesses contrasted with large businesses rebecca gatlin-watts university of central arkansas rebeccaginiai l. uca.edu joe cangelosi university of central arkansas j oecmail. uca. edu scott markham university of central arkansas scot tea, mail. uca. edu abstract sexual harassment cvntinues io be an importani topic, receiving the attention of small and large businesses. formal claiinc regarding unlawful, social-sexual behavior in the workplace doubled during the 1990's. some small business owners believe that sexual harassment is not a crucial concern, compared wiih their counterpartsin large businesses. some small business vwiiers possess the mhconception that sexual harassment, regarding federal and state law, apply primarily tv large businesses. sexuali ation in the workplace occurs when sexualjokes, comments, innuendos, and sexual or seductive dress are tolerated, or encouraged, as well as thc more blatant offense of improperly touching another employee. the membership of the society for human resoiirce management was the database for this study. it random sample froin small businesses offewer than 500 employees and large businesses with more than 500 employees was selected. important fmdings indicate that sexual harassment was more of a problem fvr large firms as there is more male-female interaction and social pressure. this is tmie even ihvugh niore training takes place in larger, rather than smaller, businesses. the findings may also indicate more of a reluctance by females iii smaller firms to report such incidences. respondents believe more formal training, education and behavior modeling, especially in small businesses, are needed to maximi e the effectiveness of wriuen policies. introduction sexual harassment continues to hold the attention of both small and large business owners and executives. claims continue to increase despite extensive company policy activities and training programs aimed at preventing sexual harassment. business owners, human resource managers, and training experts continue to contemplate various strategies to prevent sexual harassment. 42 journal ofsmall bustness strategy vot l2, no l springjsummer 200l sexual harassment can be perpetrated by women on men, men on men, and .vomen on women. this study, however, is only concerned with sexual harassment by men of women. some would disagree that this is strictly a sexual issue, arguing that it is "an exercise of power rather than of sexual interest" (gutek, et. al., 1990). examples of how not to handle claims of sexual harassment abound in the popular media. but such widespread attention being given sexual harassment does not always provide sufficient "lessons learned" to other organizations that perceive themselves to be in compliance. the small business has a dilemma. on the one hand, the entrepreneur may witness frequent media coverage of high-profile cases that seem to bash the giant corporation severely for wrongdoing. beyond those cases that are publicized, thousands of sexual harassment claims go unnoticed by the general public (luchs, 1997). although scandals and lawsuits against smaller companies do not get the media attention captured by large organizations, small firms are exposed to the same liability, along with the embarrassment of scandals and expensive lawsuits. this article offers some plausible answers for this problem based on recommendations from 663 practitioners, many of whom have successful prevention policies and training approaches. during an era when formal claims for unlawful social sexual behavior at work doubled in the decade of the 1990's vse the 1980's, the authors sought answers from practitioners in positions of authority in both small and large businesses on how best to provide harassment-free workplaces. background in widely circulated guidelines, the equal employment opportunity commission (eeoc) defines two difference types of sexual harassment at work. quid pro quo harassment occurs when sexual demands are made specifically in exchange for employment benefits, such as being hired or promoted, or to prevent adverse employment actions, such as being fired. hostile environment harassment can occur when an employer allows a work atmosphere to develop that is so pervasively hostile, offensive, or abusive as to interfere with an employee's ability to do a job. a company can be held liable if it knows about this conduct, yet does nothing (sherman, 1992). according to estess (1995) a "hostile environment" is created through constant sexual comments, questions about an employee's sex life, or the telling of offensive jokes. the distinction between well-intentioned conversation meant to be complimentary and a sexually hostile environment is oiten difficult to determine (sherman, 1992). small business in the u.s. economy no generally accepted definition of large or small business exists, because different criteria are often used to define business size. some agencies consider the size of the workforce while others use the amount of assets or sales to classify firms. for the purposes of this research, the small business administration's (sba) definition of small business will be used. the sba defines a small business as one that employs fewer than 500 workers and a large businesses one that employs 500 or more (sba office of advocacy facts about small business, 1997). small business is an important part of our nation's economy. statistics prove that small business has become the nation's primary job creator. today less than 10 percent of the american labor force works for fortune 500 companies compared to 20 percent in the 1970's (mcgreery, 1997). according to recent projections by the bureau of labor statistics, smallfirm-dominated sectors of the economy will contribute about 60 percent of new jobs between 1994 and 2005 (sba office of advocacy facts about small business, 1997). small businesses provide about 67 percent of initial job opportunities (sba oaice of advocacy facts about small business, 1997). small business accounts for 80 percent of total 43 journol ofsmell busiiiess srroiegv vol. 12, no. l spring/summer 200l businesses and created 90 percent of net new jobs added in the u.s, throughout the mid-1990's (despande 8t golhar, 1994). according to the statistical abstract published by the u.s. bureau of the census (1995), small businesses employ 53 percent of the private work force, contribute 47 percent of all sales in the country, and are responsible for 50 percent of the private gross domestic product. small-business-dominated industries produced an estimated 75 percent of the 2.5 million new jobs created during 1995 (sba office of advocacy facts about small business, 1997). small business susceptibility many small business managers, whether of family-owned businesses, sole proprietorships, or pannerships, may be taking less action to reduce sexual harassment than their larger counterparts. often sexual harassment in small business goes unnoticed and/or unreported (estess, 1995). in a smaller company when the owner goes around pinching women, employees are often afraid to speak up for fear of losing their jobs. since the atmosphere of a small company is relatively intimate, getting employees to believe they can report harassment without fear of retaliation is difficult (spraggins, 1992) low awareness of sexual harassment laws has increased the susceptibility of small firms to the occurrence of sexual harassment. according to estess (1995), managers in small businesses are often not aware that certain of their actions could be considered sexual harassment. small businesses, especially family ones, generally have few formal policies in place (estcss, 1995). ffderai. and state laws some small business owners may have the misconception that sexual harassment laws only apply to large companies. although the federal law is applicable to companies with 15 or more employees, many state laws apply to companies with as few as two or three employees, as previously stated. these state laws can be more stringent than federal laws (nelton, 1955). for instance, regardless of size, all companies in california are required to notify their employees that sexual harassment is unlawful. also, although federal law provides a $50,000 cap on damages in sexual harassment cases for smaller businesses, employees can file under state or tort or wrongful act law and receive much larger awards (nelton, 1995). the u.s. supreme court decided its first sexual harassment case in 1986, some twenty-two years after passage of the first civil right act in 1964. following passage of the civil right act of 1991, discrimination complaints increased from about 50,000 in 1992 to over 97,000 in 1995, as filed with the equal opportunity commission (eeoc) (kores, 1995). these laws, together with the 1991 clarence thomas anita hill sexual harassment hearings, combined to dramatically increase the awareness of sexually-related discrimination (moore, et. al., 1997). the eeoc defines sexual harassment as unwelcome sexual advances, requests for sexual favors, and other verbal or physical conduct of a sexual nature (kores, 1995). where does this leave the smaller firm which typically has no attorney on retainer and perhaps does not even have a sexual harassment policy? a small business owner may see the 1991 civil rights act as "protecting" it from unreasonable court settlements at a $50,000 cap for small businesses, if convicted, while their larger counterparts may pay as high as $300,000 per conviction. however, lest the small business owner get lulled into a false sense of security, it should be noted that many state laws are more stringent than federal sexual harassment laws, applying in some cases to companies with as few as two or three workers. although the federal caps provided by the 1991 civil rights act limit the entrepreneur's damages in small business sexual harassment cases, recall also that high-profile cases can occur as in the paula 44 journal ofsmail business strategy vol. /2, no. i spring/summer 2001 corbin jones lawsuit of president clinton. she sued him (for wrongful acts, outrageous behavior, or assault) under state tort laws. thus, under the 1991 civil rights act, individual plaintiffs can and do receive settlements against small businesses that exceed even the higher caps for larger businesses. workplace sexualization gutek, cohen, and conrad (1990) report that "sexualization in the workplace occurs when sexual jokes, comments, innuendos, and sexual or seductive dress are tolerated, condoned, or encouraged." other inappropriate business conduct includes persistent requests for dates that are refused or insisting on a meeting in an inappropriate place, such as a bar, or at an inappropriate time, such as 8 p.m., to discuss business (estess, 1995). in these situations, it is common to view sexual harassment as an exercise of power (pryor, lavite, & stoller, 1993). one contributing factor could be the effect of prestige or position in the organization. higher ranking employees are less likely than lower ranking ones to be targets of sexual harassment (gutek, 1995). statistics from a federal government survey clearly indicate the potential for power-based harassment. survey results found that although women make up 45 percent of the total workforce, women represent only 3 to 5 percent of senior management (masondraffen & wax, 1995). the male dominance of upper-level management provides the atmosphere to nurture power-based harassment. another factor identified in gutek's (1995) study is that women apparently hold a broader definition than men of what constitutes sexual harassment. this study indicates that women are more likely than men to label similar, or identical, experiences as sexual harassment. this means, e g., that if a man puts his arm around the waist of some women, they would think that he is being "too familiar" with them, and would thus consider this a form of sexual harassment. most men would not consider this sexual harassment if the roles were reversed. some authors find evidence that sexual harassment behaviors are only consequences of these cultural circumstances and are not typical or unique to the workplace environment, but are typical to inter-gender social interactions in general (lach and gwartney-gibbs, 1993). minimal data exists some people feel that smaller businesses have less sexual harassment than larger businesses. this is a difficult premise to prove due to the lack of research data for small businesses on sexual harassment. according to the hay group (1993)only 32 percent of smaller companies had a survey conducted during the past two years; however, many human resource departments in larger firms mandate such studies annually. the reasons for not conducting a survey included "management not supportive" (44 percent), "cost-prohibitive" (26 percent), and "already knew that employees'ttitudes were positive" (5 percent) (hay group, 1993). another factor contributing to the lack of data on sexual harassment in small business could be small business'ependence on mediation. many small companies utilize mediation to resolve workplace conllicts, because of its relatively low expense compared to court litigation (kruger, 1995). kruger (1995) also reported that 60 percent of sexual harassment claims were settled prior to going before a judicial forum. additionally, moates and kulonda (1990) reported that "women in small firms were less inclined to change jobs, were more decisive, and had a lower need for power." there could be a correlation between the decisive nature of women in smaller firms and their willingness to sue. conversely, many may suffer in silence because of their immobility in the job market. many women may believe they would be fired from a small business if they filed a sexual harassment lawsuit. additional data on this point is included in table i and the accompanying comments which follow. 45 journol of snioll business siroieg3 vol, l2, no. l spring/suntmer 200/ training and policy visibility a major difference between small and large businesses'reatment of sexual harassment claims appears to be the ability of larger firms to provide training to educate its employees. hence, larger companies have a thicker cushion to protect themselves from the law and from employees filing claims because they are willing and able to administer training and set policies. a survey pioneered by fforking wonten to fortune 500 companies showed that 81 percent of the surveyed companies have training programs on sexual harassment, compared with only 60 percent in their 1988 survey (sandroff, 1992). these companies have encouraged top management support for implementing sexual harassment training programs, including providing seminars, lectures, and group discussions, videotape presentations, case study analysis, and question and answer sessions (webb, 1992). when the federal government updated its 1981 merit system protection board study on sexual harassment, it found out that most medium and large-sized firms appear to have taken the eeoc's guidelines seriously and developed specific policies and programs detailing what constitutes sexual harassment. they have provided training and use other informational devices to sensitize all employees to sexual harassment and to inform them of their rights and responsibilities. in addition, grievance procedures have been changed so that victims can report complaints to someone other than their immediate supervisor (champagne & mcafee, 1989). small businesses do not normally have the money available for training budgets of this type. population characteris'cics the population consisted of approximately 66,000 members of the society for human resource management (shrm). from this group, a random probability sample of 2,200 names and addresses were selected. approximately half of the respondents worked in organizations with less than 500 workers (small businesses), and around one-half employed 500 or more (large businesses). the majority of respondents from small businesses carried the title of "owner," with most of the respondents from large businesses carrying the title of vphuman resources, or director human resources. surveys were returned by 663 of those surveyed i'or a response rate ol'bout 30 percent. survey respondents were 51 percent female and 49 percent male. statement of the problem practitioners in a variety of manufacturing, service, health, wholesale, retail, government, education, and finance organizations provided information that was used to attempt to discover the amount of: l. sexualization of the environment in small and large firms, 2. sexual harassment in small and large firms, and 3. to determine if differences exists in the amount of formal sexual harassment training in small and large firms. the 33-item survey extended and expanded earlier research conducted by gutek, cohen and conrad (1990). questions measured contact opportunities with the opposite gender in the workplace, the extent of formal policies, training, and reporting of sexual harassment, and demographic attributes. response data were analyzed using frequency distributions and crosstabulations. significant differences between small and large business firms were tested using the chi-square test for two or more independent samples. 46 journal of smol/ business strategy vo/. /2, no. / spring/summer 200/ findings table i contains data analysis from questions that measure the "sexualization of the workplace" of the business firm. these five questions were taken from gutek's (1995) study. the respective frequency distributions for the sample results are compared for large versus small businesses. in addition, the chi-square test for two independent samples measures whether it can be inferred that the differences in the observed sample frequencies would hold for the population as well. hence, are the differences great enough that we can assume that the distribution of responses for small versus large firms are significantly different? table i: selected questions measuring sexualization in the workplace for small versus large businesses question response small % large % stg opportunity for contact with other sex at work a lot 88.3 92.5 .100 social pressure for women to flirt with men at a lot/some 14.3 23.4 .010 work social pressure for men to flirt with women at a lot/some 17.9 27.0 .005 work how much problem is sexual harassment at minor problem 58.3 77.7 .001 work? how many women dress sexy? most/some 34.1 42.9 .001 sig =probabitin of msiznificuncc the chi-square results in table i reveal that significant differences exist for large versus small businesses for all five questions pertaining to the "sexualization of the workplace." given that small business responded differently than large businesses, the frequency distributions reveal that i) there is more opportunity for contact with the other sex in large firms; 2) there is more social pressure for women to flirt with men at work in large firms; 3) likewise, there is more pressure for men to flirt with women at work in large firms; 4) sexual harassment is perceived to be a problem in large firms more than small firms; and 5) more women dress "sexy" in large firms than in small firms. hence, we would conclude from these results that there is greater "sexualization of the workplace" in large firms than small firms. table 2 contains nine questions, also taken from gutek's (1995) study, which assess i) the initiatives by firms to reduce sexual harassment; 2) perceived benefits of sexual harassment training by firms; 3) perceived understanding of sexual harassment policies by firms; and 4) the perception of whether sexual harassment has increased or decreased in the last 12 months. the results in table 2 reveal the following: i) the chi-square analysis reveals that large firms responded differently than small firms for eight of the nine questions; 2) the only question in which there was no difference in the responses of large versus small firms was the attendance by company vice-presidents at sexual harassment training sessions; 3) significant differences in small versus large firms are as follows: a) larger firms are more likely to have written sexual harassment policies; b) larger firms are more likely to have sexual harassment policies implemented; c) smaller firms are more likely to have hourly workers attend sexual harassment training sessions; d) smaller firms are more likely to have first-line supervisors attend sexual harassment training sessions; e) smaller firms are more likely to have middle 47 jorrrno/ ofsmull business strategy vo/. /2, no i spring/sunimer 200/ and lower level managers attend sexual harassment training sessions; 1) employees in larger firms are more likely to understand the organization's attitude toward sexual harassment; g) employees in large firms are more likely to benefit from sexual harassment training; and h) larger firms had significantly more sexual harassment complaints in the last 12 months than did smaller firms. table 2: initiatives, perceived benefits, gt impact on sexual harassment resulting from company efforts ques/ion response small % large % sig. firm has written harassment policy yes 94.9 98.1 .050 is harassment policy implemented yes 95.1 97.8 .100 vice-president attendance at harassment training none/few 52 9 45.5 .166 i-iourly workers attendance at harassment training none/few 61.2 58.1 .001 first line supervisors attendance at harassment training none/few 43.8 32.1 .001 mid/lower level managers attendance at training none/few 42.6 30.9 .005 understand organization's attitude strongly/ somewhat agree toward harassment 97.6 99.4 .050 employees benefited from training strongly/somewhat agree 67.8 76.7 .100 more harassment complaints in past strongly/ somewhat agree 12 months 18.2 27.8 001 sig. =probabi /i iy %nsignificonce the combined results from tables i and 2 reveal that i) there is a greater" sexualization of the workplace" in larger firms, and hence significantly more sexual harassment complaints in the last 12 months; 2) even though there are more opportunities and greater pressure to interact and attract the opposite sex in the large firm, large firms were less likely to have hourly employees, first line supervisors or lower and middle managers attend sexual harassment training sessions; 3) larger firms were likely to have sexual harassment policies written and implemented than their smaller counterparts, but had signiflcantly more sexual harassment complaints over the past 12 months; 4) even though employees in large firms (versus smaller firms) were more likely to benefit from sexual harassment training and have a better understanding of their firm's attitude toward sexual harassment, larger firms had more sexual harassment complaints in the past 12 months. in summary, in larger firms, there is more contact with the opposite sex, more social pressure to flirt, more women dressing sexy, and hence more sexual harassment problems and formal complaints. large flrms also seemed to benefit more from sexual harassment training, have more formal written policies, and better understand what sexual harassment is all about. 48 journal ofsmall business strategy vol. /2, iuo. l spring/summer 200l workshops, which define sexual harassment explain how to handle complaints and cover other related topics, are the most popular method used by large and small firms when seeking to reduce sexual harassment. from a practical standpoint, survey respondents provided topics for sexual harassment preventive training workshops. if small businesses will conduct such workshops, using qualified leaders, this will go a long way in promoting harassment-free workplaces. table 3 indicates their topical preferences. both large and small firm respondents replied almost identically, so their answers were averaged to one percentage. table 3recommended workshop topics to reduce sexual harassment from large and small businesses topics percent examples, sensitization, and understanding of what sexual harassment is and 96.6 is not confidential handling of complaints 95.9 prompt and thorough investigation of complaints 95.7 enforcing penalties against harassers and their supervisors who allow it to 90.2 continue after it has been reported ways to prevent sexual harassment 87.2 implementing your organization's current policies and practices 84.9 role plays, cases, videos to promote discussions about sexual harassment at 79.1 work providing or referring counseling services to victims 61.8 other-gender insensitivity 59.7 conclusions and implications survey respondents indicate that formal training, education, and behavior modeling are needed to maximize the effectiveness of written policies to reduce sexual harassment in the workplace. in response to another question regarding how recent were the occurrences of sexual harassment, most of the respondents stated they felt the number of occurrences were decreasing. perhaps this encouraging statistic results from a commitment to effective, formal sexual harassment training combined with organizational emphasis on clear, zero-tolerance policies and consistent enforcement of disciplinary procedures. upper-level management can further reinforce appropriate behavior by serving as a role model for employees. these strategies may assist in improving productivity, as females in harassing, or potentially harassing, situations can better concentrate on their jobs, as opposed to worrying about being harassed. a well-executed anti-harassment policy will reduce a company's legal liability as well as promote an atmosphere of respect within the company. both small and large firms should develop a policy detailing types of conduct that will not be tolerated and inform employees of procedures for filing grievances. training and counseling sessions should be available for employees. complaints should be taken very seriously and dealt with promptly. strong policy enforcement, effective training, and employees who demonstrate lawful social-sexual behavior can help businesses achieve a harassment-free work environment, or, at least, 49 fof(rp)a/ ofsmall business srrareg/ fol. /2, no. l spring/summer 200/ substantially reduce harassment. the universal advice to sinall businesses is to follow the agreed-upon guidelines to keep harassment from happening, and when/if it does, to take pronipr action to remedy the situation, and report it to the proper authority internally and/or externally. references champagne, p. j., &. mcafee, r. b. (1989). auditing sexual harassment. personnel journal 74(10), 137. despande. s. p., & golhar, d. y. (1994), hrm practices in large and small manufacturing firms; a comparative study. journal of small business mana ement 32(2), 49-56. e ', a. e. (1995).t h 8 ~023(l i), (12, 84-85. gutek, b. a. (1995). how subjective is sexual harassment? an examination of rater effects. basic and a lied social ps chain 17(4), 447-467. gutek, b. a., cohen, a. go & conrad, a. m. (1990). predicting social-sexual behavior at work: a contact hypothesis. academ of mana ement journal 33(3), 560-577. h i 0 p. ()993). s p (lid i «k . hr 9 70(4)2. k .a.(1992). ti eeoc 4 16 . 9 i 0 i i . j 29. k 6, p. ()995). 5 ll ~wki w 20(6). 32 35,64,77. lach, d. h., & gwatney-gibbs, p. a. (1993). sociological perspectives on sexual harassment and workplace dispute resolutions. journal of vocational behavior 45, 102-115. luchs, c. (1997, january). small companies, large exposures. best's review. mason-dralten, c., & wax, alan. j. (1995, november 24). how she won 'glass'ction. new~sda . a06. moates, h., &. kulonda, d. j. (1990). an examination of differences between supervisors in large and small companies. journal of small business mana ement 28(3), 27-36. moore, h., gatlin, r., cangelosi, j., & arn, j. (1997). effectiveness of current sexual harassment prevention policies and training. central business review 41-45. mcgreery, c. (1997).letter from the executive editor. small business success vill 2. nelton, s. (1995, march). sexual harassment: reducing the risk. nation's business 83(8), 24. pryor, j. b., lavite, c. b., & stoller, l. m. (1993). a social-psychological analysis of sexual harassment: the person/situation interaction. journal of vocational education 42(l), 68-83. sba oftice of advocacy facts about small business. (1997). available: http: //www.sbaonline.sba.gov/advo/stats/fact i.html date:12/30/97. 6 d ff. r. (1992.1 ). 6 . i h -7'h i 14 0'. ~wri w 17(6). 4751, 78. sh * .a.j.()99).s ih 9 ll( .~oker 40,45. u.s. bureau of the census (1995). statistical abstract. count business patterns. annual edition. webb, s. l. (1992). dealing with sexual harassment. small business re ort 17(1), 11-14. 50 journal of small business strategv vol. /2, no / spring/summer 200/ rebecca gut/in-watts is associate professor of information systems and director of the mba program, department of marketing, managentent & information systems, college of business admim'siration, um'versity of central arkansas. dr. gatlin-wans has pubished in the journal of education for business, centra/ business review, international journal of business disciplines and nunterous other jotrrnals. her degree is from texas a&m university scott markham is professor of marketing, department of marketing, management & information systems, college of business adtninistration, university of central arkansas. dr. markham has published in the journal of prontotion management, jottrna! of product & brand management, journal of customer service in marketing & management and numerous otherjournals. his degree is from the university of arkansas. joseph cangelosi is associate professor of marketing and clruir, department of marketing, ivtanagement & inforntation sistems, college of business administration, university of central arkansas. dr. cangelosi has pttblislredin health marketing quarterly, journal of hospital hfarkentrg. delta business review and mtmerous otherjournals. his degreeis front louisiana tech universin. 51 sim"if''gã bfst papfr award recipient 2002 national entrepreneurship and small business educators conference an analysis of thf. motivational factors of intending entrepreneurs richard demartino rochester institute of technology r rtlbbugiri t. edu robert barbato rochester institute of technology tjbbbutatrit.edu abstract tliis stmli ciiiiipares men and women, ivlio inteml to become entrepreneurs. intending entrepreneurs olio /tave graduated with an mba fiom a top tier business school were compareil to mitigate ditffercnces in backgrounds. intciiding entrepreneurs are compared toi non-entrepreneurs for both nien and women. the study focuses on career motivators of inteniling entrepreneurs nnd ilre finding» both support aiid refine previous literature. among the fiiulingsi intending women were not more ilissatisfied with their ciireers, and they did possess ilifferent career motivators and intentions titan women who ilid not indicate an intention to become entrepreneurs. the difference bcoveen intending and non-intending ivoinen inaiched a similnr pattern benvcen intending aml non-i ntending men. introduction according to the small business administration (lowrey, 2001), there are nine million women-owned businesses in the us, and this number did not include home-based micro businesses. these female-owned businesses employed 27.5 million people and generated more than $3.6 trillion in sales. women owned nearly 40'/o of all private businesses and were starting businesses at twice the rate of men. the impact of this phenomenon on the u.s. economic landscape is significant, and researchers continue to explore differences in characteristics, motivations and styles of female entrepreneurs. a review of current literature reveals that, while there are many similarities between female and male entrepreneurs, a number of differences —particularly in regard to the factors motivating women toward entrepreneurship —exist. a higher proportion of women sought entrepreneurship to create balance between work and family. more recent efforts have suggested that the existence of dependent children in the entrepreneurial household increases gender motivational dil'ferences. 'revious researchers have noted career and motivational similarities among graduates from top mba programs (muzyka, stevenson, & larson, 2001, 1991). 26 journal of sniall business strategy irol. /3, bto. 2 fall/winter 2002 previous comparisons of women and men entrepreneurs often suffered because studies had not controlled for educational levels, career opportunities, and career stages. additionally, i'ew studies had explored career motivations during the pre-venture planning stage, prior to the establishment of the enterprise. this study contributes to the literature by comparing mba graduates who are similar in backgrounds, ages, and education level, who stated that they "intend or are very likely" to become entrepreneurs in the near future. for this study, a sample of mba graduates from a leading business school was chosen. four groups were compared within the survey: (i) women very likely to become entrepreneurs (intending women), (2) women unlikely to become entrepreneurs (non-intending women), (3) men very likely to become entrepreneurs (intending men), and (4) men unlikely to become entrepreneurs (non-intending men). in this case, these groups share an education and a credential that is valued in the workplace. to date, no study has been found that compares women and men mba graduates who plan to start their own venture. previous research previous researchers suggested that, while there are similarities between women and men entrepreneurs in the areas of personality factors (brush, 1993; chaganti, 1986; longstreth, stafford, & mauldin, 1987;) and motivations (sexton & bowman, 1986, 1990), important differences exist. in a comprehensive literature review, brush (1993) noted that previous research identifies a number of motivational differences between women and men entrepreneurs. she observes that a higher proportion of women are motivated by dissatisfaction with their current employment, and view business ownership as a job alternative that is more compatible with other aspects of their life. she also notes that women are motivated to a much larger extent to create businesses that allow flexibility to balance work and family (buttner, 1993; geoffee & scase, 1983; kaplin, 1988; scott, 1986). buttner (1993), supporting this notion, argued that while men and women possess many similarities, women are influenced and motivated more by family needs and men by economic motives. orhan (2000) summarized the differences identified by brush by contrasting a constructivist framework with a psychological framework. constructivists argued that female entrepreneurs were using entrepreneurship to avoid the constraints that women face in the workplace, i.e., the glass ceiling. the psychological argument stated that entrepreneurship could be a lifestyle choice for women who are seeking more choice in their lives. the inconsistency of some analysis and the failure of existing research to uncover explanations for differences between women and men-owned businesses have resulted in recommendations for further research. in particular, fischer, reuber, and dyke (1993), stated: lf the eristence of malelfemale differences is being posited, empirical evidence comparing women and men drawn from the same population at the same time is necessary... family and the need for flexibility recent researchers have sought to develop a greater understanding of the underlying career goals of men and women and how that relates to family obligations and flexibility. several researchers concluded that autonomy and flexibility to focus on family needs aflures many women to start their own business. maysami and goby (1999) found that female entrepreneurs in singapore are motivated by freedom and flexibility, which helped them to integrate their work lives with their personal lives and family obligations. fasci and valdez (1999) concluded that women-owned businesses were smaller and less profitable for this reason. their study compared female-owned accounting practices to male-owned accounting practices. they found that productivity, measured by profit ratio (net profit to gross revenues 27 jrinrnrd nf sinnll ijnsi nes» srr rrretu vrir. i j, nu. 2 i'niijivinrer 2002 ratio), was highest in men-owned accountine practices. the study also revealed that businesses that were established because of a desire for flexibility possessed a lower profit ratio, and women owned 95'in of these businesses. the stu&ly concluded that women confront barriers because of their gender and the authors cited previous research that argued that these barriers are a result of socialization practices, educational experiences, family roles, and networking. they argued that the lower productivity of women-owned businesses was the result of these factors. still and timms (2000) proposed that family considerations were especially important for women business owners. who did not rely on their business for the primary source of family income. focus group interviews with 63 women small business owners in australia revealed that women were motivated to start a business because of lifestyle issues, i.e. flexibility and the ability to balance work with their relationships and family. it was also shown that money was not a measure of success for women, and this was because they were free from the obligation of being the primary breadwinner for the family. however, the women who were either widowed or divorced did indicate that money was a printery motivator. this research confirmed the "new" model of the women entrepreneur, which proposes that the amount of time a woman spends on her business is linked to her life stage. this study explained why some women do not want to grow their business. the authors called for additional research. disenfranchisement with work the dissatisfaction that women entrepreneurs experience in working for others may be another explanation for differing goals between men who become business owners and women who become business owners. this difference in previous employment experience could lead women to start businesses for different reasons than men. however, once again, studies that focused on this question have not been limited to women or men who are well credentialed, possess similar business skill sets, and hence can be more readily compared. 11ie idea that women are "pushed" toward careers as entrepreneurs, because they often feel dissatisfaction working for others may be a more recent phenomenon. in a study by moore and 13uttner (1997), anecdotal evidence was used to show that women are less engaged by corporate careers, and this frustration and disenfranchisement pushed them to seek careers as business owners outside the corporate culture. pihkala, vesalainen, and viitala (2000) tested the idea that female entrepreneurship was in transition by examining entrepreneurial intentions among women in finland. they describe the "modern" female entrepreneur as someone who seeks professional growth, but who is blocked from advancement by the glass ceiling. they found that "push" factors, i.e., dissatisfaction with one's current job were stronger in women who have entrepreneurial intentions than men who have entrepreneurial intentions. this was not the case when women who didn't have entrepreneurial intentions were compared to men who didn't have entrepreneurial intentions. at the same time, intending women also had higher pull factors than intending men. the study also showed that intending women differed from non-intending women much more than intending men differed from non-intending men. in other words, female entrepreneurs were more distinctive than male entrepreneurs. a study by zapalska (1997) used a telephone survey of 110 male and 40 female entrepreneurs in poland. female entrepreneurs differed from male entrepreneurs in the motivation to start a new business in that the females more frequently stated that their dislike for their boss drove them to start their own business. although the survey found no differences in personality attributes between men and women entrepreneurs, female entrepreneurs were more oriented to long-term financial goals, while males were more focused on short-term financial goals. 28 journal of sn&all business srrawgy vol. /3, no. 2 fall/winter 2002 hypotheses as noted earlier, much of the existing literature suggests that women become entrepreneurs because of lower satisfaction with conventional corporate careers. this lack of satisfaction is assumed to be associated with barriers in the corporate work environment. it has been argued that many women have good training and skills and are constrained by the myriad organizational and attitudinal barriers associated with conventional employment. hence, this exploratory paper will first explore the degree of satisfaction associated with those women "intending" on entrepreneurship. hit imending women will hove a lower degree of career satisfaction than nonintemling women, intemling men, and non-intending men. existing literature also suggests that women and men possess roughly similar motivators pushing or pulling them to entrepreneurship and that women entrepreneurs differ from other non emrepreneurial ivomen m the same manner that men entrepreneurs differ from their male peers. those motivations effecting women differently from men typically focus upon family flexibility and economic (wealth creation and advancement) issues. as noted in the literature review, women desire greater balance between home and work and tend to possess a lower intensity for wealth creation or career advancement. finally, the literature suggests that marriage and dependent children serve as a personal factor motivating women to become entrepreneurial. this exploratory study tests the following hypotheses: h2& intending wrnnen possess a greater intensity of preference for traditional entrepreneurship &notivators than non-intending women. h3: intending women possess a higher intensity of preference for family and lifestyle issues than intending men nnd a lower intensity of preferences for economic &ssuis. h4: intending wrnncn uht& nre married ivith dependents will differ from intending women who du not huiv chi ltlrc&i and from intemling men ofall catego&ies. survey and research methods participants in 1998 a survey was administered to alumni of an mba program from a well-known business school that consistently ranked among the top business schools in the u.s. its program focused on traditional mba applicants, with the average admitted student in the past 20 years possessing approximately 4 years of work experience. the program was exclusively 2 full time and did not offer part-time mba programs. its graduate placement, in terms of compensation and industry, was representative of the other leading business schools. the vast majority of program graduates were in their late 20s or early 30s with significant training and job opportunities. in addition, previous exploratory research suggested that the career path of other top business school graduates share a number of similarities (muzyka, et al., 1991). the survey revealed that the mean work experience of admitted students in the past 20 years was 3.77 years with a standard deviation of 2.48. 29 ./rmrnnl vf sniull /his/ iirss srrn(r it'v 1'u/. /3, //u. 2 lrulllf vinrrr 2002 procedures and statistical analysis the survey ivas adininistered to the entire population of mba alumni, totaling approximately 5800 individuals. over 2400 alumni responded to the survey, a response rate of 42%. of those surveyed, 320 alumni responded that they were very likely to become entrepreneurs in the next few years. the survey requested information on those factors (motivators) influencing the respondents'areer management decisions over the next five years. five of these factors smight to measure traditional entrepreneurship motivators of freedom and wealth creation: desire t'or equity/ownership, desire for self-employment, desire to be free from close supervision, dynamic challenges, and earnings and income potential. an additional factor sought to measure career advancement potential and was listed as "rapid career advanccincnt". three variables sought to measure family related flexibility: partner/spouse career issues, chil&i requirements, and quality of life. 'i'his study reports the results of only those respondents graduating in the past 20 years. this subcategory was selected because prior to 1978 the proportion of female mba graduates was relatively sntall and influx. intergender comparisons between women and men prior to this svould bias the analysis by increasing the graduation range (proxy for age) for the men in the sample. furthermore, this paper only reports the findings of intending and non-intending entrepreneurs. the questionnaire was structured to capture current job satisfaction levels and hence existing entrepreneurs were excluded from the analysis. the following section reports the findings of the motivational survey. first, career satisfaction levels are reported comparing intending women with non-intending women. second, career motivators are reported comparing: intending women with non-intending women, intending men with nonintending men, and intending women with intending men. third, career motivators are reported comparing: married women with children with single and married women without children and married women with children with married men with children. findings career satisfaction levels the survey results, as documented in table i, revealed no statistically significant differences between the career satisfaction of intending and non-intending women. additionally, no statistically significant difference emerged between intending and non-intending men. career motivations leading toward entrepreneurship a number of statistically significant results emerged when comparing the career motivations of intending and non-intending women and men. (see tables 2 and 3). as expected, intending and non-intending women differed considerably in career motivations associated with entrepreneurship: desire to obtain equity (55% vs. 25%, with a chi square of 15.46 and p= 00), desire for self'-employment (80% vs. 16%, with a chi square of 83.77 and p = 00), and freedom from close supervision (73% vs. 39%, with a chi square of 16.57 and p = 00). these differences also existed between intending and non-intending men. the inter-gender differences between women and men were directionally and proportionately similar. i additionally, comparing later graduating classes (i.e., the past 15 or 10 years, etc.) provides a series of other challenges related to reduce sample size and decreased motivational interests. mba entrepreneurship requires significant gestation periods (bhide, 1996). 30 journal ofsmall business strategy vol. i3, no. 2 fall/winter 2002 table i career satisfaction not very satisfied very satisfied chi square sig. intending women 60.9 (n=28) 39.1 (n=1 8) .937 .333 other women 53.3 (n=200) 46.7 (n=175) intending men 54.9 (n=89) 45.1 (n=73) .054 .816 other men 53.9 (n=445) 46.1 (n=380) table 2 -career motivations by gender intending vs. non-intending entrepreneurs non nonintending, chi, intending chi preferences intending s sig. m intending sig. women square 'en square women men apid career 25.0% 25.1% .80 .991 42.8% 46.2% .58 .445 dvancement ompany equity 55.0% 25.2% 15.46 .000 83.4% 41.9% 83.76 .000 elf employment 80.0% 15.6% 83.77 .000 81.3% 15.8% 266.06 .000 72.5% 38.8% 16.57 .000 62.7% 39.1% 27.16 .000 upervision ynamic challenges 85.0% 70.9% 3.53 .060 81.8% 75.2% 2.92 .087 65.0% 56.0% 1.18 .278 76.0% 72.3% .85 .357 otential 70.8% 72.2% 1.16 .281 34.3% 27.2% 1.15 .283 ssues* hildren/schoolv~ 86.7% 82.8% 1.02 .313 55.3% 49.7% .10 .750 uality of life 87.5% 87.5% .00 .950 79.2% 74.1% 1.67 .195 nlncludes only those married or partnered table 3 career motivations of intending entrepreneurs gender comparisons preferences intending intending chi square sig. ivomen men apid career advancement 25.0% 42.8% 4.159 .041 ompany equity 55.0% 83 4% 14.459 .000 elf employment 80 0% 81 3% .032 reedom from close supervision 72.5% 62.7% 1.321 .250 ynamic challenges 85.0% 81.8% 219 .640 amings and income potential 65.0% 76.0% 1.968 .161 spouse co-career issueso 70.8% 34,3% 10.78 .001 hildren/schoolv v 86.7% 55 3% 8.024 .005 uality of life 87.5% 79,2% 1.411 .235 'includes only those married or partnered 31 journal of small bucintscc strrucgy vol. /3, no. 2 fahylyintcr 2002 when intending women were compared to intending men a number of motivational differences and similarities emerged. as documented in table 3, intending women possessed a lower intensity of preference for rapid career advancement (25% to 42%, with a chi square of 4.159 and p & .05), company equity (55% vs. 83%, with a chi square of 14.50 and p = .00), than intending men. other economic or entrepreneurial motivators values were roughly similar. the most significant motivational differences between intending women and men appeared in those motivators associated family flexibility. intending women possessed a higher intensity of preference for ability to manage their career simultaneously with their spouses/partners (71% vs. 34%, with a chi-square of 10.78 and p & .001) and obtain flexibility for childcare (87% vs. 55%, with a chi-square of 8.024 and p & .005) than men. differences related to marital and dependent status two motivational differences emerge when comparing intending women with and without dependents. as documented in table 4, married women with dependents possessed a lower intensity of preference for "earnings and income potential" (40% vs. 80%, with a chi square of 6.593 and p&..01) and "dynamic challenges" (66.7% and 96.0% with a chi square of 6.327 and p& .05) than intending women (both married and single) without dependents. the differences between married women with dependents and women without dependents are in contrast to the differences between married men with dependents and men without dependence. no substantial differences between men emerged. table 4 career motivations of intending entrepreneurs by gender dependents vs. non-dependents married women with married men with chi chl preferences ivomen with no s slg. men with no s sig.square square dependents dependents dependents dependents 13.3% 32.0% 1.742 .187 33.3% 50.7% 2.803 .094 dvancement 40.0% 64.0% 2.182 .140 83.1% 85.3% .046 .830 equity 66.7% 88.6% 2.66 .102 71.6% 86.6% 2.017 .156 60.0% 80.0% 1.881 .170 65.7% 59.1% 1.082 .298 upervision ynamic challenges 66.7% 96.0% 6.327 .012 82.9% 82.1% .003 .958 40.0% 80.0% 6.593 .010 73.6% 79 4% 395 529 ncome potential 66 7% 77 8% i 830 .201 27 1% 28 6% 103 748ssueso hildren/schools o 86.7% 56.3% uality of life 93.3% 84.0% .747 .388 84.5% 73.1% 3.24 .072 elncludes only those married or partnered oodependentless respondents excluded 32 journal of small business strategy voh l3, no. 2 foll/winter 2002 when intending women with dependents were compared with intending men with dependents extensive difference emerged. as documented in table 5, women possessed a lower intensity of preference for the desire for company equity (40% vs. 83.1%, with a chi-square of 13.52 and p =. 00) and earnings and income potential (40% vs. 73.6%, with a chi square of 7.2046 and p& .01) than men. women possessed a higher intensity of preference in 2 of the 3 family related motivators: spouse and co-career issues (67% vs. 27%, with a chi square of 7.389 and p&.01) and the care of children/school (87% vs. 56%, with a chi square of 4.946 and p&.05). the lower intensity of preference for financial concerns demonstrated by married women with dependents may, in some way, be explained by their contribution to family income. as noted in table 6, only 24% of married women with dependents represented their family's primary income. this compared to 88.6% of married men with dependents that represented their family's primary income. table 5career preferences of respondents with dependents gender comparison married women married men with chi preferences sig. ivith dependents quare dependents apid career advancement 13.3% 33 3% 3 13 .077 esire for company equity 40.0% 83 1% i 3 ~ 52 .000 esire for self employment 66.7% 71.6% .77 .380 ree from close supervision 60.0% 65.7% .320 .572 ynamic challenges 66.7% 82.9% 1.92 .166 arnings and income potential 40.0% 73.6% 7 20 .007 pouse co-career issues* 66 7% 27.1% 7.39 .007 hildren/school 86.7% 56.3% 4.95 .026 uality of life 93.3% 84.5% .69 .405 slncludes only those married or partnered table 6 contribution to family income intending women intending married intending men intending married preferences iyomen wlo dependents men w/dependents w/o dependents w/dependents rimary 23.5% 36.4% 88.6% 67.6% econdary 47% 18.2% 1.3% qual 29.4% 45.5% 10.1% 32.4% discussion the purpose of this study was to explore the factors and motivations that lead women and men to entrepreneurship, and to compare them in light of their similar backgrounds and educational levels. previous research has neglected to compare women and men entrepreneurs with similar backgrounds, and these findings fill an important gap in our understanding of how men and women entrepreneurs differ. previous research has also 33 jn urnn/ r&f sunni/ //usi ness srrnieg r i:nl. /3, /vn. 2 fn//2 iviruer 2002 neglected to compare women, who plan to become entrepreneurs, with their demographically similar female peeis. thc snidy's findings refute and support a number of previous findings regarding the reasons why women become entrepreneurs. in particular, there was no difference in dissatisfaction icvcls between intending women and intending men. ln addition, intending women possessed different career motivators and intentions than nonintending women. as would be expected, intending women were motivated by a greater degree hy professional freedom, self-direction, and dynamic challenges than their nonintending women peers. they also possessed a higher intensity of preferences for corporate ownership and equity associated with entrepreneurship. the difference between intending and nim-intending women niatchcd a similar pattern between intending and non-intending men. intending and non-intending women, however, did not differ in their commitment to their spouses'areers and care of dependents. both categories of women valued family and quality of lif'e with the same proportional intensity of preference. both intending and nonintending mcn valued these motivators proportionally lower than women interesting motivational differences emerged when comparing intending women by marital and dependent status. women with spouses/partners and dependents possessed a statistically lower intensity of preference for a number of traditional economic and professional motivators, than intending women (both married and single) without dependents. they ranked "earnings and income potential" and "dynamic challenges" lower than intending women without children. substantial motivational difference also emerged when comparing intending married women with dependents and intending married men with dependents. women possessed a lower intensity of preference for company equity and earnings and income potential. conversely, they possessed a higher intensity of preference for spouse/partner co-career issues and child requirements. previous researchers suggested a number of factors influencing female entrepreneurship and distinguishing it from male entrepreneurship. these explanations often touched on issues related to discrimination. previous researchers also suggested that motivational factors differ between women and men, with women more focused on balancing work and family. this study supported the hypothesis that women are motivated to a higher degree by family related issues and men are more motivated to gain wealth through equity. the results of this study suggest that women respondents were motivated to create businesses for a more diverse set of reasons than men. intending men were motivated to become entrepreneurs so that they could create income and gain professional freedom. the survey reveals that they were not primarily motivated to gain a greater balance of work and family. ln fact, the opposite appears the case. over 88% of married men with dependents represented their family's primary income. women possessed a lower intensity of preference for career advancement and equity. these findings support the previous research of brush (1993),and maysami and goby (1999), who also found that women entrepreneurs are motivated by family issues and flexibility. implications entrepreneurship as a career can offer a degree of flexibility and balance that some other careers do not offer. this study provides some clues as to why women owned businesses now make up 40% of all businesses, and women continue to start businesses at twice the rate of men. the study has implications for women and men who seek a career that balances work obligations and family obligations. the study also has implications for those professions and 34 journal of small business strategy vol. /3, no. 2 falllwinter 2002 careers that often attract self-employed; such as, accounting, consulting, nursing, etc. advisors who counsel intending entrepreneurs can use these findings to address issues surrounding the balancing of work and family goals. this study also has implications for policy makers, who need to be aware of differences between intending male and female entrepreneurs, and to ensure that programs designed to assist women entrepreneurs are aware of the motivations of intending women, and how they differ from intending men. this study has been limited to the differences in career motivations between women and men who stated they were intending to become entrepreneurs. further research is needed to understand how these difierent motivations impact entrepreneurial choices among the genders. differences in motivators may impact the orientation toward growing a business venture, and this relationship also needs to be explored. finally, since this study was limited to mba graduates from a selective business school, additional research that compares intending female and male entrepreneurs from other common bases would prove enlightening. references bhide, a. v. (1996). "the road well travelled", harvard business school case, no. 9396277. brush, c. d. (1992). research on women business owners: past trends, a new perspective, and future directions. entrepreneurshipi theory and practice, /6 (4), 5-30. buttner, e. h. (1993). female entrepreneurs: how far have they come? business horizons, 2, 59. chaganti, r. (1986). management in women owned enterprises. journal of small business management, 24 (4), 18-29. fasci, m. a., & valdez, j. (1999). performance contrast of maleand female-owned small accounting practices. journal of small business management, (july), 1-7. fischer, e., reuben, r. a., & dyke, l. s. (1993). a theoretical overview and extension of research on sex, gender, and entrepreneurship. journal of business venturing, 8, 151-168. geoffee, r., & scase, r. (1983). business ownership and women's subordination: a preliminary study of female proprietors. the sociological review, 3l (4), 625-648. hisrich, r. d., brush, c. d., good, d., & desouza, g. (1997). performance in entrepreneurial ventures: does gender matter. frontiers of entrepreneurshlp research. babson college, boston. longstreth, m., stafford, k., & mauldin, t. (1988). self-employed women and their families: time use and socio-economic characteristics. journal of small business management, 25 (3), 30-37. lowrey, y. (2001). women tn business, 200/. oaice of advocacy, vs small business administration, washington, d.c. maysami, r.c., & goby, v.p., "female business owners in singapore and elsewhere: a review of studies," journal of small business management, 36 (2), pp. 96-105 moore, d., & buttner, h. (1997). women entrepreneurs: moving beyond the glass ceiling. sage. thousand oaks, ca. muzyka, d. f., stevenson, h. h., & larson, a. (1991). a career path of entrepreneurs with mbasi a comparative study of alumni from three graduate programs. ref type: unpublished work. orhan, m. (2000). a new model for analyzing female entrepreneurship. proceedings of the icsb-conference 2000, brisbane, australia. 35 journal nfsmall business srratelu vnl. /3, ni'i. 2 fa/iijvi ntcr 2002 pihkala, t, vesalainen, j., &.. viitala, r. (2000). motivational background as an explanation for differences between male and female entreprcneurship. proceedings of the icsbconference 2000, brisbane, australia. scott, c. f:. (1986). why more women are becoming entrepreneurs. jourmil of sninll lhisincss management, 24 (4), 37-44. sexton, d. l., &: bowman, n. ()98fi). validation of a personality index: comparative psychological characteristic analysis of female entrepreneurs, managers, enirepreneurship students, business students. froturcrs of entreprenearslrip research, 18-28. wellesley, ma, babson college. sexton, d. l., & bowman-upton, n. (1990). pemale and male entrepreneurs: psychological cliaracteristics and their role in gender related discrimination. journal of business venturing, 5 ( i ), 29-36. still, l. v., & timms, w. (2000). "i want to make a difference" women small business owners: their businesses, dreams, lifestyles, and measure of success. proceedings of the icsb-conference 2000, brisbane, australia. zapalska, a. m. (1997). a profile of women entrepreneurs and enterprises in poland. jnurnnl of small biisincss mnnagcnicnt, 35(4), 76-82. rlcliard demartlno is an assistant professor nf mnnageinent at the rochester institute of technolag)s hc received his ph.d. fiiim the university nf virglnln. robert j. barbato is nn associate professor of maiingement at the rochester institute of 7'cclmolngy. he received his ph.d. from michigan state university. 36 reproduced with permission of the copyright owner. further reproduction prohibited without permission. from mass customization to customization: an opportunity for entrepreneurial differentiation aurand, timothy w;demoranville, carol w;fredericks, elisa;smith, thomas j journal of small business strategy; spring/summer 2004; 15, 1; abi/inform complete pg. 49 journal of small business strategy vol. 15. no. 1 spring/summer 2004 from mass customization to customization: an opportunity for entrepreneurial differentiation timothy w. aurand northern illinois university taurand@niu.edu carol w. demoranville northern illinois university demoranville@niu.edu elisa fredericks northern illinois university elisa@niu.edu thomas j. smith northern illinois university tjsmith@niu.edu abstract small, entrepreneurial businesses must be able to succes.~fully compete with both large, wellestablished.firms and smaller, agile .firms. by making use of modern technology to meet the product needs and wants of individual consumers, smaller firms can better position themselves as both mass producers and.firms involved in mass customization. this study evaluates the present status of customization among smaller.firms and identifies key success factors enhancing the implementation ofproduct customization initiatives. introduction a dilemma regularly facing entrepreneurs is the question of how to successfully position themselves against both larger, more financially stable competitors and smaller, nimble niche players. to be successful, the entrepreneur must often project an image of size, substance, and stability on an extremely limited budget but be agile and fast enough to pursue unique niche opportunities that may go unnoticed by the competition. a "look large, act small" motto is obviously challenging, but is frequently required in order to establish and retain a successful position in a crowded and competitive marketplace. the relatively recent influx of technology enabling e-marketing. e-commerce, and mcommerce initiatives has provided entrepreneurs the opportunity to project an image of a larger, perhaps more significant organization. but the use of technology goes far beyond the projection of a position in the market and encompasses many aspects of a firm's operations. 49 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal olsmall business strategy vol. 15, no. i spring/summer 2004 by taking advantage of technology to gamer customer input and to produce products that meet specific, individual needs, smaller entrepreneurial ventures can build a loyal customer base and establish positions in markets often ignored by larger competitors. advances in technology in the product development realm, including agile and lean manufacturing, have led many firms from a mass production to a mass customization business model, signifying a dramatic shift of focus from "products to markets to niches to individual customers" (pine l 993b, p. 225). mass customization, or the "mass production of individually customized goods and services" (pine l 993a, p. 26 ), drives firms to make this transition to customer driven production. recent declines in the american customer satisfaction index have been interpreted, in part, as a loss in customer choice (duray and milligan, 1999). mass customization attempts to address specific customer needs with products that are, in effect, developed by the customer. by allowing significant customer input into product development at any of a number of stages of the product development/distribution cycle, mass customization has brought with it a significant change in the way customers interact with firms. origins and status of mass customization while toffler ( 1970) references the strategy to produce customized goods and services with mass production efficiency and cost in future shock; others give credit to stanley davis for coining the term mass customization in his 1987 book, future perfect. davis suggested that the technology of the time restricted mass customization efforts but he believed the concept would prevail in the future. it is joseph pine il however, who is widely regarded as the father of modem-day mass customization. in his hallmark work, mass customization: the new frontier in business competition, pine (1993) emphasizes that firms can use more current technology and reengineered processes to assist them in their successful move to mass customization. in fact, if there is a signature tool of mass customization, it may be the microprocessor. philip kotler went far in validating mass customization as a viable alternative for both large and small corporations with his declaration that, "we think there is a revolution in marketing today. it is called mass customization, and it is at least as valuable to small business as to large corporations." ("tailoring ... ," 1993, p. 2). driven by customers with unique needs and wants and ever-increasing technological advancements, the further implementation of the mass customization doctrine by such noteworthy firms as dell, nike, levi strauss & company, lands' end, and andersen windows has prompted many firms to attempt applying the concept, but with varying degrees of success. on the industrial side alone, more than two-thirds ( 68%) of buyers state they have experienced an increased need for customized products or components over the past three years (andel 2002). although it cannot be claimed that the phenomenon is sweeping away the remains of mass production everywhere, there appear to be signs that it is becoming more and more widespread (salvador, forza, and rungtusanatham 2002). for the entrepreneur, the financial commitment required of a truly mass customized product may prove insurmountable. spira and pine ( 1993) refer to computer-aided design and computer-aided manufacturing systems (cad/cam), computer integrated manufacturing (cim), flexible manufacturing systems (fms), computer numerical control (cnc), and direct numerical control (dc) as all having a significant impact on the design and production processes required in a mass customization setting. on the customer information collection side of the equation, the internet has greatly enhanced the amount of information firms can capture about their customers, thereby allowing manufacturers the capability to 50 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy vol. 15. no. 1 spring/summer 2004 respond quickly to customer demands for made-to-order products (krizner 2001 ). and in spite of the on-going concerns associated with e-commerce, the internet's inherent ability to enhance communication with existing and potential customers makes mass customization far more practical and efficient. as schonfeld (1998, p. 114) puts it, "a whole list of technological advances that make customization possible is finally in place." unfortunately, for many entrepreneurs, the adoption of these advances is simply not financially feasible, and mass customization represents the unachievable .future of manufacturing (agrawal, kumaresh and mercer 2001 ). because of the high costs associated with much of the technology required for the implementation of mass customization, many small businesses have identified a viable alternative to mass customized products, the modem customized product. not to be confused with the one-of-a-kind products associated with pre-mass production, or crafted products, a small business's customized product is one that addresses unique customer needs by taking advantage of current technology, but on a more limited scale and scope than is required in a true mass customization scenario. for example, a personal tailor is capable of tailoring suits on a very limited scale, serving at best only a few customers per day. these tailored suits would be considered crafted products. a small business's customized product, on the other hand, could utilize affordable technology, such as the internet, to collect detailed customer information, and then take advantage of relatively inexpensive manufacturing technology to provide unique products that meet individual customer needs. while the key to customizing on a mass scale may be digital technology or a combination of hardware, software, and new machines that fine-tune the production process, customization on a smaller scale may require less of a financial investment in expensive technology, but a similar commitment to customer needs and/or wants. the small firm committed to customization realizes the power that choice can play in the consumer decision-making process and that with a reasonable investment, consumers can be offered at least a limited degree of choice at a price that is, hopefully, similar to that charged for mass produced products. in spite of the dramatic impact that mass customization, or a customization derivative, can have upon smaller american firms, empirical research addressing customization and smaller firms is virtually non-existent. due to the substantial financial commitments required to implement a mass customization strategy, many small firms may consider the doctrine to be cost prohibitive and not a viable option. this study, therefore, focuses on the status of customization among america's smaller firms. the study investigates key customization issues of significant importance to smaller organizations considering product offerings tailored to meet the needs of individual customers within a smaller market niche. it is hoped, that by better understanding the customization methods currently employed by smaller firms and the business results garnered from the concept's employment, entrepreneurs will be able to make more informed decisions regarding possible business ventures via customization initiatives. methodology a web-based questionnaire was developed asking where customization took place, the level of customization for products, goals for those products, and some general firm demographics. the specific items were developed from a literature review of mass customization and interviews with executives involved in mass customization. firms that produced a single product answered 38 items; firms with multiple customized products answered 65 items. 51 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of sma11 business strategy vol. 15, no. l spring/summer 2004 those firms that produced more than one customized product were asked the same series of questions about their most successful customized product and their least successful customized product, thus the questionnaire was somewhat longer. a list of 3,834 finns that customized consumer products was developed from an internet search, a literature review, and a customer list for a web custom configurator 1 software firm. a pretest with a random sample of 15 firms indicated no major problems with any of the questionnaire items. the long version of the questionnaire took about ten minutes to complete. as an incentive to participate, participants could include their name and e-mail address for a drawing of a pda. firms were recruited by calling a systematic sample from the list of 3,834 potential participants. they were first screened to ensure that they customized products and that the contact person was involved and knowledgeable about those processes in the firm. of the 290 firms that were contacted, 239 agreed to participate and were either sent an e-mail with the questionnaire web address included as a link, or were given the web address directly on the phone. given the ease of agreeing on the phone and ignoring or forgetting e-mails, we expected substantially fewer firms to actually complete the survey; however, almost half of those agreeing on the phone to participate actually completed the survey. a total of 113 firms completed the questionnaire for a response rate of39 percent of contacts and 4 7 percent of those who initially indicated a willingness to participate on the phone. when the respondent completed the survey and hit the submit button, responses were automatically sent by e-mail to an address set up specifically for this study. those responses were then entered into an spss database for analysis. customizer profile of the 113 firms that completed the questionnaire, most (88%) have been custom1zmg products for five years or more, regardless of whether they customize a single product (32%) or multiple products (68%). a little more than half of the firms (53%) customized ten or more products. the majority (64%) indicated that the bulk of their sales (76-100%) came from customized products. there was a wide variety of types of customized products including apparel, art, furniture, graphics, sporting equipment, and tools, as shown in table i. most firms (61%) had fewer than five employees. only 16 percent had more than 25 employees. while the largest number of firms (26%) had annual sales of between $25,000 and $100,000, the distribution of sample firms in terms of annual revenues was relatively uniform between under $25,000 and$ l ,000,000 to $5,000,000 as shown in table ii. 1 a web custom configurator is a software program that enables customers to define their customization requirements online. the customization infonnation is then automatically integrated into the company's production. 52 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal o{small business strategy vol. 15. no. 1 spring/summer 2004 table i study participant products customized percent of sample product (n=l 13) apparel/shoes 12% art 4% furniture 4% health care 1% home outdoor 2% home construction 3% household products 9% jewelry 4% manufacturing/design/tools 11 % misc 12% music 5% promotion/mktg/graphics 8% signs/printing/engraving 4% sportsgolf 2% sportsmarine 5% sportsother 5% woodwork/cabinetry 4% none listed 6% total 100% table ii study participant annual sales distribution percent of sample annual sales (n=l 13) less than $25,000 14% $25,000-$100,000 26% $ i 00,000 $500,000 18% $500,000 $1 ,000,000 17% $ 1,000,000 $5,000,000 18% more than $5,000,000 7% findings the vast majority (87%) of firms indicated that mass customization was very important to the firm's business strategy. the methods by which customers could customize products included e-mail (87%), telephone (85%), and mail (63%). fax (58%) and the web (56%) were also methods that over half of firms said their customers used. however, when asked which were used most commonly by customers, telephone (25%). e-mail (22%), and the web (22%) were the most frequent responses by far. for those firms that used a web custom configurator (22%), most (68%) developed it inhouse . for firms that did not use a web custom configurator, most (43%) did not use one because they felt the tools did not offer enough customization capabilities for their needs . another i 9 percent did not know such tools existed. 53 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal olsmall business strategi1 vol. 15, no. i spring/summer 2004 table ill compares the customization process for firms that customi ze only one product with those that customize multiple products. for finns with multiple customizable products. respondents were asked about the customization process for the most successful and the least successful products. responses for all three categories of firms /products are shown in table iii. for ease of interpretation, not all item response categories are listed in table lll. only those response categories that received a significant percentage of responses are included. binomial tests were run to test for significant differences between single products, most successful products, and least successful products. significant differences are noted in the table. sampl e n = 11 3 item length of time custo mi zin g product numb er o f c usto mi za ble features numb er of options fo r mos t custo mi za ble feature numb er of options for leas t custo mi zable feature customi zing pri ce premium diffi culty of custo mi zin g wh ere custo mi zati on occ urs: manu fac turin g: des ign fabricati on asse mbl y add -on whol esa ler: asse mbl y add-on reta iler: asse mbl y add -on *s1 gmficant at p<.05 **significant at p<. l 0 table ill customization analysis firms customizini multiple products single product most successful least successful product product (n=36) (n= 75) (n=67) > 6 yea rs: 64% > 6 ye ars: 65% > 6 yea rs: * 52% 1-5: 42% 1-5 : **25% 1-5: 45% 2 1+: 28% 2 1+ : **43 % 2 1+: 28% 2 1+: 53 % 2 1+: 54% 2 1+: **40% 1-5: 33% 1-5: 59% 1-5: 50% 1-5 : 53% 0-5%: **38% 0-5%: 3 1% 0-5 % : **22% 11 15%: 13% 36%+: 17% 36%+ : **22% 36%+ : ** 10% easy/v ery easy: 74% easy/v ery easy : 76% easy/very easy : *64% manuf: *86% manuf: *74% manuf: 77% whole: 23 % wh ole: 22% who le : 22% retail: 30% re ta il : 34% retail : 28% 73% 77% 83 % 63 % 54% 54% *53% *38% 43 % 33 % 32% *20% ** 50% 7 1% 80% ** 13% 4 1% 40% *50% *65% 58% **70% 46% 53% note: a row with one value asteri sked indicates th at the value is significantly different from the other two values in the row a t the noted p-value. a row with multiple values asterisked indica tes that those va lues are s ignificantly different from each other at the noted pvalue . the questionnaire had a number of items asking about the number of features that could be customized, and for those features, the number of options a customer could select from. for example, a shoe might have four customizable features (size, width , material, and color), but each feature would have a different number of options to choose from ( 12 sizes, 4 widths, 3 materials, 4 colors) . while finns were fairly similar with respect to customizing processes, several differences can be noted from the table. first, most finns had been customizing their products for more than six years, although fewer finns have been customizing their least successful product for that long (p<. l 0). this is not that surprising; finns would likely discontinue their least successful products, so the percentage of these products being produced for more than six years should be lower. as noted for the item 'number of customizable features,' the most successful products for finns that customize multiple products have more 54 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy vol. 15, no. i spring/summer 2004 customizable features than either single product firms or less successful products (p<.05). the most customizable feature for all types of products generally had 21 or more options, but significantly fewer least successful products had this many options to customize (p<.05). very often, firms are able to charge a price premium for customization. most firms in our sample had a price premium of 0-5 percent. however, firms with only one product are more likely to charge price premiums of 0-5 percent as compared to the least successful products (p<.05). the most successful product of multiple product firms is more likely to have a price premium of 36 percent or more (p<.05). the least successful products of multiple product firms show a different pattern of price premiums; they are less likely than other products to have either very high or very low premiums. thus, it appears that more successful customizable products have a higher number of customizable features, which may enable firms to charge higher premiums. in addition to the number of customizable features, the ease of customizing from the customers' perspective may also influence a product's success. we asked firms to rate how easy it is for their customers to customize the product. most firms rated their products as easy or very easy for customers to customize. however, this percentage was significantly lower for the least successful products (p<.05). the participants were then asked a series of items about where customization occurred, recognizing that customization can occur at multiple locations even for the same product. the bulk of customizing occurs at the manufacturing level (74-86%). this is significantly more so for firms with only one product (p<. i 0) as compared to the most successful product for multiproduct firms. within manufacturing customization, single products (compared to multiple products) are more likely to be customized at the assembly stage (p<. i 0), and least successful products are less likely to be customized at the add-on stage (p<. i 0). for customization at the wholesaler stages, single products are less likely to be customized at both the assembly and add-on stages (both p<.05). when customizing through retailers, firms with single products are more likely to rely on retailers' customization at the add-on stage than firms with multiple products (p<.05) and less likely to have retailers customize at the assembly stage than most successful products (p<. i 0). the results revealed some significant differences between firms that customize single versus multiple products and between successful and less successful customized products. some of those differences are the number of customizable features, where the customization occurs, and the price premium charged for the customization. these are discussed in more detail later. the questionnaire asked firms to indicate what goals they had for customizable products and how well the products met those goals. table iv summarizes these questions for single and multiple product firms. generally, firms had multiple goals for their customizable products. the most common were customer satisfaction and awareness, with almost i 00 percent of firms indicating they had these as goals for their customizable products. other goals for over 90 percent of firms were revenue and profit. firms with single products were slightly less likely to have roi (p<. i 0), roa (p<. i 0), and market share (p<.05) goals than the most successful products. for firms with multiple products, the least successful products were less likely to have roi, roa, revenue, and profit goals (p<. i 0 for all comparisons). 55 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of'sma// business strategv vol. 15. no. 1 spring/summer 2004 table iv customization goal analysis firms having goal did not meet goals goal sgl ms ls sgt ms ls (n=35) (n=75) (n=54) (n=35) (n= 75) (n=54) roi 83% *92% 83% 10% 10% **44% roa 80% *89% 79% 11 % 6% **43% revenue 94% *95% *89% **18% **7% **47% profit 97% *97% *92% 21 % 15% **52% market share **64% 83% 83% *10% *21 % **49% customer satisfaction 100% **100% **96% *0% *5% **16% customer awareness ** 100% 96% **92% 20% 18% **41% brand 79% 87% 85% *15% *27% **49% image/positioning met goals exceeded goals goal sgt ms ls sgt (n=35) (n=75) (n =54) (n=35) roi 48% 43 % 36% 41 % roa 46% 56% 50% 43 % revenue 39% *5 1% *38% 42 % profit 38% **44% **29% 41 % market share 33 % 37% 30% *57% customer satisfaction 11 % 15 % **29% 89% customer awareness 34% 33 % 3 1% 46% brand *37% *24% 29% 48% lmage/positioning sgl: firms with single customizab le product ms : most successful product of multiple customizable products ls: least successful product of multiple customizab le products *significant at p<.05 ms ls (n=75) (n=54) 46% **20% 38% **7% 41 % **15% 41% **19% *42% **21 % 80% **55% 49% **29% 48% **22% **significant at p< . i 0 note: a row with one va lue asterisked indicates that the value is significantly different from the other two values in the row at the noted p-value. a row with multiple values asterisked indicates that those values are sign ifi cantly different from each other at the noted p-value. finns were also generally very good at meeting or exceeding their product goals. even for the least successful products, a little more than 50 percent met or exceeded their goals. this is not terribly surprising, because products that performed much worse than that are likely to be discontinued. goals most likely not met by single product firms included profit (21 %), customer awareness (20%), and revenue (18%); by most successful products included brand image/positioning (27%), market share (21%), and customer awareness (18%) . for the least successful products, slightly less than half did not meet any of their goals except customer satisfaction, and the percentage of least successful products not meeting their goals was significantly higher than both single products and most successful products (p<.05). in 56 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of'small business strategy vol. 15, no. i spring/summer 2004 addition, single products were more likely than multiple products to not meet goals for revenue (p<.05), but less likely than multiple products to not meet goals for market share (p<. l 0), customer satisfaction (p<. l 0), and band image (p<. l 0). all products were most successful at exceeding customer satisfaction goals (single: 89%, most successful: 80%, least successful: 55%), although this was significantly lower for least successful products (p<.05). in addition to customer satisfaction goals, the most successful products were most likely to exceed goals for customer awareness (49%) and brand image/positioning ( 48% ). ln addition to customer satisfaction goals, over half ( 57%) of single product firms also exceeded their market share goals, and this was significantly higher than the percentage of both most successful (p<. l 0) and least successful (p<.05) products for multiple product firms. discussion customization represents a viable option for small firms seeking to increase their customer base, enhance customer satisfaction, and position themselves against large firms and small niche players. the literature on customization seems to associate this approach primarily with large firms. notable cases include dell, nike, levi strauss & company, land's end, and anderson windows, all veritable giants in comparison to smaller firms. little research has been done on the practices of small customizing firms. research is needed in this area as small firms continue to be a major source of wealth and employment creation in the u.s. firms with fewer than 500 employees account for more than 99 percent of all business establishments and employ 49.8 percent of the workforce (u.s. small business administration 200 l ). given the specifics of small businesses, it is essential to validate the application of customization within the context of these firms and to distinguish successful and unsuccessful business practices as their success is of paramount importance. this research sought to provide a profile of small customizing firms and identify the set of business practices utilized by those firms succeeding at customization. three success factors stand out that differentiate successful and not-so-successful small customizing firms. in particular, small firms should consider customization as a competitive tool and i) develop a set of metrics to evaluate their customizing efforts, 2) offer multiple products for customization and implement a premium pricing strategy, and 3) utilize technology to achieve goals whenever possible. success factor #1: develop a set of metrics to evaluate customization efforts small firms considering customizing should establish several metrics as an assessment tool. the firms surveyed utilized objectives goals such as roi, roa, revenue, profit, and market share, as well as, subjective goals, which included customer satisfaction, customer awareness, and brand image/position. while the majority of entrepreneurs surveyed embraced all objective and subjective goals, customer satisfaction stands out as an accomplishment for firms succeeding at customization, regardless of whether firms customize one or multiple products. in fact, exceeding at all three subjective goals (customer satisfaction, customer awareness, and brand image/positioning) distinguishes successful from non-successful customizing firms. this finding is significant as it supports research on large firms, which suggests that a i-point rise in a firm's customer satisfaction index corresponds to an average $240 million increase in market share (sweat 1999). while this statistic is impressive for large firms, small firms can also reap the benefits of exceptional customer satisfaction. 57 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal a/small business strategy vol. 15, no. 1 spring/summer 2004 firms succeeding at customization also perform better at achieving objective goals than their non-successful counterparts. in particular, increasing market share seems to be a top achievement for firms customizing one or more products, and although it is a goal for fewer single product firms, they seem to be more successful at exceeding this goal. since the majority of finns surveyed indicated that 76 percent or more of their sales are derived from customization, it is no surprise that successful firms pay close attention and fare better. therefore, we suggest that firms currently involved or considering customization set up objective and subjective metrics and pay close attention to the outcome of both. success factor #2: select multiple products to customize and implement a premium pricing strategy our research revealed over half of the firms surveyed customized ten or more products and have more customizable features than firms customizing a single product or firms with unsuccessful products. providing customers with an assortment of products and alternatives enhances the opportunity for increased sales for firms. premium pricing was also found to be advantageous, particularly for firms offering multiple customizable products. research shows that items marketed over the internet and perceived to be heterogeneous are least likely to experience strong competition (bakos 1998, brynjolfsson and smith 2000). this is primarily due to perceived differences by customers among products and firms with respect to non-pricing related issues such as efficiency, ease of shopping and delivery, and assortment and variety. in our survey, more firms charged a premium of 36 percent for successful customizable products, while most firms offering a single product charged 5 percent or less. the perceived price differential between firms customizing a single product and those offering multiple products may be attributed to a wider assortment of products from which to select and a variety of customizable features and options offered. success factor #3: utilize technology to achieve goals customizing success requires providing customers with an assortment of products from which to choose. however, close attention must be paid to the use of computers and the internet. in this survey, customers used the telephone, e-mail, and the web to customize their product selection. research and anecdotal evidence, however, both seem to suggest that small businesses are not ardent users of computer and information technology (howard 1997). numerous studies on small firms all seem to point to the same conclusion, "small firms have to keep pace with technological changes if they want to keep a competitive advantage" (bridge and peel 1999). the u.s. small business administration also estimates that 47 percent of small businesses have access to the internet, however, only 35 percent actually maintain a web site (u.s. small business administration 1999). only 16 percent of small businesses that use the internet are selling product or taking sales leads over this important medium (computer industry 1998). in addition, small businesses tend to have a low level of information technology expertise and do not take advantage of the tremendous power afforded by the internet and current technology (polland and hayne 1998). only a small number of firms surveyed used a web custom configurator (22) and 19 percent of finns were unaware that a web custom configurator was available to help electronically customize products for them. electronic presence on the internet allows small finns to compete directly with large firms and therefore 58 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of"small business strategy vol. 15, no. i spring/summer 2004 serves as a source of competitive advantage. therefore, small firms that want to be successful at customizing should seek continued improvements in information technology and use the internet to increase sales and marketplace presence. remember, finns do not need to be large to compete at customization. most of the firms surveyed had sales of less than $5 million and had one to four employees working for them. however, over 87 percent of firms felt that customization was a very important part of their business strategy. the results of this research provide valuable insights for entrepreneurs currently involved or considering customization by providing a set of practices utilized by successful firms. in particular, small firms may succeed at customizing by establishing metrics early in the process, providing multiple product offerings to customers and premium price products to achieve enhanced effectiveness, and utilizing improvements in technology whenever possible. references andel, tom (2002). from common to custom: the case for make-to-order. material handling management, 57(12), 24-31. agrawal, mani, t. v. kumaresh, and glenn a. mercer (2001). the false promise of mass customization. the mckinsey quarterly, (3 ), 62-71. bakos, j. yann is ( 1998). the emerging role of the electronic marketplaces on the internet. communication of"the acm, 41(8), 35-42. bridge, j. and peel, m.j., (1999). a study of computer usage and strategic planning in the sme sector. international small business.journal, 17(4), 82-87. brynjolfsson, e. and m. d. smith (2000). frictionaless commerce? a comparison of internet and conventional retailers. management science, 46(4), 563-585. davis, stanley (1987). future perf"ect. addison-wesley publishing, reading, ma. duray, rebecca and milligan, glenn w. (1999). improving customer satisfaction through mass customization. quality progress, 32(8), 60-66. howard, k. ( 1997 july). it means business? institute of management report, 1-4. krizner, ken (2001 ). individuality extends into manufacturing: how technology and the internet are making mass customization practical. frontline solutions, 2(3), 1-4. pine, b. j., ii (a) (may 15, 1993) .. "many and varied. c/o, 26-30. pine, b. j., ii (b) (1993). mass customization: the new frontier in business competition. boston: harvard business school press. pollard, c.e. and hayne, s.c. (1998) .. "the changing face of information system in small business firms. international small business journal, 16(3), 70-88. salvador, fabrizio, cipriano forza, and manus rungtusanatham (2002). how to mass customize: product architectures, sourcing configurations. business horizons, 45(4), 61-69. schonfeld, e., (l 998). the customized, digitized, have-it-your-way economy. fortune, 138(6), 114-124. small business: are they ready for e-commerce? ( 1998, august). computer industry report, 33(8), 1-8. spira, j. s., and b. j. pine (1993). mass customization. chie/executive, (83), 26-29. sweat, j. (1999). the integration challenge: integrated enterprise. lnf"ormation week, june 14, 18-22. tailoring products for a niche of one. ( 1993 ). nation's business, 81 (l l ), 42. toffler, alvin ( 1970). future shock. new york: bantam books. u.s. small business administration. (july 1999). retrieved from http://w.w.w.sba.gov/ advo/stats/e-comm.pdf. 59 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategv vol. i 5. no. i spring/summer 2004 u.s. small business administration. (2001 ). retrieved november 18, 2003, from http://www.census.gov/epcd/www/smallbus.html timothy w. aurand is an associate professor of marketing at northern illinois university. his current research interests include corporate branding, collegiate sports marketing and reengineering. he has published in numerous journals including the journal of product and brand management. journal of international marketing, journal of marketing themy and practice, journal of marketing for higher education. and the international journal of sport management. carol w. demoranville is associate professor in marketing at northern illinois university. her ph.d. is from virginia tech and her research interests focus on services marketing and marketing strategy. her articles have appeared in a number of journals including international journal of research in marketing. journal of services marketing, marketing health services, journal of retail banking. and journal of marketing.for higher education. elisa fredericks earned her ph.d. at the university of illinois at chicago and is currently an assistant professor of marketing at northern illinois university. her teaching and research interests are in the areas of product planning and development and business-to-business marketing. her research activity has resulted in publications in industrial marketing management. journal of nonprofit and public sector marketing. journal of qualitative market research, and the journal of product innovation management. thomas j. smith is assistant professor in the department of educational technology, research & assessment at northern illinois university. his research interests include cluster analysis, multivariate and categorical statistical methods, assessment, and research methodology. he teaches courses in educational statistics and research methods and has been published in such journals as the british journal of mathematical and statistical psychology, journal of class!fication, and the journal of counseling psychology. 60 ski'4ix'g'y small business brief strategic decision making in smai.l family firms: an empirical investigation bakr ibrahim concordia university bib ra hi niqa ale or. concordia. ca colette dumas suffolk university cdumasqaacad suffolk. edu jean mcguire concordia university t'mcg ut'rqa var 2.concordia. ca abstract ptttnily hiisi nesses play a signi jicani role in the national economy. despite their importance, liale aaention has beeii paid to strategic decision inaking in these jirms. this research examines strategic decision making in 74 small family firms. in addition to the firm's internal and external factors traditionallv acknowledged m strategy research, strategic decisions in fantil&i firins were found io be significantly injluenced by jamily considerations. this jinding unilerscores the tmittue characierisiics of family firms. based on the research findings a conceptual framework ofstrategic decision making in fanii ly firms is offered introduction family businesses are the most prevalent type of business in both canada and the usa. it is estimated that between 90-98 percent of all the businesses in these two countries are considered family firms (beckhard & dyer, 1983; stem, l986; ibrahim & ellis, 1994). despite their ubiquity in the north american economy, there is no clear consensus concerning the characteristics that distinguish the structures and processes found in family business (chua, christman, & sharma, 1999). recently, however, scholars have proposed the unique nature of decision-making in family firms as an important distinguishing characteristic (chua et al, 1999; james, 1999; litz, 1997; brockhaus, 1994). it is therefore surprising that relatively few studies have examined strategic decision making in family firms (brockhaus, 1994). several reasons for this lack of research have been suggested. lansberg, perrow & rogolsky (1988) argues that traditional management research 80 journal of small business strategy vol. /2, ivo. l spring/summer 2001 biases toward bureaucratic rationality have contributed to the lack of research on thc impact of family business issues on managerial behavior. similarly dyer and handler (1994) suggest that traditional management research has assumed that family involvement in an organization is antithetical to effective management. alternatively, habbershon and williams (1999) make use of the resource based view of the firm to argue that 'famliness'rovides unique advantages (for example more flexible human resource practices and greater organizational commitment) on which the firm can build competitive advantage. the existence of these divergent perspectives suggests that 'famliness'an represent both an advantage and a limitation for family businesses. the overlap between the family and business systems implies that both economic rationality and social/emotional factors must be considered in understanding strategy making in family firms. the objective of this research is to examine empirically the critical factors that influence the strategic decision in family firms. we examine the influence of family issues and unique characteristics on the decision making process of these firms. the present research offers a conceptual framework of the strategic decision-making process in these firms. in doing so it attempts to address an important gap in our understanding of family firms and develop a theoretical framework that recognizes the unique nature of these firms as both economic and social entities. the unique characteristics of family firms there is no generally accepted definition of a family business (lansberg, perrow, & rogalsky, 1988). the criteria that delineate a family business include ownership and active involvement in management (barnes & hershon, 1976; dyer, 1986; lansberg et. al., 1988); and anticipated transfer of ownership to next generation (churchifl & hatten, 1987; dyer, 1987). for the purpose of this research a multiple criteria will be used. family business is defined as one in which 51 percent of the business is owned by a single family, at least two family members are involved in the management of the business and transfer of leadership to next generation is anticipated (lbrahim & ellis, 1994). research on family business has long recognized the unique characteristics of these firms. litz (1997) and hollander and elman (1988) suggest that the overlap between both the family and the business systems and the simultaneous interactions between them accounts for the unique behavior of these firms. this may imply a dynamic tension that exists between both, the family and the business systems, giving family firms its distinct character. the family system ensures that the business pays attention to the family's needs and the survival of the firm at a level adequate enough to provide for the family. from this perspective the firms serves functions beyond economic return. the business system on the other hand ensures that the firm will attempt to maximize profits and growth. several studies suggest that because of the overlap between the family and the business systems, the decision making process tend to be unique serving the interest ofboth, the family and the business (taguiri & davis, 1992; habbershon & williams 1999).trostel and nichols (1982) found that family firms place more emphasis on family issues such as family involvement in the business and family unity than to the market or financial aspects of the firm. sharma, chrisman and chua (1997) and aronoit and ward (1991) suggest that family firms have a unique set of characteristics that are different from non-family firms. in essence, family firms must accommodate multiple identities in their strategic decision-making (pratt & foreman, 2000). building upon this framework, chua et al (1999) propose that a defining characteristic of family firms is family domination of strategic decision making with the implicit or explicit objective of continued family involvement in the firm. 81 journal ofsmall bnsiness srrarel0 vol. /2, no. l spiinglsumnier 200l if, indeed, family domination of decision making differentiates family firms from other firms, family concerns may represent either a potential advantage or a potential weakness. this perspective further suggests the importance of understanding and making use of any potential family advantages. to do so, however, it is necessary to more fully understand the impact of family on strategic decision making in family firms. factors shaping the strategic decision if, as proposed earlier, a unique feature of family business is the incorporation of the family system into the business or economic system, we would expect that family concerns influence strategic decision-making. studies examining factors shaping the firm's strategic decision have primarily focused on nonfamily organizations. these studies have mostly focused on the influence of the flirm's internal resources and capabilities and its external environment including social, economic, technological, as well as market and competitive forces. (miller & friesen, 1983; galbraith & schendel, 1983; prahalad & hamel, 1990). this traditional approach has emphasized the rational aspects of the strategic decision. however this approach adds very little to our understanding of how family issues and unique characteristics influence the strategic decision-making process in family firms. a second school of thought that could provide a better insight to the strategic decision-making process in family firms, focuses primarily on the influence of the entrepreneur and top management values and preferences on the firm's strategy (child, 1972; montanari, 1978). the strategic choice approach recognizes the unique characteristics that influence strategy in each organization (shrivastava & grant, 1985; barton & matthew, 1983). owner and manager values and preferences were found to have a significant impact on corporate decisions, strategic choices and management practices (covin, 1991; freeman, gilbert & hartman, 1988; guth &. taguiri, 1965; hin &. tyler, 1991). despite these arguments for the unique characteristics of family firms and the influence of family issues on the business, little empirical research has been conducted to integrate the i'emily dimension in the strategic decision making process. chen and smith (1987) attribute this to research sampling biases toward large publicly traded firm and the tendency to use dambases such as pims and compustat. only a few studies have been reported on the intluence of family issues on isolated decisions. khan and henderson (1992) looked at location preferences of 435 family firms compared to 555 non-i'amily firms in order to gain insight into the family intluence on the strategic decision making process. their premise was that site location is one of the most important strategic decisions of the firm. in thinking through such a decision, family businesses must acknowledge both the family preferences (proximity to residence) as well as the business perspective. they found that family preferences have a significant influence on the strategic decision concerning location. dumas et al.'s (1995) study found that family issues played a signiflcant role in the successor's strategic decision to take over the business. harris, martinez and ward (1994) offered anecdotal examples of how family issues influence strategy in family firms. ibrahim et al. (1999) found that firm strategic actions (specifically diversification) were influenced by succession concerns. in essence, little is known about the range of factors affecting strategic decisions in family firms. the co-existence of the economic and family systems suggests that both dimensions must be considered. however, the degree to which economic, family, or other considerations influence strategy is an unexplored issue. this research represents an important first step in understanding strategy making in family firms. 82 journal ofsmall business strategy vo/. /2, //o 1 spring/summer 200/ sample selection and demographics a questionnaire was sent to 460 ceo's and presidents of small family firms in montreal, toronto and new york metropolitan areas. the multi-industry sample was randomly selected from dun /k bradstreet, and the chambers of commerce directories. the response rate was 31 percent. of the 142 usable responses, 74 were identified as family business based on the definition criteria identified earlier. the relatively high response rate indicates a significant level of interest by family firms in the study. the average age of the respondents was 54.5. the majority of the respondents (74.3%) were original founders of the business, while 21.6 percent were second generation and only 4.0 percent were third or fourth generation. the only female respondent (representing 1.4% of the responses) was the founder of the business. the average number of family members involved in the business was 3 members and succession to the next generation was considered by all respondents through a formal or informal process. the average annual revenue was $ 12 million and the average number of employees was 16. the sample firms consisted of various business sectors including retail (11%), wholesale (12%), manufacturing (38%) and service (49%). participants were asked to respond to a randomly ordered listing of items that may influence the strategic decision in family firms. these items were selected based on items cited in the strategy and family business literature as being critical in making strategic decisions, and included modified versions of strategy and personal values instruments developed by england (1975); ibrahim, 1993; robinson and pearce (1988); miller and friesen (1983); dess and robinson (1984); khan and i-lenderson (1992). each respondent was asked to indicate the extent to which the statement influenced the strategic decision in the family business on a five-point likert scale ranging from "a very little extent" to "a very great extent". the questionnaire items were pilot tested for accuracy and relevance on a group of 7 family firms in montreal and new york. their responses were statistically analyzed and questionnaire items were finalized with an item reliability of .95 as measured by cronbach's alpha coefficient. results factor analysis was used to identify sub-sets of items indicating underlying patterns of decision-making criteria. three factors accounting for 64.3 percent of the variance were extracted using principal component factor analysis with orthogonal rotation. rotated factor loadings, communality (actual variance explained by each variable) and content of the factors are shown in table i along with eigenvalues and variance explained. following the criterion suggested by kim and mueller (1978), only variables that exhibited factor loading greater than 0.50 were included in the interpretation of the factors. factor i included seven items related to the internal capabilities of the small family firm, with item loadings ranging from .51 to .82. these items included management skills and competencies; product/service quality and innovation; financial and human resources; market positioning; and product and service cost. factor 2 identified items related to family issues and considerations with factor loading ranging from .62 to .84. items included, family values and preferences, accommodation of oitspring skills and competencies, family members involvement in the business, succession and the desire to establish zones of comfort for family members. factor 3 identified items related to the external/competitive environment of the family firm, with factor loadings ranging from .84 to .58. these items included customer needs and wants, market and economic conditions, and competition. 83 journal nf sniall business strategy vo/. /2, ato. / spring/summer 200/ the first factor taps many of the capabilities and resources commonly identified in the strategic management literature as influencing the firm's strategy. these results suggest that a 'resource based'iew is particularly relevant to understanding the strategy decisions of family firms (e.g. barney 1991, 1997). in view of the sometimes limited resources (e.g. personnel, managerial expertise, facilities, etc) available to small family firms, it is perhaps not surprising that resources and capabilities are a major influence on strategic decisions. family concerns were the next significant factor found in the questionnaire responses. these results confirm the qualitative studies cited earlier (e.g., ibrahim, mcguire &t dumas, 1999; dumas, dupuis, richer &. st.-cyr, 1995; kahn 3k henderson, 1992) that family considerations are critical to understanding family business. 'i'he external/competitive environment was the third factor identified. it is striking that these factors, traditionally considered to be among the most critical in understanding firm strategy from the 'industrial economics'odel (barney, 1997) were less significant than resources and family concerns in the factor analysis results. one possible explanation for this may be that the strategic environment of small family firms is perceived as being more constrained by family concerns and firm resources than may be the case for other types of firms. reliance on the skills and expertise of family members may place resources and resource constraints as a primary consideration in the firm's decision-making. table i rotated orthogonal factor analysis factor / foetor 2 factor 3 resources exrernav ltetns & family competitive capabili ries considerations environment management skills and competencies .82 i'roduct/scrvicc quality .80 i'induct/service innovation .77 i'inancial resources .77 market positioning .76 l lumen kcsourccs skills .56 i'redact/service cost .51 family values and pret'crcnccs .84 accommodating ihc off-spring skills & competencies .80 family minnhcrs'nvolvement in the business .76 succession .71 thc desire io establish zones of cont'orm for family mcmhcrs .62 customer needs and wants market condition .84 competition .72 ilconomic situation .69 .58 iiigcnvaluc 3.88 2.25 1.45 variance explained 38 4% 15.8% 10 1% 84 journal of small business sirmeg) fol 12, //o. 1 spring/summer 2001 discussion results suggest that strategic decisions in family firms are significantly influenced by three critical factors. these include the flrm's resources and capabilities, its external-competitive environment and family values and considerations. earlier research in strategy found that the internal and external capabilities of non-family firms significantly influence the strategic decision in these firms (miller & friesen, 1983; astley & van de van, 1983; galbraith & schendel, 1983; prahalad &. hamel, 1990). however unlike non-family business, the present study suggests that strategic decision in family firms is significantly influenced by critical family issues including family values and preference, getting family members involved in the business, developing the business around the immediate family members'xpertise, structuring the firm in such a way as to provide boundaries or zones of comfort to family members in order to avoid potential conflict, and succession from generation to generation. these research results underscore the unique characteristics of family firms and the influence of these characteristics on the strategic decisions of these firms. the unique characteristics of family firms have been recognized in family business research (litz, 1997; ibrahim &. fllis, 1994; hollander &. ellman, 1988). our flndings are congruent with chua et al (1999), who argue that family control of decision-making represents an important distinguishing characteristic of family firms. the interaction between both the family and the business systems were found to account for the unique behavior of these firms (tagiuri & davis, 1992; trostel & nichols, 1982). evidence on the influence of family considerations on a single strategic decision was reported by a number of studies. khan and henderson (1992) found that family preferences influenced the location decision of family firms. brockhaus (1994) and dumas et al, 1995), suggest that succession is central to family firm's strategy. further brockhaus (1994) suggests that differences in family members personality characteristics may influence the decision making process in family firms. this literature, however, has been limited and has provided no systematic framework for incorporating these influences into the decision making process. family considerations, however, are only one influence on decision making in family firms. these results suggest the need to consider family concerns as an important influence on decision-making processes in family firms. building upon the strategic choice approach to strategy formulation (child, 1972; montanari, 1978) family considerations may have a significant influence on the way in which family firms balance internal and external influences on firm strategy. this approach recognizes that social and behavioral factors affect strategic choices regarding performance objectives, selection of environmental niches, and the means used to achieve selected goals (shrivastava & grant, 1985; barton & matthews, 1983). further this finding suggests that the strategic decision making process in family firms is different from non-family firms as a result of the alignment of both ownership and management. this conclusion is congruent with research on corporate governance that suggests that entrepreneurs and owners influence the firm's strategic direction through their power of ownership (miller & friesen, 1983). it is also congruent with habbershon and william's argument for 'famliness's a source of competitive advantage. the difference in the strategic decision-making process in family firms may be beneficial to the business. a major premise of agency theory is that alignment of owner/manager interests results in more 'economically rational'ecisions which contribute to shareholder wealth. although it might seem that inclusion of such 'non rational'riteria as family considerations may be detrimental to the firm, james (1999) proposes that family considerations are advantageous helping overcome potential agency problems. specifically, concern for 85 journal of small dusiiiess siralcgli vol. 12, no. i spring/summer 2001 continued family involvement in the firm provides an incentive for long-term decision horizons unavailable to non-family firms. congruent with this argument daily and dollinger (1992) found that family firms pursued better strategic directions than professionally managed firms. specifically, family firms pursued more active, growth-oriented strategies. theoretically, pratt and foreman (2000) suggest that accommodation of multiple identities may benefit the lirm by highlighting relationships among various identities (in this case family and business), and encouraging the firm to set priorities. further, this perspective suggests that interaction of both the firm and the family systems may also encourage strategic flexibility (pratt g: foreman, 2000). to reconcile the impact of family and economic factors on the firm's strategic decisionmaking the present research suggests that the business internal and external factors are assessed in light of the family values, preferences and considerations. in fact, this perspective is congruent with porter (1991), who notes that managers have a significant inliuence on corporate strategy and exercise considerable judgment in relation to the firm's internal and external factors. it is also congruent with research indicating that owner and management values and preferences ivere found to have enormous influence on the firm's strategic choice and action (covin, 1991; freeman et al, 1988; goth & taguiri, 1965). a conceptual framework our results suggest that the family dimension plays a crucial role in the strategic decision making process ol'amily firms. although family business research has begun to recognize the importance of family concerns in strategic decision-making (chua et al, 1999; james, 1999), it has yct, to develop a conceptual framework that integrates family concerns with the external and internal factors traditionally seen as influencing firm strategy. clearly, family consideraiions do not mitigate the need to weigh both internal and external conditions in strategic decision-making. to incorporate the reality that strategic decision making in family firms is both similar to, and distinct from decision making in non-family firms we propose that the firm's internal and external factors, the basic ingredients in the strategic decision making process, are filtered by family issues, considerations and values. this model is shown in figure i. the filter is the result of the alignment of both ownership and management, and the unique strategic concerns of family business. this model integrates the family dimension in the strategy dimension while maintaining the traditional balance of external and internal factors customarily seen as elements of strategic decision making. figure i: a conceptual framework of strategic decision making in family firms input power filter output thr i'ainilv linn's (ownership 8: management) internal capabilities family values, preferences k. the 0 strategic decision thr i'amity tirm's external competitive elivlfolllileni 86 journal of small business strategy vol. /2, no. l spring/summer 2007 ln proposing the 'family filter'n strategic decision-making, the model avoids the assumption of conflict between family considerations and economic rationality. the family system provides the filter by which strategic objectives are prioritized and the need for (or value of) resources is assessed. rather than emphasizing the 'conflicts'etween the family and economic systems, this perspective highlights the role of family considerations in the strategic decision making process as a means of balancing and weighing strategic alternatives. congruent with habbershon and williams (1999) the ability to balance the firm's dual identity as a family and economic systems may represent an important source of strategic advantage to family firms. in essence, it provides a link between the family characteristics identified by habbershon and williams (1999) as potential sources of competitive advantage, and the development of unique family-based competitive advantage. for example, james (1999) notes that family interests may promote a longer-term decision framework than might be the case for non-family businesses. not only may it provide an important means of differentiating the firm from its competitors, but also it may allow the firm to exploit resources and opportunities in unique ways to create competitive advantage (pratt and foreman, 2000). specifically, the unique human capital provided by family ties may allow the firm a source of competitive advantage unavailable to non-family businesses (ibrahim et al, 1999). research impi.ications and future directions the present research offers researchers and family business practitioners a realistic explanation of strategic decision making in family firms. the results and proposed conceptual framework integrates the family dimension in the strategy dimension and thus accounts for the discrepancy between the traditional normative approach in strategic decision-making and family business practices. indeed litz (1997) citing campbell and stanley (1963) advise concerning generalization, caution against applying research finding of non-family firms to strategy research in family firms. he suggests developing an appropriate research methodology that integrates the family dimension in the strategy dimension. several authors have called for the need for a new epistemological approach in family business research (litz, 1997; victor k. cullen, 1988; meek et al, 1988). understanding the factors contributing to strategic decisions in 1'amily firms and in particular the family dimension can help enhance the quality of these decisions and thus improve the low survival rate of these firms. indeed the average life span of family firms is twenty-four years and only 30 percent survive into the second generation (see for example, ibrahim 8; ellis, 1994). on the theoretical and methodological level it is hoped that this exploratory research in a largely unexplored area will provide some insight toward further research in strategic decision making in family firms. however, several limitations of the present study must be noted. first, in light of the small size of the sample, and the focus on small family firms, care must be exercised in the interpretation of the findings discussed above especially as one attempts to generalize these to broader populations. second, the study did not distinguish between family firms'tage of development (founder, first generation and second generation). future research should account for the family firm's size and stage of development and test for their impact on strategic decisions. finally a refinement of the conceptual model will be needed to move it from a purely descriptive model to be a more prescriptive one. for example, the concept of family considerations as a 'filter'mplicitly acknowledges the importance of family considerations in decision-making. although habbershon and williams (1999) emphasize that 'filminess'an represent a unique source of competitive advantage for family firms, it is important to realize that the 'family filter'an also serve as a constraint. for example, the unity of command cited by habbershon and williams as a source of competitive advantage may also make it possible 87 journal ofsmall busiiiess strategy vvl. /2, na. i springlsumnier 200l that family considerations may override other considerations. a comparison can be drawn from corporate governance theory that acknowledges the existence of various checks and balances on the discretion of major owners such as competing ownership blocks, proxy contests, and the market for corporate control. the extent to which family considerations play such a balancing role is an important question. although the 'family filter'ight provide a source of unique competitive advantage, it may allow dominant family members to direct the firm toward individualistic ends. understanding of the mechanisms by which family considerations influence decision making may provide insight into how family firms can benefit from the advantages of their family identity while avoiding certain of its drawbacks. to do so, one must first identify the nature of'he 'family filter'perating in a given context and iis sources. congruent with the procedure suggested by habbershon and williams (1999) this understanding would provide the basis for identifying aspects of the family filter that can serve as potential sources of competitive advantage, and those that may represent sources of strategic disadvantage. this knowledge will provide a means by which the potential advantages and benefits of the family filter can be assessed. further by bringing the various dimensions of the family filter (for example, the desire to maintain family control, the need for family unity, etc.) 'into the open'heir relevance to strategic decision making can be more explicitly acknowledged and asscssetl. references aronoff, c., & ward, j. 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(2000). classifying managerial responses to multiple organizational identities. academ of mana ~ement review 25 (1) 18-42. robinson, r.b., e; pearce, j.a. (1988). planned patterns of strategic behavior and their relationship to business unit performance. strate ic mana ement journal 19, 43-60. sharma, p., chrisman, j., &: chua, j. (1997). strategic management of the family business: past research and future challenges. famil business review 11, 1-36. shrivastava, p., &: grant, j.h. (1985). empirically derived models of strategic decisionmaking processes, strate ic mana ement journal 6, 97-113. tagiuri, r., ik davis, j.a. (1992). on the goals of successful family companies. ~famil business review 5(l), 43-62. trostel, a.o., &; nichols, m.l. (1982). privately held and publicly held companies: a comparison of strategic choices and management processes. academ of mana ement journal, 25( i), 47-62. victor, b., &: cullen, j.b. (1988). the organizational bases of ethical work climates. administrative science uarterlv 33, 101-125. rt. bukr ibrahitn ir disting»ished professor of family business, and director, centre for sniall business aiid entrepreneurial siudies, and associate dean ai concordia university, it tt»i/real. he is the aiithor of entrepreneurship and sniall business management, published bt kendallllhmt, 4" editiiin 2000, faini ly business, concepts and practice, kenda///hunt, 2'dition2(/00, ant/strategic manager»ant published by mcgraw-hill, /992. he has published nuinervus research papers in the field. dr. ibrahim is a member vf the editorial board of the canadiini.lvurnal vf ildi»iiiisirati ve science. co/etre dunias is ilssvciute professor at the business school of suffolk university. dr. di»nas spccialisur in teaching, conducting research, and consulting in the areas of family biisiiiess manager»en/, organisutivn development and organi ational communication. she hier pub/is/ted n»inei»nis research papers in thc area offamily business. she is the author of counseling the entrepreneur, published by the institute of canadian bankers, i996. jeun mcguire it rlssociate professor at concordia university, mvntreal, canada. she has published extensii ely iii the arevs of sirategic management and corporate govemiance. 90 strategy transforming consultants'ecommendations into business improvement: a model and action agenda michael d. ames california state university, fullerton abstract as the company grows, successful small business owners often find their management lacks sufficient sophistication. they are good at what they do, but a small staff cannot be knowledgeable in all areas ofbusiness. seeking solutions to major growing pains, many owners engage consultants. the aim is improving the dynamics ofrunning the company. the use of consultants is a way for small businesses to gain quick, access to management expertise. unfortunately, too often, both the owner and the consultant feelpusiration at the conclusion of the consuliing engagement. the owner feels the consultant y recommendations are too general. the consultant is disappointed with the owner y follow-up on key recommendations. no oneis willing to take responsibility for implementati on. this article explores how to deal with the follow-up challenge. it covers four main topics: why business owners do not follow-up; why consultants do not follow-up; an eight-part model for organized improvement; and an action agenda for improved follow-up. both owners and consultants can use the action agenda to help turn consultant y recommendations into business improvement. an appendix offers advice to small business institute directors and advisors guiding student consultants. introduction how oren have you been disappointed with the results from a consulting engagement? too often both the owner and the consultant feel short changed. the consultant feels he or she has done a good diagnosis and made sound recommendations. the owner acknowledges the value of the proposed improvements. everyone should be happy. however, six months later the business has made little progress. in retrospect, the owner feels the consultant's recommendations are too general. more information about the problem and a generic list of "you-should-dos" is not enough. why didn't the consultant follow-up and solve the problem? moreover, the consultant is disappointed with the owner's follow-up on key recommendations. the game plan is clear in the final report. why didn't the owner follow-up and solve the problem? everyone is disappointed. i journal ofsmall business strategy volume 9, no. / spring /998 lack of follow-up is a common challenge. too many consulting engagements end with the owner and the consultant trying to fix the blame rather than trying to fix the problem. no one is willing to take responsibility for implementation. this paper explores how to deal with the follow-up challenge. it first summarizes reasons why clients and consultants do not follow up. next, it proposes an eight-part model to help consultants and owners transform consulting recommendations into business improvement in an organized way. finally, the paper incorporates the model into a consultant's action agenda. both small business owners and consultants can use this agenda to turn recommendations into client improvements. owners and consultants alike will benefit from learning how to approach business improvement in an organized way. why business owners do not follow-up we propose that learning is a decision. in our view, a "general rule of learning" applies to client follow-up on a consultant's recommendations. we synthesize this rule from personal experience with hundreds of consulting projects. also, we draw upon the observations of other consultants ("a small company," 1980; bruckman & iman, 1980; fournies, 1987; maurer, 1996; van voorhis, 1980). the general rule of learning is that learning is a value-added calculation. the learner's justification for the effort and risk of learning something new lies in anticipated satisfaction. the learner will learn new ways if the learner perceives the new ways as "improvement," i.e., (i) the learning adds value vis-a-vis the learner's needs. it adds more value than the learner could add on his/her own by following present leaniing, or by adopting other competitive new learning. (2) the learning costs the learner the minimum stake. it costs less than required by present or competitive learning. it minimizes all costs that do not contribute directly to added value. when faced with lack of follow-up, the consultant might argue that the business owner is ignorant, unorganized, lacking in courage, or otherwise deficient. however, in our experience, one thing is probably true. the owner has followed the general rule of learning and perceives the follow-up is not worth it. the general rule will not change. the only way to get a dilferent result is to get the owner to change his/her perception of value-addeddata and formulae. when the consultant "hits the wall," he or she must back track and rethink how to demonstrate value. further, we think the consultant must make a convincing demonstrai ion (barry, 1991;fournies, 1987; maurer, 1996; pierce, 1991). right or wrong, it appears to us that value added calculations are stable. you can anticipate that the owner will not normally stop doing "what works" to experiment with what might work. in the rush of daily deadlines, the business owner naturally avoids committing to anything else but doing the day's work. he or she infrequently pauses to observe the performance of the business and ponder how to improve it. in other words, without evidence of need or opportunity, the owner will not reorganize his/her workday to give improvement a high priority. without the owner's commitment, the job of improvement will not be done. 2 journal ofsmall business strategy volume 9, no. l spring /998 as we see it, the consultant's job is to build the case for needed improvements. this requires planning and hands-on effort throughout the consulting engagement. we agree with bruckman and iman who point out that: "the consulting project normally entails the consultants submitting data previously unknown to the client for his or her inspection. key members of the client's system are oren too ego-involved in the activities of the business to analyze organization problems objectively. the consultants can rarely expect instant acceptance of their ideas, so they must develop strategies for fair assessment of their proposals, as reasonable and workable plans. in part, resolving this problem involves laying the ground work for commitment, understanding and support early in the project.... consultants must also develop plans for presenting and marketing their proposals.... the energy generated by effective consulting oren vaporizes in the absence of follow-up plans or when implementation of solutions begin to threaten the client. in planning consulting projects, time should be budgeted for follow-up procedures. the consulting team should also support the client during the initial stages of implementation." (bruckman lk iman, 1980, p. 45-46). to sum up, we think business owners do not follow up on consultant's recommendations because they choose not to. they do not perceive the follow-up is worth it. improvements do not automatically follow when consultants determine recommendations are significant. the owner must determine significance and commit to improvement. without follow-up by the consultant to show value and encourage action, the owner will not follow up. the owner will put off indefinitely the additional responsibilities of implementation. an important part of a successful consulting process is hands-on teaching by the consultant that includes coaching during the initial stages of implementation. why consultants do not follow-up howard shenson, a successful consultant and small business owner, describes what a client wants when he hires a consultant, in the simplest of terms, clients usually seek out a consultant who can solve a problem, prevent a problem, or help anain some gain they don't believe they can achieve without outside help. in short, clients seek results. they may have only a general sense of what a desired result should look like when they first retain you. part of your job then is to help describe more specifically an acceptable result. nevertheless, what the client is paying for is results... a practical result, not an academically perfect or theoretically correct solution to a problem, is what you must be concerned about. the optimal solution may exist, but it almost always costs too much in terms of money or time to be practical. a business can go bankrupt trying to be perfect. consultants work in the real world, which involves looking for the best solution that can be produced within the budgeted time and money. that solution is usually suboptimal and yet satisfactory. (shenson and nichols, 1997, p. 86-87) many consultants, particularly those trained by major firms, do not see things quite this way. they do see themselves as problem solvers. however, they don't see themselves as coaches or 3 journal ofsmall business srrategjt volume 9, tvo. l spring l998 teachers who role up their sleeves and work things out with the client. according to john quay, who trains consultants for such firms as coopers and lybrand and emst and young, they see themselves as "business diagnosticians —problem solvers from outside the company... who, in a limited time frame, must gather sufficient data, analyze them, and come up with solutions or conclusions." (quay, 1994, p. xiii) quay points out, that in his experience while consultants and auditors suffer from the usual array of blind spots and prejudices, they are particularly susceptible to intellectual conceit. they tend to agree with puck's sentiments in a midsummer ni ht's dream, what fools these mortals be! this viewpoint stems primarily from repeated exposure to client problems, some of which must seem to outsiders to be self-induced and indeed foolish. this supercilious attitude will show through if not controlled or dispelled. (quay, 1994, p. 61) such consultants may hide their disdain from the business owner, but they let it color their approach to the engagement. they take an "integrative, top management perspective," thinking they possess all the expertise and wisdom (merwin, 1987). self confident (and arrogant?) they feel they can learn nothing from the owner beyond data on the current situation. further, they underestimate the owner's ability to learn. oren such consultants'inal recommendations confront the client —challenging the client's methods rather than encouraging improvement. arer they present their findings they are ready to move on with great self-confidence to "save" the next company. they give little thought to nurturing a long-term, ongoing involvement with the owner. as they interpret the general rule of learning, follow up is not worth the effort. they do not accept responsibility for implementation. to sum up, we think many consultants do not follow up on their recommendations because they choose not to. they do not perceive the follow-up is worth it. they structure their engagements so they receive final payment and can move on when they hand the final report to the owner. improvements do not automatically follow when consultants determine recommendations are significant. however, the consultant doesn't see this as his or her problem. it is the owner's problem. if the owner is unwilling to commit to improvement, so be it. based on the consultant's general opinion of the owner, the consultant accepts no responsibility for implementation. many consultants simply do not see that hands-on teaching is an important part of the consulting process. they do not include modeling and coaching in their game plan. organized improvement: an eight-part model what does it take for a consulting process to improve a small business in an organized way (ames, 1994; barry, 1991; pierce, 1991; wesner, 1995)? we suggest owners and consultants employ a balanced, eight-part model. the parts required are diagnosis, preparation, presentation, modeling, coaching, installation, and evaluation. an eighth part, data management, supports the others. appropriate tracking and reporting of data allow improvement initiatives to be based on facts rather than on intuition. figure i presents our model as an iterative process flow or work cycle. 4 journal ofsmall business strategy vo/ume 9, no. l spring l998 figure i ei ht part model as an iterative process flow diagnosis data management preparation presentation modeling coaching evaluation figure 2 illustrates the impact of the balanced use of the eight-part model. in our view, too many consultants focus on diagnosis and presentation, assuming it is the owner's responsibility to implement. too many owners expect consultants to hand them a "cook book" or "turn key" installation along with the final consulting report. they are disappointed when the consultant asks them to assume responsibility for implementation. we believe this mutual avoidance of responsibility typically leads to inettective follow-up. we depict the disappointing results with the pie chart shown nearer the origin in figure 2. results, as measured on the two axis, are relatively small. 5 journal ofsmall business strategy volume 9, no. i spring i998 figure 2 im act of balanced use of ei ht-part model for transformation learning and improvement dtag~nosis data management preparation, evaluation installation, presentation modeling t ~c~mrng preparauont presentation ~og~ increase ~ client commitment the owner hires the consultant to structure a consulting process that will lead to improvement. to induce improvements, the consultant must lead the engagement, collaborating with the owner, making balanced use of all eight parts of the model. ideally, the consultant's example will achieve two objectives: (i) convince the business owner that improvements are necessary, and (2) help the business owner learn how to apply the eight-part model to his or her own staff. we depict the improved results with the pie chart shown further from the origin in figure 2. results, as measured on the two axis, are relatively large. note that the two pie charts in figure 2 are similar in size. we think that the consultant's time budget does not necessarily have to increase to achieve improved results. however, the consultant must definitely reallocate his/her time. the first part of the model is diagnosis. authors have written much on this topic. (for example, ames, 1990, 1994; blake gt mouton, 1983; bruckman 8: iman, 1980; fuchs, 1975; holtz, 1986; 6 jaurnai af small business strategy volume 9, bio. i spring 1998 quay, 1994; stryker, 1982) the consultant needs to understand what the business is supposed to do, and how it is supposed to work. what is a quality output for this business? how can one define a quality output? who decides? next, the consultant needs to collect data on the way the business is working. what goes wrong and how do people cope? do employees know how to tell if quality is down? what can they do about it? do their orders permit them to take corrective action? next, given the owner's limited time and other resources, the consultant must prioritize improvement recommendations. which options have the greatest potential to improve the business? once recommendations are clear, the consultant must get the owner to commit resources. a prerequisite for owner commitment is preparation. the consultant must prepare for successful installation of key recommendations. the consultant must prepare an action agenda covering the remaining elements of the eight-part model. owner commitment begins with awareness. once the action agenda is ready, the consultant presents the owner with borh the recommendationsand the action agenda. commitment comes into focus with training. afler preparing the owner, the consultant must model the improvements. modeling in a training context means showing the trainee how to do the job. sometimes, the consultantcan model improvementsby doing the task a few times while the owner watches. on a larger scale, the consultant can walk the owner through the steps of a successful pilot study. or, the consultant can show steps competitors or other "benchmark" companies use to succeed. commitment builds with practice. for best results, the consultant must coach the owner as the owner practices the improved techniques. this means being there to observe performance, correct mistakes, and praise improvement. few coaches would set a game plan and then leave the team to practice and play the big game on its own. too many consultants do. commitment pays off with installation. installation makes the new method a seamless part of the whole. for example, the company must choreograph improvement with existing methods and work flow to achieve best results. management must realign authority and accountability to assure smooth coordination. channels of communication and data flow must change to reflect new realities. even if not actively involved, consultants can contribute to installation and should monitor progress. during installation, the consultant's role is more than coaching one team. it is more analogous to helping managers improve the team's entire league. consultants can help the participants keep the big picture in mind. awareness of installation challenges and successes makes the consultant more valuable to the company. the benefits of commitment culminate with evaluation. every installation provides the opportunity to leam how to further improve targeted operations and the improvement process itself. success or failure, the consultant and the participants can assess progress and pinpoint areas for advancement. they can take action to begin more cycles of organized improvement. in figure i, we show data management as a separate task. it involves seningup a tracking and reporting subsystem. the subsystem draws information from the rest of the process. it contributes information useful to other transformation tasks. effective data management helps both the consultant and the owner to keep all tasks on target and capture ideas for additional improvements. 7 journal afsmall business strategy valume 9, na. i spring /998 we suggest consultants and owners, as change agents, use our eight-part improvement model iteratively. they should not view the parts as major phases of a long term project. our experience with hundreds of consulting projects is that many small iterations or overlapping "work cycles" are necessary to accomplish big changes. other successful consultants support this conclusion(bruckman ik iman, 1980; pierce, 1991;van voorhis, 1980, wesner, 1995). we see three reasons for this. first, the person you are trying to change needs time to absorb and accept new data contrary to accepted practices. this person, who we will call the "associate," may be may be the owner, the owner's parmers, a family members, or an employee. involving the associate in early decisions, and regular feedback activities, avoids overwhelming him or her with threatening data, all at once, in your final presentation. flexibility is a second reason for preferring many small, overlapping work cycles. the consultant or owner can adjust the action agenda to fit the associate's reactions to early work. empathy and adaptability by the consultant or owner help turn associate resistance into commitment. finally, a third reason many small iterations are necessary to accomplish big changes is that the associate will need practice. the associate must become skilled enough with new approaches to feel comfortable with his or her probability of success. otherwise, the associate will revert to the "tried and true" at the first crisis. to summarize this section, the owner's follow-up on consultants'ecommendations relates directly to how good both the consultant and the owner are at organized improvement. specifically, the likelihood of successful implementation increases with two factors: (i) the degree to which the consultant and the owner understand the eight-part improvement model, and (2) how practiced they are at its use. in this regard, we recommend the consultant walk the owner through several small improvement work cycles during the term of the engagement. also, the consultant should help the owner walk his or her associates through improvement cycles. this will help assure that the owner will have the skills to follow-up on recommendations that take longer to install. diagnosis without "treatment" is probably useless unfortunately, many small business owners are not very good at organized improvement. not realizing this fact, too many consultants spend most of their time diagnosing client "ills." they spend the rest of the time writing their final report and preparing microsoft powerpoint slides for the exit-interview presentation. the client is ie(i to "treat" itself. in other words, most consultants do an acceptable job at diagnosis and report presentation. however, they assume too much, or too little, about the owner's desire and ability to follow up. for whatever reason, many consultants are not very good at organized improvement either. they need to spend more time on modeling, coaching, installation, evaluation and data management. they need to revise the time cycle of the engagement to balance diagnosis with treatment. thomas faulhaber, an experienced consultant, points out that, the consultant's job is not so much to solve the problems as to teach people in the organization to do what is necessary. the consultant is a teacher, almost a father figure. g journal ofsmall business ssrasegy volume 9, ivo l spring l998 he has to establish camaraderie with employees, but there also has to be a little fear. employees have to sense that this guy knows good from bad, that "maybe i can fool the boss, but..." [coach]...may even be a better word [than teacher]. it's like the pittsburgh steelers —the strongest guy on the team is the coach. there are some pretty big guys around, but even the superstars don't go anywhere without a good coach." ("a small company," 1980, p. 84). beyond diagnosis to treatment c an action agenda how does one move beyond diagnosis to treatment? this section offers a practical example. an air-conditioning contractor was having problems with logistics. final job costs always seemed to exceed initial estimates. for one-day jobs, costs soared when the right people and parts did not get to the right job site at the right time. for multi-day jobs, keeping costs down was still hard. the owner could not calculate if the job was within budget until long arer the job was complete. the owner called in a consulting team. the consulting team interviewed several successful contractors, researched accounting sorware, and recommended a popular package that includes job costing and inventory modules. the accounting package also includes an easy-to-use, customizable report feature. the owner purchased the package and the consultants set up the owner's business on the computer. the consultants then asked the owner to read the manual and make his staff use the sofhvare. the owner balked, claiming he and his people did not have enough time to convert from a manual system that "works pretty well." when the consulting team "hit the wall" of owner resistance, they had to step back and develop an installation plan. they approached their supervisor for help. their supervisor introduced them to the eight-part improvement model. he also gave them a generic consultant's action agenda, covering necessary steps affer diagnosis (table i). using the consultant's action agenda as a model, the consulting team quickly devised their own action agenda for the owner and key employees. they went back to the owner offering hands-on training. the owner accepted. within four weeks, the new accounting system was in daily use. table 1 consultant's action agenda consultant's action agenda how to prepare i. review your findings —go over each recommendation for improvement and prepare written activity assignments. ask yourself, what does the recommendation involve? what activities need doing to complete the recommendation successfully? why is this recommendation important to the enterprise? how will the enterprise win? (be prepared to explain your answers to the owner) what is in this for those who must install the recommendation? (the owner, the owner's partners, family members, or employees, collectively called "associates") how will each associate win? (be prepared to point out these benefits) 9 journal ofsmall business ssrasegy volume 9, //o. i spring /998 how does the new activity fit in with present activities assigned to each associate? what are the priorities for completion? for each associate, what is a quality result? how will we measure quality? how will data be collected? what rewards will the owner give if associates successfully install the recommendation? what corrective action should the owner take if installation problems occur? ii. consider the person. for each associate, ask yourself, what are his/her goals and needs? how can you best communicate with this person? what training does this person need to do the new activity right? iii. develop a training plan. fit the person into your timetable. ask yourself, who needs training? when will the training be done? (set a schedule) iv. prepare a training breakdown. list important steps and key points you want to cover. v. have everything ready. line up the equipment, tools and material you will need. will the person be writing a report? obtain examples of previous reports. does the person need to know how to use a software program? arrange to have a computer handy which is properly set up for the task. will the person be doing something without precedent? have the schedule for progress reporting and final results with you. vl. select the location to make the assignment. minimize distractions and maximize job relevance. is the new activity physical? then meet at the workplace. is the new activity a conceptual or creative task? then meet in an area where the client displays past successes and/or awards won by others. vll. select the time to make the assignment. minimize distractions and avoid busy periods. viii. pull together the information that you will need. what information do you have that the associate should have to do the job right? information includes tips on how to get up to date data and names of people the associate should collaborate with. how to train i. prepare the associate. put him/her at ease. overview what is involved in the new activity. find out what he or she already knows about it. stimulate his/her interest in the new activity. explain why the new activity is important. how will the enterprise win? how will the associate win personally? let your confidence and determination show. make sure the associate understands that you really believe that he or she can do the new activity. make sure you have the associate's full attention. ii. present the activity. give the associate a copy of the written job assignment. 10 journal ofsmall business strategy volume 9, no. l spring l998 go over the new activity; what needs to be done, the priorities, how the new activity fits in with existing tasks in the liow, who the associate should collaborate with, the tools to use, information available, success criterion, and report back requirements. tell, show, and illustrate the activity sequence —no more than the associate can master in any one session. stress key points. be clear, thorough and patient. listen to the associate's comments and make changes on the written job assignment as necessary. seek consensus. continue until you both agree it is a good assignment. iii. model the activity. when possible show the associate how to successfully complete a job assignment. walk them through it. iv. coach. have the associate tell you about the job assignment and show you how they will do it. have the associate explain key points. if possible, test working knowledge by having the associate do the activity. correct errors. repeat steps i through iii as necessary. it may take several times. praise improvement. continue until you know he or she understands. v. install. review progress with the owner. ask the owner to: i. transfer authority give the associate the necessary authority to do the new activity. give the associate appropriate latitude concerning how to reach success criterion. empower the associate to suggest improvements for the step. 2. transfer accountability. put the associate on his/her own. for activities within his or her control, let the associate know that he or she will be accountable for both the quality of results and quality of execution. stress that quality is top priority. also, make the associate accountable for assessing the overall quality of results and quality of execution. make it clear the associate's job, besides the activity itself, is to help the owner help him/her do his/her best. the owner expects him/her to exhibit self-initiation in evaluation of progress and to suggest ways to continuously improve the activity being worked on. 3. arrange for training. if the associate needs further training, agree with the owner on what the training will be and when it will take place. the employee does not really have authority and accountability until fully trained. even if the associate does not appear to need training, always have the owner designate to whom the associate should go for needed help. 4. announce the assignment. once training is complete, have the owner let everyone know that the associate has both full authority, and the owner's full support, to do the new activity on their own. introduce the people involved to each other. make sure everyone understands that the associate is the one to deal with concerning this new activity assignment, not yoii. 5. put it on record. the written job assignment is the permanent record of the new activity assignment. go over the written assignment with the associate to recap the assignment and insure agreement. ll journal ofsmall business strategy volume 9, no. i spring l998 make sure to include a list of who should receive progress reports and the dates recipients will need progress reports. verify this list with the associate. if you assign one person multiple tasks with the same due date, specify the order of priority and note this on the written assignment. make sure both the owner and the associate have legible copies of the written assignment. vl. evaluation 1. review follow-up on schedule. have the owner collect progress reports and/or visit the work site to see progress. make sure someone follows up and collects late progress reports. read progress reports immediately. have the owner set aside time to read reports upon receipt. 2. command action. this step involves giving feedback to the associate. praise improvement and correct errors. reteach if necessary. give praise. reward good performance. do not assume unsatisfactory performance is the associate's fault. does the person know performance is unsatisfactory? does the person know what is supposed to be done and when? are there obstacles beyond the person's control? does the person know how to do the activity? does the person receive negative consequence: when they do the activity right? does the person receive positive consequences for nonperformance? could the person do the job if he or she wanted to? the owner's answers to these questions will determine whether the owner must fix the "system," retrain the associate, or get someone else to do the new activity. conclusion lack of follow-up to consultant's recommendations is a common challenge. analyzing why, we see that follow-up is a hands-on improvement process. many small business owners are not very good at organized improvement. one implication for consultants is that a poorly prepared owner will gain little value from competent diagnosis alone. another is that a professional exitinterview presentation will be insufficient to assure that an owner, inexperienced at organized improvement, will follow up on sound recommendations. we conclude that, to turn consultant's recommendations into business improvement, consultants must take responsibility for following up. consultants must develop an action agenda. they must guide the owner and the owner's associates through initial iterations of the business improvement process. doing this will help the owner develop the commitment and skills necessary to tackle follow-up issues. it will increase the probability that the owner will take responsibility to follow up on the consultant's major recommendations. also, if the client's associates leam how to improve the business in an organized way, they can help. the owner will 12 journal ofsmall business s(raregy volume 9, iyo. l spring /998 not have to do it alone, and will be more likely to follow up on sound recommendations. the company will be ready for future challenges. this paper gives consultants and owners an eight-part model to help transform consultant's recommendations into business improvement. it incorporates the model into a consultant's action agenda. both owners and consultants can use this agenda to help turn recommendations into improvement. consultants and owners alike will benefit from learning how to approach business improvement in an organized way. references a small company president talks back to consultants (1980, may). inc. 82-90. ames, m. d. (1990). reflections on our art: the true objectives of the counseling process. proceedin s of the 1990 small business institute directors'ssociation national c i 117-117. a , m. d.(1994). r hh rh g h b i pi p chg : b hdgh g h g 9 b pl and plan execution. journal of small business strate 5, 69-76 barry, t. h. (1991).mana in the total uali transformation. new york, ny: mcgraw hill book company. blake, r. r. & mouton, j.s.(1983).consultation a handbook for individual and or anizational ~di .(g dedhh ).r ch gma:addi -w i yp hhhi gc . bruckman, j. c. & iman, s. (1980). consulting with small business a process model. journal of small business mana ement, 18, 41-46 foumies, f. f. (1987). coachin for im roved work performance. blue ridge summit, pa: liberty house. fuchs, j. h. (1975).mana ement consultants in action. new york ny: hawthorn books, inc. holtz, h. (1986). advice a hi h profit business a uide for consultants and other~e.e gh dchff ej: p i .r ii. maurer, r. (1996). be ond the wall of resistance austin. texas: bard books, inc. merwin, j. (1987, oct 19). we don't leam from our clients, we leam from each other. forbes, october 19, 122-128. pierce, r. j. (1991).leadershi pere ective and restructurin for total ali . milwaukee wl: asqc quality press quay, j. (1994).dia nostic interview in for consultants and auditors cincinnati, ohio: quay associates. shenson, h. & nichols, t. (1997).the com lete guide to consultin success chicago: upstart publishing company. stryker, s. c. (1982). princi les and practices of professional consultin . washington, d.c.: bermont books, lnc. van voorhis, k. (1980).entre reneurshi and small business mana ement. boston: allan and bacon, inc., pp. 495-516. wesner, j. w., et al. (1995). winnin with uali . a i in uali princi les in product ~di r ch gma:addi w ly. 13 journal oj small business strategy volume 9, no. l spring l998 appendix introduction the previous article presents an eight-part model and action agenda for transform ingconsultant's recommendationsinto business improvement. it is a big challengeto apply the model and action agenda to student field case work. are the results worth the effort for a student program? our small business institute offers student consulting to local small businesses. student teams have served several hundred clients. we have not used a systematic methodology to measure the elfectiveness of alternative approaches to the student consulting task. however, our experience base is large enough to provide more than anecdotal evidence. in our experience, the sbi filed case approach, coupled with balanced use of the eight-part model, leads to higher levels of business improvement. it works for us to help student consultants use the eight-part model to improve small business in an organized way. like professional consultants, too many student consultants focus on diagnosis and presentation, assuming it is the owner's responsibility to implement. we believe this is usually insulticient to assure elfective follow-up by clients. to induce improvements, the student consultant must lead the engagement, collaborating with the client, making balanced use of all eight parts of the model. these ideas sound great, but what about application? how do you incorporate the eight-part model and action agenda into a field case work class —especially if your school operates on the quarter system? no easy answers or quick fixes exist, but you can do it. this appendix gives eight recommendations to guide your thinking. recommendations l. use the model and action a enda ourself. let it guide the way you run your class. lead by example. 2. present the model. begin by sharing the eight-part model and action agenda with your students. discuss the importance of improving in an organized way. help the students understand how mastering the improvement process will contribute to their success -in the class and in their careers. if the students know where to go, how much faster they get there will surprise you. further, give the students concise handouts that describe your favorite tools for accomplishing each step. for example, if you give students useful diagnostic tools, they will surprise you with how quickly they can compile useful findings for the client. for ideas on what to include in your handouts, we recommend the following sources: 14 journal ofsmall business strategy volume 9, no. i spring l998 diagnostic interviewing: john quay (1994), diagnostic interviewing for consultants and auditors cincinnati, ohio: quay associates. bill cunningham presented a professional development workshop, "diagnostic interviewing for consultants," at sbida's 1998 national small business consulting conference. cunningham has students use quay's techniques. his e-mail address is cunninghamxec.corn. how to sort out what needs to be done to improve a company: michael d. ames (1994)rethinking the business plan paradigm: bridging the gap between plan and plan execution, journal of small business strategy, 5, 69-76. ames has students systematically employ twelve tools to select and prioritize improvement tasks. his e-mail address is sbiamesfullerton.edu. project management: pamela s. schindler presented a professional development workshop, "enhancing project management within the field-case consulting format," at sbida's 1998 national small business consultingconference. schindlerhas students use a planning system for improved case management. her e-mail address is pschindlermail.wittenberg.edu. 3 model each of the ei ht ste s eve da early in the term, use vignettes, role plays and analysis of text book cases to show students how to do each step. as work proceeds on field cases, point out how you might do the eight steps for specific client needs. 4. coach. actively involve yourself in each step of the students'ork. attend the first interview with the client. have the students submit progress reports and rough drafts of their work. review and discuss each step with students until they are ready for the next level. 5. install. transfer authority and accountability to students for specific tasks early in the term. the engagement letter the students prepare for the client is not enough. set up internal project management controls. have the students record specific work assignments. monitor each student's progress weekly. if students need training to complete their tasks, have them develop training time tables and find necessary resources. the students walk the tight rope. you are the safety net. require the students to use the eight-part improvement model iteratively, rather than viewing the parts asmajorphasesofa semester-long project. follow the advice of aesop's fable. during the first interview with the client, have the students look for "thorns" they can pull from the client's "paw." "thorns" are client needs, demanding immediate attention, but easy to remedy. for big, complex needs, have the students begin dealing with them, piece by piece, as soon as they have sufficient data to experiment. four benefits accrue from using many small iterations or overlapping "work cycles:" (i) early in the term, students can practice using all parts of the improvement model and action agenda to benefit their client. they start with simple tasks that meet obvious needs. successful solution builds student confidence and client rapport. (2) the client needs time to absorb and accept new data contrary to accepted practices. involving the 15 journal ofsmall business strategy volume 9, ieo. i spring l998 client in early decisions, and regular feedback activities, avoids overwhelming the client with threatening data at the end of the semester. (3) flexibility results from use of many small, overlapping work cycles. the student consultant can adjust the action agenda to fit the client's reactions to early work. empathy and adaptability by the student consultant help turn client resistance into commitment. (4)'ihe client will need practice. using many small iterations allows everyone to become skilled enough with new approaches to feel comfortable with the process of organized improvement. otherwise, clients will revert to the "tried and true" at the first crisis. 6. evaluate continuousl . don't wait until the end of the semester. review each step of each iteration. read progress reports immediately. take prompt command action to correct errors and praise progress. students get the message. they reduce procrastination and "slacking olt." frequent evaluations create a sense of urgency. momentum builds. more success occurs in less time. 7. less is more. if your student teams spend most of the term doing comprehensive diagnosis of client "ills," clients will be lett to "treat" themselves. the students will not get practice in using the other elements of the eight-part model. clients will be less likely to follow up on the encyclopedia of recommendations your students present in the final report. too much diagnosis reduces the practical value of the consulting process. both the students and the client benefit less. make the students prioritize clients'eeds. have them select improvement tasks they can follow all the way through —preparation, presentation, modeling, coaching, installation,and evaluation. each step of the way, have them practice data management. revise the time cycle of the engagement to balance diagnosis with treatment. 8. remember ou are the leader as dr. deming often said, the leader is responsible for working on the system to improve it. if your case class is not working, most of the time, you are responsible for the problems —not the students and not the clients. if your system is not working, fix the problem not the blame. you have the power. use it. consider three examples. example one: do you find it difficult to get good results in a ten-week quarter? perhaps you can set up a two-class sequence to give yourself more time. do diagnosis and preparation in the first term. implement key recommendations in the second term. or perhaps, you can compress your available time. set up a required "boot camp" workshop. otter it for a full day in the first week of the quarter, in lieu of lectures later in the term. example two: do you find it diaicult to lecture on your favorite topics while you supervise student field cases? perhaps you can teach what you want to teach without lecturing. use the case projects as a curricular motivational tool. give them tips you consider important as they seek ways to benefit the client. have the students dig into the textbook and other resources to find ways to use your tips. link your examinations to skills you want the students to acquire during the engagements. example three: do your students fail to take the case projects seriously? perhaps you can clarify the benefits. make the learning opportunity clear. show the links between work on the case and their personal success. or, perhaps you can "raise the bar." make the project grade a bigger part of the class grade. focus individual accountability by requiring and grading individual work on the case throughout the term. l6 reproduced with permission of the copyright owner. further reproduction prohibited without permission. table of contents anonymous journal of small business strategy; spring/summer 2007; 18, 1; abi/inform complete pg. 0_3 17 35 57 69 85 95 table of contents sme performance: a case for internal consistency timothy l. pett wichita state university james a. wolff wichita state university the development and statistical testing of a nascent organization structure sequence model robert a. fiore robert n. lussier springfield college springfield college coopetition as a small business strategy: implications for performance michael h. morris syracuse university akin k~ak ankara university alper ozer ankara university small business internet use and strategic flexibility gregory b. murphy university of southern indiana kevin celuch university of southern indiana stephen k. callaway university of tampa entrepreneurial strategies in a declining industry william burpitt elon university sally fowler american university do family meetings really matter? their relationship to planning and performance outcomes in small family business c. burk tower university of wisconsin oshkosh donald gudmundson university of wisconsin oshkosh susan schierstedt university of wisconsin oshkosh e. alan hartman university of wisconsin oshkosh is informal planning the key to the success of the inc. 500? anthony allred weber state university h. lon addams weber state university goutam chakraborty oklahoma state university stra tegy table of contents i siakeirolder difliieiice strategies arid value creaiion by new veatures radhn chaganti rider university candida g. brush boston university ccngia l.lakscvcr rider university ronald tj. cook rider university i6 desktop mappi age a tool for improviiig small business htarketing analysis and customer prospecting ronald rubin university of central florida z6 iln analysis oftlie motivational factors of intending entrepreneurs richard demartino rochester institute of technology roben barbato rochester institute of technology 37 tliesinall businms equirycapitalsituations an economicdevelopment perspective michael d. ames california state university fullerton john k. romano virtual capital croup vi t. pham california state university fullerton 56 david versus goliatli strategic behavior of small firmsin consolidated industries monica zimmcrman temple umversity denise dunlap temple university robert d. hamilton, ih tcmplc university t. l. hill temple university elisabeth a. chapman temple university ?5 cotnpetirive strategies of independent grocers: a ten-year review paula s. weber st. cloud state university small business briefsi g5 utilturtion of ilia small business advancementivational centerin creating a more viable classroom sening and vibrant up to date research don b. bradley ih university of central arkansas 9tt starting new small business institute programs: a survey of new programs begun since 1996 kirk c. heriot francis marion university noel d. campbell north georgia college ssk state university book revieiv 97 jack: straight from rhe gut by jack welch and john byrne reviewed by prashanth nagendra bharadwaj sfi'4'ie'~'y book review so you need to write a busiivess plaiv! by jeronie s. osteryoung & denise l. denslow south-western, 2003, 246 pg. isbn: 0030315336 reviewed by roosevelt d. butler the college of new jersey in their book, so you itieerf io iyrire a business plan, osieryoung and denslow provide an exceptional approach to building an effective business plan. they make prospective entrepreneurs and small business managers aware of the requirements of an articulated and well developed business plan. readers or users of this book are informed in the foreward that there is nothing new in the form of contents in this book. the key issue is, this book is an indispensable resource, and provides valuable information. in each of ten chapters, the authors'rimary purpose is to move entrepreneurs and small business managers to a new level of awareness of the requirements for the development of an effective business plan. this is very essential, since more than 600,000 new small business startups occur each year. secondly, many of the startups are headed by individuals who have little or no business experience. chapter i lays the groundwork for the novice as well as the seasoned entrepreneur or small business manager. it answers the basic questions of who, what, why, and how as they pertain to a business plan. the abbreviated summary for this chapter can be used in an academic environment. chapter 2 encourages the involvement of employees in the overall process. although it is not a chapter on communication, a high degree of communication is encouraged. this chapter makes use of marginal notes and provides an excellent mission/vision statement worksheet that can be used by the small business owner/manager and employees. chapters 3 and 4 involve decision making. chapter 3 provides information on the legal structure of a business. the owner/manager must decide the o'hat (type of organizationproprietorship, partnership, corporation, etc) and the o'hy (why would one type of structure be more advantageous than another). chapter 4 covers key actions or steps prior to writing a business plan. it provides detailed assessment of financial statements, and provides examples of a cash budget, balance sheet and income statement. in both of these chapters the authors do 103 jonrznil rif sino// bn»ine»» srrit/eg) vo/. /4. no / sprmg/sniiimcr 2003 an excellent job or providing comments in the margins and worksheets that can be used by the preparer(s) of these documents. chapter 5 details what should be contained in the business plan. it provides examples of table of contents and information that should be covered under each heading. the chapter application recommemls action that will enliance the preparation and contents of the business . plan. chapter 6 gives a step-by-step approach to describing the business, its history, and the product and/or service tliat will be provided. 'fen (10) key items to be included in this section, list of mistakes to avoid, and the business worksheet are provided. chapters 7, 8, and 9 are ideally grouped and cover essential information that will assist in meeting the financial requirements and actions of chapter 10. chapter 7 details the needs and requirements of a marketing plan. the importance of the marketing plan, identifying customers, meeting customer needs, trends in the industry, how to obtain market data, how and what strategies to apply, distribution, and other aspects of marketing. chapter 8 continues this process by focusing on who is to carry out the functions of the organization. the management team, its importance and contnbutions to the success of the organization are covered by examples and infomiation. chapter 9 covers product and process. it provides a production worksheet that can be used to identify action that must be accomphshed in the production process and who does each. chapter 10 gives explicit infomiation on financial statements and documents that must be included in thc business plan. it also makes the small business owner more aware of the need for a well developed luiancial plan; a plan that covers the present, but is also futuristic in nature. chapters 11, 12 and 13 cover those critical documents that frequently are over looked or given cursory effort. the authors have devoted a considerable amount of time in providing examples of time schedule for start-up, time schedule for operations, critical risk, executive summary, and other supporting documents such as resumes, market charts, financial graphs, timeline, organizational charts, and an example of a complete business plan. this book is a very useful source or reference for prospective entrepreneur or small business manager. it fulfills the requirements in academe for teaching a section on building a business plan in an entrepreneurship and/or small business management course. it constitutes a must for certificate programs offered through community based learning programs and vocational and technical schools. 104 stra tegy editor's note sbida is celebrating its twenty-fifth anniversary this year at the usasbe/sbida joint national conference february 7-10, 2001 in orlando, florida. the journal of small business siraiegy will be participating in the conference in a number of ways including the awarding of the best applied paper award that will be published in the journal later this year. we hope that you will be able to participate in what promises to be an exciting conference. jsbswill very shortly implement a website which will feature a searchable database of jsbsabstracts. the abstracts will be searchable by keyword, author, issue or title. it is hoped that this will be of aid to our readership in conducting research. in addition, information regarding submission guidelines and subscription information will be available on-line. in this issue, we are following up on the article by michael ames and paul hugstad of california state university (fullerton) on field case consulting in the small business institute"'(sbi) program. ronald cook of rider university has written a small business brief which overviews how a smaller, newer sbi program can be successfullyundertaken. other articles in this issue cover a wide range of topics including enrrepreneurshlp (classification as a factor in the scientific evoluil on of enirepreneurship); financing (the familiarity ofsmall technology-based business owners with sources of capital: impact of location and capiralisarion); competitive strategy (responding ro indusiry consolidation in fragmented indusirlesi the role of capabilities in small busmess snrvival and expecrarions for fine dining: lessons for small business resrauraieurs); consulting (small business enrerprise and development: consultation modes and startup success facrois perceived as important by usa and korean consulianis); collaboration and srrareglc alliances (collaboration between technology enirepreneurs and large corporations: key design and management issues and inrernaiiona/strategic alliances: a tale of two firms); and the emerging role of nor forprofir organizations as a small business competitor (new comperirors for small business: the for-pro/it mentality of nonprofit organi arions). we hope you enjoy this issue and hope to hear from you in the future. stephen w. osborne, editor strategf mission statement and submission guidelines the jrnirnal of small business strategy is a priicricagy-orienteiljournal tliai publishes high-ttuality, applied resenrcli on topics related to entrepreneursliip nnd .small business operations. the journal stresses strategy in all fiinctional areas. community ilevelopment and smnll businessyentrepreneurship are also emphasized. given our mission, authors are discouraged from submitting manuscripts with extremely complex statistical analyses and/or purely theoretical orientation. manuscripts should be written with the small business owner/manager, the small business consultant, and the small business/entreprcncurship educator in mind. simple statistical analyses, tables, graphs, and illustrations are encouraged. case studies are acceptable. afl papers must be properly documented. submissions should not exceed 25 typed double-spaced pages (one-inch margins). an abstract of 100-150 words must be included on a separate page. a brief biographical sketch must be submitted for each author. the biographical sketch should not be attached to the manuscript. the title page should include the title, the name(s) of the author(s), the address(es) of the author(s), and the phone number(s) of the author(s). the first page of the manuscript should include the title but no author identification. manuscripts will be blind-reviewed. main headings should be typed all caps and centered. secondary headings should be typed initial caps only and centered. paragraph headings should be typed flush left, initial caps only. tables and figures should appear at the end of the text, each on a separate page. the position of tables and figures should be indicated in the body of the paper. style (internal citations, reference list, etc.) must conform to the most recent edition of the piiblication hlanrial of ihe american psychological association (aprl ). five copies of each manuscript should be submitted to stephen w. osborne, editor, journal of small business strategy, indiana university of pennsylvania, 304 eberly college of business & information technology, 664 pratt drive, indiana, pa 15705-l07l(email —osbomeqaiup.edu). the first copy must contain author identification. afl other copies should contain no author identification. submissions must include a self-addressed, stamped envelope. accepted manuscripts must be submitted in microsoft word. submissions may not be sent to other publications while under consideration by the journal of small business strategy. from the editor it is a great pleasure to present two exceptionally talented scholars who were invited to co-edit this special issue. on behalf of all of us at jsbs, we thank you for this valuable research. gerald e. hills editor bradley university letter from special edition editors welcome readers! on behalf of domingo enrique ribeiro-soriano and me, we would like to thank you for reading this special issue of jsbs from the 2nd annual gika conference held at the university of valencia, spain. the conference increased from approximately 70 papers and presentations the first year to more than 225 the second year. featuring papers focused on entrepreneurship and strategy, we have chosen papers from the conference that fit our mission and readership. these papers come from a variety of disciplines and countries but all focus on small business, strategy, and entrepreneurship. we hope you will enjoy reading these articles from around the world. in “validation of a measuring instrument for the relationship between knowledge transfer and entrepreneurial orientation in family firms,” barroso martínez, bañegil palacios, and sanguino galván perform an empirical study to reflect the validity and robustness of their knowledge transfer measurement scale. the goal of this scale is to determine the nature of the relationships between knowledge transfer, entrepreneurial orientation, and performance. the measuring instrument is innovative because previous measuring scales are unable to measure the aforementioned relationships. this research reveals that, although entrepreneurship depends on many factors at different organizational levels, people’s willingness to share their knowledge plays an important role in entrepreneurial capacity. the authors conclude that entrepreneurial orientation involves an extensive process of knowledge sharing among members of family-run businesses. castaño-martínez, martínez-rodríguez, and ruiz-fuensanta’s paper,“the influence of socioeconomic factors on entrepreneurship and innovation,” contributes to the analysis of the factors that encourage entrepreneurs to innovate in their businesses. a broad range of elements condition entrepreneurial innovation. in this paper, however, the authors devote their attention to studying the role of socioeconomic factors such as social capital, institutions, and income distribution. these elements, which shape the environment in which businesses operate, can act as important incentives for innovation, or, conversely, s trateg y journal of small business reproduced with permission of the copyright owner. further reproduction prohibited without permission. reproduced with permission of the copyright owner. further reproduction prohibited without permission. credits anonymous journal of small business strategy; fall 2005/winter 2006; 16, 2; abi/inform complete pg. 0_4 editor fred l. fry associate editors aaron a. buchko laurence g. weinzimmer editorial assistants dexter gruber shannon m. pettit editorial review board sernra ascigil joe bell david brennan shawn carraher susan coleman cathleen folker eugene fregetto armand gilinsky joe geiger masoud hemmasi kirk heriot jeffrey hornsby bruce kemelgor larry klatt brian mckenzie thaddeus mcewen john e. prescott neal pruchansky james a. rodger c. louise sellaro matthew c. sonfield harriet stephenson joe singer leo simpson jeff shields paul stephens monica treichel jude valdez howard van auken dianne welsh bradley university bradley university bradley university bradley university bradley university middle east technical university university of arkansas at little rock university of st. thomas cameron university university of hartford university of wisconsin parkside university of illinois at chicago sonoma state university university of idaho illinois state university mercer university ball state university university of louisville florida atlantic university california state university, east bay north carolina a&t state university university of pittsburgh keene state university indiana university of pennsylvania yougstown state university hofstra university university of seattle university of missouri kansas city western kentucky university university of southern maine bradley university temple university university of texas at san antonio-downtown iowa state university university of tampa the journal of small business strategy is a joint publication of the small business institute® and the foster college of business administration, bradley university. send subscription requests to fred fry, editor, journal of small business strategy, foster college of business administration, bradley university, 150 i w. bradley ave., peoria, il, 61625 or e-mail to jsbs@bradley.edu. annual subscriptions may be ordered at $25 each (u.s. dollars only). international subscriptions add $5 annually for postage and handling. back issues may be ordered at $12 per issue. ©copyright 2006 small business institute® issn i 081-8510 strategy book review low risk, high reward: starting and growing your business with minimal risk by bob reiss with seffrey l. cruikshank new york: the free press, 2000 reviewed by thomas r. taylor, ii trtaylorworldnet. atc net many small businesses fail within the first few years of their existence. bob reiss'bjective in low risk high reward: starting and growing your business with minima! risk is to improve the success rate of small businesses by passing on "real world" wisdom gained through many years of operating successful small businesses. writing in an approachable, conversational style, the author discusses some of the key elements involved in starting and running a small business that can weigh heavily on the ultimate success or failure of the firm. the perspectives, insights and guidance provided in the book will be helpful to anyone currently operating a small business, but will prove especially helpful to individuals who are evaluating small business ownership as a potential career choice. although targeted primarily at entrepreneurs, high risk, low reward will also prove useful for members of the academic and consulting communities. the concepts emphasized by reiss, and his frequent anecdotes illustrating the concepts in action, help to connect theory with reality by providing valuable insights into how successful entrepreneurs modify, adapt and implement various small business management theories. these insights should prove helpful to consultants working with struggling clients, if only as a means for providing evidence that sound adaptation and implementation of key business practices can contribute to success. similarly, teachers of small business management or entrepreneurship courses may find that their students benefit from the perspectives of a successful entrepreneur as they seek examples of classroom learning applied to actual business practices. the first four chapters provide important attitudinal considerations for those thinking about, or currently running, a small business. chapter 1 provides a description of ten personal attributes the author believes are important for individuals considering entrepreneurship, followed by a discussion of four key skill sets that the entrepreneur needs to possess or to develop. chapter 2 introduces the importance of "numeracy," defined as the numerical equivalent of literacy and requiring a deep understanding of the ratios and financial statements used to monitor the health of a business. chapter 3 begins a discussion of risk and methods to manage risk by finding ways to reduce it to a level that is comfortable for the business owner. finally, chapter 4 provides a brief discussion of the types of product ideas a small businessperson can reasonably expect to pursue, where to find these ideas, and how to test ideas to minimize the 119 journal ofsmall business strategy vol. /2, no. 2 fal!ih'inter 200/ risk of failure. reflecting the practical nature of the book, the author emphasizes that most successful small businesses are built on an ordinary, mundane idea and not a flash of brilliance. the following five chapters are devoted to the challenges of establishing a small business and the activities required to ensure the long term success of the enterprise. chapter 5 discusses the basics of starting a company, including how to get into business (start a new venture, buy an existing company, buy a franchise, etc.), legal forms of organization, sources of funding, stafling, location, and the like. chapter 6 covers topics relating to building the company, including advice on planning for the future, managing attorneys and other professionals associated with the firm, and gaining credibility. chapters 7 through 9 conclude the heart of the book by considering key aspects of designing and producing total products, guidance on how best to sell products, and, most importantly, how to obtain reorders to ensure the long— term viability of the firm. the book concludes with a chapter entitled "reassessment: what's next?" and four appendices. "what's next?" explores the importance of evaluating what the future may hold for the entrepreneur and the business, such as maintaining the company on the same course of growth, shrinking or growing the company, going public, selling, or closing the firm. two of the more useful appendices include an example of applied "numeracy" and a harvard business school case (386—019) developed around the author's experiences that provides applied, "real-life" examples of the themes presented in the book. the dominant theme throughout the book and uniting the various topics is stated plainly in the subtitle: starring and growing your business with minimal risk. as any business owner knows, risk is an everyday reality, and the consequences of risk gone bad can be catastrophic. perhaps for this reason, successful entrepreneurs tend not to be high-rolling risk takers, but skillful managers of risk in all aspects of their business operations. throughout the book, the author provides insightful guidance and advice on how to evaluate, manage and reduce risk in various forms, and illustrates how to apply these ideas in a business setting by using personal anecdotes and the experiences of other successful entrepreneurs. while some readers may find much of the advice on risk-reduction to be familiar territory, even experienced entrepreneurs are likely to discover one or two valuable ideas that they had not previously considered. individuals launching a small business and those contemplating an entrepreneurial endeavor, in contrast, will likely find the risk-reducing strategies to be extremely beneficial. while the themes of risk reduction and risk management touch most aspects of starting and running a business venture, many readers will find the author's insights in three areas to be particularly useful. the first of these involves the personal attributes and skills that tend to be found in successful entrepreneurs. many entrepreneurs are predisposed to failure because they unknowingly lack the internal resources required for success, and fail to consider the importance of these internal characteristics. serious consideration of the attributes and skills highlighted by the author will help prospective entrepreneurs minimize their risk of failure by inducing the self-evaluation necessary to determine personal readiness for launching a business. importantly, the author emphasizes that the lack of any particular attribute or skill does not mean that an individual cannot become a successful entrepreneur. rather, a critical assessment of personal attributes and skills can help to minimize the risk of failure by provoking consideration of how weaknesses may be overcome. perhaps other personal attributes can help compensate for those that are weak or lacking. or, perhaps, skills that are lacking might be acquired or honed through training or education to enhance the likelihood of success. 120 journal ofsmall business strategy vol. /2, no. 2 falll)vi uter 200i the critical skills listed by the author contain few surprises, and include creativity, the ability to communicate effectively, the ability to sell (yourself, your company, your products), and the ability to make decisions. the personal attributes the author uses to describe successful entrepreneurs include familiar characteristics such as passion, curiosity, energy, work ethic and mental toughness, but also include balance, egotism, and greed, which may be overlooked by many current and prospective entrepreneurs. balance can be important in helping an entrepreneur keep the venture in its proper perspective, thereby helping to prevent burn —out. egotism is an attribute that is often considered to be a liability for the entrepreneur, and can be just that if taken to an extreme. however, when defined by the author as a belief that not only can you succeed, but that you deserve to succeed, a measured amount of egotism can help the entrepreneur overcome what might be a paralyzing fear of failure. similarly, greed is a harmful attribute for a business owner when taken to an extreme. when defined as a state of "wanting more money than you currently have," however, a controlled level of greed can be a powerful source of motivation. the second area in which the author's risk reduction techniques will be helpful to small business owners is cash flow. many entrepreneurs focus their attention on market share or sales revenue, but cash flow is the life —blood of a small business. the author avoids a dry, textbook approach to financial statements and accounting practices by providing a number of practical suggestions for managing this key aspect of a business. these ideas can be found not only in the chapter on "numeracy," which presents a more formal discussion of measuring a company's financial performance, but throughout the book. many of these ideas relate to the notion of finding creative ways to convert fixed costs into variable costs to better match or control cash outflows with cash inflows. the use of manufacturer's representatives rather than an in —house sales force, using a public relations firm to gain valuable "free advertising," using factors, and building relationships with suppliers to receive good payment terms (and as potential sources of capital) are just a few examples of techniques suggested by the author to maintain a healthy cash flow. a final area of risk —reducing advice involves what many entrepreneurs may consider to be the most threatening aspect of running a business: selling. the author draws heavily from his extensive selling experience to present useful insights and techniques that help de —mystify sales and improve the business —owner's chance of selling successfully. while too extensive to adequately capture in a brief review, the author's advice includes suggestions to help maximize effectiveness by focusing on particular segments or channels of distribution, building and maintaining relationships with buyers, managing manufacturing representatives to maximize performance, focusing on obtaining reorders as well as initial orders, and actively managing inventories to prevent stock —outs or large close —outs. an important distinction made by the author that should be helpful to many business owners is the notion of "selling in" vs. "selling through." selling —in is defined as the process of selling to middlemen or buyers during the launch stage of a product, which is critical to the initial success of a product. selling —through, however, may be more critical to the long —term viability of the company and involves a focus on creating consumer demand that will pull the product through the distribution channel and drive reorders. unfortunately, many small business owners lose sight of the importance of selling —through in their excitement to "get the product out there." overall, low risk, high reward: starting and growing your business with minimal risk is a well written and informative book containing practical, experience —based advice for anyone thinking about starting a small business, as well as for current small business owners wondering "where to from here?" while the book does not attempt to provide a detailed road map of every activity required to launch a business, it will help the entrepreneur consider, evaluate and find ways to reduce the risks inherent at each stage of the process. perhaps the one weakness of the book is its almost exclusive focus on product —based companies, although 121 journal ofsmall business .strategy vol. 12, no. 2 fattjãinter 2001 much of the advice it contains can be applied to ihe growing number of small service providers. overall, entrepreneurs who adopt at least some of itob reiss'deas and suggestions are likely to find that they can minimize the risks in their venture, and increase their probability of enjoying long term succes.;. thomas r taylor, 11 currently runs his own small busitrcss, taylor consulting, which provides regular reports on developntents in the patent literature, performs searches of tlie patent literature, and produces custom technology background and prior art studies based on business, technical and patent literature. prior to forming taylor consulting, he was a research director for one uf the johnson & johnson family of cotnpatries, with resporisihility for the development of consumer wvttnd cure products, iticluding brtnd-aid brand adliesive bandages. hc is also an adjunct instructor in the business division of mercer county community college (njj. his formal academic training includes a b.,s. in chemistry from lvake forest university and an m. b.a.from rider university. l22 59 the entrepreneurial spark: recognizing opportunities and developing them into viable businesses jose romaguera book review frank hoy worcester polytechnic institute fhoy@wpi.edu have you ever had a conversation with a book? we have all read books where we get caught up in the passion of the author, swept away with the story, not wanting to put the book down until we have read the last page. these are wonderful experiences, but we know that our role is that of reader, of observer. when you finish the entrepreneurial spark, you will feel like you’ve been chatting with an old friend. you will have the sense that you were in a comfortable chair, sitting across from josé, listening to his storytelling, and sharing your ideas in return. this book offers stories—some that you have heard before and some that are new. each is in the book to make a point. as you read (listen) to them, you will respond. you will tell josé, “yes, but why did she do that?” or “i know what you are saying, and let me tell you about my example.” the word spark in the title of this book lets you know you will be jolted into action as you travel through the pages. in the courses i teach, book reviews are invariably required. i want students to relate what is covered in the classroom to what other authorities have had to say on the subject. part of the review must address the credentials of the author. is the author really qualified to write about the subject? the biographical information regarding josé romaguera documents his experience in industry, both as a corporate executive and as a consultant to venture teams. he has had a distinguished career as a professor and academic dean, performing entrepreneurial roles by launching various economic development programs focused on small business and entrepreneurship. the respect he enjoys from his peers is demonstrated in many ways, including having been elected president of the international council for small business and to the board of the collegiate entrepreneurs organization there is substantial evidence that the author is not only knowledgeable in the field of entrepreneurship, but that he has also s trateg y journal of small business journal of small business strategy volume 23, number 2 60 contributed to the building of that body of knowledge. pay close attention to the subtitle of this book. a key word is opportunities, which connects directly back to the word spark. romaguera has obviously encountered many people who want to own businesses but are unsure about what concept will work for them. they want to know where ideas for successful ventures come from. they do not know how to choose the “right” idea. romaguera makes it clear that the notion of opportunity is multifaceted. there are practices by which you seek opportunities, techniques for identifying opportunities, procedures for assessing opportunities, and then steps to act on the opportunity. the first seven chapters of the book, from chapter one “the entrepreneurial spark” to chapter seven “from an idea to a business,” all deal directly with these opportunity issues. of course, romaguera acknowledges that “the entrepreneurial spark is not just about finding or identifying an opportunity. the entrepreneurial spark also relates to the process of moving an idea to a business, in such a way that will help turn that possibility into a reality.” the remaining six chapters focus on execution, while continuing to weave being opportunistic into the conversation. in the chapter entitled “the spark of curiosity,” romaguera tells us, “there are hundreds of books that define entrepreneurs and types of businesses. but our aim is not to overwhelm you with such information. we only want you to be clear in that we can all be enterprising and consequently, we can all be entrepreneurs.” this quote raises an immediate reaction: if there are hundreds of books out there, why do we need another one? in one sense, the answer to the question is implied in the comment that “we can all be entrepreneurs.” that means that people can absorb information and be generated by a spark from any number of sources. this book may be the perfect spark for those who want to move forward but have not been certain what their first step should be. however, i also find something more profound in romaguera’s contention about all being capable of entrepreneurship. in my thirty plus years as an entrepreneurship educator, i find it remarkable that articles still appear asking whether entrepreneurship can be taught. given the millions of people globally who have created enterprises, it should be obvious to everyone that there is no single set of characteristics or combination of genes that are required from birth in order to succeed as an entrepreneur. romaguera addresses this in another passage in chapter 12 “we are just beginning”: we have mentioned on various occasions that we can all be entrepreneurs and that each person may have different motives for this. there are some who think, however, that in order to be successful in business, the person must have extra special attributes; should think big, and in a global manner. the first thing we must remember, and should respect, is that not all people who are entrepreneurs have as their primary motivation to be number one in the world. nevertheless, this does not mean that they couldn’t possibly achieve such a level. on the other hand, not all businesses that are big and global today began with such a goal in mind. romaguera’s observations are supported through the many true stories that he offers journal of small business strategy volume 23, number 2 61 of individuals and teams who started their companies under incredibly diverse circumstances. thus, this book may prove to be precisely the spark needed for many who are still at the idea generation stage. having just mentioned stories, i want to note something that i particularly liked about romaguera’s approach to incorporating real cases to reinforce the advice he is offering. in many books, anecdotal stories of entrepreneurs are injected once, and then other examples are cited as the author introduces additional concepts. romaguera intentionally revisits specific entrepreneurs and their ventures. we find multiple references to ray kroc and mcdonalds, to gerber, to velcro, and more. this enables us to see more than just opportunities, more than developing ideas, more than creating viable businesses. we can grasp how these various examples followed paths that led to their eventual successes. returning to the notion of definitions of the word entrepreneur, i have preferred to view it as a label under which many more narrow concepts may fall: small business owner, gazelle (i.e. high growth venture), intrapreneur, etc. because there is no universally accepted definition, it is incumbent on authors to be explicit as to how they use the term. romaguera does so: “we present our definition of an entrepreneur as the person who has the vision to see opportunities, the skills to make them realities, and the work ethic to get going” (words in bold in original). he then proceeds to elaborate on the key concepts of vision, skills, and work ethic. in this way, romaguera provides a framework for readers to perceive that the messages conveyed through the book are interrelated. speaking of words and definitions, one recommendation i would have for the author is that i believe readers could be helped by the inclusion of jargon that is widely used in practice. in chapter two “necessity ignites the entrepreneurial spark,” romaguera introduces the saying “necessity is the mother of invention” and proposes how opportunities can be identified through the “necessity at home,” the “necessity at work,” “economic necessity,” and “necessity in the community.” in each area of necessity, there are multiple potential business opportunities for meeting the needs of a market segment. the popular term currently among entrepreneurs and investors is pain. what pain is your prospective customer suffering and what is your solution? similarly, in chapter eight “the client, the concept, and the competition,” romaguera contends that the three c’s in the chapter title provide guidance for developing an idea into a business: in this case, it should be clear that you have various alternatives of possible clients on which to focus your efforts. for each one of these possible clients, you can direct your efforts to satisfy their different needs, add value, and facilitate exchanges, taking into consideration your possible competitors. in sum, you have many options that you should consider and alternatives that can be adjusted in the process of deciding on the appropriate ways to start your business, given your particular circumstances. there is a term that has become popular in practice that is implied in this chapter: journal of small business strategy volume 23, number 2 62 pivot. the idea behind the pivot is that your original idea will almost certainly have to be changed once you launch your venture and discover what changes are demanded in the marketplace. thus, the consideration of alternatives is essential for long-term success. my point is that readers should be aware of the words used by practitioners as they begin their entrepreneurial endeavors. however, my advice could be misplaced. jargon can be overused and go out of fashion quickly. ultimately, the concepts that romaguera is attempting to express are more important that the specific words chosen. another issue that may bother readers of this book is the use of the word spark. although i have endorsed a link between spark and opportunity, some readers may recall the warning of michael gerber, author of the business classic, the e-myth. gerber referred to the entrepreneurial seizure. the seizure occurs when someone forges ahead with their new creation without having thought through the actions they must take or the risks associated with the venture. in romaguera’s case, however, he is careful to insert the necessary dose of reality. he also provides an interesting twist to risk analysis, explaining that not taking an entrepreneurial initiative can be as much a risk as taking one. in addition to describing concepts backed up with stories, romaguera presents tools for entrepreneurs both to assess viability and to consider courses of action. foremost among them is a matrix he introduces in chapter nine “the process of making the start of your business viable.” he proposes an assessment of time and resource investment against results to be achieved. the result is four squares in which a venture may find itself. then he explains how an entrepreneur can devise strategies to move from a less desirable square to a more advantageous one. having provided so many guidelines, romaguera asks “why don’t all people who have entrepreneurial ideas or projects begin them? another question could be: why do so many of the people who start an entrepreneurial journey … not continue to recognize the other opportunities that they come across and make them a reality?” he devotes chapter 11 “don’t let doubts and fear-of-risk stop you” to answering these questions. early in the chapter, he makes an extremely insightful observation: “an idea is not the same thing as a business.” a phrase that comes up often in this chapter and elsewhere in the book is, “one thing led to another.” once again, i argue that he is letting readers know that they may have to pivot from their original idea. experience and information gathering are critical to discovering the weaknesses in original plans and what opportunities really exist. it is especially important to learn from your customers that you did not resolve their pain with your first idea, but that first try can lead you to success on the second or third try or beyond. josé romaguera packs a lot in fewer than 150 pages. on nearly every page, you will want to say something back to the author about the idea or story that he tosses at you. by the end, i believe what you will want to say is, “thank you!” reproduced with permission of the copyright owner. further reproduction prohibited without permission. the new kid on the block for small business success: etidcs?* harriet buckman stephenson seattle university deborah kahle thomas management corporation, missoula, montana abstract "by the year 2000, small businesses will be the major growth machine of the u.s. economy, providing a multitude of benefits in the forms of personal independence, financial rewards, and ·economic dynamism" (anwar & stahlecker, 1989). small businesses now account for 40% of the gnp and create approximately 70% of the new jobs in the u.s., yet the majority' of all small businesses fail within a few shon years (polansky). the most common reasons given for these failures are management incompetence, poor or no planning and the inability to secure financing. for the first time, however, a study of factors imponant to success of small business places ethics in the workplace high on the list. 1be difference between success and failure for many small business owners/entrepreneurs will be their ability to cope successfully with problems associated with running a business (goodell & kraft, 1989). thrining and education become key to the success of.the small business owner, and resean:h indicates that there is a need foi educational assistance that is largely not being met (goodell & kraft, 1989). lack of available management training leaves a gap between an idea and the ability to implement it successfully. common barriers to small business success two broad classifications of problems, internal and external, must be dealt with by small business owners. the former type becomes the primary focus and includes financing, people skills and physical resources, whereas the latter type needs to be dealt with and recognized but cannot be controlled. in 1978 the literature pointed to the fact that" ... it is apparently easier to blame external factors than to apply remedies such as self discipline, training, experimentation, planning strategies and working harder to survive ... "(goodell & kraft, 1989). today, however, more small business owners recognii.e internal problems as a key to the success of the business and are seeking opportunities to learn how to solve them. • recipient of third place in the distinguished paper awards, presented at the 1992 national sbida conference in washington, d.c. it was not reviewed by the jsbs editorial advisory board. 67 the list of problems or critical success factor!\ is potentially a long one, and the process of iden1ifying !hem is ongoing. garsomhke and garsomhke ( 1989) discussed lhe influence of technological change on small-mediun1 size tirn1 pcrfonnancc. while roitman and en1shoff ( 1984) listed the inadequacy of the financial and hu111an resources needed to in1plen1ent product ideas and market strategics as major barriers to the entrepreneurial tirn1's success. bracker and pearson ( 1985) idenlified firm size. lypc of producl, indus1ry malurily, and 1he age of 1he firm as significanl factors in company performance. rocha and khan ( 1984) and pe1erson ( 1984) recognized lhe inlerrclaledness of several recurring problems confronling small businesses. anwar and s1ahlecker ( 1989) slressed lhe importance of planning. and nahavandi and chesleen ( 1988) idenlified slralegic planning deficiencies and the impact of outside consulting as critical factors in venture success. cragg and king ( 1988) found 1hal lhe qualily of planning ac1ivi1ies. markel orien1a1ion. and lhe characteristics of the owner/manager were associated with small business success. while hofer (1987) zeroed in on induslry slruclure as having lhe grealesl impacl on performance. macmillan, siegel, and narasimka ( 1985) hold lhe enlrepreneur 10 be the crilical success faclor. ibrahim and goodwin ( 1986) idenlified enlrepreneurial values. managerial skills. inlerpersonal skills, and environn1ent characteristics as key indicators of new and established venture success. psychological or personality traits of the entrepreneur have been examined with contradicting resuhs (brockhaus & horwilz, 1986; carsrud, gaglio, & olm, 1987). dun & bradslreel's reports ( 1988; 1977) indicate that the major barriers to business success arc n1anagerial incompetence and lack of owner experience. for many small businesses, financing or financial advice is critical (lister, 1991). for 15 consecutive quarters. taxes were cited as the number one problem with finances in the nfib quurterl_v econthnic report for sn1al/ busi11ejs (dunkclhcrg & dennis, 1988). owners rated finances in the following order (after start-up financing): taxes, poor sales. government regulations, competition from big business, quality of labor, cost of labor. general financing, inflation and shortage of malerial (dunkelherg & dennis. 1988). marketing is often noted as a critical factor for the successful small business owner(mendelssohn, 1991; ram & forbes, 1989; u. s. small business adminis1ra1ion [sba]. no. 4). in a recenl survey. 68% of lhe respondenls viewed lhe lack of a markeling plan as a frequemly experienced problem (weinrauch, pharr, mann, & robinson, 1989), and analyzing lhe markel from lhe customer point of view may also be a critical success factor (sba. no.4). the cost of insurance is a relatively new problem facing the small business owner (fraser, 1991; lnlindola, 1991; sba, no. 88-1190). finally, growth may be an issue in that it creates a need for different systems, skills, structures and, g~nerally. cash, presenling new problems for 1he small business owner (fiamhohz, 1989; hambrick & crozier, 1985). the use or non-use of computers and the ability to create systems to keep the business running smoothly also constitute a potential dilemma for the small business owner (nadel, 1988; sba, no. 88-1133; schleich, corney. & boe, 1990). as au1oma1ion and infonnation overload increase, the owner must take time to plan in order to achieve a satisfactory level of efficiency and effectiveness in managing. when the european econornic cornrnunity unlocks the doors to the largest econon1ic power in lhe world, 1he 1990's will begin a new focus for lhe world 1ha1 has never existed before (naisbin & aburdene, 1990). while small business owners will be seeking opportunilies abroad (edmunds 68 & khoury. 1986; morrow. i 988; sisisky, 1989). there will be obstacles to overcorne including personnel issues, tariffs. taxes, 111onctary systc1ns and cultural diversity. selling internationally will require hard work, perseverance. a con11nitn1cnt of resources. 111arkct research and attention to detail (sha. 1989). 'fhe husiness owner who has planned ahead will have carefully evaluated each of these issues in order successfully 10 penetrate this n1arket. ethical issues a new potential barrier to success ethical issues huve bcco1nc an increasing area of concern for the entrepreneur (ackoff. 1987), and rnuny aacsb 1nen1bcr schools arc searching for ways to inject ethics into the curriculum (schoenfeldt. mcdonald. & youngblood. -1991 ). in shostack's view. "all entrepreneurs who value their con1panics and hope to sec thcn1 prosper n1ust take a firn1 stand on ethics" ( 1990), but small business owners n1uy he n1ore dcn1anding in the area of ethics than managers of larger firms (longenecker. mckinney. & moore. 1989) .. unfortunately. many people may just pay lip service lo ethics. according to godfry. ethics has a long way to go (1988). james chrisman summarized the major problems that were identified from nine small business surveys conducted between 1978 and 1984 ( 1988). again, problems ranged from financing, accounting. longtenn planning, advertising and promotion to taxes, inadequate sales, employee motivation. capital. and marketing. however, the subject of ethics was not included.· methodology a survey containing issues of concern noted from past studies and interviews was mailed to 155 book s1ore owners listed in contacts /11flue11tial, an inclusive directory cove~ing a n1etropolitlln geographical area in the pacific northwest. thirty-three responses were received for a return rate of 21'k. the sarnple includes 1nostly sn1all businesses with under $1 million in sales (8lo/o) and under 100 employees (94%) and with 84% having twenty or fewer employees. of the respondents identifying their gender. 6090 of the owners were n1alc and 40r/,; were female. findings out of the list of issues of perceived i1nportance to the group of business owners. the number i issue was "reaching und maintaining cuslorners." followed closely by "ethics in the workplace ... table i contains the list of problen1s presented in the rank order of their pcn.:civcd in1portance. conclusions and implications the literuturc suggests that 1nanagen1cnt co111pc1encc. use of so1nc type of planning process and the ability to n1anage finances arc critical factors related to the success of business owners. while this new study. like its predecessor. includes n1any of these same factors (e.g. "reaching and maintaining cus10111crs." "ethics in the workplace." .. stabilizing cash flow," "development of managen1ent skills," and .. deterniining your custon1er base"). for the first tin1e. the issue of ethics emerges as the nurnber l\vo concern. the ethics issue was not significantly more important to small business owners than bigger businesses: however. unlike previous studies. both small and larger business o\.vners \\.'ere keenly aware of ethics as an integral part of their business. 69 table i business owner survey (including means of responses) given the items listed below, please rate each item from 0-5. coosider "o'' to be not important to "5" being very important to the success of your business. not lmponant 0 2 factors reaching & maintaining customers ethics in the workplace ...... . stabilizing cash flow ....... . development of management skills (i.e. planning, negotiating, analyzing) determining your customer base employee educationrrraining lack of capital ....... . taxes ............. . development of operational skills important (i.e. hiring, delegating, collecting on bad checks) availability of quality workforce· ..... . 3 company culture, value system & mission ... . benefits/compensation for employees . . .... . managing growth .......... . community involvement ..... . benefits/compensation for owner effective ·utilization of computers defining your competition .... financial retirement planning for owner . environmental & social responsibility issues network/ associations for owners .... . managing accounts receivables ..... . effective selection & use of consultants . diversity in the workplace ........ . planning for & developing your successor exploring international markets ...... . very lmponant 4 5 today 4.75 4.53 4.38 4.09 3.97 3.87 3.72 3.68 3.61 3.61 3.61 3.55 3.53 3.44 3.09 3.03 3.03 2.88 2.71 2.47 2.42 2.03 2.10 1.66 . .78 the high rating of "ethics in the workplace" was not anticipated in that prior surveys did not indicate such perceived importance as a success factor by small business owners. it is possible that the nature of the businesses surveyed and/or their geographic locations influenced these results. this does suggest that prior studies were not totally generalizable, a fact which is not surprising. in any event, the question of whether these findings may be appropriately generalized should be explored. further development and clarification are desirable to determine if this indeed suggests that the issue of ethics is a "new kid on the block," one which should be defined and incorporated 70 into entrepreneurial training, education and consulting. how should this be explored in the sbi programs? can students deal with ethical issues for the client? it may be too late to send the new kid back, and the problem may be here to stay for the 90's ... and beyond. references ackoff, r. l. 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(may/june, 1990). stand up for ethics. journal of business strategy, 48-50. sisisky, n. (may 8, 1989). small business: obstacles to exporting. business america, 5-6. weinrauch, j. d:, pharr. j., mann, k., & robinson, p. (1989). an exploratory survey of low cost marketing strategies and techniques among selected small business owners: research opportunities and implications. research at the marketing/entrepreneurship interface (pp. 122-136). chicago, il: published by the office for entrepreneurical studies. 72 sij4"tei'y table of contents i classification as a factorin the scientific evolution of entrepreneursltip minet schindehutte miami university michael h. morris miami umversity donald i'. kuratko ball state university 21 responding to industry consolidation in fragmented indus(ries: tlie role of cupabili ties in small basi ness survival jeffrey e. mcgee university of texas at arlington chnstopher l. shook university of texas at arlington 33 tlie familiarity of small technology-based business owners wiih sources of capitalr impact of location and capitalization kloward van auken iowa state university 48 small business enterprise and development: consultation modes john ellis bournemouth university julia kiely bournemouth university 60 collaboralion between technology entrepreneurs and large corporations: key design and management issues michedl j. kelly university of ottawa jean-louis schaan umversity of ottawa 77 internutional strategic alliances: a tale of two firms john hadjimarcou university of texas at el paso john w. bames loyola university -new orleans somnath bhattacharya florida atlantic university patrick traichal epicentric, inc. frank hoy university of texas at el paso 92 new competitors for small business: the for-profit mentality of nonprofit organizations karen a. froelich north dakota state university small business briefsr 105 quality field case consuliingi new program possibilities ronald g. cook rider university 108 great expectations for fine dining: lessons for small business restaurateurs joe singer university of missouri —kansas city raj arora university of missouri —kansas city 117 start-up success factors perceived as important by usa and korean consultants sang-suk lee kangnam university, korea jerome s. osteryoung florida state university sfikv tx'gy editor stephen w. osborne indiana university of pennsylvania (i up) associate editors prashanth nagendra bharadwaj indiana university of pennsylvania (iup) joette m. wisnieski indiana university of pennsylvania (iup) editorial assistant julie kocher indiana university of pennsylvania (iup) editorial review board ramachandra asundt university of puerto rico james bradley central washington university david brennan university of st. thomas (st. paul) shawn m. carraher texas a & m university commerce radha chaganti rider university j. douglas frazer millersville university joseph geiger university of idaho masoud hemmast illinois state university kirk heriot francts marion university lynn hotfman university of northern colorado lawrence klatt florida atlantic umversity krish krishnan indiana university of pennsylvania (iup) thomas j. liesz mesa state college stephen lucas university of north carolina-greensboro steven j. maranville university of st. thomas (houston) thaddeus mcewen nonh carolina a&t university abbas nadim university of new haven john e. prescott university of pittsburgh neal r. pruchansky keene state college james a. rodger indiana university of pennsylvania (iup) c. louise sellaro youngstown state university herbert sherman southhampton college of long island leo simpson western kentucky university joseph singer university of missouri —kansas city manhew c. sonfield hofstra university pamela h. specht university of nebraska at omaha harriet stephenson seattle university jude valdez university of texas, san antonio howard van auken lowe state umverstty monica zimmerman temple university the journal of small business strategy is a joint publication of the small business institute (formerly sbida) and the eberly college of business and information technology, indiana university of pennsylvania. send subscription request to stephen w. osborne, editor, journal of small business strategy, indiana university of pennsylvania, 304 eberly college of business and information technology, indiana, pa 15705-1071. annual subscriptions may be ordered at $20 each (u.s. dollars only). international subscriptions add $5 annually for postage and handling. back issues may be ordered at $ 12. o copyright 2003 small business institute issn 1081-8510 2004-2005 sbi officers small business institute president vice president -case competition jnmes brndley leo simpson central washington university phone: (206) 439-1282 fax (206) 439-3809 fax: 270-745-7098 email; bradley(t8cwu.edu president elect vice-president —marketing dt membership joe bell kirk c. heriot university of northern colorado francis marion university phone: (970) 351-1230 phone: (843) 661-1419 fax: (970) 351-1097 email: joe.bellqaunco.edu lmntediate past president vice president —development abbot nadim university of new haven office. (203) 932-7122 fax: (203) 931-6092 fax: 757-594-7808 email: anadqochargcr.ncwhavcn.edu vice president —programs shawn carraher . doug as razer texas a&m university —commerce phone: 903-886-5696 fax: 903-ggti-5702 fax: (717) 871-2464 email: shawn carrahcr@tamu-commerce.edu email: dfrazerqomarauder.mtllersv.edu vice president of conference arrangements secretary —treasurer geralyn mcclure franklin university of texas of the permian basin texas woman's university phone: (915) 552-2170 oaice: (940) 898-2903 fax: (915) 552-2174 fax: (940) 898-2120 email: franklin qout b.edu e-mail:staylortntwu.edu vice president —publications ron cook stephen w. osborne rider university indiana university of pennsylvania phone: 609-895-5522 phone: (724) 357-5760 fax: 609-896-5304 fax: (724) 357-5743 email: cookrinrider.edu email: osbornetmiup.edu vice president -program quality assvronce sbi iv b me aster bruce kemelgor charles h. matthews university of louisville university of cincinnati oaice: (502) 852-4788 phone: 513-556-7123 fax: (502) 852-7557 fax: 513-556-4891 e-maih bhkeme01@louisvilte.edu email: charles.matthews@uc.edu 2004-2005 sbi officers small business institute president vice president -case competition james bradley leo simpson central washington university western kentucky university phone: (206) 439-1282 phone: 270-745-6174 fax (206) 439-3809 fax: 270-745-7098 email: bradley@ewe.edu president elect vice-president —marheting & membership joe bell kirk c. heriot university of northern colorado francis marion university phone: (970) 351-1230 phone: (843) 661-1419 fax. (970) 351-1097 email: joe.bell@unco.edu immediate past president vice president -development abbas nadim stephanie bardwell christopher newpon university university of new haven phone: 757-594-7139 fax: 757-594-7808 email: anadqacharger.newhaven.edu vice president —a dmi nistrati on vice president —programs shown carraher j d i foug as razer texas a&m umverstty —commerce mtllersville university phone: 903-886-5696 fax: 903-886-5702 email: shawn carrahertamu-commerce.edu vice president of conference arrangements secretary —treasurer geratyn mcclure franklin university of texas of the permian basin texas woman's university phone: (915) 552-2170 oitice: (940) 898-2903fax: (915) 552-2174 fax: (940) 898-2120 email: franklin~@utpb.edu e-maik staylongatwu.edu vice president -publications ron cook stephen w. osborne indiana university of pennsylvania rider university phone: (724) 357-5760 fax: (724) 357-5743 email: cookr@rider.edu email: osbometnuiup.edu vice president -program quality assurance sbi w 6 me aster bruce kemelgor university of louisville university of cincinnati oaice: (502) 852-4788 phone: 513-556-7123 fax: (502) 852-7557 fax: 513-556-4891 e-maik bhkeme01@louisville.edu email: charles.mauhews@uc.edu t-i tra teg ~ the dll ferknck between survival and disaster: crisis planning in small busin fsses john e. spillan penn state university —dubois jes401psu.edu abstract crisis management seeks to lessen the itnpact of damaging events that can happen to an organization. although crisis-management literature addressing the needs of larger organizations is plentiful, little has been written on this subject for small businesses. this stud& exnniines the perceptions nml experiences of crisis events among the owners ami manngcrs of small-businesses the results indicate that few of these organizations have a formal crisis-nianagernent team or plan. reasons for this lack of planmng are offered and implications for management are presented. introduction crisis management seeks to minimize the impact of damaging events within an organization. many large organizations have sophisticated crisis-management plans and teams ready to act in the event of a crisis. for small businesses, the opposite is often true. managers of small operations tend to believe that the issue of crisis management is irrelevant and has limited importance. these organizations might adopt an "it can't happen to us" mentality, assuming that crisis event:; happen to other organizations or that they are somehow immune (mitroff, 1989). other small-business managers believe that they do not need to worry because they have insurance to cover any losses or work interruption. another reason smaller organizations may not adequately address crisis management is a perceived lack of resources (barton, 2001). these views are shortsighted and can be detrimental to the success of the smallbusiness operation. this is a timely topic of special interest to academics and practitioners because we live and work in a turbulent environment. the events of september 11 have changed how many managers do business. although crisis-management research is expanding, little has been written about crisis-management practices in small businesses. this study provides an overview of crisis-management perceptions of small businesses and empirically investigates three issues: 1. the perceptions of small-business owners and managers regarding the concept and practices of crisis management. 20 journal of small business strategy vol. 14, no. l spring/summer 2003 2. explanations for differences in perceptions and practices that exist in these businesses. 3. alternatives or recommendations that can strengthen the preparedness of small businesses. literature review crisis management crisis management aims to hmit the impact of an unexpected event. gorski (1998) reports that a crisis can encompass events from a natural disaster, such as a flood or hurricane, to a form of human tragedy. a crisis can cause an operational production failure and/or it can lead to a public relations fiasco. subsequent legal problems can disrupt the normal function of business. according to caponigro (2000), crisis management is the function that helps an organization gain control of the situation. it also poises managers to take advantage of any benefits that a crisis may present, sometimes focusing attention on a business segment that was previously ignored. (caponigro, 1998; hickman & crandall, 1997). crisis identification a. simbo (1993) reports that one of the major reasons businesses do not have effective crisismanagement plans is because they have not identified the potential events that could hurt their'rganizations.consequently, they have not developed the tools to deal with a crisis. fink (2000) contends that crisis identification is important for two major reasons. first, when the cnsis is properly defined, it can be managed. second, once the crisis is defined, it allows managers to determine the influence they have over the desired outcome. because crises are generally followed by a variety of diversionary problems, it is important that the manager focus interventions on the core issues. warwick's (1993) research indicates that one of the important preparations for a crisismanagement plan is conducting a risk assessment. some businesses identify vulnerabilities or crisis events that are unique to their organizations. for instance, movie theaters prepare for the occurrence of a fire with smoke detectors or emergency exits. the crisis-management literature identifies a number of classifications for crisis events. some experts have used the cluster analysis (pearson & mitroff, 1993). others have proposed different types of classification methods (coombs, 1995; irvine & miller, 1997). overall, there is no specific agreement on how to classify crisis events. while the classification systems are important to the researchers, managers need to be more concerned about their unique vulnerabilities (caponigro, 1998) thus, this study proposes to ask practicing managers . to identify the concerns in their respective organizations. exhibit 1 summarizes potential crisis categories. worst-case scenario planning managers must ask: what crisis is of most concern to our business and has such an event or any crisis actually happened? responses to these questions are important for three reasons. first, as potential crises are identified, managers can begin to plan for them. for example, one of the most difficult crises in a business is the on-site death of an employee. there needs to be a plan to deal with an employee's death in a professional and dignified way (i.e. notifying next of kin). if the worker was instrumental to day-to-day operations, plans must be available to provide a replacement with comparable skill and experience (wnek, 2000). second, recognition of potential events enables management to enact measures to prevent them. 21 journal ofstaall business strattxv val. /4, na. i spri ng/summer 2003 careful planning and the implementation ol'cnsis-management procedures allowed the y2k transition to occur ivith minimal difficulties (salerno, 2000). finally, identifying the most probable cnses allows researchers, writers, and consultants to warn the general business community about crisis events or vulnerabilities that need organizational attention. the y2k threat was greatly dimmished because of the awareness generated by the popular press and management researchers. exhibit i categories of crisis events operational crises publicity problems loss of records permanently due to fire boycott by consumers or the public computer system breakdown product sabotage loss of records permanently due to computer system negative media coverage breakdown computer system invaded by hacker natural disasters ma)or industrial accident flood major producvsetvice malfunction tornado death of key executive snowstorm breakdown of major production/service equipment hurricane earthquake fraudulent activities theft or disappearance of records legal crises corruption by management consumer lawsuit embezzlement by employee(s) employee lawsuit corporate espionage government investigation theft of'company property product recalls employee violence in the workplace adapted fratn: crandall, mccartney, & ziemnawicz, (/999). internal auditors and their perceptions of crisis events. internal auditing, l4 (i), ii-i. small businesses and crisis management every day small businesses are confronted with unwelcome crises that cause them to crash, strain, struggle and fail in unpublicized silence (traverso, 2001). since the terrorist attacks of september 11, many businesses have begun to assess their vulnerabilities. among small businesses, the task of crisis preparedness has been exceptionally demanding. according to hopkins (2001), workplace violence, cyber loss and mail contamination are some of the top security issues. one small houston firm with 110 employees leaves nothing to chance, requiring all job applicants to provide a valid driver's license. discovery of an invalid driver' license helps managers flag potential problems with an applicant (hopkins, 2001). other small businesses are developing systems to back up data to protect against data loss or hacker invasions. still others are redesigning building space to screen mail for suspicious packages before delivering them to employees (hopkins, 2001). in 1999, at hollow metal door co., an employee embezzled nearly $250,000 (daniels, 2002). while the amount may have been of little consequence to a large company, it was enough to put this small business on the brink of bankruptcy. 22 journal ofsmall business strategy vol. 14, no. l spring/sununer 2003 a small busmess's abihty to manage a cnsis can mean the difference between survival and disaster. offer's ()998) review of crisis preparedness indicates that 50 percent of all businesses stricken by a crisis. will not survive if they do not have an adequate business recovery plan. pedone (1997) presents an especially pessimistic observation indicating that 90 percent of businesses without a recovery plan would fail within two years of a disaster. 'fhus, the relevant question in crisis management and planning isn't whether a crisis will occur, but what will it be and when it will occur (caponigro, 2000). there is some ment to the argument that insurance will resolve a crisis-provoked problem, but its value is far from complete. simbo's (1993) analysis of this argument indicates that insurance can provide protection for extensive cost implications, but by itself is inadequate in terms of assuring a tirm's survival and recovery. the insurance argument has one major weakness: lt does not protect against decreased productivity, loss of goodwill, low employee morale, increased absenteeism, stress, worker unrest, and increased workers'ompensation claims (fink, 2000). the business interruption caused by a crisis can have an impact on customers, suppliers and distributors. moreover, insurance does not solve the public relations and social responsibility problems that may emanate from the crisis. this point was vividly exemplified in the exxon vatdez oil disaster (hartley, 1993).the wildlife and environmental damage could not be valued in dollars and cents. it takes years to recover from such environmental damage; no insurance claim could possibly compensate for it. some small businesses argue that they do not adequately develop crisis-management plans becahse they do not have the resources (barton, 2001), while others claim that there just is not enough time 'in today's climate to be preoccupied with crisis-management planning (caponigro, 2000). while these are understandable points of view, they are imprudent and, if continued, can be harmful to the success of the small business operation. major deals can be disrupted. it seems more realisnc to establish a crisis-management plan to save the company today and then focus on the deals that will come tomorrow crisis planning in small businesses: assessing worst-case scenarios the discussion to this point brings us to the question: what are the crisis events that are of most concern to small businesses? investigating this question will provide useful insights in determining the worst-case scenarios for the crisis-management process. figure 1 presents a format for assessing worst-case scenarios. three considerations'can be evaluated: has the event occurred in the recent past, what is the current level of concern for that particular crisis, and are there any unique characteristics of the business or industry that would increase the likelihood of a certain type of crisis? a crisis that has occurred in the recent past is a consideration in worst-case scenario planning. for example, frequent computer system breakdowns can cause ma)or disruptions. management will want to take steps to prevent their reoccurrence, so some planning must take place. a common practice in larger organizations is to have back-up computer facilities in place (hot sites) before a major disruption occurs. the level of concern about a crisis is important in worst-case scenario planning. while it is expected that concern will increase if a crisis has already occurred, it is also possible that concern may be heightened even if the specific crisis has not occurred. two examples illustrate this point. first, the y2k crisis manifested itself at a small number of organizations, although concern for this potential was extremely high. second, the september 11 terrorist 23 jout nal of small business strategy vol. 14, no. l spring/suntrner 2003 incidents have elevated organizational concerns about similar attacks, even though no attacks have occurred at these organizations. figure i —assessing worst-case scenarios crisis event occurring in past some potential worst-case scenarios: concern toward a ~ computer systems cnsis event breakdown ~ equipment breakdown ~ theft of company property small business type and industry characteristics the particular charactenstics of a business or an industry and its location may dictate what types of crises should be included in worst-case scenario planning. for example, in florida hurricanes are included in worst-case scenario planning (kruse, 1993). the previous discussion on crisis in small businesses has indicated that embezzlement and data back-up are problems that can create a crisis. businesses would be wise to develop contingency plans for these events. the study questionnaire a survey instrument was adapted from the instrument used by crandall, et al. (1999). the instrument was based on the crisis events listed in exhibit 1. respondents were asked to rate their degree of concern for each event, using a scale with i indicating a low degree of concern and 5 indicating a high degree of concern. in addition, the survey asked whether the crisis in question had actually occurred at the respondent's organization within the last three years. respondents were also asked whether their orgamzation had a crisis-management team. data collection the survey instrument was mailed to the human resources or executive offices of 1,000 small businesses in pennsylvania and new york. each survey contained a stamped, self-addressed envelope. one hundred and sixty two usable surveys were received —a response rate of 16.2 percent. results three major business types responded to the survey. these included service business (32.7 percent), manufacturing businesses (35.2 percent), retail businesses (2.5 percent) and a category of "other," which comprised a host of businesses not categorized in any of the above (29.6 percent). ninety-four organizations (64.4 percent) had fewer than 25 employees, 27 organizations (18.5 percent) had between 25 and 99 employees, 19 organizations (13.0 24 journal of small bitsmess strategy vol. /4, no. i spri itglsnnttner 2003 percent) had between 100 and 499 employees, while 6 orgamzations (4.1 percent) had over 500 employees. sixteen orgamzations did not respond to this question on the survey. with regard to crisis management teams, seventeen businesses (11.0percent) said they had a crisis-management team, while 138 organizations (89.0 percent) responded that they did not have one. seven busmesses did not respond to this question. data analysis the lirst phase of the analysis was to examine the business's perception of crises and crisis management. to determine the degree of concern for a crisis, all 27 items on the questionnaire were measured. the results are displayed in table 1. the means of each potential crisis revealed a range of scores from 3.76 for computer systems breakdown to 1.22 for an earthquake. the second phase of the analysis examined the actual occurrences of a crisis event in the last three years. these results also appear in table 1. the most frequent type of crisis was computer systems breakdown. this crisis occurred at 94 of the organizations, or 59.9 percent of the total number of businesses in the study. the least-frequent occurring crisis was earthquakes, which occurred at three of the organizations. thc next phase analyzed the relationship between the concern for a crisis and the occurrence of a cnsis. the purpose of this part of the study was to determine which crisis events happened most often and drew the most concern from the respondents. while it may seem that frequent occurrence of a crisis will generate higher concern, such is not always the case. for example, if computer-system breakdowns have previously occurred in an establishment, but management is not particularly alarmed or concerned about it, then the crisis may not be perceived as severe. when a crisis shows some degree of frequency and a higher degree of concern, then it may be a candidate for worst-case scenario planning. a pearson correlation analysis found a strong relationship between the concern for a crisis and the occurrence of that same crisis with a coefficient of .734 (significance level p ( 0.01). determining worst case-scenarios there are various methods to ascertain potential worst-case scenarios. one effective method is to simply ask which crisis events the respondents are most concerned about. these results were revealed in table 1. another method is to ask the respondents what events have actually occurred at the organization in a recent time period, such as the last three years, also in table 1. a third method would be to combine the data from both tables and make a more comprehensive determination of potential worst-case scenarios. for this study, the calculation of z-scores (table 2) was used to complete the analysis. z-scores were calculated in order to standardize the relationship between these two variables. using the means scores and the frequency of an event's occurrence presented in table 1, i calculated a standardized z-score value. the results of these calculations are presented in table 2. 25 journal of small business srraregy vo(. /4, no. l spring/summer 2003 table 1 —actual occurrence of crisis event & mean degree of concern in last three years mean type of crisis event degree of frequency % n= concern computer system breakdown 3.76 94 59.9 157 snowstorm 2.25 83 56.1 148 breakdown of a major piece of 3.33 82 53.6 153 production/service equipment theft of company property 2.67 50 34.7 144 major product/service malfunction 2.85 45 30.2 149 permanently lost records due to computer 3.26 37 23.7 156 system breakdown employee lawsuit 2.70 32 21.9 146 government investigation 2 52 30 21.1 142 consumer lawsuit 2.70 26 18.6 140 flood 1.79 24 16.9 142 major industrial accident 2.87 23 15.3 150 product recall 1.96 22 15.3 144 theft or disappearance of records 2.10 20 13.9 144 negative media coverage 2.08 15 10.1 148 embezzlement by employee(s) 1.93 14 9.5 148 employee violence at the workplace 2.08 13 9.2 142 product sabotage 1.73 10 6.6 151 death of a key executive 2.60 10 6.9 145 hurricane 1.35 9 6.2 146 computer system invaded by hacker 2.24 9 5.9 153 corporate espionage 1.71 7 4.9 144 tornado 1.51 6 4.2 142 lost records permanently due to fire 2.25 5 3.2 155 corruption by management 1.71 4 27 147 boycott by consumers or public 1.52 3 2.0 153 earthquake 1.22 3 20 147 z-scores standardize the variables according to the number of standard deviations from the mean of the sample. the higher the z-score, the farther away from the mean is the variable. z-scores of 0 equal the mean for the sample; therefore scores over 0 were of particular interest in this study because they indicated higher degrees of concern or occurrence than the sample's average. to help visually depict this relationship, an examination of graph 1 reveals nine potential crisis events where both z-scores for concern and occurrence are over 0. using the z-score greater than 0 criterions, i propose that these events are good candidates for worstcase scenario planning. graph 1 illustrates how occurrence and concern move together for each crisis. not every event follows this pattern on a smooth curve. for example, major industrial accident (item 4,) and consumer lawsuit (item 6, among others) deviate to a greater extent from the concern curve. 26 jour)tal of small business strategy vol. /4, no. l spring/summer 2003 table 2 —z-scores for degree of concern and occurrence of an actual crisis number key to type of crisis event z-score for degree of zscore for concern for the crisis occurrence of cr'isis i computer systems breakdown 2.333451 2.52353 2 breakdown of a major piece of prod/serv. 1.6g546 2.11516)4 equip 3 permanent lost records due to computer 1.55654 .38()65 breakdown 4 major mdustrial accident .94972 -.10921 5 major product/service malfunction .91860 .77034 6 consumer lawsuit .77857 .08559 7 employee lawsuit .68521 .28039 8 theft of company property g3853 1.03598 9 death of a key executive .52962 -.60506 10 government investigation .40514 .23317 11 snowstorm -.01496 2.29922 12 lost records permanently due to fire -.01496 -.82347 13 computer mvadcd by hacker —.03052 -.66409 14 theft or disappearance of records -.24835 —.19185 15 employee violence in the workplace -.27947 -.46929 16 negative media coverage -.27947 -.416i g 17 product recall —.46618 -.g2277 18 embezzlement by employee(s) -.51286 -.45158 19 flood -.73069 -.01476 20 product sabotage -.82405 -.62277 21 corruption by management -.85517 -.85298 22 corporate espionage —.85517 -.72312 23 boycott by consumer or public -1.15080 -.89430 24 tornado -1.16636 -.76444 25 hurricane -1.41531 -.64638 26 earthquake -.61758 -.89430 graph l z scores for degree of concern and occurrence of actual crisis pearson correlation = .734 (p&. 0/) 1 p~zoccurre ! 2 dod i odco i i i i i 'i i i io li 2 i i i i d 2 22 d 22 d 22 .2ccod doo io 27 yournal of sinai/ business s/ra/egy vo/. /4, no l spring/summer 2003 discussion analysis of the data reveals two major themes: first, the major crises that small businesses need to address; second, the findmgs suggest that few small businesses have established crisis-management teams or plans for deahng with a crisis. what are the worst-case scenarios? discovering the worst-case scenarios that will determine the content of crisis plans is part art and part science. in the final analysis, the specific worst-case scenarios will be a function of the individual organization within the context of its size and industry. this study analyzed the scenarios from an aggregate point of view, i.e., the sample was not further subdivided into segments such as industry or organization size. the events that meet this criterion include: ~ computer systems breakdown (zconcem = 2.333, zoccur = 2.523) ~ breakdown of a ma)or piece of prod/service equipment (zconcern = 1.665, zoccur = 2.115) ~ permanently lost records due to computer breakdown (zconcem = 1.556, zoccur =0.3866) ~ major industrial accident (zconcern = 0.9497, zoccur = -0.1092) ~ ma)or product/service malfunction (zconcern = 0.9186, zoccur = 0.7703) ~ consumer lawsuits (zconcem = 0.7785, zoccur = 0.0855) ~ employee(s) lawsuit (zconcern = 0.6852, zoccur = 0.2803) ~ theft of company property (zconcern = 0.6385, zoccur = 1.0359) ~ death of a key executive (zconcern = 0.5296, zoccur = -0.6050) ~ government investigation (zconcem = 0.4051, zoccur = 0.2331) ~ snowstorm (zconcem = -0.0149, zoccur = 2.2992). these findmgs show that 5 of the 11 potential crisis events involve significant business operations. even though they may seem to be challenging, these potential events could be controlled to some degree by the organization itself. computer systems data and equipment can be backed up. expanded or more focused quality-control measures can be implemented to assure that product/service malfunctions and industrial accidents are mitigated. these management practices need periodic assessment to ensure that they are effectively and continuously applied in the work environment. implications for management this finding reveals an important challenge in crisis planning. if a business has not experienced a crisis or no vulnerability is identified, then planning for it is not considered a priority. management books and the popular press continuously report and discuss case studies of businesses of all sizes that failed because they were unable to manage a crisis event. the challenge then, is to convince all owner/managers, particularly those of small businesses, of the need for proper crisis management. table i indicates that there is genuine concern about potential crisis events such as breakdown of a major piece of production/service equipment, major industrial accident, computer-system breakdown, and flood just to mention a few. managers and small-business owners need to think seriously about taking steps to avoid a crisis. focusing on the following ideas will go a long way toward that end: 1. form a crisis-management team. 2. know how to detect crisis symptoms or conduct vulnerability analysis. 28 journal of small basi ness strategy vol. l4, no. i spring/sumuter 2003 3. develop an effective communication mechamsm within the business. 4. train everyone to be vigilant, prepared and responsive. 5. remain tlexible to changing environments. the first reconunendation is for a small business to form a crisis-management team. no matter how small the business, an appropnate team can be established. it may be only the owner and one staff person, but that is sufficient. in a larger business, the team should consist of key company representatives from operations, marketing and accounting, as wefl as the ceo or owner. if the team is new, it is may be worthwhile to consult with experts who can provide a framework for operation. (fmk, 2000). while the size of the team depends on the particular type of business, it is suggested that it be kept to fewer than 10 members (barton, 1993). the second recommendation focuses on a vulnerability analysis. one of the most important steps in developing the crisis-management plan is to identify most significant vulnerabilities in the business and priontize them. the best way to do a vulnerability analysis is to ask questions and be perceptive about warning signs (caponigro, 2000). a business that plans for a crisis unique to its industry becomes better prepared to manage the crisis should it occur. the third recommendation centers on making the communication system as effective as possible. communicating during and after a crisis is crucial to successful crisis managenient. one essential element of this process is the selection of a proper spokesperson. to achieve competency in this area, it may be necessary to seek the expertise of professionals in communication techniques (caponigro, 2000). the fourth recommendation suggests ongoing training of personnel. offering both formal and informal traimng to management and employees is an important ingredient in the cnsismanagement equation. the more knowledge an employee has about the warning signs of a potential crisis, the easier it is to identify the crisis and deal with it immediately. this is why creating a corporate culture that is sensitive to the crisis-management concept is so important. finally, it is recommended that the cnsis-management team and business personnel remain flexible. in managing a crisis, the decision-makers must not be locked into inflexible plans. responding to a crisis is a fluid process (fink, 2000). conclusion this study investigated the perceptions and experiences of small businesses as they relate to worst-case scenanos. the results indicate that, in general, small businesses are not that 'oncernedabout crisis issues and subsequently, few have crisis-management teams. one reason this may be the case is that smaller businesses experience fewer crisis events relative to larger organizations. another reason could be that because a majority of the businesses have fewer than 25 employees, they do not believe that they have the resources for a crisismanagement process. there lies the paradox. because of those fewer resources and lack of expertise, small 'usinessesare also less likely to recover if they do experience a crisis. this study concludes that small businesses, like their larger counterparts, should adopt crisis-management plans. they should incorporate worst-case scenario identification and crisis planning in their business-development plan. reading the small business owner's guide to d good night' sleep, by debra k. traverso, provides practical strategies for identifying worst-case scenarios and managing them. 29 journal of small business s/ra/cgy vol. /4, no. i sprmg/summer 2003 study's contribution to crisis management while the study is exploratory, it does contnbute to the understanding of crisis management. first, it provides insight into the types of crises and cnsis concerns that small business managers consider important to their operations. these insights form the basis for worst-case scenario planning. a second contribution addresses the association between concern for a crisis and its actual occurrence. the study reveals that concern and frequency move in the same general direction, i.e., high-concern events have also occurred more frequently while low-concern events have occurred less frequently. one obvious caveat should be noted, the terrorism of september 11 was, statistically, a rare event. and yet, concern for terrorism has increased dramatically in the united states, even though the incidence of terrorism is low. in crisis management, it is understood that some events have a low likelihood of occurring, yet they still generate high concern among managers. references barton, l. (1993). crisis in organizations: managing and communicating in the heat of chaos. cincinnati, oh: south-western publishing co. barton, l. (2001). crisis m organizations ii. united states; south-western publishing co. caponigro, j. (1998). the crisis counselor. the executive 's guide /o avoiding, managing, and thriving on crises that occurin all businesses. southfield, mich.: barker business books, inc. caponigro, j. r., (2000). the crisis counselor: a step-by-step guide /o managing a business crisis. chicago: contemporary books. coombs, w. (1995). crisis response strategies. an exploratory study. proceedings of the 3 annual conference on crisis management, las vegas: nevada. crandall, w., mccartney, m., & ziemnowicz, c. (1999). internal auditors and their perceptions of crisis events. internal auditing, /4 (i), 11-17. daniels, c. (2002, may). confessions of an embezzler: fbsfortune small business, h://www.fortune.corn/fortune/print/0,15935,361268,00.html, pp. 1-5. amacom. (2000). crisis management planning for theinevitable. new york: fink, s. gorski, t. (1998). a blueprint for crisis management. association management, 50 (i), 7879. hartley, r. (1993). business ethics: violations of the public trust. new york: john wiley & sons. hickman, j., & crandall, w. (1997). before disaster hits: a multifaceted approach to crisis management. business horizons, 40 (2), 75-79. hopkins, j. (2001). small businesses take steps to protect themselves. usa today, 20(43), 6b irvine, r., & miller, d. (1997). multiplying the effects. factors influencing media coverage of business crisis. proceedings of the 6'nnual conference on ctds/s management, las vegas: nevada. kruse, c. (1993).disaster plan stands the test of hurricane. personnel journal, 72 (6), 36-43. marcus, a., & goodman, r. (1991). victims and shareholders. the dilemmas of presenting corporate policy during a crisis: academy of management journal, 34 (2), 281-305. mccartney, m., crandall, w., ziemnowicz, c. (1999).why plan for something bad if it may not happen? or is all this crisis management stuff just another fad?. internal auditing, /4 (il 11-17. megginson, w.l., byrd, m.j. & megginson, l.c. (2000). small business management. an entrepreneur's guidebook. boston; irwin-mcgraw-hill mitroff, i.i., (1989). programming for crisis control security management, october, 75-79. 30 journal of small business strategv vol. i4, no. i spring/summer 2003 offer, i. (1998). pessimist's charter. accountancy, i zl (4), 50-51. pearson, c., & mitroff, l. (1993). from crisis prone to crisis prepared. a framework for crisis management. acadeiny of management execurive, 71, 48-59. pedone, r. (1997, november 3). disaster recovery, are you prepared for business disruption? long island business news, nov. 3, 23-24. salerno, c. (2000). walking on sunshine. contingency planning & management, 5 (3), 10i14. simbo, a.k. (1993). catastrophe planning and crisis management. risk management, 40 (2), 64-66. traverso, d.k. (2001). the small business owner's guide ro a good night's sleep. princeton:; bloomberg press. warwick, m. (1993). disaster recovery: come hell or high water. communication international, 20 (10), 33-40. wnek, r. (2000). helping employees recover. contingency planning & management, 5 (4), '6-29. john e. spillan, m.b.a. and ph.d. in business and management and serves as assistant professor of business administration at the pennsylvania slate university -dubois campus. his research interests center on crisis management, marketing and ennepreneurship and international business with specific interest in latin america and eastern europe. his articles have appeared in the journal of business, management development forum, international journal of marketing and marketing research, journal of business in developing nations, southern business review and communication research report. dr. spillan is coordinator of the bachelors of science in business degree program at the penn stale-dubois campus. he has traveled extensively in europe, latin america and the middle east. 31 strategy usasbe/sbida 2000 conference coleman best empirical research paper awarded by the coleman foundation knowledge networks: differences and performance effects e meric solymossy western illinois university quad cities emeric solymossyqaccmail.wiu.edu abstract a survey of l4l small & medium sized enterprise (sme) principals reveals rwo distinctly different types of knowledge networks based upon the principal k perception of whether or noi networks provide a significant benefit to their firm. significant differences exist in the type of information exchanged, rhe type of networks maintained, and how networking activiiies contribute to the competitive position and performance of the firm. firms that see benefiis to networking maintain in(ense and broad neiworks oriented towards potential knowledge. assimilating this knowledge, they gain competitive advantage and maintain higher levels ofperformance. those that do not see a benefit to networking activities maintain less intensive networks, exchanging experientially based information; information that is 'fried and true" and which can be adapted toincremenrally improve their operations. introduction we are in the information age. economic environments are changing at an unprecedented rate. new and emerging technologies are altering products, methods of production, and ways of doing business. the current economic environment is "a knowledge based system, wherein a knowledge is the most important resource," (bergeron, lallisch, &. lebas, !998:733), and yet scarcity of resources is a'problem for small businesses (zacharakis, 1997; gallant-stokes, 1987). networks have been argued as enabling small businesses to assemble scarce resources (birley, 1985; ostgaard & birley, 1996) and enable their growth (jarillo, 1989). is beneficial knowledge a resource that small & medium size enterprises (smes) acquire through networks? if yes, what are the different types of knowledge-networks used by smes? networks: social structures that facilitate the exchange of resources patterned relationships among people and firms create a social structure a network that can facilitate or constrain the actions of individuals, groups, and organizations (aldrich & zimmer, 1986). networks enable small businesses to assemble scarce resources (birley, 1985; ostgaard & birley, 1996), improve information acquisition (peters & brush, 1996), and facilitate their growth (jarillo, 1989). without external contacts, a small or medium size 14 journal ofsmall business srraregy vol. ll, no. i spring/summer 2000 enterprise's capabilities are limited to its own resources and abilities. as a result of network participation, small firms can successfully compete with large competitors while maintaining flexibility and innovativeness. pfeffer and salancik's resource dependency theory asserts that a relationship between firms is affected by the importance of the resource (1978). networks are the channels through which critical external resources can flow. an essential objective for resource poor small firms should be the building of network exchange relationships with others that potentially may either supply critical resources or serve as contacts for those that can (larson, 1992). access to, and the size of, a firm's network enables growth (johannisson, 1990). while a firm's network development is influenced in part by the habits and social structure of the participants (gulati, 1995), relationships between firms may be shaped and deliberately designed, especially to accelerate a firm's access to and ability to transfer knowledge (lorenzoni &. liparini. 1999). growing firms make more use of external resources (jarillo, 1989; zhao & aram, 1995), have larger networks, and initiate more frequent contacts within their network. information alters or reinforces understanding, and becomes knowledge if it can be applied. knowledge is a critical resource. the modem economy has been defined as a "knowledgebased system ...(wherein] knowledge is the most important resource and learning is the most important process" (bergeron, lallich, & lebas, 1998:733).networks, by emphasizing the flow of information, facilitate the capture and diffusion of technical and organizational knowledge, which can be classified according to the type of information being exchanged: (i) the buyer-supplier linkage, (2) the technical problem-solving network, and (3) the informal community network (carlsson, 1997). the community network is informal and relatively stable, characterized by personal contacts among individuals within a variety of industries and occupations, and can be both extensive and loosely knit. the community network may be influenced by shared values and emotional attraction from personal rather than a purely business perspective (johannisson, 1996). the technical problem-solving network (which frequently overlaps the buyer-supplier linkage), is based on participants having a shared issue or problem of a technical or technological nature. as a problem-solving linkage, it is the transfer of knowledge, rather than the exchange of goods and services that is central. the buyer-supplier linkage, on the other hand, focuses on information that will enhance the flow of materials, hence the exchange of goods and services. networking activity promotes resource acquisition and is related to competitive information scanning activities. research has investigated the networking behavior of small and medium size enterprises from both the venture formation and the growth/competitiveness perspectives. the business planning process prompts founders to analyze the resources necessary for business success and to compare these with resources already owned or within the firm()s control. this process prompts the founder to develop network contacts to identify missing resources, and to assist in the businessperson's search for sources where they can acquire the additional resources necessary for successful venture formation (larson & starr, 1993). beyond resource acquisition, management is better able to define their competencies vis-6-vis competition by participation in networks (proven & human, 1999). research has studied networking structure and behavior in relationship to post-start-up performance measures (e.g., sales, employment) (brunderl & preisendorfer, 1998), however, results continue to be inconsistent (ostgaard & birley, 1996). inconsistent results may be due to a focus on the networking process and structure rather than on the resources being exchanged. most small and medium size enterprises do not participate in "structured" 15 journal ofsmall business siraregy vol. l i no. l spring/summer 2000 relationships such as alliances or research and development partnerships. as the firm evolves, resource needs change, thus network ties must also change (hite & hesterly, 1999). second, and more importantly, focusing on the process and structure of networking fails to test the underlying assumption of network theory, specifically that networks provide resources perceived to have an economic benefit to participants. lene foss has previously argued that research should focus on the resources being exchanged in addition to the network contact information (1993). prior research has not looked at the knowledge transfer role of networking for smes, and has not asked whether the firm's network contacts provide these critical resources. this research probes this gap by assessing whether small & medium sized enterprise principals perceive a benefit to networking for the exchange of information and knowledge, and then analyzing their networking activities and its consequences. research methodology the two principal questions motivated this research: ( i) do networks provide knowledge that benefits smes and (2) if yes, what are the diiterent types of knowledge-networks used by smes? specific questions and the composite scales for the performance, the firm and the environment have been compiled from previous research, are generally accepted in the field, and have been previously validated (solymossy, 1998).'erformance outcomes are assessed by changes in overall sales, changes in employment levels, the income of the firm's principal, and the personal satisfaction of the principal. firms are distinct in their competitive attitude, their strategic processes, their level of technology, and their network utilization. the environmental variables assess the competitive hostility, the dynamism (rate of change), the technological sophistication necessary to succeed, and the munificence (generosity) of the environment. networking activity is measured by the average number of contacts per month, a simplified measure that has previously been used for identifying which resources can be tapped for key benefits (hoang & antoncic, 1999). drawing upon carlsson (1997), additional questions focused on the three types of knowledge: buyer-supplier, technical problem-solving, and community contacts, and further identifying the potential sources for this knowledge exchange. prior research, e.g., donckels and lambrecht (1997) and discussions with other scholars and business persons suggested 7 categories of sources that might capture the scope of an sme's potential network: academic institutions, research agencies, business assistance agencies, external consultants, trade shows and industry associations, other businesses, and relatives and friends. in addition, open-ended questions were utilized to inquire as to perceptions of economic benelit and crucial external linkages for each of the three types of knowledge. a lengthy questionnaire was sent to 1250 northeastern illinois'for-profit" businesses having fewer than 300 employees. eighty-two (7%) were returned by the post office, 32 (3%) were returned by recipients as being either not applicable or with refusals, and 141 completed brevity precludes a detailed discussion of the individual questions and the scales, however, the reader is directed to solymossy, (1998), pages 46-49 for performance measures, pages 64-72 for firm specific characteristics, and pages 73-77 for environmental measures. 2 the list was acquired from dunn and bradstreet, comprised of a random selection of firms within the areas of bureau, carroll, henderson, henry, jo daviess, knox, lee, mercer, ogle, peoria, rock island, stark, stephenson, whiteside counties 16 journal ofsmall business strategy val, l i, na. l spring/summer 2000 responses were received, yielding an adjusted response rate of 12.5%. given the complexity of the instrument, a low response rate was expected; and the responses were deemed to be sufficient for exploratory purposes. respondents average 52 years of age, of which 83% were male, 17% female (table i). ninety-six percent of the respondents are principals of the firm, either having founded the firm or owning 50% or more of the firm. the average age of the firms is 24 years. the sample represents a broad cross-section of industries, with a notable preponderance in the service industry (professional services, consumer services, or guest services). there is a relatively high representation of businesses in agricultural industries, but this is to be expected given the nature of the geographic area studied. educational levels are also broadly distributed, with 71% of respondents having had at least some college (27% have pursued post-graduate education) (table i). overall, respondents'escriptive information is comparable to reports from other sme research (e.g. lee, rogolt & puryear, 1998; van auken bc neeley, 1998). table i profiles of companies and respondents transpn.l industry n production services trade agriculture constrn. 139 4 60 20 29 26 2.9% 33.2% 14 4% 20.9% 18.7% some education n h.s. or less college bachelor's post-grad 141 41 41 32 27 29 1% 29 1% 22.7% 19 1% ownership n principal non-principal 136 130 6 95 6% 4.4% gender n male female 133 111 22 83.5% 16.5% variable n avg. s.d. range respondent's age 139 51.9 11.3 24 81 age of firm 137 23.6 18.4 2 87 no. of employees 131 4.6 7.1 0-50 findings seventy-eight percent (78%) of the respondents indicate that network contacts provide knowledge of significant benefit to their business (for simplicity, this group will hereatter be referred to as the ben group). twenty-two percent (22%) indicated that they did nar see significant benefit to their firm (this group will hereafter be referred to as the noben group). no significant differences exist between the two groups in the ownership position, age, gender, education, or income level of the respondent. likewise, no significant difference exists in either business age or industry. there is appears to be a difference in continuing education, with a larger proportion of the noben group reporting having completed 17 journal ofsmall business strategy vol. l l, no. l spring/summer 2000 supplementary, continuing education or training. while only permitting a tentative interpretation, due to the small sample size of the noben group compared with the ben group, this suggests that the noben group will pursue knowledge with specific focus and intent, often acquiring this through formalized educational or training programs table 2 comparing profiles of ben and noben groups continuous variables (t-tests) "ben" group "noben" group group (significant benefit) (no significant benefit) differences mean min max s.d. mean min max s.d. t-test sig (2-t) 51.557 24.0 81.0 11.61 53.259 33.0 76.0 9.86 -0.762 0.450 age 23.787 2.0 87.0 18.62 22.786 2.0 72.0 18.28 0.253 0.801 age categorical variables (non-parametric testing) "ben" group "noben" group (significant benefit) (no significant benefit) group differences mean sum mean sum sig n rank rank n rank rank m-w-u wilcox z (2-tail) gender 94 61.8 5809 27 61.8 1572 1194 1572 -0.741 0.459 principal 92 58.8 5408 24 58.78 1378 1078 1378 -0.430 0.667 education 98 63.2 6189 28 64.71 1338 1338 6189 -0.206 0.837 96 59.3 5690 28 73.57 2060 1034 5690 -2.470 0.014 education income 96 62.5 6002 26 57.73 1501 1150 1501 -0.628 0.530 based upon the differing perspectives on the benefits of networking, it was anticipated there would be significant differences in the types of knowledge shared and the type of contacts being maintained. furthermore, since knowledge is believed to be a critical resource, differences are expected to be manifested in the firm's perceiving a competitive advantage because of their network usage. for simplicity and ease of interpretation, rather than displaying the full 21 cell matrix from the questionnaire (for types and sources of knowledge), the average number of information exchange contacts per month is collapsed to two summed scores. the type of knowledge (buyer/supplier, technical, informal community relationships —sums the responses from all seven sources for that type of knowledge) (table 3, below), while the source(s) (sums the three types of knowledge within each of the seven source categories). differences in es of knowled e: based upon contact intensity and frequency for types of knowledge, significant differences exit in the knowledge areas of buyer-supplier and informal community information. however, a significant difference does not exist in the average number of contacts for technical/problem solving networks. in examining the three types of knowledge, the firm that perceives a significant benefit from networking is more intensive in its networking activities. these firms maintain an average of 6 contacts per month more than 18 journal of small business strategy vol. i/, no. i spring/summer 2000 those firms that do not perceive a benefit (buyer/supplier = 3, technical, problem solving = .6, informal community information = 2.5) (see table 3). differences in sources of knowled e: contact frequency with the various sources of information also shows major differences between the two groups in six of the seven categories (all sources excepting for trade shows and industry associations). on average, the ben group has 5.1 more contacts per month with friends and relatives, 2.7 more contacts per month with other businesses, and 1.2 more contacts with other consultants. not a single noben respondent indicated any contact with research institutes. within the ben group, there were up 3.33 contacts per month with research institutes. while an average difference of five contacts per month may not seem significant (five phones calls or personal visits may not be excessive), the magnitude of the differences are surprising. on average, the ben group has 28. 7 times as many contacts per month based on the three types of knowledge, and 18 times as many contacts per month with their sources of information and knowledge (see table 3). the question of whether an sme acquires economically valuable knowledge benefits from their networking activities is valid and meaningful. table 3 comparing tfpes and sources of knowledge (a verage number of contacts per month) "ben" group "noben" group group (significant benefit) (no significant benefit) differences mean min max s d mean min max s.d. t-test sig (2-1) 3.059 0.0 43.7 0.71 0.039 0.0 2.5 0.7/ 4.214 0.000 applier technical 1.434 0.0 15.0 3.03 0.839 0.0 15.0 3.03 0.894 0.378 nformal 2.979 0.0 100.0 1.05 0.452 0.0 4.0 1.05 2.040 0.044 cademic 0.333 0.0 4.0 0.29 0.125 0.0 1.0 0.29 2.105 0.038 esearch 0.241 0.0 3.3 0.00 0.000 0.0 0.0 0.00 3.451 0.001 bus. agency /.127 0.0 20.0 1.00 0.240 0.0 5.0 1.00 2.357 0.020 consultants 1.41/ 0.0 34.0 0.81 0.256 0.0 4.0 0.81 2.445 0.0/6 shows/assoc. 0.722 0.0 4.0 2.96 0.885 0.0 15.0 2.96 -0.278 0.783 usinesses 3.599 0.0 21.7 1.21 0.9/3 0.0 5.0 1.21 5.035 0.000 5.785 0.0 200.0 1.89 a667 0.0 9.0 /.89 1.950 0.054 elati res differences in com etitive advanta e: respondents rated themselves (from i to 5) in each of eight areas potentially offering a competitive advantage (porter, 1985), with 5 corresponding to a level of competence that would yield a competitive advantage. three areas exhibit significant differences; two related to technology, the third with accessibility to the market. while there is no difference between the ben and noben groups in the domains of price, quality, breadth of product offerings, or differentiation (either by focus or by higher levels of service), the ben group, on average believe themselves to have a superior competitive position because of access to the market. this may be because they are more 19 journal ofsmall business 5/raregy va/./1, no./ spring/summer 2000 actively involved in scanning activities, seeking information about the marketplace (note differences on the buyer/supplier knowledge). because of this increased search, they are more confident in their evaluating themselves vis-8-vis the competition (provan & human, 1999). the noben group, having less information and knowledge, may not be as able to compare themselves to the competition. (see table 4) there are also significant differences between the two groups in technologically oriented competitive advantage (both product and process). while no significant difference exists between the two groups in the technical/problem solving 0ipe of knowledge, significant diflcrences exists in their svurces for acquiring information and knowledge. the ben group, having more intense contact with research agencies, consultants and other businesses, position themselves to receive more information. while quantity does not necessarily equate to quality, a greater frequency of contacts with different sources permits information acquisition to be more comprehensive. this translates into allowing unique production/process technology. by virtue of being "unique" knowledge, these firms assimilate information from table 4 differences in competitive advantage ( 5 = area of high competence, i = area of no, or low competence) "ben" group "noben" group group (significant benefit) (no significant benefit) differences mean min max s.d. mean min max s.d. t-test sig (2-t) 3.223 0.0 5.0 1.83 2.704 0.0 5.0 1.75 1.346 0.185nique market niche ccess /a marke/ 3.274 0.0 5.0 1.65 2.519 0.0 $.0 1.8/ 1.953 0.0$8 0 2.117 0.0 5.0 1.72 /.462 0.0 4.0 /.45 1.956 0.0$6fproduct 2.102 0.0 $.0 1.82 0.846 0.0 4.0 b /2 4.3350.000in prod. process ower price 2.559 0.0 5.0 1.57 2.704 0.0 5.0 1.73 0.697 3.820 0.0 5.0 1.34 3.481 0.0 5.0 1.67 0.968 0.340 3.112 0.0 5.0 1.68 2.852 0.0 5.0 1.77 0.680 0.500ervice lines 3.932 0.0 5.0 1.38 3.815 0.0 5.0 1.42 0.383 0.704ustomer service a variety of sources, innovatively combine using this information, and create unique knowledge which attords them a competitive advantage. beyond the significant difference in their perception of competitive strengths in the two "technology" areas, it is noteworthy that "no respondents within the noben group scored themselves a "5" in either of the technology areas. none felt themselves to have very strong competitive advantage in technology in spite of 18% of the noben group having advanced degrees (see table 4). differences in network atterns: numerous, pronounced differences have been discussed as being apparent between the groups that do, or do not, realize a significant benefit from their networking activities. there are even more pronounced differences in their network relationship patterns. to identify these patterns, correlation matrices were calculated showing the correspondence between the types of knowledge and the sources of knowledge. the 20 journal ofsmall business strategy vol. i k no. l spring/summer 2000 strongest relationships (at greater than the 99.9%confidence level) were diagramed to identify the knowledge network patterns of each group (see figure i ). the knowledge network pattern for those who do not perceive a significant benefit from networking appears to be relatively constrained relatively few, albeit fairly strong relationships, with very weak relationships between the types of knowledge. this suggests purposeful pursuit within a relatively structured set of knowledge networks. keeping in mind that the separation of these two groups is based on their perception of benefit to the firm, it is helpful to analyze these differences based upon potential cognitive differences. figure i knowledge network relationship patterns ivobbv bey lajps ~rda(dyysstups ((hrly riess rdaiaahi(s dmare 999ymarirdnce) (chty ihcse cddi arsis(s dma e999 cr/ crsrfi dea) iatsarm ilail st cs llsllsse scufm cs area(«s i cus artsd c ufhs casdaas (hh(m ~casdmts frrhlm sdvise srhhrrr sal fdeah «d fmds research has shown that cognitive styles vary significantly among people. the kai theory maintains that people differ on their approach to solving problems based on their cognitive type, with people being either adaptors or innovators (kirton, 1976). adapters tend to be conservative, exploring solutions within generally accepted guidelines and frameworks. innovators, on the other hand, see existing guidelines and frameworks as part of the problem, frequently incorporating radical processes or ideas as part of their solution. from a strategic perspective, the adaptive style focuses on doing things better, comfortable with incremental improvement, while the innovative style develops the ability to do things differently, frequently employing radically new solutions (kirton, 1980 as cited in brigham and reed, 1999). the network pattern of the nobens suggests a comfort level in using "tried and true" knowledge by seeking sources that support this. there is no contact with research agencies, and minimal (not comparatively significant) contact with academics. these sources, being on the leading edge of new knowledge, would introduce new and different information requiring processing by the firm. these firms, however, do not appear to pursue change. they cope with it. while both groups exhibit one knowledge network with a singular linkage (type and source link), they are in entirely different areas. the noben group networks with a single linkage is between buyer-supplier knowledge and other businesses. they rely on other 21 journal ofsmall business strategy vol. i i, na. l spring/summer 2000 businesses, acquiring knowledge that is new to them, but not new to others within their business community. this affords them parity, but not superiority. multiple sources are indicated for both the problem solving and informal information networks. these sources also indicate a reliance on practical experience, whether from friends and relatives, other businesses, trade shows or industry consultants. being more "adaptive," the information and knowledge that is acquired through these networks supports the noben group's need for learning what is being or has been done by others that could be applied to their current situation. the ben group, on the other hand, exhibits a broader and more inclusive knowledge network pattern. for example, their technical problem-solving network extends beyond other businesses to include academic institutions, research agencies and business assistance agencies. likewise, the buyer-supplier network is broadened to include relatives and friends, affording the possibility of unexpected sources of valuable information. performance conse uences: perhaps the most meaningful (from a practical perspective) difference between the two groups is the significant relationships (at the 95% confidence level) between the knowledge networks and the performance measures exhibited by the ben group. those firms that perceive a benefit to their networks apply the information they acquire to generate new knowledge, subsequently converting this knowledge into a competitive advantage, which results in measurable, positive results to the firm. a manova analysis was conducted to investigate how knowledge networking activity affects the performance of the firm. this testing categorized firms by economic performance levels, and then sought to determine what differentiated the high performance firm from those that didn't perform as well. sales growth of the firm is positively affected by contact frequency for exchanging technical knowledge and by the frequency of contact with consultants and friends and relatives. both the sme principal's income and a composite measure of economic success (combining income, sales growth and employment growth) show statistically significant effects from networking activities (with 95% confidence). contact with consultants corresponds to additional income for the sme principal (supporting the indications evidenced for sales growth). increased economic success corresponds to increases in contact frequency in technical knowledge (as a type of knowledge) and with academic institutions and trade shows/industry associations as sources (see table 5). this offers additional supports to earlier indications that firms which acquire and convert knowledge into a competitive advantage demonstrate improved economic results. table 5 relationship to increased performance effect variable f sig. of f power sales growth ktechn (type) 3.525 0.011 0.911 sales growth kconsult (source) 2.252 0.072 0.749 sales growth kf ri end (source) 3.981 0.006 0.940 principal's income kconsult (source) 4.622 0.012 0.854 economic success ktechn (type) 2.785 0.031 0.837 economic success ksacad (source) 2.004 0.101 0.702 economic success kshows (source) 2.033 0.097 0.709 22 journal ofsmall business strategy vol. i l. tgto. l spring/summer 2000 conclusion and implications this research finds that not all sme principals see networks as providing knowledge which benefits their firm, and as a result, network composition and intensity differs. those firms not perceiving a benefit maintain less intensive networks, focus more on experiential information, and seek information about what is or has been. the knowledge acquired is adapted to the sme's particular situation, and used to improve operations. the benefits from networking are not, however, maximized, and consequently, networking's value is not recognized by the sme. those perceiving benefits from their networks maintain more intensive, wide-ranging and overlapping networks. while they also gather information from others regarding what is being done, this group actively maintains contacts with forward-looking expertise. this emerging knowledge base is most pronounced in technological and problem solving networks, supplementing experientially based information, and appears to focus on potential. the data suggests that firms who value networks are proactive in maintaining them, appear to convert information into new knowledge, and as a result, gain competitive advantage that is subsequently reflected in the performance of the firm. these findings have potentially significant implications for both businesses and providers of services and support to smes. for the business practitioner, the findings are relatively clear. it doesn't matter whether you perceive benefits from networking or not, there are measurable benefits to networking provided the firm is disposed to capitalize on the information/ knowledge capacity of networks. institutions, agencies and policy makers must likewise realize that there are two different types of knowledge required by sme firms, and programs cannot "be-all, to-all." while these findings are statistically significant and meaningful, they must be used with some caution. this study explores new veins of inquiry with a moderate sample size. the indications provided by this research are meaningful since the study is focused specifically on a single class of resource exchange within networks, and has sought to not only clarify the nature of information and knowledge as a resource but to assess its value from both a perceptual and an outcome perspective. future research could explore these relationships further, expanding upon the basic framework presented, and would be more suitable to rigorous statistical analysis, allowing improved generalizability. references aldrich, h., 6t zimmer, k. (1986). "entrepreneurship through social networks," in sexton, 13. l., and smilor, r. (ed.), the art and science of entre reneurshi, ballinger publishing, cambridge, ma. bergeron, s., lallisch, s., bt lebas, c. (1998). location of innovating activities, industrial structure and techno-industrial clusters in the french economy, 1985-1990. evidence 7 133 p «1 g. r~hp ll 36,733-731. birley, s. (1985). the role of networks in the entrepreneurial process, journal of businessv~il, 167-117. brigham, k., tk reed, t. (1999, august). an em irical examination of entre reneurial student's distinctive co nitive s les im lications for effective entre reneurial education, paper presented at the academy of management conference, chicago, illinois. brunderl, j., i'c preisendorfer, p. (1998). network support and the success of newly founded businesses, small business economics 10(3), 213-225. 23 journal of small business strategy vol. l l, no. l spring/summer 2000 carlsson, b. (1997). on and off the beaten path: the evolution of four technological systems in sweden, international journal of industrial or anization 15, 775-799. donckels, r., & lambrecht, j. (1997). the network position of small businesses: an explanatory model journal of small business mana ement a ril, 13-25. foss, i.. (1993). resources, networks and entrepreneurship: a survey of 153 starters and 84 non-starters in the cod farming industry in norway. in churchill, n., et al. (ed.), frontiers of entre reneurshi research babson park, massachusetts: center for entrepreneurial studies, 355-369. g ii -8 k,y.(1997).e 9: ig y '.~bi ke i 17(6). 49-52. gulati, r. (1995). social structure and alliance formation patterns: a longitudinal analysis, administrative science uarterl 40, 619-652. hite, j., & hesterly, w. (1999). the evolution of entrepreneurial network ties in emerging entrepreneurial firms. strate ic mana ement journal (submitted). hoang, h., & antoncic, b. (1999). network-based research in entrepreneurship: a critical review. working paper, cleveland, ohio: case western reserve university. jarillo, c. (1989). entrepreneurship and growth: the strategic use of external resources. journal of business venturin 4(2), 133-147. johannisson, b. (1990, august). buildin an entre reneurial career in a mixed econom: need for social and business ties in ersonal networks. paper presented at the academy of management annual meeting, san francisco, ca.. johannisson, b. (1996). the dynamics of entrepreneurial networks. in frontiers of entre reneurshi research, babson park, massachusetts: center for entrepreneurial studies. ri .mj.(1976).adp d) .ad ip) d . ~ji fa rd ~ph i 61, 6 2.629. l,a.,&e,j.(1993).a k dd f g i i f i . ~ehi theo and practice 17(2), 5-15. lee, m., rogoff, e. & puryear, a. (1998, january). differences between aspiring minority d hghd, — i iyh i:i h g igp. ~pdi f usasbe 12th annual conference, clearwater, fa, 1-11. lorenzoni, g. & lipparini, a. (1999). the leveraging of interfirm relationships as a distinctive organizational capability: a longitudinal study. strate ic mana ement journal 20(4), 317-338. ostgaard, t. a. & birley, s. (1996).new venture growth and personal networks. journal of business research 36(l), 37-50. peters, m., & brush c. (1996). market information scanning activities and growth in new ventures: a comparison of service and manufacturing businesses. journal of business 8 h 36 81.89. p&ff j.&81 ikg.(1978)e* ig i fg i i n y rny(:nm & row. porter, m. (1985). com etitive advanta e: creatin and sustainin su erior erformance. new york, ny: the free press. proven, k., & human, s. (1999).organizational learning and the role of network brokers in small firm manufacturing networks. in a. grandori (ed.), inter-firm networks: ne otiated orderand industrial cpm etitiveness. new york, ny: routledge publishing. solymossy, e. (1998). entre reneurial dimensions the relationshi of individual venture and environmental factors to success, unpublished doctoral dissertation, case western reserve university, cleveland van auken, h., & neeley, l. (1998, january). the impact of planning on the acquisition of start-up capital, proceedin s of usasbe 12th annual conference, clearwater, fa 248-259. 24 journal ofsmall business strategy vol. i i, no. i spring/summer 2000 zacharakis, a. (1997). entrepreneurial entry into foreign markets: a transaction cost perspective. entre reneurshi theo and practice 21(3), 23-39. zhao, l., 8c aram, j. (1995). networking and growth of young technology-intensive ventures in china. journal of business venturin 10(5), 349-370. dr. emetic solymossy received his b.s. degree in engineering from century university and his mb.a. from colorado state university. returned to academia from successful entrepreneurial experiences in new venture creation, acquisition, and turn-around management, he completed his ph.d. at case western reserve university in /998 with an emphasis in international entrepreneurship. dr. solymossy spent i996 in eastern europe, teaching, lecturing and conducting field research. in addition to numerous international conference papers, he has auihored an instructor's manual for 'entrepreneurship," contributed a chapter on international entrepreneurship for a russian textbook, co-authored a chapier in a marketing book, and has authored severaljournal articles . dr. solymossy teaches small business management and a variety of courses within the management field at western illinois university's quad-cities campus. he is actively involved in researching the factors thai contribute to success in emerging organi ations, and is a participating member in numerous professional, academic and civic associations. 25 strategy impact of recent tax legislation on small businesses howard r. toole james e. williamson gerald e. whittenburg san diego state university abstract this paper discusses selectedchangesin the tax laws, made in the summer of i 996, which are expected to have significani impact on small businesses. the general areas discussed are i) s corporations, 2) simple pension plans, 3) independent contractors, 4) leased employees, 6) expensing qualified small business assets, 6) the work opportunity tax credit, 7) life insurance policy loans, and 8) medical savings accounts. in each case, we first discuss the basic importance ofthe issue to small business and then briefly discuss some of the technical issues involved in applying the new laws. introduction "smallbusinesses are the backbone of the american economy. they create two of every three new jobs, produce 39 percent of the gross national product, and invent more than half the nation's technological innovation."'n addition, while large firms have actually been decreasing the number of employees, small firms have accounted for much of the growth in u.s. employment.'sing differentclassificatiors, the irs classifies 96 percent of businesses as small, yet these businesses generate only 12 percent of total receipts.'ecognizing the importance of small businesses to the economy, congress has continually modilied the tax laws to encourage the growth of small businesses. during the summer of 1996, congress passed four new acts (the small business job protection act, the health insurance portability and accountability act, the taxpayer bill of rights, and the personal responsibility and work opportunity reconciliation act) that together made more than 600 changes to the tax law. there are many changes scattered throughout these acts that affect the tax situation of many small businesses. discussed below are several of the more important tax changes that affect small business. in 1997 congress passed additional legislation, some of which will affect small businesses. those that impact the subject matter of this article are included herein. the other new items, from the 1997 legislation, affecting small businesses will be discussed in an upcoming article. 79 s corporations the s corporation is a widely used vehicle for operating a small business. in general, s corporations are formed to eliminate multiple levels of corporate taxation and simplify tax reporting requirements. income and other items from s corporations are taxed in a manner similar to partnerships. in 1995, approximately 1.9 million companies were organized as s corporations.'he changes, discussed below, allow more flexibility in the use of s corporations as a form of business. in particular, s corporations may now have more, and additional types of shareholders. each of these changes increases the ability of the s corporation business to raise capital. other changes alleviate previous problems of certain trusts investing in s corporationsand allow more effective estate planning with s corporation stock. the small business act (sba) makes significant revisions to the s corporation provisions (see table i for overview of these changes). collectively, these changes make s corporations into a more flexible form of doing business for many qualified enterprises. this also reflects congressional intent to maintain the s corporation as a viable alternative to forming a limited liability company (llc) for small businesses. table i summary of key s corporation cmanges the number of allowed shareholders for an s corporation increased from 35 to 75. s corporations can now have an 'electing small business trust" as a shareholder. s corporation can now have certain tax-exempt organization as shareholders. regular 'c" corporations and certain s corporations can be subsidiaries of s corporations. the irs is given more leeway to waive the eitects of inadvertent s corporation terminations. umber of shareholders the sba of 1 996 increases the numberof allowed s corporation shareholders from 35 to 75 for tax years beginningafler december 31, 1996.'s with prior law, a husband and wife count as one shareholder.'xample. abc corporation has 90 shares ofstock outstanding. seventy four individuals each own one share of abc stock. the remaining 16 shares are owned by h and w (a husband and wife). h owns 10 shares as his separate property and if owns three shares as her separate property. together, h and w 80 own the three shares as community property. this corporation meets the maximum of 75 shareholders test for s corporations since all the shares own by h and w are considered owned by one shareholder. electin small business trusts the act allows an "electing small business trust" to qualify as a shareholder in an s corporation.' qualified small business trust is a trust that has only beneficiaries that are individuals, estates, or charitableorganizationsholdingcontingentremainder interest(s). also, the interest in the trust must not have been acquired by purchase (e.g., only by gia, bequests, etc.). thus, ifan existingshareholdercreates a trust with s corporation stock with big state university (a qualified charitable organization) as the remainder of the trust, the trust can continue as a shareholder in the s corporation without causing the loss of s corporation status. each potential current beneficiary of the trust is counted as a shareholder for the 75shareholder limitation. a potential current income beneficiary is any person, with respect to the applicable period, who is entitled to, or at the discretion of any person may receive, a distribution from the principal or income of the trust. if an electing small business trust is a shareholder in an s corporation, the trust must pay income tax on the income from the s corporation at the highest rate imposed on estates and trusts (currently 39 6n o). this provision is effective for tax years beginning aaer december 31, 1997. tax-exem t or anization shareholders under changes made by the sba of 1996, certain tax-exempt organizations (e.g., a qualified retirement plan or charitable organization) are eligible to be s corporation shareholders.'he organizationwill count as one shareholder for purposes of determining the number of shareholders in an s corporation. it should be noted that all items of income, loss, credit, or deduction from the s corporation will be taxable as unrelated business taxable income (ubti) to the tax-exempt shareholder. this provision is elfective for tax years beginning aaer december 31, 1997. s cor oration subsidiaries in a major departure from prior tax law, the sba of 1996 allows an s corporation to have subsidiaries.'n s corporation may now own 80'/0 or more of the stock of a "c" corporation or 100'/u of another qualified s corporation without loss of s status. however, unlike a c corporation, an s corporation cannot file a consolidated tax return with its subsidiaries. this provision is effective for tax years beginning aaer december 31, 1997. s cor oration terminations because of prior difficulties caused by inadvertent termination of the s corporation election, there are several new provisions in the sba of 1996 to alleviate this problem. congress gave the irs more authority to waive the effects of these inadvertent terminations," such as an invalid election caused by the corporations failure to qualify as a small business 81 corporation because it did not obtain the proper shareholder consents. the irs may also treat late-filed s corporation elections as timely if there is reasonable cause justifying the late tiling. this provision is retroactive and thus, is effective for tax years beginning arer december 31, 1982. another change makes it easier to close the books of an s corporation upon the terminationofa shareholder's interest. the termination election need only be made by the s corporation and all "affected shareholders," instead of all shareholders." thus, aaer the termination election is made, the closing of the books applies only to the affected shareholder(s), and not the other continuing shareholders. this provision is elfective for tax years beginning alter december 31, 1996. finally, any prior s corporation termination election in the five-year period beginning before january i, 1997 may be ignored." subsequently, any small business corporation that terminated its election during this period can immediately reelect s status without getting the previously required irs consent. there are other more esoteric provisions of the sba of 1996 that deal with s corporations that are not included here because they are not applicable to most taxpayers therefore, if a small business elects to operate as an s corporation, it should retain a knowledgeable tax advisor to ensure compliance with all the subtleties of the modified s corporation provisions. in addition, new possibilities exist for the use of an s corporation in individual estate planning. the importance of using a qualified tax advisor cannot be underestimated when electing s corporation status. simple pension plans small businesses account for nearly one-third of every u.s. worker over age twenty-five. yet, only one-third of small businesses offer a retirement plan while approximately 85 percent of large businesses offer some form of a retirement plan." the sba of 1996 created a new type of retirement plan for small businesses called the savings incentive match plan for employees(simple) plan." the congressional purpose for providing simple pension plans is to increase the number of small businesses offering retirement plans without unduly burdening these small businesses with administrative complexities. the new simple plans also waive the "top-heavy" provisions associated with traditional pension plans. a simple plan can be adopted by employers that don't maintain another employer-sponsoredretirement plan and have no more than 100 employees who earned $5,000 or more during the tax preceding year. a simple plan can consist of either an ira for each employee or be part of a i 401(k) plan. if the plan is established as an ira, the nondiscriminationrules generallyapplicableto qualified plans(including the top-heavy rules) are waived and simplifiedreportingrequirementsapply. generally,contributionsto a simple plan aren't taxable until withdrawn by the taxpayer. if a simple plan is adopted as part of a section 401(k) plan, the plan doesn't have to satisfy the special nondiscrimination tests applicable to 401(k) plans and isn't subject to the top-heavy rules. however, the other rules applicable to qualified plans continue to apply. 82 simple iras a simple retirement plan allows employees to make elective contributions to an ira. but, employee contributions have to be expressed as a percentage of the employee's compensation and can' exceed $6,000 per year." in future years, however, the $6,000 annual limitation will be indexed for inflation, in $500 increments. to qualify for a simple plan, employers must satisfy one of two contribution calculation formulas. the matching contribution formula generally requires that the employer match the employee's elective contributionson a dollar-for-dollarbasis up to 3 percent of the employee's compensation. an alternative contribution to ibis formula provides that an employer can elect to contribute a lower matching percentage for all employees (but not less than i percent of each employee's compensation)." the lower percentage, however, can only be elected for two out of any five years. example. a small employer maintains a simple ira plan for his employees. one of the employees, john, elects to contribute 5 percent of his salary to this simple plan. john is paid $30 000for the )997 tax year. the employer must withhold $ ),500 (5% x $30 000) from john 's paychecks and match it with $900 (3%x $30 000) andcontribute a total of$2,400 to an ira established for john. as an alternative to matching employee contributions up to 3 percent, an employer may elect to make a 2 percent mandatory contribution on behalf of each and all eligible employees who had at least $5,000 in compensation. example. a small employer business maintains a simple ira plan for his employees. the employer has five employees each of whom earn over $5,000for l99 7. the five employees earned total wages of$80 000for the year. instead of matching elective employee contributions, the employer can elect to make total $),600 contribution (2% x $80,000) pro rata for each employee. no contributions, other than the employees'lective contributions and the required employer matching contributions can be made to a simple plan. all contributions to an employee's simple account are fully vested when made." distributions from a simple account generally are taxed according to the rules applicable to iras. similarly, tax-free rollovers can be made from one simple account to another. in addition, atter an individual has participated in a simple plan for two years, the simple account can be rolled over into an ira tax-free. even when, an employee is no longer participating in a simple plan (e.g., a terminated employee) and two years have passed since the employee first participated in the simple plan, the employee's simple account is treated like any other ira. early withdrawals from a simple account generally are also subject to the 10 percent early withdrawal tax applicable to iras. however, withdrawals made during the two-year period beginning on the date the employee first participated in a simple plan are subject to a 25 percent penalty, instead of the normal 10 percent penalty on early withdrawals from iras " 83 each eligible employee can choose, within the 60-day period preceding the beginning of any year, to make elective deferrals to the simple plan, and to modify any previous elections regarding the amount of contributions for that year." an employer must contribute each employee'selective deferral to the employee's simple account within 30 days alter the end of the month to which the contributions relate. employees must be allowed to terminate participation in the simple plan anytime during the year. the plan may provide that an employee who terminates participation cannot resume participation until the following year. a plan can (but isn't required to) permit an employee to make other changes to his or her contributions during the year (e.g., reduce the contribution percent). simplf. 401 k plans in general, a simple g 401(k) plan is deemed to satisfy the special nondiscrimination tests applicabletoemployeeelectivedeferralsand employermatchingcontributionsif the plan satisfiesthe special contributionconditionsapplicableto simple plans." in addition, the plan isn't subject to the top-heavy rules for any year for which this safe harbor is satisfied. the plan, however, is subject to all other i 401(k) plan rules. the safe harbor is satisfied if, for the year, the employer doesn't maintain another qualified plan, and (i) the employee's elective deferrals are no more than $6,000; (2) the employer matches the employee's elective deferrals up to 3 percent of compensation(or, alternatively, makes a 2 percent of compensation nonelective contribution for al i eligible employees with at least $5 000 in compen'sation); and (3) no other contributions are made to the plan." contributions under the safe harbor rules have to be 100 percent vested. also, the employer cannot reduce the matching percentage below 3 percent of compensation. the simple plan provisions are effective for tax years beginning after december 31, 1996. it is extremely important to seek the advice of a qualified pension advisor when establishing a simple plan. once established, however, the administration of a simple retirement plan should be of relatively little burden to a small business owner. independent contractors many businesses attempt to use the independent contractor form of relationship in order to avoid paying benefits and to escape employment taxes (e.g., fica and futa). this subject has been a contentious one for a number of years. the new rules do not solve the problem, but rather put structure on the procedures to deal with the determination of status. the new rules do nor define the difference between employees and independent contractors. working definitions of employees and independent contractors can be found in various irs publications." the sba of 1996 modified $ 530 of the revenue act of 1978 (p.l.95-600) dealing with independent contractors. under $ 530, a safe haven was created which generally allows an employer to treat a worker as not being an employee for employment (not income tax) tax 84 purposes, despite the worker's actual common-law status, unless the employer has no reasonable basis for the treatment. the modified rules are effective for tax years after 1996. the changes are designed to provide both the irs and employers with clearer standards that will reduce the number of taxpayer-i rs disputes over the operation of the safe-harbor rule and to reduce unnecessary litigation. the provision contains four safe harbors for having a "reasonable basis." these are: (i) published rulings or case law; (2) a past irs audit" of the taxpayer;(3) longstanding industry practice; and (4) "any other reasonable basis."" also, the act reverses a longstanding irs position by stating that a worker would not otherwise have to be considered an employee for i) 530 to apply." in addition, the act loosens the longstanding industry practice safe harbor test considerably. under the old law, a practice is an industry praciice if 25 percent of the taxpayer's competitors do it." alter 1996,the 25 percent test does not have to be met and a lower percentage (e.g., 10%-15%) may qualify as an industry practice. burden of proof the new provisions shia the burden of proof to the irs once the employer establishes a "prima facie case" that it was "reasonable" not to treat the workers as employees. according to the senate finance committee report (provided the employer has cooperated with the irs in furnishing any requested information)a prima facie case means a mere showing that one of the safe harbors listed in tt 530 applies. also, in the case where an employer tries to apply the "any other reasonable basis" safe harbor(number 4 above), the burden may not be easily shiited to the irs. the burden also shiits to the irs to determine whether the employer has treated anyone holding a substantially similar position as an employee. the sba of 1996 also requires, that before raising the worker(s) classification issue in an audit, the irs must furnish an employer with written notice of the provisions of i) 530." leased employees leased employees are used by businesses, including small businesses, in an attempt to remove a particular group of workers from the employer's regular payroll and thereby avoiding any benefit package costs. as an example, komputer kompany uses a facilities management firm to operate its data center, since it does not have the expertise to do so or a desire to pay employee benefits to this group of workers. under the right set of conditions these workers could be treated as employees of the facilities management firm, not kompute kompany. the new tax law provisions tighten-up the requirements to avoid being considered common law employees of the end user of the worker's service. under the sba of 1996, an employer will not be required to treat a worker as a leased employee unless the individual's services are performed under the "primary direction and control" of the recipient employer." this replaces the prior test which stated that leased employees were entitled to benefits (e.g., health insurance) if the services were of a type "historical ly performed" by employees of the recipient. this change reduces the risk to an employer that a leased employee will be entitled to employee benefits. 85 according to congressional committee reports, factors to be considered in determining if an individual is under the "primary direction or control" of the recipient taxpayer include whether the individual is subject to direct supervision and whether the individual must perform services in a manner dictated by the recipient. a recipient may exercise "primary direction or control," by directly supervisingan individual, although the recipient does not have the power to hire or fire the individual, the individual works for another employer, or another employer pays the individual's wages and withholds employment and income taxes. example. bob works full-lime in the accounting department of very small corporationof america (vsca). however, he is actually an eniployee of temp inc, which pays his wages, withholds employmeni and income taxes, and can terminaie him, bob is subject io the direct supervision and day today control of vsca and must perform services required by vsca. ff bob has been on thej ob for a substantial peidod ofthne he is considered a leased einployee of vsca and is entiiled to the same benefits us regular employees of vsca (ifany). expensing qualified small business assets for many years small businesses have been able to immediately expense a limited amount of the cost of capital assets acquired during a year, instead of depreciating them over several years (capitalization). a key requirement in this situation is that the assets involved be in-service tangible personal property (i.e., no real estate). the sba of 1996 increases the amount that can be expensed annually from $ 17,500to $25,000." the increase will be phasedin according to the schedule in table 2. example. betty is a self employed individual. during )997 she purchases and placesintoservice$ 22 000ofequipment usedin her biisiness. she may elect to expense $ /8000 of tire $22000 in i997u the reniaiiiing 54000 is written-off under regular tax depreciation rules (ma crs). 86 table 2 year annual limitation 1997 $ 18,000 1998 $ 18,500 1999 $ 19,000 2000 $20,000 2001 $24,000 2002 $25,000 2003 on $25,000 work opportunity tax credit the 1997 act extends the work opportunity credit to wages paid to a qualitied individual who begins work on or ager september 30, 1997, and before june 30, 1998. under the 1997act, the revised credit is 25 percent of the first 400 hours of employment and 40% for 400 or more hours of employment, assuming the employee works at least 120 hours. the credit applies to wages paid during the one-year period beginning on the day the individual begins work. note, for targeted group employees hired arer september 30, 1996 and before october 1, 1997 the credit was 35 percent of wages paid during the first year of employment, up to maximum wages of $6,000. the target groups that are eligible for the credit are: ~ a qualified welfare recipient ~ a qualified veteran ~ a qualified ex-felon ~ a high-risk youth ~ a vocational rehabilitation referral ~ a qualified summer youth employee ~ a qualified food stamp recipient ~ a supplemental security income (ssi) recipient an employer can qualify by obtaining written certification of the target group status be fore the individual starts work, or can submit a completed prescree ning not ice within 21 days alter the employment date. in addition, the employer must reduce any tax deduction for salaries paid by the amount of any credit claimed. 87 example. on october /5, 1997, a business hires a certified employeepom one of the targeted groups. the employee is paid $6 00 per hour and works 300 hours during 1997. the credit for 1997is $450 (25yv x ($6.00 x 300 hours)). the deduction for wages paid in 1997 would be $ / 350 (5/ 800 $450). life insurance policy loans 'nder the sba of 1996, a deduction is not allowed for interest paid or accrued on any indebtedness used to acquire life insurance policies or annuity or endowment contracts owned by the taxpayer that cover any individual who is an oaicer, employee, or anyone financially interested in any trade or business carried on by the taxpayer." there is no exception for any variation in the aggregate amount of debt on the policies or contracts covering the individual. there is an exception(i e., the same as prior law) for interest on indebtednesson life insurance policies that cover up to 20 "key persons." a key person is an individual who is either an officer or a 20 percent owner of the taxpayer. the number of individuals that can be treated as key persons may not exceed the greater of (1) five individuals, or (2) the lesser of 5 percent of the total number of officers and employees of the taxpayer or 20 individuals. also, any interest paid or accrued on life insurance contract debt covering a key person a/ter december 31, 1995 is deductible only to the extent the rate of interest does not exceed moody's corporate bond yield average-monthly rate for corporate bonds for each month interest is paid or accrued. example. black corporation has three qualified "key employees." the corporation horro i ved 5 /00 000 and used the proceeds to buy single premi am life insurance on the key employees. the interest rate oti the loan is /0 percent, therefore the corpora/i on pays $ 10 000 (1oynof $100 000) interest in /996. for 1996, assume moody's corporate bond yield rate averaged 9 percent. the deduction for interest on this key employee life insurance loan is limited to $9,000 (9yv of $ /00,000) because the actual interest exceeded the limited based on moody 's corporate bond rate. medical savings accounts medical savings accounts(msas) represent an experiment in the 1996 tax laws. the law allows for the creation of up to 750,000 experimental medical savings accounts for employees. to do this, the employer must purchase a high deductible (and low cost) majormedical policy for each employee and combine it with a medical savings account funded by the employee. the employee's contributions to the medical savings account are not income and any costs to the employer are deductible. the experiment was designed to determine if some significant medical coverage could be provided as an alternative to current medical coverage such as health insurance and hmos. 88 one of the tax law changes in 1996 that is not a business tax provision per se is the medical savings account. the health insurance portability and accountability act (hipaa) of 1996 creates a four-year "test" of these new medical savings accounts." the msa is basically an ira used for medical expenses. the test, in theory, is limited to about 750,000 health insurance policies. for the four-year test period, personal contributions to an msa are deductible and employercontributionsto an msa are excludible from income (and wages for social security purposes). earnings accumulated in the msa are not taxed nor are distributiora for medical expenses either taxed or penalized. withdrawals for other than medical expenses are includible in income and are subject to an additional 15 percent penalty tax. distributions afler age 65, death, or disability are not penalized, but are included in income. example. bill has a qualified medical saving account. after meeting the requireddeductibleof the plan, the plan pays 5i,200 ofbill's qualified medical expensesin thecurrentyear. the $i,200paymentis not income to bill andis not reported on his tax return. ti iqq tq starting in 1997, msas are available to the self-employed who buy a high-deductible health insurance plan or to employees being provided similar coverage by a "small business" employer. the law defines a small business employer as one with no more than 50 workers. the law provides relief for businesses that once qualified to provide msas but then grew to employ up to 200 workers. to qualify as part of a tax-preferred msa plan, a health insurance policy must have a deductible amount of $ 1,500 to $2,250 for individual coverage and $3,000 to $4,500 for family coverage. out-of-pocket expenses (the deductible plus any copayments) cannot exceed $3,000 for individual coverage and $5,500 for family coverage. afler 1998, these amounts will be indexed for inflation. limits annual msa contributions, either by the employee or employer, are limited to 65 percent of the deductible for individuals and 75 percent of the deductible for families. the law requires insurance companies or financial institutions offering msas to periodically report to the irs the total number of msas established. those reports must be filed twice in 1997 and once a year from 1998 through 2000. if the irs determines that the number of msa policies will exceed 750 000 by year's end, then it will publish guidance restricting future use of msas to current self-employed participants and to those who work for employers currently offering msas. only self-employed workers who participated in an msa anytime between 1997 to 2000, and those who work for employers who had established an msa be fore 2000, may make contributionsto an msa afler 2000. this provision is eitective for tax years beginning arer december 31, 1996. example. joan has self only coverage under a medical saving account high deductible health plan with an annual deductible of $ i,800. the annual contributionlimit is 65vrv of$ i,800 (5i, i 70j, and the monthly contribution limit is 597.50 (5i,i 70/l2). ifjoan is only eligible for an msa for the last eight 89 nionths of the year (i.e., april to december), the contribution limit for the year is $ 780 (eight months x $97.50). conclusion a number of changes in the tax law of interest to many small businesses are discussed in this paper. in addition, there were other tax law changes made in 1996 that are not discussed in this paper, because of space limitations or because they would only be of interest to a small number of taxpayers. nevertheless, when these issues are present, small business owners should work closely with a cpa or tax advisor to make sure that they receive the full benefit of any tax law change for which they are eligible. 90 citations i. sbaonline, http: //www.sbaonline.sba.gov/intro. html (june 4, 1997) 2. megginson, william l., mary jane byrd, charles r. scott, jr. and leon c. megginson, small business management, an entrepreneur's guide to success, 2w edition, invin, 1997, p. 6. 3. u.s. bureau of the census, statistical abstract of the united states, 1991, i i i a edition, table 861, p. 525. 4. megginson, william l., mary jane byrd, charles r. scott, jr. and leon c. megginson, small business management, p. 80. 5. i 1361(b)(1)(a). 6. i 1361(c)(l). 7. i 1361(c)(2)(a)(v). 8 i 1361(b)(1)(b) 9. i 1361(b)(3). 10. i 1362(fl. i i. i 1377(a)(2). 12. i 1362(g). 13.schwanhausser, mark, "big plans for small business," the san diego union-tribune, may 13, 1997, section c, p. i. i4 i 408(p)(l). 15. i 408(p)(2)(a)(ii). 16 i 408(p)(2)(b) i7 i 408(p)(3). 18. i 72(t)(6). 19 i 408(p)(5)(c) 20. i 401(k)(1 i)(a). 21. i 401(k)( i i)(b). 22. for example see irs pub. 15a. 23. taxpayers may not rely on a prior audit for tax years after 1996 unless the audit examined the employment tax status of the workers involved. 24. revenue act of 1978, i 530(a)(2). 25. revenue act of 1978, ) 530(e)(3). 26. revenue act of 1978, i 530(e)(2)(b). 27. revenue act of 1978, i 530(e)(4). 28. revenue act of 1978, i 530(e)(l). 29. i 414(n)(2)(c). 30. i 179(b)(1). 31.betty's taxable income has to be at least $ 18,000 for her to get the 1997 maximum expense allowance. 32. i 264(a)(4). 33. i 220(a). 91 wouldn't you and sbida be a perfect professional fit? yes ...ifyou have a strong interest in the growth and prosperity of small, entrepreneurial, and family-owned businesses. yes ...ifyou believe that collegiate business management education is strengthened by experiential learning opportunities. yes ...ifyour academic program, small business institute™,sbdc, or management assistance center strives to give small business and entrepreneurship issues equal exposure to those of large business. yes ...ifyou have a strong interest in small business consulting and/or small business case writing. our publications and regional and national conferences explore issues, trends, and managerial training for small, entrepreneurial, and family-owned businesses. student development is encouraged and supported through our small business institute™program, the preeminent small business field case consulting program in the united states. for membership information contact: pamela s. schindler sbida vp-marketing & membership voice: (937) 327-7904; fax: (937) 327-6143 email: pschinwittenberg.edu 1997 dues: us, $ 100.00; international, $ 125.00 i small business institute 1997 membership directors'ssociation strategf the impact of empowerment in small manufacturing firms bruce h. kemelgor university of louisville bhkemeot(nowise. louisville.edu abstract empowerment, andi is resultant improvements in both personal and organizational outcomes, has generally been researched and applied in large firms. this study assessed the impact of empowerment in four small man%cturing companies. results after one year indicate that improvements were realized in productivity, scrap loss, absenteeism, and gross profit. employees were generally very satisfied with the culture of empowerment within the businesses. implications for ownerymanagers of small firms are discussed. introduction small firms are starting to be recognized as environments from which empowerment, participative management, open-book management, etc. can make a significant difference in firm performance. most research on these topics has occurred in large firms. the reasons for this have been that large firms have felt increased pressure to be globally competitive thus they have adopted many of these techniques more quickly than smaller firms (caudron,1998; hasek, 1998), large firms have had management teams monitoring and seeking best practices (hasek, 1998; heaton, 1998), and large firms have exhibited the willingness to be laboratories in which new management approaches can be tested (dawson,1998). however, several authors contend that small firms are better suited for the application of a process such as empowerment than large organizations (nathan, 1993; kinni, 1994; argyris, 1998). smaller firms have the ability and flexibility to establish and refine various systems and processes more effortlessly than larger firms, and thus it is much easier to share knowledge within a culture of empowerment (benson, 1991; nathan, 1993; hasek, 1998; martinez, 1998). in a small business, employees oflen have the opportunity to perform a larger variety of tasks than in larger ones. this can certainly provide the environment for empowerment and a better understanding of the work process. empowerment in the small business environment may enable employees and management to leam and implement new ways of working, thus improving business operations for increased profits and productivity (chandler, 1997). yet research on empowerment has consistently focused on larger manufacturing firms (argyris, 1998). 39 journo/ ofsmall business strategy vol. /l, no. l spring/sumnter 2000 the purpose of this paper is to examine a sample of small manufacturing firms and evaluate if empowerment would improve worker commitment and firm performance. implications for the practical application of this construct and further research are also presented. background empowerment defined. conger and kanugo's (1988) paper is credited with forging a major step in recognizing and legitimizing the concept of empowerment in management theory. viewing empowerment as a motivational construct, conger and kanugo proposed that fulfillmtnit of people's power needs is based on their belief that they can successfully deal with the events, situations and/or people they confront. they suggest that management's role is to identify "conditions that foster powerlessness" and remove them through formal organizational policies and informal accurate communication. from another vantagepoint, peter kizilos (1990) defined empowerment from the workers'erspectives as "the process of coming to feel and behave as if one has power (in the sense of autonomy or authority or control) over significant aspects of one's life or work." two important implicit aspects of this definition are that (i) power is perceived from within the individual or group — not from outside, and (2) the individual or group makes the determination of what is or is not "significant." bell (1991)emphasized the first point in an article aptly titled "empowerment is not a gift" in which he said, "because personal power is already present within the individual, empowerment is not a gil1 one gives another. rather one can release power by removing the barriers that prevent its expression." another argument for this perspective was forwarded by cherniss who offered that, "you can't 'give'ower to someone else. if you'e giving them power, it implies that you have the power and they don' —and if you can give it, you can take it away" (kizilos, 1990). kizilos'econd part of the definition concerns the importance of managerial issues to workers. employees who are empowered make decisions about some issues that have been traditionally reserved for management (heaton, 1998). thus, the very essence of empowerment resides in having those who know the work best take ownership of the work process (benson, 1991), and make decisions about key aspects of the process amidst the support and protection of management (mckenna, 1990). empowerment operationalized. employee empowerment opportunities will, therefore, be defined as situations or forums designed by managers to encourage employees to join in negotiation and decision-making processes and experience actions and policy changes based on their deliberations. the criteria for identifying empowerment are partially housed in this definition. one criterion for considering an activity or series of activities as an empowerment opportunity rather than simply employee involvement is the engagement in negotiation and decision-making processes. this criterion fulfills byham's distinction between participative management and empowerment in which the former is "asking for people's help" and the latter is "getting them to help themselves" (kizilos, 1990). thomas and velthouse (1990), spreitzer (1995) and sheridan (1996) have further underscored the importance of this issue. another criterion is that policy changes occur as a result of that activity. this means that as a result of empowerment, individuals realize that their work and efforts have an impact (thomas and velthouse, 1990), move the organization toward greater effectiveness (spreitzer, 1995), and lead to improved organizational learning (heaton, 1998).the third is derived from bandura's (1977) contention that the internal perspective of self-efficacy, that is, of being empowered is critical to viewing a situation as empowering. a sense of individual selfefficacy leads to heightened feelings of competence, and the related sense of autonomy or choice (independence and discretion) regarding one's work (kirkman gc rosen, 1999). methods for identifying employee empowerment relate to fulfilling these three criteria. 40 journo/ ofsniall business strategy lrol, //, no. / spring/sumnter 2000 thus, while empowerment is strongly influenced by the immediate work environment and the organization's culture, its expression ultimately resides within the individual. building upon the work of thomas and velthouse (1990), spreitzer (1995) has defined individual empowerment as increased intrinsic task motivation generated by ~meanin —the value of a work goal or purpose as judged in relation to an individual's own ideals or standards; id a 9 bqfi ~ hi v pvly p f i 1 kll; self-determination —an individual's sense of having choice in initiating and regulating actions, and; ~im act —the degree to which an individual can influence how a job is done and its outcomes. focus of the study. this study proposes to assess the impact of psychological empowerment for the individual worker and its corresponding affect upon the outcomes for the organization. the larger issue is: through the use of empowerment, can small firms leverage their competitive strengths and prosper? to date, no investigations of this application within small firms have been identified and seemingly very linle work has been done with spreitzer's (1995) multi-dimensional measure of these four concepts. methodology sample. four small manufacturing firms were involved in the study (s.i.c. codes: 3524, 3535, 3556). all four produce durable goods, such as vending machines, that involve multistep production processes. these firms were chosen because of the complex nature of their production process, thus lending credibility to the perceived application of empowerment. all four firms were non-union, though ample evidence exists (benson, 1991; juravich, 1996; caudron, 1998; heaton, 1998) that empowerment can be successfully implemented in unionized environments. firm size ranged from 24 to 47 employees. while no effort was made to control for the effects of age or experience, for purposes of this study it should be noted that workers had from 6 to 22 year's tenure within these firms. gender was fairly evenly distributed across firms with an average of 62% males and 38% females. research design. prior to any intervention or training within the respective work environments, various measures of both employee perceptions and company performance (described below) were taken. employees and their supervisors and managers were then provided with a training/orientation program. this program, also described below, was designed to improve the employees'eadiness and abilities to exercise empowerment within the work environment. several studies (mckenna, 1990; sheridan, 1996; dawson, 1998; heaton, 1998) have documented both the necessity for such training as well as the residual effects upon empowered behavior. the evolution and evidence of an empowered workforce has been found to range from three to six months afler an initial training program (benson, 1991; sternberg, 1992; flanagan, 1994; hasek, 1998). thus, the study was designed to assess improvements, if any, that are found in performance and employee perception as attributable to empowerment. measures. the employees were given a copy of spreitzer's (1995) 12-item questionnaire that focused upon elements of individual empowerment prior to their training. these 12 items are replicated in table 1. the survey was administered on company time, on premises, at the end of the workday. the twelve items were randomly arranged on the instrument so as to reduce response bias. spreitzer (1995) reported reliability estimates of .72 and .62 (cronbach's alpha) for different samples of the original implementation of the scale. various measures of company performance were also gathered prior to the training. these focused upon waste or scrap loss (excess material from the production process that cannot be reclaimed or retooled 41 7 journal ofsmall business strategy vol. l l, no. l spring/summer 2000 into useable components), absenteeism (number of employees who do not report for work on a given shift and who are not excused due to bereavement or jury duty), productivity (acceptable units produced per hour), and gross profit. regardless of the particular company orientation to these factors, all four companies provided data based upon these definitions. for each of these measures, data was averaged for the month preceding the survey administration within each nf the firms. training. the employees were provided with 16 weeks of training, on company time and premises, concerning tools and techniques for: a) problem-identification; b) problem solving; c) decision-making; d) communication; e) conflict resolution; f) negotiation; g) teamwork; and h) organization specific training to improve their skills. supervisors were also provided additional training in coaching, counseling (mentoring), and facilitation. each training session lasted approximately 90 minutes and was administered twice weekly. implementation of empowerment. afler training, employees and supervisors were encouraged to embark upon the empowerment process. it was a slow, gradual learning experience, punctuated with uncertainty and mistakes, challenges and victories. recognizing that empowerment is a process, not a program, their efforts to improve and learn are ongoing. the criteria used in determining employee empowerment opportunities were: (i) participants are engaged in negotiation and decision-making processes; (2) decisions from the aforementioned engagement are implemented; and (3) employees perceive themselves as having been empowered from the perspective of their own self-efficacy and from fulfillment of outcome expectations. for example, workers in company a were involved in a project to design a company-wide training needs assessment and negotiated with each other for the inclusion of items and made decisions on all aspects of thc survey. members of another company engaged in mon!hs r.l negotiation and decision-making with managers to devise some apprenticeship programs. in a third organization, individual employees were encouraged to focus on creating new and better ways to provide customer service including everything from order processing to packaging and shipping. in all instances, aside from specific issues such as those cited above, employees and managers were expected to learn how to behave in an empowered environment and work toward changing the culture, reward system, and management style. above all, employees were expected to accept and apply the challenges of individual empowerment in afl matters related to their tasks. re-test. approximately one year from the time of launch, the survey was administered once again. employees completed the instrument at work on company time. given that some workers had left their employer during the year (ni 8) and other workers were new hires (n=8), the reported sample (n=138) consisted of only those employees who were employed throughout the entire intervention. however, so as not to introduce bias into the respective company cultures, all employees were surveyed at the time of the re-test. the results, comparing the differences in the two administrations, are discussed in the following section. also presented are selected comparative data concerning the issues of productivity, scrap loss, absenteeism and gross profit that were benchmarked one year earlier. again, data were averaged for the month preceding the re-test for each firm. findings survey results. for the data analysis, the results of the first administration were paired with the corresponding result of the second administration (e.g., la, lb; 2a, 2b; etc.). the "a" item 42 journal ofsmall business strategy vol. l l, no. l spring/summer 2000 results were from the first survey and the "b" item results from the second administration. the degree of improvement, if any, in feelings toward and satisfaction with empowerment was calculated by subtracting "a" from "b" (b minus a). table i summarizes the arithmetic means of the twelve items between the first and second administration (b minus a). the test-retest reliability had an overall coefficient alpha of .82, with the four components of the scale ranging from .63 (impact) to .78 (meaning). following spreitzer's (1995) suggestion that the high correlations between the components do not provide sufficient evidence for discriminant validity, later supported by kirkman and rosen (1999), a composite measure of empowerment using the twelve items was employed. table i comparison of mean differences for all respondents between first and second administration (b —a) individual empowerment scale items difference score i. the work i do is meaningful to me. 1.7704 ev 2. i have mastered the skill necessary for my job. 1.9074 " 3. i have a great deal of control over what happens in my 1.8215 vv department or work area. 4. i can decide on my own how to go about doing my work. 1.6239 '. the work i do is very important to me. 1.9167" 6. my impact on what happens in my department or work area is 1.4233 s large. 7. i am confident about my ability to do my job. i 5161 '. i have significant autonomy in determining how i do my job. 1.7011 v 9. i have significant inl)uence over what happens in my 1.7944 au department or work area. 10. my job activities are personally meaningful to me. 1.5926 '1. i have considerable opportunity for independence and freedom 1.6815 e in how i do my job. 12. i am self-assured about my capabilities to perform my work 1.4444 'ctivities. n= 138 * p& 0.05 vv p& 0.01 43 journal of small bust'ness strategy vol. l l, no. l spring/summer 2000 combining all results and subjecting them to a t-test indicates that empowerment practices had a positive effect on these twelve dimensions of the work-role relationship. all difference scores were significant at the 0.05 level while 5 were significant at 0.01. to insure that the results were not unduly influenced by company size, (i.e. scores from the smaller firms), a second t-test was performed. these results, assessing differences in average scores across companies, are presented as table 2. table 2 one —tail probability of differences between companies for mean scores on empowerment scale company/company a .: ''„', c,t "2;ss',dt a .165 .123 .178 b .165 .152 .108 c .123 .152 .144 d .128 .108 .144 p& 0.05 as may be noted, there are no significant differences across companies regarding the employee responses. this suggests that all employees, regardless of company, were experiencing positive reactions to the empowerment process. company data. the last set of data was derived by comparing archival information from the respective companies. gross data were made available to the researcher that permitted within company comparisons of the effects of empowerment. table 3 summarizes the secondary data by company. table 3 comparisons of company —wide data before and after empowerment company productivity waste/scrap absenteeism gross profit a up 23% down 15% down 6% up 11% b up 35% down 19% down 8% up 12% c up 26% down 18% down 11% up 10% d up 21% down 22% down 9% up 11% 44 journal ofsmall business strategy vo/. /i, no. l spring/summer 2000 results of the comparative analysis indicate significant or noteworthy improvement in all four areas by all companies. percentage improvements are the result of calculating the differences between these dimensions as reported by the companies prior to the implementation of empowerment and after one year. among workplace issues such as these, empowerment as a business strategy appears to be benefiting both employees and company owners/managers. discussion recognizing that through empowerment, workers obtain a higher level of commitment to their tasks (sheridan, 1991; argyris, 1998; caudron, 1998), greater feelings of competence and impact (gandz, 1990; thomas & velthouse, 1990), and greater understanding of what needs to be done to perform effectively (riggs, 1995; sheridan, 1996), one is le(i wondering why more organizations are not embracing this process. the answer lies within the concept of trust. management needs to reflect its respect for the individual in a supportive culture that is open to questioning from below and tolerant of failure (hasek, 1998). learning to trust one another is essential (mountford, 1997) and the lack of managerial trust of workers is the major stumbling block to an empowered workforce (stemberg, 1992; sheridan, 1996). in order to develop trust, one has to be trustworthy, thus the issue of developing trust within the workplace requires the elfort of everyone. trust must exist on the part of management (that overall the decisions made will be good for the company) and on the part of employees (that their actions will be supported by management) (foxman & polsky, 1991).overcoming this challenge may be easier in a smaller firm where the potential for more personal contact and individualized relationships tend to exist. the results appear to support the contention that empowerment can lead to improvements in employee involvement, commitment and job performance/satisfaction. the training program implemented within each firm was designed to not only provide the necessary skills, but reinforce the belief that the company was indeed entering a new era. with the advantage of being a small enterprise, the necessary communication, decisionmaking and resulting action were readily observed. employees, at various levels of buy-in and commitment, were able to have a clear picture of the impact of empowerment on both their activities as well company goals and objectives. the company-wide data suggests that performance was positively affected through the empowerment process. results are all in desirable directions for all firms. indeed, based upon the author's experience, small manufacturing firms are ideal settings for the application of empowerment. smaller firms have traditionally been owner-managed. these owners have frequently acted either as a patriarch or autocrat because: (a) it is their business; or (b) they believed that their employees enjoy a lot of freedom and responsibility since the firm is small. accepting the fact that this researcher addressed cultural change, managerial style, and reward systems with the owners (and still is), the results of the surveys and company provided data unquestionably indicate positive results through empowerment. certainly, empowerment is not appropriate for every organization. anyone seeking to implement the process must clearly understand what their objectives are and how they intend to attain them. creating an empowered work environment requires major shi(is in both managerial and worker attitudes and responsibilities. first and foremost is the issue of trust. everyone will need to accept empowerment as a major cultural change. managers must become much more tolerant of employee initiative, risk taking, and error. not only must risktaking be encouraged, but the penalties for failure must be eliminated (story, 1993). workers must accept the challenge of learning from mistakes, demonstrate responsible freedom, seek genuine ownership of their work processes and be committed to the continuous improvement 45 journal ofsmall business siraregy vol. l l, no. l spring/summer 2000 of the outcomes of their work. the sharing of power is, therefore, something that must evolve over time, reinforced by the words and deeds of everyone involved. as a part of the orientation, training, and culture shift that were addressed within each firm, the author stressed the following trust building dynamics. for empowerment to succeed, ~ establish a company vision to focus everyone's energies ~ openly share relevant information about company goals and objectives (use of a business plan is helpful) ~ refine the information system to support workers'eeds for information (cycle time, waste, etc.) through the use of meetings, newsletters, bulletin boards, etc. ~ communicate with an open mind and listen ~ lead, don't just manage ~ remove all impediments that hamper a worker's ability to perform ~ encourage open and honest dialogue —commitment is a function of involvement ~ refine the reward systems in terms of pay (and non-monetary rewards) and the performance appraisal criteria; make use of some form of gain-sharing, skillbased compensation, or profit-sharing as it is essential to link rewards to the behavior management wants to foster. ~ invest in lifelong learning —training that addresses everything from basic math dsgqh p bi . i in d fh« i i k~ilu ~ communicate, coach and mentor; management's role undergoes a major shift ~ be committed to empowerment for its own sake. workers can learn to trust in an empowerment culture, and become trustworthy, by: ~ wanting to be empowered and seeking to understand what it means ~ acting with responsible freedom —understand how to do what needs to be done rather than simply doing what they are told ~ accepting the parameters of operational power, realizing they will not share in every managerial decision ~ seeking opportunities for growth through problem-solving, decision-making and creating solutions ~ demonstrating self-discipline while they learn, think, analyze, evaluate, and improve ~ accepting responsibility for learning ~ developing skills in communication and interpersonal relations ~ feeling a sense of ownership in everything they do. the above is intended to introduce the shared responsibility that is required of everyone in an empowered organization. specific implementation strategies are described in several of the references (e.g. foxman k. polsky, 1991; caudron, 1995) and were not part of the purpose of this article. however, the implications of the study for small firms are significant. in order to improve quality and profitability, developing an empowered workforce that can expeditiously solve problems and enhance customer service (cook, chaganti, k haksever, 1998) provides the small firm with a competitive advantage. the training that is necessary represents an investment and does contribute to future profitability (cook, et.al., 1998). other studies support the significance of empowerment for productivity (sheridan, 1996; kirkman 8'crosen, 1999), a greater sense of ownership for the work (hasek, 1998; heaton, 1998), and job 46 journal ofsmall business srraiegy vol. i i, no. l spring/summer 2000 satisfaction (thomas & tymon, 1994; spreitzer, kizilos, & nason, 1997). these are outcomes that any business owner would significantly value. implications and conclusion empowerment is becoming a demonstrated way for an organization to address the goal of getting or staying ahead. in order for small firms to be competitive they will need to demonstrate continuous improvement. having workers wanting to participate in this process will only happen if the employees develop an internal commitment (argyris, 1998) to the organization. argyris (1998) maintains that internal commitment is closely aligned with empowerment —having people take ownership of their work. they do so based upon their own reasons or motivations —it's the difference between "having to" and "wanting to". a sense of internal personal responsibility is the result. empowerment, then, is the process that provides the motivation and skill to achieve that goal. empowerment enables people to feel and behave as if they have power (or autonomy or control) over significant aspects of their work. the small business owner is in an excellent position to take advantage of this concept. because the owner is often on-site and can collaborate more closely with all employees (workers, supervisors), he or she can create a culture of permission where guidelines are not treated as law. this culture provides a vision of what the organization is trying to accomplish and supports the development of skills so that people are equipped to do what needs to be done. the more personalized or individualized environment can help support that culture, both emotionally and materially, so that people will want to "go the extra mile". in order for employees to feel safe and secure in going the extra mile, they must believe management will protect them should they detour from the traditional route. workers must come to know and understand that management will support responsible risk-taking behavior. management, therefore, needs to leam how to release the expression of personal power within each of their employees. this change will not occur on any given day —we are not looking to signal a "new program". rather, management's commitment to changing the organization's culture needs to occur "through a series of moments" (block, 1987). to effectively implement a sincere and meaningful shia toward empowerment, here are some guidelines to assist the reader in framing the challenges that lie ahead: i) realize that not everyone will want to be empowered. some will not seek to be held personally accountable, thus there will be various levels of commitment. the extent of participation to organizational goals will vary with each employees wishes and intentions (argyris, 1998). 2) it will take time, hard work, lots of communication, listening, and trust-building to develop a sense of internal responsibility and personal (individual) empowerment. 3) people will have problems and ask management for help (argyris, 1998), but their managers cannot simply tell them what to do. this is where the skill and understanding of what it means to coach and mentor is most valuable. 4) realize the limits of empowerment. do not introduce it needlessly. non-routine or complex tasks, requiring decisions as defined earlier in this paper, are necessary to introduce internal commitment opportunities. 5) work with managers and supervisors to understand and master their new, emerging roles. sharing the power requires removing many previous barriers to success. coaching employees toward accepting more responsibility, for example, requires that managers actively listen to their workers. 47 journal ofsmall business strategy vol. l l, no.l spring/sungmer 2000 6) remember what empowerment is designed to achieve. sharing the power increases authority and builds ownership for the company's priorities (foxman & polsky, 1991).in order to achieve goals and effective performance, companies can't afford to slip up in managing their priorities. 7) with employees having the power to make decisions about relevant aspects of their work, their motivation to achieve company goals and profitability will be a function of genuine shared responsibility. managers must insure that policies and controls that inhibit the employees from undertaking action based on their decisions are removed. 8) insure that the information systems of the company are capable of providing readily available data. communication that is useful, relevant and goal directed will be significantly affected by the quality of these systems. it is apparent that successful implementation, however, depends in part upon achieving individual empowerment and some authors (e.g. dawson, 1998; argyris, 1998) have suggested that individual empowerment must occur prior to team empowerment. the author is presently conducting further research involving the transition from individual to team-based empowerment in some of these firms. other writers (nathan, 1993; kinni, 1994; mcclenahen, 1995; argyris, 1998) are calling for studies of team empowerment in small firms since the literature appears robust with team applications in only large firms. because the organizations in this study are small manufacturing firms, they can only survive and effectively compete on the basis of providing better quality, reliability and durability than their larger and better-financed rivals provide. the pursuit of high quality through empowerment as a workplace strategy is a journey —a never-ending process that can apply to any small business. references argyris, c. (1998). empowerment: the emperor's new clothes. harvard business review 76(3), 98-105. bandura, a. (1977). self-efficacy: toward a unifying theory of behavioral change. ps cholo review 84, 191-215. 8 ii.c. r. i(991). e 9 i gld ~ti i 28t)2). 98.8,t. e. (199)). e p:71 ' 4 g i .~ld w k 241(9), 45-52. block, p. (1987). the em owered mana er: positive olitical skills at work san francisco: jossey-bass publishers. caudron, s. (1995).create an empowering environment. personnel journal 74, 28. c 4 .s.(1998).th iy y«y h d. ~ld w k 247()51,98-192. chandler, a. (1997). the visible hand: the mana er and revolution in american business cambridge, ma: harvard university press. conger, j. &. kanungo, r. (1988).the empowerment process: integrating theory and practice. academ of mana ementreview 13(3),471-482. cook, r., chaganti, r., &. haksever, c. (1998). improving profitability of very small and small firms: the impact of quality practices in the human resource area. journal of small ~bi s«9(2), 44.56. dawson, g. (1998). is empowerment increasing in your organization? journal for ualit and 9~ii i 21(l ), 46-49. foxman, l. d. & polsky, w. l. (1991, september). share the power. personnel journal 116120. gandz, j. (1990).the employee empowerment era. business uarterl 55, 74-79. e k g (1998) s t hh i' l gg i .~td w k 247(is) )id ii ~. heaton, w. e. (1998). the secret strategy. production and invento mana ement journal 39(1), 78-81. 48 journal ofsmall business strategy vol.li, iio. i springisummer 2000 juravich, t. (1996).empirical research on employee involvement: a critical review for labor. labor studies journal 21, 51-63. k! i, t.b.(1994).2 pp! y ' d.~ld «w k 243(17), 40. kirkman, b. l. & rosen, b. (1999).beyond self-management: antecedents and consequences of team empowerment. academ of mana ement jouma! 42(1), 58-74. k*i, p. (1990).c *y b p . t~i ~ ~ 27(lo).47-51. m i * mn.(1998).th ii i p f ply k ldg.hrm *i 43(21. 88-94. mcclenahen, j. (1995).empowerment's downside. human resources 48 57-58. mk .j.p.(1990).s:th i dh f p .~id w k 240(13), 8-19. mountford, j. r. (1997). empowerment costing. production and lnvento mana ement journal 3 (1), 65-71. nathan, j. (1993). empowerment as a workplace strategy in small business. review of 0 15(21,28-29. rigg,j.(!995,1 w).e p i g k by i gg i . ~ i ' i 6-8. sh d,l h (1991) aphl phyf «8.~10 w k 241(3)11.13. sh 0 .3. h. (1996).l f h b . ~ld w k 245(4), 13-17. spreitzer, g. m. (1995). psychological empowerment in the workplace: dimensions, measurement, and validation. academ of mana ement journal 38(5), 1442-1465. spreitzer, g. m., kizilos, m. a. & nason, s. w. (1997). a dimensional analysis of the relationship between psychological empowerment and effectiveness, satisfaction, and strain. journal of mana ement 23 679-704. stemberg, l. e. (1992). empowerment: trust vs. control. the cornell h.r.a. uarterl 33(1), 69-72. story, m. r. (1993) the secrets of successful empowerment. national productivi review 14 81-90. thomas, k. w. & tymon, w. g. (1994). does empowerment always work: understanding the role of intrinsic motivation and personal interpretation, journal of mana ement~s6 39-54. thomas, k. w. & vehhouse, b. a. (1990). cognitive elements of empowerment: an interpretive model of intrinsic task motivation. academ of mana ement review 15(4), 666-681. bruce h. kemelgor is associate professor and past chairman of the department of management at the university of louisville, college of business. he is also chairperson of the graduate studies council and director of the small business institute. he received his ph. d. in organi-ational behavior and industnal psychology from the university of illinois, and aside fiom twenty-five years teaching experience, he has been employed as a performance analyst and as a director of research for two large companies. he has owned two small businesses andis presently part-owner in a third a recreational complex. while at ihe university of louisville, dr. kemelgor has been recognized several times as outstanding teacher of the year in the college of business. dr. kemelgor has been a consultant to companies such as at& t, corning glass, squibb pharmaceutical, monsanto chemical, owens-illinois, sears and general electric and for organizations such as city government, municipal utilities, community hospitals and public transportation services. aside pom research in many of these areas he is also actively involved in investigating corporaie entrepreneursht'p as a mechanism to strengthen organizational competitiveness. he has authored two books and over 50 publications plus he has presented aver 60 professional papers. 49 stmtmf book review fast growth: how to attain it, how to sustain it by lawrence g. weinzimmer dearborn trade reviewed by joette wisnieski associate editor, jsbs indiana university of pennsylvania wi snieni up. edu today's managers and most of today's business literature focus on growth. in today's volatile business environment, growth has become the new mantra. in today's constantly changing markets and technology, rapid growth is certainly one key to success. while in the past, companies had several years to reap the dividends of product innovation, but not today. companies must grow sales very quickly because within months there is the very real possibility that the innovation will be passed by. fast growth certainly seems like an admirable goal for modern corporations and most recognize the need for this happen. but this is the value added of weinzimmer's new book fast growilv how io aaain h, haw ia sustain ir, weinzimmer spells out methods to achieve this rapid growth and sustain it. while not targeted exclusively to small businesses, this easy to understand book should be helpful not only to entrepreneurial firms but management consultants as well. through a variety of research methods along with his consulting experiences, weinzimmer uses many different well-known companies from a variety of industries to illustrate his methods to first grow the business and then sustain this growth. while much of what he presents in this book is already known to management scholars, the manner in which he presents this material is refreshing and easily comprehended. he has taken an innovative approach to integrating material from strategic management, marketing and organizational theory and presenting some very practical, easy to understand guidelines to the entrepreneur or manager interested in growth. weinzimmer suggests there are three main catalysts to growth: market catalysts, organizational capabilities catalysts and strategy catalysts. in the first seven chapters, he expands on these catalysts greatly. in chapter one, weinzimmer introduces his framework for creating growth. chapters two and three, he discusses market catalysts. market catalysts focus on market characteristics, external framing and opportunity identification. market characteristics refer to the market 123 r ,lournal of \'matt business strategy vol. i2, no. 2 fall%'inter 200/ itself and while weinzimmer points out fast growth markets are easier to grow in, mature markets offer different types of opportunities. external framing is how the entrepreneur views his or her market. how broadly or narrowly the entrepreneur views his market can encourage or hinder growth. finally, it is up to the entrepreneur to recognize opportunities. weinzimmer suggests there exist an infinite number of opportunities available, and the entrepreneur needs to not only where to look but how. chapter three is filled with practical exercises and suggestions for the entrepreneur to stretch his or her thinking about where the opportunities lie. in addition to recognizing growth opportunities, new ventures must be ready to take advantage of these opportunities and this is where developing the correct organizational capabilities is shown to be important. chapters four and five talk about the importance of developing the right company culture and identifying the best top management team. it is this top management team that must drive this growth, ln chapters six and seven, the role of strategy is discussed. traditional strategic thinking is reviewed along with traditional business strategies. weinzimmer suggests not throwing out traditional thinking but expanding on it by focusing on value innovation. value innovation, he suggests comes from creating rather than competing. it can take many forms but will most often center on new product innovations, superior customer service or new distribution channels. it is these value innovations that will lead to leap growth strategies and maintain fast growth. strategies are then discussed to pursue these value innovations including internal development, strategic alliances and acquisition options. in chapter eight, weinzimmer concludes with a look at how to balance fast growth and the resources needed to pursue and maintain current market share and the resources needed for that. as he points out, this can be quite difficult for some companies to do. fast growth can very quickly worsen any functional or operational weaknesses a company may have. very fast growth that catches a company unprepared can very quickly lead to unfilled orders, or orders shipped too quickly without proper quality checks, cash flow problems, just to name a few. in this chapter he reviews a number of problems common to fast growth companies and signs to warn the entrepreneur of potential problems. in the final chapter, weinzimmer talks about the importance of balance. entrepreneurs and managers need to find the right balance between customers and competitors, between flexibility and tight control systems, and the correct balance between the different catalysts. while weinzimmer admits this is not easy, he does provide some simple suggestions useful to the entrepreneur or manager alike. while fast growth: how to anain it, how to maintain it, may sound like a cookbook or a recipe for success, i found it is much more than that.. most of his ideas come from sound management theory and his obvious extensive consulting experience, but he has packaged these theories in a simple easy to understand formula for top level managers to use to take their company to the next step. overall, fast growth: how to anain it, how to maintain it is a well-written book filled with business insights most top level managers or entrepreneurs should find useful. while many of the ideas presented here are not necessarily of themselves new, the way weinzimmer suggests using these theories is certainly innovative. he has a very entertaining writing style and most readers should enjoy the book and find something useful to take away from it. 124 sii4ie'gy the role of fiei.d-based business consulting experiences in aacsb business education: an exploratory survey and study martha doran san diego state university doi un i (niniai l.sjs u. edu don sciglimpagtia l&on. scigli mpaglia&a~dxu. edu howard toole san diego state university htoole~i~itnail.sdsu. edu abstract tliis research was designed to explore the critical variables associated with field-based considtancy (fbci experiences as an aid to designing successful fbc programs. it is generally ucknoivledged that there ure both advantages and disadvantages associated with fbc ut the student, instnictor, and institutionul level. deans, other university administrators, anil faculty have sometimes questioned this form ofprogram instruction from the perspectives of resonrce allocation and the appropriateness of this type offaculty activity in the typical university reward system. a mail survey was conducted of business school administrators to ascertain the extent ofinvolvemcnt with fbc and the associated success factors. the findings froni this stiidy validate some basic underpinnings of business education curriculum and design. stiident-based fuctors influencing success include smaller classes, usually at a senior ur yraduaie level, graded coiirsework (as opposed to passlfail), and full-time students. as a learning niethod, field-based leurni ng adds value to students, to clients involved, to the faculty aiid io the insiimtions. the hnrdles coniiniie to be the need for a fair allocation of the time and resources to tlie parties involved. introduction as we enter a new millennium, many business disciplines are undergoing a major and pronounced period of change. those critical of traditional academic approaches have called for significant improvements to increase the relevance of what is taught and to improve the quality of graduates. part of these challenges stem from more systemic critiques ofbusiness education in general. in recent years, academic programs in business have come under fire for being too passive, for possessing too many artificial boundaries between disciplines, and for being too teacher-directed. the most recent call to reinvent college education started in the 1980s (lindquist gc marienau, i 98 i; chickering, 1981). business schools have responded to this call for change by restructuring, rebaiancing and reconfiguring their programs rather than 8 journal of small business strategy vol. /2, no. l spring/summer 2001 completely reinventing them (west bt aupperle, 1996). they have made major changes in their curricula to emphasize active learning, integrated learning, and self-directed learning. of course, the small business institute™(sbi) has known this for decades, setting the standard in its sbi case methodology, which is now widely referred to as field-based consulting. this experiential process of learning by doing, reflecting and then (oaen) re-doing, is at the heart of most any success story. the small business institute program has since the early 1970s been involved in active learning, and pre-dated the reinvention of the modem business school curriculum, through its use of field-based consulting (fbc). by exposing countless students to small, entrepreneurial ventures, the sbi has undoubtedly been a leading force in developing entrepreneurial spirit in business school students and integrating much of their disjointed traditional classroom experiences, but the sbi program has, in our opinion, oaen been undervalued and misunderstood by faculty and administrators. in the 1990s, a report released by the secretary's commission on necessary skills (scans) set the stage for integrating the skills, knowledge and abilities learned in college with "the skills employers want." the report defined five broad categories of competencies, including: ( i) resources, (2) interpersonal, (3) information, (4) systems, and (5) technology (scans, 1991). the american assembly of collegiate schools of business (aacsb) also joined the chorus calling for changes in business education by placing greater emphasis on the need for integrating capstone experiences for students. these capstone experiences can take the form of intemships, cases, ethics, and team-based experiential activities (aacsb, 1994). there is some question whether the revised accreditation standards of aacsb allow for business schools to become more responsive to their markets. west and aupperle (1996) argue that the current university infrastructure may prevent the necessary entrepreneurial spirit to pick and choose the most appropriate curriculum design. yet this kind of strategic management is what is needed most for business schools to provide utility. in this same general area of infrastructure concerns, another problem continues to be the disconnection between the value placed on traditional, academically rigorous research by the university (tenure committees, etc.) and by managers and practitioners (dulek k fielden, 1992). most managers and practitioners in business fields rely on their trade journals, finding them more relevant or practical than many academic journals. interestingly, business schools are finding programs that integrate real-world concerns with various academic disciplines can produce collaborative teaching, learning and scholarship. the small business institute program has emphasized this type of integrative service learning for many years, but its place in the curriculum has oaen been questioned. deans, other administrators, and faculty have questioned not only the resources demanded by this type of program but also the appropriateness of the faculty activity in the typical university reward system. if programs such as these are to be successful, the administration of colleges of business must actively support the individuals and departments engaging in these endeavors. a necessary step is for the deans to understand the costs (in time and resources) and benefits provided by such programs to the interested constituency. therefore, as a first step, the authors surveyed business deans to provide a clear understanding of the perceptions that administrators have of many aspects of field-based consulting. the remainder of the paper provides an overview of field based consulting, a description of the study, the results of the study, and concluding comments 9 journal ofsmall business srrategt vol. /2, no. l spring!summer 200/ fiei.d-based consulting although not new, fbc has been highlighted in the reconfiguration ofboth undergraduate and graduate business programs. many business schools currently require some form of fieldbased consulting in their curricula. for example, mba students at the university of virginia are placed on student teams that work with local businesses as consultants. the students then present their findings to the company's executives (byme, 1993). similarly, undergraduate students at emory university in atlanta enroll in field study courses where they spend the majority of their time working with executives on-site (west & aupperle, 1996). ucla's graduate school of management also has a management field study program that provides students with an opportunity to define and solve a business problem. uci a's program is unique in that it has a group writing component designed to train and improve students'bilities to produce high quality group reports (forman & katsky, 1986). a number of leading business schools now use a field-based consulting experience as the culminating component of the mba degree. business schools are also forging more corporate partnerships, with one result being an increase in field-based consulting projects. a number of leading mba programs, including duke university, university of chicago, and the university of virginia, have recently instituted such programs (west & aupperle, 1996). one example of corporate involvement exists at the university of michigan, where business executives helped design a program that places students in medical school-style residencies. the students, as teams, work on company problems and are supervised by both faculty and business managers (byrne, 1992). the increased use of field-based consulting has enabled business programs to bridge the gap between academic learning and applied practice in organizations. this has enhanced the learning experience for students and provided a beneficial community service to firms. value to clients several researchers have examined the use of business students as consultants from the client's point of view. a review by weinstein, nicholls and seaton (1992) evaluated client perception based on four dimensions —professionalism, knowledge, practicality, and overall value. their study concluded that clients had more favorable perceptions than unfavorable and asserted that such consulting activities improved their marketing activities by providing firms with objectivity and planning insight. madison and junell (1998) developed an empirical model of client perception of student consulting projects. their results indicated that marketing students may perform better in field-based consulting assignments and that clients who responded to the survey tended to be satisfied with the results of the consulting project. o'onnor and rogers (1988) also found that both clients and students benefited from field-based consulting activities. although there are some risks involved for clients and not all projects are equivalent in quality, the clients in these studies generally found value in the work performed by the student consultants. value to students a number of researchers have investigated the role of business students as consultants. many have found that field-based consulting generates high levels of student satisfaction. daly and mitchell (1995) note that since business students tend to be more applications oriented, they want more "skill building" from the curriculum, rather than mere "book learning." daly and mitchell found that students enjoyed the hands-on nature of their project and benefited from the opportunity to learn about the complexity of organizations. jessup (1995) studied the implementation of a new capstone course using field-based consulting as the senior culminating experience at california state university, san marcos. he noted that students 10 journal ofsmall brtsiness strategy vol. /2, iyo. i spring/summer 200l found the learning experience to be challenging and useful. students also appreciated the opportunity to hone their analytical thinking skills and their ability to manage group dynamics, while gaining practical experience. muir (1996) also found that students involved in a consulting experience had mainly positive outcomes and gained an understanding of applying a critical approach to technical and business communication in the social environment of the organization. these studies indicate that students have valued the use of field-based consulting experiences as an important part of their learning. learning theory and field-based consulting the process used in field-based consulting corresponds closely to kolb's learning theory on experiential learning (kolb, 1984'). learning, as a process, encompasses four different stages: concrete experience, reflective observation, abstract conceptualization and active experimentation. for the adult learner, this model could also be used to describe field-based consulting. in the fbc context, prior experiences become the concrete basis for reflection and observation of current events. then, logical inferences are drawn and systems or models are derived from the intellectual discipline. the final stage of active experimentation, the applied aspect of field consulting, completes the learning cycle and can become the concrete experience for the next round of processing (kolb 8. lewis, 1986). field-based consulting rates high in the area of active, hands-on learning. indeed, immediate, concrete experiences, occurring outside of the classroom fill these activities with relevance for the learner, as well as a high level ofpersonal responsibility(kolb 8: lewis, 1986). the areas not easily incorporated into field-based activities are reflective observation and abstract conceptualization. some would argue that these skills are not easily recognized as valuable by the workplace at large. yet these later areas are what higher education is most readily able to provide. the problem seems to be in helping students integrate or transfer the classroom learning of theory and re flection to the workplace activities (aacsb, 1994). issues and concerns with field-based consulting little research exists which suggests how business schools should organize their field-based consulting pro rams. it is generally acknowledged that there are both advantages and disadvantages associated with fbc at the student, instructor, and institutional level. in addition, issues of structuring the experience, grading, whether the experience is required or elective, faculty compensation, support resources, funding, appropriateness for adjunct faculty, factors leading to a successful consultancy experience, and the attraction of fieldbased consultancy sites are all issues of concern. the university administration, the delivering faculty and students may view the associated advantages and disadvantages differently. for example, beatty, i-laas and sciglimpaglia (1996) conducted an extensive research project on evaluation of business student performance in team-based fbc projects. their research identified major instructional issues related to grade equity, student assessment, and learning outcomes of such projects. the study showed that, in addition to instruction-centered criteria such as meeting of group deadlines and quality of group output, student perceptions of group compatibility, workload equity and grade equity are important to the success of field-based consulting. the study this research was designed to explore the critical variables associated with field-based consultancy experiences as an aid to designing successful fbc programs. to ascertain the extent of involvement with fbc and the associated success factors, a mail questionnaire was sent to 594 deans of aacsb accredited business schools. deans and/or their designee 11 journal uf small business strategy val. 12, nv. 1 spring/s«mnter 2001 returned a total of 141 questionnaires (a response rate of twenty-four percent). of these, a total of 80 programs currently report using fbc at either the undergraduate or graduate level (56.7% of all schools). these responses became the basis of the experience survey. the major thrusts of the survey were to determine: i. advantages and disadvantages to students, faculty, and institution associated with fieldbased consulting experiences; 2. alternative ways of structuring the field-based consulting experiences; 3. alternative grading policies employed in field-based consulting experiences; 4. alternative-faculty-related issues (compensation, instructional support, etc.); 5. key success factors for a field-based consulting experience; 6. key business-related success factors for a field-based experience; and 7. site recruitment policies. the results of the study should be very useful to administrators and faculty who currently conduct field-based consultancy experiences. additionally this research should be extremely helpful to those considering the adoption of such programs. results administrative organization respondents were asked to estimate the current use of fbc as a portion of the academic program. as shown in table 1, programs typically utilize fbc in less than one quarter of courses offered, student consulting makes up less than fifty percent of the student's total workload in those courses with an fbc component (table 2). table 1 current usage of field-based consulting in responding aacsb schools: proportion of undergraduate and graduate courses which utilize fbc type of coame percent ofsc'hoots reported using fbcin this proportion of courses none 1-25% 26-50% 51-75'/o 76-100% n undergraduate g.g% go 5% 6 3% 1 3% «1 3% (gp) graduate 16.3% 71.3"6 6.3% 2.5% 3.9'/o (80) *rend as: of«it 80 responding schools, 1 3% «se fbc in 76 100% ofall ug courses. table 2 student consulting workload as proportion of total course assignment in field-based consulting courses tl pe of course proporrion ofall courses using fbc none 1-25% 26-50% 51-75% 76-100% n undergraduate 1.3% 33.3% 34.7% 2p p% 1p 7% (75) graduate 3.1% 33.8% 24.6% 20.0% 18.5% (65) 12 journal of small business strategy vol /2, ivo. 7 spring/summer 200l roughly one quarter of the responding aacsb schools currently require an fbc experience at the graduate level, while slightly less required it for undergraduates (18.7%). these results are shown in table 3. from an administrative standpoint. respondents were asked about the types of student assignments used. most fbc assignments use group projects, with the typical size of the group being four people at both the graduate and undergraduate levels (table 4). table 3 field-based consulting experience required for graduation percenl program yes no n undergraduate 18.7 81.3 ('75) graduate 24.7 75.3 (74) table 4 formation of student field-based consulting assignment class type of assignmenr average level individual group group size undergraduate 11.3% 88.7% 4 graduate 19.7% 80.3% 4 issues affecting fbc success a major purpose of this research was to assess factors that impact the success of fbc projects. the researchers did not explicitly define "success" for respondents, since this was intended as an overall collective evaluation measure. certain factors are implicitly linked to successful results, such as class size. first, class size and student issues were examined (table 5). it is clear that successful implementation is very sensitive to class size, with the optimum being twenty or fewer students. large classes (40 or more) are seen as very detrimental. being a part-time student negatively impacts success (39.3% adverse ettect) as well as the usage of individual versus group assignment (41.2%). all three factors are significant at the 0.05 level. from an administrative standpoint, the types of courses and grading issues were also examined, as shown in table 6. fbc is seen as applicable to a broad range of academic disciplines in business, ranging from management (63.1% very positive) and marketing (52.4%) to finance (35.7%)and accounting (32.1%). both graduate level (72.1%)and senior level courses are seen as appropriate. the grading option is clearly advised. all of these three factors are significant at the 0.05 level. interestingly, although fbc is seen as appropriate for either required or elective classes, use in an elective course is favored although this preference is not statistically significant. 13 journal of small business strategy vol. /2, no. l spring/summer 2001 table 5 student factors lnfluencin success of field-based consultin ex erience factor f. ect si ni tcance i'ery somewhat somewhat very chi rtttverse dr/verse ivonc positive positive square df sig. class size 20 students or less 1.2% 3.7% 22.0% 8.5% 64.6% 21 —40 students 25.0 12.5 38.9 i i. i 12.5 41 —60 students 56.8 21.6 16.2 1.4 4.1 over 60 studems 75.0 6.9 12.5 i 4 42 194.4 12 0.00 type of student i'ah-lime 16.5 22.8 46.8 6.3 7.6 i'ull-timc 1.3 1.3 42.1 i 5.8 39 5 44.4 4 0.00 student assignmcnt individual 19.1 22.1 30.9 13.2 14.7 i calo 1.4 0.0 13.5 25.7 59.5 58.0 4 0.00 table 6 administrative factors inauencing success of field-based consulting factor effect significance i pry somewhat somewhat very cbi rtdvcrse ildvcrsc rvone positive posittve s uare df si type of course management 0,0/o 0.0% 20.0% 16.9/o 63.1% marketing 1.6 1.6 238 206 524 comptttcr/mis 1.8 3.6 33.9 17.9 42.9 finance 1.8 1.8 37.5 23.2 35.7 accounting 3.8 1.9 39.6 20.8 32.1 33.4 16 0.01 course level lower division 63.6 21.8 7.3 0.0 7.3 junior level 23.7 22.0 20.3 22.0 11.9 senior level 0 0 i 4 12,5 18.1 68.1 (iraduate level 0.0 1.6 14.8 11.5 72.1 174.8 12 0.00 grading i.atter grade 2.7 5.4 16.2 17.6 58.1 pass/fail 255 291 327 36 91 68.9 4 0.00 required or elective course required 15.3 13.6 23.7 11.9 35.6 elective 3.4 8.6 22.4 22.4 43.1 8.3 4 0.08 14 journal of small business srrategy vot. 72, iyo. i spring/summer 2001 table 7 —client factors inlluencing success of field based consulting experience factor effect significance i'ery somewhat some ivliat i'ery chi .4dverse:ldverse xone positive posinve square df sig. type of organization profit 0.0/o i 2/o 494/o 8.6/v 40.7/o non-profit 5.1 1.3 62.8 9 0 21.8 10.7 4 0.03 industry sector service 0.0 2.5 58.8 i 0.0 28.8 retail 0.0 0.0 57.0 15.2 27.8 manufacturing 1.3 i 3 53.2 16.5 27.8 government 10.7 16.0 50 7 8.0 14.7 53.2 12 0.00 time in business under i year 14.3 29.9 37.7 5.2 13.0 i —3 years 26 64 500 179 231 3 —5 years 1.3 0.0 41.8 26.6 30.4 over 5 years 1.3 1.3 4 1.8 i 5.2 40.5 76.9 12 0.00 niumber of employees 10 employees or 7.6 6.3 57 0 8.9 20.3 less 11 —50 0.0 i 3 57.0 i 5.2 26.6 51 —100 7.5 2 5 60.8 i 0.1 24.1 over 100 7.8 3.9 59.7 7.8 20.8 employees 119.9 12 0.00 annual revenues under $50.000 15.1 17.8 45.2 6.8 15.1 $50.0009.6 9.6 50.7 i 2.3 i 7.8 $ 100.000 $ 100,0012.7 59.5 13.5 20.3 $500.000 $500.0011.4 i 4 62 2 17.6 17.6 $ 1,000,000 over $ 1,000,000 0.0 2.8 58.3 9.7 29.2 47.7 16 0.00 proximity to campus 5 miles or less 0.0 0.0 26.6 15.2 58.2 6 —10 miles 2.5 1.3 40.5 21.5 34.2 i i —20 miles 6.5 26.0 41.6 10.4 15.6 over 20 miles 36.4 29.9 24 7 5.2 3.9 165.5 12 0.00 alumni in organization* ycs 1.3 2.6 37.7 22.1 36.4 * qttestton format did not allow cross tabulation analysis. 15 journal of small business siraiegy vol. /2, no. l spring/summer zoo/ client factors finally, this study evaluated success factors related to the types of clients used in fbc programs. the results are shown in table 7. both profit and non-profit organizations are seen as good potential clients, with for-prolit companies preferred. similarly, the results were fairly uniform across various industry sectors from which such projects originate. however, over one quarter feel that working with government clients adversely affects fbc success. the results regarding organization size and tenure are somewhat mixed. most respondents felt that fbc can be successful with organizations of various sizes, with the exception of those with minimal revenues. s(art-ups are also seen as problematic (44.2% adverse) for student projects. client proximity to campus, as an ease of access issue, is most helpful. all of these factors are significant at the 0.05 level. finally, although not cross tabulated, having an alumnus in the client organization is also seen as extremely helpful. conci.usions the findings from this study validate some basic underpinnings of business education curriculum and design. student-based factors influencing success include smaller classes, usually at a senior or graduate level of study, graded coursework as opposed to pass/fail, and full time students, client factors influencing success indicated that the respondents viewed for-profit, non-governmental, established businesses as the more favorable clients. lastly, a client-business within a five-mile radius of campus was also viewed as adding to the success of the project. the respondents rated the number of employees and the annual revenues evenly, with no one category viewed as more or less successful. the client factors'hat helped influence success in fbc mirror a client profile that is prevalent in many programs. using our university as one model, our students deal primarily with for-profit service and retail businesses, with only an occasional manufacturer. the bulk of our requests are for feasibility studies, business plans, marketing, cost studies, growth management plans or accounting system development (computerization). the business owners usually employ five or fewer people, have been in business three to five years, generate annual revenues of $ 100,000 or less and are from 11-20 miles from campus. although no authoritative literature yielded a specific profile for sbi clients, this profile seems to be typical, and can provide a reasonable basis to evaluate the findings from this survey ofdeans. a review of the literature shows many examples of perceived value to both clients and students (byrne, 1993; madison 4 junell, 1998; daly 6i mitchell, 1995), but little research in the area of faculty concerns. the study raises both some unanswered questions as well as some areas to investigate further, given the nature of the university infrastructure. in the area of unanswered questions, future research should investigate faculty and department concerns related to resource allocation. for example, marketing and management courses were viewed to have the most positive effect on the outcome of a field-based learning experience. but departments and faculty also express concern that field-based learning can take away from already scarce resources, thus not being in the best interest of the department. individual faculty may see these time-intensive courses as a deterrent to tenure. these concerns go to the core of the way the typical college of business is organized, its infrastructure, reward system and departmental model, none of which are actively supportive of field-based learning. the need for time and resources is universal. one solution may be the need to be more realistic in the alignment of a school's mission, culture and rewards. schools 16 journal of small business strategy vol /2, no. l spring/summer 200l clamoring for carnegie designations and the perceived need to prove research respectability may have few resources to apply to time-intensive pedagogics such as field-based learning. clear and realistic alignment of goals and resources is mandatory for success (west and aupperle, 1996). another solution starting to surface is the need to expand the definition of scholarship to include applied projects involving students and the community. to recognize that faculty can apply the tenets of scholarship to teaching and service as well as research may allow for areas such as field-based learning to be fairly rewarded and compensated. this broader definition may also help broaden and integrate traditional research projects (dulek and fielden, 1992). the nature and extent of funding for these projects should also be examined. many models currently rely on faculty release time for such classes, which may appear unreasonable to the public or business community. incentive pay based on number of cases handled might be a more realistic approach in tight budget times, as well as be appealing to faculty. the findings reported by the deans in regards to the need for graded coursework might be reexamined in light of the work being done in the area of service learning. student volunteers, under the guidance of faculty, have accomplished meaningful, competent work projects without a letter grade. such examples include the volunteer income tax assistance (vita), and students for free enterprise (sife). in a related area, smaller projects which include a component of field-based observations can be used in lower-level classes and help train the students in basic components of consulting skills (listening, observing, phrasing questions, writing findings), as well as provide relevance and motivation. (oestreich, venable and doran, 1998). additional study is needed to consider the use ol'hese smaller projects, to see if the smaller project can provide some of the same benefits without the negative aspects of timing and scheduling conflicts inherent with full-time projects. as a learning method, field-based learning adds value to students, to clients involved, to the faculty and to the institutions. the hurdles continue to be the need for a fair allocation of the time and resources to the parties involved. once the value added by fbc programs to the students, clients, faculty and institution are clearly understood, it should be easier for college administrations to fairly support faculty involvement in small business institute and other associated programs references a i a bly fc ii gl s h i fb i (aacsb) ~ ii 24(2), 12 13. a i a bly fc il gl s h i fg i (aacsb). ~ il 4(2), 24. 8 «y, j.r., h . r.w., & s lgll p gll, b.s.(1996, s ). il i g p assess individual performances in group class projects. journal of marketin education 18(2). byrne, j.a. (1992, october 26). the best business schools. business week, 60-70. byme, j.a. (1993, july 19). harvard b-schook an american institution in need of reform. business week, 58-65. chickering, a., and associates. (1981). the modern american calle e: res ondin to the new realities of diverse students and a chan in societ . san francisco: jossey-bass. daly. j. p., gc mitchell, w. b. (1995). synergy on campus: student consulting teamsand the university library. journal of mana ement education 19(4), 494-499. dulek, r. e., gc fielden, j. s. (1996). why fight the system? the non-choice facing 8 4b i i'l . 8 h i* 33(3).13-19. f .j,bk ky p. f1986 fii). yh g p p: ap bl ilg p writing processes? journal of business communication 23(4), 23-35. 17 journal of small business s(raregv vo/. /2, no. / springhcummer 200/ fry, f. i..(1985). the determinants of successful sbi projects from the academic perspective. sbida national proceedin s, san diego, ca: 32-37. jessup, l. m. (1995, november/december). the senior experience: applied, team problem solving in business education. journal of education for business, 82-86. k 19,0. 11994).~r* 1 1 1 1 1 g gl dcgfg, ~3: 9 1 11 kolb, d., & lewis, l. h. (1986). new directions for continuin education: ex eriential and simulation techni ues for teachin adults, no. 30. san francisco: jossey-bass. lindquist, j., & marienau, c. (1981). turnin calle es toward adults. memphis, tenn.: institute for academic improvement, center for the study of higher education. madison, t., & junell, s. k. c. f. (1998). sbi clients'erception of student consulting projects; an empirical model. sbida national proceedings. muir, c. (1996, december). using consulting projects to teach critical-thinking skills in business communication. business communication uarterl 59(4), 77-87. o'onnor, e. l., & rogers, j. c. (1988). an examination of the attitudes of clients and students in the sbi case situation. sbida national proceedin s. oestreich, n., venable, c., & doran, m. (1998). volunteer income tax assistance and the use of technology. learnin b dain: conce ts and models for service-learnin ina~d.v.r .rd),a 1 a 1 1 f high gd «,123.131. secretary's commission on necessary skills (scans). (1991).u.s. de artment of labor. weinstein, a., nicholls, j. a. f., & seaton, b. (1992). an evaluation of sbi marketing consulting: an entrepreneur's perspective. journal of small business mana ement 30 (october), 62-71. west, c. 'f., & aupperle, k. e. (1996). reconfiguring the business school: a normative approach. journal for education for business 72 (3), 37-41. h/art/r«.5'. donar is an assistant professor at san diego sla(e university, where she rnirrently leaches «udi(ing. dr. doran received her ph.d. pom ari ona sta(e um'varsity in the field of learning and lnstructir»ral technology. her research interes(s are focused in accounting ed«cu(ion (lear&ring s(yles, ussessinenr, rechnologv as a leurning (ool) and she also investigates sniall business issues in rhe fields of (aration and managemcn( accormting. dr. doran facilitates both faculty «nd business (raining seniiirars. dr»r sciglimpugliu is a i'rofessur of htarke(ing at san diego state university and co-director vf ilia biisiness consul(ing proyram for sdsu's college of business. his ph.d. is from the uniiwrsity of cr&lorado. howard r. toole is a professor in the school of accountancy at san diego sta(e university. he received his ph.d. from the universi0 of iowa. dr. toole is co-direc(or of the business consulring program a( sdsu. dr. toole's reaching and researclr interes(s include small biisiness, consul(ing, manageriallcost accounting, and accounting informa(ion systems. he has previously published in rhe journal of snrall business strategy; journal of accounting, aiidi(ing, and finance; jonrnal of financia/ and quan(it«tive analysis; financial hlanagenienr; british accounting review; management accounting; journal of business and manageinerrl; and o(hers. 18 si&"z'x"~i'ompetitive strategies of independent grocers: a ten-year review paula s. weber st. cloud state university pweber@stcloudstate. edu abstract 'ltidependent grocers have faced stiff competition from each other in terms of price competition and moves to consolidate, as well as from large, well financed grocery chains during the past decade. this paper explores competitive strategies pursued by successful independents for a ten-year period from l990-2000. the analysis is based on a review of ten years of issues of the progressive grocer: the publication for strategic management. tlirough structured content analysis, five dimensions of competitive strategy pursued by mdependents were identified and analyzed: marketing, quality, international, low cost, and service. study results highlight strategic trends followed by successful independent grocers. study findings provide insight into the strategic responses of independent grocers to the intense competitive pressures faced during the last decade. the paper concludes with suggestions for future strategic actions by independent grocers. introduction intense competitive pressures, globalization of consumer demands, and major technological advances have heightened the need for organizations to implement strategic initiatives in order to survive and prosper. while competitive pressures are not new to the grocery industry, smaller independent grocers are experiencing vastly increased competitive burdens. as competition intensifies, important questions emerge. how does an independent grocer compete and survive in today's environment? what can the independent grocers do to differentiate themselves? what strategies have been effective for independents facing stiff competition from much larger competitors? this study identifies some of the salient strategies pursued by successful independent grocers over the last ten years. independent grocers were either self-identified and/or described as independents in the media. independent grocers can be loosely defined as those stores that not publicly owned. store ownership remains in the hands of family members, a partnership, or a few private owners. independent grocers may own as few as one store or as many as 30 or more. this study highlights competitive strategies pursued by independents recognized for their success by the media in their field. it also provides insight into potentially successful strategies for the future of independent grocers. 75 journal of sinull busi&ivss sir&uegv vol. /3, nv. 2 pallylviaier 2002 cohipetitive strategies thc competitive strategy pursued by an organization has long been considered a multidimensional concept (porter, 1980). in the context of small businesses, substantial empirical evidence also supports the multidimensional nature of business strategy (kim d; choi, 1994). studies by dess and davis (1984), miller (1988), and beal (2000) have attempted to operationalize the dimensions of competitive strategy. beal's (2000) study delineated five factors: low-cost leadership, and four distinct dimensions of differentiation: marketing, service, quality, aml innovation. in contrast with porter's generic strategies, beal's research focused specifically on the strategic practices of small organizations. in addition, 13eal's work described specific operational actions associated with each strategy of which four relate specifically to different types of ditterentiation strntegies. baal (2000) defined low-cost leadership as the strategy of being the lowest cost provider in the industry. marketing differentiation is creatmg the perception with targeted customers that thc company's products are distinctly different. service differentiation distinguishes the firn& based on service before, during, and after the purchase. quality differentiation reflects an emphasis on superior quality. innovation ditferentiation focuses on the unique features or performance characteristics of a product. beal's study argues that these five dimensions comprise the key dimensions of competitive strategy for organizations. building on the results of this research, the current study explores the dimensions of competitive strategy utilized by successful independent grocers. research methodology data collection data were gathered on the competitive strategic practices pursued by independent grocers during the past decade (1990-2000). the research method used was a form of structured content analysis (jauch, osborn, &k martin, 1980). content analysis is a methodology for developing solid descriptive information about a dimension that appears in written form. it allows researchers to make inferences by identifying and categorizing characteristics of messages. competitive practices pursued by independents were identified through an extensive review of publicly available information similar to chen and hambrick's (1995) work exploring the airline industry. the content analysis methodology is very useful for systematically and objectively examining a large quantity of non-empirical data. for additional information on this methodology, see anolyzing media messages: using quanliran've content analysis in research by d. riffe, s. lacy and f. g. fico (1998). after reviewing a variety of potential data sources, progressive grocer: the publication for strategic lvfanagemenr was selected for content analysis. progressive grocer is an industry trade journal that has been a leading source of strategic information for the grocery industry for more than 75 years. progressive grocer has an annual circulation of over 60,000 and is read by grocers throughout the world. it is a premier source of information for and about the grocery industry and is seen as "the voice" of the industry. its articles reflect actual practices in the industry. progressive grocer is read and referred to by industry leaders across the u.s. and the world. ten years of issues of progressive grocer were researched to identify strategic activities pursued by successful independent grocers. specific articles were identified by searching for key words which included independent, strategic, success, and competitive. in total over 80 articles were identified and reviewed resulting in the documentation of 361 examples of competitive strategies (see bibliography). 76 journal of small business srraregy vol. 13, no. 2 eall/winter 2002 coding structure a formal coding structure was used to perform the content analysis. the structure was based on previous studies that attempted to operationalize dimensions of competitive strategy. this study utilized findings from beal's (2000) study that were modified and expanded upon as more concise definitions arose from evidence gathered during the study. as a result, the final coding framework incorporated strategic dimensions closely aligned with the grocery industry. three independent coders were trained on the coding structure. each coder was given all 361 data points in random order. the raters were not previously involved with the data and had no contact with each other during the coding process. a kappa coefficient of'agreement was calculated to determine inter-rater reliability between the three coders. according to siegel and castellan (1988), this coefficient is calculated as the ratio of the proportion of times the raters agree to the maximum proportion of times that the raters could agree. the kappa coefficient for this study is k=92. when all raters were not in agreement, the majority rating was selected. in a few cases, when coders diitered on the coding of a data point, the point was reviewed and a majority decision subsequently reached on the coding of the data point. table 1 —coding categories and examples of strategic activities specific to each coding category emphasizes customer services before, during, and after purchase. this includes development of new customer services, improvement of existing services, and improvements that enhance service to the customer including technological enhancements. examples include before or after purchase factors including such service activities as providing general services to the community; for example, the sale of differentiation postage stamps. other examples include support of community projects, sending birthday cards to customers, establishing a no-wait policy, offering prepared foods, offering choice of paper or plastic bags, adding in-store salad bar, recycling facility, or scanning equipment. involves creating perceptions in the minds of targeted customers that the firm's products or services are distinctively dittcrent from those of the competition. this includes building brand or company identification, advertising and promotional programs, establishing reliable wholesale or manufacturer relationships, direct marketing dllferentiation marketing to specific customers, and tracking customer preferences for focused marketing campaigns. examples include: coupon offerings, discount programs, free samples, special promotions or themes, in-store displays, etc. this factor involves management decisions to improve the efficiency and productivity of operations, and the enhancement of processes or procedures, with low-cost particular emphasis on the financial management of the company. examples include leadership pricing strategies, displaying comparison prices, changes in employee policies, development of strategic alliances, improving store layout or appearance, etc. emphasis is on superiority in the reliability and durability of the products and services. this includes quality control or improvement measures, benchmarking of quality industry best practices, efficient resolution of customer problems, and product differentiation improvements. examples include: customer loyalty programs, offering private label or name brand products, focus on freshness, emphasis on variety of products available including generic or organic foods emphasizes products or services to customers based on ethnicity. this includes any efforts to attract the international customer or to respond to the expanded global international tastes of the u.s. consumer. international differentiation: examples include offering differentiation ethnic foods, providing services specific to international consumer desires, adding bihngual labels or bilingual stait. 77 journal irf small business s!rraegv vun !t, nu. 2 full/!vinrer 2002 coding categories definitions oi'each of the five dimensions identitied by 13eal's (2000) study were modified to include grocery specitic activities. in particular, the innovation dimension was reframed to focus on innovations to meet growing consumer demand, specifically in the international area, as documented in the study data. low-cost leadership was also expanded to incorporate not only low-cost efforts but also other managerial efficiency efforts. these modifications were based on a grounded theory approach influenced by (glaser & strauss, 1967; gioia & chittipeddi, 1991; sutton & callahan, 1987). the final framework facilitated a comprehensive analysis of study data. coding categories utilized in the study are presented in table 1. specific examples of strategic actions relative to each coding category are also contained in 'fable 1. results figure i displays 1990 study results. it shows that strategic efforts pursued by independent grocers focused on only two dimensions: service and marketing. also notable was that these strategic actions were pursued almost equally. in contrast, study data from 1995, figure 2, highlights that four different strategies were being pursued. service remained a primary strategy representing slightly more than half of the strategic initiatives. in 2000, figure 3, study data reveal that five different dimensions of strategic activities were pursued. the newest addition was strategic efi'orts aimed at meeting consumers'eeds for international foods and international marketing. for 2000, strategic activities relative to service were found to be twice as common as marketing strategies. this is in contrast to the beginning of the decade when marketing strategies were being pursued equivalently with service strategies. study data demonstrate a dramatic increase in the variation of competitive strategies actively pursued by independent grocers by the end of the decade. r figure 1: 1990 marketing~ service 50% ~ 50% figure 2: 1995 marketing 13% quality 15'/ service 51% lowcost 21% 78 journal of small business snoregy vol. /j, no. 2 eall/winrer 2002 figure 3: 2000 int'i 14% i service marketing ~ 38% 19% quality lowcost 15% 14% figure 4: trend line by strategy 100% 8 marketing 50%0 quality 0% c3lntl oi oi oi 8 os cs ulowcost oi sn oi o f3 service l service figure 4 presents a trend analysis of strategic activities across the ten-year study period. this analysis reveals a consistent emphasis on service as a pnmary competitive strategy. services were consistently expanded during the 1990's, peaking in 1999. figure 2, 1995, shows that service remained strong despite a decline in marketing differentiation strategies. successful independents were continuously added new services such as a snack bar, bakery, salad bar, floral shop, banking services, dry cleaning, video sales and rentals, postal services, one-hour photo finishing, and wine or beer shops. the most recent strategic endeavors in service differentiation strategies included on-line shopping with home delivery and ready-to-eat hot entrees or complete meals packaged to go. marketing as depicted in figure 4, marketing was a consistently pursued competitive strategy throughout the ten-year period with a significant emphasis during a three-year period from 1992-1994. specific strategies included in-store food giveaways and food samples, special promotions and displays, in-store demonstrations, niche marketing, in-store entertainment, 79 jotuvrnl r&f sutnll business sirniegi t4~(. l3, nn. 2 ih/iiwinrer 2002 double coupon offers, and an intensive focns on building customer loyalty through a wide variety of frequent shopper programs and discount cards. focusing on the best customer' continued to be a kcy strategic eft'ort in 2000. some of the programs noted were personalizing services by sending specialized flyers depending on the shopper's purchasing habits and family needs. other programs made a special effort to know their best customer's names and favorite products. thus, a preferred customer could be greeted at the meat counter with "hello, mrs. smith, we have your favorite fresh salmon in today." low-cost leadership i.ow-cost leadership strategies, shown in figure 4, fluctuated dramatically from their first appearance in 1991 to a high in 1994 and a complete absence in 1997. the trend line in this category demonstrates some distinct peaks and valleys in the use of this strategic option. the most consistent strategic effort in this category was remodeling of the store and store layout. successful independents also focused on reducmg overhead costs and involving and empowering employees including offering stock options and providing extensive training opportunities. quality figure 4 also highlights that quality differentiation strategies first appeared in 1992 with a relatively steady increase until 1997 followed by substantial increase in emphasis in both 1998 and 1999. specific quality differentiation strategies identified included a focus on freshness of produce, baked goods, and from-scratch meals. i.lealth foods were also important and included an emphasis on organic foods and low-fat items. strategic emphasis was also given to high quality meats, extensive deli-meat selection, and expert butchers. international international strategies (figure 4) first appeared as focused strategies in 1993 and showed minimal activity until booming in 1999. strategic practices included offering an extensive variety of ethnic foods as well as an emphasis on meeting the needs of the ethnic consumer. most recently, the international focus extended to include the hiring of bilingual employees, advertising in foreign languages, and providing labels and signage in several languages. summary as a percent of total strategic actions pursued, competitive efforts in either service or marketing were the top strategic eff'orts in each of the ten years of the study. marketing and service strategies tended to compete for primary strategy pursued. in 1991, service fell sharply in relation to marketing. however, from 1992-1996 service strategies exceeded marketing. marketing then exceeded service again in 1997 only to be substantially surpassed by service in 1998-2000. most notably, in 2000, marketing differentiation, while still the second highest strategy pursued, fell to only 50% of that of service (19% marketing, 38% service) from its position in 1990 as an equally important competitive strategy with service differentiation. service only declined as a percent of total strategic initiatives with the advent of the international focus. marketing differentiation strategies tended to be inversely related with low-cost strategies. as one increased, the other decreased. analysis of the late 1990's revealed management, quality, and international vying for the lead competitive'strategy. strategies focusing on quality differentiation and low-cost leadership were significant efforts in 1998. in 2000, the data showed these categories to be of relatively equal emphasis with service remaining a lead emphasis. 80 jr&n&'nnl n/ so»nil 8asi&ress� .'iirnregv val /3, nv. 2 fahlivinrer 2002 discussion 'i'his stuily explored the strategic practices of independent grocers during a decade of intense competition. because study data is based solely on actual experiences, study results are extremely ielevant and useful in informing practice. results showed that the most frequently mentioned strategy for success was superior service. service differentiation remained the primary competitive tool for independent grocers throughout the 1990's. in addition, study results showed a steady increase in the number of competitive strategies pursued as the decade progressed. despite all the new challenges independent grocers faced during the tumultuous period from 1990-2000, service differentiation was the most heavily relied upon approach for attaining and maintaimng competitive advantage. the most frequently noted change in specific service strategies pursued was the addition of a vanety of non-food service options like in-store banking or photo labs. more recent trends were the addition of on-line or electronic shopping. throughout thc years. marl eting ettorts also were a consistent focus. pnmary marketing efforts focused on niche markcung and the development of a variety of programs to enhance customer loyalty. 'i'he hoom in 1997 was primarily driven by marketing efforts focused on spec&tie consumei puichasc liahiis. marketmg differentiation strategies appeared to replace any strategic etli»ts in the loiv-cost leadership area in 1997. however, from 1998 on, marketmg strate ies dccieased in emphasis. low-cost leadership efforts continued to fluctuate throughout the years. a pattern manifested in the data was a consistent focus on service coupled with strategic initiatives generally split between marl'eung differentiation and low-cost leadership. the decline in marketing strategies in 1992 and 1994, in particular, were counterbalanced by significant increases in the focus on low-cost leadership. quality efforts played a key role in the late 1990's particularly in 1998, 1999, and 2000. the emphasis on quality efforts seemed to surpass marketing efforts during the last years of the decade. particular areas of emphasis for quality differentiation strategies were on the freshness of produce, baked goods, and prepared meals. successful independents were positioning themselves to be the place to stop for the "home-cooked" meal that could be served to the family fresh and hot that evening. low-cost leadership and international strategies were pursued with relatively equal effort at the end of the decade. primary areas of emphasis in these strategic efforts included the addition of scanning equipment, store remodeling and the offering of a variety of ethnic foods as well as foreign language signage. implications for practitioners though only preliminary and suggestive, a second outcome of this study was to identify relevant implications for future strategic actions of independent grocers. study results provide support for following an historic recipe for success: superior service; as well as the capitalizing on the latest technological advances to improve efficiencies and gather customer data. service as a differentiation strategy worked successfully for a wide variety of independent grocers during the decade of the study as well as countless previous years. industry and consunier expectations appear to be for high-levels of service from the independent grocer. technological changes provide the grocer with new opportunities for higher levels of gl jmi mal of siiuill busnicis sirnii gv vnl. /3, nn 2 l'ollllpinier 2002 efficiency and service along with more focused marketing efforts. the appearance of strategic initiatives to meet the desire 1'r intenuitionaf foods and the needs of non-english speaking consumers demonstrates the ongoing need to continuously identify and employ new dimensions of competitive practices. the successful independents in 2000 included those that successfully developed new innovative strategies for the consumer with more global tastes and a wider vanety of ethnic heritages. today's competitive environment demands an ever-broadening range of competitive strategies to ensure the growth and survival of the independent grocer. although competition over the last decade has been fierce, ninny independents have found the recipe for strategic success. references beal, r.m. 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(1996). putting your practices in perspective. progressive grocer, 5 (4), 50-53. coupe, k. (1996). king of the jungle. progressive grocer, 75 (2), 48-53. coupe, k. (1996). stater bros: relentlessly mainstream, relentlessly successful. progressive grocer, 75 (5), 76-81. dess, g., & davis, p. (1984). porter's generic strategies as determinants of strategic group membership and organizational performance. academy of management journal, 27, 467-488. donegan, p. (1998). the way it was. progressive grocer, 77 (4), 8-11. friedman, m., janoff, b., & turcsik, r. (2000). alive and thriving. progressive grocer, 79 (5), 99. garry, m. (1991). a one-store independent takes on electronic marketing. progressive grocer, 70 (6), 39-43. garry, m. (1992). on target at last; how do you cut through the morass of data in frequentshopper programs to do target marketing? progressive grocer, 71(8), 103-107. garry, m. (1992). bracing for battle. progressive grocer, 7l (9), 112-114. garry, m. 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(1997). focus on fresh. progressive grocer, 76 (6), 61-64. hennessy, t. (1999). the good with the bad. progressive grocer, 78(3), 83. janoff, b. (1999). user-friendly. progressive grocer, 78 (3), 65. jauch, l.r., osborn, r.n., & martin, t,n. (1980). structured content analysis of cases: complementary method for organizational research. academy of management review, 5, 517-526. kim, y., & choi, y. (1994). strategic types and performances of small firms in korea. international small busmess journal, /3 (i), 13-26. lewis, l. (1997). lowell's little acre: fifteen years in the making. progressive grocer, 76 (7), 66-71. lewis, l. (1997). pushing the envelope: green hills farms, a one-store wonder, is surpassing the chains in customer-specific marketing. progressive grocer, 76 (7), 91-93. lewis, l (1998). uneasy alliance: i.low a small toivn independent fought back when walmart opened fire. progressive grocer, 77 (3), 58-63. lewis, l. (1999). lifestyles of the rich and hungry. progressive grocer, 79 (9), 34. lewis, l. (1999). marl'ets in motion. progressive grocer, 78 (4), 9. lewis, l. (1999). the enemy within. progressive grocer, 78 (4), 8. lewis, l. (1999). undiscovered country. progressive grocer, 78 (12) 23-29. matthews, r. (1995). the verdict is in. progressive grocer, 74 (i), 65-71. matthews, r. (1997). let the games begin. progressive grocer, 76 (4), 25-26. matthews, r. (1997). the imitation strategy. progressive grocer, 76(4), 6-8. mendelson, s. (1999). point of no-return. progressive grocer, 78 (10), 124. miller, d. (1988). relating porter's business strategies to environment and structure: analysis and performance implications. academy of management journal, 3/, 280308. o'eill, r. e. (1992). growing a better business: what recession? progressive grocer, 7/ (3), 42-44. o'eill, r. e. (1994). as vital as our pricing. progressive grocer, 73 (3), 61-63. o'eill, r. e. (1994). you don't build success by yourself. progressive grocer, 73 (3), 5456. porter, m. (1980). competitive strategy. new york: the free press. petreycik, r. m. (1991). iga at 65: hometown is where the heart is. progressive grocer, 70 (5), 115-119. raphael, m., & raphael, n. (1996). what the 'i'n iga stands for. progressive grocer, 75 (6), 21-23. riffe, d., lacy, s., & fico, frederick, g. (1998). analyzing media messages: using quantitative content analysis in research. lawrence erlbaum associates: mahwah, nj.. rousseau, n. (1992). one common goal. progressive grocer, 7/ (9), 66-67. sansolo, m. (1990). outstanding, yes; independent, maybe. progressive grocer, 69 (3), 4-5. sansolo, m. (1993). no bumpkins here. progressive grocer, 72 (3), 4-5. sansolo, m. (1993). competition changes everything. progressive grocer, 72 (4), 46-50. sansolo, m. (1994). the faces of hope. progressive grocer, 73 (3), 4-5. sansolo, m., & garry, m. (1994). slow going again. progressive grocer, 73 (4), 8-12. schaeffer, l., donegan, p., garry, m., & matthews, r. (1995). the profit picture improves. progressive grocer, 74 (4), 24-47. siegel, s., & castellan, n.j. jr. (1988). /4onparametric statistics for t/te behavioral sciences. new york: mcgraw-hill. shohl, d. (1994). knowlan's: where teamwork works. progressive grocer, 73 (9), 97-99. smith, a. (1999). home sweet home. progressive grocer, 78 (i), 9. 83 journal of snuill businesi .i'irniegi vot. /3, no. 2 full/winter 2002 smith, a. (1996). first aiil. progressive grocer, 75 (8), 112-113. smith, a., & donegan, p. (1997). outstanding iiulcpendcnts. progressive grocer, 76 (3), 6167. snyder, g. (1990). independent's minilabs ring up $ 175,000 a year. progressive grocer, 69 (2), 103-105. snyder, g.(1996). fast backwards. progressive griicer, 75 (9), 129-130. sutton, robert i., and anita l. callahan. (1987). the stigma of bankruptcy: spoiled organizational image and its management. academy of management journal, 30: 405-436. tanner, r. (1986). mile-high melee. progressive grocer, 65, 42-48. thayer, w. (1990). creating identity to build meat profits: here's how one independent has found success by focusing on branded products and a coinpartmentalized merchandising approach. progressii e grocer, 69 (2), 106-109. thissen, c.a., (1993). getting to know your customers. progressive grocer, 72 (12), 25-27. tosh, m. (1998). size isn't everything. progressive grocer, 77 (10), 53-54. tosh, m. (1999). bakery's new mix. progressive grocer, 78 (5), 143. tosh, m. (1999). consumer retorts. progressive grocer, 78 (4), 15. tosh, m. (1999). deli double. progressive grocer, 78 (4), 85. tosh, m. (1999). hitched or ditched? progressive grocer, 78 (4), 23. tosh, m. (1999). worth the trip. progressive grocer, 78 (3), 54. turcsik, r. (1999). sack full of dough. progressive grocer, 78 (10), 18. turcsik, r. (1999). the new world order. progressive grocer, 78 (7), 51. turcsik, r. (1999). the power of produce. progressive grocer, 78 (10), 71. turcsik, r. (2000). shipshape in passaic. progressive grocer, 79 (8), 48. turcsik, r., & lewis, l. (2000). declaration of independents. progressive grocer, 79 (12), 24. turock, a. (1999). mastering strategy. progressive grocer, 78 (10), 54-56. weinstein, s. (1992). reversal of fortune. progressive grocer, 71 (2), 99-103, weinstein, s. (1994). georgia on their minds. progressive grocer, 73 (10), 99-103. weinstein, s. (1994). surviving among the sharks. progressive grocer, 73 (2), 55-60. weinstein, s. (1995). rethinking customer service. progressive grocer, 74 (5), 63-67. weinstein, s. (1995). staying alive. progressive grocer, 74 (2),49-54. weinstein, s. (1999). added attractions. progressive grocer, 78 (5), 149. %einstein, s. (1999). independents day. progressive grocer, 78 (8), 12. weinstein, s. (1999). let the good times roll. progressive grocer, 78(3), 45. weinstein, s. (1999). supermarket privacy policies. progressive grocer, 78 (5), 128. weinstein, s. (2000). the cusp of change. progressive grocer, 79 (4), 30. weinstein, s. (2000). too little, too late'? progressive grocer, 79 (5), 113. wold, m. (1992). making workers happy: it takes more than a paycheck to motive your employees. progressive grocer, 7? (3), 44-46. paula schmidt weber, phd, is an associate professor of strategic management and international management at st. cloud state university, st. cloud, mn. dr. weber has previously taught a variety of management topics at the university of houston -victoria, and at new mexico highlands university. her publications include manuscripts in the journal of applied behavioral science, journal of management education, case research journal, and the leadership and organization development journal. she has served as an assistant editor for tire journal of applied business and behavioral sciences and has been a reviewer for numerous publications. dr. weber's printery research interests are in the areas of organizational change, organi ation development, and strategic decision-snaking. 84 sum zegf book review creating value through skill-based strategy and entrepreneurial leadership by william c. schulz hi and charles w. hofer amsterdam: pergamon, 1999 reviewed by: james j. chrisman, university of calgary chrismantlt)mgmt.ucalgary.ca schulz and hofer's book, creating value through skill-based strategy and entrepreneurial leadership (1999), is an ambitious effort to develop a process-oriented, resource-based theory of the firm. the authors suggest that their objective is to provide an improved understanding of skill-based strategy and entrepreneurial leadership through a detailed review of the literature on resources and strategy and in-depth field research of four firms that used skillbased strategies to improve their performance and create sustainable competitive advantages. from this improved understanding, the authors present a quite detailed theory and process model of the resource-based determinants of competitive advantage. the core of the authors'ontributions rest on three research findings that appear to explain the success of the firms studied (p. 219): "(1) meeting the customers'eeds is a function of knowing what the customers want and need. (2) resources in and of themselves are not as important as what management does in assembling them and developing integrative systems that can allow the company to produce quality products and be flexible, fast and cost eaicient. (3) the challenge for general managers is to keep the company 'in the hunt'y knowing both what the customers want and what the company is capable of doing with its resources and skills." at first glance one might be tempted to ask "so what?" since these three findings really just represent the strategy problem of matching opportunity and resources as defined by authors such as hofer and schendel (1978) over 20 years ago. however, if anyone were to assume that this reiteration of the fundamental premises of strategic management otters no new value, they would be wrong. for one thing, in this reviewer's mind the field of strategic management, to its detriment, has lost sight of these fundamentals, in favor of a search for measurement rigor and methodological elegance. therefore, schulz and hofer's return to the basics is welcome. more importantly, this important book gives new meaning to the match of opportunity and resources. schulz and hofer make it clear that the entrepreneurial process of identifying opportunity is one of the three most important competencies of an organization and its management. this 91 journu/ ofsmull bu»me»» sirulegv vol. /2, bio. i spring/summer 200/ competence, which depends on a firm's absorptive capacity, interpretive systems, and leadership, might not normally be associated with a resource-based view of the firm but it is important nonetheless. for example, the entrepreneurial search process can be the basis for first mover advantage. 'i'hc authors also effectively argue that an organization's 'institutional competence", the building of a distinctive organizational character that makes it peculiarly suited to perform certain types of work, is equally important. schulz and hofer borrow and adapt this concept froin selznick (1957) concepts of institutionalization, character, and distinctive competence. while i agree with the end result of their efforts, i disagreed with the inference of the authors in chapter 3 (pp. 53-55) that the concepts of organizational character and distinctive competence are essentially synonymous. although interrelated, i have always viewed distinctive compeience as that more measurable aspect of character, i.e., the particular taskrelated orientations of the organization, rather than its ephemeral features such as culture or 'personality". regardless of this small disagreement, the point is that organizations, successful ones at least, dri appear to take on a special character and do seem to become adept at performing certain types of work. furthermore. as the authors suggest, it may prove to be more effective in the long run to measure such competencies in a more holistic way, nero»» functions, than b» functional areas such as marketing, production, and so on (snow & hrebiniak. 1980). finally, schulz and hofer introduce the competence of "dynamic capability". this important determinant of competitive advantage is a measure of an organization's ability to develop and maintain systems and structures to support learning, and flexibly utilize its systemic resources to meet changing strategic requirements. in other words, dynamic capability allows the or anization to exploit its entrepreneurial and institutional competences more effectively. when all is said and done, what the authors propose are three competencies, developed by entrepreneurial leadership and given meaning through the formulation of a skill-based strategy, that define the long run productive opportunity of a firm and determine its potential to create sustainable competitive advantage. because these competencies depend upon a mixture and configuration of a variety of individual skills and basic resources, they will be rare, difficult to imitate, and have no substitutes, per barney's seminal expositions (1991, 1997). however, because the competencies are important to the organization in its identification and provision of value to customers, rather than of direct value to customers in and of themselve~, schulz and hofer's theoretical model avoids the tautological problems that have tended to plague the development of the resource-based view of the firm (priem & butler, 200 la; priem & butler, 200 lb). finally, although somewhat cumbersome in its style, the detailed development of the literature, the longitudinal nature of the data collected, the turnaround situations of the iirms studied, and painstaking presentation of the theory, provide something that is often missing in theoretical works: evidence of a cause-effect relationship between skill-based strategy and entrepreneurial leadership on the one hand and sustainable competitive advantage on the other. simply put, what the authors have accomplished may be the most important advancement of strategic management theory since porter's (1980) seminal work on competitive strategy. as noted at the outset of this review, schulz and hofer have undertaken an ambitious project. as suggested throughout this review their book is one of ideas, and they are important ideas. however, despite its many strengths, the book has some limitations that should be discussed. while it may sound trite, a major limitation for me was the writing style. i admit to a great difficulty in preparing a review that i hope does justice to this book. part of the difliculty is undoubtedly due to my own limitations as a scholar; nevertheless, i did not find the book particularly reader-friendly despite the authors'bvious attempts to make it so. there were so 92 journal ofsmall business strategy vol. 12, no. 1 spmng/summer 2001 many ideas, so many new terms. the relationships among them were not always clear. there was also a distracting tendency of the authors to repeat themselves, sometimes using the repetition as part of their explanations. there also was somewhat of a disconnection between the sections prior to and following the presentation of the four case studies from which the authors'kill-based strategy and entrepreneurial leadership theory was derived. for example, in chapter 3 (pp. 35-56) the authors present a very interesting and compelling 'typology" of resource levels: (i) basic, (2) systemic, (3) organizational services, and (4) stock assets. unfortunately, this potential contribution to the literature is then more or less abandoned in the remainder of the book. no attempt is made to explain what the four levels of resources are for the companies studied, nor do the four levels appear in a distinct, consistent fashion later in the development of the theory. given the authors'ropensity to develop deliniuons for their terms, i was surprised that they did not provide more attention to the definitions of two very key terms: entrepreneurship and competitive advantage. certainly there were allusions from which one could make inferences. however, i would have wished for more concrete definitions. for example, schulz and hofer's research and theory is clearly about corporate entrepreneurship, not new venture creation. indeed, one of the compelling features of their book is the presentation of a theory that explains why entrepreneurial leadership and managerial direction are integral and intertwined parts of the formulation and implementation of skill-based strategies. unfortunately, all the authors'ffer is vague suggestions that entrepreneurship has something to do with opportunity recognition and creative destruction (schumpeter, 1934), the latter allusion provided in a context (see p. 237) that made the definition of entrepreneurship difficult to distinguish from the definition of strategy (hofer gr schendel, 1978). some further attention and discussion of entrepreneurship vis-a-vis mainstream definitions (e.g., gartner, 1988; schumpeter, 1934) would have been useful. the need for greater definitional precision is also true for the concept of sustainable competitive advantage. as noted above the book is primarily process, not content oriented. still i wish the authors would have come to grips with some of the fundamental content issues that must be resolved if the resource-based view of the firm is to tlourish rather than fade. the recent interchanges of priem and butler (2001a, 2001b) and barney (2001) highlight some of these concerns. the first is whether sustainable competitive advantage should be, because the question is in what way the field should develop its language and theories to better frame business problems, a fimciion of valuable, rare, inimitable, unsubstitutable resources or whether sustainable competitive advantage should be defined by such resources? likewise, should firm performance (e.g., profitability) be considered a fimcrion of the presence or extent of sustainable competitive advantage, and other factors, or should sustainable competitive advantage be assumed to equal (lead automatically to) above normal firm performance? as noted earlier, i believe that schulz and hofer have effectively avoided tautology in their theoretical model; however, they have also avoided tackling those two fundamental issues. finally, schulz and hofer have neglected one other factor: the way the academic market places value on ideas. whether one likes it or not, measurement is of primary value in the academic marketplace. i fear that the ideas presented in this book will prove extremely difficult to measure. consequently, the problem of measurement must be tackled at some point if the full potential of the theory presented in this book is to be realized. in conclusion, this important book is neither an easy read nor a cookbook for a host of quantitative studies. nevertheless, it is rich in valuable ideas that must be carefully digested. as possibly one of the most important books on strategy from a resource-based perspective 93 journal of sfnall business strateg) vol. /2, no l spring/summer 200/ ever written, it deserves to be read and re-read by all serious scholars in the fields of entrepreneurship and strategic management. references barney, j. b. (1991). firm resources and sustained competitive advantage. journal of management 17( i), 99-120. barney, j. b. (1997). gainin and sustainin com etitive advanta e. reading, ma: addisonwesley. barney, j. b. (2001). is the resource-based 'view" a useful perspective for strategic management research? yes. academ of mana ement review 26(l),41-56. gartner, w. b. (1988). who is an "entrepreneur?" is the wrong question. american journal of small business 12(4), 11-32. hofer, c. w., & schendel, d. (1978). stratef formulation: anal tical conce ts. st. paul, mn: west publishing company. 9 .m.e.)1989).~cii mk ~ y r.ny:f 9 priem, r. l., & butler, j. e. (200la). is the resource-based "view" a useful perspective for strategic management research? academ of mana ement review 26(l ), 22-40. priem, r. l., & butler, j. e. (200lb). tautology in the resource-based view and the fii ) f* llfd«ad i:fe.a~df mm r i 26)l).8)-66. schumpeter, j. a. (1934). the theor of economic develo ment. cambridge, ma: harvard university press. selznick, p. (1957). i.eadershi in administration. berkeley. ca: university of california press. snow, c. c., and hrebiniak, l. g. (1980). strategy, distinctive competence, and organizational performance. administrative science uarterl . 25, 317-335. james j. cltrismuni» a professor in the entrepreneurship and innovation area, holder ofthe endow cd professorship in fafnily bufiness entrepreneurship, and the director of the centre fi)r fafnily busmess management and entrepreneurship in the faculty of management of the univerfitv of caltfary. 94 microsoft word front cover v20n1.docx       from the editor    allow me to introduce myself.  i’m paul stephens from bradley university and i am  the new editor of jsbs.  it has been a challenge learning my newest job, but the  learning curve hasn’t been too steep due to the guidance of the outgoing editor.   there are still things to understand better and perhaps improve in the future but,  for now, maintaining the quality and integrity of the publication is my primary  mission.     as the new editor of jsbs, i would like to begin by thanking our outgoing editor  fred fry.  fred did a fine job as steward of this publication over the last five years.   fred has been a mentor and friend and i want to wish him the best in his  retirement.     in this issue of jsbs, we have six new articles which are a diverse mix of topics  which i hope interest our eclectic readership.    authors kreiser and davis offer us a new theoretical framework for examining the  entrepreneurial process at the firm level.  the framework uses prior research to  establish a link between the attributes of firm‐level entrepreneurship and key  outcomes related to the entrepreneurial act.  the new framework provides a  holistic view into the entrepreneurial process within the organizational setting.    switching gears from the theoretical to the applied, our second article by ascigil  and magner examines how social capital among tenant companies within business  incubators leads to the acquisition and utilization of business skills by those  tenant firms.  the authors discover that social capital, which is built through  relationships between groups and individuals, can have a significant impact on  business knowledge and skill building early in the life of a new firm.  this is a must  read for those interested in the impacts of incubation centers on nascent firms.    smith and simon offer us a look into how data integration systems impact  strategic decision making in small firms.  prior research, which has focused on  large corporations, has clearly demonstrated the advantages of integrating data  from multiple sources in order to aid management in decision making. but, erp  may not be just for big firms after all. read this article to find out what small firm  managers should know when considering investments in data integration systems.    s trateg y  journal of small business  volume 20, number 1 spring/summer 2009    expectations about the growth of the firm, planning formality, uncertainty and  risk are highlighted in our fourth article by matthews, schenkel, ford and human.   specifically, the authors look at differences between nascent entrepreneurs and  nascent intrapreneurs.  the author’s extensive exploration reinforces theoretical  and practical contentions that the differences between the two initiation processes  are substantial both in terms of expectations and outcomes.    hertz, beasley, and white examine the topic of selecting a legal structure in small  and micro businesses.  the authors posit that when making a decision about a  legal structure, many entrepreneurs don’t fully consider the effect of their decision  on strategically important issues such as startup costs, liability, taxes and financing  options.  the paper provides readers with an insight into the decision‐making  process of firm founders in regard to selecting a legal structure.    the founders’ influence on a family business has interested researchers for years.   lussier and sonfield continue their good work in this area, adding to a list of  related articles published in a variety of outlets.  the authors, with the assistance  of faculty located around the world, collected information from almost 600 family  businesses.  these companies, which are located in six different countries, provide  the authors significant data to examine how particular family business managerial  characteristics are influenced by the founder(s) of the firm.    enjoy!    paul r. stephens  editor    reproduced with permission of the copyright owner. further reproduction prohibited without permission. small businesses a§ captive companies: business strategy and firm performance among u.s. auto suppliers aaron a. buchko bradley university abstract small business firms frequently are in the position of a "captive" company--a firm whose operations are undertaken for the benefit of some more powerful organization. this places unique demands on the planning and strategy activity. an empirical study of business strategy and firm performance in a sample of small auto supplier firms (n = 67) found significant differences in the business strategies of high-performing firms when compared to the business strategies of /ow-performing firms. the nature of these differences is presented, and implications for the formulation of effective business strategies in captive small businesses are discussed. introduction ii has been frequently noted in the strategic planning literature that differences exist between small and large businesses, and that these differences can affect the nature of the planning process and firm performance (moyer, 1982; stoner & fry, 1987; unni, 1981; welsh & white, 1981). among the issues that have been examined in previous research are differences in resource availability (welsh & white, 1981), patterns of firm development (robinson, pearce, vozikis, & mescon, 1984), and relative differences in scope of operations and organization structure (vanhoom, 1979). one difference that might influence strategic planning and performance among small businesses can be found in the panem of interorganizational relationships which exist between firms. often firms exist in an interorganizational network in which there is interdependence between organizations (pfeffer & salancik, 1978; thompson, 1967). interdependence occurs when firms are mutually dependent on one another for resources or outcomes. small businesses do not often experience such interdependent relationships. the small size, lower capital base, and the lack of slack resources that characterize many small business firms may lead to relationships with a high degree of dependence (moyer, 1982; vanhoom, 1979). small business finns often are dependent on larger organizations for critical resources or revenues. 31 table i sources of bargaining power a supplier group is powerful if: i. it is dominated by a few companies and is more coni.:entrated than the industry it sells 10. 2. its product is unique or at least differentiated, or if ii has built up switching costs. 3. it is obliged lo contend with other products for sale lo !he industry. 4. it poses a credible threat of integrating forward into the industry's business. 5. the industry is not an important customer of the supplier group. a buyer group is powerful if: i . it is concentrated or purchases in large volumes. 2. the products ii purchases from the industry are standard or undifferentiated. 3. the products it purchases from the industry form a component of its product and represent a significant fraction of its costs. 4. it earns low profits, which create great incentive to lower its purchasing costs. 5. the industry's product is unimponant to the quality of the buyer's products or services. 6. the industry's product does not save the buyer money. 7. the buyers pose a credible threat of integrating backward 10 make the industry's product. in !he extreme case small businesses become captive companies--firms which, though legally independent, are de facto controlled by another company and operate in such a way as 10 meet the needs of the controlling firm rather than an open market. the purpose of this research is to examine the differences in strategy and perfonnance among a group of captive small businesses in a panicular industry selling. the study seeks 10 highlight the differences between high and low performing captive firms in order to identify !hose strategies that might be useful in enhancing firm performance in conditions of high firm dependence. by. identifying_ these differences the study auempls 10 contribute to an understanding of the strategy process a11d to the development of effective strategies for captive companies. small businesses as captive companies as suggested by michael poner (1980, 1985), industry structure may lead to differences in the relative distribution of bargaining power among finns. in particular, several factors are thought to determine the. relative power of buyers and suppliers. these are shown in table i. 32 . issues of scale and scope are relevant to the determination of relative power. if buyers are few while suppliers are plentiful, if the volume buyers purchase relative to supplier output is high, if the costs of switching from one supplier to another are low, and if the buyer is a credible threat to integrate backward into the supplier's activities, then buyers have relatively high power compared with suppliers (porter, 1980). in addition, if suppliers are not concentrated, if firm outputs are undifferentiated, if the volume of purchases from the buyer represents a significant segment of the supplier's total sales, and if the buyer's purchases from the supplier represent a small percentage of the buyer's total purchases, then suppliers have relatively low levels of bargaining power relative to buyers (porter, 1985). in some industries, many firms may function as suppliers of components or materials for a few larger, better-integrated firms. in such industries supplier firms that lack the scale and scope of the larger customer companies have low levels of bargaining power compared with buyer firms. buyers are able to demand a low price, placing a restriction on the profits of suppliers. if the power of buyers becomes sufficiently great relative to suppliers, buyers can not only establish the price but also set terms and conditions for sale. when examining issues of scale and scope, it is readily apparent that small supplier firms often lack the resources of larger organizations and are frequently dependent on larger firms to provide a substantial portion of the firm's sales (clark, 1989). confronted with such relations, small supplier firms are often dominated by large customers and must manage operations i.n a manner that is consistent with customer demands. such suppliers are captive to the larger, more powerful customers. the nature of industry structural relations between buyers and suppliers places a premium on suppliers' planning and strategy activities. earning profits as a captive supplier requires firms to adopt strategies and management practices that are unique to this class of business organization. captive companies, whose operations are often dictated by the powerful customer firms, face a limited set of strategy alternatives. pricing, product development, and research and development activities are often mandated by the customer. some customers may even specify strategies concerning financial structure (such as the amount of allowable debt) and human resources (such as requiring firms to provide training to employees in various skills). u.s. auto suppliers as captive companies suppliers to the u.s. auto industry are frequently in the position of a captive company. the customer firms are the so-called "big three" domestic original equipment manufacturers (oemsgeneral motors corporation, ford motor company, and chrysler corporation). the 1990 business week ranking of the iooo largest u.s. companies, ranked these firms 6th, 16th, and 150th respectively in market value. the total sales for these companies for 1989 were 258 billion dollars, making this the largest sales revenue producing industry in the united states. by contrast, the firms that supply components and services to the oems tend to be smaller in terms of sales revenue. the nine largest auto parts suppliers in the business week survey yielded combined sales of 18.4 billion dollars, or a mere 7% of the total sales of the three oems ('the 1990 business week iooo" 1990). large auto parts suppliers are an exception. a recent survey of the industry (motor vehic:e manufacturers association [mvma], 1989) indicated that in 1988 there were 3 ,088 firms providing parts, accessories, and components to the automotive industry. the majority of these firms employ 33 fewer than 500 employees, and many have fewer than 200 workers on the payroll (elm international, 1988). these industry data indicate that auto suppliers are small compared with the oem customers. because of the small size and the fact that the number of potential customers is limited to the oems, many suppliers are in the position of captive firms. in addition, the forecast for the u.s: auto industry (and suppliers in particular) is not optimistic. evidence suggests that the industry is mature or will decline over the next three to five years (carr, 1988; heaney, 1988). this places a greater pressure on firms to control costs in order to maintain profit margins in the face of stagnant or declining sales and increased competition. a shakeout is predicted to occur among auto suppliers in the early 1990s, resulting in fewer firms in the supply base (heaney, 1989). this increases the pressure on suppliers to develop strategies that will enable these firms to manage operations efficiently and effectively. however, many auto suppliers are captive companies. lacking the size and resources of the oems, supplier firms are increasingly forced to operate according to the demands of the oems. each of the u.s. auto manufacturers has established programs for controlling supplier behaviors. these programs are codified (e.g., general motors' targets for excellence [targets for excellence, 1987), ford's q-1 rating, and chrysler's pentastarprograms) and specify in great detail the nature of the oem-supplier relationship, while mandating many forms of supplier behavior. in addition, there are strict penalties for non-compliance, the most severe being removal of a firm from an oem's list of approved suppliers, leading to a loss of sales revenue. since many supplier firms are dependent on the oems for a majority of the firms' sales, loss of supplier status threatens the existence of such organizations. hence auto suppliers are often captive companies. although the oems specify in great detail the required operations and behaviors of supplier firms, there are opportunities for suppliers to vary firm strategies and the management of operations. though suppliers are captive, there may be aspects of firm behavior that are not controlled by the oems and are at the discretion of the supplier firm's management (plumb, 1989). where such latitude exists, alternative strategies may be developed to influence the nature of the oem-supplier relationship and improve firin performance. it seems plausible to suggest that performance differences among supplier firms may be due to variances in their strategies. what strategies are effective for these small businesses that are captive to large, powerful customer organizations? to examine this question, a research study was performed using a sample of small businesses in captive relationships within the automotive industry. the following section reports the results of this initial exploratory research effort. strategy and performance differences among u.s. auto suppliers research methodology sur11ey. the ceos of 354 auto supplier firms were identified from the elm guide to u.s. automotive sourcing (elm international, 1988). each executive was contacted and asked to participate in a study of the auto supplier industry by filling out a survey on the firm's operations. the ceo was utilized as the key informant since the ceo frequently is in a position to evaluate firm strategies and operations (huber & power, 1985). the use of ceos as key respondents has beeri noted often in strategy research (hitt & ireland, 1981; robinson & pearce, .1988). 34 the survey contained a variety of questions concerning firm characteristics, planning activities, sales and financial data, industry assessment, and· intended strategies. several of the questions were adapted from the pims questionnaire (buzzell & gale, 1987), which is thought to yield reliable data (anderson & paine, 1975). study variables: measures identifying small-business captive companies. to identify those supplier firms that were captive companies and were small businesses, two measurement criteria were employed. to identify small businesses, firm size, measured in terms of the number of employees, was used. industry data indicated that firms with fewer than 500 employees were considered small supplier firms (elm international, 1988). thus, only those supplier firms with 500 or fewer employees were included in the study. recall that captive companies are those firms that are operated to meet the needs of the controlling firm. thus, captive firms must maintain a relationship with customers in order to achieve desired goals. the degree to which a firm must maintain such a relationship is referred to as dependence (frazier, 1983). dependence is a function of firm sales (frazier, gill, & kale, 1989) and was measured in this study by dividing a supplier firm's sales to oems by total firm sales: sales to oems dependence total firm sales captive companies were classified as those firms that are dependent on u. s. auto manufacturers for at least 60% of total firm sales. measuring firm performance. there. has been some discussion of the appropriate measure of firm performance in the strategy literature. to overcome some of the limitations imposed by subjective estimates of firm performance or operations such as reporting bias or inflation (dess & robinson, 1984: sapienza, smith, & gannon, 1988), it was determined to use objective performance measures from primary financial sources, as suggested by v enkatraman & ramanujam (1986). for analytic purposes this research adopted a traditional approach to the measurement of firm performance. it is defined as financial performance and is measured in terms of the return a firm obtains on activities. two types of activities were examined: (a) market-oriented and operating activities, and (b) the utilization of firm resources, primarily management of fixed and working capital. the return on sales percentage (ros) was employed as the measure of operating efficiency. ros is calculated by dividing the firm's net profits after taxes by firm sales and is often referred to as the profit margin. return on investment (roi) was used as the measure of the firm's efficiency in utilizing assets. roi is calculated by dividing the after-tax profits of the firm by net fixed and working capital. return on sales focuses attention on cost control and pricing and is based solely upon the firm's income statement. return on investment, on the other hand, focuses on managing the business' assets so as to yield a good return and is based on both the firm's income statement and balance sheet (hayden, 1986). measuring strategy: business strategy variables. business strategies are those concerned with the ability of a firm to compete within a specific industry (hofer & schendel, 1978). various measures have been developed to assess business strategies of firms. the measurement system 35 table 2 business·level strategic variables industry variables i. technological change: there have been major technological changes in the product offered by the business or its major competitors. or in the method of production in the last eight years. (tecchg) 2. relative compensation average: wage .salary levels relative to competitors. (relwag) product competitition variables 3. relative price: the average level of selling prices of the business' products and services relative to the average price of the three largest competitors. (relprc) 4. product quailty average: percent of products superior to customers products form the customers' perspective minus percent of products inferior to customers products from the perspective of the customer. (pqla vg) r&d variables 5. relative r&d expense: research and developement expenses relative to three largest competitors. (relexp) 6. product r&d/revenue average: product and service r&d expenses divided by net sales. (prdrev) 7. process r&d average: process r&d expenses divided by net sales. (prcrev) 8. total inventory/revenue average: total inventory divided by net sales. (invrev) 9. p&e newness average: net book value of plant and eqipment divided by gross book value of plant and equipment. (penew) 10. lnvestmenurevenue average: average investment (book value) divided by net sales. (vstrev) 11. capacity utilization average: percent capacity utilization. (caputl) 12. sales/employee average: total sales divided by number of employees. (slsemp) ·marketing variables 13. sales force/revenue average: sales force expense divided by net sales. (sferev) 14. media advertising and sales promotion/ revenue average: expenditures for media advertising, catalogs, exhibits and diplays, premiums,coupons, samples, and temporary price reductions for promotional purposes divided by net sales. (advrev) 15. relative sales/promotion expenses: media advertising and sales force expenses relative to three largest competitors. (relsls) note. abbreviations for these variables which are used in the research are in parentheses following each variable description. used in this study is based on the pims data base. the variables were developed from hofer's classification system (1975) and have been used previously in research on business strategy (anderson & zeithaml, 1984). these variables and the associated measurements are given in table 2. 36 control variables: firm age and sales. characteristics of firms that are not explicitly considered in this study might have an effect on their business strategy. two such variables that have been identified in previous studies are a firm's age and sales. if high performing firms are on average older than low performing firms, differences could be due to greater experience and learning within the industry rather than to differences in strategy. similarly, differences might be due to firm sales in that firms with greater sales levels may have additional resources to utilize in operations, greater economies of scale, and more strategy options available. this would bias any comparisons of firms based upon performance differences. accordingly, a firm's age, measured by the number of years it has been in operation, and firm sales, measured by total sales volume, were included in the study as control variables. it was thought important that comparison groups of firms be similar in terms of these dimensions in order to eliminate potential bias in the results. analysis and results sample. of the 354 executives contacted, surveys were returned by 1_62, a response rate of 45.8%. from these respondents, 89 firms were classified according to the measurement criteria as being small, captive suppliers. some of these companies, however, did not provide complete financial performance data, perhaps out of concern for confidentiality. eliminating these from consideration left a sample of 67 firms for analysis and comparison. the 67 firms were divided into three groups for each of the two performance measures, based on the mean and standard deviation for ros and roi. firms that were "high" performing firms were identified as being in the upper third of firms based upon the relevant performance measure; firms that were "low" performing firms were those in the lower third of firms for the same measure. firms in the middle group were excluded from the analysis. this method provided a greater contrast between the "high" and "low" performing companies and prevented small differences in firm performance from influencing the results. this method of classifying comparison groups has been used previously in small business research (orpen, 1985). a series oft-tests were performed for the classification variables, the control variables, and the business strategy variables. the results of these t-tests are reported in table 3 for the ros performance measure and table 4 for the roi performance measure. as indicated on the tables, differences between the comparison groups on the performance measures were significant (t(ros) = -7 .11, p <.001, and t(rol) = -5.40, p<.001 ). no differences were observed between the comparison groups for firm size or the control variables of age and total sales. the average firm size was fewer than 250 employees. according to the industry definition, the companies in the two comparison samples are small business captive suppliers. 37 table 3 differences in business strategy return on sales high ros low ros (n=24) (n=25) x s.d. x s.d. p (z-tailed) ros .077 .048 .005 .033 -5.14 <.001 fib 241.50 140.70 228.24 120.24 -0.36 n.s. tot.sales ($mm) 25.91 19.99 20.56 14.56 -1.07 n.s. age 33.42 20.14 41.12 19.84 l.35 n.s. l. tecchg 3.52 l.24 3.74 l.13 -0.65 n.s. 2. relwag 2.88 0.80 3.36 -l.19 l.67 <.io 3. relprc 3.33 0.70 3.24 0.88 -0.41 n.s. 4. pqlave 99.17 2.82 96.60 5.86 -1.94 <.05 5. relexp 2.63 l.21 3.24 l.30 l.72 <.10 6. prdrev l.89 2.00 1.87 2.66 -0.03 n.s. 7. prorev 0.72 0.90 l.92 2.03 2.67 <.01 8. invrev 5.40 4.82 6.34 4.57 -0.70 n.s. 9. penew 0.61 0.19 0.56 0.20 -0.86 n.s. 10. vstrev 23.25 13.15 22.07 14.51 -0.28 n.s. l l. caputl 74.38 17.21 64.56 16.14 -2.06 <.05 12. slsemp 104.63 36.90 91.33 37.83 -l.25 n.s. 13. sferev 3.24 2.17 3.28 l.61 -0.07 n.s. 14. advrev 0.47 0.62 0.35 0.66 -0.64 n.s. 15. relsls 2.54. l.06 3.12 l.17 1.81 <.10 examining the results of the comparison of the business strategy variables in table 3, which used return on sales as the performance measure, it can be observed tha.t 6 of the 15 strategy measures indicated significant differences between the comparison groups. high perfonning firms perceived their wages and compensation rates, expenditures on research and development, and sales expenditures to be relatively lower than those of competitors (t = 1.67, i. 72, and l.81 respectively, p<.05). in addition, high performing firms perceived their products to be of higher quality relative to competitors (t = -1.97, p<.05). when actual patterns of investment were examined, high performing firms had significantly lower expenditures in process r & d than low performing firms (t = 2.67, p<.01 ). finally, high performing firms reported greater capacity utilization than low performers (t = -2.06, p<.05). six significant differences among the 15 measures of business strategy exceed the amount which would be expected by chance. based on· firms' return on sales, therefore, it is concluded that there are differences in business strategy between high and low performing small captive auto supplier firms. 38 table 4 differences in business strategy return on investment high ros low ros (n = 22) (n=20) x s.d. x s.d. p (z-tailed) ros .46 .37 -0.08 .25 -5.40 .<.ool ffe 224.13 139.56 234.40 129.29 -0.25 n.s. tot.sales ($mm) 24.92 20.51 21.34 16.08 -0.63 n.s. age 33.41 20.85 41.55 1.9.79 1.29 n.s. i. tecchg 3.43 1.15 3.85 1.04 -1.23 n.s. 2. relwag 3.14 0.71 3.15 1.23 0.04 n.s. 3. relprc 3.36 0.73 3.25 0.91 -0.45 n.s. 4. pqlavg 98.25 4.94 98.00 4.34 -0.17 n.s. 5. relexp 2.90 1.22 3.10 1.37 -0.48 n.s. 6. prdrev 1.98 1.96 1.88 2.79 -0.13 n.s. 7. prorev 0.61 0.62 2.22 2.16 3.27 <.001 8. invrev 4.31 3.49 6.81 4.82 1.91 <.05 9. penew 0.57 0.18 0.61 0.20 0.63 d.s. 10. vstrev 19.40 12.61 26.33 16.25 1.55 <.io 11. caputl 73.io 17.50 64.45 17.92 -1.56 <.io 12. slsemp 109.89 45.71 89.74 36.10 -1.57 <.io 13. sferev 3.51 2.15 3.22 1.57 -0.49 n.s. 14. adv rev 0.43 0.57 0.38 0.73 -0.24 n.s. 15. relsls 2.62 0.92 3.15 1.23 1.57 <.10 table 4 examined differences in business strategy, using return on investment as the performance criterion and the basis for creating comparison groups. as with table 3, 6 of the 15 measures of business strategy indicated significant differences between the high and low performance comparison groups. high performing firms perceived their expenditures on sales activities to be relatively lower than competitors (l = 1.57, p<.10). with respect to actual patterns ofresource deployment, high performing firms had relatively lower expenditures on process r & d (l = 3.27, p<.001), inventory (l = i. 91, p<.05), and investment in fixed capital/plant and equipment. (l = 1.55, p<.10) than did low performers. high performing firms also indicated greater sales per employee than did low performing firms (l = -1.57, p<.10). similar to the results in table 3, high performing firms indicated greater utilization of capacity than low performing firms (l = -1.56, p<.10). since the number of significant differences exceeds that which would be expected by chance, based on firms' return on investment, it is concluded that there are significant differences in business strategies between high and low performing small captive auto suppliers. discussion the purpose of this study was lo examine differences in strategies between high and low performing captive small businesses. since small businesses frequently are in a captive relationship with larger, more powerful organizations, the ability to develop plans and strategies that allow a 39 small supplier to compete successfully might be an important aspect of firm operations. the results of 1his study indicate that captive firms can still exert a degree of strategic choice and can develop strategies which might lead to high performance relative to other firms within the industry. how arc captive suppliers able to differentiate the firm's strategics? this rcscarc~ suggests that one possible way is by concentrating on those areas over which the customer firm allows the captive supplier freedom of action. in the case of the auto industry, the oems' primary concern is with the price of parts and components (plumb, 1989). the structure of the auto industry places limitations on the pricing strategies of captive suppliers since oems control placement of parts contracts. the large number of supplier firms, the low switching costs. the threat of oems to integrate backward into parts production, and other features of the industry structure limit suppliers' ability to set price. suppliers are price takers who must accept the prices demanded by the powerful oem customer. thus, supplier firms arc not able to differentiate from one anotheron this dimension of business strategy. pricing strategy is captive to the demands of the oems. data from tables 3 and 4 indicate that suppliers do not perceive differences in the relative prices of goods that are sold to lhe oems, supporting the contention that a captor customer can exert control over certain aspects of a captive firm's strategics. it might be suggested that those aspects of the captive firm's operations that are seen as crucial to the captor customer's activities are most likely to be subject to pressure and control by the captor customer. few differences are likely to be observed among captive firms in those dimensions of business strategy that are subject to captor control. similarly, no differences could be observed between high and low performing supplier firms in several other dimensions of business strategy: the degt'ee of technological change, expenditures on product research and development, the plant and equipment newness average, and expenditures on the sales force, advertising and promotion. again, the nature of the in.dustry might explain some of these findings. technological change and product research are largely performed by the oems, who then submit product specifications to suppliers. suppliers typically seek to manufacture to customer specifications rather than attempt basic product development. thus. suppliers are "captive" to the product standards of the oems and cannot differentiate business strategies on this basis. the small size of supplier firms and the limited number of customers also limit marketing cffons. since the oems control pricing and generally seek the lowest possible price, supplier firms tend to compete on the basis of manufacture instead of marketing. along with pricing strategy, promotion and sales efforts arc also limited; suppliers are reluctant to irivest funds in activities that do not offer a return to the company, particularly when customers are few. instead, most small suppliers rely on n1anufacturer's representatives, who represent many supplier firms: with the oems and perform the basic marketing, sales, and liaison activities. hence, no differences are observed among captive auto supplier firms for these dimensions of business strategy. given the structure of the industry. the power of oem custon1ers relative to suppliers and the interorganizational relationships. it is not surprising that captive suppliers would exhibit homogeneity in business strategy. of more interest are the observed differences in strategy since such differences might influence firm performance. 40 an examination of tables 3 and 4 reveals a pattern in the types of strategy differences among the measures offinn perfonnance. those measures of business strategy associated with perfonnance differences in return on sales or profitability tend to be those associated with finns' positions relative to competitors. of the six significant differences, four involve managerial assessments of the finn's relative competitive position: relative compensation, relative product quality, relative r & d investment, and relative sales expense. profit perfonnance seems to be associated with a supplier's position relative to firms within the industry. conversely, differences in business strategy associated with high return on investment tend to be those that involve supplier finns' actual resource deployment activities, particularly investment in fixed and working capital. of the six significant differences between high and low perfonning supplier finns measured by roi, three are objective measures based on actual finn activities: process r & d expenditures, inventory, and investment in plant and equipment. high roi is also associated with efficiency, as evidenced by the significant difference in sales per employee and capacity utilization between high and low perfonning finns. three of the variables, process r & d expense, capacity utilization, and relative sales and promotional expenses, indicated similar results for both the ros and roi perfonnance measures. the results for process r & d are somewhat disturbing. in both cases high perfonning finns indicated lower expenditures on process r & d. this seems a short-tenn planning orientation. over time, decreased investment in r & d could lead to decreased operating efficiencies and increased costs. conversely, the lower level of sales and promotional expenses and the greater capacity utilization reflect increased efficiencies. this is an issue which might warrant further attention by managers in auto supplier finns. this difference in the pattern of results suggests that finn perfonnance is a function of different types of strategies. differences have been noted in previous research on perfonnance measures, particularly between objective versus subjective measures (dess & robinson, 1984; sapienza, smith, & gannon, 1988; venkatraman & ramanujam, 1986). perhaps such differences are also present in measures of strategy, some of which rely on objective measures generally based on accounting numbers, such as investment in plant and equipment, inventory, or expenses. however, some of the measures in the pims questionnaire also utilize a subjective assessment of strategic position by ceos such as wages relative to competitors, prices relative to competitors, and product quality average. differences in objective versus subjective measures might influence assessment of strategy and performance. as an example, mintzberg (1988) has presented alternative perspectives on strategy. one perspective asserts that strategy is a position within a product-market; another perspective views strategy as pattern in a stream of finn decisions. the results of this study might indicate that the perspective used to measure strategy might influence the perfonnance measure. if a finn pursues strategies that are intended to enable the finn to occupy a position in a product-market, perfonnance might be more adequately measured with outcomes associated with effectiveness such as profitability or return on sales. conversely, if the finn adopts strategies intended to maximize returns on capital, assets, or owner's equity, efficiency measures of performance such as roi would be more appropriate strategy outcome measures. this is an issue which merits additional theoretical development and empirical testing. the results of this study indicate that despite the captive status, auto supplier firms can and do differentiate from one another in the strategies these firms pursue. the demands of dominant oem 41 customers, while frequently limiting the strategic choices available to supplier firms, still seem to allow some latitude for suppliers to formulate alternative business strategies, and such differences in strategy appear to be capable of influencing comparative firm performance. the results of this study are limited by the choice of industry and the _firms in the sample. there is a need for replication using suppliers in other industries that are also subject tc:> captive pressures. different industries might exen influence on different aspects of firm strategies. for example, the oem auto manufacturers are primarily concerned with price, and this was seen in the impact on supplier pricing strategies (no differences were observed among firms). in other industries price may be less of a consideration, and firms might seek to differentiate through pricing strategy. for practitioners the data from this study yield some useful findings. supplier firms must identify the desired performance goals for the company prior to developing strategies since different configurations of strategy variables yield different results in firm performance. if firms seek profitability, strategies should focus on positioning the company within the supplier base. such strategies would be more oriented toward competilive elements in the firm's external environment. if firms seek return on capital or assets employed, the focus of strategy is on the internal resource deployment of the firm. such strategies might be more oriented toward maxmizing the efficiency of internal operations and firm expenditures. managers and ceos of small businesses in captive relationships with larger, more powerful customers should be encouraged by these findings. this study indicates that there is opponunity for captive supplier firms through the proper use of strategy and planning to affect firm performance in a positive manner. captive firms may be at the mercy of captors in many aspects of operations, but w,here there is some freedom of choice, such firins should take full advantage of the situation and seek to develop strategies and plans to maximize performance. the difference in such strategies could be the difference between high and low performance or between survival and failure. the challenges of operating a small business, panicularly in a captive relationship, are many and difficult. hopefully, the results of this research can assist managers in formulating and implementing strategies to increase perfonnance and overcome some of the problems that confront captive companies. references anderson, c. r., & paine, f. t". 0975). pims: a reexamination. academy of management journal, 3, 602-612. , anderson, c. r., & zeitharnl, c. p. 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(1981). a small business is not a little big business. harvard business review, 59, 4, 18-32. 43           s trategy   journal of small business    new product development project management: differences between korean and u.s. small business executives daewoo park xavier university parkd@xavier.edu ravi chinta xavier university chintar@xavier.edu mina lee xavier university leem1@xavier.edu david yi xavier university yid@xavier.edu abstract the manifestation of cross-cultural differences in project management practices in small firms has received scant attention in existing literature. based on a sample of 66 u.s. business executives and 62 korean business executives, we find empirical support for the persistence of cross-cultural differences in the decision criteria used in project evaluation and management. our findings reveal interesting differences in criteria used in project management. for example, while u.s. business executives emphasize safety management, korean executives did not. we conclude with implications for future research, practitioners, and regulators. keywords: new product development, project management, small businesses   83    mailto:parkd@xavier.edu mailto:chintar@xavier.edu mailto:leem1@xavier.edu mailto:yid@xavier.edu journal of small business strategy                                  vol. 21, no. 1 spring/summer 2010        84    introduction “our economy is increasingly characterized by change and change means projects” (verzuh, 2003) recognizing the preponderance and relative impact of small businesses as major contributors to job creation and economic growth, especially during the past decade, academic research on small business management practice has recently grown dramatically. in particular, topics concerning the strategic growth of small businesses have received much attention from researchers. in order to grow, many small businesses choose externally driven outsourcing projects (e.g., building and maintaining upstream or downstream portion of supply chain) or internally driven new product development projects as a path of strategic growth (kerzner, 2009; lyles, baird, orris & kuratko, 1993; merz, weber & laetz, 1994; pearson & ellram, 1995; pons, 2008; shenhar & dvir, 2007; slevin, cleland, & pinto, 2002). essentially, project management in the context of small businesses is of critical importance because of its impact on the company’s strategic growth and long term performance. a project is “a temporary endeavor undertaken to create a unique product or service” (project management institute, 2001, p. 167). as firms focused on enhancing their core competence and developing cooperative strategies over the last decade, their ability to manage projects has become a critical source of strategic competence and competitiveness in business. according to shenhar and dvir (2007), factors such as compression of the product life cycle, global competition, knowledge explosion, corporate downsizing, and increased customer focus have contributed to a recognition of the importance of project management. effective project management results in several competitive advantages. besides aiding in the improvement of overall customer value, effective project management can lower development and procurement costs, increase flexibility, spur innovation, and speed up product development (gray and larson, 2003). several anecdotal examples support the notion that effective project management can be a source of sustainable competitive advantages (jiang & klein, 1999; kerzner, 2001; kloppenborg, shriberg, & venkatraman, 2003; park & krishnan, 2002; shenhar & dvir, 2007). according to park and krishnan (2002), effective project management has enabled firms (e.g., p&g, ge, microsoft, cisco, hp, ups, southwest airlines) to take responsibility for quality, slash inventories, reduce defects, and greatly improve efficiency of production and service. in an attempt to explain the factors affecting project management practices and performance outcomes, recent research has focused on one important domain of project management: management effects (i.e., the “people” side of project management) (cooke-davies, 2002; kloppenborg, et al., 2003). there is an abundance of research in the management literature on the impact of managers on organizational processes and outcomes (hambrick & mason, 1984). journal of small business strategy                                  vol. 21, no. 1 spring/summer 2010        85    however, there is little research on the impact of national culture on project management process (e.g., selection and evaluation) and outcomes among small businesses (slevin, cleland, & pinto, 2002). next, our research focus on small firms is justified by the relative paucity of existing literature on project management in small firms. while many researchers have addressed the issues surrounding the management of projects within large firms (white & fortune, 2002; bryde, 2003; shenhar & dvir, 2007), there is little published to date about the management of projects in small-to medium-sized enterprises (kerzner, 2009; lu & beamish, 2001; murphy & ledwith, 2007). further, larson et al. (1991) note that small firms possess special organizational characteristics such as informal controls, limited resources, fewer number of projects, greater risk, and direct top management involvement that make project management practices different in small firms. for example, greater reliance on informal controls implies that project selection criteria may not be explicit in small firms, and further research is required to understand project management practices in small firms. likewise, the fewer number of projects and the corresponding greater risk in small firms warrants further research of project selection criteria in small firms. also, small firms are critical to the economy as an engine of economic and social development (hallberg, 1999). hence, our research focus is on project management in small firms; within the area of project management, we have chosen to examine project selection criteria. finally, we chose to study korea and the u.s. because, according to the 2008 u.s. census, trade between korea and the united states was approximately $72 billion. this makes korea the seventh largest trading partner of the united states, and places the u.s. as the second largest trading partner of korea. remarkably, small businesses in both korean and the u.s. played a key role in developing this trade partnership by focusing on developing new products and exporting (or executing other types of globalization) these products to each other. recognizing the national importance of korea as a trading partner, the role of small firms in international trade and the significance of project management (in particular, new product development projects), we believe that our research scope is well-defined and relevant. project management and strategic management gray and larson (2003) suggest that “strategy is implemented through projects” (p. 23). cleland (1998) also suggests that “project management must be an integral part of strategic management” (p. 27). firms are increasingly adopting project management approaches in formulating and implementing cooperative strategies (i.e., developing and managing r&d, strategic supply networks, and strategic alliances) in domestic and international competitive markets, recognizing that this is critical to gaining and sustaining competitive advantage (e.g., “strategic networks,” special issue of strategic management journal, 2000). changes in the international business environment, rapid technological changes and increased investment intensity journal of small business strategy                                  vol. 21, no. 1 spring/summer 2010        86    have forced many firms to forego their traditional go-it-alone strategy and implement cooperative strategies with domestic or international partners and suppliers. project management plays a vital role in managing these changes and challenges; nevertheless, previous management studies did not focus on the relationship between project success and corporate success. cooke-davies (2002) recently introduced a model of “corporate project management practices” (i.e., strategic project management) and emphasized the key role of project management in enhancing a firm’s competitiveness and shareholder value. strategic project management, a discipline that encompasses r&d, strategic supply networks, m&a, and strategic alliances, has become a source of inquiry for many organizational researchers and practitioners for several reasons (cleland, 1998; kerzner, 2009; meredith & mantel, 2003; miller, 1997; pinto, 1998; shenhar & dvir, 2007). first, strategic project management employing cooperative strategies can reduce a firm’s risk by (1) spreading the risk/cost of a large project and business over more than one firm, (2) facilitating diversification strategy, and (3) overcoming trade or investment barriers. second, effective strategic project management can achieve production rationalization (i.e., low-cost, efficient sourcing) and economies of scale. third, strategic project management can facilitate exchanges of complementary technologies, manufacturing/ marketing know-how, and financial resources in order to bring about mutual benefits. finally, strategic project management can provide both defensive and offensive strategic options for firms facing major challenges in domestic and international markets (meredith & mantel, 2003; shenhar & dvir, 2007). although a number of factors affect the success (or failure) of strategic project management, the role of project managers is particularly relevant (caldwell & posner, 1998; gray & larson, 2003; kloppenborg, et al., 2003; meredith & mantel, 2003; posner & kouzes, 1998). recent project management studies indicate that the “relationship investment and management” is a key success factor in implementing strategic project management (handfield & nichols, 1999; posner & kouzes, 1998). according to posner and kouzes (1998), “successful project management is essentially about dealing effectively with people” (p. 249). handfield and nichols (1999) also argue that relationship management affects all areas of strategic project management (e.g., projects dealing with supply chain development and management) and has a significant impact on performance. however, while relationship management is the most difficult part of strategic project management practices, there are few studies in this area. project management and cross cultural differences project management is relevant to a wide variety of projects (new ventures, new products, new processes, new markets, new technologies, etc.). the topic of international new ventures (inv) or global entrepreneurship (ge) has become a “hot” subject in recent management research (zahra, 2005). according to oviatt and journal of small business strategy                                  vol. 21, no. 1 spring/summer 2010        87    mcdougall (1994), inv is defined as “a business organization that, from inception, seeks to derive significant competitive advantage from the use of resources and the sale of output in multiple countries.” in attempting to overcome a financial crisis (for example, korea in 1998; u.s. in 2009), many u.s. and korean firms focused on developing more innovative, efficient, and “green” products. new product development (npd) project management is one of the most useful approaches. kerzner (2007) argues that npd project management became “not a choice, but a necessity.” both u.s. and korean small firms stand to benefit from collaborating npd project management (strategic partnership). from the viewpoint of u.s. firms, strategic partnerships with korean firms can enhance the capabilities of both upstream and downstream portions of their supply chain. for example, u.s. firms have successfully cultivated r&d joint ventures and strategic partnerships with korean firms. the success of these r&d joint ventures and strategic partnerships could be attributed to their knowledge of local project management practices and careful selection of projects. similarly, from the viewpoint of korean firms, partnerships with u.s. firms can enhance both upstream and downstream portions of their supply chains. u.s. and korean firms continue to improve their global npd project management practices (park & krishnan, 2002). as a result, understanding npd project management practices of small firms in the u.s. and korea is of increasing importance in the competitive landscape. in 2008, for example, a u.s. small firm (pittsburghbased plextronics) started its npd project management collaboration (e.g., establishing a r&d center and building a production line) with a korean small firm (korea parts & fasteners co.) to develop new organic photovoltaic panels (i.e., solar panels). the korean firm’s role is to develop advanced process technology based on plextronics’ technology (plextronics news, 2008). it is evident that a better understanding of partnering project management practices will lead to successful npd project management process and outcomes. previous studies on relationship investment and management found that asian (in particular, korean) managers are more likely to possess a relationship-oriented style and are more effective than american managers in the area of investing in and managing relationships (amsden, 1992; chang & chang, 1994; chung & lee, 1989; hitt, dacin, tyler, & park, 1997). specifically, a relationship-oriented style encompasses much more than simply dealing with people. yahaya and abubakar (2007) note that, in new product development projects, a relationshiporiented style encompasses all stages of a project from project planning, team formation, communications (upward, lateral, and downward), leading the project, and motivating the team. additional differences between korean and u.s. managers were also reported by recent management studies (e.g., baily & zitzewitz, 1998; christie, kwon, stoeberl, & baumhart, 2003; dacin, hitt, & levitas, 1997). for example, korean managers tend to be less individualistic, more favorable to journal of small business strategy                                  vol. 21, no. 1 spring/summer 2010        88    nepotism, more disposed to share insider information with friends and family, and less willing to avoid uncertainty in comparison with u.s. managers (christie et al., 2003). in managing projects (e.g., r&d collaboration and other strategic partnership projects), korean managers pay attention to project partners’ technical capabilities and partners’ willingness to share expertise, whereas u.s. managers focus on partners’ unique competencies, managerial capability, and financial resource availability (dacin et al, 1997). extensive research establishes that cross-cultural differences exist between the u.s. and korea. table 1 provides empirical support for the differences in project management practices between korea and the u.s., which are largely attributable to cross-cultural differences. table 1 management practice differences between u.s. and korea (chung and lee, 1989) management practices differences between u.s. and korea task-oriented not significant relation-oriented not significant information-oriented not significant value-imposing significant authoritarianism significant advance-coordination significant confrontation significant information sharing significant self-control significant output-control significant group decision significant informal communication significant networking significant many u.s. executives and their firms have failed to understand the management practices of their foreign project partners (chao, scheuing, dubas, & mummalaneni, 1993; hitt et al., 1997). differences in project management practices in asian countries such as japan, korea, and china can often be traced to their unique culture and business systems. however, many u.s. executives appear to believe that project journal of small business strategy                                  vol. 21, no. 1 spring/summer 2010        89    management models adopted by asian executives are very similar to the models adopted by other asian executives: japanese vs. korean, korean vs. chinese, chinese vs. japanese. contrary to this line of thinking, research has revealed that many asian executives consider themselves to be very different from other asians (chung & lee, 1989; hitt et al., 1997). these differences can result in asian small business executives adopting different criteria in their project management practices (kim & choi, 1994). while extant literature is consistent in revealing cross-cultural differences between korea and the u.s., it is important to note that the wave of globalization sweeping across the world is facilitating faster information and cultural exchanges. however, by examining the it and construction industries, kim (2009) showed that project management practices in small firms differ markedly across the u.s. and korea. an individualistic focus in the u.s. and a collectivistic focus in korea is manifested in the ways american and korean managers act and manage projects. country of origin is, thus, a significant determinant of specific project management practices in small firms. however, it is yet to be shown that such cultural differences persist in today’s globalized world (sometimes called the flat earth). our study hypothesizes about the persistence of cultural differences in today’s flat earth. our expectation is that cross-cultural differences across korea and the u.s., especially in small firms, persist despite overall trends of globalization. the above discussion leads to the following research hypotheses: h 1. criteria used in selecting new product development projects vary by an executive’s home country (u.s. and korea). h 2. u.s. and korean small business executives place different emphases on objective criteria when selecting new product development projects. method sample data were obtained through a survey instrument completed by 66 u.s. and 62 korean small business executives. in choosing the sample, this study employed one of the commonly accepted definitions of small businesses as having 500 or fewer employees (baird, lyles, & orris, 1994). the u.s. sample represented 200 small business executives chosen randomly from a list of 1,200 executives in the midwest united states (ohio, indiana, and kentucky). each executive was contacted by telephone and asked to participate in the study. the 66 responses returned represent a 33 percent response rate which is consistent with other studies in this area. the korean sample of 140 executives was chosen in collaboration with executives in korea. the 62 responses represented a response rate of 41 percent. five of the u.s. responses and 4 of the korean responses had missing data on at least one of the instruments. the companies represented a variety of manufacturing industries (12 and 10 different 2-digit sic codes for the us and korean samples journal of small business strategy                                  vol. 21, no. 1 spring/summer 2010        90    respectively) such as consumer goods, producer goods, and capital goods. the average age of the respondents was 42 (u.s.) and 46 (korea) years. the average work experience was 14 (u.s.) and 17 (korea) years. the u.s. firms and korean firms averaged $49 million and $37 million in annual sales and 110 and 97 employees, respectively. instrument the instrument contained 30 cases with potential projects described through 15 objective criteria. the instrument was carefully translated into the korean language for korean executives. to ensure comparability of english and korean versions, the korean instrument was translated into english by independent sources. the 15 objective criteria (see table 2) used to evaluate target projects were adopted from jiang et al. (1996) and pinto & slevin (1988). the 15 objective criteria are: clearly defined project goals and mission, top management support, a competent project manager, a competent project team, sufficient resources, client/customer involvement, good communication, responsiveness to clients, proper monitoring and feedback, appropriate technology, table 2-15 criteria used in our research questionnaire 1 clearly defined project goals and mission 2 top management support 3 a competent project manager 4 a competent project team 5 sufficient resources 6 client/customer involvement 7 good communication 8 responsiveness to clients 9 proper monitoring and feedback 10 appropriate technology 11 risk analysis and management 12 time management 13 contribution to profitability 14 safety management 15 synergy potential journal of small business strategy                                 vol. 21, no. 1  spring/summer 2010      91    risk analysis and management, time management, contribution to profitability, safety management, and synergy potential. these objective criteria were used to develop 30 cases on target new product development projects. the procedure known as policy capturing was used to obtain and analyze the data. such a procedure has been used in past research to model managers’ decision processes (ireland, hitt, bettis, & de porras, 1987). policy capturing may be used to determine statistical weight applied to each criterion or variable based on a number of actual decisions. a decision maker’s policy (or relative use of criteria available) is inferred through analysis of his or her ratings. the method is similar to a repeated measures design. for this study, 30 cases were constructed by randomly varying the level of each of the 15 target project characteristics (criteria) on a scale of one (low) to five (high) across the cases. the random assignment of criteria levels was intended to avoid potential collinearity among the independent variables. executives were asked to examine each case describing a target project on the basis of the 15 criteria, rate the attractiveness of the target project (on a one to seven scale), and rate the probability that this project would be selected (on a one to seven scale). the cronbach alpha coefficient for the scale combining these two questions was 0.86. this combined scale represented the dependent variable. analysis and results policy capturing analysis technique uncovers the underlying structure of respondents’ decision criteria by means of moderated linear regressions (hitt & barr, 1989; graves & karren, 1992). the block design that elicits respondents’ evaluations minimizes the biases that could creep in direct responses to each measure. the linear regressions then surface the underlying ratings of the respondents. subsequently, graham and cable (2001), zacharakis et al. (2003) and moy and lam (2003) used and affirmed the same technique to be more robust in explaining differences across subgroups. the first hypothesis suggests that criteria used in project selection decisions would vary by an executive’s home country (i.e., cultural background). this hypothesis was tested using moderated regression analysis with country as a moderator. country was coded as a dummy variable (0=u.s., 1=korea). the results of this analysis are presented in table 1. as shown, the change in r2 from the restricted to the full model is approximately seven percent and is statistically significant, suggesting that u.s. and korean small business executives’ project selection practices differ. journal of small business strategy                                  vol. 21, no. 1 spring/summer 2010        table 3-moderated regression analysis for the combined u.s. and korean samples with country as a moderator model r2 ^r2 f restricted .26 full .33 .07 27.02** ** p<.01 to test the second hypothesis, separate regression models were developed for the u.s. and korean small business executives. results of these analyses are presented in table 2. as shown, ten decision criteria were statistically significant predictors in the u.s. model and eight decision criteria were statistically significant predictors in the korean model. differences between the regression coefficients for each criterion in the two models were tested using the chow test. the differences in the coefficients for all 15 criteria between the two models were statistically significant. these results suggest definitive differences between the project selection practices used by u.s. and korean small business executives, thereby providing further support for hypothesis 2. along with the chow tests, we examined the standardized regression coefficients of both u.s. and korean models. hypothesis 2 states that korean and u.s. small business executives place different emphasis on objective criteria when making project selection decisions. the results provide mixed support for hypothesis 2. u.s. executives emphasized clearly defined project goals and mission, top management support, a competent project manager, sufficient resources, proper monitoring and feedback, appropriate technology, risk analysis and management, time management, contribution to profitability, and safety management. by contrast, korean executives emphasized clearly defined project goals and mission, top management support, a competent project team, client/customer involvement, good communication, time management, contribution to profitability, and synergy potential. 92    journal of small business strategy                                  vol. 21, no. 1 spring/summer 2010        93    table 4-comparison of regression models for u.s. and korean small business managers decision criteria standardized regression coefficients 1 __________________________________________ u.s. korean clearly defined project goals/mission .27* .31* top management support .25* .35** competent project manager .20* .17 competent project team .18 .25* sufficient resources .32* .14 client/customer involvement .13 .27* good communication .11 .23* responsiveness to clients .09 .10 proper monitoring and feedback .27* .08 appropriate technology .25* .04 risk analysis and management .37** .11 time management .42** .28* contribution to profitability .29* .39** safety management .20* .12 synergy potential .10 .22* r2=.25, f=50.17** r2=.19, f=42.21** * p<.05 ** p<.01 1. the regression coefficients for each criterion were tested to see if they were statistically different using the chow test. the results showed that the differences in the regression coefficients for all 15 criteria between u.s. and korean groups were statistically significant at p<.05. journal of small business strategy                                 vol. 21, no. 1  spring/summer 2010      94    discussion and conclusion our findings reveal an interesting difference between the u.s. and korea. korean managers, who we argue are relationship oriented, do not emphasize safety in their evaluation of projects. while this finding may appear to be counterintuitive, it can be explained by the differences in safety regulations and practices in the u.s. and korea. severe penalties and regular audits by governmental agencies are more common in the u.s. than in korea. regulatory compliance is less of an issue in korea. our research has several implications for future research, project management practice, and government regulation. first, our findings reinforce existing theory on cross-cultural differences. this is an important finding because it has been generally assumed that globalization would homogenize cultures, resulting in a weaker impact of cross-cultural differences on managerial practice. our study shows that crosscultural differences continue to exert influence on managerial practice. however, our findings are limited to small firms. future research replicating our study in larger firms will increase the generalizability of our findings. it is quite possible that globalization makes larger firms homogenize faster than small firms, thus attenuating the impact of cross-cultural differences. however, further empirical evidence is required. for practitioners, some guidance can be derived from our empirical results that decision criteria vary by country of origin. for example, we recommend that projects for which safety is missioncritical must be located in the u.s. and not in korea. likewise, table 4 provides specific guidance for the location of projects across the u.s. or korea. lastly, our study suggests to regulators that there is a need to develop countryspecific programs in order to make regulations more effective. table 4 may provide such guidance for regulators. another finding of this study is that npd project management practices vary between the u.s. and korean small firms. while previous studies have examined the impact of cultural differences on project management practices in japan and china (asanuma, 1989; pearson, carter, & peng, 1998), very few studies have examined these practices in korean small firms (kim & choi, 1994). our research includes decision criteria that are used in both evaluation and management of projects. for example, client/customer involvement, good communication, time management, proper monitoring and feedback are all criteria involved in evaluating project management. relationship-oriented managers will tend to emphasize decision criteria used in project evaluation and management differently than task-oriented managers. the implications of these findings are relevant to global businesses involved in project management across the globe. finally, the results of this study and comparison with other research suggest the importance of understanding new product development (npd) project management practices in multiple regions and countries. for example, there may be a need 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(1998). the project manager. in j. k. pinto (ed.), project management handbook (249-255). san francisco, ca: josseybass publishers. shenhar, a. j., & dvir, d. (2007). reinventing project management. boston, ma: hbs press. slevin, d. p., cleland, d. i., & pinto, j. k. (2002). the frontiers of project journal of small business strategy                                  vol. 21, no. 1 spring/summer 2010        98    management research. newtown square, pa: pmi. white, d., & fortune, j. (2002). current practice in project management – an empirical study. international journal of project management, 20, 1-11. yahaya, s. y., & abu-bakar, n. (2007). new product development management issues and decision making. npd management issues, 25, 1127-1142. zacharakis, a. l., mcmullen, j. s., & shepherd, d. a. (2003). venture capitalists’ decision policies across three countries: an institutional theory and perspective. journal of international business studies, 38, 691-708. zahra, s. a. (2005). a theory of international joint ventures: a decade of research. journal of international business studies, 36(1), 20-28. daewoo park (williams college of business, xavier university) dr. daewoo park is currently the chair of the management and entrepreneurship department at xavier university. he was the director of the sedler center for entrepreneurship and innovation from 2007 to 2009. he received his ph.d. from texas a&m university. his research and teaching focuses on small business strategy and project management. ravi chinta (williams college of business, xavier university) dr. ravi chinta currently teaches entrepreneurship and strategy at xavier university. he received his ph.d. from the university of pittsburgh. mina lee (williams college of business, xavier university) dr. mina lee currently teaches strategy, international management, and entrepreneurship courses at xavier university. she received her ph.d. from purdue university. david yi (williams college of business, xavier university) dr. david yi currently teaches international business, economics, and managerial economics at xavier university. he received his ph.d. from the university of illinois. reproduced with permission of the copyright owner. further reproduction prohibited without permission. research and development of small business and entrepreneurship is the number one goal of the small business adv an cement national center don b. bradley iii* university of central arkansas abstract this article's purpose is to acquaint the reader with the services a\•ailable at the small business advancement national center. listed in this article you will find information on the sb/da national center, small business advancement network, and long range goals and objectives of the small business advancement national center, all housed at the university of central arkansas in conway, arkansas. there is also a brief summary of some of the data collected on a national small business institute survey. introduction the small business advancement national center is the home of the small business institute directors' association national center and the small business advancement network. a staff of seven members constitutes the center at this time with the possibility of growth as· other grants are pursued. the center is located in the college of business administration on the university of central arkansas campus in conway, arkansas. an ibm as/400 is the backbone of the center computer operations with an ibm ps/2 model 95 housing the network operations. this center was funded by a grant given to the university of central arkansas by the united states congress, initially in the sum of $200,000 with a renewal of $150,000 for 1992-93. this grant is administered by the united states small business administration in washington, d.c. funding has also been secured from the state of arkansas through the university of central arkansas as well as the small business institute directors' association. *dr. bradley is 1hc dircc1or of lhe small business advancement national center. 73 small business institute directors' association national center the small business institute directors' association national genter provides a link between the sbi universities and government. one of the sb ida center's functions is lo serve as a facilitator of correspondence for universities with a small business institute program. the center sends out correspondence from national officers, sba personnel, sbi programs, the united states congress, businesses, other small business organizations, and national center staff. another function of the center is keeping up-lo-date records on all sbida universities and members as well as the processing of memberships and association financial records. sbida's secretary-treasurer has the authority over all sbida funds while the center serves as a repository of records, providing a stable address and location for the association's financial records and obviating the necessity of their movement with the election of each new officer. all records housed al the sbida national center are open lo any member or interested party. the sbida national center serves as the association's archives for all historical documents, proceedings and pamphlets (on a "space available" basis) as well as a clearinghouse for research and small business development. for the first time in the history of the association all important documents are housed in one location. if any sbida members have any artifacts or documents that they feel should be a part of these archives. they are asked to provide the national center with a description. please note that because of lirnited space, no item should be sent without prior approval. advocacy for the small business institute program is one of the major functions of the sb ida national center, performed in cooperation with sb ida 's national officers. the center complements the efforts of the total sbida family with its advocacy efforts. the advocacy program requires work with governmental agencies, businesses, universities, business students and faculty, professional organizations, the press. stale governments, the president of the united states, and the united states congress. the sbida news, which is the association newslener, is also published al the national center on the university' of central arkansas campus. dr. don b. bradley iii serves not only as national center director but also as editor of the sbida news, the objective of which is lo keep all members infonned of changes in the sbi program as well as of national association and regional news. it also infonns the association members of outstanding work being done in small business, entrepreneurship and sbi's. small business adv an cement national center the small business advancement national center's main purpose is to perfonn research and gather information about small businesses to be used in public, private, and academic senings. long range goals of the sba national center are the following: (a) to serve as a research center for all aspects of small businesses and their effects on the business community; (b) to specialize in gathering data on minorities, women, veterans, disaster relief, small businesses in rural and urban areas, international entrepreneurship and small business, and small business institute programs; (c) lo invite academic faculty members from the united states as well as other countries to do research on small business and entrepreneurship; and (d) lo serve as a training center for small business, entrepreneurship, and the small business institute program. 74 at the present time we are collecting peninent information on the small business institute program which can be used to further the program from an academic point of view. this information is also very useful in selling the sbi program to _business, congress, and sba. for the first time in the 20 year history of the sbi program pertinent data pertaining to sbi and small business is housed in one location at the small business advancement national center. our first survey has reflected many relevant facts. as of march i, 1992 the center has received completed surveys from 307 sbi programs which reveal the following: sbi directors have an average age of 47 .8 years; males strongly dominate the director's position with 240; only 53 females are reported at this time; 184 of the overall total are veterans of the united states military; the ethnic background of the sbi director is predominantly caucasian (of 279 responding); survey respondents include three american indians, two asians, three pacific islanders, two hispanics, and five blacks. every reporting sbi director has a minimum of a master's degree, 133 hold an earned ph.d., 20 have a d.b.a., and four a j.d. degree; 50% hold terminal degrees. the following teaching areas, reported to us on the sbi director's survey, truly demonstrate the varied backgrounds of individuals working with the sbi program. only those that received three or more responses are listed below. sbi directors' teaching areas business -103 political science 11 management 89 mathematics -9 marketing 83 agriculture -7 economics -57 history -7 finance 27 psychology -6 accounting 23 foreign languages -4 sciences 21 sociology -4 engineering 17 law -3 english 15 organizational behavior -3 education 14 speech 3 our respondents have been sbi directors for an average of six years with an average of seven years experience in the sbi program. we are collecting data on activities of sbi directors other than sbi cases and hope to have a report on this project within the next two months. the small business advancement network is collecting data in the following areas: i . a listing of grants available for small business and entrepreneurship 2. a listing of congressional leaders (with addresses and phone numbers) that are involved with business 75 3. a !isling of all score chaplers wilh addresses and phone numbers 4. a !isling of all sba offices wilh addresses and phone numbers 5. a listing of periodical resources pertaining lo small business and enlrepreneurship 6. sba publicalions 7. sbida proceedings a bullelin board is available 1hrough !he small business advancemenl nelwork for !he leaving and receiving of messages, relrieving of pertinenl informalion, voling on issues pertaining 10 small business and sbi, and answering additional questionnaires. the above listings are ava~lable. and research malerials can be scanned inlo files and accessed lhrough !he bulletin board. the small business advancemenl national center al !he university of cenlral arkansas is pleased to provide you with these services, and each center staff member constantly strives to serve sbi and small business beuer. if you have a need. lei us know. you may be sure iha! ii will receive our serious auention and iha! we will do everylhing we can 10 see iha! ii is salisfied. our message is a simple one: please use us; we are here to serve you. 76 i stra tegy new competitors for small business: the for-profit mentality of nonprofit organizations karen a. froelich north dakota state university karen froetichqandsu.nodak edu abstract this paper seeks to raise awareness of the increasing competition small business firms are erperiencing due to commercialization of the nonprofit sector, the traditional notion of the nonprofit organisation is one supported by donations, grants, and government fiinds. howeven commercial revenue has grown from 25 percent of total sector income in i/980 to 39 percent by 1996. these statistics suggest the folly ofignoring the for-profit strategies and commercial activities of nonprofit organizations. characteristics of small business firms and nonprofit organizations are described to 'g 'gbd hi hli ht their competitive similarities. an empirical exploration of the emerging for-profit mentality of nonprofit organi=ations suggests that nonprofits are becoming more capable rivals in the competitive marketplace. the paper concludes by considering the implications of this new competition for small business firms. introduction small businesses have always faced formidable obstacles as they strive for viability and success in a competitive marketplace. limited capital and accompanying cash flow strains, weak control systems (ebert & griffin, 1998), insufficient business management expertise, easy entry of competitors (siropolis, 1994), inadequate facilities or amenities to attract emp oyee loyees, and personal agendas that may distract from profitability (wall street journal, , th 1997) are problems frequently associated with small business firms. in addition, t e approaching millennium promises further complexities and new challenges for entrepreneurs. the business context is becoming increasingly competitive, with crowded urban markets, continued expansion of mega-firms such as wal-mart into smaller markets, and added global competition (baril, marshall, & sartelle, 1997). expensive and rapidly changing computer technology carries hardship as well as opportunity (efendioglu, 1997; lederer and maupin, 1997; prescott & miree, 1998), and proliferating government regulation complicates daily business activities (wall street journal, 1997). a less visible but equally potent challenge emerging in the small business environment is the growing use of for-profit strategies by nonprofit organizations (weisbrod, !998). 92 journal of small business strategy vol. i i, toto.2 fallllyinter 2000 the traditional notion of the nonprofit organization is one supported primarily by private contributions, including individual donations and corporate and foundation grants, supplemented with funding from various government sources. a combination of factors within the nonprofit sector is causing a change in this scenario. first, reduced income tax incentives and tighter institutional giving practices make it difficult for contributions to keep up with growth in the sector (hodgkinson &weitzinan, 1988, 1997). second, the federal government has been restrained by pressure to halt spending growth, leading to two major waves of funding cutbacks for nonprofit organizations since the early 1980s (hodgkinson & weitzman, 1997; weisbrod, 1988). third, the eitects of strained contribution and government support are compounded by rapid growth in the number of nonprofit organizations —from about 300,000 in the mid-1960s (weisbrod, 1988) to over i million today (hodgkinson &. weitzman, 1997). the overall result is intensified competition for the traditional sources of nonprofit revenue. in response, many nonprofits are turning to for-profit strategies as they engage in a variety of commercial activities to supplement traditional revenue streams. tracking the proportion of revenue attributed to each major source of funds illustrates the increasing importance of for-profit strategies and commercial activity for nonprofit organizations. private contributions have generally been declining as a percentage of total revenue in the sector —from 30 percent in 1980 (hodgkinson & weitzman, 1986), to 27 percent in 1986 (hodgkinson & weitzman, 1988), and 19 percent in 1996 (boris, 1998). funding from government sources has varied over time with changes in political leadership and public policy initiatives, going from 34 percent of sector funding in 1980 (hodgkinson &. weitzman, 1986) to 27 percent in 1986 (hodgkinson & weitzman, 1988), and rebounding to 32 percent in 1996 (boris, 1998). much of the recent increase can be attributed to the growth of medicare and medicaid spending (hodgkinson & weitzman, 1997); thus, for many types of nonprofit organizations outside of the healthcare field, the percentage of total revenue provided by government sources is still declining (boris, 1998). hodgkinson and weitzman have tracked the growth of commercial revenues from 25 percent of total sector income in 1980 (1986) to 38% in 1986 (1988), with continued growth to 39 percent —the sector's largest single source of revenue —by 1996 (boris, 1998). these statistics suggest the folly of ignoring the for-profit strategies and commercial activities of nonprofit organizations. with such a large proportion of total revenue at stake, nonprofit organizations become serious competitors, intent on generating commercial revenues to supplant the increasingly scarce contributed and government dollars. the commercial earnings are typically used to cross-subsidize under-funded charitable programs, adding to the importance of successful for-profit endeavors (adams & perlmutter, 1991; weisbrod, 1998; young, 1998). further, nonproftts have come to value the greater control over such revenues, compared to the contribution volatility and spending restrictions associated with traditional sources of funds (gronbjerg, 1993; young, 1998). the overall result is substantial and growing competition emanating from the nonprofit sector. realizing that the vast majority of nonprofits are small organizations, and typically engaged in local or regional enterprise within the service sector (hodgkinson, weitzman, noga & gorski, 1993), these new competitors can directly and disproportionately affect small business firms. the purpose of this paper is to raise awareness of the increasing competition small business firms are experiencing from the growing commercialization of the nonprofit sector. similarities between small business firms and nonprofit organizations will be described, followed by discussion of a study that explores an emerging for-profit mentality of nonprofit organizations. the paper concludes by considering the implications of this new competition for small business firms. 93 .lournal ofsinall business srraregt~ vol. l l, no.2 falll&vtytrer 2000 parallels between small business firms and nonprofit competitors nonprofit organizations provide a wide variety of services to the public. excluding religious organizations, the largest number of nonprofits are involved in human service areas including job training, youth development, and sports and recreation. other major categories include health services (hospitals, clinics, nursing homes) and counseling centers, education, and the arts and humanities (hodgkinson et al., 1993). most nonprofits are very small; in fact, only about 25 percent of the organizations have annual incomes of $25,000, the minimum for required annual internal revenue service (irs) reporting (hodgkinson & weitzman, 1988). of those filing with the irs, about one-third report annual revenue between $25,000 and $ 100,000; another third list income between $ 100,000 and $500,000, and about 10 percent have total revenue between $500,000 and $ 1 million (internal revenue service, 1993). the commercial activities of these organizations vary widely. charging fees for program services is increasingly common. examples include healthcare or counseling fees; tuition charges; membership fees for youth groups, sports teams or health clubs; contracts for job training services; and admission fees for museums, zoos, artistic performances, or other entertainment venues. some nonprofits stretch beyond their primary program areas and into retail operations, as evidenced by the growing numbers of charity-operated thrift stores, gift shops, concessions, and mail order businesses. less obvious examples of commercial activity include financial and management consulting services organized as for-profit subsidiaries of united way organizations, or property rental and catering businesses (for weddings, corporate meetings or other gala events) operated by museums. obviously, direct and indirect competition with for-profit businesses offering similar products and services results. in addition to size and prominent local and service sector presence, nonprofits exhibit several striking similarities to small business firms. limited capital and cash flow crises are endemic to organizations within the nonprofit sector (hatten, 1982). resource limitations extend to facilities, equipment, and employee compensation (mirvis & hackett, 1983; preston, 1989). low barriers to entry allow an influx of competing organizations (froelich, 1997), adding to the resource strains. another problem has been described as the "virtual absence of control systems" (kanter & summers, 1987:164) for monitoring both efficiency and effectiveness, associated with inadequate management experience within these organizations (drucker, 1990). finally, factors including idealism, professional independence, and charismatic leaders oflen drive the organization rather than rational organizational practice (newman & wallender, 1978). overall, it appears that nonprofit organizations experience some of the same vulnerabilities in the competitive marketplace as many small business firms. the emerging for-profit mentality of nonprofit organizations when organizations adopt new strategies, they also must install appropriate structures and processes to successfully implement the strategies (andrews, 1980; galbraith & kazajian, 1986). thus, nonprofit organizations are likely to modify their structures and processes to facilitate their increasingly important profit-seeking and commercial objectives. such evolutionary change within nonprofit organizations is expected to create an emerging forprofit mentality (hodgkinson & lyman, 1989; weisbrod, 1997) that could reduce the commonly observed vulnerabilities of nonprofit competitors. consequently, nonprofits would become even more formidable rivals for small business firms. little empirical evidence exists at this time to support or refute the emergence of a for-profit mentality in nonprofit organizations. the scant research found in the literature reports that larger nonprofit organizations are more involved in commercial activities than smaller ones 94 journal ofsmall business strategy vol. l l, bio. 2 fall/8 inter 2000 (adams & perlmutter, 1991; crimmins & keil, 1983), successful for-profit strategies are related or complementary to the nonprofit's charitable mission (adams & perlmuner, 1991; cain &. meritt, 1998; young, 1998), and structural elaborations (including joint ventures and for-profit subsidiaries) to accommodate commercial activities are likely to evolve (powell & owen-smith, 1998; tuckman, 1998). in order to more specifically address competitively relevant internal adaptations, the study described below examines the effects of commercial activities on selected elements of organizational structure and process within nonprofit organizations. the conceptual framework of the study follows basic tenets of strategic management as diagrammed below in figure 1 (adapted from galbtaith & kazajian, 1986). essentially, evolving trends in the environment of nonprofit organizations have encouraged widespread adoption of commercial revenue strategies. the strategies are implemented through various organizational actions, leading to appropriate adaptations to structure and process. many elements comprise structure and process within organizations; three fundamental components (functional skills, relative authority, and control processes) are selected here as a starting point for empirical study of factors contributing to an emerging for-profit mentality in nonprofit organizations. figure 1 external commercial organizational environment revenue actions strategies structure process -functional skills -control -relative authority rese'archers have long observed that functional skills and relative authority within organizations adjust to reflect the critical tasks of resource acquisition strategies (hambrick, 1981; pfeffer & salancik, 1977; tolbert, 1985). traditional resource acquisition strategies in nonprofit organizations rely on fund-raising, grant-writing, and government relations skills, enriched by experience in the particular service industry involved. ln contrast, commercial revenue strategies require knowledge and skill in the functional areas of business administration (marketing, finance, accounting) in order to eitectively compete for customers and efliciently manage operations for acceptable financial returns. studies have uncovered evidence of increasing numbers of finance and marketing personnel in arts organizations (dimaggio, 1986) and a tendency to replace traditional, social problem-focused board members with entrepreneurial, business-oriented individuals in human service organizations (adams & perlmutter, 1991) in response to higher levels of commercial income. thus, it is expected that commercial revenue strategies will be associated with both a greater number and enhanced authority of staff with skills in the functional areas of business administration. hypothesis i. commercial revenue strategies are associated with an increasedincidence of executive directors with functional skillsin business administration. hypothesis 2. commercial revenue strategies are associared with anincreased incidence of middle managers with functional skills in business administration. 95 journal of small business strategy vol. l l, bto.2 fall/)vituer 2000 hypothesis 3. commercial revenue strategist are associated with greater relative aitthority in positions priniarily involved with conunercial fiinctions. organizational activity is disciplined by multiple types of control processes that vary according to organizational needs and traditions (see peterson, 1984, for an overview). these include hierarchical mechanisms of behavior and output control, which are useful for monitoring efficiency, and nonhierarchical mechanisms focused on employee selection and socialization, which are concerned with value congruence and professional indoctrination of norms, the latter are instrumental when resources flow mainly from nonmarket sources; conformity to donor preferences or government mandates and demonstration of institutionally accepted intentions become keys to success. however, successful commercial strategies require an organization to face a competitive market environment where financial return targets and consumer evaluation of price and quality demand operational efficiency for success. research specific to the nonprofit context is limited, but a study of accountability in arts organizations found more rational accountability practices and a stronger cost-benefit mentality in conjunction with affiliated commercial ventures like gifl shops and restaurants (peterson, 1986). theory and observation thus support the expectation that commercial revenue strategies will be associated with greater use of hierarchical control processes. hypothesis 4. conimercial revenue strategies are associated wiih increased use of behavior control. hypothesis 5. commercial revemre strategies are associated with increased rise of output control. the study sample and data collection a listing of charities was obtained from the office of the attorney general for a state located in the midwest. afl organizations in the three largest industry categories (arts, culture, and humanities; mental health and crisis counseling; human services) were selected for study; however, organizations with no employees as well as very large organizations (annual salaries greater than $ 10 million) were excluded as the issues examined would be either irrelevant or too complex to assess with the methods used here. a survey instrument was developed and administered following the total design method advocated by dillman (1978), including several rounds of expert review, modiflcation, and field testing. (a copy of the questionnaire can be obtained by contacting the author.) functional skill in business administration was assessed by asking how many employees in particular job categories had college degrees or past professional experience in specific business administration fields. to quantify relative authority, respondents were asked to divide 100 points among several categories of organizational actors (including the board of directors, executive director, program directors and business managers) to indicate their relative decision-making responsibility in three vital areas: resource allocation, program choices, and goal selection at the mission level. the average decision-making responsibility across the three areas (cronbach's coefficient alpha = .74) was calculated for use in the analysis. behavior control was assessed by an equally weighted composite of two questions adapted from ouchi and maguire (1975) and jones (1987). the 5-point scales indicate frequency of monitoring work hours and work activity of a typical professional employee (1 = once a month or less; 5 = at least once a day). similarly, two questions from ouchi's (1977) outpnt control measures were adapted; 5-point scales assess the importance of numerical 96 journal of small business strategy vali l, itto.2 falls winter 2000 measures of output in both employee evaluation and program evaluation (i = not at all important; 5 = extremely important). financial measures were obtained directly from each organization's financial statements, accessed through the cooperating office of the attorney general. commercial revenue was measured by the proportion of total revenue generated from program fees and sales of goods and services. total revenue, an indicator of size, was also obtained from the financial statements. the questionnaire was mailed to executive directors of the 702 nonprofits comprising the selected population. data collection procedures resulted in 426 usable returns, for a response rate of 62% a(ter adjustments for postal returns, dissolutions and mergers. no statistically significant differences were found when comparing industry, size, or age of respondents and nonrespondents, or among those responding to the various mailing waves. data analysis multiple regression analysis was used to determine the relationship of commercial revenue strategies with each of the dependent variables. the analysis includes control variables to account for possible size or industry effects. initially, the relationship between all variables was explored by generating a correlation matrix (table i) to determine the extent of their linear dependence. table ii means, standard deviations, and pearson correlation coefficients variables mean sd. i 2 3 4 5 6 7 8 i. commercial activity .33 .35 2. totalrevenue(in millions) 1.04 2 17 . i i » 3. org-type: arts 23 .42 -.07 -.06 4. org-type: mh .12 .32 .21" -.02 -.20" 5. behavior control 2.19 1.04 .17" -.07 00 -.02 6. output control 271 .98 .01 .06 -.02»» 02 12 ~ 7. functional expertise: ex. dir. 20 .40 03 .06 —.01 03 .05 10» 8. functional expenise: mgis ~ i i ~ 15 24 .21 .11 .ol .06 .08 .ib 9. authority: business mgrs. 5 99 8 23 16»» 41" ~ 10» 07 08 07 02 13» 97 journal of sinall business strategu vol i i, no.2 fall/winter 2000 although some statistically significant correlations among variables are shown, they are of insufficient magnitude to cause concern about regression estimates. the absence of multicolinearity problems among the dependent variables made it feasible to use individual regression models for hypothesis testing. running separate regression models for each dependent variable offers'advantages over multivariate models which exclude observations due to missing values on individual variables, and can result in a considerably reduced sample size when run as a simultaneous model. the descriptive statistics displayed in table 2 provide a portrait of the organizations comprising the sample. the human service subgroup is large, reflecting the prevalence of this category in the nonprofit sector as a whole. human service organizations are larger in size, as indicated by number of employees and total revenue. in general, the sample organizations have about $ 1 million in annual revenue and 45 total employees, half of which are full-time. the mean proportion of revenue attributed to each major funding source shows the continued reliance on contributions for a substantial percentage of total income. consistent with the previously discussed strains on government funding, government provides a lower percentage of revenue for sample organizations compared to the other revenue streams. the importance of commercial revenue is clearly shown by the high proportion of revenue —one-third of total revenue for organizations in the sample as a whole, and over half of total revenue for the mental health group —attributed to this source. there may be some upward distortion in the latter however, resulting from government contract funds being reported as fee income. it should also be noted that the percentages for the three major revenue streams do not total 100 percent due to an array of relatively minor income sources including dues, interest, dividends and other investments. a common myth is that nonprofit organizations are legally prohibited from earning profits. actually, nonprofits are merely unable to distribute profits to individuals or groups for private gain; profits are to be retained and used for continued pursuit of the charitable mission which justifies the nonprofit designation. like most organizations, nonprofits seek an excess of revenue over expenses (typically referred to as "surplus" rather than "profit") to facilitate stability and long-term viability. this is clearly shown in table 2 with the average surplus exceeding $48,000. surplus divided by total revenue produces a figure analogous to net profit margin, and averages 4 percent in this sample overall. human service organizations report both a lower surplus and margin, likely attributable to ever-increasing demands for social services and greater competition for funds in this subgroup. the results of separate ordinary least squares multiple regression analyses to test each hypothesis are reported in table 3. hypothesis i is not supported; none of the independent variables are significantly related to whether or not the executive director has a business administration background. the analysis also fails to support hypothesis 2, although significant results are found. commercial revenue strategies exhibit a negative rather than a positive relationship with business expertise in middle management positions, even afler controlling for the significant effects of size. hypothesis 3 is supported; commercial strategies are associated with significantly greater authority in business manager positions. the predicted relationship in hypothesis 4 is also supported; commercial strategies are shown to be positively related to behavior control. in other words, as commercial revenue increases, so does the extent of employee monitoring. significant results are also produced for hypothesis 5, but are attributed to industry type and not commercial strategies. thus, commercial strategies are not associated with greater output control, and hypothesis 5 is not supported. 98 journal of small business strateg57 vol. i i, no.2 fall/)pi uter 2000 table 2: descriptive statistics'rts th mental human total sample culture health services organizational characteristics n = 426 n = 96 n = 50 n = 280 full-time employees 22.3 9.8 21.3 26.6 total employees 45.3 i 8.8 31.4 56.4 total revenue 1036.3 813.9 890.3 1139.8 % revenue from contributions .35 .38 .23 .36 % revenue from government .23 .20 .20 .24 % revenue from commercial activity .33 .29 .54 .32 surplus at year-end 48.78 69.52 67.26 37.25 surplus/total revenue .04 .07 .07 .02 "means in thousands table 3: results of regression analyses exec middle busn hlgr behavior output exec independent dir mgmt authority control control dir. pgm dir board variables'hi) (h2) (h3) (h4) (h5) author. author. authority commercial 012 090 2 276 .556 -026 i 484 revenue ( 549) ( 3 481) (2 065) (34 18) ( 182) ( 530) (2 414) ( 3 159) total i'028e 8 i 052e 8 i '50(en 3'524e 8 2'499e 8 '106e 5 '125e 5 '175e 5 ( i 128) ( 3 020) (8 678) ( i 376) (i 124) ( 2 413) (3 758) ( 3 809) industry.. 007 034 -1.175 -.049 525 1 838 -1 157 ' 616 (-.142) (1.448) (-1.262) (-.345) (-1919)" (,778) (.,646) (1,057) industry; -.046,015 1.618 -.254 -.031 -.764 -.621 -1.100 (717) (.538) (1.333) (-1.365) (-.189) (-.248) (-.266) (-.341) health n 408 254 394 338 371 394 297 394 f .555 6.704 23.024 3.277 4 845 i 678 5 871 7.791 pmb&f .695 .000 .000 .012 .001 .154 .000 .000 r-square .191 .038 .050 .017 .057 .074 'astaadardi md regress(on caedftcteats are reported; i statrsti cs are i a parentheses. 'p &.05 "p&.oi "'p&.ooi 99 jvitrnal vf sinall business strategy vo/. l l, na.2 fal!iwinrer 2000 the strength of the relationship between commercial strategies and business manager authority (p ( .001; r-square = .19) lcd to further investigation of authority relationships using additional questionnaire data. the results, also displayed in table 3, produce significant findings for both program director authority and board authority. specifically, commercial revenue is shown to be positively related to the authority of program directors, and negatively related to the authority of the board of directors. the analysis does not find any relationship between commercial strategies and executive director authority. discussion results of the regression analyses reveal several relationships between commercial revenue strategies and organizational structure and process. the lindings offer some empirical evidence indicating an emerging for-profit mentality in nonprofit organizations. the primary discovery is the altered authority relationships linked to use of commercial revenue strategies. as predicted, by strategic management precepts, increased reliance on commercial revenue is associated with business manager positions becoming more instrumental to strategy success and ultimate organizational viability, which leads to expanded authority in these roles. similarly, program directors are vital to successful revenue strategies when program fees are employed to generate income, and greater authority is observed in these positions. the relative authority shifts appear to be at the expense of the board of directors. nonprofit board members have traditionally been selected based on ability to mobilize a network of contacts and generate contributions to support program services; as the proportion of contributed revenue declines, the critical nature of this function and thus the relative authority of the board diminishes. commercial revenue strategies were not found to be significantly related to the executive director position in terms of functional expertise or relative authority. this key position carries responsibility for a wide range of roles in addition to revenue acquisition; greater dependence on commercially generated income is apparently not singularly important enough to organizational outcomes to be reflected in the attributes or authority of executive directors. a more puzzling matter is why middle managers with functional skills in business administration comprise a lower rather than higher proportion of total employees as commercial revenue increases. a possible explanation lies in the greater importance of service production and efficiency when relying on fee income. both of these motives would decrease the number of middle management personnel, regardless of functional background, in favor of direct service staff to enable expanded service production, higher fee income, and lower overhead costs. the process-related findings support the prediction that commercial revenue strategies are associated with increased use ofbehavior control. behavior control, including monitoring of work hours and work activity, helps achieve the efficiency necessary for successful participation in competitive markets. these process adaptations are consistent with the expanded authority of business managers and program managers discussed above. greater monitoring of employees and increased manager authority both represent a departure from traditional nonprofit management practice, and suggest a growing for-profit mentality within these organizations. the difficulty finding workable output measures or even agreeing on an appropriate definition of "output" in nonprofit organizations may explain the lack of a relationship between commercial revenue and output control. for example, what is an appropriate output measure in the performing arts: number of tickets sold, or artistic quality? although output measures 100 journal ofsmall business strategy vol. l l, no.2 fall/winter 2000 may provide useful guideposts to facilitate efficient and effective efforts as required by competitive markets, the mere existence of commercial activity will not erase problems of consensus about the nature of successful outcomes, or confounding measurement complexities. conclusions and implications for small business firms the deployment of for-profit strategies by nonprofit organizations provides a clear illustration of classic strategic management principles. essentially, an evolving resource environment with increasingly scarce contribution and government funding stimulates commercial revenue-generating activities, which in turn require adjustments to internal structure and process for successful implementation of these new strategies. structural adaptations leading to expanded authority for business managers and program directors, paired with increasing behavioral control processes, provide initial empirical support for the popular notion of an emerging for-profit mentality in nonprofit organizations. a growing for-profit mentality is likely to reduce many competitive disadvantages traditionally associated with nonprofit organizations, creating a rather insidious but ever expanding threat for small business firms. while small businesses and nonprolits are similarly afflicted by a lack of management experience and/or distracting personal agendas of key players, as well as inadequate internal control mechanisms, the internal shifts identified in the study above demonstrate progress on the part of nonprofit organizations to address these limitations. greater importance of and attention to success in commercial revenue-generating activities enhances a rational business perspective that is likely to improve the competitive performance of nonprofit organizations. in addition, nonprofit organizations possess numerous advantages over their for-profit rivals. although both nonprofits and small firms oflen suffer from resource shortages, the former have access to alternative revenue streams from contributions and government funds which can supplement profit shortfalls and provide a safety net for commercial failures. further, nonprofits do not pay income tax on revenues from activities related to their charitable mission. since most fee income flows from related programming, few organizations are subject to what is called the unrelated business income tax (ubit). nonprofits also enjoy property tax exemptions and reduced postal rates. finally, the historical presence of these organizations in many service industries (including healthcare, counseling, daycare, job training, and physical fitness —which offer expanding commercial opportunities today) bestow first mover advantages as well as the reputational and credibility benefits associated with being "not-for-profit". small businesses need to be responsive to the growing competition from nonprofit organizations. the first step is awareness. educators, business associations, consultants and small business managers must look beyond traditional competitors and recognize expanding commercialism in the nonprofit sector. these increasingly formidable rivals present a new set of challenges that require understanding and heightened vigilance. the parallel attributes of nonprofits and small businesses will frequently create direct competition based on similar strengths. reputation, service and customer relationships that convey advantages in battles with large firms will not necessarily provide differentiation here. still, the small business must continue to rely on strengths built over time through attentive satisfaction of their particular customer needs. the new competition brings renewed urgency to the familiar advice of relentless attention to all possible opportunities for improved products, operations and relationships. opportunities —whether new products or target markets, joint venture arrangements, or geographical expansion —can be seized upon swiflly by independent firms. by contrast, 101 journal of &mull bi(siness strategy vvl. ll, no.2 fahlivinter 2000 nonprofits are constrained by multiple constituencies pursuin various social ideals through a charitable mission. careful and often contentious debate about the appropriateness of new commercial initiatives slows response to the marketplace. stipulations accompanying grant funds or government contracts also reduce agility. thus, autonomy and flexibility are powerful weapons small businesses should mobilize when confronted with nonprofit rivals. price competition, on the other hand, should be avoided. the supplemental revenue streams available to nonprofits enable low prices and continued operation through unprofitable periods. and since profit is not a primary goal of these organizations, merely a contribution to cost coverage can be viewed as an adequate return. pricing decisions are further distorted by imprecise cost accounting; organizational overhead is often ignored, resulting in low perceived operating expense. the low-income markets frequently targeted by nonprofits also contribute to a low price mindset. thus, careful selection and cultivation of higher-end target markets can be another effective tactic for competing with nonprofit organizations. on a broader scale, small business groups need to monitor the appropriateness of nonprofit ventures. commercial activities disguised as charitable efforts create unfair competitive advantages. activities that are unrelated to the charitable mission are not eligible for taxexempt benefits. a high proportion of commercial relative to charitable activity can result in loss of the nonprofit designation. a collaborative effort to accumulate such knowledge about general legal requirements compared to specific competitive practices can help maintain a fair context for competition, while continued public pressure through appropriate media and government channels can curtail bold competitive initiatives. additional research on the dynamics of competition between small business firms and nonprofit organizations is sorely needed. descriptive studies identifying for-profit and nonprofit market shares in particular industries would be useful, as well as market share growth rates for each type of player. information about how the strategies and tactics of nonprofits might differ from more familiar competitors, along with studies of successful small business responses, would be valuable. and prescriptions for dealing with the unique (and maybe unfair) advantages of the nonprofit competitor need to be discovered and disseminated. so although many unknowns remain, it is important that small business firms recognize the growing competitive stance and for-profit mentality of previously benign nonprofit organizations. these organizations can no longer be considered merely bystanders on the local business scene, or awkward participants in leftover markets. increasingly, nonprofit organizations are becoming an effective competitive force and a compelling concern for small business firms. references adams, c., & perlmutter, f. 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(1998). universities and the market for intellectual property in the life sciences. journal of polic anal sis and mana ement 17(2), 253277. prescott, j., & miree, c. (1998). small business solutions: building and leveraging a competitive intelligence capability without going broke. journal of small business ~strate 9(2) preston, a. (1989). the nonprofit sector in a for-profit world. journal of labor economics 7, 438-463. siropolis, n. (1994). small business mana ement (5th edition). boston: houghton mifflin. tolbert, p. s. (1985). institutional environments and resource dependence: sources of administrative structure in institutions of higher education. administrative science 3tltl 3, 3 l3. tuckman, h. p. (1998). competition, commercialization, and the evolution of nonprofit organizational structures. journal of polic anal sis and mana ement 17(2), 175-194. the wall street journal reports: small business. (1997, may 22). p. ri-r28. weisbrod, b. a. (1988). the non rofit econom . cambridge, ma: harvard university press. weisbrod, b. a. (1997). the future of the nonprofit sector: its entwining with private enterprise and government. journal of polic anal sis and mana ement 16(4), 541555. weisbrod, b. a. (1998). to rofit or not to rofit: the commercial transformation of the lt« . ~ y cc t»tdk c 3 tyy young, d. r. (1998). commercialism in nonprofit social service associations: its character, significance, and rationale. journal of polic anal sis and mana ement 17(2), 278297. karen a. froeiicii received her ph.d. from the university of minnesota, minneapolis and is ttssociate professor of management at north dakota s(ate university. fier primary teaching area is in strategic management and her research interests are in strategic management (specifically revenue strategies and performance measures) in nonprofu orgam'=.aiions; financing business start-ups; community redcnyelopment through effeciive smai/ business strategies and internaiionai coveragein us. business school curricuia. 104 stra tegy small business enterprise and development: consultation modes john h. m. ellis boumemouth university jegisqabournemouth.ac.uk julia a. kiely bournemouth university j kietycttlbournemouth,ac. uk abstract by means offour illustrative case stttdies, consultation interventions in small and medium si=ed (smesj enterprises are explored. recognised consultation intervention modes of 'expert', 'doctor-patient'ttd 'process consultation're found to fluctuate rapidly within eaclt case study, ntaking apparent the need for consultants to be flexible and adopt an appropriate stance for client and contingencies of the situation. the pernteability of the boundaries between content and process issues, with diagnosis and intervention inter-woven, is also apparent. the article concludes with a consideration of the conditions for success for diferent consultation ntodes with small businesses andimplications for small businesses and enterprise development in their use ofconsultants. introduction the recent growth in small businesses coincides with a period of rapid technological advancement, increased competition and heightened customer expectations for service and quality. a growing number of small businesses now seek the help of consultants. this paper endeavours to establish conditions under which different consultation modes are appropriate for small business development. through a qualitative study of 34 consultation assignments, we question and challenge the appropriateness of the descriptors of 'cyclical'nd 'sequential'egarding consultation activities. similarly, the debate regarding content versus process issues is challenged as being over simplistic. a case study approach is used to explore these emergent issues and the way in which they manifest themselves. the article unfolds with an exploration of key features of the consultation process commonly found in the academic literature. the research design is outlined and the key features of the consultation process are explored in detail by four illustrative case studies. the eclectic nature of facilitiative consultation interventions with diagnosis and intervention interweaved rather than distinct cycles becomes apparent. we conclude with a consideration of the implications 48 journal ofsmall business strategy vol ll, no.2 fall/ivinter 2000 for small business and enterprise development in both their use of consultants and the conditions when different approaches may be appropriate. consultation cyclical versus linear models consultation is a term used to describe a wide variety of purposeful interventions in which some combination of problem-solving, decision-making, and meaningful organizational development takes place (jamieson, 1997; mclarty & robinson, 1998; sadler, 1998). consultation activity is still widely perceived as a series of relatively simple sequential steps concerning content, process and procedure as developed by kolb and frohman (1970), while others examine in more depth interpersonal approaches and responses to the intervention process (beckhard, 1997; harrison, 1995; shaw, 1997). the typical consultation model presents a flat, two-dimensional linear representation of what is in reality a messy, highly complex picture (old, 1995). this model outlines linear progressive stages such as gaining entry, data collection and diagnosis, feedback to clients, implementation of actions and evaluation of outcomes. an agreed end point between client and consultant drives the inquiry. planned and managed interventions achieve specific ends. rather than an awareness of all activities as interventions, only data gathering and agreed actions are perceived as interventions. managed change is driven towards a future state that would not otherwise have happened (kolb & frohman, 1970). by contrast, process consultation regards activities as cyclical and more messy (schein, 1995, 1997, 1999). in line with systems theory, the universe is seen as interconnected and part of continuous cycles of change. everything constantly changes and all interventions impact on the overall system. process consultation is analogous to a journey with the voyage itself as, if not more important, than the end. some change is anticipated; others emerge or are opportunity based. the process consultation model resembles overlapping simultaneous activities with all the phases themselves understood as significant interventions in an evolving developmental process (beckhard, 1997). it is client centered and appropriate for surfacing complex or sensitive issues. figure i provides a contrast of the two perspectives. figure i: linear versus process consultation 'linear'onsultation process consultation linear: progressive, logical stages cyclical: processional destination: moving towards specific end journey: constant cyclical change creating dis-equilibrium: altering current maintaininglrestoring equilibrium: acting to state restore balance planned & managed: achieve ends maintaining harmony: with existing order unusual: without intervention everything usual: everything constantly changes and stays the same nothing stays the same source: schein (1999) most organizational change resulting from consultation is at the transactional level of observable work or the systemic level of strategy, structure or technology information systems (old, 1995). however, for true transformational change to occur, underlying patterns and structures determining thinking, behavior and action must be challenged. this is required in addition to transactional and systemic change. simultaneously working with all three levels in an intervention transactional; systemic; values —whether it be in either cyclical or linear model, provides an opening for the process of transformational change. 49 .laurnal vf sniall business srrarel0'vl. l l, luv.2 fall/ivinrer 2000 approaches to consultation three prevalent approaches to consultation can be discerned: expert model; doctor-patient model and process consultation (schein, l999). when explored in depth, both the expert and doctor-patient model exhibits many similar features. the conventional notion of an 'expert'xternal consultant who provides special advice on contract for a specific time to clients is familiar and well established. such advice tends to be of a technical rather than of a process nature. it denotes a linear approach by which the consultant works largely independently of the data and makes final recommendations to the client. this approach rests on the assumption that the client has identified the problem correctly and wishes to find a solution. should the client be unable to accurately describe the issues or chose to withhold certain information, the consultant will be ill prepared. it also rests on the assumption that the consultant is qualified and capable of providing appropriate advice. once the problem is empowered to the consultant, the client is freed to attend to other tasks. thc doctor-patient model is a technically and interpersonally driven diagnostic approach requiring interaction between consultant and client. the model differs from that of the 'expert'n that clients are more prone to reserve the right to take advice. the patient is unlikely to empower the doctor unreservedly. following the analogy of a medical scenario, the patient is inextricably part of the situation and has a vested interest in it. similar, the type of message the 'doctor'onveys and way it is conveyed will influence the acceptability of the message. messages calling for an unwelcome change or ones that patients considered to be unreasonable are likely to be rejected. finally, as in doctor-patient medical relationships, the accuracy of the diagnosis or treatment may be questioned and alternative options deemed more palatable sought. in this approach clients are helped, from the information provided, to see their options and make informed decisions. however, as with any doctor-patient relationship, the client may choose not to take the advice. figure 2 explores these tensions and captures the different consultation modes and conditions for success with small business interventions. as can be seen from figure 2, descriptors for 'expert'nd 'doctor-patient'hare similar shading and are separated by a diagonal shaded column. this is to signify that while both are conceptually distinct approaches, they do share more features in common with each other than they do with process consultation. process consultation is an interpersonally driven, cyclical approach that requires interdependence among client members. in this approach the consultant facilitates client independence of the consultant. organizations willing to empower consultants unreservedly tend to be one of two extremes mature and confident in their diagnosis and choice of expert or immature and trusting of professional knowledge. organizations adopting a 'doctor-patient'odel are more suspicious of professional knowledge per se and unwilling to totally empower an outsider. the 'expert'nd 'doctor-patient'odes are also used for different purposes. management may empower the 'expert'afe in the knowledge that if the solution fails, the 'expert's responsible not them. the 'expert'nd 'doctor-patient'odels both differ from the 'process'odel in the manner in which the intervention is handled. with process consultation, the intervention is cyclical with awareness on the part of both the client and consultant that all activities are interventions impacting on the case. 'expert'nd 'doctor-patient'nterventions are normally linear, with a perception that only the data gathering and agreed actions are interventions. the expectation of the client is more focused and close-ended in expert consultation models. with process consultation, there is a realization from all stakeholders that issues will emerge from iterations of action. learning through transformational change, reflection and intervention are integral parts of process consultation. 50 journal of small business srr aiegy val. ll, no.2 fall/winter 2000 figure 2: consultation modes and conditions for success with small businesses s tage of mature/confident to immature & initially 2 mature & confident development empower consultant cautious of consultant ', to involve employees young or start-up owner reluctant to . entrepreneurial or seeking help delegate or empower 'dventurous m anagement solving specific preto take advice when it b issues emerge from purpose identified problems suits iterations of action 'one -otf power and 'answers'; to build and develop consultant stays with management ." a process for change involvement e xpectation of task centered & correct diagnosis will i' reflection and client focused on issue be given conjoint intervention 4 -'closed'evealing given symptoms are ' 'open'eeping no only certain correct information back information s kill base limited or expenise resting in,.', extensive range of specialized skill base hands of a i'ew skills & adaptability able to integrate & learning through transformational leam from special incremental change, change and help development source: aurliors research design since 1994, thirty-four consultation assignments have been undertaken with businesses in the southern/south west region of the uk. while the dimensions used to define the size of a business vary, the department of trade and industry identifies a micro firm as having up to nine employees; a small firm as having between ten and 49; and a medium firm as having between 50 and 249 employees. all thirty-four assignments were with small or medium sized enterprises (smes), with twenty-six firms employing less than 50 people and the remainder employing 51-249 people. the high number of small business assignments undertaken can be attributed to the following. first, the regional economy is one where small businesses predominate. secondly, small businesses approach us due to our reputation and ability to provide services they value. thirdly, the growth in small business start-ups and enterprise development in the region has resulted in a growing number of such enterprises seeking guidance. case studies provide a mechanism for empirical investigation of particular phenomenon within its real life context using multiple sources of evidence. they provide a rich description from which to formulate exploratory relationships. choosing a case study methodology facilitated the integration of different types of data. the development of tentative exploratory evidence guided the choice of subsequent cases in order to provide intelligent insights into the data. as mentioned earlier, all companies in this study are based in southern/south west region of the uk. as the research is qualitative, exploratory and case based, we make no claims for generalizations to other regions in the uk or elsewhere. nonetheless, we expect that many of our exploratory findings are common to small business and enterprise development in western europe and the usa. 5l journal vf sniall dirsiness strategy vvl. i i, nv.2 fall/winier 2000 the thirty-four small businesses may be grouped under the following sectors, with actual numbers shown in brackets: service (13); manufacturing (6); 'not for profit'9); professional practice (6). the 'not for profit'ector included charities and those working with volunteer staff. the growing presence of 'not for profit'rganizations, combined with challenging organizational issues of managing volunteers, made this an interesting sector for inclusion. to portray a full appreciation of the realities of consulting with small business, one illustrative company has been selected from each of the four business sectors. purposive sampling, with companies being deliberately selected to illustrate and explore issues was used to select illustrative cases (holloway, 1997). purposive sampling is designed to enhance understanding of issues, concepts and processes rather than demonstrate generalizations. brief vignettes of the companies are provided in figure 3, followed by case studies of respective business consultation interventions. intervention and diagnosis can be seen to permeate all interventions rather than being discrete stages. some interventions also include diagnosis and vice versa. figure 3: brief descriptions of four small businesses cases case a arclilrecrurul prucrice case b unisex lialrdressers sector: professional practice sector: service size: 2 partners employing 18 people size: owner-manager employing 5 people issue: no time to see if there is an issue issue: survival case c manufacturing company case d municipal golf club sector: manufacturing sector: 'not for profit'ize: 127 employees size: run entirely by volunteers with 224 club members issue: communication issue: catering loss source: auiliars 'ala for each case, the consultation commenced in a slightly different way. two of the companies made a direct approach to us as consultants manufacturing company (case c) and the hairdressers (case b). their initial drive to bring in consultants was for 'expert'dvice to solve a perceived problem. the manufacturing company had an issue to resolve and was looking for 'expert'elp. communication within the manufacturing company was perceived to be a problem and they wanted a questionnaire designed and executed for them. the owner-manager of the hairdressers was all too aware of his financial situation. he sought our help on the basis that were 'the experts'nd could 'solve his problem'. with cases a and d our initial involvement came through personal contacts. in neither case were we seen as 'experts', but as individuals who might be able to help. the architectural practice (case a) had been 'thinking about gening in consultants's it 'seemed like a good idea'. they were not looking for expert advice in the technical sense but felt the process 'might be useful'. the municipal golf club (case d) is an example of a 'not for profit'rganization. the club had been in existence for 11 years but had only had a clubhouse for 5 years. since acquiring the clubhouse, catering operations had caused financial problems. our help was sought by committee members to bring credibility to a solution they had already determined (chapman, 1998). 52 journal of small business strategy vol. l l, no.2 fall/ivinrer 2000 the cases: linear or cyclical intervention the intervention process with each of the illustrative small businesses will now be described. case a architectural practice. the architectural practice had been in existence 10 years and consisted of two partners and 18 employees. a couple of the employees had been with the partners since its inception with the remainder being recruited as the business expanded. at the time of our intervention, the business was flourishing. a range of building contractors used the practice consistently and contracts sometimes had to be declined. at our first meeting the two partners articulated the view that strategic management issues needed to be addressed in the practice. however, when pressed for details they were unable to articulate precisely what they understood by strategic issues. the intervention commenced in process consultation mode. by listening to and talking with the two partners a cyclical journey commenced. individual discussions were held with each of the 18 employees and time spent observing the practice and immersing and unraveling the culture. full access was given to all business and financial information. in the ten-year lifetime of their business, the partners had never articulated to themselves or others the purpose or mission of their practice. they had never reflected on issues of the direction of the business or their future visions for the business. taking time with us to think through underlying patterns and structures in their work was a revelation to all concerned. they started to think through the reasons why certain clients used their services. moreover, they began to think about the direction which they wished the business to take and how they might achieve their visions. openness, trust and willingness to engage with us and reflect on behavior, thinking and action provided the opportunity for transformational change. the partners had no secret agenda. they were not anxious about what we might find or suggest. the purpose of the practice started to be defined, redefined and re-evaluated. issues for the partners crystallized around exit strategies for the two partners in the future. a distinctive characteristics of knowledge based organizations such as architectural practices, is that they have only the expertise of their staff as assets with which to trade (winch & schneider, 1993). what is passed on is knowledge, expertise and client goodwill. the partners did not just change the way in which they'acted and behaved but called into question and re-evaluated their values. before the intervention, what the partners said they valued, or their 'espoused'heories, bore little resemblance to the values suggested by their actual actions and behavior. the process consultation caused them to become aware of their 'espoused'alues and how it differed from values demonstrated by their 'actual'ehavior. the outcome was a re-evaluation of and change to both espoused and actual values. espoused and actual values and behaviors were brought into harmony by transformational change and learning (argyris, 1999). transformational change occurs when both underlying values and the manner in which they manifest themselves alter in harmony. case b unisex hairdressers. typical of many small businesses, the owner-manager was in control and extremely reluctant to delegate. the perilous state of the business finances, coupled with the eagerness of the owner to grasp at any idea underscores a further aspect of consultation for small businesses. aside from any legal liabilities, moral and ethical issues in consultation rest heavy when dealing with small businesses who are struggling to make a living with the family home as collateral. the owner manager had gathered no data on his competitors or the potential market for hairdressing services. he had not sought the views of his existing customers regarding his services or their needs or expectations. undertaking a simple competitor analysis provided data on pricing structures, services offered and location of competitors. similarly, a questionnaire survey of existing customers explored their views 53 loornai ofsrrraii busirress.'csraregy vol. ii, no.2 fall/winter 2000 of services and areas for improvement. starting from basics, a workable business plan emerged. inexpensive but effective advertising, re-evaluation of pricing structures and minor adjustments to opening hours and lines of business to meet customers'eeds and preferences, proved successful. bowever, none of these activities would succeed in the long term without improving the client's ability to anticipate and solve both similar and novel problems in the future. this involved more than developing technical expertise. it required a transition from linear to process consultation with the owner-manager being willing to trust his staff and delegate. some weeks into the consultation, an episode brought the matter of delegation to a head. in an open discussion with the owner-manager and his staff, a junior assistant brought up the issue of involvement. denial of a problem, rejection of the implications behind it, acrimonious language and telling 'closed'ody language on the part of the owner was the instant reaction. by careful diffusion of the immediate episode and gaining agreement to return to the issue the following week, the intervention was managed successfully. the episode proved a vital turning point for the owner-manager to reflect in calmer mode on his role. over a period of weeks he became less defensive about what he had perceived initially to be attacks on his leadership style and personal ability. a gradual change of attitude and ultimately behaviour was noticeable to his staff and us. he became more aware of and responsive to the view of his staff. gradually, ideas and suggestions of staff started to be accepted or at least considered. case c manufacturin com an . this intervention commenced in a linear fashion with logical stages. the company knew what they wanted and would pay for. we were approached to undertake a specific employee attitude survey with the delivery of the analyses on a certain date. the company was keen to maximize on their strengths by oitering service quality in customers. managing service quality is an acknowledged means of small firms gaining competitive advantage vis-a-vis large enterprises (maclaran & mcgowan, 1999). employee attitudes were seen as an integral part of quality service. the employee attitude survey was the end as far as the company was concerned. they saw the intervention as technical help in carrying out a survey, the results of which they would action if they wished. our services were employed towards a clear-cut goal. there was always the intention on the part of management to have feedback presentations to staff. but it was only part way through the linear intervention that they started to warm to the idea that staff might like to take on board the resolution of issues arising from the survey. management started to see that the survey was only the beginning not the end and that actions were needed. they realized ownership of the issues was not their sole prerogative but shared by their employees. albeit in a small way, groups of employees formed working parties and were empowered to redress issues. most importantly, management came to appreciate the continuing journey and . importance of the process in addressing change and developing their staff. with the manufacturing company, there was no diagnostic period by the consultants regarding the issues or how data was to be gathered. management had prejudged the issues and the manner in which they were to be explored. by so doing, management felt more in control of the intervention and final outcome. areas to be explored in the survey were specified by management with only a very limited input from other levels of staff. in this intervention, we raised issues of who should see the data and agreement reached prior to undertaking the survey. all levels of employees would have feedback presentations and access to the full and complete report. to inculcate a more open and trusting environment for the feedback presentations, management had no prior copy of the report or the presentation. the first time they saw the report and presentation of findings was in open sessions with all employees. while management was initially uneasy about what might be in the report or presentation findings, their fears were unfounded. to allow us to proceed in this manner did indicate 54 journal ofsmall business strategy vol. il, no.2 fagywinrer 2000 confidence in our intervention and style as well as in their employees. in this illustrative case, the needs of management were served. however, if a diagnosis period had been agreed prior to intervention, it is quite likely that dilterent issues would have surfaced from those given. moreover, a questionnaire survey may not have been used. methods of gathering information influence the intervention and its findings. case d munici al golf club. the municipal golf course was owned and maintained by the district council. around 300 members of the public who used the course paid a small annual fee to join the golf club. for the first six years of its operation, the club had no clubhouse. once funds were sufficiently buoyant, a small clubhouse including catering facilities had been purchased. since buying the clubhouse five years ago, annual deficits had occurred from catering, placing the long-term survival of the golf club in jeopardy. at the 1998 annual general meeting (agm), a vote took place to empower the main committee to investigate potential solutions to the catering deficit. one potential solution suggested at the agm was contracting out the catering. another suggestion involved passing control of the catering to the district council. we were invited in by the main committee to explore potential solutions to the catering deficit. usually, when a consultant helps a client, he or she is allying themselves with the goals and values they represent (schein, 1997). constituents of the main committee felt neither of the solutions proffered at the agm were in the long term interests of the club. colluding with the option not to contract out catering was no problem. from an 'expert,'tance it was not a viable option. neither was the option of passing over control of the clubhouse to the district council financially prudent. what was problematic was handling the clients so that they came to own the problem and to see the need for constant cyclical change. while the intervention started in a linear way, we were able to quickly inliuence the direction towards process consultation. the intervention resulted in a complete re-examination of clubhouse and its potential. break-even analysis on usage and income in relation to opening hours made apparent the sense of closing the clubhouse for two days each week and thereby saving on catering wages. better marketing of the clubhouse and the introduction of non-golfing social activities also improved turnover. finally, plans were oitered for long-term sustainable growth over a five-year period. the 'above reflections on the four cases (a to d) have illustrated considerable movement and interchange between models of 'linear'nd 'process'onsultation within the same intervention. they reveal, too, how particular episodes may cause directional changes. using the same four small business cases, we now turn to approaches to consultation. approaches to consultation in the cases it is possible to see the manner in which these different approaches to consultation manifested themselves in the cases presented. in reality, during the life cycle of any consultation intervention, consultants employ different modes, much of which is unplanned and emergent, as the nature of the intervention unfolds. moreover, both the content and process of an intervention needs to be appropriate to the needs of the client and the case in hand (mclarty gc robinson, 1998). the expert model was the starting premise of the manufacturing company (case c) and for the hairdressers (case b). the architectural practice (case a) made no specific request for expert help and this is not a mode in which we commenced working. nonetheless, we moved into expert mode in case a. we introduced and installed a sophisticated spreadsheet for tracking accounts and progress monitoring which considerably improved the existing systems. expert mode raises an interesting issue. if clients accept 55 journal vf sntall business siraiegy vol. ll, no.2 fall/winier 2000 'expen'dvice they may solve immediate problems as instanced in case b but clients'ay not learn how to solve problems of this nature, or how to solve related problems in the future. in the latter stages of the intervention with cases b and c elements of process consultation emerged as management came to see the wisdom of involving their staff in resolving issues. 1'he owner-manager of the hairdressers approached us in 'expert'ode and willingly took advice until it touched on his style of leadership and control. his approach then moved to a classic 'doctor-patient'odel with the communication being unwelcome. managing client relationships and interpersonal behavior are prerequisite skills to effect desired outcomes and achieve improved action. luckily we were able to meet this challenge in a sensitive way. by the time we withdrew from the intervention, we were confident that the owner-manager of the hairdressers had not only accepted technical help but was well on the way to appreciating and capitalizing on his staff. what had started as an 'expert'ode had fluctuated to 'doctorpatient'odel and finally transformed into process consultation. process consultation emphasizes helping clients and stakeholders to help themselves. it is a developmental activity to facilitate intervention to accomplish agreed goals. in the process of managing complex relationships with the client there is mutual respect for each other's skills and knowledge. it does not assume that the manager, client or the organization knows what is wrong, what is needed or what the consultant should do. all that is required for the process to begin constructively is intent on the part to improve matters. the client owns the problem and continues to own it throughout. the process is directed not only at solving the client's immediate problem, but also improving the client's ability to anticipate and solve both similar and novel problems in the future. out of the four small business examples, only the architectural practice commenced in process consultation mode. by natural osmosis, intervention and diagnosis digressed briefly into expert mode as discussed. however, the potential for double-loop learning (argyris, 1999) and transformational change remained throughout. for the golf club (case d), the path to process consultation could only be joined once internal politics were understood, enabling us to influence networks to achieve improved action. out of the four case interventions discussed, the golf club proved to be the most difficult to steer to process consultation due to the transient and voluntary nature of the committee positions. our challenge was to develop committee members so they could develop their successors. the end points for three out of the four small business interventions were incremental shifts in behavior and work patterns rather than transformational change. 1'he hairdressers, manufacturing company and golf club all showed incremental change while the architectural practice showed transformational change. to a degree, the starting point in terms of developmental awareness and state of readiness influences the end point that can initially be achieved. the cases have shown that even within relatively simple consultation interventions, the approach taken fluctuated between the prevalent modes of expert, doctor-patient and process. interventions fluctuated within the same intervention cycle according to the contingencies of the situation. initial intervention modes were driven predominantly by the expectation of the client. once the intervention is underway, the stage of development of the firm and skill base of client(s) and employees comes into play by making apparent what is acceptable and/or feasible for the client. implications for smali. businesses gt consui.ting interventions the case studies have demonstrated that with small business interventions, modes of working fluctuate rapidly between difterent recognizable consultation models of 'expert', 'doctor56 journal of small business strategy vol. ll, no.2 fall/hinter 2000 patient'nd that of 'process'onsultation. while expert modes tend to offer linear intervention and to be content driven, process consultation is likely to be cyclical and openended. consultants working with small and medium sized enterprises need to be perceptive regarding the appropriate stance to take and sufficiently flexible to change direction according to the clients'eeds or contingencies of the situation. they cannot embark on an intervention assuming it will remain in one consultation mode throughout. regardless of the size of the firm, all consultants are likely to be concerned with both technical dimension and human dimension regarding consulting-client relationships (kubr, 1996). consultation interventions in small businesses also require clients to be open and receptive to direction changes without feeling any threat or loss of control of the intervention process. the skill of the consultant will largely determine whether or not this is achieved. the four cases illustrate that the boundaries between different intervention models and consultants are permeable. both clients and consultant must be prepared to move between models within the same intervention. regardless of the entry mode and starting point, the mode of consultation intervention in each of the four cases changed several times during the life span of the intervention. with the architectural practice (case a), the movement was from process consultation to expert and finally to process. commencing with process intervention in small business is unusual. as can be seen from figure 2, such an approach requires the business to have characteristics of maturity, confidence and openness. initial intervention modes of 'expert'r 'doctor-patient're far more common as illustrated by the cases of the hairdressers (case b), the manufacturing company (case c) and municipal golf club (case d). the cases show the importance of adopting an appropriate stance for the client, intervention and intervention phase. no particular intervention model is better than another. what is required is an awareness of the appropriateness of different approaches for the specific situation at that time. it is easy to assume clients are easy to identify, particularly in small or medium sized enterprises. but as schein (1997) acknowledges, the question of who actually is the client is in itself ambiguous and problematic. all businesses have different levels of client and stakeholders and the raw nerves consultation touches are very apparent in small businesses. in each of the four cases explored, the primary clients were easy to identify. they invited us in, authorized us to proceed and 'owned'he situation and ensuing problems and opportunities. however, in each illustrative case, intermediate clients and stakeholders and ultimate clients were readily apparent. dealing with 'not for profit'rganizations and those run by volunteers raises further interesting issues as illustrated by the case of the municipal golf club. here, multiple stakeholders and dilferent levels of clients were readily apparent, with different levels of client having contrasting expectations and skill bases. managing multiple relationships and intervening in complex systems call for high levels of interpersonal skills. content and process issues merge and blend in most small business interventions. primary clients in small businesses must be mindful that any consultant intervention will be clearly visible for all levels of client and stakeholder. inevitably, visibility raises expectations of action. the architectural practice had no difficulty with this while the manufacturing organization wished to keep a strong control on the intervention and ensuing expectations. management at the manufacturing company made it clear that the consultation was solely to develop a questionnaire survey and receive and analyze returned questionnaires. they did not wish the consultation to concern itself with any other aspect outside of that given area. process issues influence the diagnosis and.content of the intervention. this is demonstrated in the hairdressers when discussions raised the issue of the owner and delegation. open discussion brought to the fore a suspected issue but one which had been hidden from us. in 57 journal vf small business strategy vok i l, no.2 faflywinser 2000 the end, open and honest discussion resulted in this issue being resolved satisfactorily. while excellent interpersonal skills are prerequisites for any consultant, with small businesses and where the main client is the owner, demands on interpersonal skills are very high. perceptions of the business on the part of the primary client are far more likely to be intermeshed with self-perceptions and ingrained values and culture. if the owner needs to re-adjust perceptions of the business or personal style, extreme tact is required as demonstrated in the intervention with the hairdresser. employees, too, tend to be visible and emotionally involved with running and survival of an sme. clients in smes need to remember that they are the ultimate owners of any problem and as such must be convinced by any suggested solution. while consultants may show them choices and new paths, the clients have final say. in the case of the municipal golf club, many options were highlighted but the client body needed to be convinced that the options would lead them in the right future direction. consultants are fallible and the appropriateness of any intervention activity has to be set in the context of the business culture, needs and wishes of the client. the architectural practice could have expanded and become far more profltable if it so wished. but this was not the ultimate goal of the partners. the manufacturing organization was only touching on the surface of real issue with their questionnaire but this is all they wished to do. they were unprepared and unwilling to embark on anything that would involve major change or transformational learning. finally, in dealing with small businesses, consultants are dealing with individual livelihoods in a very direct, transparent way. this places a considerable emotional and moral burden on consultants and their interventions. consultants working in small businesses need to be mindful of the conditions under which the three main approaches to consultation are likely to succeed as illustrated by figure 2. firstly, the stage of developntenr of the business impacts considerably on their state of readiness for a particular approach. expect advice is more readily sought by those small business enterprises at both ends of the spectrum companies who are established, mature and confident to empower consultants and those who are newly established. by contrast the doctorpatient mode of intervention is more likely to be sought by a small business in which an owner manager is reluctant to delegate. secondly, the management purpose in bringing in consultants influences the required approach. where a business sees advantages in a continual change and development, process consultation is ideal. the solving of specific or unique problems, on the other hand, calls for expert intervention. thirdly, the expecraiions of rbe client will have a considerable impact on the way in which a consultant is advised to proceed. clients who have reached a level of maturity and self-belief, combined with a willingness to be open-minded and reflective are ripe for process consultation. those who wish for only the specific issue that they have identified to be addressed will be happier with expert or doctor-patient modes of intervention. finally, the skill base of the sme will influence the approach consultants are advised to take. where those in the business are able to learn from specialized help and draw on that learning for tackling future problems, the expert mode or that of the doctor-patient is appropriate. however, in cases where transformational changes are required, process consultation is the only suitable way forward. by taking each of the four conditions —stage of development, management purpose, expectations of the client, skill base into consideration, consultants will be able to steer an appropriate path to meet the needs of the small business enterprise and development. 58 journal ofsmall business strategy vol. i i, no.2 fall/winter 2000 references argyris, c. (1999). on or anizational leamin . oxford: blackwell. b kk b,k.(1997). a~7k .3 9 i:i 7-b chapman, j. (1998). do process consultants need different skills when working with nonprofits? leadershi and or anization develo ment journal 19(4), 211-215. harrison, r. (1995).consultant's 'oume: a dance of work and s irit. san francisco: josseybass. holloway, i. (1997).basic conce ts for ualitative research. oxford: blackwell science. jamieson, d. (1997). consultation for organizational change. journal of or anizational chan e mana ement 10(3), 198-192. kolb, d. a., tk frohman, a. (1970). an organization development approach to consulting. sloan mana ement review 12 51-65. kubr, m, (ed.) (1996). mana ement consultin: a uide to the rofession (3'd.). geneva: international labor office. maclaran, p. & mcgowan. p. (1999). managing service quality for competitive advantage in small engineering firms. international journal of entre reneurial behaviour bt research, 5(2), 35-47. mclarty, r., ttt robinson, t. (1998). the practice of consultation and a professional development strategy. leadershi and or anization develo ment journal 19(5) 256263. old, d. (1995). consulting for real transformation. journal of or anizational chan e ~ms(3), 3-17. sadler, p. (1998). mana ement consultanc: a handbook of best ractice. london: kogan page. schein, e. h. (1995). process consultation, action research and clinical inquiry: are they the same? journal of mana erial ps chain 10(6), 14-19. schein, e. h. (1997). the concept of "client" from a process consultation perspective: a guide for change agents. journal of or anizational chan e mana ement 10(3), 202216. schein, e. h. (1999). process consultation revisited —buildin the hei in relationshi . harlow; addison-wesley. shaw, p. (1997). intervening in the shadow systems of organizations: consulting from a complexity perspective. journal of or anizational chan e mana ement 10(3), 235250. winch, g., bc schneider, e. (1993).managing the knowledge-based organization: the case of architectural practice. journal of mana ement studies 30(6), 923 -937. john h. m. ellis was formally a strategic appraisal manager wuh an international resource company and continues to work with international companies to assist them in achieving and sustaining success julia a. klely is reader in organisational behaviour at the business school with specific interests in knowledge management and human aspects of the employment situation including psychological contract. 59 strategy table of contents i an investigation of the planning-performance conundrum in a dynamic macroentrepreneurial environment michael d. ensley rensselaer polytechnic institute james w. carland western carolina university joann c. carland western carolina university 22 an empirical investigation of bootstrap financing among small firms howard van auken iowa state university 37 connectivity & communication: a study of how small wine businesses use the internet armand gilinsky, jr. sonoma state university elizabeth c. thach sonoma state university karen j, thompson sonoma state university 58 differences between women-owned home-based & oflice-based businesses: an exploratory study stephanie huneycutt christopher newport university lisa d. spiller christopher newport university john e. anderson christopher newport university 73 digital divide: impact on hispanic-owned small businesses cecilia temponi texas state university-san marcos jaime chahin texas state university-san marcos 92 opportunity recognition: perceptions of highly successful entrepreneurs rodney c. shrader university of illinois at chicago gerald e. hills university of illinois at chicago 109 small business development centers: challenges and opportunities samuel r. gray new mexico state university janice black new mexico state university 123 unionization and the white-collar worker in small businesses lewis w. lash barry university 129 book summary, review & application: good to great: why some companies make the leap... and others don' by jim collins reviewed by anthony bambocci, digital solutions, inc. correction: in the lastissue(spring/summer 2003) the bio ofthe third author wasinadvertently omitted from wgrowing pains: an employment compliance primer for small employees": a. m. nunley iii, attorney and counselor at law, c.p a., ll.m. in taxation (southern methodist university school of law) is assistant professor of management at the university of texas of the permian basin. he recently co authored "wip inventory: asset or liability?" (business journal for entrepreneurs, 2002). http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2019, vol. 29, no. 02, 72-83 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2019 small business institute® w w w. j s b s . o rg insider trading can impact a firm and its shareholders in a number of ways. trading by insiders in possession of private information can serve as a mechanism of disclosing private information, and thereby improving price accuracy (manne, 1966). insider trading can also serve as an effective way to incentivize and reward managers for increasing stock price, allowing them to profit from trading as they create information that improves firm value (bainbridge, 2000). on the other hand, insider trading can impose costs upon the firm and its shareholders by decreasing the price liquidity of its equity in the open market (bainbridge, 2000; fischel & carlton, 1982). stock price liquidity, typically defined as the ease or difficulty with which a security is traded, is important for all publicly traded firms. smaller firms, which already face liquidity constraints, are even more sensitive to its changes (lipson & mortal, 2009) as declines in liquidity increase the cost of trading for investors. to encourage investment, firms must compensate shareholders for the higher transaction costs by paying higher returns required by investors (amihood & mendelson, 1986; brennan & subrahmanyam, 1996; eleswarapu, 1997). this leads to an increase in the company’s cost of raising capital. liquidity can be measured as the price difference between buying and immediately selling a particular asset. for equities, a significant component to this cost is the bid-ask spread set by the market maker, which is the difference between the market price of buying and the market price of selling a stock. market makers purchase securities at bid price with expectation of earning revenue from selling them at ask price (copeland & galai, 1983; demsetz, 1968). however, stock prices may not reflect all value relevant information, particularly when there is information unknown to the market. under circumstances of sufficient information asymmetry corporate insiders in possession of private information may trade when the securities are mispriced by market makers. the greater the perceived probability of informed trading, the wider the spread set by market maker (easley, hvidkjaer, & o’hara, 2002). in other words, market makers take potential information asymmetry into account and establish bid-ask spreads to offset expected losses from introduction valeriya v. posylnaya1, brandon n. cline2, joshua r. aaron3 1university of minnesota duluth, usa, vposylna@d.umn.edu 2mississippi state university, usa, brandon.cline@msstate.edu 3middle tennessee state university, usa, joshua.aaron@mtsu.edu the liquidity impact of insider trading on small and medium size enterprises insider trading, small business, bid-ask spread this study compares the impact of insider trading by corporate employees of small and medium-sized enterprises (smes) on the stock price liquidity of these firms with that of larger institutions. using publicly reported data, we assess how trades placed by sme insiders affect the bid-ask spread of their companies’ stock. we document that the spread gets significantly larger following these transactions relative to trades by insiders from larger firms. collectively, the evidence suggests that insider trading by sme executives, as well as non-executives, decreases liquidity for their firms. one important implication from our findings is that the cost of insider trading is more severe for smes, firms characterized by greater information asymmetry. apa citation information: posylnaya, v. v., cline, b. n., & aaron. j. r. (2019). the liquidity impact of insider trading on small and medium size enterprises. journal of small business strategy, 29(2), 72-83. http://www.smallbusinessinstitute.biz http://www.jsbs.org 73 v. v. posylnaya, b. n. cline, & j. r. aaron journal of small business strategy / vol. 29, no. 2 (2019) / 72-83 trading against insiders possessing superior information (copeland & galai, 1983; glosten & milgrom, 1985; kyle, 1985; leland, 1992). this results in a higher cost of trading for all investors and a higher cost of capital for the firm. corporate insiders have continual access to private information that is potentially exploitable. fidrmuc, goergen, and renneboog (2006) show significant positive association between the profitability of insider transactions and an insiders’ rank in united kingdom firms. similarly, ravina and sapienza (2010) and wang, yong-chul, and francis (2012) demonstrate evidence of profitability of trades placed by directors and high level executives. consequently, trading on the part of these insiders represents an environment of information asymmetry, where insiders have an informational advantage over market makers. although insiders of all firms are likely to possess information that is private, the frequency and significance of the information varies. small and medium size enterprises in particular are typically associated with more severe information asymmetry relative to larger corporations. this difference in information flow is due to a number of factors. for example, kale and arditi (1998) show that small and medium size enterprises are characterized by liability of newness. in addition, these firms struggle to gain perceived legitimacy (nagy, rutherford, truong, & pollack, 2017), suffer from a lack of sufficient trading history (cassar, 2004), as well as greater information opacity (berger & udell, 1998). huddart and ke (2007) further illustrate that information flow is limited at small firms due to less coverage by financial analysts. small businesses, therefore, face more difficulty in tracking financial information including ratio analyses and performance data (williams, manley, aaron, & daniel, 2018). it is hence not surprising that prior insider trading studies consistently document increased profitability around the transactions of corporate insiders at smaller institutions (frankel & li, 2004; lakonishok & lee, 2001; seyhun, 1986). in this study, we explicitly examine the liquidity impact of the transactions of insiders at smes relative to those of larger corporations, where smes are defined as firms with 500 or fewer employees. using transactions reported by corporate insiders in accordance with the securities exchange act of 1934, we find a significant positive association between the bid-ask spread and trades placed by sme insiders relative to the spreads of similar trades by non-sme insiders. this difference in the liquidity result holds statistically for both purchase and sell transactions, and it is economically significant. the increase in the bid-ask spreads of sme firms is 26 to 42 basis points greater than that of larger firms. the implication of these findings is that the cost of potential insider trading is heightened in these more opaque, smaller firm environments. we also provide evidence that this association remains positive and significant regardless of the rank of the insider, suggesting that order flow from even lower-ranking insiders impacts liquidity in a negative way. overall, our work provides evidence suggesting an enhanced impact on liquidity from the trades of insiders at smes, firms characterized by more severe information asymmetry. our findings also suggest that insiders of smes should recognize that even though trading in their firms’ shares, when not based on private information, is not illegal, it can impose indirect costs on the firm. as executives acutely aware of the liquidity issues faced by smes, these insiders should consider the consequences for their firms when making their trading decisions. specifically, that trading can impose a decrease in liquidity of their sme and a higher cost of raising capital for their already constrained firm. literature review information and liquidity a significant body of work studies insider transactions reported to the securities exchange commission (sec) by officers, directors, and holders of 10% or more a company’s shares. these studies provide evidence suggesting that transactions by corporate insiders contain information regarding the future performance of the firm. the informational content of the trades is typically found to be greater for insider purchases relative to insider sale transactions (jeng, metrick, & zeckhauser, 2003; lakonishok & lee, 2001; lin & howe, 1990; seyhun, 1986). in addition, the predictive power of the transactions by the insiders differs with the timing of the trades (brooks, chance, & cline, 2012), persistence of insider profitability 74 v. v. posylnaya, b. n. cline, & j. r. aaron journal of small business strategy / vol. 29, no. 2 (2019) / 72-83 (cline, gokkaya, & liu, 2017), and the sequence of trades (cohen, malloy, & pomorski, 2012). evidence also suggests that the profitability of insider trades varies with the firm’s level of information asymmetry, as well as information asymmetry resulting from insider’s position within the firm (aboody & lev, 2000; frankel & li, 2004; huddart & ke, 2007; piotroski & roulstone, 2005; ravina & sapienza, 2010). huddart and ke (2007) and frankel and li (2004) demonstrate a negative association between analyst following and profitability. consistent evidence is also presented by aboody and lev (2000), who illustrate that insider trading is more profitable in r&d intensive firms. while piotroski and roulstone (2005) show positive association between insider trading by top executives and directors and firms’ future earnings, ravina and sapienza (2010) find that the profitability of trades by directors serving on audit committees is significantly higher than that of other independent directors. the importance of access to private information through insider rank is further highlighted by evidence in other studies. wang et al. (2012) present findings that the trades by higher-level executives with access to financial data are more profitable and are associated with better information about firms’ future earnings. fidrmuc et al. (2006) demonstrate higher profitability of directors’ trades in firms with lesser presence of outside blockholders, emphasizing the link between informational content of transactions by ranked insiders and the degree of information asymmetry at the firm. in other words, trading by insiders who, due to their positions and rank, have better access to valuable relevant information represents situations where such outsiders as market makers are at informational disadvantage. given the evidence of informational advantage of corporate insiders over outsiders, another strand of literature assesses the impact of this informational advantage on liquidity by investigating the association between informed trading and measures of liquidity. the bid-ask spread set by market makers results from the market makers’ attempt to balance expected profits from non-informed traders with the expected losses from traders with superior information (copeland & galai, 1983; glosten & milgrom, 1985; leland, 1992). assuming traders with superior information exploit their informational advantage, market makers widen the spread to compensate for potential losses from trading against those information motivated traders (kyle, 1985). empirical studies often utilize reported transactions by corporate insiders to test these theoretical predictions. cao, field, & hanka (2004) investigate the impact of insider trading on market liquidity in the light of ipo lockup expirations from 1995 through 1999. they focus on lockup expirations since they represent periods of arguably greater information asymmetry and allow for better evaluation of the impact on liquidity. the expirations result in preannounced, large scale rises of sales by insiders which lead to temporary small increases in effective bid-ask spread, as well as substantial changes in quote depth. chung and charoenwong (1998) also examine transactions by corporate insiders using intraday data during 1988 to analyze the relation between insider trades and the bid-ask spread. their cross-sectional findings reveal that a greater intensity of insider trading is associated with larger spreads; however, time-series results demonstrate lack of evidence for spread changes on the dates of the insider transactions. overall, the studies suggest that market makers concerned with trading at an informational disadvantage establish wider spreads in the presence of trades from corporate insiders that are more likely to be driven by relevant private information. information and small and medium size enterprises small and medium size enterprises are typically characterized by a high degree of information opacity (angerer, niemand, kraus, & thies, 2018) due to their nature of being high growth firms with limited public history. thus, the informational content of transactions by corporate insiders is positively related to the level of information asymmetry of their firms (aboody & lev, 2000; frankel & li, 2004; huddart & ke, 2007; piotroski & roulstone, 2005; ravina & sapienza, 2010; bradley, cline, & lian, 2014). this is recognized by market makers and reflected in their changes to the bid-ask spread to mitigate trading at an informational disadvantage (cao et al., 2004; heflin & shaw, 2000; roulstone, 2003). 75 v. v. posylnaya, b. n. cline, & j. r. aaron journal of small business strategy / vol. 29, no. 2 (2019) / 72-83 the information opacity of small and medium size enterprises changes as they advance through their business cycle; however, smes remain more informationally opaque than their larger counterparts (berger & udell, 1998; caneghem & van campenhout, 2012; cassar, 2004; la rocca, la rocca, & cariola, 2011). initially, smes lack an established track record and trading history (la rocca et al., 2011; ortiz-molina & penas, 2008). in addition, smes face liability of newness and the necessity to create and develop reliable relationships with other economic agents and gain legitimacy from their environment (kale & arditi, 1998; singh, tucker, & house, 1986). even as smes develop, they are still likely to have limited operating history, less publicly disclosed financial information, fewer followings by other economic agents, and, overall, less visibility by the public (berger & udell, 1998; caneghem & van campenhout, 2012). prior findings suggest that insiders’ informational advantage over outsiders impacts liquidity, in particular, bid-ask spread. additional evidence also implies higher degree of information opacity in smaller firms. we therefore posit that this role of superior information contained in insiders’ trades will be greater for firms characterized by greater information asymmetry. specifically, we hypothesize that trading by corporate insiders of smes will have a more severe impact on liquidity relative to that of larger corporations. method according to section 16 (a) of the securities exchange act of 1934, corporate insiders are required to file form 3 (initial filing), form 4 (changes in ownership), and form 5 (transactions not reported on form 4) to update changes in the ownership of their holdings. for our insider transactions data, we employ the transactional form 4, table 1 data reported for open market purchases and sales provided by thomson financial insider trading data. we limit our sample to the period from january 2002 to december 2016 to avoid the impact of the us stock market decimalization on our results. prior to 2001, fractional format was used in price quotes in the us stock market. following the securities and exchange commission’s orders, decimal pricing in the equities and options markets was implemented by april 9 of 2001, which led to changes in bid-ask spreads among other outcomes (bessembinder, 2003). we also restrict the dataset to trades with cleanse codes r, h, c, l, or i to ensure data accuracy (liu & swanson, 2016; otto, 2014). according to thomson financial insiders data feed manual, codes r, h, and c are assigned to records that have been verified with high level of confidence, while codes l and i indicate cleansed and improved but not completely verifiable data. liu and swanson (2016), together with otto (2014), in the studies on share repurchasing and ceo compensation, respectively, refer to the thomson financial manual for cleanse code definitions and point out that these constraints to the data are important to insure accuracy. we further limit the sample to exclude amended filings, transactions where the price deviates more than 20% from the price reported in the center for research in security prices (crsp) on the trade date (lakonishok & lee, 2001), and trades resulting from option exercises. this results in a sample of 599,747 reported open market transactions. the sample is merged with the compustat, s&p global inc. database which contains financial and accounting information based on the firms’ financial filings. historical stock trade data, including the stock prices, stock returns, and volume are collected and merged from crsp. based on the merged data, we calculate our variables of interest and all control variables. we employ the bidask spread as our measure of stock liquidity. following corwin and schultz (2012), the spread is estimated on the date of each insider transaction using high and low prices from crsp. like corwin and schultz (2012), we assume that daily high and low prices represent buy and sell transactions in most cases, and thus the ratio of high-to-low prices reflects the stock price’s variance and the bid-ask spread. in addition, it is assumed that unlike the volatility component of the ratio, the bid-ask component does not grow with the length of trading interval (corwin & schultz, 2012). following corwin and schultz (2012), the spread is then estimated as specified in the equations below, with ht 1,t being the highest price over two days an lt -1,t being the lowest price over the same two-day interval. as equation (1) shows, in our estimations, β is the sum of squared logarithms of ratios of the highest to lowest prices for day t and t-1, while γ is squared logarithm of the highest price over two days to the lowest price over the 76 v. v. posylnaya, b. n. cline, & j. r. aaron journal of small business strategy / vol. 29, no. 2 (2019) / 72-83 same two days. 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 = 2(𝑒𝑒 𝛼𝛼−1) 1+𝑒𝑒 𝛼𝛼 , where (1) 𝛼𝛼 = √2𝛽𝛽 − √𝛽𝛽 3 − 2√2 − √ 𝛾𝛾 3 − 2√2 𝛾𝛾 = [𝑙𝑙𝑙𝑙𝑙𝑙 ( 𝐻𝐻𝑡𝑡−1,𝑡𝑡 𝐿𝐿𝑡𝑡−1,𝑡𝑡 )] 2 𝛽𝛽 = [𝑙𝑙𝑙𝑙𝑙𝑙 ( 𝐻𝐻𝑡𝑡, 𝐿𝐿𝑡𝑡, )] 2 + [𝑙𝑙𝑙𝑙𝑙𝑙 ( 𝐻𝐻𝑡𝑡−1 𝐿𝐿 𝑡𝑡−1 )] 2 we focus on the sme dummy variable as our primary variable of interest, where the identifier is equal to one if a trade is placed by an sme insider and 0 if the transaction is placed by a non-sme insider. firm size is calculated as the natural logarithm of the firm’s market equity in the prior fiscal year. volatility is estimated as the standard deviation of the daily stock price returns in the prior year. volume is measured as the daily number of shares traded scaled by the firm’s market value. results descriptive statistics table 1 provides descriptive statistics for smes and large firms, where smes are defined as firms with 500 or fewer employees. stock price for smes is significantly lower with an average (median) price of $12.73 ($8.61) versus $26.66 ($17.56) for non-smes. smes also demonstrate significantly higher volatility of daily stock prices (0.041 compared to 0.035) and significantly smaller market capitalization. multivariate analysis: base model results from ols regression on liquidity are reported in table 2. we estimate models for all buy and sell transactions pooled, as well as insider purchases and sales separately. the dependent variable in each regression is the bid-ask spread estimated following corwin and schultz (2012) as described above. wider corwin and schultz (2012) bid-ask spreads reflect less liquidity. the key independent variable of interest is the sme dummy variable indicating whether a trade is placed by an insider associated with a sme on the day of the transaction versus a trade place by non-sme insider. to control for other determinates of liquidity, we follow prior literature and include measures of firm size, stock return volatility, trading volume, and price table 1: descriptive statistics for small and medium enterprise and non sme for the period from 2002 to 2016 sme non sme diff mean median std mean median std spread 0.0564 0.0377 0.0641 0.0425 0.0311 0.0407 *** price 12.73 8.61 20.97 26.66 17.56 69.53 *** volume 14,865 2,311 300,694 15,345 4,204 621,009 volatility 0.0414 0.0329 0.0348 0.0350 0.2603 0.0184 *** size 519 127 2,223 4,868 539 22,657 *** n 599,747 599,747 599,747 599,747 599,747 599,747 bid-ask spread proxy estimated following corwin and schultz (2012) based on daily crsp prices. price is the price on the trade day. volume is measured as daily trading volume scaled by market capitalization. volatility is estimated as standard deviation of the daily stock returns in the prior year. size equals the log of market capitalization at the end of the previous fiscal year end. ***, **, and * denote significance at p < .01, p < .05, p < .10 respectively. 77 v. v. posylnaya, b. n. cline, & j. r. aaron journal of small business strategy / vol. 29, no. 2 (2019) / 72-83 of the stock (stoll, 2000). year fixed effects are also included in all regressions. firm size is a proxy for information available about a firm or the overall level of information asymmetry, while volatility represents uncertainty about short-term cost of holding a stock for market makers (heflin & shaw, 2000; stoll, 1978). trading volume is associated with trading activity for a stock and is a measure of the market maker’s opportunity for optimal inventory and his ability to recover losses due to presence of informed traders (mcinish & wood, 1992). spreadi,t = β1sme + β2price + β3volume + β4volatility + β5size + ε (2) model 1 of table 2 reports results for purchase and sell trades combined. the coefficient on sme is positive and statistically significant at the 1% level, indicating a strong positive association between the bid-ask spread and sme identifier. this suggests that trades placed by insiders of sme are associated with spreads that increase more relative to the spreads of larger firms experiencing a similar insider transaction. the association is also economically significant as the bid-ask spread increases by about 33 basis points in response to the trades placed by insiders working for smes compared to trades by non-smes insiders. models 2 and 3 of table 2 report estimates for buys and sells, respectively. insiders sell their stock for a number of reasons other than information regarding the firm’s future. in addition, insiders are more hesitant to trade on negative information, as the litigation risk associated with reported insider sales is greater than that of purchases (brochet, 2010; chen, martin, & table 2 impact of insider trading on bid-ask spread: base model ols regression for the liquidity measure on the transaction day by corporate insiders from 2002 to 2016 all buys sells (1) (2) (3) sme 0.00328*** 0.00417*** 0.00260*** (15.40) (13.93) (8.21) price -0.00002*** -0.00009*** -0.00001*** (-21.14) (-28.96) (-15.86) volume 0.0001*** 0.000004*** 0.00003*** (16.65) (3.69) (22.96) volatility 1.02458*** 0.94524*** 1.06783*** (340.53) (182.88) (284.30) size -0.00004*** -0.00004*** -0.00004*** (-17.70) (-5.60) (-17.07) constant 0.00328*** 0.00417*** 0.00260*** (15.40) (13.93) (8.21) observations 599,747 201,574 398,173 r2 0.2216 0.2158 0.2303 the regressions are performed for buys and sells combined in model 1, as well as separately in model 2 and 3, respectively. the dependent variable is bid-ask spread proxy estimated following corwin and schultz (2012) based on daily crsp prices. sme is indicator variable equal to 1 for firms with number of employees equal or greater than 500 and 0 otherwise. price is the price on the trade day. volume is measured as daily trading volume scaled by firm’s market value. volatility is estimated as standard deviation of the daily stock returns in the prior year. size equals the log of market capitalization at the end of the previous fiscal year end. ***, **, and * denote significance at p < .01, p < .05, p < .10 respectively. spreadi,t = β1sme + β2price + β3volume + β4volatility + β5size + ε 78 v. v. posylnaya, b. n. cline, & j. r. aaron journal of small business strategy / vol. 29, no. 2 (2019) / 72-83 wang, 2012). this implies that the sell transactions are less likely to contain private information relative to buy transactions and, thus, the findings for sales are likely to have less of an impact. indeed, both buy and sell transactions by sme corporate insiders have significant positive associations with liquidity; however, the impact for the purchases is greater (approximately 42 compared to 26 basis points for sells). other results in the models are similar to prior work. while heflin and shaw (2000) demonstrate a negative association between firm size and measures of the bid-ask spread, roulstone (2003) and stoll (2000), among others, show negative association between stock price and the spread. we also find firm size and stock price to be negatively associated with the liquidity. consistent with roulstone (2003), the findings in table 2 indicate a positive association between the bid-ask spread and trading volume. volatility is also positive and significant, supporting the findings of chung and charoenwong (1998), heflin and shaw (2000), and stoll (2000). multivariate analysis: executive rank finance literature finds consistent evidence that access to information is a key factor contributing to the profits of insiders (cline et al., 2017; fidrmuc et al., 2006; niehaus & roth, 1999; wang et al., 2012). access to firm information is likely to vary with insiders’ rank (wang et al., 2012). ceos have the highest level of access to all firm-wide data, while other executives, including other c-level insiders, have broad access as well but primarily within their areas of expertise. non-executives, unlike the other two groups, possess relatively limited information. to investigate whether the rank and associated access to the information have an impact on stock price liquidity, we divide our sample into three subgroups based insider title: ceos, executives, and non-executives. executive insiders are those who have chief, president, or vice president in their titles, while non-executives group contains all other insiders, including directors. table 3 reports ols regression results for the bid-ask spread based on equation (2) for insiders of different rank. in each panel, we provide estimations for all transactions combined, as well as purchases and sales separately. like our previous tests, we use the sme indicator as our main variable of interest and include the same control variables. sme is equal to one if a trade is placed by ceo, an executive, or nonexecutive of a sme and zero if transaction is made by ceo, an executive, or non-executive of non-sme in panels a, b, and c, respectively. model 1 of panel a demonstrates that there exists a positive and significant association between bid-ask spreads and trades placed by the ceos of smes relative to transactions by ceos of large enterprises. the association remains positive and significant for purchase and sell transactions as shown in models 2 and 3 of panel a, respectively. consistent with the findings presented in table 2, results reported in table 3 suggest that market makers at an informational disadvantage attempt to offset trading against insiders with high-level information. they widen the spread more (by approximately 29 to 45 basis points) when trades are made by chief executives working for firms with greater information asymmetry relative to the ones who work for larger corporations. panel b of table 3 reveals that the association between liquidity and transactions by sme executives is positive and significant as well. the results are consistent across all three models, implying that all trades by executives of other rank working for smes are recognized as potentially informative and are associated with wider spreads compared to other executives at larger firms. in panel c of table 3 we observe similar findings for sme non-executives. all models show positive and significant association between the bid-ask spread and transactions by these non-executives versus trades by non-executives of non-smes. this suggests even trades by non-executives associated with smes lead to reduced liquidity compared to transactions by nonexecutive insiders of large firms. overall, the findings for ceo, executives, and nonexecutives of smes show that the role of the smes’ insiders does not vary with their rank. both executives and non-executives contribute to a reduction in liquidity as measured by the bid-ask spread relative to trades from insiders at larger firms. this suggests that in an environment of greater information asymmetry, transactions by insiders of any rank have significant impact on liquidity of these firms. 79 v. v. posylnaya, b. n. cline, & j. r. aaron journal of small business strategy / vol. 29, no. 2 (2019) / 72-83 table 3 impact of insider trading on bid-ask spread: executive rank ols regression for the liquidity measure on the transaction day by corporate insiders of different ranks from 2002 to 2016 all buys sells (1) (2) (3) panel a: ceo sme 0.00283*** 0.00295*** 0.00455*** (4.91) (3.49) (5.52) price -0.00006*** -0.00008*** -0.00006*** (-16.18) (-8.67) (-16.06) volume 0.00001*** 0.000003 0.0298*** (5.35) (1.07) (85.53) volatility 0.95730*** 0.79751*** 1.03596*** (110.85) (56.12) (97.08) size -0.0006*** -0.0005** -0.0005*** (-6.09) (-2.51) (-4.62) constant 0.02287*** 0.03059*** 0.01684*** (34.30) (25.41) (22.52) observations 79,946 26,579 53,367 r2 0.2025 0.1731 0.3276 panel b: executives sme 0.00207*** 0.00257*** 0.00317*** (5.56) (4.42) (6.25) price -0.00006*** -0.00009*** -0.00006*** (-25.30) (-14.15) (-25.66) volume 0.0003*** 0.00005** 0.0247*** (13.89) (2.14) (136.10) volatility 1.03585*** 0.89312*** 1.04568*** (192.16) (90.71) (166.20) size -0.0002*** -0.0005*** -0.0001*** (-4.70) (-3.56) (-2.69) constant 0.01732*** 0.02323*** 0.01510*** (43.39) (30.51) (33.87) observations 200,628 53,332 147,296 r2 0.2266 0.2025 0.3279 panel c: non-executives sme 0.00370*** 0.00473*** 0.00290*** (14.25) (13.55) (7.36) price -0.00001*** -0.00009*** -0.00001*** (-14.10) (-25.32) (-9.87) 80 v. v. posylnaya, b. n. cline, & j. r. aaron journal of small business strategy / vol. 29, no. 2 (2019) / 72-83 discussion and conclusion one of the potential costs of trading by corporate insiders is a decrease in the liquidity of the company’s stock (bainbridge, 2000; fischel & carlton, 1982). a reduction in liquidity can present challenges, especially for smaller firms, which by their nature face many financial and liquidity constraints already. reduced liquidity results in higher cost of trading for investors, which means investors expect higher returns to mitigate the increased trading costs. this, in turn, results in higher cost of raising capital for the firm. (amihood & mendelson, 1986; brennan & subrahmanyam, 1996; eleswarapu, 1997). the bid-ask spread measures the transaction cost of investors, and thus represents a measure of liquidity. market makers balance bid and ask prices based on the likelihood of trading with an informed trader to profit from the difference (copeland & galai, 1983; demsetz, 1968). as corporate insiders have access to non-public information, they may choose to trade when the assets are mispriced, placing market makers at informational disadvantage. to mitigate potential losses due to this information asymmetry and its exploitation by corporate insiders, market makers set wider bid-ask spreads as the likelihood of informed order flow increases (copeland & galai, 1983; glosten & milgrom, 1985; kyle, 1985; leland, 1992). consequently, the greater the perceived probability of informed trading, the wider the spread set by market makers (easley et al., 2002). firms of small and medium size are typically found to be associated with greater information asymmetry (joshi & anand, 2018) compared to large firms due to such factors as liability of newness (kale & arditi, 1998), lack of trading history (cassar, 2004), as well as greater information opacity (berger & udell, 1998). in this study, we focus on trades placed by insiders of small and medium-sized enterprises to examine the impact these trades have on the liquidity of smes. by employing transactions reported by the corporate insiders, we show a significant positive association between the bid-ask spread and trades by sme insiders relative to those around the trades of non-sme insiders. the decrease in liquidity varies from about 26 to 42 basis points more than that of larger firms and is significant for sells and purchases. in addition, we find evidence that the results hold for insiders of all ranks. this suggests that smaller firms face greater liquidity constraints around volume 0.00001*** 0.000004*** 0.00021*** (12.08) (3.01) (14.86) volatility 1.01311*** 0.96738*** 1.02959*** (277.52) (158.93) (222.61) size -0.0005*** -0.0003*** -0.0005*** (-14.75) (-4.20) (-14.24) constant 0.01659*** 0.01902*** 0.01632*** (61.18) (42.63) (47.06) observations 399,119 148,242 250,877 r2 0.2202 0.2218 0.2241 the regressions are performed for buys and sells combined in model 1, as well as separately in model 2 and 3, respectively. the dependent variable is bid-ask spread proxy estimated following corwin and schultz (2012) based on daily crsp prices. sme is indicator variable equal to 1 for firms with number of employees equal or greater than 500 and 0 otherwise. price is the price on the trade day. volume is measured as daily trading volume scaled by firm’s market value. volatility is estimated as standard deviation of the daily stock returns in the prior year. size equals the log of market capitalization at the end of the previous fiscal year end. ***, **, and * denote significance at p < .01, p < .05, p < .10 respectively. spreadi,t = β1sme + β2price + β3volume + β4volatility + β5size + ε 81 v. v. posylnaya, b. n. cline, & j. r. aaron journal of small business strategy / vol. 29, no. 2 (2019) / 72-83 insider transactions relative to larger institutions. the implication is that in these environments of information asymmetry, insider trading is particularly costly. this cost present yet another financial constraint to smes. one significant implication from these findings is that insiders of smes should keep in mind that even though their trades may not violate law, they are not necessarily harmless to the firms. as executives of the smes closely familiar with liquidity issues their firms face, these insiders should be aware of more severe consequences for smes when contemplating whether and when to trade in their firms’ shares. specifically, that trading can impose a decrease in liquidity of their sme and a higher cost of raising capital for their already constrained firm. references aboody d., & lev, b. 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(2018). the relationship between a comprehensive strategic approach and small business performance. journal of small business strategy, 28(2), 33-48. 15 financing complexity and sophistication in nascent ventures charles h. matthews university of cincinnati charles.matthews@uc.edu mark t. schenkel belmont university mark.schenkel@belmont.edu matthew w. ford northern kentucky university fordmw@nku.edu sherrie e. human (retired) xavier university abstract although scholars have considered the financing challenges facing small businesses for some time, little work has focused on financing issues at the venture’s nascent stage. in this study, we investigate the sources of funding sought by nascent entrepreneurs and the relationship between the complexity of these funding sources, business plan formalization, and expectations of future firm growth. using data from the entrepreneurship research consortium/panel study of entrepreneurial dynamics, we find that nascent entrepreneurs, even those associated with high-growth ventures, favor simple rather than complex sources of funding at the nascent stage. funding complexity and business plan formalization are also found related to expectation of firm growth. an additional contribution is the development of a funding complexity continuum scale, which should be useful in future studies of nascent as well as later stage entrepreneurial finance and firm growth. 1 “the authors would like to thank the anonymous reviewers and editor for their insights and helpful suggestions that have improved this manuscript. an earlier version of this research was presented at the babson college entrepreneurship research conference.” strategy   journal of small business  journal of small business strategy vol. 23, no. 1 16 introduction financing a new or growing enterprise is a major challenge facing most entrepreneurs (sudek, 2006). extant research of entrepreneurial finance has focused on capital acquisition and capital structure of operating ventures (e.g., alsos, isaksen, & ljunggren, 2006; becker-blease & sohl, 2007; davidson & dutia, 1991; örtqvist et al., 2006; van auken & carter, 1989; zhang, 2007). such firms, often labeled small and medium-sized enterprises (smes), have typically commenced production of output and have recognized revenue from operations. on the other hand, our understanding of the financial context of nascent ventures, new firms with little or no measurable performance of which to speak, is less developed. yet, there remains critical pressure on sme’s to launch and add jobs to advance economic development. since a venture’s financial challenges depend in part on the company’s phase of development (brophy, 1997; eckhardt, shane, & delmar, 2006), a nascent entrepreneur’s financing issues likely differ from those of more established founders. of interest, for example, is how the nascent founder seeks to acquire the financial capital necessary to get the business operational (shane & cable, 2002). many commentators believe that small businesses often lack the financial sophistication necessary for effective capital management and growth (e.g., aronoff, 1998). others have found evidence suggesting that gender-based funding gaps exist despite the fact that female participation in the new venture creation process has and continues to grow (e.g., alsos, isaksen, & ljunggren, 2006; becker-blease & sohl, 2007.) it is also of interest to investigate possible linkages between nascent firm financing and other factors related to the success of new ventures. for example, studies have suggested the degree to which nascent entrepreneurs develop formal business plans appears related to the founder’s expectations for growth and possibly to future performance (matthews & human, 2000). therefore, it is possible that a nascent entrepreneur’s financing intentions may relate to business plan formalization and, in turn, to future growth expectations. using data from the entrepreneurship research consortium/panel study of entrepreneurial dynamics (erc/psed), a national study of nascent entrepreneurs, we focus on three questions meant to improve our understanding of nascent venture financing and its relationship to other operating decisions. first, do nascent entrepreneurs favor simple or complex sources of start-up capital? second, to what degree does this funding source complexity, in combination with business plan formalization, relate to nascent entrepreneurs’ expectations of organizational growth? third, are there differences in these relationships between nascent entrepreneurial ventures and nascent small business ventures? conceptual background and hypothesis development a frequently cited problem of small businesses is inadequate financing (welsh & white, 1975, davidson & dutia, 1991). while self-financing appears to be the most common financing alternative, entrepreneurs often seek external funding alternatives such as trade credit, mortgages, loans (with friends and family, banks, finance companies, government), and venture capital (eisemann & andrews, journal of small business strategy vol. 23, no. 1 17 1981; maier & walker, 1987; mason & harrison, 1995; shane & cable, 2002). the level of sophistication or complexity associated with acquiring external funding sources can be considerable. for example, entrepreneurs must deal with a financier’s aversion to risk, desire for control, and contractual issues (keasey & watson, 1994; scholtens, 1999). they build effective contact networks when venture capital is sought (choy, 1990). such efforts have been shown to enhance firm reputation by facilitating effective transfer of information critical to the process of venture selection in funding decisions (shane & cable, 2002). an important concept for this investigation is the notion that entrepreneurs tend to favor a “pecking order” or hierarchical preference when seeking financial capital—moving from simple, easy to obtain capital sources to those that are more complicated to obtain. edgar (1991), for example, found that managers in small firms tended to first finance their needs by using internally generated funds as much as possible, followed by debt, and then equity as a last resort. in their survey, van auken and carter (1989) also found a higher reliance on debt capital by small businesses rather than seeking equity sources of capital. in this study, we propose that sources of funding exist on a continuum from simple to complex, with founders own money anchoring one end of the continuum (simple) and venture capital anchoring the other end of the continuum (complex). more specifically, table 1 shows a range of twelve sources of funding from simple to complex. less is known, however, about how this preference for simple or complex capital sources relates to nascent stage firms. anecdotal evidence (e.g., mamis, 1994) suggests that nascent entrepreneurs may indeed adhere to the pecking order model of capital acquisition, preferring simple, easy to procure financing sources rather than more complex options. we define nascent entrepreneurs as those individuals who, alone or with others, are in the process of starting a business (gartner, shaver, carter, & reynolds, 2004). this preference may be due in part to an owner’s aversion for risk or for sharing control (hutchinson, 1995). it may also be due to overconfidence as a source of cognitive bias that has been associated with seeking external funding (forbes, 2006). this may be coupled with a lack of sophisticated techniques typically employed by small firms when making financial decisions (runyon, 1983). this likely plays a large role in the financing intentions of nascent entrepreneurs, since founders are at times considered to be financially under informed and unversed in sophisticated financial alternatives available for start-ups (aronoff, 1998). therefore, we posit that: h1: nascent entrepreneurs will favor simple sources of financing rather than complex sources. in much of the entrepreneurship literature, ventures are often viewed as firms with high growth potential. research on entrepreneurial finance reflects this bias, leaning towards capital acquisition and structure in the entrepreneurial business venture, or ebv, context (bygrave & timmons, 1992). it is recognized, however, that even income substitution, or lower growth, nascent ventures have funding needs on the financing complexity continuum. carland, , hoy, boulton, and carland (1984) suggest that small business ventures are independently owned and operated, not dominant in their field, and do not engage in any new marketing or innovative practices. by contrast, they journal of small business strategy vol. 23, no. 1 18 suggest entrepreneurial ventures’ principal goals include profitability and growth, characterized by innovative strategic practices. the capital requirements of slower growth small business ventures, or sbvs, are usually lower than those for ebvs. in addition, financiers seeking to fund ebv growth potential require more information from entrepreneurs given that such growth is often accompanied by greater marketplace uncertainty (shane & cable, 2002). the financing of scalable entrepreneurship ventures versus income substitution small business ventures, shows that this distinction overlooks key issues and differences. an important question, however, is whether the founder’s financing intentions significantly differ between ebvs and sbvs at the nascent stage of the firm. although it would seem likely that the founders of ebvs would favor, more complex financing sources in order to procure more capital for growth, it is also plausible that the founder’s lack of sophistication about financial matters (e.g., aronoff, 1998) might cause the financing intentions of these two groups to be more similar than different. given the inherent scale requirements of ebv growth, we posit the following difference between small and entrepreneurial nascent ventures on the dimensions developed above: h2: founders of ebvs will favor more financing complexity than will founders of sbvs. female founders appear particularly attracted to simple sources of financing such as drawing from personal savings and establishing loans with friends and family (brush, 1991). studies have shown that women obtain significantly less financial capital to develop their new businesses despite sharing similar funding perceptions and behavior with men (alsos, isaksen, & ljunggren, 2006; becker-blease & sohl, 2007). in addition, women who seek more complex financing alternatives such as bank loans may be taken less seriously and are sometimes viewed as higher credit risks than their male counterparts (riding & swift, 1990; koper, 1993). evidence also suggests that women are less likely to seek growth in their ventures (orsar, hogarthscott, and wright, 1998). this could diminish female nascent entrepreneurs’ desire for larger pools of capital available from more complex sources. we should expect, then, that: h3: female nascent entrepreneurs will favor simpler sources of financing than their male counterparts. little research has examined how financing intentions of nascent entrepreneurs interact with other factors thought to impact venture success. for example, a chronic prescription for nascent entrepreneurs has been to better plan for the future (e.g., baker, addams, & davis 1993). it is likely that financing complexity is related to the formality of business planning in nascent ventures. complex sources of funding (e.g., venture capital) are often sought by entrepreneurs who seek large pools of capital for growth (e.g., bhide, 1992); formal business plans are usually a requirement for entrepreneurs seeking to tap such capital sources. indeed, studies suggest that such a requirement is based on a financiers’ tendency to base funding decisions on objective verifiable indicators of venture development, such as the completion of marketing and organizing, as well as venture sales levels (e.g., eckhardt, shane, & delmar, 2006). further, a founder’s preference for simple or complex journal of small business strategy vol. 23, no. 1 19 financing sources might influence the degree to which the founder formally plans for the future. simple financing preferences may temper the perceived need to plan. regardless of the causal order, we should expect that: h4: funding complexity will be positively related to the formality of business planning in nascent ventures. funding complexity may relate to a nascent venture’s ability to grow. a challenge when investigating such a relationship is that growth is not easily measured at the nascent stage of the firm. drawing from the theory of planned behavior (azjen, 1991) that posits that actions can be predicted from intentions, researchers have begun employing a founder’s expectations of firm growth as a proxy for actual growth (e.g., orsar, hogarth-scott, & wright, 1998; krueger, reilly, & carsrud, 2000; matthews & human, 2000). since complex sources of funding offer access to larger pools of capital, it seems likely that entrepreneurs who employ complex funding configurations will have relatively high growth expectations. however, this relationship may be attenuated by other variables thought to influence growth expectations. for example, if the founder has declared the firm as a high-potential scalable type (ebv), it stands to reason that growth expectations should be higher (carland, hoy, boulton, & carland, 1984). closely related, the degree to which a nascent founder conducts formal business planning has also been found to influence growth expectations (matthews & human, 2000). therefore, we posit the following: h5: higher levels of funding complexity will be related to the nascent entrepreneur’s expectations of firm growth. h6: founders of ebvs will have higher growth expectations than sbvs. h7: higher levels of business plan formalization in nascent ventures will be related to the entrepreneur’s expectations of firm growth. methods and measures procedure and sample data from the entrepreneurship research consortium/panel study of entrepreneurial dynamics (erc/psed i), a national study of nascent business founders, are used for this research. the erc/psed i project gathered data from randomly selected nascent business founders utilizing both telephone interview and mail survey methods. to be considered the founder of a nascent venture, the respondent had to indicate 1) they were in the process of starting a new business, either alone or jointly with others; 2) the initial activity to start the new venture occurred within 24 months of the screening; 3) the new venture was not part of an existing organization; and 4) the respondent was a member of the founding team, and not a consultant or merely a passive investor. psed i involves the screening of approximately 62,000 adults between 1998 and 2000. the psed i is a nationally representative longitudinal study of nascent entrepreneurs that offers systematic, reliable, and generalizable data on the new venture creation process. as a result, 830 usable responses from nascent entrepreneurs were obtained for this investigation. the reader is referred to reynolds (2000) for a detailed account of this database’s development and content. journal of small business strategy vol. 23, no. 1 20 variables and measures funding complexity. a series of questions asked the founder to indicate various sources of anticipated funding. for each source where the respondent answered “yes,” the respondent also estimated the amount of funding from that source. twelve sources of anticipated financing were included in the survey: the entrepreneur’s own money, spouse, spouse of other team members, friends and family, friends and family of other team members, credit cards, employer, second mortgage, bank loan, small business loan, personal finance company, and venture capital. each of our research team independently rated each one of these funding sources on a “financing complexity” scale of one to five, where one represented a simple, easy to obtain funding source and five represented a source of funding that was complicated to obtain. it was stipulated that at least one “one” and one “five” had to be assigned among the funding sources. very close agreement was realized among our three independent ratings with only minor differences in mid-range ratings were evident. the consensus rating assigned to each source of funding appears in table 1. note that all funding sources rated 2 or less were considered “simple” and that all funding sources rated 3 or higher were considered “complex.” both the continuous (one through five) scale and the bivariate (simple or complex) scale of funding complexity were utilized in the analysis. gender. sex of the respondent was recorded by the phone interviewer as one for male and two for female. business plan formalization. a single item of the phone survey asked, “a business plan usually outlines the markets to be served, the products or services to be provided, the resources required – including money -and the expected growth and profits for a new business. has a business plan been prepared?” a “yes” or “no” response was provided. if yes, the respondent was asked, “what is the current form – (1) unwritten or in your head, (2) informally written, (3) combination of (1) and (2), (4) formally prepared?” table 1: funding sources and financing complexity ratings funding source financing complexity rating simple or complex funding source? founder’s own money 1 simple spouse 2 simple spouse of team members 2 simple friends and family 2 simple friends and family of team members 2 simple credit cards 2 simple employer 2 simple second mortgage 3 complex bank loan 4 complex small business administration loan 4 complex personal finance company 4 complex venture capital 5 complex journal of small business strategy vol. 23, no. 1 21 type of venture. a single item of the phone interview asked, “which of the following best describes your preference for the future size of this business: (1) i want the business to be as large as possible, or (2) i want a size i can manage for myself or with a few key employees?” drawing from carland et al.’s (1984) distinction between entrepreneurial business ventures (ebvs) and small business ventures (sbvs), respondents that answered (1) were considered to be associated with ebvs while those that answered (2) were considered associated with sbvs. expectations of financial growth. a single item of the phone interview asked, “we would like to ask about your expectations regarding the future of this new firm. first, what would you expect the total sales, revenues, or fees to be in the first full year of operation? and what about in the fifth year?” the fifth year estimate of revenues was used as the owner’s estimate of financial growth over the five-year horizon. given that the near term revenue base in most nascent enterprises enterprises approaches zero, we found that calculating revenue growth rates from years one through five produced an unacceptable amount of noise in the data. since very little, if any, revenue exists in a nascent enterprise, using the actual fifth year revenue value should provide an accurate reflection of expected financial growth in most cases. a log transformation was performed on the fifth year value in order to approximate a normal distribution to facilitate the regression analysis. expectations of full time employee growth. two items of the phone interview asked the respondent to estimate the number of full-time employees, exclusive of the owner, expected in year one and year five using a similar rationale for deriving the financial growth value noted above, we used the respondent’s estimate of the number of full time employees in year five as the indicator of employee growth expectations. results the funding intentions of nascent entrepreneurs appear in table 2. these results show that nascent entrepreneurs generally appear to prefer more simple forms of financing. over one half of respondents intended to fund their start-up with only simple sources, with nearly 70% of all respondents employing with at least some source of simple financing. nearly 5% of nascent entrepreneurs intended to fund their start-ups with only complex sources. table 3 summarizes the popularity of various funding types. the three most popular sources of simple funding favored by respondents were personal funds, credit cards, and spouse. bank loans were the only complex funding type in the top five. these results support hypothesis 1 funding intentions of entrepreneurial business ventures (ebvs) and small business ventures (sbvs) appear in table 4. the data suggest that ebvs favor a slightly greater mixture of simple and complex funding than do sbvs. however, a chi square test for independence was not statistically significant (χ2 = .207; p = .976), suggesting that no significant relationship exists between type of venture and funding complexity. thus, we find only minimal support for hypothesis 2 . journal of small business strategy vol. 23, no. 1 22 table 2: summary of funding intentions frequency percent cumulative percent no funding 196 23.6 23.6 simple funding only 458 55.2 78.8 complex funding only 41 4.9 83.7 both simple and complex 135 16.3 100.0 total 830 100.0 table 3: breakdown of funding intentions funding source % respondents indicating this source simple or complex funding source? founder’s own money 90.3 simple credit cards 30.6 simple spouse 25.1 simple friends and family 13.8 simple bank loan 12.1 complex friends and family of team members 9.4 simple spouse of team members 7.7 simple small business administration loan 4.5 complex second mortgage 3.4 complex venture capital 3.2 complex employer 3.0 simple personal finance company 2.4 complex . table 4: funding intentions based on venture type venture type no funding simple funding only complex funding only both simple and complex total ebv count 43 98 9 31 181 % ebvs 23.8% 54.1% 5.0% 17.1% 100.0% % total 5.3% 12.0% 1.1% 3.8% 22.2% sbv count 144 354 32 103 633 % sbvs 22.7% 55.9% 5.1% 16.3% 100.0% % total 17.7% 43.5% 3.9% 12.7% 77.8% total count 187 452 41 134 814 % total 100.0% 100.0% 100.0% 100.0% 100.0% a comparison of funding intentions for males and females appears in table 5. results indicate that females prefer simpler sources of funding than do males. specifically, a chi square test for independence suggests a statistically journal of small business strategy vol. 23, no. 1 23 significant relationship between gender and funding intentions (χ2 = 23.1; p = .000),. which provides support for hypothesis 3 table 5: funding intentions by gender gender no funding simple funding only complex funding only both simple and complex total male 108 207 32 80 427 female 88 251 9 55 403 total 196 458 41 135 830 to evaluate the relationships between funding complexity, venture type, business plan formalization, and expectations of growth, two stepwise regressions were conducted. in the stepwise procedure, independent variables entered the regression model if they were significant at the .05 level and removed if they caused previously entered variables to drop below the .10 level. descriptive statistics and bivariate correlations for these regressions appear in table 6. note that the correlation between funding complexity and business plan formalization is significant which provides support for hypothesis 4 (a simple regression using these two variables was significant at p = .006). the first regression examined the effects of funding complexity, venture type, and business plan formalization on financial growth expectations. a square root transformation was applied to the funding complexity variable to correct for heteroscedasticity. in addition, four data points were found to have large studentized residuals and were removed as outliers. all three variables entered the model significantly (table 7). business plan formalization entered the model first, followed by venture type and funding complexity, implying that all three variables are significantly related to expectations of financial growth. table 6: bivariate correlations for regression analysis variables mean sd 1 2 3 4 5 1 funding complexity 2.63 3.15 1.00 2 type of venture 1.78 .42 -.02 1.00 3 business plan formalization 2.54 1.12 ***.12 **-.08 1.00 4 financial growtha 5.14 .91 **.08 ***-.20 ***.17 1.00 5 employee growth 20.53 104.6 .05 **-.17 .02 **.13 1.00 alog transformation***p<.01 **p<.05 *p<.10 the regression results were both significant and the signs consistent with the hypothesized relationships between funding complexity (h5: β = .118, p < .05), venture type (h6: β = -.168, p < .01), business plan formalization (h7: β = .216, p < .01), and growth expectations. the adjusted r2 of the full model (model 3) was .094. journal of small business strategy vol. 23, no. 1 24 table 7: stepwise regression results of financial & employee growth expectations (standardized beta coefficients) financial growth expectations employee growth expectations variables model 1 model 2 model 3 model 4 business plan formalization ***.245 ***.222 ***.216 ***-.159 venture type ***-.166 ***-.168 .046 funding complexity **.118 .004 r2 .060 .087 .101 .025 adjusted r2 .058 .082 .094 .022  adjusted r2 .027 .014 f 24.86 11.53 5.96 7.45 *** p<.01 ** p<.05 * p<.10 the second regression examined the effects of funding complexity, venture type, and business plan formalization on employee growth expectations (model 4, table 7). only venture type entered the model significantly. funding complexity and business plan formalization were not significant predictors of employee growth expectations. the adjusted r2 for the full model was .022. based on these regression results, support was found for hypotheses 5, 6, and 7 mainly in the context of the financial growth expectations. discussion and conclusions some findings of this investigation are consistent with one of several widely held tenets of nascent entrepreneurial finance. specifically, the results show that nascent entrepreneurs tend to favor the use of funding sources that are relatively simple to obtain, such as personal funds or those available from friends and family. similarly, results show that nascent women entrepreneurs reported greater use of simple funding sources than their male counterparts. in contrast to studies focusing on the more traditional notion of capital structure as it relates to profitability in entrepreneurial financing (e.g., davidson & dutia, 1991), the present findings are more consistent with a focus on the issues of capital access (becker-blease & sohl, 2007) and maintenance of strategic flexibility and decision-making control (e.g., bhide, 1992). accordingly, these findings enhance the extant literature by suggesting that simple sources of financing play a substantial role during the nascent new venture creation stages. this study produced some surprising results as well. no significant difference in funding preference could be found between the founders of high growth potential entrepreneurial business ventures (ebvs) and relatively low-growth potential small business ventures (sbvs). one might expect that founders of ebvs would seek more complex sources of start-up financing, since the pools of capital available from these sources tends to be relatively large and focused on high growth ventures. on the other hand, it remains possible that nascent founders are conservative and/or uninformed and do not realize the levels of funding required to grow the business. it is journal of small business strategy vol. 23, no. 1 25 also plausible that founders of ebvs may restrain their acquisition of startup capital in order to develop the firm’s ability to efficiently utilize resources in its early stages (bhide, 1992). indeed, some successful founders, such as sun microsystems inc. co-founder and ceo scott mcnealy, suggest that low initial funding levels were an important element of their venture’s subsequent success. mcnealy notes: we got started on $285,000. we went profitable in our first year. that’s a good thing. [sun chief scientist] bill joy likes to say there’s never been a successful well-funded startup. if you have too much money, you’re not going to find a new and different and more efficient and effective way. you’re just going to try and overpower the current players with the same strategy. you can’t win a sailboat race if you’re behind by tacking behind the boat in front of you. you’ve got to go out and find different water and find better air (shepard, 2002: 66-67). our findings suggest a significant relationship exists between funding complexity and the nascent entrepreneur’s expectations of growth—particularly financial growth. funding complexity’s stronger relationship to financially-oriented growth expectations (as opposed to employee growth) may not be very surprising, given the monetary relationship between these two variables. when included with behavioral or operating variables such as venture type and business plan formalization, funding complexity appears to improve our ability predict founder expectations of firm growth. of course, longitudinal research is necessary to better understand how these expectations relate to actual performance once the firm becomes operational. implications for practice recent evidence has emerged suggesting that the new venture funding process is multistage in nature, and involves systematic differences in perceptions between entrepreneurs and potential financiers regarding the basis upon which funding decisions are made (eckhardt, shane, & delmar, 2006). coupled with such evidence, these results suggest that entrepreneurs can benefit from noting that complexity is likely to impact growth, both positively and negatively. this is the case early in the new venture creation process, regardless of the founder’s growth orientation. an awareness of this may help nascent entrepreneurs to avoid the sense of overconfidence cited earlier, a source of cognitive bias associated with seeking external funding (forbes, 2006). moreover, given the impact of gender differences on funding gaps observed in other studies (e.g., alsos, isaksen, & ljunggren, 2006), our results suggest that this may be particularly important for women owned ventures. in short, such consideration would constitute basic strategic decision-making practices that are likely to enhance pragmatic efforts to steer venture growth. implications for future research another contribution of this study is the notion of funding complexity—a concept that to this point has not been well operationalized. results of this investigation suggest that the funding complexity scale developed in this study has validity; it should be useful in future studies of nascent entrepreneurial finance. despite this and other contributions outlined above, no study is without limitations. a key performance oriented variable of interest in this study is firm journal of small business strategy vol. 23, no. 1 26 growth expectations. nascent entrepreneurs and small business owners as single respondents have the potential to report inflated expectations. while we are unable to control for this in this study, the concept of planned behavior (ajzen, 1991) has emerged in entrepreneurship research as a potentially fruitful and positive indicator of how well new ventures will perform over time (e.g., schwenk & shrader, 1993). yet despite such promise, evidence has emerged suggesting that new venture funding is a multistage process that entails systematic differences in perceptions between entrepreneurs and potential financiers (e.g., eckhardt, shane, & delmar, 2006). given such evidence, and the results in this study, one avenue for future research is to further explore the relationships between funding complexity, planning formality, and growth expectations, and how they translate into subsequent venture performance. research is also important to overcome the limitations of a cross-sectional design in the study and the use of single-item measures. the causal directions also need further attention. conclusion notwithstanding the noted limitations, this investigation constitutes an informative exploration of how funding complexity factors into the nascent stages of new venture growth. this study informs research into nascent start-up financing. perhaps most important, those who teach students and/or advise nascent entrepreneurs concerning the intricacies of funding new ventures, a continuum of funding complexity appears to exist. while more complex sources of funding such as angel or venture capital are often the first to be considered when launching a business, it is clear that less complex sources of funding dominate the new venture landscape even when high growth potential ventures are involved. it contributes to our growing understanding of nascent venture behavior and provides a foundation for further inquiry into the nature of financing and broader venture launch activities. references alsos, g.a., isaksen, e.j., & ljunggren, e. 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(2007). a study of academic entrepreneurs using venture capital data (august 2007). iza discussion paper no. 2992. available at ssrn: http://ssrn.com/abstract=1012546 charles h. matthews is a distinguished teaching professor and the executive director of the center for entrepreneurship education & research and small business institute® in the carl h. lindner college of business at the university of cincinnati. his research interests include strategic planning, decision-making, and leadership succession in small, entrepreneurial, and closely held firms. mark t. schenkel is an associate professor of entrepreneurship in the jack c. massey graduate school of business at belmont university. his teaching and research interests include entrepreneurial cognition, opportunity recognition, strategic decisionmaking, and corporate entrepreneurship. matthew w. ford is an associate professor of management in the haile/us bank college of business at northern kentucky university. his research interests include strategic operations, quality management, entrepreneurship and the management, and control of change. sherrie e. human (retired) was an associate professor of management and entrepreneurship in the williams college of business at xavier university. she was the inaugural holder of the castellini chair in entrepreneurial studies. her research interests include new venture initiation, entrepreneurial careers, and entrepreneurial and interorganizational networks. reproduced with permission of the copyright owner. further reproduction prohibited without permission. strategy resources in small firms: an exploratory study patricia g. greene rutgers university candida g. brush boston university terrence e. brown joenkoeping international business school abstract the importance ofresources to firms is well documentedi n theory, taxis and empirical studies. yet, researchfocuseson acquisiiionofftnancialresources, with less anention given to other types. prescriptions emphasize resource allocation or fit to opportunities, often treating resourcesin the aggregate without considering unique distinctionsin resource types or usage. this paper argues that there are five distinct types of resources applicable to small firmshuman, social, organizational, physical and ftnanciah dtn exploratory study of 76 firms examines the relative importance of these resource types and analyzes relationships between resourcesandcharacteristicsoftheownerlfounder and organization. findings show overall higher ratings for physical and organizational 9 esources than for financial resources. results indicatefew di+erencesin resources depending on ownerlfounder characteristics or industrial sector. introduction tanya sims and rose maybin of b g. s diversified, a $5 million electrical contracting firm, needed a server based computer network to manage information and to connect their 46 dp 1 6 tv~i' ),f 6.1996,p.dp).dl«l )7,1 wilcoxon, founder of paddock swimming pool company, needed office workers who were computer trained in order to be effective telecommuters, a move designed to increase productivityand decrease commuting time in traffic for the company's50 employees i)4ationh business, nov. 1995, p. 41). for ruth meric, of ruth meric catering, a $ 1 million full service firm, her contacts with the baylor college of medicine allowed her to develop a diet modification program as a basis for creating sales in the early stages of business development b 1 f 6.1996,p.6). h, m 1 9 d du gll capital to conduct research and development that would facilitate the company's ability to convert standard general motors engine blocks for marine use in boats (nation's business, march, 1996, p. 14). these four examples reflect the importance of different types of resources 25 for these ventures; physical, organizational, social networks, and financial capital. the purpose of this paper is to explore the contributions of various types of resources which are a part of small firms and the relationships of those resource types to characteristics of the owner(s) or founder(s), the firm, and each other. resources are essential to the creation of new ventures and the growth of small firms. considerable prescriptive and descriptive literature from entrepreneurshipis organized around the process of allocating resources to exploit opportunities (stevenson & gumpert, 1985). it is proposed that opportunity identification is followed by acquisition and allocation of resources to build the organization(vesper, 1990;gartner, 1985). moreover, resources in new and small ventures are generally scarce, and decisions about acquisition and/or allocation can be critical to survival (cooper & dunkelberg,1986). this situation is intensified by increased globalizationof the environment which creates new sources of resources and competition for existing resources. therefore it becomes increasingly important for small firms to choose the types of resources that allow them to compete effectively. despite the critical nature of resources in entrepreneurial endeavors, there are comparatively few studies examining various types of resources or their role in small firms. some studies combine all resource types (e.g. social, human, financial) together and relate these to performance (bates, 1985), while others recognize the relationship among types of resourcesonly implicitly(dollinger, 1995; robinson & sexton, 1994). cooper, et al. (1991) made relationshipsamong types of resources more explicit by proposing the use of a resource profile to predict firm failure, survival and growth. chandler and hanks measure several types of resources and examine their combined effect on performance relative to other variables (1994). prescriptions in entrepreneurshiptexts regarding identification, assembly and allocation of specific types of resources are limited. most texts focus on the importance of financial resources, and recognize the contribution of the human resources of the owner/founder(s) (see for instance, hisrich & peters, 1995; vesper, 1994). the relative importance of social (i.e. networks) or organizational resources (systems, alliances, capabilities) are otten given less attention. these discussions fail to recognize how these strategies should vary depending on resource type. hence a better understanding of the types of resources used in small businesses and a considerationof how these resources relate to characteristics of the owner/founder(s) or the overall firm organization can help us better understand how to approach and analyze the resource assembly. given this lack of research in entrepreneurship and the corresponding importance of resources generally, this paper explores types of resources and their relative importance in a sample of small firms. we draw from the field of strategic management which otters a theory of the firm based on resources as the determinant of a firm's reason for existing, size, scope and growth (penrose, 1959;connor, 1991). we especially emphasize the recognition of the firm as a heterogeneous bundle of resources, uniquely combined in each firm (penrose, 1959). 26 literature re vie w the resource based perspective of a iirm provides a helpful theoretical framework for discussing the internal resources of firms of all sizes. this view, rooted in the field of strategic management, defines resources as "all tangible and intangible assets thai are ried io the firm in a relatively permanenr fashion" (caves, 1980; wernerfelt, 1984; penrose, 1959; mosakowski,1993). it is argued that the resources controlled by the iirm are heterogeneous, may be relatively immobile (barney, 1991), and are both tangible and intangible. the combination of resources (penrose, 1959) and sequencing of these over time (amit & shoemaker, 1993) allow for the evolution of specific capabilities which optimally lead to a competitive advantage. for new ventures,achievement of a competitive advantage may be an ultimate but not immediate goal. instead, survival or successful acquisition of resources may be primary objectives (churchill & lewis, 1983). resource categorizations are proposed throughout the fields of strategic management and entrepreneurship. early categorizations included physical (inventory, plant), monetary (money, credit), and human (ansoff, 1965); money and people, both technical and managerial (learned et al., 1965) and material, technical, financial, and managerial (andrews, 1971). hofer and schendel (1978) expanded the discussion of the resource categories and proposed a resourceprofileconsistingofhuman, organizational, financial, physical, and technological. the financial and physical resource categories are largely self-explanatory, however, the remaining categories require some additional consideration. human resources include: "scientists, engineers, production supervisors, sales personnel and financial analysts" (1978, p. 145). in other words, under this profile human resources include all individuals within the organization. organizational resources include, "quality control systems, short-term cash management systems, and corporate financial models" while technological resources (or capabilities) are "high-quality products, low-cost plants, and high brand loyalty" (1978, p. 145). these categories are most often applied and work well in the context of large, corporate structures, however, we suggest they are less useful in the analysis of new or small firms. the category of technologicalresources also raises questions for small firms. as defined by hofer and schendel (1978) this category assumes that products, plants, and brands are an integral part of the business. while it is reasonable to substitute services for products, it is also reasonable to recognize that many small firms do not deal with plants and brands. this category also raises other issues, such as what is considered technology and what role does it play in the business. in many ways the category causes more questions to be posed than answered. do 1 linger(1995) provides the most specific discussion of resource categories, expanding upon the hoferand schendel(1978)categorizationschemeby adding a "reputational" resource category and discussing how these resources would add value to the firm. this new reputational category includes "...the perceptions that constituents in the firm's environment have of the company" (1995, p. 34). dollinger also draws from prahalad and hamel (1990) intheirrecognitionoforganizationalresourcesascorecompetencies. thesecompetencies are shown to include the "firm's structure, routines, and systems" (dollinger, 1995, p. 34). 27 chandler and hanks (1994) posit and empirically test the relationship between market attractiveness, resource-basedcapabilities,and firm performance. this research also explored the "fit" between these and coinpetitive strategy, and the authors found varying degrees of support for their hypotheses. measures of resources followed hofer and schendel's (1978) categories, however, the analysis aggregated all resources rather than examining separate contributions of different categories. taken together, this work suggests the need for a more systematic and comprehensive framework of resources which can be used as a basis for investigating resource types, and exploring how these relate to different characteristics of the owner/founder(s) and firm. we propose a typology containing five categories of resources which are displayed in table i. these resource categories are human, social, organizational, physical and financial. table 1 resource cate pries for ew ventures ryy definition associated authors human achieved attributes becker, 1964 education and experience cooper, 1981 reputation dollinger, 1995 social relationships and networks bourdieu, 1983 family liebenstein, 1968 race and ethnicity glade, 1967 political connections glade, 1967 physical tangible assets necessary for business operations hofer & schendel, 1978 facilities and equipment hofer & schendel, 1978 technology dollinger, 1995 organizational organizational relationships, tomer, 1987 structures, routines, hofer & schendel, 1978 culture, knowledge dollinger, 1995 financial funds used to start and bygrave, 1992 grow the business the major differences between this categorization scheme and those previously suggested are found within human, social, and organizational resources. the category of human resources is expanded from the acquired attributes (education and experience) originally described by becker (1964)to include other elements relevant to the entrepreneur(s) such as judgment, insight, creativity, vision, and intelligence(cooper, 1981; dol linger, 1995). 28 however, we emphasize that these are the attributes of the owner/founderor founding team and that this category does not include those same attributes as found in other organizational members. social resources are based upon the work of bourdieu (1983) to include the personal networks and social learning experiences of the entrepreneur(s). early work in the entrepreneurship field emphasizes the importance of family and ethnic relationships (glade, 1967; leibenstein, 1968) and both relationships and social learning are seen as particularly important to the marshaling of resources. organizational resources are based upon the work of tomer and are "human capital in which the attribute is embodied in either organizational relationships, particular organization members, the organization'srepositoriesof information, or some combination of the above in order to improve the functioning of the organization" (1987,p. 2). employee resources, formal and informal systems, and organizatitxtal alliances are included in organization resources. it is this category which allows us to explicitly account for the contribution of other organization members and the systems throughout the firm. our interest for this paper is to identify the types of resources in a sample of small firms, and explore the relationship between these five categories of resources and selected characteristicsof the owner/founder, and the venture. a better understanding of the types of resources will provide insights into the bases for decisions guiding strategies for resource allocation and commitment. we expected some types of resourcesto be more important than others generally, and specifically, depending on characteristics of the owner/founder and the firm. four research questions guided this study: i. what are the resource types reported in small firms? 2. are there differences in resource types depending on the gender of the owner/founder? 3. are there differences in resource types depending on the industrial sector of the firm? 4. are certain resource types related to characteristicsof the owner/founderor firm? method a sample of 410 small firms were identified from 7 national industry directories. companies were selected according to three different industry categories; primary, secondary and tertiary(buckley & brooke, 1992). the categorization scheme is based upon the level of the technologyapplied within the industry. primary industries are the most basic and include agriculture, extraction, and mining businesses. secondary includes most types of , manufacturingand the tertiary industry includes the service and retailing sector. the tertiary sector also includes most businesses considered 'high tech.'his stratification is used to better understand potential differences based upon industry effects. companies were identified by 4 digit standard industrial codes (sic) within each industry stratification, and 3 separate industries were considered within each sic. substantial efforts were made to obtain survey responses. all respondents were contacted by phone prior to the mailing. reminder post-cards 29 were mailed six weeks arer the survey was mailed, and telephone calls were made two weeks atter the postcard mailing to encourage response. measures of performance were those identified as most frequently employed by entrepreneurshipresearchers(brush & vanderwerf, 1992), and included measures of revenues and financial ratios. characteristicsof the owner/founder were used previously by brush and hisrich (1991)and cooper & gimeno-gascon (1992). for the purpose of this study these measures were limited to include gender, age, and marital status. the company characteristiis measured included industry sector, age of the firm, and percent ownership interest of the respondent. resources were measured using five point likert scales which asked respondents to rate their favorabilitiesacrossresource types(1=highly unfavorable,5= highly favorable). items were identified from previous studies (chandler & hanks, 1994) as well as conceptual works in entrepreneurship (bruno & tyebjee, 1982; vesper, 1990). resources were grouped into two categories for ease of response, personal (5 items) and company (i i items) and both categories were checked for the reliability of the scales (alpha .82 for personal, and alpha .75 for company). experience, the number of years in the firm and the number of years in the position were recoded to match the other scaled items. human resources include experience types, experience amounts, and education. social resources and physical resources represent personal networks and up to date equipmentand computer technologies respectively. the financial resourcevariables measure access to debt, access to equity, and domestic profits. organizational resources consist of organizational procedures and firm employees. the study is limited by several conditions. first, the sample is small and the measures of resources used represent the respondent's perspective at a particular point in time. a larger sample size would provide for increased generalizeability of the findings to various types of businesses. the study over time of these resources would also add a desirable dimension to the project. in addition, the sample was drawn from specified trade associations and further research is necessary in those industries not covered in this study. instead, this project provides the groundwork for the understanding of resource building blocks in certain types of small firms. major findings from a sample of410 business owners we received 76 usable responses for a response rate of 19%. consistent with our sampling, 367% of the respondents were female, while the industry sectors represented our three level stratificatbn. accordingly, 28.6% were computer or telecommunications related, 14.3% were in the medical area, and 12.9% were oil or gas companies. the average sales figure for 1994 was slightly over $ 10.5 million, while the average full time equivalent employees was 31. the average age of the iirms was five years, with starting years ranging from 1946 to 1995. nearly 90% of the respondents were chief-decisionmakers (presidents or ceo's), and 75% owned more than 51% of their businesses. the following sections present results of our analysis. 30 l. resource t es in small firms to address our first research question regarding the resource types of the firms, we ran descriptive statistics for all the variables. the average score for each type of resource provides a profile of the categories indicating the relative importance of each variable. the variables with the highest averages were equipment (4.06), prodsvc (unique products and services) (3.94), and networks (3.84). these variables, respectively measures of physical, organizational, and social resources, illustrate the importance of varied resource types. the three variables with the lowest means were years in position (1.69),years in the firm (1.87), and multilingual staff(269), the first two variables representing human resources and the last a measure of organizational resources. the ratings for the two experience variables, years in position and years in the firm are not surprising given the relatively young age of the companies, the average being less than 5 years. other human resource variables(international work experience, marketing expertise, and telecommunications/technologyexpertise) were perceived somewhat more favorably. on the whole, the human resource variables were relatively lower than the rating of all other types of resources except financial. similarly, organizational resources and social resources are also rated more highly than financial resources. 2 resource differences b gender of the owner founder we next examined whether the importance of resource types varied based on the gender of the owner/founder(s). table 2 provides the descriptive statistics for each group, and includes results of t-tests for differences between the means. the only signilicant difference between resource profiles of male and female-owned businesses was in the human resource category, favorabilityof telecommunications/technological expertise. these results suggest that importance of resource types in the firm does not vary significantly depending on the gender of the owner. the significance of telecommunications/tech. expertise seems to support recent statistics indicating that a smaller percentage of women graduate with computer science or engineering degrees, or begin businesses in these areas (wall street journal, 3/18/94). the means of all resource categories across gender groups are quite similar, even with regard to perceived favorabilityof financial resources. this result adds to the mixed findings to date regarding whether women face disadvantages in access to financial resources such as bank loans or equity deals (fabowale, orser, and riding, 1995; fay and williams, 1993; brush, 1992; buttner and rosen, 1989). however, generalization of this beyond this study is limited by the small sample size and the fact that the resource measures are only a snapshot of resources at a particular point in time. 3 resource differences b industrial sector of the small firm our next step was to examine possible variation in resource types based on industry sector. (see table 3). we believed differences across resource types might be evident depending on industrial sector, for example, serv ice or high tech might have a different profile from agriculture or mining. this analysis also yielded few significant differences and all 31 table 2 means standard deviations and t-test results full sam le and gender com orison resource measures full male female t-test sample n=44 n=28 human resources intnl work experience 3.82 3.92 3.63 0.86 1.28 i. i i 1.53 marketing experience 3.48 3.61 3.24 1.18 1.21 1.05 1.39 expenise: tele/tech 3.77 4.03 3.36 2.12'.25 1.00 1.47 years in tirm 1.87 2.00 1.64 i.50 .98 1.14 0.62 years in position 1.69 1.71 1.61 0.51 .87 1.02 0.57 years of education 3. 16 3.20 3.10 0.40 1.05 1.02 1.11 intnl bus education 3.27 3.36 3.13 0.73 1.18 1.04 1.39 social resources personal networks 3.84 3.97 3.60 1.16 1.25 1.17 1.35 organizational resources employees -intnl exp 3. 14 3.30 2.92 1.07 1.35 1.15 1.63 multilingual staff 2.69 2.69 2.68 0.04 1.43 1.37 1.57 strategic alliances 3.61 3.73 3.35 1.10 1.31 1.23 1.40 customer svc capabilities 3.66 3.53 3.85 1.18 1.06 1.10 1.01 operating efficiencies 3.78 3.70 3.88 0.76 .95 0.88 1.07 cost structure 3.72 3.60 3.88 1.21 .93 0.93 0.93 unique prods/services 3.94 4.02 3.74 0.94 1.16 1.15 1.17 physical resources equipment 4.06 4.13 3.96 0.67 .96 1.02 0.89 financial resources access to debt 3.05 3.20 2.78 1.32 1.18 1.13 1.24 access to equity 3.26 3.44 2.87 1.83 1.23 1.18 1.22 domestic profits 3.20 3.24 3.09 0.48 1.21 1.09 1.41 '&.05 "p&.01 "'p&.001 32 table 3 means standard deviations and t-test results resource measures and industr sectors industry primary second tertiary t-test t-test t-test n=l0 n=21 n=20 (i v2) (2v3) (i v3) human resources intnl work experience 4.25 3.80 4.00 0.8 0.53 0.5 1.49 1.28 1.03 marketing experience 3.50 3.48 3.74 0.05 0.66 0.5 0.93 1.23 1.20 expertise: tclc/tech 3.88 3.14 4.71 1.46 -4.66"'2.29'.13 1.24 0.69 years in firm 2.80 1.76 1.90 2.89" 0.59 2.19 1.40 0 63 0.85 years in position 2.30 1.67 1.70 1.95 0.16 1.66 1.25 0.58 0.73 years of education 3.18 3.43 2.80 0.6 1.89 1.15 0.87 1.2 i 0.89 intnl 1)us education 3.75 3.05 3.39 1.55 0.9 0.74 1.04 1.08 1.20 social resources personal networks 4.38 3.85 3.68 1.03 0.44 1.3 1.41 1.14 1.20 organizational resources employees -intnl exp 3.38 2.81 3.61 0.97 1.97 0.5 1.30 1,44 1.04 multilingual staff 3.38 2.55 2.65 1.38 0.21 1.09 1.69 1.32 1.50 strategic alliances 3.38 3.90 3.41 1.04 1.13 0.06 1.19 1.21 1.42 customer svc 3.89 3.33 3.89 1.41 1.6 0.01 capabilities 0.92 1.02 1.20 operating eaiciencies 3.78 3.57 4.05 0.49 1.55 0.74 0.97 1.08 0.89 cost structure 356 362 280 06 093 i 0.73 1.21 0.89 unique prods/services 3.75 3.89 4.20 0.24 0.94 1.02 1.58 1.23 0.77 physical resources equipment 4.44 3.95 4.20 1.54 0.77 0.6 0.53 0.89 1.15 financial resources access to debt 3.1 i 3.1 i 3.07 0.0 i 0.1 0.1 1.45 1.24 0.80 access to equity 3.00 3.29 3.56 0.56 0.67 1.15 1.23 1.31 1.15 domestic profits 2.89 3.20 3.38 0.58 0.42 0.9 1.45 1.28 1.20 p&.05 '&.01 " p&.001'5 of the respondents'industrial sectors were not able to be classified and therefore were not included in this part of the analysis. 33 differences found were in human resources. not unexpectedly, telecommunicationsll'echnology expertise was significantly different for the category representing service and high tech industries (tertiary sector) than for the other two sectors. further, the owner/founder(s) in the primary industries had been with their firms for longer periods of time. we further tested the variation in resource types based on the company characteristics ofbusiness size, measured both by number of fulltime equivalent employees and the level of sales. these analyses also offered no significant differences between larger and smaller businesses by either measure of size. at this point, given the few differences among groups, we decided to reduce the large number of variables comprising each resource type in order to simplify the analysis. using factor analysis we obtained six factors quite similar to our pre-deflned categories of resources: experience types,organizationalprocedures,organizationalcompetence/expesise, finance access,owner/founder years of experience,and owner/founder years of education. results of this analysis are reflected in table 4. table 4 factor loadin s of resource descri tars fnctor factor factor factor factor factor i 2 3 4 5 6 resource categories org. org. org. finance human i lumen descriptors: experience organicaiion orgonication finance ownerl owaerl types procedures coaipe/ence/ access foiinder founder expertise years years experience education util woi capel'icflcc marketing expertise .55 intnl business education .48 expenise; tele/technology .73 years in firm .94 years in position .94 yeats ol'education .91 access to debt finance .89 access to equity finance .91 domestic profit .59 strategic alliances .42 multilingual statf .87 employees -intnl exp. .86 customer svc capabilities .76 43 operating efficiencies .83 cost structure .84 uni ue roducts/services .84 variance on i'actor 29.5% 12.3% 10.8 9.1% 7.6% 6.3% eigenvalues 5.02 2.09 1.84 1.54 1.29 1.07 34 experience types (a human resource) was found to be the strongest factor, accounting for 29.5% of the variance. this factor contained several variables we had expected to load onto the organization competence/experience factor, somewhat confusing our measures of owner/founder and employee experiences and expertise. a possible explanation is that owner/founderswith higher levels of experience frequently have more relationships, contacts, and opportunities to hire staff with similar areas of experience (birley, 1985; cooper & gascon, 1992). therefore, both owner/founder(s) and employees would look more alike for this particular measure. similarly, human capital variables (marketing, telecommunication/technological expertise) combined with organizational level variables (customer service, unique products/services) in the factor organization competence/experience. we reasoned that although the marketing and telecommunications/technological expertise was that of the individual respondent, in fact these areas represented functional capabilities of the organization, oren referred to as "knowledge based resources" (black /k boal, 1994). further, the other two variables loading on the organization competence/experience factorcustomer service and unique products/services-also can be considered organizational capabilities. while our factor analysis yielded a slightly different categorization of the variables than expected, the major resource categories we had predicted were apparent. 4. resource relationshi s we were also interested in learning whether certain types of resources were related to particular owner or firm characteristics and whether these potential relationships suggest a strength or weakness. using pearson's correlation we identified six significant relationships. results of this analysis are shown in table 5. years of owner/founder experience was significantly related to three firm characteristics (two in a negative direction) and one individual variable. several of the relationships are a natural outcome of time passing. age of the respondent was significantly related to owner/founder years of experience, showing that the older the individual, the more years of experience he/she is able to accumulate. the negative association between owner/founder years of experience and age of the firm is curious because this implies that the older the business, the less experience will be characteristic of the owner. a possible explanation is that our sample may contain several second generation owners. the negative association between the industry and owner/founder years of experience is easier to explain in that younger individuals with less experience are frequently involved in our tertiary industry (high-tech and service areas). the positive relationship between owner/founder years of experience and their percentage ownership supports the idea that more experienced owners have acquired greater ownership interest in their businesses. the age of the firm is correlated with organization competence/expertise. this suggests that as the venture becomes established, it attracts or develops stronger organ izati on d capabilities. and finally, the positive relationship between the number of employees and organizational procedures illustrates the increased development and use of organizational systems as the number of people working in the organization increases (churchill /k lewis, 1983). 35 table 5 correlation anal ses individual and com an characteristics and resource descri tars factor factor factor factor factor factor 1 2 3 4 5 6 resource categories org org, org, finance human human social physical fnperienre oeg oeg fina em owner/ owner/ pen one/ fqnrpmenr descriptors fppee pmrm/neer fomperenre/ grnai /nuns/ee foenoer kerworke gape euie pean pean fe nicene fr/orange individual characteristics l. age .25'. gender 3. marital status company characteristics 4. age of firm .25'.44"'. industry -.43"'. % ownership .31 7. sales 1994 8. em lo ees 1994 .38"' p&.05 "p&.01 "'p&.001 conclusions and implications our study builds on earlier work by refining the measures of types of resources as appropriate for the analysis of new and small firms. results of this study show that business owners rated physical, organizational, and social resources relatively more favorable and human and linancial resources less favorable. in other words, the respondents reported more positive perceptions of their firm's tangible assets, products or services, and personal networks as resources. few significant differences based on individual or firm characteristics were evident. this finding implies that among small firms, these characteristics do not distinguish among resource profiles. altemati vely, another possible explanation for lack of ditferences based on firm and owner/foundercharacteristicsmay be related to stage of development. all the ventures in this sample were fairly young. other authors have argued that organizational characteristics, strategic problems and other aspects are similar across stages of development (churchill f/s lewis, 1983). it is possible that resource profiles also are similar and that variations are seen 36 in very early or very late stages of business growth. analysis of resources types across stages of development of the business is another future direction for research. findings from this study inform us about the satisfaction of the owner/founder rather than absolute levels of resources. for instance, a respondent may report a highly favorable perception towards physical resources, measured here as up-to-date equipment and computer technologies. for a respondent in the primary industrial sector this may mean the business owns extensive and expensive equipment and physical materials used in extraction activities. on the other hand, a respondent from the tertiary sector may report an identical favorability score on physical capital but in this context the perception is based upon a service business leasing the latest in desktop technology and sharing a telecommunication system with several other businesses. the important outcome is that the combination of resources controlled is appropriate for the context (stevenson & gumpert, 1985). the factor analysis raised questions of both content and methodology. our theoretical framework requires the separation of characteristics of the owner/founder(s) from the characteristics of other individuals employed within the business. this point is based on the increased value gained by the business from human capital characteristics of the owner/founder(s). the results of the factor analysis were somewhat problematic regarding the separation of the human capital of founders and employees. future measurement of resources must continue to more completely differentiate between the sources and the components of human capital. on the other hand, the results do support our contention that the human capital of the founder is separate from others in the company. the factor analysis also implies that organization resources may need to be treated with a finer grained analysis or subcategories; experience, procedures, and competencies. this research has important implications for owner/founder(s) of new and small firms, both specifically and more generally. the preliminary specific implications are as follows. first, the results showed that human capital is perceived to be less valuable than what you own (physical resources) and who you know(social resources/personalcontacts). this is important because human capital (i.e.achieved attributes such as education, experience, and reputation) is clearly integral to firm success. however, these results imply that owner/founder(s)may not be recognizing them as sources of value to the firm. second, the results show that the strategic importance of resources seem to be driven by the needs of the business, not the gender of the owner/founder. this shows the positive aspects of need-based managerial decision making and suggests this is an area where gender is less important. third, the lack of industry sector differences suggests that there are types of resources valued for any business. while industrial differences may become evident with a more finer grained analysis, a core of foundation resources are perceived favorably across all three industry categories. third, retaining ownership of the firm is an important issue for new and small venture owner/founder(s),especially in those firms that require external financial capital. these results 37 show that the owner/founder(s)years of experience may be key to retaining ownership. more specifically, owner/founder(s) with greater experience may be able to negotiate better equity retention with the providers of financial capital. moregenerally,thisresearchshowsthatwhilesomevariationsin importanceofresource types are evident, with physical resources, organizational resources, and social resources outranking human resources, our exploratory analysis showed few differences in resource profiles. this implies that strategic consideratitns about resource choices are more important than personal attributes. for the owner/founder(s), resources might be considered according to the following questions: i. what is the composition of human, social, organizational, physical, and financial resources in my firm? 2. which resources are most salient given the business opportunity pursued? 3. which resources support a unique advantage that can not be easily imitated? owner/founder(s)can benefit from greater awareness of the types and combinations of resources in their lirms since strategic choices about the allocation and commitment of resources depends on existing resource conligurations. as some natural resources become more scarce and technology and information resources more prolific, firm owners will need to be more aware of resource types, configurations, and application strategies. this research has implications for academics as well. the analysis of resource types in small firms lends support to the resource based view that each business is comprised of a combination of resources (barney, 1991; penrose, 1959).this research provides descriptive in formation about the importance of various categories of resources and is the first systematic examination of this topic in small firms. however, the implications must be tempered with caution because whereas the resource measures presented in this research are the results of owners perceptions of resource importance, it will be left to our future research to link these configurations with firm performance or success. 38 references amit, r.,& shoemaker, p.j. 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(1984). a resource-based view of the firm. strategic management journal, 5, 171-180. 40 strategy financial management for self-employed owners youness atizadeh gcoffrcy g meredith southern cross university abstract self employnren( eirterprises play un inrportant role in employment creation, investmenr and econonric growth enterprises operuted by the self employed persons are the most common form of busi ness establishment across all sectors of the a ustrahan economy wi th the majority r&perati ng m retai i, services and constructioni ndustr'tes past australian small business studies have been based on the data collectedfrom small business enterpr'tses —not self employment: this paper reports on the study corrcentraringspecifically on self emp'oyment enterpmses and tlreir owners use offinancial information financial infornration systems used by small business enterprises were reviewed to develop a model offinaircial infornration systems specifically applicable to self employnrent several propositions were developed pom the model. these propositionsaddress relationshipsbetweenself ernployedenrerprises'financial information needs and accounting information systems used to provide such iirfomnation. a survey conducted in the north coast region of the slate of new south lvales, provided enrpirical data. daia was collected througlr questioirnaires adr&rinistered irr personal interviews with self employed owners. frequencies and cross-tabulations were enrployed ro analyse the data. d'tscussion offindings provided a number ofi mplicationsfor the accounting profession, government departments, educational institutions and self employed owners. introduction for decades, many researchers and writers in journals(such as journal of small business management) have pursued the theme that improvements in aspects of small enterprise management and assistance for small enterprises are essential for growth and development of any nation whether industrialised or an emerging nation (meredith, 1988; williams, 1987). there exists a substantial body of prescriptive literature dealing with in whole or part with use of financial information for small enterprises a number of studies in australia and overseas have indicated that there is a close relationship between the quality and quantity of financial management in formation used by small enterprise owners and enterprise survival, development and growth. for instance, some financial management literature written for small enterprise owner/managers emphasise the importance of developing skills in reading and interpreting historical financial statements to monitor financial performance and growth (bausch, 1982; mcmahon, 1986; meredith, 1986; walker & petty, 1986; barrow, 1988). some relevant journal articles strongly advocate preparation and use of financial information (mayo & rosenbloom,1975; patrone & dubois, 1981; van voorhis, 1981; konstans, 1982; konstans & martin, 1982), while others do so with some reservations (welsh & white, 1981; howell 97 et al, 1981). a number of publications has also dealt with the distinguishing characteristics, problems, and financial information needs of small and growing enterprises (hutchinson & ray, 1986; stanworth& curmn, 1986; scott & bruce, 1987; kazanjian, 1988; turok, 1991). these articles highlight the need for comprehensive financial information in growing small enterprises. furthermore, a number of studies in australia have also demonstrated the importance of financial facts and figures in business survival, business growth and development for small enterprises. in australia, mirza (1981) produced a research report on a study of 50 small enterprise owner/ managers in north queensland. over 84 percent of the respondents in that study indicated the importanceof financialbudgetingin assistingdecisionmaking and solving problems. in a landmark longitudinal study of australian small enterprises conducted by williams in 1987 and continuing, it was clearly established there has been a positive relationship between the use of accounting information in business decisions and survival. results of this study continue to show that those owner/managersusing cash budgeting, profit planning techniques and time management methods are more likely to survive than those not utilising financial information. international agencies such as the international labour organisation(i lo) are dedicated to assisting small enterprise development in emerging nations. small enterprise development is equated with improved standards of living and community welfare (ii.o, 1990). while the focus of attention on that sector of business seen as 'smail enterprise" is obvious from the literature and from government policies and organisations devoted to small enterprise programs, focus on one sub-sector of small enterprise (the self-employed) has been less evident. yet i lo (1990,p. 7) has identified more than one billion self-employed persons and unpaid family workers associated with self-employment in the world including more than 33 million in industrialised countries and over 800 million in agriculture (table i). no further evidence than that presented in table i should be needed to demonstrate the importance of self-employment throughout the world. for the purpose of this study selfemploymententerprisesare defined as those business units which are owned and operated by individuals, working proprietors, unpaid family workers and/or what ilo (1990)calls "ownaccount workers". the self-employed enterprises are controlled by individuals —without staff employed under normal economic conditions. self-employment dominates the small enterprise sector throughout the world. as mentioned and illustrated in table i, ilo (1990)estimates that there are some one billion self-employed or unpaid family workers worldwide. self-employment enterprises in australia are also the most common form ofbusiness establishment yet financial information for the self-employed is not being studied. 98 '1 table i self-em lo ment worldwide unpaid selffamily employed workers total (millions) (millions) (millions) industrialised market economy countries 28.0 5.0 33.0 developing countries 104.0 33.0 137.0 industrialised centrally planned economy countries 1.2 0.3 1.5 agriculture 171.5 828.5 total i 000 0 source: international labour organisation, 1990 the paper now raises a number of questions relating to self employmententerprises and financial management information systems associated with those who are self-employed. a. what are the particular characteristics of the self-employed from the point of view of management? b. why is accounting and financial management information so important for small enterprise survival in general, and self-employment enterprises in particular? c. is it possible to link financial management information systems and self-employed owners needs to demonstrate what aspects of financial management systems should be stressed for small enterprise owners and those advising self-employed owners? the next sections of this paper provide tentative answers and finally the results of a survey of australian self-employed owners and their use or lack of use of financial management information is presented. to this end, the paper attempts to present an argument for improved financial information for self-employed while demonstrating current practices by owners and their use of financial management information. the importance of financial manage ment information in reviewing the requirements of financial management information for "small enterprises" (as opposed to self-employment enterprises), needs for financial management information and systems can be identified as to: a. meet the needs of statutory accounting information; b. provide budgets for internal management planning and control; c. provide additional management accounting information; and 99 1 d. assist operations on a day-to-day basis. governments of most countries require the business sector to provide key information to government for macro enterprise planning. 'fhe specific requirements may vary from country to country but in general, society through government wishes to identify profit for tax purposes, statements of'assets and liabilities, details of owner's equity as a measure of "worth" of afl enterprises in the community, and as a source of information for macro planning. management is the process of planning and controlling of operations. this (from the point of view of financial management facts and figures) includes the preparation of budgets —operating (sales, purchase, expenses, profit and loss) and financial(capital expenditure, cash, balance sheet). budgets may be expanded to meet the needs of the enterprise and are to a large extent influenced by industry sector and its needs. it is self-evident that budgets prepared by manufacturing enterprises will differ from those prepared by retail enterprises, service enterprises, or farming enterprises. accounting is a "service" activity, collecting, analysing, storing and reporting financial facts and figures for owners. these financial facts and figures may extend well beyond what is required for statutory purposes or for budget planning purposes. perhaps preparation of additional accounting information such as production costing, performance analysis, costvolume-profitanalysis, ratio analysis, cash flow statement may be useful for small enterprise owner/managers. day-to-day operations involve the handling of cash, stock, perhaps debtors, creditors, sales in some form, as well as purchases. financial information such as petty cash summary, bank reconciliatim, and debtors and creditors analysis may be necessary for small enterprise owner/managers to assist in the control of these operations. in preparing these reports for owners or for external parties, small enterprise owners may use manual or computer based systems. many small enterprise owners use computer based systems with packages readily available to provide for statutory requirements as well as internal management requirements. whether such systems are justified for self-employment enterprises is discussed below. linking financial information to self-employed owners needs the task is now to link the importance of financial information to the needs of selfemployed owners and to recognise structures of self employment enterprises and operational constraints faced by the self-employed. by definition, the self-employment enterprises have no paid staff, although there may be unpaid family members involved with the enterprise. statutory requirementsmust be met by the self employedowners. if legislation requires submission of annual or more frequent returns of profit, assets, liabilities and equity, then the self-employed has no choice but to meet those requirements. a self-employment enterprise 100 may be organised as a partnership or a corporation with unpaid family members, as partners or directors. statutory requirements of partnerships and corporations must be met. only when consideration switches to budgets, additional management accounting information and operational financial information, possible adjustments in linking the importance of financial information with self-employment needs are acceptable. budgets of some kind are important for the self-employed. the format and details of budget preparation may be influenced by self-employment enterprise characteristics. for example, cash flow budgets may be prepared in a simple format. profit budgets may be no more than estimates of revenue and major expense items. non-financial budgets may be restricted to i ey activities essential for business survival, progress and development. no attempt may be made to budget for asset, liability and equity positions in the future. if this suggestion is seen as reasonable, budgets for a self-employment enterprise may be restricted to a single page layout with provision for control through reporting of actual total revenue, total expenses and hence profits as well as regular cash received. paid and balances. the same principle applies when considering desirable additional management accounting informationthat may be justified for self employmententerprises. table 2 presents a recommended summary of information that may be considered by the self employed owner. 101 table 2 desirable dditional mana ement accountin information accounting information implications for a self-employment enterprise job order costing desirable for self-employed owners in construction industry. minimum maintenance ofjob-cost sheets for every job. performance analysis desirable to measure efficiency and effectiveness of operations. minimum monthly or quarter comparisons between actual and budget will ensure that business is proceeding according to plans. cost-volume profit desirable as an effective decision analysis or cost of models. owners can measure the impact on staying open net profit when decision has been made to change costs or sales prices. osvner's knowledge ofbreak-even point is necessary for many business decisions (special offers). minimum, whenever there has been change in price, sales volume, and costs —the new break even point should be calculated. profitability ratios desirable. minimum only: return on owner's equity, return on total assets, turnover of total assets and profit margin. liquidity and financial desirable. stability ratios minimum only: current ratio, quick ratio, and debt ratio. pricing analysis desirable. most sensitive decision for self-employed owners. minimum only: mark-up pricing method is widely used. cost is an important factor in establishing prices. prices should be analysed when there are some changes in costs. many self-employed owners are involved in the service industries. job-cost sheets are desirable to control time cost and associated material and overhead costs. industry comparisons desirable internal and external business comparisons. minimum: interfirm comparisons to have an external standard to measure weakness and strength on half-yearly or annual basis. cash flow summaries desirable. minimum: daily cash flow summaries to control cash p os i t ion. 102 the same principal applies when considering financial information for the control of a self-employmententerprise operations. activities involving revenue and expenditure may be restricted to a cash basis, eliminating debtors and perhaps creditors although it may be argued that purchases on credit should be a management feature of the sel i'-employment enterprise. table 3 summarises adjustments that may be appropriate for the selt-employment enterprise. table 3 desirable accountin information to control 0 erations accounting information implications for a self-employment enterprise petty cash desirable. summary minimum only: to prepare petty cash summary when petty cash fund has to be replenished bank desirable. reconciliation minimum only: bank reconciliation prepared as soon as bank statement is received. debtors analysis desirable. minimum only: weekly analysis of trade debtors to avoid liquidity problems. cash nature of sales transactions would minimise bad debts and follow-up time. given the limited human and financial resources, it is desirable to operate on cash sales basis. creditors desirable. analysis minimum only: weekly analysis to maintain the image of enterprise and take advantage of discount terms. sales analysis desirable: minimum only: daily or weekly analysis of sales based on major products or services. purchase analysis desirable. minimum: weekly analysis of purchases based on product and supplier to support sales and control stock level. 103 the links between key financial management information and reports required for planning and control for the selliemployment enterprise are illustrated in figure i. figurc l financial mana ement information s stems model fora self-em lo ed enter risc source documents: sales invoices, purchase invnices, cheque butts, bank deposit slips, bank reconciliation, cash rcgislcr tapes cash book: suppliers file, customer iile one write records stock file, staff file accounting information and reports statutory: profit nnd loss stutcmcnt balance sheet statement ol'owners'quity asset rcgistcr budgets: sales purchase profit and i.oss cash flow capital expcnditurc additional management information: production costing performance analysis ratio analysis cash flow analysis operations managfment information: petty cash bank reconciliation debtors and creditors analysis purchase analysis sales analysis source: prepared for this research 104 research method the primary research instrument applied to collect data was a survey questionnaire. the questionnaire was divided into four sections and designed to seek information regarding (i) the self'-employment enterprises, (2) the self-employed entrepreneurs, (3) details of financial managementinformationsystem,and (4) use of financial information in planning and decisionmaking. a questionnairewas distributed to a random sample of sell'employment enterprises in the north coast region of new south wales in australia. self employmententerprisessurveyed were selected at random from the universal business directory, north coast region a directory providing a listing of business enterprises operating in the north coast region. a personal contact between the researcher and self-employed owner/managers was made to distributequestionnairesand screenrespondentsto include only self employed in the original sample. ten days aher the initial distribution, self-employed owners were visited to discuss questions, and response sheets were collected. in total 90 useable responses were obtained from the survey representing a useable response rate of 75 percent since 120 enterprises were selected in the random sample. this report now turns to results of a study of financial management information system for the self-employed. survey data —self-employed owners and enterprises in this introductory section to survey results, four tables are presented to summarise enterprise location, legal structure, enterprise ownership/management, owners highest education qualification. and enterprise turnover. eeet k the largest percentage of respondents (80 percent) were located in cities (population between 20,000 40,000). another 15.5 percent were located in towns (population between 5,000 20,000) and some 4.5 percent were located in villages (population less than 5,000). total sample distribution per location is presented in table 4. table 4 business i.ocation total city towll village location ¹ % ¹ % ¹ % ¹ a. city 72 80.0 72 100 b. town 14 15 5 14 100 c. village 4 4.5 4 100 total 90 100 72 100 14 100 4 100 105 ~l table 5 identifies respondents based on the legal structure of self-employment enterprises dissected by location. this table indicates that the legal structure of businesses differed to some extent between locations,and illustratesthat self employmententerprisestend to use more complex legal structures in cities when compared with town or village enterprises. in the cities, self-employment enterprises were engaged in businesses in the form of sole proprietorship, partnership, company as well as trust. an interesting result of this survey shows that at least 50 percent of all self employmententerprisessurveyed in cities, towns, and villages had partnership business structure. table 5 business structure b enter rise location total city towll village structure ¹ % ¹ % ¹ % ¹ sole proprietorship 21 23.3 16 22.2 3 21.4 2 50.0 partnership 46 51 i 37 51 4 7 50 0 2 50 0 company 16 17 8 12 16 7 4 28 6 trust 7 7.8 7 9.7 total 90 100 72 100 14 100 4 100 enter rise owncrshi and mana ament one of the characteristics of the self-employment enterprise is that ownership and management functions are usually carried out by the same person. this characteristic was present in the population surveyed by this study, in that about 97 percent of selfemployment enterprises were managed and owned by the same persons. by definition, owners are the principal workers in the self-employmententerprises. the two-working-ownerswere involved in operating the majority (61.2 percent) of self-employmententerprises surveyed by this study. lt was observed by the researchers that the two-working-owners of self-employment enterprises are usually husband-and-wife who jointly carry on the day-to-day operations of the business with an exception that the wife is usually responsible for the recordkeeping. the results of the survey also show that this team of husband-and -wife plays a limited role in decision making —17.7 percent of respondents turned to their spouse for advice on decisions involving relatively large financial outlays. further, self-employment enterprises may face special problems as this relationship between husband and wife is not always smooth and can seriously damage the performance of a self employment enterprise (abbot & meredith, 1984). 106 hi hest education uglification respondents were asked to nominate their highest education qualification with the range from a primary school certificate to a post-graduate qualification. table 6 reports the highest 1 eve i of formal education achieved by se i f employed owner/managers. over 70 percent of the respondents have attained a high school certificate, with a higher proportion of owner/managers(71.1 percent) having studied for 6 years at high school. this data shows that 63.3 percent of respondents had progressed beyond a high school education, although about 36.3 percent did not attain tertiary level qualifications. in general, self-employed owner/managers'level of formal education increases as self-employment enterprises grow in size. this is evidenced by the decreasing proportion of owner/managers with no tertiary qualifications from 37.6 percent (very small) to 29.2 percent (medium) and the increasing proportionofowner/managerswith a university/collegedegrees from 8.3 percent (very small) to 25 percent (medium). table 6 formal education com leted b self-em lo ed owner / mana ers and dissected b business size total very small small medium ( i —3) (4 —6) (7 or more) ¹ % ¹ % ¹ % ¹ a. primary i 1.1 i 4.2 b. high school hs 1-3 years 25 27.8 6 25.0 14 33.3 5 20.8 hs 4-6 years 64 71.1 17 70.8 28 66.7 19 79.2 total 90 100 24 100 42 100 24 100 c. tertiary: certificate 40 44.4 10 41.6 20 47.6 10 41.6 diploma 6 6.6 3 12.5 2 4.7 i 4.6 degree i i 12.2 2 8.3 3 7.2 6 25.0 no qualification 33 36.6 9 37.6 17 40.5 7 29.2 total 90 100 24 100 42 100 24 100 sales a significant number of self employmententerprises (42.3 percent) reported total sales of more than $300,000 per annum. in general, a significantly higher proportion of selfemployment enterprises in city (45.83 percent) achieved sales of more than $300,000 as 107 compared with their counterixtrts in town (286 percent) and village (25 percent). details are presenteil in table 7. table 7 total sales of the business sales total city towii village ¹ % ¹ % ¹ % ¹ 8. $20,000 —$ 100,000 15 16.6 11 15.27 2 14.3 2 50.0 b. $ 100.001 —$200,000 13 14.4 11 15.27 2 14.3 c. $200,001 —$300,000 10 11.2 9 12.52 i 7.1 d. over $300,000 38 42 3 33 45 83 4 28 6 i 25 0 e. no answer 14 155 8 1111 5 357 i 250 total 90 100 72 100 14 100 4 100 in summary, it was found that self employed owners in this sample spent between 40-60 hours per week in conducting business related operations. in total 48.8 percent of selfemployed owners have attended some form of management training programs with an upward tendency as they expand their business. trade/industry associations and tafe colleges were considered to be the most popular providers of management training programs by selfemployed owners with an increasing tendency toward university sponsored programs as the enterprise grows in size. survey data —financial management information for self-employed one of the major objectives of this research study was to explore financial management information systems utilised in self employment enterprises and the extent to which financial information is used by self-employed owners in day-to-day management decisions of enterprise, two sections of the questionnaire sought information which focussed on these objectives one dealing with a series of questions related to the details of financial management information systein, and a second investigating use of financial information in planning, and decision-making. details of financial mana ement information s stem a series of six questions provided background information on financial management information systems associated with self-employment enterprises. the respondents were asked: 108 i. who prepares the financial statements? 2. how often are financial statements prepared? 3. in general are these financial statements useful to you in making business decisions? 4. what are reasons for preparing and/or acquiring accounting information? 5. what accounting records does your business maintain? 6. what type of accounting information does your business produce at least annually? these questions vary from accounting records maintained, to type and frequency of financial information prepared internally and/or acquired externally. usefulness of financial statements the surveyquestionnaireproceededto ask self employedownersto identifythe person/s who normally prepared financial statements for the enterprise. as it was expected, approximately?4 percent of self employed owners acquired accounting information annually through an accountantexternal to the enterprise. a question was also included in the survey to find out whether self employed owners regarded financial statements useful or not in making business decisions. the respondents were given the option ranging from extremely useful, to extremely useless. the responses to this question is reported in table 8. table 8 perceived usefulness of financial statements in decision makin response total a. extremely useful 19 21.1 b. very useful 36 40.0 c. neither useful or useless 14 15.5 d. not very useful 13 14.4 e. extremely useless 8 8 total 90 100 about 61 percent ofrespondentsconsidered financial statementsto be either "very" (40 percent) or "extremely" (21.1 percent) useful in assisting business decisions. by contrast, about 39 percent of self-employed owners did not perceive financial statement to be very useful. further, the comparison between "very small ", "small", and "medium" size enterprises reveal that the perception of self-employed owners regarding the usefulness of accounting information in decision-making improves as enterprises grow in size. predominant pur ose for pre grin accountin information three alternative reasons were nominated in the questionnaire ranging from lodgement of tax return and satisfying legislative requirements, to being informed of business 109 i perfonnance. from the results reported in table 9, it is apparent that approximately56 percent ol'self-employed owners considered the main reason for preparing or acquiring accounting information was to "facilitate the lodgement of a tax return". whilst only 10.1 percent of respondents were concerned with "legislative requirements", some 34 percent acquired accounting information for the purpose of being informed of business performance. table 9 predominant pur ose for pre grin or ac uirin accountin information purpose total ¹ u/ facilitate lodgement of tax return 82 55.4 satisfy legislative requirements 15 10.1 informed of business performance 51 34.5 total 148 100 fre uenc of financial statements further questions asked self-employed owners to indicate the frequency with which accountingreports were prepared either internally or obtained from some external sources. the responses from this question are reported in tables 10 (a) and (b). the majority of respondents prepare or acquire "balance sheet" (62.3 percent) and "profit/loss statement" (63.4 percent) on an annualbasis which is consistent with responses to prior questions, in that balance sheet and profit/loss statements are part of legislative requirements and these statutory accounts are normally required annually. however, a relatively small number of selfemployed owners prepared financial statements on half yearly or quarterly basis. table 10(a) fre uenc of balancesheet pre aration frequency total ¹ a. monthly 10 11.1 b. quarterly 6 6.6 c. half yearly 12 13.4 d. annually 56 62.3 e. never 6 6.6 total 90 100 110 table 10 (b) fre uenc of profit / loss statement pre aration frequency total ¹ gr a. monthly 8 8.8 b. quarterly 7 7.7 c. half yearly 11 12.4 d. annually 57 63.4 e. no answer 7 7.7 total 90 100 accountin recordkee in s stem self-employed owners were asked to select from four alternatives levels of record(s) possibly maintained by their business enterprises (see table 11). these five alternatives covered record-keeping systems regarded as "very simple" (such as one-write systems) or full set of records which uses a journal and ledger system based on double entry accounting concepts. table 11 accountin recordkee in s stem dissected b business size accounting records total ¹ 0/ cash book only 44 29.1 cheque book and bank statement 56 37.1 full set records (journal / ledger) 50 33.1 one-write only i 0.7 total 151 100 the discussion in section 4 linking financial information to self-employed owners'eeds outlined major components of a system as being cashbook supported by several tiling sub-systems such as debtors and creditors (figure i). further, none of the small business publications reviewed advocate keeping cheque butts and bank statements as accounting records to facilitate the preparation of accounting information. nevertheless, the results presented in table 11 indicate that the majority of self-employed owners (37.1 percent) keep cheque books and bank statements as main records to facilitate the preparation of accounting information. the implications of this finding for self-employed owners is that cheque books and bank statements generally list receipts and payments and will not provide any information useful to business management. 111 table i i also shows that 29.1 percent of self-employment enterprises maintain cashbooks as accounting records which is contrary to the financial information system presented in figure 1. these cashbook are unlikely to provide a great deal of inforination for management unless expense/revenue dissection is incorporated within the cashbook. responses reported in table 12 suggest that such dissections do not exist, since accounting records are mainly kept for tax purposes. with regard to the maintenance of full journal/ledger system, table i i indicates that 33.1 percent of self-employed owners utilise full set of records to prepare accounting information, as opposed to the financial information system model developed in figure 1. the financial information systems presented in by figure i is very much consistent with "one-write" (simplified accountingsystem) which is used only by 07 percent of self employni 0 sv li ci'. overall, it seems that accounting records maintained by self-employed owners, to facilitate the prepamtion of accounting information needed for internal decision-making and day-to-day management, tend to diverge significantly from those recommended by the accounting information model developed in figure i. t es of financial re orts a number ofquestions were posed to self employed owners to seek information on the preparation of the types of financial information and reports either internally or externally. these questions were mainly concerned with the type of financial information such as statutory accounting information, budgeted financial statements including profit/loss and cash flow, and additional managerial accounting information performance analysis, ratio analysis, industry comparisons, production and job costing reports, break-even analysis, and capital budgeting. the responses to these questions were regrouped to classif'y self-employment enterprises in three categories: a. self-employment enterprises which prepare or acquire only "statutory" financial information; b. self-employment enterprises which prepare or acquire 'statutory/budgeted" financial information; c. self-employmententerpriseswhich prepare or acquire "statutory/budgeted/additional" financial information. from the results reported in table 12, it appears that the majority of self-employed owners (52.9 percent) are primarily concerned with the preparation or acquisition of statutory accounting information. although a higher proportion of self-employed owners generate budgets, but a very limited amount of management accounting in formation was reported. thus, it seems that financial management systems used by the majority of self-employed owners basically provide statutory accounting information which is not adequate for the day-to-day management decisions made by owners. 112 1 table 12 amount and t e of accountin information information total ¹ ny statutory 90 52.9 budget 59 34.5 additional management information 21 12.6 total 170 100 the use of financial information in plannin iyecision-makin and control in order to put the application of financial information into perspective, details were sought concerning the type of financial information and source of advice used for a relatively important financial outlay, use of budgets in forecasting business operations, and reasons for engaging the services of an accountant. financial information used for a relativel lar e financial commitment self-employed owners were asked a question on the use of financial information in major decision-making. respondents were given a number of alternative situations where accounting information may be seen as being important for example, forecasting cash flow or forecasting product pricing or using accounting information as economic indicators or for costbenefit analysis. this question was designed to evaluate the respondents'bility to apply accounting information to business decisions. accounting information is the most relevant input to forecast cash flow and cost-benefit analysis. it is normally expected that the majority of self-employed owner/managers considering accounting information useful in business decisions, would also use forecast cash flow and cost-benefit information when evaluating an important or large financial outlay. the data in table 13 indicate that only 17.9 percent of respondents use cash flow forecast and 15.8 percent of self-employed owners use cost-benefit information when consideringa relatively large financial commitment. however, the majority of self employed owner/managers (24.8 percent) consider 'finances" to be more relevant than such important financialinformationas "forecastcash flo" and "cost benefit"todecisionsofa large financial commitment. this may also indicate that self-employed owner/managers consider financial information to be useful in business decisions but do not apply the information when it is necessary. 113 'i'able 13 financial information for a ma'or decision information total ¹ forecast cash flow 42 17.9 supplier information 25 10.7 product price 38 16.2 finances 58 24.8 economic indicators 23 9.8 cost-benefit 37 15.8 none ll 4.8 total 234 100 use of a written bud et in forecastin business 0 erations self-employed owners were also asked several questions concerning the use of written budgets for planning business ope rations and formal budgets for large capital expenditure items such as plant or buildings. the emphasis on these questions was related to the frequency of use on budgets with the idea of attempting to determine how useful owners saw financial information as part ofbudget processes. responses to the questions are summarised in tables 14 (a) and (b). table 14 (a) use of a written bud et in forecastin business decisions frequency . total ¹ 0/ a. always 13 14.4 b. usually 11 12.2 c. half the time i 1.1 d. occasionally 24 26.6 e. never 41 45.5 total 90 100 114 table 14 (b) use of a formal bud et for ex enditure on lar e items frequency total ¹ 20 22.2 a. always ii 12.2 b. usually 9 10.0 c. occasionally 50 55.5 d. never total 90 100 the responses listed in tables 15 (a) and (b) appear to be consistent with the answers to the earlier question, indicating that the additional managerial financial information, such as budgets are not commonly (14.4 percent and 22.2 percent respectively) employed by selfemployed owners for forecasting business operations and major decisions. tables 14 (a) and (b) also illustrate that the majority of self-employed owners (45.5 percent and 55.5 percent respectively) never use a written budget in formal business planning and capital expenditure decisions. the majority of respondents reported that budgets were either 'never "or" only "occasionally" used for controlling or forecasting business operations and large capital expenditure items. this suggests that for the majority of owners, accounting information is not seen as critical for budget preparation and control over business activities. source and t e of advice there are a range of sources of advice available for self-employed owner/managers in australia. a further question put to owners of self employment enterprises, collected information on individuals or professionals from whom advice was sought when the enterprise was faced with a relatively major financial decision. in this question, quite a number of alternativeswere presented to owners —bank managers, another business owner, solicitors or accountants and others that may not be so obvious, such as a trade supplier or spouse/relation. the responses (table 15) show that the majority of self-employed owners turn to external accountants (31.1 percent), bank managers (19.1 percent) and spouse/relation (17.7 percent) for advice on financial commitments. it is interesting to see that only 0 9 percent of the respondents turn to government agencies. 115 'i'able 15 sources of a&lvice when anal sin the feasibili of a ma'or financial outln purpose total ¹ 0/ a. bank manager 40 19.1 b. another business person 13 6.2 c. solicitor 19 9.0 d. accountant 65 3 i.i e. trade / business association 8 3.8 f. government agencies 2 0.9 g. spouse / relation 37 17.7 h. consultant 5 2.4 i. trade supplier 13 6.2 j. books, tapes, etc. k. no response 7 3.3 total 209 ioo advice sought from an external accountant would be of accounting and/or taxation nature so a further question was asked to identify the type of other advice or assistance. a number of alternatives were presented for owners some which are obvious and some not obvious. it is possible that accountants may be asked to help on a number of matters so that multiple answers were possible. the responses reported in table 16 are consistent with the answers to earlier questions. among six different services listed in the question, 35 9 percent of the self employedowners selected "tax advice/return" as a predominant reason for engaging the services of an accountant. table 16 reason s for en a in the services of an accountant purpose total ¹ prepare statutory accounts 39 17.1 tax advice/ return 82 35.9 bookkeeping services 15 6.6 financial advice 47 20.6 maintain financial control 13 5.7 assistance with business decisions 32 14.0 total 228 ioo 116 implications for self-employed owners the results indicate that legislative requirements are the predominant reason for preparing/acquiringaccounting information by self-employed owner/managers which in turn explains the limited preparation and/or acquisition of additional financial information for managementdecision-making purpose. thus financial information is considered to be a tool that is designed to satisfy legal requireinents and does not serve self-employed owners for strategic planning. given the main thrust of accounting information to 'permit informed judgements and decisions by users of the information" (american accounting association, 1966 p. i), it is perhaps relevant to note that traditional financial information has very limited application in practice and application of financial in formation may vary dramatically from one user to another. it was also found that 53 percent of self-employed owners surveyed by this study engage the services of an accountant for the preparation of tax return and statutory accounts. relationships between self-employed owners and the accounting profession are therefore limited to tax advice and it may be argued that the self-employed owners'erception of an accountant is very similar to that of a tax agent. two possible explanations can be presented: a. self employedownersare unawareofthe additionalservicesavailable from accountants in practice; b. accountants are specialists in taxation services and do not have suaicient expertise to provide management advisory services. there are iinplications from this discussion for self-employed owners, professional accountants, and their advisory services. self-employed owners should improve their knowledge and understanding of financial information. accountants should review management needs of self-employment enterprises. government agencies should consider research programs into the management needs of sell-employed owners and tertiary inst itutiora may have to research and publish more data on the establishment, development, and management of self-employment enterprises. finally, there seems to be a divergence between the financial management information systems used and that recommended in the literature. it is evident that significant differences exist between 'theory" and "practice". empirical studies indicate a strong relationship between the quality of financial management information systems used and performance of business enterprises. one possible explanation for this disparity would be the lack of communication between the business community and academic researchers. these studies suggest unsatisfactory financ i al management information systems are being used by many se i femployed owners who apparently have not implemented recommendations of academic researchers or have not been aware of these recommendations. conclusion this research was undertaken to explore self-employment enterprises in relation to the financial management information systems employed. the primary objective of the study was i 17 to investigate the extent to which financial information is used by self-employed owners in day-to-dny management of the business as well as strategic planning. it was found that selfemployment enterprises employed inadequate financial management information systems which was mainly used to generate financial information to satisfy legislative requirements. to this end there seems to be a restricted link between self employed owners and professional financial advisers, and.any existing links may be limited to the completion of statutory accounts and returns. responses indicated that government departments were not among providers of management training programs. the federal and state governments provide education, counselling. publications and direct funding to the "small business'ector, but it seems that the self-employment sector in this region is not benefiting from this assistance. government departments wishing to evaluate the effectiveness of their assistance should undertake further studies to address self-employment enterprises as a separate sector. implications drawn from the discussion of the results and limitations inherent in the study provide opportunities for further research. the need for further education and management training programs may be necessary to increase the self-employed owners'erception of the use of financial managementsystems and information for strategic planning. it is suggested that further research is needed to enhance the relationship between selfemployed owners and professional accountants beyond the preparation of statutory requirements. government departments need to review their educational, counselling and publications in order to address issues specifically concerned with the selt'-employment enterprises finally, educational institutions also need to incorporate topics in their business and financial management courses specifically related to self-employment issues. i i 8 references abbott, b. and meredith, g g. 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(1987). the characteristics and performance of small business owner i managers in australia (1973-1985),the university of newcastle. 120 stra tegy innovation and competitive advantage in smali businesses: effects of environments and business strategy *john c. palmer universityof illinois at springlield palnierj ohnqauis.edu *robert e. wright universityof illinois at springfield wright.robertqaui s.edu joshua b. powers indiana state university jpo»ersqaindstate. edu 'e firsr t» o «itihors coutrl biiied equally to the paper, aad aic ll tied io alphabetical order. abstract &snail businesses continually auettipt to achieve a sustainable cvmpetitive advantage over competitors. one possible source of competitive advantage may be through either product or processinnvvalions. hv»ever such innovations can be risky, with no guarantee ofsuccess. the success of an innvvation inay depentl vn both a firm's business.strategy and the environment in wltich il operates. this paper prvvides a framework for evaluating the possible effects of environnient and business stratel0i on the success ofproduct and process innovations. introduction as competitive environments become increasingly more complex (ali, krapfel, & labahn, 1995; ansoff, 1979; burgleman & madique, 1988; hax & wilde ii, 1999; hayes & abernathy, 1982) and technological changes constantly redefine the ways in which businesses operate (fty, stoner, &. i-lattwick, 2001, p.7; meredith, 1987), developing and sustaining a competitive advantage becomes increasingly difiicu�l for small businesses. one way businesses may attempt to create and maintain a competitive advantage is through the introduction of some type of innovation. ceos have cited innovation as being the single most critical source of competitive advantage (van de ven, 1986) and research studies consistently show a positive relationship between innovation and performance, with innovation ofien becoming a necessity for firms to survive increasing levels of competition and uncertainty in a changing business environment (han & kim, 1998). however, the proper use of innovation is a major concern for businesses (bantel &. jackson, 1989; friar, 1995; li & calantone, 1998; rothwell & zegveld, 1982). 30 journal of small busmess srraiegv vol. 12, ivo. i spring/summer 200l innovation has been described as the commercial adoption of an idea, either borrowed or developed in-house, that is in the early stages of acceptance industry-wide (e.g., bantel & jackson, 1989). innovation enables firms to respond creatively to competitive threats and opportunities (drucker, 1985). in addition, innovation may change the structure of the marketplace to one that favors the innovator, as current products and services become noncompetitive (dick son, 1992.). innovation may contribute directly to the long-term viability of operations by enabling a firm to gain and maintain a competitive advantage in the marketplace. however, innovation can also be a risky proposition (calantone. dibenedetto, & bhoovaraghavan, 1994; conner, 1995; friar, 1995). attempting to be an innovator can be very costly, with no assurance of adequate return (leavitt, 1986.) at the time of introduction of an innovation, its long term impact is unknown. process innovations may be more costly than predicted, and not produce quality improvements or cost decreases commensurate with the investment. product innovations may not generate an increase in market share large enough to cover costs. innovations may confer a temporary competitive advantage, but the competitive advantage may not be sustainable. while large corporations may be able to rebound from the failure of innovations costing millions of dollars, few small businesses have the resources to overcome such mistakes in business strategy. it is therefore imperative that small businesses realize that the eitects of innovation on competitive position may ditter depending on the fit between two key factors, the competitive environment and the business'urrent business strategy (dess, lumpkin, & covin, 1997; jennings &. seaman, 1994). innovation in small businesses small firms are often innovators (karlsson & olsson, 1998; khan & manopichetwattana, 1989; tether, 1998). in terms of efficiency, small businesses create four times as many innovations per research dollar as do medium firms, and 24 times as many innovations per research dollar as do large firms (scarborough & zimmerer, 2000). although small firms are seen as lacking the resources that might make adoption of innovations easier, they tend to have simpler organizational structures and less "built in inertia". the lack of size and complexity of small lions may enable them to respond more quickly to environmental changes in the marketplace. because of their size, small firms are likely to be very sensitive to changes in consumer tastes, changes in competitors'trategies, and any changes in technology that may have the possibility of altering the competitive structure in the marketplace (meredith, 1987; schnaars, 1991). smaller organizational size, rather than being an impediment to innovation, may facilitate innovation (damanpour, 1991). innovation may provide a key competitive advantage to small firms and become a critical element in their success (fry et al, 2001, p. 55). innovation related to the product design may enable a small firm to fill a particular niche in the marketplace with a product that is different from all other competing products. innovation in the process area may enable a small firm to lower costs, and give the firm a competitive advantage in price, or may enable the finn to produce a higher quality product, and differentiate itself from other competitors based on quality (e.g., porter, 1980). for instance, advances in computer aided manufacturing enabled a small firm in the ferrous castings industry to reduce marginal production costs to two-thirds that of its closest competitor and, at the same time, dramatically lower product defect rates (drucker, 1985). similarly, innovation by a small midwestern manufacturer of saw blades enabled it to develop a high margin market niche, literally untouched by its larger competitors, by offering customized products meeting individual customer specifications(meredith, 1987). 31 journo/ r f&sn ra// 0usi ness srraielfl'o/. /2, no. / spring/summer 200/ carpenter & nakamoto (1989)note that an innovator may also create consumer preferences for a specific type of product, making it extremely difficult for those following the innovator to "steal" market share away. for example, a small business like ben and jerry's may create an innovative taste which sets the standard of comparison for ice cream, giving ben and jerry's a unique and sustainable competitive advantage. while it is clear that innovation may be a source of competitive advantage to small firms, and contribute directly to enhanced performance, innovation may involve substantial risk (calantone et al, 1994; conner, 1995; dickson, 1992; friar, 1995) and may result in wasted resource allocations (e.g., covin &. slevin, 1989). as a consequence, decisions to innovate may be a critical factor in the long term success or failure of small businesses and must therefore be considered as part of a firm's long term strategic plan. the effects of business strategies and competitive environments on the possible contribution of innovations to a firm's success are there lore an issue of great importance to small businesses. l-lowever, despite the importance of innovation to small businesses, results of studies in the organizational literature have not been integrated to describe how business strategies of smaller fimis and characteristics of competitive environments influence innovation. as a result, practitioners have had little to guide them in making decisions concerning innovation. for instance, how might the way that firms compete influence the types of innovations that are adopted? i.low might different competitive settings affect the possible impact of innovation on a business? is innovation always likely to lead to improved financial performance? based on an assessment of available evidence from the organizational literature, this paper seeks to provide practitioners with insight into possible effects of business strategy and competitive environments on innovation as a source of competitive advantage. business strategy i inns must have a sustainable competitive advantage in the marketplace in order to survive and prosper (saloner, shcpard, & podolny, 2001, chap. 3; ansoff, 1979; watkin, 1986). business strategy is the means by which an organization aligns with its environment in order create and maintain this competitive advantage (saloner et al, 2001, chap. 2; porter, 1980). business strategy also reflects how a firm competes in product or service markets (hitt & ireland, 1985), and has direct implications for financial performance (covin, 1991; porter, 1980). while business strategy has been investigated in large organizations (e.g., dess & davis, 1984), and in small business contexts as well (e g., bantel, 1998; chandler & hanks, 1994; changhanti & changhanti, 1983; miller & toulouse, 1986; o'eill & drucker, 1986), the impact of business strategy on innovation has been largely overlooked in empirical analyses. this is somewhat surprising, given that business strategy and innovation are integrally related (horowitch & sakakibara, 1986; porter, 1988). small firms must develop business strategies to ensure that a sustainable competitive advantage is realized through capitalizing on a firm's specific strengths and overcoming its weaknesses (porter, 1980). business strategies determine the product offerings, promotional types and intensity, distribution strategies, and pricing strategies, as well as the internal allocation of resources of a firm. whether or not to pursue an innovation in either the product or process area is therefore integrally related to a firm's business strategy. focus cost-leadership is a small business strategy requiring that firms compete on the basis of price in a certain market segment (smith, arnold, & bizzell, 1991).cost-leadership involves tight internal cost control, eflicient scale economies, avoidance of marginal customer accounts, and less emphasis placed on activities such as advertising and customer service (porter, 1980). in contrast, the primary objective of a focus differentiation strategy is to build brand loyalty in a 32 journal of small business strategy vol. )2, lyo i spring/summer 200l segment of the market. it requires the creation of products or services perceived to be unique. approaches include the development of unique product designs, technologies, features, modes of customer service, or dealer networks. this is accomplished through strong marketing capabilities, product engineering, creativity, and establishing a reputation for quality or technological leadership. firms attempting to pursue more than one business strategy simultaneously may become "stuck in the middle", unable to capitalize on a single set of distinctive competencies. typically, the result is poor performance (porter, i 980). the choice of a low-cost strategy by a firm, with its emphasis on internal cost control and price leadership, suggests that the firm should emphasize process innovations that facilitate a low-cost production process, rather than product innovations. significant product innovations would require use of substantial resources to design and produce, and would also require major promotional efforts to gain acceptance in the marketplace. this would result in higher costs, which would be contrary to maintaining a low cost, price leadership position. alternatively, the choice of a differentiation business strategy, with its emphasis on the creation of products and services perceived to be unique, suggests that the adoption of innovations enhancing products or marketing capabilities should be pursued to gain or maintain a competitive advantage (dess & davis, 1984; friar, 1995; hitt, hoskisson, johnson, & moesel, 1996). product and marketing innovations would serve to constantly remind customers of the unique aspects of a firm's product line, thus helping to maintain a competitive advantage. small businesses should seek to allocate their limited resources to innovations that enhance their business strategy. the performance of firms employing a low-cost business strategy is likely to be highest when they regularly adopt innovations involving process adaptations such as more efficient production techniques, automation of routine tasks, and computer aided production planning. these process innovations will result in lower production costs, thus enabling the firms to maintain their low cost leadership in the marketplace. alternatively, frequent adoption of significant product innovations may adversely affect financial performance in these firms, since such innovations involve resource allocations that fail to enhance business strategy. product innovations may result in higher costs that might cost the firms their low price advantage in the marketplace. a low cost retailer may attempt to provide a more personalized shopping experience by hiring additional sales representatives. however, increased costs resulting from this strategy may require price increases. subsequently, the business may lose its low-cost advantage while the improved shopping experience may not be sufficient to create a ditferential advantage in customer service. performance of firms pursuing a ditferentiation strategy is likely to be highest when product innovations are adopted with regularity. such innovations might include the development of new products, improvements to current products, more effective modes of customer service, and innovations in promotion. these innovations would serve to constantly renew in consumers'inds the idea that the firms'roduct bundles, including products and service, were unique in the marketplace. thus, ditferentiation would continue to be a competitive advantage for these firms, in the face of imitators in the marketplace. in contrast, substantial process innovations are unlikely to enhance the performance of such firms. process innovations would be unlikely to contribute to the positioning in the consumer's mind of the product as highly differentiated, and would require resources that might be better spent on product innovations. for instance, if a retailer with a differential advantage due to a high level of service attempts to reduce labor costs through a major process innovation such as computerized customer ordering (in lieu of personalized service by sales representatives), some of the differential advantage gained through a high level of service may be lost. at the same time, it is unlikely that this labor saving device will enable the retailer to compete on the basis of price alone. thus, the firm may lose its differentiation in service without gaining a commensurate cost advantage. 33 journal o(small business srraregy vol. /2, no. l spring/summer 200/ competitive environments research examining innovation has also suggested that the nature of competitive environments may play a critical role in determining the frequency and success of innovation by firms (covin & slevin, 1989; hax & wilde ll, 1999; miller & freisen, 1986, robertson & gatignon, 1986; zahara & covin, 1995). hostile competitive settings are characterized by intense competition, overwhelming business climates, and weak or diminishing competitive opportunities(covin & slevin, 1989). degrees of hostility have been operationalized in the literature through the assessment of items such as perceived degrees of price competition, growth or decline of product markets, and degrees of competition in product quality (miller & freisen, 1986). past work has consistently reported that innovation occurs most frequently in firms where management perceives hi h degrees of hostility (kimberly & evanisko, 1981; miller & freisen, 1986; schmidt, 1990). flaherty (1983) showed that in the international semiconductor industry, firms in hostile competitive settings relied heavily on adoptions of innovations to gain differential advantages. hage (1986) also showed that increased hostility in the environment was associated with increased innovation in the shoe industry. mascarendas (1991) found that benign competitive conditions were negatively related to rates of innovation by firms in the off shore drilling business. covin and slevin (1989) indicate that high performing small business enterprises faced with hostile environments tend to engage in proactive behavior characterized by risk taking and innovation. in contrast, high performing firms that perceive their environments to be relatively benign assume a more conservative posture by being risk-averse, non-innovative, and reactive to external events. firms operating in hostile environments may have fewer outright opportunities and must therefore engage in proactive behavior in order to gain or maintain a differential advantage. alternatively, such behavior in firms operating in benign environments may lead to the acceptance of unwarranted risk and expenditures on programs of action that fail to enhance financial performance (covin & slevin, 1989). since small firms are typically confronted with severe resource constraints, unnecessary expenditures on innovation by those in relatively benign environments may adversely impact financial performance. likewise, a lack of responsiveness to changing environmental circumstances by firms in hostile competitive settings may have a similar negative effect on performance. firms operating in hostile environments may enhance performance by increased adoption of innovations. however, firms operating in benign environments may, in fact, incur performance declines by assuming innovative postures. a pp li cat i on s thus far, the main effects of business strategies and competitive environments on innovation and performance have been described. however, small firms pursuing innovation must consider the combined effects of innovation and business strategies in various competitive environments on performance. innovations are likely to increase performance of firms faced with hostile competitive environments when such firms pursue innovation consistent with their business strategies. firms pursuing a differential strategy should emphasize product innovations, and firms pursuing a low cost strategy should emphasize process innovations. given competitive pressures, these types of innovation are likely to be a necessary ingredient for success, and may enable firms to gain further ditferential competitive advantage by adopting innovations that enhance competitive 34 journal of small business srrareg)'ol. )2, no. l spring/summer 200l postures (see table i and table 2 for a summary of effects of strategy, environment and type of innovation on firm performance). a small firm with a differential strategy was successful by emphasizing product innovation in a hostile environment. the firm successfully developed and marketed an innovative emissions control system for a particular market segment (differential strategy) (rosenberg, 1996). another small technology related firm combined a low cost strategy with process innovation to develop a low cost network server for the highly competitive small business market (hill gt pappone,1999). table i: predicted effects on performance of firms pursuing different innovation strategies in a hostile environment low cost strategy: process innovations firms attempt to maintain a competitive price advantage through enhancements to production or service processes that reduce costs. such process innovations are likely to be positively related to firm performance in a hostile environment, as they are congruent with the low cost strategy. low cost strategy: product innovations firms attempt to maintain a competitive advantage through product enhancements or product development. these innovations are incongruent with a low cost strategy, due to the associated costs. product innovations are likely to be negatively related to firm performance. differentiation focus strategy: process innovations firms attempt to maintain a competitive advantage through enhancements to production or service processes that reduce costs. such process innovations are likely to be negatively related to firm performance, as they are incongruent with the differentiation focus strategy. differentiation focus strategy: product innovations firms attempt to maintain a competitive advantage through product enhancements or product development. these innovations are congruent with a differentiation focus strategy and are likely to be positively related to firm performance in a hostile environment, as they serve to remind consumers of the firm's commitment to its target consumers'product needs. innovations are likely to have a negative effect on performance when fums operating in benign competitive environments pursue innovation that does not directly enhance business strategy. this type of activity is likely to lead to unnecessary resource allocations, given the sluggish nature of competition, and may be inappropriate, given the likelihood that such innovations will not lead to further differential advantage. a small town bakery with a reputation for quality products (a 35 journal ofsmall business strategy vol. l2, ilo. l spring/sunrmer 200l differential strategy) attempting to lower costs through process innovations may alienate its customer base due to a perceived lowering of quality, despite a possible lowering of price. similarly, a small town thrill shop attempting to innovate in terms of new product offerings may increase costs, which may discourage those loyal customers who had sought a low cost provider of goods. innovation was not required for competitive reasons in either case, and had a negative effect on financial performance. table 2: predicted effects on performanceof firms pursuing different innovation strategies in a benign environment low cost strategy: process innovations firms attempt to maintain a competitive price advantage through enhancements to production or service processes that reduce costs. such process innovations may be positively related to firm performance, as they are congruent with the low cost strategy. however, given the benign environment, such innovations may be unnecessary to maintain a competitive advantage, and the costs may exceed the benefits. process innovations may be negatively related to performance in a benign environment, even though they are congruent with the firm's strategy. low cost strategy: product innovations firms attempt to maintain a competitive advantage through product enhancements or product development. these innovations are incongruent with a low cost strategy, due to the high costs. these product innovations are likely to be negatively related to firm performance. differentiation focus strategy: process innovations firms attempt to maintain a competitive advantage through enhancements to production or service processes that reduce costs. such process innovations are likely to be negatively related to firm performance, as they are incongruent with the differentiation focus strategy. differentiation focus strategy: product innovations firms attempt to maintain a competitive advantage through product enhancements or product development. these innovations are congruent with a differentiation focus strategy and may be positively related to firm performance, if they lead to increased share, which results in benefits to the company exceeding the costs of innovation. however, due to the benign nature of the environment, such innovations may be unnecessary to maintain a competitive advantage. if the costs of such innovations are significant, these costs may exceed benefits, and product innovations may be negatively related to finn performance. however, the performance of firms in benign competitive environments adopting innovations consistent with business strategies is indeterminate. this is because, in the wake of sluggish competition, innovation may enable firms to gain a further differential advantage, luring customers away from competitors and enhancing performance, or as covin and slevin (1989) 36 journal ofsmall business strategy vol l2, no. i spring/summer 200/ suggest, may result in inefficient resource allocations adversely impacting performance, if costs associated with innovation outweigh resultant market share gains. performance of firms adopting innovations inconsistent with business strategy in highly competitive environments is likely to be negative. it follows that firms with differentiation strategies would be unlikely to increase performance when adopting process innovations in a highly competitive environment. a small bakery had been successful with a diiterentiation strategy in a highly competitive marketplace, by focusing on hi~+ quality. process innovations meant to lower cost (such as changing p'roduct ingredients) led to a decline in the quality reputation of the firm, without lowering costs enough to enable the bakery to compete on price. thus, adoption of innovations not in line with the firm's strategy was a key factor leading to eventual liquidation of the firm (hubler, 1998). firms pursuing low cost strategies would be unlikely to increase performance when pursuing product innovations. as a small business, priceline.corn initially was successful in a hostile environment with its low cost ticketing system. however, its attempts to pursue additional product innovations (applying its system to different products such as gasoline and groceries) increased costs, were unsuccessful, and were harmful to the company's core business. summary given the potential impact of innovation on the performance of a small business, it is imperative that small business owners and managers carefully evaluate the fit of their types of innovations with both their business strategy and the type ofbusiness environment in which they operate. for those small businesses operating in a hostile environment, innovation may be necessary to compete and survive. those businesses with a low cost strategy which direct their resources largely toward adoption of process innovations should be more likely to be able to maintain or enhance their cost advantage, leading to a positive impact on firm performance. alternatively, for small businesses with a differentiation strategy, development and adoption of product innovations should serve to emphasize a firm's differential advantage in terms of the unique attributes of products, leading to a pos!tive impact on these firms'inancial performance. for small businesses operating in a benign business environment, innovation needs to be approached much more cautiously. while innovations which are inconsistent with the firm's strategy will typically be negatively related to performance, even those innovations consistent with a firm's strategy may not be positively related to overall firm performance. given the business climate and low level of competition, innovation may not lead to an increased market share, or level of profitability, while costing a relatively large amount of money. it may be better in such environments to follow a more reactive approach to innovation, reacting only to competitive threats or changes in the marketplace. while the synthesis of the literature indicates that an innovation strategy in line with the business strategy and business climate of a firm is more likely to lead to positive financial performance than an innovation which is not in line with the firm's business strategy and business climate, this refers to the major innovative thrust of the firm. small investments in product innovation for a low cost firm might be necessary and successful, and small investments in process improvements for a firm with a di(terentiation strategy might also result in positive firm performance. however, a major investment in an innovation strategy that is not in line with a firm's business strategy and business environment is unlikely to result in positive firm performance, and is more likely to result in a firm "stuck in the middle," without a clear sustainable differential advantage in the 37 journal of small business strareg)j vol. 12, iuo. 1 spring/summer 2001 marketplace. regardless of the potential effects of innovation on financial performance, it may sometimes be necessary for a firm to adopt a particular innovation for competitive reasons. for instance, drive-through banking was initially a product innovation enhancing customer service. as this innovation became accepted into the marketplace, it became an expected part of the service oftering. 'fo avoid losing market share, low cost competitors were soon forced to ofter drive-through banking as well. drive-through banking had become an expected part of the product offering, and was no longer truly an innovation. conclusion to date, small business firms have had little to aid them in evaluating innovation as a source of competitive advantage. yet, small businesses are a frequent source of innovation (e g., meredith, 1987), and ogen must innovate to survive. in addition, as previously noted, the risks of adoption of innovation are likely to be much greater for a small firm than a large firm. this paper has examined available evidence from the literature and integrated ideas to describe potential impacts of business strategy and characteristics of competitive environments on innovation and performance of small firms in an effort to provide some guidance for small firms in their adoptions of innovations. l-lowever, business strategy and competitive environments are obviously not the only relevant dimensions that lirms should consider before pursuing innovation. decisions to innovate are typically complex and specific to unique organizational contexts. factors such as resource availability, managerial risk orientations, specific customer needs, and acceptance of innovative ideas by employees are also imponant considerations that should not be overlooked. oivning and operating a small business is an inherently risky proposition. 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(1995) contextual influences on the corporate entrepreneurshipperformancerelationship: a longitudinal analysis. journal of business venturin 10, 43-58. 40 journal of small business strategy vol i2, no. i spring/summer 200i jolin palmer is an assoc tate professor of business administration at the university of illinois at springfield, where he also serves as director of mba programs. he received his phd in srrategic management froni the university of kentucky. his primary research interests are in the areas of organizational innovation and entrepreneurial strategy. robert wrigltt is an associate professor of businessridministrationat the umversity of illinois at springfieldand teaches in the areas of nrarkeiing and business research. he received his phd in marketing from indiana university. his primary research interests are in the areas of organizational innovation, non-profit marketing, and evaluation of teaching and learning methodologies josliuu powen is an assistant professor of higher education and organi=.ational theory at indiana state university. he received his phd in organizational behavior and higher educationaladministrationfrom indiana university. his pnmary researchinterestis m the area of mnovationin academic environinents 41 ~ t .i. strategy applicability of the gaps model to service quality in small firms cengiz haksever ronald g. cook radha chaganti rider university abstract dehveringqualityis as critical to survival ofsmall servicefirms as uis to large corporations. zeithaml, parasuraman, and berry (l990) developed a conceptual model of service quality (gaps) that identified gaps in service quality and suggested measures to close them. the gaps model has been usedin large service corporations, but is yet to be applied to small service firms. therefore, this paper examines the applicability of the gaps model to the smaller service firm. our analysis revealed that the resources and structure of smaller firms significantly affect the types of service quality gaps that occur and the closure measures. introduction delivering quality to customers is paramount to a company's well-being because it results in more new customers, more business with existing customers, fewer lost customers, more protection from price competition, and fewer mistakes requiring the company to redo its goods/services (albrecht & zemke, 1985). this is equally true regardless of whether it is a large corporation, a small firm, or a very small business. the latter two categories are extremely important because over 99 percent of firms in the us employ fewer than 100 people and these firms also employ almost 54 percent of the workforce (executive oftice of the president, 1995). many of these small businesses are service firms as the bureau of labor statistics reports that services currently account for 74 percent of the gnp, and 79 percent of the employment(henkoff, 1994). therefore, in recent years, researchers and practitioners have recognized the increasing importance of services. concurrently, the quality movement has embraced the service sector as service lirms strive for a competitive advantage (schonberger, 1992). i-lowever, while guidance on delivering quality service is abundant, the models offered are primarily based on an analysis of larger, mature corporations and, therefore, not always relevant to smaller companies. one of the most prominent service quality models has been developed by zeithaml, parasuraman and berry (1990)-hereaaer called the gaps modeland this paper will examine howtheuniquecharacteristicsofsmallbusinessaffecttheapplicabilityofthemodel. because small firms are numerous, insights into service quality in small firms can be gained when a firm�'s organizational life stage is taken into consideration. hence, we used the 1 i fe stage model 49 (eggers, leahy & churchill, 1994) and company size to examine the gaps model, from a very small and small firm (vs&sf) perspective. our analysis will help a popular service quality model become more applicable to small business. background one of the earliest service quality models was "perceived service quality," developed by gronroos (1988). this model identified two types of service quality from a customer' perspective: expected and experienced. high perceived quality is achieved when the experienced quality matches the expected quality. gronroos later combined his model with gummesson's 4q model (gummesson & gronroos, 1988). this model identified design, production, delivery, and relations quality as the four sources of service quality and established links to gronroos's quality perception concept. more recently, boulding and staelin (1993) proposed a dynamic model of service quality. this model stated that service quality is a cumulative measure of the overall quality performance of an organization and allows for changes in customers'xpectations and perceptions over time. concurrently, zeithaml et al. (1990)embarked upon a multi-phase research study which examined service quality. from 1983 through 1990, they examined four service sectors in the economy and, based on their findings, developed a questionnaire (servqual) designed to measure customers'erceptions of service quality. this data helped the researchers identify four internal gaps in service organizations'ractices that caused a discrepancy between what customers expect from a service and what they think they received, and they formulated "a conceptual model of service quality and a methodology for measuring customer perceptions of service quality" (zeithaml et al., 1990, p. 12). the gaps model is represented in figure 1 (zeithaml et al., p. 46). gap i is the difference between customers'xpectations of the service and management's perception of customers'xpectations. customers form their expectations through word-of mouth communications,personal needs, past experience, and commun icatiora from the service organization. gap 2 is the difference between what managers perceive as customers'xpectaticns and what they establish as service specifications. management may fail to put systems in place to meet the customers'expectations. gap 3 exists as the difference between service specificationsand actual firm performance. this may be due to the inability or unwillingness of service employees to do what the firm has specified. gap 4 is the discrepancy between what a firm promises about a service and what it actually delivers. this gap may be due to an internal breakdown of communication in an organization or the propensityto overpromiseabout what the service can do. these four internal gaps contribute to the most important gap of all, gap 5, the difference between what a customer expects from a service and what he/she perceives the organization delivers. 50 ir/ i figure iconceptual model of service quality customer word-of-mouth ~personal needs past experience communications ~expected service iu ga 5ap y perceived service —a provider service 1gap 4 external c o m m u n i c a t i on s to customers gap3 v a ga i ~service quality gap i specifications a a g 2„ management perceptions of customer expectations (source: zeithaml, v. a., parasuramana., & berry, i.. l. (1990). delivering quality service balancing customer perceptions and expectatians. new york, ny: the free press, p.46.) despite some concerns with the generic ability of the servqual questionnaire, the gaps model is the most popular framework for accessing service quality (brown, churchhill, & peter, 1993; carman, 1990). nevertheless, it appears that many of the service problems were identified from studies of predominantly large corporations. indeed, most of the examples given, for both problems and solutions, seem to fit best when this model is applied to a large corporation. consequently, we were interested in an analysis of this model from the vs&sf perspective. how does it apply to these firins? however, we first need to clarify what we mean by the term "very small/small firm" as there is not a common definition(cook & barry, 1995). of the ditterent definitions, the most common cutoff point to distinguish smaller companies from large corporations is 500 51 i employees. smaller firms are then often divided into medium-sizedbusinesses, which employ 100-499 people and small firms, which employ less than 100 (megginson, byrd, scott, & megginson, 1994; longenecker, moore, & petty, 1994). small firms can be divided further into a very small category(under 20 employees)and a small category(20-99 employees). we focused on the vs& sfs. next, we introduce the stages model (churchill & lewis, 1983; eggers et al., 1994) to help refine our analysis and account for differences in a firm's life stage. in later sections, we examine how the gaps model applies to vs&sfs, and ofter suggestions to enhance its usefulness. stages model eggers et al. (1994) elaborated six stages through which a firm can pass through in its 1 ifecycle: conception, survival, stabilization, growth orientation, rapid growth, and resource maturity. in this analysis, we focused on the first three stages because once a firm enters the fourth stage, it would generally exceed our definition of "small," i.e., less than 100 employees. the following pages describe i) key organizational tasks; 2) organizational structure; and, 3) resources, strengths and weaknesses of the vs&sf as they progress through the conception, survival, and stabilizationstages. it should be noted that in the conception stage, all firms are very small and hence, there are no distinctions between very small and small firms. ~c the key organizational tasks at this stage consist of conceiving and refining the business idea, iinalizing the product/service, procuring the capital, physical assets and other resources, setting up operations, and marketing the product to generate the first sale. thereafler, the owner/manger is concerned with developing an adequate customer base, and generating a consistent, positive cash flow. organizational structure would be strictly informal. formalized procedures and systems would be non-existent. regular monitoring of operations is absent, and the owner/manager would perform any and all tasks as needed (churchill & lewis, 1983; eggers et al., 1994; kazanjian, 1988; kazanjian & drazin, 1990; kimberly & miles, 1980; smith, mitchell& summer, 1985). at this stage, all new service ventures would be very small. resources, strengths and weaknesses are primarily embodied in the skills and experiences of the owner/manager as the firm would seldom recruit trained managerial stait. the owner/manager'scommitment, motivation,and intimate involvement in operations (including customer service and customer relations) would be a major strength of a firm during the conception stage. lack of organizational structure may be a source of weakness in that decisions would tend to be sudden and subjective, rather than deliberate. s~il s during this stage, the firm is trying to find its bearings and is still very vulnerable to failure. i.lowever, by this stage, some new firms would have experienced higher growth than others, and hence, the small firms begin to separate themselves from the very small firms. the key organizational tasks are to attract new and repeat customers to stabilize revenues, and 52 "perfect" operations like purchasing, product delivery, customer service, etc., to ensure consistent service to the customer. another key task is generate enough "cash flow to grow, finance expenses, and stay in business, while continuing to develop the business in the (chosen) niche" (eggers et al., l 994, p. 136). one additional concern for the firm at this stage would be that competitors no longer view the firm as a passing phenomenon and, there fore, are likely to aggressively retaliate against its attempts to gain a steady clientele. at this stage, the norm in both vs&sfs would continue to be a minimal organizational structure(churchill & lewis, 1983). employees would handle multiple tasks and assignments would vary with need. however, some small firms may begin to recognize the need for monitoringcompetitiveinformationas well as cash and inventories. hence, they may institute rudimentary reporting systems and some task standardization, thereby showing early signs of formalization. occasionally, a managerial layer may separate the owner/manager from daily operations and consequently, from intimate contact with customers. however, even in the small firms, few would exhibit characteristics like job specialization or elaborate information and control systems. the owner's motivation, skills, and operational involvement continue to be the firm's key strengths and these, along with informality in communication, render the firm agile and responsive. while the resources of the very small firms at this stage would be quite similar to those in the conception stage, small firms may have more resources which enable them to hire trained managerial personnel, especially in functional areas like operations, sales, and accounting. for the very small firm, the lacunae lie in trained managerial expertise, and information and control systems. ~sl ill* q s in this stage, the very small firms have become clearly distinct from the small firms; yet both earn stable revenues and have learned to cope with competition and market changes. the very small firm is consistently returning an adequate profit (from the owner's perspective), while the small firm's profits are able to finance moderate growth. generally, vs&sfs can function indefinitely at this stage, unless environmental assaults or managerial ineffectiveness cause failure or retreat into an earlier stage. organizational tasks consist of maintaining the firm's position in the market niche, and staying solvent and profitable. recruiting and motivating employees is also a key concern. very small firms continue to operate informally with the owner/manager handling all substantial decisions, although occasionallydelegating them to trusted employees. however, the picture can sharply differ in small firms, with some job specialization taking place as functionalmanagerstakeoversuchactivitiesasaccounting, operations, purchasing,etc.. basic planning, budgeting and control may occur, whereas minimal reporting systems and work procedures would likely be in place. informality and flexibility are still the key strengths of very small firms, and hence the corollaries in inadequate information systems and controls continue to be their weaknesses. for many of the small firms, the strengths lie in trained managers, systematic management 53 practices,and a more informed and deliberative decision-making process. their weaknesses are likely to be the increasing disengagement of the owner/manager from operations which may put some distance between him/her and the customer. the systems and procedures could also create some rigidities, making the tirm less responsive. we posit that the differences in the characteristics of the vs&sfs operating in the conception, survival, and stabilization stages would result in advantages and disadvantages with respect to service quality. we will examine how this happens by applying the gaps model to vs&sfs during their three life stages. gaps model from the very small and small firm perspective large or small, most companies today realize that quality is defined by customers and a contemporary definition of quality is simply "customer satisfaction." a manufacturer that doesn't know what its customers expect and value in its goods is not likely to deliver satisfaction. goods generally have a limited number of parameters which are usually well delined (e.g., customers may agree on a narrow range of years as to how long a washer must operate trouble-free). services, however, have many parameters. they are usually not well defined and customers'xpectations with respect to these parameters can cover a wide range (e.g., how courteous should your waiter be in a restaurant or what is courteous behavior in a waiter?). in services, the role of the customer in an interaction is also inseparable from production, and the buyer often has an influence on the production process (e.g., providing instructions for a haircut or documentation for an accountant) and the quality of the service provided(lewis, 1989). consequently, knowing what customers expect is even more critical in a service business, because without this knowledge, quality service is not possible. very small and small service firms face the same challenges in acquiring and utilizing this knowledge as large corporations, yet their size and lack of maturity can prevent them from focusing on this task. therefore, it is important that vs&sfs utilize frameworks to help them conceptualize service quality improvements. our analysis discusses the causes of and closure strategies for the four gaps in the gaps model and identifies what is relevant from a vs&sf perspective. gap l the gaps model defines the difference between customers'xpectations and management's perception ofcustomerexpectationsas gap 1. this gap can have three possible causes: "l) lack of marketing research orientation evidenced by insufficient marketing research, inadequate use of marketing research findings, and lack of interaction between managementand customers;2) inadequate upward communication from contact personnel to management; and, 3) too many levels of management separating contact personnel from top managers" (zeithaml et al., l99fn52). while it is clear that such a gap may exist in smaller firms as well as large corporations, the dominant factor for vs&sfs is the lack of marketing research and the main reason for this is the lack of resources. 54 vs&sf a licabili first of all, vs& sfs generally do not have the resources to conduct marketing research. very small firms, regardless of their stage of development,do not have funds to hire marketing research professionals nor do they generally have the expertise to do the job themselves. on the other hand, small firms have more urgent problems to deal with in the survival stage, such as establishing enough sales to break-even, generating enough cash flow to grow, etc.. only when a small firm has made it to the stabilization stage will it be financially stable and have the time to afford such an undertaking. second, very small and small service companies usually have a limited customer base. most of their customers are local and they are usually in frequent contact with them. therefore, they do not need sophisticated marketing research to find out what their customers need or expect. third, due to their size, and especially in the conception and survival stages, these companies do not have too many layers of management. the owner/manager is very close to the customers, often serving as the contact person for the customers. consequently, if gap i exists, it is probably not due to a lack of interaction between the management and customers, or to inadequate communication between the contact personnel and management, or to top management being too far removed from the contact personnel. instead, it may be due to deficienciesin the owner/manager'sunderstandingofcustomers'expectations. therefore,two of the three causes of gap i, and the subsequent closure steps, are not relevant to vs&sfs. if gap i does exist in vs&sfs, it is likely due to the fact that the owner/manager is too busy fighting fires, trying to keep the firm solvent, attending every aspect of managing a company, etc., and does not have the resources to research his/her customers or to formalize procedures that might make better use of the data the firm already has. this is typically the case for almost all very small firms and for small firms in the survival stages. in addition, gap i may exist because the owner/manager assumes that what customers expect is technical proficiency. if this doesn't exactly match customers'xpectations, gap i is inevitable. ~ci stt to eliminate the primary cause of gap i, lack of marketing research, the gap authors suggest seven alternatives to determine what customers expect. these methods cover a wide range: i) strategic use of complaints; 2) customers'esires in similar industries; 3) research on intermediate customers; 4) key client studies; 5) customer panels; 6) transaction-based studies; and, 7) comprehensive customer's expectations studies. as we go down the list, the methods become less likely to be viable alternatives for vs&sfs because of the high cost and the firm's lack of expertise. further, even if the simplest alternative is used (e.g., recording customer complaints),they don't seem to be an adequate source of information. zeithaml, et al. (1990)cite the following findings of tarp, a washington dc research organ izatiom "only four percent of customers with problems actually complain to companies. the other 96 percent stay dissatisfied, telling an average of nine to ten other people of their dissatisfaction" (zeithaml et al., 1990, p. 54). 55 this does not imply that marketing research is unimportant for smaller companies. rather, the approach should be different. for example, vs&sfs can simply ask customers their expectations when they are in contact with them and keep a record of the responses. further, they may be able to use information available through industry sources such as trade journals. however, the real solution rests with the owner/manager as he/she needs to be convinced to research (by any means) what customers expect from the firm. even if a formal data collection system is not utilized, the owner/manager's understanding that technical competency is not sufficient for customer satisfaction and that he/she needs to be actively involved in determining what customers expect can be a significant step towards closing gap i. looking at the applicability of the aforementioned seven solutions, it is clear that the alternativesare feasible on a sliding scale based on the resources available to vs&sfs. very small firms are generally precluded from these solutions except for the strategic use of complaints. table i summarizes gap i 's applicability. gap 2 gap 2 is the difference between what the owner/managerperceivesto be the customers'xpectationsand the service quality standards that are put into place. four major reasons are given for this gap: "i) inadequate commitment to service quality; 2) perception of in feasibility, 3) inadequate task standardization;and, 4) absence of goal setting" (zeithaml et al., 1990, p 7172). inadequate commitment to service quality may exist due to management's focus on other goals such as shortterm profits and cost reductions. in addition, companies may define quality from their internal, technical perspective rather than from standards based on customers'eeds and expectations. if these two sets of standards don't match, then gap 2 emerges. perception of infeasibility in meeting customers'xpectations exists because managers'elieve they do not have the resources to meet these expectations. while it is conceivable that a company may be lacking the necessary resources such as technology and funding, it may also be a lack of creativity and flexibility that prevents managers from achieving this end. next, inadequate task standardization is usually a result of management's belief that high-quality services must be customized, or that standardization sacrifices service quality. finally, gap 2 may emerge when a company sets service quality goals for its employees based not on customers'xpectations, but on internal company standards. vs&sf a licabili although gap 2 can exist in any firm, the specific causes may vary based on the vs&sf's stage of development. a typical owner/manager often has a technical orientation and, therefore, tends to equate quality with technical excellence, not customers'eeds. he/she is usually struggling to keep the firm afloat, upgrading the equipment and facilities can be a chronic problem and, consequently the perceptionofinfeasibilitymay be imbedded in his/her mind-set. very small firms in any stage and small firms in the survival stage generally do not have a high degree of task standardization. even when firms have procedures for specific tasks, employees are not limited to these tasks as they are expected to assume many roles and positions. hence, the lack of standardization is due to the nature of the firm and the conditions 56 table i relevance of ga i to ver small and small firms gap i: not knowing what customers very small and small firm fit expect i) cnusa: i ack ol'ml.tg. research orientation a. subcause: insufficient mktg research applies to all firms. ivleasurcs for closing subcause i: 1. strategic use of complaints all firms can use complaints. 2. what customers desire in similar not a viable alternative for very small firms, only industnes useful for small fimis 3. research on intermediate customers not a viable alternative for very small lirms, only useful for small firms in stabilization stage. key client studies not a viable alternative due to lack of resources. 5. using customers panels not a viable alternative due to lack of resources. 6. 'f racking satisfaction wl individual not a viable alternative —due to lack of resources. transactions 7. comprehensive customers'ot a viable alternative due to lack of resources expectations studies l3. subcause: inadequate use ol'mktg. applies to all firms research findings measure i'or closmg subcause b: using marketing research better lycpcnds on the available information. c. subcause: lack of interaction between not relevant to very small & small firms. mgt. & customers ii) cnusa: inadequate upward communication not relevant to very small & small firms. from contact personnel to mgt. iii) cnusa'foo many layers between contact not relevant to very small & small firms. personnel and mgt. 57 it is operating in with respect to the stage of development. in very small firms and small firms in the survival stage, formal goal setting is not likely to be a priority of the owner/manager. only in the stabil ization stage can a small firm be expected to have both well-defined positions and standardized tasks. similarly, setting clear goals based on customers'equirements and expectations is not likely to occur in this environment until the firm reaches the stabilization stage and a formal organizational structure takes hold. even then, setting goals for service outcomes requires a certain level of managerial sophistication which is unlikely to exist in these firms. ~ci . s the authors of the gaps model offer recommendations to close gap 2 and some of these measures are viable alternatives for vs&sfs. for example, they state that first, top management must commit to customer-oriented quality and then, middle management's support must be assured. if the gap is due to a perception of infeasibility, the authors recommend that managers be creative and innovative. it is clear that when management is not committed to service quality, gap 2 is certain to emerge. therefore, these suggestions are equally applicable to vs&sfs. however, vs&sfs have neither a large management team nor several organizational layers. therefore, one needs to convince only the owner/manager to enhance commitment to customer-oriented quality. others in the firm will receive the message quickly and unambiguously. consequently, a substantial part of gap 2 is about communication and vs&sfs have a distinct advantage over large corporations in ensuring that the same message is received by all employees. the lack of internal layers in vs&sfs also allows for easier implementation of solutions, except where substantial resources are needed. however, we must also emphasize that if the firm is in the conception or survival stage, it is not easy for the owner/ manager to pay attention to anything other than the most pressing issues of survival. the chances of implementationare better in the stabilizationstage. convincing the leadership of the importance of communication is probably the most daunting task. standard izationof tasks through the substitution of hard technology for personal contact, or improving work methods (or a combination of the two) are recommended as additional alternatives for closing gap 2. substitution of hard technology for human touch is usually in the form of installing a state-of-the-art computer system or using other technology to replace service workers (e.g., automatic teller machines). investment in such systems is usually out of the realm of very small firms in general and small firms in the survival stage, but may be feasible for small firms in the stabilization stage. therefore, closing gap 2 with hard technology requires resources and that becomes the most onerous problem for most vs&sfs. as an improvement in work methods is certainly feasible for any firm at any stage of development(the only prerequisite seems to be that the owner/manager believe in it), smaller firms who find a lack of standardized tasks contributing to gap 2 should focus on the work process first. 58 when gap 2 is due to an absence of goal setting, the authors recommend that service quality goals are set for employees and that these goals are: "i) designed to meet customers'xpectations; 2) specific; 3) accepted by employees; 4) (representative of) important job dimensions; 5) measured and reviewed with appropriate feedback; and, 6) challenging but realistic" (zeithaml et al., 1990, p. 84-86). as we have pointed out earlier, it is not realistic to expect any goal setting activity in very small firms and small firms in the survival stage. however, if managerial sophistication exists in a small firm in the stabilization stage, these six suggestionsare reasonableand meaningful for setting service goals for their employees. table 2 summarizes gap 2's applicability. table 2 relevance of ca 2 to ver small and small firms gap 2: wrong service quality standards very small and small firm fit i) cavsrc inadequate management commitapplies to all firms: owner/manager is the key in ment to service quality very small and small firms. measures i-or closing cause i: i commitment to quality needs to become the owner/manager's priority. 2. commitment of middle mgt. not relevant to very small & small firms. ii) cnustk perception of infeasibihty applies to all firms. measure for closing cause ii creating possibilities may be used by any firm, easier for small firms if resources are needed. iii) cause: inadequate standardization applies to all firms. a condition that most very of tasks small and small firms are in due to lack of resources. measures for closmg cause iii. 1. standardizing tasks with hard not a viable alternative, except when a small firm is technology in the stabilization stage. 2. standardizing tasks by changmg the may be used by any firm work process iv) cause. absence of goal settmg applies to all iirms: a condition that most very small and small lirms are in due to lack of resources measure for closing cause iv: setting service quality goals only relevant to small firms in the stabilization stage due to limits on the pan of owner/manager. 59 gap 3 gap 3 is called the service perfonnance gap and it emerges when the actual service falls short of what the customer wants and what management has set up to deliver. this is usually due to the inability or unwillingness of employees to perform the service at the desired level. the authors have identified the following factors that may contribute to this gap: "i) role ambiguity; 2) role conflict; 3) poor employee-job fit; 4) poor technology-job fit; 5) inappropriate supervisory control systems (leading to an inappropriate evaluation/compensation system); 6) lack of perceived control (by employees); and, 7) lack of teamwork" (zeithaml et al., 1990. p. 90). role ambiguity exists when employees are not given clear instructions and/or training to do their jobs properly. role conflict occurs when employees believe that customers'nd/or management's expectations from them are unrealistic with respect to service time, number of customers to be served in a given amount of time, etc.. poor employee job fit occurs when the firm fails to hire employees with the right skills and orientation for a service job and /or fails to train them properly. poor technologyjob fit is the result of a failure by the firm to provide the right technology and equipment for the appropriate performance of service tasks. inappropriate supervisory control systems occur when firms monitor factors that are easy to measure (e.g., number of customers served) rather than what counts (e.g., customer satisfaction). lack of control (empowerment) can happen when employees have to get approval of managers to resolve problems in the delivery of services or, when they do resolve situations, they believe that they have exceeded their authority and, therefore, were wrong. this lack of empowerment can lead to employee stress, which can result in poor service quality. teamwork(i.e., employees and managers pulling together toward a common goal) can provide great service and obviously, a lack of such teamwork can compromise service quality. vs&sf a licabili role ambiguity may be a real problem in vs&sfs because there are usually no clear job descriptions in these firms and employees are expected to perform many different tasks. this may also contribute to role conflict because when they have to do so many different things, the job demands can overwhelm them. on the other hand, close contact between the owner/manager and employees reduces the likelihood of employees not knowing what is expected of them in terms of performance. closing the role ambiguity/conllict gap may be possible by improving communication and feedback systems so that employees receive clear information about their roles in the organization. the gaps authors also suggest training employees in technical, interpersonal, customer relations skills while using a performance measurement and compensation system that is focused on service quality and customer satisfaction. to accomplish this, vs6'rsfs must first address the "unable" aspect of service performance. employees need the tools, training, and understanding of their mission in order to begin to close gap 3, or to prevent its occurrence. . once a firm has ensured that its employees have the tools and knowledge to provide quality service, the firm can then address the "unwillingness" to provide quality service. unwillingness can stem from the discretionary level of many service jobs. the discretionary 60 level is the difference between the minimum service level in which employees have to achieve or they will be fired, and outstanding service (berry, 1995). a firm needs to motivate its employees to perform beyond the bare minimum. ~ci r a vs&sf needs to focus its efforts, recognizing that it lacks sufficient financial strength to accomplish all of the solutions suggested in the gaps model. for closure steps, the owner/manager's priorities are once again the key, as poor employee-job fit and poor technology-jobfit are common occurrences in very small firms and small firms in the survival stage. they also lack funds to upgrade their facilities to have the most up-to-date technology for quality service. as a small firm reaches and settles in the stabilization stage, these problems may slowly diminish, mainly due to increased financial strength of the company. lnappropriatesupervisorycontrol systems leading to a unsuitableevaluation/compensatim situation are also common in vs&sfs, in part because there usually is no formal system. if teamwork is defined as pulling together in one common direction, then smaller firms, because of their ease of internal communication, would have less problems in ensuring a common direction and, therefore, a smaller gap 3. if teamwork is defined as two or more people working on a well-definedobjective, then for many vs&sfs, teamwork is irrelevant because of their size. finally, empowerment as a contributor to gap 3 is simply not an issue for most vs&sfs. our ongoing research suggests that because these employees have multiple roles, many of them are empowered when it comes to handling customer complaints and solving problems. as deduced from the above, some of the factors that contribute to gap 3 in vs&sfs arise from the nature of these firms or where they are in the development stage. for example, employees have to perform many tasks simply because the firm does not have sufficient number of people to have them specialize in only one area. although training employees is very useful, it is not going to solve the role ambiguity problem. in addition, training beyond technical requirements of the job is a luxury many smaller firms simply cannot afford. furthermore, while a sophisticated performance measurement system can reward employees based on service quality, this is not really necessary for vs&sfs. an owner/ manager can easily empower his/her employees to deliver quality service and clearly communicate to employees as to what is expected of them and how they will be rewarded. this is possible because of the close contact with both employees and customers as there are few, if any, layers of management to obscure the message. only as a small firm grows in size and financial strength do formal systems become necessary and feasible. table 3 summarizes gap 3's applicability. 61 table 3 relevance of ga 3 to ver small and small firms gap 3: service performance gap very small and small firm fit i) causih role ambiguity . applies to all firms: a condition that most very small and small firms arc in due to their size. measure for closing cause i: i'rovidc role clarity by: techniinil training generally useful for all firms. b. interpersonal skills training l.ikely used only in small firms in the stabilization stage. c. teaching employees about likely used only in small lirms in the stabilization stage. customers il) caus/a role conflict apphes to all firms: a condition that most very small and small firms are in due to their size. mcasurc iror closing cause ii: deline job in terms of customers'wner/manager is the key due to lack of formal structure. expectatl oils ill) c/tusa poor employee-job fit applies to all firms: a condition that most very small and small firms are in due to their size. lvteasure i or closing cause ilh improve employee-job fit not likely to occur in very small firms and in small firms in the survival stage. iv) causth poor 'fechnology-job iit applies to all firms. a condition that most very small and small firms are in due to their size. ivleasurc i'or closing cause iv: improve technology-job fit not likely to occur in very small firms and in small firms m the survival stage. v) causn: inappropriate supervisory applies to all lirms. control systems measure for closing cause v: llse a reward system as behavior likely to occur only in small firms in thc stabilization control stage due to a formal system vl) causa. lack ol'perceived control not relevant to very small & small tirms vii) causih i.ack ol'teamwork not relevant to very small & small firms 62 gap 4 gap 4 emerges when the delivered service does not match what was promised by the firm. the authors identify two major causes to this gap: "i) inadequate horizontal communication, particularly among operations, marketing, and human resources, as well as across branches; and, 2) propensity to overpromise in communications" (zeithaml et al., 1990, p. 116-117). vs&sf a licabili gap 4 is unlikely to be a major problem in vs&sfs because the reasons for gap 4 to exist in large corporations are not the same in vs&sfs. lack of communication in a large corporation is usually due to the size of the organization and the turf protection instinct among various departments. very small and small firms simply do not have this size problem, and usually they do not even have separate departments for marketing, advertising, operations, etc.. while it is possible for a sizable small firm (e.g., 90 employees) to develop this bureaucracy, the real risk would likely be only in the stabilization stage where a firm's structure becomes more developed and permanent. the second cause of gap 4, overpromising, is more likely to be a concern for vs&sfs. in general, increasing competitive pressures and heightened customer expectations may lead service firms to overpromise in their communications to customers. this is particularly evident in the conception and survival stages, as firms are trying to build a customer base and deliver the basic service in a consistent manner. firms might also overpromise simply because of inexperience. any overpromi sing may initially lead to increased sales but will inevitably create many disappointed customers. ~ci s in large service corporations, closing gap 4 requires opening channels of communication between advertising, operations, sales, human resources, etc., and ensuring that what is depicted in advertising can be delivered. very small and small firms generally need to focus only on what firms are communicating to their customers and ensure that the owner/manager is aware of any inaccuracies. however, since it is usually management who is responsible for any inaccuracies, and once management realizes the incongruity of what is promised and what can be delivered, it should not be too difficult to correct. conclusion the gaps model identified service quality gaps and suggested strategies to close these gaps. we have reviewed this model from the vs&sf perspective and indicated that many of the causes that lead to gaps 1-4 in large corporations simply do not exist in smaller firms. therefore, portions of the model become less relevant nevertheless, the model can be useful if a vs&sf is cognizant of the two main differences between a large corporation and itself: resource availability and organizational structure. resource availabilitydifferencesmean that vs&sfs do not possess the funds, personnel, expertise, etc., that larger corporations have and the closure measures suggested by the gaps model that require substantial resources may simply have to be dismissed. even the small firm 63 in the stabilizationstage suffers from resource constraintsand, therefore, many of the measures may be beyond the resources of these companies as well. however, vs& sfs can be creative regarding the resource problem and something like inter-organizational cooperation may be a more fcasibleapproach. for instance, perhaps several non-competing small firms can pool their resources and build a state-of the art computerized system for the service delivery and for monitoring quality. small grocery stores have used similar arrangements with purchasing coops. likewise, they can share the cost of providing training to the employees, or jointly hire an outside expert to provide market information. organizational structure differences mean that vs&sfs are not burdened with a formalizedbureaucracy,or other structural impediments that cause the owner/manager to lose contact with the customer, to diffuse messages to contact personnel, etc.. therefore, the agility of the vs& sf allows them to overcome certain problems and more importantly, largely reduce if not preclude some of the gaps. in addition,two other key points emerge from our analysis. first, one point of similarity between large corporationsand vs&sfs is notable: in all three kinds of organizationsservice quality gaps can occur due to deficiencies in the top management's understanding of customer expectations, and their insufficient commitment to service quality. second, one point of difference would be the target of the solutions. in vs&sfs, many of the remedial measures need to be directed at the owner/manager, whereas in large corporations, the target is often middle management. for example, to improve organizational understanding of customer expectations, it is the owner/manager of the very small firm who has to be "retrained", since she/ he embodies the firm's structure and resources. once this person is convinced of the need to gauge customer expectations and meet them, and is equipped with the requisite expertise, this individual can readily redirect operations. the aforementioned structure and resource differences allow vs&sfs to focus their utilization of the gaps model differently than their larger cousins. a vs&sf can de-emphasite gaps i and 4 because either the solutions involve substantial resources or there is only a remote chance of a gap occurring. specifically, of the three causes of gap i, only a lack of marketing research is relevant to smaller firms. of the closures suggested, almost all are beyond the ability of a single vs&sf, leaving the possibility of cooperative eitorts as perhaps the most creative way around this dilemma. gap 4 is a communication problem, either between individuals/departmentswithin the firm or between the firm and the customer. since vs&sfs do not generally have internal communication impediments like departments or branches, the main problem is overpromisingto the customer. however, since it is usually the owner/manager who is responsible for any inaccuracies, ensuring that it is corrected involves only one person and should not present a problem. therefore, most vs&sfs would likely find that gap 4 simply does not exist or is very small, allowing them to focus their eitorts on preventing or closing gaps 2 and 3. our investigation has shown how a popular service quality model can be utilized by a vs&sf interested in understanding and improving its service quality. we suggest that the next stage of development would be to utilize these findings and revise the servqual questionnaireto make it more relevant to vs&sfs. given the large number of vs&sfs, and their impact in the economy, this would seem to be a worthwhile endeavor. 64 y 'eferences albrecht, k., & zemke, r. (1985). service amemca; doing business in ihe new econonr&t homewood, il: dow jones-irwin. berry, l. l. (1995).on great service: apame&vorkfar aciion. new york, ny: the free press. berry, l. l., parasuraman, a., & zeithaml, v. a. (1994). improving service quality in america; lessons learned. academy ofmanagemeni execuiive, 8(2)32-52. boulding. w. & staelin, r. (1993).a dynamic process model of service quality assessment. in scheuing, e. e. and christopher, w. f. (eds.), tire service quality handbook (pp. 177-193).new york: american management association. brown, t. j., churchhill, g. a., jr. & peter, j. p. (1993). improving the measurement of service quality. journal r&f retailing, 69(1),127-139. carman, j. m. (1990). consumer perceptions of service quality: an assessment of the servqual dimensions. journal of retailing, 66(l),33-55. churchill, n. c., & lewis, v. l. (1983).the five stages of small business growth. harvard business revie&v, 61. 30-50. cook, r. g., & barry, d. (1995).shaping the external environment: a study of small firms'ttempts to influence public policy. business &r society, 34(3),317-344. eggers, j. h., leahy, k. t., & churchill, n. c. (1994). stages of small business growth revisited: insights into growth paths and leadership/managementskills in low and highgrowth companies. froniiers of entrepreneurship research, pp. 130-144. wellesley, max babson college. executive office of the president. (1995). the siate of small business: a repari of tire president. washington, dc: us government printing office. gronroos, c. (1988). service quality: the six criteria of good service quality. review of business 3. new york: st. john's university press. gumrnesson, e. & gronroos.c. (1987).quality of services; lessons from the product sector. in surprenant, c. (ed.), add value io your service: the key to success. chicago, illinois: american marketing association. henkoff r. (1994, october 3). finding, training & keeping the best service workers. fortune, 110-122. kazanjian, r. k. (1988). relation of dominant problems to stages of growth in technologybased new ventures: a stage of growth model. academy of management journal, 35, 257-279. kazanjian, r. k. & drazin, r. (1990). a stage contingent model of design and growth for technology-based new ventures. journal of business venturing, 5, 137-150. kimberly, j. r. & miles, r. h. (eds.) (1980). the organizational life-cycle: issues in ihe creation, transformaiionand decline oforganizations san francisco, ca: jossey-bass. lewis, b. r. (1989).quality in the service sector: a review, ijbm, 7(5), 4-13. longenecker, j. g., moore, c. w., & petty, j. w. (1994). small bust'ness management: air entrepreneurial emphasis (9th ed.). cincinnati, oh: south-western. megginson, w. l., byrd, m. j., scott, c. r., & megginson, l. c. (1994), small business management: an enirepreneur's guide io success. burr ridge, il: irwin. schonberger, r. j. 1992. is strategy strategic? impact of total quality management on strategy. acadenry of management executive, 6(3), 80-87. 65 smith, k. g., mitchell, t. r., & summer, c. e. (1985).top managementprioritie in dilterent stages of organizational life-cycle. academy of management journal, 28, 799-820. zeithaml, v. a., parasuraman, a., & berry, l. l. (1990).delivering qttality cervices balancing customer perceptions and expectations, new york, ny: the free press. 66 reproduced with permission of the copyright owner. further reproduction prohibited without permission. employee accommodations in small business organizations jannifer, david;rubenfeld, stephen journal of small business strategy; fall 2005/winter 2006; 16, 2; abi/inform complete pg. 55 employee accommodations in small business organizations jannifer david university of minnesota duluth jdavid@d.umn.edu stephen rubenfeld university of minnesota duluth srubenfe@d.umn.edu abstract because of limited financial and human resources, small entrepreneurial organizations o_fien struggle to meet work accommodation needs o.l their employees. further complicating this challenge is an absence ofprojessional human resource expertise and procedures to guide accommodation decision making. as a result. accommodations frequently carry with them more unintended negative consequences for co-workers than would otherwise he necessary or desirable. while many of these small organizations are not legally mandated to provide accommodations. their employees still have occasions where accommodations are needed and considered to be appropriate. entrepreneurial organizations need creative and practical strategies to meet such needs. to address these concerns. many factors should be considered and incorporated into organizational responses to such requests. a model discussing these factors is proposed and suggestions for implementing accommodations in a manner which minimizes negative impacts are described. introduction all organizations, at one time or another, find they must make accommodations for employees who need to attend to their own or a family member's health-related issues or to accommodate military service. accommodations may be in the form of time off for medical appointments, recovery time, or may involve work changes, such as when employees become disabled and are no longer able to work as they have in the past. small organizations, however, are particularly challenged by these changes in work status because they have fewer financial or human resources available to cover the time employees are away from their jobs or to make necessary work changes. vacation and sick time are difficult to deal with but, as these time spans are rel55 atively short and, at least for vacation, are of a finite and predictable duration, most small organizations find a way to "make do." when employees or their family members have more serious and longer lasting health concerns, simple adjustments to make do will not suffice. as more employees request leave for military duty, childbirth/adoption, or to care for aging parents, ensuring that accommodations are successful is becoming a growing need for competitive businesses. existing research on accommodations or leaves focuses primarily on the employees requesting accommodations. research issues have included: what legal rights are provided to employees (samuels, coffinberger & fouts, 1988; ennis, 1990; crampton & mishra. 1995); who is actually eligible for accommodations (hoekstra, 1997); when do reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy employees choose to utilize these rights (grosswald & scharlach, 1999; dorman, 1995; mcgovern, dowd, gjerdingen, moscovice, kochevar, & murphy, 2000); and what types of accommodations are to be provided (cash & gray. 2000). all of these questions are important but the narrow focus on the requesting employee fails to address the influence that the larger context has in the accommodation process. these contextual factors, such as organizational size and resources, co-workers, managers, job attributes, and the law, play crucial roles in defining ultimate success of the accommodation. the model proposed here explores how these issues may affect the design process and implementation of an accommodation. it is stressed that the roles of management and co-workers are critical in this process. employees requesting accommodations typically need periods of time away from work, adjustments to work schedules, and/or changes to the work tasks they regularly perform. in practice, all organizations have a combination of formal and informal systems for allowing employees time away from work for these types of life events. small organizations, like their larger counterparts, typically have time off programs for vacations, illness, and personal time. legal requirements, such as uniformed services employment and reemployment rights act (userra), apply to all employers but small organizations may be exempted from legal mandates under the americans with disabilities act (ada), the family medical leave act (fmla), and workers' compensation programs. even without these legal obligations, many small organizations will attempt voluntarily to accommodate employee needs. 4 such voluntary accommodations may be stimulated by a moral sense of responsibility to employees, empathy, sympathy to the plight of the employees, or more instrumental goals of influencing perceptions of the organization and retaining valued employees. 4many states have parallel statutes, often with lower size thresholds for coverage. nevertheless, a substantial percentage of small companies fall beneath the radar screen of the laws regulating medical and/or disability accommodations. 56 vol. 16. no. 2 fall/winter 200512006 offering successful accommodations will be difficult for small, entrepreneurial organizations from both financial and human resource perspectives. financially, many small organizations, particularly startups and those fighting for initial market viability, have few resources to spend on accommodations. in these situations, accommodations need to be based on relatively inexpensive solutions, which frequently mean shifting work to co-workers of the requesting employee. the only assured method for avoiding significant impacts on the immediate co-workers is to hire a new employee to fill in for the requesting employee. unfortunately, hiring, even on a temporary basis, often is neither financially feasible nor practical for the small organization. successful design and implementation of an accommodation requires the recognition and consideration of multiple perspectives. accommodations directly affect three stakeholders: the requesting beneficiary, coworkers, and their organization. each of these groups defines success differently. requesting beneficiaries may see a successful accommodation as one that meets all of their needs and preferences for work alteration. co-workers may define an accommodation as successful if it requires few or no changes to their workloads or if the changes needed are accompanied by appropriate recognition for their efforts. organizations may define an accommodation as successful if the business needs are accomplished and legal requirements are fulfilled. measuring the success of an accommodation must incorporate these multiple perspectives. therefore, accommodation success is not dichotomous but rather three continuous measures of successto-failure that perhaps could be additive if necessary for an overall measure of accommodation success. while protecting and satisfying the employees requesting the accommodation, their co-workers, and the organization's interests during the accommodation process, managers must design accommodations that are cognizant of financial and human resource constraints. to do this, a thorough reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy consideration of all the relevant beneficiary, job, and organizational factors should be undertaken before implementing any accommodations. beneficiary factors include aspects of accommodations that are derived from the requesting employees. first, the extent and nature of the accommodation necessary must be determined. the initial information needed to guide this assessment should be readily available from the requesting employees and managers can expect that employees will identify the types of changes that are desired. however, it is important to note that employees should not be given carte blanche to dictate the exact format or details of any requested accommodation. in practice, there often are multiple options available to employers for meeting employees' accommodation needs. second, an analysis should be done to understand the job tasks and behavioral expectations of the requesting employees' jobs. these may not be completely and accurately depicted in existing job descriptions. in the case of small organizations, these job descriptions may not even exist. third, how the requesting employees are regarded by co-workers, while largely uncontrollable by the organization, must be taken into consideration in shaping any accommodation. fourth, organizational factors related to how the organization is positioned to respond to such requests must be examined. these organizational factors are controllable by the organization and, therefore, give managers the best opportunities to design successful accommodations that meet the needs of most requesting employees and their co-workers while protecting the interests of the employer. finally, depending on the size of the organization and state law, there may be legal regulations in effect. these five factors are universal to all organizations. they will affect how all organizations design accommodations that lead to success. small organizations have additional concerns, which may moderate how some of the foregoing factors contribute to successful accommodations. the goal of most organizations will be to design and implement accommodations which are considered successful by all of the 57 vol. 16. no. 2 fall/winter 200512006 key constituencies: the beneficiary, coworkers, and the organization. the model presented discusses five universal factors influencing this multifaceted standard of success and incorporates organizational size as a moderating influence. it must be understood that the impact of these factors is not directly on the success of the accommodation itself but, rather, on the decision-making process, the final accommodation decision, and the implementation of that decision. how an organization handles these three steps is the critical determinant of the degree of success experienced. first, we will address the special circumstances of small organizations. second, we will discuss how each of the universal factors affects accommodations incorporating the organizational size issues into the discussion where applicable. these factors are modeled in figure l. accommodation challenges of small organizations small, entrepreneurial organizations have some challenges to making accommodations that will probably not be as relevant in large organizations. small organizations may have a higher percentage of single incumbent jobs. they tend not to have formal human resource departments or written human resource policies and procedures. their managers may have limited hr experience and, without the aid of a professional in the hr field, managers may have a greater tendency to make ad hoc decisions regarding accommodations. larger organizations may face some of these issues but, realistically, they are more likely to have access to larger employee talent pools and professional hr expertise. small organizations almost always embrace a lean staffing strategy which implies that there is little redundancy in the skills possessed by employees. in many situations, there will not be other employees in an organization who possess the same knowledge, skills, abilities or work expertise/experience as the employee needing an accommodation. in this context, reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy vol. 16. no. 2 fall/winter 200512006 figure i factors influencing work accommodations* organization size organization & management co-worker relationships 38 job& work factors legal factors attributes of requested accommodation 1decision making process • implementation accommodation success • causal links are labeled to identify the propositions and their predicted directions when an employee requests an accommodation, the problem may not be that co-workers are unwilling to fill in for their colleague or that there is insufficient time but, rather, that they are incapable of such an effort. this situation usually requires that managers find external sources of labor to complete work or devise some other accommodation to reduce reliance on the requesting employee's. work. such accommodations will be necessary for the short-term and, possibly, for the long-term as well. another challenge faced by most small organizations is a low level of human resource expertise. owners and managers may be lacking in knowledge of human resource issues that may be pertinent to the requested accommodation. further. such organizations typically do not have formal human resource departments or even a human resource professional on staff until they have a critical mass of employees, which is generally thought to be 100 employees or more. without professional human resource expertise, these organizations may be less likely to have formal 58 policies or procedures that can provide guidance about how requests for accommodation are to be handled and. consequently. to develop appropriate accommodations. similarly, small organizations are less likely to have written job descriptions. operating in such a human resource vacuum may result in ad hoc decisions being made about each request. the resulting accommodations may be arbitrary and inconsistent over time. which may give employees the negative impression that favoritism is involved in the determination of accommodations. these human and financial resource constraints may limit the types of accommodations small organizations are able and willing to make. a itributes of requested accommodations accommodations may be requested for any number of reasons. typically, requests will be made because employees have experienced a challenging, and sometimes life-altering, event or developed a chronic condition which causes them to need reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategv changes in their work environment. while we typically focus on events which happen directly to the employee in question, accommodations resulting from family and relationship issues also are likely to occur (starrels, ingersoll-dayton, dowler, & neal, 1997). these events may diminish people's physical capabilities or mental state (hantula & reilly, 1996). such changes may be permanent or temporary. chronic conditions, such as learning disabilities, while not discussed as often as physical disabilities, may be more difficult for employers to identify, but still will require accommodation (price & gerber, 200 l ). chronic conditions will typically require permanent accommodations. while each of these causes is legitimate and compelling, from an organizational perspective the cause of the request is not the primary issue confronting the organization. the cause is important because it triggers any legal requirements and defines the range of what work changes will be needed. these work changes, while infinite in possibilities, typically have three basic attributes: duration, timing, and the physical or environmental form of accommodations. the duration, timing, and form of the accommodation go to the heart of the beneficiary's need. these items provide an analytical framework to be used in defining and selecting accommodations that are necessary and desirable. duration refers to the length of time the accommodation will be needed. accommodations that are of an undefined duration, extend over a long time frame, or repeat frequently will impose more of a "cost" than will short and infrequent amounts of time-off. timing refers to the predictability of when the accommodation will be needed. is the requested time-off unpredictable or sporadic or is it known well in advance? in the former case, co-workers may pay a higher price as they may be forced, with little advance warning, to cancel activities outside of work, to stay late, or delay projects to adjust for the accommodation. the form of the accommodation refers to the need for time off or adjustments to the work of the beneficiary. changes in work tasks may be required not 59 vol. 16. no. 2 fall/winter 200512006 only of co-workers to cover tasks previously completed by the beneficiary but also by managers in their duties of supervising the accommodated employees. the latter may be more pertinent in cases of employees with chronic mental impairments, who will require perhaps a different management style (macdonald-wilson, rogers, & massaro, 2003 ). the costs to co-workers and the organization may be substantial with either of these forms (e.g., time off or work changes) and will increase as the extensiveness of the accommodation increases. proposition 1: the extensiveness of the accommodation needed will be negatively related to the success of the accommodation. job and work factors as was previously noted, small organizations are likely to have a lean staffing model which will increase the concerns about the interdependence and centrality of the beneficiary's work in virtually all situations. each employee in a small work organization typically holds a unique position that cannot be easily duplicated. relative to larger organizations, the workforces of small organizations are more likely to have broad jobs (i.e., scope of activities and responsibilities) that are not confined to a narrow skill set. jobs tend to be situationally defined and tailored to the unique knowledge, skills, and abilities of the employees and there frequently may be only one or very few employees who have a specific set of competencies. because the skills required for each job are more likely to cover a broader range of knowledge areas than similar jobs in a larger organization, the result is that jobs in smaller organizations may have a tendency to be more interdependent as employees work in more areas of the organization. further, knowledge, skills, and abilities are, to varying degrees, critical to organizational success. the more central a job is to the completion of organizational tasks, the more important it will be for the organization to design and implement an effective accommodation. transferring tasks to another employee often will require reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy substantial amounts of training. even where abilities are sufficient, there rarely is "slack" available to accommodate the reassigned tasks. in addition, there is no guarantee coworkers will be psychologically open to this reassignment of tasks. any significant accommodation-driven changes to the coworkers' jobs can decrease the co-workers' own work effectiveness and/or job satisfaction. employers must not lose sight of the fact that the efforts and cooperation of co-workers are just as crucial to the work process as those of the employee requesting the accommodation. until sufficient growth occurs, which will permit more employee "depth", small organizations must deal with their realities of shallow talent pools when responding to requests for accommodations. proposition 2a: higher centrality and/or interdependencies of the beneficiary 's job with other jobs will be negatively related to accommodation success. proposition 2b: organization size will be negative(v related to a job's centrality and interdependence with other jobs. co-worker relationships the beneficiary's relationships with coworkers are especially important in smaller organizations as they probably will need to rely more directly upon co-workers to accomplish accommodations than larger organizations. the relationships these beneficiaries have developed with their coworkers, prior to requesting accommodations, will have a substantial impact on co-workers' willingness to put in extra time and/or effort to support their accommodations. for example, the beneficiary's work history or job performance may play a role in co-workers' perceptions of the legitimacy of the accommodation or, at least, the degree to which changes in work or workload should be borne by them. coworkers may be more sympathetic in cases where the beneficiary has been a good performer than they would be in cases where past job performance was marginal, suggesting that the request for accommodation is just one more method of avoiding work regardless of the actual need 60 vol. 16. no. 2 fall/winter 200512006 for accommodation. as the reasons for many of these accommodations are not evident and will be difficult for co-workers to verify, perceptions of "shirking" are not uncommon (staten, 1982). related to this notion of shirking is the perceived legitimacy of the need for accommodation. for example, co-workers may not agree with the need for accommodation if the condition necessitating it is seen as having been self-inflicted rather than beyond the control of the accommodated person. an accommodation which is a result of self-inflicted needs that are perceived by co-workers to be caused by unsafe behaviors or bad judgment may not be construed as justifiable by co-workers to the extent that a serious illness of a family member might. also, if the severity of the need can be subjectively interpreted by coworkers as not extreme enough to merit the proposed accommodation, then co-workers may be less likely to adapt their work efforts in support of the accommodation. finally, the personal relationships developed by these beneficiaries with their co-workers are likely to affect co-workers' reactions to these accommodations. co-workers, who have strong, positive personal ties with the employee requesting accommodation, are more likely to be sympathetic and feel better about the effects that an accommodation has on them. co-workers will be more accepting of work impacts when they result from assisting someone they consider a friend and a good colleague rather than someone they do not know or dislike. in smaller organizations, these relationships may prove to be even more critical than in larger organizations. smaller organizations generally have fewer financial resources to make accommodations by utilizing external sources of labor or technology. as a result, accommodations will rely more heavily on the efforts of co-workers. small organizations' lean staffing issues complicate this because employees may need to exert additional effort to learn new skills. this effort may be easier to elicit from employees who have a positive working relationship with the beneficiary. reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy proposition 3a: the relationships between beneficiaries and co-workers will be positively related to accommodation success proposition 38: organization size will moderate the relationship between coworker relations and accommodation success. in practical terms, the attributes of the accommodations and these co-worker factors are largely beyond the control of management. organizations can not easily alter the accommodations needed or the perceptions, values. or relationships with which co-workers make assessments about their willingness and enthusiasm to support accommodations. however, managers must recognize that designing an accommodation does not in itself assure that the needed work will be done well or that there won't be unintentional secondary impacts. organizational and management factors organization and management factors are more directly under the control of owners and managers than is the case with coworker relationships and job and work factors. these factors deal with how the organization is positioned to address the accommodation from the perspectives of business cycles, organizational culture, and the policies and practices used to guide the development of the accommodation. the factors are not specific to the individual requesting accommodation but, rather. reflect management's approach to the external environments in which the organization operate and the roles of employees in accomplishing organizational goals. organizations may be less able or willing to accommodate employees who make requests during the peak work periods because the business needs will take precedence over the needs of an individual employee. except where legally mandated. co-workers, already stretched thin, will be less able to take on additional and unfamiliar tasks. while management cannot determine the timing of a need for accommodation. it can and should be sensitive to the implications this has on the demands on co-workers as it responds to 61 vol. 16. no. 2 fall/winter 200512006 such requests. the lean staffing dilemma of small organizations will exacerbate this problem. in larger organizations the business cycle still will be a contributing factor to accommodation success but their access to a larger number of employees will perhaps decrease the impact this business cycle will have on the accommodation. proposition 4a: an organization's business cycle will be negatively related to accommodation success. proposition 48: organization size will moderate the relationship between business cycle and accommodation success. organizational culture and management actions will affect how employees perceive requests for accommodation. management's attitudes, behaviors, and demonstrated commitment can go a long way in setting the tone for implementing accommodations. cultures that are accepting of accommodations send signals to employees that finding ways to work with accommodations is encouraged and expected. further, coworkers are more likely to be accepting of accommodations if it is apparent that managers are sensitive toward and are making reasonable efforts to limit the negative impacts on others. one management action that can greatly assist in developing an accepting culture is procedural consistency of responses to requests for accommodations. while small organizations are unlikely to have many formal policies or procedures, the use of ad hoc approaches to decision making when designing accommodations may lead to perceptions of special treatment or favoritism. even very basic policy statements about organizational commitments toward accommodations and the basic principles that will guide how requests for accommodations will be addressed can increase co-workers' acceptance of the decisions that result. proposition 5: a supportive organizational culture will he positively related to accommodation success. reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal o(small business strategy legal factors federal and state laws related to making these accommodations provide general guidance about what is considered a reasonable accommodation. basically, these laws define employee rights, impose requirements on employers, and allow organizations to consider each request individually when determining whether or not to make any accommodations and the form and substance of such accommodations. the concepts of business necessity and undue burden play key roles in shaping these decisions. when federal regulations do not apply to smaller organizations, there may be state laws that will require these organizations to make accommodations because of the lower size thresholds for coverage in these laws. even though these laws may have a positive influence on the actions of organizations, any laws that apply to organizations will, in some way, inhibit the organizations' ability to respond freely to an employee's request for accommodation. still these laws provide a mm1mum standard for organizational responses to requests. many managers recognize the minimal nature of these laws and are willing to go beyond these legal requirements when circumstances warrant it (unger, 1999). these managers understand that the spirit of these laws is to ensure the fair and ethical treatment of employees in need and that rigid adherence to the letter of these laws does not, in and of itself, assure its provision. thus, managers have, in many instances, risen above the legal requirements to meet their employees' needs and fulfill their perceived ethical obligations to their employees. accommodations built solely on legal obligation must still meet the burdens of effectiveness and support by co-workers if they are to succeed. proposition 6: the extent to which legal considerations drive the accommodation design process will be negatively related to accommodation success. imp li ca tio ns the model in figure 1 is proposed as a framework for future research and for the 62 vol. 16. no. 2 fa/i/winter 200512006 consideration of practitioners in the midst of making accommodations. more research is needed to understand if the causal links proposed reflect the realities of organizations. should the proposed relationships be confirmed by additional research, there are implications for practitioners in organizations of all sizes; however, the design of accommodations and their success may vary by organizational size. during the process of designing and implementing responses to requests for accommodation, management should consider all of the foregoing factors, which include the financial and human resource costs. this approach should increase the probability of creating a successful accommodation for the beneficiary, coworkers, and the organization. an accommodation is considered unsuccessful if it fails to meet the needs of at least one of the stakeholders: beneficiaries, coworkers, or organizations. the costs associated with an unsuccessful accommodation may be high. beneficiaries who think their organizations did not do all they could or should may engage in undesirable activities ranging from lower job performance to a law suit. co-workers who are unhappy with work changes resulting from an accommodation also may engage in undesirable behaviors in the form of negative attitudes, lower performance, lower morale, and poor organizational citizenship behaviors. these behaviors may be difficult to identify as each co-worker interprets an accommodation based on their personal understanding of the situation and their relationship with the accommodated employee. further, co-workers may mask their negative feelings because they fear a negative reaction or because of a sense a social desirability, making it all the more difficult to gauge co-workers' reactions. for organizations, an unsuccessful accommodation may mean missed opportunities and missed profits. management can minimize these problems by implementing policies and practices, which are fair and are perceived as being fair to all involved parties. table 1 provides a reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy sample of issues confronting organizations and potential options that may be available to fairly and effectively deal with employee needs while at the same time minimizing the secondary effects on co-workers and maintaining the financial health of the organization. these options focus on the organization and management factors and job and work factors as these are more vol. 16. no. 2 fall/winter 200512006 controllable by organizations. co-worker and legal factors need to be taken into account when making these decisions but these are unlikely to be changed as a result of an accommodation decision. these suggestions for accommodation designs should work for organizations both large and small, but they are presented with small organizations in mind. table i suggestions for minimizing negative impacts to co-workers while making accommodations factors • interdependence of work group • criticality/centrality of accommodated employee ' s work • organizational culture • management efforts • consistency of treatment • seasonal effects job and work factors the interdependencies and centrality of work may seem difficult to change, especially in small organizations where every employee is uniquely critical to work processes. still there are usually more options available than may be initially recognized. reallocating tasks among other workers (greenlaw & kohl, 1992), job sharing with a co-worker, or greater use of part-time and temporary employees can reduce each employee's centrality and reduce the severity of gaps created by one employee's absence or reduced capacity to perform. job and task suggestions for minimizing negative impact 63 • job sharing • part-time work • teleworking • outsourcing • management and hr policy changes aimed at increasing acceptance of accommodations • focus on work challenge rather than on accommodation • share information with co-workers • consult co-workers in determining the specifics and impacts of accommodations • give positive feedback to co-workers, who help with accommodation • well-defined, procedurally fair, documented policy • applications of consistent decision making approaches to accommodation requests • hire temps • postpone non-essential activities design to reduce the centrality of any one employee's role could be explicitly built into the organization management model. where there is advance notice, it may be possible to work ahead or develop a stockpile of the critical products or work contributions made by the accommodated employee. crosstraining may be another option for the small organizations, though the opportunities for employees to learn and/or perform other employees' tasks may be limited by existing work loads and the extent to which required knowledge domains and/or skill sets are distinct. in small organizations, as processes are likely to be already efficiently engineered reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategv and staffing slack minimal, these approaches may not seem to be viable. alternatives that focus on deepening the pool of talent available to organizations may be best. job sharing and part-time work used together can be a powerful strategy for small organizations. job sharing implies that two people each work part-time to complete one whole job. these employees are each competent to perform the duties of the other employee but their employers are not paying for two full-time employees. organizations will have the benefit of deeper talent pools without the cost implications of a higher fulltime employee headcount. if one of these employees needs an accommodation of time off from work, then the job sharing coworker is prepared to take over the tasks of this incapacitated employee. taking advantage of the technology available for teleworking is another approach to solving the lean staffing dilemma. this may be an option for employees who cannot work on-site every day because of their accommodations but would be willing and able to do work from home. teleworking may be especially feasible for service organizations where "products" can be emailed between employees or projects can be completed independently. while this option holds promise in many situations, care must be taken to view telework as a facilitative factor and not as a substitute for a needed accommodation. organization and management factors management efforts focused on improving the environment for accommodations, may not change the actual work that will need to be done by co-workers but they, hopefully, will ensure that co-workers are more positively motivated to accept the resulting changes and complete any extra tasks that may be required of them and that employees needing accommodations will not be fearful of asking for them (baldridge & veiga, 200 l ). if the organization's culture does not value and encourage these types of accommodations, owners and managers will need to take a long-term perspective on creating a supportive organizational culture. 64 vol. 16. no. 2 fall/winter 200512006 management of smaller organizations have an apparent advantage in that they may be able to affect more quickly the culture of an organization than would be possible in larger, more bureaucratic organizations. still, managers must make a concerted effort to develop a culture that both is compassionate to the needs and wants of the workforce and is outcome-oriented. the desired culture should support employee cooperation as well as a shared sense of responsibility and accountability for achieving profitable business outcomes. if all employees share a common goal and there is a spirit of openness, cooperation, consultation, and participation, then most employees will not be unreasonable when asked or are expected to facilitate an accommodation. there are a number of things that management can do to encourage an organizational culture that increases the probability that co-workers will be open to these accommodations and that they will be helpful in making the accommodations successful. it is essential that co-workers see management taking whatever actions are possible to minimize what may be perceived as unreasonable impacts on them. even though the work systems in small organizations may be fairly transparent and managers could independently design appropriate and feasible work accommodations, co-workers should still be solicited for input about the specific design of accommodations. further, offering explanations to co-workers about the nature of accommodations and, to the extent legally feasible, the general reasons for accommodations may increase co-workers' understanding and acceptance of accommodations. without such explanations, these changes might seem mystifying and be perceived as unfair, inappropriate, or unnecessary. once the accommodations are in place, management should strive to maintain a sense of community within the workforce by recognizing the extra efforts made by coworkers. formal mechanisms for recognition may exist but managers should not forget that opportunities for informal approaches to recognition also will be available. verbal reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy recognition either public or private that acknowledges co-workers' extra efforts should add to a helping culture. many creative and inexpensive ways to recognize co-workers' efforts can be used without fear of setting a precedent (nelson, 1994 ). managers should deliver this recognition in a fonnat which will be welcomed by coworkers and does not come at the expense of the accommodated employee. another method of adding to the "helping culture" is by putting in place policies that address employees' concerns with procedural fairness. small organizations have a reputation for avoiding written policies because of the perception that this allows them greater flexibility in responding to situations. unfortunately, flexibility may ultimately lead to perceptions of favoritism or ad hoc decision making that does not consider the needs of all employees. even in small organizations, employees will want to have confidence that management is considering everyone's interests before designing accommodations. inconsistencies in the decision-making process will undennine the value of these programs and can have negative impacts on how employees regard even the most deserving of accommodated employees. a written policy that outlines the underlying principles of accommodation, the sequence of steps, the actors, expectations for communication with co-workers, and any other steps in the decision process will assure co-workers that their interests specifically are considered in the accommodation decision-making process (mondak, 2000). this policy should retain a large amount of flexibility in the design of accommodations but provide a decisionmaking framework that includes all affected parties to increase the understanding and acceptability of accommodations. the timing or season of accommodation requests may have an impact on how managers respond. since small organizations have very few employees who can share the burden of accommodations, requests that come during peak seasons or near significant work deadlines will be more difficult to work around than those that come during slower times. management is encouraged to be 65 vol. 16. no. 2 fall/winter 200512006 realistic about co-workers' stress and work loads. the use of part-time, job-sharing workers that was suggested earlier may only work during slower times. during peak times, it is likely that employees who are nonnally part-time workers may be working close to full-time schedules to meet higher product demands. therefore, the use of temporary workers may be more necessary during peak seasons or some work will need to be postponed until later when product demand decreases. the financial realities of the organization will probably dictate whether or not the use of temporary workers is feasible. if temporary workers are not a viable solution, decisions will need to be made about whether some work tasks can be postponed or outsourced. establishing clear work priorities and communicating these to everyone will help employees lower their stress as they will have a good understanding of what must be done first and not waste time debating the relative importance of tasks. when management is prioritizing which work must be done when and making other operational decisions, they must encourage and reinforce the existence of an open and supportive organizational culture. including input from co-workers, as they are closest to the work and may best understand how the work is organized. may help achieve this open culture. finally, beneficiaries making these requests should understand that organizations do not have unlimited power to demand that coworkers adjust their work schedules or to take on additional tasks to cover beneficiaries' needs. it will not always be feasible for small organizations to make the needed accommodations. requesting employees should be aware that in some circumstances the organization may not be legally required to provide an accommodation that would be expected from larger organizations. all businesses, including small organizations, have a right to be in business and operate profitably. to the extent that a requested accommodation threatens these ends, management may make the decision to deny some accommodation requests, even where they recognize the legitimacy of the request and are sympathetic to the employee's plight. requesting reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strate~ employees in these situations should be made aware of the risks that these requests may carry to their continued employment. once accommodations have been implemented it is important for organizations to measure the successfulness of their efforts. the definition of success should include not only the effectiveness with which the needs of the accommodated employee are met but, also, the successful completion of organizational work and the minimization of undesired or unreasonable impact on coworkers. only by measuring these three outcomes can organizations be confident that the accommodations they are making and the process of designing these accommodations are truly effective. this model describes a perspective on the process of accommodation that will hopefully be beneficial for not only the requesting employee but, also, for coworkers and the organization itself. future research efforts should seek to verify the assumptions that underlie the proposed model and begin the process of empirical verification. it is important that the implications for accommodation success and mm1m1zmg the negative impacts of accommodation be confirmed if they are to serve as practical guidelines to managers of small organizations. this confirmatory process will be challenging, as the measurement of many of the independent variables will require subjective assessments through self-report or participant observation and include reflective descriptions of values and beliefs that affected both individual reactions and behaviors. for example, the level of beneficiary success could vary substantially from one requestor to another even with identical accommodations. in addition, these data may be distorted by the respondents' sensitivity to political correctness and the perceived social desirability of honest responses. further complicating these issues may be managers' concerns that the actual decision making process could reflect poorly on their methods, behaviors, and decisions within their managerial/professional competence. 66 vol. 16. no. 2 fall/winter 200512006 it may prove to be the case that this type of research is more easily accomplished in the format of case studies, where much can be gleaned by in-depth explorations of managerial and co-worker involvement in accommodation decision making. nevertheless, longitudinal, empirical tests of the model are appropriate and desirable. when making work accommodations for employees, organizations must consider all the factors that affect the design and implementation of the work changes. small organizations have both disadvantages and advantages in comparison with larger organizations when making these accommodations for the life needs of their employees. small organizations have fewer human and financial resources to implement these accommodations but, at the same time, they are more likely to have a culture that is supportive of accommodating employees. the design and implementation of these accommodations typically will rely more heavily on co-worker support than is the case in larger organizations. for this reason, the culture of the organization is vitally important. even where there is a supportive culture, however, owners should be careful not to ignore the needs of the other workers or assume that their support is universal or boundless. the "hidden costs" of unhappy or uncooperative co-workers could cripple small organizations that rely proportionately more on each of its employees than larger organizations. appropriate staffing and policies that include inputs from all affected parties should help to minimize these hidden costs. the real issue here is not to assure equal treatment but, rather, to assure equitable treatment of all parties affected by the decision. references baldridge, d.c. & veiga, j.f. (2001). toward a greater understanding of the willingness to request an accommodation: can requesters' beliefs disable the americans with disabilities act? academy of management review, 26( i): 85-99. reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy greenlaw, p.s. & kohl, j.p. (1992). the ada: public personnel management, reasonable accommodation, and undue hardship. public personnel management, 21(4): 411-427. hantula, d.a. & reilly, n.a. (1996). reasonable accommodation for employees with mental disabilities: a mandate for effective supervision? behavioral sciences and the law, 14: 107-120. macdonald-wilson, k.l., rogers, e.s., & massaro, j. (2003). identifying relationships between functional limitations, job accommodations, and demographic characteristics of persons with psychiatric disabilities. journal of vocational rehabilitation, 18: 15-24. mondak, p. (2000). the americans with disabilities act and information technology access. focus on autism and other developmental disabilities, 15(1 ): 43-51. nelson, b. (1994). 1001 ways to reward employees. new york: workman publishing. price, l.a. & gerber, p .j. (200 i). at second glance; employers and employees with leaming disabilities in the americans with disabilities act era. journal of learning disabilities, 34(3): 202-210. starrels, m.e., ingersoll-dayton, b., dowler, d.w., & neal, m.b. (1997). the stress of caring for a parent: effects of the eider's impairment on an employed, adult child. journal of marriage and the family, 59: 860-872. staten, m.e. ( 1982). information costs and incentives to shirk: disability compensation of air traffic controllers. the american economic review, 72(5):, 1023-1037. unger, d.d. (1999). workplace supports: a view from employers who have hired supported employees. focus on autism and other developmental disabilities, 14(3): 167-179. jannifer david is an assistant professor of human resource management at the university of minnesota duluth. her research investigates a variety of human resource domains including the impact of 67 vol. 16. no. 2 fall/winter 200512006 staffing strategies on firm and employee outcomes. stephen rubenfeld is a professor of human resource management at the university of minnesota duluth. his research explores a variety of human resource topics, including job search behaviors, discrimination in employment, employment security and compensation systems.   strategy   journal of small business  table of contents 1 is strategy different for very small firms and new firms? g.t. lumpkin syracuse university alexander mckelvie syracuse university david m. gras syracuse university robert s. nason syracuse university 27 the moderating effect of family-ownership on firm performance: an examination of entrepreneurial orientation and social capital jeffrey m. campbell university of south carolina nathan line university of south carolina rodney c. runyan university of tennessee, knoxville jane l. swinney oklahoma state university 47 the influence of strategic focus & gender on performance shanan g. gibson east carolina university 59 a perceived role of offshore outsourcing strategy in achieving success of technology start-ups jayaram madireddy colorado technical university 79 small business, community relations and sustainability: new approaches to success abbas nadim university of new haven robert n. lussier springfield college reproduced with permission of the copyright owner. further reproduction prohibited without permission. fall journal   volume 20, number 2 fall/winter 2009  81            the value of business plans for new ventures: company and  entrepreneur outcomes    richard c. becherer  university of tennessee at chattanooga  richard‐becherer@utc.edu    marilyn m. helms  dalton state college  mhelms@daltonstate.edu      abstract    writing business plans is often the first step for entrepreneurs in developing new  venture ideas.  trade press publications support their value and include templates or  even software for crafting the business plan.  however, the academic literature  supporting the value of a business plan is limited, particularly on how the plan directly  affects entrepreneurs and their standard of living.  this study polls a national cross  section of owner/operators of small to mid‐sized business start‐ups in operation less  than ten years to determine the value of the business plan for the business, its success  and longevity, and even its value, separately, for the founding entrepreneur.  results  indicate a relationship between the use of a business plan in start up and the age of the  business, its financial success, strong company success, and the achievement of  financial return goals.  findings support the link between a business plan and the  achievement of an “excellent” overall organization.    keywords: business plan, start‐up, company success, growth, and excellence.    introduction  business plans are often the starting  point for would‐be entrepreneurs as they  outline their business ideas and develop  a plan to seek financing.  the business  plan is a formal document which  describes a good opportunity and  outlines a strategic approach to pursue  the opportunity.  along with cost  estimates and profitability projections,  the business plan is used to guide  strategy and to provide information for  potential partners and other investors.   the value of a business plan is often  assumed and seldom questioned.   because strategic planning is known to  be important to businesses and to new  ventures in particular, the business plan  strateg y  journal of small business  journal of small business strategy        82  is often intuitively linked with improved  performance.  unfortunately, this  relationship has seldom been tested in  the academic literature.  there are few  studies on the value of a business plan to  the business itself or to the entrepreneur  personally.    importance of a business plan  hormozi, sutton, mcminn, and lucio  (2002) outline the essential elements of a  business plan and agree that regardless  of the size or stage of development,  companies use a business plan to  improve their internal operations as well  as to describe or market the business to  outside investors.  parks, olson, and  boker (1991) agree few have questioned  the value of business plans, particularly  for small business start‐ups, and they  find there has been increased advocacy  for business plans in entrepreneurship  and small business management  offerings at colleges and universities.  in  fact, an internet search of college  entrepreneurship course descriptions  quickly reveals preparing a business plan  is the major course deliverable.  popular  press books and software programs  abound to help the nascent  entrepreneur formulate their idea into a  business plan.    purpose of a business plan  struebing (1997) reported on a four‐year  study conducted by the american  institute of small business which found  the chances of success by companies  undertaking major expansion or by  those starting a new business increased  by 50% or more if they first prepared a  business plan.  the chances of obtaining  a bank loan increased by an even greater  percentage when the applicant had  prepared a business plan.   other studies of the value of a business  plan have focused primarily on the  business plan’s use as a vehicle for  securing funding.  singhvi (2000)  studied 24 small businesses and their  business plans and found more than  70% used the plan primarily for  financing.  the business plans covered  periods ranging from three to ten years.   interestingly, the study found most  small businesses did not update their  plans, leading one to assume the plan  was used only for early stage financing.   kirsch, goldfarb and gera (2009), in  their study of 722 funding requests  submitted to american venture capital  (vc) firms, found the presence of  business plans weakly associated with  vc funding decisions and inferred the  vcs learned much of the information  about a start‐up from other sources  independent of the business plan itself.  bowers (2009) reporting on the  goldfarb, kirsch, and gera (2009) study  notes that venture capitalists who screen  hundreds or even thousands of  solicitations for new business funding do  not even consider the content of the  business plan.  venture capitalists reveal  that most of the information in the  business plan, particularly in the  financial forecast, is not relevant for  their decisions.  market validation or  evidence of potential customers for the  volume 20, number 2 fall/winter 2009        83    service or product, however, is relevant.   generally the findings of these studies  agree the business plan is not pointless  and enables entrepreneurs to think  through the logistics, pitfalls and  possibilities and to clarify goals,  particularly in the context of a  competitive landscape.    while the business plan is assumed to be  the first step for validating a new  product or service idea, bartlett (2002)  reported only 40% of the inc. 500’s  company founders had formal written  business plans prior to launching their  companies.  it should be noted that  these percentages were based on firms  still in existence.  if it were possible to  collect this information on all new  ventures during the same time period,  the percentage of ventures with business  plans would be even less.  allred and  addams (2006) studied successful  companies included on the inc. 500’s list  to determine whether these companies  used a business plan once financing had  been obtained.  they concluded ceos  and top management of small  companies should prepare an effective  business plan, revise it to fit the  environment, and refer to it often to  assist their company in achieving even  greater success in their operations.     some researchers question if the  business plan is even necessary since the  plan includes numerous assumptions  about the future, which is uncertain and  continually evolving.  the act of starting  a business itself results in a change in  the environment and initiates actions by  competitors, hence the environment is  changed and the value of a business plan  is compromised.  karlsson and honig  (2009) agrees the preparation and use of  business plans are supported by various  universities, governmental assistance  agencies, management consultants, and  a wide array of literature, but are often  not considered as useful tools to be used  or updated.  karlsson and honig (2009)  studied six companies over five years  and found initial conformity to business  plans was followed universally by a  gradual loose coupling with the plans  over time.  most entrepreneurs who  wrote business plans also never updated  them and rarely referred to them.   upton, teal, and felan (2001), however,  studied fast‐growing family firms and  found the majority did prepare and use  formal written business plans.    business plans and firm  performance  other studies have hypothesized and  explored a link between the preparation  and use of a business plan and resulting  firm profitability.  in their study of the  1987 inc. 500 firms, parks, olson, and  boker (1991) hypothesized that business  plan preparation should improve  profitability for the respondents, but  they found just the opposite.  the  average profitability was substantially  higher for firms without prepared  business plans.  the explanation of these  findings may relate to the composition  of the 1987 inc. 500.  their business  journal of small business strategy        84  start‐up success was higher than average  and attributed not to a sound business  plan but to a proprietary advantage,  timing, meeting a well defined customer  need, or a revolutionary idea or  technology.  parks, olson and boker  (1991) also noted that fifty percent of the  successful businesses had no formal  written plan.  heriot, campbell, and  finney (2004) agree there is a  presumption that a business plan will  lead to positive firm performance and  this therefore assumes preparing the  business plan is a good idea.  while they  agree there are many ways to  operationalize positive performance,  their findings were mixed at best.    business planning versus business  plans  researchers have supported a positive  relationship between planning and firm  performance and these strategic models  typically support the preparation of a  formal, written business plan (see for  example rue & ibrahim, 1998; perry,  2001; fletcher & harris, 2002; sahlman,  1997).  yet no clear relationship between  the preparation of a business plan and  corresponding firm performance or any  other positive outcomes has resulted.   while perry (2001) found positive  relationships between business plans  and performance, others have found the  exact opposite (see, for example, hand,  sineath, & howle, 1987).  perry (2001)  concluded that in general, very little  formal planning is performed in us  small businesses.  hannon and atherton  (1998) believe a closer inspection of the  research suggests the benefits of a  business plan are for actual planning  within business rather than as a  document for acquiring resources.    business plans and positive  outcomes  in support of the business plan leading  to a new business, using historical cases,  liao and gartner (2008) found nascent  entrepreneurs who completed a business  plan were six times more likely to start a  business than individuals who did not  complete a business plan.  fiet and patel  (2006) tested a theoretically‐based  approach for evaluating and predicting  business plan performance.  their  results accounted for 74% of the  variance above the expected roi to  investors based on the original business  plan estimates.  similarly, koh, kim, and  lee (2008) studied the relationship  between business plans and corporate  performance in small and mid‐sized  enterprises (smes) in korea and found  good performance was found in firms  with an excellent plan and excellent  implementation.  delmar and shane (2003) studied new  ventures in sweden and found planning  in general as well as the business plan  itself to be important prerequisites to  action in new ventures.  the plans  helped founders make decisions, balance  resource supply and demand, turn goals  into operational steps, accelerate new  product development and venture  organizational activities, and reduce the  likelihood of disbanding the venture.  in  a follow‐up study, shane and delmar  volume 20, number 2 fall/winter 2009        85    (2004) again studied swedish  entrepreneurs and found those  completing business plans before talking  to customers and beginning promotional  and marketing activities had a lower risk  of failure, thus pointing to the benefit of  business plans.  challenging the hypothesis of a link  between a business plan and  performance, perry (2001) studied the  relationship between written business  plans and small business failure in the  us.  he found while few firms engaged  in formal planning, surviving firms do  more planning than failed firms did  prior to their bankruptcy.    business plans and the  entrepreneur’s outcomes  even though there has been research  investigating the relationship between  business plans and firm outcomes, there  is a dearth of research on how using a  business plan to start a new venture can  directly impact the actual entrepreneurs.   while business plans may increase the  probability of success of the new venture  and its profitability, does preparing a  business plan directly impact the start‐ up entrepreneur’s personal income or  wealth?  this research question should  be included in any comprehensive  assessment of the value of business plans  in start‐up ventures.    hypotheses  based upon the literature review, there  appears to be limited empirical evidence  business plans play an important role in  leading to positive outcomes for the  start‐up venture or for the entrepreneur.   the results are generally supportive of  the importance of a business plan,  although most studies do not directly  link the use or importance of a business  plan in a start‐up to specific situations or  specific performance outcomes.  it is  important to initiate exploratory  research focusing on the link between  using business plans for start‐ups and an  industry or company‐specific  characteristics.  similarly, are there  linkages between using a business plan  and both specific firm outcomes and/or  personal entrepreneur outcomes?  the business plan plays different roles in  firms based on their type and competitor  conditions.  it is likely there will be a  relationship between when a firm was  started, the scope of their business  operations and industry, and whether  they used a business plan to start their  venture.  hence the first hypothesis is:  h1:  there is a relationship between the  nature of the start‐up firm and its  competitive environment and the use of a  business plan in the start‐up.  regarding firm outcomes there are a  number of ways to measure the success  of the firm.  one measure is how large a  business becomes both in sales revenue  and the number of employees.  hence,  the second hypothesis is:  h2:  there is a relationship between the  use of a business plan in start‐ups and  how large a firm becomes.  journal of small business strategy        86  at start‐up, most entrepreneurs have a  vision of the firm they aspire to own and  the success to be realized.  generally,  most entrepreneurial firms are created  to generate financial success, but often  the entrepreneur secures equal or even  more satisfaction from initiating a firm  that creates a loyal customer following  or a strong company with a solid  employee base.  therefore to assess  success outcomes, three different  hypotheses are required:  h3:  there is a relationship between the  use of a business plan in start‐up and  financial success.  h4:  there is a relationship between the  use of a business plan in start‐up and  customer satisfaction success.  h5:  there is a relationship between the  use of a business plan in start‐up and  strong company success.  start‐up firms have specific and diverse  goals.  often these goals focus on the  financial returns the firm achieves or the  growth the firm realizes.  thus, the next  two hypotheses relate to goal  achievement outcomes.  h6:  there is a relationship between the  use of a business plan in start‐up and  satisfactory achievement of financial  return goals.  h7:  there is a relationship between the  use of a business plan in start‐up and  satisfactory achievement of growth goals.  the long run viability of a firm is based  upon how well it creates management  practices and systems that develop into  an “excellent” overall organization with  an ability to achieve sustained  performance.  proponents of business  plans would suggest their use as a first  step in building a firm that would be  considered an “excellent” organization.   therefore, it is likely that there is a  relationship between using a business  plan as part of a start‐up and creating a  business that excels over the long term.    h8:  there is a relationship between the  use of a business plan in start‐up and the  achievement of an “excellent” overall  organization.  while entrepreneurial businesses may  benefit from the use of a business plan in  start‐up, it is important to link the use of  a business plan to benefits for the  entrepreneur.  certainly being an owner  of a successful business is a positive  indirect outcome for the entrepreneur.   but does the use of a business plan in  start‐up related to direct personal  benefits for the entrepreneur?  and so,  the final hypothesis:  h9:  there is a relationship between the  use of a business plan in start‐up and  improved standard of living for the  entrepreneur once the business is  established.            volume 20, number 2 fall/winter 2009        87    methodology  the sample  using a national mailing list, a stratified  random sample was created of 1,800  owner/ operators of small to medium  sized businesses.  the sample included  equal numbers of manufacturing  businesses, wholesale/distributors, retail  businesses and service businesses.  the  sample mailing included a cover letter  explaining the nature of the study and  its anonymity, the questionnaire, and a  postage‐paid return envelope.  three  weeks later a second complete mailing  was sent to the entire sample  encouraging completion of the survey if  they had not already done so.    completed questionnaires were received  from 191 respondents for a response rate  of 10.61%, which is typical for mail  surveys.  the first twenty percent (38  total) of the 191 responses were  compared with the last twenty percent  (38 total) on all key variables and no  significant differences in response  patterns were identified.  this would  indicate that non‐response bias was not  a problem (see armstrong & overton,  1977).    measures  since the focus of this research is the  role and importance of the business plan  in the new venture process, only  businesses established during the past  ten years were included (62  respondents).  there were two primary  reasons why the research focused on  these respondents.  first, it is likely that  beyond ten years, it would be difficult  for respondents to provide valid and  reliable information about their business  plan process.  second, the direct impact  of the business plan on business  outcomes and business success will  likely diminish over time.  beyond ten  years, many additional factors play a role  in creating favorable or unfavorable  business outcomes.   each respondent was asked to provide  demographic and classification  information regarding themselves and  their business.  these variables included  the “age of the business”, the “scope of  their current operation”, and their  “industry type”.  regarding their  business planning process, each  respondent was asked to indicate  whether they “used a business plan to  launch their business”.   to evaluate the role of business plans in  launching and sustaining a successful  business, several “outcome” variables,  representing various facets of a  successful business, were measured.   since the size a business achieves is  often a surrogate for success,  respondents were asked both their firm’s  “last year total sales” and their “number  of full‐time employees”.  from the  perspective of the owner/operator,  success of the business is also a function  of how the venture personally affects  them.  to evaluate this dimension,  respondent owner/operators were asked  how they would describe their standard  of living today compared with their  journal of small business strategy        88  standard of living at the time they  started their business.  using a five‐point  likert‐type scale, respondents rated  their standard of living from “much  worse” (1), through “about the same” (3),  to “much improved” (5).  positive outcomes for small to medium  sized businesses can be evaluated from a  number of perspectives on various  dimensions.  to capture these multiple  viewpoints, again using a five‐point  likert‐type scale, respondents were  asked to indicate their level of  agreement with nine statements  representing aspects of business success.   items included: “successful in creating a  positive reputation”, “successful in  growing sales”, and “successful in  positioning the company for long term  prosperity”.  using factor analysis, three  underlying success dimensions ‐‐  “financial success”, “customer  satisfaction success” and “strong  company success” emerged from the  nine variables.  financial success is  measured with five items (alpha  reliability = .86), customer satisfaction  success is measured with two items  (alpha reliability = .87), and strong  company success is also measured with  two items (alpha reliability = .54).  additional outcome measures were  based upon self reports of how well the  company achieved goals.   owner/operators were asked to rate how  satisfied they were with their company’s  achievement of seven specific goals (e.g.,  market share growth).  these seven  items were also factor analyzed and two  underlying dimensions emerged as  measures.  the first goal‐related  dimension, “satisfactory returns”  consisted of four items (alpha reliability  = .90).  the second, “satisfactory  growth,” comprised three items (alpha  reliability = .68).   the final measure was a standardized  outcome measure, an adaptation of the  excell scale (“excellence”) based upon  the work of peters and waterman (1982).   the original sixteen attributes that  characterized excellent companies who  achieved a sustainable business were  adapted and operationalized by sharma,  netemeyer and mahajan (1990) who  created an excell scale in only eight  dimensions.  similarly our study used  the condensed adaptation to  accommodate the constraints of the  questionnaire and to encourage a higher  response rate.  the outcome/success  “excellence” measure had an alpha  reliability of .71.    findings  to investigate the role of the  environment a firm faces relative to the  use of business plans, three variables  were utilized:  age of the business,  scope of the business, and industry  type.  table 1 presents a cross tabulation  for businesses by age, scope and industry  type relative to whether they utilized a  business plan for start‐up.  as indicated,  there is a significant chi‐square  relationship between age of the business  and use of a business plan (p ≤.08).      volume 20, number 2 fall/winter 2009        89      table 1 ‐ description of the sample and comparison of business plan start‐ ups with non business plan start‐ups    *chi‐square significant at p ≤.08    the other competitive environment  variables related to business plan  utilization for start‐up, scope of the  business and industry type, were not  significant based upon the chi‐square  analysis.  hence, based on the analysis in  table 1, there is only partial support for  h1.  this suggests the use of a start‐up  business planning process is not based  upon the particular competitive  environment a new venture is preparing  to enter.  use of a business plan appears  to transcend the competitive  environment a firm faces relative to both  the scope of the business and the  industry within which they compete.   hypothesis h2 relates to the relationship  between the current size of the business  and whether the business used a formal  business plan for start‐up.  two  measures of size were investigated, sales  revenue and number of employees.   table 2 reports the sales revenue for  firms who utilized a business plan for  start‐up, and those who did not.  there  was no significant difference in sales of  the two groups.  similarly, as is indicated  journal of small business strategy        90  in table 2, there was no significant  difference in the size of firms who used a  business plan for start‐up and those who  did not.  thus the presence of business  plans at start‐up is not associated with  eventually either larger or smaller firms  and h2 is not supported.   table 2 ‐ comparison of business outcomes with business plan start‐up and  without business plan start‐up     business  plan  non‐business  plan  f  significance  sales  $3,649,614   $524,217   1.42  ns  number of  employees  9.91  8.08  0.09  ns  financial success  4.24  3.92  3.04  0.08  customer  satisfaction success  4.74  4.67  0.27  ns  strong company  success  3.71  3.13  5.29  0.03  satisfactory returns  3.56  3.13  3.32  0.07  satisfactory growth  3.48  3.21  1.49  ns  "excellence" measure  4.37  4.2  3.24  0.08  standard of living  3.85  3.5  2.74  0.10      the relationship between use of a  business plan and firm success was  investigated on three dimensions of  success:  financial success, customer  satisfaction success, and strong  company success.  the results for this  analysis are also presented in table 2.   there is a significant difference between  start‐ups who used a business plan and  firms with no business plan on financial  volume 20, number 2 fall/winter 2009        91    success (p≤.08) and strong company  success (p≤.03).  there is no significant  difference between business plan start‐ ups and companies without business  plans relative to customer satisfaction  success.  thus, h3 and h5 are supported,  but there is no support for h4.  perhaps  business plans are designed to consider  macro‐level issues such as the strength  of the idea, the financial feasibility, and  long‐run viability.  often customer  satisfaction success is a micro‐level issue  resulting from the day‐to‐day operation  and management of an organization.   the strategy and tactics used to attract  customer satisfaction success may be  beyond the scope of the initial business  plan but instead due more to the style of  the management, feedback during  operations, tactics employed, attention  to detail and continuous improvement.   regarding the achievement of goals as  an outcome, analysis results regarding  satisfactory financial returns and  satisfactory growth are also reported in  table 2.  as is indicated, firms with  business plans have returns which are  higher and significantly different than  firms without a start‐up business plan  (p≤.07).  regarding satisfactory growth,  however, there is no significant  difference.  therefore there is support  for h6 but not for h7.  the excellence measure was utilized to  investigate the relationship between  using business plans at start‐up and the  creation of a strong, sustainable  business.  as is indicated in table 2, the  excellence score for firms that used a  business plan at start‐up were higher  than for firms that did not use a business  plan.  this difference was also significant  (p≤.08).  thus, h8 is supported.  the fact  that excellence is linked to the use of a  business plan is encouraging from a  planning perspective and supports much  of the assertions in the literature.   excellence, however, may only consider  a limited set of decision areas relative to  the operation of the firm.  the business  plan process may not be able to  anticipate and focus on all the factors  that define a business as “excellent.”   future longitudinal case studies may be  able to track changes in the  subcomponents of the excellence  variable which are more closely related  to the initial business planning process.  the final hypotheses, h9 examined the  relationship between using a business  plan at start‐up and an improved  standard of living for the entrepreneur.   table 2 shows that when start‐ups use a  business plan, the future standard of  living for the entrepreneur is higher.   this difference is also statistically  significant (p≤.10).  for this reason, h9 is  supported.    discussion and implications  results of the study offer interesting  findings for both academicians and  practitioners and suggest several areas  for future research.  the data in this  study indicates that business plans have  been utilized more in recent years and  that older firms were less likely to use a  journal of small business strategy        92  plan at business start‐up.  this finding  may be confirmation that the textbooks,  courses and websites that commonly  recommend business plans for start‐up  ventures are having an impact on actual  practice.  apparently, the decision to  write a business plan at start‐up is not  related to the type of industry or the  scope of the proposed business  operations for the new venture.  the study also adds to the literature  supporting the link between writing a  business plan and the venture achieving  financial success, building a strong  company, and achieving financial return  goals.  this validates the current  pedagogical methodology of teaching  business plan preparation in collegiate  entrepreneurship and small business  classes, as there is value in the exercise  itself and the finished product is an  important resource for the start‐up  entrepreneur.    it is interesting to note that business  plans were not associated with achieving  greater company size, achievement of  growth goals, or more customer  satisfaction success.  this may indicate  that the primary benefit from a business  plan for creating new ventures is  creating a financially solid and  sustainable organization, but not  necessarily one that becomes  exceptionally large, achieves high  growth or above average customer  loyalty.  these outcomes are not  associated with business plan  preparation.  similarly differing  organizations are likely to have different  goals for their business and for their  business plan.  an effective business  plan supports the goals of the  organization, and perhaps firms with  varying strategic goals should be  identified in the data collection process  to better assess the organization’s  “definition” of positive outcomes,  whether it be a lifestyle business to  support a sole entrepreneur, a larger  scale family business, or the highest  performing multinational corporation.  the business plan process was also  associated with achievement of higher  excell scores.  the focus of this  measure is employee development  oriented and corporate culture oriented,  which provides further evidence that the  business plan is an initial step toward  building a strong sustainable  organization with a dedicated employee  base and an employee centered  corporate culture.    an important finding of this research is  the positive link between writing a  business plan at start‐up and creating a  business which ultimately provides a  higher standard of living for the  entrepreneur.  while we often discuss  the value of the business plan for the  business, it is important to personalize  outcomes to the business owner, as the  entrepreneur has to put the time and  effort into the preparation of the  business plan.  this provides further  encouragement for the entrepreneur to  invest the necessary time to craft a  business plan when launching a new  venture.  volume 20, number 2 fall/winter 2009        93    these findings support the link between  a business plan and the achievement of  positive outcomes for both the business  ventures and the entrepreneurs, thus  validating the worth of business plan  preparation to entrepreneurs and others  acting as consultants to small businesses  including the small business  administration (sba), the small  business development council (sbdc),  the service corps of retired executives  (score), and a host of other incubators  for new venture creation.  for  communities considering additional  investments in assistance for new  ventures, this study offers confirmatory  evidence of the value of business plan  preparation assistance.  for  entrepreneurs who do not really need a  business plan to obtain external funding,  the findings in this research point out  that the firm still benefits from  preparing a business plan to focus the  company and its strategies, markets, and  products or services.  in short, the study  validates the need for the business plan  document, and as a corollary, cautions  against skipping the preparation of the  business plan.    areas for future research  while this is exploratory research, the  findings point to interesting  relationships between the business plan  and resulting business and personal  outcomes.  further research should  utilize additional methodologies  including in‐depth interviews to identify  unique aspects of business plans which  have particularly strong linkages to  positive organization or entrepreneur  success, and raise new variables for  investigation.   interestingly, there was no support for  the link between a business plan and the  firm’s competitive environment, how  large the firm becomes over the decade  of study, meeting growth goals, or the  customer satisfaction with the venture’s  products or services.  in suggesting areas  for future research, exploring why these  factors are not relevant is a key area for  study.  additional research should also  compare companies of various sizes and  ages and on other key demographic  characteristics to determine if responses  change over time.  these relationships  and linkages should also be studied with  international entrepreneurs.  future research should consider the  “quality” of the business plan and how  this quality relates to outcomes for the  organization or entrepreneur.  more  research needs to specifically define  what is meant by a business plan (i.e.,  scope, depth, length) as well as the  actual characteristics of a business plan  that constitute “quality.”  future  research should attempt to define the  key criteria to evaluate a business plan  and develop measures to objectively  assess and compare quality on a number  of key issues.  we would anticipate that  the relationships identified in this study  linking positive outcomes of the  business plan for the business and the  entrepreneur would even be stronger  journal of small business strategy        94  when business plans are deemed to be of  higher quality.    most start‐up businesses would like to  attain customer satisfaction success as  part of their long‐run goals.  further  research should investigate the aspects  of the business planning process that  could be employed to ensure the  business would be operated in a way  that customer satisfaction success would  be a priority and an outcome.  this may  be an aspect of the marketing planning  section of the business plans that needs  further development.  similarly, further  investigation on the role of the  “excellence” measure as an outcome of  start‐up firms is needed.  it may be that  excellence better relates to more mature  firms, and the 10‐year study window  used in this research may not allow  enough time for excellence to be fully  developed.  however, it may be difficult  to fully evaluate this relationship as  firms that eventually achieve true  excellence may not be able to recall the  origins of the business plan or the actual  business planning process.  in more  mature firms, often the entrepreneur has  harvested the business and current  organizational leaders were not part of  the initial start up and the actual  business development process.  original  plans may not be available.   further exploration of the relationship  between preparing a business plan and  other variables related to the standard of  living of the entrepreneur should be  examined separate from an  improvement in the standard of living.   outcomes such as self‐actualization for  the entrepreneur may also be relevant.   additional research with a larger sample  size is also needed to confirm the results  of this study, particularly the  relationship between the use of a  business plan in start up and the age of  the business, its financial success, is  strong company success, and the  achievement of financial return goals.    references  allred, anthony t. and addams, h. lon  (2006).  after receiving financing, do  inc. 500 companies continue to utilize  their business plan? journal of small  business strategy.  17(1), 17‐26.   armstrong, j.s. and overton, t.s. (1977).   estimating nonresponse bias in mail  surveys.  journal of marketing research,  16(august), 396‐492.  bartlett, sarah (2002). “seat of their  pants,” inc. magazine, october.   accessed may 14, 2009 at  http://www.inc.com/magazine/20021015 /24772.html.  bowers, brent (2009) "in the hunt:   investors pay business plans little heed,  study finds," new york times, may 14,  small business, p. 1  delmar, frederic and shane, scott  (2003) “does business planning  facilitate the development of new  ventures?” strategic management  journal, 24, 1165‐1185.  volume 20, number 2 fall/winter 2009        95    fiet, james o. and patel, pankaj c.  (2006).   evaluating the wealth‐creating  potential of business plans. the journal  of private equity.  10(1), 18‐32.   fletcher, margaret and harris, simon.  (2002). sever aspects of strategy  formation,” international small business  journal, 20(3), 297‐314.  goldfarb, kirsch, and gera (2009) “form  or substance? the role of business plans  in   venture capital decision making,”  strategic management journal, may.  hand, h. w.; sineath, p. and howle, w.  e. (1987) “small business concepts and  their relationship to performance:  a  field study of retail service stations,”  journal of small business management,  25(2), 55‐63.  hannon, p. d. and atherton, a. (1998)  “small firm success and the art of  orienteering:  the value of plans,  planning, and strategic awareness in the  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venture planning on new venture  creation.  journal of small business  strategy. fall/winter, 18(2), 1‐21.  parks, bill; olson, philip d. and bokor,  donald w. (1991). “don’t mistake  business plans for planning (it may be  dangerous to your financial health),”  journal of small business strategy, 1(2),  15‐24.  perry, stephan c. (2001). the  relationship between written business  plans and the failure of small businesses  in the u.s., journal of small business  management, 39(3), 201‐208.  peters, t.j., and waterman, r.h. (1982).  in search of excellence:  lessons from  america’s best run companies, new  york, ny:  harper and row.  journal of small business strategy        96  sharma, s., netemeyer, r. g., and  mahajan, v. (1990). in search of  excellence revisited:  an empirical  evaluation of peters and waterman’s  attributes of excellence.  in w. o. b. a.  a. parasuraman (ed.), enhancing  knowledge development in marketing  (vol. 1, pp. 322‐328).     rue, l. w. and ibrahim, n. a. (1998) the  relationship between planning  sophistication and performance in small  businesses, journal of small business  management, 36(4), 24‐33.  sahlman, w. a. (1997) “how to write a  great business plan.” harvard business  review 75(4), 99‐110.  shane, s. and delmar, f. (2004)  “planning for the market:  business  planning before marketing and the  continuation of organizing efforts,”  journal of business venturing, 19, 767‐ 785.  singhvi, s. s. (2000).  business planning  practices in small size companies:  survey results.  the journal of business  forecasting methods & systems. 19(2), 3‐ 8.   struebing, l. (1997). recipe for success:  prepare a business plan.  quality  progress.  30(8), 20.  upton, n.; teal, e. j.; and felan, j. t.  (2001). strategic and business planning  practices of fast growth family firms.  journal of small business management,  29(1), 60‐72.    richard c. becherer holds the clarence  e. harris chair of excellence in business  and entrepreneurship at the university  of tennessee at chattanooga.  he has  had extensive experience both as an  academic and as an entrepreneur.  he  co‐founded one of the first for‐profit  health maintenance organizations in  the united states which became a public  company. he has been published in  numerous journals, including  entrepreneurship theory and practice,  journal of small business management,  journal of marketing, and decision  sciences.  he holds a doctorate degree  from the university of kentucky and was  a fulbright scholar in the czech  republic in 2008.  marilyn m. helms holds the  sesquicentennial chair and is a  professor of management at dalton  state college in dalton, ga. she teaches  strategic management, entrepreneurship  and quality management systems  classes.  she is the author of numerous  research studies published in journals  including the journal of business and  entrepreneurship, the international  journal of entrepreneurship and  innovation, the journal of small business  strategy, and the journal of  developmental entrepreneurship and  writes a monthly business column for  the dalton (ga) daily citizen  newspaper. she holds a doctorate degree  from the university of memphis  (tennessee) and was a fulbright scholar  at the university of coimbra, portugal in  2000.  reproduced with permission of the copyright owner. further reproduction prohibited without permission. sti&"ixi'f ': 'editor ii! stephen yv,,ozsborne indiana umvcrsity of pennsylvania (iup) associate editors prashanth nagcndra bharadwaj indiana university of pennsylvama (iup) 'joettc m. wisnieski " . indiana university of pennsylvama (iup) editorial assistant julia dobish indiana university of pennsylvania (iup) editorial review board ramachandra asundi university of puerto rico james bradley central washington university david brennan university of st thomas (st. paul) shawn m. carraher texas a & m university commerce radha chaganti rider university vwek choudhury floods state university j. douglas frazer millersville university 'errygaston southern oregon university joseph geiger university of idaho masoud hemmasi illinois state university kirk heriot francis marion umversity lynn holtman university of northern colorado lawrence klatt florida atlantic university krish knshnan indiana umversity of pennsylvania (iup) thomas j. liesz mesa state college stephen lucas university of north carolina-greensboro steven j. maranvillc university of st. thomas (houston) thaddeus mcewen north carolina a&t university abbas nadim university of new haven john e. prescott university of pittsburgh neal r. pruchansky keene state college james a. rodger indiana university of pennsylvania (i up) c. louise sellaro youngstown state umversity herbert sherman southhampton college of long island " leo simpson western kentucky university joseph singer university of missouri —kansas city matthew c. sonfield hofstra university pamela h. spccht university of nebraska at omaha harriet stephenson seattle university jude valdez umversity of texas, san antonio howard van auken iowa state umversity monica ztmmerman temple university the journal of saiall business strategy is a joint publication of the small business institute (formerly 'bida)and the eberly college of business and information technology, indiana university of, pennsylvania. send subscription request to stephen w. osborne, editor, journal of small business srraiegy, indiana university of pennsylvania, 304 eberly college of business and information technology, indiana, pa 15705-1071. annual subscriptions may be ordered at $20 each (u.s. dollars only). international subscriptions add $5 annually for postage and handling. back issues may be ordered at $ 12. @copyright 2003 small business institute issn 1081-8510 2003-2004 sbi officers small business institute president vice president —case competition ahbss nsdim steven marnnvifle university of ncw haven university of houston —downtown office: (203) 932-7122 oflice: (713) 221-8524 fax; (203) 931-g092 email: anadqocharger.newhavcn.edu president elect vice-president —marketing dr membership james bradley central washington universily phone: (20g) 439-1282 fax (206) 439-3809 fax: (717) 871-2464 email: bradleyqocwu.edu email: pat.mccaskey@miliersville.edu lmmedime past president sherrifl ih taylor texas woman's university olrice: (940) 898-2903 fax: (940) 898-2120 fax: (757) 594-7808 e-mail staylor(ntwu.cdu email: huneycuttncnu.edu vice president —programs vice president —administration joe bell j. douglas frazer university of northern colorado miflersvifle university phone: (970) 351-1230 fax: (970) 351-1097 fax: (717) 871-2464 email: joe.bellunco.edu email: dfrazer@marauder.millersv.cdu vice president of conference a rrangem en ra oernlyn mcclure franklin university of texas of the permian basin phone: (915)552-2170 fax: (915) 552-2174 email: franklin~@utpb.edu acting vice president -publications editor, journal ofsmall sexiness strategy kirk c. hcriot stephen w. osborne francis marion university indiana university of pennsylvania phone: (843) 661-1419 phone: (724) 357-5760 fax: (843) 661-1432"'""a'—'"'"' vice president -program quality assurance bruce kemelgor university of louisville visit our website at office: (502) 852a788 fax: (502) 852-7557 www.jrsbs.org e-mail:bhkemeo i@louisville.edu srmtegf editor stephen w. osborne indiana university of pennsylvania (iup) associate editors prashanth b. nagendra indiana university of pennsylvania (iup) joette m. wisnieski indiana university of pennsylvania (i up) editorial assistant julia dobish indiana university of pennsylvania (i up) book review editor radha chaganti rider university editorial review board ramachandra asundi university of puerto rico james bradley central washington university david brennan university of st. thomas (st. paul) shawn m. carraher texas a & m university commerce radha chaganu rider university vivek choudhury florida state university richard t. dailey university of montana dale dickson mesa state college terry gaston southern oregon university masoud hemmasi illinois state university lynn hoffman university of northern colorado lawrence klan florida atlantic university krish krishnan indiana university of pennsylvania (iup) thomas j. liesz mesa state college stephen lucas university of north carolina-greensboro steven j. maranville university of st. thomas (houston) thaddeus mcewen north carolina a&t university abbas nadim university of new haven john e. prescott university of pittsburgh neal r. pruchansky keene state college james a. rodger indiana university of pennsylvania (iup) c. louise sellaro youngstown state university herbert sherman southhampton college of long island leo simpson eastern washington university joseph singer university of missouri —kansas city matthew c. sonfield hofstra university pamela kl. specht university of nebraska at omaha i-larriet stephenson seattle university jude valdez university of texas, san antonio howard van auken iowa state university john b. wallace marshall university momca zimmerman temple university the journal of small business strategy is a joint publication of the small business institute directors'ssociation (sbida) and the eberly college of business and informauon technology, indiana university of pennsylvania. send subscription request to stephen w. osborne, editor, journal of small business strategy, indiana university of pennsylvania, 304 eberly college of business and information technology, indiana, pa 15705-1071. annual subscriptions may be ordered at $20 each (u.s. dollars only). international subscriptions add $ 5 annually for postage and handling. back issues may be ordered at $ 12. 4'opyright 2001 small business institute directors'ssociation issn 1081-8510 2001-2002 sbida officers i ~ small business institute directors'ssociation president vice-president btarketing di membership ruosevelt d. butler, ph.d. michael broida, ph.d. thc college of new jersey miami university of ohio oaic». (609) 771-2868 phone: (513)529-4841 fax: (609) 637-5129 fax: (513) 529-9689e-maih rbutlerrii tcn'duq )ed email: broidamsqamuohio.edu president-elect sherrin r. taylor, m.b.a., sphr vice president-development bruce kemelgor, ph.d.texas woman's university onice: (940) 898-2903 fax: (940) 898-2120 fax (502) 852-7557e-maih staylorpatwu.edu f.-maik bhkemcolpalouisviue.edu i'ice-president —programs acting i'ice president-administration j. douglas frazer, ph.d. university of new haven oitice: (203) 932-7122 fax: (203) 931-6092 email anadlncharger.newhaven.edu i'ice preiideni of conference arrangements gerab n hlcclure franklin, ph.d. university of texas of the permian basin nonh georgia college r state university phone: (915) 552-2170 phone: (706) 876-2723 fax: (915) 552-2174 fax: (706) 864-1668 email franklin~pautpb.edu email: kcheriotpangcsu.edu immediote post presideni lice presideni —pnblicoiions joseph j. geiger, mba, ed.d. gory l. aitchison, ph.d. university of idaho loiia stale university office: (208) 885-7154 oitice: (515) 294-8107 fax: (208) 885-8939 fax (515) 294-2534 e-maih joegqauidaho.edu ei-maik gaitchisqaiastate.edu eduor jonrnal ofsmall business strotegy i'ice presnlent-program (inattyy assnrance stephen w. osborne, ph.d. stephanie huneycutt, j.d., ll.hi. indiana university of pennsylvania christopher newpon university phone: (724) 357-5760 phone: (757) 594-7139 fax: (724) 357-5743 fax: (757) 594-7808 email: osbomepaiup.edu email: huneycutqacnu.edu l)ice president-case competition visit our website at jaines bradley, ph.d. central washington university www.jsbs. orgphone: (206) 439-1282 fax (206) 439-3809 email: biadleyqacwu edu the journal of small business strategy is an applied research journal. manuscripts should be written with the small business/entrepreneurship educator, small business consultant in mind. both conceptual and empirically-based papers are encouraged, but they must have an applied focus. all papers must have a significant literature review, be properly documented, with citations from research-based works rather than popular press or web sites. since jsbs is an applied research journal, each article should include a substantial “discussion and implications” section that details how the research findings are relevant for the journal’s readers. authors are discouraged from submitting manuscripts with extremely complex statistical analyses and/or a purely theoretical orientation. case studies are acceptable if they contribute substantial to the understanding of small business strategy and include a significantly to the understanding of small business strategy and include a significant literature review that underscores the issues in the case. we do not accept teaching or pedagogical cases. articles that have a significant strategy orientation are of particular interest. however, we do also publish articles that may address functional or operational issues. articles related to exporting or other international issues are acceptable. we have less interest in articles focusing on how small business compete in specific countries unless authors show that their results can be generalized to all small businesses. articles that have a public policy focus are generally not appropriate for the journal of small business strategy. journal of small business strategy 2019, vol. 29 no. 01 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2019 small business institute® http://www.smallbusinessinstitute.biz www.jsbs.org editors-in-chief dr. william c. mcdowell bradley university, united states dr. michael l. harris east carolina university, united states special issues editor dr. domingo ribeiro universitat de valència, spain senior editor dr. dianne h. b. welsh university of north carolina greensboro, united states managing editor dr. whitney o. peake western kentucky university, united states associate editor dr. steven t. walsh the university of new mexico, united states section editors dr. joshua r. aaron middle tennessee state university, united states dr. j. augusto felício universidade de lisboa, portugal dr. raj v. mahto the university of new mexico, united states dr. maria i. marshall purdue university, united states dr. juan piñeiro santiago de compostela university, spain editorial assistant cheryl a. peck journal of small business strategy editorial review board dr. joe r. bell university of arkansas at little rock dr. dolores botella universidad católica de valencia dr. shawn carraher university of texas at dallas dr. phillip e. davis texas state university dr. joseph geiger university of idaho dr. michael goldsby ball state university dr. david lyn hoffman metropolitan state college of denver dr. jeffrey hornsby university of missouri kansas city dr. jerry kudlats jacksonville university dr. cathleen (folker) leitch wilfrid laurier university dr. robert lussier springfield college dr. josé manuel guaita martínez valencian international university dr. matthew r. marvel ball state university dr. brian mckenzie california state university, east bay dr. abbas nadim university of new haven dr. john e. prescott university of pittsburgh dr. neal pruchansky keene state college dr. jeff shields university of north carolina at asheville dr. matthew c. sonfield hofstra university dr. jude valdez university of texas at san antonio http://www.smallbusinessinstitute.biz s~mr best paper award winner 2003 small business institute conference an investigation of the planning-performance conundrum in a dynamic macroentrepreneurial environment michael d. ensley rensselaer polytechnic institute enslem@rpi. edu james w. carland western carolina university carlantl@ivcu.edu joann c. carland western carolina university carlandfanvcu. edu abstract tt'hite it is intuitively appealing from a theoretical perspective to confirm the relationship between strategic planning and performance as measured by growth and profitability, ninny unknowns tend to confound tlie perfect model. the literature is rich with studies attempting to explicate the dynamics of planning and performance, yet there is no closure because of the vagaries of sample and methodology. this paper investigates tlie planning-performance conundrum m a dynamic macroentrepreneurial environment. the results of this study clearly show that for the present sample of inacroentrepreneurs, strategic planning had a deleterious effect on performance. this suggests that entrepreneurship researchers may need to reexamine some basic axioms and precepis. for example, perhaps entrepreneurs do employ a rapidly evolving vision to negotiate through dynamic environments rather than operate under the constraints of strategic planning. clearly, the firms in this sample were all highly successful ventures. further, they all practiced strategic management. ifstrategic planning did not contribute to that success, what did? the search for an explanation continues. introduction since its advent in the 1960s, a rich literature concerning strategic planning has emerged. miller and cardinal (1994) identified two primary purposes of the process: to promote adaptive thinking and to support managerial integration and control. in fact, the treatment of the process in the literature easily leads to a conclusion that strategic planning is the best, if not the only, vehicle for enhancing organizational performance. to support this conclusion, one need only read work on adaptive thinking (i.e., ansoff, 1991), and on planning for managerial integration and control (i.e., vancil & lorange, 1975; armstrong, 1982; grinyer, 1 journal of small business strategy vol. 14, no. 2 fa!i/winter 2003 al-bazzaz & yasai-ardekani, 1986), or review studies examining the strategic planning-firm performance link (i.e., armstrong, 1982; robinson & pearce, 1983; schrader, taylor & dalton, 1984; boyd, 1991; schwenk & schrader, 1993; miller & cardinal, 1994). whether planning actually enhances performance has been, and is still, the subject of debate. henry mintzberg (1994) has avowed that planning has "failed everywhere and everywhen " it has been implemented, thereby implying in a rather alliterative fashion that planning has failed at all times and in all places. historically, empirical research has not produced consistent findings with regard to a planning-performance linkage (c.f., pearce, freeman & robinson, 1987; mintzberg, 1991). reviews of the literature have also produced mixed results with researchers decrying methodological artifacts (hofer, 1976; armstrong, 1982; shrader, et al., 1984; robinson & pearce, 1984; pearce, et al., 1987; boyd, 1991;schwenk & shrader, 1993; miller & cardinal, 1994). miller and cardinal (1994) contend that they have resolved the issue with their meta-analysis, and they cite methodological complications as the source of inconsistencies in the literature. they conclude: "planning was found to be strongly and positively related to growth in studies in which industry effects were controlled, an informant source of performance data was used, planning was defined as not requiring written documentation and the quality of the assessment strategy was high" (miller & cardinal, 1994, p. 1660). obviously, there is a dual concern with their findings: the potential bias of an informant data source; and, the dubious nature of unwritten plans. we all know that one tends to perceive growth as a positive. therefore, an informant source might tend to report that the firm's growth was informally planned simply because of the appeal of an affirmative outcome. after all, if the growth was not planned, what drove it'! luck'! a meta-analysis is a method for examining previous studies, but it is not a mandate to discontinue a search for relationships nor a conclusive deterrent to future research, especially given the incongruent results across studies and the inconsistencies introduced through the vagaries of sample and methodology. clearly, the issue is far from resolved, and a rigorous, empirical study is required to demonstrate the planning-performance link. the literature is clear on one fact: the task environment is a major factor in planningperformance findings. miller and cardinal (1994) controlled for industry effects, since not surprisingly, the effects of industry variations are well established. earlier, dess, ireland and hitt (1990) found that most researchers have not used adequate controls for potential industry effects. this may be a much more serious problem with modern research due to the emergence of hypercompetitive conditions which clearly demonstrate that the planningperformance link is substantially influenced by firm context (d'aveni, 1994; ireland & hitt, 1999). the 21u century's economic landscape is replete with rapidly evolving technological development, changes in the institutional environment, more demanding consumers and competition which is more global in scope (d'aveni, 1994), and it will be turbulent, complex, challenging, and filled with competitive opportunities and threats (ireland & hitt, 1999). these conditions ciy out for an empirical study adequately addressing the environmental context. it is also clear that the relationship between planning and performance appears weak in small firms (boyd, 1991; schwenk & shrader, 1993), many of which simply do not plan at all (robinson & pearce, 1984). this is a particular problem in the literature as schwenk and schrader (1993) examined more than one hundred articles for evidence of the strategic planning-performance link in entrepreneurial firms and concluded that only fourteen studies possessed the necessary methodological rigor to be utilized in a meta-analysis. 2 journal of small business strategy vol. /4, ttto. 2 fall/5i 'nter 2003 in our view, a significant gap remains in the literature. if one controls for the task environment, uses an independent source of data, and works with small firms which plan and plan formally and rigorously, can it be demonstrated that planning positively influences performance? this manuscript describes what the authors consider to be a methodologically sound attempt to do just that. planning in entrepreneurial ventures entrepreneurial ventures are not miniaturized replicas of large firms. entrepreneurial firms have special features and needs, advantages and disadvantages. for example, entrepreneurial firms tend to be more specialized, focused on one product or product group, and more flexible: able and willing to change direction and strategy quickly. they tend to be guided by one person, the entrepreneur, who devises and executes strategy, or led by a small team of entrepreneurs. relative to large firms, they have limited resources including capital, people, materials and information. entrepreneurs have displayed a tendency not to plan (robinson & pearce, 1984), perhaps because a scarcity of resources can lead to a preoccupation with daily operational decisions. when they do plan, the effects of the planning activity can be mitigated by environmental turbulence and lack of managerial expertise, particularly early in the firm's development (schwenk & schrader, 1993). entrepreneurial ventures also have the potential for meteoric success and failure, a special aspect of entrepreneurial potential that complicates planning. in the words of richard d'aveni (1994), goliaths are brought down by davids. not only does this have far reaching implications for goliaths, but for davids as well, because davids slay each other far more frequently than they hurl their stones at giants. entrepreneurship is fundamentally about the recognition and pursuit of opportunity to realize a vision. the entrepreneur, or the new venture top management team, is the creator of this vision, and the entrepreneurial venture is the vehicle for its pursuit. in at least one view, the essence of entrepreneurship is the ability to see what is not there coupled with the drive to translate that vision into reality (carland, carland &. stewart, 1996). in the schumpeterian tradition, entrepreneurship is about creating a new order (schumpeter, 1934). on the other hand, traditional strategic planning is about gaining competitive advantage (porter, 1980). planning takes place in a paradigm, a set of assumptions about the realities of the world and how success is achievable, which is known and understood by the planners, although the outcomes of decisions are rarely certain. planners monitor the moves of close competitors and tend to make incremental adjustments (romanelli & tushman, 1994). conversely, entrepreneurship is about establishing a new paradigm that is unknown or poorly understood by any of the planners, including the originating entrepreneur. in this new paradigm, the choice of strategic initiatives is clouded by information voids and difficulties in deciphering the information that is available. more importantly, the new economic realities created by entrepreneurs redefine dynamic competition in ways that often render existing resource transformation relationships, decision making criteria, and strategies obsolete. the intersection of these factors makes the study of planning in entrepreneurial ventures extremely difficult. in fact, the almost complete lack of homogeneity among entrepreneurial firms and the differing perspectives of their interactions with their environments dictate a narrowing of focus. macroentrepreneurial ventures the tendency for entrepreneurs to avoid planning (robinson & pearce, 1984) has serious repercussions for a study of this type. further, the wide range of managerial expertise that 3 journal ofsmall business strategy vot. 14, ttto. 2 fall/winter 2003 exists among entrepreneurs is another challenging issue, because limited expertise is cited as one of the factors which can affect the planning-performance link (schwenk & schrader, 1993). to deal with these issues, the authors undertook a focus that allowed for the examination of a more narrow, and thus a more measurable field. carland and carland (1997) coined new terms and suggested that entrepreneurs occur in at least three different groupings which are vastly different in their approaches to business: microentrepreneurs, entrepreneurs, and macroentrepreneurs. their work was founded on writings spanning several decades that recognize that not all entrepreneurs are alike. over the years, many researchers have posited types of entrepreneurs (i.e., smith, 1967; decarlo & lyons, 1979; mescon & montanari, 1981; mcclelland, 1987; louis, blumenthal, gluck & stoto, 1989; gartner, mitchell & vesper, 1989), while others have proposed classifications of entrepreneurs (i.e., webster, 1977; dunkelberg & cooper, 1982; vesper, 1980, 1990), and carland (1982) actually suggested that entrepreneurship might be a continuum. the first category, microentrepreneurs, incorporates small firms that approach business from a traditional perspective, and whose owners have their primary interests outside the venture. these individuals cannot be expected to plan since their focus is upon the daily operations of the firm and because they have a narrow view of business realities. the second category, entrepreneurs, are engaged in the pursuit of wealth in their firms, and, therefore, may be involved in planning; however, these individuals are likely to change their focus and interest as they achieve some inner defined level of success. only the final group in the typology, macroentrepreneurs, can be expected to pursue their objectives relentlessly and continuously. these individuals are striving to create new paradigms and economic orders; to revolutionize business (carland & carland, 1997). given the need for at least some level of business success to support their lofty ambitions, and recognizing the focus on growth and industry domination, these authors believe that niacroentrepreneurs, as defined by carland and carland (1997), will have a higher level of managerial expertise and will conduct strategic planning in their ventures. further, these individuals are driving environmental turbulence, as they are the architects of paradigm shifts and new economic orders. at the same time, maeroentrepreneurs embody the classical entrepreneurial portrait that so many people paint in their minds: the business revolutionary who creates an industry or rises to dominate a market. from carnegie, to ford, to turner, to gates, these are the entrepreneurs whose stories become folklore. by limiting our study to macroentrepreneurs, we will ensure that we have selected the group which does plan and plans well, which does have significant managerial ability and expertise, and which does exist in an environment of turbulence and change. the environment for entrepreneurial ventures describing the environment in a suaiciently detailed manner as to permit its rigorous consideration in an empirical study is not simplistic, especially one as transient as that embracing entrepreneurial ventures. referencing an earlier comprehensive review of the literature, aldrich (1979) developed a scheme of six environmental dimensions, which dess and beard (1984) collapsed into three through a factor analysis. they are: 1) munificence, a measure of resource abundance and capacity to support growth; 2) dynamism, a measure of instability or volatility; and 3) complexity, the relative heterogeneity and concentration of environmental elements. keats and hitt (1988) utilized those three dimensions to describe a general systems model of the environment-organization interface leading to operating and market performance. sharfman and dean (1991)used essentially the same three dimensions as keats and hitt (1988), and dess and rasheed (1991)credited their work as encompassing a more theoretically correct set of environmental measures. 4 journal of small business strategy vol. 14, no. 2 fall/winter 2003 dynamism in the dess and beard (1984) study, instability in the keats and hitt (1988) study, and volatility in a study by dess and rasheed (1991) are essentially the same concepts as environmental dynamism in the sharfman and dean (1991)approach. other researchers have struggled with the dimensions of the environment, although most seem to be remarkably similar to the dess and beard (1984) conceptualization. for example, eisenhardt (1989) introduced the idea of high velocity environments, and, together with miller and friesen (1984), talked about environmental hostility. these appear to be the same concept, although eisenhardt (1989) fails to definitively describe a high velocity environment. she does argue that information technology is such an industry, as it is typified by growth-oriented firms that change fast, and that these firms are, in effect, high velocity firms. duncan (1972) does not refer to hostility, but he does examine competitive issues in his assessment of the environment. in the authors'iew, all of these concepts are analogous to the dess and beard (1984) idea of dynamism. based upon the literature and the special exigency of applying environmental measures to entrepreneurial firms, these authors conclude that the best operationalization of the dess and beard (1984) theory is sharfman and dean's (1991) conceptualization of dynamism, which reflects the rate of unpredictable change in the industry. the match is appropriate to the individuals under study as macroentrepreneurs pursue innovative behavior and produce new markets, services, products, and industries (carland & carland, 1997), thus driving the rate of change in an industry to new heights. strategic planning intensity in the traditional planning model of strategic management (steiner, 1969; andrews, 1980), after the determination of organizational mission, the formulation of effective strategy resides in identifying the threats and opportunities posed by the finn's operating environment, determining the firm's strengths and weaknesses, and then, using the information derived from this process, choosing a strategic alternative which produces alignment between the firm and its environment which in turn enhances firm performance. in theory, the key to the traditional planning model is the performance enhancing effect of fit between the environment and the strategy selected (c.f., venkatraman, 1989; venkatraman & prescott, 1990). at its core, this model embodies the concept of rational thinking and analysis, or at least, a procedurally rational process (dean & sharfinan, 1993). clearly, planning can run the gamut from a stylized, formality without real purpose, to a complete and detailed management activity map. consequently, examining a planningperformance link, even when performance is objectively measured, is problematic. the rational perspective is that the more skilled are the management personnel involved in planning, the more valuable the process will be. as mentioned above, by limiting the study to macroentrepreneurs operating successful firms, we ensure that we have selected a group with strong managerial skill, but the question must still remain as to the intensity of strategic planning in a given firm. the authors address this issue by introducing a measure of strategic planning intensity, described more fully below. the present study many authors have proposed linkages between environmental dimensions and organizational variables (i.e., burns & stalker, 1961; thompson, 1967; lawrence & lorsch, 1969; blau & schoenherr, 1971; hofer & schendel, 1978; pfeffer & salanick, 1978; andrews, 1980; grinyer & yasai-ardekani, 1981). the preceding studies and those empirical studies specific to new ventures such as those by sandberg (1986) and mcdougall, robinson, and dinisi 5 journal of small business strategy vol. 14, no. 2 fall/winter 2003 (1992) found that strategy-industry fit had a direct effect on new venture performance. further, sharfman and dean (1991) found that environmental dynamism had effects on the perceptions of managers and therefore on their planning activities. dean and sharfman (1993) found that task environment, competitive threat and perceived environmental uncertainty limit management's decision making abilities, and therefore, environmental variation altered the number of steps and level of formalization in the firm's strategic planning process. fredrickson and laquinto (1989) concluded that strategic planning processes should fit the organizational task environment in which the firm operates. they argue that strategic planning processes must be created with the speed and information requirements of their environments. boulton, lindsay, franklin and rue (1982) found that environmental characteristics can moderate planning activities and that planners in more hostile environments tend to use a more complete planning process. armstrong (1982) suggested that the strategic planningperformance link would be stronger in more hostile or turbulent environments, and boyd (1991) argued that the correlation between planning and performance would be stronger in organizations operating in hostile environments. boulton et al. (1982) posited that environment should moderate the strategic planning-performance link in the same way as boyd (1991). in our view, the literature supports the development of the following hypotheses regarding the planning-performance link and the environment in entrepreneurial firms: hypothesis one: the more intensive the practice of strategic planning in an entrepreneurial venture, the greater the performance gains, given that the performance is measured ojbeen'vely. hypothesis two: in more dynamic environments, entrepreneurial ventures will benefit mare strongly from intensive planning than will ventures in less dynamic environments, given that the environmentis mensured objectively. the remainder of this manuscript will describe our approach to testing these hypotheses. research methodology definitions macroentrepreneur like the mythical heffalump (kilby, 1971), there is no accepted definition or description of entrepreneur, despite decades of research in the field (carland, hoy, boulton & carland, 1984; bygrave, 1993). however, the entrepreneurial event involves much less controversy and is generally conceded to involve the creation of a business venture (gartner, 1990). the macroentrepreneur described by carland and carland (1997) does create a business venture, and will therefore conform to the gartner (1990) perspective. beyond that aspect, macroentrepreneurs produce new markets, services, products and industries. the definition which the authors employ in this study requires an individual, or a team of individuals, who own and manage a closely-held business venture which has actually produced new markets, services, products or industries, and which systematically engages in strategic planning. 6 journal ofsmall business strategy vol /4, no. 2 fall/winter 2003 planning the strategic planning process has been rigorously explored in the literature, and a normative strategic planning process has been described (hofer & schendel, 1978; ginter, rucks, & duncan, 1985), as well as procedures involving the existence of a strategic plan (bracker & pearson, 1986; kukalis, 1991),the formality of that plan (pearce, robbins, & robinson, 1987; shortell & zajac, 1990), an analysis of internal operations (miller, 1988; powell, 1992), an analysis of environmental trends (bracker & pearson, 1986; prescott & smith, 1989; boyd & fulk, 1996), and the evaluation of strategy (ginter et al., 1985; bracker & pearson, 1986; goold & quinn, 1990; kukalis, 1991). consequently, the authors define planning as a process which embodies analysis of a firm's internal operations, external trends and events, the identification of objectives, the development of a formal, written strategic plan, and the formal, periodic evaluation of that plan. planning intensity building on the foregoing definition, the authors define planning intensity as the strength of the top management team's commitment to the strategic planning process. that is, does the top management team actually practice all of the steps and procedures involved in the traditional planning model? performance the financial performance measures chosen for use in this study are sales, sales growth, and profits. these measures are based on several works (mcguire, schneeweis, & hill, 1986; keats & hitt, 1988; schaefer, kenny, & bost, 1990). sales are often used as a measure of performance for all firms (brush & vanderwerf, 1992), and we will employ the dollar value of sales during the most recent five-year period as the measure of sales in this study. in addition, sales growth is often cited as an objective of entrepreneurial firms (carland, et al., 1984; bygrave, 1993). consequently, we will employ the numerical rate of change in annual sales over the past five years as the measure of sales growth. finally, with regard to the last measure, profit, the researchers were concerned that profit may not be a meaningful measure of performance in entrepreneurial firms, given the growth objectives of most new ventures. a study by chandler and hanks (1993) found that the great majority of entrepreneurs have growth concerns that far outweigh their concerns about profitability. brush and vanderwerf (1992) found in a review of 34 empirical studies in entrepreneurship that employee and sales growth were the most common variables used. these studies support the use of growth as the critical measure of new venture performance. nevertheless, in keeping with the literature, we used a categorization of profits, as reported by an independent body, over the last five years, as the final measure of performance. our sources of performance data include audits from accountants that were used to develop the original inc. 500 list and dun and bradstreet's market identifiers database. survey data were avoided as performance indicators in an effort to lessen the effects of common method variance and to allow the respondents to concentrate on the strategic planning activities and dimensions. environmental change as noted by miller and cardinal (1994), many of the historic studies have not been sufficiently rigorous from a statistical perspective as to permit their use in a meta-analysis. one of the problems has been measuring environmental change. the authors propose to 7 journal of small business strategy va/. /4, na. 2 fa///winter 2003 utilize methodologies proposed by dess and beard (1984) and sharfman and dean (1991)to produce our measure of environmental dynamism. further, the authors will employ data sources independent of the questionnaire items to avoid respondent bias and to ensure that the measure can be replicated by other researchers, regardless of the participants in the study. the samples to operationalize our definition of macraenrrepreneurs, the authors required a sample of owner/managers of independently owned business ventures who had actually created new markets, services, products or industries. to find such a sample, we determined to employ entrepreneurs drawn from the inc. 500 list of the fastest growing small firms in the united states as compiled by inc. magazine. these firms are independently owned and operated, 'lthough some of them underwent initial public offerings shortly after appearing in the inc. 500 list. they are independently identified by the editors of inc. magazine, and their success in creating new products, services, markets or industries is evidenced by fantastic growth. in fact, the slowest growth firm among the 1994 inc. 500 posted a four year growth rate in sales of more than 500%, while the fastest growing firm showed a four year growth of more than 35,000% (conlin, connor, davilas, cheng, lackubiak & murphy, 1994). success in market penetration of that scale is tangible evidence of the macroentrepreneurial nature of the firm. such success also argues for the existence of strong managerial expertise, thus suggesting a greater facility for the practice of strategic management. the first sample for this project was 150 randomly selected chief executive officers and presidents of the 1994 inc. 500. member firms were selected from the itic. 500 list and then confirmed using the dun and bradstreet enhanced market identifiers file. ceos were chosen as potential respondents when possible. if no ceo was listed, the president of the firm was selected. the name of the president or chief executive officer was placed on a mailing list. a questionnaire containing the planning questions and demographic data was mailed to each ceo/president. both initial and follow-up mailings were completed. of the 150 potential participants, 120 responded for a response rate of 75 percent. all respondents were owner-managers and ceos, or company presidents. over 90 percent of these respondents identified themselves as founders, 93 percent indicated that they were owners of 10 percent or more of the equity of the firm, and 92.5 percent identified themselves as entrepreneurs. all respondents identified themselves as strategic decision makers. additionally, 88.3 percent of the respondents were male. while 81 percent of participating firms were owned by more than one person, only 2.5 percent were publicly traded (as a result of recent ipos). mean first year sales were $925,000 contrasted with a mean of $ 15.32 million in the most recent fiscal year. employment grew from a mean of 6.3 employees in year one to 152 in the most recent year. every firm had a formal, written plan, and systematically engaged in planning. in fact, the firms represented by the respondents reported that they develop or revise their strategic plans on average every 14.75 months. a second and larger sample of inc. 500 firms were collected from the 1999 list of the inc. 500 to verify the findings from the 1994 sample. this group included all firms that could be verified as currently operating at the time of the survey, which was in mid-2000, by checking the dun &. bradstreet market identifiers data base. all firms that were determined to have gone public were omitted from the sample. of the 437 firms that remained, 278 chief executive officers or company presidents returned their questionnaires for a response rate of 63.6 percent. as before, the potential for non-respondent bias was examined. t-tests on revenue, firm age, size, revenue growth rate, and profit level were conducted. all of these tests yielded non-significant results. 8 journal ofsmall business strategy vol. l 4, no. 2 fall/ivtnter 2003 of the members of the 1999 sample, approximately 93% were male and average age was 37.2 years. seventy-four percent were founders and 82% held at least 10% of the equity in their firms. ninety percent considered themselves to be entrepreneurs and only 34% had been involved in a new venture previously. during the previous 5 years, revenue growth for these firms ranged from 654% to 10,438% and averaged 1,607%. a total of 42 industries were represented and age of firm ranged from 5 to 9 years, with the average being 6.8. firm size in number of employees had a median of 49.5. the median revenue figure was $ 14,500,000. planning intensity to operationalize our definition of planning intensity, we developed an instrument incorporating the traditional elements of strategic planning. the instrument is displayed in appendix a. specifically, we included items to measure the existence of a formal strategic plan; the role of analysis of internal operations in the development of the plan; the role of analysis of environmental trends in the development of the plan; the process of developing objectives from the interaction of internal and external assessment; and, the existence of procedures to engage in periodic evaluation of the plan. the identification of existence of a formal, written plan is a dichotomous variable, while all of the remaining items were measured on five point likert scales. the instrument is scored by assigning values ranging from i to 5 to each of the likert responses, and then averaging the data. the result is a continuous variable representing the degree of intensity with which the respondent practices the formal strategic planning process. after the development of the final questionnaire, pretests were conducted on twenty inc. 500 chief executives and items that were not interpretable or confusing were eliminated (churchill, 1991). these ceos were eliminated as potential respondents in the major phase of the 1994 and 1999 studies. every respondent indicated that a formal strategic plan existed in the firm. had any indicated otherwise, those would have been eliminated from the data. a coefficient alpha was calculated for the instrument scores. as reported in appendix a, that statistic was 0.83 for the 1994 sample and 0.89 for the 1999 sample, demonstrating inter-item reliability (nunnally & bernstein, 1994). respondent reliability to investigate the potential existence of respondent bias, two groups of sixty (60) of the ceos, fifty percent (50%) of those who participated in the study, were randomly selected. surveys containing the instrument were mailed to the other members of the top management teams of those 60 firms. these individuals were identified from the dun & bradstreet market identifiers database. responses were received from other members of the teams in all 60 firms. responses of the team members were compared to those of the ceo to assess the reliability of the ceo's perception of the firm's strategic planning activities. we assessed agreement within each top management team on the intensity of strategic planning activities using the r,uat (james, demaree & wolf, 1984). in addition, we conducted a within group and between group anova on the planning scales. the r~at measures the correlation between the top management team members'erception of strategic planning with that of the ceo. the within and between anova measure the extent to which a team's responses are similar to those of their fellow team members, including the ceo, as opposed to non-team members. taken together, these statistics provide a researcher with a check on the perceptual consensus of the top management teams in each of these firms. the results of the tests suggested strong psychometric properties. the r„sw was 0.89 for the 1994 sample and .93 for the 1999 sample, showing a high correlation between team members' journal of small business strategy vol /4, no. 2 fall/winter 2003 perceptions of strategic planning intensity and those of the ceo. the f statistic resulting from the anova was 2.54 (p&.0/) for the 1994 sample and 3.07 (p&.0)) for the 1999 sample, and again demonstrated that top management team members, including the ceo, accurately perceived the state and intensity of strategic planning activities in their respective firms. environmental measure the researchers took care in developing the environmental measures to assure temporal integrity. specifically, the questionnaire responses of each sample were matched with dynamism data of the same time period. dynamism was measured as the standard errors of three regression slopes. in each case, the independent variable was time. the dependent variables were industry revenues, number of industry employees, and research and development intensity: y, = bit+ btir+ an y, = btt + bte + a, y, = bit + bird + a„i where y, = time; ir = total industry revenues; e = total number of employees in the industry; rd = research and development intensity; and, a = the residual in each regression. industry revenues and number of industry employees have been used as environmental measures in prior studies (i.e., dess & beard, 1984; keats & hitt, 1988; sharfman & dean, 1991). in our view, research and development intensity is a variable which captures the extent to which revenue dollars must be spent to keep up with technological evolution within an industry. we measured research and development intensity as the ratio of research and development expenditures to total sales. this is the same approach to measurement that has been used in previous studies (dess & beard, 1984; sharfman & dean, 1991). each of these variables was regressed with a dummy variable for at least seven years of data. while more data were available for some industries than others, the industries with the fewest years of data limited the number of years utilized in the calculations, hence the utilization of standard errors to avoid calculations with different numbers of years which might create comparability problems between industries. the years of 1985-1994 were used to calculate the employment standard error for the 1994 sample. the years of 1991-1999 was used to calculate the employment standard error for the 1999 sample. the years 1988-1995 were used to calculate the revenue standard error for the 1994 sample. the years 1991-1999were used to calculate the revenue standard error for the 1999 sample. the years of 1988-1996 were used to calculate the standard error of research and development intensity for the 1994 sample. the years 1991-1999 were used to calculate the standard error of research and development intensity for the 1999 sample. consistent with dess and beard (1984) and sharfman and dean (1991), the standard error of the regressions divided by the mean of the respective variable was used as the measure of instability: ml = se(y„)i mean(ir) nei = se(yd i mean(e) tl = se(y,s) i mean(rd) where ml = market instability; nei = number of employees instability; and, tl = technological instability; se = standard error of each of the three regressions for industry revenues, number of employees, and research and development intensity; and, mean = the mean of each of the three variables: industry revenues, employees, r&d intensity. 10 journal of small business strategy vol. /4, no. 2 fall/winter 2003 the authors then utilized sharfman and dean's (1991) method to produce our measure of environmental dynamism: dynamism = z(mi+nei) + z(ti) + io where ml is equal to market instability, ne/ is equal to number of employees instability, and tl is equal to technological instability. market instability and number of employees instability could be statistically related, so to eliminate multicollinearity concerns, the two variables were added. z scores were used to ensure that all measures were on the same metric. the constant was added to assure that the measures stay within the bounds of zero to positive infinity. data sources data for use in calculation of the environmental measure were collected from several u.s government publications and other archival sources. the government documents were the census of manufacturers (/992 d'i l997), annual survey of manufacturers (l987-2000), annual service survey (l988-2000), county business patterns (l983-2000), census of service industries (/995 & /997), census of wholesale trade (/992 & l997), census of retail trade (/992 di /997), census of construction (/992 & /997), annual wholesale and retail summary (l99/-2000), annual construction survey (/985-2000), census of transportation (l992 d'i l997), motor freight transportation and warehousing survey (/993 & /998), and the annual survey of communication industries (/994 d'i l998). the technological information was partially available from science and engineering indicators (1994-2000), a publication of the national science foundation. some of the data were used by special permission of the bureau of the census and the national science foundation. the four digit standard industrial classification level was utilized as the industry level. results of the study the first step in the study was an investigation of the correlations among the variables to be analyzed. table one displays the basic statistics for each variable, as well as the correlation matrix from the 1994 study, and table two presents the data from the 1999 study. table one correlation matrix for the 1994 sample std salesvariable mean dynamism planning d x p sales profit dev growth dynamism 0.03 0.86 1.00 strategic planning 3 84 i 09 0 03 i 00 intensity dynamism x planmng 0.10 0.96 '.32 e -0.44 1.00 sales 15,320 36,275 0.05 -0.01 0.02 1.00 profit 3.54 1.25 'e -0.19 0.05 v'0.14 0.10 1.00 2,340 3,619 0.07 0.10 "-0.19 '.47 -0.03 1.00 percentage v=p&oi v'=p&05 11 journal ofsmall business strategy vol. /4, na. 2 fall/winter 2003 table two correlation matrix for the 1999 sample std sales variable mean dynamism planning d x p sales profit dev growth dynamism 0.05 0.92 1.00 strategic planning 3 28 i 46 0 04 i 00 intensity dynamism x planning 0.16 1.18»0.41» -0.51 1.00 sales 11,567 22,744 0.07 -0.03 0.04 1.00 profit 3.17 1.18 »» -0.24 0.03 '» -0.17 0.09 1.00 1,608 2,517»» 0.16 0.08 '» -0.21 '.52 -0.05 1.00 percentage ' p&.0/; '» = p&.05 as the data in tables one and two indicate, combinations of the independent variables, dynamism, planning intensity, and the interaction of dynamism and planning, with the various dependent variables, sales, profit, and sales growth, should create no concerns of multicollinearity. consequently, the second stage of the study involved the application of multiple regression techniques to the data. specifically, we examined a model involving planning intensity, environmental dynamism, and the interaction of those two independent variables on performance as measured by sales growth. we repeated that examination using sales as the measure of performance, and repeated it yet again using profits as the measure of performance. the results for the two samples are displayed in tables three and four. table three multiple regression analysis of venture performance with dynamism as a moderator for the 1994 sample dependent variable log sales growth log sales profit environmental dynamism -0.09 0.04 '" -0.19 strategic planning intensity '" 0.19 -0.05 »» 0.23 planning x dynamism "-0.18 -0.05 -0.16 f-ratio »» 2.40 0.27 3 38 r 0.12 0.01 0.22 multivariate f-ratio on wilks'ambda = 2.05»» ' p&.0l; *' p&.05 as the tables indicate, the regressions produced insignificant results when sales were used as the measure of performance. however, the f ratios show that the models did produce significant results in both studies when sales growth or profits were used as measures of performance. in the 1994 sample, two of the three coefficients were significant for each of the two measures. in the 1999 study, all three coefficients were significant for each of the two measures. in both samples, the r suggested that only a small amount of variation in sales growth was explained by the model, however, the percentage was relatively greater when profits were used as the measure of performance. one should also note that dynamism and 12 journal of small business strategy vol. 14, no. 2 fall/winter 2003 the interaction of dynamism with planning intensity produced negative coefficients in both samples for both measures. table four multiple regression analysis of venture performance with dynamism as a moderator for the 1999sample dependent variable log sales growth log sales profit environmental dynamism 0 14 0.09 n* -0.22 strategic planning intensity "0.22 -0.11 "*0.26 planning x dynamism **-0.20 -0.06 '* -0.19 f-ratio nn 2.54 0.34 n 3.64 r 0.15 0.03 0.26 multivariate f-ratio on wilks'ambda = 2.21*n n p( 0l n i p( 05 nn ~ p( l0 to examine the results of the multiple regression more fully, we undertook the preparation of a graphical representation of the interaction following the technique described by cohen and cohen (1983). this technique is used to visualize the effects of the contextual interaction term on the dependent variable. we divided the results into high and low dynamism plots for both of the significant models. using the 1994 sample, figure i displays a graph of the effects of the interaction of planning intensity and environmental dynamism on sales growth, while figure 2 displays a graph of the effects of that interaction on profit performance. figures 3 and 4 display the same information using the 1999 sample. specifically, the graphs contrast the effect of planning intensity on sales growth and on profit for firms experiencing lower levels of environmental dynamism, and for firms experiencing higher levels of environmental dynamism. as the plot in figure 1 displays, strategic planning intensity was negatively associated with sales growth in high dynamism environments and virtually neutral in low dynamism environments. the plot in figure 2 suggests the same conditions, as do the plots in figures 3 and 4. specifically, strategic planning intensity was negatively associated with sales growth and with profits in high dynamism environments, and virtually neutral in low dynamism environments. these are startling findings and they suggest that a greater dedication to strategic planning did not improve performance in the sample firms. taken together, the findings of the study require us to reject both hypotheses. the entrepreneurial ventures in this study did not experience performance gains from greater strategic planning intensity, and planning intensity was not relatively more valuable in high dynamism environments. the results of the study do suggest that the effects of strategic planning on performance could be masked in a model that does not consider planning intensity and the effects of the environment. 13 journal af small business strategy vol. l4, ttto. 2 fall/winter 2003 figure i for the l 994 sample 0.8 0.4 low 0 o 0.0 dynamism ca -0.4 high -0.8 dynamism strategic planning intensity figure 2 for the l994 sample 0.8 0.4 high dynamism i.ow o 00 -0 4 dynamism -0.8 strategic planning intensity t figure 3 for the l999 sample 0.8 high $ 0.4 dynamism0 ln 0.0 low dynamism -0.8 strategic planning intensity 14 journal ofsmall business strategy vol /4, no. 2 falvwinter 2003 figure 4 for the 1999 sample 0.8 high dynamism 0.4 o 0,0 0 4 low dynamism -0.8 strategic planning intensity discussion perhaps the failure of the current attempt to validate the planning-performance link in an empirically rigorous fashion is rooted in the managerial investment required for formal strategic planning. that is, could a less intensive process, an informal, intuitive process, or the development of a simple vision be the best approach for a rapidly growing entrepreneurial venture? intuitively, establishing a shared vision in an entrepreneurial firm is more attainable. further, the investment in time required for a formal strategic planning process is more problematic as a result of more limited human resources. further, the rapid pace, both internally and externally, which the macroentrepreneurial firms in this study experience could well make any formal plan obsolete before its official approval could be established. this is especially true in the high dynamism environments. at any rate, these findings suggest that it is not only too early to close the door on planning-performance research, the field requires a variety of studies to fully explore the complexities of the various interactions. certainly, the sample limits the generalizability of this study to macroentrepreneurial ventures, many of which grow at spectacular rates and exist in high velocity environments. on the other hand, many of the attributes of this study were designed to eliminate methodological problems of the type that have plagued earlier investigations. first, the selection of a sample of inc. 500 firms, macroentrepreneurs as we have termed them, eliminates the problem with small firms who do not practice strategic planning. every firm in the sample did, in fact, engage in formal strategic planning activities and did possess a formal, written plan. secondly, the use of independent data to represent the performance measures of the subject firms eliminated respondent and surveyor bias and lessened the effects of common method variance, while it also allowed respondents to concentrate on the strategic planning questions to the exclusion of almost everything else. this may have driven the response rate to the exceptional levels present in both samples. finally, the data used in calculation of environmental dynamism were collected from u.s. government publications and other archival sources. again, this data was from independent sources and contained no respondent or surveyor bias. it permits replication by other researchers readily, and eliminates common method variance, while ensuring the most independent measures of environmental change which are available. 15 journal of small business strategy vol. /4, tto. 2 fal!iivinter 2003 despite our efforts to raise the level of methodological rigor in this study, problems do remain. chief among these are time and organizational context. a longitudinal methodology might have been more appropriate to permit investigation of the potential lag effect in the strategic planning process. such an approach would have been able to accommodate the delay in planning effects which some observers might suggest span months or years. on the other hand, the researchers did employ performance and environmental data drawn from a five-year period to try to make the cross sectional approach more robust, and we did utilize two separate samples drawn from two separate and non-overlapping time frames. as for organizational context, there is little question that such context could moderate the linkages between planning and performance, as well as the interaction of planning with environmental dynamism. in our opinion, the firms in this study shared more organizational similarities than differences. however, the statistical examination did not incorporate or address organizational factors. notwithstanding its weaknesses, this study did produce significant and important results. the fact that the findings failed to support the traditional, theoretical perspective of the planningperformance link is particularly important for entrepreneurship researchers. if these findings are supported and replicated by future studies, then there will be far reaching implications for entrepreneurs and for entrepreneurial practitioners. in the practical arena, entrepreneurs should be aware of the limitations of strategic planning when its interaction with the environment is considered. in the theoretical arena, researchers must consider whether regression analysis involving measures of planning and performance are underdefined when environmental effects are ignored. perhaps the most significant contribution of this study is the hint that some factor other than formal strategic planning is at work. as a result of the sample, we know the respondents were more skilled from a managerial perspective and that the firms they represented were among the most successful small firms in the united states. if we accept that methodological complications did not contribute to the findings, and these researchers are convinced that they did not, then some other strategic aspect must have been at play. the number of firms in the study, almost 400, suggests that luck could not be the common, driving factor in firm success. what was that factor? conclusion the results of this study clearly show that for the present sample of macroentrepreneurs, strategic planning intensity could not be shown to have a positive impact on performance, given a traditional approach to planning, and independent measures for performance and for environmental dynamism. as indicated above, the sample firms are among the most successful and the best managed entrepreneurial firms in the united states. clearly, there are strategic factors contributing to this success, and it is equally clear that those factors do not include formal strategic planning. should entrepreneurship researchers reexamine basic axioms and precepts? could it be that successful entrepreneurs and entrepreneurial teams utilize a rapidly evolving and changing vision to negotiate through dynamic environments? if so, the existence of the strategic plan may have its roots in the 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(1977). entrepreneurs and ventures: an attempt at classification and clarification, academy of management review, 2(1), 54-61. michael ensley is associate professor of entrepreneurship at rensselaer polytechnic institute. his doctorate is from mississippi state university and his research interests include entrepreneurial teams, strategy, performance and personality. jim carland is professor of entrepreneurship at western carolina university. his phd is from the university of georgia and his research interests include ennepreneurial strategy and personality. joann carland is professor of entrepreneurship at western carolina university. her phd is from the university of georgia, and her research interests revolve around tlie entrepreneurial psyche. 20 http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2019, vol. 29, no. 01, 55-70 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2019 small business institute® w w w. j s b s . o rg global competition between innovation-based companies is mounting. to succeed in world markets, companies in both developed and emerging markets must continually strengthen their capacity for innovation– broadly conceived as the creation and adoption of new technologies, processes, and business models. while the united states relies primarily on the private sector to drive innovation, many european countries have launched public sector programs (funded by national governments and the european union) to bolster the innovation-related capabilities of globally active companies. this article analyzes the results of one such program dedicated to strengthening the global competitiveness of startup companies headquartered in central and eastern europe (cee). launched in 2013, the polish silicon bridge is a partnership between the government of poland and the silicon valley acceleration center aimed at hastening the entry of high-potential polish startups in the united states and global markets. the polish silicon bridge is distinctive among programs designed to strengthen the global competitiveness of early stage emerging market companies. a number of emerging markets have created locally based incubators and accelerators to support domestic startups: e.g., egypt (mrkajic, 2017), kosovo (mulolli, islami, & skenderi, 2017), nigeria (iyortsuun, 2017), russia (rogova, 2014). other emerging markets have launched programs that enlist foreign-based startups to take up residencies in local incubators/accelerators (e.g., santiago-based start-up chile). by contrast, this article focuses on the experiences of emerging market startups embedded in a developed market economy with an established innovation ecosystem. in the case of silicon valley, the polish startups featured in our study were placed in a region renowned for its concentration of talent, technology, capital, global connections, and entrepreneurial energy. introduction david bartlett1, tomasz mroczkowski2 1american university, usa, dbartlett@american.edu 2american university, usa, mrocz@american.edu emerging market startups engage silicon valley: cases from central and eastern europe innovation, global startups, emerging markets, ecosystems, silicon valley, central and eastern europe this article examines the challenges and opportunities of innovation-driven growth in central and eastern europe. drawing on firm-level survey research, we analyze the experiences of early stage polish companies in silicon valley. we focus on the polish silicon bridge, an international bridge organization that differs from conventional business incubators and accelerators by embedding emerging market startup companies in foreign innovation hubs. we situate the analysis in the context of the “polish paradox”. while poland ranks as one of the european union’s fastest growing economies over the past two decades, it is one of the eu’s weakest performers measured by innovation. the silicon bridge program aims to expand poland’s innovation capacity by placing promising local startups in the world-class ecosystem of the san francisco bay area. our empirical study demonstrates that international bridge organizations generate significant benefits–knowledge acquisition, mentoring, networking with prospective investors and strategic partners–for young emerging market companies seeking to enter the global market. the article thus augments the scholarly literature on global innovation ecosystems, entrepreneurial internationalization, and emerging market startups. apa citation information: bartlett, d., mroczkowski, t. (2019). emerging market startups engage silicon valley: cases from central and eastern europe. journal of small business strategy, 29(1), 55-70. http://www.smallbusinessinstitute.biz http://www.jsbs.org 56 d. bartlett, & t. mroczkowski journal of small business strategy / vol. 29, no. 1 (2019) / 55-70 we examine the silicon valley experiences of 11 polish technology startups. through surveys and telephonic interviews, we evaluate the impact of the polish silicon bridge on the business development of participating firms. our investigation focuses on the following questions: • what benefits did polish startups derive from their participation in the silicon valley program? • how did the program influence the business strategies of participating companies? • to what degree and in what ways did the silicon valley program strengthen the innovation capacity of polish startups? • to what extent did the program prepare polish startups for entry into the united states and global markets? • what does the polish silicon bridge case suggest about the utility of international bridge organizations for accelerating global startups? drawing on the results of our empirical analysis, we propose a model to speed the integration of emerging market startups into global innovation ecosystems. in this way, our research provides guidance on how the best startup companies in the cee region and other emerging markets can become citizens of world-class hubs such as silicon valley. the article is organized as follows. we begin by explaining the rationale of our selection of poland, whose national economic trajectory (strong gdp growth performance but low innovation capacity) renders the country a suitable case for a study of international bridge organizations. we review recent scholarly work on the challenges and opportunities facing emerging market companies seeking to enter global markets. we then address the specific problem of innovation-led growth in central and eastern europe. we examine the role of international bridge organizations, noting the rising visibility of that organizational form in silicon valley. we proceed with our empirical analysis, reporting the results of our investigation of the experiences of polish startups in silicon valley. we discuss the lessons of the polish silicon bridge for enterprise development policies, international partnerships, and innovation building programs in the cee region. we conclude by identifying directions for future research on emerging market startups and global innovation ecosystems. the polish paradox poland presents an interesting paradox: measured by gdp growth and per capita income growth, poland has proven one of europe’s best performing economies over the past two decades. the country’s standing as europe’s growth champion of the 1990s-2000s reflects: (1) a sizable domestic market, which now ranks as the eu’s 6th biggest economy, (2) a highly diversified industrial sector populated by leading foreign multinationals, (3) a coastal outlet that confers a geographical advantage over the landlocked economies of the cee region, (4) an ample human resource base, including a large population of university-degreed, english-speaking young professionals, and (5) major international technology hubs in kraków, warsaw, wrocław and other cities. despite these assets, poland ranks as one of europe’s weakest economies measured by innovation. studies by the 2018 european commission place poland near the lesser-developed cee countries (bulgaria, romania) in firm-level innovation, r&d funding, and other innovation-related metrics. the polish paradox (strong macroeconomic performance combined with weak innovation capabilities) has spurred government officials to expand enterprise development programs such parp (polska agencja rozwoju przedsiębiorczości). a significant portion of poland’s current tranche (€86 billion) of eu structural and investment funds is earmarked for technology research, sme development, educational/vocational training, and other innovation-promoting activities. the international organization examined in this article (the polish silicon bridge) complements these nationaland eu-level programs, seeking to boost the global competitiveness of polish startup companies via placement in the world’s leading innovation ecosystem. the polish case underscores the competitive pressures on the emerging markets of central and eastern europe to accelerate the integration of local companies into global ecosystems. during the years leading up to its accession to the european union in 2004, poland undertook a broadly successful economic development strategy based on low labor costs and geographic proximity to the developed eu15 economies. that strategy enabled the country to attract significant volumes of efficiency-seeking foreign direct investment and to expand exports of automotive products and other manufactured goods. polish manufacturing companies became major subcontractors of leading multinationals from germany and other western countries. but amid rising factor costs and mounting competition from emerging markets outside europe, poland and other cee countries face growing pressure to migrate towards high value-added activities to spur innovation and global competitiveness. the polish silicon bridge program addressed in this article illustrates this new strategy. 57 d. bartlett, & t. mroczkowski journal of small business strategy / vol. 29, no. 1 (2019) / 55-70 emerging markets in the global economy the rapid ascent of emerging markets has spawned an extensive literature on emerging market-based firms in the world economy. this literature includes analyses of the rise of emerging market multinational corporations (fey, nayak, wu, & zhou, 2016; guillén & garcía-canal, 2012; van agtmael, 2007). these studies indicate that many emerging market multinational corporation (mncs) have already reached international standards of excellence in operations, particularly advanced manufacturing. but emerging market companies lag behind their developed market competitors in innovation, reflecting persistent institutional and cultural barriers to the creation and adoption of new technologies and business models. as operational performance metrics have converged, innovation capacity has become a key driver of the global competitiveness of emerging market companies (ramamurti, 2016). recent studies investigate how emerging market companies are striving to narrow the innovation gap. sivalogathasan and wu (2014) explore how the spillover of inbound foreign direct investment heightens the indigenous innovation capacity of emerging markets in south asia. misra, memili, welsh, and fang (2014) address the role of foreign direct investment (fdi) in promoting innovation at women-owned entrepreneurial firms in developing/emerging economies in latin america, middle east, and sub-saharan africa. wang, sutherland, and ning (2014) analyze the impact of international innovation networks in patent generation in emerging markets. pitchayadol, hoonsopon, chandrachai, and triukose (2018) examine the links between “familiness” (defined by family-specific culture and experience) and innovativeness in family-owned smes in thailand. ernst, kahle, dubiel, prabu, and subramanian (2015) and winterhalter, zeschky, neumann, and gassmann (2017) investigate the use of frugal innovation by local and foreign companies to tailor products and services for resource-constrained customers in fast-growing emerging markets. subramaniam, ernst, & dubiel (2014) address the growing incidence of reverse innovation, whereby emerging market companies (exploiting cost advantages and technology leapfrogging opportunities) become first movers in innovative products that are then exported to advanced developed markets. paulose and nair (2015) and naqshbandi and kamel (2017) analyze the expanding role of open innovation in emerging markets, whereby emerging market firms (following the precedent of many leading western companies) look outside their organizational boundaries for innovative ideas, processes, and technologies. innovation in central and eastern europe the challenge of innovation confronting emerging market firms worldwide strongly resonates in central and eastern europe, now populated by post-transition economies whose factor cost advantages are dissipating. as cee-based companies exhaust their potential for efficiency-led growth, they face a mounting imperative to strengthen their capabilities in innovation to compete in demanding global markets. the case of the czech republic well illustrates the problems of innovation-led growth in central and eastern europe. with its historical roots as the most developed economy in the region (dating from early industrialization in bohemia and moravia), its robust manufacturing industries (automotive, chemicals, armaments, glass, optics, etc.), and its recent reclassification as a high-income economy, the czech republic would appear to be a strong candidate as the regional innovation leader. indeed, these attributes have prompted some commentators to characterize the country as a low-cost version of germany. however, in many respects the czech republic shares a closer affinity with the other post-transition economies in the cee region than with advanced developed countries like germany. ministr and pitner (2015) identify the factors impeding the development of the information and communications technology (ict) sector in the czech republic: insufficient private sector funding of research and development; fragmentation of higher education and research institutions that disperse innovation efforts; educational and research structures that stifle entrepreneurial initiatives; brain drain of talented scholars and researchers amid a globalized academic job market; low levels of academic-industrial collaboration. other studies indicate that czech companies have achieved limited success expanding their global positions. musteen, datta, and francis (2014) identify the liabilities confronting czech companies seeking to globalize: origin, smallness, foreignness, newness. zapletalová (2015) finds that czech firms scaling out of their small domestic market tend to stay within geographical sub-regions and cultural clusters in the cee area, illustrating limited financial resources and thin knowledge of foreign markets. innovation-led global growth has proven even more elusive for poland. as shown in table 1 below, a recent european commission 2018 report ranks poland 25th among the eu-28 countries in overall innovation capacity. table 2 summarizes the results of the commission’s examination of the drivers of innovation in the eu. poland performs strongly in certain innovation metrics: opportunity-driven entrepreneurship; employment in fast-growing innovative sectors; enterprise births. but the country places near the bottom of the eu-28 in key measures of innovation: smes with product/process innovations; collaboration between innovative smes; private-public funding of r&d; international scientific co-publications; foreign doctoral 58 d. bartlett, & t. mroczkowski journal of small business strategy / vol. 29, no. 1 (2019) / 55-70 students. a detailed report by the world bank (piatkowski, 2016) cites the following factors hindering poland’s progress in innovation: deficient private financing; low public sector support; limited access to new markets; short supply of skilled r&d personnel; weak managerial skills; insufficient networking; high levels of risk aversion; psychological barriers of company managers focused on short-term results. the report notes that poland is particularly weak in product and process innovation, with just 8 percent of manufacturing companies introducing product/process innovations compared with 14% in the czech republic and 22% in germany. in their analysis of the polish paradox, world bank economists consider the possibility that poland belongs to a small group of european economies (ireland, spain, slovak republic) that can grow without extensive investments in r&d and other innovation-promoting activities. however, they conclude that poland enjoys substantial scope for productivity gains and that improvements in the country’s innovation capacity would yield a significant gdp growth premium. to that end, the world bank proposes an innovation framework for poland organized around the concept of “smart specialization”, which emphasizes the prioritization of public funding to support high-value technologies, fields, and company populations. the smart specialization model includes: (1) “smart labs” comprising selected young enterprises and experienced business/technology experts who form working groups focused on specific economic areas, and (2) “innovation maps” to cull critical information on company applications for r&d funding to help public agencies target projects with high innovation potential. our empirical study addresses the potential contributions of an alternative approach to innovation in central and eastern europe: the embedding of cee startup enterprises in established foreign-based innovation ecosystems to speed the entry of participating companies in highly competitive global markets. we focus on the experiences of polish companies in international bridge organizations, which we treat as global business development vehicles that are related but table 1 innovation in the european union county rankings: summary index* (overall performance relative to eu average, 2017). 59 d. bartlett, & t. mroczkowski journal of small business strategy / vol. 29, no. 1 (2019) / 55-70 ket infrastructures, weak legal/regulatory systems, and thin financial markets (dutt, hawn, vidal, chatterji, mcgahan, & mitchell, 2016). the research presented in this article focuses on another type of business development organization that offers substantial promise for emerging market-based companies seeking to build global capabilities. international bridge organizations promote transnational partnerships between governmental institutions, non-governmental agencies, universities/research institutions, and private sector agents to spur global commerce and technology innovation. these partnerships serve both to advance the international growth strategies of locally based companies and to facilitate the distinct from conventional incubators and accelerators. international bridge organizations there is extensive literature on the role of business accelerators and business incubators in speeding the development of startup companies (e.g., albort-morant & oghazi, 2016; barrehag, fornell, larsson, mårdström, westergård, & wrackefeldt, 2012; bøllingtoft, 2012; bruneel, ratinho, clarysee, & groen, 2012; cohen, 2013; pauwels, clarysse, wright, & van hove, 2016). for globally minded startups in emerging markets, accelerators/incubators help fill the “institutional voids” of home economies with inchoate martable 2 innovation in the european union country rankings: selected sub-indices (rank in eu-28, 2017). sub-indices eu leader poland rank sub-indices eu leader poland rank human resources denmark 22 linkages belgium 26 life long learning sweden 24 collaboration between innovative smes belgium 25 new doctoral graduates slovenia 28 private/public co-funding of r & d germany 27 attractive research systems denmark 26 intellectual assets malta 17 international scientific co-publications denmark 26 trademark applications cyprus 21 foreign doctoral students luxembourg 27 pct patent applications sweden 23 innovation-friendly environment denmark 26 employment impacts ireland 15 opportunity-driven entrepreneurship denmark 8 employment in fast-growing enterprises in innovative sectors hungary 8 broadband penetration denmark 19 employment in knowledge-intensive sectors luxembourg 25 finance & support france 24 sales impacts ireland 22 venture capital luxembourg 22 knowledge-intensive service exports ireland 22 public r & d expenditures sweden 23 sales of new innovative products uk 22 firm investments finland 24 governance & policy framework netherlands 21 business r & d expenditures sweden 23 government procurement of advanced technology luxembourg 18 enterprises providing ict training austria 24 rule of law finland 21 innovators ireland 27 performance & structure of economy smes with product/process innovations belgium 26 enterprise births uk 10 smes innovating in-house ireland 27 share of knowledge-intensive industry luxembourg 22 60 d. bartlett, & t. mroczkowski journal of small business strategy / vol. 29, no. 1 (2019) / 55-70 local market entry of foreign-based companies (pietrasienski & bitka, 2015). for globally oriented, early stage emerging market companies, international bridge organizations represent an attractive alternative to conventional accelerators and incubators: • hastening the internationalization of emerging market startups via embedding in the established ecosystems of advanced industrialized countries • circumventing the institutional void problem of emerging markets by integrating high-potential local startups into developed market-based technology hubs • enlarging the financing domain of emerging market startups through links with angel investors, venture capitalists, and strategic investors in developed economies • boosting exports of products and services through ties with foreign customers, distributors, and channel partners • strengthening the global competitiveness of technology-centric emerging market companies through engagement in open innovation programs with developed market-based partners international bridge organizations in silicon valley the fulcrum of the international bridge phenomenon is silicon valley, whose standing as the leading global innovation hub renders the san francisco bay area a highly attractive destination for early stage foreign technology companies pursuing international growth. the 2017 report of startup genome/global entrepreneurship network (startup genome, 2017) ranks silicon valley first among global ecosystems, followed by new york, london, beijing, and boston. silicon valley ranks first in four components of that survey (performance, funding, market reach, and startup experience) and second to singapore in the fifth component (talent). the economic value of ecosystems is concentrated in these “superstar” cities along with other innovation/ technology hubs such as tel aviv, berlin, paris, stockholm, vancouver, and sydney. as the world’s foremost enterprise ecosystem, silicon valley hosts nearly 18,000 active startups, whose business development efforts benefit from proximity to major multinational technology companies (apple, cisco, ebay, google, hewlett-packard intel, oracle, etc.), leading venture capital firms (accel partners, kleiner perkins caufield, et al), and world-class research universities (stanford, uc berkeley). silicon valley captures 28% of global investments in early stage companies, generates nearly one-third of the exit value of startups globally, and hosts one-fourth of the world’s unicorns (startups valued at more than $1 billion). the area boasts the world’s highest share of companies founded by immigrants (46%), illustrating silicon valley’s allure for talented foreign-born entrepreneurs and the region’s high rate of success of immigrants applying for visas, long-term residencies, and united states citizenship. silicon valley startups employ the world’s highest percentage of engineers with prior startup experience, bolstering the region’s capacity to develop and commercialize advanced technologies (gauthier, 2017). silicon valley thus demonstrates the potency of global ecosystems for the following: technology driven, globally oriented startup companies: concentration of talent, both home-grown and foreign-born; access to seed funding; availability of exit vehicles; clustering of customers, suppliers, and investors; robust economic and physical infrastructure; strong governmental support; large installed multinational base; premier universities and research institutions; high global connectedness; and presence of experienced business mentors with a “pay it forward” mentality. for european-based startups, silicon valley offers the locational advantages of deep economic, commercial, and political connections with europe. while europe ranks behind asia-pacific and nafta for silicon valley exports, it is the world’s largest foreign investor in the san francisco bay area. led by the uk, germany, switzerland, and france, european firms operate more than 1,000 subsidiaries in the region. technology represents the largest share of european fdi reaching silicon valley, demonstrating the area’s gravitational pull for foreign companies active in ict, life sciences, and advanced r&d. the region hosts some 170,000 european-born residents, including a sizable number of stem (science, technology, engineering, mathematics) professionals employed at local companies. there is also extensive outbound trade and investment from the bay area to europe, including substantial foreign direct investment, venture capital, and private equity investments by silicon valley-based firms (berger & brem, 2016). augmenting europe’s business presence in the bay area, the region hosts the third largest european diplomatic community in the us (following washington and new york) supported by an array of binational business organizations, public-private partnerships, and sister city arrangements. (randolph & grose, 2014). empirical study: polish startups in silicon valley an earlier article reports the results of our investigation of the czech accelerator, an initiative of czechinvest (part of the ministry of industry and trade in prague) that places selected czech startups in foreign accelerators in the united states, united kingdom, singapore, and israel (mroczkow61 d. bartlett, & t. mroczkowski journal of small business strategy / vol. 29, no. 1 (2019) / 55-70 ski, assudani, muñoz-fernández, & khilji, 2017). building on the czech survey, here we report the findings of our analysis of the experiences of polish startup companies in silicon valley. polish silicon bridge the polish silicon bridge is an initiative of the polish ministry of economy, financed by the european regional development fund under the aegis of the innovative economy part of the eu’s national cohesion strategy. the program is administered by parp in warsaw in collaboration with the trade and investment section of the polish embassy in washington and the silicon valley acceleration center (svac) in san francisco. similar to the czech accelerator, this bridge organization provides high-potential polish startups with training and advisory services, mentoring by experienced business leaders, networking with technology developers, and introductions to prospective investors and strategic partners. via immersion in the global innovation hub of the san francisco bay area, the program aims to speed the entry of polish companies into the united states and international markets and to facilitate the transfer of knowledge from silicon valley to poland (pietrasienski, 2013). our polish study focused on the silicon valley experiences of 11 out of 34 companies that were hosted by silicon valley acceleration center in 2015. our polish sample included polish-based developers of mobile technologies, digital marketing, social media, web applications, and wastewater treatment systems. method our investigation comprised computer-assisted surveys consisting of questions with likert scales to gauge company participants’ assessment of the impact of these programs, and follow-up telephonic interviews that allowed polish managers to elaborate on their experiences in silicon valley. through these surveys and interviews, we evaluated the contribution of the polish silicon bridge in the following areas: • knowledge acquisition (markets, competition, financing, intellectual property, distribution, etc.) • formation of business and technology partnerships between polish startups and host country participants • development of international networks to support the global expansion of polish participants • securing of seed funding, venture capital, and other investments • realization of increased global sales survey results to preserve the confidentiality of our survey respondents, we use pseudonyms to identify participants in the polish silicon bridge, indicated in table 3: knowledge acquisition the results of our survey of polish startups on knowledge acquisition are reported in table 4: on the likert scale (1-5, 1 = high and 5 = low), our polish respondents indicated a medium level of overall knowledge acquisition (2.66). among the eight components of this survey question, the polish startups reported the highest levels of knowledge acquisition in the following areas: • markets: average score of 1.82 • financing: average score of 2.27 • competition: average score of 2.27 our polish respondents indicated the lowest levels of knowledge acquisition in these areas: • intellectual property: average score of 3.00 • team: average score of 3.00 • suppliers: average score of 3.27 distribution (2.73) and technology (2.91) occupy intermediate positions in the knowledge acquisition survey. the table 3 participants in polish silicon bridge pseudonyms & activities of polish firms embedded in silicon valley firm pseudonym firm activity ms web development ye digital marketing es mobile technologies web development aq wastewater treatment cs mobile applications for skin care ql digital solutions gog social media vaz digital technologies management systems ho social media ng unknown evo unknown 62 d. bartlett, & t. mroczkowski journal of small business strategy / vol. 29, no. 1 (2019) / 55-70 high rankings of knowledge acquisition related to markets, financing, and competition demonstrate the value of embedding polish startups in the global business milieu of silicon valley, where managers of participating companies interact with leading multinational companies, locally based smes and entrepreneurs, angel investors, and venture capitalists. the comparatively weak results of intellectual property and technology in the knowledge acquisition survey are surprising insofar as one of the presumed virtues of international bridge programs like the polish silicon bridge is exposure of foreign startups to world-class technology companies and leading research universities. our polish sample included four startups situated in ict (web development, digital marketing/social media, mobile technologies, digital solutions) while a fifth enterprise is a developer of a next generation wastewater treatment system. our telephonic follow-up interviews indicated that these polish startups gained less value from immersion in advanced technologies (where the companies were already operating on the leading edge) than from learning about the american market and united states business practices. impact of experience the next question in the survey asked respondents to gauge the business impact of their international bridge experiences. the results are shown in table 5. similar to the knowledge acquisition question, our respondents registered a medium score (2.53) on the overall impact of their experience in the polish silicon bridge. the polish group reported the stronger values on the sales/productivity growth (2.00) and revenue growth (2.09) parts of the business impact survey. this result reflects the profile of the companies in the polish sample, which was weighted towards young, growth-oriented technology companies. starting of new initiatives (2.64) and generation of new ideas (2.73) registered intermediate scores on the business impact survey. securing of angel/vc funding yielded the weakest result (3.18), with a notable divergence between a polish cohort reporting the highest score (“very descriptive”) and one reporting the lowest score (“not descriptive at all”). our telephonic follow-ups suggested that the latter companies had unrealistic expectations regarding funding opportunities for polish startups in silicon valley, where seasoned local entrepreneurs compete fiercely for venture capital and angel investment. value of programs augmenting the likert scale numerical survey, we invited the polish startups to respond to an open-ended question about the value of their international experience in silicon valley (table 6): echoing these survey responses, participants in our table 4 survey of participants in polish silicon bridge knowledge acquisition question: on a likert scale of 1-5 (where 1 = tremendously and 5 = not at all), how deeply has the experience with the international bridge program changed your understanding and knowledge of successful company startup management (including such aspects as technology, markets, financing, competition)? area 1 = high 2 3 4 5 = not at all technology ms ve, es, aq, ql evo, gog ng, vaz, ho cs markets ms, ye, aq, vaz, ho es, ql, gog, ng evo cs financing ms, ye ql, gog, ng, vaz, ho, aq es, evo cs competition ms, aq, vaz ye, es, ql, ho evo, gog cs, ng intellectual property ms aq, ql, ho evo,vaz es, gog, ng cs team ms,aq ql, ho ye, evo, ng es, gog cs, vaz suppliers ms aq, ql ye, evo, ng es, gog, ho cs, vaz distribution ms ye, aq, ql, ng es, evo, ho cs, gog, vaz 63 d. bartlett, & t. mroczkowski journal of small business strategy / vol. 29, no. 1 (2019) / 55-70 telephonic interviews emphasized the following contributions of the polish silicon bridge: immersion in the global business ecosystem; generation of business contacts and referrals; cultivation of personal connections; expansion of professional networks; exchanges with united states entrepreneurs; gaining knowledge through mentors; exposure to american business culture; generation of feedback on products; cross-fertilization of ideas and approaches; and accelerating united states market entry. foremost challenges we asked our polish respondents to describe the business challenges facing them after their return from silicon table 5 survey of participants in polish silicon bridge impact of experience question: as a result of your experience from the polish silicon bridge program, how would you rate the following statements on a likert scale of 1-5 (where 1 = very descriptive and 5 = not at all descriptive)? • owing to the experience with the polish silicon bridge, my firm will start new initiatives • owing to the experience with the polish silicon bridge, my firm will generate new ideas • owing to the experience with the polish silicon bridge, my firm will secure angel or venture capital funding • owing to the experience with the polish silicon bridge, my firm will start to see revenue growth • owing to the experience with the polish silicon bridge, my firm will start sales or productivity growth area 1 = very descriptive 2 3 4 5 = not descriptive at all new initiatives gog, vaz, aq es, ng ye, evo, ql, ho ms, cs new ideas aq ye, ql, ho es, evo, cs, gog, ng, vaz ms secured venture funding cs, ql, ho, aq ye, vaz es, evo, gog, ng, ms revenue growth ms, ql, ho ye, evo, aq, cs, vaz es, ng gog sales/productivity growth ms, ql, ho, aq ye, evo, cs, gog es, ng vaz table 6 survey of participants in polish silicon bridge value of program question: what was the most valuable experience for you during this program? pseudonym most valuable experience ye “to meet the american way of thinking.” es “meetings with local entrepreneurs.” aq “to meet many companies/startups and people and sharing ideas. huge feedback about our products.” cs “networking.” ql “contacts.” gog “gaining knowledge on how startups communicate with the whole ecosystem.” ng “most you can learn from other entrepreneurs.” vaz “gaining knowledge from mentors as well as through self-organized meetings.” ho understanding the usa market and obtaining knowledge about what i have to do to succeed here.” evo “learning the system.” ms “jesper wind” [founder of edge business advisory, accelerator in san francisco] 64 d. bartlett, & t. mroczkowski journal of small business strategy / vol. 29, no. 1 (2019) / 55-70 valley (table 7): the most commonly cited challenge was generating funding and attracting investors. elaborating on that theme, one of the polish firms (a digital technology provider with a strong commercial portfolio and a sophisticated management team) stressed the risks of undue concentration on revenue generation to support its strategy of self-funding, which threatened to divert attention from product innovation and invited preemption of new ideas by competitors. planned changes we asked our polish respondents to identify the particular actions they intended to take following their return from silicon valley (table 8) our telephonic follow-ups provided additional information on how the polish silicon bridge influenced the forward business plans of program participants. respondents stressed adaptations to the united states market, drawing table 8 survey of participants in polish silicon bridge planned changes question: describe the most important changes you are planning to implement inside your company resulting from your experience with the polish silicon bridge program pseudonym planned changes pseudonym planned changes aq • future planning ms • triple sales • strengthen leadership • marketing strategy cs • go to market strategy • prototyping • traction results ng • more experiment with our product sales• closer focus on our customer segments es • narrowing strategic focus • hiring sales person • content marketing ql • sales strategy gog • converting existing products into startups • changing company’s offer vaz • change in communication with clients-reworking marketing strategy • changing of approach-reach big companies first to get feedback • focus on getting big brands through shadow it or direct contact • speed development cycle and focus more on rapid deployments • considering vc funding instead of self-funding ho • stronger concentration on sales • start real sales in usa • change the information we send to the market about our product • change the way i express myself when speaking about what we do • change the order of implementation of new features in our platform ve • defining core value proposition • market segmentation • refining business model • improving communication with customers • marketing strategy table 7 survey of participants in polish silicon bridge foremost challenges question: what in your opinion would be the most important challenges you could encounter upon returning to poland in terms of implementing new knowledge gained (ideas and solutions) during the polish silicon bridge program? pseudonym most valuable experience cs concentration on team es financing gog funding of new ventures ho generating sales in the usa and finding investors to scale the business ng financing ql ego of polish investors vaz focusing on revenue activities instead of product, increasing the risk that someone will implement our idea faster ye making our business model transparent and compelling to investors 65 d. bartlett, & t. mroczkowski journal of small business strategy / vol. 29, no. 1 (2019) / 55-70 on their observations in silicon valley on how companies communicate with american customers. they also cited refinements of their approaches to global product development, noting the relative shortage of such business skills in poland. recommendations to colleagues we asked the survey participants whether they would recommend the polish silicon bridge to colleagues. the responses were highly laudatory of the program (table 9): our respondents signaled strong interest in other programs administered by parp, whose portfolio includes table 9 survey of participants in polish silicon bridge recommendations to colleagues question: based on your experience, how would you describe the polish silicon bridge program to your colleagues? pseudonym description of program aq “big possibilities.” cs “great thing to start up your startup experience.” es “great experience.” evo “good.” gog “the program helps polish companies gain knowledge about the us market.” ho ”polish silicon bridge is the perfect program which will drive you from living and making business in poland to getting into usa, making your first sales here and findings investors in usa and making your business global.” ms “rocket launch to the us reality.” ng “nice boost to think about your business.” ql “easy way to get into the us.” vaz “a great program to gain knowledge on launching a product in us, giving most advantages if your product already has traction in poland.” ye “world quality program.” innovation, internationalization, and sme development. the favorable reaction to the polish silicon bridge also strengthened the case for the integration of international bridge programs in poland’s broader “strategy for responsible development”, launched in 2016 by minister of finance (and now prime minister) mateusz morawiecki to promote sustainable, inclusive, and knowledge-centric economic growth. favored united states innovation centers the final question in the polish survey prompted respondents to rate the attractiveness of particular united states cities/regions as global innovation hubs (table 10): the ranking of new york city and san francisco as “most important” echoed the findings of the global surveys cited earlier in the article identifying those locales as the world’s foremost business ecosystems. the high placements of chicago (a major international business hub and host of a large polish american community) and boston (a leader in ict and biomedical technology) aligned with the broader pattern of polish companies entering the united states. the lower placements of san diego, atlanta, miami, and seattle indicate that those cities lack high concentrations of business development resources prioritized by this particular collection of polish startups. the intermediate united states cities on this list possess specific assets of interest to these polish companies: austin (a rising player in ict), reno/tahoe (a region with close ties to the polish government and geographic proximity to the san francisco bay area), and washington, d.c. (an area that combines federal/regulatory/diplomatic organizations and significant ict and biomedical clusters). discussion this article augments the extant literature on emerging market startups by examining the contributions of international bridge organizations (a distinctive type of business development agency) to the growth strategies of early stage companies in central and eastern europe. the polish cases analyzed in the article (along with our previous work on the czech accelerator) strengthen the the66 d. bartlett, & t. mroczkowski journal of small business strategy / vol. 29, no. 1 (2019) / 55-70 oretical framework for scholarly research on emerging market startups and global innovation ecosystems. our study of the silicon valley experiences of cee-based startups provides the foundation for a distinctive model of the international bridging process, indicating particular concepts and sequences to explain the relative effectiveness of alternative strategies of new enterprise development. efficacy of incubators and accelerators business incubators, business accelerators, and hybrid incubators/accelerators have proliferated over the past decade. by 2018, over 3,000 such organizations were active worldwide covering both developed markets and emerging markets. however, empirical research indicates that these organizations have generated little measurable impact on the business outcomes of startup companies. only a handful of elite global accelerators (e.g., silicon valley-based y combinators and boulder, colorado-based techstars) have produced statistically significant effects on the acceleration trajectories of portfolio companies (hallen, bingham, & cohen, 2014; van weele, van rijnsoever, & nauta, 2017; yin & luo, 2018). drawing on a large study of startup firms in italy, lukeš, longo, and zouhar (2018) find that incubators may actually have a negative effect on the sales revenue of incubatees. in these cases, the “safe harbors” of business incubators pamper resident startups, shielding them from market competition and leaving them unprepared upon graduation. conventional incubators/accelerators deliver a number of intangible benefits that are not fully captured by financial performance metrics (e.g., expansion of international networks; cross-fertilization of ideas and experiences; exposure to leading innovative technologies and business models). but the middling results of the global proliferation of accelerators/incubators underscore the need for alternative business development models better suited to the needs of startup companies with global growth aspirations. promise of the international bridge model the international bridge organizations addressed in this article complement conventional incubators/accelerators. the particular design of the polish silicon bridge (immersion of cee technology startups in a world-class table 10 survey of participants in polish silicon bridge favored us innovation centers question: on a likert scale of 1-5 (where 1 = most important and 5 = not important) please indicate which us innovation centers you would consider most important for future international bridge programs. pseudonym 1 = most important 2 3 4 5 = not important aq austin, chicago, san francisco, washington atlanta, boston, reno/tahoe, san diego, seattle miami es new york, san francisco boston austin, chicago, seattle, washington san diego atlanta, miami, reno/tahoe evo atlanta, san francisco reno/tahoe, san diego austin, boston, chicago, miami, seattle, washington gog new york, san francisco chicago, miami atlanta, austin, boston, reno/ tahoe, san diego, seattle, washington ho chicago, new york, san francisco reno/tahoe boston, miami, washington seattle atlanta, austin, san diego ms austin, boston, new york, reno/tahoe ng chicago, new york, san francisco boston, san diego, washington atlanta, miami austin, seattle ql boston, new york, san francisco austin, chicago, washington miami, san diego, seattle reno/tahoe atlanta vaz new york, san francisco austin, chicago atlanta, boston, miami, reno/ tahoe, san diego, washington, seattle 67 d. bartlett, & t. mroczkowski journal of small business strategy / vol. 29, no. 1 (2019) / 55-70 foreign ecosystem) affords participating companies greater opportunities for rapid globalization than locally based incubators/accelerators. by forging transnational partnerships between private and public actors, international bridges provide financial support to promising startup firms that may be unable to raise seed funding through traditional investor channels. international bridge organizations also serve as a transitional vehicle for high-potential startups that are not ready for entry into premier accelerators. the application of exacting selection criteria, rigorous residential programs, and systematic follow-up with graduating firms (discussed below) would elude the safe harbor problem that afflicts many incubators/accelerators and heighten the effectiveness of international bridges. conclusions for emerging market companies, international bridge organizations offer a different value proposition than conventional business incubators and business accelerators. through immersion in developed market-based ecosystems like silicon valley, bridge organizations afford emerging market-based startups direct exposure to world-class technology companies, seasoned entrepreneurs, angel investors, and venture capitalists that hasten integration of those firms into global markets. the international bridge organizations also circumvent the institutional void problem of emerging markets, whose structural liabilities (thin capital markets, shortage of experienced mentors, weak industry-university links, low public sector capacity) hinder the growth strategies of high-potential startup firms. embedding in dynamic, globally connected, risk-tolerant milieus like silicon valley and new york also helps such companies surmount local cultural barriers to international business development. the international bridge organization assessed in this article (the polish silicon bridge) is especially promising to startup companies in central and eastern europe, which by virtue of region-specific assets are uniquely well positioned for integration into global ecosystems. eastward enlargement aligned the former socialist countries with the financial/legal/regulatory norms of the european union, rendering the new accession states of the cee region comparatively safe locations for technology-intensive, ip-sensitive foreign direct investment. eu enlargement also stimulated high volumes of manufacturing-related fdi, creating a large installed base of leading western multinationals and integrating cee companies into regional/global value chains. furthermore, eu accession gave the cee countries access to the european union’s structural and investment funds, whose early tranches hastened modernization of regional infrastructure and whose current tranche prioritizes technology, innovation, and human resource development. these regional assets clearly benefit cee-based, technology-driven startup companies that aspire to quick expansion in global markets. the cee region further benefits from an impressive endowment of university-degreed, english-speaking young professionals, a number of whom gained valuable experience with american and west european multinationals before launching their own enterprises. this factor heightens the probability of success of cee-based entrepreneurs in developed market ecosystems like silicon valley, facilitating participants’ adoption of innovative technologies and business models and easing their cultural integration into foreign business communities. our investigation of the international bridge experiences of polish startups illuminates the particular challenges and opportunities facing early stage cee companies. the startups that participated in the polish silicon bridge are representative of a new generation of cee companies, and include technology based, globally oriented young enterprises poised to leverage their international experiences for innovation-driven growth. our research indicates that polish companies reaped substantial benefits from their experiences in silicon valley and other foreign ecosystems, notably expansion of transnational networks critical for united states and global market entry. but our study also demonstrates the limitations of the international bridge model. while immersion in intensive, fixed-term programs like the polish silicon bridge can deliver short-term benefits to participating companies, their long-term success depends on sustained implementation of lessons learned during the foreign ecosystem experiences. to that end, polish authorities should consider refinements of their international bridge models, including: • more aggressive promotion of international bridge programs with local companies to enlarge the size and improve the quality of the applicant pool • more rigorous selection criteria to enlist local startups exhibiting the most talented management, most promising technologies, and greatest prospects for success in the international bridge • systematic tracking of the business progress of graduating companies (e.g., angel/venture capital received; foreign strategic partnerships formed; revenue growth achieved; new technologies/business models/practices adopted; new products and services commercialized) • reconnecting participating companies and their foreign hosts to strengthen the personal/professional connections forged in the international bridge, through funded return 68 d. bartlett, & t. mroczkowski journal of small business strategy / vol. 29, no. 1 (2019) / 55-70 trips by local participants to the foreign host and/or visits by foreign partners to the home country • sponsorship of international exhibitions to showcase the achievements of local participants in the bridge programs as an advanced post-transition country that has largely exhausted its scope for efficiency-led growth, poland faces increasing pressure to pursue innovation-led economic development strategies. the rapid integration of promising local startups in global innovation ecosystems is a key component of that strategy. however, realization of such a goal hinges on the creation of a critical mass of startup companies, small and medium enterprises, and emerging multinationals capable of integration into global innovation ecosystems. the pilot international bridge program examined in this article constitutes a first step towards that objective. future research the findings reported in this article draw on a small sample of recent participants in the polish silicon bridge, indicating directions for future research on the integration of emerging market startups in global innovation ecosystems. a future research agenda may include the following: • longitudinal analyses to track the progression of individual emerging market companies from launch to commercialization to global entry • firm-specific case studies to observe emerging market startups engaged in business incubators, business accelerators, and international bridge organizations • comparative studies of startups, incubators, accelerators, and bridge organizations in different emerging and developed market countries • mapping of global innovation ecosystems to trace the transnational commercial activities of emerging market-based and developed market companies in those hubs acknowledgements the authors would like to acknowledge the following individuals for their contributions to this article. professor pawel pietrasienski of the warsaw school of economics facilitated access to the polish startup firms that participated in our survey research. professors erran carmel and gwanhoo lee of the kogod school of business, american university provided helpful feedback on an earlier draft of the article. patryk czerwony served as research assistant for the project, effectively interfacing with our polish survey participants. we also acknowledge the valuable comments and suggestions of anonymous reviewers of the draft paper we presented at the 8th conference of the global innovation and knowledge academy (gika) in valencia, spain in june 2018. references albort-morant, g., & oghazi, p. 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(2015). models of czech companies’ internationalization. journal of international entrepreneurship, 13(2), 153-168. stk4 tegy smali. business brief quality field case consulting: new program possibilities ronald g. cook rider university cookrqarider. edu introduction in the last issue, michael ames and paul hugstad described the field case consulting model required in california state university (csu) fullerton's capstone mba course. as noted, they use the small business institute (sbi) model for this course. the csu program has completed over 850 sbi projects in the last 20 years and has consistently ranked high in national competitions. the obvious success of the csu program is to be commended. but what can you do if you don't have a large, well-established sbi program? can a newer program compete successfully in these field case competitions? can a school run a successful small sbi program? based on my experience, the answer is yes. the rider program is one example. it is small and focused. it only works with a few firms each year and is selective in which students are accepted into the program. this focused approach has produced high quality cases for small businesses, as evidenced by three top ten finishes in the sbida national undergraduate competition in the last three years and one undergraduate national champion. the sbi program at rider was started in 1994 at the undergraduate level, and recently expanded to the graduate level. program guidelines for new (or existing) programs that want to provide a high quality field case consulting experience and will remain small, i offer a few suggestions for undergraduate programs: i. be student selective. offer the sbi program to a selected student population through a permission-of-instructor procedure. require students to have taken a pre-requisite course so you have some idea of their capabilities, and have a basis for selecting participants. 105 journal ofsmall business siraieg v vol. i i, no.2 fa/i/ivinrer 2000 2. offer the sbi program as an elective course. this follows recommendation one in that you can not be selective in choosing students if this is a required course. further, having the sbi program as a separate course also allows the professor to count it towards their teaching load. 3. be selective with the client pool. we do not use size criteria in this process. rather, we ensure that the clients are established firms or organizations (been in business for two or more years) that are what we call "ready, willing and able." ready means that the ceo/owner and any key personnel are available to meet with the students. they are not traveling on business or otherwise out of touch. this availability is critical in a project that will have to be finished in a semester. ivilling is the ability of the firm to share all relevant information with a student team. the ability of the students to do an effective job will be hindered if a firm refuses to share its data. able means that a firm recognizes that the rider sbi program operates on an academic calendar and that a student team may not be available when a client approaches the university. firms must be able to wait if students are not available when a firm makes its request. 4. gain commitment from your school to run a small program. at rider, the sbi director recruits companies, selects students, provides the infrastructure and teaches the sbi class. in this system, one must be a jack-of-all-trades. despite the amount of work this entails, it can be easier to operate in this mode because you do have a measure of control over all program elements. however, in order to be able to do that, one must limit the number of cases supervised. therefore, you need the support of your school in order to teach a small class, perhaps smaller than you would otherwise have in your normal teaching load. 5. make extensive use of technology. students use e-mail to communicate with the professor, and web-based sorware (blackboard) to communicate in virtual chats, exchange files, and manage their project teams. examples of past projects are available on line, and research assistance is provided through our library. rider's sbi also has its own web site (www. rider.edu/sbi), which has links to other online research resources. 6. program funding the program is supported by donations from the client firms and by local corporate sponsors. the voluntary support has worked well in our circumstance and clients almost always make a donation. our web site also allows sponsors to gain additional publicity, above and beyond the usual recognition on brochures and reports. charging a fee is also a viable option for programs, although in our case, we have never done so. 106 journal of small business strategv vol. i i, ivo.2 faillgtinter 2000 7. consulting is about managing ambiguity. the consulting process can be somewhat unsettling, as many issues do not have a clearcut solution. help manage that ambiguity with a solid course design. web-based soiiware, an on-line library of examples and a detailed syllabus are provided to the students. in addition, one-on-one meetings between the student teams and professor occur regularly throughout the semester, focusing on potential issues and problem areas. conclusion i agree with the ames and hugstad ten keys to success points, as noted in the last issue, with some modifications for smaller programs. what i have tried to do here is otter additional guidelines that may make sense for schools and faculty that either start or choose to run a focused, selective program, at the undergrad level. at the graduate level, the main difference is that we eliminate the permission-of-instructor procedure. in our limited experience, this has not caused us any difficulties. finally, i believe one can offer a quality sbi program regardless of the school's size. programs can be tailored to suit the needs of the local community, and the resources and desires of the school and faculty. as the director of an award-winning sbi program, i can testify firsthand what the benefits are to being a national finalist and a national champion, as well as the goodwill that has been established in our community from our outreach activities. if you are not running an sbi program, please give it a try. i think you will find the benefits outstanding. (for further information on starting a small business institute™program, go to www. sbida.org) dr. ronald g. cook is an associate professor of small businessjentrepreneurship at the college of business, rider university, and ihe director of rider's small business institute™. his student consuliing prjoects (small business institute™program) have won naiional titles, and he has extensive consulting experience with small firms. his current research interests are on business plans, and micro-enterprise training. l07 http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2021, vol. 31, no. 02, 53-61 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2021 small business institute® w w w. j s b s . o rg introduction facultad de economía y negocios, universidad del desarrollo, ainavillo 456, concepción, chile, maribanezc@udd.cl inter-firm marketing collaboration in family businesses: the role of risk aversion marketing collaboration, family firms, risk aversion, strategic decisions apa citation information: ibáñez, m. j. (2021). inter-firm marketing collaboration in family businesses: the role of risk aversion. journal of small business strategy, 31(2), 53-61. family businesses have distinctive characteristics that are reflected in their decision-making process. there is considerable empirical evidence that family businesses display a high degree of risk aversion (fama & jensen, 1983; gonzález et al., 2013). some authors have challenged this premise by showing that these firms are willing to take high levels of risk if their socio-emotional wealth is threatened (berrone et al., 2012; llanos-contreras et al., 2021). this contradiction opens discussion about the conditions under which family businesses behave in a risky manner and when they act conservatively. the literature on attitudes toward risk has been widely developed in the field of family businesses (llanos-contreras et al., 2021), mainly regarding economic and financial decisions (anderson et al., 2012; gonzález et al., 2013). however, attitudes toward non-financial decisions (i.e., inter-organizational collaboration) have received limited attention. inter-organizational collaboration in family businesses was studied in the product development context, without exploring other organizational capabilities, including marketing skills. inter-organizational collaborations involve two levels of risk (van der krogt et al., 2007). the first relates to the considerable risk of deciding to engage in a collaborative relationship with another firm (costello, 2013; eeckhoudt et al., 2005; lo & hung, 2017; williamson, 1985). the second type is related to the permanence of the firm in the partnership. while the firm remains in a collaborative relationship, it can reduce the risk of its strategic activities (cainelli et al., 2012). since the literature does not explore the implications of risk on collaboration in family businesses’ strategic activities, it is imperative to expand knowledge of attitudes toward risk in non-financial decisions. this study examines the relationship between the degree of risk aversion of family businesses and the probability that these businesses will establish collaborative relationships with other firms in marketing strategies. this study focuses on the first type of risk faced at the time the family business decides to engage in a collaborative relationship. additionally, once the family business chooses to collaborate with others in marketing activities, it becomes possible family businesses show low participation in inter-organizational collaborations. inter-firm collaborations are activities in which companies seek to access resources and develop capabilities that they cannot achieve on their own. while there is empirical evidence that family businesses show a high level of risk aversion, some studies have shown the opposite. further, research on this topic has focused mainly on economic and financial decisions, but few studies explore family business attitudes toward risk in non-financial decisions, such as marketing collaborations. using a bivariate probit model in a sample of 1,118 chilean family firms, we analyzed the extent to which the degree of risk aversion influences the probability of family firms participating in marketing collaborations with other firms and on the probability of cooperating with firms with which the family firm has had previous business experience. we found that although most conservative family firms are reluctant to take risks when entering a collaborative relationship, they are willing to take risks when engaging with partners with whom they have not had a previous relationship. the findings expand on research regarding family businesses’ attitudes toward risk, relative to strategic non-financial decisions, and the theoretical development of their collaborative marketing visions. maría j. ibáñez http://www.smallbusinessinstitute.biz http://www.jsbs.org 54 m. j. ibáñez journal of small business strategy / vol. 31, no. 2 (2021) / 53-61 to explore the influence of their attitude toward risk in the decision to collaborate with known companies. a discrete choice analysis was carried out on a sample of 1,118 chilean family businesses of varying sizes and sectors. considering that a family business simultaneously chooses to engage in a collaborative relationship with the partner with whom this collaboration will be undertaken, the study used a bivariate probit model (mcfadden, 1984; van de ven & van praag, 1981). this study shows that the most conservative family businesses are reluctant to take risks when choosing to enter a collaborative relationship. yet, they are willing to take risks when engaging with partners with whom they have not had a previous relationship. the findings in this study contribute to the development of models of choice under conditions of uncertainty for different family business strategies. furthermore, it extends the field of analysis of the attitude toward risk of family businesses to non-financial decisions and the theoretical development of the relational vision of marketing collaboration in family businesses. in section 2, the article presents the development of two hypotheses based on the literature review. section 3 presents the structure of the data, definition of the variables, and specification of the model. section 4 details the empirical results of each model. these findings are discussed in section 5, and conclusions from the results are presented. section 6 mentions the limitations of the study and proposes future research directions. theoretical framework attitude toward risk is a central element in an agent’s decision-making (fellner & maciejovsky, 2007). the choices that managers make signals that their attitude toward risk is imprinted in the strategic orientation of the firm (eeckhoudt et al., 2005; kahneman & tversky, 1979; wolf & floyd, 2013). risk comes from the lack of certainty regarding the consequences of a decision, which gives rise to a series of beliefs related to the likelihood of each possible outcome (savage, 1954). for family and non-family businesses, risk is the probability of loss associated with a decision that prevents the firm’s objectives from being met (daniell & mccullough, 2013). there is evidence that family businesses show a high level of risk aversion when making decisions that affect family wealth (fama & jensen, 1983; gonzález et al., 2013). a distinctive feature of family businesses is that they not only seek to preserve financial wealth but also social-emotional wealth (gonzalez et al., 2017). although business owners may feel dissatisfied if business performance falls below a certain level (mahto et al., 2010), dynastic succession, perpetuating family identity, and ensuring control of the business in the future are elements that shape these enterprises’ long-term orientation (burk & alan, 2007; chrisman & patel, 2012). the family’s objective of retaining control of the company represents a strong incentive to make investments that allow them to project themselves into the future (anderson et al., 2012; ibrahim et al., 2001), which implies taking risks of varying magnitude. there is no consensus in the literature regarding the willingness of family businesses to take risks. for example, visser and van scheers (2018) point out that in first-generation family businesses, risk-taking is a motivator, while second-generation businesses prefer to avoid risky scenarios. other authors have demonstrated that family businesses display a high degree of risk aversion (gonzález et al., 2013). gómez-mejía et. al. (2007) propose that family businesses’ sense of risk is scenario-specific. when socio-emotional wealth is threatened, family businesses can assume excessive levels of risk that may challenge economic reasoning (berrone et al., 2012; llanos-contreras et al., 2021), while avoiding certain risky investments to retain control of the firm (gómez-mejía et al., 2014). recent research suggests that family businesses are willing to assume a level of risk that allows them to survive and avoid financial and socio-emotional losses (gomez-mejia et al., 2019). companies’ inclination to take risks influences their willingness to enter into partnership agreements with other companies (kilenthong et al., 2016; martin et al., 2019). through inter-firm cooperation, family businesses can access resources, such as capital, information, knowledge, and technology (feranita et al., 2017). specifically, collaborations are a good way to strengthen marketing capacities (tajeddini & ratten, 2020). according to bruni and verona (2009: p.103), dynamic marketing capabilities reflect the knowledge, human, and social capital of the managers involved in the creation, use, and integration of resources to shape and shift the market, according to technological change. vorhies and morgan (2005) identify eight marketing capabilities that contribute to business profitability: (1) product development; (2) pricing; (3) channel management; (4) marketing communications; (5) sales; (6) market information management; (7) marketing planning; and (8) marketing implementation. therefore, marketing collaboration is a cooperative agreement between companies to undertake joint action to develop and strengthen some of these eight marketing capabilities. marketing collaborations between companies are varied and cover activities such as the development of new products/services, reduction of marketing costs, global expansion, and entry into new markets (tajeddini & ratten, 2020). little research has been conducted on the in55 m. j. ibáñez journal of small business strategy / vol. 31, no. 2 (2021) / 53-61 ter-organizational collaboration preferences of family firms (cesinger et al., 2016; hatak & hyslop, 2015). limited research concerns the explicit influence of risk aversion on collaboration decisions in commercial or non-financial dimensions. the literature identifies two types of risks in inter-firm collaboration (van der krogt et al., 2007). the first type is when the company decides to engage in a collaborative relationship with another firm. in this first step, inter-firm cooperation is exposed to various risks, such as opportunism (williamson, 1985), unobservable effort (eeckhoudt et al., 2005), information asymmetries (costello, 2013), and power asymmetries (lo & hung, 2017). the second type of risk applies to the permanence of the company in a collaborative relationship. while the firm maintains the cooperation link with other firms, it can reduce the risk in its shared strategic activities (cainelli et al., 2012). this study focuses on the first type of risk in inter-firm collaboration, i.e., when the family business decides to get involved in a collaborative relationship with another firm. in this context, the following hypothesis is proposed: h1. increased risk aversion has a negative effect on the likelihood of family businesses becoming involved in marketing collaborations with other companies. inter-firm collaboration is a specific type of organization in which two legally independent companies agree to integrate efforts and resources in a bilateral relationship to obtain long-term and mutual benefits (hatak et al., 2015). transaction cost theory establishes two main types of governance: market and hierarchy (williamson, 1985). however, intermediate forms that do not comply with either the market or the hierarchy also exist. trust, cooperation, goodwill, and commitment in relationships cannot be regulated by explicit contracts or authoritative relationships (puranam et al., 2014). inter-organizational collaboration fits into this intermediate form of governance and can manifest itself vertically or horizontally (gibbons, 2010; williamson, 1985). naturally, firms engage in cooperative relationships with known partners, including suppliers, distributors, and customers (vertical collaboration), instead of entering into collaborative arrangements with competitors (horizontal collaboration) (lewis et al., 2015). the existence of prior relationships between collaborating firms reduces the risks of engaging in cooperative relationships with other firms, as both firms have the expertise to assess the capabilities and reliability of their partners (billitteri et al., 2013). therefore, the following hypothesis is proposed: h2. increased risk aversion increases the likelihood that family businesses will engage in marketing collaborations with known companies. method the objective of this research is to determine the influence of risk aversion on the likelihood of a family business collaborating with other businesses on marketing strategies. it would be interesting to know the effect of risk aversion on the choice of a partner for the marketing collaboration of family businesses. since the decision to engage in a cooperative relationship is made with the choice of the partner with whom this collaboration will be undertaken, the study used a bivariate probit model (mcfadden, 1984; van de ven & van praag, 1981). this model simultaneously estimates the probability that the family firm will collaborate with other firms on marketing strategies and the probability that the family firms collaborating will do so with partners with whom it had previous commercial experience (e.g., suppliers, distributors). data the study used the fifth longitudinal survey of companies (ele5). this official database provides detailed information on 6,480 chilean companies with different characteristics (ine, 2017). this survey is published every two years by the national statistics institute of chile (ine). the study used the latest version of this survey, which was published in 2019 and corresponds to 2017 data. according to cromie et al. (1995) the definition of a family business applies to those companies with an 80% stake controlled by a family group. to isolate the effect of entrepreneurship and the influence of third-generation ownership, the sample is restricted to companies between five and 50 years old. firms that did not report revenues during 2017 were discarded. the resulting sample is 1,118 family businesses of different sizes and categories. variables the first dependent variable is a dichotomous variable that takes a value of one if the family business has established marketing collaborations with other companies and a value zero if not. the analyzed collaborations are cooperations in product/service sales and promotion, considering marketing capabilities (vorhies & morgan, 2005). for example, this includes companies that partner to reduce the costs of marketing their products/services or share knowledge to enter new markets (tajeddini & ratten, 2020). the second dependent variable is dichotomous and takes the 56 m. j. ibáñez journal of small business strategy / vol. 31, no. 2 (2021) / 53-61 value one if the firm collaborates in marketing activities with a firm with which it has had previous commercial experience (e.g., suppliers or distributors) and zero if not. the independent risk aversion variable is represented by a proxy that includes the amount of insurance the firm holds and the fear of losing control of the firm (eeckhoudt et al., 2005). in the ele5, employers are asked to rank their fear of losing control of the firm on a scale of one to three, where one is very important and three is not very important. this variable was inverted in its coding to present it in an ascending form; that is, one is not very important and three is very important. the base measure was the amount of insurance that the company has (eeckhoudt et al., 2005) which ranges from zero to four insurance policies. the total risk aversion measure considers the addition of the fear of failure and the amount of insurance held by the enterprise. therefore, this variable has values between one and seven, with one being the least risk-averse measure. that is, when the enterprise does not have insurance and the fear of losing control of the enterprise is of little importance; and seven being the most risk-averse measure when the enterprise has four insurance policies and considers the fear of losing control of the enterprise to be very important. the control variables are family member managers, the intensity of competition (park et al., 2014), age and size of the firm (martin et al., 2019) and, market power (lo & hung, 2017; niemelä, 2004). the appendix defines each of the variables in detail. table 1 shows the descriptive statistics for each variable. results descriptive statistics show that family businesses involved in collaborative marketing relationships represent about 9% of the sample. more than half of the family businesses are run by a family member and show a low level of risk aversion. from the total number of family businesses that collaborate, 58% do so with firms with which they have had some previous experience (e.g., suppliers or distributors). table 2 illustrates the estimated coefficients and the marginal effects of the bivariate probit model. the results indicate that risk aversion has a significant negative influence (β=-0.102; p≤0.05) on the likelihood of family businesses collaborating with other firms on marketing activities. this finding supports h1, that is, a higher level of risk aversion reduces the willingness of family firms to enter collaborative marketing relationships. risk aversion has a negative effect on the likelihood that family firms willing to engage in collaborative marketing will choose to do so with firms with which they have previous experience, such as suppliers or distributors (β=-0.091;p≤0.10). this result does not support scenario 2. that is, conservative family businesses do not show a greater willingness to cooperate with companies with which they have interacted in the past. the model adjustment measures were satisfactory. discussion and conclusions the development of marketing capabilities directly impacts firm performance (li & calantone, 1998; morgan et al., 2009; orr et al., 2011). marketing collaboration involves taking risks in the decision to enter into a partnership (van der krogt et al., 2007) and reducing risk by sharing the management of a strategic activity for the firm with other firms (cainelli et al., 2012). in this sense, the willingness of family businesses to assume these risks is a fundamental aspect of decision-making for cooperation in marketing activities. given their particular characteristics, family businesses have a different way of perceiving the risk of their operations and evaluating the firm’s performance (fama & jensen, 1983; gonzález et al., 2013). collaboration opposes the idea that family businesses seek to retain control of their business operations (anderson et al., 2012; gómez-mejía et al., 2014). however, family businesses’ long-term orientation and objectives of preserving social-emotional wealth may lead to inter-firm collaborative activities (berrone et al., 2012) if the long-term benefits are worth the risk of cooperation. in this study, the low number of collaborating family businesses supports the findings of pittino and visintin (2011). the results of this research suggest that more conservative family businesses are less willing to face the risk of gettable 1 descriptive statistics variables min max mean std. dev. dependent variables collaboration 0 1 0.089 0.286 related collaboration 0 1 0.052 0.221 independent variables risk aversion 1 7 2.469 1.282 owner-manager 0 1 0.582 0.493 competition intensity 1 5 3.749 1.285 firm age 1 5 2.009 0.990 firm size 1 5 3.428 0.286 market leader 1 5 2.967 1.206 observations 1,118 57 m. j. ibáñez journal of small business strategy / vol. 31, no. 2 (2021) / 53-61 table 2 bivariate probit model results join a marketing collaboration collaborate with a company that is known to the family business coefficient std. dev. coefficient std. dev. risk aversion 0.102** 0.045 0.091* 0.054 owner-manager 0.043 0.113 0.222 0.133 competition intensity 0.086* 0.045 0.103** 0.048 firm age 0.121** 0.052 0.051 0.059 firm size 0.075* 0.040 0.066 0.046 market leader 0.009 0.048 0.068 0.056 constant 2.004*** 0.271 2.242 0.313 wald chi2 60.98 prob > chi2 0.000 observations 1,118 marginal effects for join a marketing collaboration with a company that is known to the family business coefficient std. dev. risk aversion 0.009* 0.005 owner-managera 0.022 0.014 competition intensity 0.010** 0.005 firm age 0.005 0.006 firm size 0.006 0.005 market leader 0.007 0.005 predict 0.047 ***/**/* indicates significance at the 0.01/0.05/0.1 level a marginals for discrete change of dummy variable from zero to one ting involved in marketing collaboration, even though this collaboration may help them reduce risk in their marketing activities in the future. nieto et al. (2015) reported similar findings in the technology innovation collaboration context. the governance paradox involves tensions between control management and collaborative approaches (sundaramurthy & lewis, 2003). for example, one of the barriers to entering partnerships is the fear of losing control of the company (skippari et al., 2017; tuffa birru, 2011). gomez-mejia et al. (2014) propose that family businesses avoid certain risky investments to retain control of the firm. the results of this research extend this conclusion into the area of strategic marketing decisions. similar to the behavior regarding financial decisions, family firms may be reluctant to engage in strategic marketing partnerships that interfere with retaining control of the firm. once family businesses have decided to collaborate on marketing strategies with other firms, the choice is whether to collaborate with known companies (e.g., suppliers or distributors) or with firms they do not know. according to billitteri et al. (2013) and lewis et al. (2015), non-family firms are more willing to collaborate with firms they already know, especially with suppliers and distributors. the findings in this research show that family businesses that are more risk-averse are not inclined to cooperate in marketing with firms with which they have had a previous business relationship. although literature on research and development (r&d) collaborations indicates that family firms show less 58 m. j. ibáñez journal of small business strategy / vol. 31, no. 2 (2021) / 53-61 breadth in seeking collaborative partners, such firms may be more willing to seek a partner outside their networks for marketing collaborations (feranita et al., 2017). a more conservative family business may be motivated to search for and carefully evaluate potential partners and make choices based on factors other than previous experience with companies in their current network. in conclusion, family businesses assume different attitudes toward risk depending on their characteristics and the type of decision required. a high degree of risk aversion in family businesses decreases the willingness to participate in inter-firm marketing collaborations. risk aversion also influences the choice of partners with which the family business will collaborate. the extent to which potential partners can lead a conservative family business to cooperate in marketing strategies, even with competitors, depends on whether this collaboration threatens family wealth and business control. this research contributes to the theoretical development of the relational vision of marketing collaboration in family businesses (feranita et al., 2017). the degree of risk aversion in the family business influences both the willingness to collaborate and the choice of collaboration partners. in marketing collaborations, the most conservative family businesses are reluctant to take risks when choosing to enter a collaborative relationship and are willing to take risks when engaging with partners with whom they have not had a previous relationship. this apparent dichotomy reflects the complex role that risk aversion plays on non-financial decisions in the family business. this study helps to demonstrate that family businesses do not necessarily have a limited scope for seeking collaborating partners and proposes that more conservative family businesses explore beyond their networks for potential collaborative partners for marketing strategies. limitations and future research since the number of family businesses involved in marketing collaborations is limited, the unbalanced data structure represents a problem for the estimation of econometric models; therefore, there may be a bias in the estimation (tomz et al., 2003). another limitation of this study is the lack of longitudinal data, which could improve the estimation accuracy of the proposed models. the available data does not reflect the complex nature of the collaborative strategies or the special characteristics of family enterprises. this study would benefit from qualitative research that provides more complete information regarding the specific marketing collaboration preferences of family businesses. this research fills an important gap in the literature on family businesses by including attitude to risk as an important element in strategic non-financial decision-making, including marketing collaboration. this study can help advance research on the mechanisms of strategic choice in diverse areas of family businesses, such as game theory and models that include moral risk, contracts, and attitude toward risk. this research can also be extended to family businesses in other countries to find contrasts and similarities based on cultural differences and diverse social contexts. family businesses assess risk in a complex manner, considering their long-term orientation and protecting their socio-emotional wealth. this opens up the possibility of future research into the assessment of collaborative marketing strategies and their influence on the long-term performance of family businesses. it would also be interesting to explore how family businesses create and develop organizational marketing capabilities in high-risk scenarios. given that collaborative relationships involve two levels of risk, when entering the cooperative relationship and when remaining in it, it is interesting to know what factors influence the permanence in or exit from a collaborative relationship. another fundamental aspect is to determine the limits of the family business in a cooperative marketing relationship that shares its resources, knowledge, and routines. further research into the choice of partners in collaborative activities presents opportunities to explore the search mechanisms and evaluation criteria that family businesses employ to select potential collaborators. references anderson, r. c., duru, a., & reeb, d. m. 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(2017). ‘strategic planning research: toward a theory-driven agenda. journal of management, 43(6), 1754–1788. doi: 10.1177/0149206313478185. http://www.jstor.org/stable/2138322 http://www.jstor.org/stable/2138322 61 m. j. ibáñez journal of small business strategy / vol. 31, no. 2 (2021) / 53-61 appendix variables definition measures dependent variables collaboration the company has established partnerships with other companies for sale or promotion of its products. 0 = no 1 = yes related collaboration the company has established partnerships with suppliers or distributors for the sale or promotion of its products. 0 = no 1 = yes independent variables risk aversion attitude toward risk based on the amount of insurance and fear of losing control of the company. scale 1 (low) to 7 (high) competition intensity number of competitors the company is facing. scale 1 (low) to 5 (high) firm age time of operation of the company since the beginning of activities. 1 = from 6 to 14 years 2 = from 15 to 23 years 3 = from 24 to 32 years 4 = from 33 to 41 years 5 = from 42 to 50 years firm size size of the firm according to the criteria of the economic authority of the country. 1 = micro business 2 = small business 1 3 = small business 2 4 = medium-sized company 5 = large company market leader how relevant is the company in relation to all its competitors? scale 1 (not important) to 5 (very important) owner-manager the manager of the company is a member of the family. 0 = no 1 = yes strategy publication stalt editor dr. joe singer university of missouri kansas city, missouri associate editor gary r. hazeltine professional support services olathe, kansas editorial assistant tom barlow university of missouri kansas city, missouri editorial advisory board dr. chi anyansi-archibong north carolina agt t state university dr. david brennan university of st. thomas dr. radha chaganti rider university ms. sally a. charles charles consulting dr. ron cook rider university dr. richard t. dailey university of montana dr. dale dickson mesa state college dr. gwen fontenot marketing solutions dr. joseph j. geiger university of idaho dr. frederick d. greene manhattan college dr. lynn hoffman university of northern colorado dr. bill jackson stephen f. austin state university dr. lawrence klatt florida atlantic university dr. kenneth j. lacho university of new orleans dr. thomas j. liesz western state college dr. stephen lucas university of north carolina-greensboro dr. steven j. maranville university of st. thomas dr. thaddeus mcewen university of north carolina-greensboro dr. inge nickerson barry university dr. neal r, pruchansky keene state college dr. matthew c. sonfield hofstra university dr. harriet stephenson seattle university dr. george vozikis the university of tulsa dr. john wallace marshall university a joint publication of the small business institute directors'ssociation and the henry w. bloch school of business and public administration. send subscription requests to 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performance and risk as signals for setting up a franchised business esther calderón-monge university of burgos ecalderon@ubu.es pilar huerta-zavala university of burgos phuerta@ubu.es abstract potential franchisees who wish to start up a business need to seek information signals. the aim of this paper is to analyze the relationship between performance and risk as signals of the quality of the franchise chains and the decision to choose one of them taken by the potential franchisee who wishes to set up a business for the first time via franchising. the results show that performance and risk operated as recognized signals for choosing a franchise chain among those which were operating in spain during 2002-2008. keywords: business risk, entrepreneurs, franchise, risk tolerance, signaling theory . introduction currently, entrepreneurship is one of the key mechanisms for generating a country’s employment and innovation as well as economic and social development (kantis et al. 2002). franchising might be considered a type of entrepreneurship since it contributes both to setting up and developing new business ventures as well as introducing new products and services to expand the market (torikka, 2009). although franchising as a type of entrepreneurship is not widely accepted (ketchen et al. 2011), the relationship between the two concepts emerged with the appearance of the general theory of entrepreneurship (shane, 2003), and mainly conceptual studies along these lines were subsequently published (dada et al. 2012). shane (2003) contends that entrepreneurship is not exclusively related to the creation of highly creative companies that manufacture new and innovative products or services. therefore, enterprises can be created through franchises without s trateg y journal of small business journal of small business strategy volume 23, number 2 42 any special innovation (vesper, 1990). depending on the nature of the entrepreneurial idea of the company created, the latter author grouped entrepreneurs into innovative and imitative firms. transferring this classification to franchising, franchisors might thus be deemed to be innovative enterprises and franchisees as imitative enterprises. a franchisor’s company might be considered innovative since it has created the business concept and its operationalization, and he/she has successfully put it to the test. the franchisee’s company could be considered imitative since it is able to successfully replicate the business concept created and proven by the franchisor in new market areas, contributing to the efficient spread of the innovation to emerge from the previously mentioned business concept. the entrepreneurial behavior of the franchisees has also been justified from the resource scarcity theory and agency theory (dada et al. 2012). accepting the entrepreneurial behavior of the franchisees, when individuals decide to set up a business project through a franchise format, they find similar business concepts developed by the franchise systems operating in the market. to choose correctly one of these franchise systems, potential franchisees need information, which they will seek in the signals sent by those franchise systems which wish to be chosen. therefore, before taking the decision to choose one of them, future franchisees have at their disposal a different quantity of information opposed to that which franchisors possess, causing a problem of opportunism, known as the adverse selection problem of the franchisor. economic literature presents the signaling theory as a solution in order to try to reduce possible information asymmetries between the parties to a relationship when they have access to different quantities of information (spence, 2002). although the signaling theory has been used to explain different subjects related to entrepreneurship (connelly et al. 2011; dehlen et al. 2012) and to the franchise (dant and kaufmann, 2003; gallini and luzt, 1992; dant et al., 2011; lafontaine, 1993; michael, 2009), in the specific case of franchisee decisions, the subject of this paper, scarce evidence exists regarding the application of this theory to the analysis of franchisees´ decisions (combs et al. 2004; norton, 1995). focusing on the franchisee-franchisor relationship, this theory might be deemed a possible strategy employed by potential franchisees to avert the problem of adverse selection and to correctly choose a franchise system (dant and kaufmann 2003). franchisees do so by studying those information signals, which have influenced potential franchisees’ decisions to open a business via franchising. nevertheless, the process of signaling will function when the receiver knows what information to search for via a signal and the senders correctly manage the signals which they give off (connelly et al. 2011; michael, 2009). in the specific case of the potential franchisees who decide to set up a business, these will look for signals given off by the franchisor, which contain the information necessary to correctly select a franchise brand. based on the signaling theory, this present paper seeks to analyze the relationship between the decision taken by the franchisees who wish to set up a business for the first time via franchising and those signals which might provide them with journal of small business strategy volume 23, number 2 43 information regarding the quality of the franchise system chosen, such as profitability and risk. the hypotheses formulated are tested by using information gathered in a database of 513 franchise systems, which operated in the spanish market during the period 2002-2008, distributed in seven sectors. the results obtained in the model estimation using the generalized method of moments (gmm), where unobservable heterogeneity and endogeneity are controlled, show that the risk and profitability of the franchise systems are signals which potential franchisees wishing to set up a business for the first time through franchising take account of while having to choose one franchise system or another from among all those operating in the market at the moment of their decision. nevertheless, the observability and strength of the signals sent by the franchisor is shown to be the main conclusion for the franchiseefranchisor relationship to be successful. this study adds to the literature in three important ways: 1) by contributing to signaling theory through its application in a franchise setting; 2) by shedding light on the relationship between the franchisor and the franchisee; and 3) by offering insight in the field of franchise entrepreneurship. first, this study offers new insights into the economic factors that function as signals for franchisees and, therefore, the features or characteristics these signals must have in common to act as such. second, and given the lack of research on franchisees, this study contributes to a greater understanding of how franchisees make decisions when choosing franchise chains before embarking on a relationship with a franchisor from the chosen chain. third, in terms of the entrepreneurship literature, this study also makes a contribution from a franchising perspective by indicating which signals franchisees look for to gather information about the franchise. this knowledge then enables franchisees to set up businesses under a franchise model. this paper is structured in six sections. after the previous introduction, in the subsequent section we briefly review the signaling theory, focusing on research related to the decision to franchise on the part of a potential franchisee. the section concludes with the formulation of the hypotheses. the third section describes the sample used in this study, as well as the variables used in the analysis. in section four, the model is specified and estimated. in the fifth part, we discuss the results and, finally, present the study’s conclusions, managerial implications, and limitations. theory and hypothesis franchisees as entrepreneurs and their decision to set up a business entrepreneurial initiative includes examining sources of opportunities, discovery processes, evaluation and exploitation of the latter, and the people who discover, evaluate, and exploit them (shane and venkataraman, 2000). an entrepreneur will therefore be a person who recognizes an opportunity and takes actions to benefit from it (kirzner, 1973). thus, a franchisee has entrepreneurial initiative and can be considered an entrepreneur when: (1) he/she has discovered the opportunity to replicate an already proven business concept, in a new geographical market; (2) he/she has evaluated it together with their franchisor and (3) decides to exploit it by opening a franchised establishment (kaufmann and eroglu, 1998). further, most franchisees originate ideas for their chains by facilitating innovation, since their journal of small business strategy volume 23, number 2 44 proximity to customers gives them an opportunity to discover what consumers need or what can be improved for said customers (bürkle and posselt, 2008). some examples are certain mcdonalds’ products such as the big mac, the fillet-o-fish, or the egg mcmuffin, which were products originally conceived by the franchisees of mcdonalds (bradach, 1998; morrinson and lashley, 2003; stanworth et al., 1996). the entrepreneurial behaviour of the franchisees (dada et al., 2012) means that the franchise chains have the capacity to adapt to the new opportunities and threats that emerge over time in order to ensure their sustainability (bradach, 1998). this entrepreneurial behavior has its main strength in the knowledge that the franchisees have of the market where they operate or where they are going to operate. while it is true that a franchisee opening a franchised establishment is not creating a new organization, it is also true that this does not have to be created in order for he/she to have engaged in entrepreneurial initiative (shane and venkataraman, 2000), given that this includes an individual’s capacity, whether independently or in an organized way, to identify an opportunity, fight for it, and, thus, create a new value or economic success. the choice of a franchise system by a potential franchisee, who wishes to set up a business via franchising, begins by knowing the franchise systems or brands operating in the market. this knowledge is acquired by compiling and analyzing the information of the brands, which form part of the overall choice in accordance with the selection criteria . with this information transformed into knowledge, the potential franchisee will choose whichever franchise system possesses sufficient quality to ensure maximum profitability and minimum risk. as previously pointed out, while franchisors possess information about the quality of their franchise system, the potential franchisee does not know it partially or totally, thus creating information asymmetries (kirmani and rao 2000). these asymmetries arise when private information exists between the franchisors and their potential franchisees. this affects the decisions of the latter, who do not possess such information and who need it to take their decisions (stiglitz, 2002). thus, when potential franchisees do not have the necessary information regarding the quality of a franchise system in order to open a franchised establishment, they can make inferences about the information transmitted through signals sent by the franchisor. therefore, the first question is posed: how does a potential franchisee resolve the previously mentioned problem of the franchisor’s asymmetrical information? one possible solution might be for the potential franchisee to learn about the quality of the franchise system that exists in the market. however, like a buyer who is sensitive to product quality, the franchisee will be unsure about the true quality of the franchise systems that exist in the market. this poses a second question: how does the future franchisee deal with the uncertainty regarding the level of quality of franchise systems operating in the market? one possible answer would be for the franchisee to choose only those signals sent to the market which reveal information about the profitability and risk of the franchise system he/she will choose to set up the business. the profitability and risk of any business venture are usually the first aspects analyzed before the decision to begin the business is taken. therefore, in the present journal of small business strategy volume 23, number 2 45 paper, we use the following as signals of franchise system quality: the performance of the franchise system as a signal of profitability (brand and croonen, 2010; minguela et al. 2009; rondan et al. 2010), and the failure rate as a signal of the risk assumed by the franchisee (hsiao et al. 2012; michael, 1996). the performance and risk of a franchise system potential franchisees who wish to set up a business via franchising are taking a financial decision. therefore, measuring the quality of the franchise system is the financial return on their investment or the profitability of the establishment they wish to set up (michael, 2009). potential franchisees will look to set up their business using the franchise systems which evidence a greater level of quality in an effort to ensure they recover the investment made. as pointed out, the signaling theory considers that high quality enterprises will be more disposed to disclose their information. thus, informing potential franchisees of the financial return, they will obtain on the turnover attained as a signal of the profitability of the franchise system, which can be valued by those who are deciding to choose a franchise system to open a franchised establishment. the information which the performance signal transmits regarding the turnover of each sales outlet will be understood by the potential franchisees as a signal of the recovery of the investment. authors such as sorenson and sorensen (2001) and rajagopal (2007) found a positive and significant relationship between the number of franchised establishments and the turnover of the franchise systems. that is why opening a franchised establishment is not only a decision of the franchisor but also of the franchisee, who will try to match the quality of the franchise system to his/her needs and, above all, will seek to obtain future financial income and, consequently, a better performance. thus, the performance on a franchise chain may be a signal of its quality, which encourages a potential franchisee to choose one chain over another. thus, the following hypothesis is formulated: hi: the choice of a franchise system by a potential franchisee who sets up a business for the first time in the chosen franchise system is positively related to the performance of the franchise system. the quality of a franchise system cannot only be interpreted by means of its profitability but also by its risk. those franchise systems that have less business risk supposedly signal a higher quality (michael, 2009). in this sense, the services the franchisors offer the franchisees have affected the exit or withdrawal of the latter from their franchise systems. the quality of the services offered by the franchisors is likely to be equal to or more important than the product or service offered (huang et al., 2007). thus, the lower the quality of services offered by the franchisor to his franchised establishments already operating, the greater the likelihood of failure. consequently, the number of franchise system establishments closed will be a signal of negative and observable information, which will be taken into account by potential franchisees wishing to start a franchised establishment. therefore, the hypothesis formulated is: h2: the choice of a franchise system by a potential franchisee journal of small business strategy volume 23, number 2 46 who sets up a business for the first time in the chosen franchise system is negatively related to the risk of the franchise system. methodology and measurements of the variables the present research seeks to analyze the relationship between the performance and risk of a franchise system as signals of its quality sent to the market by the franchisors and the choice of a franchise system on the part of a potential franchisee wishing to set up a business for the first time via franchising. to achieve this, we describe the sample and the variables be used to specify the econometric model in this section. data and sample to accomplish our objective, we use a sample of 513 franchise systems operating in spain between 2002 and 2008. it is a panel of disaggregated and unbalanced data drawn from information gathered from and analyzed by the spanish franchisors association and the tormo and associates consultancy firm. the period was chosen to avoid the influence of the adoption of the euro in spain and the start of the current global economic crisis. following the choice of the initial year, we used simple random sampling from the population of franchises to collect sample data. in the years subsequent to 2002, other franchises were added to the existing ones to ensure the sample was representative of the franchise population in each year. dependent variable as regards the variables used and their measurements, the dependent variable termed “choice of a franchise system by a franchisee who wishes to set up a business for the first time with a franchise system” is the result of the decision taken by the franchisee who sought information signals to set up a business via franchising among all those operating in spain during the study period (ehrmann and spranger, 2005; solís and gonzález, 2007). it refers to a latent variable measured by the entrepreneurship rate teado2it in each of the sample franchise systems considered in every year of the period studied: that is to say, it was measured by means of the percentage of new franchised establishments opened for the first time in each sample franchise system. with this measurement, only the new franchise decisions taken were considered in each of the franchise chains of the sample and investors were not included. the dependent variable teado2it was calculated as follows: teado2it = teado1it = 0, if teadoit <= 0 teadoit , if teadoit > 0 the variable efnewsit refers to the number of new franchised establishments opened each year. this variable was calculated as follows: efnewit = ef it ef it 1 efit is the total number of franchised establishments that have a franchise system at moment t. teado1it x 100 efnewsit 100 journal of small business strategy volume 23, number 2 47 the variable efnewsit contains the franchised establishments opened by those who set up a business for the first time and other establishments opened by franchisees who already had other establishments opened and, therefore, can be considered as investors rather than entrepreneurs. as this paper aims to analyze the potential franchisees who decided set up a business for the first time within the franchise system, the franchisees-investors were not considered, and we analyze only franchisees-entrepreneurs. for this, the variable teadoit was constructed and refers to the number of new franchised establishments opened by individuals franchising for the first time. thus, we analyze the franchisees-entrepreneurs or entrepreneurs who chose the franchise as a system to start their businesses. this variable was calculated as follows: teadoit = efnewsit x tea if teadoit < =0 it is understood that there has been no entrepreneurial activity, and tea is the rate of total annual entrepreneurial activity in spain from 2002 to 2008. independent variables we have operated with the independent variables using the data available in the information sources previously mentioned and updated annually for each franchise system and year between 2002 and 2008. the performance rate of the franchise system [rtodo] was measured by means of the percentage of profit obtained by the franchisee over the turnover obtained, after discounting the royalty demanded by the franchisor from the future franchisee. this is an observable and credible signal of the franchise system´s performance since it is contained in the franchising contract that both parties signed. rtodoit = (100 %royaltyit) the risk assumed by the franchisee [riskdo] is measured via the failure rate of the franchisor and, specifically, the percentage of franchised establishments closed in each franchise system of the sample under study and for each year of the period considered (bhattacharyya and lafontaine, 1995; michael, 1996, 2009). it is an observable and credible signal of the risk, which potential franchisees assume if they chose that signal to set up a franchise business. to measure the risk of the franchise systems, the following variable was calculated: riskdoit = ((efnews*100/ef_1it)/100 where the variable riskdoit is the failure rate of the franchisor or the risk rate that the franchisee assumes in a specific period: efnewsit contains the franchised establishments opened for each of the franchise systems studied in each period: ef_1it is the number of franchised establishments opened in a franchise system immediately prior to the period considered. when the values of the variable riskdoit are greater or equal to 0, then said values have been transformed into zeros since it was interpreted that no risk rate existed for the > 0 franchised establishments have been opened if efnewsit < 0 franchised establishments have been closed = 0 franchised establishments were neither opened nor closed journal of small business strategy volume 23, number 2 48 franchisee, given that the franchise systems were opening establishments or maintaining the existing ones without opening or closing outlets. when the values of said variable riskdoit are less than zero, the values obtained have been maintained because they are understood to reflect the failure rate of the franchisor and the risk rate of the franchisee. control variables finally, the time and sector were controlled with dummy variables drawing on previous research (shane et al. 2006), which suggested the importance of controlling these variables in order to explain potential franchisees’ choice of franchise system. to distribute the effects of time, the years of the observations were controlled with a series of seven dummy variables for each of the years considered, taking 2002 as the base year. likewise, the effects of the sector were measured by seven dummy variables for the seven sectors considered and in which each franchise system of the panel is grouped, and 0 otherwise, giving a main matrix whose principal diagonal is formed by the unit. empirical model specification and estimation having described the variables and their measurements, certain descriptive statistics are calculated to analyze the nature of the model’s variables. it can be seen in table 1 that no bias exists. the bi-variable correlations are also shown for the dependent and independent variables. table 1: descriptive statistics of the sample the correlations shown are not strong enough for there to be a problem of multicollinearity. nevertheless, the correlation between rtodo and riskdo is 0.207 (p<=1), such that the variance inflation factor (vif) of these two variables (1.01 and 1.08, respectively) was applied, indicating there is no threat of multicollinearity since they are below the suggested value of 10 (kennedy, 1998). specification of the model in line with the objective previously outlined, the hypotheses already posited and the description of the variables, the linear regression model, which we seek to estimate, is specified in order to examine the relationship between the signals, which provide information concerning franchise system risk and profitability during the period 2002-2008 and the choice of f ranchise system by the potential franchisee in the period mentioned: teado2it = άn + ά1 [rtodoit] + ά2 [riskdoit] + ηi + dt + si + vit,(1) where i is the franchise system and t is the year; [teado2] is the rate of entrepreneurship in a franchise system in a specific year: that is to say, the percentages of new franchised establishments opened for the first time by an individual; [rtodo] is the franchisees´ performance, variable mean s.d. min. max. teado2 rtodo riskdo teado2 0.028 0.031 0 0.078 1 rtodo 0.958 0.062 0.01 1 0.224 1 riskdo -0.047 0.143 -1 0 0.000 0.207 1 journal of small business strategy volume 23, number 2 49 if they chose a specific franchise system; [riskdo] is the risk the franchisees assume if choosing any of the sample franchise systems; [ηi] is the term reflecting the unobservable heterogeneity or individual effect; [dt] is the term measuring the specific effect of time through the corresponding dummy time variables by which the effects of macroeconomic variables can be controlled in the choice of a franchise system; [si] is the term measuring the effect of the sector by means of the corresponding dummy variables and [vit] is the random effect. the previously proposed model was estimated using panel data methodology. this methodology was chosen in order: (1) to control unobservable heterogeneity; (2) to correct possible endogeneity between the dependent variable and independent variables (shane et al. 2006); and (3) to include the effects of the macroeconomic variables which might have affected a franchisee’s choice of franchise system. these aspects have scarcely been considered in the research carried out into franchising decisions, and therefore, a rigorous analysis is required to have a sound understanding of said decisions. the unobservable attributes of franchisees, such as their tendency to take risks or their entrepreneurial vocation, will have a different effect on the choice, which the various franchisees make regarding one franchise system or another. the effect will be such that if any of these attributes were correlated with the quality signals of a franchise, their impact on the choice of franchise system might bias the results obtained (lafontaine and shaw, 1999). in order to avoid this bias in the estimated coefficients of the model, caused by the correlations between the unobserved characteristics of a future franchisee and the signals used to choose a franchise system, unobservable heterogeneity was controlled by modeling it as an individual effect. the second aspect taken into account when choosing the panel data methodology is the problem of endogeneity. this problem arises when the variable “choice of a franchise system by the franchisee candidate” could explain some of the independent variables considered in the model (shane et al., 2006). to avoid this possible problem, performance and risk have been considered as endogenous variables and the difference gmm estimator has been applied when estimating the model (arellano and bond 1991). this is an instrumental variables method, which employs the lags of the variables, which serve as instruments in order to correct possible endogeneity, as well as eliminating the unobservable heterogeneity. estimation of the empirical model this section presents the gmm estimation results of the linear model of the equation (see, table 2). although not reflected in the model of equation (1) previously expressed, it is a dynamic linear model since it takes into account the one period lagged dependent variable [l1.teado2] as the explanatory variable, since the choices made by potential franchisees in one year are likely to be influenced by the choices made in the previous year (see, table 2). the estimations presented are the result of applying three criteria: (1) the criteria of arellano and bond (1991) of choosing all lags when dealing with small samples – model ia and ib; (2) hansen´s j test relating to the model specification a test equal to 1 indicates that the model is well specified: that is to say, that the instruments or lags were well chosen – model iia and journal of small business strategy volume 23, number 2 50 iib; (3) a mixed criteria where we combine the greater number of significant parameters, the absence of second-order serial correlation m2 and hansen´s j test greater than 0.10, which is the limit for accepting that the instruments are well chosen – model iiia and iiib. table 2: estimations of the proposed model variable ia ib iia iib iiia iiib l1. teado2 -0.159** (0.011) -0.103 (0.144) -0.119 (0.354) -0.311 (0.034) -0.195** (0.006) -0.140 (0.048) rtodo 0.072*** (0.000) 0.084*** (0.000) 0.057 (0.755) 0.063 (0.605) 0.065*** (0.000) 0.084*** (0.000) riskdo -0.117*** (0.000) -0.141*** (0.000) -0.137*** (0.000) -0.148*** (0.000) -0.124*** (0.000) -0.142*** (0.000) year2004 ----- -0.012*** (0.000) ---- -0.008*** (0.003) ----- -0.012*** (0.000) year2005 ----- 0.014 (0.493) ---- -0.003 (0.485) ----- -0.001 (0.649) year2006 ----- 0.166*** (0.000) ---- 0.158*** (0.000) ----- 0.017*** (0.000) year2007 ----- 0.001 (0.786) ----- 0.003 (0.479) ----- -0.0002 (0.954) year2008 ----- -0.004** (0.031) ----- -0.005** (0.014) ----- -0.005** (0.004) z1 191.90 (3) (0.000) 137.96 (3) (0.000) 55.97(3) (0.000) 50.69 (3) (0.000) 117.84 (3) (0.000) 205.82 (3) (0.000) z2 ----- 87.20 (5) (0.000) ----- 68.21 (5) (0.000) ----- 94.95 (5) (0.000) m1 0.002 0.001 0.022 0.020 0.007 0.001 m2 0.257 0.898 0.284 0.136 0.168 0.718 hansen 0.031 0.701 0.028 0.978 0.003 0.746 observations 2552 2552 2552 2552 2552 2552 franchise systems 513 513 513 513 513 513 six estimations of the same model are shown in table 2. estimations ia, iia, and iiia refer to the model of equation (1) taking into account only the individual effect already mentioned [ηi] and the random effect [vit]. estimations ib, iib, and iiib are the gmm estimation of the model of equation (1) taking into account the individual effect [ηi], the random effect [vit], and the time effect by means of the time dummies [dt]. a further three estimations were performed taking into account the individual effect [ηi], the random effect [vit], the time effect using the time dummies [dt], and the sectorial effect using the dummies relating to the sector [si]. the sector dummy variables were eliminated due to multicollinearity and, therefore, the estimations that included them were not reflected. journal of small business strategy volume 23, number 2 51 finally, we first verified the possibility that the proposed model might be misspecification, to check for which hansen j-statistic of over-identification of restrictions was used. this statistic tests the validity of the instruments used, given that it indicates the absence of correlation between the instruments and the error term (p =1). secondly, the m2 statistic developed by arellano and bond, 1991, was used to verify the absence of second-order serial correlation among the residuals obtained in first-differences. it can be seen that although there is first-order serial correlation [see, m1], this is caused by the transformation in first-differences of the model and, consequently, does not represent a specification problem of the model. thirdly, the overall significance of the coefficients obtained and of the time variables were verified by the wald tests: z1 and z2 discussion of the results in table 2, we see the estimations with the lags which provide the best results when applying the three previously cited criteria. estimations i (a) and (b) include all the lags of the dependent variable and the independent variables. estimations ii (a) and (b) take into account the 1st, 2nd, 3rd, 4th, and 5th lags of the dependent variable and the 1st, 2nd, and 3rd of the performance and risk variables. finally, estimations iii (a) and (b), taking into account the third criterion applied, include the 1st, 2nd, 3rd, 4th, and 5th lags of the dependent variable and all the lags of the independent variables. the results show that the instruments employed are only valid in estimations, which incorporate the time variables (see, hansen test): that is to say, in estimations i (b), ii (b), and iii (b). in these estimations, it can be said that the lags of the variables as instruments have been well chosen. as regards the m2 statistic which indicates the second-order serial correlation in the model, table 2 shows there is no problem of second-order serial correlation in the model estimated with different lags. finally, table 2 reflects the results of the wald tests: z1 allows us to verify the overall significance of the coefficients obtained and z2 indicates that overall significance of the time variables exists. with respect to the significance of the coefficients, it can be observed that the coefficient of the variable “risk taken on by the franchisee” [riskdo] is significant in the estimations of the model with the different lags included, thus supporting hypothesis h2. the performance variable [rtodo] is significant in the estimations of model i (a) and (b) and iii (a) and (b), supporting hypothesis h1 for these cases. as regards the time variables, table 2 shows that the coefficients for the years 2004, 2006, and 2008 are significant. years 2002 and 2003 were eliminated due to collinearity. an overall assessment of the estimations of the model with the various combinations of lags, taking the three criteria into account, would lead us to choose the iii (b) estimation of the model which takes account the 1st, 2nd, 3rd, 4th, and 5th lags of the dependent variable and all the lags of the independent variables. the reasons for this choice are: (1) it addresses the estimation with the greater number of significant variables of a model; (2) the model is well specified since the lags used as instruments are well chosen and (3), moreover, no second-order serial correlation exists. journal of small business strategy volume 23, number 2 52 to close this section, it can be said that: (1) the time variables that include the macroeconomic effects in the model improve the validity of the instruments, the adjustment of the model, and also slightly improve the coefficient of the variables; (2) the results obtained support the indirect relationship between the risk of the franchise system and the number of franchised establishments opened for the first time by an entrepreneur or potential franchisee in each of the years considered. therefore, hypothesis h2 is supported; and (3) the results support the direct relationship between the performance of the franchise system and the number of franchised establishments opened for the first time by an entrepreneur or potential franchisee in each of the years considered, thus supporting hypothesis h1. conclusions, implications, and limitations research into franchisees who prefer franchising for setting up a business rather than as an investment is very scarce. this paper has sought to provide further insights on this topic by analyzing the relationship between the performance and risk of a franchise system as signals of quality sent to the market by the franchisor and the choice of a franchise system by franchiseesentrepreneurs in a sample of 513 franchise systems operating in spain between 2002 and 2008. after controlling the unobservable heterogeneity and endogeneity of the variables, the results first lead to the conclusion that the possible macroeconomic effects cannot be obviated in the entrepreneurial decisions applied to the franchises. the risk of the franchise systems studied relates more to macroeconomic factors than to features linked to the quality of the franchise systems or to the franchisee’s personal traits. it should be remembered that the latter have been controlled using the methodology applied. secondly, the performance and risk of the franchise systems perceived as signals have affected the choice of one of those carried out by the franchisees that opened one of their establishments for the first time. nevertheless, it is necessary but insufficient for the franchisors to send those signals, which potential franchisees seek, given that correctly handling their content is required for the signal to convey clarity to franchisees deciding to franchise the establishment of a franchise system for the first time. accordingly, the risk of the franchise systems, which operated in spain between 2002 and 2008, functioned as a signal to gauge their quality in franchisees that set up a business by opening an establishment for the first time in the franchise system chosen but did not solve the problem of the adverse selection of the franchisor who gathers information mainly from this signal of quality. this is true until the signal of risk of a franchise system transmits, via its content, why the establishments close since it is not the same if this is due to factors related to the quality of the franchise system or to macroeconomic factors. therefore, the risk of the franchise system, as it has been measured, is not a clear signal for potential franchisees, given that the cause may vary and potential franchisees might not be aware of them merely through the signal, which may give rise to possible opportunistic behavior by the franchisor. franchisors of top quality franchise systems need to correctly manage the content of this signal, so their potential franchisees can distinguish between franchisors that close journal of small business strategy volume 23, number 2 53 for macroeconomic factors and franchisors that close due to the lack of quality of their franchise systems. the performance that franchisees obtain in relative terms from each of the franchise systems considered is also an information signal for choosing a franchise system, in which they will set up a business as a franchisee. unlike risk, performance acts as a true signal of quality for franchisees, regardless of the effects of those macroeconomic factors of the country which may affect them, such as economic growth or interest rates if they had to finance the business through a loan. performance acts as a clear signal for potential franchisees. implications and limitations the paper has the following implications for theory and practice. this work poses new applications of signaling theory to those fields of franchising that are currently being researched, as well as continuing to identify signals which adjust their content to the signaled reality, forming a portfolio of signals which are available so that future franchisees choose the correct franchising chain with which to set up a business. among the applications are: 1) for the franchisees, it would be interesting to analyze which private information signals have more influence in their decision to choose one or another franchising brand, such as those which have been considered in this paper, like the number of establishments closed or public information signals. . knowing the signals that operate as such in a franchise, it would be interesting 2) for the franchisers to identify the correct moment to signal (given the cost involved in producing a signal) the quality of their franchise chains and their competition and, finally, it would be interesting 3) for those franchises to know the signals which the consumers of franchise products employ when deciding to choose one brand or another and to establish a comparison with the signals considered by the franchisees of the chosen brand. one field of application is the survival of the franchise chains and, more specifically, of their franchisee establishments. an analysis of the causes could lead us to identifying information signals not taken into account in the choice of the franchise chain or the errors in the signals chosen to select it. the identification of information signals that also influence the taking of decisions regarding the different types of management company-owned vs. franchised units, single-unit vs. multi-unit franchisees, area developers, master franchisees, passive ownership arrangements – within the franchise, may lead us to better explaining their existence. a further contribution is the application of data panel methodology to a dynamic linear model estimated by using the general method of moments (gmm). this makes it possible to use the best instruments of the variables, which are endogenous, to eliminate the influence of franchisees´ personal factors, so as to avoid possible correlations with the signals under study and to take into account the macroeconomic effects in the decisions of franchisees wishing to set up a business for the first time. the results obtained support the idea that the effects of the macroeconomic variable cannot be obviated when analyzing franchisees´ decisions. the strengths of panel data methodology allow new applications in research into franchising. we suggest some of them for journal of small business strategy volume 23, number 2 54 identifying the information signals, which best work for the making of decisions by the franchisors and the franchisees in a period of economic growth and economic crisis in a country and, in the field of entrepreneurship applied to franchising, for identifying those information signals which enable an entrepreneur, whether a franchiser or a franchisee, to discover a business opportunity. as regards practical implications, our paper offers some for potential franchisees and others for the franchisors of franchise systems of a quality higher than the market average that franchisees seek. for future franchisees with an entrepreneurial spirit that do not wish to open an independent business or to be investors, they need to know how to correctly choose the signals which can provide them with information in order not to make a mistake in the chosen franchise system, at least in the early years of operation. franchisors of top quality franchise systems not only need to know the signals that potential franchisees are seeking, but also to manage their content correctly so that those franchisees seeking franchise systems, in a market where high and low quality franchise systems are involved, can differentiate them because they send clear signals. the study has the following limitations: among the limitations of the paper, which we will attempt to rectify in future research, is the absence of a random sample and deficiencies in the measurement of the variables. the panel data methodology needs to have the same franchise systems in each of the years of the period under study. therefore, to resolve this problem, what we have done is to assume a random sample in the cross section dimension. currently, this problem is not very important if we follow the example of other fields of research, such as government and cooperative finance, which frequently employ all the enterprises for which the necessary information is available. measurement of the variables is 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(1990). new venture strategies. englewood cliffs. nj. usa. prentice hall. esther calderón-monge6 is a senior lecturer in marketing, and faculty of economics and administration of business at the university of burgos, spain. she holds a phd in economics and business administration. her areas of expertise include marketing and market research, financial economics and accounting, and business organization. pilar huerta-zavala is an associate professor in marketing, and faculty of economics and administration of business at the university of burgos, spain. her areas of expertise include marketing and market research, financial economics and accounting, and business organization. 6 corresponding author reproduced with permission of the copyright owner. further reproduction prohibited without permission. http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2020, vol. 30, no. 02, 93-105 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2020 small business institute® w w w. j s b s . o rg while recognizing the marketing potential of a company’s underdog status, existing research on underdog businesses has typically focused on how to effectively communicate about the underdog story. this study departs from prior research by formulating a theoretical framework to guide managers on systematically building and strengthening the underdog consumption experience as well as communicating about it. recent research on motivational bases of consumers’ underdog affection shows that drivers for underdog affection are much more than empathy and they also include feelings of dissatisfaction with dominant industry players, need for market balance maintenance, desire to be different and need for unique consumption experiences, admiration for perseverance, hope for hard-earned triumphs, and extension of oneself also as an underdog. guided by the contingency framework of strategic decision-making, we apply the above notable findings to key areas of a company’s marketing strategy, specifically translating the motivational bases identified in existing research into pertinent company actions, which will in turn generate rewarding customer benefits. by formulating a series of innovative perspectives to guide underdog businesses on building as well as selling a compelling underdog consumption experience, this current article represents a significant addition to past research on underdog businesses. introduction 1manning school of business, university of massachusetts lowell, pulichino tong business center suite 228, one university avenue, lowell, ma 01854, usa, tao_gao@uml.edu 2meehan school of business, stonehill college, 320 washington street, easton, ma 02357, usa, lmcginnis@stonehill.edu building a compelling underdog consumption experience business underdogs, underdog consumption experience, underdog affection, underdog effect, marketing strategy, customer experience, small business, entrepreneurship. apa citation information: gao, t. & mcginnis, l. p. (2020). building a compelling underdog consumption experience. journal of small business strategy, 30(2), 93-105. in the last decade, business scholars and industry observers alike have paid increasing attention to the marketing potential of the underdog status. though still limited in scope, existing research has yielded many insights on the meaning of business underdogs and drivers of consumers’ underdog support behavior. it is suggested that consumers associate underdogs with two primary attributes: lack of resources and perseverance (kim et al., 2008; mcginnis & gentry, 2009; paharia et al., 2011; vandello et al., 2007). the type of businesses most often associated with the notion of business underdogs is small businesses, many of which are struggling to survive in the age of increased industry concentration and globalization. compared to industry giants, small businesses have limited market power, limited customer bases, limited resources, difficulties in exploiting market opportunities, and less business management experiences, among other competitive disadvantages (joshi & anand 2018; mccartan-quinn & carson, 2003). in retail, walmart is often noted in the business press as the top dog, while local stores are often placed as its antithesis (runyan & droge, 2008; sobel & dean, 2008) and are often recognized as underdogs. as one author particularly notes, the entry of walmart into a community is often followed by closures of some nearby local retail establishments (ficano, 2013). past research shows that consumers often hold favorable sentiments toward businesses possessing underdog traits and being an underdog might be an advantage, and even be a motivation for some parties to promote their disadvantages (gladwell, 2013; vandello, et al., 2007). for example, mcginnis et al. (2017) note that on average, the consumers they surveyed demonstrate a high degree of underdog affection, or the emotional attachment held by consumers toward underdog business entities, at 4.94 on a scale of 1 to 7 (with 7 being the highest). when compared with tao gao1, lee phillip mcginnis2 http://www.smallbusinessinstitute.biz http://www.jsbs.org 94 t. gao & l. p. mcginnis journal of small business strategy / vol. 30, no. 2 (2020) / 93-105 consumers’ shopping activities in local stores, which are often considered a prime example of underdog businesses, consumers’ underdog affection shows extra potential that local businesses can utilize to build their competitive advantages over national chains. specifically, while the average underdog affection level is 4.94, the average level of local store shopping is at 4.19 (with 7 being the highest in both scales). importantly, underdog affection helps explain a large portion of the variance in consumers’ underdog support behavior, highlighting the value of understanding, promoting, and using underdog affection in increasing consumers’ underdog support behavior (mcginnis et al., 2017). given the significant evidence linking consumers’ underdog affection to underdog support in commerce, not utilizing the marketing potential of a firm’s underdog status would possibly constitute a waste of opportunities, especially as many small businesses are struggling to find a way to survive amid the competition from corporate giants and economic disruptions. recognizing the favorable consumer sentiments around business underdogs, scholars and experts in this growing research field have naturally emphasized how companies could communicate about their underdog status to the potential customers (paharia et al., 2011; keinan et al., 2010; mcginnis et al., 2017; jun et al., 2015). yet, while communicating about a company’s current underdog status is indeed important, drawing on recent research findings about key motivational factors for consumers’ underdog affection in commerce (mcginnis et al., 2017), we urge companies to most importantly turn attention to building a fuller, richer, and more compelling underdog consumption experience. in turn, this more enriched underdog consumption experience should be more precisely marketed with a corresponding underdog communications strategy to a select target market who are ready to convert their existing underdog affection into patronage actions. conceptual framework on underdog consumption experience two primary theoretical perspectives helped inform mcginnis et al. (2017) in their conceptual development of the motivational basis of consumers’ underdog affection: the self-oriented perspective and the other-oriented perspective. the self-oriented perspective proposes that what motivates consumers to form underdog affection is the presence of certain congruity, relevance, or consistency between what the consumer represents and what the underdog entities represent. the other-oriented perspective suggests the existence of motivational factors representing concerns for other people or the society at large. in terms of what factors make consumers more underdog affectionate, mcginnis et al. (2017) note that under the self-oriented perspective, commerce underdog affection is positively influenced by consumers’ underdog orientation, need for uniqueness, nostalgia proneness, and hope and is negatively impacted by their materialism level. under the other-oriented perspective, balance maintenance, top dog antipathy, and empathic concern positively influence underdog affection (see table 1 for the definitions of these motivational drivers). therefore, drivers for consumers’ underdog affection are much more than empathy, and they also include desire for more selections, urge to be different, admiration for perseverance and hope for hard-earned triumphs, extension of oneself also as an underdog, and feelings of dissatisfaction with dominant industry players. in this article, we advocate a holistic, communications plus underdog marketing strategy where the underdog spirit would inspire and transform several key components of a company’s marketing strategy. while existing research on underdog businesses typically focuses on how to effectively communicate the underdog story, in a major departure from prior research, this study emphasizes systematic ways of building and strengthening the underdog consumption experience as well as communicating and selling it. specifically, we demonstrate how the research findings on motivational bases for consumers’ underdog affection in mcginnis et al. (2017) help inform a company’s design of a broader, richer, and more compelling underdog consumption experience, touching on product, pricing, communication, distribution, target marketing, and positioning decisions. by applying the conceptual model and empirical findings from mcginnis et al. (2017) to key areas of a company’s marketing strategy, we develop a conceptual framework (see table 2) that drives our formulation of a series of highly innovative perspectives to potentially guide managers of likely underdog businesses on building as well as selling a compelling underdog consumption experience. the guiding logics underpinning our conceptual framework relating the motivational bases for underdog affection to underdog marketing strategy are the contingency perspective of strategic decision-making (chandler, 1962) and the market orientation theory (narver & slater, 1990; jaworski & kholi, 1993). according to contingency strategic decisions theory, a company’s strategic decisions should conform to important internal and external situational factors for it to reach optimal performance. applying such a logic to our research context, for a company’s buying and usage experience to qualify as a compelling underdog consumption experience, it should match the customers’ primary notations about underdog businesses and reflect the motivational bases underlying their underdog affection. ac95 t. gao & l. p. mcginnis journal of small business strategy / vol. 30, no. 2 (2020) / 93-105 table 1 underdog affection drivers and their definitions underdog affection drivers definitions underdog orientation the extent to which one feels he or she is an underdog in life’s pursuits, measured in the context of everyday life and not in any specific context such as sports, business, or career (mcginnis et al., 2017) need for uniqueness need to engage in creative counter-conformity choices, unpopular counter-conformity choices, and choices that reflect avoidance of similarity to others (tian & mckenzie, 2001). empathic concern sensitivity to another’s experiences and a dispositional tendency to experience the emotional reaction of warmth, compassion, and concern for others (davis, 1983) hope a positively valenced emotion evoked in response to uncertain but possible goal-congruent outcomes, driving people to accomplish challenging tasks and to be resourceful in doing so (goleman, 1995; macinnis & de mello, 2005) nostalgia a longing for the past and a general preference toward objects that were more “common” when a person was younger (holbrook & schindler, 1991) balance maintenance the extent to which people desire to hold the powers in society in check, such that no entity in society (i.e., government, business, or individual) has too much power, thereby allowing freedom of choice (mcginnis & gentry, 2009) top dog antipathy a personality trait or disposition in which a person dislikes the top dog or advantaged entity (mcginnis et al., 2017) materialism a value that guides consumer choices, consisting of (1) the belief that acquisition is essential for happiness, (2) the tendency to judge one’s and others’ success based on their possessions, and (3) the centrality of possessions in one’s life (richins & dawson, 1992). cording to the market orientation theory, the integration of a customer orientation and a competitor orientation is needed for a company to formulate a winning marketing strategy (narver & slater, 1990). our research approach specifically considers what makes underdog companies unique in the eyes of the target customers in relation to the competition (their top dog counterparts) and combine these perspectives into the design of an underdog marketing strategy. past research suggests that consumers associate disadvantaged competitive positions and perseverance as two defining elements of underdogs (kim et al., 2008; mcginnis & gentry, 2009; paharia et al., 2011; vandello et al., 2007). although companies fitting with the underdog status necessarily face some major competitive disadvantages against dominant industry players in areas such as resources, scale and scope of business operations, market share, customer base, and name recognition (mccartan-quinn & carson, 2003), they should also demonstrate persistence and determination despite all the challenges in order to truly benefit from the underdog business status. we extensively link each of the motivational bases for consumers’ underdog affection to the key aspects of the company’s marketing strategy. in developing our propositions on the scope and content of the underdog consumption experience, we further consider the certain competitive advantages that smaller businesses or brands do have over their industry leading counterparts, in the areas of flexibility, connections with the local community, entrepreneurial spirit, and ability to add variety to market choices (lumpkin & dess, 1996; parnell et al., 2015; wiklund & shepherd, 2005). in the following sections, we summarize the key propositions from our current, managerially focused study and will use examples to illustrate their relevance. underdog product strategy as consumers show affection toward underdogs because of the eight motivational factors noted in mcginnis et al. (2017), companies should understand the key implication of each driver in their product and service design considerations. in column 2 of table 2, we list the key product development implications of the motivational drivers and will describe them in greater detail below. the key message is that a company’s product decisions should tap into consumers’ need for uniqueness and their sentiments of nostalgia, hope, balance maintenance, materialism, and even top 96 t. gao & l. p. mcginnis journal of small business strategy / vol. 30, no. 2 (20120 / 93-105 table 2 a conceptual framework on matching underdog affection drivers with underdog marketing strategies underdog affection drivers product price communication distribution (& supply chain) targeting positioning and branding underdog orientation consumers show affection towards underdogs as they see themselves in these firms. create an underdog worthy experience. demonstrate that despite disadvantages, the product is as good as those from top dogs. treat customers with respect and honor when it comes to setting price and contractual terms. adequately promote the underdog status. draw connection between product and target’s self-perceptions of being an underdog. “like you, our product…” form ties with other underdog businesses and organizations such as local distributors and suppliers. target customers that consider themselves underdogs and collect data on discover their underdog identities. highlight the persistence despite all challenges. draw connections to prime fellow feelings and promote self-relevance benefit. need for uniqueness customers show affection towards underdogs as they see these companies as where to get unique consumption experiences. create unique products, ones that could compete on quality with top dogs. amplify experience with unique services. offer individual attention and flexibility in pricing and broader contractual terms, despite inability to compete on price level. focus less on price and promote experience uniqueness. highlight uniqueness of experience in various aspects. show that your firm is devoted to relationships with customers and that this product is not consumed by the mainstream. source unique materials. choose unique locations. demonstrate that national firms do not carry same products or use same supply sources. target customers who like unique experiences, especially those who like products from small, obscure locations. while limited resources make you naturally different from top dogs, try to be different on your own terms as well. focus on how you went in the other direction despite pressures. empathic concern consumers who care more about others show more underdog affection. acknowledge your plight as the underdog, but respect caring customers and give them an experience matching or exceeding their care for you. reciprocate care to customers. stress that your high price is a natural result of lacking top dogs’ scales and resources. be transparent with costs but highlight unique, compelling experiences. show that consumers’ efforts matter in keeping your brand alive but focus much more than your need for help. address all other motivational bases for consumers’ underdog affection as well. focus on local suppliers, especially those that might be missing selling opportunities due to lack of knowledge, technology, cost advantage, etc. target customers who show higher empathic concern. target those who generally understand the plight of others. do not highlight your need for help. highlight how you have overcome adversities and have even been there for others. hope people yearn for hope when they show affection to underdogs. the product and the way the experience is created should show perseverance and inspire hope and admiration. do not insist on rigid pricing and contractual policies and show confidence in giving pricing flexibility and service accommodations. use encouraging messages to inspire hope and admiration. show your overcoming odds despite difficulties (like consumers’ own underdog orientation). store or office decorations are encouraging. office spirits are upbeat. have long-term view to relationship investments. target customers who appreciate more hopeful competitive conducts and performance from small businesses. work hard and extra carefully with the limited resources. exude hope and courage amid daily challenges. nostalgia people form affection toward underdogs due to their nostalgia and the relevance of underdog firms to that sentiment. add local content and build connections to traditions. be active in local efforts at creating new traditions. show old-fashioned care to customers. demonstrate roll-back prices, explicitly indicating years as they resonate with consumers. highlight locally relevant experiences that would tie consumers back to the way things were. try to present the focal company as a part of the local history. choose store locations that reflect local traditions. find and target customers who are prone to be nostalgic, which could cut across age cohorts. position the company as an undying presentation or a spokesperson of a beloved local tradition and good old values and lifestyles. balance maintenance customers show affection for underdogs as they care about balances in market power. allow customers to try something different and diversify their supplier bases. indicate that offerings offset power held by major players. downplay importance of price and stress the product uniqueness, which customers may appreciate for balance maintenance and risk diversification concerns. focus on and highlight your ability to help customers diversify their supplier base or consumption experiences. dare to reach out to customers of even dominant companies and make your -self available as a viable market alternative. find and target customers who care about power balance and need more choices, either for idealistic or practical reasons. present the company as a viable option for buyers looking for new experiences or broadening their supplier base. top dog antipathy customers show affection for underdogs as a way to demonstrate their distain or dissatisfaction with top dogs. some buyers could be waiting for new purchase options especially from small firms due to dissatisfaction with top dogs disdain for them. price will be less of a concern when customer patronage is motivated by resentment of big players. downplay the importance of price level and stress product uniqueness that could rival top dogs. speak to customers’ animosity toward big, monopoly-type players in the market. do try to add substance and credence to the value of underdog positioning and communication. stay away from top dogs or their close partners. avoid major brands and major stores for distribution. find and target customers who show dissatisfaction with top and leading brands, either for idealistic or practical reasons. present the firm as a viable option for buyers dissatisfied with dominant offerings. bigger brands should downplay success or position as market leader to avoid negative reactions. materialism highly materialistic consumers have low underdog affection. do not invest in building status symbols. focus instead on the unique and one-of-a-kind product or experience. avoid mentioning high price as a way to build exclusive customer status. promote high and unique quality products as an enjoyable experience that could help reduce the underdog’s inability to meet materialistic needs. communicate about experience and resulting status that only few can attain. disassociate with suppliers or distributors viewed as traditional status symbols. use data to help identify higher versus lower materialism customers. do not compete or sell underdog experience as a materialist experience. highlight unique experiences. 97 t. gao & l. p. mcginnis journal of small business strategy / vol. 30, no. 2 (2020) / 93-105 dog antipathy. and companies should design their products in such a way as to honor the consumers’ concern for their less privileged market statuses and recognize their consumers’ own underdog identities. at the core of the underdog consumption experience should lie a serious underdog attitude, which should help guide the design and provision of the underdog product usage experience. underdog companies should seek to develop and demonstrate their toughness in persistent fighting despite facing numerous external disadvantages and attempt to create a unique, rewarding customer experience out of limited resources. when faced with overwhelming adversities (williams jr. et al., 2018), it could be tempting for some companies to resort to a practice of using lower quality materials and subpar processes to produce lower quality products and services (mccartan-quinn & carson, 2003). as it is often hard for the consumers to accurately judge the quality of the products and services, these companies might often be able to complete the sale of such products and services especially to first-time customers. true underdog companies, however, should work earnestly and honorably in sourcing and production to generate a truly competent consumption experience worthy of the trust and concerns consumers have for them due to their underdog status. while many customers’ patronage behaviors to underdog businesses may be partially motivated by a sense of concern and care for struggling companies, the focal companies should aim at doing much more than simply displaying their competitive plight and needs for help but will respect the caring customers and try to give them a reciprocal, total consumption experience matching their care for them. in response to the customers’ sentiments for hope from seeing underdog companies successfully compete, both the product and the way the experience is created should show perseverance and inspire hope and admiration, and demonstrate that no matter what happens, the product and brand experience will prevail (averill et al., 2012). in terms of the actual product experience, companies need to try hard to create an underdog-worthy product experience by offering unique products and services rivaling those of major industry players, tailored to local needs and individual customers’ preferences, and connected to local or industry traditions. for example, local liquor stores can emphasize the uniqueness of their craft beer from local microbreweries or niche wines from local wineries, selections that national chains do not stock. relative to large companies, small firms can be considerably more creative, innovative, adaptive, and closer to the market (mccartan-quinn & carson, 2003), and such characteristics of small businesses, when combined with their deep focus on a particular target market, may lead to unique abilities to design, produce, and deliver tailored products to their customers. thus, underdog businesses with modest resources should seek to develop some unique proprietary abilities to read and meet their customers’ needs. this practice is clearly illustrated in the case of the century-old small department store of e.a. davis in wellesley, ma. although numerous shopping options exist on nearby newbury street in boston and in the natick mall, this small store boasts a loyal clientele, largely owing to its profound proprietary ability to precisely understand the unique needs of its core customers and present just about the right merchandise assortments needed by their core customers nothing more, nothing less (allen, 2012). another example is the small regional retailer of tradepost entertainment based in topeka, kansas. this store has a unique business model of selling good quality pre-owned entertainment merchandise at greatly competitive prices. they also seek to build unique business relationships with their customers by encouraging the customers to sell back their own used products to the store. founded in 1998 as a seller of pre-owned cds, dvds, games and game systems, the company has further evolved its business model with the changing industry environment by phasing out cds and introducing vinyl records and customized apparel, among adopting other innovative merchandise development practices. another area where underdog companies are positioned to establish critical competitive advantages over corporate giants is in the provision of high quality, personalized services to their customers to complement their core product or service experience. a case in point is small connecticut-based department store called mitchell stores, which has earned a reputation for providing exceptional service to its customers and investing into long-term client relationships (mitchell, 2003). in particular response to the importance of nostalgia in underpinning consumers’ affections toward business underdogs, companies should try to instill long-cherished local contents in their product or service experience, build connections to local traditions, and be active in local efforts at creating new traditions. tradepost entertainment, for example, holds regular events promoting local musicians’ products and performances. another example is the silver elephant of bellefontaine, oh., which sells vintage and antique upholstery, benefiting from the owner’s educational background in interior design and her unique perspectives in bridging old-fashioned merchandise with modern-day usage situations (duff, 2017). as burlingham (2016) notes, successful underdog companies tend to cultivate intimate relationships with customers, based on personal contacts and mutual commitments, and often boast intimate relationships with the local city, town, or county. 98 t. gao & l. p. mcginnis journal of small business strategy / vol. 30, no. 2 (2020) / 93-105 one major driver for consumers’ underdog affection is the sense of balance maintenance in the economy (mcginnis et al., 2017). while some customers can be relatively satisfied with their consumption experiences with national suppliers, they might nevertheless appreciate the opportunity to try something different or to help diversify their supplier bases and balance their dependence on big vendors. it is thus important for underdog companies to make an earnest effort at introducing new and compelling choices to such customers to help them balance the market power and diversify their supply sources vis-à-vis dominant companies. this unique opportunity may exist for underdog companies in both the b2c and b2b markets. one case in point is amd’s recent resurgence as a relevant semi-conductor chips maker and its introduction of several new products that have been readily embraced by microsoft, amazon aws, and baidu (google of china) (bray, 2017). in another example, while independent musicians lack the influence and resources of large record companies (gao et al., 2009), recent research (midia 2019) shows a significant increase in the collective revenue generated by independent artists in 2018. two key reasons for this success are the independent musicians’ access to advanced technological resources to distribute their music and their ability to create unique music at their pace to the diverse preferences of music lovers (daniels, 2019). furthermore, small businesses should pay attention to the supplier diversity and preferential procurement programs employed by large companies and government agencies and use them to gain market access (shelton & minniti, 2018). another notable driver for consumers’ underdog affection is their outright resentment against top companies in the industry (zavestoski, 2002). some customers are perhaps already dissatisfied with the dominant companies based on their failing past consumption experiences, while others possess feelings of disdain against the top dogs due to ideological reasons and would opt for doing business with smaller players by default. as such, some buyers may be waiting for new purchase options to appear, especially from smaller players. one interesting finding by mcginnis et al. (2017) is about the close relationship between consumers’ top dog antipathy and their need for uniqueness in the cluster analysis on construct associations. it is possible that consumers may view their separation from and denouncement of dominant businesses (such as walmart) as a way to establish their uniqueness as a consumer and citizen. although not all consumers holding resentment towards dominant businesses will necessarily show such feelings publicly, some might to claim their uniqueness. underdog pricing strategy in this section, we relate the motivational drivers for underdog affection to a company’s pricing strategy. as consumers show affection toward underdogs because of these factors, companies should understand the key implication of each driver in their pricing decisions. in column 3 of table 2, we list the key pricing implications of the motivational drivers and will describe them in greater detail below. in terms of price, while it is often hard for underdog companies to compete with big players on price levels due to a lack of operational scale economy and buying power (carson et al., 1998), they can seek to beat the giants on flexibility and old-fashioned customer care with regards to both pricing itself and a broader range of contractual terms. though pricing information is readily known to consumers, what are less known to them are true product quality levels, their cost levels, and relative prices compared with the competition. small businesses or brands often need to charge higher prices due to higher costs, narrower scope, and lack of bargaining power in sourcing negotiations (mccartan-quinn & carson, 2003). some small companies may automatically charge unreasonably high price levels because of their higher costs, and even others may compromise product quality by choosing lower quality materials and ingredients or following subpar production processes (azmat & samaratunge, 2009). true underdog companies, however, should work earnestly to produce competent quality products and treat customers with respect and honor, like honorable underdogs would do, when it comes to setting prices and contractual terms. as some customers come to underdog companies for different product or service experiences, these companies may cite their unique experiences as a way to lower the importance of price in the customers’ decision-making. and they might want to be ready to offer individual attention and flexibility in pricing and broader contractual terms, despite the inability to compete on price level. in order to better present the higher prices on their products and services as underdogs, companies should try to get the buyers to appreciate the fact that such high prices are natural results of their lacking top dogs’ scales and resources (paige & littrell, 2002). rather than trying to compete on price or go as far as attempting to compromise product quality, they should be very explicit and transparent with their cost levels and their reflections on price. in this regard, while some consumers may shop at the underdog companies out of empathic concern without expecting extraordinary things in return, the companies themselves should still reciprocate such care with appreciation and authenticity in dealing with the customers. 99 t. gao & l. p. mcginnis journal of small business strategy / vol. 30, no. 2 (2020) / 93-105 at the same time, underdog companies may want to complement their cost-themed messages with an assurance of unique, compelling products and services. for example, a local fashion boutique can use customized, unique offerings such as customized jewelry to help avoid price competition. because some customers may also be shopping at underdog businesses out of balance maintenance concerns or resentments towards dominant businesses (darden & reynolds, 1971), a genuine effort at downplaying price importance and stressing uniqueness of product and experience could be well received by the customers, especially as they have risk-diversification concerns. an additional notable driver for consumers’ underdog affection is hope, a positive emotional response to uncertainty events (macinnis & de mello, 2005), where a future-orientation and a long-term perspective are integral about what positive outcomes could be achieved in an uncertain situation. thus, underdog companies should develop and demonstrate a long-term perspective in setting prices and reacting to customers’ pricing concerns. instead of insisting on rigid pricing and contractual policies, for example, they can demonstrate confidence in giving some pricing flexibility and service accommodations even as a struggling underdog. any pricing concessions or accommodations should be viewed as early-stage investments into long-term relationships with customers and the customers may pay back with added brand loyalty. underdog communication strategy in this section, we relate the motivational drivers for underdog affection to a company’s communications strategy. as consumers show affection toward underdogs because of these motivational factors, companies should understand the key implication of each driver in their communications decisions. in column 4 of table 2, we list the key communications implications of the motivational drivers and will describe them in greater detail below. the key message is that a company’s communications messages should address consumers’ need for uniqueness, their own underdog orientation, and their sentiments of empathic concern, nostalgia, hope, balance maintenance, materialism, and top dog antipathy. while small business and brands are perceived to have limited resources and a relatively weak position in the market, prior research (paharia et al., 2011) suggests that an underdog brand narrative might favorably influence customers’ perceptions and behaviors towards small businesses. this observation translates to an underdog effect which is achieved through a brand biography describing a company’s humble beginnings, its hopes and dreams, as well as its struggles in facing external challenges, including stronger, more established competitors. we posit that underdog companies should adopt a multi-pronged communication approach where the right and fitting message about a compelling underdog consumption experience is conveyed to the right audience. although it may be tempting for underdog companies to highlight their needs for help in communication messages, it is more important for them to highlight their persistent endeavors as underdogs with limited resources, noting the dominant counterparts when appropriate, which would inspire hope and admiration much beyond mere sympathy solicitations. underdog companies should work hard and extra carefully with the limited resources they have and seek to set an example on how underdog businesses could sustain and exude hope and courage amid daily challenges. they should also promote their unique, customized, and flexible product offerings, with relevance to community or industry traditions when appropriate, and highlight their strong devotions to the unique and evolving needs of a more limited clientele. as consumers who see themselves as underdogs tend to have greater underdog affection, companies should more prominently promote the underdog status in brand messages and draw connections between the company’s products and the target customers’ self-perceptions of being an underdog. the following lead phrase could be used to this effect: “like you, our store has had to face challenges in resources, scale, ….” furthermore, underdog companies may want to frame their unique underdog consumption experience in various aspects as reflections of their care and devotion to relationships with the target customers and even use it as a way to appeal to highly materialistic consumers who may value distinct consumption experiences (chan et al., 2015). as consumers with high levels of nostalgia may display more underdog affection, underdog companies can use media sources, events, and images that may remind customers of the joint heritages of the town and the business. in this regard, inviting loyal, generations-old customers to help advocate for the business may prove an effective strategy for connecting with nostalgic consumers. in general, underdog companies should highlight locally relevant experiences that would tie consumers back to the way things were and try to present the focal company as a part of the local history (miller & kean, 1998). in business to business marketing, salespeople can draw on old connections with the purchasing manager and other members of the buying team and cite past relationships between two companies to help bring back memories of joint experiences. in such instances, age and common past experiences would become a major competitive advantage in selling (holbrook, 1993; burlingham, 2016). 100 t. gao & l. p. mcginnis journal of small business strategy / vol. 30, no. 2 (2020) / 93-105 in relating to customers who value great balance in the marketplace, underdog companies should more forcefully highlight their unique abilities to help customers diversify their supplier base with competent consumption experiences. paharia et al. (2011) suggest the importance of building complete underdog biographies in trying to capitalize on the underdog marketing potential, for example, by being more salient and even showing human beings in their stories to be more effective among idealistic consumers, among those who believe power needs to be distributed equally. it may therefore benefit local business owners to position themselves more conspicuously against the titans of industry to demonstrate power discrepancies. signs of marketers leaning toward this mechanism are evident in an american express campaign supporting a “small business” saturday the day after black friday (americanexpress.com, 2017), even though this promotion was sponsored by a major company. underdog retailers, in particular, should consider their unique cost situations and leading reasons for consumers’ shopping behaviors in deciding on their sales promotion strategies. while small stores might be tempted to slash prices ‘black friday-style’, they should refrain from doing so and recognize that deep discounting works most effectively for major retailers like walmart and target. consumers may come to underdog businesses for a different reason to support local businesses as a good cause (leadem, 2016). underdog channel and supply strategy in this section, we relate the motivational drivers for underdog affection to a company’s channel and supply chain strategy. as consumers show affection toward underdogs because of these factors, companies should understand the key implication of each driver in their channel decisions. in column 5 of table 2, we list the key channel implications of the motivational drivers and will describe them in greater detail below. a company’s channel and supply chain strategies deal with issues such as what raw materials to source, from which vendors to purchase, which channels to use to distribute the products, where to locate the stores as retailers, and with which other companies to potentially partner in conducting distribution and purchasing activities (kotler & armstrong, 2016). in the interest of building unique, locally relevant product and service experiences to target customers, underdog companies are encouraged to try to elicit feelings of uniqueness in collaborating with local producers, offering products that are not only more unique but perhaps fresher and more indigenous to the local area. additionally, local channels mean that money stays in the local community as well instead of headquarters out-of-state (de clercq et al., 2015). establishing these partnerships and conveying them to customers could help the companies capitalize on consumers’ desire to maintain balance in the economy and diversify their shopping choices. local retailers that design or source unique products may enjoy higher gross margins from eliminating middlemen and avoiding direct price competition (jordan, 2013). shamsuzzoha et al. (2013) suggest that one important way for small companies to stay competitive against large companies is to establish and manage dynamic and non-hierarchical networks to better respond to market opportunities, ensuring a quick response with unique products with competitive prices and high product quality. underdog companies may also build partnerships with other underdog businesses to help bolster their collective images as fighting underdogs. underdog stores would work together with neighboring shops to give shoppers more reasons to visit. an assorted group of local businesses in downtown sioux falls, south dakota, for example, offers a number of deals and free samples throughout the town (leadem, 2016), encouraging shoppers to experience a day of sales events and explore the downtown. in relation to consumers’ nostalgia sentiments, underdog retailers should carefully choose store locations that reflect local traditions, such as in the downtown area or near a local landmark, and actively participate in locally relevant events and festivals. finally, while consumers may choose to patronize underdog businesses themselves for empathic concern considerations, underdog companies should seek to extend such care to local suppliers, especially those that might be missing selling opportunities due to lack of knowledge, technology, and cost advantages (sequeira et al., 2018). in the retail superstars book (whalin, 2009), the author underscores the role of unique community connections as an effective strategy for independent retailers in their competition with national chains. blankson et al. (2018) also note the importance of social capital, the resources (e.g., trust, norms, and networks) inherent in social relations and that a key component of social capital is a culture of reciprocity, compromise, and pluralistic relationships. parida et al. (2017) further find that small and start-up firms in high-tech industries often engage in networking to overcome resource, knowledge, and competence constraints in creative, innovation-based competition, and to make the most of their relationship building efforts, small companies may particularly need to acquire network capability, or the ability to manage and gain benefits from external relationships. when small businesses work together, they will increase their collective appeal to the consumers as a destination for a diverse set of underdog shopping experiences (cf. sequeira et al., 2018). 101 t. gao & l. p. mcginnis journal of small business strategy / vol. 30, no. 2 (2020) / 93-105 underdog target marketing strategy next, we draw implications from the motivational bases for underdog affection and use them to help inform a company’s target marketing decisions. as consumers show affection toward underdogs because of certain motivational drivers, companies should understand the key implication of each driver in their target marketing decisions. in column 6 of table 2, we list the key targeting implications of the motivational drivers and will describe them in greater detail below. importantly, companies should note that not all consumers display high underdog affection and they need to target their underdog marketing strategy to those consumers who are most likely to demonstrate high levels of affection and support towards business underdogs. in terms of target marketing strategy, underdog companies should first seek to collect more data about their current and potential customers and, when data allows, segment them according to their underdog affection levels and salience of specific, actionable motivational bases. then, based on the findings of mcginnis et al. (2017), we suggest that underdog businesses target customers who are more responsive to their marketing efforts. that is, they should try to identify and reach out to those customers who have higher levels of empathy and appreciation for the plights of others in their surroundings, who identify themselves as underdogs, who earnestly search for unique product and service experiences, who are more attentive to daily struggles of small business underdogs and may particularly enjoy seeing them succeed in their pursuits, and who may have certain nostalgic associations with the company and local community (miller & kim, 1999). they should also try to identify and target customers who care more about balance in market power and appreciate more product and supplier choices, either for idealistic or practical (e.g., dependence balance or risk assurance) reasons, who demonstrate dissatisfaction with top and leading brands and may even show resentment toward dominant players in the industry, and who are less materialistic about their shopping and consumption activities. sharp targeting is particularly important given the very limited resources and inability of underdog companies to offer wide ranging product and service selections to appeal to broader markets (miller & le breton-miller, 2017). better targeting will allow them the opportunity to focus their resources to generate maximally possible returns to their resource expenditures. underdog positioning strategy in this section, we link the motivational drivers for underdog affection to a company’s positioning strategy. in column 7 of table 2, we list the key positioning implications of the motivational drivers and will describe them in greater detail below. in terms of positioning strategy, underdog companies need to clearly articulate and invest wisely into creating a compelling value proposition for their chosen target market. they should carefully evaluate the competitive situation and their internal resources and seek to identify and deliver some unique ways of adding value to the target market. having a clear positioning strategy is particularly important as underdog companies need to achieve satisfying returns to their often-limited resources (joshi & anand, 2018; parnell et al., 2015). the minimal room for error dictates a sharp focus by these companies (williams jr. et al., 2018), and clear positioning constitutes a significant step toward achieving market and financial success as an underdog business (parnell et al., 2015). while resource limitations make small businesses naturally different from the top dogs, underdog businesses should try to build a unique organizational identity on their own terms as well and attempt to differ from other underdogs at the same time (joshi & anand, 2018). in seeking to create unique value experiences for the customers, they should analyze the specific needs of the customers and identify opportunities that may not require substantial resources but could still allow them to add considerable value to the customers. one possibility is to position the company as an undying presentation or a spokesperson of a beloved local tradition and good old values and lifestyles in the local community. another approach is to present the company as a viable alternative option for buyers looking for new experiences or broadening their supplier base, especially to potential customers dissatisfied with dominant offerings. generally speaking, underdog companies should refrain from positioning the underdog experience as a materialist consumption activity because highly materialistic customers interested in pursuing status symbols from consumption activities tend to shy away from underdog lookalikes (kleine et al., 1993). yet, an opportunity might exist for underdog companies to highlight their one-of-a-kind consumption experience to customers who do display great materialism (chan et al., 2015). and in communicating about the company’s positioning strategy, underdog brands can not only tout their humble beginnings, origin, and resource limitations, they should also more importantly stress their diligent efforts at improving customer experience despite all the challenges. 102 t. gao & l. p. mcginnis journal of small business strategy / vol. 30, no. 2 (2020) / 93-105 implications and conclusion an increasing number of business studies have examined the underdog phenomenon in recent years (keinan et al., 2010; mcginnis et al., 2017; mcginnis & gentry, 2009; paharia et al., 2014; paharia et al., 2014; paharia et al., 2011). yet, while these studies have generated important insights about the presence and antecedents of consumers’ underdog attitudes and affections, they have not undertaken a systematic investigation of the underdog consumption experience concept. and while some articles in the business press and the research literature on small and local businesses have hinted at ways of better competing as business underdogs (burlingham, 2016; cochran, 2001; gladwell, 2013; headd & kirchhoff, 2009; leadem, 2016), the coverage of the underdog marketing topic in such outlets has been limited and again often non-systematic. the research findings and managerial implications discussed in prior underdog studies have generally centered around the need and potential for pertinent companies to communicate about their existing underdog status, rather than advising them on how to build and enrich the underdog consumption experience itself. in view of the above limitations of prior research, we dedicate our current study to a primarily managerial audience, seeking to offer a series of coherent, systematic, relatively complete, and innovative perspectives on how underdog business entities can effectively and efficiently build and sell a broader, richer underdog consumption experience to the pertinent target markets. such a holistic treatment of the underdog marketing strategy concept is significantly broader in both scope and depth than what has been achieved in prior communication-themed research in the underdog marketing field (e.g., keinan et al., 2010; paharia et al., 2014). following the tenets of the contingency perspective of strategic decision-making (chandler, 1962) and the market orientation theory (narver & slater, 1990; jaworski & kholi, 1993), we advance suggestions to managers in underdog businesses on how to build and sell a rich underdog consumption experience based on recent empirical findings on the motivational bases of consumers’ underdog affection (mcginnis et al., 2017). by integrating the conceptual model and empirical findings on motivational bases of consumers’ underdog affection (mcginnis et al., 2017) with key areas of a company’s marketing strategy, we follow a structured process (motivational bases –> company actions –> customer benefits) to generate novel propositions on building as well as selling a compelling underdog consumption experience. though our current article was primarily inspired by mcginnis et al. (2017), it goes significantly beyond the managerial implications discussed in that study. the ideas presented in our current study thus represent a major departure and significant addition to past research that typically focuses on how to effectively communicate the underdog story to the marketplace, rather than building and strengthening it as well. our research is also suggestive of relevant directions future research on underdog marketing, such as on collecting data to link companies’ provision of a complete underdog consumption experience to their market and financial performance outcomes. broadly speaking, we advocate for a conscientious, systematic strategic planning approach to the formulation and implementation of a holistic underdog marketing strategy. nevertheless, owners and managers at small businesses should be prepared to sense, respond to, and cope with any unexpected situations arising from their underdog marketing strategy (cf. chia & holt, 2006; ng & al-shaghroud, 2018). managerial implications our research findings could potentially benefit many types of underdog business entities, in various market contexts. to fit consumers’ general notions of underdog businesses, for a company to qualify as an underdog business, it would typically face some major competitive disadvantages against dominant industry players in areas such as resources, scale and scope of business operations, market share, customer base, and name recognition. according to some authors, an entity may gain underdog affection irrespective of its size and market dominance, if the right heartstrings are tugged and the correct facilitating conditions are in place (kim et al., 2008; mcginnis & gentry, 2009; paharia et al., 2011). it is particularly important to note that being a small or local business does not mean that consumers will automatically view them as underdog businesses. as research has shown, consumers judge a company’s underdog status using two primary considerations: (1) their lack of resources and competitive advantages and (2) their perseverance (mcginnis & gentry, 2009; vandello et al., 2007). to materially benefit from the underdog business status, however, the company should also be able to demonstrate to the target market their persistence despite all the odds against their survival and growth. the key managerial takeaways from our research can be summarized as follows. first, companies must start their efforts at creating a superior underdog consumption experience by developing a serious underdog attitude. underdog companies should demonstrate their toughness in persistent fighting despite facing numerous internal and external challenges and attempt to create a unique, rewarding customer experience out of the limited resources. given their resource and market position limitations, maintaining a sharp 103 t. gao & l. p. mcginnis journal of small business strategy / vol. 30, no. 2 (2020) / 93-105 focus and giving the utmost dedication to the core needs of a particular target market are often essential for the success of underdog firms. and they must avoid making strategic mistakes, quickly learn from any mistakes made, and seek to optimize the performance impacts of their marketing decisions. second, in terms of product strategy, underdog companies should try hard to create an underdog worthy product experience by offering unique products and services rivaling those of major players, tailored to local needs and individual customers’ needs, and linked to local or industry traditions. once a compelling product experience is achieved, many customers could be ready to purchase from the underdog company for both the unique products and opportunities to diversify their supplier base or consumption experiences. third, in terms of pricing strategy, while it is hard for underdog brands to compete with big players on price levels due to a lack of operational scale economy and purchasing bargaining power, they should seek to beat the giants on flexibility and old-fashioned customer care with regards to both pricing itself and a broader range of contractual terms. having customized, unique product offerings should further help underdog firms avoid price competition. fourth, underdog companies should adopt a multi-pronged communication strategy where the right and fitting message about a compelling underdog consumption experience is conveyed to the right audience. they are advised to highlight their perseverance as fighting underdogs, mentioning their dominant counterparts when appropriate, that would inspire hope and admiration from the consumers. they should also promote their unique, customized, and flexible product offerings, with relevance to community or industry traditions when appropriate, and highlight their strong devotions to the unique and evolving needs of a more limited clientele. fifth, in terms of distribution and supply chain strategy, the company may want to build partnerships with other underdog businesses to help bolster their collective images as fighting underdogs. sixth, in terms of target marketing strategy, the company should seek to collect more data about their current and potential customers and segment them according to their underdog affection levels and salience of specific, actionable motivational bases. finally, in terms of positioning, underdog brands can not only tout their humble beginnings, origin, and resource limitations, but they can also more importantly stress their diligent efforts at improving customer experience along all major drivers of underdog affection despite all the challenges. references allen, e. 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(2002). the social-psychological bases of anticonsumption attitudes. psychology and marketing, 19(2), 149-165. st"i5i"i'x"~f the small business equity capital situation: an economic development perspective michael d. ames california state university fullerton sbiantesgfultertott. edu john k. romano virtual capital group info@virtualcapitatgroup. corn vi t. pham california state university fullerton vpham 2000@yahoo.corn abstract mony observers perceive a gap benveen ihe need for high risk, patient equity capital andits availability to privately-held, small businesses. owners of successful companies, consistently profitable but small anil lacking glamour, often report that rapid expansion is hard to fund. tlie major sources of worl'ing capital for such firms are loans, and lenders are uncomfortable witli rapid change. lettders view fast growth and debt financing as incompatible. the alternative is equity fiinding, and equi ty funding seems hard to find. the autliors review ihe equity capital situation for small business. tliey weigh the relative meidis of differing erpert opinion, and assess the policy implications. the authors take an economic ilevelopnient perspective; i.e., they seek solutions that will make the economic pie bigger. they contend tliai ihe best solutions will have a balanced, twofold impacri (l) increase the availobility of high risl, patient equity capital, and (2) increase the availability of high-quality equity iiiveitnients in privately-held, small businesses. they argue that the best solutions will combine evolutionary changes in public policy and private action. the authors describe specifically how legislatioii, regulation, and jinancial institutions might evolve. the resulting marketplace would provide the strongest small companies with beuer access to the capital needed for rapid growth. they also describe specific steps thar small businesses and tlieir advisors can take to better prepare to enter equity markets. introduction many entrepreneurs snd their advisors perceive sn equity capital gap. the gap exists between (i ) the need for high risk, patient equity capital, and (2) the capital available to privately-held, small businesses. owners of successful companies, consistently profitable but small and lacking glamour, often report that rapid expansion is hard to fund. the major source of working capital for such firms is commercial bank loans. however, lenders are uncomfortable with rapid change. lenders view fast growth and debt financing ss 37 journal of stnall 0uu'ness srrategv i'!/. l3, no. 2 faetlt'i nit r 2002 incompatible (dennis, 2000). 'i'hc alternative is equity funding, and equity funding seems hard to (in&i. the first section of this article reviews the equity capital situation for small business. it appears the equity capital situation has two major dimensions. first is the availability of high risk, patient equity capital. (in this context, "patient" refers to equity investors that do not require buyout in five years or less.) second is the availability of high-quality equity opportunities for investment in privately-held, small businesses. the article reviews both dimensions, weighing the relative merits of differing expert opinion in a sophisticated u. s. financial ntarkctplace. next, thc article assesses the policy implications. when considering public policy, taking an econoinic development perspective is useful, and the authors do so. if economic development is thc policy goal, what should bc done about the equity capital situation for small business? ls it significant enough to warrant attention? if so, what kind of attention will it require'.& the article argues that the best solutions will combine evolutionary changes in public policy and private action. the article describes specifically how legislation, regulation and financial institutions might evolve. the resulting marketplace would provide the strongest small companies with better access to capital needed for rapid growth. the article also describes specific steps that small businesses and their advisors can take to better prepare to enter equity markets. the availability of equity capital for small business it appears that the availability of equity capital has two major dimensions. first is the availability of high risk, patient equity capital. second, is the availability of high-quality equity investment opportunities in privately-held, small businesses? this section reviews both dimensions. it weighs the relative merits of differing expert opinion in a sophisticated u.s. financial marketplace. is there a shortage of high risk, patient equity capital? expert obscrvcrs have differing opinions about the perceived shortage of small business equity capital. two main schools of thought dominate concerning the perceived shortage or "equity capital gap," each with different policy implications. one school argues that an equity capital availability shortage exists in the united states (kuratko, lamone & kash, 2000; numark, 1995; sive & ames, 1996). they contend several factors contribute to this shortage including market inefficiencies, fraud, legislation, and regulatory practices. the other school argues that no significant equity gap exists (dennis, 2000; black, 1998). they contend that u.s. equity markets are efficient, and that current legislation and regulatory practices are appropriate. they offer as evidence the fact that the u. s. is the strongest equity marketplace in the world. a recent survey report by the global entrepreneurship monitor (gem) provides useful international data. results of the survey suggest that both schools of equity gap opinion are partially right, and partially wrong (zacharakis, et al., 2000). gem research teams conducted in-depth interviews and administered questionnaires to experts in selected domains of entrepreneurship. the study notes that experts in the financial 38 journo/ of small business srroregv vo/. /3, no. 2 fo//iivinrer 2002 support domain perceive that, among venture capitalists, too much money is chasing too few deals ($ 80 billion in the first nine nionths of 2000) (zacharakis, bygrade & shepard, 2000). it also estimates that 7 percent of adults in the u. s, were informal investors ("angels" ). angels invested an average of $3800 per year in recent years, predominately in new ventures started by family members, work colleagues, neighbors and friends. the study extrapolates its findings to the u. s. population as a whole. it estimates that angel investors contribute about $54 billion per year in venture financing (zacharakis, et al., 2000). a final observation from the study, relevant here, is that the "geographic disparity in entrepreneurial activity (especially high technology entrepreneurship) and infrastructure support for entrepreneurship (especially risk capital) continue to be a problem in many parts of the united states. two-thirds of the total venture capital invested nationwide in 1999 went to five states." (zacharakis, et al., 2000). the states were california, massachusens, new york, texas, and colorado. how do the gem findings compare with arguments made by those who believe an equity gap exists, and those who do not? kuratko, et al. (2000), represents the national consortium of entrepreneurship centers. the consortium believes an equity capital gap exists. in a september 2000 white paper, kuratko, et al. (2000), observe that the lack of infrastructure suppon is not due to the amount of money needed, but is due to a lack of efficient means of distribution of the needed funds. in their view, the private equity marketplace extends far beyond venture capitalists. it is "the last truly disjointed 'low tech'inancial marketplace in the united states," comprising "nearly $5 trillion in assets that are not now efficiently made available for investment purposes (i.e., private equity deals)." (kuratko, et al., 2000). kuratko, et al., also cite data lending support to the gem project's contention that geographic disparity exists, at least regarding venture capital investments —nearly 75 percent goes to silicon valley, the new england region, the raleigh research triangle/southeast region, the midwest, the baltimore-washington-richmond corridor and the n. y. metroplex (kuratko, et al., 2000). many good business plans do not get funded simply because of an unhappy accident of geography. in their view, the market for private equity is unorganized and depends mainly on personal relationships. "a ...small circle of vc firms are attempting to handle an astounding amount of business. however these firms cannot possibly handle the deluge of (new economy) business opportunities now being developed throughout the country. the result: an inordinate number of viable business plans go unreviewed merely because there are not enough people to analyze them, or they are not able to reach anyone' radar screen" (kuratko, et al., 2000). william j. dennis, jr. presents the views of the national federation of independent business (nfib). the nfib concludes, with some qualification, that there is not a significant equity capital gap (dennis, 2000). according to dennis, accessibility to "loans, investments and other infusions of capital from outside the firm... have varied substantially over the last quarter century, but more capital is available today for more small-business men and women than at any other time in memory. yet, financing gaps remain —situations and people who for one reason or another (besides being a poor risk) cannot obtain funds to finance their small business operations. the task of policy makers is to focus resources for these gaps rather than spreading the largess across the country" (dennis, 2000). dennis concludes that, "the small business finance problem, when and where it exists, consists of a series of gaps in the credit and equity markets (i.e. 1. mid-sized starts, 2. rapidly growing businesses, 3. business cycles, 4. transitions (in the nation's financial 39 jonrnnl r&f.'ynnll 8nsinnss .'9rnrqtlv lrnl l3, no. 2 foll/wittier 2002 sector), 5. certain ethmc groups (discriinination against african-americans, and to some degree i-lispanics and asians), and 6. 'froubled i)usincsses.) ....unfortunately, it is difficult to quantify the size of the gaps or thc numbers impacted, but the lack of overall concern among those directly involved suggests that they are limited —at least at this time" (dennis, 2000). of the six gaps that dennis mentions, the first two relate most directly to the present discussion. considering the results of the gem study, the first two gaps may be more important to economic development than dennis estimates. 1. gap one. mi&1 sized starts, refers to the estimated 10 percent of starts that rely on private investors, not including venture capital companies, and that need between $250,000 to $3,000,000. the financing gap for new starts appears when the start's planned need for capital outstrips the amount that an individual, or an individual and a partner can raise. the amount varies due both to the individual's resources and his ability to find others willing to invest. (assuming the owners wish to find informal investors.) according to focus group studies reported by the national commission on entrepreneurship and frcear, et al., (1994), the gap appears when the planned need for capital is about $250,000 to $3,000,000 (13uilding companies, 2000; freear, et al., 1994). 2. gap two, rapidly growing businesses, refers to the capital needs of fimis with growth rates exceeding 20% per year. as they expand, cash receipts never quite catch up with cash going out. further, such firms often do not grow steadily so cash flow is unpredictable. "lending to these firms is very difficult. they customarily have relatively few assets to use as collateral. (the entrepreneur is the biggest asset.) they seem to need money all the time, but the lender can never be quite sure if a sales downturn is the prelude to another upturn or the precursor of disaster. there is a huge up-side to lending to these firms from a bank's perspective. if successful, the business will eventually stabilize, and the bank will certainly enjoy the inside track for a profitable relationship. but there is also a huge downside. the chances of the firm going "belly-up" (are higher), and (the chances of) the bank being able to recapture resalable assets are much less, than in a slowly growing fimi. banking is not a high risk-reward business. it is a fiduciary business meaning there are strict limits on the risk it can take with high growth firms. equity appears to hold the greatest potential for rapidly growing firms. but, matching angels and entrepreneurs is not easy. institutional venture capital funds may be possible, but industry, geography, and the speed of the firm's growth, investment size, etc. limit the opportunity. " (dennis, 2000). in summary, a majority of researchers and practitioners agree with the qualitative assessment that the small business equity capital gap does exist. research sponsored by the nfib suggests that few small businesses view it as critical —perhaps less than 10 percent of new and rapidly growing firms (dennis, 2000). however, when the need exists, deserving owners face difficulties in accessing capital because of the unorganized marketplace for private equity (kuratko, et al., 2000; numark, 1995; sive & ames, 1996). lenders will not fill the gap (dennis, 2000). further, if three common conditions exist, venture capitalists will not fill the gap: (i ) the equity infusion required is $250,000 to $3,000,000, (2) the firm is not in the right 40 journal of smoll business strategy vol. l3, no. 2 fal/iwinrer 2002 industry, or (3) the firm is not in the right geographic area (zacharakis, et al., 2000; building companies, 2000; freear et al., 1994). the capable business owner must pursue the elusive angel investor. is there a shortage of high-quality equity investment opportunities? the second dimension of the equity capital situation for small business is the availability of high-quality equity opportunities for investment in privately-held, small businesses. jill e. fisch summarizes the views of many. "the inability of small businesses to find adequate capital may not indicate a market failure. the high failure rate of small business demonstrates the risky nature of small business investment; small businesses may not generate sufficient returns to compensate investors for assuming this risk. the inability of businesses to obtain funding does not demonstrate the existence of underfinanced [investment opportunities] with positive net present value[s]." (fisch, 1998). observers subscribing to this viewpoint argue that the problems lie with the companies seeking funding and with their advisors and underwriters. they argue that adequate equity funds are available for companies with savvy, honest management, a good track record, and knowledgeable advisors. in their view, equity scarcity reflects shortcomings in the investment offered and in the way the company offers it. equity capital is available for good investments. for example, the gem study reports that, in 2000, experts in the financial support domain perceived that, "among venture capitalists there is too much money chasing too few good deals." (zacharakis, et al., 2000). while kuratko, et al. (2000), and dennis have differing views concerning the capital-availability dimension, they have similar views concerning the quality dimension. kuratko, et al. (2000), observe that,?vc funds often turn away interested investors, with money in hand, because they cannot find enough qualified deal flow." (kuratko, et al., 2000). why can'i they find qualified deal flow? dennis perhaps provides some answers. he observes that financing is not the most difficult problem faced by people who started new firms in the late 1990s. other issues, such as poor marketing, stall the move from business planning to accomplishment. in other words, many new ventures suffer from novice errors easily spotted by sophisticated investors. dennis also notes that many established owners do not fit the qualified-deal mold. (they will)... "skip an offer because they have to surrender too much control. the purpose of business ownership in the first place may have been to escape curbs imposed from the outside. therefore, the owner may (choose to accept)... slow growth to retain full ownership." (dennis, 2000). in short, the small business owner doesn't know how to play the external equity game and, once he learns, may not choose to play. perhaps equity'markets will have to evolve that are more "owner friendly" in order to attract qualified deals. experts in securities markets and securities law have given much thought to the evolution of equity markets. specificafly, they explore future ways to match equity capital with qualified deals in public and quasi-public offerings. they discuss topics such as use of the internet, direct public offerings, and how to maintain honest markets. their work is rich in intelligent commentary on investment quality applicable to the present discussion (black, 1998; choi, 1998; cielusniak, 1998; coffee, 1997; hass, 1998; hernandez, 1993; langevoort, 1997 and 1998; mason, 1998; mcglosson, 1997; mondschein, 1999; niesar bt niebauer, 1992; thompson, 1999). 41 3oaraal ofsatag barioess sirrae!ii''ol. /3, no. 2 fall/ivinrer 2002 a prime example is bernard s. black's discussion ol'nformation asymmetry (black, 1998). l3lack's views rcflcct thc thinking of many concerning investment quality. he expresses doubt about whether the internet will significantly reduce the cost of obtaining capital through a public or quasi-public offering. also, he does not believe the internet will increase thc availability of high-quality equity investments. black observes that the issuer making a direct public oflering via the internet knows the quality of the securities offered. however, the investor does not and cannot easily find out. the issuer has information; the investor needs information. "the issuer has an incentive to puff or lie and the investor can not directly verify the quality of the information that the issuer provides. this problem is especially serious to small issuers. the smaller the issuer, the less the investor can rely on the issuer's prior reputation as a signal of the quality of the information that it provides securities markets are an example of a market for lemons. investors don't know which issuers are truthful and which aren't so they discount the prices they will offer f'r all securities. that makes honest issuers less interested in offering securities, but doesn't discourage the dishonest ones. this problem of 'adverse selection'y issuers, in which high-quality issuers leave the market because they cannot obtain a fair price for their shares, while low quality issuers remain, makes the lemon problem faced by investors still more severe. " (black, 1998). black goes on to argue that successful securities markets develop institutions and "reputational intermediaries" (who lend their reputations of offerings by their clients'ompanies) to counter adverse selection, including: ~ securities laws that require extensive disclosure. ~ sanctions for misleading disclosure, including liability of reputational intermediaries who lend their reputations to offerings without performing due diligence. ~ well funded regulatory agencies. ~ accounting rules that limit fudging of financial results. ~ a skilled accounting profession that can detect fraud. ~ investment bankers who will investigate the issuers of securities that they underwrite. (they perform due diligence because their firni's reputation depends on not selling fraudulent, or over priced, securities to investors.) ~ securities lawyers that perform due diligence, ensure offering documents comply with disclosure requirements, and counsel against excessive puffing that might lead to legal liability. ~ for smaller firms, venture capitalists who also conduct due diligence of issuers, and then lend their reputation to an offering. according to black, these institutions and reputational intermediaries reduce both the likelihood of fraud and extreme puffing and the extent of adverse selection. the work of these entities attracts honest issuers to the market and attracts investors willing to pay more for securities. however, he notes, regulatory compliance and the participation of reputational intermediaries are costly. audits and due diligence investigations are expensive, and more expensive per dollar of assets for small companies than for large ones. yet, he finds it hard to imagine a large market for public or quasi-public offerings of unaudited companies. (black, 1998). 42 journal of small business strategy vol. j3, no. 2 fall/brinier 2002 as noted above, many other experts agree with black's observations. for example, kevin mason notes that "two of the thorniest problems in internet marketing and distribution of securities are fraud and the general lack of confidence in on-line investing" (mason, 1998). he lists many ways the dishonest can use the internet to manipulate markets (mason, 1998). john c. coffee, jr. provides a similar list of ways to defraud (coffee, 1997). stephen j. choi argues that private sources of investor protection, including third party certifiers of information, will evolve to increase confidence (choi, 1998). donald c. langevoort notes that '...attention ...has been paid to the function that financial intermediaries play in signaling and bonding the infonuational credibility of issuer disclosure. by definition direct marketing (dpos) foregoes this type of bonding, and it is far from clear that many start-up ventures can afford to do without it." (langevoort, 1998). according to the scor report, a newsletter that tracks dpos less than forty percent of dpos have been able to raise any money (sjostrom, 2001). in summary, the capable small business owner who pursues elusive outside equity capital must address costly quality issues. in many regards, addressing quality issues internally can improve the company. observers, who contend that a significant equity capital gap does not exist, have a point. some small companies have novice management teams who puff aggressively, and have no track record. equity scarcity for these companies properly reflects shortcomings in the investment offered and in the way promoters offer it. however, right now, for the best small companies, quality assurance to attract outside investors is costly and, hence, it is only done to attract large amounts of equity. for example, the costs for a small ipo of five to eight million dollars will be about 20 percent of the gross proceeds ($ 1.6 million!) (gallagher &: hansen, 1999). are there ways to make raising capital less costly, and to expand the pool of qualified deals, without eroding investor confidence? policy implications when considering public policy, taking an economic development perspective is useful. if economic development is the policy goal, what should be done about the equity capital gap for small business? is it significant enough to warrant attention? if so, what kind of attention will it require'? the equity capital gap appears significant. the number of new and rapid growing firms affected by the equity capital gap is small. however, the numbers have a significant multiplier through job creation and greater economic viability throughout the country. given a sound business plan and proven track record, a projected "mid-sized" need for outside equity of $250,000 to $3,000,000 suggests that the firm seeking funding has large revenue and job creation potential. the risks of investment are high. however, if the marketplace can match a capable owner with high risk-reward investors, success is probable. one success can make a big difference to a small community or depressed area. given a significant equity capital gap, what kind of attention will it require? it appears that the best solutions must have a balanced impact on the rwo dimensions of the equity capital situation. the best solutions will both: (i) increase the availability of high risk, patient equity capital, and (2) increase available, high-quality equity investment opportunities in privatelyheld, small businesses. devoting resources to one impact dimension, while neglecting the other, will not lead efficiently and effectively to economic development. 43 jnnriinl nf sntnll /3n»inc»» sirniigv vnl. /3, nn. 2 fnll/iv/nier 2002 presently, public and private resources, devoted to the small business equity situation, have been focused on the first dimension: incrcasmg the availability of high-risk, patient equity capital. for example, use of the intcrnct is a hot topic in tbe securities law community. as a communications medium, the internet can help increase the availability of equity capital. the internet promises to reduce the cost of information transmittal from issuer to investor. it will give needed national exposure to offerings by firms in industries or geographic locations unpopular to venture capitalists and underwriters. sba's office of advocacy launched the angel capital electronic network (acenet) in 1997 to match potential investors with potential entrepreneurs through use of the internet (h://www.sba. ov/advo/acenet.html ). acenet network operators in several states act as neutral third parties to broker the deals. waivcrs of "consumer protection" rules from state securities commissioners ease the flow of capital across state borders. a handful of similar internet matching services have formed in pi « ic g i .4 g k t i i gyv ~i ofl' capital markets, l. l. c, (www.offroadca ital.corn, olima co. ltd. (www. artnerseek.corn, virtual capital group.corn, inc, (www.virtualca ital rou .corn . the company associated with the national consortnim of entrepreneurship centers, beacon venture capital.corn inc. (www.beaconventureca ital.com provides matching services oriented toward financial professionals. however, studies previously cited in this anicle suggest that use of tools like the internet will not, by itself, dramatically increase "deal flow." the internet can support private placements via angel/sniall business networks, quasi-public offerings, public offerings, and direct public offerings. however, unless one addresses the other dimension of the equity capital situation, quality investments, internet matching services will not live up to expectations. how does one increase the availability of high-quality equity investment opportunities in privately-held, small businesses'& to do so, participants must take steps to transform more mid-sized starts and rapidly growing small businesses into high-quality equity investments. high-quality equity investments will be more attractive to high risk/high reward investors. also, participants must take steps to develop quality certification methods for small offerings. use of such methods will at least assure investors of an honest offering, and perhaps rate the company's prospects, or even provide some form of guarantee. further, ~ business owners must not perceive the cure as worse than the disease; ~ the steps must enhance, not disrupt, business operations; ~ the steps must be affordable; and the steps must not wrest ownership control away from the entrepreneur. the best solutions to either dimension of the equity capital situation, equity capital availability or quality investments, will combine evolutionary changes in public policy with private action. first, consider the dimension of equity capital availability to small business. existing u. s. equity markets for larger otferings are efficient. current legislation and regulatory practices help make the u. s. the strongest equity marketplace in the world. the task is not to throw out the established. the task is to "scale down" elements of a system that works to make a place for efficient and effective small business offerings. table i provides examples of recent developments and possible future policy directions regarding the equity availability dimension. 44 journal of small business strategy vol. /3, jtlo. 2 fal/ijvt'nter 2002 table 1: making a place for small business offerings recent developments: 1. the sec, has taken no action concerning matching services like aceinet and it is considering the implications of electronic medium. it is balancing the need for equity with the need for honest markets (use of electronic media, 2001; abelson, 1995; allebach, 1999; arms & mcguire, 1996; cella & stark, 1997; cielusniak, 1998; coffee, 1997; green & sperber, 1993; lane, weirick & mcphee, 2000; mahoney, 1997; mondschein, 1999; quinn, & jarmel, 2000; thompson, 1999). 2. current actions by the sec and states are moving gradually toward articulation of state and federal regulations to simplify national offerings of small offerings. the trend reflects a long history of legislative, regulatory, and securities industry concern (national market system, 1980; report of the task force, 1997; coulson, 1998; easterbrook & fischel, 1984; galbraith, 1988; hernandez, 1993; makens, barnes, & harris, 1999 and 2000; niesar, & niebauer, 1992; olson, et al., 2000; pettilon, 1995; raghaven, lohse, & anderson, 1995; sargentich, 1984; thomas, 1967; train, 1981; walton & hogan, 2000; sjostrom, 2001). still, some would argue that the establishment remains too protective of retail investors. there remains less enthusiasm for encouraging the retail investor to invest in promising small companies than for encouraging state lotteries. (1995 national gaming survey, 1995; kpmg peat matwick llp, 1994; devine, 2001; sive & ames, 1996). 3. nasdaq, as one supporter of the national consortium for entrepreneurship centers, is seeking ways to address the small business equity capital gap. their search is not a new initiative, it has been going on for some time. also, the nasd (otc bulletin board) and the national quotation bureau (pink sheets) are seeking ways to better serve issuers and investors in small-cap equities. issuers who do not wish to list on an exchange or with nasdaq (coulson, 1998; niesar & niebauer, 1992; sive & ames, 1996). 4. the best internet matching services are now building clientele well within regulatory guidelines (report on the task force on the future of shared state and federal securities regulation, 1997; fisch, 1998; kuratko, et al., 2000; meer & nadler, 1998; moriarty, 2000; myers, 2001; romano, 2001). however, one must view current efforts as experimental. some, like the american stock exchange's emerging company marketplace and the pacific stock exchange's scor marketplace (both now defunct), will not survive. (pacific exchange likely to drop scor marketplace, 1998; coulson, 1998; hernandez, 1993; langevoort, 1998). 5. direct public offerings on the internet, which one must also view as experimental, have experienced some success within regulatory guidelines. their presence will likely be a catalyst for regulatory refinement, affordable certification services, and secondary market alternatives (choi, 1998; fisch, 1998; gallagher & hansen, 1999; giddings, 1998; greeff, leon-prado, mannix, & ruh, 1998; gruner, 1996; hersch, 1998; hulme, 1998; mamis, 1996; mcglosson, 1997; pounds, 2001; rice, 2001; romano, 2001). possible future policy directions 1. policy makers may refocus their attention away from dictating who will have an opportunity to invest in the small business equity market, and towards the creation of an honest, automated small business equity marketplace. one that offers retail investors, not just accredited investors, the opportunity to make informed, high risk investments. 45 jnnrnnf uf qnnfl linsin& as sn'nicgi l'ul. /3, aro. 2 fnlllfyinrer 2vv2 present policy solutions to the problems ot'he marketplace emphasize two approaches: (i) telling the investor that the marketplace is not a good place to invest (high risk), or (2) requiring that investors meet minimum net worth requirements. the studies surveyed in this article suggest that the intent behind legislation and regulation needs to be refocused towards how to maintain the integrity of the market and investors'onfidence, with less emphasis on deciding who the market participants are. perhaps in the near future, policy makers should allow the low to middle income investor the same opportunity as the wealthy individual to participate in the small business equity market. they are making advances in this direction. i-lowever, public policy, regulators, and the securities industry may adopt a broader, economic development view of small business offerings. for example, while regulators profess worry about retail investors, policy makers in many states have legalized gaming. lottery states have solved regulatory issues and automated the gaming process. they spend millions to establish legitimacy in the public mind and build public confidence. admittedly, lotteries create immediate cash flow for governments. small business equity markets do not. however, sound, long-term reasons exist for policy makers to also overcome obstacles to efficient small business equity markets. perhaps in the future, policy makers will promote small business equity markets extensively, as they promote state lotteries. legalized gaming does nothing to guarantee this country's technological competitiveness on a global level. small business equity markets can contribute significantly. 2. policy makers may choose to encourage the creation of automated quotation media (section 17b(b) of the penny stock reform act). automation would bring greater liquidity to the small business equity market and permit monitoring by private sector analysts and regulatory authorities. trades in a strong small business equity market would be recorded real time, and would be subject to public scrutiny and regulatory surveillance. 3. policy makers may support of legislation that encourages reputable broker-dealers to sponsor issues in small business equity markets. in the interest of regional economic development, government officials may provide equity guarantees for new equity offerings, putting a floor on investor risk and promoting secondary markets. blanket guarantees would be unwise, especially without sound disclosure rules and certification of best practices. however, providing incentives to reputable broker-dealers in special situations would help provide liquidity for investors and adequate financial information to assess the investment as well. the incentives would encourage brokerdealers to sponsor and follow small issues. currently such incentives are weak. right now, negotiated commission rates have largely eliminated the small broker. the large firms, because of high overheads and supervision costs, are not interested in small issues. as a result, most firms will neglect any small business equity market in the brokerage industry. without dealer support, a small business equity market has little chance to attain liquidity. as noted above, the best solutions to either of the two dimensions of the equity capital situation will combine evolutionary changes in public policy with private action. the second dimension is availability of high-quality equity investment opportunities in privately-held, small businesses. as with the dimension of equity capital availability, existing institutions otter means to effectively deal with thc two main components of the investment opportunity dimension: transformation and certification. ("transformation" refers to services that help transform small businesses into high-quality investment opportunities, and "certification" refers to methods that assure investors concerning the honesty of an offering, the company's 46 journal ofsinall business siraregy vol. /3, no. 2 fall/winrer 2002 prospects, or even provide some form of guarantee.). the task is not to throw out the old, the task is to realign or "scale down" service offerings. table 2 provides examples of recent developments and recommends future policy directions regarding investment opportunity availability and its two main components: transformation and certification. table 2: increasing high-quality investment opportunities transformation —do service providers need to get more involved? many entities claim to be in the business of transforming their clients'usinesses into highquality firms. the list includes economic development entities, adjunct programs at educational institutions, university entrepreneurship centers, small business institutes, and management consulting firms. they have much to offer for prices ranging from free to exorbitant. however, few offer a longitudinal approach for small businesses that advise the owner and key managers for extended periods, few assess and certify transformations in the capability of their clients in any meaningful way, and few are willing to accept a pricing structure that matches the task. they prefer tuition, seminar fees, and hourly rates to annual retainers, pay for performance, or stock options. (andrews &: welbourne, 2000; bankman, 1994). entities claiming to be in the business of encouraging transformation might consider how some effective angels'pproach their investments. angels provide more than equity to the entrepreneur. since they have been business owners themselves, they bring critical management skills and experience to the new firm, they also provide monitoring services besides operating funds, ~ they expose the entrepreneur, who may have little managerial expertise, to outsiders with business experience who guide progress, ~ they exercise substantial control over subsequent operations if the entrepreneur doesn' pay attention, develop capability, and get results (cyr, johnson & welbourne, 2000; dennis, 2000; fisch, 1998; freear, et al., 1994; lipper iii, 1998 and 1996; silver, 1985; van osnabrugge dc robinson, 2000). a possible future policy direction concerning transformation ~ in the future, policy makers may encourage services providers to address transformation issues more as angels, and less as trainers. for example, policy makers may support development of longitudinal, private-sector programs that can assess and certify their small business clients. new longitudinal programs may need seed money and initial promotional support, but effective programs may not need long term subsidies. they may be able to support themselves with annual retainer fees, pay for performance, or stock options. university entrepreneurship centers and small business institutes might be logical nexus for such transformation networks, or industry-based angel networks might choose to compete. certification —will the cure be worse than the disease? a balance must be achieved between two key certification issues to increase availability of high-quality equity investment opportunities: 47 jottrnal of sotnll lais(ness 5(rnri'sw i'ol. /3, rvo. 2 fallill'in(er 2002 ~ honesty —how will neiv methods avoid giving false legitimacy and respectability to the securities of i'raudulent issuers'! ~ burden —how will new methods perform necessary audits and due diligence without being too burilensome for legitimate, sinall companies'? (easterbrook 8; fischel, 1984; freear, et al., 1996; fletcher iii g; edward, 1989; friedman, 1970; hass, 1998; langevoort, 1997; mason, 1998). many models exist that suggest how the certification component might evolve: ~ building on the generally accepted accounting practices (gaap) idea, the accounting and legal professions could develop "generally accepted small business offering practices" (gasbop). gasbop would guide those that prepare small businesses to seek outside equity. such standardization is possible, as evidenced by the success of iso 9000 certification in the manufacturing realm. ~ given a more uniform nature of the equities, certified public accountants could profitably audit sniall firms. also, securities attorneys could profitably perform due diligence for small firms, at lower cost. ~ to further mitigate cost impacts while preserving review quahty, cpas, securities attonieys and underwriters could modify fee payment plans. for example, they could adopt a version of the approach used by corporations that offer prepaid legal plans. the approach would allow small business clients to save over time to pay for work on a future public of1'ering. or, they could form buying groups that help clients pool their resources so they can earn discounts on registration and disclosure expenses. ~ credit rating iirms, and firms such as moody's, already collect financial data and assess credit worthiness. given a uniform nature of the equities, these firms could probably devise special rating schemes. for example, they could probably rate a rapidly growing small business from an equity investment perspective. they might even devise a separate rating scheme for mid sized starts. ~ finally, in specific instances that involve a strong public interest, the government might provide equity guarantees for qualified new offerings. guarantees of small business loans illustrate what might result from equity guarantees. guarantees for small business loans have helped created a loan marketplace. loan guarantees encouraged the formation fs n i da fg -g dfl d .i .~l also, they led to securitization of guaranteed small business loans. the u. s. small business administration has procedures in place for qualifying "direct lenders" who directly underwrite loans with government guarantees. similar institutions and procedures would evolve for guaranteed equities. a possible future policy direction concerning certification ~ policy makers may choose to avoid reporting exemptions in favor of certification. they may address certification issues by demystifying and standardizing audit, due diligence, business appraisal and investment rating practices. small issuers generally provide negligible public information to investors regarding the financial standing of the underlying corporation. the reason is that many such issuers are not reporting companies under the exchange act. while regulators can "scale down" disclosure and other requirements for small businesses, allowing blanket reporting exemptions does legitimate small businesses little good. the small investor will not pay a reasonable price unless an informed trade is possible, supported by selected balance sheet and financial performance data. the sec could make financial disclosure affordable by promoting 48 journal of small business strategv vol. /3, no. 2 fall/winter 2002 widespread use of the u-7 fomi or other standard. also, the sec could work to standardize and simplify periodic financial reporting by smaller companies. in this regard, the sec could work with the legal and accounting communities. together, they could come up with standardized, economical ways to provide the necessary information to the marketplace. certification of quality builds investor confidence. the foundation stones of certification must be standards. the accounting and legal professions could promulgate generally accepted small business offering practices. if they do, it would be helpful if these practice guidelines went beyond full disclosure requirements, specifying practices that will prepare small businesses to seek outside equity. they, licensed third parties, or government entities, could certify compliance. certification will help create a more uniform nature of the equities and help investors make informed decisions. for example, based on accepted practices and compliance certification, investment rating firms could rate small business'offerings, even starts. implications for small business owners and their advisors small business owners and their advisors can act now to improve access to cash for their firms. what might work in the future at a macro, policy level can be "scaled down" to guide today's pursuit of cash. the studies reviewed for this article suggest seven important steps for improving access to cash. table 3 presents the recommended steps. recent articles in financial executive and the new york law journal discuss the process of raising cash and refer to many manuals, books and web sites that can help guide small business owners and their advisors in the elusive pursuit of cash. (littenberg, 2002; ask an fei researcher, 2001) table 3: in pursuit of elusive cash: hostv to iihi prove your firm's access to funds step i; determine if you need equity from outside. ~ update your business plan goals, how you will achieve them, time line, revenues and costs. based on your plan, prepare a rough cut cash flow projection — monthly deposits, disbursements, net cash surplus (deficit) for each month, and cumulative surplus (deficit) over time. ask yourself four questions; how much money will you need and when? when will your maximum need (maximum cumulative deficit) occur? how much is your maximum needed cash? do you already have access to sufficient cash to meet your maximum need when it occurs? ~ if you have sufficient cash, you do not need outside equity capital to achieve your plans. focus on executing your plan. if you do not have sufficient cash to achieve your present plan, or suspect you will need cash in the future to move to the next level, budget money to prepare for fund raising and proceed to step two. step 2: build your reputation. most angels and venture capitalists will not seriously consider unsolicited investment proposals or dpos (sjostrom, 2001). unless you are referred by someone they trust, you will not get an appointment. also, if you have a good reputation in your industry, investors will perceive less risk, and you will get a better deal. hence, it is extremely important to build relationships with respected advisors and key industry figures who are widely known in your industry. build your reputation by surrounding yourself with credible advisors and building business relationships with major industry representatives. 49 journal of snirill fins'ness srniicgi i'o/. /3, na. 2 fnllllgini r 2002 get a banker on your side. share your plan, your financial statements and your corporate and peisonal tax returns ivith your bank's loan officer. even if you do not plan to borrow money, a reference from good loan officer who is known in your industry will help you find equity capital. ask your loan officer fora critique and an opinion of how much cash you will really need to achieve your plan. if your bank's loan officer does not understand your business and/or cannot work through with you how to achieve your plan, seek another loan officer or lender that knows your industry. you need a lender who understands your plan, believes in your prospects, and will introduce you to potential investors. get a cpa on your side. if you foresee a significant need for cash in the future, it is now time io get your financial house in order. you need advice on how to consistently make money. (van osnabrugge & robinson, 2000) you need audited financial statements, budgets, and comparisons of your firm's financial performance to its industry. more than that, you need a respected cpa firm to vouch for you and to introduce you to potential investors. share your plans. seek a respected cpa firm that knows your industry, understands why you are special, believes you will do well, and will introduce you to potential investors. ~ ciet a corporate law firm on your side. select a firm that is well known and respected in your industry. even though you may never "go public," select an attorney within the firm who has ipo and merger/ acquisition experience, knows your industry, and believes in your prospects. such an individual will be able to introduce you to an informal network of financial middlemen and investors. ~ get key industry people on your side suppliers, customers, trade association executives. actions speak louder than words. pay promptly, deliver on your promises to customers, become an officer of your trade association and demonstrate your integrity and expertise in all your business dealings. keep your industry network up to date concerning your plans and progress. ~ don't forget to get family and friends on your side. if they believe in your prospects and know what you need, family and friends can good sources of direct investment and even better sources of referrals. treat them with the same respect as professionals. step 3: try bootstrapping before you seek outside funds. while you build your reputation, begin building cash by committing your personal savings and credit to the business. next, seek creative ways to acquire and use resources without raising equity from traditional sources or borrowing money from a bank. techniques range from getting advances from customers, to establishing trade credit, to leasing equipment instead of buying. (van osnabrugge & robinson, 2000; freear, et al., 1995; winborg & landstrom, 1997) step eh pay attention to geography. where are your best customers, your major suppliers, your major competitors, and major financial centers for your industry? are you conveniently located to your potential sources of loans and equity capital? if not, consider establishing a local presence in the right areas (local mailing addresses, local telephone numbers, etc.). are your banker, cpa and attorney conveniently located to your potential sources of equity capital? if not, consider switching to advisors who have a local presence and established network in the target area. step 5: prepare for due diligence. all lenders, professional investors and many angels will attempt to verify information you provide about your company's ownership, its history, its financial performance, and its prospects. prepare now. obtain due diligence checklists from your banker, cpa and attorney. collect and compile all the needed information, in accordance with instructions from your financial advisors. back up your claims about the industry and your company's prospects with appendices containing research data and expert 50 journal of small business strategy vol. l3, ato. 2 fall/8'inter 2002 opinion letters. methodical preparation now can save you thousands of dollars in professional fees at the last minute when the right deal comes along. also, well-organized and complete due diligence materials speak well for your professional management skills and help build your credibihty with potential investors and their advisors. step 6: know your bottom line. what is the maximum you are willing to give to lenders or investors in return for their cash? cash is king so those with the funds will dictate the deal structure. to best negotiate, you must know the maximum you are willing to give. further, cash received is not the only important thing. given the amount of cash offered, the covenants and restrictions that make up the deal structure can make the difference between a good deal and a bad one. work with your financial advisors to define your bottom line before you contact investors. when you receive offers, go over the details of the deal structure with your legal and financial advisors. make sure you know what you are getting into (lipper iii, 1996; van osnabrugge 8'c robinson, 2000). step 7: ask for referrals. once you are prepared for due diligence, know your bottom line, and well before you need the cash, start shopping for cash. approach your family, friends, linancial advisors and industry network with your updated business plan. specify the opportunity, the risks, the estimated amount and timing of your cash need, and the estimated yield to investors. ask for referrals to investors. treat referral sources as you would treat investors. provide full and frank disclosure so that they can better match you with potential investors. reveal everything up front. do not open those who refer you to potential embarrassment by "hiding skeletons in the closet." conclusion this article has reviewed the equity capital gap for small business. it has weighed the relative merits of differing expert opinion and assessed the policy implications as they relate to the small business equity gap. it takes an economic development perspective; i.e., it seeks solutions that will make the economic pie bigger. the best solutions will have a balanced, twofold impact: (i) increase the availability of high risk, patient equity capital, and (2) increase available, high-quality equity investment opportunities in privately-held, small businesses. the best solutions will combine evolutionary changes in public policy and private action. importantly, as summarized in table 3, small business owners and their advisors can act now to improve access to equity capital for their firms. what might work in the future at a macro, policy level can be "scaled down" to guide today's pursuit of equity. finally, we expect financial markets for small business equities will evolve with the internet. stephen i. choi, predicts that "third-party intermediaries acting as gatekeepers to certify the value of securities and information on the internet will expand their presence....regulators...may join in the competitive arena as potential certifiers of investment information or value." (choi, 1998). donald c. langevoort notes that, "(registered) securities professionals are not used by the nonprofit matching systems.... it would not be surprising for a variety of vendors outside the securities industry to seek to enter this market." (langevoort, 1998). long term survival is not assured for choi's gatekeepers, langevoort's matching entities, or of other adaptations to existing institutions. survival will depend on how well they work together to balance the two dimensions of the equity capital situation. the network of survivors will both increase the availability of equity capital, and increase available, highquality equity investments. journn/ oj'sinn// bnxinexx siniiegv vo/. /3, nn. 2 fni//ipinier 2002 refereinces /995 nnrionn/gaming survey. (1995). west greenwich ri: gtech corporation. abelson, r. (1995). s.f..c.i)oats proposal to test i.p.o. demand. neiv york tiines, (july 30, 1995):p. f3. allebach, m.a. 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(2000). exempt transactions: practical ways to sell secunties. american law institute american bar association continuing legal education, se77, 183-206. winborg, j., & landstrom, h. (1997). financial bootstrapping in small business: a resource based view of small bustness finance. kauffman foundation research conference. babson park, mass.: babson college zacharakis, a. l., bygrave, w. d., & shepherd, d. a. (2000). global entrepreneurship monitor: national entrepreneurship assessment: united state of america: 2000 executive report. kaufman center for entrepreneurial leadership at the ewing marion kauffman foundation. retrieved on march 10, 2002 from www.entreworld.org. michael d. ames is a professor of management at california state university, fullerton and has been the um'versity's small business institute direcror for 25 years. he is also director of tire college of business and economics'enter for entrepreneurship and is the advisor for the college's entrepreneurship concentration. dr. ames holds a ph.d. in business and economics from claremont graduate university. he is a sbida fellow. joitn k. romano'is the president and founder of miami-based virtual capital group.com inc. (an e-commerce business incubator). his company consults with corporations, accountants, and 'heir business advisors. virtual capital group. com inc. (www.virtualca ital rou .corn is dedicated to applying high technology capital-raising alternotives to small and medium-sized companies. mr. romano's experience spans over /2 years in corporate finance helping compam'es raise capital on and off wall street. vi t. pham is a practicing attorney in california specializing in civil litigation and business development. she graduated with a b.s.in business adminisoation with a concentration in finance in l997 from california state universuy, fullerton. she went on to southwestern university school of law where she graduated in 2000. she is currently practicing in fountain valley, california. 55 http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2020, vol. 30, no. 01, 31-42 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2020 small business institute® w w w. j s b s . o rg introduction 1cef.up and faculdade de engenharia, universidade do porto, r. dr. roberto frias, 4200-465 porto, portugal, ndsoares@fe.up.pt 2nipe and escola de economia e gestão, universidade do minho, campus de gualtar, 4710-057 braga, portugal, mvalente@eeg.uminho.pt exploring the relation between cultural values and r&d investment under the behavioral theory of the firm r&d intensity, innovation, cultural values, behavioural theory of the firm apa citation information: soares, n., & valente, m. (2020). exploring the relation between cultural values and r&d investment under the behavioral theory of the firm. journal of small business strategy, 30(1), 31-42. this research focuses on r&d investment by firms under the framework of the behavioral theory of the firm (cyert & march, 1963). firm managers have aspirations in relation to several of the firm’s characteristics either relative to past performance and decisions or to competitors’ performance and decisions. additionally, the so-called slack within the firm creates leeway for an r&d decision. previous empirical evidence has shown there is a link between these two characteristics of firms and r&d investment (e.g. alessandri & pattit, 2014; chen & miller, 2007; guedes, da conceição gonçalves, soares, & valente., 2016; o’brien & david, 2014). current global competition motivates countries and firms to heavily invest in r&d and innovations as it is considered fundamental for obtaining a competitive advantage and sustaining future growth (desjardins, 2018; eggers & kaul, 2018). at the same time, there has been a decrease in the role of public funding for r&d reduced from 2009 to 2016 in the oecd area (oecd, 2018), which puts even more emphasis on private r&d and its determinants. while there is evidence on the role of organizational settings and their impact on r&d investment (driver & guedes, 2012; shaikh, o’brien, & peters, 2018) not much emphasis has been placed in understanding how underlying cultural values of each society impact the firm’s decision to undertake such an uncertain and risky investment, as is the case of r&d (shinkle, 2012). in particular, o’brien and david (2014) propose that the behavioral theory of the firm should be adapted in order to take into account cultural differences when exploring firm’s r&d investment decision. in this paper we put forward the hypothesis that the relation between slack and r&d investment decisions is influenced by cultural values prevalent in the country of origin of the firm and test this hypothesis using firm-level data. the analysis is undertaken based on a sample of 104,431 firm-year observations of listed non-financial firms this paper explores the role cultural factors play in firms’ decisions to invest in research and development (r&d), under the behavioural theory of the firm (cyert & march, 1963). based on a sample of non-financial firms from 23 countries for the period of 1990 to 2016 and two of the six hofstede (1984) cultural dimensions, we observe that countries’ cultural values are statistically significant at explaining differences in firms’ r&d decisions. on one hand, there is a negative relation between firms’ r&d investment decisions and countries’ uncertainty avoidance. on the other hand, a positive relation is found between firms’ r&d investment decision and countries’ long-term orientation. evidence is also found on the extent to which these cultural characteristics influence how firms’ aspirations in relation to performance discrepancies drive r&d investment. nuno soares1, marieta valente2 *the authors would like to thank the comments provided by the two anonymous reviewers, the special issue editor andrea rey-martí, and the comments from the participants of the 2019 ineka, verona. this work was carried out within the funding by portuguese public funds through fct fundação para a ciência e a tecnologia, i.p., in the framework of the projects uid/eco/04105/2019 and uid/eco/03182/2019. the funding bodies had no involvement in the conduct of the research or preparation of the article. http://www.smallbusinessinstitute.biz http://www.jsbs.org 32 n. soares, & m. valente journal of small business strategy / vol. 30, no. 1 (2020) / 31-42 from 23 countries for the period of 1990-2016, retrieved from thomson reuters worldscope. to control for cultural values we use the classification and dataset of hofstede’s cultural dimensions at the country level (hofstede, 2001). in particular we focus on two cultural dimensions deemed more pertinent to the study of r&d investment at the firm-level, namely attitudes towards uncertainty and orientation towards the long or the short term. when interacting those cultural dimensions with the firm’s aspirations we observe that cultural values are statistically significant at explaining differences in firms’ behaviours. as such, the way firms are managed is conditioned by the cultural environment in which the firm operates. the main contribution in this paper is first to combine a country’s cultural values with the standard approach as to how situational determinants (proposed by the behavioral theory of the firm) condition r&d investment using a panel of firms from different countries. so far, in terms of research, only lewellyn and bao (2015) have combined both sets of variables to explore this relation in an international panel of firms. however, their study focuses on a specific sector (global paper products industry) which limits the generalizability of results. second, this paper provides further evidence as to the relevance of the behavioral theory of the firm by cyert and march (1963) relative to managers’ decisions. this literature already acknowledges that managers do not follow neoclassical economic theory’s prediction of optimizing behaviour. instead managers look to firm or industry outcomes to form aspirations and then make local adjustments to their decisions in order to match those aspirations. our paper provides supporting evidence from an international dataset of listed firms in the last three decades that aspirations are important determinants of r&d decisions in conjunction with the leeway provided by slack. third, the empirical relevance of cultural dimensions in this paper further highlights how managerial decisions are indeed not context-free and should not be analysed abstracting from the underlying cultural environment. additionally, lewellyn and bao (2015) argue that acknowledging the national cultural background of firms and managers can help explain inconsistent findings in the literature. in the next section we explore the literature on these two complementary determinants of firm’s r&d investment and put forward several testable hypotheses. in section 3 we present the empirical study, namely how the different variables are implemented and present the model. using regression analysis, in section 4 we present the results and discuss implications in section 5. literature review and hypotheses the behavioral theory of the firm originally developed by cyert and march (1963) understands managers behaviour as a response to self or social aspirations, either regarding the firm’s past behaviour or relative to the performance and choices of competitors. these behavioral aspirations can thus partially explain decisions made within the firms, conditioned by the level of slack resources within the firm. the study of how these aspirations impact decisions is enriched if cultural differences in backgrounds of firms and managers are taken into consideration (as put forward by shinkle, 2012). the chosen approach in this paper is to combine firm-level data on financial information, to capture the theoretically relevant variables with country data on cultural dimensions. the behavioral theory of the firm cyert and march (1963)’s behavioral theory of the firm looks at managers’ behaviour as boundedly rational, and rationalizable through routines and local adjustments in decisions, such as problemistic and slack search. as for r&d investment, it can be perceived as potentially providing a solution to performance below aspirations, but at the same time, it is a risky option with uncertain returns, and thus be overlooked as a solution for problemistic search. within the framework of this theory, there is the assumption of problemistic search based on performance feedback and comparison with aspiration levels (argote & greve, 2007). shinkle (2012, p. 416) defines organization aspirations as “desired performance levels in specific organizational outcomes and have also been called goals and reference points”. managers will define managerial aspirations levels based on self or industry performance, which will guide their choices, and in turn if performance is below/ above aspirations, managers will decrease/increase their aspirations, respectively (lant, 1992; lant & shapira, 2008). according to posen, keil, kim, and meissner (2018, p. 208) “a firm’s recognition of performance below its aspiration, which is the level of future performance deemed acceptable, leads to a process of search to discover a solution to the problem, resulting in behavioral change intended to restore performance to the aspired level”. in terms of r&d spending, it is perceived in the literature as a form of managerial risk taking (e.g. greve, 1998; palmer & wiseman, 1999). it is however not straightforward how an attainment discrepancy will motivate managers in terms of r&d decisions. when a firm is below its aspirations, problemistic search follows and it may include taking more risks, such as increasing r&d investments (as observed for example by bromiley, 1991; chen & miller, 2007). the opposite argu33 n. soares, & m. valente journal of small business strategy / vol. 30, no. 1 (2020) / 31-42 ment has also been observed for performance below aspirations (nickel & rodriguez, 2002) and specifically for the case where firm’s performance matches industry performance albeit below self-aspirations (lv, chen, zhu, & lan, 2019). when firms perform above aspirations, the results are also ambiguous. from the behavioral theory of the firm, we understand that if a firm is successfully attaining its aspirations, it should continue replicating past routines. however empirical research show that is not always the case (iyer & miller, 2008; labianca, fairbank, andrevski, & parzen, 2009). in the present paper we model both self-aspirations based on historical firm data and social aspirations that come from comparisons with industry data as explanatory variables for r&d investment. to define the first hypothesis, we follow the theoretical predictions of the behavioral theory of the firm. given that firm’s aspirations can be defined in relation to past self-performance or to industry peer performance, we can test hypothesis 1 in these two dimensions. hypothesis 1. r&d investment is positively related to performance below aspirations and independent from performance above aspirations, all else being equal. at the same time, the hypothesis of slack search implies that the slack within firms allows them leeway to innovate. cyert and march (1963) define organization slack as the “difference between total resources and total necessary payments” (p. 42). as resources are available within the firm, slack search allows managers to promote innovation and invest in r&d. the majority or studies exploring slack search have opted for quantifying organization slack using accounting measures (one exception is for example nohria and gulati, (1996) who elicit perception of firm slack using questionnaires). empirical results have however not been consensual in terms of the sign of the relation between slack and r&d investment, namely some studies have found a positive relation (greve, 2003; marlin & geiger, 2015) or an inverse u-shaped relation (e.g. geiger & cashen, 2002; nohria & gulati, 1996). daniel, lohrke, fornaciari, and turner jr (2004) consider that one of the most commonly used empirical implementation of the concept of slack is bourgeois and singh (1983)’s “ease-of-recovery” definition. using accounting information on current assets relative to current liabilities, the authors defined the more easily accessible type of slack (available slack). recoverable slack is less easily accessible and relates selling, general and administrative expenses to sales. finally, potential slack is the least easily recoverable (“the capital-raising potential represented by changes in stock price is just that—potential”, (bourgeois & singh, 1983, p. 43). the present paper focuses on the two more easily recoverable forms of slack (as for example wiersma, 2017). following from the behavioral theory of the firm, we put forward the following hypothesis: hypothesis 2. r&d investment is positively related to firms’ slack resources, all else being equal. these two hypotheses derived from the behavioral theory of the firm have been tested jointly in the empirical literature and partial supporting evidence has been found (e.g. alessandri and pattit 2014 for publicly traded u.s. manufacturing firms during 2001-2007; chen and miller 2007 for publicly traded u.s. manufacturing firms in the period 1998-2001; guedes et al. 2016 for london stock exchange listed firms from 2009-2014). our study enriches the empirical literature by using a panel of firms from several countries, which is then enriched with cultural variables, whose pertinence is discussed next. cultural dimensions and management decisions the national context in which a firm operates has an impact on management decisions, and this influence can operate through national cultural dimensions. li, griffin, yue, and zhao (2013, p. 1) argue that “even in a highly globalized world with sophisticated managers, culture matters” and beckmann, menkhoff, and suto (2008) observe how asset managers’ views and behaviour are impacted by cultural differences. aggarwal, faccio, guedhami, and kwok (2016, p. 466) define culture as including “an enduring set of beliefs or values that influences individuals’ perceptions, preferences, decisions, and behaviors. it is therefore likely that culture influences business and financial decisions”. in what concerns the focus of the present paper, i.e. r&d investment, li et al. (2013) have concluded that culture indeed matters for corporate risk-taking as measured by the volatility of earnings and r&d investments. lievenbrück and schmid (2014) corroborate the result in the case of risk hedging by firms. hofstede’s approach assumes that cultural differences translate into different management styles and values (hofstede, 1984). as such, managers when faced with the same objective financial conditions may make different decisions depending on cultural values in the home country. one fundamental management decision concerns r&d investment, which involves judgments on uncertain and risky outcomes, and has a potential impact on profitability. we argue in this paper that the cultural contextual values will influence the way managers decide about r&d under the framework of the behavioral theory of the firm. in terms of the six dimensions in hofstede’s analysis, we focus on uncertainty avoidance (the corresponding variable is the uncertainty avoidance index uai) and 34 n. soares, & m. valente journal of small business strategy / vol. 30, no. 1 (2020) / 31-42 long-term orientation versus short-term normative orientation (for parsimony, long term orientation lto). we argue that these cultural variables can impact the attitude to risk and investment within a firm, that is, when a firm is confronted with a discrepancy in its aspirations for a certain level of slack, the response may vary as a consequence of the cultural framework of the country. as such, these variables are likely to impact r&d investment. hofstede (2001) defines ua as “the extent to which a culture programs its members to feel either uncomfortable or comfortable in unstructured situations. unstructured situations are novel, unknown, surprising, different from usual”. since risky choices, such as r&d investment are often associated with uncertain firm outcomes (palmer & wiseman, 1999), we can expect that in countries with high levels of uncertainty avoidance, there is less r&d investment, all else being equal. as argued by li et al. (2013, p. 2), countries with low uncertainty avoidance, “value innovation” and do not “shun ambiguous situations”. hypothesis 3. r&d investment is negatively related to uncertainty avoidance (ua), all else being equal. as for the dimension of long-term versus short-term orientation, according to hofstede (2001, p. 15) it “refers to the extent to which a culture programs its members to accept delayed gratification of their material, social, and emotional needs”. a long-term orientation is associated with “the fostering of virtues oriented toward future rewards—in particular, perseverance and thrift” (hofstede, hofstede, & minkov, 2010, p. 239). a short-term orientation “stands for the fostering of virtues related to the past and present” (ibidem). the outcome of present r&d is uncertain and may only provide benefits in the future, so we can expect countries with a long-term orientation to be more accepting of r&d investments, all else being equal, as proposed in: hypothesis 4. r&d investment is positively related to long-term orientation (lto), all else being equal. method for the empirical analysis, data for the period of 19902016 from all non-financial listed firms in 23 countries is retrieved from thomson reuters worldscope. the original sample started with a selection of 51 countries which are often the focus of analysis of influential international studies (e.g. covrig, defond, & hung, 2007; leuz & verrecchia, 2000; persakis & iatridis, 2017). however, data requirements, as explained next, impose restrictions on which firms are included in the dataset and consequently lead to the loss of 28 countries. firms are excluded from the sample if they have no r&d, if the ratio of r&d-to-sales is larger than one, or lack the needed data to calculate the variables used. given the nature of some of the explanatory variables, it is required that for each combination of country, year and two-digit sic code there are at least 5 firms available and that each country has at least 100 observations to be included in the final sample. data for the countries’ cultural dimensions is retrieved from hofstede (2015). the final sample is comprised of 104,431 firm-year observations. with the exception of the hofstede dimensions, all continuous variables are winsorised at the top/bottom 1% to avoid the effect of outliers. tables 1 and 2 provide a breakdown of the final sample by country and by industry, respectively. table 1 sample breakdown by country countries n percent australia 601 0.58 canada 1,963 1.88 china 4,281 4.1 denmark 183 0.18 finland 396 0.38 france 744 0.71 germany 2,119 2.03 greece 245 0.23 hong kong 1,370 1.31 israel 1,034 0.99 italy 159 0.15 japan 30,460 29.17 malaysia 216 0.21 netherlands 215 0.21 singapore 273 0.26 south africa 184 0.18 south korea 9,317 8.92 sweden 768 0.74 switzerland 993 0.95 taiwan 11,823 11.32 turkey 824 0.79 united kingdom 4,708 4.51 united states 31,555 30.22 total 104,431 100 as can be seen from table 1, japan and the united states dominate the sample, although there is a wide variety of countries, which allows for differences in cultural charac35 n. soares, & m. valente journal of small business strategy / vol. 30, no. 1 (2020) / 31-42 teristics. from table 2, we observe that firms in the technology hardware & equipment and electronic & electrical equipment industries are the ones most represented in the sample. there is a clear increase in the r&d intensity during the sample period, which is present in almost all the sectors, but particularly in the technological and software sectors. this data is not reported here, but is available upon request. table 2 sample breakdown by industry industries n percent aerospace & defense 1,594 1.53 alternative energy 448 0.43 automobiles & parts 4,198 4.02 beverages 511 0.49 chemicals 7,427 7.11 construction & materials 6,340 6.07 electricity 151 0.14 electronic & electrical equipment 13,657 13.08 fixed line telecommunications 167 0.16 food & drug retailers 107 0.1 food producers 3,944 3.78 forestry & paper 676 0.65 gas, water & multiutilities 299 0.29 general industrials 2,085 2 general retailers 577 0.55 health care equipment & services 5,514 5.28 household goods & home const. 2,873 2.75 industrial engineering 10,472 10.03 industrial metals & mining 2,307 2.21 industrial transportation 245 0.23 leisure goods 2,814 2.69 media 832 0.8 mining 401 0.38 mobile telecommunications 196 0.19 oil & gas producers 466 0.45 oil equipment & services 563 0.54 personal goods 3,259 3.12 pharmaceuticals & biotechnology 5,256 5.03 software & computer services 9,284 8.89 support services 2,330 2.23 technology hardware & equipment 14,760 14.13 tobacco 114 0.11 travel & leisure 564 0.54 total 104,431 100 next we present in detail how the dependent variable and independent variables were constructed from the data following options in the previous literature. control variables are included that are not discussed in the literature review, but are relevant to capture other effects that may be impacting the dependent variable. these controls include the distance from bankruptcy and industry effects, such as industry growth and r&d intensity. dependent variable research intensity is used as the dependent variable and, following chen and miller (2007) and cohen and levinthal (1989), is proxied by r&d divided by sales (rd_sales). firm and industry discrepancy regarding firm discrepancy (firm_discrepancy), we follow chen and miller (2007) and define firm discrepancy as the difference between the firm’s return on assets (roa) relative to the previous year roa. as for industry discrepancy (ind_discrepancy), it is defined as the difference between the firm’s roa relative to the median roa in the 2-digit standard industrial classification (sic) industry in the specific country of the focal firm in the prior year. we further decompose the discrepancy measures into positive (pos_firm_discrepancy and pos_ind_discrepancy) and negative discrepancy variables (neg_firm_discrepancy and neg_ind_discrepancy), which are calculated as the multiplication of a dummy variable which takes the value of 1 if the discrepancy measure exhibits a positive value, and 0 otherwise, with the relevant firm or industry discrepancy. such approach allows the model to capture an eventual asymmetry in the way firms respond to different discrepancy measures, in line with the ambiguous empirical evidence concerning these effects. slack measures given that this study focuses on the role of internal slack on the manager’s decision of investing on r&d, only the available and recoverable slack measures are used, and we follow bourgeois (1981) definition. available slack (a_ slack) is defined as the current ratio and calculated as total current assets divided by total current liabilities, while recoverable slack (rec_slack) is measured as the ratio of selling, general and administrative expenses divided by total revenue. both these measures are included independently in the estimated model as they capture different levels of slack that are at the managers’ disposal, where available slack is immediately available to the manager while recov36 n. soares, & m. valente journal of small business strategy / vol. 30, no. 1 (2020) / 31-42 erable slack is harder for the manager to use (greve, 2003). hofstede cultural dimensions regarding the hofstede cultural dimensions variables, both the uncertainty avoidance index (uai) and long-term orientation index (lto) are used. as for the original scores in each of the cultural dimensions, “they are always relative scores in which the lowest country is situated around zero and the highest around 100” (hofstede, 1984, p. 84). for the uai, a low index means a country with low uncertainty avoidance and a high value of 100 or slightly higher means the strongest uncertainty avoidance; the index for lto means that the higher the value of the index the more long-term oriented the country is (hofstede et al., 2010). given the differences in the magnitude of these variables and the previous variables, uai and lto were scaled by 100. data for the countries’ cultural dimensions is retrieved from hofstede (2015). it has been argued that underlying national cultural features do not change over time in terms of countries’ relative positions (e.g. beugelsdijk, maseland, & van hoorn, 2015; inglehart & baker, 2000). distance from bankruptcy a control variable that is often used to account for a firm’s financial situation is how far from bankruptcy the firm appears, by inspecting financial and accounting data. this is used as a control by for example chen and miller (2007) and guedes et al. (2016). the distance from bankruptcy (zscore) is proxied by the altman’s (1968) z-score and calculated as: 𝑧𝑧𝑧𝑧𝑧𝑧𝑧𝑧𝑧𝑧𝑧𝑧 = 1.2 𝑤𝑤𝑧𝑧𝑧𝑧𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤 𝑧𝑧𝑐𝑐𝑐𝑐𝑤𝑤𝑐𝑐𝑐𝑐𝑐𝑐 𝑐𝑐𝑧𝑧𝑐𝑐𝑐𝑐𝑐𝑐 𝑐𝑐𝑧𝑧𝑧𝑧𝑧𝑧𝑐𝑐𝑧𝑧 + 1.4 𝑧𝑧𝑧𝑧𝑐𝑐𝑐𝑐𝑤𝑤𝑤𝑤𝑧𝑧𝑟𝑟 𝑧𝑧𝑐𝑐𝑧𝑧𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑧𝑧 𝑐𝑐𝑧𝑧𝑐𝑐𝑐𝑐𝑐𝑐 𝑐𝑐𝑧𝑧𝑧𝑧𝑧𝑧𝑐𝑐𝑧𝑧 + 3.3 𝑤𝑤𝑤𝑤𝑧𝑧𝑧𝑧𝑖𝑖𝑧𝑧 𝑏𝑏𝑧𝑧𝑏𝑏𝑧𝑧𝑧𝑧𝑧𝑧 𝑤𝑤𝑤𝑤𝑐𝑐𝑧𝑧𝑧𝑧𝑧𝑧𝑧𝑧𝑐𝑐 𝑧𝑧𝑒𝑒𝑐𝑐𝑧𝑧𝑤𝑤𝑧𝑧𝑧𝑧 𝑐𝑐𝑤𝑤𝑟𝑟 𝑐𝑐𝑐𝑐𝑒𝑒𝑧𝑧𝑧𝑧 𝑐𝑐𝑧𝑧𝑐𝑐𝑐𝑐𝑐𝑐 𝑐𝑐𝑧𝑧𝑧𝑧𝑧𝑧𝑐𝑐𝑧𝑧 + 0.6 𝑖𝑖𝑐𝑐𝑧𝑧𝑤𝑤𝑧𝑧𝑐𝑐 𝑧𝑧𝑐𝑐𝑐𝑐𝑤𝑤𝑐𝑐𝑐𝑐𝑐𝑐𝑤𝑤𝑧𝑧𝑐𝑐𝑐𝑐𝑤𝑤𝑧𝑧𝑤𝑤 𝑐𝑐𝑧𝑧𝑐𝑐𝑐𝑐𝑐𝑐 𝑐𝑐𝑤𝑤𝑐𝑐𝑏𝑏𝑤𝑤𝑐𝑐𝑤𝑤𝑐𝑐𝑙𝑙 + 1 𝑐𝑐𝑧𝑧𝑐𝑐𝑐𝑐𝑐𝑐 𝑧𝑧𝑧𝑧𝑟𝑟𝑧𝑧𝑤𝑤𝑟𝑟𝑧𝑧 𝑐𝑐𝑧𝑧𝑐𝑐𝑐𝑐𝑐𝑐 𝑐𝑐𝑧𝑧𝑧𝑧𝑧𝑧𝑐𝑐𝑧𝑧 (1) industry effects following chen and miller (2007), contemporaneous industry search intensity (ind_rd_sales) is included in the model as a control variable and is calculated as the mean r&d-to-sales in the 2-digit sic industry in the specific country for the year. in addition, industry sales growth (ind_ growth) is also included in the model and is calculated as the change in total sales in the 2-digit sic industry in the specific country for the year, from the past to the current year. model the testing of the hypotheses is done by estimating the following main models: 𝑟𝑟𝑟𝑟_𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑖𝑖,𝑡𝑡 = 𝛽𝛽1 + 𝛽𝛽2𝑖𝑖𝑖𝑖𝑟𝑟_𝑔𝑔𝑟𝑟𝑔𝑔𝑔𝑔𝑔𝑔ℎ𝑖𝑖,𝑡𝑡 + 𝛽𝛽3𝑖𝑖𝑖𝑖𝑟𝑟_𝑟𝑟𝑟𝑟_𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑖𝑖,𝑡𝑡 + 𝛽𝛽4𝑠𝑠_𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑖𝑖,𝑡𝑡−1 + 𝛽𝛽5𝑟𝑟𝑠𝑠𝑠𝑠_𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑖𝑖,𝑡𝑡−1 + 𝛽𝛽6𝑧𝑧𝑠𝑠𝑠𝑠𝑔𝑔𝑟𝑟𝑠𝑠𝑖𝑖,𝑡𝑡−1 + 𝛽𝛽7𝑝𝑝𝑔𝑔𝑠𝑠_𝑓𝑓𝑖𝑖𝑟𝑟𝑓𝑓_𝑟𝑟𝑖𝑖𝑠𝑠𝑠𝑠𝑟𝑟𝑠𝑠𝑝𝑝𝑠𝑠𝑖𝑖𝑠𝑠𝑑𝑑𝑖𝑖,𝑡𝑡−1 + 𝛽𝛽8𝑖𝑖𝑠𝑠𝑔𝑔_𝑓𝑓𝑖𝑖𝑟𝑟𝑓𝑓_𝑟𝑟𝑖𝑖𝑠𝑠𝑠𝑠𝑟𝑟𝑠𝑠𝑝𝑝𝑠𝑠𝑖𝑖𝑠𝑠𝑑𝑑𝑖𝑖,𝑡𝑡−1 + 𝛽𝛽9𝑈𝑈𝑈𝑈𝑈𝑈 + 𝛽𝛽10𝐿𝐿𝐿𝐿𝐿𝐿 + 𝜀𝜀𝑖𝑖,𝑡𝑡 (2) 𝑟𝑟𝑟𝑟_𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑖𝑖,𝑡𝑡 = 𝛽𝛽1 + 𝛽𝛽2𝑖𝑖𝑖𝑖𝑟𝑟_𝑔𝑔𝑟𝑟𝑔𝑔𝑔𝑔𝑔𝑔ℎ𝑖𝑖,𝑡𝑡 + 𝛽𝛽3𝑖𝑖𝑖𝑖𝑟𝑟_𝑟𝑟𝑟𝑟_𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑖𝑖,𝑡𝑡 + 𝛽𝛽4𝑠𝑠_𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑖𝑖,𝑡𝑡−1 + 𝛽𝛽5𝑟𝑟𝑠𝑠𝑠𝑠_𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑖𝑖,𝑡𝑡−1 + 𝛽𝛽6𝑧𝑧𝑠𝑠𝑠𝑠𝑔𝑔𝑟𝑟𝑠𝑠𝑖𝑖,𝑡𝑡−1 + 𝛽𝛽11𝑝𝑝𝑔𝑔𝑠𝑠_𝑖𝑖𝑖𝑖𝑟𝑟_𝑟𝑟𝑖𝑖𝑠𝑠𝑠𝑠𝑟𝑟𝑠𝑠𝑝𝑝𝑠𝑠𝑖𝑖𝑠𝑠𝑑𝑑𝑖𝑖,𝑡𝑡−1 + 𝛽𝛽12𝑖𝑖𝑠𝑠𝑔𝑔_𝑖𝑖𝑖𝑖𝑟𝑟_𝑟𝑟𝑖𝑖𝑠𝑠𝑠𝑠𝑟𝑟𝑠𝑠𝑝𝑝𝑠𝑠𝑖𝑖𝑠𝑠𝑑𝑑𝑖𝑖,𝑡𝑡−1 + 𝛽𝛽9𝑈𝑈𝑈𝑈𝑈𝑈 + 𝛽𝛽10𝐿𝐿𝐿𝐿𝐿𝐿 + 𝜀𝜀𝑖𝑖,𝑡𝑡 (3) the previous models only differ on the use of firm or industry discrepancies as capturing managers’ aspirations, based on the work by chen and miller (2007). following the findings by petersen (2009), gow ormazabal and taylor (2010) and thompson (2011), and given the panel data nature of the sample, these are estimated using firm and year clustered standard errors. table 3 presents the descriptive statistics and correlation coefficients for the variables used in the empirical analysis. results we use panel regression analysis of r&d to sales for the panel of firms described above. table 4 presents the results when the aspirations are defined relative to past performance of the firm (firm discrepancy) and table 5 considers peer effects with the performance discrepancy calculated in relation to the median of the industry (industry discrepancy). in both tables 4 and 5, column (1) tests the hypotheses concerning the behavioral theory of the firm in isolation. as postulated by the behavioral theory of the firm, the net impact of lagged measures of slack within the firm is positive and statistically significant, corroborating hypothesis 2 that the more slack resources, the more leeway firms have to invest in r&d. as for aspirations, both firm discrepancy and industry discrepancy have statistically significant coefficients, corroborating the prediction that firms indeed react to aspiration levels. firms that exhibit a positive discrepancy, i.e. have performance above aspirations, tend to invest more in r&d, which is contrary to hypothesis 1 (that follows from the behavioral theory of the firm, whereby firms would not change their decision). for firms that exhibit a negative discrepancy, the coefficient is negative: the closer they 37 n. soares, & m. valente journal of small business strategy / vol. 30, no. 1 (2020) / 31-42 table 3 descriptive statistics and pearson correlations panel a: descriptive statistics obs mean sd min max rd_salest 104,431 0.057 0.082 0.000 0.458 ind_growtht 104,431 0.071 0.154 -0.281 0.777 ind_rd_salest 104,431 0.043 0.036 0.002 0.140 a_slackt-1 104,431 2.436 1.978 0.414 12.336 rec_slack t-1 104,431 0.282 0.244 0.030 1.450 zscore t-1 104,431 0.037 0.057 -0.191 0.328 pos_firm_disc t-1 104,431 0.032 0.082 0.000 0.549 neg_firm_disc t-1 104,431 -0.034 0.078 -0.503 0.000 pos_ind_disc t-1 104,431 0.032 0.058 0.000 0.315 neg_ind_disc t-1 104,431 -0.049 0.123 -0.805 0.000 uai 104,431 0.656 0.226 0.080 1.120 lto 104,431 0.652 0.300 0.212 1.000 panel b: pearson correlations 1 2 3 4 5 6 7 8 9 10 11 12 1 rd_sales t 1 2 ind_growth t -0.031 1 3 ind_rd_sales t 0.515 -0.092 1 4 a_slack t-1 0.295 0.008 0.198 1 5 rec_slack t-1 0.689 -0.041 0.498 0.210 1 6 zscore t-1 0.060 0.056 0.074 0.519 -0.075 1 7 pos_firm_disc t-1 0.187 0.027 0.162 0.032 0.221 -0.046 1 8 neg_firm_disc t-1 -0.246 0.017 -0.150 -0.045 -0.328 0.137 0.169 1 9 pos_ind_disc t-1 0.080 0.048 0.176 0.201 0.002 0.368 0.306 0.104 1 10 neg_ind_disc t-1 -0.364 0.018 -0.184 0.037 -0.575 0.333 -0.113 0.603 0.221 1 11 uai -0.284 -0.079 -0.295 -0.139 -0.290 -0.118 -0.147 0.156 -0.184 0.182 1 12 lto -0.355 0.096 -0.455 -0.151 -0.402 -0.043 -0.181 0.176 -0.188 0.216 0.706 1 notes: all correlations statistically significant at a 1% level. 38 n. soares, & m. valente journal of small business strategy / vol. 30, no. 1 (2020) / 31-42 table 4 firm discrepancy results variables (1) (2) (3) ind_growth t 0.004 0.001 0.000 (0.004) (0.004) (0.004) ind_rd_sales t 0.466*** 0.462*** 0.461*** (0.020) (0.021) (0.020) a_slack t-1 0.005*** 0.005*** 0.005*** (0.000) (0.000) (0.000) rec_slack t-1 0.180*** 0.179*** 0.179*** (0.004) (0.004) (0.004) zscore t-1 0.039** 0.030* 0.032* (0.015) (0.016) (0.016) pos_firm_disc t-1 0.038*** 0.035*** 0.020 (0.007) (0.007) (0.016) neg_firm_disc t-1 -0.044*** -0.040*** -0.037 (0.010) (0.010) (0.023) uai -0.020*** -0.024*** (0.003) (0.003) lto 0.007*** 0.012*** (0.003) (0.002) uai*pos_firm_disc t-1 -0.065** (0.027) uai*neg_firm_disc t-1 0.073** (0.033) lto*pos_firm_disc t-1 0.082** (0.036) lto*neg_firm_disc t-1 -0.067 (0.044) constant -0.031*** -0.021*** -0.021*** (0.001) (0.003) (0.003) observations 104,431 104,431 104,431 r-squared 0.534 0.536 0.536 notes: two-way (firm and year) clustered standard errors estimation used. standard errors in parentheses. ***p < 0.01, **p < 0.05, *p < 0.1. table 5 industry discrepancy results variables (1) (2) (3) ind_growth t 0.005 0.001 0.001 (0.005) (0.005) (0.005) ind_rd_sales t 0.473*** 0.466*** 0.468*** (0.020) (0.021) (0.021) a_slack t-1 0.005*** 0.005*** 0.005*** (0.000) (0.000) (0.000) rec_slack t-1 0.181*** 0.180*** 0.180*** (0.004) (0.004) (0.004) zscore t-1 0.033** 0.024 0.025 (0.016) (0.017) (0.017) pos_ind_disc t-1 0.020** 0.014* -0.037* (0.008) (0.008) (0.022) neg_ind_disc t-1 -0.020*** -0.016** -0.012 (0.007) (0.007) (0.021) uai -0.021*** -0.024*** (0.003) (0.003) lto 0.007*** 0.007*** (0.003) (0.003) uai*pos_ind_disc t-1 0.010 (0.028) uai*neg_ind_disc t-1 0.023 (0.032) lto*pos_ind_disc t-1 0.082** (0.037) lto*neg_ind_disc t-1 -0.025 (0.048) constant -0.030*** -0.019*** -0.018*** (0.001) (0.002) (0.003) observations 104,431 104,431 104,431 r-squared 0.532 0.534 0.534 notes: two-way (firm and year) clustered standard errors estimation used. standard errors in parentheses. ***p < 0.01, **p < 0.05, *p < 0.1. 39 n. soares, & m. valente journal of small business strategy / vol. 30, no. 1 (2020) / 31-42 are to matching their aspiration (that is, lower discrepancy in absolute terms), the less r&d investment is made, whereas the further away they are (that is, higher discrepancy in absolute terms), the more r&d investment is made, all else being equal. this result for firms with negative discrepancy corroborates hypothesis 1, whereby r&d investment allows firm to address problemistic search. for these regressions, the control of industry r&d intensity is positive statistically significant, which is expected that in more r&d intensive sectors, a firm exhibits more r&d intensity. a higher zscore of the firm, proxying more distance from bankruptcy, yields more r&d investment. in column (2) we add the cultural dimension variables of uncertainty avoidance and long-term orientation. the coefficients for uai are negative in both tables and statistically significant as hypothesized in hypothesis 3. controlling for the other variables in the model, the more a country exhibits uncertainty avoidance, the lower the investment in r&d a firm in that country will undertake. hypothesis 4 proposes a positive relation between lto and r&d intensity and this is corroborated in the data, whereby a firm in a country with an outlook more towards the future engages more in r&d investment. in column (3) we enrich the model and include interactions of the cultural dimensions and the firm and industry discrepancy in each table respectively. we hypothesize that being above or below aspirations interacts with the country’s uai and lto. in table 4 for firm discrepancy results, the coefficients on the discrepancy dummy variables are no longer statistically significant. it should be noted that in column (1), the coefficients were statistically significant, although the direction of the relation was not fully consistent with the theoretical predictions. for a firm performing above self-aspirations, the higher the uai, the lower the r&d investment (in fact the coefficient of the interaction amplifies the negative relation found for the uai variable). for a firm below aspirations, the coefficient on the interaction is positive, which in conjunction with the coefficient for uai alone dampens the negative effect of uncertainty avoidance. so, when the performance is poor relative to the benchmark (in this case the firm’s own performance) the dissuading effect of uncertainty avoidance is less strong. concerning lto, the coefficient on the level variable is positive and the effect is amplified when firms are above aspirations. there is however no incremental effect for below aspirations firms. so a firm in a beneficial position compared to past performance will further its investment in r&d, the more the country is oriented towards the long term. the results are similar in terms of direction in table 5 – column (3), where the discrepancy is in relation to industry median performance. only the coefficient for the positive industry discrepancy is statistically significant and negative in column (3). in terms of the interaction between the relative aspirations position of the firm and the cultural dimensions, only lto for a positive industry discrepancy is statistically significant and positive, generating a positive effect from the higher long-term orientation on r&d investment. in the model without interaction, again the coefficients on uai and lto are respectively negative and positive as postulated by hypotheses 3 and 4. discussion and conclusion we explore firm-level data to provide further evidence that cultural values at the country level influence firms’ r&d choices. using the framework of the behavioral theory of the firm, we explore the situational determinants of r&d investment, namely aspirations and slack within the firm, but interact these variables with the cultural values of hofstede of uncertainty avoidance and long-term orientation. our results show consistent evidence for cultural dimensions impacting r&d search activities of the firms in the sample. this paper adds to the literature on r&d and innovation by using a panel of firms across different countries and expanding the approach of the behavioral theory of the firm to account for cultural differences between the countries. given the importance that innovation can play in a country’s future development, these results are consequential to designing country specific r&d promotion policies. this should be done acknowledging that slack resources and aspirational levels condition managerial decisions, but also that the cultural context of the country in its outlook towards uncertainty and the future also play a role. our study is to our knowledge the first that uses a panel of firms from different countries to combine the framework of the behavioral theory of the firm, acknowledging satisficing choices from managers in terms of r&d investment in response to aspirations and availability of slack, and the role of cultural dimensions, to better understand this relation. a previous paper by lewellyn and bao (2015) explored this relation but focused on a single sector, making their conclusions sector-specific and limited. we enrich the literature by extending the analysis across sectors. the results show how countries cultural characteristics impact r&d investment across most economic activity sectors. additionally, as briefly presented in the literature overview, the evidence has not been consistent in supporting the direction of impact of aspirations on managerial decisions. aspirations measured in relation to past performance of the firm or of peers have been found to consistently matter for decisions such as r&d investment, however the 40 n. soares, & m. valente journal of small business strategy / vol. 30, no. 1 (2020) / 31-42 behavioral theory suggests that performance above aspirations should not catalyse changes in behaviour, whereas performance below aspirations, should create problemistic search and increase r&d investment. this paper adds to the literature partially contradicting these predictions when cultural variables are not considered. when these discrepancies in aspirations are interacted with the cultural dimensions, the direction of change is impacted, albeit not necessarily towards the theoretical predictions. the research approach presented in this paper can thus further clarify in what circumstances behavioral determinants impact managerial decisions. there are nonetheless limitations which can be explored in future research. by focusing just on listed firms, which are normally just a subset of all the firms in every country and which is likely to exclude smaller firms, we do not consider how non-listed firms make their r&d investment decisions. it should however be noted that previous research has documented many idiosyncrasies of small and medium firms relative to 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(2017). how and when do firms translate slack into better performance? the british accounting review, 49(5), 445-459. doi: https://doi.org/10.1016/j. bar.2017.05.007 https://doi.org/10.1016/j.intfin.2016.10.001 https://doi.org/10.1016/j.intfin.2016.10.001 https://doi.org/10.1016/j.jbusres.2017.09.014 https://doi.org/10.1016/j.bar.2017.05.007 https://doi.org/10.1016/j.bar.2017.05.007 simixvf best paper award recipient 2002 national entrepreneurship and small business educators conference stakeholder influence strategies and value creation by new ventures radha chaganti rider university chag anti@rider. edu candida g. brush boston university cg brush@bu. edu cengiz haksever rider university haksever@rider. edu ronald g. cook rider university cookr@rider. edu abstract new ventures bring the founders'isions to fruition, creating positive benefits for entrepreneurs and stakeholder groups. simultaneously, these efforts may disrupt and destroy existing means of production, distribution, and consumption thus imposingcosts, or even creating negative values for stakeholders. this paper describes the types of value that are likely to be created and destroyed, and examines the value-related interactions between stakeholders and new ventures. ne draw upon entrepreneurship literature, stakeholder theory, and the resource dependence perspective to develop a framework illustrating these i nteractions, then we explore the effects of stakeholder salience and dependence on influence strategies that new ventures may employ under conditions of low agreement of value goals, and suggest propositions for differentinfluence strategies and value outcomes. introduction new ventures bring the founders'mbitious visions to fruition and create significant benefits or positive values for entrepreneurs and other diverse groups such as investors, customers, employees, suppliers, and communities (cooper & gimeno-gascon, 1992; acs & audretsch, 1992; kirchoff & phillips, 1989; shane & venkataraman, 2000). new ventures may simultaneously disrupt and destroy existing ways of production, distribution, and consumption (christensen, 1997; schumpeter, 1934), thus imposing costs, "destroying" value or even 1 journal nf srruill biisiiiess sirniegv vol. /j, na. 2 fall/ivinier 2002 creating negative values. therefore, groups facing negative value consequences may attempt to influence the fimi's strategic choices to create positive value for their groups (freeman, 1984). in turn, the entrepreneurs may attempt to influence these groups so that positive values arc maximized for the venture, while at the same tmie the interests of key stakeholders are met. thus the new venture seeks to "manage" its relations with key stakeholders in order to maximize the positive values created for itself. historically, research focused on the creation and destniction of ccmiomic value (chrisman, bauerschmidt & hofer, 1998; schulz & hofer, 1999; stevenson & lariflo, 1990). however, value consequences reach beyond the economic, and encompass a variety of non-economic dimensions (bird, 1989; shane & venkataraman, 2000). the degree to which new ventures satisfy the interests of diverse parties can vary widely, although research examining value consequences other than economic is limited. similarly, there is substantial literature exploring product/market and competitive strategies of new ventures (mcdougall & robinson, 1988; carter, steams, reynolds & miller, 1994), but there is less examining broader objectives and consequences of new venture strategies. this paper examines the value-related interactions between stakeholders and new ventures, and explores the influence strategies adopted by the new venture to manage stakeholder dcntands. we begin with a description of the different types of value likely to be created and/or destroyed for the key stakeholders of new ventures, then develop a framework illustrating these relationships by drawing upon entrepreneurship literature, stakeholder theory, and the resource dependence perspective. we explore the effects of stakeholder salience and dependence on the influence strategies that new ventures may employ and explore their value outcomes. here we adopt the widely accepted definition of stakeholder as an& group or individunl ilini can nffect nr is iiffected by the new venture's actions (freeman, 1984; thompson, 1967). background value creation occurs through the different functional strategies adopted by the new venture. for example, competitive strategies produce superior customer value and assure market leadership (porter, 1980; shepherd ei shanley, 1998), efficient operational strategies lead to high profitability for investors (timmons & sapienza, 1992) and effective human resource strategies provide the benefits that attract scarce personnel (aldrich, 1999). ideally the new venture prefers functional strategies that emphasize positive values for itself, and would like to use influence strategies to persuade stakeholder groups to accept its value goals as their own. if this proves difficult and powerful stakeholders pressure the firm to cater to their value objectives, the new venture's influence strategies aim at minimizing "value destruction" to its own goals while meeting these external demands. then the entrepreneurial venture readjusts the functional strategies as needed. this inquiry is a useful contribution to literature since research hitherto has emphasized influence strategies of the large, mature, established corporation (frooman, 1999). the next section explores the types of value created and destroyed by new ventures. types of value created and destroyed in creating a new venture, entrepreneurs seek multiple types of values for themselves, their firms, employees and other groups (cooper & gimeno-gascon, 1992; schulz & hofer, 1999). however, first we need to define the term value (sewafl, 1901; young, 1978). philosophers and ethicists define it normatively to separate the rights from wrongs. economists, in contrast, are interested in the value of things, and distinguish between "value in exchange" and "value in use" (sewafl, 1901). baier defines value broadly along the same lines as a "thing' 2 journo/ ofsma// business strategy vol. /3, //o. 2 fall/h'inter 2002 capacity to confer a benefit on someone, and to make a favorable difference to his life. the magnitude of its value is the measure of that capacity" (1969:40). drawing on this, we define value as "the capacity of a good, or service, or activity (les) to satisfy a need, or provide a benefit to a person or entity". this definition is broader than the traditional economic concept of value, because it not only covers market-based value, but also non-market value benefits like quality of life, safety, prestige, etc. (haksever, chaganti & cook, 1999). further, we recognize negative values as comprising of economic and non-economic costs and risks imposed by an activity, good, or service, and we emphasize the value consequences to owners/investors, customers, employees, suppliers, and the society at large. the term "society at large" encompasses both the general public and members of surrounding communities (aldrich, 1999). hence, the new venture creates value for a stakeholder group every time it satisfies a need or provides a benefit to that group. similarly it "destroys" value or creates negative value whenever its actions-however unwittingly —reduce the satisfaction of, or impose costs on a group in some way. examples of these different types of value, considered across three perspectives, /. econorn/c, 2. non-econom/c, ant/3.time, are illustrated in tables 1-2. time dimension has been included because some benefits/ rewards as well as costs/ risks can be short-lived while others extend into the long-term (eisenhardt, 1989; slevin & covin, 1997; west & meyer, 1997). some of the value consequences that accrue to each of the five stakeholders are laid out in tables 1 and 2. table 1:value creation for oivners/investors, customers and employees table lat owners/1nvestors value value created (benelits/rewards) value destroyed (costs/risks) dimension profits, dividends, wealth appreciation loss of investment, low rate of return, economic through stock price increases etc. bankruptcy, etc. stress from uncertainty about firm's nonsense of well-being and security, pride future, sense of embarrassment from economic and autonomy, etc. firm's missieps and scandals long-term wealth and income increases, uncertainty about the long-term viability time investment in new technologies, and of firm enhancement of economic prosperity table lbt value creation for customers superior use-benefits, reliability and price, cost of defective good, repair and economic durability of goods, lower cost. disruption costs, maintenance costs ctc. nonease of use, support services, difficulty in getting product knowledge, convenience, sense of security, product economic harmful effects, loss of prestige, etc. image and prestige time saved in product use, durability of learning time, delays in repair andtime benefits, etc. replacement etc. table let value creation for employees wages, monetary benefits like pension, opportunity costs of jobs foregone, costs economic insurance, profit sharing, etc. of working like commute, child care, etc. sense of well-being, job security career stress, monotony, lack of challenge, loss nonadvancement, pride and empowerment, of personal time, harmful effects of work, economic recognition etc. hurt from unethical behavior of firm long-term wealth and income mcreases, risk of loss of marketability, lack of skill time career advancement, long-term pride in development, long-term loss of personal firm, and increased self-esteem well-being, etc. 3 jnurnul nf small bn»i hc»» strrurgy virl. il no. 2 fall/ivinter 2002 table 2: value creation for suppliers and society at large value value created (benefits/rewards) value destroyed (costs/risks)dimension tahle 2ar value crearion for supplit,rs price and other concessions extracted by firm, slow payments, loss ofrcvenuc, profit, stable business financialeconomic rcvcnue from failure of customer firm,assistance from customer firm, etc. cost of meeting other customer firm demands, etc. stability of business relationship, greater uncertainty of relationship withn 0 liinnovation, tcchnical and managerial customer, damage from customer firm'seconoinic assistance, prcstigc, ctc. from customer firm unethical behaviors, etc. risk to long term viability of supplierlong-term business stability, high rate of from loss of contract, learning andtinic growth and profltability, innovativencss, other costs in long-term adaptations tocontribution to economy, ctc. customer tahle 2hr value creation for society at large tax abatements, costs of pollutionjob creation, mx revenues, more functionaleconomic od f ', h . bl 'd reduction, costs of infrastructureproducts, firm's charitable donations, etc. facilities, increased cost of living, etc. nonstable healthier economy, non-monetary pollution, congestion, social problems fconomic contributions of firm, community pride, etc. like increased crime, etc. risks of long-term loss to economygreater economic prosperity long-term,time from downsizing of firm, reducedsocial benefits of long-term growth quality of life, etc. factors influencing value-related interactions the entrepreneurial team is cognizant of value impacts resulting front stakeholder interactions, and hence seeks to maximize the positive values and minimize the negative values. accordingly, entrepreneurs try to influence the stakeholder value demands to ntaximize net positive values to the new venture, and at the same time, each external stakeholder also makes demands on the venture. however, because not all stakeholders have equal power, those that have highest power or control over the new venture's actions would shape the entrepreneurs'ecisions, capturing the greatest positive values for themselves. hence the power or»alienee of a stakeholder determines the degree to which the entrepreneurs yield to its demands. further, the stakeholders also depend on the new venture to produce desired value outcomes, and this stakeholder dependence varies among stakeholders. the interplay between stakeholder salience and dependence of the stakeholder on the venture determines the types of influence strategies adopted by the entrepreneurial venture and the resulting value outcomes. new venture perspective stakeliolder salience. the term stakeholder "salience" signifies that the entrepreneurial venture perceives the importance, approval or cooperation from a particular group as essential for its well being. however, the entrepreneurial team may not always be cognizant of the total spectrum of value consequences from its actions and there could be several unintended consequences (mintzberg & waters, 1982). still, in the majority of cases the entrepreneurs do perceive the importance of a stakeholder accurately, and will strive to cater to its value demands. research points to several factors that influence stakeholder salience (agle, mitchell & sonnenfeld, 1999; frooman, 1999; mitchell, agle, & wood; 1997; pfelfer & 4 journal of stnall business strategy vol. /3, no. 2 faflflvinter 2002 salancik, 1978). this paper will focus on two factors, namely, resource dependence of the new venture and its value goals. resource dependence of tlie new venture. resources and capabilities are critical to organizational success because these enable a firm to establish sustainable competitive advantages relative to its key rivals, and generate above-normal returns (barney, 1991; conner, 1991;mahoney & pandian, 1992; oliver, 1997; peteraf, 1993; wernerfelt, 1984). as stevenson and jarillo (1990) point out, the impetus for creation of a new venture is the innovative idea that embodies hitherto undiscovered opportunities and can be transformed into a potentially successful enterprise. while the new venture may have the edge in its unique and superior idea, it often lacks the many complementary resources necessary for bringing these ideas into fruition (mosakowski, 1993). thus the new venture is in continual pursuit of diverse inputs, and is highly dependent on the resources and commitments from several stakeholders (bruno & tyebjee, 1982), for instance, it must attract investors and creditors'ommitments for its capital needs (brophy, 1992). it needs suppliers for its material and physical capital, talented employees for managerial and technical expertise, and it needs to win the loyalty of growing numbers of customers to ensure the success of its products and services (cooper & gimeno-gascon, 1992; greene & brown, 1997). therefore, those stakeholders that provide the most vital resources gain the most power over the venture and this makes them the most salient/influential players (agle, et al., 1999; freeman, 1984; frooman, 1999;mitchell, agle, & wood, 1997; pfeffer & salancik, 1978). value goals of the new venture. the new venture is a product of the entrepreneur(s)'oals, effort and values, and, therefore, these have a substantial role in shaping the firm's strategies and success (begley & boyd, 1987; stewart, watson, carland, & carland, 1999). the entrepreneurs'alues and perceptions often determine perceived salience of stakeholders. agle and colleagues (1999) confirm that the leader's values on self-interest versus otherregarding interest influence the firm's interest in catering to non-investor stakeholders. 1'he entrepreneur of this venture is pre-occupied with achieving rapid growth, competitive superiority, economic success, and preparing for the anticipated future of the fiim (lumpkin & dess, 1996). her attention is wholly centered on the players that contribute to the venture's growth success. hence, unless the entrepreneur has strong altruistic motivations to begin with, or is obliged to address these issues, attention to the non-economic value outcomes tends to be minimal. the entrepreneur may consciously or unintentionally defer value enhancement for the less salient stakeholders. only paying attention to the "stakeholders that matter" seems to make good business sense (freeman, 1984; jones, 1995). stakeholder perspective s(akeholder dependence. dependence occurs when the new venture provides essential value outcomes to the stakeholder group and few others can satisfy this stakeholder's value needs. rephrasing in terms of power, "power is defined in relative terms that is, a has power over b if b is more dependent on a relative to a's dependence on b" (frooman, 1999: 196; lawler & yoon, 1996). hence, the venture has greater power and the stakeholder may yield more to the venture under these conditions compared to those where the dependence is more balanced. an example would be a biotech new venture that holds a'patent for a new medical formulation for say lung cancer. assuming that fda has approved this new drug, the new venture is in a position of advantage when it is negotiating with another firm, say a pharmaceutical company, for assistance in manufacturing and marketing. stakeholder value gools. stakeholder literature (freeman, 1989; frooman, 1999; jones, 1995) analyzed the value goals and their priorities for different constituents of the new 5 ji&u ma/ rf.cut u// bnsiaess snit/erat vo/. /3, no. 2 / 0//11'imei 2002 venture like investors, customers, employees, suppliers communities, and competitors. agrcemcnts and disagreements occur between each constituent's value goals iis a vis the cntrcprencurs'oals on the one hand and between the goals of the disparate stakeholders on the other. prior research on large corporations has shown much interest on how low compatibility in goals between a stakeholder and the organization affects their interactions (freeman, 1984; frooman, 1999; oliver, 1991; pfeffer & salancik, 1978). figure i presents a general framework that graphically summarizes this papers'iew of the possible interactions between the new vennire and its stakeholders. figure i: interactions between neiv venture and stakeholders stakeholder's stakeholder lnfluence new venturestrategies dependence on new stakeholder salience venture resource dependence value goals value goals venture's influence strategies value functional/ outcomes value creation strategies within this general scheme, the new venture adopts influence strategies that enable it to pursue those value creation strategies that meet its own value goals. under certain conditions, the new venture may be obliged to completely concede to the stakeholder demands, and resign itself to receiving a lower share of positive values than the stakeholder receives. but, in the long run the new venture seeks to increase its autonomy from stakeholders with incompatible value interests. as pfeffer and salancik (1978) note, "firms do not merely respond ...through compliance to environmental demands. rather, a variety of strategies may be undertaken to somehow alter the situation....and make compliance less necessary" (pp. 197). next we elaborate the concept of agreement between stakeholder and new ventures on value goals. agreement on value goals prior research points that the level of compatibility of interests between the organization and its stakeholders strongly intluences their interactions (freeman, 1984; frooman, 1999; jones, 1995; oliver, 1991; pfeffer & salancik, 1978). hence the presence of high versus low agreement regarding the value goals (or the desired value outcomes) between the two parties is an important moderator of stakeholder-and-entrepreneur interactions. for the stakeholders and the entrepreneurs, value goals would match value outcomes when the venture's value creation strategies succeed in achieving the desired values of each group. here we posit that for the entrepreneurs, the economic value goals of survival, growth and continued profitability 6 jnttrnal of sniall business strateg)'ok l3, na. 2 eall/ivinter 2002 (shane & venkataraman, 2000) are primary, along with the non-economic value goal of personal satisfaction (cooper & artz, 1995). stakeholder influence strategies and value outcomes new venture's stakeholder management consists of actions or steps taken by the venture to influence its relations with key stakeholders. as mentioned earlier the underlying purpose of these influence or management strategies is the creation of maximum possible amounts of positive values and minimum amounts of negative values for the firm under the given circumstances. oliver (1991)identified influence strategies in the context of an organization responding to external hostile pressures. she posits the five strategies of acquiescence, compromise, avoidance, defiance, and manipulation. similarly, pfelter and salancik (1978) point out that organizations seek to minimize dependence and manage the environment through strategies such as avoidance, compliance, managing by controlling access, and managing and avoiding dependency by actions such as buffering, and diversification. drawing from this research, we identify five types of influence strategies that a new venture may adopt to manage stakeholder demands for value creation: i) compliance, 2) negotiation/compromise, 3) alliances, 4) replacement, and 5) defiance. we intetpret these strategies for the purposes of this study as follows: 1. cotnpliance strategy signifies that the new venture consents to fully implement strategies conforming to stakeholder demands. thus the new venture gives priority to meeting this group's value goals over its own. 2. negotiation/ campraniise strategy involves the entrepreneurs bargaining with the stakeholder to persuade it to be less demanding and modify the terms of its value demands. the negotiation may result in a contractual agreement. 3. alliance strategy refers to entering into formal or informal joint ventures, equity stakes, shared purchasing or other types of cooperative arrangements. 4. replacement strategy is adopted when the new venture seeks to procure from others the inputs provided by the pressuring stakeholder to avoid transactions with this gr'up. 5. defiance strategy is adopted when the new venture ignores the stakeholder's value goals and pursues its own. these strategies can be differentiated on a scale of activism, where activism refers to the extent to which the new venture can exercise its strategic choices autonomously or without concern for stakeholder demands. compliance would be the least active strategy, while defiance would be the most active. a new venture may adopt one or more of these strategies and also reinforce them with other complementary strategies such as communications aimed at concealing dependence, or for exaggerating the appearance of compliance, or building buiters to reduce dependence on the particular resource provider (pfeffer & salancik, 1978). the entrepreneurial venture deals with several stakeholders at any given time and hence tailors the influence strategies to suit the different constituents. in this mix of influence strategies, the new venture will on the whole pursue strategies that minimize its dependence on those stakeholders whose value goals are incompatible with its own. to illustrate, a new venture may agree with one group of stakeholders, namely, investors'emand for more elticient operations and thus takes steps to reduce new product testing costs. 13ut other stakeholders like the new venture's consumers may view this as being harmful and this group could experience some value decrease, even if the new product adds value in other ways. thus the new venture's actions simultaneously attect some groups positively and others negatively. in fact, the same group might receive both positive and negative values. in the case of the new venture mentioned above, employees may receive several job related benefits 7 jonrnnl of stnnii business srrategv i'oi. /3, no. 2 fnhylyinter 2002 like better wages and career advancement, when the new venture achieves profitable growth with the new product. however, these employees may at the same time be dissatisfied that the fimi is skimping on new product testing. overall, the new venture employs different strategies with dif1'erent stakeholders with the aim of maximizing the positive values created for the firm while minimizing any unavoidable negative consequences. for example, it might comply with the investor group's demands for economy, and also issue communications to customers stressing product's superiority and the venture's concern for product safety. if this communication strategy suffices, economic and non-economic value outcomes could be quite positive for the venture. however, if customers arc not satisfied with these moves, they may pressure the venture over time to reverse the cuts, and this could eventually adversely affect the value received by the firm, and another of its stakeholder groups, namely its investors. the following sections explore some of these stakeholder influence strategies in greater detail. we focus on the scenano where the new venture's management and its stakeholders in question have a low level of agreement on the types of values that should be created by the firm. new venture influence strategies under conditions of low agreement on value goals situations of low agreement on value goals are clearly less desirable, and scenarios where the flmi is highly dependent are particularly problematic and unstable. when stakeholder influcnce is high, compliance may be unavoidable in the short run, and this imposes substantial costs on the new venture. in the long run, the venture may be able to actions that produce more autonomy from the hostile but dominant stakeholder. empirical research shows tliat organizations resist external pressures (covaleski & dirsmith, 1988; powell, 1988) when agreement is low, and resistance is more successful when the dependence is mutual between the organizations so that the power of each is roughly in balance. ideally, the new firm would like to move to a situation of low dependence. while attempting to reduce its dependence, the firm still needs to pursue strategies that accommodate the interests of a powerful stakeholder. overall, the new venture's value goals are constrained by the necessity to interact with powerful and incompatible stakeholders. a new venture in this predicament works hard to change this situation, and tries different solutions. it might disguise its dependence, when it complies, it may pretend to be more compliant than it actually is, build internal buffers to decrease its vulnerability to stakeholder threats, look for powerful and supportive allies, develop substitutes, or seek alternative providers of the specific resources. the following sections describe in more detail the influence strategies attempted by the firm in the four types of low agreement scenarios. figure 2 summarizes these four situations. cell a: dominant stakeholder. strategies. cotnplinnce though reluctantly oltered is the most feasible option for the firm faced with a hostile and powerful stakeholder. the latter threatens to, or actually withholds valuable financial, material or other resources like legitimacy if the focal firm fails to meet its demands (frooman, 1999; meyer & scott, 1983; oliver, 1991). the new venture, finding itself vulnerable, complies. for instance, a new software venture that is planning to introduce a promising pc-based computer game will have to abide by the conditions imposed by a dominant producer of operating software for pcs. compliance may remain 100 percent even in the long run if the applications software venture has few alternatives to this [stakeholder] dominant producer of operating systems. this situation would be particularly unattractive if the dominant company can easily monitor the new venture's actions and punish instances of low compliance. this situation was perhaps similar to that experienced by isv [independent software vendors] ventures in their relations with microsofl in the early 1990s when they were trying to bring out new and popular 8 zaunial ofstiiall business strategy val. /3, no. 2 foll/winter 2002 software applications for the pc. but where the stakeholder's control is not complete, the new venture. figure 2: stakeholder influence strategies of new venture under conditions of low agreement dependence of stakeholder on iyew venture low high cell iti dominant and cell bi high interdependence incompatible stakeholder wiih incompatibility strategies; v complies in short run, uses strategies; v and sh negotiate and also buffering and concealment. long run compromise in short run. also use v seeks replacement of this sh and also concealment. long run sh and v seek high alliances with other shs. alliances with other sh, and replacement. value outcomes: higher negatwe values value outcomes: positive and negative for v and higher positive value for sh m values high for v and sh. long run salience of short run. in long run, positive values may negative values may decrease for both stakeholder decrease for sh when sh is replaced. with replacement. io new cell d low interdependence cell ci dominant venture venture with incompatibility with incompatible stakeholder strategies: defiance and minimal strategies: sh accommodates in short exchange in short run..long run, sh and run, seeks alliances in long run. v defies v seek replacement. sh. low value outcomes. some negative value value outcomes: limited negative values impacts for sh and v. long run, net for v, but negative value high for sh. in positwe values increase for v and sh with long run, sh's alliances may increase replacement. negative values for v. note: v = new venture sh = stakeholder may go along with the dominant stakeholder's conditions, but may simultaneously make attempts to reduce its dependence. to begin with, it may make exaggerated statements regarding its compliance with the dominant company's conditions and also "engage in window dressing, ritualism, ceremonial pretense or symbolic acceptance" (oliver, 1991: 155). further, the new firm might manipulate communications to minimize the hostile stakeholder's knowledge of its dependence, and where possible it may build buffer stocks. trust is clearly absent and opportunism is common (jones, 1995) in such cases. then the stakeholder may find it necessary to institute monitoring mechanisms to verify compliance by the new venture. this might increase transaction costs for both the stakeholder and the firm (williamson, 1975). thus this imposes some negative values for the dominant stakeholder too. in the long run, the new venture will pursue replacement of interactions with the hostile stakeholder. for instance it could seek out other market segments to sell to, invest in internal supply sources, search for alternative suppliers, or develop substitutes to the inputs through its own research and development efforts (pfeffer & salancik, 1978). the new venture's attempts may be aided or impaired by the state of interrelations among the various stakeholders (rowley, 1997) the firm deals. if the venture is dealing with a hostile, powerful and close knit network of stakeholders, then few options to compliance exist either in the short or long run. in fact, as the experience of music industry newcomer napster suggests, an entrepreneurial venture can jeopardize its very existence if it fails to recognize the potential negative values feared by key stakeholders. 9 jaumutl of.'imall sucl ncl;i stratcgv val. is, niz 2 pallttvinmr 2002 value oittcutnec. the dominant and hostile stakeholder is the primary beneticiary in the interactions with the new venture, and receives significant positive values, though some negative values are incurred in monitoring costs. the entrepreneurial venture's positive values are severely reduced, and in fact, large negative values may accrue. revenue growth and profitability of the firm may be severely jeopardized by the added costs of compliance. if the flrm cannot reduce its dependence on the low agreement dominant stakeholders and if it has few supportive stakeholders, sometimes the firm's survival is jeopardized. therefore, propositioti i: umler conditions of low agreement on values, the dotninant stakeholder rrtracts significant concessions and compliance from the new venture in the sliort run. in the irmg run, the nehv vernnre will pursue negotiationl cotnprodnise with this stakclioltler, aml also look to replncemeiu strategies. relative to tire new i'enture, the hostile stakehohlcr receives a signifdcmitly greater slntre vf the positive value ourconics, but sotne negntt've values may accrue to the sntkcliolder in nionirortng costs. chiihhid~hl d d . d dl . h h dl«khld equally dependent on each other for satisfying their value goals, but their value goals differ significantly. in this case, in the short nin, negotiation and cotnpromise are appropriate for both. because the stakeholder needs the flrm to add important positive values, it will exert only moderate pressure. as frooman (1999) states, this type of stakeholder is likely to provide resources but impose usage conditions instead of withholding inputs. a hypothetical example would be the case of a new biotech venture that holds a patent on a proven new fomiulation for breast cancer that has been approved by the fda for full-scale manufacture and marketing. this drug also promises to be a blockbuster in sales and profit production, 'fhis young biotech venture would prefer to go it alone to maximize the returns to itsell; but can not pursue this option since it lacks the requisite resources and expertise. then it would seek the assistance of an established pharmaceutical firm to make and market the new drug. assume that the mature pharmaceutical firm needs the new drug desperately to replenish its depleting pipeline of lucrative products. though this company also would have prel'erred to go it alone with the product introduction, that is not feasible, and hence the two parties need each other in significant ways. these two parties are thus reluctant partners that are mutually dependent in important ways. then in the short term at least, the two firms may be willing to compromise (oliver, l991) and partially accommodate each other's interests. they may enter into a variety of agreements to collaborate, but each would also impose restrictions on the other, fearing opportunistic behavior by the other. they may concurrently use concealment strategies as well. if such arrangements prove unproductive to either of the partners, in the long run they would move towards replacement strategy, seeking other avenues for profits and growth and terminating agreements with the incompatible partner as soon as other options become viable. in cases where it is practical, each party may simultaneously try and build alliances with other stakeholders in the indusuy to build support to their demands and pit these influential and more supportive stakeholders against the less friendly party. that is, in such cases the entrepreneurial venture and its incompatible stakeholder would attempt to alter the nature of interactions over the long term. in the event the interactions can not be transformed, the uneasy alliance may continue. value outconies. in cell 8, positive and negative values accrue to both venture and the salient unfriendly stakeholder in roughly balanced proportions. in a situation of mutual dependence, neither can extract an unduly high price in value share. if the firm and the stakeholder reach a stable compromise in the long run and each gives up some values for the sake of a sustainable relationship, then the decreases in negative values may offset the decreases in positive values. hence, 10 journal of sinall business straiegi'ol. 13, no. 2 fall/winter 2002 proposition 2. under comlitions of low ngreement, negotiation and comproniise strntegv is appropriate for tlie highly inrerdependent new venture and stakehohler, but in the long min the venture and its stakeholtler would opt for the replacement strategy. the sluires of positive and negntive values will be relatively balanced to each player. cell c: dominant venture. strategies. defiance is the preferred choice for the venture provided the weak and hostile stakeholder cannot build support from other groups that also interact with the new venture. this is an anractive situation for the new venture because it can act wholly autonomously of this unfriendly stakeholder. but, the stakeholder's predicament resembles that of the dependent new venture in cell a. hence, stakeholder coinpliance would be in evidence. that is, this stakeholder group accepts the value goals of the new venture, but at the same time it may try to conceal its high dependence on the firm. in the long run the dependent stakeholder tries to increase its autonomy and or increase its clout over the dominant new venture by coopting other powerful stakeholders (freeman, 1984; frooman, 1999) through replacement and alhances. success for this stakeholder depends on the density of links in the network of stakeholders and the degree of compatibility between the different stakeholders. an example could be a growing and profitable ecommerce company in a slow economy such as in the second half of 2001 such as amazon.corn when dealing with its technical professional employees. relative to past, these employees enjoy fewer attractive employment options, and hence while they may not be pleased with the terms offered by the venture's management, they may nevertheless accept them. these professionals would no doubt continue to look for emerging opportunities, and should the environment turn in their favor over time, they would either renegotiate the job conditions or leave this employer. value outcomes. as long as the conditions remain stable, the entrepreneurial venture is clearly in a position to seek and enjoy high positive values, and it is quite likely that it would receive a greater proportion of the total positive values created. in the long run the shares may become more balanced if the stakeholder can alter the situation in its favor. accordingly, proposition 3: under conditions of low agreement, the dominant new venture may pursue a definnce strategy and refuse to meet the demands of the weak aml incompanble stakeholder. ln the near term, stakeholder compliance may be in evidence, but in the long run, it may seek replocenient of the venture, or increase its salience through alliances with others. share of the positive value outcomes received by the new venture is signijicantly higlier for the new venture and lou er for tlie stakeholder. cell d: low interde endence. strategies. the new venture and this stakeholder have limited need for each other, and given dissimilar value goals, both would prefer to exit the relationship. the firm would use defiance strategy, as would the stakeholder. if replacement strategy were possible, entrepreneurs managing the venture would terminate the relationship in the long run. if not, the transaction may remain a simple exchange. value outcomes. both would receive slightly negative values on a net basis from the interaction, but the impacts on total values added may be minimal. thus, proposition 4. under conditions of low agreement, in a low interdependence situation the new venture as well as the stakeholder will pursue defiance strategy in the short run and replacement strategy in the long run. value outcomes are not significantly impacted for either the venture or the stakeholder. 11 jonrninl ofsinn// htixine.,'iroregy i'ol. /3, /t/o. 2 /'ollltginier 2002 conclusioiv and ii11plications l,iterature often addresses product/market strategies of entrepreneurial ventures, but seldom considers strategies required to "manage" stakeholders. research regarding stakeholders is established in the context of large organizations, yet less studied in the new venture context. while the potential positive and negative effects of stakeholder management may be relatively more visible and consequential when the company is large and well established, such as starkist (frooman, 1999), the current growth of technology suggests that a better understanding of influence strategies might enhance new venture survival. because new ventures face crises of legitimacy and resource scarcity if they choose to grow rapidly, obtaining capital, gaining customer acceptance, and accessing distribution mandates intei actions with multiple stakeholders (bhide, 2000). i lence, a better understanding of the range of alternatives that a new venture might pursue is of practical, theoretical and empirical interest. our purpose was to contribute to this gap in literature by outlining various scenarios that posited influence strategies and value outcomes. further, we sought to go beyond economic value and broaden our understanding of all value outcomes. we began with the premise that new ventures may nt once create and destroy value as founder's bring their ideas to fruition. we argued that the positive and negative values resulting from the new venture creation process varied for different stakeholder groups and over time. propositions put forth in this paper could be explored in greater depth to analyze the variations in interactions and influence strategies that occur for different types of entrepreneurial ventures. for example, when a start-up entrepreneurial venture enters the rapid growth phase, conditions may shift significantly. in particular, as a new venture gains market share, it becomes more visible in the investment community, in the eyes of competitors and of course, suppliers and customers. this enhanced visibility may lead to greater expectations for returns to investors. cmplnyce salaries, supplier contracts or to givebacks to society. impacts of diverse and growing expectations on the new venture may be influenced by the foresight and proactiveness shown by the entrepreneurs in terms of the time or speed with which they identify and respond to the anticipated value demands of stakeholders. relatedly, the activities associated with stakeholder influence strategies may take place in arenas other than the marketplace; e.g. legislative, political, or social. with this in mind, it is reasonable to suggest that a variety of capabilities, skills and competencies may be more or less appropriate for these arenas. resource-based theory and empirical investigations of this perspective show tliat there are relationships between resource capabilities, expectations of the manager i'or growth, and strategies (penrose, 1959; barney, 1991; wemerfelt, 1984). hence, an articulation of stakeholder influence strategies and the associated competencies or resources would be a welcome extension of the current work. finally, there may be close correlations between the influence strategies discussed in this paper, and the i'unctional strategies pursued in the new venture. these need to be empirically investigated in order for the entrepreneurs to make effective strategic choices. in sum, we believe entrepreneurs can achieve greatest possible positive values for their venture when they accurately forecast the stakeholder interaction environment and use this information to fashion influence strategies that prevent antagonizing powerful constituents. in the near term this might sometimes imply they compromise and give up some desired values, yet this may yield better results over the long term. 12 journal vf snmll business strotegv vtil. /3, no. 2 fa/iiivt'nter 2002 references acs, z. &. audretsch, j.. 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(1999). creniing value through skill-based strategy and entrepreneurial leaders/i/ p. n y: pergamon schumpeter, j.a. (1934). the theory of economrc development. cambridge, ma: harvard university press. shanc, s. & venkataraman, s. (2000). the promise of entrepreneurship as a field of research. academy of mnnagemeni review, 25, 217-226. shepherd, d. a. & shanley, m. (1998). new venture strategy: timing, enviranmenlal miceriainry and peiformance. thousand oaks, ca: sage publications. 14 journal of small business strategv vol. /3, no. 2 fallltyinter 2002 sewall, h.r. (1901). the theory of value before ailmn smith. new york, ny: augustus m. kelley publishers, reprint, 1968. slevin, d., & covin, j. (1997). time, growth, complexity, and transitions: entrepreneurial challenges for the future. entrepreneurship theory and practice, 22, (2), 53-68. stevenson, h.h., & jarillo, j.c. (1990). a paradigm of entrepreneurship: entrepreneurial management. strategic management journal, i i, 17-27. stewart, w. h., watson, w. e., carland, j. c., & carland, j.w. (1999). a proclivity for entrepreneurship: a comparison of entrepreneurs, small business owners, and corporate managers. journnl of business venturing, i, 189-214. 'fhompson, j. d. (1967). organizations in action. new york: mcgraw hill. timmons, j. & sapienza, h. (1992). venture capital: the decade ahead. in d. l. sexton & j.d. kasarda (eds.), the state of tlie art of entrepreneurship (402-437). boston; pwskent publishing. wemerfelt, b. (1984). a resource-based view of the firm. sirategic management journal, 5, 171-180. west, g. p. iii, & meyer, g.d. (1997). temporal dimensions of opportunistic change in technology based ventures. entrepreneurship theory and practice, 22 (2), 31-35. williamson, o. e. (1975). markets and hierarchies. ny: free press. young, j. t. (1978). classical theories of value: froni smith to sraffa. boulder, colorado: westview press. radha chaganti is a professor of strategy and enrrepreneurship at rider university. her current research interests include entrepreneurship and strategy, gender and entrepreneurship, and ethnic entrepreneurship, she has published in journal of business veniuring, entrepreneurship theory aml practice, journal of small business strategy, and journal of small business management: candida brush is an associate professor of strategy and policy, director of the council for woinen's entrepreneursliip and leadership (cwel), and research director for the entrepreneurial manngement institute at boston university. her current research interests are resource acquisition and growth strategies in nascent ventures. with four other researchers, she investigates growth and financing strategies of women-led ventures, referred io as the diana project which is sponsored by the kaujfman foundation and esbri (sweden). prentice hall-financial times will publish their forthcoming book, women and wealth creation: uncovering the myths (2003). cengiz haksever is a professor of management sciences at the college of business administration of rider university. he received his ph.d. in operations research pom the university of texas in austin. his research interests are in quality and coniinuous improvement, service management, data envelopment analysis, and supply chain management. his work has appeared in european journal of operational research, journal of ihe operational research society, computers & or, computers & industrial engineering, journal of small business strategy, education economics, and business horizons. 'onald g. cook is a professor of entrepreneurship and director of small business institute at rider university. his current research interests are managerial training and prospective entrepreneurship, and entrepreneurship and public policy. he has consulted extensively with small businesses, and also supervises student proj ects in consulting with small businesses. several student projects have won national awards for excellence. he has published in business and society, journal of small business management, and journal of small business strategy. 15 effect .of professional background on venture capital proposal evaluation richard b. carter howard e. van auken iowa stateuniversity abstract this paper reports on the differences in investment related activities and evaluntion criteria of venture capitalists having a business background compared to venture capitalists having a non-business background. data was collected from a nationwide survey of 72 venture capitalists. the results show that venture capitalists having a non-business" background invest in earlier stages of the firm. require a shorter payback period and make more follow-up investments than business background venture capitalists. the non-business background venture capitalists place greater importance on the uniqueness of the product, the cost structure of the project and the entrepreneur's health and less importance on exit procedures than business background venture capitalists. capital acquisition by small growth firms is often difficult due to their limited access to the debt and equity markets (carter & van auken, 1990). finns are initially financed using alternative sources of personal equity and borrowing. however, once these sources are exhausted, entrepreneurs must rely on external capital, especially to finance rapidly growing and capital intensive firms (van auken & carter, 1989). as an alternative, entrepreneurs often seek capital from venture capitalists to finance the growth and operations of their firms (kuratko & hodgens, 1989). funding proposals submitted to venture capitalists undergo intensive evaluation (due diligence) to determine the risk and value-creating potential of the project (batterson, 1986). several studies have investigated the criteria used to evaluate venture capital proposals. similar to earlier findings by tyebjee and bruno ( 1984), those of macmillan, siegel and subbanasasimha ( 1985) confirmed that the quality of the entrepreneur is a critical factor determining the funding decision. in comparing successful with unsuccessful ventures, macmillan, zemann and subbanasasimha (1987) found that unsuccessful ventures were characterized by factors such as unqualified management, poorly developed product or lack of market demand. two major criteria which were predictors of successful ventures were the insulation of the venture finn from competitors and the degree of market acceptance of the product. the purpose of this study is to determine differences in venture capitalists' evaluation criteria relative to their professional background. hisrich and peters ( 1989) suggest that venture capitalists 45 have investment preferences (industries or products) and that, in their search for capital, the entrepreneur should attempt to match these preferences with the proposal. the paper focuses on these issues in relating the investment characleristics. the venture capitalists' geographical and industry investment preferences and the stage of development of the firm in which the capital is invested to the professional background of the venture capitalist.· while previous studies focus only on identifying the criteria used by venture capitalists, this study investigates the differences in these evaluation criteria. additionally, information is presented concerning the relative importance of venture capitalists' activities and preferred exit procedures. this type of information has not been reponed in the literature. differences in evaluation criteria are expected because of the diversity in the professional backgrounds of the venture capitalists. this diversity may influence which factors the venture capitalists consider imponant and the due diligence analysis. for example, a venture capitalist · having a technical background may be more interested in technical products or the technical aspects of a project than a venture capitalist with a non-technical background. on the other hand, venture capitalists having a non-technical background may have a greater interest in the prod.ucl, its market and competitors. such differences may be evident when comparing alternative aspects of the due diligence process. differences in how venture capitalists analyze proposals may also depend on the firms' stages of development. tyebjee and bruno (i 984) have identified six types of venture capital financing: i. seed financing-financing provided to develop a concept, 2. stan-up financing-capital used in product development and initial marketing, 3. first stage financing-financing provided lo firms that have expended their initial capital and require funds to initiate production and sales, 4. second stage financing-working capital used for initial financing of a firm that is producing and shipping products, 5. third stage financing-funds for the expansion of a growing firm that is either at breakeven or incurring· a profit, and 6. fourth stage financing-capital invested in a firm that is expected to go public within six months. since each stage has different risk/return characteristics, venture capitalists may place different emphasis on the various criteria for each stage. the allocation of funds and required rates of return may be different among different groups depending on the stage of development. for example, investors having a business background may have a preference for investing in later stages of development when an understanding of the technical nature of the product is not as important as in earlier stages. these differences may be more observable between different industries such as a high-tech industry and a consumer products industry. differences among groups may also be found relative to geographic location (thus the operating environment) and type of industry. observed differences among geographic locations might be expected as a result of a concentration of industry in various sections of the country. for example, 46 if the western part of the country concentrated on high-tech products and the midwestem part on consumer or agricultural goods, then differences in evaluation criteria might be observed. sample, questionnaire development and methodology a sample of 275 venture capitalists was drawn from pratt's directory of u.s. venture capital companies. wetzel ( 1987) has described three major segments of the venture capital market: the public market, the professiopal venture capital market and the market for informal venture capital. selection from this source limits the sample to the professional venture capital market sector of venture capitalists. a questionnaire was developed and pretested in february 1989. the first mailing occurred in march 1989, and a second mailing occurred in april 1989. a total of 72 usage questionnaires were returned, providing a response rate of 26.2%. the questionnaire was divided into three sections. the first section asked about the professional background of the venture capitalist. the second section requested information about the characteristics of funded projects, including industry preferences (telecommunications, human health, diagnostic products, electronics/data processing, robotics, consumer products, new materials and others), geographical preferences (northwest, northeast, southeast, southwest, midwest, international and no preferences) and financial characteristics of projects funded (allocation of capital between different growth stages, required rates of return and payback periods and size of investments). the third section of the questionnaire asked the venture capitalists to rank the importance of various criteria used to evaluate proposals using a 1-5 scale (i = very important and 5 = not important). the evaluation criteria were similar to those used by macmillan, siegel and subbanasasimha (1985). the categories of evaluation criteria included characteristics of the entrepreneur, financial aspects of the proposed project, product/market aspects and exit procedures. questions were also included concerning the relative importance of various activities of the venture capitalist: selecting the project, structuring the deal, monitoring the project and exiting procedures. respondents were partitioned into two groups: those having a business background ( 41 respondents), and those having other backgrounds (30 respondents). means of the responses to particular questions were calculated for the entire sample and for each group. to determine significant differences between responses to particular questions for each group, i-tests of group means were calculated. results professional background and investment preference approximately 58% of the venture capitalists listed their professional background as non-business (engineering, sciences, other), and 42% indicated a business background. most of the respondents preferred to invest in the geographic region in which they operated (more than one geographic preference could be indicated). about 16% preferred to invest in the northwest, .34% in the southwest, 18% in the northeast, 10% in the southeast, and 34% in the midwest. only 2.8% had an international preference, and 30.6% had no preference. the respondents were also asked about industries in which they preferred to invest. the percentage of venture capitalists by category (more than one category could be indicated) was as follows: 59% preferred to invest in the human health industry, 56% in the electronic products/data processing 47 table i size of investment, follow-up investments and longest acceptable payback period: the overall mean and by professional background means(%) investment variables overall business non-business minimum inveslmenl ($) 392,671 268,179 549,290 -1.3523 maximum investment 3, 138,028 3,249,375 2,994,355 0.1671 follow-up inveslmenl (%) 57.00 54.40 60.50 -0.8289 longesl payback (years) 8.06 9.20 6.50 1.4151 induslry, 4'7% in diagnoslic producls, 38% in consumer producls, 27% in robotics/mechanical devices, 18% in new materials, and 40% in olher areas. gladstone (1988) and hisrich and pelers (1989) sugge>t thal venlure capitalisls have investment preference, for example, high technology products over consumer products. these resulls indicale a wide preference for a variely of indusl_ry investments. investment activity the venture capitalists were asked about the size of their investments, follow-up investments, and required payback periods on invesled funds. table 1 shows iha! !he overall average minimum investment during !he pas! five years was $392,671, and the average maximum inveslment was $3, 138,028. the averages are also shown for 1he business background and non-business background venture capitalists. the range between the minimum and maximum investments for the non-business background venture capitalisls is grealer lhan for !he business background venlure capilalisls. however, no stalislical difference exisls belween !he categories. such large averages suggest iha! !he venlure capilalisls in !he sample have subs1an1ial funds available for investment and are pan of the formal segment of !he veniure capilal market. this differs from the informal venture capital inveslment, which is reponed to average aboul $50,000 per project (hisrich & peters, 1989). growing finns commonly require additional funds to finance expansionary requirements, and the lack of capilal is a common constrain! causing financial distress (brigham & gapenski, 1989). venture capitalists making an early investment have a financial incentive to commit more capital lo firms appearing lo be successful. this follow-up investment provides the financial resource which allows !he firm lo conlinue ils growlh wilhoul !he disruplions caused by a shonage of capilal. the survey found iha! follow-up inveslmenls were relatively common. venlure capitalisls made follow-up inveslments in 57% of !he firms in which !hey inilially invested. ahhough !he difference is no! statislically significanl, non-business background venture capitalists made followup investmenls in a larger percentage (60%) of projects 1han business background venlure capitalists (54.4%). venture capitalists are relatively shon-tenn investors concerned with recovering their invested capital (gladstone, 1988). one measure of the acceptable lime until recovery of capital is payback period. the survey found !hat !he longesl acceplable payback period for an investmenl was 8.06 years. the payback period (6.5 years) for non-business background venlure capitalisls is much s_honer than for business background venlure capi1alis1s (9.2 years), bu! !he difference is no! 48 table 2 panel a: required rates of return hy growth stage: the overall means and hy professional background means(%) stage overall business non-business seed 120.4 122.9 118.1 0.0623 start-up 81.1 60.3 99.4 -1.0186 first 78.2 84.3 73. i 0.2800 second 65.8 70.6 61.3 0.2239 third 54.9 62.7 47.5 0.3974 fourth 22.1 22.5 21.6 0.1473 panel b: percent of capital invested by stage of firm: the.overall means and by professional background means(%) stage overall business non-business seed 22.33 19.93 25.52 -0.6825 start-up 26.48 22.00 32.76 i. 7883*** first 21.09 21.85 19.96 0.5133 second 25.88 30.76 18.96 2.3304** third 24.95 26.54 22.00 0.7035 fourth 15.69 11.95 20.67 -0.4367 * significant at i o/o; ** significant at 5%; *** significant at 10% statistically significant. these ranges of acceptable payback periods are consistent with expectations of venture capitalists reported in hisrich and peters (1989). investment activity by growth stage finns in earlier stages of growth have a greater risk of failure and thus expose investors to a greater risk of loss. however, investing in the earlier stages also offers the investor opportunities for higher returns. conversely, investing in later stages exposes the venture capitalist to less risk and should be accompanied by a lower required rate of return. this risk/return relationship was expected for venture capitalists having higher (lower) returns when investing in earlier (later) stages of the firm. the survey asked about the percent of total funds invested and the required rate of return in each stage of development. as shown in panel a of table 2, the venture capitalists invested similar percentages of their funds in the start-up (26.48%), second (25.88%) and third (24.95%) stages. slightly smaller percentages of funds were invested in the seed (22. 33%) and first (21.09%) stages, and a much smaller percentage was invested in the fourth stage (15.69%). table 2 also shows the percent of total funds invested and required rates of return for each stage of growth according to the background of the venture capitalist. in panel a business background venture capitalists appear to have higher required returns than non-business background venture capitalists for all stages, except for the start-up stage. none of the differences are statistically significant. 49 table 3 rankings of venture capitalist activities: the overall mean and by professional background means(%) activity overall business non-business selection 1.39 1.25 1.35 -0. 7057 structuring 2.51 2.68 2.29 1.5612 monitoring 2.53 2.40 2.70 -1.5119 exiting 2.23 2.03 2.48 1.8428** • significant at i%; •• significant at 5%; ••• significant at 10% panel b of table 2 shows the required rate of return by growth stage. due to the higher risk of failure, the required rate of return in earlier stages was expected to be higher than for later stages. the results support this relaiicinship. the required rate of return in ihe seed stage is 120.4%, start-up stage--81.1%, first stage--78.2%, second stage--65.5%, third stage--54.9% and fourth stage--22.1 %. these results are in contrast to hisrich and peters (1989), who suggest that the required rates of return should be 60% for investments in the seed stage, 50% in the start-up phase and 40% in the other stages. the largest differences between growth stages occurs between the seed and start-up stages· and the third and fourth stages. apparently, venture capitalists perceive large changes in risk between these categories, as reflected by the large differences in required rates of return. ranking of activity by importance tyebjee and bruno (1984) have identified venture capitalists' act1v111es as falling into the following categories: selection of the project, structuring the deal, monitoring the project after investing funds, and exiting the project. hisrich and peters ( 1989) discuss the selection and structuring of the project in terms of four basic stages: preliminary screening, agreement on terms, due diligence of the project, and final approval of the deal. complications may arise in each stage as a result of the involvement of more than one venture caj>italist (brophy, 1985). the survey asked the venture capitalists about the relative importance of each stage. as shown in table 3, the selection was ranked as being the most important of activities. this result was not unexpected since venture capitalists may receive hundreds of proposals each year of. which only a very few are funded (khan, 1985). exiting the project was ranked second in importance. the high rank given to the exit procedure was also not surprising since venture capitalists are temporary investors who are interested in cashing out of the investment after a period of time (gladstone, 1988). structuring the deal and monitoring the project were considered least important and received approximately the same ranking. table 3 also shows the differences in ranking between the business background and non-business background venture capitalists. the order of the rankings between the two groups was different. both groups ranked selection as the most important activity. however, the business background venture capitalists ranked exiting as the second most important, followed by monitoring and struct~ring. the non-business background venture capitalists ranked structuring as second in importance, followed by exiting and monitoring. in terms of relative rankings, selection, monitoring 50 table 4 mean ranking of exit procedures: overall mean and by professional background means(%) exit procedure overall business non-business buyout by larger finn 1.68 1.78 1.54 1.153 finn going public 1.88 2.00 1.72 1.911 depends on situation 2.34 2.60 2.00 1.479 buyout by venture finn 2.89 2.82 3.00 -0.659 and exiting were considered more important and monitoring less important by the business background venture capitalists than by the non-business background venture capitalists. the differences between the mean rankings of the exiting procedure were statistically significant. the business background venture capitalist considered exiting as much more important than the non-business background venture capitalists. the only time the venture capitalist is financially rewarded is when the: ownership is converted to cash. gladstone (1988) describes four possible arrangements: buyout by a larger finn, the venture finn going public, buyout by a larger venture firm, or the exit being detel}llined by the situation. given its importance, the venture capitalists were asked to rank their preferred exit arrangement. the results, shown in table 4, reveal that the venture capitalists have a greater preference for a buyout by a larger firm (1.68) and the venture firm going public (1.88). ranked next in importance was the exit procedure "depending on the sit~ation" (2.34), and a buyout by the venture firm was ranked last (2.89). the order of rankings was consistent between both groups. business background venture capitalists ranked all exit methods lower than non-business background venture capitalists, except the buyout by a larger firm. no differences in means were statistically significant. rankings of evaluation criteria the literature is replete with discussion and studies of the criteria used by venture capitalists to evaluate proposals (see gladstone, 1988; hisrich & peters, 1989; kuratko & hodgetts, 1989; macmillan, seigel, & subbanasasimha, 1985). these studies consistently find that various aspects of the entrepreneur are critical to the evaluation of a proposal. macmillan, siegel, and subbanasasimha (1985) group the evaluation criteria into six categories: entrepreneur's personality, entrepreneur's experience, characteristics of the product or service, characteristics of the market, financial considerations, and nature of the venture firm. the most important criteria were found to be related to the entrepreneur, financial aspects of the proposal and the patent or copyright position of the product. this survey also collected infonnation on the criteria used by venture capitalists to evaluate proposals. the rankings are shown in table 5. all entrepreneurial qualities (except analytical abilities and knowledge of financial statements), especially honesuintegrity, commitment and experience, were ranked between i and 2 (very important to important). other factors that ranked high in importance were uniqueness of product, market analysis, return on investment, ownership structure, and competitor's ability to duplicate product and marketing strategy. these results are consistent with macmillan, siegel and subbanasasimha (1985). however, this study found license/ 51 table 5 ranking of evaluation criteria: oi'erall mean and by professional background means(%) exit procedure overall mean(%) means business non-business entrepreneur's honesty/integrity 1.08 1.13 1.03 1.1881 entrepreneur's commitment 1.15 1.23 1.06 1.3573 enlrepreneur· s experience in proposed business 1.28 1.35 1.19 1.0275 entrepreneur's background/achievements 1.39 1.48 1.29 1.0937 management team 1.39 1.50 1.26 1.3636 entrepreneur's physical/mental health 1.52 1.70 1.29 2.6506* entrepreneur's ability to handle adversity 1.54 1.55 1.52 0.2236 entrepreneur's leadership ability 1.55 1.50 1.61 -0.6999 uniqueness of product 1.66 1.82 1.45 i.7729*** market analysis 1.09 1.65 1.74 -0.4085 roi 1.80 1.79 1.80 -0.0458 ownership structure 1.87 2.03 1.68 1.6458 competitor's ability to duplicate product 1.87 2.00 1.71 1.3076 marketing strategy 1.87 1.98 1,.74 1.0918 project's cost structure 2.13 2.33 1.87 ' 2.3158** entrepreneur's analytical ability 2.24 2.25 2.22 0.1201 forecast 2.27 2.30 2.23 0.3175 time to,breakeven 2.26 2.23 2.30 -0.3077 current financial statement 2.29 2.35 2.20 0.4426 product pricing 2.39 2.45 2.32 0.5876 financial projections 2.40 2.32 2.50 -0.6289 entrepreneur's knowledge of financial statement 2.41 2.38 2.47 -0.3828 licenses/patents on product(s) 2.71 2.75 2.66 0.3247 professional background of proposal's presence 2.76 2.94 2.52 1.5320 proposed firm's personnel policies 3.10 3.03 3.19 -0.7565 to be first external 3.56 3.69 3.38 0.9116 other • 1.27 1.29 1.25 0.0490 * significant at i%; ** significant at 5%; *** significant at 10% patent agreement (2. 71) to rank as one of the least important criteria. a finding not consistent with macmillan, siegel and subbanasasimha. when comparing 1he rankings of the criteria by the professional background of the venture capitalists, several patterns are evident. those criteria given the highest ranking by the business background venture capitalists also received the highest ranking by the non-business background 52 venture capitalists. a comparison of the rankings between each group, however, showed that 20 of the 27 criteria were ranked as more important by the non-business venture capitalists than by the business ·background venture capitalists. those criteria considered more important by the non-business background venture capitalists may be grouped into the following categories: financial (financial projections, lime to breakeven and return on investment), entrepreneurial (entrepreneur's knowledge of financial statements and entrepreneur's leadership), product-related criteria (market for product) and other (personnel policies). three of these categories are similar to the categories of criteria used by macmillan, siegel and subbanasasimha (1985). three of the differences in the rankings between the two groups were statistically significant. these three criteria fall into the categories listed above. in each case, the non-business group considered the criteria to be more important than the business background group. evaluation of criteria by industry the rankings of the evaluation criteria were analyzed relative to the industry in which the venture capitalists invest. significant differences between the rankings of business background and nonbusiness background venture capitalists were then determined for each industry: 1. telecommunications-the entrepreneur's knowledge of financial statements was ranked higher by venture capitalists having a business background. 2. human health-the entrepreneur's honesty/integrity and physical/mental health were ranked lower by venture capitalists having a business background. 3. diagnostic-ownership structure was ranked lower by venture capitalists having a business background. 4. electronic products-there were no statistically significant differences. 5. robotics-the entrepreneur's leadership and analytical ability, as well as a license and patent agreement were ranked higher by venture capitalists having a busin~ss background. 6. consumer products-the project's cost structure and the sales forecast were ranked higher by the .venture capitalists having a business background. 7. new materials-the financial projections and the management team were ranked higher, and being the first external equity investor was ranked lower by venture capitalists having a business background. these resuljs reveal several patterns. first, the criteria "that are significantly different can be categorized into either entrepreneurial or financial characteristics. telecommunications, human health and robotics include many characteristics relating to the entrepreneur. assuming that ownership structure and the management team relate to the entrepreneur, diagnostics and new materials include characteristics relating to entrepreneurial characteristics. consumer products and new materials include characteristics related to the financial characteristics of the project (cost structure, sales, financial breakeven). the second pattern is that, for most of the criteria that are statistically different, venture capitalists having a business background ranked financial criteria as more important than non-business background venture capitalists. non-business venture capitalists ranked · criteria relating to the entrepreneur as more important than venture capitalists having a business background. 53 conclusions in this paper, differences in investment criteria and activities are examined according to the backgrounds of venture capitalists. responses to a questionnaire are compared for venture capitalists with business backgrounds to those with non-business backgrounds. non-business venture capitalists investing in earlier stages of the firm apjm!ar to have a shorter payback period and make more follow-up investments than business background venture capitalists. the shorter payback period may reflect investment at higher risk stages. the lower required rate of return. however, was inconsistent with the higher risk of investing in earlier stages. correctly structuring the investment becomes more important with the higher risk investments. with appropriate structuring, the exit procedure becomes less important, especially if affected by the structure of the deal. a more intensive evaluation of the project and a higher level of importance placed on the evaluation criteria would also be consistent with investment in earlier stages. the statistically significant differences in means also support these observations. the non-business background venture capitalists invest a larger percent of their funds in the earlier stages. they also place greater importance on the uniquen~ss of the product, cost structure of the project and the entrepreneur's health. however, the exit procedure is found to be of less importance. the entrepreneur searching for venture capital should be aware that the professional background of the venture capitalists may affect the evaluation of the proposal. tyebjee and bruno (1984) have stated that the search for venture capital takes longer than most entrepreneurs expect and that several venture capitalists may need to be approached before the entrepreneur's search is successful. an understanding of the impact of the professfonal background of the venture capitalist can make the search for capital easier and more rewarding. references batterson, l. a. (1986). raising venture capital and the entrepreneur. englewood·oiffs, nj; prentice hall. brigham, e. f., &_ gapenski, l. c. ( 1989). lntermediatejinancial management (3rd ed.). chicago, il: dryden press. brophy, d. j. (1985). flow of venture capital, 1977-1980. in h. h. vesper (ed.), frontiers of entrepreneurship research. wellesley, ma: babson college. carter, r. b., & van auken, h. e. (1990). a comparison of small business and large corporations: interrelationships among position statement accounts. journal of business and entrepreneurship, 2, 73-80. gladstone, d. (1988). venture capital investing. englewood cliffs, nj: prentice-hall. hisrich, r. d., & peters, m. p. (1989). entrepreneurship. homewood, il: irwin. khan, a. m. ( 1985). assessing venture capital investments with noncompensatory behavior decision models. journal of bu;iness venturing, i, 119-128. · kuratko, l:l. f., & hodgetts, r. m. (1989). entrepreneurship: a contemporary approach. chicago, • il: dryden press. macmillan, i. c., seigel, r., & subbanasasimha, p. n .. ( 1985). criteria used by venture capitalists to evaluate new venture proposals. journal of business venturing, i, 119-123. macmillan,.!. c., zemann, l., & subbanasasimha, p. n. ( 1987). criteria distinguishing successful from unsuccessful ventures in the venture screening process. journal of business venturing, 2, 123-137. 54 tyebjee, t. t., & bruno, a. v. (1984). a model of venture capitalist investment activity. management science. 30, 3550. van auken, h. e., & carter, r. b. (1989). capital acquisition in smaller finns. journal of small business management, 27, 19. wetzel, w. e. (1987). the infonnal venture capital market: aspects of scale and efficiency. journal of business venturing. 2, 299-313. 55 stra tegf challenges ahead for small business education speech delivered at usasbe/sbida 2001 joint annual conference orlando, february 8, 2001 larry edward penley immediate past chair of aacsb international dean, college of business arizona state university harry. penleyasu. edu thank you very much for the opportunity to address you on behalf of aacsb. this is a very special occasion with the 25'nniversary of the small business institute directors association meeting along with the 15 anniversary for the u.s. association for small business and entrepreneurship. i congratulate you on this occasion, and i feel very honored to be your speaker. those of you invoived in small business education have ou lieve changed the hves of many people via a special place in business schools. you bridge the gap field consitlting projects. blare than between knowledge and practice. through the sbida, h if // you have changed the lives of many people via field afjected by g///dg's jieid consuiting consulting projects. more than a half million students activities more ihan l60,000 have been affected by sbida's field consulting businesses have had the benefit of activities. more than 160,000 businesses have had your consulting, and, of course, the benefit of your consulting, and, of course, hundreds hundreds of faculty have been of faculty have been changed by their participation changed by their participation with with the students and the businesses. the students and the businesses. as i begin my comments, i know this isn't a very good time to be a dean. i listened to dale meyers'peech earlier this morning and i heard that deans of business schools aren't too popular. they are criticized because they don't like entrepreneurial research and, of course, they'e way too concerned with rankings and ratings. in the face of this criticism of deans, i can't resist telling you a fairy tale; it goes like this. there was a prince, not a dean by the way, walking through the forest and he came upon a pond. he heard someone cry out, "prince, prince." he tumed to look toward the pond from where he thought the voice was coming and he noticed a very large green frog. the green frog said, "prince, prince, i am the dean of a school of business; kiss me and i'l be a dean again." the prince looked at the frog, walked over to it, reached down, grabbed it; he did not kiss the frog. instead he dropped it into the knapsack on his back and continued to walk through the woods. well, this didn' make the frog very happy, so the frog screamed out from the knapsack, "prince, prince, i am a dean of a school of business and i am a very important person; kiss me and i'l be a dean again." the prince walked on and the frog continued to yell; finally the prince reached into his knapsack, pulled out the frog, held it up in front of him and said, "frog, you are a lot more important to me as a talking frog than any dean of a school of business that i'e ever seen." well, enough about deans. i journal of small business strategy vol 12, no. i spring/summer 2001 you have asked me to speak to you here today because of my role as chair of aacsb and i want to address some issues that i think are important to aacsb and business education. aacsb is going through an important change at this point. as a part of my role as chair of aacsb, i have appointed the blue ribbon committee on accreditation to review our accreditation standards education ntcreased variation, and processes. we are observing in business education and it is important that our increased variation, and it is imponant that our standards standards recognise iilat recognize that business schools can achieve quality in husiness scltools can aciiieve lots of different ways. it is also important that aacsb ttuatity m lots of different ways. recognize the variations in forms of intellectual contributions and the means by which faculty can legitimately contribute to our scholarship. we also need an accreditation process that transforms aacsb from a u.s.or american-centric organization into one that is more international, given the globalization of business and business education these days. such changes to aacsb standards come out of recognition that business and business education are both being transformed. in my comments, i want to talk basically about two issues today; both are challenges for aacsb and business schools and both are challenges for those of us who are concerned with small business. the first is diversity and assuring a diverse set of managers for small businesses. the second is the ebusiness transformation and how we can enable managers and business owners to manage in a transformed business environment and in transforming organizations. let me begin with diversity but not in the way you might expect me to talk about diversity. in approaching diversity in a somewhat different way, i am not suggesting that we don't have to increase our outreach and educational efforts for african americans, native americans, hispanic americans and others; we clearly do. this morning with some of your colleagues i listened to robert farlie, professor from the university of california at santa cruz. he reported that black and hispanic males'ncome grew substantially more because of selfemployment. indeed, there was a statistically significant increase in income for hispanics who were self-employed when compared with those who were not. clearly there is reason to nurture and encourage the growth and success of minority-led small businesses. however, there are additional issues of diversity that we must address in our educational efforts for small business and i fear we ignore them. let's ask ourselves a question: what is the background of most small business owners— whether black, brown or white? the answer? they lack university education altogether, especially academic business education. those who do have degrees may have them in architecture, engineering, chemistry or even dance. how important are those small businesses that are owned and managed by those with very little business education? well, i would argue that they are very important. small technology firms play a very significant role in the development of new technology in the united states. we all know the story of steve jobs and the creation of apple computer. recently the story of hewlett packard was recalled to us along with that now famous garage where hewlett and packard created the foundation of their company. small firms employ technology workers at a very high rate —37.9 percent of all technology workers are employed in small businesses. small firms play a significant role in technology creation. small firms produce 55 percent of innovations, twice as many per employee as large firms. small firms obtain more patents per sales dollar, and small firms bring new technology into the market place even when they don't create it. yet, small business classes are, for the most part, taught for business students, not engineers and scientists. and most students in 2 journal of small biismess strategy vol. l2, no. l spring/summer 200l those classes lack the engineering and technology background to create innovative technological products and services. most mba classes are reserved for business students, especially at the most prestigious business schools where business programs are relatively isolated from the rest of the university. and those programs are not for architects, engineers or science students. indeed, most of the student teams that you create as a result of the sbida do not include engineering and science students; instead they are made up of business students. we need alternative models for small business education. this morning we heard dale meyer describe the situation of the university of colorado as it expands entrepreneurial education and business planning to students outside the mainstream majors in business. i want to address that very same issue of looking beyond the business school for how we help students learn about small business. i am going to turn to an example at my own school —arizona state university —not because our example represents the best model. instead, ours is an attempt to address and diversify business education. let me focus on our asu mba high technology program. it is intended for engineers and scientists who continue to fundamentally practice their chosen professions in small or large firms; that is, the students are not intending to make a transition from engineering to brand management or financial management. the program is taught at the asu research park to symbolize its distinction from our other asu mba programs. business faculty in the first year are especially selected because of their technical orientation, their engineering background or their desire to integrate high technology examples into the curriculum experience. the second year includes team teaching by engineering and business faculty. a major part of the second year is the design of a technology-oriented small business by the students in the program with judging by venture capitalists. this program is about to graduate its fourth class this spring in arizona and our first class in china. turning to undergraduates, we have created a small business program specifically for nonbusiness majors at our center for the advancement of small business with its regentsapproved interdisciplinary minor specifically for non-business students. the introductory course in the minor is an overview of small business; four courses follow. the minor is designed for majors from areas like engineering. this kind of approach to teaching non-business students, we believe, is important because of the number of small business people without an academic business background. it is important as well because of the shared belief that you and sbida have in increasing the quality of business skills and capability in small business. it is also important because small business education must be made more widely available to a broader sector of higher education. to enhance the closeness of the classes that we teach at asu to the small business environment, each class includes not only a faculty member, but a co-teacher who is a practicing businessperson. to enhance the focus on practice, something that is very important to sbida, students work with small businesses in a consultative way, probably without the depth of a sbida consulting project but in the same vein, nonetheless. beyond this area of diversity —for non-business students —another area of diversity that does not receive enough attention, at least i believe, is gender-related diversity. we know that, disproportionately, women are choosing to work in small businesses rather than large. more than 9 million women-owned businesses exist in the u.s. today. those businesses employ about 30 million people. they generate just under $4 trillion in sales annually. 3 jiinrnol ~&fsmall business srrarel0 vol. /2, iyo. i springlgutnmer 200/ my own state of arizona is especially noteworthy when it comes to female-led small businesses. women now lead forty-one percent of arizona's small businesses. yet, women may have less access to small business classes than is desired by all of us who are educators. certainly we know that large numbers of women are not getting access to small business classes through graduate management education. less than a third of mba students are female; two-thirds are male. women remain disproportionately over-represented in some traditionally non-business majors like healthcare, social work and education. few small business programs are designed for outreach to women, i fear. small business classes in most business schools are very much like other business classes in terms of the faculty who lead them; that is, most business faculty are male. in a session this morning i listened to several women who pointed out the significance of modeling for women and the problem we confront in business classes without case studies that use female role models of entrepreneurs. i am going to turn again to an asu example, not because it is perfect but because it is an attempt to address the challenge of gender-related diversity about which i am talking. again, the example comes from our center for the advancement of small business headed by mary lou bessette. in the center for the advancement of small business, female faculty teaches three out of five classes and 75 percent of the co-teachers are women. we use live case studies and 50 percent of the case study judges are women. forty percent of the students are women, hardly a complete success but an effort nonetheless to address this issue of genderrelated diversity in business education. let me now turn to that second issue that i wanted to talk with you about. that is the ebusiness transformation and how we must enable small businesses to take advantage of the digital revolution. i understand that this is not the time to talk about ebusiness; after all, the markets are down, dot corns are failing, and venture capital firms find no opportunities that interest them. it might seem that the ebusiness revolution is dead and the new economy looks very much like the old economy. despite a downturn in the market, despite dissatisfaction with ebusiness at this point, the digital revolution is real, and technology is not dead. anything that can be digitized will still be digitized —whether it is music, video, text or lectures. i believe that it is going to be very important that small businesses not stand aside from the digital revolution. after all, almost 40 percent of high technology workers in the united states are in small firms. many new, initially small companies are creating some of the most interesting ebusiness applications that will be lapped up by large businesses. a recent example was microsoft's acquisition of great plans software —a producer of ebusiness solutions for small businesses. a company called zaplet has created new web applications that incorporate dynamic spreadsheet, database, and messaging capabilities into regular email. marketsoft and ventaso, small companies, have created applications that enable innovative supply chain management. new service providers like logictier and loudcloud offer innovative assistance with business infrastructure. the benefits of ebusiness apply to small as well as large businesses. web-based supplier consortia reduce costs for small as well as large businesses. integrated supply chain sorware reduces costs for small businesses as well as large. improvements in the quality of service can be facilitated by integrated customer databases and sophisticated data mining no matter the size of the business. financial software, in fact, may be more critical to cash-strapped small businesses than to large. productivity gains from it are finally evident, and small businesses can reap these advantages as well. 4 journal ofsmall business strategy vol. /2, no. i spring/summer 200l the digital revolution is as real to small businesses as it is to ibm, ge or intei. now the watchword of this digital revolution is change especially significant change —for small businesses. i realize that any call for change must be considered with due skepticism, but to ignore significant environmental change with a substantial likelihood of its affecting your business, your education, your profession is folly. the speed of change today is clearly very rapid, but it may be most evident in the adoption rate of digital technology. whereas it took about 25 years for the telephone to reach 20 percent of u. s. households, it has taken the web only five. why must small businesses be a part of this revolution and engage in this tremendous amount of change? we have to look no further than the example of a company called webcor builders in san francisco to understand why small businesses must be players in this revolution. workers for webcor look like any other set of construction workers —they wear hard hats, they wear work clothes, they carry steel rods and drive heavy equipment, but they'e a little bit different. they carry palm wireless computers in their back pockets. using wireless handheld devices and sophisticated project and supply chain software on their computers back in the offices, webcor keeps track of delays, budget forecasts and suppliers. suppliers to webcor have to be a part of this network and integrate themselves with the technology. only small businesses that use the technology can participate and lots of small independent businesses are involved in construction: engineers, architects, every type of subcontractor whether plumber or electrician. webcor saves 2-3 percent on its building costs with its integrated system and wireless technology. when profits for a construction company range from 2.5 to 10 percent typically, the savings can mean the difference for a construction company between loss and profit. let's talk about what's implied by the ebusiness revolution for small businesses. what does it really mean for them? what does it mean for those of us who teach about small business or for those of us who provide consulting services to small businesses through our field-based student consulting teams? well, i was in the gym the other day and i heard an advertisement for a class from one of our local community colleges. the ad went something like this: "get your small business into ebusiness. learn how to get your business on the web. sign up now for 'building your own web site,'tarting february 20.'his is not ebusiness —it is not ebusiness as i am thinking about it anyway. that kind of class and this kind of b2c approach to ebusiness is little more than what i would call brochureware —a brochure that is digital rather than physical, a brochure that is electronic rather than paper and ink, ebusiness transformation implies fundamental change in the way that business is done, and a web-based brochure, no matter how good it is, is not a fundamental change. to be successful, b2c has to surpass the quality of traditional service. it must be faster and more convenient than traditional service; it must be more personalized; it must shorten delivery time; and, it must be cost effective for the small businessperson as well. now think for just a moment about any web-based consumer-related retailing that you'e seen. think of amazon, or ebags, or petfoodl3irect.corn or whatever your favorite example really is. ask yourself some questions about that example. is the service quality better than what you find in the store with a human being who can answer your questions? is the service faster by mail or even fedex than it is by stopping by the store on your way home from work? even when the 82c software goes well beyond brochureware to sophisticated consumer-adapted web sites, is that screen more personal than what you would find at petsmart or bames and noble or the small business down the street? is it any surprise then that b2c is not the answer for small businesses? 5 journal ofsmall dusittexs sirategy vol. l2, bio. i spring/summer 2vvl where we begin to see applications of ebusiness for small businesses is in the area of b2b— business to business —or really in the e2e area —end to end integration. the construction example i used earlier had a significant impact on lowering costs and in integrating suppliers and operations with customer service. we tend, however, to think of expensive supply chain software, like ariba and manugistics, as intended for big businesses not small, but small businesses are also able to integrate their supply chains and reduce costs with less expensive versions of software and software that is being specifically designed for small business. small businesses can enable themselves to be linked to their suppliers via the internet. small businesses can automate the procurement cycle, lowering the costs associated with operating resources and other materials. with supply chain software small businesses can extend trading networks among themselves. they can drive accurate, reliable, real-time promises of and commitments for delivery of products by simultaneously performing availability checks of their own inventory and production scheduling with the distribution and transportation information of their suppliers. small business supply chain software enables the small business to become a reliable provider of out-sourced manufacturing for a larger business. i think you can see the very profound potential impact of ebusiness solutions for the small business. i think you get the idea then —ebusiness is here to stay even if dot corns are not. small businesses, to be players, will employ ebusiness systems in the future. and students in field consulting teams will need to know about ebusiness if'hey are going to help small businesses compete in this environment. let me spend just a few moments as i am about to end these comments in talking about the educational implications of the ebusiness transformation. businesses must have graduates with database knowledge and skill. new managers must possess the statistical tools for improved managerial decision-making in the face of large amounts of information, and they must understand the fundamentals of large databases which house this information. all graduates of our business schools may not need to know how to install large pieces of ebusiness software, but they must understand how to manage with that software. managerial strategy classes must address the ebusinessrevolutionized organizational structure and the new relationships among firms. new performance measures like the balanced score card and the one-day close have to be included in our accounting and management classes. legal and ethics classes must address issues like intellectual property and computer security. our business education must be transformed as business is transformed. well, i have talked long enough. let me conclude. as small business and entrepreneurship i'acuity members, you have a great advantage over most faculty because you deal with real problems of small businesses in your classes and in the student consulting projects that you supervise. you also have an great advantageadvantage in being close to business, close to the needs of small over most faculty bllsiness, and you can see the need for change in what we provide because you deal for our students in the curriculum. with real problemsof small businesses what i have talked about today are areas where i see the need —in your classes and for change. we who teach business —especially those of us who touch the lives of current and future small business ownerssuliing prof ecis that you supervise.hold great power. we can enlarge and enhance the economic potential of this country by combining opportunities to leam business skills with technical knowledge and skill. we can enlarge the potential beneficiaries of this society not only by including more minority students and business owners, but by encouraging more women to acquire the business skills that will enable them to be greater players in this economy. 6 journal of sniall business straiegy vol. /2, no. i spring/summer 200/ and whether for engineers, scientists, minorities or women, we can alter what we teach in small business classes. we know that the digital revolution is real. we have only to couple vision with action, and of course resources, in order to provide students with the knowledge they will need for a transformed world of ebusiness management. as the dean of a public school of business in which l take great pride, as a member of the leadership of arizona state university, as the chair of aacsb, as a faculty member, l find this an exciting time. the risks are great. the challenges are invigorating. the opportunities are considerable. there really is no option but to move ahead. lurrr edward penley hos been dean of the college of business ai arisona state university lasuj for almost a decade. he was selected as dean from ihe asu faculty where he served iis chair vf the department and professor of management. he holds ihe universibcs roben herberger arizona heritage chair. as dean rif the college, he has seen its reputation improve markedly. the asu mba prograins are nationally and internationally ranked among the very best, and the asu business honors program for undergraduates is considered among the finest programs ofits type associated iviih a public university. the college's faculty has been ranked among ihe iop scholars in the u. s, and ihe college's seidman insiiiuie houses prestigious, iniernaiioiially recognised programs in services marketing, supply chain nianagemeni, and eci&nona'c'orecasii ng. demi penlcy hos tauglit strategic and human resource management. his erecutive training experience and his consulting have brought him in contact with industries ranging from manufacturing io health care. his researcli has focused on individuals'rgani"ational relationships ond the skills required of effective managers, and it has been published in ihe leaili ng acadeinicj ournals. deaii penley is immediate past chair of aacsb international. ai asu, he is an affiliaied faculty member with the center for latin american studies. he serves on the boards of several cr»nniunity orgamsaiions, including the greater phoenix economic council. he is past chair of ihe k-12 ediicatiun task force of the valley citi ens league. he was honored by inroads arisona with the frank c. carr award. in addition io his academic positions in the u s., dean penley has taught in mexico and venezuela, his doctoral degree is from the university of georgia, and his undergraduate degreeis from wake forest umversity. 7 sii&vx"gs"y small business brief modeling a successful e-business using fssential principi es from netscape robert j. mills utah state university millscttib202. usu.edtt david paper utah state university dpaperqab202. usu. edu james rodger indiana university of pennsylvania j rvdgerii up, edu abstract the purpvse vf this snuly is tv explore ht»v a company can incttrpvrate important principles learned bv other successfid e-businesses. this study examines four essential principles used hl netscvpc cvrpvrativn fvr building a successfitl e-business as they relate tv anthill corn, a relative netrcvmer tv the e-business world. data were gvthered viv in-depth interviews with rlntltill.curn executives. itis hoped that other e-businesses will recognize theimpvrtance vf ctvsetyfi&llvwing these principles tv improve the vppvrtunit» tv develop inta a large-scale ebusiness. introduction although the internet is continuing to grow at a remarkable rate each year, operating a successful e-business site is an arduous task. the e-business phenomenon is so new that little is really known about best practices for success. as a result, the engineering and redesign of traditional core business processes and improved forms of collaboration and partnering are critical in creating a successful e-business (el sawy, malhortra, gosain, and young, 1999). although there is limited empirical research on best practices, yoffie & cusumano (1999) provide a foundation for building a successful large-scale e-business through their investigation of netscape corporation. the authors use their principle framework to systematically examine the practices of a relatively new e-business, anthill.corn. they then compare antihill.corn practices with those developed by yoflie and cusumano in their research with netscape to enable articulation of a set of lessons for other e-businesses struggling for success. 52 journal of small busmess strategy vol l2, no. l spring/summer 200l data collection data were obtained for this case through a number of interviews with top management of anthill.corn. respondents included ceo curt matsko, president scott alexander, and director of operations brad thurber. interviews were conducted during two site visits. follow-up information was gathered by telephone. anthill.corn provided access to important company infomiation and permission to use their name in this publication. the focus of the interviews was to gather information about the current e-business practices and business processes of the organization. the questionnaire consisted of a set of openended general questions. the utility of the questionnaire was not that of rigid data gathering tool, but rather a tool to keep the conversations focused on task. research method the authors analyzed the data from this case through the lens of the following research questions. first, they wanted to find out how a start-up organization can become a successful web-based enterprise. to address this question, they used the yoffiee and cusumano fourprinciple framework to identify a set of factors hypothesized to greatly increase the chances of success. second, they wanted to find out how the factors derived from anthill.corn compare with those reported by netscape. to answer this question, they compared the results from the yoffiee and cusumano study of netscape with those from the anthill.corn study. the authors set up the research methodology for two purposes. first, in-depth data gathered from a real case allows for determining factors that really work, at least within the limited context of one organization. second, generalizability may be increased by comparing anthill. coin results with those from another organization within the same industry (yin, 1994). the four-principle framework proved to be a very useful means for organizing a lot of data into manageable categories of information. transcripts from the interviews were thereby categorized into vision, talent, internal, and external resources. specifically, yoffie and cusumano (1999)developed four conceptually independent principles as follows: create a compelling, living vision of products, technologies, and markets tightly linked to action. e hire and acquire managerial experience, in addition to technical expertise. u build the internal resources for a big company, while organizing like a small one. v build external relationships to compensate for limited internal resources. the details of the case are reported within the context of these four principles. the four principles described by yoffie and cusumano (1999) will also be described in more detail throughout the manuscript. the next section describes the background of anthill.corn. the following sections describe analysis of the data within the context of each principle. background of anthillcom initially, anthill.corn was funded with an american express credit card available to the entrepreneurs. the roommates believed that their idea was a viable business opportunity. curt matsko (the current ceo) understood the risks involved. "it's risky business, but the potential is enormous" (c. matsko, personal communication, october is, 1999). scott alexander (the current president) agreed and was willing to take the risk. "we believe in ourselves, and with borrowed funds we can travel the country and share our vision of internet 53 journal of small business.sfrafeey vol. )2, no. i spring/summer 200l business growth with small business owners desiring to develop their companies through the lnternetn (s. alex elder. personal communication, november 5, 1999). in 1998, the personal faith matsko and alexander had in their idea was rewarded as one by one, companies began adding their presence to the internet world on an electronic mall the developers (matsko and aleyander) called i-netmall.corn (figure i). vgl xi efh cdt c.e ff . itcs r. deb kil be t 3 i lg ucosch jff mtn boite -' yei idreit atne f nin ii,ooi r'go tris" o i t.p " bs . ftifiaji ill.lf i) ig aur net mall. js ~l oonoo&fmm m t protocol siding the body to bring about more natural ~ covery thus greseryinn ane's tluehfttty of life d construction videos do it yourself custom ting pj nf lni «t figure i. homepage of anthill.corn's i-netmall. revenues from the web-mall provided the means for anthill.corn to expand from a simple online mall to a robust e-business site bringing small businesses and millions of customers to ether on one site (figure 2). according to matsko, "the 'one site'usiness and shopping opportunity was a key factor, we think, for success" (c. matsko, personal communication, november 5, 1999). in addition to mall space commerce, antill.corn contains a city guide of thousands of local businesses throughout the united states, as well as free e-mail, and a number ofjoint ventures with companies such as travel.corn and barchart.corn. these expansions to anthill.corn make it a high traffic website, which improves sales and visibility of its small business owners. currently, antill.corn obtains revenues from a variety of sources including banner advertisements, mall space commerce, domain hosting, and custom programming. the latest custom programming is called anthill blaster (b. thurber, personal communication, june 28, 2000). anthill blaster allows commerce sites to upgrade and include a variety of audio and video capabilities. this upgrade allows e-commerce sites on anthill.corn to better promote their products and services by providing a multi-sensory experience for internet customers. 54 journal of small busniess strategy val. 12, no. i spring/sulsmer 2001 ~ctp'st i'e edl seu faelmes toes udo 'ux e da sg a tsseedy rmfeycoles olhslmy s5 o fg '(sdame st hung od ml p 00 lalke anthill,... r:~:2:o old 1~0 i~e i 0 ru*d d y,m y20,2002 ihkph or, to find your business directly: selectstate, then city, click next; choose ~queue ~chen ~opinion i'ouf category and then check on the subcategory. sggussh ropy ghr agy-2000 s ehs co ss ghr d fj i,e lhlunell i'igure 2. homepage of anthilkcom. additional revenues are acquired through providing internet access to customers via an active internet service provider (isp). as a result, anthill.corn provides a way for individuals and businesses to access the internet and access their commerce sites. anthill.corn grew from a fledgling organization of two employees in 1998 to around 50 in 2000. since 1998, revenues have increased 10 fold while net profits have increased nearly 15 fold. bill gates of microsoft, inc., a premier technology corporation, once stated that businesses of all sizes benefit from the internet, but small companies are arguably the greatest beneficiaries. the success of companies like microsoft spurred the creators of anthill.corn to take the risk. anthill.corn believes that their competitive edge lies in their ability to develop unique solutions for funding the internet site, recruiting top employees, attracting attention to the site, and keeping pace with technology. with the explosion of e-business these are very tough challenges. data analysis in this section, the authors use the principles developed by yoffee and cusumano (1999) (in their case study of netscape) to systematically analyze the practices of anthill.corn. with the paucity of guiding frameworks for successful e-commerce, the authors felt that the framework was an appropriate first step for rigorous analysis of the case. 55 .iournal ofsmall business strategv vol. /2, no. i slrring/smmner 200i principle i: create a compelling, living vision of products, technologies, and markets that is tightly linl'ed to action. tlie greatest .strength of netscape's vision uas its ability to create a tight link benieen senior wanagement's high-level view of the world and the products they delivered to the marketplucc. iveiscape's vision did more than niap a path through the confirsion of the web s early years. it also mobilized the coiiipuny's troops to develop and deliver an impressive range of client and server products in a very short period of time (yoffte and cusumano, l 999). from humble beginnings, curt matsko and scott alexander envisioned developing a startup internet business into a multi-million dollar enterprise. the two friends began the anthill.corn business from a two-bedroom apartment in l998. their vision was to bring as many small-tomcdium businesses in secondary markets across the united states together into one ebusiness location. these secondary markets included cities between 10,000 and 250,000 people. anthill was an early adopter for conducting business on the internet that attempted to capture the small-to-medium markets across the united states. it was able to establish a web presence at the beginning of the dot.corn revolution and therefore provided itself with an advantage over the competition. the internet provided a channel for promoting anthill's living vision to thousands of individuals. this communication channel acted as an integrator of anthill's customer base to a central commerce location. the channel enables anthill executives to dynamically communicate their vision to all of its customers. anthill customers are able to communicate instantaneously with anthill executives or other customers via the internet site. moreover, customers are able to develop their business in a central internet location that is highly visible to consumers. likewise, small e-business owners benefit from being able to place their business in a visible location without enormous cost or effort. details on how anthill's living vision was realized are provided in principles 2, 3, and 4. with advances in internet technology and hard worl;, matsko and alexander are beginning to realize their e-business vision. with web access now very common and relatively inexpensive, anthill.corn is currently adding up to 1000 small business sites per week and is in the process of capturing 10'f the entire small business market. this forward thinking is benefiting both consumers and retailers involved in e-business. principle 2: hire and acquire managerial experience, in addition to technical expertise. netscape's strategy of hiring experience was not restricted io the top ranks; it extended throughout the organisation. managers at every level tried to bring on board people who ivould hit the ground running. netscape did not hire many preen college graduates, fresh from studies in programmmg or marketing. insteatl, it looked for people who had actually done thesej obs. anthill was pleased with company growth, but realized that other resources were necessary for the future of the company. matsko was sure that they would need an in-house lawyer to assist with legal issues and a possible move to bring the company public. "we didn't know what to expect, but we figured that rapid growth doesn't come without pain. i discussed with scott the possibility of recruiting dan thurber for legal support. he is an outstanding and experienced attorney, as well as a personal friend." scott concurred with the choice. "i think he would make an important addition to our team. we not only need dan, but should also 56 journal vf small business strategy vol i2, ivo. i spring/summer 2001 approach his brother brad. i-le knows the markets, and is an exceptional manager" (s. alexander, personal communication, november 5, 1999). since their company was made up of only the two partners, it seemed prudent to hire the management and legal experience they lacked. in addition, they knew the people they were hiring on a personal level that coincides with netscape's principal 2. as a result, matsko and alexander brought in the thurber brothers who have experiences in managing and providing legal advice for new businesses. dan thurber, a successful new york city attorney, was so impressed with the company's potential that he joined in 1999 while accepting a 70% reduction in salary. his brother brad quickly followed dan's lead and joined. brad emphasized the importance of his decision with the following comment, "the potential growth, stock options, and work environment at anthill.corn made it an easy decision for me to leave my current position as a successful stock consultant" (b. thurber, personal communication, november 5, 1999). substantial growth of anihill.corn has greatly increased the number of employees necessary to run the operation. matsko developed a unique recruitment strategy that has enabled the company to add over 45 highly qualified employees. the recruitment strategy is relatively unique at anthill.corn because it focuses on future growth and employee ownership, rather than traditional salaries and retirement plans. employees at anthill.corn have bought into the vision, potential, and excitement of managing an e-business. "employees that have joined the anthill believe in our business model and are eager to obtain stock ownership in the organization over competitive salaries which we cannot offer" (c. matsko, personal communication, november 5. 1999). principle gn build the internal resources for a big company, while organizing like a small one. most start-up companies scale their systems to meet their current needs. in fact, they usually allow their systems to lag behind their growth. one of the biggest traps for an entrepreneur is to build an organi=utional structure in advance of .sales, profits, and stable cash flow. far too ofien, wildly optimistic sales prujeciions do not materialize, the company gets overextended, and everything comes tv a crashing halt (yoffie and cusumano, 1999). attracting attention to anthill.corn is a top priority. management is responding by a method coined by matsko as "travel and conquer". the method involves traveling the country and providing training seminars for small businesses to help them develop a variety of commerce sites. according to matsko, "our clients need to know us on a personal basis and understand hoiv we can affordably help them make money with the web" (c. matsko, personal communication, november 5, 1999). this approach is the mainstay of anthill.corn. by aggressively traveling the country and contacting literally thousands of companies and individuals, anthill.corn is building tremendous internal resources that make it appear to be a large company. however, the organizational infrastructure is still very small. anthill will continue to pursue the "travel and conquer" strategy as long as customers are anracted to join the anthill colony. another advantage of this strategy is that matsko and alexander interact continuously with their customers even though they are the top executives of anthill. this personal interaction provides the coziness of a small business even as anthill works to expand into a large-scale-e-business. since anthill competes in an industry immersed in the technological revolution, it must invest much of its profits in technology resources and people with technical skills. top executives, curt matsko and scott alexander, are investing in the future. matsko underscores this by stating, edur company realizes the importance of staying abreast of the rapidly changing 57 journal af small businussgiraicgg vai. i2, na. i springlgununer 200i technologies associated with the internet" (c. matsko, personal communication, november 5, 1999). what started out as a relatively simple web server has emerged into a complex array of active server pages, java, pearl, and netscape's ssl technologies. these technological changes drastically increased the need to be able to anract technically competent employees. recruiting the best technical minds is becoming more difficult as the competition for good technical people is at its highest in years in the information systems industry. anthill executives spend much of their decision-making time devising strategies to attract talent. matsko's plan is to recruit individuals with experience in both managerial and technical areas. in addition, he wants individuals that can build unique business relationships with people that do not directly work for anthill.corn. one unique strategy utilized by anthill.corn to improve business practices is the use of independent contractors and anthill affiliates. anthill.corn currently has over 1000 active contractors (individuals who have purchased a commerce site from anthill.corn) that sell anthill commerce sites to other businesses and individuals for profit. anthill affiliates are compensated for each new business they bring to anthill.corn. the aailiates use an identification number when adding a business site to anthill.corn to receive compensation. the use of independent contractors and anthill aailiates permits anthill.corn to develop a formidable workforce similar to a large organization. principle 4: build external relationships to compensate for limited internal resources. netscape would have been unable to keep up with the demands of the internet without outside help. the company had a powerful vision, experienced leaders, and an organization geared towards fast growth, but ultimate success depended critically upon a wide variety of external resources and relationships. these external assets compensated for netscape's lack of scale in marketing, financing, and product development. netscape was essentially able to exploit the internet and other external resources to create a virtual workforce —people outside the or anization who were working for free on the company's behalf. according to matsko, "individuals we train are equipped to promote the colony though a variety of means such as registering with search engines and maintaining promotions via traditional media" (c. matsko, personal communication, october 15, 1999). as a result, there are thousands of individuals around the united states working to attract attention to anthill.corn. other methods of attracting attention to anthill.corn take place through mailers, online promotions, and face-to-face communications. for example, teams of anthill.corn employees meet daily with individual businesses. brad thurber emphasizes this facet of company growth by saying, "face-to-face communications helps us to personalize the internet and our company. it is a viable and successful approach to business" (b. thurber, personal communication, october 15, 1999). additional external relationships have been developed with a number of internet companies such as bedandbreakfast.corn, lotteryusa.corn, mapquest.corn, sisna, filmfrinzey.corn, cardserviceslnternational.corn, astrologynet.net, travel.corn and barchart.corn. these relationships help to enhance the quality of services offered by anthill.corn without requiring additional resources. according to thurber, "we plan to develop additional relationships with additional internet organizations to help improve our site within our current budget constraints" (b.thurber, personal communication, october 15, 1999). 58 journal of small business strategy vol 12, no l spring/summer 200/ lessons learned although anthill.corn is working diligently to avoid organizational setbacks, there are a number of problem areas that the organization must improve to remain competitive. two problem areas that emerge relate to the tremendous growth of the organization in such a short amount of time. first, anthill.corn has, to some extent, attempted to move forward too quickly with new web technologies. rather than focusing on providing solutions related to the original goal, anthill's original web site was unorganized, confusing, and error-prone. according to matsko, "we were just moving too quickly without the staff to keep up with the changes we desired. as a result, our site contained a lot of errors, link problems, confusion, and unnecessary information" (c. matsko, personal communication, january 20, 2000). successful changes in organizations are brought about by people and critical business decisions and not by technology alone (markus, and benjamin, 1996). although the employees of anthill.corn have a great deal of managerial and technical experience, few of them have a great deal ofexperience with e-business. e-business is still a relatively new form of conducting business and there are no general guidelines to follow, in addition, few people have enough experience with e-business to really know what the best practices are. these individuals are obviously in great demand and extremely expensive to recruit (b.thurber, personal communication, october 15, 1999). second, with the rush to incorporate innovative technology into anthill.corn, organizational changes are often taking place in a very assertive and directive manner. according to thurber, "technology is changing so auickly that we often find ourselves making changes for the sake of technology and not our customers." all must hear the voice of a customer, and customer responsiveness must be a top priority (el sawy, malhortra, gosain, & young (1999). anthill recognizes that rapid technological change is a problem and is dedicating resources toward solutions. anthill is also very sensitive to its customers. communication is also an important factor for enterprise success. by opening strong channels of communication between customers and programmers, companies increase their chances to improve their e-business (maruca, 1999). anthill executives are currently contemplating ways to improve communication flow throughout their organization. thurber indicates that communication is a major challenge of a fledgling e-commerce site. "our employees each have unique skill sets which makes it diflicult to obtain mutual agreement" (b. thurber, personal communication, june 26, 2000). anthill.corn is currently attempting to take a proactive approach to improve communications in the organization. for instance, scott alexander has decided to no longer travel with the company and stays at headquarters to help with communications. in addition, managers from each department hold weekly meetings to discuss progress status and special needs from other departments. another unanticipated challenge facing anthill.corn is the tremendous cool down on major internet companies such as yahoo and amazon.corn. "in our business we market directly to business owners. these business owners become hesitant to spend money for internet solutions when the dot-corns of the world are struggling. as a result, our job of conveying the vision and benefits of partnering with anthill.corn becomes very difficult" (d. thurber, personal communication, june 26, 2000). the challenges of anthill.corn include communication, incorporating appropriate technology, and being adaptive to fluctuations in economic conditions directly influence anthill's use of 59 journal of small business siratekn vol. /2, no. l spring/sumnrer 200l the four-principle framework of netscape. figure 3 describes the relationships between netscape and anthill.corn business strategies following the four principles. the figure was developed using a use-case diagram from the unified modeling language and suggests that alignment with the four principles of netscape are dependent upon customer demands, internal personnel, appropriate technology, and economic conditions. conclusion the authors have found that the four key principles of netscape provide valuable insights when applied in the context of anthill.corn. they found that creating a compelling vision of the company, recruiting and attracting top employees, building internal resources for the company, and developing external relationships have proven to be central to anthill's success. for instance, the founder's vision for anthill.corn expanded not only with technological advances but also with a drastic increase in small business participation on anthill's website. likewise, anthill chose to attract employees who had experience in specific areas that could immediately benefit the company. securing experienced employees helped anthill quickly build internal resources. moreover, anthill's ability to attract outside resources to its web site turned out to be an exceptional be inning to building lasting external relationships. txrhn i sy'"""""""ix" " vision of products and markets eneperial experience ii technical expertiese xcustomer ', x~ '~ internet communication ilr»»r . build internal resources / dewlop external relationships figure 3. netscape principles and challenges of anthill.corn. the authors found that internet start-up companies must focus on their organizational (business) roadmap and not charge forward with technology for technology's sake. that is, start-up companies must have a sound business plan and plan of action to create a successful business because technology is only a facilitator of information flow, not a panacea. although anthill.corn is committed to being a dynamic organization prepared to embrace new opportunities, it now understands that these changes must take place in a reasonable timeframe and with the support of their most important asset, their customers. according to matsko, sharing of information in the future among employees, customers, and business 60 journal ofsmall business strategy tiol 12, no. i spring/summer 200i partners is priceless. mits absence guarantees failure, and its presence coupled with disciplined application guarantees success" (c. matsko, personal communication, january 20, 2000). the lessons learned from netscape have provided anthill.corn with a better understanding and vision of core responsibilities needed to build a small anthill into a large-scale e-business. "innovative electronic commerce practices have created new marketing opportunities for companies that have a strategy in place to take advantage of them" (mccarthy and aronson, 2001). references el sawy, o. a., malhortra, a., gosain, s., gc young, k. (1999). it-intensive value innovation h i 3: 0 0)« i m h ii i 0 . m)g i)di2u3 )3), 305-335. markus, m. l., s; benjamin, r. i. (1996). change agentry-the next is frontier. mis -0 4). 303-403. maruca, r. f. (1999). web site blues. harvard business review, march-april, 25-35. mccarthy, r. v., & aronson, j. e. (2001). activating consumer response: a model for web site design strategy. journal of com uter information s stems 41(2), 2-6. yin, r. k. (1994). case stud research: desi n and methods. sage publications, thousand oaks, ca. yoffie, d. b., & cusumano, m. a. (1999). building a company on internet time: lessons from netscape. california mana ement review 41, 3, 8-28. robert j. mills i» an assistant professor of business information systems & education at utali stare university. current research interesis for mills include e-commerce, computerbased learning environnients, software evaluation, and electronic performance support systeins. dr, mills has cvnsulied on many technology-based projects including john deere tractor, eds, mitsubishi, techmatics, us west, and the united states air force. david puper is an associate professor at utah state universiry in the business information systems department. he has several refereed publications appearing in journals such as journal of informaii on technology cases and applications, communications of the a is, long range plunning, creutivirv and innovation, accounting management and information technologies, journal of managerial issues, biisiness process management journal, journal of compuier information systems, and informaiion strategvi the executive's journal. he has worked for texas instruments, dls, inc., and the phoenix small business administration. he is ciirrendy consulting with ihe utah depariment of transportation his teaching and research interests include database management, e-congmerce, business process reeiigineering, and organicaiional transformation. james a. rodger is an associate professor of management information systems at indiana university of pennsylvania. he received his doctorate in mis, from southern illinois university at carbondale, in l997. dr. rodger teaches network administration, system architecture, microcomputer applications and intro to mis, at iup. he has worked as an (nstallation coordinator for sunquest information systems, and presently does consulting work on telemedicine connectivity for the department of defense and management technotog) services inc. dr. rodger has published several journal articles related to these subjects. his most recent article, mtelemedicine and the department of defense" was publishedin communications of the acm 61 93 invited applied commentary mentoring and entrepreneurship: examining the potential for entrepreneurship education and for aspiring new entrepreneurs james e. wilbanks university of arkansas at little rock jewilbanks@ualr.edu abstract mentoring has been studied extensively and many positive benefits have been identified. recently, more universities and governments have been attempting to use this powerful tool in an attempt to develop potential entrepreneurs. while a great deal of research has examined the key requirements for mentoring programs within established organizations, less is known about how the demands for effective mentoring change in the entrepreneurial context. this paper discusses effective mentoring in entrepreneurial education for both student led case competitions and networks for aspiring entrepreneurs. keywords: mentoring, entrepreneurial development, entrepreneurial education introduction mentoring has been studied extensively for more than 30 years in the management literature and many positive benefits have been identified. (see allen, eby, o'brien, & lentz, 2008 for a comprehensive review). recently, more universities and governments have been attempting to use this powerful tool in an effort to develop potential entrepreneurs. while a great deal of research has examined the key requirements for mentoring programs within established organizations, less is known about how the demands for effective mentoring change in the entrepreneurial context. kathy kram (1985) conducted an extensive qualitative study in which she examined the developmental relationships of 18 pairs of junior and senior managers in a large public utility organization. several of the key mentoring functions she identified in her seminal work on mentoring in the workplace are, understandably, more closely related to mentoring within a large hierarchical organization than to developmental relationships involving mentors and either new entrepreneurs or strategy   journal of small business  journal of small business strategy vol. 23, no. 1 94 student teams. st-jean (2011) conducted a study of 360 protégés taking part in an entrepreneurial foundation’s mentoring program, and identified a different set of mentoring functions for developmental relationships between experienced and novice entrepreneurs. this underscores the need for examining the mentoring phenomena within specific contexts. while the functions and demands upon mentors in the entrepreneurial context may be different from those in a more hierarchical organization, there is growing empirical evidence that mentoring provides career benefits to entrepreneurial mentees. for example, ozgen and baron (2007) conducted a study with a sample of entrepreneurs who had recently founded new ventures in the information technology industry and their results indicated that mentors increase opportunity recognition by entrepreneurs. st-jean and tremblay (2011) expanded upon this research and found that the learning goal orientation of the mentee influenced the extent to which the opportunity recognition was increased. ozgen and baron (2007) went on to recommend that entrepreneurial educators should work to assist nascent entrepreneurs in obtaining mentors. the purpose of this paper is to discuss effective mentoring in entrepreneurial education for both student led case competitions and networks for aspiring entrepreneurs. first, i briefly review the established research findings on mentoring. then i discuss the unique demands of the new venture environment and the student led case competition team environment, and how mentoring may be adapted to fit those environments most effectively. finally, i discuss the implications of this line of research for both academics and practitioners. mentoring mentoring in the workplace has often been defined as an intense interpersonal exchange between a more senior member of the organization, the mentor, and a less experienced member, the protégé, whereby the mentor provides advice, counsel, feedback, and support in order to facilitate the career and personal development of the protégé (hunt & michael, 1983; kram, 1985, noe, greenberger, & wang, 2002). haggard, dougherty, turban, and wilbanks (2011) reviewed the various definitions used in empirical studies on mentoring and noted that the definitions tend to have three core-attributes in common: reciprocity, developmental benefits, and regular/consistent interaction over some period of time. reciprocity refers to a reciprocal relationship which involves mutual social exchange as opposed to a one-way relationship. thus, a role model is not necessarily a mentor unless there is also regular personal interaction. developmental benefits of a mentoring relationship refer primarily to the benefits regarding the protégé’s work and career, but also include benefits to the mentor as well. finally, regular consistent interaction over a period of time is necessary for a mentoring relationship. thus, an individual would not be considered a mentor for giving someone generic advice once or twice. kram (1985) introduced the two broad categories of mentoring functions which are career-related and psychosocial. careerrelated mentoring involves providing sponsorship, exposure and visibility, protection, coaching, and challenging work assignments. psychosocial mentoring involves role-modeling, acceptance and confirmation, counseling, and friendship. scandura (1992) later demonstrated through factor analysis that role-modeling is a third journal of small business strategy vol. 23, no. 1 95 distinct function rather than a sub-function of psychosocial mentoring. sponsorship involves the mentor providing public support for the protégé. exposure and visibility involves the mentor providing the protégé with the opportunity to interact with important members of the organization. coaching is the aspect of mentoring that usually first comes to mind and involves the mentor sharing valuable knowledge and experience with the protégé. protection occurs when the mentor intervenes in order to shield the protégé from potentially career harming situations. challenging work assignments involve the mentor assigning the protégé challenging work that will facilitate growth and development of professional skills, and supporting the assignments with technical training and feedback. role-modeling involves the mentor setting a good example, and the protégé emulating it. acceptance and confirmation involves the mentor providing support, encouragement, and a sense of safety to the protégé, which should empower the protégé to experiment with new behaviors without fear of rejection. counseling does not directly involve work-related areas, but by allowing the protégé to discuss anxieties, fears, and conflicts, the mentor helps the protégé deal with personal concerns that might interfere with both personal and professional development. friendship involves social interaction and enjoyable exchanges of information about both workrelated and non-work-related activities. these functions may be provided by a single mentor, or from multiple mentors within a protégé’s personal developmental network (higgins & kram, 2001; higgins & hunt, 2001). research in the mentoring literature has supported many positive outcomes for protégés in terms of both objective and subjective measures of career success (see allen, eby, poteet, lentz, & lima, 2004 for meta-analysis), but mentoring is beneficial for organizations as well. wilson and elman (1990) discussed the benefits of mentoring to organizations. the most obvious benefits for the organization are improvements in employee motivation, job performance, and retention rates. another benefit of mentoring for the organization is the strengthening and perpetuation of the corporate culture. mentors can also benefit the organization by passing information up, as well as down. in other words, mentors can act as “deep sensors” in order to detect “noise” at lower levels of the organization before it becomes a larger problem. the authors also emphasize the importance of the choice of mentors. they mention that some people are not psychologically secure enough to be mentors, and may see younger members of the organization as threats to their position. the authors note that as individuals rise through the organization, their need for mentoring does not decrease, especially when transitioning from one level of management to the next. also, as protégés advance to higher levels, they will likely take on the role of mentor for newer employees. the authors close with a warning that mentors must keep up with the changing environment so as not to pass on obsolete or harmful practices to their protégés. mentoring and entrepreneurial education and development the benefits of mentoring are well established for individuals within organizations and for the organizations themselves. while not as thoroughly journal of small business strategy vol. 23, no. 1 96 researched empirically, it makes perfect intuitive sense that having the benefit of a seasoned entrepreneur or businessperson who can share their hard-earned wisdom and experience with a student team or an aspiring entrepreneur would prove to be extremely valuable. indeed, this has been recognized by entrepreneurial practitioners and educators for decades before the scholarly study of mentoring within large organizations became widespread. from the standpoint of small business development and entrepreneurial assistance programs, it is a long standing tradition to provide mentoring to aspiring entrepreneurs. for example, score (service corps of retired executives, information available at www.score.org) is a non-profit association and resource partner with the small business administration which has been providing mentoring to small business owners since 1964. they currently have over 13,000 volunteers who offer their mentoring services to small business owners at no charge. many other organizations charged with the development of entrepreneurial activity have also implemented systems for linking novice entrepreneurs with experienced entrepreneur mentors. some prominent examples include, business link in england, mentor eget foretag in sweden, the france initiative in france, and the foundation de l’ entrepreneurship in quebec, canada (st-jean & audet, 2011). it is also considered good practice for entrepreneurial educators to provide access to mentors for student business plan competition teams (russell, atchison, & roberts, 2008). in her popular press article for businessweek, on the topic of strategies for winning business plan competitions, alison damast (2007) noted that many judges and participants emphasized the importance of obtaining mentors in order to provide feedback and guidance for the student teams. thus, it is important to examine how the functions of mentoring in the entrepreneurial education and development context differ from those of the large established hierarchical organization. sullivan (2000) summarized the research on entrepreneurial learning and mentoring that had taken place before the turn of the century and noted that learning is a necessity for successful entrepreneurship, and that mentoring is an effective teaching tool which allows entrepreneurs to take advantage of the experience of others. for example, cox and jennings (1995) found that the ability to learn from mistakes was critical for successful entrepreneurship, but that many entrepreneurs could not identify a single individual who met the classic definition of mentoring. nevertheless, most of the successful entrepreneurs studied by cox and jennings (1995) did agree that learning from the experience of others, with particular emphasis on critical incidents, was very important and had been a key to their success. this supports the idea that the type of mentoring that is most successful in the entrepreneurial context differs from that of the large established organizational context. as noted earlier, st-jean (2011) conducted a series of empirical analyses to determine the unique demands of mentoring in the entrepreneurial context. rather than applying the established mentoring functions developed by kram (1985) in a large utility organization context, he began by conducting a qualitative analysis utilizing focus groups which included 51 novice entrepreneur mentees and 8 journal of small business strategy vol. 23, no. 1 97 experienced entrepreneur mentors. this resulted in the categorization of several entrepreneurial mentor functions and the creation of several proposed items to measure the constructs. he then submitted the items and constructs to expert review by three business mentoring experts and finally tested the items in a sample of 360 mentees from the foundation de l’ entrepreneurship and conducted confirmatory factor analyses to validate the scale. this resulted in stjean (2011) identifying four psychological functions, four career-related functions, and one role-modeling function. the psychological mentor functions for entrepreneurs include reflector, reassurance, motivation, and confidant. the careerrelated mentor functions for entrepreneurs include integration, information support, confrontation, and guide. the role model function involves the mentee observing the mentor and listening to the mentor’s stories about past experiences and learning to emulate the mentor’s behaviors that have led to success. the psychological mentor function for entrepreneurs of reflector involves the mentor giving the mentee feedback on the business plan and the image that the mentee projects to others, allowing the mentee to gauge progress and development. the reassurance function involves the mentor reassuring the mentee during difficult times and helping to alleviate stress by putting problems into perspective. the motivation function involves the mentor providing encouragement and building the mentee’s self-confidence. finally, the psychological mentor function for entrepreneurs of confidant develops over time as the mentee comes to trust and confide in the mentor as one would a friend. the career-related mentor function for entrepreneurs of integration involves the mentor facilitating the integration of the mentee into the business community by introducing contacts. the information support function involves the mentor giving the mentee information which may include personal knowledge of business management, laws to be aware of, useful information on the industry, etc. the confrontation function involves the mentor questioning and challenging the mentee’s ideas to help develop and strengthen them. finally, the career-related mentor function for entrepreneurs of guide involves the mentor helping the mentee improve problem comprehension, and expand problem vision and context as well as making suggestions and giving advice towards a solution when necessary. while similar in many respects to the widely accepted mentor functions which were developed in the large organizational context, the mentor functions for entrepreneurs have distinct differences. most pronounced, would be the lack of the protection function. this is not surprising, because the primary reason why entrepreneurs prefer the term mentee to protégé when referring to the individual for whom they are providing developmental guidance, is because it does not imply protection (st-jean, 2011). the entrepreneurial mentor helps their mentees to stand on their own, which is consistent with the classic entrepreneur persona of an independent and proactive individual. an effective entrepreneurial mentor allows the mentee to reach conclusions, with some guidance, as opposed to simply telling the answer. st-jean and audet (2011) found that a low directive, but high involvement mentoring intervention style produced the best results within the context of experienced entrepreneur mentors and journal of small business strategy vol. 23, no. 1 98 novice entrepreneur mentees. in other words, the best mentors spent a lot of time with their mentees and were readily available to them, but did not try to control them, or to make them a clone of themselves. they helped them to think about possibilities from different points of view and to consider the likely outcomes of different courses of action, while sharing their experiences and allowing the mentees to reach their own conclusions. this style would also likely be the best way to assist student-teams competing in business competitions. one of the most popular and successful programs in higher education for developing entrepreneurial skill is the business plan competition. these competitions can provide stimulus for new venture creation, the development of new and innovative ideas, and an increase in the entrepreneurial skill and orientation within communities (russell, et al, 2008). from the standpoint of higher education, business plan competitions provide an excellent vehicle for the development of a variety of entrepreneurial and general business skills for students. business plan competitions are an excellent way for institutions of higher learning to teach and encourage entrepreneurial mindsets and innovative behavior. in order for students to successfully complete a business plan, they must demonstrate discipline and a solid work ethic over a significant period of time, and during this process they will develop skills and knowledge specific to their product or service, as well as general business skills. the opportunity to put into practice what they have studied theoretically in their various finance, accounting, marketing, and management courses is an invaluable part of a top-quality business education. in addition to developing the skills and refining the ideas necessary for the formation of new ventures, these competitions are an excellent opportunity for aspiring entrepreneurs to meet the contacts and mentors who can increase the likelihood of their new venture’s success. russell and colleagues (2008) noted that “…access to the business community through networking opportunities, mentors and judges all provide enormous benefits to participants and host institutions” (p. 124). the business plan competition provides an excellent opportunity to increase the exposure of the academic institution and to introduce students to their local business community in a favorable light. many business leaders are very happy to be involved with the student competition teams and view it as their way of giving back to their community. this provides an excellent opportunity for faculty facilitators of student business plan competition teams. as any experienced entrepreneurship educator knows, it is important to network in the local business community. therefore, it should be relatively easy to find experienced business professionals who would be happy to share their knowledge and experience with the team as a mentor. this should prove very helpful for the students. jodie o’keefe (2008) recommends seeking feedback from trusted mentors when developing business plans for competitions. russell and colleagues (2008) conducted a study of 51 participants in student business competitions and found that mentors and networking activities ranked second only to sponsorship and funding as factors for success. journal of small business strategy vol. 23, no. 1 99 implications the benefits of mentoring for entrepreneurial education and development are evident from both an academic and practitioner standpoint. mentoring is an excellent learning tool that incorporates the transfer of knowledge, skills, and ability through shared experience, as well as developing and strengthening selfconfidence and entrepreneurial self efficacy in the mentee. organizations which engage in entrepreneurial development within communities and entrepreneurial educators wishing to give their student business plan competition team the greatest learning experience should definitely work to provide access to experienced mentors. in order to help maximize the benefits to the mentees, it would be helpful to provide volunteer mentors with information regarding the mentor functions for entrepreneurs. by making them aware of the psychological, career-related, and rolemodeling functions that are utilized in highquality entrepreneurial mentoring relationships, they can strive to make sure they are meeting the developmental needs of the mentees. also, with regard to the manner in which mentors deal with mentees, robert and wilbanks (2012) noted that the appropriate use of humor can help to strengthen mentoring relationships and improve mentoring relationship quality. additionally, making the mentors aware of the fact that the best mentoring results occur when utilizing a low directive and high involvement style will help them to encourage the mentees to develop their own problem solving skills and learn through the examples provided by listening to stories about the mentor’s experience. conclusion the purpose of this paper was to discuss effective mentoring in entrepreneurial education for both student led case competitions and networks for aspiring entrepreneurs. the review of the research on the subject of mentoring revealed that there has been a great deal of scholarly attention directed at mentoring within large organizations. while the needs of the protégés in these traditional mentoring relationships have been well researched, very little attention has been paid to the unique demands of the mentoring of entrepreneurs until recently. despite the fact that organizational researchers have not been studying entrepreneurial mentoring until recently, organizations charged with the task of developing the entrepreneurial activity within communities and regions have been employing this tool since the late 60s. this is excellent news, because the benefit of experience often proves invaluable to novice entrepreneurs and can have an impact on the economic development of communities and regions. it is this author’s hope that the information contained in this paper will be of benefit to entrepreneurial educators as they continue to incorporate the effective tool of mentoring into their entrepreneurial developmental networks and student business case competition teams. also, that they will continue to recruit volunteer business mentors from their community and assist them by making them aware of the necessary mentoring functions for entrepreneurs and the benefits of engaging in a low directive, high involvement mentoring style. journal of small business strategy vol. 23, no. 1 100 references allen, t. d., eby, l. t., o'brien, k. e., & lentz, e. (2008). the state of mentoring research: a qualitative review of current research methods and future research implications. journal of vocational behavior, 72, 269-283. allen, t. d., eby, l. t., poteet, m. l., lentz, e., & lima, l. (2004). career benefits associated with mentoring for protégés: a metaanalysis. journal of applied psychology, 89, 127-136. baron, r. a., & markman, g. d. (2003). beyond social capital: the role of entrepreneurs’ social competence in their financial success. journal of business venturing, 18, 41–60. cox, c., & jennings, r. (1995). the foundations of success: the development and characteristics of british entrepreneurs and intrapreneurs. leadership & organization development journal, 16, 4-9. damast, a. (2007). how to win a b-school competition. businessweek online, 5/13/2007, p.15. haggard, d. l., dougherty, t. w., turban, d. b., & wilbanks, j. e. (2011). who is a mentor? a review of evolving definitions and implications for research. journal of management, 37, 280-304. higgins, m. c., & kram, k. e. (2001). reconceptualizing mentoring at work: a developmental network perspective. academy of management review, 26, 264-268. higgins, m. c., & thomas, d. a. (2001). constellations and careers: toward understanding the effects of multiple developmental relationships. journal of organizational behavior, 22, 223247. hunt, d. m., & michael, c. (1983). mentorship: a career training and development tool. academy of management review, 8, 475-485. kram, k. e. (1983). phases of the mentor relationship. academy of management journal, 26, 608-625. kram, k. e. (1985). mentoring at work: developmental relationships in organizational life. glenview, il: scott, foresman. noe, a. r., greenberger, d. b., & wang, s. (2002). mentoring: what we know and where we might go. research in personnel and human resources management, 21, 129173. o’keefe, j. 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(1992). mentorship and career mobility: an empirical investigation. journal of organizational behavior, 13, 169174. st-jean, e. (2011). mentor functions for novice entrepreneurs. academy of entrepreneurship journal, 17, 6584. st-jean, e., & audet, j. (2009). factors leading to satisfaction in a mentoring scheme for entrepreneurs. international journal of evidence based coaching and mentoring, 7, 148161. st-jean, e., & audet, j. (2011). the effect of mentor intervention style in novice entrepreneur mentoring relationships. best paper proceedings for the 2011 annual meeting of the academy of management, san antonio, tx. st-jean, e., & tremblay, m. (2011). opportunity recognition for novice entrepreneurs: the benefits of learning with a mentor. . academy of entrepreneurship journal, 17, 37-48. sullivan, r. (2000). entrepreneurial learning and mentoring. international journal of entrepreneurial behavior and research, 6, 160-175. wilson, j. a., & elman, n. s. (1990). organizational benefits of mentoring. academy of management executive, 4, 88-94. james wilbanks earned his bba at harding university in 1996 and his mba at the university of arkansas at little rock in 1998. he worked in the cable and telecom industry before returning to school for the phd program in management at the university of missouri. he is a member of the academy of management, beta gamma sigma, the decision science institute, the small business institute, the southern management association, and the united states association for small business and entrepreneurship. his research has been presented at national and international conferences and published in such journals as the journal of management, human relations, business journal for entrepreneurs, and insights to a changing world. he is an assistant professor of management at the university of arkansas at little rock specializing in strategy and entrepreneurship. reproduced with permission of the copyright owner. further reproduction prohibited without permission. stra tegf new technology-based firms'ursuit of sbir funds howard e. van auken iowa state university vanaukeni astate. edu marcene s. sonneborn central new york tdo and onandoga sbdc/new york state msonneborncnytdo. org abstract this paper presents the results of a study that investigated ihe relationship between characteristics offirms and their experience with applying for small business innovation research (sbir) funding. the basic issues investigated are (i) the relationship between firm characteristics and the decision to apply for sbirfunding, and (2) the relationship between firm characteristics and whether the sbir application was successful. the results of the study demonstrate that local efforts to promote the sbir program by encouraging firms to apply and by increasing the visibility of workshops can lead to a greater number offirms to apply for sbirfunding. efforts directed at firmsin small communities may be even more effective than efforis directed towards firms in large communities. the results also suggest that organizations that provide sbir assistance may consider screening potential clients according to the business goals offirm's owners. owners of "lifestyle" firms may needextra encouragement and, perhaps, assistance to apply for sbirfunding. finally, the results also imply that firms that are smaller (as compared to larger firms), have more limited experience raising capital, and serve a smaller market may need greater assistance in pursuing sbir funding. introduction the financial theory of capital structure, which assumes that firms will seek a financing structure that minimizes their total cost of capital, may not be applicable to early-stage technology-based firms due to their limited access to the capital markets (ang, 1992). capital acquisition, for example, is often jointly determined by owner's personal goals and market conditions (ang, 1991). new technology-based firms face unique obstacles in raising capital due to issues such as high risk, long product development time, unproven markets, motivation of owners, limited asset base, intellectual property rights, and limited experience with raising capital (sohl, 1999; timmons, 1999). one funding opportunity that may be accessed by early-stage technology-based firms is the federal small business innovation research (sbir) program. the sbir program is highly competitive research and development (rktd) source that encourages small firms to explore and commercialize potential new technologies. the 14 journal ofsmall business strategy vol. /2, no. 2 fall/winter 200l program can be an important source of financing and has been the impetus for the startup of many technology-based companies. previous studies found that sbir funding tends to crowd-out firm financed r&d funding (wallsten, 2000; irwin & klenow, 1996). receipt of sbir funding replaces a firm's r&d funding rather than increase total among of r&d expenditures. this substitution has several potential implications in a firm's capital structure. first, the substitution may reduce the firm's cost of capital by replacing a high cost of capital (i.e. equity and debt) with a lower cost of capital. second, the firm's risk exposure may be reduced since sbir funds rather than internal funds are used for the potential commercialization of new products. third, receipt of sbir funding may provide a signal to investors concerning quality of the firm and potential of the new technology. this is consistent with findings by lerner (1999), who found that firms receiving sbir awards were more likely to subsequently receive venture capital funding than firms not receiving sbir awards. this paper presents the results of a study that investigated the relationship between characteristics of firms and their experience with applying for sbir funding. the basic issues investigated are (i) the relationship between firm characteristics and the decision to apply for sbir funding, and (2) the relationship between firm characteristics and whether the sbir application was successful an estimated $60 billion is needed each year to fund the capital requirements of rapidly growing firms. the most common sources of growth capital for early-stage technology-based firms are individual investors (i.e. angels) and venture capital. despite these capital needs, only approximately $40 billion is available each year for rapidly growing firms (sohl, 1999). in addition, investment preferences among individual and venture capital investors have moved toward later stage and less risky firms whose products have demonstrated market potential. this shortage of growth capital, commonly referred to as the "capital gap," acts as a constraint to innovation and the commercialization of new technology. small business innovation research program overview of sbir program congress established the federal sbir program in 1982, to increase federal research and development (r&d) funding opportunities for small businesses while meeting the r&d needs of the federal government. the program was created in recognition that small businesses employ about one-half of the country's workforce and, on a per employee basis, generate two and a half times as many innovations as larger businesses. a primary objective of the program is to commercialize sbir-funded research and development and to generate a positive return on the commercialization of new technology. in october 1992, congress extended the act to the year 2000, with increased emphasis on commercial products. each year, roughly $ 1 billion is allocated to sbir from the ten participating agencies for earlystage r&d projects at small technology-based companies (department of agriculture, department of commerce, department of defense, department of education, department of energy, department of transportation, environmental protection agency, health and human services, national aeronautics and space administration, and national science foundation). sbir provides funding for technology development at an earlier stage than the private sector is typically willing to fund and provides up to $850,000 in pre-prototype r&d funding. a major benefit is that companies retain the patent and commercialization rights to any inventions developed under the program. the small business administration sets overall guidelines for the entire sbir program. however, each federal agency establishes its own 15 journal ofsmall business strategy vol. /2, no. 2 fallllyinter 200l priorities, award funding limits, and solicitation schedules. awards are based on a competitive peer review process. to qualify for sbir funding, the business must (i) be american-owned and independently operated, (2) be for-profit, (3) have the principle researcher employed by the business, and (4) employ fewer than 500 people (small business administration, 2000). sbir program phases sbir is a three-phase program. phases i and ii are supported from the funds allocated through the sbir program. in phase i, federal agencies periodically publish solicitations containing topics for which companies are invited to submit proposals. phase i proposals are funded for a maximum of $ 100,000 for six months of research and development that is intended to establish the scientific, technical, and commercial merit and feasibility of a proposed new technology. an average of 10-15%of phase i proposals are funded. companies which successfully complete phase i are eligible for phase ii funding. phase ii awards are given for a maximum of $750,000 for two-year projects that are expected to result in a prototype and testing of a new product or service. on average, about one out of every two or three phase ii proposals are funded. phase iii is the commercialization phase for products and processes developed during phases i and ii. phase iii is not funded through the sbir program, but can include government procurement contracts, corporate contracts, strategic alliances, manufacturing contracts, economic development agency or venture capital funding. potential benefits of sbir sbir funding offers many potential benefits for qualified small businesses. (i) the funds do not have to be repaid. (2) the funds received do not add to the debt of or claim any equity in the company. (3) the project can be used to develop new products and technologies. (4) the project can be used to begin a small business (through the initial rgcd), but should not be the only source of start-up funds. (5) the funds allow a company to conduct rtkd that has greater risk than would be funded by traditional sources of financing. (6) participation in the sbir process enables a company to become involved in the federal procurement process. (7) participation provides external verification that the company's technology has potential commercial value. research issues 1. what is the relationship between local efforts to promote the sbir program and the firm's decision to apply for sbirfundingf outside assistance has been shown to be an important source of assistance for entrepreneurs and be important in increasing the propensity of entrepreneurs to pursue business opportunities (chrisman, 1999). sbirrelated assistance from local organizations can be limited to providing information to firms that inquire about the program. alternatively, local organizations can contact firms directly, encourage them to apply, and provide a mentoring service through the process. the difference in approach may depend on the mission and workload of the organization responsible for facilitating sbir-related efforts. local efforts to promote and encourage firms to apply for sbir funding would be expected to result in a larger number of firtns applying for sbir funding. local eltorts to encourage attendance at sbir workshops and provide assistance with applications would be expected to create an environment where firms are more aware of and less intimidated by the application process. thus, the greater (lesser) the local sbir-related efforts, the greater (lesser) the number of firms that 16 journal ofsmall business strategy vol. 72, iyo. 2 fall/iyi uter 200l apply for sbir funding. the issue examined is not the diiterential impact of promotional methods, but the relationship between eitorts to promote the sbir program and the firm's decision to apply for sbir funding? 2. whatis the relationship between community size and whether or not a firm iias applied for sbirfunding? poor dissemination of information may result in less knowledge of funding opportunities and sophistication among business owners in small communities, especially as related to the sbir program. lang, calantone and gudmundson (1997) believed that small firms must rely on external expertise to be successful firms located in small communities may not have access to the same level of expertise, especially as related to the acquisition of capital, as firms located in large communities. van auken (2000) found that owners of small firms in small communities were less familiar with sources of capital than small firms in large communities. as a result of capital market inefficiencies associated with location, owners of small businesses that are located in small communities may be less aware of the sbir program than owners of small businesses that are located in large communities. 3. what is the relationship between the owner's obj ecti yes and whether a firm has applied for sbirfunding? mcmahon and stanger (1995) stated that the traditionally assumed objective of the firm (wealth maximization) does not accurately reflect the goals of the owner of the small firm. the owner's objective, which may be a combination of profit, long-term value creation, taxation, family issues, life-style vs. high growth preferences, impacts how the firm is financed (ang, 1992; petty & bygrave, 1993). chaganti, decarolis, and deeds (1995) describe entrepreneurs as being craftsman or managerial. craflsman entrepreneurs are characterized as being primarily motivated by life-style needs and often prefer a more conservative capital structure (i.e. greater equity as compared to debt in the capital structure). life style needs refer to issues dealing with maintaining a desired life style rather than pursuing a potentially disruptive high growth strategy. managerial entrepreneurs are strongly motivated by economic gain and may seek more risky sources of capital to grow the firm. differences between the objectives of each type of firm impact capital acquisition decisions. owners of firms having life style objectives may, for example, rely on owner's equity and borrowing from financial institutions. growth oriented firms utilize a different set of capital to fund needs associated with high expected growth. 4. what is the relationship between specific firm characteristics and whether or not a firm has applied for and received sblr funding? the characteristics of a firm, including factors such as age, size, type, and existing capital structure, impact access to alternative sources of capital and ability to successf'ully raise capital. greater access to either internal or external capital may result in a firm being less likely to seek sbir funding (ang, 1992). large, mature firms would be expected to have greater internal resources (time, human resources, and capital) available that can be used to fund r&d and technology transfer. new firms, especially technology-based firms, would be expected to have limited internal resources available that can be used to fund r&d and technology transfer. sample and methodology the sample was obtained from a list of companies compiled by the center for advanced technology (catd) development at iowa state university. catd compiled a list of iowa firms through the iowa manufacturing database, corptech, and references obtained through catd contacts. the sample firms for this study were comprised of catd's database of technology-based firms. this list was supplemented with firms not in catd's database, but 17 .lournal ofsmall business strategy vol. 12, no. 2 fall/winter 2001 was located in the research parks at iowa state university and the university of iowa. firms in the sample were checked to insure that they fit the criteria of being technology-based and either involved in the commercialization of new technology or having potential interested in commercializing new technology. the sample included iowa firms that the catd identified as currently developing or most likely to develop new technology. the final sample included 165 firms. a questionnaire was developed and pre-tested during the fall, 1999. the first and second mailings of the questionnaire occurred during november and december, 1999. a total of 73 useable questionnaires were returned, providing a response rate of 44.2%. the questionnaire was divided into two sections. the first section collected information on the characteristics of respondent, including year the business was launched, size of community in which firm was located, primary activity of business, form of business organization, market served, total capitalization, and owner's objective. the second section asked questions about the respondent's experience with the sbir program. specific questions asked included (i) whether they had ever applied for phase i sbir funding (never applied; applied but application was not accepted; received sbir funding); (2) whether they were aware of sbir workshops in their area; (3) whether they had ever attended an sbir workshop and, if so, the quality of the program; and (4) how o(ten they had been contacted and encouraged to apply for sbir funding. the results were initially summarized using univariate statistics (means and frequencies) to provide a better understanding of the respondents and characteristics of the data. subsequently, the data were analyzed using two statistical procedures. chi-square tests were run to examine the first three research issues. the specific tests examined the relationship between whether or not the firm applied for phase i sbir funding and (i) whether the owner was encouraged to apply for sbir funding, (2) whether the owner was aware of local sbir'orkshops,(3) whether the owner had attended an sbir workshop, (4) size of community in which the firm is located, and (5) owner's objectives for the firm. the first three chi-square tests provide evidence for the first research issue. the fourth and ftiih chi-square tests provide evidence for the second and third research issue, respectively. logit regression analysis was used to develop evidence for the fourth research issue. sbir = a+ total capital+ market+ age where sbir = i if never applied for phase i sbir funding = 2 if application for phase i sbir funding was rejected = 3 if application for phase i sbir funding was accepted total capital = i if total capital acquired & $ 100,000 = 2 if total capital acquired $ 100,001$500,000 = 3 if total capital acquired $500,001-$ 1,000,000 = 4 if total capital acquired $ 1,000,000-$5,000,000 = 5 if total capital acquired & $5,000,000 market = i if firm served local market = 2 if firm served regional market = 3 if firm served national market = 4 if firm served international market age = age ofbusiness ig journal of small business strategy vol. /2, no. 2 fall/8'inter 2001 results respondent characteristics table i shows that the primary business activity of most firms (60.6%) was services. the remaining firms fell into either systems integration (26.0%) or other (13.7%) categories. slightly more than one-half of the firms (54.8%) were organized as c-corporations, approximately 26.0% as s-corporations, and 19.2% were organized in other categories (sole proprietorships, partnerships, cooperatives, and limited liability companies). almost 58% of the firms had been in operation for 10 years or less (34.2% less than 6 years and 23.1%6-10 years). almost 75% of the firms were located in communities of less than 100,000 people. approximately 34% had raised less than $ 100,000 and approximately 38% had raised more than $ 1,000,000. the remaining 26% of the firms raised between $ 100,000$ 1,000,000. table i sample characteristics (n=73) firm characteristic percent of sample primary business activity services 60.6 products 26.0 other 13.4 organizational form c-corporation 54.8 s-corporation 26.0 other 19.2 company age &6 years 34. 1 6-10 years 23. 1 & 10 years 42.8 community size &25,000 37.0 25,000 —100,000 37.0 &100,000 24.7 total capital acquired & $ 100,000 19.2 $ 100,001 $500,000 15.1 $500,001 $ 1,000,000 26.0 $ 1,000,001 $5,000,000 19.2 & $5,000,000 19.2 19 journal ofsmall business strategy vo/. 12, no. 2 fallltyinter 2001 sbir funding applications one objective of the study was to identify dilterences between firms that applied for phase i sbir funding and those that did not apply for phase i sbir funding. approximately 46.5% of the respondents had applied for the sbir funding. table ii shows the results of chisquared analysis that evaluated whether the firm had applied for phase i sbir funding and ( i) whether they were contacted and encouraged to apply (1=never contacted or contacted one time and 2 = contacted more than one time); (2) whether they were aware of workshops to assist in understanding and applying for sbir funding (i=yes and 2=no); (3) whether they had attended an sbir workshop (1=yes and 2=no); (4) owner's objectives for the firm (1-5 ranking; i or 2 = life style and 4 or 5 = high growth); and (5) size of community in which the firm is located (i = less than or equal to 25,000 and 2 = greater than 25,000 population). table ii sbir grant application relative to variables affecting decision to apply for sbir grant: chi-square analysis (n=73) variables affecting applied for did not apply application decision sbir (%) for sbir (%) )(2 encouraged to apply 32.8 24.3 not encouraged to apply 13.7 29.7 4.903 'wareof sbir workshop 38.4 30.2 not aware of sbir workshop 8.1 23.8 5.217 v attended sbir workshop 24.1 26.4 did not attend sbir workshop 22.4 33.3 0.395 community size ( 25,000 12.5 27.0 community size ) 25,000 34.0 27.0 4.270 e life style preference 18.5 37.0 high growth preference 28.0 16.7 4.562 v e significant at 5% the first research issue examined the relationship between local efforts in promoting the sbir and whether or not the firm has applied for sbir funding. the results in table ii show that (i) a higher percentage of firms that were encouraged more than one time applied for sbir funding as compared to those firms that were either not contacted or contacted only one time (significant at 5%) and (2) a higher percentage of firms that were aware of local sbir workshops applied for funding as compared to those firms that were unaware of local sbir workshops (significant at 5%). interestingly, the results provided no evidence of a statistically significant relationship between attendance at an sbir workshop and application for sbir funding. 20 journal ofsmall business strategy vol. 12, no. 2 fall/winter 200l these results provide evidence that encouragement to apply for sbir funding and awareness of local workshops on the sbir program is significantly related to firms applying for funding. the more (less) visible the support programs and the more (less) encouragement that firms receive, the greater (less) likelihood that the firms will apply for sbir funding. active local promotional efforts appear to provide a support system that facilitates the application process. the second research issue examined the relationship between the owner's objectives and whether or not a firm had applied for phase i sbir funding. the results in table ii show that the owner's objectives for the firm have a direct impact on their likelihood for seeking phase i sbir funding. owners who associated with a growth-oriented firm strategy were significantly more likely to have applied for sbir funding as compared to owners who associated with a life-style oriented strategy (significant at 5%). the results in table ii show that a significantly larger number of firms that were located in communities of greater than 25,000 people applied for phase i sbir funding as compared to the percentage of firms that were located in communities of less than 25,000 people. sbir application and approval the fourth research issue examined the relationship between firm characteristics and whether or not the firm applied for and received sbir funding. table iii shows the pearson correlation coefficients for the independent variables in the logit regression model. the table values indicate no statistically significant correlations between the variables. table iii pearson correlations between total capital acquired, size of market served, and age of business (p-values in parentheses) variable total capital market served age of business acquired total capital acquired 1.00 0.1670 -0.136 (0.170) (0.264) size of market 1.00 0-.152 (0.213) age of business the results of the logit regression analysis are shown in table iv. the results indicate that all of the independent variables are statistically significant at 1%. the negative coeaicients for total capital acquired (-0.586), market served (-1.258), and age of business (-0.072) indicate that firms which had acquired less (more) capital, served smaller (larger) markets, and were younger (older) were more (less) likely to have applied for and received sbir funding. these findings are consistent with the expectation that larger (smaller) firms have greater (lesser) financial resources and internal expertise to fund basic research, product development, and technology transfer. because of their greater access to financial resources, these larger (smaller) firms have less (greater) need for funds provided through the sbir program. younger and smaller firms, which commonly experience significant shortages of capital, would be much more likely to view the sbir program as a more important potential source of capital than older and larger firms. 21 journal ofsmall business strategy vot. /2, no. 2 fall/(viator 2001 table iv logit regression results sbir success relative to total capital acquired, market served, and age of firm (&10 years vs. &10 years) (n =69) dependent variable independent variables regression coefficient sbir application total capital acquired -0.586 u'k' 19.92 ") market served -1.258 *s age of business -0.072 s' significant at /% discussion an important goal of the sbir program is to provide r&d funding opportunities for small businesses and assist in the commercialization of new technology. by providing early-stage risk capital, the sbir program helps fill a financing gap that currently exists in the market. a better understanding of the sbir program from the firm's perspective can be useful for government agencies that develop sbir assistance programs. enhancement of the assistance provided by government agencies can increase the number and success rate of applications. an associated benefit can be an improvement in the success of technology commercialization and the economic development environment. government sponsored programs commonly have at least two obstacles that affect participation and success. the first obstacle is the dissemination of information about the program to potential constituents. creating awareness of program of opportunities can be difficult due to the large amount of information received on a daily basis and fast-paced life styles in today's society. new entrepreneurs are ot)en so busy with activities associated with the launch of the new business that little time is available to learning about new opportunities. second, government-sponsored programs are sometimes perceived as being complicated, time consuming, and restrictive. many entrepreneurs may believe that their time is better spent growing their business than pursuing government programs. this may be especially true for owners that have significant time demands from the launch of their new business. organizations that provide sbir-related assistance are faced with the challenge of overcoming these obstacles. the results in this study suggest that efforts to encourage applications and promote visibility are positively associated with the percentage of firms that apply for sbir funding. a promotional plan that improves the dissemination of information about the sbir program can help to overcome the obstacles discussed above. a fundamental task for organizations that offer sbir-related assistance is to compile a valid mailing list of firms that may be eligible for sbir funding. once compiled, firms can be contacted through brochures, telephone calls, or other announcements about workshops and new program developments. a concern that should be assessed by organizations that provide sbir-related assistance is the goal of the owner of the firm. owners who are motivated by growth-oriented strategies rather than life-style objectives could be greater assistance since they are more likely to apply for 22 journal of small business strategy vol. 12, no. 2 fall/winter 2001 sbir funding. alternatively, organizations that provide sbir assistance may decide to devote special efforts devoted to making life-style oriented owners aware of sbir funding opportunities. another concern of organizations that provide sbir-related assistance is the dissemination of sbir-related information to firms located in small communities. efforts could be directed at compiling a list of firms located in small communities that may be disconnected with the flow of information about, but might qualify for, government programs. keeping these firms informed of sbir funding opportunities might encourage owners to attend a workshop and apply for funding. the results also indicated that relatively smaller, younger, and less experienced firms are less likely to apply and be successful with sbir funding applications. organizations providing sbir assistance may consider directing eitorts at these smaller, younger, and less experienced firms. the larger, older, and more experienced firms may have sufficient resources to pursue sbir funding with little outside assistance. business owners of all sizes should not overlook sbir grants as a potential source of funding. the lack of size, experience, or familiarity with the sbir program, remoteness of location, and perceived business goals should not be viewed as constraints to submitting applications. established organizations can assist through the process with advice on the application process and content. conclusions this study examined issues related to entrepreneurs'nvolvement in the sbir program. the results of the study demonstrate that local efforts to promote the sbir program visibility by encouraging firms to apply for sbir funding and increasing the visibility of workshops, can lead to a higher number of firms that apply for sbir funding. efforts directed at firms in small communities may be even more eitective than efforts directed towards firms in large communities. the results also suggest that organizations that provide sbir assistance may consider screening potential clients by the business goals of firm's owners. owners of "lifestyle" turns may need extra encouragement and, perhaps, assistance, to apply for sbir funding. finally, the results imply that firms that are smaller, have more limited experience raising capital, and serve a smaller market (as compared to larger firms) may also need greater assistance in pursuing sbir funding. the interpretation of the results of this study is limited in several respects. the sample is limited to only a single state at a single point in time. replication of the study in other geographic areas would confirm whether the results are specific to the midwestern u.s. or are typical of other regions. such a study could identify differences in sbir proposal success by region. another study could examine why eligible firms decided against pursuing sbir funding. in addition, a longitudinal study could validate the findings relative to the impact of economic trends and government initiatives over time. a longitudinal study could also track the success of technology transfer among firms that received sbir funding as compared to those that did not receive sbir funding. the results of this study can be of benefit to government agencies that work with firms in technology transfer, owners of firms that are engaged in bringing new technology to the market, business consultants, and the academic community. the results indicate that proactive eitorts by government agencies that provide sbir-related assistance to firms may increase the likelihood of firms applying for and receiving sbir funding. the results can be useful to owners of firms who may be candidates for sbir funding. some owners, especially 23 journal of small business strategy vo/. /2, no. 2 fa///ivi urer 200/ those with life-style preferences and located in small communities, may benefit by being more proactive in seeking sbir funding. owners may also benefit from contacting government assistance organizations to inquire about sbir workshops. business consultants and public business service providers can use the results to better understand the importance of encouraging firms to apply for sbir funding and publicizing sbir workshops. working with new small firms that have limited resources may be important. however, the results also suggest that efforts to provide assistance to firms in their pursuit of sbir funding should not ignore larger firms. the academic community can use the results in curriculum and course development to give students better insight into the sbir program and information on the success of sbir applications. this type of material would be especially useful in a discussion of the acquisition of capital by firms involved in technology transfer. references ang, j.s. (1991). small business uniqueness and the theory of financial management. the journal of small business finance i (i), 1-13. ang, j.s.(1992).on the theory of finance for privately held firms. journal of small business finance i (3), 185-203. changanti, r., decarlos, d., & deeds, d. (1995). predictors of capital structure in small ventures. entre reneurshi: theo and practice 20 (winter), 7-18. chrisman, j. (1999). the influence of outsider-generated knowledge resources on venture creation. journal of small business mana ement 37 (october), 42-58. irwin, d., & klenow, p. (1996). high-tech r&d subsidies: estimating the effects of sematech. journal of international economics 40 323-344. lang, j., calantone, r., &. gudmundson, d. (1997). small firm information seeking as a response to environmental threats and opportunities. journal of small business nun n it ~i, i l.23. mcmahon, r., & stanger, a. (1995). understanding the small enterprise financial objective function. entre reneurshi: theo and practice 19 (summer), 21-39. petty, j., & bygrave, w. (1993). what does finance have to say to the entrepreneur? the journal of small business finance 2 (2), 125-137. small business administration, h://www.sba. ov/sbir/sbir.html, (2000). sohl, j. (1999).the early-stage equity market in the usa. venture ca ital: an international journal of entre reneurial finance i (2) 101-120. timmons, j. (1999). new venture creation, (4 ed.). chicago, il: irwin pub. van auken, h. (2000, february). the familiarit of small technolo -based business owners with sources of financin: im act of location and ca italization. paper presented at the annual meeting of the united states association for small business and entrepreneurship, orlando, fa. wallsten, s. (2000). the eitects of government-industry r&d programs on private r&d: the case of the small business innovation research program, rand journal of economics 31 (spring), 82-101. (con/in/ted) 24 journal ofsmall business strategv vol. 12, no. 2 fall/winter 2001 howard e. van auken is a professor of management in the college of business at iowa state university. he was a lvilliam j. fulbrighi at the instituio de technologico y de estudios superiores de monterrey (mexico) in 1989, a ivilliam j. fulbright scholar at masarykova univeszity v brne (czech republic) in 1994,and a visiting professor at the consortium international university (paderno, italy) in 200l. he has published over 50 refereed papers in professional journals, including entrepreneurship: theory and practice, entrepreneurship and regional development, journal of small business management, journal of entrepreneurship and small business, journal of entrepreneurship, and journal of portfolio management. he has lectured or developed entrepreneurship programs in mexico, russia, czech republic, slovakia, ukraine, malaysia, italy and canada. marcenes. sonneborn is the president of innovation management consulting inc., speciali ing in marketing and strategic planning for technology-based and emerging growth companies. on contract, marcie operates the small business innovation research (sbir) outreach program, co-sponsored by the central new york technology development organization (cnytdo) and the onondaga small business development center (sbdc). in 1997, she won a tibbetts award from the small business administration in ivashington for her success in economic development by helping companies in central ny to bringin over 535 million in funding for research and development over a 5 year period. marci e woi ks with the n ys 0+ice ofscience, technology and academic research (nystar) and the new york state sbdc networks io provide expertise to c!ients across new york state. marcie has her mbapom the sucrouse hinds school of management and receivedher degree in the innovation management program, with emphasis in marketing and finance. she is an adjunct faculty for the su school of management entrepreneurship and emerging enterprise program. she teaches both online and in the classroom. 25 strategy responding to industry consolidation in fragmented industries: the role of capabilities in small business survivai jeffrey e. mcgee university of texas at arlington jmcgee uta. edu christopher l. shook university of texas at arlington cshookuta. edu abstract driven by the competitive pressures that accompany industry consolidation in fragmented industries, small business owners and managers are searching for new ways to gain and sustain competitive advantage. this paper reports the results of a study designed to examine which capabilities help small business managers react io the intensified competition that accompanies industry consolidation. profiles of capability bundles used by managers in a fragmented industry undergoing industry consolidation, specifically the neighborhood drugstore, are developed and dijferences in performance among the drugstores are examined. our results suggest that developing capabilities is important to responding effectively to industry consolidation. further, jirms that focus on developing a broad range of capabilities significantly outperform those jirms that develop only a narrow range of capabih'ties. introduction fragmented industries, which are industries where there is no clear industry leader, are of particular interest to small business managers because smalland medium-sized companies populate fragmented industries. some industries are fragmented due to historical reasons (i.e., firms in the industry historically lacked the resources and abilities to consolidate the industry), while other industries are fragmented due to the underlying economic structure of the industry (porter, 1980). economic reasons for industry fragmentation include lack of economies of scale, low entry barriers, high transportation costs of raw materials or finished goods, and specialized customer needs. in industries where there are few economies of scale, large companies do not have an advantage over small companies; thus, small companies can compete as efficiently as large companies. for example, if new product introductions and style changes are essential to competition in an industry, mass production may not make economic sense. other industries may stay fragmented because low barriers to entry allow easy entrance into the industry. for example, restaurants require such small amounts of capital that new restaurants open daily. high transportation costs may make regional production the only cost-effective means of production, which results in a fragmented industry structure. finally, industries may be fragmented because the consumers have specialized 21 journal ofsmall busi ness strategy vol. i i, no.2 fall/ivinrer 2000 needs. for example, homebuyers desire that their real estate agents have detailed knowledge of the local community. regardless of the underlying reason for industry fragmentation (i.e., historical or underlying economic industry structure), many industries recently have been consolidating. competitors have noted the strategic benefits and the ultimate financial returns of consolidating fragmented industries and have been scouting out industries that are fragmented for historical reasons. in addition, advances in technology have changed the underlying economic structures of many industries. flexible manufacturing technologies have allowed manufacturing companies to not only customize production according to customer tastes, but also produce on a massive scale. advances in communication technology have resulted in consolidation in service industries such as travel agencies and consulting. indeed the competitive landscape has been altered in a wide variety of industries. consolidation in previously fragmented industries has been noted in the hand tool (cicione, 1999), agriculture (drabenstott, 1999), solid waste and recycling (biddle, 1999), commercial banking (blackwell, 1999), lodging (nardozza, 1998), textile (morrissett bc smyth, 1997), and restaurant industries (anonymous, 1997). extant research regarding consolidating fragmented industries has focused primarily on strategies for overcoming fragmentation (e.g., franchising, horizontal mergers and acquisitions, and chaining). little is known about how small businesses should react to consolidation, if they wish to maintain their independence. this paper seeks to address this shortcoming by reporting the results of a study that assessed the relationships between small business performance and the possession of capabilities in the context of a fragmented industry undergoing consolidation. the current study is based on the premise that the capabilities needed by small firms for survival in the midst of industry consolidation may be unique. capability bundles and performance the means by which businesses achieve and sustain a competitive advantage over other firms is a centra! research thrust of strategic management. for nearly two decades, the dominant research paradigm has been porter's (1980) competitive forces model. the competitive forces model argues that industry forces determine the intensity of competition, which in turn determines the profit potential for individual firms. porter suggested that firms should seek attractive niches within an industry that are defensible against both existing and potential competitors. in a fragmented industry, an industry niche could be carved out with a focuseddifferentiation strategy or a focused-low-cost strategy (porter, 1980). both the focuseddifferentiation and low-cost strategies can be achieved by specializing in a particular product type or segment, serving a limited customer segment, or limiting a firm's geographic area. more recent research, however, has recognized that the dominant paradigm (i.e., competitive forces model) is incomplete and has begun to incorporate the role of resource-based capabilities in gaining and maintaining competitive advantage (chandler 8c hanks, 1994; long bz vickers-koch, 1995; mcgee & finney, 1997). reaching back to the traditional strategic management concept of distinctive competence (e.g., selznik, 1957; andrews, 1971), the resource-based view argues that competitive advantage results from a firm's resources and capabilities. resources include capital equipment, worker and management skills, reputation, and brand names (barney, 1991). resources are not productive in and of themselves, however, and a firm's skill at effectively coordinating and using its resources constitutes the firm's capabilities. in other words, capabilities are a firm's ability to bring various resources together and deploy them advantageously (day, 1994). while resources are relatively tangible, capabilities are much less so, and are often deeply embedded in 22 journal of small business strategy vol. i i, iuo.2 fall/winter 2000 organizational routines and practices, which makes them less subject to imitation by present or potential competitors (dierickx ec cool, 1989). the best test of a capability's value is whether it allows the firm to offer superior customer value or permits the business to deliver products or services to customers in an appreciably more cost-effective way. wal-mart's cross-docking system is an often-cited example of how an inimitable capability led to competitive advantage (stalk, evans, ec shulman, 1992). while wal-mart has the same resources (e.g., retail space, employee skills, equipment) as many other discount chains, it is distinguished by its unique capability to manage its resources for maximum productivity. this retail chain's sophisticated cross-docking system provides wal-mart with substantial cost advantages by improving its ability to reduce shipping and handling costs. the interaction between competitive advantage and capabilities is well researched and results suggest that those firms that develop and exploit bundles of capabilities generally outperform firms that do not (conant, mokwa, & varadarajan, 1990; hambrick, 1983; mcdaniels & kalari, 1987). indeed, bundling capabilities (i.e., combining capabilities together or layering capabilities) o(ten leads to competitive advantage (porter, 1996). yet, the extant literature has generally focused on large companies operating in stable industry contexts (e.g., chandler ec hanks, 1994; droge, vickery, & markland, 1994). as a consequence, we know very little about the role that bundles of capabilities play in providing a competitive advantage for the small business trying to survive industry consolidation. there are, however, two research streams that have begun to examine the role that capabilities play in the success of smaller businesses. the first research stream involves entrepreneurial orientation, distinctive marketing competencies, and organizational performance (conant, smart, & solano-mendez, 1993; smart & conant, 1994). smart and conant (1994) found a significant relationship between the entrepreneurial orientation (e.g., propensity to take risk, ability to identify new opportunities) of a small business manager and the small business'ossession of marketing capabilities (e.g., merchandising presentation, advertising effectiveness, store layout). further, a link between entrepreneurial orientation and firm performance was found. however, this study stopped short of measuring any direct relationship between marketing capabilities and performance. in a subsequent study (conant, smart, & solano-mendez, 1993), a link was found between highly focused marketing capabilities and superior organizational performance. thus, although this research stream focused on marketing capabilities rather than a broad range of capabilities, it does indicate the potential explanatory power of a firm's capabilities. the second research stream examined the relationship between capabilities and competitive advantage for a broad sample of small, local retailers facing an environmental jolt (i.e., a large, unexpected change in a firm's environment —meyer, 1982). specifically, mcgee and colleagues examined the competitive situation immediately after the arrival of a large, national discount chain into the local competitive environment (mcgee, 1996; mcgee ec finney, 1997; mcgee ec love 1999). not surprisingly, the arrival of a large, national retailing chain had a negative impact on the performance of smaller, existing retailers in the area (mcgee, 1996). more importantly, local retailers that responded to the massmerchandisers'rrival by intensifying their focus on their own store's capabilities outperformed those who did not (mcgee & finney, 1997; mcgee ec love, 1999). in summary, a search of the existing literature reveals that marketing capabilities are important determinants of organizational performance, and the possession of capabilities are vital to a small firm's survival in the wake of environmental jolts. however, existing studies do not specifically address the context of industry consolidation. thus, it is important that the 23 jonrnal uf snia08osioeis siiraiegv vol. i l, no.2 fall/ivinter 2000 role of capability bundles in surviving consolidating industries be examined. accordingly, the research question for this study is "which bundles of capabilities help a small business to gain and sustain competitive advantage in a fragmented industry that is undergoing consolidation?" in the sections that follow, this paper identifies bundles of capabilities. because capabilities are more effective when bundled in reinforcing manners (barney, 1991), a logical next step was to use taxonomy-building procedures to identify profiles of capability bundles. these procedures produced four "generic capability types" that reflect bundles of capabilities for the small independent retailers in a consolidating industry. these four capability types were then compared across a composite performance measure to determine which bundles of capabilities, if any, lead to competitive advantage. the results are presented and discussed along with their implication for both practitioners and researchers. finally, future research suggestions are offered. m etho do log y sample the traditional u.s. independent retail pharmacy industry was selected as the domain of this study. members of this industry are typically community drugstores that deliver traditional pharmacy services and whose nonprescription inventory goes beyond health care items to include other merchandise lines traditionally associated with pharmacy sales, such as cosmetics and beauty aids, stationary, tobacco, candy, greeting cards, photographic supplies and similar items (meline, 1997). this industry was selected because it is an industry that was previously fragmented, but is rapidly consolidating (tarlach, 1998). communities across america have long depended upon their local drugstore for medication, over-the-counter (otc) products, sundry items, and medical advice. in many small towns and rural areas, the local pharmacist is not only a respected small businessperson, but also the primary allied healthcare professional. most such local pharmacists owned the small, retail pharmacy in which they work. until the last several decades when their numbers began a precipitous decline, these independently owned retail establishments ruled the pharmacy marketplace. today, the neighborhood drugstore struggles to compete with a variety of retailing outlets. large chains are starting to dominate the pharmacy marketplace. while total sales have increased for all pharmacies, the market share served by independent pharmacies has declined from nearly 100 percent in 1935 to less than 25 percent today. the number of independent operators has decreased by nearly 50 percent, from more than 50,000 to about 25,000, during the last decade alone (lqational community pharmacy association, 2000). data a modified version of dillman's (1978) "total design method"'as used in this study to enhance response rate and response quality. prior to distribution, the survey instrument was pretested on eight independent pharmacists to ensure that there were not any interpretation difficulties. then, an initial survey-booklet, including a cover letter and a postage-paid return envelope, was sent to 700 independent drugstores randomly selected from the 1,826 independent pharmacies located in the state of texas in 1997. the cover letter explained the overall goals and objectives of the research project and how the data would be used. a reminder postcard was subsequently mailed to all potential respondents approximately one week a()er the initial mailing. in addition, a second booklet with a second cover letter was sent to all nonrespondents approximately three weeks after the reminder postcard. 24 journal ofsmall business strategy vo/. /l, //o.2 fa///winter 2000 measuring capabi//ties. capabilities, the primary focus of this study, were measured using an adaptation of the instrument developed by conant, et al (1993) and subsequently used by mcgee and finney (1997). some of the likert-type scale items focused on planning process variables while others focused on marketing effectiveness. this dual focus is consistent with capability scales employed by other researchers (e.g., hitt & ireland, 1985). the multipleitem, perceptual scale required respondents to comparatively rate their organization against competitors on twenty-seven capabilities. twenty-one of the items (e.g., handling customer complaints, etfectiveness of pricing strategies, employee training) were evaluated on sevenpoint scales with values ranging from "much worse" to "much better". six of the items (e.g., quality of customer service, awareness of store strengths) were evaluated on similar sevenpoint scales with values ranging from "much higher" to "much lower." measuring organi a/iona/ performance. pharmacy performance was also measured by asking respondents to compare their financial performance to other pharmacies on the following four dimensions: i) gross profit, 2) net income after taxes, 3) total sales growth, and 4) overall pharmacy performance/success, using the same seven-point likert scales previously described. although the merits and potential shortcomings of this measurement approach have been debated in the extant literature, subjective performance measures were chosen for the following reasons. first, small firms are often reluctant to provide financial data (sapienza, smith & gannon, 1988). second, objective financial data were not publicly available. third the performance measures used in the current study are quite similar to the measures used by the national association of retail druggists in the its surveying activities (ukens, 1997). finally, previous research has demonstrated that managerial assessments are generally quite consistent with objective performance data, both internal (dess & robinson, 1984) and external (venkatraman & ramanujam, 1987) to the organization. survey response the three-step survey mailing resulted in the return of 286 surveys. adjustments to the original sample size of 700 resulting from questionnaires that were undeliverable (e.g., business had closed, or no forwarding address provided) reduced the number of independent pharmacists who may have participated to 658. in addition, 16 surveys were excluded from the study because of omitted items. thus, a total of 270 surveys were available for analysis, representing a 41 percent response rate. ninety-three percent of the respondents described themselves as pharmacist/owner, four percent as pharmacy manager, and three percent miscellaneous/other titles. respondents also indicated that, on average, their pharmacies generated slightly less than $ 1 million in annual sales (mean = $976,889; s.d. = $863,477) and employed an average of six people (mean = 6.9; s.d. = 3.8). the sample's average annual sales level is comparable to the industry wide average of $ 1.15 million (ukens, 1997), thereby increasing confidence in the study's general izabi lity. to detect any potential nonresponse bias, a telephone survey was conducted with forty randomly-selected nonrespondents. nonrespondents were compared to respondents on the basis of size (square footage), prescription department's size, years in operation, number of employees, and prescription sales as a percentage of total revenues. comparisons between respondents and nonrespondents using t-tests revealed no significant differences between the two groups at p .05. these findings suggest that non-response bias was negligible. thus, the results of this study may also be used to make inferences to the entire population of independent pharmacies. 25 joiirnal ofsmall t)ttst'ness strategy vol. i i, no.2 eall/winter 2000 results since this was an exploratory study, one of its major objectives was to provide profiles of capabilities. cluster analysis was used to develop the profiles because cluster analysis groups firms that exhibit similar characteristics. because of the large number of variables, it was necessary to reduce the number of variables into factors with factor analysis. the details of the factor analysis and cluster analysis are presented in the appendix. the cluster analysis resulted in four clusters. the cluster profiles are presented in table 1. table 1 cluster profiles (n=270) cluster 1: well rounded (n = 93) the retailers in this group focused on developing and maintaining all capabilities. no capabilities were ignored and most are treated as important. cluster 2: lackers (n = 31) the retailers in this group were the polar opposite of those in the previous group. there was no particular emphasis on developing or maintaining any of the capabilities. cluster 3: promoters (n = 41) the retailers in this group focused primarily on promotional and presentation activities. these pharmacies placed a heavy emphasis on advertising, public relations, and store layout and appearance. they placed considerably less emphasis on any of the other capabilities. cluster 4: cost controllers (n = 105) the retailers in this group focused primarily on developing and maintaining capabilities in cost control and tight control over pricing. the other capabilities received considerably less emphasis. cluster one represents retailers that anempted to develop and maintain strengths in each of the four'ypes of capabilities. we labeled pharmacies in this cluster "well rounded." well rounded pharmacies did not ignore any major capability. cluster two represents retailers that were the opposite of those in cluster one. we labeled these pharmacies as "lackers" because they lacked any capabilities. we labeled the pharmacies in cluster three as "promoters." promoters placed a relatively greater emphasis on advertising, public relations activities, and store layout. finally, we labeled the pharmacies in the fourth cluster as "cost controllers." cost controllers focused primarily on capabilities involving cost containment and tight control over the store. these firms tended to compete primarily on price. aaer grouping the pharmacies into clusters, an anova was used to assess the performance differences among the four identified "capability profiles." performance was measured using the aggregated performance scale items. as shown in table 2, statistically signilicant differences were detected among the groups (f=i 2.12, p & .001). moreover, a tukey-kramer paired comparison produced identifiable patterns of performance. well rounded retailers outperformed all other retailers. cost controllers and promoters outperformed lackers, but were essentially equal to each other. thus, pharmacies that emphasized all four capabilities (service, promotion, market segmentation and cost control) outperformed those that focused on any single group of capabilities. however, pharmacies that emphasized any one of the four capabilities outperformed those retailers that lacked all of the capabilities. 26 journal aismall business sfraiegy vol. i i, na.2 fa/iiwi urer 2000 table 2 results of analysis of variance differences in pharmacy performance (n = 270) well rounded (w) cost controllers (c) promoters (p) lackers (l) univariate takes mean = 31 mean=.03 mean=28 mean=-.64 f-value paired comparison well rounded & all c)thurs relative 12.12v" performance cost controllers and promoters & lackers discussion the results of this study suggest that it may be possible for small retailers to successfully compete in an industry that is undergoing rapid consolidation. the key seems to be developing and maintaining all types of capabilities. in other words, the most successful independent retailers understand the implications of the environmental changes they encounter; re-evaluate eave element of their business practices from the ground up; and develop strategies that continuously respond to these changes, enhance their competitive positions, and improve their pharmacies'verall performance. in broad terms, successful independent retailers must: develop a continuous process to identify the wants of their customers and then meet or exceed these expectations. design every aspect of the retail operation to enhance their customer' shopping experience. this includes ensuring that customers receive the best possible service. identify and pursue a distinct target market. this includes effectively promoting a quality-oriented image. establish budgetary controls and cost containment practices that enable the pharmacy to operate efficiently. interestingly, the results of this study stand in sharp contrast to some earlier studies (mcgee & finney, 1997) which suggest that the development of a few distinctive capabilities, particularly superior customer service and a quality based image, may lead to higher performance. this study's findings may suggest, instead, that superior customer service may simply be the price of entry into the contemporary retailing marketplace. that is, superior customer service is now demanded by customers to such a degree that providing it may simply allow the firm to remain in business, but may no longer provide a competitive advantage. the availability of alternate retail outlets allows the customer to seek out other merchants when the level of customer service at one location does not suit them. to succeed and prosper in the retailing marketplace today, independent retailers need to emphasize multiple capabilities, therefore offering their customers something commonly called "value" (arthur anderson llp, 1995). although no two retail customers perceive value in the same way, most consumers typically define value as a combination of such factors as high quality products, personalized service, shopping convenience, and fair prices. gone are the days when premium prices automatically meant high quality. consequently, it is 27 journal of.small business strategy vol. i l, iyo.2 fall/wi nter 2000 up to the independent retailers to learn how their clientele defines value and to establish merchandising strategies and pricing policies that will, in turn, lead to customer loyalty. additionally, the results of this study suggest that the deck may be stacked against those independent retailers who do not have accurate record keeping systems and a basic understanding of financial analysis and control. these foundations of finance should support all strategic decision making, and independent retailers need to integrate financial strategies throughout all areas of their retailing operations. only then can independent storeowners identify potential problems and react in a timely manner. because this study was not longitudinal, the long-term implications of pursuing a broad spectrum of capabilities should be examined in future research. once a firm gains the requisite capabilities to compete at the newly established productivity frontier, tradeoffs among cost and non-cost features must be made (porter, 1996). hence, while simultaneously developing capabilities in service, promotion, market segmentation and cost control may lead to superior performance in the immediate wake of industry consolidation, over the long-term, pursuing multiple capabilities may be disadvantageous. future research should examine the long-term performance implications of pursuing a wide-range of capabilities. these findings should be interpreted in light of the limitations. the study was conducted in a single industry, using self-reported subjective measures of capabilities and organizational performance. although the generalizability of findings from single-industry studies does have some limitations, such studies also provide the desirable feature of a high degree of control over market and environmental peculiarities. the advantages and disadvantages of selfreported subjective measures have been discussed at length in the research literature and do not need to be elaborated here. finally, this study is somewhat exploratory in nature, and it remains for other researchers, therefore, to replicate these results. in sum, the results of this study support the substantive linkage between the resource-based capabilities and performance of a firm in a fragmented industry undergoing consolidation. businesses with a limited range of capabilities outperform firms that do not emphasize any capabilities. however, superior performance depends on the possession of a wide spectrum of capabilities. indeed, survival for small firms in the wake of industry consolidation may depend on it. 'illman and associates'pecific and empirically supported recommendations were designed to maximize the response rate. dillman's (1978) method specifies that the survey be pretested, and that an initial mailing be followed by a reminder postcard and second mailing to those managers not responding to the first. references ald 4 f,m 8.,&bi kfl id 8 k. (19841. c~ll i . n 0 dp 0 ca 8 8 . andrews, k.r. (1971). the conce tofco orate strate . homewood, il: irwin. arthur anderson llp (1997). small store survival: success strate ies for retailers. new york, n.ys john wiley and sons. barney, j. (1991). firm resources and sustained competitive advantage. journal of~mi 3( i i. 99-120. blddl .d. ((9991. i 4 0 4 f i 4 n lid i . ~bi 40.38-42. blackwell,k. (1999). 1998—theyearofbankmergers. america'scommuni banker 8,8 28 journal ofsmall business strategy vo/. /i, iuo.2 fall/ivinter 2000 chandler, g.n., & hanks, s.h. (1994). market attractiveness, resource-based capabilities, and venture performance. journal of business venturin 9,331-349. cicione, m. (1999). changing times. industrial distribution 88, h4-h5. conant, j.s., mokwa, m. p., & varadarajan, p. r. (1990). strategic types, distinctive competencies, and organizational performance: a multiple measures-based study. strate ic mana ement journal 11, 365-383. conant, j.s.,smart, d. t., & solano-mendez, r. (1993). generic retailing types, distinctive competencies, and competitive advantage. journal of retailin 69(3), 254-279. day, g. s. (1994). the capabilities of market-driven organizations. journal of retailin 58, 37-52. dess, g. g., & robinson, r. b. (1984). measuring organizational performance in the absences of objective measures: the case of the privately-held firm and conglomerate business unit. strate ic mana ement journal 5,265-273. dierickx, i., & cool, k. (1989). asset stock accumulation and sustainability of competitive advantage. mana ement science 35(12), 1504-1511. dillman, d. a. (1978). mail and tele hone surve s: the total desi n method. new york: john wiley and sons. drabenstott, m. (1999). consolidation in u.s. agriculture: the new rural landscape and public policy. economic review 84(l ), 63-71. droge, c., vickery, s., & markland, r. e. (1994). sources and outcomes of competitive advantage: an exploratory study in the furniture industry. decision sciences 25(5/6), 669-689. ffca report says narrow margins, fierce competition changing industry. (1997). nation's restaurant news 31: 12. hair, j. f., jr., anderson, r. e., tatham, r. l., & black, w. c. (1992). multivariate data a~nal sis. (3rd ed.) new york: macmillan. hambrick, d. c. (1983). some tests of the effectiveness and functional attributes of miles and snow s strategic types. academ of mana ement journal 26(l), 5-26. hitt, m. a., & ireland, r. d. (1985). corporate distinctive competence, strategy, industry, and performance. strate ic mana ement journal 6,273-293. ketchen, d.j. & shook, c.l. (1996). the application of cluster analysis in strategic management research: an analysis and critique. strate ic mana ement journal 17, 441-458. long, k., & vickers-koch, m. 1995. using core capabilities to create competitive advantage. or anizational d namics 24(1), 6-22. maline, n. (1997). exploding rx market propels retailers to new height. for the pharmacist, (may), 10-18. mcdaniels, s. w., & kolari, j. w. (1987). marketing strategy implications of the miles and snow strategic typology. journal of marketin 51(4), 19-90. mcgee, j. e. (1996). when wal-mart comes to town: a look at how local merchants respond to the retailing giants arrival. journal of business and entre reneurshi 8(1), 43-52. mcgee, j.e. & finney, j. b. (1997). competing against retailing giants: a look at the importance of distinctive marketing competencies. journal of business ande~hi 9(li, 59-70. mcgee, j.e.& love, l.g. (1999). competitive advantage and the small independent retailer: the role of distinctive competencies. journal of business and entre reneurshi li(1), 85-98. meyer, a.d. 1982. adapting to environmental jolts. administrative science uarterl 27, 515-536. morrissett, b. & smyth, j. (1997). industry consolidation continues. textile world 147, 140-145. 29 journal ofsmall business sirategy vol. l l, /3/o.2 fa/i/ivinter 2000 nardozza, f. j. (1998). beyond consolidation —gening ready for the next millennium. lod in hos italit 54, ri-r2. national community pharmacy association. (2000). independent pharmacy today; poised f «h ~ m(i . n b 3.2000 ~m:if p . m. e. (1980).c~i« . ~ y k: 3 p porter, m.e. (1996). what is strategy? harvard business review 74, 61-78. sapienza, h. jm smith, k. g., & gannon, m. j. (1988). using subjective evaluations of organization performance in small business research. american journal of small r 12(2),43-33. 8 i ll,p. (1937). h 4 ii i 4 i i«i . ~ y i: ~ m &r smart, d. t., &. conant, j. s. (1994). entrepreneurial orientation, distinctive marketing competencies and organizational performance. journal of a lied business r ' 10(3),28-8. s(kg e p &sh(,e.e.(1992).c 9 8 phil(i:th i f corporate strategy. harvard business review 70(march/april), 57-69. t i h,gm.(1998). th 'hl b i fh ih . ~dt 142, 74-76. dk . c. (1997). k pl p. ~dt 141(8), 18. venkatraman, n., & ramanujam, v. (1987). measurement of business economic performance: an examination of method convergence. journal of mana ement 13, 109-122. jeffrey e. mcgee (ph.d., the university of georgia) is an associate pr%ssor of management at ihe university of texas at arlington. he teaches courses in small business management and entrepreneurship. his research interests include new business developmeni and sirategic management of small businesses. dr. mcgee's research has appeared in entrepreneurshipf theory & practice, journal of business veniuring, strategic management journal, journal of small business management, journal of business and entrepreneurship, and the journal ofsmall business strategy. christopher l. shook (ph.d., louisiana state university) is an assistant professor of management at the university of texas as arlingion. he teaches courses in business policy and strategic management. his research interests include strategy processes, research methodologies, and strategy within the contexts of health care industries and small businesses. dr. shook's research has appeared in academic of management executive, academy of management journal, and strategic management journal. 30 journal ofsmall business strategy vol./i, no.2 fallltyinter 2000 appendix factor analysis and cluster analysis procedures because cluster analysis is sensitive to the number of variables used and multicollinearity among clustering variables (ketchen & shook, 1996), the first step in developing the profiles was reducing the number of variables into factors with factor analysis. this technique is an effective tool for determining whether the data can be condensed into a more parsimonious set of factors while at the same time revealing underlying relationships or patterns in the data (hair, anderson, tatham, & black, 1992). the 27 retailing capabilities and four performance measures were factor analyzed using a principal components factor analysis with varimax (orthogonal) rotation. five factors were retained and are presented in table a-i (next page). factor one, which we labeled "service image", includes the capabilities of effectively handling customer complaints, offering high quality products, ability to know and understand current customers, and ability to differentiate a store's overall image. advertising effectiveness was one of the predominant features of the second factor —"promotion and presentation." this factor also includes superior public relations and keen merchandising skills, and a greater emphasis on new product selection. factor three —"performance" represents the performance construct. as expected, all four performance variables loaded quite heavily on this factor. the fourth factor, which we labeled "segmentation," represents knowledge of potential customers and ability to effectively segment and target customers. finally, the fii)h factor — "control of retailing" —represents the ability to contain costs, establish control and evaluation of retail programs, and implementation of effective pricing. the next step in the capability profile development process involved cluster analysis. this multivariate technique groups observations on the basis of similarity across several characteristics (aldenderfer & blashfield, 198ek hair et al., 1992). the four factors that represented capability components were used as clustering variables in a non-hierarchical cluster analysis. non-hierarchical cluster analysis was preferred because it is less susceptible to outliers or other anomalies in the data and therefore less likely to produce misleading results (hair et al., 1992). a four-cluster solution was selected on the basis of minimal distance between observations and cluster means, and interpretability of the results (hair et al., 1992). the four-cluster solution resulted in a pseudo f-statistic of 122.8 and a cubic clustering criterion of 11.9. 31 journal of small business strategy vol. i i, no.2 fall/winter 2000 table a-i principal-components factor analysis of capabilities factor loadings'actor i factor 2 factor 3 factor 4 factor 5 service promotion k market control of communimage presentation performance segmentation relailing ality quality of customer service 74 .61 1landling of customer complaints .67 .53 store image .62 .66 quality of products .58 .40 knowledge of current customers .55 .40 allocation of financial resources .52 .58 public relations effectiveness .57 .46 advenising effectiveness .52 .35 selection of new products .50 .46 awareness of store strengths .48 .43 civic involvement 45 .36 putting plans into action .44 .46 slore layout/merchandise presentation .42 .32 net income .89 .81 gross profit .85 .74 overall performance nnd store success .78 .67 total sales growth .62 .50 accurncy of sales and profit .61 54 forccastmg .55 48 ability to segment and target markets .52 .39 ability of diltercntiate store offerings .51 .43 knowledge of prospective customers .40 .25 knowledge of industry trends efli:ctiveness of cost containment 65 .55 control and evaluation of retail .40 .64 .70 program .40 .63,.64 fitectiveness of i'ricing strategies eigenvalues 3.46 3.19 2.93 2.56 2.16 «these five actors accounted for 64.0% of thc total variance 32 strategy hiv/aids employees, the americans with disabilities act, and their impact on small business d. lynn hoffman university of northern colorado lynn. hoffnutn'ti) unco edu sharon clinebell university of northern colorado sharon. el/nebr//ca) utico. edit abstract this article examines the aids epidemic and ihe americans with disabilities act (ada) as they impact on small businesses. a recent supreme court ruling provides extensive ada protection for employees with hiv/aids. new therapies now allow hiviaids victims to live longer and many want to work. because sonic stereotypes about the disease exist, many small businesses are unaware that the ada protects these employees ond may violate their civil rights. the a~ticle examines this ada protection and provides a sample policy for small businesses. introduction since the center for disease control (cdc) diagnosed the first united states victim of the hiv virus in 1981, infections from the virus have dramatically increased in the u.s, and worldwide (cdc, 1998). information from the cdc presented in table i illustrates the growing problem of hiv/aids in our society. societal problems are mirrored in the work force. with the increase of the hiv/aids population in society and with new treatment therapies that are allowing hiv/aids patients to live longer, employers, both large and small, will have to deal with the issues that arise from hiv/aids employees. in 1997, there were 1,291,810 new cases of aids in both adults and children from 193 countries amounting to an increase of 26% from one year earlier (miller, backer 8c rogers, 1997). an estimated 33.4 million people worldwide have been infected with the virus with the expectation that this figure will reach 35 to 110 million by the year 2000 (prewitt, 1993; cdc, 1998). an estimated 13.9 million people worldwide have died from aids since the epidemic began. ten million (10.7 million) of these were adults (including 4.7 million women) and 3.2 million children under the age of 13 (cdc, 1998 table i). along with the human suffering other costs associated with the disease range from $356 to $514 billion or 1.4%of the world's gross domestic product (prewitt, 1993). the center for disease control (cdc) believes that 650,000 to 900,000 americans, or one out of every 300 u.s. citizens, are now infected with the hiv virus (cdc, 1998 table i). 50 lourna/ of small business strategy vo/. /l, no. l spring/summer 2000 from the start of the epidemic through june 1998, 665,357 americans were diagnosed as having full-blown aids, as opposed to being hiv positive. of this number, 657,078 were adolescents and adults (104,028 of these were women or 15.8%) and 8,280 were children under the age of 13. a total of 401,028 of the 665,357 persons reported to the cdc with aids have died (cdc, 1998 table i). table i basic statistics on hiv/aids* worldwide statistics on hiv/aids in 1997 there were 1.2 million new cases of full-blown aids worldwide from 193 countries, which was an increase of 26% from one year earlier. 33.4 million people have hiv/aids worldwide: 32.2 million of these are adults of this figure 13.8 million are women. 1.2 million are children under the age of 15. an estimated 13.9 million people have died from aids since the epidemic began: 10.7 million of these are adults of this 10.7 million are 4.7 million women. 3.2 million are children under the age of 15. more than 95% of all hiv victims live in developing countries. one in every 3 children orphaned by hiv/aids is under the age of 5. data on hiv/aids in the united states the total number of infected persons in the u.s, is estimated to be between 650,000 and 900,000. this is one in every 300 americans. through june 1998, a cumulative total of 665,357 persons with aids had been reported to the cdc: 657,078 were adolescents and adults of this number 104,028 were women (15.8%). 8,280 were children under 13 years of age. a total of 401,028 of the 665,357 persons reported to the cdc with aids have died. *source: the center for disease control web page. data updated december 1998. ~h/i . d ." costs to employees and american businesses the impact on american victims and the american economy is staggering in terms of human suffering and medical costs. many victims go through psychological and physiological changes and spend years searching for medical care and fighting bureaucracies. the costs associated with employing an employee with hiv/aids have been the subject of some debate. some estimates of the total lifetime costs to the individual and society ranged from 51 journo/ ofsmall business s/raregy vo/. l l, no. i spring/summer 2000 $70,000 to $ 140,000 (paul & townsend, 1997). however, other authors believe that the costs to employers have been overestimated because they originally included all societal costs, not just those to employers (green, oppenheimer /k wintfeld, 1994; frierson, 1995). a 1994 study conducted by farnham and gorsky specifically addressed the incremental costs to businesses employing an hiv positive employee. the model used by farnham and gorsky included health insurance, short and long-term disability benefits, recruiting, hiring, and training costs, employee life insurance, and pension costs. they found the average cost over a five-year time frame to be $ 16,639 and the maximum cost to be $31,702. farnham and gorsky used a five-year time frame because that time period represented a typical business decision-making perspective. using the five-year time frame lowers the cost estimate because of the lower probability of the hiv positive employee moving to the high-cost health state within the five years. they also caution that the model is designed for businesses over 100 employees. smaller businesses may not offer the same level of benefits as larger companies, but they may also have fewer opportunities to engage in cost-sharing activities. although the debate about costs will probably continue, it is important for employers to focus on the incremental costs to the business and not focus on the larger societal costs associated with h i v/aids. about two thirds of america's largest businesses have already had employees diagnosed with aids or hiv (miller et al., 1997). conversely, only 10 percent of small business have had employees with hiv or aids; however, that percentage is expected to rise as hiv/aids spreads from urban to suburban and rural areas (miller et al., 1997). new issues with hiv/aids employees recent advances in medicine now allow hiv/aids individuals the ability to extend their lives and many want to continue to work (lucas, 1998; minehan, 1998; shrm explores new hiv/aids and work challenges, 1998). these new therapies have decreased hiv/aids mortality 26 percent in 1997 and decreased it from the leading cause of death to the second leading cause of death for americans between the ages of 25 to 44 (lucas, 1998). the groups of workers between ages 25 and 44 constitute more than half of america's 121 million workers (miller et al., 1997). an example is ken aldrich who was the congressional affairs officer in the white house for ronald reagan and george bush. when diagnosed as hiv positive, aldrich was very concerned about his life expectancy. today, the new therapies have decreased the virus to below detectable levels although it is still in his body. his immune system has been restored, he is healthy, and wants to work (breuer, 1998). there are thousands of employees like aldrich who are fighting life threatening illnesses such as hiv/aids, cancer, and other illnesses and are able to return to work (breuer, 1998). another example is an hiv positive american airlines pilot who was recertified to fiy. although the faa has strict rules on medication, he runs marathons, is healthy, and capable of flying (greene, 1998). breuer (1998) argues that hiv/aids employees make great workers because they had major medical challenges, endured side effects, met with major psychological stress, dealt with political and bureaucratic systems, and developed creative responses to their circumstances. she believes that they are an untapped pool of good employees in this time of labor shortages. however, hiv/aids individuals have several workplace issues to surmount including stereotypes, coworker reaction, and health care before returning to work. first is the stereotype that this is a "gay" disease. information presented in table ii shows aids cases by exposure category. this information shows that the percent of people with aids who contracted hiv through male homosexual contact decreased from 64% to 51.7% and the 52 journal ofsmall business strategy vo/. / l, /to. / spring/summer 2000 proportion of people who contacted it through heterosexual contact increased from 3% to 10.2%. the percentage of female aids victims increased from 8% to 17.5% (miller et al, 1997; cdc, 1998). table ii aids cases by exposi/re category exposure category mule/female totals percents men who have sex with men 317,862 51.7% injecting drug use male 122,933 female 45,075 total 168,008 27.2% hemophilia/coagulation disorder male 4,559 female 222 total 4,781 4,781 0 8% heterosexual contact male 21,855 female 40,744 total 62,599 10.2% received blood transfusion 8,311 1.4% risk not reported or identified 53,423 8.7% totals 614,984 100.0% 'source: center for disease control web page, data updated december 1998 ~h«l/ .4, many hiv/aids individuals are concerned about the reaction of coworkers. nearly twothirds of employers say that coworkers would be uncomfortable working along side an hiv positive employee (greene, 1998). some non-infected individuals are curious how the coworker got the disease, although no one asks how someone contracted cancer or heart disease. as a result of ignorance, some coworkers are concerned about the disease even though it cannot be transmitted through typical workplace contact except in health care (paul /'c townsend, 1997). many victims are concerned about the loss of health care coverage. health insurance carriers have historically assumed that these employees would not return to work and have not developed policies to cover them (breuer, 1998: greene, 1998). consequently, if hiv/aids victims drop their ssi (government insurance) and get sick before they complete the waiting period for pre existing illnesses in their new employer's health insurance, they would be pushed into a lifetime of poverty (breuer, 1998). others are concerned that the ada will not protect them. some are suspicious that employers will not keep their medical condition 53 journal ofsmall business strategy vo/. /l, //o. l spring/summer 2000 confidential and others do not trust disability plans (breuer, 1998). most are wor'ried about the effects of job stress on their health. the americans with disabilities act the growing number of hiv/aids employees who want to work and can work longer requires that small businesses know what their and their employees'ights are under the americans with disabilities act (ada). the following explains the ada and leads to the questions of whether hi v/aids employees are covered, to what extent, and how should small busilicsscs iuspolid, the ada covers employers in interstate commerce who have 15 or more employees (42 u.s.c. section 12101). consequently, those small businesses with fewer than 15 employees are not covered by the federal ada (although they may be covered by a state law). reasonable accommodations and undue hardship the law requires that these covered small employers make reasonable accominodations to disabled employees or prospective employees who can perform the essential job functions with or without an accommodation. thus small employers cannot refuse to hire or retain an individual who can do the essential job functions with or without an accommodation. they are required to make "reasonable accommodations" unless the accommodation would present an "undue hardship" upon the small employer. the act protects any individual with a physical or mental impairment including "any physiological disorder or condition, cosmetic disfigurement, or anatomical loss affecting one or more of several body systems, or any mental or psychological disorder." it includes disabilities such as epilepsy but not physical characteristics that are within "normal ranges" such as eye color, hair color, height or weight. it does not include "characteristic predisposition to illness or disease or personality traits such as a quick temper, poor judgment, poverty, lack or education or a prison record" (eeoc guidelines, 1992 section 1630.2(h)). any individual is disabled under the act if they meet one of the following three definitions: "i) has a physical or mental impairment which substantially limits one or more of that person's major life activities, 2) has a record of such as an impairment, or, 3) is regarded by the covered entity (defined above) as having such an impairment." (eeoc guidelines, 1992, section 1630.2(g)). the impairment is a disability only if it "substantially limits one or more of the individual's life activities." the ada does not cover temporary, non-chronic impairments of short duration with little or no long term impact. examples of non-covered impairments include obesity, broken limbs, sprained joints, concussions, and influenza. the eeoc guidelines exclude the inability to perform a certain job or a certain type of job such as flying for the airlines because of a vision problem (eeoc guidelines, 1992, section 1630.2 (j)). the term substantial is determined by the duration of the impairment, the severity, and its impact on the individual's life. the guidelines specify that the effect on the individual's performance must be the result of the impairment. as an example,"...advanced age, physical or personality characteristics, environment, cultural, and economic disadvantages " are not impairments (eeoc guidelines, 1992, section 1630.2(j)) the second part of the definition includes someone who has a record of a disability. this "record" may include education, medical, or employment records and individuals that are the target of others'ttitudes towards them (eeoc guidelines, 1992, section 1630.2(l)). some 54 journal ofsmall business strategy vo/. /i, //o. i spring(summer 2000 individuals are disabled from others'yths, fear, or stereotypes about them (eeoc guidelines, 1992, section 1630.2(m)). the eeoc states that an employee may be covered if others believe they have hiv/aids (eeoc guidelines, 1992, section 1630 2(1)). the next task is to identify the essential job functions. a function is essential if it is necessary to accomplish the job and other employees doing this job must perform this function. other factors include the degree of expertise or skill, whether it is included in a job description, how often the function is performed, and how crucial it is to the job (eeoc guidelines, 1992, section 1630.2(n) essential functions). they state that job descriptions are not required but are considered relevant evidence for determining essential job functions. if the function is essential then the employer must make reasonable accommodations. this may include restructuring the work, modifying equipment, or changing work schedules. these accommodations must be made unless they present an undue hardship to the employer. undue hardship is determined by the financial capability of the employer, its geographic dispersion, and the number of employees. the ada and the hiv/aids employee from 1992 to 1997, approximately 2,300 hiv related cases were filed with the eeoc. nearly 60 percent of these cases were wrongful discharge claims (armour, 1997). these statistics and the preceding ada overview raise the following questions. first, does hiv/aids meet the requirement that it creates a disability affecting some major life activity? second if this is a disability, what essential job functions can hiv/aids employee do or not do. finally, what small business accommodations must be made for these individuals? since the inception of the hiv/aids epidemic, congress, courts, and regulatory bodies have discussed whether it is a disability that should be protected. prior to the enactment of the ada in 1990, every court that addressed the hiv/aids issue under the rehabilitation act found h «h f 1 d dt 1ttlly f000,hhb r 19987. 1 1 r dy 1 d number of school and fair housing cases that found hiv/aids to be disability (doe v. g .19908 .8 h ldt 1 fd 8 c, 7987c~i. ~,1990b* belleville 1987). many of these pre-ada cases ruled that asympomatic hiv was a handicap. during discussions on the ada, congress was aware of the disease and the rehabilitation cases. congressman owens and senator kennedy stated that, "hiv/aids is a disability" (136 cong rec s9696, july 13, 1990). both the eeoc and the department of justice, which are the two federal agencies that enforce the act have stated that hiv/aids is a disability (mckinney, 1995). several courts have addressed the issue of hiv/aids students and consistently ruled that aids is a disability (mckinney, 1995; smith vs. dovenmuehle mort a e co inc. 1994). the u.s. supreme court faced the hiv/aids issue for the first time in 1998 with the ~bd .abb . 1 bi 0 lp f dh d t«h h infected with the hiv virus although she did not show any symptoms and was in the asympomatic phase of the disease. upon finding a cavity, the dentist informed her that he could not fix the cavity in his oltice but would do so in a local hospital where they had other equipment. she sued claiming protection under the public accommodations section of the ada. in a split 5-4 decision, the supreme court ruled that the infection was a disability protected by the ada. the majority argued that the hiv virus creates a disability from the moment of infection and causes immediate abnormalities in a person's body, specifically white cells, 55 journal ofsmall business strategy vol. jl, no. l springlsttmmer 2000 hemic systems, and lymphatic systems. they argued that the affected life activity was related to reproduction and dismissed the defendant's request that only an economic or employment life activity qualify as a significant impairment. they found it a significant impairment because it permanently affected her ability to have children because of the risks of transmission to any unborn child and any male partner. ai(ghh liybud,y phylld.shy 1998,ada yh supreme court in ~bra don found that the hiv/aids infection creates a disability, the courts have not always returned the employee to work depending on whether the individual was otherwise qualified and was not a direct threat to others. a court prior to the ada found that the mere existence of the hiv infection created enough of a risk to warrant removal of a physician from practice in estate of behrin er v medical center of princeton, 592 a.2d. 1279, 1983). other courts used a cumulative approach. they argued that an infected health care employee who had contact with a large number of patients would over time create a cumulative risk sufficient to warrant removal of the employee. current cases have moved away from these general doctrines and require a specific, factual, individual analysis of the worker, their employment situation, and evidence of a direct threat to others. in health care, the courts have found removal of health care workers warranted where there was evidence of a concrete potential of possible transmission to others. a surgical technician with aids was dismissed whose job required placement of his hands inside the body cavities of patients on a daily basis and who had previously had accidents with sharp instruments in the past (mckinney, 1995). the eleventh circuit upheld the transfer of a firefighter with aids to light duty as a reasonable accommodation. the court argued that there was enough of a possibility to infect others during a rescue attempt that constituted a direct threat to others (mckinney, 1995). in ~bra don, justice kennedy used these previous cases to clarify the term "direct threat." according to kennedy's majority opinion, disabled individuals cannot be excluded unless there is a direct threat that cannot be eliminated by reasonable accommodations. a direct threat is determined by (i) the duration of the risk, (2) nature and severity of the potential harm, (3) likelihood that the harm will occur, and (4) imminence or immediacy of the potential harm (bragdon v. abbott). the supreme court then remanded the case to the lower courts to determine if the dentist did have or should have had the necessary training and or equipment to fix the cavity in his offic. the cdc's opinion is that infected health care workers who do non-exposure prone procedures and who comply with universal precautions do not pose a significant risk and thus cannot be excluded from employment. an example is a favorable administrative law judge ruling for an infected pharmacist who occasionally prepared intravenous materials. the reasoning was that with the right training, equipment, and precautions the pharmacist did not represent a direct threat (prewitt, 1993). the eeoc now requires valid medical or other objective evidence of a high probability of substantial harm to others (prewitt, 1993). in summary, it is still lawful to exclude an hiv/aids employee where his or her essential job duties require the performance of exposure prone practices. an example is the surgical technician whose essential job duties required placement of his hands inside the body cavities of patients. unfortunately, some authors have pointed out that many infected health care workers ignore the cdc's universal precautions. some infected employees believe that the probability of their transmitting the disease is low and others fear alerting coworkers to their condition (prewitt, 1993). 56 journal ofsmall bus/ness strategy vol l l, no. i spring/summer 2000 the impact of bracdon on small businesses tg ifgf ~bd .agg 1999 i i 9 pi d i df 9 9 i f small employers. first, employers, both large and small, must accept hiv/aids as a disability and follow the ada and ~bra don ruling. the crucial questions with respect to hiv/aids are under what circumstances should an infected employee be accommodated and under what circumstances are employers not required to make "reasonable accommodations?" if an infected employee constitutes a "direct threat" to others, the ada requires employers to make "reasonable accommodations" unless this creates an "undue hardship." an hiv/aids infected employee meets kennedy's first, second, and fourth criteria of a "direct threat" ~bra don). first, once an individual contracts the virus the duration of the threat is permanent becanse there is no current cure. the nature and .severiiy of ihe potential harm is a long illness and eventual death to anyone who gets the virus from an infected employee. the fourth, the imminence or immediacy of the potential harm, is an immediate impact on the new victim's body. where questions will occur is kennedy's third criteria, the i/kelihood thur ihe harm will occur. employers will be required to conduct an extensive job analysis that determines the essential job functions and whether any essential functions are "exposure prone." if an infected employee or applicant's essential job functions are "exposure prone" then the question becomes, can the employer make reasonable accommodations and remove these "exposure prone essential job functions" or move the individual to another position where they do not present a direct threat? this question can only be answered if it is possible to remove some of these functions and or transfer the infected individual to another position without creating undue hardship on the employer. this is where large and small employers may differ in their response. large employers would have more opportunities for transferring employees. many small employers would not have other positions and could conceivably release the infected employee if the exposure prone functions were essential to that position and no other position was available for the infected individual. as an example, a small health care provider could refuse to hire or retain an infected physician as an employee if that position's essential job functions required exposure prone essential job functions. however, in larger health care organizations, there might be other positions available such as administrative or counseling positions that did not create a direct threat to patients, and the larger employers would be required to make these accommodations. because the eeoc has strongly stated that it will only accept valid medical or scientific evidence and the cdc has limited the essential job functions that would meet the direct threat criteria to only those that are exposure prone, there are few jobs outside of health care that would meet these stringent criteria. most retail, office, and even production positions have few opportunities for the transmission of infected body fluids to another person except in an accident. if the probability of transmission is low, then the small employer would have difficult showing how a position warranted exclusion of the infected employee because such jobs would not meet kennedy's third criterion for a direct threat. along with the extensive job analysis mentioned above, small employers will need to document their undue hardship argument. congress did not heed the suggestions of the small business community to limit accommodations to a set standard such as a certain percentage of the relevant position's annual salary (harger, 1993). therefore, some small employers run the risk of believing that an accommodation would be an undue hardship only to discover afler 57 jonrnal ofsmag business strategy vo/. / i, //o. i spring/summer 2000 the fact that a jury or judge disagreed. documentation at the time of the decision covering the company's financial condition, number of employees, positions available and evidence of a direct threat is necessary for any later litigation. critics of the ada argue that the key terms, reasonable accommodations and undue hardship, are ambiguous and will create intended and adverse litigation for many small businesses (hearings before the committee on small business, 1990). the eeoc commissioner supports the current case by case analysis because it provides flexibility by analyzing the individual, the job, the company, and the company's situation (harger, 1993). the critics midorse a set dollar maximum for a reasonable accommodation beyond which the costs would create undue hardship. a set standard as a maximum would eliminate ambiguity, provide precise guidance to small businesses, and eliminate their fear of inaccurate predictions of a later judge or jury's decision. while most accommodations cost very little ranging from nothing to as little as $ 150 per case, even a single lawsuit would bankrupt many small businesses (harger, 1993). although some members of congress desired a specific standard of what constitutes undue hardship and reasonable accommodation, congress did not enact it. consequently, the ada stands as currently defined by congress, the courts, and the eeoc. regardless of one's views on the above debate, small businesses cannot wait for a change; they need to respond affirmatively. while discrimination lawsuits can cost between $50,000 and $250,000 in legal fees, big businesses have found that a good policy with a comprehensive employee education program costs between $5,000 and $40,000 a year (greene, 1998). with fewer employees and managers to train and educate, most small businesses could develop a policy and education program for much less cost. the question now becomes what constructive steps have big businesses done that small businesses can adopt? large employers response to the hiv/aids issue a group of concerned coworkers at levi strauss organized the first corporate response to aids in 1982 (miller et al, 1997). they asked management for permission to set up an information booth in the lobby of levi strauss's corporate headquarters. in a show of top management support, the president joined them in the booth when it first opened. levi strauss disseminated information and training to managers and employees. the company treated it like any other disability and provided accommodations similar to other life threatening illnesses (armour, 1997). american airlines developed an aids education program ai)er a publicized incident in which a group of flight attendants requested new pillows and blankets after a flight on which some passengers were attendees at a large hiv/aids awareness gathering because they suspected many of the passengers were hiv/aids patients (greene, 1998). from that incident, american airlines developed an educational program for their employees which top management views as having the following benefits for the company: greater productivity and higher morale, reduced likelihood of discrimination lawsuits, and reduced health care costs through prevention and early detection of new infections (greene, 1998). eastman kodak has had an hiv/aids policy in place since 1988, which emphasizes that the company will terminate employees who violate the policy by discriminating against employees with hiv/aids (greene, 1998). kodak also has an educational program, which includes general information about aids and specific training for managers of hiv/aids employees. 58 journal ofsmall business strategy vol./7, no. l spring/summer 2000 other companies also have implemented policies or programs regarding hiv/aids in the workplace. ibm composed a task force that dratted guidelines for businesses seeking sample aids policies. polaroid otters support groups for employees with aids or hiv (armour, 1997). bank of america, digital equipment corporation, pacific telesis, syntex corporation, and wells-fargo bank all have been cited as pioneers in the development of hiv/aids workplace policies (miller, et al, 1997). a coalition of global employers, which includes corporate leaders in the response to hiv/aids in the workplace such as levi strauss and polaroid, has urged businesses to develop policies supporting hiv/aids employees (welch, 1998). the global business council on hiv/aids, supported by the united nations, started an awards program to find organizations with the best practices of non-discrimination and positive action with regard to hiv/aids in the workplace (welch, 1998). in the united kingdom, the national aids trust has developed a statement nf employment principles for h/v/a/ds', which has been signed by over 50 organizations (welch, 1998). a 1996 cdc survey found that 43 percent of firms with more than 50 employees had a policy regarding employees with any type of disability or life threatening illnesses, but only 16 percent offered employee education on aids (greene, 1998). although half of companies with over 100 employees generally have a policy addressing hiv/aids, only 33 percent of companies with less than 100 employees do so (greene, 1998). unfortunately, greene (1998) found a decline in aids education programs from 28 percent in 1992 to 18 percent of corporate respondents in 1997. although large employers still have more progress to make in this area, they still outpace small employers. large employers are more likely to have human resource specialists whose job it is to keep current on new laws governing the workplace, such as the ada. larger employers also typically have additional financial resources to provide training for their hr specialists, as well as all employees. these advantages may explain why large employers outpace small employers in their response to the issue of hiv/aids employees in the workplace. but it is vitally important that small businesses follow the larger employers by developing their own policies. steps small employers should take small busincsscs must respond to the growing issue of hiv/aids employees. the information outlined earlier shows that the issue is increasing because of the number of new individuals diagnosed with hiv/aids coupled with new treatment therapies that allow these patients to work and live longer. a small business should take the following steps in order to proactively respond to this issue. first, a small employer needs to develop a policy specifically addressing the issue of hiv/aids employees. second, their hr practices related to job analysis, recruitment, and selection must be reviewed in light of ada considerations. third, small businesses must develop an education and training program for managers and employees. lastly, small businesses should evaluate the financial and tax incentives available to them to meet ada regulations. the first step is to develop a policy specifically addressing hiv/aids in the workplace. although many small employers do not have any policies at all, the absence of policies in this (and other) areas expose the small business to extensive human resource litigation and its subsequent costs. the small business should adopt the attitude that an adequate policy covers 59 journal ofsmall business srrareg)i vo/. /l, /i/o. l spring/summer 2000 it from potential losses just as insurance protects it from other sources of possible loss like theft or fire. the policy should explain that the employer will treat hiv/aids as any other life threatening illness. the policy should affirm the employer's compliance with the ada, explain the consequences for noncompliance on the part of employees or managers, and indicate the internal responsible patties who can deal with an aids or illness complaint. although many small employers do not have human resource specialists, the owners and manageis whu perfomi these functions should carefully review how they conduct job analysis, recruitment, selection, and training. as mentioned above, a thorough job analysis will determine what job functions are essential and which, if any, is exposure prone. interviewers need to base their questions on these essential functions and not ask about hiv/aids or other disabilities. the selection process must be consistent across applicants. while the ada allows employers to require a medical exam, the exam can only be required after the employer has made a conditional offer of employment. every applicant for that position must be required to take the same medical exam. the results of the exam should be kept confidential and not include a test for hiv/aids. an education and training program for managers and employers can eliminate stereotypes, myths, and biases about the disease. this reduces the possibility of a manager or coworker discriminating against an infected employee and embroiling the company in expensive litigation. regardless of how small an employer is, they can access a plethora of free information from the cdc or the web to build a low cost education program. the cdc's h «~h«:ii d hi .i .i dd h i i i d. h h of cases, and other training information (cdc, 1998). cdc's "business responds to aids program (brta)" was established to develop a partnership between government and business to prevent the spread of hiv through workplace education. it provides information and helps implement policies and communication pieces. the cdc's belief is that businesses are an excellent source of such communication and are seen by employees as credible purveyors of information (breuer, 1998). consequently, the cdc is willing to provide information and assistance to any employer. because two thirds of all employers believe that negative coworker reactions to hiv/aids workers will occur (greene, 1998), employers can reduce these myths with a good educational program built on the cdc's materials (cdc, 1998). data provided in table ii show that the main categories of transmission continue to be: 1. males having sex with other males, 2. sexual contact with drug users, 3. heterosexual contact with infected individuals, and 4. blood transfusions (cdc, 1998). the cdc reports that it has never had a case of transmission in a typical work setting. although the restaurant industry has never reported a case, the cdc recommends that food handlers take the typical precautions to prevent transmission of any infectious diseases. it does recommend that any professions that use instruments that pierce the skin such as health care and tattoo parlors follow its procedures. they recommend that other occupations that work with instruments that could pierce the skin in an accident such as hair salons take precautions (cdc, 1998). small businesses can also take advantage of the financial incentives to provide reasonable accommodations. the internal revenue code section 190 provides for a maximum of a $ 15,000 per year deduction for qualified architectural and transportation barrier removal expenses. i.r.c. section sl provides for a maximum of $2,400 tax credit for the first year wages of a qualified disabled worker (eeoc facts about disability related tax provisions, 1992). 60 journal of small business strategy fol. /l, /vo. i spring/summer 2000 a sample policy built upon these tenets is presented in table iii. the policy is designed so that a small business could simply personalize it by including the name of the person responsible for the policy and providing information related to hiv/aids which can received from the cdc. table ih a sample hiv/aids policy the following policy can be used by small businesses as a guide to the development of their hiv/aids policy. as mentioned above, in today's litigious environment small employers need to adopt policies that will protect them as much as possible from costly lawsuits. the policy should be ivritten and disseminated to the small business's employees. new hires should be required to read the policy and sign a statement that they have read it (and all the other policies, if any). such signatures provide proof that all employees read and understood the policy. for example, this is evidence that the employer forewarned coworkers who engage in illegal discrimination against an hiv/aids coworker. i. employees with hiv/aids are entitled to the same rights and opportunities as other employees with serious or life threatening diseases. 2. this employer complies with the federal americans with disabilities act and applicable state laws and regulations. the company will not tolerate any acts of discrimination by its managers or employees. the top management and union (if present) endorse non-discrimination policies and informational programs about aids. 3. the employer has provided free brochures explaining the disease and its inability to be transmitted through typical jobs in this company. information on how to reduce the risk in one's personal life is also available. 4. the employer will keep employee's medical records and information confidential. there will be no exceptions to this policy. 5. medical exams will not be required except for jobs requiring proof of ability to perform essential functions and in those cases all applicants will be required to take the same medical exams. a test for the hiv virus will not be made part of that exam. 6. complaints or questions about this policy should be directed to mr./mrs. name and phone number. these individuals can provide referrals to assist any employee. implications for small employers not covered by ada the ada is a federal law that does not cover employers in interstate commerce with less than 15 employees. thus employers with fewer than 15 employers would have to determine if their state or even local body has a state or local law or regulation covering disabilities. some states have anti-discrimination statutes covering disabilities and some do not. many have very different levels of the number of employees it takes to create coverage under the state law. for example, the colorado statue bars discrimination against individuals with disabilities and covers employers with one employee. a small employer with less than 15 employees who is not covered by an equivalent state antidiscrimination statue including disabilities, could discriminate against an individual with a disability, including an hiv/aids employee. their only liability would be from possible tort claims based on slander, wrongful discharge, or arbitrary and capricious actions. 61 journal ofsmall business strategy vo/. / l, no. i spring/summer 2000 given the litigious society we now face, it still would behoove those very small employers not covered by the federal or their state law to follow the sample policy outlined in table lll. but legally they do not have to do so and would not have a legal liability unless they created an employee tort claim. conclusion many small businesses run the risk of serious legal problems regarding their response to the presence of hiv/aids employees simply because they lack awareness of coverage of the ada and have failed to adopt a policy regarding hiv/aids employees. although small businesses do not oi)en have the financial, legal, and human resources available to them that large businesses do to deal with this issue, they can take advantage of the information provided to them through avenues such as the cdc. additionally, a sample policy regarding hiv/aids in the workplace is provided in table iii that can be adapted and used by small businesses. given that hundreds of thousands of americans and the millions of people worldwide have hiv/aids, this is an issue that will impact the work environment in both large and small businesses. small businesses must take a proactive approach by becoming educated about the issue and developing policies to deal with it. references armour, s. (1997, september 24). employers work around aids problems: problems arise d pl 0'~0847 d breuer, n. l. (1998). will you hire lazarus? hiring individuals that recovered from life h 6 dl 1 . w kl 77(63.(j 19983,104. c 1 dl c 1(19983.wh 1 m~jj .d. hd pd 4d 0 1998. con ressional record s. 9696 136, (1990), july 13). equal employment opportunity commission (1992). facts about disabilit related tax iirovisions, pub. no. eeoc-fs/e. equal employment opportunity commission guidelines (1992). section 1630-2. farnham, p. g. & gorsky, r. (1994). costs to business for an hiv infected worker. inguui 31 76-88. frierson, j. g. (1995). em lo er's guide to the americans with disabilites act. 2"" ed. washington d.cs bna books.0,j.t(9983. 8 pl 7 1 ll; hajds ~hr m 1 43(2396 green, j, oppenheimer, g. & wintfeld, n. (1994). the $ 147,000 misunderstanding: repercussions of overestimating the cost of aids. journal of public health politics ~pl i 0 h 19(l 3, 69.90. harger, d. (1993). drawing the line between reasonable accommodation and undue hardship under the americans with disabilities act: reducing the effects of ambiguity on small businesses. kansas law review 41 783. hearin s before the committee on small business, 101m congress, 2d session 62,79, 94 (1990). testimony of representative delay and joseph j. dragonette on behalf of the u.s. chamber of commerce, and david pinkus on behalf of national small business. lucas, k. (1998). new program helps hiv patients find work: drug therapies make productive lives possible. indiana olis business journal 18(46), 20. 62 journal of small business strategy vol. l l, no. l spring/summer 2000 mckinney, j. (1995). tribute to dr. i. beverly lake, sr. comment: hiv, aids and job dl i i i: n hc ii f/i dfd i d pl .c~hllk review 17,115. miller, a. n., backer, thomas e., & rogers, e. m. (1997). business education and the aids epidemic: responding in the workplace. business horizons 40(4), 78. ml h,m.(1998).n aids i p i« i 8 r.~hrm 42(10), 204. paul, r. j. & townsend, j. b. c. (1997). aids in the workplace: balancing employer and employee rights. st. john's universit review of business 18(2), 9. prewitt, r. b. (1993).comment: the "direct threat" approach to the hiv positive health care employee under the ada. mississi i law journal 62 719. shrm pl hiv/aids 8 k h ii 8, pr ~ (a 8 28.)998). w i h, i. (1998). 8 pl 9 f p aids i h kpl . p~im 4(18), 14-15. court cases in estate of behringer v. medical center at princeton, 592 a.2d 1279 (3'ir. 1983). baxter v. belleville, 720 f. supp. 720 (sd ill. 1989). bragdon v. abbott, 118 s. ct. 2196, 1998; 141 l.ed. 2d 540, 1998, 1998 lexis 4212. cain v. hyatt, 734 f. supp. 671 (ed pa. 1990). doe v. garrett, 903 f. 2d 1455 (ca, i, 1990). ray v. school district of desoto county, 666 f. supp. 1524 (md fla. 1987). smith v. dovenmuehle mortgage co. inc., no 94 c 139, 1994 (wl 440662 n.d. ill. june 10, 1994). applicable laws the americans with disabilities act (ada), 42 u.s.c., section 12101 d. lynn hoffman is a professor of management at the university of iyorthern colorado. he received his b.s. degree in chemistry and mathematics at cornell college and his ph.d. in labor and human relations at the university of iowa in l982. he has taught at the universi0 of northern colorado for 26 years in the areas of small business and i)oman resources. sharon clinebell is a professor of management at the university of northern colorado. she received her b.s. degree from the college of the ozarks, her m.b.a. at the university of arkansas, and her d.b.a. at southern illinois university. she has taught at the university of northern colorado for l3 years in the areas of human and organizational behavior and human resources andjust finished a term as chair of the department of management. 63 strategy table of contents i growitrg pninst an employment compliance primer for small employers robert k. robinson the umversity of mississippi geralyn mcclure franklin the university of texas of the permian basin a. m. nunley iii the university of texas of the permian basin 20 the difference between survival and disaster: crisis planning in small businesses john e. spillan penn state umversity —dubois 32 errors small business managers makein product introduction deci sionin ivhat were they tliinking! mark simon oakland university cynthia miree oakland university kristina setzekom oakland university amanda figon doner advertising 53 network catalysts to small businesses: a strategy for fragmented industries suzanne loker cornell umversity l. susan stark san francisco state university judy sasser-watkins regional training institute 71 erp system solutions for small companies: readiness & selection muhammad a. razi western michigan umversity j. michael tam western michigan university g6 top munagemcnt team heterogeneity and sme expon performance: investigating the role of environmental uncertainty franz t. lohrke university of alabama geralyn mcclure franklin the university of texas of the permian basin vinay b. kothari stephen f. austin state university 1ii3 book review: so you need to write a business plan! by jerome s. osteryoung & denise l. denslow reviewer roosevelt butler the college of new jersey table of contents validation of a measuring instrument for the relationship between knowledge transfer and entrepreneurial orientation in family firms ascensión barroso martínez universidad de extremadura tomás m. bañegil palacios universidad de extremadura ramón sanguino galván universidad de extremadura 15 the influence of socioeconomic factors on entrepreneurship and innovation maría—soledad castaño university of castilla martínez la mancha maría jesus ruiz fuensanata university of castilla la mancha isabel martínez rodríguez university of castilla la mancha 29 entrepreneurial strategy, innovation, and cognitive capabilities: what role for intuitive smes? josé manuel saiz álvarez nebrija university carlose cuervo arango nebrija university alicia coduras nebrija university 41 performance and risk as signals for setting up a franchised business esther calderón monge university of burgos pilar huerta-zavala university of burgos 59 book review: the entrepreneurial spark: recognizing opportunities and developing them into viable businesses frank hoy worcester polytechnic institute s trateg y journal of small business eknapinski typewritten text 1 reproduced with permission of the copyright owner. further reproduction prohibited without permission. s trateg   y  journal of small business  approaching the psed: “some assembly required” kelly g. shaver college of charleston sharverk@cofc.edu amy e. davis college of charleston davisae@cofc.edu mark s. kindy medical university of south carolina ralph h. johnson va medical center kindyms@musc.edu carrie a. blair college of charleston messalc@cofc.edu abstract the panel studies of entrepreneurial dynamics (psed i and psed ii) are nationally representative longitudinal surveys of individuals in the united states who are in the process of starting businesses. these nascent entrepreneurs have been followed for three to four years (psed i, n = 1,261, over 6,000 variables), or for six years (psed ii, n = 1,214, over 8,000 variables). as of this writing there are over 150 publications based on the psed, but there could be even more if some of the critical data cleaning and data combining instructions were widely available. this article presents code (both spss and stata) that can be used to check on the inclusion criteria, to renormalize weights for subgroup analysis, and to combine the data for psed i with those for psed ii. keywords: psed, longitudinal research, nascent entrepreneurship, syntax codes editor’s note (g. hills): as noted in the conclusion, the psed data set is the only representative national sample reflecting the firm creation process. commenting as a member of the ‘start up’ psed i team, there was an entrepreneurial spirit at the inception. there were 20 universities (ultimately growing to 34). each pledged $20,000, which provided the initial funding. paul reynolds, kelly shaver, and many others deserve great credit for advancing scholarship and knowledge in the entrepreneurship field. 99 mailto:sharverk@cofc.edu mailto:davisae@cofc.edu mailto:kindyms@musc.edu mailto:messalc@cofc.edu journal of small business strategy volume 22, number 1 100 preparation of this article was supported by the national science foundation partnerships for innovation (pfi) program under grant # iip-0917987, kelly g. shaver, pi. any opinions, findings, conclusions, or recommendations expressed in this material are those of the authors and do not necessarily reflect the views of the national science foundation. introduction the two panel studies of entrepreneurial dynamics, psed i and psed ii, provide entrepreneurship researchers with an extremely valuable resource for examining the process of creating a new business venture. each of these datasets is a nationally representative sample of people who are in the process of creating new businesses (psed i also includes data from a comparison group of individuals who were not starting businesses). each dataset is both wide (over 6,000 variables for psed i and over 8,000 variables for psed ii) and long, with a sizable array of questions asked of respondents who were then followed for four years (psed i) or six years (psed ii). the longitudinal design allows researchers to identify the characteristics of start-up efforts that have (and have not) succeeded (reynolds & curtin, 2011). as of this writing 13 books, over 50 book chapters, and more than 90 peer-reviewed publications based on the psed studies have appeared in the literature (frid, gordon, & davidsson, 2011). psed i has been described in detail in a book edited by gartner, shaver, carter, and reynolds (2004) with chapters written by members of the research teams who contributed the variables included. a comprehensive description of the outcomes of psed i was written by reynolds (2007). psed ii has been described in a book edited by reynolds and curtin (2009) with chapters written by researchers interested in particular topics included in the data. a comprehensive description of the outcomes of psed ii has been written by reynolds and curtin (2008). codebooks and interview schedules for both datasets are publicly available from the institute of social research (isr) at the university of michigan, http://www.psed.isr.umich .edu/psed/home. details of the construction and use of each dataset (and of the combined or “harmonized” dataset created by reynolds & curtin, 2011) have been published (e.g., appendices a-c in the gartner, et al. book; the reynolds & curtin, 2011 paper). together these resources are excellent references for researchers who have some prior experience with the data. but for many entrepreneurship researchers who have not yet dipped a toe into the psed ocean, the technical details can appear overwhelming. there is a good reason that for every parent, the three most dreaded words at holiday time are “some assembly required.” where the psed is concerned, there is a great deal of assembly required. in fact, there is enough so that with funding from the ewing marion kauffman foundation the first two authors of this paper have for four years taught a three-day course for doctoral students and faculty called “psed 101.” the present article presents some of the principles developed in that http://www.psed.isr.umich.edu/psed/home http://www.psed.isr.umich.edu/psed/home journal of small business strategy volume 22, number 1 course and includes parallel spss and stata syntax required to accomplish the purposes described. screening to identify potential respondents collection of each dataset began with a “screener” that was embedded in a larger market research process. for psed i, 64,622 individuals were reached by market facts (now synovate) from july 1998 to january 2000 through random digit dialing and asked two screening questions: 1. are you, alone or with others, currently trying to start a new business, including any form of self-employment? 2. are you, alone or with others, now trying to start a new business for your employer? an effort that is part of your job assignment? respondents who answered affirmatively to either question (or to both) were then asked if they expected to be owners of the new firm and whether they had been active in the past 12 months in trying to establish the firm. those who expected to be owners (in whole or in part) and who had been active were then asked if they could be contacted by a university-based survey research laboratory that was conducting research on the creation of new businesses in the united states. early in the project the interviews were done by the university of wisconsin survey research laboratory. a third screening criterion – whether the business organizing effort is still in the start-up phase – was asked early in the universitybased interviews. when the uwsrl closed, the psed i interviews were completed by the university of michigan’s survey research center (src). psed i consisted of two phases, an initial telephone interview (1,261 people) followed by a mail survey returned by 871 of the 1,261. of the 1,261, 830 were nascent entrepreneurs, 431 were in a comparison group composed of people who had initially said they were not organizing a business. it is important for the data analysis to note that because of a gap in funding, roughly half of those screened for psed i were reached a year later than the beginning of the first screening. for psed ii, 31,845 individuals were reached by orc international from october 2005 to january 2006 and asked three screening questions, rather than two, on the basis of what had been learned about inclusion criteria from the global entrepreneurship monitor (gem). the three psed ii screening questions were: 1. are you, alone or with others, currently trying to start a new business, including any self-employment or selling goods and services to others? 2. are you, alone or with others, currently trying to start a new business or new venture for your employer, an effort that is part of your normal work? 3. are you, alone or with others, currently the owner of a business you help manage, including self-employment or selling any goods or services to others? respondents who answered one or more of these questions affirmatively were then asked additional questions to determine whether they had been active in the past 12 months, whether they personally would 101 journal of small business strategy volume 22, number 1 102 own all, part, or none of the new business, and whether the business had received revenues sufficient to cover expenses including salaries or wages of the owners (this last point was actually three separate questions). respondents who had engaged some start-up activity in the preceding 12 months, expected to own all or the major part of the new firm, and had not achieved revenues sufficient to be classified as an ongoing new firm were asked if they would consent to a telephone interview by the university of michigan’s survey research center. interviews were completed with 1,214 respondents (there was no mail survey, and no comparison group). checking the inclusion criteria researchers interested in firm-level issues typically include all 2,475 individuals, but researchers focusing on person-level variables often elect to remove the 53 people (45 in psed i and 7 in psed ii) who did not meet a strict definition of the inclusion criteria. in psed i, the spss code to accomplish these reductions was written by paul reynolds and modified by kelly shaver. the corresponding stata code was written by amy davis. in the tables that follow, the spss code precedes the corresponding stata code (descriptions of what is being accomplished obviously apply in both cases). in psed i, 6 people had achieved positive cash flow for more than 90 days, so were by definition no longer in the organizing phase. an additional 7 individuals expected that some institution (technically, ownership by an entity that was not a person) would own more than 50% of the business. it was later discovered that 32 members of what was supposed to be the comparison group had actually been organizing a business at the time of the interview. the syntax to accomplish this data cleaning is contained in table 1. note: the syntax to be used appears in courier type. when respondents who do not meet the strict definitions of the inclusion criteria are eliminated, there are 1,216 people left in psed i (817 of whom are nascent entrepreneurs, 399 of whom are in the comparison group). weights and renormalizing one of the major advantages of using psed studies is that the data can be made to be nationally representative. in any survey research there is the possibility that biases will be introduced when contacting potential respondents. for the psed studies the primary biases are differential selection probabilities and differential rates of non-response. for example, in psed i five subsamples of data were collected. these were the initial sample (known as the “mixed gender sample,” identified by the variable rtype with a score of 10), an oversample of women collected with funding from the national science foundation (rtype = 11), an oversample of minorities also collected with funding from the national science foundation (rtype = 12), a comparison group (rtype = 20) collected contemporaneously with the mixed gender sample, and a second comparison group (rtype = 21) collected contemporaneously with the minority oversample. the clearest conceptual indication of the need for weighting the data is provided by, for example, the oversample of women: journal of small business strategy volume 22, number 1 table 1: checking the inclusion criteria step 1. eliminate 6 infant businesses that should have been screened out because they had positive cash flow including owner salary for more than 3 months prior to the date of interview. the cash flow variable is cfphlag (for cash flow phone lag). eliminating these 6 infant businesses reduces the sample to 1255. (individual respondents can be identified by sorting the data in descending order on the variable of interest. this puts the problematic respondents at the top of the data list.) respids for these 6 cases are 328100601, 37800137, 328100395, 328100124, 328100541, and 328100145. spss code filter off. use all. select if (sysmis(cfphlag=1) or (cfphlag < 90)). execute. freq cfphlag. stata code gen cfphlag1=cfphlag recode cfphlag1 .=0 keep if cfphlag1<90 step 2. eliminate cases in which institutional ownership will exceed 50%. npownpc was created by paul reynolds on the basis of q217 (who will own?) answered as "not a person" and percentage of ownership (q207c). this variable identifies 18 people (out of the total of 830 nascents) who expect that non-persons will own some percentage of the business. of the 18, 7 show an expected non-person ownership greater than 50% (one at 66%, 1 at 82%, 1 at 85%, four at 100%). delete these cases eliminates respids 328100020, 328100183, 328100255, 328100267, 328100443, 328100572, and 337800154, reducing the sample to 1248. spss code filter off. use all. select if (sysmis(npownpc=1) or (npownpc le 50)). execute. freq npownpc. stata code drop if autonsu==5 103 journal of small business strategy volume 22, number 1 table 1 continued step 3. minority oversample comparison group participants, who are rtype 21, were asked the screening questions about start-up activities. any who answered affirmatively to the question about start-up involvement, suinvol should be deleted from the comparison group. this represents a total of 28 people, 14 females and 14 males, leaving an overall total of 1220. (the total number of respondents can be seen by viewing the end of the listing in the “data view” of the data file.) spss code do if (rtype = 21). select if (suinvol = 1). end if. execute. freq suinvol. stata code gen cgbiz=rtype recode cgbiz 21=1 else=0 replace cgbiz=0 if suinvol==1 drop if cgbiz==1 step 4. respondents targeted for the erc mixed gender and nsf women (all of whom are rtype 20) comparison group were not asked about their start-up involvement. in the one-year follow-up, these respondents were asked about their start-up activities. (they should have had none.) the variable representing involvement is cgsuact. this variable identifies four individuals who should be removed. respid numbers are 328200046, 328200059, 328200084, and 328200115, reducing the sample to 1,216. spss code do if (rtype = 20). select if (cgsuact ne 1). end if. execute. freq rtype. stata code gen cgbiz1=rtype recode cgbiz1 20=1 else=0 replace cgbiz1=0 if cgsuact==0 drop if cgbiz==1 104 journal of small business strategy volume 22, number 1 105 table 1 continued: step 5. finally, there is an error in one value assignment for autonsu. a frequency count of autonsu will show a total of 716 individuals, one of whose ventures is said to be 1-50% owned by a nonperson. any such ownership, of course, means that the person is not fully autonomous. the problem is identified by a crosstab between autonsu and autonsu4 (autonsu4 will at this point have only three categories, as the fourth – institutional ownership > 50% has been eliminated). spss code crosstabs /tables= autonsu by autonsu4 /format= avalue tables /cells= count. stata code ta autonsu autonsu4 step 6. in this crosstab the column totals, which represent autonsu4, are correct (715, 102, 817). the respid in error is 337800099. the correct value, determined by comparison to the frequencies in q190 is a score of 3. correct the value for this person then check to ensure that the column and row totals agree. spss code if (respid = 337800099) autonsu = 3. execute. crosstabs /tables= autonsu by autonsu4 /format= avalue tables /cells= count. stata code replace autonsu=3 if respid==337800099 ta autonsu autonsu4 journal of small business strategy volume 22, number 1 if a male (potential) respondent answered the telephone during the collection of this oversample, that male’s probability of inclusion was zero. whether the initial screening was done by market facts (psed i) or orc (psed ii) the screening organization conducted interviews in replicated waves of 1000 people per wave. as part of their services to clients, these organizations provided a separate weight for every sample of 1000. once all of the screening had been accomplished, the staff at src reconfigured the weights based on the total sample, a change that substantially reduced the variance in the weights (e.g., in psed i from a range of nearly 10 points to a range of 1.7 points) according to curtin (2004). a similar procedure was followed for psed ii, with comparable results. in each case the weight created is for the entire sample screened (64,622 or 31,845). the general procedure for creating weights is to compare the percentage of respondents in a particular demographic group (e.g., white women aged 18-29 with incomes of $40,000 to $60,000) to the proportion of that same group in the total population of the united states, according to data from the current population survey (cps) of the u.s. department of the census. people in the specified demographic group would then be weighted to bring the weighted proportion into line with the proportion shown by the cps. for example, if white women aged 18-29 with incomes of $40,000 to $60,000 were 15% of the cps population but only 7.5% of the psed sample, each respondent would be given a weight of 2. the demographic characteristics actually used to crossclassify the cells to be compared to the cps were different from psed i to psed ii because there were too many missing values in the income data. for psed i the cells were the cross-classification of gender x ethnic background x age x educational attainment. for psed ii the cells were the cross-classification of gender x ethnic background x age x income. across all individuals in the screener, the weights were then centered to equal the total number of individuals screened. in both psed i and psed ii the resulting weight is the variable wt_scrn. although the screener samples are quite useful for estimating such things as the proportion of business creation activity among individuals with different gender, ethnic characteristics, and educational attainment, both screeners were limited to a very few questions. for detailed consideration of the factors involved in start-up, one needs the interview datasets. this means, of course, that the sums of weights need to be 1,261 and 1,214, not a number in the thousands. the process of creating weights for the detailed datasets began with using the weighted screener results to generate the demographic characteristics of nascent entrepreneurs. following the logic outlined above for producing the screener weights, poststratification weights were then created for the two detailed datasets. in psed i the screener weights were adjusted by the src to produce one normalized weight for members of the comparison group (wtcg) and one for the nascent entrepreneurs in wave 1 (wtw1). in psed ii, where there was no comparison group, the initial weight for the detailed dataset was wt_wavea. in each dataset there are weights for subsequent waves, but for present purposes we will restrict the discussion to the wave 1 weights in both datasets. if one is interested only in all nascents, or all nascents compared to members of the 106 journal of small business strategy volume 22, number 1 107 comparison group, the weights given (wtw1, wtcg; wt_wavea) are sufficient. on the other hand, many investigators are interested in gender differences, differences between nascents who are fully autonomous (no financial support from any “nonperson”), or variables that appear only in the mail survey. in any or all of these cases, the overall weights will need to be renormalized so that the sum of the weights equals the number of individuals in the particular subsample of interest. an example of the problem is shown in table 2. table 2: example of need for recentering of weights. gender (ncgender) number of people sum of wtw1 mean of wtw1 females 403 305.25 .76 males 427 524.75 1.23 total 830 830 1.00 table 2 is based on the original dataset for psed i (ercw14q, n = 1,261) downloaded from the isr website. as noted above, in that original dataset there are 830 nascent entrepreneurs and 431 members of the comparison group. wtw1 was computed so that the total of this weight would equal the number of nascent entrepreneurs (830), and the bottom row in table 2 shows that this is the case. the problem arises in the other two rows. when the sample of entrepreneurs is split into females and males (using ncgender, the only gender variable recommended for general use) the sum of weights for females is too small, whereas the sum of weights for the males is too large. this imbalance can be corrected by multiplying the value for wtw1 by a fraction consisting of (the number of individuals)/(the total weight for that class of individuals). specifically, the new weights are: for females, wtw1 * (403/305.25), sum of which is 403; for males, wtw1 * (427/524.75), sum of which is 427. the renormalizing of weights becomes a bit more complicated when the sample is cut two or more times. for this reason, table 3 contains the syntax necessary to renormalize weights when the data of interest have been split on two dimensions. this procedure can simply be generalized to as many different splits as are needed for the particular research question. one note of caution: the spss command “means tables,” is not available through the menu system in some older versions of spss. all versions, however, recognize the command when it is written out into a syntax file. combining psed i and psed ii as valuable as psed i and psed ii are separately, they allow researchers to answer even more questions if they are combined into a single dataset. for sophisticated users of spss or stata, accomplishing this task is a relatively simple matter. on the other hand, for those of us who are accustomed to working with one dataset at a time, putting the two together can be a challenge in at least four ways. journal of small business strategy volume 22, number 1 first, depending on the active memory of the computer you use, combining a 1261 person x 6000+ variable dataset with one that is 1214 person x 8000+ variables, it is prudent to be prepared for a crash. minimize the number of other applications that are open, and save your work early and often. some university email systems will not accept a file as large as the resulting combined dataset, so if you are working with colleagues it may be necessary to compress or zip the file. second, there is the need to have in the combined file some variable that indicates the source of the data (psed i or psed ii). there are several ways to accomplish this, one of which is to add a variable called psed (or source, or whatever variable name makes the most sense to you) to each dataset before the two are combined. table 3. syntax for renormalizing case weights, example for psed i mail questionnaire step 1. when the overall sample is reduced by eliminating people who did not return the mail questionnaire, the weights will need to be renormalized. the 871 respondents who completed the mail questionnaire will have a valid (not missing) value for return year (mailqyr). then retain only those respondents with a valid mailqyr. the counts should be as follows: full autonomy (245 females, 235 males, total of 480). partial autonomy (41 females, 32 males, total of 73). comparison group (173 females, 145 males, total of 318). spss code freq mailqyr. filter off. use all. select if(sysmis(mailqyr) ne 1). execute. crosstabs /tables=autonsu4 by ncgender /format= avalue tables /cells= count. stata code drop if mailqyr ==. ta autonsu4 ncgender 108 journal of small business strategy volume 22, number 1 table 3 continued: step 2. next, compute a weight that for nascent entrepreneur respondents will be wtw1 but for comparison group respondents will be wtcg. spss code compute weight = 0. execute. if (rtype = 10) weight = wtw1. if (rtype = 11) weight = wtw1. if (rtype = 12) weight = wtw1. if (rtype = 20) weight = wtcg. if (rtype = 21) weight = wtcg. execute. stata code gen weight=0 replace weight=wtw1 if rtype==10 replace weight=wtw1 if rtype==11 replace weight=wtw1 if rtype==12 replace weight=wtcg if rtype==20 replace weight=wtcg if rtype==21 step 3. next, check the weights for a gender x autonomy split (which will have six cells). the result will show the numbers to use as divisors in the fractions to renormalize. spss code means tables= weight by autonsu4 by ncgender /cells sum mean count stddev. stata code sort autonsu4 by autonsu4: su weight if ncgender==1 by autonsu4: su weight if ncgender==2 109 journal of small business strategy volume 22, number 1 110 table 3 continued: step 4. finally, renormalize the weights for each of these six cells. at this point the sum of the weights for a cell should agree with the number of individual respondents in that cell. spss code compute renormwt = 99. execute. if ((ncgender = 2) and (autonsu4 = 100)) renormwt = weight*(245/184.87). if ((ncgender = 2) and (autonsu4 = 200)) renormwt = weight*(41/33.95). if ((ncgender = 2) and (autonsu4 = 400)) renormwt = weight*(173/175.06). if ((ncgender = 1) and (autonsu4 = 100)) renormwt = weight*(235/291.68). if ((ncgender = 1) and (autonsu4 = 200)) renormwt = weight*(32/40.12). if ((ncgender = 1) and (autonsu4 = 400)) renormwt = weight*(145/160.14). execute. means tables= renormwt by autonsu4 by ncgender /cells sum mean count stddev. stata code gen renormwt=99 replace renormwt=weight*(245/184.87) if ncgender==2 & autonsu4==100 replace renormwt=weight*(41/33.95) if ncgender==2 & autonsu4==200 replace renormwt=weight*(173/175.06) if ncgender==2 & autonsu4==400 replace renormwt=weight*(235/291.68) if ncgender==1 & autonsu4==100 replace renormwt=weight*(32/40.12) if ncgender==1 & autonsu4==200 replace renormwt=weight*(145/160.15) if ncgender ==1 & autonsu4==400 sort autonsu4 by autonsu4: su renormwt if ncgender==1 by autonsu4: su renormwt if ncgender==2 this variable would be given a value of 1 if the source dataset was psed i, and a value of 2 if the source dataset was psed ii. this method is accomplished by the spss syntax in table 4. another way is to combine the datasets and then create a variable representing the source dataset. this method is accomplished in the stata syntax in table 4. note: to make the combining as widely useful as possible, we show how to combine the two original datasets (with no elimination of respondents from either dataset). journal of small business strategy volume 22, number 1 table 4. syntax for combining psed i and psed ii step 1. this syntax contains pathnames where datasets are to be found. those pathnames will differ from user to user depending on where both files are stored. first, download ercw14q.sav from the isr website (this will be data file 2b under the psed i heading). save the file onto your desktop. next, download psedii_scrn_abcdef.sav from the isr website. also save this file to your desktop. step 2. next, retrieve the ercw14q.sav dataset from your desktop and create a variable called psed to identify the source dataset. make all values of psed = 1. then save the file back to your desktop with a new name (the example uses “psed1.sav”). spss code get file='/users/kellyshaver/desktop/ercw14q.sav'. dataset name dataset1 window=front. compute psed = 1. execute. variable label psed 'source dataset'. value labels psed 1 'from psed1' 2 'from psed2'. execute. freq psed. save outfile='/users/kellyshaver/desktop/psed1.sav' /compressed. step 3. next, retrieve the psedii_scrn_abcdef dataset from your desktop, create a variable called psed and make all values of psed = 2. then save the file back to your desktop with a new name (the example uses “psed2.sav”). spss code get file='/users/kellyshaver/desktop/psedii_scrn_abcdef.sav'. dataset name dataset2 window=front. compute psed = 2. execute. variable label psed 'source dataset'. value labels psed 1 'from psed1' 2 'from psed2'. execute. freq psed. save outfile='/users/kellyshaver/desktop/psed2.sav' /compressed. now close psed2. 111 journal of small business strategy volume 22, number 1 112 table 4 continued: step 4. finally, with psed1.sav open, add psed2 to it. when the two files are combined, there should be a total of 2,475 people, which can be confirmed by checking the frequency of psed. of course, if you have previously eliminated respondents who did not return the psed i mail survey, the total number will be (871+1214) = 2,085. you will probably want to save this combined file so that you do not have to do the combining every time you care to do an analysis. spss code add files file='/users/kellyshaver/desktop/psed2.sav' file=*. execute. freq psed. stata code for the other method of combining format respid %20.0f gen sampid=respid sort sampid format sampid %20.0f append using "c:\documents and settings\davisae\my documents\research\psediihandbook\psedii_scrn_abcdef.dta" gen psed=sampid recode psed 328100000/537800160=1 50001/60000=2 third, once the datasets have been combined, it is essential to check all variables of interest using the data and the relevant codebook (codebooks for both datasets are also available as pdf files from the isr website). not all of the items included in psed i are present in psed ii, and the latter contains variables not present in the former. even when the variables are identical across datasets, their names will not be. variables in psed i have their waves identified by a leading capital letter (q for wave 1, r for wave 2, s for wave 3, and t for wave 4). in psed ii, by contrast, waves 1-6 are identified by the leading capital letters af. in the mail questionnaire for psed i, different conceptual variables appear together, based on the nature of their response scales (e.g.,most variables with 5-point scales were grouped together, whether or not they were conceptually related). in psed ii the variables are grouped in “modules,” but the placement of items into modules would not be done the same way by each of a dozen researchers interested in the topics. so if a variable of interest to you does not appear in the module where you expect it, don’t stop looking. it could simply be somewhere else. fourth, check both the codebook and the variable listing to make sure that a particular variable of interest (a) had the same stem and response scale from psed i to psed ii, and (b) that the numbers assigned to response alternatives were journal of small business strategy volume 22, number 1 identical from one dataset to the other (this is not always true). for example, in psed i the conceptual variable of entrepreneurial intensity was assessed with four items in the mail questionnaire. these are ql1d (q-ell-one-d) to ql1g: d. i would rather have my own business than pursue another promising career. e. there is no limit to how long i would give maximum effort to establish my business. f. my personal philosophy is to “do whatever it takes” to establish my own business. g. owning my own business is more important than spending time with my family. for each item there was a response scale with five alternatives: completely untrue (1), mostly untrue (2), it depends (3), mostly true (4), completely true (5) such that higher numbers represent greater levels of intensity. in psed ii, however, only two of the items were repeated (e and f) appearing as ay9 and ay10. here the response scale has six alternatives: strongly agree (1), agree (2), neither (3), disagree (4), strongly disagree (5) and not relevant (6). ignoring the last alternative, it is clear that higher numbers represent lesser levels of intensity. thus, in the combined dataset, a researcher would have only two items available and would have to reverse score those two. startup teams a distinctive feature of the psed is its inclusion of secondary founders in its surveys. most large-scale surveys of entrepreneurs and business owners only seek information from the primary owner of each business. thus, many entrepreneurs remain “hidden” from scholarly inquiry. by contrast, in the psed, the use of household telephone numbers as the sampling frame means that the originator of the entrepreneurial concept is just as likely to be interviewed as the fourth team member that he or she recruited to the startup. indeed, in psed ii, more than 200 respondents listed their primary role as being something other than “general management” or “everything” and more than 100 respondents reported that someone else on the team was in charge of daily operations in the business (davis, longest, kim, & aldrich 2009). therefore, researchers must be mindful that although the psed is richer for its inclusion of secondary entrepreneurs, those studying individual differences or personality should control for team characteristics because the attitudes and behaviors of an individual who initiated the startup process may be considerably different from an individual who was recruited into an ongoing nascent venture. psed i and ii contain information about team members’ demographic characteristics, human capital characteristics, contributions to the startup, and relationships among team members. all of this information is reported from the point of view and recollection of the respondent. in psed i, respondents were asked about their occupation, industry experience, entrepreneurial experience, and amounts of money and time invested in the business in different places depending on whether they were starting their business by themselves or as members of teams. for example, if someone new to the psed ran an analysis of q197 (the amount of 113 journal of small business strategy volume 22, number 1 money a respondent has invested in the startup), he or she would find only 376 responses out of the 830 potential answers. therefore, for anyone interested in studying teams or human capital and startup investments in the psed i, the most important variables are q210b_1 through q210b_5. these variables indicate whether the person about whom other questions are asked is the respondent or not. note that these variables do not capture human capital and startup investments across team members but simply restore missing values for respondents on teams. concluding remarks the two psed datasets are important resources for researchers who seek to examine the early stages of new business formation. indeed, reynolds and curtin (2008) identified 26 separate datasets related to business creation, including those from the bureau of labor statistics, the census bureau, dun & bradstreet, the internal revenue service, the kauffman foundation, the national opinion research center, the national science foundation, the small business administration, and the university of michigan. in their words, “only one extant research program, the panel study of entrepreneurial dynamics, provides detailed information on a representative national sample reflecting the firm creation process” (p. 162). the purpose of this article is to make the psed data more approachable by newcomers. in short, we hope we have provided an abbreviated diagram to help reduce the frustration of using the psed given that there is “some assembly required.” references davis, a. e., & shaver, k. g. (2009). social motives in the psed ii. in p. d. reynolds & r. t. curtin (eds.), new firm creation in the united states: initial explorations with the psed ii data set (pp.19-34). dordrecht, germany: springer. davis, a. e., longest, k. c., kim, p. h., & aldrich, h. e. (2009). owner contributions and equity. in p. d. reynolds & r. t. curtin (eds.), new firm creation in the united states: initial explorations with the psed ii data set (pp.71-94). dordrecht, germany: springer. frid, c., gordon, s., & davidsson, p. (2011). publications based on the panel study of entrepreneurial dynamics. downloaded from http://www.psed.isr.umich.edu/psed/d ocumentation, may 24, 2012. gartner, w. b., shaver, k. g., carter, n. m., & reynolds, p. d. (eds.) (2004). the handbook of entrepreneurial dynamics: the process of business creation. thousand oaks, ca: sage publications. reynolds, p. d. (2007). new firm creation in the u.s.: a psed i overview. . foundations and trends® in entrepreneurship, 3 (1), 1-149. reynolds, p. d., & curtin, r. t. (2008). business creation in the united states: panel study of entrepreneurial dynamics ii initial assessment. foundations and trends® in 114 http://www.psed.isr.umich.edu/psed/documentation http://www.psed.isr.umich.edu/psed/documentation journal of small business strategy volume 22, number 1 115 entrepreneurship, 4 (3), 155-307. doi 10.1561/0300000022. reynolds, p. d., & curtin, r. t. (2011). psed i, ii harmonized transitions, outcomes data set. downloaded from http://www.psed.isr.umich.edu/psed/d ocumentation, may 24, 2012. reynolds, p. d., & curtin, r. t. (eds.), new firm creation in the united states: initial explorations with the psed ii data set. dordrecht, germany: springer. kelly g. shaver is professor of entrepreneurial studies in the school of business at the college of charleston. his prior appointments include the college of william & mary, the national science foundation, and the entrepreneurship and small business research institute (esbri) in stockholm, sweden. shaver served as a member of the psed i executive committee and the psed ii advisory committee. his highly cited research has been supported by the ewing marion kauffman foundation, the national institute of mental health, and the national science foundation. amy e. davis is assistant professor of entrepreneurship at the college of charleston. her research interests include social networks, startup teams, biomedical entrepreneurship, and gender. she has published in entrepreneurship theory and practice, frontiers of entrepreneurship research, and work and occupations. mark s. kindy is the admiral pihl professor of neurosciences in the college of medicine at the medical university of south carolina and career research scientist at the ralph h. johnson va medical center. dr. kindy was on the faculty at the university of kentucky school of medicine, is a member of several societies and has served on numerous editorial boards and review committees. dr. kindy has been supported by the national institutes of health, national science foundation, veterans administration, department of defense, and the american heart association. carrie blair messal is an assistant professor of management in the school of business at the college of charleston. her passion is leader development. she has designed and executed components of the executive education leader development program at the university of tennessee-knoxville. she is the founder and director of the schottland scholars program, a leader development program for school of business undergraduates at the college of charleston. http://www.psed.isr.umich.edu/psed/documentation http://www.psed.isr.umich.edu/psed/documentation reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy vol. 25 ● no. 2 ● 2015 editor-in-chief william c. mcdowell middle tennessee state university senior editor dianne h. b. welsh university of north carolina — greensboro associate editors joshua aaron middle tennessee state university whitney o. peake western kentucky university raj mahto university of new mexico special section editor john batchelor university of west florida editorial assistant stacy aaron middle tennessee state university editorial review board semra ascigil middle east technical university joe r. bell university of arkansas at little rock david brennan university of st. thomas shawn carraher university of texas at dallas phillip e. davis east carolina university eugene fregetto university of illinois at chicago joseph geiger university of idaho armand gilinsky sonoma state university michael goldsby ball state university michael harris east carolina university david lyn hoffman metropolitan state college of denver jeffrey hornsby kansas state university jerry kudlats middle tennessee state university cathleen (folker) leitch wilfrid laurier university robert lussier springfield college matthew r. marvel ball state university brian mckenzie california state university, east bay thaddeus mcewen north carolina a&t state university abbas nadim university of new haven john e. prescott university of pittsburgh neal pruchansky keene state college jeff shields university of north carolina at ashville leo simpson seattle university matthew c. sonfield hofstra university harriet stephenson seattle university jude valdez university of texas at san antonio © copyright 2015 small business institute® issn 1081-8510 (online) issn 2380-1751 2015 sbi officers sbi small business institute ® president: william c. mcdowell middle tennessee state university william.mcdowell@mtsu.edu president-elect: patrick walker lindenwood university pwalker@lindenwood.edu vice president of programs: john h. batchelor university of west florida jbatchelor1@uwf.edu vice president of programs-elect: deborah cours california state university-northridge deborah.cours@csun.edu secretary/treasurer: joshua aaron middle tennessee state university joshua.aaron@mtsu.edu vice president of marketing and communications: whitney peake western kentucky university whitney.peake@wku.edu vice president of membership: michael harris east carolina university harrismi@ecu.ed vice president of research and publications: blake escudier university of fredericton blake@escudier.us vice president of development: joy griffin california state university – northridge joy.griffin@csun.edu immediate past president: john hendon university of arkansas – little rock jrhendon@ualr.edu editor, journal of small business strategy: william c. mcdowell middle tennessee state university william.mcdowell@mtsu.edu editor, small business institute® journal: michael harris east carolina university harrismi@ecu.edu mailto:harrismi@ecu.ed mailto:harrismi@ecu.ed mailto:blake@escudier.us mailto:blake@escudier.us mailto:harrismi@ecu.edu mailto:harrismi@ecu.edu stjategy errors small business managers make in product introduction decisions: what were they thinking? mark simon oakland university sitnongoakland.edu cynthia miree oakland university ntiree@oakland. edu kristina setzekorn oakland university setzekoroakland. edu amanda figon doner advertising afigon@donerus. corn abstract onc of thi. niost important strategic decisions nianngers of small businesses make is deciding what products to introduce. introducing the riglit product can improve firm performance. introducing the wrong product, or even the riglit produci at the wrong time can result in large losses and possiblyjeopardize a finn's longevity. it is especially important to examine small firm managers 'roduct introduction decisions because they often use less formal procedures, have more power and face less organizational inertia. thus, while their auionoiny may allow them to act on their conclusions more readily, a lack of formality may generate more judgment errors. therefore, it's vital to understand the issues that should be considered in new product introductions and explore some of the common misperceptions small firm managers have regarding these issues. toward this end, this study examined the success factors (component conditions that are prerequisites for the introduction's overall success) managers considered during recent new product introductions and their confidence in these factors'chievability. in an effort to determine where managers might be making their most critical decision errors, the auihors also examined which success factors were the most dijjicuh to achieve and which were most critical to overall product performance. 32 journal of small business strategy vol. /4, no. l spring/surnnrer 2003 introduction one of the most important strategic decisions small business managers make regards product introduction. introducing the nght product (at the right time) can enhance firm performance and generate competitive advantage, while introducing the wrong product may lead to large losses and even firm demise (brown & eisenhardt, 1995). while about half of new products 'ntroduced eventually fail, the economic outcome of the introduction is, in part, a function of managerial choices made early in the product introduction process (calantone, schmidt & song, 1996). product introductions, however, take place within a climate of uncertainty, and the information needed to make high quality decisions is often ambiguous and hard to obtain (simon, 1993). thus, it is not surprising that managers relying on faulty assumptions (cooper, 1975) often kill products that would otherwise succeed, or accept products destined to fail (cooper & kleinschmidt, 1996). it is especially important to examine the small firm managers'roduct introduction decisions because these managers often use less formal procedures, have more power, and face less organizational inertia. thus, their autonomy may allow them to act on their conclusions more readily. yet, a lack of formality may generate more judgment errors. finally, a small firm's narrow product hne makes any single product failure particularly devastating. yet, httle is known about the specific decision errors small firm managers make, and how these errors impact product performance (scott, 1999). specifically, there are two elements that may greatly affect the quality of the manager's product introduction decision. the first element relates to whether the manager of small companies considered all necessary success factors. these success factors refer to component conditions that are prerequisites for the introduction's overall success (e.g., competition, product quality, speed, rate of technological change, etc). neglecting these important issues can have disastrous consequences(solymossy, 2000). the second element refers to managers'onfidence in their ability to achieve the success factors they did consider. for example, managers who considered speed before introducing a product may have been completely confident or moderately confident in their ability to introduce the product quickly. excessive confidence, however, may cause managers to select ill-advised products that lead their firms down "pathways to disaster" (barnes, 1984). furthermore, initial unwarranted confidence may decrease the managers'ontingency planning and increase their up-front investments, thereby hampering their flexibility to make needed future adjustments (mahajian, 1992). of course managers, particularly those in small firms, may not have the time or the mental abilities to consider every important factor that might affect the success of their product, or to gauge the appropriate level of confidence in that factor's achievability. thus, it is important to isolate the specific success factors about which managers are most likely to err, and assess how those errors relate to the product's performance. consider the followmg scenario. before introducing a product, most managers may not consider the importance of speed to market, and the few who do may be overly confident in their ability to introduce the product quickly. yet, most product introductions encounter delays that impact their overall economic performance. to our knowledge, however, no previous research has examined the extent to which such patterns arise with regard to other important success factors. the following questions were therefore explored. 33 journal of sniall business strategy vol. /4, ?pro. i spring/suinrner 2003 when deciding to introduce a new product, 1) do small firm managers consider those particular success factors that are less frequently achieved' 2) do small firm managers consider those particular success factors that impact product perl'ormance most". 3) are managers of small firms more or less confident of achieving success factors that are less frequently achieved'? 4) are managers of small firms more or less confident of achieving success factors that impact performance most'! the model posed in figure 1 captures these issues. the following section describes the study's methodology. next, findings regarding each of the success factors are reported. finally, the major findings are summarized and managerial implications discussed. figure 1: the relationship among success factors, conlldence, problems and product performance success factors problems achieving considered success factor confidence in success factor impact achieving success on product performance factor methods sample and research design the sample was drawn from the georgia technology sourcebook, which contains a comprehensive list of georgia-based high technology companies. this study targeted small companies (less than 100 employees) in the computer industry that anticipated introducing a new product to the market within 30 days, or had just launched a product within the past three months. one hundred thirty-five companies met all of the study's selection criteria. the sample size was limited, due to the requirement that small company respondents in the midst of a new product introduction provide data twice during an 18-month period. this tradeoff is reasonable, given the study's exploratory nature, the task dioiculty and the multiple calls for longitudinal research linking managerial cognition to firm actions and performance (e.g., wiseman & catanach, 1997; thomas. clark & gioia, 1993). 34 journal of small business strategy vol. 14, no. l spiinglsummer 2003 the computer industry was selected because of its frequent product introductions. the sample was restricted to smaller firms due to their importance to the national economy. in the united states, small firms comprise over 80% of all businesses, provide 50% of the gross: domestic product, employ 50% of the private-sector work force, and generate over 75% of all new jobs (riddle, 1997). data about the different variables was 'collected in two waves (spanning a total of 18 months): in the first wave, managers from 65 firms agreed to participate in the research, i'r an initial response rate of 48%. the participating firms did not differ from non-participants m size (measured by number of employees) or age (p&i 10). in 38 of the firms, two managers played a crucial role in the product introduction decision. since this research focuses on the manager's perceptions (i.e., the unit of analysis'as the individual), both managers were included in the study, thereby generating a final sample size of 103 people. forty-eight of the respondents were the companies'eos or presidents, while the remaining 55 were one level below the ceo. fifty-five (85%) of the origina! firms participated in the second wave of data collection. during the first wave of data collection,'anagers were interviewed and their responses content analyzed to discover which success factors they considered in product introduction decisions, and their confidence in their ability to achieve those success factors. 'ppendix a provides a detailed description the specific steps taken during the interview process and content analysis. during the second wave of data collection, a mail survey was used to measure the extent to which a new product introduction encountered problems relating to these success factors. also, during this phase, data was collected on product introductions'verall performance, so the extent to which problems in achieving each success factor impacted overall performance could be analyzed. appendix b presents specific measures and where appropriate, the relevant inter-item reliability. measures success factors managers considered content analysis of the interviews indicated that, in the aggregate, managers considered six types of success factors. they are listed and described below. most managers, however, indicated they only actively considered two or three of these success factors. the factors are admittedly interrelated, suggesting the possibility that even if managers did not explicitly mention a success factor, they might have implicitly incorporated it into their considerations. however, managers'xplicit mention of an issue reflects what is at the top of their minds in both thought and action, and hence is most likely to impact performance. success factor description demand the product's ability to generate sufficient sales product quality the company's ability to develop a quality product. technological change the product's ability to cope with changing external tech. conditions. expense the company's ability control product related expenses. competition company's ability to cope with competitive reaction to its product. speed company's ability to get the product to market in a timely fashion. 35 jottrnol of siiiuill business sirrdegv vol. i4, ieo. i spring/surnnier 2003 level of confidence respondents'onfidence levels were measured on a scale of 0 to 3 using the following system: "3"=totally confident, "2" = very confident, "1"= moderately confident and "0"= not at all confident, totally confident respondents had no doubt that they would achieve a success factor. very congdent respondents also strongly believed that they would achieve a success factor, but acknowledged there was at least a small chance they were wrong. moderately confident respondents more actively acknowledged there was room for error, yet still indicated they were more likely than not to achieve the success factor. respondents who are not at all congdent believed that not attaining the success factor was as likely as, or more likely than attaining it. problems achieving success factors approximately 18 months after the original interviews, each company's managers most familiar with the product introduction were asked the extent to which their product introductions experienced difficulty in achieving each success factor.. because they were the most knowledgeable about the success factor and the product's outcome, these managers were best equipped to assess whether a given success factor was achieved. further, small firm researchers often use subjective performance assessments because the measures are highly correlated with more objective information (dess & robinson, 1984), and small firms o0en do not have the sophisticated accounting systems needed to provide "hard" data (covin, et al., 1990). specifically, the manager was mailed a survey containing seven-point likert-type multi-item scales which were used to measure whether an introduction experienced difficulty in achieving a given success factor. mean scores greater than four on any scale indicated that the product introduction encountered difficulty regarding that success factor. the specific items in the scales were adapted from past product introduction research (cooper & kleinschmidt, 1996) and are listed in appendix b. overall product performance while the aforementioned items were able to capture managers'ttainment of particular success factors, and provide insights into the types of problems encountered, they do not measure the product's overall performance level. thus, the survey also asked managers how satisfied they were with the product's general economic performance. specifically, the study averages the manager's responses to a two-item, seven-point, bipolar scale (a=. 84), based upon past product introduction research (cooper & kleinschmidt, 1996)]. results this study examined the four elements of the decision process for each success factor. namely, it investigated whether managers considered a success factor before introducing a product, how confident they were of the factor's achievability, how frequently they suffered introduction problems and the impact of those problems on the product's overall performance. table 1 presents these results. before discussing the findings regarding specific success factors, however, some insights may be gained by reviewing the overall results regarding the four elements of the decision process. the percentage of managers who considered a particular success factor varied greatly. specifically, managers considered the most mentioned success factor nine times more 36 journal of small business strategy vol. /4, no. l spnng/sranmer 2003 frequently than the least mentioned one. the managers'onfidence regarding their ability to achieve success factors was much less varied. regardless of the success factor, on average, managers fell between being moderately confident and very confident. in actuality, new products encountered problems achieving these success factors an average of 40% of the time with a range from 20% to 70%, depending upon the success factor. table i: elements of decision process success factors considered ave, of all d d product tech. c controli demand comp. speedsfs quality change 'xpense '/ m c't'7% 93% 50% 30% 19% 17% 10%success factor've. confidence 1.28 1.19 1.35 1.24 1.71 1.10 1.42 % managers citing success factor as a 41% 39% 56% 33% 24% 20% 70% problem'.31 -.38 -.20 -.19 -.38 -.36 -.29 level of confidence ave. % of d d product tech. c conrrol all sfs quality change 'xpense demand comp. speed % totally confident 25% 24% 24% 20% 33% 20% 42% % very confident 24% 21% 30% 27% 33% 20% 0% % moderately conf. 7% 7% 3% 12% 5% 10% 17% % not confident 45% 49% 43% 41% 29% 50% 42% 'ittll c% rd 48% 49% 45% 54% 47% 66% 40%confident to determine each success factor's impact on overall performance, the correlation between the extent of the product's failure to achieve each success factor with the manager's level of dissatisfaction with the product's overall economic performance (both of which were measured on i io 7 scales) was analyzed. regardless of the success factor analyzed, the extent of the problem was negatively associated with product perfonnance, as the correlations ranged from -.19 to -.38. these correlations were significant. are there specific patterns regarding some of the success factors that may cause concern? below is discussed each success factor in detail, specifically relaying information about where decision elements (consideration, confidence, problems and impact on performance) rank for one success factor relative to where they rank for the other success factors. figure 2 illustrates this information graphically. demand was the most considered success factor. in fact, almost all managers (93%) indicated that demand was critical to their product's success, as compared to the next highest rated factor, product quality, which only half the managers considered. one manager stated, "the existence of the market, that was my primary concern." another said, "...[if]we only move a small volume of the product, it's not worth our effort to do that..." (please note that none of the specific quotes from managers is being used as empirical corroboration for the findings, because these quotes are anecdotal instead, quotes have been included to clarify points and to increase this paper's readability). 37 journal ofsiiiall business so aregt vol. l4, no. l spring/suimner 2003 figure 2: ranking of decision elements by success factor 6 g% considered 5 4 3 e3avg. confid. 2 1 0 q% problems 3 tx n 3 g ns q tx n 0cl ~impact managers, however, expressed only moderate levels of confidence regarding their product's ability to achieve sufficient demand. as shown in figure 2, respondents were less confident of their product's ability to generate sales than they were of all the other success factors but one. in fact, half the time when managers mentioned demand, they indicated that they were not at all confident that it would be adequate. the doubt expressed by one manager who was introducing health care management software was typical. he said, "the challenge for us is that ...hospital administrators typically cannot, at first, understand the need for these systems; they are the ones we [really need to convince]. we have not learned how to do that." thus, it is understandable that a lack of confidence about demand at the outset led at least one manager to rely on analytical tools to guide his thoughts. he said, "we had to develop a comfort economic model. we had to ascertain that we could theoretically sell enough. we did the mathematical calculation." although managers frequently expressed little confidence in their ability to achieve adequate demand, they did not encounter an unusually high percentage of demand problems (39% for demand vs. 40% for all success factors). however, when they did encounter a demand problem, it was devastating to the product's overall financial performance. in fact, demand problems had almost twice the negative impact on overall product economic performance (r = -.38, p & .ooi) as some other success factors. this suggests it was appropriate for most managers to consider demand a critical success factor (wilson & anell, 1999). given the large number of managers who considered demand, their statements were more closely analyzed to see if demand could be broken into smaller categories. in the process, 38 journal of small business strategy vvl. /4, nv. i spring/summer 2003 three sub-categories of demand were uncovered: marketing, product features, and pricing. table 2 summarizes how frequently managers considered each of the sub-categories, how confident managers were in their achievability and how often they encountered problems relating to these demand subcategories. each of these subcategories is further explained below. table 2: demand sub-categories success factors considered demand marketing features pricing % managers citing success factor'3% 61% 31% 18% ave. confidence 1.19 1.03 1.36 1.00 % managers citing success factor as a problem'9% 48% 42% 35% level of confidence demand marketing features pricing % 'fotally conf. 24% 22% 28% 14% % very conf. 21% 16% 22% 29% % moderately conf. 7% 4% 8% 0% % not conf. 49% 58% 42% 57% % totally or very conf. 49% 38% 50% 43% marketing the most frequently mentioned (61%) subcategory within demand was the company's marketing expertise, that is, its ability to promote, sell and distribute the product. the following statement by the manager of a company that produces software for casinos reflects this emphasis. "the key to the success of the product ...is going to be ...[the ability] to market it to the gaming industry. the biggest thing is going to ...[be the ability] to educate them about the product." furthermore, the statements from another executive indicated that this belief was not product specific, "...with any product, you know, marketing is a key issue. here as well." the concern with marketing was consistent with lowry and chapman's (2000) finding that executives identified marketing as their biggest problem area. furthermore, executives often do not follow the marketing strategies prescribed in the literature (achua gc lussier, 2002). on average, managers expressed only moderate confidence regarding their company's marketing ability —a lower level than expressed about any of six main success factors, including overall demand. managers who considered the sub-category of marketing may have been right to express a lack of confidence in their ability, given that they encountered demand problems a higher portion of the time (48%) than all managers who considered demand (39%). product features within the general demand category, some managers explicitly considered whether their product contained features demanded by the market. most managers, however, mentioned product features less than one-third of the time (31%). on average, managers'onfidence regarding this success factor fell closer to moderately confident than to very confident. this 39 journal of stuaii business stratetw vol. /4, no. i spring/sutnnter 2003 was higher than the managers'verage confidence for each of the other two demand subcategories, and higher than the average expressed for all the success factors. this relatively high rating occurred partly because of the high proportion of'anagers (50%) who were totally confident or very confident that the product's features would generate demand. for example, one totally confident manager explained, "[it's] a very professional product; we'e going to a profession that requires it ...we [can] ensure that demand will be there." another used quite expressive terms when cxplaming why he was sure the market would value features that made his product easier to use. he stated, "[users] don't want to fool with [the software]. they want to go click, it's on, gct me joe, okay, away we go." this relatively high confidence level in the product's features was undeserved. managers considering product features encountered problems slightly more frequently (42%) than those that occurred for the entire demand category. as one manager explained, "well, i was more confident at the beginning than i was at the end. [the features] were not meeting the needs of the users." pricing prior to product introduction, 18% of the managers were concerned whether the market would accept the price they wanted to charge for the product. these managers reported a moderate confidence level, which was lower than the confidence for any of the other success factor categories or the demand sub-categories. in fact, a majority of managers who considered pricing issues reported being not at all confident (57%). for example, one manager who was very concerned about pricing simply stated, "we'e rolling the dice here." yet, the managers considering pricing actually encountered relatively few demand problems (35%). much to one manager's surprise, a customer told her that the product greatly affected the profitability of his other activities, thus "[price] really doesn't make much of a difference." product quality in addition to considering a product's overall demand, and its three associated subcategories, managers also considered whether their company could develop a quality product. as figure 2 illustrates, except for demand, managers (50%) considered product quality more frequently than they considered any other success factor in a product introduction. on average, the managers'onfidence regarding their ability to build a quality product fell between moderately confident and very confident, which was a higher average confidence level than most of the other success factors. furthermore, with the exception of competition, a higher percentage of managers (45%) who considered whether they could build a quality product were very or totally confident that they could deliver this particular factor. given this high confidence level, it is surprising that products encountered quality problems more oaen than they encountered problems with any other success factor except speed. the manufacture of a specialty toner cartridge used by banks and payroll companies serves as a dramatic illustration of the points above. when asked what key factors would be most important, if his product was to be a success, the manager answered in no uncertain terms that "quality has got to be consistent ...we'e got to maintain our quality." he further elaborated that he was "very confident" that the product would be high quality, explaining that he was having "no sleepless nights." further, he told the interviewer that his past experience in manufacturing similar products virtually guaranteed that this one would be reliable. yet, 18 months later, he indicated quite strongly that this product had extensive technological problems and contained many bugs. in one sense, however, this manager and those who fell into similar traps may have avoided total disaster, because although quality problems no doubt 40 journal of sntall busmess strategy vol. /4, no. i spring/sutnnter 2003 hurt total performance (r = —.20,p & .05), they have a smaller impact on overall performance than almost any of the other success factors. technological change thirty percent of the managers mtroducing a new product recognized that external technological change could affect their products'uccess. this made it the third most mentioned success factor. the respondents considering this factor were slightly above moderately confident, which was less than expressed for three of the other success factors. in the end, products exhibited relatively few problems relating to technological change (33%), and these problems had the least impact on overall product performance (r = -.19, p & .05), as compared to the other success factors. competition despite the fierce level of competition in the computer industry, figure 2 illustrates that managers considered competition less than they considered most of the other success factors. in fact, less than one manager in five cited the importance of their ability to distinguish themselves from competitors or to cope with the competitors'eactions. on average, those who did consider competition were very confident. this was a higher average score than any other success factor. more than two-thirds of the managers were very confident or totally confident in their competitive capability. for example, a manager in the sample decided to develop software to solve the accounting and database information requirements of property management firms. he claimed he knew the only competitor "very well" and that without question "there was nothing else [like their own product] out there in the market." fortunately for these managers, competition represented one of the lowest percentages of problems. unfortunately, however, if a problem related to competition did arise, it had a more damaging effect on performance (r = -.38, p & .001) than problems associated with any of the other success factors. the data seem to indicate that although problems with competition occur relatively infrequently, the failure to adequately consider competition, and the overconfidence shown when it is considered, might be quite dangerous. the company introducing the property management software may have learned this the hard way. eighteen months after the introduction, the managers'esponse to the survey indicated that competition had a major detrimental effect upon their product's economic performance. expenses prior to the product introduction, a low percentage of respondents (17%) explicitly considered the company's ability to control product related expenses. controlling expenses was considered less than any other success factor except speed. on average, the managers who did mention controlling expenses were only moderately confident in their ability to do so, which was the lowest level of confidence exhibited by managers. in fact, one-half of these managers were not at all confident. although one company performed extensive research and provided elaborate projections to determine that their product could be produced at a sufficiently low cost, the manager in charge seemingly dismissed all of the work, saying, "on any costing [projections] you'e got to add 20% to whatever your people come up with and use that as a baseline." while managers'onfidence in this category was relatively low, it is interesting that problems related to controlling expenses occurred less frequently (20%) than problems related to any other success factor, and only half as frequently as the average for all problems. one might conclude that the managers lacked confidence because failure to control expenses had one of the strongest negative impacts on product performance (r = -.36, r & .001). 41 journal uf sniall business stra tegv vol. l4, no. i spring/summer 2003 figure 3: % considered versus % problems 1.7 0.45 i 1.6 0.4i 1.5 i 0.35 3 14 i 3 0.3i /1.3 33 0.35 1.3 ~ 3 1.1 0.3 i 0.15 er t n ~ ri in x0 'o 3 o. ee i'l g g.em 3 3 impact ave. conf. speed speed was the least mentioned success factor (10%). however, managers reported the second highest confidence in this area, keeping it balanced between the very confident and moderately confident categories. actually, managers were twice as likely to be totally confident (42%) when they mentioned speed as when they considered other success factors. yet, managers encountered problems relating to speed (70%) much more often than they encountered problems with any of the other success factors. in fact, speed-related problems occurred almost twice as frequently as the average percentage for all the success factor problems. further, speed-related problems may wreak havoc on product performance (r =.29, p & .0 1) in that speed has a 50% greater impact than two other success factors. thus, it is not surprising that many managers were caught off guard when the introduction took longer than expected, and their product's economic performance suffered as a result. as one manager explained, "[the product introduction] is happening ...more slowly than i thought. i thought, [its rapid progress] was a no-brainer really." another manager explained their overall poor results stating, "the only problem would have been the timing i think. in high technology [industries] it always takes a lot longer than you expected. [we didn't] get it done in the timeframe that we originally estimated." discussion and recommendations the quality of a manager's decision process influences the success of his or her actions. for example, managers're-introduction consideration of a product's success factor should relate to that factor's achievability. the results of this study, however, indicate that managers may not be making high quality decisions in product introductions. figure 3 indicates that managers may be making major mistakes in assessing achievability of demand and speed to market. they usually consider demand and have no problems with it, but neglect speed and 42 journal of small business strategy vol. /4. //o. l spring/suminer 2003 usually have problems. furthermore, figure 4 suggests that there may be no relationship between the extent to which a success factor's problems impact overall performance, and the amount of confidence managers profess. figure 3: % considered versus % problems ~% considered 5 1 00%v 90% 80% f0% 8i 60'/e 50%v 40% ~ 30% ~e 20% 10% 0% p 'z 1.7 0.45 1.6 5 0.4 0.35 1.4 5 5 1.3 0.35 1.3 ~ e i.l 0.2 1 0.15 el c it ~ rie 0 vv 3 v m ee p o. ~impact avm conf. 43 jottrnnl nf snmll business strategy vol. i4, no. i spring/sunnner 2003 managers'requent mistakes related to specific success factors raised the question of whether they were making more general errors. an additional analysis was thus performed that compared the aggregate (i.e., without subdividing the data by success factor) percentage of problems that arose when managers expressed different levels of confidence. if managers made accurate assessments, they could be expected to encounter fewer problems when expressing greater confidence. figure 5, however, shows this was not the case. managers encountered problems just as frequently (42%) when they were totally confident as when they were not at all confident. furthermore, managers encountered difficulties most frequently (53%) when they were very confident, which was almost twice as often as when they were just moderately confident (28%). figure 5 also indicates the percentage of assumptions managers make at each confidence level. managers were only moderately confident of achieving success factors 7% of the time, indicating managers display the optimal confidence level with the least frequency! in contrast, managers were over three times more likely to be totally (25%) or very confident (24%), and over six times more likely to be not all confident (45%). figure 5: cuundcucc t.cvcu ~%success factors assumptions % success factor problems 60% 50% 40% 30% 20% 10% 0% ( rt c n u.0ri 0 i cl i uka it is beyond the scope of this study to determine exactly why managers encountered more or fewer problems at a given confidence level. however, the percentage of problems managers encounter at each confidence level probably depends upon two aspects: the extent to which 44 journal of small busmess strategy vol l4, no. l spring/sutttmer 2003 the inherent product characteristics hinder success factor achievement, and the extent to which the managers'verconfidence decreases their flexibihty to adapt to an unfolding reality. table 3 provides one possible explanation of these results. specifically it demonstrates that because the manager is only moderately confident, he or she may remain flexible enough to adapt to changing circumstances. as one manager who was moderately confident of achieving demand explained, "[my] entire [product] strategy is built around being flexible and adaptable. my responsibility is to ...be very opportunistic as we move along. when we take [the product) to market what will happen is clients will tell us, 'that's nice, but i need it to do this,'nd we can make the modification necessary." this anecdotal evidence is supported by several scholarly works. lei, hitt and bettis (1996) for example asserted that a product introduction's success depends upon expenmentation. similarly, krabuanrat & phelps (1998) argue that decision processes in dynamic environments, as found in technology industries, must facilitate learning and adaptation. table 3: level of confidence and % problems do inherent productlevel of is manager likelycharacteristics make sf b fl . v % of problemsconfidence to be flexible? achievement difficult? totally confident no no average % very confident somewhat no highest % moderately lowest % confident somewhat yes problems (28%) not confident yes yes average % problems (42%) why do very confident managers encounter so many more problems? possibly their product's characteristics may not make success factor achievement any more likely than the product characteristics of their moderately confident counterparts. furthermore, very confident managers'ertainty may lead to inflexibility. thus, it seems that the attitude expressed by the . following 'very confident'anager may ultimately lead to ruin. he stated, "you'e talking about an entrepreneur. sometimes we don't have our heads in the reality cloud at all. so from just a personal standpoint, i was very confident like everything that we have to do, if we do decide to do it, whether it's realistic or not, we have to be confident." yet, some researchers profess that overconfidence hurts product performance because it leads managers to act on faulty information (e.g., sykes & dunham, 1995). specifically, they argue that overconfidence causes managers to start down the wrong path (bames, 1984), ignore contingency planning (mahajan, 1992), and fail to monitor their assumptions (sykes & dunham, 1995). such inflexibility in dynamic markets could be devastating. as a caution to this sentiment, collectively, figure 5 may suggest that managers need to stay flexible even when they are totally confident or very confident, question whether they are being too optimistic when they are very confident, and avoid situations where they are not confident at all. given this tendency toward inflexibility, managers should try to remain flexible, even when confidence levels are high. in cases where maintaining cognitive flexibility is difficult, those managers should develop systematic checks and balances that will encourage system-wide flexibility. in addition to these general recommendations, the paper's findings also indicate that managers need to take deliberate steps regarding certain success factors. these recommendations are summarized in table 4. 45 journal of small business strategy vol l4, no. i syring/surnnter 2003 table 4: recommendations for management success factor recommendation demand (sub-factor — be wary of drawing conclusions about the product's features or product features) benefits teatures from small samples. emphasize quality in marketing efforts. demand (sub-factor— marketing) product quality proactively plan for delays based on product quality. technological change and develop and actively engage in a systematic competitive competition intelligence process speed 1. consider the up-front time spent planning as a valuable investment that will yield time saving dividends later. 2. speed is an important success factor that merits careful attention and further analysis. general recommendation: remain flexible very confident managers'ertainty may lead to inflexibility. as a result, managers should seek to remain flexible, even when confidence levels are high. avoid basing decisions on small samples. use external advisors. utilize dialectical inquiry or devil's advocacy. imagine situations where assumptions underlying decisions don't hold. more specifically, managers may need to adjust their actions as they relate to two subcategories within the demand success factor. those considering customer preferences for their new product's features displayed above average confidence, but often ran into demand problems. this finding reinforces researchers'oncern that managers often fall in love with their own products, only hear what they want to hear, and rely on their gut instinct or feedback from only one or two customers rather than on careful analysis (huber & power, 1985; simon, houghton & aquino, 2000). for example, one manager in the sample justified his extreme confidence that the market would appreciate his product's ease of use by explaining, "the one customer that we did visit, found our [product] to be extremely easy to use." this illustrates why managers should be wary of drawing conclusions about their product's features or benefits from small samples. interestingly, the opposite pattern arose for managers who emphasized the importance of the market accepting the price they charged for their product, even when the market was not price sensitive. the low confidence level of the manager who stated, "everyone is cost conscious in this day and age," mirrored the statements and attitudes of others. this misplaced confidence in the marketability of certain product features and over emphasis on price, is especially alarming for smaller firms, such as those in this sample. these firms often pursue focus strategies, and focus strategies are most effective when managers emphasize specialty, rather than low cost, products (mcdougall, covin, robinson & herron, 1994). thus, managers should emphasize quality when they position their products in the marketplace as opposed to price. a pernicious pattern became apparent regarding the product quality success factor. while many managers recognized the importance of product quality to their introduction's success, 46 jottrnal of small business snareg3 vol l4, ivo. i spring/summer 2003 most of them were "very" or "totally" confident that their company could provide a quality product. yet, products encountered problems related to "bugs" and reliability, more frequently than nearly any other success factor. this suggests that managers may need to either re-evaluate their company's capabilities or re-assess the difticulty in developing quality high technology products. even with the best-designed products, quality issues can still be pervasive resulting in quality-related delays. thus, when introducing new products,'managers should plan for these delays as a part of the new product introduction cycle. the destructive impact that competition can have on overall product performance suggests that managers may need to consider competition more carefully when introducing new products. surprisingly, while demand and competition have the same impact on product performance, almost five times as many managers considered the former as opposed to the latter. further, managers expressed greater confidence in their ability to handle the competition than they expressed regarding any other success factor. thus, it is not surprising that other studies found new product failures to be due to firmly entrenched competitors and managers'nderestimating these existing firms'eactions (zajac & bazerman, 1991). thus, before introducing a product, the company should build a competitive intelligence system to methodically assess its competitive environment (in particular its competition), how this competition will probably react and their relevant strengths and weaknesses (prescott & smith, 1987). although such an assessment may be costly relative to the size of a smaller firm's budget, the strong impact of competition on performance suggests that managers may find it more expensive not to gather this information (prescott & miree, 1998). finally, by being creative and innovative in their intelhgence gathering efforts, small company managers can radically reduce their costs. of all the results this study generated, the ones relating to speed may have the greatest managerial implications. although the fewest number of managers (only i in 10) initially considered speed to niarket, almost 70% of the products did not proceed in a timely fashion, a far higher percentage than any other success factor! furthermore, the managers were more confident that they would not encounter problems relating to speed than problems related to almost any other success factor. fortunately for managers, a plethora of research exists that provides direction in decreasing product development time (cooper & kleinschmidt, 1994). for example, managers should use a cross-functional project team led by a strong product champion. similarly, one ironic finding is that teams spending more time and eitort on up-front homework, such as performing initial product screening, and detailed financial analysis, actually saved time later. thus, managers should consider the planning time spent up-front a valuable investment that will yield time saving dividends in the future. of course recognizing the importance of speed is a prerequisite condition to taking these steps. in this study, the 10% of managers who did consider speed only encountered speedrelated problems 40% of time, as compared to the other managers who encountered these problems 73% of time. managers should recognize speed is an important success factor that merits further analysis and careful attention. in general, there are several specific steps to avoid becoming overconfident and to stay flexible. first, they should avoid basing decision upon the opinions of just a few people. they should also rely more on external advisors (lowry & chapman, 2000). they should, also modify group decision-making processes (russo & schoemaker, 1992) such as devil' advocacy or dialectical inquiry (schweiger, sanberg & ragan, 1986). finally, it may also 47 jonrrial of sinail business strategy vol. /4, itto. i spring/stnnmer 2003 prove effective to list reasons for and against reaching a particular judgment and imagine scenarios where one's assumptions don't hold (keren, 1991). limitations and future research suggestions the reader should be aware that the demands placed on the study's respondents, such as being in a small company that had just introduced a new product and providing data twice dunng a year and a half period, linuted the study's sample size. given this study's exploratory nature, the multiple calls to conduct longitudinal research hnking managenal cognition to firm actions and perfomiance (e.g., wiseman & catanach, 1997), and the difficulty of this task, the tradeoff is reasonable. however, future research should strive to include larger samples. it would also be interesting to consider firms in other industry sectors. this hne of inquiry could be extended by considering underlying dynamics, especially flexibility and confidence. other success factors, other small firm actions and other confidence-mitigating factors could also be examined. in summary, while it would be ideal for managers to consider and reach accurate assessments about every factor that might even be potentially important to a new product's success, there are limits to a manager's time and mental capabilities. this study, therefore, sought to focus the manager's attention by uncovering some of the more common and important decision errors managers may be making in new product introductions. references achua, c. f. & lussier, r. n. 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(1975). why new industrial products fail. industrial marketing managemenr, 4, 315-326. covin, j., prescott, j. & slevin, d. (1990). the effects of technological sophistication on strategic profiles, structure and firm performance. journal of management studies, 27 (5), 485-509. dess, g. g. & robinson, r. r. jr. (1984). measuring organizational performance in the absence of objective measures: the case of the privately held firm and conglomerate business unit. strategic management journal, 4 (3), 265-273. dougherty, d. (1990). understanding new markets for new products. strategic management journal, 29, 59-78. haley, u. c. v. & stumpf, s. a. (1989). cognitive trails in strategic decision-making: linking theories of personalities and cognitions. journal of management studies, 26 (5), 477-497. houghton, s., simon, m., aquino, k., & goldberg, c. (2000). no safety in numbers: persistence of biases and their effects on team risk perception and team decision-making. group and organization management: dn international journal, 25 (4), 325-353. 48 journal of small busuress strategy vol. /4, iva / spring/summer 2003 huber, g. p. & power, d. j. (1985). retrospective reports of strategic level managers. guidelines for increasing their accuracy. strategic management journo/,6, 171-180. keren, g. (1991). calibration and probability judgments: conceptual and methodological issues, atria psychological, 77, 217-273 lei, d., hitt, m.a., & bettis, r. (1996). dynamic core competences through metalearning and strategic context. journal of managenient, 22 (4). 549-569. lowry, j. &. chapman, j. (2000). critical business problems and advisors. journal of small business strategy, //(1), 64-73. mahajan, j. 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(1995). critical assumptions planning: a practical tool for managing business development risk. journal of business venturing, 10, 413-424. wilson timothy l. & anell barbro i. (1999). business service firms and market share. journal ofsmall business strategy, /0 (1) 41-53. winograd, t. (1983) language as a cognitive process. reading, ma: addison-wesley wiseman, r.m. & catanach, a.h. jr. (1997). a longitudinal disaggregation of operational risk under changing regulations: evidence from the savings and loan industry, academy of management journal, 40 (4), 799-830. zajac, e. j. & bazermanjm. h. (1991). blind spots in industry and competitor analysis. implications of interfirm (mis) perceptions for strategic decisions. academy of management review, /6'1), 37-56. 49 joninial of small business srrareko vol. i4, no. i spri nglsunnncr 2003 appendix a intervieiv and content analysis procedure derelopineni and use of liireniew prorocols semi-structured interviews were relied upon to collect data on the success factors managers identified and their level of confidence in each success factor. to increase the validity and the reliability of the interview process, the interview protocol was pre-tested with eight product introduction or industry experts (including two directors of risk assessment centers), an academic specializing in the computer industry, and six computer company executives who were not included in the final sample. based on the pre-test feedback, the interviewing protocol was refined to assure that the questions, and the way they were asked, were clear, relevant, not leading, and not value-laden. after finalizing the interview protocols, the lead author spent four hours training three mba students, who conducted most of the interviews. during the training, the interviewers were taught to probe for more detail without leading the interviewee, to clarify interview questions, to distinguish between complete and incomplete answers, and to provide the interviewee with specific instructions prior to starting an interview. covering these issues increased the reliability of the study by ensuring that the interviewers acted in a similar manner. it also increased the validity of the interviewees'esponses because the interviewer could clarify misinterpretations and elicit complete answers without coloring a response. finally, to assure a standardized process, the lead author accompanied each student on his or her first five interviews, after which the interviewers proceeded independently with the remaining interviews. the interviews were conducted in the manager's office and lasted, on average, 30 minutes. interviews were taped and later transcribed, thereby eliminating any inaccuracy that might have taken place due to faulty memory or incomplete note taking. to guard against potential bias from the use of retrospective reports, huber and power's (1985) recommendations were followed. first, interviews were conducted as close as possible to the time the product introduction decision was made. second, interviews were limited to the most knowledgeable individuals, namely the one or two managers most involved in each decision. third, the participants were motivated to provide valid information by a confidentiality guarantee and by an explanation of how the study's result might be useful to them. rapport was built with the executives through office visits and with unexpected gifts, (two free movie tickets). lastly, the decisions'mportance suggests that the executives'ecollections were accurate. conrenr analysis procedure interview responses were then content analyzed to determine which success factors managers considered. content analysis is a valid way to uncover and measure underlying decision processes and cognitions because the language an individual uses reflects his or her cognitions (winograd, 1983). studies with research questions and constructs similar to this one, have successfully utilized content analysis (dougherty, 1990; haley & stumpf, 1989). to develop reliable and valid scores, student coders were not used because their inexperience might lessen their ability to make fine distinctions (morris, 1994). instead, it was deemed more appropriate that the two lead researchers conduct the content analysis, given their areas of expertise (both have ph.d.s in management and specialize in decision making and product introduction research). they reviewed the relevant literature and trained for 50 hours by reading about content analysis, practicing coding, and receiving coding performance feedback. 50 journal ofsinall busmess strategy vol l4. iito l spring/summer 2003 the four-step interview coding procedure recommended by morris (1994) was followed. first, the type of text umt to be analyzed was determined, where text units could be individual'ords, ivhole sentences or paragraphs. using smaller units increases the reliability of coding, but may cause coders to misinterpret information by ignoring context.'ndividual sentences, or occasionally stnngs of sentences, contained discrete ideas, and provided the ideal trade off became the unit of analysis. within the transcripts, all the text units that indicated which success factor the manager considered were therefore identified. second, the mterview text units were reviewed to develop a coding taxonomy (e.g., did managers consider whether the product could generate suffictent sales). certain themes emerged consistently from the interview text units from which we generated a preliminary list of the success factor categories. this list was elaborated and refined over several months by discussing randomly selected interview notes that were not included in the final sample. the discussions focused on issues such as which themes should contain particular kinds of interview information, why certain classification decisions should be made, and which codes should be assigned. extensive definitions were written up, both inclusive and exclusive, for each emerging category. the definitions became the basis for the initial coding rules. third, a hold out sample was used to practice coding. discrepancies were reconciled by elaborating on the reasoning. this process increased both the reliability and validity of the sconng because it enabled greater mutual understanding of the codes. the final coding taxonomy proved to be both comprehensive and reliably coded. finally, each interview was coded independently, based on the coding rules, to place each text'nit that de'scribed a success factor into a success factor category. the inter-rater reliability was 98%. after finishmg the coding to determine which success factors the managers considered, 'an identical content analysis procedure was followed to determine how confident managers were that they could achieve that success factor. the inter-rater reliability was 97%. appendix b measures achievin success factors achiev'ement of success factors was measured using 7-point likert-type scales that ranged from "strongly disagree" to "strongly agree" ~dd =. 74 it was harder than anticipated to convince people to purchase our product. a lack of demand hindered our product sales. product uali a=. 77 the product was bug-free. * the product introduction had technical or rad problems. technolo ical chan e a=. 80 the product introduction was hindered because of external technological changes. technological change made our introduction outdated sooner than we expected.~c=.66 competition had a major detrimental effect upon our product introduction. the actions of competitors hampered our product sales.~e=.4 7 the product introduction was much more expensive than anticipated. the product introduction led to major cash flow problems. 51 journal of small business strategy vol l4, no. i spring/summer 2003 ~sd =. 70 the product introduction proceeded much slower than anticipated. v the product introduction stayed on (or ahead) of schedule. we moved quickly when introducing the product. overall product performance product performance was measured using the bipolar scale below (a=. 84). the product ... has led to a major has not led to a major increase in overall increase in overall company financial performance. 1 2 3 4 5 6 7 company financial performance. fell far below profit goals. 1 2 3 4 5 6 7 far exceeded profit goals. ~ items reverse coded mark simon is an associate professor of strategic management at oakland university. he received his ph.d. from georgia state university. his research interests include risk perceprion and cognitive biases as they relate to proacti ve firm behaviors. cynthia miree is an assistant professor of management at oakland university. her research focuses on competitive intelligence (c/) and specifically explores how the ci process can be used by organizations to facilitate the coordination of strategic and tactical intelligence in the sales and marketing functions. kristina setzekorn is an assistant professor of m. i. s. at oakland university. she earned her ph.d. from southern illinois university in december 2000. she typically teaches introduction to mis at both the undergraduate and graduate levels, as well as an it strategy course at both the graduate and undergraduate levels. her research interests involve interorganizational information systems and information sharing, currently as they apply to supply chain management and e-government. amanda figon worked in management field for over ten years and is currently pursuing a career as a psychotherapist. she received a ba in psychology at oakland university and her ms iv at the university of michigan. her primary research interests relate to decision making and anxi ety. 52 journal of small business strategy                                  vol. 21, no. 1 spring/summer 2010        99              book review creating entrepreneurs: making miracles happen edited by fred kiesner reviewed by fred fry bradley university ffry@bradley.edu when i heard that my old friend fred kiesner was writing a book, i knew it would be good. i knew this because kiesner only does good work. he almost single-handedly built the entrepreneurship program at loyola marymount university into an awardwinning program. he has been an entrepreneur, and currently holds the conrad hilton chair of entrepreneurship at lmu. he has been actively involved in entrepreneurship education for forty years. he has been president of the u.s. association of small business and entrepreneurship (usasbe) and the international council of small business (icsb). during his career, he has been a mentor to literally thousands of potential entrepreneurs and many faculty members. so, the question of whether the book would be good or not was not the main issue. the bigger question involved the sort of book it would be. the answer is that it is a “fred kiesner book.” only if you know fred personally will you understand the nuance of that statement. kiesner is a professional, a quality researcher, and an excellent teacher. but he is also a fun-loving individual who has a story for every occasion and can entertain colleagues and students alike for hours on end. once you understand this, then you know that creating entrepreneurs is a “fred kiesner book.” let me explain that in more depth. one of my personal annoyances in professional writing is large numbers of exclamation marks. i have always held the theory that quality of writing is inversely proportional to the number of exclamation marks. to me, they are the bane of good writing. the same goes for bolded text. bolded text is, in my mind, simply the result of the self-important and slightly warped mind of some s trateg y  journal of small business    journal of small business strategy                                  vol. 21, no. 1 spring/summer 2010      100    writers who think that every other sentence is so overwhelmingly wonderful that it must be bolded and end in an exclamation mark. yet, kiesner’s book is purposely full of exclamation marks and bolded text. however, that is part of fred kiesner’s personality and part of a “fred kiesner book.” in fact, kiesner explicitly states in the introduction of creating entrepreneurs that he will have exclamation marks and bolded text. acknowledging this, i accepted these annoyances and moved on. in my years of teaching entrepreneurship and strategy, i have always emphasized the need to know your target market. in fact, one of the biggest causes of failure among entrepreneurs is to misread their target markets. as i read creating entrepreneurs, i looked for the target market kiesner had in mind. the book is clearly not a textbook, nor is it a typical trade book like you might find for sale at barnes and noble or amazon. it is a book of readings, including contributions from kiesner himself. fortunately, in the contributions from other writers – all experts in the field – there are not as many exclamation marks and bolded text, although some of the bolded text that appears in those chapters seems to be gratuitous and misplaced. the target market, then, seems to be entrepreneurship professors and consultants who would buy the book for casual reading, perhaps over the holidays or summer. i am not convinced that this is a large market, but i doubt kiesner is terribly concerned about that. the book was clearly a fun project for him, and you can literally see his enjoyment in the chapters he wrote. the chapter contributors are well-known, respected educators and researchers, as well as a few entrepreneurs. kiesner states in the introduction that one should not necessarily read the book in order. he suggests reading a couple chapters at a time and in any order desired. i agree. trying to read it in some sort of theoryevolution order would be truly frustrating and would cause one to miss the thrust of the book. there is no logic in the order of the chapters, only in the topics included, which kiesner felt were important. in most cases, i agree. don kuratko wrote a chapter on entrepreneurship at indiana university. chuck hofer wrote a chapter on business plans, something that most readers already know well but can benefit from seeing another perspective. leo dana, who has authored scores of articles on entrepreneurship in international settings, wrote about entrepreneurship in asia. ted o’keeffe wrote about entrepreneurship in ireland. arthur gross-schaefer contributed a chapter on ethics – an important topic in today’s world. several different authors wrote about youth entrepreneurship. there are chapters on entrepreneurship centers, social entrepreneurship, global entrepreneurship, corporate entrepreneurship, and entrepreneurial training, which are all current, important topics. some of the chapters, including some of kiesner’s, are motivational in nature, while others seem to be more descriptive. the book does not break journal of small business strategy                                  vol. 21, no. 1 spring/summer 2010      101    new ground for members of its target market, but it is not intended to be a ground-breaking treatise. it means to be entertaining through its plethora of nuggets of knowledge or what some people call take-aways – bits of information that readers can use in their own lectures, workshops, or discussions with clients. overall, i found creating entrepreneurs: making miracles happen to be quite enjoyable and worthwhile. i recommend it highly, even with those exclamation marks and bolded sentences. reproduced with permission of the copyright owner. further reproduction prohibited without permission. reproduced with permission of the copyright owner. further reproduction prohibited without permission. the ten faces of innovation fregetto, eugene journal of small business strategy; fall 2005/winter 2006; 16, 2; abi/inform complete pg. 79 book review the ten faces of innovation by tom kelley with jonathan littman isbn 0-385-51207-4 reviewed by eugene fregetto university of illinois at chicago fregetto@uic.edu for decades we have recognized that small businesses owners need to create a "learning" organization in order to both innovate and accelerate the innovation process. the challenge is how to attain this goal. the ten faces of innovation describes a clear and doable framework for designing and managing such an organization. tom kelley offers the framework by providing an inside glimpse at ideo's success and by putting a human face on the innovation process. small business owners who judge a book by its cover may overlook this book, because the cover shows the image of ten different people each having a distinctive attribute. many owners have fewer than ten employees or may have little extra staff time to devote to only innovation. on the other hand, the small business owner who looks beyond the cover will find how to overcome the frequently played "devil advocate's" role that can "drown out a new initiative in negativity." more importantly, the owner will find a practical approach to transforming their company into a company with "360 degrees of innovation" through the help of kelley's ten people-centric approach. tom kelley's people-centric approach to innovation is refreshing and the key to its practicality. in addition, kelley's peoplecentric approach bumps up against the typical product innovation model that seeks organizational structures and processes so 79 that any employee can help the organization innovate. kelley believes the roles that people play are central to any company innovation and the heart of the process should facilitate their roles. kelley's approach is also refreshing, because it does not depend on the sole entrepreneur as the only source of inspiration, vision, and innovation. instead kelley describes innovation as the synergy of ten distinct roles that can be played by ten or fewer people. kelley's people-centric approach fully incorporates all the positive aspects of diversity. research has clearly shown that diversity of employees is a key part of every leading company. kelley's approach focuses that diversity on innovation by identifying ten different roles: the anthropologist who observes how people interact physically and emotionally with the company's products and services; the experimenter who prototypes new ideas continuously and learning by a enlightened trial and error process; the cross-pollinator who explores other industries and cultures for revelations that uniquely fit the company; the hurdler who knows the path to innovation is strewn with obstacles and develops a knack for overcoming the roadblocks; the collaborator who brings eclectic groups together; the director who gathers together talented people and sparks their creative talents; the experience architect who designs compelling experiences that go beyond mere functionality; the set designers who creates reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy the stage for the innovation team; the caregiver who anticipates customer needs and ready to look after them; the storyteller who builds both internal morale and external awareness through compelling narratives. these ten roles are the heart of a company's ability to learn and remind us that a company does not learn. instead, the people in the company learn. likewise, the company does not have a culture and organizational memory. instead, the people in the company create its culture and remember its past successes and failures. consequently, kelley organizes the ten roles into three sets of learning roles essential to innovation. the anthropologist, experimenter, and crosspollinator keep the company from becoming too internally focused and humble enough to question their own view of the world. the hurdler, collaborator, and director are the organizers who are also savvy about the counterintuitive process of how the company may need to move ideas forward. lastly, the experience architect, set designer, caregiver, and storyteller apply the insights gained from other learning roles to empower the company to make innovation happen. as general manager of the silicon valleybased design firm ideo, kelley tells the secrets of how his imaginative company uses their employees' innovative energy to produce one innovative success after another, and he richly illustrates those secrets with new product and service ideas as well as explanations of how the ten roles work together to produce their continuous steam of innovation. the book clearly supports kelley's underlying message: "innovation is definitely not self-starting or selfperpetuating. people make it happen through their imagination, willpower, and perseverance. . . . the only real path to innovation is through people." vol. 16. no. 2 fa/i/winter 200512006 80 s a perceived role of offshore outsourcing strategy in achieving success of technology start-ups jayaram madireddy colorado technical university dr.jmadireddy@gmail.com abstract this qualitative phenomenological research paper addressed the problem of lack of understanding about the reasons of the continuing underachievement in success of offshore outsourcing strategies. the purpose of this paper was to examine the perceived effect of offshore outsourcing strategies on success of technology start-ups. the study involved an exploration into the experiences of 43 organizational leaders and entrepreneurs who had experience with offshore outsourcing activities within technology start-ups from silicon valley, california. the study utilized semistructured in-depth interviews to collect the data. data were managed with nvivo 8.0 software for data analysis. the findings reveal that offshore outsourcing strategy could help technology start-ups to achieve success if they monitor and control the outsourcing activities. the findings suggest that technology start-ups may wish to consider setting up a design center or branch in the asia pacific region as an alternative to offshore outsourcing. the findings of the study could contribute to the survival and success of start-ups through success of outsourcing, which in turn contributes to society and the growth of economy through the retention of existing jobs and the creation of new jobs, and new innovation. keywords: small business, start-up, success, outsourcing, offshore outsourcing, success strategy introduction as globalization intensifies, organizations are facing greater pressure to expand their operations, enhance productivity, and lower the operational cost. offshore outsourcing is a strategy through which organizations can achieve cost efficiencies. by definition, offshore outsourcing is a strategy where an organization contracts some work to an independent organization based in another nation to accelerate product development by taking advantage of cost reduction and the local talent pool (bhagwati, panagariya, & trategy   journal of small business  59 journal of small business strategy volume 21, number 2 srinivasan, 2004). in the initial stage of inception, technology start-up organizations mainly depend on a single, innovative product or service (nobeoka & cusumano, 1997). it is crucial for technology start-ups to outsource some functional tasks and come out with the product in time to meet the high demands of the market. the use of offshore outsourcing strategies may help organizations to achieve success of projects, produce products on time, and generate revenue (kakabadse, 2005). the failure of offshore outsourcing strategies by start-ups causes financial loss to financially limited start-ups, along with a possible risk of missing the opportunity to release products in time due to the loss of project time. earlier researchers estimated that 70% of offshore outsourcing tasks are either rescinded or re-negotiated (ferguson, 2004). the failure of offshore outsourcing strategy is a major concern for entrepreneurs and organizational leaders of small business organizations, including technology start-ups. even though the failure of offshore outsourcing affects organizations negatively, in a technology start-up, the failure could be a heavy loss both financially and in time-to-market aspects. hence, this paper includes a focus on technology start-ups. the current qualitative phenomenological research paper examined if start-ups can use offshore outsourcing to benefit from this strategy at the cost of potential risks; and if so, how the adoption of offshore outsourcing strategies could affect the success of technology start-ups. this paper also includes an examination of how to overcome the challenges and risks involved in offshore outsourcing to achieve success of offshore outsourcing; and finally, the perceived role of alternate solutions for offshore outsourcing, such as setting-up a design center or branch in overseas to achieve success of start-ups. the degree to which the outsourcing objectives are achieved is defined as success of offshore outsourcing (misra, 2004). technology start-ups and offshore outsourcing. the emergence of start-up organizations into an industry enables the evolution of the industry; is crucial for economic development in general; and results in innovation through the introduction of new products (harris & gibson, 2006). start-up organizations are significant to any nation’s economic growth because they result in the creation of jobs and technological innovation (harris, grubb, & hebert, 2005). failure of start-ups is a major concern for entrepreneurs, venture capitalists, and economic growth professionals (taylor & seanard, 2004). the major benefits of offshore outsourcing include (a) a reduction in operating cost (oke, maltz, & christiansen, 2009), (b) reduction or transfer of the risk to the offshore outsourcing provider who has capabilities to manage the risks using their core competencies (farrell, 2004; taylor, 2006), (c) globalization and intense worldwide presence to meet worldwide competition (kumar, van fenema, & von glinow, 2009), (d) improvement in quality (beaumont & costa, 2002), (e) savings in project time (denny, mani, nadella, swaminathan, & samdal, 2008), and (f) a chance to refocus on core business and technology (cecere, 2005). both large and small organizations use offshore outsourcing as a strategy to gain an advantage over the competition and reduce costs. however, the offshore outsourcing includes several risks and challenges as well. evidence indicated offshore outsourcing 60 journal of small business strategy volume 21, number 2 organizations face many challenges such as management of intellectual property (ip) and capital, which are critical to an organization’s core business and survival (barthelemy, 2003). evidence purported that a large scope exists for leakage of innovation ideas and information technology through offshore outsourcing (kleim, 2004). other prominent disadvantages of offshore outsourcing include (a) a loss of quality control because offshore outsourcing reduces the amount of control the organization has over the quality of the services outsourced, (b) difficulty in reversing offshore outsourcing decisions, (c) concerns regarding the security of the data (burns, 2008), and (d) technical obsolescence (swartz, 2004). swart and kinnie (2003) purported knowledge and information transfer freely to the outside world as a result of offshore outsourcing. because innovation ideas and technology are important for any start-up, the offshore outsourcing can be a risky strategy for startups. the continuing failure of offshore outsourcing indicates the concrete reasons behind such failures are still unknown, despite significant research contributions in the field. an empirical research on offshore outsourcing strategies in technology startups is lacking. moreover, all the organizations that adopt offshore outsourcing strategy face challenges. a need exists for a study to aid in understanding how to overcome the problems and achieve success in offshore outsourcing strategy by start-ups. problem and purpose statement. the problem addressed in this paper is the continuing underachievement in success of offshore outsourcing strategies, which often results in the failure of start-up organizations (kang, wu, & hong, 2009). according to the latest bain survey report, more than half of the organizations that have adopted offshore outsourcing strategy have failed to meet the expected benefits (aron & singh, 2005). the problems associated with failure of offshore outsourcing strategy include complaints on defected products and bad quality, employee dissatisfaction, lost competencies, and leakage of intellectual property (hameri & tunkelo, 2009). the failure of an offshore outsourcing strategy in a technology start-up might lead to failure of project, which in turn could lead to failure of start-up. the purpose of this paper was to explore the experiences of 43 organizational leaders and entrepreneurs who were involved with both successful and failed offshore outsourcing activities within technology start-up organizations located in silicon valley, california; as well as to examine three specific aspects. these aspects include examination of (a) the perceived effect of offshore outsourcing strategies on success of technology start-ups; (b) how to achieve success of offshore outsourcing by overcoming the challenges and risks involved in offshore outsourcing strategy by technology start-ups; and (c) the perceived effect of alternate solution for offshore outsourcing such as setting-up an overseas design center or branch on the success of technology start-ups. the selected start-ups included companies from the hardware, software, and semiconductor industries. the general population of the current study was the organizational leaders and entrepreneurs within technology start-ups. these organizational leaders were the formal authorities who were involved in outsourcing activities within the start-up organization. even though success in offshore outsourcing is significant for all organizations, success in offshore 61 journal of small business strategy volume 21, number 2 outsourcing is crucial for technology startups. hence, the main focus was given to technology start-ups. research methodology to address the research shortfall, qualitative phenomenological study was used to explore the central phenomenon of achieving success of offshore outsourcing strategies by technology start-ups. as the nature of the current study was exploratory, and the use of qualitative study allows a focus on understanding the problem in detail based on participants’ experiences and insights, the qualitative research method was appropriate for the current study (vishnevsky & beanlands, 2004). because the intent of the current paper was not to examine the relationships among the categories of the central phenomenon of achieving success of offshore outsourcing strategies by technology start-ups, the use of a quantitative research method was not appropriate. the mixed method approach was not appropriate because the current study does not contain quantitative elements. this paper included an examination of the essence of a phenomenon through the perceptions of individuals (conklin, 2007). the phenomenological research design was appropriate because of the need to examine various individuals in different industries to identify common themes and understand the central phenomenon under study (giles, 2007). research questions. to achieve a thorough understanding of the effect of offshore outsourcing on the success of technology start-ups and to discover the effect of alternate solutions such as settingup a design center or branch in overseas on success of technology start-ups, the current study included the use of the following research questions: r1: how do entrepreneurs and organizational leaders perceive the role of offshore outsourcing strategies, regarding the success of start-ups? r2: how do entrepreneurs and organizational leaders achieve success by overcoming challenges in offshore outsourcing? r3: how do entrepreneurs and organizational leaders perceive settingup a design center / branch overseas as an alternate solution for offshore outsourcing? r4: which countries do the entrepreneurs and organizational leaders perceive suitable for setting-up a design center / branch? based on the original research questions, several open-ended phenomenological interview questions, leading questions, and probing questions were used as an instrumentation tool to collect data from participants. appendix illustrates some of these open-ended interview questions that significantly enhanced the goal of answering these research questions. sampling method and size. the use of semistructured interviews of 43 entrepreneurs and organizational leaders from silicon valley, california-based startup organizations, who were involved with successful and failed offshore-outsourcing, encouraged discussion on the successful offshore outsourcing phenomenon. the current phenomenological study used purposive sampling and snowball sampling methods to identify and select the specific population from the general population of entrepreneurs and organizational leaders 62 journal of small business strategy volume 21, number 2 63 who were involved with offshore outsourcing strategies within successful start-ups. the use of the purposive sampling technique aided in the selection of information-rich participants for studying the phenomenon in detail (cooper & schindler, 2003). the use of snowball sampling occurred to select a greater number of participants because the purposive sampling did not result in appropriate candidates to yield data saturation. data collection and analysis. the instrumentation tools used to collect the data for this phenomenological study included demographic survey and singleinstance, semistructured, face-to-face interviews with participants. the use of an in-depth interview approach helped to facilitate a vivid description and deeper insights of the participants’ experiences and perceptions. the use of face-to-face, indepth interviews helped to facilitate high accuracy and complete coverage of the research questions. the demographic information included two primary areas related to (a) general, (b) start-ups, and (c) offshore outsourcing (see table 1). table 1 summarizes the key demographics of participants related to start-ups. the demographics’ findings related to start-ups included (a) overall industry experience, (b) total start-up experience, (c) number of start-ups, (d) number of successful startups, and (e) usage of offshore outsourcing strategy. table 1: participants’ demographics participant’s code start-up experience / overall industry experience (years) number of start-ups worked / successful start-ups participant’s code start-up experience /overall industry experience (years) number of start-ups worked/ successful start-ups p1 20 / 28 2 / 5 p23 21 / 28 2 / 3 p2 15 / 24 3 / 4 p24 18 / 31 1 / 4 p3 18 / 26 2 / 3 p25 12 / 18 2 / 3 p4 22 / 28 3 / 4 p26 9 / 19 2 / 4 p5 16 / 23 1 / 3 p27 14 / 18 3 / 3 p6 21 / 31 2 / 4 p28 15 / 15 2 / 4 p7 14 / 23 2 / 3 p29 8 / 14 2 / 3 p8 18 / 25 1 / 4 p30 17 / 21 3 / 5 p9 22 / 28 3 / 5 p31 11 / 18 3 / 5 p10 24 / 32 2 / 4 p32 17 / 23 2 / 5 p11 22 / 29 2 / 2 p33 9 / 11 2 / 3 p12 26 / 37 3 / 5 p34 18 / 25 3 / 5 p13 20 / 33 2 / 5 p35 22 / 28 3 / 3 p14 14 / 27 1 / 2 p36 20 / 31 2 / 5 p15 24 / 30 2 / 4 p37 16 / 26 3 / 3 p16 15 / 23 2 / 3 p38 20 / 30 3 / 4 p17 24 / 31 3 / 6 p39 8 / 21 2 / 4 p18 17 / 32 2 / 3 p40 24 / 32 4 / 5 p19 25 / 30 1 / 4 p41 13 / 20 2 / 2 p20 16 / 35 1 / 5 p42 18 / 23 4 / 5 p21 14 / 16 2 / 2 p43 15 / 22 3 / 5 p22 17 / 23 1 / 2 journal of small business strategy volume 21, number 2 the current study included the use of moustakas’s (1994) modified van kaam methodology for data analysis. the nvivo 8 qualitative analysis software tool developed by qsr international was used in facilitating data horizonalization; identifying and validating invariant constituents; clustering invariant constituents into themes; and creating and combining textural and structural descriptions into themes. results open-ended phenomenological interview questions related to outsourcing strategies significantly enhanced the goal of answering the research question on outsourcing. based on their experiences, the 43 participants described the outsourcing strategies in terms of five themes and four sub-themes (see table 2). table 2 shows a summary of the offshore outsourcing related themes and subthemes described in the following subsections. the ‘n’ column reflected the number of participants who provided a response, and the percentage column reflected the percent of participants who provided responses. indented entries indicate emerging subthemes table 2: outsourcing strategies factor related themes and subthemes themes and subthemes n % offshore outsourcing strategy 39 90.7 selection of the correct offshore outsourcing vendor 36 83.7 offshore outsourcing strategy may fail if not controlled properly 34 79.0 offshore outsourcing and success of projects and start-ups 39 90.7 cost reduction 39 90.7 speedy completion 33 76.7 use of technical knowledge and patents 31 72.0 alternative to offshore outsourcing setting up design center 35 81.0 india / china 34 79.0 theme 1: offshore outsourcing strategy. thirty-nine participants (90.7%) perceived offshore outsourcing as an important strategy that enhanced the chances of completing initial projects at their technology start-ups. four participants (9%) noted an offshore outsourcing strategy failed in their start-ups because of the lack of proper management, cultural differences, and other mismatches. all participants agreed that an offshore outsourcing strategy would help in the completion of the project in time and the success of technology startups if (a) the selection of outsourcing firm is appropriate, (b) there is a correct match between the two firms, and (c) it is well managed. when asked about what the participants did differently in successful start-ups from failed start-ups, the majority of participants indicated that the adoption of an offshore-outsourcing strategy was the difference between the successful and failed start-ups. the participants revealed three sub-themes in support of offshore outsourcing and the success of projects and start-up themes: (a) cost reduction, (b) speedy completion, and (c) use of technical knowledge and patents. table 3 shows the excerpts that indicate the examples of how the participants stated that the offshore outsourcing strategy is an important task to 64 journal of small business strategy volume 21, number 2 achieve successful completion of projects and success of projects and start-ups. cost reduction. thirty-nine participants (90.7%) perceived reduction of cost as a major motive behind adopting an offshore outsourcing strategy. four participants noted offshore outsourcing could be very costly if it fails, in terms of both operational cost and time. the following table 4 shows the excerpts that indicate the examples of how the participants perceived reduction of cost as a major motive behind adopting an offshore outsourcing. table 3: excerpts of participants on outsourcing strategies participant excerpts participant 7 we have outsourced the work to overseas and liked the work done by outsourcing vendors. usage of patents along with cost reduction was the reason for our outsourcing strategy. and we got it. participant 26 i have used outsourcing at two start-ups. it was fruitful at both start-ups. it allowed us to tap into knowledge that was available with our offshore outsourcing vendors, that too at a lower price. participant 18 offshore outsourcing benefits are cost savings and time savings. time savings and capital savings allowed us to refocus on other core business areas. reduction in cost and speedy completion are the primary drivers in success of start-ups. participant 11 offshore outsourcing has positive impact on success of start-ups. my earlier start-ups outsourced design verification and software development to companies in india and got economic and technological advantages over our competitors. participant 34 we were able to reduce the operational costs using the outsourcing provider’s skills and capabilities, and knowledge base. this is the main criterion that brings success to a start-up. start-ups can leverage their skills, resources for increased competitiveness. table 4: excerpts of participants on cost reduction participant excerpts participant 19 the main reason for adopting outsourcing at my previous start-ups is the cost reduction. both large and small organizations use offshore outsourcing as a strategy to gain an advantage over their competition. participant 10 we gained over our competitors by offering lowest price. this was possible because we had a gain in reduction in overall operational cost through overseas outsourcing. participant 31 of course, cost reduction and savings is the reason behind the idea of outsourcing. we have saved capital because of wage differences between us and india. we have outsourced to india in all start-ups. 65 journal of small business strategy volume 21, number 2 speedy completion. thirty-three participants (76.7%) described the speedy completion of a project as an important motive behind the idea of offshore outsourcing. ten participants (23%) noted offshore outsourcing saves time only if outsourcing objectives were met; otherwise, offshore outsourcing could be a total loss. the following table 5 shows the excerpts that indicate the examples of how the participants described the speedy completion of a project as an important motive behind the idea of offshore outsourcing. table 5: excerpts of participants on speedy completion participant excerpts participant 10 other benefit is the speedy completion of project. companies can spend that time and capital savings in other areas of core business plan. participant 36 outsourcing allowed us to get advantage in quick completion of project through round-the-clock activities. we used offshore outsourcing to indian companies and reduced the project time in half. participant 18 i had a positive experience in offshore outsourcing. it allowed us to use an expanded time zone to work 24x7 and is a solution to speedy completion of projects. use of technical knowledge and patents. thirty-one participants (72%) described how start-ups can use technical knowledge and patents available with offshore outsourcing vendors in foreign countries. the participants cited the use of patents of other companies as another reason for having an outsourcing strategy, in addition to cost reduction. the following table 6 shows the excerpts that indicate the examples of how the participants described usage of technical knowledge and patents as an important motive behind the idea of offshore outsourcing. table 6: excerpts of participants on usage of technical knowledge and patents participant excerpts participant 15 in my opinion, reinventing the wheel is waste of time and money. when the desired technology is with somebody, i don’t feel it is wise thing to reinvent it rather than partner with them [vendors]. moreover, not all start-ups have the time or ability to gain the expertise that the outsourcing vendor is offering. the technology is changing at a rapid pace. firms are often challenged to keep up with that pace. rather than spending the time investigating on new technologies and ramping up capabilities, start-ups choose to outsource this. participant 2 in my case, we adopted outsourcing to use the technology that my foreign outsourcing vendor has already. participant 24 that time we had to develop two core blocks and we knew that overseas company x had that block already. so, we just outsourced that block to them while we spend all our efforts on development of other core block. this way, outsourcing to overseas company helped us in primary focusing ourselves in core ip development without having worried about other tasks. 66 journal of small business strategy volume 21, number 2 theme 2: selection of right offshore outsourcing vendor. the open-ended question on what start-up managers and organizational leaders need to do to make an outsourcing strategy successful revealed the emergence of themes on the selection criteria of the offshore outsourcing vendor. thirty-six participants (83.7%) perceived the selection of the right outsourcing vendor as an important factor that determines the offshore outsourcing as successful strategy for start-ups. the participants noted that the selection of the right offshore outsourcing vendor has a positive impact on the success of outsourcing for projects and start-ups. when asked about what the participants did differently in successful start-ups from failed start-ups, the majority of participants indicated the selection of the right offshore outsourcing vendor was the difference between the successful and failed start-ups. the following table 7 shows the excerpts that indicate the examples of how the participants stated the selection of the right offshore outsourcing vendor is an important task to achieve successful completion of projects and success of projects and startups. table 7: excerpts of participants on selection of the right outsourcing organization participant excerpts participant 4 yes. success or failure with outsourcing depends on to which company you are going to outsource. cultural differences and remote management plays a vital role in this. i had both, success and failure experiences regarding offshore outsourcing. participant 19 the success with outsourcing depends on how the outsourcing has been used. offshore outsourcing can help a start-up or hurt a start-up significantly. it can help a start-up, because on demand it can add to your manpower very quickly and get you going. on the other hand, it can hurt you, because there will be no commitment from outsourced company and hence they can take your technology anywhere else. participant 18 in my opinion, right selection of offshore outsourcing firm is the key determinant in whether outsourcing strategy becomes successful or failure. i have seen many outsourcings that became miserable to companies. i even had a bad experience with outsourcing at [company name]. we faced the problem of protecting our ip. it was a total miserable experience. participant 33 i would say that outsourcing is not an easy task. there are many challenges like cultural differences between different countries, long distance collaboration and communication with outsourcing firms, different work environments, and different time zones. right match is essential for outsourcing strategy to be successful. theme 3: offshore outsourcing strategy might fail if not controlled properly. thirty-four participants (79%) noted offshore outsourcing might fail if not controlled properly. the participants perceived a potential loss of control over outsourced projects and complexities in managing projects at remote distances, an idea associated with outsourcing. when asked about what the participants did differently in successful start-ups from failed start-ups, the majority of participants indicated that they have properly managed and controlled the outsourced work in the start-ups that became successful. 67 journal of small business strategy volume 21, number 2 table 8: excerpts on failure of offshore outsourcing if not controlled properly participant excerpts participant 42 offshore outsourcing has some drawbacks. poor communication is the main problem with outsourcing. cultural differences and protecting the ip are other problems with offshore outsourcing. participant 21 you see, there is a good thing and bad thing with outsourcing. the leakage of innovative ideas and innovative technology is a major problem with outsourcing. the good things are, as we already discussed: cost reduction, speedy completion, etc. participant 5 overseas outsourcing strategy might fail if not managed or controlled properly. loss of control is the main issue. your controlling power is very limited here. you cannot control the quality of services outsourced offshore. there is a chance of lack of quality when you do not control the outsourced tasks. participant 24 there are pros and cons [with offshore outsourcing strategy]. the pros are that it can be very cost effective to outsource an engineering work overseas. however, you need to have a good communication and good tracking system. because of time differences, it [communication and tracking] is very challenging to do and secondly, controlling the project is hard, because the people are not communicating face-to-face. another disadvantage is that if you outsource your work you don’t build internal ip. that is another problem. participant 23 we faced tons of problems with offshore outsourcing as there was no commitment from other side. there was no scope for trust; and ultimately that project was screwed up by vendors. it was total loss. table 8 shows the excerpts that indicate the examples of how the participants stated offshore outsourcing might fail if not controlled properly. theme 4: alternative to offshore outsourcing setting up an overseas design center. the open-ended question on which strategies the participants adopted as an alternative to an offshore outsourcing strategy revealed the emergence of new themes on setting up a design center, or a branch, in foreign countries. thirty-five participants (81%) suggested setting up an overseas design center as an alternative to outsourcing. when asked about what the participants did differently in successful start-ups from failed start-ups, the majority of participants indicated that they have set up a branch or design center overseas in the start-ups that achieved success. thirty-two participants (74%) explained that the strategy of setting up a design center in foreign countries led to the globalization of start-ups. the participants noted all the advantages of offshore outsourcing strategy are available with the strategy of setting up an overseas design center. thirty-two participants (74%) explained the strategy of setting up an overseas design center as an alternative to offshore outsourcing also leads to cost reduction. these participants noted that the strategy of setting up an overseas design center as an alternative to outsourcing also enables the speedy completion of projects due to round-theclock activities. thirty participants (69.7%) noted that the strategy of setting up an overseas design center also allows the use of available technical knowledge in the local talent pool. the following table 9 shows the excerpts that indicate the 68 journal of small business strategy volume 21, number 2 examples of how the participants suggested setting up an overseas design center as an alternative to offshore outsourcing india or china. the open-ended question as to which foreign country the participants prefer to have a design center or branch alternative to offshore outsourcing located in revealed the emergence of a sub-theme on setting up design centers in india or china. thirty-five participants (81%) suggested setting up a design center as an alternative to offshore outsourcing strategy. among these, 26 participants preferred india whereas eight participants preferred china, and another participant preferred israel. the following table 10 shows the excerpts that indicate the examples of how the participants preferred india to set up an overseas design center as an alternative to offshore outsourcing. table 9: excerpts of participants on setting up a design center or branch participant excerpts participant 12 setting-up a branch in overseas provides a compelling alternative to high u.s. salaries due to the cheap labor costs from overseas. participant 2 offshore outsourcing opens door to free transfer of our knowledge and information to the outside world. in my view, for any given start-up, the initial innovation ideas, architecture, and technology are very, very crucial. participant 39 outsourcing overseas causes leakage of our new innovation and technology at the cost of advantage in reduction of costs. so, i believe some other alternatives to the outsourcing might help the start-ups, such as setting-up its own overseas design center in countries like india, china, japan, and singapore, where the outsourcing is advantageous. participant 17 the most disadvantage with outsourcing lies in the fact that the wide variations between countries in the laws governing ip. once ip is stolen, it cannot be recovered and it may cause total failure of a start-up which is based on that innovative ip. alternatives could be set up a new branch in foreign country. ip will be within the company itself along with additional advantages like expansion of company and globalization. remember that all the advantages of outsourcing like low operational cost, same local talent pool remains intact in this scenario. i prefer india as the most favorable country to set up a design center or r&d [research and development] center. participant 20 offshore outsourcing creates problems due to cultural differences, time and distance variations. these will automatically impact negatively on the project progress. these drawbacks can be reduced with the idea of starting a branch over there. participant 11 if you set up an overseas r&d center, it gives an opportunity to spread or expand your business across a wider market base, attract and gain access to new overseas customer base, globalization, and capitalize on your overseas core competencies. i have experienced overseas r&d center more fruitful than overseas outsourcing. 69 journal of small business strategy volume 21, number 2 table 10: excerpts of participants on preferences of countries to set-up design center participant excerpts participant 10 india is a country that provides not only cheaper labor, but also has highly skilled workforce. needless to say, the engineers in india have comparable skills and technical knowledge to their counterparts in the u.s. participant 22 india has a number of advantages such as the availability of high skilled english speaking talent pool at a fraction of the cost compared to the u.s. labor cost. this makes india as best bet to start a design center. participant 40 i agree, which country we are going to outsourcing is also important. some countries attract with so many offerings. for example, if we look at india and china; these days they are offering many benefits. after india, china, i think russia, canada, and european countries are best suit for u.s. and u.k. companies. discussions my results confirm that offshore outsourcing strategy could enhance the chances of success of technology start-ups, specifically if the technology start-ups manage and control the outsourced tasks carefully and provide a platform that facilitates effective communication with vendor organizations. my results suggest setting up a design center in the asiapacific region, especially india or china, as an alternate to offshore outsourcing. it is evident from my results that cost reduction, speedy completion, and the usage of technical knowledge and patents were the advantages in offshore outsourcing, consistent with results of earlier researches, (quelin & duhamel, 2003; wu, li, chu, & sculli, 2005); although these earlier researchers focused on big organizations. on par with the findings of a study by wu et al. (2005), the current findings support that start-ups can enhance performance by using offshore outsourcing strategy. this is because outsourcing yields to an increased quality of products, eliminates the production bottleneck, and lowers the production cost. the findings from this study show that offshore outsourcing strategy helps start-ups to develop good intellectual capital management and allows the organization’s core team to focus on other important tasks. it was also evident that the usage of patents available from other companies is an important reason behind an offshore outsourcing strategy, which is on par with findings of levy (2005). levy (2005) stated that offshore outsourcing is not done simply to take advantage of cost reductions, rather it is a strategy to utilize the client’s knowledge, patents, and expertise. challenges and risks. my results show that a lack of commitment and trust by outsourcing vendors and a lack of effective communication plays a vital role in the underachievement of success in offshore outsourcing. it is apparent from results of this study that the main complaints with offshore outsourcing include security of intellectual property, cultural differences, a lack of commitment from the offshore outsourcing provider, a lack of communication, as well as the political instability in offshore outsourcing countries. krishna, sahay, and walsham (2004) also conducted postmortems of such failed 70 journal of small business strategy volume 21, number 2 offshore outsourcing projects and concluded that communication challenges, client dissatisfaction, cultural differences, and a lack of commitment are some of the reasons for failure of offshore outsourcing. my results indicate that a lack of trust and a refusal to divulge the information or knowledge with each other are other key reasons for failure of offshore outsourcing projects. in consistence with my results, earlier researchers found that trust between offshore outsourcing partners positively influences the success of offshore projects (desouza, 2008). successful strategies. the current findings suggest that to achieve success offshore outsourcing tasks need to be monitored, managed, and controlled efficiently by technology start-ups. the lack of direct control by technology start-ups on outsourced tasks is another challenge that exists with an offshore outsourcing strategy. rajkumar and mani (2001) also found that the strong partnership between outsourcing vendors and client firms is the key to successful outsourcing. both vendors and client organizations need to manage the offshore tasks effectively (lacity, willcocks, & rottman, 2008). in consistence with my results on the requirement of technology start-up to manage the offshore outsourcing activities, benamati and rajkumar (2008) state that proper management of the offshore outsourcing activities is imperative for success of offshore outsourcing. the current results illustrate the importance of the proper selection of offshore outsourcing vendors. my findings reflect that to achieve success by technology startups the selection of offshore outsourcing vendor is vital, which is in line with findings of study of oke et al. (2009). though focused on large and medium sized companies, oke et al. found that selection of a suitable provider plays a key role in achieving success of outsourcing tasks. wadhwa and ravindran (2007) also found that the correct selection of vendors is the one factor that achieves success to outsourcing strategy. the selection of an offshore outsourcing vendor should be appropriately based on their delivery reliability and quality, as well as the proximity relating to both geographic and cultural distance (oke et al., 2009). setting-up an overseas branch or design center. the current findings show that an overseas design center or branch helped their parent technology start-ups and enhanced their productivity. another advantage with setting-up branches or design centers includes the possibility of having a platform that provides joint problem solving, fine-grained information transfers, and trust. my results are in line with todo and shimizutani’s (2008) study. todo and shimizutani (2008) examined the japanese multinational enterprises to investigate the impact of overseas subsidiaries on the productivity growth; the results showed that overseas branches raise the parent organization’s productivity growth. my results indicate that all the advantages of the offshore outsourcing strategy could also be available with the strategy of setting up an overseas design center. the strategy of setting up an overseas design center or branch also leads to a cost reduction and enables the speedy completion of projects due to round-theclock activities. globalization, commitment, and trust are other added advantages with setting up a branch or (r&d?) or design center overseas. my results on setting-up a design center or branch are consistent with results of kotlarsky and oshri’s (2008) study. kotlarsky and oshri (2008) found that organizations gained cost benefits, as 71 journal of small business strategy volume 21, number 2 well as increased quality and productivity by setting-up overseas design centers. the rationale for setting-up branches or design centers includes cost reduction, usage of local talent, and an ability to enter new markets (carmel & tjia, 2005). surprisingly, my results indicated only one country as a preferred destination. the current findings indicate india as a first preferred country for setting up a branch or design center or r&d. it is apparent from results of this study that other countries, such as china, got next preference for setting up a branch or design center or r&d. however, my findings contradict the earlier study of kotlarsky and oshri (2008) on the issue of country attractiveness. kotlarsky and oshri found that country attractiveness plays a less significant role in selection of a country for setting-up a design center or r&d center. however, my results show that the host country's industry-specific technological capabilities attract more outsourcing activities. limitations and implications the study contained limitations associated with geographical location and generalizability. i used the participants from one geographical area, silicon valley, california. limiting the study to focus solely on silicon valley start-ups might have helped to identify the causes of offshore outsourcing successes or failures, specific only to the silicon valley organizations and excluding the causes of offshore outsourcing successes or failures for technology start-ups in other locations. this results in limitations to the generalizability of the over-all results to all start-ups in the same sectors located in other regions, or to all start-ups in other sectors worldwide. the study might have had different results if other regions of the united states had received consideration. practical implications. the findings from this paper have significant implications for the widely prevalent strategy of offshore outsourcing. even though this study focused on technology start-ups, the findings can be applied to all organizations irrespective of their size. the implications are two-fold; first, when willing to enter into offshore strategy the organizations need to be very careful and cautious in selection of vendor. second, the organizations entering into offshore agreements should proactively monitor, manage, and control the offshore outsourcing tasks on a regular basis, as well as to provide guidelines and feedback. the misalignment of these practices might lead to a failure of offshore outsourcing. setting up a branch or design center could be the alternate solution that overcomes the challenges and risks involved in offshore outsourcing, with the added advantage of having global presence. implications for future research. many additional directions for future research present themselves as a result of this analysis. future research can be carried out using large and medium sized companies as samples in an attempt to find out to what extent my results can be generalized to large and medium sized organizations. future research should include participants from other regions of the united states, or worldwide. future researchers can investigate practices that can help organizational leaders to better manage the relationship with offshore outsourcing vendors. a more complete understanding of offshore outsourcing strategy requires additional research that elaborates on the criteria for selecting offshore outsourcing vendors. another fertile area for future research includes investigating which 72 journal of small business strategy volume 21, number 2 country is best suitable to set up a design center or branch for every other country. conclusions the current qualitative phenomenological research paper includes the exploration of the experiences of 43 organizational leaders and entrepreneurs who had experiences with offshore outsourcing activities within successful technology start-up organizations located in silicon valley, california. the paper also examines the perceived role of offshore outsourcing strategies in achieving success at technology start-ups. this paper includes the perceived effect of alternate solutions for offshore outsourcing such as setting-up a design center or branch in overseas on the success of technology startups. to successfully meet the objectives of offshore outsourcing strategy, three main lessons should be taken learned from the results of the current research: (a) selection of offshore outsourcing vendors needs to be done very carefully and cautiously because any mismatches in culture or environment might force the offshore outsourcing strategy to fail, (b) offshore outsourced activities / tasks need to be closely managed, controlled, and monitored continuously, and (c) setting-up a design center or branch overseas could be an alternate solution that will enhance the value proposition through globalization and overcome the challenges and drawbacks of offshore outsourcing. the conclusions of the study allowed the formulation of recommendations for technology start-ups to achieve success in offshore outsourcing activities and thereby the success of start-ups. the recommendations may enable start-up leaders and entrepreneurs to understand how to achieve success in offshore outsourcing strategy, which in turn, may lead to the success of projects, and thereby the success of start-ups. the organizational leaders of the start-ups may wish to consider adopting outsourcing strategy. offshore outsourcing helps technology start-ups in achieving the success of outsourcing tasks by offering several advantages: (a) cost reduction, (b) the speedy completion of outsourced tasks, and (c) the use of the technical knowledge and patents of the offshore outsourcing vendor company. other advantages of offshore outsourcing strategy include the usage of the local talent pool and speedy completion of projects due to extended time zones. the organizational leaders of the start-ups may wish to consider being very cautious while selecting the offshore outsourcing vendor because any mismatches in culture or environment may force the outsourcing strategy to fail. the organizational leaders of the start-ups may wish to consider managing and controlling the outsourced work skillfully. the organizational leaders of start-ups may wish to consider setting up a design center or branch overseas, especially in an asia pacific region such as india or china, as an alternative to offshore outsourcing. this recommendation could solve the problems associated with offshore outsourcing such as (a) security of the data, (b) loss of control of quality, (c) communication problems, and (d) cultural differences. moreover, all the advantages associated with the offshore outsourcing strategy are also available with the strategy of setting up an overseas design center: (a) cost reduction, (b) speedy completion of a project due to round-theclock activities, and (c) the use of technical knowledge of the local talent pool. setting up a branch or design center for the organization may also increase the value of start-up organizations because of 73 journal of small business strategy volume 21, number 2 globalization and its ability to attract global customers. the study recommends that future researchers conduct similar studies using a larger population of organizational leaders and managers from start-ups in other cities in the united states, or from around the world. the recommendation is to conduct similar phenomenological studies from different perspectives, or to conduct grounded theory studies. the use of grounded theory designs might provide similar theoretical outcomes through the expansion of research stemming from combinations of different perspectives. the grounded theory approach, or other methodologies, could provide theoretical support for the existing concept, or a new theoretical basis for refining the concept. this study was significant as it results in an in-depth understanding about how start-ups could achieve success through adaptation of offshore outsourcing strategies. the significance of the current paper is related to four aspects: (a) process improvements in offshore outsourcing strategies, (b) financial savings, (d) society and economy, and (c) globalization. the outcomes of the current study with regard to better outsourcing strategies for start-up organizations may be applicable to organizations of any size, universally. the findings of the study may contribute to the survival and success of start-ups, which in turn may contribute to society and the growth of economy through the retention of existing jobs, as well as the creation of new jobs and new innovations. the implementation of offshore outsourcing strategies, as well as as alternate solution such as setting up a branch or design center overseas, may result in financial savings to start-ups. setting up a branch or design center overseas may enable start-ups, or any organization, to globally expand their customer base. the potential value for readers includes providing a better understanding of the underlying aspects of the successful offshore outsourcing strategies, as well as facilitating awareness of the newly researched and documented successful alternate solution for offshore outsourcing, aimed to achieve success of outsourced tasks. other potential values for readers include (a) applying the new knowledge as process improvement strategies to achieve the success of start-ups or organizations of any size; (b) applying the new knowledge to prepare and effectively overcome the challenges in achieving success of outsourced tasks at technology start-ups; and (c) establishing the basis for a new area of research oriented to the intangible forces and considerations impacting the success of offshore outsourcing and start-ups. references aron, r., & singh, j. v. 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(1997). multiproject strategy and sales growth: the benefits of rapid design. strategic management journal, 18(3), 169-186. 76 journal of small business strategy volume 21, number 2 77 oke, a., maltz, a., & christiansen, p. e. (2009). criteria for sourcing from developing countries. strategic outsourcing: an international journal, 2(2), 145-164. quelin, b., & duhamel, f. (2003). bringing together strategic outsourcing and corporate strategy: outsourcing motives and risks. european management journal, 21(5), 647-661. rajkumar, t. m., & mani, r. v. s. (2001). offshore software development: the view from indian suppliers. information systems management, 18, 63-73. shatz, d. (2006). defining project success. mortgage banking, 7(2), 97-98. swart, j., & kinnie, n. (2003). sharing knowledge in knowledge-intensive firms. human resource management journal, 13(2), 60-65. swartz, n. (2004). offshore outsourcing privacy. information management journal, 38(5), 24-27. taylor, h. (2006). risk management and problem resolution for it projects: prescription and practice. project management journal, 37(5), 49-63. taylor, l. j., & seanard, e. (2004). using goldratt’s thinking process to improve the success rate of small business startups, in proceedings of association for small business and entrepreneurship conference, dallas, tx, pp.260-273. todo, y., & shimizutani, s. (2008). overseas r&d activities and home productivity growth: evidence from japanese firm-level data. the journal of industrial economics, 56(4), 752777. vishnevsky, t., & beanlands, h. (2004). qualitative research. nephrology nursing journal, 31(2), 234-238. wadhwa, v., & ravindran, a. r. (2007). vendor selection in outsourcing. computers & operations research, 34, 3725-3737. wu, f., li, h. z., chu, l. k., & sculli, d. (2005). an outsourcing decision model for sustaining long-term performance. international journal of production research, 43(12), 2513-2535. dr. jayaram madireddy, d.m, pmp(r) is an organizational leader and project management professional. dr. jayaram is an adjunct professor at colorado technical university and serving management team at san jose, ca. he has over 20 years of engineering, management, project management experience. his research interests include project management, leadership, management, small business development, and technology start-ups. he holds doctor of management in organizational leadership and ms in electronics engineering. dr. jayaram is a project management professional (pmp) certified by project management institute, master project manager (mpm) and certified international project manager (cipm) certified by american academy of project management (aapm). reproduced with permission of the copyright owner. further reproduction prohibited without permission. 71 establishing cognitive legitimacy in emerging organizations: the role of prestige1 cheryl r. mitteness northeastern university c.mitteness@northeaster.edu melissa s. baucus university of louisville m.baucus@louisville.edu william i. norton, jr. georgia southern university billnorton@georgiasouthern.edu abstract entrepreneurs with venture ideas must establish cognitive legitimacy so they can acquire essential resources needed for survival. we extend the concept of cognitive legitimacy by developing a model through which entrepreneurs in emerging high growth organizations attempt to establish and build cognitive legitimacy. this is based on the composition of their new venture team and advisory board. novice entrepreneurs can draw on the prestige of their new venture team and advisory board to enhance perceptions of their emerging organization’s cognitive legitimacy. novelty of the venture idea moderates relationships between both new venture team prestige and advisory board prestige and cognitive legitimacy; thus entrepreneurs whose emerging organizations rely on highly novel products or services will likely need to establish higher levels of prestige to create cognitive legitimacy. keywords: legitimacy, prestige, advisory boards 1 the authors wish to thank catherine dalton, amy hillman, charles snow, david whetten and faculty participating in the 2007 ohio state entrepreneurship research boot camp for helpful comments and suggestions. an earlier version of this paper was presented at the academy of management national conference, philadelphia, pa in 2007. strategy   journal of small business  journal of small business strategy vol. 23, no. 1 72 introduction entrepreneurs with a venture idea must convince others to join them in their pursuit of opportunities and they need to influence potential stakeholders’ perceptions of legitimacy (certo, 2003; delmar & shane, 2004). individuals, groups and organizations (i.e., stakeholders) that have contact with an entrepreneur evaluate the emerging organization’s purpose and legitimacy in order to decide whether or not to become involved with the emerging organization (pfeffer & salancik, 1978). legitimacy, defined as a social judgment of acceptance, appropriateness and desirability, enables entrepreneurs to acquire resources needed for survival (deeds, mang, & frandsen, 2004; suchman, 1995; zimmerman & zietz, 2002). legitimacy helps emerging organizations overcome their liability of newness (stinchcombe, 1965) by enhancing entrepreneurs’ ability to create social ties and initiate routines to gain resources (deeds et al., 2004; delmar & shane, 2004; suchman, 1995; zimmerman & zietz, 2002). entrepreneurship researchers have not fully explained the possible strategic behaviors entrepreneurs can take to build cognitive legitimacy at the earliest stages of a new venture’s development. we extend shepherd and zacharakis’ (2003) work on cognitive legitimacy, focusing on the process by which initial stakeholders form perceptions of an emerging organization’s cognitive legitimacy. “the antecedents of cognitive legitimacy of an organization are the history and prevalence of its particular organizational form” (bitektine, 2011: p.160). novice entrepreneurs— entrepreneurs lacking prior startup experience—do not have a history or a prior track record that can help establish the cognitive legitimacy of their emerging organization. we focus on these novice entrepreneurs and on strategies that allow them to use the prestige of others to enhance the cognitive legitimacy of their ventures. among novice entrepreneurs, those who pursue competency-destroying innovation (i.e., highly novel venture ideas) likely need higher levels of prestige to create cognitive legitimacy since their novel ideas make it harder for stakeholders to place these ventures into a category of known organizational forms (aldrich & martinez, 2001). thus, novelty of the venture idea acts as a moderator, making it more difficult for novice entrepreneurs with highly novel ventures to establish cognitive legitimacy through prestige-building strategies than for novice entrepreneurs with less novel ventures. the proposed model explains how novice entrepreneurs can establish and build the cognitive legitimacy of their emerging organizations by “borrowing” prestige (i.e., social rank or membership in exclusive social networks) from their new venture team (nvt) and advisory board members. prestigious affiliations have been shown to impact ipo valuations, likely because ipo firms involve a considerable amount of uncertainty due to their limited track records and resources (e.g. pollock, chen, jackson, & hambrick, 2010; stuart, hoang, & hybels, 1999). entrepreneurship research on prestige-borrowing by ipo firms have increased our understanding of the benefits of prestige. but very few startups become ipo firms and the sources of prestige available to novice entrepreneurs and emerging organizations at the earliest stages of development likely differ from those accessible to ipo firms. for instance, statutory boards of directors are typically not formed until entrepreneurs seek external financing such as launching an ipo. early journal of small business strategy vol. 23, no. 1 73 stage emerging organizations more likely rely on advisory boards rather than statutory boards of directors, but advisory boards have received relatively little attention in the entrepreneurship literature. the model proposed here extends research on prestige in ipo firms, focusing on the strategic use of prestige in advisory boards and new venture teams to create cognitive legitimacy (and the impact the novelty of the venture idea has on this process). entrepreneurship researchers tend to view legitimacy retrospectively while this paper contributes by adopting a proactive forward-looking perspective. survival has often been used as an indication of legitimacy but this tells us little about how emerging organizations establish and build cognitive legitimacy: it merely shows or assumes an organization has legitimacy (zimmerman & zeitz, 2002). the perspective adopted here emphasizes how entrepreneurs in early stage emerging organizations can take strategic actions such as selecting prestigious nvt and advisory board members in order to create and maintain cognitive legitimacy. we contribute to entrepreneurship research that examines the sequencing of organizing activities pursued by founders. we agree with delmar and shane’s (2004) argument that the sequencing of these activities matters – founders should initially focus on activities to obtain cognitive legitimacy because legitimacy, “is a necessary precondition to initiating social ties with stakeholders and obtaining and recombining resources” (p. 386). we extend this argument by showing that the characteristics of the nvt and advisory board play an important part in establishing and building cognitive legitimacy in emerging organizations. we begin by defining cognitive legitimacy relative to other types of legitimacy. next, we address the process and challenges emerging organizations face when establishing cognitive legitimacy. we integrate the literature to support the proposed model and present testable propositions of how emerging organizations build cognitive legitimacy by creating prestigious nvts and advisory boards. we explain how novelty of venture ideas moderates this process. a discussion of the implications and limitations of the proposed model completes the paper. cognitive legitimacy a review of the legitimacy literature reveals that although many researchers distinguish between different types of legitimacy, little consensus exists regarding the various types of legitimacy and their scope. however, most researchers distinguish cognitive legitimacy from other forms of legitimacy that fall under the umbrella of sociopolitical legitimacy (e.g. suchman, 1995; hannan & freeman, 1986; aldrich, 1999). legitimacy resides in the minds of observers who may or may not be aware of how legitimacy affects their decision making (zimmerman & zeitz, 2002). these observers appear to make two fundamentally different types of judgments when evaluating organizational legitimacy: cognitive legitimacy judgment and sociopolitical legitimacy judgment (bitektine, 2011). a cognitive legitimacy judgment involves determining whether an organization exhibits a set of recognizable characteristics that can be used to classify it as a member of a certain class of organizations. a sociopolitical legitimacy judgment evaluates whether the organization is socially acceptable (aldrich, 1999; aldrich & fiol, 1994; bitektine, journal of small business strategy vol. 23, no. 1 74 2011; hannon & freeman, 1977; meyer & rowan, 1977; scott, 1995; suchman, 1995). entrepreneurs in the early stages of forming a new venture must pay particular attention to establishing cognitive legitimacy, showing outsiders that these entrepreneurs have gone beyond dreaming and talking about starting businesses to engaging in startup activities that create new ventures. as they struggle to overcome the liability of newness (stinchcombe, 1965) and develop an organization, roles for employees, procedures for operating and so on, they must find ways to ensure that their new ventures look like viable and successful businesses. this effort to establish cognitive legitimacy may represent a bigger challenge for early stage entrepreneurs than creating sociopolitical legitimacy: society generally regards profit seeking activities as valid unless they involve activities prohibited by law (aldrich, 1999; aldrich & fiol, 1994; delacroix, swaminathan, & solt, 1989; shepherd & zacharakis, 2003). this accounts for the emphasis here on cognitive legitimacy judgments about emerging organizations. establishing cognitive legitimacy with prestige entrepreneurship researchers have not fully explained how emerging organizations build cognitive legitimacy at the earliest stages of an emerging organization’s development. katz & gartner (1988) stress the importance of investigating the processes underlying the transition from emerging organizations or organizations-increation to existing organizations. new emerging organizations are not smaller, incomplete versions of existing organizations because their organizational properties are arranged in fundamentally different ways (gartner, bird, & starr, 1992). the emphasis on how to establish cognitive legitimacy in the earliest stages of emerging organizations distinguishes liability of newness from liability of smallness. an entrepreneur must establish cognitive legitimacy to overcome the emerging organization’s liability of newness—the lack of structure, policies and procedures or ways to deal with regular activities--as well as the disadvantages faced as a small organization (stinchcombe, 1965) such as limited resources. entrepreneurship researchers recognize that the organizational life cycle needs to include stages earlier than when the entrepreneur legally creates the organization (hite & hesterly, 2001). clarysse and moray (2004) identified two phases that precede the initial start-up stage used in most organizational life cycle theories: 1) the idea phase when the entrepreneur conceives of a way to address unmet needs in the market and an organization begins to emerge; and 2) the pre-startup phase that evolves from the idea phase when the entrepreneur makes a decision to form an organization. at these two early phases, the organization faces considerable uncertainty and a lack of awareness by outsiders as the entrepreneur begins acquiring essential resources. to establish cognitive legitimacy in an emerging organization, an entrepreneur must generate enough knowledge related to the new venture for its existence to be taken-for-granted by key stakeholders. these stakeholders make cognitive legitimacy judgments involving the determination of whether the new venture exhibits a set of recognizable characteristics that can be used to categorize it as a member of a certain class of organizations. innovator entrepreneurs—those pursuing highly novel ideas or technologies--likely face more difficulty in establishing journal of small business strategy vol. 23, no. 1 75 cognitive legitimacy than reproducer entrepreneurs. innovator entrepreneurs start organizations involving competencedestroying innovations that require new knowledge, routines, and competencies (aldrich & martinez, 2001). stakeholders will likely have more difficulty categorizing an emerging organization created by an innovator entrepreneur because its characteristics are more difficult to classify and stakeholders may not completely understand the innovative entrepreneur’s business idea. therefore, we focus our model on explaining the establishment of cognitive legitimacy judgments in emerging organizations and pay particular attention to the challenges faced by innovator entrepreneurs. shepherd and zacharakis (2003) identified three dimensions of cognitive legitimacy: product knowledge, organization knowledge and management team knowledge. the cognitive legitimacy of emerging organizations can be determined by measuring the level of knowledge or information the public holds regarding the emerging organization. entrepreneurs with venture ideas (i.e. individuals in the idea phase) often begin with little, if any cognitive legitimacy because stakeholders have little knowledge and understanding regarding the emerging organization (aldrich & fiol, 1994). these entrepreneurs need to send signals that link their emerging organization to categories familiar to stakeholders (fischer & reuber, 2007), reducing uncertainty. cognitive legitimacy allows stakeholders to conserve cognitive resources associated with organizing and searching for additional information (bitektine, 2011; shepherd & zacharakis, 2003). little product knowledge and organizational knowledge exist in the idea and pre-startup phase of an emerging organization’s life cycle. an emerging organization typically begins once an individual or small group of co-founders decide to pursue a venture idea. individuals considering joining the nvt at this initial stage focus on gathering information to determine a venture idea’s viability (kamm & nurick, 1993). as the emerging organization develops, product knowledge becomes more important, followed by organizational knowledge which likely consists of aggregated nvt knowledge and product knowledge. therefore, we argue that establishing cognitive legitimacy during the idea phase and pre-startup phase depends mostly on knowledge regarding the entrepreneur and the nvt. the task of establishing cognitive legitimacy is especially difficult for novice entrepreneurs. a novice entrepreneur involves someone starting his or her first venture, whereas a serial entrepreneur has founded multiple ventures (baron & ward, 2004; macmillan, 1986; ucbasaran, wright, & westhead, 2003). serial entrepreneurs have reputations gained from their experience with prior ventures and receive performance-based rewards based on these reputations. such reputations can be used to signal perceived quality when a new venture lacks other forms of information on quality (dimov, shepherd, & sutcliffe, 2007). reputation and prestige (also referred to as status) represent distinctly different constructs and both serve as a signal of future performance for stakeholders. reputation signals the likelihood of strong future performance based on past performance in contrast to status or prestige that results from an organization’s pattern of social relationships and the quality of its network partners (dimov et al., 2007). journal of small business strategy vol. 23, no. 1 76 prestige can be defined as the property of having status as derived from membership in elite social circles (d’aveni, 1990); defining prestige in terms of status accounts for why researchers sometimes use the terms prestige and status interchangeably. prestige represents a sociological concept capturing differences in social rank while reputation, an economic concept, captures differences in actual or perceived quality among organizations (dimov et al., 2007; washington & zajac, 2005). reputation commonly generates performance or meritbased awards earned by and based on past performance of the firm, whereas status (i.e., prestige) generates non-performancebased benefits known as privileges - defined as unearned ascriptions of social rank that are not performance-based (washington & zajac, 2005). empirical research supports distinguishing between prestige (i.e., status) and reputation. washington and zajac (2005) examined the impact of status and reputation on the likelihood of being invited to the ncaa tournament in a current year. their results indicate that reputation (a basketball team’s performance during the year) differs from status (the university’s history of invitations to the ncaa postseason tournament). teams with a history of being invited to the tournament (i.e., high status) received privileges beyond the outcomes predictable by considering their performance during the year (i.e., quality or performance-based rewards associated with reputation). this shows that prestige differs from reputation. prestige and reputation represent two different “channels” entrepreneurs can use to signal quality (dimov et al., 2007). novice and previously unsuccessful entrepreneurs differ from serial entrepreneurs as to which “channel” is available. the model proposed here does not apply to serial entrepreneurs because their reputations (i.e., prior entrepreneurial experience) may reduce perceived risk associated with a new startup (march & shapira, 1987), likely establishing some cognitive legitimacy for the emerging organization. novice entrepreneurs must find a way to generate non-performance based rewards such as by using prestige. prestige is not based on prior performance, so it may exist independently of real quality (washington & zajac, 2005). stakeholders facing uncertainty regarding the perceived quality of an emerging organization may rely on prestige of those associated with the firm (e.g., prestige of the nvt or advisory board members) as a surrogate for organizational quality (podolny, 1993). stakeholder decisions to provide resources to emerging organizations depend on stakeholders’ ties to individuals associated with the venture and to the credentials of the individuals associated with the venture (florin, lubatkin, & schulze, 2003). connecting individuals with high prestige to the emerging organization may provide a mechanism for establishing cognitive legitimacy. we argue that the prestige of the entrepreneur, new venture team, and advisory board communicates information about an emerging organization, establishing and building cognitive legitimacy prestige generates privileges or unearned ascriptions of social rank for an emerging organization that are not based on its historical performance. forming a highly prestigious nvt likely enhances the cognitive legitimacy of the emerging organization by increasing the information available to stakeholders (shepherd & zacharakis, 2003; suchman, 1995). when nvt members have high prestige, the perception of status sends a signal to external stakeholders that evokes journal of small business strategy vol. 23, no. 1 77 consistent and coherent categories for the emerging organization (fischer & reuber, 2007). entrepreneurs may strategically select nvt members with high prestige to provide the emergent firm with more network ties (hite & hesterly, 2001), recognizing that “both strong and weak ties are useful and contribute to the emergence and growth of firms” (elfring & hulsink, 2007: 1852). novice entrepreneurs need to rely on their social networks and those of family and friends to identify potential high prestige nvt members. entrepreneurs who establish a low prestige nvt provide stakeholders with minimal or no information. prestige provides stakeholders with some information regarding the management team and organization, thereby increasing cognitive legitimacy. this leads to the following proposition: p1: nvt prestige relates positively to stakeholders’ perceptions of the emerging organization’s cognitive legitimacy. in the idea and pre-startup phases of an organizational life cycle, entrepreneurs may choose to form an advisory board. an advisory board may be defined as a group of individuals formed to perform service and resource dependence roles similar to statutory boards (daily & dalton, 1992; 1993; huse, 1990; judge & zeithaml, 1992; murray 2003; whisler, 1988). although operating with similar formality and characteristics of a statutory board of directors, advisory board members act as advisors and thus, represent boards that are characterized as advisory rather than governing boards (huse, 2000; lynall, golden, & hillman, 2003; whisler, 1988). advisory boards signify voluntary boards and are not held to the same liability exposure as corporate or statutory boards of directors (mueller, 1988). the increasing work load and legal liability for directors on statutory boards of directors since the passage of sarbanes-oxley has made advisory boards much more attractive. advisory boards offer a way for emerging organizations to gain the expertise, connections and access to resources of board members without incurring legal liability. forming an advisory board instead of a statutory board offers a way to eliminate the need for insurance and encourages reluctant outsiders to participate (fox, 1982; ward & handy, 1988). the use of advisory boards has become especially common in silicon valley in the past couple of decades (morkel & posner, 2002). emerging organizations typically establish an advisory board before a statutory board of directors. firms often form boards of directors expressly to satisfy external financiers who are needed later in the organization’s existence (fiegener, brown, dreux & dennis, 2000). a prestigious statutory board of directors can build cognitive legitimacy but at a later stage in the life cycle of the venture than our model covers. entrepreneurs may “strategically adapt and align their networks to gain the resources they need to ensure successful emergence” (hite & hesterly, 2001: 278), including selecting prestigious advisory board members. prior research shows that the presence of high status partners adds to perceptions of an emerging organization (deutsch & ross, 2003; shane & cable, 2002). boards serve a symbolic role independent of their tangible activities (certo, 2003) and social networks. advisory board members with high prestige due to their social capital and human capital related to areas important to the emerging organization can signal information to stakeholders regarding the quality of the journal of small business strategy vol. 23, no. 1 78 management team, product, and organization, thereby increasing the emerging organization’s cognitive legitimacy. novice entrepreneurs may use their social networks and those of family, relatives, friends and neighbors to identify and try to attract prestigious advisory board members; in some cases, entrepreneurs have even paid prestigious advisory board members to become involved with their emerging organizations in an effort to build cognitive legitimacy. thus, p2: advisory board prestige relates positively to stakeholders’ perceptions of the emerging organization’s cognitive legitimacy. entrepreneurs enhance their ability to develop an advisory board with high prestige when the emerging organization has a highly prestigious nvt. since most ceos rely on their personal networks as the source for identifying advisory board members (murray, 2003), the prestige of the entrepreneur and other nvt members likely impacts the emerging organization’s ability to form a prestigious advisory board. in addition, prestigious individuals rely on the presence of other prestigious individuals to validate their own affiliation with the organization (chen, hambrick, pollock, 2008; podolny, 1994). these individuals prefer to associate with other high prestige individuals (podolny, 1994) and avoid affiliating with individuals or organizations that could reflect poorly on them (stuart et al., 1999). the prestige of the nvt members sends positive signals to prospective advisory board members about the emerging organization. the following proposition states this relationship: p3: nvt prestige relates positively to advisory board prestige. a high prestige nvt and a high prestige advisory board both signal cognitive legitimacy independently. an emerging organization may be able to borrow or “rent” the prestige of their advisory board to enhance their cognitive legitimacy (deutsch & ross, 2003). the advisory board therefore could act as a middleman (i.e., partial mediator) between the nvt and potential stakeholders. the presence of both a high prestige nvt and a high prestige advisory board will lead to the highest level of cognitive legitimacy for emerging organizations. a high prestige nvt increases cognitive legitimacy directly and also indirectly through the formation of a high prestige advisory board. the combination of a high prestige nvt and a prestigious advisory board sends signals to external stakeholders that cue up unified, coherent and consistent categories about the attributes of the emerging organization (fischer & reuber, 2007), providing the highest level of cognitive legitimacy. establishing a low prestige nvt has a definite downside since the entrepreneur with a low prestige nvt will have difficulty attracting high prestige members to the advisory board, resulting in lower cognitive legitimacy for the emerging organization. low prestige conveys little information to stakeholders facing an already uncertain situation (the idea and pre-startup phases). highly prestigious nvts are not expected to create advisory boards with low prestige nor are low prestige nvts expected to be able to create highly prestigious advisory boards since both of these scenarios would contradict the literature supporting proposition 3. however, if these scenarios did occur, the effect would be the same: a low prestige advisory board weakens the relationship between the highly prestigious nvt and cognitive legitimacy; and a journal of small business strategy vol. 23, no. 1 79 prestigious advisory board would strengthen the relationship between a low prestige nvt and cognitive legitimacy. additionally, some entrepreneurs may choose not to form an advisory board. for example, a highly prestigious nvt may choose not to form an advisory board. this choice reduces the information conveyed to external stakeholders when they are evaluating the cognitive legitimacy of the emerging organization. creating an advisory board enlarges the social network and allows individuals from outside the organization to provide feedback to the emerging organization (huse, 1990; murray, 2003). individuals outside of the organization who sit on the board offer greater independence and appear to enhance venture performance (daily & dalton, 1993; gabrielsson & winlund, 2000). therefore an emerging organization with a prestigious nvt and no advisory board results in lower cognitive legitimacy than an emerging organization with both a high prestige nvt and advisory board. therefore, we propose the following: p4: advisory board prestige moderates the relationship between new venture team prestige and cognitive legitimacy. the relationship between new venture team prestige and cognitive legitimacy will be stronger for emerging organizations with high advisory board prestige. building cognitive legitimacy in emerging organizations represents a dynamic process. the venture idea, as well as the composition of the nvt and advisory board needs to constantly adapt to meet the changing needs of the emerging organization. the emerging organization develops new network ties by altering the composition of the nvt and advisory board in the early stages of the venture (kamm & nurick, 1993), if the evolving resource needs of the venture require a shift in the network structure of the venture (elfring & hulsink, 2007; hite & hesterly, 2001). the entrepreneur and the first members of the nvt provide early indications of an emerging organization’s cognitive legitimacy. each activity an entrepreneur undertakes during the idea and pre-startup phase (such as altering the venture idea, building the nvt, adding an advisory board, and changing the composition of the nvt and advisory board) has the potential to impact the cognitive legitimacy of the emerging organization by providing stakeholders with new information. new information may transform the original idea, alter resource requirements or suggest changes in the composition of the nvt. this sort of adaptation to new information may require the removal or replacement of nvt members in order for the team to function effectively (kamm & nurick, 1993). the entrepreneur may also change nvt members in order to extend the new venture’s social network to gain greater access to information and resources (hite & hesterly, 2001). enlarging the advisory board or replacing current members with people possessing greater prestige and network ties (both strong and weak ties) can enhance the emerging organization’s cognitive legitimacy with certain stakeholders. as an emerging organization continues to build cognitive legitimacy, the entrepreneur should find it easier to recruit and replace individuals in the nvt and advisory board with others who have high prestige. the establishment of a high prestige nvt and high prestige advisory board has a lasting effect on the new venture. washington and zajac (2005) explored the journal of small business strategy vol. 23, no. 1 80 evolution of status, noting that once initial status is achieved it tends to be perpetuated. this likely makes the early establishment of cognitive legitimacy based on prestige especially critical for the emerging organization since it may have long-term implications for survival and venture success. therefore, we expect relationships among nvt prestige, advisory board prestige, and cognitive legitimacy to be reciprocal. interacting with highly prestigious individuals or entities may generate privileges (explicitly, the unearned ascription of high social rank) for an emerging organization, whereas interactions across low prestige organizations may yield less favorable perceptions or unearned ascriptions of low social rank (washington & zajac, 2005). an emerging organization that attracts high prestige individuals to its nvt at time period two creates some cognitive legitimacy that makes it easier to attract additional prestigious nvt members in time period three (shown as a feedback loop from cognitive legitimacy to nvt and feedback from nvt at time 2 to nvt at time 3). similar feedback processes occur when an emerging organization attracts high prestige advisory members in time period two, making it easier to add more advisory board members with high prestige in time period three (shown as feedback loop from cognitive legitimacy to prestige of advisory board and the feedback loop from advisory board at time 2 to advisory board at time 3). thus, acquiring additional nvt members and advisory board members who have high prestige should be easier as an emerging organization gains prestigious nvt and advisory board members and builds cognitive legitimacy. this results in the following proposition: p5: the process of establishing cognitive legitimacy is a reinforcing process: a) the greater cognitive legitimacy in time period 2, the greater nvt prestige and advisory board prestige in time period 3; b) the greater nvt prestige in time period 2, the greater nvt prestige in time period 3; c) the greater advisory board prestige in time period 2, the greater advisory board prestige in time period 3; d) the greater advisor board prestige in time period 2, the greater nvt prestige in time period 3. in addition to characteristics of the nvt and advisory board members, the process of establishing and building cognitive legitimacy in emerging organizations may be contingent on characteristics of the venture idea. the degree of novelty associated with the venture idea pursued by an emerging organization has begun receiving attention from entrepreneurship researchers as a key contextual variable (e.g. amason, shrader & tompson, 2006; choi, levesque & shepherd, 2007). new ventures pursuing highly novel innovations appear to require a different mix of strong and weak ties than those pursing less radical innovations (elfring & hulsink, 2003). the degree of novelty of the venture idea likely affects the relationships among nvt prestige, advisory board prestige, and cognitive legitimacy. unlike incremental innovations which involve small improvements to technology that is currently available, radical innovations (or disruptive innovations) involve innovations that encompass a high degree of new knowledge (dewar & dutton, 1986: 1442). journal of small business strategy vol. 23, no. 1 81 a novel or highly creative product represents one in which a clear path does not exist: no one has accomplished this task before so no heuristic exists for how to do so (amabile, 1996). entrepreneurs with highly novel venture ideas—those working in highly uncertain or unknown areas--face greater challenges in creating cognitive legitimacy, making prestige of their nvts and advisory boards more critical than for ventures pursuing more imitative ideas. emerging organizations often face substantial resistance when introducing radical innovations, in part, because many of them fail. “like biological mutations, radical innovations crop up sporadically, but very few have the qualities that lead to long-term survival” (utterback, 1994: 162). as the novelty of the venture idea increases, the nvt must spend more time processing information (amason et al., 2006) and communicating explicit knowledge to the firm’s external stakeholders (choi et al., 2007). entrepreneurs relying on radical innovations face greater problems establishing legitimacy and may need to rely on larger networks of diverse weak ties whereas ventures using incremental innovations can rely on close networks of strong ties (elfring & hulsink, 2007). this suggests that novice entrepreneurs pursuing radical innovations will likely need to create and use larger social networks in order to locate highly prestigious individuals for their nvts and advisory boards. highly novel venture ideas involve products in which individuals lack a frame of reference for understanding what the product is and what benefits it offers above that of products existing in the marketplace (athaide, meyers, & wilemon, 1996; slater, 1993). utterback (1994) demonstrates the importance of a prestigious nvt member with his example that incandescent lighting might not have been viewed as a viable new product by businesses providing gas lighting, except that it was introduced by thomas edison who gave the new idea credibility. an entrepreneur pursuing a novel idea could benefit greatly from a similar type of association with a high prestige individual on the nvt or advisory board. less prestigious individuals likely have great difficulty convincing people of a highly novel product’s viability. thus, the creation of a prestigious nvt and/or advisory board will be even more helpful in establishing cognitive legitimacy when the emerging organization involves a high novelty venture idea. we propose the following: p6: the novelty of venture idea moderates the relationship between prestige (both nvt and advisory board) and cognitive legitimacy. the relationship between prestige and cognitive legitimacy will be stronger for emerging organizations exploiting high novelty venture ideas. the proposed model (see figure 1) applies to high growth emerging organizations prior to external financing, started by novice entrepreneurs. those novice entrepreneurs who pursue highly innovative ideas will need greater levels of prestige to establish cognitive legitimacy. high growth emerging organizations are defined as those emerging organizations “where significant sales and profit growth are expected to the extent that it may be possible to attract venture capital money and/or funds raised through public or private placement” (ronstadt, 1984: 75). high growth emerging organizations typically create an advisory board and obtain external financing at some point in their organizational life cycle. emerging organizations without the motivation to journal of small business strategy vol. 23, no. 1 82 grow have little need for an advisory board or external financing. cognitive legitimacy issues and the type of social network ties needed by the organization will change as the new venture moves from the emergent to the start-up stage. figure 1: a dynamic model of establishing cognitive legitimacy with prestigious new venture team and advisory board members. discussion this paper represents one of the first attempts to examine how entrepreneurs might pursue a strategy of “borrowing” prestige to help their emerging organizations establish cognitive legitimacy. we develop a model that explains the process of establishing and building cognitive legitimacy by recruiting prestigious nvt members and prestigious advisory board members. high prestige nvt and advisory board members can also enhance the cognitive legitimacy of emerging organizations pursuing highly novel venture ideas. although we acknowledge that cognitive legitimacy is not the only factor impacting whether an emerging organization evolves into a successful new venture, we believe that it is a crucial obstacle that innovator entrepreneurs must deal with to overcome their liability of newness. the proposed model applies to “emerging organizations”, those at a very early stage of development when an entrepreneur with a venture idea begins to form an organization. we join research that explores actions entrepreneurs can take to proactively build legitimacy (e.g., liao and gartner, 2007). we answer the call for research that explains how theories and models developed for more established ventures p5b + p5a + p5d + p6 + p5a + p3 + p2 + p1 + advisory board prestige cognitive legitimacy novelty of venture idea new venture team prestige p4 + p5c + journal of small business strategy vol. 23, no. 1 83 likely differ when applied to emerging organizations (katz & gartner, 1988). we expect many concepts examined in more established organizations are likely to be even more critical to firm survival and performance in the earliest stages of an organization’slife. researchers have attempted to measure legitimacy using indirect measures related to the source of legitimacy, such as winning certification tests (rao, 1994), entering into alliances (stuart et al., 1999) and being mentioned in the press (deeds et al., 2004). this practice treats prestige and legitimacy as identical constructs. we distinguish legitimacy from its sources (i.e., prestige) and explain how prestige impacts cognitive legitimacy in the absence of reputation. successful serial entrepreneurs may rely on their reputations to generate cognitive legitimacy, but novice entrepreneurs do not have this advantage. novice entrepreneurs need to create sources of information that help them establish awareness and reduce uncertainty among stakeholders of the emerging organization. we argue that key factors affecting the amount of information conveyed to stakeholders include characteristics of the individuals involved with as well as characteristics of the venture idea. high levels of prestige have been shown to decrease the likelihood of bankruptcy (d’aveni, 1990) and organization dissolution (pennings, lee, van witteloostuijn, 1998), as well as increase ceo compensation (belliveau, o’reilly, wade, 1996) in established organizations. we extend prior research by proposing how prestige applies in an entrepreneurial context, and by going beyond the entrepreneur to include new venture teams and advisory boards. for entrepreneurship researchers, we suggest that the formation of the nvt and advisory board should be included among key organizing activities initially pursued by founders. we focus on how advisory boards can be utilized in a similar fashion as nvts to further aid in the establishment and building of cognitive legitimacy. there is a need for research to explore how advisory boards impact new venture performance, especially since advisory boards offer important advantages since sarbannes-oxley. researchers need to distinguish advisory boards from boards of directors -that entrepreneurs typically form in a later stage of venture development. our model stresses the importance of looking beyond the entrepreneur and examining the impact of all the individuals associated with emerging organizations. it is important to consider what benefits these individuals provide the emerging organization beyond advice and expertise. scholars suggest that entrepreneurs form advisory committees (e.g. timmons & spinelli, 2007; kuratko & hodgetts, 2004); however, they do not provide effective strategies for advisory board member selection nor explain how advisory boards may impact survival. we argue that in addition to the valuable advice advisory board members play, they can also generate “privileges”: unearned ascriptions of social rank that signal cognitive legitimacy. while the main focus of this article involves how entrepreneurs of emerging organizations can use (high prestige nvt and advisory board members, our model also has implications for social network research in entrepreneurship. researchers note that resource needs of new ventures change during the emergence stage so journal of small business strategy vol. 23, no. 1 84 entrepreneurs likely need ways to alter their network ties (hite & hesterly, 2001). few researchers have addressed “the actual function and utility of network ties (jack, 2005: 1254). we show that entrepreneurs may assess the potential and realized benefits of their network ties, adding some new ties and dropping other ties (elfring & hulsink, 2007): an entrepreneur striving to increase cognitive legitimacy should add high prestige nvt and advisory board members and drop those with low prestige. the primary objective of this paper is to suggest a limited-domain theory. by design, we advance a formal argument that considers emerging organizations with little if any cognitive legitimacy and offer propositions that suggest strategies, relationships, and probable outcomes. however, this theoretical framework exploring cognitive legitimacy and its sources is not limited to high tech emerging organizations. other examples of high growth ventures could include new franchise systems. although we examine how the novelty of a venture idea moderates the relationship between both nvt and advisory board prestige and the cognitive legitimacy of the emerging organization, other factors may also moderate these relationships. commitment may have a moderating effect, and is defined as behaviors that bind an individual to others (stone & brush, 1996). an advisory board that is committed to a nvt would likely enhance its cognitive legitimacy as compared with an advisory board that does not exhibit high levels of commitment. our model implies that entrepreneurs may focus on cognitive legitimacy building strategies at the earliest phases of the nascent venture and these efforts will assist them in developing commitment among internal and external stakeholders (stone & brush, 1996). we also expect a moderating relationship between reputation earned due to prior success as an entrepreneur and cognitive legitimacy. in the bayesian view, priors are experiential (norton & moore, 2006), which suggests a contextual limitation. priors--successful serial entrepreneurs--may moderate only to the extent that they capitalize on domain-specific competencies or start new ventures in the same industry as their prior successes. alternatively, priors could be conceptualized as a source of cognitive legitimacy rather than a moderating variable. very successful serial entrepreneurs likely benefit from creating a prestigious nvt and advisory board (due to the non-performance based rewards prestige generates in addition to the performance based rewards their reputation generates). we do not include successful serial entrepreneurs in our model but this stage model affords researchers meaningful control over the articulated variables. theoretical refinement and empirical examination of this model should increase our understanding of the process of establishing cognitive legitimacy. researchers need to consider possible limitations of the model. although we focus on establishing and building cognitive legitimacy through the composition of the nvt and advisory board, we acknowledge other research shows an emerging organization has other possible means for improving its legitimacy (e.g. zimmerman and zeitz, 2002; elfring & hulsink, 2003). empirical research is needed to test the propositions in our model and to determine whether these relationships generalize beyond high growth emerging organizations. however, the objective of this study involves refining and extending existing models and insights. we encourage future research to test the journal of small business strategy vol. 23, no. 1 85 propositions presented and develop theory that extends them. testing the propositions presented in this article requires operationalization of cognitive legitimacy, novelty of venture idea, and prestige. aldrich and fiol (1994) argue that cognitive legitimacy can be assessed by measuring the level of public knowledge about a new activity. consistent with zimmerman and zeitz (2002), we consider cognitive legitimacy as a continuous variable ranging from zero to very high levels of legitimacy, not as a dichotomous variable where emerging organizations either have legitimacy or do not. cognitive legitimacy requires measurement of the extent of stakeholders’ awareness of the emerging organization’s product, organization, and management team (shepherd & zacharakis, 2003; aldrich & fiol, 1994). stakeholders could be asked to rate the level of knowledge regarding these three dimensions. the novelty of venture idea has been assessed by having researchers rate the level of innovativeness and then determining interrater reliability (e.g. shepherd & detienne, 2005, amason et al., 2006). the method appears to adequately measure novelty of venture ideas and could be used in testing the proposed model. prestige has been measured in a number of studies regarding boards of directors (e.g. certo, 2003, lester, certo, dalton, dalton, & cannella, 2006), yet further work is required to adapt these measures to nvt and advisory boards. similar to dimov and colleagues (2007), research could measure prestige using centrality measures common in social network studies. eigenvector centrality is used when the status (i.e., prestige) of an actor is a function of the status of those with which he or she is connected (bonacich, 1972). a high eigenvector score indicates the focal actor is connected to well-connected “others”, whereas someone that is connected to “isolates” would have a low eigenvector score even if he or she had a high degree centrality score (borgatti, 1995). high average eigenvector centrality of nvt and advisory boards indicates high prestige. the proposed model applies to high growth, emerging organizations created by innovator entrepreneurs. therefore, the sample needed to test the proposed model needs to capture entrepreneurs who pursue competency destroying innovations in the earliest stages of organization formation. researchers may identify these organizations using the suggestions presented by katz and gartner (1988). data regarding the novelty of the venture idea and prestige may be obtained using information typically provided in a business plan, whereas cognitive legitimacy may be captured by surveying potential stakeholders of the emerging organizations. conclusion emerging organizations need to establish legitimacy to acquire resources necessary for survival. however, few researchers have addressed how emerging organizations build legitimacy, more specifically, cognitive legitimacy. many factors impact emerging organizations’ ability to survive (e.g., environmental and industry forces), but we chose to focus on factors within the control of the entrepreneur at the very beginning of the life cycle of an emerging organization. researchers have noted that, “the entrepreneurial team is a relatively controllable entity. “if well understood, the process of team formation could be shaped to enhance ventures’ chances of success” (forbes, borchert, zellmer-bruhn & sapienza, 2006: 226). the choices of nvt and advisory board members impact how journal of small business strategy vol. 23, no. 1 86 stakeholders perceive the emerging organization. relationships among nvt prestige, advisory board prestige, and cognitive legitimacy merit study since educators advise entrepreneurs to form nvts and advisory boards but do not discuss effective strategies for their formation or explain how they may impact survival in the earliest stages of the organizational life cycle. research on advisory boards, such as investigating the model proposed here, has clear implications for entrepreneurs. entrepreneurs could benefit greatly from knowing more about how to effectively create and use nvts and advisory boards to establish cognitive legitimacy. references aldrich, h. 1999. organizations 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survival: achieving new venture growth by building legitimacy. academy of management review, 27(3): 414-431. professor mitteness’ teaching and research stream focuses on how entrepreneurs build new ventures that improves their chances for success, specifically how angel investors perceive the entrepreneur and the business opportunity. professor baucus’ teaching and research focuses on issues of concern to entrepreneurs with emerging ventures such as angel investing decisions, strategies for establishing legitimacy and ethical decision making. professor norton teaching and research interests involve entrepreneurial risk assessment by entrepreneurs, systematic search for entrepreneurial opportunities and advisory boards in entrepreneurial firms. reproduced with permission of the copyright owner. further reproduction prohibited without permission. table of contents 1 invited distinguished commentary academic entrepreneurship: paradigm sought to paradigm found dale meyer university of colorado— boulder 15 financing complexity and sophistication in nascent ventures charles h. matthews university of cincinnati mark t. schenkel belmont university matthew w. ford northern kentucky university sherrie e. human xavier university 31 conflicts between venture capitalists and ceos of their portfolio companies dmitry khanin texas tech university ofir turel california state university— fullerton 55 effectuation: an alternative approach for developing a sustainability architecture in small business richard c. grimm slippery rock university 71 establishing cognitive legitimacy in emerging organizations: the role of prestige cheryl r. mitteness northeastern university melissa s. baucus university of louisville william i. norton, jr. georgia southern university 93 invited applied commentary: entrepreneurship and mentoring james e. wilbanks university of arkansas—little rock strategy   journal of small business  eknapinski typewritten text eknapinski typewritten text eknapinski typewritten text eknapinski typewritten text eknapinski typewritten text eknapinski typewritten text eknapinski typewritten text eknapinski typewritten text frances m. amatucci slippery rock university eknapinski typewritten text eknapinski typewritten text reproduced with permission of the copyright owner. further reproduction prohibited without permission. family business ceo succession: examining personal retirement expectations jamie d. collins sam houston state university collins@shsu.edu william j. worthington baylor university bill_worthington@baylor.edu john e. schoen schoen family foundation johnschoen@gmail.com abstract retirement well-being expectations of incumbent family owned business ceos are a critical precursor to successful succession events. the significant antecedents to retirement well-being expectation are family relationships, wealth management and transfer, leadership succession and development, and continuity and viability of the firm. using data from a survey of 256 family firm ceos we demonstrate those relationships and show a very strong connection between retirement well-being expectation and firm performance. study results support our premise that antecedents to retirement well-being expectation are indirectly tied to the overall health and performance of the family firm. keywords: family business, retirement, well-being, succession 51 mailto:collins@shsu.edu mailto:bill_worthington@baylor.edu mailto:johnschoen@gmail.com journal of small business strategy vol. 26 ● no. 2 ● 2016 introduction popularly quoted research suggests that only 30 percent of family owned businesses survive the transition from founder to second generation leadership (grassi jr & giarmarco, 2008) and an even smaller number survive into the third generation (chrisman, chua, sharma, & yoder, 2009; kets de vries, 1993). in fact, despite a growing number of studies of cross-generational survival rates (knowlton, 2010; parrish, 2009; sharma & irving, 2005), researchers have yet to resolve many issues pertaining to transition. although the many causes of business failure also apply to family businesses, failed succession events can be even more devastating for a family owned business (fobs). thus, attention to the process of family business succession is warranted. like other scholars, we hold the view that leadership succession is a process, not an event (longenecker & schoen, 1975, 1978; davis & harveston, 2001; chittoor & das, 2007). that process incorporates several distinct phases including initiation, integration, joint reign, then withdraw (cadieux, 2007) (for a detailed review of succession literature, see le breton-miller, miller, & steier, 2004). further, many agree that a slow succession process is considered wise (brenes, madrigal & molina-navarro, 2006). within the succession literature, predecessorrelated factors previously investigated include the incumbents’ anxiety regarding mortality, his/her ability to trust the successor, openness to new ideas, quality of relationship with successor prior to, during, and post succession (chittoor & das, 2007). given the relationship barriers naturally in place during such events, the satisfaction of the retiree is of prominent importance (klein & kellermanns, 2008). in this study we seek insights into retiree satisfaction and well-being expectations prior to retirement. next we review the family business literature with respect to succession broadly and retiree well-being specifically. we then develop our related hypotheses. we test those hypotheses using a sample of family owned businesses in india. finally, we discuss our findings and their implications before offering concluding remarks and suggestions for future research. literature review personal retirement expectations few business owners like to think about the time when they won't be at the helm of their companies. this frequently leads them to postpone the succession planning process. many family firm owners are unwilling to plan for eventual leadership changes, making such transitions less likely to be successful (cabrera-suarez, de-saa-perez, & barciaalmeida, 2001; miller, steier & le bretonmiller, 2003; putney & sinkin, 2009). incumbent concerns can lead to succession stagnation or even sabotage of the process (sharma & irving, 2005; ward, 1987). to better understand this particular piece of the succession process, we investigate concerns of the potential retiree. although several variables impact the succession process, we seek insights into concerns that incumbents have regarding their own well-being (herein we refer to the incumbent, predecessor, or retiree interchangeably). although some family business research has focused on the founders in lieu of successor consideration (cater & justis, 2009), a considerable body of literature pertains to 52 journal of small business strategy vol. 26 ● no. 2 ● 2016 successors. in their review of succession literature lebreton-miller et al. (2004) demonstrated that the majority of empirical research concentrates on successor motivations as opposed to incumbent motivations; with 40% of the literature on successor, 25% on the incumbent. while we feel that neither consideration has been neglected, and that both are important, our focus centers on incumbents considering succession. incumbent considerations of and subsequent hesitations to retire due to discomfort dealing with their own mortality are well established. for example, cadieux used semi-structured interviews of 10 canadian firms to develop a qualitative typology of predecessor roles governing the joint management phase of succession (cadieux, 2007) showcasing that incumbents are suffering from role shift as their new roles replace old ones. other incumbent qualities investigated as antecedents to successful succession include motivation and willingness to let go; quality of relationship with successor (measured as respect, understanding, trust, cooperation), and incumbent needs (capacity to trust and share vs. tendency to control or be aggressive) (le breton-miller et al., 2004). while other research efforts have investigated the requirements for appropriate successor choice as well as the training required to ensure their success, our research focuses on the potential retiree. the vast majority of the decision-making power lies within the control of the incumbent considering retirement, not the successor. thus, we focus where the decision-making power resides. our orientation is from the view of the incumbent considering exit from the firm and specifically their perception of what a successful succession event would entail. his/her concerns and desires are notably different than the incoming leadership and those differences are of important consideration. for harmony to be in place, the predecessor must be satisfied as well as the successor and other members of the family and firm. ceo personal retirement expectations have been found in prior studies to directly influence the succession planning in family firms (gagne, worsch & de pontet, 2011). we pull heavily from potts and colleagues (potts, schoen, loeb & hulme, 2001a, 2001b), primarily their work with financial planners who cater to family business owners. in their work, several elements of retirement well-being were explored. the primary dependent variable for financial planners is an effective retirement, thus the authors were seeking insights into individual retirement plan effectiveness. our research differs as our ultimate focus is on family business performance and survival. we surmise that botched succession events are a leading cause of family firm mortality. literature confirms that several elements are important for successful succession and each of those elements deserves a detailed exploration. one of those elements is incumbent satisfaction with the overall succession process (davis & harveston, 2001) and their expectation of well-being postsuccession (gagne, et al., 2011). if an incumbent does not expect an acceptable quality of life post retirement, they might hinder the succession process or fail to give their full effort. either way, an incumbent lacking expected well-being may jeopardize the succession event. 53 journal of small business strategy vol. 26 ● no. 2 ● 2016 we propose that successful family owned businesses can overcome resistance to succession. they know that family and business are not mutually exclusive and therefore spend the time, resources and attention necessary to ensure the internal family issues are in good keeping just as they ensure the business is functioning smoothly. we explore antecedents to family firm ceo personal retirement well-being expectations. we also argue that personal retirement expectations are significant antecedent to firm performance. family business ceos approaching retirement are more likely to let go and to facilitate rather than impede the succession process when they expect personal well-being following their retirement. further, we predict that for retirees to expect well-being, several relational and environmental issues must be resolved. high levels of retiree well-being will be associated with good family relationships starting with their spouse and extending to their immediate family before extending to other family members then eventually towards other communities. additionally, retirees require an orderly transition of their wealth in a manner that enables them to enjoy their retirement years then smoothly transition their remaining assets to their posterity. they have spent a great deal of time and effort building a business that has become synonymous with their individual identity and they wish to find, train and mentor a worthy successor. the combination of these factors provides the basis for our model and proposed hypotheses as proposed below. figure 1 contains the conceptual model. family relationships given the complexities of family business in combining the strategic necessities of business with the relational complexities of family (wrosch, scheier, miller, schulz & carver, 2003, wrosch, amir, & miller, 2011), it makes sense that retirees would seek familial harmony in their later years. in particular, it stands to reason that ceos of family owned businesses recognize that business issues and family harmony are inter-related. relationships with the successor, other family members, and key non-family players within the firm all influence key choices made by the incumbent ceo (chrisman et al., 1998; lester & cannella, 2006; sirmon & hitt, 2003). in order for incumbent ceos to feel good about leaving the position that likely defines their legacy, they want to know that their family relationships are healthy and in tact. previous research has demonstrated that relationships with their spouse, children, grandchildren, siblings, and other family members are of key importance to family business owners (potts et al., 2001). since family harmony is a key component to successful leadership succession (chrisman et al., 1998), all parties need to be considered. transitions are smooth when relationships are trust-based and affable (morris, williams, allen & avila, 1997). moreover, trust-based relationships produce low levels of inter-personal conflict, greater personal satisfaction with the relationships, as well as greater intimacy between individuals (mcfadyen & cannella, 2004; perrone, zaheer & mcevily, 2003; rust & chung, 2006). each of these contributes to a heightened sense of personal well-being. thus, incumbent ceo expectations of achieving retirement well-being are proposed to be positively influenced by their interpersonal relationships. therefore, it is hypothesized that 54 journal of small business strategy vol. 26 ● no. 2 ● 2016 h1: family business ceos with healthy family relationships are more likely to expect higher levels of retirement well-being. figure 1 – theoretical model wealth management & transfer given the average number of years that ceos spend working in their field (27 years in our sample) and the quantity of time spent at the helm (19 years in our sample), it is reasonable to believe that family firm ceos want to secure their financial positions prior to departure. ceos are especially concerned about their ability to maintain their lifestyle with their spouse during their active retirement period and long-term care provisions if that active period is cut short. they are also likely to be concerned about issues of inheritance involving the equitable and/or equal distribution of assets to heirs in a manner that does not reduce the incentive or motivation of those heirs. significant financial risk is involved in transitioning leadership responsibilities to a new family business leader. incumbents therefore seek to secure their financial status prior to the completion of the succession process. they also are likely to desire to be proactive regarding the conditions under which they will transfer substantial wealth to their heirs. addressing their long-term financial needs and having a plan in place for ultimately disseminating their wealth is expected to increase incumbent ceos’ anticipated level of well-being upon retirement. therefore, it is hypothesized that h2: family business ceos who have secured higher levels of wealth management and transfer of their personal finances are more likely to expect higher levels of retirement well-being. leadership succession and development in addition to solid family relationships and strong measures in place to ensure the appropriate amounts and vehicles for wealth transfer, incumbents must believe that their firm is in good hands. given the legacy of their commitment to industry, firm, and position, family relationships wealth management leadership succession & firm performance retirement well being continuity & viability 55 journal of small business strategy vol. 26 ● no. 2 ● 2016 ceos want to know that they have turned the reigns over to effective successors. since ceos of family owned businesses tend to have greater influence over matters of succession than do ceos of non-family firms, their reputational legacy will be based, on part, on how the firm did after their departure. successor-incumbent relationship dyads have been considered in previous works (longenecker & schoen, 1975, 1978; howorth, westhead, & wright, 2004). sharma, chrisman and chua (2003) demonstrate that successors and incumbents view succession success differently in their investigation of the alignment of successors and incumbents in canadian fobs. for example, the approach to business risk may differ significantly between founder and manager-builder (incumbent and successor) (cater & justis, 2009). therefore successors’ motivations to enter the family firm and their attributes with respect to leading the family firm (denoble, ehrlich & singh, 2007) are of key importance to succession events. venter and colleagues demonstrate that trust and cooperation between parties were the significant antecedents to post-succession profits and to the perception of succession success (venter, boshoff, & maas, 2005). likewise, the continued involvement of predecessors beyond a reasonable time decreases successor discretion (mitchell, hart, valcea, & townsend, 2009), reduces successor satisfaction with the process (sharma, chrisman & chua, 2003), and increases the conflict within family firms (davis & harveston, 2001; de massis, chua & chrisman, 2008). family businesses are abnormally dependent upon the owner manager single decision maker within the firm (feltham, feltham & barnett, 2005); thus, the primary role of an incumbent during the succession process is to be a mentor to the successor (cadieux, 2007), but then move on. incumbent ceos feel strong bonds towards their organization. as such, they may want to continue functioning as an active member of the leadership team of the firm, or at least act as a mentor to ensure the successor has the appropriate education to maximize the chances for a smooth transition. s/he may also want to maintain active relationships with customers, suppliers, and employees in an ongoing effort to ensure continuity and successful coordination with and acceptance of the new ceo. if these elements are in place, we predict that ceos are more likely to let go. therefore, it is hypothesized that: h3: family business ceos with established leadership succession and development programs in place are more likely to expect higher levels of retirement well-being. continuity and viability although the incumbent’s roles during the succession event include sole operator, king, supervisor, and consultant (handler, 1992), ultimately the incumbent must face the loss of control that comes with succession along with loss of identity within the community (potts et al., 2001a, 2001b). research demonstrates that incumbents may be wise in their reluctance to enact a succession event as many family firms experience post-succession stagnation. ceos want to see their operations continue long after their departure. transfer of controlling interest in the firm is critical for successful succession events, so the phase out period is critical but unlikely to occur without the retiree feeling good about her/his future. the capital needs of the firm are important to the incumbent but that must be balanced with his/her retirement 56 journal of small business strategy vol. 26 ● no. 2 ● 2016 needs and those of their spouse. successor ceos are expected to increase the size, scope and market value of the firm post succession as validation that the incumbent was diligent in his/her preparation of that successor. therefore, it is hypothesized that h4: family business ceos who have secured the continuity and viability of the family business are more likely to expect higher levels of retirement well-being. retirement well-being expectation and firm performance although numerous antecedents exist for performance (barnett, eddleston & kellermanns, 2009; chittoor, & das, 2007; milton, 2008), our focus is on what influence various constructs have on retirement wellbeing expectation and, in turn, the role retirement well-being expectation has in shaping firm performance. within the setting of family business, and specifically our focus on retirees, we argue that retirement wellbeing expectation provides tangible benefits for the firms. there are legitimate strategic reasons to ensure the well-being of retiring ceos (gagne, et al., 2011). given that ceos who lack feelings of well-being might seek to delay retirement, it may be in the best interest of all concerned to ensure retirees are well prepared to let go. retirees with high levels of well-being are more likely to look forward to the succession event, and are therefore more likely to assist in its successful conclusion. therefore, it is hypothesized that: h5: retirement well-being expectation is positively associated with firm performance in the setting of family owned businesses. h6: retirement well-being expectation mediates the relationship between a)family relationships; b) wealth management and transfer; c) leadership succession and development; and d) continuity and viability and firm performance. methods sample to ascertain the status of family businesses in india, we contracted an india based research firm to assist our efforts. a small team of interviewers were trained in our survey instrument fundamentals. due to the fact that english is one of india’s official languages, is typically the language of choice for business, is taught to all schoolchildren, and the language in which business contracts are written in india, the survey was written in english. pretests of the survey involved a total of nine senior executives from indian firms. moreover, we had our survey evaluated for face validity by three business school faculty members in india and four graduate students in india. in the u.s., feedback was gathered from a total of five business professors (including two from india). input regarding the instrument was also solicited from 3 indian graduate students studying in the us. to overcome any residual issues of language, the interviewers were all native to india. semistructured interviews were used to convey the intention of the survey and to clearly understand the responses. the sample population was simplified to ceos of family owned and operated firms within india. participants had to have direct executive authority for their respective firms to be included in the research study. these participants represented a cross-section of industries and represented numerous geographic regions – the interviews were conducted primarily in major cities of several different states within india. we originally contacted 700 entrepreneurs requesting their 57 journal of small business strategy vol. 26 ● no. 2 ● 2016 participation in this project. these ceos were identified by our research partner in india who used government tax rolls and employment databases of businesses registered with their respective state governments. after two rounds of telephone contact and subsequent face-to-face interviews with each willing participant, our response rate for this survey was 36.6%.the survey was a combination of convenience sample plus snowball, meaning that ceos interviewed were then asked to recommend any other family owned business ceos they may know that we could contact for interviews. the resultant sample size of useable surveys was 256. construct validation exploratory factor analysis (efa) and confirmatory factor analysis (cfa) construct validation procedures were conducted using spss 16.0 (klein, astrachan, & smyrnios, 2005) with varimax rotation and kaiser normalization. efa searches the family of measures to report their correlation behavior into form factors. though only theory can differentiate causality from correlation, form factors demonstrate discretion between measure groupings. measures that move more tightly together are more likely to be ‘birds of a construct feather’. when eigenvalues of 1.0+ were chosen within the analysis, spss reported up to nine possible factors. a scree plot visually suggested the accurate number was between 4 and 7 measures. to explore further, convergent and divergent validity was assessed. groupings of measure holdings were reported on a rotated component matrix where individual loadings below .4 were excluded. the rotation converged in fifteen iterations, identifying nine components. most construct measures remained true to their intended, with minor cross-loading; thus, discriminate validity was demonstrated. however, some measures loaded on isolated components. of the 37 original measures, 11 loaded on isolated constructs (though never more than two per) and were removed from the analysis. the 26 remaining measures loaded onto five unique constructs (representing our focal independent and dependant variables) that were used in the study. appendix a includes a complete list of the retained measures and their individual loadings for each construct used in the analysis. harman’s one-factor test for common-method bias was performed (bruneel, yli-renko, & clarysse, 2010) which yielded nine factors with eigenvalues greater than 1. the first factor accounted for only 22.98% of the variance, thus commonmethod bias is not an issue in our data. once factor constructs are isolated and their corresponding measures are identified, specific tests for internal reliability are rendered. the more the measures move in synch, the higher their reliability as measured by chronbach’s alpha (0.7 was considered the hurdle). the one dependent variable construct and four independent variable constructs are explained below. dependent: the dependent variable retirement well-being expectation is comprised of five items drawn from potts et al (potts, et al., 2001a,b) who pulled measures scattered across the fob literature to address the construct. measures were designed from previous literature to develop an overall sense of retirement well-being in multiple categories enveloping self image, legacy concerns, and retirement activities leading to fruitful experiences after leadership succession. a 7point likert scale was used for each item. (alpha=.752). 58 journal of small business strategy vol. 26 ● no. 2 ● 2016 independent: family relationships is an index variable measured as the average of five measures dealing with family relationships, each determined with a 7-point likert scale (alpha=.887). wealth management is the average of four items dealing with financial condition of the ceo and spouse, each on a 7point likert scale (alpha=.719). successor development is the average of eight items each on a 7-point likert scale (alpha=.826). continuity is the mean of four items of firm continuity and viability, each measured with a 7-point likert scale (alpha=.756). descriptive statistics and bi-variate correlations for the construct variables are presented in table 1. controls: firm size which we measured as the number of full-time employees. given the distribution of firm sizes and the resultant kurtosis impact, we followed the empirical norm of transforming the size variable via natural log. firmage is often considered a control variable due to history effects inherent within firms of maturity. older firms may be more settled in their ways and have less anxiety about their future and are therefore considered a potential confounder of variable relationships worthy of control. firm age was calculated by subtracting the year of origin from the current year. given the differences identified in literature between those who start firms and those who acquire them (davis & haverston, 2001), we control for generational influence by asking the responder what generation of family ownership they represent. performance. we measured performance using perceptual performance measures commonly seen in the literature. on a five point likert scale ranging from 1 – lowest 20% to 5 – highest 20%, we asked respondents how they rate their firm with respect to other firms in their industry in five performance areas: total assets, profits, sales growth, overall performance, and competitive position. we averaged the five responses. results descriptive statistics the tables in appendix b contain results of our statistical analyses. descriptive statistics and correlations are presented in table 1. responders to our survey were overwhelmingly male (91.3%). they ranged in age from 24 to 82 years old, with an average of 49.3. appendix c presents graphs regarding the demographics of the respondents and their firms. respondents have been in their industry a long time (average of 18.6 years) and have served in their current leadership capacity for 15 of those years. a large portion of our sample represent the first (46.8%) or second (42.8%) generation but ranged to fifth. 64.6% of respondents considered themselves founders, 32.9% as successors. number of full time employees averaged 86 but ranged to 540. average number of family members working in the business full time averaged 4.2 but ranged to 27; part time averaged 3 but ranged to 52. number of generations working at the same time averaged 2.6 but ranged to 7 (actually one respondent claimed 25 and another 40; we discarded both responses). negative press regarding the nature and attitude of family business succession abounds and our sample displays evidence supporting that uncertainty. while only 12.5% of our sample said they do not want to see continued family involvement, only 43.9% said yes, and 43.5% said they were unsure. the firms represented in our sample pull from a wide range of industries, but the most represented include retail (19%), professional 59 journal of small business strategy vol. 26 ● no. 2 ● 2016 services (14.2%), wholesale distribution (12.4%), and non-professional services (12.4%). average age of our firms is 25 years, but ranged from 1.5 to 200 years. most of our firms are privately held, only 9.2% trade on a publically listed stock exchange. hypothesis testing results for the regression analysis are detailed in table 2. to test the hypotheses, ordinary least square regression was employed (olson, zuiker, danes, stafford, heck, & duncan, 2003). models 1 and 3 demonstrate the impact of the control variables on their respective dvs. no issues of multicolinearity were observed when testing for variance inflation (vif levels were all below 2). model 2 includes the impact of the focal independent variables towards the retirement well-being expectation variable. hypothesis 1 predicts that family relationships will be positively associated with retirement wellbeing expectation. model 2 demonstrates that although the variable is highly significant, the relationship is in the opposite direction predicted. thus, hypothesis 1 is not supported. model 2 also demonstrates the relationships between wealth management and transfer, leadership succession and development, and continuity and viability towards retirement well-being respectively. all three are significant, thus hypotheses 2, 3 and 4 are all supported. model 3 demonstrates the relationship between the control variables and the dependent variable of firm performance. model 5 demonstrates the relationship between retirement well-being and performance when controlling for the antecedents to well-being expectation. the coefficient is significant, thus hypothesis 5 is supported; demonstrating a positive relationship between retirement well-being expectation and performance. hypotheses 6a through 6d claim that retirement well-being mediates any relationship between family relationships, wealth management and transfer, leadership succession and development, and continuity and viability respectively towards firm performance. for each hypothesis, three confirmations are required. first, a relationship between the focal variables and the dependent variable (firm performance) must be significant. second, a relationship must exist between the mediating variable (retirement well-being expectation) and the dependent. third, the relationships between the focal variables and the dependent variable must be reduced (baron & kenny, 1986) when the mediator is controlled. model 4 demonstrates significant relationships between the family relationships, wealth management and transfer, and continuity and well-being variables towards firm performance; thus satisfying the first requirement for hypotheses 6a, 6b, and 6d. the coefficient for leadership succession and development is not significant; thus, hypothesis 6c is not supported. model 5 demonstrates that the mediating variable (retirement well-being expectation) is significant on firm performance, thus meeting the second requirement. finally, model 5 demonstrates the relationship between the focal variables while controlling for the mediator. for the hypothesis to be supported, the coefficient for the focal variable must be reduced when comparing model 5 with model 4. for hypothesis 6a, the coefficient for family relationships in model 4 was -.095, in model 5 the coefficient became non60 journal of small business strategy vol. 26 ● no. 2 ● 2016 significant; demonstrating mediation. thus, hypothesis 6a is fully supported. for hypothesis 6b, the coefficient for wealth management and transfer in model 4 is .116; in model 5 the coefficient is not significant; demonstrating perfect mediation. thus, hypothesis 6b is fully supported. for hypothesis 6d, the coefficient for continuity and viability in model 4 is .189, in model 5 the coefficient reduces in magnitude to .146; thus, hypothesis 6d is supported. discussion and conclusion one of the most interesting finding in this study was that indian family firm ceos had a negative expectation of post-retirement wellbeing when they had high levels of expected family relationship involvement. this suggests that ceos of family firms in india may continue to carry the burden of being family patriarch after they have left the family firm. this role is demanding in terms of resources (time and money). wealth management and transfer, leadership succession and development, and continuity and viability are each positively related to retirement well-being expectation. when family firm ceos believe they have adequate wealth management plans established they are also likely to have high expectations of wellbeing after retirement. when these same ceos have confidence that they will have an ability to shape the development of the chosen successor for their leadership position they are also likely to report high levels of retirement well-being expectations. moreover, when family firm ceos have confidence in the continuity of their firm after they retire, their retirement well-being expectations are higher. results also demonstrate support of a positive relationship between retirement well-being expectation and firm performance. family firms in which ceos report high levels of expected well-being after retirement have higher levels of overall performance. ceos who have a positive outlook regarding their upcoming retirement likely have a more positive outlook in general, more willing to pursue opportunities, embrace input from others in the organization, and increasingly empower their employees to make relevant decisions for the organization. each of these characteristics can improve the quality of decision making in a firm and positively impact firm performance. the significance of the retirement well-being expectation antecedents is consistent with prior research (potts, et. al, 2001a, 2001b) with us family owned businesses, with one exception. given that our data collection consists of indian ceos, the differential relationship between family relationships and retirement well-being are noteworthy and consistent with past research. although both groups of ceos rank relationship with family as their primary value requirement for successful retirement, deeper investigations uncovered differences between the two. specifically, us ceos valued relationships with their children and spouse (in that order) but valued issues of lifestyle, long-term care needs, mission completion, and identity higher. in contrast, indian ceos valued relationships with their spouse as their primary concern, followed by children, grandchildren, employees, other family members well above lifestyle issues. in other words, us ceos are clearly more interested in addressing their personal retirement issues before addressing issues of family. indian ceos are family centric first and place their own self-interests subordinate to familial concerns. 61 journal of small business strategy vol. 26 ● no. 2 ● 2016 to further explore the dynamic of indian family owned business ceos’ predominantly negative relationship to retirement well-being, we performed an interaction post-hoc analysis to explore the relationships in greater depth. to do so, we median split the sample based on the family relationship variable. we then reran the regressions of remaining focal independent variables (wealth management and transfer, leadership succession and development, and continuity and viability) on the retirement well-being expectation variable to see if differences arose between the low/high groupings. table 3 offers the resulting differences between the below median sample versus the above median sample. several interesting results can be seen in the post-hoc analysis in table 3. in particular, results suggest respondents from abovemedian family relationship firms have lower concerns regarding leadership succession. we posit that leaders of this type of firm have a greater generalized positive view that leadership succession will be successful for their firm, owing to the positive expectations regarding their familial relationship post retirement. moreover, results from the posthoc analysis suggest that respondents from below-median family-relationship firms are not particularly concerned at all about continuity of the firm. we posit that this may be due to the potential for individuals without satisfactory family relationships to psychologically disconnect from personal interactions with family members as well as simultaneously ceasing to have concerns for the continuity of the family firm. the influence of wealth management and transfer on retirement well-being is robust between groups, no discernable difference was found between the high vs. low median groups. however, the remaining variables of leadership succession and development and continuity and viability interchanged. indian family business ceos who value family relationships below the median value leadership succession and development but are not concerned about issues of continuity and viability which is non-significant. in contrast, indian family business ceos who value family relationships above the median value continuity and viability but are not concerned about issues of leadership succession and development. understanding the dynamics between incumbent and incoming ceos is vital for successful family business succession events. when retirees are assured that the various antecedents to well-being are in place, it is more likely they will support and assist the succession events rather than consciously or unconsciously sabotage the process. the succession process can therefore be a positive experience for the individuals involved as well as for the family firm. limitations given that our survey sample was a combination of convenience plus snowball methodology, issues of generalizability are of ample concern. although a purely randomized sample of indian family owned businesses would improve generalizability, practical constraints make this quite challenging. as highlighted by sharma, chrisman & gersick (2012), surveys play an important continuing role in family business research. prior researchers have successfully employed survey research in family business (litz, pearson, litchfield, 2012). moreover, this approach has a history in management 62 journal of small business strategy vol. 26 ● no. 2 ● 2016 research in emerging markets such as india (collins, uhlenbruck & rodriguez, 2009). as naude (2010) notes, survey research is often essential in developing nations. future research our primary unit of analysis in this paper is incumbent ceos. in the future, we seek insights into the interactive effects between incumbent and incoming ceo before, during and immediately post succession. collecting data across such levels is difficult to manage but will ultimately test the field’s understanding of the succession process beyond antidotal case analysis. determining causal relationships between retirement well-being and its antecedents to performance is left for future research. our focus in this research effort was to confirm antecedent relationships and test their correlation with current fob performance. future efforts may implement a lag between variables and performance to explore causality. contributions to practice this study compliments prior work in this area from potts and colleagues (2001a, 2001b) pertaining to the self-defined interests of us based family business ceos. our observations are significant in that advisors to family owned businesses must understand the motivations of clients in order to deliver value to those clients. recognizing that executives have multiple possible motivations is an important consideration in determining what is required for incumbents to follow through on succession plans. for us based firms, the advisor may focus on the self-interests of the incumbent as the most important element (even if the incumbent would normally not want to admit that his/her own interests are foremost in their mind). for india based firms, advisors may focus on the on-going family relationship dynamic as the primary influencer of post succession plans. ignoring these strong and clearly significant influences can lead to botched succession plans and unhappy clients. the survey instrument developed for this study can be useful to family business advisors as a tool for identifying specific motivations of their clients 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(1987). keeping the family business healthy: how to plan for continuing growth, profitability, and family leadership. san francisco, ca: jossey-bass. wrosch, c., amir, e., and miller, g.e. (2011). goal adjustment capacities, coping, and subjective well-being. journal of personality and social psychology. 100(5): 934-946. wrosch, c., scheier, m.f., miller, g.e., schulz, r., and carver, c.s. (2003). adaptive self-regulation of unattainable goals: goal disengagement, goal reengagement, and subjective wellbeing. personality and social psychology bulletin, 29, 1494-1508. jamie d. collins received his ph.d. from texas a&m university, specializing in strategic management and entrepreneurship; he is currently an associate professor at sam houston state university. he previously taught management and entrepreneurship at the hankamer school of business at baylor university, university of dallas, southwestern university and texas a&m university. jamie has published numerous journal articles in a wide range of outlets, both academic and practitioner-focused. william j. worthington, phd is director of the institute for family business at baylor university. he also serves on the board of the north american regional council of the successful transgenerational entrepreneurial practices (step) research alliance associated with babson college in boston, massachusetts. dr. worthington is a member of the editorial review board for family business review. john e. schoen is president of the schoen family foundation. he previously was president and co-founder of the new mexico family business alliance. mr. schoen served as founding co-director of texas a&m university’s family and owner-managed business program. he is also a fellow in the family firm institute. mr. schoen is a retired professor, having taught family business at southern methodist university, texas a&m university, and baylor university. 66 journal of small business strategy vol. 26 ● no. 2 ● 2016 appendix a: survey items your perceptions regarding effective retirement picture yourself at the time you are leaving the ceo position. utilizing the following 7-point scale, please indicate the extent to which you agree or disagree that the following statements are necessary for your successful retirement. answers may range from a "7" which means you "strongly agree" with the statement to a "1" which indicates you "strongly disagree." strongly agree agree moderately agree neither agree nor disagree moderately disagree disagree strongly disagree 7 6 5 4 3 2 1 retirement well-being expectation (alpha=.752) [.644] you are comfortable with your self-image and accept your new identity as non-ceo [.785] you have a sense of accomplishment and completion of personal mission [.710] you are satisfied with the legacy conveyed to younger generations [.638] you are satisfied with the vision of the future of the business [.521] you have a sense of significance and new life after leaving the ceo position continuity (alpha=.756) [.496] the family firm continues as an on-going enterprise after you leave the ceo position [.801] the successor ceo and leadership team increase the size (revenue) and scope of the family firm [.799] the successor ceo and leadership team maintain or enhance the market value of the family firm family relationships (alpha=.887) [.781] you maintain or improve the quality of your relationship with your spouse [.775] you maintain or improve the quality of your relationship with your siblings [.877] you maintain or improve the quality of your relationship with your children [.695] you maintain or improve the quality of your relationship with your grandchildren [.742] you maintain or improve the quality of your relationship with other family members wealth management (alpha=.719) [.588] you and your spouse are able to maintain your lifestyle during your active retirement period [.707] you and your spouse have sufficient income to meet your long-term care requirements [.681] you and your spouse reconcile your retirement income needs with the capital needs of the firm [.660]the capital needs of the firm are balanced with the retirement needs of you and your spouse successor development (alpha=.819) [.603] you continue to function as an active member of the leadership team of the firm [.572] you act as a mentor for family members who are employed in the business [.527] you play an informal, consultative role with successor(s) [.601] you maintain an active role in the financing activities of the firm [.762] you consider leadership development / education programs important for successor candidates [.808] you maintain an active relationship with customers and suppliers [.764] you maintain an active relationship with employees [.462] you act as a coach/mentor to the successor ceo 67 journal of small business strategy vol. 26 ● no. 2 ● 2016 appendix b – tables table 1 descriptive statistics and correlations mean s.d. 1 2 3 4 5 6 7 8 9 1. firm age 26.4 16.1 2. firm size 86.2 88.5 .591 3. industry 7.1 3.4 .212 .286 4. founder 1.4 .54 .378 .144 -.014 5. ceo age 49.3 13.5 .342 .359 .157 -.065 6. family relationships 6.1 .77 .040 .084 .144 -.186 -.040 7. wealth management 5.5 .79 .224 .207 .075 .167 .167 .176 8. leadership succession 5.3 .73 .390 .272 .219 .080 .264 .325 .362 9. continuity 5.5 .77 .268 .285 .112 .131 .059 .279 .605 .568 10. retirement well being expectation 5.0 .94 .364 .311 .144 .162 .240 .006 .492 .575 .535 n=256 table 2 hypothesis testing model results variable model 1 model 2 model 3 model 4 model 5 firm age .009† ns ns ns ns firm size .279** .129† .222*** .161** .141† industry ns ns -.033** -.032** -.034** generation .276*** ns ns ns ns family relationships -.272*** -.095† ns wealth management and transfer .251*** .116† ns leadership succession / development .443*** ns ns continuity and viability .288*** .189** .146* retirement well being expectation .151** f 13.926*** 24.126*** 8.325*** 8.826*** 9.076*** adjusted r2 .195 .464 .120 .226 .254 dependent variable retirement well being expectation firm performance values are unstandardized regression coefficients †p<.1 * p<.05 **p<.01 ***p<.001 68 journal of small business strategy vol. 26 ● no. 2 ● 2016 table 3 post hoc analysis median split of family relationships variable below above firm age n.s. n.s. firm size .214† n.s. industry n.s. .038† generation n.s. .283** wealth management and transfer .252† .231† leadership succession / development .278† n.s. continuity and viability n.s. .516** f 5.46*** 19.11*** adjusted r2 .240 .527 dependent variable retirement wellbeing values are unstandardized regression coefficients †p<.1 * p<.05 **p<.01 ***p<.001 69 journal of small business strategy vol. 26 ● no. 2 ● 2016 appendix c demographics of survey 11.80% 24.10% 44.90% 19.20% ceo age <35 yrs 35 to 44 yrs 45-64 yrs 65+ yrs 5.70% 31.50% 43.60% 14.90% 4.30% firm age <5 yrs 5 to 24 yrs 25 to 44 yrs 45 to 64 yrs 65+ yrs 70 http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2020, vol. 30, no. 02, 59-71 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2020 small business institute® w w w. j s b s . o rg introduction 1hhl leipzig graduate school of management, jahnallee 59, 04109 leipzig, germany, frieda.rosin@hhl.de 2hhl leipzig graduate school of management, jahnallee 59, 04109 leipzig, germany, dorian.proksch@hhl.de 3hhl leipzig graduate school of management, jahnallee 59, 04109 leipzig, germany, stephan.stubner@hhl.de 4hhl leipzig graduate school of management, jahnallee 59, 04109 leipzig, germany, pinkwart@hhl.de digital new ventures: assessing the benefits of digitalization in entrepreneurship digitalization, entrepreneurship, new ventures, resource savings, operational efficiency, flexibility apa citation information: rosin, a., f., proksch, d., stubner, s., & pinkwart, a. (2020). digital new ventures: assessing the benefits of digitalization in entrepreneurship. journal of small business strategy, 30(2), 59-71. new ventures typically suffer from the liabilities of newness and smallness (djupdal & westhead, 2015; george, 2005; stinchcombe, 1965; symeonidou, 2013). a variety of challenges accompany these liabilities, such as limited resources, which restrict new ventures in the number of actions they can employ (djupdal & westhead, 2015; ko & liu, 2017). to survive despite limited resources, entrepreneurial organizations must rigorously manage resources and concentrate on actions that enhance efficiency (george, 2005). digitalization might help to overcome those limitations. information technologies encompass digital solutions for all elements of the value chain. researchers have assigned a variety of benefits to the application of digital technologies, such as resource savings, greater operational efficiency and more flexibility (bleicher & stanley, 2018; henriette et al., 2015; ladeira et al., 2019; nambisan, 2017; parviainen et al., 2017). integrating digital technologies in new ventures early in their life cycle therefore seems to be beneficial to overcome the limited amount of resources in entrepreneurial firms. in line with the resource-based view (rbv), new ventures might be able to generate competitive advantage by focusing on exploiting the benefits of applying digital technologies (barney, 1991; ladeira et al., 2019; muhos et al., 2019). although previous research has identified a generally positive influence of digitalization, this effect has not been empirically tested in an entrepreneurial environment (devos et al., 2012; obwegeser et al., 2016; riemenschneider et al., 2003). current research has just begun to understand the causalities between digital technologies and entrepreneurship, a research stream known as digital entrepreneurship (ladeira et al., 2019; muhos et al., 2019; nambisan, 2017; ziyae et al., 2014). however, this research stream is still in its infancy and is limited in scope in explaining the benefits of applying digital technologies in the area of entrepreneurship (ferreira et al., 2016; ladeira et al., 2019; nambisan, 2017; zhao & collier, 2016). as a result, researchers have called for future studies analyzing how digital technologies can shape the complex entrepreneurial environment (berger & kuckertz, 2016; ladeira et al., 2019; nambisan, 2017). our study fills existing research gaps in this context. new ventures must rigorously manage their resources because they suffer from the liabilities of newness and smallness. digitalization, traditionally associated with resource savings, higher operational efficiency and more flexibility, implies great benefits for new ventures; however, this effect has not been empirically proven. implementing the resource-based view, this article uses a survey with 102 new ventures to investigate how new ventures benefit from digitalization. we clustered the new ventures in three groups according to their degree of digitalization (low, medium or high) and conducted an analysis of variance to compare the benefits of digitalization among these groups. our results show that a higher degree of digitalization in new ventures does not result in direct resource savings such as decreased human capital or office space needed; rather, it results in indirect savings through increased operational efficiency. it also leads to considerably greater market flexibility. our findings assist founder and founder support initiatives in evaluating the necessity of investing in digitalization given the benefits realized. anna frieda rosin1, dorian proksch2, stephan stubner3, andreas pinkwart4 http://www.smallbusinessinstitute.biz http://www.jsbs.org 60 a. f. rosin, d. proksch, s. stubner, & a. pinkwart journal of small business strategy / vol. 30, no. 2 (2020) / 59-71 in this article, we examine how new ventures benefit from digitalization along the value chain. our investigation distinguishes between degrees of digitalization to determine whether a higher degree of digitalization leads to greater benefits such as resource savings, greater operational efficiency or more flexibility in new ventures. building on the rbv, we develop and test hypotheses regarding to the benefits of digitalization in new ventures. to do so, we collected data from 102 new ventures from various industries using a survey design. we used cluster analysis to group the new ventures according to degree of digitalization (low, medium or high) and conducted an analysis of variance (anova) to test for the benefits of digitalization among these groups. this study contributes to the literature by responding to current calls for more digital entrepreneurship research (ferreira et al., 2016; ladeira et al., 2019; nambisan, 2017; zhao & collier, 2016). the article provides researchers with a solid basis for understanding digitalization as a resource through the lens of the rbv and also highlights its limitations in entrepreneurship. this contribution is important in terms of research development, as there are only a few empirical studies in digital entrepreneurship and current knowledge on the effects of a higher degree of digitalization in new ventures has not been driven efficiently. understanding the causality between digitalization in new ventures and the benefits resulting thereof is also important from a practical perspective. with this article, we contribute to entrepreneurial practice by providing managerial insights that highlight the most important benefits of digitalization for new ventures. this is a key concern for new ventures, as the limited access to tangible resources results in the need to carefully evaluate costs and benefits of their investments (george, 2005; symeonidou, 2013). thus, without knowing the payoffs of digitalization, investments (whether by the new venture itself, its investors or other founder supporter) might not bring the expected returns (e.g., resource reduction) but instead result, in the worst case, in a waste of resources. because new ventures are subject to the liabilities of newness and smallness, misallocating resources to digitization could ultimately threaten not only new ventures’ competitiveness but even their survival (george, 2005). the remainder of this article is structured as follows. in the next section, we introduce the theoretical framework by providing insights into digitalization in the area of entrepreneurship and developing hypotheses to test the benefits resulting from the usage of digital technologies. next, we describe the methodology and present and discuss the results of the empirical study. finally, we highlight the implications as well as the study limitations and future research suggestions. theoretical framework entrepreneurship and digitalization entrepreneurship describes the discovery, founding and running of new businesses, allowing the realization of novel ideas or business models and the generation of new opportunities in business (ferreira et al., 2016; ladeira et al., 2019; memon, 2016). herein, we define the entrepreneurial firm as a new venture, being an organization not older than 10 years and having not more than 50 employees. research highlights that new ventures are typically confronted with a variety of challenges caused by the liabilities of newness and smallness (djupdal & westhead, 2015; george, 2005; stinchcombe, 1965; symeonidou, 2013). new ventures need to put a great deal of effort into developing intangible resources (e.g., a broad skill set, the establishment of operational routines), which they typically do not have in the initial years due to the liability of newness (barney, 1991; fackler et al., 2013; stinchcombe, 1965). developing this knowledge and these actions takes time and financial resources. however, new ventures typically lack these tangible resources and have difficulty generating scaling effects, because of the liability of smallness (fackler et al., 2013). according to the rbv, entrepreneurs therefore need to select a strategy that can exploit internal resources and capabilities in the best possible way relative to the opportunities arising externally (barney, 1991). the rbv lays the theoretical foundation in our article to examine how new ventures might be able to generate competitive advantage by focusing on exploiting the benefits of digitalization (barney, 1991; cai et al., 2014; martin & javalgi, 2016). using the rbv to explain new venture performance issues is common in entrepreneurship research (cai et al., 2014; martin & javalgi, 2016; sirmon et al., 2007). developing capabilities in the field of digital technologies might help new ventures efficiently and effectively perform value-adding tasks along the value chain (martin & javalgi, 2016). creating own capabilities, such as digital technology capabilities, is necessary because the external environment is unlikely to provide all resources needed for a new venture to perform well (cai et al., 2014; sirmon et al., 2007). building up a high degree of digitalization in new ventures seems to be a promising strategy for new ventures to overcome the liabilities of newness and smallness. “digitalization” describes the adaption of digital technologies in business, economy and society and provides possibilities to connect objects, individuals and entire organizations (autio, 2017; legner et al., 2017). applying digital technologies in the field of entrepreneurship is summarized as “digital entrepreneurship” (davidson & vaast, 61 a. f. rosin, d. proksch, s. stubner, & a. pinkwart journal of small business strategy / vol. 30, no. 2 (2020) / 59-71 2010; nambisan, 2017), defined as new ventures that are linked with digital activities or goods and services and thus pursue opportunities with the help of any digital element (davidson & vaast, 2010; dutot & van horne, 2015). according to hull et al. (2007), digital entrepreneurship can be divided into three groups: light, moderate and extreme digital entrepreneurship. light digital entrepreneurship describes a firm that uses digital technologies only as complement to more traditional processes. moderate digital entrepreneurship, in contrast, encompasses new ventures that can exist only by concentrating on a digital product/service or other digital components, and extreme digital entrepreneurship describes firms having a digital product or service as well as digital processes. berger et al. (2018) note that these digital processes can be of pure technical nature or can include the active involvement of humans (e.g., digital customer interaction, digital internal collaboration). in this article, we define the degree of digitalization similar to hull et al.’s (2007) conceptualization, distinguishing between low, medium and high degrees of digitalization by means of digital products/services, digital processes, digital customer interaction and digital internal collaboration. the benefits of digitalization the application of digital technologies in the context of entrepreneurship and small-and medium sized enterprises has revolutionized organizations around the globe (celuch et al., 2014; ziyae et al., 2014). new ventures that can successfully adopt digital technologies and develop the necessary capabilities to use those resources along the value chain are able to generate a variety of benefits (ladeira et al., 2019; voelker et al., 2017; žebrytė et al., 2019) to overcome the liabilities of newness and smallness. parviainen et al. (2017), for example, show that the potential effects resulting from digitalization are positive. organizations that can, for example, digitalize information-intensive processes are able to replace manual steps, which helps streamline actions (parviainen et al. 2017). thus, an integrated digitalization enables new ventures to track processes in real time so that workflows become more transparent (arkhipova & bozzoli, 2018; iivari et al., 2016), which allows for not only faster decision making but also the identification of processes with improvement potential, which might result in cost savings (hui, 2014; iivari et al., 2016; mazhelis et al., 2013). in addition, the transformation from manual to digital processes along the entire value chain enables firms to automatically collect and analyze data, which can help new ventures increase the quality and comprehensiveness of information that is transferred from one end to another (ladeira et al., 2019). it further helps organizations identify risk factors. the continuous access to real-time data provides managers with the opportunity to react before problems occur, resulting in potential cost savings (parviainen et al., 2017). thus, we believe that the more parts along the value chain are digitalized, the higher are the resource savings. replacing manual tasks with digital technologies can also render some tasks previously performed by employees obsolete (parviainen et al., 2017), resulting in potential staff reductions. having fewer team members might also affect the office space needed. moreover, the more digital organizations are, it seems the greater opportunity for flexible work styles such as remote work, which can potentially further decrease the need for office space (parviainen et al., 2017). when all the information and services are digitalized, the necessity of collocated work teams is minimized (hull et al., 2007) because employees have access to all necessary tools and information digitally (iivari et al., 2016). in addition, the greater the degree of digitalization in the new venture, the less infrastructure is needed to store documents or other physical products, which also appears to result in less need for office space, which in turn might lead ultimately to lower costs (ladeira et al., 2019). those potential resource savings through digitalization lead to the first hypothesis: h1. a higher degree of digitalization in new ventures leads to greater resource savings. digitalization also facilitates the development of improved working routines in new ventures (hair et al., 2013). using digital technologies in entrepreneurial organizations allows, for example, for immediate replies to customer queries, either automatically for standard requests or with justin-time replies through online applications, such as chat bots (ladeira et al., 2019; mazhelis et al., 2013). such technologies appear to save time and thereby potentially influence new ventures’ operational efficiency. digitalizing further provides firms with the potential to have digital payment or customer relationship management systems (mazhelis et al., 2013), which looks as if it leads to faster response times and less routine work. moreover, the more digital an organization is, it seems, the greater the amount of new opportunities for communication and internal collaboration (hair et al., 2013; joshi et al., 2018). this is especially relevant when members of the new ventures are dispersed in terms of time or geography (hair et al., 2013). employees’ digital capabilities can also include the ability to engage in active exchange of information and documents through digital platforms such as cloud services (fischer & reuber, 2011). these digital capabilities support decision making and ultimately influence digital collaboration. moreover, digital 62 a. f. rosin, d. proksch, s. stubner, & a. pinkwart journal of small business strategy / vol. 30, no. 2 (2020) / 59-71 means of communication also provide new opportunities to share information with external stakeholders such as suppliers (hull et al., 2007; ladeira et al., 2019). by providing suppliers with direct access to diverse digital platforms, it appears that the operational efficiency in new ventures can be increased in the sense that information does not need to be manually shared with these stakeholders. a high degree of digitalization in new ventures therefore seems to result in more operational efficiency (iivari et al., 2016). these aspects give rise to the second hypothesis: h2. a higher degree of digitalization in new ventures results in more operational efficiency. digitalizing various parts of the value chain in new ventures means that team members have access to all digital information regardless of their location. the more digital a new venture is, the greater appears the work flexibility, as the number of actions team members must physically perform in the office decreases (parviainen et al., 2017). instead, they are able to work remotely from any place with internet connection, resulting in potentially increased working flexibility. digitalization further influences the market flexibility for organizations (delone et al., 2018; ladeira et al., 2019; von briel et al., 2018). the more digitalized a new venture is, the more opportunities the firm has to generate valuable information about stakeholders such as customers and the greater its access to other markets due to the internet (ladeira et al., 2019). in addition, with digitalization comes the “ability to turn existing products or services into digital variants, and, thus, offer advantages over tangible products” (parviainen et al., 2017, p. 64). this way, new products can be introduced to the market more easily. furthermore, a high degree of digitalization enables firms to get digital customer feedback through digital platforms. this way, new ventures can integrate customers’ opinions as they develop digital innovations. as such, digital technologies seem to speed up the time to market and to affect the market flexibility (delone et al., 2018; von briel et al., 2018). this reasoning results in the third hypothesis: h3. a higher degree of digitalization in new ventures results in greater flexibility. method data we collected data of german digital new ventures from may 2018 until november 2018. we asked the founders to fill out our online survey. for the data collection, we initially dispersed our survey link within our university network as well as shared the survey at two entrepreneurship conferences. we then used a snowballing sampling technique, meaning that we asked respondents to refer us to other potential participants. using this technique for data collection is common in entrepreneurship research (khelil, 2016; kuhn & galloway, 2015; singh et al., 2015; verver & koning, 2017) because it provides an effective method to create a homogeneous sample in a population in which the total size is unknown. this holds true in the case of the german entrepreneurial landscape. due to its continuous increase but also disappearance of new ventures the overall size of the market is unidentified (khelil, 2016; neergaard, 2007). this is especially the case as we aimed to have a high share of digital new ventures in our dataset. to develop items to measure the degree of digitalization and evaluate its benefits, we referred to academic literature (berghaus et al., 2017; davidsson et al., 2017; hull et al., 2007). we made adjustments to our items by considering the characteristics of new ventures. two experts on our author team guided the process, a common academic practice (davidsson et al., 2017): one author is a successful digital entrepreneur with 20 years of experience who has founded four digital new ventures and is an investor in more than 35 digital businesses. a second author serves as minister for digitalization on the state level. furthermore, we also discussed our items with two other founders as well as four other researchers from our field. for these discussions, we put special focus on comprehensiveness and comprehensibility. we then conducted two pretests involving a total of 17 people, with the aim of gaining feedback on the survey questions. as a result of this feedback, we again adapted our items. in addition, we paid special attention to outliers in our constructs, which might have been caused by misunderstandings. again, we adjusted the items accordingly. following the first two pretests, we conducted a pilot study with 24 participants to determine the reliability of the constructs and significant items (davidsson et al., 2017). we observed a high reliability in the constructs; therefore, we began the final data collection using the questionnaire items that remained. after 116 responses, we were not referred to any more new ventures, meaning that we already had included all new referrals in our data set. we removed 14 responses from our final calculations: 4 of the participating firms were older than 10 years and 10 were not headquartered in germany. our final model therefore contains 102 cases. on average, the new ventures were 3.4 years old (median: 3). the majority of the participants (70.6%) were part of the founding team, 15.7% were members of the management team and the rest included other team members (13.7%). the industry distribution was diverse, with participating or63 a. f. rosin, d. proksch, s. stubner, & a. pinkwart journal of small business strategy / vol. 30, no. 2 (2020) / 59-71 ganizations active in information technology (it)/consumer electronics (12 participants), consumer services (11 participants) and consumer commerce (9 participants), among others. participants’ ages were diverse as well: seven participants were between 18 24 years of age, 61 were between 25 34 years, 25 were between 35 44 years, eight were between 55 65 years, and one was over 65 years. the majority of participants (59%) had a business/economics background; the remainder of respondents had varied backgrounds: it: 11, social science: 8, life science: 6, engineering 4, law: 1 and other: 11. we measured the degree of digitalization with four dimensions: digital product and services, digital processes, digital customer interaction and digital collaboration. to measure the items for the construct of digitalization, we used a multi-indicator approach. because the degree of digitalization cannot be measured directly, we used partial least squares (pls) structural equation modeling to create a latent variable score for the construct. this type of variance-based structural equation modeling has recently gained popularity in entrepreneurship and management research and is the method of choice for explorative studies (cannavale & nadali, 2018; kuckertz & prochotta, 2018; shinnar et al., 2012). we found that all four constructs exceeded a cronbach’s alpha of 0.7, a composite reliability of 0.8 and an average variance extracted of 0.5 (hair jr. et al., 2016; kline, 2015), indicating high construct reliability. in addition, we tested for the discriminant validity using three approaches: the fornell-larcker criterion, the cross-loading approach and the heterotrait-monotrait ratio (henseler et al., 2015). our model passed all tests. we then extracted the latent variable score of the degree of digitalization constructs, which captures the value of all items per construct, thereby obtaining a single variable for each construct of the degree of digitalization. we then used cluster analysis to group the new ventures according to the four dimensions of digitalization. the goal of cluster analysis is to classify the data into homogeneous groups (hair et al., 2014): the elements within one group should have very similar characteristics, and the elements from two distinct groups should be different. we used hierarchical cluster analysis with ward’s method and euclidian distances to group the new ventures in our sample accordingly. measures we distinguish between the constructs that measure the degree of digitalization and those that measure the benefits of digitalization. in the following subsections, we describe how we capture these variables. the degree of digitalization. we created four constructs to measure the degree of digitalization: digital product and services, digital processes, digital customer interaction and digital collaboration. we initially based these constructs on items from berghaus et al. (2017), but we adjusted them during the pretests to reflect the conditions of new ventures. we used five-point likert scales for all items. with regard to digital products or services, we asked respondents to rate whether their level of digitalization of their products and services is high compared with their competitors, whether they exploit all opportunities for digitalization in the market to develop their products and services, whether they successfully implemented new digital business ideas or business models within the last three years and whether they are able to quickly adopt their digital offerings. we also asked them to provide information on the integration of feedback in the technical development process of their products and services. for the construct digital processes, we asked participants to rate how often the new venture used digital technology to support standard processes, whether they implement the most current digital channels (including mobile and social media) in their processes, whether their decision making was supported by data analytics, whether digital channels were used to integrate and improve core and standard processes and whether they collect control metrics for their digital channels. for the variable digital customer interaction, we asked such questions as whether the new venture was able to handle customer requests digitally, how much of the customer journey occurred in a digital format, whether the customer interactions take place on multiple digital channels and whether marketing and communication were individualized using customer data. items for the construct digital collaboration covered whether the new venture regularly used digital tools for communication, collaboration and information sharing (e.g., sharepoint, jive, trello, slack, dropbox, google drive) and whether team members were able to work from any location because they had access to digital collaboration tools. the benefits of digitalization. to assess the benefits of digitalization in new ventures, we asked respondents to rate the extent to which they experienced a variety of benefits. we derived these items from the literature (bleicher & stanley, 2018; bogner et al., 2016; katz & koutroumpis, 2013; kuester et al., 2018; lenka et al., 2017; nambisan, 2017; unruh & kiron, 2017) and measured them with five-point likert scales (1: very weak; 2: weak; 3: average; 4: strong; 5: very strong). to examine whether digitalization leads to 64 a. f. rosin, d. proksch, s. stubner, & a. pinkwart journal of small business strategy / vol. 30, no. 2 (2020) / 59-71 resource savings, we asked new ventures to rate the extent to which they experienced cost savings, fewer team members and less office space needed. to study whether digitalization leads to higher operational efficiency, we asked participants to rate the degree of time savings, decrease in routine work, decrease in response time and increase in collaboration through the use of digital technologies. to investigate whether digitalization leads to greater flexibility, we asked new ventures to rate the extent to which they experienced greater market and work flexibility. results our cluster solution results in three clusters. the cluster solution assigned 21 participants to group 1 (low degree of digitalization), 50 to group 2 (medium degree of digitalization) and 31 to group 3 (high degree of digitalization). we chose this cluster solution for the following reasons. first, a solution with four or more clusters would lead to one cluster having only seven elements, less than 10% of the elements of our data set, which is not feasible (hair et al., 2014). second, a cluster solution with more than three clusters leads to a situation in which at least one of the outcome variables does not differ significantly within the clusters. table 1 shows the means of the cluster variables (degree of digitalization). note that the greatest differences between the means between groups 1 (low degree of digitalization) and 3 (high degree of digitalization) are in terms of digital processes and digital products/services. to assess the validity of our cluster approach, we table 1 means of the cluster variables digital products and services digital processes digital customer interaction digital collaboration group 1 −1.481 −1.430 −1.207 −1.295 group 2 0.017 −0.243 −0.169 −0.052 group 3 0.611 0.751 0.612 0.576 group 3 group 1 2.091 2.181 1.819 1.871 note: the scores are standardized, with a mean of 0 and a standard deviation of 1 used two approaches (following birley & westhead, 1994; khelil, 2016; proksch et al., 2018). first, we conducted an anova using the aforementioned four variables measuring the degree of digitalization. the values of the four variables should significantly differ between the three groups. table 2 shows that, indeed, an anova based on the three cluster solutions (low, medium and high degree of digitalization) shows all variables are significant at the 99.9% level; therefore, our cluster solution passes the first test. second, we applied discriminant analysis using the group variable as categorical variable and the four degrees of digitalization variables as independent variable. we did so to determine whether the data could be segmented into the three groups by using the values of the four degree of digitalization variables. as table 3 shows, the first discriminant function is significant, the second is not. however, the first discriminant function already explains 98.8% of the variance. furthermore, the discriminant function achieved a high degree of accuracy (see table 4), with a high ratio of 96% (98 of 102 cases) correctly classified. the maximum chance criterion (49% + 25% = 74% < 96 %) and the proportional chance criterion (37.5% + 25% = 62.5% < 96%) are fulfilled (hair et al., 2014, p. 260). our cluster solution therefore also passes the second test. we conducted an anova to test whether the consequences differ between the three groups. our findings (table 5) show that one of the three benefits assessing h1 is significant (cost savings), but the other two are not (fewer table 2 results of the anova with the degree of digitalization variables f-value significance digital products/ services 86.194 0.000 *** digital processes 124.254 0.000 *** digital customer interaction 47.861 0.000 *** digital collaboration 51.269 0.000 *** * sig. on 95% level, ** sig. on 99% level, *** sig. on 99.9% level 65 a. f. rosin, d. proksch, s. stubner, & a. pinkwart journal of small business strategy / vol. 30, no. 2 (2020) / 59-71 team members and less office space needed). thus, we can only partially confirm h1. for h2, which hypothesized that a higher degree of digitalization in new ventures results in more operational efficiency, all four of our variables (time savings, less routine work, faster response time and better collaboration) are significant (with the exception of less routine work, all at the 99.9% level), confirming h2. testing of h3 shows that only one variable, more market flexibility, is significant (99.9% level); the other variable is not. therefore, we can only partially confirm h3. table 6 shows the mean values for the benefits variables for the three groups (low, medium and high degree of digitalization). for “cost savings” (h1), the data show that a higher degree of digitalization leads to higher cost savings. for time savings (h2), the data show that the greater the degree of digitalization in new ventures, the higher are the time savings. the same applies for faster response time. here, the distances from group 1 to group 2 and from group 2 to group 3 are about equal. the data for less routine work indicates almost no difference between groups 1 and 2; the value is even a bit lower for group 2 than in group 1. in contrast, between groups 1 and 2 and group 3 the difference is quite substantial. the data for better collaboration (h2) show that the distance between groups 1 and 2 is large. groups 2 and 3 have almost the same average value, showing that the benefits of digitalization in terms of better collaboration are not much higher after a medium degree of digitalization is achieved. for more market flexibility (h3), the data indicate that a higher degree of digitalization leads to greater market flexibility: the distances between groups 1 and 2 and groups 2 and 3 are almost equal. discussion we statistically classify the digital new ventures of our data set into three distinct groups (low, medium and high degree of digitalization), confirming hull et al.’s (2007) findings. similar to their results, our data show that the less digitalized group has low values in all four dimensions and the high digitalized group has higher values in these dimensions. the biggest difference can be observed in the area of digital processes. our findings further show that digitalization only partially leads to young digital ventures needing less resources. we first looked at cost savings, which differ considerably between the less and more digitalized ventures, confirming findings from extant literature that applying digital technologies can result in significant cost savings (hui, 2014; iivari et al., 2016; ladeira et al., 2019; mazhelis et al,. 2013; parviainen et al., 2017). in this aspect, digitalization can help new ventures handle the liability of smallness. we observed multiple places where costs could be saved. for example, the digitalization of information-intensive processes helps streamline actions, so that unnecessary actions can be reduced, resulting in cost savings (parviainen et al., 2017). digital processes also enable new ventures to make workflows more transparent, leading to the potential to identify issues more easily (hui, 2014; iivari et al., 2016; mazhelis et al., 2013; parviainen et al., 2017). however, our results show that digitalization does not lead to a reduction of staff or office space. especially with small founding teams, each team member must fulfill multiple roles (e.g., product development, sales, human resources); thus, a high coordination effort for all endeavors table 3 summary of the three-group discriminant analysis discriminant function eigenvalue % of variance canonical correlation wilks’ lambda chi-square significance 1 4.826 98.800 0.910 0.162 177.566 0.000 2 0.061 1.200 0.239 0.943 5.732 0.125 table 4 accuracy of the prediction by the discriminant analysis cluster number of cases 1 2 3 percentage of cases correctly classified 1 21 19 90.5% 0 0% 2 9.5% 21 90.5% 2 50 0 0% 49 98% 1 2% 50 98.0% 3 31 1 3.2% 0 0% 30 96.8 30 96.8% 66 a. f. rosin, d. proksch, s. stubner, & a. pinkwart journal of small business strategy / vol. 30, no. 2 (2020) / 59-71 table 5 results of the anova with the 9 outcome variables consequences f-value significance h1 cost savings 8.141 0.001 *** fewer team members needed 0.322 0.726 less office space needed 0.263 0.769 h2 time savings 7.280 0.001 *** less routine work 5.682 0.005 ** faster response time 13.392 0.000 *** better collaboration 9.055 0.000 *** h3 more work flexibility 1.199 0.306 more market flexibility 19.046 0.000 *** * sig. on 95% level, ** sig. on 99% level, *** sig. on 99.9% level table 6 means of benefits per group benefits group 1 group 2 group 3 h1 cost savings 3.48 3.81 4.26 fewer team members needed 3.05 3.13 3.26 less office space needed 3.57 3.32 3.42 h2 time savings 3.57 4.03 4.32 less routine work 3.48 3.35 3.98 faster response time 3.48 4.06 4.44 better collaboration 3.48 4.23 4.26 h3 more work flexibility 4.29 4.32 4.54 more market flexibility 3.24 3.81 4.30 is more easily handled when all team members are working together physically in one office (e.g., handling application processes, meeting customers or investors). moreover, new ventures typically increase rather than reduce number of team members in the first years after inception. in our analysis, a high degree of digitalization results in more operational efficiency. first, digitalization leads to time savings. standard processes can be supported by it systems, which reduces the manual labor needed. this finding is also supported by the second variable, less routine work. however, only group 3 was able to leverage this particular benefit. a possible explanation is that we must distinguish between digitalization and automation. doing the same tasks digitally instead of using a paper-based method does not necessarily lead to an improvement of the process itself. only a redesign of the process with, for example, some form of automation might result in significantly less routine work. possibly, only the third group in our data set had the necessary level of process digitalization to also enable automation. in addition, digitalization enables new ventures to respond more quickly to customer requests. examples include chat bots, which allow an immediate reply to customer queries. new ventures can use this benefit to derive competitive advantage in line with the rbv, for example, having a better customer relationship management system than other ventures. furthermore, a higher degree of digitalization supports better collaboration among team members. they can use digital tools to support communication and to engage in active exchange of information and documents through digital platforms such as cloud services (hull et al., 2007; ladeira et al., 2019). effective collaboration ultimately also influences the working environment for team members, as it facilitates the flow of information (sievert & scholz, 2017). however, we did not see a difference between groups 2 and 3, which means that digital new ventures only need a moderate level of digitalization to inte67 a. f. rosin, d. proksch, s. stubner, & a. pinkwart journal of small business strategy / vol. 30, no. 2 (2020) / 59-71 grate such tools. nevertheless, we can see that digitalization can be helpful in supporting new ventures in managing the liability of newness. our results further show that a high degree of digitalization results in greater market flexibility, such that new ventures integrating digital technologies are able to react quickly to changing market conditions. we speculate two reasons for this finding; first, digital analysis of customer feedback can quickly reveal a change in customer needs and requirements, and second, a digital product can be adapted more quickly than a physical production (delone et al., 2018; ladeira et al., 2019; parviainen et al., 2017). therefore, new ventures might be more robust to a volatile external environment. this finding is in line with the rbv, which posits that digital capabilities are a source of competitive advantage. in contrast, a high degree of digitalization does not lead to more work flexibility, possibly because the necessary it infrastructure, including cloud storage and online accessible office tools, is a commodity and present in every new venture. in summary, we show that a high degree of digitalization in new ventures leads to a reduction in costs, but not in terms of other resources such as number of team members or office space needed. however, a higher degree of digitalization also results in greater operational efficiency, which can be interpreted as an indirect resource reduction. in addition, a high degree of digitalization increases market flexibility, though not necessarily work flexibility, in our sample. implications theoretical implications our findings contribute to the literature by responding to current calls for more digital entrepreneurship research (ferreira et al., 2016; ladeira et al., 2019; nambisan, 2017; zhao & collier, 2016). our results are important in terms of research development, as only a few empirical studies address this topic. in addition, researchers have not studied the effects of a higher degree of digitalization in new ventures. the results of our empirical study provide researchers with a solid basis for understanding digitalization as a resource according to rbv to derive benefits. we show that developing digital capabilities can help new ventures derive competitive advantages in terms of costs savings, operational efficiency and market flexibility. in addition, we also contribute to the literature by delivering empirical confirmation of the three distinct groups of new ventures, those with low, medium and high degrees of digitalization, as described by hull et al. (2007). practical implications our article contributes to entrepreneurial practice by providing managerial insights that highlight the most important benefits of digitalization for new ventures. this is a key concern for new ventures especially, because they typically have limited access to tangible resources and must carefully evaluate the costs and benefits of their investments (george, 2005; symeonidou, 2013). we demonstrate that a high degree of digitalization does not result in a direct reduction of resources such as human capital or office space needed. in this regard, founder and founder-support initiatives, such as accelerators, should not invest in the digitalization of new ventures with the goal of decreasing those resources. this result can help entrepreneurs and investors generate appropriate expectations from their investments in digitalization. that said, we find that investing in digitalization does help increase operational efficiency. one important aspect is an improvement in collaboration in new ventures, which positively influences firms’ creativity and innovativeness (mcconnell, 2015; nylen & holmström, 2015). thus, our study shows, on the one hand, that founders and founder initiatives keen to improve the internal collaboration between team members could invest in digital supporting tools. in that case, it might be useful to offer them digitalization-related training and to provide the necessary digital infrastructure. in addition, digitalization leads to a faster response time, which helps satisfy customer demands. new ventures that lack these skills can be supported by investing in digitalization. in addition, because digitalization decreases the reaction time to changed market conditions, founders and investors might especially consider investing in digitalization if the new ventures are active in a volatile environment. limitations and future research our study is subject to some limitations. we clustered new ventures with respect to their digitalization degree and tested for the benefits of digitalization. to do so our study uses cross-sectional data. we relied on participants’ perception of how they experienced the benefits of digitalization. a longitudinal research design would be of interest for future research to evaluate if scaling effects could be realized using digitalization over time by increasing the degree of digitalization in their new venture. in addition, because the founders in our data set provided a self-assessment of their degree of digitalization as well as the perceived benefits of digitalization, they may have been inclined to be more positive in answering the questions to generate a positive image of their company. to reduce this possible bias, we 68 a. f. rosin, d. proksch, s. stubner, & a. pinkwart journal of small business strategy / vol. 30, no. 2 (2020) / 59-71 clearly informed the founder that the data would be kept anonymous before distributing the survey. in addition, we did not reveal that we studied the influence of the degree of digitalization on the benefits of digitalization. nevertheless, future studies should analyze the connection of a high degree of digitalization and company performance using more concrete data. furthermore, our results are solely based on ventures in germany. we believe that studying the entrepreneurial landscape in germany is important for several reasons. not only is berlin (the capital city of germany) known as one of the top cities worldwide for new ventures, especially with regard to digital affords (startup-genome, 2019), but germany`s entrepreneurial ecosystem is also highly attractive for european investors. german new ventures receive 29% of europe’s venture-capital investments (kpmg, 2018). even though we think that our results might be transferable to other european countries with similar economic characteristics, a similar entrepreneurial infrastructure and similar values in a country digitalization index (see, e.g., chakravorti et al., 2017) like france, researchers should be cautious to generalize the results. they should first create empirical evidence for this proposition. therefore, we call for further studies that analyze the degree of digitalization and its benefits in other countries and across countries. references arkhipova, d., & bozzoli, c. 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(2014). the deployment and internationalization speed of e-business in the digital entrepreneurship era. journal of global entrepreneurship research, 4(15), 1–11. table of contents 1 early influences and entrepreneurial intent: examining the roles of education, experience, and advice networks mark schenkel, belmont university rodney r. d’souza, northern kentucky university jeffery r. cornwall, belmont university charles h. matthews, university of cincinnati 21 exposing the role of gender in the performance of founding entrepreneurs john h. batchelor, university of west florida 41 why small firms are different: addressing varying needs from boards of directors josh bendickson, east carolina university phillip e. davis, east carolina university briton j. cowden, university of massachusetts, amherst eric w. liguori, university of tampa 59 integrating sustainability into sme strategy jeff shields, university of north carolina, ashville joyce m. shelleman, university of maryland, university college 77 get what you give? an examination of enlightened self-interest, philanthropic intent, and engagement in philanthropy for small firm owners whitney o. peake, western kentucky university michael l. harris, east carolina university william c. mcdowell, middle tennessee state university phillip e. davis, east carolina university 97 what pedagogical methods impact students’ entrepreneurial propensity? bonnie canziani, university of north carolina, greensboro dianne h. b. welsh, university of north carolina, greensboro yuchin (jerrie) hsieh, rochester institute of technology william tullar, university of north carolina, greensboro table of contents stra tegy small business brief great expectations for fine dining: lessons for small business restaurateurs joe singer university of missouri —kansas city singer qa umkc.edu raj arora university of missouri —kansas city aroraqaumkc.edu abstract as ihc 2/u ceniury unfolds, oiir work and our leisure will be changed by our growing sense of individualisni and spiriiualism. experts say consumers in the new millennium will overturn inuch of what we know about target marketing; iurning upside down traditional thinking about what we'l buy, how ive'll live and work, and how ire'll eat. for the aging baby boom generation, the new "meal-lcnnium" will be more about "lime-using" (social event) than "tinie-saviiig" (eat-and-run). the fine dining experience will become the triumph of individualism over the ever faster pace of the new economy, as baby boomers deniand to be treated and catered to as individuals. this snidy investigated the difference between baby boom men and women in attitude, coiisumption emotions, and satisfaction resulting from a visit to a fine dim'ng restaurant. data were collected using a self administered questionnaire from residents of a large mid western city using ajudgment sampling approach. while there was no differencein the mean valuer on these constructs, the causal model revealed significant differences in the profile of emotions influencing satisfaction. introduction the restaurant business by its very localized nature has always been a dominant segment of small business in america. in colonial america, the establishment of taverns and roadhouses to feed ordinary people was decreed by law (alanzo, 1996) as an aid to expanding the frontiers. as a more genteel class emerged in the colonies, finer dining establishments, likened to the "parisian" public eating houses began to spread. americans have come a long way since the days when meals and atmosphere were not of the customer's choice and their price included a fee for lodging, which had to be paid whether or not the diner slept there (alanzo, 1996). the next "meal-lennium" as some restaurant forecasters have called it, will see increasing attention to satisfying so many of the senses. the 108 journal of small business siraiegy vo/. //, no.2 fall/winier 2000 sense of taste, smell, sight, feel, sound, pleasure and arousal (lawrence, 1992, p. 6). each will contribute to customer satisfaction and, more importantly, intention to return again and again. by the year 2010, the national restaurant association estimates that the total sales of the restaurant industry will exceed $580 billion annually as consumers spend 53% of every food dollar on meals away from home compared to 44% in 1999 and 25% in 1955 (bernstein, 2000). however, roger blackwell, a professor of marketing at ohio state university and author of; reinventin the retail su i chain says restaurants will need to examine very closely why and how people consume, not just what they buy. "the next generation of diners will be much more sophisticated than what the industry has ever had to cater to in the past," according to doug schmick, co-founder of a portland, oregon upscale seafood restaurant (wishna, 2000, p. 28). several fundamental demographic changes will produce this new mind-set. today, a babyboomer is turning 50 every eight seconds, entering their peak earning years and empty-nest years. (bernstein, 2000). industry experts know that between the ages of 45-55, people enjoy fine dining more than at any other time in their life, and for the next 15 years, one-third of the population will be in that age group (steinberg, 1999). professor blackwell observes that "it used to be that 25-year-old women, drove the fashion industry, now it's 45-year-old women" —who by the time they are 45, know what they look good in. and, perhaps, an even more interesting fact: baby-boomers are expected to inherit $7 trillion over the next ten years (bernstein, 2000 p.22). the casual dining trend which dominated the 80's and 90's is expected to give way to greater concern for fine dining, according to a yankelovich associates survey, which also observes that 55 percent of these patrons will dine three or more times a month (stevens, 1998). in a related trend, baby-boomers are beginning to relocate from their suburbs to america's newly revitalized and sophisticated downtowns (bernstein, 2000), primarily for social reasons and a simplicity in life that lra mayer sees as a continuation of the trend toward "entertainmentization" in the final dining experience (steinberg, 1999). the fine dining experience as had been forecast, the last ten years have witnessed the importance of affective components of consumption experiences (holbrook & hirschman 1982; westbrook 1980b; westbrook 1987). consumption emotion refers to the set of emotional responses elicited specifically during product usage. these consumption-based responses may be exhibited or expressed as joy, anger, or interest in the structural emotional dimensions such as pleasantness/unpleasantness, relaxation/action, or calmness/excitement. for some products, such as fine dining, emotional benefits are a superior choice criterion to the economic view of consumption. there is significant research evidence in the measurement of emotions and its relevance to marketing. however, what is lacking in the literature is the differential levels of felt emotions based on gender differences. the objective of this research is to study the difference in the consumption emotions experienced between males and females and investigate the differential impact of these emotions on satisfaction related to a fine dining experience. emotions importance in marketing emotions result from exposure to specific stimuli. surprise, for example, may be caused from an exposure to unexpected attributes of a product or situation such as an unusually high or 109 journal of sniall business strategli vol. i l, no.2 fall/winter 2000 unusually low quality. people may experience a feeling of being relaxed in a restaurant providing appropriate ambiance, color or music. the study of emotions is important in marketing for several reasons. emotions constitute a primary source of human motivation and also influence memory and stimulate information processing (kuhl 1986). cohen and areni (1991), in their review of affective processing mechanisms, indicate that consumption emotions leave strong affective traces or "markers" in human memory. these memory elements are highly accessible to cognitive experiences that can be readily retrieved and integrated into current evaluative judgments. thus, emotions influence the formation of attitude, and the retrieval of attitude information. thorson and page (1988) demonstrate the role of emotions in driving attitude and intention to purchase. when an event such as an incoming message or a consumption situation produces an emotional response, it increases the likelihood of meaningful processing of the new experience. this makes it more likely that the new experience will leave a pleasurable and richer trace in memory. furthermore, when the emotions are positive, the attitudes formed will be more positive than when no emotions are present. westbrook and oliver (1991)develop a framework for how emotions lead to the formation of satisfaction. satisfaction is related to attitudes, but is distinguished from attitudes in that attitudes represent a more generalized evaluation of the feeling. furthermore, satisfaction is generally regarded as the key causal factor for experience based attitude change or attitude development leading to repeating expectations. oliver suggests that restaurant patrons may have an initial attitude based on expectations. however, it is the level of satisfaction experienced that leads to final attitude. this attitude serves as the input for determining future purchase intentions. furthermore, satisfaction in a fine dining experience is distinguished from the pleasurableness of the consumption experience itself. it is mainly the evaluation of the "arousal" consumption experience with respect to expected performance. thus it is distinguishable from expected experience and attitude. the model linking these constructs can generally be stated as follows: consumption r emotions -+ satisfaction -+ attitude u intention according to this model, consumption experience encounters result in emotional feelings, which intluence the attitude toward that expected encounter. this attitude has a driving impact on intention to use (re-experience) the product or service in future. a note on the concept and measurement of emotions izard (1977) developed a framework for emotions called the differential emotions scale (des). izard conceptualized emotions primarily as motivational states for all human behavior. the framework comprises 30 adjectives to measure ten fundamental emotions: interest, joy, surprise, guilt, distress, disgust, anger, shame, fear, and contempt. plutchick (1962) formulated a comprehensive theory of primary emotions. according to plutchick, emotions are adaptive devices that regulate in individual survival. eight primary emotions were identified: disgust, anger, acceptance, fear, joy, sorrow, expectation, and surprise. 110 journal of small business strategy vo/. /l, no.2 fal//win/er 2000 mehrabian and russell (1974) used an environmental psychology approach to studying emotions. their particular interest is in the effects of physical environment on emotional responses. this line of inquiry has led to questions relating preference and avoidance of certain settings and the impact of these reactions on problem solving and work. the basic investigations under environmental psychology may be summarized as: (i) the direct impact of environment on human emotions, and (2) the effect of physical stimuli on behavior. this framework postulates that the environment and the characteristic emotions associated with personality result in primary emotional responses —pleasure, arousal and dominance. these three emotional responses describe the emotion-eliciting qualities of environments. furthermore, these also serve as mediating variables in determining a variety of approachavoidance behaviors. russell (1979) has suggested that emotions can be described in two primary dimensions: pleasantness/unpleasantness and arousal/quietness. russell has also shown that additional behavioral outcome dimensions of emotions, are correlated with these two primary dimensions. this two-dimensional view of emotions has been well applied and studied in product consumption situations (westbrook 1987). gender differences and the fine dining experience the investigation of differences in emotions is important from the perspective of understanding and being able to predict intention to patronize a fine dining restaurant in the future. this issue takes on greater importance especially if the decision to revisit a restaurant is a joint decision. there are few studies on gender differences in marketing. for example, zeithaml (1985) investigated the difference in shopping styles of males and females. the findings indicated that males spent less time planning, and gathering information, and made limited trips. mccleary et al investigate gender-based differences in preferences toward choice of a hotel. the study found no differences in the importance of basic services such as clean, comfortable rooms and free local phone service. however, some services such as security, in-room services and amenities (hair dryers and mini bars), and low price were more important to businesswomen in their selection criteria. services that were deemed more important to business travelers were: business amenities (fax machines and suites). thus, very linle is known about the consumption experience at a restaurant between males and females. objectives of the study clearly, human emotions result from exposure to specific understandable stimuli. surprise, for example, may be caused from an exposure to unexpected attributes of a product or a situation such as an unusually high or unusually low food quality. one may experience a feeling of being relaxed or belonging in a restaurant with appropriate ambiance and music (jazz). moreover the level of arousal of various emotions may be different for men and women. furthermore, the influence of emotions on experienced satisfaction, leading to attitude and future intention may be different between men and women. these two issues are central to the investigations in this research report. 111 journal of small business srraregv vali l, no.2 fall/winter 2000 research methodology the focus of the study was on emotions of baby boomers relating to a fine dining experience. data were collected using a structured questionnaire under the scenario method that has been used upon numerous occasions in marketing research (surprenant and solomon 1987). respondents were instructed to consider the specific situation —their total dining experience at a fine dining restaurant. the attitude toward dining at the restaurant was by a summated three item scale with end points as good idea poor idea, worthwhile worthless, and unpleasant pleasant. the reliability of the three items measuring attitude toward the restaurant was rz=.97. satisfaction was measured using a single item scale with end points as very satisfied very dissatisfied. the intention to visit the restaurant was a dichotomous variable. measurement of emotions: emotions related to the experience of dining at a fine dining restaurant are measured using the pad (pleasure, arousal and dominance) paradigm by mehrabian and russell (1974). the items for pad are measured on a 9 point semantic differential scale. the scale for each item was comprised of 6 items (see mehrabian and russell 1974 for details). for example, the scale items for pleasure had the following end points —happy, unhappy; pleased, annoyed; satisfied, unsatisfied; delighted, sad; hopeful, despairing and interested, bored. prior to testing the difference in mean values on various emotions, and also for analyzing the full model by lisrel, it was essential to determine the factor structure of the pad scale and to determine the reliability of the items measuring the emotions. the results of factor analysis revealed three factors, as expected. the only exception was that item 4 of the dominance scale with end points "insignificant/ significant" did not load on its expected domain. this item was dropped from further analysis, resulting in a 5-item scale for dominance and 6 items each for pleasure and arousal. the individual reliabilities were computed for each emotion. the reliabilities for pad constructs were .94, .64 and .82 respectively. although the reliability for arousal dimension may be considered lower than the reliability of other constructs, it is considered satisfactory for basic research. ~sub'ects: data were collected using a judgment sample of adults aged 40 to 56, living in a large midwestern city. respondents were contacted in person and asked to complete the selfadministered questionnaire. a total of 210 individuals were contacted, of which 184 agreed to cooperate and formed the basis of analysis. the respondents were primarily in the adult age groups, with i i % 40 years of age, 42 % between 41 and 45, approximately 36 % between 45 and 50, and remainder up to 56 years of age. the sample comprised of 60 % females and 40 % males. they also represented upper levels of education. while 10 % noted high school education as their highest level of educational attainment, 31 % had some college education, approximately 36 % were college graduates, and 22 % had post-graduate education. analysis of results the scale means for the pad components of emotions for the men and women groups of respondents are shown in table l. the findings in table i show that there are no significant differences between men and women on the three emotions, pleasure, arousal and dominance. this indicates that the restaurant environment is equally effective in arousing the three emotions amongst men and 112 journal of small business strategy vol. ll, ivo 2 fall!winier 2000 women. there are no emotional biases or differences when it comes to being stimulated by the ambience of the restaurant. table i mean values on various dimensions for male and female groups* dimension male female p-value pleasure 7.07 7.47 .064 arousal 4.27 4.85 .177 dominance 5.45 5.12 .240 attitude 7.37 7.69 .256 satisfaction 7.23 7.61 .255 'cale means. scale ranges from 1 to 9. next, the coefficient for the path model leading from emotion to attitude and intention are estimated and shown in table 2. the values in the parentheses are the standard errors and the values immediately below the standard errors are the t-ratios. table 2 estimated equations for the male and female segments male segment satisfaction = 0.78(pleasure) + 0.023(arousal)+ 0.10(dominance) error var. = 0.39, (0.087) (0.084) (0.087) (0.042) r = 0.63 9.06 0.28 1.17 9.41 attitude = 0.92 (satisfaction), error var. = 0.14, r = 0.86 (0.049) (0.015) 18.80 9.41 attitude = 0.49 (attitude), error var. = 0.70, r = 0.26 (0.11) (0.075) 4.48 9.41 female segment satisfaction = 072(pleasure) + 013(arousal) + 0 )2(dominance) error var. = 039, (0.058) (0.058) (0.059) (0.042) r = 0.60 12.35 2.22 2.06 9.41 attitude = 0.93 (satisfaction), error var = 0.14, r = 0.85 (0.035) (0.015) 26.41 9.41 attitude = 0.57 (anitude), error var. =0.70, r =0.31 (0.077) (0.075) 7.37 9.41 generalized conclusions the findings reveal that there is little significant gender based differences in the arousal of emotions related to a fine dining experience. the mean values of the scales for pleasure, arousal and dominance are virtually the same for men and women. this demonstrates that both groups are experiencing and reacting to the same levels of emotions from the stimuli. 113 journal of sniall bust'ness siraiegy vol. ll, no.2 folll)vinrer 2000 when considering the causal model showing the impact of emotions on satisfaction, attitude and intention. the findings are also very similar. there is however, one si nificant difference in the two models. the model for men shows that the pleasure emotion is most significant in its influence on satisfaction. the arousal and dominance emotions do not influence their level of satisfaction. for women, all thc three emotions experienced (pleasure, arousal and dominance) are clearly significant. although pleasure plays a dominant role in women' satisfaction, the influence of arousal and dominance also needs to be included in their overall satisfaction. the models also reveal a strong effect by satisfaction on attitude and the ultimate intluence of attitude on intention to repeat the fine dining experience. small business managers will find this outcome important for two reasons. first, there is the issue of targeting appropriate marketing channels. ln the case of studies dealing with fine dining restaurants, the findings indicate that either gender will respond to incentive advertising. second, the findings are important because both groups experienced similar levels of intensity in emotions. however, the impact of the emotions on satisfaction and intention (repeat business) was different for the two groups, with women exhibiting a significantly richer emotional impact. thus, the overall findings indicate that restaurant owners need not pursue multiple campaign levels or multiple messages to intluence these two groups of respondents. practical implications the 21" century will see the triumph of fine dining over the fast-food, casual-dining chain experience of the 1980's and 1990'here 80 percent of "diners" skipped dessert. the love of the bottomless bowl and immediate junk food (while at the same time exercising to the point of obsession) will yield to the much more sophisticated, better educated, better traveled, more exposed to cultural influence and the palates that desire more fine and adventuresome dining. today, one mcdonald's located in new york city's financial district, features fresh flowers on the tables and in the rest rooms, complimentary grapes and strawberries on the breakfast menu, and cappuccino and french pastries from one of the city's premier bakeries in the afternoon. a uniformed doorman ushers customers in, while a customer-service manager oversees fourteen hostesses dressed in purple and fuschia uniforms who direct patrons to empty tables, hand around napkins, straws, and forgotten condiments. live piano music is provided throughout the day by a staff of three musicians who perform on a catwalk high above the patrons. all of this is the vision of frank madalone, the owner, who has seven other franchises in the city. a california company "technomic" has clearly detected the trend in fine dining and the shifls in dining-out demand. they provide a new online service working with popular restaurants to lock up tables during peak periods, like friday and saturday nights. the service then re-sells the accommodations for a surcharge to consumers who absolutely, positively have to get into a place that night, even if it means paying more to do so. restaurants get a share of the take. but what does it mean for small business restaurant managers. the boomers are going to go on an eating-out fine dining tear. so what will the people for whom casual dining and drive-thru windows were created demand of restaurants in the future? they will want the obvious requirements of an aging population: menus with larger typefaces, quieter dining rooms and wheelchair accessibility. and they will want what everyone will want in the frantically-paced, stimuli bombarded future: a refuge of warmth, pleasure and arousal. 114 journal ofsmall business strategj vol. l l, no.2 fall/ivinter 2000 mi think there's a strong sense that restaurants increasingly should be peaceful, soothing and sensual, a respite from the busy lives that people lead," says architect and restaurant designer jeffrey beers, who designed las vegas, nv's rum jungle, and miami, fl's upcoming billboard live. "the idea in restaurant design is to move away from bombarding people with information and to make venues more luxurious, more of an escape." the "mini vacation" that beers believes is the future of restaurant design jibes perfectly with the main reason people in the next millennium will go out to eat: to relate. more and more, restaurants will be a place to experience life with family and friends. they will be the places that appreciate the importance of emotions on satisfaction. these findings help to stress the need for small business restaurant managers to understand the inliuence of emotions in leading to satisfaction. restaurant owners can benefit greatly by creating an ambiance that arouses pleasant emotions and thus leads to repeat business. references alonzo, r. s. (1996). ownin and mana in a restaurant. chicago: upstart publishing: dearborn publishing group, p.l. bellante, d. & foster, a. c. (1984). working wives and expenditure on services. journal of consumer research 11(september), 700 707. bernstein, e. (2000). back to the future. restaurant business journal 20(january), 18-22. blackwell, r. (1999). from mind to market: reinventin the retail su i chain. new york: harper business books. cohen, j. b,m & areni, c. s. (1991).affect and consumer behavior. in t. s. robertson & h. h. kassarjian (eds.) handbook of consumer theo and research (pp. 188-240). englewood cliffs, nj: prentice-hall. havlena, w. j., & holbrook, m. b. (1986). the varieties of consumption experience: comparing two typologies of emotions in consumer behavior. journal of consumer h i 13(d i ),394-404. h(h 8.m.b.,&hi h,e.c.(1982) th p i ii p i p consumer fantasies, feelings, and fun. journal of consumer research 9(september), 132-140. izard, c. e. (1977).human emotions. new york: plenum. jitreskog, k. & sdrbom, d. (1993). lisrel 8: structural e uation modelin with the simplis command lan ua e. nj: lawrence erlbaum associates. kuhl, j. (1986). motivation and information processing. in r. m. sorrentino & e. t. higgins (eds.) handbook of motivation and co nition (pp 404-434). new york: guilford. lawrence, e. (1992), the corn lete restaurateur. new york: penguin books. mano, h. & oliver, r. l. (1993). assessing the dimensionality and structure of the consumption experience: evaluation, feeling and satisfaction. journal of consumer ii h 20(d 0 ),431&66. mci w.k.w,w,p.a&l .l.(1994).g 4 -i 4&i'i'ravelers'odgingpreferences. cornell hotel & restaurant administration uarterl 35(2) 51-58. mehrabian, a. & russell, j. (1974). an a roach to environmental s chain . cambridge, ma: mit press. oliver, r. l. (1980). a cognitive model of the antecedents and consequences of satisfaction decisions. journal of marketin research 17(november), 460-469. oliver, r. l. (1989). processing of the satisfaction response in consumption: a suggested framework and research propositions. journal of consumer satisfaction dissatisfaction and com lainin behavior 2 1-6. 115 journal of small business strategy vo/. /l, no.2 pall/ivinter 2000 plutchik, r. (1962). the emotions: facts theories and a new model. new york: random l-louse. plutchik, r. (1980). emotion: a s choevolutiona s nthesis. new york: harper &. row. reilly, m. d. (1982). working wives and convenience consumption. journal of consumer r 8 8(m m,497-418. r ii.j.a.(19791.a(i' i(p i .j i fp i 48 ip 37(september), 345-356 steinberg, j. (1999). the millennial mind-set. american demo ra hics 21(l), stamford, connecticut: cowles business media. stevens, s. (1998). return of the red lobsters: what works. american demo ra hics 20(10), stamford, connecticut: cowles business media. surprenant, c. fm & solomon, m.r. (1987). predictability and personalization in the service encounter. journal of marketin 51(april), 86-96. thorson, e. & page, t. (1988). effects of product involvement and emotional commercials on consumers'ecall and attitudes. in s. hecker & d. w. stewart (eds.) nonverbal communication in advertisin (pp 11-126).landham, md: lexington books. westbrook, r. a. (1980a). intrapersonal affective influences upon consumer satisfaction with products. journal of consumer research 7(june) 49-54. westbrook, r. a. (1980b). a rating scale for measuring product/service satisfaction. journal ~im k i 44(p i(1.68-72. westbrook, r. a. (1987). product/consumption-based affective responses and postpurchase processes. journal of marketin research 24 (august) 258-270. westbrook, r. a. & oliver, r. (1991).the dimensionality of consumption emotion patterns and consumer satisfaction. journal of consumer research 18(june) 84-9. wishna, v. (2000). great expectations. restaurant business journal, january i, 2000, new york: bill publications, p. 28. woodruff, r. bm cadotte, e.r. & jenkins, r.l. (1983). modeling consumer satisfaction processes using experience-based norms, journal of marketin research 20 (august), 296-304. zeithaml, v. a. (1985). the new demographics and market fragmentation. journal of ~mr i 49(8 1.64-76. zeithaml, v. a., parasuraman, a. & berry, l l. (1990). deliverin uali service. new york: the free press. joe singer is professor of business operations and analysis in the henry iv bloch school of bus'(ness and public administration at the university of missouri —kansas city. he teaches small business management and managing creativity and innovation. raj arora is the schune professor of marketing and mat ket('ng research in the henry iv. bloch school oj'usiness and public administration at the university of missouri —kansas city. his research interests are in consumer behavior and gender differences in consumption patterns. 116 stra tegf an empirical investigation of bootstrap financing among small firms howard van auken, ph.d. iowa state university vanauken@iastate. edu abstract this study examines the use of 27 bootstrap financing methods among a sample of 97 small firms. owners 'ankings of the importance suggested that bootstrap financing was not central to their firms'inancbig strategy. owners who had greater di/jiculty of raising capital ranked bootstrap financing methods that (i) slowed disbursemenis, (2) generated cash, and (3) subsidized operations as being more important than owners who experienced less difficulty in raising copital. owners who believed their firms were more undercapitalized ranked bootstrap fiiiancing methods that (/) slowed disbursements, (2) generated cash, and (3) minimized investment as being more important than owners who experienced less di/ficulty in raising capital. the use of bootstrap financing was also directly related to the risk of the firm. the results can be used by owners of small firms, consultants, aml support agencies that provide assistance to small firms in areas of financial planning and capital acquisition. untlerstanding the use and availability ofall sources of capital will enable owners to obtain a comprehensive understanding of capital alternatives and financial strategies. agencies that provide support services can use the information to better assist small firms in developing finoncing strategies. this information could easily be built into training programs for both new aml existing small businesses. introduction the acquisition of capital is one of the most important issues faced by small firms (ang, 1992a). capital acquisition is also a time consuming, frustrating, and difficult challenge confronting business owners. without the appropriate level and combination of capital, a company's financial viability will be threatened. a weak financial structure can result in poor operating performance and, ultimately, failure (timmons, 1999). adequate capitalization can enable owners of small firms to pursue market opportunities and reduce the personal stress associated with operating a business (gersick, davis, hampton, gz lansberg, 1997). much of the theory of finance assumes that a firm's capital acquisition strategy should achieve an optimal capital structure that maximizes wealth. this theory of capital structure, however, relies on specific assumptions that are not relevant for most small firms. owners of small firms, for example, lack information about capital alternatives and access to capital 22 journal ofsmall business strategy vol. /4, no. 2 fall/winter 2003 markets (holmes & kent, 1991). the lack of information about and access to capital markets results in small firms having either a sub-optimal structure or being under-capitalized (van auken, 2000). many small firms cope with the challenges of capital acquisition through bootstrap financing methods (van auken & neeley, 1996). a wide variety of bootstrap financing techniques are available for business owners, including for example use of credit cards, delaying tax payments, sharing equipment and employees with other businesses, an leasing. freear, sohl, and wetzel (1995) defined bootstrap financing as "highly creative ways of acquiring the use of resources without borrowing money or raising equity financing from traditional sources." bhide (1992) believed that the true entrepreneurial spirit is often demonstrated in the business owner's ability to creatively find and use bootstrap financing. bootstrap capital provides financing alternatives to small firms that are confronted with the lack of access to traditional sources of capital. winborg and landstrom (2001) and gibson (1992) referred to small firms'ifficultiesassociated with capital acquisition in the context of a "financing gap ." bootstrap financing methods help provide capital to fill this financing gap when traditional sources of capital are not available. the purpose of this paper is to present the results of a study that examined small firm's use of bootstrap financing methods. specifically the paper examines the relationship between the ranking of importance of bootstrap financing among owners of small firms and (i) owners'ssessment of the difficulty of capital acquisition, (2) owners'ssessment of the degree to which the firm is undercapitalized, (3) risk, and (4) organizational structure. although a common source of financing, few studies have investigated the use of bootstrap financing among small firms. the use of bootstrap capital would be expected to be related to small firm risk and organizational structure. small firms that are more risky (including risks arising from organizational structure), for example, may have greater difficulty in acquiring traditional sources of finance and, thus, rely more heavily on bootstrap financing methods than firms that are less risky. the next section of this paper reviews the literature on the financing of small firms, especially previous research related to small firm financing. section ih presents the methods used in the analysis. section iv discusses the results of the analysis. the last section provides the summary, implications, and suggestions for further study. small firm financing beginning with tobin's (1958) separation theory and modigliani and miller's (1958) theory of capital structure, much of finance theory is based on the assumptions of capital market theory. the financial theory of capital structure posits that owners should select a financing mix that minimizes the firm's overall cost of capital by identifying the optimal levels of equity and debt capital one of the basic tenets of finance theory is the assumption that all firms have equal access to and are able to fully participate in the financial markets with similar competitive positions. the acquisition of capital by small firms may not be consistent with wealth maximization due to numerous constraints that limit their access to the capital markets (petty & bygrave, 1993; ang 1992b). complex objective functions, market imperfections, and agency relationships are major distinctions that detract from the application of finance theory to small firms (ang, 1992a; mcmahon, holmes, hutchinson, & forsaith, 1993). for example, small business owners may include business and personal goals, may not have complete information about or access to capital markets, and experience obstacles due to high monitoring costs, bonding costs, and residual loss. as a consequence, small firms often rely on a different set of financing sources relative to large firms. 23 journal ofsmall business strategy voh ie no. 2 fall/winter 2003 traditional sources of capital include funds from personal savings and borrowing from financial institutions. entrepreneurs who are unable to raise adequate amounts of capital from traditional sources commonly raise additional capital from bootstrap financing sources. bootstrap capital, or alternatives to traditional sources of financing, is often important through all stages of a firm's life (van auken & neeley, 1996;thome, 1989). freear, sohl, and wetzel(1995) and petty and bygrave (1993)noted that bootstrap financing methods are especially important source of funds for rapidly growing companies. bootstrap financing often has the advantages of being easy to obtain (i.e, credit cards) and convenient(i.e. loans from life insurance), and having minimal requirements (i.e. home equity loans). in addition, bootstrap sources of financing commonly do not require a business plan or collateral. disadvantages associated with bootstrap financing may include, for example, higher cost (i.e. loans from public financing companies) and loss of ownership control (i.e. venture capital). the availability of bootstrap financing may also result in the funding of firms that are not viable, especially if traditional sources of capital are unwilling to commit funds to the business. research on the use of bootstrap financing among small firms is limited. an early paper by thome (1989) pointed out that many companies obtain a considerable amount, often all, of their financing through bootstrapping. the dynamic nature of the acquisition of bootstrap finance suggests that all methods may not be documented. bhide (1992) emphasized that use of bootstrap financing methods requires a different approach than used for the acquisition of traditional sources of capital. becoming operational and reaching breakeven quickly, conserving cash, and growing slowly provide strong support of a financing strategy that relies on bootstrap linancing. winborg and landstrom (2000) identified six clusters of bootstrap financing methods (owner and relatives, management of accounts receivable, sharing and borrowing resources among businesses, delaying payments, minimization of investment, and subsidies) among firms in sweden. an empirical study by van auken and neeley (1996) indicated that firm characteristics (form of legal organization and type of firm) affected the use of bootstrap financing. sole proprietorship and firms requiring high capital investment relied on bootstrap financing to a greater extent than other firms. sampi.e, questionnaire development, and methodology sample and questionnaire design the sample consisted of 185 small firms located in a midwestern state. sample firms were obtained from listing of chambers of commerce. a questionnaire was developed and pretested during the fall, 2001. the first and second mailings of the questionnaire occurred during spring, 2002. a total of 91 questionnaires were returned, providing a response rate of 49. 1%. the questionnaire collected information on the (i) use and importance of bootstrap financing among small lirms and (2) relationships between owners'ankings of importance and (a) owners'ssessment of the difficulty of raising capital, (b) owners'ssessment of their firms'egree of undercapitalization, (c) firm risk, and (d) organizational structure.. the questionnaire was segmented into three sections. the first section asked questions about the characteristics of the business, including age, type of business (product, service, consulting, other), ownership (sole proprietorship, partnership, s-corp., corporation, and limited liability corporation), total capital raised since business started (&$ 100,000; $ 100,001$500,000; $500,001-$ 1,000,000; $ 1,000,001-$5,000,001; and &$5,000,000). and market area served (local, regional, national, international) . the second section asked respondents to rank the importance of 28 methods of bootstrap financing using a likert scale(0=never used, 24 journal ofsmall business strategy vol. l4, no. 2 fall/winter 2003 1 =seldom used and 5=frequently used). the likert scale and methods of bootstrap financing were adopted from winborg and landstrom (2000). the third section of the questionnaire asked respondents to assess the extent to which their company is undercapitalized (1=very undercapitalized and 5~at undercapitalized) and questions related to the owners'xperience and efforts associated with capital acquisition. methodology the data was initially summarized using univariate statistics (means and frequencies) to provide a better understanding of the respondents and characteristics of the data. the initial summary statistics included those relating to demographic information and the means rankings of importance of the various bootstrap financing methods. the sample was segmented and evaluated using two different criteria. first, the sample was segmented into two groups according to the owners'anking of undercapitalization (undercapitalizedr rankings of 1 or 2; not undercapitalizedaankings of 4 or 5). a wilcoxon 2sample test of difference in means compared the mean rankings of importance of the bootstrap financing methods for the two sample segments. the purpose of the difference in means tests was to identify significant differences in the importance of the alternative bootstrapping methods between owners who ranked their firms as being undercapitalized versus owners who ranked their firm as not being undercapitalized. second, the sample was also segmented into firms who owners ranked capital acquisition as being difficult and owners who ranked capital acquisition as not being difficult (difficult rankings of 1 or 2; not difftcul~anking of 4 or 5). a wilcoxon 2-sample test of difference in means compared the mean rankings of the bootstrap financing methods for the two sample segments. the purpose of the difference in means tests was to identify significant differences in importance of bootstrapping methods between owners who owners ranked capital acquisition as being difficult versus owners who ranked capital acquisition as not being difficult. the rankings of importance of all bootstrap financing methods were averaged. logit regression analysis was subsequently used to determine the relationship between the owners'anking of importance of bootstrap financing and (1) risk proxy, (2) organization structure, (3) type of business activity, (4) ln (age of firm in years), and (5) ln (total capital raised since firm was launched). the ln (business age in years) and ln (total capital raised since business was launched) were used as control variables. the risk proxy used in the study was a combination of the owners'ssessment for difficulty of raising capital (loot difficult and 5=difficult), degree of undercapitalization (lrnot undercapitalized and s~ndercapitalized), growth objectives (i=low growth and 5=high growth), and limits on growth due to lack of capital (1~o limit on growth and 5=severe limit on growth). all of these variables would be expected to be related to the risk of the firm. for example, firms that exhibit greater risk would be expected to have greater difficulty of raising capital, have higher growth objectives, have growth opportunities that are limited due to lack of capital, and be more undercapitalized. the correlations of all four of the variables were highly and significantly related. spearman correlations (shown in table ii) between the independent variables in each equation were calculated to assess significant relationships between the variables. since no significant correlations between the independent variables are present, multicollinearity should not have been a problem. 25 journal of small business strategy vol. 14, no. 2 fall/winter 2003 bootstrap financing = att + bi (risk proxy) + bi (legal structure) + bi (type of business) + b4 in (age) + bi (total capital raised) where: bootstrap financing = mean ranking of importance of bootstrap financing methods risk proxy = (difficulty of raising capital + degree of undercapitalization + growth objectives + limits on growth due to lack of capital)/4 legal structure = type of legal organization (i = sole proprietorship and 2 = other) type of business = primary activity of business (i =products oriented firm & 2 = other) ln (age) = ln (business age in years) in (total capital raised) = in (total capital raised since business started) results respondent characteristics table i shows that the primary business activity of most firms (55.6'/o) was products. the remaining firms fell into services (32.2'/v) and other (12.3'/0) categories. approximately the same percentages of firms were organized as s-corporations (40.7%) and c-corporations (39.6'/v). the remaining firms were organized as sole proprietorships (6.6'/o), partnerships (4.4%), and limited liability companies (8.8'/0). approximately 43.0'/v of the firms served a local market, 14.0'/0 served a regional market, 16.1/0 served a national market, and 26.8/o served an international market. approximately one-half of the firms raised less than $500,000 of total capital since business launch (32.2'/n less than $ 100,000 and 16.7% of the respondent firms raised $ 100,000-$500,000). of the remaining firms, 18.9'/o raised $ 500,001-$ 1,000,000 and 31.2'/o raised more than $ 1,000,000. approximately 22.8'/v of respondent firms are less than 6 years old, 18,5% are 6-10 years old, 14.9'/n between 10-15 years old, and 43.3'/n more than 15 years old. percentage of use and mean rankings of bootstrap financing table ii shows the percentage of firms using and mean rankings of importance of each bootstrap financing method. table il shows several general patterns. first, the percentage of firms using the bootstrap financing techniques is closely related to the mean ranking of importance. bootstrap financing methods used the most were also ranked as being the most important. bootstrap financing methods that were used the least were also ranked as being the least important. this result may not be surprising since owners probably consider those financing sources that they use to be relatively important. second, some bootstrap financing methods were much more important in terms of use and ranking than other methods while other methods had very low use and mean ranking of importance. third, almost all methods of bootstrap financing were ranked relatively low in terms of importance. the average ranking of 12 of the 27 bootstrap financing methods was less than 1.0. none of the average rankings of importance was greater than 4. only two of the average rankings were above 3.0. 26 journal ofsmall business strategy vol. /4, no. 2 fall/winter 2003 table i percentage of sample firms by category (n&0) category percentage of firms type of firm products 55.6 services 32.2 consulting 5.6 other 6.7 type of legal organization sole proprietorship 6.6 partnership 4.4 s-corporation 40.7 corporation 39.6 limited liability company 8.8 market size local 43.0 regional 14.0 national 16.1 international 26.8 total capital raised &100,000 32.2 100,001-500,000 16.7 500,001-1,000,000 18.9 &1,000,000 31.2 age of firm & 6 years 22. 8 6-10 years 18.5 11-15 years 14.9 & 15 years 43.3 the bootstrap financing techniques that had the highest mean ranking of importance were negotiate best payment terms with suppliers (3.59), buy used equipment (2.13), offer same terms to all customers (2.93), use routines to minimize capital investment (2.14), and speed-up invoicing (2.36). these were the only bootstrap financing methods that had a mean ranking of importance of greater than 2.0. the five bootstrap financing methods ranked lowest were factor accounts receivable (0.10), delay tax payments (0.31), obtain loans from friends/relatives (0.38), share employees with other businesses 0.40), run business from home (0.45), and share equipment with other businesses (0.47). the most surprising of these lowly ranked bootstrap financing methods was obtaining loans from friends/family. although a financing method often cited as an important source of capital for small firms, loans from friends/family was infrequently used and a relatively unimportance as a source of financing. bootstrap financing methods and diaiculty of raising capital table iii shows the results of a wilcoxon 2-sample test of difference between the owners'ankingsof the difficulty of raising capital (d=difficult and ndr not diaicult) and rankings of bootstrap financing methods. the table results show several patterns. first, the mean rankings of importance of most bootstrap financing methods (20 of the 28 methods) are not statistically different relative to the owners'ankings of the difficulty of raising capital. 27 journal of small business s/ra/egy vol. /4, no. 2 fall/winier 2003 28 d= 1 0.75 buy on consignment from suppliers 28 d= 1 0.68 employ relatives/friends at below-market salary 45 nd=2 0.49 28 d=1 0.71 share equipment with other businesses 45 nd=2 0.31 28 d= 1 0.68 run the business completely in the home 45 28 d= 1 0.50 share employees with other businesses 45 nd= 2 0.24 28 d= 1 0.71 obtain loans from relative or friends 45 nd=2 020n 28 d= 1 0.64 deliberately delay tax payments 45 nd = 2 0.16 un 28 d= 1 0.14 raise capital from a factoring company 45 nd=2 0.09 the table also shows that the owners'ankings of eight of the bootstrap financing methods (deliberately delay payment to suppliers, withhold salary when necessary, borrow equipment, obtain payment in advance from customers, rely on income from outside employment, obtain loans from relatives/friends, employ relatives/friends at below-market salary, and deliberately delay tax payments) are significantly different relative to the rankings for difficulty of raising capital. these eight bootstrap financing methods were ranking as being more important to owners who experienced relatively greater difficulty raising capital than owners who experienced relatively less difficulty in raising capital. these results provide insight into how owners of small firms use bootstrap financing as they adapt their financing strategies to difficulties in capital acquisition. the eight methods can be grouped into three categories: (1) delaying payments (deliberately delay payment to suppliers, deliberately delay tax payments, withhold salary when'necessary); (2) generating cash (obtain payment in advance from customers, rely on income from outside employment); and (3) subsidizing (borrow equipment, obtain loans from relatives/friends, employ relatives/friends at below-market salary). owners who experience difficulties in capital acquisition incorporate bootstrap financing into their financial strategies by delaying payments on accounts, generating additional cash, and taking actions that subsidize operations. all of these bootstrap financing methods have a positive effect on the firm's cash flow. bootstrap financing methods and degree of vndercapltallzatlon table vi shows the results of a wilcoxon 2-sample test of difference between the owners'ankings of the degree of undercapitalization (vr undercapitalized and nur not undercapitalized) and importance of the alternative bootstrap financing methods. the table results provide insight into the relationship between how owners adapt to undercapitalization through the use of bootstrap financing. several patterns are evident from the table. first, owners reporting a high degree of undercapitalization did not rank the importance of 16 of the 28 alternative bootstrap methods differently than owners reporting low degree of undercapitalization. the owners'ssessment of the importance of these 16 methods of bootstrap financing was not different relative to their assessment of the degree of undercapitalization. 30 journal ofsmall business strategy vol. 14, no. 2 fall/winter 2003 table vi financing methods vs. degree of undercapitalization: wilcoxon 2-sample test of difference in means degree of undercapitlization financing method n (u=vndercapitallze r mean d and nu=not ranking undercapitalized) 21 v= i 3.86 negotiate best payment terms with suppliers 55 nu= 2 3.51 offer the same conditions of all customers 20 u= i 2.85 52 nu=2 3.00 21 u= i 2.24 speed up invoicing 55 nu=2 2.33 18 u= i 2.67 vse routines to minimize capital invested 51 nu=2 2.08 buy vsed equipment instead of new 22 u= i 2.68 equipment 55 nu =2 1.80 '1 u= i 2.57 lease equipment instead of buying 55 nu = 2 1.65 * use personal credit card for business 21 u= i 2.23 expenses 55 nu = 2 1.62 21 u= i 1.62 cease business with customers who pay late 55 nu= 2 1.85 hire temporary rather than permanent 21 u= i 2. 19 personnel 55 nu = 2 1.40 21 u= i 1.90 obtain payment in advance from customers 55 nu = 2 1.35 21 u= i 2.38 deliberately delay payment to suppliers 55 nu = 2 1.09 v* deliberately choose customer who pay 21 u= i 1.67 quickly 54 nu = 2 1.19 21 u= i 2.05 withhold salary when necessary 55 nu = 2 p53 vn 21 u= i 1.81 borrow equipment 55 nu = 2 p51 vn 21 v= i 1.86 share office space with others 55 nu = 2 0.49 v* 21 u= i 1.02 use interest on over due customer accounts 55 nu = 2 p 33nv 21 u= i 1.52 rely on income from outside employment 54 nu = 2 0.33 *n 20 u= i 1.15 offer customers discount for cash payment 55 nu=2 0.69 21 u= i 0.57 coordinate purchases with other businesses 55 nu= 2 31 journal of small business strategy val. /4, no. 2 fa/iiivinrer 2003 practice barter instead of buying/selling 20 v= i 0.50 goods 55 nu = 2 0.58 21 u= i 0.86 buy on consignment from suppliers 55 nu= 2 0.50 employ relatives/friends below-market 21 u= i 0.71 salary 55 nu = 2 0.38 21 v= i 1.10 share equipment with other businesses 55 nu=2 0.20 " 21 u= i 0.81 run the business completely in the home 55 nu=2 0.24 21 u= i 0.76 share employees with other businesses 55 nu=2 0.31 21 u= i 0.81 obtain loans from relative or friends 55 nu = 2 0.16 ** 21 u= i 0.86 deliberately delay tax payments 55 nu=2 0.15 v'aise capital from a factoring company 21 u= i 0.19 55 nu = 2 0.00 * the table also shows that the owners'ankings of twelve of the bootstrap financing methods (buy used equipment instead of new equipment, withhold salary when necessary, deliberately delay payments to suppliers, borrow equipment, use interest on over due customer accounts, lease equipment instead of buying, relay on income from outside employment, obtain loans from relatives/ friends, share office space, deliberately delay tax payments, share equipment with other businesses, and raise capital from a factoring company) are significantly different relative to'the owners'anking of the degree of undercapitalization. these bootstrap financing methods were more important to owners who believed their firms were more undercapitalized than owners who believed their firms were less undercapitalized. these results provide insight into the use of bootstrap financing techniques in relationship to undercapitalization. the twelve bootstrap financing methods that are different relative to the degree of undercapitalization can be grouped into three categories: ( i) slowing disbursements (withhold salary when necessary, deliberately delay tax payments, and deliberately delay payments to suppliers); (2) generating cash (raise capital from a factoring company, charge interest on over due customer accounts, rely on income from outside employment, and obtain loans from relatives/friends) and (3) minimizing investment (buy used equipment instead of new equipment, borrow equipment, lease equipment instead of buying, share office space, and share equipment with other businesses). through their positive impact on cashflow, use of all of these methods would reduce a firm's need for capital acquisition. owners who experience undercapitalization incorporate bootstrap financing into their financial strategies by delaying payments on accounts, generating additional cash, and taking actions that minimize investment requirements. all of these bootstrap financing methods have a positive effect on the firm's cashflow. logit regression analysis table v shows the results of the logit regression analysis that examined the relationship between the owners'ankings of importance of bootstrap financing (dependent variable) and (i) a risk proxy (independent variable), (2) organization structure (independent variable), (3) 32 journal ofsmall business strategy vof l4, no. 2 fall/winter 2003 business activity (independent variable), (4) ln (age of business in years) (control variable), and (5) ln (total capital raised since firm launched) (control variable). the results indicate that only the coefficient for the risk proxy is significant. organizational structure, business activity, and the control variables are not significantly related to the owners'ankings of importance of bootstrap financing. table v logit regression results: degree of bootstrap financing vs. risk proxy, organizational structure, business activity, ln (business age), and ln (business size) (n=73) dependent variable independent variable regression coefficient bootstrap financing risk proxy 0.2026 'x= 102.99) organizational structure 0.0266 business activity 0.1170 ln (business age) -13.6027 ln (business size) 0.0703 e significant at l%. the positive coefficient for the risk proxy variable indicates that as risk increases, then the importance of bootstrap financing also increases. conversely, decreases in risk are associated with decreases in the importance of bootstrap financing. the challenge of capital acquisition would be expected to be positively associated with the risk of the lirm. higher risk firms would be expected to have greater difficulty in raising capital (especially from traditional sources of capital) than lower risk firms. as a result, higher risk firms would be expected to place a greater reliance on and consider bootstrap financing to be of greater importance than lower risk firms. lower risk firm would likely be better able to acquire capital from traditional sources and, thus, be expected to rank bootstrap financing lower in importance than higher risk firms. the insignificant relationship between the owners'ssessment of the importance of bootstrap financing and organization structure shows that the legal organizational form is not related to the owners'ssessment of the importance of bootstrap financing. bootstrap financing is equally important to regardless of organizational form. discussion availability of capital is a common theme in much of entrepreneurial and small business research. most research has been devoted to traditional sources of finance (i.e. acquisition of debt and equity). much less research has been devoted to understanding the use and importance of bootstrap financing among small firms. bootstrap financing is probably widely used and, thus, an integral aspect of small firms'inancial strategies. some types of bootstrap financing (such as accounts payable) would be expected to evolve through normal business operations. other methods of bootstrap financing would necessarily be planned (such as sharing office space and business equipment). the acquisition of capital by small firms can be one of the most time consuming and frustrating aspects of business ownership. adequate and appropriate capitalization affects all aspects of firm operations. the ability of the firm to compete and pursue opportunities is directly affected by the availability of capital. small firms that are viewed as being more risky will undoubtedly experience greater challenges in capital acquisition than small firms 33 journal ofsmall business strategy vol. /4, no. 2 fall/)vinrer 2003 that are viewed as being less risky. one consequence of being more risky is that small firms will likely use bootstrap financing methods to a greater extent than firms that are less risky. higher risk firms may experienced greater difficulty in acquiring traditional sources of capital and, thus, rely to a greater extent on bootstrap financing methods than lower risk firms. the results in this study provided several broad insights into the bootstrap financing. first, the owners'se and ranking of the relative importance of bootstrap financing were similar. the greater the usage among firms, the higher the ranking of the importance of the bootstrap financing method conversely, the lower the usage among firms, the lower the ranking of importance of the bootstrap financing method. second owners ranked the importance of almost all methods of bootstrap financing relatively low. two financial issues that potentially affect the use of bootstrap financing are the owners'ssessmentof the degree of (i) diaicutty of raising capital and (2) undercapitalization. difficulties associated with capital acquisition and undercapitalization may lead small business owners to access a variety of sources of capital. one finding of this study is that the eight bootstrap financing methods are ranked as being more important among owners who believe that capital acquisition is difficult as compared to owners who believe that capital acquisition was not difficult. these eight sources of bootstrap financing improve the small firms'ashflow by delaying payments, generating cash and subsidizing firm operations. each of these eight bootstrap financing methods are ranked as being more a more important source of capital among owners who believed that capital acquisition was difficult relative to owners who believed that capital acquisition was not difficult. another finding of this study is that twelve bootstrap financing methods were ranked as being more important among owners who believed that their firm was undercapitalized relative to owners who believed that their firm was not undercapitalized. these twelve sources of bootstrap capital improve cashflow by slowing disbursements, generating cash, and minimize investment. the twelve bootstrap flnancing methods were ranked as being more a more important source of capital among owners who believed that their firm was undercapitalized relative to owners who believed that their firm was not undercapitalized. the results also showed a direct relationship between owners'ankings of the importance of bootstrap financing and a proxy used to assess the risk of the firm. bootstrap financing was ranked as being more important as the risk of the firm increased. conversely, bootstrap financing ranked as being less important as the risk of the linn decreased. higher risk firms would be expected to have greater difficulty in raising capital from traditional financing sources and, thus, rely more on alternative, non-traditional sources of capital than lower risk firms. the owners'ankings of the importance of bootstrap financing methods were not, however, associated with organizational structure and the control variables. conclusions this paper presents the results of a study that examined the use of bootstrap financing among small firms. acquisition of capital is a challenge facing all firms. the challenge of raising capital is even greater among small firms due to their higher risk and lack of access to capital markets. an inappropriate capital structure, a misunderstanding of the characteristics of the financing instrument, or a lack of information about the availability of specific sources of capital can result in sub-optimal capital structure and financial distress. many small firms rely on bootstrap financing due to the difficulty of capital acquisition, unavailability of traditional sources of capital or, in some case, due the simplicity. 34 journal ofsmall business strategy vol. /4, hlo. 2 fall/itrinter 2003 the results of the study have several implications. first, owners and managers of small firms can gain insight into the potential for including bootstrap financing methods in their financial strategies. usage and rankings of importance of bootstrap financing methods can assist owner and managers more completely understand alternative sources of capital that can be accessed. better and more complete information can help in the development of comprehensive primary and contingent financial strategies. the relatively low ranking of importance of most bootstrap financing methods may suggest that owners may not understand or appreciate the potential usefulness of bootstrap capital. bootstrap financing can be used when other sources of capital are not available and as a complement to traditional sources of capital. some bootstrap financing methods, such as negotiating the best payment terms with suppliers and speeding-up invoicing, can be quite cost effective even if traditional sources of capital are available. the results can be used by consultants and support agencies that provide assistance to small firms in areas of financial planning and capital acquisition. understanding the use and availability of all potential sources of capital is important so that owners are able to explore the ramifications of alternatives, develop contingent plans, and make informed decisions. providing information on all potential sources of financing will enable owners to obtain a comprehensive understanding of capital alternatives and financial strategies. this information could easily be built into training programs for both new and existing businesses. the study has several limitations that provide avenues for potential future research. the sample was collected from a single state located in the midwest. other studies that examme similar issues in other regions of the country could provide comparative results. for example, a large national study would enable results to be compared by region. the data was also collected at a single point in time. a longitudinal study would provide evidence in the changing pattern of information about entrepreneurs'earch for capital. references ang, j., (1992a). on the theory of finance for privately held firms. the journal of small business finance, i, 185-203. ang, j., (1992b).small business uniqueness and the theory of financial management. journal ofsmall business finance, i, 3-13. bhide, a., (1992). bootstrap finance: the art of start-ups. harvard business review, 70, 109-117. freear, j., sohl, j. & wetzel, w., (1995) who bankrolls software entrepreneurs. frontiers of entrepreneurshlp research, wesley, mass: babson center for entrepreneurial studies, 394-407. gersick, k., davis, j., hampton, m. & lansberg, i., (1997). generation to generation: life cycles ofthe family business. boston: harvard business school press. holmes, s. & kent, p., (1991). an empirical analysis of the financial structure of small and large australian manufacturing enterprises. the journal of small business finance, l, 141-154. mcmahon, r., homes, s., hutchinson, p., & forsaith, d., (1993).small enterphse financial managements theory and practice, harcourt brace: australia. modigliani, f. & miller, m., (1958). the cost of capital, corporation finance and the theory of investment, american economic review, 261-97. petty, j. & bygrave, w., (1993).what does finance have to say to the entrepreneur? journal ofsmall business finance, 2, 125-138. journal of small business strategy vol. i4, no. 2 fa(iiwinter 2003 thorne, j,, (1989). alternative financing for entrepreneurial ventures, entrepreneurship: theory and practice, /3, 7-9. timmons, j., (1999).new venture creation. 4 ed., irwin pub., chicago, il. tobin, j., (1958).liquidity preference as behavior towards risk, review of economic studies, 65-86. van auken, h., (2000). the familiarity of small technology-based business owners with sources of capital: impact of location and capitalization, journal of small business strategy, 99 (2), 33-47. van auken, h. 8c neeley, l., (1996). evidence of bootstrap financing among small start-up firms, journal of entrepreneurialand small business finance, 5, 235-250. winborg, j. 8t lanstrom, h., (2001) financial bootstrapping in small business: examining small business managers'esource acquisition behavior, journal of business venturing, 16, (235-254). howard e. van rluken is a professor of management iii the college of business at iowa state university. his research interests are in the area of new venture financing. he was a william j. fulbright scholar at the instituto de tecltnologico y de estudios superiores de monterrey (mexico) in /989, a william j. fulbiight scholar at masarykova univeszity v brne (czech repubbc) in /994, and visiting professor at the consortium international university (italy) in 2001. he has published over 50 r%rred articles and participated in entrepreneurship programs in many foreign countries. t 36 t http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2021, vol. 31, no. 02, 62-79 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2021 small business institute® w w w. j s b s . o rg introduction 1 universidad san francisco de quito usfq, diego de robles sn circulo de cumbayá, fvelasco@usfq.edu.ec 2 departamento de economía cuantitativa, facultad de ciencias, escuela politécnica nacional, ecuador 3 institut de recherche en gestion et economie, université de savoie mont blanc, (irege/iae savoie mont blanc), annecy, france, cintya. lanchimba@epn.edu.ec 4 departamento de administración, facultad de ciencias económicas y administrativas, universidad católica de la santísima concepción, concepción, chile, alonso de ribera 2850, código postal 4090541, concepción, chile, ollanos@ucsc.cl 5 department of marketing and market research, university of granada, campus cartuja s/n, postal code: 18071, granada, spain, manuelalonso@ugr.es 6 facultad de cs. económicas y administrativas, universidad católica de la santísima concepción, alonso de ribera 2850, postal code: 409054, concepción, chile personalized service and brand equity in family business: a dyadic investigation family business owners, work overload, personalized services, collective organizational citizenship behavior, brand equity, job demands-resources theory apa citation information: velasco vizcaino, f., lanchimba, c., llanos contreras, o., & alonso-dos-santos, m. (2021). personalized service and brand equity in family business: a dyadic investigation. journal of small business strategy, 31(2), 62-79. corporate reputation and brand equity are two closely related concepts (heinberg et al., 2018). for this reason, brand equity can be considered a good proxy for the assessment of family business reputation. brand equity, as an indicator of family reputation, is not only an important concern at the business level, but also mainly at the family level due to the fact that family and business identities are normally tied (berrone et al., 2010; llanos-contreras & alonso-dos-santos, 2018). hence, the family businesses’ ability to assess and manage their firm’s brand equity can be considered one of its most salient socioemotional priorities and a source of a competitive advantage against their non-family counterparts (llanos-contreras & alonso-dos-santos, 2018; zellweger et al., 2013). similarly, family business owners’ socioemotional priorities can be conceived as a job resource and a factor that fuels their motivation although job demands can take a toll on them when trying to deliver a personalized service and to build brand equity to the firm. previous literature has informed of the reputational advantages of family business firms over their non-family counterparts (deephouse & jaskiewicz, 2013). for example, beck (2016) described family firms’ advantages in those processes that develop organizational identity, brand image, and brand reputation compared to non-family businesses. an argument behind family business firms having these advantages is how family businesses are interested in pursuing a strong brand equity for their firm due to their self-identification motivations (deephouse & jaskiewicz, 2013). these competitive advantages are rooted in several unique and idiosyncratic resources as a consequence of the overlapping relationship between family and business identities (binz astrachan et al., 2018), but also, these adfamily business owners are crucial in building personal relationships with customers and in supporting marketing strategies that aim to develop brand equity for the firm. through the lenses of job demands-resources theory, this research examines how family business owners’ time in servicing customers produces a chain of positive and negative effects that ultimately impacts brand equity. because family businesses depend heavily on owners’ motivation and ability to multitask, their effort in dedicating time to serve consumers is limited and is expected to produce work overload. this burden harms the effectiveness in delivering personalized services to customers. however, if family businesses nurture expressions of citizenship behaviors in employees, the negative effect of work overload on delivering personalized services is reduced. therefore, collective organizational citizenship behavior will act as a buffer to limit the negative effects of owners’ job demands in delivering a personalized service. collective organizational citizenship behavior is capable of energizing everyone in the family business, including family business owners, for them to continue to service customers in a personalized way, and at the same time develop brand equity. implications for family business strategies are discussed based on our findings. franklin velasco vizcaino1, cintya lanchimba2, 3, orlando llanos contreras4, manuel alonso-dos-santos5, 6 http://www.smallbusinessinstitute.biz http://www.jsbs.org 63 f. velasco vizcaino, c. lanchimba, o. llanos contreras, & m. alonso-dos-santos journal of small business strategy / vol. 31, no. 2 (2021) / 62-79 vantages relate to the family business priority of preserving socioemotional wealth among stakeholders (berrone et al., 2010). all these motivational factors encourage family business owners, managers, and employees to propel strategic decisions and processes (i.e., as personalizing services and developing brand equity) to preserve their family and business reputation and to enhance brand equity of the firm (van gils et al., 2014). therefore, decisions and business processes influencing family firms’ relationships with the relevant stakeholders are critical in explaining their reputational performance (cruz et al., 2014). there is evidence that when family firms promote their brands using a “family business” claim, consumers often react positively as they rely on certain heuristics to better understand what the values of a family-firm are (alonso-dos santos et al., 2019). previous research informs that family businesses are perceived as socially responsible, trustworthy, customer-oriented, and authentic (beck & kenning, 2015; binz et al., 2018; presas et al., 2014; sageder et al., 2015). although these positive responses have been acknowledged by previous studies, there are also circumstances under which stakeholders demonstrate negative attitudes toward family firms (botero et al., 2018). family firms have also been viewed as poorly innovative, stagnant, and limited in terms of product offerings and pricing (carrigan & buckley, 2008; krappe et al., 2011; nieto et al., 2015). we believe that managing and controlling these factors adequately, through owners’ active involvement in taking time to serve customers, is a strategy that positively impacts the firm’s brand equity. however, this motivation requires owners’ energy and resources, but, according to job demands-resources theory these positive factors are counterbalanced by signs of stress, burnout, and exhaustion as these job demands are related to work overload. one of the critical processes and characteristics, particularly in small and medium family enterprises (smfe), is the firm’s ability to provide personalized services to their customers (huang & dev, 2019; rust & huang, 2014). the development of this strategic goal and value generation process depends on whether the family firms have sufficient resources to sustain personalized services in the long run (craig & moores, 2005). because in smfe the owners directly take part in administering most of the business functions, their time is considered to be a scarce and valuable resource (berthon et al., 2008). hence, family firms’ ability to deliver personalized services could be severely limited by the owner’s restriction of time, and how much the owners suffer from work overload (george & hamilton, 2011). nevertheless, the presence of a working team of employees inside a family business, demonstrating collective organizational citizenship behavior (cocb), becomes a significant organizational characteristic, and a valuable job resource in mitigating the negative impact of the owners’ work overload in delivering personalized services (glomb et al., 2011). regrettably, to the best of our knowledge, there is no previous research in smfe assessing the relationships among these variables and how these factors are associated with brand equity. this research aims to fill this gap by responding to the following questions: (i) how family business owners’ time serving customers, work overload, and cocb interact and influence the delivery of personalized services in smfe, and, (ii) understand how these relationships ultimately influence smfe brand equity. to respond to these two relevant questions, we rely on survey data collected from smfe owners and their customers. this dyadic approach can help us understand the impact of the trade-off between smfe owners’ time dedication to attend customers and work overload over personalizing services. since the nature of smfe is building brand equity, we include this variable as the outstream variable in the model. this article is organized as follows. the next section describes our theoretical framework and the research hypotheses. second, we present the study’s methodology. third, we present the results. finally, the conclusion section describes this research’s contribution in relation to smfe literature, managerial implications, and the study’s limitations. theoretical framework an owner of a smfe might have to engage in multitasking due to the lack of resources and limitations that are characteristic of a smfe. imagine the daily routine for an owner of a family business in which he or she will have to revise the financial performance of the firm, plan marketing strategies, deal with inventory and with supplier issues, and at the same time service consumers to ensure that a more personalized service can develop brand equity. one motivational factor that could explain such a great effort and energy in family business owners is the pursuit of a successful succession process over the next generations because customer loyalty and brand equity are relevant factors related to smfe performance ( harris et al., 2005; llanos-contreras et al., 2019). however, we also need to consider that intrinsic motivation (i.e., a successful sucession process) is a scarce resource in individuals, especially, if job demands (e.g., how dedicating time to deliver a personalized service increases work overload) can play a significant role in depleting job resources like intrinsic motivation or organizational characteristics. according to job demands-resources theory [jd-r] 64 f. velasco vizcaino, c. lanchimba, o. llanos contreras, & m. alonso-dos-santos journal of small business strategy / vol. 31, no. 2 (2021) / 62-79 (demerouti et al., 2001; schaufeli & bakker, 2004), job resources correspond to those psychological, social, or organizational characteristics that propel individuals to act positively in their jobs. meanwhile, job demands (e.g., work overload) consume individuals’ energy and diminish their ability to perform well. embracing job demands-resources theoretical framework is suitable to predict how smfe owners are capable of winning the battle against work overload in order to continuously deliver a personalized service that can further positively impact brand equity. job demands-resources theory has been applied to predict how individuals in organizations use their energy to increase a firm’s performance (schaufeli, et al., 2006), as well as how burnout impacts performance (bakker, et al., 2004). additionally, it has been applied to predict how job resources (i.e., organizational characteristics such as collective organizational behavior) limit the negative effects of job demands (i.e., work overload) in a firm’s performance (i.e., brand equity) (bakker et al., 2005). brand equity is conceptualized as a sequence of repeated consumer purchases driven by effect-based perceptions that consumers have about the brand (jung & yoon, 2013). to develop in firm brand equity, it is necessary to: (i) develop a strong brand reputation (srinivasan, 2006); (ii) develop internal processes to strengthen the brand-customer relationship (jung & yoon, 2013); (iii) build an organizational culture that nurtures friendly relationships between employees and consumers (srivastava & banir, 2016); and (iv) foster personalized services (wolk & wootton, 1995). thus, it seems reasonable to conceptualize all these factors as job resources that family firms can internally nurture to enhance customer-service relationship quality through the delivery of a personalized service and simulataneously advance in developing brand equity. in fact, family business owners demonstrate persistence and resilience in every aspect of administering a smfe to increase the firm’s performance because they consider the success of the company a personal matter (murphy et al., 2019). this level of persistence and strong motivation in an owner of a smfe serves as a catalyst (i.e., a job resource) to dedicate time to serve customers. this link is crucial in the performance of a family business (hernández-trasobares & galve-górriz, 2017), as smfe owners favor time dedication to serve customers (wolk & wootton, 1995). however, we believe this effort from owners is a job resource subject to depletion, as work overload can diminish the benevolent energy of smfe owners to service customers in a more personalized manner. when smfe owners develop the courtesy to dedicate time to customer-oriented activities such as order taking, listening to customer needs, and solving customer complaints, they are directly and indirectly building not only customer loyalty through being customer-oriented, but also generating brand equity (anees-urrehman & johnston, 2019). in addition to this, when smfe owners demonstrate their commitment to customer service and developing brand equity, employees at the smfe will mimic this behavior and collectively support the owners’ mission. this is possible because owners are social actors and their personal traits permeate through the organization (vizcaíno et al., 2021). this means that the negative effects of the owners’ burden in multitasking to handle and manage the family business activities while at the same time maintaining close contact with customers, are counterbalanced by the positive effects of cocb and by the fostering of brand equity (see vizcaíno et al., 2021). srivastava and banir (2016) argue that close contact with customers helps managers and employees to understand what the customers’ needs are. when a smfe demonstrates production of customized services, the brand value of the firm increases, influencing brand equity. because the purpose of this study is to explore the impact of the trade-off between smfe owners’ time dedication to attend customers and work overload over personalizing services and how this set of factors ultimately does or does not generates brand equity, the proposed model includes all these variables. figure 1 illustrates the constructs included in the model. next, we provide theoretical support for the relationships among the factors included in the framework by using the job demands-resources theory. it is important to note that we are interested in the chain of effects among smfe owners’ time servicing customers, work overload, personalized services, and brand equity. we further predict that the negative effect produced by work overload in personalizing services is moderated by collective organizational citizenship behavior, which we conceptualize as a key resource of smfe. effect of owner’s time servicing customers in work overload research that compares small and large firms has indicated that consumers develop stronger negative sentiments toward small firms compared to large firms when expectations are infringed (yang & aggarwal, 2019). similarly, previous research suggests that for smfe, competence is a more relevant attribute than being perceived by customers as warm, close, or friendly, which are characteristics naturally attributed to smfe (aaker et al., 2010; kirmani et al., 2017). jha and balaji (2015) suggest that firms focusing on delivering interaction quality (e.g., delivering a more personalized service) enhance consumers’ perceptions about 65 f. velasco vizcaino, c. lanchimba, o. llanos contreras, & m. alonso-dos-santos journal of small business strategy / vol. 31, no. 2 (2021) / 62-79 the firm and this positively impacts the firm’s performance. these arguments shed light on the importance for smfe owners to be involved in servicing customers and delivering personalized services to make sure their firms are perceived by customers as being competent. adding to this logic, it could also be interpreted that exceeding customer expectations, demonstration of competence, and delivering interaction quality are job demands of smfe owners. particularly in smfe, personalized service has been described as a critical process to build long term relationships with customers and in the development of brand equity. service personalization is defined as any adjustment of a service to fit customer requirements (ball et al., 2006). as said before, delivering a personalized service is a job demand for smfe owners. that is why smfe owners must devote attention to serve customer needs, as this action is capable of signalling that smfe are interested in customer welfare (ball et al., 2006). expected consequences of delivering a personalized service includes greater customer satisfaction, loyalty, and trust (ball et al., 2006). nevertheless, the firm’s ability to efficiently implement adjustments in their service delivery processes to offer a personalized service depends on whether the firm has enough resources (craig & moores, 2005). this includes smfe owners’ time, motivation, and service orientation attitudes that can be conceived as job resources. in this study we focus on examining owners’ time dedicated to serving customers. smfe owners are considered a critical resource for small family firms as they have a strong influence in the performance of the firm (llanos-contreras et al., 2019). in addition to the multiple roles and tasks smfe owners face on a daily basis, they also allocate time to serve customers (wolk & wootton, 1995). smfe owners’ effort in servicing consumers may act as a catalyst to improve interaction quality and can help the development of brand equity. seeing smfe owners’ time as a job resource is evidenced by previous literature that considers smfe owners to be central for entrepreneurial success, firm survival, and business recovery when negative conditions of the environment take place (abd-hamid et al., 2015; alonso-dos-santos & llanos-contreras, 2019; llanos-contreras & jabri, 2019; marshall et al., 2015). however, according to job demands-resources theory, a job resource can be depleted by job demands such as exhaustion and burnout (bakker et al., 2005). this logic supports our prediction that smfe owners face work overload when they are devoted to serving customers in a personalized way. becherer et al. (2005) offer further evidence that in small businesses, top management are likely to exhibit work overload.this negative effect can be further explained by the tradeoff between delivering exemplary interaction quality and attempting, at the same time, to develop brand equity while having to deal with the other job demands (george & hamilton, 2011). following this conceptualization, we predict: h1. family business owners spending time to service customers leads to work overload. effect of work overload in delivering personalized services as explained before, smfe owners are motivated figure 1. conceptual model 66 f. velasco vizcaino, c. lanchimba, o. llanos contreras, & m. alonso-dos-santos journal of small business strategy / vol. 31, no. 2 (2021) / 62-79 in servicing customers, but the chances of work overload playing a role are considerable. work overload is related to job stress, interpersonal conflict, work-family conflict, and emotional exhaustion levels (jaramillo et al., 2011). emotional exhaustion is a typical consequence of work overload and is related to physical or emotional fatigue. in individuals (e.g., smfe owners), work overload causes a reduction of their mental energy. it also depletes people’s resources for coping with the challenges associated with work overload. further, work overload generates feelings of discouragement from work and a sense of ineffectiveness (doğan et al., 2015). work overload supposes a loss of personal identity and the absence of a feeling of achievement (kimura et al., 2018). added to these negative consequences of work overload is the loss of communication skills (altinoz et al., 2016). therefore, poor performance of the firm is expected as a consequence of work overload (becherer et al., 2005). this happens because job demands, such as work overload, predict disengagement (bakker & de vries, 2020; bakker & demerouti, 2017). in summary, we predict that under work overload conditions it will be very difficult for smfe owners to ensure the provision of personalized service. h2. work overload negatively impacts the delivery of personalized services to customers. the moderating effect of cocb in the relationship between work overload and delivering personalized services work overload triggers a hostile environment within organizations which makes it hard to support relationship-building processes with stakeholders (kimura et al., 2018), so, we predict that work overload harms the intentions to deliver personalized services. however, the presence of a job resource such as a team committed to demonstrate cocb is a valuable factor to mitigate this problem (glomb et al., 2011). when employees in an organization engage in collaborative effort, perform voluntary tasks, assist fellow employees and customers, and participate in extra-role tasks beyond their duties, the organization is determined to be demonstrating organizational citizenship behavior as a characteristic (organ, 2018; organ & paine 1999). a key outcome of cocb is how employees use their positive motivation and altruistic behavior as job resources to improve the organization in many aspects, including the delivery of high-quality service interactions with customers (podsakoff et al., 2009). several studies investigating cocb identify that this organizational factor is critical to deliver service quality (bell & menguc, 2002; bienstock et al., 2003; morrison, 1996; yoon & suh 2003). moreover, not only does cocb increase the probability of delivering high quality service to customers, but it is also beneficial to employees in the sense of providing them with a positive energy (e.g., a job resource) to regulate their mood (glomb et al., 2011). when employees are focused on “doing good,” they also “feel good” (glomb et al., 2011) and feel energized (lam et al., 2016). therefore, it can be expected that the whole organization is willing to leave aside their work overload problems as everyone in the organization, including its owner, is willing to “go the extra mile” to service customers in a personalized manner. in this way, cocb constitutes a job resource that consistently supports the delivery of a personalized service. when employees are satisfied with their jobs, they engage in cocb (foote & tang, 2008). because delivering a personalized service requires an organizational effort to go beyond the organizational scripts, cocb seems to be the perfect match to smfe owners’ motivation to help them reduce the negative effects of stressor variables (i.e., work overload) impacting the delivery of personalized services. it is well understood that cocb helps smfe owners and firm employees to achieve strategic business goals (organ, 2018). certainly, we can expect cocb to support the goal of delivering a personalized service although work overload is a present factor. central to cocb are the values of altruism, courtesy, empathy, and virtue (podsakoff et al., 1997). these values are common in smfe owners, can be conceived as resources, and produce a greater motivation to strengthen relationships with customers (jones, 2010). another way to foster cocb in family businesses is through teamwork, flexibility, multitasking, and proactiveness (van dyne, et al., 2007), which are all factors embedded in owners’ and employees’ resources when personalizing services. thus, cocb could also be interpreted as a job resource because it is an organizational characteristic that nurtures goal achievement. h3. cocb moderates the relationship between work overload and personalized services in a way that it diminishes the negative effect of work overload in delivering personalized services. the effect of personalized services in brand equity one of the most important aspects of brand equity is, without a doubt, building strong relationships between consumers and the organization (jung & yoon, 2013). srivastava & banir (2016) highlight the importance of a good-quality interaction between the customer and firm, which implies a close communication that allows the firm to 67 f. velasco vizcaino, c. lanchimba, o. llanos contreras, & m. alonso-dos-santos journal of small business strategy / vol. 31, no. 2 (2021) / 62-79 create, design, and customize products or improve service quality. therefore, brand equity can be reached through personalizing services, which refers to the way a firm creates value by adapting itself to better meet customers’ needs typically through offering an individualized service (ball et al., 2006). customization of a service implies tweaking the various processes and elements that make up the marketing mix with a focus on the customer. as ball et al. (2006) state, the personalization is not limited to altering the core service or product offerings; personalized services also represent adapting the firm pricing strategies, promotions, and the distribution practices to accommodate customer needs. shugan (2005) describes that there is a close relationship between a personalized service and the way a customer builds a relationship with a brand to eventually become loyal to it. nonetheless, in order for personalized services to be effective, it is crucial to have a good understanding of the organization’s operational system (shugan, 2005). by offering a more personalized service, there is great possibility for smfe to increase customer perceptions for a greater service quality. in this way, brand equity is enhanced via service customization due to the fact that, by having a wide variety of options available to customers, a better customer-service match can be achieved, compared to standardized services (coelho & henseler, 2012). brand equity can also be enhanced by the additional interactions that take place between customers and smfe owners. as stated by solomon et al. (1985), this can be explained by role theory, which states that if a business owner or their staff is able to adapt their attitudes and behaviors for different clients, they are likely to meet generated expectations and lead to a better level of satisfaction. thus, by having owners who are customer-oriented and dedicated to serving customers, a better service quality can be obtained (solomon, et.al, 1985). as a consequence, brand equity can be nourished when owners engage in personalizing services to customers. previous studies that analyzed the relationship between personalized services and brand equity have determined that there is a positive relation between these two constructs (ball et al., 2006; coelho & henseler, 2012). as such, this indicates that having a service delivery system from the owner that focuses on the customizing customer needs enhances the likelihood that customers will develop a strong level of commitment and bond to the family business brand. furthermore, this implies that a firm that is capable of personalizing services generates an atmosphere determined by being customer-oriented. a potential consequence of this firm capability can be reflected in a customer showing a self-connection with the brand, repeated purchases, and brand favoritism (hwang & kandampully, 2012). additionally, when a firm aims to personalize services, this strategy is positively linked to customer satisfaction, perceived service quality, brand loyalty, and brand equity (coelho & henseler, 2012). based on these arguments, the following hypothesis is proposed: h4. personalized service has a positive relationship with brand equity. method data collection and sample characteristics the reference population for this study are american and ecuadorian family business owners and their customers. family businesses in the sample of the study were chosen based on the authors’ personal contacts with owners and based from a small business directory. the final database of firms consisted of 1,072 firms to whom an email invitation was sent to participate in the study. the snowballing sample technique was also utilized to reach favourable responses. a dyadic sample of owners and customers was selected as the sampling strategy. authors carefully checked if the selected businesses fulfilled the criteria suggested by diéguez-soto et al. (2015) to classify them as family businesses. two surveys were designed for the present study. one for the owners and another for their customers. we used the back-translation technique (beaton et al., 2000) to translate the surveys to spanish when the surveys were used in ecuador. this technique assured the validity of the two surveys by first using a professional translator to translate the questionnaire from english to spanish. in parallel, one of the authors translated the survey and asked an independent scholar to back translated it to english. then, two of the authors solved discrepancies by comparing the original items with the new. then, before inviting business owners to participate in the study and ask them to collect data from their customers, we pilot tested the surveys with a sample of undergraduate students. two waves of email invitations to participate in the study were sent. data was collected from april 2019 to august 2019. the final sample is made up of 246 pairs of family business owners and customers across different industries. the sample family businesses belong to multiple industries, such as consumer services (33%), retail (24%), manufacturing (21%), imports and exports (8%), and miscellaneous others (14%). smfe owners had a mean age of 39.47 years (sd= 9.61), and 48% were female. customers had a mean age of 32.51 years (sd= 10.35), and 46% were female. 68 f. velasco vizcaino, c. lanchimba, o. llanos contreras, & m. alonso-dos-santos journal of small business strategy / vol. 31, no. 2 (2021) / 62-79 measurement variables our literature review of the constructs included in the model provides the basis for the design of the questionnaire. scale adaptations from previous studies were used. all items and their validity scores are listed in appendix a. to address the potential concern of common-method bias in our study, we ran two tests. first, we used harman’s one-factor test with all of our items entered into an exploratory factor analysis, which yielded that in no case was there a one factor solution. second, we used kock’s (2015) full collinearity test for common-method bias in pls-sem models. this test resulted in none of our items showing a vif higher than 3.3, as they ranged between 1.329 and 2.782. thus, the test results were optimal. data analysis technique in order to test the proposed model and hypotheses, we used partial least squares structural equation modelling (pls) to simultaneously assess the measurement and the structural model. pls is considered a reliable data analysis technique to study relationships among variables (garson, 2016; hair et al., 2019; hair jr et al., 2016). pls is a multivariate statistical tool that is suitable to use when the researchers’ objective is to examine construct relationships that include multiple dependent variables when the proposed model includes complex relationships (i.e., testing moderation effects) and when the study sample is not large (roldán & sánchez-franco, 2012). smart-pls version 3.2.7 software (ringle et al., 2005) was used to compute the items’ psychometric properties, items’ factor loadings, estimate model fit statistics, and compute path coefficients. results results from the analysis of the pls comprises the assessment of the validity of the measurement model and the assessment of the structural model. next, we describe the findings from these two steps. measurement model first, we evaluated the psychometric properties of the constructs included in the proposed model and estimated the corresponding reliability scores for each measure. convergent validity was assessed by the average variance extracted (ave) scores and composite reliability (cr) for all variables. ave scores were above 0.5 threshold as anderson and gerbing (1988) and hair et al. (2017) recommended. therefore, the constructs included in the proposed model are explaining more than fifty percent of the variance. cr scores for all constructs were robust and above 0.80. second, the constructs demonstrated adequate reliability indices as cronbach’s alpha scores ranged between 0.77 and 0.87. following henseler et al.’s (2015) recommendation, the hetereotrait-monotrait indices were shown to be below the maximum value of 0.90. finally, all outer loadings were significant and the rho_a indicators were higher than 0.70 (dijkstra & henseler, 2015). table 1 illustrates the constructs’ attributes and the robust reflective scheme of the inner model. table 1 measurement model results construct name construct reliability statistics rho_a standardized loadings owners’ time dedicated to attending customers’ needs (tc) 1.0 1.0 1.0 work overload (wo) cronbach’s alpha = 0.82 ave= 0.73 cr= 0.88 0.93 0.67 – 0.94 *** collective organizational citizen behavior (cocb) cronbach’s alpha = 0.77 ave= 0.68 cr=0.86 0.78 0.81 – 0.84 *** personalized services (ps) cronbach’s alpha = 0.79 ave= 0.71 cr= 0.87 0.83 0.71 – 0.90 *** consumer-based brand equity (cbe) cronbach’s alpha = 0.86 ave= 0.70 cr= 0.90 0.86 0.79 – 0.90 *** notes: ave= average variance extracted; cr= composite reliability *** = p < 0.001 69 f. velasco vizcaino, c. lanchimba, o. llanos contreras, & m. alonso-dos-santos journal of small business strategy / vol. 31, no. 2 (2021) / 62-79 third, the analysis for the discriminant validity tests were successful. the average shared variance of each construct and its diagonal values, illustrated in bold on table 2, exceeds the shared variance with other constructs (fornell-larcker criterion). table 2 shows the heterotrait-monotrait ratio (htmt) above the diagonal, square root of the ave in the diagonal (bold) and correlations between the constructs under the diagonal. table 2 discriminant validity construct name tc wo cocb ps cbe owners’ time dedicated to attending customers’ needs (tc) 1.0 0.14 0.27 0.13 0.15 work overload (wo) 0.14 0.85 0.11 0.16 0.08 collective organizational citizen behavior (cocb) 0.24 0.03 0.82 0.07 0.06 personalized services (ps) 0.11 -0.13 0.06 0.84 0.71 consumer-based brand equity (cbe) 0.14 -0.05 0.02 0.60 0.84 common method bias was not a concern. the assessment of a single latent factor applying all the scale items as indicators, revealed low correlations among the variables. descriptive statistics for the constructs included in the proposed model are illustrated in appendix b. structural model after the successful evaluation of the measurement model, the second step in our data analysis considered the inner model and the estimation of the path coefficients. we conducted this analysis using the pls bootstrap method with 5.000 samples, as recommended by hair jr et al., (2016). when assessing our models with plspredict, we followed the steps detailed in evermann and tate (2016) and shmueli et al., (2016). results from plspredict analysis yield in having a robust model. in addition, the r-square results of the structural model provide evidence that an acceptable portion of the variance of brand equity (r2 = 0.35) and personalized services (r2 = 0.25) is being described by the model. these r-square indicators are in accordance with chin’s (1998) limits on how to test the homological validity of the model. in addition to these robustness indicators, the standardized root mean square residual coefficient (srmr) reported by the model was 0.06. this indicator demonstrates the model has an adequate fit, as henseler et al. (2016) suggests. hypothesis testing was performed by computing and examining the path coefficients among the constructs. these path estimates are included in table 3 and are the result of the bootstrapping technique obtained from the pls analysis. h1 states that owners’ time spent in servicing customers is predicted to be positively linked to job workload. the path coefficient (β = 0.138, p < 0.01) confirmed this prediction. for job workload and its negative relationship with personalized service, h2, we also found supporting evidence (β = 0.134, p < 0.01). then, we focused on the main outcome variables in the model. hypothesis (h4) predicts that a personalized service has a positive relationship with brand equity. the path coefficient (β = 0.595, p < 0.001) confirmed this prediction. moreover, the results of the inner model provide evidence of the moderating effect of collective organizational citizenship behavior in the relationship between job workload and personalized services. h3 was supported (β = 0.103, p < 0.001); when the family business has created an organizational culture that supports employees volunteering and championing for each other, this organizational factor weakens the negative effect between job workload and personalized service. for further examination of the moderating effect, appendix c graphically represents the interaction effect following the method recommended by aiken et al., (1991). appendix c shows work overload at high and low values (one standard deviation above and below the mean) of cocb and the impact on personalized services. in effect, the graph shows that the slope for those firms high in cocb protect the delivery of personalized services when work overload is high. therefore, all the hypotheses were supported. table 3 presents the path coefficients and goodness-of-fit statistics for the structural model. figure 2 illustrates the model’s path coefficients. 70 f. velasco vizcaino, c. lanchimba, o. llanos contreras, & m. alonso-dos-santos journal of small business strategy / vol. 31, no. 2 (2021) / 62-79 this empirical paper estimates the chain of effects related to smfe owners’ time dedication to service customers and work overload. dyadic data from pairs of owners and customers were analyzed using partial least squares structural equation modeling. this method allows us to study the simultaneous influence of the owner’s time servicing customers, work overload, and personalized services on brand equity, taking into account the moderating effect of cocb between work overload and personalized services. contribution to family business marketing literature the results suggest that smfe owners spending time to service customers leads to work overload. more precisely, the paper provides evidence that owners’ job resources are scarce, and this triggers work overload because owners spend more than half of their time servicing customers. this means that owners must absorb the costs related to their job demands and try to find extra energy to deliver personalized services. moreover, our results suggest that work overload negatable 3 structural model results structural relationships coefficient t-value hypothesized links h1 owners’ time to serve customers → work overload 0.138 2.18** h2 work overload → personalized service -0.134 -2.54** h3 personalized service → brand equity 0.595 11.41*** h4 moderation test 0.103 3.00 *** (cocb x work overload) → personalized service control variables owner’s tenure → work overload 0.03 0.50 ns notes: ** p ≤ .01, *** p ≤ .001 figure 2. model’s path coefficients conclusions notes: ** p ≤ .01, *** p ≤ .001 71 f. velasco vizcaino, c. lanchimba, o. llanos contreras, & m. alonso-dos-santos journal of small business strategy / vol. 31, no. 2 (2021) / 62-79 tively influences the delivery of personalized services. this finding is crucial, as it suggests that owners’ resources are limited, and this negatively impacts on delivering personalized services when firms try to use this type of interaction quality as a marketing strategy. even though the negative effect of work overload on delivering personalized services seems to be present in family businesses, we found a positive effect in the relationship between personalized services and brand equity. this positive and significant effect can be conceptually acknowledged via two distinct theoretical approaches. on one hand, the attitudinal approach shown by customers when perceiving a firm delivering a personalized service describes the way in which they demonstrate a profound tie with family business organizations and show commitment with it, despite there being many switching opportunities available in the market (hwang & kandampully, 2012; oliver, 1999). this positive effect is constant despite the fact that the toll of delivering personalized services is work overload. secondly, the behavioral approach refers to a customer’s continuous repurchase of the goods or services provided by a specific brand (hwang & kandampully, 2012; reinartz & kumar, 2000). as mentioned by coelho and henseler (2012), the main purpose of customization is to meet the needs of a customer in a superior way to those available from a more basic service. as a consequence, the appeal of other alternatives (i.e., service offerings provided by large firms or non-family firms) diminishes when compared to that of the personalized service offering of a family firm. applying the job demands-resources theory to the proposed link between smfe owners’ time dedicated to serving customers and work overload provides a suitable framework for our predictions. as the job demands-resources theory predicts, certain job resources such as smfe owners’ motivation and certain organizational factors such as cocb constitute valuable assets for family businesses when they decide to deliver a personalized service. both factors mitigate work overload, which is a natural factor present in smfe owners. it is noteworthy to point out that conventional wisdom dictates that cocb is a common factor in family businesses. this leads to conceptualizing cocb as a resource for family businesses. however, our findings suggest that cocb needs to be nurtured inside the organization, as this resource is the one that mitigates job demands. managerial implications in the context of family businesses, developing and maintaining a customer base loyal to the brand, via personalized services, is a key element to take into consideration for family firms, for the fact that it ensures a fruitful avenue of opportunities (obermiller, 2002). as stated by reichheld (1993), having a loyal group of customers is beneficial, from a financial point of view, as it is less costly and more efficient to sell their goods and services to these clients, instead of trying to obtain new ones. similarly, a strong brand equity is important for family businesses, since loyal customers will be less perceptive and sensitive towards new market offerings and/or price changes from competitors (e.g., non-family businesses or large-scale firms), thus, giving a family business advantages when implementing marketing strategies (obermiller, 2002; aaker, 1991). future research and limitations future research might consider our findings and explore in more depth which factors develop cocb in family business. our results suggest that when employees feel empowered, demonstrate being collaborative with their co-workers, are motivated to extend their duties beyond their assigned tasks, and exhibit customer orientation, a family business develops an organizational culture that can handle stressor variables (e.g., job demands) that affect top management and in particular the owner of a family business. moreover, future studies might want to explore if business owners at family firms can have control of strategies that nurture cocb in their organizations. previous research shows that owners’ attitudes and personality permeate through the organization (vizcaíno et al., 2021) and act as an exemplary behavior for employees to facilitate building brand equity. thus, the first individual in a family business to act as a role model of cocb is the owner. we also must acknowledge this study presents a few limitations. first, this study is cross-sectional and presents evidence from a single point of time in which our society was not yet impacted by covid-19 virus breakout. today’s business environment is very different in terms of the high levels of concern and anxiety present in family business owners. thus, smfe have to deal with more job demands, especially those concerning how to cope with covid-19, which leads us to think that work overload might be even more severe under today’s circumstances. second, our dyadic sample did not include employee perspectives. future research might incorporate their own evaluation about work overload and cocb in family firms. finally, our study might be vulnerable to a selection bias, due to the nature of our sampling strategy as we only include one customer for each family business owner. 72 f. velasco vizcaino, c. lanchimba, o. llanos contreras, & m. alonso-dos-santos journal of small business strategy / vol. 31, no. 2 (2021) / 62-79 references aaker, d. 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to 7 = “describes my organization very well” (1) “my employees help others who have been absent” .846 (2) “my employees help others who have heavy workloads” .810 (3) “i take time to listen to my employee’s problems” (4) “i go out of the way to help my employees and customers” .810 personalized services (items developed by the authors based on bowen, 1990; liu, shan, & pigneur 2016; wang & groth 2014 ). 7-point scale from 1 = “distant contact” to 7 = “close contact” (1) “how would you rate the level of personal contact you had with employees at this company” .898 7-point scale from 1 = “not at all” to 7 = “i feel all the time” (2) “when you are doing business with this company, how much do you receive a preferred treatment from them” .710 (3) “when you are doing business with this company, how much do you feel you receive a customized service to your needs” .896 consumer-based brand equity (yoo & donthu, 2001) 7-point scale from 1 = “extremely unlikely” to 7 = “extremely likely” (1) “if price is not a consideration, how likely are you to purchase services from our brand in the future” .819 7-point scale from 1 = “not well at all” to 7 = “extremely well” (2) “how well does our brand fit your practical needs” .792 7-point scale from 1 = “extremely badly” to 7 = “extremely well” (3) “how good or bad is the quality of our brand” .869 7-point scale from 1 = “extremely untrustworthy” to 7 = “extremely trustworthy” (4) “in relation to comparable brands in the marketplace, how trustworthy is our brand” .867 78 f. velasco vizcaino, c. lanchimba, o. llanos contreras, & m. alonso-dos-santos journal of small business strategy / vol. 31, no. 2 (2021) / 62-79 appendix b descriptive statistics measures mean sd owners’ time dedicated to attending customers’ needs (tc) 57.59 31.04 work overload (wo) 4.52 1.41 collective organizational citizen behavior (cocb) 4.65 1.00 personalized services (ps) 5.90 1.04 consumer-based brand equity (cbe) 6.11 0.79 79 f. velasco vizcaino, c. lanchimba, o. llanos contreras, & m. alonso-dos-santos journal of small business strategy / vol. 31, no. 2 (2021) / 62-79 appendix c interaction effect s trategs trateg y   journal of small business  editors ross l. fink bradley university ty gerald e. hills bradley university gerald e. hills bradley university associate editors associate editors paul belliveau rider university paul belliveau rider university bruce h. kemelgor university of louisville bruce h. kemelgor university of louisville editorial assistants editorial assistants rebecca nunes bradley university rebecca nunes bradley university editorial review board editorial review board semra ascigil middle east technical university semra ascigil middle east technical university joe r. bell university of arkansas at little rock joe r. bell university of arkansas at little rock david brennan university of st. thomas david brennan university of st. thomas shawn carraher indiana wesleyan university shawn carraher indiana wesleyan university eugene fregetto university of illinois at chicago eugene fregetto university of illinois at chicago joseph geiger university of idaho joseph geiger university of idaho armand gilinsky sonoma state university armand gilinsky sonoma state university michael l. harris east carolina university michael l. harris east carolina university david lyn hoffman metropolitan state college of denver david lyn hoffman metropolitan state college of denver jeffrey hornsby kansas state university jeffrey hornsby kansas state university cathleen (folker) leitch wilfrid laurier university cathleen (folker) leitch wilfrid laurier university robert lussier springfield college robert lussier springfield college matthew r. marvel western kentucky university matthew r. marvel western kentucky university brian mckenzie california state university, east bay brian mckenzie california state university, east bay thaddeus mcewen north carolina a&t state university thaddeus mcewen north carolina a&t state university todd d. mick lindenwood university todd d. mick lindenwood university abbas nadim university of new haven abbas nadim university of new haven john e. prescott university of pittsburgh john e. prescott university of pittsburgh neal pruchansky keene state college neal pruchansky keene state college jeff shields university of southern maine jeff shields university of southern maine leo simpson seattle university leo simpson seattle university joe singer university of missouri – kansas city joe singer university of missouri – kansas city matthew c. sonfield hofstra university matthew c. sonfield hofstra university harriet stephenson seattle university harriet stephenson seattle university jude valdez university of texas at san antonio jude valdez university of texas at san antonio dianne h.b. dianne h.b. welsh the university of north carolina at greensboro welsh the university of north carolina at greensboro book review editor book review editor michael goldsby ball state university michael goldsby ball state university special thanks to heather shaner and amy mentgen for their high quality editorial work and their commitment and devotion to creating a great product. thanks also to james foley and jennie hale, through their excellent leadership, have ensured a high quality publication. special thanks to heather shaner and amy mentgen for their high quality editorial work and their commitment and devotion to creating a great product. thanks also to james foley and jennie hale, through their excellent leadership, have ensured a high quality publication. the journal of small business strategy is a joint publication of the small business institute and the foster college of business administration, bradley university. send subscription requests to journal of small business strategy, foster college of business administration, turner center for entrepreneurship, bradley university, 1501 w. bradley ave., peoria, il, 61625 or e-mail to jsbs@bradley.edu. annual subscriptions (two issues) may be ordered at $25 each (u.s. dollars only). international subscriptions add $5 annually for postage and handling. back issues may be ordered at $12 per issue. members of the international council for small business receive a 40% discount. icsb members pay $15 plus $5 for international subscriptions. the journal of small business strategy is a joint publication of the small business institute and the foster college of business administration, bradley university. send subscription requests to journal of small business strategy, foster college of business administration, turner center for entrepreneurship, bradley university, 1501 w. bradley ave., peoria, il, 61625 or e-mail to jsbs@bradley.edu. annual subscriptions (two issues) may be ordered at $25 each (u.s. dollars only). international subscriptions add $5 annually for postage and handling. back issues may be ordered at $12 per issue. members of the international council for small business receive a 40% discount. icsb members pay $15 plus $5 for international subscriptions. copyright 2012 small business institute issn 1081-8510 copyright 2012 small business institute issn 1081-8510 reproduced with permission of the copyright owner. further reproduction prohibited without permission. editor gerald e. hills bradley university associate editor bruce h. kemelgor university of louisville eugene fregetto university of illinois at chicago editorial assistant elizabeth knapinski bradley university editorial review board semra ascigil middle east technical university joe r. bell university of arkansas at little rock david brennan university of st. thomas shawn carraher indiana wesleyan university eugene fregetto university of illinois at chicago joseph geiger university of idaho armand gilinsky sonoma state university michael l. harris east carolina university david lyn hoffman metropolitan state college of denver jeffrey hornsby kansas state university cathleen (folker) leitch wilfrid laurier university robert lussier springfield college matthew r. marvel western kentucky university brian mckenzie california state university, east bay thaddeus mcewen north carolina a&t state university abbas nadim university of new haven john e. prescott university of pittsburgh neal pruchansky keene state college jeff shields university of southern maine leo simpson seattle university matthew c. sonfield hofstra university harriet stephenson seattle university jude valdez university of texas at san antonio dianne h.b. welsh michael goldsby the university of north carolina at greensboro ball state university special thanks to elizabeth knapinski for her high quality editorial work and her commitment and devotion to creating a great product. thanks also to james foley and jennie hale that, through their excellent leadership, have ensured a high quality publication. the journal of small business strategy is a joint publication of the small business institute and the foster college of business administration, bradley university. send subscription requests to journal of small business strategy, foster college of business administration, turner center for entrepreneurship, bradley university, 1501 w. bradley ave., peoria, il, 61625 or e-mail to jsbs@bradley.edu. annual subscriptions (two issues) may be ordered at $25 each (u.s. dollars only). international subscriptions add $5 annually for postage and handling. back issues may be ordered at $12 per issue. members of the international council for small business receive a 40% discount. icsb members pay $15 plus $5 for international subscriptions. copyright 2014 small business institute issn 1081-8510 s y journal of small business trateg reproduced with permission of the copyright owner. further reproduction prohibited without permission. strategy   journal of small business  editors ross l. fink bradley university ty gerald e. hills bradley university gerald e. hills bradley university associate editors associate editors paul belliveau rider university paul belliveau rider university bruce h. kemelgor university of louisville bruce h. kemelgor university of louisville editorial assistants editorial assistants rebecca nunes bradley university rebecca nunes bradley university editorial review board editorial review board semra ascigil middle east technical university semra ascigil middle east technical university joe r. bell university of arkansas at little rock joe r. bell university of arkansas at little rock david brennan university of st. thomas david brennan university of st. thomas shawn carraher indiana wesleyan university shawn carraher indiana wesleyan university eugene fregetto university of illinois at chicago eugene fregetto university of illinois at chicago joseph geiger university of idaho joseph geiger university of idaho armand gilinsky sonoma state university armand gilinsky sonoma state university michael l. harris east carolina university michael l. harris east carolina university kirk heriot columbus state university kirk heriot columbus state university david lyn hoffman metropolitan state college of denver david lyn hoffman metropolitan state college of denver jeffrey hornsby kansas state university jeffrey hornsby kansas state university cathleen (folker) leitch university of wisconsin – parkside cathleen (folker) leitch university of wisconsin – parkside robert lussier springfield college robert lussier springfield college matthew r. marvel western kentucky university matthew r. marvel western kentucky university brian mckenzie california state university, east bay brian mckenzie california state university, east bay thaddeus mcewen north carolina a&t state university thaddeus mcewen north carolina a&t state university todd d. mick lindenwood university todd d. mick lindenwood university abbas nadim university of new haven abbas nadim university of new haven john e. prescott university of pittsburgh john e. prescott university of pittsburgh neal pruchansky keene state college neal pruchansky keene state college jeff shields university of southern maine jeff shields university of southern maine leo simpson seattle university leo simpson seattle university joe singer university of missouri – kansas city joe singer university of missouri – kansas city matthew c. sonfield hofstra university matthew c. sonfield hofstra university harriet stephenson seattle university harriet stephenson seattle university jude valdez university of texas at san antonio jude valdez university of texas at san antonio dianne h.b. dianne h.b. welsh the university of north carolina at greensboro welsh the university of north carolina at greensboro book review editor book review editor michael goldsby ball state university michael goldsby ball state university special thanks to heather shaner for her high quality editorial work and her commitment and devotion to creating a great product. thanks also to james foley and jennie hale, through their excellent leadership, have ensured a high quality publication. special thanks to heather shaner for her high quality editorial work and her commitment and devotion to creating a great product. thanks also to james foley and jennie hale, through their excellent leadership, have ensured a high quality publication. the journal of small business strategy is a joint publication of the small business institute and the foster college of business administration, bradley university. send subscription requests to ross fink, editor, journal of small business strategy, foster college of business administration, bradley university, 1501 w. bradley ave., peoria, il, 61625 or e-mail to jsbs@bradley.edu. annual subscriptions (two issues) may be ordered at $25 each (u.s. dollars only). international subscriptions add $5 annually for postage and handling. back issues may be ordered at $12 per issue. members of the international council for small business receive a 40% discount. icsb members pay $15 plus $5 for international subscriptions. the journal of small business strategy is a joint publication of the small business institute and the foster college of business administration, bradley university. send subscription requests to ross fink, editor, journal of small business strategy, foster college of business administration, bradley university, 1501 w. bradley ave., peoria, il, 61625 or e-mail to jsbs@bradley.edu. annual subscriptions (two issues) may be ordered at $25 each (u.s. dollars only). international subscriptions add $5 annually for postage and handling. back issues may be ordered at $12 per issue. members of the international council for small business receive a 40% discount. icsb members pay $15 plus $5 for international subscriptions. copyright 2011 small business institute issn 1081-8510 copyright 2011 small business institute issn 1081-8510 reproduced with permission of the copyright owner. further reproduction prohibited without permission. reproduced with permission of the copyright owner. further reproduction prohibited without permission. the consequences of fairness for a small professional services firm robbins, tina l;jeffords, ben c journal of small business strategy; spring/summer 2004; 15, 1; abi/inform complete pg. 81 journal of small business strategy vol. 15. no. 1 spring/summer 2004 the consequences of fairness for a small professional services firm tina l. robbins clemson university rtina@clemson.edu ben c. jeffords erskine college jeffords@erskine.edu abstract this paper distinguishes among client perceptions of outcome, procedural and interactional justice in professional services. we surveyed clients of a small accounting firm and focused specijicai(v on fairness perceptions in income tax services. we predicted that procedural and interactional fairness would he more influential than distributive fairness on evaluations of the service. the results suggest that interactionaljairness, the interpersonal treatment in the delivery of the service, is the most significant predictor of client perceptions of service quality, loyalty, and trust. implications .for managers of small businesses as well as sole practitioners that offer professional services are discussed. introduction fairness, or justice, has long been established as one of the most significant principles upon which people judge relationships and exchanges (e.g., clemmer & schneider, 1996). an abundance of research has been conducted in the area of organizational justice (see review by greenberg, 1990), which addresses fairness in employee-employer exchanges. more recently, the importance of fairness in customer-service firm exchanges has received attention by researchers (see review by clemmer, 1993). much of this literature has established that fairness is judged on the basis of outcomes, procedures, and interactions received in the exchange (clemmer and schneider, 1996). these criteria appear to generalize across multiple contexts (employee-organization, citizen-legal authorities, customer-service firm) in which parties judge the fairness of the exchange (e.g., clemmer & schneider, 1996; folger & konovsky, 1989;tyler, 1989; 1994). the purpose of this study is to identify the distinct influences among client perceptions of outcome, procedural and interactional fairness in professional services offered by a small accounting firm. accounting services, income tax preparation in particular, were chosen since these services reflect certain criteria suggested to be particularly vulnerable (seiders & berry, 1986) to influences from customer perceptions of fairness (robbins, jeffords & summers, 2002). the application of these fairness categories to professional services, particularly income tax preparations is unique in that each fairness component is likely to be salient to the clients of this service. prior research (clemmer, 1993) has defined the distributive or outcome component in services as the technical quality or object of the service. the final outcome of the tax return services is the client's tax liability or the amount that the client owes the irs or 81 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy vol. 15. no. 1 spring/summer 2004 is due in refund. procedural fairness, defined as the procedures followed in delivering the service, would best be represented by the cp as' work, including the interpretations and judgments of ambiguities that vary by 'facts and circumstances'. finally, interactional fairness, the interpersonal treatment that individuals received from service providers (seiders & berry, 1998) has also been established (e.g., clemmer & schneider, 1996) as an important, distinct, and independent component of justice in client-service firm exchanges. in the context of this study, the interpersonal treatment by the cpa in interactions with the client would represent this component of fairness. although a few larger businesses that provide professional services (e.g., medical, banking) have been the focus in some preliminary research (e.g., clemmer, 1993), there has been little attempt to apply these fairness concepts to services that are commonly offered by small accounting firms. one previous study (robbins, et al., 2002) attempted to identify the basis for which clients of small accounting firms define outcome, procedural, and interaction fairness in income tax services. the professional's knowledge and innovativeness are examples of criteria upon which clients base their perceptions of procedural fairness (i.e., cpa interpretations and judgments). the degree to which the cpa is accommodating and adequately explains decisions was cited most frequently as the basis for opinions regarding the fairness of interpersonal treatment in these services. although we have some preliminary knowledge of the criteria that clients use to define justice in professional services, many important potential consequences of fairness perceptions in small accounting firm-client exchanges have not been studied. for example, we do not know what fairness component is most influential on client evaluations of service quality, client loyalty, trust, and perceived competence. in organization-employee exchanges, the distinct influences of distributive and procedural fairness have been found to be dependent on the nature of the outcome itself (see review by mcfarlin & sweeney, 1992). in most cases (e.g., folger & konovsky, 1989), procedural fairness has been found to be more predictive than distributive fairness of attitudes and evaluations of companies and its representatives (e.g., organizational commitment, trust in supervisor), while distributive fairness has been more influential on satisfaction with a specific decision or outcome (e.g., pay raise). this same pattern has been found in research assessing the public's evaluation of service by legal and political authorities (see review by folger and konovsky, 1989). for example, procedural fairness has been more closely linked to global system or institutional evaluations, as well as attitudes about legal authorities and government leaders. on the other hand, distributive fairness has been found to be more closely linked to the evaluation or satisfaction with a specific outcome (e.g., satisfaction with a trial verdict). some researchers (lind & tyler, 1988) suspect that the distinct influence of procedural fairness is attributable to the long-term perspective that is reflected in broad, more stable attitudes about companies and their representatives versus the less stable evaluation of a specific outcome that results from more of a short-tenn perspective. as folger and konovsky explain, "as the issue moves from the level of personal satisfaction with present outcomes to higher-order issues regarding commitment to a system and trust in its authorities, these procedural concerns begin to loom larger than the distributive ones emphasized by equity theory" (1989: 126 ). others (e.g., sweeney & mcfarlin, 1993) suggest that procedural issues uniquely determine the perceived capacity for fairness on the part of the company. the fairness of procedures as "means" to an end, are more influential on attitudes and evaluations that reflect "faith in the system." 82 reproduced with permission of the copyright owner. further reproduction prohibited without permission. .journal of small business strategv vol. 15. no. 1 spring/summer 2004 there is reason to believe that this same pattern of distinct influences found in other contexts will occur with client evaluations of their exchanges with small businesses offering professional services. as reviewed by clemmer ( 1993 ), bowen and schneider ( 1988) suggest that in service exchanges, customers' roles are similar to employees in that they provide essential inputs into the transformation process. the service provider-customer exchange relationship has been suggested to have much in common with organization-employee exchanges. "by extension then, those concepts that have proven useful in understanding employee reactions and behaviors in other settings may also be fruitful in comprehending customer reactions and behaviors in service encounters (clemmer, 1993: 196)." consistent with the justice research in other contexts, we predict that certain categories of fairness will be more predictive of important reactions and attitudes regarding services provided by a small accounting firm. it is likely that the aspects of the service over which a firm and their cp as have more internal control will be more influential on the evaluations of the business and their service professionals. research on organizational fairness (e.g., crapanzano & folger, 1989) suggests that people are particularly sensitive to unfairness when it results from someone else's actions. generalizing this finding to the context of professional services, income tax services more specifically, we would expect clients to react significantly to procedural quality problems and unfairness that result from the cpa's judgments and interpretations used in applying the tax code. outcomes the clients attribute to the federal tax code, for example, should have less serious consequences. while the tax liability may be influenced in part by the cpa, it is an outcome over which the professional has only partial control. we therefore predict that the fairness of procedures will be a more significant predictor than will distributive or outcome fairness on client evaluations of service quality, client loyalty, trust, and perceived competence. hi: client perceptions of procedural fairness will be more influential than distributive fairness. we also believe that relational concerns, specifically interpersonal treatment, are likely to be of utmost importance in professional service exchanges. past researchers (hoffman & kelly, 2000) suggest certain contingencies (i.e., proximity of the relationship, degree of customization) that affect the relative importance of the different fairness components in service exchanges. most professional services are conducted in close physical proximity, i.e., more likely face-to-face rather than long-distance, mail or electronic communication. furthermore, interactional fairness is likely to be more important than distributive fairness to clients of income tax preparation because the service is customized and tailored to the customers' income, deductions, financial status, etc. clients of services that are conducted in close proximity and those that are more customized are likely to expect more personal treatment and place greater weight on the relationship aspect (hoffman & kelly, 2000). related to the above contingencies is the notion of the customers' perceived type of exchange or implied contract (e.g., rousseau & parks, 1993 ). due to the personalized nature of many professional services, clients are likely to perceive their exchanges at least in part, relational, rather than purely economic. social or relational aspects of service relationships are particularly important in professional services where the relationships are more stable (halinen, 1996). furthermore, fair interpersonal treatment likely plays a key role in building the trust that is so important with "at risk exchanges," such as income tax returns (robbins, et al., 2002) and services in which the outcomes are difficult to evaluate (seiders & berry, 1998). ln sum, we believe fair interpersonal treatment will be a more significant predictor than will distributive justice on client attitudes about the firm and the professionals delivering the service. 83 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of'small business strategi1 vol. 15, no. i spring/summer 2004 h2: client perceptions of interactional fairness will be more influential than distributive fairness. method survey questionnaires were mailed to 460 randomly selected clients of a small public accounting firm. respondents were assured of anonymity since responses could not be individually identified. the finn had 12 partners, 39 staff employees, and had annual sales of $3.5 to $4 million at the time of the research, criteria consistent with the definition of a small business according to the u.s. small business administration (sba). measures the specific items used for each measure can be found in the appendix. for the entire questionnaire, the clients were instructed to refer to their last income tax service. subjects were asked to indicate their degree of agreement with the statements about the cpa firm and/or cpa(s). a six-point scale (i = strongly disagree; 2 = disagree; 3 = neutral; 4 = agree; 5 = strongly agree; na = not enough information to evaluate) was used for all measures unless indicated otherwise (i.e., duration of service relationship) in the appendix. all items were mixed in presentation on the questionnaire in order to mitigate repetitiveness of those representing any one construct. predictor variables. in order to assess distributive, procedural, and interactional fairness, we used measures that were developed for use in this study, but chose wording based on measures used in past research. perceptions within each component of fairness were measured with two items, tapping "fairness" and "appropriateness." appropriateness has been used in past research (e.g., greenberg, 1993) as alternative terminology for assessing fairness perceptions. distributive fairness has been operationalized in past literature (e.g., hoffman & kelly, 2000) as the fairness of what is provided by the service, i.e., the core aspect of the service as stated earlier, we believe the analog in this context would best be represented by the tax liability resulting from the service (i.e., the balanced owed or due from the irs). as shown in the appendix, one item measured the clients' degree of agreement that the tax liability associated with this income tax return service was appropriate; the second that the outcome (i.e., balance owed to or due from the irs) of the tax return service was fair. to measure procedural fairness, we used two items in which clients indicated their perceptions of the "fairness" and ''appropriateness" of the interpretations and judgments made by the cpa when processing the return. based on operationalizations in past research (e.g., seiders & berry, 1998), interactional fairness was measured by the client's perception of the fairness and appropriateness of his or her interpersonal treatment by the cpa during the delivery of the service. criterion variables. we measured two attitudes/evaluations of the firm, client loyalty and perceived quality of service provided. for both of these variables we used adaptations of measures used in prior service research (e.g., behn, carcello, hennanson & hermanson, 1997; miller, craighead & karwan, 2000; turner, aldhizer & shank, 1999). for perceptions of service quality, two items assessed clients' attitudes about the overall quality of the service provided and the firm's commitment to quality. client loyalty was measured by clients indicating their level of agreement that they would "classify myself as a loyal client of this cpa finn." 84 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategv vol. 15, no. 1 spring/summer 2004 client evaluations and attitudes about the cpa representing the small finn were also measured. more specifically, the clients' trust in the cpa and perceptions of the cpa 's competence were measured. the three items that were used to tap client perceptions of the cpa's competence were based on prior research addressing similar attitudes (behn, et al., 1997; crosby, evans & cowles, 1990). the clients indicated their degree of agreement with three statements; that the cpa had adequate training, knowledge, and experience in income tax preparation. client trust in the cpa was measured with four items that were based on past research addressing trust in service professionals (crosby, et al., 1990). these items measured the clients' attitudes regarding the cpa's sincerity, trustworthiness, integrity, etc. control variables. income tax services are unique in that there are many external influences (i.e., federal tax laws) that may potentially confound justice evaluations of the cpa firm. therefore, consistent with the procedure for measuring the classic justice constructs, two items were used to assess the clients' degree of agreement that the federal tax code procedures used in the service were fair and appropriate. costs are also particularly important in professional services and should not be overlooked as an important influence on client evaluations of the service (halinen, 1996). client perceptions of the fairness of the charges assessed for services, particularly whether they are commensurate with the services rendered, have been shown to influence other aspects of outcome fairness (clemmer & schneider, 1993). we therefore controlled for this potential bias with the use of a measure that included two items assessing the clients' agreement that the charges for services rendered were fair and appropriate. we also controlled for the duration of the relationship between the client and the firm, since prior research suggests this variable may influence perceptions of fairness (clemmer, 1993; coulter & coulter, 2002; hoffman & kelly, 2000). one item, "how long have you been using this cpa's firm's services?" was anchored with four options; less than one year, two to five years, six to ten years, and more than ten years. results seventy-five of the 460 questionnaires were returned, resulting in a response rate of 16 percent. this is a fairly low response rate, but one that is fairly common in this type of research (e.g., turner, et al., 1999). table i provides the descriptive statistics, reliabilities, and correlations among the primary variables in the study. in order to test the hypotheses, four regression analyses were conducted, each with the control variables (federal tax code, service cost, length of service with the firm) and the three components of fairness (tax bill, cpa's procedures and interactional fairness) entered as predictors of the dependent variables of interest (service quality, loyalty to firm, perceived competence of and trust in the cpa). 85 r e p ro d u ce d w ith p e rm issio n o f th e co p yrig h t o w n e r. f u rth e r re p ro d u ctio n p ro h ib ite d w ith o u t p e rm issio n . [/l (l ...., ::r 0 po 0 ::i a" .,, .... -<: ..., (1,) ::is:.._ a·<..; ...., e; ..., po -· (1,) a" po [/l ~ 2: g (1,) .... [/l po po ::i & ;;i 0... (1,) erst(ti (1,) ~r ~ c (p ;::::;:' ::s r.n r:r. .n· [/l 0 c "o ....., (1,) ..., .... (l (1,) ::r 0 9: (1,) ::i (l 0 5". 0 < a" ..., (1,) c ..., ii] §"· ~ = ::i (1,) ..., [/l pi (1,) ~i ~ :::.@ ('d • .~ po 0 -· (l 0 ::r &::i ~ (1,) 3 (1,) ::r 0 0... '< 0... -· "o (1,) (l 0 -0 .en ..., ::r po pj ~ r.n [/l (1,) .,, 0... [/l (jj ~"'o = (1,) ..., :l (1,) po ~ ~ c/j -· ::s .-::i .... ::r (1,) (1,) (1,) 0... 0......, a" (1,) (1,) '< po ~ s:~ ~ (1,) (1,) [/l r.n :-; 0 j:l ....., ~ > g (ti ~ () 0... 0 ::r variable l. duration as a client 2. service cost 3. tax code 4. distributive fairness 5. procedural fairness 6. inter. fairness 7. service quality 8. loyalty 9. compe . 10. trust mean s,d 1 2 3 3.46875 0.83512 3.95313 0.81998 0.26439 (0. 92) 4.03125 0.76571 0.17531 0.52695 (0. 77) 4 .04688 0.69988 0.08402 0.59855 0.81175 4.49219 0.56689 0.14197 0.47726 0.47595 4.50781 0.65763 0.05103 0.33184 0.38565 4.46875 0.70640 0.09249 0.33312 0.37599 4.45313 0.75445 0.21178 0.39409 0.37351 4.63542 0.51338 0.09641 0.41124 0.41305 4.48047 0.67745 0.05852 0.21621 0.34162 ~ ::: ..... :::: s2.. 4 5 6 7 8 9 jo ~ ~ !:l :::::: ~ ;'"~· ~ "' ~ :i -l i~ ~ c" ;" -(0.80) i rjj ~ 3 "c ;" 0.42101 (0 .87) rjj .... ~ .... ~: 0.34406 0.72398 (0 .98) ;:::;· 10~ "' :--.._ ~ 0.38828 0.71285 0.84620 (0.93) ~ .._ 0.33490 0.65789 0.79256 0.92049 ~ 0.46064 0.74454 0.69029 0.66110 0.61088 (0.94) ~· ~ ~ 0.23631 0.53691 0.82426 0.70354 0.67754 0.56491 (0.84) ::! ~ "' ..... "-" ~ ~ ""'reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal a/small business strategy vol. j 5, no. j spring/summer 2004 semi-partial correlation (sr2), which indicates the incremental change in r-squared for one predictor (i.e., fairness component) after the other predictors (e.g., control variables) have already entered the model. confirmation of these findings with the examination of unique, independent variance when making comparisons among the predictors should mitigate problems with multicollinearity inherent in the regressions procedure, thus "providing more stringent test of the relationships in the context of single source data" (korsgaard & roberson, 1995; p. 663). table ii results of regression analyses model f value model r2 control variables duration as a client cost of services tax code justice variables distributive fairness procedural fairness lnteractional fairness service quality 27 .65*** .72 .04 -.05 .12 -.20 .27 .74*** loyalty 18 .94*** .63 . 13 .08 -.01 .00 . 14 (ns) .78*** (.23) (.22) parameter estimates (beta weights) are provided. perceived competence 15 .94*** .59 .02 -.01 -.12 .22* (.03) .43*** (.09) .24* (.05) trust 21.85*** .67 .02 -.03 .18 -. 16 -.17 .94*** (.39) if significant, the unique variance contributions (sr2) are shown parenthetically below. *** p<. 001 **p < .ol *p < .05 hypothesis 1 predicted that procedural fairness would be more influential on client evaluations than would distributive justice. the results, as shown in table ii, are consistent with hi in that procedural fairness significantly (h = .43; p <.001) influenced evaluations of the professional representing the firm (i.e., cpa competence). even though distributive fairness also had a significant effect (h = .22; p <.05) on perceived competence of the cpa, the independent, unique variance (sr2 = .09) attributable to cpa judgments and interpretations was much greater than that attributable to perceived fairness of the tax liability (sr2 = .03). as shown in table ii, the results support h2 in that interactional fairness significantly influenced all criteria, including service quality ( h = . 74; p <.001 ), loyalty to the finn ( h = . 78; p <.001), perceived competence of the cpa (h = .24;p <.05), as well as trust in the cpa (b = .94; p <.001). in fact, only interactional fairness (i.e., the cpa's interpersonal treatment) 87 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal olsmall business strategv vol. 15. no. 1 spring/summer 2004 offered an independent, unique contribution to account for variation in perceptions of service quality, client loyalty to the firm, and trust (sr2 = .23, .22, and .39 respectively). as was the case above, even though distributive fairness had a unique effect (sr2 = .03) on perceived competence of the cpa, the independent contribution of interactional fairness in explaining this criterion was greater (sr2 = .05). discussion the results of this study should provide useful and important information for small businesses offering professional services, particularly small accounting firms and sole practitioners offering income tax services. although distributive justice, which is externally influenced to a great extent in this context, had a significant impact on the perceived competence of the cpa, it is fortunate that clients in this study did not let the federal tax code, over which the firm has no control, influence their judgments of service fairness. in contrast, fairness components with the most significant consequences were those over which accounting firms and cp as have the most control. the appropriateness and fairness of the cpa 's procedural interpretations and judgments was the most influential predictor of client perceptions of his or her competence. this is important in that prior research (robbins, et al., 2002) suggests that clients may believe these judgments and interpretations are fairer when the cpa is aggressive, allows the client to assume some risk, is innovative, progressive, and original. clients' perceptions of interactional fairness, the way they were treated in interactions with their cpa, had the most significant influence on client perceptions of service quality, loyalty, and trust. the relationships between interactional justice, trust, and loyalty have significant implications for firms providing professional services. past research (coulter & coulter, 2002) suggest that clients of services have an inherent need to trust, and treating the client with empathy and politeness should increase trust by reducing interpersonal barriers, raising comfort levels, and alleviating perceptions of risk. service businesses are likely to derive substantial benefits from long term relationships that are characterized by trust and loyalty (e.g., coulter & coulter, 2002; curasi and kennedy, 2002). loyal clients are more likely to communicate positive information word of mouth to potential clients and continue with the service provider in the future (curasi & kennedy, 2002). building trust with clients is likely an instrumental step in developing the types of emotional bonds that characterize loyal customers. in this study, we gathered some additional data that made it possible to conduct a few post-hoc analyses of the relationships between trust, loyalty, word of mouth recommendations, and intention to remain as a client of the firm. in separate analyses, trust was regressed on loyalty, positive word of mouth likelihood, and intentions to remain as a client of the firm. (see appendix for additional measures used in these analyses.) trust was a significant (p<.001) predictor of all of these outcomes. of course, the present study has some limitations, including the sampling of clients from a small business engaged in only one type of professional service. future research should attempt to generalize these data to other types of services offered by small businesses and sole practitioners. these data might be subject to error because we relied primarily upon survey responses, the use of a common method for most measures. however, our analysis of unique, independent contributions should mitigate problems with common method variance among the predictors (korsgaard & roberson, 1995). also, the pattern of results makes it unlikely the relationships are solely attributable to common methods since some were particularly strong, some more moderate, and others were nonexistent (i.e., not significant). however, future research on small professional service organizations using different methods to measure predictor and criterion variables would serve to further support our interpretations of these results. 88 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy vol. 15. no. 1 spring/summer 2004 given the cross-sectional nature of our study, we must consider the possibility for alternative causal explanations. particularly in professional services, the relational bonds between the client and professional (e.g., attraction, trust, commitment) may influence perceptions of the service process and outcomes (halinen, 1996). for example, it could be that the client's loyalty to the business and trust in the professional lead to more positive perceptions of fairness in the exchange. past research suggests that loyal customers may be more inclined to forgive an intermittent or occasional mistake by the service provider (e.g., bejou & palmer, 1998; miller et al., 2000) as long as they are treated fairly by the firm in subsequent responses or reactions (robbins & miller, in press). loyal clients are more likely to allow minor difficulties in the exchange relationship to be overcome because they perceive the costs of switching to another service provider as too great (bejou & palmer, 1998). many accounting professionals, particularly those opening their own business, are probably unaware of the criticality of interpersonal or relational aspects of the service. practically, managers of professional services should ensure that adequate attention is paid to interpersonal treatment (e.g., willingness to spend time with the client, addressing concerns, answering questions, assuring understanding, etc.) during service exchanges. lnteractional fairness was the only significant predictor of perceptions of service quality, trust, and loyalty in this study. although trust is very important for establishing loyal and long-term client relationships, it has not been studied extensively in small professional service operations (de ruyter & wetzels, 2000). client loyalty is particularly critical for the survival of new small businesses. the benefits of customer loyalty (see curasi and kennedy (2002] and rundlethiele & mackay (2001] for reviews), including the link to profitability (e.g., reichheld, 1996; reichheld & sasser, 1990; tax & brown, 1998), have been well established in past research. references behn, b.k., carcello, j.v., hermanson, d.r. & hermanson, r.h. 1997. the determinants of audit client satisfaction among clients of big 6 firms. accounting horizons, vol. 11: 7-24. bejou, d. & palmer, a. 1998. service failure and loyalty: an exploratory empirical study of airline customers. journal a/services marketing, vol. 12 (i): 7-22. bowen, d.e. & schneider, b. 1988. services marketing and management: implications for organizational behavior. in b.m. staw & ll. cummings (eds.) research in organizational behavior (vol. 10, pp. 43-80). greenwich, ct: jai press. clemmer, e.c. 1993. an investigation into the relationship of fairness and customer satisfaction with services. in crapanzano, r. (ed.) justice in the workplace: approaching fairness in human resource management: 193-207. hillsdale, nj: lawrence erlbaum assoc. clemmer, e.c. & schneider, b. 1996. fair service. in t. swartz, d. bowen, & s. brown (eds.) advances in services marketing and management: 109-126. greenwich, ct: jai press. coulter, k.s. & coulter, r.a. 2002. determinants of trust in a service provider: the moderating role of length of relationship. journal of services marketing. vol. 16( i): 35-50. crosby, l.a., evans, k.r. & cowles, 1990. relationship quality in services selling: an interpersonal influence perspective. journal of marketing, vol. 54: 68-81. cropanzano, r. & folger, r. 1989. referent cognitions and task decision autonomy: beyond equity theory. journal o/applied p.\ychology, vol. 74(2): 293-299. 89 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy vol. 15. no. 1 spring/summer 2004 curasi, c.f. & kennedy, k.m. 2002. from prisoners to apostles: a typology of repeat buyers and loyal customers in service businesses. journal of services marketing, 16(4): 322-341. de ruyter, k. & wetzels, m. 2000. customer equity considerations in service recovery: a cross-industry perspective. international journal of service industry management, 11(1): 91-108. folger, r., konovsky, m.a. 1989. effects of procedural and distributive justice on reactions to pay raise decisions. academy of management journal, vol. 32( i): 115130. goodwin, c. & gremler, d.d. 1996. friendship over the counter: how social aspects of the service encounters influence consumer service loyalty. advances in services marketing and management, 5:247-282. greenberg, j. 1990. organizational justice: yesterday, today and tomorrow. journal of management, vol. 16: 399-432. greenberg, j. 1993. stealing in the name of justice: informational and interpersonal moderators of theft reactions to underpayment inequity. organizational behavior and human decision processes, vol. 54:81-103. halinen, a. 1996. service quality in professional business services: a relationship approach. advances in services marketing and management: vol. 5: 315-341. konovsky, m.a. 2000. understanding procedural justice and its impact on business organizations. journal of management, vol. 26(3): 489-511. korsgaard, m.a. & roberson, l. procedural justice in performance evaluation: the role of instrnmental and non-instrnmental voice in performance appraisal decisions. journal (){management, vol. 21: 657-669. lind, e.a., & tyler, t. 1988. the social psychology of procedural justice. new york: plenum. mcfarlin, d.b. & sweeney, p.d. 1992. distributive and procedural justice as predictors of satisfaction with personal and work outcomes. academy o{ management journal, vol. 35(3): 626-637. miller, j.l., craighead, c.w. & karwan, k.r. 2000. service recovery: a framework and empirical investigation. journal a/operations management, vol. 18: 387-400. reichheld, f.f. 1996. the loyalty effect. boston, ma: harvard business school press. reichheld, f.f. & sasser, w.e. 1990. zero defections: quality comes to service. harvard business review, 68(september-october): 105-111. robbins, t.l., jeffords, b.c. & summers, s.b. 2002. identifying client fairness criteria in income tax services. services marketing quarterly, vol. 22(4): 33-44. rousseau, d.m. & parks, j.m. 1993. the contracts of individuals and organizations. in ll. cummings and b. staw (eds.), research in organizational behavior, 15 (pp. 1-47), greenwich, ct: jai press. rundle-thiele, s. & mackay, m.m. 2001. assessing the performance of brand loyalty measures. journal a/services marketing, 15(7): 529-546. seiders, k. and berry, l.l. 1998. service fairness: what is it and why it matters. academy of management executive, vol. 12(2): 8-20. sweeney, p.d. & mcfarlin, d.b. 1993. workers' evaluation of the 'ends' and 'means': an examination of four models of distributive and procedural justice. organizational behavior and human decision processes, vol. 55:23-40. turner, l.d., aldhizer, g.r., iii, & shank, m.d. 1999. client perceptions of mas quality as measured by a marketing-based service quality model. accounting horizons, vol. 13: 17-36. tyler, t.r. 1989. the psychology of procedural justice: a test of the group-value model. journal a/personality and social p.1ychology, 57: 830-838. 90 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of'small business strategy vol. 15. no. i spring/summer 2004 tyler, t.r. 1994. psychological models of the justice motive: antecedents of distributive and procedural justice. journal of personality and social psychology, 67(5): 50-863. justice variables distributive fairness appendix operational measures of construct my tax liability associated with this income tax return service was appropriate. the return outcome (i .e., balance owed to or due from the irs) of this tax return service was fair. procedural fairness my cpa/cpa team ' s judgments and interpretations used to process this tax return were appropriate. my cpa/cpa team ' s judgments and interpretations used to process this tax return were fair. interactional fairness my cpa/cpa team's treatment of me during this tax return service was appropriate. my cpa/cpa team ' s treatment of me during this tax return service was fair. criterion variables service quality i was satisfied with the overall quality of the service provided by this cpa firm. this cpa firm had a strong commitment to quality. client loyalty i would classify myself as a loyal client of this cpa firm. perceived competence my cpa/cpa team had adequate training in tax return preparation. my cpa/cpa team had adequate knowledge related to tax return preparation. my cpa/cpa team had adequate experience in tax return preparation. trust there are times when i found my cpa/cpa team to be a bit insincere. (reverse scored) i found it necessary to be cautious in dealing with my cpa/cpa team. (reverse scored) my cpa/cpa team could be relied upon to keep promises. my cpa/cpa team was trustworthy . 91 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy vol. 15, no. 1spring/summer2004 control variables duration as a client how long have you been using this cpa finn's services? less than one year 2-5 years 6-10 years more than 10 years service cost the fees assessed for this income tax return service were appropriate. the charges for this income tax return service were fair. tax code the irs tax code procedures used in this income tax return service were appropriate. the irs tax code procedures used in this income tax return service were fair. trust correlates used in post-hoc analyses intention to remain with the finn i am likely to continue to use this cpa finn for future accounting service needs. i am likely to switch to another accounting firm for future accounting service needs. positive word of mouth i would likely recommend this cpa finn to a friend/business associate. tina robbins is an associate professor of management at clemson university, where she teaches organizational behavior. she received her ph.d. in business administration from the university of south carolina. her current research focus is organizational justice. ben c. jeffords is a c.p.a. and an associate professor of accounting in the department of business administration at erskine college. he received his masters of accountancy at the university of south carolina. his current research interest is client perceptions of fairness in accounting services. 92 stra tegy small business brief the integration of computfr technology in small businesses leanne c. mcgrath university of south carolina aiken i eaiineitliii,.'oiken.sc.erin richard a. heiens university of south carolina aiken ri chardii!itraiken.soedu abstract in an effiin io iiuire fiilli imdersiand ihe use of coinputers and information technology in ihe snuill business sector, a survey ives conducted of small business owners in tire state of souih carolina. based oii this snrvey, ihe preseni study investigates the exieni of coniputer and information technologt integration in sniall businesses, identifies the nijaor coniputer applicatioiis used by small biminess, and explores the use ofe-niail and internet technology by smal! bnsinesses. the imthors coiiclude that sniall business owners do not sufficiently take advontage of coinpiiters and inforniation technology for either operational or strategic assistance, or for comiinmicutions and promoiion. introduction computers are becoming much more powerful all the time. in fact, each new generation is incredibly more powerful, faster, and has an increasingly larger capacity than the last. kids'ames have more computing power than the most powerful mainframe computers had 20 years ago, and some greeting cards today have more computing power than existed on earth before 1950 (pilarski, 1997). it is not surprising then that numerous surveys on small business all point to the same conclusion, "small firms have to keep pace with technological changes if they want to keep a competitive edge" (bridge e; peel, 1999). moreover, "small business has a reputation for moving quickly and taking risks" (hise, 1996). consequently, conventional wisdom would suggest that small businesses should be ardent users of computers and information technology. nevertheless, research on small business and anecdotal evidence both seem to suggest that this is not the case (howard, 1997). in an effort to more fully understand the use of computers and information technology in the small business sector, a survey was conducted of small business owners in the state of south carolina. based on this survey, the present study investigates the extent of computer and 62 journal ofsmall business strategy lrol. /2, lvo. i spring/summer 2001 information technology integration in small businesses, identifies the major computer applications used by small business, explores the use of e-mail and internet technology by small businesses and concludes with a set of managerial implications and recommendations. information technology and small business traditionally, information technology has been used most extensively for administration and operational tasks. in this administrative support role, computer aided systems were commonly used to support accounting, budgeting, inventory control, word processing, and spreadsheet analysis (farhoomand & hrycyk, 1985; nickel) & seado, 1986). however, with the increasing sophistication of current information technology, many believe that information technology has transcended beyond its traditional administrative support role to be used as a strategic weapon to gain sustainable advantages and support the competitive position of the firm (pollard & hayne, 1998). rather than being confined to operational matters, information technology has moved from simple record keeping to decision-making. computers are now used to assist with such strategic planning issues as financial modeling, forecasting, production planning, and sales planning (bridge & peel, 1999). when applied to small businesses, such applications have the potential to provide smaller firms with a competitive advantage and to allow them to compete on a more equal footing with larger organizations (fuller, 1996; pollard & hayne, 1998). one striking example of this potential is the ability of small firms to compete directly with large firms through an electronic presence on the internet (pollard & hayne, 1998). although the u.s. small business administration estimates that 47 percent of small businesses have access to the internet, only 35 percent actually maintain a web site (u.s. small business administration, 1999a). the percentage of small businesses with web sites is even smaller in some markets. for example, one recent study in the houston area indicated that only 25 percent of small businesses had a web site (houston business journal, 2000). moreover, only 16 percent of small businesses that use the internet are selling products or taking sales leads over the internet (computer industry report, 1998). according to pollard and hayne (1998), the majority of small businesses do not take advantage of the tremendous power afforded by current information technology largely because they do not have the resources to take advantage of information technology. in addition, many small businesses still have a low level of information technology expertise. the present study ln order to further explore the use of information technology among small businesses, a survey of small business owners in the state of south carolina was conducted. for the purpose of this study, a small business was defined as a business having 50 or fewer employees. in conjunction with the small business development center of south carolina, a sample consisting of 455 businesses was obtained from an initial mailing of 4052. the resulting 11.23 percent response rate is about par for a "cold" mail survey of this type (dillon, madden, & firtle, 1987). in aggregate, 55.1 percent of the small businesses in this sample had two to nine employees; 17.1 percent had ten to nineteen employees; and 16.9 percent had one employee. retailers comprised 31.2 percent of the sample, the largest single group, followed by firms in the services category, including personal services (21.6%) and business services (16.2%). the gender of the majority of the responding owners was male (73%), and the average age of all owners was 50. 63 .io omni ofsmoii dtcri neat srroiegy vol. /2, no . i spring/summer 2001 according to the u.s. small business administration (1999b), there were approximately 82,250 businesses with fewer than 500 employees operating in the state of south carolina in 1998. of this total, approximately 32.3 percent were women-owned businesses. by comparison, women owned only 27 percent of our sampled businesses. in addition, retailers comprise approximately 24 percent of all businesses in south carolina with fewer than 20 employees, compared with just over 31 percent for our sample. consequently, given that the sample is not entirely representative of south carolina small businesses in terms of the gender of owners and the line of trade, caution must be taken when generalizing our findings. findings the first issue ol'nterest was the extent of computer and information technology integration in small businesses. businesses in the present sample reported that an average of 43 percent of employees use computers on a regular basis in their work, while only 10.1 percent of employees use a computer 50 percent of the time or more at work. furthermore, 25.7 percent of respondents said that their employees do not use a computer at all in their work. as one writer concludes, most people who use computers use them as enjoyment, not as tools (pilarski, 1997). i lowever, if used effectively, computers and information technology can be expected to result in substantial productivity increases for small businesses. in fact, according to the u.s. small business administration, small businesses that use the internet have higher revenues, averaging $3.79 million in 1998 compared to $2.72 million overall (u.s. small business administration, 1999a). the second objective of the study was to identify the major computer applications used by small businesses. the results are reported in table 1. respondents were instructed to check as many catcgorics as apply. table i: small business computer applications word processing 63.3 % accounts receivable 59.1 % accounts payable 51.8% payroll 49.5 % general ledger 46 9% spreadsheets 41.4 % inventory 38.5 % tax preparation programs 34.9% graphics applications 30.2 % data base management 28.9 % management 8.8 % an -other" category was also provided for open-ended responses and resulted in 74 replies. those replies listed with a frequency of between five and ten were cash register, industry specific software, engineering, and estimations. mentioned only once, even though approximately one-third of the small businesses were in the retailing sector, were customer profile, mailing programs, and appointments. our final objective was to explore the use of e-mail and internet technology by small businesses. specifically, owners were asked whether their small business provided e-mail for 64 journal of small busmess stra/egy vo/. /2, no. l spring/summer 200/ employees. only 20.4 percent answered affirmatively, while a resounding 79.6 percent responded "no." the percentages for utilization were slightly higher when owners were asked if they personally used e-mail to conduct business. these results were 29.3 percent stating "yes" and 70.7 percent stating "no." the ways in which small businesses use the internet were also investigated. responses are included in table 2, with respondents instructed again to check as many categories as apply. table 2: ways that small businesses use the internet obtain information 31.9% sell own products 12.0 % develop leads 11.3% purchase equipment 84% follow economic trends 7.9 % qualify clients for credit 2.9 % clearly the largest percentage of those responding used the internet to obtain information. followin far behind were to sell products and to develop leads. twenty-three responses were gathered in the 'other" category provided. those listed with a frequency ofbetween two and six in descending order were: for ads, to communicate with clients/suppliers, and to find vendors. to place orders and to post job openings tied for last place. whether the small business had its own web site was also questioned. only 18.8 percent answered 'yes" to a web site while 81.2 percent indicated that they did not have a web site. of these, it was further asked when their small businesses were planning to have a web site. the responses of those that replied to this additional question included 17.2 percent answering "soon," 13.8 percent indicating "next year", 20.7 percent indicating "this year", 20.7 percent answering 'don't plan/not in the near future/not soon", and 14.9 percent replying "never." in order to understand the potential benefits for small businesses afforded by information technology, another question asked the owners to identify the top five challenges for strategic planning that their small business was currently facing. in order, they were: cash flow (39%), competition (32.6%), taxes (32.4%), controlling costs (29.7%), management (28.6%), and employee productivity (28.2%). following closely behind these were health insurance, quality of labor, regulations/red tape, advertising/promotion, and government regulations, all above 20 percent. only 13.2 percent of small businesses selected technology applications/use of computers as one of the top five challenges facing their business. a complete reporting of challenges and their respective percentages in descending order are in table 3. supplementary to the challenges issue was a question concerning whether the respective small businesses plan to increase emphasis on the company's technological capabilities within the next two years in order to increase their competitiveness. a four point likert scale ranging from responses of "none" to "a lot of emphasis" was used. results are in table 4. just over two-thirds at 69 percent showed "some" or "a lot of'lanned emphasis on technology while almost 13 percent planned "no" emphasis in this category. 65 ./r&tuna/ ofsinai/ business stra/ega vol. /2, /i/o. i spring/summer 200/ table 3: strategic planning challenges facing small businesses cash flow 39.0 % competition 32.6% taxes 32.4 % controlling costs 29.7 % management 28.6% fmployec productivity 28 2% i.lealth insurance 26.9 % quality of labor 25.3 % re ulations/red tape 24.9 % advertisin/promotion 22.0 % government regulations 21.1% employee skills 20.0% customer service i 6.3 % labor costs i 5.4 % technology applications/ 13 2% use of computers accounts receivable 13.0% accounting/bookkeeping 12.8% inventory management 12.6% fmployee benefits 12.1 % long range planning 11.7% competing strategies 11.0% financing 10.4 % inflation 7.7% worker's compensation 7.0 % weak demand 6.2 % supplier relationships 5.7 % compensation 5.5 % creditor/bank relationships 4.6 % how to export 0,9% how to import 0.9 % procurement 0.9 % table 4: fmphasis on increase in firm's technological capabilities a lot of emphasis 24.5 % some emphasis 44 5% not very much emphasis 18.5 % none 12.5 % 66 journal of small business straiegy vol. /2, no. l spring/summer 200l a perception question of how important the small business owners viewed technoiogy to the operation of their small business was also posed. the results are reported in table 5. table 5: importance of technology to operation of small business very important 40.5 % somewhat important 36.7 % somewhat unimportant 11.2 % not important at all 11.6% overall, 77.2 percent of owners felt that technology was "very important" or "somewhat important" to the running of their small business. just over one-fifth of owners did not share this view of the importance of technology to their business operations. the cross tabulation between "the importance of technology to the operation of the small business" and the "planned emphasis on technology" is presented in table 6. a chi-squared test revealed that cell sizes in the cross tabulation were significantly different ()i' 140, d.f. = 9, p& .0001). in addition, table 7 shows the cross tabulation between "the importance of technology to the operation of the small business" and whether or not the company has a web site. once again, a chi-squared test revealed that cell sizes in the cross tabulation were significantly different (yt = 48, d.f. = 3. p& .0001). table 6: planned emphasis on increase in firm's technological capabilities by importance of technology to the operation of business planned emphasis on importance of technology to the operation of business increase in firm's technological capabilities not mtportant somewhat somewhat irery at all unimportant important important toiai none 22 7 15 9 53 noi very much emphasis 16 20 28 15 79 some emphasis 10 21 87 76 194 a lot of emphasis i i 28 78 108 total 49 49 158 178 434 table 7: company has web site by importance of technology to business operation importance of technology to the operation of business ãoi someirhai somewhat very imponant unimportant important important total at all company bas no 49 48 140 117 354 web site ycs 2 i 20 61 84 total 51 49 160 178 438 67 jvitrnal vf sniall business siraiegv vol 12, no. 1 spring/summer 2001 discussion this exploratory research identifies that not many small businesses (13.2%) are putting technology applications and computer usage as a top strategic planning issue. interestingly, in four of the top challenges that are identified, specifically cash liow, competition, controlling costs, and management, the utilization of computer technology has tremendous potential to help. however, slightly over one-fourth of small businesses report "no" computer usage by employees on a regular basis. and only about 10 percent of employees use a computer 50 percent of the time. of those employees using the computer on a regular basis as reported in table i, a relatively low percentage uses each of the most critical applications. most users report the use of computers for word processing, but considerably fewer use them for areas with great potential impact on managing the business (i.e. general ledger, spreadsheets, inventory management, and database management). spreadsheets to track cash flow and control costs are used by only 414 percent of the small businesses, roughly equivalent to the percentage listing cash flow as an important challenge. data base management that could be employed to track customers and maximize marketing efforts is utilized by only 28.9 percent of small businesses. lagging in last place is the general management category at 8.8 percent. surely management is the primary concern of every small business. nevertheless, the use of technology applications and computer programs for small business management is apparently being shortchanged. connecting to the internet is becoming increasingly essential for business today. large companies are leading the way in this explosive technological area. in querying small businesses about the ways they use the internet, 31.9 percent report obtaining information as their reason for access rather than business development and promotion. selling their products on the internet is listed by 12 percent even though 31.2 percent of the small businesses surveyed are in retailing. also only 18.8 percent of the small businesses indicate that they have their own web site to promote their business and reach a large audience. overall, thc results appear to demonstrate an inconsistency on the part of small business owners. as revealed in table 7, although 41 percent of business owners surveyed indicated that technology was "very important" to the operation of their business, only 34 percent of those firms actually have a web site. small businesses, especially retailers, are missing an opportunity and will soon be too far behind to catch the leaders. moreover, even for the more basic computer application of using e-mail, only 20.4 percent of small businesses provide it for their employees and only 29.3 percent of owners use e-mail to actually conduct their business. consequently, approximately 70 percent of small businesses surveyed are missing the opportunity for continual and instant communication with current and potential customers and suppliers. more alarming is the fact that small businesses do not appear to be moving to correct this technological timidity. as revealed in table 6, only 44 percent of those firms who view technology as "very important" actually plan to place "a lot of emphasis" on increasing the firm's technological capabilities. if an issue is important to a small business, then clearly emphasis should be focused in that area. it simply must be addressed. for example, in the human resources areas of employment benefits, insurance, and payroll/relevant taxes, computerization would allow faster, easier, and more accurate tracking and controlling of costs and benefits. in health and safety areas, compliance with governmental guidelines, regulations, and red tape can reduce exposure and preclude legal ramifications. integrating the use of technology to help with the pressing day to day issues, such as cash tlow for small business owners, would certainly be valuable and in 68 jour nal of small business strategy vol. /2, b/o. i spring/summer 200i the end would help to alleviate some of the day to day cash squeeze commonly faced by small business owners. this research clearly shows the need for and acknowledges the importance of technology application and computer usage in small businesses. it should serve as an alert for all small business owners. if small businesses are to compete effectively with larger enterprises, then they must begin to take advantage of both the operational and strategic benefits afforded by modem information technology. references bridge, j., & peel, m.j. (1999).a study of computer usage and strategic planning in the sme sector. international small business journal 17(4), 82-87. dillon, w.r., madden, t.j., & firtle, n.h. (1987}. marketin research in a marketin environment. st. louis, mo: times mirror mosby. farhoomand, r., & hrycyk, g. (1985). the feasibility of computers in the small business environment. american journal of small business 9(4), 15-22. fuller, t. (1996). fulfilling it needs in small businesses: a recursive learning model. international small business journal 14(4), 25-44. hl, p. (1998, a g ). b h k: s ii b i b h . i~m i 8(i i),102. howard, k. (1997, july). it means business? institute of mana ement re ort, pp. 1-4. nickell, g., & seado, p. (1986). the impact of attitudes and experience on small business computer use. american journal of small business 10(1), 37-48. pll kl. a. (1991.sp vf ii). c p — h d h 9 . 8 1 f 22(2-3), 74-75. pollard, c. e., & hayne, s.c. (1998).the changing face of information system issues in small firms. international small business journal 16(3),70-88. small business slow to jump on e-commerce bandwagon. (2000, january 14). houston business journal 30(35). i i . s )lb i:a hy dyl . (1998.ag ).c~(d ~re ort 33(8), 1-8. u.s. small business administration (july, 1999a). e-commerce: small businesses venture online. retrieved january 16, 2001, from world wide web: http: //www.sba.gov/advo/stats/e comm.pdf u.s. small business administration (1999b). 1999 small business profile: south carolina. retrieved january 16, 2001, from world wide web: http: //www.sba.gov/advo/stats/profiles/99sc.pdf leanne mcgrath, ph.d. is an associate professor of management in the school of business administration at the university of south caroh'na aiken. she holds bs and ms. degrees in pharniacy, and mba and ph.d. degrees in business administraiion, a//porn the university of south carolina. dr. mcgrath has a wide range of research interests. she has presented papers at nunierous regional, national, and international conferences and published in the ureas of corporate strategy, e-business, small business, and human resources management. richard a. heiens, ph.d. is an assistant professor of marketing in the school of business administration at the university of south carolina aiken. he holds b s and ph d degreesin marketing from florida state university. his primary research inrerests are in rhe areas of business. strategy and promotion. dr. heiens has published research articles in a variety of academicjournals, including the s(rategic management journal, the journal of education for business and the journal of business and industrial marketing. 69 s when it’s right to be “wrong”: the effects of overconfidence and planning on product performance in a dynamic environment mark simon oakland university simon@oakland.edu john kim oakland university kim@oakland.edu susan m. houghton north carolina a&t state university smhought@ncat.edu xiaodong deng oakland university deng@oakland.edu abstract some authors emphasize overconfidence may benefit managers by increasing decision-making efficiency, whereas others argue it results in serious errors. this study helps resolve the debate by examining the relationship between overconfidence and product performance, as well as testing whether planning might mediate the link. the study sampled 52 small computer companies that had decided to introduce a product. it examined the manager’s overconfidence and planning when the product was launched and measured the product’s performance 18 months later. we found that overconfidence decreased planning, planning decreased performance, and, as hypothesized, planning mediated the relationship between the two other variables. by examining the meditating role of planning, we were able to better identify the causal relationships and clarify the effects of overconfidence. keywords: overconfidence, planning, performance, small business, product introduction this research was generously supported by an oakland university summer fellowship.  trateg y   journal of small business  21 mailto:simon@oakland.edu mailto:smhought@ncat.edu journal of small business strategy volume 22, number 1, introduction seminal works (e.g., blau & schoenherr, 1971; galbraith, 1977) suggest that managers in small businesses, as opposed to those in larger companies, may face different challenges and employ different processes when making strategic decisions. often they have fewer resources and formal processes, making it more difficult to remove initial uncertainty when making strategic decisions (simon, houghton & savelli, 2003). this uncertainty is multiplied when managers employ a strategy of introducing new products in dynamic environments (simon & houghton, 2003). dynamic markets make it difficult for managers to use historical knowledge to inform current choices. it is, for example, difficult in dynamic environments to discern customer preference and which competitors will be relevant (e.g., brown & eisenhardt, 1997; brinckmann, grichnik, & kapsa, 2010). as explained by heuer (1999), the mind is poorly "wired" to deal effectively with this inherent uncertainty. therefore, when facing uncertain conditions, some managers deny it exists, exhibiting overconfidence (busenitz & barney, 1997; simon & houghton, 2003). overconfidence occurs when one’s certainty of specific facts exceeds the accuracy of his or her knowledge (busenitz & barney, 1997; russo & schoemaker, 1992). specifically, scholars (e.g., d'souza & kemelgor, 2008; liao, welsch, & stoica, 2008; mcnamara & bromiley, 1997; simon & houghton, 2003) have suggested that overconfidence is more likely to occur when coping with dynamic environments, ill-structured decisions, and introducing pioneering products, and it may be especially prevalent among smaller firms. virtually every business study of overconfidence acknowledges that overconfidence may be beneficial by increasing decision-making efficiency (hayward, forster, sarasvathy, & fredrickson, 2010), but that it also could result in errors that are large, persistent and serious (hayward, shepherd, & griffin, 2006). yet, these contradictory implications have not been reconciled empirically, to date (e.g., busenitz & barney, 1997; forbes, 2005). some researchers maintain that the incorrect facts of overconfident managers hurt business performance because these managers rush to action and leapfrog classical decision formulation and implementation steps (hayward et al., 2006). in particular, they argue that overconfidence may encourage the managers to ignore planning and start down a false path. and without planning, some assert, economic performance will suffer. other scholars, however, do not accept this negative view of overconfidence as universally applicable (busenitz & barney, 1997). while most accept that overconfidence may reduce planning, they believe that in certain circumstances, such as dynamic environments, planning is not useful. mcgrath and macmillan (1995), for example, argue that in dynamic environments, planning does not work because there is little data upon which to base projections. these, and other scholars, contend that planning leads to a futile search for "reliable" information (busenitz & barney, 1997; houghton, simon, aquino, & goldberg, 2000). furthermore, by skipping planning, these managers may avoid locking into 22 journal of small business strategy volume 22, number 1, rationales based on outdated beliefs about the emerging market situation. the above suggests that understanding the extent and effects of planning seems to lie at the center of the debate about the effects of overconfidence on performance. as such, the core question arises; does planning mediate the relationship between overconfidence and performance, and if so, how? examining potential mediators, such as planning, helps identify underlying processes, which, in turn, can provide insights into contradictory conclusions about relationships (hedstrom & swedberg, 1998). if planning mediates the effects of overconfidence on performance, it may serve as a generative mechanism and increase our understanding of cause and effect. in addition, by examining the role of planning as a mediator, we can also identify the relationships, in dynamic markets, between overconfidence and planning; as well as, between planning and product introduction success. the following section reviews the study's theoretical model and presents the hypotheses. we then detail the research methods and report the results of the analysis. finally, the article discusses the study's findings and implications. overconfidence, planning and performance smaller firm size is associated with less structural inertia (blau & schoenherr, 1971), more centralization (blau & schoenherr, 1971), less formalization (blau & schoenherr, 1971), and greater strategic change (kelly & amburgey, 1991). these organizational characteristics suggest that strategic decision making is often not codified, sometimes resulting in the lack of procedural buffers and formal processes to “rationalize” the decision-making process (simon et al., 2003). thus, small firm managers may face great uncertainty when making strategic decisions. pursuing a strategy of introducing products in dynamic markets exacerbates this challenge. in dynamic markets, past experiences and successes cannot be extrapolated to guide current competitive behaviors; consumer tastes are unclear, the range of current competitors is changing, and historical key success factors may be unimportant in the changing circumstances. yet even when faced with such a murky, ambiguous setting, managers of small firms must somehow eventually learn about their products' markets, technologies, and competition (brown & eisenhardt, 1997; brinckmann et al., 2010). we use the term planning to refer to the structured information gathering and analyzing process that takes place prior to acting. planning involves comprehensively, exhaustively, and inclusively searching for and evaluating information that is deemed relevant by the decision makers. planning is a highly analytical process that involves much upfront homework, and uses a multitude of techniques, such as delphi analysis, concept tests, focus groups, and surveys, which all attempt to build an understanding of the competitive environment before launching a new initiative (lynn, morone, & paulson, 1996). through the planning exercises, managers socially construct a detailed schema of their competitive environment, comprised of cause and effect relationships, which guide their creation of a sequence of detailed action steps 23 journal of small business strategy volume 22, number 1, (fredrickson & mitchell, 1984; lynn et al., 1996). planning relies primarily on historical understandings of the environment or interpretation of responses to hypothetical questions, such as whether one might purchase a yet-to-be-developed product. it is important to distinguish planning from decision comprehensiveness (eisenhardt, 1989; 2001). although the two can overlap, the latter is a broader concept. comprehensive decision making can emphasize collecting data after an action, and/or basing decisions on real time operating information (eisenhardt, 1989; 2001). overconfidence and planning although overconfidence may be influenced by both dispositional and contextual factors (forbes, 2005), this study focuses on the dispositional component, consistent with our effort to study overconfidence in similar contexts across firms. some people exhibit a tendency to be more overconfident than others (forbes, 2005; klayman, soll, gonzalez-vallerjo, & barlas, 1999; soll, 1996; yates, lee, shinotsuka, patalano, & sieck, 1998). for example, klayman et al. (1999) found that certain people consistently expressed greater overconfidence in their information, regardless of whether that information was about presidents, prices of consumer goods, or life expectancies. these tendencies stem from cognitive trails etched in the minds of individuals (haley & stumpf, 1989) based upon stable factors such as long-standing habits (yates et al., 1998), firmly established cognitive customs (yates et al., 1998), and established personality types (soll, 1996). forbes (2005) found that several of the determinants of overconfidence were related to relatively stable individual differences. consistent with this logic, busenitz and barney (1997) proposed that overconfidence was a quasi-trait and people high in the trait self-selected toward entrepreneurship. we are interested in the extent to which variations in overconfidence affect the amount of planning when introducing a product in a dynamic environment. given the unreliability of data related to product introductions in dynamic environments, managers who are not overconfident of their knowledge will realize that they do not have accurate information. this realization, in turn, may cause a manager to experience substantial uncertainty, where uncertainty is defined as the gap between the information one has and the information one needs to perform a task (forbes, 2007). feelings of uncertainty may inhibit proceeding with an action until the feelings are reduced (brinckmann et al., 2010). one of the classic uncertainty-reducing procedures managers use is planning (brinckmann et al., 2010). the process of gathering and analyzing more information alleviates feelings of discomfort before launching a product (galbraith, 1977). thus, is it not surprising that managers will initiate a more extensive search for information before deciding to act to reduce uncertainty (e.g., bourgeois & eisenhardt, 1988). specifically, milliken (1987) contends that the greater the managers’ uncertainty about the state of the environment, the more time and resources they will invest in planning, through increased forecasting. furthermore, brinckmann et al. (2010) found that managers exhibiting greater uncertainty are more likely to develop plans. 24 journal of small business strategy volume 22, number 1, this planning-dominated behavior stands in stark contrast to the behaviors of managers who are overconfident. these managers, by definition, believe that they already have sufficient information, so they may proceed immediately with their product launch and largely bypass the planning process. mahajan (1992) argued that managers who are overconfident will commit resources without waiting to collect additional information. along related lines, cooper, folta, and woo (1995) determined that overconfident individuals do less searching for information when initiating a business. furthermore, schwenk (1986) suggested that a manager's overconfidence could engender commitment from others to ideas, even when their information is quite incomplete. thus, overconfidence may encourage managers to take action without engaging in extensive information search, analysis and planning prior to starting an initiative. these arguments lead to the first hypothesis: hypothesis 1: overconfidence decreases planning for product introductions. planning and priduct introduction performance in dynamic markets we believe that planning has a negative relationship with product introduction performance in dynamic markets based on four key factors. first, planning can become expensive (forbes, 2007). the employee costs associated with the time spent acquiring and analyzing data, preparing reports, and discussing alternatives may be substantial. and this is to say nothing of the monetary outlays associated with mailings, presentations, and computer time. of course, this investment could be justified if planning generated useful results. this, however, brings us to the second reason why we believe planning is negatively correlated with product performance in dynamic environments. in dynamic environments, conditions can change in an instant, rendering planning-based information obsolete (e.g., miller, 1996). for example, in response to a new introduction, other companies may lower their prices, increase their advertising, or modify their own current offerings. planning data cannot incorporate these market responses because planning data are historical, not proactively generated based on experimental action (bourgeois & eisenhardt, 1988; eisenhardt & tabrizi, 1995). as explained by mcgrath and macmillan (1995), in dynamic environments, reliable and predictable knowledge of well-understood business has not yet emerged and managers only have access to assumptions about possible futures. thus, managers who rely on planning will be wasting precious resources on studying a condition that ceases to exist as soon as they act. the third reason why planning may decrease product introduction performance is because it may delay product launches. decision-making speed is particularly important in dynamic environments. while, in theory, planning may increase product introduction speed by launching managers on “correct” paths (e.g., cooper & kleinschmidt, 1996), in dynamic settings, reliable information is unavailable, so planning is not likely to lead to the correct path (e.g., lynn et al., 1996). delays are one of the most significant problems that managers face when introducing new products. they decrease a firm’s profits, diminish competitive advantage, and minimize the ability to adapt to a changing environment (cooper & kleinschmidt, 1996; 25 journal of small business strategy volume 22, number 1, eisenhardt, 1989). and while one may make rapid decisions using certain processes even if they engage in comprehensive decision making; following a planning process does not seem to produce this outcome (eisenhardt, 1989; 2001). further, products are growing obsolete at an increasing rate and windows of opportunity are closing more rapidly than we have seen historically. lastly, even after the planning process is complete, it still may decrease the manager’s ability to recognize and/or respond to new, ongoing, real-time information (thomas, clark, & gioia, 1993), a process that is critical for managers of small businesses (parker, 2006). based on structured analyses of historical and non-direct product data (such as focus groups), the planning process creates an intricate articulation of underlying beliefs and elaborate schemas about the environment. when the planning is completed, the management team believes that it has an understanding of how to proceed. the planning-generated schema becomes a robust informationprocessing template that leads to formulaic thinking and acting (day & nedungadi 1994), creating cognitive rigidities in the belief system of the managers (fiske & taylor, 1991). the manager may find it difficult to acknowledge discordant feedback and unlearn important assumptions and beliefs about the environment (nystrom & starbuck, 1984). collectively, the arguments above suggest that the product introduction expenses, delays, and cognitive rigidities associated with planning in dynamic environments will not generate a return in the form of more useful information. given these arguments, it is not surprising that seminal articles (fredrickson & mitchell, 1984) have found that although planning is associated with higher performance in stable industries, it is associated with decreased performance in unstable ones. therefore, hypothesis two follows: hypothesis 2: in dynamic environments, planning decreases the economic performance of new product introductions. planning as a mediator of overconfidence on performance notwithstanding hypotheses one and two, the question remains, does planning mediate the relationship between overconfidence and performance? identifying planning as a mediator would provide evidence of a causal mechanism between overconfidence and performance. hypotheses one and two represent two of the conditions that need to be present to establish that planning is a mediator. collectively, they suggest that lower overconfidence leads to more planning, and more planning leads to lower performance. as such, they represent necessary, but not sufficient, conditions to indicate that planning mediates the overconfidence-performance relationship (hedstrom & swedberg, 1998). nevertheless, we do believe the other conditions exist, and that planning mediates the relationship between overconfidence and performance. in addition to confirming hypotheses one and two, the argument for mediation must also establish that overconfidence would not have a direct effect, or would have less of a direct effect, on performance when planning is present in the model. we believe this to be the case because overconfidence is a cognitive process, and is therefore unlikely to directly influence a 26 journal of small business strategy volume 22, number 1, firm level outcome. instead, cognitive processes are more likely to have an effect through their influence on a variable that reflects actions, such as planning (simon, houghton, & savelli, 2000). actions, like planning, would then influence the outcome (simon and houghton, 2003). several empirical studies in other areas have uncovered similar mediated relationship among cognitions, actions, and performance (e.g., king, dalton, daily, & covin, 2004). furthermore, if planning does mediate the relationship between overconfidence and performance, it would help explain why scholars reached different conclusions about the effects of overconfidence (king et al., 2004). therefore, hypothesis three follows: hypothesis 3: planning mediates the effect of overconfidence on the economic performance of new product introductions in dynamic environments. methods most research assessing cognitive biases has used a laboratory design approach (camerer & lovallo, 1999). laboratory findings have encouraged researchers to call for field studies that examine the effects of biases in real business situations (staw, 1991). in response, the current study examines the effects of overconfidence on the performance of an actual product that a company had recently introduced. we focused on just one product per firm; managers are best able to judge performance at this level, and aggregating all of a firm’s products confounds the influence of a given variable on a product's performance (maidique & zirger, 1985). we gathered data at two time periods. near the time the product was first launched, we measured the extent of the manager’s overconfidence and his or her use of planning. eighteen months later, we measured the product’s overall performance. the study focused on the top managers of smaller companies (under 100 employees) in the computer industry. as recommended by barczak (1994), we focused on one industry because simultaneously examining multiple industries may have confounded the results of many past product introduction studies. the computer industry was an especially relevant setting for our study because it is known for its dynamism (brown & eisenhardt, 1997). the industry is dominated by frequent product introductions, short product lifecycles, and rapidly shifting competitive landscapes (brown & eisenhardt, 1997). the sample was selected from the georgia technology sourcebook, which contains a comprehensive list of georgia-based hightechnology companies. the directory indicated that there were 213 georgiabased computer firms that had fewer than 100 employees. we contacted each of the companies by phone to determine whether it anticipated introducing a product to the market shortly or had just done so. one hundred thirty-five companies met all of the study's criteria. sixty-one of the firms agreed to participate and provided all the information needed for the first stage of the study, generating a response rate of 45%. the firms of respondents did not differ from those of non-respondents regarding number of employees or company age at the 0.05 level of significance. each of the firms had just launched a product within the past 3 months or anticipated a launch within 30 27 journal of small business strategy volume 22, number 1, days. following a pilot test, we gathered data from the individual who was most responsible for making decisions regarding the product introduction. thirty of the respondents were at the highest level within the company, (ceos or presidents), while the remaining 31 respondents were one level below. responding firms were, on average, 10 years old and had 20 employees. eighteen months later, we surveyed the firms regarding the product’s overall performance. managers from 52 of the original firms responded, generating an 85% response rate for the second phase of the study and an overall response rate of 39% for both stages. (appendix a details the specific steps taken to gather followup data.) overconfidence consistent with foundational overconfidence studies (russo & schoemaker, 1992; yates et al., 1998), we defined overconfidence as being overly certain of one’s facts. overconfidence was measured by asking managers to respond to factual questions that had clear-cut right and wrong answers, and then to predict the accuracy of their responses. the managers were given two possible responses and asked to select the one they thought was correct. after choosing, they recorded how confident they were that their answer was right on a scale ranging from 50 to 100%. they would not put down less than 50% because that would suggest they should have selected the other choice. a response of 50% would indicate that they thought their response was a total guess, while 70% would indicate that they thought they had seven chances in ten of being correct. managers were overconfident if they believed that they were accurate more often than they actually were. specifically, each respondent's overconfidence was determined by averaging his or her level of confidence for all seven of the questions and subtracting the percentage of items correct; the greater the difference, the greater the degree of overconfidence. although an individual's tendency towards overconfidence is relatively stable across decision domains (yates et al., 1998), we took the added precaution of tailoring the instrument questions to the general type of information that managers might use when deciding whether to introduce a product within the computer industry. for example, respondents were asked, "which of the following pc 'markets' grew more rapidly last year?" the two possible answers provided were "retail sales” or “corporate sales." eight experts specializing in the computer industry and/or product introductions (including a venture capitalist), two directors of risk assessment centers, and an academic confirmed the relevance of the questions to the computer industry (listed in appendix b). we did not want the measure of overconfidence to be influenced by recent experiences of the managers. to avoid this potential confound, we were careful to limit the topics of the questions to general information that managers might use, excluding questions about specific information that managers did actually use when introducing a product in the computer industry. this precaution insured that the respondent’s rating of his or her confidence in their information accuracy was unlikely to change as a result of any specific product outcome experience. consistent with traditional measures, our method did not capture one’s optimism about an outcome or one’s 28 journal of small business strategy volume 22, number 1, tendency to overestimate one's general skills. planning the study used three close-ended survey items adapted from past research to gather data about the degree to which managers engaged in planning. managers responded on a five-point likert-type scale that ranged from "strongly disagree" to "strongly agree." product performance to measure product success, the study assessed outcomes that were directly related to the product's economic performance, including the product's profitability, sales, market share, and financial success. consistent with past research (e.g., cooper & kleinschmidt, 1996), we used self-report measures rather than more objective ones, because small firms often do not have the sophisticated accounting systems needed to provide "hard" data regarding a product's financial performance (covin, prescott, & slevin, 1990). instead, we argue that product’s performance can best be judged by the party who is most knowledgeable about the product introduction and most responsible for its success or failure (i.e., the respondent manager). furthermore, although not directly focusing on product introduction performance, research by dess and robinson (1984) suggests that subjective performance measures are appropriate when objective performance data may be unavailable, because the two types of measures are highly correlated. for example, in our study, overall product performance was associated with the extent to which the product's profit margin was higher than that of the company (r=0.30, p<0.05, n=30), the percent of company sales the product generated (r=0.36, p<0.01, n =41), and the percent of company profits the product generated (r= 0.40, p<0.01, n=33). in the context of our study, however, the subjective measure of performance raised a potential concern: will managers who were more overconfident of their general computer industry information in phase i of the data collection overstate performance in phase ii? we argue that they will not for several reasons. first, empirical studies have found no relationship between overconfidence and perceiving low risk or between overconfidence and optimism (astebro & adomdza, 2007; houghton et al., 2000; keh, foo, & lim, 2002). the measure of overconfidence allows the manager to be overly confident of negative information, while optimism is a bias of overconfidence only in positive information. for example, the respondent would be overconfident, but not optimistic, if he or she expressed certainty of the size of a relevant market segment, yet they underestimated the market size. second, affect factors that might lead to overstating performance, such as the need to maintain a high self-esteem, or thinking highly of one’s general skills, are also not associated with overconfidence (forbes, 2005; yates et al., 1998). this provides additional confirmation that overconfidence, in and of itself, does not influence the assessment of performance. finally, we believe that measuring performance 18 months after we measured overconfidence and using widely different measurement formats (i.e., composite percentages for overconfidence; likert scales for performance) also minimized the chance of inducing a specious relationship between the two variables. thus, there is little reason to believe that overconfident managers, as we use the 29 journal of small business strategy volume 22, number 1, term, would systematically overestimate performance 18 months later. controls the larger the company, the more extensive the use of planning (delvecchio & anselmi, 2006). therefore, when testing hypothesis one, the effects of overconfidence on planning, we controlled for the effects of company size. consistent with past literature, we used the log of number of company employees. we also included two control variables, namely cross-functional communication and past company performance, when examining hypothesis two, the effects of planning on performance. scholars have found that cross-functional communication enhances new product performance, arguing the effects of this variable may be one of the strongest and most robust findings in the new product literature (brown & eisenhardt, 1997). we measured cross-functional communication using the average score of a two-item scale. we also included past company performance as a control variable, as it might be directly associated with performance when facing a changing environment (audia, locke, & smith, 2000). consistent with past research (covin et al., 1990), we first asked managers to rate how satisfied they were with the firm's performance on six economic criteria and then to indicate how important each criterion was to them. we then multiplied the performance scores by the importance scores for each of the six criteria and summed the results. this process generated a weighted average performance index for each firm. using the manager's assessment of past performance helps partial out any variance that might be caused by a manager’s general tendency to be optimistic or pessimistic that might also affect their assessment of current performance. results the data were analyzed with structural equation modeling technique (i.e., lisrel). lisrel allows us to test the hypothesized relationships by examining the paths among overconfidence, planning, and product performance. researchers (e.g., iacobucci, saldanha, & deng 2007; zhao, lynch, & chen 2010) have claimed that using lisrel to test mediation (hypothesis 3) is superior to baron and kenny’s (1986) procedure. lisrel allows us to estimate the model simultaneously instead of assuming that the three regression equations which test for mediation are independent, as required by baron and kenny's (1986) procedure. furthermore, lisrel allows us to use each of the individual measures to capture constructs, which may be a better option than using scale means to represent the constructs, as is the norm when using the baron and kenny’s mediation test. following anderson and gerbing’s (1988) two-step process, we first assess the measurement model, and then examine the structural model for the testing of the substantive hypotheses 1 through 3. measurement model assessment table 1 reports the constructs’ descriptive statistics, correlations, cronbach alpha (), average variance extracted (ave), and the chi-square differences (2) between models with fixed versus free correlations between pairs of constructs/variables. the descriptive statistics include means, standard deviations, skewness, kurtosis, range, and the number of items used to measure each variable. the skewness values are 30 journal of small business strategy volume 22, number 1, 31 between minus 2 and plus 2. the kurtosis values are between minus 5 and plus 5. these values provide evidences that all three variables are normally distributed (ghiselli, campbell, & zedeck, 1981). all three variables are significantly correlated with each other (p < 0.01). overconfidence is negatively and significantly correlated with planning (r = -0.52). product performance is positively and significantly correlated with over confidence (r = 0.37) and negatively and significantly with planning (r = -0.57). reliabilities are measured by cronbach alpha (). an alpha value of 0.7 or above indicates a good measurement scale (nunnally, 1978). the reliabilities of 0.77 for planning and 0.86 for product performance suggest that both measurement scales have adequate reliability. table 1: descriptive statistics, correlations, reliability, average variance extracted, and chi-square test of discriminant validity among three variables overconfidence planning product performance mean 0.11 2.91 3.98 standard deviation 0.16 0.74 1.29 skewness 0.10 -0.04 -0.49 kurtosis 0.38 -0.08 -0.04 range -0.25-1.00 1-5 1-7 # of items 1 3 5 - overconfidence - -0.52  = 0.77 planning 2=44.91 ave=0.54 0.37 -0.57  = 0.86 product performance 2=207.98 2=26.26 ave=0.57 for convergent validity of a scale, ave should be above 0.50 (segars, 1997). the ave values are 0.54 for planning and 0.57 for product performance, respectively. convergent validity is also assessed by how well the items load on their respective construct. figure 1 depicts standardized item-factor loadings (s) for all three variables in table 1. all the standardized item-factor loadings are 0.71 (t=5.81) or higher. both the ave values and standardized item-factor loadings suggest that the measurement models have adequate convergent validity. for discriminant validity, the ave scores for each variable should be greater than the square of the correlation between the focal variable and other variables. an examination of table 1 shows that the ave scores for planning and product performance are greater than the square of the correlation between the focal-factor and other factors, suggesting adequate discriminant validity. a more rigorous chisquare (2) test of discriminant validity is to examine whether a unidimensional rather than a two-dimensional model can account for the intercorrelations among the observed items in each pair (segars, 1997). for the journal of small business strategy volume 22, number 1, 32 over confidence formal planning product performance plan1 perf1 χ2=26.73; df=25; χ2/df=1.07; p-value=0.36947; rmsea=0.030; nnfi=0.99; cfi=1.00 ovc1 perf2 perf3 perf4 perf5 plan2 plan3 0.40 0.49 0.00 0.46 0.37 0.36 0.50 0.49 0.48 0.77 0.72 1.00 0.74 0.80 0.80 0.71 0.71 0.72 -0.59 -0.70 0.40 three comparisons, the adjusted chi-square value for the test of discriminant validity between pairs of constructs must be equal to or greater than 8.62 for significance at p < 0.01 (cohen & cohen, 1983). findings reported in table 1 indicate that all chisquare differences are significant at the p < 0.01 level, suggesting discriminant validity between each pair of constructs. figure 1: three factor measurement model (standardized solution) the model-data fit was evaluated by chisquare, degrees of freedom, p-value, root mean square error of approximation (rmsea), non-normed fit index (nnfi), and comparative fit index (cfi). rmsea value less than 0.050 suggests good modeldata fit (steiger & lind, 1980). nnfi and cfi indices greater than 0.90 suggest good model-data fit (bentler & bonnett, 1980; bentler, 1990; joreskog & sorbom, 1989). the three-factor/construct correlated measurement model (see figure 1) was assessed to have good model-data fit with 2 = 26.73 for 25 degrees of freedom, chisquare per degree of freedom = 1.07, pvalue = 0.36947, rmsea = 0.030, nnfi = 0.99, and cfi =1.00. each of the items had item-factor loadings greater than 0.71. no major modification index has been suggested for possible improvements to the model. having found that the three factor correlated measurement model has good model-data fit, we proceed to examine the structural model and test the hypotheses. the structural model: assessing substantive hypotheses h1 thru h3 figure 2 illustrates the structural relationships () between the exogenous variable (ξ) overconfidence and the endogenous variable () planning. it also depicts the structural relationship () between planning and product performance. the structural model (see figure 2) indicates good model-data fit (a chi-square of 26.78 for 26 degrees of freedom, chisquare per degree of freedom = 1.03, pvalue = 0.42080, rmsea = 0.020, nnfi = 1.00, and cfi = 1.00). the good model-data fit permits us to examine the hypotheses. overconfidence has a significant path coefficient ( = -0.58, t = -4.59, p < 0.01) to planning. thus, hypothesis h1, overconfidence decreases planning for product introductions, is journal of small business strategy volume 22, number 1, supported. planning also has a significant path coefficient ( = -0.70, t = -4.60, p < 0.01) to product performance. thus, hypothesis h2, in dynamic environments, planning decreases the economic performance of new product introductions, is supported. the variance explained in planning and product performance by the model is 34% ( = 0.66) and 49% ( = 0.51), respectively. figure 2: structural model for hypotheses testing to test hypothesis h3, we followed the steps suggested by iacobucci (2008). first, a baseline structural model was constructed to connect overconfidence directly to product performance. this baseline model had good model-data fit (chi-square of 10.30 for 9 degrees of freedom, chi-square per degree of freedom = 1.14, p-value = 0.32700, rmsea = 0.043, nnfi = 0.99, and cfi = 1.00). overconfidence had a significant path coefficient ( = 0.40, t = 3.18, p < 0.01) to product performance. the variance explained in product performance by the model was 17% ( = 0.83). this baseline model demonstrated that overconfidence had a significant, direct relationship with product performance. second, planning was introduced to the baseline model to mediate the direct overconfidence product performance relationship. the re-constructed structural model had good model-data fit (see figure 2). overconfidence had a significant path coefficient to planning and the planning also had a significant path coefficient to product performance. thus, hypothesis h3, planning will mediate the effect of overconfidence on the economic performance of new product introductions in dynamic environments, is supported. third, a direct path from overconfidence to product performance was added to the model and tested for significance. the added path was not significant, suggesting that planning fully mediated the relationship between overconfidence and product performance (iacobucci, 2008). control variables (firm size, past performance, and cross-functional communication) were introduced to figure 2 one at a time. firm size was found to significantly enhance planning ( = 0.29, t = 2.74, p < 0.05). cross-functional communication was found to significantly improve product performance ( = 0.24, t = 2.37, p < 0.05). however, past performance was found to have no significant impact on product performance. none of these control variables had changed the fact that planning fully mediated the relationship between overconfidence and product performance. the combined structural model is depicted in figure 3, where firm size and cross functional are introduced to the model simultaneously. over confidence planning product performance β= 0.70 = 0.58 (t= 4.60) (t= 4.59) =0.66 =0.51 χ2=26.78; df=26; χ2/df=1.03; p-value=0.42080; rmsea=0.020; nnfi=1.00; cfi=1.00 33 journal of small business strategy volume 22, number 1, discussion our findings add to the literature by identifying that planning mediates the relationship between overconfidence and product performance. uncovering a previously unidentified mediator suggests that scholars may have underspecified the effects of overconfidence on a product’s performance. this mediation indicates that planning is a generative mechanism, thereby helping enhance our understanding of cause and effect. figure 3: structural model with significant control variables included cross functional communication firm size by identifying variables that serve as intermediate actions, our model contributes to an understanding of the complex causal chain that starts with overconfidence and ends with product performance. more specifically, identifying planning as a mediator helps resolve a controversy in the literature. prior research indicates that many managers of small firms may use biases, such as overconfidence, when making strategic decisions (liao et al., 2008). some argue that overconfidence hurts performance by causing managers to bypass planning, thereby starting down the wrong path. other scholars, however, believe that overconfident managers save time and resources by avoiding a futile search for "reliable" information that initially does not exist in dynamic environments. these scholars also assert that overconfidence may generate action that produces useful feedback. thus, a contribution of the current paper is to provide insight into this intense debate, which prior to this effort, to the best of our knowledge, has not been examined empirically. we examine how overconfidence influences product performance through its effect on planning in dynamic environments. we found that overconfidence is associated with less planning (h1) and that less planning was associated with improved product performance (h2). furthermore, planning fully mediated the relationship between overconfidence and performance (h3). collectively, these finding help resolve the contradictory suggestions of scholars about the effects of overconfidence on performance. over confidence formal planning =0.29 =0.24 (t=2.75) (t=2.38) product performance β= 0.67 = 0.58 (t= 4.68) (t= 4.83) =0.57 =0.47 χ2=40.30; df=40; χ2/df=1.01; p-value=0.45678; rmsea=0.010; nnfi=1.00; cfi=1.00 34 journal of small business strategy volume 22, number 1, it is important to note that our research does not examine the precise dynamic by which managers succeed, even if they are initially overconfident. we believe that adaptive sense-making, as compared to planning, may be more likely to lead to success in dynamic markets, although admittedly we did not explicitly test this assertion. adaptive sense-making refers to making rapid decisions based on post-launch information gathering and taking experimental actions to generate more feedback about the emerging environment (bogner & barr, 2000). the process facilitates understandings that are grounded in real time, not retrospective behaviors and information. furthermore, by bypassing planning, we believe being overconfident of one’s facts may lead to rapid action,which is a prerequisite to adaptive sense-making. because overconfident managers have not developed and committed to a detailed cause and effect schema, they are likely to notice and accept relevant feedback, which, given their confidence, the manager react to with great alacrity. furthermore, even if some of the unfolding information contradicted their initial beliefs, they might be more willing to modify those beliefs, given that they have not made large tangible or emotional investments in them. their ability to become confident allows them to iterate rapidly multiple times between acting, feedback, and adjusting, which, in turn, generates the intuition needed in dynamic environments (eisenhardt & tabrizi, 1995). ultimately, they generate constantly evolving schemas that are complex, based on relevant information, and contain ever increasingly useful cause and effect understanding which are needed for new product success. alternatively, managers who are initially overconfident may engage in improvisation (crossan, cuhna & cuhna, 2005). according to crossan, lane, white, and klus (1996), improvisation can reflect taking advantage of opportunities as they unfold and capture a mix of strategy formulation and implementation. weick (2001) further explains that improvisation involves less investment in front-end loading (trying to anticipate everything that will happen or that you will need) and instead focuses on a greater reliance on the ability to do a quick study, intuitions, and sophistication in cutting losses. as such improvisation’s emphasis on an experimental culture, real-time information and communication (crossan et al., 2005) may make it ideal for dealing with dynamic environments. the current paper complements several works on confidence and overconfidence in business settings. the largest group of these papers contain measures whose format was identical to (e.g., busenitz & barney, 1997; forbes, 2005) or only slightly different from (e.g., keh et al., 2002; simon et al., 2000) the one used in this paper. all of this research measured the individual’s confidence and accuracy regarding factual information. these studies added greatly to our knowledge of many topics, including risk perception (simon et al., 2000), differences between entrepreneurs and managers (busenitz & barney, 1997), opportunity identification (keh et al., 2002), and antecedent to overconfidence (forbes, 2005). however, despite the authors' comments about the importance of a link between overconfidence and performance, none captured the direction of this relationship. other research measured or discussed overconfidence in a way that is almost synonymous with poor organizational performance. for example, although 35 journal of small business strategy volume 22, number 1, appropriate for their research questions, isabella and waddock (1994) measured confidence as optimistic predictions about performance outcomes and discussed overconfidence as being optimistic and failing to achieve positive results. similarly, simon, houghton, and savelli’s (2003) field study determined that overconfidence occurred when a manager was 100% certain that a product introduction would achieve a success factor and ultimately failed to do so. both of these studies’ measures made it definitional that overconfidence would yield lower performance. our measure of overconfidence did not involve predictions of future performance, but instead focused on inappropriate certainty in current knowledge. thus, it was potentially possible to detect a positive association between overconfidence and performance. our measure of overconfidence provides insights into eisenhardt's (1989) finding that managers who followed specific processes in dynamic environments had greater confidence and improved performance. they argued that one of the reasons for this relationship was that the managers’ confidence was well-founded because the process they followed generated better information. however, they did not actually examine the quality of the information that the managers used. yet quality of information may be crucial (forbes, 2007). our study suggests that it is at least possible that increased confidence, even in the absence of increased initial accuracy, could have been associated with improved performance. it is interesting to compare our finding that overconfidence decreased planning with forbes’ (2005) finding that decision comprehensiveness increased overconfidence. we believe these findings complement rather than contradict each other. at a very general level, we are proposing that uncertainty of ones facts leads to information search, whereas forbes (2005) found that this information search leads to greater, but unwarranted, certainty. consistent with other scholars (zacharakis & shepherd, 2001), he argues that considering more information may increase an individual’s certainty without increasing their accuracy. clearly, though, to test the complementary nature of these findings, future research needs to rigorously measure how overconfidence and information search change and relate to each other over time. limitations and future research directions this study has some limitations that suggest future research directions. the demands placed on the study's respondents, such as being in a small company that had just introduced a new product and providing data twice during a year and a half period, limited the study's sample size. the small size in turn decreases the power of the analysis while increasing the instability of the results. this, in turn, increases the likelihood that future studies may not replicate this study's results. given this study's exploratory nature, the multiple calls to conduct longitudinal research linking managerial cognition to firm actions and performance (e.g., thomas et al., 1993), and the difficulty of this task, we believe that the sample size was reasonable. furthermore, other studies (e.g., adams, nelson, & todd, 1992) have used comparable sample size in running lisrel. moreover, we checked the modification index at the measurement and structural model levels and no major modifications were suggested. in addition, the t-values for all the paths (figure 2) are significant at the .01 level. these findings provide evidence that the results are reliable. finally, to the extent that the study 36 journal of small business strategy volume 22, number 1, achieved significant results despite its small sample size, it served as a conservative test of the hypotheses. the study's small sample size restricted the number of control variables (churchill, 1979) related to both the individuals completing the questionnaire and the firm's outcomes. we did, however, minimize this problem by constraining many conditions that could have affected outcomes. for example, all the firms were small, introducing a product in the same industry, and were located in the same geographic area. also, the respondents were at roughly the same organizational level and were the individuals most responsible for the product introductions' success. clearly, however, if possible, future studies should strive to use larger samples and utilize more control variables, especially ones reflecting differences in individuals. in striving to make sure that managers faced very similar decision situations, we limited the study's generalizability. consistent with whetten’s (1989) suggestion that exploratory research should focus on areas where the phenomenon of interest is most likely to be present, we examined smaller firms. managers of these firms exhibit the overconfidence bias to a greater degree than their counterparts (busenitz & barney, 1997). we also examined dynamic environments, given that the information overload, high uncertainty, and high time pressures associated with these environments may make it likely that managers are overconfident (busenitz & barney, 1997). dynamic environments were also worthy of study because they pose special challenges to learning and to achieving product introduction success given their relative lack of reliable and relevant data for decision making (isabella & waddock, 1994). several scholars (e.g., forbes, 2005), however, have argued that the performance effects of biases and heuristics depend, in part, on the environment in which they are exhibited. we concur. for example, we do not necessarily believe that the relationships we uncovered exist in more stable environments or for larger firms, where planning may be crucial to success. this belief, however, needs to be directly examined to test the boundary conditions of the relationships we uncovered. managerial implications we caution readers not to misinterpret or overstate our findings. our study is descriptive, not prescriptive. we are not stating that managers should do no planning. some planning and research may be beneficial. also, while we found that greater overconfidence may actually enhance product performance as compared to planning, it is very doubtful that overconfidence is an overall panacea or that it is without some negative ramifications. we do not suggest that we have uncovered the best way to generate new product performance. other, more advantageous ways may exist. for example, eisenhardt (1989; 2001) uncovered a detailed and comprehensive process that differed from planning, and allowed managers operating in dynamic environments to make decisions rapidly and effectively. their process was quite specific, and went far beyond planning. it explained, for example, when managers should collect information, what type of information they should use, and who they should involve in the planning process. additionally, an article by sykes and dunham (1995) argues that the key to success lies in initially identifying one’s assumptions, and recognizing their uncertainty. managers then need to act with 37 journal of small business strategy volume 22, number 1, the explicit goal of testing and, as needed, modifying those assumptions. grant (2003) suggests that planning systems which minimize the use of analytical processes, but lay out clear performance targets and corporate guidelines may enhance performance in dynamic environments. similarly, mcgrath and macmillan (1995) suggest a unique planning process that may be especially beneficial by better enabling managers operating in dynamic environments to explore their assumptions. in fact, our study's findings notwithstanding, it may make sense to reduce overconfidence if one does so in combination with the alternative planning methods above. admittedly, though, it is difficult to correct the general tendency to be overconfident, and even increased awareness of the tendency does little to decrease the bias (heuer, 1999; russo & schoemaker, 1992). there are, however, several effective steps managers can take which focus on the process of how people make judgment and reach conclusion, rather than just focusing on the judgments and conclusions themselves (heuer, 1999). these steps include techniques like devil's advocacy, eliciting outside expertise, and interdisciplinary brainstorming (heuer, 1999; russo & schoemaker, 1992). our research leaves many questions unanswered that were beyond this study's scope. we believe that early research needs to be evaluated not just by its results, but also by questions and the opportunities for future research it generates. we do not view this paper as the ultimate answer, but rather as 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academy of management review, 14(4): 490-495. yates, j.f., lee, j., shinotsuka, h., patalano, a.l., & sieck, w.r. 1998. cross cultural variations in probability judgment accuracy: beyond general knowledge overconfidence? organizational behavior & human decision processes, 74(2): 89-117. zacharakis, a. l., & shepherd, d. a. 2001. the nature of information and overconfidence on venture capitalists’ decision making. journal of business venturing, 16(4): 311-333. zhao, x., lynch, j.g., & chen, q. 2010. reconsidering baron and kenny: myths and truths about mediation analysis. journal of consumer research, 37(august): 197-206. mark simon is an associate professor of strategic management, at oakland university, michigan, usa. he received his bachelors of science from babson college with a concentration in entrepreneurship. he obtained an mba and ph.d. at georgia state university in august of 1996. he has publications in the area of entrepreneurial decision making in multiple journals. susan houghton is an associate professor of strategic management at north carolina a&t state university. she received her b.a. from yale university, and her m.b.a. and ph.d. from the university of north carolina at chapel hill. her research focuses on small business management, strategic planning and managerial cognition. john kim is an associate professor of marketing at oakland university. his area of teaching and interest is consumer behavior, especially decision making. xiaodong deng is an associate professor of management information systems at oakland university. he received his ph.d. in manufacturing management and engineering from the university of toledo. his research has appeared in journal of management information systems, decision sciences, information and management, information resources management journal, and journal of intelligent manufacturing. his research interests are in post-implementation information technology learning, information systems benchmarking, and information technology acceptance and diffusion. journal of small business strategy volume 22, number 1, appendix a eighteen months after we gathered the first wave of data, we contacted the original companies and mailed the manager most responsible for the product introduction a questionnaire about problems his or her product encountered. in 87 percent of the cases, this individual was the same person who had responded 18 months earlier. to increase response rate, we conducted multiple follow-up calls and mailings and provided all participants with two free movie tickets. we also entered respondents in a drawing for a dinner for two at an exclusive restaurant in georgia (valued at over $100). to track firms that had moved, we used state phone directories and internet search engines to look up both the name of the company and the name of its employees. the eight firms that failed to respond either refused to participate or were impossible to contact, possibly because they were acquired, moved, or failed. although survivor and response bias is a consideration, the concern was minimized by the high response rate, as well as the fact that non-respondents had potentially positive (e.g., being acquired) and negative (e.g., failing) outcomes (mcdougall & oviatt, 1996). furthermore, there was no statistical difference at the five percent level between those firms completing both parts of the study and those that dropped out on the data that was collected during the first wave including number of the firm's employees, firm age, or the level of the manager's overconfidence. appendix b overconfidence: executives circled the answer they thought was correct ("a" or "b") to the questions below. then, in the last column, they recorded their level of confidence by indicating a percentage ranging from 50 to 100%. for example, if they thought there was a three out of four chance that they chose the correct answer, they would than indicate a 75% level of confidence. fifty percent indicated a pure guess. respondents' overconfidence was determined by averaging their level of confidence for all questions and subtracting the percentage of items correct. if their average level of confidence was greater than the percentage of items correct, then overconfidence occurred. this measure generated a continuous variable. questions answers level of confidence 1. what percent of businesses with fewer than 100 employees use pcs? a. over 80% b. under 70% __________ 2. from october, 1994 to march, 1995 which company sold more pcs in the u.s.? a. compaq computer b. packard bell electronics __________ 3. which of the following pc "markets" grew more rapidly last year? a. retail sales b. corporate sales __________ 4. in 1994, lotus development ... a. lost money b. made a profit __________ 44 journal of small business strategy volume 22, number 1, 45 5. what percent of new computer users utilize pc magazines to help them buy software? a. more than half b. less than half __________ 6. relative to 1991 sales, how much did compaq's sales increase by in 1994? a. less than double b. over triple __________ 7. what percent of computer owners use educational software? a. about 66% b. about 40% __________ planning: planning was measured using the average score on the three-item scale, below. i prefer careful and thorough analysis rather than intuition if it affects results 1 2 3 4 5 my strategic decisions are generally more affected by industry experience and lessons learned by formal research and systematic evaluation* 1 2 3 4 5 we develop and use a detailed plan when marketing our products 1 2 3 4 5 product performance was measured using the five-item bipolar scale below. respondents were asked to circle the number that best captured their product introduction's potential financial performance. for example, for the first item below they would circle a "1" if the product has not led to a major increase in overall company financial performance and a "7" if it has led to a major increase in overall company financial performance. responses for the five items were averaged. the product … has not led to a major increase in overall company financial performance. 1 2 3 4 5 6 7 has led to a major increase in overall company financial performance. fell far below profit goals. 1 2 3 4 5 6 7 far exceeded profit goals. fell far below sales goals. 1 2 3 4 5 6 7 far exceeded sales goals. fell far below market share goals. 1 2 3 4 5 6 7 far exceeded market share goals has achieved a far higher market share than competitor's 1 2 3 4 5 6 7 has achieved a far lower market share than competitor's.* firm size was captured using the log of number of company employees. * items denoted with an asterisk are reverse coded. journal of small business strategy volume 22, number 1, 46 cross-functional communication: we measured cross-functional communication using twoitems. we utilized a cross-functional team to introduce this product. 1 2 3 4 5 6 7 there was substantial communication between functional areas regarding this product. 1 2 3 4 5 6 7 past performance: the measure is reproduced below. how important is this performance measure to the company? how satisfied are you with the company’s achievement on this measure? not important very important not satisfied very satisfied sales growth 1 2 3 4 5 1 2 3 4 5 net profit margin 1 2 3 4 5 1 2 3 4 5 cash flow 1 2 3 4 5 1 2 3 4 5 market share 1 2 3 4 5 1 2 3 4 5 ret. on equity 1 2 3 4 5 1 2 3 4 5 ret. on assets 1 2 3 4 5 1 2 3 4 5 reproduced with permission of the copyright owner. further reproduction prohibited without permission.     in memorium: a personal note it is with a deep sense of sadness that i write these words in tribute to dr. debra malewicki. i still think of “deb” as my former ph.d. student as i was privileged to chair her dissertation committee and have her as a vibrant contributor to discussions in the ph.d. seminar in entrepreneurship at the university of illinois at chicago (uic). her intellect and energy combined to make her one of the most talented students i worked with in my four decades of teaching. beginning with her admission to the ph.d. program at uic, it was clear that she was totally committed to help build the developing, intellectual field of entrepreneurship. at a time when we were all pioneers, establishing the legitimacy of this domain, dr. malewicki brought her exceptional abilities and experience. she had already worked extensively with entrepreneurs, gaining insights through observation that were rare for new ph.d. candidates. this led her to identify particularly important issues to discuss and pursue, and she continued this into her last work regarding networks in this issue of jsbs. she also continued her outstanding work on technology commercialization. deb was not only a scholar in her own research but she served as a leader in the annual research symposium on marketing and entrepreneurship, held at george washington university. it was there where i met her wonderful children and husband, and enjoyed their company with my wife. deb was always quick to smile and laugh and her leadership orientation was infectious, always positive and upbeat. we already miss dr. debra malewicki, but we know that our world is better because she made a difference. as an ideal professor and role model, she generated important new knowledge and changed the lives of students and entrepreneurs for the better. she enriched her family and her many friends with her love. we thank you deb. in gratitude, gerry hills turner chairholder, bradley university professor emeritus, uic   reproduced with permission of the copyright owner. further reproduction prohibited without permission. http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2019, vol. 29, no. 02, 1-21 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2019 small business institute® w w w. j s b s . o rg research generally shows a strong association between entrepreneurial orientation (eo) and firm performance, and this relationship has been found to hold across multiple operationalizations of the construct, as well as a number of cultural settings (see, rauch, wiklund, lumpkin, & frese, 2009). the true value in eo is the creation of strategy through which innovativeness, risk-taking, and proactiveness (lumpkin & dess, 1996; wiklund, 1998), are consistently communicated and manifest to innovative behaviors (kang, matusik, kim & phillips, 2016; pett & wolff, 2016) or outputs (e.g., shan, song, & ju, 2016; wang & juan, 2016). in fact, higher levels of eo are consistently associated with the firm’s ability to find leverageable new opportunities via the creation of innovative solutions; thus, providing a competitive advantage and superior performance effects (ahluwalia, mahto, & walsh, 2017; aloulou & fayolle, 2005; forés & camisón, 2016; ireland, hitt, & sirmon, 2003; mcdowell, peake, coder, & harris, 2018). as such, both eo (covin & slevin, 1991; wiklund & shepherd, 2003, 2005) and individual entrepreneurial orientation (ieo) (bolton & lane, 2012), when proxying strategic priority have been shown to influence reported innovation levels, or innovation output within small firms (avlonitis & salavou, 2007; bolton, peake, & coder, 2017). based on the initial work of covin and slevin (1986, 1989) lumpkin and dess (1996) and miller (1983), eo is generally viewed at the organizational level as “the entrepreneurial strategy-making processes that key decision makers use to enact their firm’s organizational purpose, sustain its vision, and create competitive advantage(s)” (rauch et al., 2009, p. 763). since the strategic direction of small firms ofintroduction whitney o. peake1, dennis barber iii2,, amy mcmillan3, dawn l. bolton4, leanne coder5 1western kentucky university, usa, whitney.peake@wku.edu 2east carolina university, usa, barberde17@ecu.edu 3east carolina university, usa, mcmillana@ecu.edu 4western kentucky university, usa, dawn.bolton@wku.edu 5western kentucky university. usa, leanne.coder@wku.edu do management control systems stifle innovation in small firms? a mediation approach small business, management control, innovation, accounting how entrepreneurial orientation (eo) as a strategy manifests into entrepreneurial behaviors like innovation, is an important research topic but not well understood. there is a gap in the examination of eo and entrepreneurial behavioral outcomes. since mediators exist (see rauch, wiklund, lumpkin, & frese, 2009; wales, 2016; wales, patel, parida, & kreiser, 2013) additional research is needed to uncover these potential relationships. research suggests that management controls systems (mcs) may serve as a mediator between strategy and innovation outcomes. there is, however, conflicting evidence regarding the impact and use of management control systems (mcs) in the small firm context. as such, we examine the relationship between an individual-level measure of eo (ieo) and innovation level and explore the mediating role of financial and nonfinancial mcs on that relationship. results suggest that nonfinancial mcs partially mediate the relationship between ieo and innovation, while financial mcs do not. apa citation information: peake, w. o., barber iii, d., mcmillan, a., bolton, d. l., coder, l. (2019). do management control systems stifle innovation in small firms? a mediation approach. journal of small business strategy, 29(2), 1-21. http://www.smallbusinessinstitute.biz http://www.jsbs.org 2 w. o. peake, d. barber iii, a. mcmillan,d. l. bolton, l. coder journal of small business strategy / vol. 29, no. 2 (2019) / 1-21 ten depends on the values and priorities of the owner (dickson & weaver, 2008), ieo has been a valuable construct in bringing eo from a firm level phenomenon to the individual level (bolton & lane, 2012; goktan & gupta, 2015). while research examining eo and innovation as an output of the firm stemming from innovativeness as a strategic priority, has been conducted (e.g. anderson & eshima, 2013; atuahene-gima & ko, 2001; tang, chen, & jin, 2015) there is still opportunity to examine these constructs both in terms of ieo and within the small firm context. this is particularly salient since innovation within small firms generally links to superior performance (mcdowell et al., 2018), yet the linking mechanisms between entrepreneurial strategy and translating that strategy into innovation activity merits further exploration. there are likely important mediating mechanisms to this relationship since innovation is a process facilitated by priorities, behaviors, and organizational processes within the firm (lumpkin & dess, 1996). management control systems, when considered as “formal, information-based routines and procedures managers use to maintain or alter patterns in organizational activities” (simons, 1995, p. 5), have been argued to serve as an important facilitator between the strategy of the firm and innovation outcomes (davila, foster, & oyon, 2009). these systems were traditionally more oriented towards accounting systems but have morphed to include a broader variety of activities (otley, 2016). the role of mcs in promoting or stifling innovation within small and/or start-up firms is a source of debate and is argued to be context-dependent. early research on mcs suggest that accounting and control are purely a hindrance to innovation (amabile, 1998) since mcs may lead to overly detailed, bureaucratic processes, which suppress innovation (davila et al., 2009). such research suggests that informal controls based in social norms tend to be more effective in small businesses (e.g., abernethy & brownell, 1997; abernethy & lillis, 1995; ouchi, 1979). more recently, empirical evidence suggests there is evidence counter to these decades-old assumptions (bisbe & otley, 2004; henri, 2006; li, li, liu, & wang, 2005; sandino, 2007) since mcs provide processes that codify and disseminate information, streamline innovation processes, and lend accountability for relevant employees and across departments (e.g., barringer & bluedorn, 1999; davila et al., 2009; greiner, 1972); thus improving innovation levels. additionally, davila et al. (2009) suggest that innovation level is contingent upon owner/manager characteristics and priorities, firm characteristics, and the level of management control implemented within the firm. further, when considered from a contingency theory perspective, davila et al. (2009) suggest that perhaps innovation levels may differ across entrepreneurial and/or small firms based on these preceding factors, indicating the need for more analysis focused on this area. studies related to mcs have traditionally focused on established, larger firms embedded in stable contexts (davila et al., 2009); however, with the importance of small businesses to the global economy, the field is remiss to overlook mcs adopted by or embedded within smaller firms by the owner/manager. small firms must be flexible, agile, and innovative but also organized to codify information and streamline processes. further, the founders’ psychological frame likely impacts adoption of management controls as opposed to the more informal forms of control. the small amount of prior research integrating mcs into this discussion provides inconclusive evidence for whether such controls benefit or harm the innovation level within small, entrepreneurial firms, and for how owner/manager characteristics may influence the implementation of such controls. part of this divergence in the literature may be due to the theory basis used to explore such efforts (davila et al., 2009). since universal solutions to strategy implementation and control for small businesses is unavailable, contingency theory may provide an updated and useful lens for examining these phenomena. in particular, contingency theory has been studied and applied in a variety of contexts including large and small firms for 60 years (lawrence & lorsch, 1967; thompson, 1967; tosi & slocum, 1984; woodward, 1965). it is based on the idea that fit between organizational structural variables, such as formalization, decentralization, etc. and contextual variables, such as technology, individual predispositions, the external environment, culture, etc. are critical to organizational success. we examine four mediator models couched in contingency theory for 185 small firms in the southeastern united states. we first explore the role of financial management control mechanisms as a media3 w. o. peake, d. barber iii, a. mcmillan,d. l. bolton, l. coder journal of small business strategy / vol. 29, no. 2 (2019) / 1-21 tor between the ieo level of the firm’s owner/manager and the different innovation approaches reported for the firm. we then follow with an exploration of the mediating role (or lack thereof) of non-financial, primarily human resources oriented, management controls on the relationship between owner/manager ieo and reported innovation levels for the firm. our results suggest that although higher levels of ieo are significantly associated with greater levels of management control, non-financial controls, (i.e., human resources-oriented controls) do partially mediate the relationship between ieo and different innovation approaches. given these results, it appears that investments in management control of personnel issues plays a substantial and important role in facilitating innovative activity within the firm. the remainder of the paper is organized as follows. in the subsequent section, we provide a theoretical basis and develop hypotheses for analysis. then, we outline the methods employed in our analyses, followed by presentation of the results. finally, we conclude with a discussion, outlining both academic and practical implications of this research, as well as limitations and opportunities for future research. theory and hypothesis development contingency theory contingency theory has been one of the most widely utilized theories in organizational research, dating back to the 1960s. the fundamental assumption is that there is no one best way to manage an organization. according to tosi and slocum (1984), organizational outcomes are the consequence of the fit between several structural and contextual variables. van de ven, ganco, and hinings provide a critical examination of contingency theory and state “contingency theory proposes that performance outcomes of an organizational unit are a result of the fit between the unit’s external context and internal arrangements” (van de ven et al. 2013, p. 394). contingency theory has been one of the dominant theories in management control research for many years. in particular, research suggests that there is not one universally appropriate control system that works in every situation. in fact, control systems must be carefully and uniquely aligned with other organizational factors (fisher, 1995). the theory has also been used to explain various relationships involving innovation (fernandes & solimun, 2017; huang, 2009; teasley & robinson, 2005). chen, liu, and cheung (2014) use contingency theory in their examination of managerial ties, radical innovation, and market forces. in particular, they produce a model that suggests managerial ties have a positive impact on radical innovation and that market forces may have a positive or negative effect on these relationships. van de ven, et al. (2013) suggest that technology (i.e. innovation), in particular, is a critical boundary that needs further examination under the contingency theory lens. finally, while contingency theory has mainly focused on large organizations, it has been applied in various contexts to small businesses. “complex relationships exist among environmental, organizational, and individual/group variables, and these relationships and their salience change with the strategic and organizational design choices made by members of the dominant coalition” (tosi & slocum, 1984, p. 9). for small businesses, the dominant coalition is usually the small business owner, and as stated earlier, individual predispositions are a contextual variable that are often included in contingency theory-based research. in particular, the ieo of the small business owner likely impacts the innovation levels of the firm. as such, we suggest that contingency theory is most appropriate when examining the relationship between ieo, managerial control systems, and innovation. small business context although there is much research on innovation and small businesses, there is a noticeable gap specifically examining variance in incremental versus radical innovation among small businesses as well as the effect of control systems on small business innovation. innovation in general has been shown to have a positive effect on small business performance (keskin, 2006). however, given that incremental innovation focuses on extensions to and building on current product or service offerings (subramaniam & youndt, 2005), while radical innovation focuses on disrupting current product or service offerings (subramaniam & youndt, 2005), differential performance effects are possible. past research, however, does suggest that radical and 4 w. o. peake, d. barber iii, a. mcmillan,d. l. bolton, l. coder journal of small business strategy / vol. 29, no. 2 (2019) / 1-21 incremental innovation are highly correlated, with 90% of firms in a study conducted by plotnikova, romero, and martínez-román (2016) reporting that incremental innovation complements their radical innovation processes. as such, it is unsurprising that small firms engage in both types of innovation, with positive effects often found for both, depending on the context. in their study, keskin (2006) surveyed 157 turkish smes and measured innovativeness and firm performance using a model from calantone, cavusgil, and zhou (2002). keskin (2006) found that when smes frequently try new ideas, seek out new ways to do things, develop new product/services, and try to be creative in their methods of operations, they become more profitable, get higher market share, and grow at a higher rate. these findings are consistent with those found in similar studies (forsman & annala, 2011; saunila, ukko, & rantanen, 2014). bhaskaran (2006) examined incremental innovation in 87 seafood retail smes in australia. results of this study suggest incremental innovation positively associated with both profitability and sales growth. in their study of 108 uk sme’s in manufacturing, technology, and information industries, oke, burke, and myers (2007) found that these smes tend to focus on incremental innovations and that such innovations are positively related to sales growth. additionally, research has attempted to identify controls and forces that influence the innovation level of small businesses. while it has been found that many external factors such as government policy, resource scarcity, and economic climate can have a significant effect on innovation in small businesses, there is a noticeable lack of research focusing on internal factors and controls (foreman-peck, 2013; madrid-guijarro, garcía-pérez-de-lema, & auken, 2016; woschke, haase, & kratzer, 2017). eo versus ieo eo has been widely studied (see rauch et al., 2009 for a meta-analysis) and the subject of a special issue of entrepreneurship theory and practice (covin & lumpkin, 2011). the eo scale was constructed using behaviors identified in business strategy and entrepreneurship literature (covin & slevin, 1989; miller, 1983) and generally includes three to five dimensions: innovativeness, willingness to take risks, proactiveness, competitive aggressiveness and autonomy (lumpkin & dess, 1996). the rauch et al. (2009) meta-analysis looked at 51 studies with 14,259 companies and found that in the majority of the studies, only innovativeness, risk-taking, and proactivness were used, and that the eo construct was studied as unidimensional (in 37 studies) as opposed to multidimensional (in 14 studies). rauch et al. (2009) found eo was correlated with performance (“moderately large” r = 0.242) and robust to different operationalizations of key constructs as well as cultural contexts. research on small business strategy uses eo also. messersmith and wales (2013) looked at eo and the role of human resource management in young firms, and lechner and gudmundsson (2014) looked at eo, firm strategy, and small firm performance. in such studies, eo is measured at the firm-level where the response of one individual became the measure of eo for the entire firm. in the small business context, eo is generally studied as a firm-level construct. for example, wiklund, (1998) defines eo as a “willingness of a firm to engage in entrepreneurial behavior” (wiklund, 1998, p. 65) and lumpkin and dess (1996) suggest that eo reflects how an organization operates. primarily studied for its relationship to firm performance, eo has been shown to explain on average, 24% of variation in performance of the firm (rauch et al., 2009). additionally, rauch et al. (2009) concluded that other factors are likely and recommended examining other variables. prior research suggests a gap between eo and entrepreneurial behavior in the organization (kilenthong, hultman, & hills, 2016), such as innovation level (kollmann & stöckmann, 2014). bolton and lane (2012) proposed measuring an individual’s eo with their ieo scale. initially using all five dimensions of eo, bolton and lane (2012), adapted the eo scale by asking participants to respond to likert scale statements referring to the individual rather than to the firm (e.g., changed “my firm” to “i”). innovativeness, risk-taking, and proactiveness emerged as three distinct factors resulting in the ten-item ieo scale which demonstrated validity and reliability. as such, this appears to be a more appropriate measure in the small-firm context, where the owner/manager sets the strategic posture for the firm (andries & czarnitzki, 2014; madison, runyan, & swinney, 2014; nejati, 5 w. o. peake, d. barber iii, a. mcmillan,d. l. bolton, l. coder journal of small business strategy / vol. 29, no. 2 (2019) / 1-21 quazi, amran, & ahmad, 2017). in their analysis, strese, keller, flatten, & brettel (2018) examined the effects of a given ceo’s passion for inventing on the radical innovation of smes as well as a hypothesized moderating effect from shared vision, defined as “the extent to which organizational members have collective goals and common aspirations with regard to their firm’s future development.” surveying a sample of 388 german smes, it was found that ceo’s with a high passion for invention represented a strong correlation with the radical innovation of their firm, and that this relationship was strengthened by the firm’s shared vision (strese, et al., 2018). while not completely congruent, the measure of passion for invention could be stated to be comparable to that of ieo; thus, further validating the relevance of individual level constructs in the small firm setting. ieo and innovation level innovation can vary in terms of the “newness” to the organization or unit (dewar & dutton, 1986). in particular, it can be categorized as radical vs. incremental. radical innovation involves clear departures from existing technology or practice (duchesneau, cohn & dutton, 1979; ettlie, 1983) while incremental innovation is considered to be minor improvements or simple adjustments in current technology or practices (munson & pelz, 1979). there is a dearth of research examining the relationship between eo and innovation level and to our knowledge, no prior studies have examined ieo, management control, and innovation level simultaneously. this is particularly relevant given the importance of the owner/manager’s role in a small business context. in line with the upper echelons view (hambrick & mason, 1984), small business research suggests that the owner/manager sets the firm’s strategic posture or orientation for important arenas of operation (aloulou & fayolle, 2005; chaganti, watts, chaganti, & zimmerman-treichel, 2008), including the pursuit of innovation. given ieo has not been frequently used in such investigations, however, we develop our hypotheses based on evidence provided by the firm-level eo construct. given that eo is the firm-level operationalization of the individual-level construct, we anticipate the same direction of effects. researchers have examined the eo and innovation link across different contexts, although most are specialized contexts, such as particular industries and look only at innovation as a mediator rather than an outcome. for example, avlonitis and salavou (2007) investigate the relationship between eo, product innovativeness, and performance in 143 greek firms. they found that entrepreneurs with high eo correlated with new product uniqueness and product newness to the firm, and as such indicates a relationship between eo and innovation within the firm. in their study of eo and innovation in exporting, boso, cadogan and story (2013) found that eo in export behavior led to export product innovation success. in their study of eo in creative industries, parkman, holloway, and sebastiao (2012) found that a highly significant association existed between eo and innovation capacity in their larger study. in their examination of the italian and spanish tile industries alegre and chiva (2013) found a positive and significant link between eo and innovation performance of the firm, although distinctions in types of innovation were not made and the ultimate goal was to examine firm performance. although the parameters of their study differ quite markedly from most eo-innovation work, kollmann and stöckmann (2014) found that the three dimensions of eo significantly correlate with exploration activities within the firm. this suggests a positive relationship between eo and innovative activities. further, kollmann and stöckmann (2014) argue that it is critical to examine how eo manifests into entrepreneurial behavior. additionally, some research has been conducted on the relationship between spin-offs and innovation (scaringella, miles, & truong, 2017). spin-offs are defined as business ventures stemming from technological knowledge originating from universities, research centers, and corporations (scaringella, et al., 2017). scaringella et al. (2017) concluded that spin-offs’ ability to capture knowledge from both customers and the originating research center directly and positively affects their ability to radically innovate. although not a direct link between ieo and innovation, scaringella et al. (2017) provides a valuable backdrop for this study. despite the myriad of contexts, studies exploring eo and innovation have generally reported a significant effect for eo as a precursor to innovation of all types. as such, we hypothesize the following relationship using ieo as the individual-level operationalization of the eo construct. 6 w. o. peake, d. barber iii, a. mcmillan,d. l. bolton, l. coder journal of small business strategy / vol. 29, no. 2 (2019) / 1-21 hypothesis 1a. ieo of the owner/manager is positively associated with reported incremental innovation level for the firm. hypothesis 1b. ieo of the owner/manager is positively associated with reported radical innovation level for the firm. management control processes simons (1990) states “management control systems are the formalized procedures and systems that use information to maintain or alter patterns in organizational activity” (simons, 1990, p. 128). there have been several categorizations of mcs in the literature, ranging from formal/informal, behavioral/input/output, to financial/nonfinancial. financial controls involve traditional accounting-based methods such as budgets, cash flow, sales, etc. nonfinancial controls include performance evaluations, policies/procedures, and customer feedback. companies generally begin by adopting informal and nonfinancial control systems according to davila and foster (2007). as they grow there is a move toward more formal and financial mcs because the constant interaction and observation required of many nonfinancial mcs become cumbersome. mcs have evolved in ways to assist in increasing innovation. “the need for organizations to be innovative has added to the challenges for control systems to help managers accomplish innovation” (chenhall & moers, 2015, p. 2). additionally, bedford (2015) suggests that mcs play a central role in the management of innovation. mcs actually increase the capacity of an organization to derive benefits from innovation (bisbe & otley, 2004; jørgensen & messner, 2010). research on the relationship between mcs and innovation is generally lacking, but some studies have been conducted on the matter. bisbe and otley (2004) examined the effect of interactive mcs on project innovation and defined interactive control systems as “formal control systems that managers use to become personally and regularly involved in the decision activities of subordinates…” (bisbe & otley, 2004, p. 717). overall, they found that mcs do not significantly affect the relationship between innovation and performance in low-innovating firms but do negatively mediate the relationship between innovation and performance in high-innovating firms (bisbe & otley, 2004). as such, in highly innovating firms mcs appear to be a detriment to product innovation level. similarly, dunk (2011) examined the relationship between budget controls and product innovation and performance. specifically, he hypothesized that when budgeting is used as a control measure as opposed to a planning measure, it would have a negative effect on innovation and performance. dunk (2011) found that when used as a planning measure, budgets had a positive effect on product innovation and performance. conversely budgets were determined to have an adverse effect on product innovation and performance when used strictly as a control measure (dunk, 2011). this is consistent with findings in other related research (abernethy & brownell, 1997; bisbe & otley, 2004). when considering nonfinancial mcs, rockness and shields (1984) found that nonfinancial controls, such as rules and procedures, were most important in r&d when there were high levels of knowledge in the transformation process. additionally, abernethy and brownell (1997) reported that personnel controls were more effective than accounting controls when task uncertainty was high within r&d. finally, rockness and shields (1988) discovered that social controls can substitute for expenditure budgets in r&d settings. these findings are all relevant as r&d functions often rely on innovation. merchant (1990) found that financial controls resulted in a discouragement of new ideas because of the short-term focus, while govindarajan (1988) found that product differentiation strategies, which often rely on innovation, resulted in the diminished role of budgetary controls. these studies all point towards the significance of nonfinancial mcs in the creation of innovation in firms. in fact, chenhall and moers (2015) conclude: …research into the role of performance measurement in settings where innovation is important confirms that the traditional use of financial controls for evaluation is insufficient and potentially ineffective. rather, broader controls, such as nonfinancial metrics and subjective measures, are more useful. this is because these measures are able to encourage and evaluate innovative effort, the effects of which have a longer time horizon. (chenhall & moers, 2015, p. 4) 7 w. o. peake, d. barber iii, a. mcmillan,d. l. bolton, l. coder journal of small business strategy / vol. 29, no. 2 (2019) / 1-21 using a case study method, chiesa, frattini, lamberti, and noci (2009) found that top management utilized more informal controls throughout radical innovation projects such as belief systems, especially during the concept generation and launch phases, where such radical innovation and change were most apparent. conversely, incremental innovation projects were defined by more formal control systems, namely diagnostic controls and quantitative indicators of performance, due to the more predictable natures and outcomes of the projects. mcdermott and o’connor (2002) found that most firms based their radical innovation projects on already familiar internal knowledge in competencies, that they then launched into new products or processes (mcdermott & o’connor, 2002). finally, the authors noted that traditional management and controls seemed to play a minor role in these projects, with informal networks and controls serving as a much more important backdrop. generally, there is a lack of research oriented towards owner or owner/manager psychological frame and the implementation of financial and nonfinancial management controls. in small businesses, it is the owner/manager that determines the types of controls to be implemented. the product innovation and research and development orientation of most of the prior studies mentioned suggest that there is a relationship between strategy of the firm, management control system implementation and innovation level as the entrepreneurial strategy is manifest through such behavior. in their seminal piece, neimark and tinker (1986) argued that mcs are socially constructed, which suggests it is critical to consider the culture and orientation of the firm when examining these phenomena. for example, in software development, a naturally more innovative industry, ditillo (2004) found that knowledge complexity influenced the configuration of management controls; thus, suggesting that the culture and strategy of the firm influence level of management control implementation, which then manifests in a behavioral outcome, such as innovation, software development, new product development, etc. in summary, the research suggests that the owner and/or owner/manager set the strategic posture for the firm through their ieo, and as such, the implementation of mcs, as a socially constructed phenomena will be affected. further, mcs exhibits effects on both incremental and radical innovation levels. as such, we expect a partial mediation effect for both types of management control systems on the relationship between ieo and radical and incremental innovation levels. hypothesis 2a. non-financial management control systems for the firm partially mediates the relationship between ieo and incremental innovation level of the firm. hypothesis 2b. financial management control systems for the firm partially mediates the relationship between ieo and incremental innovation level of the firm. hypothesis 2c. non-financial management control systems for the firm partially mediates the relationship between ieo and radical innovation level of the firm. hypothesis 2d. financial management control systems for the firm partially mediates the relationship between ieo and radical innovation level of the firm. method sample and procedure data were collected via survey over the course of two semesters across the mid-south region of the united states using a peer recruitment sampling technique known as network sampling (e.g., ingram, peake, stewart & watson, 2017; mcgee, peterson, mueller & sequeira, 2009). students in entrepreneurship and human resource courses at a mid-major university were asked to identify entrepreneurs and managers affiliated with small firms as part of an entrepreneur interview project required for their respective courses. students contacted small business owners and managers in advance of the interview to ask them to complete a survey as part of the interview process. since students served as the initial point of contact, students were instructed on the research objectives of the survey instrument. additionally, through this initial contact, respondents were assured that their survey responses would remain confidential and that any potentially identifiable information would be held separately from the surveys. students were instructed that follow-up would be made with the small business owners and managers to ensure that surveys were completed as instructed. 8 w. o. peake, d. barber iii, a. mcmillan,d. l. bolton, l. coder journal of small business strategy / vol. 29, no. 2 (2019) / 1-21 prior research suggests that such methods may lead to greater diversity of ethnic and socioeconomic backgrounds than traditional mail survey methods that rely on small business administration databases or local chambers of commerce (cooper, peake, & watson, 2016; ingram et al., 2017; mcgee et al., 2009; peake, davis, & cox, 2015a; peake, harris, mcdowell, & davis, 2015b; sequeira, mueller & mcgee, 2007). with students serving as the point of contact, researchers suggest that business owners may be identified who would not have been available via lists from entities such as chambers of commerce, since the personal contact made through this methodology may appeal to respondents (ingram et al., 2017). using this technique, 265 surveys were returned. we only retained respondents who were owners or owner/managers active in the day-to-day operations of the firm and who indicated that s/he and his/her employees made major decisions affecting the firm, given the importance of the influence of the owner and/or owner/manager on the firm’s use of mcs, as well as its innovation levels. additionally, to maintain focus on small firms, we deleted cases in which the total number of employees were greater than 250 (chowdhury, schulz, milner, & van de voort, 2014; mcdowell, et al., 2018; thurik, khedhaouria, torres, & verheul, 2016), as well as any survey observations where an entire construct or more was incomplete on the survey. after removing data points which did not adhere to the aforementioned criteria, 212 survey observations remained. for any analysis, when missing cases were deleted listwise, a range of 185-194 observations were utilized. although the sample size is below n = 200, paterson, harms, steel, and credé (2016) determined recommended sample sizes for 0.95 statistical power in performance studies is 168. given expected effect sizes given prior literature of (0.12 – small, 0.20 – medium, 0.31 – large), our study appears to possess the credibility to find significance. while our sample holds many similarities to the most recent data reported by the small business administration (2015) in its issue brief on “demographic characteristics of business owners and employees,” we see many differences that may be a result of our sampling methodology. for example, as shown in table 1, our sample skews younger than the sba sample, with a higher percentage of male respondents, who are generally more educated than those reported via the sba. other studies utilizing network sampling likewise report differences in similar areas (ingram et al., 2017; peake & watson, 2015; peake et al., 2015b), given that students tend to approach younger, better educated entrepreneurs. however, we do not believe these differences affect the quality of our analyses, given prior researchers likewise collected data with similar features using this methodology. table 1 samples compared to sba (2013) data sba sample* (%) sample (%) age under 35 15.6 27.8 35 to 49 32.7 39.2 50+ 51.7 33.0 gender male 64.6 71.3 female 35.4 28.7 race minority 14.1 10.1 non-minority 85.9 88.9 education high school or less 28.0 30.0 some college 32.8 16.7 bachelor’s or higher 39.2 53.4 *source: demographic characteristics of business owners and employees: 2013, sba office of advocacy the data collected via our survey are cross-sectional, since a single individual provided responses to the survey at a single point in time. as such, common method bias may be a concern (podsakoff, mackenzie, lee, & podsakoff, 2003). to mitigate potential concerns associated with common method bias, following podsakoff et al. (2003), we employed procedural techniques during the survey phase. we took care that wording of items was clear and to the point, avoided the use of dichotomous scales, and ensured respondents their anonymity would be protected through the 9 w. o. peake, d. barber iii, a. mcmillan,d. l. bolton, l. coder journal of small business strategy / vol. 29, no. 2 (2019) / 1-21 data reporting process since results are only reported in the aggregate, and we provided careful examination of the data via statistical techniques (podsakoff, et al., 2003). although we cannot ensure all biases are omitted, our precautions associated with data collection, as well as our statistical procedures detailed in the results section indicate that such biases does not impede us from meaningful analysis and interpretation of the results. measures and validity innovation level. the innovation level of the firm serves as the dependent measure. this is further broken into two separate measures, radical innovation and incremental innovation per the development of the measures detailed by subramaniam and youndt (2005). radical innovation addresses innovations that disrupt the firm and its products and services (dewar & dutton, 1986; meyers & tucker, 1989; subramaniam & youndt, 2005), with the following items: innovations that make your prevailing product/service lines obsolete, innovations that fundamentally change your prevailing products/services, and innovations that make your existing expertise in prevailing products/services obsolete. respondents were asked to indicate the number on a scale from 1 to 7, with 1 = much stronger and 7 = much weaker, that best represents their organization’s capacity to generate innovations in products/services compared to the competition. after respondents had completed the surveys, responses were recoded to 1 = much weaker and 7 = much stronger. incremental innovation indicates the level to which the firm builds on and further develops its current product and/or service offering(s) (chandy & tellis, 2000; subramaniam & youndt, 2005). items addressing incremental innovation include: innovations that reinforce your prevailing product/service lines, innovations that reinforce your expertise in prevailing products/services, and innovations that reinforce how you currently operate. given that radical and incremental innovation are highly correlated (0.511), yet are distinctly different approaches to innovation strategy (forés & camisón, 2016; subramaniam & youndt, 2005), we examine two separate models for the level of innovation associated with each type. both measures exhibit solid reliability, with a cronbach’s alpha of 0.845 for the three incremental innovation items and a cronbach’s alpha of 0.844 for the three radical innovation items. individual entrepreneurial orientation (ieo). bolton and lane (2012) developed a ten-item ieo scale with subscales of risk-taking, innovativeness, and proactiveness all with cronbach’s alphas above the generally accepted thresholds for scale development (nunnally & bernstein, 1994). averages of all scale items correlated with entrepreneurial propensity, which bolton and lane (2012) used to establish construct validity for the ieo scale in addition to its content and face validity and its internally consistent set of items. respondents were asked to indicate their level of agreement with the 10 items on a 7 point likert scale, where 1 = strongly agree and 7 = strongly disagree. once respondents had completed the survey, responses were recoded to represent 1 = strongly disagree and 7 = strongly agree. we averaged the 10 items as developed and validated by bolton and lane (2012) to form a single construct, which exhibited a cronbach’s alpha of 0.875. management control systems. using the management control systems (mcs) aspects of davila et al. (2009), we examine two types of mcs, financial management control systems and non-financial management control systems. we created two measures, one representing financial management controls with four items, and another comprising non-financial management controls with eight items that have primarily a human resources orientation. (see appendix 1 for a summary of these measures.) respondents indicated whether or not they had implemented a particular control for each item. items were then coded for whether the control was in place (x = 1) or was not in place (x = 0) at the time the survey was completed. averages were calculated for each construct with regards to implementation of the item, and the averages for both items ranged from 0 to 1. such coding has been common in the human resources literature with regards to high performance work systems (e.g., patel & conklin, 2012). in examining reliability, the four financial monitoring items exhibited a cronbach’s alpha of 0.923, while the eight other monitoring items exhibited an alpha of 0.902. given the high correlation between these two constructs (0.686), and the potentially different implications derived from each determined per the 10 w. o. peake, d. barber iii, a. mcmillan,d. l. bolton, l. coder journal of small business strategy / vol. 29, no. 2 (2019) / 1-21 literature review, we examine these measures separately for their potential effects on innovation level. controls. there are likely many other factors at play in the examination of the relationships about which we hypothesize. as such, we examine a number of other controlling factors that relate to both the individual owner/manager and the business itself. business level factors include the family business status of the firm, the number of employees, and business age. just under 50% of the respondents indicated that their business was a family business. given the literature’s examination of innovation within family businesses versus other small businesses (e.g., calabró et al. 2018; de massis, frattini, pizzurno, & cassia 2015), we look to family business status as a potentially important control. further, the number of employees as a proxy for firm size is often an important controlling factor that helps to account for resources at hand. we examine the total number of employees reported by the owner/managers. we also assess the business age as a proxy for stability, as older firms have overcome the threshold for survival. the business age was reported by the respondent in terms of number of years the business has been in operation as of the time the survey was completed. additionally, we examine individual-level factors of the owner/manager to account for influences aside from ieo that may hold important impacts. like many other studies in this realm, we asked respondents to report their gender, education level, and experience in previously starting a business. prior studies suggest that gender plays an important role in managerial decisions (kakabadse et al., 2015; quintana-garcía & benavides-velasco, 2016). as such, there may be important gender effects for implementation of mcs. gender of the respondent is in binary form, coded with 1 = female and 0 = male. because more educated business owners may adopt higher levels of management control, respondents were asked to indicate their highest level of education completed, on a scale with 1 = less than high school and 7 = doctorate or professional degree. since prior experience may give owner/managers more incentive to implement mcs, we examine whether the individual had previously started or owned anther business, reported as yes (x = 1)/no (x = 0). results to ensure the data are appropriate for undertaking our statistical procedures, we conducted precursory analyses regarding multicollinearity and common method bias. although efforts were taken with the methods to ensure the mitigation of common method bias to the extent possible, we examined the data for such biases via a harman one-factor test (chen, chang, & lee, 2015; roxas, ashill, & chadee, 2017; virick, basu, & rogers, 2015). the harman one-factor test suggests that no single factor dominates the analysis, since the items loaded onto eight factors with eigenvalues greater than one, and no factor accounted for more than 23% of the variance. as such, common method bias does not appear to preclude meaningful analyses with our data. additionally, multicollinearity does not appear to pose a serious limitation to the data since all vifs were less than 1.5 and the condition index was less than the commonly accepted threshold of 30 (hair, anderson, tatham & black, 1998; hair, black, babin & anderson, 2010). mean, standard deviation and correlations for the variables of interest are available in table 2. we tested our hypotheses via four models, with models 1 and 2 shown in table 3 and models 3 and 4 highlighted in table 4. for an overview of controlling variable effects only, please see the model 0 regressions in appendix 2. these two regressions suggest that the control variables do not unduly affect the associations in the analyses that follow. model 1 explores the relationship of ieo on incremental innovation, with financial management controls as a mediator. ieo (β = 0.4477, p < 0.001) has a powerful, positive direct effect on level of incremental innovation as hypothesized. further, ieo has a positive and significant effect on the implementation level of financial management controls (β = 0.0783, p < 0.01). however, there is no indirect effect for financial management controls on the relationship between ieo (β = 0.4273, p < 0.001) and level of incremental innovation for the firm. model 2 examines the effect of non-financial management controls as a mediator between ieo and incremental innovation level. this model indicates that ieo has a strong, positive effect on both the implementation of non-financial management controls (β = 0.0729, p < 0.01) and level of incremental innova11 w. o. peake, d. barber iii, a. mcmillan,d. l. bolton, l. coder journal of small business strategy / vol. 29, no. 2 (2019) / 1-21 tion (β = 0.4486, p < 0.001). further, as hypothesized, non-financial management controls (β = 0.6551, p < 0.01) partially mediates the relationship between ieo (β = 0.4008, p < 0.001) and level of incremental innovation, such that the direct effect is lessened but still significant. in model 3, we see that ieo exhibits a significant and direct effect on both the adoption of financial management controls (β = 0.0844, p < 0.01), as well as on radical innovation level (β = 0.4477, p < 0.001). financial management controls, however, do not mediate the relationship between ieo (β = 0.5000, p < 0.001) and radical innovation level. model 4 exhibits a strong direct effect of ieo on the implementation of non-financial management controls (β = 0.0742, p < 0.01) and level of radical innovation (β = 0.5116, p < 0.001). the implementation of non-financial management controls (β = 0.5988, p < 0.05) exhibits partial mediation of the relationship between ieo (β = 0.4672, p < 0.001) and level of radical innovation. our results indicate support of both hypotheses 1a and 1b in that ieo is positively and significantly associated with incremental and radical innovation, respectively. further, we find support for hypotheses 2a and 2c, given that non-financial management controls partially mediate the relationship between ieo of the owner/manager and incremental and levels of radical innovation, respectively. although owner/manager table 2 means, standard deviations and correlations mean std. dev. 1 2 3 4 5 6 7 8 9 1. family business 0.45 0.50 2. gender (female) 0.27 0.46 0.01 3. education level 4.11 1.59 -0.15* 0.09 4. no. of employees 18.94 28.89 -0.10 -0.11 0.19* 5. business age 21.13 27.24 0.06 0.02 0.02 0.34** 6. owner experience 0.39 0.49 0.03 -0.06 -0.05 0.14 -0.13 7. ieo 5.60 0.88 -0.01 -0.11 0.02 -0.04 -0.11 0.20** 8. financial mgmt. controls 0.78 0.36 -0.18 * -0.05 0.10 0.10 -0.15* -0.01 0.22** 9. other mgmt. controls 0.65 0.36 -0.17 * -0.06 0.13 0.30** -0.10 -0.08 0.18* 0.68** *p < 0.05, **p < 0.01 ieo is positively and significantly associated with implementation of financial management controls, there is no indirect relationship of financial management controls between the relationship of owner/manager ieo and either form of innovation. as such, we fail to find support for hypotheses 2b and 2d. discussion academic implications our results indicate that ieo is an important strategic posture to promote both radical and incremental innovation levels within small firms. further, ieo shows a positive and significant association with the implementation of both financial and nonfinancial mcs. however, only nonfinancial mcs partially mediate the relationship between ieo and innovation level (both incremental and radical). financial mcs do not exhibit an effect on innovation level, and as such, do not have an indirect effect. to our knowledge, our study is the first to explore the relationships among ieo as a strategic posture, mcs, and innovation level in the small firm context. we believe our results hold important implications both from academic and practical perspectives. financial mcs suggest a control of resources, and greater access and control of financial resources can be expected to promote innovation within the firm. our 12 w. o. peake, d. barber iii, a. mcmillan,d. l. bolton, l. coder journal of small business strategy / vol. 29, no. 2 (2019) / 1-21 table 3 regression models examining incremental innovation model 1 model 2 financial mgmt controls incremental innovation level incremental innovation level other mgmt controls incremental innovation level incremental innovation level family business -0.0932ᶧ (0.0503) -0.1271 (0.1373) -0.1029 (0.1383) -0.0673 (0.0487) -0.1282 (0.1380) -0.0841 (0.1351) gender (female) -0.0293 (0.0558) 0.0264 (0.1525) 0.0341 (0.1523) -0.0112 (0.0540) 0.0270 (0.1530) 0.0343 (0.1492) education level 0.0088 (0.0160) -(0.0160) (0.0436) -0.0183 (0.0436) 0.0064 (0.0154) -0.0158 (0.0438) -0.0200 (0.0427) no. of employees 0.0018ᶧ (0.0009) 0.0003 (0.0026) -0.0002 (0.0026) 0.0043*** (0.0009) 0.0003 (0.0026) -0.0026 (0.0027) business age -0.0021* (0.0010) 0.0030 (0.0027) 0.0035 (0.0027) -0.0025** (0.0010) 0.0030 (0.0027) 0.0046ᶧ (0.0027) owner experience -0.0176 (0.0517) -0.1521 (0.1412) -0.1475 (0.1409) -0.0552 (0.0502) -0.1537 (0.1422) -0.1175 (0.1392) ieo 0.0783** (0.0290) 0.4477*** (0.0792) 0.4273*** (0.0806) 0.0729** (0.0281) 0.4486*** (0.0798) 0.4008*** (0.0792) financial mgmt controls 0.2612 (0.1999) non-financial mgmt controls 0.6551** (0.2032) f 3.1376** 4.7974*** 4.4272*** 5.6157*** 4.7400*** 5.6567*** r2 0.1056 0.1529 0.1607 0.1752 0.1521 0.1974 n 194 193 total, direct, and indirect effects total effect x on y 0.4477 *** (0.0792) 0.4486*** (0.0798) direct effect x on y 0.4273*** (0.0806) 0.4008*** (0.0792) indirect effect x on y 0.0205 (0.0205) 0.0478* (0.0319) normal theory tests 0.0205 (0.0183) 0.0478* (0.0243) ᶧ p < 0.10, * p < 0.05, ** p < 0.01, *** p < 0.001 results are surprising in that financial mcs do not display a significant link to incremental or radical innovation level of the firm. given that dunk (2011) found that when used as a planning measure, budgets had a positive effect on product innovation and performance and that budgets were determined to have an adverse effect on product innovation and performance when used strictly as a control measure, we expected to see some effect consistent with findings in related research (abernethy & brownell, 1997; bisbe & otley, 2004) as well. our descriptive statistics indicate a high level of financial mcs implementation across our sample, with an average of 0.75. this suggests that, on average, firms in the sample had incorporated three of the four financial mcs items. we believe our results may suggest 13 w. o. peake, d. barber iii, a. mcmillan,d. l. bolton, l. coder journal of small business strategy / vol. 29, no. 2 (2019) / 1-21 table 4 regression models examining radical innovation model 3 model 4 financial mgmt controls radical innovation level radical innovation level other mgmt controls radical innovation level radical innovation level family business -0.1010* (0.0509) 0.0780 (0.1579) 0.0975 (0.1598) -0.0829 (0.0497) 0.0845 (0.1587) 0.1341 (0.1576) gender (female) -0.0143 (0.0574) 0.1490 (0.1776) 0.1517 (0.1781) -0.0034 (0.0558) 0.1454 (0.1784) 0.1474 (0.1757) education level 0.0102 (0.0163) -0.0271 (0.0505) -0.0291 (0.0506) 0.0108 (0.0159) -0.0281 (0.0507) -0.0346 (0.0500) no. of employees 0.0018ᶧ (0.0010) 0.0023 (0.0030) 0.0020 (0.0030) 0.0043*** (0.0009) 0.0024 (0.0030) -0.0001 (0.0031) business age -0.0023* (0.0010) 0.0009 (0.0031) 0.0014 (0.0031) -0.0027** (0.0010) 0.0009 (0.0031) 0.0025 (0.0031) owner experience -0.0324 (0.0526) -0.2681 (0.1632) -0.2618 (0.1635) -0.0626 (0.0515) -0.2588 (0.1644) -0.2213 (0.1626) ieo 0.0844** (0.0292) 0.4477*** (0.0792) 0.5000*** (0.928) 0.0742** (0.0285) 0.5116*** (0.0912) 0.4672*** (0.0915) financial mgmt controls 0.1933 (0.2326) non-financial mgmt controls 0.5988* (0.2366) f 3.4423** 4.8305*** 4.3057*** 5.8528*** 4.6891*** 5.0291*** r2 0.1192 0.1596 0.1629 0.1880 0.1564 0.1861 n 186 185 total, direct, and indirect effects total effect x on y 0.5163 *** (0.0906) 0.5116*** (0.0912) direct effect x on y 0.5000 *** (0.0928) 0.4672*** (0.0915) indirect effect x on y 0.0163(0.0239) 0.0444ᶧ (0.0295) normal theory tests 0.0163(0.0215) 0.0444ᶧ (0.0254) ᶧ p < 0.10, * p < 0.05, ** p < 0.01, *** p < 0.001 that financial mcs are a basis to pursue innovation, and as such do not have sufficient variability to yield significance in promoting innovation. some research has found that both personnel and social controls serve as a substitute for accounting (abernethy & brownell, 1997) and budgets in r&d settings. the results of our analyses allow an opportunity to build on prior work, which suggests a substitution effect for financial and nonfinancial mcs. using a contingency-based approach to manage people in organizations has been shown to be related to innovation and firm performance in large organizations. for example, schuler and jackson (1987) argued that firms which were more innovative used tailored hr policies that better supported their strategic goals rather than a “one size fits all” approach. a study 14 w. o. peake, d. barber iii, a. mcmillan,d. l. bolton, l. coder journal of small business strategy / vol. 29, no. 2 (2019) / 1-21 by berends, jelinek, reymen, and stultiëns (2014) extends this use of contingency policy implementation to the small firm context and illustrated how these types of firms were more innovative than their more structured counterparts. as such, from a contingency perspective we believe our research raises important implications for small business researchers in considering nonfinancial mcs configurations. our results showed that the use of non-financial mcs had positive impacts on innovation in small firms. support for this can be found in previous literature from the hr domain. studies by ceylan (2013), chadwick, super, and kwon (2015), and chen and huang (2009) found that using hr policies and practices that demonstrated commitment to the employees resulted in increased innovation and firm performance in large firms. we believe our results suggest what anecdotal evidence has also perceived, in that when job functions are described as relating to innovation and are measured based on their innovation output, innovation level within the firm will be higher. in addition to important academic implications, we likewise believe our work raises important implications for practitioners. practical implications the practical implications of our work are important for small business owners. our results suggest an association between high ieo and the implementation of both financial and non-financial mcs. however, only nonfinancial mcs appear to mediate the relationship between ieo and both forms of innovation. as such, it appears that the implementation of nonfinancial, primarily human resources based, mcs are important to the development of both radical and incremental innovation in small businesses. as shown in appendix 1, these items deal with clear objectives for employees and managers, with compensation linked to performance. this suggests that clearly planning managers’ and employees’ roles, and ensuring that meeting targets is tied to it, creates an environment in which innovation can take hold. however, additional, longitudinal data is needed to address causation rather than association. while ieo was directly tied to the implementation of financial mcs, there was no indirect effect of financial mcs on innovation. as can be seen in table 2, financial mcs hold an even greater positive association with ieo than nonfinancial mcs. it appears that high ieo owners and owner/managers implement such measures to monitor and control their businesses; however, the mere implementation of financial controls does not appear to provide an impetus for innovation. mcs associated with the “people” side of the business increases innovation productivity, which is an intuitive element. the lack of significance for financial mcs does not indicate a lack of importance to innovative small firms. quite the contrary is true. looking to our descriptive statistics, it is apparent that the small firms in our sample indicate a substantially higher implementation of financial mcs than other mcs. as such, other mcs may serve as a key differentiator or source of variability in innovation level emanating from high ieo owners and owner/managers. given our results and the data, the implementation of solid financial mcs may be a necessity rather than a differentiator. limitations and future research as is the case with any research study, ours suffers from limitations. we believe there are three primary limitations. first, our data are cross-sectional in nature, and as such may be subject to common method bias (podsakoff et al., 2003). however, precautions were taken during the data collection process to limit the impact of such bias, and statistical analyses suggest such biases do not preclude us from meaningful analysis and interpretation of the results. further, cross-sectional data are common in small business research, given the difficulty of collecting data from small business owners (e.g., patel & conklin, 2012; peake, cooper, fitzgerald, & muske, 2017; peake, mcdowell, harris, & davis, 2018). second, our data collection area was constrained to the southeastern united states, which may limit inferences to other regions. the data, however, skew similarly from the small business administration (2015) data compared to other recent studies. as such, we believe some valuable generalizations may be made across the united states with our results. implications for other countries, however, cannot be drawn since comparative data are not available. this is an important future area of investigation, given both potential ieo differences across culture, as well as varying 15 w. o. peake, d. barber iii, a. mcmillan,d. l. bolton, l. coder journal of small business strategy / vol. 29, no. 2 (2019) / 1-21 levels of emphasis on innovation. finally, our mcs measures likewise hold some limitation. although they are derived from well-cited and recognized sources in the mcs literature (davila & foster, 2007), clearly they do not comprehensively address all sources of mcs within the firm. given the basis in contingency theory, future research would benefit from more than a binary view of whether a particular mcs was implemented. for example, the degree of implementation and the owner/manager’s perspective of its relative importance to other mcs measures would be helpful in showcasing perceived relative importance. also, since the “people” side of mcs appears to strengthen the relationship between entrepreneurial strategy orientation and both incremental and radical innovation level, additional exploration of human resources controls for their effect on innovation level would prove a useful avenue of research from both academic and practical perspectives. conclusion this study set out to 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(2017). resource scarcity in smes: effects on incremental and radical innovations. management research review, 40(2), 195-217. 21 w. o. peake, d. barber iii, a. mcmillan,d. l. bolton, l. coder journal of small business strategy / vol. 29, no. 2 (2019) / 1-21 appendix 1 management control system variables financial management controls operating budget α = 0.923 cash flow projections sales projections routine analysis of financial performance against target non-financial management controls codes of conduct α = 0.902 written job descriptions written performance objectives for managers written performance evaluation reports linking compensation to performance definition of strategic (nonfinancial) milestones customer development plan (plan to develop market) headcount/human capital development plan appendix 2 regression models with controls only model 0 incremental innovation level radical innovation level family business -0.136 (0.147) 0.074 (0.170) gender (female) -0.023 (0.162) 0.063 (0.190) education level -0.010 (0.047) -0.016 (0.055) no. of employees 0.000 (0.003) 0.002 (0.003) business age 0.002 (0.003) 0.000 (0.003) owner experience -0.016 (0.149) -0.097 (0.173) f 0.208 0.186 r2 0.007 0.006 n 195 186 stra tegy critical business problems and advisors james r. lowry ball state university j lowryqngw. bsu. edu joseph d. chapman ball state university j chapmanqabsu.edu abstract many small and mid-si e businesses rely on external advisors when specific business problems arise. the obj ectives of this stitdy are threefold: i) to determine the most serious problenis encountered by small and mid-size businesses, 2) to identify the external advisors most important in resolving the problems, and 3) to determine the amount of tinie a businessperson spends with these advisors. overall, the respondents natned accountants, /awyers, bankers, family members, and trade associations as their most favored advisors. the most critical problems identified by respondents were sales/marketing, personnel/recruiting, organization/administration, government regulations, and/axes. introduction the owner or chief executive of a small or mid-size business often feels like someone suspended in air without any visible means of support. he/she is focused and driven, but may not have a reliable support system to assist in resolving problems. many small and mid-size businesses are characterized as having leadership dependent on the charisma of the chief executive, planning directed toward growth, administrative activities plagued by inefficiencies, and a relative lack of organization structure (brereton 1974; longnecker, moore, & petty 1997). by using external advisors when specific business problems arise, business people can compensate for the lack of a specialized internal staff. object i yes the objectives of this study are threefold: 1) to determine whether small and mid-size businesses with different specializations have distinct problems, 2) to identify the external advisors most important in resolving the problems, and 3) to determine the amount of time a businessperson spends with these advisors. a review of the literature in academic journals and the popular press indicates this research is unique because it identifies both the major problems of businesses and the advisors used to help resolve them. some literature identifies the major problems facing businesses (mehra, 1982; dwyer group, 1996; and arthur andersen 1997) while others identify important sources of information for those starting a business (gumpert & timmons, 1984; kuratko & hodgetts, 1998; laventhol & horwath, 64 joirrna/ of small bitsi ness strategy vo/. l /, //o. / spring/summer 2000 1985; national federation of independent business, 1995; stevenson & sahlman, 1988; stevenson & sahlman, 1992; &. timmons, 1999). an interesting study ranked the usefulness of business advisors based on their accessibility, informality, and richness of information (smeltzer, hook, &. hutt, 1991). none of this literature, however, indicates the particular advisors used to assist in resolving specific business problems. a significant aspect of this study is that it identifies and analyzes the major problems facing businesses and ranks in order of importance the external advisors used to help solve those problems. methodology a survey of the owners or chief executives of small and mid-size businesses was conducted. the indiana co orate director published by indiana business ma azine was the source of the businesses surveyed. only indiana-based firms are listed in the directory. businesses that had estimated sales of $ 19 million or less and employed 100 or fewer workers were selected as potential respondents. there were 1,404 firms that were in this grouping. a mail survey was sent to each of these firms resulting in 340 usable responses, which is a 24 percent response rate. a 30 percent survey response by all businesspeople is cited as high, and a response rate of 20 percent by small business firms is cited as excellent; therefore, a 24 percent response rate was considered highly acceptable (the editor, 1962; forsgren, 1989; and alreck & settle, 1995). a pilot questionnaire was developed and six businesspeople were interviewed either by telephone or in person to evaluate their reactions to the proposed research. from this pilotstudy and from the literature review, important external advisors and critical problems for small and mid-size businesses were identified. in the final survey instrument, the respondents were asked to rate in order of importance the five persons or organizations external to their firms whom they considered their principal advisors. all of the respondents'atings (from one to five) were added together to determine the final rankings for each of the principal advisors. the person or organization with the highest score was considered the most important advisor. the one with the second highest score was regarded as the second most prominent advisor and so on. based on the pilot study, the following classification choices for advisors were listed on the questionnaire: accountant, banker, independent business consultant, chamber of commerce representative, small business development center (sbdc), computer service company, family member, friend, government agency other than small business administration (identify the agency), insurance agent/broker, lawyer, small business administration, trade associations, university professor or university business/management center, private investor to my business, and other (identify). a second question on the survey instrument asked the respondents to identify in order of seriousness their five most critical business problems. the order of importance was calculated by adding together all of the respondents'ankings (from one to tive) and arriving at a total score for each problem. the problem that garnered the highest score was deemed the most serious one. the problem with the second highest score was viewed as the second most critical one and so on. respondents were also asked to state the number of hours during a typical month that an advisor spent on a specific problem. to arrive at this calculation, the responses related to the number ofhours that an advisor spent on each problem were summed and divided by the number of respondents to determine an average. 65 journal ofsmall busmess strategy vo/. //, na. / spring/summer 2000 results without a stalt of competent internal specialists to assist in solving business problems small and mid-size businesses frequently must rely on outside advisors. while some businesspeople rely on a single advisor to guide them through a variety of business problems, the results of this study indicate that most businesspeople recognize the expertise provided by specialists and use them as the situation warrants. conversations with the businesspeople completing the pilot-form questionnaire tended to confirm this conclusion. most important business advisors one of the objectives of this study was to identify the most important external advisors to small businesses. table i shows the most mentioned business advisors for the businesses surveyed without regard to the type of problem being solved. each business ranked their top five business advisors. a five was assigned to the advisor that each business ranked as their number one advisor. a four was assigned to the advisor that each business ranked second, and so on. the assigned numbers were totaled for all respondents resulting in the scores presented in table 1. as shown, the five principal advisors in order of importance were accountants, lawyers, bankers, family members, and trade associations. of particular interest is how the respondents'ankings for accountants, lawyers, and bankers substantially exceeded the rankings for the other advisors. a possible explanation is that these advisors provide specific, specialized services that many medium to small businesspeople cannot do on their own. therefore, since banking, legal, and accounting services are needed by most businesses and require a degree of expertise, these advisors are viewed as being very important to small and medium businesses. table i: most important business advisors order of score based on sum of importance respondent rankings advisor 1 1184 accountants 2 923 lawyers 3 549 bankers 4 396 family members 5 287 trade associations 6 269 insurance agents 7 262 friends 8 218 computer service co/s 9 162 consultants 10 121 private investors most important business problems the problems experienced by businesses are otten determined by the current business climate. for instance, during the current period of low unemployment, personnel/recruiting would be expected to be identified as a major business problem. the results of this survey supported this assumption. table 2 presents the most critical problems facing businesses in the marketplace today. in order of importance, the five most critical problems identified by respondents were sales/marketing, personnel/recruiting, organization/administration, government regulations, and taxes. according to the survey, sales/marketing (630) and personnel/recruiting (528) distance themselves substantially as the most important problems facing businesses today. these results show the continued need for businesses to emphasize 66 journo/ ofsmall business strategy va/. /i, na. l spring/summer 2000 the development of good marketing programs as well as the development and maintenance of a good personnel and recruiting plan. table 2: most important business problems of small and mid-sized businesses score based on order of sum of respondent importance rankings most important business problems 1 630 sales/marketing 2 528 personnel/recruiting 3 353 organization/administration 4 286 government regulations 5 272 taxes 6 226 working capital 7 218 competing with large firms 8 214 growth 9 208 pricing 10 205 inventory control key advisors for each important business problem one of the major contributions of this research was identifying which advisors are used for each of the important problems facing businesses. while some businesses may use multiple types of advisors given certain business problems, the results in table 3 indicate the key advisors used for each specific business problem. for example, the main advisors used by businesses to assist with sales/marketing problems were outside sales/marketing consultants and suppliers; whereas, the main advisors used for personnel/recruiting problems were lawyers and business service firms. of particular interest are the differences in rankings for accountants and lawyers compared to the other business advisors. obviously, these two types of outside advisors are very important to businesses in resolving their ditticult problems. bankers and family members also appear to be more important than other advisors in handling some key business problems, whereas, consultants and suppliers were important advisors for sales and marketing problems. since sales and marketing problems were ranked as the most important problems facing small and medium businesses (table i), the results in table 3 show the importance for these businesses to develop good working relationships with their suppliers as well as with certain outside marketing or sales consulting agencies. hours spent by advisors respondents were asked to indicate the average number of hours over the period of a typical month that an advisor spends on a problem with the respondent. table 3 presents the average number of hours spent by different types of advisors on each of the most important problems (shown in parentheses). because of the difficulty associated with the recall of an event, the number of hours a month that a respondent recalls spending with an advisor is only an estimate and should be viewed with some skepticism. if the estimates were always correct, one would expect that the greatest number of hours would be spent with the most important advisor and fewer hours with the less significant advisors. the results indicate that this behavior did not always occur. possible explanations are that the main advisor simply may be 67 journal ofsmall businrss stratrgv va/. / i, no. / spring/summer 2000 able to deal with the particular problem more quickly than some of the secondary advisors or the advisor needs to learn less about the problem since he/she already knows the business. as indicated in table 3, when dealing with a sales/marketing problem, businesses spend an average of 57 hours per month with the external sales/marketing consultants. in certain instances, companies may use suppliers as advisorswhen dealing with sales andmarketing table 3: key advisors ranked for each important business problem by category* (in parentheses are the typical number of hours during a month that the advisor spends on the problem)" i. sales/marketing iv. government regulations viii. growth problems advisors advisors advisors i. consultants (57) i. trade associations (7) i. accountants (19) 2. suppliers (33) 2. lawyers (5) i. bankers (9) 3. family members (22) 3. accountants (16) i. family members (8) 3. business service firms (20) 4. consultants (5) i. consultants (6) 3. friends(8) 5. friends (80) 5. friends (4) 6. trade associations (4) 6. trade associations (4) ii. personnel/recruiting v. taxes/tsx planning ix. pricing problems advisors advisors advisors i. business service firms (12) i. accountants (6) i. accountants (6) i. lawyers (7) 2. lawyers (14) 2. consultants (17) 3. consultants (19) 4. trade associations (6) vl availability of working x. inventory control capital advisors iii. organization/ advisors 1. computer service administration i. bankers (38) companies (7) advisors 2. accountants (53) 2. consultants (7) i. consultants (14) 3. accountants (6) 2. accountants (11) vil competing with large 4. family members(7) 3. family members (5) firms 3. trade associations (5) advisors 5. lawyers (3) i. friends (6) i. trade associations (3) 3, consultants (9) 3. suppliers (8) because an/y the advisors that recetvedfrequent mentiane are listed, the number of advisors for each problem dier. for some problems there tmre ties in the ran ki ngs ofadvisors. vv ln severalinstances latter ranked advisers spent more hours on a problem than higher ranked advisors problems. according to the survey, businesses spend an average of 33 hours per month on sales/marketing problems with their suppliers. of particular interest in table 3 are the results found when dealing with the diaiculties attributed to government regulations. the most important advisors used for these particular problems are trade associations while the f/rh most mentioned advisors are friends. note, however, that businesses will spend an average of only 7 hours per month with trade associations on government-regulation problems while spending 80 hours per month on this same problem with friends. one possible explanation is that you usually do not have to compensate friends, who may be other businesspeople, to 68 journal of small business srra/egy vo/./i, no. i spring/summer 2000 discuss mutual problems; and. perhaps, the atmosphere for discussing a problem with friends is much more casual. another example of where more time is spent with a secondary advisor is in dealing with pricing problems. notice that the most important advisors for pricing problems are accountants and the second most mentioned advisors are sales/marketing consultants. although accountants are the most important advisors used for this problem, more time is spent per month on pricing problems when using sales/marketing consultants as advisors. a possible explanation for these results is that while accountants are often needed as advisors on pricing problems, the problems the accountants deal with may not be extremely time consuming. however, the results could also indicate that because of previous work with a firm, accountants are simply more efficient at dealing with its pricing problems. the results of table 3 give businesspeople and future businesspeople an idea of who to use for each general type of business problem and how much time they might need to spend with each type of advisor i'or each problem. concl,usions the results of this survey indicated that the critical problems identified by the respondents reflected the business climate of the late 1990s. in order of importance, respondents declared their five most critical problems were sales/marketing, personnel/recruiting, organization/administration, government regulations, and taxes. to assist in resolving their sales/marketing problems, the respondents relied mainly on consultants. when respondents encountered personnel/recruiting difficulties, they were equally divided between using either lawyers or business service firms as their most valued advisors. to help resolve organizational and administration problems, respondents depended on consultants. the key advisor to assist businesses to become responsive to government regulations was a trade association. for taxes and tax planning problems, accountants were the overwhelming choice of respondents. limitations while this research extends other studies by matching business problems to the advisors most favored to resolve the problem, there are some limitations. the research for this study was not designed to be theoretically oriented. the research was structured to be more practical, applied, exploratory research with the idea of identifying information that could be useful and interesting to business managers/owners. more precisely, theoretically oriented research can be used to build on these findings. all of the respondents were based in indiana, possibly giving the results a midwestern bias. however, the midwest is often identified as a representative demographic region of our nation. indiana communities such as indianapolis, fort wayne, and marion, are frequently used for test marketing. because of their demographics, those cities are cited as a microcosm of the united states market. still, comparative data from a larger number of firms nationwide would be useful. the presence of hispanic, asian and other minority businesspeople, particularly in the west, southwest, and major metropolitan centers, may generate different responses to this survey. implications the results of this study should assist small and mid-sized businesses to recognize the key advisors for particular business problems. a hierarchy of significant advisors for a problem is recognized. this allows a businessperson that is experiencing a problem to identify the advisors that others turn to for assistance. the respondents'nswers indicated that marketing and personnel/recruiting problems were major concerns affecting all types of businesses. 69 journal ofsmall business strategy vol. i i, no i spring/summer 2000 for accountants, lawyers, and bankers, this study demonstrates that a significant market exists among small and mid-size businesses for their expertise on specific business problems. the research indicates that trade associations and insurance agents are also important advisors to small and mid-size businesses. to serve their members more effectively, trade associations may wish to strengthen their advisory function. insurance agents should recognize that by providing a comprehensive plan for controlling a firm's risks, the agents can enhance their value to the small and mid-size businesses. many businesspeople rely on insurance agents to assist them in planning for the succession and continuity of their businesses ai)er they retire, requiring an agent to build strong personal relationships with business owners. another implication of this study is the importance of family members and friends to the owners or chief executives of small and mid-size businesses. trust, loyalty, expertise, similarity of viewpoints, and cost-free counsel are factors that cause businesspeople to consult with family members and friends. references alreck, p. l, and settle, r. b. (1995).the surve research handbook. burr ridge, il: richard d. irwin, inc. brereton, p. r. (1974). the qualifications for entrepreneurship. journal of small business nmn (0 b ), 1-22. businessman re advertising: 'yes, but...? (1962). harvard business review 21, (may-june). forsgren, r. a. (1989). increasing mail survey response rates: methods for small business researchers. journal of small business mana ement 27, 61-66. gumpert, d. e. and timmons, j. a. (1984). the enc clo edia of small business resources. new york, ny: harper & row, 48-59. kuratko, d. f. and. hodgetts, r. m (1998).entre reneurshi a contem ora a roach new york, ny: the dryden press, (4), 326-328. longnecker, j. g., moore, c. w., and. petty, j. w (1997). small business mana ement. cincinnati, oh: south-western college publishing, 374-376. mehra, s. (1982). operational problems of small business in the mid-south. mid-south business journal (3'uarter) 6. s~i(b i i (1992). w 91 2 . dc: tb nfi ~ f 9 smeltzer, l., van hook, b. l and hatt, r. w. (1991). analysis of the use of advisors as information sources in venture strategies. journal of small business mana ement (july), 10-20. stevenson, h, and sahlman, w. h. (1988). how small companies should handle advisors. harvard business review (march-april), 28-34. stevenson, h. and sahlman, w. h. (1992). entre reneurial venture. boston, ma: harvard business school press, 295-302. surve of small and mid-sized businesses trends for 1997 (1997). st. louis, mo: arthur andersen 15. surve of 250 small businesses (1996).waco, tx: dwyer group. thechallen estoentre reneurs asurve amon owners of rivatel -heldbusinesses(1985). new york, ny: laventhol & horwath. timmons, j. a. (1999).new venture creation. new york, ny: irwin mcgraw-hill, 330-332. 70 journal ofsmall business strategy vol. i i, no. i spring/summer 2000 james r. lowry is professor and chairman, department of marketing, ball state university, muncie. in 47306. he is affiliated with the marketing management association, anterican marketing association, and the national association of purchasing managentent. he received his ph.d. from the ohio state university. he has authored or co-authored introduction to business, retad managentent, and principles of marketing textbooks. his articles have been published in business horisons, journal of ptofessional services markettng, marketing education review, cpcu journal, international journal of retail & distribntion, and journal of business ethics. his research is focused on marketing management and retatl management. joseph d. cltupmun is an associate professor of marketing at ball state university and the associate director of ball state university's professional selling institute. he earned his plr d. from virginia polytechnic ctnd state university (i987). hejoined the ball state faculty in )987. before obtaining his ph.d., dr. chapman was a sales representattve for burrough's corporation (currentl& unisys) and burrough's wellcome, inc. (currently glaso-wellcome). dr. chapman has published research in several top btrsiness journals, e.g., jounral of personal selling and sales management, journal of marketing theory and practice, journal of business ethics, the review of business, and markett'ng education review. dr. chapman has also worked on several sales and marketing consulting projects at the national, regional, and local levels. 71 siki zei'y the competitive behaviors of small retailers: examining the strategies of local merchants in rural america michael j. rubach university of central arkansas mrubach@mai iuca. edu jeffrey e. mcgee the university of texas at arlington jmcgeeuta. edu abstract mass merchandisers, discount chain stores, category killers, and e-commerce are changing the retail industry through innovations in marketing and service. driven by increased competition and discriminating customers, small, local retailers are searching for ways to gain and sustain competitive advantage. this study examines the competitive behaviors and performances of 236 retailers located in rural nebraska. the findings indicate that retailers which adopted competitive behaviors with a goal of low cost/low price leadership were most successful. however, retailers using a combination or value-oriented strategy were also successful. retailers which adopted competitive behaviors that constitute solely a differentiation strategy and those which had no clearly defined strategy were the worst performers. these findings suggest that in order to achieve competitive advantage, rural retailers should follow a value-oriented strategy, being effective at both cost reduction and competitive pricing while offering unique products and services. introduction shifting demographics and changes in consumer purchasing patterns, coupled with new and stronger competition, are putting increased pressure on local merchants. e-commerce and mail order threaten the very concept of "brick and mortar" retailing. large mass merchandisers and discount chain stores are altering the landscape of retailing across america (mcgee, 1996). in these increasingly competitive environments, small local retailers are searching for new formulas to achieve competitive advantage. despite the challenges of the competitive environment, many retailers are thriving, and retailing continues to be an attractive avenue for entrepreneurs. however, little empirical research has attempted to systematically identify which specific competitive behaviors actually help small merchants cope with the changes occurring within the retailing industry. the literature provides little guidance on how small local merchants can compete effectively in this dynamic environment. this study attempts to help fill this void by examining the relationships between performance and the competitive behaviors of 236 retailers located in rural nebraska. 65 journal of small business strategy vo/. /2, no. 2 fall/winter 2002 models of competitive advantage should attempt to capture the finer-grained patterns of activities (mauri & michaels, 1998; porter, 1996). prior research has addressed the wide variety of issues related to the appropriateness of competitive behaviors among larger organizations and manufacturing and other non-retail businesses. this study's contribution is its examination of the competitive behaviors of local retailers. while retailers enact identifiable business level strategies, they most likely do not set down or consciously develop these strategies. this study's premise is that the existence and effectiveness of certain competitive behaviors among small merchants may not be readily apparent. specifically, this study first identified distinguishable patterns of competitive retail behavior using taxonomybuilding procedures. these procedures produced four generic retailing types which reflect how the retailers compete. these four retailing types were then compared across a series of performance measures to determine which competitive behaviors, if any, lead to competitive advantage (i.e., superiority in performance outcomes). strategies for retailers lt should not be presumed that small retailers cannot be innovative in response to the competitive behaviors of larger competitors such as large mass merchandisers, category killers and discount chain stores (kirchhoff, 1994). small businesses, despite the liabilities of newness and smallness, adopt distinguishable competitive methods or behaviors, whether articulated or not (mcgee & rubach, 1997; mcdougall & robinson, 1990). these competitive behaviors are a major factor in their performances (droge, vickery, & markland, 1994). while there is some evidence of a general lack of variety among the competitive behaviors associated with small business success, small business owners do have options in their sources of advantage (chaganti, chaganti, & mahajan, 1989), and the range of choices may be more robust than previously thought (carter, steams, reynolds, & miller, 1994). competitive behaviors, methods, or items are viewed as potential strategic abilities which a firm acquires, sustains, or improves with a goal of either differentiation or lower costs (droge et al., 1994; miller, 1988; porter, 1980). early research debated whether small businesses should avoid direct competition with large firms and adopt "niche" strategies. small firms, with limited resources, skills, and capabilities, were advised to design specialized products or services for targeted markets which were generally overlooked by larger, more established firms (carter et al., 1994). competition is dynamic and firms advance by continuously taking actions and responding to the actions of their competitors. strategic management research focuses on the competitive behaviors of firms and on firm performance as an outcome of a series of competitive actions (d'aveni, 1994). traditional strategic thought suggests that organizations should pursue a singular strategic approach of either low cost leadership or differentiation (porter, 1980, 1985; cappel, wright, wyld, & miller, 1994). low cost leadership suggests that firms seek to be the low cost producer/provider in a market or industry. for retailers, this often translates into a no-frills approach because the primary means of attracting customers is through lower prices. this competitive behavior is offen associated with cost controls and economies of scale. achieving cost leadership typically requires a high relative market share and aggressive pricing (porter, 1980; miller & friesen, 1986). above average returns are anainable because cost leaders can match the prices of their most eaicient competitors. retailers can typically achieve cost advantages by adopting the following competitive behaviors: inventory control methods, efficient transportation systems, purchasing practices, such as quantity discounts, elticient staffing, use of new technologies, which include point-ofsales technologies and computers, and efficient use of aoor space (cappel et al., 1994). this 66 journal ofsmall business strategy vol. 12, no. 2 fall/ivinter 2002 approach is oaen identified with mass merchandisers such as home depot, kmart, and lowe's. small discount chains such as dollar general and family dollar have also succeeded by implementing a low cost strategy. differentiation, on the other hand, characterizes firms striving to develop a product or service that is unique. differentiation can be based on image or exclusivity, grounded in high quality merchandise, unique products, or superior service (brennan & lundsten, 2000). its aim is to create brand loyalty and price inelasticity. differentiation is tailored to the retailer's target market segment and customer characteristics. it is oaen identified with specialty retailers such as the body shop, sharper image, and brookstone. it is also most closely identified with small retailers that adopt competitive behaviors aimed at specific consumers or product niches. the methods used to differentiate are almost unlimited. porter (1980) groups all forms of differentiation into one category, while mintzberg (1988) argues that low-cost leadership is but another form of differentiation, and that cost leadership, based upon cost minimization, does not create competitive advantage by itself. for mintzberg, low-cost leadership must result in below average prices to provide competitive advantage. kotha & vadlamani (1995) found empirical support for porter's typology of distinct generic business level strategies, but little support for mintzberg's typology. for purposes of this study, low-cost leadership is deemed to produce low price leadership, and the constructs of low cost leadership and lowprice leadership have been consolidated in this study as one competitive behavior. questions remain as to which competitive behaviors are most appropriate for small retailers. while small business strategists have begun to examine which specific competitive behaviors a firm should adopt, the classification schema of generic business strategies continues to be useful in characterizing the goals of competitive behaviors on the simplest and broadest level. the generic strategies framework accentuates the need for companies to choose specific competitive methods and to make trade offs in adopting specific competitive behaviors (porter, 1996). clearly defined competitive behaviors historically, strategic management theory has suggested that using a single, clearly defined strategy was most appropriate in achieving competitive advantage, so experts advised organizations to adopt clearly defined strategies that emphasized either superior differentiation or lower overall costs and prices. the early literature advised small business owners to pursue a narrow or focused strategy, avoiding direct competition with large firms (broom & longnecker, 1979). firms were advised to concentrate on specialized products or localized operations or on market segments where service and customization could create unique advantages (hosmer, 1957). firms lacking emphasis and clarity or following inconsistent strategies or strategies with no apparent focus are characterized as "stuck in the middle" or "straddlers" (porter, 1985; hodgetts, 1999). these firms suffer lower profitability because they lack market share, do not possess the resolve to pursue a low-cost approach, have not differentiated their products or services, or have not focused upon a specific segment. by trying to be all things to all people, they set themselves up for mediocrity (hodgetts, 1999;porter, 1985). prior research has generally supported the notion that a lack of strategic clarity (i.e., straddling or being stuck in the middle) can be detrimental to an organization's performance. for example, robinson and pearce's (1988) cross-industry study strongly indicated that firms which pursued inconsistent strategies were underperformers. hooley, lynch, and jobber's 67 journal ofsmall business strategy vo/. /2, no. 2 fa///iv/uter 2002 (1992) study of uk retailers provided similar empirical support for the pursuit of a single, clearly defined strategy over a muddled or inconsistent strategy. finally, conant, smart, and solano-mendez's (1993) study of small apparel retailers also suggests that firms which have chosen to compete in clearly defined ways outperform those firms whose competitive behaviors are characterized by a lack of emphasis or clarity. the patterns of competitive behavior should constitute a specific strategy (droge et al., 1994). theory suggests that firms which follow a discrete/distinct strategy will outperform those firms which follow a strategy that positions them as "stuck in the middle" or "straddlers." this leads to the first hypothesis: hypothesis it rural retailers whicli follow a discrete generic strategy will outperform rural retailers which have an inconsistent or muddled strategy. value-oriented or combination competitive behaviors although there is general agreement that an organization's competitive behaviors should constitute a clearly defined strategy, many experts argue that companies should not limit their competitive tactics to either differentiation or cost/price leadership. instead, they suggest a value-oriented strategy which encompasses both differentiation and cost/price leadership. porter (1980, 1985) has argued that low cost and differentiation strategies were diametrically opposed, and that firms in most circumstances could not effectively pursue both strategies (hodgetts, 1999). murray (1988), wright (1987), and miller (1992), all counter that mixed or hybrid strategies (value-oriented strategies) have distinct advantages and that pursuing a discrete strategy may be dangerous, leading to lower performance. for example, the goal of differentiation is consistent with a low-cost strategy or position especially when the product or service can be differentiated, switching costs are low or reasonable, and there is a potential for cost reductions (hill, 1988). thompson and strickland (2001), among others, have delineated a strategy which contains aspects of both differentiation and low-cost. we have called this generic business strategy: value-oriented (see figure i ). customers are becoming increasingly discriminating in their purchasing habits and are demanding more product or service for less money. competitiveness among providers of such products or services is quickly becoming dependent upon a merchant's ability to offer higher quality products or unique products at lower costs. providing value to the customer has emerged as the primary goal of many organizations, and a multifaceted or combination strategy provides an attractive means of achieving this objective. achieving both cost leadership and differentiation may seem inconsistent because differentiation is usually costly. for porter (1996), the generic business strategies framework continues to identify the need to choose between these contradictory strategies and make tradeo/ts between these incompatible positions. while porter admits that a company can pursue both lowest cost and highest quality at the same time, he continues to argue that it is rare that a company can improve both simultaneously, unless the competition is inept (hodgetts, 1999). however, there is empirical support for a combination or value-oriented strategy. miller and dess (1993), for example, found that not only are combinations of generic strategies possible, but that the combination strategies are also quite profitable, especial)ye combination of low cost and high differentiation. experts have suggested that 68 journal ofsmall business strategy vol. 12, no. 2 falllivinter 2002 figure i the five generic competitive strategies type of competitive advantage being pursued lower cost differentiation a broad cross-section i a narrow buyer segment (or market niche) retailers can use a combination of low-cost behaviors together with differentiation (pitelis & taylor, 1996; cappel et al., 1994). moreover, the evidence suggests that certain retailers have adopted competitive behaviors characterized by efforts at both differentiation and cost leadership (helms, haynes, & cappel, 1992). a retailer can pursue a strategy based upon image or exclusivity and high quality merchandise, while maintaining low costs through the competitive methods of efficient staffing, space use, and inventory controls. the cost leader can preempt rivals by creating entry barriers, while differentiation creates a sustainable competitive advantage through its responsiveness to customer tastes. the value-oriented or combination strategy has been identified with image conscious retailers such as dillard's department stores (cappel et al., 1994) and marks & spencer, the uk apparel retailer (pitelis & taylor, 1996). the potential for cost savings exists in a rural market. selling costs tend to be lower due to family ownership and operation, and property rental costs and employee wages are also favorable (lowry, 2000). these factors lend themselves to the pursuit of a low-cost focus and the adoption of a combination or hybrid strategy. this leads to the second hypothesis: hypothesis 2: rural retailers whose competitive behaviors emphasize a value orientation comprising both a high degree of differentiation and efforts at pricelcost leadership will out perform all other rural retailers. methodology context and sample the unit of analysis for this study is the local store and its competitive behaviors. this study's context is the rural market where a mass merchandiser (wal-mart) had recently opened a 69 journal of small business strareg3 vol. 12, no. 2 fall/ivinrer 2002 store. the sample was drawn from all retailers in the counties surrounding four nebraska cities with populations of less than 25,000 inhabitants and where the nearest metropolitan area was at least twenty miles away. the sample was equivalent to a census (i.e., a total population) of the 658 retail merchants in and around those four communities. a crossindustry study was used to avoid the problem that the competitive methods utilized by the merchants evolved only from unique industry characteristics (carter et al., 1994). two hundred thirty-six useable responses were received, a response rate of approximately 36 percent. to detect any potential non-response bias, early and late responding firms were compared (armstrong & overton, 1977). this extrapolation method assumes the late or last respondents in a sample are similar to theoretical non-respondents. the similarities which were found between the early and late responders in this study can be interpreted as suggesting the absence of non-response bias (miles & arnold, 1991).although this evidence indicates that non-response bias is not a major problem in this study, it cannot be assured that the non-respondents did not differ in important ways from the respondents. while it is unlikely that sample selection bias drove the results, more confident generalization would only be demonstrated by additional studies. sam pie profile most of the retail stores in the sample were small in terms of annual revenues and number of employees. nearly 64 percent of the sampled stores reported annual sales of less than $500,000. roughly 78 percent of the businesses employed fewer than five employees with a median of three full-time employees. these retailers would be classified as small according to the small business administration which defines a small retail business as a retail store having fewer than 100 employees (gaskill, van auken, & manning, 1993). these retailers are also located in rural areas. a rural area is an area located outside a united states census bureau's "metropolitan statistical area" (msa) (trinh & o'onnor, 2000). all of the counties covered by the sample are not in a msa; the only msas in nebraska are those in lincoln —lancaster country, and the omaha metropolitan area douglas county. in terms of business longevity/age, 29 percent of the respondents reported that their stores had been in business for less than ten years, while 45 percent indicated they had been in existence for more than twenty years compared to the national average of 34'/s (see table i). compared to retail industry standards, the sample's demographic characteristics are quite similar to national averages in the areas of employment and annual sales (statistical abstract of the united states, 1998). in terms of business longevity, sample respondents appear to be somewhat more mature than the national average. in any event, the sample appears to adequately reflect the population of small retailers in the united states. survey instrument a questionnaire was used to collect the data. a modified version of dillman's (1978) total design method was used. the questionnaire was pretested on six retailers (not included in the sample) to determine if there were any interpretation difficulties. no problems were noted and the pretest respondents were not troubled by any of the questions or their abilities to rate their companies. a booklet comprising a cover letter of explanation and the questionnaire, together with a postage-paid return envelope, was sent to each retailer. a reminder postcard was mailed approximately one week later to all potential responders. finally, duplicate booklets with a follow-up cover letter and postage-paid return envelope were re-sent to nonrespondents approximately three weeks later. the questionnaire items requested merchants to identify and rate their competitive behaviors along 24 dimensions using a five-point likert scale. the scale was anchored by the labels "no emphasis" and "major, constant emphasis." the competitive behaviors comprised 70 journal ofsmall business strategy vol. 12, no. 2 fall/ivinrer 2002 activities which local managers/owners can implement. the dimensions of competitive behavior were adopted from previous empirical studies (robinson & pearce, 1988; conant et al., 1993) because they have been shown to be valid measures for ascertaining the archetypes of generic strategies (kotha & vadlamani, 1995; dess &. davis, 1984). slight modifications were needed to improve the appropriateness of certain items because the previous studies addressed the competitive behaviors of manufacturing firms rather than small independent retailers. such modifications do not, however, alter this proven method for identifying which competitive behaviors constitute generic strategies. table 1 summary statistics (n=236) annual revenues (in dollars) percent less than 100,000 18 100,000 to 250,000 21 250,000 to 500,000 24 500,000 to 1 million 20 1 to 5 million 13 more than 5 million 2 total 100 employment (number of full-time employees) percent fewer than 5 78 between 5 and 10 14 between 10 and 15 5 more than 15 3 total 100 store age (number of years) percent less than 5 8 between 5 and 10 21 between 10 and 20 26 more than 20 45 total 100 three measures of performance were used in this study. the performance of the sampled firms was operationalized using subjective self-report measures (dess, lumpkin, & covin, 1997). each local retailer was asked to compare its performance to other local retailers in the community along three dimensions: net income after taxes, total sales growth over the past three years, and overall store performance/success. for this performance measure, respondents were requested to use a seven-point scale anchored by the labels "much better" and "much worse." this subjective method was chosen over objective data because small firms are often reluctant to disclose financial information, objective data are not readily available, and reporting of the data may be inconsistent across industries (hooley et al., 1992). also, due to the cross-industry design of this study, making objective comparisons may be misleading (covin & slevin, 1989). previous research has found that subjective assessments of organizational performance are quite consistent with objective performance data both internal and external to the organization (hooley et al., 1992; dess & robinson, 1984). also, organizational performance measures when assessed comparatively or relatively tend to be more meaningful (conant et al., 1993). the use of subjective self-reports for small business 71 journal ofsmall business strategy vol. /2, no. 2 fall/winter 2002 performance has been used extensively in prior research and is recognized as an appropriate methodology to determine performance (dess et al., 1997). the questionnaire also solicited descriptive information regarding merchandise categories, age/years in operation, approximate annual sales, and number of employees. results one purpose of this study was to determine whether patterns of competitive behavior among rural retailers exist. this study did not presume that certain strategies exist or that small business owners can identify or articulate their strategies or the goals of their competitive behaviors. in all likelihood, rural merchants did not consciously develop or set down in writing their strategies. accordingly, factor analysis of the responses was used to identify how many distinct patterns of competitive behavior actually existed. the details of the factor analysis are provided in the appendix. another purpose of this study was to determine whether retailers are pursuing clearly defined patterns of competitive behavior. to identify the pattern, cluster analysis was employed. nonhierarchical cluster analysis techniques are appropriate to identify similar entities from the characteristics they possess (hair, anderson, & tatham, 1987), which is appropriate for identifying those retailers using a distinct, clearly defined strategy or a combination strategy (hooley et al., 1993). the use of cluster analysis has been quite prevalent in identifying generic business strategies and their performance differences (wagner & digman, 1997; wright, kroll, tu, & helms, 1991; dess & davis, 1984; hambrick, 1983). prior research of generic business strategies of retailers produced factor and cluster analyses that differ from this study's results. this study used entirely different measures for discerning the presence of generic business strategies, and did not assume that a specific strategy or archetype existed. this study attempted to allow the data to identify the strategies pursued by retailers. none of the prior studies attempted to ascertain whether retailers pursued value-oriented or combination strategies. helms et al. (1992) in their study of forty publicly-traded retailers with annual sales of more than $ 1 million used archival data and only two strategy variables (low cost or differentiation). they did not consider combination or value-oriented strategies. their cluster analysis found that few (only eight of 40) companies followed a low cost/low price strategy. hooley et al. (1992) in their study of uk retailers used five dimensions of marketing strategies: objectives, focus, targeting, quality, and price, which are quite different from the competitive behaviors studied herein. the details of the cluster analysis are also provided in the appendix. the cluster analysis resulted in five clusters. each cluster grouping was labeled to capture the nature of each strategic behavior: variety discounters, broad differentiators, focused differentiators, muddled strategists/straddlers, and value-oriented merchants. the cluster profiles are presented in table 2. to determine performance ditterences among utilized strategies, each strategic cluster was compared, using anova and tukey-kramer paired comparisons, over the three performance measures (net income after taxes, total sales growth over the past three years, and overall store success or performance). as the anova results suggest (see table 3), significant differences exist on all three performance measures. the tukey-kramer paired comparisons also produced identifiable patterns of performance. retailers which followed a low-cost/low-price variety strategy (variety discounters), which is most akin to a low-cost leadership/low-price strategy, outperformed the other retailers on the performance measures of net income a(ter taxes and overall store performance. the "variety discounters" also outperformed the "broad differentiators" and the "muddled strategists/straddlers" on three years sales growth. retailers which followed a combination or multifaceted strategy (value-oriented merchants) 72 journal af small business sira/egp val. /2, /vo. 2 fall/winier 2002 also reported significantly higher net income aaer taxes and overall store performance than groups following either a differentiation strategy (broad differentiators and focused differentiators) or the "muddled strategists/straddlersy also, except for the "focused differentiators," the "value-oriented merchants" perceived better three years sales growth than the remaining groups. only the "focused differentiators" exhibited any significantly higher performance among the three lower groups; their three year sales growth was higher. ln terms of failed strategies, the "broad differentiators" and the "muddled strategists/straddlers" were clearly the weakest performers. table 2 cluster profiles cluster i: variety discauniers (n = 16) the competitive orientation of this group is one that seeks to emphasize both low prices and a variety of products. cluster 2: broad differenrialars (n = 45) the competitive orientation of this group is one that seeks to offer a wide variety of differentiated products. this group of retailers does not emphasize low prices. cluster 3: focused differenfiarars (n = 30) the competitive orientation of this group emphasizes differentiation and the careful monitoring of competitors'ricing and promotional activities. this group does not emphasize factor 3. cluster 4: muddled siraregisis/sfraddlers (n = 55) the competitive orientation of this group is unclear. cluster 5: value-oriented merchants (n = 88) the competitive orientation of this group is one that seeks to provide value to their customers by emphasizing both differentiation and low price. the retailers in this group are not concerned with the pricing and promotional activities of their competitors. table 3 results of analysis of variance performance 'p. ten pifferentiators pitferentiators 'strategists/ oriented unirorior p ' (ci) (c2).,(c3) r straddlers merchants p-voice ccrnporjsprr (c4) .; (c5); c1 &aii; 5.30 3.9g 4.03 3.90 4.66 3 99"'s&c2,c3, after taxes three year 5 14 3.85 4.09 3 63 4 53 3 girs ~ ci,c3,c5 sales growth c2,c4 c 1&aii; 5.10 3.65 3.04 3 4g 4 11 3 1orrr c5&c2 c3 performance '"p & 00/ 73 journal ofsmall business strategy vo/. /2, no. 2 fall/winter 2002 table 3 (continued) descriptive statistics for performance variables performance measure mean standard deviation net income after taxes 3.35 1.25 three years sales growth 4.13 1.38 overall store performance 3.88 1.57 to summarize, a strategy emphasizing low costs/low prices m~a be viable. only sixteen retailers belonged to this group, however, so this particular finding may be somewhat misleading. a value-oriented or combination strategy, on the other hand, is clearly an effective means of achieving a competitive advantage. the results also clearly suggest that a muddled or ill-defined strategy should be avoided. discussion the purpose of this study was twofold. first, we attempted to determine if rural merchants exhibited distinct patterns of competitive behavior and then determine whether following a discrete generic strategy produced superior performance. the results of the factor and cluster analysis suggest that they do. to reiterate, we were able to group the sampled retailers into the following five clusters based on their distinct patterns of competitive behaviors: "variety discounters," "broad differentiators," "focused differentiators," "muddled strategists/straddlers," and "value-oriented merchants." more importantly, we discovered that rural merchants pursuing ill defined or muddled strategies were consistently out performed by firms pursuing clearly defined strategies. this finding supports hypothesis one, reflecting that firms suffer if their competitive behaviors lack emphasis and clarity. our second purpose was to see if certain strategies or patterns of competitive behavior were more successful than others. specifically, we predicted that retailers exhibiting a combination of differentiation and low-cost /low-price leadership competitive behaviors, termed "valueoriented merchants," would outperform all other merchants. this prediction was only partially supported because the "variety discounters" actually outperformed all other merchants including the "value-oriented merchants." notwithstanding this finding, "valueoriented merchants" reported better performance than every other type of merchant. in other words, merchants whose patterns of competitive behavior were characterized by a desire to offer low prices and a differentiated shopping experience were more successful than most other retailers. this finding is of particular interest because it suggests that the days when high prices meant high quality may be gone (mcgee tk snook, 2000). today's retail consumers are seeking value, and it is up to individual merchants to offer a shopping experience that matches the consumer's perception of value. retailers generally understand that their pricing policies have a direct impact on their stores'mage and profitability. however, they are oflen less confident about whether their merchandising and pricing policies equate to value. consequently, local merchants need to identify and pursue a distinct customer market or niche. they then need to otter unique, but fairly priced, merchandise or value-added services that appeal to their market segment. specifically the competitive methods or tactics which were identified with the higher performing strategies cover three areas (factors): superior quality and service, low prices, and product depth and promotion. to compete against mass merchandisers, discounters, and category killers, the results suggest that rural retailers should: ( i) carry a variety of higher quality and unique merchandise, including merchandise which is recognizable to consumers, (2) carry products which cover a wide range of prices, 74 journal ofsmall business srraiegy vol. 72, no. 2 faiiylyinier 2002 (3) provide before and after sales service, (4) promote their establishments, including the use of sales, and, (5) be innovative by making the consumers'hopping experience unique. the results demonstrate that the competitive behaviors of low-price offerings, including sales and sales promotions, are effective. lower costs support the adoption of such behaviors. retailers can typically achieve cost advantages through the adoption of a number of activities including inventory control methods, efficient transportation systems, efficient purchasing practices, efficient store staffing, and the use of new technologies including point-of-sales technologies and computers. additional research is needed, however, to determine if a lowcost/low-price strategy is sustainable for small retailers. regardless, rural retailers should tighten their belts and develop ways of achieving greater efficiencies. they should concentrate on the basics, which are offen overlooked or not well done by larger retailers. limitations and directions for future research this study examined the competitive behaviors of retailers in rural communities. the competitive behaviors of retailers in urban or large metropolitan settings may be quite different. urban retailers may be under different pressures to follow a niche or focused strategy. future research should study competitive behaviors in these other contexts. while size may effectively inhibit rural retailers from emulating the mass merchandisers and large chains, the development and exploitation of a firm's social capital should be an emerging strategy. small retailers can join together to make volumes purchases and utilize these discounts to create scale economies. further small firms can cooperate in joint advertising and other promotional activities (lowry, 2000). also, civic involvement and social interactions can increase patronage, especially by older consumers (miller bt kim, 1999). future research should address the effects of the social capital of small retailers on their performance. this study examined small, not necessarily young, retailers or retail ventures. new ventures oflen possess many of the characteristics of small firms, though they oflen lack the advantages which may accrue through age. however, the results indicate that certain strategies may capture the "essence" of strategic positioning and be appropriate for new ventures. certain strategies, especially value-oriented or combination strategies, were found to be more successful for small retailers. the same array of strategies could be equally applicable to new ventures (carter et al., 1994). the issues presented should be examined in the context of new ventures. further, future studies should examine how the competitive behaviors of small merchants are influenced by the continuing advances of e-commerce and mail order. the retail landscape will face considerable upheaval in the coming years, as more u.s. households shop on-line, potentially producing dramatic revenue growth in web sales. conclusion historically the advice given to small retailers has been to "provide superior customer service." superior service will reliably bring customers to, and back to, your store (buss, 1996).customer responsiveness is the one building block of competitive advantage which can differentiate small and rural businesses from the competition of the mass merchandisers and category killers. the ways or methods to dilterentiate are almost unlimited. following a lowcost/low-price strategy without the benefits of economies of scale enjoyed by many discount merchandisers may be difficult for many small retailers. this is especially true in markets that are undergoing dramatic changes. following a value-oriented or combination strategy, however, may not be a bad thing. this does not mean having no strategic concentration. a 75 journal of small business s(ra/egy vol. /2, /f(y. 2 fa///iv/urer 2002 value-oriented or combination strategy of low-cost/low-price and differentiation can be effective; it need not equate to a lack of strategic focus. while further studies are necessary to determine whether value-oriented strategies create sustainable advantages, and under what environmental conditions such strategies are most effective, this study lends support to the idea that single, discrete generic strategies may not be the most advantageous. retailers should consider adopting competitive 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(1997). the relationships between generic and time-based strategies and performance. journal of mana erial issues 9(3), 334-354. woodruff, r.b.(1997).customer value: the next source of competitive advantage. journal of the academ of marketin science 25 2), 139-153. wright, p. (1987). a refinement of porter's strategies. strate ic mana ement journal 8, 93101. wright, p., kroll, m., tu, h., & helms, m. (1991). generic strategies and business performance: an empirical study of the screw machine products industry. british journal of mana ement 2, 57-65. michael j. rubach is an assistant professor of management at the university of centtal arkansas with a ph.d. in management (business policy and strategy) fiom the university of nebraska at lincoln, jd. from creighton university, and mba. from the university of nebraska at omaha. he teaches courses in strategic management, international business and small business management. his current research interests include small business management and corporate governance. his work has appeared in the journal of ivorld business, journal of business ethics, journal of applied business research, international journal of organizational analysis, and journal of business dc entrepreneurship. jeffrey e. mcgee is an associate professor and the chair of the management department of the university of texas at arlington. he teaches courses in small business management and entrepreneurship. his research interests include new business development and the strategic management of small businesses. dr. mcgee holds a ph.d. in entrepreneurship fiom the university of georgia. his work has been published in the management science, journal of business venturing, sirategic management journal, entrepreneurship theory and practice, journal of small business management, journal of applied business research, journal oj small business strategy, and journal ofbusiness & entrepreneurshi p. 78 ! journal of small business strategy vol. 12, no. 2 fall/winter 2002 app,endi x factor analysis and cluster analysis procedures the twenty four competitive methods (see table 4) were factor analyzed using a principal components analysis with varimax rotation. a factor loading of .50 was used because factor loadings greater than or equal to .50 can be considered very significant: the larger the absolute size of the loading, the more significant it is in interpreting the matrix (hair et al., 1987). the kaiser-meyer-olkin measure of sampling adequacy (kmo = 0.921) supported the use of factor analysis because it was substantially greater than the required minimum of .50 (hair, anderson, tatham, k black, 1995). the factor analysis yielded five patterns of competitive behavior (see table 4). these five factors, each with eigenvalues greater than one, accounted for 65 percent of the total variance. to test the reliability of the constructs, coefficient alphas were calculated for the items loading on each factor. they were as follows: factor one (.81); factor two (.73); factor three (.64); factor four (.58); and factor five (.49). albeit less than optimal, these reliabilities are encouraging because scale development was not the primary purpose of this study. moreover, they are higher than those found in other studies that used similar emphasis-anchored items to assess the content of strategic behavior. for example, the coefficient reported by conant et al. (1993)ranged from .74 to .49. the inherent variability that exists in strategic behavior across firms may be the cause of these less than optimal reliabilities. we labeled each of the patte'ms of competitive behaviors used by the retailers (table 4). factor one —"superior quality and service" most closely aligns with a goal of differentiation, where image and service are most important. high quality products and a perception of exclusivity are important. differentiation is often achieved through innovation and intense customer support (porter, 1980). the competitive methods loading on the second factor"low prices" most closely aligns with an overall goal of cost leadership or low prices, where low cost relative to one's competitors is the dominant theme. the second factor captures the relationship between low-cost leadership and low price (mintzberg, 1988). factor three— "image creation" contains competitive methods that would be associated with methods used to achieve differentiation, the use of advertising and civic involvement, and store identification in an attempt to gain higher market share (porter, 1980). the small independent retailers emphasizing the fourth factor —"product depth and promotion" use competitive methods that emphasize depth of products and stocking highly recognized products. this factor is not dominated by either a low cost/low price or differentiation strategy, but has methods that are identifiable with both. stocking highly recognized products can be both low cost and focused. maintaining high inventories would most likely be associated with a differentiation strategy, as it could entail incurring higher relative costs to carry the products or inventory. the filth factor —"competitive reconnaissance" recognizes a method of monitoring the practices of one's competitors, both for pricing and promotions. it is aligned more with a process of adding value than with a specific strategy (woodruff, 1997). two competitive methods, maintaining high inventory levels and using computers to monitor sales and inventory levels, did not load. non-hierarchical cluster analysis was applied to the items comprising each'of the five factors (fastclus in sas). as previously indicated, cluster analysis has been used extensively to study business level strategies. further, non-hierarchical cluster analysis is less susceptible to anomalies in the data and, thus, less likely to produce misleading results (hair et al., 1995). a five-cluster solution (with a pseudo f statistic of 43.2 and a cubic-clustering criterion of 4.2) was produced (table 5):'9 journal ofsmall business strategy va/. /2, na. 2 fa/i/tvinter 2002 table 2 provides a narrative of the competitive profiles of each cluster. cluster i, "variety discounters," (n=16) includes firms that emphasize low cost while maintaining a wide variety of products. cluster 2, "broad differentiators," (n=45) includes firms that adopt competitive methods of providing customer service, carrying high quality, higher priced merchandise, and maintaining a depth of products. these firms do not emphasize relative low cost, but incur costs to achieve differentiation through service, employee training, advertising, and civic involvement. firms in cluster 3, "focused differentiators," (n=32) are similar to the "broad differentiators" in their primary strategy of differentiation; however, they do not emphasize table 4 factor analysis of competitive weapons used by small retailers (n=236) , factor lo'adings competitive methods factor i factor 2 factor'i,, factoi 4 factor' superior quality and service before-the-sate service .81 stocking unique products .77 1ligh quality merchandise .74 carrying higher priced products .68 concerted etyort to be innovative .66 after-the-sale service .64 store layout/merchandise presentation 63 employee training .59 lotv prices canying lower priced product lines .76 pricing below competitors .74 carrying a variety of products .58 holding sales .52 sales promotion .50 image creation stocking private label products .69 use of co-op advenising .66 civic involvement .61 advertising general use .53 product depth and promotion sales promotion programs .69 depth of product selection .64 stocking highly recognized products .63 competitive reconnaissance monitoring competitors'ricing .82 monitoring competitors'romotions .80 eigenvalues 4.68 2.14 1.14 1.08 1.02 cumulative % of variance 42.7 51.8 56.7 61.0 65.0 explained cronbach's alpha .81 .73 .64 .58 .49 advertising, private labels, or civic involvement. instead, they emphasize monitoring both the pricing and promotions of their competitors. this group does not emphasize relative low cost. cluster 4, "muddled strategists/straddlers" (n=55) includes firms whose competitive orientation is not clear. these lirms do not seem to emphasize either low cost or differentiation, relying instead upon advertising and monitoring of their competitors. cluster 5, "value-oriented merchants" (n=88) includes firms that follow both general generic 80 journal ofsmall business strategy vol. 12, no. 2 fall/tvinter 2002 strategies: differentiation and low-cost/low-price leadership. they are not concerned with maintaining high inventories or monitoring the activities of their competitors. table 5 cluster means factor 1 factor 2 factor 3 factor 4 factor 5 1 -0.048 2.83 -0.68 1.80 -0.02 2 0.44 -0.75 0.28 0.89 -0.19 3 0.99 0.00 -1.01 -0.19 1.05 4 -0.81 -0.12 0.11 -0.33 0.13 5 0.98 0.99 0.20 -0.47 -0.80 81 reproduced with permission of the copyright owner. further reproduction prohibited without permission. table of contents anonymous journal of small business strategy; fall 2005/winter 2006; 16, 2; abi/inform complete pg. 0_3 table of contents i the influences of entrepreneurial motivation and new business acquisition on strategic decision making richard c. becherer university of tennessee at chattanooga j. howard finch florida gulf coast university marilyn m. helms dalton state college i 5 sales force automation tools for small businesses susan delvecchio east carolina university kenneth anselmi east carolina university 29 building sustainable success in art galleries: an exploratory study of adaptive strategies howard l. smith the university of new mexico richard discenza the university of colorado, colorado springs kenneth g. baker the university of new mexico 43 revenue management: a strategy for increasing sales revenue in small businesses jeff shields university of southern maine 55 employee accommodations in small busines.<1 organizations jannifer david university of minnesota duluth stephen rubenfeld university of minnesota duluth 69 evaluating lawyer service quality in chapter 7 bankruptcies: the case of small profes.'lional businesses todd starr palmer st. bonaventure university syed saad andaleeb penn state erie brenda e. joyner loyola university new orleans book review 79 the ten faces of innovation by tom kelley with jonathan littman reviewed by: eugene fregetto university of illinois at chicago strategy   journal of small business  from the editors welcome to volume 21, number 2 of the journal of small business strategy. this issue brings us a wide variety of topics ranging from the moderating effect of family ownership on entrepreneurial orientation and social capital to the extent of strategic focus and gender on perceived performance to an examination of the underachievement of offshore outsourcing strategies of technology start-ups to a conceptual piece on sustainability and community. we think that there is something for everyone in this issue. our first regular article, campbell, line, runyan, and swinney use a structural equation model to test the moderating effect of family ownership on entrepreneurial orientation and social capital. their results show that the effects of entrepreneurial orientation and social capital vary based on whether the firm is family-owned or non-family owned. in our next article, gibson uses a sample of 237 small business owners to examine the extent of strategic focus (internal versus external) and gender of small business owners as predictors of perceived performance. the main effects of the anova model indicate that perceived performance was higher in organizations with internal focus. the main effect for gender on perceived performance was not significant. madireddy uses qualitative research techniques to examine the underachievement of offshore outsourcing strategies by technology startup companies. specifically, 43 organizational leaders or entrepreneurs from the silicon valley were interviewed to collect the data. lessons learned from this research include careful selection of offshore outsourcing vendors to avoid mismatches in culture or environment, offshore outsourced activities need to be closely managed and controlled, and setting-up a design center or branch overseas might be an alternative to overcome the challenges and drawbacks of offshore outsourcing. our last article by nadim and lussier provides a conceptual piece on sustainability. using the current literature, they argue that sustainability through community is a strategic approach, as well as mechanism for long-term viability for small businesses. several suggestions are made for avenues of future research in this area. we are pleased to highlight a special invited article by one of the most distinguished scholars in the entrepreneurship field. g. thomas lumpkin and his excellent coauthors address one of the more fundamental research topics for the journal of small business strategy. indeed, to what extent is “small business strategy” unique as compared to strategy in large corporations? most strategy research is based on empirical work in large firms. tom lumpkin and his coauthors, in conducting a focused literature review, challenge the field of strategy and entrepreneurship in what could become a highly cited analysis. they conclude that there is a research void regarding the liability of smallness and the liability of newness. this presents a great opportunity for extending existing strategy and entrepreneurship research into small and/or new firms. we trust that this jsbs article will stimulate faculty and doctoral student research into this critically important realm.     finally, we would like to thank kirk heriot for his service to the journal. kirk has resigned from the review board to pursue other activities. kirk served on the review board since 2001. we wish kirk the best in his future endeavors. a major new development regarding jsbs is the transition from ross fink as the editor to gerald (gerry) hills, both at bradley university. ross has played a superb role in helping jsbs further develop as a quality journal and to also help jsbs become current with the publication schedule. the coming months will include becoming completely up to date. ross has served as an excellent scholar. gerry hills will strive to continue to develop jsbs. ross fink gerry hills     reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy vol. 25 ● no. 2 ● 2015 from the editor it is with great pleasure and a profound sense of duty that i assume the role of editor-in-chief of the journal of small business strategy. the faculty and staff of middle tennessee state university, the jones college of business, and the office of the wright travel chair of entrepreneurship are grateful to the members of the small business institute® for giving us the opportunity to publish this exceptional journal with such a rich heritage. the hard work, dedication, and research of authors, reviewers, and previous editors have all contributed to this body of knowledge we know as the journal of small business strategy. i am especially humbled when reviewing the list of editors during the 25 year history of the journal. the previous editors include: • gwen fontenot • lloyd elgart • joe singer • stephen osborne • fred fry • paul stephens • ross fink • gerald hills this issue marks the first issue of the journal of small business strategy to be published by middle tennessee state university in conjunction with the small business institute® after being housed for more than 10 years at bradley university. i would like to express my sincere appreciation for gerald hills and the editorial review board who have served the journal well and made the transition to middle tennessee state smooth and seamless. the contributions in this issue include two papers in the area of entrepreneurship. the first paper primarily focuses on the early influencers on potential entrepreneurs while the second paper specifically examines the gender of the entrepreneur and the relationship to performance. these two papers are followed by the best and distinguished papers from the 2015 small business institute conference that was held in st. pete beach, florida. these papers include an article that deals with the small business board of directors, a paper on sustainability, one on philanthropic intent, and concludes with an empirical examination of pedagogical methods and the impact on student entrepreneurial propensity. the future of the journal of small business strategy is bright, and there are some exciting collaborations that will be unfolding as the new year approaches. the key to success, however, lies with you and your research in small business and entrepreneurship. your submissions are always welcome. in addition, the editorial team would like to see book reviews once again become a regular feature of the journal. your comments and suggestions can help us stay at the forefront of small business and entrepreneurial thought. i look forward to hearing from you! william c. mcdowell, ph.d. strategy opportunity recognition: perceptions of highly successful entrepreneurs rodney c. shrader* university of illinois at chicago rshrader@uic. edu gerald e. hills university of illinois at chicago gehi lls@ui c.edu abstract this study examined multiple dimensions of opponunity recognition (or) among a group of exceptionally successful etitrepreneurs and a control group of mote randomly selected entrepreneurs. there were few differences between the two groups. results indicated that or stetnmed fi'om prior experience, focusing on markets and customers, and responses to spemfic problems along with several other sources. furthermore, or appeared to be a imtltiple-step process far more frequently than a "eureka" experience. these results support much of the conventional wisdom about or and intlicate that multiple approaches to or can lead to success. introduction opportunity recognition (or) has long held a prominent position in entrepreneurship theory and has more recently become a central focus of entrepreneurship research (e.g., gaglio & katz, 2001; kirzner, 1973, 1979; shane &. venkataraman, 2000; venkataraman, 1997). the importance of or is demonstrated by the fact that basic definitions of entrepreneurship allude to opportunity recognition (or) as central to the phenomenon. for example, kirzner (1973) argued that the discovery of opportunities is the core issue of entrepreneurship. according to kirzner, entrepreneurs find and exploit opportunities by taking advantage of economic disequilibria by knowing or recognizing things that others do not. although or is an essential step in the early stages of formulating and launching a new venture, or may also occur to greater or lesser degrees throughout the life of the enterprise and the life of the entrepreneur (ronstadt, 1988, weinzimmer, fry &. nystrom, 1996). while or has been prominent within theories of entrepreneurship, researchers have only recently begun to report the results of empirical studies on or. that empirical research supports a number of different views of the opportunity recognition process, but a comprehensive model of or has not yet emerged (lumpkin, shrader & hills, 2001). the purpose of this exploratory study, therefore, is to contribute to a more complete view of or 'unded by the ewing marion kauffman foundation's center for entrepreneurial leadership. 'please address all correspondence to rod shrader. 92 journal of small business strategy vol. l4, no. 2 falllwinter 2003 by examining this phenomenon in a comprehensive fashion that builds upon several diverse perspectives of the process. literature review significant contributions have been made in conceptualizing the phenomenon of or and empirical studies have begun to generate a fundamental understanding of this important phenomenon. however, there is little agreement about the sensitivity of entrepreneurs to opportunities, the cognitive processes they use to identify opportunities, or their selfperceptions regarding this phenomenon. this literature, which is fragmented and sometimes appears contradictory, will be summarized below. in one of the earliest relevant writings in the entrepreneurship field, vesper (1980) cited several ways that new venture ideas maybe identified and suggested that or is the result of a deliberate and systematic search eltort. christensen, madsen, and peterson (1989; p. 3) defined or as, "either a) perceiving a possibdity to create new businesses or b) significantly improving the position of an existing business, in both cases resulting in new profit potential." according to kirzner, entrepreneurs find and exploit opportunities by taking advantage of economic disequilibria by knowing or recognizing things that others do not (kirzner, 1973). likewise, piet (1996), shane (2000), and eckhardt and shane (2003) emphasized the role of knowledge in or. cooper (1981) suggested that entrepreneurs informally and intuitively perceive opportunities based upon some "feel" for the market. koller (1988) reported that most entrepreneurs recognized, rather than sought opportunities. stevenson, roberts, and grousbeck (1985) suggested that entrepreneurship is driven by perception of opportunity, rather than resources controlled. to this end, stevenson and jarillo-mossi (1986) view entrepreneurship as the process of creating value by combining resources to exploit an opportunity. eckhardt and shane (2003) discussed multiple sources of entrepreneurial opportunities. long and mcmullan (1984)proposed a model of the opportunity identificationprocess with four stages including pre-vision, point of vision, opportunity elaboration, and the decision to proceed. pre-vision is affected by both uncontrollableand controllable factors such as environmental and job forces as well as venture alertness cultivation, moonlight venturing, and job selection (p. 575). two exploratory studies provided empirical evidence in support of this model. kaish and gilad (1991)tested three hypotheses derived from the theoretical writings of kirzner (1979) and compared 51 founders of companies with 36 executives in a large company. entrepreneurs spent more time searching for information in their off hours, employed different information sources than executives and paid special attention to risk cues about new opportunities. the findings reinforced the idea that entrepreneurs are opportunistic learners, but not necessarily in a verbal, social networking manner. teach, schwartz and tarpley (1989) examined how software firms identified their first market opportunities with a field survey. statements about the recognition of opportunities were analyzed and four distinct clusters were found. the searchers believed in doing one' homework as part of a deliberate search process; the pin stripes had a strong commitment to formal planning and evaluation processes; the innocents developed their software on their own time, not on that of their employer; and the blue jeans saw product development as an accidental process and eschewed formal planning and evaluation. christensen and peterson (1990) examined the sources of new venture ideas using four structured case field studies with 15 ventures and a survey of 76 companies. they concluded 93 journal of small business strategy vol. 14, no. 2 fall/winter 2003 that specific problems and social encounters are often a source of venture ideas, but also that profound market or technological knowledge is a prerequisite for venture ideas. gaglio and taub (1992, pp. 136-147)examined whether the concept of entrepreneurial alertness to new business opportunities can be operationalized as a set of unique cognitive skills and strategies. a small sample of business owners and corporate managers was presented with an ambiguous business situation and asked to search for new business opportunities or ideas. the analysis found that the two groups appeared to approach the task differently. bhave (1994), as part of his process model of venture creation, found two types of or. first was externally stimulated or, where the decision to start a venture preceded or. these entrepreneurs engaged in a search for opportunities with filtration of opportunities, massaging of ideas, and elaboration. opportunistic search, as cited by cyert and march in 1963, was pursued. an alternative path was internally stimulated or. here the entrepreneurs discovered problems to solve or needs to fulfill and only later decided to create a venture and become an entrepreneur. in summary, the literature highlights the importance of or to entrepreneurship and offers numerous insights into the or process from diverse perspectives. however, no comprehensive, widely accepted theoretic model of or has emerged and the literature suggests few empirically testable hypotheses. despite this, several themes have emerged as important. for example, it has been shown that different entrepreneurs place varying emphasis on different or activities. entrepreneurial alertness is an important stimulant of or and evaluation of ideas is an important part of or. different entrepreneurs rely to varying degrees on different sources and causes of opportunities. finally, the literature suggests that while some scholars view or as a one time "eureka" experience, others view or as a process over time. this study builds upon these theoretical and empirical foundations and examines multiple dimensions of opportunity recognition (or) in a comprehensive fashion. to shed additional light on the topic, we studied two groups of highly successful entrepreneurs. our objectives were to: a) identify the variety and quantity of or approaches used by these entrepreneurs, b) measure self-perceived entrepreneurial alertness; c) test often proposed fundamental causes and sources of entrepreneurial opportunities, d) explore or as a process with many related issues, and e) measure the relative importance of several potential causes and sources for or. given the exploratory nature and breadth of the study, only descriptive findings will be presented. discussion of practical implications of the findings will be emphasized throughout the results section. methodology for one segment of this project, a group of exceptionally successful entrepreneurs in the sevencounty chicago area were identified and sampled. over a three-year period, more than 100 entrepreneurs were identified, both for this study and to be inducted into the chicago area entrepreneurship hall of fame. trained mba students (who possessed prior business experience) applied qualitative and quantitative rating scales and then faculty and professional staff also rated the entrepreneurs. the better candidates were then personally interviewed and rated by arthur andersen enterprise group professionals, using a questionnaire developed by the second author. finally, all of the finalists'nformation was sent to a distinguished panel of judges, comprised of private sector professionals and previously inducted entrepreneurs, who made the final selection. leading criteria for selection included innovativeness, sales growth, and financial performance. those selected were stellar entrepreneurs by any measure and 53 participated in this study. 94 journal ofsmall business strategy vol, l4, no. 2 fall/winter 2003 data for the second segment of the study were collected by mail survey of business owners/entrepreneurs in the seven-county chicago area, yielding a comparative, more random sample. the sampling frame for this portion of the study was obtained from dun and bradstreet (d&b). they randomly selected 1,500 organizations (from a total of 18,000) with revenues between $5 and $ 100 million. a cover letter and questionnaire were mailed to 1,419 entrepreneurs from the list. eighty-one of the individuals were eliminated due to the entity either being a non-profit organization or the contact individual not being the owner, president, or ceo. following the first mailing, another 128 of the 1,419 in the sample were eliminated because: i) the firm had either moved or gone out of business and had not provided a forwarding address; 2) the individual to whom the survey was addressed was no longer with the fum; or 3) the business entity was a non-profit organization. this left a total potential sample of 1,291 businesses. following the mail survey and one post card follow up, 187 useable surveys were returned for a response rate of 14.5 percent. a comparison of respondents to non-respondents revealed that there was little difference between the two groups. revenues and number of employees are nearly identical. five focus groups provided a rich discussion of or and related issues that aided in questionnaire design. in addition to numerous new items, the questionnaire replicated and modified selected items from the above noted studies by teach, schwartz and tarpley; christensen and peterson; and kaish and gilad. the questionnairewas extensively pre-tested. sample profiles completed questionnaires were obtained from 53 members of the chicago area entrepreneurship hall of fame (ehf). they averaged $42 million in annual revenues and 371 employees. one hundred, eighty-seven usable responses were received from the randomly sampled entrepreneurs (rses). however, six franchisees and any respondents who were not founders, cofounders, or who had not started a "major, new part of (the) business" were deleted. this left 165 respondents, whose companies averaged $ 16.7 million in annual revenues and 121 employees. results and discussion or behaviors it may be seen in table i that both groups of entrepreneurs have considerable experience with opportunities. nearly all of them have pursued major, new business opportunities in the past five years, with approximately one-third of both groups having pursued 3-4 opportunities and another quarter of both groups having pursued 5-10 opportunities. it may be seen that 12 and 13 percent, respectively, pursued more than 10 major, new business opportunities in the past five years. although the success rates are by definition lower than the sheer pursuit of opportunities, 16/18 percent of the ehf and rse samples had five or more successes and 80/74 percent had 1-4 successes. forty percent of the ehfers had 3-4 successes as compared to 23 percent of the rses. but this is the only notable difference concerning successes. it is striking that so many of the opportunities pursued were unrelated to their existing businesses at the time and this is more often the case for the ehfers than the rses. more fundamental or behaviors include founding/co-founding companies: 78/68 percent; starting a major, new part of the business: 90/95 percent; and acquiring any new type of business: 29/45 percent. acquisitions are slightly more common among the rses and the ehfers are more often founders. the rses, it must be remembered, have at least $5 million in sales, and this is one indicator of considerable success. both groups are clearly opportunistic. 95 journal ofsmall business strategy vol. l4, /i/o. 2 fall/winter 2003 table 1 or behaviors: entrepreneurshipha)lnif-famers(ehf) and randomly sampled entrepreneurs(rse) ehf rse item 0 1-2 34 5-10 &10 0 1-2 3-4 5-10 &10 how many new, major business opportunities have you pursued (invested time 2% 29 33 24 12 !% 30 29 27 13 and money) in the last 5 years? how many of these new business opportunities can be 4 40 40 12 4 7 51 23 15 3 said to be successes'? how many of these new business opportunities were 28 42 21 9 0 56 30 10 2 2 unrelated to the existing business at that time? yes no yes no did you have any ideas that could have become a new 78/ 22/ 60/ 40/ busmess (or a significant part of a business) in the past: month/year other than ideas for starting a business (or a major expansion of), have you 50/ 50/ 71/ 29/ identified any other types of 71 29 92 8 significant opportunities m the past: month/year are you the original founder/cofounder of your 78 22 68 32 business? did you start any major, new part of your business? have you ~ac uired any new type (at the time) of business? self-perceived entrepreneurial alertness table 2 provides results related to respondents'elf-perceptions of entrepreneurial alertness. the overall conclusion from both samples is that entrepreneurs strongly see themselves as "entrepreneurially alert." overwhelmingly, the respondents indicate that they have a "special alertness" toward opportunities; describe themselves as opportunistic; see new business opportunities "naturally;" and even enjoy casually thinking about new opportunities. the full percentage distributions are shown to aid in practical interpretation of the results. although statistically significant t-tests are shown, the clear message from table 2 is of similarities rather than differences and of strong, clear results from both samples. 96 journal of small business strategy vog 14, no. 2 fall/winter 2003 these results raise the question: to what extent, if at all, is opportunity alertness an important characteristic of successful entrepreneurs? although the entrepreneurship field was "born" with numerous studies of the psychological characteristics of entrepreneurs, and despite the lack of success in documenting such characteristics, these results demand systematic study of this variable as a potential psychological and/or behavioral characteristic. while alertness may be an inborn psychological trait, an alternative hypothesis, however, is that entrepreneurial alertness may be a learned behavior. these opposing hypotheses, in turn, raise questions about whether alertness can be taught. table2 self-perceived entrepreneurial alertness: entrepreneurshiphall-of famers(ehf) and randomlysampledentrepreneurs(rse) ehf item sa pa n pd sd mean i have a special alertness or sensitivity toward opportunities. i would describe myself as opportunistic. 53 27 8 4 8 1.88 "seeing" potential new business opportumties does not come very naturally for me. i enjoy just thmking about and/or looking for new business opportumties. i ultan think of new business ideas when i am totally relaxed, doing something unrelated to business. iise i have a spemal alertness or sensitivity toward opportunities. i would describe myself as opportunistic. 44 33 18 4 i 1.85 "seeing" potential new business opportunities does not come very naturally for me. i enjoy just thinking about and/or looking for new business opportumties. i often think of new business ideas when i am totally relaxed, doing something unrelated to 33 38 14 9 6 2.16 business. sa =strongly agree=l pa =panly agree=l n=neutral =3 pd=panly disagree4 4 sd=strongly disagree=5 'ased on a t-test of the difference in means, there is a statistically significant difference at the .10 level. 97 journal of small business strategy vol. /4, no. 2 fall/winter 2003 causes of entrepreneurial opportunities as shown in table 3, 91/95 percent of the ehf/rses agree that new business opportunities often arise in connection with a solution to a specific problem. more than half of both groups ~stion 1 agree. the significance of these results could easily be lost. the intensity of these responses, however, suggests that the probabilities of entrepreneurial success may be enhanced by commercializing a solution to a heartfelt problem rather than following the conventional wisdom of merely "satisfying a need." a second fundamental cause of opportunity arises from market changes and customers. fully 68/73 percent of the ehf/rses agreed that their own business was derived from a market driven idea and 84/91 percent affirmed that they listen "extremely well to what customers say" as a way of identifying opportunities. seventy-five percent of the rses knew who the first customers would be before introducing their first product/service. finally, technology as a basic cause of opportunity is addressed in table 3. only 29 percent of the ehfers agreed that "the idea for (their) business was mostly technology driven," although 38 percent of the rses agreed. so technology as a basic cause of opportunity has some support, although only 14 percent of both groups ~stron 1 agreed. fully 59 percent of the ehfers ~stree 1 disagreed. so, although technological change can be critically important for many opportunities, it is far less important, in general, than markets. these findings suggest that focusing on market and customers increases the probability of recognizing entrepreneurial opportunities. they also suggest that while technology leads to many entrepreneurial opportunities, it is selectively rather than pervasively important. other factors, such as technical strength of the entrepreneur, may determine the relevance of technology as a fundamental cause of opportunity. importance of venture ideas, individualism, and creativity a "venture idea" is not necessarily an "opportunity." but it is still striking that 58/69 percent of the ehf/rses in table 4 agreed that "new venture ideas are a dime a dozen. evaluation is the key." also, 52 percent of both groups agreed that, "the problem is not to get the venture idea, but to get capital and other resources." here, however, approximately one-third disagreed. this suggests that recognizing venture ideas by itself is but one step in the opportunity recognition process. also, in table 4, there are bimodal distributions as to whether or not "the business was strictly my idea alone." although 42/46 percent agreed, many disagreed. at their current stage of development, the entrepreneurs indicate that other people commonly bring new venture business ideas to them. these items suggest that individualism may still play a major role but that networking is also important. the findings regarding creativity are clearer. these entrepreneurs strongly see themselves as creative; 90/88 percent agreed that "creativity is very important to identifying business opportunities," and about half say they set aside a few minutes each day or week to be creative. finally, well over half of the entrepreneurs in both groups (53/61 percent) indicated that their business idea was developed in connection with employment with another firm. 98 journal ofsmall business strategy vol. 14, no. 2 fall/winter 2003 table3 fundamental sources of entrepreneurial opportunities: entrepreneurship hall-of-famers (ehf) dk randomly sampled entrepreneurs (rse) ehf item sa pa n pd sd mean new business opportunities often arise in connection with a solution to a specific problem. the idea for my business was mostly market driven. 25 43 6 10 16 2.51" i listen extremely well to what customers say they want and don't want as a way of identifying opportunities. i knew who the first customers would be before introducing our first product/service. the idea for my business was mostly technology driven 14 15 6 6 59 3.82" iise new business opportunities often arise in connection with a solution to a specific problem. the idea for my business was mostly market dnven. 43 33 9 6 9 205" i listen extremely well to what customers say they v ant and don't want as a way of identifying opportunities. i knew who the first customers would be before introducing our first product/service. the idea for my business was mostly technology driven 14 24 14 15 33 3.29'v sa=strongly agree=l pa=panty agree=2 n=neutral=3 pd=partly disagree=a sd=stiongly disagree=s based on a t-test of the ditterence in means, there is a statisncally significant dinerence at the .05 level based on a t-test of the dittercncc in means, there is a statisncally significant difference at the .001 level. process, deliberate search, spin-offs, and immersion perhaps the most important finding was that 92 percent of the rses agreed that, "identifying opportunities is really several learning steps over time, rather than a one time occurrence." eighty six percent of the ehfers also agreed (see table 5). this finding indicates that or is a process over time and should be approached accordingly. they also suggest that time should be allowed for the chance of encountering and evaluating opportunities. although more than half disagreed that "the idea behind the business just seemed to suddenly appear," 41 percent of the ehfers agreed. most disagreed (69 percent in both groups) that the venture idea came from an accidental process. thirty-eight percent of the ehfers "made a deliberate effort to search for an idea to start a business," but 54 percent did not. this general 99 journal ofsmall business strategy vol. /4, no. 2 fall/winter 2003 finding is also true of the rses. thus, it appears that while opportunities are often perceived in a random/accidentalmanner, systematic search ~ma be helpful as well. table4 importance of venture ideas, individualism, creativity and sources: ehfers and rses ehf item sa pa n pd sd mean new venture ideas are a dime a dozen. 25'/ 33 i p 19 13 2 60+ evaluation is the key. the problem is not to get the venture idea, but to get capital and other 25 27 12 16 20 2.82 resources. other people bring new venture 25 35 23 13 4 2.35 business ideas to me. the business idea was strictly my idea alone. being creative is very important lo identifying business opportunities. i am not a very creative person. 2 13 i i 17 57 4.15 i set aside a few minutes each day or week to be creative. our venture idea came from an accidental process that just happened to 6 )9 6 27 42 3.79 uncover the concept. our business/venture idea was developed in connection with 31 22 8 4 35 290 employment with another firm. rse item sa pa n pd sd mean new venture ideas are a dime a dozen. evaluation is the key. the problem is not to get the venture idea, but to get capital and other 25 27 12 16 20 2.68 resources. other people bring new venture 25 35 23 13 4 2.49 busmess ideas to mc. 100 journal ofsmall business strategy vo/. l4, no. 2 fall/winter 2003 the business idea was strictly my idea alone. being creative is very important to identifying business opportunities. 1 am not a very creative person. 14 44 26 11 5 4.05 i set aside a few minutes each day or week to be creative. our venture idea came from an accidental process that just happened to 58 30 6 4 1 3.98 uncover the concept. our business/venture idea was developed in connection with 3 9 15 25 48 2.55 employment with another firm. sa=strongly agree=l pa=partly agree=2 n=neutra =3 pd=partly disagree=4 sd=strongly disagree=,5 au based on a t test of the ditterence in means, there is a statistically significant difference at the .05 level regarding opportunity idea spin-offs, both groups strongly recognize that opportunities often lead to other opportunities. knowledge and insights in one context often lead to other venture ideas. very importantly, there is strong support for "immersion" in a particular industry and marketplace. the basic idea underlying ronstadt's corridor principle (1988) receives further support with 95 percent in both groups agreeing that, once in the market, one must be prepared to quickly adjust a new product or service to what the market requires. the importance of customer feedback is clear. these findings suggest that value of qualitative "immersion" in a marketplace cannot be replaced by formal market research. entering a market with a new product/service demands flexibility and responsiveness in the expectation that changes in strategy will be required. as helpful as business plans and feasibility studies may be, there is a danger if they lead to over-commitment to a specific product/service and strategy. the results here clearly underscore the critical importance of actual market feedback. necessary changes should be expected. importance of sources for major ideas in table 6, sources for identifying major new business ideas are rated in importance, and some of the more important sources are customers, employees, suppliers, and professional acquaintances. some of the less important are patent filings, technical literature, libraries, distributors, consultants, investors, and hobbies. prior employment here yielded only mixed results. these results suggest that it is helpful to focus on certain sources of venture opportunities, particularly those providing insights into industries/markets including customers, suppliers, employees'and professional acquaintances, as a way to find opportunities. 101 journal of small business s/raregy vol. /4, na. 2 fall/win/er 2003 table 5 opportunity recognition processes, deliberate search, spin-offs and immersion: ehfers and rses ehf item sa pa n pd sd mean identifying opportunities is really several learning 0 steps over time, rather than a one-time occurrence the business opportunities i have identified over the years have been largely unrelated to one another. i have found that the consideration of one opportunity rarely leads to other opportunities. identifying good opportunities usually requires "immersion" in a particular industry and marketplace. once in the market, one must be prepared to quickly adjust a new product/service to what the market 91 4 0 2 2 1.20 requires. upon entenng the market with a new venture, i made n/a n/a n/a n/a n/a n/a major changes based on customer feedback it is easier to see the real opportunities alter you begin to n/a n/a n/a n/a n/a n/a enter a market (as compared to before you start). the idea behind this business just seemed to come suddenly appear i/we made a deliberate effon to search for an idea to stan a new business our venture idea, or a closely related one, was actually seen in another context. rsfs identifying opportunities is really several learning 0 steps over time, rather than a one-time occurrence the business opportunities i have identified over the years have been largely unrelated to one another. i have found that the consideration of one opportunity rarely leads to other opportunities. identifying good opportunities usually requires "immersion" in a particular industry and marketplace. once in the market, one must be prepared to quickly adjust a new product/service to what the market 71 24 3 2 0 1.36 requires. upon entering the market with a new venture, i made major changes based on customer feedback 102 journal ofsmall business strategy voh /4, no. 2 fall/winrer 2003 it is easier to see the real opportunities affer you begin to enter a market (as compared to before you start). the idea behind this business just seemed to come suddenly appear i/we made a deliberate effort to search for an idea to 13start a new business our venture idea, or a closely related one, was actually seen in another context. sa=strongly agree i pa=partly agree=2 n=neutra =3 pd=partly disagree=4 sd=strongly dtsagret. 5 "based on a r rest ofdifference in means, there is a statistically significant difference ar the .05 level. table6 source importance for identifying major new business ideas: rank order ehf item vi si ni mean customers/clients 75% 25 0 1.25 employees 59 37 4 1.45»» professional acquaintances 41 49 10 1.69 suppliers 47 35 18 1.71 trade publications 40 38 22 1.82»»'agazines/newspapers 26 51 23 i 9g»»»» family 32 22 46 2.14» prior employment 25 29 47 2.22»» consultants 16 42 42 2.26»*» distributors is 32 50 2.32 personalfriends 14 40 46 2.32 other 21 21 58 2.36 investors 14 32 54 2.40 technical literature 18 is 64 2.46 hobby 10 27 63 2.53»» libraries 8 14 78 2.70 patent filings 10 6 84 2.73 rsfs customers/clients 75% 20 5 1.30 employees 46 41 13 1.67" professional acquaintances 44 43 13 1.68 103 journal of small business strategy val. 14, na. 2 fall/winter 2003 suppliers 44 37 19 1.75 trade publications ii 57 32 2.22 magazines/newspapers 8 40 52 2.45ss's family 18 27 55 2.38s prior employment 41 28 31 1.89vs consultants 6 34 60 2.55'*'istributors 21 34 45 2.24 personal friends 11 41 47 2.37 other 30 10 60 2.30 investors 16 24 60 2.44 techmcal hterature 9 34 57 2.47 hobby 6 13 81 2.76»* libraries 2 24 74 2.71 patent filings 4 13 82 2.77 vi=very important=t si=somewhat important=2 ni=not important=3'& 10 s'& 05 s's p& 01 *"~*p& 001 evaluation of opportunities finally, table 7 presents the results on the evaluation of new business opportunities. it may be seen that the entrepreneurs consider intuitive judgment or "gut feel" to be an extremely important part of judging market potential. most of the entrepreneurs also agreed that, "the most important thing is to believe in the idea." therefore, although formal market research may provide useful information, it is also important to recognize that the entrepreneur's collective, qualitative judgment must be weighted most heavily in evaluating opportunities. conclusion this study has gone beyond any previous or study in the breadth of variables studied, the size of the sample, and in reporting findings from two groups of high performing entrepreneurs. as a result, several issues of critical importance to understanding or have been identified. furthermore, results were consistent between the ehfers and the rses, which supports the validity of the overall findings. in general our findings support much of what other studies have conc luded about or. while our study was exploratory and primarily descriptive in nature, our results lay a firm foundation for future theory building and empirical research. we consistently found that or is a fairly complex process that unfolds over time, and is not necessarily a "eureka" experience that takes place at one moment in time. instead, or involves multiple steps, includes elements of evaluation and vetting ideas, and may sometimes include making adjustments midstream in response to specific customer feedback. our results indicate that there are multiple influences on or, and that there are multiple paths to the successful recognition of entrepreneurial opportunities. while the type of formal evaluation of ideas that is typically taught in business school plays a role in vetting ideas, successful entrepreneurs also place a great deal of importance on their own subjective gut instincts. another profoundly important finding is that 104 journal af small business strategy vol. 14, tito. 2 fall/winter 2003 table 7 evaluation of new business opportunities: entrepreneurship hall-of-famers (ehf) and randomly sampled entrepreneurs(rse) ehf item sa pa n pd sd mean the most important thing is to believe in the idea. our company experiments with new venture ideas which results in both failures and 40 42 8 4 6 1.92 successes. one's own intuitive (or "gut feel" ) is oaen the most important part ofludging market potential 0 9 5 24 62 1.74vvv for a new product. in-depth, formal customer surveys are usually more costly than can be justiged. it is oaen better to enter a market and, if necessary, make changes than to take the time 31 12 15 23 19 2.83 and money to first do formal marketing research. in-depth market analysis is oaen used more for impressing tinancial sources than for actual 17 17 16 30 20 2.93 decision making. rsfs item sa pa n pd sd mean the most important thing is to believe in the idea. our company experiments with new venture ideas which results in both failures and 35 42 13 9 i 199 successes. one's own intuitive (or "gut feel" ) is oaen the most important part ofjudging market potential 15 48 16 16 5 2.48vvv for a new product. in-depth, formal customer surveys are usually more costly than can be justified. it is oaen better to enter a market and, if necessary, make changes than to take the time 9 23 26 22 20 3.23 and money to first do formal marketing research. in-depth market analysis is often used more for impressing financial sources than for actual 17 17 16 30 20 2.93 decision making. sa=strongly agree= i pa=partly agree=2 n=neutra =3 pd=partly disagree=4 sd=strongly disagree=5 ''ased on a west ofdifference in mean r, there is a statistically significant diperence at the .oo i level. 105 journal of small business strategy vol. l4, no. 2 fall/winter 2003 successful entrepreneurs immerse themselves in their industries and operating environment as a means of developing insights into their markets. these insights then allow them to be highly responsive to specific needs of customers. while formal market research may have some value, industry experience and networking with customers, suppliers, employees, and professional acquaintances are the most important sources for identifying new business ideas representing potential opportunities. one of the more interesting findings was that technology did not play a major role in the recognition of opportunities among these samples of stellar entrepreneurs. this suggests that academics or practitioners who emphasize technological innovation as a major cause of entrepreneurshipmay, in fact, see only a small portion of the overall picture regarding entrepreneurialopportunities. alertness to opportunities also played a central role in the or process among our sample. there was uniform agreement across multiple measures that these highly successful entrepreneurs perceived themselves to be particularly alert to potential opportunities. alertness is a critically important element of or, because without it, potential entrepreneurs could find themselves surrounded by stimuli that might otherwise spark ideas for new businesses, but never perceive those stimuli. numerous interesting questions arise about the nature of entrepreneurial alertness then. is alertness an inborn trait that distinguishes entrepreneurs from the rest of us, or is alertness a behavior that can be learned (and, consequently, taught)? what is the nature of alertness to other variables in the or process? is alertness the mechanism that triggers or' does alertness mediate the relationship between sources if opportunities and the recognition of those opportunities? future research certainly should address these questions. in conclusion, our research used a large sample to empirically validate several important building blocks for future theory and empirical research. it is our hope, then, that this work will stimulate additional research in this critically important area. based on our findings, we would advise potential entrepreneurs to immerse themselves in an industry that they find interesting; establish strong network ties to players in that industry (especially customers); be alert to opportunities that might appear at random or as the result of systematic search; think creatively; evaluate ideas carefully, yet trust gut instincts; and not to be too focused on technology as the source of entrepreneurial opportunities. we believe future research will bear out the wisdom of this advice. references bhave, m. p. (1994).a process model of entrepreneurial venture creation, journal of business venturing, 9, 223-242. christensen, p. s., madsen, o. o., & peterson, r. (1989). opportuniry identification: the contribution of enrrepreneurship to strategic management. denmark: aarhus university institute of management. christensen, p. s. & peterson, r. (1990). opportunity identification: mapping the sources of new venture ideas, presented at the babson entrepreneurship research conference, denmark. cooper, a. c. (1981). strategic management: new ventures and small business, long range planning, /4(5), 39-45. cyert, r. m. & march, j. g. (1963).a behavioral theory of the firm. englewood cliffs, nj: prentice hall. eckhardt, j. t & shane, s. a. (2002). opportunities and entrepreneurship, journal of management, 29(3), 333-349. fiet, j. o. (1996). the information basis of entrepreneurial discovery, small business economics, 8, 419-430. 106 journal of small business strategy vol. i4, no. 2 fall/winter 2003 gaglio, c.m. & katz, j. (2001). the psychological basis of opportunity identification: entrepreneurial alertness, journal of small business economics. gaglio, c.m. & taub, r.p. (1992). entrepreneurs and opportunity recognition, in frontiers of enoepreneurship research. ed. n. c. churchill. wellesley, ma: babson college, 136-147. kaisch, s. & gilad, b. (1991). characteristics of opportunity search of entrepreneurs vs. executives: sources, interest, and general alertness, journal of business venturing, 6, 45-61. kirzner, i. m. (1973). competition and entrepreneurship. chicago, il: university of chicago press. kirzner, i. m. (1979). perception, opportunity and profit. chicago, il: university of chicago press. koller, r. h. (1988). on the source of entrepreneurial ideas, frontiers of entrepreneurship research, wellesley, ma: babson college. long, w. & mcmullan, w. e. (1984). mapping the new venture opportunity identification process, in frontiers of entrepreneurship research. ed. j. a. homaday. wellesley, ma; babson college, 567-590. lumpkin, g.t., shrader, r. c., & hills, g. e. (2001). entrepreneurial opportunity recognition: a creativity based model, annual meeting of the academy of management. ronstadt, r. (1988).the corridor princi pie, journal of business venturing, 3, 31-40. shane, s. (2000). prior knowledge and the discovery of entrepreneurial opportunities, organizationscience, i l(4), 448-469. shane, s. & venkataraman, s. (2000). the promise of entrepreneurship as a field of research, academy of management review, 25(1), 217-226. stevenson, h. h., & jarillo-mossi, j. c. (1986).preserving entrepreneurshipas companies grow, journal of business strategy, 7, 10-23. stevenson, h. h., roberts, m. j., & grousback, h. i. (1985).new business ventures and the entrepreneur. homewood, il: irwin. teach, r. d., schwartz, r. g., & tarpley, f. a. (1989). the recognition and exploitation of opportunity in the software industry: a study of surviving firms, in frontiers of entrepreneurship research. ed. r. h. brockhaus. wellesley, ma: babson college, 383-397. venkataraman, s. (1997). the distinctive domain of entrepreneurship, in advances in entrepreneurship: firm emergence and growth. ed. j. a. katz. greenwich, ct: jai press, 119-138. weinzimmer, l. g., fry, f. l., & nystrom, p. c. (1996), the search for opportunities by small business owners, journal ofsmall business strategy, 7(3), 1-14. rodney c. shrader is an associate professor of management and entrepreneurship and a research fellow in the institute for entrepreneurial studies at the university of illinois at chicago. his research on international entrepreneurship and opportunity recognition has been published in academic journals and scholarly books including the academy of management journal, journal of business venturing, entrepreneurship: theory & practice, international journal of management, journal of international entrepreneurship, mastering entrepreneurship and several editions of frontiers of entrepreneurship research. dr. shrader's research focuses on tlie foreign market entry strategies of young high-technology firms, internationalization of e-commerce, and entrepreneurial opportunity identification. he teaches mba and undergraduate level courses in new venture formation, e-commerce, strategic management and international management. 107 journal ofsmall business strategy vol. /4, no. 2 fall/winter 2003 gerald e. hills holds the coleman chair in entrepreneurship, is executive director of the institute for entrepreneurial studies, and professor of marketing at the university of illinois at chicago. he has written and edited /3 books and written more than 75journal articles. he serves on the editorial boards of the journal of business venturing and the journal of research in marketing and entrepreneurship. dr. hills is past-president of the international council for small business and co founder and first president of the united states association for small business and entrepreneurship. he served as co-founder and first president of the american marketing association academic council, the closest equivalent in the marketing discipline to the academy of management. he was also chairperson of the national small business development center advisory board under the reagan administration. through the business he founded, business development, ltd., dr. hills consults with entrepreneur driven firms and serves on several private and public boards of directors. 108 reproduced with permission of the copyright owner. further reproduction prohibited without permission. after receiving financing, do inc. 500 companies continue to utilize their business plan? allred, anthony t;h lon addams journal of small business strategy; spring/summer 2006; 17, 1; abi/inform complete pg. 17 after receiving financing, do inc. 500 companies continue to utilize their business plan? anthony t. allred weber state university aallred@weber.edu h. lon addams weber state university laddams@weber.edu abstract small, successful companies included on the inc. 500 list were surveyed to determine whether these companies use a business plan once financing has been obtained. the responding ce os indicated that the business plan is a document of substantial importance in obtaining funding and in managing operations. additionally, these ceos were questioned regarding the importance of specific sections of their business plan when using the business plan to: (1) obtain funding and (2) manage their business. when it comes to obtaining funding, inc. 500 ceos rank the executive summary and the financial section as the top two most important sections of the business plan. when it comes to managing the company, the finance section of a business plan was ranked first in importance over all other sections. ceos and top management of small companies should take appropriate steps to craft an effective business plan, revise it periodically to reflect a changing environment, and refer to it ojien to assist their company in achieving even greater success in their operations. introduction many start-up companies find it difficult to move from opportunity identification to successful implementation without significant support from debt or equity funding partners. emerging companies with few years of business experience need funding to stabilize cash flow, build inventory, weather seasonal sales dips. and fend off attacks from competitors. wellestablished companies with excellent track records need funding for researching and developing new products, increasing market share, and entering undeveloped markets. without a well-constructed business plan, however, the probability of obtaining funding from banks, venture capital firms, or 17 angel investors is relatively low for either type of company. hence, many companies devote considerable resources to the development of a well-constructed business plan to satisfy investor requirements and receive necessary funding. yet, some researchers, like bhide ( 1994 ), argue that many small companies do not bother with well-formulated plans because they work in rapidly changing industries and niches. on the other hand, if a business plan is used to secure investor funding, is the business plan then set aside-much like the ticket that allows the holder to enter the sports arena, but the ticket is then stuffed in a pocket or thrown away? the purpose of this study is to determine how small, successful companies use their business plan. is the reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy plan useful after obtaining financing as a frequent reference point for strategic and operational decisions? if so, are certain sections of the plan more valuable than others? accordingly, the study examines inc. 500 companies to determine how these small, successful companies utilize their business plan for initial funding and for managing their companies once financing has been obtained. literature review the importance of planning a substantial stream of research has investigated the impact of planning on the success of the firm. fulmer and rue (1974) noted, for example, that henri fayol wrote about the importance of the ten-year plan in 1916. since then, the value of long range planning (lrp) has grown in popularity, been widely discussed, and generally accepted. fulmer and rue argue, however, that many firms are engaged in lrp not because they wish to but because they feel they must due to lrp's popularity. other researchers indicate that planning is fundamental to business success. latham and saari's (1979) study found substantial evidence indicating that setting goals often leads to increased performance. further, thune and house ( 1970) found that planning does pay. they examined six industries and found that formal planners significantly outperformed informal planners. however, bhide ( 1994) interviewed 100 founders of inc. 500 companies and concluded that entrepreneurs invest little time on their initial business plan. specifically, 28 percent had drafted complete business plans, but 40 percent had no business plan at all. further, 26 percent had rough "back-of-the-envelope" type plans and 5 percent had created some financial projections for investors. trying to adapt quickly to changing market conditions, these business owners lean on their flexibility to 18 vol. 17, no. i spring/summer 2006 remain viable and do not take the time to write detailed business plans. orser, hogarth-scott, and riding (2000) surveyed 1,004 small and medium-sized businesses and found that the presence of a business plan was highly correlated with performance (revenue increases). however, much like bhide's research, only one-third of the firms surveyed indicated that they were involved in an ongoing, formal planning process. similarly, sanberg, robinson, and pearce (2001) reported that at least one-half of the small businesses they studied did not have a business plan. their research indicated that most small company owners agreed that a business plan's importance is primarily for establishing a line of credit, obtaining loans, or attracting investors. however, they add that the business plan has minimal value once funding has been received. perry (2001) investigated the influence of planning on small business failures. a failure was defined as a business that required bankruptcy protection. failed firms and nonfailed firms were analyzed from the dun & bradstreet credit-reporting database. the researchers concluded that very little formal planning goes on in small businesses; however, non-failed firms utilized more planning than failed firms. in 2002, hormozi, sutton, and mcminn (2002) postulated that a business plan is an effective tool used by businesses to organize their goals and objectives into a coherent format. according to these authors, no matter the size or stage of development, companies use business plans to improve internal operations and to market the business to potential outside investors. hormozi et al. emphasized that a business plan should be written by: (i) new business owners, (2) new business owners seeking outside financing for start-up, (3) existing business owners seeking outside financing for expansion, and ( 4) business owners who reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy want to increase the success of their businesses. while studies indicate that fewer than half of companies participate in planning, ibrahim, angeli dis, and parsa (2004) examined the planning practices of small firms in the united states and found that planning practices of smaller businesses might be more sophisticated than generally perceived. almost 81 percent of the 663 responding firms reported that they prepare some type of written long-range plans, and more than 69 percent of these firms prepare plans covering the next three years. as indicated above, some researchers emphasize business planning for attracting potential investors while others find the business plan a useful medium for guiding internal operations. although there appears to be some debate about how many firms directly participate in a formal planning process, there is much jess debate about the value of planning. planning does appear to be important. the important sections of a business plan herter (1995) asserted that every business, regardless of size, needs an effective, comprehensive business plan because the process of developing the plan forces the entrepreneur to think about the harsh reality of the business world rather than the more common dream world. he believed that the business plan should have a well-defined format. but, which sections of a business plan should be emphasized? schneider ( 1998) regarded business plans as the difference between success and failure. a comprehensive business plan, according to schneider, includes a description of the business, products, market, competition, promotion strategy, management operations, personnel needs, and projected financials (income statement, balance sheet, and cashflow statement). 19 vol. 17. no. 1 spring/summer 2006 hormozi et.al. indicated the need for four parts in the business plan: (1) the introductory section (including the executive summary); (2) business section (industry and the market analysis, product information, management team description, and marketing strategy); (3) financial statements; and (4) appendix (assumptions used to forecast previous sections). while hormozi, et. al. stressed the financial section of the business plan, sahlman ( 1997) downplayed it. sahlman believed most business plans wasted time on numbers and devoted too little attention to four interdependent factors critical to every new venture: (l) the people, (2) the opportunity, (3) the context, and (4) the risk and reward. sahlman' s research focused on the marketing plans and situation analysis. burmeister (2003) emphasized that when presenting a business plan to venture capitalists, the executive summary is the most important section. venture capitalists have a scarcity of time, not capital. thus, presenters must convey their case quickly and effectively. while burmeister was concerned about one particular audience venture capitalists for the business plan, mason and stark (2004) were adamant that entrepreneurs customize their business plan according to whether they are seeking funding from a bank, venture capital fund, or business angel investor. mason and stark's research indicated that bankers stress the financial aspects of the business plan whereas equity investors emphasize both market and finance issues. kuratko and hodgetts' (2001) sample format for a complete business plan included the following sections: executive summary, business description, marketing, location, management, financial, critical risks, harvest strategy, and a milestone schedule (p. 296). timmons and spinelli's (2004) recommended outline for a business plan reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy indicates the following sections: executive summary; industfy~:ompany/products or services; market research and analysis; economics of the business; marketing plan; design and development plans; manufacturing and operations plan; management team; overall schedule; critical risks, problems, and assumptions; financial plan; and proposed company offering (p. 403 ). timmons and spinelli agreed with kuratko and hodgetts regarding a schedule of milestones or deadlines critical to the venture' s success. a "milestone" schedule should show the timing and interrelationship of the major events necessary to launch the venture and realize its objectives. by showing critical deadlines, a well-presented schedule can be extremely valuable in convincing investors that the management team is able to plan for growth while recogn1zmg obstacles and minimizing investor risk. milestones help managers stay on track and meet their deadlines. schermerhorn (2006) offered a slightly different version in his business plan sections: executive summary, industry analysis, company description, products and services description, market description, marketing strategy, operations description, staffing description, financial projection, capital needs, and milestones (p. 153). sections of the business plan shown on the survey instrument were compiled from a review of business plan formats found in popular textbooks on entrepreneurship and small business management (as presented in the aforementioned literature). having a concise and clear executive summary as the first section was typically recommended. likewise, sections focusing on the management team, the market plan, the product/service description, and a detailed financial plan were consistently suggested. further, various writers and business plan users promote the need for sections on 20 vol. 17, no. 1 spring/summer 2006 situation analysis (or swot) and critical milestones. given the differences in opinion regarding business plan uses for small businesses and the most important sections within business plans, the purpose of this study is to determine how small, successful companies use their business plan and what sections are most important for obtaining financing and for managing the company. methodology this study sought the opinions of small, successful company owners inc. 500 ceos. annually, inc. magazine ranks the 500 fastest-growing, privately-held companies in the u.s. to be eligible for the listing, a company had to be an independent, privately-held corporation, proprietorship, or partnership, have had sales of at least $200 thousand, and have a five-year operating or sales history that included an increase in sales over the previous year's sales. surveys inquiring about business plan utilization were mailed to 250 of the inc. 500 ceos. the researchers selected every other firm in the top 500 companies, as listed in inc. in 2002. as a result, 59 surveys were returned and 53 were usable, generating a 21 percent return rate. as indicated above, the survey content was based on the researchers' examination of popular textbooks to determine the essential components of a typical business plan. six essential components or sections were identified: • executive summary • marketing section • management section • financial section • swot analysis section • milestones schedule section ceos were asked to respond to the importance of each of these six sections regarding reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy the two basic questions of this research: 1. how important has a business plan been in obtaining outside funding for your company? 2. how important has a business plan been in managing your company? results obtaining outside funding the first survey question in section one of the study asked inc. 500 ceos, "how important has a business plan been in obtaining outside funding for your company?" this question received an overall rating of 4.3 (scale: 0 = no importance and 6 = great importance). this solid rating indicates that ceos have judged the business plan to be an important document in the fund-raising arena. relative to obtaining outside funding, inc. 500 ceos were asked to rate the importance of each section of the business plan (executive summary, marketing, management, financial, swot analysis, and milestone sections). the mean ratings for each section of the business plan in relation to obtaining outside funding can be seen in table 1. the executive summary was rated most important in obtaining funding, followed by the financial section, management section, marketing section, swot analysis, and, lastly, milestone section. managing the company the first question in section two of the study asked inc. 500 ceos, "how important has the business plan been in managing your company?" this question received an overall rating of 4.1 (scale: 0 = no importance and 6 = great importance). this strong rating indicates that small successful companies continue to use their plan for more than funding. some previous research studies 21 vol. 17, no. 1 spring/summer 2006 have suggested that the prevailing business planning paradigm is: we have received our funding, our business plan can now be retired to company archives. however, this study indicates that a very different pattern of thinking is widely held by the ceos of the fastest-growing private companies in the united states. using the business plan in managing company operations appears to be the practice of the successful ceos of businesses on the inc. 500 list. relative to managing the company, inc 500 ceos were asked to rate the importance of each section of the business plan. the mean ratings for each section of the business plan in relation to managing the company can be seen in table 2. the financial section wasrated most important, followed by the marketing section, milestone section, swot analysis, management section, and, lastly, executive summary. statistical analysis was conducted to confirm the conclusions drawn from the initial examination of the means in table i and 2. for obtaining outside funding, repeatedmeasures anova indicates that the six means of importance are significantly different at the multivariate level (wilk's lambda=0.337, f(5,39) = 15.35, p-value < 0.001 ). subsequent follow-up tests using the appropriate contrasts indicate the following means are significantly different from each other at a 5 percent level of significance as shown in table 3. (in table 3, two means with different letters implies they are significantly different from each other at the 5 percent level. two means with shared letters indicates that they are not significantly different at the 5 percent level.) this analysis indicates that when it comes to obtaining funding, the executive summary is statistically different from the marketing section, swot analysis section, and milestone sections. it is not, however, statistically different from the financial section and management section. this appears to indicate that inc 500 ceos find reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy vo/, 17, no, j spring/summer 2006 table l obtaining outside funding 1 executive summary 5.04 2 financial section 5.02 3 management section 4.68 4 marketing section 4.60 5 swot analysis 3.80 6 milestones section 3.30 (scale : 0 = no importance and 6= great importance) table 2managing your company 1 financial section 4.40 2 marketing section 4.08 3 milestones section 3.73 4 swot analysis 3.66 5 management section 3.44 6 executive summary 3.22 (scale : 0 = no importance and 6= great importance) table 3 obtaining outside funding executive summary 5.04 a, e financial section 5.02 b,e management section 4.68 b,e marketing section 4.60 b swot analysis 3.80 c milestones section 3.30 d (scale: 0 =no importance and 6= great importance) the executive summary, financial section, and management sections are all vitally important to obtaining outside funding. the marketing section is statistically differentfrom swot and milestone sections -indicating that inc. 500 ceos find it next in value. swot analysis and milestone sections, though statistically different, appear to be less important to obtaining funding. 22 for managing the company, repeatedmeasures anov a indicates the six means of importance are significantly different at the multivariate level (wilk's lambda=0.627, f(5,43)=5 . 13, p-value < 0.00 i). subsequent follow-up tests using the appropriate contrasts indicate the following means are significantly different from each other at a 5 percent level of significance as shown in table 4. in that table, two means reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy vol. i 7, no. i spring/summer 2006 table 4 managing the company financial section 4.40 d marketing section 4.08 b, e milestones section 3.73 e, a swot analysis 3.66 e, a management section 3.44 c, a, e executive summary 3.22 a (scale: 0 =no importance and 6= great importance) with different letters indicate that they are different from each other. (like table 3, two means with shared letters indicate that they are not significantly different from each other at the 5 percent level.)this analysis indicates that when it comes to managing a company, the financial section is statistically different from all other sections. in other words, inc. 500 ceos report that the financial section is the most important section when it comes to managing the company. the marketing section, milestone section, swot section, and management section are not statistically different; this suggests that these sections are all about equally important to managing the company in the eyes of inc. 500 ceos. the statistical analysis also indicates that the executive summary is least important but not far behind management, swot, and milestones. in addition to the above tests, a paired samples t test (or dependent t test) was calculated to compare the mean score for the importance of the business plan in obtaining funding (4.3) to the mean score for the importance of the business plan in managing the company (4.1). no significant difference from obtaining funding to managing the company was found (p > .05). although a number of researchers indicated that many companies do not have written plans or conduct long-tenn planning, this study finds that inc. 500 ceos view the written business plan as important for both obtaining 23 funding and managing the company. implications obtaining outside funding the top-ranked section was the executive summary but only slightly above the financial section. there appears to be a virtual tie for the no. 1 item of importance. with a rating of over 5 both sections seem to be extremely important in the minds of the ceos. why would a one-page document, the executive summary, rate so highly (5.04)? it is often said that investors give a business plan a "one-minute" perusal to decide whether to read the entire business plan. thus, the typical one-page executive summary meets the needs of the swiftmoving, time-conscious investor given the inherent assumption that the key sections of the accompanying business plan are effectively covered in that one page. likewise, bankers are equally, if not more, cautious than private investors. ceos of the inc. 500 have apparently learned that this "quick read" is the nonn when seeking funds and, accordingly, place significant importance on their key points in the executive summary. essentially tying the executive summary for the no. 1 spot, the financial section (5.02) gives the private investor or banker critical infonnation needed to make the ultimate decision on funding the enterprise in question. most business plans provide pro reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy fonna income statements, balance sheets, and cash flow statements in detail for the first 12 months by month and quarterly for the second and third years. many bankers and investors now say that projecting beyond three years is not needed, given the economic swings of our times. unless the management team can be perceived as viable for the startup or growing company, the banker or private investor will not trust the rest of the business plan. in this regard, the management section (4.68) is perceived as quite important in the minds of the company ceos. in this section, the major players running the company are identified, complete with resumes. the company owners are anxious to establish significant credibility so as to convince the potential fund provider that their company will be run with experienced professionals. typically, the functional areas are covered in an effort to reassure the reader of the breadth of skills necessary to facilitate the profitability expected. thus, the management section is understandably a critical section for the fund provider. the marketing section (4.6) received approximately the same importance rating as the management section. without a viable marketing plan, the potential investor or banker most assuredly will not advance funds. a solid marketing section would typically provide the promotion and distribution of the product or service, sufficient detail about advertising methods, and channel sources. given the bombardment of promotional material through various media in today's market, the finn seeking funds must give convincing evidence that this company's marketing strategy and methods are viable. both the swot section (3.8) and the milestones schedule section (3.3) appear to be slightly above middle of the road in importance not of great importance but still important. a swot analysis provides the potential investor some assurance that the 24 vol. 17, no. 1 spring/summer 2006 ceo and management team have thoroughly analyzed the strengths that will win the day for the company. in addition, offering a forthright discussion of the company's weaknesses suggests that realism pervades the rest of the business plan. insight into "opportunities" gives an indication of the foresight and intelligence of the management team. likewise, a potential fund provider can assess whether the company's management team has done their homework when "threats" are thoroughly addressed. clearly, a well-thought-out swot analysis would be very helpful to the investor or banker. managing the company the financial section tops the list when it comes to the importance of using the business plan to manage inc. 500 companies. top management in a company would undoubtedly rather examine actual perfonnance as compared with the pro fonna financials. it is hard to imagine not having key figures whether it be in a cash flow statement or an income statement constantly at the fingertips of the company's management team as reference points. similar to the "funding" question above, the marketing section follows closely behind the financial section in perceived importance. no doubt, ceos and other top managers in a company would continually check to see if they were following the plans they had carefully laid out in advance to market the product or service. are all the methods described in the business plan being fully utilized? has the company strayed from the initial marketing strategy? these and other pertinent questions would be asked often while referring to the detailed marketing section. in the midst of operations, ceos apparently see the value in checking to see whether projected milestones are being reached. without these carefully-crafted milestones in the business plan, the management team would only be guessing as to where they reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy might be in relation to where they projected they needed to be on a certain date. whether the milestone is opening a new store, getting a new product to market, or achieving a key financial position, the usefulness of checking and re-establishing milestones as needed is apparent to the ceos in this study. hence, the 3.73 rating indicates the need for the milestones schedule in the business plan because of the ongoing assistance it provides for the management team. the responding ceos indicated that swot analysis is a useful tool (3.66) as they manage their operations. referring to the initial swot analysis in their business plan, top management may decide it is time for another complete swot analysis as conditions may have changed significantly over the past several months. a periodic assessment of their strengths and weaknesses profiled against the backdrop of new threats or exciting opportunities outside their firm can only be deemed "smart business." the management section of a business plan is still useful in terms of running a company. revisiting the business plan, the ceo and other members of management may realize that they are deficient in an area of expertise needed. perhaps company management team members have left and have not been replaced. perhaps a division of the company has been downsized or enhanced and changes need to be made. perhaps an important, growing section of the business is without leadership and immediate recruitment of a professional in a certain area of expertise is critical. finally, the executive summary received a rating of 3.22. as a ceo or management team member rereads this one-page summary, he or she cannot help but reexamine the moorings of the business. has our mission changed? do we still have the uniqueness of product or service stated in the business plan? are we meeting our overall marketing and financial projections? thus, the bigger picture can be seen vividly. 25 vol. 17, no. 1 spring/summer 2006 perhaps changes need to be made in certain directions. overall, it is not surprising that the executive summary moved from first place for obtaining funding to last place for managing operations. for an ongoing management team who examines the other sections of the business plan often, the executive summary should not need significant changes. the ceos have spoken: the business plan is a document of importance in both obtaining funding and in managing operations. using the business plan to help them run their business is equally important to using the business plan to get the all-important funding necessary for company survival or growth. these inc. 500 companies have achieved much success; their ceos have provided insight into the usefulness of their business plans in achieving this success. small companies trying to improve and grow would do well to strengthen the quality of their business plans and sharpen this helpful tool. whether needing additional funds from outside investors or looking for ways to improve their ongoing business operation, ceos and top management of small companies should take appropriate steps to use an effective business plan to help their companies achieve even greater success. references bhide, a. ( 1994, march/ april). how entrepreneurs craft strategies that work. harvard business review, 150161. burmeister, p. (2003, march). breaking the code: what to present to venture capitalists. strategic finance, 84(9), 36-39. fulmer, r. m. & rue. l.w. (1974, may/june). the practice and profitability of long-range planning. managerial planning, 22. 1-7. herter,g. (1995). business planning boosts your chances. accounting technology, 11(4), 20-30. reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy honnozi, a. m., sutton, g.s., & mcminn, r.d. (2002). business plans for new or small businesses: paving the path to success. management decision, 40(7 /8), 755-764. ibrahim, n. a., angelidis, j. p., & parsa, f. (2004 ). the status of planning in small businesses. american business review, 22(2), 52. kuratko, d. f. & hodgetts, r. m. (2001). entrepreneurship: a contemporary approach (5th ed.). mason, oh: southwestern/thomson learning. latham, g. p. and saarim l.m.. (1979). importance of supportive relationships in goal setting. journal of applied psychology, 64, 151-156. mason, c., and stark, m .. (2004). what do investors look for in a business plan? a comparison of the investment criteria of bankers, venture capitalists and business angels. international small business journal, 22(3), 227. orser, b. j., hogarth-scott, s., & riding, a. l. (2000). perfonnance, finn size, and management problem solving. journal of small business management, 38(4), 42. perry, s. c. (2001). the relationship between written business plans and the failure of small businesses in the u.s. journal of small business management, 39(3), 201-209. sahlman, w. a. (1997). how to write a great business plan. harvard business review, 75(4), 98-108. sanberg, w.r., robinson, r. & pearce, j.a. jr. (200 l, april). one more time ... should small companies attempt strategic planning? the entrepreneurial executive, 46-48. schennerhorn, j. r. jr. (2006) management (8 1 h ed.). hoboken, nj: john wiley & sons, inc. schneider, t. w. (1998). building a business plan. journal of property management, 63(6), 30-33. thune, s. s. & house, r.j. (1970, august). where long-range planning pays off. business horizon, 13, 81-87. 26 vol. i 7, no. i spring/summer 2006 timmons, j. a. & spinelli, s. (2004) new venture creation: entrepreneurship for the 21st century (6th ed.). new york, ny: mcgraw-hill irwin. 71 effect of participation in business membership organizations on the size and occupational diversity of entrepreneurs’ core business discussion network 1 lee j. zane rider university lzane@rider.edu michele k. masterfano drexel university mkm55@drexel.edu abstract participation in social networks is associated with increased odds for entrepreneurial success, but few studies suggest how one best establishes a social network. this study investigates the effect that participation in business or professional membership organizations has on the size and occupational diversity of business owners’ core business discussion networks. it compares the networks of those who belong to business-type membership organizations against those who do not. results suggest that belonging to these organizations has a significant effect on the size and composition of the core business discussion network for male business owners, but not for females. keywords: social networks, social capital, business member organizations, entrepreneurs 1 an early version of the paper was presented at the 26th annual conference of the united states association for small business and entrepreneurship, january 2012 (new orleans, la). s trateg y journal of small business mailto:lzane@rider.edu journal of small business strategy vol. 22, no. 2 72 introduction the importance of entrepreneurial activity to economic progress is well established (schumpeter, 1934; shane, 2004). while founders of businesses face a high probability of failure (strotmann, 2007), many factors exist that may increase the likelihood of success. among these factors are: business planning (delmar & shane, 2004), the reputation of affiliated firms and institutions (higgins & gulati, 2003; stuart, hoang, & hybels, 1999), ownership of intellectual property (zhang, soh, & wong, 2009) and social networks (florin, lubatkin, & schulze, 2003). access to social capital via networks has been extensively discussed in the literature, and studies show that personal networks can be a key ingredient in overall firm performance through exchange of knowledge and access to resources (hargadon & sutton, 1997; nahapiet & ghoshal, 1998). obtaining resources for a new venture often involves asking others for money, labor, and additional resources for a venture with a somewhat uncertain future (dubini & aldrich, 1991). this may be why some say that the entrepreneurs’ social networks could be the entrepreneurs’ most important strategic resources for the new venture (ardichvili, cardozo, & ray, 2003; dubini & aldrich, 1991), as these networks of ties provide access to necessary resources which can then affect firm survival (liao, welsch, & moutray, 2008/2009). social network theory suggests that an organization’s external networks are a major contributor to its overall performance (vissa & chacar, 2009), as firms conduct transactions with business partners to acquire resources in order to produce goods and services (burt, 1992; pennings, lee, & witteloostuijn, 1998). social capital, which is defined as the aggregate of resources available through the network of relationships possessed by an individual or organization (inkpen & tsang, 2005), represents the ability of actors to secure benefits by virtue of membership in social networks or other social structures (portes, 1998). the idea is that through social ties, entrepreneurs can gain access to knowledge and information, opportunities for new business, enhanced understanding of network norms, and can obtain credibility through affiliation with individuals or institutions of high esteem (higgins & gulati, 2003; inkpen & tsang, 2005; portes, 1998). while some conflicting theoretical and empirical evidence exists as to how, and when, various types of connections are helpful, for example, structural holes (burt, 1992), weak ties (granovetter, 1973), or strong ties (brüderl & preisendörfer, 1998), there is substantial evidence that social networks are an important factor in a firm’s ability to obtain financial capital (batjargal & liu, 2004), human resources (lee, lee, & pennings, 2001), and alliances (walker, kogut, & shan, 1997). furthermore, the social capital derived from social networks facilitates the formation of start-up companies (walker, et al., 1997), and affects the overall firm performance (koka & prescott, 2008; mcdonald, khanna, & westphal, 2008; watson, 2007). despite the large array of research discussing the benefits of social networks, “it is surprising to note that relatively few studies have examined how new ventures build and grow their networks” (milanov & fernhaber, 2009, p. 47), hence we continue to know little about their emergence (stuart & sorenson, 2007). the literature has examined the effect of joining various journal of small business strategy vol. 22, no. 2 73 voluntary groups on the size and heterogeneity of one’s overall social network with disparate results (e.g. bekkers, volker, van der gaag, & flap, 2008; j. m. mcpherson & rotolo, 1996), however, there exists little literature that discusses whether it is beneficial for entrepreneurs to attempt to proactively form or broaden his or her social network by being active in formalized business membership organizations such as a trade association, chamber of commerce or rotary. overall, there appear to be no comparative studies that analyze the variances between those entrepreneurs who invest time and money to build their social networks via business membership organizations, and those who rely mostly on informal networking through chance encounters or other methods of business networking, providing business owners no prescriptions on how best to develop a productive social network. the purpose of this study is to investigate the effect that membership in business or professional membership organizations has on an entrepreneur’s core business discussion network’s (cbdn) size and occupational diversity. if larger and more functionally diverse social networks lead to greater business success, can an entrepreneur increase her odds for success by joining one or more such organization? core discussion networks, which are subsets of owners’ overall social networks, are composed of those persons with whom we are willing to discuss important topics (m. mcpherson, smith-lovin, & brashears, 2006). hence, a core business discussion network is defined as those people an entrepreneur goes to first and most frequently with questions or issues regarding business, while occupational diversity looks at the diversity of functional business knowledge residing within the cbdn. this paper contributes to the entrepreneurship literature and provides practical advice to business owners as it explicitly examines the effect of joining one or more business membership organizations on the demographics of business owners’ cbdns, thus providing clear advice as to best practices. we find differing results for male and female business owners. for males, joining these business organizations has the effect of expanding the portion of their cbdn drawn from business contacts, as well as its occupational diversity, but not so for females. the paper continues with a brief review of the literature surrounding entrepreneurship and social networks which will serve as a foundation for the development of hypotheses. this will be followed by a discussion of the study methodology, data analysis, and results. study conclusions, limitations and contributions will close the article. entrepreneurs and social networks we focus on network size and occupational diversity because past research has shown these network attributes to have important consequences for the quantity and range of resources available to those engaged in business activities (kale, singh, & perlmutter, 2000; renzulli & aldrich, 2005). the size of social networks has been shown to positively affect organizational growth (hansen, 1995). essentially, startups with larger networks are expected to enjoy superior early performance because of greater or richer access to information and capabilities (kale, et al., 2000). the thought is that a network containing a journal of small business strategy vol. 22, no. 2 74 greater number of contacts should, all else being equal, have access to a somewhat larger pool of resources than a smaller network. occupational diversity in relationships constitutes an important avenue through which new and diverse viewpoints, information and resources can be gathered. those in varying occupations have been exposed to diverse education, experiences and social contacts and thus possess varying knowledge bases, social networks and access to information and resources. these diverse network connections help entrepreneurs to gather non-redundant, and possibly actionable information (granovetter, 1973). in particular, networks containing individuals with diverse occupations have been shown to facilitate entrepreneurs’ access to financial resources (renzulli & aldrich, 2005) and enhance firm performance (mcevily & zaheer, 1999). research shows that successful entrepreneurs spend time building their networks. for example, a study by delmar and shane (2004) concluded that firms that undertake activities to generate social ties to external stakeholders reduce the hazard of the venture disbanding during the first 30 months of venture life. in addition, dollinger (1985) provided evidence that successful entrepreneurs were particularly active in networking with business people and others who were influential (for example: suppliers/vendors, potential employees, business trade associations and stockholder/creditors). the dollinger study showed that business owners spend a significant amount of time on outside activities. while the highest use of outside time was spent with customers, the secondhighest use was spent with contacts in business membership organizations. these organizational contacts each lasted almost an hour, suggesting that a significant amount of time was invested in the development and maintenance of relationships with other business people. in addition, batjargal (2003) examined the impact of entrepreneurs’ social capital on firm performance and determined that the ability of entrepreneurs to mobilize financial resources from network ties improves financial performance, as the reduced cost of financial capital is then reflected in lower overall costs, making products more competitive on the market, and thus facilitating revenue growth. many studies suggest positive outcomes due to networking (lechner, dowling, & welpe, 2006; staber & aldrich, 1995). for example, egge and stoehr (1997) showed that the economic benefits of participating in a business membership organization exceeded the direct costs of belonging to the organization, with members reporting positive business decisions being made that were strongly influenced by their circle of contacts. in addition, most reported that their business group is a more important source of support than their family, board, or others. specifically, being a member of a business membership organization, such as a chamber of commerce, rotary or other type of business club, was strongly associated with successful exploitation of the business idea in terms of achieving a first sale and of reaching overall profitability (davidsson & honig, 2003). while it would appear that joining various business associations provides opportunities to meet a variety of people with diverse backgrounds, research finds that many associations tend to be segregated by sex, age, education and occupation (e.g., j. m. mcpherson & rotolo, 1996) and that joining such associations may actually inhibit the development of diverse networks journal of small business strategy vol. 22, no. 2 75 because the people met are the same type met in other social situations (kufman, 2002). most business owners recognize the value of networking; the question becomes, is joining a business membership organization a supportive method of building an effective network? this is important, as many organizations tout networking opportunities and access to fellow business owners and others who could potentially be important to an entrepreneur’s business as a major benefit of joining their organization. in addition, many nascent entrepreneurs will need to build their social networks; we should inform them clearly as to best practices. this study examines two important network attributes, size and heterogeneity. specifically, we examine the networks of business owners with regard to the number of business membership organizations in which they participate, and the effect of these memberships on the size and occupational diversity of their cbdn. hypotheses the question is whether joining a business membership organization would significantly increase the portion of a cbdn drawn from business contacts, as opposed to other walks of life, as well as its occupational diversity. previous research, on populations other than business owners that examined the joining of voluntary associations and its affect on the diversity of social networks, finds conflicting results. on the one hand, several studies support the sorting hypothesis (e.g. j. m. mcpherson & rotolo, 1996) which is a homogenizing effect. the explanation is that membership in these organizations mostly provide opportunities to meet people similar to those already known, as several researchers have concluded that many such voluntary groups are segregated by sex, age or education, thus limiting members’ opportunities to develop diverse networks (davis, renzulli, & aldrich, 2006). on the other hand, additional studies support the integration hypothesis (e.g. j. m. mcpherson, popielarz, & drobnic, 1992), which is a diversifying effect. researchers in this camp conclude that individuals who belong to one or more voluntary groups have larger and more diverse networks (bekkers, et al., 2008). the explanation by bekkers and colleagues is based on reverse causation, meaning that those with large or diverse social networks tend to join more organizations because they are recruited by more people and organizations than those with small or closed networks. one of the key terms in this area of research is that of homophily, or the tendency for people to associate with others who are like themselves in terms of social characteristics (m. mcpherson, smith-lovin, & cook, 2001). the thought is that people choose to associate with those similar to themselves, and thus join organizations whose members are similar, or are recruited into organizations by its members who are similar. size of cbdn according to research, the size of an entrepreneurs’ network is very important to the firm’s success. ostgaard and birley (1996) point out that the entrepreneurial process involves gathering scarce resources from the environment, and that these resources are usually obtained through the entrepreneur’s personal network. they hypothesized that it is a worthwhile enterprise for entrepreneurs to nurture their network, and results showed a correlation between larger firms and larger networks, suggesting that firms might be larger because the owners’ networks were larger. likewise, hansen (1995) looked at size of journal of small business strategy vol. 22, no. 2 76 an entrepreneur’s action set (those who cooperated or contributed in some way to founding the new organization) prior to founding a business, and found that network size was a significant predictor of payroll. in addition, results from a study by singh, hybels, and hills (2000) suggest that network size is a gauge of the sum body of knowledge the entrepreneur has access to, again suggesting that network size is an important factor for entrepreneurs. research by greve and salaff (2003), using a cross sectional sample of nascent entrepreneurs from italy, norway, sweden, and the united states, showed that the size of entrepreneurs’ networks corresponded to the amount of time these entrepreneurs devoted to development of the network. studies also suggest that entrepreneurs are quite pragmatic in the development of their networks, adding and pruning people based on an evaluation of their value (larson & starr, 1993; staber & aldrich, 1995). it would appear logical that one way of meeting new (potentially valuable) contacts would be to join and participate in one or more business membership organization. the question is, why does joining a business membership organization lead to the addition of business contacts to the joiners’ cbdn? the idea is that “if you consistently meet people over such a long time, you know each other. you have a beer with them once in a while. these contacts … are almost on a personal level” (maurer & ebers, 2006, p. 273). over time, and through repeated interaction, communities develop. strong communities have “identities that separate and a sense of sociological boundary that distinguishes members from nonmembers” (etzioni, 1996, p. 9). the general rationale is that those who share similar values and goals would be inclined to trust one another (tsai & ghoshal, 1998) and hence be inclined to work with each other. substantial research demonstrates that where relationships are high in trust, people are more willing to engage in social exchange and cooperative interactions, which facilitates access to ideas and people. furthermore, trust and cooperation are interwoven as “trust lubricates cooperation, and cooperation itself breeds trust” (nahapiet & ghoshal, 1998, p. 255). it is in the linkages among individuals or groups that give the collectivity cohesiveness and thereby facilitate the pursuit of common goals, thus leading to the sharing of resources among members (adler & kwon, 2002). while key social network contacts can come from many walks of life, based on the above research and rationale, it is hypothesized that those who join professional networks do so with the intention of looking for valuable contacts to supplement their social network believing that their business will ultimately benefit (dollinger, 1985; schouten, 2007). the time and effort spent in this endeavor results in adding social contacts to their overall social network, with some joining the inner circle of their cbdn, thus producing a larger overall cbdn. h1: participation in business membership organizations is positively associated with the size of an entrepreneur’s core business discussion network. makeup of the cbdn research points to a general decline in memberships over all types of voluntary associations in the united states, but also notes that there has been an increase in professional association memberships (putnam, 2000; rotolo, 1999). this is supported by additional research reporting journal of small business strategy vol. 22, no. 2 77 that many small business owners believe that building relationships will help their business, and that joining professional groups will aid in this endeavor (schouten, 2007). the author also noted that selecting the right organizations to join is important, and that an entrepreneur should not expect relationships to develop magically; he or she must invest both time and money in order to make the membership worthwhile. in the case of business member organizations, it is clear that because these organizations are designed to serve business people, they will consist largely of business people (homogenizing effect) looking to meet other business people. hence, contacts made through these groups should consist largely of business people and thus should expand the number of contacts in the joiner’s overall cbdn derived from business contexts. h2: participation in business membership organizations is positively associated with the number of business derived contacts in an entrepreneur’s core business discussion network. occupational diversity marsden (1987, p. 124), in his study of the data from the 1985 general social survey, discussed network heterogeneity as increasing the range of a network, thus providing more information to the “actor”, or individual under consideration. he stated, “high diversity . . . is deemed advantageous for instrumental actions like gathering information.” while his results focused on measures of heterogeneity such as age, education, race, and sex, renzulli and aldrich (2005) brought the concept into the realm of entrepreneurship. their results suggest that occupational heterogeneity has a large positive effect on the quantity of resources provided. the benefits of a wide range of contacts is demonstrated by the work of maurer and ebers (2006). for a group of six german biotechnology firms, those firms that were more successful had typically extended their social network beyond their existing network of scientists to the business community and industry partners, including lawyers and tax consultants, those with political connections, and those with ties to the financial industry. in similar fashion, donckels and lambrecht’s (1995) study of 900 small business entrepreneurs reported that those entrepreneurs having regular contact with other entrepreneurs at the regional, national and international level were more likely to report growth. while these results do not establish causality, in that it may be that growing firms need to establish wider connections, they clearly show a correlation between networking and firm growth. more interestingly, they show a connection between range of networking and firm growth such that broader networking, national and international, was more valuable than regional. it seems consistent that joining a business membership organization would bring an entrepreneur into contact with business people of diverse job descriptions (e.g. accountant, lawyer, venture capitalist, salesperson) as diverse business people may join such organizations as well as target its members as potential clients (e.g. insurance agents, lawyers, bankers). it also appears logical that joining multiple such organizations could bring an entrepreneur into contact with business people of additional diverse occupations, as each group may have differing goals and journal of small business strategy vol. 22, no. 2 78 therefore draw from dissimilar sections of the overall business population. this rationale is supported by the work of davis et al. (2006) who suggest that maintaining multiple memberships in dissimilar organizations could increase one’s network diversity. based on the above research and rationale, it is hypothesized that all other things held equal, those who join business membership organizations do so with the intent to meet valuable contacts, and will purposefully seek out such contacts, and ultimately derive a more occupationally diverse cbdn than those who choose not to join such organizations. h3: participation in business membership organizations is positively associated with increased occupational diversity of an entrepreneur’s core business discussion network. methodology davis et al. (2006) recommend studying a sample across multiple memberships to better understand the tendency of memberships to expand or contract the diversity of one’s social network, including those with and without membership. the sample frame for this research is comprised of those who own businesses and/or are self-employed in the mid-atlantic region of the united states. in late 2007, a snowball methodology of obtaining respondents was employed. we started with a seed group of 146 business owners/entrepreneurs known to one of the authors through various means. this seed group was sent a request (via e-mail) to participate in a research study using an anonymous online survey. in addition, potential respondents were asked to 1) forward the survey appeal to their list of contacts who were business owners in the same mid-atlantic area, and 2) send to the researcher the number of additional people contacted. the snowball technique generated an additional 528 potential respondents, for a total of 674. of the original 146 emails, eight were returned due to an invalid email address and one person requested that they be removed from the distribution list. this left an effective sample size of 665. a survey was developed based on the literature cited above. ego-centered network analysis explores the relations around each sampled person, rather than the total network of which individuals are members. in ego-centered network studies, respondents describe their networks, activities, and their relations with various network members (marsden, 1990; suitor, wellman, & morgan, 1997). this form of analysis is especially appropriate for collecting network data from a target population that is a small percentage of a population, and whose relations are not normally concentrated in a single social structure, such as entrepreneurs (greve & salaff, 2003) whose networks are often a mix of multiplex social and professional ties (anderson, jack, & dodd, 2005). the survey utilized a name generator technique (marsden, 1987; renzulli & aldrich, 2005) to elicit the names and professions of those that the respondents speak to regularly regarding business issues, and also to understand where the entrepreneur met those individuals. name generators are used to ensure that the respondent thinks about whom he or she consults with on a regular basis, rather than allowing the respondents to indicate simply that they speak to, for example, four people. in this case, the survey asked respondents to “please list the people you turn to with business questions or ideas.” journal of small business strategy vol. 22, no. 2 79 with regard to business memberships, respondents were asked: “do you currently participate in any business organizations, such as a chamber of commerce or other membership-type organization that focuses on business, your specific trade, or your specific profession?” along with a followup question to gather the count. data collection and analysis over the period of 18 days that the survey remained open, 109 responses were received (16.3 percent response rate). two surveys were eliminated due to being incomplete, leaving 107 valid responses. seventy-one respondents (66 percent) report being male, 35 (33 percent) report being female, and one did not answer the question (see table one). the majority of respondents, 75.7 percent, participated in one or more business membership organizations. of those who do participate in these types of organizations, the number of groups they participate in range from one to fourteen, with a mean of 3.05 and a standard deviation of 2.09. the number of memberships was similar for males and females; males have a range of zero to fourteen memberships with a mean 2.27 and a standard deviation of 2.432 while females have a range of zero to six memberships with a mean of 2.39 and a standard deviation of 1.840. with regard to the cbdn, the survey instrument allowed ten names to be listed. while renzulli and aldrich (2005) limited respondents to naming no more than five people that were members of their discussion network, marsden (1987) found that 5.5 percent of the average americans’ discussion network held six or more people. therefore, to ensure that most if not all respondents would be able to list their entire discussion network, we allowed for ten responses each. the number of contacts entered ranged from one to ten with a mean of 6.40 and a standard deviation of 2.642. the number of contacts was similar for males and females. males had a mean of 6.49 contacts, and 45.8 percent of their contacts were from business. females had a mean of 6.22 contacts and 55.55 percent of their contacts were from business. with regard to years in business, 34.6 percent of respondents report having been in business for less than five years, with the remaining being divided among the categories of six to 10 years (24.3 percent), 11 to 15 years (19.6 percent), and 16 or more years (21.5 percent). business experience for males and females were similar (see table 2). for each name listed, respondents were asked: 1) whether the person was related to them (kin), 2) the profession or occupation of the person, and 3) how they met or knew the person. to ensure consistency in responses, drop-down boxes were utilized in the survey instrument for both profession/occupation as well as how the respondent met the person. the professions available for selection included: marketing, strategy, law, bookkeeping, accounting, financing, banking, operations, manufacturing, logistics, purchasing, it, secretarial/clerical, and other. those choosing “other” were asked to enter a description. a total of 159 of 685 contacts (23.2%) were labeled “other” with various descriptions entered for most. we examined the descriptions entered for “other,” as well as the existing categories and made modifications. four categories were added: journal of small business strategy vol. 22, no. 2 80 1) professional (architect/ engineer/ designer), 2) business owner/ entrepreneur, 3) hr/ personnel and 4) advisor (insurance/ consultant/ security). in addition, those designated in the other category as lawyer were added to law, those designated as sales were added to marketing/sales, those designated as software development were added to it, and venture capitalist was added to banker. with only two entries in bookkeeping, it was combined with secretarial/clerical which had one entry, thus eliminating one original category. this process left “other” with 116 items with descriptions such as homemaker, minister, healthcare, doctor, client, carpenter, dog walker, teacher, psych student, retired, journalist, friend, other and blank. after the category adjustments, we have sixteen categories (see table 3); the most frequent occupations were marketing (127), other (116), strategy (115), finance (69), operations (56), law (52), it (47) and accounting (43). these sixteen categories were used to evaluate heterogeneity of the cbdn. table 1: respondent contacts n minimum maximum mean std. deviation number of memberships 107 0 14 2.31 2.242 total contacts 107 1 10 6.40 2.642 total family and friends 107 0 10 2.31 1.959 business organization member 107 0 6 0.76 1.334 current work relation 107 0 8 1.42 1.749 previous work relation 107 0 8 0.93 1.334 total business contacts 107 0 9 3.14 2.139 percent family and friends 107 .00 % 100.00 % 35.68 % 26.94 % percent business related 107 .00 % 100.00 % 50.43 % 27.62 % percent other 107 .00 % 71.43 % 13.89 % 18.31 % table 2: respondent business experience: males to females overall males (n=71) females (n=35) less than five years 34.6% 35.2% 31.4% six to ten years 24.3% 21.1% 31.4% eleven to fifteen years 19.6% 16.9% 25.7% sixteen or more years 21.5% 26.8% 11.4% journal of small business strategy vol. 22, no. 2 81 likewise, respondents were asked to select from the following categories to describe where they met the listed person, namely: family member, neighbor, long-time friend, colleague/employee, previous colleague/employee/employer, church/synagogue/mosque/temple, business membership organization, other organization, and other. again, those choosing “other” were prompted to enter a description. in examining the data, as expected, years in business is significantly (p=.057) related to the number of business organizational memberships (people join more groups over time). an unexpected result is that the number of years in business is not related to the total number of contacts. it may be that business owners recognize that maintaining contacts takes time, and thus prune their social networks, either purposefully or inadvertently, as new contacts are added; staber and aldrich (1995) suggest entrepreneurs often add or prune contacts based on an evaluation of the exchange relationship. hypothesis one predicts that participation in business membership organizations will lead to a larger overall cbdn while hypothesis two predicts that membership would be positively associated with a larger proportion of the cbdn deriving from business. we therefore examined differences between the two groups with regard to the demographics of their cbdns. specifically, we examined the size of the cbdn, the number of business related contacts and the number of different business functions represented in the cbdn (see table 4 below). table 3: occupations of cbdn category count % of total marketing 127 18.54% other 116 16.93% strategy 115 16.79% finance 69 10.07% operations 56 8.18% law 52 7.59% it 47 6.86% accounting 43 6.28% business owner/ entrepreneur 12 1.75% manufacturing 11 1.61% banking 10 1.46% professional (architect/ engineer/ designer) 9 1.31% advisor (insurance/ consultant/ security) 6 0.88% logistics 5 0.73% hr/personnel 4 0.58% secretarial/ clerical/ bookkeeping 3 0.44% totals 685 100.00% journal of small business strategy vol. 22, no. 2 82 table 4: core business discussion network – all respondents participate in business organizations number of contacts number of business contacts number of business functions in network number of functions in network (including other) no n 26 26 26 26 mean 5.77 2.42 3.12 3.62 std. dev. 2.717 1.528 1.505 1.627 range 1-10 0-6 0-5 1-6 yes n 81 81 81 81 mean 6.60 3.36 3.54 4.05 std. dev. 2.601 2.232 1.509 1.515 range 2-10 0-9 1-8 1-9 significance two-sample, one tailed, t-test .085 .025 .105 .107 for h1 to be supported, those respondents belonging to business membership organizations should possess a larger overall cbdn. as expected, the mean size of the cbdn is larger for those who belong to business membership organizations. those with memberships have a range of 210 contacts with a mean of 6.60 and a standard deviation of 2.601, while those without such memberships have a range of 1-10 contacts with a mean of 5.77 and a standard deviation of 2.717. a two-sample t-test was run to determine the significance of these results. the difference in size of the total discussion network between the two groups—those that belong to business membership organizations and those who do not—approached, but did not reach significance (p < .085, one tailed). therefore, hypothesis one is not supported. for h2 to be supported, those respondents belonging to business membership organizations should have a larger number of business contacts residing within their cbdn. the data show that the mean count of the number of business contacts in the cbdn is larger for those who belong to business membership organizations (see table 4). those with memberships have a range of 0-9 business contacts with a mean of 3.36 and a standard deviation of 2.232 while those without such memberships have a range of 0-6 business contacts with a mean of 2.42 and a standard deviation of 1.527. a two-sample t-test was run to determine the significance of this result. the difference in the number of business derived contacts in the discussion network between those that belong to business membership organizations and those who do not is significant (p < .025, one tailed). therefore, hypothesis two is supported. however, it must be noted that the change in the proportion of the overall cbdn deriving from business contacts was not significant. the third hypothesis predicted that participation in business membership organizations would be positively associated with increased occupational diversity of the entrepreneur’s cbdn, which is defined as the number of different journal of small business strategy vol. 22, no. 2 83 functions or professions that are represented in the entrepreneur’s network. to test h3, we examined the difference in mean number of functions represented in the discussion network between the two groups. for h3 to be supported, respondents belonging to business membership organizations should have networks containing a significantly higher number of business functions than those who do not belong to such organizations. results (see table 4) indicate that those participating in business membership organizations had a mean of 3.54 business functions (or 4.05 functions if including “other”) represented in their discussion network, as compared to a mean of 3.12 (or 3.62 functions if including “other”) for those who did not participate in such organizations. a one tailed t-test showed the difference to be not significant (p < .105 or .107 if including “other”), thus h3 is not supported. with many studies pointing to voluntary groups being largely segregated by gender (e.g. j. m. mcpherson & smith-lovin, 1986), and that gender segregation leads to unequal distribution of resources (popielarz, 1999), we decided to run separate tests for males and females and were a bit surprised at the diverse results based on gender. for males, joining business membership organizations was significantly related to a larger overall cbdn, a greater proportion of the cbdn deriving from business contacts, and a more heterogeneous cbdn (see table 5), as predicted by our hypotheses. in contrast, for females (although keeping in mind that the number of females in this sample not joining business member organizations is small), joining business membership organizations was not significantly related to any of our measures (see table 6). with the females in this study having as many, if not more, business contacts than their male counterparts, this result implies that these female business owners obtain their cbdn contacts from sources dissimilar to their male counterparts, and that for these female business owners, joining these groups is not a good source for picking up additional contacts for their cbdn. conclusions and recommendations this research examined the core business discussion networks of business owners, comparing the size and heterogeneity of those who participate in business membership organizations to those who do not. in general, we found that number of years in business is related to the number of business organization’s memberships, but not the total number of contacts in the core business discussion network. specifically related to our hypotheses, belonging to business membership organizations was not significantly related to the total number of contacts in the core business discussion network or functional diversity, but was significantly related to the number of contacts derived from business contexts. that said, differing results were found for male and female business owners. males who joined business membership organizations appeared to add significantly to their cbdn in terms of overall size, proportion of their cbdn derived from business contacts, and occupational diversity. female business owners who joined business membership organizations obtained none of these things. the result that those joining business membership organizations increased the size of the cbdn and the number of business contacts, but not the proportion of contacts drawn from business, could be interpreted as meaning that these business owners are looking to increase the reach of journal of small business strategy vol. 22, no. 2 84 their social network, while not limiting themselves to the sources of their contacts. indeed, these business owners may be actively seeking valuable contacts from multiple sources, with business membership organizations being just one such source. the point is that these business owners may be seeking some balance in the makeup of their cbdn. results from this study shed light on how business membership organizations play a role in the formation and composition of an important part of an entrepreneurs’ social network, the core business discussion network, and may provide differing strategies for male and female business owners seeking to build diverse networks. with research showing that greater size and heterogeneity of social networks are beneficial for firms (kale, et al., 2000), it would appear that male business owners should endeavor to join one or more such organization while females may want to look elsewhere. however, zhao and aram (1995) argued that there is a cost to maintaining social ties (in terms of the owner’s time) and, therefore, entrepreneurs need to be strategic in their building and use of such networks by balancing the potential benefits against the costs. with the female business owners in this sample having a cbdn of similar size and occupational diversity as males, and not deriving these contacts from business member organizations, means that females are either joining dissimilar groups than their male counterparts, or joining these groups with either a different purpose or result. we should investigate further and understand the genesis of female business owners’ social networks in general, and their cbdn in particular. limitations surveys are subject to common method bias, but nonetheless are an accepted methodology for collecting data. a limitation of this study is the potential nonresponse bias due to data being collected via an anonymous and voluntary online survey. while online surveys are not perfect, they do permit quick and accurate data collection from a wide range of respondents while simultaneously reducing the need for resources. in addition, while the sample consisted of business owners and other self-employed individuals, the relatively small sample size (n=109), and snowball methodology limit generalizability of the findings. also, the small number of female business owners not belonging to business member organizations limits the ability to interpret finding for the female sub-set. finally, with the data being collected in the mid-atlantic region of the united states, it is possible that the results obtained reflect a local phenomenon with regard to social norms or the associations chosen. future research as noted, few research studies focus on the differences in networking outcomes between those entrepreneurs who specifically join business membership organizations such as a trade association, chamber of commerce or rotary and those who do not. this is an important area of research, as there are many organizations that market themselves as being for networking purposes; it should be determined if these organizations provide the outcomes that entrepreneurs typically seek, that is, forming bonds with other business people for the purposes of discussing business issues and perhaps also in an effort to increase sales. the studies journal of small business strategy vol. 22, no. 2 85 that have looked at size and heterogeneity of social networks (davis, et al., 2006) typically have used networking organizations as a sample frame, which obviously allows for no comparison to entrepreneurs who spurn these groups for one reason or another. there is a difference between passive membership and active participation in membership organizations. future studies should endeavor to uncover both intent and actual levels of participation in these organizations as some businesses may join organizations for benefits other than social networking, such as access to group health insurance, publications, training and other educational opportunities. these intentions, along with actual levels of participation, could then be compared to firm performance to help uncover any connections. another avenue of research could examine the intersection of organization type and geographic scope (for example, local rotary club versus regional chamber of commerce versus national trade association) with company size and market. it may be that particular types of membership organizations will benefit small versus regional, or national firms disproportionally. with the divergent findings for male and female business owners with regard to the effects of joining business member organizations on their cbdn, future studies need to look at the possible disparate rationale for joining these groups, whether different groups are targeted, and whether gender discrimination or other factors are in play. finally, how do the recent developments in social media (i.e. facebook, twitter, linkedin) and technology (e.g. skype) affect how business owners find and interact with members of their cbdn? are cbdns shrinking because we can now run general ideas by thousands? conversely, are they growing because time and location are not as relevant to having business discussions? is the composition of cbdns changing because of who can now be included in discussions? finally, how do these developments in social media and technology affect general business information collected by business owners? as is well-known, there is voluminous research on networking among entrepreneurs. this work should continue, and should increasingly focus on outcomes, as well as the specifics of the types of networks and the ways one builds a network, that is, can one measure the direct effects of the different types of networking activities— participation in voluntary organizations, joining business clubs, purposeful versus serendipitous meetings, and so forth—on the constructs of network size, density, and heterogeneity, not to mention growth, profitability and overall survival of the business. journal of small business strategy vol. 22, no. 2 86 table 5: core business discussion network – male respondents participate in business organizations number of contacts number of business contacts number of business functions in network number of functions in network (including other) no n 18 18 18 18 mean 5.56 2.33 2.94 3.39 std. dev. 2.791 1.534 1.392 1.501 range 1-10 0-5 1-5 1-6 yes n 53 53 53 53 mean 6.81 3.23 3.77 4.19 std. dev. 2.675 2.292 1.476 1.532 range 2-10 0-9 1-8 2-9 significance two-sample, one tailed, t-test .047 .065 .025 .030 table 6 core business discussion network – females respondents participate in business organizations number of contacts number of business contacts number of business functions in network number of functions in network (including other) no n 8 8 8 8 mean 6.25 2.63 3.50 4.13 std. dev. 2.659 1.598 1.773 1.885 range 2-10 1-6 0-5 1-6 yes n 28 28 28 28 mean 6.21 3.61 3.11 3.79 std. dev. 2.455 2.132 1.499 1.475 range 2-10 0-8 1-6 1-6 significance two-sample, one tailed, ttest .486 .119 .267 .297 journal of small business strategy vol. 22, no. 2 87 references adler, p. s. & kwon, s.-w. 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(1995). networking and growth of young technology-intensive ventures in china. journal of business venturing, 10(5), 349-370. lee j. zane, ph.d. is currently an assistant professor of strategy and entrepreneurship at rider university. he teaches primarily in the areas of strategic management and small business management. his research interests focus on entrepreneurship (both individual entrepreneurs and their ventures) and strategy. michele k. masterfano, dba is currently clinical assistant professor of management in the lebow college of business at drexel university. she teaches strategy and entrepreneurship classes to both undergraduates and mba students. her research interests include the real-life effects of social networking among entrepreneurs and how technology and its adoption and issues correlate with the successful implementation of business strategy. reproduced with permission of the copyright owner. further reproduction prohibited without permission. adm_69893_20120103_00006.pdf editor associate editors paul belliveau rider university editorial assistants vice president of membership:             performance of historically underrepresented firms in the public-private sector       troy a. voelker university of houston clear lake voelker@uhcl.edu william c. mcdowell strategy   journal of small business  east carolina university mcdowellw@ecu.edu             abstract    this study examines the performance of historically underrepresented firms, which  includes women‐owned businesses and socially disadvantaged businesses.  we  examine performance in the context of securing public contracts and compare the  performance of these historically underrepresented firms to those of non‐minority  small and large businesses.  utilizing a sample of all contracts awarded by the johnson  space center, a nasa directorate located in houston, texas, which identified 5,676  contracts totaling approximately $157 billion, we found that small businesses received  around 63% of all contracts.  the results indicate that more diverse firms received  higher awards than specialists and that disadvantaged firms received higher dollar  awards than general small businesses.  in addition, women‐owned businesses neither  outperformed nor performed more poorly than general small business in the dollar  amounts of contracts received, and they are neither more or less specialized than  general small and large businesses. a discussion, practical implications, and future  research ideas are also presented.    keywords: women owned businesses, socially disadvantaged businesses, historically underrepresented firms, public-private sector   18    mailto:voelker@uhcl.edu mailto:mcdowellw@ecu.edu journal of small business strategy                                  vol. 21, no. 1 spring/summer 2010        19      introduction strategic alliances, joint ventures, partnerships, and other interorganizational relationships between businesses have continued to grow in popularity in both business and research (das & he, 2006; kelly, 2007; lee & gongming, 2007). small businesses have been recognized as being uniquely suited for partnerships with other organizations due to many advantages such as a simple organizational structure, a focus on growth and continuity, flexibility, and central decision making (gelinas & bigras, 2004). in addition, these small businesses have access to additional resources and learning opportunities that can boost performance (beekman & robinson, 2004). for many small businesses, collaboration with the public sector is vital. in fact, many small businesses view public-private partnerships as their primary area of work and expertise. public-private partnerships are gaining popularity as some research indicates that they increase innovation and opportunities for growth, and that they are the way of the future due to the interconnectedness of industries and work sectors (richter, 2004). bovaird (2004) defines a public-private partnership as a working arrangement between a public sector organization and an organization outside of the public sector. the form of these partnerships can be very broad as can be the range of products and services they produce or render. one advantage of these business-to-business relationships is they can create value networks that make up a business ecosystem that can provide advantages to all parties involved (beekman & robinson, 2004; sawhney & zabin, 2002). these connections can take place in many arenas which include state and local governments, international agencies such as the un, and even the federal government as these organizations partner with the commercial sector (richter, 2004). while many federal contracts go to large, publicly-traded firms, small businesses are well represented. for the past several decades, the federal government has recognized the job creation and innovation potential of small and mid-sized businesses (audretsch, 2003). this recognition has led to increased emphasis on funding small to mid-sized businesses, thereby enhancing job creation benefits. specific targeting of minority-owned and innovative businesses spurs the emergence and creation of such ventures (cooper, 2003). along these lines, public policy supporting preferential treatment of small businesses is aimed at the broader economic benefits resulting from heightened job creation and innovation. for the federal government, the benefits accrued from the private-public partnership go beyond job creation. small businesses with strong connections to public and nonprofit entities such as universities and other research institutions achieve heightened levels of innovation with lower direct investment in r&d (audretsch, 2003). thus, federal procurement aimed at innovation, such as the small business innovation research (sbir) program journal of small business strategy                                  vol. 21, no. 1 spring/summer 2010        20    enables the creation of many new business ventures and enhances the commercialization of government sponsored research (held, 2007). the second thrust of public policy addresses institutional inequities blocking certain entrepreneurs from equal market opportunities. women-owned and minority-owned businesses are systematically underrepresented in most industries and face many institutional obstacles that extend well beyond simply running an effective small business. for example, minority-owned and womenowned businesses suffer excessively high mortality (robb, 2002) and face substantial challenges in securing institutional sources of capital (treichel & scott, 2006). seeking to mitigate these inequities, the federal government fills a gap in sourcing for entrepreneurial capital (cooper, 2003), extending several programs targeting strategically disadvantaged businesses. in addition to specialized sources of funds and initial funding, small businesses gain benefits of legitimacy from their business relationships with public institutions (connell, 2009). the documentation required to become a candidate for receipt of federal procurement, along with the due diligence applied in awarding such contracts, makes the federal government an important ally for emerging ventures. this legitimacy carries forward to increased access and interest from venture capital for growth and technology oriented small businesses (lerner, 1999). while an emerging body of research offers insight into the nature of small-business performance within public procurement, little is known about the comparative performance of small business types within those systems. to date, the research tends towards descriptions of the benefits of specific programs (abramowicz & sparks, 2007; connell, 2009), need for specifically targeted programs (reardon, nicosia, & moore, 2007) or public performance of major government entities (held, edison, pfleeger, anton, & clancy, 2006). we lack, however, information regarding the comparative performance of focal categories (e.g. women-owned and minority-owned ventures) relative to their counterparts. to this end, a gap exists in identification of whether the various focused programs result in performance gains for small business. it is along these lines that we proceed in our current research. in this paper, we explore four research questions. first, how do small businesses fare in their receipt of contract awards? second, are there differences in the extent of specialization and generalization between small and large businesses in their receipt of awards? third, are focused categories of small business better (or worse) positioned in their receipt of contractual awards? finally, are there differences in the specialization and generalization levels of focused categories of small businesses? our research examines the performance of small businesses and various types of small businesses in terms of their receipt of federal contracts and dollars awarded. we focus on the relationship with a single federal agency because of that agency’s broad funding in supporting numerous projects. the businesses represented journal of small business strategy                                  vol. 21, no. 1 spring/summer 2010        21    include large multi-national firms, small businesses, and minority-owned businesses. the contracts awarded include basic services, research and development, construction, and substantial investments in technology. federal contracts and business categories our examination of small business performance distinguishes between several demographic categorizations of small business contracts. the distinctions we use to separate categories of small business are defined by the federal government. each of these categories represents a classification of small business ownership of specific interest to the federal government. depending on the category, this interest may involve historical underrepresentation, challenges in acquisition of capital, and proclivity to generate innovations. each category consists of a series of rules and targets for the distribution of federally awarded contracts and, in some cases, provides for additional services (such as mentoring). we provide definitions and background information for each of these categories in the following subsections. small business categories the small business administration (sba) provides standards for definitions of small businesses, categories of small business, and additionally manages the certification of firms following within certain special categorical programs. for all small business categories, the primary designation depends on the size aspect. the sba uses classification standards based on both number of employees and annual sales revenues. depending on naics classification, a firm is considered small if its sales are under the $12 million range. however, for certain industries such as most construction industries (naics 23), businesses are classified as small up through $35 million in sales. similarly, for many segments of professional, scientific and technical (naics 54), firms are considered small through $27 million in sales. using employee metrics, firms are generally considered small if they have fewer than 500 employees, although significant variation exists depending on the industry sector. the federal government focuses procurement efforts on small businesses out of recognition of the significant economic impact and job creation typical of small ventures. current guidelines from the federal government set targets for federal direct procurement contract awards for small businesses. this target has grown since its inception and currently provides 23% of direct procurement (reardon et al., 2007). while the economic impact of successful small businesses is noteworthy, small businesses also face substantial failure rates. robb (2002) finds that four-year mortality rates for small businesses exceed 50%. further, the mortality rate is substantially higher for minority-owned firms and women-owned businesses fail 2-3% more frequently than male owned businesses within each category. in addition to heightened failure rates, minority-owned (robb, 2002) and women-owned (reardon et al., 2007) businesses are substantially underrepresented in most industry journal of small business strategy                                  vol. 21, no. 1 spring/summer 2010        22    categories. recognizing this, the federal government provides preferential treatment and offers support programs both through the sba and through the agencies who manage procurement awards. women-owned businesses the sba defines a firm as women-owned if it meets the parameters for a small business and if a 51% ownership position is held by a woman. federal procurement procedures provide preferential selection practices towards firms who are women-owned and additional preferential programs are available for firms whose minority owner is women-owned and economically disadvantaged (reardon et al., 2007). women owners comprise a significant percentage of small businesses. white females (8.3%) are the fourth highest demographic likely to own or operate their own business following white males (14.4%), asian (10.2%) and hispanic (8.5%) (blanchflower, 2009). further, facing slow gains in employment opportunities and inequality in larger firms, women increasingly turn to selfemployment. through 1997, the growth of women-owned businesses was roughly three times that of male-owned businesses and the magnitude of change is projected to increase (daniel, 2004). daniel additionally notes that women who own businesses have an average income level 2.5 times that of women who are not business owners. while robb (2002) reports mortality rates for women-owned businesses as 2-3% more prevalent than male-owned counterparts, other evidence suggests that these mortalities may not represent firm failures. indeed, discontinued firms with female ownership are substantially less likely to have entered bankruptcy than their maleowned counterparts (robinson, 2007) suggesting that this difference is driven by higher risk-aversion in female entrepreneurs. while robinson concludes that lower risk of firm failure should result in favorable capital access, women-owned firms have historically proven less likely to receive financing and receive lower financing amounts from institutional sources (treichel & scott, 2006). there are other issues facing women-owned businesses that include less early startup capital (s. carter & rosa, 1998), more difficulty securing loans (verheul, risseeuw, & bartelse, 2002), and less credit history (shaw, carter, & brierton, 2001). in addition, many women-owned businesses also have less managerial and technical experience (chaganti & parasuraman, 1996) which may play a role in the higher mortality rate as indicated above. when these constraints are coupled with the fact that women-owned businesses are more likely to enter industry sectors with higher failure rates (n. m. carter & williams, 1997), it is easy to see why problems may exist. in terms of federal procurement awards, women-owned businesses are targeted for 5% of all contracts. however, reardon et al. (2007) cautions that this target has never been hit and women-owned businesses actually receive approximately 3.5% of all federal contracts. they additionally note that women typically receive fewer and smaller awards than their male counterparts. journal of small business strategy                                  vol. 21, no. 1 spring/summer 2010        23    additionally, women-owned businesses are significantly underrepresented in virtually all industry categories when examining contracts awarded. some of these findings may be the result of women-owned businesses not having the capital nor being able to secure the financing necessary to win these contracts. disadvantaged and 8(a) disadvantaged business the sba classifies socially disadvantaged businesses (sdb) as unconditionally owned by u.s. citizens from socially and economically disadvantaged groups. under current classification, this includes (but may not be limited to) black americans, hispanic americans, native americans, and asian pacific americans. groups receiving this classification are deemed socially and economically disadvantaged because of historic discrimination in capital and credit opportunities. robb (2002) notes that small businesses with ownership from sdb categories have significantly higher mortality rates. blanchflower (2009) further notes that black owned businesses are significantly underrepresented in virtually every industry and only notes a growth in construction and this following roughly a decade of contraction in construction. he reports substantial differences in access to capital sources, with minority owners facing systematically lower opportunities for funding. these findings are consistent with other evidence that black entrepreneurs face higher denial rates than white counterparts (cavalluzzo, cavalluzzo, & wolken, 2002). unlike some other programs (e.g. sbir), sdb's are allowed to enter into partnerships and joint ventures with non-disadvantaged owners in a mentor-protégé relationship (abramowicz & sparks, 2007). the program sets a 10% funding goal for any federal agency awarding contracts in excess of $250,000. while this establishes favorable evaluation of disadvantaged and 8(a) disadvantaged firms, judicial requirements mandate that distribution of awards must be race neutral in order to minimize discrimination against white owned small businesses and other nondisadvantaged businesses (myers jr & ha, 2009). the 8(a) program additionally extends to sub-contracting relationships. under this program, large primary contractors receive bonus payments if they subcontract with 8(a) disadvantaged firms (abramowicz & sparks, 2007). small business innovation research (sbir) program initially created by the small business innovation development act of 1982, the sbir program was initially targeted for 1.25% of extramural research funding (held et al., 2006). since its inception, the program has raised its targets to 2.5% for projects meeting sbir characteristics. the program initially expired in 2008, but has been extended through a series of shortterm packages involving elements of the stimulus program (seong, horn, & held, 2008). requirements for participation in sbir research include independent ownership (at least 51%) by a u.s. citizen or lawful resident with the firm located within the united states. the goals of sbir are to increase use of small journal of small business strategy                                  vol. 21, no. 1 spring/summer 2010        24    businesses r&d, enhance commercialization of federal r&d, and improve access for minority and disadvantaged businesses (held et al., 2006). the motivation for the sbir is reflected upon the advantages small firms have in generating innovation (audretsch, 2003) and extends the legitimacy benefits for small businesses with government contracts (connell, 2009) ultimately leading to increased creation of innovative new ventures (cooper, 2003). research examining the performance of sbir firms finds that recipients of sbir contracts create more jobs (connell, 2009) and grow sales faster than similar sized counterparts (lerner, 1999). the growth advantages of sbir firms may represent inherently greater innovative productivity for the award winners, rather than innovation created as a result of federal funding (wallsten, 2000). wallsten suggests sbir funding simply functions as a supplement to firm r&d investment. whether sbir causes innovation or innovative firms receive more sbir funds, a positive correlation exists between sbir funding and innovative firms. audresch (2003) observes that “some of the most innovative american companies received early stage finance from sbir, including apple computer, chiron, compaq and intel” (p. 133). sbir participation occurs in three funding stages, progressing from phase-1 merit, to phase-2 primary r&d, and, occasionally, phase-3 follow-up (held et al., 2006). the program is highly selective with only 17% of applicants receiving phase-1 funding and merely 50% of those moving on to phase-2 funding (cooper, 2003). the total federal sbir program generates roughly 4000 contracts per year going to some 1500 firms, many of whom win multiple contracts (connell, 2009). firms winning sbir contracts also move on to receive other non-sbir federal contracts, prompting held and colleagues (2006) to suggest sbir functions as a recruiting tool bringing firms into a federal participation network. some criticism has been made of the sbir program. held and colleagues (2006) observe that the sbir program, while significant, remains a small part of the overall small business program. further, sbir initiatives targeted at women-owned businesses and sdb's may be less effective than distinct programs targeted at those two groups. additionally, seong and colleagues (2008) find that sbir administrative costs are quite high, running 4-5 times the cost of similar small business targeting programs. they caution, however, that these administrative costs may be driven by the nature of the innovation research. held and colleagues (2006) further observe that the commercialization goals for sbir are generally only met by a handful of firms. this conclusion echoes arguments by lerner (1999) suggesting that the high performance outcomes for sbir firms may be an artifact produced by a handful of firms in venture-capital dense geographic communities (e.g. silicon valley). research questions in the preceding sections, we have defined and characterized small business categories specifically highlighted in federal journal of small business strategy                                  vol. 21, no. 1 spring/summer 2010        25    procurement programs. these small business categories reflect demographic groups who are underrepresented in entrepreneurship, have higher failure rates for their ventures, and are composed of entrepreneurs who are systematically restrained in access to institutional capital. if this were a sample of small businesses without partnership connections to the federal government, we might expect performance below that of non-minority small businesses and large businesses. however, given decades of attention by federal procurement, including special programs, incentives, and within network mentoring, it is quite possible that these historically underrepresented firms will fare similarly to their non-minority small and large business counterparts. analysis our study involves the examination of all contracts awarded between the years of 2005 and 2007 by johnson space center (jsc), a nasa directorate located in houston, tx. jsc engages in a number of public-private partnerships with both large and small firms. this includes funding for ongoing projects, such as space station freedom, emerging r&d, and general facilities development and management. in addition to relationships with direct contractors, larger recipients, such as boeing, often sub-contract out parcels of their awards, creating an interdependent network of small to large businesses focusing on a variety of projects. primary contractual data is available online through the nasa acquisition internet service (nais). this website allows for ad-hoc queries on all direct relationships between nasa (and its directorates) and the various organizations it awards funding. this includes for-profits, not for-profits, ngo's, educational institutions, as well as state and municipal governments. for the purposes of our study, we omit contracts awarded to educational and governmental institutions. further, in our examination of small business performance, we also omit not-for profits and ngo's. table 1 depicts the number of contracts and dollar value awarded for large businesses, small businesses and not-for-profits (including ngo's). we specifically emphasize the dollar value awarded, rather than the total amount paid to the awardee. while this may at times overstate the amount each entity ultimately receives, it maintains a uniform presentation for all awards. in some cases, awards were still being disbursed for contracts with lengthy durations, and emphasis on payments received would have underrepresented the actual commitment in the award. we were able to identify 5,676 contracts amounting to roughly $157 billion awarded over the three years of our sample. not surprisingly, large businesses received the majority of the funded awards, taking in nearly 97% of all funds. however, small businesses received the overwhelming number of contracts, receiving approximately 63% of all contracts. journal of small business strategy                                  vol. 21, no. 1 spring/summer 2010        26    table 1-contracts awarded based on size and type of business category contracts awarded dollars awarded large business 1759 (31%) $151bn (96.6%) small business 3567 (63%) $4.9bn (3.1%) nfp 350 (6%) $.5bn (.3%) 5676 $157bn nais also provides categorization data for small businesses. prior to 2005, this information is generally restricted to the size of the business and whether it is a strategically disadvantaged business. however, beginning in 2005, this information was uniformly reported to include designations for women-owned businesses, disadvantaged businesses, 8(a) disadvantaged businesses, and sbir firms, thereby allowing examination of various combinations of categories (e.g. womenowned, disadvantaged businesses). below, table 2 documents the number of firms, dollars received, and contracts received for all small business categories receiving awards in our sample period. small businesses make up the largest number of firms in the sample (n = 958). this category represents firms which do not meet the definitions for any other small business category. table 2-number of firms, dollar amount received, and contracts received category firms dollars awarded contracts awarded small business 958 73.6% $ 1,624,624,022.76 33.4% 2514 70.5% women-owned 149 11.4% $ 562,639,152.00 11.6% 380 10.7% disadvantaged 47 3.6% $ 2,085,069,152.00 42.9% 155 4.3% 8(a) disadvantaged 11 .8% $ 168,530,354.00 3.5% 79 2.2% sbir 93 7.1% $ 90,851,524.00 1.9% 256 7.2% wob disadvantaged 22 1.7% $ 271,320,938.00 5.6% 121 3.4% wob 8(a) 7 .5% $ 43,675,446.00 0.9% 34 1.0% wob sbir 10 .8% $ 8,494,100.00 0.2% 21 0.6% dis sbir 5 .4% $ 2,064,673.00 0.0% 7 0.2% journal of small business strategy                                  vol. 21, no. 1 spring/summer 2010        27    while such businesses make up the majority of sampled small firms (74%), and receive a similar majority of the awarded contracts (71%), they receive the second largest level of awards (33%) behind that awarded to disadvantaged firms (43%) who represent a substantially smaller number of firms (4%). this cursory examination suggests that certain categories of small businesses perform better (or worse) than the general small business category. nais also contains information on the naics category associated with the contract award. while this information is omitted in some cases, most of the contracts awarded to for-profit ventures contain this information. an examination of the most frequently cited naics codes, the percentage for each category, and the rank order for that frequency within each category of business is shown in table 3 below. nais reports this information at the six-digit naics code, and we retain that information in our documentation and subsequent analysis. the most frequently occurring naics codes appear to come from naics 54, professional, scientific and technical services. indeed, six of the ten most frequent naics codes (roughly 33%) come from this area. in general, the most common naics codes are fairly well represented across all categories of business. the two primary exceptions appear, at first glance, to come from 8(a) disadvantaged firms and sbir firms for whom five and seven of the ten most common naics codes respectively do not appear. an examination of the top-ten naics codes by category and their relative weight within each category appears in table 4 below. this information offers insights into the nature of the differences observed initially in table 3. while sbir firms only comprised three of the ten most common naics codes, the difference appears largely driven by the weight of the most frequent naics category for sbir contracts. naics 541710, r&d in physical, engineering and life sciences, makes up over 86% of the sbir contracts awarded by jsc in this period. to this end, sbir firms mirror all other business categories in the fact that most awards come from naics 54. the 8(a) disadvantaged businesses, however, differ significantly in the types of firms receiving contracts. here, we find four of the ten most frequent awards coming from naics 23, construction. further, these awards make up roughly 43% of the total contracts awarded to 8(a) firms. our examination of contracts and dollars awarded suggested that different categories of small businesses perform differently in their receipt of awards. however, our examination of the industries represented suggests differences only in the 8(a) disadvantaged category. other than 8(a) firms, the various categories of small business seem relatively equivalently spread across the same types of industries represented by large and non-minority small businesses.     jo u rn a l o f s m a ll b u sin ess s tra teg y                                   v o l. 2 1, n o . 1 s p rin g /s u m m er 2 0 10     table 3-naics codes, industry category, and the rank order of each category naics category percent lb sb wob dis 8(a) sbir wobdis 541710 r&d phys, eng, and life 14.1% 2 3 1 36 8 1 9 541330 engineering services 7.2% 1 2 17 4 6 2 n/a 334111 electronic computer mfg 5.0% 4 1 5 26 n/a n/a 2 443120 computer and software stores 3.8% 3 4 n/a n/a n/a n/a 5 541519 other computer related svc 3.8% 6 7 6 6 4 n/a 1 541611 adm mgmt consulting 3.3% 10 5 4 8 17 n/a 16 541511 custom computer programming 2.8% 15 8 45 35 1 6 14 511210 software publishers 2.4% 5 10 10 33 n/a n/a 8 541512 computer systems design svc 2.0% 8 19 46 10 n/a n/a 15 337214 office furniture mfg 1.8% 11 18 3 30 n/a n/a n/a 2 8         table 4-naics codes and relative weight within each category large business small business disadvantaged business 8(a) disadvantaged women owned sbir disadvantaged women-owned 541330 10.0% 334111 7.4% 238160 13.3% 541511 20.2% 541710 10.4% 541710 86.1% 541519 25.5% 541710 6.6% 541330 7.2% 236210 8.9% 236210 19.1% 611430 10.4% 541330 2.9% 334111 23.6% 443120 6.3% 541710 5.3% 238210 8.9% 238160 11.7% 337214 9.6% 334413 1.6% 423430 9.1% 334111 4.0% 443120 4.3% 541330 8.1% 541519 8.5% 541611 5.2% 333999 1.2% 323115 5.5% 511210 4.0% 541611 4.3% 236220 7.4% 237110 6.4% 334111 4.3% 336415 1.2% 443120 5.5% 541519 3.6% 334112 3.6% 541519 6.7% 541330 6.4% 541519 3.5% 541511 1.2% 561612 5.5% 335999 3.4% 541519 3.1% 541310 4.4% 237310 5.3% 611420 3.5% 927110 1.2% 237110 3.6% 541512 3.3% 541511 3.0% 541611 3.7% 541710 3.2% 334515 2.6% 325411 0.8% 511210 3.6% 541310 2.9% 334515 2.5% 423430 3.0% 561410 3.2% 421430 2.6% 334419 0.8% 541710 3.6% 541611 2.9% 511210 2.2% 541512 3.0% 562910 3.2% 511210 2.6% 334510 0.8% 236220 1.8% all other 53.1% 57.3% 32.6% 12.8% 45.2% 2.0% 12.7%     jo u rn a l o f s m a ll b u sin ess s tra teg y                                   v o l. 2 1, n o . 1 s p rin g /s u m m er 2 0 10   29     journal of small business strategy                                  vol. 21, no. 1 spring/summer 2010      30    the remainder of our analysis examines receipt of federal contracts, dollars awarded, and degree of specialization and generalization. here we conducted regression models using three dependent variables: number of contracts awarded, log-dollar values of contracts awarded, and number of naics codes covered in contract awards. we used three subsets of our data to conduct this analysis. the first analysis examined differences across all forprofit and not-for-profit firms (n = 1925). our second analysis examined performance characteristics of all for-profit firms (n = 1913). our final analysis examined differences across only small businesses (n = 1299). these analyses are presented in table 5 below.   table 5-comparison of for-profit and small business firms all for-profit firms small business only model 1 model 2 model 3 model 4 model 5 dv ## contracts ##naic s log_dollars ## contracts ##naics predictor β p β p β p β p β p sb -.06 * -.09 ** wob -.00 .02 -.02 -.01 .03 dis .02 .09 ** .12 ** .02 .11 ** 8(a) .03 .09 ** .10 ** .04 .12 ** sbir -.04 † .13 ** .24 ** -.05 † .16 ** nfp 0 diversified .30 ** .20 ** .30 ** r2 .10 ** .03 ** .15 ** .09 ** .05 ** n 1925 1813 1299 1299 1299 base case large business large business small business small business small business † 0.1 * 0.05 ** 0.01 ** 0.001 journal of small business strategy                                  vol. 21, no. 1 spring/summer 2010      31    in each regression, our predictors are categorical variables separating the base case from our categories of interest. the base case is large businesses in model 1 and 2 and general small businesses in models 35. categorical predictors exist for general small businesses (in models 1 and 2) along with firms meeting government procurement program definitions for women-owned business, sdb's, sdb's meeting 8(a) requirements, and sbir contracting firms. in regression models examining contracts and dollars awarded, we additionally track the number of naics codes a firm operated in, thus estimating effects from diversification (multiple naics codes) and specialization (one naics code). small businesses and their receipt of jsc contracts our first research question examines whether small businesses (and related subcategories) differ in their receipt of federal contracts. we focus on contracts awarded, rather than dollars awarded, as the very definition of small under sba rules suggests that small firms will receive inherently smaller contracts than large businesses. we thus examine the number of contracts awarded as a function of the business category type, with large businesses representing the base case. regression results are reported as model 1 in table 5. our regression model is significant (r2 =.10; p<.001) and predictors for diversification (β=.30) and small business (β=-.06) are significant with the predictor for sbir (β=-.04) approaching significance. from this, we conclude that firms operating across multiple naics codes receive more contracts than specialist firms functioning in a single (or few) naics codes. further, individual small businesses receive fewer federal contracts and sbir firms receive somewhat fewer federal contracts than do large businesses. none of the firms representing small businesses in disadvantaged minority groups differ substantially in their contract award characteristics. small business specialization within the jsc contract network our second research question examines the extent to which small businesses, and categories of small businesses, differ in their extent of diversification or specialization. here, we use the number of naics codes a firm operates in as a dependent variable in a regression against the various categories of organizations, with large businesses functioning as a base case. results for this regression are reported as model 2 in table 5. the regression model is significant (r2 = .03; p <.001), although the variance explained is quite low. we find significant positive relationships for disadvantaged (β = .09), 8(a) qualifying firms (β = .09) and sbir recipients (β = .13) along with a negative significant relationship for general small businesses (β = -.09). from this, we conclude that sdb and sbir program recipients tend to operate across more naics codes than do large businesses. taking model 1 and 2 together, small businesses receive fewer contracts from jsc and tend to operate across fewer naics codes. journal of small business strategy                                  vol. 21, no. 1 spring/summer 2010        32    small business categories and their receipt of jsc contracts where our initial models compared the performance of small businesses and specific categories of small businesses relative to large businesses, we turn our attention now to the comparative performance within the small business subset itself. here our sample is reduced to firms meeting small business characteristics (n = 1299) and we examine results using both the number of contracts and dollars awarded. our predictor variables in this stage include the various categories of small business (with general small business functioning as the base case) along with a predictor for the number of naics codes the firm operates in. the regression runs are presented as model 3 and model 4 in table 5. model 4 uses the log dollars of the contract awards as a dependent variable against the categorical predictors. the model is significant (r2 = .15; p<.001) and we find a number of the predictors significant. consistent with our examination across all organizations, more diversified firms receive higher dollar awards than do specialists (β = .20). additionally, both types of sdb's, disadvantaged firms (β = .12) and 8(a) classified firms (β = .10) receive higher dollar awards than general small businesses. sbir recipients (β = .24) also receive higher dollar awards than nonsbir small business recipients. model 5 uses the number of contracts awarded as a dependent variable against the same range of predictors. once again the model is significant (r2 = .09), although few predictors reach significance. consistent with earlier analysis, diversified firms receive more contracts (β = .30) than do specialists. sbir recipients (β = -.05) receive marginally fewer contracts than do non-sbir small businesses although the preceding results suggest these fewer contracts are more lucrative. specialization of small businesses awarded jsc contracts our final analysis examines the tendencies towards diversification or specialization for small business recipients of jsc contracts. here, our dependent variable is the number of naics codes a firm operates in regressed against the various categories of small businesses, with general small businesses functioning as the base case. results of this regression are depicted in model 5 on table 5, once again the model is significant (r2 = .05). we find significant, positive coefficients for both categories of sdb's with both disadvantaged firms (β = .11) and 8(a) firms (β = .12) functioning in more naics codes than do general small businesses. additionally, sbir firms (β = .16) tend to operate in more naics codes than do their non-sbir general small business counterparts. discussion the federal government expends some effort understanding the impact of small business on the economy as well as understanding institutional biases which undermine the potential effectiveness of many categories of small business. while small business have historically functioned as job and innovation incubators for the journal of small business strategy                                  vol. 21, no. 1 spring/summer 2010        33    united states (audretsch, 2003) and while entrepreneurship generally produces better earnings and lifestyle opportunities for many individuals (daniel, 2004), these benefits do not come without pitfalls. small businesses retain a very high failure rate (robb, 2002) and outcomes for small business are not equivocal across demographic groups. we discuss our findings categorically, looking at findings for general small business, women-owned business, sdb's, and sbir businesses. general small business includes all firms meeting sba definitions who did not fall into any other category. while these firms receive the largest number of total contracts (70.5%), they receive the second largest total awards (33.4%). considering that general small businesses comprise the largest number of firms in the small business category (73.6%), these initial outcomes suggested that the individual firm performance lags behind that of other small business categories. this phenomenon is, in fact, born out in our regression models. individual general small businesses receive fewer contracts and smaller awards per contract than do all other firms, except for women-owned small businesses. however, it does not appear that this is through any specific penalty in awards as much as in self-selection by the general small businesses themselves. general small businesses tend to operate across fewer naics codes than do any other firms in our sample, except for women-owned businesses. additionally, general small businesses seem concentrated in naics 54 (science and technology) and naics 33 (manufacturing) which appear to be the most competitive contracts in the jsc data set. in the three models where we examined contract award characteristics, the number of naics codes a firm operates in routinely emerged as the strongest performance predictor. a tendency towards specialization in more competitive arenas likely limits potential contracting opportunities for general small businesses. while we find general small businesses to underperform nearly all other business categories, the same cannot be said for women-owned businesses. businesses owned by female entrepreneurs do not under or over-perform general small and large businesses in their receipt of contracts. similarly, they do not outperform, nor do they underperform, general small businesses in the dollar amounts of contracts received. additionally, they do not appear to be any more or less specialized than general small or large businesses. while reardon et al. (2007) report that federal procurement targets, as a whole, have never been met for womenowned businesses, we find little evidence that women-owned businesses are underperforming in their role as contractors for jsc. our findings that wob are not underperforming in terms of number or dollar of contracts echoes the findings of reardon et al., although their study pertains to contracts only. given the general underperformance of women-owned businesses, as a whole, in the federal procurement system, our findings suggest actions and policies in place at jsc are producing desired results. while our findings for women-owned businesses suggest performance that is journal of small business strategy                                  vol. 21, no. 1 spring/summer 2010        34    neither higher nor lower than the performance of small businesses, the same cannot be said for sdb's. sdb's outperform general small businesses, receiving higher contract awards on average. additionally, sdb's neither under, nor over, perform large or small businesses in the numbers of contracts awarded. held et al. (2006) observes that sbir programs targeted at sdb's may be less effective than direct programs targeted at sdb's. while we cannot test the comparative suggested by held and colleagues in this data set, we confirm their endorsement of targeted sdb programs. within the jsc procurement program, sdb's are receiving opportunities for their firms to flourish. robb (2002) notes that sdb's tend to be underrepresented across industry categories and that sdb owners tend to concentrate in specific industries. our findings suggest that, within jsc procurements, sdb's tend to be less specialized than other firms and are more likely to operate across multiple naics codes than general small businesses. we notice a concentration of sdb contracts awarded in naics 23 (construction) which is consistent with robb's analysis. however, we also find naics 54 (science and technology) is also well represented for sdb's in the jsc network. our examination of sbir contracts suggests that the vast majority of sbir awards go to firms operating in naics 54, which is unsurprising given the nature of sbir work. we further observe some sbir contracts going to firms in naics 33 (manufacturing). additionally, we find that sbir firms are more likely to operate across multiple naics codes than do general small businesses. taken together, this suggests that jsc-sbir contracts may be making strides to address the commercialization of r&d goals of the sbir program (held et al., 2006). our performance evaluation for sbir firms produces mixed, but generally positive, findings. we find very weak evidence that sbir firms receive fewer contracts, on average, than do general small and large businesses. however, the statistical results for these findings are notably weak. taken in conjunction with our finding that sbir firms function across multiple naics codes, which substantially correlates with number of contracts awarded, this suggests that the negative finding is a statistical artifact. our evidence suggests that sbir contracts provide substantially higher award dollars than do general small business contracts. our finding here is consistent with connell's (2009) examination of sbir awards for all federal agencies. on the whole, our examination of jsc contracts produces a number of important findings. specifically, jsc appears to perform admirably with regard to their mandate to stimulate business opportunities across historically underrepresented small businesses. while other research suggests that the federal contracting performance lags behind policy goals (held et al., 2006; reardon et al., 2007), this nasa directorate offers evidence of programs producing desired outcomes. to date, the examination of public-private partnerships specifically those involving small business and underrepresented businesses has largely emphasized macro-policy outcomes. journal of small business strategy                                  vol. 21, no. 1 spring/summer 2010        35    our examination of a single directorate within one agency of the federal government finds that macro-policy outcomes are not always emblematic of directorate performance. even though our research documents important positive outcomes for sdb's, our findings themselves suggest three important questions for future research. these questions involve potential interaction effects, causal arguments, and network evolution. we address each of these separately. in general, our investigation of procurement program categories focused on direct effects. to this end, we examined outcomes for women-owned businesses as well as sdb's. we find no significant over, nor underperformance for the former and indication of substantial positive performance for the latter. we did not explore effects for businesses who occupy more than one category simultaneously (e.g. women-owned sdb's or sdb sbir firms). in this, our research mirrors the general tenor of research examining public-private partnerships with the federal government. within our sample, few firms (less than 3.5% of all small businesses) were flagged for multiple characteristics, offering little ability to explore these interactions. it is interesting, given our findings, to inquire whether all women-owned businesses performed equally with their general small business competitors or, alternately, whether separation of sdb women-owned businesses would substantially alter these findings. we believe this is an important question to pursue in the future. our second research question addresses that of causality. research examining the general performance of sdb's (robb, 2002) finds them underrepresented and underperforming in most industries. to this end, a number of federal programs seek to remedy this historical underrepresentation, yet as a whole performance lags behind policy goals (reardon et al., 2007). in our study of jsc, we find sdb's well represented and performing at or above levels of general small businesses. while this is a significant and admirable outcome, it is unclear, given the nature of our data, whether this outcome is policy driven. we do not know, given this data, whether specialized procurement programs, mentoring opportunities within the jsc network, or other jsc driven initiatives led to this outcome or whether the outcome is associated with other factors. further, because our data is panel data, taken within the same time period, all of our outcomes are thus correlations only. we make no claims of causality, merely inferences of causation. given that our findings are atypical of general business and federal procurement (overall), further research should explore causal outcomes. to what extent are the results we observe outcomes of concentrated efforts at jsc? which programs (assuming a causal link exists) produce these positive outcomes? can such programs (should they exist) be modeled and replicated elsewhere? while we advise cautious optimism, future research should explore causal factors directly. finally, do the correlations we find carry forwards? held and colleagues (2006) argue that programs like sbir can function journal of small business strategy                                  vol. 21, no. 1 spring/summer 2010        36    as gateway programs bringing new firms into the federal participation networks. audretsch (2003) suggests that participation in these programs can lead to higher innovation outputs in future periods. connell (2009) suggests that public-private partnerships with the federal government provide legitimacy benefits yielding greater opportunities for performance and growth in future periods. do these benefits accrue? are firms in the jsc procurement system likely to remain in the network? assuming the firms will remain, is it equivocally true or are some types of firms more (or less) likely to remain in the network? do firms entering the federal network through one agency expand their connections across multiple agencies or do they tend to stay with one agency partner? do these partnerships materialize in firm performance benefits and, if so, are these benefits located entirely within the government network? given the nature of our data, we are unable to address these questions. however, considering our findings in conjunction with existing research suggests that greater knowledge is needed about the antecedents and consequences of participation in publicprivate partnerships with the federal government. we began this study with the intent of impproving our understanding of correlates to participation within the jsc procurement network. we couched our analysis in a macro-economic understanding of the historical underrepresentation of sdb's and how that informs federal procurement initiatives. our findings suggest that, at the directorate level, positive outcomes exist for historically underrepresented businesses. federal agencies often operate with dual strategic mandates, an operational mandate tied directly to their identity (e.g. space exploration) and a policy mandate to enact their operational mandate in conjunction with broader federal initiatives (e.g. promoting small business and disadvantaged business opportunities). while federal guidelines subordinate the policy mandate to the operational mandate, the interaction of the two should always be considered. specifically, jsc appears to have realized at least some of the policy goals the federal government has established for small, underrepresented businesses. however, our analysis is restricted to contracts awarded within one presidential administration. current discussion regarding the future of nasa and potential changes to the mandate for several directorates may result in changes in funding levels and targets. to the extent that current funding and targets realize policy goals for small and underrepresented businesses, substantial changes in mandates and funding should be carefully implemented to avoid losing any current benefits. references  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technology-based business owners with sources of capital: impact of location and capitalization howard van auken iowa state university vanaukenqai astate. edu abstract this paper examines issues related to the acquisition of capital by a sample of /42 small technology-based firms. specifically, the study investigates the relaiionship between owners of small technology-based firms'familiarity with the aliernative sources of capital and (l) location of the business and (2) amount of capital raised by the business. the results show that familiarity with alternative sources of capital is affected by the location of the business and amount ofcapital raised by the company the results have several implications affecting small business owners, providers of capital, and policy-makers. first, many small business owners are relatively unfamiliar with many sources of capital that are used to fund growth. second, owners of small technology-based firms indicate low familiarity with government financing programs. third, owners of small technology-based firms in smaller communities are less familiar with sources of capital commonly used to finance growth. fourth, owners of small technology-based firms are relatively unfamiliar with methods of bootstrap financing. introduction traditional finance theory assumes that the goal of the firm is to maximize the wealth of the owners. finance theory asserts that value is maximized through increasing the size of cash flows and/or decreasing the risk associated with the cash flows. variables having an important impact on value maximization include those affecting the risk and return characteristics of the firm. finance theory states that firms will be rewarded by maximizing returns or minimizing risk by a greater investor demand for ownership in the firm and, resultantly, higher market value for the firm. brophy and shulman (1992) emphasize the relevance of finance theory in the field of entrepreneurship. the development of finance models, including the capital asset pricing model and arbitrage pricing model, provide insight into the relationship between risk and return in the context of valuation that can be useful to entrepreneurs (brigham & gapenski, 1996). much of the theory underlying value maximization relies on the assumptions associated with perfect capital markets (petty 8'c bygrave, 1993). these assumptions include, for example, homogenous expectations, zero transaction costs, infinitely and perfectly divisible 33 journal ofsntall business strategy vol. /l, no.2 fall/ivinrer 2000 investments, and perfect information (brigham r(gapenski, 1996). while these assumptions may be valid for large public companies, the application of these assumptions to small firms has often been questioned in the literature. ang (1991) discusses financial issues that are different for small firms as compared to large firms. these issues include (i) greater agency problems arising from type of ownership (i.e. sole proprietorships and partnerships have no agency problems and firms with separation of ownership and management have agency problems) and higher monitoring costs associated with debt, (2) information problems arising from asymmetric (different information available to different groups) information, (3) high failure costs, (4) differences in taxation and (5) high transaction costs resulting in limited access to alternative sources of capital. small firms'ack of access to the capital markets and information about financing alternatives are important violations to the perfect capital market assumptions. these violations are especially important for technology-based firms for several reasons. product development and marketing are oaen very lengthy and expensive for technology-based firms. in addition, owners of technology-based firms oaen have technology/science backgrounds and limited knowledge of financial management issues. the impact of these limitations may be more significant for technology-firms that are located in smaller communities and have raised limited amounts of capital. this paper presents the results of a study that examines the relationship between the owners of small technology-based firms'amiliarity with alternative sources of capital and the firm's ( i) location and (2) capitalization. a better understanding of the issues associated with the financing of technology-based companies may be beneficial due to their growing role and importance in the us economy. the results of the study can be used by service providers and consultants who assist owners of technology-based firms in their search for capital. the results of the study also can be incorporated into college curriculum to provide students with insight into the acquisition of capital, especially for technology-based firms. the next section of the paper presents background material on small firm financing. research issues are examined in the study followed by the presentation of the methodology used in the analysis. the results are presented and conclusions are drawn. small firm financing finance theory the acquisition of capital has traditionally been one of the most difficult aspects of launching, operating, and growing a small firm. the lack of capital may lead to cash flow shortages, inability to pursue market opportunities, and failure. landstrom (1992) uses agency theory to show that asymmetric information results in small firms having greater diiticulty in raising capital as a result of higher monitoring costs, bonding costs, and residual loss potential as compared to larger firms. emery and finnerty (1997) emphasize that financing structure provides a signal to providers of capital about the risk and return characteristics of the firm. signals by the owners provide information to providers of capital about the future strategies that the firm intends on implementing and thus, can have an important impact on the potential sources and availability of capital. the goal of wealth maximization dictates a financing structure that is consistent with the traditionally defined risk-return relationship. petty and bygrave (1993) point-out that the goals of the firm may vary according to the type and characteristics of the firm. mcmahon and stanger (1995) state that the traditional objective of the firm is oversimplified and not an accurate reflection of the goals of the owner of the small firm. ang (1992) states that the 34 journal of small business s/raregy vo/.//, /iio.2 fall/winier 2000 objective of the firm may be quite complicated and depend on organizational characteristics. the objectives of owners of smaller firms may be a combination of profit, long term value creation, taxation, family issues, and career independence. capital acquisition among small firms is affected by numerous factors, including economic conditions, credit history, type of business, current financial characteristics and owner's preferences (chaganti, decarlos & deeds, 1995). petty and bygrave (1993) believe that the maturity and owner's objectives are important influences on a small firm's capital structure. sources of capital small firms have traditionally acquired start-up capital from either personal savings or loans from lending institutions. when traditional sources of capital are not available, owners oren use bootstrap financing, or "highly creative ways of acquiring the use of resources without borrowing money or raising equity financing from traditional sources" (freear, sohl, & wetzel, 1995). bhide (1992) believes that the ability to locate bootstrap financing identifies entrepreneurial spirit. other sources of start-up capital may include friends and relatives, sale of personal assets, home equity, cash value of life insurance, issuance of stocks/bonds, credit cards, leases, government grants, research and development/manufacturing loans, customers and suppliers (van auken & neeley, 1996). ongoing operations are commonly financed through profitability. profits that are reinvested in the finn, especially growing firms, can be an important source of capital during the earlier years of operation. reinvested capital enables the firm to fund growth without accessing external funds. maintaining strong profit margins aaer paying cost of goods sold, overhead costs, and owner's compensation is important (emery & finnerty, 1997). one of the more challenging issues facing successful firms is negotiating and obtaining growth capital through informal and/or formal venture capitalists. most firms are unsuccessful in attracting venture capital and must pursue other strategies to raise capital. firms seeking investment from venture capitalists should recognize important differences between informal investors and formal venture capitalist investors (timmons, 1997). for example, the informal venture capital market consists of a diverse set of investors who invest in high-risk, high potential return ventures that are oaen in the early stages of development. ln addition, informal venture capital investors typically invest smaller amount of capital than do formal venture capitalists. formal venture capital firms prefer to invest in firms that are in later stages of development than informal venture capital investors (busenitz & piet, 1996; freear, sohl, & wetzel, 1995). capital acquisition constraints the constraints that entrepreneurs confront in raising capital arise from several problems. first, many entrepreneurs are not knowledgeable in business disciplines and the financial management of a firm. as a consequence, some entrepreneurs may accept greater business and financial risks than the potential rewards from the business. in addition, an entrepreneur's high need for control and desire to avoid accountability can result in the development and implementation of poor operational and financial strategies. these entrepreneurs may not recognize or accept a signal from providers of capital about the weakness of their proposed business concept and be unwilling to change their initial business concept (ang, 1992; ang, 1991). a second group of problems is related to the quality and characteristics of the proposed business concept. adverse reaction to the business idea from potential lenders or investors 35 journal ofsmall business stratci0 vol. i i, i&to.2 foll/ivtnter 2000 may occur due to the entrepreneur's inexperience, inadequate information on the proposed business, high cost of financing smaller requests, and high risk (petty &: bygrave, 1993; ang, 1991; mcmahon & holmes, 1991). capital structure decisions can also be affected by the owners'reference for debt that results from the tax shield associated with the debt capital (norton, 1991). a third issue concerns the availability of information. gibson (1992) believes that finance theory associated with the acquisition of capital by small firms requires modification due to the lack of information about alternative sources of capital by owners of small firms. this information asymmetry increases the risk of and reduces the flow of funding to small firms (landstrom, 1992). holmes and kent (1991) refer to the limited awareness of capital alternatives in the context of a financing gap or "knowledge gap*'. technology-based firms in a relatively early stage of development may find great difficulty in obtaining capital due to the risks associated with the development of technology-related products and the transfer of product into the market. the high research and development costs and long lead-time in bringing the product to the market make start-up technology firms very high risk investments. as a result, technology-based firms often have great difficulty in acquiring capital, especially in the early stages of the product development (mason &. harrison, 1995). research questions the efficiency of the capital market is affected by the flow of information to both users and providers of capital. less eaicient capital markets lead to greater difficulty in capital acquisition and higher costs of capital. ultimately, firms may experience cash flow and liquidity problems. these problems can be especially challenging for new technology-based firms that commonly experience long product development times, high risk in commercialization of new technology, and, as a result, causing difficulty in raising capital. location and capital acquisition experience of the firm may be an important factor affecting the familiarity with financing alternatives and placing constraint on capital acquisition. research question ¹i: are owners of small teclmology-based firms who are located in smaller communities (&2$,000 people) less familiar with olternative sources of capital &lian owners of small technology-hosed firms wlio located in larger communities fv2$ ,000 peoplej. one of the basic assumptions underlying much of finance theory is that information is widely and freely accessible to all market participants (emery &c finnerty, 1997). owners of technology-based firms in smaller communities may be less informed and, thus, less familiar with alternative sources of capital than owners of small technology-based firms in larger communities. on the other hand, owners of technology-based firms located in smaller communities may be fully utilizing information technology and the expertise of service providers to gain access to and become more familiar with alternative sources of capital. van horn and harvey (1998) emphasize the diaiculties of acquiring information by small firms located in small communities. the unfamiliarity with alternative sources of capital may be the result of poor dissemination of information, lack of sophistication, and/or lack of expertise among both providers of capital and business consultants in smaller communities. in addition, firms in smaller communities may be more isolated, have less visibility and, thus, attract less attention by providers of capital than firms in larger communities. lang, calantone and gudmundson (1997) believe that small firms must rely on external expertise, oflen not available in small communities, when developing business strategies. saxenian (1990) states that the success of small technology-based firms is negatively impacted by the lack of information that occurs from geographic isolation. deeds, decarolis and coombs (1997) 36 journal ofsmall business strategy vot. it, no.2 fall/winter 2000 found that geographic clustering of firms in the biotechnology industry increased firms'ccess to the capital. research question ¹2r are owners of small teclinology-based firms wlio trave raised smaller amounts of capital (&$1,000,000) less familiar with the alternative sources of capital than owners of small technology-based firms wlio have raised larger amounts of capital (&sl,000,000). owners of small technology-based firms who have raised smaller amounts of capital may have less experience with the acquisition of capital as compared to owners of small technology-based firms who have raised greater amounts of capital. as a consequence, the less experienced owners may have a weaker understanding of and be less sophisticated with the alternative sources of capital than owners of larger technology-based firms. however, the experience associated with capital acquisition may not improve the understanding of alternative sources of capital, but only provide owners with an understanding of the capital acquisition process. callahan and cassar (1995) found that owners of smaller firms (as compared to larger firms) were less sophisticated and used less market information in making decisions. the constraints resulting from inexperience in the use and access of information affects the ability of the firm to raise capital. petty and bygrave (1993) found that owner's experience directly impacted the ability to raise funds from the alternative providers of capital. sample and methodology sample and questionnaire development a sample of 500 small technology-based businesses was provided by the small business development center (sbdc) located in a midwestern state. the sample was constructed by the sbdc as part of an effort to identify the scope and nature of small technology-based firms in the state. questionnaires were mailed to each of the 500 companies during october 1998. after two weeks, a second questionnaire was mailed to non-respondents. a total of 142 usable questionnaires were returned, resulting in a 28.4% response rate. the questionnaire was organized into two sections. the first section collected demographic information on respondent firms (legal structure, community size, and total capitalization). the second section collected information on sources of capital used to finance the business (personal equity, stock, bonds, loans from financial institutions, loans from finance companies, factoring, credit card, suppliers, customers, leasing, rgtd, government programs, venture capital, individual investors, and other). in addition, respondents were asked to indicate their familiarity with each source of capital using a i (very familiar) to 5 (not familiar) scale. methodology the data were initially analyzed using univariate statistics to evaluate the characteristics of the sample using means and frequencies. subsequently, the sample was segmented into two groups. each grouping corresponded to a research issue that was being examined. the first partitioning of the sample was based on community size (& 25,000 people and & 25,000 people). the second partitioning of the sample was relative to total capitalization (&$ 1,000,000 and &$ 1,000,000). witcoxon two sample tests of the difference between means were examined for each of the two sample groupings (community size and total capitalization) relative to the owners'7 journal ofsniall business strategy vot. ll, ato.2 fall/winter 2000 familiarity with the various sources of capital. owners were classified as being familiar with the source of capital if they ranked familiarity with the source of capital as i, 2, or 3 and were classified as being unfamiliar with the source of capital if they ranked familiarity as 4 or 5. finally, the familiarity with each source of capital was combined into a single variable (familiarity with capital) that was used to measure the respondents'verall familiar with capital. a logit regression analysis was preformed to determine whether size of community or total capitalization had a greater impact on familiarity with capital: familiarity = a+ b, size of community+ b. total capitalization these variables are operationalized in the following manner: familiarity: respondents'verall familiarity with sources of capital si e of community: i = (10,000 (population) 2 = 10,001-25,000 3 = 25,001-50,000 4 = 50,001-100,000 5 = &100,000 total capitalization: i = &$ 100,000 2 = $ 100,001-$500,000 3 = $500,001-$ 1,000,000 4 = &$ 1,000,000 in addition, spearman correlations between the independent variables (size of community and total capitalization) were calculated to determine the degree of relationship between the variables. no significant correlations were present. results business characteristics table i shows the demographic characteristics of the sample firms. the majority of firms (64.1%) were organized as c-corporations and s-corporations (29.6%). the remaining firms were organized as partnerships (3.5%), sole proprietorships (1.4%) and limited liability companies (1.4%). the very high percentage of firms organized as corporations may be due to the limited liability aspects of being incorporated, which may be especially relevant for technology-based. most respondent firms (78.9%) sold products and services (14.1%). the remaining firms offered consulting (2.1%)and other (4.9%). approximately 43.7% of the lirms were located in communities having a population of less than 10,000, 12.0% in communities 10,001 —25,000, 15.0% in towns 25,001 —50,000, 8.5% in cities 50,001 —100,000 and 20.4% in cities &100,000. approximately 27.3% of the firms began operations within the last five years, and approximately 20.2% began operations more than 10 years ago. about one-half (52.5%) of the firms began operations between 6-10 years ago. finally, table i shows that about 10.4% of the firms raised less than $ 100,000 since operations began. approximately 25.9% raised $ 100,001-$500,000, 17.8% between $500,0001-$ 1,000,000, and 45.9% more than $ 1,000,000 of total capital. 38 journal ofsmall business srrategy vol. ll, no.2 fallfwinier 2000 table i: type of firm, type of ownership, age, sales, community size, and total capital raised (n=142) variable percent of sample 7j pe of firm products 78.9 services 14.1 consulting 2.1 other 4.9 type of oiuoership corporation 64. i s-corporation 29.6 pannership 3.5 sole proprietorship 1.4 limited liability company 1.4 vtge of firm (years) &6 27.3 6 —10 52.5 &10 20.2 community stet &10,000 43.7 10,001-25,000 12.0 25,001-50.000 15.0 50,001-100,000 8.5 & 100,000 20.4 totoi capital raised &$ 100,000 10.4 100,001-$500,000 25.9 $500,001-$ 1,000,000 17.8 & $ 1,000,000 45.9 sources of and familiarity with capital table ii shows the sources, mean usage, and standard deviation of means of start-up capital used to fund operations. the table shows that personal equity (31.32%) and loans from financial institutions (26.63%) were the most common sources of start-up capital. this distribution of capital is consistent with previous studies of start-up financing (see van auken & carter, 1989). issuance of stock (11.51%),investment from individual investors (5.03%) and other unspecified sources of capital (4.85%) were also relatively common sources of startup capital. all other sources of start-up capital were used infrequently. the large standard deviations of many of the sources of capital indicated wide variation in usage. small firm financing is often tailored to the objectives of the owner and characteristics of the firm and, thus, the contribution of alternative sources of capital varies by firm. (timmons, 1999). table iii, which shows the means of the owners'amiliarity with each source of capital (i = very familiar and 5 = not familiar), indicates that the respondents are most familiar with sources of capital that are traditionally associated with small firms. these sources include loans from financial institutions (1.66), supplier credit (2.28), si)a guaranteed loans (2.43), and leasing (2.48). the respondents also indicated moderate familiarity with capital investment from private investors (2.53), perhaps due to the large extent to which private investors (i.e., angels) provide capital to technology-based firms (freear, sohl, & wetzel, 1995). owners were somewhat less familiar with stocks (2.54), asset-backed loans (2.82) and customer-based financing (2.88). the results also indicate a relatively low mean ranking of familiarity with government programs (state programs = 3.45, local programs = 3.45 and federal programs = 3.56) at all levels. these low rankings are especially revealing in the 39 journal ofsmrdl business strategy vol i i, ivo.2 fall/winter 2000 context of the important role of government backed financing programs. finally, the owners were least familiar with factoring (3.57) as a source of capital. table ii: mean and standard deviation of source of capital (%) (n = 142) source of capital mean (%) standard deviation personal firiuity 31.32 36.26 i.oan i'rom financial institution 26.63 31.31 stock 11.51 11.50 private invcsair 5.03 15.20 state govcmmcnt programs 3.25 12.30 vcnturc capital 2.53 14.54 loan from finance company 2.47 9.62 customer 1.73 11.23 i.casing 1.20 4.23 credit card o. i i 0.72 supplier 1.79 7.99 research snd development 0.46 5.05 bond 0.39 3.26 local govcmment programs 0.27 12.30 federal govcmment programs 0.04 0.41 other 4.85 18.96 table iii: familiarity with sources of capital source of start-up capital n mean ranking loan from financial institution 139 1.66 supplier credii 137 2.28 sba guaranteed 139 2.43 lease 140 2.48 private investor 139 2.53 stock 140 2.54 asset lendmg 137 2.82 customer 138 2.88 venture capital 139 3.10 third party 137 3.13 bond 138 3.13 state government programs 138 3.45 local government programs 138 3.45 federal government programs 138 3.56 factoring 138 3.57 40 journal of small business strategy vol./0 na.2 falllivinter 2000 statistical tests table iv shows the results of the wilcoxon two sample tests of differences between means of familiarity with sources of capital relative to size of community (&25,000 population versus &25,000 population) in which the firm is located. the table shows that owners of technologybased firms in smaller communities are less familiar with almost all sources of capital than owners of firms in larger communities. more specifically, owners in smaller communities are signilicantly less familiar with stocks, investment from another company, federal government programs, venture capital, and investment from private investors. in all case, owners in larger communities are significantly more familiar with sources of capital than owners in smaller communities. table iv: familiarity with source of capital relative to community size: wilcoxon 2-sample test of difference in means community size: (small=&25,000 variable large=&25,000) mean response stock small 78 2.88 large 62 2.11 " bond small 76 3.47 large 62 2.71 " supplier credit small 76 2.30 large 61 2.26 customer small 77 3 01 large 61 2.72 factor small 77 3.73 large 61 3.36 asset lending small 76 2.97 large 61 2.62 loan from fiuaucral institution small 78 1.59 large 61 1.75 sba guaranteed small 78 2.47 large 61 2.38 lease small 78 2.58 large 62 2.35 iuvcsuueut from other company small 76 3.46 large 61 2.72 vv federal government programs small 77 3.79 large 61 3.26 " state government programs small 77 3.61 large 61 325 local government programs small 77 3.49 large 61 3.39 venture capital small 77 3.45 large 62 2 66 v'rivate investor small 77 2.79 large 62 2.21 " ~ significant at 1% aa significant at 5% the results in table iv provide several general implications. first, the results provide evidence on whether owners of small technology-based firms are more or less familiar with several sources of capital than owners of small technology-based firms in larger communities (research issue ¹i) . the results show statistical differences in familiarity with several sources of capital that are commonly used to finance growth. thus, lirms in the smaller communities may face limitations on growth due to the owner's lack of understanding of 41 jorrrnal of small btrsinesssiraiegy vol. l l, ivo.2 fall/winier 2000 financing alternatives. this result supports the concept that market inefficiencies in raising capital may exist due to the lack of information about the alternative sources of capital that may be available. second, the results suggest that owners of technology-based firms in small communities are equally familiar with several of the traditional sources of capital used to fund small firms as are owners in larger communities. sources such as loans from financial institutions, personal savings, supplier credit, etc. are commonly used by all firms during the initial stages of operations. table v shows the results of wilcoxon two sample tests of difference in means of familiarity with several sources of capital relative to total capitalization (0 = less than $ 1,000,000 and i = greater than $ 1,000,000). the general trend in the table shows that owners of small technology-based firms who have raised smaller amounts of capital are less familiar with the several alternative forms of capital than owners who have raised greater amounts of capital. more specifically, the owners who have raised smaller amounts of capital are significantly less familiar with capital from supplier credit, customer financing, asset-based loans, factoring, state government programs and local government programs than owners who have raised larger amounts of capital. table v: familiarity with sources of capital relative to total capitalization: wilcoxon 2-sample test of difference in means capitalization (lower=&1,000,000 variable higher=&1,000,000) n mean response stock lower 73 2.67 higher 61 2.33 13ond lower 72 3.35 itigher 60 2.62 ~ supplier credit lower 71 2.46 higher 60 1.97 " customer lower 71 3.10 tligher 61 2.51 '~ i'actor lower 72 3.gg higher 60 3.10" asset lending lower 72 3.00 higher 59 2.46 " loan i'rom linancial institution lower 72 1.72 higher 61 1.54 si3a guaranteed lower 72 2.47 higher 62 2.26 lease lower 73 2.53 higher 61 2.34 investment from other company lower 71 3.31 higher 60 2.92 federal government programs lower 72 3.76 higher 60 3.30 state government programs lower 72 3.63 higher 60 3.17 i local government programs lower 72 3.72 higher 60 3 p5 0 venture capital lower 73 3.21 higher 60 2.92 private investor lower 73 2.60 higher 60 2.43 significant at )% 'v significant at 5% 42 journal af small business strategy val. l l, tv0.2 eall/winter 2000 a moderating influence on differences in familiarity may be differences or similarities in the distribution of sources of capital by amount of capital raised. for example, the distribution of sources of capital between firms that raised large amounts as compared to firms that raised small amounts of capital may be similar. similarities in the distribution of sources of capital may result in similar uses and familiarity. to investigate this issue, a wilcoxon 2-sample test of difference in means between sources of financing versus size of firm was completed. size of firm was measured using amount of total capital acquired since firm was launched (& $ 1,000,000 and & $ 1,000,000). the only statistically significant dilterence in mean values between firms that raised less than $ 1,000,000 and greater than $ 1,000,000 was for common stocks. firms that acquired more capital used significantly more common stock in their capital structure than firms that acquired less capital. few differences in distribution of sources of capital by size does not necessarily suggest that there would be no differences in familiarity. the experience gained through acquiring capital (all types of capital) would add to the knowledge base of the owners about the characteristics of and familiarity with sources of capital. the more that owners interact with providers of capital (which would occur as more capital is acquired) to explore issues related to capital acquisition, the greater their understanding of the sources of capital. greater experience with capital acquisition would be expected to result in greater understanding of the sources of capital and familiarity with the sources of capital. the results shown in table v have several implications. first, the results provide evidence on whether owners of technology-based firms who raised larger amounts of capital are more or less familiar with sources of capital than are owners who raised smaller amounts of capital (research issue i)2). owners who raised smaller amounts of capital are generally less familiar with bootstrap sources of capital than are owners who raised greater amounts of capital. second, the results indicate that owners who raised lesser amounts of capital are less familiar with state and local government programs than are owners who raised greater levels of capital. third, the results suggest that owners are generally less familiar with the sources of capital commonly used to financing growth (i.e. venture capital, capital from private investors, and investment from another company) than sources of capital typically used to start-up and run operations (i.e. loans from financial institutions, supplier credit, and sba guaranteed loans). these findings suggest that owners who have less experience in raising capital may be overlooking sources of funds that might be available to fund operations. capital constraints may be due to lack of information about availability as well as limitations on availability of capital. the data were evaluated using logit regression analysis to determine whether size of community or total capitalization had a relatively greater impact on the respondents'amiliarity with capital. the correlation analysis shown in table vi shows that size of community and total capitalization are not significantly correlated and, thus, measure different attributes of familiarity. table vi: spearman correlation between capitalization and community size (p-values in parentheses) 0=139 capital size capitalization 10 -0.0223 (0.797) community size -0.0223 1.0 (0.797) 43 jottrnal ofsttiall dttsiness strategv vol. i i, no.2 fall/winter 2000 the results of the logit regression analysis are shown in table vll. both independent variables (size of community and total capitalization) are significant at 1%. the positive coefficients indicate a direct relationship between familiarity and (i) size of community and (2) total capitalization. the larger (smaller) the community size and levels of capital acquired, the more (less) familiar that respondents're with the sources of capital. size of community and total capitalization appear to be relatively equally important factors affecting respondents'amiliarity with capital. table vll: logit regression results familiarity with capital relative to community size and amount of capital raised (n =75) dependent variable independent variable regression cocfticicnt x community size 0.3275 11.1004 familiarity capitalization 0.4380 $.9239 " signilicant at 1% summary and discussion previous research emphasized the difficulty associated with the acquisition of capital by small firms (ang, 1991, 1992). the discussion in the literature has suggested that the difficulty of raising capital may be attributable to high agency and high transaction costs (landstrom, 1992). another explanation for the difficulty of raising capital may be the lack of sophistication and knowledge about alternative financing sources among small business owners. the lack of sophistication and knowledge may be especially relevant for owners of small technology-based firms that face long product development times and high research and development costs. the study results have several implications for owners of small technology-based firms, providers of capital, and policy-makers. first, the results suggest that small technology-based business owners are relatively unfamiliar with many of the sources of capital that are used to fund growth. this unfamiliarity with sources of growth capital may be an important constraint on the ability of the firm to successfully continue product development, transfer products to the market, and grow. on the other hand, the results indicate a relatively high degree of familiarity with many of the traditional sources of capital. this is not surprising since these traditional sources of capital are commonly used to launch and fund operations of most types of firms. this first implication provides an opportunity for service providers and consultants who assist technology-based firms with their acquisition of capital. the acquisition of capital by new technology-based firms is time consuming, sometimes requires specialized insight into the capital acquisition process, and often is facilitated through networks/contacts. service providers and consultants who are familiar with these issues may bring value to technologybased firms by providing advice on the appropriate sources of capital, where to look, how to approach providers of capital, etc. reliance on consultants to navigate through capital acquisition may be beneficial in that owners can focus on product development and internal 44 journal ofsmall business strategy vol. ll, no.2 fall/winter 2000 management issues. knowledgeable consultants can help firms avoid costly and time consuming mistakes. a second implication of the study is the low familiarity with all sources of government financing programs. government financing initiatives directed at assisting small technologybased firms may have limited effectiveness without business owners being familiar with and understanding the programs. the results suggest that information on federal, state, and local government sponsored programs may not be effectively disseminated among the small technology-based business community. third, the results show that owners of small technology-based firms in small communities are less familiar with sources of capital commonly used to finance than owners located in larger communities. unfamiliarity with these sources of capital may be an important constraint affecting the growth potential of firms in the small communities. such a finding is especially important given the decline in small communities'opulations and in economic viability in midwestern states. the third implication should be interpreted with some caution. if all firms have a similar distribution of capital in their capital structure, then an argument could be made that familiar with sources of capital would not vary with firm size. however, this does not account for the knowledge about the alternative sources of capital through the process of capital acquisition. the experience gained through capital acquisition would add to the knowledge base of the owners about the characteristics and, thus, familiarity with all sources of capital. the more that owners interact with providers of capital (which would occur as more capital is acquired) to explore issues related to capital acquisition, the greater their understanding of the sources of capital. greater experience with capital acquisition would be expected to result in greater understanding of the sources of capital and, also, familiarity with the sources of capital. additionally, some firms may locate in smaller communities because they do not require large amounts of capital. owners of firms that anticipate raising large amounts of capital (growth firms) may decide to start operations in larger communities that have better networking opportunities, greater visibility, and better access to capital. owners of firms having a slow growth (life-style firms) strategy may decide to locate in small communities since access to large amounts or specialized forms of capital would not be anticipated. evaluation of the relationship between level of total capitalization and community size in this study, however, revealed no statistically significant relationships. the fourth implication is concerned with the unfamiliarity with bootstrap financing among the firms that have raised smaller amounts of capital. unfamiliarity with bootstrap financing can be a constraint on the firm's financing flexibility in all stages of development, especially during periods of illiquidity arising from seasonal fluctuations, growth, or unexpected events. the study has several limitations that affect-the interpretation of the results and provide insight into areas for further research. for example, the study was completed using a relatively small sample in a single geographical area during a single time period. other studies could be completed in other locations focusing on different areas of the country or population densities. a longitudinal study could reveal changes over time in financing patterns, familiarity with alternative sources of capital, effectiveness of the dissemination of information about financing alternatives, understanding of government-backed initiatives, and knowledge about new financing developments. a larger sample that is national in scope could provide greater insight into these types of differences. finally, the study did not specifically examine the relationship between type of product or service offered and capitalization. some firms (such as manufacturing or new technology 45 journal oj sntall business strategy vol. l l, iyo.2 fall/winter 2000 firms) require larger amounts and different forms of capital than other firms, such as consulting or service firms. a future study could examine capitalization by major activity of firm versus familiarity with sources of capital. the insight gained from this analysis may provide insight into the life cycle nature of capital acquisition as well as the evolving impact that familiarity with capital on capital acquisition. additionally, the study did not explicitly examine how the experience gained through raising capital affected the usage of capital over time. a longitudinal study of capital acquisition could provide additional insight into how experience with raising capital affects financing choices as the firm matures. references ang, j. s. (1991). small business uniqueness and the theory of financial management. the journal of small business finance i, 1-13. ang, j. s. (1992). on the theory of finance for privately held firms. journal of small business finance i, 185-203. bhide, a. (1992). bootstrap financing: the art of start-ups. harvard business review 70, 109-117. brigham, e., & gapenski, l. (1996).financial mana ement: theo and ractice. hinsdale, il: dryden press. brophy, d., & shulman, j. (1992). a linance perspective on entrepreneurial research. journal of small business mana ement 30, 61-71. busenitz, l, &. fiet, j. (1996). the effects of early stage venture capitalists actions on eventual venture disposition. entre reneurial and small business finance 5, 97-114. callahan, t. & cassar, m. (1995). small business owners'ssessment of their abilities to perform and interpret formal market studies. journal of small business mana ement 33, 1-9. chaganti, r., decarolis, d., & deeds, d. 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(1991). an empirical analysis of the financial structure of small and large australian manufacturing enterprises. the journal of small business finance i, 141-154. landstrom, h. (1992). the relationship between private investors and small firms: an agency theory approach. entre reneurshi and re ional develo ment 4, 199-223. lang, j. r. c., & gudmundson, d. (1997). small firm information seeking as a response to environmental threats and opportunities. journal of small business mana ement 35, 11-23. mason, c., & harrison, r. (1995). closing the regional equity capital gap: the role of informal venture capital. small business economics 9, 153-172. mcmahon, r., & holmes, s. (1991). small business financial management practices in north america: a literature review. journal of small business mana ement 29, 19-29. 46 journal ofsmall business straiegy vol. i i, no.2 faliiwt'uter 2000 mcmahon, r., & stanger, a. (1995). understanding the small enterprise financial objective function. entre reneurshi: theo and practice 19,21-39. norton, e. (1991).capital structure and small growth firms. the journal of small business finance i, 161-77. petty, j., & bygrave. w. (1993). what does finance have to say to the entrepreneur? the journal of small business finance 2 25-137. saxenian, a. (1990). regional networks and the resurgence of silicon valley. california mana ement review 8 89-113 timmons, j. (1997).new venture creation. 4 ed., chicago, il: irwin. van auken, h. e., & neeley, l. (1996). evidence of bootstrap financing among small startup firms. journal of entre reneurial and small business finance 5, 235-250. van horn, r., 8c harvey, m. (1998). the rural entrepreneurial venture: creating the virtual megafiim. journal of business venturin 13, 257-274. howard e. van auken is professor of management in the college of business at iowa state university. he was a william j. fulbright scholar and visiting professor at the instituto de technologico y de estudios superiores de monterrey (mexico) in 1989 and a william j. fulbright scholar and visiting professor at masarykova unives ity v brne (c ech republic) in 1994. he his research has been published in entrepreneurship: theory and practice, entrepreneurship and regional development, journal of small business management, journal of entrepreneurial and small business finance, journal of entrepreneurship and small business, journal of entrepreneurship, and journal of portfolio management. he has lectured or developed entrepreneurship programs in mexico, russia, c ech republic, slovakia, ukraine, malaysia and canada. he has served as vice-president for researcli, vice-president for the individual entrepreneurshi p division, and vice-president for women 's entrepreneurship division for the united states association for small business and entrepreneurship. he has served on the editorial review boards of entrepreneurship: theory and practice, journal of small business management, and journal of small business strategy. he was selected as the most outstanding visiting professor at itesm in 1991, awarded the outstanding reviewer of the year by the journal of small business management in 1998, and received the isu international service award in 1999. 47 topic evolution of innovation academic researches yu-shan lin national taitung university, taiwan ysl.nttu@gmail.com abstract innovation is an important issue of academic research for several decades. however, no comprehensive study in the trend of innovation topics is available. therefore, this paper proceeds to review the innovation research. in general, the common methods for research review are content analysis, bibliometrics, and literature mining techniques, but these methods don’t provide a comprehensive viewpoint. based on big data thinking, this study introduces corpus-based approach which makes the structural text database possible to extract the hidden knowledge through analyzing the text. this work uses 1,460 abstracts published from 1973 to 2015 in journal of business research as the text. moreover, the text is divided into two groups (1973-1995 and 1996-2015) to analyze the evolution of innovation research topics using wordsmith tools with three main functions — concord, wordlist, and keywords. finally, this study provides a basis for future academic research on innovation, and offers important references for industrial practices. keywords: innovation, topic evolution, comparative analysis, corpus-based approach, big data 25 journal of small business strategy vol. 26 ● no. 1 ● 2016 introduction the publication of big data in 2013 is a big shock for business. all businesses start to create more business opportunities through the power of data. data revolution will come after the digital revolution. big data promote the innovative economic value. arriving of the big data era generates a new discipline, namely culturomics, which belongs to the field of computational lexicology. comprehending humanity behavior and cultural trend through the quantitative analysis for text is expected (mayer-schönberger & cukier, 2013). innovation issue is valued accompanying technological development and internet popularization all the time in the business research. not only nations endeavor to promote innovation policy, but also businesses regard innovation as superior competitive strategy. therefore, the objective of this study is to draw a conclusion towards innovation research trends hiding in the literature through textual analysis. the conclusion can be the base for future academic research. literature review innovation related researches are plentiful and diversified for a long time. however, no overall and complete review research has been done for innovation topic evolution trends. in the past, review researches of innovation topics are not much. review topics can roughly divide into three types. the first type focuses on innovation issues, such as success and failure of innovation (van der panne, van beers, & kleinknecht, 2003), innovation management measurement (adams, bessant, & phelps, 2006), and organizational innovation (crossan & apaydin, 2010). the second type discusses innovation in different subjects, sectors, or industries, such as innovation in marketing science (hauser, tellis, & griffin, 2006), innovation in the manufacturing sector (becheikh, landry, & amara, 2006), innovation in services (gallouj & savona, 2009), and innovation in tourism (hjalager, 2010). the third type explores the relationship between innovation and other variables, such as social capital and innovation (li, 2009), and innovation and entrepreneurship (niu & hsin, 2011). concise interpretations of these researches are as follows. van der panne, van beers, and kleinknecht, (2003) examine 43 studies of factors in the success and failure of innovative projects. of these, nine studies reported and ranked success factors. comparisons show that the 10 highest-ranking success factors in these studies are very similar; however, the studies are far from consistent when lower ranking factors are considered. the literature agree on the positive impact of factors such as firm culture, experience with innovation, multidisciplinary r&d team and explicit recognition of the collective character of the innovation process or the advantages of the matrix organization. however, many studies are either inconsistent or inconclusive regarding the effects of factors such as strength of competition, r&d intensity, the degree to which a project is innovative or technologically advanced and top management support. adams, bessant, and phelps (2006) review the literature relevant to the measurement of innovation management at the level of the firm. they develop a synthesized framework of seven categories of factors in the innovation management process: inputs management, knowledge management, innovation strategy, organizational culture and structure, portfolio management, project management and commercialization. they then identified factors empirically shown to have significant 26 journal of small business strategy vol. 26 ● no. 1 ● 2016 effects in the innovation process, and illustrative measures to map the territory of innovation management measurement. this review makes two important contributions. first, it takes the difficult step of incorporating a vastly diverse literature into a single framework. second, it provides a framework that practitioners can use to evaluate their own innovation management activity, to explore the extent to which their organization is nominally innovative, to explore whether innovation is embedded throughout their organization, and to identify areas where attention and resources might be focused. crossan and apaydin (2010) comprehensively review the state of academic research on innovation. based on their systematic review of studies published during 1981-2008, they integrate diverse research perspectives into an exhaustive multi-dimensional framework of organizational innovation. in their framework, leadership, managerial levers, business processes, innovation as a process, and innovation as an outcome are linked. they also suggest measures for determinants of organizational innovation and propose implications for both academic and managerial practice. hauser, tellis, and griffin (2006) identify 16 topics relevant to marketing science, which they classify into five research fields. the consumer response to innovation field includes attempts to measure consumer innovativeness, models of new product growth, and recent ideas on network externalities. the organizations and innovation field includes contextual and structural drivers of innovation, organizing for innovation, and adoption of new tools and methods. the market entry strategies field includes recent research on technology revolution, extensive marketing science research on strategies for entry, and issues of portfolio management. the prescriptive techniques for product development processes field includes techniques which have been transformed through global pressures, increasingly accurate customer input, webbased communication for dispersed and global product design, and new tools for dealing with complexity over time and across product lines. the innovation outcomes field includes defending against market entry and capturing the rewards of innovating. for each topic, authors summarize key concepts and highlight research challenges. after a systematic review of empirical studies published during 1993 to 2003, becheikh, landry, and amara (2006) propose a research framework which brings together a set of variables related to innovation and the internal and contextual factors driving it. the dependent variable is innovation, and three major issues considered include type of innovation, investigation method, and measurement. the internal factors include firm’s general characteristics, global strategies, structure, culture, control activities, management team, and functional assets and strategies. the contextual factors include firm’s industry, region, networking, knowledge/technology acquisition, government and public policies, and surrounding culture. the following results emphasize several means which could help managers and policy makers to better promote innovation and researchers to better direct their efforts in exploring the phenomenon. gallouj and savona (2009) review the arguments for service innovation and suggest a research agenda for the evolutionary theory to integrate the conceptualization of 27 journal of small business strategy vol. 26 ● no. 1 ● 2016 innovation in services. they discuss whether, and the extent to which, the ill-definition and mis-measurement of service output have influenced the conceptualization and analysis of innovation in services. they then reclassified the diverse contributions according to their assimilation, demarcation or integrative nature with respect to the more consolidated literature focused on technological innovation in the manufacturing sector. they also review the synthesizing contributions of other studies, and suggest a taxonomy for the forms of innovation in services, based on the lancasterian characteristics-based approach to product definition. hjalager (2010) reviews the literature on tourism innovation in the past two decades. several categories of innovation are addressed, such as product or service, process, managerial, marketing and institutional innovations. important determinants and driving forces of innovation are identified, including the role of entrepreneurship, technology push and the existence of industrial districts. representation of knowledge is also considered essential for innovation. their review shows that there is still little systematic and comparable empirical study for the innovative activity levels and their influences and implications for destinations and national economies. the authors also recommend further quantitative and qualitative studies of the foundations, processes, implications and policies of innovation in tourism. li (2009) integrates current knowledge of the relationship between social capital and innovation after an extensive review of empirical studies of the relationship between social capital and innovation. the study analyzes and makes comparison based on relations between innovation and the three dimensions — structural, relational, and cognitive components of social capital structure of nahapiet and ghoshal (1998). consensus, discordances, and gaps in the social capital-innovation connection are identified and directions for future research are generated. niu and hsin (2011) apply the content analysis method in a review of the literature on innovation and entrepreneurship published from 2000 to 2010 accessed through the isi database. they analyze each paper through author’s nationality, research type, research field, journal types based on publication year. then, they process relation analysis on journal rank and keywords to analyze the variation of research contents over the years and understand the research trend of innovation and entrepreneurship. their analytical results show that studies of innovation and entrepreneurship have significantly increased in recent years. the usa, uk and germany are found to be the most productive countries. finally, this research finds that the trend of innovation and entrepreneurship research issues are in technology related industries, policy and economic themes, and academic subjects. as a whole, the importance of innovation in management field is mentioned continuously, and innovation is an important research tendency in the future. however, the evolution of innovation issue only focuses on specific business function; it seems that a study of comprehensive research issue trend isn’t appeared so far. this study hopes to make effort to the part. 28 journal of small business strategy vol. 26 ● no. 1 ● 2016 methodology in the past, the most commonly used methods to conduct review researches are content analysis. content analysis is a method that transforms materials of qualitative research into quantitative data. content analysis is a research method that makes an objective and systematic quantification towards concrete mass contents. however, content analysis describes the obvious contents of information, and doesn’t deal with potential and concealing contents. this is a big defect of content analysis. textual analysis and discourse analysis can supplement this deficiency of quantitative content analysis. fairclough (2003) considers that textual analysis for social research has at least four values- theoretical, methodological, historical, and political reasons. the methodological reason is that text is an important source of offering evidences, and textual analysis can get the research declaration based on the detailed characteristics of the text. based on the analytical thinking of big data, text is also statistic having giant potential values. but traditional textual analysis is restricted to the limited samples and the stereotype of qualitative researches, it can’t satisfy the breadth and depth of contents mining in the big data era. in the situation, using the corpus-based approach coming from applied linguistics can make the construction of structured text statistics database possible. furthermore, combining the content analysis of linguistics and rhetoric field can supply some new thinking for methodology and research tools (yu & li, 2014). this study will use abstracts containing the word ‘innovation’ of papers published in journal of business research (jbr) as the text. the publication period is from 19732015, and text will be classified into two groups for evolution trend analysis of innovation issues. the research framework appears in figure 1. figure 1. research framework the study adopts ‘corpus-based approach.’ officially speaking, corpus is a set of natural language usage passing specified theoretical principles. usually the usage contains oral or written language, and is stored in a mode of computer files. corpus resources in the written style can be news media, literary works, or personal writing pieces. oral style resources can come from narratives, interviews, conversations, or other oral data of tapes and videos. then, the oral resources can be transformed into written styles. the size of corpus can be several tens of thousands to tens of millions, even hundred millions words. abstracts of innovation related publications in jbr clusters of words in period 1973-1995 clusters of words in period 1996-2015 trend evolution of innovation topics 29 journal of small business strategy vol. 26 ● no. 1 ● 2016 bigger corpus usually offers for large scale research projects, for example, compiling a dictionary or composing a grammar book. even though small oral corpus of several tens of thousands words also can influence language teaching. after the construction of corpus, we can use software to analyze and generate wordlist, word by word index, and other data (corpus portal, 2014). the text chosen is abstracts containing the word ‘innovation’ of papers published in jbr. there are 1,460 papers between 1973 and 2015 up to january, 2015. choosing jbr is because the journal applies theory developed from business research to actual business situations and recognizes the intricate relationships between the many areas of business activity. therefore, jbr can comprehend every dimension research of business functions. the filter function of jbr website classifies papers according to year and topic. the most innovation related papers appear in 2014. in the next place, there are 185 papers in 2013. then 174 papers appear in 1995 and before, and 124 papers in 2012 (see table 1). paper amount in other years are all below 100. this shows scholars pay much attention to innovation issue in the past three years. from the view of topic, market orientation is the most popular topic and there are 34 papers. secondly, 22 papers about china and firm respectively. moreover, 20 papers about firm performance and internet individually. other topics are innovation, latin american, business research, competitive advantage, marketing strategy, new product, service quality, organizational learning, company, jog satisfaction, organizational performance, costa rica, social capital, marketing. but topic classification can only offer the rough bracket, not pure classification of innovation. therefore, the study provides a further issue of analysis. table 1 numbers of innovation related papers published in jbr by year years 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 number of papers 77 206 185 124 81 78 61 40 41 58 58 years 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 and before number of papers 48 38 47 30 38 20 20 14 22 174 the appearance and widespread application of internet have already exerted influence over global economics. from the era of year 1990, the global internet market shows an extremely 30 journal of small business strategy vol. 26 ● no. 1 ● 2016 fast growth trend. for example, comparison with 1995, the market capacity of global internet hardware industry experiences a high growth rate in 1996. the development of internet on transnational commerce application makes progress at a tremendous pace. global internet population is over fifty million in 1996. over 80% businesses in fortune 500 construct websites (institute for information industry, 1997). furthermore, the year is concordant with the year borderline of the journal database. therefore, the study analyzes texts over the past forty years, and splits them into two periods, 1973-1995 and 1996-2015. the software used in this study is wordsmith tools. illustrations of three main functions— concord, wordlist, keywords are as follows (wordsmith tools, 2014). (1) concord concord is a program which makes a concordance using plain text or web text files. to use it we can specify a search word or phrase, which concord will seek in all the text files we have chosen. it will then present a concordance display, and give us access to information about collocates of the search word, dispersion plots showing where the search word came in each file, cluster analyses showing repeated clusters of words (phrases) etc. briefly, concord is for finding all instances of a word or phrase. when conducting the software analysis, we can use the function of cluster and set up word numbers accompanying both sides of target vocabulary. (2) wordlist this program generates word lists based on one or more plain text files. the word lists are automatically generated in both alphabetical and frequency order, and optionally we can generate a word index list too. in short, the function lists the words in our text(s) in alphabetical and frequency order. we can also apply the lemma function to find out vocabularies that have the same meanings but show in the text with a different manner. generally speaking, high frequency of one word means that it is more important in the text than other low frequency words. (3) keywords this is a program for identifying the ‘key’ words in one or more texts. key words are those whose frequency is unusually high in comparison with some norm. the function helps find salient words in a text or set of texts. the meaning of keywords here is different from the representation of important meaning traditionally. it indicates vocabularies having distinctive frequency when compare with reference corpus. proceeding the keywords function, the study adopts british national corpus（bnc）as reference corpus. bnc is a speaking and writing language sample including a hundred million vocabularies set. the keywords function not only verifies the result of wordlist, but also confirms keyword’s exact place in the texts. data analysis and results first, wordlist function generates wordlist according to the frequency. the top ten words (frequency in parentheses) in turn are study (1,241), research (959), performance (818), firms (807), marketing (716), results (635), market (602), firm (561), business (556) and innovation (547). second, we use the keyword function to identify the ‘key’ words in texts. wordsmith tools can calculate the keyness of each word and build a sorted list based on keyness value. innovation (4,437.95) is the number four, and top three words are study (6,110.20), firms (4,943.50) and marketing (4,710.63). the number in parentheses is the ‘keyness’ of that word. the 31 journal of small business strategy vol. 26 ● no. 1 ● 2016 study focuses on the target word, innovation. finally, we use concordance function to extract the repeated clusters of words and phrases through cluster analyses. we set up 2 words in cluster, minimum frequency is 5, and horizons 1l, 1r. when we process to 4 words in cluster, minimum frequency is only 3 (lower than 5). therefore, we stop at 3 words per cluster. then, we use innovative as the target words and repeat the same process. at last, we get the top 20 repeated clusters of words as table 2. we merge two pairs of synonyms among the list. innovation performance (frequency: 35) is combination of ‘innovation performance’ (25) and ‘innovative performance’ (10). entrepreneurship and innovation (frequency: 13) is combination of ‘entrepreneurship and innovation’ (8) and ‘innovation and entrepreneurship’ (5). the sources of ‘community innovation’ (frequency: 5) and ‘community innovation survey’ (frequency: 5) are the same, so two clusters are merged into one. the following discussions base on these clusters of words and their appearance on the title of publications in jbr. service innovation and innovation performance are simultaneously in the first place. the concept of service innovation is first discussed in miles (1993) and has been developed in the past 2 decades. the first paper focusing on service innovation in jbr appears in 1998. frambach, barkeman, nooteboom, and wedel make an empirical test about adoption of a service innovation in the business market. the greater part appears in the last three years. as to innovation performance, manu and sriram’s study exploring innovation, marketing strategy, environment, and performance in 1996 is the earliest paper focuses on innovation performance published in jbr. about threefourths papers appear in the last five years. product innovation is the third. numerous examples of product innovation include introducing new products, enhanced quality and improving its overall performance. product innovation, alongside cost-cutting innovation and process innovation, are three different classifications of innovation which aim to develop a company's production methods (hoang, 2010). thus product innovation can be divided into two categories of innovation: radical innovation which aims at developing a new product, and incremental innovation which aims at improving existing products (wong, 2014). radical innovation and incremental innovation also rank 6th and 19th respectively. although the earliest appearance of product innovation in jbr is iwinska-knop’s paper in 1986, the widespread research emerges in last five years. organizational innovation is the fourth, but the topic appears in jbr earlier than the top three. cummings and o'connell’s study in 1978 is the earliest one. about two-thirds papers appear in the last five years. firm innovation (firm’s innovation) is the fifth. nearly three-fourths studies publish in the last three years. the earliest study in jbr is forrester’s paper in 2000. he investigates the use of innovation teams in japanese and american automotive firms. except for the top five and foregoing clusters, others still include entrepreneurship and innovation, technological innovation, innovation activities, innovation outcomes, r&d innovation, learning and innovation, innovation strategy, innovation capability, innovation success, process innovation, innovation adoption, innovation survey, virtual innovation, community innovation, management innovation, innovation orientation, radical product innovation, performance and innovation, and innovative behavior. 32 journal of small business strategy vol. 26 ● no. 1 ● 2016 table 2 repeated clusters of words in period 1996-2015 rank cluster frequency 1 service innovation 35 1 innovation performance 35 3 product innovation 27 4 organizational innovation 19 5 firm(’s) innovation 18 6 radical innovation 13 6 entrepreneurship and innovation 13 8 technological innovation 11 8 innovation activities 11 10 innovation outcomes 10 11 r&d innovation 9 12 learning and innovation 8 13 innovation strategy 7 13 innovation capability 7 13 innovation success 7 16 process innovation 6 16 innovation adoption 6 16 innovation survey 6 19 incremental innovation 5 19 virtual innovation 5 19 community innovation 5 19 management innovation 5 19 innovation orientation 5 19 radical product innovation 5 19 performance and innovation 5 19 innovative behavior 5 some topics emerge earlier than 1995. therefore, we use concordance function to extract the repeated clusters of words and phrases through cluster analyses for the period of 1973-1995. we set up 2 words in cluster, minimum frequency is 5, and horizons 1l, 1r. when we process to 3 words in cluster, minimum frequency is only 2, so we stop at 2 words in cluster. then, we use innovative as the target words and repeat the same process. we set up 2 words in cluster, minimum frequency is 3, and horizons 1l, 1r. at last, we get the top 3 repeated clusters of words as table 3. the result has a wide gap with the above one. that’s because the paper quantity difference is remarkable, 1,286 papers in 1996-2015 and only 174 papers in 1973-1995. the result also reveals that innovation becomes a flourishing research topic over the past two decades. table 3 repeated clusters of words in period 1973-1995 rank cluster frequency 1 organizational innovation 5 2 product innovation 5 3 innovative products 3 only organizational innovation and product innovation appear simultaneously in the two periods. no doubt the two topics emerge earlier than other ones, and their importance remains high in period 1996-2015 (4th and 3rd respectively). in the later period, diverse topics appear in droves. service innovation deserves respect following the rise of service industry. the conduct and result of innovation are deemed important issues, such as innovation performance (1st), firm (’s) innovation (5th), innovation activities (8th), innovation outcomes (10th), and etc. conclusion the study based on big data thinking adopts the cross-field methodology, corpus-based approach, to analyze academic research papers published in jbr. corpus-based approach is originated and commonly used in linguistics research. the study attempts to apply the approach in business research and 33 journal of small business strategy vol. 26 ● no. 1 ● 2016 analyze the trend evolution of innovation researches over past 40 years. because the text quantity is up to 1,460, it is like a big database so that we can fully master the trend evolution of innovation topics. organizational innovation and product innovation are highly valued for a long time, whereas service innovation, innovation performance, firm (’s) innovation and other innovation related topics rise and flourish over the past twenty years. the result can offer an important reference value for future academic research about innovation field. as to the future research, two words--firms and marketing--sieved out from the keyword function seem very important and can be further studied and probed into their relations with innovation. furthermore, the study anticipates supplying a direction towards innovation practice for industry. the practitioners should synchronize internal innovation management and actual actions with academic research results. this step is an extremely urgent task. academic research needs to take the lead, and industry need to apply research results in practice. references adams, r., bessant, j., & phelps, r. 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(2013), big data: a revolution that will transform how we live, work, and think, houghton mifflin harcourt. miles, i. (1993), services in the new industrial economy. futures, 25(6), 653672. doi:10.1016/0016-3287(93)90106-4 nahapiet, j., & ghoshal, s. (1998), social capital, intellectual capital, and the organizational advantage. academy of management review, 23(2), 242-266. niu, h.-j., & hsin m.-c. (2011), the development of innovation and entrepreneurship: a literature review. journal of innovation and management, 8(4), 33-62. van der panne, g., van beers, c., & kleinknecht, a. (2003), success and failure of innovation: a literature review. international journal of innovation management, 7(3), 309-338. wong, s.k.s. (2014), impacts of environmental turbulence on entrepreneurial orientation and new product success. european journal of innovation management, 17 (2), 229249. wordsmith tools website, http://www.lexically.net/wordsmith/inde x.html. yu, g.-m., & li, h.-j. (2014), the value of corpus-based approach in communication researches in the era of big data. retrieved from http://media.people.com.cn/big5/n/20 14/1126/c390949-26099195.html. yu-shan lin is an assistant professor in the department of information science and management systems, national taitung university, taitung, taiwan. dr. lin received her ph.d. degree of business management from national sun yat-sen university, kaohsiung, taiwan, and majored in marketing. her research interesting areas include marketing, marketing strategy, tourism marketing, consumer behavior, internet marketing, social marketing, and research methods. she serves as reviewer for many important academic journals, tourism management, journal of business research, etc. 35 http://media.people.com.cn/big5/n/2014/1126/c390949-26099195.html http://media.people.com.cn/big5/n/2014/1126/c390949-26099195.html 29 entrepreneurial strategy, innovation, and cognitive capabilities: what role for intuitive smes?5 josé manuel saiz-álvarez nebrija university jsaiz@nebrija.es carlos cuervo-arango nebrija university ccuervoa@nebrija.es alicia coduras nebrija university acoduras@nebrija.es abstract the role of intuition applied to entrepreneurship remains under-researched. the present work contributes to the progress on research on this field proposing and testing an indicator to measure the degree of intuition of entrepreneurs at early and consolidated stages. the indicator is designed under the literature highlights and applied over a sample of 501 early stage and consolidated entrepreneurs, a sample extracted from gem spain 2011-2012. the intuitive behavior of the spaniard entrepreneurs is moderated and depends significantly on leadership abilities along with skills to motivate others, capacity to develop technological products or services, and the age. the intuitive style is proportionally more prevalent at early stages of entrepreneurship and, in spain, does not show significant dependence on the previous experience of the entrepreneurs as employees, managers of companies, other entrepreneurial activities or years in the same sector as they are operating at present. keywords: intuition, entrepreneurship, behavior indicator 1 we would like to thank domingo ribeiro, dianne welsh, and kun huang-huarng for their support on publishing this work. s trateg y journal of small business journal of small business strategy volume 23, number 2 30 introduction from the seminal works of collins, moore & unwalla (1964), rotter (1966), and mcclelland (1961), personality-based entrepreneurship related to business performance has been widely studied, as in the works of kautonen, van gelderen & tornikoski (2013), halim, muda & amin (2011), hodgkinson et al (2009), shane, locke & collins (2003), and others. however, despite these advances in the economic literature focused on the psychological aspects of entrepreneurs, the role of intuition in creativity applied to man-agement remains under-researched (doerfler & ackermann, 2012). this reality is seen especially in the study of the reasons for entrepreneurship and the role that cognitive abilities have on entrepreneurship. arenius & minniti (2005) have shown that perceptual variables, such as alertness to op-portunities, fear of failure, and confidence about one’s own skills, are significantly corre-lated with new business creation across countries and across gender, although women still lag behind men on startup activity (mitchell, 2011)(marlow & patton, 2005). com-plementarily to these perceptual variables, behavioral qualities of an entrepreneur, mainly leadership, risktaking, and rational planning (bruni, cherardi & poggio, 2004), foster entrepreneurship, as well as employment creation, reallocation of resources, and socio-economic wealth. the objective of this work is to contribute to the study on how intuition affects entrepreneurship in smes (“intuitive smes”). the main goal has been to build an index able to estimate the degree of “entrepreneurial intuition” and to give answer to this research question: what are the behavioral variables that characterize an intuitive entrepreneur? secondary goals have been to use this indicator to test relevant hypotheses in the field of entrepreneurial intuition. specifically, we ask whether intuition is more present in the early stage of entrepreneurship and also if higher degrees of intuition are linked to necessity driven entrepreneurs. to achieve these goals, we first analyze the role of intuition in entrepreneurship and propose a theoretical model of intuitive behavior. second, we apply the proposed model to newly born and to consolidated spanish entrepreneurs using a sample of 501 cases from the 2011 gem data. in what follows, we present a theoretical background section, the proposition of the theoretical model for intuitive entrepreneurship, the methodological section, analyses and results, a discussion of the results and the conclusions, limitations, and further research proposals. entrepreneurship and the role of intuition the cognitive approach to entrepreneurship is a response to the limitations of the trait approach. its aim is to explain entrepreneurial behavior through cognitions. the degree of intuition is contemplated within the cognitive approach as a concrete cognitive style, which has been defined as the way people perceive environmental stimuli and how they organize and use information from their environment to guide their actions. recent studies on cognitive styles of entrepreneurs (boucknooghe et al., 2005) raised questions such as: what is the cognitive style of entrepreneurs? is the way they perceive, organize, and use journal of small business strategy volume 23, number 2 31 environmental information different from the way non-entrepreneurs do? the investigation on these questions confirmed the notion that entrepreneurs differ from non-entrepreneurs in their cognitive styles, but they also indicate that there is a basis to distinguish between, at least, two relevant cognitive styles among entrepreneurs. these styles were described as intuitive and rational by bridge, o’neil & cromie (2003). for them, individuals who show intuitive (creative) styles are more driven by holistic and conceptual thinking, which reflects more capacity for creation, experimentation, opportunity´s perception, and new challenges. creative individuals do not like rules and procedures, and they take pleasure in uncertainty and freedom. they used to be more ambitious and achievement oriented than the average. not only can this vision be considered the desirable paradigm for entrepreneurs, but hodgkinson & sparrow (2002) argue that the integration of both analytic (knowing) and intuitive (creative) processing styles is required to process information and to minimize the dangers of cognitive biases identified by other researchers into behavioral decisions. taking all the above in consideration, we can define intuitive entrepreneurship as a psychological behavior consisting of a decision process mainly guided by intuition in which experience has more weight than formation, especially in the early stages of company development. according to dalglish (2004), but contrary to bass (1985, 1990 & 1997) and kotter (1997), who focus business success on personal leadership and charisma, business sustainability in the long-term is mainly based on the business organization and not on the charisma and the personality of the entrepreneur, as these psychological characteristics are only critical in the early stages of business development. moreover, ardichvill, cardozo, & ray (2003) identify entrepreneurs’ personality traits, social networks, and prior knowledge as antecedents of entrepreneurial alertness to recognize, develop, and evaluate business opportunities. intuitive individuals see beyond the obvious facts and solutions for considering future possibilities. according to baron (2006), entrepreneurs identify opportunities for new business ventures using human cognitive frameworks they have acquired through formation and experience to perceive connections between seemingly unrelated events or trends in the external world to end up in new ideas for new products or services. as a result, the combination of training and experience of the staff form the basis of the organization, which allows companies to reach leadership positions in the sector they operate. entrepreneurs in large organizations are more susceptible to the use decision-making biases and heuristics than managers. under conditions of environmental uncertainty and complexity, biases and heuristics can be effective and efficient guides to decisionmaking, mainly through overconfidence (overestimating the probability of being right) and representativeness (the tendency to overgeneralize from few characteristics or observations). after having analyzed responses from 124 entrepreneurs, busenitz & barney (1997) show that overconfidence and representativeness variables correctly categorized entre-preneurs and managers more than 70 percent of the time; while entrepreneurs behave differently than managers do in large organizations was a substantial reason for these differences. journal of small business strategy volume 23, number 2 32 biases and heuristics are necessary to create new businesses, but, whereas the use of cognitive biases may be beneficial in some circumstances, and mainly during the startup years, it can lead to major errors in others damaging the firm. to complete the literature’s overview on intuition and entrepreneurship, other research has shown that entrepreneurs collect, process, and evaluate information in a more intuitive way than managers, middle managers, and initiates. senior managers tend to show cognitive styles similar to those of entrepreneurs (allison, puce, & mccarthy, 2000). a theoretical model for entrepreneurial personality and business performance even though entrepreneurs often cite the use of intuition as a basis for their venturing decisions, verifying that entrepreneurs are actually using intuition is very difficult (blume & covin, 2011). one of the problems is the availability of data and especially of an indicator able to give a measure of the intuitive character of individuals. it is true that there are validated psychological tests and tools to estimate intuitive versus rational personalities, but as our research is focused in the role of intuition in entrepreneurship, we find it necessary to propose a theoretical model for entrepreneurial personality (see figure 1) as a frame in which to place and identify variables that are critical in building the different cognitive styles. to do so, we selected key concepts, explained their role in the model, and developed a methodology to calculate and test a quantitative indicator of entrepreneurial intuition. figure 1: entrepreneurial personality and business performance with respect to intuition, doerfler & ackermann (2012) distinguish between intuitive judgment and intuitive insight. the former is formed by the method of deduction by analogy connected with past experiences, either directly lived by the individual or indirectly internalized thanks to the knowledge gained or given by journal of small business strategy volume 23, number 2 33 external experiences, while the latter is defined by achieving solutions from new perspectives. business opportunity recognition is directly linked to intuitive insight, as three factors play an important role in it: (1) active search for opportunities, (2) alertness to them, and (3) prior knowledge of an industry or market, and the interrelation among these factors. intuitive entrepreneurship constitutes the first step for smes before starting a continuous learning process when the firm begins to operate. as the company grows, business decisions begin to be less guided by intuition and to be directed by experience. this high reliance on intuition in the early stages of development, coupled with the weakness in the financial resources available in the early years of the company, cause high business mortality in the first year of life organization. as intuition is counterbalanced with training and experience, decision making is more consistent, which allows the organization to take on risky commercial and business oper-ations. businesses are inserted in a continuous process of organizational learning that is, according to crossan, lane & white (1999), integrated in four processes (intuition, in-terpretation, integration, and institutionalization) linking the individual, group, and or-ganizational levels. as the company grows, decision making becomes more complex while stakeholders are involved in a multidirectional learning process. successful management teams build col-lective intuition through frequent meetings and real-time metrics that enhance their ability to see threats and opportunities early and accurately (eisenhardt, 1999), as a result of the internalization of the learning processes. to analyze intuition’s role in entrepreneurs, we will use the entrepreneurial intuition indicator as a proxy to try to measure the influence of intuition in making business decisions, especially in smes. we shall do it in the next section. methodology as pointed out in the introduction, the main goal of this research is to build an index able to estimate the degree of entrepreneurial intuition and to give an answer to the research question: what are the behavioral variables that characterize an intuitive entrepreneur? to achieve this objective at a global level and to give a general valid response, we use a sample of 501 cases extracted from the global entrepreneurship monitor results of 2011 for spain. data are related to businesses at entrepreneurial stage (less of 42 months operating in the market) and to established or consolidated businesses (42 or more months operating in the market). these cases were randomly selected and reinterviewed in 2012 in order to get additional information and details for research purposes. taking this in consideration, we built a variable that represents “intuitive style of entre-preneurship” as follows: enjoys discovering opportunities considering entrepreneurial opportunities in the area they live for the next six months as little representative of the capacity and ability to discover business opportunities, we applied a validated construct on this topic. all the items were valued in likert journal of small business strategy volume 23, number 2 34 scales of five points (1 = completely disagree, 5 = completely agree), and questions were as follows: qop_1 i can recognize the opportunities of a new business in a sector in which i had no previous experience. qop_2 new business opportunities that i have recognized were not previously interrelated. qop_3 to recognize a good opportunity requires being immersed in a specific sector or market. qop_4 although i am immersed in activities and daily routines of my business, i think of new ideas for new business initiatives. qop_5 i have a special ability to be alert or be sensitive to new business opportunities. we consider that an individual that has a score of four or five points in variables qop_1, qop_2, qop_4, and qop_5 is more prone to be intuitive, as well as individuals having scores of one or two points in variable qop_3. to homogenize this last variable with the rest of the group, we recoded the scores and changed the text for a negative sentence: “to recognize a good opportunity does not require being immersed in a specific sector or market.” after making this operation, individuals that scored four or five points in variable qop_3 recoded were more prone to be intuitive. takes risks, is less rational and is ambitious with respect to variables representing these features, gem only provides a dummy variable to capture this fear of failure from starting up. this was the reason to include the following items in the re-interview as they are more adequate to get information on risky, rational, and ambitious personalities: qr_1 operations taking place at my company are characterized as high risk. qr_2 i take a non-conservative view when making important decisions. qa_3 i tend to support decisions and projects where expected revenues are uncertain but high. all these variables are valued in a five-point scale. we consider that an individual showing a score of four or five points in variables qr_1, qr_2, qa_3 is more prone to be intuitive, active on taking risks, less considered about rules, and ambitious. is innovative to be innovative is a gem variable valued in a three-point scale: 1 = none, 2 = some, and 3 = all. following the literature, we can consider that the higher the score is, the higher is the possibility of an individual to be an intuitive entrepreneur, as creativity (innovation) is identified as one of the key characteristics of those individuals. to build the variable “intuitive style,” we apply a simple function defined by a degree of intuitive behavior as a sum of scores of all the presented variables, being nine points the minimum value of the variable and 43 points (=3+5*8) its maximum value, being the range of the variables of 34 points. to better interpret the results of the variable “intuitive style,” we transformed the scale in order to have a minimum score of zero journal of small business strategy volume 23, number 2 35 points (low intuitive character) and a maximum score of 34 points (high intuitive entrepreneurial character). the transforming operation consisted in deducting nine points from the individual scores. the distribution of the resulting variable and the test of normality are described in table 1. table 1: distribution, descriptive statistic, and kolmogorov smirnov (ks) test for the variable “intuitive style” the typical individual of the sample is moderately intuitive as the mean and the median show scores around 14 points over the upper limit of the variable of 34 points. the most frequent score is 16 points, and the higher score in the sample is 30 points. there are individuals that show null intuitive style with scores of zero points, and there are no indi-viduals reaching the highest score of 34 points. once we built the “intuitive style” variable, we tested which are the behavioral variables that explain it, or rather which ones are able to determine the intuition of an entrepreneur among a selected group of abilities and experience. these selected explanatory variables were measured thanks to the extension of the survey applied to the gem spanish sample of entrepreneurs and consolidated businesses, as follows: q12_1: ability to: get good results leading and motivating people; q12_2: ability to: organize resources and coordinate tasks; q12_3: ability to: delegate tasks effectively; q12_4: ability to: supervise, influence and lead people; q12_5: ability to: get the best possible results with limited resources; q12_6: ability to: develop technological goods or services; t16_1: years of experience: previous experience; t16_2: years of experience: working experience as employee; t16_3: years of experience: experience as a manager or company’s directive; t16_4: years of experience: experience in the same sector of my current company, and age: age of the individual in years. these six variables on abilities were measured on likert scales of five points. as the dependent is a quantitative normal distributed variable, as well as are the rest of the proposed variables, we selected a multiple stepwise linear regression as the method to determine which of these variables have explanatory capacity on the “intuitive style.” there are precedents of the use of likert scales of five points in linear regression. although they do not satisfy the normality criteria, the method is recommended among other parametric ones because of the extension of the scale too long to be treated as a n 501 percentiles 10 7.0000 mean 14.1257 20 9.4000 median 14.0000 30 11.6000 mode 16.00 40 13.0000 std. dev. 5.49929 50 14.0000 range 30.00 60 15.0000 minimum 0.00 70 17.0000 maximum 30.00 80 19.0000 z ks test 1.147 90 21.0000 significance 0.144 result normality journal of small business strategy volume 23, number 2 36 categorical variable (grace-martin, 2011). so, as in our case, ordinal predictor variables can be reasonably considered as numerical if distances in the scale can be considered meaningful and equal. finally, we applied binary logistic regressions to test the complementary hypothesis: h1: intuitive behavior is more prevalent at early stages of entrepreneurship than in consolidated phases, and h2: intuitive entrepreneurial behavior is more prevalent among necessity-driven entrepreneurs than among opportunitydriven entrepreneurs. in these binary logistic regressions, the dependent variables were the entrepreneurial stage, and the main reason for entrepreneurship and the independent variable was the “intuitive style.” results are presented in the next section. results table 2: results of the multiple stepwise linear regressions on the intuitive style variable table 3: results of the binary regressions on the entrepreneurial stage on the main reason for entrepreneurship dependent intuitive style independents coefficients beta t p-value constant 8.701 5.419 0.000 ability to get good results leading and motivating people 1.177 0.215 4.614 0.000 ability to develop technological goods or services 0.799 0.185 4.318 0.000 age -0.089 -0.157 -3.759 0.000 ability to supervise, influence and lead people 0.573 0.108 2.358 0.019 r square 0.412 corrected r square 0.163 variables out of the model are all those measuring years of experience and abilities to organize resources and coordinate tasks, getting the best possible results with limited resources and delegating tasks effectively dependent stage: entrepreneurial = 0, consolidated = 1 independent b e.t. wald fd p-value exp(b) intuitive style -0.066 0.021 9.947 1 0.002 0.937 constant 2.341 0.337 48.322 1 0.000 10.389 dependent e-ship reason: necessity = 0, opportunity = 1 independent b e.t. wald fd p-value exp(b) intuitive style -0.010 0.016 0.365 1 0.545 0.990 constant 0.360 0.249 2.101 1 0.147 1.434 journal of small business strategy volume 23, number 2 37 conclusions to build an indicator of entrepreneurial intuitive behavior is a goal that can be achieved synthesizing the conclusions of previous academic research. the experience presented in this work opens the door to progress in this issue and to refine the presented tool. the preliminary analytical results point out that in spain the intuitive character in smes promoters is a variable that depends significantly on leadership and motivation skills, accompanied by abilities to develop technological goods or services. these abilities tend to be more present in young people as the relationship between age and intuitive style is negative. also, intuitive behavior is determined by a positive behavior on supervision and influence to lead people. the years of experience as employees, of business management experience, and of previous entrepreneurial activities or activities in the same sector do not show significant relationships with intuitive style, which contradicts the literature, as intuition is expected to be a function of the experience. the explanation for this result can rely in the fact that spanish entrepreneurs tend to show similar average years of experience, both in the entrepreneurial and the consolidated phase. thus, if intuitive style is more associated to youth and to early stages of activity, as confirmed by the first binary logistic regression, and there is no difference in years of experience, then this variable has no effect in the overall determination of an intuitive style in this population, but results can differ in populations showing more variance in years of experience. the results of the logistic regression allow us to accept the first complementary hypothesis: the intuitive style is more prevalent at the early stages of entrepreneurship than at the consolidated phase. however, these results do not allow us to accept that the intuitive style is more prevalent among necessity-driven entrepreneurs. the first result is supported by the literature and the second can be due to the fact that the information was obtained in the middle of the economic crisis, a fact that adds noise to the gem variable that captures the reasons for entrepreneurship in spain. thus, the profile of the entrepreneur in spain is affected by an unusual increment of necessity-driven entrepreneurs due to the current crisis. limitations and future research limitations of this research rely on the lack of data at international level. gem spain is a powerful observatory that allows researchers to re-interview samples and get complementary information to make indepth investigation on several issues, but the extension of the general questionnaires is difficult to implement at a general level. to test a general hypothesis on entrepreneurial intuition will require the acceptance of a research proposal attractive for the observatory at international level. entrepreneurial failure can be diminished if intuitive potential entrepreneurs are well oriented. this is an important contribution that the research on cognitive styles can offer and relevant to be considered to enlarge this research line. future research will be focused on making a general proposal to include information resources able to measure cognitive styles in the gem tools. this experience and the results obtained allow us to analyze which refinements must be considered to build a journal of small business strategy volume 23, number 2 38 better indicator of entrepreneurial intuition and to include them in the planned proposal. if accepted, it is possible that in a few years we can test the general research questions proposed in 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(2003). entrepreneurial motivation, human re-sources management review, vol. 13, n. 5, pp. 86-102. josé manuel saiz-álvarez, ph.d., in economics and business administration from autonomous university of madrid, spain. he is a doctor in sociology, pontifical university of salamanca, spain. his research interests are entrepreneurship, family business, and economic integration. carlos cuervo-arango, ph.d., in economics from the university of minnesota, usa. his is the dean of the faculty of social sciences at nebrija university. his research interests are monetary economics, entrepreneurship, and family business. alicia coduras, ph.d., in political and administrative sciences from pompeu fabra university, spain. she is the technical director of gem spain and director of the chair to foster entrepreneurship in business at nebrija university in spain. her research interests include entrepreneurship and family business. reproduced with permission of the copyright owner. further reproduction prohibited without permission. http://www.smallbusinessinstitute.biz keywords: journal of small business strategy 2019, vol. 29, no. 01, 16-29 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2019 small business institute® w w w. j s b s . o rg dynamic analysis of business demography strategy: an european perspective francisco del olmo-garcía1, fernando crecente-romero2, maria teresa del val-núñez3 1 phd program in economics and business management, university of alcalá, spain, francisco.olmo@uah.es 2 university of alcalá, spain, fernando.crecente@uah.es 3 university of alcalá, spain, mteresa.val@uah.es business dynamics, entrepreneurial failure, business survival, european union, regional analysis a b s t r a c t the development of entrepreneurial spirit based on market opportunities, innovation, and creativity is what drives economic growth, provided this takes place under conditions of sustainability. to ensure such development, an institutional framework conducive to business creation must be established. however, the scope should be broadened to consider the lessons learned by entrepreneurs who have not failed in their first five years of activity. authorities can thereby design and implement suitable measures to ensure high rates of entrepreneurial survival. this paper presents an analysis of business demography in the eurozone, with a special focus on new firms. using business demography data from eurostat for the period 2008 to 2015, we study differences in business dynamics (business creation and failure), comparing the likelihood of survival and failure of newly created firms across different stages of the economic cycle. during the aforementioned period, entrepreneurs and self-employed persons intensified their internationalization efforts and increased their contact with other regions in response to the effects of lower internal demand and variation in relative labor costs. in this paper, we analyze a) historical trends in the rate of entrepreneurship by business size, legal form, and sector; b) trends in business specialization across european regions; and c) the regional trends in the number of firms per 1,000 active persons (or business density) as an indicator of growth to assess the convergence or divergence of northern european regions and southern european regions over the study period. these analyses highlight the economies with the highest rates of entrepreneurial survival and have implications for employment and sector dynamics. apa citation information: olmo-garcía, f., crecente-romero, f., & val-núñez, m. (2019). dynamic analysis of business demography strategy: an european perspective, journal of small business strategy, 29(1), 16-29. introduction choosing to become an entrepreneur by starting a business venture is no easy decision, nor is it easy to understand the repercussions that this decision will have for entrepreneurs themselves and society as a whole. the sheer diversity in the profile of entrepreneurs is one of the most valuable assets of any country’s economic context. the entrepreneurial profile varies regardless of gender, origin, or other characteristics. an entrepreneur may be a young person who opts not to work for others but instead decides to devote all of his or her efforts to making a success of a new venture. an entrepreneur may just as well be an experienced professional who decides to take a new direction in her or his career and go it alone by starting a new business. alternatively, an entrepreneur might be an experienced entrepreneur who has launched failed or successful businesses and who, upon seeing an opportunity, decides to take it by starting a new venture. understanding the entrepreneurial process means understanding the tradeoff defined by risk under uncertain conditions (to borrow knight’s terms) versus the chance to exploit a market opportunity using some form of innovation (to borrow schumpeter’s terms of “creative destruction”). in this sense, joshi & anand (2018) provide interesting evidence about the relationship between perceived uncertainty and routine and non-routine information seeking, while business models change and a dynamic capabilities point of view is necessary for understanding early-stage firms and its adaptability to the environment (adam, strähle & freise, 2018). thus, strategies based on high performance work systems become vital to achieve startup success (bendickson, mulhttp://www.smallbusinessinstitute.biz f. olmo-garcía, f. crecente-romero, & m. val-núñez 17 doon, ligouri. & midgett, 2017). understanding this tradeoff also involves considering the repercussions that these business decisions have for economic activity, taking into account how entrepreneurs predict what markets will be like in the future. in this sense, rita, priyanto, andadari, & haryanto (2018) show evidence of strong correlation between future anticipation, entrepreneurship and entrepreneurial background. in addition, schenkel, d’souza, cornwall, & matthews (2015) expose that prior start-up experience has significant positive influence over entrepreneurship. however, harris, gibson & mcdowell (2014) conclude that previous business experience does not significantly impact firm performance. so, entrepreneurial failure could be an important experience for business success, but it is not the only factor to considering. from a theoretical perspective, interest in the figure of the entrepreneur is exemplified by classical research by authors such as cantillón, say, and stuart mill (carrillo, bergamini, & navarro, 2014). as almodóvar (2016) notes, however, until recently, this has only been enough to elicit scarce consideration of entrepreneurial activity in economic growth models. nevertheless, a systemic relationship has been found between a country’s per capita gdp and economic growth and the rate and type of entrepreneurial activity, highlighting the existence of a virtuous circle consisting of entrepreneurship and economic activity (minniti, 2012). the empirical evidence indicates that a higher rate of entrepreneurial activity enables faster economic growth and greater productivity (audretsch, 2007; boente, heblich, & jarosch, 2008; callejón & segarra, 1999), while causing a long-term reduction in unemployment (thurik & verheul, 2002) and increasing per capita gdp (audretsch, thurik, verheul, & wennekers, 2002). here, institutional quality is important because of its role as a driver of growth and its effect on the entrepreneurship process (minniti, 2012). those responsible for economic policy have taken note of these findings. the european commission has stressed the need to support entrepreneurship as a powerful driver of economic growth and job creation (european commission, 2003). this stance is reflected by the numerous measures adopted in recent years, best exemplified by the entrepreneurship 2020 action plan. this plan is devoted not only to helping budding entrepreneurs complete the necessary procedures to start a business but also to fostering an entrepreneurial culture that can strengthen the european economy. the plan focuses on the following pillars: developing education and training to foster entrepreneurial spirit, removing administrative barriers that prevent entrepreneurs from taking their first steps, and creating the right business culture. in this paper, we study the behavior and development of european entrepreneurship from the perspective of business dynamics and demographics. the goal is to study the rate of entrepreneurship success and failure in the main countries of the eurozone for the period 2008 to 2015, which spans the recent period of economic crisis. to do so, we first present the method and information sources used for the study, supported by a rigorous literature review. after describing the method and main information sources, we analyze the dynamics of the demography of business creation and failure and study the role of entrepreneurial failure. next, we analyze changes in sector specialization to determine whether the model of production has changed as a result of the prolonged period of crisis. finally, we analyze the process of convergence between different countries in the eurozone, using annual growth in entrepreneurship as a proxy for economic growth. if eurozone countries wish to continue growing sustainably over time, with the attendant development that this entails for european society, they must encourage the development of entrepreneurship in europe and foster competitiveness through economic policies that improve the economic environment and the institutional framework where these new firms operate. business demography business failure has been analyzed using a range of perspectives and methodologies. this analysis has underpinned one of the most active areas of research in business economics in recent decades. in parallel with the study of the causes of business failure, emphasis has been placed on the study of business dynamics, especially within the regional economy. this consists of the study of the process of net creation and destruction of firms, principally through the analysis of demographic features (segarra, arauzo, gras, manjón, mañé, teruel, & theilen, 2002; van dijk & pellenbarg, 2000; van wissen, 2002). this analysis approach is nothing new, as reflected by classical research by stanback and knight (1970), and hannan and freeman (1977), among others. driven by increasingly accurate public information, notable analyses include those by eurostat (e.g., schrör, 2008a, 2009), the oecd (2017), and the european commission (european commission, 2004; rossetti, 2017). the latter analysis referred to here focused on behavior in the information and communications technology sector. other notable research includes analysis of business dynamics in job creation (schrör, 2007; schrör, 2008b). similarly, scholars have conducted numerous studies of european countries with a national scope focusing on, for example, belgium (verduyn, 2013), portugal (nunes, & de morris sarmento, 2012), and poland (markowicz, 2007; ptak-chmielewska, 2011). in the case of spain, concern over business dynamics has always been linked to the study of industry and convergence across regions (segarra et al., 2002, segarra & marjournal of small business strategy / vol. 29, no. 1 (2019) / 16-29 journal of small business strategy / vol. 29, no. 1 (2019) / 16-29 18 f. olmo-garcía, f. crecente-romero, & m. val-núñez tin, 2004). a sector approach has been applied in numerous studies (spanish chamber of commerce, 2001; segarra & martin, 2004; garrido, 2008b; banco de españa, 2015), although territorial studies (cardona, garcía, & i caralt, 2012; garrido, 2008a; spanish chamber of commerce, 2001) and aggregate studies (e.g., fariñas & huergo, 2015) have been just as important. in the wake of the recent economic crisis, scholars such as herce, parada, barragán, galindo, delgado, & sepúlveda (2012) and crecente, martos, & rivera (2014); crecente, martos, & rivera (2015), the latter focusing on self-employment, have analyzed survival, adopting a regional and sector-based perspective to identify differences in trends of business mortality as a function of a birth cohort. method to perform the proposed analysis, we selected only firms with a maximum of nine employees (including firms with no employees), as per the definition of microenterprises found in annex i of commission regulation (eu) no 651/2014. the justification for this selection criterion is that we only sought to analyze the demographic dynamics of newly created firms resulting from entrepreneurship. this excluded all other firms, which, even if they had been newly created, probably resulted from splits from larger companies or the formation of subsidiaries of business groups. thus, throughout this study, we refer to entrepreneurial ventures as firms that have no employees or have fewer than 10 employees and that were created during the study period. the geographical scope of the study was extended to all member states in the eurozone. this decision is justified by the need to reduce as much as possible any element of the economic and institutional environment that might cause differences between different countries and that might create bias in the conclusions derived from the analysis. we therefore chose countries with the same monetary policy and, accordingly, the same economic and financial rules and institutional demands. from a sector perspective, the data collected for this analysis were based on the definitions published in the nace rev. 2 classification. for this study, we considered the categories “industry (except construction),” “construction,” and “services of the business economy except activities of holding companies.” the main data source was eurostat, the european statistical office. more specifically, we took data from the “business demography” database, which contains annual data and provides aggregate information on firms and the features of business demographics for each member state (eurostat, 2007). this approach meant that we were able to use data from different countries following harmonized definitions and criteria. however, this data source also has certain limitations. for example, data was not available for all countries for the entire study period (i.e., data for greece and malta were missing). the variables that were used in this study are detailed in table 1. table 1 variables used in the study variable description expression rate of entrepreneurship number of ventures created in year t divided by active business population in year t. r^t is the number of ventures created in year t, and n^t is the active business population in year t. entrepreneurial failure rate number of ventures that failed in year t divided by active business population in year t. d^t is the number of ventures that failed in year t, and n^t is the active business population in year t. entrepreneurial failure/ mortality function number of ventures created in year t that had not survived by year t + k divided by the number of ventures created in year t. s^(t+k) is the number of ventures created in year t that had survived by year t + k, and r^t is the number of ventures created in year t. being: entrepreneurship and labor population rate n^t is the number of active ventures in year t, and pa^t is the labor population (aged 15–64 years) in year t. specialization index n_(s,p) is the number of ventures in sector s and country p, and n_p is the number of country p entrepreneurial projects. note: authors’ calculations. journal of small business strategy / vol. 29, no. 1 (2019) / 16-29 19 f. olmo-garcía, f. crecente-romero, & m. val-núñez results business structure in the eurozone before the economic crisis the economic dynamism of the eurozone is reflected by the highly consolidated business population, which comprised 18,463,349 firms in 2015. this figure represents 72.3% of the businesses in the european union. analyzing this data further shows that self-employment makes up the largest segment, accounting for 61% of all firms. firms with 1 to 4 employees account for 28% of firms. firms with 5 to 9 employees and those with 10 or more account for roughly the same percentage of firms (approximately 6% each). therefore, 95% of firms in the eurozone have fewer than 10 employees. in short, it is fundamental for the european authorities to develop suitable initiatives to encourage the survival and growth of the smallest firms, which provide 34% of total employment in the eurozone business sector. in terms of activity, 76% of firms are service firms, whereas just 15% operate in the construction sector, and 9% operate in the industry sector. this distribution hardly changes when firm size is accounted for, although when smaller firms are considered, the percentage of service firms is higher and the percentage of industrial firms is lower see (figure 1). when type of employment is considered, we observe that 77% of the employment generated by self-employment is in the service sector, largely influenced by the range of services provided by those who work in the liberal professions, versus 7% in industry. however, the effect of size is noticeable: the service sector accounts for only 64% when firms with 10 or more employees are considered, whereas the industry sector accounts for 30% of employment, most likely because of the effect of economies of scale enabled by the size of these firms. this data reflect the decreasing relative importance of the construction sector as firm size increases. this data shows the prominent role of self-employment and microenterprises in the eurozone. the aim of the study is to analyze the dynamics of entrepreneurship. hence, our analysis focuses on the segments comprising the smallest firms, which are therefore also most closely related to recent entrepreneurial activity. this focus allows us to study structural characteristics in depth. accordingly, we were interested in analyzing the historical evolution of the population of self-employed businesses and microenterprises by sector. notably, the first year of the study period coincided with the start of the financial crisis. figure 2 shows how the business population evolved over time, taking 2008 as the base year. figure 2 plots the varying trends that define this evolution and reflects the way the effect of the crisis varies by firm size and sector. the results by sector show that the crisis mainly affected the industry and construction sectors, mainly the latter of the two. the results by firm size indicate that self-employed persons showed the greatest strength. their flexibility and ability to adapt and reinvent themselves meant that the number of firms virtually remained stable throughout the period in the construction and industry sectors, both of these sectors were heavily affected by the crisis. meanwhile, there was considerable growth in the service sector. the number of service firms in 2015 was 6% higher than in 2008. in contrast, the segment of larger firms (5 to 9 employees) had the highest rate of failure throughout the crisis. the number of construction firms with 5 to 9 employees reached a minimum in 2013, after losing 27% of firms in just five years, but failed to recover by 2015. although less pronounced, a similar negative trend can be observed in relation to firms in the industry sector. after seven years of economic crisis, the number of firms in the eurozone had fallen by 15% with respect to the number in 2008. the service sector, however, figure 2. self-employed and microenterprises evolution in the euro zone by economic sector (2008 = 100) note: authors’ calculations based on eurostat data; greece and malta excluded. figure 1. proportion of enterprises by size class and economic sector note: authors’ calculations based on eurostat data. journal of small business strategy / vol. 29, no. 1 (2019) / 16-29 20 f. olmo-garcía, f. crecente-romero, & m. val-núñez experienced a different trend. after reaching a minimum in 2013, following a 5% drop with respect to 2008 in terms of the number of firms with between 5 and 9 employees, subsequent economic recovery drove an increase in the number of firms such that by 2015, the number of firms was 4% higher than it was in 2008. the number of medium-sized microenterprises (i.e., 1 to 4 employees) followed a more positive trend that reflects how, once again, the service sector continued to grow steadily from 2008 onward, with 6% more firms in 2015 than in 2008. however, this dynamic was not reflected in the other two sectors under study. in the industry sector, the number of firms with 1 to 4 employees was 8% lower than in 2008, and in the construction sector, the number of firms was 16% lower than in 2008. in light of these results, the strength of smaller firms, especially those in the service sector, helped boost the business population in the eurozone, albeit with a high cost in terms of firm mortality and therefore employment. following this analysis of the eurozone business structure based on aggregate data, we focused on the individual situation in each country, considering the changes experienced by self-employed businesses and microenterprises in each region. table 2 shows the historical evolution of the number of self-employed businesses and microenterprises from 2008 to 2015 as well as the rate of entrepreneurship, taking 2008 as the reference year. the analysis highlights the notable case of latvia, which experienced a 191% increase in the number of self-employed persons over the 7-year period, albeit with a marginally downward trend in the number of microenterprises. the other baltic countries, lithuania and estonia, experienced strong growth in the number of microenterprises (33% and 25% growth, respectively). lithuania also experienced strong growth of 41% in the number of self-employed persons, whereas the number of self-employed persons in estonia essentially remained constant, with virtually no variation in the business population for this segment. these results are particularly noteworthy given the major impact of the crisis on the three baltic countries, whose economies underwent major economic adjustments that enabled them to successfully overcome their difficulties (garrote, del río, sastre, & valdeolivas, 2013). another notable case given its contradictions and the major impact of the economic crisis, which led to financial bailout, is ireland. ireland’s self-employed population rose by 65% over the period, contrasting with an 8% drop in the number of microenterprises over the same period. the trend in the number of self-employed persons was also positive in the benelux countries, with 130% growth, and in france, slovenia, and slovakia, all with growth rates of more than 45%. in contrast, there was a prominent negative trend in spain, where the self-employed population fell by 3%, and in italy, cyprus, germany, and portugal, where the decrease was more than 10% in all cases and close to 20% in germany and portugal. the microenterprise population has followed a much less dynamic trend since 2008. positive trends can be observed in the cases of luxembourg, which experienced an increase of 33%, and france, slovenia, and italy, whose growth was approximately 10%. the trend in the microenterprise population was highly negative in portugal, spain, and cyprus, whose business populations shrank by between 8% in portugal and 15% in spain and cyprus. there was a notable reduction in the number of businesses in the segments of smaller sized firms in these three countries over the study period. this finding affords the competent authorities an opportunity to reflect upon the proposed measures to help smaller firms become more competitive and reduce the likelihood of failure in recessive economic cycles. similarly, the data presented in table 2 also refer to the way that the rate of entrepreneurship has evolved over time. the rate of entrepreneurship captures the number of self-employed persons and microenterprises per 1,000 active employees as an indicator of the degree of entrepreneurial initiative of the active population of each country (spanish chamber of commerce, 2001). this rate is closely associated with entrepreneurial processes and the dynamics of labor market entry and exit. regarding self-employed persons, notable cases are latvia and ireland, with growth of 231% and 72%, respectively, although the trends in slovakia, slovenia, france, and lithuania were also notable, with growth of between 40% and 50%. in contrast, cyprus, germany, portugal, and italy stand out because of the considerable reduction in their rates of entrepreneurship, which ranged between 10% and 20%. the case of germany is particularly noteworthy because in both 2008 and 2015, germany had the lowest rate of entrepreneurship in the eurozone, with fewer than 40 self-employed persons per 1,000 active persons. in terms of microenterprises, once again there was strong growth in the baltic countries and slovenia, with rates that ranged from 13% to 37%. this contrasted with the dramatic fall in spain (15%) and cyprus (23%). the netherlands had the lowest rate of microenterprise entrepreneurship in the eurozone, with just 20 microenterprises per 1,000 members of the active population, again followed by germany, with a rate of around 27. historical evolution of business demography in the eurozone the analysis presented in the previous section yields certain conclusions regarding the differences in the dynamics of entrepreneurship across the eurozone. however, journal of small business strategy / vol. 29, no. 1 (2019) / 16-29 21 f. olmo-garcía, f. crecente-romero, & m. val-núñez studying the dynamics of entrepreneurship requires analysis of the processes of business creation and failure, in this case focusing on small ventures as the representation of entrepreneurial spirit. as a reflection of the dynamics of entrepreneurship, the rates of business creation and failure displayed in table 3 show, by firm size, the idiosyncrasies of each country within the eurozone. this data is conditioned by the impact of the economic crisis and the policies implemented in response to this crisis in each country. the data once again conclusively show that the baltic countries are leaders, with rates of creation of self-employed businesses of 35% (estonia), 19% (latvia), and 28% (lithuania) in 2008. these rates remained virtually constant for the whole study period in lithuania and even increased by 7 percentage points in latvia. estonia was the only country that experienced a decrease of almost 20 percentage points in the rate of entrepreneurship, resulting in a rate of 15.5%, which was nonetheless still higher than the eurozone average. these countries likewise stand out in terms of creation of microenterprises, with a rate that reached 7% in 2015 following a positive trend. other countries with outstanding rates are portugal, slovenia, slovakia, finland, luxembourg, and the netherlands, all of which had rates close to or greater than 10% in 2015. these countries also had 2-digit rates of creation of self-employed businesses. in 2008, slovakia and luxembourg were leaders in the creation of microenterprises, although this trend had slowed by 2015, especially in slovakia. conversely, cyprus, belgium, and italy had notably low rates of entrepreneurial dynamism, with rates of creation of self-employed businesses of less than 10% in 2008. belgium and particularly cyprus experienced positive trends in this regard, whereas italy experienced a similar level of growth self-employed number of enterprises growth index entrepreneurship and labor population rate growth rate 2008 2015 2008 2015 2008 2015 2008–2015 latvia 19,207 55,969 100% 291% 17.51 58.00 231% ireland 86,602 142,629 100% 165% 37.46 64.28 72% slovakia 222,013 327,389 100% 147% 82.87 120.41 45% slovenia 51,075 74,611 100% 146% 50.02 75.21 50% france 1,618,824 2,361,988 100% 146% 58.32 80.99 39% lithuania 79,964 112,630 100% 141% 53.88 78.54 46% belgium 334,931 456,014 100% 136% 70.56 96.06 36% luxembourg 9,196 12,013 100% 131% 43.17 43.84 2% netherlands 685,523 883,775 100% 129% 78.76 101.36 29% finland 140,724 155,088 100% 110% 52.73 59.22 12% estonia 31,779 32,021 100% 101% 47.43 48.96 3% austria 207,309 207,735 100% 100% 50.56 48.10 -5% spain 1,736,994 1,688,181 100% 97% 75.82 74.15 -2% italy 2,737,144 2,432,989 100% 89% 112.38 97.33 -13% cyprus 21,197 17,804 100% 84% 54.91 43.11 -21% germany 1,599,010 1,322,461 100% 83% 38.97 32.16 -17% portugal 620,178 510,096 100% 82% 119.20 103.07 -14% microenterprises (from 1 to 9 employees) number of enterprises growth index entrepreneurship and labor population rate growth rate 2008 2015 2008 2015 2008 2015 2008–2015 lithuania 42,847 56,851 100% 133% 28.87 39.65 37% estonia 34,992 43,883 100% 125% 52.23 67.10 28% luxembourg 12,742 15,449 100% 121% 59.82 56.38 -6% france 866,564 976,010 100% 113% 31.22 33.47 7% slovenia 54,244 59,335 100% 109% 53.13 59.81 13% italy 1,132,365 1,229,713 100% 109% 46.49 49.19 6% slovakia 99,154 104,233 100% 105% 37.01 38.34 4% germany 1,119,012 1,122,691 100% 100% 27.27 27.30 0% netherlands 170,873 170,659 100% 100% 19.63 19.57 0% belgium 156,047 155,473 100% 100% 32.87 32.75 0% latvia 45,975 45,713 100% 99% 41.91 47.37 13% austria 164,369 161,267 100% 98% 40.09 37.34 -7% finland 121,075 116,483 100% 96% 45.36 44.48 -2% portugal 292,267 269,700 100% 92% 56.17 54.50 -3% ireland 94,839 87,346 100% 92% 41.02 39.36 -4% spain 1,384,135 1,168,283 100% 84% 60.42 51.31 -15% cyprus 33,982 28,072 100% 83% 88.04 67.97 -23% table 2 self-employed persons and micro enterprises population (2008–2015) note: authors’ calculations based on eurostat data; greece and malta excluded because of a lack of data for the study period. data for cyprus for 2015 were unavailable, so data for 2014 were used; countries sorted in descending order by growth rate journal of small business strategy / vol. 29, no. 1 (2019) / 16-29 22 f. olmo-garcía, f. crecente-romero, & m. val-núñez as at the beginning of the period. these countries, together with ireland, spain, and france, had microenterprise venture creation rates of less than 5% in 2008 but generally experienced a positive trend, although the highest increase in any of these cases was still less than 2 percentage points. the exception was belgium, whose rate in 2015 did not change with respect to 2008. in terms of business failure, countries with high rates of self-employed business failure were the baltic countries, ireland, and portugal, all of which had entrepreneurial failtable 3 entrepreneurship and entrepreneurial failure rates (2008–2015) rate of entrepreneurship (%) self-employed microenterprises (1–9 employees) 2008 2009 2010 2011 2012 2013 2014 2015 2008 2009 2010 2011 2012 2013 2014 2015 belgium 6.5 7.6 8.4 8.6 7.5 6.1 7.2 7.6 4.0 3.8 4.4 4.4 3.9 3.7 4.4 4.0 germany 12.3 10.8 11.6 11.9 10.9 10.8 11.1 11.2 6.8 6.5 6.5 6.1 5.6 4.1 4.6 4.2 estonia 35.3 16.5 17.0 17.9 18.8 17.5 16.5 15.5 6.6 5.7 7.4 8.2 8.0 6.8 7.5 7.9 ireland 10.2 12.2 9.5 10.5 11.8 10.2 9.2 9.6 3.2 2.5 2.5 2.9 2.8 3.7 4.4 4.2 spain 10.6 10.1 10.9 11.0 11.6 11.7 13.8 13.0 4.2 3.8 4.2 4.3 4.3 4.6 4.8 4.6 france 14.0 18.9 18.2 15.4 14.1 12.4 12.7 11.9 3.5 3.0 2.9 2.8 2.6 4.8 4.9 4.8 italy 8.5 8.8 7.7 7.8 8.4 8.6 8.6 8.4 4.4 4.8 5.2 5.1 4.9 4.9 4.9 6.0 cyprus 1.8 3.9 3.6 4.8 4.7 6.2 10.3 4.5 2.9 4.4 4.8 6.3 6.7 5.3 5.3 latvia 19.2 30.6 27.2 22.8 22.9 21.6 22.1 26.4 15.0 12.5 13.5 20.3 13.5 11.3 10.1 8.9 lithuania 27.8 21.4 34.3 37.8 36.6 34.5 34.3 25.3 13.0 10.4 11.6 12.3 15.2 8.9 12.4 9.8 luxembourg 14.5 13.4 14.0 15.1 14.4 14.8 15.0 14.2 9.3 8.8 8.7 8.2 8.4 8.5 8.6 8.0 netherlands 15.9 14.4 12.9 13.5 12.4 12.0 12.0 11.6 6.2 4.8 3.5 4.3 3.9 4.1 3.8 3.1 austria 11.6 10.8 11.3 10.6 10.3 10.4 10.2 10.2 6.0 5.8 5.4 5.4 5.4 3.8 4.2 3.9 portugal 18.8 15.6 15.6 16.2 16.5 18.9 19.3 21.1 7.8 6.6 6.4 7.5 6.7 8.4 8.2 8.2 slovenia 18.5 18.0 15.9 15.4 15.1 20.6 16.0 16.0 6.9 6.3 5.9 5.8 5.7 5.7 6.1 5.3 slovakia 15.8 15.9 11.0 13.0 11.1 8.8 24.7 14.7 17.6 19.2 19.4 17.9 10.6 12.4 6.6 5.2 finland 14.8 12.6 13.7 13.8 11.9 10.0 10.6 9.1 6.4 6.1 6.5 6.0 6.9 4.4 5.4 4.7 entrepreneurial failure rate (%) self-employed microenterprises (1–9 employees) 2008 2009 2010 2011 2012 2013 2014 2015 2008 2009 2010 2011 2012 2013 2014 2015 belgium 4.5 3.8 3.8 3.8 4.1 5.5 5.3 3.8 1.2 1.1 1.1 1.3 1.2 1.2 1.4 1.0 germany 14.8 15.2 14.5 14.7 14.6 14.1 15.3 14.9 0.0 2.1 2.2 1.9 1.8 1.7 2.4 1.8 estonia 20.8 22.6 14.2 11.9 10.6 12.7 10.9 10.0 8.6 9.3 7.5 6.3 7.1 6.8 6.5 5.9 ireland 16.2 19.1 12.8 15.4 14.6 13.4 11.3 10.8 5.6 6.9 4.5 5.0 4.1 3.8 4.2 3.6 spain 9.9 11.3 10.3 12.0 12.1 11.7 10.0 10.4 9.8 8.0 8.1 6.6 7.4 7.2 6.4 5.8 france 9.5 9.0 8.0 7.6 6.7 7.1 7.5 6.9 5.6 5.5 5.2 4.8 3.9 2.2 2.1 2.1 italy 8.1 7.4 8.0 8.4 8.4 9.5 9.0 10.3 5.2 4.1 4.1 4.7 4.9 5.1 4.9 5.0 cyprus 2.2 5.7 9.3 12.7 9.8 14.6 14.4 14.4 2.7 3.2 7.0 9.6 9.4 5.9 7.4 7.4 latvia 24.7 22.3 20.6 20.5 21.0 20.9 15.3 10.2 12.4 13.9 7.3 9.7 7.1 6.6 3.8 2.4 lithuania 47.3 36.7 29.1 24.6 23.4 21.1 21.9 24.7 6.3 8.4 7.3 5.3 16.8 5.6 7.9 6.3 luxembourg 13.1 11.3 11.7 11.5 11.0 11.6 12.5 12.1 6.0 6.4 6.3 6.6 6.4 6.4 6.5 6.9 netherlands 9.7 10.7 9.3 9.7 11.1 9.8 7.8 7.5 1.7 1.6 1.3 1.2 1.5 1.7 1.3 1.0 austria 7.6 8.4 9.7 10.0 9.6 9.2 8.4 9.5 4.7 4.4 4.9 4.8 4.6 2.9 2.8 3.0 portugal 20.2 21.4 20.6 21.4 21.2 18.6 17.9 20.3 7.3 7.6 8.2 8.9 8.3 6.9 6.4 6.7 slovenia 10.5 11.2 12.2 11.6 12.8 12.3 11.3 12.5 3.9 4.7 5.6 5.6 6.1 5.9 5.2 5.4 slovakia 14.8 14.0 7.6 14.3 11.3 17.3 12.7 13.4 5.9 4.7 6.6 15.2 6.6 6.7 4.3 4.3 finland 12.0 12.9 13.8 0.0 5.9 11.3 11.3 11.0 4.0 4.3 2.9 0.0 7.1 3.1 3.1 4.4 note: authors’ calculations based on eurostat data; greece and malta were excluded from the study because of a lack of data for the study period. data for cyprus for the year 2015 were unavailable, so the most recent data for cyprus were for the year 2014. journal of small business strategy / vol. 29, no. 1 (2019) / 16-29 23 f. olmo-garcía, f. crecente-romero, & m. val-núñez ure rates of approximately 20%, except for ireland (16%) and lithuania (47%). this data, which illustrate the intensity with which the crisis affected these countries, had virtually halved by the end of the study period, except in the case of portugal, which maintained a rate of failure of around 20% for the whole period. in terms of microenterprise failure, latvia was the leader at the start of the period with a rate of more than 12%. spain, estonia, and portugal also had high rates of approximately 10%, 8.6%, and 7.3% respectively. these countries generally showed positive progress over the period. the exception was portugal, whose rate remained higher than 6%, with a decrease of just 0.6 percentage points. the case of latvia was remarkable in that the rate of microenterprise failure decreased by 10 percentage points. we complemented this analysis of the rate of entrepreneurial dynamics by considering aggregate eurozone data by sector. figure 3 presents the trend of entrepreneurial creation and failure by firm size and sector, taking 2008 as the base year. the data in figure 3 show that in general, the level of business creation fell with respect to the level in 2008. only the service sector displayed a real entrepreneurial dynamic following the most severe period of the crisis. this entrepreneurship was mainly supported by self-employed businesses. these conclusions reflect the highly prominent role of services in new business trends, which relate to service personalization and knowledge management. one example is the provision of personal services and care services in a society where it is increasingly common for people to live longer. another example is data management, reflected by the emergence of new paradigms such as big data or the development of technologies such as the internet of things. these trends contrast with those in sectors such as construction and industry, which are gradually becoming less relevant to today’s society. figure 3. births and failures of entrepreneur’s projects in the euro zone (2008 = 100) note: authors’ calculations based on eurostat data; greece and malta excluded because of a lack of data. journal of small business strategy / vol. 29, no. 1 (2019) / 16-29 24 f. olmo-garcía, f. crecente-romero, & m. val-núñez from the perspective of entrepreneurial failure, firms have undoubtedly faced difficulties throughout the crisis. this is particularly true of self-employed businesses, who despite their greater flexibility, have fewer resources and less capacity to resist in tough conditions. the segment devoted to the provision of services is the only segment with rates that were slightly higher than they were in 2008. as regards the industry sector and (mainly) the construction sector, there was a trend toward a reduction in failures, although this trend was considerably slower in the case of self-employed businesses. entrepreneurial dynamics: the role of entrepreneurial failure the study of firm mortality in each year equips us with a better understanding of the dynamics of firm survival according to the firm’s year of birth, capturing structural and contextual changes that influence business failure. the eurozone currently comprises 19 countries, which would make a study of individual countries dense and difficult to perform. we therefore selected a group of countries that reflected certain noteworthy characteristics. first, we selected germany, spain, italy, and france. this choice is justified by the fact that these four countries account for 75% of the business population of the eurozone. as figure 4 shows, germany had the highest rate of firm failure among young firms because 24% of self-employed persons or microenterprises born in 2014 had failed by the following year, having increased by 4.4 percentage points with respect to firms born in 2007. spain had high but virtually constant rates (just 1.5 percentage points) throughout the crisis. the finding implies that the factors behind this phenomenon are more structural than situational. in both countries, the highest probability of business failure, which was greater than 60%, was in the fifth year of activity. in france and italy, the likelihood that self-employed persons and microenterprises would fail after one year increased by more than 10 percentage points between firms born in 2007 and those born in 2014. this likelihood of failure considerably reduced these countries’ competitiveness and capacity to innovate with respect to other european regions. lithuania and austria were also selected because they have specific characteristics of interest. in the case of lithuania, the likelihood that the smallest businesses would fail in their first year was 37%, and the likelihood of failure after five years was 70%. however, during the crisis, economic policies led to a reduction in both rates of 6 and 14 percentage points, respectively, which placed lithuania on the path to fostering entrepreneurship, although there is still considerable progress to be made. in the case of austria, the likelihood of failure after one year rose by virtually 6 percentage points from one of the lowest levels in the eurozone for firms born in 2007 (8.2%). similarly, the likelihood of failure after five years was one of the lowest for firms born in 2007 (less than 40%). however, the consequences of the crisis altered this dynamic such that figure 4. entrepreneurial failure function: self-employed and microenterprises (by birth year) source: authors’ calculations based on eurostat data. journal of small business strategy / vol. 29, no. 1 (2019) / 16-29 25 f. olmo-garcía, f. crecente-romero, & m. val-núñez 50% of self-employed ventures and microenterprises had failed within five years of activity. trends in specialization: from crisis to recovery in the previous sections, we showed how the processes of entrepreneurial dynamics are predominantly focused on the service sector as the driver of development across the eurozone. a crisis such as the one covered by this study, whose effects on the eurozone were particularly severe, has not only affected the decisions of entrepreneurs but has also had major consequences for the production model in the eurozone member states. for each country, the specialization index presented in table 4 shows whether a particular sector is more or less prominent with respect to the mean for the eurozone between 2008 and 2015. the data in table 4 shows that the trend of specialization in the eurozone seemed to be influenced by geographical conditions. regions that specialized the most in services at the start of the crisis were situated in central and eastern european countries, with the exception of portugal. the results are similar for the industry sector, although the cases of slovenia and slovakia are also notable. in terms of the role of construction in the production model, countries that experienced a housing bubble, such as spain and ireland, were most relevant. the effect of the crisis has left its mark not only on these countries but also on countries such as slovenia and portugal, where there has been a clear shift in the focus of production from construction toward industry and especially services. this shift represents the biggest change in the eurozone over the study period. however, it is also worth noting the increase in the prominence of the construction sector in countries such as belgium, germany, latvia, and austria, with a minimum increase of 12%. the industry sector was also prominent in these countries, especially in germany, as reflected by an 18% increase in the index of table 4. specialization index evolution in the euro zone (2008–2015) specialization index (2008) specialization index (2015) variation (2008-2015) industry construction services industry construction services industry construction services belgium 79% 95% 104% 69% 112% 101% 88% 118% 98% germany 105% 78% 104% 124% 93% 98% 118% 118% 95% estonia 109% 86% 102% 115% 86% 101% 105% 100% 99% ireland 71% 162% 90% 74% 136% 96% 104% 84% 107% spain 82% 125% 97% 75% 102% 103% 92% 81% 106% france 92% 108% 99% 90% 119% 97% 97% 110% 98% italy 120% 97% 98% 118% 91% 100% 98% 94% 102% cyprus 122% 112% 95% 117% 100% 98% 97% 90% 104% latvia 108% 60% 108% 113% 67% 105% 105% 112% 97% lithuania 115% 97% 99% 124% 106% 96% 108% 109% 97% luxembourg 38% 69% 115% 32% 76% 113% 83% 110% 98% netherlands 65% 95% 106% 64% 97% 105% 98% 103% 99% austria 93% 57% 110% 95% 64% 108% 102% 112% 97% portugal 89% 79% 106% 92% 64% 108% 103% 80% 102% slovenia 165% 113% 88% 163% 94% 93% 98% 83% 106% slovakia 183% 122% 84% 167% 131% 86% 91% 107% 102% finland 118% 103% 97% 112% 114% 96% 95% 111% 99% source: authors’ calculations based on eurostat data journal of small business strategy / vol. 29, no. 1 (2019) / 16-29 26 f. olmo-garcía, f. crecente-romero, & m. val-núñez specialization. this finding provides a clear example of how germany has focused on a sector in which it has major competitive advantages and massive exports. dynamics of regional convergence and divergence in the eurozone finally, to complement the previous analyses, we analyzed the process of convergence across the eurozone countries. following crecente, et al. (2014); crecente, et al. (2015), the annual average growth and decline of firms is a suitable proxy for economic growth because of the correlation between gdp per capita and changes in the business population, thereby implying greater wealth per inhabitant in countries with a greater business population. in this study, which focuses on the population of self-employed persons and microenterprises, using these segments of the population as a proxy for business density is a suitable approach given that they account for 95% of the total population. a european business structure based on small firms, even considering their high flexibility in response to economic shocks, lacks the necessary levels of productivity and competitiveness for long-term growth. this leads to divergence between countries in the eurozone, as shown in figure 5. for each country, figure 5 shows the variation in numbers of firms between 2008 and 2015 with respect to business density in 2008. the results depict a reality characterized by divergence arising from the fact that the impact of the crisis and the responses of the authorities varied from country to country. first, four countries had particularly high relative rates of entrepreneurship before the crisis. however, these four countries were also severely affected and were heavily involved in the debt crisis. the entrepreneurial dynamic in portugal, italy, cyprus, and spain was weaker than in other eurozone countries, even though these countries started from a strong position. in contrast, other countries that started from a weaker situation in terms of rate of entrepreneurship with respect to the mean also profoundly suffered the effects of the crisis. however, these countries emerged from the crisis with remarkable strength. this is reflected by strong entrepreneurial dynamics, as exemplified by the baltic countries and ireland. finally, germany is worthy of mention because at the start of the crisis, it had the second worst rate of entrepreneurship in the eurozone, having converged by approxi figure 5. business density and cumulated growth (2008–2015) note: authors’ calculations based on eurostat data; greece and malta excluded from the eurozone because of a lack of data; calculations were performed for self-employed persons and microenterprises. journal of small business strategy / vol. 29, no. 1 (2019) / 16-29 27 f. olmo-garcía, f. crecente-romero, & m. val-núñez mately 20 points toward the mean over the seven years considered in this study. nevertheless, germany still remained some way away from the mean. conclusion between 2008 and 2015, whether for structural reasons or due to contextual causes such as the economic crisis and the policies implemented by the authorities in each country, firms in the eurozone followed different demographic trends. entrepreneurial dynamics in terms of business creation and failure have been affected because of the need to adapt to a complex economic environment. without doubt, the smallest firms are crucial across the eurozone. self-employed persons, microenterprises with 1 to 4 employees, and microenterprises with 5 to 9 employees reflect the european entrepreneurial spirit, accounting for 61%, 28%, and 6% of firms in the eurozone, respectively. the eurozone is a service-providing region because 76% of all firms operate in the service sector, making this sector responsible for creating the majority of jobs. during the difficult period of crisis, the microenterprises and self-employed individuals in the construction and industry sectors were those that suffered most from the effects of the crisis, while self-employed businesses showed their resilience and their growth in the provision of services. in general, larger companies faced greater difficulties, probably owing to a lower degree of flexibility in adjusting their economic and financial structures to the realities of a struggling economy. from a regional perspective, ireland and the baltic countries have been highlighted throughout the paper as the paradigmatic examples of countries showing positive trends, not only in the rate of entrepreneurship and the birth of self-employed businesses and microenterprises, but also in the high rate of business failure, which has positively affected the relative change in business density. these findings must be contextualized, especially given the severe effect of the economic crisis on these economies and the political economy measures that were implemented. lithuania stands out as one of the countries with the highest likelihood of business failure when this is analyzed by the firm’s year of birth. however, lithuania is also noteworthy for having substantially reduced this likelihood. ireland once again stands out, in this case together with spain, because of the dramatic decline of the construction sector, once a driver of growth, within the business population. some countries in southern europe such as spain, portugal, and cyprus stand out because of the decrease in the number of self-employed businesses and microenterprises, as well as the negative trend in the rate of entrepreneurship. this negative trend affected these countries’ entrepreneurial dynamics, with respect to the rest of the eurozone, despite having started from a strong position in 2008. portugal and cyprus offer particularly negative examples in terms of how the rate of business creation evolved over time, particularly in relation to self-employed businesses. cyprus followed a highly negative trend in terms of rate of failure, whereas portugal remained stable or improved slightly in the microenterprise segment. the entrepreneurial rate worsened in spain too, although less substantially. spain also stands out because of its negative trend in terms of rate of failure of self-employed persons. analysis of firm failure in each country shows that besides the effect of the crisis, structural factors prevented a substantial reduction in the likelihood of failure. therefore, the eurozone can be characterized by an established business population dominated by smes and focused on the provision of services. however, this characterization nonetheless differs greatly when the situation in different regions is analyzed. despite the major impact of the crisis, the diverse responses by different authorities coupled with structural idiosyncrasies have led to a wide range of outcomes in terms of entrepreneurial dynamics. this can best be appreciated by comparing southern european countries with ireland and the baltic countries. references adam, m., strähle, j., & freise, m. 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(2013). business demography. nbb economic review, june 2013, 39-56. sz'i4"i''y david versus goliath: strategic bfhavior of small firms in consolidated industrifs monica zimmerman temple university ni".i imnerqnsbm. temple. edu denise dunlap temple university i!dim lapqatcm pie. edu robert d. hamilton, ih temple university rdhanii ltonqaaol. corn t. l. hill temple university tl.hillqatemple.edu elisabeth a. chapman temple university echapmanbellatlantic.corn abstract this stuily assesses the iffect of strategy selection and firm adaptability on small firm perfonnance, using finn tenure ar a inoileratm. variable. tlie stiidy is based upon interviews witli sixteen small firms operating in rapiilly clumging and consolidating industries. till of the firnis in the study pursucil a differentiation strategy. half of the firms pursued a broad product strategy and more than three-ttuarters pursued a broad service strategy. the study found that small firms adapt by addressing community needs and forming cooperative agreements with otlier small firms but not larger jirms. variation among the industries studied suggests that the intensity ofintlustry concentration affects firm adaptation decisions. for instance. while the heavily concentrateil hardware aml drugstore industries showed limited adaptation, the unconsolidated bookstore industry showed greater commitment to adaptive strategies. in addition, jirm tenure was found to ajfect the adaptation of the small firms studied. introduction small firms face severe competitive challenges. hirschman (1958) argued that small firms will fail or will be consumed by large firms. welsh gc white (1981)pointed out that because small firms are resource impoverished, they face significant disadvantages when competing head-to-head against larger firms. more recently, mccune (1994) found that the "price 56 journal of small business strategy vol. 13, no. 2 falllwinrer 2002 chopping" practices of mass merchandising retailers (e.g. wal-mart) and category killers (e.g. home depot) threaten the survival of small competitors, limit the shopping alternatives for customers, limit the customers to which manufacturers can sell, and decrease the negotiation power of vendors. fenn (1997) noted that while independence is valued, scale is rewarded. thus, small firms are challenged when faced with the competition of large firms. despite the many competitive challenges faced by small firms, especially those operating in concentrated industries, some have suggested that small businesses do have advantages. these advantages include extraordinary accessibility; customer and market knowledge; close social relations with customers; product, service and geographic specialization; flexibility; and management (keen, niemeyer, & miller, 1996; litz & stewart, 2000; litz, 2000; longenecker & moore, 1987). indeed, there are approximately 23 million small businesses in the united states, which account for nearly half of all goods and services produced and sold and employ more titan 99% of all employers (daft, 2000; hodgetts & kuratko, 1995; kuratko & hodgetts, 1998; small business administration, 2002). while definitions vary in the studies cited, most arc consistent with the sba definition of less than 500 employees (federal register, 2000). the research reported in this paper was conducted to understand the survival of small firms competing against large firms and to resolve inconsistencies in the literature on small firm viability, 'fhe firms in this study were very small, usually less than 100 employees. researchers disagree on (i) whether or not small firms can be successful (e.g., hirschman, 1958) and (2) if they can succeed, which strategies enable success (e.g., mccune 1994; porter, 1980b). in addition, the literature suggests that there are certain adaptation approaches, such as cooperation and flexibility that may affect the performance of the firm's chosen strategy (e.g., fenn 1997; mccune, 1994). on the assumption that small firm success is particularly problematic in consolidating industries, this study explores in some detail the performance of small firms in three narrowly defined retail industries. the three industries are the highly concentrated drug store industry, the highly concentrated hardware industry, and the rapidly consolidating book selling industry. the study is based on sixteen case studies designed both to analyze the impact of strategy selection, firm adaptability and firm tenure on firm viability as well as to understand in greater detail the nuances of successful small firms'trategies. this study proposes that the strategy of the small firm is related to its performance. the performance of the small firm'is also related to its ability to adapt in an ever-changing competitive environment. furthermore, firm tenure affects the strategy selected by the firm and the adaptability of the firm. the relationships are illustrated in figure i and reviewed in the following sections. using a familiar metaphor, the paper seeks to understand "how does david manage to smite or at least live in the same town as goliath?" conceptual background and theory in the study of small firms, the perfonnance of the firm has been linked to its competitive strategy, adaptation, and tenure. the following sections review these aspects. competitive strategy porter (1980a, 1985) argued that a firm's competitive strategy is linked to its performance. he argued that a firm can gain competitive advantage by pursuing one of three generic competitive strategies: differentiation, cost leadership, and focus. firms employing a differentiation strategy attempt to distinguish their products and/or services from those of their 57 journal of sinull bust next biruicg i voi /3, nu. 2 full/winter 2002 competitors; they attempt to establish and mamtain custonicr loyalty through uniqueness. firms using a cost-leadership strategy compete i'or custoiners by offering competitive quality at the lowest prices. firms choosing a focus strategy decide to compete not only on the basis of uniqueness (differentiation) or price (cost leadership) but also by targeting a segment of an industry or inarket, figure i: small business strategic model firm strategy selection dittcrentiation cost leadership focus small firm performance firm tenure growing stable declining firm adaptability community cooperation chaganti, chaganti, and mahajan suggested that "firms should match strategy to the type of competition in the market, and that effective strategies vary with the type of competition" (1989: 31). they found that firm size limits the competitive strategy options of businesses, with large profitable businesses having more options than small profitable businesses. specifically, mccune (1994) argued that a cost leadership strategy is infeasible for small lirms because they cannot enjoy economies of scale. instead, he suggested that small firms should differentiate themselves from their competitors by providing something that chain competitors do not provide, such as excellent service or unusual products, as well as practicing good planning and business savvy. other researchers have found that differentiation through product uniqueness, customer responsiveness, quality, excellent service and convenience has enabled small firms to survive or prosper (chaganti, et al, 1989; lieber, 1997; macht, 1999). in addition, chaganti, et al. (1989) found that dilterentiation in terms of quality aided performance, while differentiation through innovation did not affect performance. in light of the above literature, it would appear that a small firm's performance is related to implementing a differentiation strategy. accordingly, hlr a small firm is more likely to succeed by implementing a differentiation strategy than by implementing a cost leadership strategy. in addition to pursuing a differentiation strategy, small firms may also gain competitive advantage by carving a niche in the marketplace or pursuing a focus strategy. for example, mccune (1994) found that local stores that carved out a niche not filled by wal-mart improved their performance because wal-mart shoppers eventually spilled over into the local stores. thus, he argued that small businesses should (i) focus upon their niche, (2) narrow 58 jotrrnol of small busmess strategv vo/. /3, no. 2 fall/iv(nter 2002 and deepen their product line, (3) offer superlative service, and (4) remain knowledgeable about consumers, competition, and pricing. in addition, kean, et al (1996) found that concentration on a unique market segment allows small retailers to differentiate the product assortment and to incorporate cost or pricing strategies that best serve their defined market. longenecker and moore (1987) proposed that by clearly understanding their customers and markets through maintaining close contact with their customers, small firms are well suited to specialize and develop expertise in a product, service and/or specific geographic market. accordingly, because there are distinctions in the arguments between the product array and the range of services, it is hypothesized that: h2ai a small firm is more likely to succeed using a focus product strategy tlian a broad or narrow product strategy. h2bi a small firm is more likely to succeed using a focus service strategy than a broad or narrow service strategy. firm adaptability: community and cooperation in addition to porter's three competitive strategies, there are other strategic factors that affect the performance of small firms. fenn (1997) pointed out that while small firms have built-in disadvantages regarding economies of scale in purchasing, production, and information systems, these competitive disadvantages can be partially offset through entrepreneurial tactics such as adaptation. indeed, small businesses can be more adaptable because they have lower overhead costs than large firms (longenecker & moore, 1987). adaptation may involve addressing changes or developing social relations in the community in which small businesses operate (chell & haworth, 1992; litz & stewart, 2000; maggina, 1992; maurer, 1998). more specifically, daft (2000) suggested that entrepreneurial growth opportunities exist for small firms that take advantage of or adapt to changing community demographic and lifestyle trends. thus, because fulfilling a community need may be linked to the small firm's performance, it is hypothesized that: h3i a small firm is more likely to succeed by adapting its product and/or service to fulfill a unique community need. cooperation is another form of adaptation. for small firms competing against industry giants, cooperation is a survival mechanism (fenn, 1997; maggina, 1992; mccune, 1994). small businesses cooperate by aligning with other small firms to benchmark, develop quality standards, form buying cooperatives, refer customers, and develop joint marketing. ehrenfield (1995) found that when small businesses in the office supply industry formed strategic collective purchasing alliances, they were able to lower prices. in addition, small business owners that adapt by cooperating with large businesses may enable their survival (lieber, 1997; mccune, 1994). according to fenn (1997) and litz (2000), however, such collaboration can be risky because it may result in loss of competitive advantage, dilution of market share, exposure of weaknesses, damage to customer relationships and reduced margins. in light of the above literature, this study hypothesizes that: hdai a small firm is more likely to succeed by seeking cooperative agreements with other small firms. hdbi a small firm is more likely to succeed by seeking cooperative agreements with large firms. 59 journo(of small business stratr gv vol. /3, na. 2 fag/8'i ntcr 2002 finn tenure although davis & thompson (1994) found that there is no relationship between firm tenure and strategic positioning, including the decisions to differentiate or pursue a narrow focus, other scholars argue that tenure is important. thus, in the study of small firm performance, tenure is of interest. porter (1996) asserted that new entrants, unencumbered by industry history, often discover unique positions overlooked by established competitors. new strategic positions often open up due to changes such as new customer groups, new needs, new distribution channels, or new technologies. new firms, less wedded than old firms to past practices, are able to identify these novel strategic positions more easily than older firms. in terms of choosing a differentiation or focus strategy, kean, leistitz, gaski)i and jasper (1998) found that older small firms may be better able to survive without differentiating or narrowing their focus due to their established reputations and ties to their industries. it appears that as firms age, they are less likely to engage in adaptive strategies such as meeting a unique need in the community or forming cooperative agreements. accordingly, this study hypothesizes that tenure will have a profound impact on a firm's strategic options. hsai as firm tenure increases, a small firm is less likely to select a differentiation strategy. hsbi as firm teiiure increases, a small firm is less likely to select a focus strategy. hsci as firm tenure increases, a small firm is less likely to adapt by meeting a community need. hsdi as firm tenure increases, a small firm is less likely to adapt by forming cooperative agreements with other firma methodology this study uses a linear-analytic, multiple-case design (yin, 1994) to explore the performance of small firms competing against industry giants. "case studies are the preferred strategy when "how" and "why" questions are being posed, when the investigator has little control over events, and when the focus is on a contemporary phenomenon within some real-life context (yin, 1994: i). the firms were selected for the case studies from three highly consolidated retail industries —the bookstore, hardware, and drugstore industries. the firms studied were located in major metropolitan areas throughout the united states, the majority in the east coast. according to davis and thompson (1994), industry context plays a critical role in a firm's ability to succeed. to facilitate a deeper understanding of how small firms are succeeding in these consolidated industries, an industry analysis was first conducted followed by in-depth interviews with small business owners. in case studies, the advantage of interviews is that they are focused directly on the topic studied. industry analysis of the three industries included in this study, the bookstore industry is the least consolidated. as of the end of 2000, the $ 18 billion bookstore industry was actively consolidating, with the top five competitors commanding a combined market share of 52%. the established firmsbarnes & noble ($3.62 billion), borders ($3.27 billion), and books-a-million ($0.42 billion) —had the majority of the market share. the "internet upstarts" amazon.corn ($ 1.69 billion) and barnesandnoble.corn ($0.32 billion) captured a significant share of the market (united 60 journal of small business strategy vol. 73, no. 2 falllivi nter 2002 states securities and exchange commission, 2001; milliot, 2002). by contrast, the hardware and drug store industries are almost fully consolidated. in the hardware industry, the home depot ($38.4 bilhon) and lowes companies, inc. ($ 15.9billion) controlled 94% of the $57.65 billion hardware market share (stockselector.corn, 2000). similarly, the $60.05 billion drug store industry is so consolidated that the top four competitors controlled virtually 100% of the total market share. the top competitors in the drug store industry were walgreens ($19.6 billion), cvs ($ 18.4 billion), rite aid ($ 13.4 billion), and eckerd ($ 12.6 billion) (walgreen's rankings & ratings, 2000). data collection given the extreme competitive pressures facing firms in the highly consolidated industries described above, the challenges confronting small firms in any environment, and the lack of detailed theory on small firm competitive strategy, there is a need for both exploratory research and hypothesis testing. to meet this need, primary data was collected through personal interviews. the in-depth interviews allowed sufficient time to explore the development, maintenance, and alternative strategies that small businesses were usmg to compete against large competitors. elite interviewing was selected as the primary qualitative method of unit analysis. elite interviewing is a specialized and qualitative interviewing technique that focuses the research on persons within the organization who have selected expertise in the areas most relevant to the research (marshall & rossman, 1995). the elite interviewees selected to participate were small business owners and who were considered "elite" because of their expertise in the issues under investigation in this study. each interviewee was responsible for strategy selection, was the most knowledgeable about local competition, and could provide descriptive information about the firm's past history, performance, and future plans. the interviews provided indepth information about the areas most relevant to the study. a semi-structured interview style was selected to allow the interviewees the opportunity both to reflect on their experiences and to use their knowledge and expertise to uncover and describe various strategy selection and adaptability decisions. open-ended interview questions were developed based on the results of an extensive literature review and industry analyses. these questions are presented in appendix 1. the interviews lasted thirty minutes to two hours and were conducted between the fall of 1998 and the spring of 2000 either by telephone or in person. four bookstore owners, five hardware store owners, and six drug store owners were interviewed. to ensure confidentiality, responses were collected through the note-taking method rather than the tape-recorded method (marshall & rossman, 1995). to further protect the confidentiality of the firms, each firm was assigned an alternate name consisting of a letter for each industry and a number for each store. thus, bl, b2, b3, and b4 represented firms in the bookstore industry. hardware stores were represented by hl, ...h6. drug stores were represented by dl, ...d6. following dess and robinson (1984), who found that self-report assessments are accurate representations of general performance data, the study relied solely upon the qualitative information obtained in the interviews as a proxy of firm performance. the interviewees'esponses were paraphrased to form a structural framework for the study's data analysis. as patterns and themes became apparent in the data, two reviewers independently grouped the responses into identified categories. inferences from the data along each of the hypotheses were identified. where the firm results were virtually uniform, the assessment had greater certainty. if the results were less evident (e.g. seven out of sixteen firms have cooperative 61 j»urnul uf s&nuit ih&s&near strutegv pui i3, nu. 1 fuiiliyintcr zbb1 agreements), then the outcomes were identifie&t as having "partial support." because the number of firms analyzed was limited and because the study was exploratory, the conclusions drawn from each of the hypotheses needs to be regarded as likelihood rather than as a certainty. results the in-depth personal interviews provided rich information about small firm strategy while also allowing preliminary evaluation of this study's specific hypotheses concerning the affect of small firm strategy selection, firm adaptation, and firm tenure on firm performance. results are presented in table la and lb. 'fable la: interview data —hypotheses hl to h4b and firm performance industrpl ht& h1a& h2b& h3& h4a& hdb& firm firm s&ra&cgy& product: service: adapt: adapt& adapt: performance: df focus vs. focus vs. meeting cooperation cooperation growing,df vs. broad or broad or community with small with large stable, and narrow narrow need firms firms declining bookstores bl df f 8 yes yes —fa no g 82 df n 8 yes yes —fa no g 83 df f 8 yes yes —fa no g 84 df 8 8 no yes —fa no g hardware stores hl df 8 f no yes —ta no g h2 df 8 8 no no no g h3 df 8 8 no no no s h4 df 8 8 no no no g hs df 8 8 no no no g h6 df 8 8 no no no g drug stores dl df f f yes no no g d2 df 8 8 no no no s d3 df f 8 no no no g d4 df n 8 no no no d ds df f 8 no yes —ta no g d6 df n f no yes —ta no d key: bbroad, cl —cost leadership. d —declining, dfdiperentiation, ffocus, fa —formal agreement, g —growing, mo —middle-old, nnarrow, nf —no focus, 0 —old, sstable, ta —tacit agreement, yyoung, ym —youngmiddle 62 journal of sinai/ busitiess strategy vol. /3, no. 2 fa/lltpinter 2002 table lb: intervlew data —hypotheses h5 to h5d and firm performance llltlustryl h5r h5ar hsbr h5rt h5dt firm firm firm tenure: strategpr focus: adapt: adapti performance: young, young-middle, df vs. meeting cooperation growing, stable, stratef y community with small or and declining need large firms and old bookstores b 1 23 —ym df f yes yes g b2 20 —ym df nf yes yes g b3 22 —ym df f yes yes g b4 28 —ym df nf no yes g hardware srorrs hl 1 —y df f no yes g h2 43 -mo df nf no no g h3 43 —mo df nf no no s h4 97 —0 df nf no no g h5 91 —0 df nf no no g 1-16 7 —y df nf no no g drag stores dl 5 —y df f yes no g d2 40 —mo df nf no no s d3 30 —ym df f no no g d4 76 —0 df nf no no d d5 25 —ym df f no yes g d6 25 —ym df f no yes d key: bbroad, cl —cost leadership, d —declining, dfdifferentiation, ffocus, fa —formal agreement, g —growing, mo —middle-old, n —/varrow, nfno focus, 0 —old, s-stable, ta —tacit agreement, y —young, ymyoung-middle the study identified three levels of finn performance: declining, stable, and growing. "declining" firms exhibited decreasing sales and/or earnings; "stable" firms had relatively constant revenues and/or earnings; and "growing" firms had increasing sales and/or earnings. based on the study's characterizations of successful performance, there were twelve "growth" firms, two "stable" firms, and two "declining" firms. thus, this study's sample is composed largely of lirms that are succeeding against the odds. nevertheless, although there was limited variation found in this study, the results shown in table 2 suggest that there would be considerable value to conducting this research on a much larger scale 63 jnurnnl (if small business satttegy vrtl. /3, no. 2 fall/lyinter 2vv2 taitle 2: results hypo(/toils i grit witt stable dec/i ne diifcrcntiation strategy 12 2 2 cost lcadcrship strategy 0 0 0 hyporhesis 2a grow(it stable decline broad product strategy di 2 0 narrow product strotegy i 0 2 focus product strategy 5 0 0 hypotllesis 26 grow(it stable decline bl'oud service strategy 10 2 i narrow scrvicc strategy 0 0 0 focus service strategy 2 0 i hypothesis .i growth stable decline community need 4 0 0 no community need g 2 2 itypothesis 4a growth stable decline cooperative with small 6 0 i no cooperation 6 2 i hyporhesi s 46 grow(i( stable decline cooperative with large 0 0 0 no cooperation 12 2 2 hypotliesis sa differentiation cost leadership young 3 0 young-middle 7 0 middle-old 3 0 old 3 0 broad narrow focus hypothesis sb product/service product/service product/service young 2/i 0/0 i/2 young-middle i /6 2/0 4/i middle-old 3/3 0/0 0/0 old 'i /3 i /0 0/0 hypotliesis sc communiry lveed no communiyy need young i 2 young-middle 3 3 middle-old 0 3 old 0 3 cooperation no cooperation hypothesis sd sma/vlarge smalvlarge young i/o 2/3 young-middle 6/0 i/7 middle-old 0/0 3/3 old 0/0 3/3 64 journal of small business strategy vol. /3, no. 2 fall/winter 2002 ~vh pl. i *pl lgh*«hy f llh, lll l pdh«hl firms were implementing a differentiation strategy rather than a cost leadership strategy. in addition, the majority of the firms (i.e., 13 out of 16 firms) reported growing sales and profits. this first hypothesis stipulates that ha small firm is more likely to succeed using a differentiation strategy than a cost leadership strategy." while the uniformity of the surviving firms were using a differentiation strategy, no direct conclusion about the accuracy of this hypothesis can be made given the absence of firms pursuing a cost leadership strategy. h 'theses 2a and 2b. in terms of product strategy, only four interviewees reported using a focus product strategy. of these firms, two were bookstores and two were pharmacies; none of the hardware stores implemented a focus product strategy. based on a count of the responses, hypothesis 2a —ha small firm is more likely to succeed using a focus product strategy than a broad or narrow product strategy" was not supported. in terms of service srrategy, only three used a focus service strategy, one of which also used a focus product strategy. based on the count of the responses, hypothesis 2b —ha small firm is more likely to succeed using a focus service strategy than a broad or narrow service strategy" was not supported. in total, only seven of the sixteen firms used either a focus product or focus service strategy. in addition, eight of the firms used a broad product strategy, thirteen of the firms used a broad service strategy, and thirteen firms used some form of broad strategy. ~hh l y. 0lyf fd l l p d h«hl l dp d« special need in the community. based on a count, the majority of the responses indicate that hypothesis 3 —ha small firm is more likely to succeed by adapting its product and/or service to fulfill a unique community need" was not supported. three of the four firms, which reported that they adapted to meet a community need, were bookstores, all of which were growing iirms in a consolidating (but not yet concentrated) industry. h otheses 4a and 4b. in examining whether small firms succeed using cooperative agreements with other small firms, seven of the firms were found to adapt by cooperating with other small firms. thus, based on a count of the responses, only partial support was found for hypothesis 4a ha small firm is more likely to succeed by seeking cooperative agreements with other small firms." all of the bookstores had cooperative agreements with small firms, so hypothesis 4a was supported in the bookstore industry. none of the small firms had cooperative agreements with large firms. the majority of the responses indicate no support was found for hypothesis 4b —ha small firm is more likely to succeed by seeking cooperative agreements with large firms." h otheses 5a 5b sc and 5d. firm tenures ranged from one year to 97 years, with an average tenure of 36 years. firms were classified as "young," "young-middle, "middle-old," and "old." there were three "young" firms, with tenures of i to 10 years; seven "youngmiddle" firms, with tenures of 11 to 30 years; three "middle-old" firms, with tenures of 31 to 50 years; and three "old" firms, with tenures of 51 years or more. the bookstore industry, with an average tenure of 23.25 years, is best characterized as "young-middle." the hardware stores and the drug stores both are characterized as "middle-old" with average tenures of 47 and 33.5 years, respectively. the twelve firms that were growing were distributed across all age categories, with only the "middle-old" firms showing a tendency towards stability rather than growth. of the two "declining" firms, one was "old" and one was "young-middle." since all firms selected a differentiation strategy, hypothesis sa, which stated "as firm tenure increases, a small firm is less likely to select a differentiation strategy" cannot be assessed. there was, however, support for hypothesis sb "as firm tenure increases, a small firm is less likely to select a focus strategy." all the firms that pursued a focus strategy fell into the young or young-middle categories, and the majority of the firms in the young or young65 journo/ nf bmoll business srrnregi yo/. /3, no. 2 / n///winter 2002 middle categories pursued such a focus strategy. tints, a cimnt ol'he responses indicates that increased finn teiuire is related to a broader focused line of products or services; the majority of the middle-old and ol&l firms pursued a broad strategy. in assessing the relationship between firm tenure aml adaptability, all of the firms that adapted to specific community needs were young or young-middle. no middle-old or old firms adapted by meeting a community need. this supports hypothesis sc —"as firm tenure increases, a small firm is less likely to adapt by meeting a community need." turning finally to the relationship between firm tenure and adaptation through cooperative agreements with other firms, seven ot'he ten younger firms had some sort of cooperative agreeinent with other firms. none of the middle-old or old firms formed a cooperative agreement with other firms, thus supporting hypothesis sd —"as firm tenure increases, a small firm is less likely to adapt hy forming cooperative agreements with other firms." interestingly, all cooperative relationships that were fomied were with other small firms. no cooperative agreements were formed with large firms. discussion the results of this study provide some interesting insight into the performance of small firms competing against large firms. there was clearly an effect of strategy selection and firm adaptability on small firm performance. competitive strategy the rich detail gleaned from the elite interviewees provided important insight into the decision-making strategies used by small firms. with regard to the strategy selected by small firms, the results of this study indicate that small firms use dilferentiation strategies rather than cost leadership strategies. this is consistent with the literature that argues that it is more beneficial for a small firm to use a differentiation strategy (chaganti, et al., 1989; lieber, 1997; macht, 1999; mccune, 1994). uiven that most of these firms were successful, the results suggest that a small fimi is more likely to succeed by selecting a differentiation strategy than a cost leadership strategy. in terms of offering differentiated services, firm owners unanimously cited "customer service" or "personal service" as keys to their longevity. most firms offered the relatively common services of special ordering and/or special sourcing, backed by deep knowledge of their customers and wares. two of the drug stores differentiated themselves by offering home delivery services. firm owners also differentiated themselves through their product lines. for instance, drug stores differentiated themselves by providing a variety of merchandise ranging from surgical supplies, to a full line of horse and other pet products, to a variety of gift items and gourmet candy. one hardware store differentiated itself by offering an extensive array of christmas merchandise; the owner's display of christmas merchandise is so extensive that it prompts customer inquiries as early as september. in addition, one bookstore developed such a deep collection in certain subject areas that scholars from around the world visit regularly. while all of the firms used a differentiation strategy instead of a cost leadership strategy, most also implemented a cost-minimization strategy. all but one of the pharmacies, bookstores, and general hardware stores tried to control costs by using management information systems of various levels of complexity. nevertheless, none of them was able to use technology as extensively as their larger competitors. for example, only one of the bookstores studied was working toward establishing a presence on the internet, despite the huge rise of book sales 66 journal of small business slraregy vok l3, no. 2 fagyivinrer 2002 over the net. small firms may be severely disadvantaged if they do not respond to technology changes quickly. while successful small firms used both differentiated and cost-minimization strategies, the study found that successful small firms used neither a focus product strategy nor a focus service strategy. rather, they used either a broad or narrow service or a broad or narrow product strategy. the majority of the firms pursued a broad strategy —product or service. this evidence supports the arguments of chaganti, et al. (1989) who found that firms with broad product ranges outperformed those with narrow product ranges. however, two of the bookstores did focus. they focused upon very specific audiences (e.g., readers of critical theory) in part by developing extremely deep and focused product lines. in addition, one of the drug stores offered a truly focused and personalized delivery service; it delivers staple itenis (e.g., toothpaste) along with prescriptions to the elderly at no additional cost. adaptability in general, adaptation to. a community need was not found to be related to small firm performance. however, adaptation to a community need was found to be related to the performance of small bookstores. the majority of the bookstores responded to competitive pressures through some form of adaptation. of the bookstores that did respond to such competitive pressure, they were also labeled as "growing." this finding suggests that in growing firms, adaptation may be hnked to performance. in addition, the bookstore industry is consolidating but less concentrated than the hardware and drug store industries. this diminished industry concentration may suggest that in such an industry, constant adaptation may be advantageous (even necessary). adaptation by forming cooperative agreements with other small firms was found to be common among the small firms studied. however, agreements with large firms were not found to be part of small firm performance. in particular, all of the bookstores in this study had formal cooperative agreements with other small firms. given that all of the bookstores in the sample were growing, adapting by forming cooperative agreements may be linked to the growth of small firms. in addition, the on-going consolidation of the bookstore industry may have encouraged bookstores to develop cooperative agreements with other small firms. the interviews suggested that cooperative arrangements might play a particularly important role in cost minimization strategies. the hardware stores, for example, gained access to sophisticated management technologies needed for aggressive buying through their supply cooperatives (e.g. truserv), while the association of independent booksellers, the american booksellers association, provides the same service to bookstores. in addition, drug store owners were able to reduce their fixed overheads by trading high-priced prescription drugs with other independent stores at cost. the combined results for hypotheses 3, 4a and 4b indicate that, while small businesses may have the ability to adapt (longenecker & moore, 1987), small firms do not have to adapt to be successful. the results from this study do not support the literature that suggests that small firms should adapt to be successful (chell & haworth, 1992; daft, 2000; ehrenfteld, 1995; fenn, 1997; lieber, 1997; maggina, 1992; maurer, 1998; mccune, 1994). tenure the findings regarding tenure effects are mixed. as to the competitive strategy, all the firms selected a differentiation strategy. tenure appears to affect whether a firm chooses a more focused line of products or services aimed at a niche market: all the firms that elected to 67 journo/ of sino/i bnsineis stt ate/j vo/ l3, no 2 fa/1/ivtnter 2002 narrow their foci lbll into the young or young-iniddle categories, and 70% of the firms in those categories chose to focus. in sum, "younger" fimis (i.e. less than 30 years old) seem more hkely to select a focus strategy, fomi cooperative agreements with other small firms, and/or adapt to community needs. this finding may, however, reflect industry effects since such a large proportion of the "younger" category is bookstores, which are in a consolidating rather than a concentrated mdustry. the results suggest that there is no association between fimi tenure and fimi performance. strategic distance 'fhe interviews also suggested that many successful small firms thrive to the extent that they can create and maintain cultural and/or product/service distance, in addition'to or instead of geographical distance, from industry behemoths. geographic distance is clearly an important factor to consider, especially for hardware stores. hardware store owners noted that the further their stores were located away from larger powerful competitors like home depot the less their stores were threatened. equally important, at least for bookstores, may be "perceptual distance." for example, as suggested by mccune (1994), one bookstore continues to thrive a mere block from a superstore (e.g., borders) by eschewing bestsellers and offering intellectual and cultural fare that appeal to sophisticated book buyers. as helpful as the varying forms of distance may be, this distance may well be eroded as larger firms turn their attention to smaller niches and/or shift the rules of competition by, for example, mcreasing their use of the internet. according to k(eindl (2000), the internet allows larger firms to compete directly with smaller firms in their niche markets at virtually no additional cost. further, as the large competitors with strong brand names such as amazon.corn, home depot, and riteaid, establish a first mover advantage on the internet, and thus capture market share and achieve scale economies, they will become more and more formidable. the interview detail suggests that small firms may indeed be able to mitigate such competitive pressures by honing their ability to employ adaptive strategies rather than engaging in head-to-head competition —at least while there is still time and space to do so. while adaptive strategies seemed only weakly related to firm performance in this study's results, in the still consolidating bookstore industry, three of the four bookstores adapted to meet a specific community need. all of these stores adapted by cooperating with other independents to, among other things, challenge the dominant competitors. (see also milliot 1999). adapting to meet the needs of a unique community and other forms of close association with a well-defined customer group and/or community may also increase the stock of social relations or "social capital" that entrepreneurs can actually translate into concrete economic advantage (e.g. granovetter, 1985). for example, one of the bookstores was able to buy its building for less than market value despite offers from a large competitor; another received advanced information from concerned community members about changes in the leases of nearby superstores; and a third was able to raise from its customers the down-payment needed to buy the store. environmental constraints the interviews also highlighted the impact of the wider environment on small firm strategies and performance. despite the dominance of industry leaders, small drug stores reported that insurance companies, not drugstore chains, were their most threatening adversaries. the growth in third-party prescription plans and repeated changes in insurance company 68 jonrnol of sino!i boriiiesr siroieg v vol. /3, ato. 2 foll/winrer 2002 prescription policies cause more pain than direct competition because they cut into the independents'raditional profits from prescription sales. several drug stores complained that brand-name drug sales now act as loss leaders. one drug store owner even pointed out that although the fimi is now doing twice the business than it had done twenty-five years ago, the firm would make more profit today selling christmas decorations than prescriptions. the erosion of earnings has become so severe that two of the six pharmacy owners are planning to tread water until they can retire. the drug store owners'ilemma highlights another extenial factor that may affect small firm strategy and performance —proprietor age. treading water until retirement may make good sense for an older owner but would not be a feasible strategy for a younger owner. as a result, one "younger" drug store owner responded to third-party drug prescription plan pressures by shifting focus and receiving the training necessary to sel! medical and surgical supplies. implications historically, small businesses have been at a disadvantage in competing against larger firms and chains. clearly they lack the economies of scale of their larger competitors. their competitive advantage lay, instead, with greater knowledge and intimacy of their targeted consumers and their needs. the principal evidence in this study showed that this depth of consumer knowledge appeared to assist the unconsolidated bookstore industry the most by allowing the majority of the firms within this industry to adapt more appropriately and more quickly despite their smaller size. managers will need to review industry structural and technological characteristics to ensure that their firm is sufficiently adaptive. responsiveness to a firm's environment or adapting to communities in the form of cooperation with other small firms requirements remains a key countermeasure for small firms. firm owners who are not currently doing this on a regular basis need to reassess their strategy. clearly combining efforts such as purchasing with other small firms will help generate improved economies of scale. although cooperation with larger firms remains a possibility, it was not evident in this study. a retail hardware store that specializes in restoration hardware, for example, could develop a reciprocal tacit agreement to send customers that need items which are impractical to carry (e.g., rider movers) to the larger chain. the small firm could then be the recipient of customers for the specialty products that are uneconomical for chain stores. the sales loss, if any, to the large firm would be minimal. the discussion of physical, cultural, and product distance from large competitors has some explanatory value for practitioners. the closer the small firm's understanding of the needs of the consumer and how the small and large firm both provide for their needs, the greater the ability to embed these differences or attributes in the customer's mind. despite the small firm's ability to create strategic distance from their competitors, there was a significant gap in the technology employed in the small firms studied. while there was some evidence of firms using computerized information systems, there was virtually no evidence of firms using internet technology. firms that overlook this facet of business will face increasing productivity problems and lost sales. the transformation of the bookstore industry is a reminder of the speed and impact of this type of change. lastly, regardless of smaller firm counter measures, some industries will remain more hospitable to small firm survival then others. the consolidation of the drugstore indusuy is 69 jnatttnl nf small basmess srrarel'v vnl. /3, lsro. 2 fahytyt'nrer 2002 an example of a changing anil increasingly hostile industry. this study identified multiple owners in this industry who were waiting to retire. absent any change, the economics increasingly will force morc independent pharmacies out of business. in this case, a rational move is to withdraw from the market. proactive responsiveness to these trends may mean a career change for the owner. conclusions despite the competitive pressures in each of the industries studied —bookstores, drug stores and hardware stores, there are examples of small firms that not only survive but thrive. for both practical and theoretical reasons, it is useful to discern the approaches to strategy that liave enabled these "davids" to slay, outrun, or avoid the "goliaths." the premise of the study was that successful small firms use differentiation strategies, have a product and/or service focus, and adapt in special ways. it was hypothesized that an entrepreneur's intimate knowledge of a well-defined customer group would provide both strategic ideas for developing focus and for developing subtle early-warning detection of changes in their customers'redilections. however, the intensity of industry consolidation and the proliferation of technology seem to threaten the effectiveness of these strategies. while all limis studied employed differentiation strategies, only the youngest firms in highly consolidated industries like the hardware industry and the drug store industry adopted focus or adaptive strategies in areas unexplored by existing competitors. in the consolidating bookstore industry, on the other hand, nearly all of the stores studied were trying some form of focus and/or adaptive strategy. together, these observations suggest that the degree of industry consolidation may have a decisive effect on the types and e(tectiveness of strategies available to small firms. further research into the relationship between these factors and the availability and success of various strategies is recommended. all the interviews highlighted the difficulty of maintaining market share and profits as industry standards and customer expectations grow. the power gained by consolidation and the efficiencies gained through technology seem to raise the threshold of operational effectiveness necessary for survival in a given industry. to keep playing, small firms may need to raise their standards of operational effectiveness while either aggressively defending their niche or responding to changes in the industry by discovering new way of competing (e.g. adapting to new community need). thus, an area of future research would be to define and measure the minimum level of operational effectiveness in various industries; to study if, over time, consolidation does raise the minimum standards; and to determine if the eltects are similar across industries. a limitation of this study is that the majority of the firms studied were growing. future research should examine successful and unsuccessful firms. the inherent unequal design limitation made quantitative statistical analysis impossible. it was also difficult to identify firms that had failed and to interview owners of failed businesses as to the reasons for their firm's poor performance. another limitation of this study is the lack of systematic selection of the geographic location of the firms. the firms were selected largely based upon convenience. although case studies generally involve smaller number of firms analyzed than do surveys, future research testing the results of this study on a large sample of firms using a survey would benefit the understanding of small firm performance. case studies rely on analytical generalization rather than statistical generalization as does survey research (yin, 1994), and 70 journal of small birsiness srraiegv vo/. /3. no. 2 fa///winier 2002 so the small number of firms examined in this study is legitimate. future research should survey a large sample to test the results of this exploratory multi-case study. in conclusion, for the last few decades the field of strategic management has wrestled with the question of how some small firms thrive despite pressures from the huge competitors that have grown through industry consolidation. this study developed a strategic framework that highlights some of the key factors that account for small firm performance. data drawn from the interviews support some of the hypotheses while raising additional questions regarding the impact of increasing consolidation especially in the presence of today's ever-changing technological landscape. successful small firms were found to use a differentiation strategy, cost minimization, broad or narrow product/service strategy, cultural and lor product/service distance, and adaptive strategies rather than head-to-head competition. it is hoped that the knowledge gained as a result of this analysis will enable small firms to take a more proactive stance in terms of making the decisions that may affect not only their performance but also 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(1981). a small business is not a little big business. harvard business review, 59(4), 18-32. yin, r. k. (1994). case study research (2nd ed). thousand oaks, ca: sage publications. 72 journal of sniall business strategy vol. /3, no. 2 fall/winter 2002 hlonica a. zimmerman, ph.d., cpa is an assistant professor of general & strategic management speciali ing in entrepreneurship at tire fox school of management, temple universi tax she earneil a bachelor's degree from messiali college, her mba from penn state uniiersity, irnd her pli.d. front the fox scliool of business and management, teniple university. lier researcli interests include legitimacy, tlie top managenient teant, software firms anil intei net firins. denise dnnlap is a ph.d. candhlate of inieinationnl business oml strategic management at tlic for scliool of biisiness and management, temple university. her research interests lie in tlie following areas: technology transfer, tlie expatriation and repatriation of employees and their spouses, top inonagenient tennis, and entrepreneurial small companies. she earned a bs in international business and spanish from penn state university and an ms from southwest state uni i'ersity. roben d. hamilton, eil ph.d. has been a member of the faculty in the general and strategic manageinent department at temple university since 1981. his academic research has focused on scientific management, industry competitive analysis and managerial control, panicularly the control of multinutional enterprises. professor haniilton lias published more than i8 articles in voriousjournals. his academic training includes a bachelor's degree from cornell um'versity, his mba. degree from the darden school of the university of virginia and his ph.d. from northwestern university. t. l hill is an assisiant professor in the gsm department at temple university. he comanaged a publishing firm for thirteen years before joining temple university. besides helping to manage the innovation and entrepreneurship institute, tl helps to manage the umversity community collaborative of philadelphia and teaches the global entrepreneurship in technology consulting course and consulting-oriented internships offered as part of the entiepreneurship major. he earned an mba from the fox school of business and management executive mba program, temple university and a b.a. from brown university. elisabeth a. chapman has a bsee degree from lafayette college, a mesc degree from penn state university, and an mba from the fox school of business and management executive mba program, temple university in /998. since i998, she has been an independent business strategv consultant for several small and large firms. prior, she worked as a senior radar systems engineer for. navmar applied sciences and the naval air warfare center. she is a member of beto gamma sigma. 73 jotunn/ of small business siraiegi vi&i. /3, nrn 2 fall/t'ai&aer 2002 alipeivdix i: interview questions q: l.low long has your firm been in business? are you or is your family the original owner'encourage "history" of the store.) q: who are your main competitors? when did they move to the area? what is their proximity to your store'? q: what is the most important component of your overall business strategy'! how do you compete with the local mass merchandisers or large chains? q: do you believe that customer loyalty makes up a large percentage of your revenue? q: what types of products do you stock? have you changed your product mix? when and why? what makes your merchandise and/or service different from that of your competitors? q: do you carry specialty products'? what types'& why? q: do you have cooperative agreements with other small firms? if so, when did you form them and why? are they written or verbal? q: do you have cooperative agreements with large firms'? if so, when did you form them and why'! q: i.las the community or town borough offered their assistance to help your store in anyway'? lf so, what types of assistance have they offered your store'? what years did they offer this assistance'? q: i-low many people do you employ? what are your annual sales? how have they changed'! what is your profit margin'& mow has it changed? 74 stra tegy small business brief start-up success factors perceived as important by usa and korean consultants sang-suk i.ee kangnam university, korea leesskns. kangnam. ac.kr jerome s. osteryoung florida state university jostery@garnet. acns fs u. edu abstract this study evaluates the determinants for the stan-up process of successful businesses in the usa and korea. in particular, this study focuses on the personal background of the consultants for start-up businesses pom the two countries. how consultants perceive the determinants for start-up and the different factors between the two countries are examined. introduction it is an important role of the consultant to help the entrepreneur have a successful start-up business. consultants are dedicated to providing customer-oriented, full-service programs and accurate, timely information to increase opportunities for small business success. this study discusses determinants of start-up businesses that are considered by consultants as being necessary for having a successfully operating small business. the specific objectives of the study were to determine whether korean consultants dilter from their usa counterparts with respect to: (i) personal background and (2) consultants who work on consulting for start-up businesses. the literature regarding international comparison of entrepreneurship practice is limited. so, this study will compare factors in korea versus the usa that are essential for a successful small business. most of the prior studies were based on the experience of small firms operating either in north america or in european countries (luk 1996). these studies have concluded that business success is the result of a web of factors (hills & narayana 1990; duchesneau 8c gartner 1990; keely & roure 1990; hattton & ramond 1994). steiner and solem (1988) investigated factors crucial for success of small manufacturing firms in the u.s.. they found that relevant managerial background and experience, flexibility in operations, availability of labor, and possession of identifiable competitive advantages are 117 journal of small business strategy vol. ll, no.2 fall/winter 2000 the factors significant in determining success. huck (1991) investigated competency factors for small business success of jamaican entrepreneurs. he found that 12 competency areas (starting a business, planning and budgeting, management, marketing/selling, advertising and sale promotion, merchandizing, financing and accounting, personnel relations, purchasing, production, facilities and equipment, and controlling risk) are needed for small business success. yusuf (1995) discussed critical success factors that are perceived by south pacific entrepreneurs as being necessary for successful operation of small business. they found that entrepreneurs believe individual factors, such as possession of certain skills and of good character, and environmental factors, such as governmental support, political and traditional demand, and the need for balancing these demands with business comments, are critical to small business success. ibrahim and goodwin (1986) identified the entrepreneurial behavior and managerial skill as key success factors in small business. in this study, we will ascertain the determinants that are perceived by usa and korean consultants as being necessary for a successful start-up business. there are many factors to consider when starting a new business. trying to establish a priority list would be difficult, but grieco (1975) suggested the following: (i) determining the capital requirements, (2) obtaining legal assistance, (3) researching the market, (4) locating the business enterprise, (5) securing personnel, (6) providing physical facilities, and (7) creating a profit plan etc. lee (1998) suggested and validated the determinants to be considered for successful start-up business in korea (table i) by querying 87 consultants about small businesses in 1998. table i shows the determinants of successful start-up business in lee's study. research method data collection and samples after the pilot survey in the usa and korea, a three-page questionnaire was prepared and randomly sent to 240 consultants in each country. the names of the consultants were drawn at random from the sbdcs (small business development centers) in the usa and from consulting companies for start-up business in korea. fifty-three responses from the usa and 59 responses from korea were received, for a total of 112 responses, yielding an average return rate of 27 percent. surveys were discarded if they were not complete (n=12). respondent's characteristics demographic variables of consultants are illustrated in table 2. seventy-six percent of the sample consisted of male consultants, and 24 percent consisted of female consultants. in terms of age, most of the respondent's portion in the u.s. (62 %) were 41 to 50 years old and korea (52 %) were 31 to 40 years old. the area the korean and usa consultants majored in at college was predominantly business (usa: 55 % and korea: 65%). the consultant's educational level was at least an undergraduate degree with the usa at 98 percent and korean at 100 percent. these results explain why consultants need to have a special know-how and experience. many of the respondent's in the usa (61%) had more than 10 years of consulting experience, but the respondent's in korea (62%) had less than 3 years. in terms of current positions, sixty percent of respondent's in the usa were middle managers and in korea (55%) were first line managers. table 2 shows the complete analysis of all the respondent's demographic characteristics. 118 journal ofsmall business strategy vo/./l, iuo.2 fal//)vinter 2000 table l: determinants of start-up business in korea marketing factors e marketability: the customers demand for the product when it is introduced to the market ~ expected market share: the share of your item in the market compared to the total market share ~ distribution channel: availability of distribution/collection channel u pricing concerns: the item's competitiveness in terms of market price technological factors u availability of core technology: the extent to which you have attained your core technology ~ availability of technical manpower: availability of technicians for production ~ technology intensity: the extent to which your core technology creates added value ~ availability of production technology: capabilities to attain and operate the technology required for production economic/financial factors ~ availability of factory/building site: the extent to which the factory sites are already anained ~ availability of machines and facilities: capability to secure machines and facilities ~ working funds/capital: availability of funds to acquire raw material, labor, manufacturing expenses etc. ~ profitability: expected profitability from the business governmental/regulation factors ~ governmental support: whether the business is entitled to request regulatory support from state (local) or federal (central) government ~ financial support of government: the range of the government's financial support to start-up (interest rate, period of repayment etc) u environmental issues: whether the business needs to consider juridical and/or social regulations with. respect to environmental issues u tax support: whether the business is entitled to request support in terms of taxes managerial ability ~ raising capability of funds: capability of raising operating funds u marketing/service management capability: capability to conduct various marketing activities and provide appropriate services to customers ~ organization management capability: capability to manage an organization and human resources u forecasting capability: capability to forecast and analyze broader industries 119 journal of small busmess strategy vol. ll, no.2 fall!ivinter 2000 measurement for the personal background of respondents in a categorical format, they were asked to indicate their sex, age, major at college, education level, consulting career and current position. for the determinants of start-up businesses, successful business start-up factors (five) were measured on a seven-point likert type scale (i=very unimportant; 7=very important). these factors were already categorized within the survey of entrepreneurs and consultants in korea (lee, 1998). a reliability test on the final data revealed a cronbach alpha coefficient of ,85 in the korea's data and .88 in the u.sjs data for the scale item. therefore, the scale was deemed highly reliable for this analysis. results since the focus of this empirical study was on determinants of start-up businesses in korea compared to those of u.s. counterparts, a bivariate analysis was deemed appropriate. entrepreneurs were divided into two groups, general entrepreneurs and technical entrepreneurs. t-tests and chi-square analysis were utilized for comparison of characteristics of start-up businesses between the two countries. the personal background of the consultants the first research question was to compare the personal background of korea's consultants with their u.s. counterparts. table 2 presents the statistical results of the chi-square analysis. four variables (sex, age, consulting career, current position) out of six significantly differentiated korean consultants from u.s. consultants. the majority (76%) of consultants were male, but compared to the u.s. counterparts there were many more male korean consultants (y' 13.05; p&. 001). the majority of consultants in usa (83%) were over 40 years old but the majority in korea was under 40 years old (70%). so korean consultants tended to be younger and have more males compared to their u.s, counterparts (i( = 84.14; p&. 001). in terms of educational backgrounds between each country, for example college degrees, and educational levels, there were no differentiations. most of the consultants majored in business & economics and similarly had an undergraduate (42%) and a master degree (48%). sixty-two percent of consultants in korea had less than 3 years consulting experience but sixty-one percent of usa consultants had more than 10 years of consulting experience. so, 2 usa consultants had more years of consulting experience than their counterparts (y 111.80;p&. 001). ninety-two percent of respondents in the usa were middle and top managers but seventy percent of korean respondents were operatives and first line managers. so, usa consultants had higher current positions than their korean counterparts (x' 121.25; p&. 001). a comparison of start-up success factors perceived as important by usa and korean consultants a series of t-tests were conducted on the means of the two groups'korea & u.s.) responses to 20 start-up business factors. a total of 12 start-up business factors were significant at a .05 level or lower. table 3 presents start-up business factors of the mean scores of all respondents by 5 groups (marketing, technological, economic/ financial, governmental/ regulation, managerial ability factors), as well as the t-test results for 20 start-up business factors. 120 journal ofsmall business strategy vol i l, l(to 2 fall!ivi uter 2000. table2: chi-square analysis of personal characteristics of consultants x test of relation between usa (%) korea (%) total (%) consultants th personal demographic variable (n=53) (n=59) (n=l 12) characteristics sex male 63 90 76 13 05»»«'emale 37 10 24 (df= i) age under 30 years 0 19 8 31-40 years 17 51 31 84.14»»» 41-50 years 62 19 44 (df=3) over 50 years 21 ii 17 major at college business g& economic 55 65 60 engineering 8 ll 10 2.79 others 37 24 30 (n.s.) education level high school 2 0 i undergraduate degree 45 40 42 4.5 master 47 50 48 (n.s.) doctoral degree 6 10 9 consulting career less than 3 years 5 62 24 4 —6 years 13 21 15 ill 80»»* 7 —9 years 21 12 18 (0f=3) more than 10 years 61 5 43 current position operatives i 15 6 first line manager 7 55 27 121.25**» middle manager 60 13 41 (df=3) top manager 32 17 26 «»» p & 001. n.s. (noi significant) expected market share (t=2.75; p&. 01), one of the marketing factors, was perceived to be slightly more important for korean consultants (mean=5.61). in addition, pricing concerns (t=4.79; p&. 001) were more important for korean consultants (mean=6.00) than for the usa consultants (mean=4.88). availability of technical manpower, technology intensity, and production technology were shown to be more important for korean consultants. availability of factory/building site (t=9.79; p&. 001), classified into economic/financial factors, was perceived to be more important for korean consultants (mean=6.35) than for their u.s. counterparts (mean=4.60). and then, availability of machines and facilities (t=6.06; p&. 001) were slightly more important for korean consultants (mean=6.01) than their usa counterparts (mean=4.84). governmental/regulation factors (governmental support, financial support of government, environmental issues and tax support) were shown to be more important for korean consultants than for their u.s. counterparts. 121 journu/ of sniull business stratcgv vo/. / i, no.2 fall/ivinter 2000 forecasting capability (t=3.81; p&. 001), classified into managerial ability, was shown to be slightly more important for korean consultants (mean=5.96) than their u.s. counterparts (mean=5.11). table3: start-up success factors perceived as important by u.s. & korean consultants mean total usa korea determinants mean (n=53) (n=59) t-value marketing fuclors marketability 6.07 6.03 6.1 i 0.3 i expected market share 5.25 4.88 5.61 2.75*v distribution channel 4.88 4.81 4.94 0.54 pricing concerns 5.44 4.88 6.00 4.79"'ee/trio/ogical factors availability of core technology 4.76 4.86 4.66 -0.97 availability of manpower 5.45 5.01 5.88 5.12**'echnology intensity 4.86 4.31 5.40 5.14*** availability of production technology 5.27 4.83 5.71 4.10*** econ omi c/fi nuncio/ fuctors availability of factory/building site 5.48 4.60 6.35 9.79"* availability of machine and facilities 5.43 4.84 6.01 6.06'*'orking funds/capital 5.73 5.90 5.55 -1.51 profitability 5.25 5.30 5.20 -0.43 governmentavregulotion fuctors governmental support 4.46 3.91 5.00 4.17**v financial support of government 4.61 3.69 5 52 8 44"vv environmental issues 4.63 4.16 5.10 3.88**'ax support 4.54 3.77 5.30 5.69*" managerial ability raising capability of funds 6.19 6.05 6.33 1.22 marketing/service mgmt. capability 5.83 5.84 5.81 -0.14 organization management capability 5.83 5.88 5.77 -0.45 forecasting capability 5.53 5.11 5.96 3.81"' p & 05 " p & 01 **' & 001 standard devi'att'ons and the entire list are available from the authors upon request. score from l (very uni mpoivant) to 7/very important/. conclusion and discussion despite the rapidly growing area of global entrepreneurship in recent years, very little is known about the characteristics of this sector including research on factors about start-up business. the primary goal of this study was to evaluate the different factors between the usa and korean consultants for start-up business. in terms of personal background, four demographic variables (sex, age, consulting career, current position) out of six significantly differentiated korean consultants from usa consultants. for example, the fact that the korean consultants are younger and have less consulting experience are interrelated. this could be interpreted to mean that the consulting 122 journal ofsmall business srraiegy vo/. /i, no.2 fall/winter 2000 profession might be much more recent in origin in korea in general. also, our study found that a higher percent of the korean consultants held lower level managerial positions relative to the usa consultants, even though on average the latter were more highly educated. this difference could be partly explained by the fact that korean consultants professionally started to consult only in the last few years. the other variables (major at college, education level) do not differentiate korean consultants from usa consultants at a significant level. this study analyzed the differences of characteristics on determinants of start-up businesses between korea and the usa and used i-tests for this analysis. it was found that a total of 12 start-up business factors were significantly different in korean consultants compared to their usa counterparts at a .05 level or lower. expected market share and pricing concerns, classified into marketing factors, were perceived to be slightly more important for korean consultants than for their usa counterparts. this may be due to the fact that as korean firms increase their service quality and reputation, they also increase their price. technical manpower, technology intensity and availability of production technology, classified into technological factors, were perceived to be slightly more important to korean consultants than to their u.s. counterparts. this may be due to the fact that korea imports much of the related technology for start-up business and korea is more production driven. also, this result may be different because entrepreneurial style may be either general/opportunistic entrepreneur or technical/craftsman entrepreneur. availability of factory/building site and availability of machines & facilities, classified into economic/financial factors, were perceived to be slightly more important to korean consultants than to their usa counterparts. these factors may seem to be more important to koreans because these are scarce resources in korea compared to the large availability of resources in the u.s.. governmental/regulation factors (governmental support, financial support of government, environmental issues, tax support) turned out to be slightly more important to the korean consultants. this could be interpreted to mean that korean businesses depend on their government for support much more than u.s. businesses do. forecasting ability, classified into managerial ability, was perceived to be more important to korean consultants than their usa counterparts. the ability to forecast demand could be very useful when operating a business in the fluctuating korean economy. overall, there seems to be a significant difference between the attributes and factors considered important by consultants in korea and the usa. however, some of these differences might be related to cultural or governmental differences. nevertheless, the consultants in korea or the usa will garner the skills and abilities necessary to succeed. references baumback, c. 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(1990). management, strategy, and industry structure as ;ll 9 f fl:4 « i 4).~mhik 36(10), 1256-1268. kelly, p. cm & lawyer, c. k. (1985). how to or anize and o crate a smal! business. englewood cliffs, nj: prentice hall. lee, s. s. (1998). determinants of start-up business in small and medium firms. the korean 9 1)g 2 i 29(i).179-192. k 9 k .j.g..m,c.w.,d.huy,j.w.(1997).h llh ~()d ). cincinnati: south-western college publishing. longenecker, j. gm & moore, c. w. (1987). small business mana ement. cincinnati: southwestem publishing co. luk, t. k. (1996). success in hong kong: factors self-reported by successful small business owners. journal of small business mana ement 34(3), 68-74. megginson, w. l. & byrd, m. j. (1994). small business mana ement. chicago, ii: irwin. osteryoung, j. s., newman, d. l., & davies, l. g. (1997). small firm finance an entre reneurial anal sis . fort worth, tx: the dryden press. robert, e. b. (1991). entre reneur and hi h technolo: lessons from nit and be ond. oxford, england: oxford university press. siropolis, n. c. (1986). small business mana ement. boston ma: houghton mifflin co. steiner, michael p., & solem, o. (1988). factors for success in small manufacturing firms. journal of small business mana ement 26(l ), 51-56. yusuf, a. (1995). critical success factors for small business: perceptions of south pacific entrepreneurs. journal of small business mana ement 33(l), 68-73. sang suk lee is an associate professor of management at kangnam university, seoul korea. he was a research scholar; program in entrepreneurship and small business management of school of business, florida state university. he received his ph.d. from korea university, seoul korea. his primary teaching and research interests are operations management, entrepreneurship and small business management. jerome s. osteryoung is the jim moran professor of entrepreneurship and a professor of finance in the college of business, florida state university in tallahassee. his current research interests are in the area ofentrepreneurial finance. 124 stra teg y characteristics of mergers and acquisitions by small manufacturing firms david j. flanagan western michigan university david flanagan wmich. edu abstract while acqiiisitions by large firms receive a great deal of media and researcher auention, acquisitions by small firms tend to be overlooked. this studv compares a sample of m& as by small us. manufacturing firms that occurred between /992 and 1999 with a sample ofm&as conducted by large us. manufacturing firms that occurred during ihe same period. characteristics examined include the type of transaction, ihe type of ownership of the target firm and the relationship between the target and acquirer 's primary products and geographic locations. results indicate that many small firms are active acquirers and are involved in a wide range of m&a activities that are often quite similar to that undertaken by large firms. there are, however, several important differences. smallftrms are found to be more likely to purchase privately held targets and to make acquisitions of targets that were primarily involved in industries outside of manufacturing. large acquirers are more likely to make acquisitions ofpartial interest in a target and to make cross-border transactions. lmph'cari ons for researchers and practitioners are discitssed introduction in the world of mergers and acquisitions (m&as), large firms are generally considered the hunters. acquisitions by companies like ford motor co., dow chemical and exxon grab the lion's share of media attention and researcher interest. small firms are rarely mentioned in the m&a press with the exception of being labeled as targets for large firms. it is important to note, however, that many small firms are taking the role of acquirer in m&a transactions. one example of a small firm that has made an acquisition is injection plastics manufacturer, compass plastics (380 employees) of gardena california. it purchased fellow plastics manufacturer, mos plastics inc. (175 employees) of san jose. another example is unifab international inc. (414 employees) of new iberia la, a producer of fabricated metal for ships. it purchased allen tank inc. (140 employees), also of new iberia. allen tank inc. is a producer of gas and oil field machinery. this paper examines the types of m&a undertaken by small u.s. manufacturing firms and compares them to transactions undertaken by large u.s. manufacturing firms. this analysis 26 journal ofsmall business strategy vol. 12, no. 2 fallllvi nrer 200/ highlights the m&a activity that is being conducted by small firms and provides important information that can help us better understand how small firm m&a activity compares to that undertaken by large firms. a data sample of 3,377 m&a transactions conducted by large manufacturing firms and 1,114 m&a transactions conducted by small manufacturing firms between 1992 and 1999 is examined. managers, policy makers and researchers should be interested in the characteristics of m&a transactions conducted by small manufacturing firms. knowing the characteristics of small firm m&a activity will help these groups better assess the opportunities available and/or enable them to anticipate potential problems when executing/evaluating transactions. knowledge of m&a activity by small manufacturing firms is also important to academics with an interest in small business strategy. the first part of this paper provides a literature review of past work on m&as in large and small firms. the second part discusses the important characteristics of m&a transactions that are examined in this study. part three outlines the methodology of this study. part four reports the results. finally, part five discusses the results and makes concluding comments with a special emphasis on suggestions for future research. literature review a great deal of scholarly research on m&a has focused on transactions undertaken by large firms and has generally found that these deals have not been beneficial to acquiring firms. event studies, which examine the impact of an m&a announcement on the stock price of the target and acquirer have been quite common (see, for example, elgers & clark, 1980; chatterjee, 1986; singh & montgomery, 1987; morck, shleifer & vishny, 1990; lubatkin, srinivasan & merchant, 1997; jarrell & poulsen, 1989)'. these studies have tended to conclude that, while stockholders of firms being acquired usually benefit, shareholders of acquiring firms oren lose wealth. studies of the long-term impact of m&as on acquirer financial performance have also found that acquiring firms do not typically benefit from m&as (sirower, 1997; hayward & hambrick, 1997; fowler & schmidt, 1988). studies have also examined the impact of m&as by large firms on other organizational characteristics. m&as, for example, have been found to have a negative impact on the amount of r& d activity undertaken by the combined firm (hitt, hoskisson, ireland, & harrison, 1991). research has also found that layoff announcements regularly accompany, or shortly follow, announcements of large m&as and tend to be more common when the combining firms are in the same or closely related lines of business (o'shaughnessy & flanagan, 1998). additionally, research has found that target company top management turnover is higher than "normal" following an m&a (walsh, 1988) and leads to lower performance for the combined firm (cannella & hambrick, 1993). overall, research on m&as by large firms suggests that picking the right target, negotiating a price that does not consume all possible benefits, and properly combining the activities of the target and acquirer are all crucial, yet very diaicult tasks. while the scholarly studies listed above, and many more, have examined m&as by large companies, very few have focused on m&a activity by small firms. characteristics of smaller company leveraged buyouts have been analyzed (malone, 1989) and one article discussed implementation issues for small firms making acquisitions (odell, 1977). 'ost of these studies did not explicitly state the size of the acquiring firms in their samples. given, however, the data sources used and the size of the targets it is reasonable to assume that the samples used in these studies contained all or mostly acquisitions by large firms. 27 ja irma/ %sina// business stratef0 vol. /2, ivo. 2 fa/lltvinter 200/ publications in the popular press also tend to focus on acquisitions by large firms. a wide variety of books are available that give insights into the m&a process (see, for example, marren, 1993; gaughan, 1999; galpin & hemdon, 2000; morris, 1995; clemente & greenspan, 1998; hooke, 1996; reed & lajoux, 1998). even books that specifically mention small firms tend to cast them in the role of target rather than that of acquirer and/or do not provide specific characteristics of the types of transactions undertaken by small firms (see, for example, west & jones, 1997; sherman, 1998). in sum, considerable energy has been devoted to understanding m&a activity by large firms. in contrast, virtually no research has focused on m&a activity by small firms. this is an important omission for research to address given the unique issues faced by small firms and the major impact that an m& a can have on an organization. characteristics of m&a transactions examined in this study when studying m&a activity, researchers have been interested in a variety of transaction characteristics that can influence the acquisition process and/or its outcome. in this section we discuss several major characteristics of m&as. these are i) the form of the transactions, 2) the public status of the target firms, and 3) the relationships between the primary products and primary geographic locations of the acquiring and target firms. form of transaction m&a transactions fall into three basic categories i) asset acquisitions, 2) stock acquisitions, and 3) mergers. each of these transactions has different consequences with respect to legal obligations, acquisition procedures, and tax liabilities. exact m&a procedures depend on the incorporation laws of the states involved in the transaction as well as the individual corporate charters of the target and acquirer. knowledge of the types of transactions that are undertaken by small firms gives practitioners and researchers a better idea of what to be prepared for when contemplating or analyzing an m&a. while we provide a general overview, interested readers are encouraged to see sources such as marren (1993) or morris (1995) for a more complete discussion. in an asset acquisition an acquiring company purchases part or all of the assets of the target. the target remains legally in existence after the transaction, although it may be liquidated after a major asset sale to return money to the shareholders. the management of both the target and the acquiring firm normally execute the transaction. if the transaction is particularly large, it may have to be approved by the target and/or acquirer's board of directors or stockholders. asset acquisitions offer several advantages for acquiring firms. for instance, the acquiring company purchases only the assets it desires and does not have to take on all of the target's liabilities (there are some exceptions for liabilities like environmental clean up). an asset acquisition can also give the acquirer the opportunity to step up the value of acquired assets that have a depreciation basis that is lower than their true market value. asset acquisitions are not, however, always optimal for the acquiring firm. since the seller retains any liabilities not specifically assumed by the buyer and because the seller in an asset transaction often incurs a large tax liability, the seller may demand a high purchase price or more restrictive sales terms. in addition, the acquiring firm may have difficulty maintaining the seller's customers or suppliers if contracts are invalidated by an asset sale (fouts, 1997). 28 journal ofsmall business strategy vol. 12, )to. 2 fallltyi uter 200/ an alternative to an asset acquisition is a stock acquisition. in a stock acquisition, the acquiring company buys ownership shares in the target company. if the stock is privately held, the acquirer can deal with the stockholders individually. if the target is a wholly owned subsidiary of another company, the management of the acquiring firm and the target's parent conduct the transaction. if the stock of the target is publicly held, the acquiring firm may have to deal with a large group of disorganized shareholders. in these instances, a tender otter can be announced for the shares outstanding. while a tender offer is a transaction that is conducted between the acquiring firm and the target firm's shareholders, the acquiring firm normally negotiates the transaction with the target's board of directors and managers. stock acquisitions can also be used to take a partial stake in a company. a company may purchase a minority or a majority of a target's stock. in some cases, acquirers start out purchasing a stake in a company and later acquire the remaining shares to take full ownership. an advantage of stock acquisitions is that they tend to be easy to execute and can be accomplished quickly. the transaction involves an exchange of stock certificates for payment. another advantage is that stock purchases can help shareholders of the acquired firm avoid the double taxation that is possible with an asset purchase (morris, 1995). stock deals are not without drawbacks. one problem with stock deals is that the acquiring company assumes all liabilities of the target. another problem is that it assumes the target's assets at their old, oaen undervalued, depreciation basis. thus, it cannot step up the depreciation basis of old assets to rellect market conditions and hence reduce future tax liability. additionally, with partial stake purchases, the acquirer has to contend with the problems faced with being a minority shareholder or, in cases where a majority of a target's shares are purchased, having to deal with a minority shareholder. minority shareholders can oaen suffer from the "tyranny of the majority." the majority shareholder may pass policies through the board that are detrimental to minority shareholders (newton, 1994; feinberg, 2000). an example would be approval of a management fee paid to a company owned by the majority shareholders (feinberg, 2000). on the other hand, minority shareholders, while unable to control the company, can cause majority shareholders a great deal of time, grief and money (how to protect against misuse of business ownership, 2001). while the terms 100% stock acquisition and merger are often used synonymously, there are important differences. in a one hundred percent stock acquisition, the target company can remain intact as a wholly owned subsidiary of the acquiring firm. in a merger transaction, not only is 100% of a target's stock acquired, additionally, the target company is completely dissolved into the acquiring company. the target company ceases to exist as a separate legal entity. the procedures for executing a merger transaction tend to be fairly straightforward and are structurally similar to a stock purchase (see morris, 1995; marren, 1993). mergers oaen require the approval of both the acquiring and target firms'hareholders. whether a transaction is structured as a merger or a 100% stock acquisition can have important implications on factors such as tax treatment and the integration of the organizational cultures (sherman, 1998). public status of the target the public status of the target can have a large impact on an mlka transaction. the securities and exchange commission imposes very high reporting requirements on publicly held companies (goodman tk scanlon, 2001). the higher reporting standards for publicly held firms can lead to a greater amount of information for the acquirer for doing due diligence and negotiating an offer price. the stock price of a publicly traded target can also provide a benchmark for an acquirer making a valuation. privately held companies are more difficult to value since there is no active market for their shares. 29 journal of small business stratei0 vol. /2, no. 2 fallllvinter 2001 targets in an acquisition may also be government owned, a subsidiary of a public or private parent company, or a joint venture of two or more companies. purchases of government owned targets normally entail a careful bidding process (brown & ridley, 1994). companies wishing to purchase a subsidiary of a company will typically have to negotiate with the managers of the parent firm. if the target is a joint venture, the acquiring company will have to deal with two or more parent firms. industry and geographic relationship between the target and acquirer the relationship between the industries of firms involved is also an important characteristic of an m&a. the rationale often cited for m&as is the realization of synergies (singh e; montgomery, 1987; lubatkin & lane, 1996; porter, 1987). synergies occur when two activities are combined in such a way that they are worth more together than the sum of their values when they are kept apart. for instance, the combination of two cement firms might lead to synergies through things like the elimination of redundant activities, increases in batch size that bring about scale economies or pricing power due to the consolidation of previously competing firms. combinations of firms in similar lines of business tend to be identified as those with the greatest potential for synergy. finally, m&as can be characterized by the geographic relationship between the combining companies'rimary areas of operation. firms that primarily operate in the same area may find it easier to implement mergers and take advantage of geographic proximity. these firms may be able to build market power in a certain area or find it easier to communicate and/or transport materials between the acquiring and target firm. managers acquiring a company that is in close proximity may also be in a better position to truly understand the target's market and the potential of the deal. in contrast, managers that acquire firms located in different areas may not only have to overcome geographic distance when communicating or transporting materials but may also have to deal with a variety of unfamiliar laws regarding combinations. a u.s. manufacturing firm purchasing a target outside of the u.s. (a cross-border combination) can be particularly difficul due to geographic distance, regulatory environments, and differences in national cultures. methodology data for this study were drawn from security data company's (sdc's) worldwide m&a database, the most comprehensive m&a database available. sdc builds this database by scanning sources such as the business wire, reuters, dow jones news retrieval service, company news releases, and the wall street journal for m&a announcements. we examined completed m&a transactions that were announced between january of 1992 and december of 1999. we chose 1992 as our initial year because that was the year that sdc changed its inclusion criteria to cover all announced m&a transactions rather than using a lower bound size limit. we retrieved 4,491 transactions that had all the necessary information where the acquiring firm's primary business was manufacturing (primary standard industrial classification (sic) codes from 2000 through 3999). manufacturing firms were chosen for this study for three reasons. first, the small business administration provides a clear lower bound criterion for what it considers a small manufacturing firm (500 employees or less). this criterion has been used in past research on small manufacturing firms (flanagan & deshpande, 1996; deshpande & golhar, 1994; cole & wolken, 1995). second, m&as in disparate industries may be driven by specific factors (mitchell & mulherin, 1996). thus, it may be problematic to aggregate mecas across all industries. third, despite growth in non-manufacturing occupations in the u.s., the 30 journal ofsmall business strategy vol. 12, no. 2 fal!/winter 200/ manufacturing sector remains an important part of the country's economy that warrants attention (panchak, 1999; delano, 2000). increases in productivity are fueling consistent increases in total output of the u.s. manufacturing sector (economic report of tire president, 2000). the activities of small manufacturing firms continue to be of interest to researchers (13eal, 2000; pelham, 2000). we divided our sample of 4,491 m&as into sub-samples of 1,114 transactions by small acquirers and 3,377 transactions by large acquirers using the 500 employee cut-off point. table i provides a more precise breakdown of our data sample by acquirer size. table i size distribution of sample of m&a transactions by large and small manufacturing firms acquirer number of number of employees observations 1-100 383 101-200 245 201-300 224 301-400 153 401-500 109 501-600 108 601-700 68 701-800 52 801-900 70 901-1000 75 above 1000 3004 total 4491 information on the form of the transaction, the public status of the target, the primary location (state and country) and the primary sic code of the target and acquirer were drawn from the sdc database. in a single business firm, the primary sic code represents the only product or service sold by the company. for a multi-business firm, the primary sic code represents the product line that a firm reports as its largest. primary sic codes have been used in past research to classify m&as (flanagan, d'mello & o'shaughnessy, 1998; haunschild, 1994; maquieira, megginson &. nail, 1998). firms operating in the same primary 4 digit sic codes are those identified as being the most similar in terms of products/services. firms that do not share the same four-digit primary sic but do share the same sic code at the three or two-digit level are classified as less similar. for a complete description of the sic code classification system, see the standard industrial classification manual (1987). we examined how similar the target and acquirer tend to be in m&a's by large and small firms by analyzing the relationships between the combining firms'rimary lines of business. for instance, we examined whether large and small firms tend to purchase targets primarily operating in businesses that are the same, similar to or unrelated to their (the acquiring firm's) primary line of business. additionally, in order to examine the specific lines of businesses that large and small manufacturing firms are targeting through acquisitions, we examine the primary industry of the target firms (agriculture vs. construction, for example). this provides more detailed information on the typical targets of large and small acquirers. 31 journo( of small business strategy vol. 12, nrs 2 faiiilpinrer 2007 results form of transaction the sdc database allows us to identify m&a transactions as i) asset acquisitions [of certain assets of the firm or of all assets]; 2) stock acquisitions [for partial, majority or remaining interest in a target]; 3) mergers or 100% stock acquisitions. our sample's breakdown into these categories is presented in table 2. table 2 form of m&a transactions by large and small manufacturing firms m&a activity by small m&a activity by form of firms large firms chi square for transaction ¹ of transactions ¹ of uansactions diffcrencc in (% by small firms) (% by large firms) acquisitions of cenain 18 41 assets (1.62%) (1.21%) 706 2135 acquisitions of assets (63 38%) (63.22%) .01 acquisitions of 40 158 majority stock interest (3 59%) (4 68%) acquisitions of partial 58 366 stock intcrcst (5 21%) (10.84%) acquisitions of remaining stock (1.35%) (2.69%) 6.61r'nterest mergers or 100% 277 586 stock acquisitions ("4 87%) (17 35%) total number of m&a transactions ~~ p & .01.r~~p &.001 the data suggest that small firms, like large ones, are involved in many different forms of m&a activity. asset acquisitions are the most prevalent transactions in our sample for both large and small firms. asset acquisitions make up 63.38% of the transactions made by small firms and 63.22% of the transactions made by large firms. while mergers or 100% stock acquisitions we the second most common transaction form for both large and small firms, the proportion of small firms that made these transactions is significantly greater than the proportion of large firms that made these types of transactions (24.87% vs. 17.35% respectively, these percentages are significantly different at p&.001). conversely, while acquisitions of partial interest are the third most prevalent transactions for both large and small firms, the percentage of these transactions in the large firm sub-sample (10.84%) was significantly greater than the percentage in the small firm sample (5.21%).these percentages are significantly different at p&.001. while acquisitions of remaining interest are infrequent for both large and small firms, they were a significantly higher percentage of the large firm transactions (1.35%vs. 2.69%, these percentages are significantly different at p&.01). 32 journal ofsmall business snaiegy vol. /2, no. 2 fall/jvinrer 200/ the percentage of transactions by large firms that are acquisitions of certain assets in a target (1.21%) is not statistically different than the corresponding percentage for small acquirers (1.62%). likewise, the percentage of transactions by large firms that were acquisitions of majority stock interest in a target (4.68%) is not statistically different than the corresponding percentage for small acquirers (3.59%). public status of the target privately held firms are the most common targets for both large and small acquirers (see table 3). they are, however, even more prevalent targets for small firms. privately held targets make up a significantly greater percentage of the transactions conducted by small firms than they did for large firms. small firms in our sample acquire privately held targets 63.64% of the time while large firms acquire privately held firms 48.39% of the time (these percentages are significantly different at p&.001). table 3public status of target in mera transactions by large and small manufacturing firms m8ra activity by smill 'dka activity by firms large firms chi square for status difference in¹ of transactions ¹ of transactions (% by small firms) (% by large firms) 69 480 publicly held (6.19%) (14.21%) 50.21'uu 709 1634 privately held (63.64%) (48.39%) 78.16uuu 5 67 joint venture (.45%) (1 98%) 12.52"u government 1 11 organization (.09%) (.33%) 330 1183 subsidiary (29.62%) (35 03%) 10.97u"'otal ¹ mdta 1114 3377 tfutlsuctlolis ~ uup & .001 subsidiaries of other companies are the next most common targets for both large and small firms but, overall, are more common targets for large firms. thirty five percent of the transactions conducted by large firms involve targets that were subsidiaries of other companies while 29.62% of the acquisitions made by small firms were of subsidiaries of other companies (these percentages are significantly different at p&.001). publicly held companies are the third most prevalent targets for both large and small acquirers but are more common targets for large firms. the large firms in our sample acquired publicly held firms 14.21% of the time while small firms acquired publicly held firms 6.19% of the time (these percentages are significantly different at p&.01). 33 journal ofsmall business siraregy val. l2, na. z fall/ivinrer 200/ joint ventures and government organizations are infrequent targets for both large and small acquirers. only .45% of the acquisitions made by small firms are of targets that were joint ventures. the percentage of large acquirer targets that were joint ventures (1.98%) is still fairly small but significantly larger than the figure for small acquirers (the percentages are significantly different at p&.001). only i (.09%)of the transactions made by small firms is for a government target while only 11 (.33%) of the transactions made by large firms involve government owned targets (these percentages are not significantly different). industry and geographic relationship between the target and acquirer looking at the primary relationship between target and acquirer in m&as conducted by manufacturing firms (table 4), small firms are more likely to make transactions involving targets that have their primary area of operation ouiside of manufacturing. over 38% of the transactions made by small acquirers involve targets whose primary sic code is not in manufacturing whereas only 27.84% of the large firms purchased targets outside of manufacturing (these percentages are significantly dilterent at p&.001). table 4: primary product relationship between target and acquirer in acquisitions by large and small firms m&a activity by m&a activity by primary product small firms large firms chi square for difference in relationship 4 of transactions,tt of transactions (% by small firms) '% by large firms) target and acquirer's primary areas of operations 289 798 are the same (same 4 digit (25 94%) (23 63%) primary sic codes) target and acquirer's primary areas of operations are similar but not the same 107 289 (same 3 digit primary sic (9 61%) (8.56%) codes but ditrerent four digit codes) targets primary area of operation is not in the same or similar categories but is (26.30%) (39.98%) 67.52"s in manufacturing (between sicsl999 and 4000) target's primary area of 425 940 operation is not in (38.15%) (27.84%) 42.13svv manufacturing. total number of m&a transactions uusp ( 001 this is not to say, that large firms do not use m&as to diversify their operations. large firms do make more purchases than small firms in manufacturing, but not in the acquiring firm's industry group (both target and acquirer had sic codes between 2000 and 4000, but their 3 digit sic codes are different). over 39% of the acquisitions made by large firms involve manufacturing targets that do not share the acquirers three digit sic code while only 26.30% 34 journal of small business strategy vol. 12, no. 2 fall/winter 200l of small firms'cquisitions are firms that do not share the same 3 digit sic code (these percentages are significantly different at p&.001). there is no difference in the percentage of targets in the same four digit or same three digit sic code for small vs. large acquirers. the data in table 5 provides more detail on the target industries of m&as by large and small manufacturing firms. both large and small manufacturing firms execute transactions involving targets in a variety of industries but there are some differences in the primary industries of their targets. in accordance with the information displayed in table 4, large manufacturing firms are more likely than small manufacturing firms to make transactions involving targets that are also in manufacturing. over seventy-two percent of the transactions made by large firms involved manufacturing targets while only 61.85%of the targets of small manufacturing firms are also in manufacturing (these percentages are significantly dilyerent at p&.001). small firms make up for their smaller proportion of acquisitions in manufacturing by purchasing relatively more service sector targets. the percentage of acquisitions of firms primarily in the service sector by small firms (24.24%) is significantly greater than the percentage of such transactions undertaken by large acquirers (13.90%). these percentages are significantly different at p&.001. mining is not a terribly common target industry for large or small firms but the percentage of large acquirers that purchased mining firms (1.42%) is significantly larger than the percentage of small firms that purchased mining firms (.27%). these percentages are significantly different at p&.001. table 5primary industry of target firm in mdka transactions by large and small manufacturing firms m&a activity by small m&a activity by firms large llrms chi square for primary industry difference inof transactions tt of transactions (% by small firms) (% by large firms) percent 1 17 agriculture (.09'/o) (.50%) 3.59 3 48 mmmg ( 27%) (1 42%) 11 31 construction .99'/o (.92%) .04 689 2437 manufacturing (61.85%) (72 16%) 42.13'" transportation, communications, 26 90 electric, gas and (2 33%) (2.67%) sanitary services wholesale and retail 98 257 trade (8.80%) (7 61%) finance insurance and 16 30 real estate (1.44%) (.89'/o) 270 468 services (24.24%) (13.90%) 68.88' total number of 1114 3371 m&a transactions "p&/dt. "p&.ont 35 jvurnal ofsmall business strategy vol. /2, na. 2 fall/winier 200l the percentages of transactions by large firms that involved targets in; agriculture; construction; transportation, communications, electric, gas and sanitary services; wholesale and retail trade; and finance, insurance and real estate are not statistically different than the corresponding percentages for small acquirers. with regard to geographic location, small firms tend to acquire targets primarily located in their home state more oren than large acquirers do (see table 6). over 24% of the acquisitions made by small firms involve targets that had the same home state as the acquiring firm while, for large firms, target and acquirer share the same state for their primary operations only 12.91%of the time (these percentages are significantly dilterent at p&.001). larger firms are more likely than small firms to make acquisitions outside of the united states (cross-border transactions). cross-border transactions make up 29.79% of the m&as conducted by large firms but only 15.44% percent of the m&as conducted by small firms (these percentages are significantly different at p&.001). the percentage of transactions by large firms that are acquisitions of u.s. targets that had their primary operations in different states than the acquiring firm (57.30%) is not statistically different than the corresponding percentage for small acquirers (59.96%). table 6 geographic relationship between target and acquirer in acquisitions by large and small manufacturing firms m8ia activity by small m&a activity by 'h' geographic firms large firms chi square for difference relationship ' of transactions 4 of transactions (% by small firms) (% by large firms) in percent target and acquirer's primary area of 274 436 operations are in thc (24.60%) (12 91%) same state target and acquirer's primary area of 668 1935 operations are both in (59.96%) (57.30%) 2.44 the v.s. but in different states target is not 172 1006 headquartered in the (15.44%) (29 79%) tt9.14" united states total number of m&a transactions eiip & .00l discussion/conclusions results of this study show that many small firms are indeed active acquirers, involved in a wide range of m&a activity. small firm activity includes asset purchases, mergers and partial interest stock transactions. small firms also purchase targets that have varying public status. private companies, publicly held companies and subsidiaries of other companies are all prevalent targets for small as well as large firms. joint ventures and government organizations are much less frequently acquisition targets for both large and small acquirers. like large firms, small manufacturing firms make purchases of companies in a variety of industries as 36 journal ofsmall business siraiegy vol. 12, no. 2 fall/winter 200l well as make purchases of companies outside of the acquiring firm's primary state of operations or even outside of the united states. m&a activity by small u.s. manufacturing firms bears many similarities to activity by large u.s. manufacturing firms. no differences are found between large and small acquirer acquisition activity in the percentages of transactions that are asset acquisitions, acquisitions for a majority stock interest in a target, or for targets that are government organizations. m&a's by small firm are found to be just as likely as those undertaken by large firms to involve combinations of firms that operate primarily in the same or very similar industries. small firm activity is just as likely as large firm activity to involve targets in: agriculture; construction; transportation, communications, electric gas and sanitary services; wholesale and retail trade; and finance, insurance and real estate. finally, small acquirers'ransactions are just as likely as large acquirers transactions to involve targets that operate in the united states, but outside the primary state of business of the acquiring firm. this study does, however, reveal important differences between m&a activity by small, as compared to large manufacturing firms. a greater percentage of m&as by small firms are found to be mergers or 100% stock acquisitions. small firm transactions are less likely to involve acquisitions of partial or remaining interest in a target. thus, small firms are less likely than large firms to be involved in transactions that result in shared ownership of the target. this can have benefits and drawbacks for small firms. the primary benefit is that small firms making 100'/o stock acquisitions or mergers will not have to deal with potential conflicts with a co-owner. the drawbacks include that the small firms making such transactions will have higher capital outlays and may lose profit sharing motivation on the part of the owner(s) of the target firm if the previous owner(s) are kept on as employees. privately held firms tend to be more common targets for small acquirers than for large acquirers. therefore, small firms will tend to be more likely to encounter problems obtaining information and determining offering prices on targets. various valuation methods such as comparable worth, asset evaluation or discounted cash flow can be used to determine an appropriate purchase price for a privately held target (see sources such as sherman (1998) or clemente and greenspan (1998) for additional information on valuation methods). small firm managers may also want to employ the services of a professional business appraiser to provide input on valuing a target. west and jones (1997) provide a discussion on the roles of outside professionals when conducting an m&a. interestingly, small manufacturing firms, as opposed to large firms, are found to be more likely to purchase targets with primary areas of business outside of manufacturing. this is surprising since one would reasonably expect that larger firms would be more diversified and thus more likely to purchase firms outside of their primary manufacturing areas. acquisitions of firms in the service sector are particularly prevalent targets for small manufacturing firms. it may be that owners of small firms use m&as as a way to diversify their personal asset base. that is, they diversify the firm's portfolio of businesses in order to diversify their personal wealth. on the other hand, small firms may also see opportunities for synergies between their traditional manufacturing businesses and service businesses that large firms overlook. large firms may become rigid and bureaucratic and therefore unable to see creative opportunities for synergy. future research that explores the motivations for m&as by small firms would be useful. small firms tend to purchase targets that are geographically closer to their primary area of operation than larger firms do. this may be because the larger companies have a variety of locations before the acquisitions in question, resulting in the new acquisition being close to some part of the acquirer's operations but not necessarily the acquirer's primary place of 37 ./o nrna/ ofsin a// business siraregv vo/. /2, no. 2 fa///ivinrer 200/ business. it may also be that the large acquirers have already exhausted opportunities for expansion within their home state/country and are now looking other places for growth through acquisition. another possible reason for this difference is that the resources needed to execute and manage an m&a across states and across country borders may be so large that these transactions tend to be undertaken by larger firms. policy makers should be particularly interested in the large number of small acquisitions that occur between firms that primarily operate in the same state. if these firms are in fragmented industries, such as concrete or printing services, they may be able to develop a large amount of monopoly pricing power in a concentrated geographic region. small firms may view these types of combinations as an opportunity if they are able to avoid antitrust scrutiny. while the sdc database certainly provides a large sample of acquisitions by small firms for analysis and research, future studies may benefit from also using other sources to obtain information on the m&a activity of small firms. this study examines only a sample of m&a activity by large and small firms rather than an exhaustive list of all transactions that have been conducted. while it is the most comprehensive database available, the sdc merger database is based on merger announcements in public sources. many transactions, especially those in small and/or privately held firms might never be publicly announced. sherman (1998) estimates that 60% of completed m&a transactions are never announced. thus, an even more complete view of m&a activity by small firms may be developed through the use of multiple data sources research on m&a activity in small firms may provide a variety of insights that can help us explain and understand m&a activity in general. while large firms do tend to have more secondary financial information available for study, top managers of large firms are oiien very inaccessible to scholars. researchers have, however, had success in surveying ceos of small firms (see, for example, flanagan & deshpande, 1996; thong, 1999; kathawala, judd, monipallil, & weinrich, 1989; silverman &. castaldi, 1992). since m&a decisions tend to be made at the highest managerial levels of an organization, access to small firms'eos may be a crucial source of information on m&a motivation and success factors. additionally, isolating the impact of an m&a or determining a target's relationship with an acquirer can be very difficult in a large, diverse, firm. since small firms tend to be less complex than large firms, they may provided a useful laboratory for answering important questions about m& as, such as the role of synergy or market governance. in summary, this study's examination of the characteristics of m&as by small firms reveals that small firms are actively engaged in a broad range of m&a activity. this is noteworthy because past research has focused almost exclusively on the m&a activities of large firms. researchers are advised that small firm m&a activity is an important area for future research. the implication for small businesses is that m&as should not be viewed as a strategy reserved for large firms. small firm managers are, however, advised to proceed cautiously with any m&a plans. as discussed earlier, research on large firm m&a's indicates that, while they are popular, m&a transactions are not always beneficial to acquiring firm. references beal, r. m. 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(2000, january). market orientation and other potential influences on performance in small and medium-sized manufacturing firms. journal of small business mana ement 38, 48-67. porter, m e. (1987, may/jun), from competitive advantage to corporate strategy. harvard business review 65, 43-59. reed, s. f. & lajoux a. r. (1998). the art of m&a: a mer er/ac uisition bu out uide 3rd ~ed.. new york: mcgraw-hill. sherman, a. j. (1998). mer ers and ac uisitions from a to z: strate ic and ractical uidance for small and middle-market bu ers and sellers. new york: amacom. silverman, m. & castaldi, r. m. (1992, april). antecedents and propensity for diversification: a focus on small banks. journal of small business mana ement 30, 42-52. singh, h. &. montgomery, c. a. (1987, july/august). corporate acquisitions and economic performance. strate ic mana ement journal 8, 377-386. sirower, m. (1997).the s ne tra: how com anies lose the ac uisition arne. new york: the free press. standard industrial classification manual. (1987). washington, d.c., oflice of management and budget, executive office of the president. thong, j. y. (1999, spring). an integrated model of information systems adoption in small businesses. journal of mana ement information s stems 15, 187-214. walsh, j. p. (1988, march/april), top management turnover following mergers and acquisitions. strate ic mana ement journal 9, 173-183. west, t. l. & jones, j. d. (editors) (1997).mer ers and ac uisitions handbook for small and m~idi* c i .m y ki i wly&8 w if h .1. 11999 f b wi.i. 8 b ii . yh 8 k 149,1419. david j. flanagan (ph d. indiana university) is an associate professor of management in the haworth college of business, ivestern michigan university. he teaches corporate strategy and strategic change management. his current research interests concern mergers and acquisitions. dr. flanagan has amicles publishedin severaljour nals inclnding the journal of management, strategic management journal, the journal ofsmall business management, journal ofapplied business research, and the international journal ofmanagement. 40    s trateg y   journal of small business  table of contents 1 balancing exploration and exploitation in a declining industry: antecedents to firm adaptation strategy and performance william j. burpitt, jr. elon university matthew valle elon university 18 performance of historically underrepresented firms in the public-private sector troy a. voelker university of houston clear lake william c. mcdowell east carolina university 39 the effect of early internationalization on survival consistency, and growth of export sales jerzy cieślik kozminski university eugene kaciak brock university dianne h.b. welsh university of north carolina at greensboro 65 what attracts directors to boards of small and mid-sized companies? m. alix valenti university of houston clear lake clifton o. mayfield university of houston clear lake rebecca a. luce xavier university 83 new product development project management: differences between korean and u.s. small business executives daewoo park xavier university ravi chinta xavier university mina lee xavier university david yi xavier university 99 book review: creating entrepreneurs: making miracles happen edited by fred kiesner reviewed by: fred fry bradley university reproduced with permission of the copyright owner. further reproduction prohibited without permission. http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2020, vol. 30, no. 01, 43-57 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2020 small business institute® w w w. j s b s . o rg introduction michael obal1, todd morgan2, george joseph3 1 university of massachusetts lowell, pulichino tong building room 316, 72 university avenue, lowell, ma 01854, usa, michael_obal@uml.edu 2 western michigan university, 2300 business ct. #3325, kalamazoo, mi 49006, usa, todd.morgan@wmich.edu 3 university of massachusetts lowell, pulichino tong building room 316, 72 university avenue, lowell, ma 01854. usa, george_joseph@uml.edu integrating sustainability into new product development: the role of organizational leadership and culture new product performance, sustainability orientation, firm culture, firm strategy, new product development apa citation information: obal, m. morgan, t., & joseph, g. (2020). integrating sustainability into new product development: the role of organizational leadership and culture. journal of small business strategy, 30(1), 43-57. the concept of corporate social responsibility (csr) has witnessed a shifting landscape in the past few decades, emerging from the friedman era where “the social responsibility of business is to increase its profits,” to a greater realization that the corporation is accountable to society for their actions and that capital markets and profits do not solve social and economic problems that emerge from unfettered capitalism (hunt, 2003). in this transition from a profit-centered approach to being more socially responsible, corporations are increasingly called upon to play a role in sustainable development, resulting in a wider acceptance of sustainability by firms (kiron, kruschwitz, haanaes, & von streng velken, 2012). sustainability, a more specific concept than csr, includes the consideration of and reporting on social, environmental, and economic aspects impacted by firms when pursuing organizational goals (epstein & buhovac, 2014; shields & shelleman, 2015). according to hult (2011), the primary difference between csr and sustainability relates to how market-focused sustainability can be a strategic resource that leads to competitive advantage for the organization, particularly where such efforts engage the organization and enter into its cultural fabric. recent research depicts such a link between sustainability orientation and new product development (npd) performance (du, yalcinkaya, & bstieler, 2016; nidumolu, prahald, & rangaswami, 2009). this link has led to more useful insights during the npd process and consequently more customer-focused products (pujari, 2006). firms with a sustainability orientation are likely to view the customer centered value creation for new product development from the social and sustainability perspectives that may be increasingly important to customers (handelman & arnold, 1999; luo & bhattacharya, 2006). hence, sustainability orientation has some overlapping although not synonymous characteristics with customer orientation, which has been shown to positively influence new product performance (crittenden, crittenden, ferrell, ferrell, & pinney, 2011). this orientation is further reinforced through organizational learning (slater & narver, 1995). sustainability initiatives by new product developers have also been influenced by the while corporate sustainability research continues to grow, we contend that key organizational factors influence the ability of firms to strategically integrate sustainability orientation to the performance of new products. using data from 349 product developers, this paper examines organizational factors that instill a sustainability orientation leading to market performance of new products. specifically, we construct a model where organizational leadership (i.e., leadership practices, employee incentives, and a focus on patents), and culture (i.e., innovation culture and geocentricity) lead to sustainability orientation that results in the translation of firm resources into improved new product development outcomes. our results support our contention; sustainability orientated firms are likely to realize improved market performance of new products as these firms benefit from an innovative organizational culture exposed to the global environment with complementary leadership that provides focus and reward mechanisms for employees. http://www.smallbusinessinstitute.biz http://www.jsbs.org 44 m. obal, t. morgan, & g. joseph journal of small business strategy / vol. 30, no. 1 (2020) / 43-57 interpersonal factors of a firm’s leadership (bettiga, lamberti, & noci, 2018). given the increasing importance of sustainability within npd, this study extends this research stream to investigate the drivers of a sustainability orientation, specifically factors involved in the coordination of market information and customer orientation into subsequent impact on new product performance (du et al., 2016; nidumolu et al., 2009). prior literature has noted that a firm’s market orientation to sustainability is driven by both firm strategy (van egeren & o’connor, 1998) and factors in the organizational environment (wei & morgan, 2004). for example, sustainability issues have resulted in firms developing such strategies that address the need to reduce risk and strengthen competitiveness (birnik, 2013). strategies integrating sustainability orientation focuses on optimal use of resources through resource alignment across the value chain and new product development, leading to a firm-wide change in thinking and learning (hurley & hult, 1998; sharma & vredenburg, 1998). however, we assert that organizational characteristics of leadership and a culture of innovation are necessary to bring about the “social cohesion” that supports integration of sustainability orientation to market expansion through new product development (shaner, beeler, & noble, 2016). in this context, leadership attributes that include a global outlook paired with an innovation culture leads to employee solidarity around long-term themes, such as a sustainability orientation. further, drawing from the resource-based view (rbv), this orientation harnesses and aligns firm resources to bring internal change from somewhat static resource configurations to a greater focus on action orientation (berger, cunningham, & drumwright, 2007; dunphy, griffiths, & benn, 2003). to illustrate this inter-relationship between the resources highlighted above, we first develop a framework highlighting the dual organizational characteristics of leadership and culture as they impact sustainability orientation and new product market performance. we test our hypotheses using data from 349 product developers from varying regions and industries. specifically, we focus on organizational leadership, through project leadership practices, incentives for npd teams, and a focus on obtaining patents, and organizational culture, through innovation culture and geocentricity, as they influence a sustainability orientation in npd. further we measure the impact of a sustainability orientation on new product market performance. the results of the analysis support our hypotheses, indicating how internal organizational leadership and culture lead to greater sustainability orientation and in turn positively impacting the market performance of new products. the manuscript continues in the following manner. in the next section, we describe the relevant literature and develop a theoretical framework that leads to the formal hypotheses. in the third section, we describe the data set and collection process, data analysis, and relevant results. finally, we end with a discussion on the practical implications and limitations. literature review and hypotheses development there is a rapidly growing interest in the topic of sustainability as it relates to long-term business performance that optimizes the “triple bottom line”: economic, environmental, and social outcomes. while sustainability is usually associated with ethics and corporate social responsibility, the managerial approach to sustainability has also been widely developed and discussed. this managerial approach or strategic approach to csr emphasized the opportunity to enhance competitive advantage through a csr strategy that improves the quality of the business environment where corporations locate, bringing social and economic goals into alignment and improving a company’s long-term business prospects (porter & kramer, 2002). nevertheless, according to porter and kramer (2002), the context-focused approach to philanthropy was not simple. one size did not fit all, companies differed in their comfort levels and time horizons for philanthropic activity, and individual firms would need to make different choices about how to implement such socially responsible actions. as van egeren and o’connor (1998) contend, a firm’s orientation is driven by their strategic decisions, including the goals they aim to accomplish, and the means that facilitate the achievement of such goals (i.e., drivers). such a strategic approach fosters integrating innovation with sustainability (du et al., 2016) as opposed to viewing sustainability as separate from everyday strategies (sharma & vredenburg, 1998). further, according to lloret (2016), sustainability expectations may form “restrictions” imposed by economic, social, and environmental systems that sustainable companies overcome by developing a strategy that sustainably generates and captures value into the future leading to successful long-term performance. studies have also considered specific sustainability issues as climate change and firm adaptation of business strategy to meet such challenges, for example through the design and implementation of human resource management practices (buller & mcevoy. 2016). overall, strategic sustainability has been viewed as a challenge and opportunity to value creation, with the overall goal to reduce risk 45 m. obal, t. morgan, & g. joseph journal of small business strategy / vol. 30, no. 1 (2020) / 43-57 and strengthen the competitiveness of their organizations (birnik, 2013). fundamental to value creating strategy is customer value. sustainability encompasses multifaceted environmental, social, and economic aspects that have broad implications in a globalized marketplace. market-focused sustainability can be a strategic resource that leads to competitive advantages and, ultimately, to superior performance for an organization, becoming ingrained in its cultural fabric (e.g., values, beliefs, norms, artifacts) (hult, 2011). ramirez (2013), for example, assert that consumers view sustainably-oriented firms as maintaining procedures and developing products, and portraying themselves accordingly. further, sustainability also involves integration of stakeholder theory with rbv, in that they both involve supporting firm goals within the context of aligning resources to a wider context (kull et al., 2016) that includes, for example, community in addition to customers. while stakeholder theory holds that firms that develop a mutually trusting relationship with their stakeholders will have a competitive advantage over firms that do not (e.g., jones, 1995), similarly, rbv maintains a consistency between social welfare concerns, the firm reputation and strategies leading to long-term competitive advantage (e.g., barney, 1991). to deliver value in this multi-stakeholder environment requires organizational capabilities of coordination and integration of management strategy that could integrate sustainability orientation (melnyk, davis, spekman, & sandor, 2010). sustainability is a global phenomenon and sustainability-orientation can be related to all forms of firms, including smaller ones (nadim, abbas, & lussier, 2010). sustainable oriented firms would also be likely to translate such views into sustainability efforts that are salient to the consumer, with the stakeholder support necessary to maintain firm reputation, leading to the joint maximization of social and economic objectives (porter & kramer, 2002; shields & shelleman, 2015). further, entrepreneurial ventures rather than established firms are more likely to pursue sustainability as a strategy for creating private and social value and durable competitive advantage (parhankangas, mcwilliams, & shrader, 2014). following epstein, buhovac, and yuthas (2010), we combine organizational leadership and culture, and assert that these dual elements lead to a cohesive social environment conducive to harnessing resources for innovative value-adding strategies (shaner et al., 2016). specifically, organizational leadership presents a type of dynamism that helps the firm adjust to the changing environment and harness resources over a range of functions and processes. further, organizational cultures emerge from a global outlook and a culture of innovation, where employees are incentivized to experiment, take risks, and even fail on occasion. such firm competencies enable them to develop strategic value through “their ability to manipulate resources into value-creating strategies” (eisenhardt & martin, 2000, p. 1118), and to “integrate, build, and reconfigure internal and external competencies to address rapidly changing environments” (teece, pisano, & shuen, 1997, p. 516). thus, organizational culture and leadership can bring together resources and assets (day, 1994; hunt & morgan, 1995) and enable firms to deploy them advantageously for increasing competitive strengths (zhou, yim & tse, 2005). drawing from the discussion above, this paper proposes a framework, consistent with galpin, whitttington, and bell (2015) that demonstrates how a sustainability culture can be developed through leadership practices that reinforce corporate missions, incentivizing employees through pay and employment rewards, and harnessing strengths emerging from a global presence. the framework for this study, depicted in figure 1, connects organizational leadership and culture and their internal (leadership) and external (geocentricity) facets, with the incentive systems that integrate these elements to deliver outputs (sustainability based) and outcomes (performance) (hurley & hult, 1998; shaner et al. 2016). specifically, a culture of innovation (du et al., 2016; linnenluecke & griffiths, 2010), with related outcomes (i.e., patents) and a global focus (bansal, 2005; gualandris, golini, & kalchschmidt, 2014), combined with multi-faceted incentives to allow risk-taking, the framework reflects capabilities integrated in a sustainability-oriented environment (epstein et al. 2010) that leads to market performance and the creation of stakeholder value (epstein & buhovac, 2014). leadership a key to market-focused sustainability is good management and relationship building with stakeholders. most organizations today recognize the need to provide the diverse leadership skills to manage a larger set of stakeholders rather than attending to the needs of owners as perhaps their sole responsibility (freeman 1984; freeman, harrison, wicks, parmar, & de colle, 2010). the move towards a sustainability orientation has the potential to face pushback from employees who either do not see the value or are hesitant to accept changes to their work processes (daly & geyer, 1994). prior research has shown that the existence of project leadership can make process change easier to accept and 46 m. obal, t. morgan, & g. joseph journal of small business strategy / vol. 30, no. 1 (2020) / 43-57 make the transition more seamless (chang, bai, & li., 2015). after the initial sustainability goals are set within an organization, it is often up to leadership to reinforce these goals and standards through regular dialogue, thorough reviews, and training for employees (galpin et al., 2015). unless the ceo needs to lead this charge, change efforts fail or happen only halfheartedly when the development of the sustainable business model is delegated to the corporate social responsibility office or another task force (bhattacharya & polman, 2017, p. 72). further, leadership is critical in both managing board member involvement and expectations as well as ensuring sustainability as a part of every employee’s job. sustainability involves creating value for all stakeholders in the ecosystem and viewing profits from the perspective of such value creation (han, kim, & srivastava, 1998; hurley & hult, 1998). implementing a sustainable business model requires executives to engage with the entire organization as well as multiple external stakeholders (such as nongovernmental organizations, shareholders, suppliers, regulators, and competitors), and to balance multiple goals that are sometimes in conflict (bhattacharya & polman, 2017). sustainability efforts, as encouraged by strong leadership, engage the organization and become ingrained in the cultural fabric of an organization in order to effectively add value (e.g., crittenden et al. 2011). thus, we hypothesize: hypothesis 1. project leadership practices will positively impact the firm’s sustainability orientation. geocentricity geocentricity in this instance refers to the number of countries a firm currently operates in and standardization practiced across those countries (markham & lee, 2013). firms that operate in more nations are more likely to be exposed to a greater variety of external stakeholders and sustainability orientations. hence, such internationalization from expansion into global environment leads to a culture that is external oriented, and would be able to perceive the risks and opportunities (for example, reputational and legal) from integrating the sustainability issues they would encounter in the global arena, which would be more significant, given their global exposure. additionally, firms exposed to varied cultures and external resources are more attuned to opportunities and empathetic to the needs of their external stakeholders, thereby making the firm more likely to adopt a sustainability approach (du et al., 2016). global firms are more likely to encounter a wide variety of sustainability issues and thus be forced to address these varying issues, thereby developing a global culture in the process (gualandris et al., 2014). additionally, firms oper figure 1. organizational framework for sustainability orientated new product development 47 m. obal, t. morgan, & g. joseph journal of small business strategy / vol. 30, no. 1 (2020) / 43-57 ating in numerous global markets have the ability to leverage knowledge acquired in these various markets to develop best practices that adhere to varying global standards (bansal, 2005). teece et al. (1997) that stress in globalized markets, the ability to orchestrate internal and external co-specialized assets and build valuable intangible ones, such as reputational assets, is another key firm feature to create and sustain competitive advantage. if sustainability orientation is believed to reflect a firm’s culture, it would therefore follow those factors influencing firm culture, such as geocentricity, which would positively impact a firm’s sustainability orientation. barkemeyer & figge (2014) argue that the increasing professionalization and dissemination of mainstream csr approaches among mncs lead to an influence of cohesion in strategic decision-making that increasingly centers to the companies’ headquarters, while the scope of action within the subsidiaries and the supply chain of mncs becomes increasingly restricted over time. while this might favor some regions over others, this orientation to consider external influences in strategy furthers the idea that globalization leads to wider scope of sustainability issues. similarly, perez-batres, miller, pisani, henriques, & renau-sepulveda (2012) acknowledge that while firms may be tempted to embrace host-country orientation – for better or worse – most firms will ultimately embrace a global best practice that elevates their sustainability orientation and corresponding initiatives to the highest standard amongst the countries they operate in. further, they argue that firms that adopt a supranational approach are likely to have already met their own national standards and embrace a higher standard in their global sustainability practices. in a similar vein, chan (2005) found that foreign invested enterprises (fies) in china integrate sustainability issues into strategy to enhance corporate environmental and financial performance. nishant, goh, and kitchen (2016) also found that differences in regional factors influence strategy, and therefore, such factors, when considering global mnes become important ways to influence the global culture of innovation, given that it is not static but rather dynamic nature pertaining to the differences between the regions. consistent with these arguments, we hypothesize: hypothesis 2. a firm’s geocentricity will positively impact the firm’s sustainability orientation. incentives it has been argued that capable organizational leadership can only occur when employees are motivated and involved in integrating, coordinating, and operationalizing changes in the different areas of value-creation (galpin et al., 2015). such capabilities may be necessary at different levels, but they have the potential to create an environment for innovation and dynamism, such incentives need to be coordinated and integrated with project goals. thus, incentivizing employees demonstrates a desire by a firm to stimulate and give back to employees in order to improve firm performance. however, as noted by thomé, scavarda, ceryno, and remmen (2016), achieving sustainability objectives in npd can be uniquely challenging. the authors note that sustainability objectives can be fuzzy and naturally difficult to define. furthermore, moving to a sustainability orientation may require employees to change their regular work processes, thus resulting in potential pushback from employees (daly & geyer, 1994). prior literature has noted that employee incentives, both formal and informal, can be helpful in the face of organizational change (kaplan & henderson, 2005). galpin et al. (2015) noted that employee incentives, such as pay, empowerment, and skill development can increase the likelihood of establishing a workplace that values sustainability. in addition, given the nature of sustainability, intangible incentives such as recognition for service to the communitymay have an important role in motivating employees. in sum, incentives are crucial to harness employee actions to sustainability goals, particularly where such incentives form a broad range that can directly benefit a variety of stakeholders. thus, we hypothesize: hypothesis 3. incentives for npd teams will positively impact the firm’s sustainability orientation. innovation culture we next contend that firm innovation, described as “from doing things differently to doing entirely different things” (kruschwitz, 2013, p. 1), also impacts a firm’s culture and sustainability orientation. a firm with an innovation culture creates an environment in which individuals and teams can pursue risky or uncertain projects supported by the overall organizational culture (hurley & hult, 1998; stock & zacharias, 2011). extant research has identified a broad set of antecedents of innovativeness, with the assumption that maximizing as many of them as possible leads to an innovative capability for sustained innovativeness. given organizational constraints, firms would need to identify and combine those factors that could positive48 m. obal, t. morgan, & g. joseph journal of small business strategy / vol. 30, no. 1 (2020) / 43-57 ly drive innovativeness in their firms (stock & zacharias, 2011). such elements as vision and strategy to harness the competency base and an organizational innovation culture leads to innovation outcomes and efficient business performance (lawson & samson, 2001). organizations possessing this innovation capability have the ability to integrate key capabilities and resources of their firm to successfully stimulate innovation. for innovation to become embedded into firm culture, it must have a variety of facets. managers are involved with the process, providing encouragement across a firm’s functional boundaries in the pursuit of innovation, and enabling a learning atmosphere through failure and conflict. such an environment leads to a higher frequency of interactions, higher amounts of shared information, and higher likelihood of shared goals, naturally building social cohesion as a by-product of the process (naveh & erez, 2004). dunphy et al. (2003) noted that firms must be flexible in both their services and their business models in order to encourage the development of innovative products. these truly innovative firms must be willing to overlook traditional success metrics in the short-term in order to achieve long-term innovative success. further, berger et al. (2007) argues that firms lacking the necessary flexibility to encourage innovation are also unlikely to embrace sustainability initiatives unless they help to meet short-term, bottom-line success metrics. likewise, linnenluecke and griffiths (2010) note the link between firms that pursue innovative initiatives have a greater likelihood of embracing sustainable initiatives. hence, we argue that sustainability orientation results when stakeholder perspective integrates their concerns within sustainability goals. thus, we hypothesize: hypothesis 4. an innovative culture will positively impact the firm’s sustainability orientation. patents innovation that is effective needs barriers for protection, such as patents. as bhattacharya and pollman (2017) point out, for sustainability to be an integral part of business strategy and not just a cost-cutting exercise, the case for sustainable innovation needs to be made. further, companies such as unilever encourage managers to look at consumers’ environmental and social needs during product development. for example, when developing products for markets that tend to be water-stressed, managers not only worry about reducing water footprint in their own manufacturing but also think about ways to reduce water usage at the consumer end (bhattacharya & pollman, 2017). these innovative approaches necessitate practical outcomes, therefore combining innovation with patents. as previously mentioned, a firm’s strategic decisions can impact their subsequent level of sustainability orientation (sharma& vredenburg, 1998), specifically, a firm’s focus on patents, the incentives offered to npd team members, and project leadership practices. acquiring patents is an important goal for most product developers as patents provide a firm with a competitive advantage, protection from imitators, and a legal asset that can influence product performance (meso & smith, 2000). this aligns with the rbv, which contends that firms can realize success in the market by taking advantage of their unique assets, such as patents (barney, 1986; henard & mcfadyen, 2012). a sustainability orientation that presents an organizational learning environment has the potential to be deemed a beneficial asset under the rbv (hart, 1997; surroca, tribo, & waddock, 2010). specifically, dynamic innovation and the learning that accompanies it (olmo-garcía, crecente-romero, & val-núñez. 2019) presents opportunities for firms to focus on obtaining patents aiming to acquire beneficial, unique assets. furthermore, focusing on sustainability may provide new avenues for firms to innovate, thereby creating more opportunities to obtain patents. therefore, we argue there is a link between a focus on obtaining patents and developing a sustainability orientation. thus, we hypothesize: hypothesis 5. a firm’s focus on patents will positively impact the firm’s sustainability orientation. sustainability-orientation and npd performance embracing sustainability can be viewed as the result of both a firm’s culture and their strategic management decisions. a sustainability orientation occurs when a firm already has an innovative, outward-looking culture (linnenluecke & griffiths, 2010), consciously integrates sustainability goals into their strategies, reinforces and rewards employees, and demonstrates the connection to firm performance (galpin et al., 2015). prior researchers have viewed sustainability orientation as an offshoot of firm innovativeness and market orientation, where the firm is motivated to continuously search for unique and novel ways in which to meet and exceed customer needs (han, kim, & srivastava, 1998; hurley & hult, 1998). this drive to innovate for the end consumer necessitates that the firm embraces organi49 m. obal, t. morgan, & g. joseph journal of small business strategy / vol. 30, no. 1 (2020) / 43-57 zational learning and develops strong social relationships from new product performance (hynds et al., 2014; sen, bhattacharya, & korschun, 2006). the dual organizational leadership and culture framework presents an environment for cohesive response to the changing environment with greater sustainability emphasis, for example, between different elements of sustainability such as environmental and social, as well as between partners, suppliers and the firm. in such an environment, social cohesion is higher as individuals and teams operate in a climate where taking calculated risks is desired rather than punished, where organizational goals are more likely to be aligned, and where free exchange of ideas and knowledge is encouraged rather than silenced (hurley & hult, 1998; shaner et al., 2016). consistent with galpin et al. (2015) and shaner et al. (2016), cohesion between organizational leadership and culture could help form a sustainability orientation in such a manner that motivates positive actions. in the case of new product development, employees may be less likely to build sustainability orientation unless there are appropriate ways by which risks are addressed and the incentives seem likely to be attained. for firms focused on sustainability-based outcomes, the positive and significant effects of innovation culture on sustainability orientation and the positive and significant effects of sustainability orientation on value creation leads to market share from new product performance as they address concerns more important to some customers (luo & bhattacharya, 2006.) given the strong indicators that consumer interest in sustainable products has increased in recent years (kiron et al., 2012), stakeholderand sustainability-oriented marketing that also integrates the fiduciary responsibilities to the shareholder may not only be increasingly necessary, but also presents new opportunities for the product developer. therefore, we complete our proposed model by analyzing the impact of a sustainability orientation onto new product market performance. like market orientation, sustainability orientation has a positive impact on new product performance as it encourages organizational learning and an organization-wide emphasis on searching for the best solution (han et al., 1998; hurley & hult, 1998). furthermore, firms that embrace a sustainability orientation tend to have stronger external partnerships (du et al., 2011; sen et al., 2006). these external relationships work as an asset, benefitting the development firm by enabling them to better identify and solve customer needs and work with strategic partners. in fact, a sustainability orientation has a better chance of surviving and thriving within a firm if a connection to firm performance is clear (galpin et al., 2015). thus, we build off of prior literature and hypothesize a relationship between sustainability orientation and new product market performance. hypothesis 6. sustainability orientation will positively impact market performance. method data the data utilized for this study comes from the 2012 product development management association (pdma) comparative performance assessment study (cpas). there are 453 business units of pdma members and non-members that participated in the study across 24 countries. one hundred ninety-seven usable responses come from north america, 149 from asia, 61 from europe, and 44 from “others”. firms in 31 industry categories participated in the study that are grouped into meta-categories (e.g. health care) and there was a similar distribution between large firms and smes (47.7% vs. 52.3% respectively). the data has been utilized in previous research studies and provided a strong basis for npd research (lee & markham, 2016; markham & lee, 2013, 2016). after careful inspection of the data, several cases had missing data for the variables of interest in this study. a little’s missing completely at random (mcar) test was run and the results of the test suggest that the missing cases are random and therefore deleted from the study. after deletion of the cases, the sample size used in this study is 349 product developers. dependent variables sustainability orientation. this was measured using a 10-item scale established by du et al. (2016). prior research has noted the importance of capturing both the stated importance of overall firm sustainability goals as well as capturing the actions firms have actually undertaken to encourage and measure sustainability (hart, 1997; waddock, 2008). thus, these items capture various aspects of a firm’s integration of sustainability criteria into general management as well as activities specific to the npd process. market performance. this was measured using a 2-item scale capturing the outcomes of new product performance: (1) our new product program meets the performance objectives set out for it and (2) overall, our new product program is a success. 50 m. obal, t. morgan, & g. joseph journal of small business strategy / vol. 30, no. 1 (2020) / 43-57 independent variables geocentricity. this was measured as the number of countries the focal firm operates in. innovative culture of the firm. this was measured on a six-item scale that assesses the internal environment of the firm in regard to innovation focus, objectives, and accepting failure in npd. focus on patents. this was measured on a two-item scale that assesses the focal firm’s focus on generating patents and effectiveness of patents. npd team incentives. this was measured on an eightitem scale that assesses the incentives and rewards provided to npd teams for radical innovations, more innovative projects, and incremental innovations. project leadership practices. this is assessed using a three-item scale measuring the duties and focus of leadership on npd projects. control variables needless to say, to make the inferences claimed in this study, we sought to control for additional variables that may explain variance in our dependent variables. as such, we controlled for it capabilities, firm size 1 using approximate annual sales, and firm size 2 using approximate number of employees. these control variables were selected based on similar, prior literature, and the availability of completed responses (du et al., 2016; shaner et al., 2016). the correlations and descriptive statistics of the study can be found in table 1. the list of variables and the scales utilized for this study can be found in table 2. validity, reliability, and common method variance a confirmatory factor analysis was run via amos 22.0 to confirm the validity and reliability of the data and the measures used. the results of this analysis can be seen in table 2. model fit metrics all met appropriate levels. in support of convergence validity and reliability, the construct reliability (cr) exceeded appropriate thresholds for all items, average variance extracted (ave) exceeded 0.50, and factor loadings all above acceptable thresholds. inter-item correlations are higher within factors, thus satisfying criteria for discriminant validity. furthermore, the ave values are all higher than the shared variance values (squared correlations) between constructs, thus supporting discriminant validity between constructs (fornell & larcker, 1981). to assess common method variance, two methods were utilized. first, we employed the harmon one-factor method and found the first factor to account for approximately 27.35% of the variance, well below the suggested 0.50. second, we assessed a common latent factor in the sem process and did not find any items that were impacted beyond appropriate levels for common method variance. as such, it is not a concern in this study. the results are consistent with the hypothesis and suggest that adapting these leadership and organizational table 1 descriptive statistics and correlations mean st. dev. 1 2 3 4 5 6 7 8 9 performance 4.48 1.51 sustainability orientation 2.68 1.11 .026 geocentricity 31.64 46.54 -0.06 0.26 innovative culture 2.79 0.09 0.30 0.43 -0.00 patent focus 2.19 1.29 0.24 0.34 0.09 0.27 npd team incentives 2.18 0.78 0.14 0.41 0.22 0.23 0.26 project leadership practices 2.25 0.92 0.26 0.26 -0.01 0.13 0.23 0.26 it capabilities 2.98 1.23 -0.10 -0.09 -0.03 -0.06 -0.23 -0.25 -0.20 sales* 6712.32 36797.16 0.08 0.10 0.09 0.02 0.05 0.02 0.02 -0.10 employees 3552.40 3517.86 0.06 0.04 0.01 -0.02 0.01 -0.02 -0.02 -0.13 0.90 all correlations with absolute value above 0.13 significant at p < .05 *in thousands 51 m. obal, t. morgan, & g. joseph journal of small business strategy / vol. 30, no. 1 (2020) / 43-57 table 2 reliability and validity construct and items factor loadings ave msv cr market performance (likert 1-7 scale, 1=disagree, 7=agree) 0.59 0.30 0.74 1. our new product program meets the performance objectives set out for it. 0.86 2. overall, our new product program is a success. 0.70 sustainability orientation (likert 1-5 scale, 1=not at all, 5=extremely) 0.65 0.30 0.95 how important are the following to your company? 1. environmental sustainability 0.81 2. social sustainability 0.79 3. sustainability criteria for new product development 0.88 4. measuring new product progress on sustainability 0.90 5. future importance of sustainability-type criteria 0.87 to what degree does your company do the following? 6. develop sustainability practices 0.78 7. manage your product’s carbon foot print 0.74 8. use triple bottom line for product planning 0.73 9. include sustainability in your product development budget 0.83 10. select suppliers and partners based on sustainability criteria 0.76 npd incentives (likert 1-5 scale, 1=never, 5=virtually always) 0.54 0.22 0.82 how often are the following incentives and awards are provided to npd teams? 1. project-based profit-sharing 0.65 2. project-based stock or stock options 0.77 3. compensation time 0.80 4. recognition in organization newsletters 0.70 5. recognition at award dinners* 6. plaques, pins, project photographs* 7. non-financial rewards chosen by team (e.g. trips)* 8. the opportunity to work on a bigger project next 0.77 innovative culture (likert 1-5 scale, 1=never, 5=virtually always) 0.53 0.30 0.87 how often does your organization reflect these values? 1. open to the constructive conflict that occurs within the innovation process 0.70 2. failure is understood to be a natural part of the innovation process 0.80 3. both innovation and risk taking are valued for career development 0.76 4. recruitment parameters include consideration for innovation potential 0.80 5. managers establish objectives in the areas of innovation including training, measures and results 0.65 6. these established objectives are used in the performance review process 0.62 patent focus (likert 1-5 scale, 1=not at all important, 5=extremely important) 0.68 0.26 0.86 which indicators are most important to your business unit to measure results from npd efforts? 1. number of new patents generated 0.84 2. focus on effective patents 0.85 project leadership practices (likert 1-5 scale, 1=never, 5=virtually always) 0.52 0.15 0.76 what percent of the time are the following project leadership practices used? 1. a project leader who has many duties 0.67 2. a full time project leader borrowed from a full time position for a single project 0.83 3. a process owner serves as leader 0.73 model fit chi-square = 1005.11; df = 335; χ2/df = 3.00; rmsea = .07; srmr = .05; cfi = .90; tli = .90; ifi = .90 average variance extracted (ave) score is calculated according to fornell and larcker (1981) and should be greater than .5. ave = σ(λyi)2/[σ(λyi)2 + σvar(εi)], where λ is the loading of each item. n=349 respondents. df, degrees of freedom; rmsea, root mean square error of approximation; srmr, standardized root mean residual; cfi, comparative fit index; ifi, incremental fit index; nnfi, tucker lewis index *item deleted due to reliability concerns 52 m. obal, t. morgan, & g. joseph journal of small business strategy / vol. 30, no. 1 (2020) / 43-57 resources in a sustainability oriented dynamic setting enables npd project members to implement improved, holistic product development processes leading to more customer-focused products. thus, the results extend the body of literature on factors impacting the centrality of sustainability orientation that leads to market performance of new products (du et al. 2016; hynds et al. 2014; shaner et al. 2016, among others). analysis and results this research involves studying associations among latent and directly observed constructs. as such, we utilized structural equation modeling (sem) to test the hypotheses in amos 22.0. sem allows the simultaneous estimation of both the measurement and structural models in order to test the hypotheses. a major advantage of sem is the ability to incorporate confirmatory factor analysis with path analysis. the model showed good convergent validity, discriminant validity and reliability of the items as shown in table 2. hypothesis 1 states that project leadership practices will positively impact the firm’s sustainability orientation. the model results show that the relationship is indeed positive and significant (β = 0.17, p < 0.01). hypothesis 2 suggests that a firm’s geocentricity will positively impact the firm’s sustainability orientation. the model indicated that the relationship is positive and significant, as expected (β = 0.12, p < 0.01). hypothesis 3 claims that incentives for npd teams will positively impact the firm’s sustainability orientation. as our model results indicate, the relationship is positive and significant as predicted (β = 0.21, p < 0.001). hypothesis 4 argues that an innovative culture will positively impact the firm’s sustainability orientation; the model indicated that the relationship is positive and significant, as expected (β = 0.37, p < 0.001). hypotheses 5 claims that a firm’s focus on patents will positively impact the firm’s sustainability orientation; the model indicated that the relationship is indeed positive and significant (β = 0.10, p < 0.001). hypothesis 6 states that sustainability orientation positively impacts market performance. the model results show that the relationship is indeed positive and significant (β = 0.55, p < 0.001). the results of the analysis can be seen in table 3. previous research has suggested that there may be country-level effects occurring for npd. as such, we conducted a post hoc analysis to assess the impact of the region table 3 model results sustainability market performance b p-value standard error b p-value standard error sustainability orientation 0.55 *** 0.06 geocentricity 0.12 ** 0.01 innovative culture 0.37 *** 0.07 patent focus 0.10 *** 0.13 npd team incentives 0.21 *** 0.06 project leadership practices 0.17 ** 0.05 it capabilities -0.08 ns 0.03 0.07 *** 0.07 salesa 0.31 *** 0.04 0.79 *** 0.04 employees -0.21 *** 0.04 -0.71 *** 0.04 † p < 0.10, *p < 0.05, **p < 0.01, ***p < .001 ns = not significant 53 m. obal, t. morgan, & g. joseph journal of small business strategy / vol. 30, no. 1 (2020) / 43-57 that the firm is headquartered in plays a role in sustainability orientation and market performance. while the results suggest that all regions do have a significant impact on the dependent variables in the study, the significance and sign of the coefficients of the main independent variables remain the same. the results of the region analysis show that the north and south america regions have a negative impact on sustainability orientation whereas the other regions in consideration have a positive impact. additionally, north america was the only region to show a positive impact on performance. theoretical implications this paper highlights the role of cohesive organizational leadership combined with firm culture characteristics in creating a sustainability-oriented environment that encourages successful new product development. the integration of stakeholder relationships with firm resources involves the recognition of the need for understanding implications of strategy in a dynamic environment where resource usage is aligned with the changing nature of the external environment (eisenhardt & martin 2000; strønen, hoholm, kværner, & støme, 2017). sustainability orientation, increasingly accepted in corporate communities, becomes embedded within corporate planning and outcomes through an innovative focus, strong npd leadership, incentives, focus on patents, and geocentricity. the nature of such organizational characteristics was to broaden, expand and widen the approach to firm governance, perhaps by exploring innovative manners of developing products or new global options, as opposed to a more parochial approach. leadership, for example, expanded to multiple tasks, with incentives to include an array of options that allowed a range of risk-taking opportunities and incentivized different strengths and personalities. further, the resulting innovation and focus on generating new patents leads to a sustainability orientation that results in a focused approach to product development and market performance. these findings demonstrate that short-term motives, such as incentives and a focus on patents can be positively aligned with a long-term, sustainability orientation, thereby overcoming the “fuzzy” nature of promoting a sustainability orientation amongst employees (thomé et al., 2016). perhaps not surprisingly, having an innovative culture appears to have the strongest influence on the development of a sustainability orientation, which aligns well with prior findings (nidumolu et al., 2009). however, the development of a sustainability orientation is vastly improved when a firm is able to combine a variety of factors, including a focus on innovation, strong leadership, and an outward looking approach through geocentricity. importantly, our findings support the contention that sustainability orientation is an offshoot of an innovative culture and thus leads to improved market performance of new products (han, kim, & srivastava, 1998; hurley & hult, 1998). this is critical as it demonstrates that sustainability goals and initiatives are more than simply altruistic efforts as has been cited in prior literature (bettiga, lamberti, & noci, 2018). thus, the paper enables a better understanding of what leads firms to become more sustainable and provides further support of how sustainability impacts market performance. overall, the paper extends the sustainability research, expanding our understanding of sustainability orientation and its integration into strategy. as previously noted, sustainability orientation requires long-term commitment and buy-in from employees; in essence, sustainability orientation should be viewed as firm resource that requires nurturing (berger et al., 2007; dunphy et al., 2003). interestingly, short-term goals and incentives can be utilized in concert with a shift in culture to encourage the development of the sustainability resource. practical implications for practitioners, this study highlights the need for firms to build an innovative, outward-looking culture while also making the correct strategic decisions in regard to seeking patents, offering employee incentives, and project leadership. while factors such as firm size and it capabilities do not impact sustainability, firms that are operating in more countries and embrace innovation are more likely to embrace sustainability. thus, smaller and less technologically advanced firms can successfully embrace a sustainability orientation that benefits their market performance. instead, we recommend the following: firms should focus their new product efforts on obtaining new patents; they should look for opportunities to enter new international markets when those opportunities align with their organizational strategy, and they should offer incentives to npd employees, such as project-based profit sharing and compensation time. leadership within npd also plays an important role. we recommend that firms dedicate a full time project for new product initiatives, which may mean pulling that leader from their regular roles. furthermore, that leader should encourage a culture in which risks are encouraged, educational opportunities exist, and failure is not punished. a sustainability orientation may not naturally occur on its own, even for in54 m. obal, t. morgan, & g. joseph journal of small business strategy / vol. 30, no. 1 (2020) / 43-57 novative, international firms. as sustainability requires employee buy-in and learning, these firms must be proactive in their strategic decisions. our study connects sustainability orientation to the performance of a firm’s new product program. for example, a product development firm should feel comfortable that their efforts to manage the carbon foot print of their new products will be well received by customers and play a role in increased sales. as such, we recommend that product development firms not only embrace sustainability, but also include their sustainability initiatives in their advertising and promotions. we believe this recommendation especially carries weight as it connects academic research to recent popular press articles (houlihan & harvey, 2018). managers should consider this study as another piece of evidence that taking a holistic, sustainable approach can actually lead to increased product performance. overall, we contend that corporations must make a concerted effort to develop sustainability capabilities in their regular goals and objectives to realize the benefits towards market performance. our findings have implications for how firms promote leadership development through incentives that encourage innovation and risk-taking and forms a strong basis to address challenges in the growing area of sustainability. importantly, we demonstrate that relatively short-term, incentive driven initiatives can be linked to longer-term, sustainability orientation. thus, long-term, sustainability goals and short-term, performance goals do not need to be considered mutually exclusive; in this study, we argue that they can be complementary. from the practitioner perspective, this study highlights the fact that intervention strategies have benefits in relation to sustainability that could lead to long-term benefits for firms, but are contingent on the capabilities of leadership and innovation culture development. limitations and future research limitations of the study are as follows. first, due to the length of the survey, fatigue may have set in for respondents. pdma reduced the total surveys based on noticeable responses that were affected. this was also reduced by allowing respondents to log in and out of the survey without losing data. however, we had to reduce our sample size due to this issue. furthermore, we did not have the ability to include some desired control variables due to incomplete responses, as noted in our methods section. second, a single respondent from each business unit was used. this could affect accuracy. in 32 cases there were multiple responses from one business unit and a difference test concluded no issues. third, it is likely that sustainability orientation and performance could both be driven by variables we had not considered in this study. the data set utilized in this study allowed us unique access to a diverse set of product developers, yet limited our ability to gather all potentially relevant data. thus, we view this study as an extension to existing literature and as such, we believe this basic framework could be built upon in future studies. additionally, not all variables were measured using multi-item scales. for example, geocentricity was measured on a single item. this construct is likely to contain more dimensions that could be analyzed in more depth. moving forward, we believe there are a few directions respondents could take in this line of literature. first, we believe national culture and political standards have an impact on a firm’s likelihood of developing a sustainability orientation. as such, researchers should consider this model within the context of national culture (e.g. collectivist vs. individualist) and political structure (e.g. more vs. less democratic). we also believe that certain leadership practices could actually harm a firm’s likelihood of moving towards a sustainable model. this data set consisted entirely of product developers, a group that is inherently innovative and forward thinking. however, respondents who are less forward thinking (e.g. focused on efficiency) may have a different impact on the development of a sustainable orientation. thus, an interesting area of research would be to investigate how different leadership styles impact this model. another possible shortcoming of the paper is that we do not measure the motivations of manager’s as to why they seek to engage in sustainability. in addition, the hierarchy levels of reward systems (i.e. incentives) is not measured. different hierarchy levels may receive different rewards to engage in sustainable behavior. in sum, we hope this study advances the literature on sustainability orientation 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(2005). the effects of strategic orientations on technologyand market-based breakthrough innovations journal of marketing vol. 69 (2), 42–60. table of contents 1 entrepreneurial and market-oriented activities, financial capital, environment turbulence, and export performance in an emerging economy nathaniel boso, university of leeds pejvak oghazi, linnaeus university john w. cadogan, loughborough university & lappeenranta university vicky m. story, loughborough university 25 topic evolution of innovation academic researches yu-shan lin, national taitung university 37 linking market orientation, innovation and performance: an empirical study on small industrial enterprises in spain antonio l. leal-rodríguez, universidad loyola andalucía gema albort-morant, universitat de valència 51 investigating the path from firm innovativeness to financial performance: the roles of new product success, market responsiveness, and environment turbulence stella zulu-chisanga, university of leeds & copperbelt university nathaniel boso, university of leeds ogechi adeola, pan-atlantic university pejvak oghazi, linnaeus university 69 from the business strategy result to a source of economic development: the dual role of csr inmaculada carrasco, university of castilla-la mancha inmaculada buendía-martínez, university of castilla-la mancha 87 corporate governance and the performance of commercial banks: a fuzzy-set qca approach j. augusto felício, university of lisbon ricardo rodrigues, university of lisbon antónio samagaio, university of lisbon reproduced with permission of the copyright owner. further reproduction prohibited without permission. credits anonymous journal of small business strategy; fall 2004/winter 2005; 15, 2; abi/inform complete pg. 0_4 http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2020, vol. 30, no. 03, 01-15 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2020 small business institute® w w w. j s b s . o rg introduction 1suny plattsburgh, 218 ausable hall, 101 broad street, plattsburgh, ny 12901, usa, gottscrl@plattsburgh.edu 2california state university, bakersfield, office: bdc 136a, 9001 stockdale highway, bakersfield, ca 93311-1022, usa, jwoods7@csub.edu family human capital and the championing of innovation in small firms family firms, human capital, champion of innovation, adoption of innovation apa citation information: gottschall, r., & woods, j. a. (2020). family human capital and the championing of innovation in small firms. journal of small business strategy, 30(3), 01-15. while the influence of family ownership and control is widespread and self-evidently strong in small firms (astrachan & shanker, 2003), the effects are as diverse and rich as family life itself. studies repeatedly find that family influence has such varied impacts on standard measures of firm behavior or performance that they are, in this sense, indistinguishable from nonfamily firms (o’boyle et al., 2012). some suggest that it is important to find a link between family influence and firm behavior that distinguishes family from nonfamily firms (chua et al., 2012). the complex overlap of family and firm institutions has many researchers looking for mediators and moderators of family influence that help explain the heterogeneity of family firm behaviors and performance (gedajlovic et al., 2012). this article examines the championing of innovation in small family firms and tests the potential of family human capital to moderate rates of innovation adoption. this approach responds to calls to fill multiple knowledge-gaps in the literature with regard to: the multileveled-nature of the family firm (déniz‐déniz et al., 2018; eddleston et al., 2008), mediating and moderating variables (gedajlovic et al., 2012), and individual family members’ characteristics and influence (chirico & salvato, 2014; stewart & hitt, 2012). using existing constructs and relationships from the human capital and innovation literatures, we chose two related questions in the family firm context: do family or nonfamily members champion more of the organization’s innovation adoptions? and, does family members’ human capital moderate the relationship between family championing and levels of organizational innovation? we follow on the proposition that differences in family firms may be related to differences in individual family members’ influence (lumpkin et al., 2008). we conceive of family-level influence as being comprised of individual family members’ characteristics and behaviors that would, in aggregate, impact firm-level outcomes. while there are many potential aspects of family member involvement that could influence the firm, we chose the constructs of championing of innovation, family human capital, and organizational innovation for their multi-level natures. literature review human capital is an excellent construct for bridging inthis study of 94 small family firms focuses on complex interactions between individual family members and firm-level activities and outcomes. we develop and test a model of relationships between family championing of innovation, family human capital characteristics, and the firms’ adoption of innovation. family members championed many more adoptions of innovation than non-family members did, demonstrating strong family influence in smaller firms. an important point is that this strong family influence would appear insignificant without accounting for the significant moderating influence of variance in family human capital levels. this study contributes to our understanding of family influence’s heterogeneous nature by modeling interaction between mediating family behaviors and moderating family characteristics richard gottschall1, jeremy a. woods2 http://www.smallbusinessinstitute.biz http://www.jsbs.org 2 r. gottschall, & j. a. woods journal of small business strategy / vol. 30, no. 3 (2020) / 01-15 dividual, family, and firm concerns in the multilevel family business system (boxall, 2011). the “strength” of both families and firms depends largely on the human capital of their members (becker, 1991; dawson, 2012; grant, 1996). the principle idea of human capital theory is that early investments in human capabilities can be repaid by future gains in productivity (schultz, 1961). the family firm provides family members with both an environment for learning and for applying knowledge both sides of the human capital equation (chirico & salvato, 2008). the employment of a family member impacts the family member’s career, family dynamics, and firm operations; these are three important issues for families that own and control businesses (chrisman et al., 2012). family human capital concerns affect many important decisions in a small family firm. the championing of innovation is an individual behavior that anyone can engage in, regardless of rank, title, or family status, and it impacts important firm-level activities and outcomes (howell & higgins, 1990). the central idea of a champion of innovation is in uncertain situations, an individual persuades the organization to take risk by assuming personal and professional responsibility for success (burgelman, 1983). while there is empirical evidence documenting the role of champions in organizational innovation processes, to our knowledge, it has not been studied in the context of the family firm. we examine championing because multiple family members could potentially influence the firm in this manner, but also may not, if nonfamily members more often play the role of champion. we chose the adoption of innovation as the reference variable because it is a multilevel phenomenon, driven by individual employees, that ultimately affects the interface between the firm and its market (kimberly & evanisko, 1981; mcdowell et al., 2018). in small family firms, the adoption of innovation often refers to the incorporation new technology, materials, products, management ideas, suppliers, and/or customer-types in their business operations (rosenbusch et al., 2011). the focal point of organizational innovation in this study is the firm’s strategic adaptation to changing market conditions. while it is difficult to measure innovation at the market level (how new is it to the market/ world?) it is easier at the organizational level (is this new to our organization?) (crossan & apaydin, 2010). for the purposes at hand, we conceive of the adoption of innovation in the small family firm as a firm-level strategic orientation similar to conceptions of entrepreneurial orientation (zahra, 2005). in a sample of 94 family firms with fewer than 200 employees, we find significant differences in the number of innovations championed by family and non-family members. family members exercise considerable individual influence on the firm’s adoption of innovation. we also find significant relationships between family champions’ human capital (measured by education and experience) and organizational innovation. these findings suggest how individual family members’ characteristics and behaviors influence family firms and help generate heterogeneity in firm-level activities and outcomes. adoption of innovation in family firms in small family firms, the adoption of innovation strategically positions the firm in the market (ahluwalia et al., 2017; hayton et al., 2008). the term, innovation, captures a broad range of activities and outcomes (crossan & apaydin, 2010). a very few firms generate disruptive, new-to-theworld offerings, while most adopt new-to-their-firm products, services, methods and practices in order to keep up to date in the marketplace (tushman & anderson, 1986). in practice, impetus to adopt innovations might arise internally in the organization or externally (barwinski et al., 2020), when working with existing or new suppliers, while monitoring competitors’ activities, and when working with their existing or new customers (von hippel, 1986). keeping up with all the possibilities for change can be a challenge, even when innovations have been proven in the marketplace. research on innovation in family firms is growing rapidly, but insights and conclusions remain tentative and primarily focused on comparisons with nonfamily firms (de massis et al., 2012; filser et al., 2016). compared to nonfamily firms, family firms may have weaknesses and strengths when it comes to innovation capabilities (de massis et al., 2015). it may be that a more conservative approach to innovation, that might be common in family firms, results in delayed or missed adoptions, but once begun, improves execution and increases commitment to success (könig et al., 2012). additional evidence suggests that family firms out innovate nonfamily firms after adjusting for investment levels (duran et al., 2016) and that family firms are more innovative than nonfamily firms when responding to stakeholder concerns (craig & moores, 2006). these perspectives are primarily rooted in a long-term, conservative, risk averse orientation that might by typical in family-governed firms and yet less detrimental to innovation levels than is commonly expected. family member involvement and family influence for all the considerable power of the family institution (becker, 1991), researchers find that family member involvement does not necessarily influence firm performance (chua et al., 1999; o’boyle jr. et al., 2012). in smaller firms, 3 r. gottschall, & j. a. woods journal of small business strategy / vol. 30, no. 3 (2020) / 01-15 ownership, control, and employment are usually limited to a very few family members (chua et al., 1999), which greatly constrains the quantitative variability and statistical interest of these measures. to address this problem, researchers have created a variety of family-level constructs that might serve to distinguish family from nonfamily firms (chua et al., 2012; diéguez-soto et al., 2015). for example, nepotistic behaviors common in family firms may reflect families’ noneconomic-familial concerns (berrone et al., 2012; chua et al., 2003). researchers are developing a more comprehensive conceptualization of the involvement-influence overlap. the f-pec scale uses nine items to assess family influence in three dimensions: family power (ownership and board representation), family experience (number and generational status of active family members) and family culture (shared values and commitment) (astrachan et al., 2002). the more recent fifs scale uses 20 items to assess 6 dimensions of family influence, including: ownership and control, proficiency level of active family members, sharing of information between active family members, transgenerational orientation, family-employee bond, and family business identity (frank et al., 2017). these scales attempt to capture a variety of involvement and influence dimensions that in different combinations can produce qualitative differences and better explain family firm heterogeneity. family influence is primarily conceptualized as a family-level construct, such as a common concern for transgenerational ownership (chua et al., 1999), a shared long-term orientation (le breton-miller & miller, 2006), collective claims on resources (schulze et al., 2003), or communal feelings and bonds (litz, 1995). these group-level constructs, as well as the f-pec and fifs scales, are predicated on individual family member characteristics and behaviors (eddleston et al., 2008). furthermore, we note that the considerable attention paid to succession in family firms is largely about individual family members (molly et al., 2010). finally, carney’s (2005) description of family influence as parsimonious, personal, and particularistic describes a unity of command that is difficult to imagine as pluralistic. a model of family employee influence on the firm in the model presented below (figure 1), relationships between individual variables, family variables, and firm variables are depicted. family-level constructs are composed of individual family member characteristics and behaviors (arrows marked b) (déniz‐déniz et al., 2018). the addition or subtraction of a family employee directly affects family-level human capital and may affect family-levels of championing. given insignificant relationships between family employment levels and firm-level outcomes (arrow b a b c individual level family level firm level number of family employees family employee championing behavior family employee education and experience family championing behaviors average family human capital levels organizational innovation d figure 1. a model of individual family employee influence on the firm 4 r. gottschall, & j. a. woods journal of small business strategy / vol. 30, no. 3 (2020) / 01-15 a), this model explores both mediating influential activities (arrow c) and characteristics that might moderate family influence (arrow d). who champions innovations in family firms? the adoption of an innovation is an important firm-level decision that is often championed by a single individual. business organizations are complex, comprised of many activities and processes that must be coordinated (alchian & demsetz, 1972). an experienced and creative individual may identify an opportunity for improvement in their area that would require changes in other parts of the organization (howell & boies, 2004). the initial challenge is that no single individual possesses the expertise to evaluate a potential innovation’s impacts on the organization’s complex system of activities and processes (burgelman, 1983). in discussing the potential positive and negative impacts of the adoption with other stakeholders, the champion’s personal and professional opinions become central in the firm’s decision making process. importantly for this study, is that either a family or nonfamily employee could potentially play the influential role of champion. some researchers suggest that family members might be more likely champions of innovation. in a case study of the famous, musical family, the brubeks (litz & kleysen, 2001), the activities and processes of intentionally sharing in creative pleasures and innovating together are described in a family setting. the brubecks’ focus on family inclusion and their ability to transfer creative abilities provide powerful examples of how effective families can be in fostering innovation. another interesting study of ten “german dynasties” (firms more than 100 years old) found that the families delegated lesser adoption decisions to nonfamily managers but were directly involved in more consequential adoptions (bergfeld & weber, 2008). still other authors have identified knowledge sharing among individual family members as a means of individually influencing innovation activities (chirico, 2008; chirico & salvato, 2008, 2014). taken together, we may find that family members exercise disproportionate influence on more consequential adoptions in smaller family firms. on the other hand, when considering the importance of knowledge and expertise in the adoption process (galunic & rodan, 1998), there are also good reasons for nonfamily employees to play the role of champion. the german dynasties discussed above delegated smaller innovation decisions to nonfamily employees. in most cases, nonfamily employees will greatly outnumber family employees and are a more abundant source of potential champions (barnett & kellermanns, 2006). nonfamily members offer a potentially greater wealth of knowledge and different perspectives that are essential for more transformational innovations (dyer, 1989). the informal nature of the championing role allows nonfamily members to make important contributions without necessarily compromising family control of the firm. family firms that can effectively leverage the knowledge and abilities of nonfamily employees will have greater capacity for organizational innovation. it stands to reason that good ideas can come from anyone in the organization and that the economic rationale for adapting to market conditions would result in both family and nonfamily members championing innovation. however, in smaller family firms (the focus of our study), the literature seems to indicate that family members may be more likely champions of important innovations. on these grounds, we hypothesize that individual family members will carry outsized influence on the firm through their championing of innovation. hypothesis 1. in small family firms, family employees will champion more adoptions of innovation than the non-family employees. heterogeneous family influence and human capital resources due to the heterogeneous nature of family influence it is uncertain if family influence via championing would produce any outcomes general to family firms. we suspect not, and therefore identified family human capital as a possible moderator of family championing influence. by exploring a link between firm activities (adoptions) and family human capital, we rely on a resource-based view of the family firm and use one of the most unique family firm resources (sirmon & hitt, 2003). we define family human capital as an aggregation of individual family members’ knowledge, skills, and abilities made available to the firm (danes et al., 2009). the strategic human resource management literature addresses the challenges of aggregating human capital in theory and in practice (boxall, 2011). at the firm-level, we understand that a more knowledgeable family might direct the firm differently than a family with less collective knowledge. likewise, an individual family member who is high in knowledge might contribute more knowledge to the firm than a less knowledgeable family member. however, people don’t always work well together and predicting group performance is challenging. moreover, it is problematic to compare a family firm with three high school graduates (36 years of education in aggregate) to a firm with two college graduates (32 years of education). depending upon the business situa5 r. gottschall, & j. a. woods journal of small business strategy / vol. 30, no. 3 (2020) / 01-15 tion, either two college or three high school graduates might be a more desirable combination. the proposition that family influence may be moderated by family human capital levels is made in many important papers in the family business literature (danes et al., 2009; habbershon & williams, 1999; hoffman et al., 2006; sirmon & hitt, 2003), yet remains largely unexplored (chirico, 2008; mahto et al., 2018). reactions to this research at conference presentations have echoed concerns that family human capital may be of insufficient power to moderate influence (sirmon & hitt, 2003). family sizes and family involvement are so limited that overreliance on family human capital would strongly constrain firm behavior (carney, 1998). this type of resource constraint may be undesirable, but that does not mean it is not the case in many, primarily smaller, family firms. family human capital constraints may be eased by increasing family education levels and useful experiences, and by leveraging family with nonfamily human capital (verbeke & kano, 2012). a primary insight on family human capital is its stronger link to the firm than is found with nonfamily human capital (dawson, 2012; gomez-mejia et al., 2001). family members have generally longer tenures than nonfamily members (miller & le breton-miller, 2006). this is a nontrivial phenomenon in economic, organizational, and strategic thinking (williamson, 1991). family firm or not, organizations strategize around their resources, some of which are clearly more important than others (lepak & snell, 2002). longevity imbues family human capital with asset specificity, a resource that is specific to the firm’s unique strategy, as opposed to other resources that may be necessary for production but are more generic and easily replaced (gedajlovic & carney, 2010). concerning innovation, the continued involvement of family human capital may be a strategic-given, a resource to be worked with or around, and influential in either case. the literature linking human capital and innovation provides useful insights for application in the family firm context. categorizing knowledge as being either general, widely applicable, or specific and useful for a given purpose or setting is important for innovation and for family firms (becker, 1962; dakhli & de clercq, 2004). general knowledge is associated with comprehending newer or foreign ideas that enable more innovative adoptions. conversely, more specific knowledge related to an internal organizational process more often leads to incremental innovation adoptions. the family firm might gain more general knowledge by sending family members to school and/or hiring educated and/or externally trained nonfamily members. specific knowledge is primarily gained by working in the family firm and having access to top managers at family gatherings. the family firm offers unique opportunities for family human capital development. in theory, nonfamily employees have greater general human capital potential while family members have unique opportunities for specific human capital development. the human capital and innovation literatures support the hypotheses that general human capital can fuel higher levels of organizational innovation than specific human capital (burt, 1992; granovetter, 1973; marvel & lumpkin, 2007; rauch & rijsdijk, 2011). again, this is not to imply that more organizational innovation is better than less. the purpose of examining the generality or specificity of family human capital is for better understanding the moderation of family influence. we surmise that the family influence of championing might be indistinguishable at the firm level without accounting for some moderating force. in particular, we hypothesize that increases in general family human capital will positively moderate the relationship between family championing and organizational innovation while increases in specific human capital will negatively moderate the relationship. hypothesis 2. increased experience working in the family firm will negatively moderate the relationship between family championing and the adoption of innovation. hypothesis 3. increased formal education will positively moderate the relationship between family championing and the adoption of innovation. research design data collection on family human capital and championing behaviors in small, family firms is challenging (beck et al., 2011; chua et al., 1999). therefore, a survey was designed according to principles and tips from dillman (2000) and van selm and jankowski (2006) using well-established scales and variables (davidsson, 2005). precautions in sequencing related variables (spector, 2006) and the collection of a second response from 12 firms (11.7% of the sample) (cf. miller et al., 2008; 2009) were undertaken to control and assess possible common method variance problems. sample data collection surveys were disseminated by three different methods. snowball-sampling techniques, used for hard-to-reach-populations (see biernacki & waldorf (1981)), were employed in asking 36 associates to respond to the survey and/or pass it on to other small business-owners. and an additional 6,934 6 r. gottschall, & j. a. woods journal of small business strategy / vol. 30, no. 3 (2020) / 01-15 surveys were emailed to addresses found on eight chamber of commerce websites and a list of owners, presidents, and partners from email-list.com. response rates were approximately 50% for snowball-sampling, 9% from the chamber of commerce websites, and .082% from e-mail-list.com. out of 241 complete responses, 94 (39%) met the criteria of employing at least two family members fullor parttime and at least one non-family member. all the selected respondents (94) self-identified as family members. this sample of 94 family firms has a mean age of 24.04 years and employs an average of 25.85 people. independent samples t-tests showed no evidence of geographic or non-response biases. analysis of 12 paired-responses showed acceptable levels (> .7) of inter-rater agreement and reliability (nunnally, 1978). operationalization of constructs to measure championing of innovation, respondents were asked to identify the firms’ top three “most-important” innovations in the last eighteen months by type: (1) new products, (2) new services, (3) new methods of production, (4) opening new markets, (5) new sources of supply, and (6) new ways of organizing. after identifying a specific most-important innovation, the respondent was asked: “who, in your organization, was responsible for identifying and leading the adoption of this innovation?” this method of identifying champions is reported as “a highly reliable and valid technique” (howell & higgins, 1990, p. 326). this measure will result in a variable ranging from 0/3 to 3/3 for family and non-family members. family human capital is commonly measured by levels of education and experience. firm-specific family human capital was measured by how many years each family employee has worked in the family firm. general human capital was measured by highest degree obtained by each family employee (cf. bates, 1990; becker, 1962; blaug, 1976; davidsson & honig, 2003). the choices are: (1) high school, (2) two-year college, (3) four-year college, (4) master’s degree, (5) ph.d., (6) technical certification (7) did not finish high school, (8) don’t know/recall. this measure results in a variable for the average number of tertiary degrees obtained (beyond a high school diploma). organizational innovation was measured using a scale developed by johannessen et al. (2001) that measures respondents’ perceptions of the level of adoption of: (1) new products, (2) new services, (3) new methods of production, (4) opening new markets, (5) new sources of supply, and (6) new ways of organizing. respondents ranked their firms’ level of activity for each type of innovation on a fivepoint likert scale, from “not active” to “extremely active.” these six measures converge to produce a single measure of innovation based on the introduction of “newness” to the organization (johannessen et al., 2001), and reflect an encompassing measure of the family firm’s total level of innovation over the last 18 months. control variables were selected from the innovation literature (kimberly & evanisko, 1981). organizational size is related to innovation by economies of scale and the ability to spread the costs of innovation over a greater resource base (chrisman et al., 2003). organization age may be associated with structural inertia, which may limit organizational innovation (hannan & freeman, 1984). organizational climate for innovation consists of organizational culture, resources, and reward systems that are favorable for innovation (amabile et al., 1996; kimberly & evanisko, 1981). a four-item scale was developed to measure organizational atmosphere for innovation based on the seven-item-scale of madjar et al. (2002). for example, “my supervisor discusses with me my work-related ideas in order to improve them” was translated as, “organizational members regularly discuss work-related ideas in order to improve them.” respondents rated four such statements on a five-point scale from “strongly disagree” to “strongly agree.” industry dynamism and industry classification: a firm’s market environment affects its level of innovation (drazin et al.,, 1999; kimberly & evanisko, 1981). zahra et al., (2004) assess the environment with a single, self-reported item, identifying the industry as “high tech” or “low tech.” eddleston et al. (2008) use four self-reported measures concerning the abundance of innovation opportunities in the firm’s industry. a single question, “how important is innovation to performance in your industry?” was answered with a five-point scale ranging from “not important” to “very important.” respondents also identified their industry using the two-digit standard industrial classification that begins with: (1) agriculture, (2) mining, (3) construction, (4) manufacturing, (5) transportation, (6) wholesale, (7) retail, (8) finance, and (9) services. descriptive analyses there is little research on family human capital, as operationalized in this study, so a brief descriptive analysis precedes hypothesis testing. the measures were tested for colinearity, reliability (nunnally, 1978) and inter-rater agreement (miller et al., 2008; miller et al., 2009). overall, the data appears statistically suitable to use in bi-variate correlation and multivariate regression analyses, seen in table 1. . 7 r. gottschall, & j. a. woods journal of small business strategy / vol. 30, no. 3 (2020) / 01-15 table 1 descriptive statistics and bivariate correlation table variables n mean std. deviation 1 2 3 4 5 6 7 8 9 10 11 1 firm atmosphere for innovation 94 1 2 industry dynamism 94 4.23 0.8 0.014 1 3 firm age 94 24.04 18.9 -0.135 0.076 1 4 industry sic code 94 6.63 2.5 0.196 0.064 -0.103 1 5 firm size, number of employees 94 25.93 41.5 -0.067 -0.012 .277** -0.011 1 6 family championing of most important innovations 94 2.19 1.0 .222* -0.028 -.203* -0.178 -0.155 1 7 total family experience in firm (years) 94 39.2 35.1 -0.130 0.048 .555** -0.136 .371** -0.061 1 8 family championing by experience in firm 92 3302.7 2960.3 -0.089 0.042 .479** -.212* .224* 0.199 .854** 1 9 average family education 94 2.19 1.1 0.200 0.168 0.144 0.035 .339** 0.115 .471** .490** 1 10 family championing by family education 86 0.89 0.3 0.186 0.129 0.069 0.061 0.005 -0.037 -0.036 -0.072 .272* 1 11 organizational innovation 94 .301** .316** -0.044 -0.119 0.004 0.143 -0.174 -0.191 .212* .366** 1 ** p < .01 * p < .05 family involvement in the 94 small family firms, 263 family members worked fullor part-time in the last eighteen months, an average of 2.8 family employees per firm. ranging from two to seven, 57.4% of the small family firms had two family employees, 21.3% had three, 12.8% had four, and the remaining 8.5% had five, six, or seven. the average of 2.8 family employees represents 10.8% of the average of 25.85 total employees (family and non-family). family members were the chief executives in all 94 firms. family human capital the average family employee has 13.5 years of working experience in the family firm. the 13.5-year average-tenures of family employees greatly exceeds the national average of 4.6 years. of 263 family employees, 78% had post-secondary degrees, which is more than double the national rate of 36.7%. hypothesis tests and analysis hypothesis 1, that family employees will champion a disproportionately larger number of most-important inno8 r. gottschall, & j. a. woods journal of small business strategy / vol. 30, no. 3 (2020) / 01-15 vations than non-family members, is supported. statistical package for social sciences (spss) was used to perform an independent samples t test on the data. the mean number of “most-important” innovations championed by family employees of (ᵪ2.19; s 1.091) is statistically larger than the mean of “most-important” innovations championed by non-family employees (ᵪ.37; s .748) at the .000 level. firms reported an average of 2.56 most-important innovations, 85.5% of which were championed by family employees. we have little data in the literature to compare and interpret this finding. the 85.5% is dominant but also shows that championing is not necessarily a form of influence that is exclusive to family members. the level of championing performed by family employees is even more disproportionate when considering that family members represent only 10.8% of employees. in table 2 we report the data from multiple linear regression models conducted in spss. model 1 regresses the control variables, organizational age and size, atmosphere for innovation, industry classification, and industry dynamism against organizational innovation. the model explains 48.2% of the variance in organizational innovation (ar2 .189; αf .000). in table 2, we find support for both hypotheses regarding the moderating impact of family human capital on family influence. first, the relationship between the proportion of most important innovations championed by family members and organizational innovation is insignificant as shown in model 2. model 2 provides no greater explanation of variance in organizational innovation than the control model, and the family championing item is insignificant. the insignificance of model 2 is important for establishing the role of moderating influences. in model three, we see explained variance increase from 48.2% to 61.1% with the addition of the two family-human-capital variables and the adjusted r-squared statistic rising from .189 to .318. when family championing levels interact with the family’s total years of experience working in the family firm, there is a significant and negative relationship with innovation (β -.256, α .024). conversely, when family championing levels interact with education levels, there is significant and positive relationship with innovation (β .267, α .005). as hypothesized, table 2 multivariate linear regression models of the adoption of innovation model 1 model 2 model 3 variables std. coefficients std. error sig. std. coefficients std. error sig. std. coefficients std. error sig. organizational atmosphere .333 .096 ** .323 .099 * .313 .096 ** industry dynamism .330 .115 ** .330 .116 ** .279 .112 ** organization age -.058 .005 .051 .005 .037 .006 industry -.211 .038 * -.200 .040 * -.272 .038 ** organization size (employees) .044 .002 .048 .002 .083 .002 family championing .042 .100 family championing and experience -.256 .000 * family championing and education .267 .374 ** constant .551 * .636 .605 ** f 5.336 ** 4.434 ** 6.65 ** explained variance r .482 .484 .611 adjusted r2 .189 .181 .318 change in r2 -.008 .129 n 94 94 86 ** p < .01 * p < .05 9 r. gottschall, & j. a. woods journal of small business strategy / vol. 30, no. 3 (2020) / 01-15 the family influence of championing was difficult to assess without incorporating the moderating influence of human capital characteristics. discussion we briefly summarize the findings and contextualize them in a multilevel view of the family firm. we first identified the championing of innovation as an important mechanism that mediates individual family employee influence on the firm. we then show the implausible finding that family championing influence appears uncorrelated with organizational innovation; it is implausible given the 85.5% level of family championing and the nature of these constructs. as is typical in the family business literature, the powerful influence of family appears dissipated and difficult to characterize without accounting for moderating forces. lastly, we identify human capital variables that moderate and explain multiple variants of family influence on the adoption of innovation. our specific model of family member involvement, behaviors, and characteristics produces quantifiable evidence of individual family members’ contribution to family influence on the firm. to answer the question of “so what?” we begin by referencing the multi-level “systemness” of the family firm. at the market level, family firm behavior and performance is not easily distinguishable from nonfamily firms (chrisman et al., 2016). we found variability in innovation levels that significantly correlated with industry and industry dynamism. especially in smaller firms, family influence may often be oriented toward marketplace conformity rather than reflecting a family-nature (miller et al., 2012). in some instances, some consumers may appreciate firms that identify as family-owned and exhibit family values, culture and identity (zellweger et al., 2010). however, from the perspective of strategic adaptation, promoting “family-owned” is one of the more flexible elements of firm strategy that families could emphasize or deemphasize as warranted by prevailing market conditions (binz et al., 2018). taking an ecological perspective on innovation, we speculate that small family firms prioritize fitting-in over distinguishing themselves from nonfamily firms. at the firm level, we focus on the firm’s necessity to adopt new physical and intellectual resources from time to time. firm growth, which is one indicator of adaptive success, may require the incorporation of nonfamily financial and human capital and the professionalization of routines (stewart & hitt, 2012). although organization size was insignificant in our range-restricted sample, our findings suggest a strong, and possibly limiting, relationship between family resources and firm behaviors. decisions about which resources to maintain and which to change appear strongly biased toward family resources (sharma & manikutty, 2005). in this study, family employees dominated innovation adoption activities and most likely squeezed out nonfamily championing. family member involvement in the firm affects the family collective and family-level influence. strong altruistic family relationships infuse the family firm with family concerns and objectives (schulze et al., 2003). family members may value and pursue socio-emotional benefits of working together alongside their personal and collective economic goals. however, in this data, we see high levels of family engagement in the most important economic and strategic activities of the firm. family championing may be facilitated by family bonds but also reflects concerns for the economic wellbeing of the family and family members’ responsibility to steward collective resources. the behaviors in this study seem better explained by a social capital rather than a socio-emotional wealth perspective. the individual family member is neglected in many ways in the family business literature (chirico & salvato, 2014; stewart & hitt, 2012). this study goes beyond counting family members or focusing on the influential roles of founders and successors. operationalizing family involvement as regular employment in the firm, we find that 56% of firms have two family employees and another 23% have three. this range limitation is conceptually and statistically relevant to theory development and testing. this study provides some ideas about developing appropriate aggregate constructs of the family in the family-firm context. individual family members may contribute significantly to the family firm’s character, identity, resources and behaviors; as these individuals come, go, and change, so too may the firm. family human capital is crucial to the explanatory power in this model, as we could not determine the influence of championing without accounting for its moderating effects. the notion of family human capital as a limited resource may not infer its insignificance. with only 2.8 family employees per firm, this data reflects extreme levels of influence that may restrict the use of nonfamily human capital and the firms’ ability to grow. if so, this would apply to the great majority of family firms that typically employ fewer than 200 employees (astrachan & shanker, 2003). furthermore, the small number of family employees does not constrain the quantitative and qualitative range of variation in educational and work experiences that we found in our data. this data suggests that simplistic characterizations of family human capital in the literature may miss important aspects of human capital complexity as well as human capital’s importance in organizational contexts. 10 r. gottschall, & j. a. woods journal of small business strategy / vol. 30, no. 3 (2020) / 01-15 practical implications the practical implications of this research, given the stated limitations, are for practitioners to be more aware of the strategic linkage between family human capital and organizational adoption of innovation. family members may be likely to dominate innovation activities to the exclusion of non-family members. while this may not always be a problem, should the firm’s needs change, family human capital is not a rapidly adaptive resource. with forethought and planning, family members’ capabilities may be developed through training and education. however, to be prepared for unexpected situations small family firms should foster access to non-family human capital, including outside advisors for general knowledge and long-tenured employees for firm-specific know-how. this study provides further empirical evidence for a knowledge based approach to managing small family firms. limitations this is an exploratory study conducted on a small sample of 94 firms using convenience-sampling techniques. while statistical tests show no signs of biases in the sample firms, generalizations should be limited. the relationships reported are based on survey data from a single respondent, which may inflate the strength of relationships. the question sequencing and use of standard human capital scales in the survey reduce spurious relationships and increase validity of the instrument. a sub-sample of the firms provided multiple responses that yielded acceptable levels of inter-rater reliability. these are significant results, using well-established constructs, that may point to future research opportunities rather than explaining a phenomenon in the general population of small family firms. a larger sample might provide more information about the relationship between firm size and family human capital influence and tease out greater sensitivity between levels of education and years of experience. for example, this sample may have been too small to register the effects of advanced degrees. beyond these sampling issues, the complexity of the human capital and innovation constructs as well as the narrowness of the championing construct present further limitations on generalizations. this is a highly specified model and care should be taken in making inferences about these constructs in alternative contexts. family human capital was significantly influential in a carefully constructed context of innovation. future research many researchers encouraged this examination of mediation and moderation in a multilevel model of the family firm (gedajlovic et al., 2012; kellermanns et al., 2008). we only scratch the surface of the complex constructs of human capital and innovation and examine one aspect of family firm behavior. perhaps, the most parsimonious take away from this study is that mediators and moderators may help explain family influence from the individual level. other mediators and moderators might explain different types and ways for individual family employees to contribute to family-level influence (chrisman et al., 2016). because there are so many important ways to address the multitude of interactions within a complex system, we focus our discussion of future research on the family human capital construct. explaining any family firm phenomenon that might be related to human capital, researchers might focus attention on the quality of education (pérez-gonzález, 2006), education in a business discipline (verbeke & kano, 2012), or studying a special curriculum for family businesses (carsrud, 1994). a finer grained examination of experiences working outside the family firm may be sensitive to the role played, duration, and industry (davidsson & honig, 2003). how individual family employee human capital stores are aggregated may be particularly useful in understanding family-level influence. we know little about what unique knowledge family members might bring to the firm (chirico & salvato, 2014). does it matter if family members’ knowledge complements one another (teece, 1986)? our data showed the employment of some more-educated family employees in less-innovative firms, which may be interpreted as the underutilization or underachievement of family human capital. to what degree do the pleasures of working alongside family members outweigh these human capital concerns? dissatisfaction of family members has received attention in the family business literature (kets de vries, 1993), but with little human capital perspective. while underutilization denotes a problem, it would be helpful to provide qualitative and quantitative guidelines for families to address this issue, possibly reducing social and emotional strain. some quantifiable aspects of the family human capital concept may provide important measures by which to compare competing social and economic goals in the family firm context. conclusion answering calls in the literature, we developed and tested a model linking individual family employees to fam11 r. gottschall, & j. a. woods journal of small business strategy / vol. 30, no. 3 (2020) / 01-15 ily influence and firm behaviors. solid foundations in the human capital, innovation, and family business literatures provided the groundwork for reasonable hypotheses that were supported by the data. the data demonstrated the active involvement of family employees in important strategic activities. by linking family influence to individual family employees it becomes easy to see why family firms would vary so much in their behavior and performance. as family members change, by joining or leaving the firm, gaining experiences or education, maturing, experiencing health problems, or other personal issues, so too would the family’s influence. a change in one family member’s circumstances or plans can shift family influence from long term, even a transgenerational orientation, to a short-term view, of even selling or closing the firm. we perceive a large contrast between an individual perspective on family influence, like we have presented, and the unified systems or essence perspectives. that being said, our hypotheses about individual family employee behaviors are heavily influenced by a family-systems-perspective. the individualand system-perspectives may inform one another even though their foci are different. strategic management researchers have described the shifting perspectives on strategy from internally focused on the firm (such as the resource or knowledge based views) to external focus (such as industrial organization or stakeholder theory) since the 1950’s (hoskisson et al., 1999). family business researchers initially focused on individuals in the succession process and have more recently focused on a system perspective (zahra & sharma, 2004). we propose that, if the individual perspective can include more family members than just a founder or successor, family influence might become a more explanatory and predictive construct. references ahluwalia, s., mahto, r. v., & walsh, s. t. 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(2004). family business research: a strategic reflection. family business review, 17(4), 331-346. zellweger, t. m., eddleston, k. a., & kellermanns, f. w. 15 r. gottschall, & j. a. woods journal of small business strategy / vol. 30, no. 3 (2020) / 01-15 (2010). exploring the concept of familiness: introducing family firm identity. journal of family business strategy, 1(1), 54-63. journal of small business strategy vol. 25 ● no. 2 ● 2015 best conceptual research paper awarded by the small business institute® why small firms are different: addressing varying needs from boards of directors josh bendickson east carolina university bendicksonj14@ecu.edu phillip e. davis east carolina university davisp14@ecu.edu birton j. cowden university of massachusetts, amherst bcowden@isenberg.umass.edu eric w. liguori the university of tampa eliguori@ut.edu abstract board of director member diversity has an impact on the functions each director successfully provides. appropriate and necessary board member capabilities differ between small and large firms. although these differences seem apparent, current research has favored studies related to large firms and neglected those related to board member needs of small firms. grounded in agency theory and resource dependence theory, the following manuscript theoretically suggests that firm size moderates the relationship between board member diversity and the two primary functions (monitoring and the provision of resources) of board members. furthermore, small firms can enhance performance through appropriate member composition in differing ways than large firms. keywords: firm size, board composition, resource dependency theory, agency theory 41 mailto:whitney.peake@wku.edu mailto:davisp14@ecu.edu mailto:bcowden@isenberg.umass.edu journal of small business strategy vol. 25 ● no. 2 ● 2015 introduction the past few decades have led to great expansions in technology and available data. with that said, the vast benefits of these sources also come with some drawbacks, particularly in board of director research. a great deal of this research has focused on large firms (e.g., anderson & reeb, 2004) leaving us, as a field, somewhat speculative as to the various impacts that boards of directors and boards of advisors may have on small firm performance. the board may in fact play different roles in small and large firms due to differences in monitoring and resource provisions, therefore it is necessary to consider the integration of these theories (e.g., agency theory and resource dependence theory) (hillman & dalziel, 2003) as they pertain to differences in firm size. as small firms may be resource constrained (both in information and tangible resources), finding and compensating a board may present difficulties. due to these reasons, amongst others, the following manuscript attempts to answer a handful of questions related to this gap in the literature. first, could small firms benefit from different board members more or less than large firms? second, does firm size have implications on board monitoring and the provision of resources? to assess these questions, this manuscript utilizes prior information on board composition as an antecedent to board member diversity. firm size is then described as having a moderating effect between board member diversity and the functions of a board. next, this paper extends on prior research through the integration of agency theory (at) and resource dependence theory (rdt) (dalziel, gentry, & bowerman, 2011; hillman & dalziel, 2003) to better explain the dual board functions, monitoring and the provision of resources, respectively. the results ultimately lead to a final proposition suggesting a means for small firms to enhance firm performance through strategic board member selection. this research contributes to the literature in three primary ways. first, it is of interest to the collective body of board of director research to better understand differences between large and small firms. because small firms have been somewhat neglected in this body of work, this manuscript addresses the need to advance the discourse as pertaining to various firm sizes. secondly, as developed through the integration of two theories and various aspects of boards of directors, attention is drawn to more careful consideration of board selection in small firms. lastly, this research provides practical means for small firms to enhance performance. because an overwhelming majority of firms are small (u. s. census bureau, 2012), this issue applies to the great majority of businesses in which the effectiveness of the board is a socially complex phenomenon both within the firm and with external constituencies. theoretical overview agency theory and boards essentially, at utilizes “alternative governance structures to mitigate the agency conflict” (kochhar, 1996: 715) and is used to identify the problems that may occur as managers, rather than owners oversee business operations. as eisenhardt (1989) points out, the agency problem occurs when principals and agents have different desires while at the same time are embedded in a context presenting difficulty for principals to verify agent behavior. to minimize these agency problems, two governance mechanisms are emphasized: incentive 42 journal of small business strategy vol. 25 ● no. 2 ● 2015 compensation and governance structures (davis, schoorman, & donaldson, 1997; hillman & dalziel, 2003; jensen & meckling, 1976). the emphasis of this research, as it pertains to at, will focus on monitoring, being that monitoring the structure and composition of the boards of directors is a primary function marrying at and boards. here, stockholders can use boards of directors as a mechanism for monitoring executives (fama & jensen, 1983). many researchers (e.g., baysinger & butler, 1985; daily, 1995) have given preference toward independent outside directors to make up board composition in order to better satisfy the monitoring function. such a scheme suggests insiders would not act independently and therefore compose a board weaker in monitoring management whereas nonaffiliated directors provide stronger monitoring as the disincentive to monitor is removed (hillman & dalziel, 2003). although at is the most widely used theory when focusing on boards of directors (dalton, hitt, certo, & dalton, 2007; hillman, withers, & collins, 2009; johnson, daily, & ellstand, 1996; zahra & pearce, 1989), much of the at literature on boards of directors has undertaken samples of large public companies to analyze the monitoring mechanism (e.g., lane, cannella, & lubatkin, 1998; nyberg, fulmer, gerhart, & carpenter, 2010). however, this is not the boards’ only application, albeit perhaps being the most straightforward. boards can also monitor firms in smaller private organizations, a focal point of this paper. 2 institutional theory may indicate that boards are assembled to manage legitimacy (suchman, 1995). resource dependency theory and boards given firms work in an open and interacting environment (thompson, 1967), they are situated in a context full of uncertainty and interdependence (knight, 1921; macmillan & katz, 1992; pfeffer & salancik, 1978). it is here where managers have the ability and obligation to attempt to control for this uncertainty and to reduce various dependencies. gaining and maintaining power is focal to reducing dependency. emerson (1962) provided the groundwork for the concept of power dependence which was later applied in the organizational setting to control for resources (ulrich & barney, 1984). studying boards of directors through a rdt lens leads to great benefits and many studies have asserted that rdt has provided for a better understanding of boards through theoretical and empirical analysis2 including topics such as board size and composition (johnson et al., 1996; pfeffer, 1972). directors with access to various resources provide valuable impacts at the firms in which they sit (boyd, 1990). these resources are not onedimensional and in fact, can be broken down into a number of subcategories. pfeffer and salancik (1978) provide insight to the four primary ways in which directors add value to organizations. these include: advice, legitimacy, and access to information and resources. these categories, as applied to small and large firms will be further differentiated later in this manuscript. notably, more recent research follows this trend. hillman and colleagues developed a taxonomy also suggesting directors provide varying degrees of expertise and resources in rdt roles. (hillman, cannella, & paetzold, 2000). we note this importance and consider it to be subsumed under rdt in the present context. 43 journal of small business strategy vol. 25 ● no. 2 ● 2015 although some point out the limitations of rdt (casciaro & piskorski, 2005), it has stood the test of time providing a sociological theoretical underpinning and explaining a great deal in strategic management. the rdt presence in corporate governance is quickly approaching the prominent at perspective. while each theory provides a unique perspective, the collaboration of the two provides a more complete lens to view the role of the board of directors. rdt and at hillman and dalziel (2003) were seminal in integrating these theories as they pertain to corporate directors. they differentiate the two functions of corporate directors by underpinning the monitoring function in at and the provision of resources function in rdt. others have also more recently integrated these theories for various governance purposes. arthurs and colleagues (2009) focus on mitigating the agency and resource dependence challenges and examine governance mechanisms when firms enter the ipo stage based on their resource dependencies. amongst other conclusions, they find that when ventures are dependent on key entrepreneurs, firms seek directors with greater start-up experience and a higher level of contingent compensation (arthurs, busenitz, hoskisson, & johnson, 2009). by also integrating at and rdt, callen, klein, and tinkelman (2009) find that the theories are complementary yet address different components of nonprofit performance, but with the caveat that rdt produces stronger statistical results. this section is not to provide an entire literature review, but rather emphasize the seminal work of hillman and dalziel (2003), while also providing the work of like-minded scholars more recently merging these two theories with emphasis on corporate governance. this manuscript looks to follow suit in a similar integrative fashion yet in a different context with greatest emphasis toward small firm board composition recommendations. formal propositions firm size firm size is a dimension of the meta-analysis conducted by dalton and colleagues (1998). although they focus more specifically on the influence of the insider versus outsider board member, they explicitly note that firm size is important. through the lens of firm size, it is suggested that a larger firm would mask the impact that a board might have (dalton, daily, ellstand, & johnson, 1998; dalton & kesner, 1983). however, larger firms have great complexity and hence potentially greater uncertainty. under the rdt umbrella, this may increase the need for desired relationships to control for these complexities and uncertainties (zahra & pearce, 1989). in their meta-analysis (dalton et al., 1998), they continuously point to the complexities that arise in dealing with larger firms, not only from the rdt perspective, but also from an agency perspective as ceos may try to carefully control the information given to the board. smaller firms may provide boards with greater influence over the firm (in comparison to larger firms) (e.g., daily & dalton, 1993; eisenhardt & schoonhoven, 1990). accordingly, this might lead to more thorough monitoring and better utilization of provision of resources provided by the various directors. from the perspective of board contributions, this may lead smaller firms to more efficiently capitalize on resources as well as more readily adjust their strategies (dalton et al., 1998). interestingly, despite this potential for improving firm performance for smaller 44 journal of small business strategy vol. 25 ● no. 2 ● 2015 firm’s utilization of board members, little research has been conducted in this area (bennett & robson, 2004; kroll, walters, & le, 2007; nelson, 2003; ) and filatotchev and bishop (2002) allude to the potentially different governance structures based on firm size. small and large firms may face different competitive situations, dynamics, and needs from their board members. for the purposes of this paper, precisely defining small and large firms is not overly necessary. the present concern is directed toward the needs of small firms, and since they have been underrepresented in the studies on both governance and boards of directors, the aforementioned and following rationale will hopefully help to build some better practices for small businesses to consider when designing and creating their board of directors (or in some cases, board of advisors). board composition board member composition has been studied over multiple decades and has been intensely analyzed to find whether or not differences in composition impact various issues such as performance (e.g., baysinger & butler, 1985; boeker & goodstein, 1991; dalton, daily, johnson, & ellstand, 1999; zahra & pearce, 1989), ownership structure (kroll et al., 2007), bankruptcy (gales & kesner, 1994), and leadership structure (dalton et al., 1998) to name just a few. others have more specifically addressed issues within compositions such as the impact of outside directors (peng, 2004), balancing family influence (anderson & reeb, 2004), shareholder wealth and dividend policies (schellenger, wood, & tashakori, 1989) and so forth. however, because metaanalyses have shown unclear linkages between board composition and performance (dalton, et al., 1998), this may suggest the need to further incorporate moderating variables such as firm size in order to examine other contextual factors. many authors conclude that greater proportions of outside directors lead to more effective boards (lorsch & maciver, 1989; mizruchi, 1983; zahra & pearce, 1989), with the term effective implying some form of firm performance. this is a clear case of an at presence in that outside directors will better monitor ceo and/or top management teams through separating ownership and control (dalton et al., 1998). although stewardship theory is not a focus of this manuscript, there is also some support from this theory that in fact, inside directors would actually make for better board members (davis et al., 1997; kesner, 1988). sharing this news however is no way ground breaking and there have been many contradicting studies and little consistency with regard to board composition on firm performance (dalton et al., 1998). as identified by prior integrative models (zahra & pearce, 1989), composition also consists of more than just an inside/outside director comparison. size and minority representation are also common considerations. although there have been some differences addressed in prior research, the great breadth and depth of the various composition findings lead to the belief that composition is in fact important, and the board make-up will have an impact on monitoring and the provision of resources. while prior research has attempted to address board composition via outside versus inside members, one area of board composition worthy of further exploration is the differences stemming from gender. presently, there are no studies outlining these differences at the board member level despite the extensive literature base outlining differing levels of new venture start-up and resulting firm performance between women and men 45 journal of small business strategy vol. 25 ● no. 2 ● 2015 entrepreneurs (fairlie & robb, 2009; kelley, brush, greene, & litovsky, 2013; lerner & almor, 2002). by using gender as a lens to assess board composition, we offer insights into how the strategic planning and business experiences may shed further light on the human capital resource gap between women and men owners (fairlie & robb, 2009). effective strategic planning may be critical for newly created businesses and vital in the growth of existing firms (wiklund & shepherd, 2003). a dynamic planning process can play an important role in predicting firm performance (brinckmann, grichnik, & kapsa, 2010). in addition, prior research suggests that women invest in strategic planning to augment business performance (lerner & almor, 2002). while men also engage in strategic planning, the strategic focus of the planning efforts for women may be different than that for men (gibson, 2010). the planning horizon for women typically spans further into the future, when compared with that of men who are more short-term focused (sandberg, 2003). these differences in focus are likely to lead to differences in management values between men and women business owners (carter & cannon, 1992). for instance, men are more likely to measure the success of their strategies via quantitative measures such as profitability and market position, while women are more likely to measure the success of their strategies more qualitatively, such as personal satisfaction and customer service (van aueken, gaskill, & kao, 1993). as a result of these differences, the path to business success for female entrepreneurs is likely different than the path experienced by that of male entrepreneurs. bennett and robson (2004) noted that experience, advice, and expertise are consistently ranked as the top reasons board members are asked to serve. given this, forbes and milliken (1999) contend that these experiences shape executive perception. in other words, the decisions made by owners and board members alike, are shaped by one’s collective experience. a review of the literature has identified numerous differences between male and female entrepreneurs, but do these differences also transfer to the board room? we purport that the differences in experiences may lead to different cognitive perceptions for the board member and hence, do transfer. for example, female entrepreneurs have more difficulties with raising start-up capital (carter & cannon, 1992) and securing loans (verheul, risseeum, & bartelse, 2002). as a board member, a female with these experiences may be willing to risk less capital for business growth due to perceptions of capital availability. this risk aversion may lead to initially lower returns, however, robinson (2007) found that women owned businesses are less likely to end in bankruptcy, when compared with the businesses run by men. johnston (2013) offered support along this line of rationale and concluded that female entrepreneurs, in many instances, exhibit stronger ability in handling workplace pressures. we included a question in this section, “do these differences transfer to the board room?” cognitive behavior of any executive, including board members, is influenced by an individual’s experience. “modes of thinking are gender-specific” (rowley, lee, & lan, 2015: 206). given this journey, the experiences and expertise of the individual will be different for women than for men. therefore, the perceptions and cognitive behaviors that form the foundation of his or her cognitive processes will influence how an individual views and engages in monitoring 46 journal of small business strategy vol. 25 ● no. 2 ● 2015 and the provisioning of resources. in accordance with rdt, companies should select board members based on the individual’s ability to help address the company’s needs (valenti, mayfield, & luce, 2010). given the differences in female and male entrepreneurial experiences, we contend that small firms should consider gender, along with outside versus inside expertise when evaluating board composition. the composition of the board impacts the characteristics of board members (dalton et al., 1998; provan, 1980). relevant dimensions of board of director diversity can come in various forms such as education, training, and work experience (zald, 1969), as well as through interlocks (mizruchi & stearns, 1988), stakeholder positions (hillman, keim, & luce, 2001), political experience (hillman, 2005) and so forth. the characteristics that members possess have important implications regarding the capabilities which they may be able to offer a firm. as imagined, these characteristics can make a board more or less diverse and have been fairly well studied and synthesized over the course of the past few decades (dalton et al., 1998; johnson et al., 1996; zahra & pearce, 1989). these characteristics play a considerable role in accomplishing their responsibilities involving control, service, and resource dependence (johnson et al., 1996). various studies were conducted over the past four decades which helped to identify important board characteristics (vance, 1968) and beliefs and attitudes (norburn, 1986) that help to make them more successful (sonnenfeld, 2002). ultimately, many would argue that the characteristics may lie in their abilities to monitor and provide resources (hillman & dalziel, 2003). thus, as firms realize that individual members provide various skills, firms will likely attempt to attain properly diverse boards to utilize these varying strengths as pertaining to the firm needs. this is particularly important for smaller firms because they typically have fewer employees, a less diverse workforce, and fewer skills sets. however, creating diverse boards with a combination of inside and outside directors, men and women, and varying skill sets can help boards reduce this gap. additionally, empirical studies show that this diversity of board of directors is significant for the strategic planning of small firms (robinson, 1982). while the ceo of a large firm is tasked with the role of leading the firm’s enterprisewide strategy, small business owners are forced to deal with daily operational issues, and any planning that does occur is much more ad hoc. through the board, a small firm can formalize its planning process, allowing it to achieve better returns (ackelsberg & arlow, 1985). thus, the board of a small firm inherits some of the role traditionally performed by a top management team of large firms, in which, heterogeneity has shown to be positively related to firm performance (hambrick, cho, & chen, 1996). accordingly, we present the following proposition: proposition 1: in comparison to large firms, small firms can gain a greater and more impactful access to skills and resources through board member diversity. board functions as alluded to in the theoretical development, this manuscript adopts the perspective of hillman and dalziel (2003) in that boards take on two primary functions: monitoring through an at perspective or providing resources through the rdt perspective. however, why does it have to be either-or? as they (hillman & dalziel, 2003) eloquently integrated the theories, note that it doesn’t necessarily have 47 journal of small business strategy vol. 25 ● no. 2 ● 2015 to be either-or, but that the two theories can work together to provide a valuable alternative to the conflicting camps. others have also followed suit in integrating these two theories when it comes to governance (arthers et al., 2009) and boards (callen et al., 2009) which is also the lens this manuscript will pursue. the merger of these perspectives allows for an interesting interconnection between the two which better explains what may occur for boards at small firms. members with access to resources will not only provide the firm with at least some level of access to these resources, but these resources will also influence their capabilities for monitoring. that being, the essence of monitoring is integrated into the resources that these board members have at their fingertips. meaning, the two are not mutually exclusive albeit we can address them separately in the following sections. monitoring despite the interrelationship, these two functions may each have their own respective roles pertaining to firm size. monitoring is the mechanism to help reduce the agency problem. this is also often referred to as the control role (e.g., boyd, 1990; hillman, nicholson, & shropshire, 2008) and is a fundamental function of each board. each director is responsible for this at least to some extent. this function looks out for the various stakeholders whom can be separated into many different groups depending on the firm (shareholders, owners, etc.). because a primary function is to align the investor’s interests with that of the manager, incentive pay is often tied to manager compensation to better align interests between the two parties (garen, 1994). however, are differences in agency problems and monitoring mechanisms in large and small firms more similar or more different? monitoring relies heavily on the board of directors (e.g., hillman & dalziel, 2003). furthermore, in larger firms where there are likely more employees, managers, executives and so forth, the monitoring function increases in complexity as there is more personnel to oversee. additionally, ceos and managers are less likely to be owners in larger firms. conversely, the monitoring function differs in smaller firms due to the nature of their ownership structure. small firms are more likely to have hands-on owners (reynolds, 2004), have less disconnect between investors and owners due to small bank lending (jayaratne & wolken, 1999) and internal funding (hamilton & fox, 1998), have compensation plans naturally integrated into firm performance more comparable to other staff (tice, 2011), and finally, have fewer owners and managed by the owners. although agency costs are not fully removed in small firms (schulze, lubatkin, dino, & buchholtz, 2001), there are fewer principal-agent contracts to monitor in small firms. from this, the traditional monitoring role of the board is lessened, which allows the board of a small firm to focus on other strategic issues. proposition 2: monitoring functions will differ based on size of the firm such that monitoring will play a lesser role for boards of directors in smaller firms. furthermore, such monitoring plays a smaller collective role in smaller firms, the responsibilities of this function are in fact quite different for directors in small firms versus directors in large firms. for instance, because larger firms are more likely to be traded on various stock markets, monitoring directors who are more knowledgeable in 48 journal of small business strategy vol. 25 ● no. 2 ● 2015 finance and trading will have greater capabilities in monitoring (xie, davidson & dadalt, 2003). large firm board members who are more familiar of complex structures (e.g., through experience) will also have greater capabilities in monitoring the greater variety of c-level and upper management positions (kroll, walters, & wright, 2008). alternatively, director members of small firms may have greater monitoring capabilities if they are familiar with the industry in order to benchmark the managing position against that of other similar firms (rosenstein, 1988). furthermore, small firm board members familiar with general small business practices and principles will also provide greater monitoring capabilities to these sized firms due to their exposure and valuable experiences in similar capacities. accordingly, in addition to the greater collective focus on monitoring in large firms, board member specific capabilities may vary and the variance in these capabilities may better lend themselves to a certain firm size. proposition 3: firm size will moderate the relationship between member diversity and the monitoring demands such that large firms will place greater emphasis on finance and structure knowledge to monitor while small firms will place greater emphasis on industry and small business knowledge to monitor. board members are appointed for different reasons between small and large firms (coles, daniel, & naveen, 2012). the process is more formal in large firms where stock prices may react to the appointments (shivdasani & yermack, 1999); and are also more likely to be conducted based on outside recommendations separate from what the ceo and managers may desire (shivdasani & yermack, 1999). however, in a small firm, often the owner(s) who manages the firm assembles the board of directors (vesper, 1990). under these circumstances, boards for small firms are more likely to be tied to the owner which develops from a smaller circle of possible board members (mosakowski, 1998). they are likely chosen more for their provision of resources and less for the monitoring capabilities and thus we present the following proposition: proposition 4: small firm boards will have less autonomy over monitoring because directors will be more likely owner appointed. provisions of resources the provision of resources allows for board members to reduce uncertainty in the firm (pfeffer & salancik, 1978). resources provide firms with access to human capital and network capital. although perhaps not fully developed, rdt and boards have received notable attention. hillman and colleagues (2000) suggested the various roles could be broken down into insiders (e.g., firm knowledge), business experts (e.g., expertise on competition), support specialists (e.g., experience in law or banking), and community influentials (e.g., influence, power, legitimacy). (hillman et al., 2000). the combination of these resources can make board members very valuable to the firm. as mentioned, those board members with greater access to resources may also be networked and interlocked with other board members not only gaining the firm access to resources, but also providing board members with the knowledge to better monitor. whereas monitoring keeps activities in check, provision of resources can provide a whole new wealth of capabilities (arthurs et al., 2009). as monitoring was suggested to play a larger portion of the director activities in the 49 journal of small business strategy vol. 25 ● no. 2 ● 2015 larger firm, resource dependence roles may likely represent a greater role in smaller firms. proposition 5: the provision of resources function will differ based on size of the firm such that the provision of resources will play a larger role for boards of directors in smaller firms. all firms need access to resources but the following paragraph posits that smaller and larger firms will have much different needs from these resources. for example, a smaller firm might be very pleased to find out board member x is (or knows) a lawyer that could draft legal documents. this differs from large firm y which likely has internal corporate attorneys to draft such documents. in smaller firms, directors’ capabilities are sometimes used in lieu of recruiting full-time employees (bennett & robson, 2004). cost concerns (e.g., salary and benefits) and moving new associates down a learning curve to help them understand the business could be counterproductive to the business in the short term. hence, creating an opportunity for the director at a smaller firm to engage with the owner in operating the business alleviates this concern in the short-term. engaging in operating the business creates an additional demand on one’s time for smaller firm directors versus large firm directors, hence assisting the owner by “stewarding” for the business and providing skills and expertise. endless applicable examples could be listed, but providing readers with one should give an idea that although resources remain an important contribution made by board members, various resources and specifics about these resources will greatly differ based on the needs that the firm has as dependent on its size. based on the prior listed fundamental resource areas (hillman, et al., 2000), small firms will derive significant value from all four areas (e.g., insiders, business experts, support specials, and community influentials) whereas large firms are more concerned with emphasis on business experts (singh, terjesen, & vinnicombe, 2008) and community influence (huang, vodenska, wang, halvin, & stanley, 2011). proposition 6: firm size will moderate the relationship between member diversity and the resource demands such that there should be a greater emphasis on networks in large firms whereas well-rounded access to various resources in smaller firms. discussion small business makes up a great deal of the american economy (u. s. census bureau, 2012) and hence the implications for this type of research are important and widespread. with attention to board of director members and even boards of advisors, small firms can set themselves up to have better monitors and have access to great and pertinent resources in order to reach their potential whether that be profits, growth, market share, or goals (for non-profit small firms). the combination of these two functions will lead firms to achieve these varying goals. additionally, management may be positioned to make better strategic actions and decisions by better aligning boards through diversity and relevant experience. ultimately, addressing these needs will better prepare a small firm for success in comparison to other small firms that more arbitrarily (or less thoughtfully) develop their boards. in essence, comprehensive attention to these potential firm resources (monitoring ability and provisions of resources) can lead to better firm performance. this is not to overlook larger firms and the attentiveness they should give to selecting their board of directors. more so, to note that the selection of each member should be 50 journal of small business strategy vol. 25 ● no. 2 ● 2015 careful and in a manner that can help lead to better performance due to the differing needs of smaller firms. as we also mentioned, small firm board members receive much less (if any) compensation and thus the nature of acquiring talented individuals who can appropriately serve becomes a more challenging but worthwhile endeavor. therefore, all else equal, small firms which put forth the effort and successfully comprehensively capitalize on both their monitoring and resource provisions will have better performance over other small firms which do not. limitations and future research there are a few limitations that should be noted. first, as a theoretical piece, many of the propositions remain untested. though the suggestions are underpinned in prior research and theory, it is difficult to say what exactly would be the ideal board member and composition for small firms. secondly, due to the wealth of research conducted regarding boards, rdt, at, and firm size, as well as stewardship theory, it was not feasible to survey and include all of the literature. although this manuscript draws attention to differences in size, there is additional literature along with data that would have led to a more comprehensive study as to what small and large firm need from their boards of directors. relatedly, while it was convenient for us to consider firms as small or large, some limitations (as well as future research) exist due to our dichotomous rather than continuous frame of reference. these are our greatest limitations; admittedly, others are also likely to exist. future research could include a more comprehensive look at firm size (i.e., more than two groups). this might lead researchers to find fundamental differences at various levels rather than by simply distinguishing between small and large firms. for example, some studies trichotomize firm size (e.g., roza, van den bosch, & volberda, 2011), but even this procedure may not catch all of the possibilities and nuances. additionally, firm size may change over time as a firm evolves out of the start-up phase. it would be beneficial to know more about how board composition changes as firms grow, stabilize, or decline in size and if they conscientiously seek out different types of board members. our research suggests they should, but knowing more about the results when they do would be helpful to firms that are undergoing size fluctuation. second, testing these propositions could provide for empirical validity in addition to the prior theoretical rationale. to do so, one could likely obtain data on large firms through secondary data, such as the board analyst database. however, for the smaller firms, surveys or some other means of primary data collection would likely be necessary. broadly speaking, the board of director literature within corporate governance has given much greater emphasis to the large firm. it is now time for small firm board research to catch up. collecting data for the small firms is a necessary step in order for small businesses and entrepreneurs to have a better grasp on their needs from a board of directors or a board of advisors and a means in which they can find greater success. practical implications the concepts discussed in this manuscript should help lead to a better and more full understanding as to what a firm may need from their board members. the practical implications of this research may present greater advancement for small firms for it is at this level that the board member resources can be better tested in the future. as suggested, small firms may want to pay particularly close 51 journal of small business strategy vol. 25 ● no. 2 ● 2015 attention to the resources each member is able to provide. it is also at the small firm level where many of the board members are often affiliated with the owners which may impact monitoring. addressing these items and laying out what a small firm needs from their board of directors or board of advisors is critical. through appropriate planning, small firms may be accordingly provided with greater firm performance. conclusion in following suit with others (e.g., hillman & dalziel, 2003), the preceding content attempted to theoretically merge at and rdt as a means to distinguish between board of director functions and address the moderating effect of firm size. as argued, the function of monitoring and function of the provision of resources should be addressed differently based on firm size. lastly, it is suggested that meeting these demands could help provide for enhanced firm performance while calling more specific attention to small firms. it’s with hope that this work leads to the three 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(2003). aspiring for, and achieving growth: the moderating role of resources and opportunities*. journal of management studies, 40(8), 1919-1941. xie, b., davidson, w., & dadalt, p. (2003) earnings management and corporate governance: the role of the board and the audit committee. journal of corporate finance, 9, 295-316. zahra, s., & pearce ii, j. (1989). boards of directors and corporate financial performance: a review and integrative model. journal of management, 15(2), 291-334. zald, m. (1969). the power and functions of boards of directors: a theoretical synthesis. american journal of sociology, 75(1), 97-111. josh bendickson earned his ph.d. in strategic management from louisiana state university. josh’s research interests include strategic human capital, small business/entrepreneurship, and international 56 journal of small business strategy vol. 25 ● no. 2 ● 2015 strategy and he is a member of multiple professional organizations including the academy of management, the small business institute, and the united states association for small business and entrepreneurship. josh is currently employed as an assistant professor of management at east carolina university in greenville, north carolina. phillip e. davis is an assistant professor of management in the college of business at east carolina university. his teaching and research interest include strategy, capabilities, entrepreneurship, and small business management. birton cowden, ph.d. is the associate director of the berthiaume center for entrepreneurship and management faculty at the isenberg school of management umass amherst. his focus is on fostering the entrepreneurial mindset. dr. cowden’s research interests include international entrepreneurship, entrepreneurship pedagogy, entrepreneurial orientation, and small business success. dr. eric liguori is an entrepreneurial advocate, researcher, and educator on faculty in the university of tampa’s sykes college of business. dr. liguori researches primarily on the topics of entrepreneurial self-efficacy, entrepreneurship education, and entrepreneurial ecosystems 57 stxvtegf network catalysts to small businesses: a strategy for fragmented industries suzanne loker cornell university sl i 35@cornell. edu l. susan stark san francisco state university lsstark@sfsu. edu judy sasser-watkins regional training institute j watkins@4cd net abstract the catalyst roles played by the new york city's garment industry development corporation (gidc) and san francisco's garment 2000, two non-profit organizations providing services to ihe apparel industry, were analyzed using a network perspective. the networks of apparel businesses in the two cities were advanced by gidc and garment 2000 through their siructures and strategies, including building trust, providing easy entry and exit mechanisms to network members, offering dynamic programming, and establishing partnerships with other organizations serving the apparel industry. the loosely structured business networks in the apparel industry and other fragmented industries benefit from catalyst organizations that can increase communication across the memberships, identify and address needs of member businesses, and seek fundmg to supporr programs. implications for businesses that want to initiate catalyst organizations to serve small business networks in other industries are discussed. introduction business networks, networks within organizations, and personal use of networks or networking have been extensively discussed in the 1990's. small business or small firm networks are loosely organized groups of firms that interact, share information and contacts, cooperate, and reciprocate on a fairly stable basis (sydow, 1996).networks within and across large organizations are engaged as people repeat internal and external business transactions with the same people, such as interactions that arise between designers and production managers or when purchasing from a particular vendor. linkages up and down the supply chain are characteristic of both small and large business networks. entrepreneurs ]ust starting a business and young people fresh from college are advised to identify mentors, clients, and potential jobs to help them in their respective objectives, in other words, to network. 53 journal af small business strater0 val /4, no. i spring/summer 2003 some industries are more fragmented than others, that is, have many small busmesses with many supply chain levels resulting in less well defined supply chain relationships. these fragmented industries, such as apparel and service, are less likely to have stable, formal, structured business networks. indeed, by defimtion, the communication and inl'ormation sharing is fragmented. these industries may be helped by a catalyst organization that works on behalf of the fragmented business network membership. networks can result from interpersonal relationships founded outside or within a business context that build trust among the parties, often based on repeated interactions. the literature has highlighted the role of geographic proximity, shared resources, and shared needs as positive influences to business network development. the general goal of a regional business network, or industrial district, is for businesses to benefit from clustenng in location by sharing resources such as labor, information, and business services as well as vendors and customers. businesses that share input-output relationships, such as apparel cutting contractors, sewing contractors, and manufacturers, locate together to allow easy and frequent personal interactions that enhance the workforce and workplace opportunities for all businesses and promote the industry as a whole. networks can be informal without a clear accounting of members and activities or more formalized with membership directories, regular meetings, or by-laws. sometimes, established organizations that businesses have in common, such as trade associations, unions, or chambers of commerce, have a part in the initiation, development, or evolution of business networks, even to the extent of institutionalizing the network in the form of an independent, catalyst organization. the purpose of this paper is to analyze and compare the catalyst roles of two organizations from a network perspective: new york city's garment industry development corporation and san francisco's garment 2000. background the dynamic business network was described by miles and snow (1986) as a new organizational form compatible with the competitive environments of the 1980's. they outlined the building blocks of network theory to be vertical disaggregating of business functions, increased use of brokers, market mechanisms such as contracts for results, and information sharing across firms. the theory contended that the traditional functional business roles would be divided among a set of network members instead of within an individual firm. network members would have complementary relationships that encompassed a broad view of an industry and competitive relationships that focused on firm-specific productivity and profit. network theory has since been explored and extended by a number of researchers, including a focus on regional location and catalyst institutions. powell (1990) listed four characteristics of a network framework that distinguish a network's logic of exchange from either a hierarchy or economic motivated exchange. these were: i) cooperation along a horizontal exchange format, 2) open-ended membership allowing easy entry and exit, 3) supplier of efficient and rehable information, and 4) enhancement of the industry knowledge base and innovation through incentives for learning. these characteristics included social variables that were not always included in explanations of an exchange transaction. trust was identified by staber (1996) as a necessary social element of a business network as he explained "how a cluster of autonomous firms can be transformed into a community of trusting partners, willing to share scarce information in pursuit of innovative projects" (p. 168). the embeddedness concept focused on economic action embedded in social structure. granovetter (1985) initiated interest in embeddedness as an explanation for successful small 54 journal of sniall bnsbtess strategy fol. /4, no. l spring/summer 2003 firms operating without being absorbed by larger firms "because a dense network of social relations is overlaid on the business relations connecting such firms and reduces pressures for integration" (p. 507). uzzi (1997) extended granovetter's work by identifying four types of embeddedness (i.e., structural, cognitive, political, and cultural) and more fully developing the concept of structural embeddedness m a business network context. he emphasized the quality of social relationships in a network as the unit of analysis for embeddedness, the use of both arms'ength and embedded ties, and the desire for repeated transactions rather than single, maximum-profit transactions. using the new york apparel industry as an illustrative example, uzzi (1996; 1997) argued that structural embeddedness could explain the effectiveness of networks in environments where i) time was an important venable, 2) there were low barriers to entry, and 3) many substitutable shops were available. he evaluated the structure and quality of social ties among firms in analyzing the success of nyc apparel contractors through interviews of manufacturers and contractors and union records. he concluded that embeddedness was used as a logic of exchange that contrasted to market logic and that resulted in economies of time, integrative agreenients, allocation efficiency, and complex adaptations. however, he cautioned that there was a threshold where too much social embeddedness combined with external shocks could cause negative economic effects. for example, excessive embeddedness with network members without a continuous monitoring of the market place could create a false security that all was stable and going well when, in fact, innovations and new approaches were emerging that had major effects on network members'usinesses and the industry. uzzi (1996) defined network "go-betweens" as individuals who facilitated two parties working together when the parties were known to the go-between but not to each other. the connection was based on trust, fine-grained information (that is, detailed or specialized), and eventually resulted in joint problem solving arrangements. an institution as well as an individual could serve as a network go-between. staber (1996) described an increasing need for institutional infrastructures that facilitated business networks while limiting opportunistic behaviors among the members. piore and sabel (1984) used the network perspective in developing the concept of flexible specialization as a strategic business choice. flexible specialization required an inter-firm dependence often coordinated by a collective institution, such as a trade union, where each firm could specialize on its best product or process and flexibly offer it in coordination with the other network members. piore and sabel used the italian textile industry as an example of a successful regional business network using flexible specialization through technology innovation, a sense of community, and trust. lazerson (1995) extended the illustrative example, analyzing the network structure of the italian knitwear industry near modena. he concluded that technology, marketing, cohesive family units, and relationships among businesses, communities, and institutions contributed to the network's success. others (uzzi, 1996, 1997; waldinger, 1986; rantisi, 2002; and kaan, 2001) studied new york city' apparel industry using a network perspective to explain'he close proximity of design, production, and retail functions, and use of personal and business networks. 'he concepts of flexible specialization, industrial district (or regional business networks), and a network catalyst institution have been applied to other industries and locations, including the high-tech indusny in silicon valley (saxenian, 1994) and the automotive industry in baden wurttemberg region of germany (cook & morgan, 1990). this paper evaluates the catalyst roles that two non-profit institutions, the garment industry development corporation and garment 2000, have played in the apparel industry in new york city and san francisco by developing and extending business network relationships to new participants and markets. data acquired through interviews, reports about the 55 lournal ofsmall business sirniegy vol. 14, iyo. i spring/summer 2003 organizations, and first-hand knowledge based on authors'ork with the organizations were analyzed using powell's framework of network characteristics and vzzi's work on network embeddedness and the role of go-between or catalyst organizations. apparel industry networks in new york city and san francisco new york city's garment industry development corporation (gidc) new york's garment district has long been considered the center of fashion and the apparel industry in new york. defined as the section of manhattan island between fifth and ninth avenues and 23rd and 35 streets, the garment district is organized by product type and price points. whole buildings house business competitors, for example, manufacturers of women's dresses that retail at $ 100-200. in the past several decades, however, apparel production, and fabric, trim, equipment, and service suppliers have moved to other city locations, such as chinatown, queens, brooklyn, and the bronx. many innovative young designers are currently clustered in the lower east side. housing over 4000 apparel production shops and employing over 87,000 workers in the manufacturing sector even after decades of decreasing employment (u.s. census bureau, 2000), new york city's five boroughs have hosted the dominant cluster of apparel design and innovation, manufacturing, and retail business headquarters since world war ii. new york city's garment industry development corporation (gidc) was created and initially funded in 1984 by the city, union, and several garment industry trade associations to advance the new york city (nyc) apparel industry. it served as a catalyst organization to the nyc apparel industry, addressing the needs of the many small production firms located throughout the city's five boroughs that were driven by fashion change. citywide geographic proximity of businesses was long established but at risk as international trade policies and changing relationships between manufacturers and retailers were sending apparel production off-shore to countries with plentiful low wage labor. as the largest manufacturing sector remaining in nyc, the apparel industry provided jobs for many unskilled workers, often new immigrants, and gidc was founded in an effort to keep these jobs in new york city. san francisco's garment 2000 california had the largest apparel worker population nationally in the 1990's while new york was second. san francisco's apparel industry spanned nine counties that touch the san francisco bay: san francisco, san mateo, alameda, marin, sonoma, solano, napa, santa clara, and costa contra. in 1996, there were approximately 330 to 400 manufacturers, contractors, and subcontractors that supported over 25,000 workers, 14,500 of whom were located in the county of san francisco (schiorring & stark, 1997). for the remainder of this analysis, the entire bay area apparel industry will be referred to as san francisco. los angeles had an even larger cluster of apparel manufacturers, 4,085, with an additional 315 in neighboring counties, and supported 115,000 workers (schiorring & stark, 1997). only san francisco area businesses were served by garment 2000. the apparel industry in san francisco did not have a central location. at one time chinatown held a large number of contractor shops, but due to its proximity to an expensive real estate market driven in part by the dot.corn frenzy of the late 1990's, many shops moved to the south side in the market/portrero area. according to a study by stark & rabolt (1997), 81 percent of the typical sewing machine operators in san francisco were women and 90 percent were chinese. less than 21 percent spoke english fluently. as with new york city, the apparel manufacturing industry offered employment for immigrants who were likely to speak english as a second language (esl) and were relatively unskilled. 56 journo/ of smell /3usiness sn'oiegv vo/. /4, no. / spring/summer 2003 san francisco's garment 2000 was formed in 1994 in response to labor law violations in the apparel industry. modeled after gidc's collaborative structure, it ivas a partnership formed by stakeholders including the city college of san francisco (ccsf), the u.s. department of labor, the san francisco mayor's office, the umon of needletrades industrial and textile employees (unite), the san francisco fashion industries, and local manufacturers and contractors. its funding came from the federal government and independent foundations. a sister project san francisco center for applied competitive technologies (sfcact) was one of twelve regional sites of a statewide manufacturing initiative in california. the sfcact was the only state site that worked with the apparel industry and its expertise ivas often lent out to other regions. garment 2000 and sfcact programs, staffing, and clients overlapped. for the rest of this analysis, discussion of garment 2000 will include programs and networks of both garment 2000 and sfcact. garment 2000's mission was to reposition the local apparel industry m a way that would enable small and medium sized apparel producers to compete in the 'global economy. san francisco manufacturers and contractors faced the same problems as new york based manufacturers: modifications of mtemational trade policies, changing relationships between manufacturers and retailers, low-skilled workers without transferable skills, an ever changing fashion product, and no central point for knowledge exchange. a production manager with koret in california described the environment (personal communication, 1999), "there was an important need to refine the way we did business in the apparel industry in san francisco because of increasing pressure from global competition. garment 2000 provided contractors with expertise in use of current technology and manufacturing systems." as was gidc's, garment 2000's strategy was to shift production away from high volume manufacturing and toward higher-value, higher-quality manufacturing. this was accomplished by developing training activities to upgrade both workforce and workplace through the introduction of new production processes and information technologies (schiorring & stark, 1997). using the concept of embeddedness and a network analysis perspective, the catalyst roles played by gidc in nyc's apparel industry and garment 2000 in san francisco's apparel industry were examined and compared to provide a model for other industries. the evaluation focused on initiation and oversight by industry stakeholders, organizational structures, and dynamic programming. catalyst roles building trust neither new york city nor san francisco apparel manufacturers and contractors had a history of trust with each other. so, the initial structures and collaborative funding of gidc and garment 2000 were designed to build trust among the stakeholders of the apparel industry (see table i). the union (now unite) represented its workers on the boards, the trade associations represented its business members, and the city governments worked toward the economic interest of keeping industry jobs in new york city and san francisco. unite provided initial and on-going financial support to gidc through the american council for american fashion, but garment 2000 received no funding i'rom unite. through collective bargaining, unite had a clause in its new york city contracts requiring employers to contribute i/10 of one percent of payroll in this development fund managed by unite. the varying financial support of unite was indicative of the differing union membership in the two regions. approximately 50 percent of new york city apparel shops were unionized compared to the less than five percent unionized shops in san francisco. 57 jvttrttal ofsaiall business strategy fiil. l4, no. i spring/summer 2003 table i: program category-initial program issue comparison of garment industry development corporation and garment 2000 filllilliia prograni r date partners audience program goalssource gidc 1984 ncw york city contractors sell affordable garment district condominiums to building purchase contractors in chinatown real estate study 2001 new york union, understand changes industrial policy in real estate market rctcntion network makers in the garment district garment dol 1995 department of apparel expand skills tk 2000 agilf. 1995 labor; oflice contractors technical expertise lcvi's city college of sf scc notes i'or full name of funding sources from table i it is noted that gidc and garment 2000 initiated their programs due to very different reasons. gidc's funding was developed from real estate collectives while garment 2000 was developed in an anempt to refurbish a dying industry. gidc defined itself as a representative of the stakeholders with a mission to support the apparel industry at a time of escalating rents, decreasing employment numbers, and pricedriven orders. its first program focused on real estate prices, purchasing a building in chinatown to divide into condominiums for sale to apparel contractors. business owners reaped a direct benefit from this program —a benefit that required a financial contribution and rezoning by the city and that would not have happened without gidc's vision and catalyst role to the apparel business network. in san francisco in 1992, compliance with the u.s. government's regulations concerning overtime, child labor, safety regulations, homework, worker's compensation, communication issues to workers, and rate of wages was problematic. in direct response, the department of i.abor initiated a dialog among a small group of san francisco manufacturers, contractors, and existing trade organizations resulting in the 1994 master agreement articulating the need for garment 2000. in this voluntary agreement, both contractors and manufacturers agreed to a price, but they had the ability to renegotiate the price if something was not acceptable once the sewing began. compliance increased dramatically from 12 percent in 1992 to 36 percent in 1993, and 61 percent in 1995 (chin, 1995), an indication of the proactive role played by garment 2000. monthly meeting of its stakeholders established initial trust in garment 2000's catalyst role through active dialog among its members and knowledge of its activities. location was used to build trust in apparel industry networks through gidc and garment 2000. gidc was located in a building owned by the union right across seventh avenue from the fashion institute of technology (fit) and garment 2000 at city college of san francisco (ccfs). these were familiar territories and in close proximity to many of the businesses in the networks. gidc training courses were first offered at fit and the nearby fashion industry high school, establishing useful and visible connections with new york' well-known industry-focused educational institutions. at the time, garment 2000 worked closely with ccsf and san francisco state university in curriculum development to connect the non-credit and credit-bearing opportunities for industry workers. locating training at these institutions with excellent reputations for fashion industry-related education gave credibility to gidc and garment 2000 programs. 58 i journal of small business strategy vol. /4, no. l spring/suiinner 2003 in 1998, gidc opened the fashion industry modernization center, a training facility, in chinatoivn where many unionized apparel contract firms still resided. garment 2000's teaching lactory, institute of design and education in apparel (idea) was developed at ccsf in 1999. millions ol'ollars of equipment and software donated by the industry to be used at both facilities and were used in training programs and expositions to improve the skills of industry workers and competitiveness of local businesses. again, location proved to be advantageous to the trust-building role of gidc and garment 2000 among business'embers as well as other industry stakeholders. deliberate staffing decisions increased trust as well. most gidc employees had industry experience. chinese-speaking and spanish-speaking employees were hired by gidc to facilitate easy, communication with the industry's dominant ethnic groups and between business owners and workers. some instructors also taught at fit. similarly, garment 2000 increased trust through staffing decisions, hiring a director who was a retired union contractor, was of chinese descent, and had strong connections in the san francisco apparel indusny. the director contacted and hired trainers, educators, and specialists with industry experience and connections to its immigrant populations to develop and deliver industrydriven curriculum that supported changes in the apparel manufacturing environment. easy entry and exit although gidc and garment 2000 were formal in structure and operation, the business networks of apparel producers that were represented by gidc and garment 2000 were very loosely structured. indeed, at any given time it would be difficult for gidc or garment 2000, the union, trade associations, or other businesses to list the networks'embership. as powell (1990) argued, easy entry and exit from a network was an advantage and a significant difference from most hierarchical organizations. it was up to the businesses when and whether to connect with other network members or gidc and garment 2000. although this loose structure made it diaicult to offer and evaluate services, it also made the networks and the catalyst roles of gidc and garment 2000 less confining, more hke a web than an organizational chart. as uzzi (1996; 1997) described, unique and accessible opportunities were provided to network members through the embeddedness of the catalyst organizations rather than through connections among its individual members. dynamic programming the gidc and garment 2000 program offerings are presented in four categories with date of initiation, audience, and goal (see tables 2-5): n traming ~ technical assistance research, information analysis, and dissemination n market development. while gidc's initial services focused on real estate and garment 2000's on compliance, training for displaced and incumbent workers, supervisors, and business owners quickly became standard program offerings of both organizations. both organizations first focused on unemployed workers who had some sewing skills in the super sewer program. the funding. agency required that prospective students were collecting unemployment compensation and that job placement and retention record systems be part of the program. over a five-year period, gidc trained 574 dislocated workers and placed 70-80% (garment industry development corporation, new york city, 1994). a more recent study conducted by the aspen institute (zandniapur & conway, 2001), found that there was a 9% increase in average 59 drturnal ofstmrll business strategv vol. i4, no. i spring/sumnrer 2003 individual earnings for workers participating in gidc programs and that 88% of the respondents were employed at some point in the 12 months after gidc training. these evaluation data confirmed the successful role gidc played in providing skilled workers for the industry. over the years and with the opening of the fashion industry modernizatton center and idea, the training programs of gidc and garment 2000 included more courses and advanced courses for sewing machine operators, pattern makers, supervisors, and managers to competitively position the nyc industry on the basis of quality and production time. table 2: program category-training comparison of garment industry development corporation and garment 2000 funding program progrant t date partners audiencesource goals gidc super scwcrs jtpa, cwe consortium for unemployed expand sewing worker education, apparel production skills, esl, unite workers health and safety production nys, usdol, unite local incumbent workers cutting & cwe, nyc 10 pressing machine nys, usdol, greater blouse, apparel expand mechanics cwe, nyc skin and contractors &. machine repair undergarment incumbent workers skills association supervisory nys, usdol, supervisory improve skills skills cwe, nyc personnel pattern making nys, usdol, incumbent workers career step cwe, nyc grading & nys, usdol, incumbent workers career step marker making cwe, nyc computer nys, usdol, 1998 apparel computenze courses for cwe, nyc contractors and operations managers managers work skills 1998 incumbent workers increase standards ponability of skills and career planning garment 2000 super sewers manex-mep 1996 unemployed expand sewing apparel production skills workers super incumbent workers incumbent workers career advance supervisors machine mocd 1996 juki apparel expand repair contractors & machine repair incumbent workers skills supervisory mocd 1996 incumbent workers prepare for skills levi' supervision career step work skill dol 1997 dol managers efficiencies standards 1998 (table continued on next page) 60 journal of small business strategy val. id, na. i spring/summer 2003 funding programprogram i date partners audiencesource goals sewing aacc award 1997 incumbent workers career step operators levi' 1996 dol 1996 grading & jdif 2000 gerber incumbent workers career step marker making computer c act 1997 sfsu apparel computerized courses for dol 1999 contractors and operations; managers jdif 2001 managers, students improve . eaiciency total quality dol 1995 gerber contractors improve mgn. cact 1998 eaiciency entrepreneurial cact 1998 gerber new businesses enter new 1999 juki business see notes for full name of funding sources. both of rhese hu'riatives developed training programs for the apparel industry workers and students, including skill upgrading for the sewers and supervisors of the sewers, grading and nrarker making, computer courses for nranagers, sewing machine mechanics and repair, and english as a second language. in addition gidc a/fered training in pattern making and production cutting and pressing, while garment 2000 overed training in areas indirectly related ia the floor sewing operations: quagiy nianagemeni, entrepreneurial develapmeni, and some international training. both gidc and garment 2000 training programs addressed methods of improving production efficiencies and improving operator skills through technical, communication, and teamwork skills. they also encouraged entrepreneurs and start-up companies as illustrated by an assessment of a private label contractor, "the value of gidc to small businesses that can become isolated is to bring thinking to confirm or negate their own thinking. gidc helps me move forward. i would still be here without it, but not so advanced 'or efficient" (personal communication, february 24, 1999). garment 2000's incubator program provided space, support in conducting marketing research, and assistance in developing apparel samples to new design/manufacturers at its idea teaching factory.—one entrepreneur user expressed appreciation, "this opportunity made our small company realize challenges and we were able to overcome some pretty scary obstacles" (personal communication, 1999). communication with network members is an ongoing challenge due to the fragmented nature of the industry, the small size and continuous entry and exit of businesses in the industry, as well as the flexibility required to address the training needs of these network members. another gidc network member (personal communication, february 24, 1999) confirmed how diaicult it was to keep in touch with the members of the apparel industry business network, "[gidc] could do a better job with getting newsletters and course announcements out to people in a timely manner. newsletters sometimes come after an event has happened and course announcement notices are sporadic." on-site technical advice and training was introduced at gidc in 1998 in collaboration with the federally funded, nyc manufacturing extension program, industrial technology assistance corporation (itac) (see table 3). itac targeted five industries in new york city, including apparel, for assessment and contracting of services. gidc was hired as the service provider for the apparel industry and it conducted on-site training for workers and managers using one-on-one and train-the-trainer approaches. the san francisco center for applied competitive technologies (sfcact) offered on-site technical assistance similar to 61 journal of small business straiegv voh ld, nv. l spring/strrrrrnrr 2003 itac though it was funded by thc state of california rather than federally. garmen'f 2000 also initially offered free on-site consultation, but moved to a fee-for-service structure. while most of the businesses used the advice to make changes, others seemed to use the technical expert as an extra worker. the shit't in structure helped to eliminate this misappropriation of services. table gn program category-technical assistance coniparison of garment industry development corporation and garment 2000 program funding date partners audience program goals source'idc on-site training nys, nyc, unite apparel contractors, improve production uniteicouncil incumbent workers cfficicncy for american fashion on-site ni st itac apparel contractors improve production training —itac & incumbent process eaiciency contmct workers on-site training alfred p. sloan 2000 [tc] apparel contractors introduce modular [tc] i gidc foundation & incumbent manufacturing protect workers garment 2000 on-site training cact 1999 apparel improve production dol 1995 contractors efficiency mocd 1996 on site 1995+ sf sewing contractors & introduce modular demonstration association manufacturers manufacturing costing video dol 1998 contractors & improve eaiciencies manufacturers see notes for full name of funding sources. bath pragraais offered both on-sire and aff si te technical assistance ta their cli eais. information gathering and trend analysis was another service offered by gidc and garment 2000. reports were disseminated widely to help businesses and outside agencies understand industry successes and challenges and its contributions to the economic and social environment. in addition to commissioned studies, gidc and garment 2000 cooperated with studies conducted by other agencies in which their organizations were highlighted. for example. the aspen institute analyzed gidc for its sectoral employment development achievements along with five other sectoral employment development organizations (zandniapour & conway, 2001; conway & loker, 1999) and the wellness foundation (schiorring & stark, 1997) funded research to consider the viability of the made by the bay program to promote specific contractors in san francisco. the business networks gained insights from these objective analyses and the networks'tories and needs were disseminated to new audiences that could result in additional funding, partnerships, or advantageous public policies. another form of evaluation came from participation in research and demonstration projects, such as the u.s. department of labor-funded projects for gidc and garment 2000 on work skill standards for high performance manufacturing and the gidc/[tc] (textiles i clothing technology corporation) project on modular manufacturing funded by the alfred p. sloan foundation (see table 4). in all of these, curricular strategies and materials were 62 jvttrnal of sniatt business strategv vot. /4, no. i spring/summer 2003 developed and applied in training programs and on-site training and final reports were disseminated to fundmg agencies and their mailing hsts. these participations produced positive results for gidc and garment 2000 networks and network members while serving as models for other business networks. table ah program category-research, information analysis & dissemination comparison of carment industry development corporation and garment 2000 fundingpfogralll date partners audience program goals source'idc keeping new york 1992 report state of in fashion fashion industry child care study 1991 city, industry, policy statement union to improve child care for workers employer nccds industry identify needs of study local firms buyer needs study women's industry identify patterns wein daily of buymg trips to nyc gidc: a case ford 1999 aspen institute foundations, present gi dc as study of a sectoral foundation, policy makers, model for employment mott stakeholders, employment development foundation, training providers development approach a.e. casey foundation thc garment unite 2001 new york union, policy report state of ccntcr: still in industrial makers fashion fashion retention occupancy in network garment district garment 2 0 0 0 newsletter dol 1995+ contractors & disseminate manufacturers information marketing video mocd 1998+ contractors disseminate development information strategic plan wellness 1997 sfsu, u of cindustry develop a foundation berkeley consortium strategic plan skill standards dol '000 dol dol prepare skill rcport standards for the industry see notes for full name of funding sources. research was essential to both programs to keep pace with the needs of the community and to keep the conimunity aware of the training availabi lity. the goal of market development programs at gidc and garment 2000 was to increase the amount of production work completed in new york city and san francisco (see table 5). gidc's sourcing center connected apparel contractors with manufacturers and retailers that were looking for assembly or other production services. in collaboration with the fashion . center, the business industry district (bid) for the nyc garment district, the new york fashion international program (nyfi) promoted new york's image as a fashion center while helping businesses export internationally, a new endeavor for most. the recent made-in-new 63 dorrrrra/ of sniall bnsi ness srrategy vo/. /4, no. / spring/srnmner 2003 york label program and gidc's role in encouraging the production of new york city, state, and department of defense uniforms in nys apparel shops were opportunities to promote the business network of apparel producers while bringing work to them. made by the bay was initially funded by an industry driven regional collaborative (idrc) grant issued through the state chancellor's office and managed and monitored by garment 2000. made by the bay promoted member apparel contractors located in the nine-county region but ceased to exist when its funding was depleted. table 5: program category-market development comparison of garment industry development corporation and garment 2000 program funding i date partners audience program goalssource gidc new york fashion usdoc, 1991 fashion new york increase market international unite/council center manufacturers for nyc (nyfi) i'or american apparel fashion sourcing center nys, nyc, contractors, increase nyc unite/co un c i i manufacturers apparel for american production fashion made-in-new nys 2000 unite contractors, increase nyc york label manufacturers apparel production domestic uniforms national 2002 contractors, increase nyc network of manufacturers apparel sector partners production garment 2000 idrc 1998 apparel apparel increase market made by the bay contractors contractors for apparel see notes for full name of funding sources. g/dc and ga rmfnt 2000 initiated marketmg campaigns io be used by rhe manufacturers and contractors to lrelp increase nrarketmg or apparel production with varyrng levels of srrccess m a declinrng apparel nulusrry. partnerships with other industry institutions a catalyst institution representing a business network was positioned to interact with other interested institutions. in the case of gidc, this meant the union, trade associations, city/state/federal government as well as itac and the fashion center. in the case of garment 2000, this meant ccsf and made by the bay. for both gidc and garment 2000, partnerships were also made with large supplier businesses that might have a stake in the machinery in the fashion industry modernization center and idea teaching factory such as gerber and juki. partnerships were also made with community colleges and four-year universities, other new york and california organizations supporting the apparel industry, manufacturing extension programs, and city/state/federal government oflices. in the fragmented apparel industry, partnerships were easier to establish and nurture with a centralized institution than with independent small business owners. 64 journo( of senal! business siroregy vol. /4. jvo. i spring/sununer 2003 challenges although there were many advantages to loosely structured networks with easy exit and entry, inlormal memberships presented some challenges. for both gidc and garment 2000, one major challenge was to identit'y small, mdependent businesses that might be interested in their programs, encourage their participation, and assess their needs. it was much easier to recognize the need for change than to convince a business person that attending a class, welcoming on-site traimng, or buying a new piece of equipment was more important than the immediate crises of workers quitting, machine breakdowns, acquiring new work, and paying bills. a gidc network member commented (personal communication, february 24, 1999), "the problem is that so many firms need to access, but few choose to access due to time, fear of competition because they know something that another doesn', resistance to change, maybe marketing of programs." recruitment of new students and identification of firms tha't would commit time and money to gain long-term advantages never ended and was discouraging to the gidc and garment 2000 staff. courses with enrollment minimums made planning and staffing decisions difficult. gidc provided names of potential workers to prospective employers every day as the turnover rate for industry production employees was high. providing matching services such as the sourcing center was extremely difficult in an industry where, on the one hand, firms went into and out of business every day and, on the other, some firms had the same customers today as in 1950 and were not accustomed to using such services. even encouraging manufacturers to explore new opportunities such as international export was sometimes discouraging to network catalysts as the return on investments m such endeavors might not be realized by the businesses for years. some network members became dependent on a central organizing institution for the network, 'such as gidc or garment 2000, and the central organizing institutions worked more closely with firms that were well known to them instead of continually increasing in scope. just as uzzi (1997) argued that there was a threshold at which individual businesses were to'o dependent on the network and neglected other activities to promote their businesses, some apparel industry network members became too dependent upon gidc or garment 2000. for example, a production manager member of garment 2000 lamented, "i wish you were here all the time. it's good to bounce ideas back and forth. you give me the courage to try new ideas" (personal communication, 1998). as the industry evolves with con'tractors, manufacturers, hnd retailers taking new roles, gidc and garment 2000 must continuously redefine constituencies and programs so as not to become over-embedded by focusing'on the same firms. in oitering educational programs and connecting producers to customers, gidc and garment 2000 must balance their catalyst roles to assure a certain level of independence for their business network members and to constantly interact with a range of old, new, and potential network members for accurate assessment of the industry environmerit. acquiring on-going funding was also challenging. gidc and garment 2000 were increasingly successful at competing for city, state, federal, and foundation funding, but this funding brought other considerations. for example, the funding requirements of gidc's super sewers were changed by the sponsor in 2000, putting the program's future in question. gidc and garment 2000 both received primary funding through state programs and were affected by changes in the political environment. some other funding was for short-term 'projects that had very specific objectives, such as the work skill standards projects, that may or may not be in alignment with the organization's central goals. partnerships with other organizations had the same potential as short-term projects to dilute progress toward the 65 journal ofsinall business siraiegy vol. /4, no. l spring/suiiirner 2003 central goals of gidc and garment 2000 and could benefit only a few firms or a few employees in the networks. 1'he close relationship between gidc and the union, unite, and the initial focus on unionized shops was also problematic. i'unding from state and federal sources required gidc to serve all apparel shops, union or not. with its historic connection to the union, building trust with a broader mission was challenging. in addition, the number of unionized shops in nyc, was decreasing and, therefore, receipts trom the union to i'und gidc were also decreasing. the small percentage of unionized shops in san francisco and the lack of financial support from unite made the relationship between garmen1'000 and unite less influential. manufacturers were becoming more concerned with in-house design, merchandising, and distribution and more likely to contract out production while retailers were taking on similar roles with their private label business in the early 2000's. consequently, a new challenge for gidc and garment 2000 was developing relationships with retailers without jeopardizing older relationships with manufacturers. if accomplished strategically, the pool of members for the apparel industry's network of businesses represented by gidc and garment 2000 could expand considerably. growth in funding and programming could follow. external influences alfected apparel businesses as trade policies and retail consolidations increased off-shore production activity. the attacks on the world trade center were particularly devastating to new york's apparel industry due to its location in lower manhattan and the lack of consumer spending in the aftermath. these changing environments challenged apparel manufacturers and contractors and the catalyst organizations that represented them to identify and implement strategies that enhanced the competitiveness of the domestic industry. gidc, garment 2000, and other network catalyst organizations must be dynamic, flexible, and ever evolving to address the future needs of an industry as fragmented and volatile as the apparel industry. creating partnerships with a variety of organizations and government agencies (city, state, and federal) seemed to be a successful strategy to address these external influences than gidc or garmen1'000 on their own. the focus on both supplyand demand-side programs of gidc and garment 2000, such as upgrading career ladders in low-skilled jobs (supply) and expanding markets for the nyc and san francisco apparel industries (demand), ultimately strengthened the entire industry and individual businesses. innovative approaches to production and distribution such as contractor alliances to offer full-package services (i.e., design, fabric purchase, patterns, assembly, and delivery) should be encouraged through training opportunities and communication among network members. one such example of a contractor alliance in nyc sold the work of six to eight contractors, each with a different specialty (e.g. pants, dresses, blouses, etc.). the alliance provided customers one-stop service for a variety of garment types rather than separate orders with multiple contractors. the contractors offered their products independently as well (kaan, 2001). an educational gidc stakeholder described (personal communication, february 25, 1999), "a good contractor has to be very flexible, to make a variety of product —have to invest in equipment to do this. contractors aren't known for being strategic. they have to develop a capacity for selling themselves. need to do more than sit and wait for orders. the [gidc] sourcing center is a key thing here. gidc's equipment shows also meet a strong need here." discussion and implications gidc and garment 2000 can serve as models for developing catalyst organizations in other geographical areas, industry sectors, or small business networks. by building trust in the 66 journo/ of sniall bnsi ness strategy vo/. /4, no. / spring/summer 2003 catalyst orgamzations rather than in individual members, the networks can operate efficiently across large, loosely structured, and fragmented memberships. catalyst organizations can provide clearinghouse services for network members, collecting information to understand what members are experiencing and providing industry trend information to its members. catalyst organizations can develop strategic partnerships with other organizations interested in the success of businesses in specific networks in order to jointly identify problems, evaluate possible solutions, and seek funding for programs. what imlustries wouk/ benefit frotn caralyst organizations? industries with low skilled. workers, with family and friendship relationships that drive business relationships, with fragmented supply chains, and with regional specializations may find a network catalyst'rganization particularly helpful. the low skilled labor needs of industries such as apparel, construction, service, warehousing, daycare, and other health services pose special problems due to structural issues —low wages, dominance of unionized shops, and lack of advancement opportunities —and labor pool issues —educational level, language barriers, and lack of work experience. when business in the industry sector was traditionally established through. friendships and family relationships, assistance may be needed to establish and support new business networks.'ndustries with fragmented supply chains need some centralizing structures to support the various functions of the small business members. locating near to others in the industry supply chain can provide easy access, but communication may still be difficult without a centralizing catalyst organization. the need for proximate location may grow less as virtual networks develop using technology, but these industries are traditionally slow adopters of technology. catalyst organizations can address the needs of workers through education and training programs while also promoting communication and establishing a broad view of the industry for its members, suppliers, and customers. how would small businesses or communities initiate a catalyst organization? it is important to start small and focus your efforts, establish partnerships with other organizations for building trust and credibility, and address both labor supply and customer demand issues. the first step is to define a broad, enduring mission for the catalyst organization. the mission should not change every few years, though particular program objectives may change frequently. the mission should clarify for network members, customers, and other organizations what the catalyst organization stands for and hopes to achieve. flexibility in structure and process must be continually evaluated based on the changing industry and external forces that influence it. catalyst organizations have the responsibility to provide embeddedness for their network members, but not too much. some participation is desirable for all members and programs offered by the catalyst organizations should be diverse to address the needs of all sizes and shapes of business members. on the other hand, members should be selective in their participation so as not to become too dependent on the catalyst organizations. the organizational structure should allow members to choose the types and level of participation as well as easy entry and exit to any or all services. communication from the organization should be continuous and communication from its members encouraged in a variety of ways. the five categories of programs described in this paper —initial program issue, training, technical assistance, research/information analysis/dissemination, and market developmentcan serve as an outline for developing the programs for a new catalyst organization. the initial program issue should be the starting point for programming, support the organization's mission, but may not be a long-term goal. gidc's initial issue was high rents and its solution was offering lower rents in a building it purchased. this issue launched the catalyst organization but is not its emphasis 18 years later. choosing the right initial issue that addresses the current needs of the business network is very important but not necessarily self67 journa/ of suuill business stra/cgy vo/. /4, no. / spring/sununcr 2003 evident. lengthy discussions with potential network members about their current needs or problems should be conducted. then, network members and partners should brainstorm to develop creative solutions. these potential initial issues should be tested for mission relevancy aml one selected. other programs should be added as needs and funding become available, but care should be taken to accept funding for programs that address the core mission of thc catalyst organizations. one way to think about program growth is with career ladders. especially in industries that employ many low skilled, low wage workers, it is important to develop training programs that identify and reinforce career paths to greater responsibilities and higher wages as well as develop skills that can transfer across firins. oft'ering a series of courses that build upon one another and demonstrating how these courses lead to specitic jobs can result in higher skilled workers that are less likely to leave the industry for other work. gidc and garment 2000 used the skill standards approach to build these career ladders based on the national skill standards for advanced high perforniance manufacturing (schroll, 1997). other industry sectors such as retailing and information technology have also developed skill standards and might be useful in developing career ladders. a second approach is to address both supply and demand industry issues. gidc and garment 2000 initiated programs that focused on the supply of trained labor for the apparel industry through training programs and compliance. later, both added programs marketing services and campaigns that created value and demand for apparel products made in new york and san francisco. finally, partnerships are essential to initiating and building catalyst organizations. the current program offerings of chambers of commerce, economic development organizations, educational institutions, and organizations supporting small businesses in general and the specific industry should be evaluated. then, those likely to advance the proposed mission should be contacted for collaboration and support. if educational programming and training is one of the offerings, partnerships with high schools, vocational schools, community colleges, and other educational institutions can be very helpful, both as sources of clients and as resources for developing programs. just as the catalyst organization works with its own business networks, it is crucial for the catalyst organization to develop its own network of stakeholders. programming and funding should be developed jointly to develop stakeholder ownership in the catalyst organization. notes: 'names of gidc funding sources: cwe —consortium for worker education itac —industrial technology assistance corporation jtpa —job training partnership act nist —national institute for standards and technology nyc —new york city nys —new york state [tc] —textiles/clothing technology corporation usdoc —u. s. department of commerce usdol —u.s. department of labor 68 journal of small biisiness sirategv vol. 14, no. i springisummer 2003 'names of garment 2000 funding sources: jdit —job development incentive training mocd —mayor's office of community development dol —department of labor idrc —industry driven regional collaborative cact —center for applied competitive technologies sfsu —san francisco state university ccsf —city college of san francisco manex-mep —center for manufacturing excellence aacc —american association of community colleges levi's —levi strauss, inc. references the aspen institute. (2001). closing the gapi how sectoral warkforce development programs benefit the working poor. (sedlp research report no2). washington, d.c; zandniapour, l. 8; conway, m. the aspen institute. (1999). the garment industry development corporation: a case study of a sectoral employment development approach. washington, d.c: conway, m. &. loker, s. california wellness foundation. (1997). final report and strategic plan. san francisco, calif.: schiorring, e. & stark, l. s. chin, s. (1995, june 25). sewing up a model garment industry agreement. san francisco examiner. p. b3. cook, p. 8t morgan, k. (1990). industry, training and technology transfer: the baden wurnemberg system in perspective (cardilf:regional industrial research paper no. 6). university of wales. garment industry development corporation. (1994). report prepared by mt. auburn associates. new york: granovetter, m. 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(1994). regional advantage: culture and competition in silicon valley and route /28. cambridge, mass: harvard university press. national skill standards for manufacturing. (1997). national skill standards for advanced high performance manufacturing. washington, dc: schroll, c.j. staber, u. (1996).networks and regional development. perspectives and unresolved issues.. in staber, u.h., schaefer, n.v., & sharma, b. (eds.), business networks: prospects for regional development. stockholm, sweden: almquist & wiksell international. 69 joirrnal of smull business strotegy vol. 14, no. 1 spring/suinmer 2003 sydow, j. (1996). flexible specialization in regional networks. in staber, u.h., schaefer, n.v., & sharma, b. (eds.), business networks: prospects for regional development. stockholm, sweden: almquist & wiksell international. garment 2000. (1997) san francisco suney of apparel opermors, contractors, and manufacturers, 1996/97. san francisco, california: stark, l. s. & rabolt, n. u.s. bureau of the census. (2000). annual survey of mamtfacturers. washington, dc: u.s. government printing office. uzzi, b. (1996). the sources and consequences of embeddedness for the economic performance of organizations: the network effect. american sociological review, 61, 674698. uzzi, b. (1997). social structure and competition in interfirm networks: the paradox of embeddedness. admim'strotive science quarterly, 42, 35-67. waldinger, r.d. (1986). through the eye of the needle: immigrants and enterprise in new york's garment trades. new york: new york university press. dr. suzanne loker is the j. thomas clark professor of entrepreneurship and personal enterprise in the department of textiles and apparel at cornell university. her research program focuses on apparel industry issues including homebased businesses, management of technology, und mass customization. dr. l. susan starkis a professor ofapparel design at san francisco state university. she is also an instructional designer and technical expert at garment 2000/sfca ct at city college ofsan francisco. judi sasser-ipatkins is the senior program coordinator with the regional training institute in ivalnut creek, ca. formerly, she was the director ofsan francisco center for applied competitive technologies (sfcact) and program manager of garment 2000 at city college of san francisco. she has over seventeen years of experience in the garment industry. 70 http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2019, vol. 29, no. 03, 33-45 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2019 small business institute® w w w. j s b s . o rg introduction shaike marom1, robert n. lussier2, matthew sonfield3 1hiram college, usa, shaike.marom@gmail.com 2springfield college, usa, rlussier@springfield.edu 3hofstra university, usa, matthew.c.sonfield@hofstra.edu entrepreneurial strategy: the relationship between firm size and levels of innovation and risk in small businesses entrepreneurial strategy matrix, entrepreneurial strategy, strategy, entrepreneurial orientation, firm size, risk, innovation apa citation information: maron, s., lussier, r. n., sonfield, m. (2019). entrepreneurial strategy: the relationship between firm size and levels of innovation and risk in small businesses. journal of small business strategy, 29(3), 33-45. during the last decade, there has been a growing interest in entrepreneurial strategic orientation, emphasizing the importance of innovation as a main driver to business performance and growth (chang, memili, chrisman, & welsh, 2011; mcdowell, peake, coder, & harris, 2018; pett & wolff, 2016; rauch, wiklund, lumpkin, & frese 2009; thornhill, 2006; williams, manley, aaron, & daniel, 2018; zulu-chisanga, boso, adeola, & oghazi, 2014). small businesses differ from large firms in terms of their management, organizational structure, resource availability, flexibility, culture and other attributes. therefore, it has been said that “a small firm is not a scaled down version of a large firm” (westhead & storey, 1996, p.18) but rather has unique characteristics that need to be recognized (murphy, 1996). small businesses have small management teams – frequently the owner-manager is over-occupied with the everyday running of the business, resulting in a short-range management perspective (tilley, 2000). in the absence of formal business strategy, the business is steered forward according to the owner’s personal characteristics and beliefs – individual entrepreneurial orientation (ieo) (mazzarol, 2004; peake, barber, mcmilan, bolton, & coder, 2019). however, it has been suggested that the firm’s eo does not draw only on the personality traits of the owner/manager, but rather consists of three variables – environmental, organizational, and individual (aloulou & fayolle, 2005; brettel, chomik, & flatten, 2015; engelen, flatten, thalmann, & brettel, 2014; miller, 2011). thus, certain firm characteristics, including firm size, can influence the level of eo, as well as the impact of eo on firm performance (covin & miller, 2014; edmond & wiklund, 2010). while there has been extensive research on how eo affects firm performance and growth (harris, gibson, & mcdowell, 2014; leal-rodríguez & albort-morant, 2016; pett & wolff, 2016), there has been much less inquiry on the opposite direction of the impact – how firm size affects eo (altinay, madanoglu, de vita, arasli, & ekinci 2016; engelen, kaulfersch, & schmidt, 2016; simmons, 2010; wales, 2016). therefore, there is a need for future research on how organizational characteristics influence the firms’ the expression that “innovation is the central issue in economic prosperity” (michael porter), encapsulates the importance of entrepreneurial strategy, which has been linked to firm growth, particularly through its dimensions of innovation and risk. firm growth will increase its size, which in turn may affect the entrepreneurial strategy; a research area that has been under-studied. this research contributes to the literature by exploring the relationship between firm size and the entrepreneurial strategy. findings support the hypothesis that in larger firms the owners pursue a strategy that tends to be higher in innovation but with reduced risk, while in smaller firms the owners pursue a strategy that is higher in risk but lower in innovation. additionally, it was found that the firms’ entrepreneurial orientation (eo) is moderated by the organizational size; which supports the notion of bi-directional relationship between eo and organization attributes http://www.smallbusinessinstitute.biz http://www.jsbs.org 34 s. marom, r. n. lussier, & m. sonfield journal of small business strategy / vol. 29, no. 3 (2019) / 33-45 eo (covin & lumpkin, 2011; miller, 2011; wales, 2016; wales, gupta, & mousa, 2011). driven by the call for future research, this study explores how firm size affects eo, with regard to the two dimensions of innovation and risk taking, for small and medium-size businesses (smes). we used a sample of 184 small businesses in the usa to construct a conceptual framework and test empirically the relationship between the size of small businesses and level of innovation and risk chosen by their owners. findings indicate that in larger firms the owners pursue a strategy that tends to be higher in innovation but with reduced risk, while in smaller firms the owners pursue a strategy that is higher in risk but lower in innovation. therefore, owners, managers, entrepreneurship educators, and consultants to small businesses should realize that the size of the small business plays an important role in setting business strategy. in addition, the study also lays the foundation for further exploration of the two-way interaction between firms’ eo and business performance that has been called for by wales (2016). more specifically, inquiry of a close cyclic relationship fabric, going from eo impact on firm growth and size and in turn continue to the impact of firm size on innovation and risk taking which partially constituent eo. such inquiry advances the lesser researched longitudinal interdependency between eo and firm attributes, while to date most research referred to one point in time (miller, 2011; rauch et al., 2009; wales, 2016). the remainder of the article is structured in the following way: the next section presents a theoretical background with regard to the variables of eo, firm size, innovation and risk taking; their interrelationships as well as influencing moderators. we then explain the theoretical framework for the research and hypotheses. this is followed by the methods, research design, and analysis of results. finally, we discuss the findings and their theoretical and practical implications, as well as the research limitations and suggestions for further research. theoretical background entrepreneurial strategy and orientation the concept of (eo) has served to explain how businesses can create value that leads to growth (altinay et al., 2016). eo refers to a business’s strategic orientation that encapsulates managerial philosophies and firm behaviors aimed at being innovative, including features of decision-making styles, methods, and practices (anderson, covin, & slevin, 2009; lumpkin & dess, 1996). the importance of the concept, which has been studied extensively, draws on research findings indicating a high correlation with firm success (anderson et al. 2009; green, covin, & slevin, 2008; wiklund & shepherd, 2005). the majority of academic work has adopted a three-dimension construct for eo – innovativeness, proactiveness, and risk-taking (george & marino, 2011; miller, 1983; wales, 2016; wales et al. 2011), although contesting concepts have been suggested, such as the lumpkin and dess (1996) five-part construct (george & marino, 2011; wales, 2016; wales et al. 2011). innovativeness is the propensity to pursue novel ideas and non-linear thinking and creativity, as opposed to pursuance of existing practices. proactiveness refers to management practice of opportunity-seeking and anticipating future trends from the outside environment. risk taking involves a behavior pattern of making large investments in activities with high levels of uncertainty, which can result in costly failure (lumpkin & dess, 1996; miller & friesen, 1982). although eo relates to the organizational level, it is closely linked to the individual-level measure of eo (ieo), in the case of small businesses, as the business is steered forward according to the owner’s personal characteristics and beliefs (peake et al., 2019). if eo is a multidimensional construct, the relationship between eo and its dimensions should be defined. however, such definitions of eo and its dimensions have not been consistent, with possibilities ranging from multidimensional, in which the dimensions represent independent predictors, to unidimensional construct (covin & wales, 2012; george & marino, 2011; wales, 2016; wales, gupta, & mousa, 2011). while some view eo as encompassing simultaneously all three dimensions (miller, 1983), the possibility that eo is formed by the aggregation of the dimensions was adopted by scholars who separately studied individual dimensions of eo rather than the entire eo construct (lechner & gudmundsson, 2014; lumpkin & dess, 2001; naldi, nordqvist, sjöberg, & wiklund, 2007; wales, gupta, & mousa, 2011). as such, innovation has been the most researched dimension of eo, as it has been recognized to be the most powerful antecedent to firm growth and improved financial performance; as well as being easier to operationalize and measure. risk taking has gained less attention in research, being less tangible and more difficult to operationalize. however, the dimension of proactiveness has received even less focus in eo studies (simmons, 2010). firm size and innovation the importance of the relationship between firm size 35 s. marom, r. n. lussier, & m. sonfield journal of small business strategy / vol. 29, no. 3 (2019) / 33-45 and its level of innovativeness derives from the understanding that innovation is a significant antecedent to growth (engelen, et al., 2016; wolff & pett, 2006). although a large body of research has focused on this relationship, the findings have been inconclusive (laforet, 2008). on one hand, numerous studies have found a positive relationship between firm size and the level of innovation (camisón-zornoza, lapiedra-alcamí, segarra-ciprés, & boronat-navarro, 2004). however, there are multiple studies reporting a negative relationship between firm size and innovation (camisón-zornoza et al., 2004). yet, others reported a u-shaped relationship where innovation is high for small and large firms and relatively low for medium-size businesses (bertschek & entorf, 1996), or that no relationship exists between the two (aiken, bacharach, & french, 1980). the conclusion has been that the relationship between firm size and innovation depends on multiple variables (damanpour, 1992; wolfe, 1994), yielding inconsistent findings (fores & camison, 2016; laforet, 2008; simon & shallone, 2013) as presented below. positive relationship between firm size and innovation. many studies have reported findings supporting a positive relationship between firm size and innovation (aiken & hage, 1971; damanpour, 1992; ettlie & rubenstein, 1987; kimberly & evanisko, 1981; rogers, 2004; sullivan & kang, 1999). the rationale for a positive relationship can be traced back to schumpeter (1942), who is sometimes regarded as the ‘prophet of innovation’. schumpeter identified innovation as a prime driver for economic growth and change. his view about innovation was that it is not limited to inventions of new products, but rather it refers to the implementation of new manufacturing processes, new techniques and the commercial applications of new technology. accordingly, he asserted that firms of larger size have higher levels of innovation as they can capitalize on their greater market power to finance r&d and exploit returns from innovations. since then, several explanations have been suggested for the positive relationship between firm size and innovation. first, financial resources – large firms have more financial resources that can be allocated to advance innovation, as well as better access to external finance (ahluwalia, mahto, & walsh, 2017; cohen & klepper, 1996; rogers, 2004). second, human resources – large firms are able to employ higher numbers of professionals, having a wider range of knowledge and dedication to r&d efforts (capon, farley, lehmann, & hulbert, 1992; pla-barber & alegre, 2007). third, infrastructure – large firms have more resources and capabilities such as laboratories, equipment and manufacturing facilities in support of innovation activities (damanpour & evan, 1984; nord & tucker, 1987; rogers, 2004). fourth, risk taking – large firms’ robustness enables them to bear the losses from unsuccessful innovations, and thus, able to take on greater risks (damanpour, 1992; kraft, 1989). finally, market power – higher volumes of sales are translated to lower development costs per unit of product, as well as higher ability to generate returns (acs & audretsch, 1991; chaney & devinney, 1992; galbraith, 1952). negative relationship between firm size and innovation. numerous studies found a negative relationship between firm size and innovation – small businesses have shown to be relatively more innovative than large firms (aldrich & auster, 1986; arvanitis, 1997; hage, 1980; rogers, 2004; shefer & frenkel, 2005; wade, 1996). these findings contradict the schumpeter (1942) hypothesis, and several arguments have been suggested for such a negative relationship. first, bureaucracy and rigidness – higher level of bureaucracy exist in large firms, including complex organizational structure and extensive regulations and procedures that weaken creativity and slows down innovative activity. small firms with fewer employees, simple structures and less reliance on formal procedures, makes them much more innovative (kamien & schwartz, 1975; nooteboom, 1994). second, organizational culture – large organizations are characterized by culture that resist creativity and change (cohen & klepper, 1996; hitt, hoskisson, & ireland, 1990). third, flexibility in operation – large firms suffer from lower efficiency in operation, including their r&d efforts due to organizational complexity and overhead (nooteboom, 1994; rogers, 2004; scherer & ross, 1990). fourth, adaptability to external change – small firms are more flexible to adapt to external changes which enable them to better implement new technologies and directions as well as recognize and exploit external opportunities (damanpour, 1992). finally, communication – small firms have the advantage of better internal communication across the organization, which enables cross disciplinary fertilization that promotes higher creativity and innovation (sosa, eppinger, pich, mckendrick, & stout, 2002). mixed results and moderators of firm size and innovation. several studies reported mixed results, regarding the findings on the relationship between firm size and innovation, including: u-shaped relationship – small and large firms have been found to be more innovative than medium-sized firms (bound, cummins, griliches, hall, & jaffe, 36 s. marom, r. n. lussier, & m. sonfield journal of small business strategy / vol. 29, no. 3 (2019) / 33-45 1982; scherer, 1965). such relationship could result from the different advantages applying for large and small firms, but not to medium-size firms (bertschek & entorf, 1996). others reported that no relationship exists between firm size and innovation (aiken, bacharach, & french, 1980; wolfe, 1994). yet, some studies reported mixed results depending on other moderators such as industry sector and type of innovation, as described below (acs & audretsch, 1987; pla-barber & alegre, 2007). industry sector as a moderator. with the understanding that the firm size-innovation relationship is complex, several studies tested the effect of industry type on the relationship. some studies have found that a positive size-innovation relationship applies to low-tech production-intensive industries, while negative relationship between firm size and innovation was found for high-tech knowledge-intensive industries (acs & audretsch, 1991; pla-barber & alegre, 2007; shefer & frenkel, 2005). the theoretical rationale given, for the difference in the direction of the relationship, was based on barney’s (1991) resource-based view of the firm. accordingly, the direction of the relationship depends on the type of critical resources that provide the firms with competitive advantage (pla-barber & alegre, 2007). for low-tech production-intensive industries, for which size related resources are critical, such as production or marketing competences, the size-innovation relationship would tend to be positive (pla-barber & alegre, 2007). however, for high-tech industries, for which the critical resources are drawing on knowledge and competence to develop cutting-edge technology, the size-innovation relationship would tend to be negative (shefer & frenkel, 2005). measurement of size and innovation. furthermore, the inconsistency in research findings about the direction of the relationship between firm size and level of innovation has been attributed to variation in the operationalization and measurement of those variables (camisón-zornoza et al., 2004). firm size has been operationalized using different indicators including total number of employees, measures of firms’ output such as sales volume, financial measures including net assets, and number of personnel engaged in development as a percentage of total employees (camisón-zornoza et al., 2004; szymanski, bharadwaj, & varadarajan, 1993). however, the different indicators have served to derive a qualitative measure of firm size – large, medium and small; thereby minimizing the problem that could arise from the use of different measurement indicators (camisón-zornoza et al., 2004; damanpour, 1992). likewise, innovation has been measured in different ways (damanpour, 1992; verhees & meulenberg, 2004; wolff & pett, 2006). level of innovation can be measured by input, output or both (coad & rao, 2008). coad and rao (2008) stated that input refers to the level of r&d spending, which serves as an indicator for the input level for the innovation process. whereas, the number of patents was used as a measure of innovation output, although not every innovation is patented. firm size and risk taking risk taking may include several types (lumpkin & dess, 1996). baird and thomas (1985) defined three types of risk taking – entering unknown areas, investing of resources and high leverage from borrowing. the first type is generally associated with the nature of entrepreneurship of venturing into the unknown (kreiser, marino, & weaver, 2002; mcclelland, 1960; miller & friesen, 1978). the other two types of risk taking are associated with the entrepreneur’s willingness to commit high levels of resources to innovation activity that is known to have high failure rates, resulting in substantial financial losses (miller & friesen, 1982). thus, the common view of risk taking follows the miller and friesen (1978) definition as the propensity to make large investments in activities with high levels of uncertainty, which can result in failure. the behavioral theory of the firm (cyert & march, 1963) served as the basis to suggest a possible relationship between business size and level of risk chosen by owners. with relation to the process of decision making, the theory refers to two stage phases. first, management sets goals for the firm performance. second, a decision making process is conducted by management. if the aspiration level for goals is high, there will be higher risk taking in the decisions. alternatively, when the performance exceeds the goals, managers will tend to lower the risks taken for future operations (cyert & march, 1963; march & shapira, 1992). applying the behavioral theory to the size-risk taking relationship, it is assumed that small firms aspire to grow, aiming to create strong market presence and increased survivability; by making relative high-risks decisions. once a firm grows in size beyond the initial aspiration level, it will not pursue additional risky growth opportunities. therefore, it is assumed that the relationship between the size of the business and the level of risk taken will be negative; suggesting that larger businesses tend to choose strategies with 37 s. marom, r. n. lussier, & m. sonfield journal of small business strategy / vol. 29, no. 3 (2019) / 33-45 lower risk in comparison to small businesses (mahoney, 2004). hypotheses and the entrepreneurial strategy matrix as this research investigates how firm size affects the two dimensions of innovation and risk, we used the previously developed entrepreneurial strategy matrix (esm) (sonfield & lussier, 1997; sonfield, lussier, corman, mckinney, 2001). the esm model describes four possibilities of business strategy adopted by the entrepreneur, based on the two parameters of innovation and level of risk. each of these dimensions can have dichotomous value of high (i and r) and low (i and r) levels of innovation and risk, thus creating a matrix with four quadrants as depicted in figure 1. the essence of each of the four strategies is described in table 1. figure 1. the entrepreneurial strategy matrix as well as (lussier, sonfield, corman, & mckinney 2001) and sonfield and lussier (2000), providing support for the esm model and its survey instrument’s validity. thirdly, as most academic models are complex and difficult to use by entrepreneurs, the esm model was developed to provide the entrepreneur with a simple model that is easy to use by practitioners, and it was successfully tested for ease of use by small business owners (lussier, sonfield, frazer, greene, & corman, 1998). in addition, a recent google search typing in “entrepreneurial strategy matrix” resulted in more than 1,880 hits (july 1, 2019). thus, the esm has practical use by small business owners, e.g., impact factor. accordingly, the research hypotheses are: hypothesis 1. there is a difference in the strategy used by small business owners based on the size of the firm. hypothesis 2. there is a positive relationship between firm size and strategy of innovation – larger firms pursue a strategy that tends to be higher in innovation. hypothesis 3. there is a negative relationship between firm size and strategy of risk – smaller firms pursue a strategy that tends to be higher in risk. hypothesis 4. the eo at the organization level is not driven solely by the personality attributes of the owner-manager, but rather is also moderated by organizational factors, e.g., firm size. method design and sample the research design used the esm survey data set of sonfield and lussier (2014) to identify which strategy quadrant within the esm was selected and utilized by the respondents (table 1). the sample was constructed by random selection of 900 small businesses from the united states representing all d&b nine industries. the mailing resulted in 78 completed questionnaires, with 98 nondelivered. telephone interviews resulted in an additional 116 respondents; 10 not usable. thus, after two months, the sample size for statistical testing was 184, with a response rate of 23%. to ensure nonresponse bias was not problematic, the questionnaire results of the mail and telephone interviews were statistically tested for difference, and no significant differences were found between the early and late cell a i, r cell b i, r cell c i, r cell d i, r high high low low risk in no va ti on the entrepreneurial strategy matrix (esm) was selected for data collection for three reasons. first, because the survey instrument was designed to provide measures of the three variables being investigated in this study. the questionnaire measures the small business owner’s level of innovation and risk, as seen in figure 1, and it also provides a measure of the owner’s strategy, as seen in table 1. secondly, the esm conceptual model was published in a quality journal (sonfield & lussier, 1997), and then the survey instrument was developed by sonfield and lussier (2000), empirically tested for validity by puetz and hunt (1998) and used for empirical research published in the jsbm journal of small business managment (sonfield et al., 2001), 38 s. marom, r. n. lussier, & m. sonfield journal of small business strategy / vol. 29, no. 3 (2019) / 33-45 responses. measures and statistical analysis the size of the business (number of employees) was the independent variable. the esm strategy chosen by the owner of the small firm was the dependent variable. the control variable covariates are the commonly used years in business (actual number of years), industry (retail/services vs manufacturing), gender (male or female), and education (grade school to doctorate degree) as shown in table 1. although we don’t directly measure eo, we do measure level of innovation, which is linked to the construct of eo. the variable terms dependent, independent, and covariate are spss terms used for statistical testing of the hypotheses that there is a difference in the strategies used by small business owners based on their size. these variables are not tested for causality or the direction of the relationship. regression analysis (commonly used in prediction studies with a dependent variable with a ratio level of measure) is commonly used in research because it is an advanced multivariate statistical analysis that can control for extraneous variables that you are not studying, and you don’t want to affect the results of the study. however, it is not the most appropriate statistical analysis for this study because the hypothesis is designed to test difference in strategy selection (a nominal level variable with 4 descriptors). alternatively, the analysis of covariance (ancova) is also an advanced multivariate statistical analysis that is designed to test for differences between the strategies used by owner/mangers using covariates as control variables; like regression it also develops a model and the analysis includes r-square (lussier, 2011). thus, ancova was used to test the hypotheses to include commonly used control variable covariates for years in business, industry, gender, and education. by controlling for industry, we help overcome a limitation of eo research. engelen, kaulfersch, and schmidt (2016) stated that “a limitation to almost all empirical research on eo is that it does not distinguish between service and manufacturing firms, which could be an important differentiation since eo’s influence on performance may differ with firm type” (p. 842). results here is a summary of the descriptive statistics (n = 184). the sample of small business owners includes 40% women and 60% men; 70% are retail/service firms and 30% are manufacturers. the average business and owner in the sample has approximately 15 years in business (m = 14.72 / sd 14.29), 20 employees (m = 19.71 / sd 51.51), and some college education. the sample includes entrepreneurs from 34 u.s. states. overall, the small business owners are satisfied with their business. table 1 includes the descriptive statistics for the owners’ level of innovation and risk strategy selected. also, see table 1 for the ancova hypothesis testing results. the model is significant (p = .002), and thus hypothesis 1 is supported. when comparing the mean size of business of the four strategy groups (m = 30.63, 19.10, 18.91, 11.71), they are significantly different. the businesses using the high innovation and low risk (cell a i-r) strategies employ almost three times the number of employees as those using low innovation high risk (cell d i-r) strategies (m = 30.6 vs. 11.7). the results also support hypothesis 2. larger businesses are using higher levels of innovation (cell a i-r) strategies, in comparison to smaller businesses, which are using lower levels of innovation (cell c i-r) strategies. additionally, the results support hypothesis 3. smaller businesses are using higher levels of risk (cell b i-r) strategies, in comparison to larger businesses, which are using lower levels of risk (cell a i-r) strategies. the results show that firm size acts as a moderator to the level of innovation and thus support hypothesis 4 that eo at the organization level is not driven solely by the personality attributes of the owner-manager. discussion and implications in this section, we begin with the implications by discussing the results of our study compared to prior research, stating our theoretical contributions to the literature. next, we discuss the limitations and recommendations for further research. we end with practical implications for small business owner/mangers, entrepreneurship educators, and other stakeholders. the finding of this research provides unique and interesting insights into how eo, which drives the entrepreneurial business strategy, is influenced by the firm size. first, findings indicate that the sector of small businesses is not homogenous in itself, and that differences in firm size within the sector exist – larger firms within the sample had different orientation than smaller firms. the understanding that firms within the sme sector are far from being homogenous supports beaver (2003), and blackburn, hart, and wainwright (2013) findings. 39 s. marom, r. n. lussier, & m. sonfield journal of small business strategy / vol. 29, no. 3 (2019) / 33-45 table 1 ancova test results strategy one strategy group selected as the major strategy frequency and / percentage strategy selected mean and / standard deviation number of employees cell a i-r move quickly protect innovation lock in investment and operating costs, via control systems, contracts, etc. 24 / 13% 30.6 / 61.6 cell b i-r lower investment and operating costs maintain innovation outsource high investment operations joint venture options 64 / 35% 18.9 / 61.7 cell c i-r defend present position accept limited payback accept limited growth potential 68 / 37% 19.1 / 46.6 cell d i-r increase innovation-competitive strategy low investment and operating costs use business plan and objective analysis franchise option abandon venture? 28 / 15% 11.7 / 17.6 f ancova model p-value 3.42 .002 source f significance model 3.42 .002 intercept .562 .455 control variables years in business 13.94 .000 industry .111 .740 gender 1.62 .205 education .089 .766 40 s. marom, r. n. lussier, & m. sonfield journal of small business strategy / vol. 29, no. 3 (2019) / 33-45 second, findings support the hypothesis that in larger firms the owners pursue a strategy that tends to be higher in innovation but with reduced risk, while in smaller firms the owners pursue a strategy that is higher in risk but lower in innovation. this supports hypotheses 2 and 3, and is consistent with findings of previous research (camisón-zornoza et al., 2004; laforet, 2008; rogers, 2004) that reported a positive relationship between firm size and innovation tendency. this provides further support for the schumpeter (1942) hypothesis asserting that firms of larger size are able to invest more resources into innovation. an important contribution of this research is that it identified an impact of firm size within the sector of small businesses, while most previous research considered the full spectrum of firm sizes – small, medium and large companies (camisón-zornoza et al., 2004). third, the findings of this research provide support for the hypothesis that the owners of larger firms within the sme sector tend to pursue less risky business strategies than the strategies chosen by owners of smaller businesses. this is consistent with a few previous reports (mahoney, 2004; simmons, 2010) that indicated that while small firms are growing, the owner-managers tend to make decisions that are less risky. interestingly, more responsible behavior can relate to internal stakeholders such as employees, as well as external stakeholders such as investors; which means that as the firm grows in size, it is becoming more socially responsible toward stakeholders, as commonly accepted in the research field of corporate social reasonability (lepoutre & heene, 2006; mcwilliams & siegel, 2001; stanwick & stanwick, 1998). implications two and three taken together infer the probability that in larger businesses the owners tend to pursue the ‘high-innovation, low-risk’ cell of the entrepreneurial strategy matrix. this might coincide with previous findings that larger firms can afford to use more resources to pursue the innovativeness orientation of the owner/manager (rogers, 2004), however at the same time taking less risk as they assume more responsible behavior (mahoney, 2004). finally, and having the most overarching contribution to the literature, this research has supported hypothesis 4 that eo is not driven solely by the personality attributes of the owner-manager, but rather is also moderated by organizational factors – firm size. thus, providing further support to the understanding that eo might be influenced and change over time, due to environmental and organizational variables (aloulou & fayolle, 2005; miller, 2011). moreover, this finding provides further support to the understanding that there is a bi-directional interaction between eo and firm size (miller, 2011; wales, 2016). that is, eo may promote growth and firm size, while consequently the increase in firm size may in turn affect eo. in conclusion, this research makes two important theoretical contributions with regard to the relationship between firm size as an organizational attribute and the entrepreneurial strategic orientation, with particular focus on small businesses. first, findings indicate the possibility that indeed firm size has an impact on the eo. this is consistent with the understanding that moderators to eo can include many variables of the environment and the organization. second, this research strengthens the understanding that eo and firm size is a two-way relationship. such interrelations can lead to cycles of variations in eo levels that can vary between high and low levels over time. like all studies, there are limitations within this research and the need for further research. as stated by engelen, kaulfersch, and schmidt (2016), the specific culture in each society could affect the owner entrepreneurial orientation toward innovation and risk; therefore, the results may vary in countries with different cultures. although self-reporting data is commonly used for data collection in entrepreneurship research, it does have limitations. our data was self-reported by the owner/managers of the businesses. although the selection of a listed strategy is fairly objective, an owner/manager may not actually use the strategy. this could result from the difference between the self-concept of the owner/managers with regard to their orientation, and their actual behavior, due to lack of linkage between attitudes and behavior (wicker, 1969). moreover, the subjective reporting of all responders is not aligned within the sample due to lack of a single objective metric. the research also used a cross sectional data collection relating to one point in time. such measurement cannot capture the interplay between eo and firm size, which is expected to create changes over time with regard to the dimension of innovation and risk within the entrepreneurship strategy matrix; such dynamic changes due to the bi-directional relationship could best be captured through longitudinal research design. considering the findings and the limitations of our research, we suggest the need for future research. first, duplication of this study in other cultures is needed to support the generalizability for external validity of the finding outside of the usa, across different countries and cultural contexts. secondly, the entrepreneurship strategic orientation data collected for this research was based on self-reporting by the owners of businesses, which is subjective by nature. future research should verify those finding through a more objective data collection method. one way to achieve this is 41 s. marom, r. n. lussier, & m. sonfield journal of small business strategy / vol. 29, no. 3 (2019) / 33-45 by collecting data with regard to behavior and actions rather than self-reported attitude. second, while our finding supports the conclusion that firm size does impact eo, future research should inquire whether other organizational attributes have similar moderating impact on eo. this could enlarge the body of knowledge on how eo draws on organizational variables. third, while we have established that the organizational variable does influence eo, future research can investigate how environmental attributes may affect eo. this could provide support to previous indications that eo might be in the aggregate influenced by three types of variables – personal, organizational and environmental. finally, with the acceptance of a bi-directional relationship between eo and firm size, and that such interplay creates dynamic changes over time, we recommend that future research use longitudinal design, rather than the cross-sectional approach, in order to better understand variation of eo over time. far reaching practical implications can be drawn from the research finding, which indicate that smaller businesses tend to start with relatively higher risk taking than larger small-businesses, and the reverse trend regarding innovation. our findings support the hypothesis that owners of new businesses tend to take higher risks, which is one of the many reasons for the low survivability of firms within the sme sector. this behavior can result from an erroneous self-perception and lack of coherence between attitudes and behavior (wicker, 1969). such understanding has practical implications applying to various stakeholders of the sme sector. entrepreneurship educators and consultants can take a center role in bringing this problem to entrepreneurs by making them aware of the tendency to subconsciously take higher risk than appropriate. recall that the entrepreneurial strategy matrix is a practical model found easy to use by entrepreneurs. educators and consultants can make entrepreneurs aware of the esm model and help them to use it to match their strategy to the level of risk and innovation of the new or ongoing growing business venture. investors and lenders should utilize proper measures to closely follow-up on the entrepreneurial activity, and actively engage in controlling the level of risk taking. research has shown the positive relationship between having social capital with supporting networking ties and performance (engelen, kaulfersch, & schmidt, 2016). thus, another important practical implication refers to entrepreneurs and potential external networking ties, with regard to the level of innovation. findings indicate the level of innovation is low in the initial phase of smes, which may result from the lack of resources, which constrains innovativeness attitude. one way to overcome such resource constraint is by building networking ties between the new small business and external parties. thus, entrepreneurs and owners of small businesses can increase the level of innovation by harnessing more resources through teaming and forming partnerships with other relevant stakeholders. in summary, all stakeholders of the sme sector should be aware of and take proper measures to educate would be entrepreneurs regarding the tendency of pursuing a high risk and low innovation of new small ventures. acknowledgments the authors would like to thank jsbs managing editor whitney o. peake and springfield college douglas scanlon for their reviews and improvement to this article. references acs, z. j., & audretsch, d. b. 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(2014). investigating the path from firm innovativeness to financial performance: the roles of new product success, market responsiveness, and environment turbulence. journal of small business strategy, 26(1), 51-68. http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2021, vol. 31, no. 03, 01-18 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2021 small business institute® w w w. j s b s . o rg introduction 1universidad ana g mendez – cupey, division de negocios uagm cupey, po box 21150, san juan pr, usa, 00928 2keiser universitylatin division, 1500 nw 49th st, fort lauderdale, fl 33309, usa, ulmendez@uagm.edu 3universidad estatal a distancia, escuela de ciencias de la administración, edificio c, 4to piso, oficina 405, de la rotonda la betania 500 metros al este, carretera a sabanilla, mercedes de montes de oca, san josé, costa rica, g.munizumana@student.keiseruniversity.edu 4keiser universitylatin division, 1500 nw 49th st, fort lauderdale, fl 33309, usa, ulmendez@uagm.edu 5universidad ana g mendezgurabo, po box 3030, gurabo, pr, usa, 00778-3030, flechaj1@uagm.edu 6keiser universitylatin division, 1500 nw 49th st, fort lauderdale, fl 33309, usa, ulmendez@uagm.edu 7universidad ana g mendezgurabo, po box 3030, gurabo, pr, usa, 00778-3030, msantos@uagm.edu innovation as competitiveness driving force through the resources and capacities of smes in costa rica, puerto rico, and dominican republic resource-based, capacity-based, innovation, competitiveness apa citation information: mendez-vega, u., muñiz-umana, g., flecha-ortiz, j. a., & santos-corrada, m.. (2021). innovation as competitiveness driving force through the resources and capacities of smes in costa rica, puerto rico, and dominican republic. journal of small business strategy, 31(3), 01-18. the theory of resources and capabilities analyzes how companies use rare, valuable, and inimitable resources (cruz, 2018; garcía et al., 2018; miller & breton, 2017; reynoso et al., 2017) in order to increase their capacity to achieve competitive advantages through their strategic adjustment (garcía et al., 2018; miller & breton, 2017; reynoso et al., 2017). the academic literature establishes that the use of unique resources results in a greater capacity for innovation than other groups of variables (akhtar et al., 2015; badriyah, 2017; bedoya & arango, 2017; choo, et al., 2010; cruz, et al., 2018; fernández guerrero et al., 2018; fernández ortiz et al., 2006; gil-lacruz & gil-lacruz, 2006; lonial & carter, 2015; matsuno et al., 2014; reynoso et al., 2017; sok et al 2017; sok et al., 2017; villegas et al., 2018). the capacity for innovation is also an important element for the establishment of competitive advantages in small and medium-sized enterprises (smes) (villegas et al., 2018; cruz, 2018; pérez et al., 2018; gonzález, 2018; mejía-giraldo et al., 2015; magdaleno et al., 2015). arroyo (2008) argues that smes in latin america and the caribbean face an external environment of great uncertainty and high competitiveness. this level of uncertainty is related to financial crises, globalization, political and social instability, among other factors, which promote the availability of various business alternatives (venegas, 2008; de arruda, 2009). therefore, the capacity for innovation is recognized as a key factor in achieving the competitiveness of smes. however, it is recognized that the capacity for innovation will be based on the use of resources. in few cases are the studies on innovation capacity and smes in latin america and the caribbean analyzed from the perspective of their resources and capacities. even fong reynoso et al. (2017) highlight the need for studies that analyze factors such as innovation on resources and capacities in smes in latin america and the caribbean. currently, latin america and the caribbean have more smes compared to the rest of the world (yang, 2017) and maintain a relevant role in the region’s economy (lederman et al., 2014; saavedra garcía, 2012; tabares, 2012). valdez literature reflects that latin america and the caribbean register more smes and produce more entrepreneurial activity than any other place in the world. using the theory of resources and capabilities, this research explored how smes in costa rica, puerto rico, and the dominican republic managed the heterogeneity of their entrepreneurial orientation, market orientation, social and human capital resources and their impact on innovation capacity and competitiveness. with a survey of 467 smes and the analysis of data with the use of pls-sem & pls-mga, this study contributed new information based on resources and capacities that showed the maximum set of possible variables analyzed for a theoretical understanding and practice of the heterogeneity of resources. the results reflected a positive impact on the proposed hypothesis through the structural model. the data highlight market orientation as the most valuable resource that facilitates innovation and competitiveness in smes analyzed. the results revealed and contributed to the new lines of research on how differences and the degree of importance in managing resources generated high competitiveness through their capacity for innovation. ulises mendez-vega1, 2, glenda muñiz-umana3,4, josé a. flecha-ortiz5,6, maria santos-corrada7 http://www.smallbusinessinstitute.biz http://www.jsbs.org 2 u. mendez-vega, g. muñiz-umana, j. a. flecha-ortiz, & m. santos-corrada journal of small business strategy / vol. 31, no. 3 (2021) / 01-18 et al. (2017) explain that internal and external knowledge through innovation capacity will have an impact on the profitability of a sme. therefore, the theory of resources and capabilities is an ideal theoretical framework that will allow an analysis of how smes use their resources to impact their capacity for innovation and achieve high competitiveness. this quantitative research explored how smes in costa rica (cr), puerto rico (pr), and the dominican republic (dr) valued their social capital (sc), entrepreneurial orientation (eo), market orientation (mo), and human capital (hc) over their capacity for innovation. secondly, it studied how the innovation capacity in the smes of cr, pr, and dr could be a factor that had a positive impact on competitiveness. finally, it investigated if there were significantly different impacts on the way in which smes in cr, pr, and dr valued their resources over their capacity for innovation and how the capacity for innovation had a different impact on competitiveness. the research model was analyzed through an electronic survey of 455 smes in cr, pr, and dr and divided the analysis into two parts. the first part of the study employed the use of partial least squares structural equations (plssem) and the second part of the study used a multi-group analysis (pls-mga). the results reflected a positive impact for four of the analyzed resources, eo, mo, hc and sc, on their ability to innovate, out of which the mo was the most valued resource. the researchers also obtained positive results on the study variables. then, using plsmga, the researchers explored if the research model had a significantly different impact on the variables of interest. the paper will present a background of the research objectives and the development of a group of hypothesis on the research model developed by the researchers through the review of literature. at the end of the study, there will be a discussion of its results and contributions, as well as its limitations and lines of future research. this study provides new literature in the face of limited studies in latin america and the caribbean on smes and the theory of resources and capabilities. literature review strategic planning based on the resources of smes in latin america and the caribbean rogo et al. (2017) state that all performance of a sme is observed based on its available resources in order to maintain a competitive advantage. a recent study reveals that latin america and the caribbean register more smes compared to the rest of the world (yang, 2017). it is for that reason that smes have an important role in the economy since they generate employment and compensate for the commercial activities left by large companies (saavedra garcía, 2012; tabares, 2012; lederman et al., 2014). the resource-based theory states that companies achieve sustainable competitive advantages only when they have valuable, rare, imperfectly imitable, and non-substitutable resources (cruz, 2018; garcía et al., 2018; miller & breton, 2017; reynoso et al., 2017). ferreira & fernandes (2017) report that an effective strategy requires the understanding of resources and capabilities with an emphasis on how these resources contribute to the formation of organizational strengths. fong reynoso et al. (2017), on the other hand, report that the heterogeneity of resources and the company’s ability to manage them determines its competitive advantage over obtaining benefits. studies of interest show in detail that the adequate management of resources allows a strategic adjustment through its capacity for innovation that will then positively influence the competitiveness of companies (garcía et al., 2018; hernández et al., 2018; lin & wu, 2014). the identified literature provides four types of valuable resources (eo, mo, hc and sc) (cruz, 2018; domínguez et al., 2017; ferreira & fernandes, 2017; gonzález, 2018; hernández et al., 2018; lonial & carter, 2015; miller & breton, 2017; paradkar et al., 2015; pérez et al., 2018; ramos et al., 2018; sok et al., 2017; villegas et al., 2018). however, these studies are limited only to analyzing some of these resources by business sector or specific region. due to that, the need to study these four resources is even more relevant. entrepreneurial orientation the entrepreneurial orientation is defined as a driving force behind the organizational search that allows defining and analyzing entrepreneurial behavior (frese et al., 2002, sok et al., 2017). researchers establish that the eo analyzes the entrepreneur’s behavior through three dimensions: (a) innovation, (b) risk taking and (c) proactivity (bedoya & arango, 2017; matsuno et al., 2014; sok et al., 2017). the eo allows us to observe how a company faces environmental conditions, thought, and the execution of the entrepreneur’s strategy (fernández-mesa et al., 2012) and how the three dimensions allow it to implement improvements in its innovation capacity (elche & gonzález, 2008). this research analyzed the eo in terms of the way that the smes of cr, pr, and dr used eo as a strategic resource through its three dimensions. it also studied how a strategic execution allowed them to boost their capacity for innovation. literature concludes that eo is an important factor that positively influences innovation capacity (ajayi, 2016; be3 u. mendez-vega, g. muñiz-umana, j. a. flecha-ortiz, & m. santos-corrada journal of small business strategy / vol. 31, no. 3 (2021) / 01-18 doya & arango, 2017; lópez & contreras, 2009; schumpeter 2000). these arguments are supported by other studies that establish that an adequate eo will allow smes to react more aggressively to changes in the environment and on how entrepreneurs implement improvements in their companies through their capacity for innovation (gómez villanueva et al., 2010; martins et al., 2012). smes must remain in constant adaptation through a competitive environment in which their capacity for innovation will allow them greater competitiveness in order to evaluate their performance and obtain competitive advantages (hernández et al., 2018). therefore, eo appears as an important factor for smes to manage innovation, which has better competitiveness as a result (silva et al., 2017; valero & gonzález, 2018; vargas & lerma, 2018; augusta, 2018). it is established that eo is a valuable resource for smes since its impact on innovation capacity provides an ideal environment that brings competitiveness as a result (augusta, 2018; sok et al., 2017, solano et al., 2017, vargas & lerma, 2018). market orientation in an analysis of the marketing variable in an sme, a substantial resource can be observed with variables such as promotion, pricing, distribution, services, development of commercial networks, and development of customer relationships (sok et al., 2017). however, the resource-based theory focuses on the strategic study of marketing in two aspects. first, it analyzes resources based on marketing support (asikhia, 2010). this approach contributes indirectly and analyses how managers implement strategies based on their internal resources that result in a competitive advantage (asikhia 2010; reynoso et al., 2017). secondly, the theory analyzes marketing resources based on their market orientation (asikhia, 2010). market orientation as a resource contributes directly as it can be executed immediately and results in maintaining a competitive advantage in the market (li & liu, 2013; lonial & carter, 2015; reynoso et al., 2017; sok et al., 2017; villegas et al., 2018). mo is defined in the way that an organization generates superior value to customers through its strategic adjustment that will result in superior performance to the organization (solano et al., 2017). studies establish that mo in smes positively influences their capacity for innovation and is one of the relevant factors for a sme to be able to innovate successfully (asikhia, 2010; didonet et al., 2016). therefore, this research analyzed marketing resources based on the direct impact that mo generated in smes in cr, pr, and dr in terms of their ability to innovate. one study concluded that an approach to mo in smes maintained a positive impact on their capacity for innovation (afriyie et al., 2018). other researchers highlight that mo was a more significant factor than the other smes variables on average according to the sector in which they compete over their ability to innovate (garcía, et al., 2008; santos et al., 2000). didonet et al. (2016) concluded that mo is a critical factor in smes, which allows us to observe the success in their capacity for innovation. therefore, the management of marketing resources based on their market orientation allows for competitive advantages and impacts their ability to innovate, which will result in higher returns (estrella et al., 2012; vorhies & morgan, 2005). it is important to note that mo also has positive innovation mechanisms based on the way smes execute their innovation capacity (didonet et al., 2016). human capital warnier et al. (2013) highlight that human capital is one of the most analyzed variables throughout the theory of resources. human capital is defined as all the competences and skills of human resources that result in competitive advantages beyond their structure and production processes (choo, et al., 2010; cruz, 2018; fernández ortiz et al., 2006; fernández guerrero et al., 2018). hc research is analyzed under two approaches: (a) specific and (b) generic. the generic perspective analyzes it on the general knowledge of the entrepreneur and the specific perspective analyzes it on the abilities of the personnel to be able to execute their work (kato et al., 2015). this research analyzed hc under a specific perspective on how the smes of cr, pr & dr used their resources in order to hire qualified personnel with the ability to increase knowledge in order to improve their processes and influence their ability to innovate. studies establish that hc has implications for smes since it can positively impact the results of the business (fernández ortiz et al., 2006; marenzana & abraham, 2016) and allows for an increase in innovation capacities by using it as a unique and differentiating resource among its competitors (carson, et al., 2004, choo et al., 2010; marenzana & abraham, 2016). kato et al. (2015) identify that the specific hc is associated with the capacity for innovation based on previous experiences of innovation that the staff has had. other studies detail that hc is a source of value creation that has a positive impact on its ability to innovate (cruz, 2018; martínez-román et al., 2015; pike et al., 2005). in addition, other studies conclude that the innovation capacity of a sme in hc results in greater competitiveness in the competing sector (marulanda et al., 2016; rocca et al., 2016). on the other hand, some researchers sustain that hc reflects a lesser impact or is not a factor that influences innovation capacity (canales & álvarez, 2017, cruz, 2018; gonzález, 4 u. mendez-vega, g. muñiz-umana, j. a. flecha-ortiz, & m. santos-corrada journal of small business strategy / vol. 31, no. 3 (2021) / 01-18 2017; zontek, 2016). cruz (2018) argue that the hc has an influence on the innovation strategy, but sometimes it is not observed as a source of innovation since from their specific perspective they observe it as a resource that executes specific tasks. these antecedents establish that human capital may or may not advance innovative capacities. social capital ramos et al. (2018) explain that social capital resources are an important factor in analyzing trade relations between different parties. the sc is defined by how organizations establish ties of collaboration, trust, and frequent reciprocity on the implementation of individual strategies (arredondo et al., 2017; castañeda & bazán, 2017; ramos et al., 2018). studies establish that the sc is one of the variables that facilitates innovation in a positive way for smes and directly impacts competitiveness (akhtar et al., 2015; badriyah, 2017; gil-lacruz & gil-lacruz, 2006). subramaniam & youndt (2005) establish that sc is an important factor for smes since it allows increasing innovation processes more rapidly. social capital was analyzed in this research by studying how the smes of cr, pr, and dr employed strategies through their collaborative networks in order to increase their capacity for innovation. the literature establishes that the sc is essential to improve the competitiveness of smes through their capacity for innovation (kim & shim, 2018). mejía-giraldo et al. (2015) show that sc is decisive for increasing entrepreneurial knowledge (xu, 2011) through productive learning (ortega et al., 2016) and results in an increase in the capacity for innovation (badriyah, 2017). consequently, sc is a valuable resource as it facilitates the capacity for innovation through collaboration between different parties. innovation capabilities and their impact on competitiveness in smes the capacity-based theory establishes how companies make use of various resources that allow them to obtain a competitive advantage through their strategic adjustment (cruz, 2018; garcía et al., 2018; miller & breton, 2017; reynoso et al., 2017). a broad body of literature has analyzed the resources on the variables of entrepreneurial orientation (bedoya & arango, 2017; matsuno et al., 2014; sok et al., 2017), market orientation (lonial & carter, 2015; reynoso et al., 2017; ; sok et al., 2017; villegas et al., 2018), human capital (choo, et al., 2010; cruz, 2018; fernández ortiz et al., 2006; fernández guerrero et al., 2018), and social capital (akhtar et al., 2015; badriyah, 2017; gil-lacruz & gil-lacruz, 2006) as a group of important variables that facilitate innovation capacity. innovation is defined as the generation, acceptance, and implementation of new ideas, products or services that arise through an interactive process in order to influence a market (brunswicker & vanhaverbeke, 2015; garcía & calantone, 2002; ; hsieh & chou, 2018; sahut & peris, 2014; zhai et al., 2018). this research analyzed the capacity for innovation in the way in which the pymes of cr, pr, and dr implemented continuous improvements in order to improve their competitiveness in the markets they operated. on the other hand, competitiveness was analyzed in this investigation as the set of productive processes that increased the income of a business, over its resources and capabilities. as it is detailed, competitiveness is complex because it involves a series of variables that are analyzed according to the needs of the company through its resources (aguilera et al., 2011; flores-romero & gonzález-santoyo, 2009; parody et al., 2016). several studies establish that the implementation of innovation strategies in smes has a positive impact on competitiveness (cruz, 2018; gonzález, 2018; magdaleno et al., 2015; mejía-giraldo et al., 2015; pérez et al., 2018; villegas et al., 2018;). in the search for competitiveness, smes can determine their competitive advantage and increase the chances of success through their resources and capabilities (flores-romero gonzález-santoyo, 2009; montoya et al., 2010). therefore, the capacity for innovation allows them to be more competitive in the market in which they operate (aragón-sánchez, & rubio-bañón, 2005; jankowska, et al., 2017; montoya et al., 2010). brunswicker & vanhaverbeke (2015) explain that the scope of competitiveness in smes is associated with a greater approach to innovation. therefore, the innovation capacity of a sme will be determined by the development of competitive strategies over the execution of its resources and capabilities (gonzález-campo & ayala, 2014; lin & wu, 2014). lópez and merono (2011) conclude that innovation capacity positively influences competitiveness resulting in positive performance. the capacity for innovation will allow the transformation of resources, resulting in greater competitiveness in the sector in which smes compete. these antecedents make the researchers pose the following hypothesis, which can be seen in figure 1: h1. the heterogeneous effect of the eo, mo, hc, and sc resources has a positive impact in the capacity for innovation of the sems in cr, pr, and dr. h2. the capacity of innovation through the generation, acceptance, and implementation of new ideas, products or services has a positive impact in competitiveness in the mar5 u. mendez-vega, g. muñiz-umana, j. a. flecha-ortiz, & m. santos-corrada journal of small business strategy / vol. 31, no. 3 (2021) / 01-18 kets where the sems of cr, pr and the dr operate. h3. there is a significantly different impact among the sems of cr, pr, and the dr in the heterogeneity of the eo, mo, hc, and sc resources and their impact in the innovation capacity. h4. there is a significantly different impact in the sems from cr, pr, and the dr in how the innovation capacity through the generation, acceptance, and implementation of new ideas, products or services positively impacts the competitiveness in the markets in which they operate. figure 1. research model method an electronic survey was sent to the email database of the main organizations digepyme costa rica, the commerce and export company of puerto rico, and the chamber of commerce and production of santo domingo. with the support of these organizations, 659 surveys were received in which 467 were valid for the analysis. the data collection used the technique of no replacement. to comply with the rigor of the technique of no replacement, the survey was coded and protected so that it could only be accessed once. if the participant abandoned or left the survey incomplete, it was automatically rejected (malhotra & dash, 2016). the distribution of participants culminated with n = 193 from costa rica, n = 141 from puerto rico and n = 121 from the dominican republic. instrument design thirty-one (31) items were used to measure the study variables. the researchers designed the items based on the review of the literature and the research objectives. the items of the instrument were designed on a five-point likert scale where participants responded 1 as totally disagree and 5 as totally agree. the design of each item began with the variable heterogeneity of the resources that researchers configured as a second level variable through its dimensions of entrepreneurship orientation, market orientation, social capital, and human capital. to analyze the variable, the researchers used the hierarchical component models (hcm) using the repeated indicators approach of the dimensions eo, mo, sc & hc (ringle et al., 2012). to measure the dimensions, the variable eo had seven items, which were designed through the dimensions of innovation, risk taking, and proactivity. for this group of items, the researchers investigated how the eo allowed reacting with greater agility to the changes of the environment through its capacity for innovation. the mo had five items, which investigated how smes adapted their strategies in the markets in which they operated and how this allowed them to achieve competitive advantages. the sc dimension had three items that analyzed how smes used their collaborative network and contacts in order to establish innovations through individual strategies. the hc had two items analyzed from the specific perspective of how managers hired qualified personnel and how knowledge of their staff could improve their production processes. the innovation variable had six items that investigated the way in which innovation capacity allowed the obtaining of competitive advantages within a market and how they responded to different contingencies based on their strategy. in the end, the competitiveness variable had seven items that investigated how the tactics used by smes 6 u. mendez-vega, g. muñiz-umana, j. a. flecha-ortiz, & m. santos-corrada journal of small business strategy / vol. 31, no. 3 (2021) / 01-18 have allowed them to respond based on their resources and capabilities. validity & reliability of research before analyzing the data, the researchers analyzed the validity and reliability of the study. the summary of the results can be seen in table 1. the results show that the alpha coefficients, standardized loads, and convergent validity are according to the criterion of .70 in most of the analysis variables (hair et al., 2011; henseler., et al., 2009). in the hc variable an alpha of .69 was observed; however, standardized loads and convergent validity showed validity and reliability. furthermore, composite reliability represents a better indicator for analyzing alpha coefficients. according to chin (1998), the composite reliability is much more accurate since the received indicators are not assumed to be weighted. in the end, the ave values reflected results over .50 that led researchers to conclude that the latent variables explained more than half of the variance on their indicators, according to the criteria of .50 by hair et al. (2016). thus, in turn ave values are a measure that provides the value that a constructor obtains from its indicators. this test is ideal since it indicates that a set of indicators represents a single underlying construct (henseler et al., 2009). this analysis led to the conclusion that the study showed high validity and reliability. table 1 reliability and validity analysis variable dimensions coding factor loading cronbach’s alpha composite reliability average variance extracted (ave) competitiveness comp01 comp02 comp03 comp04 comp05 comp06 comp07 0.747 0.817 0.739 0.794 0.783 0.819 0.767 0.893 0.916 0.61 entrepreneurial orientation meem01 meem02 meem03 meem04 meem05 meem06 meem07 meem08 0.673 0.705 0.661 0.796 0.742 0.848 0.807 0.781 0.890 0.913 0.569 human capital caph01 caph02 0.853 0.895 0.693 0.866 0.764 innovation inno01 inno02 inno03 inno04 inno05 inno06 0.795 0.767 0.742 0.807 0.890 0.887 0.899 0.923 0.667 market orientation mark01 mark02 mark03 mark04 mark05 0.841 0.841 0.814 0.829 0.708 0.866 0.904 0.653 social capital caps01 caps02 caps03 0.834 0.834 0.841 0.786 0.875 0.700 7 u. mendez-vega, g. muñiz-umana, j. a. flecha-ortiz, & m. santos-corrada journal of small business strategy / vol. 31, no. 3 (2021) / 01-18 discriminant validity the researchers analyzed that there was no significant variance between the different variables that could have the same meaning. the researchers analyzed the data using the fornaken & laker criterion (table 2). according to these results, the study did not indicate problems between variables that could have the same meaning. for the fornell-larcker criterion analysis, a diagonal level of the results of the square root of ave values is observed while the rest of the cells present the correlation data between the constructs. the discriminant validity analysis allows us to justify the definition and choice of the indicators. it leads to the conclusion that there is no significant variance between the different variables that could have the same meaning (fornell & larcker, 1981; luque, 2000). hierarchical component models (hcm) the researchers analyzed the explanatory power of the variable resources. as established in the literature, the researchers analyzed the four internal resources that were unique and difficult to imitate. to observe the heterogeneity of the resources, the researchers analyzed the variable using the hierarchical component models (hcm). according to hair jr et al. (2018), using the hcm allows researchers to reduce the number of relationships in the structural model, which makes the pls route model more accurate and easier to understand. to achieve this, the researchers used the approach of repeated indicators for second-order constructs that made up the variable resources (hair jr et al., 2018; ringle et al., 2012). the results of figure 2 reflect a strong impact on the conformation and heterogeneity of the resources and the way in which they are valued is explained table 2 analysis of discriminant validity competitiveness entrepreneurial orientation human capital innovation market orientation resources social capital competitiveness 0.781 entrepreneurial orientation 0.585 0.754 human capital 0.663 0.454 0.874 innovation 0.729 0.638 0.53 0.816 market orientation 0.764 0.586 0.573 0.683 0.808 resources 0.803 0.87 0.694 0.787 0.865 0.661 social capital 0.701 0.504 0.605 0.718 0.646 0.78 0.836 entrepreneurial orientation market orientation human capital social capital resource-based capacity-based innovation competitiveness 𝑅𝑅 =1.000 𝑅𝑅 =0.638 𝑅𝑅 =0.532 figure 2. hypothesis results 8 u. mendez-vega, g. muñiz-umana, j. a. flecha-ortiz, & m. santos-corrada journal of small business strategy / vol. 31, no. 3 (2021) / 01-18 first by mo (β = 0.36; t = 27.617), followed by eo (β = 0.48; t = 24.181), then sc (β = 0.22; t = 23.139) and finally hc (β = 0.13; t = 17.375). results the results of the measurement model can be seen in figure 2. these reflect a high predictive power. the analysis began by observing whether the heterogeneous effect of the eo resources (β = 0.48; t = 24.181), mo (β = 0.36; t = 27.617), hc (β = 0.13; t = 17.375) and sc (β = 0.22; t = 23.139) maintained a positive impact (h1 β = 0.72; t = 35.345) on the smes innovation capacity of cr, pr, & dr. secondly, it was analyzed whether the innovation capacity (h2 β = 0.72; t = 24.692) maintained a positive impact on competitiveness. the results showed support for h1 & h3. these results demonstrate that there is a strong relationship through variable resources and variable innovation (β = 0.72) and, in the same way, another strong relationship between innovation and competitiveness (β = 0.72). other data of interest is seen when observing the results of r² and q². the data lead to the conclusion that the research model maintains a high predictive power. the dynamic data from the innovation variable is explained in 65% and 53% by competitiveness. this result is also supported by observing values of .30 and .40 through the blindfolding test (q²) so that the modified model data has a high predictive power and strengthens the discussion of the selected results. discussion the statistical analysis of this first part of the study provided empirical evidence on how the heterogeneity of resources was valued and how the way they were managed (fong reynoso et al., 2017) generated innovation capacity (loggiodice, 2012). the theory of resources and capabilities emphasizes the need for companies to develop strengths in order to achieve competitive success (carrillo et al., 2017). the data showed how differences and the degree of importance in managing resources generated the capacity for innovation. this is how hcm data explained the heterogeneity of resources through the impact obtained on innovation capacity (otero et al., 2018). therefore, the results of the hcm in the conformation of the resources variable and its impact on the capacity for innovation presented valuable information about the way in which they executed and managed their resources. first, mo was listed as the most valued resource, which was managed in order to achieve superior performance for the generation of innovations in the markets in which they operated. the eo positively increased the capacity for innovation through the exploration of new strategies (bedoya & arango, 2017; matsuno et al., 2014; sok et al., 2017) and was managed as a relevant factor to innovate successfully (asikhia, 2010; didonet et al., 2016). on the other hand, the sc was established as a powerful determinant (chen et al., 2011) and an element that generated the capacity for differential innovations (kim & shim, 2018; li et al., 2018). finally, the hc allowed them to hire qualified personnel and increase knowledge in order to improve processes and thus increase their capacity for innovation. study 2 in this second part of the work, the researchers analyzed whether there was a significantly different impact between the sme groups of cr, pr & dr through the research model. the selection of analyses of these three countries is sustained since the hispanic caribbean is made up of pr, dr and cuba. given the political and economic differences in cuba, it is not considered comparable. instead, pr and dr are in the caribbean region and are neighboring countries with free trade and democratic economies. cr is now selected as a central american country that is remarkably close to the caribbean. in other aspects, according to the 2019 global competitiveness index, it places a cr at number 62 and dr at number 78 of 141 economic purchases (schwab, 2019). on the other hand, pr does not appear in this report due to its territorial relationship with the united states. in addition, according to doing business (2020) statistics, it gives a rating of .60 for cr, pr .70, and dr .60 to the analysis of national smes and the ease of doing business in the country. hence, these three ideal countries are similar enough for this study. a summary of demographic data of interest can be observed in table 3. method to determine whether there was a significantly different impact between the paths of the research model, the model was analyzed through pls-mga. prior to the analysis, an invariance analysis was performed on the constructs, using the three-step measurement invariance of composite model (micom) test and the calculation of permutations in smart-pls, in order to validate whether pls-mga was adequate for the analysis and presentation of results (henseler et al., 2016). 9 u. mendez-vega, g. muñiz-umana, j. a. flecha-ortiz, & m. santos-corrada journal of small business strategy / vol. 31, no. 3 (2021) / 01-18 table 3 demographic sample summary puerto rico n = 142 costa rica n = 193 dominican republic n = 121 how long has the company been established? one year or less 5 3.52% 5 2.59% 22 18.18% 2 to 5 years 46 32.39% 56 29.02% 48 39.67% 6 to 10 years 18 12.68% 35 18.13% 24 19.83% 11 to 15 years 22 15.49% 38 19.69% 12 9.92% 16 to 20 years 21 14.79% 23 11.92% 3 2.48% 21 years or more 30 21.13% 36 18.65% 12 9.92% total employees 7 employee or less 79 55.63% 131 67.88% 86 71.07% 8 to 25 employees 32 22.54% 44 22.80% 24 19.83% 26 or more employees 31 21.83% 18 9.33% 11 9.09% estimated annual income (us dollars) $ 500,000.00 or less 77 54.23% 145 75.13% 100 82.64% 501,000.00 to $ 3,000,000.00 35 24.65% 30 15.54% 17 14.05% $ 3,000,000.00 or more 30 21.13% 18 9.33% 4 3.31% sems type of business agriculture, forest hunting and fishing 1 0.70% 6 3.11% 4 2.48% mining 0 0.00% 0 0.00% 0 0.00% electricity, water and gas 0 0.00% 2 1.04% 3 2.48% construction industry 4 2.82% 15 7.77% 11 9.09% manufacture 20 14.08% 11 5.70% 8 5.79% wholesale trade 5 3.52% 7 3.63% 12 9.92% retail trade 16 11.27% 68 35.23% 6 3.31% information’s system 2 1.41% 2 1.04% 2 1.65% finance and insurance 2 1.41% 0 0.00% 5 4.13% real estate, rent or lease 3 2.11% 3 1.55% 1 0.83% professional and technical services 29 20.42% 35 18.13% 34 27.27% management companies 2 1.41% 0 0.00% 1 0.83% administrative services and solid waste 0 0.00% 0 0.00% 0 0.00% educational services 9 6.34% 5 2.59% 2 1.65% health and social assistance services 6 4.23% 2 1.04% 5 4.13% arts, entertainment and recreation 7 4.93% 5 2.59% 2 1.65% tourism and food services 4 2.82% 12 6.22% 3 2.48% other services (except public administration) 4 2.82% 14 7.25% 8 2.48% other 28 19.72% 6 3.11% 24 19.83% 10 u. mendez-vega, g. muñiz-umana, j. a. flecha-ortiz, & m. santos-corrada journal of small business strategy / vol. 31, no. 3 (2021) / 01-18 micom test the first step was to establish the configural invariance. to achieve the first step, the researchers configured the pls algorithm using the same indicators for each variable observed and the same treatment for the data on the cr n = 193, pr n = 141 and dr n = 121 groups. they concluded that the configural invariance was successfully established, so they continued with step 2 (henseler et al., 2016). hair jr et al. (2018) state that the second step is to analyze the compositional invariance using the permutation test. to determine the compositional invariance, the null hypothesis could not be rejected where h0 c =1; 1. it will also be observed for its level of significance of p > 5% (hair jr et al., 2018, henseler et al., 2016). the summary of the results can be observed in table 4. one thousand (1,000) permutations were executed on the study sample, leading researchers to support the hypothesis that the groups being compared showed significantly 1 scores (c). the data reflected that there was no invariant effect, so the grouping of the data was not necessary. this result led to the conclusion that step 3 was not necessary, determining that pls-mga was appropriate for analysis purposes (henseler et al., 2016; hair jr et al., 2018). table 4 configural invariance (micmo test step 2) country comparison cr vs pr cr vs rd pr vs rd configural invariance c=1 5% p < .05 c=1 5% p < .05 c=1 95% p < .05 cv competitiveness 1.000 0.999: 1.000 0.543 1.000 0.998:1.000 0.834 0.998 0.996:1.000 0.332 yes entrepreneurial orientation 0.999 0.999:1.000 0.420 0.999 0.995:1.000 0.613 0.999 0.999:1.000 0.386 yes human capital 0.999 0.995:1.000 0.081 0.999 0.995:1.000 0.436 0.999 0.994:1.000 0.465 yes innovation 1.000 0.999:1.000 0.517 1.000 0.999:1.000 0.473 0.999 0.999:1.000 0.110 yes market orientation 1.000 0.999:1.000 0.685 1.000 0.999:1.000 0.893 1.000 0.999:1.000 0.972 yes resources 0.999 0.998:1.000 0.326 1.000 0.998:1.000 0.922 0.999 0.997:1.000 0.501 yes social capital 1.000 0.998:1.000 0.921 1.000 0.998:1.000 0.983 1.000 0.997:1.000 0.988 yes results pls-mga pls-mga is a non-parametric one-tailed test where p <.05 values indicate whether the coefficient of the route is significantly higher in the first group and is compared with the second group (cr, pr & dr) on the results of bootstrapping (hair jr et al., 2018). in analyzing more than three groups, the researchers conducted a preliminary test through an omnibus test of group differences (otg) proposed by sarstedt et al. (2011). the otg allows the researchers to analyze more than three groups of cr, pr & dr simultaneously and offers an acceptable level of statistical power without relying on distribution assumptions. the otg test is not available through pls-sem. to calculate the otg, the researchers used a spreadsheet for otg designed by chan (2014). through the spreadsheet, the researchers placed the estimates of 1000 bootstrapped generated by pls-sem. preliminary results showed no significant differences between cr, pr & dr to be compared (table 5). after this preliminary evaluation, the pls-mga was executed and the results in table 5 led researchers to reject the hypothesis for h3 and h4 as there was no significantly different impact through the measurement model. discussion the results in table 5 reflect that there was no significantly different impact on the variables throughout the research model, so h3 and h4 were rejected. the results of this second part allowed the researchers to deepen their knowledge and provided additional information in the way in which the resources and capacities presented in study 1 were managed. although the results showed similarity in the way they managed resources, the results of the t-test reflected some interesting data. cr reflected impacts greater than pr and dr in the way in which they managed their resources, but it was dr that managed to take greater advantage of its capacity to innovate (innovation competitiveness; t = 17.861) than cr and pr in order to develop strengths to achieve competitive success. it is interesting to note that in dr its most valued resource is the eo (t = 11.966) and in pr the second most valued resource is sc (t 11 u. mendez-vega, g. muñiz-umana, j. a. flecha-ortiz, & m. santos-corrada journal of small business strategy / vol. 31, no. 3 (2021) / 01-18 = 14.089). this second part of the study provided valuable information on the different thinking perspectives of the sme administrators in the region and the degree of importance in managing resources and capacities in the markets in which they operate. conclusion the theory states that the heterogeneity and the way in which resources and capabilities are managed persist over time and provide a competitive advantage, as long as they are valuable and rare, in order to maintain a sustainable advantage over time (cruz, 2018; garcía et al., 2018; matsuno et al., 2014; miller & breton, 2017; reynoso et al., 2017). this study explored how cr, pr and dr smes tailored their eo, mo, sc, and hc resources and their impact on their innovation capacity. secondly, it explored how innovation capacity appeared as a component for the generation of competitive advantages and its impact on competitiveness. finally, it explored if there was a significantly different impact on the smes of cr, pr, and dr through the proposed research model. this study offers several contributions to literature. according to barney et al. (2011) and bedoya and arango, (2017), the new direction of resource-based studies should contemplate the analysis of the maximum set of variables to present a theoretical and practical understanding of the heterogeneity of resources. historically, the resource-based study only contemplates one to two variables in which the literature reveals positive impacts on innovation capacity (ajayi, 2016; asikhia, 2010; bedoya & arango, 2017; canales & álvarez, 2017; cruz, 2018; didonet et al., 2016; gonzález, 2017; lópez & contreras, 2009; schumpeter 2000; zontek, 2016). when contemplating the set of most analyzed variables (eo, mo, sc and hc) in the literature through the hcm, it presents a valuable contribution of how the heterogeneity in the variable resources is observed. the theory supports the idea that the effects of valuable resources must be observed heterogeneously to determine the performance of the company. this study offers more extensive information about how the resource variable is composed and how it is used to manage innovation capacity. secondly, the results add to what cuervo (1993) states, who establishes that competitiveness is determined by external variables and by the internal actions of managers to generate resources and capacities in which heterogeneity will explain the competitive advantages and success of the company. the adequacy of resources and the way the managers of smes obtain their innovation capabilities translate into a positive impact on competitiveness, thus demonstrating that they are valuable, rare, inimitable, and non-substitutable (barney et al., 2011; bedoya & arango, 2017). then, when determining the factors in their competitive environment, innovation capabilities, together with the way in which they manage and select their resources, explain competitiveness (garcía et al., 2018; hernández et al., 2018; lin & wu, 2014). the resources are not the ones that generate the competitive advantage, but the combination of resources through their strategic adjustment generates value through their capacity for innovation, thus allowing them to achieve greater competitiveness. the data reflected that the way smes of cr, pr and dr adapted their resources is explained firstly by their mo, followed by eo, sc and hc. it is distinctive to note that the table 5 pls-mga results country cr pr dr cr pr dr cr vs pr cr vs pr pr vs dr cr vs pr cr vs pr pr vs dr path β β β t t t pls-mga p <.05 pls-mga p <.05 pls-mga p <.05 otg p<.05 otg p<.05 otg p<.05 entrepreneurial orientation→ resources 0.446 0.544 0.492 19.415 12.528 11.966 0.981 0.835 0.193 0.981 0.837 0.192 human capital→ resources 0.133 0.127 0.141 12.878 8.836 6.411 0.367 0.637 0.711 0.499 0.538 0.541 innovation→ competitiveness 0.752 0.695 0.739 16.961 12.940 17.861 0.207 0.403 0.735 0.448 0.467 0.528 market orientation→ resources 0.358 0.341 0.37 22.266 14.959 10.881 0.267 0.614 0.762 0.499 0.538 0.541 resources → innovation 0.803 0.793 0.76 23.330 21.999 18.804 0.419 0.210 0.272 0.515 0.438 0.432 social capital→ resources 0.213 0.22 0.229 17.137 14.089 9.942 0.63 0.724 0.62 0.501 0.524 0.522 12 u. mendez-vega, g. muñiz-umana, j. a. flecha-ortiz, & m. santos-corrada journal of small business strategy / vol. 31, no. 3 (2021) / 01-18 three countries show the same order and level of importance to each resource. this implication is valuable and supports what was exposed by priem et al. (2001), who explains that the application of strategies requires an understanding of how resources are adapted according to their level of importance and how they contribute to capacity building as the innovation. in this sense, each resource contributes to the capacity for innovation in diverse ways. for example, mo is listed as a resource that can be immediately deployed in the market (ferreira & fernandez, 2017). the em explains the participation and the business through its practices and processes (sok et al., 2017). this is how sc, through its network of contacts, increases processes in an accelerated way (subramaniam & youndt, 2005). finally, the hc affects how the entrepreneur implements its strategy and how the human resource contributes its knowledge and skills to the business results (fernández ortiz et al., 2006; marenzana & abraham, 2016). therefore, the degree of importance of these resources and the way in which the owners of the smes of cr, pr and dr execute their strategies more quickly allow the innovation of products and services that results in greater competitiveness within their local and international market. however, the adequacy of the resources of the smes of cr, pr and dr reflect an impact on their capacity for innovation and competitiveness. for example, at the level of government policies, the three countries have incentives, training programs for entrepreneurs, the strengthening of business networks and the improvement of productivity that strengthen the efficiency of smes. this involvement is valuable since the resources and capacities for innovation and competitiveness are similar in cr, pr, and dr, so at the country level there is a strong sme base focused on innovation resulting in greater competitiveness. this is how competitiveness strengthens the economy, becoming a source of competitive advantage. on the other hand, considering the current context of a constantly changing market, these results have management implications for smes in the three countries. with mo, owners must identify and promote value creation for their clients so that they do not lose the loyalty of those who are part of their target market and take advantage of the opportunity to attract new ones with innovative products or services in the new social and market reality. in relation to the eo, the strategic thinking of these owners allows for practice to adapt more easily to changes, and in this way, a culture of innovation is strengthened. the sc promotes collaborative alliances to increase the competitiveness of smes. suppliers of raw materials or finished products support and innovate. in this way, they manage to stay on the market. finally, the hc is the one that materializes the strategic thinking of the owners of smes. contributions of ideas by collaborators improve products and services, making them more attractive and responsive to customer needs. for the owners and administrators of smes, once the external factors that lead them to be competitive are determined, the results provide valuable information on how internal action generates resources and capabilities. therefore, the way they manage heterogeneity produces sustainable competitive advantages. smes that want to be more competitive should take into account the resources analyzed in this study in order to establish more innovative companies through their management of products and services, internal processes, collaboration, and staff development which will allow them to differentiate themselves from their competitors. limitations first, this research used data collection through a cross-sectional design, which can result in bias problems through sample selection. to solve these limitations, researchers recommend the use of a longitudinal design in order to observe if there are changes over time and thus reduce bias problems. secondly, the researchers did not analyze other control variables such as company size, established time, among others. aranguren peraza (2007) argues that to overcome these limitations there should be a focus on the degree of simplification of experience, training, and socialization done by the researchers through the recommended methodology. finally, future research should consider each country’s analysis in more detail to determine differences and similarities depending on where smes are located. future research & final considerations one of the recommendations is to expand the model by analyzing variables such as company size, established time, and differences between smes of services and those of products. this analysis will allow researchers to analyze in greater depth the impact that the theory of resources and capabilities has on innovation strategies or which sector takes more advantage of the adequacy of its resources. the final recommendation is to do research comparing smes between local business models and export activities. the research model proposed in this study advances current knowledge by suggesting that in order to achieve competitiveness over innovation capacity, it is necessary to use all available resources effectively. in the end, the results of the model reveal that the implementation of their innovation capabilities, the adequacy of the heterogeneity of the resources, and the degree of im13 u. mendez-vega, g. muñiz-umana, j. a. flecha-ortiz, & m. santos-corrada journal of small business strategy / vol. 31, no. 3 (2021) / 01-18 portance with which they are managed will result in greater competitiveness within their sector. references afriyie, s., du, j., & appiah, k. 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(2016). the role of human resources in enhancing innovation in tourism enterprises. managing global transitions: international research journal, 14(1), 55-73 editor-in-chief william c. mcdowell middle tennessee state university senior editor dianne h. b. welsh university of north carolina — greensboro associate editors joshua aaron middle tennessee state university whitney o. peake western kentucky university raj mahto university of new mexico editorial assistant stacy aaron middle tennessee state university editorial review board semra ascigil middle east technical university joe r. bell university of arkansas at little rock david brennan university of st. thomas shawn carraher university of texas at dallas phillip e. davis east carolina university eugene fregetto university of illinois at chicago joseph geiger university of idaho armand gilinsky sonoma state university michael goldsby ball state university michael harris east carolina university david lyn hoffman metropolitan state college of denver jeffrey hornsby kansas state university jerry kudlats middle tennessee state university cathleen (folker) leitch wilfrid laurier university robert lussier springfield college matthew r. marvel ball state university brian mckenzie california state university, east bay thaddeus mcewen north carolina a&t state university abbas nadim university of new haven john e. prescott university of pittsburgh neal pruchansky keene state college jeff shields university of north carolina at ashville leo simpson seattle university matthew c. sonfield hofstra university harriet stephenson seattle university jude valdez university of texas at san antonio © copyright 2016 small business institute® issn 1081-8510 (online) issn 2380-1751 2015-2016 sbi officers sbi small business institute ® president: william c. mcdowell middle tennessee state university william.mcdowell@mtsu.edu president-elect: patrick walker lindenwood university pwalker@lindenwood.edu vice president of programs: john h. batchelor university of west florida jbatchelor1@uwf.edu vice president of programs-elect: deborah cours california state university-northridge deborah.cours@csun.edu secretary/treasurer: joshua aaron middle tennessee state university joshua.aaron@mtsu.edu vice president of marketing and communications: whitney peake western kentucky university whitney.peake@wku.edu vice president of membership: michael harris east carolina university harrismi@ecu.ed vice president of research and publications: blake escudier university of fredericton blake@escudier.us vice president of development: joy griffin california state university-northridge joy.griffin@csun.edu immediate past president: john hendon university of arkansas little rock jrhendon@ualr.edu editor, journal of small business strategy: william c. mcdowell middle tennessee state university william.mcdowell@mtsu.edu editor, small business institute® journal: michael harris east carolina university harrismi@ecu.edu mailto:harrismi@ecu.ed mailto:harrismi@ecu.ed mailto:blake@escudier.us mailto:blake@escudier.us mailto:harrismi@ecu.edu mailto:harrismi@ecu.edu stra tegy tapping the benefits of the living case methodology: a case study janet bear wolverton southern oregon university wolvertj'qaoit, edu roy a. cook fort lewis college took t@ilinticuiccdu abstract the traditional case methodology has been used effeciively in business education since /921. rtlthough tltis method of instruction promotes critical thinking, problem solving and communication skills, there are inherent disadvantages associated with it. in an auempt to address these disadvantages, the researchers utilized the living case methodologt in a capstone senior strategy course. in the living case environment, students becotne active participants in the case. they interact with the decision makers of the cotnpany to gather the data, analyze it and determine the relevancy of the data in the decision making process. the concluding comments of the business owner as well as those of the instructor add insight to the advantages of the living case methodology as an instructional tool. introduction over the past decade, the emphasis in higher education has changed from professor-centered learning to active student involvement and participation in the educational process with the goal of graduating students who possess superior communication, critical thinking and problem solving skills. in addition, calls continue to emanate from legislators, governing boards and business advisory groups for research relevancy. the application of case methodology to the learning process has been used successfully to address these goals and concerns. in fact, mcewen (1994) found that the use of case studies ranks as the classroom method considered most effective for developing critical thinking skills. using cases to enhance the learning process has a long history in the academic community which can be traced to the medical and legal areas. today, however, cases are being used very eltectively over a wide range of disciplines from physical education and engineering to psychology and business. case teaching has enjoyed a successful history of enhancing education in the business disciplines. in 1921, the harvard school of business introduced the case method of instruction for business classes based on the documented learning successes that had been achieved by having students analyze actual business situations (mcnair gc hersum, 1954). most business schools now use cases in their capstone courses in areas such as management, 74 journal of small business strategy vol. l l, tvo. l spring/snmmer 2000 marketing and finance. these disciplines have relied on cases as a teaching mechanism to refine critical thinking, communication and problem solving skills in "real world" situations and to draw previously acquired concepts into a dynamic learning experience. the use of cases to illustrate specific and integrative concepts is becoming more popular and can be found in courses throughout the business school curriculum, even in entry level courses. what is a case? in general, a case is a written, descriptive history of a particular situation. specifically, it is a written account of an event as it actually occurred with the key players in place. a case "commonly involves a decision or a problem. it is normally written from the viewpoint of the decision maker involved and allows the student to step figuratively into the shoes of the decision maker. the basis of each case is the fundamental fact that an actual person truly faced the situation described" (erskine ec leenders, 1989:10). the content of the case varies with its educational purpose. a case may be short or long; it can cover a broad range of information or it can be more in-depth and specific. in business education, the traditional case is a teaching document that has been researched and written for classroom use. classically defined by gregg (1940): ...itis typically a record of a business issue which actually has been faced by business executives, together with surrounding facts, opinions, and prejudices upon which the executives had to depend. these real and particularized cases are presented to students for considered analysis, open discussion and final decision as to the type ofaction which should be totten (p. 6). traditional case methodology the primary purpose of the case method is to bring some reality into the classroom by providing students with real world problems that promote in-depth analysis and discussion. "the ultimate goal of the case method is to train students to make effective management decisions by recreating, as closely as possible in a classroom setting, the reality of organizational situations" (little, 1993:27). in doing this, students gain both professional knowledge and problem-solving skills. traditional case methodology provides an arena for students to test their critical thinking and problem solving skills. it allows them to develop action plans applying their knowledge and experience to formulate alternatives and to make decisions based on these alternatives. the classroom setting provides a risk-free environment where students can become involved in case analyses and have the opportunity to make mistakes and leam from them. intrinsic in the case methodology is the idea that there is no single correct answer. the students analyze the facts presented in the case, determine the different possible courses of action the decision maker may select, choose an alternative based on this analysis, and defend their selection. advantages of traditional case methodology many additional advantages have been attributed to the use of the case method in the classroom (graham gc cline, 1980; andrews gc noel, 1986; little, 1993). cases enhance the educational value of instruction by allowing theory and/or research to be applied to a decision. theory becomes easier to understand and more concrete. 75 journal ofsmall business strategy vo/. i /, //o. / spring/suinmer 2000 students are more likely to remember concepts when they are applied to real world situations course concepts become intemalized. students'xperiences are broadened. they get a chance to see different points of view through various resolutions to the case. the case method improves students communication skills both verbal and written. students are actively involved in the learning process through questioning, probing and responding. students usually find the case method of instruction more interesting and, therefore, more motivating. using cases increases the student's ability to develop ideas. disadvantages of the traditional case methodology in spite of its many advantages, the traditional written case is seen to have some shortcomings (andrews & noel, 1986; turner & kumar, 1991; kreck 1992). decision making in the real world is filled with real time complexities and inconsistencies which cannot be duplicated in the written case. the written case lacks immediacy since it is the history of a past situation and there is no opportunity to create an environment of dynamic feedback where students can learn from analysis and implementation mistakes. the information is presented in a single medium print. real situations use a variety of information sources. there is a vast difference between actually experiencing something and only reading about it. the written linear case description constrains some of the potential inherent in the case method of instruction by following a time or story line where the student may be led through the material to conclusions which have been shaped by the facts presented. the traditional method is relatively weak in its efforts to teach business problem identification and solution. the living case addresses some of the disadvantages of the traditional case method while providing an opportunity for both instructors and students to benefit from the many advantages of this methodology. what is a living case? living cases can best be described as dynamic, "real-time" business decision making opportunities. generally speaking this teaching method includes both students and a business principal working together to identify current managerial issues and/or problems. once these issues and/or problems have been identified, students are faced with the challenge of developing and presenting recommendations that can withstand the scrutiny of the business principal. the idea of bringing business people into the classroom to allow students to deal with specific problems can be traced to the pioneering efforts of dean edwin f. gay at harvard university in 1912. at the first meeting with the class, /the businessman j explained his problem to the students and answered such questions as they raised, provided the questions could be answered. at (he next meeting of the class two days later, each student handed in a wrinen report embodying his analysis of the problem and his recommended solution. at the third meeting of the week, the businessman discussed these reports with the class (mc//air & hersum, l954: 26-27). 76 journal of small business strategy vol. ll, no. l spring/summer 2000 in the living case environment, students have the opportunity to become active participants in the case. the living case is an example of the learning by discovery methodology. teaching literature has shown this technique to be effective in domains where inference and induction skills are important (eysenck, 1984; carroll, paine 8: ivancevich, 1972). turner and kumar (1991)state, "ln this method, students are allowed to gather their own data, form hypotheses about problems and solutions, and then accumulate additional confirming or refuting information" (p. 353). the living case addresses some of the disadvantages of the traditional case methodology. it allows the students to ask questions of the decision makers to feel the uncertainty and/or risks associated with a situation. in addition, it gives them an opportunity to sift through the original data which may enable them to identify significant trends or the climate of the organization (andrews k noel, 1986). living cases also allow students to hone their information gathering skills. students are placed in a learning environment where they can experience the complexity, inconsistencies and chaos of real world situations. they receive timely feedback and must then determine which path to follow next to reach their goals. the information is presented in a non-linear, undirected format real-time. when students enter the realm of the living case, they move away from the artificially imposed constraints of traditional cases and into a dynamic decision making world. living case methodology kreck (1992) stated that "[a]sking questions that probe specific issues was the secret to operational problem solving" (p. 70). using the traditional case methodology, students cannot go to the company and ask questions which could bring to light many things which influence decision-making. kreck's solution to the problem is the use of "live" or "real" cases. a company calls with an undesirable symptom, e.g., a significant variance from a budgeted norm. a pair of students travel to the business location and are given three days to present their recommendations to management. he stated, "one either asks the appropriate or critical questions, defined as the ones belonging to this particular situation, or one simply misses a part of the investigation and makes incorrect or less-than-complete recommendations" (p. 72). andrews and noel (1986) reported on a two-day segment of a four-week management training course sponsored by general electric which used the living case methodology. "instead of studying something that happened in the past, participants work on a major, unresolved challenge facing the company" (p. 28). the case involved a decision on introducing a new medical technology and the effects it would have on the company. participants traveled to the medical center where they examined data and documents and interviewed executives. they then developed a marketing strategy, presented their recommendations, gained feedback and made revisions to their proposals. this involvement approach provided participants an opportunity to experience the risks, ambiguities and pressures facing the decision maker. implementing the living case methodology when using the living case approach, a solid conceptual foundation from textbook materials and a combination of lectures spiced with a number of current and relevant examples to highlight the textbook concepts was required. in addition, the input and counsel of other business professionals such as bankers, lawyers, small business development center (sbdc) personnel and certified public accountants (cpas) who served as guest speakers and student resource contacts were solicited. 77 journal of small business strategy vol. l i, tvo. l spring/suntmer 2000 to implement a living case learning environment, instructors must prepare students to keep one foot in two different worlds. first, students must be prepared academically. second, they must be prepared to deal with business people not as students but as professionals. venturing into the world of the living case, the basic components of the case teaching method were kept in mind. the case was: ~ related to actual administrative situations ~ focused on problems ~ designed to place students in analytical, decision making, and evaluative situations ~ based upon data sources and viewpoints essentially from management ~ intended to have the student identify with the organization (ling, 1997; 38) experimental design the authors who are both teachers and avid case writers, decided to experiment with an expanded course using the living case in an undergraduate capstone strategic management class. this class, consisting of 12 students, met for six hours, once a week, focusing on one company throughout the term. this type of course or any course that is taught using the case approach presents an opportunity to actively involve students of varying levels of academic achievement in the learning process. even before students entered the classroom, the stage was set to teach with the living case approach. through previous contacts, several company presidents and business owners were contacted and encouraged to allow their companies to be the focus of our classroom study. the authors explained the case method and provided copies of cases wrinen about other small businesses; students described the possible time commitments and addressed the issues of confidentiality. since the entire class and not just a few team members oren need access to linancial information, the issue of confidentiality can be a major stumbling block when working with privately held companies. this barrier can be overcome when owners are assured that confidentiality statements will be signed by all participants. based on our experiences, the task of finding willing participants who could commit their organizations to these constraints proved to be difficult yet possible. don baker, president of baker distributing company, agreed to work with the class. baker distributing company was engaged in the wholesale distribution of gourmet foods. the company is a very small business (less than $ 1 million in annual revenues), dedicated to locating producers of gourmet and specialty food items and then distributing these items to gir shops and grocery stores in a small geographic region. mr. baker was interested in subjecting his company to the investigation incumbent with the living case process, since he had reached a critical point in the growth of his company. he believed that the living case method would provide him with several benefits. first, it would force him to think about the future and articulate his plans. second, he would have the "consulting services" of both the professor and senior business administration students provided at no charge. third, he stated that working with students would force him to do more research about the industry to be able to answer their questions. the format to which he agreed became part of a free-wheeling process of discussion, research, and discovery which captured the educational benefits oren attributed to discovery learning. 78 journal ofsmall business strategy vol. l l, no. l spring/summer 2000 the initial class meetings included several very structured lectures to enhance textbook materials. students were encouraged to outline the chapters. as a "reward" for outlining chapters, they were allowed to use their notes during any discussions with company representatives or speakers who visited the class. in addition, students were permitted to use the notes to answer questions on the objective portion of their exams. however, notes could not be used during the essay portion of their exams. during the initial class meetings, students were placed in several short (ten to fifteen minutes) group problem solving and discussion activities. the purpose of these activities was to provide students with opportunities to become acquainted with one another and comfortable with freely expressing their ideas and opinions with others. applying the living case mr. baker agreed to meet with the class at least once a week and provide them with any information they needed to perform a strategic analysis. although he agreed to meet with the students once a week for ten weeks, the students chose to meet with him in class on only six occasions. sometimes these meetings were long (three hours) and sometimes they were fairly short (about 30 minutes). in fact, at)er the first two meetings, students decided that they wanted to skip one meeting so that they could do more research and prepare to make better use of mr. baker's time. students used this time to divide several research tasks they had identified as important to understanding his business. some of these tasks included visiting his warehouse, talking with key customers and suppliers, and riding along on delivery routes. to avoid being a nuisance, the students divided these tasks and coordinated their schedules for the convenience of everyone involved. the class decided that, for the sake of efficiency and professionalism, they would elect a "scribe" or secretary to keep minutes of the meetings and collect notes from the individual students describing their observations and findings. although this position was not initially built into the class plan, it proved to be an invaluable service. it is interesting to note that a student with extraordinary keyboarding skills volunteered for this task and kept notes on a laptop, printing these out at the end of each class and providing working copies for everyone. the length of classroom meetings was directly related to the amount of research the students had conducted before class and to the subject area(s) being discussed. students were always required to prepare some questions before the meetings, and these questions were forwarded to mr. baker before hand. this process of encouraging thoughtful communication between the students and mr. baker was facilitated by the use of e-mail through the instructor. in addition to the faculty member serving as the gatekeeper for questions, this process also allowed the faculty member to assist students in refining their questions to obtain relevant information. over the weeks, the class format stabilized. ai)er the prearranged questions had been answered, the classroom turned into a learning laboratory. mr. baker asked questions that piggybacked on previous conversations and sought student input into problems with which he was dealing. these ranged from ways to dispose of excess inventory to suggestions on upgrading computer hardware and software. lt should be noted that mr. baker was not asked for the company financial statements until the third meeting. even though everyone in the class had signed contidentiality agreements, the delicate subject of obtaining detailed financial statements was not approached until a trusting 79 journal ofsniall business strategy vol. i i. no. i spring/summer 2000 relationship had been established. having access to financial statements allowed students to conduct ratio analyses, prepare proformas. and make relevant industry comparisons. access to these statements also led the students to request guest speakers (a bank president, an sbdc director, and a cpa) to discuss relevant small business issues and provide input. mr. baker agreed to have all these speakers participate with the class as long as the students did not divulge specific financial information. owners'erspectives in thc spirit of continuous improvcmcnt, the researchers asked mr. baker a series of questions at the conclusion of the case study. the following are excerpts from his responses to the questions. in what way(s) do you feel the students helpedyou? my presentation to the students and their questions gave me an opportunity to assess the business objectives and helped me crystallize my thinking with respect to future plans and action. what problems did you have with the students and/or their questions? i saw no problems at all, only individuals interested in probing into the activity of a real live business. obviously, some students have an idealism that does not fit the practicality of the situation, but that is why we have such projects for them to explore. how could students improve the project? a little more on site involvement would be beneficial for students to then form their "own" perspectives of the situation rather than take the shared opinion of a couple who formed an idea. ifyou were to do it again, what would you do differently? i would have the entire class start with a tour of the business on-site with a brief overview and then make an in-depth presentation in the classroom followed by questions and answers. i was unable to attend the scheduled report presentations by students. i believe that it would be highly beneficial to listen to student presentations and have an opportunity to engage in further dialogue concerning the thrust of students'houghts. ivhat advice would you give students who will be doing this proj ect for the first rime? i would make every attempt to put students in the shoes of the owner/manager/executive by in-depth participation. i would give them the opportunity to ask themselves "what would i do?" if i were the guy in charge given fiscal constraints of a practical nature and to scope out thoughts and ideas by investigation into the cost of implementation of an idea with a projected return on investment. the biggest problem a business has, every business, is dealing with fiscal constraints and cash ilaw...[i would] try to bring it to life in the study. what advice would you give a business owner/manager doing this project for the first time? open the doors wide. encourage questions and provide honest answers. don't be afraid to air dirty linen...students may give you some options that can solve problems or potential problems. try to set the stage for mutual trust in order to keep the lines of communication open. engage with students at every opportunity and definitely have them visit the business site as frequently as possible, as a group or individually. 80 journal of sniall business strategy vol. i i, ivo. i spring/summer 2000 student reactions students who participated in this process freely shared their thoughts through evaluations conducted during the final class period. following are highlights of their responses: what did you like most about this project? working with a real company and real people was challenging. my ideas were seriously considered. the project helped the class material flow in a logical and meaningful manner. having access to professionals in a real world setting; facing an undefined and challenging set of problems. what did you like least about the project? it was hard to decide where to start since there was so much information and so many different interrelated issues to consider. i was uncomfortable making recommendations that could impact the success or failure of a real business and a real person, but this was also a wake-up call as to the reality of making business decisions and the complexities managers face. i wish we had more time to gain more information and the opportunity to see some of our ideas implemented. ifyou could make changes for students facing a similar project in the fittur, what would they be? assign small working groups (committees) to tackle specific tasks and report back to the larger group (board meeting) to discuss the overall project before writing the final paper. tell the owner to not share as much information about how his company was dealing with challenges. this way, we could think about what kind of recommendations we will offer before we know what types of things are already being considered. start early, take good notes during meetings, and seek as much help as possible from other professors and outside business people. instructors'omments a review of student reactions when viewed in light of the owner's perspectives led to a series of ref)ections for successful implementation of the living case methodology. from the perspective of all involved parties (business owner, students and instructors), the living case was a resounding success. as this pedagogical process is approached in future classes, instructors should inform company principles that the opportunity to share their stories and key decisions points with others through the publication of a case would be appreciated; create an ongoing relationship that would allow students in subsequent classes to build upon the knowledge created by their peers; secure permission to allow instructors to speak to other organizations about the successes and failures resulting from student recommendations; inform company principles that they may strongly disagree or even, at times, be offended by student questions and/or recommendations egos need to be checked at the door when you engage in this process; fully prepare undergraduate students through textbook materials, readings, and lectures to effectively participate in this process; and 81 journal ofsmall business sir a/egy vo/./1. no. l spring/summer 2000 prepare students for the transition from a system that has encouraged and rewarded individual competition for grades to one where the emphasis is on investigative questioning, problem solving and professional interaction. ln this environment, students are faced with meeting professional expectations as well as group expectations, thereby subjecting them to more personal risks. faculty also face more personal risk as they abandon the traditional, secure teaching methods for their new roles as facilitators in the discovery learning process. based un ihe documented success achieved using the living case methodology with baker distributing company, the authors tested the concept in two subsequent strategic management classes. one class, consisting of thirteen students, met two hours daily for five weeks during the summer, working with a regional travel services company. the other class, consisting of twenty-four students, met two hours, twice a week during the regular term, working with a national solbvare development company. both companies would be classified as small businesses using the small business administration's classification criteria. the successes achieved with baker distributing company were replicated in both of these classes. small business institute (sbi ")case methodology in many respects, the classroom-oriented living case method draws on the successful small business institute (sbi) program. this program began over 25 years ago as the u.s. small business administration (sba) and several higher education institutions sought a vehicle to bridge the gap between academic preparation and the entry-level training needs of small businesses. through the sbi™program, "teams of qualified university students, under expert faculty supervision, provide consulting to small business owners and managers, as part of their educational training... the emphasis is on practical, realistic, and affordable solutions to problems confronting small businesses" (see http: //www.cba.uc.edu/cbainfo/sbida/history.htm). the goals of the sbi™case consulting method and the living case are the same in that the emphasis is on the improvement of a small business by applying a thorough analysis using interdisciplinary business knowledge. the process is the same in that students use the decision making model of analysis, looking at the critical success factors of the company, determining the problem(s) the company is experiencing, forming alternative solutions and then making the decision for the most appropriate solution. but, with the living case method, students do this work in the classroom as a whole with the owner/manager coming to the classroom and meeting with students rather than the students being required to visit the site(s) being investigated. the owner/manager provides the students with answers to their questions. the students are not required to actually go through the papers, books, etc. of the company on the premises. by using a broader classroom setting, many students, and not just selected teams of students, are given the opportunity to become intimately involved in a single case. this classroom setting allows many students to be involved in a single case where the entire class becomes the "team." the sbi™approach to helping small businesses is a long-standing program with a proven track record of providing eiyective consulting services to its clients. the living case methodology allows students who are not able to participate in sbi™programs to gain some of the same benefits as those who do. the living case is an expanded, inclusive alternative to the sbi program with many of the same goals: to promote small business, help owners, etc. tm the substance is the same; it is the form that is different. the living case format allows institutions that do not have the resources to support an sbi™program to promote small 82 journal ofsmall business stra/egy vol. //, //o. / spring/summer 2000 business assistance and help owners as well as providing a teaching and learning vehicle for professors and students in a variety of classroom settings. conclusion case analyses and discussions serve as a vehicle to actively integrate students in the teaching/learning process. however, although case analysis can be used effectively as a teaching tool, "...students sometimes feel case discussion becomes routine and tiresome, which reduces its value as a learning experience" (molstad & levy, 1987-88: 28). one approach that has been suggested to alleviate this problem is the use of a class case study. based on the documented successes of this approach and others that actively involve business participants such as the sbi 'eam consulting program, the researchers have taken the idea a step further and actually brought the case into class. bringing the case into the class means more than simply bringing in guest speakers from the company. it requires creating an environment where students can become immersed in the many issues facing an organization, thus placing students in the vicarious roles of managers who have decision making responsibilities. this additional step has resulted in the opportunity to teach a living case. through the use of a living case, an environment was created in which students became actively involved in the teaching/learning process. actively involving students through realtime business experiences is a pedagogical approach that could be used in many difterent types of courses and appears to be especially well suited for instruction designed to bring to life the issues surrounding the formulation and implementation of business strategies. the living case method can be used in any size class or type of course or institution and does not require additional resources or administrative oversight. in addition, students of all academic levels can be given the chance to experience the learning process provided through consulting opportunities that are typically reserved for the best and brightest students at most institutions. this approach is designed to create a learning environment charged with excitement and the competitive desire to excel which is an important trait for successful entrepreneurs and small business owners. peer pressure to prepare and meaningfully participate in class activities was reinforced by the presence of outside business professionals who viewed the undergraduate students as useful resources. the living case should be especially effective with graduate students. one word of caution is in order before closing. be prepared to become an active participant in the process. references a d, e. g. d n i, i. l. (1996). add( g bl h dy h d. nyign dd develo ment journal 40, 28-29. carroll, s. j., paine, f. t. and ivancevich. (1972). the relative effectiveness of training hdp p i d a,~pip hl .a erskine, j. a. and leenders, m. r. (1989). case research; the case writin rocess. london, canada: research and publications division, school of business administration, university of western ontario. eysenck, m. w. (1984). a handbook of co nitive s chain . hillsdale, new jersey: erlbaum associates. graham, p. t. and cline, p. c. (1980). the case method: a basic teaching approach. theorh( p (9. i 12-(16. 0 gg,c.i.(1949,0 6 19). b 14 ' ld. h dai ib ii the article is also included in: mcnair, m.p. (ed.) and hersum, a.c. (1954). the case method at the harvard business school. new york: mcgraw-hill. 83 jv orna/ ofsmall business strategy vvl. i i, no. i spring/suet mer 2000 history of the small business institute. small business institute directors'ssociation online. world wide web. available: hnp://www.cba.uc.edu/cbainfo/siba/history.htm). kreck, l. a. (1992). operational problem solving: overcoming a weakness of the case method. the cornell h.r.a. uarterl 33, 69-72. ling, c. c. (1997, march). the case for "contextual" case. proceedin s of the annual conference of the societ for case research, chicago, illinois. little, c. (1993). the boardroom comes to the classroom. women's review of books 10, 27. mcewen, b. (1994). teaching critical thinking skills in business education. journal of ejucation for business, november/december 99-103. mcnair, m. p. and hersum, a. c. (eds.) . (1954). the case method at the harvard business school. new york: mcgraw-hill book company, lnc. molstad, c. gc levy, s. (1987-88). developing experiential analogs to cases. the or anizational behavior teachin review 12, 28-32. turner, j.a, and kumar, r. (1991). the living case: an intelligent system for providing case instruction. proceedin s of the twelith international conference on information ~sstems, new york, ny, 351-368. janet bear wolverton, ms., c.p.a., is an associate prvfessvr at southern oregon universiry, ashland, oregvn. she has taught in the united states, germany and canada while pursuing her resevrch in/eras/sin accounting education, informativn systems development and stnall business managetnent. s/te has wriuen and published a number of articles, cases and papers in these areas. ms wolvertonis a ntentber of tire atnerican accounting association, society for case research, decision sciences institute, the oregon society of cpas and the associavon of ceni fied fraud examiners. roy a. cook, d.b.a. (mississippi state university) is assistant dean of the school of business and professor of management, fort lewis college, durango, colorado. he has wrinen and published a textbook, numerous articles, cases, and papers based on his extensive experience in the hospitaliry industry and research interests in the areas of strategy, small business management, human relations, and communications. he serves on the editorial boards of the business case journal, the journal of business strategies, and the journal of teaching in trvvel and tourism. he is a member of the academy of management, society for case research (past president), and international society of travel and tourism educators. dr. cook teaches courses in strategic management, small business management, tourism and resort management, and human resource management. 84 safe'd reof small business brief best paper award recipient 2002 national entrepreneurship and small business educators conference utilization of the small business advancement national center in creating a more viable classroom setting and vibrant up to date research don b. bradley hi university of central arkansas donb@mai/.uca.edu abstract this article provides the reader with a beaer understanding of how to utilize the small business advancement ivational center in their classroom and their research. the center's website is used by numerous colleges and universities for research and classroom information. the electronic resource allows the professor and students a much greater opportunity to communicate via tiie internet and e-mail as well as receive classroom and business consulting information. the paper also gives ideas as to how to utilize other internet interfaced teaching tools. introduction this article provides an overview of how to utilize the small business advancement national center (sbanc) in the classroom and for research. the center's website has been employed by numerous colleges and universities around the world to assist in research and to provide information for the classroom. in addition, a large number of academic institutions, foundations, small businesses and governmental agencies use its web site and newsletter. this article provides the reader with the essentials to explore the many teaching techniques that can be utilized by the center's electronic resource (web site h://www.sbaer.uca.edu and the internet. the united states government has instituted as its number one goal that "all students and teachers will have access to information technology in their classrooms, schools, communities dh "i~4..*'wuchc g f vl g hk, d p ii*4 to spend more and more time working. one of the consequences is that they have fewer hours in which they can utilize a teacher's office hours. the number of adult learners is also growing, and they too are pressed to find a time when both they and their professor are free for consultation" (banks & coombs, 2002). the electronic resource allows the professor and students a much greater opportunity to communicate via the internet and e-mail as well as receive classroom and business consulting information. 85 journal of small biisi tints srrnirgv vof /3, no. 2 foilllvmier 2002 small business advancement na'flonal center (sbanc) located on the scenic university of central arkansas caiupus in conway, arkansas, the small business advancement national center (sbanc) is an organization that was founded in 1990 by an act of the united states senate. since its inception as the small business institute directors'ssociation national center, it has evolved into a multi-faceted small business counseling and electronic resource information center. "while high-tech companies have long nurtured intellectual capital, companies today of all types recognize they are in the business of creating value through applied knowledge. even small corporations have surprisingly diverse needs for up-to-date knowledge and skills" (workforce.corn). now a leading-edge facility, sbanc offers small businesses some of the newest, i'reshest information on advances in today's small business technology. sbanc's purpose is to provide the following constituents with the necessary resources to further their business and economic efforts and goals: ~ small businesses ~ economic developnient officers ~ entrepreneurs ~ government agencies ~ eclucatots ~ small business counselors and consultants ~ students ~ international trade development officers ~ lawyers ~ state and federal legislatures one main focus of the center's activities is the promotion of the entrepreneurial spirit. this is accomplished through consulting, educating, and training center constituents. these activities are provided locally, statewide, nationally, and internationally for those interested in small business and entrepreneurship using the following methods: ~ internet ~ conferences ~ distance learning ~ newsletters ~ seminars ~ counseling sessions ~ research ~ international exchanges ~ internships the center's mission is part of the broader mission of the university of central arkansas and college of business administration, which is built on teaching, research, and service. the center's staff has expertise in the areas of small business counseling/consulting, training and education, entrepreneurship, international programs, the internet, electronic commerce, publications and more. in addition, student workers and interns who are eager to help provide small businesses with needed assistance will have the opportunities to provide fresh ideas and learn while they are working on real business problems. the small business advancement electronic resource is available around the clock. staff members will be available to answer questions from 8 a.m. to ah 30 p.m. (central time) monday through friday. all data is updated daily with information that is received from many sources concerning small business and entrepreneurship. 86 journo/ of small business strategy vo/. /3, no. 2 fall/ivinter 2002 instant up-to-the-moment electronic small business information is provided to small business constituents through our small business advancement electronic resource. this connection serves as an extensive electronic link among small business owners, entrepreneurs, foundations, educational institutions, associations, international partners, and local, state, and federal government. the world wide web site offers an endless supply of valuable information that is geared towards helping already established businesses, as well as those just beginning. at the present time, the electronic resource is servicing the united states and its protectorates, as well as over eighty nations worldwide. examples of information provided include industry profiles, business plans, research articles, international and domestic contact databases, and loan information. the small business advancement electronic resource: the following resources and services are provided free of charge to the internet public. n houses research information on all aspects of small business and entrepreneurship, including articles from conference proceedings, industry profiles, and publications from other pertinent sources. n has software that will produce cash flow reports, profit/loss statements, a business plan, and provide a user with the probability of obtaining a loan. o provides a means for electronic consulting and training. provides on-line databases that can be queried on programs such as service core of retired executives, small business institute, international small business contacts, small business development centers, small business institute (formerly the small business institute director's association), congressional contacts, small business administration and the international council for small business. n offers a weekly electronic newsletter to provide "helpful hints" to small businesses and entrepreneurs. n serves as a source for important news and information concerning small business such as conferences, educational resources, government programs and issues, and small business programs. n provides links of other small business and entrepreneur sites on the world wide web. n serves as a clearinghouse for small business advocacy information. provides a web server that is accessible through the internet with any web client software. (h;//www.sbaer.uca.edu the following associations have their proceedings listed on the website: small business institute (formerly the small business institute director's association sbida), association for small business and entrepreneurship (asbe), united states association for small business and entrepreneurship (usasbe), academy of collegiate marketing educators (acme), western decision sciences institute (wdsi), international council for small business (icsb), southwestern marketing association (swma), decision sciences institute (dsi), society for marketing advances (sma), international small business congress, small business administration (sba), service corps of retired executives, southwest decision sciences institute (swdsi), federation of business disciplines (fbd), institute for supply management, us department of veterans affairs and the marketing management association (mma). "teachers are becoming freed from the physical boundaries of classrooms and the time restrictions of schedules" (charp, 2000). having technology set up in the classroom is just a small part of what the instructor has to put up with. "it has been noted that one out of every four visitors to internet sites is either a student or an educator seeking curriculum ideas, research tools, information on publications, or opportunities for professional development" 87 fourmo? of sniall bit si ness strtt«yv vol. i 3, no. 2 fa???ivi nter 2002 (charp. 2000). the real question is: "how does the instructor utilize all of these resources'?" (levine, 2002). fortunately, there are many answeis to this question. some ideas as to how to utilize the sbanc electronic resource and other internet interfaced teaching tools are presented below. of course, the easiest way to use the internet is to present notes that the instructor has prepared. these lecture notes should also be available to students either as a handout or downloadable from the instructor's website. if a website is not available, the instructor can utilize the same material with slides and an overhead projector. but it is a lot easier to do this with a computer. the only problem that the author has found in utilizmg this method is that it is very easy to present more material than the student can absorb. thus, the instructor must pay attention to the student's reactions and check to see if the students understand the material by asking questions. "use of the internet for reinforcement of concepts already learned in the classroom and as a practical application of theoretical principles are great examples of how to niake concepts niore easily understood" (iloveteaching.corn). the electronic resource also offers software that can be downloaded and utilized in the classroom. one of the most important downloadable software items is the first step review, which allows a student or business to plug in their financial data and see their opportunity of getting a loan at the bank. this is a piece of software that has been heavily utilized not only in the classroom, but also with students utilizing the sniall business institute live case approach. links to other small business related web sites appear on our electronic resource. these links can be used for instructional purposes or research. our links section can be utilized as a onestop shop for web sites with information pertaining to small business and entrepreneurship all over the world. there are hundreds of web sites listed. many times the author will utilize these web sites as part of the author's lecture to bring current and up-to-date information to the students. the response from students has been very positive both from the utilization of the web sites live in the classroom and by having assignments made from these links. this information is not only much more current, but in many cases more accurate than what is available from other resources. another instructional tool is the utilization of demonstrations and simulations by having the students connected to the internet and a projection system. the instructor or the students can give demonstrations and simulations that make the topic come alive. it has been amazing to the author how much more the students leam by interactive learning techniques. when utilizing the small business institute hve case model, many students across the world have utilized the electronic research by a laptop in a place of business or meeting room. with a lab top, modem and phone line, the students can literally utilize the electronic resource right in the place of business or give a demonstration or seek information immediately. many times the students will have a demonstration loaded on the electronic resource that can be played back to the business over the internet. small business owners have been overwhelmed by the ingenuity of the student teams. "instructors who value the processes of discussion, dialogue, and public discourse and who are interested in incorporating these forms of electronic resources into their courses, whether serving small or large numbers of students, will find useful ideas for enhancing (economics) courses" (gillette, 2001). we are just looking at the beginning of these new pedagogically techniques. "e-learning is surging largely on the strength of advances in networking and web technologies, collaboration software, multimedia, content management systems, and other building blocks for educational and training applications (bowen, 2002). 88 journal of sniiill business strategy vo/. l3, no. 2 eall/winter 2002 center staff and college of business faculty to further economic opportunities conduct primary and field research. research is disseminated, shared, and exchanged with various small business related entities around the world to promote the development and globalization of arkansas businesses. the center provides the small business institute program with needed information and data. sbi is conducted at approximately 475 colleges and universities nationwide assisting over 6,000 small businesses annually. the center also supports the efforts of the small business institute (formerly the small business institute directors'ssociation) by providing some operational and archival support on a mutually acceptable basis. information clearinghouse sbanc serves as a central information point for up-to-date knowledge, skills, and tecluiiques on small business and entrepreneurship. small business advancement national center university of central arkansas college of business administration uca box 5018 201 donaghey avenue conway, ar 72035-0001 phone (501) 450-5300 fax (501) 450-5360 web server: h://www.sbaer.uca.edu references banks, r. & coombs, n. (n.d.). your onramp ro the internet: theppower of electronic mail. retrieved on april 23, 2002 from h://www.rit.edu/-nrc sh/arts/aahebc95.htm. bowen, t. (n.d.).e-learning tested. retrieved april 22, 2002, from info world online at ht://www.infoworld.com/articles/hn/xml/00/10/30/001030hnlearn.xml charp, s. (2000). the role of the internet. t h.e. journal, 27 (march), 8-10. gillette, d. (2001). extending traditional classroom boundaries. american economist,(pal/), 45:57-68. levine, l. (2002). using technology to enhance the classroom environment. t.h.e. journal, 29 (january): 16-18. product showcase: e-learning (n.d.). retrieved on april 10, 2002, from h://www.workforce.com/section/00/article/23/20/50.html. us. office of educational technology (n.d.). retrieved on april 22, 2002 from h://www.ed. ov/technolo /eleamin using the internet in the classroom (n.d.). retrieved on april 10, 2002, from h://www.iloveteachin .com/intemetclass/. dan b. bradley iii is a professor of marketing and executive director of rhe small business advancement national center at the university of central arkansas. he teaches courses in entrepreneurship, retailing, fashion merchandising, and small business management. his articles have appeared injournals such as: journal of small business strategy, journal of business and enirepreneurshlp, journal of pharmaceutical marketing and management, journal for small business and enterprise development (uk), american business perspectives, industrial management, arkansas business small business journal, the journal for quality and participation, business journal for entrepreneurs, nebraska business development center report, journal of applied business research, and the business advisor journal (uk). he is ihe chief editor of the sbanc weekly small business newsletter. 89 sti4 t'e''o'y payroll tax incidence on small businesses: an empirical investigation of shifting the payroll tax burden'ed d. englebrecht louisiana tech university tenglebrl cab. latech. edu laurie l henry old dominion university lhenryodu. edu govind s. iyer arizona state university govind iyer iasu. edu abstract the payroll tax earmarked for the financing of social security benefits has been ihe leading growth tax on small businesses over the past few decades. small businesses pay more in payroll tax than in any other form of tax. indeed, these taxes ore levied on small businesses irrespective of their profits. the statutory incidence of one-half of the payroll tax being paid by the employer and one-half by ihe employee may be very dt/ferent from the actual incidence of the iax due to employer shifting mechanisms. while there has been considerable conjecture about the shifiing ofihe payroll tax burden, there has been very li itic research that has explicitly siudhed the shifting mechanisms undertaken by small businesses. ln this study, responses were elicited from a sample of i82 small business owners in the hampton roads area of virginia to ascertain whether the payroll tax is shifted by passing it on to the consumer by way ofincreased prices, passmg ii on to ihe employee by way ofreduced wages, or absorbed by the business reducing profits. this inquiry found that, in general, small busmesses are not likely to shifl the employer's share of the tax burden to employees, specifically, the most popular alternative in dealing with payroll tax increases was to increase prices for their product/service. introduction the payroll tax earmarked for the financing of social security benefits has been the leading growth tax over the past few decades. the old age survivors disability health insurance (oasdhi) tax is basically a universal tax levied at a proportional rate on wages and salaries. one-half of the payroll tax is levied on the employer, and the employee pays the other onehalf. despite the simplicity of the statutory levy, the fundamental problem in the analysis of payroll tax burden is the question of which economic group actually bears the tax burden 'his research was supported in part by a research award from the southern business administration association. g2 journal ofsmall business strategy vol. l2, ltto. 2 fall/winter 2001 (brittain, 1972). the effects of the payroll tax on the distribution of tax burden, income inequality, and other performance measures depend upon critical assumptions regarding the incidence of the tax. while seemingly one-half of the payroll tax is paid by the employer and one-half by the employee, this is merely the statutory incidence. the actual incidence of the payroll tax may be very different due to shiaing mechanisms. for instance, the employer may shift his/her payroll tax burden to the employees by way of lower wages or to the customers by way of higher prices. extant theoretical analyses that address the incidence of the payroll tax depends upon critical assumptions about the product and labor markets. specifically, the elasticity of the labor market, the strength of the substitution effect, and the elasticity of demand for the product will determine whether the payroll taxes are shifted backward to employees, forward to customers, or borne by capital. while there has been much conjecture, there has been very little research that has explicitly studied the shiaing mechanisms undertaken by employers. most researchers concede that the question of incidence of payroll tax remains unresolved. it is because of this unresolved issue and the prominence of the tax to millions of small businesses that this study is necessary. in this study, responses were elicited from a sample of small business owners to ascertain whether the payroll tax is shiaed backward, forward, or borne by profits. in the next section, the background of the study is provided and the motivation for conducting this study. the third section describes the questionnaire sent to small businesses in the hampton roads area of virginia. this is followed by a presentation of results, and finally, the paper ends with a summary, conclusion and limitations. in general, small businesses tend to deal with payroll tax increases by increasing the price of their product or service, or to accept lower profits. background and motivation payroll tax history and procedures the payroll tax was instituted in 1935 with the explicit objective of providing retirement income for the participants. since this tax enactment, its relative share of the federal revenue has gone from zero to thirty percent. between 1970 and 1990, there were eleven federal insurance contributions act (fica) tax rate increases amounting to a sixty percent rise, and nineteen fica tax base increases cumulatively totaling a 630 percent increase (fica tax base is indexed every year). in 1993, the cap on the health insurance portion of the payroll tax (2.9 percent) was completely eliminated. currently, for 2001, both the employer and employee each pay 6.20 percent for the social security portion of the fica tax on earnings up to $80,400. additionally each pays 1.45 percent toward medicare on an unlimited income base (internal revenue service, 2001). small business employers report fica taxes on a quarterly basis on federal form 941, employer's quarterly federal tax return. form 941 may be filed by mail, by electronic methods, by telephone, or on magnetic tape. quarterly payroll tax accumulations of less than $2,500 (reduced by the advance earned income credit) are paid with federal form 941. quarterly payroll tax accumulations of more than $2,500 must be deposited at an authorized financial institution on either a monthly or semi-weekly schedule, and the federal form 941 sent to the internal revenue service separately. the deposit schedule is based on a "lookback" at the four previous quarters'otal payroll taxes. businesses reporting $50,000 or less in payroll taxes use a monthly schedule, making payroll tax deposits on the 15 day of the month following the pay period. businesses reporting more than $50,000 in payroll taxes use a semi-weekly schedule, making payroll tax deposits for pay periods falling on wednesday 83 journal ofsmall business strategy vol. l2, no. 2 fallllyinrer 200/ through friday on the following wednesday, and for pay periods falling on saturday through tuesday on the following friday. payroll tax deposits are payable by check, money order or cash. taxpayers with tn:al depository taxes of more than $200,000 in 1999 are required to deposit payroll taxes by electronic funds transfer (internal revenue service, 2001). politically, it has been relatively easy to increase payroll tax rates for the following reasons: (i ) the payroll tax is cloaked as a contribution towards retirement (although no real fund exists and the system operates on a pay-as-you-go basis), (2) it is tied to increased expenditure on retirement and medicare that affect the important elder generation who tend to be politically active, and (3) unlike other taxes, there is no important constituency that lobbies strongly against the increase in the payroll tax.. payroll tax and small businesses payroll taxes have been, by far, the fastest growth tax on small businesses. small businesses pay more in payroll tax than in any other form of tax. indeed, these taxes are levied on small businesses irrespective of their profits. unlike large businesses, payroll taxes are much more debilitating for small businesses for the following reasons: (i) small businesses in general tend to be more concentrated in those sectors of business that tend to be primarily labor intensive; (2) small businesses cannot as easily shifl from labor to capital expenditures when payroll taxes increase because capital equipment is expensive; (3) small businesses do not have the financial resources to withstand prolonged periods of poor earnings, and consequently, most small businesses survive not on profits but on cash flow, and payroll taxes exert tremendous pressure on cash flow; (4) even though the employer's share of the payroll tax is allowed as a deduction, small businesses because they are in lower tax brackets get less tax relief as compared to large companies that are in the higher tax brackets; and (5) since small businesses tend to have mainly lower minimum wage earning employees, the payroll tax can be a much higher percentage of the total payroll as compared to large businesses who oaen have highly paid employees who earn more than the ceiling on the payroll tax. given these problems, the eiyect of payroll tax on small businesses is vastly different from its effect on large businesses. research question: who bears the payroll tax burden? according to the law, employers and employees split the fica tax; each pays half the tax. however, as mentioned earlier, the actual incidence of the tax may be very different from the statutory incidence due to shiaing mechanisms. the popular assumption is that the employer portion of the payroll tax is borne by the consumer in the form of higher prices (pechman, aaron, & taussig, 1968). several economists disagree and claim that a major portion of the employer's share of the payroll taxes falls on the employee in the form of lower wages (brittain, 1971, 1972; break, 1981).because of conflicting theories, most economists concede that the ultimate incidence of the payroll tax would depend upon the critical assumptions made regarding the product and labor markets. when payroll taxes are increased, a small business owner has three options: (i) pass the increased cost on to the consumer by way of increased prices; (2) pass the increased cost on to the employee by way of reduced wages; or (3) accept reduced profits.'he purpose of this study is to investigate what shiaing mechanism (if any) is undertaken by a small business owner in dealing with payroll taxes. 'hese options are also discussed by mark isakowitz in his testimony on a hearing on "payroll tax burden on small business" before the house committee on small business, subcommittee on taxation and finance, june 28, 1995. 84 journal ofsmall business strategy vol. l2, no. 2 fall/winter 200/ extant research notwithstanding its policy relevance, the issue of who bears the payroll tax burden has remained unresolved. extant research on tax incidence, though numerous, has focused primarily on the economics of different shiaing mechanisms. empirical studies in this area have employed either a time-series or a cross-sectional analysis of wages, tax rates, employment rates and prices of commodities. for instance, hamilton (1999) presents a methodological approach for the analysis of tax incidence that encompasses familiar forms of taxation in a general and analytically convenient model. kesselman (1996) employs an analytical model to study the short and long run incidence of employer payroll taxes in canada. they found that in the long run, the tax burden is shiaed to reduced wages. gruber (1997) documents the incidence of payroll taxation before and aaer the privatization of the social security system in chile. using data from a census of manufacturing firms, the study concludes that the incidence of payroll taxation is fully on wages. wang (1993) documents the incidence effects of the corporate income tax using duality theory for a two-sector general equilibrium model. the study demonstrates that capital always bears more of the corporate tax burden than does labor. however, despite significant research in the area of tax incidence in general, the real shiaing mechanism of payroll taxes remains elusive. importance of the research issue as explained above, there is a paucity of research in the area of payroll tax incidence. the little research that exists analyzes the issue of tax incidence through economic models. furthermore, none of the extant research focuses exclusively on the effects of payroll tax on small business owners. in this paper, the shiaing mechanisms employed by small business owners to deal with the increasingly burdensome payroll taxes are studied. through a survey of small business owners, the research documents whether payroll taxes are shifted to the consumer, and/or to the employee, or are borne by the owners themselves. this research issue is relevant and timely given the recent dwindling federal surplus and the renewed debate in the area of tax cuts and tax reform. increased attention needs to be focused on small businesses and payroll taxes to ensure that they are not forgotten once again. research methodology the questionnaire method of inquiry was used to ascertain what shiffing mechanisms, if any, are utilized by small businesses in response to increases in payroll taxes. the small business population surveyed was the hampton roads area of virginia. a discussion of the method used, and survey employed follows. method a questionnaire was developed and mailed out to 1,599 small businesses in the major cities of the hampton roads area of virginia. the sample was obtained from the 1999 corporate america cd-rom database that listed 3,560 small businesses in the cities selected (knightridder, 1999). thus the sample included approximately 45 percent of the small businesses in the area. in order to increase the confidence of the potential respondents and encourage them to participate in the study, total anonymity was assured. the questionnaires did not contain any means of identifying respondents from non-respondents, therefore a follow-up mailing to non-respondents was not possible. out of the initial mailing, 159 questionnaires were returned as undeliverable. of the remaining 1,440 questionnaires, 182 responses were returned for a response rate of 12.64 percent. two factors led to a lower than expected response rate. first, immediately aaer the mailing of the questionnaires, the hampton roads area of virginia was battered by two 85 journal ofsmall business strategv vol. l2, no. 2 fafflivinter 200 l hurricanes that wreaked unprecedented damage to many small businesses in the area. this might have led to several of the questionnaires being misplaced or damaged. secondly, since anonymity was promised and since the questionnaires were not identified as to respondent in any way, it was not possible to send reminder letters to the participants who did not respond. however, given the sample size of 182, the results can provide useful insights into the actual incidence of payroll tax increases on small businesses. questionnaire in developing the questionnaire, there was a need to balance the two countervailing issues of eliciting as much relevant information as necessary to do the analysis, but keeping the questionnaire short so as to increase the response rate. eventually, a questionnaire was designed that was approximately two pages in length and could be completed in less than 10 minutes. the questionnaire consisted of four sections. the first section elicited participant's responses regarding their feelings toward the social security tax. respondents were asked to indicate their opinion of the minimum number of employees a business must have before the payroll tax is mandated, what annual revenue should a business earn before it is subject to the payroll tax rules, what is the fairest rate of payroll tax, and whether they consider the current payroll tax system to be fair. in the second section, respondents were asked to detail their actions in response to a hypothetical increase of one percent in the employer's portion of the social security tax. the second section consisted of three parts. in part a, the survey ascertains whether the small business owner would pass on all or some part of the tax increase to his/her employees. likewise, in parts 8 and c, there was an attempt to assess whether the small business owner would pass all or some part of the tax increase to the customers and whether the small business owner would bear all or some part of the tax increase himself/herself by way of lower profits. in the third section, respondents were asked to allocate (in dollars) a fixed increase in payroll tax to various components such as wages, prices, and profits. the intent behind this section is to determine the proportion of tax shiited to employees and customers, as well as the proportion borne by the business owner. small business owners were asked to allocate a hypothetical increase of $ 1,000 dollars in their payroll tax to a reduction in employee wages, an increase in customer prices and a reduction in the profits accruing to themselves. finally, in the fourth section, the survey elicited some demographic information regarding the small business such as approximate annual revenue, approximate number of employees and the type of industry they were in (automotive, painting, etc.). for a copy of the survey instrument used in this study, see appendix a. descriptive statistics the descriptive statistics of the data are given in tables i, 2 and 3. as depicted, responses were received from small businesses engaged in eighteen different industries ranging from manufacturing, construction, public accounting, software, marketing and advertising to dealing with local and federal government and not-for-profit organizations. manufacturing, construction, health, hotel-restaurant, retail and service industries were represented more than any others. the responses also included small businesses of different sizes ranging from less than 10 employees to greater than 50 employees. almost 40 percent of the responses were from small businesses employing between 26 and 50 employees. furthermore, the data 86 journal ofsmall business strategy vol l2, na. 2 fall/winter 200l represented truly small businesses in that approximately 19 percent had annual revenues less than 1 million and 62 percent had revenues between 1 million and 10 million. table 1 classification by industry industry frequency percentage service 31 17.0 construction 21 11.5 manufacturing 17 9.3 retail 17 9.3 hotel-restaurant 16 8.8 not for profit 16 8.8 health 15 8.2 wholesale 9 4.9 real estate 8 4.4 engineering 6 3.3 marketing-advenising 4 2.2 transpohatioo 4 2.2 legal 3 1.6 public accounting 3 1.6 federal government 3 1.6 banking 2 1.1 sottware 2 1.1 insurance 1 0.5 communication 1 0.5 local government 1 0.5 24 hour 1 0.5 not reported 1 0.5 total 182 100 table 2 classification by number of employees number of employem'requency percentage &10 10 5.5 11-25 44 24.2 26-50 72 39.6 & 50 56 30.8 total 182 100 87 journal ofsmall business srrare~ vol. l2, ryo. 2 falllteinter 200l table 3 classilication by annual revenue annual revenue, 'requency percentage & i million 35 19.2 1 million —10 million 113 62.1 11 million —25 million 16 8.8 26 million —50 million 4 2.2 51 million —100 million 3 1.6 & 100 million 8 4.4 not reponed 3 1.6 total 182 100 results perceptions regarding the payroll tax table 4 presents the results of the two questions that elicited responses as to who should pay the payroll tax based on the number of employees and on annual revenue. approximately, 71 percent of the respondents opined that everyone must pay some payroll tax irrespective of the number of employees employed by the business. similarly, 71 percent of the respondents felt that the payroll tax must be paid irrespective of the amount of annual revenue earned by a business. given the overwhelming support for the universal application of the payroll tax, it can be concluded that small businesses are not averse to the imposition of the payroll tax as long as it is fair (as discussed later in the paper). table 4 who should pay the payroll tax? panel a who should pay'the.payroll tax? .:', 'req'uency-. '„percentage need not pay if number of employees &25 23 12.6 need not pay if number of employees &50 22 11.9 everyone must pay some payroll tax 129 70.9 not reported 8 4.4 total 182 100 88 journal ofsmall business strategy val. /2, na. 2 fallltpinrer 200l panel b who should pay the payroll tax? frequency percentage need not pay if annual revenues &100k 21 i 1.4 need not pay if annual revenues & 500k 22 11.9 everyone must pay some payroll tax 129 70.9 not reported 10 5.5 total 182 100 on the question of what is the fair rate of social security tax, the response had a mean of 3.76 percent (median 5 percent). responses (table 5) ranged from 0 percent to 8 percent. a rate of 3 percent to 5 percent was favored by 44.5 percent of the respondents. an overwhelming majority of taxpayers (87.4 percent) indicated a preference for a rate below the current rate of 6.2 percent. table 5 what is a fair payroll tax rate? rate frequency percentage 0% 24 13.2 10 5.5 15 8.2 3% 21 11.5 4% 14 7.7 5% 46 25.3 29 15.9 7% 8 4.4 8/ 2 1.1 not reported 13 7.1 total 182 100 in assessing the fairness of the current social security tax system (table 6), just over half of the respondents (52.8 percent) disagreed or strongly disagreed with the statement that the current system was fair. these respondents were equally divided between "disagree" and "strongly disagree." nevertheless, the statement found support from approximately one-third (33 percent) of the respondents indicating that there is a significant minority of small businesses that considers the current social security tax system to be a fair system. however, only 3.3 percent of small businesses "strongly agreed" that the current social security tax system was fair. 89 journal ofsmall business strategy voh /2, 1vo. 2 fall/0'inter 200 l table 6 is the social security tax system fair? responses to the statement "overall the social security system is fair. " responses (to above frequency percentage statement) strongly disagree 46 25.3 disagree 50 27.5 undecided 24 13.2 agree 54 29.7 strongly agree 6 3.3 not reported 2 1.1 total 182 100 effect of payroll taxes on wages, prices and profits the second section of the questionnaire elicited responses on how a small business manager would react to a hypothetical increase in the social security tax. table 7 documents the responses with respect to employees. obviously, as expected, an overwhelming majority (approximately, 85 percent) of respondents indicated that an increase in their portion of the payroll tax would not prompt them to increase wages of the employees. however, surprisingly, an overwhelming majority of the respondents (approximately 84 percent) also indicated that they were "unlikely" or "very unlikely" to decrease employees'ay. the reliability of this conclusion is also established by their response to the "no change" alternative. nearly 82 percent of small business owners indicated that a one percent increase in their portion of payroll tax was "likely" or "very likely" to result in no change in employees'ay. the result was consistent across all industries. this result is in stark contrast to the general belief and conclusions of prior research (brittain, 1971, 1972; break, 1981; gruber, 1997; kesselman, 1996) that most or at least some of the employer's portion of the payroll tax is shired backward to labor by means of lower wages. this conclusion may not be applicable for small businesses since their labor structure is fundamentally different from that of large corporations. in general, small businesses tend to employ lower paid employees with many of their employees drawing the minimum wage. it may be legally impossible to decrease the wages of their employees (below minimum wage). table 8 documents the small business managers'eactions relating to shifting of the additional tax burden to customers by way of price increases. in responding to the statement that an increase in payroll taxes will result in no change in the price of product or service, the respondents were evenly split. roughly, 44 percent of the respondents expressed that an increase in payroll tax was likely or very likely to leave the prices unchanged while approximately 45 percent of the respondents suggested that an increase in payroll tax was unlikely or very unlikely to leave the prices unchanged. with regard to how much of the one percent increase in the payroll tax would be shired to the consumers, about 31 percent of the respondents suggested that they were likely or very likely to increase the price by less than one percent, about 35 percent suggested that they were likely or very likely to increase prices by exactly one percent, and about 38 percent of the respondents suggested that they were likely or very likely to increase prices by greater than one percent. 90 journal ofsmall business strategy vol. i2, no. 2 fall/ivinter 200l table 7 actions regarding employees prompted by an increase in payroll tax responses to a hypothetical increase of l percent in the current payroll tax frequency reaction total unlikely undecided likely very likely reduce employees pay g2 59 11 6 6 164 by & i percent reduce employees pay 65 12 5 9 164 by exactly i percent reduce employees pay 74 18 5 3 161 by & i percent no change in employees 13 5 13 44 99 174 pay increase employees pay 90 43 19 5 2 159 by & i percent increase employees pay 92 45 17 i 5 160 by exactly i percent increase employees pay 94 42 15 3 5 159 by & i percent table 8 actions regarding customers prompted by an increase in payroll tax responses to a hypothetical increase of i percent in the current payroll tax frequency .reaction unlikely undecided likely likely reduce price by & i percent 113 42 4 0 0 159 reduce price by exactly i 112 42 5 i i 161 percent reduce price by & i percent 107 43 6 i i 158 no change in price of 43 27 18 34 34 156 product/service increase price by & i percent 52 35 25 37 14 163 increase price by exactly i 49 33 22 34 23 161 percent increase price by & i percent 47 33 21 28 34 163 table 9 summarizes the opinion of small business owners regarding the effect of increased payroll taxes on resultant profits. almost one third (33.3 percent) of the respondents felt that resultant profits would be unaffected by a change in payroll taxes. however, almost half of the respondents (49.6 percent) felt that an increase in payroll taxes would result in a change in their profit. just over a third of the respondents (36.2 percent) felt that a one percent increase in their share of payroll taxes will likely and very likely result in a decrease in profits greater 91 journal ofsmall business strategy voh i2, no. 2 fall/winter 200/ than one percent, a quarter of the respondents (23.5 percent) felt that their profits will likely and very likely decrease by exactly one percent, and over a third of the respondents (36.0 percent) felt that their profits would decrease by less than one percent. table 9 effect on profft prompted by an increase in payroll tax responses to a hypothetical increase of 1 percent in the current payroll tax frequency 'eaction.v„.. ' v ~ total ' unlikely. undecided likely unlikely " likely-. profit decrease by &1 percent 44 42 16 32 26 160 profit decrease by exactly 1 48 24 24 12 153 percent profit decrease by & 1 33 39 29 39 18 158 percent no change in profit 44 38 28 23 32 165 profit increase by & 1 86 46 15 4 3 154 percent profit increase by exactly 1 percent profit increase by & 1 91 47 12 2 3 155 percent shifting the payroll tax burden the third section of the questionnaire requires the small business to allocate a hypothetical $ 1,000 increase in their payroll tax bill to employbes (by way of lower wages), customers (by way of higher prices) and profits. table 10 pre'sents the results. on the average, respondents indicated that of the $ 1,000 dollar increase in payroll taxes, they would pass on $ 126 to their employees by way of lower wages, shia $602 to their customers by way of higher prices and would bear $272 by way of lower profit. however, the distribution of responses was not uniform. more than a third (34 percent) of the respondents indicated that they would shia the entire increase to their customers by way of higher prices. approximately 13 percent of the respondents indicated that they would bear the entire tax increase by way of lower profits while approximately 11 percent of the respondents indicated that half of the tax increase would be shifted forward to their customers and half borne by themselves by way of lower profits. only 3.6 percent of respondents indicated that they would shia the entire tax increase to employees by way of lower wages, and about 6 percent of respondents indicated that the tax increase would be passed on to employees and customers equally. clearly, contrary to popular belief, small businesses seem to be limited in their ability to shiit much of the payroll tax backward to labor. summary, conclusion, an13 limitations summary ln this study, the shiaing mechanisms employed by small businesses to deal with payroll taxes were examined. the statutory operation of the law was explained and why the actual incidence may be different than the statutory incidence. the study also explicated how payroll taxes might affect small businesses differently from other large businesses. the conventional 92 journal ofsmall business strategy vol. 12, no. 2 fall/w/nter 200l assumption that all or most of the employer's portion of the tax is passed on to labor may not be vaiid in the case of small businesses. by way of a survey of small businesses, we attempted to glean the shitting mechanisms employed by them in dealing with payroll taxes. in doing so, the actual incidence of the payroll taxes is also revealed. table 10 shifting the payroll tax to employees, customers and profits percentage share shifted to: frequency percentage emtttoyees customers profit 0 100 0 59 34.9 0 0 100 22 13.0 100 0 0 6 3.6 0 50 50 18 111.7 0 70 30 5 3.0 0 80 20 4 2.4 0 90 10 3 1.8 0 75 25 3 1.8 0 25 75 2 1.2 0 95 5 i 0.6 0 85 15 i 0.6 0 40 60 i 0.6 0 20 80 i 0.6 0 10 90 i 0.6 50 50 0 10 5.9 25 75 0 2 1.2 20 80 0 2 1.2 75 25 0 i 0.6 70 30 0 i 0.6 10 90 0 i 0.6 50 0 50 2 1.2 25 0 75 i 0.6 33 33 34 4 2.4 10 80 10 3 1.8 50 25 25 2 1.2 30 50 20 2 1.2 25 50 25 2 1.2 25 25 50 2 1.2 50 40 10 i 0.6 50 30 20 i 0.6 40 20 40 0.6 30 30 40 i 0.6 25 40 35 i 0.6 20 70 10 i 0.6 20 60 20 i 0.6 total 169 100.0 93 journal ofsmall business srraregi vol. 12; no. 2 fall/winter 2001 conclusion we found that, in general, small businesses are not likely to shift the employer's share of the tax burden to employees. indeed, most respondents indicated a marked reluctance to decrease employee pay. in contrast, the most popular alternative in dealing with payroll tax increases was to increase prices demanded for their product/service. less than 15 percent of the small businesses indicated that an increase in the payroll tax would be totally shiaed to reduce profits for the business. with regard to the actual shiaing mechanism, on average, small businesses tended to shia more than 60 percent of the tax burden to customers by way of higher prices. employee wages were minimally affected, while there was a moderate reduction in the amount of profit generated by the business. pursuant to the research by pechman et al. (1968), the findings of this study suggest that small businesses pass payroll tax increases on to their customers rather than reducing employee's wages. limitations in interpreting these results, the following limitations must be carefully considered. first, the survey includes the specific geographic area of hampton roads area virginia. while there is no evidence to suggest that the small businesses surveyed in this area are any diiyerent from small businesses elsewhere, one must consider this in generalizing these results to other parts of the country. second, in the interest of increasing the response rate, the questionnaire was limited in its inquiry of small businesses. for instance, the questionnaire presents the small businesses with only three options; decrease wages, increase prices, and reduce profits. other options are possible. for instance, one option that a small business could consider is laying oit employees. given that most small businesses do not tend to have excess capacity, this may not be possible. if despite lack of excess capacity, employees are laid off, this will ultimately result in lower profit. finally, the conclusion that employees'ay is minimally affected should also be interpreted with caution. fringe and other employee benefits may be affected, bonuses may be canceled, and raises may be delayed.'eferences break, g. f. (1981). the oasi program. social securi financin . massachusetts: mit press. brittain, j. a. (1971, march). the incidence of social security payroll taxes. american economic review 61(2), 110-25. the pa roll tax for social securi . (1972). washington, dc: the brookings institution. gruber, j. (1997, july). the incidence of payroll taxation: evidence from chile. journal of labor economics 15(3), s72-s101. hamilton, s. f. (1999).tax incidence under oligopoly: a comparison of policy approaches. journal of public economics 71(2), 233-45. internal revenue service. (2001}. publication 15. circular e em lo er's tax guide. washington, dc: department of the treasury. isakowitz, m. (1995). testimony of mark isakowitz, director federal government relations house, before the house committee on small business, subcommittee on taxation and finance, june 28, 1995. federal document clearing house. y4.sm i:104-35. 'hese options are also discussed by mark iwry in his testimony on a hearing on "payroll tax burden on small business" before the house committee on small business, subcommittee on taxation and finance, june 28, 1995. 94 journal ofsmall business strategy vol. 12, no. 2 fall/winter 200i iwry, m. (1995).testimony of mark iwry, benefits tax counsel department of the treasury, before the house committee on small business, subcommittee on taxation and finance, june 28, 1995. federal document clearing house. y4.sm i:104-35. footnote 3 kesselman, j. r. (1996, june). payroll taxes in the finance of social security. canadian ~pbl p ll 22(2), 162-19 kk1 f 6 . (1999 a g ). c~ab .(cl ( fn 6'nk big( 9 9, chesapeake, portsmouth, newport news and hampton, virginia) knight-ridder information inc. pechman, j. a., aaron, h. j. & taussig, m. k. (1968). social securi: pers ectives for reform. washington, dc: the brookings institution. wang, l. f. s. (1993). sector-specific unemployment and corporate income tax incidence: a geometric exposition. american economist 37(l),64-67. ted d. englebrecht holds the smolinski eminent scholar chair in accountancy at louisiana tech university. he received a ph.d. in accounting pom the university of south carolina. his previous publications have appeared in the accounting review, accounting horizons, the journal of the american taxation association, advances in taxation, journal of small business management, journal of accounting and public policy, journal of accountancy, and the cpa journal. dr. englebrecht has coauthored eight textbooks and serves on several editorial boards. laurie j. henry is an associate professor of accounting at old dominion university. she received her ph.d. in accounting from the university of mississippi. her previous publications have appeared in international journal of accounting, education & research, internal auditor, and journal ofaccountancy. also, she is very active in both local and state cpa associations. gwind s. /yer is an associate professor of accounting at arizona state university. he received his ph. d. in accounting from georgia state university. his previous publications have appeared in accounting horizons, auditing: a journal of practice and theory, the journal of accounting & public policy, the journal of the american taxation association, and the cpa journal. 95 journal ofsmall business srrarelpr vol. 12, no. 2 fallllpinrer 200i appendix cocirt g sfcurity trtx questioltlltirlire part i these questions ask about your feelings towards the social security (payroll) tax. please circle any one among the choices provided to indicate your response. 1. a business should not have to pay any social security tax if the number of employees is less than: 5 10 15 20 25 30 35 40 45 50 do not agree 2. a business should not have to pay any social security tax if the annual revenues of thc business is less than (in thousmtds of dollars): less than 20 40 60 80 100 150 200 300 400 500 do not agree 3. the fairest rate of social security tax for a business (excluding the medicare portion) is: (circle anywhere on the line to indicate your response.) ~'~~-i-1 i»i-2'/»i--3 ~~1-;-4y~i-5'l~i--6'i»i-2'~»i-~'~~-i--9 /~-i--10% 4. overall the social security tax system is fair. (i) (2) (3) (4) (5) strongly disagree disagree undecided agree strongly agree part 2 these questions ask your likely reactions to an increase in the social security tax rate. assume that the employer's portion of the social security tax rate is increased from 6.2% to 7.2% (one-percentage point): your reacrion ia iheincrease will be (please check your response) a. regarding employees kely react ton likely likety dectded to reduce employees'ay by more than one percentage point to reduce employees'ay by exactly one percentage point to reduce employees'ay by less than one percentage point 4 no change to employees'ay to increase employees'ay by less than one percentage point to increase employees'ay by exactly one percentage point to increase employees'ay by more than one percentage point 96 journal ofsmall business strategy vo/. /2, no. 2 fa///tyinter 200/ still assuming that the employer's portion of the social security tax rate is increased from 6.2% to 7.2%: your reaction to the increase will be: b. regarding the price of products and services very ..ununvery unllkely reaction likely like y decided likely likely to reduce product/service price by more than one percentage point to reduce product/service price by exactly one percentage point to reduce product/service price by less than one percentage point 4 no change to product/service price to increase product/service price by less than one percentage point to increase product/service price by exactly one percentage point to increase product/service price by more than one percentage point still assuming that the employer's portion of the social security tax rate is increased from 6.2% to 7.2%: your reaction to the increase will be: c. regarding your profits very ununvery unlikely reactioa likely likely decided likely likely profit will be reduced by more than one percentage point profit will be reduced by exactly one percentage point 3 profit will be reduced by less than one percentage point 4 no change to profit profit will increase by less than one percentage point profit will increase by exactly one percentage point profit will increase by more than one percentage point (continuedj 97 journa/ ofsmall business strategy vol. /2, iso. 2 fa/i/win/er 200l part 3 the next question is very important because it asks you how you will apportion an increase in the social security tax between employees'ages, prices charged to customers, and your profit. assume that an increase in the social security tax rate has resulted in a $ 1000 increase in your social security tax bill. decide how much of it you will shift to your employees by way of lower wages, how much you will shift to customers by way of higher prices, and finally how much of it you will bear yourself by way of lower profits. the total should add up to $ 1000. amount (in $) employees customers your profit total $ 1 000 part 4 demographics this questionnaire is confidential. the following items are not intended to identify you, but instead, they help us better understand your responses. for example, we might look at the responses to see if businesses of a particular size tend to answer questions similarly or businesses in a particular industry tend to answer questions similarly. i what is the industry classification of your company? (check one only) i manufacturing 13 marketing/advertising 2 banking/financial 14 public utilities 3 insurance 15 research/development 4 architectural/engineering 16 transportation 5 legal 17 wholesale distribution 6 public accounting 18 retail trade 7 construction 19 governmentfederal 8 real estate 20 governmentstate 9 communications 21 governmentlocal 10 health care 22 non-profit org. i i hotels/restaurants 00 other 12 computer soibvare specify 2. how many employees are at this location? i less than 10 3 2650 2 1125 4 more than 50 3. what is the company's approximate annual revenue per year? (check one only) i less than $ 1 million 6 $ 101 million $250 million 2 $ 1 million$ 10 million 7 $251 million$500 million 3 $ 11 million $25 million 8 $501 million $ 1 billion 4 $26 million $50 million 9 greater than $ 1 billion 5 $51 million $ 100 million 98 http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2021, vol. 31, no. 03, 148-163 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2021 small business institute® w w w. j s b s . o rg introduction 1university medical center utrecht, universiteitsweg 98, 3508 ga utrecht, the netherlands. gabikaffka@hotmail.com 2university of new mexico, usa & lm thapar som, india. ilayaraja@gmail.com 3university of groningen, 9712 cp groningen, the netherlands, a.j.groen@rug.nl 4university of amsterdam, 1012 wx amsterdam, the netherlands, jk@kraaijenbrink.com entrepreneurial cognition of the business model construct: a mixed methods study of stem and non-stem entrepreneurs entrepreneurial cognition, socially situated cognition, business model, opportunity development, abductive analysis apa citation information: kaffka, g. a., singaram, r., groen, a. j., & kraaijenbrink, j. (2021). entrepreneurial cognition of the business model construct and the influence of founders’ education. journal of small business strategy, 31(3), 148-163. managerial cognition literature within strategy features numerous studies that examine the cognitive influences of ceos and top management teams on the strategy process in established firms (for reviews see bromiley & rau, 2016; narayanan et al., 2011). similarly, entrepreneurial cognition of the entrepreneurs – knowledge structures that include the cognitive scripts, schemas and processes related to new venture decision-making – plays an important role in strategy generation and execution of new ventures (payne et al., 2005; maron et al., 2019). design of the initial business model (bm) is crucial to the strategy formulation of new ventures and it is certainly subject to the influence of the entrepreneurs’ cognitive processes (morris et al., 2006; zott & amit, 2007). bm design and innovation led by entrepreneurs contribute significantly to the overall firm innovation which remains the bedrock for the survival and growth of these firms (dunne et al., 2016; ahluwalia et al., 2017; barwinski et al., 2020). hence, recent studies on the role of managerial cognition on bm design have called for more research attention into this subject (foss & saebi, 2017; frankenberger & sauer, 2019). according to the theoretical perspective of socially situated cognition, entrepreneurial opportunities are cocreated through the shared cognition distributed among entrepreneurs and their stakeholders (mitchell et al., 2011; dew, grichnik, mayer-haug, read & brinckmann, 2015). scholars have argued that the bm aids opportunity co-creation by acting as “the cognitive link between entrepreneurial appraisal of the opportunity and its exploitation” (george & bock, 2011, p. 88). similarly, doz and kosonen (2010, p. 371) suggest that a new venture’s bm functions as the ”cognitive structure” that provides “a theory of how to set boundaries to the firm, how to create value, and how to organize its internal structure and governance.” taking a cognitive approach, martins et al. (2015) showed that entrepreneurs could innovate the bms of their firm through analogical reasoning and conceptual combinations. building on this, we argue that entrepreneurial cognition could enable entrepreneurs to leverage the cognitive functions of the bm while designing the value creation elements of the construct as real attributes of their new venture (massa et al., 2017). despite the breadth of extant research on bms applying the theory of socially situated cognition, we study how entrepreneurs cognitively process the business model construct during the early stages of launching technology-based new ventures. through an abductive reasoning procedure, we aggregate four underlying socially situated cognitive functions of the business model and describe how these functions facilitate opportunity development. we examine if the entrepreneur’s educational background (stem vs non-stem) influences their cognitive processing of the construct. we discuss the contribution of our study to the literature on managerial cognition, business models, and to practice in detail. gabi a. kaffka1, raja singaram2, aard j. groen3, jeroen kraaijenbrink4 http://www.smallbusinessinstitute.biz http://www.jsbs.org 149 g. a. kaffka, r. singaram, a. j. groen, & j. kraaijenbrink journal of small business strategy / vol. 31, no. 3 (2021) / 148-163 (see wirtz et al., 2016; foss & saebi, 2017), the influence of entrepreneurial cognition on bm design is relatively understudied (zott & amit, 2007; massa et al., 2017). the main purpose of our study is to unpack how entrepreneurs cognitively process the bm construct during opportunity development. prior studies show that human capital characteristics affect the way entrepreneurs develop a business opportunity (davidsson & honig, 2003; brinckmann & kim, 2015; digan et al., 2017). even beyond the founding stage, human capital remains closely related to organizational innovation and performance (mcdowell et al., 2018). specifically, human capital acquired through formal education positively affects the cognitive development of entrepreneurs by aiding opportunity recognition (shepherd & patzelt, 2018). amit and zott (2015) underscore that the professional background and education of the entrepreneurs could affect their decisions on bm design. entrepreneurs with a background in the academic disciplines of science, technology, engineering and mathematics (the so-called stem disciplines) tend to focus on the technical aspects of their business idea (berry, 1996). the technical orientation of stem-trained entrepreneurs could shift their focus away from understanding what customers value which in turn could pose a management or survival challenges for the novel business venture (west & noel, 2009; schindehutte et al., 2008). thus, results from prior studies indicate that we can expect entrepreneurs trained in stem disciplines to cognitively process bms differently than those from other educational backgrounds. in sum, we have two research questions that can be summarized as: how do entrepreneurs cognitively process the business model construct during the early stages of creating a new venture? how does entrepreneurs’ educational background affect their cognitive processing of the business models? we employed a mixed methods approach to answer these questions. using the abductive reasoning method (mantere & ketokivi 2013; wright, 2017), we compared theoretical concepts on cognitive processing of bms with empirical findings from interviews with 56 entrepreneurs (c.f., adam et al., 2018). through this exercise, we identify and describe the four socially situated cognitive functions of the bm during opportunity development namely, comprehension, communication, development and analysis. to answer the second research question, we performed quantitative analysis to uncover the differences in cognitive processing of the bm among entrepreneurs based on their educational background. we find that entrepreneurs with stem educational backgrounds draw from all the four cognitive functions while the entrepreneurs with non-stem education predominantly use comprehension and development. we make several contributions to theory and practice from our study. first, we add to the research on managerial cognition by providing empirical support for situated cognition shared between the entrepreneurs and their stakeholders and show how it influences the strategy process (mitchell et al., 2011; dew et al., 2015). second, by focusing on the opportunity development phase of new venture creation (shepherd et al., in press), we contribute to a series of studies that treat “business models as a facilitative intermediary in the opportunity-creation process” (george & bock, 2011, p. 88). we describe how this facilitation is realized through the entrepreneurs’ use of socially situated cognitive functions of the bm. third, by comparing the cognitive processing of the bm by stem and non-stem educated entrepreneurs, we inform the literature as to how differences in the education of the entrepreneurs plays a role during bm design (amit & zott, 2015). finally, we discuss the implications of our findings for bm design, pedagogy, and practice (snihur et al., 2020). theoretical background entrepreneurial cognition and business model design the development of new business opportunities is governed by entrepreneurial cognition of the entrepreneurs. entrepreneurial cognition is defined as, “the knowledge structures that people use to make assessments, judgments or decisions involving opportunity evaluation, venture creation and growth” (mitchell et al., 2002, p. 97). these knowledge structures are used for ‘connecting the dots’ to arrive at recognition of patterns in the market. entrepreneurs gain critical insights towards opportunity appraisal through this pattern recognition (baron & ensley, 2006). prior studies have argued that opportunity recognition and sensemaking by the entrepreneurs impacts bm design and innovation of new ventures (spieth et al., 2014; george & bock, 2011). by extension, entrepreneurial cognition which drives opportunity recognition and development affects bm design in a fundamental way. a venture’s bm can be defined as the “design or architecture of the value creation, delivery, and capture mechanisms” (teece, 2010 p. 172). a critical review of the research on bms by massa et al., (2017) reveals that scholars and practitioners interpret the construct in three distinct ways namely, 1) bms as real firm attributes, 2) bms as 150 g. a. kaffka, r. singaram, a. j. groen, & j. kraaijenbrink journal of small business strategy / vol. 31, no. 3 (2021) / 148-163 cognitive/linguistic schema and, 3) bms as formal conceptual representations of how a business functions. it is important to note that these three views are not mutually exclusive and more than one of these interpretations often co-exist in the same study. researchers that view the business models as cognitive schema are “concerned with how bms are interpreted by organizational members, and their role and manifestation in social (inter)action, including organization-level sensemaking, environmental scanning and sensing opportunities and the cognitive antecedents of bm design and innovation” (massa et al., 2017, p. 82). this approach is most germane to study how shared cognition between entrepreneurs and their stakeholders help them design their initial bm for a new venture. scholars that have adapted the bm as cognitive schema perspective argue that an “owner-manager’s cognition and sensemaking provides the most important input into the initial business model design.” (sosna et al., 2010, p. 387). several studies from this literature stream show that entrepreneurs could tap into both the material as well as the cognitive aspects of the bm construct at the same time (tikkanen et al., 2005; baden-fuller & mangematin, 2013). the shared cognitive processes of executive teams have been found to impact the bm transformation in major firms (aspara et al., 2013). bm design and change over time are closely related to the attention shifts and attention intensity of tmts (frankenberger & sauer, 2019). the search behavior, thinking style and decision-making of the entrepreneurs affect bm innovation in young ventures (snihur & zott, 2020). we extend this literature by focusing on the opportunity development phase of new ventures to study the cognitive processes used by the entrepreneurs while designing bms. opportunity development and socially situated cognition mere identification of an entrepreneurial opportunity is not sufficient to realize it. entrepreneurs must develop the opportunity by working with other stakeholders (dimov, 2007; george & bock, 2011; shepherd et al., in press). during the opportunity development phase entrepreneurs work closely with launch customers, early investors, mentors, incubators whose contribution is crucial beyond just the individual cognitive abilities of the core founders. successful initial bm design, therefore, is a product of entrepreneurs securing commitments from these stakeholders who provide the resources required to realize the business opportunity (c.f. sirmon et al., 2011). within entrepreneurial cognition literature, one of the theoretical perspectives that supports opportunity co-creation is that of socially situated cognition. according to this perspective, cognition is action-oriented, embodied, situated, and distributed among multiple individuals (smith & semin, 2004). invoking this perspective to new venture creation, mitchell et al. (2011) suggest that entrepreneurial cognition can be better understood by examining the cognitive abilities of the entrepreneurs in relation to the social situations and their stakeholders. when viewed through the lens of socially situated cognition, the activity of bm design during the opportunity development phase could be argued as an exercise of achieving shared cognition among stakeholders. in this scenario, entrepreneurs not only design the actual architecture for value creation the literal purpose of the bm in line with the notion of bm as a real firm attribute (massa et al., 2017). more than that, they also use the bm to achieve shared understanding of how the entrepreneurial opportunity would be co-created and exploited with their stakeholders. we illustrate this through the socially situated cognitive functions of the bm. educational background and business model design entrepreneurial cognition is influenced by the entrepreneur’s prior knowledge (grégoire et al., 2010), such as education, work, and entrepreneurial experience (smith, 1967; davidsson & honig, 2003; haynie et al., 2009). given the strong influence of one’s prior knowledge structures on the perception and interpretation of information (baron & ensley, 2006; grégoire et al., 2010), the formal educational background of an entrepreneur can be expected to affect how they cognitively process the bm. this is supported by amit and zott (2015), who assert that the educational background of the entrepreneurs would indeed affect bm design and innovation. studies have shown that entrepreneurs with a background in the stem disciplines tend to focus on the technical aspects of their business idea. for example, berry (1996) describes how firms which are dominated by technologists in the management are likely to be technology-driven instead of being market-driven. this could have serious effects on the survival and growth of small technology-based firms. similarly, researchers studying technology-based ventures observe that “a common concern with entrepreneurs […] is that they often lack commercial experience, resulting in a tendency to focus only on the technical aspects of innovation.” (knockaert et al., 2011, p. 790). other studies have shown that technology entrepreneurs often tend to hire others with the same technology educational background leading to the lack of commercial experience among the venture’s team members (ensley & hmieleski, 2005; franklin et al., 2001). the ensuing predominantly ‘technical mindset’ can impede the en151 g. a. kaffka, r. singaram, a. j. groen, & j. kraaijenbrink journal of small business strategy / vol. 31, no. 3 (2021) / 148-163 trepreneur’s focus on value for the customer, which in turn causes a survival challenge for the novel business venture (west & noel, 2009; schindehutte et al., 2008). these findings point to the influence of education of the entrepreneurs on bm design that warrants further research investigation. in sum, the focus of our study is to examine how the bm is cognitively processed by entrepreneurs to achieve shared cognition among stakeholders, and to show how this is affected by the educational background of entrepreneurs. method to accomplish our research goal, we used an abductive reasoning procedure (mantere & ketokivi 2013; wright, 2017). “abductive analysis is a qualitative data analysis approach aimed at generating creative and novel theoretical insights through a dialectic of cultivated theoretical sensitivity and methodological heuristics” (timmermans & tavory, 2012, p. 180). the overview of methodological steps shown in figure 1 provides the outline for our abductive approach of iterative triangulation of findings by recursive comparison of theory and empirical data. timmermans and tavory (2012, p. 180) prescribe further that “researchers should enter the field with the deepest and broadest theoretical base possible and develop their theoretical repertoires throughout the research process.” we first describe the deductive steps by which we established the socially situated cognitive functions a bm from extant theory. then, we show how we inductively validated those functions with the empirical analysis of our interview data. figure 1. overview of method theoretical grounding in order to ground our arguments in extant literature on bms, we performed a focused literature review through which we gathered support for how bms could serve as cognitive links during opportunity development. as an initial starting point, we used two special issues on the topic of bms from well-known academic journals in strategy and entrepreneurship, namely, strategic entrepreneurship journal and long range planning. from the papers comprised in those two special issues, we identified studies which investigated the instrumental roles, functions or purposes for which entrepreneurs use the bm in support of intended value creation. next, we carried out a bibliography analysis on bm functions using the papers cited in the references section of the initial set of articles which resulted in the expansion of the literature covered in a snowballing fashion. the results of this literature review are presented in table 1, which shows the repetitive cognitive themes we aggregated from current literature on bms. these aggregated cognitive functions of the bm during new venture creation were labelled as comprehension, communication, analysis and development. empirical validation and further elaboration of these themes is obtained through abductive reasoning incorporating both theory and interview data from the entrepreneurs in tandem. we describe them in the results section. 152 g. a. kaffka, r. singaram, a. j. groen, & j. kraaijenbrink journal of small business strategy / vol. 31, no. 3 (2021) / 148-163 empirical setting to validate the cognitive functions derived from theory and to explain how they manifest in practice, we conducted interviews with entrepreneurs involved in opportunity development activities for at least the past one year. the setting was a business incubation program affiliated with a large technological university in the netherlands. the one-year incubation program provided institutional support for entrepreneurs developing novel technology-based ventures in the form of office facilities, trainings, one-on-one coaching, and expert panel feedback on business progress. the program also facilitated the entrepreneurs to network with industry players as well as the investment community that consisted of corporate and private venture capital firms located in the netherlands and usa. the program offered multiple classes taught by experts from usa and europe including one on bm design. hands-on training enabled participants to design their venture’s value creation logic, and the entrepreneurs had worked on this task for at least a year before we formally interviewed them. interviews we had informal conversations with the participants of the training class to understand how they perceived and used the bm for their venture. formal in-depth interviews were scheduled when the entrepreneurs exited the incubation program in batches. every quarter about a dozen entrepreneurs completed the program and the interviews took place over a period of two years. we conducted structured, open-ended interviews to capture the entrepreneur’s reports about their meanings, impressions, and cognitive processing of the bm. the entrepreneurs also spoke about their experience with the incubation program, who they collaborated with, mentorship received, and results achieved. by prior agreement, firm performance metrics were kept confidential between the entrepreneurs and the management of the incubator. therefore, we did not have access to that data. to keep the researcher bias low, we did not specifically use the functions aggregated from literature or related terms that might prime the entrepreneurs. all the interviews were audio-taped and transcribed to satisfy the criterion of low-inference descriptors which ensure high data validity (silverman, 2001). educational background in addition to the qualitative data, we collected basic data about the respondents: their age, gender, and education. education is coded in terms of two dimensions: the level of education [primary school to graduate education] and the type of education of respondents [stem vs non-stem]. the basis of our stem classification was informed by two sources. first, for a comprehensive coding of professional fields, we drew on the international standard classification used by the united nations educational, scientific and cultural organization (unesco). second, drawing on berry’s (1996) descriptions of technical disciplines, we further distinguished the professional fields of study. based on this, those disciplines with educational content relating to natural sciences, technology, engineering and mathematics are coded as ‘stem’ disciplines. all other educational disciplines, such as social sciences, liberal arts, and humanities, are coded as ‘non-stem’ disciplines. sample characteristics sixty-five entrepreneurs that participated in the program were interviewed, but we had to exclude 9 entrepreneurs who had either quit the opportunity development activities or were not pursuing a new venture but were trying to grow their existing business. our final sample containsed 56 interviewees of which eight are female entrepreneurs. due to the dropouts, we had a balanced sample with 28 stem educated and 28 non-stem educated entrepreneurs and this balance was unintentional. the average age of entrepreneurs in this sample is 45 years (sd = 10 years). they had 14 years of work experience on the average before making the decision to become an entrepreneur (sd = 10 years). the entrepreneurs on average had 7 years of previous entrepreneurial experience (sd = 7 years). 19 participants in this sample were serial or portfolio entrepreneurs. overall, the average educational level of entrepreneurs in our sample is high. more than half of the sample had a graduate degree, and 32 entrepreneurs had obtained a doctorate degree. 19 entrepreneurs in the stem group had doctorate degrees in the field of natural science or technology. the netherlands as a country is known for a high educational level (oecd, 2019), which is reflected in this sample. the high level of education is also likely due to the research setting. the incubation program was affiliated to a technical university which typically attracts graduate and post-graduate alumni who wish to pursue the commercialization of their scientific research results. data coding and interrater reliability we carried out discourse analysis of the interviews. discourse analysis is an interpretive process in which key categories, recurrent themes and terms help to organize the data (tonkiss, 1998; silverman, 2001). accordingly, 153 g. a. kaffka, r. singaram, a. j. groen, & j. kraaijenbrink journal of small business strategy / vol. 31, no. 3 (2021) / 148-163 table 1 focused literature review and aggregated cognitive functions of the business model construct source type of study use of the venture’s business model in the study aggregated cognitive functions of bm from current literature osterwalder et al. (2005) meta literature review understanding, sharing, analyzing, managing, prospecting and patenting of a value creation logic comprehension, communication, analysis, development doganova & eyquem-renault (2009) empirical case study function of providing a ‘bounding’ base for articulating and defining the logic of value creation, secondly the function of communicating about it to others, and thirdly the function of objectifying and singularizing (calculating) the logic of value creation comprehension, communication, analysis baden-fuller & morgan (2010) meta literature review experimentation, innovation, refinement and variation of one’s business opportunity analysis, development demil & lecocq (2010) empirical case study creation of internal coherence between the various components of the firm’s business model; facilitation of change and innovation of specific components or the whole business model comprehension, analysis, development nenonen & storbacka (2010) literature review and empirical interactive study co-creation of value by offering a means (a model) which facilitates collaboration between network partners communication, development mason & spring (2011) empirical case study a business model describes agency (activities) in value creation and network structure such as key partners in value creation comprehension spieth et al. (2014) meta literature review a business model has three major roles: explaining the business, running the business and developing the business comprehension, development martins et al.(2015) meta literature review innovation of value creation logic development we coded the entrepreneurs’ reports based on the cognitive functions of comprehension, communication, analysis, and development by identifying signal words from theory. a codebook developed through this process ensured the validity, reliability and thus transparency of the analysis. the unit of analysis is an individual sentence as well as a logical chain of sentences in the transcripts of the interviews. to ensure the objectivity and validity of our qualitative data analysis we used multiple coders and checked for inter-rater reliability (flick, 2007) following best practices laid out by previous qualitative studies in entrepreneurship (grégoire et al., 2010). two coders independently read the initial set of interviews from the entrepreneurs and coded for how they described, reasoned, and explained the use of the bm. the initial coding was compared among the coders and coding assignments were checked. any discrepancies were discussed and resolved. we repeated this procedure in multiple rounds of qualitative coding. cohen’s kappa yielded an inter-rater reliability of 84%, which is considered excellent (landis & koch, 1977; fleiss, 1981; brennan & prediger,1981). after the compilation of the cognitive functions of the bm, we counted how many of these functions were 154 g. a. kaffka, r. singaram, a. j. groen, & j. kraaijenbrink journal of small business strategy / vol. 31, no. 3 (2021) / 148-163 mentioned by each entrepreneur. this served as the basis for quantitative comparisons between entrepreneurs grouped by education. results we were specifically interested in unpacking the cognitive aspects of the bm construct that entrepreneurs tap into during opportunity co-creation (massa et al., 2017). in line with george and bock (2011), we find that the bm acts as a cognitive intermediary that helps entrepreneurs through comprehension, communication, analysis, and development of their value creation logic. it is important to note that these cognitive functions are socially situated in that they facilitate the interaction between the entrepreneurs and their stakeholders and the establishment of shared cognition among them. our findings are summarized in table 2 in which we have compiled of detailed descriptions of how the functions aid entrepreneurs in their cognitive processing of the bms. in this section, we explain these functions in detail. comprehension a broad understanding of all the moving parts of the business is an important aspect that guides the thinking of entrepreneurs designing the initial bm for their startup. in addition to the understanding of the parts, the interrelationships between them must be well understood. we aggregate quotes which signified that the entrepreneurs used the bm to gain an all-encompassing, big picture view of the firm’s proposed value creation logic. such understanding, descriptions and visualizations are grouped under the cognitive function of comprehension. signal words such as “overview,” “comprehensive,” “total picture,” “total concept” etc., from the entrepreneurs’ quotes exemplify this. the following quotes illustrate the cognitive function of comprehension: r05: yes, nice, a new way of looking at it... [...] i thought it to be quite – it is rather nice because it actually gives an impression of the total concept on one page, yes, that model does that well.” “r17: the business model can be used for a better way of thinking about all the aspects that have to do with the product, customers, service, and suppliers – altogether. if you’re very busy you are inclined to think very fragmented: there is an issue and you search for a solution.” r08: “yes, [the business model] i found very enlightening because it gives a total picture. and it not only forces you but gives you the opportunity to formulate and form that total picture. so that there are no more inconsistencies in it.” we did find that the comments on comprehension were influenced by the business model canvas tool (osterwalder & pigneur, 2010), which was used in the training class and is adopted popularly in practice (c.f., sohl et al., 2020). entrepreneurs’ answers reveal how they use the cognitive function of comprehension to achieve clarity about the value creation logic of their venture and how they iron out the inconsistencies in the bm design. we observed that the interactions with stakeholders triggered the entrepreneurs’ reflection of the bm components and their interrelationships, which in turn enhanced comprehension. communication communicating with the stakeholders is an important activity for the entrepreneurs during the bm design phase of a startup. it enables them to mobilize support and orchestrate the required resources. facilitation of communication is an important cognitive function of the bm construct that we were able to validate from our analyses. quotes from entrepreneurs clearly mentioned the communicative aspects via signal words such as, “get the message across,” “getting everyone on the same page,” “brainstorming with everyone,” etc. the entrepreneurs converse with stakeholders both within (e.g. managers, engineers) and outside the venture (e.g., partners, customers, investors). clear communication aids the achievement of common understanding among multiple parties and focuses the attention of the individuals towards what work needs to get done. relevant quotes include: r14: “we use [the business model] to get everyone on the same page within the organization, i have presented it to the organization, that is good, then everybody knows what we are doing. and then it’s also input for our action plans.” r28: “i know now i can create, show my business model to a new audience and get the message across in 15 minutes, i can do that now whenever i need to, that is a good feeling.” 155 g. a. kaffka, r. singaram, a. j. groen, & j. kraaijenbrink journal of small business strategy / vol. 31, no. 3 (2021) / 148-163 analysis entrepreneurs engaged in designing the initial bm must evaluate the pros and cons of the value creation logic being constructed. before deciding on a specific configuration of the building blocks of the bm, they must gauge the viability of various alternatives. this process may at times involve generating multiple potential bms and assessing the fit of each bm for their venture. the cognitive function of analysis helps the entrepreneurs use the bm construct as a tool to experiment on these possibilities and compare the available options against each other. analysis also helps them to identify the measures that they need to track over time. critical reflection through analysis helps entrepreneurs make course corrections when required. the following quotes illustrate the cognitive function of analysis: r02: “i designed about six business models […]. before starting the venture, i picked the most practical business models to start with. and it ended […] with a list of criteria of which business models can yield the most profit for me.” r25: “from what i learned most and what i look at every month, is the business model. that gives me a very good image of where we stand and where we go and if we’re on the right track.” development bm design is a dynamic process subject to change and improvisation as the entrepreneurs gather more information and recruit various stakeholders to work with them. the cognitive function of development demonstrates how entrepreneurs use the bm to institute continuous improvement of various aspects of their new venture. in certain cases, owing to the complexity of the value proposition and value capture, not one but a portfolio of bms must be designed. entrepreneurs use the cognitive function of development to improve the existing bm components, to react appropriately to the changes in the competitive landscape, and to create a bm portfolio. following quotes illustrate how entrepreneurs have used the bm to document change and innovate their value creation logic over time. r28: “now we have the business model to step by step focus on execution [..], to document changes in the business model.” r24: “it requires continuous attention, a living document, you can put your successive experiences in it.” r57: “in first instance, my business model was directed towards product development. […] i think that actually, in particular with the situation after the bankruptcy, we have examined everything again. before we were very product-focused, afterwards we had a better balance between product-focus and market-focus, and strongly oriented towards a good cost and revenue structure. that is quite facilitated by the business model.” additional quotes on the cognitive functions are provided in table 1. overall, we deciphered that the attention of the entrepreneurs is directed and refined when they employ the four socially situated cognitive functions the bm. they also reported that the bm enabled them to structure their thinking on the intended value creation while sidestepping distractions. one of them observed: r17: and because you are often dominated by everyday issues that means that when you are thinking about where you want to go with the venture you often think very opportunistically. with the [...] business model you learn to think about this structurally. the socially situated nature of entrepreneurial cognition was exemplified by the entrepreneurs’ reports on how they engaged multiple stakeholders such as customers, partners, investors, managers, and engineers as sources of information and knowledge during opportunity development. the nature of our research setting, a university-affiliated incubator, also helped the entrepreneurs seek input from an array of other parties outside their firm such as coaches, professors, experts, as well as their peers in the incubation program. the bm construct was quite useful in helping the entrepreneurs gather purposeful feedback by tapping into the cognition distributed across these stakeholders. quantitative analysis of the interview data yielded further insights. the effect of educational background (stem vs non-stem) on the use of the cognitive functions by the entrepreneurs is displayed in figure 2. figure 3 shows the number of functions reported per entrepreneur in each of these groups. all the entrepreneurs, regardless of education type or education level, utilized the comprehension and development cognitive functions of the bm. stem educated entrepreneurs used the communication and analytical cognitive functions more frequently than non-stem educated entrepreneurs. technological 156 g. a. kaffka, r. singaram, a. j. groen, & j. kraaijenbrink journal of small business strategy / vol. 31, no. 3 (2021 / 148-163 table 2 cognitive processing of the business model construct by entrepreneurs leading new ventures cognitive function of the bm empirical evidence quotes from entrepreneurs entrepreneurs cognitively process the business model construct by: comprehension r08. “it is a perfectly fine model, everything is in it, everything which is relevant, yes. that means it is comprehensive instead of you running the risk of getting caught up in details. by visualizing a business model you realize you’re in a process and that still you must keep your eyes on other points as well.” r02. “you see [the business model] as a system: how do you create something and how do you sell something? yes, that overview... overview of the business, it’s logic.” r12. “the [bm], in which all aspects of marketing of the products are brought up and can be worked out... business model is, sort of, real strong.” understanding, describing and visualizing the venture’s business model design or parts of it thinking about specific aspects of the venture’s value creation logic, to understand and/or gain insight into it capturing the interrelationships among various components of the business reflection with the aim of comprehension communication r04. “in fact, the business model offers a very easy way to communicate with all partners.” r06. “and in addition, [the bm] is good because you are becoming aware yourself about those things, but you also learn, because you have to explain it to others, how you have to build a presentation, because you have different business models for different types. for investors a different story than for customers. the business model helps because you have ordered your business aspects well.” communication about the venture’s value creation logic with third parties, inside or outside the venture engagement of/or interaction with other parties such as managers and engineers in the process of creating or reflecting on the value creation logic analysis r16. “i use [the business model construct] in order to validate ideas, to see if the idea i have, if it is practically applicable, and if it can be offered on a commercial base.” r27. “so if you look closely you see that it were actually ten business model. [...], and we focused on two business models; one focused on consultancy, and the one on software, and now we’ll see how to we can go on with that.” r36. “now [...] we will try to make a better distinction between different business model, and work on them.” identification of measures to improve management, track issues of the firm’s value creation logic over time comparison of various alternative value creation logics, also with that of competitors to test it (in terms of prototyping, simulation or business cases) experimentation with or testing of different value creation logics and to reflect what you can do with that logic in the future (‘what would work better’) reflection with the aim of critical examination or assessment of the venture’s business model 157 g. a. kaffka, r. singaram, a. j. groen, & j. kraaijenbrink journal of small business strategy / vol. 31, no. 3 (2021 / 148-163 development r24. “so we have examined, by means of the business model, how we can bring it together, [my] ideas like i have explained […] and then in that way make the other part possible because of that.” r56. “the best was, what i learned the most from [...] is the business model. [...] small changes are very easy to implement in it so that you can see with one glance if you will reach your goals.” r46. “yes, by means of the business model – i don’t know if you know it -, i have changed a number of things, mainly that i make more advertisement… so actually in support of the cold acquisition, yes, that sort of thing… [bm] is very useful for that.” planning, changing, refining or implementing activities regarding the venture’s business model, for example in order to detail, adapt or improve the existing business model reacting to changing competitive landscape, alignment of the bm with strategy and the firm’s technology innovation of the existing business model creating a business model portfolio 158 g. a. kaffka, r. singaram, a. j. groen, & j. kraaijenbrink journal of small business strategy / vol. 31, no. 3 (2021) / 148-163 complexity of the business idea and the number of stakeholders involved could increase the need for communication while also necessitating analysis. at the same time, we must infer the causal relationship between education type and cognitive functions of the bm with caution given that all the ventures are technology-based. more research on these variables is warranted. to ascertain if the entrepreneurs from the stem and non-stem education groups invoke the cognitive functions of the bm construct differently, we performed a t-test. from levene’s f-test we figure 2. cognitive functions of the bm reported by entrepreneurs’ education type 34% 32% 27% 7% 21% 29% 36% 14% 46% 36% 18% 0% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% o n e f u n c t i o n r e p r o t e d t w o f u n c t i o n s r e p o r t e d t h r e e f u n c t i o n s r e p r o t e d f o u r f u n c t i o n s r e p r o t e d total stem non-stem figure 3. number of cognitive functions of bm reported by entrepreneurs’ education type 159 g. a. kaffka, r. singaram, a. j. groen, & j. kraaijenbrink journal of small business strategy / vol. 31, no. 3 (2021) / 148-163 checked for the homogeneity of variances between the samples based on education. the results of the f-test show that the sub-samples do not differ significantly regarding their variance; f(27) = 1.71, p = 0.09, f value < f critical value. we followed this with running t-test assuming equal variances between the entrepreneurs with different educational backgrounds. based on the results, we could confirm that the number of cognitive functions of the bm reported was significantly different between entrepreneurs with stem education (m = 2.43, sd = 0.96) and non-stem educated entrepreneurs (m = 1.71, sd = 0.76), t(54)= 3.01, p = 0.004. comparison of the use of cognitive functions of the bm based on educational level both within and across the education types did not yield any meaningful differences. discussion we started our research inquiry with the question of how entrepreneurs performing opportunity development activities cognitively process the bm in concert with stakeholder interactions. using the theoretical lens of socially situated cognition and interviews from entrepreneurs, we were able to extract and validate four cognitive functions of the bm which we explicated in detail. in this section, we discuss the theoretical and practical implications of our findings. theoretical implications studies dealing with the influence of managerial cognition on strategy processes have emphasized the role played by executive cognition in designing and shaping the bm of large firms (sosna et al., 2010; aspara et al., 2013). the attention patterns and attention intensity of top management teams (tmts) are known to drive changes and bm innovation (frankenberger & sauer, 2019). we extend the literature on the cognitive perspective of strategy through our study of the cognitive processes that entrepreneurs employ during bm design (snihur & zott, 2020). here, we find evidence that the bm helps entrepreneurs refine their attention and efforts during opportunity development. our findings also suggest that the bms channel the reflective attention of the entrepreneurs towards finding performance metrics, experimenting with alternatives in design and the assessment of the current bm design. through the bm’s cognitive function of development, entrepreneurs focus their attention on change and innovation in response to the competitive landscape and refine product-market fit. from this, we argue that while the attention of the entrepreneurs may affect bm design initially, once the bm becomes concrete it in turn directs the attention of the entrepreneurs towards next steps thus unfolding a virtuous attention cycle. these findings are in line with massa et al. (2017), who describe that bms can function as cognitive schema that can operate as a ‘focusing device’ to aid decision-making. previous studies have proposed that the bm functions as a ‘cognitive link’ between opportunity identification and exploitation (doz & kosonen, 2010; george & bock, 2011). we explicate the nature and content of this cognitive link through the four socially situated cognitive functions and provide empirical proof for these arguments. we add to the stream of literature which views the bm as a facilitative intermediary during opportunity co-creation (george & bock, 2011). this facilitation is validated through the quotes from the entrepreneurs who report that they use the bm to get the stakeholders on board using comprehension and communication. as proposed by mitchell and colleagues, we find that by enhancing comprehension and communication, entrepreneurs actively work at communicative, relational and group levels of situated entrepreneurial cognition (mitchell et al., 2011). both communication and comprehension could be closely associated with sensemaking, sensegiving, sensedemanding and sensebreaking processes that the entrepreneurs and their stakeholders engage in while dealing with uncertainty during the early stages of a venture (hill & levenhagen, 1995; spieth et al., 2014; kaffka & krueger, 2018; kaffka et al., 2021). entrepreneurs, as a result, are able to orchestrate the resources required for the new venture thereby advancing opportunity co-creation (sirmon et al., 2011; frankenberger & stam, 2020). the socially situated cognition perspective that explains the shared cognition between entrepreneurs and critical stakeholders is complementary to the shared mental models approach pursued by other scholars that study entrepreneurial vision in teams in later stages of a venture (see hensel & visser, 2019). our study provides strong empirical proof for entrepreneurial cognition being distributed across multiple social agents (dew et al., 2015; kaffka et al., 2021). researchers from the entrepreneurship as design perspective (berglund et al., 2020) view bms as abstract artifacts constructed by entrepreneurs in order to instantiate entrepreneurial opportunities (berglund & glaser, 2021). we inform this literature by showing how such an artifact is designed through shared narratives, between entrepreneurs and their stakeholders, that leverage the cognitive functions of the bm. furthermore, these scholars regard narrative entrepreneurial artifacts as “sensemaking devices that are not defined by their materiality, but rather by their ability to relate individuals, objects, and events in meaningful accounts” (berglund & glaser, 2021). from our empirical observations, we find that the bm artifact can also function as one such sensemaking device that helps entrepreneurs clarify the business oppor160 g. a. kaffka, r. singaram, a. j. groen, & j. kraaijenbrink journal of small business strategy / vol. 31, no. 3 (2021) / 148-163 tunity through comprehension, communication, analysis, and development. therefore, we suggest that some abstract artifacts like the bm could also have narrative properties especially during its design in the opportunity development phase. future research investigations may help us resolve if entrepreneurial artifacts should be kept categorically distinct or if a single artifact can simultaneously take on multiple properties that are abstract, narrative or material in nature (berglund & glaser, 2021). finally, amit and zott (2015) had proposed that the educational background of the entrepreneur may affect bm design. we test this empirically to find that stem and non-stem educated entrepreneurs do differ in their cognitive processing of the bm lending support to their argument and highlighting the need for more research in this direction to understand and make sense of these differences. practical implications in practice, entrepreneurs at the helm of new ventures and small businesses, consultants, incubators, and educators would benefit immensely from leveraging various cognitive functions of the bm identified and validated in our study. the socially situated cognition perspective adopted in our study extends the focus beyond the entrepreneurs to also include their interaction with those that help them exploit the entrepreneurial opportunity. entrepreneurs find themselves typically cognitively overloaded, having to make numerous decisions in the customer development phase of a startup (york & danes, 2014). the function of comprehension serves a dual purpose of converging their attention while also conserving the entrepreneurs’ time and efforts. it also helps them bring internal and external stakeholders on the same page, leading to avoidance of errors and misconceptions. similarly, entrepreneurs could use the bm to tailor-make their communication to cater to the expectations of their valued audience, whether it is a customer or a supplier. the communication function allows for framing and reframing of the core aspects of the business for the purpose of clarification and gaining support. reflection of the entrepreneurs facilitated by input from stakeholders such as investors, customers, mentors etc., allow them to experiment with alternatives, discover performance metrics and enhance product-market fit. practitioners could use the functions of analysis and development for achieving bm innovation. lastly, the need for better frameworks to educate engineers and non-entrepreneurs on the entrepreneurial process, including the design of bms, has been emphasized by researchers (e.g., mahto & mcdowell, 2018; snihur, lamine & wright, 2020). teaching the cognitive functions of the bm along with the value creation and capture aspects of the construct would enhance its utility for students as well as practitioners. limitations and future directions our study’s limitations stem from the context in which the interviews were conducted which is a technology-incubator. here, all the entrepreneurs were pursuing a technology-based new venture irrespective of their educational background even though the complexity of technology being commercialized had differences. future studies that investigate the differences between entrepreneurs (stem versus non-stem) could match the nature of the venture in addition to education type. furthermore, there was low variance in the level of education of the entrepreneurs in our sample. close affiliation with the technical university that led the incubator was one of the reasons for this. researchers interested in understanding the role of educational level (sonfield & lussier, 2014) on bm design would be better served in pursuing samples with larger variance on this construct. similarly, the low sample size of entrepreneurs also limited our ability to perform robust quantitative analyses of the differences between the entrepreneurs. in addition, education is just one of the sources of human capital which has other attributes such as experience and training that future studies could explore in relation with the initial bm design. the entry threshold at the incubator was set in such a way that entrepreneurs with promising ideas and domain experience were chosen to be part of the oneyear support program. this meant that the participants had substantial entrepreneurial experience before they started their current venture. as a result, we were not able to observe the differences between novice and experienced entrepreneurs and how they might be different in processing the bms during their initial design. the interviews took place at the end of the startup incubation program. in order to trace the development of the initial bm design more interviews or observation points could be planned by researchers to get a better idea of dynamics bm design (cosenz & noto, 2018) at early stage startups (snihur & zott, 2020) and the cognitive processes associated with it. finally, the scope of our research did not include the type of bms designed (e.g., freemium versus subscription) or performance of the venture owing to their nascency. thus, future research studies could investigate the various intersections of bm type, performance, and entrepreneurial cognition. beyond overcoming said limitations, studies connecting bm design to the cognition and sensemaking of the top management teams, their stakeholders and resultant resource orchestration for small businesses would be fruitful pursuits from both theory and practice perspectives. 161 g. a. kaffka, r. singaram, a. j. groen, & j. kraaijenbrink journal of small business strategy / vol. 31, no. 3 (2021) / 148-163 conclusion the core functions of a bm are to specify a venture’s logic for value creation, capture and delivery (osterwalder, pigneur & tucci, 2005). beyond these core functions, the bm also offers socially situated cognitive functions that entrepreneurs leverage to orchestrate support for exploiting entrepreneurial opportunities. intentional use of comprehension, communication, analysis, and development functions of the bm would be immensely useful in achieving shared cognition among stakeholders thereby propelling nascent ventures to next stages of growth. references adam, m., strähle, j., & freise, m. 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(2007). business model design and the performance of entrepreneurial firms. organization science, 18(2), 181-199. https://doi-org.ezproxy.depaul.edu/10.1016/j.jbusvent.2020.106033 https://doi-org.ezproxy.depaul.edu/10.1016/j.jbusvent.2020.106033 https://doi.org/10.1016/j.techfore.2018.11.011 http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2021, vol. 31, no. 02, 06-18 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2021 small business institute® w w w. j s b s . o rg introduction 1 department of marketing and market research, university of valencia, av. dels tarongers, s/n, postal code: 46022, valencia, spain 2administration department, universidad católica de la santísima concepción, alonso de ribera 2850, postal code: 409054, concepción, chile, jocueli@alumni.uv.es 3administration department, universidad católica de la santísima concepción, alonso de ribera 2850, postal code: 409054, concepción, chile, ollanos@ucsc.cl 4administration department, universidad católica de la santísima concepción, alonso de ribera 2850, postal code: 409054, concepción, chile 5department of marketing and market research, university of granada, campus cartuja s/n, postal code: 18071, granada, spain, manuelalonso@ugr.es reputation and identity in family firms: current state and gaps for future research reputation, identity, image, family firms, literature review apa citation information: cuevas lizama, j., llanos contreras, o., & alonso dos santos, m.. (2021). reputation and identity in family firms: current state and gaps for future research. journal of small business strategy, 31(2), 06-18. family firms are predominant among small and medium companies, as well as among big companies (zellweger, 2017). recent empirical research has pointed out that they enjoy a better reputation than their non-family peers (deephouse & jaskiewicz, 2013). this is an advantage that improves the response of different interest groups when given communicational stimuli. along these lines, alonso-dos-santos et al. (2019) found that transmitting the family identity of a firm positively influences the attitude toward the website of the company and the potential consumers’ intention to purchase. however, other studies have suggested that the term “family company” can generate both positive and negative associations from different stakeholders (as suppliers, customers and the community) (botero et al., 2018). for this reason, knowing the different approximations and findings in the literature about reputation and transmission of the family identity of a firm is important. a family firm can be defined as a firm controlled by a family (property and control) over generations (chua et al., 1999; habbershon & pistrui, 2002). the literature about these firms proposes that the interaction family-firms is a source of unique resources that sustain competitive advantages (habbershon et al., 2003). among the resources resulting from this interaction is the family identity itself and the reputation it transmits. the family identity of a firm is a concept that seeks to explain the link between the participation of the family in the firm and how this influences its competitiveness (zellweger et al., 2010). this family identity of a firm would have the potential to reflect the tradition, experience and knowledge of the family in the business (beck & prügl, 2018; berrone et al., 2010). on the other hand, reputation is defined as the level of favourability toward a company and indicates the level at which the people involved admire and trust a company (deephouse & carter, 2005; pfarrer et al., 2010). a favourable reputation can susresearch surrounding the strategic value of the reputation and identity of a family firm is still an incipient topic and there is not absolute clarity about the response the different interest groups could have when these elements are communicated to them. starting from a systematic review of the literature of web of science, 56 articles published between 2000 and 2020 were analyzed. the results show a growing number of articles based on the reputation and transmission of the family identity of firms. the cites in this articles have also shown important growth, confirming the relevance this topic has had. this work provides a review of the current state and evolution of the literature surrounding this topic, discusses the different lines of research related to the reputation and transfer of family identity, and finally identifies gaps in the research that can orient the development of future work. jonathan cuevas lizama1, 2, orlando llanos contreras3, manuel alonso dos santos4, 5 http://www.smallbusinessinstitute.biz http://www.jsbs.org 7 j. cuevas lizama, o. llanos contreras, & m. alonso dos santos journal of small business strategy / vol. 31, no. 2 (2021) / 06-18 tain consumer preferences towards a brand, as well as willingness to pay for products/services related to that brand (deephouse, 2000; rindova et al., 2010). the image an organization projects is linked to its business strategy, which makes reputation an important asset (fombrun, 1996). in the case of family businesses, the need to protect their image and reputation means that they are more socially responsible actors than their non-family peers (dyer & whetten, 2006; peake et al., 2015; block et al., 2013) and are more concerned about providing reliable information (chen et al., 2010; micelotta & raynard, 2011). similarly, priorities for social-emotional wealth motivate family members to identify more strongly with the firm and to maintain a positive reputation (deephouse & jaskiewicz, 2013; lohe & calabrò, 2017). these perspectives detail how reputation priority influences family business strategies (see table 1). this article makes three contributions: first, it provides an updated review of the different perspectives of the influence of family identity on business; second, it contributes to lowering the barrier to understanding the perspective of identity in the family business; and finally, it provides an initial discussion that could be useful to illuminate future research. from here on in, this article describes the methods used for the systematic review of the literature, then explains the results about the evolution of the research about the topic, discusses the findings and contributions and finally presents the main conclusions and suggestions for future research. method this systematic review of the literature is based on tranfield et al. (2003). as a first stage, this method determines the topic to be analysed, considering its relevance and importance. following that, we proceed to identify the protocols for carrying out the review. in this case, the research is centred only on articles of recognized academic validity, based on the impact factor of the journal where they have been published. the main collection of web of science was used as the most adequate option. this criterion has been used in prior literature reviews (e.g. baier-fuentes et al., 2019). based on the aforementioned, a review of the literature was carried out with the aim of identifying the relevant articles. for this, the key words: “family business” or “family firms” or “family firm” or “family enterprise” were used and combined with “reputation” or “family firm identity” or “image transfer” or “corporate brand identity” which are the constructs related to the management of family identity. the key words were reviewed considering their presence in the title, summary or key words, taking into account the database of web of science, including the databases of the science citation index expanded (sci-expanded), the social sciences citation index (ssci) and the arts & humanities citation index (a&hci), and excluding the articles in the book citation indexscience (bkci-s) and the emerging sources citation index (esci). publications in journals in the list of emerging sources were not included in the final list of articles. the search produced a sample of 73 articles, of which 17 were eliminated as they had no relation to the search. the final sample is of 56 articles. table 2 provides a list of the number of works selected. table 1 theoretical perspective on reputation in family businesses theoretical perspective authors reputation and priority for socio-emotional wealth deephouse & jaskiewicz, (2013); berrone et al. (2010); lohe & calabrò (2017) influence of reputation on corporate social responsibility dyer & whetten (2006); peake et al. (2015); block et al. (2013) reputation and information to the market chen et al. (2010); micelotta & raynard (2011) source: prepared by authors even with the strategic value of reputation and the family identity of a firm, the research surrounding this topic is still incipient (sageder et al., 2018). firms use different types of communicational strategies in which some seek to further exhibit their family identity while others hide it (micelotta & raynard, 2011), but the level of effectiveness of each of these is not clear. this article shows that, globally, the reputation and transmission of family identity of firms is a recurring topic in business administration, business and economics journals. it also reveals that the methodologies used are mostly of a quantitative type. the studies that relate family identity and reputation with the family property of a firm have been published in the principal journals of the collection of web of science (88% in q1 y q2). the results of this review of the literature show that the majority of the articles analysed are focussed on understanding the sources of the advantages of reputation that family firms would have (27% of the publications). 8 j. cuevas lizama, o. llanos contreras, & m. alonso dos santos journal of small business strategy / vol. 31, no. 2 (2021) / 06-18 table 2 publications about reputation and transmission of family identity of the company by journal journal publications impact factor quartil entrepreneurship theory and practice 7 6,193 q1 family business review 6 6,188 q1 journal of management studies 1 5,839 q1 journal of accounting research 1 4,891 q1 journal of financial economics 1 4,693 q1 management science 1 4,219 q1 journal of business research 2 4,028 q1 journal of business ethics 1 3,796 q1 journal of product innovation management 2 3,781 q1 international small business journal 1 3,706 q1 human resource management review 1 3,625 q1 organization studies 1 3,543 q1 corporate governance: an international review 1 3,390 q1 brq-business research quarterly 1 3,250 q2 journal of family business strategy 6 3,225 q2 journal of small business management 1 3,120 q2 european management journal 1 2,985 q2 strategic entrepreneurship journal 1 2,956 q2 business horizons 2 2,828 q2 british journal of management 1 2,750 q2 asia pacific journal of management 1 2,737 q2 global strategy journal 1 2,730 q2 sustainability 2 2,592 q2 review of managerial science 1 2,393 q2 journal of corporate finance 1 2,349 q1 emerging markets review 1 2,108 q1 journal of business economics and management 1 1,855 q2 journal of business finance & accounting 2 1,562 q2 psychology & marketing 1 1,882 q3 scandinavian journal of management 1 1,415 q3 european journal of international management 1 1,349 q4 journal of organizational change management 1 1,185 q4 journal of management & organization 2 1,021 q4 betriebswirtschaftliche forschung und praxis 1 0,186 q4 source: prepared by authors 9 j. cuevas lizama, o. llanos contreras, & m. alonso dos santos journal of small business strategy / vol. 31, no. 2 (2021) / 06-18 results evolution of the literature about reputation and transmission of family identity in family firms the first article in the list of works analysed was published in the year 2000 by marcelo paladino in the journal of business research. this work, based on a case study, makes it clear that reputation and family identity are critical elements for the development of these firms and deserve to be researched. however, it was necessary for six years to pass before this idea began to be developed at an empirical level. along these lines, dyer and whetten (2006) published a study in the journal entrepreneurship theory and practice where they found that family firms are more socially responsible than their non-family peers and they attributed this behaviour to the concern for preserving their image and reputation, as well as the desire to protect the assets of the family. this article was the beginning of a series of publications that analysed the phenomenon of reputation and transmission of family identity of these firms. these publications consider that family ownership influences the identity of a business (zellweger et al., 2010) because of the family’s involvement in the management and/or direction of the business (chen et al., 2008). participation contributes to the creation of a family identity (deephouse & jaskiewicz, 2013) that is impacted by the company’s financial and non-financial results (dyer & whetten, 2006). family members identify more strongly with the family business (deephouse & jaskiewicz, 2013), adopting long-term perspectives (le breton-miller & miller, 2015) and promoting trans-generational control (gómez-mejía et al., 2007; zellweger et al., 2012). due to the above, these companies are more concerned about social-emotional objectives such as projecting a positive image and reputation of the company and family (berrone et al., 2010; deephouse and jaskiewicz, 2013). the data shows that the number of publications and cites began to grow year by year and reached its maximum in the year 2019. these data show the great influence this topic has had over the last few years. figure 1 shows the evolution of publications and cites on the topic. the analysis of the results allows us to identify that the relationship between the reputation and communication of family identity of an enterprise has multiple effects and would have an impact not only at the level of the consumers, but also at that of other stakeholders. thus, publications are found in multiple fields such as finance, marketing and general administration. the greater part of these works has been published by high impact journals (88% in q1 and q2). the following journals are the ones that have the most space for the dissemination of the topic: entrepreneurship theory and practice (7), family business review (6), journal of family business strategy (6). 0 2 4 6 8 10 12 0 100 200 300 400 500 600 publications citations figure 1. evolution of publications and cites about reputation and transmission of family identity of family firms source: prepared by authors 10 j. cuevas lizama, o. llanos contreras, & m. alonso dos santos journal of small business strategy / vol. 31, no. 2 (2021) / 06-18 the analysis of the relationship between published articles and cites by journal allows us to observe how the research about reputation and transmission of the family identity of the firm has increased the interest of researchers from the year 2000 to now. the data in table 3 allows us to observe that 26% of the journals analysed make up 55% of the publications and around 50% of the cites. this would confirm the relevance of these journals in the dissemination of these ideas. however, to date, this topic has transcended to a much wider spectrum of journals classified mainly within the sphere of administration and business, but also to others considered to be journals of finance and economics. thus, for example, journals such as entrepreneurship theory and practice (7/567), family business review (6/253), journal of family business strategy (6/110) and journal of financial economics (1/370) have published articles about reputation and transmission of family identity, relating them to diverse topics. table 3 number of publications and number of cites of research about reputation and transmission of family identity of the family firm no. publ./no. cites journal 2000-2006 2007-2014 2015-2020 total entrepreneurship theory and practice 1/2 2/168 4/397 7/567 family business review 0/0 4/49 2/204 6/253 journal of family business strategy 0/0 2/9 4/101 6/110 business horizons 0/0 0/0 2/17 2/17 journal of business finance & accounting 0/0 1/0 1/8 2/8 journal of business research 1/0 0/0 1/2 2/2 journal of management & organization 0/0 1/9 1/23 2/32 journal of product innovation management 0/0 0/0 2/48 2/48 sustainability 0/0 0/0 2/11 2/11 journal of financial economics 0/0 1/87 0/283 1/370 journal of management studies 0/0 1/13 0/190 1/203 british journal of management 0/0 0/0 1/12 1/12 brq-business research quarterly 0/0 0/0 1/2 1/2 corporate governance: an international review 0/0 0/0 1/1 1/1 emerging markets review 0/0 0/0 1/5 1/5 european journal of international management 0/0 0/0 1/10 1/10 others 0/0 7/121 11/331 18/452 total 2/2 19/456 35/1645 56/2103 source: prepared by authors methods used in the research on reputation in family firms in relation to the research methods used in this topic, 82% (46 works) of the articles of the sample were identified as empirical, while 18% (10) were theoretical works. starting from the empirical articles, the quantitative research has been of greater relevance in the journals analysed, representing 63% of the sample, while the qualitative type works represent 18% of the total sample. on the other hand, it was observed that only one work uses mixed methods to advance the understanding of the topic. these articles considered mostly a sample of general companies from multiple economic sectors/industries (73%) when studying mainly companies belonging mainly to stock exchanges. these studies mostly considered samples with mostly large companies (58%), while only three articles exclusively analysed family identity in the context of small companies. the results of the research show that the empirical studies used longitudinal and cross-sectional data. 57% (32 works) utilized cross sectional data, while 25% (14 works) carried out longitudinal studies (see table 4). 11 j. cuevas lizama, o. llanos contreras, & m. alonso dos santos journal of small business strategy / vol. 31, no. 2 (2021) / 06-18 discussion the analysis of the selected articles generated a grouping of the works into seven large topics. table 5 shows the topics analysed, the articles associated with each topic and their impact. sources of advantages of reputation in family firms this topic is centred on understanding the sources of the advantages in reputation of family firms. fifteen articles account for more than 50% of the total number of cites, the great majority of the works suggest that the priority in preserving socioemotional wealth (sew) is the main reason why these firms achieve a better reputation (e.g. deephouse & jaskiewicz, 2013). this perspective sustains that family enterprises decide mainly based on the need to preserve a set of non-economic assets, with reputation among them (gómez-mejía et al., 2007). the priority of preserving the family reputation (as a mechanism to enhance socioemotional wealth) would explain the importance that these firms grant to reaching non-financial objectives, their keen sensitivity to social problems, their concern for preserving the trust of their shareholders and the keeping of their commitments to other interest groups such as the state (tax office) (chen et al., 2010; isakov & weisskopf, 2015; van gils et al., 2014; zellweger et al., 2013). implicit in this is the idea that the family identity and its values are at the centre of the decisions that determine the reputation of the firm. along these lines, the literature analysed highlights the importance of leadership styles, the long-term vision, the sustainability of the business and the intention to pass on the business to the next generation as relevant factors in the socioemotional priority of reputation (hedberg & luchak, 2018; jaskiewicz et al., 2016; le breton-miller & miller, 2015; lópez-pérez et al., 2018; van gils et al., 2019). critical decisions associated with the design of the policy of corporate governance and the composition of boards are also considered as signs that determine reputation before banks and shareholders (dibrell et al., 2019; samara et al., 2019). reputation and its effects on strategic behaviour ten works in this section account for 18% of the publications and 8% of the total cites generated. these explain how the interest in maintaining a favourable family reputation affects strategic decisions of family enterprises. they conclude that the interest in non-financial objectives (like maintaining a positive reputation) affects decisions such as the adoption of new technologies, investment in r&d, international expansion and the social responsibility of these firms. in terms of the decisions in the adoption of new technologies, the priority of maintaining a good reputation is positively aligned with the willingness of the ceo to develop these kinds of projects (kammerlander & ganter, 2015). the same happens with respect to the decisions of r&d, as this type of initiative would be seen as an element that allows the firm to maintain required standards of quality and social responsibility (brinkerink & bammens, 2018). in relation to social responsibility, it is observed that family companies increase the volume of their philanthropic donations especially when they have the intention of carrying out succession processes (he & yu, 2019). this would be a way of strengthening the family reputation as an asset for the next generation. other studies point out that these firms tend to integrate and maintain control of the assets when internationalizing to protect their reputation in the new markets (yamanoi & asaba, 2018). the priority on reputation would also positively align with entrepreneurial behaviour in this type of enterprise (llanos-contreras & alonso-dos-santos, 2018). being recognized as highly entrepreneurial allows them to convert reputation into a factor of attraction in new business opportunities (sieger et al., 2011). on the other hand, samara and arenas (2017) propose that fair labour practices are also a priority for their importance in maintaining the reputation of the family. this idea has recently been confirmed on an empirical level by kang and kim (2020) who conclude that the managers of family businesses pay greater attention to the labour policies that improve relationships with employees. table 4 research methods used in works on reputation and transmission of family identity of the family firm research methodologies number of articles percentage quantitative 35 63% theoretical 10 18% qualitative 10 18% mixed 1 2% total 56 100% cross-sectional 32 57% longitudinal 14 25% literature review 10 18% total 56 100% source: prepared by authors 12 j. cuevas lizama, o. llanos contreras, & m. alonso dos santos journal of small business strategy / vol. 31, no. 2 (2021 / 06-18 table 5 articles about reputation in family firms, publications (n ° / %) and cites (n ° / %) by topic topic articles by author n° publ. / n° cites % publ. / % cites sources of advantages of reputation dyer and whetten (2006); block (2010); chen et al. (2010); zellweger et al. (2013); vardaman and gondo (2014); van gils et al. (2014); le breton-miller and miller (2015); isakov and weisskopf (2015); jaskiewicz et al. (2016); lampel et al. (2017); lópez-pérez et al. (2018); hedberg and luchak (2018); samara et al. (2019); van gils et al. (2019); dibrell et al. (2019) 15/1097 27%/52% reputation and its effects on strategic behaviour sieger et al. (2011); kammerlander and ganter (2015); samara and arenas (2017); kabbach de castro et al. (2017); lohe and calabrò (2017); brinkerink and bammens (2018); yamanoi and asaba (2018); llanos-contreras and alonso-dos-santos (2018); he and yu (2019); kang and kim (2020) 10/158 18%/8% reputation and its effects on shareholders and the financial market chen et al. (2008); sue et al. (2013); ding and pukthuanthong (2013); wang and ye (2015); ma et al. (2016); ahlers et al. (2017); gonzález et al. (2019); fang et al. (2019); santiago et al. (2019) 9/249 16%/12% dissemination of the family identity and its effect on consumer response paladino (2000); parmentier (2011); binz and smit (2013); binz et al. (2013); diéguez-soto et al. (2017); beck and prugl (2018); gavana et al. (2018); schellong et al. (2019); alonso-dos-santos et al. (2019) 9/104 16%/5% reputation and its effect on performance danes et al. (2008); huybrechts et al. (2011); deephouse and jaskiewicz (2013); basco (2014) 4/303 7%/14% dissemination strategies micelotta and raynard (2011); botero et al. (2013); binz astrachan et al. (2018); beck et al. (2020) 4/127 7%/6% transmission of identity towards internal stakeholders parada and viladás (2010); wielsma and brunninge (2019); ponroy et al. (2019) 3/27 5%/1% others du et al. (2016); sageder et al. (2018) 2/38 4%/2% source: prepared by authors 13 j. cuevas lizama, o. llanos contreras, & m. alonso dos santos journal of small business strategy / vol. 31, no. 2 (2021) / 06-18 reputation and its effects on shareholders and the financial market this topic captures 16% of the publications and 12% of the total cites. these works show how the interest in preserving reputation in family firms influences the management of financial information, its communication and the effect on investors or other stakeholders. the priority on reputation diminishes the probability that they would falsify financial reports, increases the preciseness of these reports and encourages them not to hide negative news about profits (chen et al., 2008; ma et al., 2016; sue et al., 2013). all of this shows a high priority on transparency to maintain the trust of the market, which would increase the probability of being considered a solid investment by investors (santiago et al., 2019). in terms of what the research says about communicating reputation and family identity, a study based on the initial public offering (ipo), found that the tone of the communications generated by the company affects the market valuation of the firm (gonzález et al., 2019). for their part, fang et al. (2019) observed that negative actions by members of the family damage the credibility of the business and wang and ye (2015) found that negative information in the media about the company negatively affects the reputation and perception of the level of risk of the company. dissemination of family identity and its effect on consumer response this section captures 16% of the publications. the data shows that more than 50% of these studies have been published in the last three years. this would, on one hand, explain the low number of cites and would, on the other, show that the understanding of this phenomenon is still very incipient. already in the first two articles included in this research (based on case studies), the value of reputation for commercial strategy and brand creation for these companies is known intuitively (paladino, 2000; parmentier, 2011). the empirical works provide relevant information to comprehend the responses of consumers to communicational stimuli based on the transmission of family identity. thus, binz et al. (2013) found that promoting the family status of an enterprise strengthened the consumer preference for products and services offered by family firms. along the same lines, binz and smit (2013) added that the relational qualities of these companies have an influence in that the community perceives them as economic agents that are both responsible and committed to their surroundings. more recent studies confirm the positive effects of communicating the family identity on consumer response. diéguez-soto et al. (2017) developed a study focussed on hotels that inform their family identity on electronic platforms and concluded that this would increase their level of popularity. beck and prügl (2018) concluded that communicating the family identity of a firm positively influences consumer trust and this in turn influences intention to purchase. along the same lines, alonso-dos-santos et al. (2019) found that transmitting the family identity of firms in their webpages positively influences the attitude towards the website and intention to purchase. reputation and its effect on performance the works in this section show the strategic effects of the reputation of the family firm and confirm potential competitive advantages caused by them. four articles account for 14% of the total cites. the works analysed in this section indicate that family firms can benefit from a positive reputation by expanding their networks and obtaining greater trust, collaboration and identification from different stakeholders (deephouse & jaskiewicz, 2013; huybrechts et al., 2011). it was also observed that the priority on reputation in small and medium enterprises is a barometer of the quality of their products and services (danes et al., 2008). coherent with this, basco (2014) concluded that family firms obtain better results following a strategy of differentiation and balancing decision-making oriented to family and business or following a cost strategy, but putting the business first in the decisions. dissemination strategies these works report which strategies are used by family firms to communicate their identity and reputation. they conclude that family enterprises adopt brand strategies to communicate their family nature (binz astrachan et al., 2018), as they can use the brand in this way as a source of differentiation. micelotta and raynard (2011) found that family firms use brand strategies to show the connection between the family and the company (family preservation), to show the connection of the family with the products and services of the company (family wealth generation) and to highlight organizational components of the firm (family subordination). this communication of family identity has gathered strength with the rise of the internet. web pages have become a medium used by family firms to highlight their family identity (botero et al., 2013). the degree of intensity with which companies communicate their family identity is related to the type of market in which they compete and the type of stakeholders with whom they wish to 14 j. cuevas lizama, o. llanos contreras, & m. alonso dos santos journal of small business strategy / vol. 31, no. 2 (2021) / 06-18 communicate (beck et al., 2020). transmission of identity toward internal stakeholders three articles that represent only 1% of the cites talk about how the family identity is transmitted to members of future generations and workers in the company. parada and viladás (2010) found that narratives/stories are a medium to transmit values to the following generations, but this identity is not only transmitted by the family. wielsma and brunninge (2019) found that family identity is also influenced by the identity of the firm, pointing out that this is a dynamic and bidirectional process that would influence decisions at a family and individual level. finally, ponroy et al. (2019) contribute to this discussion by proposing a model of the process of maintenance of the family identity where three mechanisms of preservation of family identity (transmission, unification and modelling) are identified. others two other studies in the set, which have been cited 38 times (2% of the total cites), could not be grouped in any of the previous categories. the first of these analyses how the coverage of the media plays a role in encouraging family firms in china to establish ethical standards, concern themselves with their socially responsible image and increase their philanthropic actions (du et al., 2016). on the other hand, the work of sageder et al. (2018) carries out a review of the literature which analyses how particular characteristics of family enterprises (e.g. participation and the control of family ownership) influence the priority to create and preserve a good reputation. this study confirms the positive influence between reputation and organizational success. this is coherent with the findings and discussion of this work. conclusions and future research this article develops a systematic review of the literature about reputation and transfer of family identity of family firms. the evolution of the research into this topic and its impact over time was analysed, and seven topics of relevant research were identified, and their main contributions discussed. the two areas with the greatest number of articles published study the sources of the advantages of reputation in these enterprises and how the priority of preserving reputation influences the strategic behaviours of these companies (le breton-miller & miller, 2015; van gils et al., 2014). these studies conclude that the priority of preserving socioemotional wealth of reputation is the main factor that leads to taking actions that benefit the image of the enterprise (lohe & calabrò, 2017; yamanoi & asaba, 2018). this priority would have, on one hand, a direct effect on reputation and, on the other, would decisively influence strategic actions such as socially responsible management and/or investments in r&d (brinkerink & bammens, 2018; he & yu, 2019). some articles add that the long-term vision of family firms would play a role in this dynamic (le breton-miller & miller, 2015). the aforementioned contributions have been important, but a central element in the conceptual framework of socioemotional wealth is the situational context in which decisions are made (gómez-mejía et al., 2007; llanos-contreras et al., 2019). therefore, it is necessary to advance in this direction, identifying if the priority of reputation is maintained under financial stress of the firm and if their strategic behaviour (in which their reputation is sustained) does not change in this scenario. on the other end of the spectrum, the topics which have generated the lowest number of publications refer to the way in which the family identity is transmitted to internal stakeholders, the strategies of dissemination towards external groups and the effects of reputation on performance (basco, 2014; micelotta & raynard, 2011; wielsma & brunninge, 2019). even when the research on reputation and performance is not very extensive, there is consensus about its positive relationship (deephouse & jaskiewicz, 2013). thus, in this topic, future research can use alternative performance indicators such as the effect of reputation on marketing and advertising costs and the social identification of family members (deephouse & jaskiewicz, 2013) and variations in the characteristics of the sample. on the other hand, interesting opportunities are observed for the understanding of the phenomenon of the dissemination (be it external or internal). it is possible to advance in identifying generic communications strategies of the family identity that integrate the existing literature in the topic. still more importantly, it is possible to advance in determining the impact of the different strategies and their effect on several stakeholders (for example, product/services market vs labour market). it would also be interesting to evaluate the effect of communicating family identity through different mediums. two other topics that are dealt with in the analysed literature study the phenomenon of reputation, transference of family identity and its effects on financial markets and on consumers. the research surrounding reputation and financial markets discusses the priority that these enterprises place on transparently informing the market of their actions as a way of preserving their reputation (santiago et al., 2019). in addition, they discuss the effect that this has on their valuation by the market (gonzález et al., 2019). in 15 j. cuevas lizama, o. llanos contreras, & m. alonso dos santos journal of small business strategy / vol. 31, no. 2 (2021) / 06-18 relation to the market of products and services, there is a positive response from consumers to the communication of family identity (binz et al., 2013), but this needs to continue being measured as there is literature that places doubt on whether the associations that people make with the concept of “family business” is positive or negative (botero et al., 2018). this opens opportunities to compare the response of consumers in the market of final products vs industrial markets. this could also be a relevant topic to study in the response of investors in the case of financial markets. another relevant issue arises when comparing the sample size used in the research. studies involving small and medium-sized family businesses agree on the importance of maintaining a positive reputation (danes et al., 2008; llanos-contreras & alonso-dos-santos, 2018). basco (2014) reveals the link between the differentiation strategy and positive reputation and the benefits of incorporating the family in the decision-making of these companies. however, for the family this connection can lead to difficulties such as frustration, loss of family harmony, or loss of family privacy (wielsma & brunninge, 2019; beck et al., 2020). it would be relevant to explore further how the priority of reputation impacts on smaller businesses. this work makes, at least, the following contributions: first, it provides a revision of the current state and evolution of the literature surrounding this topic. secondly, it discusses the different currents of research related to reputation and transference of family identity, identifying contributions and impact. lastly, it identifies gaps in the research that can orient the development of future studies. in spite of the aforementioned, it is not free of limitations. from the point of view of method, it only includes publications from web of science and while this allows for the incorporation of the most influential publications, it does not consider all the available literature on the topic. future work could include updating this, considering publications available on other platforms such as scopus. references ahlers, o., hack, a., madison, k., wright, m., & kellermanns, f. w. 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(2013). why do family firms strive for nonfinancial goals? an organizational identity perspective. entrepreneurship theory and practice, 37(2), 229–248. https://doi. org/10.1111/j.1540-6520.2011.00466.x https://doi.org/10.1016/j.jfbs.2009.12.003 fall journal   volume 20, number 2 fall/winter 2009  97            family‐member and non‐family‐member managers in  family firms: adding a seventh country to the international  database ‐ kosovo   robert n. lussier  springfield college  rlussier@spfldcol.edu    matthew c. sonfield  hofstra university  matthew.sonfield@hofstra.edu    robert j. barbato  rochester institute of technology  rbarbato@saunders.rit.edu      abstract    extending earlier analyses of the authors in other countries with regard to the  inclusion of family‐member managers and non‐family‐member managers in family  businesses, and the relationship of this variable to certain management activities,  styles and characteristics, this current study analyzes data from kosovo.  results of  statistical testing indicate almost no changes in management attributes as the  proportion of non‐family‐member managers increases in family firms.  implications for  practitioners, consultants, and researchers are presented.    keywords: family business, family firm, family business management    introduction  the purpose of this study was to  investigate family businesses with regard  to the degree to which such firms  employ non‐family members as  managers.  how does the ratio of non‐ family‐member managers to family‐ member managers in a family firm relate  to various managerial activities, styles  and practices of that firm?  recent  studies by the authors in other countries  were replicated in kosovo, so as to  expand the total data base and to  strengthen the total set of findings.   prior research into the issue of family‐ member managers (fm’s) versus non‐ family‐member managers (nfm’s) in  strateg y  journal of small business  journal of small business strategy        98  family businesses has been limited.  chua, chrisman and sharma, with very  strong empirical experience in the field  of family business, concluded that  “issues related to non‐family managers  [in family firms] have received very little  attention by researchers” and “there is  definitely a gap in our understanding of  the role played by non‐family managers  in the family business” (2003, pp. 102,  103).  chrisman, chua, and sharma  (2005) stated that many questions  remain unanswered and much  interesting research remains to be done  to determine how family involvement  affects firm performance.  ensley and  pearson (2005) concluded that family  business research needs to identify the  nature of family involvement in top  management teams, in response to  which nordqvist (2005) agreed that this  is a breach in the literature that has not  received much attention.  chrisman,  chua, and steier also agreed with the  need to better understand top  management teams in family businesses  as “this is a topic of great importance  since the decisions of top mangers may  determine the extent to which a family  business obtains distinctive familiness  and superior economic performance  (2005, p. 241).  there is also a growing interest in  investigating management  characteristics and activities in different  countries.  oviatt and mcdougall (2005)  called analyzing entrepreneurial  behavior in various countries rich in  opportunities and having possibilities to  move such research from its infancy into  high growth.   this current study is therefore important  in that it brings new empirical research  to these issues of fms and nfms in  family business management, and that it  does so in a country not previously  studied with regard to this issue.   furthermore, the results of this research  are not only of value to researchers, but  should also be of value to consultants to  family businesses and to family business  owner/managers themselves, both of  whom may gain insight into the possible  impact of having non‐family managers  in family businesses.    literature review  although most definitions of a “family  business” include the criterion of the  prevalence of family members in the  management team, an extensive review  of the family business literature has  found few academic papers or journal  articles that investigated the impact of  nfm’s on the management activities,  styles and practices of family firms.  the  papers and articles that did touch on  this topic usually did so in a tangential  manner and/or in a conceptual or  anecdotal method, rather than via  empirical investigation.  somewhat more  frequently found, but still few in  number, were papers and articles that  compared family businesses and non‐ family businesses, an issue quite  different in nature.  still another related  but, again, a different issue is the use of  non‐family‐members on the corporate  or advisory boards (but not in the  volume 20, number 2 fall/winter 2009        99    management) of family firms, a topic  occasionally investigated and the  (largely anecdotal and conceptual) focus  of an entire issue in the first year of  publication of the family business  review (1988 v.1 n.3).  still, some prior studies did indeed  investigate fm’s and nfm’s in family  firms.  several analyses have focused on  the issue of how a family firm ceo  should adapt to working with non‐ family managers, and the difficulty of  delegating managerial responsibilities to  non‐family‐members (firnstahl, 1986;  goffe & scasse, 1985; hofer & charan,  1984; mathews, 1984; perrigo, 1975).  the  reverse issue ‐ how to facilitate the  adaptation by the non‐family‐manager  to the family firm’s culture and goals ‐  was considered by dyer (1989) and by  mitchell, morse and sharma (2003), who  pointed out that nfm’s must adapt to  the family firm and need assistance in  doing so.  other investigations regarding fm’s and  nfm’s focused on compensation for  nfm’s (mcconaughy, 2000; poza, alfred  & maheshawi, 1997), and on retention of  nfm’s (ward, 1997).  and gallo and  vilaseca (1996) and dorgan, dowdy and  rippin (2006) looked at the possible  performance benefits of family firms  with nfm’s versus those without.   a study by chua, chrisman and sharma  (2003) emphasized the relevance of  agency theory in explaining and  understanding the relationship between  fm’s and nfm’s in family firms.  they  empirically investigated the percentage  of nfm’s in the management team of a  family firm and its relationship to the  fm’s concerns about their relationships  with nfm’s.  among their conclusions  was that past assumptions of zero or low  agency costs in family firms require  further thinking, as these costs are more  complex and asymmetric than  previously supposed.  yet another group of (largely anecdotal  and conceptual) studies relate the  advantages and disadvantages of family‐ members versus nonfamily‐members as  managers of family firms.  some studies  see positive benefits of fm’s, such as  extraordinary commitment (donnelly,  1964; horton, 1986), more warm,  friendly and intimate relationships  within the management team (horton,  1986; staff, 1981), the potential for deep  firm‐specific tacit knowledge, often  based on early involvement in the firm  (lane & lubatkin, 1998), governance  advantages (carney, 2005), and the  creation of a synergy in the top  management team due to higher  cohesion, potency, and positive task  conflict (ensley & pearson, 2005).   marcus and hall (1992) see a  preponderance of fm’s as benefiting the  firm’s service providers, and goody  (1996) concludes that such  preponderance facilitates firm growth as  members of succeeding family  generations are available to open new  branches of the company.  journal of small business strategy        100  however, some other studies see a  downside to a firm’s managers being  members of the same family.  limiting  management positions primarily to  family members may lead to hiring sub‐ optimal people who cannot be easily  dismissed (dunn, 1995; whyte, 1996),  and can lead to greater conflict because  of non‐merit‐based promotion criteria  (leyton, 1970: wong, 1988).  also,  qualified nonfamily managers may avoid  family firms where their potential for  growth, promotion and remuneration is  hampered (covin, 1994a; covin, 1994b;  donnelly, 1964; fiegener et. al., 1996;  horton; 1986; stewart, 2003).  and  dhaliwal (1998) and song (1999) note  that in many cultures, kinship criteria in  choosing managers reduce the  managerial opportunities and role for  female members of the family.  another group of studies investigate the  negative impact of nfm’s in family  firms.  several researchers conclude that  the presence of nfm’s can result in  “creative destruction” when nfm’s  create too much firm growth and thus  weaken family managerial and/or  financial control (morck & yeung, 2003;  morck, strangeland & yeung, 2000;  olson, 1963, 1982, 2000).  the fear of  such “creative destruction” may in turn  lead to fm’s blocking or discouraging  nfms’ creativity and innovation and  thus stifle desirable company growth.   other studies have found that a mixture  of fm’s and nfm’s in the same firm may  lead to greater conflict within the  managerial team (schultz et. al., 2001,  2003).  therefore, because there are both  positive and negative conclusions about  the inclusion of nfm’s in family firms,  several writers focus on the need to  socialize new nfm’s, clearly  communicate to them existing family  values and objectives, and tie the  interests of the nfm’s to the firm, for  example via stock ownership and board  membership (astrachan & kolenko,  1994; berenbeim, 1990; dyer, 1989;  gubitta and gianecchino, 2002; sirmon  & hitt, 2003).  finally, some family business researchers  have focused on developmental issues or  the stages of evolution of family business  growth.  gersick et. al. (1997) presents a  four‐stage model of family firm  development, and peiser and wooten  (1983) focus on the life‐cycle changes in  family businesses.  as family firms grow,  these writers see a likelihood of bringing  greater numbers of nonfamily managers  into the company.  thus, the body of  literature specifically relating to fm’s  and nfm’s in family firms provides  limited empirical evidence and little  consensus or clear conclusions.    hypotheses  as explained above, the objective of this  study was to investigate family  businesses with regard to the degree to  which such firms employ non‐family‐ members as managers.  how does the  ratio of non‐family‐member managers to  family‐member managers in a family  firm relate to the managerial activities,  styles and practices of that firm?  the  hypotheses used for this current study  volume 20, number 2 fall/winter 2009        101    are based on the hypotheses used in  previous studies by sonfield and lussier  (2004, 2005a, 2005b) of family firm  management activities, styles and  practices, which in turn derived from  findings and propositions developed by  earlier researchers who investigated  family firms.  due to the limited prior  empirical research with this specific fm  vs. nfm focus, and the exploratory  nature of this current research project, a  large number of hypotheses involving a  wide variety of family business issues  have been chosen for testing, rather than  focusing on a few specific managerial  issues.  thus the significance of the  various hypothesis test results may  indicate that some factors are more  worthy of further research and analysis  than are others.  the prior research from which these  hypotheses are derived generally did not  specifically focus on fm’s versus nfms.   rather, these various research studies  dealt with other aspects of family firm  growth – measured in particular by  generations, and also by age, size, or  stages.  because family firm growth may  sometimes be accompanied by a rising  proportion of nfms, these studies were  used to identify family business variables  worthy of investigation in this current  study but not to generate specific  hypotheses of relationships between the  proportion of nfms and management  attributes.  for this reason, and because  there are minimal and mixed prior  findings with regard to fm’s and nfm’s  in family firms, the null hypothesis is  used throughout.  the following  paragraphs briefly provide the basis for  each hypothesis.  nelton (1998) investigated gender issues  in family firms and concluded that  daughters and wives are rising to  leadership positions in family firms more  frequently than in the past, and that the  occurrence of daughters taking over  businesses in traditionally male‐ dominated industries is increasing  rapidly.  focusing on societal trends  rather than family firm generational  issues, cole (1997) found the number of  women in family businesses increasing.   more generally, u.s. census bureau data  showed women‐owned firms growing  more rapidly than those owned by men  (office of advocacy, 2001).  while this is  an important variable for family  businesses, no prior studies have linked  this issue to the variable of fms versus  nfms.  thus:  h1. the percentage of non‐family‐ member managers in a family firm will  not have a significant relationship to the  percentage of women family members  involved in the operations of the firm.  the distribution of decision‐making  authority in the firm is another aspect of  family business behavior.  dyer (1988)  found decision‐making to be more  centralized in first‐generation family  firms than in subsequent‐generation  family firms.  aronoff (1998) developed  this suggestion further and postulated  that subsequent‐generation family firms  journal of small business strategy        102  are more likely to engage in team  management, with parents, children and  siblings in the firm all having equality  and participative involvement in  important decision‐making, even if one  family member is still the nominal  leader of the business.  thus:  h2. the percentage of non‐family‐ member managers in a family firm will  not have a significant relationship to the  use of a “team‐management” style of  management.  interpersonal dynamics, including  conflict and disagreement among family  members, has been a major focus of  family firm research (kellermann &  eddleston, 2004).  conflict can exist in  younger, first‐generation family firms,  when siblings, spouses, or other relatives  participate in management and/or  ownership, and conflict can also arise  between members of different  generations in older, subsequent‐ generation family firms.  beckhard and  dyer (1983) found that conflict among  family members increases with the age  of the firm and the number of  generations involved.  conversely, davis  and harveston (1999, 2001) concluded  that family member conflict increased  only moderately as firms grew and  moved into the second‐generation stage,  but there was a more sizable increase in  further growth from second to third‐ generation.  thus:  h3. the percentage of non‐family‐ member managers in a family firm will  not have a significant relationship to the  occurrence of conflict and disagreement  among family members.  another major focus of the literature on  family firms has been succession.  the  primary issues here involve the  difficulties founders have in “letting go”  and passing on the reins of control and  authority, the lack of preparation for  leadership next‐generation family  members often receive, and thus the  need for, and importance of, succession  planning (davis, 1983; handler, 1994;  upton & heck, 1997).  dyer (1988)  investigated “culture and continuity” in  family firms, and the need for firm  founders to understand the effects of a  firm’s culture and that culture can either  constrain or facilitate successful family  succession.  fiegener and prince (1994)  compared successor planning and  development in family and non‐family  firms, and found that family firms favor  more personal relationship‐oriented  forms of successor development, while  non‐family firms utilize more formal and  task‐oriented methods.  building upon  these and other studies of succession in  family firms, stavrou (1998) developed a  conceptual model to explain how next‐ generation family members are chosen  for successor management positions.   this model involves four factors which  define the context for succession: family,  business, personal and market.    some of the earlier family business  studies have dealt with various aspects  of succession, but none have specifically  investigated succession planning and  practices in relationship to fm’s versus  volume 20, number 2 fall/winter 2009        103    nfm’s.  still, given that the importance  of succession has been well established  and publicized, and that family firms  often experience the trials of succession  as they grow, there may be a relationship  between the proportion of nfm’s and  succession planning.  thus:  h4. the percentage of non‐family‐ member managers in a family firm will  not have a significant relationship to the  formulation of specific succession plans.     a number of earlier researchers of family  firms have postulated that, as these  firms grow, they also progress from one  style of management to another.   informal, subjective and paternalistic  styles of leadership become more formal,  objective and “professional” (aronoff,  1998; cole & wolken, 1995; coleman &  carsky, 1999; dyer, 1988; filbeck & lee,  2000; mcconaughy & phillips, 1999;  miller, mcleod & oh, 2001; schein,  1983).    “professional” management may involve  the following: (a) the use of outside  consultants, advisors and professional  services, (b) more time engaged in  strategic management activities, and (c)  the use of more sophisticated financial  management tools.  these conclusions  lead to three hypotheses:  h5. the percentage of non‐family‐ member managers in a family firm will  not have a significant relationship to the  use of outside consultants, advisors and  professional services.  h6. the percentage of non‐family‐ member managers in a family firm will  not have a significant relationship to time  spent engaged in strategic management  activities.  h7. the percentage of non‐family‐ member managers in a family firm will  not have a significant relationship to the  use of sophisticated methods of financial  management.  still another issue of interest in the  investigation of family business is  “generational shadow” (davis &  harveston, 1999).  in a multi‐generation  family firm a generational shadow, shed  by the founder, may be cast over the  organization and the critical processes  within it.  in such a situation,  “succession” is considered incomplete,  may constrain successors, and may have  dysfunctional effects on the performance  of the firm.  yet this “shadow” may also  have positive impact, by providing a  clear set of values, direction and  standards for subsequent firm managers.   kelly et al. (2000) similarly proposed  that a family firm founder’s “legacy  centrality” will influence the strategic  behavior of succeeding generations’  family member managers, with both  positive and negative impact.  davis and  harveston (1999) also investigated  generational shadow, but reached mixed  conclusions regarding its impacts.  if  “generational shadow” and “legacy  centrality” are valid components of the  family business system, then it is of  value to investigate whether the  journal of small business strategy        104  increased presence of nfms will related  to stronger or weaker “generational  shadow” or “legacy centrality. thus:  h8. the percentage of non‐family‐ member managers in a family firm will  not have a significant relationship to the  degree of influence by the original  business objectives and methods of the  founder.  although most family firms are privately  owned, some are not.  as family firms  grow, opportunities and needs for “going  public” may arise.  the family may not  be able, or may not choose, to provide  sufficient management or financial  resources for growth, and outsider  ownership can resolve this situation.   and even publicly owned companies can  continue as “family businesses,” if  management or financial control is  maintained by the family.  in the united  states, mcconaughy (1994) found that  20 percent of the business week 1000  firms are family‐controlled, while weber  and lavelle (2003) report that one‐third  of s & p 500 companies have founding  families involved in management.  thus:  h9. the percentage of non‐family‐ member managers in a family firm will  not have a significant relationship to  management’s consideration of “going  public.”    methodology  country selection  the opportunity to collect data in  kosovo provided continued expansion of  the authors’ data base of family  businesses.  earlier analyses of family  businesses have been conducted in  croatia, egypt, france, india, kuwait,  and the united states.  the republic of kosovo, with a  population of about 2 million, is located  in the center of the balkan peninsula.   kosovo is a new country which is in the  early stages of creating a market driven  economy with minimal intervention  from the government.  kosovo imports  mostly come from macedonia and  serbia, as well as from other european  countries.    kosovo’s gdp in 2008 was 3.8 billion  euros, just above 1,800 euros per capita,  the lowest in the balkans.  kosovo’s  economy relies heavily in remittances  from abroad, which represent up to 15%  of the gdp, as well as foreign direct  investments.  kosovo is one of the  poorest countries in europe with 70% of  the population younger than 35.  the  data on the unemployment rate and  poverty are not that reliable.   international financial institutions such  as world bank and imf have different  perceptions on the employment rate.  it  is believed that unemployment in  kosovo ranges from 25 to 40%, the  highest in the balkans.   there are 90,929 registered businesses  in kosovo, 89,447 (98.3%) of which are  micro enterprises with 1‐10 employees.  another 1,218 enterprises are registered  as small enterprises with 10‐49  employees.  the above figures are good  illustrations on how much the kosovo  volume 20, number 2 fall/winter 2009        105    economy relies on micro and small  businesses which mostly are family  businesses where the families are  involved in the operations of these  enterprises. see table 1 for a summary  comparison of kosovo to the other six  countries.   table 1 ‐ country data    country  population  (millions)  gross domestic  product   us$  per capita  gdp      us$  gem    tea rate  kosovo  1. 8  5,000,000,000  2, 300  na  croatia  4.5  69,980,000,000  16,100  3.6  egypt  83.1  158,300,000,000  5,400  na  france  64.1  2,978,000,000,000  32,700  3.2  india  1,166.1  1,237,000,000,000  2,800  17.9  kuwait  2.7  159,700,000,000  57,400  na  usa  307.2  14,330,000,000,000  47,000  10.5      sample  the sample of kosovo businesses were  collected using personal interviews.  the  process resulted in 80 family businesses  with a response rate of 85 percent. this  is an excellent sample size and response  rate for family business, as it has been  reported that 62 percent of prior family  business studies included no sample at  all, or a sample with less than 100 family  businesses, and 66 percent of these were  convenience samples (bird, welsch,  astrachan & pistrui, 2002).  in three  highly‐rated small business and  entrepreneurship‐oriented journals  (entrepreneurship theory and practice,  journal of business venturing, and  journal of small business management)  around one‐third of the articles had a  response rate of less than 25 percent  (dennis, 2003).    measures and statistical analysis  with correlations, the results are the  same regardless of which variable is  dependent or independent.  thus, for  statistical testing of all nine hypotheses  the test variable is the percentage of  non‐family‐member managers, which is  a ratio measure.  the nine hypotheses  journal of small business strategy        106  variables in hypotheses testing are  interval or ratio levels of measures.  see  table 3 for a listing of variables with a  brief explanation of operationalization  and measure for each variable.  to  conserve space in this table, all  hypotheses are denoted by summary  phrases.  in the actual survey  instrument, the questions or statements  used to collect the data were more  substantial.  likert interval scales were  used: “describes our firm” 7‐1 “does not  describe our firm.  based on level of measures, hypotheses  1‐9 were tested using pearson  correlations.  higher level statistical  regression is not appropriate because the  purpose of the study was to determine  relationships between variables, not to  predict the percentage of managers  based on the nine independent  variables.    results  descriptive statistics  see tables 2a and 2b for a summary of  descriptive statistics discussed below.   also, see table 3 for a comparison of the  means and standard deviations for each  variable.   table 2a ‐ descriptive statistics              volume 20, number 2 fall/winter 2009        107    table 2b ‐ descriptive statistics        table 3 ‐ correlations hypotheses tests (n = 80)      (7‐1) likert scales “describes our firm” 7 6 5 4 3 2 1 “does not describe our firm.”    hypothesis testing  the results of the statistical testing are  presented in table 3.  there was only  one significant (positive) correlation (p <  .05): between the percentage of non‐ family‐member managers and the level  of conflict:  h3.  as the percentage of  non‐family‐member managers increases,  so does the amount of conflict (p = .015).  discussion and implications  earlier analyses of these same variables  in other countries produced a somewhat  greater numbers of significant  relationships than in this kosovo study.   for example, there were six significant  journal of small business strategy        108  relationships in france, five in the  united states, and three in india.  thus  this current study further indicates the  need for additional research with regard  to this issue of fm’s versus nfm’s.    certainly the very small size of kosovo –  the nation, its economy, and its family  businesses – has an impact upon these  data results.  smaller than any of the six  countries previously analyzed (in  population, gnp, and in sample  businesses size), generational influences  can be expected to be more minimal.   the value of this current study is thus  not so much in its specific country  findings but rather in its expansion of  the total international family business  database.  this train of research should be of both  interest and value to practitioners,  consultants, and researchers.  the  findings of this study, combined with  comparable and derivative future  studies, should enable family business  owner/managers to better understand  the possible impacts of bringing non‐ family managers into a family business.   would there be likely changes in  management activities, styles and  characteristics, and would these changes  be desirable and beneficial or  dysfunctional for the firm?  this is also a  question that consultants to family  businesses must consider as they analyze  such firms and make recommendations  regarding alternative strategies for  growth.    for researchers in the field of family  business, these findings build upon  earlier and generally non‐quantitative  studies, provide some results that future  research can focus on, replicate, and  build upon, and may indicate some  specific factors especially worthy of  further investigation.  furthermore, this  research raises many ideas for future  research which, for example, might focus  on factors not considered in this study,  such as gender issues, the varying levels  of profit motivation among family firm  owners, or the influence of different  national cultures upon family business  management practice.  the potential  scope for future research relating to  family‐member and non‐family‐member  managers in family business is indeed  extensive.    conclusions  through its investigation of family‐ member managers versus non‐family‐ member managers in family firms in  kosovo, this study further fills an  identified gap in the family business  literature.  as discussed earlier, the  limited prior writings on this specific  family business issue reached few  conclusions, with some writers  postulating that nfm’s strengthen a  family firm (coven, 1994a, 1994b;  donnelly, 1964; dunn, 1995;fiegener et.  al., 1996; horton, 1986; leyton, 1970;  stewart, 2003; whyte, 1996; wong, 1988)  and other researchers concluding the  opposite (carney, 2005; chua, chrisman  and sharma, 2003; donnelly, 1964;  ensley & pearson, 2005; goody, 1996;  volume 20, number 2 fall/winter 2009        109    horton, 1986; lane & lubatkin, 1998;  marcus & hall, 1992; staff, 1981).  as  most of these earlier writers reached  their deductions and findings through  non‐quantitative analyses, the authors’  current series of empirical and  quantitative analyses in various  countries adds to the literature.  as this  research focus continues to be  developed by scholars, this combination  of qualitative and quantitative analyses  should allow us to better understand  this issue of fm’s versus nfm’s (guillén,  1994).    references  aronoff, c. e. (1998). megatrends in  family business, family business review,  11(1), 81‐192.  astrachan, j.h.; kolenko, t.a. (1994). a  neglected factor explaining family  business success: human resources  practices, family business review, 7(3),  251‐262.  beckhard, r.; dyer, w. (1983). managing  continuity in family‐owned business,  organizational dynamics, 12(1), 5‐12.  berenbeim, r. (1990). how business  families manage the transition from  owner to professional management,  family business review, 3(1), 69‐110.  bird, b.; welsh, h.; astrachan, j.h.;  pistrui d. (2002). family business  research: the evolution of an academic  field, family business review, 15(4), 337‐ 350.  carney, m. (2005). corporate  governance and competitive advantage  in family‐controlled firms,  entrepreneurship theory and practice,  29(3), 249‐265.  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articles in family business, minority  business, and automotive business  history.   robert j. barbato is professor of  management at rochester institute of  technology. he has a diverse  publication interest including family  business.  reproduced with permission of the copyright owner. further reproduction prohibited without permission. ss editor editor ross l. fink bradley university ross l. fink bradley university associate editors associate editors paul belliveau rider university paul belliveau rider university bruce h. kemelgor university of louisville bruce h. kemelgor university of louisville editorial assistants editorial assistants heather holland bradley university heather holland bradley university editorial review board editorial review board semra ascigil middle east technical university semra ascigil middle east technical university joe r. bell university of arkansas at little rock joe r. bell university of arkansas at little rock david brennan university of st. thomas 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goldsby ball state university michael goldsby ball state university the journal of small business strategy is a joint publication of the small business institute and the foster college of business administration, bradley university. send subscription requests to ross fink, editor, journal of small business strategy, foster college of business administration, bradley university, 1501 w. bradley ave., peoria, il, 61625 or e-mail to jsbs@bradley.edu. annual subscriptions (two issues) may be ordered at $25 each (u.s. dollars only). international subscriptions add $5 annually for postage and handling. back issues may be ordered at $12 per issue. members of the international council for small business receive a 40% discount. icsb members pay $15 plus $5 for international subscriptions. the journal of small business strategy is a joint publication of the small business institute and the foster college of business administration, bradley university. send subscription requests to ross fink, editor, journal of small business strategy, foster college of business administration, bradley university, 1501 w. bradley ave., peoria, il, 61625 or e-mail to jsbs@bradley.edu. annual subscriptions (two issues) may be ordered at $25 each (u.s. dollars only). international subscriptions add $5 annually for postage and handling. back issues may be ordered at $12 per issue. members of the international council for small business receive a 40% discount. icsb members pay $15 plus $5 for international subscriptions. copyright 2011 small business institute issn 1081-8510 copyright 2011 small business institute issn 1081-8510  trateg y   journal of small business  reproduced with permission of the copyright owner. further reproduction prohibited without permission. http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2020, vol. 30, no. 02, 17-25 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2020 small business institute® w w w. j s b s . o rg introduction 1kennesaw state university, 1000 chastain road. kennesaw, ga 30144, usa, bcowden@kennesaw.edu 2university of louisiana at lafayette, 214 hebrard boulevard, lafayette, la 70503, usa, josh.bendickson@gmail.com 3kennesaw state university, 1000 chastain road, kennesaw, ga 30144, usa, jbungcay@students.kennesaw.edu 4kennesaw state university, 1000 chastain road, kennesaw, ga 30144, usa, swomac16@students.kennesaw.edu unicorns and agency theory: agreeable moral hazard? unicorns, moral hazard, agency theory, disruption, venture capital apa citation information: cowden, b. j., bendickson, j. s., bungcayao, & womack, s. (2020). unicorns and agency theory: agreeable moral hazard? journal of small business strategy, 30(2), 17-25. startup unicorns are pre initial public offering (ipo) ventures that have been valued over $1 billion. just a few years ago, there were only a handful of these companies in the world, which is why they are referred to as unicorns (schindehutte, 2016). as of the beginning of 2019, there are 328 ventures that would be considered unicorns, with anticipation that more are quickly on the horizon (cb insights, 2019). while it has been claimed that studying unicorns are a distraction from understanding “real” entrepreneurship (aldrich & ruef, 2018), this paper demonstrates that unicorns represent a unique and new sample of ventures to expand upon existing theory. from a theoretical standpoint, scholars have argued that due to the congruence of goals between investors and ventures to grow and make money, agency problems are less applicable (arthurs & busenitz, 2003). while seemingly true in its traditional application, we dissect a key element of agency theory, moral hazard, to explore how it may impact unicorns differently than more traditional ventures. agency theory states that problems will arise when the goals of the owner or principal (venture capital firm) no longer align with the agent (entrepreneur), and where the agent may not operate in the best interest of the principal (eisenhardt, 1989; jensen & meckling, 1976) which is widely known as the principal-agent problem (bendickson et al., 2016a; 2016b). in this case, we anticipate there will be varying alignment issues between the venture capital (vc) firm and the entrepreneur. a key element of agency theory is moral hazard. while research in different disciplines defines moral hazard in different ways, we align with the most generalized definition of moral hazard: an agent taking higher than normal risk with the principal’s money. historically, moral hazard has been seen negatively, providing inefficiencies and unnecessary costs for the principal. while we agree with the negative connotation of moral hazard in traditional settings, we introduce the concept of agreeable moral hazard, providing a new perspective on moral hazard in the unicorn population. because of the overarching drive of unicorns to disrupt markets—defined more generally as a form of schumpeterian shocks (schumpeter, 1934) rather than the theory of disruption (christensen, 2006)—we argue that the investors desire for entrepreneurs to take higher the number of unicorns, startups valued over $1 billion, has steadily risen over the past decade. the abnormally high valuation of a unicorn from investors is based on their potential to disrupt a market and create a new paradigm. with this as the backdrop, this piece asks the question, what theoretical tools do we have to understand unicorns? specifically, we explore agency theory. we argue that if principals and agents agree on the goal of disruption, then perhaps the agency problem that does occur in unicorns is beneficial, not a cost. further, we argue that the principals of unicorns do want agents to take higher than normal risks with their investment to disrupt a given market. from this phenomenon, we introduce the concept of agreeable moral hazard and its use in the unicorn setting. not only does the concept of agreeable moral hazard provide theoretical implications for future research, but it also highlights the need for more research to test existing theory on the unicorn population. birton j. cowden1, joshua s. bendickson2, jerrica bungcayao3, simona womack4 http://www.smallbusinessinstitute.biz http://www.jsbs.org 18 b. j. cowden, j. s.bendickson, j. bungcayao, & s. womack journal of small business strategy / vol. 30, no. 2 (2020) / 17-25 than normal risks with their money. where moral hazard is relevant is not necessarily that the principal and agent agree to take higher than normal risks, but in how that risk is operationalized in market actions. while investors, especially vcs, consider themselves experts in the area they are investing in, the nature of disruption is fraught with uncertainty, raising questions about the usefulness of previous market interactions. with no definitive tactics for disruption, this creates room for information asymmetry, where the venture has more information about all of its market experiments than the investor. without enacting atypical strategies and taking higher than normal risk, the entrepreneur cannot achieve disruption. with this, the venture must make quick iterations in the market to solidify its value proposition. because of this quickness and rush to disruption, consensus among all of the principals on the proper strategic action cannot be achieved. hence we argue that there is a level of agreed upon moral hazard, or agreeable moral hazard occurring in unicorns for goal congruence of disruption to continue. in other words, because the venture is moving quickly and making many decisions in its disruptive pursuit, we argue that investors want the venture to take higher than normal risk with their money and that the investors may not be aware of all of the market actions of the venture and its associated risks. yet, this is uniquely acceptable by the investor in the unicorn context. this paper provides implication to both theory and practice. by introducing the idea of agreeable moral hazard, we extend agency theory beyond its largely negative implications. agency may have benefits in certain settings, specifically with unicorns, and may serve a very useful strategy. this paper also provides new logic as to how any firm may be able to achieve disruption. by having principals willing to have agents take higher than normal risks with their money allows a platform for those agents to try to disrupt markets. if agents cannot take certain actions towards disruption, the outcome of disruption will not occur. the following sections will explore existing thought on agency theory and moral hazard, along with understanding how unicorns differ from other populations of firms. from this, we introduce the concept of agreeable moral hazard and its implications. literature review agency theory agency theory describes a problem that arises when one party (the principal) hires another party (the agent) to perform a service in which the agent has decision-making responsibilities (jensen & meckling, 1976). the theory operates under the assumption that both parties in the agency relationship are utility maximizers acting in their own self-interests (eisenhardt, 1989; jensen & meckling, 1976). as a result, the agency problem arises in the relationship when the goals and interests of the agent and principal diverge, when it is challenging for the principal to monitor or check the behavior of the agent, and when the principal and agent’s risk preferences differ (bosse & phillips, 2016; eisenhardt, 1989). agency theorists use a contract as the unit of analysis to describe the relationship between the principal and agent, thus, maximizing the optimal contract is essential to mitigate opportunistic behavior. one facet of the agency problem is moral hazard, which occurs when the agent’s actions are self-serving, such as shirking (gomez-mejia & balkin, 1992). moral hazards are likely to emerge in environments with high information asymmetry and managerial freedom (gomez-mejia & balkin, 1992). adverse selection, another aspect of the agency problem, refers to a misrepresentation of the agent’s abilities (arthurs & busenitz, 2003). moral hazards and adverse selection can emerge as a result of asymmetric information—when one party in the agency relationship possesses knowledge that the other party does not. accordingly, agency theory suggests the implementation of monitoring devices and incentive structures to reduce these agency costs (tosi jr & gomez-mejia, 1989), specifically moral hazard. moral hazard the term moral hazard was originated from the insurance literature (rowell & connelly, 2012; zeckhauser, 1970), but also became popular in economic probability and decision-making (dembe & boden, 2000; hale, 2009; holmstrom, 1979). in the insurance literature, moral hazard is said to be present because insurance is perceived as an incentive for people to behave carelessly (dembe & boden, 2000). for example, moral hazard is present when an individual can be reckless with a rental car if he or she paid a small amount of money for complete insurance on the vehicle. the deposit insurance literature suggests that moral hazard may arise in the banking industry because banks may be more inclined to “gamble” or engage in risk-taking behaviors at a cost to taxpayers (yilmaz & muslumov, 2008). in other words, moral hazard occurs when the agent takes higher than normal risk with the principal’s money. this risk has been assumed to only benefit the agent and be to the detriment of the principal. with a negative connotation, moral hazard has been described as hidden actions by agents (arrow, 1984), unobservable behaviors resulting in consequences that are observable (mirrlees, 1999). in the organization literature, moral hazard has been viewed 19 b. j. cowden, j. s.bendickson, j. bungcayao, & s. womack journal of small business strategy / vol. 30, no. 2 (2020) / 17-25 through the lens of agency issues surrounding risk and information (mitnick, 1992). the foundation of this concept is rooted in economic logic, attributing moral hazard and adverse selection to issues with monitoring and incentivizing agent behavior in the principal-agent relationship. since it is often difficult to verify that the agent is performing in the best interest of the principal, moral hazard can be problematic without the appropriate controls, incentives, and rewards in place. traditional vc literature and moral hazard while entrepreneurs almost always have some stake in the venture (e.g. money, patents, efforts, time, and so forth), in pursuit of starting an entrepreneurial venture, funding provided by vcs enables entrepreneurs to benefit by bearing less risk (murad, 2015). while vcs typically understand risk due to their often extensive industry experiences, because the venture capitalist may not be able to monitor or verify how the entrepreneur allocates the funds, and take advantage of the knowledge, moral hazard emerges leaving the venture capitalist unaware of some of the risks taken (bergemann & hege, 1998). additionally, moral hazard unfolds as the entrepreneur could shirk and use the invested capital for other expenditures (bergemann & hege, 1998). in order to protect their investment, traditional vc literature has identified two strategies for vcs to prevent moral hazard: 1) staged investments and 2) board positions. according to wang and zhou (2004, p. 1) “key characteristics in venture capital financing are staging the commitment of capital and preserving the option to abandon the project.” to reduce moral hazard, staged investments are used to guide decision makers to produce an advantageous outcome for vcs (gompers, 1995). staged financing enables vcs to invest capital at different phases of the project. “each financing round is usually related to a significant stage in the development process, such as completion of design, pilot production, first profitability results, or the introduction of a second product” (cornelli & yosha, 2003, p. 1). entrepreneurs may occasionally withhold negative information regarding the status of the project to avoid putting the venture’s financing at risk. this includes implementing tactics to improve their reputation at a cost to the vc (gompers, 1995). in order to protect their investment and reduce moral hazards, vcs monitor the entrepreneur’s progress and, if necessary, threaten to terminate funding, (wang & zhou, 2004). similarly, the board of directors examine risks closely to reduce moral hazard in relation to the use of internal and external resources (singh & harianto, 1989). the board’s decision-making guides the overall performance of the company (zahra & pearce, 1989), and research has shown that board members take a more active role in the strategy-making process of venture-backed firms (fried et al., 1998). vcs take a board position in order to monitor and influence how their money is spent (rosenstein et al., 1993). thus, traditional literature indicates that investors increase their mentoring and control function as the venture becomes more risky (e.g. khanin & turel, 2013). however, does this still apply to unicorns? proposition development unicorns traditionally, vcs look for businesses that can multiply their investment (i.e. 10x), with the logic that they have already proven a market, and with this investment they can scale to reach a probable performance measure that satisfies the investors (gompers, 1995; sullivan, 2017). while unicorns may not be void of needing similar logic as a basis, the bigger goal is disruption of a market, which provides a hope that even more money can be made beyond estimates based on historical market conditions. not unlike the innovation premium that shows why certain public firms trade at higher values (dyer et al., 2011), there is perhaps a disruption premium that vcs are willing to pay to be part of the economic benefit of a paradigm shift in the market. because of this disruption focus, we argue that vcs and ventures enact nontraditional strategies, such as giving ventures a longer than normal runway to get to profitability. when profits are helpful, but not necessary for a $1 billion company, this sample of ventures may need their own theoretical evaluations. why unicorns differ there is very little research on the specifics of unicorns, and most often, they are lumped into venture capital conversations (bellavitis et al., 2017; kenney & zysman, 2018). while unicorns do utilize venture capital, there are stark differences in these ventures, which is why unicorns are valued so much higher than other venture-backed startups. in fact, an analysis conducted by cb insights (2018) found that only 1% of startups funded by vcs ever reach unicorn status, further illustrating its distinctiveness from other venture types. unicorns receive much higher valuations based on the hope that they can be the first to disrupt existing large industries by creating a paradigm shift. this goal of disruption separates unicorns from other ventures and is how large investors get attracted to the venture. these investors put up the capital in the hopes that their unicorn is the “home run” venture that will create significant wealth 20 b. j. cowden, j. s.bendickson, j. bungcayao, & s. womack journal of small business strategy / vol. 30, no. 2 (2020) / 17-25 (griffith & primack, 2015). thus, both the investors and the venture have goal congruence on disruption. the intent of disruption can be viewed as a schumpeterian shock (schumpeter, 1934; 1942), where unicorns typically add technology in hopes to create a new market, displace existing competitors in an industry, and/or displace existing businesses in many segments by providing a product that consolidates industries. unicorns tend to couple technology with an innovative business model that removes many of the flaws of the existing market transactions and costs (chesbrough, 2007; 2010; zott & amit, 2007). most unicorns are leveraging technology to redefine consumer behavior and effect some transformational change. what is more important is that most unicorns are competing in already competitive markets, resulting in disruption of the status quo. for example, businesses like dropbox, uber, and zillow provide new ways to do things consumers were already doing; save electronic documents, get a taxi, or buy a house, yet easier with fewer transaction costs. for investors, it is the hope that these ventures become the new market paradigm, which could generate unforeseen wealth for every owner. perhaps the ultimate goal is to create a blue ocean strategy (kim, 2005), where a venture is able to disrupt many industries at once, making it nearly impossible for incumbents to respond. with this, the principals will get to experience monopolistic-like rents for their investment for an extended period of time. next, unicorns differ in long-term orientation. this great hope for tremendous wealth due to disruption includes a willingness from the investors for unicorns to experiment and find their way to a sustainable business model that creates a new market norm. investors of unicorns expect to give leeway to the ventures if the venture stumbles, as it is expected that changing the paradigm will not be easy. in fact, the larger valuations and investments are there to provide a cover for the venture to survive tough times while it figures out how to make money, and fight incumbents should they try to outspend the new venture. for example, investors of spacex understand that they will not see a return until the venture seeks an ipo, which will take several years as the venture builds out the private space exploration industry (sheetz, 2018). additionally, with disruption being the key driver and knowing that this could take several years to start paying back dividends, a longer timeframe is also given for revenue and profits. profitably as an emphasis also somewhat drastically differs. because of the long-term orientation and being substantially backed by vcs, arguably be too big to fail, it is expected that unicorns will operate with sizable financial losses for a much more significant amount of time (kenney & zysman, 2018). the vc dollars allow these firms to create their technology, the platform, and develop the marketplace that currently does not exist in the existing organizational field (zietsma & lawrence, 2010). as seen with the freemium model (kumar, 2014), the drive is to grow a user base first and a revenue model second. if the venture is able to attract a loyal customer base with a freemium model, as that base grows, the venture will have a more accurate understanding of what those customers may be willing to pay for, or the data from those customers may be even more valuable. for example, prior to achieving unicorn status, slack, a business software company, attracted thousands of users on a weekly basis. consequently, the company was able to attract $120 million in financing and reach a valuation of $1 billion (griffith & primack, 2015). vc money gives the unicorns deep pockets to survive the transformation from being a peripheral threat to a direct competitor (greenwood & hinings, 1996) while the venture discovers its sustainable business model. lastly, the disruptive nature of unicorns is not without its fights (i.e. the effects of trailblazing). existing businesses rarely sit idly by as they get disrupted by a new entrant. with this, existing market leaders will utilize market and governmental forces to protect themselves from disruptive forces. for example, airbnb’s disruption of the hotel industry has resulted in them having to fight legal battles for the right to operate in important markets. former ceo of uber, travis kalanick, stated “you’re changing the way cities work, and that’s fundamentally a third rail. we’re in a political campaign, and the candidate is uber and the opponent is an asshole named taxi” (swisher, 2014, para 4). with focus on disruption, the venture and its owners are in for the fight to change the status quo, creating an underdog culture that everyone can rally behind to achieve the “impossible.” with vcs often sitting on boards, the function of the board of directors to provide independent and balanced guidance may be compromised (hillman & dalziel, 2003; pfeffer, 1973; wagner iii et al., 1998; westphal & zajac, 1997; zahra & pearce, 1989). to make their investment worth it, principals of unicorns may not only be more agreeable to founders taking nontraditional paths in order to cross the disruption finish line, but also in helping them along the way in achieving their audacious visions. for example, one investor of spacex told a reporter, “they are not invested first and foremost for financial upside, they’ve invested for the chance to play a small part in one of the very few private companies that will likely change the course of history” (sheetz, 2018, para 3). this sentiment is not common for many venture-backed firms. 21 b. j. cowden, j. s.bendickson, j. bungcayao, & s. womack journal of small business strategy / vol. 30, no. 2 (2020) / 17-25 agreeable moral hazard as stated above, moral hazard is defined as taking higher than normal risk with someone else’s money. in most situations, moral hazard is negative so that the principal does not get taken advantage of while the agent reaps the benefits of using someone else’s money. however, we propose that principals of unicorns accept some element of moral hazard from the founders in order to find their way to successfully disrupt a market. while there is never a fully blank check, founders need a level of autonomy and the ability to experiment to test potentially radical ideas in the market (dew et al., 2009; lumpkin et al., 2009). without the ability to enact non-traditional strategies, the unicorn will not be able to take the necessary experimental steps to unearth a disruptive and sustainable business model (brush et al., 2015; osterwalder & pigneur, 2010; smith et al., 2010; zott & amit, 2007). in other words, should normal governance mechanisms take hold, having the principals concerned about preventing moral hazard, the process will encourage traditional thinking and action versus something that might be paradigm shifting (fisher, 2012). theranos, the now defunct unicorn focused on revolutionizing the blood diagnostics industry (carreyrou, 2018), is an example demonstrating that agreeable moral hazard exists and also shows that there is a point where its effects can be detrimental to the principals. theranos proposed a proprietary single stick method for testing hundreds of medical tests. their proposed technology and methodology should have allowed them to offer hundreds of blood tests for a fraction of what traditional testing methods cost. after two years of near universal praise, a report published in october of 2015 by the wall street journal called into question the validity of its tests and kicked off a series of negative stories about the company (carreyrou, 2015). fda regulators found deficiencies in theranos’s processes for monitoring quality, vetting suppliers, and handling customer complaints (fda, 2015). when asked about these issues, theranos founder elizabeth holmes frames them as a communication failure. she says that the company has been so focused on building the technology that they have failed to communicate important truths about phlebotomy and the blood diagnostics industry. for instance, blood tests are not subject to fda regulation and that there is no official arbiter of validity or methodologies for new technologies. in essence, her argument is that theranos is blazing a trail. further, she argues that just because regulators have not caught up yet, it does not mean their tests are invalid. with this trailblazing argument, the investors rallied behind theranos and even more investors joined to help the company disrupt the market. elizabeth holmes fraudulently sold the impossible vision to investors that had very little knowledge in this industry. it has been reported that the investors asked very few questions to validate the venture’s claims, and solely focused on being part of this venture that could “change the game” in healthcare (mckenna, 2018). these investors wanted theranos to take higher than normal risk with their money in the hope that much greater wealth would be created. however, elizabeth holmes took advantage of agreeable moral hazard, resulting in a loss of nearly $700 million (mckenna, 2018). the theranos example demonstrates that agreeable moral hazard has a limit and is dependent on the intentions of the founders. however, mature unicorns, such as airbnb, uber, or spacex, have shown the results and benefits of agreeable moral hazard when not taken advantage of. collectively, these three ventures are now worth roughly $123 billion, and are anticipated to keep growing as they continue their disruption of markets and sustain their revenue streams. while elizabeth holmes crossed the line to take advantage of investors, arguably, elon musk, founder of tesla and spacex, has found a way to optimize agreeable moral hazard. investors of spacex want musk to be taking higher than normal risks and pushing ideas to their limit (de lea, 2018). musk and his investors have found agreeable moral hazard, which has created many benefits for all involved. thus, we propose: proposition 1. principals of unicorn or soon-to-be unicorn ventures (a) desire and (b) aid those ventures to take higher than normal risks (c) to a certain point (inverted-u relationship) with their investments to disrupt markets. proposition 2. the above relationships (i.e. agreeable moral hazard) do not occur in traditional venture-backed (non-unicorn) startups. implications and conclusion this article introduces the concept of agreeable moral hazard, while also subsequently demonstrating the need for more research focused specifically on unicorns. agreeable moral hazard provides a pathway for scholarship to understand the relationship between principals and agents in a setting focused on disruption. because there are congruent goals on disruption between the two, we propose that opposite forces occur from the traditional principal-agent costs, where principals expect agents to take higher than normal risks with their money to create a paradigm shift in existing markets. this agreeable moral hazard is required for founders to test new ideas in the market. additionally, the vcs that have invested high dollar amounts into the unicorns 22 b. j. cowden, j. s.bendickson, j. bungcayao, & s. womack journal of small business strategy / vol. 30, no. 2 (2020) / 17-25 need these ventures to successfully create a paradigm shift in the markets to make their potentially inflated investment worth the gamble. without agreeable moral hazard, traditional governance perspectives hold, and will most likely not result in moon shot disruption. this also shows that these moon-shot investments are thought about differently than other venture-backed firms. this paper points out the fallacy in lumping the unicorns into all vc discussions. unicorns are very different from traditional venture-backed firms based on their goals and strategies. we are not the first to explore issues within the agency theory framework that differ based on firm size (e.g. bendickson et al., 2015). however, by exploring the concept of agreeable moral hazard and the differences from traditional agency theory, our article points out that unicorns are a unique population to test existing theory. just as the chinese setting provided the outlet to test existing theory in that unexplored setting (e.g. tang et al., 2017), unicorns provide a similar population to contradict, extend, or create theory. another implication of this article is that agreeable moral hazard may be a necessary, but not sufficient element for any organization trying to disrupt a market. one could argue that any organization focused on reducing agency costs will never desire agreeable moral hazard. if the agents cannot ever experiment, disruption will rarely occur (fisher, 2012). argued from a different perspective, most organizational governance structures form a board to protect the principals’ investments and prevent moral hazard through three primary roles (singh & harianto, 1989; zahra & pearce, 1989). the three major roles boards play are service, strategy and control (zahra & pearce, 1989). the board’s control role is to ensure that the agents are performing in a manner that will protect the shareholders’ interest (chapin, 1986). how this is setup in the organization has been shown to influence the type of research and development pursued by the organization (baysinger et al., 1991). ideas that are more radical may never reach the board, as the firm may self-filter out nontraditional ideas. it is extremely difficult to estimate market demand when considering disruption. with this creates problems for marketing, finance, and legal departments to approve projects to go any further than just an idea. structurally speaking, it would appear to be difficult to pursue disruption without agreeable moral hazard. our paper is not without limitations yet some of which may lead to fruitful areas of future research. first, while we present our ideas for propositions theoretically, we did not conduct a study to test these. scholars could look to empirically test these ideas by collecting data on risk-taking at unicorns (and soon to be unicorns) to better understand decision making at these firms as it pertains to risk. then, by collecting preferences for risk in smaller startups (i.e., vc-backed firms that are not of or nearing unicorn status), comparisons and conclusions could be further explained. related, in terms of smaller startups, scholars may want to assess whether these propositions apply when vcs are involved and/or would they also apply to an entrepreneur seeking other types of funding (e.g. seed funding)? secondly, in practice, it can be observed that certain public companies seem to be responding to market contingencies differently than others. for instance, how can amazon not only think about, but quickly execute on more radical ideas than the world leader wal-mart? or, how can google and facebook span into other realms? while path dependency plays a role (greener, 2002; sydow et al., 2009; vergne & durand, 2010), future research can further expand upon the practical implications of agreeable moral hazard. for instance, what role do lawyers and their power in the firm play in disruption and agreeable moral hazard acceptance? is agreeable moral hazard beneficial? from a theoretical standpoint, more must be understood about agreeable moral hazard. what are the boundary conditions of agreeable moral hazard? what environments create agreeable moral hazard, and what elements make it a positive or negative for the firm? how does a firm reach agreeable moral hazard and how is it defined within firms? what role does trust play in this relationship, and what individual-level variables matter, as in the theranos example? how might agreeable moral hazard align or differ with the christensen’s (2006) theory of disruption or the effectuation literature (sarasvathy, 2001)? in what context might agency problems be beneficial? by developing this idea we hope to launch a starting point for further research and discussion as there is certainly more to 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(2007). business model design and the performance of entrepreneurial firms. organization science, 18(2), 243-257. strategy small business development centers) challenges and opportunities samuel r. gray new mexico state university samgray@nmsu. edu janice black new mexico state university j anblack@nmsu. edu abstract the nationwide network of small business development centers (sbdcs) provides training and assistance to small businesses and nascent entrepreneurs. the academic researcli to date indicates that sbdcs lieve a positiveimpact on national and regional economies and are cost efficient in accomplishing their mission. other evidence, however, suggests tliat sbdcs are currently facing severe challenges that threaten their continued success. )pe provide evidence on the scope and seventy of these challenges based on tlie responses of a random sample of sbdc directors. we find that the most pressing issues are funding, auracting and retaining competent counselors, inability to meet demand, obtrusive oversight from the small business administration (sba) and host institutions, target market problems, and outcome assessment. we offer suggestions for opportuni ties to resolve some of the issues noted. introduction providing assistance and training to small firms and pre-venture entrepreneurs are significant activities for economic growth and societal gains. a leading provider of small business support services is the nationwide network of small business development centers (sbdcs) (kuratko, hornsby, & naffzinger, 1999). more than $86 million is provided annually by the small business administration (sbe) to support sbdcs (fy 2002 a ro riation for the ~sbdc 0, 2002). s ii 0 i ii 0 * 2) g advice on business feasibility, financing, and planning (allerton, 1996) are the primary consumers of sbdc services. evidence suggests that small businesses rely on the services of the sbdc more than those of any other service provider (kuratko et al., 1999). the academic literature reviewed below strongly suggests that the nationwide network of sbdcs has been extremely successful in accomplishing its mission to "provide management assistance to current and prospective small business owners" (chrisman, hoy, & robinson, 1987; chrisman & katrishen, 1994, 1995; chrisman & mcmullan, 2000; sbdc mission and overview, 2002). despite the generally glowing accounts of the sbdc success story, the authors'iscussions with several sbdc directors over the past few years indicated that their sbdcs are encountering a great deal of di(ticulty in continuing success at accomplishing their 109 journal of small business srrategy vol l4, ato. 2 fall/winter 2003 mission. these directors indicated that sbdcs are severely constrained by inadequate funding, unrealistic expectations, low compensation levels for employees, conflicts with other organizations, and many other problems. one director, for example, told us that his funding has been flat for the past four years while the demand for their services has continued to grow rapidly, straining his ability to function effectively. the authors have found no mention of these pressing issues in the academic literature to date. it is against this backdrop that the current study was conducted. the purposes of this paper are to: i) provide evidence, gathered from a nationwide survey of sbdc directors, on the scope and severity of the challenges facing sbdcs; and 2) explore some remedies for these issues and examine some of the currently unexploited opportunities for accomplishing the sbdcs'ital mission. background on the sbdc funding from both the public and private sectors has been provided to sbdcs over the past few decades to provide advice and guidance for small businesses (macdonald & cook, 1997). sbdcs are nonprofit organizations that partner with government, education, and business organizations. in many states, the sbdc is supported by a land grant college or community college in partnership with local economic development entities (wilton, 1997). federal funding for the nationwide sbdc network exceeds $85 milhon per year (fy 2002 a ro riation for the sbdc pro ram, 2002) and provides for less than half of the costs incurred in running the centers. sbdcs claim these funds are well spent, as sbdc programs have contributed substantially to economic growth, job creation, and the overall satisfaction level of small business owners (association of small business development centers, 2001). there are nearly 1,000 sbdcs in universities, colleges, vocational schools, chambers of commerce, and economic development corporations nationwide (levenburg, 1999). centers are located in all 50 states as well as the distnct of columbia, guam, puerto rico, and the virgin islands. these centers are partially funded and administered by the u.s. small business administration (sba). the centers aim to "assist small entrepreneurs and small business owners, resolve problems, increase productivity, and expand to ultimately improve profitability" (macdonald bz cook, 1997). clients have access to training sessions on various small business topics as well as individual counseling based on their specific needs. in addition to providing assistance and training to existing small business owners, sbdcs potentially play a valuable role by discouraging startups that have little chance for economic success. sbdcs also provide indirect assistance to lending institutions by helping their clients prepare comprehensive business plans (wilton, 1997). in doing so, not only do they increase the chances of the loans being approved, but they also assist in clarifying to their clients what they can expect from the various sources of debt and equity capital. the bulk of the academic research on sbdcs has focused on their economic impact. these studies strongly suggest that sbdcs provide useful services that have a strong economic impact on both the regional and national economies. chrisman et al. (1987) studied sbdc effectiveness in georgia and south carolina and found that sales generated by sbdc clients totaled $30 million with 1,100 new jobs created by sbdc clients. in a national study of the economic impact of sbdcs chrisman and katrishen (1994) found that sbdc services generated $2.61 in tax revenue for each $ 1 spent on sbdc programs. in addition, sbdc clients created about 65,000 new jobs during this one-year study period. pelham (1985) 110 journal of small business strategy vol. l4, no. 2 fallltpinter 2003 provided evidence that the sbdcs are cost effective in delivering their services. more recently, chrisman and mcmullan (2000) found evidence that previous research on economic impact of sbdcs may have actually underestimated such impact because they did not include long-term follow-up of sbdc clients. internal sbdc reports dealing with overall economic impact and effectiveness by state have also been conducted, (e.g., new mexico small business development center performance statistics for fiscal year /997, 1997). these reports indicate a positive and substantial economic impact. the literature on sbdcs also provides information about client satisfaction with sbdcs'ervices.for example, chrisman et al. (1987) measured clients'ssessment of the overall quality of sbdc services. the mean response was 4.06 using a 6-point scale, with the modal response being "good" (4). in addition, chrisman and katrishen (1994) reported that 80% of established and pre-venture clients perceived sbdc services to be beneficial. the new mexico internal study (new mexico small business develapinent center performance statisn'cs for fiscal year l997, 1997) found that clients'atisfaction with sbdc services was very high and 98.8% of pre-venture clients indicating that they would recommend sbdc services to others. an internal study in the commonwealth of virginia (client satisfaction survey. virginia sinall business development center network, 1997) also reported a very high level of client satisfaction. while a few studies reported a less glowing account of client satisfaction (gray & eylon, 2002; kuratko et al., 1999), the bulk of the literature indicates an impressive level of client satisfaction with sbdc services. methods the focus of our research, as outlined above, is to describe the current conditions affecting sbdcs across the u.s. and to suggest some potential remedies. our research is necessarily exploratory in nature as there are no published accounts to guide us. as a result, we have chosen a descriptive research methodology as our primary tool of inquiry. we obtained a listing of all sbdcs from the website of the sba (directory ofsmall business development centers, 2001). from this universe we drew a stratified random sample of 250 centers using a random number generator. the sample was stratified by state since there is substantial variation in the numbers of sbdcs in different states. we obtained the name of the director and the mailing address of each sbdc in the sample from the same website. the questionnaire we used had been previously developed and pilot tested on a small number of sbdcs. based on feedback from respondents, the instrument was refined and mailed to the sample directors. since the final instrument differed significantly from the pilot instrument, the pilot data were not included in our analyses. the questionnaire was mailed to the director of each sbdc in the sample. the cover letter requested that only the director of the sbdc complete the questionnaire. we received 138 completed questionnaires for a response rate of 55.2%. since we promised respondents total confidentiality, we did not code the questionnaires for follow-up mailings. as a test for nonresponse bias, we compared the percentage of female directors in the returned questionnaires (36.1%) to the percentage of known female directors in our entire sample (34.3%). missing data reduced the useable sample size to 128. the questionnaire included questions on general demographics, services offered, resources employed, fiscal conditions, and personnel characteristics. the survey also included openended questions that allowed us to collect information about the challenges currently faced by 111 journo! of small business strategy vol. 14, no. 2 fall/winter 2003 sdbcs. we used two open-ended questions rather than a checklist approach due to the exploratory nature of this study. the first question dealt with pressing issues being faced by the sbdc. the question asked, "what do you see as the primary challenges facing your sbdc?" it yielded a total of 228 comments, as some respondents identified more than one issue. the second open-ended question asked for other information on outcome assessment strategies used by the specific sbdc. specifically, the question stated, "please provide any additional information you may have about the effectiveness or the economic impact of your sbdc." a sample copy of the questionnaire is available from the first author upon request. the qualitative data yielded by the open-ended questions were examined using a content analysis methodology. the two authors independently read and categorized each of the responses to the first open-ended question. we then met to compare our categorizations and resolve any disagreements over specific responses. typical dilterences were in the degrees of specificity. to keep the category numbers low, the more general category headings were chosen. once we reached a consensus on the categories, a ph.d. student was asked to independently code the comments into the identified categories. both authors also independently evaluated each comment or set of comments from an sbdc and determined which categories that response addressed. interrater reliability was calculated as 89.7%. results the quantitative data we collected indicate that sbdc directors are well endowed with experience and education. the directors reported they had a mean of 6.3 (sd 4.1) years of experience as director of their current sbdc, and 3.1 (sd 3.7) years with other sbdcs. in addition to their sbdc experience, they reported 18.1 (sd 9.3) years of business experience. their highest educational levels were reported as ph.d. (2.4%), master's degree or law degree (64.2%), college degree (31.7%),and less than college degree (1.6%). some general characteristics of sbdcs are presented in table 1. the modal sbdc is located on an educational campus, has its own web site and strategic plan, does not have an incubator, and primarily serves microenterprises (less than 5 employees). table i selected sbdc characteristics characteristic percentage located on educational campus 62.6 has own web site 79.7 has an incubator 14.8 has written strategic plan 73.8 clients with less than 5 employees 69.9 the sample sbdc directors also revealed their clients fell into three categories by type of business —startups (39.4%), existing small businesses (39.9%),and clients who do not own a business but are considering starting one (20.7%). table 2 summarizes the most requested services provided by sbdcs. respondents were asked to pick their top three services and the percentage figures in table 2 indicate the 112 journal of small business strategy vol 14, no. 2 fall/winter 2003 percentage of respondents choosing each item as one of the top three. the most requested services were financial assistance, business plan preparation, and help with marketing. the least requested services were technical assistance, people skills, and production. requested services in the "other" category included help with buying and selling businesses, community relations, energy conservation, export expansion, and assistance with specific government contracts. the problem areas identified in the responses to the first open-ended question fell, for the most part, into five categories: funding issues, difficulty in attracting and retaining competent counselors, inability to meet demand for services, problems encountered in dealings with the sba and other stakeholders, and target market issues. table 3 indicates the number of responses in each "primary challenge" category and the percentage of sbdcs reporting this issue. there were 111 responding centers and 228 separate comments coded across those centers. this means that the centers had identified on average about two primary challenges each. table 2 services most requested by sbdc clients percent of respondents rating item in topservice three services requested financial assistance 82.0 business plan preparation 78.1 marketing 53.9 business feasibility 25.8 accounting/bookkeeping 18.8 legal, including organizational structure technical assistance 5.5 people skills 1.6 production 0.0 other, not listed 12.5 table 3 primary challenges indicated by sbdc directors issue number percentage of sbdcs inadequate funding 70 63.0 recruiting and retaining personnel 53 47.7 stakeholder issues 44 39.6 inability to meet demand 34 30.6 target market 27 24.3 113 journal ofsmall business strategy voh 14, no. 2 fagged'inter 2003 when examining some of the resource needs and uses of the sbdcs, we used both information from specific questionnaire items and information provided by the open-ended questions. some of the information regarding resources is embedded in the general descriptions provided above and will be restated as appropriate. each of the problem and challenge areas will be examined separately, although it is important to note that there is inevitably some overlap between the issues. since many comments were deemed by the researchers to fit into more than one category of pressing issues, there was confounding inherent in the results. for example, 60.4% of those sbdcs who mentioned personnel issues also mentioned funding. of those that mentioned stakeholder problems (typically with the sba or their host university), 34.1% also listed funding issues. over half (52.9%) of those that mentioned demand issues also included funding issues. finally, of those that mentioned issues related to their target market, 55.6% also listed funding issues. thus funding problems appear to impact all other categories. we discuss each category of issues in more depth below. funding the sbdcs reported a mean annual budget of $ 248,067 (sd $354,035; median $ 150,000). funding sources are reported in table 4. table 4 sbdc funding sources funding source mean (%) sd sba 39.4 19.3 educational institutions 26.6 23.4 state government 20.9 19.9 chambers of commerce 3.3 i 1.5 business funding 1.6 4.9 client fees 1.5 4.9 other funding sources 6.9 16.0 slightly less than 40% of sbdc funding is provided by the sba, with educational institutions and state governments accounting for about 47%. only 1.5 % of funding came from client fees and 1.6% from the local business community. funding, however, was the primary issue in the responses to the open-ended question. of the 111 responding sbdcs, 63.0% identified funding as a pressing issue. some typical conunents received were: "the sbdc has been jlat funded for the past 5 years. because of this, ability to maintain counselor resources is difficult and it has become impossible to maintain professional development, technology, tools, etc." "static funding with increased demand for services. " "not enough funding to be competitive in salary for sbdc director. " "funding sources have been jlat for the past 4 years. " 114 journal of small business strategy vol. 14, no. 2 fall/winter 2003 "the formula for funding (i. i) and the local political changes where our sbdc is located mean that much effort is spent ensuring match funding. " "money —especially getting financial support from college dean." recruiting and retaining personnel another issue we identified, which tends to overlap with funding issues, is the inability to attract, train, and retain competent counselors (45.7% of those who mentioned funding also mentioned personnel issues in this way). the sbdcs in our sample reported employing a mean of 3.3 full time and 2.6 part time employees with a mean annual payroll of $ 149,930 (sd $220,395; median $90,000). almost half (47.7%) of sbdc directors identified personnel issues in various forms as their primary challenge. interestingly, sbdcs reporting personnel problems tended to be located on college campuses and have a very high number of clients served per year. some typical comments from the responding directors: vgeuing qualified counselors." "inadequate salaries to get competent help. " "keeping well trained, highly quolified personnel given poor salary structure for sbdc personnel within the university pay plan." "the biggest challenges are identifying, recruiting and retaining quahfied business analyst/counselors. once they have benefited from our professional development training, they find higher paying positions and leave. average turnover rate 2 years. " "keeping good consultants. " "lack of incentive to remain in position — underpaid for experiencelknowledge. " stakeholder issues the third issue identified deals with problems with sbdc stakeholders (39.6%), primarily funding sources, host institutions, and the community in general. difficulties dealing with funding sources primarily involved the sba. while less than 40% of the funding was provided by the sba, 56.7% of the problems with funders was with the sba. comments reveal the nature of the relationship to be the perceived bureaucracy and obtrusive oversight by the sba. the strained relationship with the sba seemed to the researchers to be especially frustrating for the respondents as many underlines and exclamation points were used in their responses. some comments from the respondents: "inability to meet unrealistic (double underline) sba imposed goals for both ¹ of clients counseled and workshop aaendees, as well as etlinic based goals for loan application. " 115 journal of small business strategy vol. /4, no. 2 fally8'inter 2003 "tye feel that we are one of the best sbdc programs in the nation but the sba district director is too busy taking credit for our work to even say thank you, lve make a real difference in the h'ves and fortunes of our clients. " "s~tu id sba requirements!" "sba initiatives do not match service area needs!!" "sba 's total disinterest in our program. " "sba 's ever-changing 'special emphasis 'rojects which take away from our ability to do what we were created to do. " "the sba does everything it can to discredit (double underline) our program while promoting the score program. " "our biggest problem is how to fulfill ~nonunded sba mandates! " remaining comments in this category dealt with relationships with host institutions, state and local governments, and other stakeholders. some examples are: "leveraging ceiiter 's capabilities through partnerships with other centers. " "overcoming a bail reputation from first 2 years of center's operation." "getting the word out about our services and working with the incubatorin letting him know we are not a competitor." 'having sbdc d'ihost institution strategic planning run parallel." two 'bosses 'funding agenciesj wlio have di/fereni priorities. " "competing organizations — edc's won't share leads on existing or potential businesses. " difficulties meeting demand almost a third (30.6%) of the responding sbdcs identified problems meeting demand for their services as a critical issue. the comments indicated that inability to meet demand might be more a reflection of the level of entrepreneurial and small business activity in the u.s. rather than an ongoing chronic problem. unmet demand, however, may result in increased competition among service providers for existing resources. losing resources to competitors would certainly compound the sbdcs problems of funding and personnel and meeting demand even further. an additional threat would be the decreased value to the community due to increased waiting lists or lags in service. the demand issue is closely related to the two issues identified above. some typical comments received: "only so many iiours in the day. too much need!demand for services. " "meeting demand —we turn one client away for every one we see. " l l6 journal of small business strategy vof 14, no. 2 fall/winter 2003 "70-80% increase in goals over past 4-5 years despite no increase in funding." "keeping up with growing need. " "tiying to provide quality servi ces to ever-increasing sba imposed goals. " target market the fifth issue identified deals with problems in identifying and focusing on a target market (24.3% of responding sbdc identified this area as critical). comments indicated a great deal of frustration with the "take-all" policy of the sbdc. by this the respondents referred to not being able to define niches but having to meet the needs of all who walk through their doors. comments indicated that the problem was in part due to meeting the directives of the sba. some typical responses include: 'ylow to continue to pull in established business owners, as opposed to start-ups and 'tire kickers '. " "our biggest challenge is shifting client base from 'wannabe'tart-ups to viable start-ups and existing businesses." "attracting high impact, viable clients." "moving away from so many start-ups to more high growth type existing busmesses. " "dealing witli volume ofstart-ups." "sba 's ever-changing 'special emphasis 'rojects which are incorporated as sba/sbdc goals which take away from our ability to do what we were created to do. " outcome assessment while economic impact was not the primary thrust of our study, we did collect data on the number of new businesses and jobs created by sbdc clients. we were somewhat dismayed to learn that only slightly over half of sbdcs maintain this data (56.1% for new businesses creation and 57.4% for job creation). as one director wrote on the survey, "lack of personnel and time prevent our particular center from tracking clients over time to determine economic impact. until funding improves this task is not one we can pursue." for those sbdcs that do maintain these records, we find the three-year average of new businesses created is 50.3 (sd 49.3) and jobs created is 187.7 (sd 370.4) per sbdc. total sbdc cost per job created averaged $2,534 (sd $3,988.6; median $ 1,479). obviously, this is an area that needs further investigation and again underscores the critical issues of funding and personnel noted above. while most of the research reviewed earlier in this paper evaluated economic impact in terms of job creation and new business start-ups, we felt there was room for the inclusion of other evaluative criteria. although the initial formation of small enterprises may not provide convincing evidence of success or failure of sbdc programs, many sbdcs do indeed 117 journal of small business strategy vok /4, no. 2 fall/winter 2003 examine these indicants for evidence of a successful program. alternatives have yet to be established in the literature. our motivation for investigating this issue further was to add to the literature base by examining possible new evaluative criteria. we asked an open-ended question requesting additional information about how the director felt it best to evaluate their particular sbdc's economic impact. most of the responses dealt with volume of loans processed and financing arranged for clients. for example, one director responded, "we track loan dollars received by our clients by year. our sbdc clients receive on average $2m every year." other responses dealt primarily with efficiency of operations, cost effectiveness, and money clients save by avoiding ill-advised new ventures. many respondents conveyed a sense of urgency about evaluating their impact. some responses of this type are: "i think the toiighest part is not doing the work, rather it is gauging our i~m nct!" "amount of economic impact is difficult to quantify. we are currently trncking $ generated and jobs created/retained —but that is inexact at best and does not measure ihe incremental benefits provided our clients. " "ln the mid 00's we began receiving referrals from honks, chambers of businesses that were about to fai i—today those companies are employing 825 people, grossing $700,000 —$/m and still growing. by rights, without our assistance they would have failed. why can't government see the i~nr act we have niaile over the years und the importance of continuing to do these services in the future —we need more funding/" "economic impact is impossible to quantify. we rely on client responses to seini-annual, mailed surveys. most clients do not return the surveys and many ofour actiiities are not reflectedi thesurvey anyway. we need a bener way. " we concluded that evaluating the performance of an sbdc is frustrating and difficult for many sbdcs. clearly, a better way to evaluate effectiveness is warranted. in the section that follows, we address this and other issues raised by the sbdc directors. opportunities for sustainability a majority of the sbdcs reported that funding is the crucial issue that affects their stalting and ability to meet demand for services. the adequate staffing and retention of qualified counselors in the sbdc is a problem identified by almost half of the responding sbdcs. funding problems are confounded by increased demands from the host institution and/or the sba without additional funding to meet such demands. in general, meeting the demand for their services constitutes a problem for over a quarter of the respondents. this problem may also be the result of a lack of a specific target market or forced inclusion of a wide target market than can be served with current resources. obtaining adequate funding is clearly the major issue facing sbdc directors. the funding issue is closely related to the other issues discussed above. for example, funding is a supporting issue in the acquisition and retention of appropriate personnel and in assessing 118 journal of small business strategy vol. 14, no. 2 fall/winter 2003 their current output. funding problems are compounded by the "take-all" policy and lack of target market focus in many sbdcs. it is somewhat ironic that the sbdcs'roblems are very similar to those of their clients. as noted in table 2, the three services most requested by clients are financial assistance, business planning, and marketing. the problems of the sbdc network are also related to broader macroeconomic and political trends. all types of organizations —business firms, nonprofits, universities, and government agencies —are facing an increased need for higher levels of performance in an environment marked by limited resources and demands for more accountability. we believe that the challenges outlined above are severe and that the sbdcs cannot continue on their present course. we also believe that sbdcs have a number of attractive opportunities that may enable them to become sustainable over the long run. we present some of those opportunities below. training in the acquisition of other funding sources appears to be a crucial need of the existing sbdc directors. only an average of 13.4% of current funding comes from sources outside of the sba, state government, and local host institution. as noted above, sbdc personnel appear to be stretched to their limits and hence it is very difficult for directors to engage in extensive fund raising under current conditions. in addition, fiscal constraints prohibit hiring personnel to raise funds. the researchers believe that the sbdcs have an opportunity to immediately improve their fiscal situation by relying more on fees from their clients. client fees currently provide only 1.5% of sbdc funding. while sbdcs create a public good through job creation and economic growth, they also help to create private goods through wealth creation and growth of their clients'usinesses. it seems only reasonable that these private enterprises should share in the cost of providing these valuable services. increased funding from clients may also help to resolve some of the current problems sbdcs are having meeting demand for their services. basic economic theory holds that maximum demand occurs at a zero price level. by instituting or increasing basic counseling fees, demand for services would certainly decline, perhaps to a sustainable level. fees could be designed on a sliding scale according to clients'bility to pay. the authors also suggest that partnering with other organizations may help to alleviate some of the other issues we identified. for example, many of the sbdcs are co-located with institutions of higher education. such institutions typically have students that are interested in opportunities for internships and semester-long projects. developing relationships with the various departments whose expertise can be utilized on short-term projects may be a way of providing both educated help for the center and experience for the student. the past several years have seen the advent of local service corp of retired executives (score) chapters, entrepreneurship centers, business incubators, and similar organizations. working collaboratively may increase the effectiveness and efficiency of each of these support organizations by leveraging resources, avoiding duplication of effort, and allowing each organization to specialize in what it does best. the sbdcs'take-all" policy is a major strategic issue. this issue is associated with the lack of defined target markets and the pressure from the sba to provide services to a wide constituency. like many of the other issues, this is not a freestanding problem but one that is intertwined with other issues. as mentioned earlier, charging for services (even on a sliding scale basis) may help mitigate this problem of unmet needs. 119 journal ofsmall business strategy vol. 14, l4o. 2 fall/winrer 2003 we believe, however, that the sbdcs'urrent "take-all" policy needs to be refined. the feeling of many of the directors we surveyed seems to be that the core business of the sbdc is serving existing small businesses and high-potential startups. focusing exclusively on this target market is certainly not out of the question, but would require an increased level of coordination with other service providers as mentioned earlier. the recent increase in entrepreneurship centers throughout the country makes a niche strategy for the sbdc more compelling. in our local market, for example, the entrepreneurship center, through agreement with the sbdc, handles most of the clients that one sbdc director referred to as "tire kickers." the emerging issue of outcome assessment also needs to be addressed. despite the obvious importance of economic impact information, almost half of the sbdcs in our sample do not currently maintain this data. many expressed frustration because their level of funding does not allow them to engage in this activity. there also seems to be a variety of opinions regarding the specific types of data that should be collected. we believe the sbdcs have an opportunity to obtain better outcome assessment information by partnering with local colleges and universities. class projects could be designed to collect and analyze data, providing valuable experience for students taking courses in research and statistics while relieving the sbdc director of the responsibility and time commitment for much of this work. we have pointed out that opportunities exist for collaborations that may have been overlooked in a typical "defend one's territory" mentality that can be adopted by those who depend upon governmental funding. i-lowever, when the overarching mission of the sbdcs is considered, the judicious use of collaborations appears to be a viable strategy to gain access to needed resources and facilitate the missions of multiple service organizations. finally, it is worth considering whether or not sbdcs are viable, sustainable entities under their current relationship with the sba. friction between sbdcs and the sba and host institutions, as well as current political and economic conditions, suggest that the sbdcs'ituation might indeed be a perilous one. sbdcs may need to organize a national effort aimed at a strategy of self-sufficiency and reduced reliance on federal funding over the long term. the mission and activities of the sbdc are far too important for these problems not to be aggressively addressed before they reach crisis proportions. conclusions in summary, our exploratory project found many challenges and opportunities facing small business development centers today. the major issues were identified as funding, attracting and retaining qualified personnel, stakeholder relationships, inability to meet demand, target market issues, and outcome assessment. we concluded that funding impacted all of the other issues. the major stakeholder relationship problems were those with funding sources and host institutions. the largest problem appeared to be the strained relationship between the sbdc and the sba. the issues of increased range of services and project support mandated but not funded by the sba contributed to clouded target market issues, increased demand, restricted funding, and reduced time for providing the services central to the sbdcs mission. opportunities also became evident. sbdcs have a multitude of organizations with whom they can partner. sometimes these potential partners were presented as competitors for a reduced funding stream, but most sbdcs looked on the organizations as having complementary goals with each focusable on separate niches. certainly, interorganizational 120 journal of small business s/raiegy val. /4, no. 2 fallllp/nrer 2003 alliances are not uncommon and the sbdcs with their background in communicating with other organizations are ripe for taking advantage of these potential partners. partnering with other nonprofit, quasi-governmental organizations in seeking specific grants to meet the needs of their constituents represents a compelling opportunity. it is important to note that this study is based on self-reports and that our findings and interpretations need to be confirmed with additional research. our research was exploratory in design and needs to be supplemented with a quantitative approach. indeed, there is the question as to whether the conditions mentioned by the directors are chronic or acute. a longitudinal study conducted 5 to 10 years from now will help to determine whether these are simply the conditions under which the sbdc operates or if there has been a marked increase in demand, marked decrease in funding, and so on. potential future areas of research include; i) studies designed to examine these issues and confirm their presence and severity, 2) other exploratory studies to examine the various ways that sbdcs have an economic impact and how to measure their effectiveness, 3) longitudinal studies to determine if these issues are always present, present in cycles or simply a reflection of this time. we look forward to exploring this topic further over the years and call for others, as it meets their interests, to join us. references allerton, h. (1996).help for small businesses. training & develapmenr, 50(4), 9. association of small business development centers (2001). chrisman, j. j., hoy, f., & robinson, r. b. (1987).new venture development: the costs and benefits of public sector assistance. journal of business venturing, 2(4), 315-328. chrisman, j. j., & katrishen, f. (1994). the economic impact of small business development center counseling activities in the united states: 1990-1992. journal of business venturing, 9, 271-280. chrisman, j. j., & katrishen, f. (1995).the small business development centre programme in the u.s.a: a statistical analysis of its impact on economic development. enrrepreneurship and regional development, 7, 143-155. chrisman, j. j., & mcmullan, w. e. (2000). a preliminary assessment of outsider assistance as a knowledge resource: the longer-term impact of new venture counseling. enrrepreneurship theory and practice, 24(3), 37-53. client saiisfacnon survey, virginia small business development center nerwork. (1997). richmond, va: virginia tech economic development assistance center. directo of small business develo ment centers (2001). small business administration. retrieved january 3, 2001, from http: //www.sba.gov/gopher/local-information/smallbusiness-development-centers/sbdcall.txt fy 2002 a ro riation for the sbdc pro ram (2002). retrieved january 28, 2003, from http: //www.sba.gov/gopher/business-development/funding.txt gray, s. r., & eylon, d. (2002). clients'erceptions of the effectiveness of small business development centers. journal of business and enrrepreneurship, /4(2), 57-68. kuratko, d. f., hornsby, j. s., & naffzinger, d. w. (1999). the adverse impact of public policy on microenterprises: an exploratory study of owners'erceptions. journal of developmental enrrepreneurshi p, 4(1), 81-93. levenburg, n. (1999).research resources exist for small businesses. marketing news, 4, 19. macdonald, s., & cook, m. (1997). letters from america: a lesson for the business link? international small business journal, ocr-dec, 74-79. 121 journal of small business strategy vo/. /4, no. 2 fall/winter 2003 new mexico small business development center performance statistics for fiscal year /997. (1997).new mexico small business development centers. pelham, a. m. (1985). should the sbdc program be dismantled? american journal of small business, /0(2), 41-52. sbdc mission and overview (2002). small business development center. retrieved december 21, 2002, from http: //www.sba.gov/sbdc/mission. html wilton, w. (1997). for small businesses, sbdcs offer planning, financial, marketing expertise. commercial lending review, /2(2), 70-71. samuel r. gray (phd texas a &m university) is an associate professor of management and general business at new mexico stare university. he is also the director of the nmsu center for entrepreneurship and small business. dr. gray's research interests include entrepreneurship, small business management and business policy. janice a. black (phd texas tech university) is an associate professor of management at new mexico state university. her research interests include applying complexity and chaos theory to organizations and dynamic markets, strategy and strategic competencies, and market creation. she is also interested in organizational development and capacity for cliange, orgam'zational learning, entrepreneurial orientation, and distribitted strategic thinkinglacti ons. 122 s female & male entrepreneurs’ perceived value of formal networks: are there differences? debra s. malewicki university of wisconsin-whitewater cathleen a. (folker) leitch wilfrid laurier university folker@uwp.edu abstract since entrepreneurs play a crucial role in job creation, and evidence suggests that networks play an important role in both facilitating new businesses and helping existing businesses grow, a strong incentive exists to better understand and support entrepreneurial network development. in this study, we examine the differential values perceived by female and male entrepreneurs of entrepreneurial network organizations (enos). women perceived a higher economic benefit (instrumental value) from the network than men, as well as a higher affective value. there were no significant differences on perceived normative value from eno’s. keywords: entrepreneurial network organizations, female entrepreneur, networks, perceived values introduction since entrepreneurs play a crucial role in job and wealth creation (e.g., robb, 1998), and evidence suggests that networks play an important role in both facilitating new businesses and helping existing businesses grow (e.g., hoang and antoncic 2003), a strong incentive exists to better understand and support entrepreneurial network development. researchers from the national commission on entrepreneurship (ncoe, 2000) suggest that the existence of entrepreneurial networks is a key to promoting entrepreneurial vitality in a region. although critical for all entrepreneurs, networks may play a more important role for stimulating entrepreneurship among women than men. women entrepreneurs are a rapidly growing sector of entrepreneurship worldwide (minniti, arenius, & langowitz, 2005). in the u.s.  trateg y   journal of small business  1 journal of small business strategy volume 22, number 1 alone, women own more than 10 million firms that employed over 13 million people and generated $1.9 trillion in sales in 2008 (center for women’s business research, 2008). notably, firms owned by women of color grew faster than all privately held firms between 2002 and 2008. according to a recent study sponsored by intuit (king, townsend, and ockels, 2007): “over the next decade, women entrepreneurs will continue to grow in number. demographics will play a part as baby boomer and gen y women form increasing numbers of small and personal businesses along with their male counterparts. but across the age cohorts, women looking for better career options and work–life balance will increasingly turn to entrepreneurship to fulfill their goals.” yet on a worldwide basis, the likelihood of becoming an entrepreneur remains far greater for men than women (minniti , arenius, and langowitz 2005). some research points to access to financial resources. data from the kauffman firm survey examining financing sources of high-tech firms found that women raised smaller amounts of financial capital than men did during the start-up stage (robb & coleman, 2009). however lee and denslow (2005) found that as womenowned businesses grew, they faced less credibility problems with banks than during the early start-up phases. given that entrepreneurship is critical to economic growth, and that women appear to represent underutilized potential, it becomes particularly critical for research to reveal the factors that encourage the strategy and growth of women-owned businesses in particular. from economic development, research and educational perspectives, we need to better understand the priorities and values of women as they make the choices to start and grow businesses. this research explores whether men and women derive separate values from networks, deemed a critical element in an entrepreneurial climate, and attempts to categorize them into clear dimensions that contribute to the ongoing stream of genderbased network research. it also offers practical suggestions to leaders of network organizations to enhance their appeal to female entrepreneurs, thus facilitating entrepreneurial activity among women. literature review value of networks several researchers have suggested that networks are of particular value to entrepreneurs, partly due to their need for resource acquisition (e.g. acs, 1996; aldrich and zimmer, 1986; brush, green, and hart, 2001; gatewood, brush, carter, greene, and hart, 2009; larson, 1992, hansen, 1995, hoang and antoncic, 2003) and advice (renzulli and aldrich, 2005; robinson and stubberud, 2009; robinson and stubberud 2011). much research has centered on their role in business success (miller, besser, and riibe, 2006/2007; sorenson, folker and brigham, 2008), business formation (bygrave and minniti, 2000; aldrich and zimmer, 1986); competitiveness (malecki and tootle 1996); growth (johannisson 2000, shaw 1999, hansen 1995); and international market entry (welch, welch, young and wilkinson 1998, iyer and shapiro 1999, mcauley 1999). networks have also been recognized as a source of innovation and a facilitator of opportunity recognition (shaw 1999; singh, hills, hybels, lumpkin 1999), which may become the basis for innovative new 2 journal of small business strategy volume 22, number 1 products (sivadas and dwyer 2000, munro 1997). in a critical review of network based research in entrepreneurship, hoang and antoncic (2003) find that substantial research supports that networks are a “principal medium for the transfer of resources critical to entrepreneurial success” (p. 177). the majority of this research has focused on the “instrumental,” or economic, value of entrepreneurial networks. the role of entrepreneurial networking organizations (enos) entrepreneurial networks can take many forms. this research focuses on the value derived from entrepreneurial network organizations (enos), which are memberbased organizations that sponsor structured activities and are committed to encouraging entrepreneurial firm member growth and interaction of entrepreneurs with other entrepreneurs, as well as with service providers, investors, and other resource providers. following davidsson and honig (2003), which measured networking by membership in a professional or trade organization, this study uses such a membership as a basic indicator of networking. these associations are often important networking forums (mckendrick and carroll 2001), and ties to business support and service organizations have been found to be predictive of nascent entrepreneurial activity (honig and davidsson 2000). mentors, informal industry networks, and professional forums have direct, positive effects on opportunity recognition (ozgen and baron 2007), which confirms that there are different forms of networks that can make a potential contribution. although enos are “formal” networks in the sense that an organization and a structure exist solely for the purpose of facilitating networking and knowledge exchange for entrepreneurial development, they exist for the purpose of spurring additional “informal” connections, i.e., personal interactions that occur outside of the eno’s structured activities and efforts. informal networks are generally considered to be those that exist without clear contractual governance mechanisms (araujo and easton 1996). one goal of enos is to become a vehicle for accelerating personal network development. from a managerial standpoint, an objective of this study is to provide insight on how to focus eno’s on potential member benefits. knowledge of member priorities and values can clearly inform eno leadership. since many enos are tax-supported (pages and garmise, 2001), enhancing their longevity and member utility, a likely consequence of improving perceived value, is also of interest from a public policy perspective. the networking needs of women entrepreneurs a number of studies confirm that the general business management skills of women and men do not vary significantly (e.g. bass, 1990), but women business owners have been known to report social adroitness and interpersonal skills as their strongest assets (hisrich and brush 1984)— thus networking opportunities allow women to exercise one of the primary skills they bring to entrepreneurship. even though longitudinal trends in the u.s. show that women are an increasing proportion of entrepreneurs, they also seem more involved in starting sole proprietorships rather than partnerships or corporations (ruef, aldrich and carter 2003). but multimember teams are associated with higher levels of success in entrepreneurship (e.g., kamm and nurick 1993, lechler 2001), so it would be beneficial to assist women in expanding their entrepreneurial networks from 3 journal of small business strategy volume 22, number 1 economic development and entrepreneurial education perspectives. godwin, stevens and brenner (2006) suggest that establishing mixed-sex entrepreneurial founding teams is one way for women entrepreneurs to overcome unique, and often invisible, barriers stemming from sexbased stereotypes. (evidence that these stereotypes still exist is found in gupta, turban, wasti, and sikdar’s study of gender stereotypes in perceptions of entrepreneurs, 2009). in addition, management teams with a gender team balance have been found to outperform either all male or all female management teams (litz & folker, 2002) langowitz and minniti (2007) find that knowing other entrepreneurs is positively and significantly related to entrepreneurial propensity to start a businesses, and significantly higher for women than men, but they are not able to conclude whether this reflects the importance of role models or the existence of networks. klyver and grant (2010) also found the relationship between personally knowing an entrepreneur and becoming one, however they noted that women lacked entrepreneurial role models in their social networks. nonetheless, enos would obviously facilitate opportunities for connections to other entrepreneurs, suggesting additional support for their particular importance to women. hampton, cooper, & mcgowan (2009), in their qualitative exploratory study, interviewed 18 female entrepreneurs in nascent, new and established ventures in northern ireland in order to “gain a deeper understanding of network ties and network quality” (pg. 199). they found that networking was key throughout the business life cycles, as it helped prevent isolation and provided support for the entrepreneur (early stages), and helped in promoting the company and building a sound reputation (later stages) (pg. 200). in addition, the female owners of established businesses had “become sophisticated and effective networkers” (pg 202). informal networking was important throughout the life cycles, however as the business matured, the women developed more formal and semi-formal networks. “the female entrepreneurs in the later stages of the business life cycle considered these mixed gender industry networks as crucial to business development and growth, a finding which contrasted with the new business venturers whose need for confidence and support drew them to all female networks in the short term” (pg. 205). of significant interest from an economic perspective, women owners of firms with $1 million or more in revenue are more likely to belong to formal business organizations, associations or networks than other women business owners (81% vs. 61%; center for women’s business research, 2008). women entrepreneurs and multidimensional network value if enos are a critical element of an entrepreneurial climate (ncoe, 2000), and entrepreneurs play a crucial role in job and wealth creation in communities (robb,1998), then an important research opportunity exists in providing insight on how to facilitate and nurture enos, particularly to meet the needs of women. prior research has suggested that women may use collaborative networks for a variety of reasons not tied to business success (sorenson et al. 2008), and calls for further research on exploring gender differences in the ways networks are enacted inside and outside an organization, suggesting that males may focus more on 4 journal of small business strategy volume 22, number 1 5 strategic business issues, while females may focus more on quality of life and personal, family, and community interests. this research addresses that call and adopts a multicomponent approach to network value, viewing it from instrumental, affective and normative perspectives. in the context of an entrepreneurial networking organization (eno), instrumental value may be defined as the perceived economic, or rational, value of participation (gundlach, achrol, and mentzer, 1995). affective value, a widely studied issue in both organizational and consumer behavior, focuses on emotional attachment. in the context of this study, it refers to the extent that members hold favorable attitudes or feelings toward the organization as well as their level of identification with it (allen and meyer, 1990). normative value refers to the extent to which members perceive a moral obligation to maintain a relationship with the organization (allen and meyer, 1990; gruen, summers, and acito, 2000), as well as the extent to which the organization contributes to a sense of social responsibility. a theoretical model of the multi-dimensional network value for enos is in figure 1. figure 1: theoretical model of the multi-dimensional network value for enos instrumental value  economic  rational perceptions of entrepreneurial network organizations (enos)’ value affective value  emotional  belonging normative value obligation social responsibility journal of small business strategy volume 22, number 1 although some research suggests that men focus more narrowly on business success than women because women place a higher priority on maintaining a broad network involving both business and non-business interests (fitzgerald and folker, 2005), we contend that substantial research exists that both men and women seek instrumental value from networks. we do agree, however, that women are more likely than men to focus on diverse network benefits that go beyond business support alone. in assessing whether women or men derive differential benefits from networks from an instrumental, or economic, perspective, the evidence, although mixed, tends to support the view that women derive more economic benefit from their networks. some research finds little or no support that male and female networks differ (diaz garcia and carter, 2009; foss, 2010), while others find no differences in perceived network benefits based on gender (miller, besser, and riibe, 2006/2007). however, according to a review of the research by mckay (2001), compared to men, women prefer to organize in collaborative networks that enable them to acquire resources to meet business needs, considered an instrumental value. sorenson, folker and brigham (2008) found that a collaborative network orientation (cno) was associated with business success for both male and female business owners, but was significantly more positively associated with success for males. women, however, had a stronger preference for a cno. however the cno included a much broader perspective of collaboration than just professional network organizations, including collaborative behaviors and teamwork. in a study of bulgarian entrepreneurs, growth expectancy was more positively associated with advice from networking for men than for women; women’s expectations were based more on perceived benefits from prior experience (manolova, carter, manev, and gyoshev 2007). this study also found that membership in a professional or trade association was not a predictor of growth expectancy for men or women. this contrasts with prior research that found that higher levels of available network contacts lead to higher growth expectancies (gatewood 2004; krueger, reilly, and carsrud, 2000). network development processes were thought to differ between male and female entrepreneurs, with women entrepreneurs requiring higher levels of network contacts that would provide legitimacy and critical business information (burt, 1992; ibarra 1992). however, aldrich and zimmer (1986) tested for gender differences in terms of size and amount of activity, but found none. hoang and antoncic (2003) suggest that this result means that the importance of “ascriptive” groups for organizing networks is overshadowed by similarities across groups in their resource requirements. in a study of help-seeking behaviors, fitzgerald, philbrick, & folker (2008) found that women entrepreneurs that continued (vs. those no longer in business) were more likely to use network resources such as state and local economic development corporations or chamber of commerce and state/county extension. for men, those that continued in business were more likely to use the extension office. in addition, fielden, davidson, dawe, & makin (2003) found that a lack of business networking groups was a barrier to women’s development of their businesses. 6 journal of small business strategy volume 22, number 1 in spite of some mixed results, we suggest that although both men and women have a need for networks as a source for various economic resources, women will perceive a greater economic benefit from the network leading us to hypothesis one: h1: female entrepreneurs are more likely to derive instrumental value from formal networks than male entrepreneurs. although women are involved in networks to meet business needs, several researchers contend that women, more so than men, tend to view the world holistically; in other words, they are more likely to see business, family, community, and society as an integrated whole than see their businesses as separate economic entities (aldrich 1989, brush 1992, bird & brush 2002). if we accept that family and business are both part of this “whole,” it seems reasonable to suggest that women are more likely than men to see value in affective relationships, given that they would be more likely to view networks as connected to all aspects of their lives, not just the economic, “rational” portion. some of these studies have been criticized for not taking into account personal variances such as level of education and work experience; however, a study by demartino and barbato (2003) examined the motivations of women and men mba graduates with similar work experience and concluded that equally-qualified women tend to become entrepreneurs for familyrelated, lifestyle reasons and are less motivated by wealth creation and advancement reasons. the disproportionate value that women entrepreneurs put on relationships is reflected both in their orientation toward balancing work and family roles (brush 1992; carter, gartner, shaver and gatewood 2003) and their leadership and management styles (e.g., gray 1994). women tend to organize their work groups, whether in small businesses or in larger companies, as a networked team, frequently characterized by people-related concerns (gray 1994). as noted earlier, research by sorenson et al. (2008) found that female entrepreneurs had a stronger preference for a collaborative network orientation, which emphasized “maintaining positive relationships and achieving the interests of network members over the long-term” (p. 619). this emphasis on concern for relationships offers additional support for the importance of the “affective” orientation for female entrepreneurs. support for different attitudes is also noted by gupta et al. (2009); in a study across three countries, researchers found that women associate both feminine and masculine characteristics with entrepreneurship, but men associated only masculine traits. further evidence for the desire for an emotional attachment to a networking organization may stem from the need to support women’s self-perceptions and perceptions of the environment. in an assessment of entrepreneurial propensity using a broad survey base in 17 countries, langowitz and minniti (2007) find that “women appear to perceive themselves and their business environment in a less positive light than men” (p. 342). manolova et al. (2007) affirms the idea that networks might be even more important when the environment is perceived as “hostile,” which she suggests is the case in transitional economies where material and financial resources are scarce and the institutional environment is unstable. some 7 journal of small business strategy volume 22, number 1 research suggests that environments that are not historically supportive of entrepreneurship may benefit most from networking efforts. johannisson and monsted (1997) mention that regional variations in values and attitudes toward entrepreneurship have an impact on the creation and development of new firms, and suggest that a “hostile general environment may be controlled through a rich personal network” (pg. 115). to the degree that women see their environment as less supportive, the affective need to identify with an organization as a source of emotional support seems to be a reasonable contention. h2: female entrepreneurs are more likely than males to derive affective value from networks. according to the center for women’s business research (2000), both women and men business owners surpass the general population in terms of involvement in philanthropy, whether measured in terms of money donated or time volunteered. but women surpass men on both measures. differences between women and men are also more dramatic in terms of tendencies to serve in leadership positions in volunteer initiatives. notably, high net worth women business owners are even more philanthropic than their male counterparts. for both men and women, most of their philanthropy is primarily motivated by a desire to be socially responsible, rather than by the expectation of a financial return, but this motivation is higher for women than men (center for women’s business research, 2000). in addition, hood & thompson (1994) found that women entrepreneurs used care and connection as important criteria in charitable giving decisions. these criteria related to the personal connection to the recipient. in an examination of female entrepreneur’s management style, buttner (2001) found that women tended to use relationship building abilities to facilitate mutually empowering collaborations. although these benefits were “mutual,” it does suggest an orientation or willingness among women to be focused on “giving back” in some way. as noted earlier, women entrepreneurs have been found to have a stronger preference for a collaborative network orientation; this research also suggests that entrepreneurs with high cnos value community involvement and social standing in the community. other research has suggested that further evidence for supporting a work-life balance for themselves and their employees comes from a time-use study which found that self-employed women spend significantly more time on household management and child care activities than do self-employed men (gurley-calvez, harper and biehl 2009). in addition, earlier research in women’s entrepreneurship found that starting a business was motivated by a greater desire to balance work and family (e.g., brush 1990, scott 1986). moore and buttner’s (1997) extensive interviews with female entrepreneurs suggest that self-fulfillment, rather than profits, is the most important measure of entrepreneurial success, implying again that personal values are reflected in women’s business organizations, which is likely to extend to their network organizations. h3: female entrepreneurs are more likely than males to derive normative value from networks. 8 journal of small business strategy volume 22, number 1 9 research methedology and design initial interviews/sample the first phase of research focused on identifying enos and interviewing select members, followed by a member survey and statistical analysis. in-depth, semistructured interviews were conducted with ten selected eno members and leaders. one purpose for these interviews was to stimulate an interest on the part of the organization to participate in the study. results overall supported that organization leaders believed that members potentially derived different values from the organizations, and leadership was strongly interested in better understanding what those were in an effort to enhance them. the sample was composed of members from six entrepreneur network organizations. see table 1. survey instrument most affective and normative measurement items were adapted from organizational behavior studies (e.g., allen and meyer 1990) and the relationship marketing literature (e.g., gruen et al. 2000, garbarino and johnson 1999). instrumental value refers to an interest in the organization based on perceived financial costs associated with leaving, or a self-interest stake in the relationship, usually cast in economic terms. descriptor variables included business size (in terms of employees and sales) and business duration; at low levels, both variables may imply more of a “still struggling” business (stinchcombe’s “liability of newness” theory, 1965), which may translate into a greater interest in networking. length of membership in the organization was also measured; based on loyalty research in the consumer behavior literature (sheth and parvatiyar 1995), members who have been with the organization longer may, by definition, be the ones who perceive the greatest value. given the diverse membership of enos, data was also collected on member industry and member type (e.g., entrepreneur, investor, government, university). the eno members interviewed during the qualitative phase, along with ten new members, were used to pretest a survey instrument to further assess relevance, consistency of interpretation and clarity of meaning of the questionnaire. the survey consisted of 65 items. this study focuses on a subset of the items, namely the 17 that relate to instrumental, normative and affective commitment as well as demographic information. after final adjustments, the survey, along with a cover letter noting the goals of the study, the benefit to the organization, and a five dollar salvation army donation, was e-mailed or hard copy mailed to all members of the organizations noted above, for a total mailing of 1205. no differences in response rates were noted between email and postal mail. two waves of follow-ups to nonresponders ensued, using fax, email and telephone, yielding an overall response rate of 17 percent, or a usable sample size of 205; 106 of the sample were categorized as entrepreneurs (based on their responses to survey items on the organization represented, size of business, and main product or service) and identified their gender, and formed the basis for this analysis. (see table 2) journal of small business strategy volume 22, number 1 r es p on se r a te 1 6 .5 % 1 2 .0 % 2 2 .5 % 1 4 .6 % 4 6 .7 % 2 5 .3 % 1 7 .0 % s u rv ey s r ec ei ve d 2 9 5 1 4 1 4 4 2 1 1 9 2 0 5 n u m b er o f m em b er s 1 7 6 4 2 5 1 8 2 3 0 2 4 5 7 5 1 2 0 5 l o ca ti o n m il w au k ee m ad is o n m ad is o n m il w au k ee ja n es v il le m il w au k ee y ea r f o u n d ed 1 9 9 9 1 9 8 5 1 9 8 7 1 9 8 4 1 9 9 1 1 9 9 0 m is si o n t o e nc o u ra ge t he f o rm at io n, e d uc at io n , n et w o rk in g a n d m en to ri n g o f ebu si n es se s in w w is co n si n t o a ss is t ne w a nd g ro w in g t ec h no lo g y -b as ed b u si n es se s w it h ac ce ss t o c ap it al n et w o rk in g , in fo rm at io n, a n d b u si n es s t o a d va n ce w is co n si n ’s b io te ch n o lo g y i n d u st ry a n d s u p p o rt en tr ep re n eu rs h ip a m o n g b io te ch c o m p an ie s o f al l ss ez es t o p ro v id e a fo ru m f o r en tr ep re ne u rs , in ve st o rs , an d b u si n es s ad v is o rs t o i n te ra ct , l ea rn a n d ex ch an g er es o u rc es , p ro m ot in g, an d c o nt ri b u ti n g to t h e fo rm at io n an d g ro w th o f bu si n es se s t o f o st er t he s ta b il it y, g ro w th a nd c o n ti n u in g h ig h e th ic al st an d ar d s o f in de p en d en t b u si ne ss es o w n ed a n d c o -o w n ed b y w o m en t o s tr en gt h en t he w ea lt h cr ea ti ng c ap ac it y o f o u r m em b er s an d p ro m o te e co no m ic d ev el o pm en t, c re at e in n o v at iv e an d ef fe ct iv e ch an g es i n t h e bu si n es s cu lt u re ; b u il d s tr at eg ic a ll ia nc es , co al it io n s an d a ff il ia ti o n s; t ra n sf o rm p u b li c p ol ic y a n d i n fl ue n ce o p in io n m ak er s o rg a n iz a ti o n e -i n n o v at e h ig h -t ec h c o n so rt iu m ( h t c ) w is co n si n b io te ch n o lo g y a ss o ci at io n ( w b a ) w is co n si n v en tu re n et w o rk (w v n ) w is co n si n w o m en e nt re p re n eu rs (w w e ) n at io n al a ss o ci at io n o f w o m en b u si n es s o w n er s o f m il w au k ee (n a w b o ) t o ta l e n o s ar e re g io n al , i nd ep en de n t, m em be r or g an iz at io n s w it h r eg u la r m em b er s er v ic es . * n et o f b ad c o nt ac t in fo rm at io n . * * a t m ee ti ng . t a b le 1 : a s a m p le o f e n tr ep re n eu r n et w o rk o rg a n iz a ti o n s (e n o s) i n w is co n si n 10 journal of small business strategy volume 22, number 1 table 2: female & male entrepreneurs by entrepreneur network organization (eno) organization entrepreneur surveys received male entrepreneurs female entrepreneurs e-innovate 22 21 1 high-tech consortium (htc) 14 13 1 wisconsin biotechnology association (wba) 21 14 7 wisconsin venture network (wvn) 18 16 2 wisconsin women entrepreneurs (wwe) 15 15 national association of women business owners of milwaukee (nawbo) 16 16 total 106 64 42 data analysis pre-tests to test for nonresponse bias, t-tests were conducted on all items, comparing early and late responses, based on the thesis that late responses may be representative of nonresponders (armstrong and overton 1977, although this concept dates back to the 1940’s). no items had significant differences. given that other information, such as sales or industry, was not available on non-responders (as it might be in more conventional databases like dun and bradstreet), the early and late comparison was the best quantitative option available. organization leaders were asked to review the distribution of member types and membership duration, and they all considered the sample to be representative. factor analysis and mean comparison as noted in the sample description, based on responses to measurement items on the type of organization represented, the size of the business, and the main product or service of the organization, respondents were categorized as entrepreneurs, corporate representatives, service providers, public sector representatives, or investors/sources of capital; 106 respondents were classified as entrepreneurs, including 64 men and 42 women. since the measurement items were adapted, we used an exploratory factor analysis to review the scale items for the dimensions of instrumental, affective and normative. exploratory factor analysis is useful for determining whether the measures are consistent with the constructs (pedhazur & schmelkin, 1991, pg. 69). t-tests were performed to test possible gender differences in means for both mean scores for the factor dimensions as well as individual items. using varimax rotation in the factor analysis, items loading at .500 and above were initially retained. items loading across several factors were eliminated. communalities were also examined; items with low communalities and poor or no loadings were removed (hair, anderson, tatham, and black, 1998). to test for reliability, item to total (>.50; the correlation of the item to the summated 11 journal of small business strategy volume 22, number 1 scale score) and inter-item (>.30; the correlation among items) correlations were examined along with cronbach’s alpha (>.70). the three projected factors emerged. results of the t-tests to examine gender mean comparisons between the factor summations as well as individual items are shown in table 3. t-tests also compared men and women entrepreneurs on sales, number of employees, sales growth, years in business, and length of membership in the eno. no significant differences were found. hypothesis 1, which proposed that women would perceive a higher economic benefit (instrumental value) from the network than men, was supported. a significant difference exists between the factor score and most of the scale items, suggesting that women find enos to be of greater value from an economic standpoint than men do. hypothesis 2, which focused on affective value, found the strong support predicted. the factor summation and all individual items were statistically significant. however, in contrast to predictions, hypothesis 3, which proposed that women would derive higher levels of normative value from eno’s, was largely not supported. one exception was the individual item that measured whether respondents felt an obligation to participate in the eno to help entrepreneurs. table 3: factor dimensions and item comparisons by gender dimension/variable items mean males mean females tvalue sig instrumental factor 3.22 4.08 -4.67 .017* d1. the benefit of membership in eno contributes to the bottom line of my business/goals of my organization. 3.38 4.60 -2.98 .004* d2. i generate more dollars in business (benefits) than the time or money i spend involved with eno. 2.91 3.81 -2.27 .025* d4. belonging to eno is extremely important to the growth of my business. 3.38 3.83 -1.21 .229 affective factor 4.16 5.37 -4.67 .000* e1. i feel a strong sense of belonging to eno. 3.42 4.74 -3.73 .000* e2(rs). i have little, if any, emotional attachment to eno. 4.02 5.15 -3.29 .001* e6. i am proud to be an eno member. 1.84 1.41 -3.97 .000* e7. i admire many other eno members. 1.46 1.09 -4.12 .000* normative factor 4.38 4.68 -1.03 .305 f2. i feel i have an obligation to participate in eno to help entrepreneurs. 4.11 4.90 -2.24 .027* f3. i feel i have an obligation to participate in eno to help the community. 4.22 4.29 -.183 .855 f4. other entrepreneurs and organizations should participate in the eno. 1.54 1.68 -.405 .686 f5. eno provides me with a means to help others. 4.09 4.31 -.669 .505 variable items were based on 1(disagree) – 7 (agree) scales. *significant at p<.05 at a minimum 12 journal of small business strategy volume 22, number 1 discussion past research on gender differences in entrepreneurship suggests that women view the world more holistically than men do, which implies that they are likely to be involved in networks for more than just instrumental value. some studies have suggested that when researchers define network value in terms of business success only, it does not fully explain women’s involvement. as noted earlier, sorenson et al. (2008) found a stronger association between business success and a collaborative network orientation for men than women, even though women had a stronger preference for a cno. they acknowledge that perhaps it was because the benefit/outcome was described too narrowly. because of women’s holistic views, we proposed that women may see professional business networks as offering not only instrumental value, but affective and normative benefits as well. the “professional” integrates with the “personal.” although the research on the instrumental value of networks to women was mixed, we suggested that women would perceive a higher economic value from the networks than men would. our results support this, helping to clear up the confusion in this area. this finding is important for both women entrepreneurs and for enos. substantial research has suggested that affective value, based in emotional connections and relationships, is likely to be more important to women. this study confirmed the importance of this concept even in the context of a formal entrepreneur network organization; from a pragmatic standpoint, leaders of these organization that wish to specifically support female entrepreneurs may wish to take this into account. for example, ample time for social events, as well as face-to-face small group facilitation, may be particularly appealing. educational topics might include those that focus on work-life balance as well as business growth issues. given prior empirical research that suggests that women tend to be disproportionately concerned with their communities, their employees, and philanthropy, we expected that women would report different results than men when it came to deriving normative value from the network organization, but this was not the case. these results could be due to a variety of reasons. perhaps the way the questions were worded focusing on obligation and “should” did not resonate with women’s view of their holistic involvement in their communities. or women are involved in their communities but do not utilize the enos for that purpose, although they did note that helping entrepreneurs through involvement in the eno was a focus. we appreciate recent calls in the literature to view gender as a social construction vs. a biological difference (e.g., gupta, turban, wasti, sikdar 2009), but from a pragmatic standpoint, given that biological sex is an easily identified and frequently collected demographic data point, and gender views are much less visible, we believe that it is important to continue research that uses a biological distinction as well as a more psychographic one. for example, as economic developers continue to support entrepreneurial networks, market segmentation can much more easily be performed based on a biological gender distinction. from a small business strategy perspective, our research suggests that women entrepreneurs might consider joining enos, 13 journal of small business strategy volume 22, number 1 as the women entrepreneurs in our sample found that the enos contributed to the bottom line for their business. limitations limitations include a relatively small sample size, possible geographic bias, as well as self-report bias. this research only addressed men and women entrepreneurs’ perceptions of the value of the eno. we did not have success measures in the survey other than sales and growth in sales – (which are growth measures and size measures, but not necessarily success or profitability measures). in addition, the sample was not random across all enos nationally and was limited to eno’s in wisconsin. wisconsin may have some unique regional culture issues that prevent generalization of these results at a national or international level. overall, however, women entrepreneurs appear to believe more strongly than men that their eno is valuable and effective, and they tend to be more involved in the organization. however, it should also be noted that 31 of the 42 female entrepreneurs (74 percent) were from the two groups specifically targeted to women, so differences may be attributable to characteristics of the organizations themselves rather than to member gender. further investigation of possible genderdriven differences in enos, through expanding such a study to greater numbers of women’s groups, is a logical area for further research. practical implications countries where women have a higher degree of social equity are also those that are more economically successful. given entrepreneurship’s role in promoting economic development in general, and the lower level of entrepreneurship among women worldwide, it becomes clear that we may be missing an opportunity. although a variety of factors influence the entrepreneurial propensity and business growth motivation for women, this study points to the importance of entrepreneurial networks to women in particular. from a practical perspective, our research would encourage women entrepreneurs to get involved in enos. this study supports the notion that networks, in this case formal network organizations, are not only more important to women for instrumental reasons, but they provide other forms of value as well. recognizing that networking for women is more multidimensional than for men is critical for creating and positioning entrepreneurial networking organizations to meet the relatively unique needs of aspiring and existing women entrepreneurs, predicted to become an economic force of increasing importance to regions and nations. future research future research on gender and entrepreneurial networks should take into consideration utilizing narrative approaches that incorporate the “voice” of the entrepreneur (foss, 2010) and thus perhaps find more variations within groups (female entrepreneurs or male entrepreneurs) than between groups (pg. 95). jack (2010) calls for different research strategies to explore the “real process of networking” (pg. 131) and suggests that 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(2000). an examination of organizational factors influencing new product success in internal and alliance based processes. journal of marketing, 64, 31-49. sorenson, r., folker, c., and brigham, k. (2008). the collaborative network orientation: achieving business success through collaborative relationships. entrepreneurship theory and practice, 32 (4), 615-634. stinchcombe, a. l. (1965). social structure and organizations. in james g. march (ed.), handbook of organizations. chicago: rand mcnally. welch, d. e., welch, l. , young, l. and. wilkinson, i. (1998). the importance of networks in export promotion: policy issues. journal of international marketing, (4) 6, 6682. debra s. malewicki was an assistant professor in entrepreneurship at the university of wisconsin-whitewater. an earlier version of this paper was presented at usasbe in january 2010. sadly, debra passed away in may of 2010. according to her dean, “deb had a major impact on our college and took us a very long way in the small business/entrepreneurship area.” (email correspondence with chris clements, dean, college of business and economics, university of wisconsin-whitewater, june 8, 2010). cathleen a. (folker) leitch was an associate professor of management and entrepreneurship at the university of wisconsin-parkside. currently, she is teaching at wilfrid laurier university in ontario. her teaching interests include small business and entrepreneurship, leadership, and family business. her research interests include family business and gender differences in management and leadership. reproduced with permission of the copyright owner. further reproduction prohibited without permission. from the editor this special issue discusses the impacts of new knowledge on designing implementable innovative realities in small business and strategy. the special issue blends contextual information and cognitive knowledge from global innovation and knowledge academy (gika) contributions. the gika annual conference provides a platform to discuss challenges pertaining to contemporary issues. the 5th gika annual conference took place at the university of valencia from july 14 to july 16, 2015. some international journals are sponsor journals of the academy. one of the aims of the gika conference is to select high-quality conference papers for publication in a special issue of the jsbs. after undergoing double-blind reviews and revisions, six conference papers were selected to appear in this special issue, together with the current editorial. the global innovation and knowledge academy (gika) annual conference collaborates with some international journals to create a special issue on the impacts of new knowledge on designing implementable innovative realities in different topics. the purpose of the special issue is to encourage scholars to focus on the research on small business and strategy. after two double-blinded reviews, this special issue comprises 6 papers. the gika conference provides a platform for answering the challenges pertaining to contemporary issues in innovation and knowledge. university of valencia, spain, hosted the 2015 gika conference from july 14th to 16th. the gika conference attracted more than 250 submissions and accepted only 150 papers for presentation. contributions to the special issue six articles in this special issue analyze and explore different aspects of the impacts of new knowledge on designing implementable innovative realities in small business and strategy. the first contribution by boso, oghazi, cadogan and story titled “entrepreneurial and market-oriented activities, financial capital, environment turbulence, and export performance in an emerging economy” examines how the implementation of entrepreneurial and market-oriented export activities affects the success of the export and the role of environment turbulence and financial capital in that relationship. the sample comprises 164 ghanaian exporting sme. the findings evidence a positive relationship between level of entrepreneurial and market orientation and export success. furthermore, the relationship is stronger in presence of high financial capital and environment turbulence. the study provides various managerial implications and indications regarding strategy. in her article “topic evolution of innovation academic researches,” lin applies a corpus-based approach to a set of 1,460 abstracts published from 1973 to 2015 in journal of business research to analyze the evolution of research in innovation using wordsmith tools. this article offers interesting insights for researchers in the area and useful references for industrial practitioners. the study by leal, albort-morant, and ribeiro-navarrete titled “linking market orientation, innovation and performance: an empirical study on small industrial enterprises in spain” devises a model to empirically test the mediating role of innovation outcomes in the relationship between market orientation and business performance. the authors use pls to validate the model. the sample comprises 145 firms from the spanish automotive components manufacturing sector, which is essentially made of sme. the findings suggest that firms willing to be innovative must initially rely on market orientation to identify and anticipate market changes and trends and thus devise an appropriate response. zulu-chisanga, boso, adeola, and oghazi present “investigating the path from firm innovativeness to financial performance: the roles of new product success, market responsiveness, and environment turbulence.” the authors use data from a questionnaire to smalland medium-sized exporting firms in the united kingdom and find that new product success is a partial mediator of the path from firm innovativeness to financial performance. the findings also evidence that environment turbulence has a weakening effect on the relationship between new product success and financial performance, whereas market responsiveness has a strengthening effect on the same relationship. the article further discusses managerial and theoretical implications of these findings. the next contribution by carrasco and buendía-martínez is titled “from the business strategy result to a source of economic development: the dual role of csr.” this study analyzes the role of corporate social responsibility (csr) from an international comparative perspective and finds that csr acts as an interface between economic development and social change, and between levels of internationalization and business innovation. to do so, the authors apply a pls analysis to data from the gem aps database. the findings suggest that policy makers should emphasize csr use by public powers which can promote its application in the business sectors. finally, felício, rodrigues and samagaio present “corporate governance and the performance of commercial banks: a fuzzy-set qca approach.” this study draws on pre-crisis data from 32 commercial banks in the uk to analyze the role of commercial banks’ governance mechanisms in financial performance and loan quality. the results from a fuzzy set qca show how different combinations of governance mechanisms yield similar results in financial performance and loan quality. the practical implications of this research are alternative governance solutions for commercial banks. norat roig-tierno valencia international university (viu) and esic, spain* domingo ribeiro-soriano university of valencia, spain email: norat.roig@esic.edu, norat.roig@campusviu.es, noratroig@gmail.com mailto:norat.roig@esic.edu mailto:norat.roig@campusviu.es http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2021, vol. 31, no. 02, 19-35 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2021 small business institute® w w w. j s b s . o rg introduction 1university of louisville, director family business center, family business center, college of business, louisville, ky 40292, isabel.botero@ louisville.edu 2independent researcher, shanan.litchfield@gmail.com customer perceptions about family firms and their effects on customer behaviors family business brands, perceptions of family business brands, purchase intentions, marketing in family firms apa citation information: botero, i. c., & litchfield-moore, s. r.. (2021). customer perceptions about family firms and their effects on customer behaviors. journal of small business strategy, 31(2), 19-35. in today’s business world it is becoming increasingly important for organizations to distinguish their products and services from similar companies. as technology advances and competition increases, companies strive to create a distinctive value in the products and services they offer (anisimova, 2007). creating this distinctive value is important because organizations are faced with challenges that include intense competition from similar organizations and sophisticated consumers who have more information available when making decisions about what products to buy (ind, 1997). these changes in consumer behavior have led organizations to focus some of their marketing efforts on strategic brand building in order to differentiate themselves from their competition and remain economically viable. these branding efforts are geared towards developing a strong brand that will allow the organization to enhance and sustain their distinctiveness by creating positive connections in the minds of consumers (anisimova, 2007). while the branding literature has primarily focused on large multinational brands (berton et al., 2008), the process of enhancing and sustaining distinctiveness also holds great value to family firms (this paper uses the terms family firm, family-owned business, and family business interchangeably) as they try to market themselves in ways that enable differentiation from other organizations (binz astrachan et al., 2018). brands hold great importance for both organizations and consumers. to organizations, brands represent a way to identify and differentiate their products from those of their competitors (de chernatony & mcwilliams, 1989; keller, 1993). for customers, brands represent a bundle of information that is useful when making decisions about relationships with an organization and intentions towards the organization (laforet, 2009). therefore, depending on the interest, branding research has been studied either taking an organizational perspective (i.e., what organizations do to enhance their brands, how does this affect performance) or a consumer perspective (i.e., what are consumer perceptions of a brand, how do brand perceptions affect consumer behavioral intentions). this study explores branding from the consumers perspective. in particular, the focus is on understanding the associations and impressions evoked by the term “family-owned business” (fob) and how these perceptions affect intentions to buy from fobs. the current is an exploratory project exploring the associations and impressions evoked by the term “family-owned business” (fobs) and how these impressions affect intentions to buy from a family firm. four studies were conducted to assess the perceptions about family firms. based on signaling theory and the theory of reason action, it was predicted that the family nature of firms would act as a signal that consumers will use to determine perceptions, attitudes towards family firms, and intentions to buy from family firms. results indicate that, in general, participants had positive perceptions about organizational values and neutral perceptions about products and services offered by family firms. as suggested by the theory of reasoned action, these perceptions affected attitudes and intentions towards fobs. implications for theory and practice are discussed. isabel c. botero1, shanan r. litchfield-moore2 http://www.smallbusinessinstitute.biz http://www.jsbs.org 20 i. c. botero, & s. r. litchfield-moore journal of small business strategy / vol. 31, no. 2 (2021) / 19-35 research on branding in family business has been growing in the last decade. most of this work has focused on understanding what fobs do to brand themselves and how these branding efforts affect organizational performance (see andreini et el., 2020; binz astrachan et al 2018, sageder et al., 2016 for reviews). in general, this research suggests that fobs pride themselves in offering excellent customer service (cooper et al., 2005). when communicated, this family brand works as an advantage in building relationships with customers (binz astrachan & botero, 2018; binz astrachan et al., 2018; botero et al., 2013; cabrera-suarez et al., 2011; ward, 1997) and is positively related to organizational performance (martinez et al., 2019; craig et al., 2008; memili et al., 2010; zellweger et al., 2012). although there is the assumption that the uniqueness of fobs is also tied to the positive perception that consumers have about fobs, there is limited systematic empirical evidence to support this claim (binz astrachan et al., 2018; binz astrachan et al., 2019; sageder et al., 2016). this gap is important to address given that past research in branding suggests that perceptions that customers have about an organization and their products (i.e., attitudes towards the organization) are important because they affect purchase intentions (keller, 2008) and willingness to work for an organization (cable & turban, 2003). responding to this gap and drawing on literature from marketing, branding, corporate communication, and family business, this manuscript presents an exploratory project developed to address two questions: (1) what cognitive associations does the term “family-owned business” evoke in the minds of consumers? and (2) how do these perceptions affect intentions to buy from a family firm? building on the theory of reasoned action (ajzen & fishbein, 1980), we argue that perceptions about fobs affect individual attitudes toward fobs and their intentions to buy. to test these predictions, we conducted four waves of data collection. in study 1, we used a qualitative approach to gather general, positive, and negative associations with the term family-owned business. in study 2, information gathered in study 1 was used to develop a survey instrument to assess general perceptions of products and services of fobs, attitudes toward fobs, and intentions to buy from fobs. study 3 and 4 were created to replicate the findings from study 2 with different samples and to refine the measures. our results show that there is great variance in how family businesses are perceived. however, supporting the theory of reasoned action, individual perceptions influence attitudes towards fobs and intentions to buy from these firms. in particular, positive perceptions of fobs’ company values and their products and services resulted in more positive attitudes towards fobs, which increased the intentions to buy from these firms. the following sections present the logic for our work, describe the procedures followed, discuss our findings in relation to previous work, and highlight areas for future research. literature review family business brands although many family firms, both large and small, promote their family ownership as a means for differentiation, only in the last 10 years research has consistently explored the branding process of fobs (binz astrachan et al., 2018; binz astrachan et al., 2019). even though scholars agree that family ownership can work as a differentiator in the marketplace, there is no generally accepted definition of what constitutes a family business brand. one of the reasons for this is that branding research in family firms has been approached from three different points of view (binz astrachan et al., 2018). some scholars have studied family business brands taking an organizational identity approach. these scholars take the organization’s point of view (i.e., sender view) to understand which processes and factors drive and/or hinder whether a family firm promotes its brand (binz astrachan & botero, 2018; blömback & ramirez-pasillas, 2012; cooper et al., 2005; gallucci et al., 2015; kashmiri & mahajan, 2015). a second group of scholars explore family business brands using an identity approach to better understand which features of the family firm organizational leaders and managers decide to communicate to stakeholders and the way that this information is communicated to them (botero et al., 2013; micelotta & raynard, 2011; parmentier, 2011). a third group of scholars take a reputation view of a family business brand. those who take this approach try to capture the unique perceptions that stakeholders have about family firms and understand part of its effects on their behavior (arijs et al., 2018; beck & prügl, 2018; botero, 2014; hauswald & hack, 2013; lude & prügl, 2018). we take a receiver approach to studying the family business brand that is consistent with the reputational approach. for this project, similar to others (i.e., martinez et al., 2019 and binz astrachan et al., 2018), we view a family business brand as the formal and informal communication of the family element of a company that creates associations and expectations in the minds of stakeholders that can differentiate one organization from others in the marketplace. we take a stakeholder approach to the study of a brand and try to understand the different family brand associations that customers may have when a company communicates that they are a fob. although there is research that suggest that 21 i. c. botero, & s. r. litchfield-moore journal of small business strategy / vol. 31, no. 2 (2021) / 19-35 the term “family firm” can be used as an element of the brand that elicits positive associations (binz et al., 2013; blombäck, 2009; blombäck & ramirez–pasillas, 2012; botero et al., 2018; carrigan & buckley, 2008; kashmiri & mahajan, 2014; orth & green, 2009; sageder et al., 2016), there are authors who also find support for family brands eliciting negative association in the minds of customers (botero et al., 2018; carrigan & buckley, 2008; krappe et al., 2011; orth & green, 2009). thus, we need to systematically understand what different positive and negative associations are generated when family firms communicate their family ownership as an element of their brand, and how these perceptions influence their behaviors towards the brand. a first step to better understand when to communicate the family business brand is to capture the general evaluations that different types of customers have with the term “family-owned business.” to our knowledge there has been only one study that has explored this in a systematic way. botero et al. (2018) argue that the term “family firm” serves as a signal that activates perceptions about an organization. these authors argue that when individuals do not have ample information about a firm, they will use previous knowledge or information to assign a positive or negative value to that signal (i.e., the family firm label). for example, if a person does not know anything about a firm that describes themselves as family-owned, they will use their previous experiences with family firms, or what they generally know about family firms to infer the characteristics of this organization, and infer whether they like it or not. however, when they have previous experiences with a company with these characteristics, they will base their perceptions on whether they had positive or negative experiences with these types of firms in the past. botero et al. 2018 find that family firms generate associations that encompass tradition and continuity, small and medium companies, trustworthiness, strong culture, corporate citizenship, unprofessionalism and limited career opportunities. these findings provide a baseline understanding of the general associations that stakeholders have about family firms. however, they are limited in that the authors did not directly ask what participants perceived as positive and negative attributes associated with the term “family firm” and in that they are done with a swiss sample. recent work from binz astrachan et al. (2019) indicates that the perceptions about a family business brand may be culturally dependent. thus, we wanted to build on this work to better understand the general and specific (i.e., positive and negative) perceptions about family firms and the effects of these perceptions on intentions to buy from a firm. building on signaling theory (connelly et al., 2011; spence, 1973; taj, 2016) we argue that the term “family-owned business” serves as a signal that activates both positive and negative associations for receivers of information. when individuals have limited information about an organization, explicitly communicating the family business brand (i.e., the involvement of a family in the business) is likely to activate unique positive and negative interpretations about this firm, which will play a role in the intentions that they have towards buying from these firms. given that previous research varies regarding the positive and negative features associated with the family brand, we wanted to better understand the associations that would be activated regarding the characteristics of the firm and the products and services they offered. besides the work of botero et al. (2018), previous research has not directly focused on perceptions. therefore, due to the limited understanding of these associations based on past research, we approached this part of our project in an exploratory way. this exploratory approach enabled us to better understand what associations potential consumers have about fobs. with this in mind, the following research question is advanced: rq1. what are associations that customers have with products and services from “family-owned businesses”? much like keller (2008), we believe that perceptions that consumers create about a brand are formed through the interaction they have with the branded entity. that is, a consumer’s perception about a family firm and its products is affected by the current and previous interactions the consumer has had with organizations that describe themselves as family-owned. in general, the type, the favorability, the strength, and the uniqueness of these brand perceptions are what determines the value of a brand for an organization (keller, 1993). therefore, the benefits of communicating that an organization is a family firm will only happen when consumers have positive perceptions about family firms. to better explain the effects these associations have on individual behavior, the following section summarizes research on consumer perceptions of ffs and how they influence their behaviors towards family firms. effects of perceptions on intentions towards a family firm research has suggested that the perceptions that individuals have about organizations are important because they affect the behaviors of internal and external stakeholders (fombrum & van riel, 1997; rindova & fombrum, 1999). for internal stakeholders, perceptions about the organization have been related to organizational identification 22 i. c. botero, & s. r. litchfield-moore journal of small business strategy / vol. 31, no. 2 (2021) / 19-35 (dutton et al., 1994), organizational change and adaptation (dutton & duckerich, 1991), organizational commitment (coyle-shapiro & morrow, 2006), and organizational citizenship behaviors (organ et al., 2006). for external stakeholders, perceptions about an organization have been linked to intentions to work for an organization (rafaeli, 2000, 2006), intention to invest in an organization (balmer & greyser, 2003), and consumer buying behavior (balmer & gray, 2003, balmer & greyser, 2003). given the importance of perceptions, organizations today acknowledge the strategic importance of brands and brand management in the creation of impressions about companies and their products in the minds of the consumers (anisimova, 2007; balmer & gray, 2003; hulberg, 2006). in this sense brands can play an important role in the consumer market. that is, when brands generate positive associations in the minds of consumers, this can result in stronger buying behavior. however, when they generate negative perceptions, it can hurt a firm by lowering its sales. previous research supports the importance of consumer perceptions on their buying behavior (da silva & alwi, 2006; ind, 1997; spears & singh, 2004). one of the assumptions in the family business literature is that “family-owned businesses” have unique advantages over other types of organizations, and that external stakeholders (i.e., consumers) are able to perceive those differences and evaluate family firms more positively than non-family firms. the problem is that up to date there is limited research understanding what associations are evoked when communicating that an organization is a “family-owned business” and their effects on consumer intentions. research so far has only assessed the level of trust ascribed to family and non-family firms (lude & prügl, 2018; beck & prügl, 2018) and the degree of authenticity perceived in the family business brand (lude & prügl, 2018). although these are important first steps, it is important to continue to build our understanding to better understand what associations are created and when these associations result in benefits for the family firm (binz astrachan et al., 2019). to address this gap, we designed a set of studies to understand the effects that perceptions about products and services of family firms have on attitudes towards family firms, and intentions towards family firms. the theory of reasoned action (tra) provides a useful framework to understand this process. tra posits that the best predictor of actual behavior is behavior intentions, which is dependent on two things: (1) one’s attitude toward the behavior and (2) subjective norms (fishbein & ajzen, 1975). attitudes toward performing a behavior represent an assessment of how much individuals like engaging in a behavior (fitzmaurice, 2005) and consist of one’s beliefs and evaluations about that behavior. research suggests that the attitude that an individual has towards a behavior will determine positive or negative intentions of individuals (ajzen & fishbein, 1980). that is, when individuals have positive attitudes toward a behavior, they will be more likely to have positive intentions to engage in a behavior. at the same time, when they have a negative attitude toward a behavior, they will be less likely to engage in it. the second component of the theory talks about subjective norms. subjective norms represent the individual’s perceptions of social appropriateness of performing a behavior (stiff & mongeau, 2003), and includes others’ perceptions of performing that behavior, as well as how important others’ opinions are for the individual engaging in the behavior (i.e., the motivation to comply with what others believe). research has supported that an individual’s decision to engage in a behavior is stronger when the opinions and attitudes of the people from one’s referent group (i.e. friends, family, etc.) are positive toward that behavior (kim & hunter, 1993). using tra as a framework can help us better connect how perceptions about products and services of family firms are related to an individual’s behavioral intentions and, ultimately, to their behavior. for this paper we focus on the attitudinal component of the theory and argue that in exchange relationships such as buying from an organization, the attitudes individuals have about an organization are formed based on the impressions that the individual has about characteristics of the organization or its products/ services. in particular, we believe that these attitudes are affected in part by what the organization communicates. therefore, the messages that individuals receive from organizational branding efforts are used to create attitudes toward that organization, and those attitudes affect their intentions to engage in relationships with the organization (i.e., buy from or work for the organization). with this rationale in mind, the following hypotheses are advanced: h1. individual perceptions about products and services offered by family firms will be positively related to attitudes towards family firms. h2. attitudes towards family firms will be positively related to intentions to buy from family firms. four studies were conducted to explore the research question and hypotheses presented above. study 1 was conducted as a pilot study to assess the general, positive, and negative perceptions stakeholders had about organizations that described themselves as “family-owned businesses.” from these responses, a survey was created to assess perceptions about products and services from family-owned 23 i. c. botero, & s. r. litchfield-moore journal of small business strategy / vol. 31, no. 2 (2021) / 19-35 businesses and the likelihood to buy from a family-owned business (study 2). we wanted to replicate the findings from study 2 with students and working professionals and improve the measures; therefore, we conducted two other studies (study 3 & 4). in the remaining sections of this paper, each of the studies will be presented independently and a final general discussion will summarize the contributions of this project. method study 1 participants and procedure eighty-seven students from introductory courses were recruited during class for the first data collection wave for this project. to assure anonymity demographic information was not collected. in an attempt to determine participant perceptions about family-owned businesses, three open-ended questions were asked: (1) when you think about a family business, what thoughts, feelings, images, etc. do you think about? (2) what are the positive thoughts that come to mind when you think about a family business? and, (3) what are the negative thoughts that come to mind when you think about a family business? participants took between 10 and 15 minutes to complete the survey. results eighty-four students responded to the first question. responses were coded by two independent coders. coders first coded each of the information by themselves to create the themes. then, coders met to identify the common themes and to reconcile differences about the themes. after the discussion, six themes emerged when coding the general thoughts and feelings that participants associated with family-owned businesses. results from the coding indicate that 40% of respondents viewed family firms as businesses that come from a small town (theme 1). twenty-two percent viewed these firms as businesses that are based on tradition (theme 2). twelve percent viewed them as businesses with good quality products and services (theme 3). eleven percent viewed these companies as businesses that were less effective/efficient than larger corporations (theme 4). ten percent as businesses that encourage wealth and success in the family (theme 5). and 5% viewed them as businesses that are father/son operated (theme 6). eighty-five students provided their responses regarding the positive thoughts generated by the label “family-owned business.” similar to the first question, responses were coded to see emerging themes, and eight different themes emerged. respondents expressed that the term “family-owned business” was positively associated with organizations that showed closed relationships and opportunities for bonding of family members (39%), consistent and positive customer relations (35%), tradition (12%), wealth (5%), quality of products and services (4%), small size (2%), positive impact on the community (2%), and trustworthy organizations (1%). finally, when identifying the negative associations created with the term fob, 85 students responded and three themes emerged. overall, respondents perceived that fobs were organizations characterized by more conflict (51%), less competitive drive than larger corporations (30%), and not as profitable as other organizations (19%). the results of this study helped us build an initial understanding regarding the positive perceptions about products and services associated with the term family-owned business. however, to further understand what particular perceptions individuals have about products and services and how these perceptions are associated with the term family-owned business, we designed a second study to better test our predictions. in study 2, the initial responses and themes generated from study 1 were used to create a survey instrument to assess perceptions about products and services and ask how these perceptions would affect intentions to buy from and work in fob. study 2 participants and procedure participants in this study included 145 college students. the average age was 20.58 years (sd = 2.65) and 65% were females. additionally, 72% currently worked, 50% had worked for a family firm in the past, and 32% had families that owned a business. participants were recruited during class and asked to answer a survey designed to assess their knowledge, perceptions, and intentions regarding products and services about organizations that were described as “family-owned businesses.” the survey was divided into two parts: perceptions of products and services from family-owned businesses, and demographic information. completion of the survey generally took between 10 and 15 minutes. measures the survey for study 2 included a total of 73 items that were created to measure different perceptions about characteristics of family firms, attitudes towards family firms and 24 i. c. botero, & s. r. litchfield-moore journal of small business strategy / vol. 31, no. 2 (2021) / 19-35 intentions to buy and work for family firms. participants indicated their level of agreement with each statement using a 5-point likert-type scale (1 = strongly disagree and 5 = strongly agree). four factors were retained after factor analysis: intention to buy from family-owned businesses (1 item), perceptions of organizational values (3 items), perceptions of quality of services (3 items), and attitude toward family firms (4 items). each variable was measured with items developed for this study. all measures can be found in the appendix. organizational values attitudes toward fobs product/service quality intentions to buy from fobs figure 1.tested model for intentions to buy from ffs analyses after assessing discriminant validity using factor analyses, rq1 was answered by looking at the frequencies of the aggregated variable. to assess h1 and h2, we assessed mediation using principles from baron and kenny (1986). the model tested is presented in figure 1. regression analysis was conducted. in model 1 (dv = intention to buy from fobs), the effects of control variables (age, sex, whether family owns business, and whether participant worked in fob) were examined. in model 2 (dv = intention to buy from fobs), the effects of the independent variables were examined. in model 3 (dv = intention to buy from fobs), the effects of the mediator (attitudes) were assessed. in model 4, the effects of the independent variables on attitudes towards fobs were examined. finally, in model 5 (dv = intention to buy from fobs), the effect of all the variables combined was assessed. results means, standard deviations, and reliabilities for all studies are shown in table 1. when assessing the general perceptions about products and services of ffs (rq1) results show that 87% of the participants had positive perceptions about the organizational values that family-owned businesses had, and 50% had positive perceptions regarding the products and services offered by family-owned firms (see table 2). as seen in table 3, model 2, results show that perceptions of organizational values were significantly related to intention to buy from family firms (β = .42, p < .01). in model 3, attitudes and intentions were positively related (β = .59, p < .01), fulfilling the initial pre-condition for mediation. in model 4, perception of organizational values (β = .36, p < .01) and product/service quality (β = .17, p < .10) were significantly related to attitude toward fobs. finally, results from model 5 indicate that attitudes were significantly related to intentions (β = .48 p < .01). thus, these results support that attitude toward fobs fully mediated the relationship between perception of organizational values and product/service quality on intention to buy from fobs. these results support h1 and h2. although study 2 was useful in helping us understand what perceptions participants had about products and services of family firms and how these perceptions influence attitudes toward family-owned businesses and intention to buy, it had two major limitations. first, the scales had been originally developed for the study and had not been used in research before. thus, the scale for perception of product service/quality had very low reliability. low reliability can introduce error when interpreting our results, thus requiring us to retest the scale or redevelop the scale. additionally, given that our sample was primarily students, it was difficult to ascertain whether the results obtained would be peculiar to the student population. this could prevent the generalizability of our findings. given these two issues we decided to develop two additional rounds of data collection: one that was focused on the redevelopment of the scale and had student participants (i.e., study 3) and one that collected data with professionals as part of the sample (study 4). in the following pages we present these two studies and their results. study 3 participants & procedures participants in this study included 90 students. the average age of participants was 19.89 years (sd = 1.60) and 25 i. c. botero, & s. r. litchfield-moore journal of small business strategy / vol. 31, no. 2 (2021) / 19-35 table 2 perceptions about products, services and work environment in family firms variable negative neutral positive study 2 organizational values 7% 6% 87% product and service quality 4% 56% 40% study 3 organizational values 9% 2% 89% product and service quality 17% 55% 28% study 4 organizational values 1% 4% 95% product and service quality 2% 58% 40% note. negative values = scores below 2.5 neutral values = scores between 2.5 and 3.5 positive values = scores above 3.5 table 1 mean, standard deviation and reliabilities for variables in each study chronbach’s alpha mean sd study 2 perception of organizational values .92 4.09 .91 perception of product/service quality .55 3.37 .53 attitude toward fob .83 3.63 .72 intent to buy 3.66 .85 study 3 perception of organizational values .89 4.23 .98 perception of product/service quality .74 3.13 .80 attitude toward fob .52 3.60 .61 intent to buy 3.83 .84 study 4 perception of organizational values .68 4.37 .54 perception of product/service quality .73 3.52 .51 attitude toward fob .86 4.08 .58 intent to buy .76 2.87 .81 26 i. c. botero, & s. r. litchfield-moore journal of small business strategy / vol. 31, no. 2 (2021) / 19-35 48% were males. additionally, 60% currently worked, 46% had worked for a ff in the past, and 33% had families that owned a business. similar to study 2, participants were recruited during class and asked to participate in this study in exchange for extra credit, but given that the survey in study 2 was extremely long, we decided to explore intentions to buy from fobs and intentions to work for fobs with separate samples. in this study we followed the same procedure as used in study 2. measures the variables assessed in this study were intention to buy from fobs (1 item), attitudes toward fobs (4 items), perceptions of organizational values (3 items), and perceptions of products and services (3 items). the items were the same ones used in study 2. table 1 summarizes mean, standard deviation and reliability for all measures, while the appendix shows all the items for this study. results when exploring rq1, results indicate that 89% of the participants in this study had positive perceptions about the organizational values of ffs. additionally, the majority of participants (55%) had neutral perceptions about products and services offered by ffs (see table 2). we tested h1 and h2 following the same procedure as in study 2. as shown in table 4, in model 2, neither perception of organizational values (β = .12, n.s.) or perception of product/service quality (β = .09, n.s.) was related to intention to buy from fobs. in model 3, attitude toward fobs (β = .56, p < .01) was positively related to intentions to buy. since the mediator was significant, the initial precondition for mediation was fulfilled. in the next step, model 4, we tested the independent variables’ significance in relation to the mediator. perception of organizational values (β = .12, n.s.) was not related to attitude toward fobs; however, perception of product/ service quality (β = .44, p < .01) was. in the final step, model 5, the mediator (attitudes) had a significant relationship to intentions to buy from fobs (β = .614, p < .001). these results indicate that attitude toward family-owned businesstable 3 results for ols regression analysis for intention to buy from fob a (study 2) variable intention intention intention attitude intention model 1 model 2 model 3 model 4 model 5 control variables age .04 .04 .02 .03 .02 sex b .09 .08 .13† -.08 .11 family owns business c .03 .08 .01 .07 .04 has worked for fobs c .04 .04 -.03 .12 -.03 independent variables per. organizational values .42** .37** .24** per. product/service quality .08 .17† .05 mediator attitudes toward fobs .59** .48** r2 .01 .22 .35 .24 .39 adjusted r2 -.02 .19 .33 .21 .37 f .41 6.52** 14.95** 7.20** 12.82** n = 143 a model statistics are betas b coding: 0 = female, 1 = male c coding: 0 = no, 1 = yes ** p < .01 * p < .05 † p < .10 27 i. c. botero, & s. r. litchfield-moore journal of small business strategy / vol. 31, no. 2 (2021) / 19-35 es partially mediates the effects of perception of product/ service quality on intention to buy from a family-owned business. thus, h1 was partially supported and h2 was supported. this study helped us develop a better measure for perceptions of products and services. however, two shortcomings remained. first, the reliability of attitude toward family-owned businesses dipped below the .70 acceptable rate. this meant that we needed to evaluate this measure again. second, although our participants had work experience, we wanted to also assess whether our results could generalize to the working population. to address these two issues, we ran a fourth wave of data collection that combined students and professional respondents. study 4 participants & procedure to explore the generalizability of our previous results, in study 4 we also recruited working professionals as part of the sample. participants included 54 students and 65 working professionals (n = 119). the average age of participants was 32.59 years (sd = 15.84), and 72% were females. additionally, 70% reported having a college education, 60% had worked for family businesses, and 40% indicated that someone in their family-owned a business. similar to study 3, the focus of this study was on intentions to buy from family firms. to recruit participants, we sent 270 email invitations. participants were asked to forward the email to co-workers and friends, creating the snowball table 4 results for ols regression analysis for intention to buy from fob a (study 3) variable intention intention intention attitude intention model 1 model 2 model 3 model 4 model 5 control variables age .01 .02 -.00 .14 -.06 sex b -.03 -.03 .00 -.11 .04 family owns business c .01 .02 .11 -.15 .12 has worked for fobs c -.07 -.05 -.05 .06 -.09 exposure to fobs .05 .12 .00 .22† -.03 independent variables per. organizational values .12 .12 .05 per. product/service quality .08 .44** -.19 mediator attitudes toward fobs .56** .62** r2 .01 .01 .31 .24 .36 adjusted r2 -.05 -.05 .25 .17 .33 f .14 .84 5.91** 3.63** 4.71** n = 90 a model statistics are betas b coding: 0 = female, 1 = male c coding: 0 = no, 1 = yes ** p < .01 * p < .05 † p < .10 28 i. c. botero, & s. r. litchfield-moore journal of small business strategy / vol. 31, no. 2 (2021) / 19-35 sample. the email directed participants to an online version of a survey designed to assess their knowledge, perceptions and intentions regarding products and services from organizations that are described as “family-owned businesses.” measures building on the measures from study 2 and 3, the survey for this study assessed perceptions of organizational values (3 items), perceptions of products and services (4 items), attitudes toward family businesses (4 items) and intentions to buy from family firms (2 items). means, standard deviations and reliabilities are presented in table 1. items are presented in the appendix. results we first assessed participants’ perceptions of organizational values and products and services offered by family firms. similar to study 3, the majority of participants (95%) had positive perceptions about the values that family firms possessed, while the majority of respondents (58%) had neutral perceptions about the products and services offered by family firms (see table 2). a similar procedure to study 2 and 3 followed to test hypotheses. as can be seen in table 5, in model 2, perception of product/service quality was related to intention to buy from a fob (β = .272, p < .01). in model 3, attitude toward fobs (β = .44, p < .001) was related to intentions to buy from fobs. since the mediator was significant, the initial preconditions for mediation were fulfilled. in model 4, perception of organizational values (β = .19, p < .05) and perception of product/service quality (β = .38, p < .01) were significant predictors of attitude toward fobs. in the final step, model 5, attitudes were significantly related to intentions to buy from fobs (β = .40, p < .01). the models suggest that attitude toward family-owned businesses fully mediates the effects of perception of organizational values and perception of product/service quality on intention to buy from a family-owned business. given this, h1 and h2 were supported. table 5 results for ols regression analysis for intention to buy from fob a (study 4) variable intention intention intention attitude intention model 1 model 2 model 3 model 4 model 5 control variables age .53** .49** .47** .07 .46** sex b -.01 .03 .09 -.15† .09 family owns business c .05 .03 .03 .01 .03 has worked for fobs c .03 -.01 .03 -.09 .03 independent variables per. organizational values .03 .19* -.05 per. product/service quality .27** .38** .12 mediator attitudes toward fobs .44** .40** r2 .29 .37 .47 .30 .48 adjusted r2 .27 .33 .44 .26 .45 f 11.61** 10.80** 19.75** 7.90** 14.44** n = 119 a model statistics are betas b coding: 0 = female, 1 = male c coding: 0 = no, 1 = yes ** p < .01 * p < .05 † p < .10 29 i. c. botero, & s. r. litchfield-moore journal of small business strategy / vol. 31, no. 2 (2021) / 19-35 discussion as competition between organizations increases, companies have placed greater emphasis on strategic brand building in order to set themselves apart from their competitors and to remain economically viable. this paper explored the perceptions that potential consumers have about the products and services of organizations that describe themselves as family-owned businesses and the effect of these perceptions on intentions to buy from a firm. using principles from signaling theory and the theory of reasoned action, we argued that highlighting that a firm is family-owned will provide a signal that consumers will interpret as positive or negative. when consumers perceive it as a positive characteristic, they are more likely to have positive attitudes toward family firms, which leads to a higher level of intention to buy from a firm. results from the studies in this project suggest that describing a business as family-owned can generate both positive and negative associations in the mind of the stakeholder. in this sense, our results replicate the work of botero et al. (2018), who also find that family firms are associated with tradition, strong culture, corporate citizenship, more conflict and lower professionalism. however, our results also suggest that in the context of products and services the family association is likely to generate positive perceptions, particularly for values that reflect customer centric behaviors. these results are consistent with the work of cooper and colleagues (2005) and lyman (1991), who report that family businesses pride themselves on their relationships with customers and are more focused on personal interaction. in this sense, our study helps to clarify the unique differences that customers may ascribe to family firms. in this case, it seems as though study participants perceived family firms as paying important attention to their customers and being important players in their communities. however, when assessing the direct perceptions about products and services, our results indicate that participants had primarily neutral perceptions. these results are interesting given that previous studies have claimed that individuals often perceive that family-owned businesses produce high quality products (carrigan & buckley, 2008; poza, 2010). this points to the need for additional research to continue to understand how customers evaluate a family business brand and under which conditions it would be beneficial to promote the family business brand. a second aspect explored in this project was the influence of perceptions on attitudes toward fobs and intentions to buy from fobs. results from studies 2, 3 and 4 are consistent with the theory of reasoned action, which suggests that attitudes towards family firms will be positively related to intentions to buy from these organizations. in all of our studies, we found that those who had positive attitudes toward family-owned businesses were more likely to also have greater intentions to buy from these firms. we also hypothesized a relationship between perceptions and attitudes towards fobs. the two perceptions that we focused on were organizational values, which measure the perception of the importance that family firms placed on customers and the community, and products & services. our results show some support for the positive relationship between perceptions of organizational values and attitudes towards fobs. study 2 and 4 found that values were positively related to attitudes. we believe that one of the reasons not all the studies found this relationship significant is because of the sample used. in study 3, the sample was composed entirely of students, and it is possible to think that given the students’ acquisition power, a more important issue that develops positive attitudes toward a business is the product price. thus, it seems that the attitudes towards fobs are in part determined by the extent to which customers perceive that the family firm cares for its customers and the community in which they reside. we also explored the effects of products and services perceptions on attitudes toward fobs. although past research has found some support for this relationship (okoroafo & koh, 2009), our studies found mixed support. in our case only two out of the three studies conducted (i.e., study 3 and 4) found support for this relationship. we believe that lack of support from study 2 may be a product of using students in the sample. as mentioned above, given the difference in acquisition power between professionals and students, it may be that when individuals know that they can afford better products, their perceptions of quality of products and services will influence attitudes towards firms in a stronger way. however, our results do point towards the importance that perceptions about product and services can have on the attitude toward fobs. combined, our results seem to suggest that the process through which the family business brand influences intentions to buy from a firm includes several steps. first, the family business brand influences different perceptions about the firm (i.e., the value and respect that it places on customers & the community, and the quality of products & services). the second step involves how different perceptions translate into attitudes towards a family firm. in this step, we expect that those customers that have positive perceptions will also develop positive attitudes towards the family firm. finally, it is these attitudes that will, in turn, influence the attitudes towards a family firm. with this in mind, we believe that to better understand when and how the family business brand influences intentions to buy from 30 i. c. botero, & s. r. litchfield-moore journal of small business strategy / vol. 31, no. 2 (2021) / 19-35 a firm, it will be important to take a process approach. implications for theory and practice when taken together, our results have several implications for theory and research. first, we believe that our study provides important insights into the process of how a family business brand can translate into intentions to buy from a family firm. as we mentioned earlier, the family business brand first influences perceptions. these perceptions then affect the attitudes toward fobs, which ultimately impact intentions to buy. taking this approach, we could argue that previous research that has explored the effects of the family business brand on intentions to buy has already explored several perceptions that matter. these include trustworthiness (beck & kenning, 2015; beck & prügl, 2018), benevolence (beck & prügl, 2018), brand authenticity (lude & prügl, 2018, zanon et al., 2019), and reputation (binz et al., 2013), just to mention a few. what is currently missing is a better understanding of how, why, and when these perceptions positively influence the belief and evaluations that a customer would have about a family firm (i.e., attitudes towards fobs), and then intentions to buy. given this, future research could benefit from using a process view to better understand the effects of the family business brand. our results also have important implications to understanding the receiver/ recipient approach to family business brands. binz astrachan et al. (2018) argue that family business brands can be explored either from the sender’s or from the receiver’s point of view. thus, an important implication of this project is that it continues to shed light into the different considerations that are at play to better understand the receiver and how they process family business brand information. in particular, it sheds light onto the different aspects that are affected by the communication of the brand. it also provides some understanding of the consumer and how they may process information. binz astrachan et al. (2019) have suggested that for family business branding research to move forward, one of the aspects that we need to focus on is on understanding the receiver. this study sheds some light into how the receiver could be impacted by the family business brand. it also sheds light into how consumers from the north may react to the family business brand. given that the data was collected in the usa, these results can provide some insights of these consumers. at a practical level, results from studies 2, 3, and 4 can help family business owners better understand the importance of how perceptions about an organization can affect attitudes and intentions towards a family firm. in this case, practitioners can reflect on how their actions and communications are likely to impact the attitudes that consumers have towards family firms, to make sure that they do not hurt the possibilities of enhancing the perceptions and attitudes in these types of consumers. strengths, limitations and future research like any project, this one has both strengths and limitations. we believe that an important strength is that we systematically explored the perceptions that stakeholders have about fobs, and how these perceptions affect intentions towards fobs. although exploratory in nature, the four studies that make this project allowed us to fine-tune understanding, measurement, and the framework in the project. at the same time, it allowed for replication and extension of previous work. therefore, the main strength from our study is the inclusion of multiple waves of data collection to test the ideas proposed in this paper. as is the case in any research, there are limitations that are important to acknowledge. the first limitation is the scales used in this study. given the limited empirical research exploring perceptions about family firms from the non-family stakeholder’s perspective, there were no previously tested scales that we were able to use for our project. thus, we had to develop our own scales based on an initial pilot study and past family business literature. the reliability of these was not always the best for empirical research. this can be problematic because the lack of a sound scale may introduce error that can influence the generalizability of the findings in this project. therefore, we suggest that future research work on the scale development first and then continue to explore the perceptions about fobs. a second limitation of the project was the lack of comparison to non-family business perceptions. the current study focused solely on perceptions of businesses that described themselves as fobs; however, this means that conclusions cannot be drawn as to whether or not fobs are different than non-fobs or which types of family firms can benefit from using the family business brand. the findings merely indicate that in certain contexts, family businesses may find it useful to communicate their family association when branding their products or their organization. not having a comparison group may be problematic because when participants compare fobs and non-fobs or different types of family businesses, their perceptions about fobs may change. with this in mind, future research should seek to address this issue by including a comparison group. this comparison can provide more clarity regarding when the use of the family business brand is beneficial to a firm. a final limitation is the general focus of the studies. the survey instruments did not ask about a specific product or service. focusing on a specific product or service may 31 i. c. botero, & s. r. litchfield-moore journal of small business strategy / vol. 31, no. 2 (2021) / 19-35 change people’s opinions because it would include more details for the participant to consider. there may be multiple factors that affect attitudes toward fobs. however, this project explored only a couple of these factors. with this in mind, future research should explore perceptions about family firms using other experimental techniques to test whether the results from the study replicate when using different data collection techniques. conclusion this study explored consumer perceptions about family firms and their effects on intentions to buy from a firm. taking a receiver approach to the family business brand, we found that attitudes towards the family firm are at the center of understanding how a family business brand influences a customer’s intention to buy. in particular, we find that in our four samples family firms were generally associated with positive organizational values (i.e., higher concern for the customer and the community) and neutral perceptions about the quality of products and services. these in turn influenced attitudes towards the fob and then intentions to buy. when taken together, these results point to the importance of taking a process view to understand why and how a family business brand influences intention to buy. future research would benefit from exploring further focusing on the customer (i.e., target audience) to more broadly understand how they are impacted by the family business brand and could influence how a family company may choose to communicate their brand. references ajzen, i., & fishbein, m. 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(2012). building a family firm image: how family firms capitalize on their family ties. journal of family business strategy, 3(4), 239-250. 34 i. c. botero, & s. r. litchfield-moore journal of small business strategy / vol. 31, no. 2 (2021) / 19-35 appendix scales for the studies study 2 perception of organizational values • a family-owned business values its customers. • a family-owned business would help the local community. • a family-owned business builds relationships with its customers. perception of product/service quality • overall, family-owned business would make better products than other organizations. • i trust a product from a family-owned business to be of high quality. • family-owned businesses pay close attention to detail when developing their product. attitude toward fobs • i believe that i should support family-owned businesses. • it is important to support family-owned businesses. • i would recommend a family-owned business to my friends. • i would encourage my friends to support family-owned businesses. intention to buy • if all things were equal, i would purchase from a family-owned business. study 3 perception of organizational values • a family-owned business values its customers. • a family-owned business would help the local community. • a family-owned business builds relationships with its customers. perception of product/service quality • overall, family-owned business would make better products than other organizations. • i trust a product from a family-owned business to be of high quality. • family-owned businesses pay close attention to detail when developing their product. attitude toward fob) • i believe that i should support family-owned businesses. • it is important to support family-owned businesses. • i would recommend a family-owned business to my friends. • i would encourage my friends to support family-owned businesses. intention to buy • if all things were equal, i would purchase from a family-owned business. study 4 perception of organizational values • a family-owned business values its customers. • a family-owned business would help the local community. • a family-owned business builds relationships with its customers. perception of product/service quality • overall, family-owned business would make better products than other organizations. • i trust a product from a family-owned business to be of high quality. • family-owned businesses provide the best services in town. • services by family-owned businesses are of better quality than other organizations. attitude toward fobs • i believe that i should support family-owned businesses. 35 i. c. botero, & s. r. litchfield-moore journal of small business strategy / vol. 31, no. 2 (2021) / 19-35 • it is important to support family-owned businesses. • i would recommend a family-owned business to my friends. • i would encourage my friends to support family-owned businesses. intention to buy • i currently go out of my way to support a family-owned business. • when i shop, it does not matter if i buy from a family-owned business. strategy economic value added for new ventures and small business sidney j. baxendale university of louisville bttxendalepalouisville. ed» leigh bowen owner campus quilt company louisville, kentucky lbowen,'a.:campusguiit. coin abstract historically, economic value added (eva) was a financial tool reserved for large corporations and mature businesses. however, eva can be particularly useful for small businesses and entrepreneurial endeavors. the value, computed from uncomplicated and available jinancial data, can direct the tactical and strategic activities of the firm toward value producing projects, help regulate spending, andserve as an exitindicator for jirms that may never become successful. introduction launching a business or new venture is oflen a risky undertaking, requiring both foresight and steadfastness. those who are drawn to start-up phases of business oflen understand what minimal requirements must be met for basic survival. but do most entrepreneurs and small business owners push themselves to find tools that will lead them past survival toward legitimate, profitable success? by taking advantage of revealing financial measures, the entrepreneur can raise expectations in pursuit of profitable and challenging financial goals, rather than settling for the minimal necessity of positive cash flow. while most entrepreneurs possess intuitive traits that contribute to general entrepreneurial activity, it is the incorporation of legitimate financial assessments like economic value added (eva) that distinguish long-term success from short-term survival. the purpose of this amcle is to discuss the means by which eva can contribute to the long-term success of a new business venture through its use in evaluating proposed uses of resources, evaluating managers of resources, and evaluating the continuing economic viability of existing committed resources. eva is the term coined by the stem stewart and company, a new york city-based consulting firm, for a financial indicator that evaluates a company's efficient use of resources, taking into account the cost of capital. eva is generally derived by deducting a capital charge (owners'quity plus interest-bearing debt times the weighted average cost of capital) from the afler-tax operating income. 41 journal ofsmall business strategy vol. l2, no. 2 fall/ivmier 200/ though eva has been heralded for the past several years as a key financial measure for large corporations and mature businesses, we discuss its importance in assessing small businesses and entrepreneurial new ventures. for the following several reasons, eva is a particularly relevant measure for these types of business entities. to most entrepreneurs and small business owners, cash is the most precious resource. eva helps better manage this critical business resource by including the cost of capital in tactical and strategic financial planning. furthermore, the use of an eva evaluation helps create a framework for future goals and measurements. developing initial organizational and assessment systems is an activity that often gets overlooked by extremely busy entrepreneurs. by acknowledging the cost of capital and establishing eva as an initial and valued financial measure, a new venture can create a system of measurement that is scalable and relevant, one that is useful as the business grows. eva is a tool that remains consistent throughout the tenure of a venture's life by focusing on the cost of capital even though the cost of capital is likely to change as the new venture's capital structure changes over time. furthermore, this use of eva provides an objective measure for sole proprietorships and partnerships, firms that are absent the scrutiny of shareholders. a final benefit of eva is its effectiveness as an exit indicator for firms whose future may not be promising. literature review although stewart (1990) are credited with the introduction of eva, there have been a number of contributors to the topic. in writing this piece, we reviewed articles discussing eva, entrepreneurship, and the characteristics of each that made the marriage of the two a reasonable expectation. the first challenge in assessing the topics involved establishing the most appropriate definitions of our critical terms. though a number of academics and professionals have developed definitions of eva (pressley, 1999; dodd & johns, 1999), we used the equation used by brewer, chandra, and hock. (1999). eva, for our purposes, is calculated by deducting a capital charge (the owners'quity plus interest-bearing debt times the weighted average cost of capital) from the alter-tax operating profit. complicating this definition were opinions that suggest accurate eva evaluations depend on a clear understanding of over 160 gaap definitions (keyes, azamhuzjaev, & mackey, 1999). some suggest that the numbers used to calculate eva are intrinsically ambiguous, this referring particularly to the use of alter-tax operating income. stern and stewart themselves, however, dispute the necessity to consider all 160 gaap adjustments and offer a test to companies to guarantee that their eva calculations are not skewed because of faulty input variables (keyes et al, 1999.). with this support, a simple calculation suffices for our purposes. determining the distinguishing characteristics of entrepreneurs and small business owners was an equally daunting endeavor. based on the research of chrisman, bauerschmidt, and hofer (1998), we settled on our terminology of ventures, small businesses, and entrepreneurial endeavors. this was important in that the terminology helped distinguish traits that put the businesses entities we are focusing on in like groups. we also benefited from these authors regarding research in determining the appropriate definitions for survival and success. again, the article by chrisman ei al. (1998) that detailed the determinants of new venture performance provided sound definitions of necessary terms. additionally, karen bishop's work on the characteristics of entrepreneurs (2000) also proved particularly useful. 42 journa! of small business strategy vol. l2, ivo. 2 fallllyinrer 200l our article presents the attributes of eva that can take small businesses and entrepreneurial endeavors from survival to success. however, a number of objections exist regarding the general use of eva and the benefit of the measure for young firms. the primary objection comes from opponents of the stem stewart measure who feel the measure is complex, the calculation is ambiguous, and the results are easily manipulated by shrewd managers seeking financials that are more impressive than true. many in the field feel this potential manipulation of the eva measure is highly detrimental because firms will capitalize expenditures that have little to no future value, de-emphasize long-tenn planning, and decrease customer satisfaction and continuous improvement processes because they do not directly improve the eva figure (keyes ei al. 1999; brewer er al. 1999; dodd & johns, 1999). others object to the measure because it is short-term oriented, stating that eva is ineffective for firms that generate huge economic losses but still create value (delves, 1999). these would be firms in high-tech or bio-tech fields, for example. critics argue that eva does not account for the intangibles that certainly contribute to the long-term value of a firm. using the same line of reasoning, many argue that eva is only relevant for firms that have capital primarily stored in hard assets such as buildings and equipment. under this thinking, eva would not be beneficial for service industries. furthermore, many object to the benefit of eva because the calculation does not measure future cash flow, rather it is based on past accounting accrual net income. definition of terms established corporations regularly take advantage of popular financial tools like eva to assess growth and performance. a fortune article (anonymous, 1993: 38) touted the successful use of eva by major united states companies such as coca-cola, at&t, quaker oats, briggs & stratton, and csx. the article provided evidence that the use of eva in decision-making and performance evaluation had been a major contributor to the success of those companies. our focus, however, is to identify the impact this measure can have on small businesses, new ventures, and entrepreneurial endeavors. venture performance is based in two primary dimensions, survival and success. for the purposes of this article we define survival as the continued existence of a firm as an economic entity. success, on the other hand, is the relative measure of venture performance that occurs when the venture creates value for its stakeholders in a sustainable and economically efficient manner (chrisman ei al. 1998). we will discuss how the use of eva by entrepreneurs and small business owners bridges the gap between mere survival and flourishing success. definition of eva traditional income statements include only the revenue and the cost associated with transactions that are reflected in the accounting records. the cost of financing the business enterprise is not fully reflected in the accounting records to the extent that the business is financed with equity capital. eva attempts to remedy that situation. accountants and economists have never used the same metric for measuring the performance of the firm. the accountants and the economists agree on the measurement of revenues, but they differ on the measurement of costs. in calculating a firm's profit, the accountant considers only costs that are evidenced by objectively verifiable transactions such as the cost associated with the purchase of raw materials or the cost associated with the paid salary of a supervisor. economists consider those same objectively verifiable costs, but they go further 43 journal ofsmall /iusi ness strategy vo/. /2, no. 2 fa///iyinrer 200/ to include "economic costs" that are not objectively verifiable based on documentation. among these "economic costs" is the cost of equity capital. accountants recognize that equity capital has a cost, but that cost is not objectively verifiable and thus it is not recorded in the accounting records and is not considered in determining the firm's profit. the power of eva is that it is based on the economist's view of profits and thus, it is more inclusive in consideration of costs when measuring the firm's profit. this contrast between the accountant's view of profits and the economist's view of profits is explored more fully after our discussion of the calculation of eva which follows. eva is net operating profit (on an after-tax basis) less a capital charge. the net operating profit is the profit before the deduction of any interest expenses. effectively, it represents the profit from operations of the business without the deduction of any interest expenses associated with financing the business using debt financing. many entrepreneurial business ventures have no debt financing. thus, for a business without debt financing, net operating profit (on an arer-tax basis) is the same as the business's arer-tax income. the capital charge, which is subtracted from the net operating profit, is an imputed cost (not recorded as an actual accounting transaction) associated with the capital that is employed in the business. this capital charge is determined by multiplying the estimated cost of capital times the capital employed in the business. the capital employed in the business is determined by reference to the balance sheet. it is the sum of interest-bearing debt and stockholders equity. the cost of capital used in determining the capital charge is the arer-tax weighted average cost of the capital employed. the calculation of the cost of capital recognizes that interest expense is tax deductible, whereas the cost of equity capital is not tax deductible. for example, if the entrepreneurial business enterprise has $ 100,000 of 12% debt and $900,000 of equity financing, the after-tax weighted average cost of capital would be calculated as follows assuming that the marginal tax rate is 36% and the cost of equity is 20%. debt $ 100,000 x (.12 x (i .36) = $7,680 equity $900 000 x .20 = $ 180 000 total $ 1,000,000 $ 187 680 arer-tax weighted average cost of capital = $ 187,680 / $ 1,000,000 = 18.768% in the above calculation, we used 20% as the cost of equity capital. the cost of equity capital is determined subjectively. it is essentially the return that the shareholders consider appropriate given the level of risk they are undertaking. it represents the shareholders opportunity cost —the rate at which the shareholder could earn in an investment of equal risk. the cost of equity capital will always be greater than the pre-tax cost of debt capital because the equity shareholder bears more risk than the lender. if we assume that the net operating profit (on an arer-tax basis) was $250,000, then the eva calculation is as follows: net operating profit (arer-tax) $250,000 less capital charge: capital employed $ 1,000,000 weighted average costs of capital 18.768% less capital charge -187 680 eva $62,320 44 journal ojsmall business strategy vol. 12, lira. 2 fall/ivinrer 2001 the eva amount of $62,320 is significantly different from the a(ter-tax profits of $242,320 that would have been reported on the income statement based on recorded transactions. the alter-tax net income reported on the income statement is calculated as follows: net operating profit (aller-taxes) $250,000 less interest expense atter-taxes: interest expense $ 12,000 tax savings from interest -4320 interest expense atter-taxes -7680 atter-tax net income $242 320 in our opinion, it is the $62,320 eva amount, rather than the $242,320 aller-tax net income amount that is relevant in assessing the performance of the new business venture during the year. some might argue that the eva amount of $62, 320 should be compared to the return on investment (roi) associated with the $242,320 atter-tax net income that was calculated for reporting in the accountant prepared financial statements. that roi would be calculated as follows: roi = alter-tax net income $242 320 capital employed = $ 1,000,000 = 24.232% with the roi measure, there is nothing explicit in the elements of the calculation that alert the entrepreneur as to the acceptability of the realized roi percentage. is 24.232 % roi and acceptable performance or is it not? eva overcomes that disadvantage in that it includes cost of capital as an explicit element in its calculation. if the eva measure is a positive amount (as it was in this case with a $62,320 eva amount), then the entrepreneur knows that he or she is generating profit sufficient to cover all costs including the cost of capital employed. if the eva measure is a negative amount, the entrepreneur knows that he or she is not generating profit sutticient to cover all costs including the cost of capital employed. roi lacks that explicit consideration of the cost of capital and could result in an entrepreneur being deluded into thinking that the business venture has been a success when it has not been. eva and economic profit as mentioned earlier, accountants and economists view profits differently. the accountant determines profits by dealing with cost transactions that are recorded in the accounting records. those cost transactions include purchases of raw materials, supplies, and assets, payment of wages, payment of interest, and other executed transactions. on the other hand, the economist considers all of the executed cost transactions that are recorded in the accounting records but adds some economic costs that are not considered by the accountants. normal profit is included among these economic costs. according to economists, who take a more theoretical perspective than accountants, normal profits represent the expected recompense to the owners for the factor of production called "entrepreneurship" and also any opportunity costs associated with equity capital. if the business enterprise is paying dividends to the owners, those dividends represent at least some portion of the recompense that the owner entrepreneurs expect in order to keep them involved and invested in the new venture and to reward them for committing equity capital to the venture. however, rarely does a new venture pay dividends in the early stages of development or during the growth phase of the business. without dividends, there are no 45 journal of small business strategy vol. l2, no. 2 fallllvinier 2001 transactions in the accounting system that represents the recompense to the owner who has invested capital in the new venture. even when there have been dividends paid; those dividends are not regarded as costs that reduce profits. instead, dividends are treated as reductions in retained earnings. the retained earnings account is a balance sheet account, not an element of the income statement. the eva approach to evaluating a new venture goes beyond the accounting profit. eva attempts to make the cost of the capital provided by the owner entrepreneurs an explicit cost. the result is a cost amount that is closer to what the economist had in mind —a summation of the explicit accounting costs based on transactions and the imputed cost of the capital supplied to the new venture by the owner entrepreneur. evidence suggests that new ventures are often financed almost exclusively with equity capital rather than borrowed funds. in a recent year, the united state of america's federal reserve system, under the leadership of alan greenspan, attempted to slow the overcharged economy by raising the federal discount rate, the interest rate at which member banks borrow from the federal reserve system. the result was that the common stock of established businesses, declined precipitously. however, the common stock of the newer business ventures continued to increase in value. financial analysts, in an attempt to explain the divergent behavior of the common stock of the two business classifications, concluded that the market value of common stock of the new business ventures was not impacted by the increase in interest rates. the lack of impact was explained by the observation that new business ventures rarely have significant borrowed funds as a part of their capital structure. the financial analysts concluded that the capital structure of new business ventures was typically dominated by equity financing and therefore a change in interest rates had no impact on the reported profits of new business ventures. this feature of the capital structure of new business ventures in which there is very little debt financing and significant equity financing results in very little of the cost of capital being regarded as an explicit accounting cost represented by the transaction of paying interest to a lender. thus, if the cost of the capital is to be considered in determining the economic costs associated with the new business venture, that cost is going to have to be an imputed cost that is subtracted from the accounting profit amount to arrive at a better approximation of economic profit. eva does just that. eva benefits despite the tremendous regard in which cash is held, many small business owners and entrepreneurs unknowingly squander considerable amounts by not including the cost of capital in their evaluation of new projects. the reason is probably not lack of sophistication or financial savvy on behalf of the entrepreneur, but it is more likely a simple lack of exposure and/or instruction. barron's (willoughby, 2000) recently discussed the change in attitude among venture capitalists as a result of the decline in the economic outlook for the companies traded on the technology-laden nasdaq stock exchange. whereas, new technology related ventures used to be evaluated based on their future prospects, the focus switched to the "burn rate" in early 2000 when the prospects for technology-related companies looked less promising. willoughby (2000: 31) defined "bum rate" as "how fast they were depleting their cash reserves." he went on to say that the nasdaq-traded companies were critically dependent upon a continually receptive stock market to keep funding their furious spending. ln our opinion, eva is a tool to reinforce the discipline needed to avoid "furious spending." using eva, spending cash is only justified when the spending is expected to enhance the eva of the company. 46 journal ofsmall business strategy vol. /2 no. 2 fall/winter 200l as mentioned previously, eva, for our purposes, is calculated by deducting the imputed capital charge from the after tax operating income. these are certainly obtainable values for the typical business owner. the figure derived from this simple equation gives a considerably more accurate evaluation of the financial health of the venture than other more limited profit and earnings calculations. the use of eva enlightens the entrepreneur by prompting him or her to be cognizant of the cost of capital from various sources. this is critically important as new ventures and small businesses grow because they are constantly deciding how to best use the treasured capital of the firm. in making these decisions, the entrepreneur must have reliable data on which he can base decisions. eva is a reliable basis on which entrepreneurs and small business owners can gage progress toward true success. disadvantages of eva now that we have extolled the advantages of eva, it is appropriate to discuss the cited disadvantages associated with eva. one of the primary disadvantages associated with using eva as a measure of performance or economic viability is that it an absolute measure rather than a relative measure. when roi is used to measure perfonnance or assess economic viability, one can meaningfully compare the roi of one business entity with the roi of another business entity. in contrast, when eva is used, it is meaningless to compare the eva of one business entity with the eva of another because, all else being equal, the larger business entity will have the larger eva. thus, eva is an absolute measure, not a relative measure. however, in our opinion, the fact that eva is not a relative measure is of no significance to an entrepreneur who is attempting to make economically viable decisions concerning how the resources of the new venture should be employed. another criticism of eva is that it tends to place too much emphasis on the short-term and too little emphasis on the long-term. brewer et al. (1999:8), in discussing the disadvantages of eva, mention that eva overemphasizes the need for immediate results. we do not disagree. the same could be said of roi, atter-tax profits, or any other financial measure of performance. an entrepreneur must balance the short-term and the long-term perspective throughout the life of a new venture. the long-term perspective is best served by a portfolio of performance measures (financial and non-financial) as suggested by the literature on "balanced scorecard" (kaplan & norton, 1993, 1996). eva is an appropriate financial measure for use in a balanced scorecard. when so used, its short-term focus is balanced with performance measures that focus on the long-term. eva as the bridge from survival to success survival, being the absolute measure of a business'bility to continue to exist, requires the entrepreneur to meet basic financial obligations such as paying creditors, maintaining employees and equipment, and purchasing necessary supplies. survival mandates that a business owner or entrepreneurs understand only the most fundamental financial aspects of business. oiien, a business can maintain this level of existence without knowing or understanding critically important financial inlluences, such as cost of capital. though eva has historically been preferred in established, mature businesses, the use of the financial measure for small businesses and entrepreneurial ventures makes sense for a number of reasons. first of all, there is not a lot that distinguishes a small business from a larger one in terms of desire for success and the ways success is achieved. 47 journa/ of sma// business siraiegy vol. /2, no. 2 ea///ivin/er 2001 according to the strategic management theory, a business unit's performance, or success, is both directly and indirectly related to the environment of the industry in which the business competes, the resources it controls, the strategy it uses to align available resources with opportunity, and the organizational structure, process, and systems, it employs (hofer & schendel, i 978). research reveals that the determinants of performance in a new venture and an established venture are nearly identical (chrisman ei al. 1998). by using eva, the flrm is better able to make the leap from survival to success by more carefully controlling the resources, identifying profitable opportunities through positive eva values, establishing sound, systematic performance measures, and by directing decisions under a cohesive structure of financial goals. bennett stewart outlined the three general ways to increase the values, eva, of a firm. these include: 1. improving the rate of return on the existing capital base. 2. investing in projects that return more than the cost of the capital. 3. liquidating capital from projects where inadequate returns are earned. by establishing these eva principals as the guidelines by which day-to-day, tactical, and strategic goals are created, a new firm has a sound business policy intrinsic in its operation. the use of the financial tool directs the company to make efficient use of capital by investing in value-added projects and withdrawing from value-destructive projects (dodd & johns 1999). these ideas are particularly beneficial for start-up firms because they are not completely intuitive. research by bishop (2000) suggests that entrepreneurs and small business owners depend heavily upon intuition in managing new business ventures and small businesses. because of this selfreliance, owners may be less inclined to seek available tools, particularly those that are not completely intuitive, to validate their decisions. the use of eva brings important issues into the analysis for entrepreneurs and small business owners and mandates, by virtue of the calculations, that capital is thoughtfully used. this idea is supported by the tendency for entrepreneurs or business owners in start-up phase businesses to devote little attention to controls on spending. a term commonly referred to when talking about new ventures is "burn rate." the bum rate is the amount of cash a firm uses to sustain itself in infancy stages. because so many significant costs are incurred at the start-up phase, the owner or entrepreneur can "burn" so much cash he or she becomes lax about completing a true cost-benefit analysis for significant expenditures. spending becomes habitual and one becomes callused to the ultimate effects of the outgoing capital. eva regulates spending and requires resource commitments to contribute value to the firm and be in line with the goals of the business. the use of eva by a start-up enterprise is especially important when one considers that during the start-up phase, entrepreneurs should be giving serious consideration to outsourcing. the use of eva as a basis for evaluating the use of capital to acquire assets could be very persuasive. for example, assume the entrepreneur is considering the alternatives of acquiring a small fleet of delivery trucks or using contract delivery services. the savings associated with owning the fleet rather than contracting for delivery services should be sufficiently large enough to cover the cost of capital associated with owning the fleet. the use of eva to evaluate the choice results in the cost of capital being explicitly considered. when comparing the two alternatives —owning the fleet or outsourcing the delivery —the savings could be calculated for the expected level of delivery activity. assuming that the calculation revealed that owning the fleet would produce annual after-tax savings of $50,000 when compared with 48 journal ofsmall business strategy vol. /2, no. 2 fall/winter 200l outsourcing, eva would be calculated as follows assuming that the acquisition of the delivery fleet would require an investment of $400,000 and the arer-tax cost of capital was 15%: increase in annual afler-tax accounting profits $50,000 less capital charge: required investment $400,000 cost of capital x .15 less capital charge 60 000 economic value added $ 10 000 the eva of a negative $ 10,000 indicates that outsourcing would be a better choice when all of the relevant costs are considered. eva enforces the consideration of all relevant costs. following the attainment of the young firm's desired success, eva is a tool that does not go out of fashion. eva is also the preferred financial tool because it maintains its usefulness once a finn has reached a comfortable level of business success. at this time, the capital structures of most company's will dramatically change, moving from equity financing to a blend of debt and equity financing. this shift reduces the cost of capital for the firm and can alter the perspective by which purchasing and investment decisions are made. eva can transition with firms as they go through the various stages of development. it is at this stage in the life of the business venture that the entrepreneur may hire a business manager to manage the business. at this stage, it will be necessary for the entrepreneur to establish financial objectives against which the business manager's performance will be measured. those financial objectives, when expressed in terms of eva, assure the entrepreneur that the successful accomplishment of those objectives will result in sufficient economic profit to sufficiently reward him or her for the entrepreneurial risk that the entrepreneur has undertaken. when eva is used to evaluate the performance of a manager, the focus is on the controllable investment. assuming that the manager is given authority to manage a division of the company, the eva calculation would focus only on the invested capital over which the manager has authority. if the capital employed by the division of the company was $2,000,000, then the annual financial objective expressed in terms of eva should be calculated as follows: minimum financial objective for the year: cost of capital calculation: controllable capital $2,000,000 cost of capital as% .15 cost of capital $300 000 thus, when establishing the annual financial objectives for the division manager, the entrepreneur should expect the division manager to commit to a goal of divisional afler-tax profits in excess of $300,000. it is only when arer-tax profits exceed $300,000 for the year that the entrepreneur is reaping any reward for the entrepreneurial effort. finally, eva can serve as an exit indicator for start-up firms that may never become successful. entrepreneurs have often developed an emotional relationship with their new venture and the emotional tie can be so strong that it clouds the judgment of the entrepreneur. when this happens, the entrepreneur may find it diflicult to divest himself from the business 49 journal ofsmall business strategy vog l2, no, 2 eall/winter 200l as long as it is at least surviving. eva is the measure that can reveal that success is out of reach and substantiate the need to terminate the business. many entrepreneurs, by focusing on accounting profits, are lulled into a sense of success when the business is in trouble. accounting profits do not include the cost of capital. when eva is used as the basis for evaluating the performance of the business, the cost of capital is dealt with explicitly. an evaluation of the economic viability that considers the cost of capital is likely to be very different from an evaluation that focuses only on accounting profits in relation to invested capital (accounting return on investment). the use of eva will provide a strong signal when it is appropriate for the entrepreneur to sell the business and pursue other interests. if the entire business has a capital structure that includes stockholders equity and interestbearing debt equal to $3,000,000, arer-tax cost of capital is l5% per year, and arer-tax operating income is $300,000, the eva is calculated as follows: arer-tax operating income $300,000 less capital charge: investment $3,000,000 cost of capital .15 less capital charge -$450 000 economic value added -$ 150 000 the large negative eva (-$ 150,000) is a strong signal that the business may not be economically viable. divestiture of the business should not proceed based on only the eva calculation. future prospects for the business are of great importance; however, the eva calculation provides a clear signal that the business is not currently covering all of its economic costs. conclusion in this article we have presented a case for eva as a tool that bridges the gap from mere survival to legitimate success for small businesses and entrepreneurial ventures. though there are critics who believe eva should be reserved for mature and established firms with significant assets and few intangibles, we think that the financial measure is also highly applicable to new businesses ventures. first, eva puts the focus on economic costs, not just accounting costs. eva clearly identifies projects that actually add value to the business. additionally, because the measure is short-term focused, it provides immediate results for a business and validates or refutes the financial decisions of the owners. this helps start-up firms grow quickly and develop tactical decision-making skills. as the business grows, the financial tool maintains its relevance throughout the various business life stages. finally, eva, while pointing out investments that contribute to growth and profitability, is also particularly useful as an exit indicator for situations in which it is better to terminate a business rather than devote capital to a lost cause. wise use of the firm's cash is one of the most important considerations that an entrepreneur will face during the early stages of the business. this means making wise investment decisions. in making investment decisions, covering the cost of capital is critical for the success of any business. entrepreneurs and small business owners, who are less likely to recognize that necessity intuitively, can benefit greatly from eva. eva is the tool that bridges the gap between mere survival and legitimate success for small businesses and new ventures. 50 journal ofsmall business strategy vol. i2, no. 2 faivwinter 200i references a y . 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(1998). how nonfinancial performance measures are used. mana ement accountin 79 (8), 44-49. 0/ill ghhy, j., (2ddd). cp i~ k . 8 '0 (25), 3(-36. sidney j. battendale is a professor of accountancy in the college of business and public administraiion at the university of louisville. he obtained his doctorate in business administration at indiana university and is a certified accountant, a certified management accountant, and certified in financial management. he is a member of the american accounting association, american institute of certified public accountants, and the institute of management accountants. dr. baxendale has published in the journal of cost management, management accounting, and strategic finance. leigli bowen is a graduate assistant in the entrepreneurship program and an m.b.a. candidate at the university of louisville in kentucky. she is also the founder and owner of campus quilt company, also based in louisville. in 2000, ms. bowen won the newkirkmoore award for female entrepreneurs. 51 http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2020, vol. 30, no. 03, 102-126 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2020 small business institute® w w w. j s b s . o rg introduction 1president university, faculty of business, jababeka education park, jl. ki hajar dewantara, rt.2/rw.4, mekarmukti, north cikarang, bekasi, west java 17530, indonesia, adhi.setyo@president.ac.id 2universitas indonesia, graduate school of management, jl. margonda raya, pondok cina, kecamatan beji, kota depok, jawa barat 16424, indonesia adhi.setyo@ui.ac.id 3universitas indonesia, graduate school of management, jl. margonda raya, pondok cina, kecamatan beji, kota depok, jawa barat 16424, indonesia ruslan.prijadi@ui.ac.id 4universitas indonesia, graduate school of management, jl. margonda raya, pondok cina, kecamatan beji, kota depok, jawa barat 16424, indonesia, tebalqiah@gmail.com how open innovation strategy and effectuation within platform ecosystem can foster innovation performance: evidence from digital multi-sided platform startups multi-sided platform, open innovation, user communities, supporting partner firm management practice, platform ecosystem, platform-based entrepreneurship, effectuation apa citation information: santoso, a. s., prijadi, r., & balqiah, t. e. (2020). how open innovation strategy and effectuation within platform ecosystem can foster innovation performance: evidence from digital multi-sided platform startups. journal of small business strategy, 30(3), 102-126. along with the rapid growth of digital technology, the phenomena about digital entrepreneurial firms that adopt a multi-sided platform (msp) business model, such as alibaba.com, airbnb, go-jek, facebook, tripadvisor.com, or instagram, have been rising in recent years (kenney & zysman, 2016). msp itself is defined as an “organization that creates value primarily by enabling direct interaction between two (or more) distinct types of affiliated customers” (hagiu & wright, 2015, p.185). the affiliated customers, such as users and other digital platforms that utilize msp firms services, are also called as platform complementors (gawer & cusumano, 2014). as an emerging business model, strategic management and entrepreneurship scholars categorize msp firms in two perspectives that is relevant to this study, msp core competence perspective (cusumano & goeldi, 2013) and digital platform ecosystem perspective (gawer & cusumano, 2014). first, the msp core competence perspective by cusumano and goeldi (2013) proposes three msp business model categorizations with different core competencies for each type. it includes voluntary user generated content (ugc)-based msp business model, sharing economy business model, and freemium business model. user generated content-based msp business model (ex: facebook, tripadvisor.com) that allow users to contribute the content in the platform has core competence in collecting valuable data from customers and turn it into revenue. sharing economy business model (ex: airbnb, uber) has core competence in facilitating the transaction between multi-sided markets. lastly, freemium business model, a business model that offers a free version for certain features and premium paid features for the upgrade version (ex: eharmony.com), has core competence in developing superior product platforms such as sophisticated features or algorithm. the second perspective, a perspective known as the digital platform ecosystem (gawer & cusumano, 2014), a perspective that positions a digital firm as a platform leader in the central of the digital platform ecosystem that this article explores how effectuation approaches – entrepreneurial action that deals with a set of means as given and focuses on selecting between possible effects that can be created with that set of means – contribute to digital multi-sided platform (msp) startups significant growth. the study integrates effectuation theory with an open innovation strategy within the platform ecosystem to understand the innovation process under resource constraint, limited knowledge, and uncertainty. our inductive multiple-case study findings from three leading digital msp startups show how their founding team uses the knowledge, ideas, and resources from external parties within the platform ecosystem, including agents, user communities, and supporting partner firms, along with means from the entrepreneurs’ background, in the beginning to produce high growth innovation outcomes. platform-based entrepreneurship becomes the integrating point of effectuation theory from entrepreneurship research and open innovation strategy through strategic management research. the bridge for these two areas suggests implications for platform-based entrepreneurship research in strategic entrepreneurship. adhi s. santoso1,2, ruslan prijadi3, tengku e. balqiah4 http://www.smallbusinessinstitute.biz http://www.jsbs.org 103 a. s. santoso, r. prijadi, & t. e. balqiah journal of small business strategy / vol. 30, no. 3 (2020) / 102-126 provides values for the platform complementors, differentiates the transaction platform and innovation platform. the transaction platform facilitates the transaction between two or more different parties that would be difficult to interact with each other without a platform. on the other hand, the innovation platform facilitates the external innovators (e.g., e-commerce sellers, mobile app developers) who develop complementary services by utilizing digital msp firms technology or features. in line with the digital platform ecosystem perspective, hsieh and wu (2019) created the categorization based on digital msp functionality, including transaction platform, innovation platform, and combination of transaction and innovation platform. as seen in those studies, digital msp business models in every proposed categorization utilize and maximize external resources in the open system. this setting regarding the digital msp business model makes a clear difference between its practice and traditional business model practice. the digital msp firm business models rely on the micro-entrepreneurs who are the platform agents who utilize the msp firms for their business activities, and also another msp firms within the digital entrepreneurial ecosystem (sussan & acs, 2017). the micro-entrepreneurs or another digital msp firm contribution to the platform can be ranging from participating as either buyer or supplier in platform business operation such as uber driver or airbnb host to participating as the platform innovators such as application developer in facebook platform or e-commerce seller who help to innovate the e-commerce platform through varieties products or services. thus, the core competence needed for digital msp firms is minimizing the transaction costs that happened in the platform ecosystem (helfat & raubitschek, 2018). furthermore, from the innovation perspective, platform-based open innovation plays a significant role in new msp firm growth since their business model is implemented in the open system (chesbrough & bogers, 2014). in the pre-venturing entrepreneurship stream discussion, the rise of digital msp firms mentioned above is closely associated with the young entrepreneurial team who found the venture; therefore, the firms can be mention as digital msp startups (ghezzi & cavallo, 2020). in recent years, there is growing attention to open innovation research in the entrepreneurship area, especially in new venture contexts. for example, greul et al. (2018) inductive study reveals the condition that triggers a new venture to adopt (or not to adopt) inbound or outbound open innovation. eftekhari and bogers (2015) depict how open innovation may lead to new venture survival. even though this area of research is growing, there are still limited studies that examine the relationship between entrepreneurship and platform-based open innovation strategy that also develop the platform core competencies (hsieh & wu, 2019). for example, while extant research has explored absorptive capacity as pre-condition of open innovation practice (west & bogers, 2014), however, how young entrepreneurial team with limited absorptive capacity due to limited resource and experience implement open platform strategy through digital msp business model has not yet fully understood (patton, 2014). on the other hand, digital msp startups often produce a nascent business model that is still unproven (choudary et al., 2015). in this case, the effectuation approach is often used by entrepreneurs to do foresight and achieve new venture performance (chandler et al., 2011; djuricic & bootz, 2018; fisher, 2012; read et al., 2009; sarasvathy, 2001). effectuation theory scopes that include means driven, non-predictive control, leverage contingencies, and design the environment (dew et al., 2008; sarasvathy, 2001, 2009) has potential to explain new digital venture platform-based entrepreneurship process within open innovation strategy that maximize the roles of platform ecosystem members such as agents, users communities, and supporting partner firms (saebi & foss, 2015). in order to explore the paradox about how the young entrepreneurs with less experience and resource constraint can produce high growth digital msp business model, effectuation logic provides a perspective to examine how the founding team maximizes and expand their means during innovation process (ghezzi, 2019). the effectuation theory has been developing steadily for the last decades as the alternative theory that explains how entrepreneurs have different logic from mba-type managers who commonly use causation logic (sarasvathy, 2001). the causation logic tends to pre-determined the goals and accumulates the resource to achieve the goals while effectuation logic tends to start with a given set of resources and co-create the goals along with the partners or stakeholders that willing to collaborate with the entrepreneurs (dew et al., 2009; sarasvathy, 2009). the co-creation process in the effectuation logic, a mutual value creation process that involves different stakeholders within platform ecosystem and is expanded together through platform engagement, is often discussed in the open innovation process (enkel et al., 2009; ghezzi, 2019; piller et al., 2012; west & bogers, 2014). however, in both entrepreneurship and open innovation literature, the relationship between effectuation and open innovation strategy has yet to be proposed. nevertheless, the importance of studying the bridges in these two theories has been discussed in several works of literature about digital entrepreneurship. (ghezzi, 2019; sussan & acs, 2017). we address the gap above by investigating how effectuation can facilitate digital msp startups’ open innovation practice to produce high innovation performance. 104 a. s. santoso, r. prijadi, & t. e. balqiah journal of small business strategy / vol. 30, no. 3 (2020) / 102-126 hence, our main objective in this study is to examine the platform-based innovation process by integrating open innovation strategy within the platform ecosystem (saebi & foss, 2015) with effectuation theory (sarasvathy 2001, 2009). the effort in this study to integrate these two theories is important since it can deny open innovation theory assumptions regarding the organization that can implement it should have the absorptive capacity with high resources and high prior experience (davis, 1971; sarasvathy, 2001; west & bogers, 2014). contrarily, the contextual gap regarding the implementation of an open innovation strategy in small and young firms with limited resources and experiences is addressed in this study (salder et al., 2020). the effectuation process used by the digital msp startups may develop the requirement to implement an open innovation strategy. thus, it can complete the inadequacy open innovation theory in the digital msp startups context as well as the inadequacy of effectuation theory for the digital msp business model where the stakeholders can be from the entities within the ecosystem (locke & golden-biddle, 1997). in order to achieve the research objective, we raise research questions, including: how do young entrepreneurial teams effectuating the development of high growth innovation outcomes for digital msp startups? what are the roles of the platform ecosystem in the platform-based entrepreneurship process? the research question addresses the innovation performance and innovation strategy concepts. specifically, it aims to investigate the process of young entrepreneurs to achieve high startups’ growth as an outcome of the innovation (i.e., the innovation performance). furthermore, this research gives emphasis on the innovation process that is a part of the innovation strategy. we investigate these research questions by using multiple case study technique that sheds lights on the platform-based open innovation practice in emerging economies context. the emerging economies contextual become important for both effectuation and platform-based open innovation research since it has high uncertainty and also has a high number of users that contribute to the msp firm within the digital entrepreneurial ecosystem for their living or lifestyle (hsieh & wu, 2019). this study offers contributions to effectuation literature as well as open innovation literature in several areas. first, it explores the phenomenon of platform-based entrepreneurship as an entrepreneurial process. this perspective integrates the open innovation strategy within the platform ecosystem with effectuation theory. while open innovation strategy in the platform ecosystem explains the network-based open business model at the ecosystem level, effectuation theory helps to understand the platform-based entrepreneurship process at the young entrepreneurial team level. integrating those two theories can be a respond for research agenda about “conceptual and empirical model of the moderation and interaction effect of digital governance and digital user citizenship on the path from digital entrepreneurship to digital marketplace” (sussan & acs, 2017, p.71) as well as “enablers and barriers to adopt the platform-based entrepreneurship strategy” (hsieh & wu, 2019, p. 320). second, as mentioned previously, our research contributes to the missing link about how young entrepreneurial teams with limited knowledge and experience are able to produce high innovation performance (hulsink & koek, 2014). even more, they develop high innovation performance through open innovation strategy as well as an open business model that needs high absorptive capacity through experiences and resource stock (west & bogers, 2014). whereas, most innovation literature mentioned that decent knowledge is a pre-condition of any innovation outcomes (ex: galunic & rodan, 1998; leiponen & helfat, 2010; mardani et al., 2018; nonaka & takeuchi, 1995; santoro et al., 2018). the nature of effectuation theory and open innovation strategy within the platform ecosystem helps to understand this “anomaly” process. third, this study enriches the entrepreneurship literature with research that explores the platform-based startups with digital ecosystem perspective. the study with this perspective is still limited in the entrepreneurship literature since most of the researches focuses on the individual entrepreneurs or teams as the growth driver (daunfeldt & halvarsso, 2015). the structure of the article is presented as follows; we start with the literature review about the theoretical framework used in this study in the next section. then, we explain the detail about qualitative methodology, multiple-case study, used in the research. later, we discuss the findings from the case studies. next, we develop the proposition based on the findings and present the conclusions, implications, as well as future research direction for platform-based entrepreneurship in both entrepreneurship and strategic management literature. theoretical foundation the theoretical foundation discussed in this study can be presented as seen in figure 1. this study tries to integrate effectuation theory (sarasvathy, 2001; 2009) and open innovation theory (saebi & foss, 2015) in the platform ecosystem context (gawer & cusumano, 2014). it explains the different approaches in generating innovation outcomes from young entrepreneurial teams who develop digital msp startups compare to the established firm. in developing innovation outcome from open innovation process, the es105 a. s. santoso, r. prijadi, & t. e. balqiah journal of small business strategy / vol. 30, no. 3 (2020) / 102-126 tablished firm tends to use causation logic that defines the innovation goal in the beginning and then accumulate the resources, knowledge, or ideas from external parties (chandler et al., 2011; chesbrough, 2006). on the other hand, digital msp startups use effectual logic that has open-ended goals (ghezzi, 2019). they start with what they already have, and then the goals can be iteratively changes based on their experimentation and interaction with stakeholders. in the platform ecosystem context, the effectual logic of digital msp startups is integrated with open innovation and develops a process that is called platform-based entrepreneurship. in this matter, since the digital msp startups have limited resources and prior experience, they conduct the effectuation process by leveraging the external resources (open innovation) from the stakeholders within the platform ecosystem such as platform agent, user communities, or supporting partner firms. the innovation outcome is generated iteratively from the successful experimentation in this process. platform ecosystem knowledge ideas resource open innovation effectuation platform-based entrepreneurship innovation outcome figure 1. platform-based entrepreneurship framework platform-based entrepreneurship in emerging economies msp is defined as an ‘organization that creates value primarily by enabling direct interaction between two (or more) distinct types of affiliated customers’ (hagiu & wright, 2014, p.185). in the recent development of this concept, the roles of each platform ecosystem members are discussed as the actors that provide the platform growth through the digital entrepreneurial ecosystem. the digital entrepreneurial ecosystem itself is the integration concept between the digital ecosystem and entrepreneurial ecosystem that consists of the integration of agents and users within the platform (sussan & acs, 2017). in this case, agents are the parties that perform as “supplier-side” of the platform such as micro-entrepreneurs and small businesses, while users are the parties who use the service from the agents facilitated by the digital platform. in certain business model where the users can participate in both taking and giving intellectual property such as open-source software and social media, users can also produce innovation outcomes within the digital platform that can be used for other users. the users often form user communities to maximize and enhance their innovation outcomes and business activities (sims & seidel, 2017). in the innovation platform perspective, the agents and users communities, as well as supporting partner firms, are categorized as the complementors that drive platforms’ innovation as the ecosystem-based organization (gawer & cusumano, 2014). in contextual perspective, emerging market such as indonesia, where there is an enormous number of the necessity-based entrepreneur (who will take a role as agents) and internet, is very suitable for digital msp startups with the characteristic discussed in this section. as an emerging market, indonesia has remarkable growth in the past few years, including in the digital economy sector. the growth engine for this phenomenon mostly comes from digital msp startups that maximize both of the agents and users within their platform ecosystem, such as go-jek, tokopedia, bukalapak, midtrans, kitabisa, olx, tees.co.id, sribulancer, and so on. for example, in 2017 gojek made 3 million transactions of ‘martabak’ food from 106 a. s. santoso, r. prijadi, & t. e. balqiah journal of small business strategy / vol. 30, no. 3 (2020) / 102-126 its go-food services, a peer-to-peer (p2p) food delivery service, with an economic value around usd $10 million (nurbayti, 2019). in a recent study, even go-jek main service, p2p online transportation, can influence their users for not buying their private vehicles (santoso et al., 2018). another example, tokopedia, leading indonesian e-commerce, reach the sales of $1 billion in 2016 (kowanda et al., 2018). in 2017, tokopedia just got a remarkable $1.1 billion investment from alibaba group thanks to its performance (kowanda et al., 2018). commonly, those digital msp startups evolved and expanded their business model over time to maintain their competitive advantage (santoso & wahyuni, 2018). for example, go-jek introduced go-food for the food delivery industry by leveraging its main service, p2p online transportation, and accessing the agents, the restaurant owners. tokopedia expanded its services from retail e-commerce into a digital platform that can serve anything, including zakat, donation, and qurban, by using their existing platform after they have access to those islamic activities providers. those two examples show that the new innovated business model from the collaboration between digital msp startups and the agents provides a win-to-win situation. for the digital msp startups, it expands their business portfolio to enhance the platform performance overall with an efficient cost-to-expansion scale ratio. on the other hand, for the agents, the digital msp startups platform expands the channel for accessing the customers as well as innovate their conventional trade-based business model into the more advanced business model such as online zakat or qurban (setiawan et al., 2020). in terms of service and product variation within the platform, there are digital msp startups that control the service offered by the agents such as go-jek, uber, ubiklan, and grab. in this business model, the services conducted by the agents are pretty much similar since the agents commonly perform as labors. on the other hand, there are also digital msp startups that use the open business model with more dependency on the agents’ innovation such as tees. co.id that allow the crowd to design their t-shirt and sell them to the platform user. another example is tokopedia, the largest e-commerce in indonesia, that allow the user to sell anything needed for the customer. there is a trend where the nascent entrepreneurs in indonesia adopt e-marketplace right away after they start their business (wiradinata, 2017). since the source of the sold goods come from the crowds, this platform enjoys the innovative inbound products that often created as the results of environmental changes. for example, when indonesian government implements cashless payment for every highway gates, there are a bunch of sellers who offer “tongtoll” tools (a stick to put the e-toll prepaid cards) as the cheap alternative of e-toll pass on-board unit (obu) right away after the new regulation was announced. the open innovation process that happened in the tokopedia msp business model can be presented in figure 2. smes seller multi-sided platform firm complementor’s customer amil zakat smes seller’s emerging customer zakat payer e-commerce (ex: tokopedia) co-creation / knowledge flow e-commerce customer new market accumulated market platform complementors (agents) platform customers (user communities) third-partly logistic (ex: jne, go-jek, ninja express) tpl user new market co-creation / knowledge flow co-creation / knowledge flow figure 2. example of open innovation process on msp business model 107 a. s. santoso, r. prijadi, & t. e. balqiah journal of small business strategy / vol. 30, no. 3 (2020) / 102-126 as the typical marketplace-based e-commerce platform, tokopedia offers limited or no internal content to serve a certain market. therefore, this type of msp firm starts with an outbound open innovation process that allows under-utilized assets or ideas to be used outside the organization by other entities for their business and market (chesbrough & bogers, 2014). in this open innovation process, the msp firm produces the core infrastructures or features that enable crowds or communities to use them for their benefit. tokopedia creates the end-to-end online platform infrastructures that allow smes to open their online store based on their resources with various content produced outside the msp firm r&d division. the online store infrastructures are very valuable for smes as the platform agent or user communities since it is costly to create and maintain an online store platform by themselves. on the other hand, the content creation results from the smes provide benefit to the msp firm through the new market from the smes network. by using this method, some niche market that too small to be justified by internal r&d division also can be served through crowds or communities. as a result, these new contents and markets can increase the revenue, platform traffic, and also brand awareness in their industry. for instance, when an emerging smes seller start to sell new products in the platform such as used car, at the same time, they serve used car markets that haven’t been served previously by the marketplace e-commerce. in another example, amil zakat institution, the institution who collect islamic mandatory donation, such as rumah zakat or dompet dhuafa also use marketplace e-commerce infrastructure to serve their markets, zakat payer, that haven’t been served by marketplace e-commerce. the new markets from the outbound open innovation process are accumulated as the msp firm’s market within the platform ecosystem. at this point, the inbound open innovation process can happen when the innovation and knowledge from crowds or communities that create the new market flow back to the msp firm. inbound open innovation process opening up the firm innovation process by involving external contributions and inputs (chesbrough & bogers, 2014). the accumulated different markets brought by the smes can be served by other smes in the platform with various products or services. thus, both the economy of scale and economies of scope can be achieved within the platform (chesbrough, 2011). in the msp platform setting, the inbound knowledge flow is not only come from the smes as suppliers but also come from customers. beside leads to some incremental innovation through data-driven insight analysis, the knowledge may also lead to business model innovation (e.g., tokopedia) and also open service innovation (e.g., sejasa, go-jek) (santoso & wahyuni, 2018). the open service innovation often shifts the product functionality into the service-based offering, such as product-service system, where the offering is turning from product owning into the pay-per-use method (santoso & erdaka, 2015). this large scale of experimentation and exploration from the inbound open innovation process is something that internal msp firm r&d division cannot do by themselves. for msp firms with b2b or b2c business models, their open innovation practice commonly starts with the inbound process. for instance, the branded sellers and smes sellers provide inbound new products/services to the platform. third-party logistics provides the solution to innovate the fulfillment process. the customers also provide feedback for the platform services that can be used to improve or innovate its services. the combination between inbound open innovation process and outbound open innovation process that includes value co-creation as well as giving and taking practice between msp firm and its crowds or communities results in coupled open innovation process (sims & seidel, 2017). the co-creation activities mostly related to the user-related part of open innovation (rayna & striukova, 2015). in this matter, the users contribute either in product design or product manufacturing and distribution. for example, in the design marketplace, the crowds or communities can provide the design through the crowdsourcing method, then the msp firm does the manufacturing, packaging, and delivery of the final product to the end-user (brabham, 2008). thus, the msp firms will have an extended product portfolio that co-created together with the crowds or communities. in msp firm context, the crowds or communities can be a firm. therefore, coupled io processes can include joint ventures, strategic alliances, or consortiums that produce innovation together. for example, an e-commerce msp firms can work together with the logistic company to create an instant delivery service that closes the gap between online and traditional shopping in terms of the product delivery to the end-user (santoso & wahyuni, 2018). tokopedia also creates a new co-created business model to facilitate the zakat payer in making a donation with amil zakat institution. these facts are consistent with the view of agents that creative (florida, 2004) and innovative (acs & audretsch, 1988). from a digital entrepreneurial ecosystem perspective, these agents are the source of the digital msp startups to do schumpeterian innovation by optimizing the utilization and reconfiguring the digital platform into new systems and new networks as the exogenous model (sussan & acs, 2017). later, as the platform manager, the digital msp startups acquire and monetize the users through this effort. thus, the agents’ innovation role for the digital msp startups with 108 a. s. santoso, r. prijadi, & t. e. balqiah journal of small business strategy / vol. 30, no. 3 (2020) / 102-126 an open business model has a more significant impact on the platform innovation from the routines perspective. open innovation strategy in platform ecosystem the open innovation (oi) concept was coined with the focus of the new innovation process logic from external knowledge (chesbrough, 2003). this concept opens up a new paradigm to overcome the limitations of closed innovation within the firm that assumes the boundaries of the firm is dependent on the strategic factor market acquired and internalized inside the firm organization (barney, 1988; peteraf, 1993). based on this resource-based view (rbv) perspective, the oi concept expands the closed boundary of the firm with external resources utilization. later, chesbrough and bogers (2014) update the definition of oi as a distributed innovation process that utilizes purposively managed knowledge flow across firm boundaries and use both monetary and non-monetary mechanisms in line with the firm’s business model. since the digital msp startups innovation strategy within their platform ecosystem mostly involves the platform members, the platform ecosystem is closely related to oi. for example, apple relies on the musician and the app developers to enrich their itunes store in order to enhance the value of its core mobile products, iphone, and ipad (boudreau, 2012). google and yahoo also rely on partnering portfolios in their value-creation activities for their entrepreneurial firm growth (rindova et al., 2012, 2016). in the oi perspective, the platform is an essential element for leveraging external resources of innovation in obtaining phase within the enabling/filtering category (jeppesen & lakhani, 2010). in the bigger picture, the key phase for profiting from external sources of innovation includes obtaining, integrating, commercializing, and interaction (west & bogers, 2014). in oi research, agents and users communities are considered as valuable external resources for firm collaboration (piller & west, 2014; von hippel, 2005; west & sims, 2018). they have a unique role that even though the agents and users communities are not officially the employees of the firm, the organization may depend on them as the source of innovation. the collaboration between firm and agents or users communities leverage the multiple actors that can produce knowledge and information needed to create the innovation or support the firms’ open innovation strategy. the state of the art of agents or user community-based oi is categorized based on the combination of platform ecosystem concept that categorizes the actors as msp firm and its complementors (gawer & cusumano, 2014) and agents and user community categorization in oi (west & sims, 2018). in the beginning, the coupled oi concept was influenced by the interaction within open source software (oss) communities that common to share the source code and use the code shared by the other community member (stallman, 1985). from the platform ecosystem perspective, the community members become the complementors of the platform since their innovation activities affect the overall platform innovation (gawer & cusumano, 2002, 2008, 2014). not the only community, the crowds that detached from firms boundaries also contribute to the platform innovation (jeppersen & lakhani, 2010; stanko & henard, 2017). for these reasons, there is growing research interest on the innovation process and their outcomes within the platform that include agents or user community members interaction as well as digital msp startups interactions (dahlander & wallin, 2006; tien & cheng, 2017). the state-of-the-art agents or user communities based oi typically have four patterns that include crowds or communities members’ motivation, their interaction within the agents and users communities as well as its outcome, strategic effect for the complementors, and the msp firms strategy in the platform ecosystem. in these topics, the oi outcomes can provide the benefit for both msp firms as well as the complementors. in the platform ecosystem context, the oi scholars record the motivation for platform members to participate in platform crowds or communities for both monetary and non-monetary reason that includes intrinsic motives, extrinsic motives, and social motives (antikainen & vaataja, 2010). they are ranging from rewards or incentives (leimeister et al., 2009), firm recognition (jeppesen & frederiksen, 2006), interest in the creative process (füller et al., 2008), enjoyment of online interaction (wiertz & de ruyter, 2007) perceive value learning and fun (nambisan & baron, 2009), peer network effects (boudreau & jeppesen, 2015) to “personal but shared” needs (budhathoki & haythornthwaite, 2013). when the agents or users communities members join in a platform ecosystem, they will have peer interaction with another member or the msp firms that create a certain outcome for them as the platform complementors. for example, the free and open-source (foss) community members sponsored by msp firms tend to have more interaction with individuals rather than with other sponsored members and also seek the central individuals within the community (dahlander & wallin, 2006). those sponsored members take a role as ‘insiders’ for msp firms to get access to the community and utilize it for the firm benefit. the interaction between community members through discussion and other peer-to-peer communication forms can provide the digital msp firm the valuable ideas and knowledge to create incremental innovations, innovations that new to the firm, and 109 a. s. santoso, r. prijadi, & t. e. balqiah journal of small business strategy / vol. 30, no. 3 (2020) / 102-126 come from the progressive refinement of existing solution (tien & cheng, 2017). this interaction can also drive the non-canonical community within the canonical community that can produce innovation for the firm through the working and learning process together with the peers (brown & duguid, 1991). forte, larco, and bruckman (2009) suggest that as the community grows up, the role of a senior community member to keep self-governance mechanism by guiding the social norm and policy but utilize distributed decision-making at the same time. the oi scholars also noted the occurrences of strategic effect for complementors as a result of the interaction process with other complementors. the taking and giving of source code and help practice in the foss community makes the firm as community member expand the social ties, have conservative strategic posture, and have incremental innovation orientation (sims & seidel, 2017). in the recent development, there are growing discussions about the business model that support oi in terms of content, structure, and governance dimension called the open business model (saebi & foss, 2015). these discussions are motivated by the different results of the organizations that implement open innovation strategy since the business models are not fit. then, this study proposes the four typologies of the business model that fit with each open innovation strategy including efficiency-centric open business model for market-based innovation strategy, user-centric open business model for crowd-based innovation strategy, collaborative open business model for collaborative innovation strategy, and open platform business model for network-based innovation strategy. the ability to develop these business models that fit with each open innovation strategy depends on the digital msp startups’ integrative capabilities (helfat & raubitschek, 2018). the integrative capabilities contribute to digital msp startups ability to design and transform their business model that can orchestrate the digital msp ecosystem members, scanning/sensing the opportunities based on their core products/services and the digital ecosystem member knowledge, lower the transaction costs of outsourcing to agents, users communities, or supporting partners firms, develop positive cross-side network effect, as well as expand the boundary of digital msp startups. effectuation in platform ecosystem effectuation has evolved from emerging to developed theories about new venture creation in the past decades. in the early theory development phase, effectuation is defined as a process where entrepreneurs take ‘a set of means as given and focus on selecting between possible effects that can be created with that set of means’ (sarasvathy, 2001). in effectuation theory, means consists of the entrepreneurs’ relevant “what i know,” “who i am,” and “whom i know” that affect greatly on how entrepreneurs behave in the new venture creation stage (read et al., 2009). this process enables the entrepreneurs to create a new business model that has not been implemented previously since the underlying logic is controlling the future at certain extent without predicting the future (fisher, 2012; reymen et al., 2017). in this case, the established new ventures also able to create new markets through cooperating with external stakeholders as well as strategic alliances as their means. after sarasvathy (2001) seminal work, entrepreneurship scholars start to explore the usage of effectuation, the antecedents and consequences of effectuation in a new venture context, its interplay with the causation process, as well as its relationship with other theories and concepts. effectuation process has been found useful for new venture creation in the uncertainty and unpredictable context such as turbulent environment in transition markets (mainela & puhakka, 2009; nowinski, & rialp, 2013), robust development process (midler & silberzahn, 2008), international new venture (harms & schiele, 2012; maine et al., 2015). effectuation process also differentiates how entrepreneurs in the new venture and managers in established behave in their decision-making (hayton et al., 2011; sarasvathy, 2009). specifically, effectuation has become the rudimentary approach for new venture creation by entrepreneurial teams such as experience entrepreneurs (dew et al., 2008; fiet et al., 2013; harms & schiele, 2012), young entrepreneurs (hulsink & koek, 2014; laskovaia et al., 2017), family firms co-founders (hayton et al., 2011; miller et al., 2016), and also university spin-offs (hannibal et al., 2016). the studies about new venture show that effectuation as well as its second-order constructs that include experimentation, affordable loss, flexibility, pre-commitment, and strategic alliances, have association and consequences with new venture performance (chandler et al., 2011; guo et al., 2016; read et al., 2009) as well as creativity in its new product development (blauth et al., 2014). in order to perform effectual action and behavior, there are various conditions or antecedents for the entrepreneurial teams in new venture creation context such as entrepreneurial experience (harms & schiele, 2012), entrepreneurial self-efficacy (hinz, 2017), patterns of opportunity discovery and innovativeness of opportunity (long et al., 2017), social media interaction (fischer & reuber, 2011), socially supportive culture (laskovaia et al., 2017), as well as environmental uncertainty and venture resource position (reymen et al., 2015). however, in order to achieve sustainable new venture performance, the effectuation process alone is not 110 a. s. santoso, r. prijadi, & t. e. balqiah journal of small business strategy / vol. 30, no. 3 (2020) / 102-126 enough. several studies reveal that the interplay between the effectuation and causation process is needed for each different purpose. for example, effectuation contributes to the new internet venture growth through resource bundling, while causation contributes to it through stabilizing resources (guo et al., 2016). when environmental uncertainty increase and ventures resource position decrease, the new venture scope becomes wider, and they drive effectual logic for the decision-making. on the other hand, when environmental uncertainty decrease and stakeholder pressure increase, the new ventures scope become narrower and they drive causation logic for their decision-making (reymen et al., 2015). in the new venture business model development phase, effectual logic is used to create a viable value proposition for a certain customer segment while causal logic is used for defining business model components that related with value proposition and customer segment (reymen et al., 2017). thus, the processes of effectuation and causation are dynamic in the new venture creation process. in the recent study, the underlying cognitive logic with effectuation logic shows that it plays an essential role in early stage of digital msp new venture creation that relates with some lean startup approaches (lsas) context including resource scarcity, options, experimenting, leverage contingencies, testing, iteration, accepting change, shaping reality, proactivity, and also limiting investment (ghezzi, 2019). lsas are the set of methods to test the value proposition and validate the business models that consist of customer development (blank, 2007) and lean startup development (ries, 2011). in this context, the digital ecosystem members (customers in lsas) have significant roles in helping the digital msp startups to produce high innovation performance in uncertainty situations through a suitable business model. for example, the feedback from both merchant (agents) and users help the digital msp startups to run the experiment for both markets in a local setting to develop outstanding value-added services and ensure higher penetration rate (ghezzi & cavallo, 2020). another example, the interaction with agents and users are needed to perform decent matchmaking between both sides of the market as well as develop fit profit formula from them. these experiments use effectuation principle, affordable loss, called minimum viable product (mvp) in lsas. the mvp (business model) will be iterated based on the customer feedback in such a short time-window until the digital msp startups produce the innovation outcomes that achieve product-market fit (blank & dorf, 2012). thus, these processes need agile organizations as well as a business model. when the environmental dynamism and uncertainty are high, strategic agility in early stage of digital msp startups is more needed than operational agility (ghezzi & cavallo, 2020). the implementation of effectuation theory in examining the innovation outcomes itself has been conducted in several studies. for example, roach et al. (2016) study show that product/service innovation as the sme’s innovation outcomes is determined by two effectuation principles, means, and leverage contingencies. as a result, product/ service innovation generates innovation performance in this context. in the other study, effectuation also determines service innovation performance (jisr & maamari, 2017). another example, szambelan et al. (2019) study, mentions that two effectuation principles, leverage contingencies, and means, negatively associates with market-based innovation barriers that also has a negative association with innovation performance. comparison of open innovation strategy and effectuation in platform ecosystem in order to combine two different theories above in the theoretical rigor stage, examining interactive effects as well as establishing complementary is needed (bello & kostova, 2012). thus, this section focuses on presenting the differences and commonalities of open innovation strategy and effectuation in platform settings. our article identifies the differences and commonalities in these two theories, in particular, the implementation in the platform ecosystem setting. first, both of these theories aim to achieve outstanding innovation performance as the determinant of the organization’s competitive advantage by leveraging external resources. in an open innovation strategy, the determinant of innovation performance is organization knowledge breadth and/or knowledge depth (chesbrough & bogers, 2014). oi works of literature emphasize the valuable knowledge flow from or to external parties to accelerate innovation performance (chesbrough, 2006; gassman & enkel, 2004). in this context, there are two types of external knowledge search. breadth knowledge search such as crowdsourcing captures the diverse knowledge from external sources to provide knowledge input for the innovation activities (amara & landry, 2005; leiponen & helfat, 2010). in contrast, depth knowledge searches such as r&d alliances conduct a high intensity of external knowledge flow from external parties that deeply integrated with the firms’ innovation activities (laursen & salter, 2006; leiponen & helfat, 2010). on the other hand, in effectuation theory, the innovation performance is determined by maximizing means (whom i know) and leveraging contingencies through experimentation or flexibility based on the co-creation, result, and feedback from the digital ecosystem members (roach et al., 2016; sarasvathy, 2009). the means will be expanded overtime after the entrepreneurs interact with external stakeholders. 111 a. s. santoso, r. prijadi, & t. e. balqiah journal of small business strategy / vol. 30, no. 3 (2020) / 102-126 second, both open innovation strategy and effectuation theory coordinate the value creation with external parties. network-based open innovation strategy with open platform business models such as apple iphone app store creates the highest potential of co-creation from a multitude of different stakeholders (saebi & foss, 2015). in this setting, msp firms select and integrate new business ideas and opportunities from both internal and external organizations and also set up a valuable incentive mechanism for those who contribute to the innovation (foss et al., 2013). on the other hand, in effectuation theory, the external stakeholders are expanded through unplanned networking action and also contribute to means expansion through co-creation (galkina & chetty, 2015). in the platform setting, the external stakeholders can have agents, user communities, or supporting partner firms’ roles. the stakeholders that fit with the digital msp startups business model will expand the numbers of the agents, user communities, or supporting partner firms with the same category with scalable growth. third, both open innovation strategy and effectuation theory propose essential organization culture to achieve high innovation performance. open innovation strategy proposed two types of essential organizational culture, avoid not-invented-here (nih) and not-sold-here (nsh) syndrome (west & bogers, 2014). avoid nih syndrome is essential for inbound open innovation practice to avoid the reluctance to use the ideas, knowledge, or even innovation from external parties. in contrast, avoid nsh syndrome is essential for outbound innovation practice to allow external parties to utilize the unused asset or internal innovation for their business activities. on the other hand, effectuation theory proposes the agile business model and high flexibility as well as social support culture to support the innovation process (ghezzi, 2019); laskovaia et al., 2017). during the early stage of new venture creation, the business model may change quite often depends on the entrepreneurs’ interaction with external stakeholders and how they leverage contingencies afterward (barwinski et al., 2020).. fourth, both of the theories suggest an important role for digital platform ecosystem members. oi literature mentions that the firm performance measures innovation performance contributed from the innovation outcomes (tien & cheng, 2017). in the platform setting, most of the platform performance is contributed by the platform ecosystem member activities. open innovation strategy suggests that the digital ecosystem members, including agents, user communities, and supporting partner firms involved in the re-organization production and distribution system as platform complementors with the formal procedure (saebi & foss, 2015). however, effectuation theory suggests both formal and informal external stakeholders’ contributions based on their pre-commitment with an open structure toward the organization (read et al., 2009). the co-creation process can be implemented in the informal procedure as well. fifth, in terms of handling uncertainties, both theories have the mechanism to be implemented. open innovation strategy suggests a market-based innovation strategy to reduce the uncertainty (saebi & foss, 2015). when the innovation comes from the market that close to the end-users, the distance search activities of the platform are converted to local search activities that have less uncertainty (afuah & tucci, 2012). on the other hand, effectuation theory suggests handling collective uncertainty through collective experimentation that is conducted with the digital ecosystem members. this process not only helps the digital msp startups to reduce uncertainty but also helps agents, user communities, as well as supporting platform firms to handle their uncertainty within the platform ecosystem. the summary of the comparison in these two theories is presented in table 1. table 1 a comparison of open innovation strategy and effectuation in the platform ecosystem setting open innovation strategy in platform ecosystem (saebi & foss, 2015) effectuation in platform ecosystem (de vasconcelos gomes et al., 2018; ghezzi, 2019; read et al., 2009; sarasvathy, 2001, 2009) innovation performance source knowledge breadth and/or knowledge depth maximizing means and leverage contingencies value creation coordination coordinate multiple stakeholders through the business model as the open-innovation platform network coordination through stakeholder co-creation essential organization culture avoid not-invented-here (nih) and not-sold-here (nsh) syndrome socially supportive culture, agile/high flexibility platform ecosystem member role involve in formal re-organization of the production and distribution system as complementors involve in both formal and informal platform activities based on stakeholders’ pre-commitment with open structure uncertainty management uncertainty reduction through market-based innovation strategy managing collective uncertainties within the platform ecosystem through collective experimentation 112 a. s. santoso, r. prijadi, & t. e. balqiah journal of small business strategy / vol. 30, no. 3 (2020) / 102-126 our comparison shows that even though there are differences between open innovation strategy and effectuation theory within the platform ecosystem, there are also common understanding in platform ecosystem practices. therefore, effectuation theory can complement the open innovation strategy and help to explain the anomaly of high innovation performance by less experience young digital msp startups. the integration of these two theories helps to capture the innovation process of digital msp startups. finally, the next section discusses multiple-case study research that explains about this integration based on the phenomena in the indonesian digital msp startups context. method since there is still a limited holistic approach to understand how effectuation influences co-creation capacity development, the researcher conducts an exploratory and inductive multiple-case study (eisenhardt, 1989; yin, 2009). the qualitative approach is appropriate to analyze the nascent theory, such as effectuation (edmondson & mcmanus, 2007; perry et al., 2012). furthermore, the case study approach can explore situational constraints as well as the local context that provide the holistic perspective of the phenomenon (yin, 2009). it is also a suitable methodology for theory development (eisenhardt, 1989; eisenhardt & graebner, 2007). thus, it is relevant to the nature of this study that is not intended to test the hypothesis or proposition, but it has the objective to extend the effectuation theory toward open innovation strategy within the platform ecosystem theory. to examine the effectuation process in the new venture that conducts the oi process above, we choose the personnel of the founding team from the digital msp startups as respondents. then, to avoid the bias on the innovation capability of the team that might be developed from the members’ previous experience, we choose the new internet-based msp startups that the co-founders are the young people with a few experiences in creating ventures or managing firms. they founded the ventures with the nascent business model while they are 20s. according to guo et al., (2016) and milanov and fernhaber (2009), the age of new internet ventures are ten years or younger. moreover, the context in this study is chosen based on the context fit with effectuation that includes a new and unproven business model (fisher, 2012; sarasvathy, 2001), and emerging economies (cai et al., 2017). these contexts have very high market growth as well as high uncertainty due to environmental dynamism. thus, exploratory learning is needed to overcome the challenge. based on the respondent criteria above, the researcher uses three leading local indonesian digital msp startups that implement oi practices with their agents, user communities, or supporting management practice as respondents. these digital msp startups implement a nascent and unproven business model that has high uncertainty. the first digital msp startup, p2prentalco., is one of the early digital msp startups in indonesia that uses peer-to-peer (p2p) rental business model. the second company, socialculinaryco., is the first social media platform for recipe in indonesia. the last one, socialcrowdco., is one of the first crowdfunding platforms for social causes in indonesia that has promising growth up until this article is written. the author summarizes the overview of these three digital msp startups in table 2. table 2 overview of digital msp startups interviewed digital msp startup funding stages age (years) domain number of employees agents, user communities, or supporting partner firms p2prentalco. (alias name) non-funding 4 p2p renting platform, pre-loved selling platform, software-as-services (saas) 20 rental stuff owners, user communities, rental entrepreneurs communities socialcrowdco. (alias name) seed 5 crowdfunding platform for social cause 50 campaigner, beneficiary, donor, payment providers socialculinaryco (alias name) acquired 7 social media platform for culinary recipe 23 user communities, food blogger 113 a. s. santoso, r. prijadi, & t. e. balqiah journal of small business strategy / vol. 30, no. 3 (2020) / 102-126 in this process, the author conducts semi-structured interviews for about one hour and three informal meetings around 30 minutes for each respondent. the respondents are aware that the interview process is recorded and transcribed afterward. to ensure the reliability of the information obtained from the interview, the researcher also collects other documentation data from the company website, online news, company social media channels, as well as the founders’ speeches in seminars. then, data triangulation is conducted by comparing the interview result and those secondary sources. during the data analysis process, the key themes are taken from the literature and the finding patterns for those key themes are described from the respondent interview and secondary data transcripts. the key themes are categorized as innovation performance source, value creation coordination, platform ecosystem member role, uncertainty management, and essential organization culture. as a summary, the qualitative method in this research use a case study approach that tries to explain platform-based entrepreneurship phenomena as the empirical evidence of the integration between effectuation theory and open innovation theory. the findings from the case study are discussed to develop the propositions that also answer each research question. therefore, the propositions are presented in the discussion section. these propositions fill the gap mentioned previously and can be a starting point of future research direction with the quantitative method in terms of hypothesis development for generalization purposes (wahyuni, 2012). the summary of the case study analysis is presented in the next section. case studies p2prentalco. p2prentalco. co-founders, a young husband and wife couple, start the business after their first daughter born. the idea about the online rental platform for baby stuff appeared when the co-founders prepare the list of baby stuff. they realize that as new parents, they need to spend a lot of money to buy expensive baby stuff, especially for those with high quality. furthermore, baby stuff is the typical products that have relatively short-term usage. in this situation, they will have more problems to store the unused baby stuff in their home. the co-founders believe that these problems are a common problem for young parents. they hypothesized that online baby stuffs rental platforms might be a solution to help the young parents to be able to use high-quality baby stuff at affordable prices since they only need to pay for the usage rent usage and do not need to store the stuff after they do not use them anymore. after they talk a lot with young mother community members and other entrepreneurs, they established an online platform called p2prentalco. that enable the user to rent high-quality baby stuff. p2prentalco. try to prove their hypothesis by experimenting with a simple website where they upload their baby stuffs that they have to buy and offer them to the young mother communities. after they got positive progress, they scale up the business by using an affordable software-as-services (saas) rental platform modified by using the online rental plugin. at this stage, interestingly, this startup creates a digital platform without it experts. when the business side has been established for achieving constant growth, the co-founders start to develop a small it team. however, the industrial engineering background from one of the co-founders also contributes to making the platform operation very efficient. over time, the p2prentalco. platform offers new products and business models mostly triggered by the users who met with the co-founders or p2prentalco. team. when the users talk with the p2prentalco. co-founders in some event about their problem in utilizing unused baby stuff, the platform comes up with the new business model, p2p renting platform. p2p renting platform business model is a result of the experimentation of extending the supply chain process from the online rental platform. the new business model enables the user to rent the baby stuffs from another user. p2prentalco. handle the delivery, cleaning, and the rest and got the transaction fee for these activities. this method produces a very scalable baby stuffs supply in terms of the number of products and product variation. the supply side is very critical for every rental business model since many of the rental entrepreneurs got trouble because they cannot fulfill the demand due to the limited supply. as a result, this new business model becomes the growth engine for p2prentalco. one day, at their community event, the co-founders meet the users that do not want to rent their unused baby stuff, but they ask help to sell them. then, p2prentalco. created another business model, pre-loved selling platform. the pre-loved selling platform is also created based on the e-commerce operation side from the online rental platform. when the interview was being conducted, p2prentalco. team prepared to update their outbound open innovation outcome, a software-as-services (saas) online rental platform that enables entrepreneurs to open a rental business by using p2prentalco. technology. a new business model with an outbound open innovation approach, a software-as-services (saas) online rental platform, was also developed after the co-founder met an old friend, a software developer who can generalized p2prentalco. platform for another online rental business model. in the fourth year of their operation, these emerging business models serve as the backbone of the platform. as a startup with a specific target market, young moth114 a. s. santoso, r. prijadi, & t. e. balqiah journal of small business strategy / vol. 30, no. 3 (2020) / 102-126 ers, the p2prentalco. perform friendly engagement with them. for example, their staffs often chat with customers who take care of their baby at midnight. in this process, p2prentalco. often get insight into some problems with their service from the customers directly. these stated problems help the platform to do process innovation that makes customers more satisfied. furthermore, this startup often hires employees from its own users. as a result, the platform acquires a lot of knowledge and even resource needed to produce the fit product/service or business model for the users. the most interesting part of this case is the highest growth of the platform is contributed by the innovation that initially comes from the users or platform ecosystem members. “pre-loved selling platform contributed around 30% of p2prentalco. sales revenue after that new platform was launched for about three months. currently, most of the inventories used by the users come from the users in p2p renting platform. furthermore, the saas online renting platform also gives an indirect effect to our main platform since the renting platform market becomes larger,” said p2prentalco. co-founder. as mentioned earlier, those new business models were created as p2prentalco. answer to help the communities’ problems that informed in the community-gathering event or during chatting with p2prentalco. staff. socialcrowdco. the other digital msp startup, socialcrowdco., is founded by an entrepreneur who was a student activist. he had a dream to develop a social enterprise that has a real impact on society. then, after he graduated, he worked for his professor, who expert on social entrepreneurship. from him, he learned about the indonesian social entrepreneurship landscape and did a lot of online research. at that moment, many activities in the social media or whatsapp groups collect the funds to help their colleagues. at the same time, there were also emerging crowdfunding platforms that raise the donation funds to support creative projects or movements in several countries. he thought that it would be an excellent social enterprise idea if he can combine these two emerging phenomena. he began to work on the ideas after he met a well-known e-commerce platform co-founder in an indonesian youth forum. then, he asked help to him to develop a crowdfunding platform for social causes as well as make this expert become his advisor for the new startup. when the platform established, socialcrowdco. co-founder brought his student activist friends to join the startup. similar to p2prentalco., the platform keeps changing when socialcrowdco. co-founders or team meet with certain parties within the platform ecosystem. the platform users at socialcrowdco. consist of individual campaigners who start the campaign to help collect the funds for their colleagues, ngo, as well as the donors. at the early stage, the campaign categories keep changing based on the campaign created by the users. before the platform got enough traction to grow, socialcrowdco. co-founders conduct the experimentation of various crowdfunding categories of social cause. they started from the social activities that they often do when they were student activists, such as help the micro-business to revitalized their broken kiosks. however, there is still no significant growth to keep the platform sustain. the high growth was achieved when the crowdfunding for medical causes was initiated. initially, the crowdfunding for the medical cause was not available, but after the platform receive some requests from the users, socialcrowdco. started to launch it. “at first, we are struggling to seek growth. we just got the significant platform growth after we open the crowdfunding for medical purposes because our users asked for that,” said socialcrowdco. co-founder. the tipping point happened in early 2015. the word-of-mouth effect of crowdfunding for medical purposes also provides a positive network effect on the other categories that make the overall platform grow. this category becomes the critical engine growth since it contributes 40% of the total donation after the category had operated for 1 year. in q3 2016, the platform collects donation fund for above usd $500.000. socialcrowdco. co-founders and team often do field visits for the campaigner that has reached their raising funds goals. besides enhancing the positive engagement with the user, socialcrowdco. team also got some insights to offer better process innovation, such as create the campaign with whatsapp for the urgent campaign. typically, they have two weeks window period to see the result of whether the experimentation result is working or not through some measurable metric. for example, after they found an excellent metrics in crowdfunding for medical purposes category experimentation, socialcrowdco. adjust the platform feature and the organization activities to support this category, such as initiate the doctors to create their campaign for their patients. socialcrowdco. also launch a new business model as a crowdfunding ngo after the co-founders meet the users who have difficulties in collecting the social funds with socialcrowdco. platform. the crowdfunding platform got enormous benefits from the platform ecosystem member since every campaigner initiates the word-of-mouth activities to achieve the fundraising target. as a result, socialcrowdco. does not need to spend a huge budget for advertising that commonly performed by startups that seek high growth to get the user for their innovation outcome. furthermore, the campaign performance improves significantly where the public figure and famous ngo join the platform as a campaigner. the 115 a. s. santoso, r. prijadi, & t. e. balqiah journal of small business strategy / vol. 30, no. 3 (2020) / 102-126 digital msp startups co-create the social donation campaign that provide new value creation ranging from red-cross for blood-donor campaign, famous artists such as dian sastro for scholarship, raisa for book donation in her birthday that raise usd 4000, largest media groups, kompas, put the crowdfunding social donation link on their online news about unfortunate stories, famous mayor of bandung city, ridwan kamil, for some humanity donations campaigns that reach more than usd $400,000 (usd $20,000 is reached just within a week) to act, baznas, dompet dhuafa, rumah zakat and other islamic obligation for collecting yearly obligation donation for moslem, zakat, with amount about 2.5% of donors total yearly earning. in 2018, socialcrowdco. also co-create with the largest financial technology platform in indonesia, go-pay, to provide breakthrough qr-code donation mechanisms that enable the users to make small donations by scanning qr-code pictures through the mobile app in some public transportation or other public spaces. the campaign went viral in the last ramadhan moment. up until early november 2018, socialcrowdco. has raised the accumulative donation around usd $30,000,000 from more than 1 million people. they have reached 6000% donation growth in just 2 years from q3 in 2016. as presented above, the growth of crowdfunding platforms like socialcrowdco. depends on the campaign created by the users. the campaigns triggered new users to create other campaigns. however, at the early stage, often, the created campaign is not resulting in significant growth of the problem. this problem also arises in another wellknown crowdfunding platform that closes its business. in contrast, the engagement with users, especially when socialcrowdco. can fulfill the users’ wish, becomes the critical moment for the platform tipping point. sometimes there is a users’ wish that leads to significant growth, but there is another users’ wish that hardly provides any traffic to the crowdfunding platform. the suitable crowdfunding category for the digital ecosystem member needs to be discovered through collective experimentation with multiple users’ categories. socialcrowdco. founder mentions that the platform has undergone 4 stages of new venture creation path until they reach high growth performance including social entrepreneur wannabe (q3 2013 – q1 2014), experiment (q2 2014 – q1 2015), customer discovery (q2 2015 – q4 2015), and iterate (q1 2016 – now). socialculinaryco. the third platform, socialculinaryco. is founded by a group of young entrepreneurs who have no expertise in the culinary industry; nevertheless, they have a passion for the culinary business. thus, in the beginning, they tried to develop e-commerce that enables the users to sell home food products provided by the users who cook in their home. this platform won several competitions; however, the business model is not sustainable, and the growth is not enough. then, by using the money that they receive from the startup competition, the team shifts the focus to socialculinaryco, a social media platform to upload and share their cooking recipes, and that initially was developed to create online communities to support e-commerce platform. they are willing to abandon the culinary e-commerce platform that has been self-invested for more than usd $50,000. at the early stage, the co-founders meet with the food blogger communities who live near their home, and they ask them to contributes the content for the platform. the growth of the platform was achieved at this moment since the food bloggers produced high-quality content and shared them with their networks. as a result, more individual users join socialculinaryco. as its platform ecosystem member. as a social media platform, socialculinaryco. relies on the users’ activities. the users easily post their recipes and the dish made by those recipes. the user engagement logic in this digital msp startup is that when the users see the recipes as well as the dish photo that they like, they feel challenged to create similar content and post the results in the platform again afterward. “sometimes, there are users who modified other user’s recipes by themselves and bragged the dish created by those modified recipes.” said the co-founder. moreover, for digital msp startups, more user-generated-content developed by the users improve the platform search engine optimization (seo) that enables the website to appear on the first page of google search when someone looks for a recipe on the internet. socialculinaryco. team often visits their content creator home to engage them as well as get valuable information from them to sharpening the experimentation outcome. as a social thanks to the growth and the concept, socialculinaryco. also won prestigious startups competition. the competition committee introduced the co-founder of socialculinaryco to the founder of cookpad, a leading global platform with sa similar business model with socialculinaryco. the founder of cookpad realized that socialculinaryco. actually copy their international platform idea for the indonesian context and have the same vision with his platform. finally, cookpad fully acquired socialculinaryco. in q2 2014 afterward. the co-founders of socialculinaryco. learn much about the online culinary industry from this acquisition activity. this acquisition went well, and socialculinaryco reaches 8.5 million monthly visitors and around 300,000 food recipes in q1 2017. they achieved visitor growth rate for almost 600% in less than 2 years from 1.5 million monthly visitors in q3 2015. socialculinaryco keeps the strength of the users’ en116 a. s. santoso, r. prijadi, & t. e. balqiah journal of small business strategy / vol. 30, no. 3 (2020) / 102-126 gagement by creating an official socialculinaryco community as a place for the users who love to write recipes and share the dish photo that they made to enhance their cooking skill. besides the interaction in the online platform, they have several offline activities such as gathering, cooking class, recipes competition, cooking competition, as well as cooking inspiration week. socialculinaryco also forms socialculinaryco community affiliate, specific communities within the socialculinaryco ecosystem that still related to the culinary industry, such as food photography, plating, and food blogging. these particular communities are developed organically based on the users’ interests. after several years operating as a newly acquired entity, the co-founders introduce a new business model by combining the knowledge from socialculinaryco and the network that they create in indonesia. this business model offers bakeit-yourself services to strengthen the presence in both the online and offline culinary industry. the users can register the book the bake oven, baking tools, as well as the menu at a certain schedule in the bakeasy office. then, the users will do baking together with other users who book at the same schedule and post the result on the socialculinaryco platform. in developing socialculinaryco. the founders have learned their mistakes when developing a culinary e-commerce platform. the culinary e-commerce platform is hard to get the growth traction since there are many missing roles of digital ecosystem members. this platform does not have a clear value proposition for the home food providers as well as the supporting system such as logistic providers. however, socialculinaryco has successfully developed a strong community that keeps contributing their knowledge to the platform since the entrepreneurial team uses the users’ knowledge for adjusting the platform. thus, the result of these digital msp startups’ growth is different even though the founders are the same. discussion and propositions innovation performance source and value creation coordination the case studies above show that in general, digital msp startups’ agents, users communities, and supporting partner firms management practices are crucial for their growth. the majority process of platform innovation is driven by the platform ecosystem members, either end-user customers, supplier-side of the platform, or supporting partner firms. specifically, the effectual logic of maximizes means and leverage contingencies influences the innovation process for the nascent business model with high uncertainty. in some cases, the interviewed digital msp startups founders difficult to specify the exact moment when the platform decided to create a new product, process, or business model innovation, and how the actual innovation started since it is an organic process of the new venture development. the process of maximizes the means also includes the process of increasing its means (resources) through networking. the entrepreneurs in those case studies do not write a plan or predefined the network goal like what managers in the established company do. the entrepreneurial process went effectual. they add the new contacts to the existing part of the means, ‘who i know.’ often, the new contacts are created based on the existing contacts referral. in the beginning, however, they are not using the “whom i know” part for the innovation process. they are more likely to use “what i know and who i am.”. the entrepreneurs’ background and previous activities influence the type of digital msp startups that they create. consistent with dew et al. (2015) study, the effectual logic drives them to control what they can control rather than predict the uncertain outcomes from the nascent business model. in the early stage, the closest things that the entrepreneurs can control are the activities inside the organization. in our cases, after they start developing early-stage products or services and try to penetrate the market, they extend the control to the network relations acquired to their contact, in other words, “whom i know.” instead of doing comprehensive market research that commonly conducted by an established company, the founders initiate some collaboration with external stakeholders including early partners, customers, mentors, suppliers, other platforms, as well as their employees. as happened in our case studies, this action leads to co-creation that produces products or services as well as business model innovation. mostly, these innovations are not something that the digital msp startups founders ever think about at the beginning of new venture creation. this process explains why it seems the platform of digital msp startups changing overtime. furthermore, it also shows that effectuation approach in platform ecosystem (sarasvathy et al., 2008) is consistent with open innovation strategy in term of innovation performance source since increasing means through stakeholder co-creation activities also enhance the knowledge breadth or knowledge depth (saebi & foss, 2015). as a result, in platform setting, the stakeholder collaborated with the platform will be involve in the platform business model that has a significant role to produce innovation outcomes (saebi & foss, 2015). for example, an indonesian famous actress who collaborates with socialcrowdco. through the co-founder’s almamater network as one of its stakeholders become the leading campaigner for scholarship program through her foundation. “it was a great opportunity to collaborate with her as 117 a. s. santoso, r. prijadi, & t. e. balqiah journal of small business strategy / vol. 30, no. 3 (2020) / 102-126 fellow alumni of our university, as an endorser, she help us in amplifying our effort in introducing our scholarship donation category and our social crowdfunding platform as a whole that bring a significant amount of traffic to our website.” – socialcrowdco. co-founder this co-creation outcome also drives another campaigner to create the scholarship program campaign. more parties that operate within the digital msp startups business model will produce more innovation outcomes for the platform. therefore, we develop the following proposition: proposition 1. new digital multi-sided platform firms that maximize means (who i am, what i know, whom i know) in their innovation process are more likely to be able to accumulate external resource overtime and are consequently more likely to achieve high platform innovation performance. essential organization culture the case study presented in the previous section is taken from the leading digital msp startups that develop novel business models in their industry. as mentioned previously, those business models are the results from “effectuators” digital msp startups founding team action through maximizing means and leveraging contingencies. these processes are needed since it is tough to predict the uncertainty environment faced by the nascent digital business model with a limited benchmark. the process of leveraging contingencies is dependent on the willingness of the entrepreneurs to experiment with the means that they have for some ways that not originally intended (exaptation). often, learning from failure drives entrepreneurial restart intention with different approaches (jeng & hung, 2019). for example, in our case socialculinaryco., a successful social media for recipe sharing platform is developed from the failure ideas and digital infrastructure of cooking e-commerce platform. “we were failed to develop cooking e-commerce platform for some reason. however, the engagement from the social media feature was pretty high even though it didn’t convert into the transaction. then, within a month, we changed our platform and focused on social media for the recipe. here we are now.” – socialculinaryco. co-founder the exaptation can produce an unexpected outcome from the innovation process. to conduct this process, the digital msp startups conduct an openness culture repeatedly from the experiment outcome that leads the organization to become socially supportive, agile, and flexible. whenever they find the experiments do not provide an acceptable result, they shift the experiment into another way. the openness culture is also implemented in the knowledge area as well. the digital msp startups founding team avoid not-invented-here (nih) and not-sold-here (nih) syndrome. for example, p2prentalco. business model innovation about second-hand baby products store does not come from the firm, but it comes from the customers that want to sell their unused baby products. “many of our customers ask us whether it is possible to sell their unused baby products to us. so we try to improve our platform a bit that able to sell second-hand product. it was surprising that this effort contributes around 30% of our revenue.” – p2prentalco. co-founder furthermore, another business model innovation from the digital msp startup, supersewa, allows another rental platform to utilize the p2prentalco. strong renting infrastructure for their business. “based on our experience, we were realized that the rental business model needs different e-commerce features. when we met our old programmer friend who wants to develop digital products, we think it is a great opportunity to try this idea. then, we generalize our rental platform infrastructure that able to be used by any rental businesses. the rental business owners accepted and subscribed to this new platform.” – p2prentalco. founder these cases show that essential organization culture for open innovation strategy in the platform ecosystem (saebi & foss, 2015) is consistent with that with the effectuation approach (laskovaia et al., 2017; sarasvathy et al., 2008). furthermore, avoiding nih and nsh syndrome in an open innovation strategy is presented as the manifestation of socially supportive, agile, and high flexibility culture of digital msp startups with effectual behavior that can achieve higher innovation performance. on the other hand, the market orientation approach also strengthens innovation outcomes (leal-rodriguez & albert-morant, 2016). hence, we develop the following proposition: proposition 2. new digital multi-sided platform firms that leverage contingencies through experimentation or flexibility in their innovation process are more likely to be able to adaptive to their environment and are consequently more likely to achieve high platform innovation performance. platform ecosystem member role the case studies in the previous section also show that in most cases, the digital msp startups founders also lever118 a. s. santoso, r. prijadi, & t. e. balqiah journal of small business strategy / vol. 30, no. 3 (2020) / 102-126 age the uncertainty through gathering the information from the platform ecosystem member or any potential parties that may join the platform. during the innovation process, the founders are open to unexpected outcomes from agents, users communities, and supporting partner firms management practices. the case studies show that there are various ways to do agents, users communities, or supporting management practices ranging from create official communities with frequent activities, visit the users when they conduct relevant activities, co-create initiatives, do the intense communication and analyze it afterward, invite them to digital msp startups office, befriends with digital ecosystem members, to hire the staffs from the communities. they believe that these practices not only strengthening the ties between the digital msp startups and their platform ecosystem but also providing the chance for “surprises” to explore and exploit new opportunities. for example, socialcrowdco. founders reveal how the ideas from the user crowds during their interaction produce the innovation outcome that provides the highest contribution for the platform growth. we were quite struggling for the first two years to bring people to our website. a lot of our crowdfunding ideas never work at that time. so, we tried to interact and meet our users quite often and tried to understand what they need from our platform. at a certain moment, our users ask us to enable a medical-related social crowdfunding category that we never pay attention in the beginning. this category survived our platform. now, we create many specific strategies for this medical-related social crowdfunding. – socialcrowdco. co-founder the same story also happened at p2prentalco.. the agents, users communities, or supporting partner firm management practices sustain the flow of external ideas since the practices are open up the organization boundaries with the platform ecosystem member (langner & seidel, 2015). “our customers are our friends. we think the most important interaction with our customers is when they chat us as a friend and share their parenthood feelings. indirectly, we understand their situation and what they need in their parenthood life that we can support.” – p2prentalco. co-founder closing down the organization boundaries for carefully selecting the relation based on the pre-determined goal will limit the means as well as decrease the opportunities. in contrast, the effectual logic used by the digital msp startups founders expand their “who i know” to the platform ecosystem members in massively and also expand their control to overcome the uncertainty at the same time. at this stage, the expanded means are based on both platforms and their members’ pre-commitment through both formal and informal activities. the result of this effectual approach through the agents, user communities, or supporting partner firms practices will involve one or more platform user sides as formal complementors in the re-organization for the production and distribution system. in this case, the effectuation approaches (sarasvathy et al., 2008) in the platform ecosystem perform as the driver of the open innovation strategy in the platform ecosystem (saebi & foss, 2015). as a result, when the digital msp startups have a high degree of interaction with platforms’ agents, user communities, or supporting partner firms, the innovation performance resulting from the accumulation of digital ecosystem members activities tend to be higher. thus, we develop the following proposition: proposition 3a. the platforms’ agents, user communities, or supporting partner firms management practices could enhance the influence of means (who i am, what i know, whom i know) toward innovation performance. uncertainty management setting up an unproven nascent business model in a particular context like these three digital msp startups in our case studies makes high uncertainty since common market research cannot be used properly. in the platform setting, often times the uncertainties reach the collective uncertainties stage where both the platform and its platform ecosystem members have difficulties in predicting certain business aspects (de vasconcelos gomes et al., 2018). hence, these startups conduct collective learning experiments to manage the collective uncertainties within the platform ecosystem. in this matter, agents, user communities, or supporting partner firms practices have significant roles. commonly, in the innovation process with uncertainty situation, the platform ecosystem members do not provide ready to use ideas, resources, or knowledge. however, they bring a set of their problems and expectation that can be potential opportunities for digital msp startups. for example, when socialcrowdco. founding team struggle to find a decent social donation category for their growth; some users ask the founding team to help them collect the social donation for medical purposes. in this case, both the platform and its platform ecosystem members face uncertainties. the digital msp startups face the uncertainty in finding out the way to increase the acceptance of the platform while the users face uncertainty to solve their problem with the platform existing services. from this point, socialcrowdco. finally can provide innovative medical-related social donation solutions that help the platform reach significant growth after conducting mul119 a. s. santoso, r. prijadi, & t. e. balqiah journal of small business strategy / vol. 30, no. 3 (2020) / 102-126 tiple experiments with the users. de vasconcelos gomes et al. (2018) study mention that there are at least two strategic actions that can be adopted by the entrepreneurs to solve the ecosystem uncertainties, conducting collective learning experiment by creating a network of allies, and building a common template. in our case, the digital msp startups have limited resources in the beginning, and they tend to use the first strategy by incorporating the platform ecosystem members. when the digital msp startups were conducting collective learning experiment strategy, they experiment with the innovation outcomes through interaction between the platform, and the user that share and combine assets and competencies to solve particular collective uncertainty. for example, in medical-related social donation case, after realizing there is high demand in this segment, socialcrowdco. come up with the solution for the users uncertainty to collect social donation funds. the platform creates the innovation that enables the medical doctors as well as the hospitals to initiate the crowdfunding for their patients. furthermore, socialcrowdco. also build the ngo to help the campaigner with those uncertainties conduct social crowdfunding. “after we achieve decent growth, we still keep interacting with our users or campaigners in some activities such as when the campaign has just started, and when the campaign has achieved its goal. at a certain moment, we realize a major problem for our platform growth. when we interact with the users, our users share the thoughts that some of them often have difficulties in collecting social donation funds. our platform growth depends on the achievement of social donation created by the campaigners. to solve this problem, we experiment to extend our business line by creating the ngo that helps the campaigners to achieve their social donation target.” – socialcrowdco. co-founder this case shows that uncertainty management through collective experimentation within effectuation approach (de vasconcelos gomes et al. (2018) leads to a market-based innovation strategy in the platform ecosystem to reduce uncertainty (saebi & foss, 2015). the roles of agents, user communities, or supporting management practices in this matter are substantial to enhance innovation performance through reducing the uncertainty. as a result, when the digital msp startups have a high degree of interaction with platforms’ agents, user communities, or supporting partner firms, the innovation performance resulted from the leverage contingencies approach based on digital ecosystem members activities tends to be higher. thus, we develop the following proposition: proposition 3b. the platforms’ agents, user communities, or supporting partner firms management practices could enhance the influence of leverage contingency (experimentation/flexibility) toward innovation performance. proposed conceptual framework the discussions in the previous section show the intersections of open innovation strategy and effectuation theory in the platform ecosystem setting. in innovation performance source, value creation coordination, and platform ecosystem member role aspect, effectuation logic becomes determinant of open innovation strategy constructs. on the other hand, in essential organization culture and uncertainty management aspects, these two theories have some overlap as the manifestation of one theory into another theory. hence, based on the discussed proposition for the platform-based entrepreneurship context, we develop the conceptual framework presented in figure 3 as the theoretical implementation output of the integration between those two theories. figure 3. conceptual framework 120 a. s. santoso, r. prijadi, & t. e. balqiah journal of small business strategy / vol. 30, no. 3 (2020) / 102-126 conclusions and future research by integrating the open innovation strategy (saebi & foss, 2015) and effectuation theory (sarasvathy, 2001, 2009) in platform ecosystem context through the central concept of platform-based entrepreneurship, this study explains the “anomaly” of innovation process conducted by less-experienced and resource constraint young entrepreneurs that result in high-growth nascent business models with open platform approach. the findings of our study answer the research question with the developed propositions and conceptual framework discussed in the previous section. for the first research question regarding young entrepreneurial teams effectuating development process to produce high growth innovation outcomes for digital msp startups, the findings show that high growth digital msp startups maximize means (who i am, what i know, whom i know) in their innovation process to accumulate external resource over time. they also leverage contingencies through experimentation or flexibility in their innovation process to exaptive to their environment. these entrepreneurial actions are more likely to bring digital msp startups to achieve high platform innovation performance. on the other hand, for the second research question regarding the roles of the platform ecosystem in the platform-based entrepreneurship process, the findings reveal that in the platform setting, the roles of digital ecosystem members to support the digital msp startups growth are very substantial. the decent platforms’ agents, user communities, or supporting partner firms management practices enhance the effect of maximizing means (who i am, what i know, whom i know) as well as leveraging contingency (experimentation/flexibility) within the platform ecosystem that results outstanding innovation performance. the growth of digital msp startups depends on the positive activities of their platform ecosystem members. in our cases, the digital msp firms rapid growth is achieved when micro-entrepreneurs or other digital msp firms as platform agents increase in terms of the numbers as well as the business activities scale within the digital platform ecosystem. the network effects from those platform agents bring more users to utilize digital msp firms services. the concept of platform-based entrepreneurship is an essential bridge between those two theories since its importance in both entrepreneurship and open innovation theory (eckhardt et al., 2018; hsieh & wu, 2019; nambisan et al., 2018; sussan & acs, 2017). therefore, there are some contributions as well as theoretical implications from this study in both entrepreneurship and open innovation research. first, this study explains the integration of open innovation strategy within platform ecosystem with effectuation theory as the respond to the research call of “conceptual and empirical model of the moderation and interaction effect of digital governance and digital user citizenship on the path from digital entrepreneurship to digital marketplace” (sussan & acs, 2017, p.71) and “enablers and barriers to adopt the platform-based entrepreneurship strategy” (hsieh & wu, 2019, p. 320). this study also finds that in a theoretical perspective, effectuation theory determines the output of the open innovation as well as has overlaps in some manifestation of both theories. the result of this study and its interpretations are derived from the qualitative studies that use the analytical generation. this approach might be considered as a limitation for scholars who use positivist or post-positivists paradigm. therefore, future research can also develop the questionnaire based on this study and conduct quantitative research and develop the hypothesis to test its robustness and generalization through a statistical approach with a larger sample. second, this study contributes in explaining the knowledge development of young entrepreneurial teams through utilizing platform ecosystem to fill the gap of missing link about the explanation of how young entrepreneurial teams with limited knowledge and experience can produce high innovation performance with open platform business model (hulsink & koek, 2014). the study shows that expansion of means, the experience in experimenting, as well as the agility to leverage contingencies with the support of platform ecosystem members develop the knowledge breadth as well as knowledge depth of the young entrepreneurs that enable them to create nascent products, services, or business model. compared to mba-type managers, these young entrepreneurs may have fewer abilities to perform established business models due to their lack of industrial experience. however, their developed nascent business models are still a “blue ocean” area with none or very few experts. thus, the digital msp startups founders are the experts in this area. then, future research direction can explore the less developed area about knowledge management as well as open innovation strategy for the nascent business model since at the time when the startups have reached decent growth, and the innovation process may less depend from their founders (dalmarco et al., 2017). third, this study enriches the entrepreneurship literature with research that explores the role of digital platform ecosystem members in helping the digital msp startups to reach outstanding growth (nambisan et al., 2018). the construct of agents, user communities, and supporting firm management practices help to explain the role of the ecosystem in the innovation process and the entrepreneurs’ action to involve them in this process. as presented in the case studies, the interaction of the digital entrepreneurs and the digital ecosystem members is not only happened in the online environment but also the offline environment. 121 a. s. santoso, r. prijadi, & t. e. balqiah journal of small business strategy / vol. 30, no. 3 (2020) / 102-126 therefore, future research can explore how to integrate both online and offline innovation processes in the platform ecosystem setting to capture optimal value. it also responds to hsieh and wu (2019) call regarding the strategic consideration in entrepreneurship through innovation platforms. since the digital msp startups have various business models with the different roles of agents, users, and supporting partner firms, the future study can be done with multiple business models as different contexts. for example, as the enterprises start or have established the platform-based enterprise (van alstyne et al., 2016), future research can also explore the platform-based entrepreneurship in corporate entrepreneurship context. for the practical implication, this study suggests that it is quite important for digital msp startups to involve their agents, user communities, as well as supporting partner firms in business model development. these digital ecosystem members can help the platform to cope with the main challenges of the msp business model, creating a positive network effect. most of the inputs of the digital ecosystem members are not ready to use ideas or innovation. instead, they are the agents or users problems that can be converted into opportunities for the platform. sometimes, these agents or users have not become platform ecosystem members yet. once the digital msp startups come up with a suitable business model that solves the digital ecosystem members’ problem, the identic or similar categories of agents or users that have common problems will join the platform on a significant scale. thus, the digital msp startups need less effort in searching or creation opportunities since they come from the platform ecosystem. furthermore, in the problem-solving process, the multiple scales of digital ecosystem members are the most valid and reliable respondents for experimentation. the involved supporting partner firms such as other platforms with the relevant product, services, or business models can also provide new value creation for both agents or users through the co-creation process. furthermore, in the digital platform landscape, digital msp startups can also serve the supporting partner firms’ digital ecosystem 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(2009). case study research: design and methods (4th edition) applied social research methods. sage. 93 womenpreneurs: 21st century success strategies dorothy perrin moore book review frances m. amatucci slippery rock university of pennsylvania frances.amatucci@sru.edu reviewing this book was a particularly daunting task, not only because of the respect i have for the author’s accomplishments as a leading scholar on the subject of women and management, but also due to the wide variety of topics she chose to address in one volume. moreover, there were seventeen case studies of outstanding women who are all worth mentioning and chapters which contain valuable practical advice taken from research which is meticulously referenced. dorothy perrin moore is an internationally respected scholar who has dedicated her entire career to the advancement of women in management. womenpreneurs: 21st century success strategies brings together three decades of research that clearly achieves the purpose of integrating theory with contemporary practice. the target markets for the book include the following: 1) academics teaching courses in management, entrepreneurship, human resource management, and gender and diversity and professional development directors; 2) working women and those interested in advancing their professional careers; and 3) women entrepreneurs at all stages of venture development. this is moore’s third book and she draws from the experiences of over 350 women she has interviewed in the past to include seventeen case studies of phenomenally successful women whose professional accomplishments are impressive and inspirational. womenpreneurs covers a broad array of contemporary topics relevant to women in management and is organized in five chapters: 1) the new work landscape; 2) organizations: leadership and management; 3) work, life and career strategies; 4) on the road to entrepreneurship; and 5) preparing for the future. in chapter one, moore makes a case for the numerous drivers of change that impacted the workplace over the past several decades. these include organizational restructuring since the mid2008 recession, the erosion of trust between business and society, increased importance of teamwork, increasing employee diversity s trateg y journal of small business journal of small business strategy vol. 22, no. 2 94 and the development of innovative leadership styles. citing the influx of women as a notable trend, moore provides the case study of gail k. naughton, founder and ceo of histogen. naughton holds over 100 patents and served as the dean of the college of business at san diego state university. her secret to managerial success? naughton commented, “if you believe in what you want to do, what others think doesn’t matter. it doesn’t matter if people put up road blocks, or tell you it’s impossible; if you’re doing what you believe in and think it is right, sooner or later they’ll come around.” likewise, nikki hardin, founder and publisher of skirt® magazine commented about her amazing career transition, “what is looking for me? looking back, i can see that all the while the field was being prepared in the darkness, the seeds being planted…. something is looking for me as intensely as i am looking for it.” moore’s book is chock full of reflective tidbits of advice from these high achieving women who exhibit intelligence, creativity, courage, persistence, vision and risk-taking. what makes these stories all the more amazing is the fact that women are not playing on as level a playing field as men, as there still remains considerable challenges for opportunity and advancement. performance metrics that favor men, unfavorable organizational environments, and lack of core opportunities that lead to advancement were some of the issues women encountered. moore summarized barbara bird (2010) stating “glass ceilings, glass escalators that move men up faster, the glass cliffs of being chosen for high-risk leadership positions in times of crises, and the glass walls of staff and other sidetracking assignments. these are some of the invisible, systemic and hard to prove barriers that women (and minorities) face.” i couldn’t agree with this statement more, and yet so many girls and young women are clueless about the career challenges they will encounter. after discussing government legislation and policies regarding discrimination, moore reviewed job analyses and the gender problem of performance appraisals. chapter one concluded with two case studies demonstrating how the business landscape is changing because of the increased participation of women. also, the business case for having women on corporate boards was presented. moore referenced research by catalyst and other academic journal articles that address this diversity and governance issue. led by norway, and followed by finland, spain, france, australia and the united kingdom, the mandate for the increased inclusion of women on corporate boards has become a global trend. chapter two, “organizations: leadership and management”, provided an extensive review of management theory taken from some of the most widely read scholars in management and leadership. the references are too numerous to mention but include bernard bass, warren bennis and james o’toole, richard daft, peters and waterman, david nadler and michael tushman, and peter drucker to name a few. moore then turned to the subject of women, power and management and a discussion of gender and leadership. although women tend to display a transformational style, moore cautioned that “successful management techniques run the gamut from fiercely hierarchical to the widely participatory. what works in any given situation depends on a number of complex factors.” journal of small business strategy vol. 22, no. 2 95 in the discussion of ‘avoiding skilled incompetence,’ moore introduced the seminal work by chris argyris on organizational learning. interestingly, argyris found that “women were more open to discussion and thinking creatively than men.” given the emphasis on strategic adaptation, innovation, dynamic capabilities, and flexibility in the 21st century business landscape, a discussion of learning at the individual and organizational levels is particularly relevant. moore concluded chapter two with a discussion of values, ethics and stress. sharon watkins from enron and cynthia cooper from worldcom have become renowned ethics speakers after being a whistle blower in their respective companies. the author presented a hypothetical case taken from the worldcom collapse in 2002. it described an ethical dilemma and the four choices that individuals have including: 1) go along, 2) resign, 3) blow the whistle or 4) live two lives. according to the ethics pundits, the best choice is to leave the organization in order to “keep you out of harm’s way and preserve the personal brand of ethical behavior that you have worked so hard to create.” given past discussions of ethical dilemmas in the classroom, i know that some individuals may view this choice as a lack of moral courage and, in a way, compliant with unethical behavior. how many employees chose to do nothing and left enron before its demise in 2001? could the corporate downward spiral have been stopped sooner if they had spoken up? many corporations today require employees to sign a whistle blowing contract that legally requires them to inform management when they become aware of wrongdoing. in chapter three, “work, life and career strategies”, moore provides pointers on the job hunting process and retooling your skill sets, as well as addressing key questions a novice job hunter may ask. self analysis regarding your strengths and weaknesses, taking a proactive stance, doing the research on your company, creating networks and marketing your skill set in the best possible way are deemed important. when considering dress, moore reminds the reader that “most people make up their minds about someone in the first 10 seconds” and suggested that “classic (dress) always works” and admonished high spiked heels, miniskirts and sexy clothes. while this may be true in the united states and the united kingdom, my experience with latin american mba students suggests such advice may not hold true. likewise, cultural norms in italy, france and other countries where fashion is important can be more open with regard to ‘appropriate’ dress in business situations. in other words, ‘classic may be culture-specific’. moore took on the gender gap in wages citing the bureau of labor statistics report that in 2010 “the median wage of nearly 100 million women working full time was 81 percent of what men earned.” suggestions for avoiding this trap included doing extensive research on job titles, responsibilities before the interview and be prepared to negotiate for the same salary men earn. she addresses negotiation skills later in chapter five. finally, moore revisits the problem of stereotyping and arguments for increased diversity training and modern management styles that are more inclusive. an important career tip offered is the notion of ‘managing up’ which means how to manage your boss instead of the traditional interpretation of managing direct reports. sponsorship and networking are also identified as critical journal of small business strategy vol. 22, no. 2 96 aspects of career strategies. since most companies do not assign mentors, it is important to be proactive in finding an advocate who can be both a mentor and a sponsor. in chapter four, “on the road to entrepreneurship”, moore focused on the woman entrepreneur citing research by catalyst and the national foundation for women business owners as to why women left corporate jobs in favor of starting their own businesses. major reasons included lack of flexibility, glass ceiling issues, unhappiness with the environment and lack of challenge. the percentage of women who left because of these reasons increased from 25 to 46 percent over a twenty year period! moore describes the paradox of firms needing internal entrepreneurs, or intrapreneurs, for new product development and venture creation; however, corporate bureaucracy preserves the status quo and may view intrapreneurs negatively. this challenge is not gender-specific and the topic of whether the intensity of negativity is gender-specific is not addressed. the author discussed the similarities and differences between two types of female entrepreneurs from corporate backgrounds that were identified in previous books – women entrepreneurs (co-authored with e.h. buttner) and careerpreneurs (moore, 2000; moore and buttner, 1997). these are intentional entrepreneurs, who knew they would someday start their own business, and corporate climbers, who left the corporation for any of the previously mentioned reasons. some of the notable trends in women’s entrepreneurship include their significant role in innovation driven economies, and the growth potential for the “missing middle” which represents the largest group of women entrepreneurs whose needs are not sufficiently addressed by existing entrepreneurship programs -that are developed from male-based paradigms (weeks and riebe, 2007). another trend is the global growth rates as documented in the global entrepreneurship monitor (gem) reports. in chapter five, “preparing for the future”, the author discussed additional contemporary topics such as philanthropy in an age where there is a significant transfer of wealth across generations, successful negotiation strategies to get what one deserves, work-life balance, technopreneurs and the dearth of women in stem (science, technology, engineering and math) careers. moore references some of the leading scholars on the topic of gender and negotiation styles and cautions readers about the dangerous effects of sex-role stereotyping. moore provided the case study of diane c. harris, founder and ceo of hypotenuse enterprises, inc. who shatters the image of a woman negotiator as being passive and compliant. she founded the deal training program “the smart of the deal” where she remains a principal lecturer in north america. the proficiency of women entrepreneurs in negotiation strategies, especially for private equity investment has not been well researched (amatucci and swartz, 2011). the discussion of women and stem training presented serious concerns about the low numbers of young women who will miss out on high paying jobs in these fields later in their careers (amatucci and crawley, 2011; coleman and robb, 2012). moore described the book as a collection of essays and, if there is one criticism i have, it seemed disjointed at times without logical flow of content. but perhaps that was not her intent. the author achieved the objective of providing a wealth of journal of small business strategy vol. 22, no. 2 97 information about women in management, the myths, opportunities and challenges, while celebrating the successes of these women who refused to be put in their place, to be pigeon-holed into a gender stereotype, and to let anything keep them from their calling. i highly recommend this book as very useful supplement to courses on women and management, diversity management, and women and entrepreneurship in business or liberal arts courses. references amatucci, f. and crawley, d. (2011) “financial self-efficacy and women entrepreneurs,” (with d. crawley) international journal of gender and entrepreneurship, 3(1):23-37, 2011. amatucci, f. & swartz, e., (2011) “through a fractured lens: women entrepreneurs and the private equity negotiation process,” journal of developmental entrepreneurship, september, 2011. bird, b. (2010) “overview: women leaders in the business and profit sector,” in gender and women’s leadership: a reference handbook, o’connor, k. (ed.) women leaders in the business and profit sector, thousand oaks, ca: london & singapore: sage publications. coleman, s. & robb, a. (2012) a rising tide: financing strategies for women-owned firms, stanford university press: stanford, california. moore, d.p. (2000) careerpreneurs lessons from leading women entrepreneurs on building a career without boundaries. palo alto, ca: davies-black publishing. moore, d. p. (1997) women entrepreneurs moving beyond the glass ceiling, thousands oaks, ca, london, & new delhi: sage publications) weeks, j. & riebe, m. (2007) “mapping the ‘missing middle’: determining the desire and dimensions of second-stage women business owners. a womenable research inbrief. http://www.womenable.com/userfi les/downloads/researchinbrief_mi ssing_middle.pdf . reproduced with permission of the copyright owner. further reproduction prohibited without permission.             the effect of early internationalization on survival, consistency, and growth of export sales jerzy cieślik kozminski university jerzy@cieslik.edu.pl eugene kaciak brock university s trateg y  journal of small business    ekaciak@brocku.ca dianne h.b. welsh the university of north carolina at greensboro dhwelsh@uncg.edu abstract this paper presents the results of a ten year longitudinal analysis of almost 19,000 polish manufacturing firms engaged in export operations. export dynamics was measured by the rate of growth, consistency of export sales and survival in international operations. it was found that early involvement in international activities negatively affected the survival and regularity of sales of small exporters but that had a positive impact on larger exporters. a strong commitment to internationalization and a capacity for managing rapid growth are factors in achieving high growth in international sales over time. managerial implications include recognizing the risk of possible failure when they enter international markets, and take into account that export volumes may stagnate after a first opportunity and not justify the initial effort to expand abroad. to remedy such unfavorable outcomes, managers should plan carefully before entering export markets or undertaking subsequent phases of export growth. keywords: internationalization, survival, smes, exports, transition economies   39    mailto:jerzy@cieslik.edu.pl mailto:ekaciak@brocku.ca journal of small business strategy                                   vol.21, no.1 spring/summer 2010        40    introduction small medium enterprises (smes) that internationalize early are considered “born global” and have the strategic advantage of early international operations that may have a positive impact on overall growth, particularly export sales (keupp & gassman, 2009). in fact, early definitions of born global enterprises have consistently included rapid growth (bloodgood, sapienza, & almeida, 1996; oviatt & mcdougall, 1995) and a strong entrepreneurial orientation (mcdougall & oviatt, 2000). the link between early internationalization and subsequent growth of export firms in emerging economies has not been well-researched (autio et al., 2000; bloodgood et al., 1996). while there have been limited studies on the effect of early internationalization on growth and profitability, the results of these studies have been attributed, for the most part, to survival bias. bloodgood et al. (1996) stressed the need for longitudinal studies of young smes that internationalize. the purpose of our study is to examine longitudinally the relationship between early internationalization and growth to understand the relationship between early internationalization and strategic advantage for smes. we contribute to the literature by conducting a longitudinal analysis of export growth trajectories by dividing our sample into non-surviving exporters, low surviving exporters (those that survive but engage in export operations sporadically, typically with a low level of export volumes), and successful exporters. this approach allows us to compare our results to the key findings of comparable studies in high-growth literature, thereby augmenting the body of knowledge relevant to both streams of research. in line with other studies focusing on smes, we limit the analysis of internationalization process to exports. smes rarely engage in more advanced entry modes, such as fdi or co-operative arrangements with foreign partners. we examine the sme characteristics longitudinally with respect to growth rates of export sales in light of the existing stream of research on highgrowth smes (oecd, 2008). launching early international operations allows an sme to broaden its customer base, thereby facilitating implementation of a rapid growth strategy. some indirect effects that stem from early internationalization include exports that may help achieve economies of scale and higher labor productivity; diversification of revenues that diminish the adverse effects of business cycles; and international exposure that enhances development of new knowledge, which stimulates innovation and future growth (salomon & shaver, 2005). smes that internationalize early build knowledge more efficiently than do those that enter international markets later, in part, because born global firms allow modification of existing domestic market operations for the international market. these firms have a built-in “learning journal of small business strategy                               vol. 21, no. 1 spring/summer 2010        41    advantage of newness” (autio, sapienza, & almeida, 2000). however, dilution of limited capital, materials, and human resources across a number of geographic destinations can pose a serious risk to the survival of young smes. while early globalization can enhance long-term growth opportunities for smes, early internationalization may threaten shortterm survival. sapienza, autio, and zahra (2006) differentiated between the impact of early internationalization on future growth and its impact on survival chances. while early internationalization may have a positive impact on long-term growth, a capital-intensive process may reduce short-term survival. the sooner an sme begins exporting in the early phases of its life cycle, the greater the negative effects on its survival. gabrielsson, kirpalani, dimitratos, solberg, and zucchella (2008) found that early initiation of export activities sometimes occurs without the commitment and organizational maturity required for success. high-tech born global smes typically initiate sales to international markets early because of limited opportunities in their domestic markets (kudina, yip, & barkema, 2008), but rarely demonstrate subsequent growth (mustar et al., 2006). the paper proceeds in the following manner. the next section describes exporting and explains why a longitudinal study is useful in describing new firm survival and growth. exporters fall into three groups based on success and survival. our hypotheses are developed. second, we describe our sample, which includes polish manufacturing smes that were active as exporters during 1993–2003. the third section of the article describes the methodology used to test our hypotheses. we address both the issue of the impact of early internationalization on the survival and consistency of export sales as well as identify the key characteristics of high-growth exporters. the fourth section describes the results of this analysis. the fifth section discusses conclusions and implications from the study. theoretical framework and hypotheses exporting the previous studies of small medium enterprises’ (smes) export activities have identified not only key differences between exporters and non-exporters, but also identified strategic differences in exporters’ behaviours after launching international sales. some firms export permanently, while others engage in such operations sporadically. this heterogeneity has been observed in both developed (johansson, 2009) and emerging countries (alvarez, 2007). the sporadic exporters face greater difficulties in building sizeable export volumes that represent a significant percentage of their total sales (samiee & walters, 1991). consequently, this hampers their export knowledge base. the positive effects of exporting most often benefit permanent exporters that place a significant portion of their sales on international markets (alvarez, 2004; anderson & loof, javascript:void(0); javascript:void(0); javascript:void(0); journal of small business strategy                               vol. 21, no. 1 spring/summer 2010        42    2008). these findings have significant implications for designing effective exporting programs: instruments could be developed for the purpose of reducing entry costs; characteristics of superior exporting firms could be identified to assist in the export firm selection process; and success criteria could be identified to increase the chances of permanent export involvement for firms (alvarez, 2007). the need to explore this segment of smaller, sporadic, and generally less successful—in terms of their expansion in international markets—exporters has been only modestly addressed in the literature. mcauley (1999) studied the internationalization patterns of the scottish micro-enterprises in arts and crafts businesses, which were identified “instant exporters”− as those that launch international sales within the first year of doing business. in one out of three cases, their involvement in exporting was unplanned and originated at trade shows or through other networks. mcnaughton (2003) focused on a group of small canadian exporters to investigate the number of markets served. bell, mcnaughton, young, and crick (2003) identified the incidental patterns of export initiation, the stagnation of export sales after the initial expansion, and fluctuations of export involvement over time. the authors suggested that the “sporadic” trajectory is a specific internationalization pathway that is different from both the incremental and the born-global routes. early internationalization and information systems the impact of early internationalization on firm survival, stability, and growth of exporting smes is affected by the rapidly changing environment in which international business has been conducted since the end of the 20th century. the widespread application of information systems, the use of the internet, the decreasing cost of international travel, the flow of goods and services across borders based on lower customs and elimination of trade barriers, and the movement toward greater economic integration, particularly within regional alliances like the european union (eu), have all positively impacted the business environment for exporting. the role of information systems is of particular relevance for the internationalization efforts of smaller, young firms in the pre-internet era affected by the liabilities of foreignness and newness, while initiating export sales (arenius, sasi, & gabrielsson, 2006). internet technologies reduce both these liabilities and opening significant opportunities for young, rapidly growing firms to internationalize quickly. one of the key concepts in the entrepreneurship literature is the “liabilities of newness.” morse, fowler, and lawrence (2007) argue that this concept should be reexamined in light of contemporary technological and social changes since, by implementing modern information technologies, firms can greatly reduce javascript:void(0); journal of small business strategy                               vol. 21, no. 1 spring/summer 2010        43    the negative effects of newness. they explain that it is possible to build solid relationships through electronic ties while effectively managing a much greater number of individual connections, and adding new relationships that matter more efficiently. there is widespread agreement in the literature that the liability of foreignness is greatly lowered with the use of modern internet technologies. as loane, bell, and deans (2007) pointed out, “smaller firms can particularly benefit from the internet to gather information, promote themselves, and service customers in new markets for relatively little expense” (p. 279). an unsolicited international order is often a central factor in a firm’s decision to begin export sales (bilkey & tesar, 1977). this event is much more likely to occur via the internet than with earlier means of communication. a well-designed website of a young firm may attract potential customers and help overcome the trust barrier, which is the key disadvantage of the “liability of newness” (loane, mcnaughton, & bell, 2004). young firms can efficiently use the internet to facilitate information sharing and establish collaborative networks with partners that are often much larger in terms of size and resources (prashantham, 2005). the extensive use of e-commerce also leads to a reduction in the perceived psychic distance between home and international markets. nevertheless, as yamin and sinkovits (2006) suggested, this may eventually lead to a “virtuality trap,” defined as an extensive reliance on online information sources while downplaying alternative, more direct ways of learning about international markets. clearly, the perception of reduced psychic distance provides additional stimuli for early internationalization by small and young exporters but can also lead to a lack of risk assessment in decision-making. the overwhelming positive effects of information systems have given way to the possible negative ramifications of early internationalization and subsequent growth of new ventures. in fact, researchers have identified information system technology as the key enabler of firm growth (mitra, 2005). however, the impact of information systems is much more complex. in a number of industries, these technologies have greatly reduced sunken costs associated with entry into international markets. these costs include market research, building sales channels, adjusting products to local preferences and requirements, and legal and governmental requirements, among others. in the past, such costs constituted significant barriers for smaller firms with limited financial and human resources (bernard & jensen, 1999; roberts & tybout, 1997). since the internet decreases not only the economic costs of expanding internationally, but the liability of newness, the liability of foreignness, and psychic distance, young firms with minimal resources and a strong growth strategy can engage in international operations at a much earlier stage (cabrol & nlemvo, 2009). this is particularly true with regard to crossborder trade within economically journal of small business strategy                               vol. 21, no. 1 spring/summer 2010        44    integrated groups, such as the european union or north america through the north american free trade agreement (nafta). based on the internationalization and exporting literature, we believe that the widespread application of ict technologies has the effect on early internationalizing firms becoming heterogeneous (davidsson & wicklund, 2000; davidsson, kirchhoff, hatemi-j, & gustavsson, 2002). in addition to firms with substantial potential and determination to expand internationally, a growing number of micro-exporters operate on a smaller scale (davidsson, kirchhoff, hatemi-j, & gustavsson, 2002). therefore, early internationalization affects micro-exporters differently than it does exporters that are more substantial. based upon the heterogeneity in the population of exporters, the impact of early internationalization on survival, and the consistency of export sales: h 1.1. the longer the time to internationalization for a microexporter, the more likely it is a surviving exporter. h 1.2. the longer the time to internationalization for a surviving micro-exporter, the more likely it is a regular exporter. h 1.3. the longer the time to internationalization for a substantial exporter, the less likely it is a surviving exporter. h 1.4. the longer the time to internationalization for a surviving substantial exporter, the less likely it is a regular exporter. entrepreneurial behavior we also expect highly diverse growth patterns in export sales once exporters survive the initial period that is typically turbulent and unstable (morgan-thomas & jones, 2009). only some embark on an accelerated growth strategy thereafter, whereas others settle for relatively low export volumes. because of limited research on the growth of international sales (halabisky, 2005; klatt, 2006), we refer to the entrepreneurship literature on new venture growth in order to identify key characteristics at the firm level that differentiate dynamic exporters from slow-growing or declining ones (wiklund, patzelt, & shepherd, 2009; mckelvie & wiklund, 2010; davidsson, steffens, & fitzsimmons, 2009). after reaching an initial level of stability or “business platform” (davidsson & klofsten, 2003), new ventures typically face major challenges during the accelerated growth stage (flamholtz & randle, 2000). among the factors that influence high growth (gilbert, mcdougall, & audretsch, 2006), two are particularly relevant to international expansion (klatt, 2006): the founders’ strong motivation to grow, reflected in the venture’s growth-oriented vision (barringer, jones, & neubaum, 2005), and the managerial capability to cope with the problems and obstacles typically encountered during the rapid-growth journal of small business strategy                               vol. 21, no. 1 spring/summer 2010        45    phase (barringer & jones, 2004). therefore, h 2. high-growth exporting firms are predominantly those with a long-term international commitment and strong managerial capacity for carrying out international operations. in addition, a commitment to international expansion and the managerial capacity to deal with rapid growth in international markets are integral for success (knight & kim, 2009; cadogan, kuivalainen, & sunqvist, 2009). initiating export operations immediately after start-up indicates a strong commitment to international markets according to the “born global” literature. when the time needed to reach the minimum threshold of export volume after the initial export sale is shorter, there is likely to be a strong commitment to expand exports in subsequent years h 2.1: the time between company formation and the first export sale is negatively associated with the company’s export growth rate. h 2.2: the time between launching export sales and reaching an annual export volume exceeding the minimum threshold is negatively associated with the company’s export growth rate. the choice of legal form is an important firm-specific attribute that affects future performance (brüderl & schüssler, 1990). the key distinction is between the sole proprietorships and partnerships as compared to corporate vehicles, like limited liability and joint stock companies. particularly for suppliers in emerging transition economies, the use of limited or joint stock companies can moderate the use of corporate legal vehicles help to reduce the liability of foreignness, as well as importers’ and customers’ negative perceptions of the country of origin. ownership form does make a difference in the success of small firms (for a full review of the literature prior to 1994, see storey 1994). almus and nerlinger (1999) found that firms that had a limited liability form realized higher growth rates than firms that had their founders’ private capital investments liable. the study included a multivariate analysis of high-tech german firms. therefore: h 2.3 a: the use of corporate legal vehicles is positively correlated with a company’s export growth rate. h 2. 3 b: limited liability or joint stock companies will have greater growth than firms operating as sole proprietorships. h 2. 3 c: limited liability or joint stock companies will have greater growth than firms that operating as partnerships. it is difficult to achieve a high level of aggregated growth over a longer period when expansion is interrupted by setbacks, such as a year when export sales decline compared to the previous year (garnsey & heffernan, 2005). therefore, high-growth exporters use deliberate growth management policies so that they experience fewer setback journal of small business strategy                               vol. 21, no. 1 spring/summer 2010        46    years in export sales than do their slower-growing counterparts: h 2.4: the number of setback years relative to the total export horizon (time between the first export sale and the last observation year) is negatively associated with the company’s export growth rate. the ability to achieve low volatility of export sales during turbulent, rapidgrowth periods is even more difficult and calls for sophisticated planning techniques because increased volatility often results in production bottlenecks, deteriorating quality, problems meeting delivery schedules, and cash flow problems (nicholls-nixon, 2005). highgrowth exporters with strong managerial capabilities are better equipped to avoid excessive volatility in their annual export sales: h 2.5: high volatility of export sales is negatively associated with a company’s export growth rate. the overall research design is illustrated in figure 1.   methodology sample our longitudinal data set includes the entire population of 158,300 polish firms engaged in export commodity trade during the period 1993-2003. the data were provided by the foreign trade data centre (ftdc), a public organization responsible for compiling and processing official statistics on poland’s export/import commodity turnover. we refer to this data set as the ftdc database. access to such comprehensive, longitudinal database provided a unique opportunity. unfortunately, regulatory changes enacted in 2004 prohibited access to the data beyond 2003. during the period covered by our analysis, all exporters in poland were required to register with customs in order to process relevant documents on commodity export transactions. therefore, the database is considered highly reliable. while records on annual export volume were readily available, additional data on individual exporters was somewhat limited. for each exporter, we identified the industry, year of establishment, legal form, region, and ownership type. total sales or employment data for individual firms was not available. however, the longitudinal data available allowed us to analyse the growth trajectories of export sales, the core premise of our research. because of high inflation rates during the period under investigation, we adjusted export values for inflation by using producer price indexes (ppi) (econstats, 2006). journal of small business strategy                               vol. 21, no. 1 spring/summer 2010        figure 1-study design phase 1. micro and substantial exporters   47                    phase 2. surviving substantial exporters                       micro–exporters  surviving after 5 years  of which  regular  exporters  h.1.2 (+) h.1.1 time to  internationalization  substantial exporters   surviving after 5 years  h.1.4 (‐) h.1.3 (‐) of which  regular  exporters  commitment to  international expansion  time to  internationalization  time to minimum  threshold  use of corporate  vehicles  capacity to manage  international growth  number of setback  years  volatility of export  sales  h.2.1 (‐) h.2.2 (‐) growth of   international sales  h.2.3 (+) h.2.4 (‐) h.2.5 (‐) journal of small business strategy                               vol. 21, no. 1 spring/summer 2010        48    because of the size of the population of exporters, we adopted certain thresholds in regard to the volume of export sales. in order to eliminate the impact of incidental export transactions within the micro-exporter category, we distinguished a sub-category of marginal exporters defined as those that never exceeded an annual export volume of 80,000 pln (approximately $20,000 usd). assuming an optimistic profit margin of export sales, this threshold equates roughly to the average annual wage in the private sector in poland during the period covered by our analysis. we found a surprisingly high proportion of marginal exporters; they accounted for 61.4% of the population of firms engaged in exporting during 1993 – 2003 and for 46.4% of those engaged in exporting in 2003. for categorizing the micro-exporters and substantial exporters, we adopted an annual export sales limit of 800,000 pln (approximately $200,000 usd), which is used in the polish statistical system as a threshold for distinguishing exporters that are not required to provide detailed statistics on commodity turnover within the european union. we applied this threshold as a substitute for the minimum employment level in the growth analysis. the core analysis of the survival, consistency and subsequent growth of export sales was confined to 18,896 exporting firms, from the original set of 158,300 firms, that met the following criteria: not a marginal exporter; established after 1988 (to eliminate transition-specific factors); not a subsidiary of a foreign corporation (to eliminate the impact of the parent company on the export decisions and the export process in general); and belonging to the manufacturing sector (nace classification division 15 to 37). this represented 49% of the total number of firms. we excluded the second-largest group of exporters, trading companies, since their inclusion could confound the results due to the inherent differences between the two industry groups. the remaining firms were predominantly service firms. we also excluded these firms because cross-border service transactions cannot be accurately captured in commodity trade statistics. impact of early internationalization. in order to assess the impact of early internationalization on firm survival and on the consistency of export sales, we examined the status of 8,563 exporting firms that launched export activities during 1994-1998, five years after their initial export sales (see table 1). davidsson, kirchhoff, hatemi-j, and gustavsson (2002) found that age, industry, beginning size, ownership form, and legal form are the most important factors related to growth for small independent firms.   table 1polish manufacturing firms initiating export sales during 1994 – 1998   jo u rn a l o f s m a ll b u sin ess s tra teg y                        v o l. 2 1, n o . 1 s p rin g /s u m m er 2 0 10   survival as exporters after 5 years and regularity of export sales (number of firms and % of the total) source: own computations based on the ftdc database   4 9   status t + 5 as % of total exporter category all firms (number) non surviving surviving of which regular sporadic nonsurviving surviving of which regular sporadic microexporters 5540 2056 3484 2288 1196 37,1% 62,9% 41,3% 21,6% substantial exporters 3023 646 2377 2179 198 21,4% 78,6% 72,1% 6,5% total 8563 2702 5861 4467 1394 31,6% 68,4% 52,2% 16,3%   journal of small business strategy                               vol. 21, no. 1 spring/summer 2010      50    surviving exporters were defined as those firms that continued as exporters five years after launching export sales. the five-year period is consistent with how new venture survival is categorized in the entrepreneurship literature as well as with how high-growth firms and gazelles are categorized by oecd/eurostat (oecd, 2008). among surviving exporters, we distinguished between regular exporters (those with consistent export sales) in the five consecutive years after launching, and irregular exporters (those failing to export in one or more years within the five year time period). this categorization is more complex than literature implicates (alvarez, 2007; johansson, 2009; samiee & waiters, 1991). thus far, sporadic exporters are defined as those with at least one missing export year, including the last year of observation. by further delineating our sample, we are able to capture a more detailed analysis of irregular exporters by distinguishing between non-surviving exporters and sporadic ones. characteristics of high-growth exporters. the analysis of growth rates of export sales of surviving , substantial exporters was conducted by adopting the most recent accepted definition of highgrowth firms by the oecd and eurostat (oecd, 2008), and measuring their contribution to the economy. highgrowth firms are those whose average growth rate of employment or sales greater than 20% during three years, with a minimum of ten employees in the base year. “gazelles” achieve high-growth status within five years of beginning operations. we adopted the oecd/eurostat definition of high-growth firms as well as their definition of high-growth exporters, with the following adjustments. first, our growth analysis was confined to export sales since the corresponding figures on total sales and employment were not available. second, instead of a minimum employment threshold of 10 people in the base year that was used in the oecd (2008) methodology, we used the minimum sales volume of export sales (800,000 plnapproximately $200,000 usd) to distinguish micro-exporters in the polish customs statistics. analysis early internationalization. to test the relationships between early internationalization and the survival and the consistency of export sales in the first hypothesis, we conducted four binary logistic regressions. descriptive data including zero-order correlations are presented in table 2, and the results of the binary logistic regressions in table 3. journal of small business strategy                               vol. 21, no. 1 spring/summer 2010        51    table 2means, standard deviations, and correlations in logistic regression analysis variables mean std 1 2 3 4 5 6 7 1. surviving .68 .465 2. time to internationalization (in years) 2.26 2.164 .016 3. firm age 9.40 2.435 .017 .819** 4. factor intensity (science-based) .02 .147 .020 .010 -.006 5. factor intensity (specialized supplier) .10 .297 .046** .026* .016 -.049** 6. factor intensity (scale-intensive) .18 .382 .005 .032** .022* -.070** -.153** 7. factor intensity (labor-intensive) .35 .476 .053** .031** .024* -.110** -.240** -.340** 8. factor intensity (resource-intensive) .35 .478 -.092** -.077** -.049** -.111** -.244** -.345** -.542** **. correlation is significant at the 0.01 level (2-tailed). *. correlation is significant at the 0.05 level (2-tailed). n = 8,563 first, we estimated the coefficients of two models-one model for microexporters (model 1) and the other for substantial exporters (model 3). then we estimated the coefficients of two other models − one model for micro-exporters (model 2) and the other for substantial exporters (model 4). in each model, we measured the independent variable, time to internationalization, as the number of years between the year of establishment and the first recorded export sale. we controlled for two factors: 1)firm agethe number of years from the formation of the firm to 2003. 2)industry effectsindustries categorized by factor intensity that included sciencebased, specialized supplier, scaleintensive, labor-intensive, and resourceintensive groups. this is one of the key classifications used for the analysis of patterns and specialization in international trade at the industry and country level (oecd, 1987). journal of small business strategy                               vol. 21, no. 1 spring/summer 2010        52    table 3-logistic regression results for surviving, non-surviving, regular and irregular exporters models 1 and 3: dependent variable: 1 = surviving exporter; 0 = non-surviving exporter models 2 and 4: dependent variable: 1 = regular exporter; 0 = irregular exporter; only surviving exporters considered   model 1 (microexporters) n = 5,540 model 2 (microexporters) n = 3,484 model 3 (substantial exporters) n = 3,023 model 4 (substantial exporters) n = 2,377 independent variable h1.1: time to internationalization (confirmed) h1.2: time to internationalization (not confirmed) h1.3: time to internationalization (not confirmed) h1.4: time to internationalization (confirmed) .050** -.012 -.058 -.195*** control variables firm age factor intensity (science-based)1 factor intensity (specialised supplier) factor intensity (scale-intensive) factor intensity (resourceintensive) .001 .071 .121 -.206** -.476*** -.103*** -.075 -.092 -.272** .022 .080* .651 .214 .232 -.279** .064 .039 .185 -.164 -.152 hosmer and lemeshow χ2 -2ll overall % correct nagelkerke r2 11.37 (p = .182) 7221.11 62.9% .021 9.55 (p = .298) 4415.52 65.5% .026 12.06 (p = .148) 3106.96 78.6% .015 20.40 (p = .009) 1342.59 91.7% .020 note. regression coefficients: ***p < .001; **p < .01; *p < .05; †p < .10; two-tailed tests 1 ‘factor intensity (labor-intensive)’ used as base category journal of small business strategy                               vol. 21, no. 1 spring/summer 2010        53    characteristics of high-growth exporters. in testing the second hypothesis, we used hierarchical linear regression to measure growth in annual export sales against the independent variables of time to internationalization, years to minimum export threshold, legal form, setback years, and volatility in the annual export sales. we controlled for firm age and industry effects. the base population used in the statistical analysis were 18,896 domestic manufacturing firms engaged in exporting during 1993–2003. in the regression analysis, we selected 8,545 firms established after 1992 that were still exporting in 2003. among those firms, only 2,411 had exceeded the micro-firm level export sales of 800, 000 pln ($200,000 usd) at least once and had positive export sales in 1999 or earlier. this is based on the work of hair, black, babin, anderson, and tatham (2006), that when regression analysis is used with one independent variable there must be a minimum of five observations. after deleting extreme data points with values beyond four standard deviations from the mean (a univariate detection of outliers) or unusually high mahalanobis d2 measures (a multivariate detection of outliers) [hair et al., 2006], the final sample consisted of 2,376 firms. the dependent variable: growth in annual export sales. sales are often considered one of the more suitable indicators of growth (davidsson & wiklund, 2000). following the recommendation by weinzimmer, nystrom, and freeman (1998), we used the ols regression coefficient as a measure of growth. this approach recognizes changes in observations during the middle years of the time horizon and is preferable over growth measures that are based on only two observations-the first and last. accordingly, the regression coefficients were calculated separately for each of the 2,376 firms based on all the observations available for each firm, as its actual export horizon (aeh). aehs ranged from 11 observations for firms established in 1993 to five observations for firms established in 1999. independent variables: time to internationalization, years to minimum threshold, legal form, setback years relative to aeh, and volatility in annual export sales. time to internationalization was measured by the number of years between the year of establishment and the first recorded export sale, the same as the binary logistic regression. beginning export operations soon after start-up indicates a strong commitment to international business. years to minimum threshold was operationalized as the number of years between the year of the first recorded export sale and the year in which export sales reached the minimum level of 800,000 pln ($200,000 usd). reaching this minimum threshold in the initial phase of export development indicates strong commitment to export growth. legal form was a corporation (joint-stock or limited liability), a sole proprietorship, or a partnership. limited liability frees the owners of some types of liability due to the firm’s operations. setback years journal of small business strategy                               vol. 21, no. 1 spring/summer 2010        54    relative to aeh was calculated by determining the number of times export sales in year (t) were not higher than export sales in year (t-1). then, we divided these numbers by the aehs to account for the numbers of years which export sales may take place for a given firm (garnsey & heffernan, 2005). volatility in annual export sales was measured by the firm's annual export sales as the coefficient of variation (e.g., pinches & kinney, 1971), divided by the aeh. control variables: firm age and industry effects. these same control variables were used in the previous binary regression analysis. growth in annual export sales was measured against the control and independent variables by entering the control variables and adding the independent variable. the correlations between the independent variable coefficients are not higher than the threshold of 0.7 (anderson, sweeney, & williams, 1996), and a majority are within an acceptable ±0.2 range. nevertheless, we checked for potential multicolinearity by also examining the variance inflation factors and found them all to be at acceptable levels, with vifs well below 10.0 (neter, kutner, nachtsheim, & wasserman, 1996). calculations of vifs ranged from a low of 1.066 to a high of 1.865. we also employed levene's (1960) test to check for heteroskedasticity, which was found to be a problem with the data. graphical inspection of the plots involving standardized residuals versus the dependent (predicted) values, as well as the independent and control variables also revealed heteroskedasticity problems. consequently, all variancecovariance matrices were estimated according to white's (1980) method. see table 4 for descriptive data, including zero-order correlations.   table 4-means, standard deviations, and correlations in linear regression analysis variables mean std 1 2 3 4 5 6 7 8 9 10 11 12 13 1. growth in annual export sales 483,003.87 1,209,891.28 2. time to internationalization (in years) .91 1.24 -.012 3. years to minimum threshold 2.02 2.18 -.102 ** .114** 4. corporation .49 .50 .121 ** -.128** -.186** 5. sole propriet. .30 .46 -.078 ** .116** .134** -.645** 6. partnership .21 .41 -.061 ** .026 .077** -.500** -.340** 7. setback years relative to aeh .33 .17 -.398 ** -.101** -.124** .054** -.031 -.031 8. volatility in annual export sales 80.15 44.17 .025 .161 ** .530** .015 -.010 -.007 .090** 9. firm age 7.62 1.85 -.095 ** .350** .235** -.040* .061** -.019 .144** .147** 10. factor intensity (science-based) .02 .16 -.007 .007 .047 * .110** -.088** -.035 .009 .030 .002 11. factor intensity (specialized supplier) .11 .36 -.047* -.028 -.015 .115** -.087** -.043* .016 .017 -.045* -.055** 12. factor intensity (scale-intensive) .16 .37 .023 .008 .072 ** .077** -.096** .015 -.008 .118** .025 -.070** -.153** 13. factor intensity (labor-intensive) .35 .48 -.056 ** .046* -.026 -.149** .133** .033 .011 -.114** .020 -.117** -.255** -.325** 14. factor intensity (resourceintensive) .35 .48 .070** -.037 -.035 -.020 .026 -.005 -.019 .001 -.011 -.118** -.256** -.326** -.545**   jo u rn a l o f s m a ll b u sin ess s tra teg y                        v o l. 2 1, n o . 1 s p rin g /s u m m er 2 0 10   5 5     journal of small business strategy                               vol. 21, no. 1 spring/summer 2010        56    results early internationalization the binary logistic regression results are found in table 3. two hypotheses were confirmed − the longer the time to internationalization for a micro-exporter, the more likely it is to be a surviving exporter (model 1), and the longer the time to internationalization for a surviving substantial exporter, the less likely it is to be a regular exporter (model 4).the time to internationalization has no statistically significant effect on the likelihood of a surviving micro-exporter’s being a regular exporter (model 2) and the time to internationalization has no statistically significant effect on the likelihood of a substantial exporter’s surviving as an exporter (model 3), were not supported. characteristics of high-growth exporters table 5 shows the results of the hierarchical regression analysis. model 1 (table 5, first column) shows the results when only the control variables were included. the hypothesis is tested in model 2 (table 5, second column) by including the control and independent variables and was significant (∆r2 = .179; p = .00). hypotheses 2.1, 2.2, 2.3a, 2.3b, and 2.4 are supported. beginning export operations soon after start-up (h 2.1), reaching the minimum threshold (800,000 pln) in the initial phase of export development (h 2.2), choosing a corporate legal vehicle (limited liability or joint-stock company) rather than a sole proprietorship (h 2.3a) or a partnership (h 2.3b), and minimizing the number of setback years relative to the length of export horizon (h 2.4) are significant predictors of high growth in annual export sales. we also found support for the relationship between volatility and growth in annual export sales, although it was in the direction opposite to that predicted in hypothesis 2.5. those exporters with high growth rates of export sales typically experienced greater volatility of such growth rates. concerning the control variables, we found (see table 5; model 2) that firm age is not significantly related to a firm's growth in annual export sales and compared to labor-intensive firms, specialized suppliers exhibit lower growth in annual export sales and resource-intensive firms show higher growth. neither science-based nor scaleintensive firms show any significant difference in growth in annual export sales when compared to labor-intensive firms. journal of small business strategy                               vol. 21, no. 1 spring/summer 2010        57    table 5-regression results for growth in annual export sales (n=2,376) dependent variable model 1 model 2 h1: time to internationalization h2: years to minimum threshold h3a: legal form (sole proprietorship)1 h3b: legal form (partnership/other) h4: setback years relative to aeh h5: volatility in annual export sales -.057*** -.117*** -.106*** -.119*** -.172*** .088*** control variables firm age factor intensity (science-based)2 factor intensity (specialized supplier) factor intensity (scale-intensive) factor intensity (resource-intensive) -.053*** -.007 -.050† .084*** .067*** .003 -.035 -.084*** .044 .035* f ∆f (robust) 10.23*** (5;2370) 30.581*** (11;2364) 54.528*** (6;2364) r2 ∆r2 adjusted-r2 .025 .023 .204 .179 (p=.00) (compared to model 1) .201 note. unstandardized regression coefficients: ***p < .001; *p < .05; †p < .10; two-tailed tests 1 legal form (corporation) used as base category 2 factor intensity (labor-intensive) used as base category journal of small business strategy                               vol. 21, no. 1 spring/summer 2010      58    discussion and implications our research confirms that heterogeneous structures exist in the population of exporters − regular and irregular exporters are common. a significant number did not survive after an initial period or are engaged sporadically in export operations. this finding reflects similarities of domestic and international operations of a large segment of smes. while the widespread use of internet and ict in general and the progress in regional integration have positively impacted the business environment for exporting, it opened international markets for smaller firms with limited resources and lack of growth orientation. shane (2008) pointed out the myths and illusions regarding entrepreneurship in general, we speak of “illusions of international entrepreneurship”, reflected in the existence of large population of exporters which after initial entry, continue with small volume, irregular export sales. although large in terms of numbers, this group is insignificant in terms of the size of their overall contribution to the growth of international trade at the country level. regional integration has positively impacted the business environment for exporting, it opened international markets for smaller firms with limited resources and lack of growth orientation. moreover, our study confirmed that the size of export operations affects the consistency of exports. micro-exporters face greater risks of becoming irregular exporters. findings were mixed concerning if early internationalization contributes to increased diversification among exporters. delayed internationalization clearly enhances the chances of micro-exporters’ surviving the initial five year period in international markets but does not have a statistically significant impact on subsequent consistency of export activities. the latter finding may indicate that the volume of export sales plays a decisive role in achieving consistency in export sales. with a relatively low export sales volume (the equivalent of usd $200,000 annually), it is difficult for firms to achieve consistency because the limited number of export orders, which can be delayed for several months, and may result in a calendar year that has no exports sales. exporters that reach more substantial sales volumes do not face significant risks of non-survival, irrespective of time before internationalization. on the other hand, early internationalization may reflect a general strategic commitment to international operations that is demonstrated in the subsequent consistency of exports. in the case of exporters that internationalize at a later stage, even quite sizeable export sales can be considered residual sales that are subordinate to predominant domestic sales operations. the results of the empirical analysis confirm the positive impact of a strong commitment to international expansion on the subsequent growth of export sales, which has been identified in the entrepreneurial growth literature (gilbert, mcdougall, & audretsch, 2006; barringer, jones, & neubaum, 2005) as well as internationalization literature (klatt, 2006). this commitment is reflected in early internationalization, quickly reaching substantial export volumes, and the use of corporate legal vehicles. the results were mixed concerning managerial capacity issues-another important factor in highjournal of small business strategy                               vol. 21, no. 1 spring/summer 2010        59    growth firms (barringer & jones, 2004). high-growth exporters were found to be more efficient in avoiding temporary setbacks in absolute volumes of export turnover but saw higher volatility in growth rates over time compared to their slowgrowing counterparts. this finding may lead to the conclusion that volatility in growth rates represents a major and still unresolved management bottleneck among high-growth exporters. the results of our research have important implications for managers and consultants assisting smes in developing plans for international expansion. so far the focus has been on the careful preparation for initial export sales, including assessing company readiness to exports through specifically designed tools like company readiness to export (core – www.globaledge.msu.edu). as a result, managers usually recognize the risk of possible failure when they enter international market. our study found that these companies should also consider that export volumes may stagnate after a first opportunity and not justify the initial effort to expand abroad. to remedy such unfavorable outcomes, entrepreneurs and managers should plan carefully not only initial entry on export markets, but also subsequent phases of export growth. in addition, we found that the most up to date technology is integral to success on international markets. we also derive important implications from emerging market economies from our research. first, emerging market economies could further small firm early export success by providing support. emerging market economies should include initiatives for accelerated internationalization of such firms as the most promising avenue for achieving growth objectives. size matters, support is integral for small firm success. unlike moen and servais (2002), who recommended a shift in export-promotion programs from established firms to young ventures, we contend that growth potential is the most important criterion for export promotion programs. export promotion measures aimed at newly established firms should be more selective. young companies should be encouraged to look for export markets shortly after their launch. however, policy efforts and funds allocated for implementation of export promotion programs may not yield the desired results if they are based on a sizeable segment of stagnant micro-exporters that do not contribute to achieving macroeconomic objectives. specific objectives should include specific targeted measures of growth and diversification of exports , improved competitive position, building strong export management team which can efficiently manage the expansion phase, securing adequate financing for meeting additional cash flow requirements, among others. second year fund allocation to these exporters should be based on meeting the criteria for the first year. therefore, adopting efficient mechanisms for selecting new firms with international growth potential represents a major challenge in the implementation of export assistance programs. by doing so, emerging market economies have the opportunity to assist young exporters to have a greater chance of survival. journal of small business strategy                               vol. 21, no. 1 spring/summer 2010        60    future studies while discussing the results of our study, we have pointed out serious limitations to further studies concerning success in exporting. first, there is a lack of access to crucial company data, such as total sales and employment figures. if firm-specific data can be acquired, it would significantly enhance the knowledge-based concerning internationalization and high-growth firms, which would benefit both policy makers and exporters’ strategic decision-making. our research used international sales as an integrated variable but we did not explore the geographic scope of those sales. based on the limited research in this field (johansson, 2009; pangarkar, 2008; salomon, 2006), we suggest that research on the geographic scope of export sales, as an important dimension of internationalization speed and a crucial influence on export dynamics, should be advanced, particularly in terms of small firms. strategies for export success and survival need to be expanded, particularly for emerging market economies. in addition, specific policies related to geographic scope of export sales and the success of those policies worldwide could be compared and contrasted. strategic implications of decision-making by different size exporters and success ratios should be explored in future studies. lastly, a comprehensive investigation of the findings discussed above 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(2006). online internationalization, psychic distance reduction and the virtuality trap. international business review, 15, 339– 360. jerzy cieślik is a director of the center for entrepreneurship at kozminski university, warsaw, poland. he specializes in entrepreneurship development in a transitional environment, high-growth firms and the internationalization processes at the company level. eugene kaciak is an associate professor of management at brock university in st. catharines, ontario, canada. his current research interests include laddering (meansend chain-based) methods in social sciences, international entrepreneurship and co-evolution of emerging markets and multinational enterprises. dianne h.b. welsh is the hayes distinguished professor of entrepreneurship, founder and executive director of the north carolina entrepreneurship center at the university of north carolina greensboro. her research centers on global entrepreneurship, family business, and franchising.   reproduced with permission of the copyright owner. further reproduction prohibited without permission. http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2020, vol. 30, no. 03, 33-46 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2020 small business institute® w w w. j s b s . o rg introduction whitney o. peake1, mariah yates2,, dennis barber iii3, amy mcmillan4 1western kentucky university, 1906 college heights boulevard #11058 bowling green, ky 42101 usa, whitney.peake@wku.edu 2western kentucky university, 1906 college heights boulevard #11058 bowling green, ky 42101 usa, mariah.yates@wku.edu 3east carolina university, 1000 e. 5th street bate 1100 greenville, nc, 27858 usa, barberde17@ecu.edu 4east carolina university, 1000 e. 5th street bate 3105 greenville, nc, 27858 usa, mcmillana@ecu.edu do entrepreneurs do good deeds to maximize wins or avoid losses? a regulatory focus perspective small business, regulatory focus, social responsibility, employee responsibility apa citation information: peake, w. o., yates, m., barber iii, d., & mcmillan, a.. (2020). do entrepreneurs do good deeds to maximize wins or avoid losses? a regulatory focus perspective. journal of small business strategy, 30(3), 33-46. corporate social responsibility (csr) researchers and practitioners are recognizing that we cannot continue to use large multinational corporations (mncs) as the standard for understanding csr, especially when considering small and medium-sized enterprises (smes) (perrini, 2006; spence & rutherfoord, 2003; thompson & smith, 1991). it is imperative that we gain further understanding of the relationship between csr and smes (russo & tencati, 2009), due to the impact smes have on the global economy (morsing & perrini, 2009) through their substantial levels of entrepreneurial activity (wickert, 2016) and serving as large sources of employment (world trade organization, 2016). in addition, smes are also known as the entities that often spearhead social responsibility within local communities (avram et al., 2018), and are more likely to consider social responsibility closer to home, such as employee motivation and retention, and community involvement (jenkins, 2006). when trying to gain insight into smes, one must understand the important influence that owners and owner/managers have over the strategies and behaviors of the firm. these individuals are often the sole or major-decision makers within the organization and therefore have the potential to shape organizational culture and values beyond simply earning profits (klein & kellermanns, 2008; nicholson, 2008). given their level of influence, it is important to understand owner and owner/managers’ motivations and interpretations of csr, as these will likely impact how csr is pursued and implemented within the organization (murillo & lozano, 2006; perrini, russo, & tencati, 2007). a lack of understanding regarding the microfoundations (i.e., individual-level factors) of social responsibility engagement within small firms is often lamented (aguinis & glavas, 2012; alonso-almeida et al., 2015); however, little research currently examines the effect of owner disposition, motivation frame, etc. on the level of social responsibility engagement in the small firm context. these individual-level differences may provide important explanations for why small firms are heterogeneous in their level of social responsibility engagement. regulatory focus theory may provide a useful lens through which to examine small business owners’ engagement in social responsibility. regulatory focus theory sugresearchers and practitioners generally agree that small businesses are important contributors to social responsibility within their communities and beyond. despite the well-documented importance of small businesses in carrying out social responsibility, particularly locally, little is known about the motivation orientation underlying such behavior. further, there is little agreement about what constitutes social responsibility in the small business context. using regulatory focus theory as a theoretical lens, we examine how promotion focus versus prevention focus of the small business owner motivates social responsibility engagement targeted at society, employees, and customers. we find that regulatory focus of the small business owner does not play a role in motivating society-focused social responsibility engagement; however, prevention focus plays an important role in motivating engagement in employeeand customer-oriented social responsibility. http://www.smallbusinessinstitute.biz http://www.jsbs.org 34 w. o. peake, m. yates, d. barber iii, & a. mcmillan journal of small business strategy / vol. 30, no. 3 (2020) / 33-46 gests that individuals take one of two primary motivation orientation foci in goal pursuit: promotion focus versus prevention focus. these motivation orientation frames in turn influence the ideas generated and actions pursued by the individual (prasastyoga et al., 2017). a promotion focus lends individuals to pursue gains and maximize positive outcomes, while prevention focus orients individuals towards working to minimize loss through safety and carrying out responsibilities (higgins et al., 2001). for example, brockner et al. (2004) determined that promotion focus plays a more critical role in developing business ideas; whereas, in screening ideas, prevention focus is a more salient motivation orientation. since regulatory focus provides insight into the entrepreneur’s motives, beliefs and behaviors, it is likely an important determinant of entrepreneurial success (brockner et al., 2004) and strategy (cesario & higgins, 2004). given that the owner’s motivation frame sets small firm strategy and behavior, regulatory focus theory likely holds critical associations with motivation for engaging in socially responsible behaviors through the business (chang et al., 2018). in addition to our narrow understanding of drivers of social responsibility engagement in the small firm context, we likewise know little about the types of social responsibility in which small businesses engage. myriad measures have been examined over time (fitzgerald et al., 2010; peake et al., 2015; peake et al., 2017), but little agreement has been reached regarding how to best examine social responsibility outcomes from the sme perspective. many studies employ single-item measures, or measures that have notable limitations (peake et al., 2015). as such, we assess three well-validated measures of social responsibility from turker (2009), adapted to the small firm context. given these challenges to expanding our knowledge of small business social responsibility, we examine how the motivation orientation of small business owners translates to engagement in social responsibility for the small business with regards to societal, employee, and customer oriented social responsibility. we first examine regulatory focus theory to develop hypotheses related to these phenomena. then, we provide an examination of the data and measures, followed by the results of our analyses. finally, we provide insights into the academic and practical implications of our work, as well as future research that may stem from any progress we make with the work at hand. theory and hypothesis development regulatory focus theory the framework and basis of regulatory focus theory (rft) has been largely provided by higgins (1997) which examined motivational foci and attempted to expand upon prior theories of motivation. higgins examined the desired end-states of individuals, as well as the self-regulations one imposed to reach those end states (higgins, 1997). through this effort, higgins established two independent self-regulatory systems in promotion regulatory focus and prevention regulatory focus (higgins, 1997). these two systems both included desired end-states as well as undesired end-states, expanding upon the “pleasure vs. pain” formula found in earlier hedonism-focused theories of motivation (higgins, 1997). a promotion focus centers on hopes, achievements, and goals when self-regulating behavior and cognition. a person using this focus sees achievements as desirable and the lack of achievement as non-desirable (higgins, 1997). individuals using this focus do not consider losses when making decisions, and instead focus on striving towards their preferred end state by trying various behaviors to see what works, resulting in less risk-averse behavior (brockner & higgins, 2001). in contrast, prevention focus emphasizes the role of duty and responsibility in an individual’s motivation (higgins, 1997). prevention focus attempts more to prevent mistakes and mitigate risk of failure as opposed to desiring success. individuals who utilize a prevention focus orientation see lack of failure as a desirable end-state and failure as an undesirable end-state and focus on vigilance (higgins, 1997). further, they engage in behavior that guards against error, resulting in a more risk averse mindset when moving towards goals (brockner & higgins, 2001). notably, both motivations can be involved in the pursuit of an individual’s goals, and both can be demonstrated by individuals (forster et al., 2003; gamache et al., 2015). as we will address below, regulatory focus has received some attention in the entrepreneurship literature in general, but, to our knowledge, has not yet considered the regulatory focus of the entrepreneur in conjunction with the social responsibility engagement in the small business. rft and entrepreneurship the relationship between regulatory focus theory and entrepreneurship has been examined through a variety of lenses. fischer et al. (2018) researched the link between regulatory focus theory and sustainable entrepreneurship. using qualitative methods, 14 venture founders were interviewed on topics such as sustainability, idea development processes, the acquisition of resources, and the stages of the entrepreneurial process. follow-up interviews focused on the founders’ motivation and the venture development process (fischer et al., 2018). it was found that self-regula35 w. o. peake, m. yates, d. barber iii, & a. mcmillan journal of small business strategy / vol. 30, no. 3 (2020) / 33-46 tory foci changed during the entrepreneurial process. when conceiving ideas, a prevention-focused process was likely to be used in order to develop sustainability goals, as sustainability was viewed as a responsibility and duty of the respondent. during rollout, a promotion-focus was more likely to be used in order to pursue venture growth (fischer et al., 2018). while no specific study has examined the individual differences that might result in an entrepreneur choosing a prevention or promotion focus, we can draw some inferences regarding what might drive these decisions. in other words, what possible individual differences result in an entrepreneur choosing a prevention or promotion focus? previous research has focused on motivations and goals as the drivers for regulatory focus theory. vaughn (2017) found support for the relationship between self-determination theory and the need for autonomy, competence, and relatedness, and a promotion or prevention focus. this is particularly enlightening given the fact that al-jubari et al. (2019) found that autonomy, competence, and relatedness (self-determination theory) provide an explanation for the motivational processes of entrepreneurial behavior. we can therefore link these constructs to entrepreneurs and hence a promotion or prevention focus. lanaj et al. (2012) conducted a meta-analysis related to regulatory focus theory. while this study was not directed or geared towards entrepreneurs, they did present a framework of personality traits that might impact a person’s regulatory focus. they categorize personality traits into approach temperance and avoidance temperance. approach temperance includes traits such as extraversion, positive affectivity, and learning goal orientation. the avoidance temperance category includes neuroticism, negative affectivity, and performance avoidance goal orientation. in addition, they include self-esteem, self-efficacy, and openness to new experience, among others. self-efficacy in particular has been found to be an important trait related to entrepreneurship (lyons et al., 2015). in addition, zhao et al. (2010) found that openness to new experiences and extraversion were a critical trait for entrepreneurs. as such, we can again infer that there is a relationship between individual traits and regulatory focus in entrepreneurs. wallace, et al. (2010) examined the relationship between a small firm ceo’s regulatory foci and the performance of their firm. using a questionnaire method, 1,059 ceo’s of firms with less than 300 employees were surveyed. results indicated that a promotion focus is positively related to firm performance, and prevention focus is negatively related to firm performance (wallace et al., 2010). environmental dynamism was found to moderate these relationships, strengthening the relationship between promotion focus and firm performance and weakening the relationship between prevention focus and firm performance. environmental dynamism was characterized by a high rate of change and instability, resulting in increased decision uncertainty (wallace et al., 2010). in their work, prasastyoga et al. (2017) attempted to analyze the effect of regulatory foci on an individual’s small business growth beliefs (sbgb’s), defined as: “individuals’ evaluations of expected consequences of small business growth” (prasastyoga et al., 2017). 121 indonesian students and 114 business owners were surveyed with the intent of measuring the subjects’ individual regulatory foci and their sbgb’s. questions regarding sbgb’s were divided into emotion-related sbgb’s (i.e. what emotions the subject associated with the thought of their business growing) and finance and business-related sbgb’s (i.e. what effect the business growth would have on the financial well-being of both the business and the individual). it was found that individuals with a strong promotion focus tended to have more positive sbgb’s, while those with a strong prevention focus tended to have more negative ones (prasastyoga et al., 2017). rft and corporate social responsibility very little research has examined the relationship between rft and corporate social responsibility (csr), and the literature is sparse in the context of small firms or the entrepreneurial process. rft has been linked to altruistic behavior in individuals, with a promotion focus strengthening altruistic behavior and a prevention focus weakening it (baek & reid, 2013). from a marketing standpoint, different regulatory foci have been found to be linked to different reactions to csr activities (kim et al., 2012). kim et al. (2012) analyzed the relationship between promotion hope/ prevention hope and consumer attitudes towards csr. promotion hope/prevention hope were characterized as the different outcomes presented by advertisements to consumers and the type of hope induced in the consumer. for example, a weight loss commercial would instill prevention hope as the consumer would hope to prevent the negative outcome of weight gain (poels & dewitte, 2008). prevention hope focus resulted in altruistic csr activities being more effective than strategic csr activities, while a promotion hope focus produced no significant difference between the two. habitzreuter and koenigstrofer (2018) investigated whether a csr sport event sponsorship influenced attitude toward the sponsor depending on regulatory fit. it was found that when the regulatory focus of the participant matched that presented by the csr sponsorship, there was an increase in the perceived philanthropy of the sponsorship (habitzreuter 36 w. o. peake, m. yates, d. barber iii, & a. mcmillan journal of small business strategy / vol. 30, no. 3 (2020) / 33-46 & koenigstrofer, 2018). sme, entrepreneurs and csr a common perception is that smes’ defining characteristic is their size, and therefore they tend to be homogenous in terms of behavior (wilkinson, 1999). while size certainly plays a key role, especially when differentiating from the behaviors of mncs, there are other key internal and external factors that define their behavioral characteristics (jenkins, 2006). the behavior of smes is often viewed through the lens of the entrepreneur or owner/manager. bolton (1971) noted that smes often have a ‘personalized style’ of management that is less formal in nature and can vary widely based on the individual personalities of owner/managers. the most common form of sme is the owner-managed firm, where ownership and decision-making power lie within the same person (jenkins, 2006). this close connection between the organization and the entrepreneur strongly influences the organization’s strategies, policies, practices, as well as the role that the organization plays within society as a whole (e.g. barnett & karson, 1987; carroll & hoy, 1984; hamman et. al, 2009) this type of organizational structure grants the owner/manager a high degree of autonomy and influence as to how and why csr is pursued. lepoutre and heene (2006) state that smes are well positioned to engage in socially responsible behavior in part because they often create new jobs, induce economic growth and introduce innovations. as such, smes engage in behaviors that align them with stakeholders including employees, customers, and the community within which they operate. these stakeholders are particularly relevant when considering csr. in fact, turker, (2009) created a framework for corporate social responsibility based on these exact stakeholders – society, employees, and customers. society includes communities, the natural environment, next generations, and non-government organizations. this is referred to as csr to social and nonsocial stakeholders. csr to employees refers to activities which are directly related with the physical and psychological working environment of employees. finally, csr to customers refers to the extent to which the company builds and maintains good relations with consumers including providing high quality products or accurate information about its activities. in addition, turker’s framework is aligned with the european commission’s definition of social responsibility and the responsible entrepreneur that has been used in the sme literature previously (e.g. lamberti & noci, 2012; stekelorum et al., 2019; torugsa et al., 2012). the european commission’s publication on ‘‘responsible entrepreneurship’’, defines the socially responsible entrepreneur as one that (1) treats customers, business partners and competitors with fairness and honesty; (2) cares about the health, safety and general well-being of employees and customers; (3) motivates his workforce by offering training and development opportunities; (4) acts as a good citizen in the local community; and (5) is respectful of natural resources and the environment (european commission, 2004). society-related social responsibility csr measures often focus on the enhancement of reputation and trust (ortiz-avram et al., 2018). a small business owner’s success criteria may include having a positive societal impact and public recognition through society related social responsibility (gorgievski et al., 2011). in addition, given the small size of these businesses, anonymity is forsaken and if a mistake is made or a questionable action taken, it is easy to identify the responsible party or parties. in these cases, responsibility will ultimately end with the owner-manager (besser, 2012; spence, 2007). “this moral proximity with community and customers can focus the mind considerably on socially responsible behavior” (spence, 2007, p. 537). burton and goldsby (2009) determined that small business owners’ attitudes towards social responsibility substantially predicted engagement in those behaviors. they found there to be alignment between economic versus noneconomic goals and the focus of subsequent social responsibility initiatives. in the sme domain, the impact of engagement in social responsibility on firm performance has been examined more often than behavioral drivers. as such, research suggests performance benefits do exist for sme firms engaged in socially responsible behaviors (fitzgerald et al., 2010; niehm et al., 2008; petrenko et al., 2016) and that small business owners are aware of this link. increased environmental, social and governance reporting transparency decreased debt costs for small firms (dunne & mcbrayer, 2019). besser (2012) found that small business owners indicated their primary motive for involvement in community-facing social responsibility was to promote business success. this is echoed in the studies of small business social responsibility that highlight the role of enlightened self-interest in more societal-oriented social responsibility (peake et al., 2015; peake et al., 2017). society-related social responsibility is more discretionary by nature (panwar et al., 2016; panwar et al., 2017), so those entrepreneurs with a promotion regulatory focus would be more predisposed to chase the “gains,” or business success (besser, 2012), that society-oriented social responsibility may pose. grayson and hodges (2004) ad37 w. o. peake, m. yates, d. barber iii, & a. mcmillan journal of small business strategy / vol. 30, no. 3 (2020) / 33-46 vocate that a key driver for business success or gains is a competitive instinct and an inclination to look for opportunities in non-traditional areas, such as those found within the csr realm (parhankangas et al., 2015). this critical instinct is one that we would expect entrepreneurs with a promotion regulatory focus to display through their pursuit of society-oriented social responsibility. h1. small business owners with a promotion focus will report higher levels of engagement in society-oriented social responsibility. employee and customer related social responsibility many smes tend to emphasize csr efforts that focus on employees, the local community, and other stakeholders that are ‘closer to home’ (fitzgerald et al., 2010; jenkins, 2009; russo & tencati, 2009). most smes are content to survive as long as they are able to make a sufficient living (baker, 2003). this may particularly impact an owner/ manager’s proclivity towards a prevention focus rather than a promotion focus when considering social responsibility. companies that place salience on employees as a major stakeholder in their firms’ strategies tend to be more ethical in their human resource practices (goldsby et al., 2018) in smes the pressure for responsible action is most strongly felt about stakeholders such as employees and customers (lepoutre & heene, 2006). this pressure however is often preventative in nature. in other words, small business owners and owners/managers are focused on legal issues related to employment law and consumer protection laws. in addition, “the extent and depth of an sme’s implementation of csr measures will depend on the owner-manager’s awareness of the costs of irresponsibility as well as of the benefits of responsible behavior” (ortiz-avram et al., 2018, p. 259). csr to employee behavior, while regulatory in nature may involve minimal treatment such as a focus on the availability of employee training and development opportunities that are both accessible and inclusive and the crafting of reward systems that are fair and equitable (jamali et al., 2009). in addition, turker (2009) states that these types of csr activities involve or are directly related with the physical and psychological working environment of employees. they may do little however beyond keeping the small business outside of the legal system or avoiding any potential lawsuits. csr to customer socially responsible behavior may involve openness, honesty and fairness in contracts, agreements, payments and (marketing) information; pricing issues; and the origin of resources (hornsby et al., 1994; humphreys et al., 1993; lahdesmaki, 2005; vitell et al., 2000; vyakarnam et al., 1997). additionally, consumers are requesting more sustainable products. as consumers become more environmentally conscious smes need to consider this in order to meet customer demand. these activities may include increasing quality standards, offering the right products, or offering after-sales support or even prompt delivery services (stoian & gilman, 2017). the focus is however, still on prevention as it relates to safety and responsibility. both employee and customer oriented social responsibility involve meeting minimum thresholds for employee and customer relations; thus, these measures represent a more vigilance-type approach. as such, we would expect higher levels of prevention focus to associate with higher levels of engagement in employee-oriented and customer-oriented social responsibility. h2. small business owners with higher levels of prevention focus will report higher levels of engagement in employee-oriented social responsibility. h3. small business owners with higher levels of prevention focus will report higher levels of engagement in customer-oriented social responsibility. data and method data was collected via mail surveys and online from small business owners or managers through three data collection efforts. in each of the data collection efforts, small business owners or managers, who agreed that they specifically deal with human resources were targeted for the original survey. the organizations of respondents must have at least one and less than 250 employees. the survey was originally designed as a mail survey, and was distributed in summer 2015, to 4103 businesses in kentucky using traditional methods with a notification letter, survey, and reminder card. with the mail survey, a total of 234 surveys were returned, yielding a response rate of 5.7%. additional data was collected using qualtrics panels (n = 492) and mturk (n = 401) using the same parameters. through these means, 1127 surveys were originally collected with 1023 complete surveys. since the purpose of this study is to examine the relationship between the regulatory focus of the business owner or owner/manager and firm engagement in social responsibility activities, we removed any respondents who were not the owner or owner/manager of the firm, who did not make key decisions, or who did not participate in the day-to-day operations of the firm. further, to ensure that all 38 w. o. peake, m. yates, d. barber iii, & a. mcmillan journal of small business strategy / vol. 30, no. 3 (2020) / 33-46 respondents had a sufficient number of enough employees to be able to respond to employee social responsibility, we restricted the respondents for analyses to those with more than five and less than 250 employees. firms fewer than five employees are more likely to have informal human resources practices and are potentially less likely to provide professional development opportunities for their employees (coder et al., 2017). after these restrictions were put into place, 387 observations remained for analysis. measures social responsibility engagement we used the society, employee, and customer elements of the turker (2009) social responsibility constructs. respondents were asked to indicate the extent to which they or their business had engaged in an activity within the community. seven items comprise the societal social responsibility measure, and include items such as, “make investments in our community to create a better life for future generations,” “encourage employees to engage in volunteering opportunities,” etc. cronbach’s alpha for these items is 0.889. five items make-up the employee social responsibility measure, and include items such as, “implement flexible policies that allow employees to have a good work/life balance,” “support employees who want to acquire additional education,” etc. cronbach’s alpha for these measures is 0.802. three items make up the customer social responsibility measure, including, “go above and beyond to respect and serve our customers,” “provide customers with full and accurate information regarding our products,” and “ensure high levels of customer satisfaction.” cronbach’s alpha for these measures is 0.849. promotion versus prevention focus the promotion versus prevention achievement orientations were taken from the regulatory focus questionnaire (rfq) developed by higgins et al. (2001). these measures have been widely used in the entrepreneurship literature related to regulatory focus (e.g., bryant, 2009; hmieleski & baron, 2008). the rfq contains 11 items, related to either promotion or prevention focus. respondents were asked on a scale of 1 to 5, where 1 = never/seldom and 5 = almost always/always, to circle the number that best represents their response. there are five promotion focus oriented items, such as “growing up, would you ever ‘cross the line’ by doing things that your parents would not tolerate?” and “not being careful enough has gotten me into trouble at times.” six items comprise the prevention focus construct, including items such as “compared to most people, are you typically unable to get what you want out of life?” and “do you often do well at different things that you try?” any negative phrases were reverse coded in alignment with higgins et al. (2001). cronbach’s alpha for the promotion items is 0.823. cronbach’s alpha for the prevention items was 0.632, which is not uncommon given the measure was extracted from prior research (zahra et al., 2004) controls with a focus on the entrepreneur’s regulatory focus and the subsequent firm engagement in social responsibility, we analyze several entrepreneur and firm-related controls. with regards to entrepreneur-level information, we examine gender, age, and education level. both gender and education level have been found to have important impacts on small business social responsibility (peake et al., 2017), while the age of the owner has often been included as a control across studies acknowledging the importance of the owner in setting firm values and decisions. in terms of business-level controls, we examine the industry of the firm and the number of full-time employees. results the averages, standard deviations, and correlations for the variables employed in our analyses are reported in table 1. we examine three models, one representing each of the dependent social responsibility variables, societal social responsibility, employee social responsibility, and customer social responsibility. the models are reported below. prior to examining the variables via regression analysis, we undertook statistical analyses to assess the suitability of the data for further analysis. results of the harman one-factor test reveal that common method bias does not appear to be a concern with the data, given that the items loaded on 6 factors with no factor comprising more than 23% of the variance (e.g. andersson & bateman, 1997; greene & organ, 1973; schriesheim, 1979). we likewise assessed the data for multicollinearity via the calculation of variance inflation factors and condition index values. we found that all vifs were less than 1.3 and the condition index was less than 30, which provides no evidence of issues with multicollinearity (hair et al., 2013). given the results of the harman one-factor test and multicollinearity examinations, we believe our data to be suitable for further analyses. results of these analyses are available in table 2 below. our results indicate that neither promotion nor prevention focus significantly impact engagement in societal-oriented social responsibility. as such, hypothesis 1 is not 39 w. o. peake, m. yates, d. barber iii, & a. mcmillan journal of small business strategy / vol. 30, no. 3 (2020 / 33-46 table 1 average, standard deviation, and correlations for variables under analysis variable mean std dev 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 1. societal social responsibility 3.54 0.89 2. employee social responsibility 4.06 0.66 0.66* 3. customer social responsibility 4.59 0.57 0.13* 0.46* 4. prevention focus 3.91 0.62 0.09* 0.34* 0.47* 5. promotion focus 3.56 0.86 0.07 0.17* 0.23* 0.30* 6. male 0.60 0.49 0.39* -0.17* -0.10* -0.06 -0.10* 7. education level 4.58 1.41 -0.06 -0.00 -0.02 0.09 -0.00 -0.02 8. age 42.24 13.03 -0.04 0.10* 0.21* 0.21* 0.14* 0.06 0.12* 9. retail 0.18 0.39 -0.03 0.00 -0.09* -0.10* -0.07 -0.07 -0.03 -0.12* 10. service 0.40 0.49 0.02 -0.01 -0.04 0.01 0.01 0.06 0.13* -0.06 -0.38* 11. manufacturing 0.06 0.24 -0.03 -0.12* -0.02 -0.10* -0.02 0.12* -0.05 0.01 -0.12* -0.20* 12. number of employees (ft) 23.59 31.92 0.15* 0.08 -0.04 -0.05 0.01 0.07 0.04 0.00 -0.03 -0.05 0.10* 40 w. o. peake, m. yates, d. barber iii, & a. mcmillan journal of small business strategy / vol. 30, no. 3 (2020) / 33-46 supported. although model 1 has weak predictive power overall, two control variables exhibited significance in this model: gender (𝛽 = -0.193, p < 0.05) and number of employees (𝛽 = 0.005, p < 0.01). the significant effects for gender suggest that men negatively impact the level of society-oriented social responsibility engagement. the number of employees was positively and significantly associated with the level of societal-oriented social responsibility engagement. the two subsequent models, however, provide both greater predictive power and lend support to hypotheses 2 and 3, since prevention focus is positively and significantly associated with higher levels of engagement in employee (𝛽 = 0.323, p < 0.001) and customer-oriented (𝛽 = 0.384, p < 0.001) social responsibility. the results of model 2 suggest that, as in model 1, gender (𝛽 = -0.198, p < 0.01) and the number of employees (𝛽 = 0.002, p < 0.05) in the firm likewise hold significant impacts on engagement in employee-oriented social responsibility. as mentioned previously, prevention focus underpins the findings in model 3. here we also find a marginal influence of promotion focus (𝛽 = 0.053, p < 0.10) on engagement in customer-oriented social responsibility. in terms of controls, age of the owner or owner/manager (𝛽 = 0.005, p < 0.01) is significantly associated with higher levels of engagement in customer-oriented social responsibility. robustness check the results of the model for societal-oriented social responsibility were both surprising and unexpected. as such, we ran a robustness check for the model. since the number of employees held a substantial association with engagement in societal social responsibility, we examined the robustness of our results are differing thresholds for number of employees. with a model that examined the minimum number of employees at 10, the results held for gender and number of employees, respectively. regulatory foci table 2 results of linear regression analysis model 1 societal social responsibility model 2 employee social responsibility model 3 customer social responsibility prevention focus 0.115 (0.078) 0.323*** (0.054) 0.384*** (0.044) promotion focus 0.031 (0.055) 0.043 (0.038) 0.053i (0.031) male -0.193* (0.093) -0.198** (0.064) -0.085 (0.053) education level -0.048 (0.032) -0.019 (0.022) -0.027 (0.018) age 0.000 (0.004) 0.002 (0.002) 0.005** (0.002) retail -0.025 (0.130) 0.056 (0.090) -0.063 (0.074) service 0.039 (0.104) -0.026 (0.072) -0.068 (0.059) manufacturing -0.113 (0.201) -0.237i (0.139) 0.034 (0.114) no. of employees (ft) 0.005** (0.001) 0.002* (0.001) 0.000 (0.001) f 2.218* 8.040*** 14.145*** r2 0.050 0.161 0.252 n = 387, ***p < 0.001, **p < 0.01, *p < 0.05, ip <0.10 41 w. o. peake, m. yates, d. barber iii, & a. mcmillan journal of small business strategy / vol. 30, no. 3 (2020) / 33-46 did not enter the model as a significant predictor, and the gender and number of employees variables held, although the significance for the number of employees waned as the minimum employee threshold grew larger; thus, suggesting an important role for slack, which we address in the subsequent section. discussion, implications and conclusions in utilizing the lens of regulatory focus, our study sheds new light upon the micro-foundations of csr within the sme context. csr researchers and practitioners have a long history of pointing to the ‘business case for csr’ (e.g. carroll & shabana, 2010; friedman, 1970; panwar et al., 2017) by emphasizing the potential gains that organizations, including smes, could achieve through the adoption of such practices (panwar et al., 2016, 2017). while the economic value of csr is a priority within smes, it appears that the focus is more on vigilance, or preservation, and less on gains. further, our findings suggest a prevention regulatory focus leads entrepreneurs to strategically interact with specific stakeholders, namely customers and employees, in an attempt to insulate their firms from failure. stakeholder salience (mitchell et al., 1997; sen & cowley, 2013) likely plays a key role in terms of whose interests are prioritized by the entrepreneur (panwar et al., 2016). mitchell et al. (1997) outlined the importance of any given stakeholder based on the possession of one or more of the following attributes: power, legitimacy, and/ or urgency. stakeholders possessing a single attribute are latent, while those possessing two or more attributes are perceived as more salient. sen and cowley (2013) list a range of potential sme stakeholders in terms of highest to lowest salience. employees and customers are classified as dominant stakeholders, while groups that make up societal social stakeholders (e.g. community, political groups) are considered discretionary stakeholders. these assertions are backed by the work of fassin et al. (2011), given that they found job creation and job continuity were the most widely recognized and accepted forms of social responsibility by small business owners; thus, solidifying the importance of employee-oriented social responsibility for small business owners and owner/managers. this classification of dominant versus discretionary ties back to one of csr’s seminal frameworks; carroll’s (1979) csr pyramid. carroll (1979; 1991) defines csr as encompassing “the economic, legal, ethical, and discretionary (philanthropic) expectations that society has of organizations at a given point in time.” in addition, the study gives values or weights to each of the four components based on the relative importance that executives place on each area. similar to maslow’s (1943) hierarchy of needs, carroll emphasized the need for organizations to work from the bottom up to meet each of the csr components, with economic responsibilities being met first, followed by legal, then ethical, and lastly, discretionary. meeting the needs of dominant stakeholders (i.e. customers and employees), falls in line with meeting the economic, legal, and ethical responsibilities outlined by carroll (1979). meeting the needs of discretionary stakeholders (i.e. societal social stakeholders) falls within carroll’s discretionary/philanthropic responsibilities. as the name implies, these ‘responsibilities’ are voluntary, or optional, by nature. discretionary csr is not considered a required ethical or moral responsibility, and therefore society does not deem organization’s ‘unethical’ for not engaging in said efforts (carroll, 2016). in other words, losses are not likely to occur if organizations fail to engage with discretionary stakeholders. failure to meet the needs of dominant stakeholders, on the other hand, could result in potential losses, whether they be in the form of profit loss, legal repercussions, reputational hits, or all the above. while smes are not subject to the same level of global scrutiny as large firms, they are still vulnerable, making preservation of business reputation a primary motivation for engaging in csr (sen & crowley, 2013). as such, further examination of balance with more discretionary stakeholders in the social responsibility domain merits further attention from researchers in the sme context. with the discretionary nature of societal-oriented social responsibility, there is the possibility that organizational slack plays an important role in facilitating engagement in that domain. although we do not have conclusive evidence, our analysis suggests that engagement in societal-oriented social responsibility heightens when the firm is larger in terms of number of employees. a larger number of employees may suggest the firm is of sufficient size for organizational slack to become a point of leverage for participation in more discretionary forms of social responsibility. prior research suggests that organizational slack in the form of human resources and financial stability (george, 2005; jenkins, 2004) may allow a firm to commit more time and financial resources to social responsibility (panwar et al., 2017). as such, we suggest that future explorations for more discretionary forms of social responsibility consider the effects of slack resources, both in terms of human resources and financial resources. given that entrepreneurs appear to be engaging in csr as a means to avoid loss rather than achieve gains, it would be interesting for future research to examine entrepreneurs’ holistic attitudes towards csr itself. do they feel ‘forced’ to engage in such efforts, and as a result, does that affect whether they view the efforts in a positive or negative light? 42 w. o. peake, m. yates, d. barber iii, & a. mcmillan journal of small business strategy / vol. 30, no. 3 (2020) / 33-46 do they feel true autonomy over the csr efforts, given the perceived obligations towards certain stakeholders? in a study of executives, mazereeuw-van der duijn schouten et al. (2014), found that the attitude of csr as a financial responsibility was associated with higher engagement in csr behaviors aimed at internal stakeholders. we do not have a substantial understanding of attitudes in the small business context, however, and although these results suggest there may be some alignment in small and large corporations related to these attitudes and their impact on socially responsible behavior, more research is needed. practical implications prior research suggests that regulatory focus of the individual affects how opportunities should be framed in order to gain support (yi & baumgartner, 2009). this work suggests that although messages or pitches may be factually equivalent, framing can affect how the message is received, depending on regulatory focus of the recipient (yi & baumgartner, 2009). such results are supported on the consumer-side as well, since csr and sustainability issues regarding the environment are most appealing when prevention framing is utilized (bullard & manchanda, 2013). our research appears to provide support for this, particularly in the context of pitching socially responsible initiatives to entrepreneurs and small business owners. in focusing the sharing of socially responsible behaviors from a vigilance or avoiding loss frame, our results suggest entrepreneurs may be more responsive regarding employee and customer-oriented socially responsible behaviors. limitations although this work holds substantial implications for social responsibility in the sme context, there are several limitations to acknowledge. the data examined are cross-sectional and self-reported. while this is certainly a limitation, we do not believe it impedes the interpretation of the analyses, nor the implications of the results. in designing the survey instrument, we followed best practices by podsakoff et al. 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(2010). the relationship of personality to entrepreneurial intentions and performance: a meta-analytic review. journal of management, 36(2), 381-404. file:///h:/jsbs%202020/vol%2030%20no%203/do%20entrepreneurs%20do%20good%20deeds%20to%20maximize%20wins%20or%20avoid%20losses/%20https://www.wto.org/english/res_e/booksp_e/world_trade_report16_e.pdf file:///h:/jsbs%202020/vol%2030%20no%203/do%20entrepreneurs%20do%20good%20deeds%20to%20maximize%20wins%20or%20avoid%20losses/%20https://www.wto.org/english/res_e/booksp_e/world_trade_report16_e.pdf file:///h:/jsbs%202020/vol%2030%20no%203/do%20entrepreneurs%20do%20good%20deeds%20to%20maximize%20wins%20or%20avoid%20losses/%20https://www.wto.org/english/res_e/booksp_e/world_trade_report16_e.pdf   table of contents 1 female & male entrepreneurs’ perceived value of formal networks: are there differences? debra s. malewicki university of wisconsin-whitewater cathleen a. (folker) leitch wilfrid laurier university 21 when it’s right to be “wrong”: the effects of overconfidence and planning on product performance in a dynamic environment mark simon oakland university john kim oakland university s trateg y   journal of small business  susan m. houghton north carolina a&t state university xiaodong deng oakland university 47 a resource-based view of three forms of businesses in the startup phase: implications for franchising dianne h.b. welsh the university of north carolina greensboro amy e. davis college of charleston david e. desplaces college of charleston cecilia mchugh falbe university at albany state university of new york 67 the impact of public assistance programs on small businesses: strategic planning, entrepreneurship, resources usage, and market orientation as mediating variables rami schayek ben-gurion university of the negev dov dvir ben-gurion university of the negev 99 distinguished research commentary: approaching the psed: “some assembly required” kelly g. shaver college of charleston amy e. davis college of charleston mark s. kindy medical university of south carolina carrie a. blair college of charleston reproduced with permission of the copyright owner. further reproduction prohibited without permission. s trateg y   journal of small business  from the editor welcome to volume 21, number 1 of the journal of small business strategy. first, you will notice that i am the new editor. paul belliveau and bruce kemelgor are the new associate editors. this represents a total change-over of the editors at jsbs from the last issue. although, jsbs continues to be produced at bradley university, a new group has taken over the production process as well. this group is led by james foley of the turner center for entrepreneurship at bradley university. after going through my first issue as editor, i have new found respect for any team that puts a journal together. the second thing that you probably noticed is that the year listed on the journal is 2010. yes, we realize that it is 2011. we are one year behind on our publication schedule. our goal is to make-up the issues that have been missed. we hope to do this sooner, rather than later. but, we intend to maintain the quality and integrity of the journal as we catch-up. it should also be noted that several of the manuscripts were accepted in 2011. we realize that you have many outlets for your manuscripts today. we hope that this issue is a key step in demonstrating that jsbs is a reliable outlet for your manuscripts. i would also like to mention that we have several manuscripts that have been accepted or are under r&r for our next issue. so, please consider jsbs for manuscripts and mention to your colleagues that jsbs is a potential outlet for their manuscripts. jsbs’s sponsoring organization is the small business institute®. a call for papers for their 2012 conference is found at the back of this issue. i hope to see you there in february 2012. of course the key to this publication is the authors. this issue contains a wide variety of articles. one of the more interesting is former editor fred fry’s book review. for those that know fred (i worked with him for over 15 years until he retired), he brings his own style to this book review. specifically fred reviews the book creating entrepreneurs: making miracles happen, edited by fred kiesner. basically fred describes this book as unusual, so you will receive an unusual book review for an unusual book. i think you will find this book review to be both informative and enjoyable. the first article in this issue is by burpitt and valle. their paper utilizes the theoretical framework of raisch and birkinshaw (2008) to investigate the performance implications of three strategic adaptation approaches--exploitation, exploration, and organizational ambidexterity. specifically, they measured four organizational antecedents to strategic adaptation and the performance outcomes associated with adaptation choice. their results demonstrate that organizational deftness, group potency, elements of communication and cooperation within the firm, and low centralization were significantly related to organizational ambidexterity, and that ambidexterity was positively related to revenue and profit growth.       the second article by voelker and mcdowell examines the performance of historically underrepresented firms using a sample of all contracts awarded by the johnson space center, a nasa directorate located in houston, texas. their findings indicate that more diverse firms received higher awards than specialists. also disadvantaged firms received higher dollar awards than general small businesses. women-owned businesses did not outperform or underperform general small businesses in terms of the dollar amounts of contracts received. also, they were not more or less specialized than general small and large businesses. the third article by cieślik, kaciak, and welsh utilizes a unique data set consisting of over 19,000 polish manufacturers engaged in export operations. the 10-year longitudinal study found that early involvement in international activities negatively affected the survival and regularity of sales of small exporters. however for large importers, it had a positive impact. their findings also indicated that a strong commitment to internationalization and a capacity for managing rapid growth are factors in achieving high growth in international sales over time. the fourth article by valenti, mayfield, and luce explores reasons why outside corporate directors choose to serve on the boards of small to mid-sized companies. their finding, using a sample of 102 nasdaq companies, indicate that firm performance, financial incentives, and time constraints influence the decision of an outsider to accept a board seat. the fifth article by park, lee, yi, and chinta examine the manifestation of cross-cultural differences in project management practices in small firms. using a sample of 66 u.s. and 62 korean business executives, they find cross-cultural differences in the criteria used in project management. the authors of these articles have spent a great deal of time and effort to research and write them. i hope you find this issue informative. i am looking forward to bringing you more issues of jsbs in the future. ross l. fink editor bradley university reproduced with permission of the copyright owner. further reproduction prohibited without permission. 5tra tegf connectivity & communication: a study of how small wine businesses use the internet armand gilinsky, jr. sonoma state university armand. gilinskysonoma.edu elizabeth c. thach sonoma state university li z. thach@sonoma. edir karen j. thompson sonoma state university karen. thompson@sonoma.edu abstract this paper addresses the development and effects of internet use by small wine businesses. it includes usefiil insights that can be applied to other sinall businesses, and also proviiles helpful information for consultants and entrepreneurship educaiors. an erploratory fiainework is presented thar includes a four-stage sequence through which small businesses rypically progress in relation to the use of internet-related tools. the stages include awnreness, desrgn, implemeruarion, and practice. propositions are also developed ro guide analysis of the framework, aml an empirical test of various parts of the framework is performed using a sample of 382 wineries. results slrowed that, beyond rhe use of e-mail for conmiunication and connectivity, awareness of the imernet's uses is moderate, wlrile implementation is moderore to low. thirty-nine percent of the respondents believe tire internet will make a strong contribution to sales and profitability in the future, though only 9% report they are currenrly achieving this with interne( utilization. introduction increasing internet utilization and the further development of infrastructure for e-commerce have induced small businesses to seek expanded market development opportunities (evans & wurster, 1999) and cost savings benefits (garciano & kaplan, 2000). it has been suggested that, "the emergence of virtual markets opens new sources of innovation (e.g., business model innovation) that may require a parallel shift in strategic thinking towards more integrative, dynamic, adaptive, and entrepreneurial strategies," (amit & zon, 2001, p. 516). rates and types of utilization of the internet by businesses have been varied due to many factors (timmers, 1998). while the internet offers broad access and nchness of information, different industries have different informational needs (evans & wurster, 1999). for example, legal professionals may require extensive research capabilities whereas wholesale distributors may not. insufficient human, technical, and financial resources may prevent a company from deploying desirable internet applications. lack of commitment to or 37 journal of sinai/ business strategy vol. /4, iyo. 2 fall/winter 2003 familiarity with rapidly changing technology on the part of management may also affect internet adoption and utilization (henderson, 1993). further, security concerns may deter adoption of internet transaction applications and the support systems needed to make them work (venkatraman, 2000). small businesses represent the majority of american businesses & serve as important engines for economic growth, yet recent research on internet adoption has focused almost exclusively on large businesses (amit & zott, 2001; dutta & segev, 1999; smith, bailey, & bymjofsson, 1999). the purposes of this exploratory investigation are to provide a frame of reference for small business owners and consultants as to how small manufacturers perceive and utilize the internet for e-commerce implementation, to provide educators with a new framework for internet utilization, and to serve as a foundation for future research. an important issue for both small business research and practice is, "why do some small firms choose to utilize the internet whereas others do not?" previous research has tried to explain this phenomenon by citing industry and organizational characteristics as possible causal factors (lohrke & franklin, 2002; poon & swatman, 1999; premkumar & ramamurthy. 1995). due to the multiplicity of organizational issues surrounding internet adoption and utilization, and the particular relevance of industry classification, it is important to focus the research on a single industry to minimize environmental noise. with this m mind, the wine industry was selected, because it is composed of many small businesses. according to the american viticulture association (a va, 2002), there are approximately 2,000 wineries in the us, and more than 50% of them have fewer than 5 employees. there are approximately only 10 us wineries with more than 1.000 employees (perdue, 1999), thus making the us wme industry an excellent resource for small business research. in addition, the researchers are located in a part of the country with access to many winery associations. internet utilization afuah & tucci (2001) describe the five major business activities that occur via the internet: communication, content, community, coordination, and commerce. the first and most obvious internet business activity is conununicntion. companies primarily use e-mail as a means to give and receive information, coordinate activities and tasks, and build and maintain relationships. communication, both internal and external (i.e., with customers and suppliers), is generally acknowledged as the most quickly adopted busmess activity on the internet. a second business activity is content, or the information that is delivered over the internet. for a small business this may include industry news, stock quotations, weather forecasts, and travel int'ormation. content can be produced and dehvered via e-mail, or accessed via websites. chat rooms, bulletin boards, and other online group conversation mechanisms comprise the third business activity, communiry. community provides interactive formats for interest groups, industry networks, or internal design groups to meet and share information in real time. it can save time and money by reducing the need for travel and meetings, and by increasing the speed of design and marketing. customers can even be invited to join online communities to provide feedback about products and services. similar to community, but with a different intent, coordination is generally focused on accomplishing work tasks online between groups within the business as well as with external suppliers. the mediating property of the internet reduces the need for paper transactions and rapidly accelerates business processes that may have taken days to complete in the past. 38 journal ofstnall business strategy voh /4, no. 2 falll)vtnter 2003 the final internet business activity, and the one that receives the most anention in the press, is commerce. according to kalakota and whinston (1996), commerce via the internet involves activities that lead to an exchange of value. these activities can be divided into two major areas: ( i) business to consumer (b2c), in which a business provides products and services to a customer, and (2) business to business (b2b), in which one business provides products and services to another business. a third category, consumer to consumer (c2c), as exemplified by internet trading firms such as ebay and on-line auction houses, has emerged since 1996, but does not apply to the firms in this investigation. depending on the industry, b2b activities may be more prevalent than b2c, but either one of these activities can lead to competitive advantage if adopted as part of an overall internet strategy focused on the particular strength and needs of the small business. small business internet use the research stream on small business use of the internet is sparse. one recent survey notes increasing small business internet use (dibernardo, 2000). small businesses use the internet to expand their geographic reach, increase efficiencies of executing transactions, and reduce printing costs (alba et. al., 1997); to establish direct communication with customers (shaw, gardner & thomas, 1997); to improve customer support (strauss & hill, 2001); and to create a permanent information resource for customers via websites (griffith & krampf, 1998). most recently, researchers into small business practices have examined the awareness and usage of the internet in terms of the perceived benefits of this communication medium for competitiveness. as shown in table i, various researchers have examined the impacts of firm size (van beveren & thomson, 2002), perceived utility and ease of use (levenburg, schwarz, & dandridge, 2002), degree of information specificity (lohrke & franklin, 2002), and the degree of business innovation and business criticality on the propensity of small businesses to employ internet technology. the studies listed in table i focus on various stages of internet adoption and use by small businesses, ranging from awareness to design, implementation, and practice. table i: typology of recent research pertaining to small business internet use adoption independent dependentstudystage variable(s) variable(s) kickul, sandercock, v degree of business. finkl, & selden (2002) innovation 'nternet readinessawareness [n = 24 small 'egree of business v e-commerce strategy manufacturers] criticality levenburg et. al, (2002) v firm performance[n = 300 small 'erceived utilitydesign (i.e., sales, costs,busmesses in 75 sic 'erceived ease of use codes] profits) v degree of information lohrkc & franklin specificity (i.e., follow(2002) up service, knowledge v e-mail and websiteimplementation [n = 41 small spewalization, use manufacturers] customization branding, product technology) van beveren & thomson (2002) * 8 f f * e-mail and websitepractice ( 11 * ize 0 ifnl manufacturers] 39 journal of sniall business siraregy vol. /4, no. 2 fall/iv(nrer 2003 small business internet utilization framework to structure our analysis of small business internet use, a small business internet utilization framework is developed to categorize issues considered critical to small business internet utilization into a four-step process. this exploratory framework consists of four stages that characterize the cyclical adoption and utilization process, beginning with an initial awareness stage and progressing through the design, implementation, and practice stages. a feedback loop is also included. a business can be in multiple stages of the framework with respect to different internet activities (e.g., e-mail might be in the practice stage, while e-commerce is in the design stage). the stages are described below. following the discussion of each stage of the framework measures are proposed. ~di:a: i h g, b i b «h i dh some initial experience with the technology. as a result of exposure to internet technology and related information (via the media, word of mouth, or direct experience), the business comes to realize an internal need for internet technology adoption. factors influencing awareness include management's realization of the rapid internet adoption rate and the corresponding use of technology by customers and business partners. at the time of this writing, the external pressures imposed by an increasingly sophisticated marketplace (e.g., high customer expectations including accelerated transaction rates, volumes, scope and accuracy) are driving the use of internet technology. also, having professional internet services (i.e., domain name, web page, e-mail addresses, etc.) contributes to stakeholders'erception of the legitimacy of a small business as a going concern (aldrich 8f. fiol, 1994). another facet of the awareness stage is the busmess's realization of the possible benefits of internet technology. these benefits can include operating efficiencies resulting from the connectivity of business stakeholders, internal productivity gains, cost savings from streamlined business processes, and increased customer service levels. also in this stage, a business realizes that one or more benefits are possible at a cost that makes the effort worthwhile. to measure awareness, researchers can ask how small businesses perceive the importance of the internet for communication, content, community, coordination, and commerce. g~fbg ig: th d ib g i h i*dby ff technology-based business application (amit & zott, 2001). in this planning stage, the business decides what services it will offer online and how those services will be implemented and managed over time.. before developing the internet application questions of who will design, develop, and maintain the internet applications must be answered. many small businesses do not possess the it skills or the manpower necessary to completely develop the application and turn to outside internet consultants, isp's, and other business consultants. other issues pertinent to the design stage include where the applications will reside (in-house vs. isp); the choice of where the application is hosted plays a role in access speed, initial and ongoing maintenance costs, security, and ease of administration. management issues include determining who will manage the applications, where on the technology curve the business will target applications, how distribution channel issues will be addressed, and what feedback mechanisms will be used to monitor the applications. infrastructure issues must also be considered with special attention to emerging new technologies, the standards that are (or will be) in common use, and the flt with the business itself. these issues merit consideration early in the design process and throughout its subsequent iterations over the internet application's life cycle. to analyze this stage, researchers can ask small businesses how they designed an infrastructure for use, as well as to what extent the design function was outsourced. 40 journal ofsmall business strategy vo/. 14, /k/o. 2 fall/h'inter 2003 sta e 3: im lementation: the implementation stage occurs when the business begins to implement a designed internet application. the end result of this stage is the achievement of the design specifications and a functioning internet application (developed internally or with help from outside practitioners). considerations in this stage generally fall into two categories: technical issues and management issues. technical issues relating to implementation include the selection of required hardware, software, development tools, and providers of services. management issues include managing consulting professionals in their efforts to meet the goals specified in the design stage and both defining and monitoring the interface between staff and consultants. during the implementation stage management must also be prepared for a transition period of chaos or confusion as new business applications come online. to measure implementation, researchers can measure the degree to which small businesses have or have not implemented internet tools for communication, content, community, coordination, and commerce. researchers could also analyze the perceived barriers to adoption. g~p:p 0: tk p i g fk f k* p k i g fk* developed internet services. during this stage, businesses examine the benefits, costs, and disadvantages actually realized from the use of new services. the potential benefits realized during the practice stage of the framework might be: cost savings, productivity gains from improved business processes, expansion of business to new customers or markets, improved customer service, and/or efficiencies gained from the benefits of collaborative computing. additionally, benefits may result from aggregation of users, products, quality, and resources. costs examined in the practice stage include both dollar costs of implementation, maintenance and access, and opportunity costs that may relate to losses incurred at the expense of pursuing internet services. disadvantages might include any area where the traditional business functions demonstrate an advantage over the internet implementation (e.g., having personal contact with customers). for researchers, potential measurements for this stage can include the level of perceived value small businesses place on the internet regarding its current impact on revenues and profits, as well as i ts funtre impact on revenues and profits. sta e 5: feedback loo: a feedback loop enables small businesses to measure the effectiveness of internet business models by analyzing their strengths or shortcomings. businesses have specific goals for each internet application developed. the feedback loop allows small businesses to examine the mechanisms used to gather information about service utilization, costs, and benefits. further, the gathered information must be analyzed in some way to determine if the business is meeting its specified goals. the results of this analysis lead to another iteration of the process beginning with a new awareness stage followed by a re-design stage. small businesses can incorporate any new "lessons learned" from the previous iteration. research propositions based on the proposed small business internet utilization framework, several research propositions were identified as the bases for an exploratory study on how small manufacturers utilize the internet. since design issues were considered by respondents in a pilot sample to be proprietary and dampened response rates in the test of the original survey instrument, the design stage of the framework was not measured in the final survey. thus, the awareness, implementation, and practice stages of internet adoption became the focus of inquiry. 41 journal of small business strategy vol. 14, no. 2 fall/winter 2003 this study focused on differences in business size as the key determinant of internet use. consistent with the size of small businesses in the focal wine industry, sample respondents firms ranged in size from one to 50 employees. our expectation was that awareness of the internet's uses would be lower for the smallest companies in our sample than for the larger ones. as demonstrated in earlier studies of internet adoption and use, small businesses might not perceive the internet to be important to their current small-scale operations (ruth, 2000; van beveren & thomson, 2002; weiss, 2000). as company size increases, though, internet technology could become increasingly necessary due to heightened internal and external pressures to gather and disseminate information to important stakeholders such as suppliers and customers (lohrke & franklin, 2002). thus, the following is proposed: proposition i: smaller businesses will have a lower awareness of the internet for commimication, content, coordination, commumty, and commerce purposes than will larger businesses. a natural corollary issue focuses on the implementation stage. small businesses could be expected to use internet tools to a lesser degree than larger companies. here again, it was anticipated that larger companies would devote the necessary resources and capabilities to use the internet and, therefore, would assign a higher level of importance to various internet uses (davis, 1989; vassos, 1996). this gives rise to the following proposition: proposition 2. smaller businesses will have a lesser degree of internet use for communication, content, coordination, community, and commerce purposes than will larger businesses. related to proposition ¹2 is the expectation that smaller businesses would perceive greater barriers to using internet technologies than would larger businesses. smaller businesses would tend to expenence more constraints resulting from such factors as reduced ease of use, fewer employees on hand to create and implement new information technologies, smaller budgets, and weaker market pressures to use to internet (levenburg et al., 2002). proposition 3: smaller businesses will perceive more barriers to internet use than will larger businesses. a need to raise transaction volume and lower attendant transaction costs via the internet suggests that larger companies would perceive greater value currently and in the future than would smaller companies (lohrke & franklin, 2002). the final proposition tests the assumption that larger businesses are further along the internet development and deployment curves than smaller businesses and, therefore, would have higher expectations for the internet's sales and profit-generating potential in the shortand long-term (hartman, sifonis, & kador, 2000). proposuion 4 larger businesses will perceive greater current and future value related to internet use than will smaller businesses. method sample by the beginning of 2001, over 900 small california wineries produced 149 million cases of wine, accounting for 85% of the total u.s. wine market (wine business monthly, 2001). offsetting declining per capita consumption in the i.s, and flat export sales, northern california premium wine sales and production were growing over 20% per year, leading to 42 journal of small business strategy vol. /4, no. 2 fall/its(uter 2003 the entry of new wineries into the market and to the expansion of existing wineries. predominantly family-owned, wine businesses provide job creation and growth in northern california's agricultural economy, yet relatively little rigorous research has been done on this important industry. prior empirical research into the behavior of firms in this industry has focused on documenting the frequency of organizational entry and exit (delacroix & swaminathan, 1991; stoeberl, parker, & joo, 1998), the creation of inter-organizational networks (brown & butler, 1995), the evolution of specialist organizations (swaminathan, 1995), and competitive strategies (gilinsky, stanny, mccline & eyler, 2001). studies specifically addressing wine industry internet usage are needed to expand our understanding of these small businesses. focusing on the wine industry also provides a means of minimizing environmental "noise" because of the concentration of firms in one industry and one geographic location. access to a sample of small manufacturers in the u.s. wine industry was provided by a wine industry trade service via the service's regular client mailing list. questionnaires were mailed and/or emailed in both paper and online format to the chief executives of the 1500 small wine businesses as part of a joint survey between the industry trade service and the researchers in january 2001. after the set of returned questionnaires was cleaned to eliminate duplicate responses from companies and responses from firms that identified themselves only as grape growers or service providers (e.g., accountants and financial firms that supported the wine industry), a total of 382 usable questionnaires were compiled (response rate = 25.5%). questionnaire development the first section of the questionnaire asked participants to identify basic demographic information about their businesses, including size of business. the latter sections focused on internet strategy and usage issues highlighted m the four propositions above (see appendix i). to measure awareness, five questions were asked on the survey. first, respondents were asked if they had a business email address (yes vs. no). this capability provides evidence of the company's awareness of internet uses and shows the company is using the internet for communication purposes. second, respondents were asked about the extent to which they would prefer to use company websites when researching wine supplies and equipment (on a scale of i to 5, with 5 being most preferred and i being least preferred). the question was designed to tap into the respondents'egree of experience with the internet and their awareness of its utility. the implication is that the more that respondents prefer to use other companies'ebsites for research purposes, the more they see it as an important tool for delivering content. the third awareness-related question asked if the company's current strategy included the use of the internet and e-commerce (yes vs. no). affirmative answers to this question indicate that the company has an awareness of the internet's capacity for building community both within the organization and between the organization and its external constituents (e.g., customers and suppliers). the fourth question asked respondents how interested they would be in using the internet for order processing purposes, in order to measure awareness of the internet's usefulness for coordination of a critical work task. the fifth question asked respondents about their level of interest in utilizing website marketing, as a way of measuring the degree of awareness that companies have related to commerce-based internet capabilities. respondents were also asked to indicate their interest level in using a variety of other internet services. to measure implementation-related aspects, respondents rated various internet uses as they pertained to their jobs. for these measures, respondents needed to indicate the level of importance (on a scale of most important [i] to least important [5]) that they attached to a communication-related use (using email), a content-related use (doing research), a 43 journal ofsmall business strategy vol. /4, no. 2 fall/winter 2003 coordination-related use (transferring files to associates), and a commerce-related use (purchasing). in addition, respondents were asked to check any of ten categories of internet uses that were currently being employed at their company (see appendix a). the "providing customer service" category was employed as the community-related variable for the implementation stage. finally, respondents were asked to place checkmarks next to any of ten types of diaiculties that they had experienced in doing global e-commerce. to measure practice, three questions were developed. the first and second questions asked about the extent to which the internet and e-commerce were making a contribution currently to company sales and profitability and expectations for their contributions to sales and profitability in the future. respondents were then asked to indicate when they believed that the internet and e-commerce would play an important role in their companies (0 = already important; i i year or less; 2 = 1-3 years; 3 = 4-6 years; 4 = 7 or more years). the survey insnument was pilot tested with a convenience sample of 20 participants. their feedback included suggestions to drop questions pertaining to the design stage as noted above, and to simplify technical terminology to match the internet experience level of the target population. as a result, no questions were added, but certain terms were simplified. results univariate statistics were used to identify means, frequencies, and percentages regarding sample characteristics and propositions. business size is usually measured by the number of employees (miesenbock, 1988). following the methodology of gaskill, van auken and manning (1993) and van beveren and thomson (2002), the sample was divided into four groups by size of business (i = i to 5 employees; 2 = 6 to 10; 3 = 11 to 25; and 4 = 26 to 50). the percentage breakdown by size of business for the 382 small manufacturers was as follows: 52% represented businesses with i to 5 employees; 15% represented businesses with 6 to 10 employees; 19% represented businesses with 11 to 25 employees; and 14% represented businesses with 25 to 50 employees. table 2 displays the means, standard deviations, and correlations for the study's key variables. the table shows that over twothirds of the correlations achieved significance (at p & .05 or lower). the strongest correlations were related to the measures of content, while business size had the weakest correlations. small business internet awareness regarding proposition ¹i, table 3 illustrates the level of awareness of the internet 5-c's for the small manufacturers by business size. the table shows average awareness levels of various activities conducted using the internet (on a scale of least preferred [i] to most preferred [5]) in addition to percentage responses to yes vs. no questions. regarding awareness of communication, respondents were asked whether they had an e-mail address that they used for business purposes. percentage responses were high for all 4 groups, ranging from 88% at the 11 to 25 employee businesses to 94% at the i-to-5-employee businesses. awareness of content scored somewhat lower, with a high mean of 3.41 (on a 5point scale) for the smallest businesses and a low mean of 2.60 for the larger businesses. while respondents indicated a moderate preference for using the web to research supplies and equipment, most preferred to access more traditional content found in product literature and newspapers or journals. awareness levels for community revealed moderate scores for the question on the degree to which the businesses'verall business strategies included internet usage. responses ranged from 62% awareness for the i-to-5-employee businesses to 74% for the 6-to-10-employee businesses. 44 journal ofsmail business strategy vog 14, no. 2 fall/winier 2003 table 2: means, standard deviations, and correlations among all variables means so 1 2 3 ~ 5 6 7 6 9 10 11 12 1 almbless sls4 196 113 awareness varlables 2 commenlcadon 0 e3 02e -06 3 content 3 11 1.36 -24"" .12' crnnnaedtp 0 65 0 48 .04 09 .02 5 coordlnauon 2.60 i 65 08 -.06 .14'2 e commerce 3 21 i 63 02 05 .11'2'33-7 commenlcatlon 4 25 1 20 col 27-25-.14d5 12' content 3 21 1 42 ~ 07 .10 45'"'s .16" .30'"'2"" 9 commnnllr 028 045 -.03 .09 11'3"" .04 .10 .12'ml'" ~ coordlnaeon 2 27 1.73 .16"'1"" 16'" .09 .17"'10 .33"" 29'"'l' commerce 208 143 -.14.19"" 45'"'08 .12'13'18"'0'"'1""23'"' actlco variables ~ peters conlrlbedon 1 37 0 53 .01 08 31"" 21"" 20"" .32"" .12'28'"'19"" 19"'4"" 38"" 'p 05 "p .01 "'p .005 --p ml table 3: small business internet awareness level susiness communication content commerce community coordinationsize average average average % having an interest in interest in% having email preference for internet. using website for business using websites related using internet marketing in for order purposes to do research business current (i to 5 scale) strategy i business processing i to 5 94 3.41 62 2.54 3.22 6to10 93 2.93 74 2.42 3.11 11 to 25 88 2.79 68 2.58 3.12 26 to 50 93 2.60 65 3.00 3.42 overall 93 3.11 65 2.60 3.21 level of awareness regarding coordination of order processing activities was the lowest scoring area for respondents, with the highest mean being 3.00 for the largest businesses in the sample and the lowest mean being 2.42 for 6-to-10-employee businesses. awareness of commerce, for which respondents were asked about their interest in using website marketing, 45 journnl of small business strategy vol. 14, no. 2 fall/winter 2003 showed a mean of 3.21, with the low being 3.11 for the 6-to-10-employee businesses, and the high being 3.42 for the largest businesses in the sample. proposition ¹ i was tested using the analysis of variance (anova) statistical technique. this technique was used to provide information on whether or not there were differences in awareness among the four business sizes. because of the formatting of questions, this test could only be used to test the content, coordination, and commerce variables for the awareness stage. results of the anova tests are presented in table 4. table 4: one-way analysis of variance summary table for awareness, implementation, and practice variables dependent source of degrees mean fp variables variation of square ratio values freedom awareness business size 3 13.404 7.59 .000 content within groups 366 l. 767 coordination business size 3 3.230 1.192 n.s. within groups 326 2. 7/1 commerce business size 3 1.117 .418 n.s. within groups 349 2.674 implementation business size 3 .209 .144 n.s. communication within groups 370 1.456 content business size 3 6.227 3.149 .025 within groups 359 1.978 coordination business size 3 13.941 4.820 .003 ivithin groups 354 2.893 commerce business size 3 5.001 2.477 .061 lvi thin groups 358 2.019 practice business size 3 .494 1.467 n.s. current within groups 357 .337 contribution future business size 3 .159 .559 n.s. contribution within groups 364 .284 n.s. = not significant. the results showed no differences among business sizes on the coordination and commerce awareness variables. however, significant ditferences were found for the content variable, showing differences among business sizes in their preference to use company websites when researching supplies and equipment (f = 7.586, p & .001). deeper analysis (via contrasts) revealed that the smallest businesses (i.e., those having 1-5 employees) preferred using websites for research significantly more than did the other business sizes (t = 4.83, p & .001). 46 journal of small business strategy voh l4, na. 2 fall/winter 2003 while there was some evidence of differences on the content variable, the results were in the opposite direction to what was expected. these findings, then, provide no support for proposition ¹l. small business internet implementation the findings for internet implementation are shown in table 5. in the communication area, email was rated as highly important by all of the businesses, with means ranging from 4.17 for the 11-to-25-employee businesses to 4.30 for the largest businesses. with respect to content, the average importance of using the internet for doing research was 3.21; the smallest businesses had the highest mean at 3.39 while the 6-to-10-employee businesses had the lowest mean at 2.85. for the community variable, the internet was used for customer service functions by only 28% of the businesses, ranging from 23% (for 11-to-25-employee businesses) to 38% (for 6-to-10-employee businesses). table 5: small business internet implementation level business communication content community coordination commerce size average average average importance of average importance importance % using using internet importance of of using . of using using internet for internet for internet for for transferring internet for customer files to email (on a scale research purchasing of i to 5) (on a scale service associates (on f ] (on a scale of 1 to 5) of 1 to 5) 1 to 5 4.26 3.39 28 2.08 2.22 6 to 10 4.26 2.85 38 2.22 2. 14 11 to 25 4.17 2.94 23 2.20 1.83 26 to 50 4.30 3.32 26 3.10 1.71 overall 4.25 3.21 28 2.27 2.06 for coordination, the average importance of using the internet to transfer files to associates was lowest for the smallest businesses (mean = 2.08) and highest for the largest businesses (mean = 3.10). the overall average for all of the businesses was 2.27. with respect to commerce, the average importance of using the internet for purchasing was lowest for the largest businesses (mean = 1.71) and highest for the smallest businesses (mean = 2.22), and the overall average for all of the companies was 2.06. proposition ¹2 was also tested to determine if there were differences in implementation among the four business sizes (using anova). again, due to question formatting, this test 47 journal of small business strategy vof 74, no. 2 fal(/winter 2003 could only be used to test the communication, content, coordination, and commerce variables for the implementation stage. no differences among business sizes on the communication (using email) and commerce (purchasing) variables were found. however, significant differences were uncovered for the content and coordination variables (see table 4). for content, businesses significantly differed in their use of the internet for research purposes (f = 3.15, p & .05). more focused analyses (using contrasts) revealed that the smallest businesses (i.e., those having 1-5 employees) placed a greater importance on internet research than did the other 3 business sizes (t = 2.35, p & .05). for coordination, results showed significant differences among business sizes in the importance of using the internet to transfer files to associates (f = 4.82, p & .005). contrasts revealed that the largest businesses (i.e., those having 26-50 employees) rated the importance of this use significantly higher than did the other business sizes (t = 3.53, p & .001). thus, the findings on the coordination variable provide some support for proposition ¹2. similar to the awareness analyses, the results for the content variable were not in the anticipated direction as the smallest businesses gave higher ratings than did the larger businesses. business size was not a significant predictor for the other implementation variables. regarding internet implementation, email was used by a majority (92%) of the businesses. about half the respondents had a company website, but only 40% used the internet for receiving orders. the findings also revealed the internet was sometimes used for improving communication (35%), generating sales leads (33%), customer service (28%), retail sales (27%), market support (25%), purchasing (22%), and researching competition (7%). respondents also provided information on the major difficulties related to implementing global e-commerce. the top three obstacles reported were regulatory issues, lack of knowhow, and having a complicated product to deliver. table 6 shows the results related to difficulties. table 6: percentages of businesses reporting major difficulties in using the internet personal company inadequate lack of business preference not preference inadequate service knowsize to use enot to use e.d hardwareprovider how commerce commerce 1 to 5 6 4 3 3 18 6 to 10 5 3 5 2 22 11 to 25 7 6 6 6 18 26 to 50 7 2 2 2 7 overall 6 4 3 3 17 proposition ¹3 could not be tested statistically due to extremely low response rates on the "difficulties of doing e-commerce" question. it is possible that our ten proposed barriers did not accurately reflect the actual barriers that businesses perceived. alternatively, respondents 48 journal of small business stra(egy vah /4, na. 2 fall/ivinrer 2003 may not have considered their internet use from this perspective before and did not have a reason readily available to explain their current approach. table 6 (continued) complicated business regulatory cultural marketproduct to costsize issues differences pressuredeliver i to 5 15 24 10 3 2 6 to 10 17 21 7 7 0 11 to 25 11 16 10 7 i 26 to 50 17 20 4 4 2 overall 15 22 9 4 i small business internet practice the current contribution of the internet to sales and profitabihty was reported as strong by 9% of respondents, 60% indicated some contribution, and 27% saw no contribution. when asked about the internet's future contribution to sales and profitability, 39% of respondents expected a strong contribution, 56% expected some contribution, and only 2% saw no contribution. overall, fewer than 12% of respondents reported that they expected a strong contribution of the internet to sales and profitabihty in the short-term, yet 32-41% expected a strong future contribution. for all business sizes, respondents indicated that they thought the internet would play an important role in their businesses in the next one ra three years. as with the previous propositions, proposition ¹4 was tested using the anova technique to determine if there were differences in practice among the four business sizes. as indicated in table 4, no differences among business sizes were found with regard to perceptions about the internet's current and future contributions to company sales and profitability. also, no significant differences were revealed as to when the internet was expected to play an important role in their businesses. these results provide no support for proposition ¹4. discussion small business internet awareness it appeared that small businesses in all the size groupings were well aware of the importance of email as a key communication tool — nearly all respondents had e-mail addresses. respondents reported a moderate degree of internet usage for research and content-gathering purposes, indicating they had some degree of experience with and awareness of the internet. with respect to level of awareness of community-related internet uses, approximately twothirds of respondents indicated their current business strategy incorporated the use of the internet. this suggested a growing awareness of the need to include internet-related functions in one's long-term business plan as a way to promote internal and external relationships. 49 journal of small business strategy vol. l4, no. 2 fall/winter 2003 in terms of coordination, the results showed a moderate degree of interest in using the internet for order processing. thus, companies may just be beginning to recognize the utility of the internet for coordinating work tasks between employees, customers, and suppliers. finally, the compames reported a moderate level of interest in using website marketing, indicating that they were moderately aware of internet options related to commerce. when the sample was segmented by size of company, there were no differences reported in awareness levels for communication, community, coordination, and commerce; however, there were significant differences in respondents'atings for content. the smallest businesses had a stronger preference for using supplier websites as a way to research wine industry supplies and equipment than did their larger counterparts. this finding may indicate that the smallest businesses, being low on manpower, have more difficulty gathering adequate information. or, it may indicate that the smaller businesses did not have enough buying volume to encourage supplier salespeople to call upon them. therefore, they rely more heavily on the information that they can access via the internet. on balance, it appeared that most companies were aware of the importance of the internet for communication purposes, but the content, community, coordination, and commerce areas were relatively weak blips on the small business radar screen. small business internet implementation the findings for internet implementation for the small businesses showed a strong focus on communication, a moderate focus on content, and a weak focus on the community, coordination, and commerce areas. all of the respondents rated email as being highly important, a prime indicator of a communication-related use of the internet. there were signilicant differences among the companies on the content variable; the smallest businesses assigned more importance to doing research on the internet than did the larger businesses. agam, this may be a result of the labor-poor situation characteristic of very small businesses, because the internet provides an easy and speedy way to access needed information that requires little manpower. results for the community factor showed that only about a fourth of respondents were employing the internet for customer service purposes. in terms of coordination, respondents placed a relatively low importance on using the internet for file transfers to associates. however, here there were significant disparities among respondents of different sizes. the smallest businesses rated this internet use as far less important than did the largest businesses. this finding shows how business growth may dnve internet usage. since the largest businesses have anywhere from five to fifty times more employees than the smallest businesses, it is reasonable that the coordination needs would be greater in the larger businesses. finally, this study found that using the internet for purchasing was of relatively low importance for respondents, indicating that the commerce area is still developing. thus, a pattern similar to the awareness findmgs emerged in that most businesses were using the internet for communication purposes, but internet use for content, conununity, coordination, and commerce was substantially less. the data related to how companies use the internet supported this conclusion because they showed a dramatic reduction in the reported importance of various internet uses aside from the all-important email. although most of the implementation variables showed similar results across the business sizes, the significant differences in the content and coordination variables provide clear evidence of the effects of business size on internet usage. the major barriers to implementing e-commerce revolved around the perennial problem of complexity. regulatory issues, lack of know-how, and having a complicated product to 50 journal of small business strategy vol. /4, no. 2 fall/winter 2003 deliver were all obstacles that tapped into the problems of coping with a multifaceted, complex, and uncertain realm. since small businesses must function with greatly reduced manpower compared to larger businesses (of 50 employees or more), it makes sense that they would have particular difficulty in dealing with these complicated areas. small business internet practice according to respondents in every size category, the future effects of the internet on sales and profitability were expected to be much greater than they are currently. clearly, respondents saw the internet as a critical factor in their business's future growth and success. in fact, the findings revealed that respondents believed the internet would play an important role m their businesses over the next one-to-three years, a finding consistent across all size segments. the fact that there were no differences among respondents by size indicates that, even though there may be differences in internet awareness and implementation, all had similar perceptions of the growmg importance of the internet and expect greater involvement in the practice stage in the near future. respondents apparently perceive the urgency of enhancing their internet-related practice to become more competitive and profitable. implications and applications for smai.l businesses if small manufacturers are to expand their capabilities to use the internet for commercial purposes, they need to develop an appropriate set of goals and evaluation criteria with which to measure their progress towards those goals. companies are currently struggling in this area, particularly in the tension between their awareness of the internet's potential and the strategic concerns that they may need to make investments even if the iinancial benefits are hard to quantify or realize in the short term. in an effort to provide practical application of this research to small busmess owners, consultants, and entrepreneurship educators, the following five quesnons are provided as evaluative critena for internet utilization: 1. does the internet strate fit with the business strate ? in general, internet initiatives permit a broadening of the scope of a business strategy and greater emphasis on differentiated services. for this study's wine manufacturers, the niost critical limitation is access to markets, as direct wine sales are subject to regulation and are currently limited to 14 u.s. states. using the internet to help customers leam more about products and make online purchases provides an additional service to complement other promotional activities. to some extent, online sales may canmbalize conventional distribution and retail channel sales, but for the smallest manufacturers producing low volumes of product, access to conventional channels is notonously difficult. 2. is the com an 's roduct or service conducive to electronic transaction'! will it make sense to the tar et customers? the "product" is not only the manufactured product itself, but also the information and education that the internet provides about new products and savings incentives. information products are easily transmitted electronically. online wine shopping differs from retailing because a physical product needs to be delivered, and consumers need to adjust to a new method of selecting wine. these differences suggest that online wine sales are a much riskier e-commerce application than online education about wine. 3. does the a roach take advanta e of the uni ue attributes of the internet? one attribute of the internet is 24-hour, 7-day-a-week accessibility. this is an improvement over purchasing wine at retail stores or at restaurants, where information about the product may be limited or non-existent. the internet as content medium for information can thus benefit manufacturers, retailers, and consumers. for the wine manufacturers, however, 5l journal ofsrooll business strategy vol. 14, no. 2 fallltyinter 2003 the benefits of this attribute are limited by the above-mentioned regulatory restrictions regarding physical delivery of the product. the internet permits global expansion of markets, considered critical for small manufacturers, particularly in the wine industry, and it also facilitates mass customization through interactivity. with online sales tracking, interactivity enables much more targeted offerings, which are more convenient for consumers and more cost-effective for manufacturers. moreover, if small manufacturers can handle delicate privacy concerns to consumers'atisfaction, they can gather and sell useful data regarding product satisfaction to their customers. 4. is the or anization re ared for the redefinition of the business that usuall accom anies a shift to an internet strate ? small manufacturers'mplementation of an internet strategy must give high-level attention to new initiatives and moving quickly. the disadvantage is that it may be difficult to coordinate with other parts of the business. many sniall manufacturers already have the challenge of managing multiple products that are sold to overlapping sets of customers. for example, numerous small wine manufacturers sell wine through traditional distribution and retail channels, as well as through tasting rooms. managing electronic products separately and needing to coordinate with strategic partners increase the complexity of this task. furthermore, the lesser intimacy of selling via the internet is hkely to be seen as a threat that will require major education and communication efforts to minimize organizational resistance. choosing an internal person as the point person for information technology is recommended to help perl'orm the needed coorilination and championing of internet activities. 5. does the internet initiative rovide a rofitable business model'! the prolitability of any internet model for small business depends on a clear understanding of how customers purchase products as well as the effectiveness of competitively pricing products and services sold via the internet. smce the online wine business is a new busmess model, strategic alliances can help provide access to experience and knowledge in operating online. many small manufacturers do not have a consumer brand name themselves, but can rely on their partners to attract consumers to online web sites. however, if small manul'acturers'mplementation is indirect, providing tools to distributors, restaurateurs, and retailers to allow them to compete online, an(l if these channels value the tools, the internet could be a profitable business for all. limitations of the study there are several limitations to this study. the first is that it is a cross-sectional study focused on the wine industry this makes it more difficult to generalize findings to other small business industries. in addition, because of proprietary issues, it was not possible to measure the design stage of the small business internet utilization framework. finally, as this is the first survey of its kind —developed specifically to measure the four stages of the framework—the validity of the survey questions inay be of concern. however, with repeat studies in the future, this limitation could be alleviated. future research areas for future research regarding this study include a replication of the study in other small business industries. through this type of apphcation, researchers could determine the validity of the survey questions, ascertain the validity of the model, and analyze potential differences or similarities between industries, increasing the generalizability of these findings. other iesearch could include the addition of the design stoge measures specifically for industries that do not harbor strong proprietary issues. finally, this type of research lends itself well to 52 journal ofsmall business strategy vol. /4, no. 2 fa?iiiv/nter 2003 longitudinal studies that could assess any potential uses of feedback loops to improve the capabilities of small businesses to adopt and use the internet, as well as to assess the extent to 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(2000). manufacturers not making full use of tech. atlanta business chronicle, 22(54), 20. wine business monthly, wine industry directory and almanac —200l. sonoma, ca: wine business publications. 54 journal ofsmall business straiegy vok )4, no 2 fall/winter 2003 armand gilinsky, jr., ph.d. is professor of business at sonoina state university, where he teaches strategy, entrepreneurship and small business management. he has also held teaching appointments at the harvard business scliool, csu hayward, and northeastern university. dr. gilinsky has extensive consulting experience with more than 30 companies, includmg menibers of the wine mdusiry. his areas of specialty include strategic planning and corporate business planning services. he has authored numerous business case .stutlies, coauihored several articles on corporate strategy. he hohls the ph.d. in busiiress policy froin henley maiiageinent college/brunel um'versity (london), aiid m.b.a. in finance froiir golden gute university, an a.m. in education adniinistration and policy analysis from sta%rd university and an a.b. (honors) in english from sta%rd university. elizabeth "liz" tliach, pli.d. is an associate professor of management and hrd at sonoma state uiiiversity. she currently has over /8 years experience in the field, specializing in international leadership developinent, change management, and the impact of conrniunicaiion technology on business perfonnance. liz has extensive corporate experience —having worked previously for cotnpaq, us west, amoco, and texas instmiments. icaren thompson, ph.d. is an assistant professor of management and huinan resources ai sonoma state university, where slie teaches courses in leadership, organizatiottal behavior, and human resource management. she received lier pli.d. at the state university of new york in buffalo. her work experience spans both large corporations and small businesses, in addition to botli public and prii aie organi ations. i 55 journal ofsmall business strategy vol. /4, no. 2 fall/winter 2003 appendix i: survey questions 1. do you personally have an email address that you use for business purposes? yes no 2. which of thc following would you prefer to use when researching wine industry supplies or equipment? (please rate based on level of preference from 0-5 with 0 = not applicable; i = least preferred and 5 = most preferred) trade shows 0 i 2 3 4 5 product literature 0 i 2 3 4 5 company website 0 i 2 3 4 5 company sales rep 0 1 2 3 4 5 b2b internet site 0 i 2 3 4 5 broker 0 i 2 3 4 5 3. does your current business strategy include the use of the internet and ecommercc? yes no 4. with respect to the internet, which of the following services would you be interested in utilizing to enhance your current business. (please rate based on interest from 0-5 with 0 = not applicable; i = low interest; 5 = very interested) website development 0 i 2 3 4 5 website marketing 0 i 2 3 4 5 sales leads generation 0 1 2 3 4 5 targeted broadcast emails 0 i 2 3 4 5 request for quotes 0 i 2 3 4 5 purchasing 0 1 2 3 4 5 wine tracking 0 i 2 3 4 5 accounting services 0 i 2 3 4 5 order processing 0 1 2 3 4 5 data storage 0 i 2 3 4 5 compliance services 0 i 2 3 4 5 5. which of thc following best describes your use of the internet as it pertains to your job? (please rate based on importance from 0-5 with 0 = not applicable; i = least important; 5 = most important) email 0 i 2 3 4 5 file transfers to associates 0 i 2 3 4 5 research 0 i 2 3 4 5 purchasing 0 i 2 3 4 5 reading news 0 i 2 3 4 5 using directories 0 i 2 3 4 5 researching competition 0 i 2 3 4 5 56 journal of small business strategy vol. /4, no. 2 fall/winter 2003 6.wwh thill lgh td lh ~ lh i ty(ch k many as you like) email website with general information receive orders customer service purchasing generate sales leads improve communication retail sales market support research competition other: 7. with respect to your business, what is the major difficulty in doing global ecommerce? (please check all that apply) personal preference not to use e-commerce company preference not to use e-commerce inadequate service provider inadequate hardware lack of know-how complicated product to deliver regulatory issues cost cultural differences market pressure other: 8. do you believe that the internet and e-commerce c~urrenrl make a contribution to sales and profitability in your company? makes no contnbution makes some contribution makes a strong contribution not sure 9. do you believe that the internet and e-commerce will make a contribution to sales and profitability in your company in the future? will make nio contribution will make some contribution will make a strong contribution viot sure io. if you agree that the internet and e-commerce will play an important role in your company, when do you believe that will happen? already important i year or less i —3 years 4 —6 years 7 or more years 57 journal of small business strategy vol. 25 ● no. 2 ● 2015 early influences and entrepreneurial intent: examining the roles of education, experience, and advice networks mark t. schenkel belmont university mark.schenkel@belmont.edu rodney r. d’souza northern kentucky university dsouzar@nku.edu jeffery r. cornwall belmont university jeff.cornwall@belmont.edu charles h. matthews university of cincinnati charles.matthews@uc.edu abstract the independent effects of education, personal experience, and advice networks in the development of new venture creation intent is of considerable interest to educators, researchers, practitioners, and policy makers. little research, however, has systematically considered the possibility that the relative importance of these factors varies in the early stages of entrepreneurial intent formation. using a unique dataset (n=963), this study investigates these key relationships at two different points in time. our results suggest that personal start-up experience and advice networks are particularly influential on the formation of intent to start a new venture, and that a marked shift in significance occurs from the former to the latter. keywords: entrepreneurial intent, formal education, professional experience, start-up experience, advice networks acknowledgement: an earlier version of the manuscript was presented at the babson college entrepreneurship research conference held in lyon, france, 2013. 1 mailto:mark.schenkel@belmont.edu mailto:dsouzar@nku.edu mailto:jeff.cornwall@belmont.edu journal of small business strategy vol. 25 ● no. 2 ● 2015 introduction why it is that some individuals develop the intent to pursue start-up activities or entrepreneurial opportunity while others do not (krueger, 1993; matthews, schenkel, & yates, 2015; shane, 2000)? at the core of extant explanations is the idea that information is unevenly distributed (hayek 1945). one key reason for such uneven distribution suggests that it is the cost of acquiring additional information which tends to rise exponentially (casson, 2003). as a result, fully resolving information access gaps from one individual to the next within the marketplace becomes cost prohibitive, making optimal economic decisions virtually impracticable at any given point in time (kirzner, 1979). from this perspective, information becomes an actionable resource in the sense that it allows some individuals to perceive and act more efficiently, creatively, and effectively in the marketplace through new venturing activity than others (kirzner, 1999). in recent years, increasing interest has emerged with respect to the role of education and start-up assistance in enhancing information available to nascent entrepreneurs and in turn fostering start-up or entrepreneurial activity (e.g., chrisman & mcmullan, 2004; harris, gibson, & taylor, 2007). such interest is clearly driven, at least in part, by the continued emergence of small business and entrepreneurship education (e.g., formal entrepreneurship programs across universities) and assistance programs (e.g., score, sbdc, sba, community entrepreneurship centers and accelerators) throughout the united states (kuratko, 2005). these support activities are built on the presumption that the availability of information resources and advice helps individuals develop “corridors” of knowledge (ronstadt, 1988) and skills for managing important practical start-up challenges (blair & marcum, 2015), thereby facilitating the formation of the intent to launch a new venture. even though the benefits of entrepreneurship education have been discussed by numerous researchers, the nature and extent of the presumed positive impact these programs have on start-up and new venture creation competencies and intentions remains less than fully understood (e.g., duvall-couetil, 2013; peterman & kennedy, 2003; wilbanks, 2013). scholars have argued that one reason is that current and widely known intentions models are underspecified, too “narrow minded,” or cerebral in the sense that they fail to provide a full sense of the role of human and social capital influences (hindle, klyver, & jennings, 2009). in a closely related fashion, brännbeck, krueger jr., carsud, kickul, and elfving (2007) argue that how intentions evolve remains less than fully known because the dynamics of what informs the early stage start-up decisionmaking process are poorly understood. this paper amplifies our understanding of in the nascent start-up process by drawing on the extant human and social capital literatures. specifically, this research builds on and further informs theory with regard to the role(s) knowledge and advice networks play in the process of forming entrepreneurial intent. we develop and empirically test a robust model which suggests that knowledge, both experientially-based and formal educationbased, and advice networks each play systematically unique roles in influencing the formation of entrepreneurial intent. our 2 journal of small business strategy vol. 25 ● no. 2 ● 2015 contention is that, all else being equal, knowledge, both based in prior experience and that which is based in traditional education, and advice networks each provide unique forms of information helpful to the development of the intent to pursue a start-up opportunity. theory and hypothesis development entrepreneurial intent building on the prior research, we adopt the definition of entrepreneurship as, “…the creation of venture and value for multiple constituencies, including, but not limited to, customers, employees, communities, and countries” (matthews & brueggemann, 2015). subsequently, in this research, we define “entrepreneurial intent” as the intention to engage in activity to start a new venture and “entrepreneurial actions” as those resulting activities associated with creating the new venture and value. 1 driven in part by disappointing results confronted when focusing on character traits and demographic factors to explain start-up activity, entrepreneurship researchers have adopted models of start-up or entrepreneurial intent as a way of predicting and understanding entrepreneurship as a behavioral phenomenon (ajzen, 1991; krueger jr., reilly, & carsrud, 2000; shapero & sokol, 1982). specifically, the study of entrepreneurial intent draws on a well-established body of literature that links intention to subsequent new venture creation actions as a form of “planned behavior” 1 for a more robust discussion of the overuse and misuse of the word “entrepreneurial” that has led to confusion regarding the terms “entrepreneurial intent” and “entrepreneurial opportunity” (that is, (ajzen, 1987, 1991). intention-based models of entrepreneurial action assume that behavior is systematically influenced to some significant degree by future expectations (casson, 2003; shapero & sokol, 1982). but what drives whether or not, and the extent to which, an individual develops the intent to pursue a start-up or entrepreneurial endeavor is a question that remains less than fully answered. answers to this question are critical given the continued interest in entrepreneurship education (kuratko, 2005). because of its potential to serve as an important “triggering environment” (kuehn, 2008), such answers maintain the potential for adding new and enduring value to entrepreneurship education programming by positively influencing the probability of new venture success (katz, 2007). scholars postulate that expectations and intentions that develop toward the recognition and pursuit of a start-up opportunity are based on an individual’s knowledge and access to information, both about their respective surrounding external environment as well as their internal motivations and abilities (knight, 1921; shane, 2003; singh, 2000). as conceptualized from a “planned behavior” perspective, individuals perceive and learn from their personal life experience, which in turn informs them about the potential efficacy of pursuing entrepreneurial opportunity. sometimes these experiences reflect direct functional, industry, or start-up experience (shane, 2000). at other times, these experiences may be the result of seeing how the identification of an underserved or unserved market opportunity or the opportunity to start a venture), please see, matthews, schenkel, and yates (2015); and solomon and matthews (2014). 3 journal of small business strategy vol. 25 ● no. 2 ● 2015 others engage in and are impacted by start-up activity. indeed, a central premise of social cognitive theory is that individuals can develop a sense of self-efficacy either through the direct experience (that is, learning by doing) or vicariously by observing another person doing something (bandura, 1986). thus, whether direct or vicarious, information coupled with knowledge based on experience is presumably a key influence on the attitude toward the pursuit of new venture creation (ajzen, 1991) because it is believed to bear a significant impact on individuals’ perceptions of desirability and feasibility, and the propensity to act (kuehn, 2008). scholars do indeed find empirical support for the idea that entrepreneurship reflects a stronger fit that emerges between some people and their environment (markman & baron, 2003). in some studies, start-up intentions have been empirically shown as one of the most significant predictors of entrepreneurial behavior (e.g., honig, 2004). such observation arguably reflects the ability of prospective entrepreneurs to recognize the strategic value of resources coupled with the ability to secure and direct otherwise unor under-exploited resources (alvarez & busenitz, 2001). in doing so, it represents important human capital that provides an influential underlying foundation for a string of subsequent decisions and activities that will impact venture performance (haber & reichel, 2007). yet as noted at the outset of this paper, scholars are increasingly challenging existing models of entrepreneurial intentions for taking an overly “between the ears” view, or on the grounds that for the most part ignores the role of social capital (hindle, klyver, & jennings, 2009). we agree that the dynamics between human and social capital are particularly significant in the early stages of the entrepreneurial process, given the potential for each to inform – that is to supply with information or direct – individuals about factors that may influence the prospects of successfully pursuing opportunity. indeed, evidence has recently emerged to suggest individuals may sometimes seek to substitute or complement some forms of human and social capital for and with one another (klyver & schenkel, 2014). our goal in this paper is to advance the current understanding of how intentions evolve by embracing extant research to investigate the combined influence of human and social capital in order to more fully capture the inherent dynamics of start-up or entrepreneurial intent as a key emergent aspect of broader decision making in the new venture creation process (brännbeck et al., 2007). we do so by focusing on human capital, both formal education-based and experientially-based, and social capital in the form of advice networks, investigating the systematically unique role each plays in influencing the formation of entrepreneurial intent. knowledge knowledge can be conceptualized as the accumulated body of information gained by individuals over their respective life experiences (shane, 2000). varying life experiences and access to information leads to unequal distribution of information among individuals (hayek, 1945). as such, for some individuals, knowledge about idiosyncratic topics could be easier to access because stores of related information previously entered into memory (dreyfus & dreyfus, 1986; d’souza & schenkel, 2011; palich & bagby, 1995). in 4 journal of small business strategy vol. 25 ● no. 2 ● 2015 this sense, knowledge represents the type, range, and mix of information systematically embedded in an individual’s unique personal and social experiences. knowledge can be classified as either tacit (know-how) or explicit (know-what) (polanyi, 1967). tacit knowledge consists of the difficult or noncodifiable information of an activity (e.g., knowledge gained by way of deep training or specific types of work experience) while explicit knowledge consists of information that is easily codifiable and conveyable (e.g., knowledge gained by way of a formal education or general work experience). because tacit and codifiable knowledge are experienced, and hence transferred differently, knowledge corridors (ronstadt, 1988) are likely to develop differently across individuals. despite such differences, the potential for systematic patterns of similar knowledge structures or expert scripts remains (seawright, smith, mitchell, & mcclendon, 2011). drawing on the explicit-tacit knowledge distinction, researchers have operationalized knowledge through objective measures including formal education, startup experience, work experience, and managerial experience (cohen & levinthal, 1990; davidsson & honig, 2003; harris, gibson, & taylor, 2007; kim et al., 2006; schenkel, 2004). implicit within these operationalizations is the presumption that knowledge represents a form of human capital that leads to the creation of general business skills (boden & nucci, 2000; davidsson & honig, 2003; kim, aldrich, & keister, 2006). such skills, by extension, hold the potential to enhance intentional implementation activities necessary in starting a new venture (d’souza & schenkel, 2011; shane, 2000, 2003). we now consider each of these knowledge types in detail to see how they are related to intention of starting a business venture. formal education studies have shown that formal education is one significant component of human capital with the potential to spur entrepreneurial activity. operationalized as the accumulation of explicit knowledge, formal education presumably helps build skills useful in becoming an entrepreneur (bates, 1995; davidsson & honig, 2003; bellu, davidsson, & goldfarb, 1990; evans & jovanovic, 1989; gimeno, folta, cooper & woo, 1997; honig, 1996, 1998; reynolds, 1997). this perspective is consistent with the notion of vicarious learning reflected in social cognitive theory (bandura, 1986), as well as with empirical evidence suggesting that growing up with close family involved in entrepreneurial activity has a positive impact on individual’s interest in pursuing self-employment (matthews & moser, 1996). although much remains to be learned about the variability of teaching methods (neck & greene, 2011) in and impact of entrepreneurship education programs (duval-couetil, 2013), empirical evidence suggests that formal education has a positive, albeit limited impact on human capital assets (volery, müller, oser, naepflin, & rey, 2013). moreover, it is generally associated with an increased pace in the nascent new venture creation stages, particularly with respect to undertaking and completion of important start-up gestational activities and milestones (davidsson & honig, 2003). thus, we would expect: hypothesis 1: formal education will be positively associated with start-up intent. 5 journal of small business strategy vol. 25 ● no. 2 ● 2015 prior experience work, supervisory, and start-up experiences reflect knowledge sources that also hold the potential to independently impact entrepreneurial activity (bates, 1995; gimeno, folta et al., 1997; robinson & sexton, 1994) and at different levels of depth (krueger jr., 2007). this idea is reinforced by arguments that costs of acquiring information frequently vary across individuals, inhibiting their ability to make optimal economic decisions (casson, 2003). as a result, each has the potential to uniquely add to the extant theoretical understanding and knowledge base that underpins entrepreneurial activity. consistent with this line of reasoning, ucbasaran, wright, and binks (2003) find that experienced entrepreneurs identify more opportunities than novice entrepreneurs. davidsson and honig (2003) find that prior startup experience has a direct and positive impact on the discovery and exploitation of an entrepreneurial opportunity though they find no such a relationship with supervising/managerial experience. this finding, they suggest, is due to the non-entrepreneurial nature of managerial activities undertaken by the individual in an existing organization. it also may be a result of the perceived opportunity cost of moving from a managerial position into a start-up venture (amit, glosten, & muller, 1993). thus, we would expect: hypothesis 2a: prior work experience will be positively associated with startup intent. hypothesis 2b: prior managerial experience will be negatively associated with start-up intent. hypothesis 2c: prior start-up experience will be positively associated with start-up intent. advice networks given the start-up of a new business is fraught with many challenges, researchers observe that entrepreneurs realize they need information and advice beyond that which they possess on their own (smeltzer, van hook, & hutt, 1991). similarly, and based on the resource-based perspective (alvarez & busenitz, 2001; wernerfelt, 1984), researchers studying social capital argue that entrepreneurs gain unique resources in the form of social capital from their network. specifically, it is argued that social capital resources obtained from networks include information, advice, and social support, and legitimacy (hindle et al., 2009). indeed, anecdotal observation suggests that a wide range of government-sponsored programs such as the sba, sbdc, score, and community entrepreneurship centers have emerged over the past decades across the u.s. to offer entrepreneurship education and assistance programming built at least in part on the logic that such informal or organic advice networks can be replicated into formal assistance structures. empirical studies support the these observations by suggesting that participation in such public assistance programs has a significant direct positive effect on venture performance (e.g., schayek & dvir, 2011). while research on the effectiveness of education, assistance, and training for entrepreneurs in general remains mixed (e.g., chrisman & mcmullan, 2004; wu & jung, 2008; zinger, lebrasseur, & zanibb, 2001), the influence of factors such as advice (direct and indirect) provided by role models (scherer, adams, carley, & wiebe, 1989; krueger jr., reilly, & carsrud, 2000; kirkwood, 2007) is generally observed to be 6 journal of small business strategy vol. 25 ● no. 2 ● 2015 positive. some suggest that individuals develop entrepreneurial intentions if they observe entrepreneurial acts directly (scherer et al., 1989; hmieleski & corbett, 2006). others suggest that role models impact individual’s entrepreneurial intent indirectly through feasibility and desirability plus a propensity to act on opportunities (krueger jr. 1993). this brings us to our final hypothesis: hypothesis 3: access to advice networks about start-up resources will be positively associated with start-up intent. methodology data and sample data for this project were generated via a webbased survey of 963 university-level students in the southeast region of the united states. students had varying levels of academic experience both in terms of their academic rank and level of training in entrepreneurship. given the temporal aspect of the research focus in this investigation, students were sampled from two courses. the first was introductory entrepreneurship course in which the focus was on acquainting students with a range of core foundational concepts in entrepreneurship as a discipline. the second course was a capstone entrepreneurship course in which the focus was on students developing greater proficiency with business modeling and planning. students completing the capstone course did so only after completing the introductory course and two other courses as part of a broader entrepreneurship curriculum. thus, the data collection points reflect between a year and a year and one half of time passage on average for between curriculum comparison points. both courses employed a range of experiential learning exercises and techniques throughout the semester. these techniques included student research beyond the classroom of both a primary and secondary nature as part of final course projects. prospective respondents were emailed a request for their participation both at the beginning and end of each course, and a web link for completing the survey was included with the inquiry. time one (t1) and time two (t2) responses were matched for each course, and then student identifying information removed from the file to facilitate the maintaining of respondent confidentiality. two subsequent follow up requests were sent to those who did not respond to the initial inquiry for each phase, resulting in a total initial sample size of 692 responses for t1, and 548 responses for t2 across the two courses. thus, the final aggregated response rate was approximately 71.86 percent for t1 and 56.90 percent for t2 respectively. data analysis strategy principle components factor analysis, descriptive, and hierarchical multiple linear regression techniques are employed to evaluate the hypothesized relationships. specifically, we first employ principle components factors analysis (jöreskog, 1969) to assess the underlying factor structure is consistent with prior research on the entrepreneurial intent (krueger jr. et al., 2000) and entrepreneurship advice networks (chrisman & katrishen, 1994; chrisman & mcmullan, 2004) constructs. next, we employ hierarchical multiple linear regression to examine whether formal education, prior experience, and advice network access predicts entrepreneurial intent, both early and late in the coursework of a comprehensive entrepreneurship curriculum. in order to assess the contribution of each, we consider 7 journal of small business strategy vol. 25 ● no. 2 ● 2015 whether the extent to which each of these variables extends the predictive capability reflected in the overall regression model. dependent variable entrepreneurial intent. entrepreneurial intent was measured using a four-item scale based on prior research (krueger jr. et al., 2000). respondents were asked “to what extent do you intend to start your own business . . . prior to graduation?”; “. . . in the next year?”; “. . . in the next 5 years?”; and “. . . at some point beyond five years?” all four items were coded individually on a 5-point likert scale ranging from 1 (“no intent”) to 5 (“very strong intent”). these four items produced a strong cronbach alpha of .829 among the items at t1 and .864 among the items at t2. principal component analysis using varimax rotation was then employed to further examine whether the list of items produced a factor structure that warranted the aggregation of these individual items into a single measure. this analysis revealed the four items loaded on a single component with an eigenvalue of 2.655 and explained 66.387 percent of the total variance observed among the t1 items, and an eigenvalue of 2.851 and 71.304 percent of the total variance explained observed among the t2 items. therefore, respondent item scores for these items were aggregated into a single factor via an arithmetic mean score for subsequent hypothesis testing. independent variables formal education. human capital theory (becker, 1964) suggests that knowledge is an important factor in increasing the cognitive ability for individuals, which in turn enhances their ability to be both more efficient and effective in their efforts. consistent with this theoretical perspective, formal education has also been shown to be a strong empirical indicator of nascent entrepreneurial activity (e.g., davidsson & honig, 2003; honig, 1996; robinson & sexton, 1994). given both the theoretical and empirical evidence, survey respondents were asked, “what is your academic rank (for example, freshman, sophomore, etc.)?”. respondents replying with “freshman” were coded as 1, “sophomore” coded as 2, “junior” coded as 3, and “senior” coded as 4. professional experience. experience and practical learning through one’s professional experience is also an important source of human capital (becker, 1964). professional experience too has been shown to be a strong empirical indicator of nascent entrepreneurial activity (e.g., davidsson & honig, 2003; robinson & sexton, 1994). accordingly, professional experience was measured in two ways. first, the survey asked, “how many total years of full-time, paid work experience in any field have you had?” second, the survey asked, “for how many years, if any, did you have managerial, supervisory, or administrative responsibilities?” responses to each of these questions were coded in the actual number of years reported. start-up experience. entrepreneurship research has demonstrated that prior start-up experience encompasses a level of specificity that extends beyond the general notion general work experience (bates, 1995; robinson & sexton, 1994). therefore, prior start-up experience was measured by asking respondents, “how many businesses have you started?” responses were coded as the actual number of start-up ventures. responses ranged from zero (0) to six (6). 8 journal of small business strategy vol. 25 ● no. 2 ● 2015 entrepreneurship advice networks. drawing on prior research (e.g., chrisman & katrishen, 1994; chrisman & mcmullan, 2004), respondents were asked to consider the various forms of support provided at their university to foster entrepreneurial activity. they were then asked to rate the extent to which they agreed (1 = strongly disagree, to 5 = strongly agree) the support included each of the following: business planning assistance/advice; product/ service development assistance/advice; comp-etitive analysis assistance/advice; accounting assistance/advice; and legal assistance/advice. these five items produced a strong cronbach alpha of .885 among the items at t1. principal component analysis using varimax rotation was then employed to further examine whether the list of items produced a factor structure that warranted the aggregation of these individual items into a single measure. this analysis revealed the five items loaded on a single component, with an eigenvalue of 3.434 and explained 68.688 percent of the total variance observed among the items. similarly, these five items produced a strong cronbach alpha of .855, an an eigenvalue of 3.167 and explained 63.337 percent of the total variance observed among the items respectively at t2. therefore, respondent item scores for these items were aggregated into a single factor via an arithmetic mean score at each time period respectively for subsequent hypothesis testing. empirical results the means, standard deviations, and zeroorder correlations among the variables for the full sample in our study are presented in table 1. academic rank was not significantly related to entrepreneurial intent at either at time one (t1) (r = .001, p > .10) or time two (t2) (r = .050, p > .10). work experience was significantly related to entrepreneurial intent at t1 (r = .372, p > .01) but not at t2 (r = .050, p > .10). analysis of the correlations in table 1 also shows that while none were significantly related to entrepreneurial intent at t1, managerial experience (r = .112, p > .05), prior start-up experience (r = .346, p > .01), and entrepreneurial advice networks (r = .212, p > .01) each tended toward higher entrepreneurial intent at t2. a post hoc means comparison test reveals no significant change in the overall level of entrepreneurial intent reported between t1 and t2. does progression through a traditional, formal education program positively relate to the development of entrepreneurial intent? multiple linear regression results presented in tables 2 and 3 suggest the answer to that question is that it does not, at least not directly as measured by one’s academic rank. 9 journal of small business strategy vol. 25 ● no. 2 ● 2015 table 1: means, standard deviations, and correlations 1 full sample intro course capstone course variable mean s.d. mean s.d. mean s.d. 1 2 3 4 5 6 7 1. ent. intent(t1) 2.82 1.03 2.76 1.05 3.05 0.88 2. ent. intent(t2) 3.08 1.21 2.99 1.21 3.51 1.08 .683** 3. formal education 3.16 0.88 2.96 0.87 3.96 0.29 .001 .050 4. work experience 3.17 3.42 3.38 3.66 2.36 2.05 .372* .064 .187** 5. mgmt/supervisory exp. 2.25 2.46 2.32 2.67 2.01 1.30 .068 .112* .166** .735** 6. prior start-up exp. 1.31 1.04 1.30 1.01 1.37 1.13 .037 .346** .067 .189** .313** 7. ent. advice networks(t1) 3.75 0.68 3.65 0.66 4.15 0.61 -.004 .074 .048 -.105** -.074 .056 8. ent. advice networks(t2) 3.99 0.67 3.91 0.65 4.39 0.60 .105 .212** .109* -.006 .010 .145** .403** † p ≤ .10; * p ≤ .05; ** p ≤ .01 1 correlations presented are based on full sample. as shown in each of the models in tables 2 and 3, academic rank does not predict entrepreneurial intent at t1 or t2 for the full sample, nor for respondents in either the introductory or capstone course. consequently, no support is found for h1. . table 2: results of regression analyses predicting entrepreneurial intent at time 1a model 1 model 3 model 3 predictor variable full sample intro course capstone course full sample intro course capstone course full sample intro course capstone course formal education .001 -.051 -.098 -.010 -.070 -.133 -.009 -.073 -.132 work experience -.013 .057 -.186 -.013 .057 -.184 managerial or supervisory exp. .062 .027 .140 .062 .027 .141 prior start-up exp. .035 .006 .241* .035 .009 .236* entrepreneurial advice networks -.004 -.031 -.057 model f value 0.000 1.028 0.871 0.572 0.851 2.136† 0.458 0.754 1.754 adjusted r2 -.002 .000 -.001 -.004 -.002 .048 -.006 -.003 .040 change in r2 -.002 .000 -.001 -.002 -.002 .049† -.002 -.001 -.009 a full sample, n = 481; intro course, n = 390; capstone course, n = 91. standardized regression coefficients are shown. † p < .10; * p < .05; ** p < .01 10 journal of small business strategy vol. 25 ● no. 2 ● 2015 table 3: results of regression analyses predicting entrepreneurial intent at time 2a model 1 model 2 model 3 predictor variable full sample intro course capstone course full sample intro course capstone course full sample intro course capstone course formal education .047 -.054 -.053 .031 -.063 -.076 .010 -.051 -.118 work experience -.034 .041 -.129 -.025 .034 -.117 managerial or supervisory experience .027 -.033 .201 .027 -.031 .213† prior start-up experience .348** .360** .334** .321** .341** .313** entrepreneurial advice networks .192** .164** .141 model f value 0.932 0.984 0.224 14.926** 12.847** 3.305* 15.999** 12.693** 2.979* adjusted r2 .000 .000 -.010 .116 .121 .102 .150 .146 .109 change in r2 .000 .000 -.010 .116** .121** .112** .034** .025** .007 a full sample, n = 426; intro course, n = 344; capstone course, n = 82. standardized regression coefficients are shown. † p < .10; * p < .05; ** p < .01 does experience, either of a professional nature or in the start-up process, positively relate to the development of entrepreneurial intent? multiple linear regression results suggest the answer to this question is affirmative. the results in table 2 show that upon entering entrepreneurship coursework, neither prior work experience nor prior managerial or supervisory experience predicts entrepreneurial intent. prior start-up experience, by contrast, does appear to be a significant positive influence over entrepreneurial intent for those entering into their capstone entrepreneurship course. interestingly, the results in table 3 show a very different pattern at the conclusion of entrepreneurship coursework. specifically, and at the outset of each course considered, neither prior work experience nor managerial nor prior managerial or supervisory experience predicts entrepreneurial intent following coursework. however, the results show that prior start-up experience, both in general (β=.348, ρ≤.01) and when considering the introductory (β=.360, ρ≤.01) and capstone (β=.334, ρ≤.01) courses separately, becomes a strong influence associated with the development of entrepreneurial intent following the completion of entrepreneurship coursework. thus, whereas no support is found for h2a or h2b, strong support is found for h2c. does exposure to advice networks positively relate to the development of entrepreneurial intent? multiple linear regression results suggest it does. as in the case of traditional, formal education and prior work experience, the results in table 2 reveal that upon entering entrepreneurship coursework, access to entrepreneurial assistance and advice networks is unrelated to respondents 11 journal of small business strategy vol. 25 ● no. 2 ● 2015 expressing entrepreneurial intent. however, the results in table 3 show that access to entrepreneurial assistance and advice networks is generally related to entrepreneurial intent (β=.192, ρ≤.01) at the conclusion of traditional entrepreneurship coursework. moreover, these results show that access to entrepreneurial assistance and advice networks is particularly positive and significant to the development of entrepreneurial intent following the introductory entrepreneurship course (β=.164, ρ≤.01) in a comprehensive entrepreneurship curriculum, though such networks are unrelated to the likelihood of developing entrepreneurial intent following the completion of the capstone course (β=.141, ρ>.10) in that same curriculum. collectively, these results provide partial support for h3. discussion theoretical implications human and social capital impact on the formation of entrepreneurial intent. this research builds on the idea that the process of forming entrepreneurial intent reflects a complex set of knowledge resources that include traditional, formal education, work, managerial, and prior start-up experience, and advice from others. together, these knowledge resources can and should be conceptualized as information asymmetries that provide a more complete understanding of the role of human and social capital influences than prior research has suggested (hindle et al., 2009). for example, the systematic variability observed in the present results across the two time periods suggests that prior personal experience with the start-up process and connectivity to advice networks are particularly important human and social capital aspects in the early emergence of entrepreneurial intent. these findings extend prior insights on nascent entrepreneurial decision-making (e.g., brännbeck et al., 2007), particularly that which is considered at the nexus of perceived internal motivations and abilities and the recognition of marketplace opportunity (knight, 1921; shane, 2003; singh, 2000). specifically, these findings suggest that the immediate applicability of these sources of information may be particularly helpful to individuals as they seek to evaluate their ideas for starting up a venture against their perceptions of the marketplace. this possibility is consistent with what alvarez, barney, and young (2010: 24) call an “evolutionary realist approach,” whereby individuals seek to test their marketplace perceptions with more objective external information sources before deciding if and how to proceed in acting on a start-up or entrepreneurial idea. social capital: time and its changing nature. it has become axiomatic that “timing is everything.” the present findings suggest a theoretical corollary to this axiom with respect to the role of social capital in the development of entrepreneurial intent. specifically, klyver and schenkel (2014) find that in startups, the benefit of belonging to a network of entrepreneurs is diminished if the entrepreneur has prior start-up experience or is more confident in their personal ability to start a business venture. they theorize that this is due to a redundancy of social capital resources the entrepreneur already possesses. our results extend that line of theoretical reasoning. they do so by highlighting the seemingly parallel shift from a focus on outside resources towards one of self-reliance in the nascent stages of new venture creation. moreover, the 12 journal of small business strategy vol. 25 ● no. 2 ● 2015 present findings suggest that such a shift may occur fairly early following experience with, and training in, the entrepreneurial process. normative implications experiential knowledge over time. when students first come into a comprehensive entrepreneurship program, it appears that start-up experience has little impact on their reported entrepreneurial intent. if they possess prior start-up experience upon entry, the likelihood of developing such intent appears to significantly increase by the end of the first entrepreneurship course. by contrast, when students enter the final entrepreneurship course at the end of such a program, it appears that start-up experience has a significant and positive impact on the likelihood students report having start-up or entrepreneurial intent that only intensifies with further training throughout the semester. this pattern and consistency of this positive finding speaks well of the continued interest in entrepreneurship education (kuratko 2005). specifically, it supports the line of reasoning that suggests that learning about entrepreneurship is increasingly perceived as having the potential to add real value by positively influencing the probability of new venture success (harris et al., 2007; fregetto, 2015; katz, 2007). for those approaching graduation, a noted important “triggering” (kuehn, 2008) or “displacement event” (krueger jr. et al., 2000), the results suggest the importance of experiences in the start-up process as a positive factor in the development of the intent to launch a venture. coupled with evidence suggesting that experienced entrepreneurs identify more opportunities than novice entrepreneurs (ucbasaran et al., 2003), the present results underscore the importance of the experiential, and potentially selfreinforcing nature of entrepreneurship educational experiences, as an essential element toward cultivating entrepreneurial thinking (krueger jr., 2007; neck & greene, 2011). advice networks as information resources. for educators and policy makers, our results suggest that a while focusing only on formal education in narrow a quantitative sense might not yield significant influence entrepreneurial intent, a more holistic focus and complex and potentially nuanced view of entrepreneurial education that consists of formal classes, cocurricular activities, and access to an entrepreneurial support structure could positively impact the formation of entrepreneurial intent. advice networks appear to have little impact on their reported entrepreneurial intent, likely because students know little at the outset (that is, at the start of the first course in a broader program of study) about what type of advice is available to prospective entrepreneurs. yet by the end of their first course and like prior start-up experience, access to entrepreneurial advice networks appears to be significantly and positively associated with entrepreneurial intent. interestingly, however, and as in the case of when students first enter the final course of the program, it appears that advice networks have no impact on their reported entrepreneurial intent. by the end of the final course in program, little changes in the observed relationship between these factors and entrepreneurial intent. taken in total, these findings seem to suggest that the influence of outside sources of information and advice begin to become internalized relatively quickly in students’ academic course of study with respect to the development of entrepreneurial intent. as a 13 journal of small business strategy vol. 25 ● no. 2 ● 2015 result, the present findings suggest curriculum structure design should be an important consideration for educators. specifically, they suggest that if the goal is to “inform” students effectively about entrepreneurial career path, then the present results suggest designing a curriculum that exposes them to intensive coursework and advice networks earlier on followed up by highly applied (e.g., fieldor experientially-based coursework) in the later stages of their educational program may be a particularly effective approach. specifically, curriculum should include learning opportunities that are embedded within startup experiences such as student-led startups or internships within community-based startup ventures. experiences modeled after accelerator programs, which integrate intensive educational components and coaching within the start-up process, also offer promise in light of our results. future research directions the findings of this paper suggest a number of directions for future research. first, there is a need for theory and empirical research that amplifies the role of knowledge resource interactions over time. specifically, consistent with recent challenges to existing models of entrepreneurial intentions on the grounds of taking an overly “between the ears” view by failing to consider the role of social capital (hindle et al., 2009), the present results suggest that advice networks may be a particularly fruitful approach for understanding both the development and persistence of entrepreneurial intentions, above and beyond an individual’s personal capital alone. second, and in closely related fashion, the present results suggest research is needed to explore the potential for meaningful interactions to extend current theory. for example, researchers might consider both the nature and extent to which the advice networks intensify the presence of prior managerial or start-up experience. consideration may also be given to whether or not such combined influences are equally influential across individuals with different genders (malewicki & leitch, 2011), family business backgrounds (matthews & moser, 1996) or levels of involvement (campbell, line, runyan, & swinney, 2010), or other aspects shown to differentiate entrepreneurial interests. third, we suggest that academic rank or year in study may be too narrow to capture the prospective influence of formal or traditional education as reflected in prior research (e.g., davidsson & honig, 2003). it is also possible that such a compressed time frame may be masking important nonlinear effects (e.g., honig, 1996). consequently, future research should more fully consider other potentially important differentiating aspects of formal education. for example, future research should examine more fully whether factors such as academic discipline may influence formal training with respect to start-up intent or start-up activity. moreover, future research should also examine potential moderating effects such as the range (e.g., freshman, sophomore, etc.) of academic rank as an influence on the advice network-start-up intent relationship. finally, given the present sample reflected students from one academic institution in the southeastern region of the united states, research is also needed to validate and extend the findings along academic rank and the other 14 journal of small business strategy vol. 25 ● no. 2 ● 2015 variables pursued in this investigation, both within the u.s. and beyond. conclusion education, experience, and advice networks have emerged as useful predictors in the formation of intentions to pursue entrepreneurial opportunity (e.g., bates, 1995; kirkwood, 2007; volery et al., 2013). our study shows how focusing on the combination of these human and social capital influences can provide a fuller sense of the relative importance and role of each in the formation of entrepreneurial intentions (hindle et al., 2009). moreover, it has provided insight into the evolutionary aspect of the intentions formation process (brännbeck et al., 2007), illustrating how new theoretical insights can be gained from investigations that explicitly focus on differential influences over time rather building on the assumption that such influences necessarily have cumulative impact. references ajzen, i. 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(2001). factors influencing early stage performance in canadian microenterprises. journal of developmental entrepreneurship, 6(2), 129-151. mark t. schenkel is associate professor of entrepreneurship at belmont university in nashville, tennessee (usa). his teaching and research interests include human and social capital, entrepreneurial cognition, opportunity recognition, strategic decision-making, family business, and corporate entrepreneurship. he has published in academic journals such as entrepreneurship theory and practice, academy of management review, entrepreneurship and regional development, journal of small business management, journal of small business strategy, british journal of management, journal of business and entrepreneurship, new england journal of entrepreneurship, journal of developmental entrepreneurship, and frontiers of entrepreneurship research. he received his doctorate in strategic 19 journal of small business strategy vol. 25 ● no. 2 ● 2015 management from the university of cincinnati. rodney r. d’souza is the fifth third bank endowed professor of entrepreneurship and the director of the center for innovation and entrepreneurship at northern kentucky university (usa). his teaching and research interests include the entrepreneurial opportunity identification, new venture teams, and new venture financing. he has published in academic journals such as journal of leadership and organizational studies, journal of small business strategy, journal of the association for information systems, journal of business and entrepreneurship, journal of developmental entrepreneurship, and southern journal of entrepreneurship. he received his doctorate in entrepreneurship and strategy from the university of louisville. jeffrey r. cornwall is the jack c. massey chair and professor of entrepreneurship at belmont university in nashville, tennessee (usa). his teaching and research interests include entrepreneurship and public policy, entrepreneurial finance, bootstrapping, business modeling, business ethics, and international entrepreneurship. he has authored nine books and published in academic journals such as entrepreneurship theory and practice, journal of management, human relations, journal of entrepreneurship and public policy, business horizons, business ethics quarterly, journal of business ethics, and journal of business and entrepreneurship. he received his doctorate in management and organization from the university of kentucky. charles h. matthews is a distinguished teaching professor of entrepreneurship and strategic management in the carl h. lindner college of business, university of cincinnati. he is an internationally recognized scholar and innovative teacher in the field of entrepreneurship and the founder of the uc center for entrepreneurship, serving as executive director 1997-2013; as well as director; small business institute® 1982-2013. his teaching and research interests include: strategy, entrepreneurship, leadership and decision making. his research is published in small business economics, the journal of small business management; the journal of small business strategy; entrepreneurship & regional development; frontiers of entrepreneurship research; family business review; the international journal of operations & production management; the center for the quality of management journal; quality management journal; industry & higher education; and the new england journal of entrepreneurship. he received his doctorate in strategic management from the university of cincinnati. 20 http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2019, vol. 29, no. 01, 30-42 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2019 small business institute® w w w. j s b s . o rg entrepreneurship and related behavior have attracted a great deal of research concentrated on finding the antecedents of entrepreneurial ventures (hannafey, 2003; miskin & rose, 1990). however, research should focus on the elements that enable entrepreneurial success and efforts that lead to entrepreneurial failure (mcgrath, 1999; shepherd, 2003; singh, corner, & pavlovich, 2007). to gain a holistic view of entrepreneurship, studies have focused on the causes of failure (abdullah, hamali, deen, saban, & abdurahman, 2009; bruno, mcquarrie, & torgrimson, 1992) and how failure drives subsequent venture success (minniti & bygrave, 2001). lussier and halabi (2010) demonstrated that an entrepreneur who is highly motivated does not guarantee the success of a venture. establishing a new firm involves high risks, and ventures frequently fail despite entrepreneurs making great efforts (holtz-eakin, 2000). new firms struggle to survive and achieve success in an unstable, complex, dynamic, and global environment, particularly when they lack resources and capabilities. failure can be painful and costly for an entrepreneur, who may be required to cope with the stigma of failure in addition to a damaged reputation (coelho & mcclure, 2005; politis & gabrielsson, 2009; shepherd & haynie, 2011). failure can cause entrepreneurs to feel shame (smith & mcelwee, 2011), grief (shepherd, 2003; shepherd, wiklund, & haynie, 2009), discouragement, rejection (mcgrath, 1999), and many other negative emotions (smith & mcelwee, 2011). studies have observed that business failure leads to financial (dew, sarasathy, read, & wiltbank, 2009; peng, yamakawa, & lee, 2010; van auken, kaufmann, & herrmann, 2009) and social costs (hasan & wang, 2008; kirkwood, 2007; shepherd et al., 2009) for an entrepreneur. other costs caused by business failures have introduction don jyh-fu jeng1, ta huy hung2 1national chengchi university, taiwan, jeng@nccu.edu.tw 2thuongmai university, vietnam, hungth@tmu.edu.vn comeback of the failed entrepreneur: an integrated view of costs, learning, and residual resources associated with entrepreneurial failure failed entrepreneur, entrepreneurial failure costs, learning from entrepreneurial failure, entrepreneurial resource, venture restart intention although failure can be financially, socially, and psychologically costly, it can promote future entrepreneurial success. this study investigated how failure can be utilized as a springboard for new ventures by considering the cost recognition, learning ability, and resources of entrepreneurs within a social environment. failure costs, learning outcomes, and residual resources following business failure and how they influence the intention to undertake subsequent entrepreneurial endeavors were considered. with the motivation–opportunity–ability (moa) framework as a theoretical foundation, we quantitatively analyzed the sample, which comprised 216 entrepreneurs who had experienced business failure. perceived residual resources were a major factor affecting an entrepreneur’s decision-making in subsequent ventures, even when the entrepreneur had learned from failure and overcome the associated costs. additionally, the psychological costs incurred exhibited a nonsignificant effect on learning from failure. based on the moa framework, failure costs can be regarded as learning opportunities for an entrepreneur as well as drivers promoting the intention to resume business. such intentions are mediated by the learning ability of entrepreneurs and moderated by motivation in terms of residual resources. this study provides a holistic view re-examining the mechanisms of frustrated entrepreneurs to identify opportunities and evaluate resources. apa citation information: jeng, d. j. f., & hung, t. h. (2019). comeback of the failed entrepreneur: an integrated view of costs, learning, and residual resources associated with entrepreneurial failure. journal of small business strategy, 29(1), 30-42. http://www.smallbusinessinstitute.biz http://www.jsbs.org 31 d. j. f. jeng, & t. h. hung journal of small business strategy / vol. 29, no. 1 (2019) / 30-42 also attracted research attention (hayward, forster, sarasvathy, & fredrickson, 2010; shepherd, 2004; singh et al., 2007). studies have analyzed the costs of a single failure, considering the total costs of a business failure and how those costs affect the entrepreneur’s life (singh et al., 2007; ucbasaran, shepherd, lockett, & lyon, 2013). although business failure leads to negative consequences, failure can also lead to tremendous learning opportunities for an entrepreneur (cope, 2005, 2011; mcgrath, 1999; singh et al., 2007). huovinen and tihula (2008) demonstrated that business failure can lead to the improvement of entrepreneurial skills, which can be applied to subsequent businesses. the experience of failure also effects motivation and decision-making; entrepreneurs may delay starting a new business, or conversely, they may become more determined to succeed (cardon, stevens, & potter, 2011; cope, 2011; singh et al., 2007). although scholars consider failure-related experiences as crucial in the entrepreneurship process, how failure influences intention in subsequent entrepreneurial activities is not understood. researchers have indicated that business failures benefit the economy and society overall because of the resources and knowledge generated from bankrupt firms (hoetker & agarwal, 2007; knott & posen, 2005; ucbasaran et al., 2013); these resources can be utilized to establish new businesses (delacroix & carroll, 1983; ucbasaran et al., 2013). moreover, business failures can help reduce the costs for surviving businesses through vicarious learning (madsen & desai, 2010; ucbasaran et al., 2013). the effects of business failure on individual entrepreneurs are more complex and damaging. although failures are a useful resource because of the learning experience for the entrepreneur (mcgrath, 1999), they often lead to negative emotions or traumatic experiences (cope, 2011; shepherd, 2003; ucbasaran et al., 2013). the costs of failure (i.e., social and psychological costs) can be seen to outweigh the benefits of learning from failure (ucbasaran et al., 2013). this study explored the mechanism of failed entrepreneurs’ intention to start a new venture. specifically, we investigated the correlations among the costs associated with entrepreneurial failure (i.e., social and psychological cost), experience of learning from failure (i.e., incurred by oneself, networks, and relationships), and residual resources after a business fails (i.e., human and social capital). the correlation between business failure and learning from failure has attracted studies focusing on management practices (cannon & edmondson, 2005; madsen & desai, 2010; mellahi & wilkinson, 2004) and entrepreneurship (cope, 2011; mcgrath, 1999; minniti & bygrave, 2001; politis, 2005; shepherd, 2003). entrepreneurs have investigated the reasons for business failure and used these lessons to revise their methods to achieve more effective management of the venture process (shepherd, 2003). scholars have argued that failure sends a “clear signal” regarding what went wrong and motivates entrepreneurs to be more cautious (sitkin, 1992). this signal encourages learning through reflection on the reasons for failure, which prompts changes to individual thought processes (minniti & bygrave, 2001; politis, 2005; ucbasaran et al., 2013). although many studies have addressed the relationship between failure and the process of learning from it, none have established a holistic perspective of the mechanisms driving a failed entrepreneur to start a new venture. theoretical background motivation–opportunity–ability framework the motivation–opportunity–ability (moa) framework is commonly adopted in research in the fields of industrial and social psychology (siemsen, roth, & balasubramanian, 2008). in the moa framework, motivation theory is used to predict individual behavior. hughes (2007) defined motivation as the impetus toward a behavior or motivation that reflects a willingness to act. bayton (1958) defined motivation as the driver that initiates a behavior. in this study, motivation was considered to lead the entrepreneur toward subsequent venture behaviors, ability comprised the requisite skills and capabilities to complete the entrepreneurial action, and opportunity represented the contextual and situational constraints that prompt the development of an ability. numerous studies on entrepreneurship have focused on the human capital of an individual entrepreneur. venkataraman (2002) suggested that an entrepreneur’s knowledge comprises opportunity recognition and prior knowledge, which also influence opportunity exploration. rosenbusch, brinckmann, and bausch (2011) used education, start-up experience, management experience, and work experience to measure human capital. shane (2000) suggested that prior 32 d. j. f. jeng, & t. h. hung journal of small business strategy / vol. 29, no. 1 (2019) / 30-42 knowledge is paramount to the human capital of entrepreneurs, which leads to the recognition of entrepreneurial opportunities. therefore, human capital is a source of motivation and increases opportunity recognition. in this study, the ability to learn from failure was seen as a rich resource for a failed entrepreneur (mcgrath, 1999) as well as a great opportunity to learn from experience and acquire valuable knowledge for the preparation of future ventures. attribution theory attribution theory concentrates on the motivational and emotional consequences of perceived attributions of a particular experience (weiner, 1985; 1986). this theory is relevant for understanding feedback on failure because it is based on the personal interpretation of an individual’s own behavior (prussia, kinicki, & bracker, 1993). adapted from zacharakis, meyer, and de castro (1999) and cardon et al. (2011), attribution theory has been applied to the interpretation of entrepreneur reflection and motives following business failure. the attribution of failure has attracted the attention of many researchers, such as gaskill, van auken, and manning (1993) and zacharakis et al. (1999). attribution is often triggered by negative events (wong & weiner, 1981) or experiences of business failure (diener & dweck, 1978). because business failures are often defined as negative (shepherd, 2003; shepherd et al., 2009; singh et al., 2007), attribution theory is highly capable of exploring the learning process following business failures. literature review opportunity and ability factors: social costs, psychological costs, and learning from failure failed entrepreneurs learn from prior business failures by reflecting upon and revising existing knowledge and perceptions (shepherd, 2003). entrepreneurs learn that internal and external stakeholder relationships are weakened as a result of the social costs of failure. moreover, they can learn about creating and managing partnerships with entrepreneur teams that have been affected by business failure (cope, 2011; singh et al., 2007). business failures signal that something negative has happened and motivate entrepreneurs to consider what happened more closely to further understand (sitkin, 1992). these signals, which arise when businesses fail, motivate learning because entrepreneurs often conduct postmortems for the business to understand what led to its failure; this leads to informative and motivational changes to the perspective of the entrepreneur (minniti & bygrave, 2001; politis, 2005). close relationships, such as those with family and friends, encourage failed entrepreneurs to be more vigilant and understand the causes and consequences of failure. cope (2011) categorized the outcome of learning from experience as a deeper understanding of oneself, the reason for the failure, the extent of social networks and relationships, and how to more effectively manage ventures in the future. failed entrepreneurs often engage in this higher level learning to recover and learn to mitigate the costs of failure. the moa framework enables us to view the failure of an entrepreneur in terms of social cost and as an external learning opportunity that triggers a deeper learning process. hypothesis 1. social costs of entrepreneurial failure positively affect learning from entrepreneurial failure. failure usually represents an entrepreneur’s personal loss of network relationships and motivation because of the psychological losses from negative emotional responses. negative emotions generated by failure may affect the ability to learn from an event (shepherd, 2003), especially if the problems concerned are ambiguous (kumar, 1997; shepherd, 2003). shepherd (2003) demonstrated that to acquire a deep understanding from the costs of failure, entrepreneurs must identify the role that negative emotions play in that understanding. for entrepreneurs and their families, a firm can be considered a context for family activity, epitomizing pride and social position (shepherd, 2003). thus, business failure can create negative emotional feedback in the form of grief. grief is negative emotional feedback that hinders the ability to concentrate sufficiently for information processing (mogg, mathews, bird, & macgregor-morris, 1990; shepherd, 2003). moreover, this interference negatively affects the ability to learn from a negative situation (bower, 1992; shepherd, 2003). based on the moa framework, psychological cost is an internal opportunity for learning that has a negative influence on the learning process. hypothesis 2. psychological costs of entrepreneurial 33 d. j. f. jeng, & t. h. hung journal of small business strategy / vol. 29, no. 1 (2019) / 30-42 failure negatively affect learning from entrepreneurial failure. ability and motivation factors: learning from failure, human capital, and social capital cope (2005) mentioned that experiential learning is the primary form of entrepreneurial learning. how entrepreneurs learn from formative experiences is dependent upon entrepreneurial learning mechanisms. these learning mechanisms can be more accurately comprehended by considering the prominent role of critical events or episodes in entrepreneurial learning as a motivator (cope, 2005; rae & carswell, 2000). relevant studies have observed that the changes in perspective that result from learning from failure affect entrepreneur behavior and may improve entrepreneurial capabilities or prompt adjustments to firm strategies and practices that result in future success (cope, 2003; cope & watts, 2000; deakins & freel, 1998). minniti and bygrave (2001) asserted that entrepreneurs learn from their experiences by updating a subjective stock of accumulated knowledge. according to the moa framework, learning from failure is considered the ability to reconstruct mental reasoning. if entrepreneurs are capable of learning from failure, their new knowledge may promote the intention to start a new business. hypothesis 3. learning from entrepreneurial failure positively affects the intention of entrepreneurs to start a new business. people are motivated to become entrepreneurs for many reasons. they may select an entrepreneurial career path because of negative external forces, as indicated in “push” theory, or the desire for independence, self-fulfillment, and wealth, as indicated by “pull” theory (segal, borgia, & schoenfeld, 2005). high entrepreneurial ability corresponds to ease of confronting difficult situations and learning valuable lessons from failure. relevant studies have recognized that learning from failure is a pivotal aspect of the experience of failed entrepreneurs (cardon & mcgrath, 1999; minniti & bygrave, 2001). the strain on relationships that results from the social costs of failure can provide entrepreneurs with an opportunity to learn to manage social networks more effectively. moreover, failure is beneficial for learning because it provides an opportunity to understand the causes of failure (sitkin, 1992). similarly, mcgrath (1999) suggested that business failures increase knowledge and can help reduce uncertainty, increase variety, and strengthen the ability to search for market opportunities. these conditions are crucial for the increase in entrepreneurial intention to establish a new business. politis (2008) discovered that habitual entrepreneurs seem to possess more experience than nascent entrepreneurs in terms of starting new ventures. this experience is acquired by learning from numerous entrepreneurial setbacks and failures. with such useful experience, habitual entrepreneurs continue to pursue an entrepreneurial career path because they can use what they have learned to overcome their natural tendency to view failure as strictly negative. based on the moa framework, entrepreneurs with the ability to transform costs into lessons also exhibit high potential to establish a new business. hypothesis 4. learning from entrepreneurial failure positively mediates the relationship between the social costs of entrepreneurial failure and entrepreneurial intention to start a new business. hypothesis 5. learning from entrepreneurial failure positively mediates the relationship between the psychological costs of entrepreneurial failure and entrepreneurial intention to start a new business. according to kim, aldrich, and keister (2006), klepper (2002), lazear (2004), phillips (2002), and sonfield and lussier (2014), human capital is a critical internal factor influencing the decision to start a venture. kim, aldrich, & keister (2003) argued that acquired skills and credentials are critical measurements of human capital and may create more attractive opportunities for individuals to work for others rather than pursue their own businesses. butler and herring (1991), and van auken (1999) have concluded that education is negatively correlated to entrepreneurship. we assumed that entrepreneurs who learn from failure may realize their future capabilities and exhibit a decreased intention to start a new venture. social capital is crucial to the intention to establish a new business (bosma, van praag, thurik, & wit, 2004; stam & elfring, 2008). however, social capital in the form of a specific network of entrepreneurs can be affected by social attitudes toward failure. kirkwood (2007) described the “tall poppy syndrome,” in 34 d. j. f. jeng, & t. h. hung journal of small business strategy / vol. 29, no. 1 (2019) / 30-42 which high achievers are glorified and individuals with experiences of business failure are discouraged from starting a new venture by potentially negative public reactions. thus, social capital, as an external factor that comprises formal and informal relationships, can have a negative effect on the intention to start a new venture. according to the moa framework, residual resources from business failure are negative motivations that moderate the intention to start a business. hypothesis 6. human capital negatively moderates the relationship between learning from entrepreneurial failure and entrepreneurial intention to start a new business. hypothesis 7. entrepreneurial social capital negatively moderates the relationship between learning from entrepreneurial failure and entrepreneurial intention to start a new business. method the questionnaire used in this study comprised 38 items measured on a seven-point likert scale. these items measured costs of entrepreneurial failure (10 items), as adapted from blau (2007) and harris and sutton (1986); learning from entrepreneurial failure (7 items), as adapted from shepherd, patzelt, and wolfe (2011); entrepreneurial intention to restart business (9 items), as adapted from douglas and shepherd (2002), krueger (1993), and segal et al. (2005); and entrepreneurial resources (13 items), as adapted from baron and markman (2003), riggio (1986), subramaniam and youndt (2005), and youndt, subramaniam, and snell (2004). the sample comprised businesses that had been registered by the e-tax portal of the ministry of finance, vietnam but had ceased business operations within 12 months. a total of 11,210 companies were identified, and their registered phone number was retrieved and called. if the phone number was valid and the founder could be reached, they were invited to participate in this study. if the response was positive, a phone interview was conducted. a total of 5,000 phone calls were made, yielding a valid survey of 216 samples and return rate of 4.32%. table 1 presents the results of the descriptive analysis. figure 1. research framework 35 d. j. f. jeng, & t. h. hung journal of small business strategy / vol. 29, no. 1 (2019) / 30-42 analysis and results factor analysis, correlation analysis, and reliability tests (cronbach’s α) were conducted to confirm the reliability and consistency of the factors. the kaiser–meyer–olkin (kmo) measure was used to assess sampling adequacy, and confirmatory factor analysis was conducted to evaluate the reliability and construct validity. the hypothesized measurement model demonstrated good fit with the data (x2 [n = 216] = 276.785; degrees of freedom [df] = 186; x2/df = 1.488; root mean square error of approximation (rmsea) = .048; goodness of fit index (gfi) = .895). table 2 lists the descriptive statistics for our scales along with their intercorrelations and coefficient alphas for reliability. table 3 represents the results of structural equation modeling analysis to test hypotheses 1, 2, and 3. the mediating effect of learning from entrepreneurial failure (h4 and h5) was examined through regression analysis (tables 4 and 5, respectively). moderating effects were analyzed through hierarchical regression (table 6). conclusion and recommendations although other studies have focused on entrepreneurial success, little is known regarding the ability of entrepreneurs to cope with and learn from failure. learning from failure is a prominent influence on subsequent entrepreneurial initiatives. this study may provide a resource for mitigating entrepreneurial failure, which reduces the motivation to undertake subsequent entrepreneurial projects. following failure, entrepreneurs re-evaluate their resources (i.e., human and social capital) and reconsider their capability of managing the venture. to achieve a learning outcome, entrepreneurs retable 1 descriptive analysis of samples (n = 216) variable category frequency percentage gender male 129 60 female 87 40 age 0-20 years old 0 0 21-30 years old 150 69.40 31-45 years old 55 25.46 46-60 years old 11 5.09 more than 60 years old 0 0 education phd 1 0.46 master 35 16.20 bachelor 170 78.70 high school 7 3.24 primary school 1 0.46 other 2 0.93 number of household 1-3 people 88 40.74 4-5 people 102 47.22 more than 5 people 26 12.04 firm age of last failure 1-5 years 179 82.87 6-10 years 31 14.35 more than 10 years 6 2.77 36 d. j. f. jeng, & t. h. hung journal of small business strategy / vol. 29, no. 1 (2019) / 30-42 table 2 results for pearson correlation coefficient (n = 216) mean s.d cr 1 2 3 4 5 6 7 8 9 1 failure social costs 4.2685 0.85884 .788 (.744) 2 failure psycho. costs 4.5009 1.05071 .740 .487** (.647) 3 learning from failure 5.7415 0.97834 .709 0.096 0.066 (.742) 4 restart intention 4.9514 1.06389 .696 0.103 0.06 .370** (.709) 5 human capital 5.088 1.1755 .851 0.128 .136* .489** .469** (.737) 6 social capital 5.0856 1.09012 .726 0.123 0.105 .608** .454** .685** (.698) 7 gender 0.4306 0.4963 -0.052 -0.039 .147* 0.009 -0.032 0.043 8 age 2.3889 0.60745 0.011 -0.078 -0.093 -0.094 -0.009 -.136* -.280** 9 education 3.1111 0.61506 .169* .148* -0.13 0.001 -0.014 -0.086 -0.112 0.095 10 firm age on failure 3.4769 2.64477 0.045 -0.047 0.013 -0.091 0.105 0.008 -.263** .645** 0.024 note: **p < .01; *p < .05. the number in parentheses is the square root of ave. cr and ave are calculated based on values obtained in the full measurement model table 3 results of structural equation modeling variable standardized coefficients c.r. social costs  learning from failure 0.19** 1.790 psychological costs  learning from failure -0.07 -0.637 learning from failure  restart intention 0.53*** 5.271 fit index x2 = 59.096 df = 49.996 x2/df = 1.182 gfi = 0.956 agfi = 0.932 rmsea=0.029 37 d. j. f. jeng, & t. h. hung journal of small business strategy / vol. 29, no. 1 (2019) / 30-42 table 4 regression results of learning from entrepreneurial failure as mediator between socialcosts of entrepreneurial failure and intention to restart business independent dependent variable restart intention learning from failure restart intention model 1 model 2 model 3 model 4 step 1: control variable gender -0.021 0.0135 -0.075 -0.072 age -0.058 -0.119 -0.015 -0.012 education -0.013 -0.130 0.048 0.036 firm age before last failure -0.063 0.033 -0.107 -0.111 step 2: predictor esc 0.108 0.106 0.069 step 3: mediator efl 0.383*** 0.376*** r2 -0.012 0.041 0.151 0.156 δr2 -0.002 0.023 0.135 0.136 f-value 2.410 2.444 35.451 33.722*** p-value (sig.) 0.122 0.119 0.000 0.000 note: esc = social costs of entrepreneurial failure; efl = learning from entrepreneurial failure. table 5 regression results of learning from entrepreneurial failure as mediator between psychological costs of entrepreneurial failure and intention to restart business independent dependent variable restart intention learning from failure restart intention model 1 model 2 model 3 model 4 step 1: control variable gender -0.021 0.135 -0.075 -0.073 age -0.059 -0.117 -0.015 -0.013 education -0.003 -0.122 0.048 0.045 firm age before last failure -0.056 0.132 -0.107 -0.107 step 2: predictor esc 0.053 0.086 0.019 step 3: mediator efl 0.388*** 0.386*** r2 0.014 0.060 0.154 0.156 δr2 -0.014 0.033 0.129 0.126 f-value 0.568 1.597 35.183*** 34.459*** p-value (sig.) 0.452 0.208 0.000 0.000 note: esc = social costs of entrepreneurial failure; efl = learning from entrepreneurial failure. 38 d. j. f. jeng, & t. h. hung journal of small business strategy / vol. 29, no. 1 (2019) / 30-42 quire a process for overcoming the grief of failure. three such processes are recovery, cognitive reflection, and behavioral modification. shepherd et al. (2009) acknowledged that an entrepreneur’s recovery from failure occurs when grief subsides and business losses are overcome. entrepreneurs recover from failure when the events surrounding their business losses no longer generate a negative emotional response (shepherd, 2003). after negative emotions have been overcome, cognitive constructs such as confidence or optimism replace grief. hayward et al. (2010) suggested that although optimism explains the high rate of failures, it also constitutes an opportunity for failed entrepreneurs to recover. this study determined no significant correlation between the psychological costs of entrepreneurs and learning from entrepreneurial failure (hypothesis 2). one possible reason for this is that even learning from failure can be viewed as a recovery outcome; if the psychological cost is excessively high, then learning performance can be inhibited. wolfe and shepherd (2015) used college football teams as a sample to investigate how failure influences their subsequent performance. they discovered that negative emotional content and subsequent performance exhibited a u-shaped relationship, indicating a threshold for the psychological costs incurred by team players. exceed this threshold for entrepreneurs, negative emotions may trigger positive learning processes and increase the intention to start a new venture. however, if negative emotions exceed this threshold, entrepreneurial intentions may be diminished. this study demonstrated that learning from failure has a mediating effect on failure costs and restart intention. learning is often viewed as a pivotal outcome of entrepreneurial failure (cope, 2003; corbett, neck, & detienne, 2007; shepherd, 2003). business failures can be a rich source of feedback for entrepreneurs regarding the effectiveness of their decision-making protable 6 hierarchical regression of entrepreneurial resources as moderators between learning from entrepreneurial failure and intention to start a new business dependence restart intention variable model 1 model 2 model 3 model 4 control gender -0.007 -0.002 -0.033 -0.030 age -0.010 0.009 0.023 0.030 education -0.088 0.053 0.083 0.070 firm age on failure -0.147 -0.144 -0.146 -0.135 independent oneself 0.099 0.016 networks & relationship 0.073 0.026 moderator human capital 0.361*** 0.360*** social capital 0.396*** 0.356*** interaction oneself x human capital -0.241*** networks&relationship x human capital -0.206*** oneself x social capital -0.256*** networks&relationship x social capital -0.228** r2 0.305 0.284 0.276 0.264 δr2 0.278 0.257 0.248 0.235 f-value 11.371*** 10.287*** 9.883*** 9.258*** f change 12.707*** 8.105** 12.657*** 9.719** 39 d. j. f. jeng, & t. h. hung journal of small business strategy / vol. 29, no. 1 (2019) / 30-42 cess (corbett et al., 2007; minniti & bygrave, 2001), management skills, and social networking and relationships. minniti and bygrave (2001) recognized that knowledge gained from failure could be applied during subsequent entrepreneurial endeavors to enable entrepreneurs to achieve greater success in the future. evidence indicates that highly successful entrepreneurs attribute their success to learning from past failures. the ability to learn is a prominent factor that affects behavior after failure. although failure is a remarkably beneficial learning experience, entrepreneurs fail to learn if they lack the ability to confront the reasons for failure effectively. entrepreneurs may only learn lessons that correspond to their existing beliefs (baumard & starbuck, 2005). as a result, they may replicate their mistakes in future entrepreneurial endeavors (shepherd, 2003). failure does not automatically lead to valuable learning outcomes (cope, 2011; cannon & edmondson, 2001), and entrepreneurs must be capable of learning to acquire knowledge that will benefit their future ventures. this study has several limitations that constitute opportunities for further research. first, this study applied cross-sectional data, which limited our ability to evaluate real outcomes for failure recovery and learning processes as well as resource mitigation following failure. future studies can address these limitations by analyzing longitudinal data consisting of information of failed entrepreneurs who have been monitored over time. second, our study did not consider the skills required for different entrepreneurial ventures. innovation-driven entrepreneurship requires greater skill and more resources and involves higher levels of uncertainty when compared with necessity-driven entrepreneurial ventures (liao, welsch, & moutary, 2008). furthermore, this study did not explore the timing and sequence of failure experiences reported by various types of entrepreneurs, which may influence how entrepreneurs comprehend their failure. the strength of emotional response (e.g., grief) may be mitigated by time (cannon, 1999). future studies should explore the timing of failure and consider the difficulties of business ventures. finally, the sample used in this study was reflective of a specific culture, and we did not consider how different cultural perceptions of failure may affect the learning behaviors of entrepreneurs. we encourage researchers to explore how cultural contexts influence entrepreneurial behavior outcomes following business failure. acknowledgments the authors would like to thank the anonymous reviewers for their valuable comments and suggestions that helped improve the quality of this manuscript. this study was supported by the ministry of science and technology of taiwan under grants most1042410-h-004-191 and most105-2410-h-004-178ss2. references abdullah, f., hamali, j., deen, a. r., saban, g., & abdurahman, a. z. a. 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(1999). differing perceptions of new venture failure: a matched exploratory study of venture capitalists and entrepreneurs. journal of small business management, 37(1), 1-14. stra tegf collaboration between technology entrepreneurs and large corporations: key design and management issues michehl j. kelly university of ottawa kellyqaadmin.uottawa.ca sean-louis schaan university of ottawa schaanqaadmin. uottawa.ca hklkne joncas notte l networks jhoncasqanortetnetworks.corn abstract the l990's witnessed an explosive growth in strategic alliance activity. today, strategic alliances are a central element in the growth strategies of technology entrepreneurs and emerging technology companies. in many instances, these alliances involve a large corporate partner. this phenomenon has been accelerated by the explosion in corporate venturing activity in recent years. on a conceptual level, alliances between small entrepreneurial firms and large corporations can provide significant benefits to both parties. d small technology company can leverage the research, manufacturing, marketing and jinancial resources of the large partner while ihe lauer can tap into the innovative capacity of the smaller partner. on a practical level, however these alliances pose some significant design and management challenges. this article examines these challenges and outlines actions that the technology entrepreneur can take to respond to them. introduction in all high-technology sectors, small firms are investigating, negotiating and forming alliances in record numbers. their ability to develop and execute these collaborative strategies has become a key determinant of survival, growth and profitability in an increasingly complex, uncertain and rapidly changing business environment. in recent years, a growing number of small technology companies have been engaging in alliances with large corporate partners. this trend has been accelerated by the rapid increase in corporate venturing activity (e.g. intel, siemens, \bm, panasonic, etc.). using one of the most widely recognized definitions, an alliance is: 60 journal of small business strategv vol. ll, no.2 fall/winter 2000 a formal and mutually agreed commercial collaboration between companies. the partners pool, exchange or integrate specific business resources for mutual gain. yet the partners remain separate businesses (lewis, 1990). collaboration with large partners ranges from informal cooperative agreements and joint projects to more formal arrangements (e.g. licensing, distribution agreements, joint procurement, new product development, r&d, etc.). when equity investment is involved, it can range from minority shareholding to a full-scale joint venture. surveys show that executives of small technology companies are acutely aware of the need to partner: almost 90% of executives from small information technology companies believe that alliances will be critical in their future business strategies (kelly & schaan, 1996). e among future alternative strategies, biotechnology industry executives assigned top priority to the formation of alliances. (coopers & lybrand, 1998). this paper examines the importance of alliances from the perspective of the small entrepreneurial technology company, typically employing less than 50 employees. it focuses on the unique benefits and managerial challenges inherent in collaborative arrangements with large partners. why small techonology firms & large firms enter alliances? alliance benefits to small technology firms small companies face significant hurdles to commercializing their early-stage technology or products. roadblocks are numerous but significant ones include access to resources or capabilities such as capital, manufacturing and marketing skills, distribution channels, etc. a key challenge is to develop a new product or service while simultaneously generating enough capital to keep a business afloat, either by selling product or accessing other sources of financing. many fail this challenge. it is estimated that 85 percent of start-up companies fail in their first five years. highly innovative products never make it to potential customers because of the principals'nability to fill out the needed infrastructure and access marketing, distflbution and financial resources (botkin & matthews, 1992). a partnership with a large corporation can improve not only the financial position and reputation of the small firm, but can also substantially strengthen its business system in areas of research and development (r&d), manufacturing, marketing and distribution. table i summarizes from the literature about alliances, some the benefits that may accrue to small technology companies when they collaborate with large firms. a major reason for a smaller high-technology firm to enter into a strategic alliance with a larger firm is to quickly take its technology through commercialization in order to pre-empt the competition and/or avoid obsolescence.'xpanding the market coverage is a natural strategy and partnering with a larger organization with resources allows the small firm to see products through to commercialization. according to a manager of a small soflware company, allying with larger firms is the key to ensuring that her organization has a future (mcfarland, 1995). a good example of the benefits derived from partnerships with larger partners is juniper networks; a young u.s.-based company focused on the development and delivery of high performance networking products for the growing internet market. juniper's technology is directed at the heart of cisco in the internet core. in 1998 it partnered with ericsson, nortel, 3com, the siemens/newbridge alliance, uunet technologies inc, lucent, and att 61 journal of small business strata/0 vol./l, no.2 fall/winter 2000 ventures. for juniper this represents a partnership with companies that collectively represent more that $75 billion in annual sales to virtually every major networking customer. the relationship provides a foundation for the delivery of juniper's technology around the world. ln return, corporate investors are able to integrate juniper's leading edge technology with their existing product lines and services worldwide. table i: potential benefits of alliances with large firms activity benefits financing access financial resources-equity, royalties, r&d funding, etc. reduce costs r&d/ new product v utilize market intelligence development access to extensive publications library obtain technological insights ~ leverage core competencies access complementary technologies access to labs and test facilities manufacturing receive manufacturing knowledge and capabilities capitalize on component purchasing power access quality assurance capabilities marketing/ ~ improve market access (distribution channels, global distribution networks) v access and established and loyal customer base acquire market research and personal insights ~ reduce cycle time increase credibility ties to a partner capable of driving industry standards l.egal/ regulatory advice on regulatory or patent approvals service/ support establish warranty, service and customer support procedures reputation exploit "halo effect" that comes from large company's endorsement small technology firms like juniper networks, facing time pressures and financial considerations which can offen preclude the creation of value chain infrastructure by an individual company, build their strategies around a business model centered on alliances. many small information technology (it) companies, for instance, are focused on a key software-based or ingredient technology that the company controls. using alliances to outsource non-mission critical aspects such as hardware elements, sales and support, they can aim internal efforts at improving their product offerings while creating the infrastructure to be competitive. in the biotechnology sector emerging companies have realized that their ability to finance and create the infrastructure to be a fully integrated pharmaceutical company is virtually impossible. instead, many of these companies focus their efforts on basic research and develop alliances with larger firms to handle testing, clinical trials, manufacturing, sales and distribution. this permits them to stay lean while leveraging and complementing their capabilities and reducing their time to market. a report for biotecanada found that the major reasons that canadian biotech companies enter alliances is for access to money and markets (coopers /k lybrand, 1998). it has been 62 journal of small business strategy vol. i i, no.2 fall/ivinter 2000 estimated, for example, that in 1998 over 60 percent of the financing for biotech companies came from collaborations with big pharmaceutical companies (zegera, 1999). these partnerships allow biotech companies to increase revenues and reduce risks while perfecting their particular areas of expertise. they can also be an important source of credibility. small companies can point to their collaborations as visible validation of the technology and products making it easier to attract traditional venture capital financing. a good example of how small companies in the biopharmaceutical industry can use alliances with large partners to fill out needed infrastructure is the relationship between vancouverbased quadralogics technologies (qlt) and american cyanamid. in the late 1980s, qlt had patents on a number of promising drugs including photofrin, a light activated drug that can be used in the treatment of cancers the company had an excellent science base and the ability to develop further products in the area of photodynamic technology. in order to make significant profits from their scientific research, the company's founders recognized that they needed access to a range of complementary resources including clinical research capability, production facilities, management of the regulatory process and marketing and sales capabilities (callahan, 1990). they also realized that the company had neither the time nor resources to develop these capabilities internally. through its partnership with american cyanamid, at the time a $4.6 billion company with a $ 365 million research budget and strong experience in the area of anticancer drugs, qlt was able to access many of the competencies it lacked. cyanamid also invested $ 15 million into qlt for a 16% equity position alliance benefits to large firms clearly, alliances between small and large firms occur because significant benefits can accrue to the larger partner as well. a major reason for partnering with small technology companies is that it can help large firms stay at the forefront of innovation. competition in all high-technology sectors requires ongoing innovation to stay ahead of rivals. the continuous building and renewing of capabilities is the only path to sustained advantage. in order to improve competitive position, large companies leverage internal developments with initiatives such as the promotion of intrapreneurship, skunk works, spin-offs and acquisitions. they also use alliances with small companies as a means of accessing innovation and innovative capabilities. there is growing evidence that: small technology firms appear to exhibit higher rates of innovation than large firms do (gilman and siczek, 1985). s the products developed by small firms tend to be more innovative than those resulting from efforts of large organizations (kotabe k. swan, 1995). in many cases large firms use smaller ones to provide best-of-class integrated solutions. in recent years canada's bce inc has used this strategy for both its outsourcingl consulting activities and for the emerging e-commerce market. partners of choice for each endeavour were the cgi group and mpact-immedia, now renamed bce emergis. partnerships with small entrepreneurial firms can be used to gain early insights into new products, strategies and technologies and hedge bets on industry evolution. in recent years an increasing number of these arrangements have involved equity investments by the larger iirm as a number of large technology companies are creating venture capital funds to support their small company alliance strategies (kelly & schaan, 1999). in creating mustang ventures, its new venture capital fund, germany's siemens ag, a $ 10billion company with 10,000 in-house developers, was acknowledging its need for partnerships with small innovative companies because of its inability to cover all of the new 63 journal ofsntall business vrarei0 vol. 11, iio.2 falllivinier 2000 technologies critical to its future competitiveness. not only are top engineers are increasingly attracted to small companies with their stock options and entrepreneurial spirit but many large companies have found their innovation efforts weighed down or crippled by the bureaucracy and internal politics. processes for structuring an ali.iance as noted above, the value creation possibilities in alliances between small firms and large companies are significant. to ensure that value is created and that the small firm is capable of appropriating its anticipated share of the benefits, technology entrepreneurs need to proactively manage the process of designing and implementing these ventures. they also need to find ways to manage the co-operative/competitive dynamics inherent in these arrangements. table 2 sets out some guidelines for technology entrepreneurs to consider in this respect. these guidelines were derived from a review of the literature on alliances and interviews with executives in technology companies. the remainder of this paper explores the guidelines in detail and identifies some of the major challenges in implementing and managing small/large technology alliances. table 2: guidelines for entering an alliance with a large firm process key steps 1. define strategic u identify capability gaps and formulate objectives for agenda a i i i ance s formulate profile of ideal partner(s) 2. screen partners clarify large firm's strategic agenda assess potential operational compatibility 3. design br negotiate u formulate shared vision alliance clarify roles and responsibilities u protect strategic interests protect proprietary knowledge design interfaces at strategic and operation levels 4. implement alliance u jointly monitor progress address issues as they arise ~ implement infrastructure for conflict resolution monitor roles and responsibilities establish effective communications 5. maintain ongoing u assign champions operations create teams and task forces establish a learning process define strategic agenda identify capabiliry gaps and formulate ojbeciives for the alliance. for the small company, protecting itself against surprises begins with a good understanding of its own strategic interest; the capabilities needed to pursue it and a clear strategy for obtaining them. small technology companies should have an agenda for partnering and proactively manage the process. the strategic agenda is easy to define when the small firm proactively decides that to meet its future strategic objectives an alliance with a larger partner is the best way to fill specific gaps. it is not as obvious when it is the large firm that initiates the contact with a deal 64 journal ofsmall business strategy vol. ii, no.2 fall(ivinter 2000 in mind. at that point, it is essential to consider the deal in the context of the current and future strategic imperatives of the small firm. formulate profile of ideal partner(s). this strategic agenda should be the basis for both seeking potential corporate partners and identifying their suitability. in seeking a partnership with a large corporate partner, the small company needs to be realistic in its expectations. it is more likely to achieve a limited set of objectives, 2 to 3 primary goals rather than a broad range of diituse benefits. challenge —being reactive. unfortunately, yoshino and rangan (1995) observed that small firms often enter alliances on an ad hoc basis, driven largely by immediate or tactical concerns. harbison and pekar (1998) found that too many alliances began with one company reacting to overtures from another company rather than undertaking an active, vigorous and thoughtful assessment of its own capability gaps and prioritizing its ideal partners. in many cases, there is too much emphasis on vague synergy and not enough on common strategy and joint value proposition. screen partners clarify large firm's strategic agenda. in developing alliances with large firms technology entrepreneurs need to be as clear as possible about the agenda of prospective partners. understanding the competitive benefits that the other partner seeks to gain from the arrangement can provide useful insights into true strategic intent. with this information, the technology entrepreneur can assess whether the strategic direction of its potential partner complements or conflicts with its own. harbison and pekar (l998) note that inexperienced firms tend to pay more attention to their own objectives and rationales instead of conducting detailed analyses of potential partners. experienced firms, they suggest, develop knowledge of potential partners, their management cultures, previous alliance experience, reputation and strategic objectives. they note in particular that a company needs to look closely at the resources and capabilities necessary to achieve its strategic objectives and whether the partner has the motivation and disposition to deliver the required resources. successful alliance builders, in their view, have learned that an ad hoc or sofl evaluation of agenda places an alliance in a precarious position from the start. challenge — hidden agendas and conflicts of interest. a study by bain g: co. (rigby tk buchanan, 1994) found that 90 percent of alliance negotiations do not pan out. a number of the negotiations were not entered with the objective of building an alliance but rather to obtain information and/or knowledge from the other party. small technology firms may find themselves negotiating with a larger firm that is: trying to capture the technology of the small firm and appropriate it; wishing to appropriate it or acquire exclusive marketing rights and shelve its product as a means of eliminating a potential competitor; u regarding the partnership as a kind of insurance policy or a hedging strategy against a technology or market with little real interest in its success; or attempting to prevent the small firm from entering into a partnership with a competitor. ~ has a competing project group working internally looking to use the alliance as a prelude to an acquisition assess poiential operational compatibility. while evaluating prospective large companies, a small firm should satisfy itself that the two parties would be able to work together. in many cases it is wise to do business with the large corporation before seeking to partner with it. this can benefit the future alliance in three ways. first, the technology entrepreneur would have an 65 jvurna/ of small business strategy va/. //, //o.2 fall/winter 2000 opportunity to assess the large firm's strategic intent. second, it provides a way to assess the compatibility and capabilities of the firms and minimize surprises once a partnership is established. in particular, it can provide important insights into the potential partner's decision making process and its political and personal dynamics. third, it facilitates negotiations since both partners know each other. figure i: typical differences in % of resources devoted to alliance alliance %of large % of small firm resources ; firm resources challenge —si=e asymmetry. although the large firm will often provide the resources to address the gaps identified by the small firm, the difference in size can be a barrier to success in collaborative activity (harrigan, 1986; jacobini & mccreary, 1994; doz & hamel, 1998). doz and hamel (1998) suggest that size differences in organizational contexts, often stemming from size differences between partners, do more to undermine alliances than do differences in national culture. doz (1988) suggests that such partnerships are often a disappointment to the partners and that the tensions in making them work oflen dwarf their success in the eves of the participants. figure i shows how the small firm devotes nearly all of its resources to the alliance whereas the investment in the alliance for the large firm is not as great. such inequalities can cause serious conflicts at both the strategic and operational/organizational levels. if these conflicts are not avoided or managed effectively they can derail or undermine the successful operation of the venture. challenge —differences in corporate culture. a common challenge in any alliance is how to make people from different organizational cultures work effectively together. this challenge is heightened in small firm/large firm alliances since the size of the partners generally has an important impact on corporate culture. generally, large firms are inclined to be more hierarchical with entrenched bureaucracies and highly political decision-making structures. the politics involved in committing resources and new projects can result in a lack of consistency and position over time. small firms, on the other hand, tend to be more flexible and entrepreneurial and are often frustrated when dealing with the slow bureaucracies of their large partners. in a study of alliances in the canadian high-technology industry, kelly and schaan (1996) found that many small company executives highlighted the cultural challenges that arose in partnerships with large companies. one likened the large company culture to that of government with multiple layers of authority and defined processes, with people rewarded for doing things correctly within the box. this was juxtaposed with the small entrepreneurial firms where "thinking outside the box" and speed were essential. according to one of the executives interviewed in their study: 66 journal ofsmall business strategy vol. i i, ivo.2 fall/ivinter 2000 ifyou differ with a partner in yoitr approach to doing business, the speed ofdoing business or your auitude towards business you have an enduring problem where you are always going to be rubbing each other the wrong way. for small companies the common component is the time that it takes to get things done, a highly precious resource in small companies. ln some cases, the transaction costs can outweigh the benefits that the small partner expects from the relationship. design and negotiate the alliance formulate shared vision once the partners have a mutual understanding of how the intended project will fit in their respective companies't'rategies, they need to jointly formulate a vision statement for the alliance. this is an essential step to facilitate decision-making and to help resolve the differences in views that will develop between the small technology company and its large corporate partner. once they agree on a shared vision, the partners can make decisions and/or resolve differences by deciding what is in the best interest of the future of the alliance as opposed to their respective self-interest at the time. clear roles and responsibilities. according one executive experienced in managing alliances "the key to managing an alliance is to understand how the strategy is going to get implemented in their organization and in yours, and ...who is going to be responsible for it in each organization" (kefly ec schaan, 1996).an understanding of partner roles and a definition of responsibilities are the foundation of a manageable alliance. partners need to develop a consensus on role assignments. many studies suggest that these assignments should be clear before launching the operation. lynch (1993) has referred to this as designing management into the front end. he suggests the development of a responsibility chart defining what tasks need to be performed and what decisions need to be made and by whom. although such decisions may be sensitive because of the egos involved or because of the fear of loss of control, they are part of a good implementation plan and should be clear to all parties before the venture becomes operational. protect strategic interests. small firms also need to ensure that strategic interests are well protected in an agreement or contract between parties. according to (botkin and mathews, 1992), particular attention needs to be paid to: v conditions for renewal and termination, clear benchmarks to measure progress and identify deviations from the plan, and agreement as to what happens if a partners does not deliver on its part of the bargain at the deadline. protect proprietary knowledge. for technology entrepreneurs one of the key concerns both during the negotiation and implementation stages of an alliance is the potential loss of their proprietary knowledge, which could jeopardize future competitiveness. ln alliances with larger partners the small partner is typically a technology provider. the day-to-day operation of the relationship provides substantial opportunities for technology leakage to the corporate partner. the unplanned or unintentional transfer of knowledge can alter the balance of power in an alliance in favour of the large firm and may even make the venture's continuation unnecessary. at the same time, alliances provide an important vehicle for learning and developing new skills and capabilities. achieving a balance between ensuring that information critical to the partnership flows freely with the need to guard against the unplanned transfer of key competitive assets or critical skills is a never-ending challenge in alliance management. 67 fattrnal of small business strategy vat. ll, ttta.2 fall/ivinter 2000 knowledge protection is especially difficult in more intensive and interactive partnerships or where the task is more complex and involved. many types of alliances, such as joint research and product development, require extensive communication and interaction between the partners. rigid restrictions on information flow or an obsession on skill loss is likely to undermine the ability of the partnership to achieve its objectives. baughn et. al (1997) suggest that one way to gauge partner intentions in this area is to look at some of its other activities around or outside of the alliance to determine whether it has parallel activities internally or with other partners. companies must address this problem as they construct alliance agreements. however, no matter how well crafted the agreement, a substantial potential for unintended skill transfer remains in daily interactions. design interface at a strategic and operational level: strategic level successful alliance implementation is contingent on a well-designed interface between the partners that fosters trust, commitment, communications and the development a shared understanding in support of the venture's strategic objectives. interface design needs to take into account differences in organizational contexts and cultures. while it may be unrealistic to think that the executives of a small company can establish strong personal relationships with the ceo of a large multinational enterprise, creating of linkages to key senior executives in the partner company are important. strategic alliances need acceptance from the entire organization, buy-in that usually starts at the top. in their study of executives of canadian high-technology companies, kelly and schaan (1996) found senior management commitment ranked by executives as the most important factor in the successful implementation. one small company executive in this study suggested that top level commitment in the larger partner was what defined the deal as strategic. linkages and communication with, and commitment from, the senior/strategic level in the partner is important for several reasons. it sets the environment for the alliance and signals its importance to others within the large partner. ~ the alliance stakeholders from both firms are in a better position to defend the alliance against resource cuts by the large firm. it allows operational managers to push things upstairs when required and keep the venture moving forward. operational level the right chemistry between those involved in the day-to-day operations is key to producing value. in managing the interface with the larger partner, a technology entrepreneur needs to consider the following questions: i. how will the two companies relate to each other? 2. how will communication take place? 3. what are the initial roles and responsibilities of the partners? 4. how will intellectual property be managed? 5. how will conflict between partners be resolved? 6. how will learning take place? in co-operation with its counterparts in the large firm, management should institute a communications program among operational managers and stait to justify and clarify the reasons for the alliance and the benefits to be gained by the firms. people should be made aware of the rationale for the alliance, be given background on the partner and understand the particular roles they are expected to play. this should be done by senior management in person and also through such as newsletters and email. communicating the successes and benefits of the alliance needs to be an ongoing effort if support is to be maintained. 68 journal of small business strategy vol. l l, ivo.2 fallltyinter 2000 internal support for the alliance also requires providing incentives to reward alliancesupporting behavior by the people involved. this means ensuring that the goals against which employees are measured and rewarded are consistent with the alliance responsibilities and tasks people are required to perform in support of the alliance. there is no point trying to convince people to behave differently if they are not rewarded for it. a lack of appreciation of this simple fact has derailed numerous alliances, acquisitions and reorganizations. challenge middle management buy-in. eighty-four percent of the managers of canadian high-technology companies indicate that strong linkages at, and commitment from, the middle management in the partner companies was a key factor in the successful implementation of alliances (kelly & schaan, 1996). top management's endorsement does not guarantee that it is openly embraced at the operating level. as harbison and pekar (1998) note, if operational managers are uncomfortable with some aspect of the proposed alliance the chances of success will diminish. executives in the canadian study mentioned above, (kelly & schaan, 1996) referenced alliances with strong senior management commitment in both parties yet they were falling apart at the business level. this lack of commitment at the operational level can stem from either personal or professional sources: fear loss of power or status, even a loss ofjob: given the wave of downsizing and reengineering that many companies have experienced, senior management should not be surprised that people inside the large partner view alliances with a great deal of suspicion and from a perspective of personal interest. alliance perceived as more work ot trouble with little recognition or reward: they may be reluctant to spend time on a venture for which they do not see any immediate and tangible results emerging. as a result, the response oflen ranges from "going through the motions" to "too busy, not a priority" to outright bureaucratic sabotage. ~ the pursuit of personal agendas: the implementation of successful alliances can often stand in the way of middle managers'areer aspirations, empire building, etc. implement alliance the dynamic nature of alliances makes them particularly difficult to implement and manage successfully. one of the first things that partners must realize as they begin to execute their alliance is that negotiation does not stop with the deal's close. alliance implementation is a process of ongoing negotiation with one's partner. as lei and slocum (1992) note, the ability to smoothly accommodate managers and practices from different partners is directly related to how well managers can negotiate the uncertainties and complexities of day-to-day activities that can not be specified in legal documents. moreover, there is a tendency to underestimate the amount of management time required and the skills required might be new to many managers. nevertheless, alliance success will only be achieved through careful, attentive and active management of the venture since the process of real strategic convergence and value creation occurs over time. jointly monitor progress. start-up is the time when partners have the opportunity to test their assumptions and plans and the period where they can have the most influence on its proper direction and tone. during the negotiation phase it is important to have identified key implementation milestones against which one can monitor developments. the start-up period is where most surprises are likely to occur and where relationships may be put under significant stress. thus there's a need to pay very close attention to the alliance until it demonstrates that it is able to fly on its own. it is imperative that small firms invest the time and resources needed to actively manage their relationships. in particular, it is their responsibility to ensure that its strategic objectives are met and its strategic interest and assets are not compromised by the relationship. 69 journal ofsniall business stratei0 vol. i i, ivo.2 fail/i@inter 2000 address issnes as they arise. not everything can be foreseen in the alliance agreement and assumptions and expectations may change dramatically as the alliance is implemented. some of these issues may be quite difficult. partners must be able to resolve outstanding issues and effect changes together in a constructive and mutually beneficial way. this involves the kind of good will and trust that comes from the existence of close personal ties between key players and managers in both companies. implement infrastmrcture for conflict resolution. conflict is inevitable in all strategic alliances. it results from both sins of commission and omission. managing conflicts is the role of the alliance managers who should implement good conflict resolution techniques. conflict can be productive and a good learning experience. it should be dealt with up-front, not suppressed. ideally conflicts should be resolved where and when they surface in order to maintain a healthy performing alliance. senior management should only be called upon to resolve difficult issues including those involving the broader relationship. moniti&r roles and responsihiiities. task definition is not something cast in stone. rather, it is something likely to evolve over time as partners leam to work together and get a true understanding of each other's capabilities. doz (1988) found that partners in the most successful alliances engaged in a series of iterative and interactive learning cycles over time. ooz and hamel (1998) suggest that companies should look at the early phase of an alliance as an opportunity to improve, learn, refine and build trust. these actions are likely more important than rushing to implement specific joint tasks. by working together on a small project at the outset partners are better able to understand and work out their differences, refine expectations and to test assumptions about their ability to contribute the value-creation logic of the partnership. afler this period, they may be better able to document clearly how roles and responsibilities are best allocated. establish effective communications. effective communications mechanisms between partners are a key factor in partnership success. open communications and information sharing between the partners is critical to build a shared understanding of venture goals and objectives and in creating the trust needed for the day-to-day operations of the alliance. good communication is a key to overcoming alliance problems and preventing them from becoming destabilizing. the small firm should guarantee that liaison points and communications channels are in place at the engineering, project and executive levels in the large partner. the methods for doing this vary. the partners should consider fixed electronic linkages by establishing an email, newsgroup or phone mail system. if a large partner already has these facilities, the small partner should seek access —even if limited. a regular schedule for telephone calls or teleconferences for status reporting might also be useful. technical means of communication, however, are no substitute for the face-to-face interaction from which trust and mutual respect are built (hollowel, 1999). the parties can also benefit from intelligence gained from important non-verbal communication. information in electronic communication can be misinterpreted or distorted leading to problems in the relationship and are void of the intuitive, oaen subtle, non-verbal signals exchanged during face-to-face encounters. canadian high-technology executives oaen pointed to the importance of frequent face-to-face meetings between partners. others pointed to weekly progress reports via teleconference with live meetings on the occasion of significant milestones (kelly & schaan, 1996). regular meetings between the managers involved in the venture can be a key vehicle in developing strategic and operational convergence. 70 journal ofsmall business strategy vohl i, no.2 fall/winter 2000 the methods for establishing effective communication in alliances vary and, in many cases, need to be tailored the unique characteristics of the partnership. they can entail intranets, email connections and other electronic linkages, groupware, teleconferencing, memos, bulletin boards, newsletters, etc. technical means of communication, however, are no substitute for face-to-face interaction (hollowel, 1999). more and mcgrath (1996), for example, found that face-to-face communications played a critical role in successful alliances. kelly and schaan (1996) identified it as an important means of developing strategic and operational convergence. the establishment of the trust and mutual respect essential to making alliances work necessitates a level of face-to-face interaction. without trust, electronic communication can be misinterpreted or distorted. moreover, while electronic communication is a useful supplement, it can miss the oflen subtle, non-verbal signals exchanged in face-to-face encounters. de meyer (1992) found that while electronic communication was widely used, managers still preferred personal contacts to build mutual trust and confidence. persaud (1999) suggests that face-to-face communications is an important prerequisite for the eitective use of electronic communications media. the quality of communications is also a critical factor. it is often good bell weather for the alliance. canadian executives felt that it was extremely important to be up-front with problems and to deal with them as soon as they occurred. one of them expressed the view that a breakdown or deterioration of communications such as when people don't return phone calls was typically one of the first indications of a serious problem (kelly & schaan, 1996). implementation challenge —devoting the time and resources to ensure success. the major challenge involved in implementing the previous points is ensuring that the necessary time and resources are allocated to the alliance, once it has been agreed upon. a study conducted by coopers and lybrand (1998) found that senior management involvement in alliances declines precipitously with time (parkhe, 1998). it determined that 46% of management time allocated to alliances goes into the conceptual phase of developing an alliance, 23% to the development of the business plan and to just 9% to implementation. other research has found that executives tend to rank themselves poorly with respect to alliance implementation abilities (kelly & schaan 1996; pekar, 1989,). doz and hamel (1998) suggest that few executives understand how to move from "the deal" and structural aspects of alliance making to actually managing alliances for strategic value. in many cases, the dealmakers may not everi have a specific game plan for the venture. andersen consulting (frerichs, 1999) found that most of the companies participating in their study had launched into alliances with high hopes, but no real plan to realize these hopes. finally, kanter (1994) comment that "too often top executives devote more time to screening potential partners in financial terms than to managing the partnership in human terms" and tend to be more worried about controlling the relationship rather than nurturing it. no matter how much anention has been paid to the strategic and structural design aspects of the alliance, the actual "take-off" stage is likely to be a challenging experience for most companies. sherman (1992) notes that learning to work together is hard. nevertheless, the initial stage of an alliance is a critical shakeout period where the foundation is laid for a good working relationship (anderson & weitz, 1989). doz and hamel (1998) note that the initial context of an alliance seldom encourages co-operation. the managers and staff involved will most likely find themselves in unfamiliar territory in which they have no clear frame of reference. they may have different assumptions, attitudes and expectations about the alliance, as well as private fears about their role in it. this situation is likely to be further complicated by cultural diiterences, communications barriers, lingering suspicions about partner motives and latent opposition within the partner companies. this is never a situation conducive to a fast and full-blown implementation. moreover, if these early uncertainties, conflicts and 71 jvtrrnal of sniall bnsinessgrrarel0 vol. l l, bio.2 fall/)vinrer 2000 tensions are not handled carefully and deliberately they can cause mistrust and reinforce the separateness of the partners thereby undermining the foundation of the venture. neglecting implementation —"what happens the morning after" —has proven to be the achilles'eel of many promising ventures. in fact, evidence is mounting that many alliances flounder badly during implementation. bleeke and ernst (1993) found that 66 percent of the cross-border alliances they examined ran into serious managerial problems in their first two years. typically, the root cause of these problems is: inadequate planning, the inability of the managers involved to successfully execute an otherwise well-thought out plan, or an organization trying to manages the alliance as if there is only one company involved. implementation is a high risk, difficult and time-consuming period. but new ventures can be further hampered by the partners'esire to get joint activities up and moving quickly and to start demonstrating results. the dilemma is that on one hand, market pressures require rapid action by the partners whereas human factors such as trust and relationship building are gradual and time-consuming activities (wildeman, 1996). raphael (1993) and others caution that demanding the fast start-up of an alliance can be extremely risky unless the partners have substantial experience in managing them or have worked together before. challenge cornnnmicarions. it is often said that the management of an alliance takes place through its communications processes. communication between partners can be seriously hampered by significant structural or organizational differences, such as size and culture, and can increase the co-ordination or transaction costs involved. botkin and mathews (1992) have suggested that the leading cause of death in small-large alliances is not non-perfoimance or missed deadlines but rather poor communication between the partners. harrigan (1994) found that good communications between corporate counterparts overcame the a priori barriers to success suggested by the partner's differences in size, organizational complexity, unequal venturing experience and different perspectives on the details of a venture's activities. kelly and schaan (1996) found that 73 percent of respondents cited poor communication as the major cause of alliance failure. communications problems have also been sited as the major operational problem in the first year of an alliance's existence (kelly, schaan et joncas, 2000). maintain ongoing operations the characteristics of small/large partnerships lend themselves well to a few strategies the small firm can implement to ensure on-going success. these strategies involve mitigating the differences between the partners and leveraging the large firm's strengths. assign chanipions. the high level of management turnover common in large firms complicates building effective operational linkages with large partners. this results in an ongoing requirement to bring new managers up-to-speed and to constantly resell the value of the venture at the operational level. according to yoshino and rangan (1995), a lack of continuity in management teams is perhaps one of the greatest impediments to building organizational trust and setting the right tone for the alliance. each change in management adds unneeded uncertainty to the alliance. the small company can mitigate the impact by building numerous and reinforcing ties across the organization. the greater the number of organizational ties, the more secure and the greater the commitment of the personnel of both 72 journal ofsmall business strategy vol. ll, itto.2 fall/ivinter 2000 firms and the better information the small firm has about what is actually going on in its larger partner (13odkin & mathews, 1992). small companies can also benefit enormously from having a champion or champions in the large firm. a champion is someone who believes in the venture and strives to get it accepted and implemented across the organization. ninety percent of canadian technology executives rated champions as important to the successful implementation of alliances (kelly & schaan, 1996). small companies looking to form alliances with large corporations need champions who can steer the venture through the bureaucracy of the corporation and who will be credible in defending it. kanter (1985) has suggested that projects in large organizations require enthusiastic championing to stand any chance of success. champions can also give the small company a way to get the big picture of the business. what they are being told at the project level and what is actually going on within the company may be two different things. a champion outside the particular division involved in the partnership can help provide broader insights into the company's priorities. a champion can also fight for the alliance in the neverending competition for resources in big companies. create special teams and task forces. at times partnerships between companies of substantially different sizes frequently require the fostering of a special environment and the creation of special arrangements. although the partnership may be between a small company and a particular business unit or division of a large company, as opposed to the company as a large whole, the diiyerences in bureaucratic cultures and operational practices may still stifle the venture. the way around this is to create task forces or horizontal teams with some decision-making capability to relate to the smaller partner. one approach is to form a team of talented and committed people drawn from both organizations. these teams are referred to as tiger teams, action teams, project teams, etc and are created when managers realize that an alliance cannot be managed along traditional modus operandi. the purpose of the team is to promote the active development of the alliance and, in that respect, it is empowered to do what is irrespective of established processes. the team usually contains individual champions who represent key functions or activities relevant to the success of the alliance. in many cases, individuals from both companies are matched together and held responsible for one or more of these function or activities. these teams are designed to fully capture the capabilities that both companies bring to the co-operation and to overcome some of the bureaucratic barriers in large companies (cal laban, 1990). establish a learning process. in a competitive environment the ability to develop and apply new sources of knowledge is a key to sustaining competitive advantage. hamel (1991) has described strategic alliances as a "race to learn". alliances with large companies offer the small technology company a unique opportunity to leam in a variety of areas including product development, r&d management, process technology, marketing and distribution, supplier management, etc. for a small company learning and extracting value from the partnership should be one of the key objectives of an alliance with a large partner to better ensure long-term success. to achieve this: design into the partner interface a window on the skills being sought. ensure senior level commitment to procedures and attitudes which foster the requisite learning environment. learning from a partner will only take place if there is an eitort to institutionalize it. lei and slocum (1992) suggest that reward and incentive systems need to be designed in ways that encourage learning-oriented behaviour and innovation. 73 jourttai ofsmall ijttsiness strategy vol. ii, ihlo,2 fall/winter 2000 many of the skills and knowledge that the large partner possesses, and which the small companies seek, may have significant learning barriers. large technology firms are typically more organizationally mature and have matching processes. manufacturing and marketing experience, the knowledge of customer requirements and distribution systems, etc are often embedded in the firm's specific and culture-specific organizational practices. thus, they can be extremely difficult to disentangle and absorb. conclusion alliances between small and large technology partners can be extremely beneficial due to the complementary fit of resources versus needs. although alliances are important to both parties, large companies generally have more options available to it should joint ventures fail than its small partner. the small firm is more vulnerable given the percentage of resources small firms invest as well as the importance an alliance can have to its strategic direction. consequently, the onus is on the small firm technology manager to take the greatest amount of care in the management of the venture to ensure its success. finally, as the alliance moves towards its initial goals, technology managers need to start thinking about "phase two" of the alliance. the experience of small technology firms suggests that failure to review and adapt the alliance's strategy over time can lead to lost opportunities or conflicts between the partners (kelly & schaan, 1996). alliances are dynamic and need to be adjusted to reflect the exponentially changing environment. considering this, the evolution of a partnership could lead to the termination of an alliance but could include creating a new co-operative arrangement with the same large partner and thereby the continuation of an experienced, profitable relationship. references anderson e., & weitz, b. 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(1994). collaborative advantage: the art of alliances. harvard business review 72(4), 96-108. kelly, mh & schaan, j. lh (1996).the mana ement and im lementation of strate ic alliances in the canadian hi h technolo indust . menlo park, ca: sri. kelly, m., & schaan, j. l. (1999).technology venture capitalists getting back in the game. financial post, march 19, c7. kelly, m., schaan, j. l. & joncas, h. (2000). managing alliance relationships: key challenges in the early stages of collaboration. ottawa: working paper. faculty of administration, university of ottawa. kotabe, m., & swan, k. s. (1995). the role of strategic alliances in high technology new product development. strate ic mana ement journal 16(8), 621-636. lei, d., & slocum, j. (1992). global strategy, competence-building and strategic alliances. california mana ement review 35(1), 81-97. k i.).(1999).~ph i i .n y k:9 p mcfarland, j. (1995).life gets harder for software firms. globe and mail 15(december), bl. more, e., & mcgrath, g. m. (1996). coo erative co orate strate ies in australia's telecommunication sector the nature of strate ic alliances. canberra, australia: depamnent of industry, science and tourism. lynch, r. p. (1993). business alliance vide: the hidden com etitive wea on. new york: wiley. parkhe, a. (1998). building trust in international alliances. journal of world business 33(4), 219-240. pk,p.(1969).h b i-«d g «gl lll .~pi i r (july/ august), 34-37. persaud, a. (1999). s ner istic innovation in intemationall dis ersed r&d labs. ottawa: unpublished ph.d. dissertation, carleton university. raphael, d. (1993).desi nin strate ic alliances: guidelines for mana ers, menlo park, ca: sri. rigby, d.k., & buchanan, r.w.t. (1994). putting more strategy into strategic alliances. directors and boards, 14-19. sherman, s. (1992).are strategic alliances working? fortune 21(september), 77-78. wildeman, l., erens, f., et. al. (1996). alliances and networks: the next eneration, kpmg survey. yoshino, m., & rangan, u. (1995). strate ic alliances: an entre reneurial a roach to gib(i i .b:h db i sh ip zegera b. (1999).pharma chameleons: partnerships are transforming the business models of «h p i dllgph .~rdh i 61,7479. 75 journal of small business sirategy vol. i i, no.2 fall/winter 2000 micltedl j. kelly is a professor of strategic and international management and dean of the faculty of administraiion of the university of onawa he holds a ph.d. from carleton university. his research interests include strategic alliances and financing of technology companies. jean-louis scliaan is an associate professor of strategic and international management in the faculty of administration of the university of onatva. he holds a ph.d. in btisiness policy from the r. ivey school of business at the university of western ontario. his research interests focus on strategic alliances and governance issues in emerging companies. hbl&ne joncas is a senior manager at nortel networks responsible for strategic marketing. throughout her career at nortel and as a consultant in the high tech sector, ms. joncas has focused on understanding the contest within which strategic alliances can be successful arid applying these techniques. ms. joncas has been lecturing at the university of ottaiva where she received her mba. 76 strategy   journal of small business  from the editors welcome to volume 22, number 1 of the journal of small business strategy. we hope you enjoy the articles in this issue. in this issue, our topics range from gender differences on the differential value of networks for entrepreneurs to the mediating effect of planning between overconfidence and performance to an examination of three forms of businesses during the startup phase to the effectiveness of a public coaching program. this issue concludes with an opportunity to further analyze the panel study on entrepreneurial dynamics. our first article by malewicki and leitch looks at the differential values of networks to entrepreneurs broken down by gender. specifically, females perceived a higher economic benefit from networks, and a higher affective value. no significant differences were found on perceived normative value. the sad part of this article appearing in this issue is that the lead author, debra malewicki passed away in may of 2010. this paper was submitted to jsbs after her passing. this research represents some of her last work. the editors want to thank her coauthor, cathy (folker) leitch, for her continued effort to see that debra’s contribution was not lost. (see memorium preceeding article.) in our next article, simon, kim, houghton, and deng sampled 52 small computer companies that introduced a new product. they examined a manager’s overconfidence and planning at the points where the product was launched and 18 months later. their findings indicate that overconfidence decreases planning, and planning decreased performance. additionally, they found that planning mediated the relationship between these two variables. in our third article, a resource-based view of three forms of businesses in the startup phase: implications for franchising, welsh, davis, desplaces, and falbe utilize the resource-based view of organizations to compare franchisees during the startup phase utilizing the u.s. data from the kauffman firm survey. this study extends the literature by considering three forms of startups—franchises, new independent startups, and repurchased existing businesses in their analysis. our fourth article by schayek and dvir uses a longitudinal study of small trade and service businesses that were part of a coaching program run by the ministry of industry, trade and labor in israel. their findings show that the public assistance program produced a direct positive effect on small business performance.     this issue concludes with a distinguished research commentary by kelly shaver and his coauthors concerning the panel study of entrepreneurial dynamics. this database provides a rich source of insights into nascent entrepreneurs. the longitudinal samples are representative of the u.s., making the psed unique in the quality of sampling and one’s ability to generalize. there are abundant opportunities to further analyze these data and this article provides valuable insights to facilitate this process. ross fink, coeditor gerald hills, coeditor   reproduced with permission of the copyright owner. further reproduction prohibited without permission. http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2020, vol. 30, no. 01, 58-67 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2020 small business institute® w w w. j s b s . o rg introduction eugenia melo1, juan llopis2, josé gascó3, reyes gonzález4 1university of alicante, campus san vicente del raspeig, san vicente del raspeig 03080, alicante, spain, myriameugenia.melohernandez@gmail.com 2university of alicante, campus san vicente del raspeig, san vicente del raspeig 03080, alicante, spain, juan.llopis@ua.es 3university of alicante, campus san vicente del raspeig, san vicente del raspeig 03080, alicante, spain, jl.gasco@ua.es 4university of alicante, campus san vicente del raspeig, san vicente del raspeig 03080, alicante, spain, mr.gonzalez@ua.es integration of ict into the higher education process: the case of colombia ict, education, universities, colombia apa citation information: melo, e., llopis, j., gascó, j., & gonzález, r. (2020). integration of ict into the higher education process: the case of colombia. journal of small business strategy, 30(1), 58-67. demands in the field of education as a whole, and more precisely in university education, are increasingly high because social development largely depends on education. in this respect, icts play an essential role in the mediation of the teaching-learning process to conceive the future. for example, in relationship with entrepreneurial careers, garrido, hilton, cagle, and wright (2018), schenkel, d’souza, cornwall, and matthews (2015), and smith, sardeshmukh, and syed (2019) recognized this. at the same time, as highlighted by hilty and huber (2018), and zane, yamada, and kurokawa (2014), ict constitutes an example of a transformational and to a certain extent disruptive technology. concerning lecturers’ perception profiles, they can be categorized into two according to riascos, quintero, and ávila (2009); those who are reluctant to use icts as an innovative strategy under the excuse that the methods which they have utilized for so long have worked well; and those willing to adopt the role of an innovative lecturer seeking to improve the teaching-learning process. the new demands make it necessary to train lecturers so that they can reflect on technological contents, their use in teacher training, and the advantages that it brings (soto, serna & neira, 2009). the ois (2010) points out that, despite the great efforts made in aspects linked to training and raising awareness about teachers’ roles, those efforts are still insufficient, since they have mostly focused on providing lecturers with the basic notions needed to make an instrumental use of icts, neglecting the training aimed to achieve the skills required for the joint utilization of innovative didactic methodologies and sophisticated icts through which teachers can apply such methodologies to real world problems in their university classrooms. so much so that the project la ciencia y la cultura (oei) (2010) states that training teachers in the skills needed to teach the new generations perhaps constitutes the most important dimension when it comes to generating educational change. for gascó and melo (2017), ict incorporation into educational systems has required modifications in their projects, to such an extent that they eventually rethought the goal and feasibility of different means, available resources, and relevant infrastructures. this comes as no surprise either, considering —as highlighted by alhabeeb and rowley (2018) too— that the way in which students and students approach these themes usually differs. this paper has as its aim to establish a pedagogical strategy aimed at supporting the integration of icts (information and communication technologies) into the higher education process. a survey was carried out aiming focus on the analysis of teachers’ practices so that competences in ict use at university education in colombia could be enlarged. 81 universities answered the survey questionnaire: 51 private and 30 public, and a total of 423 lecturers from different academic disciplines. our findings show the degree of attention paid by teachers to strengthening ict skills in their training tasks. this research is complemented with strengths, weaknesses, opportunities, and threats (swot) analysis performed with 50 professionals experienced in ict use in higher education. http://www.smallbusinessinstitute.biz http://www.jsbs.org http://www.redage.org/autor/la-ciencia-y-la-cultura-oei http://www.redage.org/autor/la-ciencia-y-la-cultura-oei 59 e. melo, j. llopis, j. gascó, & r. gonzález journal of small business strategy / vol. 30, no. 1 (2020) / 58-67 in turn, nakano, morla, garret, vásquez, and lozada (2012) see icts as a valuable tool for the educational community which has been validated in terms of both mass media and communication equipment and regarding programs and new solutions for users. therefore, skills are arguably fundamental to teach about context and culture diversity, to help students join the knowledge society, and to ensure the existence of multicultural and solidarity-oriented citizens. thus, lion (2012) points out that digital competence refers to the specific use of knowledge, capabilities, and skills associated with the development of elements and processes which allow for an effective, efficient, and innovative use of technological instruments and resources. garrido et al. (2918), prado, quintanilla and pérez (2017), and digan, kerrick, cumberland, and garret, (2017), also sustained this. as for colombia, the studies carried out by barrera, hernández, and luna (2018) and lugo (2010) describe it as a country which finds itself at an integration stage, and where universities not only have technological resources at their disposal but have also started working on professional teacher training and the integration of icts both into education and into the teaching-training process. the design of a strategic pedagogical methodology makes it possible to integrate icts into colombian higher education, in accordance with the ideas provided by cabero (2015). integrating icts into higher education implies using them as a tool which facilitates learning as well as the dissemination of knowledge, thus permitting to reach the goal of learning in a more significant and excellent way. it deserves to be mentioned that, according to a study undertaken by jara, claro and martinic (2012), icts can favor universal access to education, equality in instruction, the exercise of teaching, and quality learning, including therein teachers’ professional development, additionally stressing the perspective oriented to achieve a more efficient educational system management and administration. in this sense, these technologies have helped lecturers enrich their pedagogy and didactics to establish novel exchanges with other lecturers dedicated to the same discipline and even with others who work in different disciplines, ultimately seeking to build collaborative links of a multidisciplinary nature. delving deeper into the specific case of colombia, the ministerio de educación nacional (2013) [ministry of national education 2013] explains in the document entitled “competencias ict para el desarrollo profesional docente” [ict skills for professional teacher development] that the existence of a regulatory framework together with other antecedents have made it possible to define essential conditions to strengthen educational innovation policies. that is how the link generated around icts, their pedagogical use, and the teacher’s skills in this regard, permit to update the classical practices in terms of knowledge transmission. the availability of skills, the essence that underpins the importance of icts, requires a systematization effort not only for their diagnosis, intervention, impacts and actions but also for their proper assessment, use, and implementation. from this perspective, hernández, gamboa and ayala (2014) conclude that a national policy framework for the integration of icts into the educational system devised by different public and private institutions must reach students, teachers, and executives/managers/administrators of educational institutions. the words of cabero (2015, p. 23) in this respect sound quite sensible: “making icts become part of higher education implies their utilization as instruments that help facilitate learning and knowledge dissemination, thus permitting to achieve the goal of learning in a more significant and excellent manner.” in the light of the above, one can say that the suitable use of icts for universities arises as a necessary strategy, because they would not only be developing technical and economic resources but also jointly empowering their lecturers, managing to have competent and qualified professionals who fulfill the present-day requirements. according to rangel (2015), digital teaching skills entail an effective performance based on mobilizing resources of a technological, informational, pedagogical, and communicative nature. it must be additionally recognized that ict incorporation into educational systems has required modifications in their projects, even rethinking the aims and viability of using various means, available resources, and relevant infrastructures. in the opinion of gonzález (2016), the training of an ict lecturer necessarily involves an organization of contents, an arrangement of educational activities, forms of interaction and communication, as well as constructive evaluation mechanisms. it consequently becomes essential to ensure teacher training following the standards contained in the three approaches to educational change, basic ict notions, knowledge deepening, and knowledge generation. technologies offer multiple chances for the generation of new learning experiences. as many as different variables may influence the design of the educational situation (mirete, 2016). we can therefore state, on the basis of the paper written by lion (2012), that digital competences refer to the specific use of knowledge, capabilities, and skills related to the development of elements and processes thanks to which technical tools and resources can be effectively, efficiently, and innovatively developed. 60 e. melo, j. llopis, j. gascó, & r. gonzález journal of small business strategy / vol. 30, no. 1 (2020) / 58-67 in view of all the above, this paper has as its aim to carry out a quantitative and qualitative analysis of ict integration within the context of higher education in colombia that can serve as the basis for a methodological strategy to achieve that goal. method seeking to know the state of the art concerning ict presence in colombian university teaching, a decision was made to implement a descriptive type of methodology with a qualitative and quantitative study, taking as our primary sources: (a) a survey administered via google drive in september 2016 amongst lecturers of small-, mediumand large-sized private and public universities (classified by the colombian ministry of national education) and located in the six natural regions of colombia, namely: amazónica; andina; caribe; insular; orinoquía; and pacífica; and (b) focused personal interviews via phone to experts in ict use in higher education: teachers, pedagogues, social communicators with experience in ict, and systems engineers that were in charge of ict departments in higher education institutions. the information provided by university websites also served as a secondary source, drawing a comparison between colombia’s ministry of national education proposals and the real extent of ict implementation and use. a total of 81 colombian universities (50 private and 31 public) voluntarily took part in the study, with 423 teachers from a variety of disciplines (art and humanities, social and legal sciences, health sciences, engineering, economic and business sciences, and basic sciences). in regards to interviews, we selected 50 professionals characterized by their knowledge and experience in ict use within higher education environments. pursuant to the law, higher education institutions are the entities which enjoy official recognition as the deliverers of the higher education public service throughout the colombian territory (law 30 of 1992). their classification depends on their academic nature and their legal status. academic nature appears as the main feature in the constitution (creation) of a higher education institution. it defines and provides the identity in terms of competence (field of action) that gives it academic power to offer and develop higher education programs in one training modality or another. they may adopt a wide range of formats in colombia: professional technical institutions; technological institutions; university centers; or technological schools and universities. legal status defines the most important characteristics that statutorily and administratively distinguish one legal person from another, and it has to do with the origin of its creation. that is how, based on the latter aspect, higher education institutions are private (non-profit, corporations, foundations or solidarity-oriented economy institutions) or public (public establishments and autonomous university entities). the data collection used two instruments: a) questionnaire its design was based on the consultation of works which combined icts and higher education, such as those by durán (2014), and suárez, almerich, gallardo, and aliaga (2013). attention was also paid to other studies dedicated to the preparation of questionnaires meant to assess lecturers’ ict use skills in education, including those authored by fernández, fernández and cebreiro (2016) and rangel (2015). another important reference to build the questionnaire came from the document published by the colombian ministry of national education (2013) which defines technological competence within the educational context as the capacity to relevantly, responsibly, and efficiently select and utilize a variety of technological tools, understanding the principles by which they are governed, the way to combine them, and the licenses which protect them. three dimensions are identified for them: • exploratory: it identifies the characteristics, uses, and opportunities that technological and audiovisual tools offer in educational processes. • integrative: it combines a wide range of technological tools to improve educational practice planning and implementation. • innovative: it uses complex or specialized technological tools to design virtual learning environments that favor the development of skills amongst students along with the creation of learning communities and/or networks. our intention is to use these dimensions to identify the activities that teachers develop to strengthen their technological skills when it comes to ict use and integration within the higher education context. and likewise, to find the differences in relation to general and personal aspects of participants concerning their professional tasks and the extent to which they use each one of the questionnaire items. from the above, and for questionnaire validation purposes, a trial instrument was created for its accreditation by lecturers and pedagogues from different disciplines, and systems engineers dedicated to the ict use in higher education, from 15 colombian universities. this made it possible 61 e. melo, j. llopis, j. gascó, & r. gonzález journal of small business strategy / vol. 30, no. 1 (2020) / 58-67 to introduce the suitable correction and to refine the final questionnaire with close-ended items categorized as dichotomous, order-related, and scale-based that facilitate both systematization and a relevant statistical analysis. b) interviews with experts in accordance with the descriptions provided by froschauer and leitrer (2009), and gonzach, kluger and klayman (2006), this kind of interview focuses on the interviewee’s relevant knowledge and experience about a specific text. the preparation of the interview starts with a list of the most important aspects to be known in connection with the research aims and the interviewee’s profiles. fifty knowledgeable and experienced ict professionals working in higher education were selected, including: teachers; social communicators; and systems engineers in charge of ict higher education departments linked to small-, mediumand large-sized public and private colombian universities. the answers obtained in the interviews were compared to those received about the same topic through the questionnaire administered to teachers. results and discussion as previously explained, the survey questionnaire was completed by lecturers from small-, mediumand largesized private and public universities located in the six natural regions of colombia —amazónica; andina; caribe; insular; orinoquía; and pacífica. the participants belonged to 81 colombian universities (50 private and 31 public) and comprised 423 lecturers from different disciplines (art and humanities, social and legal sciences, health sciences, engineering, economic and business sciences, and basic sciences). the statistical package for social sciences (spss), version 20, served to analyze the results obtained for the purpose of identifying the practices followed by teachers to improve their skills in the use of icts as a pedagogical support instrument. as shown in table 1, 81 universities from colombia’s six (6) geographical regions took part in the survey: 50 = 61.7% private and 31 = 38.3% public. the highest concentration corresponds to the andina region with 42 = 68.9% private and 19 = 31.1% public —which can be explained because this region is the most populated in colombia and comprises cities that have a large number of higher education centers. table 2 provides a descriptive analysis of the different variables which characterize both the higher education centers and the lecturers that completed the survey, such as, sex, age, type of university, university size, teaching category, scientific level and teaching experience. one can check a higher participation of men (56.9%) and of under-45s (61.23%). private universities account for table 1 interviewed universities by colombian geographical regions geographical regions private univ. public univ. amazónica: caquetá, putumayo, guainía, guaviare, amazonas, and vaupés 0 2 andina: cundinamarca, caldas, quindío, antioquia, tolima, huila, boyacá, santander, norte de santander, risaralda, and córdoba 42 19 caribe: guajira, magdalena, atlántico, córdoba, bolívar cesar, and sucre 4 4 orinoquía: arauca, vichada, meta, and casanare 0 2 pacífica: chocó, nariño, cauca, and valle del cauca 4 4 insular: san andrés archipelago in the atlantic ocean, and the malpelo and gorgona islands in the pacific ocean 0 0 total of universities 50 31 56.7%, large ones reach 53.43%, those with a permanent link as staff amount to 54.37%, master’s degrees/technical schools account for 56.50% and those with less than 15 years’ experience represent 65.96%. this last finding is in tune with the study by gyaase, gyamfi and kuranchie (2019), where these authors conclude that ict integration implies that teachers must own the skills and experience required to use them efficiently. as for gender, the research carried out by ntuli (2018) did not detect any differences in terms of being prone to use icts, an aspect that we have also checked in our study. in turn, valtonen, kikkonen, kontkanen, makitalo, and sointu (2018) paid attention to university lecturers’ age and came to the conclusion that newly-arrived lecturers and younger ones were more likely to utilize icts. within the survey, interviewees were asked about ict implementation and frequency of use through the following 62 e. melo, j. llopis, j. gascó, & r. gonzález journal of small business strategy / vol. 30, no. 1 (2020) / 58-67 question: when selecting an ict resource for the virtual classroom, what degree of importance do you give to the factors listed below according to the following scale, 1 (not important at all), 2 (hardly important), 3 (important) and 4 (very important)? 1. teachers’ knowledge about the use of the resource 2. time devoted by teachers to using the resources 3. professional and scientific importance 4. technological and didactic innovation 5. accessibility for all students the data used to perform the descriptive analysis by ict implementation and frequency of use can be seen in table 3 and have a mean close to 3.44. the data with the highest score correspond to accessibility for all students (m = 3.27, sd = 0.621), as opposed to those referred to technological and didactic innovation, the data of which show the lowest scores (m = 3.69, sd = 0.520). table 3 reveals that, when it comes to standard deviation, most data take values from 0.520 onwards but never exceed 0.627, which leads to infer that the values collected are not so far from the averages corresponding to the main variables. table 3 descriptive analysis by ict implementation and frequency of use component no. of interv. m sd knowledge about the use of the resource 423 3.47 0.603 time devoted to using the resources 423 3.33 0.627 accessibility for all students 423 3.27 0.621 professional and scientific importance 423 3.43 0.600 technological and didactic innovation 423 3.69 0.520 a factor analysis about ict implementation and frequency of use can be found in table 4 below. the kaiser-meyer-olkin (kmo) test value in table 4 —0.701— allows us to accept the analysis as being satisfactory. table 2 teachers’ general and personal aspects sex men % women % total 241 56.97 182 43.03 423 age <45 % >45 % total 259 61.23 164 38.77 423 type of university private % public % total 240 56.74 183 43.26 423 university size small % medium % large % total 101 23.88 96 22.70 226 53.43 423 teacher’s type of relationship chair % occasional % staff % total 125 29.55 68 16.08 230 54.37 423 educational level undergraduate % specialist % master’s degree % doctorate % postdoctorate % total 34 8.04 81 19.15 239 56.50 65 15.37 4 0.95 423 teaching experience <15 % >15 % total 279 65.96 144 34.04 423 63 e. melo, j. llopis, j. gascó, & r. gonzález journal of small business strategy / vol. 30, no. 1 (2020) / 58-67 table 4 validity of the ict implementation and frequency of use factors kmo and bartlett’s test kaiser-meyer-olkin (kmo) measure of sampling adequacy 0.701 bartlett’s sphericity test approx. chi-square 527.510 freedom degrees 10 significance 0.000 the components in table 5 tend to provide better explanations for the answers given to this question: when selecting an ict resource, what degree of importance do you give to the following factors? in this case referred to ict implementation and frequency of use, it is the values for the rotation sum of squared loadings that tell us how the components “knowledge about the use of the resource” and “time devoted to using the resources” are the ones which best describe the problem jointly accounting for 70% of all components. table 6 shows the rotated factor matrix. in the component referred to as “direct operational applicability” stand out the aspects of knowledge, time, and student accessibiltable 5 analysis by components for ict implementation and frequency of use component initial eigenvalues rotation sum of square loadings rotation sum of square loadings total % of variance cumulative % total % of variance cumulative % total % of variance cumulative % knowledge about the use of the resource 2.487 49.742 49.742 2.487 49.742 49.742 1.950 38.994 38.994 time devoted to using the resources 1.015 20.310 70.052 1.015 20.310 70.052 1.553 31.058 70.052 professional and scientific importance 0.691 13.821 83.873 technological and didactic innovation 0.414 8.273 92.146 accessibility for all students 0.393 7.854 100.000 ity, which entails being able to utilize icts immediately — because they own the technical knowledge required for that purpose— to do it in a reasonably time-efficient way, and to place them at the disposal of students. these aspects were also detected by islam, mok, gu, spector, and hai-leng (2019) in malaysian universities and by sang, liang, chai, dong, and tsai (2018) in chinese ones. as for the second component, that we termed as “strategic relevance,” one can easily see professional and scientific importance along with technological and didactic innovation, grouping them together in a strategic aspect when dealing with ict implementation use. unlike what happened in the first component, immediacy does not prevail here; it is actually the innovative nature (both technologically and didactically) as well as the scientific, academic, and professional relevance that matter most. a similar line of argument is followed by reyes, reading, doyle, and gregory (2017). in short, two teacher typologies appear depending on whether we pursue an immediate applicability of icts or rather their consolidation as a key strategic element in teaching and learning relationships. with regard to this, the proposal made by khoo (2019) to additionally check employers’ views about ict requirements would also be relevant for these issues not to rely exclusively on what lecturers think but also on market needs. in parallel, the research undertaken by buabeng-andoh, yaokumah and tarhini (2019) verified the absence of 64 e. melo, j. llopis, j. gascó, & r. gonzález journal of small business strategy / vol. 30, no. 1 (2020) / 58-67 significant differences between teachers’ behavior concerning icts in western countries compared to others. there are some studies, amongst them that authored by cubeles and riu (2018), in which it is even stated that universities’ investments in icts have a clearly incremental nature within teaching and learning processes, although their effective results are not so evident. on the contrary, aboudahr, mohamed and musiban (2018) actually reach the conclusion that a direct relationship exists between the investment made in icts for university teaching and learning purposes and students’ academic performance. with a view to complete our work, table 7 reproduces the swot analysis with its most important findings, so that the reader can understand the perception of the 50 interviewees about teaching practices aimed to enlarge ict use skills. it follows from this swot analysis that the availability of teachers specialized in ict areas together with the fact that a considerable offer of applicable technologies already exists stand out as strengths. as for weaknesses, it is worth highlighting that teachers can choose whether to implement and use icts or not —and they do not necessarily have to adapt to this new reality. an outstanding opportunity lies in the fact that icts favor the exchange of experiences as well as the participation in professional and teaching networks. finally, teachers’ reluctance and aversion to change deserve to be highlighted as threats for the implementation of new icts. conclusions the results obtained in the interview tell us that the threats for ict implementation and frequency of use can be found in such aspects as the vertiginous technological advances which make new tools available to us every day table 6 rotated factor matrix for ict implementation and frequency of use factor component direct operational applicability strategic relevance knowledge about the use of the resource 0.858 0.088 time devoted to using the resources 0.824 0.153 accessibility for all students 0.637 0.272 professional and scientific importance 0.059 0.903 technological and didactic innovation 0.353 0.795 table 7 swot analysis weaknesses strengths lack of teaching practice in icts. not enough time to use icts. teachers are the decision-makers when it comes to ict implementation and frequency of use. some teachers are experts in the field of icts and use them to broaden their ict use skills. many valuable resources are currently available on the net; it is up to the lecturer to use them, since many applications and software programs are free. it becomes necessary to adopt a strategic approach to work in technologies that are essential for pedagogical and academic tasks and not according to cutting-edge technology. threats opportunities many teachers are reluctant to use technologies, whether because they do not like those technologies or because they lack the proper training. ict use has improved lately, but a much stronger commitment of teachers is needed. frequency of use is relative, even though it must be permanent in the interviewee’s opinion. constant exploration in new technologies. remaining up to date in teaching practices and competences related to ict use becomes fundamental. some lecturers are motivated to use icts. icts act as tools for the exchange of experiences and the participation in professional or teaching networks. 65 e. melo, j. llopis, j. gascó, & r. gonzález journal of small business strategy / vol. 30, no. 1 (2020) / 58-67 and the time needed by the institution to be able to acquire and update such ict devices in a more versatile and pertinent way. two teacher typologies appear based on the outcomes of the factor analysis performed, depending on whether one seeks immediate ict applicability or rather the consolidation of icts as a key strategic element when it comes to teaching and learning relationships. all in all, it turns out that the financial investments made by institutions should especially focus on the availability of technological equipment, leaving aside the coverage and adoptation of icts by the whole academic population. the idea is to try and implement them gradually, beginning with the most prone teachers (because they are not only knowledgeable in ict skills but also motivated to utilize them). it also becomes relevant to design and provide permanent, ongoing training in icts and their implementation in the educational context. this is a scenario that requires a co-responsibility of all the actors involved in the training process: teachers, students, managers, and academic support staff. in view of all the above, and taking into account both the survey performed and the swot analysis, we can say that the experiences described have not only proved that it is important to lay emphasis on the technical use of devices or applications or on teaching lecturers about that, but also that it becomes essential to ensure that lecturers can understand and later consciously exploit the real possibilities of interrelating —and consistently using— icts on the basis of an improved pedagogy. we can thus summarize that this is a process which permits to efficiently construct knowledge within the framework of pedagogy —where icts come to form part of the didactic action. proper ict use appears as an essential strategy for universities, since they would not only be enhancing technical and economic resources but also jointly developing their teachers in an overall manner. the positive outcome would be the availability of competent, well-trained professionals able to face the present-day requirements. the improvement of these teaching practices related to ict use will be possible through training and a planned and oriented updating of visual and interactive activities. lecturers need to be digitally competent in order to cope with their pedagogic work, taking advantage of an ict mediation suited to students’ skills. this will only be feasible if training centers have the necessary resources and technology. institutional success depends on a well-trained human capital. as for future research lines, it is worth highlighting the possibility to apply a longitudinal study that will make it possible over time to compare the findings of this paper with those that may be eventually obtained after a significant period of time has elapsed. the comparison of the results obtained in colombia with other countries —especially those situated in nearby geographical regions— constitutes another future research line which seems worth developing. checking employers’ opinion about the use of icts in university learning could also be an interesting research aim for subsequent works. as for the limitations faced in this paper, it must be recognized that, although the number of surveys administered is 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(2014). strategic maneuvering of technological factors and emergence of de facto standards. journal of small business strategy, 24(2), 91-113. http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2019, vol. 29, no. 03, 16-32 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2019 small business institute® w w w. j s b s . o rg introduction thomas maran1, marco furtner2, sascha kraus3, simon liegl4, paul jones5 1university of liechtenstein, liechtenstein, thomas.maran@uni.li 2university of liechtenstein, liechtenstein, marco.furtner@uni.li 3esce international buisness school, france, sascha.kraus@esce.fr 4university of liechtenstein, liechtenstein, simon.liegl@uni.li 5swansea university,united kingdom of great britain & northern ireland, w.p.jones@swansea.ac.uk entrepreneurial leadership: an experimental approach investigating the influence of eye contact on motivation entrepreneurial leadership, charismatic leadership, motivation, communication apa citation information: maran, t., furtner, m., kraus, s., liegl, s., & jones, p. (2019). entrepreneurial leadership: an experimental approach investigating the influence of eye contact on motivation. journal of small business strategy, 29(3), 16-32. effective leadership is a core ingredient for entrepreneurial success (banks et al., 2017), most of all in small and medium sized enterprises (gonzales, rodriguez, & sossa, 2017; o’regan, ghobadian, & sims, 2004). a key element of leadership is motivating followers, thereby achieving increased business performance (van knippenberg, 2012). in this regard, certain leadership styles have proved more effective than others. for example, transformational leadership is often quoted as being the optimal approach to adopt (bass, 1985). closely related is the entrepreneurial leadership style, which takes the transformational concept, combines it with an entrepreneurial spirit and requires leaders to transport this spirit to their followers (lajin & zainol, 2015). specifically, charismatic communication, which is characterized by a value-based, emotional, visionary and expressive style of delivery (antonakis, bastardoz, jacquart, & shamir, 2016), enables leaders to inspire and motivate followers (antonakis, fenley, & liechti, 2011; johnson & dipboye, 2008; towler, 2003). the simple circumstance that charismatic leadership is effective (banks et al., 2017), while imposing no additional production cost for the benefits it promotes, makes it relevant for small and medium size enterprises, which often struggle with a lack of resources (greene, brush, & brown, 1997). some techniques from the repertoire of charismatic communication have already been proven to be effective for entrepreneurs, including emotion-laden communication, storytelling (roundy, 2014) or vision communication (hensel & visser, 2019). however, there is minimal empirical investigation on which operative tactics and concrete behaviors should be employed in management practice to foster charismatic communication, in order to successfully persuade and motismall, new firms lack the resources of most larger, established firms, which makes effectively motivating employees challenging. charismatic leadership is effective in increasing the performance of both groups and entire organizations. specifically, the impact of charismatic leadership practices on followers stems from nonverbal communication and construed immediacy. the purpose of this study is to investigate the impact of an entrepreneurial leader’s eye contact and smiling on followers’ objective motivation in an experimental leadership situation. a sample of 129 young adults was tested in a 2×2 (nonverbal tactics: high eye contact/low eye contact × high smile/low smile) experimental design. motivation was measured by objective performance in a motoric reaction time task. the conditions were operationalized by manipulating gaze behavior and facial expressions of the leader in a staged instructional video, showing a start-up entrepreneur attempting to enhance the performance of his employees as part of a competitive comparison. regardless of whether the leader smiled or not, participants showed faster responses and therefore performed more effectively when the leader maintained high eye contact.these findings support the hypothesis that increased eye contact is a strong nonverbal signal, which in the immediate context of leader-follower interactions, stimulates an increase in performance. in fact, eye contact could induce an increased level of motivational arousal in followers, resulting in improved confidence and self-reference when taking instructions. this study advances the existing research on learnable skills that can be used to appear more charismatic and thus potentially increasing follower performance by adopting simple nonverbal rules in communication behavior. this offers an invaluable and low-cost tool for leaders founding a start-up business. http://www.smallbusinessinstitute.biz http://www.jsbs.org 17 t. maran, m. furtner, s. kraus, s. liegl, & p. jones journal of small business strategy / vol. 29, no. 3 (2019) / 16-32 vate followers (antonakis et al., 2016; van knippenberg & sitkin, 2013). this study evaluates communication between a start-up leader and followers, and aims to identify nonverbal signals that lead to increased employee motivation within simulated leader-follower interactions. the investigation selected an experimental design that operationalizes nonverbal leader-follower communication signals as independent variables, and motivation regarding objective performance as a dependent variable. thereby, our design allows the examination of whether specific communicative behaviors that are associated with charismatic leadership (antonakis et al., 2016) exert effects on followers’ objective motivation (wang, oh, courtright, & colbert, 2011) at the moment of interaction, beyond the mere immediate construal of charisma ascriptions (antonakis et al., 2011; towler, 2003). literature review and hypotheses the outstanding importance of charismatic leadership in organization science is clear considering convincing evidence, which proves its effectiveness in leading an organization. meta-analytic evidence from 76 independent studies shows that charismatic leadership increases organizational effectiveness by improving objective performance on multiple levels (banks et al., 2017). specifically, charismatic leadership predicts supervisor-rated task performance, supervisor-rated citizenship behavior, and organization performance (banks et al., 2017). moreover, charismatic communication constitutes a crucial component of effective leadership in the early formation of an enterprise (mcgrath & macmillan, 2000; podsakoff, mackenzie, moorman, & fetter, 1990; renko, el tarabishy, carsrud, & brännback, 2015), as well as at subsequent higher management levels with more differentiated organizational structures (jacquart & antonakis, 2015). this means that alongside providing technical knowledge, leaders also need to adopt a visionary charismatic role in order to effectively sustain an organization (thompson, 1999). therefore, while some may show entrepreneurial talent and high levels of competence in a given field, they might lack the necessary charisma needed to increase the motivation of others, which is indispensable in order to join the leader in a risk-taking approach (renko et al., 2015). leaders’ charisma exerts its strongest influence on followers’ behavior in face-to-face communication. hence, for small and medium size enterprises, where leaders and followers stay in close exchange and communicate directly with each other, enhancing a leader’s charismatic communication should be particularly effective in meeting the challenge of motivating followers. in small scale businesses that are operated by either a manager or owner, the individual and the organizational level may be equivalent (frese, van gelderen, & ombach, 2000), while leadership in small and medium size enterprises is more direct than in larger companies. an entrepreneur’s decisions strongly shape the firm’s strategy, culture, and actions, and hence their behavior is critical to the survival and development of small and medium size enterprises (beaver & jennings, 2001; davies, hides, & powell, 2002; puplampu, 2005). since leaders in small and medium size enterprises are intensively involved in operations, their leadership is highly demanding (baldegger & gast, 2016; gonzales et al., 2017; o’regan et al., 2004). additionally, when the firm and employee numbers grow, leaders increasingly have to manage formal leadership and micro-politics, which are constituted social and, in particular, interpersonal processes (leitch, mcmullan, & harrison, 2013). moreover, recent accounts describing leadership emphasize the crucial role of social influence and persuasion (ruben & gigliotti, 2016, 2017). effectively understanding the way leaders communicate with their followers therefore offers a promising psychological approach towards an increased appreciation of a crucial component of successful entrepreneurial leadership (e.g. roundy, 2014). in the early developmental stages of a new venture the entrepreneur’s leadership style tends to be mostly transformational, often changing as the venture is growing, and becoming more of a transactional style (baldegger & gast, 2016). however, early entrepreneurial leadership, which features certain combinations of leadership styles unique to this setting (kempster & cope, 2010), is not identical with transformational leadership, although many definitions recognize an ability to influence employees, strengthening their intrinsic motivation or commitment to increase business performance, as a key element (gupta, macmillan, & surie, 2004; ireland, hitt, & sirmon, 2003; renko et al., 2015). a unique characteristic of entrepreneurial leadership is the additional focus on opportunities (renko et al., 2015), particularly when recognizing and exploiting entrepreneurial opportunities (shane & venkataraman, 2000) that enable accessing markets through innovations (renko et al., 2015; tidd, 2014). they also face challenges in the early stages of their business development, making it necessary to motivate their followers to improve performance, in order to succeed in gaining market share (mcgrath & macmillan, 2000). at the same time, they must still know their companies, their own, and their followers’ limits (brazeal & herbert, 1999), and operate with limited access to resources (drucker, 1985; greene et al., 1997; leitch et al., 2013). however, there are also two aspects of charismatic leadership that seldom appear in the entrepreneurial leadership literature: 18 t. maran, m. furtner, s. kraus, s. liegl, & p. jones journal of small business strategy / vol. 29, no. 3 (2019) / 16-32 individualized consideration and, most notably, charisma (podsakoff et al., 1990; renko et al., 2015). charismatic leaders are normally recognized as entrepreneurial (conger, 1999), but it is not necessarily the other way around, with entrepreneurs often lacking the necessary charisma to motivate others in following their risk-taking approach (renko et al., 2015). charismatic signalling and entrepreneurial leadership thompson (1999) argues that entrepreneurial leaders are only able to sustain an effective organization if they adopt a visionary charismatic role underneath the architectural role (i.e. control) in their enterprise. only a balance between those aspects qualifies a founder to be an “entrepreneur” or an “entrepreneurial manager” (thompson, 1999). however, it is not only within their business that entrepreneurs need to demonstrate charisma. as being an entrepreneur means bringing novel and creative ideas to the market, it is necessary to positively influence others regarding idea validity (van knippenberg & van kleef, 2016). persuasion as an outcome of charismatic leadership and communication (niebuhr, tegtmeier, & brem, 2017; tskhay, zhu, zou, & rule, 2018) is required to acquire potential customers, but also to attract investors (parhankangas & ehrlich, 2014). since newly founded businesses typically lack information regarding their market potential and cannot predict expected revenue, subjective factors like positive affect greatly influence the decision of investors (davis, hmieleski, webb, & coombs, 2017; dimotakis, conlon, & ilies, 2012). as described previously, positive affect is associated with charisma and effective leadership (bono & ilies, 2006; van knippenberg & van kleef, 2016). the task of an entrepreneurial leader consists also of influencing their followers, which, as stated in the definitions of entrepreneurial leadership, is typically achievable by being charismatic and inspiring trust (alvarez & barney, 2005, 2007). the necessity to acquire trusting and committed followers is described in gupta et al. (2004) as “cast enactment”, being one of the two cross-cultural challenges entrepreneurial leaders have to face. in conclusion, it seems that being a charismatic person is a key factor for attaining entrepreneurial success. this may sound challenging for those seeking to undertake a business startup but lacking in personal charisma. however, as research demonstrates, appearing more charismatic can actually be taught (antonakis et al., 2011; frese, beimel, & schoenborn, 2003; towler, 2003). therefore, a potential perceived lack of charisma in entrepreneurial leadership (renko et al., 2015) could and should be overcome. signals of leaders’ charisma even though convincing evidence exists on the effectiveness of transformational or charismatic leadership (banks et al., 2017), its definition and measurement have been criticized due to the lack of a tight definition (van knippenberg & sitkin, 2013). first of all, it remains unclear which specific behavioral signals and tactics charismatic leaders use to persuade and motivate their followers (antonakis, day, & schyns, 2012). hence, opening the black box of charismatic communication represents a sparsely addressed approach in leadership research, but holds great promise in closing the gap between distal interpersonal perception of charisma and closely related transformational leadership, and proximal, measurable communicative signals. we feel that this is an important step in advancing effective leadership development. to address the above criticism, charisma has been more recently conceptualized as “values-based, symbolic and emotion-laden leader signaling” (antonakis et al., 2016, p. 304). this conceptualization refers to signalling theory (connelly, certo, ireland, & reutzel, 2011), which is widely applied in research on management (bergh, connelly, ketchen, & shannon, 2014) and entrepreneurship (moss, neubaum, & meyskens, 2015) and puts a clear focus on charisma as a repertoire of leader signals. signalling approaches state that a sender provides signals to give credible information about his quality (connelly et al., 2011). such signals should be perceived by a receiver, and they should act upon the signal (connelly et al., 2011). the effect of charisma in the context of leadership relies on the communication signals of leaders (de vries, bakker-pieper, & oostenveld, 2010), through both verbal and nonverbal channels (connelly, gaddis, & helton-fauth, 2013; tskhay, zhu, & rule, 2017). nonverbal signals are not merely an expression of an inner state, but at the same time act as a social signal, and therefore have an effect on the receiver. the expressive and communicative function of nonverbal cues either signals to the partner one’s own state, or the kind of behavior one would like to see from the other person (jack & schyns, 2015; van kleef, 2009, 2014; van kleef, van den berg, & heerdink, 2015). thus, smiling while praising someone would first and foremost indicate an inner state (“i am happy”). but from an interactive point of view, different messages are being sent on a relational level (e.g. “i am happy because you achieved something!”), which also communicates to the other person that smiling is likely if such behavior is being shown (“i like what you are doing, please keep on doing that!”; chartrand & lakin, 2013; goldin-meadow & alibali, 2013). hence, in the workplace, nonverbal be19 t. maran, m. furtner, s. kraus, s. liegl, & p. jones journal of small business strategy / vol. 29, no. 3 (2019) / 16-32 havior also plays a vital role, even beyond leadership processes (reh, van quaquebeke, & giessner, 2017). in fact, it can promote affective and inferential reactions in organizations (van kleef, 2014; van kleef, homan, & cheshin, 2012; van knippenberg & van kleef, 2016). in summary, it is clear that social influence is required for successful leadership (e.g. côté & hideg, 2011; schultheiss & brunstein, 2002; van kleef, van doorn, heerdink, & koning, 2011), and that nonverbal displays form crucial communicative skills for persuasion (kopelman, rosette, & thompson, 2006; overbeck, neale, & govan, 2010; van kleef et al., 2015). however, research is scarce on which exact nonverbal signals increase followers’ motivation. hypotheses development the transfer of emotional arousal is a crucial mechanism in leadership communication (van knippenberg & van kleef, 2016), and is one of the most significant interpersonal effects of emotions within the social and organizational contexts (erez, misangyi, johnson, lepine, & halverson, 2008; grabo, spisak, & van vugt, 2017; van kleef, 2009, 2014). nonverbal communication, especially when conveyed through emotional expressions and social gaze, can lead to affective and inferential reactions, depending on the adequacy of the nonverbal signal (van kleef, 2014; van kleef et al., 2012, 2015). expressing energetic positive emotions such as enthusiasm, and showing more directed eye gaze, increases both the charisma attributed to a person (bono & ilies, 2006; erez et al., 2008; tskhay et al., 2017) and the arousal level of the social encounter (krumhuber, likowski, & weyers, 2014; myllyneva & hietanen, 2015). moreover, frequent and prolonged eye contact and smiling make a sender appear to be more effective, confident, powerful, dominant, and charismatic (awamleh & gardner, 1999; brooks, church, & fraser, 1986; damen, van knippenberg, & van knippenberg, 2008; gardner, 2003; hall, coats, & lebeau, 2005; holladay & coombs, 1993; howell & frost, 1989; strongman & champness, 1968; trichas, schyns, lord, & hall, 2017; tskhay et al., 2017) which in concert indicates leadership ability (grabo et al., 2017). since arousal reflects motivational activation (calderon, kilinc, maritan, banavar, & pfaff, 2016; gable & harmon-jones, 2010; lang, 2010), a behavioral willingness on the part of the observer occurs (damen et al., 2008). hence, the transfer of arousal through nonverbal signalling might represent an essential mechanism by which charismatic leaders effectively motivate their followers. in fact, motivational arousal not only alters cognitive functioning (maran et al., 2017), but also modulates the processing of social signals (maran, sachse, & furtner, 2015). arousal refers to the activation of motivational systems (calderon et al., 2016; lang, 2010). more vividly, if emotional behavior were understood as a vector, the associated arousal would be the vector magnitude and reflect behavior invigoration (calderon et al., 2016). this induction of a state of increased motivational willingness could have an immediate effect on followers’ behavior and performance (e.g. koning & van kleef, 2015). thus, of primary interest is how nonverbal signals can act as a motivating tool in managerial practice in small and medium sized enterprises. interestingly, even though eye signalling and smiling have been mentioned in all existing dramaturgical operationalization of charismatic leadership in research (e.g. johnson & dipboye, 2008) research has so far paid little attention to how these signals affect followers’ performance. the importance of eye gaze is likely based on the fact that humans are hardwired to shift their attention towards faces, especially pairs of eyes (johnson, dziurawiec, ellis, & morton, 1991). once mutual eye contact is established, this also increases arousal levels (helminen, kaasinen, & hietanen, 2011; myllyneva & hietanen, 2015). in addition, directed eye gaze increases self-awareness and self-referential information processing (baltazar et al., 2014; conty, george, & hietanen, 2016). thus, offering eye contact might be particularly effective in hijacking a group’s attention and gaining trust with a captivating message. in a next step, followers can then be persuaded to join the pursuit of a leader’s entrepreneurial vision. thus, we hypothesize that: hypothesis 1. while offering task instructions, a leader’s increased and prolonged eye gaze leads to higher follower performance. similarly, facial happiness regulates conversational dynamics (kaukomaa, peräkylä, & ruusuvuori, 2015), supports human cooperation (centorrino, djemai, hopfensitz, milinski, & seabright, 2015; danvers & shiota, 2018; mussel, göritz, & hewig, 2013), and affects social perception (chanes, wormwood, betz, & barrett, 2018), for example promoting positive impressions in marketing communication (söderlund & sagfossen, 2017). most importantly, happy facial expressions increase ascriptions of leadership, sympathy and charisma (damen et al., 2008; rychlowska et al., 2017; trichas et al., 2017), and vice versa charismatic leaders generally display more positive emotions, which positively influence their followers (bono & ilies, 2006; erez et al., 2008). finally, like directed eye gaze, smiling induces a state of heightened arousal in the observer (krumhuber et al., 2014). thus, we hypothesize that: hypothesis 2. while offering task instructions, a leader’s 20 t. maran, m. furtner, s. kraus, s. liegl, & p. jones journal of small business strategy / vol. 29, no. 3 (2019) / 16-32 facial happiness leads to higher follower performance. taken together, the goal of this study is to investigate whether the deliberate use of directed eye gaze and facial happiness is effective in motivating followers using an experimental design. following hisrich, langan-fox, and grant (2007), we developed an experimental design simulating an entrepreneurial context to examine the causal role of nonverbal signals in invigorating performance (kraus, meier, & niemand, 2016). considering psychological methods and experimental designs in entrepreneurship research is a valuable approach, which offers insight into novel facets of entrepreneurial success at the behavioral level (frese & gielnik, 2014; frese et al., 2000; kraus et al., 2016). to test our hypotheses, we developed a 2 × 2 between-subject design with four experimental conditions. participants received video-based task instructions from an entrepreneurial leader either displaying shortened or prolonged directed eye gaze and a low or high amount of smiling. thereafter, participants performed the instructed motoric response task, where motivation was objectively measured by assessing response latencies. although motivation is a multi-layered construct (deci, koestner, & ryan, 1999), findings reveal that during a tapping task, motivated participants make significantly more taps than less motivated participants (eysenck, 1964). thus, when information is gathered that extends beyond basic introspective surveys (wilson, tunstall, & eysenck, 1972), the time required to achieve a specific reaction to a set target stimulus can be viewed as an objective measurement of motivation (chiew & braver, 2016; zedelius, veling, bijleveld, aarts, & mattes, 2012). moreover, leaders’ nonverbal signals might exert their effect on followers through the transfer of arousal (van kleef, 2009, 2014; van knippenberg & van kleef, 2016), which reflects the magnitude of behavior invigoration (calderon et al., 2016; lang, 2010). hence, the readiness to react, as reflected by response latencies, represents a reliable indicator of motivation. in fact, a plethora of evidence shows response latencies to be susceptible to systematic variations in immediate and future monetary reward, hence reflecting fluctuations in motivation (bijleveld, custers, & aarts, 2012; zedelius et al., 2012, 2014). evidence supporting our hypotheses would be an increase in objective performance, as measured by the reaction time, when the leader maintains directed eye gaze (hypothesis one) or shows more smiling (hypothesis two) as compared to the respective control condition. furthermore, since evidence on the cumulative use of nonverbal displays is sparse, we performed exploratory analyses to test for an interaction between nonverbal signals. method a staged face-to-face situation was used to test the conditions of both high and low amounts of directed eye gaze as well as high and low amounts of smiling. in this experiment, participants played the role of followers and watched one of four instructional videos. each video corresponded to one of the four 2 × 2 factorial conditions (high directed eye gaze vs. low directed eye gaze × high smile vs. low smile). consistent with the experimental conditions there were four different versions of the video, which, aside from the manipulated variables, were completely identical in terms of their content and presentation. the simulated leader in the video first presented himself as a successful entrepreneur who explained to the participants the importance of cooperation in the experiment towards optimizing business success and provided instructions on the following experimental task (see visual stimulus material). participants were randomized into four groups (high-directed eye gaze and low directed eye gaze and/or high smile and low smile). they then completed a motoric reaction time task as soon as the video had finished. the measured task performance, namely reaction time, was operationalized as the dependent variable reflecting an objective indicator of participants’ motivation. participants all participants were volunteers and had normal or corrected-to-normal visual ability. they were not under the influence of psychoactive substances or psychopharmacologic treatment, nor had they suffered major head injuries at any time in their lives (self-report). overall, 129 participants (67 females, 62 males; (mage = 21.58, sd = 2.40; age range: 18-32 years) were randomly assigned to one of the four conditions and performed the motoric reaction time task. informed consent was obtained according to the guidelines of the ethics committee of the department of psychology, university of innsbruck. visual stimulus material the video sequences lasted for five minutes. the content and delivery (i.e. prosody, speech tempo) were identical and showed an individual elaborating their career as the founder of a successful business start-up. the individual went on to explain the importance of ongoing employee tests, then revealing to the participants their participation in the subsequent task. for the sake of comparability, they should participate as part of their team. the video informed test participants that work precision, perception, and re21 t. maran, m. furtner, s. kraus, s. liegl, & p. jones journal of small business strategy / vol. 29, no. 3 (2019) / 16-32 action time would be measured and that the requirements were accuracy and efficiency in task completion. thereafter, participants were informed regarding the task they had to complete following the video. depending on the testing condition, the participants viewed one of four videos where the entrepreneur either made high level or limited degree of directed eye gaze, and correspondingly smiled significantly or only to a limited extent (high directed eye gaze vs. low directed eye gaze × high smile vs. low smile). notably, regarding directed eye gaze, it has been demonstrated that increased contact is equally as effective regardless of whether it is viewed as a video or through face-to-face interaction (fry & smith, 1975). motoric reaction time task in order to measure participants’ performance, a reaction time task was used. participants initially did one test round and received the instruction to press the space key as fast as possible as soon as they would see the letter “x” on the computer screen. ten other white letters appeared during the test on a black background in one-second intervals as distractions between the target stimuli. the task lasted seven minutes and thirty seconds and was presented in one of three conditions with five blocks each. the participants’ motoric reaction time was measured as the time difference between the target letter appearing on the display and pressing the space key (orosz, cattapan-ludewig, gal, & feldon, 2008; orosz, feldon, gal, simon, & cattapan-ludewig, 2007). the task results were evaluated with the goal of the investigation in mind, i.e. objectively understanding the motoric reaction time, since it proves to be a valid measurement for the participant’s motivational level (eysenck, 1964). data analysis a two-factor analysis of variance was performed to examine the interaction and primary effects of the 2 × 2 (high directed eye gaze vs. low directed eye gaze × high smile vs. low smile) investigation design. in addition, in order to test the hypotheses described above, a t-test for independent random samples (separated for each factor) was computed to allow a comparison of the participants’ performance under the varying conditions. degrees of freedom were corrected in case of deviance from sphericity (greenhouse-geisser). effect sizes are reported by partial eta squared ηpart 2 [0.01 = small; 0.06 = medium; 0.14 = large] for analyses of variance and as cohen’s d [0.3 = small; 0.5 = medium; 0.8 = large] for t-tests (elis, 2010). bayesian factors were calculated according to the guidelines of marsman and wagenmakers (2017) and wagenmakers et al. (2018). bayes factors were reported as bf10 [1 to 3 = anecdotal evidence; 3 to 10 = moderate evidence; 10 to 30 = strong evidence; 30 to 100 = very strong evidence; > 100 = extreme evidence; (lee & wagenmakers, 2014)]. data analyses were conducted using spss (version 24) and jasp (version 0.8.6; jasp team 2018). results effects of directed eye gaze and smiling a 2 × 2 (high directed eye gaze vs. low directed eye gaze × high smile vs. low smile) factorial univariate analysis of variance (anova) was conducted to investigate the interaction between eye contact and smiling. the results are presented in table 1 and figure 1. there was a main effect for directed eye gaze f(1,125) = 10.117, mse = 7082.266, p = 0.002, ηpart 2 = 0.075, bf10 = 14.51, with neither an interaction between factors, f(1,125) = 0.927, mse = 641.603, p = 0.340, bf10 = 0.39 nor a main effect for smiling f(1,125) = 1.386, mse = 970.578, p = 0.241, bf10 = 0.31. in support of our first prediction, results indicate that maintained eye contact during the leadership situation alters performance, as reflected by faster reaction times. on the other hand, no effect was found for smiling as stated in hypothesis two, or for an interplay between both directed eye gaze and smiling. effects of directed eye gaze on performance t-tests for independent samples of the cross-subject variables of directed eye gaze and smiling were conducted to analyse performance differences. compared to the low table 1 effects of alterations in eye contact and affective displays on the participants’ motivational level, as indicated by their average reaction times eye contact affective display total low high m [ms] se [ms] m [ms] se [ms] m [ms] se [ms] low 394.16 4.53 404.12 4.11 398.90 3.12 high 383.79 4.99 384.82 4.85 384.31 3.45 total 388.98 3.41 394.01 3.41 22 t. maran, m. furtner, s. kraus, s. liegl, & p. jones journal of small business strategy / vol. 29, no. 3 (2019) / 16-32 directed eye gaze group [m = 398.90; se = 3.12], the participants from the high directed eye gaze group [m = 384.31; se = 3.45] displayed faster reaction times, t(127) = 3.13, p = 0.002, d = 0.551, bf10 = 14.51. these results highlight a difference in the reaction time between both groups, supporting our first hypothesis, that a leader keeping eye contact within the simulated organizational context does in fact enhance objective performance. effects of smiling on performance a t-test for independent samples was also conducted as part of diversity tests of the independent variables high smile and low smile. compared to the low smile group [m = 388.98; se = 3.41], test participants from the high smile group [m = 394.01; se = 3.41], t(127) = -1.04, p = 0.299, bf10 = 0.309, did not display faster reaction time. contrary to our second prediction, results showed that increased smiling on the part of the entrepreneur during the leader-follower interaction does not alter participants’ performance. figure 1. mean reaction times in the motoric reaction time paradigm across the four experimental conditions (low/ high directed eye gaze × low/high smile). error bars denote se. discussion the objective of this investigation was to determine whether the simple, deliberate use of a leaders’ directed eye gaze and smiling, two nonverbal signals, could increase objective performance in human subjects within an experimentally staged leader-follower situation. indeed, our findings show enhanced performance when an entrepreneurial leader displayed high amounts of directed eye gaze as compared to low amounts of directed eye gaze while giving instructions. participants who received eye contact from the leader reacted faster to the target stimulus than participants receiving low eye contact. hence, directed eye gaze led to an increased behavioral readiness to act. this indicates that directed eye gaze acts on immediate motivational channels, as we determined it through an objective behavioral performance measurement. manipulating directed eye gaze might represent a simple communication strategy to highlight the importance of any given task and potentially improve its execution through subtle persuasive signals, without having to use costly resources. hence, a start-up leader’s use of nonverbal signals might be effective in motivating followers to show increased performance, and thereby represent a simple and effective tool in managerial practice. our findings thus support the notion that a charismatic communication style characterized by increased directed eye gaze is beneficial for performance (boies, fiset, & gill, 2015; koning & van kleef, 2015). but surprisingly and contrary to our expectations, alterations in the leader’s smiling behavior did not impact followers’ performance. based on our findings, two questions require further explanation. first, why does a leader’s directed eye gaze increase follower performance and second, why does smiling show no such effect? first, a plausible explanation for the performance enhancing effect of prolonged eye gaze is due to the fact that directed eye gaze increases arousal (helminen et al., 2011; jarick, laidlaw, nasiopoulos, & kingstone, 2016). arousal represents the driving force behind motivated behavior and indicates the intensity of a performed action (calderon et al., 2016; pfaff & banavar, 2007). thus, enhanced arousal leads to an increased behavioral preparedness, as measured by our motoric performance paradigm (calderon et al., 2016; lang, 2010; lang & bradley, 2010). moreover, current theoretical models trying to explain the effect of leadership on followers’ motivation postulate the transfer of arousal to be a key component (damen et al., 2008; van kleef, 2014). therefore, increased arousal might enhance the motivational value of a represented task instruction (zedelius et al., 2012) or simply increase action readiness (calderon et al., 2016; maran, sachse, & furtner, 2018). the notion of arousal being a crucial phenomenon underlying the motivation-enhancing effects of leadership is supported by existing models that identify arousal as the central mode of action in organizational communication processes (van kleef, 2014), focusing first and foremost on the effects of emotional facial expressions. moreover, interpersonal transfer of arousal represents one crucial psychological mechanism behind the attribution of charisma 23 t. maran, m. furtner, s. kraus, s. liegl, & p. jones journal of small business strategy / vol. 29, no. 3 (2019) / 16-32 and persuasion to leaders through their nonverbal emotional displays (côté & hideg, 2011; damen et al., 2008). beyond having merely an arousing effect, being gazed upon by others has also been demonstrated to promote comparable psychological effects to hearing our own name being called (kampe, frith, & frith, 2003), as well as increasing self-focus (conty et al., 2016). hence, perceiving a leader’s gaze might enhance the self-referential nature of a leader’s instruction by signalling to followers that the leader’s message is directed to oneself. our findings indicate that directed eye gaze is effective in motivating followers. this fits well with existing findings, showing social gazing having strong impact on receivers’ behaviors. interestingly, these behaviors, like the effects found in the current study, are highly relevant for effective leadership of followers. experiencing directed eye gaze can increase self-awareness (myllyneva & hietanen, 2016), self-focus (conty et al., 2016) and even alter cognitive functioning (conty, gimmig, belletier, george, & huguet, 2010; hietanen, myllyneva, helminen, & lyyra, 2016), for example by activating mind reading abilities (senju & johnson, 2009). since humans are biologically hard-wired to orient towards faces (johnson et al., 1991), and particularly the eye region, from birth (farroni, csibra, simion, & johnson, 2002), the eyes essentially shape our social behavior by offering social information to others (i.e. social referencing; striano & rochat, 2000), enhancing cooperative behaviors (bateson, nettle, & roberts, 2006; ekström, 2012) and reducing dishonesty (nettle, nott, & bateson, 2012). thus, offering eye contact might be especially effective in grabbing the attention of a follower or a whole group, to create a mutual bond, stimulate followers’ social cognition supporting group interaction (grossmann, 2017) and cooperation between them (bateson et al., 2006; ernest-jones, nettle, & bateson, 2011; grabo & van vugt, 2016). summarizing, establishing mutual eye contact represents a strong social signal that allows leaders to grab their followers’ attention and influence them towards joining the organizational vision. second, in contrast, even though smiling is considered a crucial cue eliciting arousal in followers (damen et al., 2008), contrary to our expectations, we found an increased amount of smiling had no influence on subjects’ performance. there are several reasons, which could explain why smiling failed to enhance performance in our study. first, when looking at the hierarchy dividing leaders and followers within an organization, our findings contribute to the contradictions found in the current literature on verticality and positive emotional expressions (hall, halberstadt, & o’brien, 1997; hall, horgan, & carter, 2002). although facial happiness shapes leadership perception (trichas et al., 2017), promotes ascriptions of charisma (damen et al., 2008) and represents a potent tool for persuasion (crivelli & fridlund, 2018) in the workplace, the social message sent by a smile is highly dependent on context (e.g. culture or adequacy; krys et al., 2016, van kleef, 2014) and reaches from affiliative to aggressive intentions ascribed (rychlowska et al., 2017). second, although smiling has been considered to promote a transfer of arousal in organizational communication (damen et al., 2008), psychological evidence suggests that happiness represents a state of low arousal, hence low in motivational intensity (gable & harmon-jones, 2010, 2011; nesse & ellsworth, 2009). third, in our study, nonverbal tactics were experimentally varied in a way that the entrepreneurial leader motivates and directs instructions towards his followers. directed eye gaze acts as a personal cue (kampe et al., 2003) signals dominance (strongman & champness, 1968) and promotes both increased self-focus (hietanen et al., 2016) and self-referencing (conty et al., 2016). hence, social gazing supports a more self-referential processing of a leader’s instructions and increases the affordance of a leader’s message by signalling status. by contrast, facial happiness signals affiliative intent (danvers & shiota, 2018; marsh, ambady, & kleck, 2005), is linked to less dominant traits (deska, lloyd, & hugenberg, 2018; hess, adams, & kleck, 2009) and reliably indicates decreased physical dominance in competitive challenges (kraus & chen, 2013). although smiling represents a strong nonverbal signal in organizational communication (van knippenberg & van kleef, 2016), presumably acting as a social reward signal (lin, adolphs, & rangel, 2012), facial happiness alone might fail to increase the affordance of a leader’s message. in eye contact, our findings were able to unlock at least one piece of the puzzle of how entrepreneurial leaders are able to increase their followers’ performance. leaders’ eye contact can exert influence on a company’s chance to succeed via three pathways. first, because of the common lack of time and money in new and small businesses (greene et al., 1997), leaders are dependent on motivating their employees to performance that exceeds their competitors, without being able to provide monetary incentives (renko, 2018). therefore, the ability to employ simple communicative tools to motivate your followers, like eye contact, is of great use for entrepreneurial leaders. second, entrepreneurial leaders are often characterized by their passion, an affective state high in arousal, when pursuing their company’s goals (cardon, wincent, singh, & drnovsek, 2009, renko, 2018). existing findings show that directing your gaze towards your followers’ eyes allows for the transfer of emotion and arousal onto followers (helminen et al., 2011; myllyneva & hietanen, 2015). while other research finds 24 t. maran, m. furtner, s. kraus, s. liegl, & p. jones journal of small business strategy / vol. 29, no. 3 (2019) / 16-32 that the successful transfer of arousal facilitates goal setting (locke & latham, 1990), and increases, in a second step, followers’ own affective commitment to these goals (breugst, domurath, patzelt, & klaukien, 2012). third, eye contact increases self-referential processing in perceivers (conty et al., 2016), enabling a spoken vision accompanied by eye-directed gaze to become deeply rooted within followers and thus being accepted as their own. motivated employees who show passion for achieving their company’s goals, and are internally convinced of their leader’s vision, will show exceptional performance, and are therefore the key in compensating small and medium businesses’ limited resources, making the company able to compete and succeed on the market (renko, 2018; renko et al., 2015). limitations and future research despite the application of a reliable experimental paradigm (e.g. koning & van kleef, 2015) and results providing strong evidence (lee & wagenmakers, 2014) for the derived predictions, the present study has some limitations. first, although we refer to entrepreneurial leadership, our design was not performed in an organizational context, hence ecological validity represents one important limitation. to ensure the transfer of our findings to organizational performance and to prove their importance for actual leadership practice, there is a need to design field studies using a similar experimental approach. one possible approach might be to train leaders to show increased or decreased eye contact in motivational employee meetings, and to then assess their followers’ motivation, or even to later measure performance directed towards achieving goals set in the meeting. second, in contrast to some evidence, our findings show that positive nonverbal displays are not effective in increasing follower motivation. the social message conveyed by smiling does in fact seem ambiguous and strongly context dependent (rychlowska et al., 2017), but existing evidence shows smiling to increase charisma ascriptions (bono & ilies, 2006; erez et al., 2008) and leadership effectiveness (van knippenberg & van kleef, 2016). therefore, further research is needed to address the question under which conditions smiling affects follower motivation. for example, since smiling acts as a reward signal, it seems plausible that facial happiness increases motivation in followers when a leader’s expression is shown after any given performance, acting as social reinforcement. in fact, recent approaches highlight the crucial role of adequacy when displaying facial expressions in the workplace (van kleef, 2014; van kleef et al., 2012), indicating that facial emotion exerts its effects when displayed as an evaluative response to a given situation. nevertheless, our study provides support for the notion that communicating tactics are an effective instrument for start-up leaders to motivate their followers. thus, measures of entrepreneurial leadership (e.g. renko et al., 2015) should consider assessing it from a signalling point of view by measuring objective leader behaviors and including the style of communication employed (antonakis et al., 2016). practical implications this study offers important lessons for business practice, however its topics would profit from additional investigation. for one, our study provides further evidence for the impact of nonverbal signals on business communication effectiveness (van kleef, 2014; van kleef et al., 2012). our findings show that eye contact invigorates followers’ motivation in a simulated start-up context, increasing their task performance. however, examining the signals underlying efficient motivational communication remains an under-researched endeavour, emphasizing the need for further research into individual constituent behaviors (yukl, 1999). our findings add to existing knowledge, which supports the importance of nonverbal communication tactics in the performance of entrepreneurial leadership, and thereby offer insights that might be addressed by effective leadership training. previously, the effectiveness of business training, even in terms of financial outcomes, has been queried by existing studies (barling, weber, & kelloway, 1996; jones, beynon, pickernell, & packham, 2013). however, leaders can indeed be trained to appear charismatic (antonakis et al., 2011; frese et al., 2003; towler, 2003). specifically, in business start-ups, survival is only possible if leaders are able to motivate their employees to deliver optimum performance (renko et al., 2015), while possessing limited resources (drucker, 1985; leitch et al., 2013). therefore, it is essential to use business resources as advantageously as possible. this research provides evidence for an easy way to achieve a state of motivational preparation for interactions with employees. finally, the opportunity to increase followers’ performance by employing simple behavioral tactics like maintaining directed eye gaze while delivering important messages would increase business performance. this study recognizes the need for future experimental research examining teachable, business-relevant behaviors for leaders to appear more charismatic, enabling them to adopt a more efficient and charismatic leadership communication style. conclusion motivating employees to commit to their company’s 25 t. maran, m. furtner, s. kraus, s. liegl, & p. jones journal of small business strategy / vol. 29, no. 3 (2019) / 16-32 goals is an essential element of transformational leadership, and especially of entrepreneurial leadership, caused by the necessity to efficiently exploit opportunities (hensel & visser, 2019; mcgrath & macmillan, 2000; shane & venkataraman, 2000). the goal of this study was to investigate how an entrepreneurial leader’s charismatic communication can exert influence on followers’ motivation to act. our findings demonstrate that increased leader eye contact promotes enhanced performance of followers in a simulated start-up context. this supports the hypothesis that an increased strategic use of specific nonverbal signals such as directed eye gaze is effective for motivating followers. by contrast, this effect was not found with increased amounts of smiling by the leader. in managerial practice leader’s eye contact might act like a pointer, tagging followers with the spoken content, as reflected by increased self-referential processing (lamer, reeves, & weisbuch, 2015), along with increased self-focus (conty et al., 2016) and even altered attention (böckler, van der wel, & welsh, 2014). indeed, the effects of directed eye gaze stretch across multiple aspects. not only can the eyes of others increase self-awareness (myllyneva & hietanen, 2016) and arousal (helminen et al., 2011; myllyneva & hietanen, 2015), but eye gaze can affect cooperation (bateson et al., 2006; ekström, 2012), prosocial behavior (shotland & johnson, 1978), honesty (nettle et al., 2012) and even facilitates behavioral synchronization (prinsen et al., 2017), hence creating the antecedents of successful group coordination, the main function of leadership (grabo & van vugt, 2016). we conclude that a leader’s deliberative use of directed eye gaze might be effective in motivating followers to show increased performance, hence representing a simple and effective tool in leadership communication to enhance managerial practice. although charismatic leadership represents the most effective form of leadership (banks et al., 2017; barling et al., 1996; dvir, eden, avolio, & shamir, 2002), it has recently been criticized for its conceptual definition and operationalization (antonakis et al., 2016; van knippenberg & sitkin, 2013). since our study examines the effect of observable and measurable behavior on follower motivation, it advances the quest to link the distal construal of leaders’ charisma and proximal behavior (antonakis et al., 2016). finally, this study supports the value of experimental approaches for research on leadership behavior, extending beyond survey data and cross-sectional designs to identify and examine causal factors (bommer, pesta, & storrud‐ barnes, 2011; 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(2014). a new perspective on human reward research: how consciously and unconsciously perceived reward information influences performance. cognitive, affective, & behavioral neuroscience, 14(2), 493–508. https://doi. org/10.3758/s13415-013-0241-z sz%i zi py the small business screen: a way to evaluate small business opportunities jerry kopf radford university henry h. beam western michigan university abstract a small business screen is developed which prospenive small business owners can use to screen business opponuni ties according to market auractiveness and their ability to compete. assessments of market artractiveness and ability to compete are used to plot rhe position of each proposed business. the resulting plot shows which businesses are likely to succeed and which are likely to fail. the small business screen is a logical extension of the concepts used to develop the general electric/mck/nsey industry attractiveness-business strengrh screen. its use should prevent many prospective small business owners from entering businesses in which they are almost cenain to fail. studies show that small businesses which use strategic planning perform significantly better than ones that do not (ackelsberg & arlow, 1985; bracker & pearson, 1986; bracker, keats & pearson, 1988). however, few small businesses use strategic planning, and even then they are not likely to use it consistently (sexton &. van auken, 1985; shrader, mumford & blackburn, 1989). twenty-five years ago george steiner (1967) found small businesses were unlikely to engage in strategic planning because "it's for big companies, not for me," or "it' too complicated." steiner's findings are just as pertinent today. strategic planning models have been primarily developed by, and for, large firms, and they can be complicated and time-consuming to use. in the 1970s a substantial amount of work was done developing matrix-based strategic planning models to help large firms determine which businesses they should be in. the best known of these models are the boston consulting group (bcg) growth-share matrix and the general electric (ge)/mckinsey industry attractiveness-business strength screen.'lthough conceptually similar, the ge model differs from the bcg model in that the ge model uses several factors to make up its horizontal and vertical axes (a multi-factor assessment), while the bcg model uses only one factor on each axis. many sources document in detail how these models were developed, how they should be used, and their shortcomings (e.g., day, 1977; hall, 1978; hax & majluf, 1983, 1984; hedley, 1977; hofer & schendel, 1978; walker, 1984). small businesses have historically made almost no use of such models. however, small businesses have an even greater incentive to review and evaluate strategic alternatives (business 31 opportunities) than do large tirms. due to their smaller resource bases, small businesses can usually choose only one business in which to compete. a single poor decision can be fatal. fortunately, it is possible to develop a small business screen, similar to the ge(mckinsey industry attractiveness-business strength screen, which can be used by prospective small business owners to assess their chances of success before they enter a particular business. use of this simple strategic planning tool should prevent many people from entering businesses in which they are almost certain to fail. the small business screen the small business screen is shown in figure i. the vertical axis is labled marker attractiveness and the horizontal axis ahih'ry io coinpere. the purpose of the screen is to show how well internal capabilities (ability to compete) match up with external factors (market attmctiveness). internal capabilities are usually under control of the owner, while, with one major exception, external factors are usually not controllable by the owner. the major exception is that small retail and service businesses can usually change tlieir location without difficulty and, in so doing, can often change their market. since large businesses usually have regional or national markets, they rarely have this capability. using the small business screen here is how to use the small business screen. step l: select the business to analyze the business to be analyzed may be either a potential new business or an existing business. many people become small business owners by buying an existing business rather than starting a new one. when this is the case, the business under consideration for purchase would be analyzed. step 2: assess market attractiveness to assess market attractiveness, it is first necessary to identify the factors that comprise market attractiveness. while these factors can vary with different businesses, the following should apply to most situations: size of the local market, local market growth rate, labor supply (skills and wage rates), local demographics, and the number and relative strength of competitors. the factors can be evaluated by two methods. the first method is the more quantitative of the two. each factor is graded on a five point scale such as the following: 1 — very unattractive 2 — mildly unattractive 3 n neutral 4 + mildly attractive 5 ++ very attractive 32 figure a the small business screen. high 5 high chance of success 4 market attractiveness 3 caution 2 little chance of success low 1 1 2 3 4 5 low high ability to compete the average of the scores for all factors gives a numerical value for market attractiveness. if the factors are given weights, then a weighted average can be found for market attractiveness. the result is a measure of market attractiveness which ranges from one (low) to five (high). however, a word of caution is in order. when a numerical value for market attractiveness is calculated in this manner, it appears to be much more accurate than it really is. there is always some subjectivity associated with the selection and evaluation of the factors used to assess market attractiveness. thus the value obtained should be considered an approximation of the actual value rather than the actual value itself. furthermore, it is generally assumed that the values of the factors are additive and that no value can constitute more than a certain percentage of the final value. in practice this may not be the case. a low value of one factor such as a weak local economy may be enough to negate high values on the other factors. the second method explicitly recognizes the subjective nature of selecting and evaluating individual factors. instead of attempting to put a precise quantitative measure on each factor, the prospective owner together with his or her advisors identifies the most important factors relating to market success. each factor is then discussed and evaluated in general terms. after this has been completed, external events are considered that may be relevant to the analysis such as an announcement that a long-time local competitor is going out of business. loss of a competitor would probably improve market attractiveness if it was due to retirement of the owner. on the other hand, it would probably reduce market attractiveness if it was due to severe local competition. after all factors and their interactions have been considered, market attractiveness is assigned a numerical value for purposes of plotting on the small business matrix. again, the range is from one (low) to five (high), and the value is an approximation 33 of the actual value. the most important reasons leading to the final evaluation should also be written down for future reference. at first glance it may not appear that much data are available to facilitate making ussessments concerning the attractiveness of a local market. however, local chambers of commerce and state departments of commerce will often provide extensive data on a particular community free of charge. trade associations are an invaluable source of information on an industry. a comprehensive listing of associations including trade associations can be found in the current edition of the fncyclitpedirt nf asxriciniions (burek), available in most public libraries. step 3: assess ability to compete ability to compete is closely related to the strategy a small business selects. using the framework developed by porter (1985; 1991), a business can select one of three strategies and related ways to compete: low price, differentiation of products or services, or filling a niche. competing on low price is difficult for most small businesses, since it implies high volume, mass production of an undifferentiated product, rapid inventory turnover, and low margins. jan bell marketing is an example of a business that successfully competed on price from the time it was started in 1983 (brown, )990). jan bell distributes large volumes of private label jewelry to wholesale clubs such as pace and sam's for about a third ol'hat other manufacturers charge. however, most small businesses are better suited to compete on the basis of differentiation or filling a niche than on the basis of price. differentiation refers to adding features to a standard product or service to meet the specific needs of onc or more customers, usually for some premium in price. niche products fill a specific need. often many businesses need the products such as office supplies or packaging materials, but the volume is insufficient to be attractive to a large firm. differentiation and niche strategies require special skills in marketing and production to allow for modifications of existing products or to respond quickly to changes in the nature of volume or demand. ideally, the firm's internal skills in each major functional area should be consistent with the basis of competition it has chosen. evaluation of internal skills is often less subjective than evaluation of market attractiveness because comparisons can be made against the skills of the strongest competitor. a five point scale such as the following can be used to develop an initial value of ability to compete. i — large competitive disadvantage 2 — small competitive disadvantage 3 n neutral; about equal 4 + small competitive advantage 5 + + large competitive advantage this initial value should then be factored up or down as appropriate to (ake into account important intangible factors such as the commitment of the owner or owners to the business. for example, small businesses are much more likely to fail when their owners are not personally involved in them than when they are (beam and carey, 1989). thus a business that would otherwise plot in the high chance of success portion of the small business matrix will probably fail if its owner does not want to become personally involved in running it. 34 step 4; plot the factors on the screen the numerical values obtained for market attractiveness and ability to compete are used to plot the business's position on the small business screen. a business that plots in the upper right corner should have an excellent chance of success, while one that plots in the lower left comer should have little chance of success. a business that plots in the diagonal area from upper left to lower right should be avoided unless the prospective owner is confident he or she can improve or overcome the factors that caused the overall assessment to fall in the questionable region. a demonstration: starting an ethnic restaurant to see how the small business screen works in practice, assume a typical small business start-up situation where a couple is considering starting an ethnic restaurant. for purposes of demonstration, only four types will be considered: chinese, french, italian or mexican food.'igure 2 illustrates how the couple might assess market attractiveness and its ability to compete for each type of restaurant under consideration. market attractiveness has been assessed using the second, less quantitative method described in step 2. these assessments are plotted on the small business screen as shown in figure 3. the most promising alternative is the french restaurant. the local market is attractive due to the large number of executives and professionals in the area who can afford to eat at a french restaurant. in addition, there is no french restaurant in the area. ability to compete is also high since one of the prospective business owners is an accomplished french chef. the least promising alternative is a chinese restaurant. the local chinese population is small, and the only chinese restaurant in the area closed a year ago due to lack of business. also, neither of the small business owners knows how to prepare chinese food. the italian restaurant plots well on market attractiveness but not on ability to compete. to make a success of an italian restaurant, the couple would have to find a good chef and become more interested in italian food. the situation with the mexican restaurant is just the opposite. here the couple knows how to prepare mexican food, but would have to work hard to make mexican food more appealing to the local population. the couple could probably make a success of either the italian or the mexican restaurant if they wanted to. however, given the local market and the couple's personal skills and interests, the french restaurant has a much higher chance of success. the optimal choice might be different if the couple had different culinary skills, or if the restaurant were located in a city with a different demographic makeup. this simple example shows how prospective small business owners should screen business opportunities before investing in them. unfortunately, few prospective small business owners take the time to do this sort of analysis. as a result, the failure rate for new small businesses remains very high. reassessing a current business the small business screen can be as useful to those already in business as it is to those staning a business. it can help identify why a business is not doing as well as it should be doing. usually the remedy is to attempt to increase a firm's rating either on industry attractiveness or on ability to compete. 35 figure 2. sample assessment of market attractiveness and ability to compete for four types of restaurants. ability type of market to restaurant attractiveness reasons corn te reasons french high there are many high one owner is executives and a skilled (4.5) professionals in (4.5'i french chef. the area who can afford more owners can expensive meals. increase profits by local residents doing their often travel to a own cooking. neighboring city to eat at its owners enjoy french restaurant. preparing french food. there is no french restaurant nearby. italian high there is a large low owners do local italian not like (4.5) population. (i.5 italian food, the largest italian it is hard to restaurant in the find a good area is expanding. chef. mexican low mexican food is high owners can not popular in increase (1.5) this part of the (4.5) profits by country. doing their own cooking. a national fast food chain already offers owners have inexpensive mexican lived in the food at two local southwest and outlets. like mexican food. chinese low the local chinese low owners lack population is small. expertise in (i.5) (1.5) preparing the only chinese. chinese food. restaurant in the arcs closed last it is hard to year. find a good chef. 36 figure 3. a demonstration of the small business screen: selecting a type of restaurant. high 5 italian french 0 0 best choice 4 narket attractiveness 3 night succeed with luck and will 2 hard work probably 0 0 fail chinese mexican low 1 1 2 3 4 5 low high ability to compete improving market attractiveness the owner of the largest bookstore in a midwestern city initially located downtown, where his primary market was lunch time browsers who bought more nick-knacks and calendars than books. a few years ago he moved from downtown to a location between two mails. his bookstore now attracted customers throughout the day and on weekends. just as important, the dollar value of the average purchase nearly doubled. his ability to compete (internal skills) did not change at all since his staff remained the same. however, the new location greatly increased the attractiveness of his local market. in fact, one of the great advantages of small businesses, especially retail and service ones, is the ability to improve the attractiveness of the local market simply by changing location. improving ability to compete for several years a small printing company strove to increase sales and utilize its equipment more fully by competing on price, a least cost strategy. sales did increase, but profits remained flat. when the firm examined its distinctive competencies more closely, it found it could use a differentiation strategy by filling many small custom orders more quickly than its competitors. both sales growth and machine utilization decreased, but the most important measure of success, profitability, increased. the firm's ability to compete increased greatly when it shifted (o a differentiation strategy from its original low cost strategy. internal skills such as production scheduling and cost control could now be used to full advantage. conclusion the small business screen is a logical extension of the concepts behind the bcg growthshare matrix and the ge/mckinsey industry attractiveness-business strength screen. in the small business screen, the horizontal axis becomes ability to compete while the vertical axis becomes market attractiveness. the assessments of market attractiveness and ability to compete are used to plot the position of each proposed business on the small business screen. the 37 resulting plot shows which businesses are likely to succeed and which are likely to fail. costly mistakes can be avoided by not entering businesses which have very little chance of success according to their position on the small business screen. footnotes 'the general electric/mckinsey industry attractiveness-business strength model was developed by ge with the assistance of the management consulting firm of mckinsey & company. although this model is still widely used, ge itself has not used it since john f. welch, jr., became chairman in 1981. as stated in its annual reports, ge's primary strategic objective since 1981 is to be first or second worldwide in the markets it enters. otherwise, it will leave the business. 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(1984). portfolio analysis in practice. lang range planning, /7(3), 63-71. 38 sz:~"t'xvy erp system solutions for small companies: readiness gz selection muhammad a. razi western michigan university nniliainnitid.ra i@tvmich.edu j. michael tarn western michigan university mike. tarn@wmich. edu abstract over the past decade almost all of inaj or businesses in the us have inipleinented enterprise resource planning (erpj systems to run daily business operations. however, a complex erp system, if not iiiiplemented properly, can easily disrupt, or sometimes cripple, the flow of the manufacturing and other operations. while large organizations are in a unique position to implement a good erp svstem, most small companies cannot afford the acquisition and impleinentation cost of a big naine erp system tlierefore, snialler organizations rely on venilors with affordable, but not necessarily proven, erp systems. to help small businesses avoiil iiiiplementation probleins uiid system glitclies after erp implementation, two proactive initiatives are recommended, erp readiness and erp selection. this nrticle organizes a checklist for each initiative so that small companies are better prepared to overcome implementation challenges and their expectations are more uligned with the norm of an erp implementation. introduction according to the u.s. chamber of commerce (www.uschamber.corn), small business is defined as "in terms ot eligibility for federal small business programs, it is based upon industry (defined by naics code. similar to sic code) and employee and revenue size. as a general rule: 500 employees for most manufacturing/mining and $6 million in annual receipts. for non-manufacturing." this study adopts this definition and focuses on the selection and implementation of an erp system for small companies. up until a few years ago, the focus of erp vendors was on the large companies and erp systems were unaffordable by the smaller companies. however, the situation has changed significantly and recently small companies are getting much needed attention from erp vendors. despite the failure of many internet and related startup businesses in recent years, the influence of small companies on the entire economy is getting stronger with more people than ever employed by them. small companies with fewer than 50 people are experiencing double-digit growth, while large companies that employ more than 1,000 workers are 71 journal of small business srrnrt)„v vol. /4, no. i syring/smmner 2003 experiencing only single-digit growth (chapman, ettkin 2 i lelms, 2000). according to u.s. small business adnunistration, "america's 25 million small businesses employ more than 50 percent of the private work force, generate more than half of the nation's gross domestic product, and are the principal source of new iobs in the u.s. economy". the us census bureau reported that more than 380,000 us manufacturing firms have fewer than 500 workers. these companies employ more than 12 million people, over 65% of this country' manufacturing workforce, account for more than $ 185 billion in payroll and produce over half of all us-manufactured goods (chahners, 1999). many companies, especially small ones, either depend on manual system or old legacy systems to run their daily operations and find it difficult to improve operational efficiency, lower inventory level, reduce cost, use real-time information for decision making, and communicate with customers and suppliers electronically. a software system designed to improve business processes and promote best practices will make companies more agile, competitive and better able to meet the challenge of competitors. realizing the importance of infomiation technology, small companies are increasingly feeling the pressure to use specific application software to nm business or replace their existing systems with new and more reliable ones, such as the enterprise resource planning (erp) system. the historical growth in the sales of erp applications has come from large, fortune 1000 multinational corporations. this market has been highly penetrated and has experienced a significant slowdown after years of continuous double-digit growth. currently, more than 60% of fortune 1000 companies have implemented core erp applications for manufacturing, finance and human resource management (zheng, yen & tam, 2000). the combined cost of software and implementation is prohibitively expensive for most small companies. this problem has seriously limited the market potential of the erp system and motivated erp vendors to focus on marketing strategy geared toward small and medium size companies. to penetrate this relatively untapped market segment (taylor, 1998), erp vendors are developing packaged products with component-based solutions instead of a full erp implementation to meet the needs of organizations with different sizes. in general, packaged products have a modular approach which allow quick customization of the software according to the need of the customer and a speedy installation at a lower cost (zheng et al., 2000) resulting in affordable erp systems for small companies. irrespective of the size, each company must justify the necessity of the new software by assessing its potential benefits and then, if the software is affordable, identifying whether the company is capable of a smooth implementation or not. in this research, the authors provide a framework to identify the erp readiness, analyze the relevant factors that need to be considered during the software selection process, and discuss the erp implementation challenges, all in the context of a small organization. research framework the process of erp selection and implementation requires at least a preliminary understanding of the erp process, an understanding of the characteristics that made it a dominant player in the business software industry and an understanding of the tangible and intangible benefits that can be derived from an erp system. this study starts with a review of existing literature on the concept and evolution of erp systems, and then provides erp implementation experience of several small companies. after examining the erp implementation challenges, a review on currently available erp products marketed by both large (e.g., sap, oracle, peoplesoft etc.) and small vendors is presented. since most of the small companies are just starting to embark on an erp system, it is recommended that each company should evaluate its resources and business needs in order to figure out whether it is 72 jotovml of snroll business srrnregy i'ol. 14, no. i spring/sunirner 2003 ready for the system or not. after careful evaluation, if a company decides to purchase an erp system then the management should follow a selection guideline to facilitate their search process. in support of these two recommendations, two checklists are organized for helping small companies detemnnc erp readiness and erp selection. figure i shows the research procedure. figure i research procedure model erp for small businessoconcept evolution beneflts erp experiences survey of offerings of erp solutions erp readiness factors checklist erp selection factors checklist concept and evolution of erp kumar and van hillegersberg (2000) define erp systems as configurable information systems packages that integrate information and information-based processes within and across functional areas in an organization. in this sense, erp systems are designed to integrate business functions and allow data to be shared across many boundaries and divisions within the company. for example, a customer service department of a company would have access to information being used by its sales and marketing divisions. this ability to share information gives businesses increased flexibility and allows them to operate more efficiently than before. an erp system is an integrated set of application software modules such as accounting, distribution, marketing and sales, material requirement planning (mrp), human resources, logistics and more. instead of concentrating on specific functional areas separately, these modules work as an integrated unit by bringing the visibility of real-time information to all departments and thereby focusing on business process as a whole. typically, erp systems 73 journal ofsmall business siraiegv vol. l4, no. l spring/summer 2003 include a single repository of data, and all business processes occur seamlessly within a single information system. today's erp systems are an outgrowth of materials requirement planning (mrp) systems. mrp systems were developed in the 1970s largely for manufacturing concerns and were initially designed for the time phased work order and purchase order release system which, for many companies, eventually lead to reduction of inventories, improved customer service and better production efficiency. as these systems evolved (e.g., mrpii in the early 1980s), they began to incorporate financial control and measure, master production scheduling and capacity planning. erp has extended the reach of the planning system to include the entire enterprise, from marketing to product development, and to achieve total organizational excellence through integration (mabert, soni, & venkataramanan, 2000). the main reason that small manufacturers are eager to apply erp systems to run daily operations is because erps are instrumental in improving business processes such as manufacturing, inventory procurement, sales and distribution. according to smith (1999), "implementing an erp system is often the catalyst for small and midsize manufacturers to examine and improve competitive capability." furthermore, many small companies would like to get away from spreadsheet-based system or manual filing procedures in order to implement much more interactive and efficient software like an erp system. a spreadsheetbased system or a manual system is error prone since data validation and data integrity check are non-existent and deriving necessary information for decision making or simply getting real time information is very time-consuming and frustrating. an erp system cuts duplication effort, imposes standards across the company, speeds order delivery and gives management a snapshot of what the company is doing at any particular moment (tuynman, 2000). after afl, more and more customers and vendors are requiring speedy exchange of real-time electronic information. effective communication and information exchange among departments such as production and sales within a company is also vital for the survival and, of course, for the growth of the company. small companies'rp experiences erp system delivery and implementation is generally considered to be complex, costly and highly problematic (tuynman, 2000; doyle, 2000a; stedman, 1999a). according to gartner group's survey, 58% of the 1,300 companies surveyed in europe and in the united states indicated that the erp installation time matched their expectations and about the same percentage of companies expressed their satisfaction over the post-erp installation performance (tuynman, 2000). in the same survey, only 26% of the companies rated their overall it projects as successful which reflect the fact that the failure rate of erp implementations are significantly less than the failure rate of all it projects combined. the survey results may be an indication that the companies are more careful, thorough and methodical in erp implementation since the consequences of a failed erp implementation project has far greater ramification to the overall performance of the company than most other information technology (it) projects. eshelman, lurs and taylor (2001) research how a small manufacturing company overcame effectively the challenges of its erp implementation. they convincingly point out with examples that the implementation challenges such as data conversion, temptation to take shortcuts, lack of resources, and fear of change can be dealt with effectively if a company is aware of these challenges prior to implementation and put a good faith effort to solve them. however, not all companies face the same challenges and the importance of each challenge may vary from company to company. take a distributor and manufacturer of hockey-related 74 journal nf sniall btrsiness sirniegi'iil. 14, nn. i spring!sinnrner 2003 products and equipment as an example (doyle, 2000b). this firm implemented a sivedish erp system on as/400 on time and under budget. 1'he ntain concern of the company was the compatibility of its business process with ihe erp solution due to the fact that overcustomization of the softivare is costly and could complicate the implementation process and lead to an unsuccessful erp project. the firm's project team identified 20 elements as key to their successful erp implementation including the requirement of'executive commitment, a realistic project schedule, an experienced project manager, and a positive attitude toward change. the roadblock to building an erp infrastructure is seldom attributed to the performance or capability of the software itsell. an e-mail poll shows that most companies view cost, planning and traming among others to be the main concerns associated with an erp project (romeo. 2001). the results of the i'ailed and not-so-successful erp projects indicated overexpectation, inadequate pre-installation preparation, poor business process mapping, lack of planning, and insufficient user training as the main reasons for undesirable outcomes, not the applications (stedman, 1999b). a company regardless of its size must be ready for an erp implementation project since it involves a significant amount of money and highly skilled ntanpower from almost all departments in the organization. survey of offerings of erp solutions for small buslivesses non-web based erp solution providers erp van&lors are approaching small companies through different ways to meet their specific needs while making erp affordable to them. while prominent vendors such as sap, peoplesoft and oracle are offering traditional (non-web) as well as web based solutions, others are bidding to gain attention of small companies with cheaper, non-web mini-erps. important information regarding smaller vendors along with their products (e.g., non-web mim-erp) is provided in table l. web-based erp solution provlders oracle, peoplesoft and sap are the most popular web-based erp solution providers. oracle corporation (www.oracle.corn) is the world's second largest independent software company. with annual revenues in the billions, the company offers its database products, tools and applications, along with related consulting, education, and support services. peoplesoft (www.peoplesoft.corn) started in the mid-1980s with the human resources application. today, peoplesoft operates in more than 140 countries and offers a variety of software solutions such as human resource management (hrm), customer relationship management (crm), and supply chain management (scm). sap (www.sap.corn) employs nearly 30 thousand people in more than 50 countries and offers more than 20 industry solutions. sap is one of the world's largest independent software suppliers overall. erp vendors have recognized that the incremental shift from client-server to web-based architecture brings organizations the opportunity to enhance interactions with their customers, suppliers, and employees. therefore, erp vendors are increasingly looking to the internet to increase profitability by making customer and vendor transactions faster and better. the most lucrative aspect of the hosted erp solution for small companies is the value a leased erp package brings to the company. for example, leasing is cheaper than purchasing or building an erp system (harney, 2000). the implementation is faster and easier. in addition, software upgrade is done automatically and there is no need to hire and train extra staff for ongoing maintenance and technical support associated with in-house erp solution. on the 75 journal vf sr»a// business s/rareg v lrvl. /4, no. / spring/sunmrcr 2003 other hand, outsourcing erp helps smaller cotnpanies conserve cash flow by paying off investments over longer periods. table i erp providers (ivon-iveb based) vendor important information erp modules/functionality compiere is a 100% pure compiere, usa java solution based on quote to cash, requisition to product: compiere erp k oracle database technology. pay, customer management, crm l-lowevcr, some application partner management, supply http: //www.compiere.org/ i'unctionality is implemented chain, performance analysis as pl/sql. the system is microsoft inventory control, bills of operating system materials, purchasing, compatible and is capable of receiving, sales order, erplite, canada exchanging data with shtpptng order, mrp, product: erplite access, excel, odbc, xml, production scheduhng, http;//www.erplite.corn/ text files, quickbooks, master production schedule, peachtree, agile, quickbase routing, and seriaulot and most other databases number tracking intuitive erp uses only microsoft technologies and platforms such as, microsoft intuitive manufacturing visual basic for plan, buy, make, sell, systems, usa applications, microsoft inventory, general ledger product: intuitive erp access as the user interface and customer. http;//www.intuitivemfg.corn/ for forms and reports and microsoft sql server as the database 'fhe system uses visual foxpro 6.0. it also offers the ganak lnfonet, india flexibility of upgrading to sales, purchase, inventory, product: invento higher end platforms like production and finance http: //www. inventoerp.corn client-server technology with rdbms back end. resonance technologies, resonance mini-erp uses india microsoft visual basic for distribution systems, product: resonance minifront-end user interface and production scheduling and erp, clinic monitor access, oracle or sql financials source; (business line-india, server as the backend 1999) database. the unique characteristic of an application service provider (asp) is that it permits hosting of almost any software. this enables erp vendors to offer asp-based solutions and provide essential modules. all three big erp vendors'trategy is to offer their vertical markets with standard hosted solutions and target high tech manufacturers, startup companies, and companies with rapid growth. hosting erp is appealing since it provides scalability and easy integration along with evolving it infrastructure and a smaller investment. for example, oracle focuses on small-to-medium companies with revenues from $50 million and up. it specializes in high-tech industry and e-companies but also offers erp solutions to service organizations like education. oracle offers its fee-based service for the oracle release 11 application suite and all asp components (except network cost) since oracle data centers 76 jaurvial af sinall business strategy val. /4, na. l spring/sutntner 2003 provide asp facilities and its partner qwest communications provides network support. oracles business online hosting service uses oracle's fastforivard program, which typically deploys in one to six months and permits no source code customization. peoplesoft takes its strictly leased solutions for the core erp modules (human resources, financial, manufactunng and distribution) to companies with annual revenue less than $250 million. peoplesoft's asp partners, corio and usi provide all implementation, integration, service and support. cono claims "end-to-end" support while usi offers service level agreements (slas) guaranteeing 99.9%network and application availability (harney, 2000). like oracle and peoplesoft, sap also offers hosted erp solutions to those vertical customers who are at the high end of the small-to-medium market zone; e.g., manufacturing (high and low tech), automotive supply, and retail and utility companies. sap's asp partners such as, interpath, eds, applicast, qwest and eonline are responsible for specific accelerated sap (asap) modules and asp components. this asp-based erp product, asap, offers manufacturing, financial, sales, distribution, enterprise and human resources modules among others. erp implementation challenges small businesses face many erp implementation challenges. when it comes to implementation, companies of all sizes share common goals; a quick and smooth implementation that does not disrupt business processes with post implementation system glitches (fichman & moses, 1999). smaller companies having limitations in terms of money, experience, skilled manpower and understanding of erp face implementation challenges that often are far more serious than those faced by large companies. because large companies are better prepared with cash, skilled implementation teams and partnerships with one or more third party consulting firms, they are better equipped to meet the challenges. many research studies have contributed to the exploration of erp implementation challenges (c.f., taylor, 199'); markus, tanis & fenema, 2000; jeffery & morrison, 2000; siriginidi, 2000; jiang, plein & chen, 2001; romeo, 2001). in this section, the potential challenges are summarized and possible courses of actions are suggested. ~ minimizing implementation time and cost: erp projects have a reputation for consuming large amount of time and money and the challenge is how to minimize both implementation time and cost which are difficult to come by for a small company. therefore, in order to minimize implementation time and cost, it may be necessary for key team members in smaller companies to attend training programs arranged by the vendor or its partner on implementation framework or on implementation model that includes steps such as scope, data conversion, business process mapping and parallel testing of the old and the new system. involvement in pre-implementation training programs is a way to resolve process and data mapping conllicts thereby streamlining the implementation process. rapid implementation tools [e.g., computer aided software engineering (case) tools] and templates for fast and easy configuration should be used whenever possible. ~ incremental implementation vs, all-at-once implementation: project managers, researchers, programmers and software methodologists all have advocated incremental approaches to project management, development of software or implementation of complex software packages (fichman & moses, 1999). because along with other benefits, it requires less implementation time than the traditional all-at-once implementation approach. however, in those situations where the software is not modular or cannot be divided into smaller integrated components or the internal business 77 /r&urnol of simill busi tress strniegy vol. i4, no. i spring/summer 2003 process doesn't allow incremental implementation, an all-at-once implementation may be the only option. ~ selection of the right implementation partner: time and it resources are often in short supply in small companies. therefore, in many cases, small companies have no choice but to assign implementation responsibilities to the software vendor or a third party implementation partner. however, the challenge is selecting the right implementation partner. implementation partner's level of experience with the client-server architecture (lan, server, operating system etc.), database, rdbms, selected erp system and implementation process need to be assessed during the selection process. romeo (2001) states the risk of picking someone who sounds great during the sales pitch but has a tough time to perform later on. above all, having smooth communications and a good understanding between the company and the implementation partner is a must. ~ resources allocation: due to the small size of it departments in small companies, allocation of resources for erp implementation is a big challenge. unless both the implementation process and the post implementation maintenance contract are given exclusively to the vendor and/or the implementation partner, a sufficient number of employees (it staff and end users) should participate in the implementation process for the successful implementation of the erp system and also to carry on post implementation niaintenance operations. ~ resistance to change: a pressing issue for companies undertaking erp implementation is to convert the psychology of employees from resenting to welcoming the change. it is not uncommon to see smaller companies relying on a manual or a very inefficient legacy system to run daily operations. therefore, going from a manual or an obsolete system to a sophisticated erp system is a significant change for many employees and it is quite normal that they feel threatened because a new enterprise system changes almost everything familiar; e.g., the way the data entry screens and reports look, how to enter and access data, and the complex manner in which day-to-day business is performed on the new system (taylor, 1999). management can take proactive measures such as educating employees about the new system and providing pre-implementation training programs so that they understand the usefulness and the necessity of the new system towards increasing productivity and enhancing the competitiveness of the company. ~ meeting expectations regarding erp implementation time frame and system glitches: an erp system is complex and contains lots of checks-and-balances which are put in place to maintain data visibility, integrity and accuracy across the system. some functions may require extra steps, however unlike old legacy systems, data duplication is avoided and data, once entered into the system, can be viewed by all users of the system. management and users alike should understand that during and after implementation, system glitches may occur and the new system may make some employees unhappy. however, all eitorts must be made to eliminate major system glitches and to motivate people to exhibit patience and determination when glitches occur. as emphasized by taylor (1999) and jiang et al. (2001), cooperation and open, honest communications among all parties (vendor, managers, project leaders, users, implementation partner) are the keys to educating users in this matter. ~ applying business process profiling and mapping: the complexity in erp systems requires a thorough understanding of the business process flows such as generating a customer order, assigning raw material to the shop floor, transferring material from one warehouse to another, and then mapping the processes to configure erp functions. companies who fail to map business processes to the erp functions properly may end up with an inefficient system (eshelman et al., 2001; doyle, 2000a). one way to face the challenge is to educate and train employees so that they understand the core erp concepts; e.g., how various functions in different modules such as manufacturing, financial and marketing work in harmony to make data visible for all users. 78 journal of small bttsi ness strategy vol. 14, leo. l spnng/summer 2003 ~ data migration: data profiling and mapping requires examination and understanding of legacy data sources and then creating specifications (mapping) for migration of data from source to target. the challenge is to extract, scrub, transform and transport data while maintaimng data integrity. in many small companies, business processes are performed manually or data comes from a homegrown proprietary system and then needs to be extracted, cleansed, and converted. this requires ample time and patience. ~ avoiding rushing in erp implementation: too often, small companies restricted by limited resources and driven by a strong desire to minimize disruptions to the business, set an arbitrary completion ("go live" ) date and do not allow time for adequate testing. rushing for the finish line, in the case of erp implementation, is never a good idea, because going back and trying to'repair or apply patches to fix implementation problems is a difficult, time-consuming and costly task. o avoiding temptations to add functionalities to the core erp package: to add or not to add functionalities to the original code is an issue which arises normally during the implementation process. most vendors do not allow clients to modify source code of the erp system just because it is diflicult for the vendor to upgrade the client's system to the new version and provide maintenance once the system has been modified. most vendors, however, allow clients to develop peripheral applications, add new databases and functionalities to the menu structure if all the additional codes are kept in directories that are separated from the original source code directories. ~ arrangement of adequate training programs; the importance of training cannot be overstated (stedman, 1999a; eshelman et al., 2001; romeo, 2001). the challenge for implementers are two folds; first, training end users so that they know how to use the system to carry out daily operations, and second, training it professionals so that they know how to maintain, identify and solve system glitches. ~ developing a comprehensive strategy for testing: a basic requirement for the successful implementation of any solbvare package is that it passes the acceptability test by its end users. for an erp system to be acceptable it requires rigorous and thorough testing. a single transaction might be responsible for creating or updating multiple records in different tables. therefore, the company needs to develop a comprehensive test management strategy that can be used to guide the test and verification of all system functions. for small companies with limited human and financial resources, it may be advantageous to have implementation partners conduct an initial phase of testing and then have the end users test the system before the "go-live" date. recommendations after exploring the benefits of erp, learning small companies'rp experiences, surveying offerings of erp solutions for small businesses, and examining erp implementation challenges, the authors identify the critical criteria that influence the outcome of an erp implementation in a small enterprise setting, and further recommend two checklists to assist the company in examining its erp readiness and selecting its erp system solution. erp readiness factors and suggested checklist there are two options open to a business, developing erp from scratch or purchasing a turnkey solution. when it comes to the selection and implementation of an erp system, the ideal candidate would be economical and user friendly, require less implementation time and minimal business process reengineering, and provide a measurable benefit in terms of returnon-investment (roi). small companies constitute a relatively new but promising market segment in the erp arena (doyle, 2000a; doyle, 2000b). 79 jorrrnal of srnnll biuiness srraiegv vo/. /4, /lo. / s/n'ing/srnniner 2003 in addition to possessing a smaller erp budget, other criteria unique to sinall companies are small it staff and a preference for cheaper servers and a familiar operating system instead of more costly and complex systems (naini, 2000). given the complex nature of an erp system and its costly implementation prospect, it is essential for a company to find out its financial, technological and human resources strengths before embarkmg on an erp system implementation. considering the imntations of resources and lack of necessary it knowledge regarding erp, the issue of frp readiness applies differently for smaller companies than for the larger corporations. as discussed before, large corporations are better prepared to absorb unexpected financial requirements during the implementation process than their smaller counterparts. in a large corporation, since the chief information officer (cio) makes it related decisions, his or her total commitment in the erp selection and implementation process is necessary. in smaller companies, on the other hand, the commitment has to come from the chief executive officer (ceo). it is expected that smaller companies would migrate from a manual or from a legacy system to an erp system. if the migration is from a legacy system, then the company should identify whether the legacy system can be replaced entirely by an erp system. this is because the cost to keep both systems up and running could be prohibitively high for small companies. as one of the major challenges, the resistance to change ainong employees is also expected to be high when the move is from a manual or from a legacy system to an automated system. in order to be ready for an erp system, the employees must be ready to embrace the change. on the technology side, since most erp systems are based on the client/server (c/s) platform, smaller companies have to be ready to enter into the world of 2-tier or 3-tier c/s architecture and at the same time recruit skilled professionals to work as a database administrator (dba), network administrator, software developer and/or system administrator. in addition, a thorough understanding of data proflling and mapping is required for the successful movement and transformation of data from source to target. small companies with manual systems may require training in data profiling and mapping. users of legacy systems need to know how to clean data since a legacy database may have many irregularities (romeo, 2001). employees with the knowledge of business process and work flow are needed since a thorough knowledge of the various business processes is imperative for proper parameter (global and local) setting during implementation process, which thereby ensures the eiticient use of the system. a company lacking the knowledge of how parameters in an erp system work should work closely with the system provider to set the value of important parameters correctly. in table 2 we provide a checklist to identify the readiness of a small company for a new erp system. in general, the higher the number of checked items on the list, the better prepared the company is to procure and tmplement an erp system. erp selection factors and suggested checklist an important step in selecting a proper erp system is to identify business needs and set proper expectations by mapping software selection to business process. in the selection process, a number of important factors need to be considered and identified properly with respect to the current and future priorities. a typical selection process involves the evaluation of vendors'roducts at the initial stage. siriginidi (2000) suggests financial stability, size of the company, stability of the product and the implementation support as the criteria to be used 80 journnl of small busmess s/ruiegy vo/. /4, //o i spring/summer 2003 table 2 erp readiness checklist factors readiness checklist ~ adequate it budget is available. erp budget ~ financial strength (liquidity) to absorb unexpected financial shocks: the company is financially strong. o the ceo is committed. top management o the cio is committed. commitment ~ the ceo/cio is ready to release appropriate resources in a timely manner. ~ number of legacy systems. (the less the better) ~ erp will replace all legacy system(s) [cost to keep both systems up and running could be prohibitively high for small companies]. resources v the company is familiar with the (c/s) architecture.' resources are available to fill database administrator (dba), network administrator, software developer and/or system administrator positions. ~ move is from a manual system to an erp system (expect high resistance). v move is from a legacy system to an erp system (expect assess the intensity of moderate to high resistance). resistance a end users willingness to embrace change: ~ low a moderate ~ high ~ level of understanding of data profiling and mapping is adequate. ~ at least one employee has received training on data profiling and mapping in the past.'nderstanding ~ at least one employee is knowledgeable in data cleaning procedures (legacy databases may have many, irregularities). a organized data repository is available. ~ one or more implementation members understand the organizational structure. knowledge of global and ~ one or more implementation members understand the local parameter setting business practices and work flows. v one or more implementation members are familiar with the erp parameter (global and local) concept. to select the initial pool of vendors. the incorporation of implementation time and cost in vendor selection is essential since smaller companies cannot afford to get engaged in a lengthy implementation process, the cost of which may be more than five times the cost of the software itself (scheer & habermann, 2000). a lengthy and costly implementation process is one of the major reasons behind erp dissatisfaction (kumar & van hillegersberg, 2000). the direct correlation between erp and the cost is that the more complex the erp system is, 81 journal of sinoll busmess srruregy vol. /4, no. i spring/smnincr 2003 the higher the cost to procure and implement the system. like any other selection process, vendors should provide references of a number of satisfied clients who have recently implemented their erp systems. the reality is that a selected erp system is going to stay with the company for sometime and for that reason the management must make sure that the system is robust, flexible and has the potential to support the organizational objectives and future growth. small companies may not need all of the modules available in an erp system. component-based products are available so that a company can decide which modules and how much it can handle at one time. as taylor (1999) suggested, vertical industry focused products are best suited for companies with small it depamnents. many smaller companies are prepared to purchase one of the numerous erp systems available in the market only if it could be tailored to their more modest needs (nairn, 2000). in case a modular product is not available, the application software must be able to support a high percentage of current processing needs so that the requirement for customization and therefore maintenance is minimized. on the technology side, an erp vendor should provide specifications such as bandwidth, cpu, memory, storage space for workstations and servers as well as the operating system platform most suitable for the respective erp system. some databases do not work smoothly with certain applications and a tech audit may be necessary to identify if the existing database platform will run efficiently with the chosen erp software (romeo, 2001). an erp system that comes with a pre-defined "reference model" to reflect the new customers functional style and business practice may be preferable to others that do not come with reference models. custom modification of the system source code may be an option to reduce the gap between the system capability and the business practice. however, the source code may not be provided to the customer. on one hand, custom modification allows the customer to enhance the capability of the system, but on the other hand, too much modification leads to a complex system difficult to support and virtually impossible to upgrade to the newest version of the software. smaller companies, due to lack of adequate it personnel, may have to rely on consultants for the implementation of an erp system as well as user training. therefore, the availability of consultants and partners who have proven implementation records and who have successfully integrated the erp system into several enterprises should also be considered while selecting an erp system. likewise, a company must inquire about the quality of the training programs olyered by the vendor or its parmer(s). many software application packages failed to meet expected roi because employees failed to acquire full benefit of the system due to lack of proper training. table 3 provides a checklist for identification and selection of an erp system. it is suggested that the higher the number of checked items on the list, the better the software is for the company. conclusion today's competitive environment requires access to real-time information, a business must have an ability to compete and thrive in this information age. as opposed to tedious manual systems, direct access to information such as material cost, labor cost, overhead cost as well as real-time information in related to sales order provided by an erp or a comparable software system can help the management of a small business to determine the profitability quite accurately and efficiently. the obvious question is, what are small companies that lack the sophistication of an erp system to do in that situation? clearly, the need is to have an 82 journal of small business strategy vol. /4, no. i spring/sumnter 2003 enterphse business application that meets the processing need, size, budget, resources and objectives of the business. after the need is assessed, the guideline for determining erp readiness for small companies and the guideline for the erp selection process applicable for small companies presented in this article can be used to help small businesses justify and conclude their decisions of erp acquisition. table 3 erp selection checklist factors; ', '' ' .'election checklist r n vendor is financially stable and the size of the company is reasonable. ~ the ratio of number of satisfied clients to the total number of implementations is high.vendor record ~ references of satisfied clients are available. ~ level of implementation support from the vendor or from third parties is expected to be high. e the product is stable. ~ software cost is affordable. cost: software and e implementation cost is manageable. implementahon ~ the ratio of the software cost to the implementation cost is reasonable (the industry norm about i to 5). ~ capability of the system aligns with the overall organizational organizational goal. objective and capability of the system aligns with the company growth potential growth potential ~ erp is flexible enough to incorporate future changes (ready to accept change). e necessary functions required to run daily business are available in the system. required modules to support internal e the system is granular, component based. ~ the product is vertically focused? (vertical industry focusedbusiness processing needs products are best suited for companies with small it departments). u the software is scalable. percentage of current processing ~ the application software is able to support a high percentage of need meet by a current processing need. particular ~ the requirement for customization is minimum. application ~ the system maintenance cost is manageable. software ~ adequate network infrastructure is available and bandwidth tocomputer and access the application in a timely manner is supported.network infrastructure. ~ cpu, memory, storage space of pcs (workstations), server(s) and other hardware requirements are affordable. database and n database platform, operating system and the chosen erp software operating are compatible. platforms ~ data retrieval and control are efficient. implementation ~ expected implementation time is reasonable. time e expected system downtime, if any, is very short. 83 journal of small business srraiegy vol. /4, /vo. i spring/summer 2003 i,,':factors'..'. '. ": ':selection checklist', ~is". a'.~"-.;i~,:~a~; ~ consultants or implementation partners who know the system consultants and are available. implementation ~ consultants have proven implementation records. partners ~ consultants have successfully integrated the erp system into several enterprises. ~ effective training programs are available through the vendor or by its authorized implementation partner, or by independent training programs consultants. ~ training programs are designed to gamer full benefit of the system. ~ a method to do a gap analysis to compare the erp systems gap analysis and capabilities against the customer's business requirements is availability of available through the vendor. "reference model" ~ the erp system comes with a pre-defined "reference model" to reflect the customers'unctional style and business practice. ~ source code is available to implement custom modifications of availability of the core system. source code ~ source code is available but custom modifications of the core system are not allowed. references chalmers, r. e. (1999).small manufacturers seek best erp fit. manufacturing engineering, /23(4), 42-46. chapman, s., ettkin, l., & helms, m. (2000). do small business need supply chain management. iie solutions, 32(8), 31-33. doyle, j. (2000a). erp: going afler the little guy. midrange systems, l3(13), 18-22. doyle, j. (2000b). for mission hokey, small business erp is mission: possible. midrange systems, /3(13), 24-26. eshelman, r.g., jurs, p.e., & taylor, t.c. (2001). when small companies implement big systems. strategic finance, 82(8), 28-33. fichman, r. g. & moses, s. a. (1999).an incremental process for software implementation. sloan management review, 40(2), 39-52. hamey, j. (2000, january/february). hosted erp: who offers what and how. inform, /4(1), 38-40. jeffery, b. & morrison, j. (2000). erp, one letter at a time. c/0, /3(22), 72-76. jiang, j. j., klein, g., & chen, h. (2001). the relative influence of is project implementation policies and project leadership on eventual outcomes. project management journal, 32(3), 49-55. kumar, k. & van hillegersberg, j. (2000). erp experiences and evolution. communications of the a cm, 43(4), 22-26. mabert, v., soni, a., & venkataramanan, m. (2000). enterprise resource planning survey of u.s. manufacturing flrms. production and inventory management journal, 4/(2), 52-58. markus, m. l., tanis, c., & fenema, p. c. (2000). multisite erp implementations. communications of the acm, 43(4), 42-46. naim, g. (1998, september 2). erp market software vendors target smaller companies. financial times surveys edition, financial times, 9. 84 journal of small busi ness strategy vol. /4, no. i spring/summer 2003 romeo, j. (2001). less pain, more gain in erp roflouts. network compitting, /2(19), 49-56. scheer, a. & habetmann, f. (2000). making erp a success. conununications of tlie acm, 43(4), 57-61. singinidi, s. (2000). enterprise resource planning in reengineering business. business process management journal, 6(5), 376-391. smith, d. (1999). better data collection for greater efficiency. manufacturing engineering, /23(4), 62-68. stedman, c. (1999a, november 15). erp flops point to users'lans. computerworld, 33(46), 1, 137. stedman, c. (1999b, december 13). erp project problems plague city payroll. compiiterworld, 33(50), 38. taylor, j. (1998).small company, big challenge. manufacturing systems, /6(10), 82-90. taylor, j. (1999).fitting enterprise software in smaller companies. management accounting, 80(8), 36-39. the united states chamber of commerce (2003). how is small business defined. http: //www.uschamber.corn/events/matchmaking/faq.htm tuynman, j. (2000, november). software solutions. business mexico, /0(11), 46-51. zheng, s., yen, d., & tarn, j. (2000). the new spectrum of the cross-enterprise solution: the integration of supply chain management and enterprise resources planning systems. the journal of computer information systems, 4/(1), 84-93. muhammad a. razi is an assistant professor of computer information systems at wesiern michigan university, kalamazoo, michigan. he holds a phd and an mba from virginia commonwealth utiiversity, richmond, virginia. his areas of research interest are database systems, systems analysis and design, erpiscm, electronic commerce and it applications for smes. j. hfichael tarn is an associate professor of computer information systems at western micliigan university, kalamazoo, michigan. he holds a ph.d. and an ms in information systems from virginia commonwealth university, richmond, virginia. dr. tarn specializes in interdisciplinary research, involving info-communication systems, electronic commerce, strategic management, and modern organizational theory. his recent research has contributed to erpiscm integration, mobile commerceinfrastructure and network security. 85 stra txgy developing expert systems for small business: an application for selecting a legal form of organization ronald s. rubin james m. ragusa university of central florida abstract the success and iaiue ro citents of small business counseling programs such as those offered by stnail business dei elopment centers (sbdcs) and smuii business insritutes (sbis) are directly related to the availability and qua(in of expert advice. this article prthides an overview and erpiores the possibilities for pc-based erpert sysrem development with pumicular at ternion ro u stnuii business application. a proof of concept sbdc advisory system is described. it provides expert-based advice for selecting a legal form of business organizarioti. issues of ciietit usability and liability are raised. conclusions show that tire use of expert systems for sinai) business consulting offers an erpanded potential for relieving already overworked consulting staff tnembers, for offering clients quaiiry advice, and for providing a merhod of trainitig less e.rperienced consultants. introduction the rapid acceptance of a branch of artificial intelligence (al) known as expert systems has recently emerged from the realm of basic research into real-world business applications (feigenbaum. mccorduck, & nii, 1988). artificial intelligence focuses on producing computerbased results that parallel the intelligent human decision process (harmon & king, 1985; rich & knight, 1991; waterman, 1986). the al branch called expert systems is capable of emulating human decision capability with an interactive computer program (frenzel, 1987; liebowitz, 1988). expert systems programs integrate existing data and capture the essence of the experiences and expert rules-of-thumb (heuristics) in a field of specialized knowledge (mockler & dologite, 1 992), performing symbolic and numeric reasoning and solving a set of interrelated, semi-structured problems (rangaswamy, burke, wind, & eliashberg, 1987). expert system technology offers a relatively new way to organize data and retrieve information for decision making by allowing a computer program to handle complex reasoning (guterl, 1986; prerau, 1990). such systems will provide the opportunity for sharing the recognized expert's knowledge and decision-making skills in a given field with novices and other individuals who possess less expertise (liebowitz, 1988). numerous expert systems have already 51 been developed for usc in business situations. to name a few: mentzer and gandhi (1992) have reported on marketing systems; heath-brandt, carter, and yozie (1991), mci's pricing for potential customers; springer, buta, and wolf (199i), automatic letter composition for customer service; mccann, tadlaqui, and gallagher (1990), creating retailer advertisements; and ebersold (1991), meeting a compctitivc challenge in frequent flyer competition. with the prolil'aration of microcomputers and programs for designing expert systems applications, this technology is within the reach of client counseling programs and small businesses. three works addressed the small business environment and the use of microcomputerbased expert systems. first, a case study by sullivan and shively (1989) identified several small business uses of expert systems, namely, serving as a staff assistant and owner surrogate, reducing owner role conflicts (manager of operations versus consulting expen), improving self-management, and providing product/service marketing support. in a second study martin, jones. mcwilliams, and nabors (1991) described the development of an pc-based expert system which provided small business development center (sbdc) counselors with client entrepreneurial trait assessments and financial statements to help explain financial and market reality data. in a third study muller-boling and krichoff (1991) discussed shortcomings of expert systems over human decision making but concluded that these systems have value in small business start-up consultation activities. in order to actualize such potential. however, it is necessary to understand what expert systems are and how they can bc developed and applied to the small business environment. toward this goal thc purpose of this article is to provide an overview and explore the possibilities for expert system development with particular attention to selecting a small business legal form of organization as an example. throughout this anicle reference is made to the use of this technology for sbdc application because of the proof-of-concept system developed. however, the authors believe that application of this technology to small business institutes (sbis) is equally appropriate. an overview of an expert system structure an overview of the development of expen systems should provide a better understanding of its potential benefits in the small business environment. in the past expert systems were constructed with the use of one of several programming languages. for example, lisp, prolog, and even pascal and basic. however, because of recent commercially available'oftware "shells," the user does not have to know these languages to construct an expert system. these programs have the built-in capability to function as a translator between the internal programming language and the english-like language of the rules and questions asked the computer user. as a result, these shells are much easier to learn than programming languages and an application can be more easily and efficiently constructed. the basic framework of an expert system is presented in figure i. an expen system can be broken down logically into three separate parts (harmon & king, 1985; mishkoff, schafer, & ramus, 1988: waterman, 1986). the first of these is the knowledge base which contains the facts of information that are widely shared, publicly available, and generally agreed upon, and heuristics (rules-of-thumb, rules of plausible reasoning, rules for guessing) that characterize an expert's decision-making process. this section is the "expert" knowledge the program needs to solve problems. this knowledge can be encoded in various ways such as hierarchical, network, relational data bases, semaniic networks, production rules, 52 figure 1. structure of an expert system. user user interface (input-output system) may entail: menus or a natural language question & answer graphics of icons inference engine inference control knowledge base facts rules 53 and predictive calculus, or some combination of these (rangaswamy et al., 19g7). the most common and popular method of encoding knowledge is "rule-based" representation in which decision rules of an if (premise)-then (actions) design are used for consultation and recommendation development. by linking (or chaining) these decision rules, this knowledge-based system can simulate the thought and decision process of an expert. the second element of an expert system is referred to as the "inference engine." it is the coded software reasoning mechanism of the system. it acts as a control structure or rule interpreter. this software code controls the search techniques and regulates ways in which the rules in the knowledge base arc to bc applied to the problem. it.sequences through the rules of the knowledge base, asks appropriate questions of the user when additional infomiation is required, and then offers advice liased on the rules and the user's input. it is possible for thc system to start its reasoning in a "forward" or "backward" mode. forward reasoning starts with facts (premises of a rule arc first checked to determine if they are true) and then follows an inference path through onc or more levels of rules to reach a conclusion about a goal (examines thc knowledge base to imd rules that are applicable). conversely, backward reasoning starts with thc goal (possible solution) und follows inference paths back to the details (looks through the knowledge base to find rules that justify that goal solution). backward reasoning works best if there are fcw goals and many details-a situation common in everyday business problemsolving. the last part of thc system is the user interface. this manmachine bridge is used to collect information using menu prompts and other means needed by thc inference engine, to display results, and to facilitate updating and modifying of the knowledge base. the nuthors'tudy of one sbdc revealed several potential applications for such a system. development of an expert system application thc sbdc serves the emerging business community with seminars and private consultations on cvcry aspect of starting and maintaining a business. the sbdc mission is to assist individuals who are either considering thc start-up of a small business or who have reached a stumbling block in thc operation of their business. in addition to the director and various clerical staffcrs, the office usually has consultants in accounting and finance, management. marketing, nnd energy managcmcnt. these consultants are degreed in their specialty and have several years experience working in their individual fields. some own or have owned small businesses. when a business person contacts the sbdc, a brief phone interview is conducted by the rcccptionist. any client in business for six months or less is encouraged to attend onc of the seminars conducted by thc sbdc. these are typically one-day seminars that outline each of the functional areas of a business and the specifics in each area that should be addressed by thc entrepreneur. the speakers are drawn from the local business community and cover topics from setting up an accounting system to identifying a potential market. thc sbdc has determined that this is the m&xst eflicient method of disseminating information to the largest number of new and potential business owners. the basic seminar is i'ree or low cost but is somewhat time. limited. if the client has been in business for more thatt six months. an attempt is made to schedule individual appointments with thc appropriate consultant. the purpose of these meetings is to help the client resolve individual business problems by identifying resources in the community and determining an appropriate course of action. assistance is offered on thc functional level in solving specific problems as well as on the strategic level in deterinining an overall focus 54 of the business. this service is free to the client; however, clients often fail to call i'or assistance until there is a situation in need of immediate attention. the sbdc does a laudable job of pt'oviding an important service to a large clientele. however, because of short staffing, consultants are often booked well in advance. if a firm is in need ol'mmediate assistance, the waiting time inay be too long. furthermore, although some prioritizing now occurs when clients are directed to either the seminars or published materiuls, thc system in place provides only these two additional resources before clients arc put into the queue to meet a consultant. seminars help i'ill the gap. but they are by their nature general in scope and cannot be tailored to a firm's specilic needs. published material is another source of information, but clients often find it difficult to make a decision based on their study of thc materials. what is required is another resource that will intelligently provide customized advice without involving more consultant time. is an expert system the answer? thc proposed expert system would act as a supplement to the current methods of providing information to small businesses. by using the expert system, some of the simpler consulting tasks could be designated to a non-consultant staffer. if willing and able, the client could work with the expen system without the assistance of any sbdc staffer. this would provide a preliminary answer more quickly or supplant attending all or part of the business stan-up seminar. if thc client has already reviewed published materials, the expert system could provide guidance through the areas of specific interest for that firm. while not all clients can be expected to bc totally assisted by the expen systein. it should shift the caseload of the consultants so that clients with the most pressing and complicated needs will be assisted first. with the problem identified and the application of expert systems technology considered feasible. the next step is to select an appropriate sbdc application. after discussions with the director of the university of central florida's sbdc, aloyse polfer. it was determined that a proof-of-concept system which helps clients select a legal form of organization would be a worthwhile target application. polfer served as the expert supported by a guide he co-authored (polfer. dicks. & holland. 1990). the next step in the building process was to test the application for appropriateness and potential for success. one of the critical factors in dcterinining the potential of an expert system is appropriate problem selection. cenain applications lend themselves to the expen systein solution morc easily than others. two models were used m the analysis to determine the applicability of the expert system solution to the proposed problem solution: the texas instruments (tl) project advisor checklist ("knowledge engineering." l 989) and criteria rules from silverman (19g7). the proposed application passed every section of the tl instrument except the political environment test, which was not considered to be important in this situation. the proposed project also passed the silverman criteria and showed reservations only on the successoriented section. a concern was raised that the system would find a management champion only if it could be proven that the use of the systeins would reduce a consultant's workload. ln light of the requirements of the project, it wus dgcided to limit the scope ol this prototype to advising a client of ways to choose the correct legal structure for a business organization. this is uppropnate because that is one ol'hc areas of greatest concern for potential business owners. additionally. choosmg a legal form ol'usiness is now addressed only as part ol'hc start-up seminar. the expert system would provide u source of information in uddition to the 55 seminar. this application choice is meant to serve simply as a possible example of how expen systems could be employed, and that this application as well as any other should be subjected to substantial testing and development before it is employed by a small business advisory group, building the expert system the prototype system is a knowledge-based computer program which uses expert systems techniques to assist a client in determining the best legal form of business organization. the program requires an ibm-pc or compatible and was developed using texas instruments'ersonal consultant easy shell. other alternative products in the same price range ($500 or less) are vp-expert by wordtech systems inc. and exsys el by exsys, inc. information on these and other shells is available in harmon, maus, and morressey (1988) and wielgos and ragusa (1991). the prototype works by backward chaining through the goal rules. in order to obtain values for the parameters in the premise of these rules. the system must test and fire (activate) several rules. the parameters in the premises of rules are assigned values from the knowledge base or by prompting the user for appropriate information. from the user's perspective, the system appears to operate in a more straightforward manner. to determine an appropriate legal form for a business, one should address many factors in satisfying a client's objectives. when a consultation begins, the client is asked a series of questions about the characteristics of his or her business. these questions generally address six key issues: control, continuity, regulation, administration, liability, and financing, although the user may not be aware of this grouping. when the necessary questions have been answered, either a form of business is recommended for sole proprietorship, corporations (both s and c), partnerships (both limited and general), or professional association, or instructions are given which will assist in determining the appropriate legal form. the prototype system consists of 66 rules and 42 parameters. two rule groups make up the system —issue rules and goal rules. issue rules draw conclusions about the characteristics of a client's business as related to the important considerations mentioned previously. for example, an issue rule would be used to determine if a small business has sufficient accounting, legal, and administrative capability to suppon corporate regulatory and reponing requirements. goal rules use the conclusions of the issue rules to select an appropriate form of business and)or make other recommendations. if, for instance, the issue rules conclude that the client lacks the required administrative capacity but has other compelling reasons to become a corporation, a goal rule would suggest the appropriate type of corporation and provide instructions for improving administration. validation (building thc product correctly) and verification (building ihe right product) testing of the prototype system was accomplished in the manner described by grover (i982). using this method, progressively morc difficult client scenarios identified by the expen were tested until thc system consistently behaved (u) within the established domain, and (b) in a manner approved by the original expert. figure~ 2 and 3 illustrate several sample scenarios representative of the expert system in operation. as is shown, the client responds to u series of questions. when answered, the system displays a client conclusion containing: (a) a recommended legal form of organization, (b) a "why" rationale. and (c) a summary of client confidence factors. thc stronger the rationale 66 and conlidence factors. the more robust is the system recommendation. also, if assistance is needed in answering an application question. the system provides access to a help module through the fl key. for example, if a user was not familiar with the definition of "passive income." the term would be clarified. discussion several issues remain unresolved at the completion of this prototype or need to be resolved before there is complete implementation of the system. because the sbdc deals with such a variety of clients, the problem of creating an appropriate user-interface is very important. the design approach taken for this prototype assumes that the user has minimal personal computer skills and has at least a high school education. those assumptions may not always be true and may result in a system not always as user-friendly as intended. a further problem is that pcs may not readily be available to clients since the sbdc has a limited number of units. if the system is to be implemented as part of the client assistance plan, purchase of additional systems may be required. research time spent with the staff consultants was very limited due to their extremely busy schedules. in order to refine the system further and introduce more of the heuristics of client consultation, more time with the sbdc staff would be required. a liability issue emerges in the creation of this system since any recommendations made by the system and followed by the client may establish a liability claim against the sbdc and the system developers. if a client answers questions in a less than truthful or less than accurate manner and as a result the system makes a recommendation, is the sbdc liable? what if a client answers completely but because of unforeseen circumstances the system makes a recommendation that causes damage to the client? these questions of liability must be raised and resolved by the sbdc before the system is presented to the public. one possible solution is to have the clients sign release forms, stating that they must not base a decision for a legal 'orm of business strictly on the recommendation of the expert system. the client is informed that each of the issues addressed by the expert system should be discussed with an experienced lawyer, who will advise them of requirements, options, and responsibilities. conclusion in addition to supplying information for use in developing the prototype system, the interviews with the sbdc director and the staff identified several benefits possible through full implementation of a small business consulting expert system. such a system will allow clients to get help without involving the already overworked staff. thus, consultant productivity will be improved because clients can obtain much assistance from the system. the expert system will also fil i the need for immediate assistance at times when consultants are booked to capacity. another benefit lies in its potential to provide flexible and comprehensive quality answers (o their questions. although sbdc seminars and published materials are excellent, they may not be convenient, or they may not allow a client to locate answers quickly to particular questions. furthermore, through comprehensive questioning of the client, the expert system is likely to arrive at a better solution than the client could reach by independent study and analysis. 57 figure 2. sample scenario dt i. client dialogue: do the principals have enough capital for the business? yes could the firm�'s activities cause personal injury or property loss? yes is the potential liability too big to be carried by individual owners? yes does the liability exposure or the need for liquidity and or continuity justify the additional administrative costs and tax consequences of becoming incorporated? yes what type of owner(s) does the company have? individuals is the firm's passive income greater than 20 percent of total income'& no is the business already incorporated with only one class of stock? no is the company a u.s. corporation with only one class of stock? no conclusions: bill —since your business is already incorporated, you should be incorporated as a c corporation. why: —liability, liquidity, or continuity are factors —there are 35 or less owners or stockholders —the owners are composed of individuals —passive income is less than 20 percent —the firm is already incorporated and has more than one class of stock client confidence factors: —increased liability exposure 100% —need for liquidity 80% —need for continuity 0% —need for administrative skills —100% 5&t figure 3. sample scenario i'. client dialogue: do the principals have enough capital for the business? no can capital be borrowed for banks or venture capitalists? no could the firm's activities cause personal injury or property loss? yes is the business a profession e.g., dr., cpa, or lawyer, etc.? no is the number of owners less than or equal to 35? yes what type of owners does the company have? estates and trusts is the firm's passive income greater than 20 percent of total income? no have you spoken to an investment banker about your finding requirements? no does the firm have sufficient legal, accounting, and administrative resources available? no conclusions: bill —your business should be set up as an s corporation. however, you should consult an investment banker before incorporating. you will also need to acquire additional administrative, accounting, and legal services. why: —external equity capital is required —there are 35 or less owners or stockholders —primary owners are estates and trusts —passive income is less than 20 percent of income client confidence factors: —increased liability exposure 70% —need for liquidity 0% —need for continuity 0% —need for administrative skills 90% 59 finally, thc small business consulting expert system can benefit the sbdc by offering assistance and "what-it" training experiences to less expcricnccd consultunks, allowing part-time volunteer counselors to pcrfonn more cffcctively and efficiently. thc prototype cxpcn system has not solved all the probltnns in selecting an appropriate legal forin ol'usiness, but it exemplifies thc way in which a computer's flawless memory and systematic thnught process can enhance a client's comprehension of the multiple factors influencing thc selection of an appropriate business legal structure. morc work remains to be done. while this article has focused on an sbdc application, thcrc is no reason to believe that other small business advisory organizations such as sbis could not bcnelit crom such systems. microc&miputers and commercial expert system shell software cor developing and economically deploying advisory programs are now being used by numerous cnd-user organizations. hopefully, other upplications like the one described will help to ptovidc solutions to thc needs of small business advisory 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(research report no. i). orlando, fl: university of central florida, intelligent multimedia applications laboratory. 61 http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2018, vol. 28, no. 03, 18-30 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2018 small business institute® w w w. j s b s . o rg family firms play a significant role in the economies of many countries around the globe (chua, chrisman, & chang, 2004; la porta, lopez-de-silanes, & shleifer, 1999; poza, 2007). given their importance as the key economic driver of regional economies and entire countries, family firms have attracted significant attention in academic research. a major focus of academic inquiry has been the differences between family firms and non-family firms, especially in terms of their culture, operations, innovativeness, and financial performance (e.g., anderson & reeb, 2003; gomez-mejia, nuñez-nickel, & gutierrez, 2001; heileman & pett, 2018; mahto, ahluwalia, & khanin, 2014; miller, le breton-miller, & scholnick, 2008). however, the empirical findings in the literature comparing family and non-family firms have been mixed (e.g., ahluwalia, mahto, & walsh, 2017; carney, van essen, gedajlovic, & heugens, 2015; miller et al., 2008; wagner, block, miller, & schwens, & xi, 2015). some studies have shown that family firms exhibit superior performance compared to non-family firms (e.g., anderson & reeb, 2003; audretsch, hulsbeck, & lehmann, 2013; miller & le breton-miller, 2005). other studies have established the opposite (e.g., bloom & van reenen, 2007; lubatkin, durand, & ling, 2007; morck & yeung, 2003; pérez-gonzález, 2006; schulze, lubatkin, & dino, 2003). so far, most research efforts have been focused on examining large, publicly listed firms (e.g., anderson & reeb, 2003; villalonga & amit, 2006), even though relatively few such firms exist in the world (de massis, sharma, chua, & chrisman, 2012; miller et al., 2008). in contrast, small and unlisted family firms that represent approximately 70% of all family firms in any country (astrachan, klein, & smyrnios, 2002; chrisman, chua, & litz, 2004; sharma, 2004) have been understudied, with less than 20% of papers in the family-business literature dedicated to such firms (e.g., wagner et al., 2015). moreover, even research on smalland medium-size firms (smes) has paid most attention to larger family smes with over 500 employees (de massis et al., introduction raj v. mahto1, saurabh ahluwalia2, dmitry khanin3, steven t. walsh4 1the university of new mexico, usa, rmahto@unm.edu 2the university of new mexico, usa, sahluwalia@unm.edu 3 nazarabayev university’s graduate school of business, kazakhstan , dmitry.khanin@nu.edu.kz 4 the university of new mexico, usa, swalsh91@comcast.net financial performance enhancing strategies: small family firms vs. small non-family firms commitment, employee training, learning orientation, small firms, family firms advancing prior research on the key determinants of firm financial performance, we identify the internal performance-enhancing strategies (i.e., raising employee commitment and investment in employee training) and external performance-enhancing strategies (i.e., boosting the learning orientation and adopting an emphasis on marketing). we argue that these performance-enhancing strategies will be positively associated with sales and profits, for both small family firms and small non-family firms, yet the effect will be stronger for family firms that often lag behind in these management domains. we test our hypotheses on a sample including 36 family firms and 28 non-family firms. while some hypotheses received support (e.g., investment in employee training was positively associated with sales in family firms), other hypotheses did not receive support (e.g., employee commitment was not associated with sales in family firms, and emphasis on marketing was negatively associated with sales in family firms). we discuss the theoretical and practical implications of our study and outline directions for future research on firm financial performance. apa citation information: mahto, r. v., ahluwalia , s., khanin, d., walsh, s. t. (2018). financial performance enhancing strategies: small family firms vs. small non-family firms. journal of small business strategy, 28(3), 18-30. 19 r. v.. mahto, s. ahluwalia, d. khanin, s. t. walsh journal of small business strategy / vol. 28, no. 3 (2018) / 18-30 2012). and yet we still know little about small family firms and what makes them unique compared to other small firms (shanker & astrachan, 1996). moreover, such preoccupation with larger smes could make understanding the specificity of the family business, in general, more difficult. after all, large family firms are likely to resemble non-family firms (kirzner, 1979; simon, houghton, & savelli, 2003). therefore, it is important to examine whether the findings of prior research comparing family and non-family firms will hold in the context of small family firms, especially for firms with fewer than 100 employees (de massis et al., 2012; heileman & pett, 2018). currently, we have not developed a sufficient understanding of the differences between small non-family firms and small family firms. our paper seeks to fill this gap and thus increase our understanding of the uniqueness of family firms. based on prior literature on family firms (de massis et al., 2012; dyer, 1989; patel & chrisman, 2014; patel, & cooper, 2014), we identify the key performance-enhancing strategies: internal (i.e., firm investment in employee training and raising employee commitment) and external (i.e., a firm’s efforts to boost its learning orientation and emphasis on marketing). we suggest that the relationships between these variables and firm performance will be stronger for family firms than for non-family firms. we base our predictions on the theory that family firms exhibit both a stewardship orientation—that is, care and dedication to the business, employees, and community (donaldson & davis, 1991), and stagnation orientation— that is, resistance to innovation (de massis et al., 2012; patel & chrisman, 2014; patel & cooper, 2014) and unfair attitudes toward non-family employees (vallejo, 2009). we test our hypotheses on a sample of small firms that includes family and non-family firms from the u.s. southwest. our paper makes four important contributions to the family-firm literature. first, it establishes that investment in employee training is especially important for family firms as the key predictor of sales and profit growth. second, it discovers that the marketing orientation may play a positive role and a negative role for small firms’ financial performance. such ambiguity regarding the expected impact of the marketing orientation on small firms’ balance sheet deserves further examination. third, it determines that learning orientation and employee commitment could influence financial performance of small non-family and family firms differently. this finding calls for rethinking what we know about small family and non-family firms. fourth, it demonstrates that sales growth can affect generation of profits in small family firms and in small non-family firms differently. this finding, in our view, has important practical implications, as it seems to imply that small non-family firms over-invest in their marketing efforts and learning, which dampens their profitability. theoretical framework & hypotheses although there are many studies comparing the financial performance of family firms and non-family firms, their findings have been inconsistent (e.g., mazzi, 2011; wagner et al., 2015; carney et al., 2015). curiously, two recent meta-analytic studies (carney et al., 2015; van essen et al., 2015) arrived at opposite conclusions about whether family firms achieve better performance than non-family firms, or vice versa. other meta-analytic studies (o’boyle, pollack, & rutherford, 2012; wagner et al., 2015) found that family firms have a slight performance advantage over non-family firms. scholars provided different explanations for such apparent inconsistencies in empirical findings by pointing out that different researchers: (1) may define family firms differently; (2) apply different measures of financial performance; (3) focus on examining different types of firms; (4) use different country data, and (5) examine listed versus unlisted firms (e.g., mazzi, 2011). miller, le breton-miller, and scholnick (2008) suggest researchers predict superior or inferior performance of family firms to non-family firms depending on their overriding theoretical perspectives. specifically, studies applying the stewardship theory’s lens (davis, schoorman, & donaldson, 1997) that emphasizes managers’ personal integrity and professionalism generally view family managers as dedicated and competent leaders and portray family firms positively. conversely, studies applying the agency perspective, especially the behavioral agency model (bam) which suggests that family owners may be strongly driven by their desire to preserve the socio-emotional wealth (sew) of the firm (gómez-mejía, haynes, núñez-nickel, jacobson, & moyano-fuentes, 2007; jaskiewicz, block, combs, & miller, 2017), generally view family managers as owners rather than professionals, and respectively, portray family firms negatively (e.g., as less competitive than non-family firms). in addition, there are some important differences among family firms that may influence the findings. thus, some family firms may have a culture that emphasizes long-term goals and non-financial aspects of performance (mahto, davis, pearce, & robinson, 2010). conversely, other family firms may practice an entrepreneurial approach, seeking to grow faster while placing a greater emphasis on obtaining abnormal profits in the short run (kassicieh, ahluwalia, 20 r. v.. mahto, s. ahluwalia, d. khanin, s. t. walsh journal of small business strategy / vol. 28, no. 3 (2018) / 18-30 & majadillas, 2015; zahra, 2003). thus, researchers need to consider underlying cultural differences among family firms while studying these entities. in this study, we use stewardship theory (davis et al., 1997) and a stagnation orientation perspective (de massis et al., 2012; miller et al., 2008; patel & chrisman, 2014; patel & cooper, 2014) to build our theoretical arguments. we argue that when multiple members of a family are employed by the family firm, and the firm accounts for the family majority of wealth (collins, worthington, & schoen, 2016), then family owners may have a strong motivation for solid commitment to the firm. in other words, founders or family members acting as managers strongly identify with their family firm and the role it plays in the community, thus linking their identity and reputation with the firm’s performance and survival. such identification with the family firm may lead to internalization of the family firm’s core values that become part of family employees’ self-identity, thereby contributing to their intention to steward the family firm (eddleston & kellermanns, 2007). moreover, the involvement of other family members in the family business may strengthen kinship obligations and enhance stewardship attitudes (arregle, hitt, sirmon, & very, 2007). at the same time, family firms often exhibit an unfair attitude toward non-family employees; this has a strong negative effect on non-family employee’s commitment (vallejo, 2009). in small family firms, where owners have absolute or dominant control over the firm, stewardship attitudes may compel owner-managers to get engaged in firm preservation activities (e.g., stieg, cesinger, apfelthaler, kraus, & cheng-feng, 2018). thus, family managers adopt a longterm perspective contrasting with the short-term perspective that entrepreneurs often adopt (simon, et al, 2003). these activities may include building a strong organization and strengthening the connection with external stakeholders, especially with customers (miller, et al., 2008). to create an effective organization, family owners-managers may invest in enhancing the knowledge orientation of the family firm (via vicarious learning from other firms in the industry), enhancing employee skills and competencies (via apprenticeship, mentoring and employee training), and enhancing employee loyalty (via building a strong culture based on shared values and employee identification with the family firm) (e.g., pruitt, 1998; reid & harris, 2002; stieg, et al., 2018). non-family firms also try to increase their profitability by strengthening their learning orientation and differentiating themselves via marketing. family owners are also likely to steer the firm toward launching new products and processes and adopting a learning-oriented managerial style (allouche & amann, 1998). the family firm owner’s stewardship obligations may also motivate them to invest in solidifying their firm’s roots in the community as well as building its market share (chadeau, 1993; collins, et al, 2016). the resulting dominant position in the market and the industry may offer the family firm many advantages, none more important than the ability to withstand market shocks. importantly, for family firms, the path to dominant position requires investment in marketing effort over the long term (miller et al., 2008). in contrast, owners or managers of small non-family firms are likely to be primarily motivated by quick generation of financial rewards associated with their innovative endeavor (kirzner, 1997). this entrepreneurial approach may compel the owner-managers of non-family firms to seek higher efficiency with minimum emphasis on investment in creating the knowledge orientation, enhancing employee skills, building a strong organizational culture, and buttressing relationships with external stakeholders for the long term (covin & slevin, 2017). however, over the short-term, the non-family managers may invest in the firm to achieve rapid growth and gain momentum to make their firm appealing to potential buyers. also, unlike family-firm owners, entrepreneurs or managers of non-family firms can indulge in high-risk endeavors that could turn out to be advantageous and profitable (gómez-mejía et al., 2007). as a result, non-family firms operate in a completely different context compared to family firms. given the importance of internal performance-enhancing strategies (e.g., investment in knowledge and learning or investment in employee capabilities and advancement) and external performance-enhancing strategies (e.g., investment in marketing), we propose to examine the relationship between internal and external performance-enhancing strategies and family firms’ vs. non-family firms’ performance. in the family firm literature, the main predictors of firm performance, based on the stewardship perspective, are employee training, learning orientation, and employee commitment (miller et al., 2008). studies of human resource management and organizational development have found that investment in employee training positively influences firm performance (e.g., chandler & mcevoy, 2000; delaney & huselid, 1996). in the small-firm context, empirical findings have supported the positive impact of employee training on firm performance (e.g., kotey & folker, 2007) although the relationship appears to be more complicated than in big firms (hoy, 2003; sharma, 2004). employee training is likely to enhance the performance of small-business firms, as employees in such firms may not always have 21 r. v.. mahto, s. ahluwalia, d. khanin, s. t. walsh journal of small business strategy / vol. 28, no. 3 (2018) / 18-30 appropriate education and experience. professional training could reduce the gaps in employee education and help employees acquire professional skills. moreover, family firms could benefit significantly more from employee training than could non-family firms since family firms often disregard the importance of employee training (kotey & folker, 2007), and, thus, those family firms that do pour resources into employee training could receive greater returns on their investment compared to non-family firms. to summarize: hypothesis 1a. employee training will be associated positively with a small firm’s financial performance. hypothesis 1b. the positive relationship between a company’s investment in employee training and financial performance will be stronger for small family firms than for small non-family firms. learning orientation has been shown to positively influence desired organizational outcomes, such as firm innovation and firm performance (e.g., calantone, cavusgil, & zhao, 2002; tippins & sohi, 2003; wang, 2008). learning helps firms build their dynamic organizational capabilities that facilitate ongoing adaptation to the changing business environments. furthermore, learning has been found to positively influence small-firm performance (e.g., macpherson & holt, 2007; wolff & pett, 2006). this is because small firm owners and managers neither have the resources to set up learning processes nor recognize the importance of learning, as they are engulfed by the details of running a business. in addition, family firms may be oblivious to the importance of innovation (de massis et al., 2012). hence, those family firms that do adopt a learning orientation could reap greater benefits from this emphasis compared to non-family firms. to summarize: hypothesis 2a. learning orientation will be positively associated with a small firm’s financial performance. hypothesis 2b. the positive relationship between a companies’ learning orientation and financial performance will be stronger for small family firms than for small non-family firms. employee commitment has been studied extensively in psychology and organizational behavior (meyer, becker, & vandenberghe, 2004; meyer, stanely, herscovitch, &topolnytsky, 2002). the construct measures an employee’s psychological attachment to the firm as expressed in feelings of belonging and loyalty. it has been consistently shown to contribute positively to firm performance, either directly (e.g., ahluwalia, 2012; gong, law, chang, & xin, 2009) or indirectly (meyer & allen, 1984). this is because committed employees have lower absenteeism and turnover rates (meyer et al., 2004) and display higher task performance (shore & wayne, 1993). commitment has been found to be associated positively with desired organizational outcomes, both in small family firms and small non-family firms (mahto et al., 2010; mahto & khanin, 2015). in fact, more-committed employees can work longer hours, exhibit greater diligence and stronger work ethics, and seek to be more innovative than employees with lower levels of commitment are. unfortunately, non-family employees in family firms often do not feel like they are part of the family since family employees may enjoy various advantages, such as better training, salary increases, and promotions (vallejo, 2009). no wonder that non-family employees may show lower levels of commitment compared to family employees, and even family employees may take their jobs for granted and fail to develop commitment to the family firm. therefore, raising the commitment of employees in family firms could provide even greater benefits for such firms compared to raising employee commitment in non-family firms. to summarize: hypothesis 3a. employee commitment will be associated positively with a small firm’s financial performance. hypothesis 3b. the positive relationship between employee commitment in a company and its financial performance will be stronger for small family firms than for small non-family firms. marketing is one of the most important performance-enhancing activities for any firm. many studies have shown that adroit marketing is absolutely critical for improving firm performance (e.g., krasnikov & jayachandran, 2008; morgan, vorhies, & mason, 2009). empirical investigations of this relationship in the small-business literature established similar findings (e.g., pelham, 2000; wiklund & shepherd, 2005). however, family firms often exhibit weaknesses in the area of marketing compared to non-family firms. therefore, we expect that the benefits of adopting a marketing orientation will be proportionately greater for family firms in comparison with non-family firms. hypothesis 4a. marketing orientation will be associated positively with a small firm’s financial performance. 22 r. v.. mahto, s. ahluwalia, d. khanin, s. t. walsh journal of small business strategy / vol. 28, no. 3 (2018) / 18-30 hypothesis 4b. the positive relationship between companies’ marketing orientation and financial performance will be stronger for small family firms than for small non-family firms. these relationships can be seen in figure 1. employee training employee commitment marketing orientation learning orientation financial performance family vs. nonfamily independent variables figure 1. proposed model method we tested study hypotheses on a sample of small firms operating in the us southwest. we used a mail survey to collect the data. the small firms targeted for the survey were part of a list compiled by the executive education office of our business school. we randomly selected a group of 300 small firms and called each of them on the phone, inviting the owners to participate in the survey. the phone call was followed by mailing the survey questionnaire to the firm’s top manager. sixty-six firms responded positively to our invitation, resulting in a response rate of 22%. thirty-six firms in the sample described themselves as family firms, whereas 29 firms in the sample described themselves as non-family firms. one respondent failed to identify the firm as either a family firm or non-family firm, and therefore, was excluded from the sample. on average, the family and non-family firms in our sample had sales revenue ranging from $1 million to $2 million and employed 14 employees. the average annual growth rate was about 5%. study measures dependent variable (dv). we measured a small firm’s financial performance using two widely used measures of financial performance: sales and gross profit. we obtained this information by asking respondents to indicate a firm’s gross margin and sales revenue in the previous year. even though both measures are correlated, we run our analysis using one dependent variable at a time. in order to obtain accurate information, we assured respondents of confidentiality and did not ask for any firm or respondent identifying information. independent variables (ivs). learning orientation. we measured learning orientation using two questions. these questions were drawn from the learning orientation scale commonly utilized in the marketing literature (sinkula, baker, & noordewier, 1997). the first question asked respondents about the importance 23 r. v.. mahto, s. ahluwalia, d. khanin, s. t. walsh journal of small business strategy / vol. 28, no. 3 (2018) / 18-30 of learning to the firm’s competitive advantage. the second question asked respondents about inclusion of learning in the firm’s basic values. respondents indicated their preference on a five-point likert scale, where 1 = strongly disagree to 5 = strongly agree. as the cronbach’s alpha (α = .82) indicated high reliability for the scale, we averaged the two items to obtain our measure. employee commitment. the employee commitment variable used in the study is based on the three-part effective-commitment scale developed by meyer and allen (1984). the first item measures commitment to the organizational vision of the company. the second item measures commitment to the principal goals of the company. finally, the third item measures if the employees feel that they are genuinely involved in formulating the strategic course for the company. the firm respondents indicated their preference for each question on a five-point likert scale similar to the previous measure. we averaged the scale for the analysis as the cronbach’s alpha (α = .69) indicated acceptable level of reliability for the scale. employee training. we assessed the investment in employee training variable based on a survey question that asked the respondents to report the percent of revenue spent on training of employees. marketing orientation. we measured a firm’s marketing orientation using a single item measure that asked respondents to indicate percentage of sales revenue the firm devoted to advertising or creating product or service awareness. the respondents indicated their preference on a scale where 1 = less than 1% to 5 = more than 10%. firm type (family firm vs non-family firm). we operationalized this variable by asking respondents to categorize their firm as a family firm or non-family business. table 1 provides summary statistics for variables used in this study. table 1 summary statistics of sample variables panel a: full sample variable obs mean std dev min max sales 64 2.9063 1.4877 1 5 gross profit 63 3.0952 1.3526 1 6 employee training 61 1.7049 0.7152 1 4 marketing 63 2.1111 1.1232 1 6 learning 65 4.1615 0.6679 2 5 employee commitment 65 3.9178 0.6319 2.33 5 panel b: family firms variable obs mean std dev min max sales 36 2.6667 1.5306 1 5 gross profit 35 2.9143 1.3799 1 6 employee training 35 1.7714 0.6897 1 3 marketing 35 2.1143 1.0224 1 4 learning 36 4.0972 0.7253 2 5 employee commitment 36 4.0183 0.6517 2.67 5 panel c: non-family firms variable obs mean std dev min max sales 28 3.2143 1.3973 1 5 gross profit 28 3.3214 1.3068 1 6 employee training 26 1.6154 0.7524 1 4 marketing 28 2.1071 1.2573 1 6 learning 29 4.2414 0.5919 3 5 employee commitment 29 3.7931 0.5939 2.33 5 24 r. v.. mahto, s. ahluwalia, d. khanin, s. t. walsh journal of small business strategy / vol. 28, no. 3 (2018) / 18-30 analysis in this study, we utilized an ordinal logit regression model to test our hypotheses, as some of the independent variables are categorical. table 2 reports correlation among the study variables. as can be observed in the table, none of the inter-variable correlation reach high enough to introduce the possibility of multicollinearity bias. for example, sales numbers were found to be positively correlated with most of the variables except for marketing, which had a table 2 pairwise correlations between sample variables panel a: full sample variable sales gross profit employee training marketing learning employee commitment sales 1 gross profit 0.2351 1 employee training 0.1521 -0.0563 1 marketing -0.2552 -0.0459 0.0775 1 learning 0.1989 0.0106 0.2649 0.1659 1 employee commitment 0.0039 0.0703 -0.0296 0.1933 0.3159 1 negative correlation with sales. we found similar results for gross profit, but the magnitude of the observed correlations was much smaller. results table 3 shows the results of our regression analysis. as can be seen in the table, the employee training is not associated with the combined sample’s sales, thus failing to support our hypothesis 1a. however, hypothesis 1b, table 3 ordinal logit regression on determinants of sales for small firms dependent variable sales full sample family firms non family firms gross profit 0.4510** 0.5779** -0.3115 (0.1903) (0.2683) (0.3309) training of employees 0.5208 1.4170** -0.4489 (.3390) (0.5941) (0.4961) marketing -0.6335** -0.9245** -0.3285 (0.2509) (0.3753) (0.3500) learning 0.5904 0.4236 1.9384* (0.3829) (0.4991) (0.9921) employee commitment -0.1848 0.3898 -2.5427** (0.4275) (0.5901) (1.1988) constant 1.4620 4.5362* -5.9642* (1.8750) (2.6052) (3.5932) observations 58 34 24 standard errors in parentheses * p < 0.10, ** p < 0.05, *** p < 0.01 which proposes family firm employee training to be associated with sales, is supported. the coefficient for training of employees’ variable is (β = 1.42, p < .05) positive and significant. in contrast, for non-family firms the positive relation between employee training and sales does not hold and is in fact negative and insignificant. hypothesis 2a, which proposes learning orientation of non-family firms to be associated with sales, is partially supported. hypothesis 2b failed to receive support (family-firm learning orientation was not associated with sales). the coefficient for learning for non-family firms is over three times the size of the comparable coefficient for family-firm and total samples and is significant at a 10% level. hypothesis 3a, proposing employee commitment in non-family firms to be associated with sales, received partial support, but hypothesis 3b did not find support. coefficient for employee commitment is negative and significant for non-family firms. however, for family firms the same coefficient is positive, but insignificant. finally, hypothesis 4a, proposing marketing orientation to be associated with sales, is supported. but, hypothesis 4b is not supported, as although marketing in family firms was associated with sales, the relationship was negative. importantly, sales in family firms (but not in non-fam25 r. v.. mahto, s. ahluwalia, d. khanin, s. t. walsh journal of small business strategy / vol. 28, no. 3 (2018) / 18-30 ily firms) served as significant predictor of gross margin. we also ran our results using an alternative dependent variable: gross margin (profit), to measure financial performance. the results of the regression analysis on the alternative dependent variable are shown in table 4. table 4 ordinal logit regression on determinants of sales for small firms dependent variable sales family firms family firms non family firms sales 0.3908** 0.5489** -0.1486 (0.1677) (0.2479) (0.3001) training of employees -0.1853 -0.02118 -0.4974 (0.3378) (0.5556) (0.4706) marketing 0.07081 0.2975 -0.08119 (0.2224) (0.3386) (0.3133) learning -0.1668 -0.6202 1.2264 (0.4226) (0.5305) (0.8869) employee commitment 0.1200 0.4782 -1.9039* (0.4103) (0.5135) (1.0577) constant -1.6956 -0.7782 -6.9982* (1.8960) (2.3809) (3.7038) observations 58 34 24 standard errors in parentheses * p < 0.10, ** p < 0.05, *** p < 0.01 as can be seen from table 4, for gross profit employee training is not significant, but, interestingly, the magnitude of the coefficient is over 20 times lower (less negative) than that of the coefficient for family firms. in terms of magnitude of coefficient, employee training is much more positively associated with gross profits for family firms as compared to non-family firms. the finding is directionally similar to the finding for sales. similarly, coefficient of learning is insignificant and negative for family firms, but it is positive for non-family firms. again, the finding is directionally similar to the finding for sales. thus, hypotheses 1a, 1b, 2a, and 2b are directionally supported by the gross-profit measure of financial performance. hypothesis 3a is partially supported (employee commitment in non-family firms was associated with gross profit), but hypothesis 3b is not supported (employee commitment in family firms was not associated with gross profit). finally, neither hypothesis 4a nor hypothesis 4b is supported. for example, although marketing in family firms is associated with gross profit, it was associated positively for family firms and negatively for non-family firms. overall, results are weaker for gross profit as a measure of financial performance as opposed to sales, but directionally the results are consistent. discussion and conclusions in this paper, we contrast internal performance-enhancing strategies (i.e., investment in employee training and raising employee commitment) and external performance-enhancing strategies (i.e., boosting the learning orientation and adopting an emphasis on marketing). we argue, therefore, that employee training, learning (knowledge) orientation, employee commitment, and emphasis on marketing are the key determinants of a small firm’s financial performance. additionally, we predict that small family firms may reap greater returns than small non-family firms may when they pursue effectively these four performance-enhancing strategies. this argument is based on the theory that family firms may exhibit both a strong stewardship orientation and strong agency conflicts (miller et al., 2008) so that their performance may at times be superior and at times inferior compared to non-family firms. thus, previous studies have demonstrated that family firms are weaker than non-family firms in the areas of employee training (astrachan & kolenko, 1994), learning orientation (de massis et al., 2012), employee commitment (vallejo, 2009) and emphasis on marketing (mahto & khanin, 2015) compared to non-family firms. although family firms have a stewardship orientation, they may also suffer from various agency conflicts (schulze et al., 2003) and try to preserve the sew (gómez-mejía et al., 2007; gomez‐mejia, campbell, martin, hoskisson, makri, & sirmon, 2014) foregoing smart business strategies. the resulting conflict between stewardship orientation and agency conflicts in family firms (miller et al., 2008) may lead to a non-linear relationship between family involvement and firm performance (sciascia & mazzola, 2008). our results suggest that the effect of these key determinants of financial performance turned out to be more complex than we expected. first, only sales emerged as a meaningful predictor of profits, and then only for family businesses. this suggests that family businesses could be more frugal than non-family businesses so that growing sales typically result in greater profitability for family 26 r. v.. mahto, s. ahluwalia, d. khanin, s. t. walsh journal of small business strategy / vol. 28, no. 3 (2018) / 18-30 firms but not for non-family firms. it is also possible than non-family businesses invest more as they grow sales in innovation and learning, marketing campaigns, and employee training than non-family firms so that greater sales volume does not lead to greater profits. second, employee training was significantly related to sales for the entire sample and for family firms but not for non-family firms. this suggests that, as we expected, family firms lag behind non-family firms in terms of employee training so that those family firms that do provide employee training may substantially improve their financial performance. it is also possible that non-family firms provide more employee training so that the benefits of enhanced training for them have a weaker effect on performance. in any case, the fact that investment in training was significantly related to sales for all the firms in the sample, and especially for family firms, is very important. it demonstrates that even small investments in training may have a significant effect on family firms’ performance, and since sales is related to profits for family firms, growing sales, thanks to employees’ increased competence and expertise, will lead to palpable results. third, our study shows that marketing was positively related to sales for the entire sample, yet negatively related to sales for family firms. this is an unexpected finding that could possibly be explained in that family firms do not stand to benefit from emphasis on marketing as much as non-family firms and could actually suffer from giving prominence to marketing as opposed to deemphasizing marketing efforts. apparently, family firms grow their sales based on word-of-mouth and reputation, so that customers may feel that family firms adopting a strong emphasis on marketing betray themselves. another explanation is that family firms may adopt a marketing orientation out of despair when failing, hence the negative association between marketing and sales. positive association between sales and marketing for the entire sample supports our assumption that greater marketing effort in small businesses results in increased sales. neither the learning orientation nor employee commitment were related to sales either for the entire sample or for family firms but were related to sales for non-family firms. it is possible that this could be because small firms are well-entrenched in their niches and know them thoroughly so that additional learning efforts do not add much. it is also possible that small firms need to strengthen their learning orientation to a greater extent before they will experience the benefits of learning. moreover, it may also indicate that non-family employees in family firms do not identify with the firm and exhibit low levels of commitment. if so, this is an important warning to family firms that need to make non-family employees feel like they are part of the family. the stewardship orientation characteristic of family firms needs to become more inclusive. overall, the main contributions of our study are as follows. first, our study establishes that family firms need to provide more training to employees since this is the area where they get the greatest returns or the most substantial benefits relative to their investment and efforts. second, family firms may want to approach their marketing efforts cautiously since over-emphasis on marketing could actually be related negatively to family firms’ sales. third, family firms need to pay much more attention to enhancing their learning (knowledge) orientation and employee commitment since their efforts do not appear to be sufficiently effective in these domains. fourth, non-family firms benefit the most from boosting their learning orientation, employee commitment, and emphasis on marketing and should prioritize these performance-enhancing strategies. research limitations & future research directions this study has certain limitations. first, we used a sample of small firms (i.e., with less than 100 employees) from only one region of the united states. hence, the generalizability of our findings may be in doubt, and we encourage scholars interested in the subject to reexamine our findings by conducting studies in other regions of the united states and other countries. second, we utilized a single respondent to obtain all firm-related data, which introduces the possibility of a single respondent bias. however, we did assess the possibility of a single respondent bias in our sample by conducting herman’s single-factor test. the results ruled out the possibility of a single-respondent bias in our sample. also, we included a mix of subjective and objective measures in our survey to avoid single-method bias. finally, we utilized cross-section data to test our hypotheses, which limited any inferences about the causality of the observed relationships. researchers seeking to establish causality should investigate these relationships in a longitudinal study. practical implications family firms should invest more in employee training since this investment has the most direct effect on their sales and profits. at the same time, family firms need to consider transforming their culture so that they gradually boost the level of non-family employee commitment and learning 27 r. v.. mahto, s. ahluwalia, d. khanin, s. 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directots'ssociauon journal of small business strategy vol. 25 ● no. 2 ● 2015 sbi 2015 conference best applied paper awarded by the small business institute® integrating sustainability into sme strategy jeff shields university of north carolina, asheville jshields@unca.edu joyce m. shelleman university of maryland university college joyce.shelleman@faculty.umuc.edu abstract small-to-medium enterprises (smes) increasingly are expected to develop strategies to accommodate accelerating global sustainability reporting requirements and proactively address sustainability considerations. many lack a structured approach to facilitate getting started with strategy formulation in response to this significant change in their external environment. this paper presents a readily applicable and practical method smes can apply to integrate sustainability considerations as a beginning toward developing a sustainability strategy. current sustainability issues are identified and discussed with respect to determining company capabilities and assessing the external business environment. this classification of critical sustainability issues offers a flexible planning innovation well-suited to smaller enterprises seeking to begin developing a sustainability strategy. keywords: smes, sustainability, sustainability strategy, strategy formulation 59 mailto:jshields@unca.edu mailto:joyce.shelleman@faculty.umuc.edu journal of small business strategy vol. 25 ● no. 2 ● 2015 introduction sustainable business practices have been steadily on the rise. many companies now embrace sustainability. approaching half (43%) of those surveyed by mckinsey & company report seeking to rectify sustainability with company values, mission, or goals. this focus on strategy is now the top corporate reason for addressing sustainability, just ahead of reputation effects and cost efficiencies (bonini & bove, 2014). alongside large corporations, smes are aware of the insurgent sustainability tide and many have begun to incorporate sustainability strategy into their operations for many of the same reasons as large corporations (brammer, hoejmosr, & marchant, 2012; heras & arana, 2010). a clear trend in sustainable business practice is the reporting of company performance with respect to the “triple bottom line”. the triple bottom line encompasses the economic, environmental, and social performance of an organization and this constitutes its current performance with respect to sustainability. this trend has been growing for several decades and now many large companies also require other enterprises in their supply chain, some of which may be smes, to report information on sustainability performance. along with other aspects of the sustainability movement such as public opinion supporting its value, this requirement represents a potentially major change in smes’ business environment with consequences that can have substantial impacts on their business. smes should assess, monitor, and potentially develop strategies to accommodate widespread sustainability reporting and to proactively adapt to overall sustainability demands (parhankangas, mcwilliams, & shrader 2014; nadim & lussier, 2010; avram & kuhne, 2008). however, a key challenge faced by many companies, both large and small, is that they currently lack a structure to integrate sustainability into business decisions (kiron, kruschwitz, rubel, reeves, & fuiszkehrbach, 2013). this is likely to be even more acutely felt in smes because many lack financial and human resources (nicholas, ledwin, & perks, 2011; gadenne, kennedy, & mckeiver, 2009). smaller smes, in particular, can face resource constraints that increase the difficulty of getting started on the path of systematically bringing sustainability issues into their operations and aligned with competitive considerations. in fact, 98% of smes have 20 or fewer workers (u.s. census bureau, 2012; 2013). this precludes the luxury of either a dedicated sustainability staff or full-time strategic planning support. the changing business environment and a growing perceived mandate to address sustainability intersects with the reality of resource constraints that is a feature of smes, highlighting the need for an organized approach to begin development of a sustainability strategy that is readily accessible to even very small businesses. however, no method to do this that has a clear focus on sustainability issues has previously been articulated in the small business management literature. this paper provides such a process focused on sustainability to address the need for smes to get started on the path of incorporating sustainability as a strategic consideration. a method smes can apply to assess their competitive position with respect to sustainability and thus lay the groundwork for formulating a sustainability strategy is presented here. first, we discuss sustainability and the related issue of sustainability reporting globally and 60 journal of small business strategy vol. 25 ● no. 2 ● 2015 in the u.s. then building on the well-known management process of assessing the match between organizational capabilities and environmental conditions, we draw from the literature to identify criteria to apply to integrate sustainability considerations into this framework, focusing on environmental sustainability. finally, we conclude with a discussion of implications for sme management practice with respect to this practical innovation, limitations, and possible future research. sustainability sustainability is defined as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs” (world commission on environment and development, 1987). this definition has been taken up in business to address stakeholders; a sustainable business “meets the needs of its stakeholders without compromising its ability to meet their needs in the future” (hubbard, 2009). by this focus on the future, sustainability goes beyond corporate social responsibility (csr) and can be even more difficult to achieve (parhankangas et al., 2014). smes have been viewed as relatively slow to adopt sustainability practices. this can be due to a lack of external stakeholder pressure (e.g., government regulations) (masurel, 2006), time constraints on owners that preclude them from taking on what might be considered a “discretionary” business endeavor (schaper, 2002), or just limited resources overall (bosbrouwers, 2010). unlike large firms, sme owners typically lack financial resources, time, staff, technical expertise, and organizational structures to take on sustainability (nicholas et al., 2011; schulz, kraus, & demartini, 2011). the unclear payback, that may be delayed, tends to limit the expenditure of smes’ limited resources on sustainability investments (european commission, 2002). further, they lack knowledge of their collective impact as smes on the environment, the benefits of addressing sustainability, and tools that can be used to develop sustainability strategies and practices (aykol & leonidou, 2014; lawrence, collins, pavlovich, & arunachalam, 2006). company mindset, culture, and subcultures are key elements that help to determine smes’ response to sustainability (bonini & bove, 2014; baumgartner, 2009; howard-grenville, 2006). the heavily formalized strategic management approach that works for large companies may well not be the best approach for smes, where the owner’s vision, a flatter structure, and fewer internal stakeholders will affect discussions and positions on sustainability (sloan, klingenberg, & rider, 2013; brammer et al., 2012). instead, a less formalized and flexible approach like that presented in this paper may offer smes sufficient structure to draw attention to key issues while not imposing a degree of formalization that is out of character with the smaller organization. sustainability reporting requirements, an accounting issue, create pressure and lend an urgency for smes to develop and adopt a sustainability strategy. this appears to be a situation where practice is leading theory. these sustainability reporting frameworks have been evolving globally for over two decades and gaining momentum in their importance and participation by large corporations. this accounting issue has significant implications for the business environment of smes and their management and, most important, their sustainability strategy. for example, the securities and exchange commission (sec) and the 61 journal of small business strategy vol. 25 ● no. 2 ● 2015 sustainability accounting standards board are moving in the direction of requiring integrated reports and developed sector reporting standards (schooley & english, 2015; romero, lin, jeffers, & degaetano, 2014). many companies are either planning to or currently are integrating their environmental and social performance into their external financial report and, in many cases, national governments (e.g., south africa, sweden) now require external reporting of companies’ sustainability performance (schooley & english, 2015; acca, 2014; kpmg, 2013). the sustainability reporting practices of large companies have implications for smes. among the 100 largest companies from 34 countries as measured by revenues (the n100), sustainability reporting has grown from 53% in 2008 to 71 % in 2013 (kpmg, 2013). among the top 250 companies listed in the fortune global 500 (the g250), reporting has grown from 83% in 2008 to 93% in 2013 (kpmg, 2013). large companies report a variety of motivations for voluntarily reporting on their environmental and social performance: considerations of reputation, brand, ethics, risk management, economics (e.g., cost reduction, new product and service opportunities), and relationships with governmental authorities (ernst and young, 2014; bonini & bove, 2014; kpmg, 2011; mckinsey and company, 2010). at present, the most well developed and popular reporting framework is the global reporting initiative (gri) (kpmg, 2013). in 2013, 78% of the n100 and 82% of the g250 used the gri framework (kpmg, 2013). the gri framework allows companies to select which of two levels of reporting they will use (gri, 2013). the highest level requires more comprehensive reporting across a variety of key aspects of economic, environmental, and social performance. the less comprehensive level still requires the discussion and disclosure of a variety of measures and factors related to economic, environmental, and social performance. each major aspect then has a set of indicators that are specific measures of a particular aspect. with respect to environmental performance, the aspects are materials energy, water, biodiversity, emissions, effluents and waste, product and services, compliance, transport, overall, supplier environmental assessment, and environmental grievance mechanism (gri, 2013). companies analyze which aspects are important or material for their company and then must, at a minimum, report one indicator for each aspect they have identified as material. an analysis of the frequency of reporting environmental performance measures across 1170 gri reports shows that 74% of the reports reported on direct energy use, 71% on total water withdrawal, and 81% on greenhouse gas emissions by weight (gri, 2014). according to the international finance corporation, more than 90 percent of companies globally are smes, accounting for more than half of all employment (ifc, 2012). nearly three quarters of all pollution can be attributed to smes (european union, 2010; williamson, lynch-wood & ramsay, 2006; hillary, 2004). for these reasons, they play a “vital role” in stewarding social and ecological resources (moore & manring, 2009). further, networked smes can behave much like a larger company in the marketplace (moore & manring, 2009), increasing their potential impact. beyond linkages among smes, large companies that use gri reports are expanding their reporting requirements along a limited 62 journal of small business strategy vol. 25 ● no. 2 ● 2015 set of indicators to their supply chains. thus smes in supply chains of large companies may expect to have environmental reporting become a part of their business as a result of their supply chain participation. the commonly reported environmental performance measures above may serve as a benchmark for what smes might be expected to produce. in short, sustainability reporting requirements are providing a powerful impetus and need for smes to integrate sustainability issues into their business decisions. in response to this and other pressures to address sustainability, in the next section of this paper, we present a structured practical approach for smes to incorporate sustainability considerations that starts to lay the groundwork for a sustainability strategy. by identifying key issues, this method seeks to remedy potential sustainability knowledge limitations and, because it is so straightforward, it can work within the resource constraints of smes in order for them to begin to proactively address sustainability. a structured approach to integrating sustainability issues given the increasingly large scale attention and reporting of sustainability efforts and the potential benefits of reporting, smes must engage in this endeavor. sustainable performance and associated reporting are unavoidable 21st century strategic issues. the benefits of sustainability efforts in smes go beyond any directly quantifiable financial benefits to include factors such as innovation, market share, brand, and compliance with regulations (conway, 2014; brammer et al., 2012; heras & arana, 2010). however, many smes may be unaware of these benefits (lawrence et al., 2006). a management approach that integrates sustainability into the overall management of an sme is viewed as an essential tool for incorporating sustainability into strategy (tsalis, nikolaou, grigoroudis, & tsagarakis, 2013). the well-known technique known as “swot” analysis (based on strengths (s), weaknesses (w), opportunities (o), and threats (t)) is common to most strategic management processes. it is an easily grasped framework intended to assess the suitability among perceived company capabilities and future environmental conditions. swot is a simple tool and thus is especially appropriate for the needs of smes’ given their limitations (lumpkin, mckelvie, gras, & nason, 2010). “swot analysis can be highly useful for microenterprises wishing to take stock of their strategic situation and forming a strategy that matches the situation…the swot framework can best be used as a starting point for analysis in that it provides the “raw material” to conduct more comprehensive … analysis” (lumpkin et al., 2010, pp. 4-5). research suggests that not knowing about available strategic tools, such as swot, may be what prevents their use in small smes (woods & joyce, 2003). many companies report that they lack a model to integrate sustainability issues into their primary business (kiron et al., 2013). unlike highly formalized approaches that may work well in resource-rich large companies, swot can be an ideal approach for relatively resource-poor, less formalized small enterprises to engage with sustainability issues. the goals of swot analysis include identification of key strategic issues – in this case related to sustainability, examination of relevant data and information, and evaluation of the potential magnitude and importance of 63 journal of small business strategy vol. 25 ● no. 2 ● 2015 issues. an ultimate goal is to help to assess a fit among company capabilities and its external environment in order to take competitive actions that seize opportunity, deflect or avoid threat, remedy or sidestep weaknesses, and develop and/or capitalize on capabilities (lumpkin et al., 2010). this concentrated focus on competitive issues and actions, along with other strategic tools, culminates with budgeting and resource allocation decisions that then drive actions. in a sustainability context, this represents the beginning of a sustainability strategy and resulting sustainability practices throughout the business. as a framework, swot can be graphically represented in a simple two-by-two matrix, as shown in figure 1. its accessible graphic representation allows key issues to be summarized and then debated within a participatory strategy-making session to best surface the ideas and specialized knowledge of key parties within the organization. it likely owes much of its popularity as a management tool to this accessibility and ease of use. figure 1: swot analysis matrix trends and factors in the external environment opportunities threats internal company capabilities strengths weaknesses in table 1, we outline a sustainability swot framework that is based on review of the sustainability and sme sustainability literatures. from this review, we identify and categorize major sustainability strategic issues within each cell of the matrix. in this presentation, we focus on environmental sustainability (i.e., ecological or planet issues) although the principles of the method and framework itself apply equally to the social dimension of sustainable business practice (i.e., people issues). while some of the strategic issues considered here may be unique to smes, many cut across business size and apply to a broad range of businesses. we begin our discussion of the sustainability swot with the external business environment and move then to internal company capabilities. the sustainability and sme literature on the pressure for and benefits to smes of adopting sustainability practices provide the basis for the issues in each cell. collectively these factors represent an informal checklist for smes to consider as they begin their discussions of their sustainability strategy. in the following discussion, we highlight some of the environmental sustainability issues from each cell of the matrix. this is a beginning for smes to stimulate their own consideration of such issues. environmental sustainability opportunities and threats in the business environment smes have experienced pressures to adopt sustainable practices (i.e., become aware of potential threats) and have benefited from adopting sustainable practices (i.e., have seized opportunities) (brammer et al., 2012). these are primarily in the areas of customers and markets, competitors, government incentives and regulation, other stakeholders such as value chain companies and workers, resource availability and sourcing, and macrolevel systemic factors. customers and markets opportunities related to customer and market demand such as new markets and market share can be traced to significant benefits that smes have experienced (bagur-femenias, llach, & 64 journal of small business strategy vol. 25 ● no. 2 ● 2015 alonso-almeida, 2013; brammer, et al., 2012; revell et al., 2010; heras & arman, 2010; lawrence et al., 2006; williamson et al., 2006). as just one example of this, a recent nielsen global study showed that half of all respondents in the 40-44 year old age group are willing to pay more for goods and services from sustainable companies (hower, 2013). to what extent do the sme’s existing customers or other potential customers who share their respective demographics place value on the environment with respect to products, services, and sustainable operating practices? these changing needs can facilitate retention of customers and entrance into new markets by offering environmentally friendly products or business practices; conversely, changing customer preferences can be a threat (kpmg, 2013; lawrence et al., 2006). are there opportunities for sustainability branding in key lines of business (kpmg, 2013)? do any of these offer a first mover branding advantage? as the sustainability trend continues to expand, these may decline over time. competitors. cost advantages from adopting sustainability practices (revell et al., 2010; kpmg, 2013) represent an opportunity to be more competitive. on the output side, other companies’ need for sustainable products and services in the sme’s existing supply chain may be an opportunity for sustainable sourcing. on the input side, evolving technologies such as solar energy and new technologies may offer operations and materials cost reductions. when a competitor promotes and brands itself as a green company (e.g., introducing new green products or services, reducing energy consumption, adopting renewable energy sources, etc.) that is a threat (bagur-femenias et al., 2013; brammer et al., 2012), especially if it’s “greenwash”. greenwash is advertising that falsely portrays a company as environmentally responsible. government incentives and regulation. a lack of legislation and regulation is an opportunity for an sme to define its sustainability efforts free of constraints imposed by government stakeholders. at the same time, pending legislation and/or regulation may be an opportunity for branding and early mover advantages that demonstrate proactive compliance (brammer et al., 2012; heras & arana, 2010; revell et al., 2010; zorpas, 2010). reporting environmental performance could position the sme to influence the shape of pending regulation, staving off the threat. regulation with respect to environmental impacts by business can be expected to continue (gri, 2013). other stakeholders. stakeholders can represent either opportunities or threats. some stakeholders, such as investors, may resist sustainable practice while others demand it. balancing competing stakeholder interests with respect to sustainability can be an important strategic issue (kpmg, 2013). smes with improved environmental performance may represent a lower level of risk to financiers, investors, and insurers because of factors such as positive brand effects and a reduced likelihood of adverse publicity (e.g., dumping of toxic waste reported in the local newspaper) (kpmg, 2013; revell et al., 2010). some supply chain partners require reports on sustainable performance (brammer et al., 2013; bagurfeennias et al., 2013; revell et al., 2010). 65 journal of small business strategy vol. 25 ● no. 2 ● 2015 table 1: swot analysis framework for potential environmental sustainability issues opportunities • cust. dem. associated with valuing sustainability • evolving customer demand for sustainable operations, products, or services • revenue generating products/services that address sustainability concerns of existing customers • revenue generating product/service extension to assist customers in reducing their env. impacts • new market segments to target with sustainable products/services • sustainability branding in key lines of business, including first mover advantage • comp. not competing based on sustainability brand • regulation (lack of or pending) • stakeholder demand for change • supply chain competitive sourcing • material cost reductions • emerging technologies threats • cust. lack of awareness and/or commitment • competitors’ sustainable products/services/operations • competition branding itself based on environmental impacts, including “green wash” • insufficient gov. incentives and/or fin./investors to facilitate inv. in eco-efficient processes • regulation (lack of or pending) • value chain partners demand sustainable oper. • stakeholder resistance to sustainability • difficulty attracting and retaining talented workers who value sustainability • potential shortages in key resources/inputs • key resources/inputs facing dramatic price increases and/or price volatility • rising energy costs • unanticipated syst. economic and sociopolitical impacts of climate change, water shortages, etc strengths • a sustainability strategy is in place • executives and owner(s) committed to sustainability • employees value sustainability • have taken actions to innovate at improving environmental performance • a company history of proactive strategic choices • experience mapping processes • risk management capabilities knowledge base & structured process(es) for plan. • good understanding of stakeholder and customer preferences for sustainability •roles and responsibility for sustainability allocated and clearly communicated • strong comp. mission and history based on ethical serv., comm. responsibility, and long term effects • organization and culture supports innovation and cross disciplinary collaboration • indirect org. capabilities in sustainability • well-developed information systems, performance measurement and reporting • resource base is robust weaknesses • no sustainability strategy • lack of commitment from managers/owner(s) • lack of/low commitment from employees • business case for sustainability is not apparent • no current hist. & track record of actions taken • knowledge base and capabilities for sustainability readiness planning are weak • poor understanding of how stakeholders and customers value sustainability • poor or no formal allocation of responsibility for sustainability initiatives and outcomes. • heavily dependent on ecologically unsustainable processes • company culture places low value on innovation • few, if any, systems for performance measurement and reporting • lack of infrastructure for working with suppliers • facing other significant competitive challenges associated with resource constraints sources: avram & kuhne (2008), bagur-femenias et al. (2013), baumgartner (2009), brammer et al. (2012), bonini & bove (2014), bos-brouwers (2010), cima (2011), cgma (2014), clarkson et al. (2011), ernst & young (2013), gri (2013), heras & arman (2010), hoogendoorn et al. (2015), hower (2013), jasch (2009), kiron et al. (2013), klewwitz & hansen (2014), kpmg (2013), lawrence et al. (2006), leonidou et al.(2014), loucks et al. (2010), lumpkin et al. (2010), revell et al. (2010), the economist intelligence unit (2008), williamson et al. (2006), woods & joyce (2003), zorpas (2010). 66 • journal of small business strategy vol. 25 ● no. 2 ● 2015 customers may be able to readily switch suppliers to those with superior performance. dramatic price increases and/or volatility in key resources threaten the ability to contain costs and maintain pricing advantages. companies may also experience difficulty in attracting employees who value sustainability. resource availability and sourcing. reductions in energy consumption represent an opportunity. rising energy costs also can threaten the operations of most smes and should stimulate efforts to alter existing energy paradigms. potential shortages of key inputs and price volatility are threats that warrant close attention (ernst &young, 2013). similarly, if an sme’s suppliers are themselves part of a supply chain that is vulnerable to environmental disruption (e.g., drought) then these potential disruptions can be a threat. macro-level systemic factors. unanticipated systemic economic and sociopolitical impacts of climate change along with water shortages, rising sea levels, rising greenhouse gases, and related environmental catastrophes represent threats to business (kiron et al., 2013). these events present difficult issues that may require scenario planning sessions and other approaches for smes to try to surface potential impacts and devise appropriate responses. the swot analysis can help to bring them to the agenda. environmental sustainability company strengths and weaknesses environmental sustainability capabilities are primarily in the categories of strategy and commitment, knowledge and experience, organization, and resources. potential strengths with respect to environmental action and reporting are related to the competencies necessary to obtain the benefits smes have associated with adopting sustainable practices and reporting on their environmental performance; lack of internal competencies to obtain the benefits of sustainability is a weakness. strategy and commitment. a company that already has developed a sustainability strategy has an important capability to deal with an external threat or an opportunity as it emerges. lack of a sustainability strategy and an apparent business case for sustainability are related weaknesses. companies that thoroughly address sustainability have developed both a business case for sustainability and have a strategy (kiron et al., 2013, p. 3). if an sme’s owner and employees are committed to sustainability, these preferences can motivate development and implementation of programs to reduce environmental effects (e.g., purchasing, energy efficiency, product redesign, process changes) (hoogendoorn, guerra, & van der zwan, 2015). without commitment at the top and at all levels, sustainability efforts will be stymied. top management, along with customers, is the prime mover that determines commitment to sustainability (kiron et al., 2013; leonidou, christodoulides, & thwaites, 2014). involving employees in sustainability brainstorming and decision-making can ensure the best ideas and greatest commitment to implementation of changes as well as functioning to both attract and retain talented employees (leonidou et al., 2014). management capabilities such as allocation and communication of roles and responsibilities for sustainability provide universal clarity of expectations and tell others where to go for assistance. knowledge and experience. alongside strategy, a track record of actions to innovate 67 journal of small business strategy vol. 25 ● no. 2 ● 2015 at improving environmental performance is a key capability due to accumulated organizational learning to achieve benefits by being proactive (klewwitz & hansen, 2014; bos-brouwers, 2010; avram & kuhne, 2008). a knowledge base (becherer & helms, 2014) and structured process for sustainability planning enables the sme to treat it as a strategic issue and integrate it into core business decision making. part of this knowledge base should include a good understanding of customer and stakeholder preferences that support sustainability (loucks, martens & cho 2010). poor understanding or data to support understanding customer preferences for sustainable operations, products and/or services is a weakness. innovation in both process and products and services is important to attain the benefits of addressing sustainability (hoogendoorn et al., 2015; klewitz & hansen, 2014). for example, cost reductions are many times achieved by looking at the way an sme has always done things and finding new ways that reduce the use of inputs such as energy or water (bosbrouwers, 2010). improving reputation and brand require programs to already be in place to reduce impacts on the environment (e.g., product design to use less energy or lower disposal costs, improving the efficiency of the manufacturing process) (brammer et al., 2012; heras & arnan, 2010). experience mapping processes for new process installation or for improving efficiency or quality is a strength. material flow analysis maps the inputs to the business (e.g., types of materials, energy) and then outputs (e.g., waste) (jasch, 2009), identifying outputs to target to improve environmental performance. experience evaluating business risk also can be used to assess environmentalrelated risk so that steps can be taken to address the largest environmental risks (e.g., effluent or waste outputs from the business) (ernst & young, 2013; the economist intelligence unit, 2008). organization. tackling sustainability in a serious way requires support from the organization (kiron et al., 2013). not only commitment from top management but also allocation of formal responsibility for sustainability offers a strength (cgma, 2014). indirect weaknesses are latent capabilities that may limit response to sustainability challenges. this includes a company culture that places low value on innovation (baumgartner, 2009; bonini & bove, 2014). a lack of infrastructure can inhibit supply chain collaboration on sustainability issues or a crucial response to a supply chain partner’s new sustainability requirements (vaaland & heide, 2007). a well-developed performance measurement and reporting system lays a foundation for sustainability. sustainability reporting is made possible by a system for measuring and reporting environmental-related performance (e.g., lbs. of paper recycled, lbs. of toxic waste). reporting provides important impetus to develop programs that show improvements (cima, 2011). lack of systems for performance measurement and reporting preclude internal accountability and reporting sustainability performance to important external bodies or stakeholders (e.g., gri, governmental regulatory bodies). resources. a robust resource base is an important capability for a company that plans to take on sustainability issues in a substantive manner (clarkson, li, richardson, & vasvari, 2011). a lack of resources to back up initiatives can lead to forgoing financial and related benefits of sustainability, 68 journal of small business strategy vol. 25 ● no. 2 ● 2015 disenchantment with the effort within the organization, and superficial responses that will be readily discernible in external reporting, potentially undermining the company’s reputation with respect to sustainability. similarly, resources diverted to other significant competitive challenges can prevent an sme from developing a viable strategy for dealing with sustainability issues. in this section of the paper, we have outlined many of the key issues in each cell of a sustainability swot matrix that smes need to integrate into their sustainability strategy. in the next part of the paper, we discuss implications of the model, limitations, and future research. discussion and conclusions this framework offers a flexible but structured approach to smes to begin to formally integrate sustainability considerations into their overall business strategy, meeting an important need especially for the 98% of smes that operate with 20 or fewer workers (u.s. census bureau, 2013; u.s. census bureau, 2012). swot fits many smes’ context of limited resources and the framework’s identification of issues addresses their reported lack of awareness of the benefits of addressing sustainability (e.g., opportunities) (lawrence et al., 2006). a major practical implication of the framework and identification of key sustainability issues is as a tool to get started or continue to develop a sustainability strategy (lumpkin et al., 2010; nadim & lussier, 2010). the checklist items in the matrix enable smes to identify key strategic sustainability issues that warrant their attention. companies can seek then to optimize congruence between their internal capabilities and the external cells in the matrix as they examine the current status of the company and potential trends in the competitive (including regulatory and social) global environment with respect to sustainability. when an sme finds that it has many strengths that give it a readiness to engage in improving sustainability performance, it should take action and gain the advantage of being proactive (jenkins, 2006). this could begin with efforts to develop a better understanding of stakeholder and customer preferences regarding sustainability related performance standards and related issues (see gri, 2013; loucks et al., 2010). this preliminary assessment will point to follow-up steps such as to identify important sustainability impacts (e.g., emissions, waste) and their locations (e.g., community, customers, suppliers). strengths that are translated into further development of company capability will then lead logically to a reassessment of opportunities. such opportunities can be pursued to achieve some of the benefits of improved sustainability performance (e.g., cost reduction, brand enhancement, risk reduction). similarly, when an sme finds instead that, rather than strengths, it has many weaknesses in the presence of opportunities (e.g., customers who value sustainability) and/or threats (e.g., competitors branding themselves as green or marketing green products and services), it also must take action. in such a situation, the company is faced with a strategic imperative (i.e., critical and urgent) to take action to mitigate its weaknesses through steps to develop internal capabilities that address sustainability. beyond the initial assessment of capabilities relative to its environment, the sme can progress to gathering additional information as needed on company capabilities, 69 journal of small business strategy vol. 25 ● no. 2 ● 2015 stakeholder preferences, and relevant environmental trends. evidence of ecological impacts of unsustainable business practices is continually emerging and must be factored into company decisions in the 21st century. with this matrix, sustainability issues can be integrated with the rest of the sme’s strategic considerations and planning. from there, smes will have a clear mandate for budgeting and resource allocation decisions with respect to sustainability. development of organizational capabilities, especially environmental performance reporting, should be a ground floor strategy. for example, by tracking performance, one office products sme was able to quantify that it saved the equivalent of 0.5% of annual sales by developing and using reusable boxes from propylene to replace cardboard disposables (cgma, 2013). such results help to establish the business case that is important for a sustainability strategy (kiron et al., 2013). the sustainability swot is not the entirety of a strategic planning process – a potential limitation if the framework is viewed in isolation. another limitation is that the sustainability swot is better suited to smaller smes and those that have not yet begun to address sustainability in their core business decision processes. an examination of overall trends in social, economic, political, technological, and ecological arenas is a preliminary step to provide inputs to this analysis that we do not address here. similarly, it is expected that a company subsequently would integrate strategic issues emerging from this sustainability swot analysis into line of business strategic assessments of non-sustainability-related issues to arrive at integrated strategy. finally, a limitation of this paper is that we have focused only on issues related to environmental sustainability. integration of the social dimensions of sustainability also is possible in a similar process by using a sustainability swot. it is important to avoid establishment of a “parallel organization” for sustainability (schaltegger & wagner, 2006) with lesser priority which will tend to be minimized when times are tough. in fact, a purpose of the sustainability swot is to begin to draw attention to stakeholder and other concerns with sustainability implications that have the potential to affect the entire business. over time, it is likely and to be expected that sustainability issues (identified in the matrix in table 1) will become fully integrated into core business strategy as its sustainability strategy. future research could explore how this tool is deployed in smes of various sizes, perhaps using a methodology such as case studies. research might also investigate how it might be modified to suit industry differences (hoogendoorn et al., 2015), the effects of its use on outcome measures of smes’ sustainability performance, and the perceived usefulness of this element of a planning process at identifying critical opportunities, threats, strengths, and weaknesses within smes with respect to sustainability. in conclusion, this paper details the first known structured process to integrate sustainability issues into sme strategy and overall business considerations, meeting a current need that is increasing in urgency. with a focus here on environmental (i.e., ecological) sustainability, critical sustainability issues related to opportunities and threats in the business environment and with respect to company capabilities (strengths and weaknesses) are drawn from the scholarly literature and current studies of 70 journal of small business strategy vol. 25 ● no. 2 ● 2015 practice. identification of these issues provides an essential starting knowledge base for smes that have never before engaged in sustainability discussions and addresses an urgency for heightened awareness. the framework itself addresses the need for companies to find a structured way to integrate sustainability considerations, offering a method that is aligned with the significant resource constraints normally experienced by smes. it should require little in the way of staff support or financial resources to implement. it also offers a less formal and perhaps even familiar approach that may be better suited to these organizations, especially smaller smes (lumpkin et al., 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(2013). a framework development to evaluate the needs of smes in order to adopt a sustainabilitybalanced scorecard. journal of integrative environmental sciences, 10(3-4), 179-197. doi: 10.1080/1943815x.2013.858751. us census bureau (2013). retrieved from: http://www.census.gov/econ/nonemploy er/index.html. us census bureau (2012). retrieved from: http://www.census.gov/econ/susb/. vaaland, t.i., & heide, m. (2007). can the sme survive the supply chain challenges? supply chain management: an international journal, 12(1), 20-31. williamson, d., lynch-wood, g., & ramsay, j. (2006). drivers of environmental behaviour in manufacturing smes and the implications for csr. journal of business ethics, 67, 317-330. woods, a., & joyce, p. (2003). ownermanagers and the practice of strategic management. international small business journal, 21(2), 181-195. world commission on environment and development (1987). our common future. oxford: oxford university press. zorbas, a. (2010). environmental management systems as sustainable tools in the way of life for smes and vsmes. bioresource technology,101, 1544-1557. 74 http://www.census.gov/econ/nonemployer/index.html http://www.census.gov/econ/nonemployer/index.html http://www.census.gov/econ/susb/ journal of small business strategy vol. 25 ● no. 2 ● 2015 jeff shields is an assistant professor at unc asheville where he teaches in the area of cost and management accounting. he earned his in ph.d. in business administration from the university of pittsburgh. his research interests are in the use of management accounting information by small businesses in making business decisions (e.g., cost management, revenue management, seasonality, and sustainability). joyce m. shelleman is adjunct professor of management in the graduate school, university of maryland university college, and also serves as adjunct faculty in the leadership mba program at st. joseph’s college. she earned her ph.d. in business administration from the university of pittsburgh. her current research interests include small and micro-smes, planning and control systems, and sustainability management strategy. 75 journal of small business strategy vol. 25 ● no. 2 ● 2015 76 fall journal   volume 20, number 2 fall/winter 2009  23            the disproportionate costs of forming llcs vs.  corporations: the impact on small firm liability protection    eden s. blair  bradley university  esblair@bradley.edu    tanya m. marcum  bradley university  tmarcum@bradley.edu    fred f. fry  bradley university  ffry@bradley.edu      abstract    the llc is increasingly the ownership form of choice by nascent small business owners  as it has some advantages over corporations and sole proprietorships and  partnerships.  despite its advantages, some states have higher filing fees for llcs than  for corporations.  some states have significantly higher filing fees than other states for  both llcs and corporations.  as a result, emerging companies are often discouraged  from seeking liability protection, or they seek a corporation, reducing the flexibility  that could be provided with an llc.  our research shows that the disproportionate  cost of starting an llc is related to the percentage of llcs formed in comparison with  corporations.  this can have significant implications to small business owners since  they may be choosing ownership forms that are not advantageous to their particular  venture strictly based on initial filing costs.  these state policy decisions may lead to  long‐term tax revenue loss within states with higher filing fees.    keywords: small business, legal entity, llc, corporation, state fees    introduction  the limited liability company (llc) is a  relatively new form of entity that is  appealing for many small companies.   although the first llc statute was  passed in wyoming in 1976 (dreyer,  2003), most states did not adopt llc  regulations until the 1990s, and the last  state passed enabling regulation in 1997  (fox & luna, 2005).  llc regulations  strateg y  journal of small business  journal of small business strategy        24  vary state‐by‐state and, while attempts  have been made to make consistent  statutes among the 50 states with the  uniform limited liability act, these  attempts have failed (kleinberger &  bishop, 2007).  the llc is generally  considered to be superior to a c  corporation for small business owners  because of tax considerations, such as a  lack of double taxation, and superior to  an s corporation because of ownership  flexibility considerations.  llcs do not  require as many formal aspects such as  establishing a board of directors, by‐ laws, or shareholder restraints.  it is also  considered superior to sole  proprietorships and partnerships  because of liability considerations  (ribstein, 2003).  small business owners can easily access  many sources of information on llcs  and corporations and these sources fall  generally into one of two categories.   the first category is trade books found  in bookstores.  these books range from  an in‐depth treatise on forms of  ownership to a brief treatment found in  the idiot’s guide or dummies genre  (bellafante, 1998).  the second source of  information comes from textbooks when  small business owners take certain small  business, entrepreneurship or business  law classes.  these textbooks are most  likely small business and/or  entrepreneurship textbooks or are legal  textbooks used either in business  schools or law schools.  law school texts  will treat the topics in great depth for  law students, while business school texts  typically offer a few pages for the  aspiring small business owner.  these  sources generally leave small business  owners with limited access to detailed  information on the advantages of  forming an llc or corporation.    small business owners really need to  know the risks and rewards of various  ownership forms  for their potential  business.  however, small business  owners generally are not good strategic  planners.  they tend to be better at  creative tasks such as idea creation than  at managerial tasks like long‐term  planning (khandekar & young, 1985;  smith, hampson, chaston, & badger,  2003).  in addition, small business  owners are bombarded with a myriad of  tasks when starting a new business, so  they often make decisions based on  limited factors which may not lead to  quality decision making (blair, 2010).   this includes the possibility that small  business owners focus on the price to file  rather than the long‐term benefits of  one form of ownership over another.   concrete distinctions such as differences  in filing costs are easy for a small  business owner to quickly compare and  may be used more often when making  decisions on business forms, even if this  leads to poorer quality decisions.  due to the variance in regulations from  state to state, there is a wide disparity  among the states regarding filing costs  to launch a protected entity.  table 1  shows the filing costs for corporations  and llcs by state for the year 2007.  for  example, arkansas charges $50 to start a  corporation and also $50 for an llc, but  volume 20, number 2 fall/winter 2009        25    texas charges $300 for both a  corporation and an llc.  in addition,  while many states charge the same  amount for a corporation or an llc,  such as those stated above, some states  charge more for a corporation, like  california, and some charge significantly  more for an llc.   table 1 – costs to file for an llc and corporation by state (2007).  state  llc  filing costs  corporation  filing costs  state  llc  filing  costs  corporation  filing costs  ak  $250  $250  mt  $70  $70  al  $85  $95  nc  $125  $125  ar  $50  $50  nd  $125  $90  az  $50  $50  ne  $110  $60  ca  $70  $100  nh  $100  $100  co  $125  $125  nj  $125  $125  ct  $60  $275  nm  $50  $100  de  $90  $89  nv  $75  $75  fl  $125  $70  ny  $200  $125  ga  $100  $100  oh  $125  $125  hi  $60  $50  ok  $100  $50  ia  $50  $50  or  $50  $50  id  $100  $100  pa  $125  $125  il  $500  $175  ri  $150  $230  in  $90  $90  sc  $110  $110  ks  $165  $90  sd  $125  $125  ky  $40  $50  tn  $300  $100  la  $75  $60  tx  $300  $300  ma  $500  $250  ut  $52  $52  md  $100  $100  va  $100  $75  me  $175  $175  vt  $75  $75  mi  $50  $60  wa  $180  $180  mn  $160  $160  wi  $170  $100  mo  $50  $50  wv  $100  $50  ms  $50  $50  wy  $100  $100    to illustrate, illinois charges $175 for a  corporation, $500 for an llc, and $750  for a series llc.  it seems to us that  these costs can influence a small  business owner to choose one ownership  form over another.  we believe this is  true even if the amount is nominal, such  as the $325 difference in the above  journal of small business strategy        26  example.  our argument is that small  business owners, with the myriad of  decisions they make in the early stages  of business formation, often need  specific and easily comparable  information to make their decisions.   thus, a small business owner may see  the cost to file as an llc or corporation  as a way of evaluating their relative  merits and use it as a major decision  factor.  in addition, we believe that high  costs of forming either type of protected  entity can dissuade or bias a small  business owner from gaining desirable  liability protection and perhaps relying  solely on liability insurance, if anything,  to meet their needs.  there is a dearth of academic research  on the relative merits of different  ownership forms and especially a lack of  academic research on the relative costs  and benefits of llcs vs. corporations.   little is known about how the costs of  forming an llc or corporation impact a  small business owner’s decision to form  a particular business entity.  this article  takes the following form.  first, we  present a review of the literature on  limited liability companies and  corporations, focusing on the unique  advantages of each and the cost or  challenges of forming each.  we then  look at the relative costs of forming an  llc vs. a corporation on a state‐by‐state  basis and the relationship that cost has  with the number of llcs and  corporations formed.  next, we examine  how these implications could impact  how a small business owner chooses a  particular form of business.  we will  then discuss those findings and the  implications they may have for public  policy as well as for small business  owners seeking liability protection.   finally, we will suggest avenues for  future research regarding related topics.  literature review  we begin our literature review with a  comparison of the benefits to a small  business owner between corporations  and llcs as the most common choices  of business formation that provides  liability protection.  other business  forms, such as sole proprietorships and  partnerships generally lack liability  protection and are not discussed in  detail here.    corporations  corporations have been in existence for  centuries.  the first corporation in the  united states was formed in 1636 and is  known today as harvard university  (kaufman, 2008).  because of their  longevity, the benefits as well as the  problems of the corporate form of  business are well known, and both state  statutes and case law regarding  corporations are well accepted in the  legal profession (blair, 2004).  perhaps  the most significant advantage of  forming a corporation is the concept of  limited liability (carney, 1998).  owners  of sole proprietorships and partnerships  are subject to unlimited liability in the  case of lawsuits or claims by creditors.   that is, they can lose not only what they  have invested, but also other wealth or  assets held personally in the name of the  owner.  the corporation provides  volume 20, number 2 fall/winter 2009        27    protection of those personal assets not  invested in the business itself.  thus, if  an owner invests a total of $50,000 in the  business, the lien the creditors obtain  can only attach up to $50,000.  they also  cannot take other assets outside the  business, except when a lender requires  the owner to sign personally for a loan  rather than in the name of the  corporation, which is a separate legal  entity (soderquist, 2000).    some small business owners may  substitute liability insurance to protect  them against losses instead of  incorporating their business or forming  an llc.  complete liability insurance for  a business should include workers’  compensation, auto, general liability and  property/casualty coverage, plus an  added layer of protection, the umbrella  policy.  too little insurance leaves the  business vulnerable.  all insurance  premiums are based on the risks  involved within the business, thus  varying from business to business.  at  first glance, this may seem like an  approach to reduce the costs of business  formation; however, insurance coverage  may not cover potential litigation,  leaving the small business owner who  remains a sole proprietor with high out  of pocket liabilities, usually resulting in  risk to personal assets.  all businesses,  regardless of their entity, should have  proper insurance coverage to protect the  entity as well as the owner. in addition,  some states have passed laws limiting  the tort liability judgments that can be  awarded by juries.  small business  owners should not interpret this as  minimizing their liability risks in their  business.  corporations also provide the advantage  of ease of sale of all or portions of the  business (carney, 1998).  in sole  proprietorships and partnerships,  owners own actual assets in the  business.  thus, if a potential owner  desires to buy into the business or a  current owner wants out of the business,  the owners must go through the often  laborious task of valuing each of the  assets of the company and then deciding  how the new ownership set will take  possession of those assets (tuller, 1994).   in a corporation, owners own shares of  stock in the company.  thus, adding or  subtracting owners involves only the  process of agreeing on the value of the  stock itself and not the individual assets  of the company (carney, 1998).  in the  case of publicly held corporations, the  value of stock or other assets is  determined by the market and can easily  be traded.  a third benefit of the corporate form is  the relative ease of raising capital.  since  the corporation utilizes shares of stock  as ownership units, it is relatively easy to  issue more shares of stock (shleifer &  vishny, 1997).  private or public  placements of stock can yield substantial  sums of capital to operate the business.   adding equity capital through issuance  of additional stock also then sets the  stage of leveraging that equity by adding  still more capital in the form of debt.   journal of small business strategy        28  thus, growth of a business is enabled by  the corporate form of business that is  typically beyond the capacity of many  sole proprietorships and partnerships.   we believe this is one reason why  corporations are more advantageous for  fast‐growing entrepreneurial firms,  which often need to raise capital in  stages, than the more steady growth  found in most small businesses.  the major disadvantage of the corporate  form of ownership is the concept of  double taxation (morck & yeung, 2005).   corporations are taxed on their income  since they are a separate entity.  if the  owners of the corporation receive  dividends from the corporation, then  those dividends are also taxed as income  to the shareholders.  owners of  corporations can overcome this double  taxation, however, by declaring the  business as an irs subchapter s  corporation.  this provides the pass‐ through taxation for owners (goolsbee,  2004).  there are a number of  limitations to the subchapter s  corporation.  these include that the  owners of the subchapter s corporation  must be individuals rather than other  companies, trusts, and other entities,  they must be us citizens, and the  number of owners is limited to 100  shareholders (goolsbee, 2004).  the sarbanes‐oxley act of 2002 (sox), a  federal law, provides that large  corporations that are subject to public  reporting requirements of the securities  and exchange act of 1934 must take  greater internal control of financial  reporting.  one goal of sox is to  promote greater investor protection by  providing for criminal liability for  violations by corporations.  although  these laws are uniform for all  corporations regardless of their state of  incorporation, the requirements do not  pertain to most small business owners.    limited liability companies  the limited liability company (llc) is a  relatively recent phenomenon.  the first  llc was formed in wyoming in 1977  (dreyer, 2003), but general acceptance of  llcs throughout the united states  developed primarily during the 1990s  (murdock, 2001).  limited liability  companies are now accepted in all  states, although states do vary somewhat  in their treatment (murdock, 2001).  limited liability companies have the  same limited liability protection as  corporations (friedman, 2004).  like  corporations, they must be registered  with the state in which they are formed  or are doing business.  they can also  have the pass‐through taxation  comparable to sole proprietorships and  partnerships.  thus, they have many  similarities with the subchapter s  corporation.  the advantage of llcs,  however, is that they have more  flexibility than the subchapter s  corporation (murdock, 2001).  they can  have more than one form of ownership  such as individuals, other businesses,  and trusts.  they can be managed either  by the membership of the llc or by a  manager who may or may not be a  member of the llc.   volume 20, number 2 fall/winter 2009        29    members of an llc adopt an operating  agreement that specifies the voting  rights, withdrawal rights and issues,  responsibilities of members, and how  the llc is to be managed.  the  operating agreement determines  whether the members manage the llc,  delegate that power to one of their  members, or hire an outside manager  (jennings, 2009).  however, these are  much more flexible than the articles of  incorporation that are required by state  corporate formation statutes.  llcs can  have, for example, shareholders from  outside the united states, unlike  subchapter s corporations, and are not  required to have a board of directors or  annual meetings as required by  corporations.    disadvantages of limited liability  companies are relatively minor  (murdock, 2001).  like the corporation,  forming an llc requires filing with a  state secretary of state’s office (or  similar government office), thus there is  some paperwork that must be completed  (ribstein, 2008).  it also typically  requires payment for submitting an  annual report fee.  these fees often vary  from state to state from as little as $0 in  minnesota to as high as $500 in  massachusetts.  an llc also requires an  operating agreement which includes the  determination of whether the llc is  manager‐managed or member‐managed  (ribstein, 2008).  since llc enabling  statutes are relatively new in many  states, there has not been a significant  amount of case law filed to help owners  anticipate how legal disputes might  affect their business (barringer &  ireland, 2008).    state filing costs and other fees:   perspectives of the states  states levy taxes and other fees on state‐ chartered entities in order to generate  fees.  this is due partially to offset the  expenses incurred by each state because  of the additional paperwork and  regulatory monitoring of the business  entities.  a more significant reason for  the fees, however, is that the fees add  money to state treasuries.  thus, there is  a quandary with setting state‐imposed  fees.  businesses and their associations  attempt to reduce the cost of operating a  business by lobbying for lower fees and  taxes.  state governments are sensitive to  their constituents but realize that  lowering fees also lowers revenues to the  state.  state budget offices will resist any  legislation that has the effect of reducing  revenues even though the action could  be interpreted as a business‐friendly  move (wetzler, 1993).  states will  generally only approve modifications to  existing laws that make these fees more  equitable when they can ensure that the  net result is revenue‐neutral or revenue‐ positive (c. moles, personal  communication, march 9, 2009).  a case can be made that the advent and  growth of llcs are revenue‐negative,  thus bringing less revenue into the state,  either when fees for llcs are less than  for corporations or when fees for llcs in  one state are more desirable than fees in  journal of small business strategy        30  another state.  fox and luna (2005)  concluded that, indeed, the proliferation  of llcs across the united states did  have a negative impact on state revenue  generation, because of the loss of double  taxation revenues associated with  corporations.  the total impact of llcs  on state revenues, however, should  consider whether owners choosing llcs  previously held c corporations, s  corporations, or one of the non‐entity  forms of ownership, such as a sole  proprietorship or partnership.  business  owners that switch from a sole  proprietorship or partnership to an llc  will increase revenues to the state  because no initial filing fees or renewal  fees are collected for sole  proprietorships or partnerships.  these  business owners would most likely  switch their venture to an llc if the  filing costs were lower.  thus, lower  filing fees could actually increase  revenues to the state by the increase in  the volume of llcs.    state filing costs and other fees:   perspectives of the small business  owner  considering the impact of llcs from the  perspective of the small business owner  rather than state governments, the issue  is one of costs to form and operate the  business as well as the ease of operation  of the business itself.  one of the  advantages of sole proprietorships and,  to an extent, partnerships, is the ease of  formation (doran, whittenburg, &  bunn, 2004).  this ease of formation  relates both to the lack of filing  requirements and the relatively low cost  of forming the business.  conversely,  owners of both corporations and limited  liability companies are required to file  articles of incorporation for corporations  or articles of organization for llcs and  pay necessary fees (miller, 2009).   owners of start‐up companies must  decide which form offers the most  benefits for the cost (friedman, 2004).   owners of existing companies may, at  some time, consider whether their  current ownership form still meets the  needs of the company as it grows.  articles of incorporation must include  the name of the corporation, its  shareholders’ names and addresses, and  shareholder rights.  the fees for  corporations vary by state.  some states  charge as little as $50 while others, such  as texas, charge up to $300.  states may  charge a franchise tax based on the size  of the capital contribution.  in addition,  states charge for incidentals such as  change of address, dissolution,  amendments of articles of incorporation,  late filing penalties, and others  (spadaccini, 2007).  limited liability companies file articles  of organization which are similar to the  articles of incorporation.  the articles of  organization include names and  addresses, the operating agreements,  and other issues.  fees for these vary  from state to state with arizona,  oregon, and others charging $50 and  illinois and massachusetts charging  $500.  in addition, some states allow a  series llc, which isan llc within an  volume 20, number 2 fall/winter 2009        31    llc.  the series llc is one or more llcs  formed as subsidiaries to a main llc.   there are seven states with series llcs,  delaware, illinois, iowa, nevada,  oklahoma, tennessee, and utah.  series  llcs are useful when different llcs  (such as real estate properties) have  differing risk factors, and the owner  desires to keep them separate but under  the overall ownership of a single llc.   again, illinois tops the list of statutory  filing fees for a series llc at $750.  states  typically require annual reporting and  assess fees for those annual reports,  reservation of names, amendments,  dissolution, and other issues.  it is the filing fees and tasks associated  with forming and reporting llcs or  corporations that are of concern to a  small business owner considering which  ownership form of business to use  (friedman, 2004).  sole proprietorships  cost virtually nothing to start.   partnerships require only partnership  agreements (and do not require that in  all states).  partnership agreements  should be done with the help of an  attorney.  however, since this adds  additional costs, even if relatively minor,  some small business owners may choose  to file their business form independently  (schanz, 2007).  corporations and llcs,  however, have the cost of filing plus the  cost of attorney assistance if the small  business owner seeks legal advice.  this  cost can be significant for start‐up  companies, to the extent that some  small business owners elect not to avail  themselves of the benefits of  corporations or llcs because of the  added expense.  further, in states that  charge more for an llc than a  corporation, small business owners may  be encouraged by the disproportionate  costs to adopt the corporate form of  business rather than the llc, despite  the potential disadvantages for doing so.    theory development  our interest is in determining whether  or not the filing fees and other costs of  forming the business dissuade small  business owners from adopting business  organizational forms that limit liability.   in addition, we are interested in whether  states that assess higher fees for llcs  will see fewer llcs registered.  based upon the literature research above  and analysis of information regarding  corporations and limited liability  companies among states, we make the  following hypotheses.  when filing fees  are higher, we would expect fewer small  business owners choosing that form of  business.  states with lower fees are  more likely to have greater numbers of  registered businesses than in those  states with high filing fees.  these  hypotheses test how much the fees to  file as a corporation or llc encourage or  deter a small business owner in that  state compared to other states with  lower or higher filing fees.  h1a:  states requiring higher fees for  establishing corporations will have a  lower percentage of their total businesses  journal of small business strategy        32  registered as corporations than llcs  than those states with lower fees.  h1b:  states requiring higher fees for  establishing llcs will have a lower  percentage of their total businesses  registered as llcs than corporations  than those states with lower fees.  even though many states charge  essentially the same fees for llcs as for  corporations, some states charge  substantially higher fees for llcs.  the  reasoning here is most likely that  corporation fees were established many  years ago, and it is a difficult legislative  process to amend the statutes to keep up  with cost or revenue needs of the states.   llcs, however, are relatively new.  thus,  state legislatures or secretary of state’s  offices may have seen higher llc filing  as a revenue‐positive move when the  statutes were created, generally in the  early 1990s.  these revenues are positive  in the sense that since new legislation  was needed to create the llc statutes,  higher fees, relative to the fees of  corporations, were also included with  the legislation, and higher fees should  lead to more revenue.  however, this  discrepancy in costs might lead a small  business owner to choose to file as a  corporation.  h2:  states that charge  disproportionately higher fees for llcs  compared with corporations will have a  smaller ratio of their total businesses  formed as llcs.  hypothesis 2 asserts that these higher  fees in comparison with that state’s  corporation filing fees will encourage  small business owners to form  corporations rather than forming llcs.   those small business owners will most  likely utilize the corporation with  subchapter s treatment or will use a sole  proprietorship or partnership, which will  likely not protect them from personal  liability.    methodology  fees charged for llcs and corporations  were determined by checking each  state’s secretary of state’s office (or  similar state agency) website.  website  addresses were obtained from michael  spadaccini’s (2007) forming an llc in  any state, as well as independent  internet searches.  tables 2a, 2b & 2c  show the differences in costs of filing for  corporations and llcs by state, with  states divided into three categories:   states with the same filing fee for llcs  and corporations, ones with higher llc  filing fees than corporations, and ones  with lower llc filing fees than  corporations.  the numbers of  corporations and llcs filed each year  were provided by the international  association of commercial  administrators annual report of  jurisdictions.  many states charge a  primary filing fee as well as a bevy of  secondary fees for minor aspects, such as  reserving a name, dissolving the entity,  or even changing the location of the  business.  while we note these as  additional costs, we do not include them  in our analysis for several reasons.  first,  some initial fees, such as filing to reserve  volume 20, number 2 fall/winter 2009        33    a name, may be paid earlier than the  decision to form as an llc or  corporation, and thus may not be  considered in the business formation  decision.  second, states are not  consistent on what fees they require, so  reliable control variables for these costs  could not be obtained.  third, we believe  that small business owners are looking  at the initial filing fee to make their  business formation decision, not later  fees, which is consistent with our belief  that small business owners look at one  concrete factor (the differences in filing  fees) without considering the long‐term  impact of later annual renewal costs.      table 2a – filing costs ‐ states with equal costs to file (2007)  state  llc  corporation  state  llc  corporation  ak  $250  $250  nc  $125  $125  ar  $50  $50  nh  $100  $100  az  $50  $50  nj  $125  $125  co  $125  $125  nv  $75  $75  ga  $100  $100  oh  $125  $125  ia  $50  $50  or  $50  $50  id  $100  $100  pa  $125  $125  in  $90  $90  sc  $110  $110  md  $100  $100  sd  $125  $125  me  $175  $175  tx  $300  $300  mn  $160  $160  ut  $52  $52  mo  $50  $50  vt  $75  $75  ms  $50  $50  wa  $180  $180  mt  $70  $70  wy  $100  $100        table 2b – filing costs ‐ states with greater costs to file an llc (2007)  state  llc  corp.  diff.  state  llc  corp.  diff.  de  $90  $89  $1  ne  $110  $60  $50  fl  $125  $70  $55  ny  $200  $125  $75  hi  $60  $50  $10  ok  $100  $50  $50  il  $500  $175  $325  tn  $300  $100  $200  ks  $165  $90  $75  va  $100  $75  $25  la  $75  $60  $15  wi  $170  $100  $70  ma  $500  $250  $250  wv  $100  $50  $50  nd  $125  $90  $35          journal of small business strategy        34    table 2c – filing costs – states with less costs to file an llc(2007)  state  llc  corp.  diff.  state  llc  corp.  diff.  al  $85  $95  $10  mi  $50  $60  $10  ca  $70  $100  $30  nm  $50  $100  $50  ct  $60  $275  $215  ri  $150  $230  $80  ky  $40  $50  $10            for the study, the authors gathered u.s.  state‐by‐state data on llc and  corporation filing costs and the numbers  of llcs and corporations filed per year  from the international association of  commercial administrators annual  report of jurisdictions as well as other  publically available data sources.  data  from 2006 to 2008 were entered.   because of a lack of independence  among data from one state across three  years, only one year’s data was used for  each state.  2007 data was chosen  because that year included the most  complete data and was the most recent  economically stable year, since in 2008  there was a drastic economic recession.   the 2007 data was used when this data  for the state was available (n = 42 states).   to make this dataset as complete as  possible, 2008 data (n = 2 states) and  then 2006 data were used for the  analysis (n = 4 states), giving a total  sample size of n = 48.  due to missing  data, our dependent variable has 46  cases.  the dependent variable used for this  analysis is the filed ratio, the ratio of  the number of llcs filed over the  number of corporations filed in that  state for the year collected.  this ratio  demonstrates how many more or fewer  lccs were filed than corporations filed  in that year, with values above 1 meaning  more llcs were filed and below 1  meaning fewer llcs were filed than  corporations.  the following  independent variables are used for this  analysis:  • llc cost – the cost, in u.s.  dollars, for a business to file as  an llc, mandated by each state.  • corp cost – the cost, in u.s.  dollars, to incorporate a  business, mandated by each  state.  • cost ratio – the ratio of llc  filing costs over corporation  filing costs.  values greater than  one demonstrate a greater cost  for filing a firm as an llc than  incorporating in that state.  • cost difference – the dollar  value difference in llc filing  cost minus the corporation  filing cost.  results and discussion  figure 1 shows the means of the average  ratio of llcs to corporations filed  divided into three categories:  those  states where filing costs for llcs are  greater than corporations, those where it  is less, and those where the costs are  volume 20, number 2 fall/winter 2009        35    equal.  table 3 reports key descriptive  statistics for the main variables.  pearson  correlations are reported.   the filed ratio  variable was inversely correlated (r = ‐ 0.31, p < 0.05) with llc cost, suggesting  that higher costs to file an llc was  correlated with a lower ratio of llcs  filed compared to corporations,  supporting h1b.   figure 1 ‐ the mean ratio of llcs to corporations filed by the cost differences  of filing as an llc or corporation        table 3 ‐ correlation matrix      n  mean  s.d.  1  2  3  4  5  6  1. filed ratio  46  2.87  1.91              2. llc cost  48  $128.17  $98.66  ‐.31*            3. corp cost  48  $110.54  $63.09  .12  .63**          4. llc filed  46  28,564.33  27,383.00  ‐.06  ‐.03  .02        5. corp filed  47  15,974.68  25,357.65  ‐.38*  .13  .01  .77**      6. cost ratio  48  1.19  .53  ‐.40**  .63**  ‐.10  ‐.08  .15    7. cost  difference  48  17.63  76.79  ‐.31*  .42**  ‐.17  ‐.01  .11  .80**  * p < .05  ** p < .01  journal of small business strategy        36    the correlation between filed ratio and  corp cost was not statistically significant;  suggesting the cost to file a corporation  is not related to more llcs being filed  than corporations, which suggests no  support for h1a.  filed ratio and cost  ratio were significantly correlated (r = ‐ 0.40, p < 0.01), suggesting that, when  llc filing costs are higher than  corporation filing costs, fewer ventures  file as an llc compared to corporations,  providing support for hypothesis 2.  this  proportional difference also holds true  when examining the actual dollar  difference (cost difference) between the  cost to file as an llc and a corporation  (r = ‐0.31, p < 0.05), providing additional  support for h2.  we used a hierarchical regression to test  the hypothesized relationships between  the filed ratio variable and the various  filing costs variables mentioned above.   these three models appear in table 4  and depict the effects of entering  additional variables into the equation.   model 1 examines the effects of the  straight dollar difference between llcs  and corporation filing costs and it ability  to predict the proportion of llcs to  corporations filed.  model 2 added the  variable of the ratio of differences in the  costs of llcs over the costs of  corporation filings.  model 3 included  the costs to file an llc and the costs to  file a corporation, although llc filing  costs were excluded from the analysis  due to multicollinearity effects.  the  only significant predictor in the variables  included for the different proportion of  filings was the difference between llc  and corporation filing costs, which  provides additional support for h2.   adding additional variables to the model  did not improve the predictability of  model 1.    table 4 ‐ hierarchical regression results predicting ratio of llcs over  corporations filed.    filed ratio  variable  model 1  model 2  model 3  cost difference  ‐ 0.50**  ‐ 0.67*  ‐ 0.72*  cost ratio    0.20  0.25  corporation filing costs      0.13  r2  0.25  0.26  0.27  adjusted r2  0.23  0.22  0.22  δ adjusted r2    0.01  0.02  f  14.56**  0.46  0.92  * p < .05  **p < .01    conclusion  this article finds evidence that state  policies towards filing fees are an  important factor when initial business  organizational decisions are made by  start‐up companies.  states with equal  volume 20, number 2 fall/winter 2009        37    costs between filing for an llc or a  corporation and states in which it costs  less to file for an llc than a corporation  typically have a higher proportion of  ventures filed as an llc than as a  corporation than those with greater  differences in costs.  this suggests that  small business owners do use the cost to  file between the two entities as a  decision factor when choosing between  filing for an llc or a corporation.  this  may mean that small business owners  lose the benefits of greater flexibility and  fewer restrictions of an llc because they  see incorporating as a less expensive  alternative.    there are, however, some disadvantages  to changing the fee structure.  illinois,  with the highest disparity between llc  filing costs ($500) and corporations  ($125) reported that they would stand to  lose almost $7 million (of the forecasted  $27.2 billion in revenues (quinn, 2009))  if the state lowered their filing fees  (moles, 2009b).  however, this  assumption made by the secretary of  state’s office, does not account for  additional filings if small business  owners switch to an llc from their  existing sole proprietorship or  partnership.  it is possible that lower  filing fees could encourage more small  business owners to file as an llc, thus  increasing state revenues.  state laws regulating the formation of  business entities, their operation, and  dissolution are unique to each state,  which could have an impact on business  formation decisions.  however, relatively  uniform laws have been adopted by  most states in the areas of partnerships,  i.e. the uniform partnership act (and  subsequent revisions) and corporations,  i.e. the model business corporation act.   in an attempt to create a uniform  template for state legislatures to adopt,  the uniform limited liability company  act was adopted by the national  conference on commissioners on  uniform state laws by the u.s. in 1996;  however, as of 2002, only eight states  had adopted those regulations.  despite  this lack of adoption and given that the  laws for the formation of various  business entities are state laws, not  federal laws, most laws are very similar  in nature.  we believe that this  uniformity suggests that the relatively  minor state statute and liability practice  differences do not have an impact on the  business formation decision.  implications  as the greatest difference between llc  and corporate filing costs is $325, and  the most expensive filing cost is $500,  some might argue that the expense paid  to file is negligible when compared to a)  the risk of liability if a small business  owner does not form an llc or  corporation, or b) the risk of inflexibility  and greater requirements of a  corporation because it is more expensive  to file as an llc.  however, it does  appear that there are a smaller  proportion of filings of llcs compared  to corporations when the filing costs of  journal of small business strategy        38  llcs are higher than corporations.   anecdotal evidence from discussions  with small business owners supports this  assertion.  despite the relatively small  cost to file in comparison to all start‐up  costs, small business owners do seem to  take these costs into account.  small business owners are faced with  numerous decisions that they must  make early on in their venture.  as  stated earlier, these owners generally are  not nearly as good at the managerial and  planning tasks as they are with the  creative tasks, such as opportunity  recognition and product development  (khandekar & young, 1985; smith et al.,  2003).  thus, with the dozens, if not  hundreds, of decisions they make early  in the business formation process, small  business owners might prioritize their  time and energy on more interesting and  creative aspects of starting their firm.   they may choose simple, specific  factors, like filing fees, when making  decisions on business forms of  ownership.  sifting through the various  advantages and disadvantages of  forming one business form over another  takes longer than comparing two  separate dollar values and often requires  the use of a lawyer and/or an  accountant, which adds to the  complexity in making a decision as well  as the additional legal and accounting  fees.  small business owners may be  making poor business ownership  decisions in lieu of ease in evaluating the  process.  these oversimplified decisions can put  the small business owner at risk.  first,  small business owners may choose the  easier and less expensive forms of  business, like a sole proprietorship,  which puts them at personal risk for  liabilities incurred by the firm.  second,  they might choose a corporation despite  an llc having the greater flexibility and  tax incentives they need, or choose an  llc when they are planning to grow  into a large, public firm, where a  corporation has greater advantages.   changing forms of business once the  business is in operation is expensive and  time consuming.  firms have to wind  down their businesses, in essence  shutting down, to reform as another  form.  this not only costs money, time  and paperwork, but it isalso a taxable  event.  small business owners  uneducated on the advantages and  disadvantages of each form are at the  greatest risk of using differences in cost  as a major decision factor.  educated  small business owners are at less risk,  but are still probably likely to use filing  costs as a factor when the differences are  greater.  a small business owner  knowledgeable about the characteristics  of each form of business in a state with  equal costs to file for an llc or  corporation will probably make the best  decision based on the relative merits of  each business ownership form.  states argue that lowering the filing fees  for an llc will hurt the state, since  revenue from filing fees will decrease.   however, this makes the assumption  that the number of llcs filed each year  volume 20, number 2 fall/winter 2009        39    will remain the same.  this assumption  is likely to be incorrect.  high llc filing  fees may dissuade a number of small  business owners from choosing to form  an llc and instead remain a sole  proprietorship or partnership.  this has  two implications for states.  first, lower  llc and corporation filing fees may  cause more businesses to switch from  sole proprietorships or partnership to an  llc or corporation.  thus, revenue lost  from lowering the filing fee may be  made up and surpassed because of  higher volume of llc filings.  second,  the states run a financial risk when more  of the small business owners in their  states remain unprotected from liability.   for example, if an employee is disabled  in a workplace accident and a firm is  unprotected, the employee may end up  on state disability when the financial  resources of the firm and the personal  assets of the small business owner are  exhausted.  even if the employees do not  need public assistance, the income tax  revenues of the firm in the case of a  corporation, or the small business owner  in terms of the corporation and llc,  would diminish if a firm must close  because of an incident in which it was  not protected from liability.  future research  as stated above, while states like illinois  could lose revenue if they reduced their  filing fees, it is possible that ventures  that are currently sole proprietorships or  partnerships might be more likely to file  as an llc if the costs to do so were  lower, thus perhaps making up or even  surpassing revenue from filing.  a  possible future study might look at how  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of entrepreneurship at bradley  university.  her primary research and  teaching interests are in entrepreneurial  cognition, venture financing, and  creativity and innovation.  tanya marcum is an assistant professor  of law at bradley university.  her  research interests include business and  labor law.  fred f. fry is the turner chair of  entrepreneurship, emeritus, at bradley  university.  his research interests  include entrepreneurial and small  business strategy and policy.    reproduced with permission of the copyright owner. further reproduction prohibited without permission. stxitegy u.s. trade association internationalization acfivities as collective strategy stefan wally chapman university wall&gchaptnan. edu vinod k. dain bowling green state university vjai ncba. bgsu. edu abstract this paper empirically explores us, trade association internationalization activities as a manifestation of collective strategy. data were drawn pom eightyfour respondents to a survey of association executives and from secondary sources. the findings indicate that trade associations engage in internationalization activities involving information dissemination about foreign government activities and international martteting and also in maintenance of international capabilities and functions. relative market internationalization, membership demand for international services, and membership industry sector all had an influence on the degree of trade association internationalization activities. introduction ln the last decades, markets have undergone continuing global integration. changes in the economic and political environments coupled with ongoing improvements in communication, transportation, and production technology have made a variety of new markets accessible to all united states'irms. these international markets had been hitherto beyond the resource capacity of all but large transnational corporations, but they are now accessible to a variety of foreign suppliers of goods and services regardless of size (dunning, 1993). businesses have experienced increasing interconnectedness with their suppliers, buyers, and competitors, as well as with political entities, because of these global macro-structural changes (boddewyn & brewer, 1994). these interdependencies in both competitive and institutional environments have fostered increasing environmental uncertainty for individual businesses. firms sharing similar forms of uncertainty and similar environmental contingencies increasingly turn to collective action. for example, smaller businesses can seek to secure their external resources and exchange relationships through a spectrum of interlirm strategic alliances (dollinger, 1990; dollinger k. golden, 1992). in the international arena, firms have used cooperative or collective strategies —for example, joint ventures —to manage the environmental uncertainties associated with entering foreign 99 jottrnal ofsntall bnsincss strotegy vol l2, no. 2 fall/winter 200l markets (child & faulkner, 1998). like joint ventures, trade associations are a manifestation of collective action by businesses (barringer & harrison, 2000). a trade association is a formal organization that represents a coalition of businesses that face similar environmental contingencies and that seek to adapt to them collectively (staber, 1985). as formal organizations distinct from their member firms, trade associations can play an important role in facilitating the adaptation of businesses to environmental contingencies, such as the internationalization of markets (svevo-cianci, 1995). this paper draws upon theories of competitive and collective strategies to develop and test hypotheses concerned with the activities that trade associations undertake to facilitate the internationalization of their member firms'usinesses. we begin with a background discussion of issues in internationalization of firms and markets, the environment and collective action, and trade associations. we then offer and test hypotheses concerned with the factors that promote trade association internationalization activities. finally, we review our findings and discuss their implications. background in recent years, technological advances have facilitated product and process innovations. the new global economy is characterized by both new economies of scale and revamped minimum efficient scales. traditional conceptions of comparative advantage and factormarkets have gone by the wayside. these advances have facilitated the easier entry of smaller firms into international markets, but have also brought increased research and development costs. for smaller firms collective action to deal with these greater costs is a natural strategy. among other major trends in the restructuring of the global environment of business has been the emergence of regional trading blocks. the europe 1992 agreements leading to a single european currency, the north america free trade pact, and the asean block, for example, all have raised competition from the level of the nation-state to that of the multi-state region. these larger markets work together with technological advances to foster global products and markets. moreover, these trading blocks inevitably bring supranational political entities, such as the european union, onto the political scene. smaller firms naturally engage in collective action to respond to these larger economic and political entities, especially when they enter into the international arena. such collective action is the theoretical response to the environmental uncertainty engendered by these technological, economic, and political developments. environmental uncertainty is the lack of predictability in a business environment. uncertainty is related inversely to the sense of control that managers perceive when addressing their environments, and, therefore, is the primary source of a firm's uncertainty. in dealing with this uncertainty, smaller firms, especially those in fragmented industries, rely upon collective strategies (doll inger & golden, 1992). in their empirical study, dollinger and golden (1992) found that small manufacturing firms engaged in collective activity of both emergent and intentional nature. the firms in their study joined in community activities to establish networks. they engaged in joint-venture-like activities with suppliers, competitors, and buyers, and they received important economic and technical information from indirect, industry-wide activities. some of these activities are intentional approaches to collective strategy that businesses can use to complement their competitive strategies. intended collective strategies involve different levels of commitment and control that vary in formality; regulative legislation, mergers, joint-ventures, interlocking directorates, trade'associations, and collusion are all examples of intended collective strategies (barringer &. harrison, 2000). 100 journal ofsmall business strategy vok /2, no. 2 fall/winier 2001 a trade association is an example of formal, organized coordination of interdependence among businesses. associations consist of their member firms, but they are also independent formal organizations capable of developing their own strategies (staber, 1985). their budgets derive from their members'oluntary contributions. their defining missions involve the furtherance of their membership's goals and strategies. historically, the rise and fall of trade associations, like that of mergers —another form of collective strategy, has been associated with industry and market cycles. for instance, many modern trade associations, first formed at the end of nineteenth century, focused primarily on defending their memberships from economic downturn (staber, 1985). trade associations can engage in a number of activities. they can act to collect data and facilitate information exchange within industries, and also as public relations clearinghouses for member firms in their interactions with outside constituencies. they also can promote international trade through the collection and dissemination of data of relevant foreign markets, the organization of exhibitions and trade fairs, and the establishment of overseas contact networks for member firms. even the lobbying of foreign governments and regional political entities, such as the european union, appear to be viable trade association activities that would promote international trade. in some cases, trade associations may even sponsor export trading companies or supervise industry trading conditions and regulations (potter, 2001; rosamond, 1998). hypotheses we seek to explore how trade associations, as manifestations of the pooling of interests of a collectivity of businesses, might facilitate adaptation to the internationalization of markets. as industries internationalize, domestic firms encounter new foreign competitors who become rivals for resources. these new rivals contribute to resource scarcity and interconnectedness in a firm's environment and lead to greater conllict and interdependence, both of which exacerbate uncertainty. when industries have internationalized, we expect trade association activities to be commensurately internationalized. hypothesis i: a trade association's internationalization activities will be greater the more internationalized the markets in which its members participate. we further expect trade associations to be responsive to their members: not only should trade associations help member firms maintain domestic markets, but more proactively, trade associations should help member businesses to think more internationally (harrison gc westgeest, 1998; potter, 2001). since membership in trade associations is voluntary, we expect member satisfaction to be critical to an association's viability. we therefore expect internationalization activities of trade associations to be commensurate with their memberships'eeds and demands. hypothesis 2: a trade association's internationalization activities will be greater, the greater the demand of the association membership for such services. historically, trade associations have been more active in periods of industry and market change (staber, 1985). in the ongoing development of the global economy, organizations and entire economies are becoming increasingly interconnected. trade associations can encourage collective action to deal with uncertainty in times of great flux. especially for small businesses, such collective action may be the only viable means of effectively addressing 101 dinmnal ofsmall bttsi ness strategy vol. j2, no 2 fall/winter 200/ large-scale change (johnson, 1996; welch, young, & wilkinson 1998). given the unprecedented new uncertainties in domestic markets attributable to industry internationalization, we expect organizations to welcome the possibilities for collective action that trade associations could offer in addressing these changes. hypothesis 3: 3 trade association's internationalization activities will be greater, the greater ihe volatility ofits member firms'domestic markets. the classical economic theory of comparative advantage holds that nations will tend to specialize in the production of goods and services in which they are relatively more productive. this comparative advantage is based on the relative endowment of factors of production. recent revivals of the theory of comparative advantage have focused on inclusion of a dynamic element, recognizing that among the factors of production that may provide national competitive advantage for an industry are historically developed, inimitable skills or tacit knowledge (porter, 1990). in industries that have developed such national competitive advantage, the internationalization activities of trade associations serve as another means for the pooling of collective interests in the defense of the market domain. moreover, in industries in which competitive advantage appears to be strong, efforts on the part of trade associations to maintain and augment their members'ompetitive advantage probably flow from established relative national competitive advantage. hypothesis 4i it trade association's internationalization activities will be greater, the greater the national competitive advantage of the industries in which its members compete. control variables the economic sector, for example, manufacturing or agriculture, in which a trade association's members compete probably has an influence on the extent and nature of the association's internationalization activities. as a reflection of its members, an association's size or budget also probably influences the degree and type of internationalization activities the association pursues. we control for these influences in our analyses. methods sample an initial sample of the 212 largest trade associations in the united states was identified. these constituted all trade associations with annual budgets over $2.5 million (columbia books, 1992). this budgetary threshold was chosen, because it encompassed a sufliciently large sample to assure the inclusion of trade associations whose activities might have a strategic impact on competitive outcomes. to discover the extent of trade association internationalization activities, we conducted several informational interviews with association executives as well as a search of the relevant professional literature (see svevo-cianci, 1995). this initial information gathering served as the grounding for the development of a questionnaire to probe the steps that the trade associations in the larger sample were undertaking to promote the internationalization of their member firms'ndustries. this questionnaire instrument was mailed to the top-ranking executive in each of the 212 trade associations. 102 journal ofsmall business strategy vol. /2, no. 2 fa!i/winter 2001 respondents returned eighty-five completed questionnaires. another nineteen declined to participate for a variety of reasons. our effective response rate was thus 49%. because of missing values, the final sample used in the statistical analyses consisted of eighty-four trade associations; representing a 40% response rate. measures association internationalization activities. a principal components factor extraction analysis with varimax rotation using thirty-one items from the questionnaire was performed to develop the measures of trade association internationalization activities (dollinger & golden, 1992; kim & mueller, 1986; spss, release 6). three factors with eigenvalues greater than 1.0 emerged from the analysis. items with factor loadings greater than .50 were retained in the factors. a review of the items indicated that two of the factors were concerned with information collection and dissemination. these factors were labeled i) information dissemination foreign government activities and 2) information dissemination international marketing. the third factor concerned an association's internationalization activities and its capabilities to undertake them. this factor was labeled 3) international capabilities and functions. based on our interviews we had identified activities, such as trade missions, as a form of internationalization activity in which trade associations participated. we also had recognized that information services were important, but we had not discerned the distinctions that emerged from our factor analysis. the items in each factor along with their factor loadings and inter-item reliabilities (cronbach's alpha) appear in table i. we used the factor loadings to weigh the measures and summed them to construct the factors. the independent variables in the analyses were measured as follows: market internationalization. the extent to which the markets in which an association's member firms participated had internationalized was measured by the ratio of exports to industry output as supplied by the questionnaire respondents. we relied on respondents rather than archival sources for this measure, because we believed respondents'ata would more precisely define the industries in which their members participated. membership demands. a principal components factor extraction analysis with varimax rotation of sixteen questionnaire items was used to develop measures of trade association membership demand for internationalization services (dollinger & golden, 1992; kim & mueller, 1986; spss, release 6). two factors with eigenvalues greater than 1.0 emerged from the analysis. items with factor loadings greater than .50 were retained in the factors. the two factors were labeled: i) membership demands for international information, and 2) membership demands for international functions. the factor loadings and internal reliabilities appear in table l. environmental uncertainty. two measures of environmental uncertainty were developed. the first measured market volatility to determine the predictability of a firm's environment. less predictable environments are more uncertain (dollinger & golden, 1992). following tosi, aldag, and storey (1973) (see also snyder & glueck, 1982), market volatility was measured as the average of the coefficients of variation of sales divided by average sales revenue for individual firms in the industry. the formula used was that of snyder and glueck (1982). the years used in the calculation were 1986 to 1990 inclusively. data were drawn from standard & poor's compustat tapes. 103 journal ofsmall business .serrate(0i vol /2, no. 2 fall/winter 2001 table i. factor analyses internationalization activities factor i. information dissemination foreign government activities how much information is your association able to provide to members in each of the following categories? factor scores regular information on volume of exports to the u.s. .84595 regular information on volume of exports from the u.s..80169 foreign customs'uties 6i excise taxes .80145 u.s. government regulations for exporters .75604 other government regulations .71047 assistance available from government sources in the u.$..70455 foreign taxation .68427 international standards .67293 copyright/patent infringement regulations .66248 (4 = we can help a great deal, 0 = we can not help at all) a =.9055 factor 2. information dissemination international marketing how much information is your association able to provide to members in each of the following categories? factor scores directorates or mailing lists of potential overseas customers .86055 foreign health, language, culture, customs, etc. .81483 identification of agents tk distributors overseas .80865 identification of potential joint venture partners .70733 advice on advertising, direct mail, and marketing abroad .69073 enquiries received from abroad .61974 (4 = we can help a great deal, 0 = we can not help at all) a =.8806 factor 3. international capabilities and functions does your association maintain: factor scores employees whose background makes them especially suited for work in the international arena? .79430 an international affairs committee? .73048 overseas offices? .62053 an export market research department? .59184 (yes= i,no =0) (table l continued on next page) 104 journal ofsmall business strategy vol. /2, no. 2 fall/ivinter 200/ has your association participated in any of the following international activities or events? overseas conferences .58536 tt =.69 membershi demands factor 4. membership demands for international information how often have your members sought the following information or services from your association? factor scores overseas product standards .86951 overseas market research .83189 information on foreign government regulations .81685 information on foreign markets .65511 other marketing assistance .68284 (4 = often,0 =never) a =.8839 factor 5. membership demands for international functions how often have your members sought the following services from your association? factor scores study tours .85032 trade missions .79565 overseas trade fairs .73797 overseas conferences .58758 (4 = often, 0 = never) a =.8158 national cpm etitiveadvanta e factor scores '.s, firms operate more eaiciently .82585 u.s. firms invest more heavily in personnel training .81295 u.s. firms provide customer service superior to foreign competition .79501 u.s. firms have better product or brand identification than foreign competitors .72339 u.s. firms produce products of a quality equal to or superior to foreign competitors .68445 v.s. firms have better warehousing and distribution facilities overseas .58569 u.s. firms maintain production facilities in other countries .51172 (4 = generally true, 0 = not at all true) u =.8829 105 journal of.small business srrateg) vol. /2, no. 2 falllivinier 2001 a second surrogate measure of environmental uncertainty, the four-firm industry concentration ratio, also was used. we anticipated that concentration would be inversely related to environmental uncertainty. this measure was calculated as the mean of the concentration ratios of the industries, identified by the u.s. 4-digit sic codes, in which association member firms participated. similarly, dollinger and golden (1992) used concentration as a surrogate for the complexity dimension of environmental characteristics. to perform the calculations, information on industry sales were drawn from )vard's business directory of us. private und public companies (1992). national competitive advantage. a measure of national competitive advantage was derived from a principal components factor analysis of 11 items in a portion of the questionnaire. a single factor, which we termed national competitive advantage, emerged (eigenvalue ) 1). as with the other measures derived through factor analysis, the exact items, their loadings, and the internal reliability measure appear in table l. manufacturing sector. a dummy variable was used to code whether or not an association's membership was primarily in the manufacturing sector (1=membership primarily engaged in manufacturing; 0=membership primarily engaged in other than manufacturing). association size. association size was used as a control variable and was measured as the association's 1991 annual budget. analysis table 2 contains descriptive statistics as well as the correlation matrix for all measures used in the analyses. none of the variables appear sufficientl correlated to introduce multicollinearity into further analyses. three regression analyses were carried out. the three measures of association internationalization activities served as the independent variables. market internationalization, member demands for international information and functions, market volatility, concentration, and national competitive advantage sewed as independent variables. manufacturing sector and association budget sewed as control variables. table 3 provides the results of these analyses. results the regression analyses as reported in table 3 indicate support for hypothesis i and hypothesis 2. this support indicates that when the markets in which the membership participated are relatively more internationalized and/or when the trade association membership had a relatively greater demand for international information and functions, trade associations provide internationalization information regarding volume of exports to and from the u.s., foreign customs'uties and excise taxes, government regulations for exporters, assistance available from government sources in the u.s., foreign taxation, or international standards including copyright and patent regulations. also, when the respective markets are internationalized and/or the membership demands it, associations are more likely to maintain employees whose background makes them especially suited for work in the international arena, an international affairs committee, an overseas office, an export market research department or to participate in overseas conferences. 106 journal ofsmall business srraregy vol. i2, fv o. 2 fabyivinrer 2007 table 2. descriptive statistics and correlation matrix variable . m sd 'i 2 3 4 5 6 7 8 9 10 i. information dissemination13 01 9.80 foreign government activities 2. information dincminnuon— 7.69 6.12 55 international marketing 3. inicmntionn! capabilities 1.89 1.45 .54 .57 und functions .64 0.37 .49 .30 .55 5. demand for international 8.60 5.62 .67 .75 .67 .34 information 6. demand for international 5 56 3 95 .37 .66 .47 .04 .58 functions 7. market volatility 4.11 4.14 . i i -.06 .10 -.10 .12 .09 8 industry 039 020 -.i i -.07 -.14 -.03 -.08 -.14 .01 concentration 9 national competitive 15.51 7.22 .21 .14 .09 .26 .19 .il .09 -.10 advantage sector ""mm'mg 0,61 0,49,06,02,14 .,02,03 .10 07 13 07 budget 8.88 10.57 .0i -.06 05 .16 -.03 -.07 .12 .01 .04 -.09 n=841 pl�& .37 p&.001 the findings did not support hypothesis 3. domestic market volatility appears to have a negative relationship with trade association information dissemination about international marketing, contrary to the hypothesis. otherwise, neither market volatility nor industry concentration appears related to the internationalization activities of trade associations. hypothesis 4 also did not find support in our analysis. the status of a membership's industries with regard to national competitive advantage does not appear to have been related to the degree to which the trade association engaged in internationalization activities. with regard to the control variables, only the manufacturing sector appears to have been an important control. there was a positive association between having a membership concentrated in the manufacturing sector and maintaining international capabilities and functions. 'no statistically significant relationship between association budget size and internationalization activities was found. 107 i journal af small business srramgy val. 12, ltla. 2 fallywi nrer 200l table 3.regression analyses" (n=g4) info. dissemination: info dissemination ', intcmntionnt capabilities foreign governments international marketing':et functions market lntcmationalization 0.21* 0.07 0.28»» demand for international 0 60»»» 0 53» ~ » 0.49'" int'ormation demand for international -0.01 0 3g»»» 0.19» functions market volatility 0.05 -0.16'.03 concentration -0.05 0.02 -0.09 national competitive 0.05 0.01 -0.08 advantage manufacturing sector 0.05 0.05 0.16'ssociation budget -0.01 -0.01 0.06 f-score 9 45»»» 19.15*»* 12.51»'» adjusted r 0.45 0.64 0.53 » p&.05»» p&.01»»» p& 001 'coefficients are standardized discussion our results supported our first and second hypotheses, and were consistent with earlier theorizing regarding trade associations. research has suggested that trade associations activities are oren defensive, for example, potential competitors use the trade association as an agent of a collective strategy in reaction to threats to the status qua (staber, 1985). hypothesis i posited that association internationalization activities would be commensurate with the internationalization of members'arkets. thus, the association internationalization efforts could be seen as a means for firms to maintain global market share when their domestic market shares are threatened or diluted by foreign competitors. similarly, our second hypothesis indicated that the levels of trade association internationalization activities were closely related to the demand for such activities or services. membership in trade associations is voluntary, so the continuing existence of an association hinges upon an ongoing, positive cost-benefit analysis of membership by its member firms. associations, like other organizations, depend on membership demand to shape their activities over time. our hypothesis regarding environmental uncertainty was not supported. businesses, especially smaller businesses would have greater need for information in dynamic environments. theoretically, these businesses would seek through collective means, such as a trade association, to secure information resources. nevertheless, neither the present study nor dollinger and golden (1992) found a relationship between environmental dynamism and 108 journal ofsmall business strategy vol. /2, no. 2 fall/ivinrer 200l cooperative strategy. dollinger and golden (1992) did, however, find that industry concentration was inversely related to collective strategies. their results also confirmed earlier findings that less cooperation occurs in more competitive situations, and that more cooperation occurs in resource rich environments. this result is not inconsistent with the historical arguments and our findings regarding trade associations. trade association activities, like other collective strategies, may be superseded by competitive forces unless resource munificence permits, or third parties, such as foreign competitors or government regulation, necessitate cooperative action (staber, 1985). whether or not a trade association's members enjoy a national competitive advantage does not appear to influence the degree of the association's internationalization activities. one might expect an iterative process whereby association activities are likelier in industries that have comparative advantage and these activities would assist in maintaining and developing the membership's national competitive advantage. this, in turn, would promote further association with internationalization activities. on the other hand, associations of weak and threatened industries may act to defend against foreign entry. unfortunately, our findings do not permit a conclusion. with regard to our control variables, we did find that trade associations whose members were primarily manufacturers did maintain relatively more international capabilities and functions. we attribute this result to the dominance of the manufacturing sector in international trade. certain limitations to our research must be considered. first, the analysis is cross-sectional, and therefore does not lend itself easily to interpretations of causality. further, the sample draws from trade associations in only one country, the united states of america. although some u.s. associations may seek international members, future research might gain insights from dynamic comparative analysis of association activities among different nations or even among different regional trading blocks. watson and williams (1988), for example, suggest that association activities may be regulated at a regional trading block level. closer scrutiny of individual associations who have undertaken the greatest internationalization efforts could offer a better understanding of the mechanisms by which collective strategies emerge in the actions of associations (dollinger, 1990). our inability to find support for our third and fourth hypotheses may be attributable to incompleteness of our measures. although we drew on multiple measures, our factors may not dimensionalize the constructs of environmental uncertainty or national competitive advantage in such a way as to offer insights into our research questions. future research could seek to create more complete or alternative measures of these constructs. more broadly, further research on trade association activities can offer insight into the returns that firms can receive by engaging in collective strategies. rehbein and lenway (1994), for example, found that use of trade associations as intermediaries in interaction with a specific government agency, via the u.s, international trade commission, was associated with greater industry political effectiveness. costs associated with use of a trade association in this way would have to be weighed against benefits. from a managerial perspective —especially from the standpoint of trade association executives —the results indicate that there is a window of opportunity for proactive internationalization activities. indeed, to the extent that trade associations can initiate activities that introduce their members'oods and services to new markets, great opportunities for proactive behavior still appear to exist. the internet, or world wide web, has become a viable means for trade associations, governments, and others to facilitate business exports, especially for smaller firms (farrell & updike, 1997; poner, 2001). once trade associations successfully establish their abilities to facilitate their members'nternationalization,a sustainable network to promote export promotion and member 109 journal ofsmall business siraield u pol. j2, no. 2 fall/ivinrer 2001 internationalization should result (johnson, 1996; welch ei al. 1998). naturally, individual firms should not overlook the benefits that could be had through seeking internationalization help from their associations. this is especially true as the means and steps by which small business enter the international market become more diverse and less predictable (wolff & pett, 2000). in short, the potential international role of trade associations in helping small businesses internationalize remains unrealized. references barringer, b.r., & harrison, j,s, (2000). walking a tightrope: creating value through interorganizational relationships. journal of mana ement 26, 367-403. boddewyn, j,ju & brewer, t.l. 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(1998). the importance of networks in export promotion: policy issues. journal of international marketin 6, 6682. 110 journal ofsmall business strategy vol. 12, no. 2 fallltyinter 2001 dr. stefan wally (ph.d. new york university) is associate professor of management in the argyros school of business and economics at chapman university. h'ts research has been published in the academy of management journal, strategic management journal, journal of business venturing, industry and innovation and in numerous otherjournals and books. his research interests include the internationali"ation of competition, entrepreneurship, and speed ofstrategic decision making. dr. vinod k. jain is an assistant professor ofinternational business and strategy at bowling green state university. he iras a ph.d. degree in strategy and international management pom the university of maryland at college park and master's degrees in management (ucla) and statistics (indian staiistical institute). prior to returning to academia in 1989, dr. jain served business andindustry for several years as a senior and top-level manager and freelance consultantltrainer. he represents bgsu on the board of directors of taita (toledo area international trade association). i 1 i stra tegy small business brief unionization and the white-collar worker in small businesses lewis w. lash barry university 1wl /226@corneas/. ner introduction the american labor movement has experienced significant challenges in the last two decades in maintaining the size of its membership. the effects of a sharp increase in business being shifted off-shore, an unstable u.s. economy which resulted in major reductions in work force, and the growth of small businesses and the decline in major industry have lead to a continuing erosion of the non-government employees represented by collective bargaining agencies. tom sweeney, then president of the teamsters international union, predicted in 1985 (carhng, 1985, p.4) that the labor movement in 2000 would represent only 10-19% of the non-agricultural, non-governmental workforce. further, he stated that if this occurred, the labor movement would "slide past the point of political relevance." these somewhat dire predictions have become reality: the bureau of labor statistics reported h://stats.bls. ov/newsrels.htm that in 2002, only 8.5 percent of private sector employees were represented by a collective bargaining unit. the changing nature of work performed, coupled with the above-noted shifts, has revitalized union interest in the white-collar worker as a target for organizing efforts. this was fueled in part by the continuing shift away from job growth in the production arena to an accelerated growth in the service industries where white-collar positions have been more abundant. this situation was reinforced by hatch and clinton (2000, p. 7) who reported that while construction-related manufacturing added workers during the 1990s, the prevailing trend was negative throughout most other manufacturing industries —13 out of 20 lost workers. of the 10 specific industries adding the most jobs during the decade of the 1990s, seven were in the service sector. kilgour (1983, 1986) reported on the organizing efforts amongst white-collar workers during the calendar years 1980 and 1984. this somewhat more tranquil period produced the following conclusions from his study: 1) american employers went on the offensive against unionization efforts during the 1970s; 2) management had gotten good at remaining nonunion; 3 office automation did not have the impact on employee attitudes that was expected; and 4) labor's timing could not have been worse, based on the image of organized labor held 123 foccrnal ofsmall business strategy vol. /4, no. 2 fall/wincer 2003 at that time. it was kilgour's conclusion that "there is no reason to expect any of the explanatory factors (noted above) to change in the near future" (1986, p. 19). research design the current study provides a longer timeline to measure the success of unionization efforts relative to those persons holding clerical white-collar positions within small businesses. the primary question that was posed was whether there is any significant difference between the success rate by size of target employee group or can we draw the conclusion that organizing efforts are basically equal, regardless of the group being addressed. also, the issue of whether white-collar organizing enjoyed a higher or lower success rate than unionization efforts in general was explored. the source of information was the monthly national labor relations board (nlrb) representation election (exclusive of decertification) reports generated by the national labor relations board in washington, d.c. "w"-designated workers for the years 1985-2000 were analyzed. the national labor relations board defines the w-designated workers as "office, clerical, and other white-collar workers" (national labor relations board election reports.) of specific interest relative to "other white-collar workers" would be food service and health care employees —key organizing targets in more recent years. comparisons were made between the success rates of all organizational elections sponsored by the nlrb and that of the white-collar elections during the 16-year period, 1985-2000. in addition, the white-collar elections were reviewed relative to size of the potential bargaining unit size; the intent of this analysis was to see whether the success rate was impacted by the size of the group that the union was attempting to organize. elections the period reviewed, 1985-2000, represented a relatively wide range of economic conditions, from the recessionary period of the late 1980s/early 1990s to the boom period of the 1990s and the subsequent slowing of the economy in 2000. the results reported, accordingly, should provide a clear indication of how the organizing of white-collar employees is impacted by varying economic conditions. the success rate of unions attempting to represent all workers is noted in table 1. over the 16-year period under review, the unions won an average of 49.5 percent of all nlrbsponsored elections. the highest percentage was recorded in 1999 when 52.2 percent of the contested elections were won by unions. this is a point of interest that 1999 was at the peak of the economic boom. somewhat greater volatility is noted when the percent of white-collar elections won by the unions is considered. the 16-year average of white-collar elections won by unions was 53.3 percent, with a high of 62.2 percent in 1986 and a low of 46.7 percent in 1992 and 1996. no clear trend is noted relative to points on the economic cycle; there is a relatively high volatility rate observed, year-to-year. bargaining unit size the success of white-collar organizing efforts when taking into consideration the size of the representation election provides an interesting perspective. as noted above, the percent of white-collar elections won by petitioning unions was 53.3 percent over the 16-year period 124 journal of small business strategy vol l4, no. 2 fall/winter 2003 reviewed. however, when the number of eligible voting members increases, the unions do somewhat better. table i representative elections conducted by the nlrb 1985-2000 all nlrb white-collar elections elections no. won % won no. won % won years no. ~buaion ~bunion no. ~buaion ~bunion 1985 3,734 1,732 46.4 139 77 55.4 1986 3,543 1,685 47.8 143 89 62.2 1987 3,389 1,664 49.1 112 57 50.9 1988 3,478 1,733 49.8 124 69 55.7 1989 3,659 1,853 50.6 133 67 50.4 1990 3,187 1,537 48.2 124 63 50.8 1991 3,206 1,522 47.5 125 61 48.8 1992 2,895 1,443 49 8 120 56 46.7 1993 2,803 1,401 50.0 109 56 51.4 1994 3,038 1,495 45.4 102 62 60.8 1995 2,783 1,393 50.1 101 56 55.4 1996 2,933 1,398 47.7 92 43 46.7 1997 3,261 1,656 50.8 112 64 57.1 1998 3,296 1,711 51.9 94 46 48.9 1999 3.007 1,571 52 2 108 64 59.3 2000 2 946 i 513 51.4 91 44 484 totals 51,158 25,307 49.5 1,829 974 53.3 source: national labor relations board election reports table 2 white-collar representation elections by bargaining unit size 1985-2000 1-24 voters 25-49 voters 50-99 voters 100+ voters elec woo y elec won ss elec lyon n etecs iyoo 1985 89 56 62.9 15 9 60.0 12 6 50.0 13 6 46.2 1986 95 66 69.5 27 13 48.1 7 3 42.9 14 7 50 0 1987 74 42 56.8 19 6 31.6 i i 6 54.5 8 3 37.5 1988 71 47 66.2 24 12 50.0 13 8 61.5 16 2 12.5 1989 89 47 52.8 19 12 63.2 13 5 38.5 12 3 25 0 1990 67 32 478 24 15 625 21 13 619 12 3 250 1991 75 39 52.0 19 10 52.6 20 8 40.0 i i 4 36.4 1992 78 37 474 17 8 471 9 5 556 16 6 375 1993 68 38 559 14 5 357 15 s 533 12 5 417 1994 68 39 574 17 11 647 i i 7 636 6 5 833 1995 53 35 66.0 23 7 304 14 8 571 ii 6 545 1996 60 30 500 13 5 385 9 5 556 10 3 300 1997 55 43 78.2 13 7 53.8 29 10 34 5 15 4 26 7 1998 54 24 44.4 14 8 57.1 20 8 40 0 6 6 100 0 1999 58 34 58 6 25 16 64.0 13 7 53.8 12 7 58.3 2000 49 27 55.1 17 9 52.9 12 4 33.3 13 4 30.8 totals 1103 636 57.7 300 153 51.0 229 i i i 48.5 187 74 39.6 125 journal of small business s/raiegy vo/. /4, no. 2 fa/iijvinrer 2003 this suggests that as the size of the voter block increases, the management of the companies involved dedicate more energy and financial resources to thwart the likelihood of having to contend with a collective bargaining group. the data contained in table 2 send a relatively strong message to small businesses: the greatest level of activity in the white-collar organizing area is within firms with fewer than 25 employees and the success rate of the unions is the highest in that same group. of the 1,819 union elections conducted to represent white-collar workers over the 16-year period reviewed, 1103 or 60.6 percent involved target groups of less than 25 employees. of greater signiflcance is the fact that amongst the smaller target groups, the success rate of the unions is 57.7 percent while amongst populations with 100 or greater potential members, the rate drops to 39.6 percent. in each year of the review period, the success rate was significantly higher amongst small target group than that of the larger (100 or more voters) groups. discussion as noted in the bargaining unit size section of this paper, the small business firm has become a target for white-collar unionization efforts undertaken. the overall level of elections conducted has not seen any notable increase over the time period studied; in fact, the number of elections in 1986 (143) compared with the 91 elections conducted in 2000 indicates a decline of 36.4 percent. this general decline paralleled units of 1-24 employees where the number of elections skidded from a high of 95 in 1986 to a low of 49 in 2000, a decline of 48.4 percent. while the number of elections has declined over the 16-year period, it still suggests that small unit elections dominate when compared with those with 100 or more voters. there are some factors that will need to be considered as we look at the future of collective bargaining within the general economy. cobble (1997, p.334) states that people do not reject unionism per se; rather, they reject the particular form of unionism that is dominant today. as john sweeney noted in his book, america needs a raise (/996), the labor movement must reach out to workers in their occupations and professions and not be contained by the thinking which has dealt with employees in enterprise-based bargaining units. this would have significant implications for white-collar organizing where many firms have minimal numbers of employees who meet the definition of a white-collar employee. such a strategy, however, would require modifications in the national labor relations act that prohibits cross-company organizing. the afl-cio has targeted organizing as a key element of the agenda for its 78 affiliates. in 1997, these affiliates were asked to allocate 20 percent of their budgets for organizing, up from a typical three percent allocation (cohen, 1997). there was a flurry of union organizing initiatives in 1996, including the creation of a separate organizing department in the afl-cio and the allocation of $20 million to organizing efforts, followed by $30 million being set aside for organizing in 1997. critics insist that the real number expended is far less —as little as 10%. the list of major unions that everyone agrees commit to 30% is not long. it includes here (hotel employee and restaurant employee international union), unite (union of needletrades, industrial and textile employees international union), the service employees, the steelworkers, and the carpenters. (whitford, 2001). the service industries experienced the greatest growth in number of jobs in recent years and will continue to be a prime target of any future organizing effort amongst white-collar workers (htt:/avww,uslaw.com/librar /article/carelxunionsur e.html . it seems likely that unions will keep their white-collar efforts focused on the lowest ranks of the ladder, 126 journal of small business srraregy vol. /4, no. 2 fall/jvinrer 2003 particularly with respect to staffers such as those who may be categorized as technical, administrative, and contingent h://www. c.edu/newlaborforum/html.g article79.html . the emergence of sophisticated technology has also provided union organizers with added means of getting their messages to disgruntled employees. as lucore (2002) suggests, some unions are trying to provide information through easy links to job openings with union employers. it is also seen as an online resource for non-union job seekers who would like a job with union representation. one can look at this as modem versions of old-fashioned hiring halls. while web pages can provide information about the virtues of a union, of even greater threat is the possibility of communicating with interested employees without having to physically be present during the early stages of an organizing drive —a real advantage when the potential unit is small. so, what message does this all this convey to the owners/managers of small businesses? freeman and rogers (1999) summarize the outcome of an extensive survey/interview effort including 2,300 individuals that focused on what workers want from their employers. their basic findings were: 1. american workers want more of a say/influence/representation/participation at the workplace than they now have. 2. employees want greater say both because they think it will directly improve the quality of their working lives and because they think it will make their firm more productive and successful. 3. employees want greater workplace participation as individuals and as a part of a group as well. 4. workers want cooperative relations with management. 5. workers want some measure of independence and protection of that independence in their dealing with management. 6. workers believe that management resistance is the primary reason they do not have their desired level of influence at the workplace. if the small business owner is going to avoid the threat of unionization and still maintain their focus on bottom-line performance, they will need to address their current efforts to dealing with the issues noted above. it is not enough to simply assume that because the organization is relatively small and "family-oriented" that issues will not surface which encourage employees to seek out an intermediary to represent their claims to management. smaller service and information technology firms are vulnerable because they do not have the requisite financial resources to wait out a work stoppage or to shift their business abroad. the government rarely takes an interest in labor actions against smaller companies. small it and service companies —especially software firms, cleaning services companies and restaurants— have shown concern because labor organizations have won a series of victories in these industries. for example, boston janitors recently used a month-long strike to win wage increases from the contractors who manage them (kurtantzick, 2003.) when addressing wage/benefit issues, consideration has to be given to the situation which has surfaced in the united states: data from the organization for economic cooperation and development (oecd) show that the top 10 percent of u s. workers earn 5.6 times as much as the bottom 10 percent. by contrast, the top 10 percent of workers in the european union or japan earn, respectively 2.1 and 2.4 times as much (freeman & rogers, 1999). this would suggest that the lower echelons of employees, including white-collar workers, are not receiving their fair share of the economy's benefits. !27 journal of small business strategy vol. l4, no. 2 fall/winter 2003 as brian grieg, a partner at fulbright &. jaworski llp states, "it usually takes more than a single issue for employees to want to change the terms of relationship with their employers by bringing in a third party" (ht://www.biz'oumals.cont/austin/storeis/1999/08/09.sto 3.html if the efforts of labor unions continues within the small firms'hite-collar workers, management will need to remain vigilant in assessing the concerns of their employees and taking appropriate action prior to having the wolf at the door. while many small business owners/managers may not be skilled in union avoidance techniques, they must be cognizant of those actions of the part of employees that might suggest that external forces are working to intervene on their behalf. it is at this time that they need to seek the counsel of those persons that have the skill base to aid them in devising an appropriate strategy for retaining a unionfree environment, if that is their choice. references carling, f. (1985). what happened to the threat of white-collar unionization? management review (march), 74, 52-54. cobble, d. 1996. the prospects for unionism in a service society. in a. macdonald &. d. siranni ( eds). working in the service society. (pp. 333-358). philadelphia: temple university press. cohen, w. (1997). a union drives to woo women. u.s. news and world report (march 3) /22 (8) 43. freeman, r. & rogers, j. (1999). what workers want. ithaca, ny: cornell university press/russell sage foundation. htt://www.biz'oumals.cont/austin/stories/1999/08/09.stot 3.html http: //www.qc.edu/newtaborforum/html.g article79.htm ~h«:s. l . bl.. i swu:t if*b ~ 25, 2003i httlt://www.uslaw.com./librar /article/carelxunionsurlie.html hatch, j. & clinton, a. (2000). job growth in the 1990s: a retrospect. montlily labor review, 23(12), 3-18. kilgour, j.g. (1986). white-collar organizing: a reappraisal. personnel, 63, 14-16+. kilgour, j.g (1983). union-organizing activity among white-collar employees. personnel, 60, 18-27. kurlantzick, j. (2003). united we fall? worker interest in unions may threaten your business. how will you respond? entrepreneur, 3/(3), 13-14. lucore, r. (2002). challenges and opportunities: unions confront the new information technologies. journal of labor research, 23, 201-214. national labor relations board monthly election reports, january, 1985-december, 1999. sweeney, j. (1996). america needs a raise: fighiing for economic security and social justice. new york: houghton-mifflin. whitford, d. (2001). labor's last hope. fomune, 144(8), 119-122. dr. lewis iv. lash serves as associate professor of management at the andreas school of business, barry university, miami shores, florida. lash was the first person to be awarded the doctor of business administration by nova university in /98l. his research interests are in the areas of unionization egorts in the white-collar arena as well as strategic planning for small businesses. these areas parallel his industry assignments where he retired as director of personnel planning for eastern airlines. 128 s is strategy different for very small and new firms? g.t. lumpkin syracuse university lumpkin@syr.edu alexander mckelvie syracuse university mckelvie@syr.edu david m. gras syracuse university dmgras@syr.edu robert s. nason syracuse university rnason@syr.edu abstract in this paper, we argue that much of the small business strategic management literature has drawn too heavily from work done on large, established firms. we build upon the notions of the liabilities of smallness and newness to discuss how microenterprises and very new firms are different in regards to their strategic analysis, strategic content, strategic resources, and strategic processes. we note that there are a number of important and non-obvious questions that need to be asked that have implications for the most common firms in the world, those that are very small. keywords: strategy; microfirms; small business; entrepreneurial orientation introduction is strategy different for very small businesses, including solo entrepreneurs? most studies of strategic management found in the research literature posit theories about larger companies and use data sets from established organizations or publicly-traded firms. although there is a body of literature about small business strategy, for which this journal is a prime example, much of that literature draws on perspectives developed for large firms. further, a quick review of the leading small business management and trategy   journal of small business  1 journal of small business strategy volume 21, number 2 entrepreneurship texts reveals two things: a) strategic management occupies a small number of pages; and, b) most of what is offered in the form of strategic thinking is adapted from studies of large, established companies. in this paper, we examine the implications of deriving small business strategic thinking from big business research. we are especially interested in how this might apply to very small and very young firms. perhaps the concepts and findings from the broader strategy literature can easily be applied and there is no reason for concern. but it is our belief that at least some aspects of small business planning, strategizing and competitive positioning will be significantly different for the smallest of firms. for instance, one study compared the effects of industry on firm performance on new and small versus large and established firms (short, mckelvie, ketchen & chandler, 2009). this research showed that industry impacts smaller and new firms substantially less than their large counterparts. the authors suggest that this may be due to the differing ways that these types of firms compete. understanding how and why the strategic management literature may differ for the smallest and newest of firms is important in part because of the huge number of microenterprises and solo entrepreneurs. in his book free agent nation, published in 2002, daniel pink reported that in the u.s. alone, about 25 million citizens are self-employed (pink, 2002). further, approximately 4-6% of the adult population joins the list of entrepreneurs each year (reynolds & white, 1997). these numbers are growing and are likely far greater when considered as a global phenomenon. the number of microbusinesses that have recently been spurred by the surge in microlending and the vast amount of commerce being carried on in the informal economy suggests that there could be many millions of small business founders and owners who would benefit from a clearer understanding of small business strategy. to address these issues, we evaluated components of strategic management in terms of two concerns that solo entrepreneurs and new, very small businesses face: the liability of newness and the liability of smallness. the liability of newness (stinchcombe, 1965; freeman, carroll & hannan, 1993) refers to the risks of failure that new firms experience because their organizational roles and routines are underdeveloped, and they lack trust relationships and established customers. these features contribute to low levels of legitimacy that make it relatively more difficult for young firms to thrive in a competitive environment. the liability of smallness refers to the risk of failure associated with firm size (aldrich & auster, 1986; wholey, christenson & sanchez, 1992). because very small organizations typically lack economies of scale, have difficulty raising capital, and are relatively more vulnerable to fluctuations in the marketplace, they find it difficult to effectively compete. the question we asked is whether the major components of strategy that have been useful in understanding larger firms—strategic analysis, strategic content, strategic assets/capabilities and strategic processes— can also be applied to microenterprises, that is, solo entrepreneurs and very small firms. the remainder of the paper proceeds as follows. in the next section, we elaborate on how the liabilities of newness and smallness might impact the manner in which a microenterprise views strategy. then we evaluate the following components of strategy from the literature on strategic 2 journal of small business strategy volume 21, number 2 management in large organizations: strategic analysis including swot analysis, 5-forces analysis and value chain analysis; strategic content including the generic strategies of cost leadership vs. differentiation; strategic assets/capabilities including the resource-based view of the firm; and, strategic processes including entrepreneurial orientation. this is followed by a section in which we consider entry strategies, and a discussion and implications section that addresses future research directions. microenterprises and the impact of smallness and newness the focus of this inquiry is microenterprises and solo entrepreneurs. we find little value in distinguishing between the two as selfemployed entrepreneurs are regarded as a type of microenterprise. given that a microenterprise can consist of one employee, the more salient question might be how large can a microenterprise be? this varies slightly in different parts of the world. in the u.s., the association of enterprise opportunity regards microenterprises as those with 5 or fewer employees, including the lead entrepreneur. the european union caps the number of employees at 10; australia labels singleowner businesses with up to 20 employees as microenterprises (association for enterprise opportunity, 2012). in the developing world, we know of no defined limit but many involve solo entrepreneurs. based on these various perspectives, we define microenterprises as small businesses with no more than 10 employees including the founder. in a recent year, the number of u.s. firms with employees that fit that description was approximately 4.7 million (u. s. small business administration, 2012). microenterprises may have full-time employees, part-time employees or family members working in the business. the enterprise itself may be a part-time or seasonal business. in recent years, the number of individuals who filed sole proprietor tax returns in the us—which can include both part time and full time business—has been about 23 million (u.s. internal revenue service, 2012) we are also interested in the role that liability of newness might play in the strategic management of microenterprises. prior researchers have concluded that, in general, new ventures remain “young” up until about 7-8 years of age (biggadike, 1976; miller & camp, 1985). firms that survive beyond 7-8 years are regarded as entering maturity. hence, consistent with this age convention which can be found in numerous studies of new ventures (e.g., mcdougall, covin, robinson, & herron, 1994; shrader & simon, 1997), we regard new ventures as those that are eight years old or younger. given our definitions, it is not surprising that microenterprises would be vulnerable to liabilities of newness and smallness. young firms face a number of limitations that can impede their ability to survive and thrive. several factors contribute to an overarching lack of legitimacy among new firms—few trust relationships, poorly defined organizational roles, absence of efficient operations and established routines, and a general lack of experience. very small firms also face a number of important impediments because of their size. lack of financial and human resources, as well as the ability to access such resources is a common plight among small firms. small firms may also find it difficult to achieve economies of scale or gain recognition as a significant player relative to larger firms. such conditions are 3 journal of small business strategy volume 21, number 2 likely to affect the extent to which microenterprises use strategic tools and pursue strategic initiatives. despite these liabilities, smallness and newness bestow certain advantages on microenterprises that should not be overlooked. relative to large organizations, very small firms may be highly flexible in terms of being able to make decisions and act rapidly. young firms that are unfamiliar with the norms of an industry may be able to implement new practices. microenterprises are often skilled at bootstrapping and may be able to conduct low cost experiments without incurring heavy financial losses. as such, there may be some settings or strategic situations in which smallness or newness endow microenterprises with a comparative advantage. microenterprises and strategic management in the subsections that follow, we discuss the impact of newness and smallness on the ability of a microenterprise to analyze, devise and deploy strategic plans and actions. the discussion is divided into four major categories of strategic management activity—strategic analysis, strategic content, strategic assets/capabilities, and strategic processes. strategic analysis the tools of strategic analysis enable an organization to evaluate their status and performance relative to other firms, industry norms and trends, and conditions in the business environment. it is widely believed that by using such information, companies can more effectively plan new strategic initiatives or adapt existing strategies to achieve goals and reach desired future states (becherer & helms, 2009). approaches to strategic analysis range from the rather basic, such as scoping out competitors at a trade show, to more complex techniques, such as consultant-developed formal business plans or intricate scenario analysis models. in this section, we consider how solo entrepreneurs and microenterprises can use three such tools—swot analysis, 5forces analysis and value chain analysis—to enhance their strategic planning and decision making. swot analysis. swot analysis is a triedand-true approach to evaluating an organization’s strengths (s), weaknesses (w), opportunities (o), and threats (t) (jackson, joshi, & erhardt, 2003). it is a tool for developing an overview of a company’s current strategic circumstances that can apply to organizations of any size. by examining strengths, a microenterprise can discover untapped potential or identify distinct competencies that can be leveraged to achieve desired results (valentin, 2001). by examining weaknesses, an entrepreneur can identify gaps in performance, vulnerabilities, and erroneous assumptions about existing strategies. by examining opportunities, a firm can discover untapped markets, new products or new technologies, or identify potential avenues for diversification. by examining threats, a small business can identify unfavorable market shifts or changes in technology, and create a defensive posture aimed at preserving its competitive position. swot analysis can be highly useful for microenterprises wishing to take stock of their strategic situation and forming a strategy that matches the situation. without additional analysis, however, such assessments are of little use in developing and enacting a strategy. instead, the swot framework can best be used as a starting 4 journal of small business strategy volume 21, number 2 point for analysis in that it provides the “raw material” to conduct more comprehensive internal and external analysis. very small firms are likely to be seriously constrained in terms of available resources and stocks of human and social capital. a new firm or microenterprise might have a different view of its salient environment in terms of how it defines its competitors or the trends that are likely to affect its business model or prospects for success. for example, a very small software firm operating in a particular niche may have limited opportunities and fewer threats than a major launch developed by microsoft. hence, swot analysis is context specific. five forces analysis. another highly recognizable method for assessing strategic conditions is known as 5-forces analysis (porter, 1980). the purpose of 5-forces analysis is to diagnose the principal competitive pressures in a market and assess how strong and important each one is. the five forces are environmental forces that impact on a company’s ability to compete in a given market. they consist of the bargaining power of suppliers, the bargaining power of buyers, the threat of new entrants, the threat of substitutes and the intensity of rivalry among existing competitors. five-forces analysis is regarded as a framework for analyzing a particular industry because the forces are thought to affect all the businesses in that industry in a similar fashion. because it permits a company to assess strategic conditions in an industry, 5-forces analysis is useful for crafting strategies that enable firms to address the influence of the forces. to be successful, strategy must be designed to cope effectively with competitive pressures. the analysis enables a firm to build a strong market position based on competitive advantage. a company whose strategy and market position provide a good defense against the five forces can earn exceptionally good profits even when some or all of the five forces are strong. such strategizing should be available to small and/or young microenterprises, as well as firms of other sizes. however, some of the forces may be especially challenging for a very small business to overcome. for example, microenterprises may have very little bargaining power relative to suppliers who conduct a substantial part of their business with much larger companies (brown & butler, 1995). when a microenterprise only represents a small percentage of a supplier’s total business activity, the loss of the microenterprise as a customer would have very little impact on the supplier. hence, the small business has low bargaining power. likewise, a microenterprise that has one or a few large buyers might be highly dependent on those buyers to sustain its viability, thus giving those buyers high power relative to the microenterprise. with regard to the threat of new entrants, smallness may provide some advantages if the business is highly focused on a particular niche. that is, the microenterprise may have such a unique following or operate in such a narrow niche that new entrants may have few opportunities to effectively compete (cooper, willard & woo, 1986). further, the smallness of the microenterprise’s niche may make competing in that arena unattractive for a new entrant. as for rivalry among existing competitors, to the extent that a microenterprise has many similar competitors, smallness probably makes them relatively more vulnerable when dips in their performance or surges in the 5 journal of small business strategy volume 21, number 2 success of a rival changes the dynamics of a given marketplace. hence, 5-forces analysis can assist microenterprises in identifying both vulnerabilities and promising prospects. value-chain analysis. value chain analysis is another strategic tool for evaluating an organization’s prospects. whereas 5-forces analysis is principally designed for external analysis of opportunities and threats, value-chain analysis is internally focused on the strengths and weakness that affect how well a firm can compete. a value chain analysis helps identify the activities, functions, and business processes that have to be performed in designing, producing, marketing, delivering and supporting products and services. a company’s competitiveness depends on how well it manages its value chain relative to its competitors. porter’s (1985) value chain framework identified two elements of a strategic value chain. the first is labeled primary activities and refers to a series of actions that are commonly thought to add value in a manufacturing-type setting, that is, in a context where lower value raw materials are converted into higher value goods. these include inbound logistics, operations, outbound logistics, sales and marketing, and service. the second component is referred to as support activities and consists of firm infrastructure, human resource management, technology development, and procurement. according to porter (1985), support activities are vitally important and can be a strong source of competitive advantage. because of this, organizations that pay too little attention to support activities are likely to suffer from relatively poorer performance. the strategic importance of value chain analysis derives from its usefulness in identifying sources of competitive advantage that can be leveraged, as well as potential weakness that may be inhibiting superior performance. by making up for resource deficits and concentrating resources on those activities where the company can gain dominating expertise, an organization can optimize its value proposition. unfortunately, the liabilities of smallness and newness place microenterprises at a disadvantage relative to most older and larger firms. to a great extent this is because of the analysis tool itself. that is, because value chain analysis focuses on strengths and weaknesses and young, small firms typically have very few of either, it is not a tool that shows how a microenterprise might best use its strategic resources to achieve success. for example, relative to larger firms, the ability of a microenterprise to add value through the primary activities of sales and marketing or service is highly constrained. a larger firm can devote more resources to salesand service-related activity, and a young firm will likely have far fewer sales contacts and marketing opportunities. further, all four of the support activities— procurement, infrastructure, technology development and human resource management—are likely to be more highly developed in established firms than in young or small microenterprises. hence, value chain analysis has very limited usefulness as a tool to evaluate microenterprises. further, many of these very small firms may only focus on one particular part of the value chain instead of multiple parts. as such, they may specialize in one narrowly defined activity and collaborate with other firms who can also provide targeted support activities (hagerdoorn, 1993). a helpful alternative 6 journal of small business strategy volume 21, number 2 would therefore be an analysis method that assessed strategic capabilities such as the ability to deploy available resources or leverage network ties to identify and pursue growth opportunities. strategic content a great deal of extant work has investigated the strategic content of entrepreneurial ventures. perhaps the most common research question in this regard concerns whether new firms should pursue narrow or broad strategies (e.g. mcdougall, covin, robinson, & herron, 1994; miller & camp, 1985). a narrow strategy is pursued when a firm focuses on serving the needs of a particular customer segment or industry niche (porter, 1980). in contrast, firms utilizing a broad strategy extend beyond individual market segments or niches and attempt to serve an industry-wide range of customers (porter, 1980). early scholarship on breadth-related strategic content consistently supported the notion that entrepreneurial firms should pursue a narrow strategy in order to avoid direct competition with large and mature firms (broom, longenecker, & moore, 1983; buchele, 1967; cohn & lindberg, 1974; hannan, 1976; hosmer, 1957). however several follow-up studies challenged the prevailing wisdom and suggested that pursuing a broader and more aggressive strategy may be advantageous for new ventures (biggadike, 1976; macmillan & day 1987; miller & camp, 1985). holistically, there is a large body of work which investigates the effects of broad and narrow strategies in new and small ventures. however, beyond the broad versus narrow question, little research has been conducted on the applicability of traditional strategic content to very small and emerging ventures. the strategic management literature has generated a number of generic strategies that mature firms may employ in competing with other firms (e.g. herbert & deresky, 1987; hofer & schendel, 1978; miles & snow, 1978; porter, 1980). it is beyond the scope of this paper to address the applicability of all strategies in these extant classifications. instead, we focus on two of the most commonly cited generic strategies: low cost leadership and differentiation (porter, 1980). we identify the drivers of each generic strategy and discuss whether liabilities of newness or smallness prevent firms from employing them. low cost strategic content. a low cost leadership strategy is one in which firms derive advantages by having a lower cost structure than their competitors (hill, 1988). from a survey of the strategic management literature, we have identified four primary drivers which facilitate a low cost structure: 1) economies of scale, 2) economies of learning, 3) economies of scope, and 4) superior technology (miller, 1988; murray, 1988; porter, 1980). we describe each of these drivers and analyze their applicability to new and small ventures. economies of scale is a microeconomic concept referring to the reductions in unit cost that accompanies greater size, or increased production (makadok, 1999). several factors may account for the decrease in unit cost, including increased purchasing power or spreading fixed costs over higher volumes. almost by definition, economies of scale-related strategic content is the domain of larger firms for the simple fact that to attain the benefits one must have significant production magnitude. as such, the liability of smallness precludes the use of this strategic focus (chaganti, 1987; wright & parsinia, 1988). the liability of 7 journal of small business strategy volume 21, number 2 newness, on the other hand, is not necessarily at odds with economies of scale. for instance, a well-funded new venture (e.g. one with venture capital, or corporate backing) may achieve the size necessary to achieve economies of scope from inception. however, the vast majority of microfirms do not have the benefit of external funding and would therefore not be able to pursue this strategy. economies of learning are phenomena whereby incremental production costs decline as production experience is acquired (yelle, 1979); it is essentially the benefits that arise from ‘learning by doing’. several factors account for the decline in costs associated with task repetition (gaynor, seider, & vogt, 2005). for instance, labor may become more dexterous over time as workers make fewer mistakes, hesitate less, and learn short-cuts in production. improved efficiencies in technologies may be introduced over time as users understand them better. standardization of product inputs and production processes may develop as workers and managers learn. unlike economies of scale, economies of learning strategic content may be available to small firms, but generally not to emerging firms, who may lack the track record, established routines, and relevant experience which contribute to economies of learning. whereas economies of scale refer to decreases in cost derived from producing more of a product, economies of scope refers to decreases in costs derived from producing multiple types of products (helfat & eisenhardt, 2004). essentially, economies of scope may be achieved by product-diversified firms. such firms may reduce costs by spreading the use of resources across product lines. similar to economies of scale, small firms are not likely to have the diversity required to achieve economies of scope. while it may be possible for microfirms to offer multiple products or services, diversification into multiple product areas is often something that occurs over time as part of growth. new firms, on the other hand, present an interesting context for diversification. while strategy research generally portrays diversification behavior as the domain of mature firms (scott, 1971; quinn & cameron, 1983), this does not exempt new firms from having multiple products from their inception. however, the ability of a new venture to diversify may also be a function of resource endowments. superior technology may also contribute to executing low cost strategies in entrepreneurial ventures. a classic example is the use of new technologies such as electric arc furnaces by mini-mills in the mid 1900’s to enter the market cheaply and compete with behemoth competition such as bethlehem steel and u.s. steel (christensen, 2000). we propose that superior technology is unrelated to the liabilities of newness and smallness. although researching and developing elaborate technologies may be beyond the reach of most new and small ventures, the adoption of new technologies, particularly those that are affordable, may be accomplished by either. indeed, many new firms are founded on the basis of unproven technology and many solo entrepreneurs/inventors may develop superior innovations without the benefits of larger organizational endowments or staff (o’regan & ghobadian, 2005; rosa, 1999). taken together, our analysis indicates that some of the drivers of low cost leadership strategies apply to new and small ventures, while others do not. specifically, 8 journal of small business strategy volume 21, number 2 economies of scale and economies of scope may not apply to small ventures, but are possible for new ventures. conversely, economies of learning do not apply to new ventures but are possible for small ventures. superior technology seems applicable to both new and small ventures. differentiation strategic content. a differentiation strategy is one in which firms derive advantages by making the uniqueness of their products apparent to their consumers. from a survey of the strategic management literature, we identified six primary drivers of differentiation. they are: 1) quality, 2) brand image, 3) customization, 4) speed, 5) convenience, and 6) unique style (miller, 1988; murray, 1988; porter, 1980). we describe each of these drivers and analyze their applicability to new and small ventures. of the six drivers of differentiation, four seem fully applicable to both new and small ventures: quality, customization, unique style, and convenience. there is a long history of entrepreneurial firms who entered markets with high quality strategies. for instance, starbucks was founded with the goal of selling high quality coffee products, google differentiated itself by producing better results than other search engines, and jetblue distinguished itself by having both low cost and high quality in-flight amenities for passengers (e.g. a television in every seat). such examples attest to the fact that new ventures can pursue differentiation through high quality products. yet microfirms are not precluded from high quality strategies either. often local fruit stands are considered as having higher quality than grocery stores even though they are significantly smaller. customization refers to the production of products or offering of services which are specifically tailored to the preferences of the customer (dewan, jing, & seidmann, 2003). in many ways, customization is more amenable to small firms than large for the simple reason that the latter tend to target a larger customer base and compete on the basis of efficiency; customizing products for all would be a complex and costly undertaking that would suggest competing on flexibility (ebben & johnson, 2005). for this reason, differentiation through customization may be an ideal strategy for new firms wishing to carve out a niche in an established market. firms differentiating themselves through convenience make it easier for customers to purchase their goods and services than the competition, often through close geographic proximity. this is a common differentiator for small and new firms, particularly those selling relatively undifferentiated products or services, such as dry cleaners, gas stations, or liquor stores. finally, firms differentiating themselves through unique styling provide products with distinctive fashion or design. we have no evidence that either a liability of newness or smallness would limit a firm’s ability to engage in unique styling differentiation. in fact, in certain industries, a lack of legitimacy may be an advantage for certain entrepreneurial design firms if the founders are not seen as being part of ‘the establishment.’ taken together, we believe that extant research on differentiation via quality, customization, convenience, and unique styling are applicable to both new and small ventures. conversely, we argue that differentiation via brand image and speed may be limited by liabilities of newness and smallness, respectively. a brand image is the impression in the consumer’s mind of the qualities and shortcomings associated with the brand (kunde, 2002). thus, even though a firm’s 9 journal of small business strategy volume 21, number 2 product may be similar to that of competitors, the brand image may differentiate them. pertinent to the present study, brands are developed over time through consumers’ experiences with products bearing the brand and through advertising campaigns (kunde, 2002). because it takes time and oftentimes substantial resources to develop brand images, this route to differentiation is unavailable while firms endure a liability of newness. speed refers to the ability of a firm to consistently be first to market with new products or services. achieving continual innovation and speedy product introductions generally requires significant research and development investments. as such, we believe that the liability of smallness could limit the ability of entrepreneurs from utilizing a speed-based differentiation strategy. specifically, microfirms may have limited resources to devote towards research and development of new products, and therefore not be able to expeditiously create and launch new products. however, there is evidence that small firms may actually be better at using speed to their advantage as they lack many of the core rigidities and structures that may bog down the response time to pursue opportunities. for instance, chen and hambrick (1995) found that many small firms were able to compete by sequencing quickly scheduled competitive moves. as microfirms have fewer employees and decision-making often by one individual, there are likely to be fewer barriers to quick decisions. in sum, while new and small firms may be able to differentiate themselves via quality, customization, convenience, and unique styling, we argue that they are limited in differentiating themselves via brand image and speed. strategic assets and capabilities strategy scholars as early as penrose (1959) have focused on how internal firm capabilities effect the growth and performance of firms. the resource-based view (rbv) codified a theoretical approach to treating the firm as a collection of resources (wernerfelt, 1984), which can be exploited for a competitive advantage (barney, 1991). resources are comprised of a diverse set of tangible and intangible resources (e.g. financial, social, human and physical). their usefulness stems from their valuable, rare, inimitable and nonsubstitutable characteristics, and from their heterogeneous configurations within individuals firms (barney, 1991). while initially an area of study within large and established firms, the possession and usage of resources has been shown to be important in new and small firms as well (alvarez & busenitz, 2001). resources such as human and social capital (wiklund & shepherd, 2008), financial capital (zellweger, 2007) and reputation (sieger, zellweger, nason & clinton, 2011) have been linked to entrepreneurial behavior. in the context of new and very small ventures, the resources of the founder may also be the resources of the firm. as such, it may be difficult to separate the individual from the firm. the liabilities of newness (stinchcombe, 1965) and smallness (freeman, carrol & hannan, 1983) can both be viewed from a resource and capability perspective. specifically, the theories argue that new and small firms lack legitimacy and face difficulty creating a track record, and thus have a much lower survival rate than 10 journal of small business strategy volume 21, number 2 established firms. the lack of legitimacy (itself an intangible resource) creates difficulties for new and small firms in acquiring other rare and valuable resources, such as financing and employees, which are necessary for survival and growth. as such, this view of possessing key assets and being able to deploy them in the pursuit of competitive advantage seem especially germane for very young firms and microenterprises. a traditional perspective of resources may assume that the accumulation of more valuable and rare resources will necessarily lead to a competitive advantage, thus rendering small firms who control fewer resources at a tremendous competitive disadvantage. this rather simplistic ‘bigger is better’ view in theorizing is quite common in rbv literature (e.g. unger et al., 2009); however, recent empirical results in these research streams show that oftentimes less is better (christensen, 1997; bradley, wiklund & shepherd, 2011). bradley and colleagues (2011) demonstrate that while slack (excess resources) has a positive overall effect on growth, it has a negative effect on entrepreneurial management, which in turn has a positive impact on growth. this provides a more nuanced view to rbv and suggests that the size of a firm’s resource endowments may not always have a clear direct positive benefit to firm performance. thus, while larger organizations may have greater absolute stocks of resources, they may face more significant challenges in the structuring, bundling and leveraging of those firm resources due to their more complex structure and administrative processes (sirmon, hitt, & ireland, 2007). for instance, large and small organizations in the knowledge-based economy both engage in strategies aimed at generating critical knowledge based resources. large firms may be able to do this more quickly, for instance, through purchasing and investing in small firms. smaller firms, as they often lack the financial capital to purchase firms or the managerial capacity to integrate post-purchase (mckelvie & wiklund, 2010), have to rely on the longer process of organically growing through internal projects. however, given the less complex structure, smaller firms may be able to better internalize and apply this learning than larger, more diverse firms (hoang & rothaermel, 2005). small and micro-firms in the knowledgebased economy may also be able to access different types of resources and in amounts disproportionate to their size. for instance, firms with relatively few employees can gain access to valuable resources through social networks (nahapiet & goshal, 1998). in addition, firms with few assets can also accumulate valuable reputation resources through recognition by the popular press and media. by developing a large network or significant reputation, microenterprises can gain access to a larger pool of resources which can be exploited for competitive advantage and growth. new firms face a strategic asset challenge in that they may not have a codified firm level bundle of resources. research on the use of effectuation in the entrepreneurial process (sarasvathy, 2001) has emphasized the way in which entrepreneurs use their individual collection of resources and the resources in their network to shape entrepreneurial opportunity and eventually transfer these resources into the firm. such an approach, while divergent from a traditional firm level strategic asset approach (e.g. barney, 1991) may be more appropriate for microfirms and emerging enterprises. small and microenterprises may be similar to family firms in that there 11 journal of small business strategy volume 21, number 2 is a flow of resources between the firm level and the external individual (or family) level (sharma, 2008). not only do small and microfirms have the potential to expand the boundary conditions of resource-based theory by broadening the level of analysis, but the process that solo and emerging entrepreneurs use to identify and collect resources has the potential to shed light on the micro-foundations of resource-based theory (barney, ketchen, & wright, 2011). in fact, the heterogeneous nature of human capital capabilities is an underlying mechanism for capabilities in general (foss, 2011) and further study of the human capital of solo entrepreneurs may help enrich this important dimension. clearly, access to and control of valuable, rare, inimitable and non-substitutable strategic resources is a critical challenge for new and small firms. the ability of small and microfirms to gain access to and leverage these resources will be a determinant of their ability to survive and eventually grow. however, small and microenterprises in the knowledge-based economy may actually be better suited to overcome the liabilities of newness and smallness than in the era of the industrial corporation. while small firms and microenterprises may not directly control as many valuable resources, an increasingly inter-connected world gives firms easier access to valuable and rare resources. new strategies such as joint-ventures, outsourcing (tsang, 2002) and virtual teams (montoya-weiss, massey & song, 2001) allow new and small firms to access a disproportionate amount of resources than their size would have previously allowed. the resource-based processes at work in small and emerging firms will surely prove to be a valuable area of future research. strategic processes strategic processes are distinct from strategic content, strategic resources, and strategic analysis. strategic processes are more in line with “how” strategy is executed whereas strategic content is more concerned with the “what” (bourgeois, 1980), and strategic analysis may be seen as the “why” used in helping to determine the strategic content. to that end, strategic processes capture issues such as the mindset of the firm and its decision-making processes (dess & lumpkin, 2001) that help the firm to enact its purpose or carry out its vision (hart, 1992). this might include the continued attempts to determine opportunities and threats and ensuring that the firm is correctly positioned in the market in order to achieve its goals (shrivastava, 1983). much of the work on strategic processes has focused on the elements or dimensions of strategy making (rajagopalan, rasheed & datta, 1993). early work conducted on large firms began to address the modes or dimensions that firms displayed. for example, mintzberg’s work (1973; 1978) examined such factors as the planning mode that was characterized by formal analysis, the adaptive mode of strategizing that took stakeholder concerns into consideration, and the entrepreneurial mode that included opportunity-seeking behaviors and risktaking. in turn, mintzberg’s research was influential in subsequent work into the strategy-making dimensions that showed that three common dimensions of strategic processes were common to entrepreneurial firms: innovativeness, proactiveness, and risk-taking (miller, 1983). these three dimensions have now become to be widely viewed as the key components of a firm’s entrepreneurial orientation (eo) (covin & slevin, 1989). 12 journal of small business strategy volume 21, number 2 there have been over 100 empirical studies that have examined the relationship between eo and firm performance (rauch, wiklund, lumpkin & frese, 2009). among these, eo appears to be especially important for understanding firm level outcomes for small firms (wiklund, 1999) as it helps to provide insight into how the mindset of continuing to grow and seek opportunities is carried out over time. interestingly, the strength of the relationship between eo and firm performance is actually higher for microfirms than for firms of any other size firm (rauch, wiklund, lumpkin & frese, 2009). the logic behind this is that, for the smallest of firms, top managers have additional ability and power to influence the overall direction of the firm as there is less reliance on others within the firm (i.e. middle managers, employees). in other words, eo is likely to best be carried out within microfirms in line with management’s aspirations. yet, although eo is more important for smaller firms, there appear to be an important number of considerations that may affect microfirms ability to display such an orientation. for instance, carrying out eo activities are extremely resource consuming and oftentimes require substantial resource investments (covin, 1991). further, the influence of eo is the highest when organizational structures are in place to help manage eo and firm decisions (green, covin, & slevin, 2008). as such, even if microenterprises may desire the pursuit of an eo, they may struggle with implementing these strategic processes on account of a lack of significant resource endowments and developing organizational structures. simply put, even displaying an eo may not be possible for microand emerging firms given a lack of resources and routines. while certainly providing challenges for new and small firms, the empirical finding that eo is highly correlated with the performance of smaller firms means that some firms are able to meet these challenges. yet, it appears as though there may be a tradeoff or difficult balancing act needed for these firms. for instance, there is an important trade-off in regards to the eo component of risk-taking. risk-taking involves committing resources to endeavors whose outcomes are uncertain. given a lack of slack resources, new and small firms may need to engage in calculated risk-taking in order to gain control over important resources (pfeffer & salanick, 1978). acquiring these resources may help these firms fuel future prosperity due to continuous investments into growth. yet, since the outcomes of risky endeavors are unknown in advance, there is certainly no guarantee that these risks will pay off. as new and small firms are not likely to possess a resource buffer to sustain potential losses due to unprofitable risks, many of these firms are not likely to survive as a result (wiklund & shepherd, 2011). consequentially, many new and small firms may succumb to their liabilities, whereas older and larger firms may survive as they have more likely acquired larger resource bases from which they can sustain some risky losses. a similar argument can be made for the difficult balancing act of innovativeness. many new and small firms are encouraged to develop novel products or services offerings. indeed a core strength that is often attributed to new and small firms is their ability to provide radically different innovations that truly alter an industry (leifer et al., 2000; christensen, 1997). further, there is some research that shows that the capability to innovate tends to decrease as a venture ages (thornhill & 13 journal of small business strategy volume 21, number 2 14 amit, 2003). as firms age, they tend to develop innovations that are more closely in line with their existing market offerings and building upon their existing capabilities (sorensen & stuart, 2000). older and larger firms may also have to deal with core rigidities, the need to balance the needs of multiple stakeholders, and organizational politics that may prevent firms from carrying out framebreaking work (baker & cullen, 1993). yet, while this speaks to the potential to innovate for microand new firms, there is also the challenge of gaining legitimacy. new and small firms are known to lack legitimacy and oftentimes are dismissed as not being ‘serious’ firms if they do not conform to the established industry norms and methods. firms that are ‘too innovative’ compared to industry norms or exemplars may not be seen as legitimate and may therefore be ignored by the market as compared to the offerings of more established firms (aldrich & auster, 1986). within industries, there is often a push by the major players to set standards and norms, in line with isomorphic pressures (dimaggio & powell, 1983; meyer & scott, 1983). as such, there appears to be an additional external legitimacy concern for new and small firms as it concerns their level of innovativeness. together, these issues show a precarious situation for those firms who are very new and very small. there appears to be an important balancing act in the strategic processes of these firms, where these firms need to carefully weigh the areas of risktaking and innovativeness with an eye to both fitting in with established norms, yet also standing out in order to earn financial returns. as such, there is a tradeoff in dedicating resources and processes related to implementing entrepreneurial strategic processes. discussion in this paper, we have addressed the question of whether strategy is different for new and very small firms. in short, we answer yes, but also present a number of non-obvious reasons. in discussing four major components of strategic management (strategic analysis, strategy content, strategic assets/capabilities and strategic processes), we explore the impact of the liabilities of smallness and newness. we outline many of these issues in table 1. at first glance, these liabilities would appear to be unduly negative, and thus constitute a strategic management-based logic as to why firms in this size and age class have a higher mortality rate than others (stinchcombe, 1965; freeman, et. al., 1983). reasons that would be particularly relevant include that new and small firms, almost by definition, have lower stocks of valuable resources that are critical for growth (barney, 1991), they lack legitimacy which creates challenges in acquiring those critical resources such as financing and new employees, and that they lack bargaining power in relation to suppliers (dobrev & carroll, 2003). the result of these issues is that microfirms and emerging enterprises may be seriously hindered in certain areas of strategic management, including creating challenges in establishing low-cost economies of scale strategies or differentiated strategies based on brand or speed. however, once a strategy is chosen, small and new firms may face an inability to implement them. strategic processes, such as entrepreneurial orientation, consume a significant amount of resources, which are often scarce within new and small firms. as a result, well intentioned strategic processes may be faulty, incomplete or ineffective. journal of small business strategy volume 21, number 2 table 1: mapping the impacts of newness and smallness on strategy the impact of newness the impact of smallness strategic analysis swot analysis 5-forces analysis value chain analysis lack of power over supplies and customers may force firms into precarious competitive positions view of locally defined competitors and niche customers may constrain analyses may lack ability to conduct traditional analyses due to a lack of core strengths or weaknesses unable to provide full set of activities due to lack of human capital strategic content cost leadership vs differentiation new firms lack the experience to derive cost benefits from economies of learning the lack of a track record prevents new firms from differentiating themselves through brand image smallness runs contrary to economies of scale and scope, limiting the ability of small firms to derive cost advantages. limited resources in small firms inhibit a firm’s capacity to continually be first to market. strategic assets/capabilities resource-based view lack of legitimacy creates challenges in acquiring other valuable resources lack of firm level resources creates a greater reliance on individual and firm external resources lower stock of valuable resources greater flexibility in the ability to manage resources strategic processes entrepreneurial orientation new firms lack legitimacy and therefore may force them to follow industry norms lack of track record may allow them to be more innovative risk-taking is balancing act to ensure survival lack of core rigidities and structures allow to quickly react and be proactive in pursuing opportunities innovative launches oftentimes require major resource outlays however, this bleak picture may not tell the whole story. practically, we know that many firms overcome the liabilities of newness and smallness and go on to become the next generation of dominant players. it was only a few years ago that google, facebook and amazon were just interesting words on the pages of a business plan. empirically, we know that frame breaking entrepreneurial activity is often prevalent in young, small firms and that these firms can play a disruptive role in entire industries (schumpeter, 1942; hockerts & wustenhagen, 2010). we suggest that small firms may also benefit from certain strategic advantages. as it concerns strategic analysis, small and micro firms may be able to succeed in niches 15 journal of small business strategy volume 21, number 2 which may initially appear unattractive for larger players. given the strong emphasis placed on business planning in many new ventures (delmar & shane, 2003), they may be more likely to think critically about the competitive landscape and put to use strategic analysis tools in ways which large firms with entrenched routines and strong path-dependences may not (baker & cullen, 1993). newness and smallness may also allow firms to employ strategies that established firms simply cannot. for instance, a new and small firm may be able to more successfully differentiate itself in a way that is against the industry norms, while established players who have helped to define the norm would be unable to replicate this approach. while new and small firms almost certainly have less stocks of resources than large established firms, they may also possess less complex structures (blau, 1970) and core rigidities, which in turn may allow them to more effectively deploy and manage their resources (sirmon et al, 2007). indeed there is evidence that smaller firms may be able to better apply knowledge resources than large diverse firms (hoang & rothaermel, 2005) and may be able to more quickly pursue subsequent opportunities (chen & hambrick, 1995). as such, the liabilities of newness and smallness can actually lead to greater advantages in new and small firms. in addition to negative and positive effects of newness and smallness, there may simply be differences in the strategy of large and small firms. we have largely reviewed small business strategy through established theoretical lenses developed within the context of large firms; however, there may be ways in which new and small firms follow different rules of the game entirely. the emerging theoretical and empirical evidence from studies on effectuation (sarasvathy, 2001) show that entrepreneurs think and act in ways that are contrary to dominant mental models in traditional corporations (chandler et al., 2011). according to an effectual approach, entrepreneurs often employ a creation or effectual logic which focuses on how to create value out of existing resources within the context of uncertain environments, which could include a heavier reliance on strategic partnerships. this is contrary to the causal logic prevalent in the strategic planning of large firms which attempt to predict an optimal decision based on a set of assumptions. similarly, new and small firms may be more likely to engage in intuitive and informal strategic processes while large established firms may be more likely to use formal strategic planning (allred, adams & chakraborty, 2007). further, many new firms and microenterprises need to rely on bootstrapping in order to overcome a lack of resources (winborg & landstrom, 2011). this may promote entrepreneurial thinking such as making do with what is at hand as opposed to planning grandiose financing plans. both strategies have advantages and disadvantages and the use of each may be better suited for their particular context. implications for new entry. in our discussion, we have frequently alternated between young firms and small firms and their related management issues. one of the potential advantages that we attributed to the liabilities of newness and smallness was an ability to pursue subsequent opportunities due to fewer sunk costs and core rigidities. while the initial entry of a microfirm into a market is the focus of many important streams of literature, there is less attention paid to subsequent strategic changes, such as expansion into new markets, and launching of new products or services. lumpkin and dess (1996) refer to 16 journal of small business strategy volume 21, number 2 17 these activities as new entry1, which they describe as the essential act of entrepreneurship. one of the key ideas brought up in our discussion of microfirm strategy was that of focusing on a well-defined niche market. in many cases, this comes in the form of a very specific (local) geographic area, such as an individual street or a particular neighborhood. one advantage of this approach is avoiding having to face larger competitors head on, as larger firms may ignore smaller niches, or attend to more heavily populated geographic markets. consider the distinction in focus of a street hot dog vendor versus a fast food restaurant such as mcdonald’s. there appear to be a number of important considerations with regard to subsequent new entry related to the liabilities of newness and smallness. for instance, many niched firms may enter a parallel or geographically proximal new market, such as one block over from their current location. yet these young and small firms may face persistent liabilities of newness and smallness even when they enter these nearby markets because internal conditions are different and they may be dealing with new customers. that is, even though their internal liabilities (routines, organizing) may have become established 1 new entry can also consist of the development of new organizations. however, this mode of new entry is very uncommon for new and very small firms, who lack the organizational structures to successfully manage this. instead, an alternative approach to this might be seen as new projects or independent new firms started by an entrepreneur. this portfolio approach to owning multiple firms is common but moves our discussion from being at the firm-level to that of the individual level. in their original location, they may have little reputation or legitimacy to draw on in the new location. as such, there may be discrete activities that new and small firms may need to enact in order to convince external stakeholders that they are legitimate. while this new entry may seem miniscule from a large firm perspective or the impact of small firms on the economy, the risks involved may be very large for the microenterprise. there are similar effects for the new product or new service new entry as well. if a microfirm needs to develop new relationships with suppliers or distributors as part of diversification, then it may face issues of supplier power again. there is currently little research as to how to transfer legitimacy from one industry to the next, and therefore how legitimacy and reputation play a role in subsequent new entry. an important aspect of future new entry research is to better understand how these liabilities are affected in a knowledge-based and networked economy. one strategy that many new and small firms engage in is to develop relationships with others to overcome individual resource shortages. yet, in the current economy where joint ventures, alliances, and virtual teams are commonplace, there is a blurring as to where the lines of an organization are drawn. individual small firms may be seen as moving parts in a machine, with fewer physical investments and a reliance on knowledge capital. in such increasingly complex network structures or clusters of firms where entrepreneurs work together to provide individual know-how to a particular task at hand, knowing what a singular firm does itself and what it does via others may provide a challenge in understanding the strategic management of these firms. journal of small business strategy volume 21, number 2 in a related area, one of the motivations behind this paper was to better understand how the liabilities of newness and smallness affect the strategic management of microfirms and emerging enterprises. for many firms, the goals of the founder are paramount. yet, prior statistics suggest that these firms also have a higher likelihood of exit and suggest that many of the founders’ goals are not met. from a new entry perspective, the question becomes what happens to these entrepreneurs? do they reenter the market with different business models, strategies, and products/services in order to try their luck again? if so, how much do they alter their strategies as part of this re-entry? or do these individuals pursue other options, such as traditional employment or unemployment insurance? there may be some national culture and political structure issues that may help define the options of these individuals, but the point nonetheless is what new entry approaches do these individuals take, if any? implications for research. there are several topics related to our analysis which we believe represent fruitful opportunities for future research. first, this paper investigated the applicability of four components of strategy common in the strategic management literature to new and small ventures: strategic analysis, content, assets/capabilities, and processes. we discussed and applied a select number of theories and perspective only to the extent that they informed these relationships. however, future research may make the applicability of theories common in strategic management to new and small ventures a focal point. a comprehensive discussion of how theories such as agency theory, stewardship theory, resource dependence theory, upper echelon theory, prospect theory, or diffusion theory manifest themselves differently in new and small ventures may provide a useful resource for strategic entrepreneurship scholars. second, while the four components we investigated may account for a large portion of strategic management activity, we were limited in our ability to comprehensively address each component. for example, the bulk of our evaluation of strategic content concerned low cost leadership and differentiation. yet other facets of strategic content include issues such as organizational simplicity (lumpkin & dess, 1995; miller, 1993) or the structure and controls used by an organization (keats & o’neill, 2001; tempel & walgenbach, 2007). an analysis similar to the one conducted in this paper upon such omitted facets of strategic analysis, content, assets/capabilities, and processes by future scholars would provide a more complete understanding of the relationship between liabilities of smallness and newness, and strategy. third, we essentially treated the smallness and newness of a firm as dichotomous – firms are either small or not; new or not. yet size and maturity are continuous firm characteristics. we have identified in this paper many findings from traditional strategy research that do not necessarily apply to young and new ventures. however, while scholars attempt to classify them, firms are generally not small or new one day and large or mature the next. for most, the progression is gradual with few obvious demarcations. as part of this, organizations have begun to adopt a number of organizational forms to either ‘act big’ in the case of smaller firms that exude substantial power or also ‘act small’ in the case of larger firms attempting to circumvent organizational structural 18 journal of small business strategy volume 21, number 2 constraints and politics in order to emulate smaller, more entrepreneurial firms. thus, taking an evolutionary perspective on the relationship between smallness, newness, and strategic components may represent an opportunity for future work on the subject. fourth, there is an important linkage between the firm and individual levels of analysis. for many microenterprises and new firms, the founder is also the most important employee and driving factor behind all of the strategic actions of the firm. as such, although we have discussed a potential lack of knowledge or legitimacy on behalf of the firm, the founders’ human capital and previous industry experience may in fact confer a large amount of knowledge and legitimacy upon the firm if the founder is someone with superior talent and reputation. one important area of interest in future is therefore in trying to understand how individual level (or team level) strengths or weaknesses play into the strategic management of the firm, and at what stage of firm development (age or size) does the reliance upon a key individual change. limitations. in this review, we have addressed very small and new firms rather generally; however, it is important to recognize that the population of small and new firms is extremely heterogeneous. within these broad classifications of firms, there may be a myriad of ways in which these firms implement strategy. for instance, the founding resources of the firm may have a substantial impact on its subsequent trajectory. among the most obvious of these resources is the impact of financing on strategic decisions. for instance, an early stage venture that receives venture capital investment or the financial support of a parent firm will have a completely different resource endowment – not only financially, but also the access to expertise and networks. this resource base has implications not only for which initial strategies they choose to implement, but also their effectiveness in resource consuming strategic processes such as eo. perhaps more pertinent is that the receipt of such investment speaks to the growth potential of the firm and its initial product/service, and therefore the human and social capital of the founder or founding team. however, while we have attempted to discuss microfirms and new ventures as being autonomous and independent, we acknowledge that the founding resources of the firms will also affect their strategy. we believe that those firms receiving external capital are more likely to pursue strategies in line with the ‘large firm’ strategic management literature. further research to understand strategy in very small firms should also examine the heterogeneous nature of small firms themselves. some important work has been done, for instance, identifying opportunity vs. necessity entrepreneurs (gem global report, 2011), growth oriented versus small business oriented firms (wiklund, davidsson & delmar, 2003), gazelles (henrekson & johansson, 2010), and microenterprises (de jong & marsili, 2006). however, much further work is needed to identity the dimensions, such as goals, growth orientation, resources, and formality, which differentiate small firms from each other and how these dimensions may impact strategy. conclusions in this paper, we have argued that the majority of work in strategic management has adopted tools, concepts and processes that have been applied in the context of large, established firms. while there is a 19 journal of small business strategy volume 21, number 2 rich literature on small business strategy, even these studies have tended to adopt the perspectives of the broader management literature. we suggest that there are potentially rich areas of research by examining the effects of liabilities of newness and smallness on the most common firms in our economy: very small and very new firms. references aldrich, h.e. & auster, e.r. 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(2007). time horizon, costs of equity capital and generic investment strategies of firms. family business review, 20, 1–15. g.t. lumpkin is the chris j. witting chair of entrepreneurship at the whitman school of management at syracuse university in new york. he is a globally recognized scholar whose primary interests include entrepreneurial orientation, social entrepreneurship, family business, and strategy making processes. his work has appeared in several top research journals and he is a co-author with greg dess, alan eisner and gerry mcnamara of strategic management: creating competitive advantages, 6th edition, published by mcgraw hill. alexander mckelvie is an assistant professor of entrepreneurship at the whitman school of management at syracuse university. alex’s research concerns how and why firms grow; and how entrepreneurs and entrepreneurial firms pursue opportunities. he received the nfib best doctoral dissertation award in entrepreneurship and he is a two-time winner of a research promise idea award from the entrepreneurship division of the academy of management. he ahs also received multiple teaching awards. his work appears in a number of journals including, journal of business ventruing, strategic entrepreneurship journal, and entrepreneurship theory & practice. david m. gras is a doctoral candidate at syracuse university. his dissertation focuses on diversification strategies within new ventures. robert s. nason is a phd student in entrepreneurship at syracuse university. he is interested in understanding firm growth and entrepreneurial activity across a diverse set of organizational configurations. robert has published in several peer reviewed academic journals including strategic entrepreneurship journal, family business review and entrepreneurship theory and practice. reproduced with permission of the copyright owner. further reproduction prohibited without permission. http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2020, vol. 30, no. 03, 65-85 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2020 small business institute® w w w. j s b s . o rg introduction olivia fachrunnisa1, ardian adhiatma2, najah lukman3, md noh ab. majid4 1dept. of management, faculty of economics, universitas islam sultan agung (unissula), jln. kaligawe raya km. 4 semarang, indonesia, olivia.fachrunnisa@unissula.ac.id 2dept. of management, faculty of economics, universitas islam sultan agung (unissula), jln. kaligawe raya km. 4 semarang, indonesia, ardian@unissula.ac.id 3dept. of management, faculty of business and management, universiti teknologi mara (uitm) cawangan terengganu, sura hujung, 23000 dungun, terengganu, malaysia, najah@tganu.uitm.edu.my 4dept. of operations management, faculty of business and management, universiti teknologi mara (uitm) cawangan terengganu, sura hujung, 23000 dungun, terengganu, malaysia, mohdnoh@tganu.uitm.edu.my towards smes’ digital transformation: the role of agile leadership and strategic flexibility apa citation information: fachrunnisa, o., adhiatma, a., lukman, n., & ab. majid, m. n.. (2020). towards smes’ digital transformation: the role of agile leadership and strategic flexibility. journal of small business strategy, 30(3), 65-85. the digital era is such a pleasant era to run a business with the support of technological sophistication. exciting new technologies, such as cloud service, big data, machine learning, and cognitive computing provide the opportunity to completely change the business way (prasad et al., 2018). the company must establish a connection to develop through a network of interconnected relationships in order to get the access of resources and capabilities (mu, 2013). these externally accessible resources are able to influence the company’s performance. it is because the interconnected relationship provide positive relationship and competitive advantage (havila & medlin, 2012; mirtega et al., 2012; mu, 2013). in this digital era, all business sectors experience a change that requires digitization in its operations, including small and medium enterprises (smes). smes are also required to adapt toward the changes in order to survive and have a sustainable competitive advantage. the biggest challenge faced by smes is how to increase the accessibility of smes to go-digital, increase the capabilities of smes to produce high quality products and have a strong competitiveness to improve community welfare. in developing countries such as indonesia and malaysia, it is important to remember that most smes operates with very limited internet access and low digital-literate levels. lack of connectivity and affordable digital access result in low attention about the importance of using digital technology, so that it affects the level of smes with weak readiness and digital capacity (warner & wäger, 2019). therefore, this is the moment for the stakeholders of smes to solve this problem. utilization of digital technology, the internet and social media can encourage the innovation capabilities of smes, and play a role in market expansion both regionally and globally through network capability (cenamor et al., digital transformation in smes has become a necessity in the industrial revolution 4.0 era. the asean economic community will be more established if smes are able to take the benefit of information technology advancement in its business process. this research aims to test the role of agile leadership and strategic flexibility to improve digital transformation in smes among asean countries. the data from this research were from 539 smes in indonesia and malaysia as representatives of asean community and tested using smart pls 3. a total of 519 usable surveys were collected. data testing results showed that agile leadership becomes the key to success in implementing digital transformation. moreover the strategic flexibility, which comes from workforce transformation and dynamic capability, is also the determining factor in the creation of digital transformation in smes. the fast response of the leader followed by strategy flexibility, play a significant role to the success of digital transformation implementation. agile leadership, strategic flexibility, digital transformation, workforce transformation, smes http://www.smallbusinessinstitute.biz http://www.jsbs.org 66 o. fachrunnisa, a. adhiatma, n. lukman, & m. n. ab. majid journal of small business strategy / vol. 30, no. 3 (2020) / 65-85 2019). the proven durability and adaptation capability become the main capital for smes to be the leading actors in digital economy. if during this time smes have difficulty in selling their products in the market, in digital economy era smes can easily market their products. through transformation efforts towards business digitization in smes, it is expected that smes will have a sustainable competitive advantage. digital transformation has opened up various possibilities for companies to interact with customers, which has led to new and unexpected business model innovations (amit & zott, 2001). in order to facilitate the wider marketing process of the smes’ product, it also needs to pay attention on the human resources readiness in the smes. the human resources in smes are expected to be able to adapt with any changes, including digitization, so that the process will run effectively, efficiently and optimally. thus, the digitization can really facilitate the interaction experience between the company and the customer, and cover a wider market. the next problem is how does the smes balance the current capabilities and build new digital capabilities that are compatible with smes’ dependency on a wide range of instruments in the past (svan et al., 2017). digitization is the fastest, most conductive and fundamental labour market intruder. according to accenture technology vision (2019), it is predicted that in the year 2020, about a quarter of the world economy will be digital. the development of technology, which triggers the presence of workforce transformation, at the same time is the cause and effect of digital era. people are always trying to develop creative innovations and new discoveries. as stated by morgan (2016), we face the next industrial revolution in form of a cyber-physical system. the revolution is not about one invention but some ongoing advances that incorporate the digital, physical and biological worlds. this leap technological becomes the main reason why there are so many new social measures taken and new businesses. the great expectation of smes development in digital era will certainly bring major changes from various facets of the company. the company will face new problems that require the important role of a leader in making decisions. strategic decisions often arise suddenly and only have a small amount of time to immediately make the most effective and efficient decision for the company’s strategy. in today’s digitization era, digital transformation becomes a strategic necessity on the leadership agenda (singh & hess, 2017). a leader has an important role in an organization. facing this era, it needs an agile and sensitive leader in all aspects. the agility of a leader will produce a strategy, which will make the company, especially smes, follow the development of the era. in addition, it needs a leader who is able to give influence to his members in order to do the work based on the needs of the company in this dynamic era. moreover, digital technology makes the consumer behaviour unpredictable, and the competition experiences a rapid change (warner & wäger, 2019). it makes dynamic capabilities become an interesting factor to be analysed. dynamic capabilities represent a suitable approach to learn the effects of information systems or their specific capabilities in organizations ( contractor et al., 2017; rialti et al., 2018. the system utilization which is able to analyse big data is often associated with general processes and routines that can be used to fix various problems related with data (wamba et al., 2017). a big adaptable data analytics system can be used in different situations and can provide a competitive advantage during environmental turbulence. similarly, the big data analysis capability is a set of capabilities that can help organizations to adapt with the underlying resources (in this case is data) to overcome the various needs of information in different situations (rialti et al., 2018). since these considerations are coherent with dynamic capability theory which most widely used approach in research of big data and performance (wamba et al., 2017). through dynamic capability, it is expected that smes will be able to maintain the implementation of business digitization in the current era especially by knowing the readiness to change of all smes stakeholders, especially owners. this is because, in the current digital era, other than ability, it also needs a readiness in addressing business transformation. in order to develop smes in the digital era, it needs a mature strategy. the successful renewal and business model transformation are the major part of strategic flexibility (doz & kosonen, 2010). the agility of this strategy cannot be separated from the company resources especially the workers. towards the agility, the workers must transform to follow the development through workers who are literate in technology, information, and innovation. not only from human resources, but it also needs to pay attention on how the company responds to the technological changes and fast markets that’s called dynamic capability (teece, 2007). if smes do not follow the development, there will be no progress, even the performance of smes itself will decreased. existing research has been discussed about how to prepare smes to go on digital transformation; however, there is still a limited number of research that offers a complex model ranging from workforce involvement, strategy implementation and leadership capability. hence, this research aims to examine the role of agile leadership and strategic flexibility in improving smes digital transformation. the rest of the paper is organized as follows: section 2 is literature review, section 3 is research method, and section 67 o. fachrunnisa, a. adhiatma, n. lukman, & m. n. ab. majid journal of small business strategy / vol. 30, no. 3 (2020) / 65-85 4 is result and discussion. conclusion and suggestions for future research are provided in section 5. literature review digital transformation for smes transformation gives the meaning of a comprehensive change in form of appearance, character and so on in a reciprocal relationship for either individual or group (sunarti et al., 2013). the transformation includes creation and it is a change from one form to completely new form in functionally and structurally (kinosian et al., 2016; margolis et al., 2017). digital transformation related with digital technology changes can bring changes in the company’s business model. the result is there is a change in the product, in the organizational structure, or in the process automation. fitzgerald et al. (2014) defined digital transformation as the use of new digital technologies (social media, mobile, analytics, or embedded devices) to enable the key business improvements such as enhancing the customer experience, streamlining the operations, or creating new business models. meanwhile, liu et al. (2011) defined digital transformation as an organization transformation that integrates digital technology and business processes in the digital economy. digital transformation is not only about technology, but also about strategy. in addition, the senior leaders’ team have to find ways to leverage new and unexpected business model innovation that optimise the customers’ needs and experience. hence, it can be concluded that digital transformation is a process or business for the company in facilitating the relationship between customers with the company itself, simplify the various processes by changing the business model through the recent technology. this change is not only limited to the use of technology but also has an impact on the structural and strategy of the company to fit the business model due to the new technology. warner & wäger (2019) measured digital transformation on three things: navigating the innovation ecosystem, redesigning internal structures and enhancing digital maturity. the research by li et al. (2018) about digital transformation on smes, explained that sme actors do digital transformation by utilizing the availability of digital platform, digital investment (ict), social capital (torres et al., 2018) development, building business team, and improving the ability of all members in the organization. not only using technical ability, in order to perform digital transformation (information system) besson and rowe (2012) argued that it also requires managerial capabilities, such as work process design, business strategy training, human resources investment in digital literacy capability. digital transformation for sme actors should not be limited to investment information technology and information system, but also more focused on the business dimension or basic business process (automation, simulation and analysis integrated data, supply chain, work design, product design, and product cycle management), products (utilization of internet, digitization with technological use for market expansion) and business model (customer oriented, adaptation ability with consumer behavior changes, increased innovation and creativity to produce products and services with a high level of personalized services). hence, it can be concluded that smes who perform the digital transformation have a goal to improve the product quality and the services. workforce transformation and strategic flexibility the transformation of the workforce is a fundamental change in circumstances and it requires a change in culture, behaviour and mind-set (shaughnessy, 2018). in other words, workforce transformation requires a change in human consciousness that truly transforms the life and livelihoods (pan et al., 2019). transformation is not just a change; but it has a more rational, cognitive and holistic perspective and can even be spiritually oriented (bertola & teunissen, 2018). workforce transformation is the creation and alteration of one form to another entirely new form functionally or structurally. gibson et al. (2015) identified the dimensions for measuring workforce transformation consist of; data capture, information integrity, identity management, access and disclosure, information management governance, content compliance, information/knowledge asset management, customer support, and information analysis and business intelligence. according to shaughnessy (2018), the dimensions for measuring workforce transformation are, the large-scale visualization of all work; a work concept, flexible and fluid, faster and more adaptive on a daily basis; adoption of new social values; and the prioritization of value-seeking activity in all work. meanwhile, according to stevens (2018), the dimension of workforce transformation are skills required, qualities required from workforce, communication, reliability, and humour. therefore, this research will use the dimensions of skill and qualities required from workforce, adoption of new social values, flexible and fluid, and faster and more adaptive on a daily basis to measure workforce transformation. based on previous research, in the digitization era, workforce transformation can be called a component that cannot be abandoned. since workforce is a very important resource of a company, it needs to be developed in order to 68 o. fachrunnisa, a. adhiatma, n. lukman, & m. n. ab. majid journal of small business strategy / vol. 30, no. 3 (2020) / 65-85 produce the performance of companies that can compete according to the era development. in this digital era, the workforce must be literate in technology. as stated by (uimonen, 2016), technological development is the mother of transformation of the workforce. if the workforce can transform in the digital era, the company will design the strategy easily. strategic flexibility is a company’s ability to respond to changes in the dynamic business environment in order to achieve the objectives, with the support of knowledge and superior capabilities. the strategic capabilities are comprised of an integrated workforce, process, product, and system (warner & wäger, 2019). strategic flexibility supports the future strategy development, and it requires rapid reaction towards the internal and external changes. the concept of strategic flexibility in product competitions is a fundamental approach to the management of uncertainty (celuch & murphy, 2010; ghorban-bakhsh & gholipour-kanani, 2018). the flexibility of strategy can offer the company a distinctive competitive advantage, due to the ability to make decision options, and various forms of strategic flexibility. it aims to deal with dynamic and changing environments that may be difficult for competitors to emulate (sanchez, 1995). factors that become the cause of smes must have strategic flexibility are; first, the development and improvement of digital technology utilization (digital network, use of access to the intensity, the use of smart phones, tablets, personal computers, and laptops in small business activities). internet usage is applied to smes such as in communication with customers, payment transactions and products promotion or services, also known as market-sensing activity (celuch & murphy, 2010). second, smes must be able to deal with global competition that requires comprehensive problem solving skills, innovation and creativity (schneider & spieth, 2014). in addition, strategic flexibility also helps smes to manage risk management through both increased rapid response capability towards the current business problems and to proactively design the future strategies (grewal & tansuhaj, 2001). strategic flexibility is also a key for smes to balance the internal and the external needs of the company to achieve competitive advantage, so that it can improve the performance. workforce transformation is related with the creation of changes from a workforce to other forms that include the fundamental changes of a state, culture, behaviour and mind-set. in digital transformation, culture in the workforce context is needed, which emphasizes on achieving efficiency, forming awareness and engagement of workers to be able to adapt to the use of digital technology in accordance with the needs of the organization to develop its business (ndayizigamiye & khoase, 2018). workforce transformation in form of skills required, quality required, communication, adoption of new social values, flexible and fluid, faster and more adaptive on daily basis, will support the growth of strategic flexibility. the study in agrifood nanotechnology by (yawson & greiman, 2017), found that workforce transformation conducted by human resource development is able to map future skill needs through skills training and development (identify best practice, learning and sharing knowledge, identification of opportunities and challenges ahead, and increased coordination and consultation for all stakeholders), so that it creates strategic flexibility for the company. based on the results of the previous study, the hypothesis can concluded as follows: h1. there is a positive relationship between workforce transformation and strategic flexibility. dynamic capability and strategic flexibility dynamic capability is related with the organization’s ability to adequately and timely adapt towards the changing environments by reconfiguring the internal or external processes and resources, through the existing competencies (eisenhardt & martin, 2000; gaur et al., 2014). the use of dynamic capability theory will allow a researcher to dismantle the big data results by simultaneously considering the routines. this aims for analysing the data and spreading knowledge to everyone in the organization (rialti et al., 2019). dynamic capability is the agent of evaluation and change that allows the company to assess what changes are needed for the resource base and their ability to remain competitive, especially to face the changing market environment (wilden et al., 2013). the absence of dynamic capabilities is seen as a threat that can hamper the company’s ability to maintain the performance level in new and constantly changing environments (gnizy et al., 2014). dynamic capabilities are characterized by persistent long-term patterns of company behaviour that facilitate adaptation, but they do not directly affect the company’s performance. so it can be concluded that dynamic capability is an organization’s ability to adapt with the changing environment for the resource base and their ability to remain competitive by spreading knowledge to everyone in the organization in a persistent long-term pattern. gnizy et al. (2014) stated that dynamic capabilities could be measured from marketing program adaption, and local integration. meanwhile oliva et al. (2018) measured dynamic capabilities with integration of individuals’ expertise in the organization; culture, orientation and leadership; and company strategies. the other dimensions are the development of an entrepreneurial management (teece et al., 69 o. fachrunnisa, a. adhiatma, n. lukman, & m. n. ab. majid journal of small business strategy / vol. 30, no. 3 (2020) / 65-85 2016), markets, technologies and regulations (park et al., 2018) sensing (ability to identify new opportunities), seizing (ability to absorb external knowledge and assimilate with prior knowledge), transforming (ability to transform knowledge into new products/services/systems/processes) (tallott & hilliard, 2016) the ability to identify and explore emerging opportunities and new sources of competitive advantages (bamel & bamel, 2018; schilke et al., 2018). so it can be concluded that, to measure or find out the dynamic capabilities, the dimensions are sensing capability, adaptive capability, innovation capability, networking capability, learning capabilities, integrating capabilities and coordinating capabilities. based on previous research, companies need to build strong dynamic capabilities to quickly create, deploy, and transform business models to remain relevant in the current digital economies (teece, 2018; teece & linden, 2017; velu, 2017). smes should be flexible, to always develop knowledge about changes in external environments by growing dynamic capabilities in organizational culture. an organizational culture that focuses on empowering dynamic abilities of workers is needed to create, deliver and capture value in the context of innovation in the digital age (schallmo et al., 2017). the example of high dynamic capability is the utilization of information technology conducted by smes. it helps to achieve the objectives more specifically, and can avoid coordination and sales transactions. dynamic capability through the use of it (information technology), also helps smes to develop strategic flexibility and to adapt towards their position in competition, to adjust and establish the connectivity between customer and competitor (schneider & spieth, 2014). as such, we hypothesize the following: h2. there is a positive relationship between dynamic capability and strategic flexibility. strategic flexibility and digital transformation strategic flexibility refers to the company’s ability to respond to uncertainty by adjusting its objectives with the support of knowledge and superior capabilities. strategic flexibility allows the company to support future strategy development, to react rapidly towards changes in internal and external. the concept of strategic flexibility in product competitions is a fundamental approach to the uncertainty management, including digital transformation (sanchez, 1995). the flexibility of strategy offer the company a distinctive competitive advantage, due to the ability to make decision options, and various forms of strategic flexibility in order to deal with dynamic and changing environments, which may be difficult for competitors to emulate (sanchez, 1995). therefore, strategic flexibility is a company’s ability to adapt towards a constantly changing environment in order to survive and continue to evolve in a new and higher level. warner (2013) measured strategic flexibility with strategic sensitivity, leadership unity and resource fluidity. the existing research proved that strategic flexibility has the potential to give positive impacts of technological capabilities. the impacts are in term of the exploration and shifting boundaries of the company’s exploration into a higher level (zhou & wu, 2010). in this digitization era, the company is encouraged to make a good change from traditional to digital. in order to realize these changes, it needs strategic flexibility, so that the company can respond to any form of uncertainty in order to realize the objectives of the company. thus, the hypothesis 3 is as follows: h3. there is a positive relationship between strategic flexibility and digital transformation. the moderating role of agile leadership in addition, we argue that successful strategic flexibility and digital transformation is determined with the existence of agile leadership. agile leadership is an agile leader who can guide his team and continually influence the team behaviour by defining, spreading, and maintaining organizational vision (perker et al., 2015). agile entrepreneurs are obsessed with providing more value to customers. in an agile organization, “customer focus” means that everyone in the organization has a clear view to the main customers and can see whether their work adds value to the customer or not (denning, 2018). marquest (2018) stated that the entire performance environment is the current fastand agility is the key to stay in a business game. leadership agility means agility in affecting people and make a change. agility is considered one of the main skills for current managers. an agile manager who has a lot of skills with flexibility and speed can facilitate the achievement of the success of larger organisations and prepare to face the challenges of the world today (buhler, 2010). so it can be concluded that agile leadership is an agile leader who can guide the team and continuously influence the team behaviour. so that the team always provide value to customers by having many skills with flexibility and speed in order to achieve the larger organization’s success, and always ready to face the current world’s challenges. perker et al. (2015) measured agile leadership as a form of leader capability to feel the sense of urgency and direction, hard work upfront – sets expectations and norms, shares responsibility and mutual accountability, effective in 70 o. fachrunnisa, a. adhiatma, n. lukman, & m. n. ab. majid journal of small business strategy / vol. 30, no. 3 (2020) / 65-85 recognising problems and making decisions, commitment and trust among members, balances individual and group needs, cohesive without stifling individuality, confronts differences and deals with conflicts, deals with minority opinions effectively, and effective communication methods. the agile leadership guidance consists of: intrinsic ability to face change; organizational views, adaptive systems; recognition of external control constraints; a humanistic, problem-solving approach; collective capability of autonomous team as basic problem-solving mechanisms; limiting planning in advance to the minimum based on the assumption of uncertainty; adaptability; react based on the results from a self-managed team; and manage results (gardner et al., 2005). the other dimensions of agile leadership include customer-first mind-set, focus on the road map for the future, continuous creation of new businesses, multiple paths to yes, willingness to take risks and acquire new institutional skills, and turning institutional skills into new businesses (denning, 2018). meanwhile, according to sanatigar et al. (2017) the dimensions to measure agile leadership are collaboration and nurturance, accepting diversity, competency, innovation and creativity, transparency and trust, flexible structure, appropriate and smooth, regulations and directives, new methods and processes for performing work, robust – high speed and updated hardware and infrastructures, appropriate and timely software and programs. so it can be concluded that the dimensions to measure agile leadership are: shares responsibility, effective in recognizing problems and making decisions, adaptive systems, and flexible structure. according to previous research results, an organization will have greater agility capability, if a leader use a far ahead and strategic perspective to make the best decision in the best time, and exert the best goal and plan by using their own initiative also the awareness and application of modern scientific methods related with work, in an environment which is filled with obscurity and uncertainty. agile leadership allows a congruence in the implementation of strategies, quickly articulates and creates a strategy into the choice of business logic, as well as infrastructure. the skills, system infrastructure, functions and processes are required in articulating and prototyping essential strategies in preparing smes to quickly respond to the changing environments (li et al., 2018). thus, hypothesis 4 is as follows: h4. agile leadership strengthen the relationship between strategic flexibility and digital transformation hence, the research empirical model (figure 1) can be visualized as follows: workforce transformation agile leadership dynamic capability strategic flexibility digital transformation h1 h4 h3 h2 figure 1. empirical model 71 o. fachrunnisa, a. adhiatma, n. lukman, & m. n. ab. majid journal of small business strategy / vol. 30, no. 3 (2020) / 65-85 method population, sample and data collection a survey methodology is used in this research to collect primary data for empirical analysis. the samples used in this research were smes with high usage of simple digital technology such as using social media for marketing and partnership purposes with clients and customer. the high usage of simple digital technology in this study is the smes who use at least mobile phones with internet connection in running their business. this is because the mobile phone is a simple digital technology that supports the use of the internet and social media (i.e., facebook, whatsapp, instagram, etc) that facilitates access to information about various digital technology features. the population of this study were smes in indonesia and malaysia with industrial classification, which are included in a homogeneous-specific section that falls under the classification of small and home industries. the samples in this study were smes with less than 300 employees, and sampling technique used in this study was non-random sampling with a purposive sampling method. they were composing company data and also collecting interest information (e.g., type of industry, number of employees and annual sales) into an ad hoc database specifically for this research project (table 1). in order to compile the primary data, the research assistants gave questionnaires to owner/leader/manager of 350 creative industries smes companies in semarang – central java indonesia and 350 companies in terengganu malaysia, as they have a strategic position in decision making related to information technology adoption. the criteria of smes selected as samples in this study are based on the development and adoption of (badan pusat statistik (bps), 2017; sme corporation malaysia, 2018; uu no. 20 tahun 2008, 2008), referring to smes according to the world bank standard (world bank group, 2018) is business types with annual sales turnover of usd 100.000 < usd 15.000.000, and full-time employees of 10 ≥ 300 people. additionally, semarang as one capital city in indonesia, and terengganu as one capital city in malaysia were selected as population targets since these areas have potential for the development of creative industry-based small businesses (bin abdul halim & mat, 2010; hapsari & setiawan, 2019). other selection criteria used in this research are smes who have used the internet in their part of business, with organization tenure more than one year (smes have been operating for at least one year). the smes creative industry sector was chosen as a sample because it requires the use of digital technology (business development, production and distribution processes, and customer relationship) to develop innovation in their business (li, 2018). smes creative industry sectors in this research, including fashion, retailer, service, food and beverages, handcraft as their part of creative industry. according to (national creative industry policy (dikn), 2018) malaysia and (badan ekonomi kreatif indonesia, 2017) indonesia, the creative industries definition refers to the united kingdom’s (departement of culture media and sport (dcms), 1998) “those industries which have their origin in individual creativity, skill and talent and which have a potential for wealth and job creation through the generation and exploitation of intellectual property”. the questionnaire contains some detail literature review on measurement scales and some questions that address workforce transformation, dynamic capability, strategic flexibility, agile leadership and digital transformation. the questionnaire also included a letter that requests the owners or senior managers or executives who acquire the topic of this study to complete the questionnaire. before doing the survey, five owners of smes had personal interviews and the questionnaire validated first by a number of academics. the interview aims to improve the quality of items and correct the wording issues. finally, after three months, a total of 519 usable surveys were collected. the majority of the respondents are owners and middle-level managers. the smes employed 5 – 300 staff and have between $100,000 (usd) and $15,000,000 (usd) in annual sales. systematic measurement error and bias in the estimation of the true relationship among theoretical constructs can be caused by the self-report questionnaire data with a cross-sectional research design, common method variance from the measurement method rather than the constructs of interest (podsakoff & organ, 1986). harman (1960) tests the existence of this problem in one-factor test (through exploratory factor analysis). this test provides substantial amount of common method variance, such as (a) a single factor from the factor analysis or (b) the majority of the covariance among the variables of one general factor (podsakoff & organ, 1986). the existence of six distinctive factors with eigen values greater than 1.0 is shown by the factor analysis (principal component analysis with varimax rotation) on the questionnaire items. these factors are 77.2% of the total variance. moreover, the largest factor is 29.8% of the total variance. common method variance concern is unlikely to merge the interpretations of the results in this study. it is because there is more than one factor and specific factor for the total majority variance. in this study, the collection of data through the distribution of questionnaires arranged in stages based on a fivepoint likert scale ranging from strongly disagree to strong72 o. fachrunnisa, a. adhiatma, n. lukman, & m. n. ab. majid journal of small business strategy / vol. 30, no. 3 (2020) / 65-85 ly agree. measures workforce transformation we defined workforce transformation as a phenomenon among workers because of some external environment changing. we measure this variable with four items such as skill and qualities required from workforce, adoption of new social values, flexible and fluid, faster and more adaptive on a daily basis. these items are developed by combination from (kucukusta et al., 2015; liu, 2014; shaugnessy, 2018; stevens, 2018). dynamic capability dynamic capability is defined as smes capability in responding to the rapid change of technology and market. the five-point likert scale with four items from (bamel & bamel, 2018; gnizy et al., 2014; schilke et al., 2018) measured dynamic capability. the items include sensing capability, adaptive capability, innovative capability, networking capability, learning capabilities, integrating capabilities and coordinating capabilities. strategic flexibility we defined strategic flexibility as the company’s ability to respond to uncertainty by adjusting its objectives with the support of knowledge and excellent ability. multi-items adopted from (warner & wäger, 2019) to measure strategic flexibility. it includes four items, which are sensitivity, strategy, leadership unity, and resource fluidity. these items mainly relate to smes activities that permit the company to generate or adjust their business strategy flexibly. agile leadership we defined agile leadership as a leadership style that can give a fast response on business opportunities and threats which derive from changes and advances in information technology. the five-point likert scale with four items from perker et al. (2015) defined agile leadership are about share responsibility, effective in recognizing problems and making decisions, adaptive system and flexible structure. digital transformation digital transformation is defined as organization transformation which integrates digital technology and business processes in a digital economy. the three items of (warner & wäger, 2019) are used to measure. those three items are navigating the innovation ecosystem, redesigning internal structures and enhancing digital maturity. results demographic respondents this study used 519 indonesia and malaysia smes as a sample. demographics respondents in this study include; country, business fields, number of employees, and annual sales, as seen in table 1. table 1 demographic respondents detail semarang, indonesia terengganu, malaysia total sample (519) 280 239 total percentage total percentage semarang 280 53.95 terengganu 239 46.05 business field semarang terengganu foods/drinks 89 31.79 76 31.80 craft 48 17.14 35 14.64 fashion 76 27.14 68 28.45 retailer 38 13.57 45 18.80 service 29 10.36 15 6.28 number of employees semarang terengganu 5 – 10 150 53.57 136 56.90 ≥ 10 – 49 85 30.36 65 27.20 50 300 45 16.07 38 15.90 annual sales semarang terengganu ≤ usd 100.000 128 45.71 118 49.37 usd 100.000 usd 3.000.000 83 29.64 67 28.03 usd 3.000.000 < usd 15.000.000 69 24.64 54 22.59 in terms of country, 53.95% smes were from indonesia and 46.05% were from malaysia. the majority of respondents in this study were smes actors engaged in the food and drinks business (terengganu 31.80% and semarang 31.79%), then the fashion business sector (semarang 27.14% and terengganu 28.45%). the business sectors of craft semarang and terengganu smes are (17.14% and 14.64%). while the terengganu smes retailer business sector was 18.83% and semarang was 13.57%. the re73 o. fachrunnisa, a. adhiatma, n. lukman, & m. n. ab. majid journal of small business strategy / vol. 30, no. 3 (2020) / 65-85 maining 10.36% and 6.28% are semarang and terengganu smes with service business. most respondents (smes) semarang (53.5%) and terengganu (56.90%) have five – employees. semarang smes with employees between 11 20 are 30.36% and 27.2% terengganu smes. then smes with more than 20 workers are only 15.90% terengganu smes and 16.90% semarang smes. judging from the ability of annual sales, the majority of indonesian and malaysian smes have a production capability of < 100 (45.71% and 49.37%). annual sales capability between 100 – 300 is 29.64% semarang and 28.03% terengganu smes. whereas smes that have more than 300 annual sales capabilities are only (24.64% and 22.59%) semarang and terengganu smes. descriptive analysis all variables in this study were measured using a fivepoint likert scale ranging from 1 = strongly disagree to 5 = strongly agree (items of measures in appendix). the mean score lower than two is rated as low, two to four rated as moderate, and higher than four is rated as high perception of understanding each variable (radzi et al., 2018). the descriptive statistical values of this research are shown in (table 2): statistical analysis and hypothesis testing the study used partial least squares (pls) to analyse the research model. the software to conduct the analysis was provided by smartpls (hair et al 2017). a variance based on pls approach is preferable to covariance-based methods, since pls imposes less restrictions on sample size and distribution (chin et al., 2003). pls is defined as a sem technique in which a measurement model and the theoretical structural model are simultaneously assessed (chin et al., 2003). in addition, it is an equal method to resolve multicollinearity problems that frequently arise in multivariate regression analysis, since pls transforms predictor variables to an orthogonal component called as pls (chin et al., 2003). although the measurement prediction and structural parameters happen simultaneously, the pls model application typically occurs in two stages. the first stage is to assess the measurement model using confirmatory factor analysis also to estimate the reliability and validity of the theoretical constructs. then, the second stage is to estimate the structural model tests of the (path) associations among the hypotheses in this research model. measurement model the initial stage before test measurement models test is to estimate the model (figure 2). evaluation of measurement models is used to test internal consistency (cronbach table 2 descriptive statistics variables terengganu semarang mean sd mean sd work transformation 4.27 0.83 4.20 0.83 dynamic capability 4.26 0.78 4.24 0.74 strategic flexibility 4.15 0.96 4.07 0.93 agile leadership 4.3 0,85 4,34 0,85 digital transformation 3.88 1.01 3,97 0.98 figure 2. estimation model 74 o. fachrunnisa, a. adhiatma, n. lukman, & m. n. ab. majid journal of small business strategy / vol. 30, no. 3 (2020) / 65-85 alpha and composite reliability); convergent validity (indicator reliability and ave); and discriminant validity (fornell-larcker, 1981, cross loading, and htmt). the test results of the measurement model of figure 3 and table 3 shows that the model is valid and reliable. the evaluation result of pls models algorithm run 1, the outer loading are more than 0.70, showing that all indicators of all variable are valid, then there is no indicators figure 3. measurement model evaluation table 3 measurement model evaluation latent variable indicators (appendix 1) convergent validity internal consistency reliability discriminant validity loadings ave composite reliability cronbach alpha htmt > 0.70 > 0.50 > 0.70 > 0.70 < 1 workforce transformation wt1 0.842 0.663 0.887 0.831 yes wt2 0.801 wt3 0.819 wt4 0.793 dynamic capability dc1 0.824 0.624 0.921 0.899 yes dc2 0.843 dc3 0.765 dc4 0.808 dc5 0.746 dc6 0.757 dc7 0.780 strategic flexibility sf1 0.875 0.734 0.892 0.818 yessf2 0.843 sf3 0.851 agile leadership al1 0.806 0.708 0.906 0.863 yes al2 0.854 al3 0.846 al4 0.858 digital transformation dt1 0.832 0.687 0.868 0.774 yesdt2 0.836 dt3 0.819 moderating effect al*sfdt 1.706 0.734 1.000 1.000 yes source: smartpls output 75 o. fachrunnisa, a. adhiatma, n. lukman, & m. n. ab. majid journal of small business strategy / vol. 30, no. 3 (2020) / 65-85 that needs to be eliminated. reliability indicator shows the value of all indicator-loading factor of more than 0.70 and ave values above 0.50. internal consistency reliability demonstrates the value of cronbach alpha and composite reliability of more than 0.70. to test the discriminant validity, fornell-larcker 1981 researchers used a matrix and htmt (heterotrait-monotrait ratio of correlations) as suggested by (henseler et al., 2016). in fornell-larcker 1981 matrix (table 4), the value of the square root of ave (diagonal) greater than all the values, and the value of htmt (table 3) is less than one. hence, it can be concluded that the discriminant validity of the measurement models was confirmed. in order to assess discriminated validity, fornell & larcer (1981) stated that the square root of the ave of a latent variable should be higher than the correlations among the rest of the latent variables. table 4 shows, discriminated validity holds for the model, as the square root of the ave for each construct shows higher than the correlations among the variable construct. table 4 fornell-larcker criterion agile leadership digital transformation dynamic capability moderating effect (agile leadership moderates strategic flexibility on digital transformation) strategic flexibility work transformation agile leadership 0.841 digital transformation 0.567 0.829 dynamic capability 0.580 0.549 0.790 moderating effect (agile leadership moderates strategic flexibility on digital transformation) -0.433 -0.184 -0.342 1.000 strategic flexibility 0.595 0.582 0.747 -0.420 0.856 workforce transformation 0.673 0.550 0.781 -0.356 0.766 0.814 source: smartpls output structural model coefficient of determination the coefficient of determination (table 5) is used to measure the ability of exogenous constructs in explaining endogenous variable. the expected r² value criteria are between zero and one. the result of r² value of all endogenous variables shows ability in predicting the model. the value of r² 0.75, 0.50 and 0.25 (hair et al., 2017) show that the ability of endogenous variables in predicting models is (strong, moderate, and weak). it can be concluded that endogenous variables of strategic flexibility and digital transformation have moderate abilities (0.434 and 0.644) in predicting models. it can be 76 o. fachrunnisa, a. adhiatma, n. lukman, & m. n. ab. majid journal of small business strategy / vol. 30, no. 3 (2020) / 65-85 said that exogenous variables (workforce transformation, dynamic capability) are able to predict (43.4%) endogenous variables of strategic flexibility, while the rest is influenced by other variables outside of this research. exogenous variables of agile leadership and strategic flexibility are also able to predict (64.4%) endogenous variables of digital transformation, while the remainder is influenced by other variables outside this research. figure 4 shows the results of the structural model analysis, showing the path coefficients along their significance levels. path coefficient, t-value, and ρ-value for each hypothesis are shown in table 6. path coefficients describe the strength of relationship between constructs (latent variables). this evaluation is similar to that of the regression coefficients. analogous to the indicator weight analysis, the use of bootstrapping techniques allows for accessing each coefficient’s significance (tenenhaus et al., 2005). h1 assesses a positive impact of workforce transformation on strategic flexibility. diamantopoulos et al. (2005) categorized path coefficients that are under 0.30 as the causing moderate (effects), from 0.30 to 0.60 as strong, and up to 0.60 as very strong. consequently, workforce transformation establishes a strong, positive, significant effect on strategic flexibility (path coefficient = 0.469; t-value > 1.96; ρ-value < 0.001. if the company often transform their workforce, it will give the better chance to have strategic flexibility. the other result also arises dynamic capability, which has a strong, positive and significant effect on strategic flextable 5 coeffecient of determination endogenous variable r² r² adjusted strategic flexibility 0.434 0.431 digital transformation 0.644 0.643 source: smartpls output figure 4. structural model evaluation table 6 path coefficient and effect size path coef t-value p-value f² hypotheses work transformation  strategic flexibility 0.469 7.803 0.000 0.241 supported dynamic capability  strategic flexibility 0.381 6.793 0.000 0.195 supported strategic flexibility digital transformation 0.418 6.780 0.000 0.189 supported agile leadership moderates strategic flexibility  digital transformation 0.094 2.392 0.017 0.035 supported source: smartpls output 77 o. fachrunnisa, a. adhiatma, n. lukman, & m. n. ab. majid journal of small business strategy / vol. 30, no. 3 (2020) / 65-85 ibility (path coefficient = 0.381; t-value > 1.96; ρ-value < 0.001). therefore, h2 also confirm empirical support from the data. the result of h3 also confirm empirical support from the data. strategic flexibility has a positive and significant relationship on digital transformation (path coefficient = 0.418; t-value > 1.96; ρ-value < 0.001). in conclusion, strategic flexibility demonstrates a strong, positive, and significant impact on digital transformation. finally, the results of h4 also confirm the moderated effect of agile leadership between strategic flexibility and digital transformation. the moderating effect shows the interaction between exogenous variables (predictor) and moderator variables in influencing endogenous variables (baron & kenny, 1986; henseler & fassott, 2010). agile leadership as moderator variable of interaction between strategic flexibility on digital transformation shows (path coefficient = 0.094; t-value > 1.96; ρ-value < 0.001). this result show that agile leadership has a moderate, positive and significant moderation effect on the interaction between strategic flexibility to increase digital transformation. effect size of f-square indicates that exogenous latent variables have a large influence (effect degree/ effect size) on endogenous variables, with criteria (0.02 = weak/ low, 0.15 = moderate, and 0.35 = strong/high) ((baron & kenny, 1986). the f² value in table 6 illustrates the effect of workforce transformation, dynamic capability and strategic flexibility have moderate effect on digital transformation (0.241, 0.195, and 0.189). figure 5 illustrated the graph of the moderating effect. these results represents effect of strategic flexibility on digital transformation under high and low levels of agile leadership, respectively. in the context of moderation effect, f² indicates what degree the moderation variable contribute to the explanation of the endogenous variable. the f² value suggested by hair et al. (2017) from the f² classification is 0.005, 0.010, figure 5. graph of the moderating effect and 0.025 constitute more realistic standards for low, moderate, and high effect sizes, respectively. table 6 explains that agile leadership as a moderating variable in the interaction between strategic flexibility and digital transformation, provides a high degree of moderation effect with a value of f² 0.035. predictive relevance (q²) cross-validated redundancy (q²) is a method used to test predictive relevance. if the q² value is higher than zero then the model has an accurate predictive relevance to a construct (figure 6). the previous cross-validation test hypotheses commu figure 6. predictive relevance 78 o. fachrunnisa, a. adhiatma, n. lukman, & m. n. ab. majid journal of small business strategy / vol. 30, no. 3 (2020) / 65-85 nality and redundancy indices estimate the quality of the structural model. it means that the cross-validation (cv) communality global ensures that the quality of the structural model fit the indices are positive for all the blocks, considering the measurement models as a whole. in addition, a metric to evaluate the quality of each structural equation is offered by cv redundancy index. this index should be positive for all endogenous constructs (tenenhaus et al., 2005). this study provides the models of equal and suitable predictive validity since all the latent variables have values for cross-validation (cv) redundancy and commonality. table 7 and figure 6 shows the value of the q-square all dependent variables more than 0. after analysing the quality of the structural equation, the next step is to examine the relationship among all constructs. according to chin (1998), bootstrapping (500 sub samples) generates standard errors and t values. figure 7 shows the results of structural model analysis and the path coefficients along with their significance levels. path coeffitable 7 predictive relevance variable cv communality cv redundancy agile leadership 0.503 digital transformation 0.365 0.286 dynamic capability 0.496 moderating effect 1 agile leadership*strategic flexibility digital transformation 1.000 strategic flexibility 0.448 0.467 work transformation 0.433 source: output of smartpls cient and t value (sign) for each hypothesis shown in table 6. work transformation digital capability strategic flexibility digital transformation agile leadership 0.469(7.803)*** 0.418(6.780)*** 0.388(6.063)*** 0.094(2.392)** rr²²==00..4433 rr²²==00..6644 figure 7. results of the structural model **ρ < 0.05; *** ρ < 0.001 discussion workforce transformation and strategic flexibility workforce transformation establishes a strong, positive, significant effect on strategic flexibility (path coefficient = 0.469; t-value > 1.96; ρ-value < 0.001. if the company often transform their workforce, it will give the better chance to have strategic flexibility. the result ensure that the existence of this kind of transformation – combining features of knowledge, skill and attitude of workforce – is antecedent to the strategic flexibility. this shows that the higher the level of ability to work transformation of smes (workers), has an effect on increasing the ability of smes to design strategic flexibility. the results of this study are in line with (uimonen, 2016) which shows the ability of workforce transformation in the digital era influence strategy design. the results of the research showed that workforce transformation improves strategic flexibility. these initiatives mainly regard workforce as the main component in technology change (ghobakhloo et al., 2012). in this case, a strong workforce transformation lim79 o. fachrunnisa, a. adhiatma, n. lukman, & m. n. ab. majid journal of small business strategy / vol. 30, no. 3 (2020) / 65-85 its the company to start the digital transformation through substantial investment and development initiatives in order to change the workforce mindset and behavior. this type of transformation leads the employees to believe that technology disruption along with support from organization are basic for organizational transformation (cha et al., 2015). dynamic capability and strategic flexibility h2 also admits empirical support from the data. dynamic capability, has a strong, positive and significant effect on strategic flexibility (path coefficient = 0.381; t-value > 1.96; ρ-value < 0.001). dynamic capability features such as sensing capability, adaptive capability, innovative, networking, learning and integration between those capabilities also contribute to the development of strategic flexibility. therefore, a greater tendency of firms focused on workforce transformation and dynamic capability for organizational functioning and performance are likely to consider efforts devoted to development and support of the strategic capability by strategic sensitivity, leadership unity, and resources fluidity. smes owner and their leader need to build strong, dynamic capabilities to quickly create, implement and change business models to stay relevant in the emerging digital economy (teece, 2018; teece & linden, 2017; velu, 2017). strategic flexibility and digital transformation strategic flexibility has a positive and significant relationship on digital transformation (path coefficient = 0.418; t-value > 1.96; ρ-value < 0.001). the result of h3 also admits empirical support from the data. strategic flexibility demonstrates a strong, positive, and significant impact on digital transformation. a combination between strategic plan, leadership on strategy and resources of business revolution practices give positive relationships with digital transformation. traditionally, this research demonstrates that strategic flexibility has a relation with digital transformation (celuch & murphy, 2010) as new or existing combined leadership of strategy plan and implementation can contribute to either innovation or transformation (schneider & spieth, 2014). the moderating role of agile leadership agile leadership as moderator variable of interaction between strategic flexibility on digital transformation shows (path coefficient = 0.094; t-value > 1.96; ρ-value < 0.001). this result show that agile leadership has a moderate, positive and significant moderation effect on the interaction between strategic flexibility to increase digital transformation. finally, h4 also confirms the moderated effect of agile leadership between strategic flexibility and digital transformation. the result of f² 0.035 represents that agile leadership is able to provide a high degree moderating effect of the interaction between strategic flexibility and digital transformation. agile leadership moderates the relationship between strategic flexibility and digital transformation. as the hypotheses proposed, when a company has a greater tendency toward digital transformation, this company develops and supports a larger volume of flexibility to plan and implement a strategy, which then gives a positive impact to its digital transformation. the results show that agile leadership acts as a moderator in aligning the implementation of strategic flexibility and quickly articulating and designing a strategy in the logic of the business world, (sanatigar et al., 2017). this supports the study by li 2018 and steude 2017 that leadership helps improve the ability to adapt infrastructure and process of digital information systems, to deal with uncertainty and radical change in the business world. conclusion and implications research on the best way to plan and implement organizational factors to produce digital transformation is growing, owing to this question’s theoretical importance and practical relevance for firms. among these factors, strategic flexibility and agile leadership define a way to establish a clear direction for firms to resolve organizational tasks due to digital transformation (callaway et al., 2009; doz & kosonen, 2010). this study shows that in digital era, work transformation and dynamic capability should also be established in order to create the conditions for adequate management of digital transformation (li et al., 2018). furthermore, this research demonstrates the role of agile leadership as a moderating variable towards the enhancement of digital transformation in their business environment. this can be achieved through a leader who is a visionary and thinks strategically in making decisions. in addition, a leader also needs to have initiative and awareness in implementing modern scientific methods because of the rapid and uncertain environmental changes. in the end, the company will be able to achieve higher agility. work transformation has a positive and significant impact on strategic flexibility. dynamic capability has a positive and significant impact on strategic flexibility. furthermore, strategic flexibility positively and significantly affect the ability of digital transformation. the findings illustrate that most sme actors already have agile leadership, strategy flexibility, workforce transformation and dynamic capability in 80 o. fachrunnisa, a. adhiatma, n. lukman, & m. n. ab. majid journal of small business strategy / vol. 30, no. 3 (2020) / 65-85 running their business. so that, it is expected that digital transformation will be faster. this flexibility combines the different elements of strategic sensitivity, leadership capabilities and resource fluidity that encourage digital transformation. this is because the environmental change will bring a sensitivity on strategic evaluation. the main point of this finding is that smes should have capability to combine the practices of strategic flexibility and agile leadership in order to implement digital transformation. smes should have the capability to flexibly change the stress on these elements in accordance with the situation demands (klein et al., 2017). therefore, developing an environment that encourages the use of strategic flexibility and agile leadership is an essential condition for managers to strengthen digital transformation. an additional contribution of this paper is to investigate the relationship theories among workforce transformation, dynamic capability, strategic flexibility, agile leadership and digital transformation through an extensive literature review, and to anticipate some effects among these constructs. indeed, it calls for additional research on how strategic flexibility and agile leadership can influence digital transformation processes. in conclusion, this paper shows the effect of agile leadership and strategic flexibility in digital transformation practices. the empirical evidence has important implications for managers and marks the effects of moderating progress related with leadership factors in the relationship between strategic flexibility and digital transformation. however, this research has the following aspects of limitations. first, research design of this study is cross-sectional, and the research design is incapable of ensuring that the causal relationships set out in the hypotheses; even the results are consistent with theoretical reasoning. further, researchers could solve this issue by applying a longitudinal design. second, this study analyses strategic flexibility in the sense of strategy changes, leadership unity and resources fluidity. in addition, agile leadership is analysed through leader capabilities in sharing responsibility, recognizing problem and decisions making, adaptive system and flexible structure. nevertheless, approaches that are more specific may be needed to take full advantage of those two processes in order to obtain distinct results when companies find themselves in different contexts (e.g., environment and time stage) (rosing et al., 2011). hence, when smes require creativity and experiment to face the rapid change scenario, a strategic flexibility and agile leadership may need other measurements. in this regard, future studies could try to analyse another type of strategic flexibility and agile leadership with different environmental or temporal settings. third, self-report data is used by this study. it may suffer from the effects of general method variance. future research could be useful from independently achieving and using objective measures of digital transformation. fourth, the t test is to verify that non-response bias is applied in this study. even though the higher response rate is 96.28 only in semarang central java indonesia and terengganu, malaysia, it is not enough to describe the overall condition of indonesian and malaysian smes. sampling is needed for smes in several regions of indonesia and malaysia more broadly. future research could focus on a wider range of smes in order to validate the results and increase the sample size of the study. fifth, respondents in the study were limited to smes in the southeast asian region, potentially limiting understating of workforce culture and leadership. therefore, different work and cultural dynamics in the context of workforce and leadership of several smes outside the asia region can be targeted by future research in order to validate the results for a wider impact to increase smes digital transformation. references accenture technology vision. 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(2010). technological capability, strategic flexibility, and product innovation. strategic management journal, 31(5), 547–561. https:// doi.org/10.1002/smj.830 85 o. fachrunnisa, a. adhiatma, n. lukman, & m. n. ab. majid journal of small business strategy / vol. 30, no. 3 (2020) / 65-85 appendix items of measures 1. workforce transformation (adapted and developed from stevens, 2018 and shaugnessy, 2018) 1) my company always improves the skills of the workforce needed in accordance with the changing environment. 2) my company adopts new social values of the community to the workplace. 3) my company has regulations that are flexible and easily adapt to the conditions of the business environment. 4) my company’s human resources are always faster and more adaptive in responding to changes in digital technology. 2. dynamic capability (adapted and developed from bamel & bamel, 2018; schilke et al., 2018; gnizy et al., 2014) 1) my company is able to feel the changes in the business environment periodically so that the products or services we provide are as expected by customers. 2) my company is able to adjust to changes in the business environment. 3) my company able to create innovation with changes in the business environment. 4) my company is able to form a network with changes in the business environment. 3. strategic flexibility (adapted and developed from warner & wäger, 2019) 1) my company has a strategic sensitivity facing the dynamics of the business environment. 2) my company has a core team that is reliable at making bold and fast decisions, without getting caught up in the top-level “win-lose” politics. 3) my company has an internal ability to modify resources quickly. 4. agile leadership ( adapted and developed from perker et al., 2015) 1) i always share responsibilities with members of my company. 2) i have the ability to recognize problems to make decisions. 3) i always ready to face all challenges in the changing business environment. 5. digital transformation ( adapted and developed from warner & wäger, 2018) 1) my company emphasizes the use of digital technology in its business activities. 2) my company summarizes some of its business processes because it switches to the use of digital technology. 3) the company increases the mastery of digital technology in its business processes. summer journal strategic entrepreneurship: imitation versus substitution scott b. droege western kentucky university scott.droege@wku.edu lily c. dong university of alaska fairbanks fflcd@uaf.edu abstract while entrepreneurship is linked with innovation, entrepreneurial firms often imitate competitors rather than offering new substitute products or services. this research examines the conditions under which entrepreneurs utilize an imitation versus a substitution strategy by integrating entrepreneurial orientation with resource-based view of the firm in considering entrepreneurs’ resource accumulation decisions. we apply this integration to the managerial decision of whether to imitate competitors or create substitute products or services. introduction as an emerging field of study, one of the m a n y q u e s t i o n s r a i s e d a b o u t entrepreneurship is how it differs from other domains such as strategy (shane and v e n k a t a r a m a n , 2 0 0 0 ) . e a r l i e r entrepreneurship literature has focused on the identity and attributes of the entrepreneur or on the characteristics of young, start-up firms. this contrasts with a still earlier emphasis on innovation (schumpeter 1934), and uncertainty (knight, 1921; cantillon, 1734). shane and venkataraman (2000) have called for a more theory-driven approach that addresses the questions of how promising entrepreneurial opportunities are identified, evaluated, and exploited to actualize opportunities. it is interesting that while entrepreneurial activity focuses on actualizing promising opportunities, the strategies and actions by which many entrepreneurial firms do so are best described as imitation strategies. thus, entrepreneurial activity comprises not only innovation but also imitation. to better understand this dynamic, we integrate entrepreneurial orientation (lumpkin and dess, 1996) and the resource-based view of the firm (e.g., barney, 1991; wernerfelt, 1984) to analyze the decision processes firms use when evaluating imitation versus s u b s t i t u t i o n r e s o u r c e a c c u m u l a t i o n strategies. although the resource-based view literature primarily concerns itself with firm p e r f o r m a n c e , t h a t p e r f o r m a n c e i s conditioned by a firm’s ability to attract and create valuable and rare resource bundles and the conditions of uncertainty that govern resource acquisition and use. we therefore ask the following question: when are entrepreneurial firms more likely to attempt acquiring innovative resources—a substitution strategy—as opposed to imitative resources? such decisions are influenced by a myriad of factors including the type of resource involved (peteraf, 1993; miller and shamsie, 1996), external dimensions of the firm (e.g. dess and beard, 1984), and internal dimensions such as top management team diversity (richard, barnett, dwyer and chadwick, 2004). 51 strategyjournal of small business mailto:scott.droege@wku.edu mailto:scott.droege@wku.edu specifically, we combine the entrepreneurial orientation literature with the resource-based view of the firm to consider whether firms u s e d i ff e r e n t r e s o u r c e a c c u m u l a t i o n strategies dependent on whether they compete using an imitation or a substitution strategy. to provide a framework for our arguments, we draw upon the concept of entrepreneurial orientation focusing on entrepreneurial practices, processes, and managerial decision-making activities that lead to a firm’s resource accumulation strategies. among the dimensions that have frequently been characterized as important in such processes are innovativeness, risk taking, and proactiveness. kreiser, marino, and weaver (2002) found in their test of the covin and slevin (1989) scale measuring t h e s e d i m e n s i o n s o f e n t r e p r e n e u r i a l orientation that the scale’s psychometric properties are reliable and valid across multiple countries and cultures. they argue that innovativeness, risk taking, and proactiveness can vary independently and are valid, reliable measures for assessing entrepreneurial orientation and are adequate measures across multiple nations and cultures. to these dimensions lumpkin and dess (1996) add competitive aggressiveness and autonomy. dess, lumpkin, and mcgee (1999) suggest that the multidimensionality of the entrepreneurial orientation construct requires assessment of these various dimensions and argue that little co-variation exists due to the independence of each dimension. we thus direct our attention to these five dimensions—innovativeness, risk t a k i n g , p r o a c t i v e n e s s , c o m p e t i t i v e aggressiveness, and autonomy— because each requires a different resource bundle to enact strategy. this provides a useful f r a m e w o r k f o r i d e n t i f y i n g a f i r m ’s propensity to engage in entrepreneurial activities that can include imitation or substitution-based resource accumulation. before developing our arguments, we suggest a caveat. there is debate as to whether or not the inclusion of competitive aggressiveness and autonomy (lumpkin and dess, 1996) are unique variables that add significant variation to the entrepreneurial orientation construct (covin and slevin, 1989). indeed, entrepreneurial orientation may be more unidimensional than had been previously thought given that correlations among the entrepreneurial orientation dimensions tend to be high. given this caveat, our following arguments should be interpreted with the cautionary note that there may be high multicollinearity among variables. still, in the interest of exposing fine-grained theoretical distinctions, we treat each variable separately. in the following sections, we explain how the process of recognizing the characteristics of different resource bundles helps to shape the decision to pursue either imitation-based or substitution-based strategies, and to examine the internal contingencies to entrepreneurial firms that influence decisions to shift resource accumulation strategies b e t w e e n i m i t a t i o n a n d s u b s t i t u t i o n emphases. we divide our discussion into the following sections. the first section discusses the resource-based view of the firm a s i t r e l a t e s t o f i r m s e n g a g i n g i n entrepreneurial activity. this is followed by a discussion of the inimitability and nonsubstitutability prerequisites for such firms to obtain sustainable resource rents. next, we e x a m i n e t h e c o n t i n g e n t e f f e c t s o f entrepreneurial orientation dimensions on pursuing either imitationor substitutionbased resource accumulation bundles. we then present a discussion of implications for managers, how the propositions developed in this research might be empirically tested, and suggest future research directions. the resource-based view of the entrepreneurial firm the resource-based view of the firm suggests t h a t w h e n f i r m s e x p l o i t b u n d l e s o f idiosyncratic resources, these firms may gain superior performance when these resource bundles (1) have value; (2) are scarce; (3) are difficult for competitors to imitate; and (4) for which strategically equivalent substitutes do not exist or are too costly to present buyers with a reasonable alternative (barney, 1991). thus, the differences among firm performance in a given industry may be at least partially explained by the accumulation and exploitation of such idiosyncratic resources (peteraf, 1993). penrose (1959) journal of small business strategy 52 was among the first to develop this line of thinking by arguing that the possession of superior resources alone is not sufficient to create competitive advantage; instead managers execute strategies that exploit these resources in ways that synergistically leverage resource value. although the resource-based view has been p r i m a r i l y e m p l o y e d t o d i s c u s s t h e performance differences across existing firms, we take a different approach by considering whether the entrepreneurial o p p o r t u n i t y p r o c e s s i s r e l a t e d t o i d i o s y n c r a t i c r e s o u r c e a c c u m u l a t i o n . entrepreneurs differ in their ability to recognize new opportunities; this is partly the result of absorptive capacity, or the ability to recognize new opportunities as a result of an accumulated knowledge base (cohen and levinthal, 1990; venkataraman, 1997). because entrepreneurs’ accumulated k n o w l e d g e b a s e s a r e c o m p r i s e d o f i n t a n g i b l e , t a c i t , a n d i d i o s y n c r a t i c knowledge, entrepreneurs’ absorptive capacity can serve as the starting point in developing an idiosyncratic resource base. however, relying on superior knowledge as the starting point for resource accumulation presents problems when considered in light of sustainable competitive advantage. because knowledge typically diffuses over time, sustainable value, arised from knowledge scarcity, erodes over time, thus p o t e n t i a l l y e r o d i n g t h e c o m p e t i t i v e advantage that may have initially resulted from such knowledge. kogut and zander (1992) suggest that sustainable competitive a d v a n t a g e r e q u i r e s a “ d y n a m i c ” accumulation of knowledge, in addition to processes that support a faster and broader inclusion and analysis of new information (cohen and levinthal, 1990). the challenge i s t o s l o w k n o w l e d g e d i f f u s i o n t o competitors. even patent and trademark protection, while valuable, cannot provide absolute guarantees against knowledge diffusion and exploitation by competitors. for the entrepreneur, this creates both a challenge and an opportunity. the diffusion of new knowledge provides fresh material to combine with existing stocks of knowledge, but it is also the means by which the value of existing knowledge erodes. the rate of erosion largely determines the returns received from specific resource bundles: rapid erosion eliminates any economic or strategic rents from accruing to the firm. thus, entrepreneurs seek not only to identify promising opportunities, but also to identify ways to erect mobility barriers around their resources. with dynamic diffusion of knowledge both in and out of the firm, creation of unique resource bundles arises partially from a firm’s ability to leverage its knowledge. rare, inimitable resource bundles created from a firm’s stock of knowledge represents an active flow of k n o w l e d g e g a i n e d b y a f i r m f r o m competitors balanced against knowledge losses that diffuse to competitors (dierickx and cool, 1989). while the threats from diffusion of knowledge include erosion of a firm’s economic profit to a normal profit level, the threats from substitution may be more pronounced. substitution can render a firm’s resources obsolete as competitors destroy the value of competencies through s c h u m p e t e r i a n c r e a t i v e d e s t r u c t i o n (schumpeter, 1934). while the resource-based view sheds light on entrepreneurial new opportunity discovery processes, it also provides a conundrum for opportunity exploitation. the resource-based view presents the key insight that the acquisition of resource bundles occurs under uncertainty. firms and individuals cannot openly bid for resources that explicitly provide an economic or strategic rent. otherwise, competitors will bid away any rents in excess of normal profits in accumulating the assets (barney, 1991). thus, a successful resource accumulation strategy requires luck, superior knowledge, a willingness to accept greater risk, or a combination of these (barney, 1986). while we agree with shane and venkataraman’s (2000) argument that an entrepreneur’s idiosyncratic stocks of knowledge may open up new opportunities, nothing precludes other entrepreneurs from being able to identify those same opportunities. this argues for a theoretical separation of entrepreneurial imitation versus substitution resource accumulation strategies. volume 19, number 1 spring/summer 2008 53 fortunately for entrepreneurs, idiosyncratic knowledge, while valuable, is also difficult to value. while the costs for an opportunity can be estimated to some level of precision, estimations of the returns are much less precise (knight, 1921). indeed, if the superior knowledge is tacit, how can it be sufficiently communicated such that the entrepreneur can leverage it to create unique resource bundles? several researchers (e.g., deeds, decarolis, and coombs, 1997; stuart, hoang, and hybels, 1999) have identified other critical resources that entrepreneurs must acquire in order to successfully exploit an opportunity. these other resources, while valuable, need not be unique, provided that the ability to acquire them is moderately rare and creates a separating equilibrium between those who possess the resource and those who do not (peteraf, 1993). thus, the ability to successfully exploit an opportunity may have less to do with the value of the opportunity and more to do with the firm’s stock of c o m p l e m e n t a r y r e s o u r c e s . t h e s e complementary resources provide the means to acquire additional resources. the ability to gain additional resources can itself be considered a resource. we can thus view entrepreneurial firms as comprising both common and scarce resources while promising that opportunity is rare and associated with uncertain returns. what we lack is an understanding of why firms create the specific resource bundles that they do. some have proposed separating entrepreneurship—the study of new entry to market—from entrepreneurial orientation, the attributes of how the entry to market occurs and the a priori processes involved in the decision (lumpkin and dess, 1996). while we appreciate the value to theory building that this separation creates, when it comes to moving from opportunity discovery to opportunity exploitation we see the two as critically linked. we contend that an important internal attribute drives the decision to acquire specific types of resources. in the following section, we examine the effects that entrepreneurial orientation has upon that process and develop propositions to guide future research. figure 1 illustrates the relationships of our propositions to substitution-based and imitation-based resource accumulation strategies. journal of small business strategy 54 figure 1. relationship of propositions to substitution-based and imitation-based resource imitation-based resource accumulation strategy substitution-based resource accumulation strategy p1: autonomy at multiple levels p2a: incremental innovation p2b: radical innovation p5b: second-to-market (or later) p5a: proactive first-movers p4: increased risk-taking p3: increased competitive aggressiveness accumulation strategies internal influences: entrepreneurial orientation entrepreneurial orientation suggests an independence of action, a willingness to explore new ideas, and attempts to destroy the market leader’s position by discovering new markets. such a perspective derives from schumpeter’s (1934) seminal work on “creative destruction.” entrepreneurial orientation consists of five dimensions: autonomy, innovativeness, risk taking, p r o a c t i v e n e s s , a n d c o m p e t i t i v e aggressiveness (covin and slevin, 1989; lumpkin and dess, 1996). although these d i m e n s i o n s a r e s e p a r a t e f r o m t h e e n v i r o n m e n t , t h e y i n t e r a c t w i t h t h e environment to influence the choice of decisions to be made. autonomy autonomy refers to the independent actions taken to execute an idea. autonomy can be expressed in terms of centrality of power and decision making, i.e., from firms composed of autocratic leaders at one end of a continuum to those promoting empowerment at the other end. in a highly centralized organizational structure, the top management team exercises authority to decide which resources are to be accumulated. similar to hart’s (1992) command mode and bourgeois and brodwin’s (1984) commander model, autocratic leaders impose their vision upon the rest of the firm. this is particularly t y p i c a l o f s m a l l e r a n d n e w e r f i r m s (mintzberg and waters, 1985). autocratic leaders are just as likely to imitate a competing firm in the belief that their management capability will provide the firm with better results as they are to strike out on their own, exploring purposefully for substitute strategic resource bundles. at the other end of the spectrum, some firms develop organizational structures that drive decision making downward to individuals and small groups. such firms flatten their hierarchical structure and encourage intrapreneurship (pinchot, 1985), promoting innovativeness among smaller business units. burgelman (1983) identified the presence of product champions, who move new ideas through the firm’s marketplace for resources. such autonomy encourages new ideas, which are frequently substitutes for existing products and processes. thus, depending on how autonomy is managed within the firm, we could expect to observe different outcomes. autonomy, then, may be seen in smaller s t a r t u p f i r m s e v e n w i t h a u t o c r a t i c m a n a g e m e n t . wi t h d e c i s i o n m a k i n g a u t h o r i t y c o n c e n t r a t e d i n t h e t o p management of these firms, autocratic managers have the discretion to allocate resources to new market possibilities. on the other hand, we expect firms that encourage idea generation from individuals outside the top management team to be more likely to recognize new market opportunities. greater recognition of new opportunities by these firms should lead to more substitution-based resource accumulation strategies compared to firms with autocratic top management teams. proposition 1: firms with autonomy at multiple organizational levels are more likely to use a strategy based on substitution rather than imitation resource accumulation. innovativeness the innovativeness dimension refers to the degree in which a firm engages in developing and sustaining new ideas and processes, especially since these new processes create new products and services. this perspective draws on kogut and zander’s (1992) work on combinative capability. they contend that firms create new knowledge through the process of r e f i n i n g t h e i r e x i s t i n g k n o w l e d g e . schumpeter (1934) developed the concept of “creative destruction” which suggests that i n n o v a t i o n s h i f t s w e a l t h t o g r e a t e r productive uses. it spurs entrepreneurship as funds flow from existing businesses to newer ones. while by definition innovativeness might suggest employing substitute resource bundles, many improvements center on modifying existing products and processes with incremental changes. c o v i n a n d m i l e s ( 1 9 9 9 ) a rg u e t h a t innovativeness is part and parcel of corporate entrepreneurship; in fact, they suggest that firms lacking innovativeness should not be volume 19, number 1 spring/summer 2008 55 considered entrepreneurial regardless of the presence of other entrepreneurial indicators such as autonomy, risk taking, proactiveness, a n d c o m p e t i t i v e a g g r e s s i v e n e s s . innovativeness is thus a necessary but insufficient condition for firms debating whether to pursue an imitation or a substitution strategy. the covin and miles (1999) typology suggests that differentiation is the typical basis for competitive advantage of entrepreneurial firms focusing on new products or new markets. however, we take the position that fast imitation can lead to competitive advantage without incurring the risks inherent in substitution strategies. that is, while covin and miles (1999) suggest that frequent new product introduction and new market entry are modes of sustained regeneration for entrepreneurial firms, we argue that firms should not disregard the potential value-creation opportunities of imitation strategies. i n a d d i t i o n , f i r m s m a y e m p h a s i z e incremental process changes that, in total, add significantly to their ability to perform c e r t a i n f u n c t i o n s b e t t e r t h a n t h e i r competitors. for example, a firm may engage in process re-engineering to develop a low-cost leadership position (porter, 1980). the end product or service may still appear familiar to consumers, while providing the innovator with a valuable advantage. while schumpeter (1934) encouraged incremental change, such change does present some limits to the creation of new knowledge. to make meaningful changes, firms must sometimes drastically alter their resource bundles. as firms engage in what hage (1980) characterizes as radical change, they recognize the need to substitute entirely new processes for existing ones. while firms can import entirely new processes from other organizations, frequently they are new processes not in place anywhere else (hage, 1980). frequently, firms pioneer advances in both process and product design. kimberly (1981) describes innovation as a departure from existing technologies or practices and a venture beyond the current state of the art. new features not previously available now provide valuable opportunities for marketbased differentiation. nahapiet and ghoshal (1998) suggest that radical change presents itself in phenomena such as double-loop learning (argyris and schon; 1978) and paradigmatic change (kuhn, 1971). radical changes tend to be more difficult to implement; they are not only disruptive to competitors, but regularly to the firm as well. as such, radical changes are frequently opposed both inside the firm and out. radical change occurs more frequently when its value is more readily recognized, such as when firms recognize that their existing processes place the firm’s viability in jeopardy, or when critical mass to support needed changes occurs (hage, 1980). therefore: proposition 2a: firms with innovative processes that emphasize incremental improvements are more likely to use a strategy based on imitation rather than substitution resource accumulation. proposition 2b: firms with innovative processes that emphasize radical change are more likely to employ a strategy based on substitution rather than imitation resource accumulation. competitive aggressiveness competitive aggressiveness describes a firm’s emphasis on responding to a competitor’s actions rather than to the m a r k e t i n g e n e r a l . c o m p e t i t i v e aggressiveness differs from proactiveness by emphasizing reactiveness. competitive aggressiveness can be found in both market leaders and market followers (lumpkin and dess, 1996). when firms high in competitive aggressiveness choose to enter an existing market, they typically sacrifice initial profit margins in order to establish market share. similarly, when existing firms choose to d e f e n d t h e i r e x i s t i n g m a r k e t s f r o m competitors, they frequently offer to match a competitor’s best price offer. competitive aggressiveness emphasizes quick responses to competitor actions. pricing tactics are among the quickest changes firms can make. because they must lower prices quicker than they can lower costs from their products, their emphasis on speed necessarily comes at a sacrifice in profit (venkatraman, 1989). similarly, firms journal of small business strategy 56 high in competitive aggressiveness may enter markets with a high profile, spending heavily to build consumer awareness quickly (macmillan and day, 1987). competitive aggressiveness seeks to overcome any advantages that have accrued to market leaders while providing the firm with its own set of advantages. such advantages cannot be created solely by price cuts. competitive aggressiveness also suggests that firms s t r u c t u r e t h e i r t a c t i c s t o a d d r e s s vulnerabilities in a competitor’s process. thus: proposition 3: as the level of competitive aggressiveness increases, firms are more likely to employ a strategy based on imitation rather than substitution resource accumulation. risk taking strategic risk taking suggests a willingness to accept greater levels of uncertainty about the outcome of some action. miller and freisen (1978) define risk taking as “the degree to which managers are willing to make large and risky resource commitments, i.e., those that have a reasonable chance of failure” (923). baird and thomas (1985) posit three dimensions of strategic risk: venturing into the unknown, committing a relatively large portion of assets, and borrowing heavily. while virtually all decisions involve uncertain outcomes, some decisions involve greater risk because a firm’s top management team may not understand what resources are necessary to execute a decision. firms may find it difficult to imitate a competitor because they do not know what aspect of the competition to imitate. we contend that under conditions of low causal ambiguity, firms should feel more confident in their ability to determine whether or not to pursue an imitation strategy. causal ambiguity occurs when the relationship between a specific action and a specific outcome, e.g., rent generation, is unclear and tenuous. as the level of ambiguity increases, imitation becomes an increasingly less certain strategy. if causal ambiguity is low, firms should be able to estimate the level of commitment needed to accumulate imitation and substitution resource bundles. the decision to pursue an imitation versus substitution resource accumulation strategy then becomes a cost-benefit decision as the amount of resources needed for an imitation strategy is less than that needed for a substitution strategy and hinges on which strategy has the higher rent generation potential. as the cost of acquiring an imitation or substitution resource bundle increases (presenting a capital resource mobility barrier), a firm’s willingness to pursue such a bundle increasingly depends on the amount of slack resources available for the firm to employ. major commitments require firms to forego other opportunities, and the firm’s viability is jeopardized should the decision prove incorrect. similarly, debt financed resources also constrain a firm’s other opportunities, because funds generated by the resource must be employed to service the debt. again, as before, an incorrect decision may jeopardize the firm’s viability. a major cost of acquiring a resource rests with its level of specificity (williamson, 1981). a resource that can be easily redeployed lowers the acquisition cost given that the resource is less likely to be idiosyncratic to a single productive capability. a firm that makes major commitments to a flexible resource does not have to pass on as many other opportunities as one that relies on resources with highly idiosyncratic asset specificity. if risk taking is viewed as commitment under uncertainty, then which is more risky: pursuing imitation or substitution resource accumulation strategies? march (1991) suggests that one way for a new market entrant to overtake a market leader is to substitute greater variability-based processes for ones employed by the market leader. assuming that competitors have had some success, an imitation strategy should be less risky than a substitution strategy with respect to asset specificity. because a substitution resource bundle has not yet been tried in a market (as opposed to imitating an existing, successful strategy), a substitution strategy involves more uncertainty regarding redeployment of specific assets, ceteris paribus. volume 19, number 1 spring/summer 2008 57 proposition 4: as the level of risk-taking increases, a firm is more likely to employ a strategy based on substitution rather than imitation resource accumulation. proactiveness core to the entrepreneurial concept are assumptions about the importance of seizing opportunities once these opportunities are realized by the firm. even when the specific strategy needed to pursue an opportunity is not completely clear, inaction is bound to end in failure, while action, even in uncertain environments, poses the greatest opportunity for gains. firms exhibiting emergent strategy have recently been shown to have higher rates of sales growth than those following a more planned, intended strategy orientation (covin, green, and slevin, 2006). this is consistent with a proactive stance even when projected returns are difficult to estimate. nearly one-half century ago, penrose (1959) contended that management’s ability to both grasp and execute new opportunities largely determines the firm’s growth potential. the proactiveness dimension concerns itself with how a firm behaves once it discovers new market opportunities. proactiveness is distinct from both innovativeness and c o m p e t i t i v e n e s s a g g r e s s i v e n e s s . t h e proactiveness dimension can shape the firm’s competitive environment, influence trends, and in some situations, create demand (lumpkin and dess, 1996). proactive strategies focus on anticipating and acting upon market opportunities. proactive firms are frequently the first to market, and are thus the target of other firms’ decisions for accumulating imitation or substitution resource bundles. lumpkin and dess (1996) note, however, that proactiveness does not require being first to market, and that firms can seize new opportunities, even if they are not first to market. miller and camp (1985) studied 84 strategic business units and found that the second firm to market was as pioneering as the first and equally likely to succeed. proactiveness thus can manifest itself in both first mover and second mover strategies. because first movers create new demand and markets, they would not be, by definition, construed as employing imitative resource bundles. they should, therefore, expect to become targets of some other firm’s i m i t a t i o n o r s u b s t i t u t i o n r e s o u r c e accumulation strategies. to the extent that a new market emerges from the first mover’s combination of existing resources with new ones, we would better classify the proactive b e h a v i o r f o r f i r s t m o v e r e ff o r t s a s substitution-based resource bundles. second movers often succeed because they follow the market leader into a new market, capturing market share before the leader has fully established a dominant position within the market. such a tactic does not require substitute resources and can effectively employ imitative-based ones. as such, resources built on imitation are often highly effective. therefore: proposition 5a: when first to market, proactive firms are more likely to use a strategy based on substitution rather than imitation resource accumulation. proposition 5b: when not first to market, proactive firms are more likely to use a strategy based on imitation rather than substitution resource accumulation. discussion firms developing an entrepreneurial orientation benefit from a compounding e ff e c t . e a r l y o n , t h e r e s u l t s o f a n entrepreneurial orientation may consume resources at a faster rate than they achieve performance gains (dess and lumpkin, 2005). over time, however, performance gains compound from year to year, s u g g e s t i n g t h a t t h e e f f e c t s o f a n entrepreneurial orientation can be sustainable (wiklund, 1999). still, the plethora of strategic alternatives and their resultant resource accumulation requirements suggest the need for managerial guidance on which resource accumulation paths to pursue. this is a particularly important issue for small firms with limited access to the capital markets; resource accumulation that is less than optimal can create a path-dependent continuity of perennial underperformance. thus, whether to focus on imitation or substitution resource accumulation is of paramount importance particularly to firms with limited resources. journal of small business strategy 58 what is it, then, that causes entrepreneurs to focus on imitation or substitution? clearly, the decision is influenced by numerous factors, including the type of resource to be acquired, how resource bundles fit with the environment, as well as internal dimensions. peteraf (1993) suggests that a resource dividing an industry into “haves and havenots” could provide for a relative, though not absolute, advantage. this has an important implication for entrepreneurs: firms compete not only to identify promising opportunities, but also for the resources necessary to exploit that opportunity. many of those resources are commodities (e.g., capital); thus, once the firm has acquired those resources, the game shifts to competition based on the quality and value of the promising opportunities of each firm. following peteraf’s (1993) line of reasoning, we should expect firms to copy competitors when it comes to acquiring those resources that are scarce, but not unique, if they provide a separating equilibrium. similarly, we should expect to see more imitation after, rather than before, standards within an industry have been set. still, there is an advantage to setting industry standards even though this requires a riskier accumulation of resources needed for substitution strategies. firms employing a substitution resource accumulation strategy have the opportunity to define new parameters. such first mover advantages may, but do not always, result in a competitive advantage. clearly, however, these first movers take on substantial risk and unless the resultant competitive advantage is sustained; second movers using an imitation strategy may quickly dissipate the competitive advantage of a firm utilizing a substitution strategy. however, those firms that are successful in setting industry standards using substitution strategies, by defining the rules of the game, may erect entry barriers that, for a time, can hold imitators at bay. an area for future research is the linkage between cultural diversity, entrepreneurial orientation, and resource accumulation strategies. prior research has indicated that cultural diversity among top management team members plays a role in gaining a competitive advantage (barney, 1986). for example, richard, barnett, dwyer, and c h a d w i c k ( 2 0 0 4 ) f o u n d a p o s i t i v e relationship linking innovativeness to racial and gender heterogeneity while uncovering a negative relationship linking risk taking to racial and gender heterogeneity. such findings may be expanded by considering cultural diversity at a national level. national culture serves as a moderator between entrepreneurial orientation and the extent to which firms engage in strategic alliances (marino, strandholm, steensma, weaver, and mark, 2002). similarly, brown-johnson and droege (2004) argue that national culture moderates the level of risk agents are willing to accept. this same line of reasoning could be applied to entrepreneurial orientation and imitation versus substitution resource accumulation strategies. empirical testing of the relationships between our propositions and substitutionb a s e d a n d i m i t a t i o n b a s e d r e s o u r c e a c c u m u l a t i o n s t r a t e g i e s m a y b e accomplished by modifying a combination o f e x i s t i n g s c a l e s . f o r e x a m p l e , entrepreneurial orientation in terms of innovation, risk-taking, and proactiveness is often measured using the covin and slevin (1986) scale. others have added autonomy and competitive aggressiveness as well as examining entrepreneurial orientation from multi-country and multi-cultural perspectives (e.g., knight, 1997; kemelgor, 2002). ireland, hitt, and sirmon (2003) have elaborated constructs or measuring strategic entrepreneurship while wiklund and s h e p h e r d ( 2 0 0 5 ) h a v e m e a s u r e d a configuration of entrepreneurial orientation and small business performance. clearly, researchers must proceed carefully in borrowing from existing scales to measure different phenomena; however, such scales provide solid ground from which to build. we have decomposed the entrepreneurial construct into five dimensions consistent with previous research. however, there may be mediating and/or moderating relationships among these constructs. if this is the case, it may challenge the nature of the relatively linear propositions we have offered. further research should continue to assess whether the entrepreneurial construct is composed of volume 19, number 1 spring/summer 2008 59 three (covin and slevin, 1989), five (lumpkin and dess, 1996), or perhaps even a single dimension. in addition, future research should consider whether there are moderating and/or mediating relationships among these variables. conclusions we have addressed some of the internal attributes that influence the imitation versus substitution resource accumulation decision. w e h a v e a t t e m p t e d t o i n t e g r a t e entrepreneurial orientation with the resourcebased view but suggest that further study on this question consider other approaches. the competitive analysis literature offers additional insights into the imitation versus substitution decision. fruitful research may emerge from a better integration of the resource-based and competitive analysis literature. similarly, the real option literature (myers, 1977; dixit and pindyck, 1994) suggests several mechanisms firms may attempt in developing superior resource bundles. conner (1995) argues 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(1981). the economics of organizations: the transaction cost approach. american journal of sociology, 87: 548–577. lily dong is an assistant professor of marketing at the university of alaskafairbanks. her research interests are in the areas of marketing strategy and consumer behavior. scott droege is an assistant professor of m a n a g e m e n t a t we s t e r n k e n t u c k y university. his research interests include the relationships between entrepreneurial strategy and institutional change in emerging markets. journal of small business strategy 62 reproduced with permission of the copyright owner. further reproduction prohibited without permission. http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2019, vol. 29, no. 03, 97-116 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2019 small business institute® w w w. j s b s . o rg introduction luis pacheco universidade portucalense infante d. henrique, portugal, luisp@upt.pt this work is supported by feder funds from compete 2020 and portuguese funds portugal 2020. project iecpbi interactive ecosystem for portuguese business internationalization poci-01-0145-feder-032139. internationalization effects on financial performance: the case of portuguese industrial smes internationalization; financial performance; export markets; smes; panel-data methodology apa citation information: pacheco, l. (2019). internationalization effects on financial performance: the case of portuguese industrial smes. journal of small business strategy, 29(3), 97-116. small and medium enterprises (smes) are commonly referred to as the backbone of the economy, playing a critical role as suppliers of employment and key agents for local and regional communities’ well-being. the role of these firms ultimately depends on the flexibility they have to undertake entrepreneurial strategies and promote innovation (navarro-garcía, schmidt, & rey-moreno, 2015). the adverse effects of the recent financial and economic crises prompted smes to seek their viability abroad, increasing their exports and looking attentively to more distant markets (navarro-garcía, peris-oritz, & barrera-barrera 2016). so, this context highlights the importance to understand the determinants of firms’ financial performance, namely, the impact of that internationalization effort. international expansion is an especially important decision for smes, which traditionally face financial constraints, have a domestic focus and a limited geographic scope (pangarkar, 2008; pukall & calabrò, 2014). researchers in the international business and strategic management areas have routinely explored if and how international diversification influences firm performance. however, most of these empirical studies were originally focused on large, well-internationalized firms, originating in the us and large european countries (dana, etermad, & wright, 1999; geringer, beamish, & da costa, 1989; goerzen & beamish, 2003; mcdougall & oviatt, 1996). the empirical findings on the relationship between internationalization and firm performance based on samples of large firms do not necessarily apply to smes because it has been well argued and documented that smaller and larger businesses are different species (lu & beamish, 2001; oviatt & mcdougall, 1994), exhibiting differences in ownership, resources, organizational structures and management systems. it is well recognized that, in an increasingly interlinked and borderless world, smes make important contributions to the economy, sometimes initiating their internationalization processes at early stages of development (karagozoglu & lindell, 1998; oviatt & mcdougall, 1994; stray, bridgewater, & murray, 2001). european smes have in most cases directed their internationalization efforts to other countries from the same area. however, a crucial question that arises is whether firms mainly focused on the european market show differthe objective of this paper is to empirically examine the relationship between the firms’ degree of internationalization and their financial performance. the literature about performance determinants is abundant however, the relation between internationalization and profitability in the context of small and medium enterprises (smes) is much less studied. it used an unbalanced panel data of 4.133 portuguese industrial smes for the period from 2010 to 2016 and applied a random effects model. the results indicate that internationalization, measured as export intensity/diversity/distance, influences firm profitability, in particular when exports are directed to distant markets and conducted by small firms. also, the presence of a non-linear relationship between internationalization and profitability calls for managers’ attention to its dysfunctional consequences for firm performance, especially at intermediate levels of internationalization. due to smes relevance in the majority of the economies, our results and its implications can be generalized to other countries. http://www.smallbusinessinstitute.biz http://www.jsbs.org 98 l. pacheco journal of small business strategy / vol. 29, no. 3 (2019) / 97-116 ent profitability levels than those with a broader geographic scope. the answer to this question could enable us to highlight the consequences for the profitability of smes of the choice between proximity and a global approach (zucchella, 2001). since theoretical predictions are not straightforward, the main objective of this paper is to use an unbalanced panel data of 4,133 portuguese industrial smes for the period from 2010 to 2016. then apply a random effects model to empirically examine the relationship between the degree of internationalization of industrial smes, measured as export intensity/diversity/distance and their financial performance levels. the following specific objectives are also studied: i) to explore the moderating role of some firm characteristics in influencing the internationalization-financial performance relationship; ii) to deep between the non linear nature of that relationship and; iii) to make a contribution to distinguish between export intensity, export diversity and export distance, facilitating the interpretation of their different effects on firm profitability. to the best of our knowledge, this paper fulfills a gap in the literature since it employs a set of alternative measures of international activity to examine the relationship between internationalization and firm financial performance. additionally, this paper extends the literature on this topic since it is focused on a small european economy, with different historical factors, financial markets, legal frameworks and business characteristics when compared to english-speaking countries, where most studies on smes have been conducted. the choice of a national data set allows us to compare our results with similar studies in other countries (e.g., fernández-olmos, gargallo-castel, & giner-bagües, 2016; lu & beamish, 2001; majocchi & zucchella, 2003;). from this comparison, we expect to gain some insights into country-specific factors influencing the international commitment and performance of smes, which are frequently rooted in the domestic environment (narayanan, 2015; stouraitis, mior harun, & kyritsis, 2017). the obtained results indicate that internationalization, measured as export intensity/diversity/distance, influences firm profitability, in particular when exports are directed to distant markets and conducted by small firms. in addition, the non-linear nature of the relationship between internationalization and financial performance evidences that internationalization brings dysfunctional consequences for firm performance, especially at intermediate levels of internationalization. the next section presents an introduction to the main issues dealt in this paper and a literature review. section 3 presents the research hypotheses and outlines the variables, data and methodology to be used. section 4 presents the empirical results, which are extensively discussed in the following section. the final section concludes analyzing the paper’s main limitations and suggesting future research possibilities. literature review internationalization and firm profitability the contribution of exports to firm growth through sales increase is straightforward. by selling in new geographic markets, a firm broadens its consumer base and can potentially achieve a higher sales volume. thus, by broadening markets, creating room for expansion and enabling the achievement of economies of scale and improved efficiency, exporting to foreign markets is considered a crucial factor for firm growth and profitability (lu & beamish, 2006). according to kirca et al. (2011, p. 49), “no theoretical rationale supports a generalizable multinationality-performance relationship”, and hennart (2007. p. 442) argues that “it seems difficult to develop a single theory that would predict the effects of such expansion on profits”. thus, since internationalization is a multi-layered concept, its relationship with performance must be approached with a set of different theories, namely, organizational learning, industrial organization or resource-based theories. these multiple lenses would try to explain the effects of internationalization on performance (nguyen, 2017). miller, lavie, and delios (2016) identify three distinct facets of internationalization: international intensity, international diversity and international distance. international intensity captures the firm’s commitment to serving customers in foreign markets. international diversity captures the breadth versus depth of internationalization by studying the dispersion of a firm’s operations across the host countries (goerzen & beamish, 2003; kim, hwang, & burgers, 1989). international distance refers to the geographic, cultural, institutional, and economic differences between the characteristics of the firm’s home country and those of the host countries of its subsidiaries. international distance introduces costs and benefits, with firms normally entering first proximate markets (johanson & vahlne, 1977) and experience regional effects (ghemawat, 2001; goerzen & beamish, 2003; navarro-garcía et al., 2016; qian, li, li, & qian, 2008). pangarkar (2008) argues that prior literature on the relationship between internationalization and performance is hampered by problematic measures for the key constructs (degrees of internationalization and firm performance), since there is a lack of uniformity across different studies 99 l. pacheco journal of small business strategy / vol. 29, no. 3 (2019) / 97-116 that yield inconsistent results. much of the literature on international strategy tends to agree that the benefits of internationalization outweigh the increased costs and hence should positively impact firm performance (gomes & ramaswamy, 1999; papadopoulos & martín, 2010). regarding smes, some authors argue that this conclusion is not so clear-cut, due to their internal constraints and ability to compete in international markets (pangarkar, 2008). despite the constraints and challenges faced, smes are likely to enhance their performance through greater internationalization (loth & parks, 2002; pangarkar, 2008). nevertheless, international expansion involves high risks and uncertainties, therefore, firms having the organizational and resource endowments required to deal with those risks are likely to be more proactive in international expansion, as these resources and capabilities are key success factors for innovation (singla & george, 2013). according to lu and beamish (2001), miller et al. (2016), pangarkar (2008), and others, the main constraints for smes internationalization are: i) the lack of the necessary information to exploit international opportunities (due to the shortage of managerial resources); ii) an increase in the requirements for coordination and communication and; iii) an increase in the risk level for the firm, due to the exposition to new risk factors (political, exchange rate, global market behavior, etc.). concerning the benefits from internationalization, the literature refers the following: i) exporting is a less capital intensive path (than fdi) providing firms with fast access to foreign markets and the opportunity to gain valuable international experience; ii) to exploit market niches and economies of scale and scope (this specially if volume gains were constrained in the domestic market due to saturation or increased competition); iii) the presence in multiple multinational markets leads to an increase in market power; iv) to provide better services to their clients and avoid tarrifs (in the case of fdi) and; v) to benefit from export incentives from the home government or, in the case of fdi, from the host country. lu and beamish (2006) argue that firms have extensively employed exporting as an internationalization strategy. compared to foreign direct investment, exporting is a relatively easy and fast way to enter foreign markets because it involves comparatively low levels of commitment and risk, without the need to establish subsidiaries and letting open the decision to easily withdraw due to political instability or adverse market conditions. these advantages are particularly attractive to smes, which tipically face resource constraints and do not want to make excessive resource commitments and be exposed to unreasonably high investment risks. there is a widespread consensus that the effects of foreign expansion on the profitability of smes have not been studied sufficiently (miller et al., 2016). empirical studies on samples of smes have revealed the existence of a “liability of foreignness” at the beginning of the internationalization process via fdi, and a positive relationship between profitability and exports. this “liability of foreignness” stresses the costs of unfamiliarity and discrimination ascribed to cross-national differences (contractor, kundu, & hsu, 2003; lu & beamish, 2001; miller et al., 2016; zaheer, 1995) empirical results of prior studies have been inconclusive with some studies finding a positive impact of the degree of internationalization (e.g., de jong & van houten, 2014; delios & beamish, 1999; geringer et al., 1989; grant, 1987; grant, jammine, & thomas, 1988; hsu, chen, & cheng 2013; kim et al., 1989; qian, 1996, 1997, 2002; tsao & chen, 2012;), others finding no effect (e.g., buckley, dunning, & pearce, 1978; buhner, 1987; geringer et al., 1989; hoskisson & hitt, 1990; hughes, logue, & sweeney, 1975; kumar, 1984; morck & yeung, 1991; rugman, lecraw, & booth, 1985; tallman & li, 1996; vithessonthi, 2016) and still others finding a negative effect (e.g., michel & shaked, 1986; siddharthan & lall, 1982; singla & george, 2013; vithessonthi & racela, 2016; xiao, jeong, moon, chung, & chung, 2013). recently, scholars have predicted curvilinear relationships, again with little consistency across studies. using the organizational learning perspective, chiao, yang, and yu (2006), lu and beamish (2001), miller et al. (2016), and ruigrok and wagner (2003), predicted and found support for a u-shaped relationship. other studies (e.g., geringer et al., 1989; gomes & ramaswamy, 1999) have theorized and found an inverted u-shaped relationship, primarly based on an increase in organizational costs (coordination and communication) as the diversity grows beyond the optimal level. finally, another set of studies (e.g., contractor et al., 2003; riahi-belkaoui, 1998;) argued for and/or found (contractor et al., 2003; lu & beamish, 2004; thomas & eden, 2004) a multi-stage sigmoid relationship. the sigmoid shape is an attempt to reconcile the last three decades of research into a three-stage model (contractor, 2007; ruigrok, amann, & wagner, 2007). according to ruigrok et al. (2007), in the context of an s-shaped relation between internationalization and performance, the literature tends to locate a higher performance in the 40% to 70% foreign-sales-to-total-sales range. ruigrok et al. (2007) also indicate that the research in this field needs to focus on the role of some promising moderating variables, which may add to knowledge that has academic as well as managerial relevance. miller et al. (2016) consider that low international intensity levels affect firm performance by imposing setup costs, whereas at intermediate levels economies of scale generate accrued gains 100 l. pacheco journal of small business strategy / vol. 29, no. 3 (2019) / 97-116 to the firm, albeit the situation is reversed for higher levels given information processing costs and psychological factors. according to the same authors, this non-linear relation between internationalization and performance is also present when internationalization is regarded in terms of international diversity. given the liabilities of foreignness, at low levels of international diversity firm performance is reduced, whereas at higher levels economies of scope and access to resources generate accrued gains to the firm, thus implying a u-shaped relation. although some researchers attributed the mixed findings to measurement issues (e.g., goerzen & beamish, 2003), the mixed empirical evidence also reflects the distinctive conceptualizations and theoretical lenses, confirming that internationalization is a complex phenomenon and a theoretical framework that analyzes its performance implications should reflect that complexity. additional determinants of firm performance in order to rule out alternative determinants of the sampled firms’ performance, and following previous authors (e.g., fernández-olmos et al., 2016; miller et al., 2016; vithessonthi, 2016), it includes a set of control variables, namely, firm age, size, indebtedness, intangible assets, advertising expenses and the exchange rate. it also explores the moderating role of some of those organizational characteristics in influencing the internationalization-performance relationship, because certain characteristics can reduce some of the costs of internationalization. for instance, organizational attributes such as size and age could play a role in enhancing the legitimacy of firms and reducing their “liabilities of foreignness” in foreign markets (singla & george, 2003). theoretically, older firms should possess a greater stock of knowledge and experience, which could have a positive impact on performance. older firms have enjoyed the benefits of learning, are not prone to the liabilities of newness and therefore can enjoy superior performance. for example, brand, reputation and legitimacy are some strategic resources that firms build with time. these resources can reduce some of the costs associated with the “liabilities of foreignness”. older firms could also be better equipped to learn from their experiences in the past and would possess more skills to implement their learning in new undertakings (singla & george, 2008). yet, as firms age they tend to become more conservative and prone to inertia (aggarwal & gort, 1996; hannan & freeman, 1984;). albeit the impact of age on performance is ultimately an empirical question (capasso, gallucci, & rossi, 2015; coad, segarra, & teruel, 2013), our expectation is that age negatively moderates the internationalization-performance relationship. regarding the impact of size on performance, the literature points to the fact that size can be a source of competitive advantage because larger firms have at their disposal greater technical and commercial opportunities, allowing them access to economies of scale, greater bargaining power and the capability to raise barriers to deter potential competitors or have an easier access to capital markets (dhanaraj & beamish, 2003; schuman & seeger, 1986; thomas & eden, 2004). based on these arguments, several authors (e.g., bloodgood, sapienza, & almeida, 1996; claver, rienda, & quer, 2009; fernández & nieto, 2006; tallman & li, 1996) show that resource availability – proxied by firm size – positively correlates to the extent of internationalization. nevertheless, the fixed costs and organizational inefficiencies associated with larger size could outweigh the benefits of increased market power, with the larger flexibility of smaller firms being a competitive advantage (chen & hambrick, 1995) or size could only influence performance in certain industries, given specific differences in terms of the degree of competition or the existence of economies of scale (bamiatzi, bozos, cavusgil, & hult, 2016). in sum, the existence of competitive advantages positively related to size also remains an empirical issue. regarding leverage, some studies show that smes prefer going into debt before increasing capital to finance their investments, thus avoiding the entry of external shareholders (anderson, mansi, & reeb, 2003). however, other studies show that smes prefer to be more prudent, not going into debt in order to avoid losing their independence to creditors (lópez-garcia & aybar-arias, 2000). given that smes could have specific concerns in terms of privacy, control and generational transition, they tend to prefer internal financing policies, favouring the reinvestment of their own funds to capital increases or long-term debt (gallo, tàpies, & cappuyns, 2004; zahra, 2005), nevertheless, their attitude towards debt could change as generations, managers and the business as a whole evolves (lussier & sonfield, 2009). debt ratios are included because a firm’s ownership may influence its capital structure (demsetz & lehn, 1985; randøy & goel, 2003) and, in line with the agency and pecking order theories and the majority of the literature, we expect a negative relationship between smes indebtedness and its financial performance. knowledge and innovation, as a result of r&d activities, should have an impact on firm performance. departing from a knowledge-based view of the firm, vithessonthi and racela (2016) regard r&d and internationalization as means for firms to build up their knowledge stock toward developing a competitive advantage that leads to superior performance. the authors also find that the level of r&d is 101 l. pacheco journal of small business strategy / vol. 29, no. 3 (2019) / 97-116 negatively associated with firm performance but the level of internationalization has no direct effect on the return on assets, albeit a positive effect on the return on sales. the authors also find weak evidence for the moderating effect of internationalization on the relationship between r&d intensity and firm performance. the negative relation between r&d and the return on assets is attributed to the high degree of uncertainty and risk associated with capital investment needed to develop r&d activities, so that in the near term r&d brings about negative returns. while two separate streams of research have been developed to address how firm performance is influenced by either r&d or internationalization, a growing body of literature has focused on the interplay of these two determinants. there are several prior studies that have examined simultaneously the role and impact of r&d and internationalization on firm performance (bae, park, & xiaohong, 2008; chakrabarty & wang, 2012). due to the lack of data about smes’ r&d, we will consider intangible assets as a proxy for r&d, alternatively computing that variable as the ratio of intangible assets to total assets or to total sales. additionally, we include advertising intensity, defined as the ratio of the firm’s advertising expenditures to total sales, to measure the level of proprietary content in marketing assets. finally, following lu and beamish (2001) and majocchi and zucchella (2003), it considers the exchange rate and it also tests the presence of sectoral differences (bamiatzi et al., 2016). hypotheses considering the literature review made in the previous section, we can now state the six hypotheses tested in this paper: hypotheses 1. there is a positive relationship between smes level of export intensity/diversity/distance and its financial performance hypotheses 2. there is a non-linear relationship between smes level of export intensity/diversity/distance and its financial performance hypotheses 3. there is a negative relationship between smes age and its financial performance hypotheses 4. there is a positive relationship between smes size and its financial performance hypotheses 5. there is a negative relationship between smes indebtedness and its financial performance hypotheses 6. there is a negative relationship between smes intangible /advertising intensity and its financial performance. the following figure presents a graphic illustration of the research hypotheses: internationalization export intensity export diversity export distance financial performance age size debt intangible/adv. h2 (non linear effects) h1 + m od er at in g ro le h3 h4+ h5 h6 figure 1 research hypotheses 102 l. pacheco journal of small business strategy / vol. 29, no. 3 (2019) / 97-116 method constructs and variables prior studies have used a broad range of performance measures ranging from outcomes achieved in the product markets (such as sales growth: grant, 1987; siddharthan & lall, 1982), to accounting measures (such as roa, ros and roe: daniels & bracker, 1989; kumar, 1984; lu & beamish, 2001; rugman et al., 1985; riahi-belkaoui, 1998) as well as market-based measures (such as beta and risk-adjusted returns: buhner, 1987; collins, 1990; goerzen & beamish, 2003; hughes et al., 1975; michel & shaked, 1986). a key problem with narrow measures is that they may not be representative of firm performance, which may differ from traditional profitability ratios (pangarkar, 2008). for instance, many smes in the early stages of their evolution might place a strong emphasis on sales growth. due to data availability, the use of roa is widely supported by the literature and has been used in several studies analyzing the relationship between internationalization and firm performance (e.g., gomes & ramaswamy, 1999; lu & beamish, 2001; 2004; majocchi & zucchella, 2003; singla & george, 2013; vithessonthi, 2016; vithessonthi & racela, 2016), being generally considered to be a key performance indicator and superior to alternative measures such as roe which is sensitive to the firm’s capital structure (miller et al., 2016). additionally, roa and related profitability measures can be easily computed from financial statements and compared in cross-country surveys. roa is computed as net income scaled by the book value of total assets. in order to check robustness, we also proxy financial performance by the ratio between ebitda and total assets (rebitda) and by the ratio between ebit and total assets (rebit). concerning the independent variable “internationalization”, a consensus is still lacking on the best or true measure (pangarkar, 2008). the use of a uni-dimensional measure such as the ratio of exports to total sales (“export intensity”) does not take into account the geographical distribution of sales, i.e., whether or not they are geographically well balanced in major world markets, a factor which has relevant implications for performance. in fact, thomas and eden (2004) argue that dispersion (or breadth) may be a more important determinant of performance than the traditional intensity measures. additionally, as stated by majocchi and zucchella (2003), it can be argued that, given the existence of the internal market and a single currency, exporting to other european union countries cannot strictly be defined as a form of internationalization. thus, we consider a set of alternative measures of internationalization, trying to account both the intensity of foreign sales and its breadth (diversification and distance to different markets: national, eu or the rest of the world). this should allow us to identify possible differences in profitability between regional and global players. regarding “international diversification” and “international distance”, this paper used three sets of variables. firstly, following pangarkar (2008), we use a combination of the traditional proportion of foreign sales variable and the dispersion of foreign sales across geographic regions, albeit unfortunately, due to data availability, we can only distinguish between the eu and the rest of the world markets: doi1 = %foreign sales / [(% sales to eu countries) 2 + (% sales to the rest of the world)2] we also employed an alternative measure, which is grounded in the psychic distance and location perspective (johanson & vahlne, 1977; petersen & pedersen, 1997; clark & pugh, 2001; navarro-garcía et al., 2016): doi2 = (1 + % sales to eu countries) + (2 + % sales to the rest of the world) weights (1 and 2) are arbitrarly assigned and we test the robustness of our results to alternatives. notice that, due to the lack of detailed data regarding exports by portuguese industrial firms, we do not compute a traditional “international distance” measure (for instance, similar to the one used by miller et al., 2016). secondly, following majocchi and strange (2012), it used a measure of entropy, which accounts for the dispersion of a firm’s sales by three main geographical areas (portugal, the eu and the rest of the world): the subscript j defined one of the three markets and xj is the percentage of sales realized in market j. the natural logarithm of the inverse of the sales realized in every market is the weight given to each geographical segment. the entropy measure will equal zero for firms that have all their sales concentrated in one region, and will reach a maximum value of 1,098 for firms with exactly the same share of sales in each of the three defined areas. nevertheless, as stated by majocchi and strange (2012), such a measure also has some weaknesses: it is not expected that a firm’s level of internainternational diversity (div_int) = ∑ ( exportsj total exports ) 22 j=1 103 l. pacheco journal of small business strategy / vol. 29, no. 3 (2019) / 97-116 tional sales to be evenly distributed between destiny areas, and an ideal measure of internationalization should not only measure the dispersion of foreign sales, but also their level. thirdly, following miller et al. (2016), “international diversity” (div_int) is measured using a herfindhal index: the subscript j defined one of the two markets (eu and the rest of the world). this measure takes into account the relative importance of each market and it is highly correlated with the entropy index (e.g., majocchi & strange, 2012), being preferable to a simple count of countries, which does not consider the depth of operations in each market. finally, it also tested the traditional and simpler measures of internationalization intensity, measured by the traditional ratio foreign sales/total sales (int) and by the percentage of total sales exported to the eu and to the rest of the world (respectively, expeu and exprw). even though our paper is focused on the relation between the degree of internationalization and performance, we will include a set of control variables in order to rule out alternative determinants of the sampled firms’ performance. those variables are traditionally used in studies about performance determinants: firm age, size, debt, intangible assets, advertising expenditures and the exchange rate. for kurtosis reasons, variables age (age) and size (siz) are measured, respectively, as the log of the number of years since the firm’s inception and the log of total assets. the debt level of the firm is measured as total debt (td = total liabilities/ total assets) and its subdivision in long-term and short-term debt (respectively, non-current liabilities/ total assets and current liabilities/ total assets). intangible assets are measured as a proportion of total assets (intag) and advertising intensity is measured as the ratio of the firm’s advertising expenses to sales (ad). data for the average annual usd/eur exchange rate was retrieved from the portuguese central bank. sample and database in this paper, we used a sample of portuguese industrial smes. the dependent variables are different performance measures and the independent variables represent the firm’s performance determinant factors according to the previously stated hypotheses (table 1). aditionally, the exchange rate is also included in the regressions. after the identification of the hypotheses to be tested as well as the dependent and independent variables, it is necessary to describe the data collection process for the sample characterization over which our empirical study will be made. our objective is to analyze a sample of smes from the industrial sectors (codes 10 to 32, from the european classification of economic activities – nace – rev. 2) obtained from sabi (sistema de análise de balanços ibéricos), a financial database powered by bureau van dijk. applying the criteria for smes definition (commission recommendation 2003/361/ec), thus excluding a large number of micro firms (which employ fewer than 10 persons and whose annual turnover and/or annual balance sheet does not exceed 2m€), considering only firms already existing in 2010 and presenting at least 5 years of complete data from 2010 to 2016, excluding firms with negative debt ratios or liabilities greater than assets and winsorizing all variables at the 1st and 99th percentiles to mitigate the impact of extreme values and potential data coding errors, we obtained an unbalanced panel data of 4.133 smes distributed by all industrial sectors. table 2 presents a detailed description of our sample. the sample is composed of mature smes, with a mean age of 24 years, accounting for 171.891 employees, a turnover near 14.750 m€ and total assets of 16.500 m€ in 2016. the sample has 73% of small firms (3.021), 27% of medium firms (1.112) and all relevant sectors are represented. analysis and results the relation between internationalization and performance is addressed with a panel data methodology estimated through three different regression models: pooled ordinary least squares (pols), fixed effects model (fem) and random effects model (rem). applying the breusch-pagan and hausman tests to choose the most appropriate regression technique, the breusch-pagan test leads to the rejection of the null hypothesis, indicating that rem is more appropriate than pols whereas the hausman test leads to the acceptance of the null hypothesis that rem is preferable to fem. a random-effects model explains inter-firm performance variation over time and, as stated by king and santor (2008), it is a well-suited specification since a number of our variables are either time-invariant or exhibit few changes over time (e.g., age or size). similarly, to lu and beamish (2006), we repeated the estimations lagging all the independent variables and controls, experimenting 1-, 2and 3-year lag structures. nevertheless, the results from different lag structures were qualitatively the same, so that in the next section we report the results with no lags. before estimating the different models we present in table 3 some descriptive statistics and the correlation matrix of the variables. according to gujarati and porter international diversification (intern) = ∑ xj ln( 1 xj ) 3 j=1 104 l. pacheco journal of small business strategy / vol. 29, no. 3 (2019) / 97-116 (2008), when the correlation coefficients are above 50%, the problem of collinearity becomes significant. observing the correlation coefficients between the independent variables, only in three circumstances they are above 50%, albeit those variables will not be used jointly. therefore, the problem of collinearity between explanatory variables will not be particularly relevant. notice that correlations are relatively low, although international intensity and international diversity are positively correlated, consistent with the observation that firms tend to internationalize in multiple facets, albeit at different rates. the regression results for the random-effects model are presented in table 4, where the three alternative dependent variables (roa, rebitda and rebit) are run on the different variables for “internationalization” and the control variables age, size, debt (ltd and std), intangible assets, advertising expenses and the exchange rate. table 4 presents mainly the results for roa as the independent variable, albeit the results for rebitda and rebit are very similar, thus testing h1 and h3-h6. the random-effects model results presented in table 4 display values for r2 between 12 and 18%, which are within the usual range for this kind of regressions. the first rows in table 4 evidence that export dispersion, intensity and distance seems to have a significant impact on performance, albeit without a clear sign. the regressions run with rebitda and rebit yield extremely similar results. exports’ dispersion seems to have a negative effect, whereas exports’ intensity and distance seems to have a positive impact, thus confirming the results from delios and beamish (1999), kim et al. (1989), loth and parks (2002), pangarkar (2008) and singla and george (2013). the results for the control variables confirm the previous literature since younger, larger, less indebted and with lower intangible assets’ firms tend to present better performance measures (measured by roa, rebitda or rebit). finally, notice that the exchange rate appears with the expected negative sign, indicating that a lower exchange rate increases profitability due to the increase in sales it promotes outside the euro area. since one of the objectives of this paper is to test the presence of non-linear effects of internationalization on table 1 independent variables hyp acronym independent variables formula h1/h2 doi1 degree of i nternationalization 1 doi1 = % foreign sales / [ (% sales to eu countries) 2 + (% sales to the rest of the world)2 ] doi2 degree of internationalization 2 (1 + % sales to eu countries) + (2 + % sales to the rest of the world) intern international diversification ∑ xj ln( 1 xj )3j=1 (xj = % of sales in market j) div_int international diversity int export intensity foreign sales/ total sales expeu exports to the eu exports to the eu / total sales exprw exports to the rest of the world exports to the rest of the world / total sales h3 age age logarithm of number of years since the firm’s inception h4 siz size logarithm of total assets h5 td total debt total liabilities / total assets std short-term debt current liabilities / total assets ltd long-term debt non-current liabilities / total assets h6 intag intangible assets intangible assets / total assets ad advertising expenditures advertising expenditures / total sales 105 l. pacheco journal of small business strategy / vol. 29, no. 3 (2019) / 97-116 performance, we test the internationalization variables and their squares as independent variables, thus testing h2, with table 5 presenting the results. table 5 presents the results testing the presence of a non-linear relationship, where only the most significant specifications are presented. the results depend on the internationalization measure used, with columns i to iii displaying an inverted u relationship for doi1 and a w-shaped relationship for doi2. columns iv and v evidence an inverted w relationship for div_int and regarding exports to the “rest of the world” the last column presents the interesting result of a sigmoid relation, where the financial benefits of internationalization are potentially outweighted by the higher costs brought up by the “liability of foreignness” and the psychic distance as well as the higher costs of managing and coordinating international activities when the firm attains an advanced stage of internationalization. interaction variables are included in table 6 in order to test whether the effect of size, age or indebtedness levels are additive or not to the internationalization-performance relationship. the results in the first four columns of table 6 seem to indicate that, apart from age, there are no moderating effects on the internationalization-performance relationship. column iv presents a full specification with all the interactions jointly considered, evidencing the absence of such effects. considering the traditional measures of internationalization (columns v to vii) the results also evidence that firm age has a moderating role on the positive relationship between internationalization (export intensity and distance) and performance. the variables doi2 and expeu/exprw are significantly positive and when multiplied by age maintain the positive sign, whereas the interaction variable is significantly negative. table 2 distribution of the sample by industry classifications industry classification (nace) number of firms small firms (%) avg number of empl avg sales (th€) exports (%) average ebitda food products (10) 500 76,8% 40 4.794 11,6% 348,7 beverages and tobacco (11/12) 118 95,8% 20 3.109 25,8% 488,3 textiles (13) 281 71,5% 46 3.964 35,1% 479,8 wearing apparel (14) 357 52,9% 62 3.597 69,5% 270,9 leather and related products (15) 322 51,6% 59 4.090 56,7% 337,8 wood and of products of wood and cork (16) 231 85,7% 31 3.332 31,3% 354,8 paper and paper products (17) 92 78,3% 39 4.805 14,5% 491,6 printing and reproduction of recorded media (18) 123 83,7% 34 2.598 7,6% 412,6 refined petroleum, chemicals, man-made fibers and pharmaceutical products (19/20/21) 142 84,5% 29 4.720 20,2% 556,4 rubber and plastic products (22) 244 76,2% 39 4.420 26,1% 546,2 other non-metallic mineral products (23) 292 78,1% 40 2.998 36,1% 411,0 basic metals (24) 52 69,2% 47 5.707 35,0% 609,7 fabricated metal products (25) 697 75,2% 41 2.907 35,1% 474,1 computer, communication and electronic equip. (26) 24 62,5% 59 4.597 42,1% 702,8 electrical equipment (27) 83 77,1% 38 3.191 31,5% 339,8 machinery and equipment (28) 222 77,9% 39 3.308 36,7% 488,5 motor vehicles, trailers and parts (29) 68 63,2% 51 4.049 48,4% 553,6 other transport equipment (30) 19 47,4% 55 4.315 48,4% 501,3 furniture (31) 195 71,8% 43 2.705 42,5% 332,0 other manufacturing activities (32) 71 80,3% 38 2.937 27,5% 393,0 4.133 73,1% 43 3.665 34,8% 420,8 note: small firms are firms with less than 50 employees. sectors 11/12 and 19/20/21 are aggregated since the sample only comprises a very small number of firms in sectors 12, 19 and 21. 106 l. pacheco journal of small business strategy / vol. 29, no. 3 (2019) / 97-116 table 3 descriptive statistics (average and standard deviation) and correlation matrix between independent variables average s.d. doi1 doi2 intern int div_int age siz td intag ad roa 0,031 0,067 rebitda 0,098 0,084 rebit 0,054 0,076 doi1 225,21 4943,5 1 -0,041 -0,036 -0,023 -0,046 -0,007 0,00 0,005 -0,005 -0,001 (***) (***) (***) (***) doi2 3,320 0,356 1 0,471 0,181 0,542 0,023 0,120 0,013 0,039 -0,007 (***) (***) (***) (***) (***) (**) (***) intern 0,283 0,353 1 0,669 0,830 0,136 0,288 -0,068 0,046 -0,012 (***) (***) (***) (***) (***) (***) (*) int 0,120 0,172 1 0,479 0,126 0,232 -0,081 0,027 -0,010 (***) (***) (***) (***) (***) div_int 0,215 0,213 1 0,085 0,230 -0,023 0,042 -0,009 (***) (***) (***) (***) age 2,953 0,709 1 0,328 -0,314 -0,032 -0,016 (***) (***) (***) (***) siz 14,681 0,877 1 -0,191 -0,009 -0,008 (***) td 0,610 0,230 1 0,021 -0,003 (***) intag 0,004 0,017 1 0,004 ad 0,014 0,527 1 note: s.d. is the standard deviation. * p < 0.10; ** p < 0.05; *** p < 0.01 107 l. pacheco journal of small business strategy / vol. 29, no. 3 (2019) / 97-116 table 4 random-effects model results roa roa rebitda rebit roa roa roa roa c 0,220 (***) 0,147 (***) 0,291 (***) 0,180 (***) 0,184 (***) 0,182 (***) 0,187 (***) 0,193 (***) doi1 -0,000 (***) -0,000 (***) -0,000 (***) -0,000 (***) doi2 0,015 (***) 0,015 (***) 0,015 (***) 0,018 (***) inter -0,002 int -0,008 (***) div_int 0,002 expeu 0,016 (***) exprw 0,015 (***) controls age -0,018 (***) -0,020 (***) -0,024 (***) -0,021 (***) -0,020 (***) -0,020 (***) -0,020 (***) -0,020 (***) siz 0,002 (***) 0,003 (***) 0,002 (**) 0,002 (***) 0,004 (***) 0,005 (***) 0,004 (***) 0,003 (***) ltd -0,133 (***) -0,170 (***) -0,183 (***) -0,180 (***) -0,171 (***) -0,171 (***) -0,171 (***) -0,170 (***) std -0,108 (***) -0,141 (***) -0,165 (***) -0,149 (***) -0,140 (***) -0,140 (***) -0,140 (***) -0,141 (***) intag -0,097 (***) -0,079 (**) -0,027 -0,075 (**) -0,044 (*) -0,044 (*) -0,046 (*) -0,053 (**) ad 0,000 exc -0,063 (***) -0,053 (***) -0,032 (***) -0,049 (***) -0,054 (***) -0,054 (***) -0,054 (***) -0,053 (***) overall r2 0,18 0,18 0,12 0,14 0,18 0,18 0,18 0,18 notes: standard-deviations presentedin brackets.* p < 0.10; ** p < 0.05; *** p < 0.01. 108 l. pacheco journal of small business strategy / vol. 29, no. 3 (2019) / 97-116 table 5 random-effects model (testing the presence of non-linearities). roa as dependent variable. i ii iii iv v vi vii c 0,341(***) -1,766 (**) 34,2661 (***) 0,108 (***) 0,108 (***) 0,109 (***) 0,109 (**) doi1 0,000 (**) 0,000 (**) 0,000 doi1 2 -0,000 (***) -0,000 (**) -0,000 (***) doi1 3 0,000 0,000 doi1 4 0,000 doi2 -0,148 (***) 0,1693 (**) -40,174 (***) doi2 2 0,024 (***) -0,509 (**) 17,668 (***) doi2 3 0,051 (**) -3,444 (***) doi2 4 0,251 (***) div_int 0,017(**) 0,056 (**) div_int2 -0,025(*) -0,364 (*) div_int3 0,885(*) div_int4 -0,712(*) expeu 0,006 0,027(**) expeu2 0,015(**) -0,049 expeu3 0,046(**) exprw -0,018(**) -0,044 (***) exprw2 0,055(***) 0,132 (***) exprw3 -0,067(***) controls age -0,016(***) -0,016 (***) -0,016 (***) -0,017 (***) -0,017 (***) -0,017 (***) -0,016 (***) siz 0,004(***) 0,004 (***) 0,004 (***) 0,004 (***) 0,004 (***) 0,004 (***) 0,004 (***) td -0,154(***) -0,153 (***) -0,154 (***) -0,154 (***) -0,154 (***) -0,154 (***) -0,154 (***) overall r2 0.17 0.17 0.17 0.16 0.16 0.17 0.17 notes: standard-deviations presented in brackets.* p < 0.10; ** p < 0.05; *** p < 0.01. 109 l. pacheco journal of small business strategy / vol. 29, no. 3 (2019) / 97-116 table 6 random-effects model (moderating effects). roa as dependent variable i ii iii iv v vi vii viii c 0,037 (*) -0,038 0,077 0,017 0,112 (***) 0,106 (***) 0,117 (***) 0,110 (***) doi1 0,000 (*) 0,000 0,000 (**) 0,000 doi2 0,021 (***) 0,047 0,013 0,026 expeu 0,019 (**) 0,048 0,019 0,051 exprw 0,066 (***) 0,036 -0,014 -0,027 controls age -0,007 (***) -0,017 (***) -0,017 (***) -0,007 (***) -0,016 (***) -0,017 (***) -0,017 (***) -0,016 (***) sz 0,004 (***) 0,011 0,004 (**) 0,005 0,004 (***) 0,004 (***) 0,004 (***) 0,004 (***) td -0,154 (***) -0,154 (***) -0,173 -0,160 -0,154 (***) -0,154 (***) -0,156 (***) -0,155 (***) doi1xage 0,000 (*) 0,000 doi2xage -0,000 (***) -0,000 (***) doi1xsiz -0,000 0,000 doi2xsiz -0,002 -0,001 doi1xtd -0,000 (***) -0,000 (***) doi2xtd 0,006 0,002 expeuxage -0,001 0,000 exprwxage -0,018 (***) -0,017 (**) expeuxsiz -0,002 -0,002 exprwxsiz -0,001 0,005 expeuxtd -0,001 -0,003 exprwxtd 0,047 0,033 overall r2 0,17 0,17 0,17 0,17 0,17 0,17 0,17 0,17 notes: standard-deviations presented in brackets.* p < 0.10; ** p < 0.05; *** p < 0.01. 110 l. pacheco journal of small business strategy / vol. 29, no. 3 (2019) / 97-116 finally, testing the presence of differences between industries, table 7 presents the results for the different sectors of activity. regarding differences between industries, table 7 indicates that internationalization seems to have a broadly positive effect on performance across all sectors, particularly in sectors 23, 25, 28 and 31 and concerning exports to the eu. the positive effects seem to be stronger in those sectors with a larger proportion of small firms and lower internationalization levels. the only evidence of negative effects appear in highly technological and capital intensive sectors (26 and 29) and particularly regarding exports to the rest of the world, possibly due to higher barriers to entry and psyshic distance costs. when using the variables doi1 and doi2 the results were not significative for doi1, whereas doi2 displayed a very significant positive influence in performance in 12 of the 20 considered sectors. discussion and implications this section presents a discussion of the results, confronting them with previous literature and assessing their coherence with the proposed objectives and tested hypotheses. results from table 4 indicate that the different export variables seem to have a significant impact on performance, albeit without a clear sign, so that we can partially confirm h1. also, the results confirm our hypotheses h3, h4, h5 and h6. possibly, older firms are more likely to be in the maturity phase, with lower levels of growth opportunities and, consequently, lower financial performance levels. larger firms present a better financial performance, possibly a result of the positive relationship between resources and performance. finally, more indebted firms are less profitable, independently of the maturity of the debt. this result, which is typically found in the literature, is in line with the predictions of the agency and pecking order theories, since a high level of leverage imposes a fixed financial commitment on the firm, reducing the free cash flows available to management (vieira, 2017). the differences in profitability between european vs. world players evident in table 5 illustrate the fact that the increasingly integrated european market allows firms to better exploit scale economies whereas new entrants in the rest of the world market tend to serve narrow market niches and face higher entrance costs and barriers to entry. nevertheless, after surpassing that stage, firms exporting to world markets enjoy increasing profitability. accordingly, the existence of such inflection points suggests that managers can use the above findings to identify their position on the internationalization-performance relation in order to determine the desirability of further international expansion. notice that, the presence of these non-linearities confirms our hypothesis h2 and previous results from lu and beamish (2004), qian (2002), and ruigrok et al. (2007) and represents one of the main findings of the present paper. the main result from table 6 – the moderating effect of age on internationalization – means that the positive impact of internationalization on performance is greater for younger firms, that is, those firms seem to be in a better position to leverage the opportunities provided by internationalization, possibly due to internal operational inefficiencies or to the fact that they export products to mature and highly competitive markets with lower margins. this result highlights the importance to further study the impact of firm age on performance and perhaps implement strategies to assist those firms in their internationalization efforts, helping them to surpass the “liability of foreignness”. as stressed by miller et al. (2016), the challenge is, however, to reach these optimal levels of internationalization, given that high levels are achievable only after expanding beyond previous lower levels. being internationalization an expansion process and not a state, most firms would encounter a substantial performance decline by gradually increasing internationalization in the world markets. nevertheless, beyond a certain level of internationalization, smes might lack the managerial resources as well as the experience needed to efficiently coordinate their international activities (qian, 2002). without appropriate capabilities greater internationalization may not lead to better performance. thus a keytask for smes is to build up their capabilities in areas such as branding and marketing, technology development, financing and other managerial capabilities useful for international expansion. naturally that remains the question of which comes first — capabilities or internationalization. probably, the additional learning gained from internationalization may be useful for developing new products and technologies and thus increase performance. finally, regarding differences between industries, the results from table 7 confirm the previous idea that export diversification is not correlated with financial performance, whereas orienting exports to more distant markets exerts a positive impact on performance. so, our results confirm that there are some interesting differences between sectors of activity. conclusion the main objective of this exploratory paper is to empirically examine the relationship between industrial smes’ degree of internationalization, measured by export intensity, diversity and distance and their financial performance. con111 l. pacheco journal of small business strategy / vol. 29, no. 3 (2019) / 97-116 table 7 random-effects model for different manufacturing sectors. roa as dependent variable cae 10 11/12 13 14 15 16 17 18 19/20/21 22 c 0,183 (***) 0,289 (***) 0,170 (***) 0,097 (**) 0,047 (*) 0,211 (***) 0,297 (***) 0,138 (**) 0,010 0,230 (***) expeu 0,002 0,014 0,019 (***) 0,006 0,008 0,002 0,072 (***) 0,038 (**) 0,023 (**) 0,012 (***) exprw 0,037 (**) -0,014 0,015 -0,017 0,011 0,015 -0,025 0,022 0,013 0,013 age -0,015 (***) -0,008 (**) -0,018 (***) -0,026 (***) -0,021 (***) -0,015 (***) -0,024 (***) -0,018 (***) -0,012 (**) -0,010 (***) siz 0,002 -0,009 (**) 0,006 (**) 0,013 (***) 0,009 (***) -0,001 -0,002 0,005 0,013 (***) -0,002 td -0,140 (***) -0,108 (***) -0,133 (***) -0,166 (***) -0,162 (***) -0,110 (***) -0,181 (***) -0,131 (***) -0,149 (***) -0,133 (***) exc -0,050 (***) -0,036 (***) -0,082 (***) -0,052 (***) -0,000 -0,040 (***) -0,047 (***) -0,041 (***) -0,038 (***) -0,050 (***) overall r2 0,15 0,16 0,14 0,16 0,21 0,17 0,27 0,15 0,28 0,24 23 24 25 26 27 28 29 30 31 32 c 0,154 (***) 0,166 (**) 0,213 (***) 0,312 0,350 (***) 0,208 (***) 0,522 (**) 0,295 (*) 0,239 (***) 0,358 (***) expeu 0,012 (**) 0,046 (***) 0,013 (***) -0,014 -0,006 0,028 (***) 0,002 -0,063 (**) 0,018 (***) 0,011 exprw 0,033 (***) 0,024 0,015 (***) -0,076 (*) 0,036 (*) 0,030 (***) -0,091 (**) 0,017 0,021 (*) 0,064 (***) age -0,025 (***) -0,028 (***) -0,023 (***) -0,007 -0,018 (***) -0,019 (***) -0,038 (***) -0,011 -0,025 (***) -0,026 (***) siz 0,006 (**) 0,005 0,002 -0,009 -0,005 0,001 0,000 -0,000 0,002 -0,005 td -0,096 (***) -0,106 (***) -0,137 (***) -0,173 (***) -0,167 (***) -0,093 (***) -0,323 (***) -0,081 (**) -0,134 (***) -0,182 (***) exc -0,079 (***) -0,060 (***) -0,051 (***) -0,002 -0,069 (**) -0,069 (***) -0,136 (***) -0,122 (**) -0,078 (***) -0,055 (**) overall r2 0,13 0,16 0,19 0,18 0,18 0,15 0,50 0,10 0,17 0,21 notes: standard-deviations presented in brackets.* p < 0,10; ** p < 0,05; *** p < 0,01. 112 l. pacheco journal of small business strategy / vol. 29, no. 3 (2019) / 97-116 sidering a representative sample, it is used an unbalanced panel data of 4,133 portuguese industrial smes for the period from 2010 to 2016. a set of control variables were used namely firm age, size, debt, intangible assets, advertising expenditures and the exchange rate. our results support the hypothesis that firm performance is positively related to internationalization, in particular, when this variable is measured in terms of export intensity and distance. nevertheless, that positive relationship is not linear, with some interesting differences between international efforts focused on the eu versus the rest of the world markets. the sigmoid relationship between internationalization and performance differs between those two markets being evidenced the higher costs brought up by the “liability of foreignness” and the psychic distance as well as the higher costs of managing and coordinating international activities when the firm attains an advanced stage of internationalization. thus, this non-linear nature of the relationship between internationalization and financial performance calls for major attention to these effects by managers who must acknowledge that internationalization brings dysfunctional consequences for firm performance, especially at intermediate levels of internationalization. possibly, some of the differences found in this paper are due to the fact that several previous papers focused on small firms at very early stages of their life or large listed firms and used different measures of performance and internationalization. the hypotheses tested in this paper have been tested in other different sectors and country samples, being this paper, to our knowledge, the first one to test them for smes in the portuguese context. some limitations of this study should be mentioned. firm performance is affected by many variables that were not considered (e.g., managerial labour and product markets, political and economic factors or even the personality of shareholders and managers), meaning that the results should be treated with caution. for instance, as stressed by pangarkar (2008), we focus on the overall (firm-level) performance implications of internationalization but do not consider the performance attained by individual initiatives such as ventures in particular markets. also, we did not control for several firm characteristics such as the prior experience of top managers in internationalization. our study is focused on a sample of portuguese firms, enabling us to control for the characteristics of the home market. to generalize our findings, scholars may seek to test our hypotheses in other home countries and consider inter-industry heterogeneity of internationalization effects. although different samples may exhibit distinctive patterns of internationalization, our theory is not specific to the portuguese context, so the predicted shape of the performance function is likely to be preserved. the limitations of the internal market and the small size of firms are characteristics also present in other countries, so our conclusions could perfectly be applied elsewhere. the measures of performance and internationalization used in the literature differ widely, leaving us with the question whether our results are dependent on the measures used. due to data availability, this paper was focused on profitability measures, but firm performance can be studied in different perspectives (financial indicators, employee satisfaction, innovation levels, etc. ) regarding future developments, we can study at a “case-study” level the effect on profitability of external alliances between firms. it is crucial to further study the profitability effects of other strategic options for international growth. as suggested by the literature, strategic aliances allow smes to overcome many of the aforementioned managerial resources constraints to international growth (oviatt & mcdougall, 2005).we can also perform cross-country analysis of the internationalization-performance relationship, instead of using a single country sample (some recent examples are de jong & van houten, (2014) and vithessonthi, (2016). this includes studying the different impacts on performance coming from internationalization to specific markets, namely the differences brought up by the choice between near and distant markets. finally, one can examine prior experience with international expansion and uncover inter-firm heterogeneity in firms’ abilities to benefit from internationalization. that is, besides studying the distinctive implications of the firm’s own international experience and the international experience of its peers, future research may examine a subtler typology of learning from rivals versus non-rivals. as scholars develop a more fine-grained understanding of different types of experience, they may be able to suggest how a firm can leverage particular types of experience to improve specific aspects of internationalization. this papers’ main contribution is to distinguish between export intensity, export diversity and export distance, facilitating the interpretation of their different effects on firm profitability. in summary, the results allow us to conclude that financial performance is influenced not only by firm-specific characteristics, such as age, size or leverage, but also by the internationalization level and type. due to smes relevance in the majority of the economies, our results and its implications can be generalized to other countries and we hope this study stimulates future research on this still unexplored topic of performance determinants. references aggarwal, r., & gort, m. 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(2001). the internationalisation of smes: alternative hypotheses and empirical survey. in m. berry, m. mcdermott & j. taggart (eds.) multinationals in a new era (pp. 47-60). london: palgrave macmillan. sx%avx pk publication staff editor dr. lloyd d. elgart barry university associate editor dr. lil1 inn schanfield barry university editorial advisory board dr. david ambrose university of nebraska-omaha mr. john bebris small business administration dr. don b. bradley iii university of central arkansas dr. robert brockhaus st. louis university dr. stephen brown eastern kentucky university dr. sam bruno university of houston-clear i ake dr. james carland, jr. western carolina university dr. joann c. carland western carolina university dr. peng s. chan california state university-fullerton dr. donald clause university of west florida dr. richard dailey university of montana dr. paul dunn northeast louisiana university dr. fred fry bradley university dr. steven hanks utah state university dr. rudy kagerer university of georgia dr. robert kemp drake university dr. lawrence klatt florida atlantic university dr. joseph c. latona university of akron dr. binshan lin louisiana state university-shreveport dr. inge nickerson barry university dr. john pearson arizona state university dr. louis g. pol university of nebraska at omaha dr. howard rudd college of charleston dr. homer saunders university of central arkansas dr. pamela s. schindler wittenberg university dr. herbert sherman mari st college dr. joseph f. singer university of missouri dr. george solomon small business administration dr. matthew c. sonfield hofstra university dr. harriet stephenson seattle university dr. howard van auken iowa state university dr. john wallace marshall state university 'a publication of barry university and the small business institute directors'ssociation. send subscription requests to geralyn mcclure franklin, ph.d., sbida secretary-treasurer, stephen f. austin state university, department of management and marketing, nacogdoches, tx 75962-9070. annual subscriptions and back issues may be ordered at $ 15 each. ocopyright 1992 small business institute director,'ssociation small business institute ~ r directors'ssociation sbida 1993-94 officers president vice-president program quality assurance robert a. kemp richard t. dailey department of management deparunent of management drake university university of montana dcs moines, ia 50311 missoula, mt 59812-1216 office: (515) 271-2807 office: (406) 243-6644home: (515) 223-6504 home: (406) 549-8095fax: (515) 271-2001 fax: (406) 243-2086 president-elect secretary-treasurer geralyn mcclure franklin department of management and marketing stephen f. austin state university oflic: (216) 972-7337 nacogdoches, tx 75962 home: (216) 666-4419 ortce: (409) 568-1730 fax: (216) 972-6588 home: (409) 569-7267 fax: (409) 568-1117 vice-president programs john r. kerr psst president college of business lynn hoffman borida state university department of management tallshssscc. fl 32306-1042 university of northern colorado office: (904) 644-7869 greeley, co 80639 home: (904) 386-9406 office: (303) 351-1224 fax: (904) 644~8 home: (303) 455-7814 fax: (303) 351-2500 vice-president publicatioas peter rainsford school of hotel administration cornell university ess etfithaca, ny 14853-6901 ~ c oo ofi)ce: (607) 255-8748 home: (607) 387-6020 c) fax: (607) 255-4179 s ib s the influence of strategic focus & gender on performance: an examination of small businesses shanan g. gibson east carolina university gibsons@ecu.edu abstract this study examines the extent to which strategic focus (internal versus external) and the gender of small business owners are predictive of perceived organizational performance. utilizing a sample of 237 small business owners in the southeastern region of the u.s., a factorial anova was used to test hypotheses related to both constructs. results indicate that a main effect exists for organizational strategic focus, but not for gender. while female business owners who utilize an internal strategy had the highest levels of perceived performance, the interaction effect was not statistically significant. keywords: strategic focus, gender, perceived performance introduction gender differences in the managerial practices of small business owners have been postulated as a major factor in the success or failure of these businesses. the findings have been mixed, and, therefore, there has been a push for new studies to investigate the relationship between gender and strategic choices, as well as human resource practices, and use of social capital and networks (verheul, risseeum & bartelse, 2002; ruynan, huddleston & swinney, 2006; mazzarol, reboud & soutar, 2009). previous research indicates that women business owners often report less start-up capital (carter & rosa, 1998, boden & nucci, 2000); have greater difficulty obtaining loans (verheul & thurik, 2001; coleman, 2002); have less of a credit history (shaw, carter & brierton, 2001); possess less managerial and technical expertise (chaganti & parasuraman, 1996; jones & tullous, 2002); and are more likely to enter business sectors that have higher failure rates (cater, trategy   journal of small business  47 journal of small business strategy volume 21, number 2 williams and reynolds 1997; brush & chaganti, 1999; perry, 2002). robb (2002) and marlow and patton (2005) suggest that this industry segregation may result from the capital restraints faced by many women entrepreneurs. sonfield et al. (2001) found that no gender differences existed in the types of strategies used by small business owners. other studies (sandberg, 2003; boohene, sheridan & kotey, 2008; knotts, jones & brown, 2008) have uncovered differences in choices of business strategies, indicating that the impact of gender on strategic choice remains an unresolved question. thompson (2004) points out that successful entrepreneurship requires a combination of temperament, talent and technique. the focus of this paper is to examine the perceived performance of organizations and whether or not differences exist based upon the strategic techniques used by small business owners, and whether or not there are gender differences associated with these strategic choices. a better understanding of the strategies and techniques of business owners can make an important contribution to the research body, as well as offer important practical implications for policy makers and service providers. literature review past studies of entrepreneurship and small business management have included both environmental and internal characteristics. previous areas of focus for entrepreneurial research have included geographical location, regional policies, access to resources and support programs, family history, educational levels, personality traits, personal experiences, strategic choices, human resource practices, ethnicity, and gender. strategic focus. the strategic management literature presents various typologies to categorize the strategic choices that organizations may choose (miles & snow, 1978; porter, 1980; miller, 1981). when strategy type is examined within the context of the entrepreneurial firm and small business, it is important to examine the individual responsible for making these strategic choices, as these individuals direct the small business. as highlighted in several global entrepreneurship monitor (gem) reports, entrepreneurs throughout the world often pursue business ownership based either on opportunity recognition or necessity, due to the lack of viable economic alternatives. research has indicated that women and minorities often seek out entrepreneurial opportunities as a way to overcome the frustration and discontent which result from the lack of advancement opportunities in large organizations (weiler & bernasek, 2001; heilman & chen, 2003). as a result of this discontent, the nature of the strategic decisions made when initiating their own business endeavors is likely impacted. similar findings have shown gender differences in the strategic focus of small business owners (sandberg, 2003; boohene, sheridan & kotey, 2008; knotts, jones & brown, 2008). sandberg (2003) found that women business owners were more longterm in their strategic thinking, while men were more action oriented. research by verheul, risseeum and bartelse (2002) suggests that men are more focused on opportunity recognition, while women are more necessity driven in their desires to start a new venture. as a result, men tend to focus more on external growth strategies and women are more likely to pursue a specialized strategy that focuses on customer service and other internal factors such as human relations, in order to 48 journal of small business strategy volume 21, number 2 promote continuity, as opposed to expansion. in order to promote growth, men concentrate on controlling resources and production, while women place more importance on establishing both customer and employee loyalty. edelman, brush and manolova (2005) propose that internal customer service strategies are more beneficial than innovation strategies in most non-high technology business ventures. verheul, risseeum and bartelse (2002) also found that women are more likely to combine personal and business goals, and strive to have a more personalized network, whereas men often use their business networks to gain access to tangible resources. the findings from boohene, sheridan and kotey (2008) and knotts, jones and brown (2008) show that women generally have a stronger marketing focus, and men place greater emphasis on production and financial objectives. overall, boohene, sheridan and kotey (2008) suggest that men are more proactive business owners and more focused on achieving higher levels of financial performance. they, along with marlow and carter (2004), argue that these differences in strategic focus are not surprising, since men and women often have different values and motivations for starting a business. social capital and networks. as proposed by runyan, huddleston, and swinney (2006), social capital and informal networks can serve as a competitive advantage, especially for women business owners. similarly, daniel (2004) found that women are more adept at nurturing relationships and often possess stronger people and networking skills than their male counterparts. these strategic alliances and effective networking skills can help to escalate the growth process in small firms (mazzarol, rebound & soutar, 2009). social capital is often developed through social relationships where greater levels of trust, dependency, and obligation are nurtured and shared by participating members. these relationships allow for the dissemination of information among involved parties, leading to a greater emphasis on reciprocity and commitment (tsai & ghoshal, 1998). similarly, cohesive networks can be used by small business owners to gather important customer feedback and market knowledge (ruynan, huddleston & swinney, 2006). a key component of customer service is to develop strong working relationships with employees and to adopt strategic human resource practices (mazzarol, reboud & soutar, 2009). this is important since research shows that men generally have greater access to tangible resources like capital and equipment. nonetheless, the exploitation of intangible resources like social networks may help to equalize the playing field for women business owners and help to offset resource constraints (runyan, huddleston & swinney, 2006). regardless, a key success factor for any small business owner is to effectively manage all available resources, which includes everything from information to individuals, and to choose the appropriate strategy that best leads to overall business success (rogers, miller & judge, 1999). some researchers (krueger, reilly & carsrud, 2000; poutziouris, 2003; mazzarol, reboud & soutar, 2009) believe that strategic choices are linked with prior entrepreneurial behaviors and experiences, and these experiences, along with gender differences, can help to explain why men and women often use different approaches to strategic management. specifically, poutziouris (2003) claims that the strategic vision of each business owner is the direct result of blending one’s internal belief 49 journal of small business strategy volume 21, number 2 system with the market forces dictated by the external environment. hypothesis the resource-based view suggests that differences in firm resources help to explain differences in business performance. a venture has a specific set of tangible, or intangible, resources to be used for developing a competitive advantage. examples of resources include capital, equipment, proximity to customers, managerial skills, organizational process, or some form of specialized knowledge. business owners use their unique resources, in conjunction with their internal capabilities, in a manner that creates a sustainable advantage, in order to develop and grow the venture. in the small business arena, the availability of resources is often directly linked to the talents and skills of the business owner (runyan, huddleston & swinney, 2006). based on the literature review above, the resources available to men and women may vary to the extent that each group tends to use different capabilities and strategies to achieve business success. it is our belief that women will rely more heavily on intangible resources and relational strategies, as well as an internal focus that emphasizes customer service and human resource management practices. likewise, the strategic focus of men will be based more upon tangible resources that emphasize production and financial performance, an external focus. therefore, we hypothesize that: h1: internally-focused strategies are more likely to result in perceptions of higher small business performance. h2: female small business owners are more likely than their male counterparts to develop internallyfocused strategies. consistent with these two hypotheses, it is anticipated that the highest levels of performance will be realized by an interaction of gender and organizational strategic focus. h3: female small business owners who pursue internally-focused strategies are more likely to perceive higher performance than those who pursue externally-focused strategies. method participants. small business owners identified by their membership with the north carolina small business and technology development center (sbtdc) were contacted via email and asked to complete an anonymous online survey regarding their small business and its developmental needs. special effort was made to reach out to minority small business owners; these individuals received additional reminders to complete the survey. a total of 270 responses were received (18% response rate) of which approximately 237 were usable (others were incomplete). this sample was 55% male and 50% ethnic minority (non-caucasian). the average age of respondents was 49 years and the average length of time that individuals had been in business was 10.7 years. measures. achievement of performance outcomes may be impacted by several factors, including the characteristics of the business owner and the strategies that he/she pursues. the current paper examines the degree to which business owner gender, 50 journal of small business strategy volume 21, number 2 51 and choice of an internal versus external strategy, impacts organizational performance. as part of the survey, participants provided demographic information, including gender, age, and ethnicity. participants also were asked to indicate to what degree each of several statements was consistent with the strategic emphasis for their businesses. these items were measured using a variation of davis, miles and mcdowell’s (2008) questions on strategic focus. their instrument was developed specifically for use in small businesses and is consistent with the diverse sample of firms utilized in the current study. although previously validated by davis et al., the items were subjected to exploratory factor analysis, in order to examine the veracity of a twofactor strategic scale. this thirteen-item, five-point likert scale was found to assess two strategic tendencies – described as a focus on internal strategies (six items; α = .882) and a focus on external strategies (seven items, α = .803). the items, factor loadings, and associated descriptive statistics are shown in table 1. table 1: internal & external strategic emphasis items factor loadings items internal strategy external strategy mean sd fostering employee participation and empowerment .860 3.39 1.38 monitoring and enhancing employee satisfaction and morale .835 3.46 1.38 incentive compensation based on team or facility performance .775 2.96 1.40 attracting and retaining high quality employees .752 3.57 1.42 training and continuing education of employees .704 3.20 1.37 employee profit sharing .648 2.20 1.43 increasing growth in revenue .776 4.24 .96 improving profit margin .773 4.12 1.01 continuous improvement of existing products or services .735 4.40 .85 realizing returns on new products or services .717 3.86 1.09 customer satisfaction .692 4.68 .75 advertising and promotions .448 3.35 1.21 offering lower priced products or services .397 2.75 1.31 perceived performance was also measured by a series of ten likert-type questions that were combined to yield a single scale score for performance. while financial performance data is commonly used to measure performance, in this sample, which examines many types of organizations, a subjective performance evaluation was appropriate. it utilizes the approach of kumar, subramanian, and strandholm journal of small business strategy volume 21, number 2 (2001), which tested the degree of satisfaction related to a variety of organizational performance items, which can be found in table 2. previous empirical evaluations have found these subjective measures to be highly correlated with objective measures (dess & robinson, 1984; vernkatraman & ramanujam, 1986). justification of their usefulness can be seen in the business literature (covin, prescott and slevin, 1990; greenley, 1995; slater and narver, 1995; subramanian, kumar, and strandholm, 2009). in order to confirm the appropriateness of this method, the factor analysis of the scale items was assessed. the factor structure coefficients were sufficient, ranging from .519 to .781, with a scale reliability of α = .851, thus ensuring a good fit to the data. table 2 shows the descriptive statistics for the performance items. table 2: organizational performance items items factor loadings mean sd collecting accounts receivables .520 4.00 1.079 paying debts or liabilities .579 4.14 .977 managing expenses .600 4.01 .935 finding new customers .519 3.68 1.078 retaining customers .696 4.07 .930 pricing products/services .753 3.93 .791 developing new products or services to meet customer needs .595 3.82 .981 maintaining employee morale .781 3.60 1.107 communicating with employees .731 3.80 1.141 managing staffing needs .747 3.63 1.128 results this analysis was designed to assess the effects of both strategic focus and gender on perceived organizational performance. organizational performance scores were subjected to a two-way analysis of variance having two levels of strategy (internal, external) and two levels of gender (male, female). the anova supported the main effect for strategy type, yielding an f ratio of f(1, 175) = 7.580, p < .01. this indicates that the perceived performance was significantly higher in the organizations that pursued an internal strategy (m = 4.11, sd = .659) than it was in those which pursued an external strategic focus (m = 3.81, sd = .635). analyses did not support 52 journal of small business strategy volume 21, number 2 figure 1: table 3: descriptive statistics for performance by gender and strategy type organizational strategy type gender internal external total m sd m sd m sd male 4.01 .7000 3.83 .592 3.87 .619 female 4.37 .479 3.80 .687 3.87 .689 total 4.11 .659 3.82 .635 3.87 .648 hypothesis two; no significant main effect for gender was found (f(1, 175) = 1.424, p > .05). the interaction effect was nonsignificant, f(1, 175) = 2.132, p > .05; however, as can be seen in figure 1, female business owners utilizing an internal strategic focus had the highest levels of perceived performance (albeit not significantly higher than their male peers), which is consistent with hypothesis 3. table 3 provides the descriptive statistics for performance perceptions, both strategic focus and gender. discussion and practical implications past research on strategic gender differences in the small business context has been mixed, and our results add additional support to the findings of sonfield et al. (2001) from almost a decade ago. based on 53 journal of small business strategy volume 21, number 2 a national sample, they found no gender differences in strategic choices and preferences for risk and innovation among small business owners. as they suggested, more research is needed to better understand the strategic behavior of men and women business owners, and our study offers additional support that some of the perceived gender differences in business practices have dissipated. however, one area in which our findings differed from sonfield et al. (2001) is that, while they found men were more satisfied with business performance, we found that women business owners using internal strategies had a slightly higher perception of their own business’ performance. this seems to provide more evidence that women business owners are closing any real or perceived gender gap, with regard to business practices and performance. another critical contribution to both the literature and the small business owner is to highlight the use of internal strategies for business success. given the constraints of the current economic environment, it may be highly impractical, or even untenable, to focus one’s limited resources on increased advertising, profit margins, revenue growth, or other traditional external strategic initiatives. however, by maximizing one’s human resources through careful selection; by fostering empowerment and participation; by utilization of incentive programs, and other internally focused strategic actions, the small business owner may be able to achieve very satisfactory levels of performance. another implication from our findings is that, despite any resource differences or start-up advantages, men and women small business owners use similar strategies. those more focused on internal factors, such as employee relations and employee satisfaction, were more successful. as suggested by moreno and casillas (2008), business strategy is tied directly to the availability of resources. while our study did not focus on access to resources, the similarity in strategic choices may indicate that men and women are making business decisions based upon access to comparable resources. mazzarol, reboud and soutar (2009) argue that small business growth is directly related to the blending of an owner’s strategic planning skills and resource availability. edelman, brush and manolova (2005) offer similar recommendations. they found that internal customer service strategies are often more effective than innovative practices for businesses not focused upon high-tech products and services. an internal focus also includes a focus on effective human resource management practices and the use of social capital to make critical business connections, which may lead to accessing new resources (mazzarol, reboud & soutar, 2009). while some have argued that an internal strategy does not promote as much growth through new opportunities (verheul, risseeum & bartelse, 2002), it can also be said that an internal focus can help a business owner better prepare for incremental growth. as suggested by sandberg (2003), women business owners are often more long-term in their strategic thinking, so perhaps our findings indicate that business owners, regardless of gender, are adopting a more gradual strategic approach to business expansion. this type of strategic approach can help business owners to be better prepared for changes in customer demands, as opposed to offering knee-jerk reactions that hamper future growth. it may be of interest that the small business owners were surveyed during a challenging economic period. perhaps it can be argued that business owners are more concerned with continuity than growth in the current 54 journal of small business strategy volume 21, number 2 marketplace. future research could examine the extent to which economic conditions act as a moderating variable related to perceived organizational performance. according to verheul, risseeum & bartelse, (2002), women business owners are generally more focused on continuity, while men often strive for growth and expansion. the economic crisis experienced from 2008 2011 may dictate that all business owners adopt a more conservative approach to strategic planning -one that focuses on investments in customer service and internal networks to maintain current market share. research has shown that intangible resources can be used to offset financial constraints, and that women are just as successful as men in using these types of resources to enhance business performance (runyan, huddleston & swinney, 2006). future research within the realm of organizational performance, there exist myriad attributes that have the potential to impact the success of a small businesses. factors associated with the owner and his/her approach to strategic focus are certainly among them. the current paper examined only two such factors – the gender of the owner and the strategic focus (either internal or external) that the owner predominantly pursued. while no significant interaction for these two variables was found, future research should continue to examine factors associated with the owner; management strategies pursued by the owner; contextual factors such as industry type and organizational size or longevity; as well as the potential interaction of these attributes. in addition, the current study is crosssectional in nature. as such, our findings may not be representative of longitudinal trends and our conclusions should be interpreted in this light. future research that extends our knowledge of perceptions of performance, over time, and in different economic circumstances, has the potential to add to our overall knowledge base. any knowledge gained through this study may be used to develop better small business owner training opportunities, and, in general, may be beneficial as we continue to nourish the small business atmosphere during challenging economic times. references boden, r. & nucci, a. 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(2003). an exploratory study of women in micro enterprises: gender-related differences. journal of small business and enterprise development, 10(4), 408-417. shaw, e., carter, s., & brierton, j. (2001). unequal entrepreneurs: why female enterprise is an uphill business. london: the industrial society. sonfield, m., lussier, r., corman, j. & mckinney, m. (2001). gender comparisons in strategic decision-making: an empirical analysis of the entrepreneurial strategy matrix. journal of small business management, 39(2), 165-173. subramanian, ram; kumar, kamalesh; strandholm, karen. (2009). the 57 journal of small business strategy volume 21, number 2 58 relationship between market orientation and performance under different environmental conditions: the moderating effect of the top management team's risk taking behavior. academy of strategic management journal. thompson, j. l. (2004). innovation through people. management decision, 42(9), 1082-1094. tsai, w. & ghoshal, s. (1998). social capital and value creation: the role of intrafirm networks. academy of management journal, 43(4), 464-476. venkatraman, n., & ramanujam, v. (1986). measurement of business performance in strategy research: a comparison approach. academy of management review, 11: 801-814. verheul, i., risseeuw, p. & bartelse, g. (2002). gender differences in strategy and human resource management: the case of dutch real estate brokerage. international small business journal, 20(4), 969-988. verheul, i. & thurik, r. (2001). start-up capital: does gender matter? small business economics, 16(4), 329-345. weiler, s. & bernasek, a. (2001). dodging the glass ceiling? networks and the new wave of women entrepreneurs. social science journal, 38, 85-103. shanan g. gibson, ph.d. is an associate professor of management at east carolina university. her expertise is in issues related to human resources management & organizational behavior in organizations and her research includes more than 46 published conference proceedings and 29 peer-reviewed journal articles on topics relevant to human resources and organizational development including job analysis, technology acceptance in organizations, and entrepreneurship. her research can be seen in the journal of small business strategy, the international journal of entrepreneurship and small business, and the journal of applied management and entrepreneurship, among others. dr. gibson was awarded the 2010 board of governor's teaching award, the 2009 robert l. jones university alumni award for outstanding teaching and the 2009 max ray joyner award for faculty service through continuing education. in addition to her university responsibilities, shanan currently serves as an appointed member of the social security administration's occupational information development advisory panel (oidap). reproduced with permission of the copyright owner. further reproduction prohibited without permission. 1 stratxgy editor's note the officers and members of the small business institute directors'ssociauon (sbida) dedicate this issue of the journal of small business strotegy (jsbs) to drs. lloyd elgart and lillian schanfield, former editors of the jsbs. drs. elgart and schanfield served as editors of the journal for approximately two years. we appreciate their excellent contributions toward making the journal a highly-recognized, quality small business journal. the articles published in this issue of the journal represent a focused effort to provide the readers with practical information that can be used to help small business owners and managers improve and grow their businesses. in keeping with a practice begun by drs. elgart and schanfield, the special non-reviewed section includes invited papers and papers that received the disunguished paper award at the sbida national consulting conference. i commend the reviewers and authors for their contribuuons and pauence during this ume of uansition between editors. i would appreciate your comments on articles published in either section and any suggesuons for improving the journal. gwen fontenot, ph.d. editor 27 what can drive successful entrepreneurial firms? an analysis of inc. 500 companies erick p.c. chang 1 arkansas state university echang@astate.edu esra memili university of north carolina—greensboro e_memili@uncg.edu james j. chrisman mississippi state university jchrisman@cobilan.msstate.edu dianne h. b. welsh university of north carolina—greensboro dhwelsh@uncg.edu abstract entrepreneurship scholars tend to discuss the merits of using innovation over imitation for the creation of new ventures. we take a step forward to focus our attention on the drivers of successful entrepreneurial firms and use inc. 500 companies to test our framework. findings indicate that the extent of innovation positively influences long-term sales growth and the relationship is positively moderated by prior experience and negatively moderated by family involvement. research and practical implications are discussed. keywords: innovation, entrepreneurial success, imitation, firm growth 1 corresponding author. s trateg y journal of small business mailto:e_memili@uncg.edu mailto:jchrisman@cobilan.msstate.edu mailto:dhwelsh@uncg.edu journal of small business strategy vol. 22, no. 2, 28 introduction shane and venkataraman (2000) describe entrepreneurship as a field that focuses on the discovery of opportunities for new goods and services. although scholars have debated “who is” and “who is not” an entrepreneur (carland, hoy, & carland, 1988; low & macmillan, 1988; sharma & chrisman, 1999), gartner (1988:26) places more importance to the notion of “what the entrepreneur does” rather than “who the entrepreneur is.” in that regard, entrepreneurship scholars have discussed aspects related to what can be considered entrepreneurial and what are the merits of those individuals and organizations who actively pursue their entrepreneurial dreams (dew, velamuri, & venkataraman, 2004; drucker, 1985; gartner, 1990; kim & mauborgne, 2005; minniti, 2004; sharma & chrisman, 1999; stopford & baden-fuller, 1994). as a result, entrepreneurial activity can exist during the process of organizational creation or as part of innovative or renewal activities that occur within or outside an existing organization (sharma & chrisman, 1999). however, it remains unclear what can be considered as a successful entrepreneurial activity after an opportunity is discovered and exploited. on one side, there are society expectations that place a higher valuation on those entrepreneurs who challenge “the circular flow” that lead to “the gale of creative destruction” by bringing their innovations to the market (schumpeter, 1934, 1950). these innovators are motivated to outcompete existing offerings in the environment (alvarez & busenitz, 2001; barney, 1991), or even create new markets where competitors become irrelevant (kim & mauborgne, 2005). on the other side, the presence of imitators, or even those who are alerted to profitable opportunities (kirzner, 1973), may not allow the creative entrepreneurs to instantly profit and/or destroy existing industries in the short term (nelson & winter, 1982), as they may find opportunities to operate in the current market conditions by overcoming entry barriers or challenging the industry incumbents (porter, 1980). thus, it is not possible to determine if a successful entrepreneurial event is achieved solely by offering new products or services and/or creating new industries because new ventures offering similar products or services will also have the potential to reap benefits in the market. our study aims to explore what can drive the success of entrepreneurial firms. particularly, we focus our attention on the extent of innovation, family involvement, and the entrepreneurial experience needed for starting the firm. the firm’s entrepreneurial success is operationalized as long-term sales growth because a new entrepreneurial effort requires time to generate acceptance in the market to overcome the liability of newness (stinchcombe, 1965). first, we analyze the long-term sales growth of entrepreneurial firms based on their extent of innovation. second, we analyze the moderating effects of entrepreneurial experience and family involvement in the relationship between innovation and sales growth. to test our framework, we used the companies listed in the 2003 inc. 500 magazine, as researchers have used them to study new venture performance, survival, growth, and profitability (allred & adams, 2007; allred, adams, & chakraborty, 2007; ensley, pearce, & hmielesky, 2006; gartner, star, & bhat, 1999; markman & gartner, 2002). because we rely on companies with extremely high levels of growth, our results provide an opportunity to investigate the nature of entrepreneurial firms in america. journal of small business strategy vol. 22, no. 2, 29 in the remainder of the paper, the theoretical framework and hypotheses are developed, and the methods and results are presented. the paper concludes with implications for theory and practice. theory and hypotheses once the entrepreneur has been influenced by different environmental and/or individual factors, scholars have argued that the first milestone of success for the entrepreneur is the actual start-up of the business (blanchflower & oswald, 1998; brazeal & herbert, 1999; bygrave & minniti, 2000; carter, gartner, shaver, & gatewood, 2003; chang, kellermanns, & chrisman, 2007; chrisman, 1999; gartner, 1985, 1988, 1990; katz & gartner, 1988; krueger, 1993; low & macmillan, 1988; minniti, 2004, 2005; minniti & bygrave, 1999; shapero & sokol, 1982). however, entrepreneurial success can also occur after the exploited opportunity overcomes the liability of newness (gartner, et al. 1999; stinchcombe, 1965), grows (markman & gartner, 2002), or receives external recognition at the regional level, such as economic development and growth (barringer & greening, 1998; chang, 2008; chrisman, bauerschmidt, & hofer, 1998; minniti & levesque, 2008). as a result, these two interpretations of entrepreneurial success imply that there is a complex process where external and internal factors may interact with particular actions by establishing a set of conditions (e.g. strategy, structure, resources) while exerting high levels of entrepreneurial behavior (chrisman et al., 1998; covin & slevin, 1991; lumpkin & dess, 1996). we present in figure 1 a theoretical framework that takes a step forward from prior conceptualization to determine drivers of success for entrepreneurial firms (chang et al., 2007; chang, et al., 2009; katz & gartner, 1988; minniti, 2005; minniti & bygrave, 1999; shapero & sokol, 1982). our framework provides three key aspects. first, success is driven by the entrepreneur(s’) level of experience, the level of family involvement, and the extent of innovation used to start the business. second, extent of innovation exerts a moderating effect between (a) family involvement and entrepreneurial experience and (b) entrepreneurial success. third, we consider that the entrepreneurial firm has become legitimate in the market (katz & gartner, 1988; stinchcombe, 1965) so the next stage for the entrepreneurial firm is to generate growth in terms of revenues and employees before engaging in future strategic and structural changes (galbraith & kazanjian, 1986). consequently, the long-term sales growth represents an appropriate operationalization for measuring the success of entrepreneurial firms. the following sub-sections develop our hypothesized relationships. figure 1 theoretical framework h2b (+) h3a (+) extent of innovation entrepreneurial experience entrepreneurial success (long-term sales growth) family involvement h2a (+) h3b (-) h1b (+) journal of small business strategy vol. 22, no. 2, 30 extent of innovation new products, services, or technological processes are the results of firms engaging and committing to support new ideas, novelty, experimentation, and creative processes (lumpkin & dess, 1996). sharma and chrisman (1999) explain that the extent of innovation is related to the degree of newness in the entrepreneurial activity. it can range from exploiting an opportunity that merely imitates current offerings in the marketplace to discovering unexplored opportunities that disrupt the market (christensen, 1997; drucker, 1985; henderson & clark, 1990; kirzner, 1973; schumpeter, 1934; stopford & badenfuller, 1994). from a schumpeterian perspective, innovators can range from incremental (those offering refinements or extensions) to radical (those offering new combinations that disrupt existing practices) (aldrich & martinez, 2001; drucker, 1985; henderson & clark, 1990). hence, the newness of the entrepreneurial activity provides benefits in the market as the process of creative destruction replaces the old industry routines and forces competitors to adapt or perish (cheah, 1990; johannessen et al., 2001; lumpkin & dess, 1996; schumpeter, 1934, 1950). empirical studies conducted at the industry level have supported schumpeter’s claim (anderson & tushman, 1990; christensen, 1997; henderson & clark, 1990; sexton & bowman-upton, 1991). further support to schumpeter was obtained via simulations that have modeled the effects of r&d investments to alter industry and regional conditions (minniti & levesque, 2008; nelson & winter, 1982). however, we also need to consider kirzner’s (1973) suggestions that entrepreneurs may be alerted to profitable opportunities as they encounter market inefficiencies of the pioneers. furthermore, profitable opportunities also exist in the market even in the absence of innovation (aldrich & martinez, 2001; cheah, 1990; drucker, 1985; kirzner, 1973; minniti, 2004; sharma & chrisman, 1999). as late entrants in the creative destruction process, imitators replicate, or even enhance, the prior experiences (failures and successes) of market pioneers (e.g. those who can be considered as the schumpeterian entrepreneurs). in that respect, kirzner differs from schumpeter in terms of the alertness expressed by the entrepreneur to discover opportunities, regardless of the nature of the business or industry. consequently, we can see that the market will offer opportunities to imitators who can profit and compete in order to reestablish the market disruptions caused by the schumpeterian entrepreneurs (cheah, 1990). moreover, the level of success of the innovators may be reduced by the time it will take the market to adopt and use the innovations. meanwhile, imitators will develop their own learning processes to compete against the innovators, but their level of success will depend on how creative they become to erode the competition of the pioneers (kirzner, 1973; nelson & winter, 1982). in this regard, the views of schumpeter and kirzner are similar because success includes being creative to remain in the market, making a profit, and reducing the competitive threats of substitutes or new/imitative products. nelson and winter (1982) explain that in the long run, those firms that continue to search and adapt to technological changes may end up outcompeting those lacking innovative and creative capabilities (e.g., imitators). to succeed, those innovators must possess a level of competitive advantage that allows them to reduce threats by the imitators (barney, 1991; porter, journal of small business strategy vol. 22, no. 2, 31 1985). kim and mauborgne (2005) take a further step to imply that highly entrepreneurial firms must seek to stand out in the market so competitors become irrelevant. as a result, the level of entrepreneurial success is driven by those firms that continuously innovate and the followers (the imitators) may fall behind or even disappear (kirzner, 1973; nelson & winter, 1982; schumpeter, 1934). particularly, studies show that exploring future opportunities may also help firms avoid stagnation and guide operations toward organizational growth, profitability, and sustainability (barrett & weinstein, 1998; hoy, 2006; zahra, 1996; zahra, hayton, & salvato, 2004). in addition, the need for offering innovative products can improve the financial performance of the entrepreneurial firm under hostile environment (wright, palmer, & perkins, 2005) or during the early stages of their organizational life cycle (lester, parnell, & menefee, 2009). henceforth, the arguments developed above indicate that the extent of innovation has a direct influence to drive the success of entrepreneurial firms. in addition, entrepreneurial firms offering imitations in the market will not attain the same level of long-term sales growth of those that innovate in the market. thus, h1a: innovating firms will have higher long-term sales growth than imitators. h1b: extent of innovation is positively related to long-term sales growth. entrepreneurial experience and family involvement the entrepreneurship literature is rich in theories backed by empirical evidence concerning the positive effects of prior entrepreneurship exposure and family involvement in the development of new ventures (e.g. chang et al., 2009; minniti & bygrave, 1999, shapero & sokol, 1982). for driving the success of entrepreneurial firms, entrepreneurial experience and family involvement represent positive influences on the strategic direction of the business, as well as serve as a source of knowledge and support in the business operation. on one side, individuals with a prior entrepreneurial experience (e.g., worked with an entrepreneur or started a business in the past) have developed a knowledge base that is critical and specialized in the decision making process (alvarez & busenitz, 2001). particularly, those who can be identified as serial entrepreneurs (davidson & wiklund, 2001) have developed a learning curve that allows them to correct prior failures while gaining valuable experience for future entrepreneurial actions (birch, 1987). in addition, having entrepreneurial experience implies a sense of knowledge pertaining to the understanding of where the sources of resources are in order to successfully operate the business (granovetter, 1985; greve & salaff, 2003) and who can provide support (chrisman & mcmullan, 2000). consequently, the success of entrepreneurial firms is driven by how experienced the entrepreneur is in developing and operating the business. thus, h2a: entrepreneurial experience is positively related to long-term sales growth. on the other side, new businesses may be endowed with family involvement by active ownership, management, and transgenerational succession expectations from the entrepreneurs’ family (chrisman, chua & sharma, 2005). family journal of small business strategy vol. 22, no. 2, 32 involvement provides additional support elements in terms of resources, norms, and social capital to develop a strong link between family objectives and business goals that can create distinctive effects on organizational outcomes (aronoff & ward, 1995; chang et al., 2009; habbershon & williams, 1999; hoffman, hoelscher, & sorenson, 2006; pearson, carr, & shaw, 2008; sundaramurthy & kreiner, 2008). accordingly, the family business literature has outlined the positive influence of family members in the strategic management process (chrisman et al., 2005). family members tend to develop altruistic behaviors (such as advising and cooperation) (arregle, hitt, sirmon, & very, 2007) that can positively contribute to achieve entrepreneurial success. moreover, family involvement generates a sense of value and intent for transgenerational succession that seeks to create wealth, jobs, and achieve economic goals (chrisman, chua, & zahra, 2003b; sirmon & hitt, 2003). indeed, entrepreneurial activities play an important role in providing a future for the next generations (memili, eddleston, zellweger, kellermanns, & barnett, 2009). furthermore, firms with family involvement can be more responsive to changes in the environment by rapid decision making via heuristics and intuition that can consequently facilitate growth (carney, 2005). thus, h2b: family involvement is positively related to long-term sales growth. moderating effects figure 1 also explores two moderating effects that analyze how entrepreneurial experience and family involvement exerts an influence in the relationship between extent of innovation and the long-term sales growth of entrepreneurial firms. first, entrepreneurial experience represents a source of knowledge that can identify and value the types of profitable opportunities available in the market. in that regard, entrepreneurs can use their knowledge built on prior successes and failures to engage in future entrepreneurial activities. particularly, entrepreneurs will find innovation attractive enough to fully exploit their future entrepreneurial aspirations. this search process can be linked to establish innovative routines that may increase the prospects of achieving entrepreneurial success (nelson & winter, 1982). as a result, the arguments developed above suggest that combining prior entrepreneurial exposure with innovation will increase entrepreneurial success as those ventures will be guided by founders who have experience and an aspiration for success. thus, h3a: entrepreneurial experience positively moderates the relationship between the extent of innovation and long-term sales growth. second, the positive influence of family involvement may not remain when the question of innovation emerges in the new venture process. particularly, family members may not be as supportive, or lack enough social capital, (arregle et al., 2007; pearson et al., 2008) to provide guidance toward what type of innovation activity or profitable opportunity may exist in the market. carney suggests that family control over assets of the firm may limit the positive effects of high levels of innovation on organizational outcomes. furthermore, family involvement can create conflicts when important decisions such as extent of innovation, are introduced into the strategic direction of the business (eddleston & kellermanns, 2007). moreover, the corporate governance of firms with a substantial level of family involvement may journal of small business strategy vol. 22, no. 2, 33 force the business to focus on simple technologies and industries where the level of competition is not as intense as the one that characterizes those firms exerting higher levels of innovation (carney, 2005). in other words, the entrepreneurial success of firms with a certain level of family involvement lies in stable environments where they can exploit their competitive advantages over longer periods of time (chang, chrisman, chua, & kellermanns, 2008b). thus h3b: entrepreneurial experience positively moderates the relationship between the extent of innovation and long-term sales growth. methods research design and sample in order to test our hypotheses, we needed a dataset of entrepreneurial firms that can be identified as successful new ventures. for this reason, we used the entire 500 firms listed in 2003 by the inc. magazine. according to markman and gartner (2002), the inc. 500 data is verified by independent sources and provides a 5-year process to analyze firm growth.2 furthermore, the inc. 500 companies are an appropriate dataset because these firms tend to be smaller and younger and/or have used an entrepreneurial strategy to exploit available opportunities in the environment. particularly, these types of firms have been labeled as gazelles as they have been able to exploit market opportunities to attain levels of growth that are beyond market standards due to the offering of radical innovations (birch, 1987). ___________________________________ 2 please refer to markman and gartner (2002: 67-69) who provides a comprehensive description of the inc. 500 dataset. we used the 2003 list because it was the first time that inc. magazine incorporated additional firm-specific information to construct our set of independent variables. in 2004, inc. magazine started an online version (subscription base) of the 500 list that restricted the public access to firm level information in comparison with prior years. measures dependent variable as explained in our theoretical developments, sales growth represents an important success measure for an entrepreneurial firm. therefore, we used the percentage of sales growth from 1998 to 2002 as our dependent variable. because the companies listed in the inc. 500 present high levels of sales growth, the variable follows a non-normal distribution and we were unsuccessful in transforming the variable (tabachnick, 1996). independent variables extent of innovation. the measure was created via content analysis to assess the level of innovation presented by each of the firms. the magazine provided short descriptions of each of the companies that were analyzed by the first author who followed the guidelines provided by gartner et al (1999:223). three categories were used to measure the extent of innovation: (a) values of “1” were given to firms offering similar products of services; (b) values of “3” were given to firms offering an incremental innovation; and (c) values of “5” were given to firms offering a major innovation. the outcome of the content analysis classified 17 firms offering a major innovation (3.4%); 61 firms offering an incremental innovation (12.2%); and 422 firms offering similar products/services (84.4%). the results of the content analysis conducted with the firms’ descriptions indicated that the majority of the inc. 500 journal of small business strategy vol. 22, no. 2, 34 firms did not offer products or services that can be considered as innovative as it was previously suggested (birch, 1987). we provide the following examples: advanced vision research was coded as a “5” (major innovation) because dr. jeffrey gilbard, a harvard researcher, patented the electrolyte balance of the human tear to market theratears, an over-the-counter eye drop; ecopy was coded as “3” (incremental innovation) because: “edward schmid wondered why people weren't using scanners and pcs to replace fax machines, so he founded ecopy to develop the technology… when canon introduced the first digital copier, marrying a digital scanner and a laser printer, schmid began designing applications for it;” and the scooter store was coded as “1” (similar offering) because: “the company sells power wheelchairs and electric scooters to the elderly and disabled.” family involvement. prior research suggests the important role of the family to support and operate new businesses (chang et al., 2009; chrisman, chua, & litz, 2003a; chrisman et al., 2003b). the inc. 500 list of 2003 identified 205 firms (41%) that possess some level of family involvement in the creation and operation of the business. in that manner, we used a binary variable where values of “1” were given to those firms identified as operating with the influence of the entrepreneur’s family and values of “0” if the firms lack family involvement. entrepreneurial experience. researchers have found that prior exposure and experience are a determinant in developing new ventures (davidson & wiklund, 2001; krueger, 1993). the inc. 500 list of 2003 included 183 firms (37%) that are run and/or started by serial entrepreneurs. thus, we used a binary variable where values of “1” were given to those firms that were created and operated by serial entrepreneurs as a proxy for entrepreneurial experience and values of “0” if the firms were created and operated by nascent entrepreneurs. control variables because inc. magazine reports the main place of operations and the industry sector of each of the firms listed, we were able to use a set of state-level variables and firmspecific variables as controls. the statelevel variables were region, economic development, state knowledge base, and an index of nativity (blau, 1977) to capture the level of population heterogeneity in the state. the firm-specific variables were industry sector, age, size, and prior performance. state-level variables. the entrepreneurship literature considers that a favorable socioeconomic environment provides location advantages to not only start and operate new ventures, but also to achieve a certain degree of entrepreneurial success (bygrave & minniti, 2000; chang, chrisman, & kellermanns, 2011; jacobs, 1969; minniti, 2005; minniti & levesque, 2008). empirical results conducted at different units of analysis have also provided several indicators that establish these environmental conditions (audretsch & lehman, 2006; birch, 1987; bull & winter, 1991; carree, van stel, thurik, & wennekers, 2002; chang, 2008; chang, chrisman, chua, & kellermanns, 2008a; chang et al., 2008b). following prior research (chang, 2008; chang et al., 2011), three binary variables were used to identify firms operating in the east, south, and north regions of the united states. economic development was measured as the natural logarithm of the nominal change of the gross state product from 1998 to 2002. the data come from the journal of small business strategy vol. 22, no. 2, 35 u.s. bureau of economic analysis. state knowledge base was measured by the number of universities and 4-year colleges in the state. universities serve as sources of knowledge to foster innovation and entrepreneurial activity in a region (anselin, varga, & acs, 2000; audretsch & feldman, 1996). the data were collected from the national center for education. index of nativity was constructed from the blau (1977) index of heterogeneity. theoretically, the index ranges from 0 to 0.80 whereas values over 0.25 would reflect relatively high heterogeneity (richard, barnett, dwyer, & chadwick, 2004). we used the diversity of the population as prior research indicated that it facilitates the exchange of information when starting new companies in a particular region (jacobs, 1969). we collected data from the 2000 u.s. census for three categories: the proportions of individuals born in the state, born in other states, and born outside the u.s. firm-specific variables. the inc. magazine separated the firms into 26 different industrial sectors. to control for industry effects, we created two binary variables: (1) consumers to identify firms that offer business-to-consumers goods and services, and (2) suppliers to identify firms that offer business-to-business goods and services. in addition, we collected data from the magazine to create three additional controls. prior performance is a binary variable that gave a value of 1 to identify the 187 firms listed in the 2002 inc. 500. firm size captures the natural logarithm of the 2002 revenues and firm age is the natural logarithm of firm age as of 2003. data analysis the hypotheses were tested using anova and moderated ordinary least squares (ols) regression. it is important to address that the non-normality of our independent variable caused us to take caution in analyzing our results. thus, we considered them as exploratory in nature. results the entrepreneurial firms listed in the 2003 inc. 500 magazine had an average 5-year sales growth of 1,300%, 7 years of operations, and 252 employees. in addition, the magazine only identified 66 firms (13.2%) as being profitable without disclosing additional information. anova was used to test h1a. the results are presented in table 1. the average longterm sales growth of firms coded as major innovators, incremental innovators, and offering similar products or services were 3,050%, 1,359%, and 1,235% respectively. the results support h1a as the f-value was significant (p<0.001). to attain further support to the hypotheses, we combined the two innovator categories into one. the average long-term sales growth rate of the innovators (major and incremental) was 1,727%. when compared against the growth rate of the firms offering similar products or services, the f-value was significant (p<0.05). thus, firms offering similar products/services to those in the market presented lower sales growth rates than those offering incremental and major innovations. table 2 presents the descriptives and correlations of the variables and table 3 presents the results of three ols regression models. model 1 is the base model where the control variables are regressed against the dependent variable. the model is significant (p<0.001) and the adjusted r2 was 0.12. from the state-level variables, the index of nativity is positively related (p<0.05) and the state knowledge base is journal of small business strategy vol. 22, no. 2, 36 negatively related to firm growth (p<0.10). from the firm-specific variables, consumer and firm size are positively related at the 0.05 level or better, while prior performance (p<0.10) and firm age (p<0.01) are negatively related to firm growth. in the model, firm size exerted the highest relative influence (β=0.34) and was the only significant indicator (p<0.05). table 1: anova results full sample entrepreneurial experience family involvement long-term sales growth similar offering 422 149 176 1,235% incremental innovation 61 25 21 1,359% major innovation 17 9 8 3,050% total 500 183 205 f-value=6.65*** *** p<0.001 model 2 adds the set of independent variables to test the direct relationship hypotheses. the regression is significant (p<0.01) and the adjusted r2 increases to 0.13. firm size continues to show the highest relative influence. h1b is supported as extent of innovation is positively related to long-term sales growth (p<0.01). in contrast, h2a and h2b were not supported because both entrepreneurial experience and family involvement were not significantly related to long-term sales growth. model 3 adds the two interactions to test the moderating effects. the regression is significant (p<0.001), the adjusted r2 increases to 0.15, and the change in r2 is significant (p<0.01). h3a and h3b are supported as the interactions are significant at the 0.05 level or better. in sum, our analysis of the 2003 inc. 500 firms provides evidence to support h1a, h1b, h3a, and h3b. robustness tests we decided to increase validity to our results because (1) the majority of the firms first author conducted the content analysis of the entire set of firms to measure extent of innovation. first, we re-ran the ols regression models using a categorical variable where values of 1 were given to those coded as offering similar products or services and values of 0 were given to those coded as offering incremental or major innovations. the models results were consistent to the ones reported in table 3. second, we sought an external opinion to code a random sample of 50 firms using the same procedure conducted with the entire sample. the external coder did not know the original codes assigned to the random sample. the second code resulted in 31 firms offering similar products or services, 17 firms offering incremental innovation, and 2 firms offering major innovations. once the original and second code were examined, the correlation of the two measures was significant at the 0.01 level. in addition, we compared the sales growth rate of the random sample and the f-value was significant (p<0.001) to provide further support to h1a. were coded as offering similar products or services (e.g. imitators), and (2) the journal of small business strategy vol. 22, no. 2, 37 m ea n sd 1 2 3 4 5 6 1. s al es g ro w th 9 802 13 11 .6 0 20 38 .7 5 2. e as t 0. 31 0. 46 0. 00 3. s ou th 0. 25 0. 43 -0 .0 1 -0 .3 9* ** 4. n or th 0. 15 0. 36 -0 .0 4 -0 .2 8* ** -0 .2 5* ** 5. s ta te k no w le dg e b as e 99 .0 0 67 .1 5 -0 .0 9* 0. 04 -0 .1 0* -0 .1 3* * 6. in de x of n at iv ity 0. 52 0. 08 0. 12 ** -0 .0 3 0. 02 -0 .3 9* ** 0. 20 ** * 7. e co no m ic d ev el op m en t -1 .6 4 0. 28 0. 09 * -0 .0 9* 0. 05 -0 .2 6* ** -0 .2 3* ** 0. 49 ** * 8. c on su m er 0. 41 0. 49 0. 07 + -0 .1 1* * 0. 03 0. 02 -0 .0 6+ 0. 01 9. s up pl ie rs 0. 28 0. 45 0. 03 0. 06 + 0. 06 + -0 .0 3 0. 03 -0 .0 4 10 . f ir m a ge 2. 11 0. 40 -0 .0 8* 0. 00 -0 .0 2 0. 06 + 0. 03 -0 .0 8* 11 . f ir m s iz e 16 .3 3 1. 20 0. 29 ** * -0 .0 1 0. 02 -0 .0 2 -0 .0 6+ 0. 06 + 12 . p ri or p er fo rm an ce 0. 38 0. 48 -0 .0 3 -0 .0 2 0. 02 0. 02 -0 .0 1 -0 .0 3 13 . e nt re pr en eu ri al e xp er ie nc e 0. 37 0. 48 0. 03 0. 04 -0 .0 6+ -0 .0 1 -0 .0 3 0. 01 14 . f am ily in vo lv em en t 0. 41 0. 49 -0 .0 4 -0 .0 1 -0 .0 2 0. 06 + 0. 00 0. 02 15 . e xt en t o f i nn ov at io n 1. 38 0. 94 0. 13 ** -0 .0 4 -0 .0 4 0. 05 0. 00 0. 00 7 8 9 10 11 12 13 14 8. c on su m er 0. 05 9. s up pl ie rs 0. 02 -0 .5 2* ** 10 . f ir m a ge -0 .1 3* * 0. 03 -0 .0 2 11 . f ir m s iz e 0. 07 + -0 .0 3 0. 08 * 0. 24 ** * 12 . p ri or p er fo rm an ce -0 .0 1 0. 02 -0 .0 4 0. 23 ** * 0. 25 ** * 13 . e nt re pr en eu ri al e xp er ie nc e 0. 02 0. 09 * -0 .0 9* -0 .0 4 0. 03 -0 .0 5 14 . f am ily in vo lv em en t 0. 04 -0 .0 1 0. 06 + 0. 07 + -0 .0 4 -0 .0 6+ 0. 06 + 15 . e xt en t o f i nn ov at io n 0. 00 0. 13 ** -0 .1 5* ** 0. 03 0. 01 0. 07 + 0. 07 + -0 .0 2 n = 5 00 + p <0 .1 0, * p <0 .0 5, * * p< 0. 01 , * ** p <0 .0 01 t ab le 2 : d es cr ip ti ve s an d c or re la ti on s journal of small business strategy vol. 22, no. 2, 38 table 4 presents the results using the random sample as we also included the firms that the magazine reported with entrepreneurial experience and family involvement. finally, we ran ols regression models with the random sample where we only incorporated the firm-level controls and the average of the two codes for the extent of innovation variable to attain further support to h2a. however, the results were not consistent for the moderating effects. table 3: results of ols regression models with long-term sales growth as the dependent variable model 1 model 2 model 3 state-level controls east 0.01 0.01 0.01 south -0.03 -0.03 -0.02 north 0.00 0.00 0.00 state knowledge base -0.09 + -0.09 + -0.10 * index of nativity 0.12 * 0.12 * 0.13 * economic development -0.04 -0.03 -0.04 firm-level controls consumer 0.11 * 0.10 * 0.08 suppliers 0.05 0.07 0.06 firm age -0.14 ** -0.13 ** -0.13 ** firm size 0.34 *** 0.33 *** 0.34 *** prior performance -0.08 + -0.09 + -0.08 + independent variables extent of innovation 0.13 ** 0.10 entrepreneurial experience 0.00 -0.18 * family involvement -0.03 0.11 moderating effects experience * innovation 0.24 ** family * innovation -0.18 * f-value 7.16 *** 6.43 *** 6.69 *** r2 0.14 0.16 0.18 change in r2 0.02 * 0.02 ** adjusted r2 0.12 0.13 0.15 n= 500 + p<0.10, * p<0.05, ** p<0.01, *** p<0.001 journal of small business strategy vol. 22, no. 2, 39 table 4: post-hoc analysis with random sample random sample entrepreneurial experience family involvement long-term sales growth similar offering 31 11 11 1,533% incremental innovation 17 7 6 1,851% major innovation 2 1 0 6,713% total 50 19 17 f-value=6.60*** *** p<0.001 conclusions by using the long-term sales growth rate of the 2003 inc. 500 firms, our findings provide an initial step for understanding what have driven the success of these entrepreneurial firms. first, we found significant differences as firms offering major innovations in their products or services experienced higher long-term growth rates than those offering similar products or services. second, our findings suggest two moderating effects as longterm sales growth is positively influenced by the interaction between entrepreneurial experience and innovation and negatively influenced by the interaction between family involvement and innovation. our study provides important contributions to the entrepreneurship literature. first, this is one of the few studies conducted with inc. 500 firms that have found significant differences within the group of firms in terms of growth drivers. particularly, the sales growth period considered (1998-2002) was characterized by the emergence of new technologies, such as e-commerce, and the development of new products and services that have significantly revolutionized the market. although prior performance was a control and categorical variable, the marginally significant and negative relationship to long-term sales growth advances prior studies that found no relationship between growth and performance (markman & gartner, 2002). also, the results suggest that as the inc. 500 firms become older, their growth prospects decrease to remain in the list. thus, these firms may have enjoyed a level of growth that it is very difficult to sustain beyond the five-year period. second, innovation does matter to generate substantial firm growth. consistent with prior studies (anderson & tushman, 1990; birch, 1987; christensen, 1997; henderson & clark, 1990), the 78 firms offering incremental and major innovations enjoyed relatively higher levels of long-term sales growth than the 422 firms offering similar products or services. however, it is important to note the firms coded as offering similar products or services can be considered successful as they were able to capture market and acceptance from the public by the goods and services offered. in fact, seven of the top 10 firms in the list did not offer innovative products or services; journal of small business strategy vol. 22, no. 2, 40 earlier claims that gazelles are the only ones offering radical innovation cannot hold for the firms analyzed in this dataset (e.g. birch, 1987). thus, the results comply with both schumpeter and kirzner’s views of entrepreneurship as these entrepreneurial firms were able to exploit opportunities and brought new products and services to the market. third, the moderating effects suggest that firms may achieve growth rates in different ways. on one hand, the positive interaction between entrepreneurial experience and extent of innovation suggests that the serial entrepreneurs bring value to the entrepreneurial firm by using their prior expertise and knowledge to operate. this result complements prior findings where inc. 500 ceos tend to be highly involved on the functional aspects of the business (allred et al., 2007). on the other hand, the negative interaction between family involvement and extent of innovation suggests a different behavior over the nature of the inc. 500 firm as the influence of the family may involve the achievement of non-economic goals (e.g. chrisman et al., 2003b). in that regard, our findings support a potential preference of family firms to focus on offering similar products or services to increase their longterm orientation and achieve their entrepreneurial success. this is consistent with carney’s (2005) arguments about the preference of family firms to operate in benign environments with low levels of technology and even compete more on a cost-leadership basis rather than by a differentiation basis (porter, 1985). limitations we acknowledge some theoretical and methodological limitations that can guide the future investigation of entrepreneurial firms. first, the companies’ descriptions in the magazine were too brief to properly expand the extent of innovation categories. in that regard, further research is needed in order to collect more information about the firm’s products, resources, and market transactions. also, there is a need to rely on the several typologies and classifications of innovations that have been proposed and analyzed in the literature to create additional distinctions within the firms (dess & lumpkin, 2005; henderson & clark, 1990; johannessen et al., 2001; roberts, 2002). the categorical expansion could have brought further data analysis, such as the formation of clusters or the emergence of discriminant functions. even though the first author did the content analysis for the entire sample, the coding of the random sample by an external coder increased the validity of the extent of innovation measure. we concluded that this alternate validation process reduces the potential author bias. however, it is necessary that future research use more than one coder when conducting content analysis of this nature. second, despite the five-year growth period, the study can be considered crosssectional so longer horizons. or even longitudinal studies, can properly assess the sustainability of the entrepreneurial success of these inc. 500 companies. particularly, further investigation is needed to confirm how the firm’s offerings contributed to the adoption of new technologies at the industry level or even to the creation of new industries. third, the study could have benefited from incorporating a different level of agglomeration (counties or cities rather than states) to properly determine community level effects as the success of journal of small business strategy vol. 22, no. 2, 41 entrepreneurial actions tend to be local (sternberg & rocha, 2007). although findings were obtained at the demographic and knowledge-based level (nativity and state knowledge), the lack of support at the economic level may imply further analysis with different lag times or estimators to be consistent with prior research (chang, 2008; chang et al., 2008b; ensley et al., 2006). future research directions in addition to improving the study limitations, we provide the following research directions. first, the extent of innovation may be subjected to the perceptions of the entrepreneurs and the market. for example, a new offering in a particular region may be considered as new by certain groups of consumers, but such perception cannot be generalized to the rest of the population. future research needs to incorporate perceptions outside of the firm’s domain to properly assess how innovative a particular firm is, or what strategic elements were incorporated by the firm to generate its entrepreneurial success. second, future research is needed to explore further relationships in terms of the governance and strategic direction of the firms. managerial and family perceptions are needed to establish how the firm dynamics and strategic processes were developed to properly attain these extraordinary levels of growth. third, longitudinal studies may be required if the firms continue in their innovation processes. in this manner, it is important to determine, which other strategies adaptations are employed to maintain competitive advantage, or which other environmental conditions (competitors, industry, etc.) could prevent firms to generate sustained growth. particularly, one limitation of the inc.500 dataset is the focus on sales growth rather than profit growth as new firms may behave toward achieving extraordinary firm growth without considering costs or value creation to their founders. thus, founders will solely focus on attaining short-term growth and may not be prepared to face challenges such as emerging competition, technology changes, or changes in consumer/industry behavior. finally, additional information to profile the entrepreneur may expand the drivers for attaining success. for example, some of the company’s briefs indicated particular reasons (e.g., social connections, prior industry experience, or government programs) that founders used to find and exploit opportunities. therefore, there may be external sources of knowledge and support that can contribute to enhance and stabilize the level of entrepreneurial success of these firms. practical implications our study also provides implications for managers and entrepreneurship educators. first, the results imply that managers and entrepreneurs need to exert a level of creativity when developing and operating new businesses. even if the offering is similar to those offerings by direct competitors, particular elements and strategic approaches are needed to create value to the consumer and generate repeated business. as the results indicate, firms identified as imitators also enjoyed high levels of sales growth indicating that the opportunities exist in the market to those entrepreneurs who are capable of designing business models that fit with the available opportunities. on the other hand, offering an innovative product or service may not be the sole ingredient of journal of small business strategy vol. 22, no. 2, 42 entrepreneurial success. the positive moderation effect of entrepreneurial experience implies that new firms require a sense of direction, knowledge, and social capital to properly attain success. those elements are incorporated in the experience brought by the founder. as suggested by firm growth theorists (churchill & lewis, 1983; greiner, 1972), firms will encounter crises and revolutions throughout their life cycle that will require managerial intervention and knowledge to avoid stagnation. second, managers and entrepreneurs need to consider the family effect when developing and operating a new business. although the negative moderation effect may suggest that those firms considered as family owned and controlled are less innovative, or that family involvement is not a determinant of long-term sales growth, the findings need to be taken with caution. on one side, preliminary analysis of the data showed no statistical differences in the average firm growth between firms with family involvement (1.204%) and without it (1.386%). on the other side, the inclusion of family in the development and operations of those firms may have expanded the discussions about the strategic direction of the firm to include non-economic goals such as family employment, savings for future education, wealth creation, etc. (chrisman et al., 2003b). hence, there may be additional dimensions beyond sales growth to measure the success for these types of firms. in the short term, economic goals, such as ipo rate and sales growth, may outweigh non-economic goals, such as family concerns. due to the nature of the database, these firms are looking at a quick return and focusing on growth in the immediate term rather than longer term goals that involve family issues that are less immediate and overarching. this is one explanation as to why these family firms rely less on innovation to drive their sales growth. in that manner, it is possible that these fast growth family firms tend to become more efficient in their operations rather than offering innovative products or services. third, entrepreneurship educators may use the findings to expand their new venture planning discussions to include the tradeoffs involved with different types of innovation. on one side, educators may advise aspiring entrepreneurs toward the discovery of profitable opportunities that may not require expensive applications of innovation. for example, a radical innovation requires substantial investments that may not create entrepreneurial profit in the long run or even may not generate enough market success to be viable. on the other side, educators need to advise aspiring entrepreneurs toward the good use of their knowledge and social capital in their search processes so their business models and plans can incorporate useful elements to properly manage innovation. as a result, entrepreneurship educators need to compare and contrast the entrepreneur’s characteristics and sources of knowledge and support with the entrepreneur’s aspirations and goals toward the type of business (imitator vs. innovator) to develop and operate. in conclusion, our analysis of the 2003 inc. 500 companies provides multiple implications and contributions to the study of new firms’ growth as a dimension of 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(2005) product innovations and small business performance in hostile and benign environments. journal of small business strategy, 15(2): 33-44 zahra, s. a. (1996). governance, ownership, and corporate entrepreneurship: the moderating impact of industry technological opportunities. academy of management journal, 39(6), 1713-1735. zahra, s. a., hayton, j. c., & salvato, c. (2004). entrepreneurship in family versus non-family firms: a resource-based analysis of the effects of organizational culture. entrepreneurship theory and practice, 28(4), 363-381. erick p.c. chang is an assistant professor of management at arkansas state university. his research in family business and entrepreneurship has appeared in the journal of business venturing, entrepreneurship theory and practice, journal of business research, family business review, and others. esra memili is an assistant professor of entrepreneurship at the university of north carolina-greensboro. she is the author of published manuscripts that have appeared in the family business review, journal of family business strategy, academy of management best paper proceedings, and others. james j. chrisman is a professor of management and the director of the center of family enterprise research at mississippi state university. he also holds a joint appointment as a senior research fellow with the centre for entrepreneurship and family enterprise at the university of alberta. dianne h.b. welsh, is the hayes distinguished professor of entrepreneurship and founding director of the award-winning cross-disciplinary entrepreneurship program at the university of north carolina-greensboro. she is an internationally known scholar in franchising, family business, and entrepreneurship. she delivered the keynote address on gender and entrepreneurship at the 2012 u.n.e.c.e. conference. reproduced with permission of the copyright owner. further reproduction prohibited without permission. adm_69893_20120103_00004.pdf editor associate editors paul belliveau rider university editorial assistants vice president of membership: str'a tegf basic skills deficiencies at work: perceptions of small and large employers* geralyn mcclure franklin stephen f. austin state university abstract american business is faced with major problems due to the decline in basic work skills, yet many employers continue to ignore the threat of a proficiency gap in the workforce. this paper addresses the importance of basic work skills to business, especially small business. it also presents the results of a study comparing how small and large employers are screening for and dealing with workers who lack busic skills. introduction basic work skills have been the subject of much attention in the united states during the last few years. "eye-opening" publications like jonathan kozol's illiterate america (1985), the hudson institute's workforce 2000 (1987), the united states department of labor's and the american society for training and development's workplace basics: skills employers wunt (carnevale, gainer, & meltzer, 1989), and the u.s. bureau of labor's statistical reports as well as studies from various private sector organizations have focused attention on the issue. american employeis are fonunate that a majority of workers are literate (i.e., they can read, write, and compute at acceptable skill levels). however, there are millions who cannot use these skills effectively (i.e., they cannot read, write, or think well enough to meet challenging job requirements). according to the business council for effective literacy (bcel) (1987), 23 million or 20% of american workers read at no better than an eighth-grade level, yet, most of the reading material in the workplace is geared toward at least a ninth-grade comprehension level. the united states department of labor (hudson institute, 1987) and bcel (zemke, 1989) estimate that 25 million to 27 million american adults (over the age of 17) are unable to read, write, perform simple calculations, or solve problems at a level adequate to enable them to cope with simple and fundamental tasks. in addition to these functional illiterates, an estimated 45 million to 47 million individuals are borderline or "marginal" illiterates (i.e., able to function but not proficiently). their reading and writing skills need upgrading in order to improve their job performance and everyday functioning. vrunner up for distinguished paper award, presented ar the /993 national sbida conference in san diego. it was noi reviewed by the jsbs editorial advisory board. 73 however, today's workplace demands more than competency in the three r's. employers want a new kind of employee with a broad set of skills or at least a strong foundation ln the basics in order to facilitate learning on the job (carnevale, gainer, & meltzer, 1990). exhibit i illustrates the skills today's employers need. deficiencies in many of these basic skills are barriers to entrylevel employees, experienced employees, and dislocated workers attempting tn adapt to economic and technological change within organizations (camevale, gainer, & meltzer, 1990). exhibit i the seven skills groups learning to learn 3 r's (reading, writing, computation) communication: listening and oral communication creative thinking/problem solving self-esteem/goal seti'ing —motivation/ employability —career development interpersonal/negotiation/teamwork organizational effectiveness/leadership note. from workplace basics: the essential skills employers wam (p. 2) by a. p. carnevale, l. j. gainer, and a. s. meltzer, san francisco, ca: jossey-bass. 1990. concerns for business business needs to be aware that deficient workplace skills contribute to low productivity, workplace accidents, poor product quality, costly errors, and lost management and supervisory time (bcel, 1987; gorman, cannell, & hallanan, 1988). it is estimated that illiteracy costs american businesses $20 billion every year due to absenteeism, workplace accidents, lost profits, lowered productivity, reduced competitiveness, increased remedial training, lost customers, and reduced customer spending (pilenzo, 1990). additionally, the business council for effective literacy believes adult illiteracy costs american business and taxpayers $225 billion annually in lost wages, profits, unrealized tax revenues, prisons, crime, and related social ills (goddard, 1987; pack, 1990). for the first time in american history, employers face a proficiency gap in the workforce so great that it threatens the well-being of organizations both large and small. the smaller the business, the more important basic skills proficiency becomes. small businesses are the primary job generators in the united states economy, having created two-thirds of the new jobs between 1980 and 1986 (szabo, 1990). additionally, small business and self-employed entrepreneurs provide 56% of the nation's private employment and over 47% of the total output (hudson institute, 1987). small businesses also hire the majority of young, older, minority, and female employees, groups that will continue to expand in the 74 future. if present trends prevail, disproportionate numbers of these workers will lack the necessary skills, and this will have a disproportionate impact on small businesses. it appears that there will be intense competition for experienced and technically competent workers. larger firms, typically with more financial resources, will be in a position to outbid smaller firms. offering relatively lower salaries and less extensive benefits coverage than their larger counterparts, small businesses will be scrambling to compete in a tight market where qualified labor is at a premium (berney, 1988). workers hired by small firms typically have less formal education than those working for larger companies. according to jules h. lichtenstein, chief of the applied policy branch of the united states small business administration, small firms are more likely than large firms to hire and to train functional ill iterates (szabo, 1990). one study commissioned by the department of labor found that in firms with fewer than 500 employees, almost 4% of workers of the ages 20 to 25 had no more than an eighth-grade education. in large firms, however, employees in the same bracket and with that level of education accounted for under one percent of the workforce (szabo, 1990). when skills deficiencies affect the bottom line, employers respond with training or replacement. however, replacement is becoming less practical since the supply of workers is shrinking. employers are forced to utilize training to make employees more productive instead of simply hiring productive employees. as a result there is increasing interest in providing training in basic work skills. justification for research a study of efforts in basic skills training by small business is needed, as evidenced by a review of the literature. to date, research has focused on the changing nature of the workforce and projecting the future impact of illiteracy on the workplace (kozol, 1985; hudson institute, 1987; beilinson, 1990; askov, 1991; sherman, 1991; zalman, 1991). a significant amount of attention has been given to basic skills education programs in large businesses (employing more than 500 persons) (ross, 1986; fields, hull, & sechler, 1987; berney, 1988; carnevale, gainer, & meltzer, 1989; goddard, 1989; zemke, 1989; lee, 1990; may, 1990; szabo, 1990; lamoglia, 1991; petrini, 1991; cunniff, 1992; washburn & franklin, 1992). relatively little attention other than one major research project (cited by carlson, 1992) and a few individual case studies (saddler, 1988; szabo, 1990; petrini, 1991; sixel, 1991; carlson, 1992) has been given to small businesses. the research in the area of basic skills and the effect on the workplace has been entirely descriptive. however, it has failed to address an important issue: does the size of the organization influence perceptions of applicant/employee basic skills deficiencies, employment procedures, or training programs? this study was designed to address these issues. research methodology the sample for the study was drawn from texas businesses listed in million dollar directory. to operationalize large versus small businesses, a cutoff point of 500 employees, as identified by the united states small business administration (sba), was utilized. the 75 sba defines a small business as one with fewer than 500 employees or fewer than 100 employees, depending on its purpose (sba, 1989).since a diversity of industries was represented in the sample, it was determined that the cutoff of 500 employees was more appropriate. the data were collected through the use of a mail questionnaire. a pilot study was conducted in a rural texas county. based on the responses and review of other research efforts, the final questionnaire was developed. the questionnaire was divided into four sections (sections a, b, c, and d). section a contained nine questions pertaining to basic employment procedures. section b consisted of seven questions related to training efforts. section c was composed of five-point, likert-sca)ed statements. finally, section d contained organiza(iona( and individual demographic questions. questionnaires were mailed to the personnel/human resource director in 900 businesses (450 small and 450 large). the overall response rate from the mailing was 40.67% (366 responses). of these, 228 (62.3%) represented small businesses (fewer than 500 employees), while 138 (37.7%) represented large businesses (500 or more employees). within the group of small businesses, 100 (27.3% of total respondents) have fewer than 100 employees, 87 (23.8% of total respondents) have 100 to 299 employees, and 41 (11.2%of total respondents) have 300 to 499 employees. of the large businesses responding, 54 (14.8%of total respondents) have between 500 and 999 employees, 30 (8.2% of total respondents) have from 1,000 to 1,499 employees, and 54 (14.8% of total respondents) have more than 1500 employees. the responding companies represent a diversity of types of businesses (see table 1). 76 table 1 respondents by type of business tvpe small businesses large businesses n=228 n= 138 number number retail/wholesale trade 63 27.6 31 22.5 manufacturing 55 24. 1 30 21.7 other services 37 16.2 19 13.8 agriculture/fishing/ natural resources 32 14.0 14 10.i finance/insurance/real estate 27 11.8 19 13.8 utilities/transportation/ communication 7 3.1 17 12.3 computer/data processing 2 .9 3 2.2 health care 2 .9 2 1.4 government 3 1.3 0 0.0 mining 0 0.0 3 2.2 228 99.9 138 100.0 research findings the following findings describe perceptions of small and large employers to basic skills deficiency. specific emphasis is given to employment procedures (particularly screening efforts) and training programs. applicant/employee basic skills deficiencies small business respondents (110 or 48.2') indicated that "verbal communications skills" were the number one deficiency of job applicants. on the other hand, large businesses (79 or 57.2%) noted that "writing skills" were most often lacking in applicants. significant differences existed between the responses of small and large businesses in regard to writing, job specific, and reading skills of applicants (see table 2). 77 table 2 basic skills job applicants and current employees lack skills small businesses large businesses n= 228 n= 138 job current job current applicants employees applicants employees no. no. no. no. verbal communication 110 48. 2 85 37.3 63 45.6 49 35.5 computer 106 46. 5 93 40.8 69 50.0 51 37.0 writing 97 42.5* 85 37.3 79 57.2» 65 47.1 job specifics 86 37.7* 51 22.4 70 50.7* 35 25.4 math 85 37 3 58 25.4 59 42 8 31 22 5 word processing 75 32.9 58 25.4 50 36.2 32 23.2 reading 65 28.5* 43 18.9 56 40.6* 31 22.5 none 9 39 22 9.6 3 2.2 16 11.6 others: interpersonal 0 0.0* 2 09 e o.o 2 1.4 worth ethic i 04 0 00 i 07 i 0.7 crosstraining 0 00 i 0.4 0 0.0 i 0.7 safety skills i 04s 0 00 i 0.7 0 0.0 ijo not know 3 1.3 0 0.0 0 00 0 00 *chi-square p & .05 although no significant differences appeared relative to current employee deficiencies, small employers (93 or 40.8%) reported "computer skills" as most lacking followed by "verbal communication skills" and "writing skills" (85 or 37.3% each). again, large employers (65 or 47.1%) noted "writing skills" as most lacking, followed by "computer skills" (51 or 37.0 percent) and "verbal communication skills" (49 or 35.5%). screening mechanisms employers have long seen basic skills competency as a prerequisite for employment. therefore, employers have focused on measuring the skills of prospective employees and screening out those unsuitable for employment. application forms. two hundred twenty (96.5%) of the small businesses reported using an application form for screening purposes; eight (3.5%) responded negatively, yet only 103 (46.8%) indicated they required applicants to complete the forms in their facility. on the other side, 137 (99.3%) of the large businesses responding use an application form; one respondent did not answer the question. seventy-four (53.6%) require application forms to be completed in the facility. these findings indicate that large businesses are more likely to use an application form than small businesses (chi-square 6.56, e value & .05). educational requirements. the "ability to read and write" is the number one requirement of small (121 or 53.1%)and large (69 or 50.0%) employers. table 3 summarizes the basic or minimal education requirements of respondents. 79 table 3 basic or minimal education requirements requirement small businesses large businesses n= 228 n= 138 number number ability to read and write 121 53.1 69 '0.0 high school diploma/ged 106 46.5 63 45.7 some college 16 70 8 5.8 college degree 11 4.8 10 7.2 others: depends upon position 18 79 18 13.0 ability to perform assigned tasks i 0.4 2 1.4 common sense 1 0.4 1 0.7 require no reading i 0.4 1 07 sixth-grade education 1 04 0 00 abstractreasoning 0 00 1 0.7 no requirements 5 2.2 2 1.4 respondents were also asked how they verify educational requirements (see table 4). both small (134 or 58.8%) and large (69 or 50.0%) businesses reported that verification was most often done "during the interview." still, 71 small employers (31.1%) and 48 large employers (34.8%) stated they "do not verify" educational requirements. significantly, large businesses are more likely to require a copy of a diploma for verification of education requirements than their smaller counterparts (chi-square 6.55, e value & .05). 80 table 4 verification procedures for educational requirements procedure small businesses large businesses n=228 n= 138 number number verify during interview 134 58.8 69 50.0 require testing 37 16.2 27 19.6 require copy of diploma 18 7.9 20 14.5 do not verify 71 31.1 48 348 no answer 4 1.8 6 4.3 *chi-square p & .05 testing procedures. what type of pre-employment testing'is most often utilized? significantly, drug/alcohol testing is the most utilized pre-employment testing procedure (see table 5). then too, large businesses are more likely than small ones to engage in drug/alcohol testing (chi-square 8.69, p value & .05). 81 table 5 testing prttcedures applicants tested small businesses large businesses for n= 228 n= 138 number number drugs/alcohol 110 48.2 88 63.8 reading skills 49 21.5 34 24.6 math skills 41 18 0 34 24.6 writing skills 35 15.4 18 13.0 *chi-square p & .05 positions available for individuals with basic skills deficiencies ninety-six (42.1%) small businesses and 49 (35.5%) large businesses responded there are "no positions available in the organization for individuals who lack basic skills." thus, 128 (56.1%) small employers (four did not respond) and 87 (63.0%) large employers (two did not answer the question) indicated that their organizations might have positions available for individuals deficient in basic skills. why would you employ persons who lack basic skills? interestingly, 91 (39.9%) small employers and 42 (30.4%) large employers said they "would not employ persons who lack basic skills" (see table 6). therefore, it appears that 128 (56.1%) small employers (9 did not answer the question) and 91 (65.9%) large employers (5 did not respond) might employ persons who lack basic skills. of these, both small (91 or 39.9%) and large (69 or 50.0%) businesses cited "skills not needed for job" as the primary reason for employing those who lack basic skills. 82 i table 6 reasons for employing individuals who lack basic skills reason small businesses large businesses n= 228 n=138 number number skills not needed for job 91 39.9 69 50.0 to give individual an opportunity 58 254 30 21.7 skilled workers not available 9 39 42 30.4 would not employ persons who lack basic skills 91 39.9 42 30.4 others: can train 4 1.8 4 2.9 to cut costs 1 0.4 0 0.0 training programs eighty-six small businesses (37.7%) offer basic skills training. on the other side, 67 (48.6%) of the large businesses reported they offer basic skills training. the resulting chisquare statistic was 4.15 (e value & .05). thus, large businesses appear to offer basic skills training more than small businesses (see table 7). 83 table 7 types vf basic skills training offered type small businesses large businesses n=86 n=67 number number job specific skills 59 686 44 65.7 computer skills 49 60.0 49 73. 1* word processing skills 39 45.3 46 8.7+ writing skills 13 15.1 22 32.8+ verbal communication skills 13 15.1 20 29.9* math skills 9 10.5 9 13.4 reading skills 8 9.3 9 13.4 english as a second language skills 7 8.1 13 19.4" * chi-square e & .05 +chi-square p & .01 the methods used for basic skills training were then addsena resse trefertotable8) specireally, respondents were asked what sources are used to d „1„; ''rainingprograms. o eve op and implement baste skdls 84 table 8 methods utilized for basic skills training method small businesses large businesses n=86n=67 number number in-house staff 67 77.9 62 92.5+ outside consultants 24 27.9 30 44.8* community colleges/universities 33 38.4 30 44.8 partnerships 8 9.3 18 26.9+ community education 8 9.3 9 134 trade schools 18 20.9 12 17.9 volunteertutors 3 3.5 3 4.5 computers/videos 32 37.2 26 38.8 traditional classroom 14 16.3 18 26.9 " chi-square ii & .05 +chi-square p & .ol monetary support for training one hundred eleven (48.7%) small employers and 93 (67.4%) large employers offer tuition assistance for training purposes (chi-square 12.86, ilvalue & .ol). thus, large employers are more likely to offer tuition assistance for training purposes. of the 111 small businesses offering tuition assistance, 48 (43.2%) cover remedial or basic skills training. on the other side, 51 (54.8%) of the 93 large employers cover remedial or basic skills training. fifty-four (23.7%) small businesses and 51 (37.0%) large businesses provide overtime pay or other monetary support (like regular pay) for training purposes (chi-square 8.36, ii value .05). thus, large businesses are more likely than small businesses to provide monetary support (i e., overtime or regular pay) for training purposes. seventeen (31.5%) of the 54 small employers and 25 (49.0%) of the 51 larg employers provide such support for remedial or basic skills training. finally, 56 (24.6%) of the small employers reported they work with public programs such as publicly subsidized, on-the-job training, welfare department sponsored classroom training, the lob traimng pannership act, and so forth. at the same time 64 (46.4%) of the large businesses indicated involvement with such programs. the chi-square statistic was 18.95 (g value & .01). ultimately, large employers are more likely to work with public programs than small employers. analysis of significant research findings basic work skills deficiencies are a growing problem for all businesses, particularly smaller organizations. small employers perceived verbal communication skills to be most lacking in job applicants, while large employers perceived writing skills to be the primary deficiency. 85 with regard to current employees, small employers reported computer skills most lacking. large employers, on the other hand, cited writing skills. screening procedures that enable unsuitable applicants to be identified should be of benefit to small employers, yet large employers are more likely to effectively screen prospective employees than imall employers (i.e., use of an application form, chi-square 6.56, p value & .05). also, large employers require a copy of the diploma (or certificate) for verification of education requirements more so than small employers (chi-square 6.55, p value & .05). effective screening of prospective employees will more (han likely not be enough if demographic predictions prevail. small employers will no doubt have to offer basic skills training opportunities to compete with larger firms and remain competitive in a global environment. however, this research effon discovered that larger employers are more likely to offer basic skills training programs than smaller employers (chi-square 4.15, p value & .05). larger firms are also more likely to provide tuition assistance (chi-square 12.86, p value & .01) and monetary support (chi-square 8.36, e value & .05) for training purposes than smaller firms. then, too, larger organizations take advantage of publicly subsidized programs more sc than smaller organizations (chi-square 18.95, 11 value & .01). concluding remarks while it does require extra effort for businesses, especially smaller firms, to set up basic skills training programs, the positive results are numerous. according to jerome carlson, co-founder and co-owner of united mailing, incorporated, an organization in chanhussen, minnesota that has been participating in a workplace literacy program, "small firms become known in their communities as employers who not only represent potential employment but also who offer training opportunities. the result is that more employees want to work for you" (szabo, 1990). forrest chisman, project director of the southport institute for policy analysis, states in a 1989 study, "there is no way in which the united states can maintain the health of its economy, fend off the competition, improve productivity, and in general maintain its standard of living unless we substantially increase the skills of the workforce" (reiss, 1990). improving basic skills is a challenge to the school system, government, and business to ensure that america's businesses continue to be a source of competitive strength. 'ow can smaller employers assist in improving basic skills? first, smaller firms can increase attention to the importance of a literate small business workforce in a competitive economy. second, smaller employers can improve the understanding of basic skills concerns by becoming more involved in local school systems. this can include encouraging business-education basic skills partnerships. third, smaller businesses should identify existing local and state adult literacy resources they can utilize. also, successful basic skills programs in other smaller organizations should be identified. ultimately small employers must work to improve public education to prevent future adult illiteracy. 86 references askov, e. n. (1991,summer). literacy: impact on the workplace, family, and school. education ii i(4), 542547. beilinson, j. (1990, october). workforce 2000: already here?. personnel 67(10), 3-4. berney, k. (1988, october). can your workers read?. nation's business 76(10), 26-32. business council for effective literacy (bcel) (1987).business council for effective literacy, (brochure), new york, ny: bcel. carlson, e. (1992, june 26). helping educate small firms'orkers. the wall street journo/, b i. carnevale, a. p., gainer, l. j., & meltzer, a. s. (1989). workplace basics: the skills employers want. washington, d.c.: united states department of labor and the american society for training and development. carnevale, a. p., gainer, l. j., & meltzer, a. s. (1990). workplace basics: the essential skills employers want. san francisco, ca: jossey-bass. cunniff, j. (1992, january 21). poor skills at heart of jobs crisis. houston post, ai, a6. fields, e. l., hull, w. l., & sechler, j. (1987). adult literacy: industry-based training programs. columbus, oh: the national center for research in vocational education. goddard, r. w. (1987, december). the crisis in workplace literacy. personnel journal 66(12), 73-81. goddard, r. w. (1989, march/april). combatting illiteracy in the workplace. management world /8(2), 8-11. gorman, c., cannell, m., & hallanan, d. b. (1988, december 19). the literacy gap. time /36, pp. 56-57. hudson institute (1987). workforce 2000: work and workers for the 2/st century. indianapolis, in: hudson institute. kozol, j. (1985). illiterate america. garden city, ny: anchor press. lamoglia, j. (1991,october). study: training doesn't match skills need. shrm news /0(10), 3. lee, j. (1990, december). amidst the presses. american printer 208(3), 54-56. may, p. l. (1990, october). back to basics. personnel journal 69(10), 63-69. pack, w. (1990, march 5). the state's education challenge. the houston post, a-l, a-10. petrini, c. m. (1991, february). literacy programs make the news. training & development journal 45(2), 30-36. pilenzo, r. c. (1990, february). managing for survival in the 1990s. modern offic technology 35(2), 66. reiss, a. h. (1990, april). nonprofits tackle a nationwide crisis. management review 79(4), 30-33. ross, i. (1986, september 29). corporations take aim at illiteracy. fomune /20, pp. 48-54. saddler, j. (1988, november 3). small companies are target of efforts to improve the literacy of employees. the wall street journal, bl. sherman, s. p. (1991, november 18). america won't win till it reads more. fortune i25, pp. 201-204. sixel, l. m. (1991, august 10). basic training: small firms focusing on need to teach workers skills. houston chronicle, b i, b6. small business administration (sba) (1989). the state of small business: a report to the president. washington, d.c.: united states government printing office. 87 szabo, j. c. (1990, february). learning at work. nation's business 78(2), 27-28. washburn, s. z. & franklin, g. m. (1992, january/february). a modern workplace in the face of an age-old problem: illiteracy. /ndustriui manugemenr 34(1), 2-4. zalman, r. g. (1991, february). the 'basics'f in-house skills training. hr magazine 36(2), 74-78. zemke, r. (1989, june). workplace illiteracy: shall we overcome?. training 26(6), 33-39. l strategy flexitime and the compressed work week: possible strategies for smaller firms to increase employee performance and satisfaction joseph c. latona the university of akron joseph c. latona, ph.d. is a professor of business administration and director of the small business /nsiitute at the university ofakron. he is president of rhe united state association for small business and enireneurship (u.s.a.s.b.e.)and vice-presldeni of the small business instiiute directors'ssociation. abstract the objecn've of this study was to evaluate the effect of flexitime'nd the compressed workweek'n the performance and satisfaction of employees of small firms. employees were selected from three small organizations representing the service, retail, and manufacturing areas. a pre flex/tim and pre-compressed workweek questionnaire was administered to each of the employees of the three firms measuring various dimensions of performance and satisfaction. a post questionnaire was administered approximately one year later. the resulrs of this study indicate that employees of all three surveyed firms preferred flexitime and the 4/10/40 workweek over ihe traditional work schedule in the variables used to measure employee performance and satisfactions. introduction over the last several years, there has been growing discussion about reducing worktime and making work hours more flexible. the rising interest in worktime issues is rooted in a number of fundamental social changes. among the most important of these has been the growing number of working women, many of whom are mothers who desire part-time jobs and flexible work schedules to pursue both careers and child-rearing activities. along with this change has come the rise of dual-earner families and fewer children, tending to increase family income while reducing financial needs and thus allowing men to reduce their worktime and earnings (rosenberg, 1977). at the same time, there has been increasing interest in part-'time and part-year work among the younger student population and older workers near or past retirement age. employees'eeds for elder care has become a genuine concern (belson, dopkeen & retchell, 1988). in addition, persistently high levels of unemployment have increased interest in sharing available worktime, not only to spread available jobs among more persons but also to share the limited number of desirable positions among an increasingly skilled work force. finally, there are indications that american values have been moving away from materialistic goals toward concern with the "quality of life," particularly among both male and female 67 professionals (banbury-masland & brace, 1985; bonfield, 1988; fischel-wolovick, cotter, masser, kelman-brave, joffe, rosenberg & wiuenberg, 1988; thomas, 1986). although these social changes are not likely to cause massive reductions in worktime, they are likely to tilt american society toward a growing concern with worktime issues (best, 1978; best & stern, 1977; buckley, fedor & kicsa, 1988; burdetsky & kaplan, 1981; levitan & belous, 1977). the problems of job dissatisfaction and worker discontent among employees have resulted in many organizations'dopting alternative work schedules in an attempt to solve these problems. as a result the incidence of alternative work schedules has increased from a total in 1976 of 1,270,000 workers or 2.1% of all full-time non-farm wage and salary workers and in 1977 between 2.5 and 3.5 million employees on flexitime to double these amounts in 1987 (nollen &. martin, 1978; ralston, anthony & gustapson, 1985;thomas, 1986;the hanis survey, 1977). these figures are quite impressive considering that flexitime originated in germany only in the late 1960's and in the early 1950's the five-day-forty-hour week had become almost completely established in the united states (bloom &. northrup, 1969). recent studies of flexitime in large organizations in both the private and public sectors revealed some positive results. a study by latack and foster (1985) within a computer operation within a large industrial firm found increased job satisfaction, productivity, and morale along with a substantial reduction in absenteeism due to sick time among employees. economides, speck, and shah (1989) studied flexitime among 65 white collar, salaried employees of an engineering service unit and found favorable employee reaction along with an increase in performance. in the public sector these conclusions were supported by studies conducted by ralston, anthony, and gustafson (1985). studies of the compressed workweek by mcguire and liro (1987; 1986) as well as herrick, vanick, and michlitsch (1986), and dunham, pierce, and castaneda (1987) reported an increase in morale, productivity, and satisfaction as well as less stress. these studies were conducted, however, in the larger type of organization. however, little research has been conducted to determine the influence of alternative work schedules on employees of small firms. the objective of this study was to evaluate the attitude of employees of smaller firms toward flexitime and the compressed workweek in the areas of employee performance and satisfaction. employees were selected from three small organizations representing the service, retail and manufacturing areas. all three firms were established between 1980 and 1982. method sample the three firms represented in this study were located in northeastern ohio. the service firm (in the research and development area) employed a total of 36 employees, all of whom participated in the study. all 32 employees of the retail firm participated in the study as well 6' as the 24 employees of the chemical manufacturing firm. in the three firms flexitime arrangements were as follows: employees could start between 6:00 and 8:00 a.m. (9:00 — 11:00 a.m. for the retail firm) and work until 4:00 and 6:00 p.m. (7:00-900 p.m. for the retail firm) as long as they worked a total of 10 hours during the day. all employees were to be present for the core hours between 8:00 a.m. and 3:00 p.m. (11 a. m, and 600 p.m. for the retail firm), with a lunch and dinner break at noon and 500 p.m. the compressed workweek in all three firms consisted of four 10-hour days (4/io/40). however, in the r &. d firm the four 10-hour days could be fulfilled on any four days from monday through saturday. in the retail firm the four 10-hour days had to be worked consecutively, and in the manufacturing firm the 4/10/40 arrangement was specified as monday through thursday only. measures a pre-flexitime and pre-compressed workweek questionnaire was administered to each of the employees of the three firms. five general employee reactions were measured. scales developed by melcher (1976) were used to measure four of these: (a) job involvement, (b) work-goal commitment, (c) cooperation, and (d) sense of achievement. the fifth, general job satisfaction, was assessed using the short form of the minnesota satisfaction questionnaire, modified to the me)cher scale. two specific work schedule attitudes were measured. scales from dunham, pierce and castaneda, modified to the melcher scale, were used to assess general schedule affect and effects on family and social life. the flexitime and 4/10/40 workweek was initiated in all three firms, and a post-flexitime and post 4/io/40 questionnaire was administered approximately one year later. results employee performance four of the five general employee reactions measured relate to employee performance (i.e., job involvement, work-goal commitment, cooperation and sense of achievement). among the three firms, nine of the twelve results were significant at the .ol level and above from the 're to the post periods. job involvement for both the retail and manufacturing firms was significant at the .01 level and for the r & d firm at .10. work-goal commitment results for the pre and post measures revealed significance at the .01 level for both the r tfc d and retail firm but .10 level for the manufacturing firm. however, the manufacturing firm witnessed a change at the .01 level for sense of achievement, whereas both the r /k d and retail were significant only at the .10 level. it is interesting to note that the results for the variable of cooperation from the pre to the post period for all three firms were insignificant. 69 table l employee reactions and /(/tirades toward ftexitime and the compressive work week pre-flexitime and 4/10/4 post flex itime and 4/10/40 r&d r. m. r&d r. m. general employee reaction job involvement 4. 10 2.75 2.95 5.90** 6.90* 7.55* work-goal commitment 4. 15 3.50 4.55 6.85* 7.80* 6.55** cooperation 5.85 5.75 5.90 6. 15*** 6.25*"* 6.08*"* sense of achievements 3. io 3.50 3.45 4.00** 4.40** 5.30* general job satisfaction 3.10 3.34 4.40 4.45** 4.65** specific work schedule attitudes general schedule affect 4.50 3.20 4.20 6.10v* 6.05v 7.15* effects on family and social life 3. 15 4. 10 4. 16 5.95* 6.20** 7.50* "significant at .ol level v*significant at .10 level "'*not significant r & d (research & development firm) r (retail firm) m (manufacturing firm) employee satisfaction the one measure under general employee reaction to the category of general job satisfaction resulted in a difference for all three firms at the . io level of significance. the two specific work schedule attitudes measured, general schedule aft'ect and effects on family and social life, resulted in four of the six variables being significant at the .01 level. specifically, both the retail and manufacturing firms witnessed a .ol level of significance among its employees from the pre to post period for the variable of general schedule affect. the r & d firms'mployccs'esponses resulted in a .10 level of significance. effects on family and social life resulted in a .ol level for both the r & d and manufacturing firm and .10 for the retail flllb. summary the findings of this seem to indicate that it is possible to anticipate worker reaction to alternative work schedules such as flexitime and the compressed work week prior to their introduction. furthermore, results of this study indicate that improvements in employee reactions and attitudes were realized in the general areas of performance and satisfaction. therefore, small 70 firms should consider flexitime and the compressed work week as strategies for improving employee performance and satisfaction. footnotes 'bexitime is a work schedule where employees may vary their starting and stopping times within limitations while they work the controlled number of hours in a specific time period. 'compressed workweeks are work schedules in which the usual number of full-time hours are worked in fewer than five days. examples are the four-ten hour days (4/10/40) and the three twelve hour days (3/12/36). references best, fred (1978, july). preferences on worklife scheduling and work-leisure tradeoffs. monthly labor review, 31. best, fred, & stern, barry (1977, july). education, work, and leisure —must they come in that order?" monthly labor review, 3-10. banbury-masland, brooke & brace, daniel j. (1985, may/june). concern, marriage and children: are women changing their minds? business horizons, 81-86. belson, peter s., dopkeen, jonathan c: & retchell, wonda a. (1988, winter). meeting employees'eeds for elder care. compensation and benefits management, 117-121. bloom, g. f., & northrup h. r. (1969).economics oflabor relations (pp. 3-10). homewood, ills richard d. irwin, inc. bonfield, phyllis k. (1988, february). working solutions for working parents. management world, 8-10. buckley, ronald m., fedor, donald b., gi kicza, dionne c. (1988, december). work patterns altered by new lifestyles. personnel adminisiration, 43. burdetsky, ben, & kaplan, marvin (1981, december). alternative work pattern applications. journal of systems management, 6-9. dunham, randall b., pierce, jon l., & castaneda, maria b. (1987, summer). alternate work schedules: two field quasi-experimen(s. personnel psychology, 215-242. economides, spyros, speck, d. n., & shuh, allen j. (1989, may). longer days and shorter weeks improve productivity. personnel administrarion, 112-114. fischel-wolovick, lisa, cotter, connie, masser, llene, kelmanbravo, emily, joffe, ronnie sue, rosenberg, gary & wittenberg, beth (1988). alternative work scheduling for professional social workers. administration in social work, 93-102. the hartis survey (1977, may 23). quality wins over quantity. press release. herrick, edward j., vanick, jennee r., & michlitsch, joseph f. (1986, summer). alternate work schedules, productivity, leave usage, and employee attitudes: a field study. public personnel management, 159-169. latack, janine, & foster, lawrence w. (1985, spring). implementation of compressed work schedules: participation of job redesign as critical factors for employee acceptance. personnel psychology, 75-52. levitan, sar, & belous, richard (1977). shorter hours, shorrer weeks: spreading rhe work to reduce unemployment. baltimore: john hopkins press. likert, r. (1967). the human organization. new york: mcgraw-hill. mcguire, jean b., & liro, joseph r. (1987, spring). absenteeism and flexible work schedules. public personnel management, 47-59. mcguire, jean b., & liro, joseph r. (1986, spring). flexible work schedules, work attitudes, and perceptions of productivity. public personnel management, 67-73. 71 melcher, arlyn j. (1976). strucrure and process of organizations: a systems approach. englewood cliffs, n.js prentice-hall, inc. nollen, stanley d., & martin, virginia h. (1978). alternative work schedules parts 2 and 3 (p. 6). new york: amacom (a division of american management association). ralston, david a., anthony, william p., & gustapson ( 1 985, may). employees may have flexitime, but what does it do to the organization's productivity? journal ofapplied psychology, 272-279. rosenberg, robert. (1977). spreading work opponunities. working paper, no. 5, california state senate office of research, sacramento, california. thomas, edward b. (1986, april/may). flexible work keeps growing. management world, 43-48. weiss, d.j., dawis, r.v., england, c.w., & lofquist, l.h. (1967). manual for minnesota satisfaction questionnaire. minneapolis, minnesota: university of minnesota, ind. rel. center. 72 stk4tegy strategic researci-i and performance of smes'heo j. b. m. postma university of groningen tj.b.m postmabdkrug.nl peter s. zwart university of groningen p.s. zwartoa ceo. rug. nl abstract the aim of this article is to outline a rich/holistic conceptual framework with regard to strategy and performance in simes. the conceptual research model consists of the following building blocks; the internal environment and distinctive competencies, the external environment and critical success factors, the sustainable competitive advantages and the strategic conditions, and the ownerlmanager. the mutual relationships of these building blocks and their relationship with performance are discussed. in this way, we expect to obtain a beuer ftheoreti cal and practical) insight in the strategic behavior ofsmes. introduction small and medium-sized enterprises (smes) play an important role as a job creator and innovative engine in the economy. increased competition has raised the competitive pressure on smes. adaptation to changing environments and survival and success of firms seems to be contingent on management's capacities to adjust the structural and strategic context in organizations (burgelman, 1991); in order to assess these kinds of relationships burgelman suggests to use 'rich theories'f organization (269). an extensive body of literature is concerned with factors influencing the performance of smes (gibb tk davies, 1990). gibb and davies suggest four general and distinctive approaches; entrepreneurial personality: research in this field links the personal characteristics of the entrepreneur/manager with the performance of the company; organizational development: this research contains stage of growth models, approaches emphasizing the pursuit of non-financial objectives, approaches taking into account family influences, and approaches focusing on the influence of networks and personal contacts; functional management skills: this kind of research emphasizes the need for the smaller firm to adopt a more formalized approach to such activities as strategic planning and the installation of effective control systems; sectoral economics: research within this approach places emphasis on industry and locational aspects. although chaston and mangles (1997) we thank frits wijbenga for his helpful comments on an earlier draft of this anicle. in addition we thank the editor and the anonymous reviewers for their suggestions in developing the manuscript. 52 journal oj'mall business strategy vol. 12, no. 2 fa///ivi nrer 200l indicate that these four approaches have all made significant contributions to our understanding of the impact of management processes and company perfonnance within these firms, they, however, also conclude that these approaches unfortunately do not generate a generalized technique (or model) for predicting the growth potential of smes with any degree of consistency. nooteboom (1994:332) notes that earlier research on smes was characterized by trying to establish partial relationships (e.g. between personal characteristics of entrepreneurs and the success/failure of their firms). he suggests a research approach of smes that allows for different conditions, different actions, and different organizational outcomes (gartner, star, k bhat, 1998). dess, lumpkin, and covin, (1997), indicate that prior research suggests that multivariate combinations of strategy, structure, and process variables may be better predictors of firm performance than bivariate combinations. also, roper (1998) stresses that relationships between smes performance, entrepreneurial characteristics, firms'perating environment, and their strategic and organizational choices must be simultaneously taken into account. to this aim, he develops and tests a broad model of the different relationships, by using logit regressions as an instrument of analysis. this kind of research shows that the complexity of the problem field and the various interrelationships between variables (especially the indirect relationships) demands integrated approaches. an integrated framework (integrating various perspectives and variables) is needed to capture the complexity of this problem domain. research into only partial relationships does not add very much to the existing knowledge base. miller (1981:3) already made a plea for research at the complex interaction of many variables at the same time, as they interact over time and are manifested by a stream of decisions and events, in order to gain insights into the determinants and consequences of the strategies. the aim of this article, therefore, is to outline a conceptual rich/holistic framework with regard to strategy and performance in smes, which takes into account different internal and external environmental characteristics. in the next few sections this framework will be introduced, elaborated and discussed. determinants of strategy this article concentrates on strategy and performance. since the seminal publications of chandler (1962) and ansoff (1965), this relationship is a much researched and discussed subject. in the following an inside-out strategic perspective (the resource-based view, theory of entrepreneurship/entrepreneurs) and an outside-in strategic perspective (contingency theory, industrial organization) will be sketched. the discussion starts with the resource-based view (wernerfelt, 1984), which explains from an inside-out point of view the choice of strategies (of smes). the resource-based view is expressly concerned with the rentgenerating heterogeneous firm and its origin, function, evolution, and sustainability (mahoney 8r pandian, 1992). the possibilities of a firm to gain a so-called 'rent'above normal profit) will be influenced by the attractiveness of an industry and the possibilities to gain sustainable competitive advantages (grant, 1991). a sustainable competitive advantage (e.g. iow costs/prices, better service, faster delivery, innovativeness) can be described as the development of a unique product market combination, by using resources and taking specific strategic decisions concerning the business. this is reflected in strategic choices and the ways they are established. unique resources or combinations of resources are sometimes referred to as 'distinctive competencies'barney, 1997). distinctive competencies can be categorized as uncodified institutional knowledge (in networked people; in embedded processes) and sunk costs and irreversible investments (investments in reputation; in legal protection; in specialized assets) (van der heijden, 1996: 63). the resource-based view is for our purpose useful, because it stresses the basic relationships of our integrative framework. figure i shows the relationships between distinctive competencies, sustainable competitive advantages, strategies, and rents (see also bamberger, 1994; fletcher k. hardill, 1995; love 53 journal ofsmall business sfrafeg) vol. /2, no. 2 faiiylyinfer 200/ stephen, ec paterson, 1995). this figure indicates a number of basic relationships of our research model. sustainable dlstincuvc competitive slraleycs rents competences advantages figurc i: resource based model (adapted from grant, 1991) another set of factors that influences the sustainable competitive advantages of a firm are the external environmental factors (related to industrial organization theory). for the analysis of the external environment, especially the industryand market characteristics, different approaches are available (structure-conduct-performance inodel; porter's five forces model, pest-analysis, scenario-analysis, etc.). the set of relevant factors from the external environment is sometimes referred to as critical success factors. bamberger (1994: 138) distinguishes the following groups of critical success factors; demand (customer needs; heterogeneity of demand; price elasticity; stability of demand), industryand market structure (concentration, behavior of competitors; entry/exit barriers), and technology and dynamics (capital intensity; economies of scale; learning curve effects). the prevalence and importance of certain critical success factors depend on the stage of the life cycle (evolution) of the firm and the development of its industry. start-ups have other industryand market conditions compared to older more established companies. the relevant external environment, critical success factors, internal environment, distinctive competencies, and sustainable competitive advantages are related as shown in figure 2. internal drslalcllvc sustainablc crit ical success esrernat environment competences compuilive factors ctlvlf oiiiiicnt advantages slralcglcs figure 2: faclom rbar dctennine slratey'es(based on aambcrgcr, 1994) figure 2 is the basis for the development of the research model in the next section. this figure shows that sustainable competitive advantages are basically the result of at the one hand a set 54 journal of small business strategy vo/. /2, /vo. 2 fall/ivinrer 200/ of distinctive competencies (e.g. embedded processes, capabilities, knowledge or technology) that are derived from the internal environment and the other hand critical success factors (such as market position, cost conditions in industry, market demand) which are determined by the external environment. sustainable competitive advantages drive the strategy (e.g. differentiate in certain ways or choose for scale effects) and vice versa. note that strategy determines the performance of the firm in terms of success and failure (see next section). development of the conceptual research model strategic management literature suggests that integrated approaches of strategy, structure, and other variables may be better predictors of firm performance than bivariate combinations (dess, lumpkin, & mcgee, 1999: 97). moreover, dess et al. (1997: 691) indicate that research that takes into account a configurational approach outperforms former (partial) research. one of their main findings is that in general entrepreneurial strategy making was most strongly associated with performance when it was combined with both the appropriate strategy and environment conditions. they also indicate that more research is needed to consider these links. in this article, we aim specifically at such integrated models in smes. smes are special because of their size, growth potential, and the specific role of the entrepreneur/top management. nooteboom (1994) suggests a comprehensive model of smes, in which internal characteristics (such as personal characteristics of the entrepreneur, team characteristics, goals), external characteristics (such as technology, market features, institutions, life cycle stage), conduct characteristics (such as strategy, product, price, knowledge acquisition, external networks), and performance (profit, growth) are interrelated. also, chrisman, bauerschmidt, and hofer (1998) outline an integrated model of critical variables affecting new venture performance with respect to the entrepreneur (personality characteristics, values and beliefs, skills, experience and education, behaviors and decisions), industry structure (structural characteristics, industry rivalry, nature of buyers and suppliers), resources (intangible and tangible assets), internal environment (organizational structure, systems and processes, ownership structure), strategy (planning and strategy formulation, goals and objectives, strategic direction, entry strategy, competitive weapons, segmentation, scope, investment strategy, political strategy), and performance. in sum, integrative approaches are likely to offer a better understanding and explanation of performance inhibiting or enhancing phenomena within the problem domain of smes, compared to partial models (see also boone, de brabander, bt van witteloostuijn, 1995). the proof of the pudding is of course in the eating. empirical tests of these so-called holistic approaches, which indicate the applicability of integrated models, now show up (pelham //t wilson, 1996; borch, huse, k. senneseth, 1999; flamholz bc aksehirli, 2000). based on the literatures from different research fields and various integrative approaches, we propose the following conceptual research model (figure 3): the main building blocks of this model are the internal environment and distinctive competencies, the external environment and critical success factors, the sustainable competitive advantages and strategy, and the entrepreneur/manager. in smes, an important determinant of specific resources or distinctive competencies, sustainable competitive advantages, and strategies is the personality (characteristics, reputation, knowledge, relation networks) of the entrepreneur/manager. the entrepreneur/manager has a pivotal role in perceiving and determining what is distinctive and strategic. (s)he as the main controlling actor in smes is mainly responsible for the development and management of distinctive competencies (e.g. r/kd-capabilities) and the way strategies are established (process) and eventually chosen (such as a differentiation strategy). the various building blocks, their mutual relationships and their relation to performance are visualized in figure 3. the relationships between the building blocks are described above. the feedback loop from 55 journal of small business strategy vol 12, lpo. 2 fall/ivi nfer 200l performance to internal environment and entrepreneur/manager indicates that success (e.g. profit) or failure (e.g. loss) of the firm has repercussions for the input and development of resources and the decisions made by the entrepreneur/manager. each of the building blocks will be described in the following sub sections. estemal environment cnncal success factors sustamable internal distinctive competluve strategies performance environment competencies advantages entrepreneur/ manager figure 3 . conceptual research model characteristics of the internal environment and distinctive competencies the resource-based theory discusses the importance of certain resources or 'distinctive competencies'or sustained competitive advantages of the firm (diericxk 4 cool, 1997) (see previous section). in smes the scarcity of resources is even more obvious compared to large companies. for instance think of the following intangible assets: access to capital markets, access to distribution channels, access to suppliers, culture, employee flexibility, intellectual property, reputation, and social networks. examples of tangible assets are current assets, equipment rtk machinery, and initial size. the importance of the resources approach for our research is for instance outlined by nooteboom (1999), who discusses a synthesis between transaction cost theory and the competence perspective, which is of relevance for the choice of the network strategy (e.g. outsourcing depends to a large extent on specific competencies). next to these, the internal environment also consists of aspects like organization structure, life cycle, management information systems, corporate governance elements (such as financial control, board composition, dispersion of ownership among employees, share of equity owned 56 journal ofsmall business srra/egy vo/. /2, no. 2 fa///ivi urer 200/ by founders) (chrisman ei al., 1998). the internal environment and distinctive competencies have an indirect relationship with performance. in general, structural and cultural aspects are well known contingencies that determine strategic behavior. organizational life cycle models or stage of development models suggest a holistic perspective of organizations in which clusters of variables regarding structure, culture, strategy, and environment are studied (covin & slevin, 1990; snuif & zwart, 1994a, 1998). the stage of development of an organization may influence for instance the choice of a social network and in that way indirectly the performance of a firm (huse, 1994). characteristics of the external environment and critical success factors the institutional context is important for the relationships between the entrepreneur/manager and financial institutions (banks, venture capital), shareholders, government and the way the business is assessed by these stakeholders. specific characteristics of the industry context might be of relevance for the discretionary strategic behavior of the entrepreneur/manager (risseeuw & masurel, 1994). research by dean, brown, and bamford, (1998: 724) suggests that small and large businesses differ substantially in their responses to industry environments. they indicate that their results suggest that small businesses are adept at pursuing strategies built upon the strengths of speed, flexibility, and niche-filling capabilities. important contingencies of the external environment are heterogeneity and uncertainty (dess et al., 1997). bamberger (1994) specifies different 'critical success factors'or smes that represent heterogeneity or uncertainty of the external environment (e.g. the life cycle of a product/service). grant (1995) describes critical success factors in this respect as answers to two questions: what do customers want and how do firms survive their competitors? these contingencies have an indirect relationship with performance. entrepreneur/manager the entrepreneur/manager is an important strategic factor in smes (gibb & scott, 1985). his/her cognitive development and personal goals determine the possibilities of understanding and using strategic management and planning (olson & bokor, 1995: 40). the problem of distance between strategy formulation and implementation (and planners and managers) is not very relevant in smes, because both groups of activities are (oflen at the same time) performed or strongly influenced by the same person: the entrepreneur/manager. also, the entrepreneur/manager has a clear impact on the development of specific distinctive competencies, because of his unique knowledge, experience, and position. this person directs the firm. his background, personal goals, and vision on the future guide both strategic and operational decisions and activities. strategic decision making in smaller firms in this respect is generally top down, informal and intuitive (mintzberg, 1989). relevant characteristics of the entrepreneur/manager include various personal characteristics (nooteboom, 1994), such as internal locus of control, need for achievement, and risk taking behavior. an internal locus of control might be an indication of visionary power and a strong position of the entrepreneur/manager (which also fits within the resource-based approach of strategy). the entrepreneur/manager or the top manager usually is the person who has the vision. as such he (and therefore his personal goals) has a profound influence on the performance of the firm. corporate governance theory indicates that different ownership or governance structures of the firm can be (indirectly) related to company performance (huse, 1994). examples of relevant indicators are management holdings and insiders/outsiders (e.g. family) in the board (daily & dalton, 1994; huse, 1994). the entrepreneur/manager can be considered as one of the main elements that differentiates a sme from a larger firm. as figure 3 shows, the entrepreneur/manager has a pivotal role in the research model, because (s)he influences almost al building blocks of the model. 57 journal ofsmall business srratetp 'o/. /2, /vo. 2 fall//vinier 200/ sustainable competitive advantages and strategy the relationship between sustainable competitive advantages and strategies has been elaborated and extensively discussed by porter (1985). his generic strategies of cost leadership, differentiation or focus are well known in reflecting the distinctive competencies of a firm, which lead to sustained competitive advantages. in general, different strategies may influence the performance or 'success'f a firm. grant (1991; 1995) discusses this relationship also (see previous section, figure 1). in strategic management the distinction between content and process is well known. content is concerned with the type of strategic decision or strategy (e.g. miles and snow's strategic types), whereas process focuses on its formulation and implementation process. the process view aims at the way strategies are formulated and implemented. both points of view are interdependent. because this section is the central building block of the model, the two complementary concepts of strategy content and process are somewhat more extensively described. the following aspects are of importance for smes: ~ the most traditional way of specifying the process approach is the formal strategic planning approach. formal strategic planning has received a lot of criticism (hurst, 1986; mintzberg, 1990, 1994). nevertheless, the strategy process is often discussed from the point of view of formal planning. the literature shows mixed results concerning the impact of formal planning on performance. an important indicator of (the quality of) a strategy process (formalized or not) is the existence of a business or strate ic lan (snuif et zwart, 1994b,c; zwart & van der werf, 1996). olson and bokor (1995) indicate that in 50% of the cases, starters do not make a formal business plan. snuif and zwart (1994b) found that in more than half of their sample of smes no formal strategic planning activities were prevalent. we have to be careful to draw conclusions only on this anecdotal empirical research. based on his stratos-database, bamberger (1994) indicates that, although this might be the case, strategic behavior may show up: "small firms in eneral do not ca out a strate ic lannin rocess the rarel have formal lans. however strate ic behavior does not necessaril mean the elaboration of lon~ as far as content of strategies is concerned olson and bogor (1995: 35) state that strategic behavior can vary between the two extremes of being highly innovative to being highly imitative. a new product/service strategy or the degree of innovation can be very powerful in the survival of a firm, were performance is expected to reflect its distinctive competencies. dess et al. (1997: 691) explored the nature of strategy making and its relationship with environment and performance. they concluded that entrepreneurial strategy formation is a salient strategy-making approach that non-diversified organizations, such as smes, use. entrepreneurial strategy making is most strongly associated with performance when it was combined with both the appropriate strategy and environmental conditions. ~ the choice of a network strategy. networks (clusters or alliances) are important instruments for smes. they can be used as social networks, as learning devices or as resource-relating instruments. trust between actors is in this respect a central concept; for instance it lowers the need for contracting. ring and van de ven (1992) consider the riskiness of the venture and the nature and degree of trust between parties as key features determining whether markets, hierarchies or networks based on relational contracts are used. atkins and lowe (1994) define strategic networks as "long term purposeful arrangements among distinct but related for-profit organizations that allow these firms to gain or sustain competitive advantage". they indicate also that the 'glue'hat binds the network together is the lowering of transaction costs. the lack of trust is the main reason for transaction costs. therefore, generating trust will lead to lower transaction costs 58 journal of small business strategy vo/. /2, no. 2 fall/winter 200/ (nooteboom, 1 996: 989). nooteboom (1994) suggests that the strategy of employing external networks serves to compensate for the problems of absorption capacity; they are used for generation of awareness and the efficient acquisition of relevant specialized knowledge (think of r&d knowledge in the biotechnology sector). a broader point of view holds kamann (1998), when he states'hat actors in a network require specialized external assistance when resources (for instance venture capital) are not available for particular activities required for a successful operation of the entire business. the nature may be legal, institutional, financial, managerial, organizational, related to r&d, know how, reputation and so forth. in this respect, also the finding that small firms tend to use alliances to reach scale and scope can be interpreted (gomes-casseres, 1997; van gils, 2000). in general, the relationship between sustainable competitive advantages and performance will be moderated by strategy. this will also be influenced by the entrepreneur/manager and the external context (as figure 3 shows). performance performance measurement is a much-discussed subject. olson and bogor (1995) for example adopted a straightforward framework in which performance is measured by only sales growth. other relevant measures are e.g. profitability, return on investment, overall company performance (growth), corporate social responsibility, or (esp. for starting firms) survival. also, composite measures are possible (haleblian & finkelstein, 1993). next to these objective measures, subjective measures must be taken into account in the context of smes (bamberger, 1994; snuif & zwart, 1998). moreover, sometimes in smes subjective goals (such as continuity, maintaining traditional methods of working, working conditions) can be considered more important compared to objective measures of performance. performance can vary depending on factors as organizational size and industry type. therefore, in the analysis, control variables, which take these factors into account, must be considered (hitt & tyler, 1991; huse, 1994). as has been shown in the previous section, the performance or success of the firm also has (investment) consequences for the resources (and subsequently the distinctive competencies) of the firm. the personal income of the entrepreneur/manager oflen depends on the performance of the firm. the discussion of this section can be summarized as presented in figure 4. we want to stress that the major challenge is to test such an integrative model (that captures in a pragmatic way the various variables and relationships of different theories). by doing so, we expect to obtain a better insight in the factors that drive the strategy and performance of sme's. relevance of approach the relevance and need of performing strategic research in smes by taking into account a wide range of relevant factors has been described. compared to strategic research at large enterprises, this kind of research in smes has more relevance and can be better executed, because of the sheer size of smes and the specific role of entrepreneurs/managers. in the context of smes, the various relationships are generally more transparent and better interpretable and measurable. the conceptual research model of the previous section is based on a set of theories: strategic management theory (esp. resource-based theory), theory of entrepreneurship/entrepreneurs, industrial organization theory, corporate governance theory, network theory, and contingency theory. these theories can be used to carefully specify the conceptual relationships in the research model that explain different aspects of strategic behavior of smes. in this way, the theoretical as well as a more practical relevance of this research shows up. the theoretical relevance has been described in the previous sections (haahti, 1989; bamberger, 1994; bijmolt & zwart, 1994). 59 joldrnal ofsmall bnrinessgfrafegv vol. j2, no. 2 fall/)vinfer 200i external environment d c) col)cat success factors(+ d di« internal environment nistinclivc s 'iustaina e corn pclcnclcs slraleg)cs performance corn titivc i) entrepreneur/ imllagal tp p )r i add.p, p «nd') figure 4: mam duncnstons of research model the practical relevance comes forward in the possibility to provide sme-researchers, owners/managers, policy-makers or consultants with a richer view on factors which influence the performance of smes. a view that stresses the inter-relationships between for instance the level of performance (think of a composite measure of return on investment, return on equity, return on sales, or corporate social responsibility measures such as limited environmental pollution), the use of a business plan, the kind of competitive advantage (e.g. product innovation or -quality and participation in a rfkd network), the phase of the business (e.g. start-up in new market; young organization with no established culture and routines), the extent of hostility/dynamics of the external environment, and the management holdings (of shares) and personality of the entrepreneur/manager(s). in this way a start-up firm has other scores on the variety of dimensions compared to a more established firm. a more confined approach —e.g. by considering only the direct relationship between strategy and performanceis less satisfactory, because it neglects the other influencing factors and isolates the relationship at the expense of more complete insights. another argument to perform this kind of research is that it may lead to better managerial insights into the strategic behavior of decision makers in smes. these insights (theories) may contribute to more possibilities of improved strategic thinking (lasher, 1999), strategic conversation (van der heijden, 1996) or even strategic learning (eood dfg postma, 1997) in smes. 60 journal ofsmall business srraregy vol. /2, luo. 2 fallllfinrer 2001 conclusion in this article a pragmatic conceptual framework has been suggested to study strategic behavior in smes. the conceptual research model of this article makes clear that the various (causal) relationships must be considered in an integrated way. new research aimed at only partial relationships in this field has no value-added compared to the existing literature. the conceptual and empirical specification and testing of such a model is a challenge for researchers, because it asks for methodological pluralism. eclectic quantitative and qualitative research approaches are both needed to fruitfully approach this problem field. the proposed research framework also has practical implications. in contrast to studying and discussing only partial relationships, we identify, distinguish and suggest various elements and levers to direct strategic action (issues that can be changed such as competencies and strategies) and ultimately performance. more practice-oriented people might take advantage of this holistic approach, because it appeals more to their intuition and experience. the next step will be the empirical testing of the proposed research framework. with this article we hope to stimulate debate and a fruitful area of research. enijnotes 'andberg and hofer (1987) made some early efforts to fill this gap.'n fact, more recursive relationships could be established (e.g, also from sustainable competitive advantages to critical success facors and external environment). in this article we, however, want to stress the main relationships and show the complexity of an integrative model. 'n a certain way (s)he (her)himself is also part of this set. in the following, the entrepreneur/ manager is considered as the central directive and controlling person of the sme. 'ee also the discussion on this subject in the ranks of the strategic management journal. mintzberg (1994) concentrated his criticism on the following subjects: the problem of forecasting. oren not very realistic assumptions concerning the potentialities of forecasting the environment (historical trends; discontinuities) are used. the problem of distance. an artificial distance may be created between strategy formulation and implementation, between planners and managers, and between sor (qualitative) data and hard (quantitative) data. the problem of formalization. too little attention is paid to intuition and creativity to deal with the in-transparency and uncertainty of the environment (too much analysis and too little synthesis). 'he stratos database involves data about 550 variables on 1,135 enterprises in three different sectors (clothing: 35%, food: 39%, and electronics: 27%) in eight european countries (including the netherlands). the database is based on structured interviews with identical questionnaires with (owner) managers of smes, especially tailored to various strategic aspects of their organizations (the data consists of quantitative and qualitative (likert-scale) scores). references ansoff, h. a. (1965). co orate strate: an anal ical a roach to business olic for~kd * i .h y hmg -hill atkins, m., & lowe, j. (1994). stakeholders and the strategy formation process in small and medium enterprises. international small business journal 12(3), 12-24. 61 journal nf sniall business strategy vol /2, )vo. 2 fall/)vinrer 200l bamberger, i. 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(1987). improving new venture performance: the role of strategy, industry structure, and the entrepreneur. journal of business venturin 2(l), 528. 63 doirrnal ofsmall business strategy vol. 72, no. 2 fallllyinter 200/ snuif, h. r., & zwatt, p. s. (1994a). modeling new venture development as a path of configurations. proceedin s of the 39 icbs world conference, straatsburg, frankrijk, 263-274. snuif, h. r., & zwart, p. s. (1994b). strategische besluitvorming in het mkb, een procesmodel. maandblad voor accountanc en bedri'fseconomie 68(5), 264-274. snuif, h. r., & zwart, p. s. (1994c). strategische besluitvorming in het mkb, een typologic van bedrijven. maandblad voor accountanc en bedri'fseconomie 68(6), 336-345. snuif, h. r., & zwart, p. s. (1998). small firms as confi urations of structural strate ic environmental and individual characteristics: an em irical validation, paper groningen. van der heijden, k. (1996). scenarios: the art of strate ic conversation. chichester: wiley. van gils, a. e. j. (2000). coo erative behavior in small and medium-sized ente rises: the role of strate ic alliances (thesis). rijksuniversiteit groningen. wernerfelt, b. (1984). resource-based view of the firm. strate ic mana ement journal 5(2), 171-180. zwart, p. s. & van der werf, j. e. (1996). een analyse van ondernemingsplannen ter ondersteuning van regionaal economisch mkb-beleid. maandblad voor accountanc en ~bd if 7u5i.25tl-26d. theo postma is associate professor of strategic management at the faculty of management and organization of the university of groningen. his research interest focus on strategic management, strategic alliances, and organizationallcorporate governance peter ztvart is professor of small business and entrepreneurship at the faculty of economics of the university of groningen. his research interests focus on strategies of smes, business plans, internaiionalization and smes, and entrepreneurship. he founded the smemanagement program at the university of groningen (the netherlands). 64 1 invited distinguished commentary academic entrepreneurship: paradigm sought to paradigm found g. dale meyer university of colorado – boulder gdalemeyer@gmail.com editor’s notes (g. hills): it’s a pleasure to invite and present thoughts from an early pioneer in our emerging entrepreneurship discipline. his scholarly works and academic association leadership have elevated the entire field. this article is in part a personal statement from one of our greater minds. the reader will see the interwoven theoretical application to dale meyer’s own career. this reminds me of the deference he received from leaders in the field when he spoke at an iowa state research conference decades ago. this was a step toward him entering the field. it also reminds me of dale and myself skipping down the sidewalk like school children at another conference; and this article helps to explain his leadership behaviors! professor meyer is indeed a distinguished scholar and professor who continues to make a difference. you will enjoy this article. a limited expose of the path of academic entrepreneurship in establishing legitimacy [including continuing mal-appropriate practices and behaviors along the way] the long journey of academic entrepreneurship during the mid-1970s through the 1980s and 1990s pioneering leaders in academic entrepreneurship had little traction for the creation of legitimacy to establish entrepreneurship as a valid discipline in colleges and universities. when we counseled ph.d. students regarding publishing to earn tenure we argued against submitting their manuscripts to existing entrepreneurship and small business journals. for example, ph.d. students and assistant professors were alerted against publishing their research findings and/or theoretical models in such journals as the journal of business venturing, entrepreneurship theory and practice, journal of small business management, strategy   journal of small business  journal of small business strategy vol. 23, no. 1 2 and small business economics. once tenured, research papers could be submitted to these reputably “lesser” journals as judged by most business school professors. i sat in on several sessions at the academy of management where pioneers such as my mentor max wortman led such discussions. in other words, academic entrepreneurship did not fit the traditions and paradigms of the foundational b-school disciplines such as finance, accounting, management science, and to a lesser degree marketing. academic entrepreneurship would “earn” legitimacy only if it adopted the normal science, database analyzing, econometric modeling paradigm.1 in the narration herein i will argue/show that academic entrepreneurship over the past 30 years has sought and adopted a paradigm that focuses on database2 variations of econometrics, and topics in entrepreneurship where quantitative measures are available [e.g. venture capital, sampled telephone interviewing psed i and ii, standard questions utilized in the global entrepreneurship monitor techniques, new federal government databases fomented by kauffman foundation lobbying, initial public offerings – ipos, and an ever increasing set of available databases.) thomas kuhn defined a paradigm as a “disciplinary matrix” that includes subject matter content and research methodologies that become the agreed upon standard of the professional group’s shared rules of research.3 in this paper the goal is to provide a concise review about the paradigm that most of the present academic scholars of entrepreneurship increasingly are adopting through the content and research methods that they abdure. meyer and monarchi4 are in the final stages of completing a research project covering 32+ years of entrepreneurship publications. we have partnered with mathematica to develop and utilize a new and unique construct identification technique that elucidates subject matter and research methodologies. from this work we have concluded and will provide evidence that academic entrepreneurship now works with an agreed upon paradigm. in these 32+ years entrepreneurship education and research has travelled from “paradigm sought” to “paradigm found.” [ps-to-pd]. the meyer and monarchi report that undergirds the ps-to-pd claim is in its final stage of refinement before a decision will be made about the best forum to publish this research. given what we have found in academic entrepreneurship regarding (a) current research subject matter and techniques, (b) teaching foci and (c) entrepreneurship program self-promotion, we can assess the “state of the art” of academic entrepreneurship – 2013. in the present paper i will first restate the critique that began with my coleman foundation white paper in 2001 and updated/added to in the journal of small business management in 2012. this critique includes common patterns in academic entrepreneurship that have “self-organized” [as in complexity science] to define the field. the paradigmatic details that meyer/monarchi located are not included in this paper due to (a) refinements that are underway within the meyer and monarchi data, and (b) my desire to keep the present paper within reasonable page limits. one matter that is addressed later in this paper is the fundamental importance and neglect of the creative and creativity aspect of real/true entrepreneurship. i draw upon mihali csikszentmihali’s research on creativity and “flow” to offer a “how to” methodology for doing research on entrepreneurship creativity. journal of small business strategy vol. 23, no. 1 3 two critiques of academic entrepreneurship – 2001 and 2012 early in the year 2000 the officers of the united states association for small business and entrepreneurship [usasbe] chose me to present the coleman foundation white paper on february 8, 20015. ten years later the editor of the journal of small business management invited me revisit my 2001 white paper to analyze both change and continuance in academic entrepreneurship. that article was published in january, 20126. this section of this paper is devoted to summarizing what the 2001 and 2012 papers highlighted and then to focus on similarities and changes in ten years; these observations will lead to a later section of this paper that focuses on significant, important factors and processes that are overlooked or eliminated to the detriment of the full promise of academic entrepreneurship. in other words, i am the “curmudgeon” who writes this piece not realizing that a new generation brings an enlightened paradigm that finally establishes academic entrepreneurship as fully legitimate within the norms of the modern academic world. “so it goes” said my personal friend kurt vonnegut.7 by 2000 the discipline of academic entrepreneurship had developed into a burgeoning “movement” wherein colleges and universities included entrepreneurship courses in their curricula. professional jerry katz8 kept track of this huge movement that none of the pioneers in the “fight to legitimate” would have come close to predicting. professional associations were attracting new members; among these the international council for small business [icsb], usasbe, and the entrepreneurship division of the academy of management. legitimacy was being established in highly reputable business schools and universities, among faculty and administrators. highly respected established faculty members from academic disciplines other than small business and entrepreneurship became interested in entrepreneurship [e.g. sociology, economics, strategic management, engineering and other sciences, creative arts, music et al.] a few ph.d. programs were focusing on entrepreneurship – for example the ph.d. program at the university of colorado – boulder became the first fully committed ph.d. program in entrepreneurship and strategy. this ph.d. program was founded by dale meyer in 1988 who was also the chair of the entrepreneurship division of the academy of management [aom]. in 2013 the overlap of members in this entrepreneurship division is in the range of 75 percent. eventually the strategic management society [sms] created an entrepreneurship and strategy interest group9 and began publishing the strategic entrepreneurship journal in december 2007. dale meyer’s coleman white paper 2001 the following preliminary statement introduced the domain of this paper and talk: “this presentation begins with the premise that high quality education foments change, hopefully for betterment of individual students and also for society as a whole. it is also argued that the domain of entrepreneurship education is creation – as venkataraman10 stated ‘how opportunities to bring into existence future goods and services are discovered, created, and exploited, … but we must ask: 1. who are the teachers? how well qualified are they to teach high quality courses in entrepreneurship? journal of small business strategy vol. 23, no. 1 4 2. how valid are the ‘reputational rankings’ of entrepreneurship programs? 3. should entrepreneurship education be only the ‘property’ of business schools/colleges? 4. how do we measure entrepreneurship education outputs? 5. how do we continue to counter colleagues who are against or deeply skeptical about the validity of entrepreneurship as an academic discipline?” several observations are relevant to the questions that were posed in the five categories listed above: (1) an increasing number of new ph.d.s matriculate from a larger number of ph.d. programs in entrepreneurship. however, very few of the new professors have experience in small business or entrepreneurship, adjunct instructors who are or have been entrepreneurs still teach the majority of entrepreneurship classes – often in excellent fashion – but mostly “wing it” without much coaching or workshops taught by “master teachers.” more dedicated training of all teachers of entrepreneurship does not appear to be a high priority. (2) magazine rankings have increased in numbers, the criteria for these rankings are highly questionable, and the brochures and other promotions of entrepreneurship programs and centers place rankings front-and-center as great achievements. much bombastic egoism is involved in the magazine ranking “game.” in fact rankings have grown as criteria for measuring “success” of academic entrepreneurship. (3) although “cross-campus” and departmental entrepreneurship education is increasing, bschools and selected but excellent engineering colleges still dominate. given the now recognized crisis of unemployed and/or underemployed college graduates, some b-schools are creating “minors” in entrepreneurship. (4) of the five queries presented in the 2001 coleman white paper, one stands out as almost completely ignored. only one rigorous, admirable, and useful study that tracks entrepreneurship graduates continuously was developed (and presents regular reports) at the massachusetts institute of technology [mit]. mit measures businesses founded, revenues and profits produced, gdp and wealth created, and provides detailed feedback about the practical influence of their entrepreneurship education programming.11 perhaps other entrepreneurship programs conduct continuous follow-up rigorous research that validates results from entrepreneurship education programs. yet, little is known about any reported results. if the data were available, there is no doubt that these studies would be circulated for public relations and/or recruitment purposes. what is presented, mostly at academic meetings, are single cases or a few examples, told to lift the reputations of professors and their entrepreneurship programs. mostly such presentations are “look at me” ego talk. (5) validation of the legitimacy of academic entrepreneurship is now accepted. student demand for entrepreneurship courses, large donations from wealthy entrepreneurs for naming schools of business and entrepreneurship centers and creating endowed academic chairs have put legitimacy, at least temporarily, to bed. sometime in the future it will take mittype data to maintain academic entrepreneurship legitimacy. the reinvention of academic entrepreneurship in january 2012 the previously mentioned journal of business venturing article/essay begins with the following introduction: journal of small business strategy vol. 23, no. 1 5 “in the heat of the long ‘battle’ advocating the legitimacy of academic entrepreneurship, few, if any, of the early advocates predicted the swarm of colleges and universities that now embrace the academic entrepreneurship discipline. present and growing, academic departments, hybrid departments, institutes, centers, and even one encompassing “school” now focus on academic entrepreneurship. . . . my focus here, however, is on a number of “elephants in the room.” keep in mind that 11 years had passed since the coleman white paper critique. the continuing “elephants” found some overlap but this article/essay framed the issues differently. five continuing “elephants” were not only introduced but strengthened by illustrations and examples that, no doubt, agitated the “in-charge” coteries of leading marquee paradigm setters. the five “elephants” were presented with change in mind as we were now into the second decade of the 21st century. 1. “… is it not about time that rigorous measurements of results and accountability be required?” magazine reputational rankings are a poor substitute for measuring actual accomplishments over time. 2. “. . . academic entrepreneurship is constrained by old paradigms that are primarily products of neoclassical economics and its attendant theories.” my point is that when one examines carefully the scholars and academic jargon utilized in these efforts at entrepreneurship theory building, it is apparent that economic theory is the overwhelming backbone of what is presented and published.” [note fyi: dale meyer was the first ever ph.d. earned in what is now labeled “behavioral economics”, taking comprehensive exams in three disciplines: industrial organization economics, social psychology, and the philosophy of science. i never revealed this until i researched this for a long period of time and found it to be true.] 3. the standard processes of publishing at the “altar of academic journals leading to tenure” is a prison that disallows truly long-term personal interactive research [often named “longitudinal” at the end of articles that note it is needed for validation – however, it never occurs due to the “prison rules”. 4. today’s normal science emphasizes “database dances” that utilize and depend on impersonal, often incorrect secondary data, to show “models” that are pronounced valid even though they do not serve humanity in any way. 5. real entrepreneurs are creative and engage in creation; with few exceptions this aspect of entrepreneurship teaching and research are seldom the subjects of academic entrepreneurship. b-schools create departments that are organized imitations of corporate functional departments. i argue the following: “bureaucracy is the mortal enemy of entrepreneurship. corporations are bureaucracies. b-school professors internalize corporate processes through corporate departmentalization. b-schools themselves become bureaucracies. entrepreneurship is about the creative and creation. therefore, b-schools cannot appropriately teach entrepreneurship.” so, why wouldn’t b-school faculty be obsessed with journal of small business strategy vol. 23, no. 1 6 business plan courses as the ubiquitous unifying basis for course and curricular development? the “paradigm found” in academic entrepreneurship is intertwined with items 2, 3, 4, and 5 above. i have chosen to focus on two “elephants” that are living in the elucidation offered above in this paper: first, a succinct overview of a classic personalized study of creative people by mihali csikszentmihali, and second, the linguistic construct of “semantic bleaching” as it relates the entrepreneurship terminology. entrepreneurship and creativity it was a pleasure indeed to team-teach the annual usasbe doctoral consortium from its inception to 2011. i became interested in the continuing career development of the ph.d. students after they worked with us in that consortium/colloquium. actually, that interest was imprinted by the 43 ph.d. students whose dissertations i chaired in my years at the university of colorado – boulder. one of the doctoral consortium students became quite interested in the many definitions of entrepreneurship that have been proposed in the past to the present. she decided to research a large sample of definitions of entrepreneurship in textbooks, journal articles, newspapers, and magazines. she utilized over 130 definitions and used latent semantic indexing to extract the common words and phrases that define entrepreneurship. she found that the words “creative”, “creativity”, and “creation” were found in entrepreneur and entrepreneurship definitions in 95 percent those researched. this study contributed to her teaching and focused her research creativity factors among entrepreneurs. this finding is enough to convince me that realistic research in entrepreneurship must directly examine the creative aspects of entrepreneurship. however, as academic entrepreneurship research has moved from “paradigm sought to paradigm found” one finds an increasing paucity of journal articles and books that focus on creativity. since creativity databases are few, if any, research about the creativity aspects of entrepreneurship do not fit the new research paradigm. a classic study of creative people was undertaken and published by mihaly csikszentmihalyi. the next section of this paper is presented as a model for doing research about creativity and entrepreneurs. undertaking such studies seems impossible for academic entrepreneurship researchers due to the magnet of tenure and then for publishing journal articles in rapid fire frequency. studying real entrepreneurs is greatly needed but “database dances” are quicker – even though such “coarsegrained” research almost always lacks practicality compared to “fine-grained” personal research. academics are forced to obey the laws and timelines of tenure and promotions. in addition, entrepreneurship research based on csikszentmihali’s creativity and “flow” methodology could bridge the present chasm between real entrepreneurs’ needs and academic publications. that chasm will become wider as the new research paradigm gains even more momentum. ponder the minimal practical influence of the “imperial social science” of economics on real world macroeconomic crises. [they actually use the word “imperial”.] creative people – who are they and how they became so the following describes czikzentmihali’s creativity definitions and the research that became his books titled creativity12 and flow13. “creativity is some sort of mental activity, an insight that occurs in inside the heads of journal of small business strategy vol. 23, no. 1 7 some special people. . . creativity is an idea or action that is new and valuable.” [p. 23]14. . . creativity in a given place at a given time does not depend only on the amount of individual creativity. it depends just as much on how well suited respective domains and fields are to the recognition and diffusion of novel ideas15. most investigations focus on the creative person, believing that by understanding how his or her mind works, the key to creativity will be found. but this is not necessarily the case. for though it is true that behind every new idea or product there is a person, it does not follow that such persons have a single characteristic responsible for the novelty16. a person who wants to make a creative contribution not only must work within a creative system but must also reproduce that system within his or her mind. in other words, the person must learn the rules and the content of the domain, as well as the criteria of selection, the preferences of the field. [p. 47]17 [gem: this is akin to nobel laureate herbert simon’s axiom that to be creative takes approximately 50,000 “chunks” of knowledge and 10 years of experience]. the ten dimensions of the creative person – complex personalities csikszentmihali conducted a study of 91 individuals who were identified as among the most creative in their work or profession. these “creatives” were identified by informed people in the careers or professions. csikszentmihali spent limitless hours conversing with the chosen 91. he used both structured and open-ended interviews to capture what makes these creative people “tick.” the goal of this interpersonal activity focuses on how they think, learn, and how new ideas come into their consciousness. they also discussed whether any or many “mystical” [intuitional] thoughts have fomented creative ideas and concepts that became productive. these interviews and questionnaires took about 18 months to complete – notice that most academics are (a) too busy to spend this much time on interviewing, deeply internalizing who these people are how they find and utilize their creative selves, and (b) prefer to sit in front of computers using programs such as sas, spss, or stata to test databases to find significant relationships through statistical computing. the following are the primary characteristics that csikzentmihali discovered about the 91 chosen creative people. one primary finding is that highly creative people have multifarious other characteristics that are unpredictable. is the same true of successful entrepreneurs? should csikszentmihali’s research design be utilized to study similar or distinctive characteristics, mental processes, and creativity? why not? it has not been done to date. do coarse-grained database dances increasingly eliminate such research as the new research paradigm dominates? this is my explanation of the mihali deep study of creative people 18 we are going to overview:  the real characteristics of creative persons;  the interesting part;  the tortured souls;  the impossible dreams;  the agony and ecstasy of creative one needs to remember that creativity is the property of a complex system, and none of its components can explain it alone. the personality of an individual who is to do something creative must adapt to the:  particular domain journal of small business strategy vol. 23, no. 1 8  the variances from domain to domain the point is that you cannot assume the mantle of creativity just by assuming a certain personality style. (i.e. picasso or steve jobs, etc.) one can be creative by burning the candle at both ends [busily “out there”] or living like a monk. if we had to express in one word what makes their creative personalities different from other people it would be complexity. . . creative people contain contradictory extremes – instead of being an “individual” each of them is a “multitude” [akin to multiple personality disorder, i.e. sybil’s 12 personalities.] like the color white that includes all the hues in the spectrum, creative individuals live in the entire range of human possibilities, mostly within themselves. these qualities are present in all of us, but usually we are trained to develop only one pole of the dialectic. . . a creative individual is more likely to be both:  aggressive and cooperative either at the same time or different times;  and express the full range of traits potentially in the human repertoire, whereas this array in uncreative people atrophies because we think that one or the other pole is “good” whereas the other is “bad”. this is not so for the creative person. the creative person has many traits in common with carl jung’s “mature personality”. that construct points out that every one of our strong characteristics has a repressed shadow side that most of us refuse to acknowledge. examples are, (a) an orderly person who longs to be spontaneous, (b) a submissive person who wishes to be dominant, etc. as long as we disown these shadows, we can never be whole or satisfied. yet that is what we usually do, and so we keep on struggling against ourselves, trying to live up to an image that distorts our true being. very creative people live out their many “shadows” [usually without becoming sociopathic!]. a complex personality does not imply neutrality, or the average. it is not some position at the midpoint between two poles. it does not imply, for instance, being wishywashy, so that one is never very competitive or very cooperative. rather it involves the ability to move from one extreme to the other as the occasion requires. perhaps a central position, a golden mean, is the place of choice, what software writers call the default condition. but creative persons definitely know both extremes and experience both with equal intensity and without inner conflict. the study investigated the creative personalities of 91 individuals who were culled by numerous other people in several fields: (1) arts and humanities [historians, media, performers and composers, philosophers and critics, writers], (2) sciences (biologists, physicians, chemists, economists, physicists, astronomers, social scientists, psychologists, and (3) business and politics (activists, business – no entrepreneurs!), inventors, politicians (only ones elected). a rigorous interview protocol was utilized in this study. i can find no study in academic entrepreneurship research that has replicated this study. please inform me if you know of something comparable journal of small business strategy vol. 23, no. 1 9 [sarasvathy’s study is not quite the same as i understand it, but her research is “up front and personal” which is where i would direct meaningful research unhooked from the “religious doctrine” of tenure]. ten antithetical traits found in mihali’s study19 1. creative individuals have a great deal of physical energy, work very long hours, with great concentration, while projecting an aura of freshness and enthusiasm. yet it is surprising how often individuals in their seventies and eighties exude energy and health but remember a childhood plagued by illness. . . it seems that the energy of these people is internally generated and is due more to their focused minds than to superiority of their genes. . . . their energy is under their own control – it is not controlled by the calendar, the clock, or an external schedule. 2. creative individuals tend to be smart, yet also naïve at the same time. . . they possess what psychologists call the g factor – meaning a core of general intelligence. . . iqs not in the high levels such as 170+ but rather strong in the 120 range but higher scores do not necessarily imply higher creativity. . . thinking is both convergent and divergent where convergent is solving welldefined rational problems, and divergent involves fluency, the ability to generate a great quantity of ideas, flexibility, the ability to switch from one perspective to another, originality in picking unusual associations of ideas. ability to originate novel ideas. 3. creative individuals evidence a paradoxical combination of playfulness and discipline, responsibility and irresponsibility. the playfulness is not quite joking, but has some of the lightness of joking. . . has been called “detached attachment”. . . but this playfulness doesn’t go far without its antithesis, the quality of doggedness, endurance, perseverance. [in my own experience: focus, persistence, patience]. another way of looking at this paradox is that creative “wonderful wild ideas and then a lot of hard work that evolves into the “flow”. 4. creative individuals alternate between imagination and fantasy at one end, and a rooted sense of reality at the other. both are needed to break away from the present without losing touch with the past.. . . in rorschach or thematic apperception tests creative artists gave responses that are more original, with unusual, colorful, detailed elements but never bizarre. normal people are rarely original, but they are sometimes bizarre. . . for creative people the novelty they see is rooted in reality. . . . however, when a person begins to work creatively, all bets are off – the artist may be as much a realist as the physicist, and the physicist as imaginative as the artist [einstein as portrayed by walter isacson, einstein: his life and universe. 2007. (new york: simon and schuster)20 . . [what einstein implied about art and science is an journal of small business strategy vol. 23, no. 1 10 evolutionary process. .and one must be on the alert for the shape of things to come.] 5. creative individuals seem to harbor opposite tendencies on the continuum between extroversion and introversion. creative people seem to express both traits at the same time. but the stereotype of “solitary genius” is strong and gets ample support from our interviews. after all, one must generally be alone in order to write, paint, or do experiments in the laboratory. . . practicing music or studying math requires solitude. . . yet, over and over again, the importance of seeing people, exchanging ideas, and getting to know another person’s work and mind are stressed by creative individuals. 6. creative people are also remarkably humble and proud at the same time. it is remarkable to meet a famous person whom you expect to be arrogant and supercilious, only to encounter self-deprecation and shyness instead [in my own observations.] . . . at the same time . . . they know that in comparison with others they have accomplished a great deal. and this knowledge provides a sense of security, even pride. this is often expressed as a sense of selfassurance. . . some individuals stress humility, others selfassurance . . . but of the people interviewed they had a good dose of both. . . another way of expressing this duality is to see it as a contrast between ambition and selflessness. it is often necessary for creative individuals to be ambitious and aggressive. yet at the same time, they are often willing to subordinate their own personal comfort and advancement to the success of whatever project they are working on. nobel laureate george stigler: “every scholar, i think, is aggressive in some sense. he has to be aggressive if he wants to change his discipline. now, if you get a keynes or friedman, they are also aggressive in that they want to change the world, and so they become splendid public figures as well. but that is a very hard game to play.” and author sarah levine states: “up until quite recently [age 51] i used to think of production only for greater glory for myself, really. i don’t see it that way at all anymore. i mean, it’s nice if one gets recognition for what one does, but much more important is to leave something that other people can learn about, and i suppose that comes with middle age.” 7. creative individuals to a certain extent escape rigid gender stereotyping. . . . this tendency toward androgyny is sometimes understood purely in sexual terms; therefore it gets confused with homosexuality. but psychology androgyny is a much wider concept, referring to a person’s ability to be at the same time aggressive and nurturant, sensitive and rigid, dominant and submissive, regardless of gender. . . . “femininity of the men in the sample was their great preoccupation with their family journal of small business strategy vol. 23, no. 1 11 and their sensitivity to subtle aspects of the environment that other men are inclined to dismiss as unimportant. 8. generally, creative people are thought to be rebellious and independent. yet it is impossible to be creative without having first internalized a domain of culture. and a person must believe in the importance of culture in order to learn its rules. . . . true creative people are at the same time rebellious and iconoclastic but also culturally traditional and conservative. . . . artist eva zeisel states: “a negative impulse is always frustrating. and to be different means not like this and not like that. and ‘not like’ – that’s why postmodernism with the prefix of ‘post’ couldn’t work. no negative impulse can work, can produce any happy creation. only a positive one.” and, again, george stigler nobel prize economist states: “i’d say one of the most common failures of able people is a lack of nerve. they’ll play safe games. they’ll take whatever the literature’s doing and add a little to it. in our field [economics], for example, we study duopoly [when there are only two sellers]. then why not try three and see what that does. so there’s a safe game to play. in innovation, you have to play a less safe game, or it’s going to be interesting. it’s not predictable that it’ll go well.” 9. most creative people are passionate about their work, yet they can be extremely objective as well. . . . without the passion we soon lose interest in a difficult task. yet without being objective about it, our work is not very good and lacks credibility. so the creative process tends to be what some respondents called yin-yang alteration between these two extremes. [in my own experience, i simply detested being the department chair!] 10. finally, openness and sensitivity of creative individuals often exposes them to suffering and pain yet also a great deal of enjoyment. . . . the greater sensitivity can cause slights and anxieties that are not usually felt by the rest of us. . . . being alone at the forefront of a discipline also makes one exposed and vulnerable. eminence invites criticism and often vicious attacks. . . . ever since the romantic movement gained ascendance a few centuries ago, artists have been expected to suffer in order to demonstrate the sensitivity of their soul. in fact, research shows that artists and writers do have unusually high rates of psychopathy and addictions [and recent research shows that this is true of college professors in general]. . . . it is also true that deep interest and involvement in obscure subjects [like the pioneers in academic entrepreneurship greatly faced] often goes unrewarded, or even brings on ridicule. divergent thinking is often perceived as deviant by the majority, and so the creative person may feel isolated and misunderstood. these occupational hazards do come with the territory, so to speak, and it is difficult to see how a person could be creative and at the same time insensitive to journal of small business strategy vol. 23, no. 1 12 them [in my experience, notice how very close the pioneers in academic entrepreneurship are with each other – friends for life in academe!]. . . yet, when the creative person is working the area of his or her expertise, worries and cares fall away, replaced by a sense of bliss [per joseph campbell]. . . the one that is most consistently present in in all creative individuals, is the ability to enjoy the process of creation for its own sake. in sum, “these ten pairs of contrasting personality traits, disappointment but elation, might be the most telling characteristics of creative people. of course, this list is to a certain extent arbitrary. it could be argued that many other important orientations have been left out. but what is important to keep in mind is that these conflicting characteristics . . . are difficult to find in the same person. yet without the second pole, new ideas will not be recognized. and without the first, they will not be developed to the point of acceptance. therefore, the novelty that survives to change a domain is usually the work of someone [and other creative individuals] who can operate at both ends of these polarities – and that is the kind of person we call ‘creative’. so it goes it is quite exciting, having observed the trail “from paradigm sought to paradigm found” – as one who has witnessed and participated in this long journey. i am simply thrilled. the unpredictable upswing seems mostly a self-organizing system of ubiquitous interest and action in entrepreneurship. kuhn argued that paradigms sometimes change slowly and sometimes quickly. the present paradigm that seems to be in place will certainly be criticized as a new generation of scholars enters leadership ranks. the “semantic bleaching” of the word entrepreneurship argues for more precision about the domain of this academic discipline. for example, earlier b-schools – before the gordon howell and other criticisms took hold – offered small business management courses on a regular basis. entrepreneurship and small business are really two distinct domains. the critique that i offered in this paper will be archaic sometime in the future – and is so to some readers already. as always, the whole world is dynamic and higher education is presently changing rather dramatically with the advent of the mooc world. enjoy the ride and periodic changing results. references 1thomas s. kuhn. 1996 third edition. the structure of scientific revolutions, pp. 10, 15, 18-19, 23, 43-44, 182191. 2two prominent sociologists who are distinguished pioneers in academic entrepreneurship – professor howard aldrich at the university of north carolina and professor paul reynolds at george washington university have been avid advocates for normal science and database research. paul reynolds and a dedicated team developed the psed i and ii databases, refined the global entrepreneurship monitor database and created the global entrepreneurship research and policy conference at george washington university – 4th annual in october 2013 that focuses mostly on available and new entrepreneurship databases. professor aldrich has been a journal of small business strategy vol. 23, no. 1 13 critic of entrepreneurship for not emphasizing normal science e.g. howard e. aldrich. 1992. “methods in our madness? trends in entrepreneurship research.” pp. 191-213 in donald l. sexton and john d. kasarda (eds.), the state of the art of entrepreneurship. boston: pws-kent publishing. professor aldrich critiqued entrepreneurship research several other times – and found inadequate the methodologies that were applied. 3kuhn, pp. 182-191. 4g. dale meyer and david monarchi. 2013. a 32+ year analysis of academic entrepreneurship: research content and designs in published journals. 5g. dale meyer. 2001. major unresolved issues and opportunities in entrepreneurship education. chicago: coleman foundation and usasbe archives. 6g. dale meyer. january, 2011. the reinvention of academic entrepreneurship. journal of small business management, 49(1): 1-8. 7kurt vonnegut. 1969. slaughterhousefive: a novel. new york: delacorte press/seymour lawrence 8katz, j. a. 2008. fully mature but not legitimate: a different perspective on the state of entrepreneurship education. journal of small business management, 46(4), 550-556. 9g. dale meyer. 2009. commentary: on the integration of strategic management and entrepreneurship: views of a contrarian. entrepreneurship theory and practice, 35(1): 341351. 10edward b. roberts and charles eesley, 2009. entrepreneurial impact: the role of mit. kauffman foundation with copyright by edward b. roberts 11mihaly csikszentmihali. 1996. creativity: flow and the psychology of discovery and invention. new york: harper collins. 12mihaly csikszentmihali. 1990. flow: the psychology of optimal experience. new york: harper collins 13s. venkataraman. 1997. the distinctive domain of entrepreneurship research: an editor’s perspective. in j. katz and r. brockhaus (eds.),advances in entrepreneurship, firm emergence, and growth. greenwich, ct: jai press. 14csikszentmihali, “flow the psychology of optimal experience,” p.23 15ibid. p.31 16ibid. p.45 17ibid.p.47 18csikszentmihali, “creativity:flow and the psychology of discovery and invention,” p.55-76 19this section is abstracted from pp. 55-76, csikszentmihali journal of small business strategy vol. 23, no. 1 14 20einstein: his life and universe. 2007. new york:simon and schuster. dale meyer (university of colorado boulder) joined the business faculty as an assistant professor in 1970, and currently holds the anderson professorship of strategy and entrepreneurial development. he has received numerous teaching awards at colorado university, including the hazel barnes prize, the campus’ highest honor for teaching and research. meyer is a prolific scholar with 50 refereed journal articles, 58 refereed papers and 15 invited papers at professional conferences, and 52 technical reports to his credit. he has won two "best journal article" awards and five "best paper proceedings" awards. he has served as president, vice president, chair or board member of 17 professional associations and served on numerous committees and panels. he holds a bachelor's degree in economics and psychology from northwestern university, a master's in economics from northern illinois university, and a doctorate in business from the university of iowa. reproduced with permission of the copyright owner. further reproduction prohibited without permission. microsoft word front cover v20n1.docx     table of contents 1  a revised conceptual model of the firm‐level entrepreneurial process  patrick m. kreiser  ohio university   justin davis    ohio university    19  business incubators:  leveraging skill utilization through social capital  semra f. ascigail  middle east technical university  nace r. magner   western kentucky university    35  how data integration systems affect strategic decision making in small  firms  benjamin smith   oakland university   mark simon    oakland university    53  comparing nascent entrepreneurs and intrapreneurs and expectations of  firm growth  charles h. matthews  university of cincinnati   mark t. schenkel  belmont university   matthew w. ford  northern kentucky university  sherrie e. human  xavier university    81  selecting a legal structure:  revisiting the strategic issues and views of  small business owners  giles t. hertz    university of tampa   fred beasley    university of south carolina, beaufort  rebecca j. white  university of tampa    103  founder influence in family businesses:  analyzing combined data from  six diverse countries  robert n. lussier  springfield college  matthew c. sonfield  hofstra university    strategy  journal of small business  reproduced with permission of the copyright owner. further reproduction prohibited without permission. front-if_v20n1_proofed front cover v20n1_finalized.pdf inside front cover_8-09 205051 body.pdf jsbs-v20n1.pdf table of contents v20n1_finalized.pdf editorial review boad_8-09 sbiofficers from the editorv20n1_finalized blank page kreiser_80504_proofed ascigil _80701_proofed simon _80801_proofed blank page matthews _80802_proofed hertz_81202_proofed blank page sonfield _81203_ proofed submission guidelines_8-09 fall journal review draft 109.pdf submission guidelines back-ib_v20n1_proofed inside back cover_8-09.pdf backcover_8-09 st& 4'k table of contents page title/author 1 services marketing for the smaller firm edward w. wheatley ernest b.uhr 11 barter: a small business strategic option in a weak economy mauhew sonfield 17 trade show planning: a model and tools for maximizing effectiveness mary s. sperm leah johnson mel adams dawn bendall 31 flexible benefits as a strategic tool: supporting the use of human resources as a distinctive competency jeffrey s. hornsby donald f. kuratko douglas w. naffziger special section 41 the role of the small business administration in economic resurgence erskine b. bowles 43 an empirical examination of managerial competencies among black women entrepreneurs and black women corporate executives joe singer 63 cash flow —the oil that keeps the small and family business organization running smoothly andrew j. potts strategy letters to the editor pittsburg state university department of business administration pittsburg, ks 66762 316/235-4588 fax 316/232-7515 november 19, 1992 dr. lloyd elgart, editor journal of small business strategy andreas schoool of business barry university 11300 northeast second avenue miami shores, fl 33161 dear dr. elgart: while trying to convert my pig sty back to academic office, it occurred to me that i had collected a fairly large number of academics texts that i really didn't need. out library tells me that annotated instructor's editions, instructor's manuals and software sets are something they really can't use to any large degree. although some in the profession sell comp copies back to the used book companies, i'e always been bothered by that practice. it seems to me that if a way could be found to identify academic institutions (or faculty) in the ldcs and if there was a low-cost shipping method, it might be appropriate to send these texts to the ldcs. i checked with our local snail mail branch and found out that they have something called "m bags" for books. this is a low cost, surface mail shipment method that accepts boxes of books between 16 and 66 pounds. this shipping cost (to almost anywhere in the world) is $.72 per pound. thus for $25 per year ($ .07 per day) anybody could send textbooks to our less fortunate peers. i wonder if anyone in the sbida would like to work with me in setting up some sort of central clearinghouse for shipping destinations and areas of need that could be publicized in the newsletters. or, perhaps, even the journal. please let me.know what you think. regards, thomas b. box, ph.d. 89 response from editor december i i, 1992 dr. thomas b. box pittsburg state university department of business administration pittsburg, ks 66762 dear dr. botp 1 have your letter dated november 19, 1992 containing the idea we discussed recently. we plan to publish it in the "letters to the editor" section with our editorial endorsement. sincerely, lloyd d. elgdrt editor 90 sfixi™i&ay cash flow —the oil that keeps the smai l and famie.v business organization running smoothly~ andrew j.polls university of southern maine abstract the purpose of this paper is to emphasize the imponance of cash flow and the purposes of uses of the statement of cash flows. two dt'forest methods of calculating cash flows from operations are presented along wi th a discussion ofways to i nterpret cash flows and how to plan for fiaure activity. the importance of cash flow should be clear to thefinancial manager whether the business entity be a small family business or a major corporation. a shortage of cash flow could result in the loss of valuable trade discounts or, in extreme circumstances, financial embarrassment and bankruptcy. while a cash surplus does not necessarily translate into greater returns to owners, it cenainly provides opportuni tiesfor prospective buyers who undersiand how to utilize posiri ve cash flows. the caveat for interpreting cash flow is the same as thai used for netincome: quality counts. this means that firms ttun depend heavily on depreciation to generate cash flow are not looked on as favorably ai jinns that have a preponderance of cash flow from operations. furthermore. cash flow should be analyzed to make cemain that the company is invesdng properlyin order to maintain fiuure operanons. managers who auempt toimprove cash flow artificially by ignoring necessary invesunents in plant and equipment may not be familiar wuh the concepts of cash flow. introduction before the business day is over, probably a dozen small companies inour nauon will declare bankruptcy. ibe small business administration states that most businesses fail for lack of good management (small business administration, 1988). according to the bank of america, the history of small business failures reveals that many firms fail because of inadequate wodting capital and poor cash flow management. small business managers must always be concerned with their company's day-to-day financial position, as well as its future growth and profitability. it becomes ~to ensure that your company is using its assets and liabilities effectively, is able to meet current obligations and botmw funds when ~,and is financially ptepued to suppmt future operations. othis paper wai a runner up for the distinguished paper award ar du. sbida national conference in san diego. it was not mvriwed by the jsbseditorial advisory board. 63 a good starting point in an effort to enhance future operations would be in planning cash flow —planning cash and planning profits period by period, performing cash flow analysis, calculating cash flow from extended data, determining free cash flow and undedicated cash flow and the cash conversion cycle. the purpose of this paper is to suggest some procedures a small family business manager might follow in planning cash flow. tite income statement and the balance sheet, the general purpose and generally accepted financial statements, do not answer all questions raised by users of financial statements. such questions include: how much cash was generated by the company's operations? how much was spent for equipment and property, and where did the company get the cash for the expenditures? how was the company able to make distributions to the owners when it incurred a net loss for the year? the statement of cash flows answers those questions. in november 1987, the financial accounting standards board issued statement of financial accounnng standard no. 95, "statement ofcash flows (fasb, 1987)."the statement is effective for annual financial statements for fiscal years ending after july 15, 1988. 'ibus, the statement of cash flows is now one of the major financial statements issued by a public company. unfortunately many small businesses do not prepare this statement and are content with the conventional statements —the income statement and balance sheet. the main purpose of a statement of cash flow is to report on the cash receipts and cash disbursements of an entity for a period. cash is broadly defined to include both cash and "cash equivalents," such as commercial paper and money market funds. a secondary purpose is to report on the entity's investing and financing activities for the period. to accomplish these purposes, the statement of cash flows reports the effect on cash during a period of its operating activities, investing activities, and financing activities. the effects of investing and financing activities that do not affect cash are also shown. a reconciliation of net income and cash flows from operating activities is also provided. ifone could visualize the income statement as a motion picture and the balance sheet as a still photo in black and white, the statement of cash flows converts the balance sheet into a motion picture in technicolor. 'ihe statement of cash flows summarizes the effects on each of the operating, financing, and investing activities of a company for a period; it reports on past management decisions on such mattets as expansion and the incurrence of debt. this information is available only in bits and pieces from other financial statements. because cash flows are vital to a company's financial health, the statement of cash flows provides useful information to management and other interested parties, especially creditors and investors. this paper deals with the financial management of organizations whether they be the large multi-national corporation or the smail independent family business. financial management is not confined to preparing financial statements, managing the petty cash, paying bills, collecting debts, and handling relations with banks. almost every action of the small business and every decision made by its manager(s) or the individual enuepreneur has financial implications. for the most part, small business owners are concerned with the future. they must formulate decisions in terms of plans, with sufficient flexibility to adopt them to ever-changing clfculrlstailces. 64 as a small business grows in scale and complexity, so does the area of financial decision making. the following is a list of what the author believes are the live most important responsibilities of small business owners in this environment: 1. to ensure that the company always has enough cash to meet its legal obligations. 2. to arrange to obtain whatever funds are required lmm external sources at the right time, in the right form, and on the best possible terms. 3. to use their knowledge and viewpoint to ensure that the company's assets and liabilities current and long-term —are utilized as effectively as possible. 4. to forecast and to plan for the financial requirements of future operations. 5. to perform afl the above functions and make afl decisions on the basis of one key criterion: maximizing the long-term wealth of the company's owners ("steps to starting a business," 1986). as the operations of a company go on day-by-day and month-by-month, they cause cash to be received and cash to be disbursal moreover, these receipts and disbursements will not always balance out to a steady, gradual increase in the company's cash, even if the company is mahng steady profits. large cash outflows will occur at times, such as when income taxes are due or a major new capital investment must be paid for. thus, over the short term, the cash balances of any company fluctuate considerably. there are two reasons for planning cash flow. the first reason is to ensure that short-term sources of funds can be negotiated and arranged well in advance of having to use them. as the cash flows fluctuate, there may be a time when cash balances fall below zem. these shortfafls must be anticipated so that the liquidity of the business is not jeoaardizetl it is much easier to negotiate a short-term knn in advance, thereby giving the indication of good management, than it is to attempt to secure funds at the last moment in a crisis. lbe second reason for planning cash flow is just as important if not more so than the first, especially during high inflation periods. as a result of fluctuations, cash balances may be much higher than immediate needs. tbe idle cash must be invested in short-term money-market instruments as soon as the cash becomes available, so as to preserve its purchasing power and contribute to business profitability. whether the business's cash budget indicates a shortfall or a surplus, the manager of the firm must take appropriate action in a timely manner. planning for profits and cash flow although there is a relationship between them, profits are not the same as cash flow. profit is an accounting concept designed to measure the overall performance of the company. it is a somewhat nebulous concept, open to various measurement techniques and accounung principles each of which produces somewhat different results, which are then open to different interpfetatlolls. in contrast, cash flows are not a measure of a company's performance. take two extremes: a new, profitable company, and an old, unprofitable company heading for bankruptcy and/or receivership. the results in terms of cash flow are likely to be the same: declining cash balances. a company can show a handsome profit and a net cash outflow in the same month, if it chooses 65 to pay for new equipment in that month. it can equally show a substanual loss and an increased cash balance in one month, if the results of increased borrowing or the proceeds from the sale of other assets are received in tluu month. however, the concept of cash is not nebulous. either the company has a certain amount of cash or it does not. and a lack of cash is critical. a company can sustain losses fora time without suffering permanent damage, but a company that has no cash is insolvent and in imminent danger of bankruptcy, no mauer what its profit picture may be. thus, many financial transactions that do not enter into the calculation of profit —such as buying new operating assets, getting additional financing, and making distributions to owners —enter into cash flows. similarly some transactions that enter into the determination of profit —notably, the deduction of depreciation expenses —do not enter into cash flows because they are non~h transactions with no effect on cash balances. planning periods cash flow planning consists of both short-and-long-term forecasts. the principal purpose of a short-term forecast is to identify temporary cash shortages or surpluses and to deal with them. the primary purpose of a long-tenn forecast is to establish lang-tenn goals and objectives and provide a financial plan to meet the desired target. short-tenn forecasts are often prepared on a receipts minus disbursements basis, while longer tenn forecasts are usuafly based on an adjusted net income approach. the short-term forecast is focused on the timing of cash flows and on the availabitity of cash to meet bills as they come due. an insufficient level of cash on hand could cause the business to pass up valuable tmde discounts. and, at the extreme, could cause the business to file for bankruptcy. thus, the shortterm forecast concentrates on the actual receipt and disbursement of cash. in times of high inflation, the necessity for actively managing the business's cash position is obvious. not only is it very expensive to bonow short-term funds, but there also may be periods when no funds are available at any price. a business that has not secured a commitment in advance will be unable to meet its cash requirements. excess cash must be invested as soon as it becomes available, so as to avoid erosion in purchasing power. making a cash budget also allows the financial manager to see the impact of various decisions on speeding up or slowing down cash flows. since cash flow planning is concerned with fluctuations in cash balances, the interval of time used in planning is a more important consideration than the length of the whole planning period. 'ihe most common interval is one month. that is to say, a financial manager forecasts cash inflows and outflows over one month and then cakulates beginning and end-of-month balances. the procedure is repeated for the other eleven months of the year, if the overall planning horixon is one year. using one month as the time period has the advantage of coinciding with the accounting period of most companies and probably also with their official period for collecting receivables. many companies use a shorter interval of time, and some companies forecast by the day. why such a short interval? if the company forecasts by the month and shows adequate balances at the end of each month, isn't it a waste of time to use a shorter interval? that this is not uue can be shown by tables i and 2. 66 table i cash flow plan for one itfonrh cash at start of month $20,000 cash inflows: collection of accounts receivable $35,000 pmceah from sale of operating assets 10,000 other collections miscellaneous revenues 3 000 total cash inflows $48 000 cash outflows: selling expenses and wages $ 15,000 purchases of inventory 20,000 supplies 5,000 rent 3,000 taxes 4,000 miscellaneous expenses 1 000 total cash outflows q8 000 cash at end of the month l20 000 it would appear from table 1 that all is well 'ihe company's cash balance will stay steady at $20,000. but will it'l suppose we break down this forecast by the week, as is done in table 2. table 2 the same cash flow plan by the weeh week i week 2 week 3 week 4 cash at stan of week $20,000 ($2350) ($9300) ($2350) cash inflows collection of accounts receivable 6,000 15,000 17,000 20,000 pmceeds from sale of operating assets 12,000 other collections: misc. revenue ~4000 ~5000 total cash inflows $6 000 $ 15 000 $21 000 $37 000 cash outflows selling expenses and wages $6,000 $6,000 $6.000 $6,000 purchases of inventory 9300 5,000 4,000 5,000 supplies 1350 1350 1350 1~ rent 4,000 taxes 5,000 7300 miscellaneous expenses 2 500 2 500 ~200 2 500 total cash outflows $28 250 $22 250 ~13 750 $14 750 cash at end of week ~250 ~900 ~250 $20 000 67 suppose a company uses a planning interval of one month. its cash flow plan for one month might look like that in table i. as can be seen flom table 2, although the month cash flow forecast looks fine, the weekly forecmx shows that the company will be in considerable trouble before the first week is over. such a company would do well to choose a planning period not longer than one week, and igtggtjiiitglgglgf. usually, the size of cash inflows and outflows is much more predictable than their timing. but when it is not, unexpectedly small inflows combine with unexpectedly large outflows could create a serious cash shortage over a short time. this possibility must be avoided, either by carrying large balances to provide a margin of safety or by maintaining a very short planning interval and a continuous watch on how actual events are conforming to plan. which alternative is adopted will depend on the size of the balances needed and the management time available for short-interval cash planning. from the point of view of avoiding insolvency, the size of cash balances in relation to cash flow has a bearing on the planning interval. ifcash balances are large, temporary variations within a long planning interval such as a month are unlikely to place them in jeopmdy. but if the company is operating on inadequate balances, a strong net cash outflow over only a few days may bring balances down to dangerously low levels. in such circumstances a short planning interval is ecessary for survival, even if it could not be economicafly justifled on any other grounds. for this reason, a company that normally uses a planning interval of one month may switch to weekly planning when its cash bahnces are dangerously low. developing the plan once the planning horizon and planning interval have been determined, the actual planning can begin. the first step is to forecast expected cash receipts during each planning interval. sales receipts are nonnafly based on the sales forecast and experience of the pauern of receivables coflecdtxts. other receipts, such as those from the sale of operating assets, and invesunent income, can also be predicuxl with a fair degree of accuracy. receipts higher than the forecasts may result in cash that might otherwise have been invested profitably; but receipts lower than expected may expose the company to ifliquidity, which is far more serious. the next step is to forecast cash disbursements. here planners again lean on experience of what cash outlays are normally needed to maintain a given level of sales, but they also need the help of others in the organization. for example, if the purchasing department believes that prices may soon be going up and plans to pick up several months'orth of inventory soon, the planner must know about ik if a major advertising campaign is being planned the financial manager must be made aware of its planned cost and timing. every manager with the authority to commit large sums of money must be fully aware of the responsibility to keep the financial manager informed of future plans. table 3 shows estimated cash outflows included in the cash flow forecast. 68 table 3 cash flow forecast by afonrh jan. feb. mar. apr. may june cash at first of month $ 19,680 ($ 10,020) ($1,820) $ 13,180 $22,230 $ 13,670 cash inflows sales receipts 55,000 57,000 69,000 61,000 64,000 65,000 insurance claim 7,000 misc. revenue 4 000 3 500 total cash inflows $59 000 $57 000 $~69 000 $~$4 500 $71,000 $~65 000 cash outflows labor payroll 23,000 23300 24,000 24500 31,000 25300 salaries 4ji00 4,800 4,800 5,600 5,600 5,600 inventory 31,000 15300 18350 11,650 28,760 15,625 supplies 2,400 1,800 2,000 2,000 2,000 2,000 insurance 750 icase payments 1,000 1,000 1300 1,000 1,000 1300 advertising exp. 500 500 1300 500 500 500 misc. expense 1,000 1400 1~ 1~ 1~ 1%0 loan payments 18,000 income taxes 7,000 9,000 professional fee 500 4,000 new equipment ~500 total cash outflows $88 700 $48 800 $54 000 $55 450 $79 560 $51 625 cash at end of month ~$ 10 020 ~$ 1 820 $ 13 180 $22 230 $ 13 670 $27 045 once cash inflows and disbursements have been forecast, the planner can forecast cash balances at the end of each planning unit. 'ibe results of this appear as the top and bottom lines of table 3. at this point, the planner has a cash flow forecast, nota plan. planning is the mental process of visualizing a set of events that one is determined to make happen in the future, not just a summary of what one expects to happen. but it is at this stage that planning can begin. some of the cash balances at the end of each planning interval may be higher than needed; others may be too low or even negative. planners first determine how to invest any excess cash in order to earn the maximum mturn on it, depending on its amount and the length of time for which it will be available. next, they decide how to cover temporary shortages of cash exposed by the forecast. other means are delaying purchases or payments until a later period, deciding to reduce or eliminate certain expenditures, selling short-term investments or other assets, accelerating collections, and so on. table 4 shows the results of this kind of planning based on the cash flow forecast in table 3. 69 table 4 cash flow plan jan. feb. mar. apr. may june cash at first of month $ 19,680 $9380 $7380 $7480 $ 11,630 $8,070 cash inflows sides receipts $55,000 $57,000 $69,000 $61,000 $64,000 $65,000 insurance claim 7,000 misc. income 4,000 3300 shon-tenn bank loan 19,400 total cash inflows $78,400 $57,000 $69,000 $64,500 $71,000 $65,000 cash outflows salaries $27.800 $28,300 $28,800 $30,100 $36,600 $30,800 inventory 31,000 15300 18250 11,650 26,760 17,625 payments for supplies 2,400 1,800 2,000 2,000 2,000 2,000 insurance 750 lease payments 1,000 1,000 1300 1,000 1,000 1500 adverusing 500 500 1400 500 500 500 misc. expenses 1,000 1300 1300 1~ 1300 1~ loan payments 18,000 10,000 10,000 income taxes 7,000 9,000 professional fees 500 1,000 3,000 equipment 5300 short-term investment 5,000 5,000 ~5000 outflows $88,700 $58,800 $69,000 $60,450 $74,560 $61,625 cash at end of month $ 9380 $ 7380 $ 7380 $ 11,630 $ 8,070 $11,445 tite financial manager has decided to finance the forecasted cash shortage in january by a $20,000 short-tenn bank kran with a yearly interest rate of 18 percent, which will be paid olf in two equal installments in february and march. flhe $ 19,400 actually received from the bank represents the loan less interest deducted in advance. this is known as the proceeds from a discounted loan). by march, the company has spare cash, which it can invest in short-term, interest yielding securities —$5,000 in each of the three months of march, april, and june. however, this would have caused cash to drop to a low in may: $3,070 by the end of the montix instead of investing in april and borrowing again from the bank, the planner has decided that payment of some may bills can be deferred until june: $3,000 in professional fees and $2,000 for inventory. thus, once the financial manager has determined how to invest excess cash and how to cover cash shortages, he or she incorporates the results of these decisions into the cash flow forecast, which now becomes a plan. the accuracy of the forecasts that are used in preparing the cash flow plan is of critical imponance in having the plan be a useful tool the less reliable the forecasts or the more uncertain the financial manager is about the unexpected events they may affect the cash flows, the larger 70 the cash balances, lines of credit, or a combination of both that are required. if the planner does not have much confidence in the forecasts, the resulting plan will be of little value to the organization. planning and cash flow analysis tbe financial manager should recognize that much of the desired infomution is difficult to forecast, since many of the receipts and disbursement dates are not always available. this will surely complicate cash flow planning. the traditional receipts and disbursements approach does not lend itself easily to in erpretarions of cash flow. for example, the answers to such questions as how much the firm shoum set aside for investments in fixed assets or how the firm should fund future growth are not apparent from such an analysis. although net cash flow can be calculated by subtracting cash disbursements from cash receipts, the financial manager should note that cash flow from operations is often calculated by taking net income and adding expenses that do not affect cash such as depreciation, amortization, and deferred taxes. historically, financial managers used net income plus depreciation as a pmxy for cash flow. today, most accountants and financial managers recognize cash flow as being the former amount (net income plus expenses not decreasing cash) plus increases (minus decreases) in spontaneous liabilities minus increases (plus decreases) in spontaneous assets. spontaneous assets and liabilities are those accounts which move directly with a change in sales. for example, accounts receivable and invenuuies would be representative of spontaneous assets, while accounts payable and accruals would be indicative of spontaneous liabilities. 'ibis calculation of cash flows is referred to as an indirect approach, since the actual cash receipts and disbursements are not used, but rather are estimated from all the accounts affecting cash flows. for example, all of the sources and uses of funds that affect cash flows from operations are included in the indirect cash flow calculation. the indirect approach is frequently used for forecasting long-term cash flows (more than one year), since projections of net income may receive greater attention than the actual timing of receipts and disbursements. the indirect approach may also facilitate more reliable long-term planning. many financial analysts and managers are becoming increasingly interested in the concept of cash flow. careful management of available cash resources is critically important to maintain a company's competiuveness. references fasb (1987)."student of cash flows," siaiemenr offinancial accounting srandards no. 95, stamford, conn. small business administration (august, 1988). sba: what u is...wiuu ir docs, publication opi-6, washington, d. cz oflice of public information. "steps to starting a business," (1986).small business repurrer 10, 1986 3. 71 fall journal   volume 20, number 2 fall/winter 2009  43            perceived strategic uncertainty and strategy formation in  emerging markets    scott b. droege  western kentucky university  scott.droege@wku.edu    matthew r. marvel  western kentucky university  matt.marvel@wku.edu      abstract    we investigate the relationships between perceived strategic uncertainty and strategy  formation mode using a sample of 286 small and medium sized enterprises in the  emerging markets of the philippines, vietnam, and china.  our results highlight the  importance of the relationships between strategy development and entrepreneurial  perceptions of the dynamism and complexity of environments in emerging markets and  underscore the difficulties smes in emerging markets face when considering planned  versus emergent strategy decisions.    keywords: strategy, uncertainty, emerging markets    introduction  while it is well known that firms’  strategy formation mode is a  combination of planned and emergent  strategy (mintzberg and waters 1985),  the conditions under which firms lean  toward planned or emergent strategy are  less well understood. this research  explores whether perceived strategic  uncertainty inclines firms more toward a  planned or an emergent strategy.  clearly, planned and emergent strategies  represent a continuum rather than a  dichotomy. within this continuum,  however, inclinations toward planned  strategy may be an attempt to cope with  an uncertain environment while  inclinations toward emergent strategy  may be an attempt to capitalize on  opportunities arising from this  uncertainty. given that emerging  markets are by definition uncertain  (peng 2003; peng, wang and jiang  2008), nations undergoing economic  emergence provide a naturally occurring  experimental setting from which to  study such phenomena (tsui 2007).  because small and medium sized  strateg y  journal of small business  journal of small business strategy        44  enterprises (smes) tend to lack the  diversification of larger corporations,  they are particularly prone to emerging  market uncertainties. larger  corporations tend to have sufficient  resources to hedge their bets by  operating in multiple markets, making  riskier bets in the most uncertain  markets while smoothing overall  revenue with sales in more stable  markets (barton 1988; montgomery and  singh 1984). studying smes in emerging  markets, while making data collection  more difficult, allows us to more clearly  see the relationships under  consideration in this study without  confounding the issue with larger, more  diversified firms. thus, one goal of our  research is to determine the extent, if  any, that smes in emerging markets are  predisposed toward planned or  emergent strategy based on their  perceptions of strategic uncertainty.  strategy formation mode is a related  area addressed in this research. our  review of the literature suggests that  strategy formation mode is certainly not  a straightforward endeavor. particularly  in relation to perceived strategic  uncertainty, exactly what is uncertain  can become clouded by the intricacy  involved in disentangling general  environmental factors from industry  environmental factors. in addition,  general and industry environmental  factors themselves have subsets. to  further complicate the issue, perceptions  of strategic uncertainty do not  necessarily represent reality but rather  perceptions of reality. still, perceptions  shape strategies; market results  ultimately sort out whether a firm’s  perceptions and resultant strategies  were the correct choices.   despite the construct difficulties  surrounding strategy formation mode,  we can add clarification by testing  specifically for the extent to which  perceived environmental subsets of  general and industry environments  shape the continuum between planned  and emergent strategy. thus, a second  goal of this research is to determine the  relationship between perceived strategic  uncertainty and strategy formation  mode.  while certain findings are what we  expected, others conflict with our  expectations illustrating the  multifaceted nature of strategy  formation mode when firms perceive a  high degree of strategic uncertainty. our  findings are intriguing and help to at  least partially explain how perceptions of  strategic uncertainty shape the planned  and emergent strategy continuum, and  we find several interesting relationships.  our data show that a positive  relationship exists between perceived  strategic uncertainty and emergent  strategy when sme founders perceive  high socio‐cultural uncertainty. on the  other hand, there is a negative  relationship between high socio‐cultural  uncertainty and planned strategy.  further, smes are more likely to use  planned versus emergent strategies  when founders perceive high uncertainty  in the competitor environment.  volume 20, number 2 fall/winter 2009        45    emergent strategy, however, is favored  in the presence of perceived  technological environment uncertainty.   we elaborate on these findings in the  discussion section. prior to this,  however, we provide the theoretical  background from which we derived our  hypotheses and explain our methods  and results in the following sections.   theoretical background and  hypotheses  mcmullen and shepherd (2006) provide  evidence that perceived strategic  uncertainty influences the actions of  entrepreneurs who have founded smes.  in particular, dynamism (defined as the  rate of environmental change) and  complexity (defined as the number of  simultaneous environmental changes)  amplify perceptions of strategic  uncertainty by increasing the number of  decision variables facing firms. this  occurs at both the general  environmental level (elenkov 1997; lee  and peterson 2000) and the industry  level (sawyerr 1993; stewart, may and  kalia 2008). amplified perceptions of  strategic uncertainty are especially  pronounced in emerging markets due to  the transitional nature of these highly  volatile environments (lyles, saxton and  watson 2004) and their movement  toward free market characteristics  (manalova, eunni and gyoshev 2008).  however, perceptions of dynamism and  complexity are bound by time and  context; that is, smes accustomed to  emerging market environmental  transition may be so conditioned by  economic transition, especially when  transition is prolonged, that they  perceive little variance despite the actual  presence of high variance. stewart and  others (2008) provide evidence of this by  comparing environmental dynamism  and complexity between groups of sme  entrepreneurs in the united states and  india and found no significant difference  in perceived strategic uncertainty  between these groups despite substantial  changes in india’s environment versus  the relatively more stable u.s.  environment during the study period. in  addition, another study (baugh, cao, li,  lim, and neuport 2006) found that in  the three countries we studied—the  philippines, china, and vietnam—close  business affiliations are determining  factors in firm success suggesting that  such tactics are means toward reducing  uncertainty.   as smes become conditioned to  heightened environmental dynamism  and complexity, their perception may be  that the environment is simply  maintaining the status quo. that is,  despite the presence of substantial  change, such change may be so common  that sme founders perceive that little has  changed; they become so conditioned to  change that change becomes less  noticeable, thus reducing their  perceptions of uncertainty. we highlight  this in our study by including in our  sample only sme founders, whereas a  previous similar study by baugh and  journal of small business strategy        46  others (2006) utilized third and fourth  year business students who for the most  part did not have any substantial equity  stake.  following may, stewart, and sweo  (2000), we classify perceptions of  environmental change according to their  complexity (defined as the number and  diversity of events), their dynamism  (defined as the frequency and speed of  change), and the importance firm  owners place on each environmental  segment as they relate to accomplishing  organizational goals. environmental  segments are broken down into six  sectors: regulatory, socio‐cultural,  economic, competition, customer, and  technological.   the wider institutional environment is  typically associated with the general  environment versus the industry  environment; these institutions tend to  bring about stable rules and thereby  reduce uncertainty (scott 2002).  however, certain conditions result in  institutional flux (seo and creed 2002)  and even deinstitutionalization where  formerly stable institutions deconstruct  (oliver 1992). such institutional  deconstruction makes room for  institutional reform beginning with  intermediate, meso‐institutions that are  not yet the stable structures of fully  developed institutions but instead are  bridges between deconstructed  institutions and new, developing  institutions. these developing,  intermediate‐phase institutions allow  room for experimentation with new  modes of institutionalizing that may  ultimately provide more effective  institutional arrangements (droege and  brown‐johnson 2007). that is, over time,  deconstructed institutions, such as those  we often find in transitioning emerging  markets, reconstruct in a way that may  be vastly different from the former rules  of the game but provide increased  correspondence between the institutions  needed and the conditions in which  those institutions would appropriately  guide organizational actions.   such institutional change necessarily  brings with it changes in the regulatory  environment although regulatory  institutions sometimes maintain a  certain amount of imprecision. indeed,  less than concrete legal structures have  been shown to provide regulatory bodies  the latitude necessary to intervene in  exceptional situations that run counter  to the norm (edelman 1992). however,  while regulatory latitude has its  advantages, it also causes uncertainty for  firms. we hypothesize that under  conditions of regulatory uncertainty,  firms tend to adopt an emergent strategy  formation mode to avoid strategic  choices that would lock up resources if  pending regulations may render those  choices obsolete or otherwise affect firm  performance. specifically:  h1: greater regulatory perceived strategic  uncertainty is positively associated with  emergent strategy and negatively  associated with planned strategy.   volume 20, number 2 fall/winter 2009        47    the socio‐cultural environment, as with  the regulatory environment, can be a  particular source of uncertainty in  emerging markets (ahistrom and bruton  2002). scott (2002) refers to socio‐ cultural phenomena as normative. in  contrast, cultural‐cognitive institutional  pillars consist of taken‐for‐granted  expectations of conduct; for example,  professional organizations have codes of  conduct their members are expected to  abide by (greenwood, suddaby and  hinings 2002). cultural‐cognitive  institutions take for granted certain facts  about social life; for example,  organizations involved in international  trade assume that english is the default  language when crossing language  boundaries. both normative and  cultural‐cognitive institutions give  structure and order to what would  otherwise be inefficient, negotiated  actions for which it would be necessary  to repeat with each social interaction, or  as broom and selznick (1955: 238)  explain, these institutions are “…the  emergence of orderly, stable, socially  integrating patterns out of loosely  organized, or narrowly technical  activities.” for example, english as the  lingua franca of international business  stabilizes negotiations among such firms  thus reducing transaction costs by  reducing the need for translation of  business documents. of course,  emerging markets are less likely to  subscribe to this, a condition that only  further exacerbates the complications of  conducting business in emerging  markets, particularly when international  trade is a substantial element.   the point is that settled regulatory,  normative, and cultural‐cognitive  institutions tend to reduce market  inefficiencies and perceived uncertainty;  in contrast, the lack of a stable set of  institutions tends to increase market  inefficiencies and perceived uncertainty.  this is consistent with recent work by  manalova and others (2008) suggesting  the key role of institutional forces on  entrepreneurial strategy in emerging  markets. this institutional view of  strategy suggests that institutional  context is in the foreground rather than  the background in emerging market  strategic considerations (peng 2003;  peng, wang and jiang 2008). a business  climate with a changing socio‐cultural  environment would be characterized  more by unstable, loosely organized  actions rather than by orderly, stable  actions. such instability in social  structure would be disruptive to planned  strategy. we thus hypothesize:  h2: greater socio‐cultural perceived  strategic uncertainty is positively  associated with an emergent strategy and  negatively associated with planned  strategy.   the recent global economic downturn  has clearly affected firm strategy.  emerging markets have been affected to  an even greater extent than developed  markets primarily due to reduced  demand for the exports of emerging  journal of small business strategy        48  market products and services. domestic  demand in emerging markets is simply  insufficient to profitably maintain the  production levels of recent years when  demand from more developed markets  subsides. when sme founders and ceo  equity stakeholders anticipate  protracted global weakness for exports,  we suspect that firms in emerging  markets would focus on long‐term  viability strategies such as selling excess  capacity, reducing workforces, and  delaying capital expenditures into the  future—generally, basic retrenchment  for long‐term survival in the face of  prolonged economic instability. this  suggests that:  h3: greater economic perceived strategic  uncertainty is positively associated with  planned strategy and negatively  associated with emergent strategy.   perceived strategic uncertainty of the  competitor environment refers to the  uncertainty of competitors’ strategic  choices and their implementation of  those choices. the competitive dynamics  literature suggests that firms engage in  cycles of competitive actions and  reactions (ketchen, snow and hoover  2004). however, two assumptions  underlying this line of thinking are that  firms (1) have the scanning and search  capabilities to rapidly discover  competitors’ actions/reactions and (2)  have the resources to respond to  competitors’ actions/reactions. smes in  emerging markets, however, tend to lack  the capabilities and resources needed to  participate in such activities. indeed, the  propensity to engage in competitor  scanning behavior is itself dependent on  institutional constraints (elenkov 1997).  this is not to say that smes in emerging  markets are naïve or unaware of  competitor strategic choices and  implementation, but rather that they are  less focused on these factors due to  resource scarcity compared to larger  firms in developed markets (lyles and  others 2004).   emerging economy smes may thus  choose to focus on long‐term planning  and dismiss, at least to some extent, the  rapid‐fire competitive battles requiring  constant resource reallocation of  competitors in more developed markets.  it is not necessarily that they  strategically prefer this, but rather that  their relative resource scarcity tends to  force them into longer‐term strategic  planning allowing less flexibility for  emergent types of strategic reactions.  paying less attention to emerging battles  that will likely change quickly and  paying more attention to long‐term  resource commitment for these firms is  a means of dealing with uncertainty. as  perceptions of uncertainty increase,  these firms default to a future rather  than present oriented view. for smes in  emerging markets, we thus hypothesize  that:  h4: greater competitor perceived  strategic uncertainty is positively  associated with planned strategy and  negatively associated with emergent  strategy.   volume 20, number 2 fall/winter 2009        49    as with perceived strategic uncertainty  and the competitor environment, a  similar logic follows with the  technological environment. an  emergent strategy formation mode  requires short‐term slack resources to  rapidly keep research and development  on the frontier of technology (nohria  and gulati 1996). certainly, planned  strategy does not necessarily require  fewer resources; however, resource  commitment can be smoothed over time  when firms are inclined more toward a  planned rather than an emergent  strategy. the key issue here is slack  resources; excess cash is a particularly  flexible resource that can be employed  when firms enact emergent strategies  (george 2005). however, emerging  market smes do not typically possess  such slack; indeed, mere survival is  paramount to development of slack  resources for many of these firms  (chang and velasco 2001). therefore:  h5: greater technology perceived  strategic uncertainty is positively  associated with planned strategy and  negatively associated with emergent  strategy.   changes in buyer preferences require  careful production planning to match  changes in anticipated demand. despite  its importance, this is not the most  critical factor for emerging market  smes. the more critical issue is often  investment in the production equipment  needed to revamp product lines— typically a much more costly capital  outlay than simply changing production  quantity. this also applies to service  firms in that services commonly must  deploy new back office technology to  implement new service offerings. when  strategic uncertainty is present in the  customer environment, smes may be  more likely to plan needed capital  outlays and associated new product and  service introductions well in advance  rather than base strategy decisions on  shorter‐term contingencies to manage  uncertainty (alessandri, ford, lander,  leggio and taylor 2004). this is  consistent with tendencies toward  planned strategy rather than emergent  strategies. we thus hypothesize:  h6: greater customer perceived strategic  uncertainty is positively associated with  planned strategy and negatively  associated with emergent strategy.   table 1 provides an overview of these  hypotheses with regard to the expected  associations among our variables  expected regarding our variables.            journal of small business strategy        50  table 1 ‐ hypothesized relationships and results ‐ psu and strategy  formation mode        perceived strategic uncertainty  planned  emergent  findings  h1: regulatory psu  +  ‐  not supported  h2: socio‐cultural psu  ‐  +  supported  h3: economic psu  +  ‐  not supported  h4: competitor psu  +  ‐  supported  h5: technology psu  +  ‐  supported  h6: customer psu  +  ‐  not supported      method  sample  the sample consisted of 286 smes in the  three emerging markets of the  philippines, china, and vietnam. all  firms employed between five and 500  employees. we administered our survey  only to founders of each sme; managers  and other non‐owner executives were  excluded from the sample. although this  increased the difficulty of data  collection, founders are in a better  position to assess the smes long‐term  strategic formation mode given that  managers and other non‐owner  executives may not have been with the  firm since its inception and would have  been less qualified to accurately  complete the survey.  we follow lyles and others (2004) and  stewart and others (2008) by personally  administering each survey to increase  the response rate rather than relying on  mail surveys; these researchers note that  this is particularly important in  emerging market research contexts. may  and others (2000) explain that high  response rates attributable to face‐to‐ face survey administration in emerging  markets has the additional advantage of  reducing non‐response bias. in addition,  this method is also consistent with data  collected by daft, sormunen, and parks  (1988) from which we derived the  perceived strategic uncertainty portion  of the survey instrument. our response  rate using face‐to‐face survey was 74%.  owing to the difficulty of entrée for  foreigners conducting research in a  variety of emerging markets, making  contacts quickly and collecting data  from local sme founders presents a  difficult challenge (aidis and van praag  2007). the need for a new translator as  volume 20, number 2 fall/winter 2009        51    each national border was crossed (except  in the philippines where english is  commonly spoken) required trade‐offs  between sampling methods and the  realities in the field. thus, this research  follows may and others (2000) in using a  convenience sample in each country but  drawing from a wide variety of industries  to inhibit results biased toward any  single industry. the variation across  industries helps offset imbalances  resulting from lack of a representative  sampling frame (mitchell 1985).  nevertheless, because these  methodological limitations are common  conditions faced by emerging market  field researchers, we consider the trade‐ offs between methodological perfection  and the practicalities of collecting  primary field data in emerging markets  justifiable.  prior to entering the field, surveys were  translated into the native language of  each country using double‐back  translation to ensure cross‐language  accuracy (riordin and vandenberg 1994;  brislin 1980). double‐back translation  helps address problems of measurement  equivalency prior to survey  administration.  scales and variables  the independent variable, perceived  strategic uncertainty, was assessed using  a scale previously developed by daft and  others (1988). this scale addresses  environmental complexity and  dynamism and their importance  including perceptions of the immediate  task environment (customer,  competitor, and technological  environments) and the general  environment (economic, regulatory, and  socio‐cultural environments).  complexity refers to the number of  factors in an environment undergoing  change; dynamism refers to the rate of  change of these factors; importance  refers to the importance respondents  place on each sector in the operation  and strategy of their firm.   although this scale was originally  administered to ceos in large u.s.  manufacturing firms, it has subsequently  been successfully tested in nigeria  (sawyerr 1993), bulgaria (elenkov 1997),  and russia (may, stewart and sweo  2000) providing evidence of  measurement equivalency in emerging  markets. may and others (2000),  concerned with measurement  equivalence of using the daft and others’  (1988) scale validated the scale with  slight modifications in their sample from  russia. because the may and others’  modifications were designed specifically  for use of the daft and others’ (1988)  scale in emerging markets, we adopt the  may and others’ (2000) changes in our  survey instrument. specifically, rather  than the relatively lengthy explanations  of the various environmental sectors and  definitions of importance, dynamism,  and complexity given to u.s. ceos by  daft and others (1988), may and others  provide a more abbreviated explanation  that they find maintains the same  measurement equivalence of the original  journal of small business strategy        52  daft and others’ (1988) instrument  without the misunderstandings that can  result from lengthy preambles. this is  especially important when conducting  research in emerging markets.   the dependent variable, strategy  formation mode, was taken from slevin  and covin’s (1997) strategy formation  mode scale. the strategy formation  mode scale assesses the extent to which  firms are more inclined toward planned  or emergent strategy formation. this  scale has been assessed as to its validity  and reliability by covin, green and  slevin (2006). it is a five‐item measure  using a seven‐point likert‐type scale.  scale items relate to trial and error  actions, the extent of formal planning  prior to competitive actions, and  emergent modes of strategy. in addition,  we controlled for whether firms in the  sample were primarily service firms or  manufacturing firms.  results  the study incorporated eight variables: a  strategy formation mode variable, six  perceived strategic uncertainty variables,  and one variable to control for  manufacturing versus services. the  perceived uncertainty variables included  perceived (1) regulatory uncertainty, (2)  socio‐cultural uncertainty, (3) economic  uncertainty, (4) competitor uncertainty,  (5) technology uncertainty, and (6)  customer uncertainty. table 2 provides  descriptive statistics and correlations  across the variables.   table 2 ‐ descriptive statistics and inter‐correlation matrix        hierarchical multiple regression was  used to explore the perceived strategic  uncertainty variables most strongly  associated with the strategy formation  mode variable (table 3). variance  inflation factor (vif) scores were  examined for the predictive variables  and all were considerably below the 10.0  standard (ryan, 1997). as a further  check, we mean centered the data with  no resultant changes occurring. thus,  multicollinearity did not pose a problem  with the analyses.  the analysis used two  models comprising the manufacturing‐ volume 20, number 2 fall/winter 2009        53    services control variable and the set of  perceived strategic uncertainty variables.  the base model (model 1) included only  the effect of the control variable and  explained minimal variance (r2 = .01).  the perceived strategic uncertainty  variables were then introduced as a step  change in model 2. the set of perceived  strategic uncertainty variables explained  a significant portion of variance in the  strategy formation mode variable (r2 =  .39; p <.01).   table 3 ‐ regression results for perceived strategic uncertainty and strategic  formation mode      the full model reveals that among the  perceived strategic uncertainty variables,  socio‐cultural uncertainty was  statistically significant (p < .01) and  positively associated with an emergent  strategy formation mode and negatively  associated with a planned strategy  formation mode. neither perceived  regulatory uncertainty nor perceived  economic uncertainty explained  significant variance. perceived  competitor uncertainty was statistically  significant (p < .01) and positively  associated with a planned strategy  formation mode. likewise, perceived  technology uncertainty was also  significant (p < .05) and positively  associated with planned strategy and  negatively associated with emergent  strategy. on the other hand, perceived  customer uncertainty was not  significant. therefore, hypotheses two,  four, and five were supported.   several variables may have affected our  results. thus, we controlled for the  journal of small business strategy        54  number of employees, whether the firm  was primarily in manufacturing or  services, a self‐report measure of  revenue, the number of firms the owner  had previously started (serial  entrepreneurship), and the number of  years since the sme’s founding. our  findings were unchanged when  controlling for these variables.  discussion  hypotheses two, four, and five were  supported. hypothesis two suggests a  positive relationship between perceived  strategic uncertainty and emergent  strategy when sme founders perceive  high socio‐cultural uncertainty.  conversely, there is a negative  relationship between high socio‐cultural  uncertainty and planned strategy.  changing socio‐cultural norms assail the  foundation of societies (ahistrom and  bruton 2002; busenitz, gόmez and  spencer 2000; scott 2002)).  it is not  surprising, then, that smes lean toward  emergent strategy formation modes as  the fundamental bedrock on which  societies are built transition from one  form to another. this meso‐institutional  context somewhat bars planning given  that the institutions in one period  cannot be expected to maintain the  status quo in future periods (droege and  brown‐johnson 2007).   hypothesis four predicts smes are more  likely to use planned versus emergent  strategies when founders perceive high  uncertainty in the competitor  environment. recall that perceived  strategic uncertainty of the competitor  environment refers to the uncertainty of  competitors’ strategic choices and their  implementation of those choices.  previous work has detailed investments  under conditions of uncertainty (dixit  and pindyck 1994) including  contingencies such as real options  (mcgrath, ferrier and mendelow 2004);  however, our research explicitly links  emerging market competitor uncertainty  to strategy formation mode in smes. a  plausible explanation for this finding is  that perceived competitor uncertainty  combined with a lack of organizational  slack creates a context departing from  the norm relative to firms in more  developed markets. that is, rather than  reacting in an emergent fashion to  changes in competitor actions, lack of  organizational slack among smes in  emerging markets may force these firms  to rely on longer term planning rather  than more rapid but responsive  emergent strategy. actively responding  to sudden competitor moves requires  slack resources (nohria and gulati 1996;  george 2005), a notoriously difficult  position to achieve in emerging markets  (peng 2003; peng, wang and jiang 2008;  tsui 2007) especially when exacerbated  by a global economic downturn.  hypothesis five predicts perceived  uncertainty in the technological  environment creates a tendency for  smes to rely on planned rather than  emergent strategy. the rationale is  similar to hypothesis four; staying on the  cutting edge of technological innovation  requires slack resources that can be  committed as current capital  volume 20, number 2 fall/winter 2009        55    expenditures. as discussed previously,  emerging market smes generally lack  the financial resources to participate in  strategic hedging. technology capital  expenditures thus appear to be based on  longer term planning perhaps based on  overall technological trends rather than  competitor’s actions.  hypotheses one, three, and six did not  receive statistical support. hypothesis  one predicts smes are more likely to  participate in emerging strategy rather  than planned strategy as the regulatory  institutional environment becomes  increasingly uncertain. the data,  however, suggest that uncertainty in the  regulatory environment is not associated  with emergent strategy formation.  perhaps in emerging markets, highly  uncertain regulatory environments are  so common relative to developed  markets that sensitivity to change  becomes blunted.   hypothesis three predicts economic  uncertainty will be positively associated  with planned strategy formation modes.  this is a puzzling finding given that  perceptions of change in the competitor  and technological environments stress  planned strategy. perhaps the rationale  follows the argument that perceptions  are blunted given that by their very  nature, emerging markets are  characterized by economic uncertainty.  thus, economic uncertainty may appear  to be the norm despite objective data to  the contrary.  hypothesis six anticipates that perceived  customer uncertainty would be  positively associated with a planned  strategy formation mode. however, this  was not supported. again, the very  nature of emerging markets with their  velocity and complexity of change may,  over time, appear to sme founders as  simply normal business conditions. this  finding may also be related to the  scanning and search costs required to  foresee changes in consumer sentiment  that may portend changes in customer  preferences.  recent research has called for  elucidation and clarification of  relationships that may affect emerging  economy firms (bruton, ahistrom and  krzysztof 2008). our research is an  effort in this direction. by considering  the extent to which sme founders  perceive strategic uncertainty and how  this relates to the continuum of planned  versus emergent strategy formation, we  contribute additional knowledge on  emerging market strategy.  although emerging markets tend to be  characterized by higher uncertainty than  developed markets, relatively little has  been discovered about whether this  uncertainty affects development of sme  planned or emergent strategy modes.  although not all of our hypotheses were  supported, our research does provide  evidence that there are, in fact, at least  some relationships among emerging  market sme founders’ perceptions of  strategic uncertainty and their strategy  journal of small business strategy        56  formation mode that bear further  research. clearly, future research will be  needed to further understand the  mechanisms and relationships related to  perceived strategic uncertainty and  strategy formation mode. particularly,  the specific differences between  developed and emerging economy smes  requires additional research.  managerial implications  consider, for example, how an sme  owner may use the knowledge gleaned  from this research. recall from our  findings that smes perceiving high levels  of strategic socio‐cultural and  technological environmental uncertainty  have a tendency to rely on emergent  strategy rather than planned strategy.  competitors armed with this knowledge  are in a much better situation to “divine”  the next moves of their competitors. in  these specific high uncertainty  conditions, an sme owner may expect at  least some competitors to begin testing  the waters with increased r&d spending  designed for quick market penetration.  these types of innovations, due to their  speed and relatively quick times from  concept to actual product are typically  aiming for brand extensions rather than  deep industry overhaul. often, the smart  money will run counter to the herd.  while many competitors utilize r&d  allocations and marketing budgets for  quick hits, the wiser sme owner will use  the time plan strategy in efforts to bring  deep revolution to product or service  design rather than simply brand  extensions. clearly, it is this type of  counterintuitive thinking that can result  in disruptive innovations (christensen,  roth & anthony, 2004) that bring about  game‐changing products.   conversely, imagine conditions in which  smes are more likely to use planned  versus emergent strategies when  founders perceive high uncertainty in  the competitor environment. the typical  sme owner may reduce inventory levels  resulting in a self‐fulfilling prophecy— just as many competitors are shrinking  inventories resulting in opportunity  costs due to inventories that are  insufficient to meet future demand, a  few sme owners may build up  inventories, choosing instead to ignoring  the typical temporalness of  uncertainties. thus, by virtue of their  growing relative to competitors’  shrinking inventories, this sme stands  to benefit through increased sales  revenue. if competitor response is very  severe  due to uncertainty, these  competitors can literally hand over the  market to those who planned and built  up inventory, giving the planners an  edge in pricing power (sharp, 2009).   these can be powerful prescriptions. for  those in tight competitive rivalries,  outthinking competitors also entails  employing resources (sirmon, gove, &  hitt, 2008) during times of industry  retrenchment. those confident enough  to buck the perceived trends can  decimate competitors who are overly  cautious during times of uncertainty  through bold competitive responses  (aboulnasr, narasimhan, blair &  chandy, 2008).  volume 20, number 2 fall/winter 2009        57    conclusions  our research was limited to perceived  strategic uncertainty and strategy  formation mode. certainly, whether a  firm tends toward planned versus  emergent strategy along a strategy  formation mode continuum is  contingent on a much wider variety of  variables. still, by explicating certain  relationship between these variables, we  have a better understanding of emerging  market sme founders’ responses to  perceived strategic uncertainty. perhaps  additional variables would further clarify  these relationships. as others have noted  (bruton and others 2008), there is a  tremendous amount of work to be done  to fully understand the strategic  differences between firms operating in  developed markets compared to those  operating in emerging markets (tsui  2007). delineating at least a modest set  of these differences was the goal we  hope this study has achieved.  references  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slevin, d.p. and covin, j.g. (1997).  ‘strategy formation patterns,  performance, and the significance of  context.’ journal of management, 23,  189–209.  stewart jr., w.h., r.c. may, and a. kalia  (2008). ‘environmental perceptions and  scanning in the united states and india:  convergence in entrepreneurial  information seeking? entrepreneurship  theory and practice, 1, 83‐106.  tsui, a.s. (2007). ‘from homogenization  to pluralism: international management  research in the academy and beyond.’  academy of management journal, 50,  1353‐1364.  scott b. droege is associate professor  of strategic management at western  kentucky university. he is a frequent  visiting professor at ramkhamhaeng  university in thailand and previously at  yunnan university of finance and  economics in china. his research  interests concern the impact of  institutional change on entrepreneurial  strategy in emerging markets. he has  conducted extensive research in china,  vietnam, thailand, and the philippines.  his business background is in the  financial services industry and his  consulting work has been related to  robotics and nanotechnology  innovations. scott provides training for  economic development groups and  others.  matthew r. marvel is the vitale  research fellow and an assistant  professor of entrepreneurship at  western kentucky university.  his  research interests include new venture  creation, learning, and innovation  creation. before earning his doctorate,  matt led in a variety of consulting and  sales roles for technology‐based  businesses.  reproduced with permission of the copyright owner. further reproduction prohibited without permission. http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2019, vol. 29, no. 02, 22-43 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2019 small business institute® w w w. j s b s . o rg high-tech firms operate in a highly dynamic environment typified by both frequent changes in industry composition (wolf & terrell, 2016) and an increasing concentration of market power among a small group of large firms through aggressive acquisition activity driving consolidation (andriole, 2017; deans, kroeger, & zeisel, 2002). operating as a smallto medium-sized enterprise (sme) within this highly dynamic and increasingly concentrating environment poses many new and complex challenges, especially when considering the financial resources needed to successfully start, grow, and exit a venture (e.g., droege & marvel, 2009; gnyawali & park, 2009; simpson, padmore, & newman, 2012; zulu-chisanga, boso, adeola, & oghazi, 2016). one factor entrepreneurs often overlook in their efforts to obtain the necessary financial resources to grow a venture and provide a pathway to successful entrepreneurial exit (rosenbusch, brinckmann, & müller, 2013) is the pattern of investment funding (ragozzino & blevins, 2016). for example, in traditional founder, angel, and venture capital backed firms, both the number of investors and early investment are associated with increased likelihood of acquisition (ragozzino & blevins, 2016). however, a more recent trend of investor diversification which includes incubators, accelerators, and crowdfunding approaches provides new investment options for firms looking for financial resources, which may affect funding decisions and exit outcomes (drover et al., 2017). high-growth-potential technology firms, also referred to as smallto medium-sized technology enterprises (smtes) (li, qian, & qian, 2012; qian & li, 2003), represent more than 10% of all us smes (caruso, 2012), which make up over 99% of all u.s. introduction kristin c. irwin1, collin m. gilstrap2, paul l. drnevich3, chance m. tudor4 1university of alabama, usa, kirwin1@crimson.ua.edu 2university of toledo, usa, collin.gilstrap@utoledo.edu 3university of alabama, usa, dren@ua.edu 4university of alabama, usa, cmtudor@crimson.ua.edu from start-up to acquisition: implications of financial investment trends for smallto medium-sized high-tech enterprises acquisition, financial investments, smtes, high-tech the high-technology (high-tech) industry is a dynamic environment defined by both frequent changes in composition and a concentration of market power through consolidation. operating as a new or small venture within this environment poses many complex challenges, especially when considering the financial resources needed to be successful. in their efforts to obtain financial resources, entrepreneurs often overlook how the choice and pattern of investment funding to maintain a growth path can later affect a successful entrepreneurial exit. exit via acquisition for smallto medium-sized technology enterprises (smtes) is a strong area of interest given firms in the u.s. high-tech industry experience the fastest growth rates and have been the target of over $400 billion in deal volume and 20% of all merger and acquisition (m&a) transactions in the last twenty years. much of this m&a activity is conducted by five prominent firms, alphabet, amazon, apple, facebook, microsoft, commonly referred to as the fearsome five or the “fangs”. however, as there has been only limited research examining this unique m&a context, in this study we explore the investment funding factors influencing exit via acquisition by the fearsome five. we highlight questions and potential concerns for smtes given the trends in financial investments and increasing market power. apa citation information: irwin, k. c., gilstrap, c. m., drnevich, p. l., & tudor, c. m. (2019). from start-up to acquisition: implications of financial investment trends for smallto medium-sized high-tech enterprises. journal of small business strategy, 29(2), 22-43. http://www.smallbusinessinstitute.biz http://www.jsbs.org 23 k. c. irwin, c. m. gilstrap, p. l. drnevich, & c. m. tudor journal of small business strategy / vol. 29, no. 2 (2019) / 22-43 organizations (small business & entrepreneurship council, 2016). the u.s. high-tech industry is also recognized as the fastest growth market for the industry (biery, 2017) and u.s. high-tech firms represent over $400 billion and 20% of all merger and acquisition (m&a) transactions over the last twenty years (imaa, 2018). the recent “jumpstart our business startups act”, which changed the regulatory environment for investment options to help small businesses (lander, 2012), and the increase in alternative funding options (colombo, franzoni, & rossi‐lamastra, 2015; mollick, 2014; prive, 2012) adds further complexity and change to the financial environment in which smtes operate (spigel & harrison, 2018). one development over the last decade is the expanded growth and concentration of wealth within the high-tech industry. alphabet, amazon, apple, facebook, and microsoft, termed the “fangs” or “fearsome five,” are among the largest, most recognizable, and most valuable global brands (bradshaw, 2017), and the wealthiest technology firms in the world posting a collective market cap of $3.3 trillion (la monica, 2017). their growth and increase in market power is one added wrinkle to the global complexity in which smtes operate. such industry concentration and the potential for oligopolistic influence (either real or perceived) has the potential to greatly influence resource allocations and/or distort markets in many ways (e.g., anderson & tushman, 2001; dalton, todor, spendolini, fieldingg, & porter, 1980; love & roper, 1999). the effect of such factors on smte growth both in terms of influencing the financial investment environment and acquisition activity could have profound effects on the industry and is clearly in need of further research attention. to examine the influence and implications of these factors, in this research study we evaluate such factors and their implications for influencing an smte’s acquisition. in doing so we focus on evaluating two of the potential major influential factors: the availability of financial resources and the increasing power of the fearsome five within the high-tech industry. the objectives of this study are as follows: (1) to examine the changing financial investment environment within the high-tech industry; (2) to determine the effects of the different investment trends on smte exits to acquisition; (3) to understand the role and influence of the fearsome five firms on smte current exits and future options. in our pursuit of the answers to these questions, we focus on smte’s in the u.s. over the last 20 years and develop hypotheses for the implications of several prominent influencing factors on acquisitions. we then examine these hypotheses using sample data consisting of a cross-panel of smtes, who obtained one or more type of investment funding and who subsequently exited via acquisition or did not, in order to better understand the role and implications of investment funding sources and their associated outcomes. to provide additional insights for both research and practice, we extend our analysis to incorporate the industry composition and assess how the top five firms of the high-tech industry engage in smte acquisitions. we conclude with a discussion of the implications of our results for academic research and practice, as well as considerations of limitations and suggestions for future research. theoretical development entrepreneurs face many challenges and decisions in their efforts to sustain and grow their businesses (e.g., baron, franklin, & hmieleski, 2016; slevin & covin, 1998; spigel & harrison, 2018). smtes are no exception and face additional hurdles operating in a fast-paced high-tech industry (biery, 2017) and the increasingly varying options of how to pursue their growth. for example, incubator and accelerator programs (albort-morant & oghazi, 2016; drover et al., 2017) provide smtes with additional avenues to acquire resources including financial support (chen, 2009; drover et al., 2017). while many types of resources are associated with entrepreneurial growth such as networking opportunities (ebbers, 2014) or training programs (lyons & zhang, 2018), one necessary requirement for both growth and survival is the ability of a firm to acquire financial resources (desantola & gulati, 2017). according to the resource-based view (rbv; e.g., barney, 1991; wernerfelt, 1984) competitive advantage can be obtained through the use of valuable tangible resources such as access to financial capital, which in turn may enable firms to acquire and/or fund the development of rare, inimitable, and non-substitutable technological and human capital resources and 24 k. c. irwin, c. m. gilstrap, p. l. drnevich, & c. m. tudor journal of small business strategy / vol. 29, no. 2 (2019) / 22-43 capabilities. for example, financial resources enable smtes to hire valuable strategic human capital, build new organizational and technological capabilities (mckelvie & davidsson, 2009), which are associated with overall new venture performance and growth (chandler & hanks, 1994), and are critical to generate a positive cash flow to avoid early failure including bankruptcy (liao, welsch, & moutray, 2008; thornhill & amit, 2003). however, the challenges in obtaining financial resources can be daunting to many entrepreneurs. to obtain financial resources, the entrepreneur needs to identify high-potential funding options, apply for funding, and provide documentation for why investment in their firm will produce returns and lead to an exit opportunity or liquidity event that meets expectations of the investor (carpentier & suret, 2015; fairchild, 2011; mitteness, sudek, & cardon, 2012; winston smith, 2011). the role of the environment (d’souza & kemelgor, 2008) and industry (e.g., high-tech; liao et al., 2008; lumpkin & dess, 2001) can also affect the financial resources, strategic path, and exit options for entrepreneurs (zulu-chisanga et al., 2016). environmental uncertainty, measured through the levels of munificence, dynamism, and complexity (dess & beard, 1984), in the high-tech industry adds another level of complexity and provides an interesting backdrop for understanding the financial decisions smtes make. the increase in the number and type of investors reflect an increase in the complexity of the financial decisions as it provides more options to entrepreneur owners. previous literature on entrepreneurs and investors focused on the success of financial and non-financial factors (detienne, mckelvie, & chandler, 2015), different motivations (achtenhagen, brunninge, & melin, 2017; detienne et al., 2015), and/or conflicts between the two groups (collewaert, 2012). this challenge of navigating the “right” path in selecting investment opportunities, both in timing and type(s), may not be prioritized over the general challenge of just obtaining the financial resources required. however, as we argue and examine in our study, these decisions matter when looking forward to entrepreneurial exit via acquisition as they may influence the availability and type of exit option. in addition, the complexity of the decision is further enhanced given the changing dynamics of the high-tech industry and its operating environment (e.g., boso, story, cadogan, micevski, & kadic-maglajlic, 2012; decker, haltiwanger, jarmin, & miranda, 2016; wolf & terrell, 2016). the reduction in the complexity of an industry, outlined by the concentration of the number of top firms over the total number of firms, increases barriers to entry and thus poses challenges to start-ups and smtes (porter, 1979). one example of this environment is seen with the continued growth in the high-tech industry. the market concentration, control, and power of the fearsome five are proposed to have a negative impact on innovation (curry & george, 1983; dolata, 2017; turner, mitchell, & bettis, 2010) and have brought forth calls for antitrust legislation to manage their growing influence (manjoo, 2016). in addition, liao et al. (2008) highlight that new entrepreneurs of high-tech firms have to manage many demands for success, which include adjusting to market conditions and intellectual property requirements while still working with venture capitalists to acquire funding. one advantage to exit via acquisition is the ability of a quick and handsome repay to investors. vcs interested in a planned exit of their investment include options of either through a smte’s ipo or acquisition (drover et al., 2017). smtes may entertain the option of acquisition based on the possibility of growth without the additional overhead of searching for more funding. as li et al. (2012) outline, difficulties to expand both products and internationally to remain competitive in the high-growth environment of the technology industry may not align with the entrepreneur’s motivations and future interests (carsrud & brännback, 2011; gabrielsson & politis, 2011; shane, locke, & collins, 2003; wright, robbie, & ennew, 1997). our focus is on the financial motivations for exit (strese, gebhard, feierabend, & brettel, 2018). we do not include the failure options such as bankruptcy and liquidation, or where the smtes remain independent or choose to go public (pagano, panetta, & zingales, 1996). while these types of exit options are also important, they are beyond the scope of our in-depth analysis of acquisitions through which we seek to provide a better understanding of the changes in concentration in the hightech industry. in previous assessments of the likelihood of venture-backed firms to go public or be acquired scholars identify the need for a better understanding of the role 25 k. c. irwin, c. m. gilstrap, p. l. drnevich, & c. m. tudor journal of small business strategy / vol. 29, no. 2 (2019) / 22-43 of different types of funding beyond venture capital (ragozzino & blevins, 2016) and of the underlying motives of the entrepreneurs (ragozzino & reuer, 2007). more specifically as drover et al. (2017, p. 1845) highlighted, more research is needed into different earlier-stage funding mechanisms for new ventures and their interactions with other prospective investors and stakeholders. factors influencing exit via fearsome five acquisition the firms making up the fearsome five are typified by a “high demand for scientific research and intensity of r&d expenditure, high level of innovativeness, fast diffusion of technological innovations, ..., high level of employment of scientific and technical personnel...,” (zakrzewska-bielawska, 2009, p. 94). authers (2017), the senior investment commentator of the financial times, summed the year 2017 up in one word: “fangs,” defined as “the label for the group of evermore powerful internet companies that dominate the online world, which also made their investors very, very rich in 2017”. this elite group of high tech behemoths uses their size, market power, and vast financial resources to engage in extensive m&a activity. while the motivations for their m&a behavior may be classically presumed to improve firm growth and performance, increasing shareholder value, etc. (e.g., grimpe & hussinger, 2014; hagedoorn & duysters, 2002; makri, hitt, & lane, 2010), research has been unable to clearly link such motivations with performance outcomes (king, bauer, & schriber, 2018; king, dalton, daily, & covin, 2004). some leading scholars and industry insiders speculate on more nefarious set of motivations for m&a activity (carper, 1990; moeller, schlingemann, & stulz, 2005), including eliminating current or preventing future competitors, as well as the procurement of proprietary knowledge, technology, patents, and/or talent (christensen, alton, rising, & waldeck, 2011; kaul & wu, 2016). the implications of m&a activity from “super predators” such as the fearsome five present an interesting area in need of further study, specifically from the target’s perspective. the rbv perspective views firms as a “bundle of resources” (barney, 1991) and thus provides that smtes and the fearsome five may utilize m&a activity to enhance their resource positions. the application of rbv, originally put forth by wernerfelt (1984), outlines how to address certain management issues such as the diversification or the acquisition of firms by answering the question, “why acquire?” given m&as are known to have a high likelihood of failure (christensen et al., 2011). the potential for smte acquisitions to provide specific resources to larger firms like the fearsome five that are more easily acquired than built outlines one motive for the acquisition. this type of motive aligns with wernerfelt’s (1984) argument that a firm wants either to utilize its resource position directly or indirectly to achieve a competitive advantage over competitors. this argument also directly applies to other types of resources such as human resources (talent) or workplace processes that are highly sought after in high-tech industries. experience with investors. prior research has shown that, in the short-term, both target firms and acquiring firms gain from an m&a announcement (kashiramka & rao, 2014; kohers & kohers, 2000). acquiring firms’ shareholders are excited about potential value creation and the premiums that target firms receive from the acquiring firm increase the target’s valuation. however, the difficulty involved in bringing on new firms, including cultural fit and the degree or speed of integration, often shows a decrease in value in the long term (bauer & matzler, 2014). however, fearsome five firms are much better positioned to overcome these difficulties. first, they are what the boston consulting group (bcg) refers to as “serial tech buyers”: firms that completed more than five tech m&as over ten years’ time (kengelbach, klemmer, schwetzler, & sperling, 2012). this status allows them to have a deeper understanding of the m&a process and how to make the deal work out in their favor. secondly, fearsome five firms have more resources to dedicate to m&a activities. in another bcg publication, hansell, walker, and kengelbach (2014) explain that by articulating a set of underlying principles and policies successful serial acquirers are able to add rigor and discipline to the m&a process. firms that lack established processes and procedures offer a greater chance for the acquiring firm to create synergies with the target firm (ransbotham & mitra, 2010). in addition to potential synergies, acquir26 k. c. irwin, c. m. gilstrap, p. l. drnevich, & c. m. tudor journal of small business strategy / vol. 29, no. 2 (2019) / 22-43 ers are interested in smaller or younger firms that offer innovative power (graebner, eisenhardt, & roundy, 2010) and the intrinsic sources of motivation for innovation found in successful smes (schenkel, farmer, & maslyn, 2019). as graebner et al. (2010) note, larger acquirer firms will value skill or performance more highly than seniority when assessing smtes as targets. in addition, the relationship between acquisitions and r&d is shown to possibly act as a substitute for innovation (blonigen & taylor, 2000). furthermore, acquiring firms looking at smaller and younger target firms benefit from valuation uncertainty, allowing the acquirer to buy low early and potentially reap greater rewards through acquisition (ransbotham & mitra, 2010). thus, to offset the difficulty and cost of internal r&d or take advantage of information asymmetry, established firms like the fearsome five, will be more likely to acquire less established smtes. established serial acquirers (e.g., hansell et al., 2014; kengelbach et al., 2012; laamanen & keil, 2008), prominent competitors / firms represented in an oligopoly (nilsen, sørgard, & ulsaker, 2016; salvo, 2010), and those with excess cash (brush, bromiley, & hendrickx, 2000; von beschwitz, 2018), may be more likely to engage in sme acquisitions. thus, a fearsome five firm is more likely to engage in acquisitions of smtes in comparison to other high-tech firms that do not have a history of acquisitions and access to additional resources for m&as. therefore, stated formally, we propose that: hypothesis 1. smtes with less experience with investors will have a higher likelihood of acquisition by a fearsome five firm as compared to smtes with more experience with investors. number and value of investments. as smtes may be resource-constrained (e.g., bendickson, davis, cowden, & liguori, 2015; li et al., 2012; parida, westerberg, & frishammar, 2012) and newly formed and developing businesses require influxes of financial capital for continuing operations and growth (blevins, ragozzino, & reuer, 2017), a firm’s success in obtaining funding, including how much and how often, can serve as a positive signal to the market (elitzur & gavious, 2003; islam, fremeth, & marcus, 2018). similar to literature on signals surrounding ipo announcements (mantecon & thistle, 2011; ragozzino & reuer, 2007), venture capital funding can provide firms with legitimacy to attract other investors (deeds, mang, & frandsen, 2004; mitteness, baucus, & norton jr, 2013; peake & d’souza, 2015) and help reduce uncertainty of future investments (kollmann & kuckertz, 2010; ragozzino & blevins, 2016). as such, a firm’s collective history of venture capital investment funding can provide insights into the perceived worth and anticipated growth of a developing business (ragozzino & blevins, 2016). in contrast, firms with high levels of market power (galbraith & stiles, 1984) and extensive financial resources (bruner, 1988) may be in a position to not have the necessity to conduct extra vetting in the acquisition of smtes. this situation may be particularly prevalent in an industry controlled by an oligopoly whose leading firms have enhanced knowledge of the market and industry (m’chirgui, 2009). this superior market position provides an information advantage that allows for those firms like the fearsome five better to assess smtes that have limited number of investors or investor dollars. in addition, firms representing an oligopoly power can assume greater amount of risk (hitt, hoskisson, & ireland, 1990). thus, a fearsome five member may be more likely to take a chance on smtes with less investor commitment. stated formally, we propose: hypothesis 2. smtes with a lower number of investors will have a higher likelihood of acquisition by a fearsome five firm as compared to smtes with many investors. hypothesis 3. smtes with a lower value of investment dollars will have a higher likelihood of acquisition by a fearsome five firm as compared to smtes with high investment dollars. incubator and accelerators. smtes may utilize different sources of funding to support their growth than other types of firms (drover et al., 2017; sudek, 2006). the financing options for smtes include venture capital (vc), corporate venture capital (cvc), angel investment, and crowdfunding (drover et al., 2017). these options are chosen by the entrepreneurs based on numerous selection criteria such as the similarity between the investor and entrepreneur (bruns, 27 k. c. irwin, c. m. gilstrap, p. l. drnevich, & c. m. tudor journal of small business strategy / vol. 29, no. 2 (2019) / 22-43 holland, shepherd, & wiklund, 2008; franke, gruber, harhoff, & henkel, 2006; murnieks, haynie, wiltbank, & harting, 2011). in addition, globally, countries have expanded the availability of financial resources through grants for small start-up organizations (islam et al., 2018). the ability to obtain a grant from institutions is associated with increased legitimacy with a newer start-up (mitteness et al., 2013; tracey, dalpiaz, & phillips, 2018), which has subsequently resulted in the start-up achieving more success and additional vc funding. one distinguishing factor a fearsome five firm may look for in smtes is higher legitimacy in comparison to other smtes. legitimacy gained through having interest from multiple types of funders allows for a smte to demonstrate the ability to attract different types of investors’ interest (drover et al., 2017). the ability to obtain various sources of capital can also be of competitive advantage to firms and validate their resilience and openness to many opportunities for growth (sequeira, weeks, bell, & gibbs, 2018). incubator and accelerator investment opportunities can provide start-ups with additional resources and are associated with an increased likelihood of growth and continuance (e.g., liao et al., 2008; roig-tierno, alcazar, & ribeiro-navarrete, 2015). an incubator or accelerator can be independently owned and operated as a stand-alone business, a sub-unit as part of a larger corporation (kanbach & stubner, 2016), or be provided as part of a university program (berbegal-mirabent, ribeiro-soriano, & garcía, 2015; dada & fogg, 2014). while there is no consensus on the difference between an incubator and accelerator, incubators are typically more focused on early-stage ventures while accelerators have more predominately focused on organizations looking to increase growth of an already established product or service (isabelle, 2013; malek, maine, & mccarthy, 2014). while different incubators and accelerators may have slightly different requirements and goals, the result of their investment is directed toward the continued success of the business by providing not only financial resources but also programs and curriculum providing an ecosystem of mentors and training resources (dempwolf, auer, & d’ippolito, 2014; kohler, 2016; pauwels, clarysse, wright, & van hove, 2016). social capital is one important resource for entrepreneurs (liao et al., 2008). social capital, is defined in the literature as the “goodwill derived from relationships, both formal and informal, that managers have with others and can use to obtain resources and information” (helfat & martin, 2015, p. 1286). as such, it can provide resources to smtes through access to additional financial capital, the ability to gain legitimacy more quickly, or to facilitate business through the network of relationships of the entrepreneurs (liao et al., 2008). for example, accelerators like y-combinator, based in california’s silicon valley, provide a unique opportunity for entrepreneurial networking that can aid venture development (drover et al., 2017; hallen, bingham, & cohen, 2014). thus, given the potential or a scarcity or shortage of resources smtes may experience (nouri & ahmady, 2018), the benefits of both incubators and accelerators include creating links between the organization and individuals to help support and grow the venture (albort-morant & oghazi, 2016). both the legitimacy of participating in an incubator or accelerator program and strategic relationships built within the high-tech community (albort-morant & oghazi, 2016; liao et al., 2008) would make them a potential target for a fearsome five member. thus, the addition of additional perceived legitimacy of funding through the access and visibility afforded by participation in an incubator or accelerator program provide a positive environment for increasing the likelihood of a fearsome five firm acquisition. thus, stated formally, we propose: hypothesis 4. smtes participation in an incubator or accelerator will increase the likelihood of acquisition by a fearsome five member as compared to smtes who do not participate in an incubator or accelerator. geographic proximity. one additional component highly associated with the participation in an incubator or accelerator program is the co-location requirements typically required by the start-ups (pauwels et al., 2016; tracey et al., 2018). this co-location is claimed to help increase the opportunities for participation in events and help expand the social capital of the participants, thus further associated with a successful exit such as through an acquisition. the type of events including typical demo days hosted by these investment funders also provides an opportunity for 28 k. c. irwin, c. m. gilstrap, p. l. drnevich, & c. m. tudor journal of small business strategy / vol. 29, no. 2 (2019) / 22-43 acquirers a “one-stop” venue to assess many different ventures for either further investment or acquisition (cohen, 2013; kanbach & stubner, 2016; kohler, 2016). this opportunity provides cash-rich high-tech firms such as the fearsome five an efficient mechanism to identify and assess smte’s that participate. the opportunity to successfully network with potential acquirers is further enhanced if the smte is located in geographically close proximity to the acquirer, increasing the likelihood of awareness of, and interaction with, the target, as well as reducing the costs of travel to visit and evaluate the target. all factors that should be positively associated with increasing the opportunity for future engagement and possible likelihood of acquisition (ragozzino & reuer, 2011; reuer & lahiri, 2013). thus, the additional legitimacy from enhanced awareness and interaction through geographic proximity established by locational choice of the smte, as well as continued opportunity for increasing social capital through networking of local events, provides a more positive environment for a fearsome five firm to become aware of an investment opportunity. thus, stated formally we propose: hypothesis 5. an smte’s closer geographic proximity to a fearsome five member will increase the likelihood of acquisition by that fearsome five member over smtes not located in close geographic proximity. method to examine these hypotheses, we conducted an empirical analysis of high-tech firms who acquired venture funding on their path to an m&a exit with a public firm. we constructed our sample using the venturexpert dataset from the sdc platinum database. our sample included all m&a deals flagged as “high tech” in the venturexpert dataset that were completed from 1995 to 2017. we required that the acquirer be public at the time of the acquisition, and that both the target and acquirer be based in the u.s. additionally, we filtered out deals that did not report the number of rounds, number of private equity firms involved in the deal, or state of operations. this approach yielded a sample of 1044 m&a deals. we then divided our sample by firms acquired and not acquired by a fearsome five firm, given that we are interested in the effects of the oligopolistic nature of these firms on acquisition targets in the high-tech industry. additionally, these target smtes acquired by the fearsome five were assumed to have equal chances for successful post-merger integration given the similarity based on industry, potential for organizational fit, and synergy (bauer, strobl, dao, matzler, & rudolf, 2018). dependent variable. the primary dependent variable for our logit regression model is a binary measure (f5) which takes on a value of one in the event that one of the fearsome five acquired the target firm and zero if the target is acquired by a firm outside the fearsome five. independent variables. our independent variables of interest are: time of vc which measures the time in years that a target firm is first associated with a venture firm until the final purchase by a public company. num funds is the number of venture funds involved with the target. investment is the total amount invested by venture firms reported in thousands. incubator is an indicator for targets held by an accelerator, incubator, university, or an angel investor. bank is an indicator for targets held by investment bank venture fund. corp is an indicator for targets held by a corporate backed venture fund. same state is an indicator if the target is in the same state as the acquirer, a proxy for geographic distance. control variables. we include controls for prestige which is an indicator that takes on a value of one if the largest venture holder is in the top 25% of total venture capital deployed by venture funds in our sample (ragozzino & blevins, 2016). the lead venture fund in each target is the fund with the largest dollar investment in the target. time to vc is the time in years from a target’s founding to the first venture investment. rounds is the number of venture rounds a target experiences. cali is an indicator that takes on a value of one if the target is headquartered in california. we also considered additional control variables commonly used in the finance literature, which we decided to omit due to lack of theoretical scope fit and statistical insignificance to our study. in table 1, we report the top acquirers in our sample. microsoft and google are the second largest 29 k. c. irwin, c. m. gilstrap, p. l. drnevich, & c. m. tudor journal of small business strategy / vol. 29, no. 2 (2019) / 22-43 acquirers in the fearsome five with 37 and 20 deals, respectively. amazon has eleven acquisitions, and facebook and apple each have six acquisitions. table 1 top acquirers ticker count percent csco 54 5.47 msft 37 3.75 goog 20 2.03 brcm 16 1.62 orcl 14 1.42 ibm 13 1.32 symc 13 1.32 aaba 12 1.22 amzn 11 1.11 crm 11 1.11 msi 11 1.11 vrsn 7 0.71 aapl 6 0.61 fb 6 0.61 in table 2, we report the participation and lead frequency in deals by venture fund type. with respect to deal participation, individual private equity (pe) funds are involved with 3,905 (lead 3) deals, pe advisors and private equity funds of funds are involved with 51 (lead 838) deals, corporate backed pe funds have 791 (76), investment banks are involved with 370 (lead 35) deals, and individual investors are involved with 299 (lead 5) deals. in table 3, we report the summary statistics of all variables in our analysis. approximately 7% of targets in our sample are acquired by members of the fearsome five, prestigious funds account for deal leads on 41% of deals, and the average deal has just under four rounds of financing. the average deal has seven venture backers, with $30.6 million in capital invested. firms typically receive venture backing in the first three years of their life, and backers are usually involved with the firm for just under five years. in our sample, nearly half of the firms (48%) are headquartered in california and 36% of deals are between an acquirer and target in the same state. in table 4, we report the correlation matrix of the table 2 venture group participation and leads venture group type participation count participation % lead count lead % angel group 23 0.37 3 0.29 bank affiliated 370 5.89 35 3.35 corporate pe/venture 791 12.6 76 7.28 endowment, foundation or pension fund 43 0.68 2 0.19 government affiliated program 35 0.56 7 0.67 incubator/development program 35 0.56 8 0.77 individuals 299 4.76 5 0.48 insurance firm affiliate 26 0.41 1 0.1 investment management firm 98 1.56 15 1.44 non-private equity 4 0.06 44 4.21 other 534 8.51 4 0.38 pe advisor or fund of funds 51 0.81 838 80.27 pe firm 3905 62.2 3 0.29 sbic 37 0.59 3 0.29 service provider 15 0.24 0 0 university program 12 0.19 0 0 30 k. c. irwin, c. m. gilstrap, p. l. drnevich, & c. m. tudor journal of small business strategy / vol. 29, no. 2 (2019) / 22-43 table 3 summary statistics n mean sd p25 p50 p75 f5 1044 0.07 0.25 0.00 0.00 0.00 prestige 1044 0.41 0.49 0.00 0.00 1.00 time to vc 886 2.76 4.86 0.42 1.25 2.87 rounds 1044 3.85 2.93 2.00 3.00 5.00 cali 1044 0.48 0.50 0.00 0.00 1.00 time of vc 1042 4.66 3.75 2.24 3.74 6.01 num funds 1044 7.12 5.69 3.00 6.00 9.00 investment ($000s) 1044 30590.66 43724.46 6999.85 17000.05 38560.05 incubator 1044 0.06 0.24 0.00 0.00 0.00 bank 1044 0.23 0.42 0.00 0.00 0.00 corp 1044 0.41 0.49 0.00 0.00 1.00 same state 1044 0.36 0.48 0.00 0.00 1.00 table 4 correlation matrix 1 2 3 4 5 6 1 f5 1 2 prestige 0.0625* 1 3 time to vc -0.0448 -0.0877** 1 4 rounds -0.0624* -0.0476 -0.150*** 1 5 cali 0.0563 0.118*** -0.197*** 0.0108 1 6 time of vc -0.0877** -0.0324 -0.029 0.490*** -0.0517 1 7 num funds -0.0748* 0.0422 -0.225*** 0.658*** 0.0999** 0.360*** 8 investment -0.0709* 0.194*** 0.0422 0.295*** 0.0251 0.220*** 9 incubator 0.0929** -0.0496 -0.0562 0.0278 0.00569 -0.00101 10 bank -0.0752* 0.0389 -0.0978** 0.308*** 0.0143 0.215*** 11 corp 0.0319 0.0895** -0.142*** 0.240*** 0.112*** 0.111*** 12 same state -0.0362 0.0660* -0.137*** -0.034 0.537*** -0.0807** 7 8 9 10 11 12 7 num funds 1 8 investment 0.433*** 1 9 incubator 0.130*** 0.00786 1 10 bank 0.492*** 0.236*** 0.0318 1 11 corp 0.429*** 0.225*** 0.0408 0.206*** 1 12 same state 0.00996 -0.00282 -0.00828 -0.022 0.0231 1 * p < .05 **p < .01 ***p < .001 31 k. c. irwin, c. m. gilstrap, p. l. drnevich, & c. m. tudor journal of small business strategy / vol. 29, no. 2 (2019) / 22-43 variables in our main analysis. results preliminary analysis as part of our preliminary analysis we performed some exploratory background assessments for robustness including the trends in the overall types of investors and an industry analysis. as we depict in figure 1, the different types of investors from 1990-2017 shows while traditional private equity and venture capital firms invests the most in smtes, both corporate and incubators show an increasing number of investments starting in 2013. in addition, we also assessed the trends in investment dollars and total deals, which show a negative trend in the number of overall investments. however, the year 2018 shows a dramatic increase in investment dollars. see figure 2 for the full trend analysis. figure 1. deal participation figure 2. deal frequency and total capital investment 32 k. c. irwin, c. m. gilstrap, p. l. drnevich, & c. m. tudor journal of small business strategy / vol. 29, no. 2 (2019) / 22-43 when analyzing the data from an industry perspective, we also found some signs that the oligopolistic nature of the fearsome five seems to affect the market. see figure 3 for the graphical representation of the deals made by the fearsome five each year, from 1995-2017. on the left-hand side of the graph is the collective fearsome five deal count done in each year; on the right-hand side of the graph is the herfindahl-hirschman index (hhi), a measure of market concentration. for reference, an hhi of 1 represents a monopoly, while an hhi of 0 represents a completely free market. the fearsome five steadily increase the amount of deals they do in each year up to 2015, when the deals suddenly drop off by a large margin. at the same time, the hhi rapidly increases after steadily declining for the past eight years. when looking at the entirety of m&a activity of every firm characterized as a 737 sic code (computer programming, data processing, and other computer related services) during the same period as the analysis, the total number of deals remains relatively consistent (see figure 4). for the total number of deals performed by 737 firms in each year we depict the percentage of each total deal count that was done by only the fearsome five. the results show that the fearsome five increasingly hold a higher and higher percentage of all 737 m&a activity up until 2015, when it drops and remains lower than previous years. these results support our initial arguments that fearsome five acquisition activity will decrease as the industry concentration grows. regression analysis. to formally test our hypotheses we use a logit regression model with the following form: pr(f5) = a + b*variable of interesti + x*controlsi + ei (1) where the dependent variable is the indicator f5 which takes on a value of 1 if the acquirer is in the fearsome five and zero otherwise. our control set includes controls for deal lead prestige (prestige), length of time in years to first venture investment from firm formation (time to vc), number of venture rounds during the deal (rounds), and an indicator if the target is in california (cali). we report the results of our analysis in table 5. figure 3. fearsome five deals 33 k. c. irwin, c. m. gilstrap, p. l. drnevich, & c. m. tudor journal of small business strategy / vol. 29, no. 2 (2019) / 22-43 the cells report the marginal effects of the logit models and p-values. in column 1 of table 5, we report the results of our model with only the control variables included. in column 2 of table 5, we depict the test our first hypothesis that the f5 prefer firms earlier in the vc cycle by including the time of venture participation (time of vc) with the firm in years. this variable loads negative and significant at the 5% level, supporting our first hypothesis. the marginal effect suggest that a one year increase in time of vc leads to 70 basis point decrease in the probability of being acquired. in column 3 of table 5 we test our second hypothesis that the f5 prefer firms with fewer venture participants by including the number of venture investors (num funds). this variable loads negative and significant at the 5% level, supporting our second hypothesis. the marginal effect suggests that increasing the number of investors by one fund reduces the probability of being acquired by 50 basis points. in column 4 of table 5 we test our third hypothesis that the f5 prefer firms with lower venture investment by including the total amount of venture investment (investment). for this model we scale investment to millions to adjust the reported coefficient. thus, the marginal effect implies that each additional $1 million invested reduces the probably of acquisition by 1.7%. this variable loads negative and significant at the 1% level, supporting our third hypothesis. in column 5 of table 5 we test our fourth hypothesis that the f5 prefer firms from incubator to other types of backing by including incubator, bank, and corp. each of these variables is an indicator that takes on a value of 1 if the target has backing from an incubator venture fund, investment banking venture fund, or a corporate backed venture fund. incubator loads positive and significant at the 5% level, supporting our fourth hypothesis that fearsome five firms prefer targets who participate in accelerators and incubators. the marginal effect implies that participation with an incubator increases the probability of acquisition by 9.7%. bank is negative and significant at the 5% level, which provides additional support in comparison the fearsome five firms do not acquire targets with investment bank funding. the marginal effect implies that investment bank backing decreases the probably of acquisition by a fearsome five by 3.5%. in column 6 of table 5 we test our fifth hypothesis that the f5 prefer firms located close in geographic proximity by including same state, which takes on a value of 1 if the target and acquirer are in the same state. this variable loads negative and significant at the 1% level, not supporting our fifth hypothesis, and the marginal effect implies that the probability of acquisition of from an f5 firm is lower by 4.2%. finally, in column 7 we include all of our hypothesized variables in the same model. the statistical significance and direction remains consistent in the full model on the majority of our independent variables of interest at 0.0 % % 0.5 1.0 % % 1.5 2.0 % % 2.5 % 3.0 0 200 400 600 800 1000 1200 1400 1600 1800 2000 737 deals pct f5 figure 4. 737 sic and f5 m&a activity 34 k. c. irwin, c. m. gilstrap, p. l. drnevich, & c. m. tudor journal of small business strategy / vol. 29, no. 2 (2019) / 22-43 table 5 logit models (1) (2) (3) (4) (5) (6) (7) prestige 0.017 0.016 0.017 0.026* 0.019 0.016 0.019 (0.296) (0.301) (0.249) (0.086) (0.215) (0.280) (0.134) time to vc -0.004 -0.003 -0.004* -0.004 -0.003 -0.004 -0.003 (0.140) (0.196) (0.070) (0.129) (0.158) (0.105) (0.116) rounds -0.007** -0.002 0.000 -0.002 -0.005 -0.007** 0.004 (0.042) (0.697) (0.981) (0.415) (0.119) (0.025) (0.191) cali 0.009 0.007 0.011 0.010 0.007 0.030* 0.028* (0.564) (0.624) (0.450) (0.489) (0.614) (0.072) (0.050) time of vc -0.007** -0.005* (0.042) (0.052) num funds -0.005** -0.004** (0.010) (0.043) investment -0.017*** -0.000 (0.008) (0.209) incubator 0.097** 0.099** (0.039) (0.036) bank -0.035** -0.012 (0.015) (0.440) corp 0.012 0.020 (0.410) (0.121) same state -0.042*** 0.035*** (0.005) (0.005) observations 886 885 886 886 886 886 885 * p < .05 **p < .01 ***p < .001 the 5% level. the two exceptions are time to vc, which is only significance at the 10% level, and investment, which is insignificant. given significant, positive pairwise correlation of investment and num funds reported in table 3, it is likely that the multicolinearlity of these two variables explains the loss of significance on investment in the results depicted in the full model in column 7 of table 5. discussion one popular question smtes are interested in answering is “what is their path to riches?” based on investment trends and the current projected role of consolidation of power and financial resources in the high-tech industry, smtes that are involved with incubators, have less investment dollars and fewer investors, and less time working with the investors, have a higher likelihood of exiting via acquisition by a fearsome five member. given our analysis, we conclude that the sheer market power of the fearsome five has crowded out other high-tech firms, decreasing the industry complexity. there is currently limited room for another high-tech firm to make a splash in the market, leading to fewer ventures, and thus less m&a activity. 35 k. c. irwin, c. m. gilstrap, p. l. drnevich, & c. m. tudor journal of small business strategy / vol. 29, no. 2 (2019) / 22-43 academic implications based on our theoretical integration of rbv and environmental uncertainty, our results offer several academic implications. first, expanding on the boundary conditions of rbv and environmental uncertainty, we show the limitations of smtes financial capital competitive advantage when looking for entrepreneurial exit via m&a. as industry complexity decreases, while opportunities for funding may still exist, if the top firms within the industry perform all acquisitions, less, not more, venture capital funding is preferred. less m&a activity with a sudden increase in market concentration is concerning, to say the least. the conversation amongst industry insiders, financial analysts, and the general populace must now be one centered on the health of the high-tech industry. do we really want five firms controlling a market that has increasingly greater sway upon everyday life? historically, such a market situation has led to higher prices and lower quality. the same results may be true for this market situation, with the addition of yet another noxious effect: less privacy. the concentration of firms in control of hundreds of millions of users’ data makes them a target for hacking (kshetri, 2014), and without a high level of security could be a recipe for disaster (dawson, 2018; schneier, 2011; straub & welke, 1998). one need only look at facebook’s various data scandals that have rattled investors, users, and regulators. the ongoing concerns over the intrusion in to the home of the internet of things (iot) and ai-based home and office automation platforms from amazon, google, apple, and others leading to discussions not only about privacy and data usage but also about the very foundation of modern life (solon & laughland, 2018). it is not in the scope of this paper to discuss and attempt to resolve each of these possible implications and how their potentially catastrophic privacy rights and market implications could be remedied. it is in the scope of this paper, however, to suggest that this discussion be hurried and aided by much additional research and examination in the near future. practical implications one consideration for investors and policy makers is the potential impact of the consolidation of the high-tech industry related to the outcomes of acquisitions of smtes. for example, local community investors look to invest in start-ups and smes to encourage local community growth through employment and productive output (islam et al., 2018). while this may be the case for smtes, after acquisition, the local economy is dependent on the actions of the fearsome five or other acquirer choices on whether support the growth smte in their current location. if the trend of acquisition of smtes shows a lack of giving back to the local community, while larger investors may receive a return, a negative trend may begin with the lack of initial investments in start-up (decker et al., 2016). this negative cycle, or death spiral, could thus result in a reduction of high-tech start-ups receiving the financial support they need to grow into smtes, which results in a lack of options for vcs and thus for large high-tech firms like the fearsome five for acquisition. while such a death spiral is a very pessimistic viewpoint, both scholars and industry practitioners suggest this potential outcome is likely to occur over the next 30 years (andriole, 2017). limitations we encourage some caution in interpreting these results. while they show support that the fearsome five acquire smtes earlier in the investment funding process, we do not account for the outcome of the acquisition. in addition, the changing nature of the m&a activity by the fearsome five provides another reason to pause and assess if exit via acquisition by a fearsome five member in the future is as likely and promising as it has been. another limitation to this study is the use of only investment funding provided by those that are listed in the xpert database, which does not include debt or classify other types of equity funding. smtes that also utilize grants, or other terms of accelerator or crowdfunding resources that may or may not be associated with either debt or equity financing not included in expert could provide additional insights to the financial path from start-up to acquisition (drover et al., 2017). another avenue not explored in this paper that could provide additional insights into the future role of investment funding in entrepreneur exit is the changes in the investment environment over time. for example, 36 k. c. irwin, c. m. gilstrap, p. l. drnevich, & c. m. tudor journal of small business strategy / vol. 29, no. 2 (2019) / 22-43 as the number and type of financial investors increases, the number of smte acquisitions may increase given the observed significant relationship between smte’s gaining funding and acquisition exit. however, the trend of different types of investments over time both in terms of growth in the different categories of investment types and the increasing number in volume and dollar needs further analysis. both scholars and practitioners may find this future avenue of research interesting as it could foreshadow both the role of growing investment firms and the role the fearsome five may play going forward. future research some open questions not addressed in our analysis include how the role of acquirer motives and their actions post-acquisition may further affect the industry and subsequent future investment opportunities. we identify the increasing trend of investments by the fearsome five up until 2015 and then a subsequent decline is noted. while some of this decline can likely be explained by the decrease in m&as in general due to the waning of the m&a wave (park, morel, & madhavan, 2010), other reasons for a decline could be a lack of smtes to acquire or lack of interest by smtes for acquisition. for example, recent negative media may serve as a disincentive to smtes to pursue acquisition if culture or customer privacy are as or more important than financial incentives (strese et al., 2018). smtes may view recent issues the fearsome five have had with data privacy (e.g., macmillian & mcmillian, 2018; solon & laughland, 2018) or the issues of culture and support for diversity (e.g., edwards, 2016; seetharaman, 2018; waters, 2018) as negative factors and may choose to explore other alternatives for exit. for example, smtes may instead decide given these issues to explore utilizing the additional investment funding to pursue their own acquisition opportunities for further growth (e.g., celikyurt, sevilir, & shivdasani, 2010; ng & al-shaghroud, 2018). additional future research directions may include a deeper investigation into hhi: what are the top firms making up the hhi index? which of the fearsome five has the greatest market power? future research may also be conducted around the choice of fearsome five targets. are fearsome five member firms more often targeting public or private firms, and why? finally, researchers may seek to find out whether the rest of the high-tech sector will follow the fearsome five’s m&a activity. will m&a activity plummet like the five’s has in recent years? conclusion through this study, we offered a greater understanding of the potential impact of how financial investments can influence an entrepreneurs exit via an m&a by that of the fearsome five in the high-tech industry. while smtes strive to overcome financial challenges by raising capital through one or many investment funding opportunities, we highlight the importance of the source and timing of those funds if the smte is looking to attract the attention of the top five firms in the high-tech industry. a more thorough understanding will lead to far-reaching implications for the rest of high-tech industry and business and society in general. for example, another practical implication includes possible governmental oversight and new policy to help encourage the growth and funding of smtes or mitigate potential negative impacts of the power held by the fearsome five. expanded understanding of whether or not potential targets should decide to merge with a fearsome five member, and how the market power of the fearsome five affects the 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(2016). investigating the path from firm innovativeness to financial performance: the roles of new product success, market responsiveness, and environment turbulence. journal of small business strategy, 26(1), 51-68. stx4tegy small business brief component depreciation: a tax planning strategy for small businesses nathan oestreich san diego state university drnoqamaibsdsu. edu howard r. toole san diego state university htoo!email. sdsu. edu james e. williamson san diego state university willi am 6@m ai b sdsu, edu abstract recent federal court and internal revenue service (/rsj decisions have opened up an excellent opportunity for both small and large businesses to once again use component depreciation, thus accelerating depreciation deductions and reducing cost of buildings and improvements in present value terms. minor changes in the design or in the procedures followed in purchasing a building make ii possible to shorten the depreciable lives ofportions of the "building". the savings can easily exceed the additional design, construction, and bidding costs especially tf the changes are minor. small business owners, who may not always retain a fulltime tax advisor, should be aware that it is necessary to involve a tax consultant at the beginning of the design process for construction projects or early in the search for a building purchase. introduction in order to maximize benefits, many tax planning opportunities require that the tax consultant be involved from the outset of the project. planners refer to such a situation as an open-fact situation. before transactions and contracts are entered into, the facts can be controlled or planned. alter the fact, there is less control as to the tax effects. one planning opportunity of potential benefit to small businesses is the "reincarnated" component depreciatibn. one of the in vogue tax planning ideas in the sixties and seventies was component depreciation. companies could account for a building, for example, not just as a building, but as the sum of its individual components. the depreciation schedule included such assets as roof, plumbing, electrical hardware, partitions, and exterior 'walls', each with individual estimated lives and salvage values. using component depreciation (as. opposed to i 12 journal of small business strateg3t vol. /2, no. 2 fall/8'inter 200l "composite" or "whole asset'epreciation) resulted in accelerating depreciation deductions since most of the components had lives shorter than the building. although the "component depreciation" of the sixties and seventies was outlawed, it has been 'reincarnated" in a new form. in the current form, proper planning may allow one to classify part of a "project" (e.g., the carpeting or the electrical service) as depreciable personalty, rather than depreciable real estate (i.e., the structure itself), similarly resulting in shorter aggregate depreciable lives under the statute. this article summarizes the applicable statutes and cases and illustrates how planning can be effective. statutes and cases assets placed in service under current law are depreciated using the modified accelerated cost recovery system (macrs). macrs, and its predecessor acrs, specifically disallowed component depreciation. under macrs, real estate is either residential rental property, with a 27 'a year life, or nonresidential real estate, with a 39 year life. real estate is depreciated using the straight-line method with certain assumptions about when the asset was placed into service. the recently reincarnated component depreciation is an outcome of the tax court case of hospital corp. of america.'he court concluded that parts of a building project that are not part of the structural components and that qualify as depreciable personal property can be depreciated over much shorter lives as personalty and, possibly, even be expensed. more recently, the irs has issued guidance as to what factors must be considered by taxpayers to take advantage of the "new component depreciation."" this case, and the subsequent guidance, are just as applicable to small businesses as to large publicly-traded corporations. it substantially affects the after tax costs of buildings, making them less expensive and possibly affecting the decision as to whether to own or lease corporate properties. component depreciation —the old way in the case of herbert shainberg,"'he tax court concluded that a taxpayer had properly applied irs regulations in depreciating a shopping center. the regulation provided that "...depreciable property may be accounted for by treating each individual item as an account, or by combining two or more assets in a single account." when assets were combined, a composite life was used. thus, the life of a building is a weighted average of all its parts. in shainberg, the shopping center was accounted for as building, wiring, plumbing, roof, etc. each component was assigned its own estimated life and salvage value. depreciation was calculated for each component. it was especially easy to determine the component cost in this case since the building was constructed under a cost plus contract. the irs subsequently ruled that if a taxpayer presented expert testimony as to the relative fair market values, estimated lives, and salvage values, component depreciation could also be used for newly acquired previously used buildings. the new component depreciation depreciation for most property placed in service atter 1986 is calculated using the methods and conventions provided in the modified accelerated cost recovery system [macrs]. the basic provisions of macrs are summarized in the appendix. in general, accelerated depreciation is allowed for personalty (i.e., generally property other than real property) and i l3 .iournal of small business strate~'ol. l2, no. 2 fatllivt'uter 200/ straight-line depreciation is required for realty (i.e., most real estate). however, it is not always clear which category some assets fall into. nothing in macrs changes the definition of personalty (sometimes referred to as ii 1245 property)'" or depreciable real estate (tj 1250 property)" related to component depreciation. component depreciation of real estate was disallowed by macrs (and its predecessor acrs") because all residential rental property and nonresidential real property, respectively, placed in service during a year has the same life. assets that were personalty before acrs are still personalty —and this is exactly the conclusion of the tax court in hospital corporation of america (hca)."" thus, the small business may depreciate these assets over a shorter time period than the building structure and obtain the associated aaer-tax benefit. the irs had tried to deny taxpayers the ability to take more rapid depreciation deductions on non-structural building components that qualified as personalty. in many instances in their hca opinion, the court disagreed with the position of the irs, and the irs has subsequently acquiesced in much of this result. as such, many parts of a construction project or purchased facility can qualify for more rapid depreciation. an example consider a situation in which a business owner purchased or constructed a building to house production facilities, say a phone bank and computer facilities for a telemarketer at a cost of $500,000 (not including the value of the land). modern construction methods were applied and costs were held to a minimum. chances are the entire $500,000 would need to be depreciated over 39 years. alternatively, consider a situation where the plans for the structure are such that the building consists of specifically identifiable components such as foundation, walls, exterior doors, roof, basic electrical service and plumbing service and anything else that is needed for the building to function as a building. interior partitions, wall coverings, floor coverings, electrical and lighting serving the production area, communications components such as wiring and fiber optics can be designed such that they are not part of the building or its structural components. since they qualify to be depreciated using shorter lives and accelerated methods, the depreciation deductions are allowed much earlier. say, for example, that one-half of the total cost, or $250,000, can be successfully reclassified as seven-year macrs property, resulting is more rapid write-off for this amount. also assume that the business's marginal tax rate is 35 percent and its cost of capital is 12 percent. the present value of the tax savings related to the depreciation for the $500,000 building is $36,943""'esulting in an aaer-tax cost of the building of $463,057; while the present value of the tax savings related to the depreciation for the $250,000 building and $250,000 of components is $83,055'" resulting in an afler-tax cost of the building of $416,945. so, for example, if the design changes cost $20,000 an additional savings of $26,112 ($463,057 -: $416,945 $20,000) in after-tax cost savings could be enjoyed (in present value terms). this may seem trivial, but it is more than five percent of the total cost of the project and if there had been no additional design and construction costs, the savings would hav'e excebded 91 percent. furthermore, for owners with higher tax burdens and higher costs of.capital, the differences will be even more significant. strategies to maximize tax benefits 'he significant opportunities for tax deferral are not limited to large corporations with massive investments in depreciable property like hospital corporation of america. small 114 1 journal of small business strategy vol. 12, wo. 2 fall/0'inter 200l business managers can also apply hca in many new construction projects, as well as when a used building is acquired. since they do not ordinarily have in-house tax managers, they may need to rely on independent tax professionals for advice and counsel, and a basic understanding of the component depreciation concept will assist in this process. small businesses are oflen quite sensitive to cash flow variations, perhaps more than larger businesses. so, any efforts like those outlined in this article, that provide cash flow in excess of the related costs might be critical. in essence, a tax deferral is the equivalent of an interestfree loan. it is also important to realize that this is solely a tax issue. selecting this approach to tax depreciation does not affect the depreciation calculations for the company's financial statements. thus, the straight-line method, or whatever other acceptable method the company selects, can still be used in determining financial statement (book) net income. so, this tax deferral can be enjoyed without affecting the amount of income reported to lenders and other investors. by altering the engineering of a building and making certain that the design conforms to the above discussion, it is possible to qualify certain "building" components for rapid depreciation by making them something other than "building" for tax depreciation purposes. the use of partitions that can be relocated, carpets and wall coverings than can be moved, or the installation of special-purpose electrical circuits which only support a computer system are simple examples. these decisions, of course, must be accompanied by contemporaneous design and cost studies which support the cost allocated to the component. obviously, the type and function of a building affects the ability to control these factors, but the earlier in the process they are addressed, the more control the small businessperson will have. in addition, the more flexible the taxpayer is, the more likely they will be willing to accommodate certain design changes made to take advantage of the new component depreciation. in addition, certain strategies such as the use of cost-plus contracts or a wider use of subcontractors may make supporting information easier to acquire. used buildings also qualify. it is important that the small businessperson employ qualified experts to carry out contemporaneous cost allocation studies to support the allocation of costs to be allocated to qualifying personalty. the use of a qualified accountant and/or construction experts should increase the likelihood of the irs accepting the account classifications as valid. the experts should be brought into the process at the earliest possible time —when the building is being designed. in many instances it is likely that the tax savings will be greater than the additional costs of construction and paying for experts. the payoff, in the form of tax savings, varies widely depending on the amount of the costs that can be considered personalty, since this determines the amount of the depreciation deductions that can be accelerated (due to the shorter lives and the use of accelerated depreciation methods). this is only a timing issue —eventually 100 percent of the cost of the project will be claimed as depreciation regardless of the depreciation method —but, by utilizing component depreciation, taxes can be deferred. hence, the time value of money becomes an issue. as is shown in the following section, the amount of the savings may be significant. as is demonstrated, this analysis is amenable to simple computation in an electronic spreadsheet that any small businessperson may access. 115 jat!mal afgmall bn!'nnc 8!!r.!!10 val. 72, na. 2 fall/winrer 200l the most significant aspect for inana'ers is that they be aware that planning early in the process is important. yrs. !i e tax advisor should be a key contributor in the building design process. financial effects although the tax savings related to component depreciation are evident, their magnitude may or may not be worth the marginal planning effort. since the benefit is in tax deferral, the actual savings vary widely with changes in marginal tax rates and discount rates. the following table provides estimates of the savings, as a percentage of the total cost of a project, assuming a marginal tax rate of 40 percent. the discount rate is varied from 6 to 10 percent and the percentage of the rirojcct that is reclassified iis personalty is varied from 10 to 60 percent. savings diie to comporient d'epreciation as,a, ",.:~ „,' 'ercbntage of proje'ct cost portion of project discount rate reclassified 6/o 7!o 8/o 9/o 10/o 10'/o 1.88/o 1.97/o 2.03/o 2.07/o 2.09/o 20/o 3.7s/o 3.93/o 4,05/o 4.14/o 4.18/o 30/o 5.63/o 5.90/o 6.08/o 6.20/o 6.28/o 40/o 7.51/o 7.86/o 8.11/o 8.27/o 8.37/o 50/o 9.39/o 9.83/o 10.13/o lb.34/o lb.46/o 60'/o 11.26'/0 11.79'/0 12.16'/0 12.41'/0 12.55'/0 take, for example, a situation where the discount rate is 10 percent and 30 percent of a project could be reclassified as personalty. the present value of the tax savings is 6.28 percent of the total cost of the project. for a $ 100,000 project, this savings is $6,280. if the additional design and construction costs are less than $6,280, a net savings is enjoyed. otherwise, the redesign should be rejected, unless there are other benefits. the reclassification may be as simple as altering the design so certain components can be removed or reused. it could involve changing the methods of attachment. conclusion small business managers have long been aware that accelerated depreciation provides benefits in the form of deferred taxes. this study illustrates that magnitude of the savings available when steps are taken to reclassify certain costs of construction projects as personalty rather than realty. the desired results can best be accomplished by involving the tax consultant in the building design or purchase project earlier rather than later. 109 tc 21 (1997) irs legal memorandum 199921045 116 1 journal ofsmall business strategy vol. i2, no. 2 fallllyinter 200i 33 tc 241 (1959) irc t) 1245. section 1245 includes depreciable personalty plus certain real property other than a building and its structural components, as specified in this paper. irc i'i 1250. section 1250 property includes all depreciable property other than i) 1245 property. accelerated cost recovery system (internal revenue code [irc] i'i 168 as applicable for assets placed in service from 1981 to 1986). see note i this is the present value of the annual deduction for depreciation ($500,000 / 39) for each year for 39 years. the mid-month convention was ignored since it is immaterial to this comparison. this is the present value of $250,000 depreciated over 39 years and $250,000 depreciated over 7 years (14.29, 24.49, 17.49, 12.49, 8.93, 8.93, and 4.46 percent, respectively, for years i through 8). ivatltan oestreich is a professor in the school ofaccountancy at san diego state university. he received his phd from the university ofhousion and is a cpa licensedin texas. he is a member of the american taxation association, the american accounting association and the california society of cpas. dr. oestreich's teaching and research interests include taxation, especially taxation of small business and entrepreneurs. he has previously published in the real estate review, the journal of real estate accounting and taxation, taxation for accountants, and the ivativnal public accountant. he is a contributing author to arc publications 'ederal taxation and individual taxation texts. howard r. toole is a professor in the school of accountancy at san diego state university. he received his ph.d. pom the university of iowa. dr. tooleis co-director of the business consulting program at sdsu. dr. toole's teaching and research interests include small business, consulting, manageriallcost accounting, and accounting information systems. he has previously published in the journal of small business strategyi journal of accounting, auditing, and finance; journal of financial and f)uantitative analysis; financial management; british accounting review, management accounting, journal of business and management; and others. james e. williamson is a professor in the school of accountancy at san diego state university. he received his phd. and ms. degreespom the university of minnesota andis a cpa. he is a member of the american accounting association, the american institute of ceriified public accountants, and the institute of management accountants. he has previously published in numerousjournals, including the journal of small business strategy, trusts and estates, management accouniing, the journal of taxation of investments, the journal of real estate accounting and taxation, taxation for accountants, the national public accountant, and the accouniing review. 117 journal of small business strategy vol. l2, no. 2 fallltyinrer 200 l appendix —accf lerated cost recovery system acrs applies to all eligible tangible assets placed in service after 1980. it was subsequently modified for assets placed in service after 1986 (macrs). under macrs tangible personal property falls into one of six classes, with most assets falling into the five or seven year depreciable life classes. real estate is either 27'/~ year residential property or 39 year nonresidential real estate. tangible personal property generally qualifies for the double declining balance method of depreciation. salvage value is ignored and a half-year convention usually applies. taxpayers may also elect to expense the cost of a limited amount of depreciable tangible personal property placed in service in an active business. for property placed in service in years beginning in 2001 and 2002, the limit is $24,000, increasing to $25,000 thereatter. excess amounts must be depreciated under the above methods. real estate is depreciated using the straight-line method. salvage value is ignored and certain conventions apply. under macrs, the definition of real estate is relatively straight forward, but property law is not always consistent with the definition. residential rental property is any building or structure if 80% or more of the gross rental income is from dwelling units. nonresidential real property means i) 1250 property (i.e., realty) that is not either residential rental property or property with a class life of less than 27.5 years. thus, t) 1250 property is real property, excluding certain assets that are () 1245 property (i.e., equipment). assets that may, in fact, be real property under state law, but still qualify as ti 1245 property, include properties that are not part of a building or its structural components, are tangible, and are used as "an integral part of manufacturing, production, or extraction or of furnishing transportation, communications, electrical energy, gas, water, or sewage services." additionally, certain single purpose agricultural structures, horticultural structures, and storage facilities also qualify. these assets qualify for more rapid depreciation. nonresidential real property specifically excludes i'i 1245 property (equipment), including certain real property that qualifies as ti 1245 property. examples of the latter would be a single-purpose milking parlor for a dairy farm. another, more common example, would be wiring designed into a building and installed when the building was constructed for the purpose of providing power to the company's computers. 118 http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2019, vol. 29, no. 02, 44-57 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2019 small business institute® w w w. j s b s . o rg internal auditing is defined by the institute of internal auditors (iia) as “an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. it helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes” (the institute of internal auditors, 2015). up until the 1990s, internal audit services were exclusively provided by a department or group within the organization (anderson, head, ramamoorti, riddle, salamasick, & sobel, 2017). today, however, many organizations elect to outsource some (or even all) of their internal audit services to third parties. utilizing 2015 common body of knowledge (cbok) survey results data from the institute of internal auditors research foundation (iiarf), we first compare the extent of outsourcing of internal audit activities among small, medium, and large organizations in anglo-culture countries (u.s., canada, new zealand, australia, south africa, the u.k., and ireland). the data reveal that small organizations are outsourcing internal audit activities to a greater extent than medium and large organizations. next, limiting our investigation to small organizations, we examine three types of factors that prior literature suggests may impact an organization’s decision whether or not to outsource internal audit activities. since all respondents to this survey were internal auditors, all organizations of interest have some presence of internal audit. thus, instead of studying the presence/ absence of an in-house internal audit department, we examine an organization’s decision whether or not to outsource a portion of their internal audit activities. specifically, we explore differences related to audit committee involvement, financial health, and chief audit executive (cae) expertise. focusing the investigation on small organizations is critical due to the high quantity of small organizations worldwide. in the u.s. alone there were 30.2 million small businesses in 2015 (u.s. small business introduction audrey n. scarlata1, sarah garven2, brandon vagner3, tammy bahmanziari4 1middle tennessee state university, usa, audrey.scarlata@mtsu.edu 2middle tennessee state university, usa. sarah.garven@mtsu.edu 3middle tennessee state university, usa, brandon.vagner@mtsu.edu 4middle tennessee state university, usa, tammy.bahmanziari@mtsu.edu internal audit outsourcing in small organizations: an exploratory study outsourcing, cbok, internal audit, small business few papers have studied internal audit outsourcing in general, and significantly fewer have limited their analysis to small organizations. this study examines the association between small organizations’ propensity to outsource internal audit activities and (1) audit committee involvement, (2) organizational financial health, and (3) need for expertise. prior studies find mixed evidence when analyzing both large and small organizations concurrently. this study utilizes the institute of internal auditors research foundation 2015 common body of knowledge (cbok) survey results data from chief audit executives (caes) of small organizations (<500 employees) based in seven anglo-culture countries. we find significant associations between both audit committee involvement and organization financial health and internal audit outsourcing in small organizations. apa citation information: scarlata, a. n., garven, s., vagner , b. , & bahmanziari, t. (2019). internal audit outsourcing in small organizations: an exploratory study. journal of small business strategy, 29(2), 44-57. http://www.smallbusinessinstitute.biz http://www.jsbs.org 45 a. n. scarlata, s. garven, b. vagner, & t. bahmanziari journal of small business strategy / vol. 29, no. 2 (2019) / 44-57 administration office of advocacy, [u.s. sba], 2018). the small business role within the overall economy is undeniably significant, with, for example, 99.9 % of all businesses within the u.s. classified as small businesses (u.s. sba, 2018). the long-term survival of these organizations has lasting impacts on employment rates and economic growth both locally and globally. unfortunately, two-thirds of small businesses fail, to the extent of closure, within ten years of launch (u.s. sba, 2018). analyzing various factors and facets of small organizations, including the internal audit function, is critical to improving their survival rates. specifically, analysis of the internal audit function is important due to its focus on improving the effectiveness of risk management, control, and governance processes. these aspects of an organization have not only the potential to directly influence organizational survival rates, but also to influence an organization’s ability to flourish. that said, organizations should incorporate internal audit outsourcing in their annual strategic planning discussions to ultimately improve their comprehensive strategic approach, which has been evidenced to positively affect small business performance (williams, manley, aaron, & daniel, 2018). not all small organizations outsource all or even some of their internal audit function, and potentially they do not outsource even when they likely should. in this study, we explore factors that have the potential to influence the decision of a small organization with an established in-house audit function to outsource some of its internal audit activities. understanding these associations can provide insight for both caes and management when making internal audit resource allocation decisions. we find support for an association between audit committee involvement and outsourcing. of the four audit committee variables we examine (existence of an audit committee, number of audit committee meetings held, number of audit committee meetings the cae was invited to attend, and percentage of audit committee meetings the cae attended), all four are significant and positively associated with a small organization’s decision to outsource some of its internal audit activities. prior internal audit research suggests that greater audit committee involvement signals a greater commitment to corporate governance and internal auditing (anderson, christ, johnstone, & rittenberg, 2012; barua, rama, & sharma, 2010; carcello, hermanson, & raghunandan, 2005). thus, our results suggest that more involved audit committees of small organizations recognize outsourcing to be beneficial in promoting internal audit quality. this could be the result of the committee recognizing a shortfall of required skills on staff or a directive for the in-house internal audit function to focus its activities around routine internal audit activities, with non-routine activities to be outsourced. we also find support for an association between financial health and outsourcing. both financial health variables we examine (sufficiency of internal audit budget and increase in budget over prior year) are significant and positively associated with a small organization’s decision to outsource some of its internal audit activities. these results suggest that small organizations in poor financial health may elect to cut back or forego spending on various assurance activities, including moneys spent on internal audit outsourcing activities, as these may be considered discretionary items. we do not find support for an association between the need for expertise and outsourcing. of the five cae expertise variables we examine (cia certification, cpa or equivalent certification, hours of annual training, years of experience, and technical specialization), none are significant. these results suggest that when evaluating the decision to outsource some of its internal audit activities, a small organization may take into consideration the competencies of the internal audit function as a whole, not just the leadership of the department. our results provide implications for practice. the results evidencing that increased audit committee involvement and financial health have a positive and significant association with small organizations’ decision to outsource some of its internal audit activities provides powerful insight for management. small organizations need to be aware of the quantity and quality of interactions between the audit committee and the cae. monitoring this relationship could prove extremely beneficial as outsourcing some of the organization’s internal audit activities may significantly influence the quality of risk management procedures and operating effectiveness of internal controls, ultimately improving the organization’s operations. additionally, as budget cuts are being made across departments, management should contemplate the potential reduction in technical expertise and specialized skills the organization could realize if 46 a. n. scarlata, s. garven, b. vagner, & t. bahmanziari journal of small business strategy / vol. 29, no. 2 (2019) / 44-57 outsourced internal audit activities are eliminated. discussions are warranted with caes to ensure that after eliminating outsourced audit activities, the internal audit function has “the knowledge, skills, and other competencies needed to perform its responsibilities” (iia 2016 standard 1210 – proficiency) (the institute of internal auditors, 2015). management should seriously consider internal audit outsourcing as a unique exception to the proposed budget reductions. the paper is organized as follows. the next section discusses relevant literature and research questions. this is followed by the data and research method used in this study. results are then presented, followed by discussion and implications. background and research questions despite the benefits of having a completely inhouse internal audit function, such as retaining total control over the organization’s internal audit approach and having direct knowledge of all the current critical issues facing the organization (kpmg, 2016), many small organizations may not have adequate personnel on staff to perform all of the internal audit activities needed in their organizations. in order to implement all needed internal audit activities, these organizations must choose whether to divert current resources and/ or hire additional personnel to perform the needed functions in-house or to outsource all or a portion of their internal audit activities. if an organization does choose to outsource some or all of its internal audit activities, many potential benefits may arise. as noted by gonzalez, rodriguez, and sossa (2017), all businesses could benefit from outside advice and counsel when dealing with ongoing business challenges. advocates of internal audit outsourcing argue that the special expertise of outside contractors, in addition to their ability to potentially deliver substantial savings, are advantages of outsourcing (kamyabi & devi, 2011; majdalawieh & alkafaji, 2012; okpara, ezirim, & mohammed, 2017; rittenberg & covaleski, 1999). small organizations with little internal audit expertise may find that outsourcing some of their internal audit activities increases in-house internal audit resource availability (van peursem & jiang, 2008). increased internal audit outsourcing, therefore, may contribute to the strengthening of overall internal audit departmental capabilities in the short-term and could have a lasting technical influence on in-house internal auditors as a degree of knowledge transfer occurs. additionally, investments in internal audit can contribute to increases in operational efficiencies and safeguarding of assets, decreases in financial accounting risk, and can assist the respective organization in meeting its goals and objectives (feng, li, & mcvay, 2009). prior literature suggests three primary reasons associated with the decision to outsource internal audit activities are: (1) level of audit committee involvement, (2) financial health, and (3) need for expertise. we look at each of these factors in turn. audit committee involvement the blue ribbon committee on improving the effectiveness of corporate audit committees (1999) recommends that organizations’ audit committees meet at least four times each year (anderson et al., 2012), but it is silent on the recommended number of times the audit committee should meet with the cae. abdolmohammadi (2013, p. 71) notes that “the literature has generally argued in favor of a strong relationship between the internal audit function and the audit committee of the board” (cf. cooper, leung, & mathews, 1994; brody & lowe, 2000; gramling, maletta, schneider, & church, 2004; griffiths, 1999; mchugh & raghunandan, 1994). prior internal audit research suggests that greater audit committee involvement signals a greater commitment to corporate governance and internal auditing (anderson et al., 2012; barua et al., 2010; carcello et al., 2005). conversely, felício, rodrigues and samagaio (2016) investigate the impact of audit committee characteristics on financial performance with mixed results. however, little research has been performed on the influence of audit committee involvement on internal audit outsourcing. the two primary studies that have been conducted provide conflicting results. however, their audit committee involvement and outsourcing variables were fundamentally different. abbott, parker, peters and rama (2007) analyzed audit committee involvement from a perspective of how many times the audit committee met on an annual basis. utilizing pre-sox data, they found that active audit committees are less likely to outsource routine internal auditing activities. using post-sox data, abdolmohammadi (2013) analyzed audit committee involvement from a perspective of whether the cae meets or talks 47 a. n. scarlata, s. garven, b. vagner, & t. bahmanziari journal of small business strategy / vol. 29, no. 2 (2019) / 44-57 with the audit committee chairman in addition to regularly scheduled meetings, and whether the cae attends meetings with the audit committee regularly. abdolmohammadi (2013) found that audit committee involvement was positively and significantly associated with the outsourcing of internal audit activities when proxied as whether the cae meets or talks with the audit committee/chairman in addition to regularly scheduled meetings but found no association when proxied as whether the cae attends meetings with the audit committee regularly. although the two studies’ findings are not consistent, they are also not directly comparable as the outsourcing of routine and nonroutine activities were not distinguished from each other in the second study as in the first. this leads to our first research question. rq1: is audit committee involvement associated with internal audit outsourcing in small organizations? financial health prior literature suggests that cost savings is a common motive for outsourcing internal audit activities (carcello et al., 2005; carey, subramaniam, & ching, 2006; robinson et al., 2008; lankford & parsa, 1999). in the current competitive environment for smes, some organizations may engage in more knowledgeintensive work and outsource less knowledge-intensive work (ahluwalia, mahto, & walsh, 2017). increased efficiency and technological competencies of external internal audit providers (carey et al., 2006; okpara et al., 2017; selim & yiannakas, 2000) have been found to be factors when organizations attempt to cut costs. thus, due to the potential cost savings that outsourcing may provide, organizations in poor financial health may be more likely to outsource some of their internal audit activities. on the other hand, as noted by carcello et al. (2005), as internal auditing is an administrative function, money spent on internal audit activities may be considered a discretionary expense that can be reduced during difficult financial times. thus, organizations in poor financial health may choose to cut back spending on internal audit activities, including foregoing internal audit outsourcing activities. this leads to our second research question. rq2: is financial health associated with internal audit outsourcing in small organizations? need for expertise risk management is at the forefront of most organizations and has the potential to impact the decision to outsource the internal audit function. consequently, we believe the lack of formal training and other indicators of in-house expertise could lead an organization to outsource in an effort to acquire the necessary expertise. however, some internal audit activities require organization specific expertise or knowledge of sources of competitive advantage, proprietary information, or organization-specific technology (edwards, 1997; williamson, 1991), leading organizations to keep the internal audit function in-house to protect this information. for example, prior research has found that organizations are less likely to outsource the internal audit function due to the potential loss of confidential knowledge and competitive advantage (barac & motubatse, 2009; widener & selto, 1999). thus, there are incentives for small organizations to keep internal audit activities completely in-house or outsource some portion of these activities. as noted previously, an advantage of outsourcing internal audit services includes the special expertise provided by external parties. carey et al. (2006) found that technological competence was associated with the decision to outsource internal audit, and selim and yiannakas (2000) found that the most important factor in the decision to outsource the internal audit function was the perceived access to internal auditors with specialized knowledge and skills. public accounting firms arguably have the most advanced technological competence and highly trained specialists in the field. public accounting firms are experts in providing assurance in the reliability of financial information and evaluation of internal controls. as a result, they enjoy a reputation of competence through the rigorous training required in the field and provide organizations an excellent pool of well-trained staff to hire for internal audit outsourcing. therefore, if an organization lacks adequate in-house expertise, it is relatively easy for the organization to outsource some of its internal audit activities to one of these firms. this leads to our final research question. rq3: is the need for expertise associated with internal audit outsourcing in small organizations? 48 a. n. scarlata, s. garven, b. vagner, & t. bahmanziari journal of small business strategy / vol. 29, no. 2 (2019) / 44-57 method data the common body of knowledge (cbok) global internal audit practitioner survey data is provided by the institute of internal auditors research foundation (iiarf). the first of these series of surveys was implemented in 1972, and the cbok 2006 survey was the first international survey. we use data from the most recent cbok survey (2015) in our study. surveys were sent internationally to internal auditors at various levels (participants ranged from staff level to caes) to gather information about internal audit departments. participants in the 2015 survey included 14,518 institute of internal audit (iia) members from over 160 countries. similar to abdolmohammadi (2013), we limit the sample to seven anglo-culture countries to alleviate the concern that any differences found may be the result of cultural attributes, resulting in 3,248 observations. these countries include the u.s., canada, new zealand, australia, south africa, the u.k., and ireland. we also limit our sample to responses from caes as caes are presumed to be both knowledgeable and instrumental in the decision to outsource, resulting in 791 responses. focusing on small organizations (< 500 employees) in particular, the sample drops to 236 observations. we lose an additional 21 responses due to respondents not answering or responding with “i don’t know” to the outsourcing question, for a final sample of 215. the number of responses vary between questions, resulting in different sample sizes for each variable examined. a complete listing of all variables used in the study can be found in the appendix. in order to gain a sense of how prevalent outsourcing of internal audit activities is in small organizations compared to medium and large organizations, before limiting our data to small organizations, we first examine the cbok (2015) question “what percentage of your organizations’ internal audit activities were performed by a third party in the past calendar year?” we find that small organizations are outsourcing their internal audit activities to a greater extent than medium and large organizations. organizations with less than 500 employees reported outsourcing around 27.1% of their internal audit function, compared with 20.8% for medium firms (501-10,000 employees) and 21% for large firms (10,001+ employees) (p = 0.065). the next section provides insight into what factors appear to influence a small organization’s decision to outsource some of its internal audit activities. variable measures the outsourcing variable we examine in our study relates to whether or not an organization with an established internal audit function chooses to outsource any portion of its internal audit activities. the cbok (2015) question we use is, “in the previous calendar year, were some of your organizations’ internal audit activities provided by a third party?” our current study analyzes audit committee involvement’s influence on internal audit outsourcing using three audit committee involvement-related items from the cbok (2015) data that we have identified as potential significant indicators of the decision to outsource. caes were asked (1) “is there an audit committee or equivalent in your organization?”; (2) “approximately how many formal audit committee meetings were held in the last fiscal year (including inperson meetings, telephone meetings, online meetings, and so on)?”; and (3) “approximately how many formal audit committee meetings was the chief audit executive (cae), or director, invited to attend (entirely or in part) during the last fiscal year?” additionally, we divided the answer to question (3) by the answer to question (2) to determine the percentage of meetings attended by the cae. cbok (2015) has two financial health-related items we have identified as potential significant indicators of the decision to outsource. caes were asked (1) “from last year to this year, how did your internal audit department budget change?” (1 = increased, 2 = decreased; 3 = remained the same) we used a binary variable where 1=increased, 0=not increased for this question; and (2) “in your opinion, how sufficient is the funding for your internal audit department relative to the extent of its audit responsibilities?” (1 = not at all sufficient, 2 = somewhat sufficient; 3 = completely sufficient). cbok (2015) has five expertise-related items we have identified as potential significant indicators of the decision to outsource: caes were asked (1) “which professional certifications and/or qualifications do you have related to internal auditing? (choose all that apply).” one of the options was “cia (certified internal auditor).” we used a binary variable (selected/not selected) for cae responses to this option; (2) “how 49 a. n. scarlata, s. garven, b. vagner, & t. bahmanziari journal of small business strategy / vol. 29, no. 2 (2019) / 44-57 many hours of formal training related to the internal audit profession do you receive per year?”; (3) “in addition to performing general internal audit activities, do you have an area of technical specialization for which you have had formal training and in which you spend a majority of your time working?” (1=i do not have a technical specialization for my internal audit work; 2=accounting; 3=financial reporting; 4=fraud; 5=information technology (it); 6=ethics; 7=compliance; 8=legal; 9=risk management; 10=operations; 11=management; 12=engineering; 13=construction; 14=environmental auditing; 15=performance auditing; 16=other) ). we recoded this to a binary variable in which 1=had a specialization and 0=no specialization; (4) “how many hours of formal training related to the internal audit profession do you receive per year?”; and (5) “which professional certifications do you have in areas other than internal auditing? (choose all that apply)” one of the options was “public accounting and chartered accountancy (such as ca, cpa, acca, aca).” we used a binary variable (selected/not selected) for cae responses to this option. results descriptive statistics for the pooled sample are reported in table 1, panel a. interestingly, less than half of caes surveyed hold a cia or cpa certification (47.9% and 47.0%, respectively) and less than half saw their budgets increase over prior year (45.9%). more than half indicated that their internal audit function outsourced some of its internal audit activities in the past year (57.7%) and an overwhelming majority have an audit committee or equivalent (90.1%). panel b reports univariate tests of our variables of interest for subsamples of organizations that outsourced (outsource = 1) and did not outsource (outsource = 0). we discuss the results related to each of our three outsourcing categories in turn. audit committee involvement of small organizations that outsource some of their internal audit activities, 97.2% have an audit committee, compared with 80% of organizations that do not outsource (p = 0.000). the number of audit committee meetings held also differs between groups. organizations that outsource report an average of 6.28 meetings held per year, compared with 4.98 meetings for organizations that do not outsource (p = 0.006). we also investigate the difference between the number of audit committee meetings that the cae was invited to attend and find similar results (6.01 versus 4.28, p = 0.000). we find that caes of outsourcing organizations attend 96.2% of meetings, while those that do not outsource attend only 89.3% of meetings (p = 0.027). overall, these findings support rq1 (is audit committee involvement associated with internal audit outsourcing in small organizations?). financial health our two measures of financial health center on the organization’s budget. our first measure is internal audit departmental budget change since last year. over half of outsourcing organizations (52.0%) report a recent increase in their internal audit budget, while only 36.9% of small organizations that did not outsource report an increase (p = 0.032). our second measure relates to budget sufficiency. caes of outsourcing organizations felt their budgets were between somewhat and completely sufficient relative to the responsibilities of the department (2.32 on a scale of 3), which was more sufficient than those who did not outsource (2.17 on a scale of 3) (p = 0.085) both of these findings support rq2 (is financial health associated with internal audit outsourcing in small organizations?). need for expertise organizations that outsource have a slightly lower percentage of caes with cia certification (46.0% versus 50.5%) but a slightly higher percentage of caes with cpa certification (49.2% versus 44.0%). however, the differences for both types of certification are not significant between groups. there are also no significant differences between years of cae experience, technical specialization, or hours of annual training attended between groups. thus, we do not find support for rq3 (is the need for expertise associated with internal audit outsourcing in small organizations?). additional descriptive statistics table 2, panels a through e provide additional information about the sample. panel a details the types 50 a. n. scarlata, s. garven, b. vagner, & t. bahmanziari journal of small business strategy / vol. 29, no. 2 (2019) / 44-57 table 1 descriptive statistics panel a: pooled sample descriptive statistics variable n minimum maximum mean std. deviation outsource 215 0.00 1.00 0.577 0.495 audit committee involvement ac_exist 181 0.00 1.00 0.901 0.300 ac_mtg_held 163 0.00 15.00 5.804 2.952 ac_mtg_invite 161 0.00 12.00 5.385 2.817 ac_perc_attend 158 0.00 1.00 0.938 0.187 financial health budg_inc_prior 207 0.00 1.00 0.459 0.500 suff_budg 210 1.00 3.00 2.262 0.613 expertise tech_spec 215 0.00 1.00 0.679 0.468 cert_cia 215 0.00 1.00 0.479 0.501 cert_cpa 215 0.00 1.00 0.470 0.500 hrs_train 215 0.00 200.00 43.521 20.325 yrs_exp 215 0.00 50.00 16.502 10.015 panel b: univariate statistics for outsourced (outsource=1) and did not outsource (outsource=0) subsamples outsourcing =1 outsourcing = 0 variable n mean n mean significance t-statistic audit committee involvement ac_exist 106 0.972 75 0.800 0.000*** 3.942 ac_mtg_held 103 6.282 60 4.983 0.006*** 2.763 ac_mtg_invite 103 6.010 58 4.276 0.000*** 3.913 ac_perc_attend 103 0.962 55 0.893 0.027** 2.226 financial health budg_inc_prior 123 0.520 84 0.369 0.032** 2.159 suff_budg 124 2.320 86 2.174 0.085* 1.730 expertise tech_spec 124 0.685 91 0.670 0.815 0.234 cert_cia 124 0.460 91 0.505 0.509 -0.662 cert_cpa 124 0.492 91 0.440 0.449 0.758 hrs_train 124 43.468 91 43.593 0.964 -0.045 yrs_exp 124 16.032 91 17.143 0.423 -0.803 ***, **, & * indicate significance at the 1%, 5% and 10% levels, respectively, two-tailed. 51 a. n. scarlata, s. garven, b. vagner, & t. bahmanziari journal of small business strategy / vol. 29, no. 2 (2019) / 44-57 of organizations (org_type) included in the sample. panel a reveals that for-profit organizations, including privately held (non-listed) and publicly traded organizations, represent 55.35% of the organizations in the sample. participants were asked to choose the iia institute with which they primarily identified (and presumably where the organization in which they work is located). panel b (iia_inst) results disclose that the majority, (67.91%), of the organizations identify primarily with the u.s.. panel c provides information about the number of years for which the organization has had an internal audit department in place (ia_age_cat). the participants were asked to provide the number of years. the data in panel c was grouped into five categories. interestingly, most of the organizations (62.36%) have internal audit departments that are less than 15 years old. approximately 5% of the respondent organizations have internal audit departments that have been in place 35 years or more. panel d presents information about the geographic scope (scope) of the organization or governmental entity. panel d indicates that the majority of the sample organizations operate regionally (38.60%), followed by nationally (25.58%). panel e presents data concerning the number of internal audit employees in the internal audit departments (ia_size_cat) of the sample organizations. panel e reveals that 86.73% of the respondent organizations had less than ten employees in their internal audit department. table 2 additional descriptive statistics panel a: organization type the survey question was as follows: “what is the type of organizations for which you currently work?” type of organization frequency (%) of responses privately held (non-listed) organizations 37.21 publicly traded (listed) organizations 18.14 public sector (including federal, regional, and local government, government agencies, and government-owned organizations) 24.19 non-for-profit organization (not related to government) 16.28 other 4.19 n=215 panel b: anglo-culture country the survey question was as follows: “select the iia institute with which you primarily identify. (if you are from a country included in iia-north america, select your country name.)” iia institute participant identifies with frequency (%) of responses australia 7.44 canada (iia-north america) 7.91 new zealand 2.79 south africa 10.23 united kingdom & ireland 3.72 united states (iia-north america) 67.91 n=215 52 a. n. scarlata, s. garven, b. vagner, & t. bahmanziari journal of small business strategy / vol. 29, no. 2 (2019) / 44-57 panel c: internal audit department age the survey question was as follows: “approximately how many years has the internal audit department been in place in at your organization?” we categorized responses into groups as noted above. age of internal audit department frequency (%) of responses less than 5 years 22.58 5 to 14 years 39.78 15 to 24 years 23.12 25 to 34 years 9.14 35 years or more 5.38 n=186 panel d: geographic scope the survey question was as follows: “what is the geographic scope of your organization or government entity?” geographic scope of the organization frequency (%) of responses local (operating in one municipal level body such as a city or county) 17.21 regional (operating in a province or state within an independent country) 38.60 national (operating throughout an independent country) 25.58 international or multinational (operating in more than one independent country) 17.67 other 0.93 n=215 panel e: size of internal audit department the survey question was as follows: “approximately how many fulltime equivalent employees make up your internal audit department?” the question asked participants to input an exact number of ia employees, which was recoded into categories (see the appendix)* number of internal audit employees frequency (%) of responses 1 to 3 62.56 4 to 9 24.17 10 to 24 8.53 25 to 49 2.37 50 to 299 2.37 n=211 *we found neither the size of the internal audit department nor the age of the department was significantly associated with the decision to outsource. 53 a. n. scarlata, s. garven, b. vagner, & t. bahmanziari journal of small business strategy / vol. 29, no. 2 (2019) / 44-57 discussion and implications provided that 99.9% of all businesses within the u.s. are classified as small business and that two thirds fail within ten years of launch (u.s. sba, 2018), internal audit’s role of monitoring organizational risks and assessing internal control effectiveness is critical for the survival of small organizations. for some small businesses, outsourcing some or even all of their internal audit activities may be necessary in order to ensure all needed internal audit activities are performed. thus, it is important for small organizations to understand (1) the benefits and drawbacks of outsourcing internal audit activities, and (2) the organizational factors that appear to influence the decision to outsource internal audit activities. we first find support for an association between audit committee involvement and outsourcing. all four audit committee involvement variables analyzed are significant and positively associated with a small organization’s decision to outsource some of its internal audit activities. our findings suggest that more involved audit committees of small organizations recognize outsourcing to be beneficial in promoting internal audit quality. thus, small organizations need to be aware of the quantity and quality of interactions between the audit committee and the cae. monitoring this relationship could prove extremely beneficial, especially during difficult financial times, as outsourcing some of the organization’s internal audit activities may significantly influence the quality of risk management procedures and operating effectiveness of internal controls, and ultimately improve the organization’s operations and financial situation. second, we find support for an association between financial health and outsourcing. both financial health variables we examine are significant and positively associated with a small organization’s decision to outsource some of its internal audit activities. our findings are not consistent with prior literature that suggests cost savings is a common motive for outsourcing internal audit activities (carcello et al., 2005, carey et al., 2006; robinson, 2008; lankford & parsa, 1999). if cost savings was a significant motive for small organizations to outsource internal audit activities, we would expect to find a greater likelihood of outsourcing as the perception of budget sufficiency decreased and if the actual budget decreased. however, we find the opposite. it is possible that the difference in our findings relative to prior research could be a result of a different sampling emphasis and time period. for example, due to more limited resources, internal audit departments of small organizations, compared to larger organizations, may be directed to do more with less during difficult financial times. our results are concerning, as they suggest that small organizations in poor financial health may elect to cut back or forego spending on various assurance activities, including moneys spent on internal audit outsourcing activities, as these may be considered discretionary items. from a practice standpoint, these results can provide insight to small business consultants when advising clients in financial turmoil. it is important for these consultants to appropriately weigh the costs and benefits of internal audit outsourcing prior to advising management to simply cut all outsourcing activities. as a result of eliminating internal audit outsourcing, the efficiency and effectiveness of internal controls could suffer, and inadequate responses to risk may result which could put the organization in jeopardy. additionally, as budget cuts are being made across departments, management should contemplate the potential reduction in technical expertise and specialized skill the organization could realize if the outsourcing budget is affected, and discuss with caes their plan to ensure needed outsourcing is not going to be entirely eliminated. management may want to consider internal audit outsourcing as a unique exception to the proposed budget reductions. lastly, we do not find support for an association between the need for expertise and outsourcing. although we do not find support for this association using various cae characteristics as a proxy for expertise, when evaluating the decision to outsource, a small organization may take into consideration the competencies of the internal audit function as a whole, not just the leadership of the department, as we examined. limitations and future research our study has a few limitations worth noting. first, the study is limited to anglo-culture countries (u.s., canada, new zealand, australia, south africa, the u.k., and ireland). analysis of countries outside of these could yield differing results. second, one could 54 a. n. scarlata, s. garven, b. vagner, & t. bahmanziari journal of small business strategy / vol. 29, no. 2 (2019) / 44-57 argue that the study is too widely focused. however, when attempting to isolate north america or just the united states, our number of participants, and subsequently power, were both significantly reduced, although the results remained consistent. finally, the study has a limitation in that the survey it is based on was conducted during 2015, which was in the midst of one of the greatest bull markets of all time. many small organizations were realizing astounding growth at this time. thus, our financial health results may not be generalizable during a bear market or an industry downturn, when severe internal audit budget fluctuations are likely to occur. our study provides several avenues for future research. results from this study indicate that audit committee involvement has a significant association with small organizations’ decision to outsource some of their internal audit activities. literature would benefit from research analyzing the dynamics of audit committee involvement and what in particular about the involvement leads to an increase in the likelihood of internal audit outsourcing. additionally, the literature would benefit from research analyzing further the relationship between small organization financial health and internal audit outsourcing. specifically, what costs and benefits are considered in the decision to outsource internal audit activities when small organizations realize shrinking budgets? how much consideration is given to the technical capabilities and skills of the in-house internal audit department when deciding whether or not to eliminate outsourcing of internal audit activities? references abbott, l. j., parker, s., peters, g. f., & rama, d. v. 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(1991). strategizing, economizing, and economic organization. strategic management journal, 12(s2), 75-94. https://home.kpmg.com/au/en/home/insights/2016/09/internal-audit-outsource-vs-insource.html https://home.kpmg.com/au/en/home/insights/2016/09/internal-audit-outsource-vs-insource.html https://home.kpmg.com/au/en/home/insights/2016/09/internal-audit-outsource-vs-insource.html https://public.deloitte.com/media/0524/us_bnet_chs_deloitteconsulting2008outsourcing%20report_1207.pdf https://public.deloitte.com/media/0524/us_bnet_chs_deloitteconsulting2008outsourcing%20report_1207.pdf https://public.deloitte.com/media/0524/us_bnet_chs_deloitteconsulting2008outsourcing%20report_1207.pdf 56 a. n. scarlata, s. garven, b. vagner, & t. bahmanziari journal of small business strategy / vol. 29, no. 2 (2019) / 44-57 appendix variable mapping data was obtained from the cbok 2015 global internal audit practitioner survey (lake mary, florida, usa: the internal audit foundation). question number and wording are provided below. visit www.theiia,org/cbok for more information. the views in this study reflect the researchers’ opinions, and are not intended to represent the position or policies of the iia or the internal audit foundation. variable name cbok variable question wording outsourcing outsource q38 in the previous calendar year, were some of your organizations’ internal audit activities provided by a third party (either internal or external to your organization)? (caes only) 1=yes, 2=no, 3= i don’t know (recoded 1=yes, 0=no) organizational characteristics org_type q24 what is the type of organization for which you currently work? 1=privately held, 2=publicly traded, 3=public sector, 4=not-for-profit, 5=other scope q27 what is the geographic scope of your organization or government entity? 1=local (operating in one municipal level body such as a city or county), 2=regional (operating in a province or state within an independent country), 3=national (operating throughout an independent country), 4=international or multinational (operating in more than one independent country), 5=other iia_inst q9 7=australia, 21=canada (iia-north america), 78=new zealand, 102=south africa, 117=united kingdom & ireland, 118=united states (iia-north america) ia_age_cat q510 approximately how many years has the internal audit department been in place in at your organization? 1= <5, 2= 5-14, 3= 15 to 24, 4 = 25 to 34, 5=35+ ia_size_cat q41specified_1_cleanq41specified_cleasnednumericnumberoffulltim1 approximately how many full-time equivalent employees make up your internal audit department? the specified variable (exact number) was recoded into the following catergories:1=0 to <4, 2= 4 to <10, 3=10 to <25, 4= 25 to <50, 5= 50 to <300 audit committee involvement ac_exist q108 is there an audit committee or equivalent in your organization? 1=yes, 2=no (recoded to 1=yes, 0=no) ac_mtg_held q109specified_1_ cleanq78aspecifiedcleansednumericnumberofmeeting approximately how many formal audit committee meetings were held in the last fiscal year (including in-person meetings, telephone meetings, online meetings, and so on? ac_mtg_invite q110specified_1_ cleanq78bspecifiedcleansednumberofmeetingsspecif approximately how many formal audit committee meetings was the chief audit executive (cae), or director, invited to attend (entirely or in part) during the last fiscal year? 57 a. n. scarlata, s. garven, b. vagner, & t. bahmanziari journal of small business strategy / vol. 29, no. 2 (2019) / 44-57 ac_perc_atend q110/q109 percent of audit committee meetings that the cae was invited to attend (created variable) financial health budg_inc_prior q46 from last year to this year, how did your internal audit department budget change? 1=increased, 2=decreased, 3=remained the same (recoded to 1=increased, 0=did not increase) suff_budg q47 in your opinion, how sufficient is the funding for your internal audit department relative to the extent of its audit responsibilities? 1=not at all sufficient, 2=somewhat sufficient, 3=completely sufficient technical expertise cert_cia q21_1 cia (certified internal auditor) 0=not selected, 1=selected cert_cpa q22_2 cpa (certified public accountant) 0=not selected, 1=selected yrs_exp q520 total years of experience tech_spec q20 in addition to performing general internal audit activities, do you have an area of technical specialization for which you have had formal training and in which you spend a majority of your time working? 1= i do not have a technical specialization for my internal audit work, 2=accounting, 3= financial reporting, 4= fraud, 5= information technology (it), 6= ethics, 7= compliance, 8= legal, 9= risk management, 10= operations, 11= management, 12= engineering, 13= construction, 14= environmental auditing, 15= performance auditing, 16= other (recoded to 1=yes, 0=no) hrs_train q823_1 how many hours of formal training related to the internal audit profession do you receive per year? stra teg f book summary, review & application good to great: why some companies make the leap... and others don' by jim collins harpercollins, 2001, 320 pages reviewed by anthony bambocci abambocci@dsicdi.corn president, digital solutions, inc. www. dsicdi.corn introduction 'good is the enemy of great' a seemingly simple and trite phrase that opens the book 'good to great'y jim collins. it represents the central theme of the best selling business book of all time. this is a powerful message that once fully understood, can be applied to all aspects of our life as well as our business. it means that satisfaction is the lowest bar that we can set for ourselves. it means that doing a good job is just not good enough. we don't have great schools, principally because we have good schools. we don't have great government, principally because we have good government. few people attain great lives, in large part because it is just so easy to settle for a good life. the vast majority of companies never become great, precisely because the vast majority become quite good —and that is their main problem. 'good to great'as based on five years of analysis. the background on how the book was developed is important. this book does not represent the opinion or thoughts of one person— like most other business books. one thousand four hundred and thirty five companies were examined under strict criteria and only eleven of them were identified as making the leap from good to great. collins and his team reviewed books, articles and annual reports covering each company; examined financial analyses for each company, totaling nine hundred and eighty combined years of data; conducted 84 interviews with senior managers and board members of the companies: scrutinized the personal and professional records of ftay-six ceos; analyzed compensation plans for the companies; and reviewed layoffs, corporate ownership, "media hype," and the role of technology for the companies. with the list narrowed to eleven candidates. the next step in the analysis was to isolate what it took to make the transition from good to great. at this point, each of the eleven companies was paired with a comparison company —a company with similar attributes that could have made the transition, but didn'. 129 journal ofsmall business strategy vok l4, no. 2 fall/winier 2003 selection of the companies the actual process used in selecting these eleven companies was rigorous: 1. the company had to show a pattern of gooil performance, punctuated by a transition point, after which it shifted to great performance. "great perfomiance" was defined as a cumulative total stock return of at least three times the general market for the period from the transition point through 15 years. 2. the transitiou from good to great had to be coinpan» specific, not an inrlnstry-wiile event. 3. the company had to be an established and ongoing enterprise —not a startup, it had to have been in business for at least 25 years prior to its transition, and it had to have been publicly traded with stock-return data available for at least 10 years prior to its transition. 4. the transition point had to occur before 1985 to give the team enough data to assess the sustainability of the transition. 5. whatever the year of transition, the company had to be a significuni, imgi&ing, stanrl-alone company. 6. at the time of its selection, the company siill had to show an upivord ireiid. the study began with a field of 1,435 companies and emerged with a list of eleven companies; abbott laboratones, circuit city, fannie mae, gillette co., kimberly-clark corp., the kroger co., nucor corp., philip morris cos. inc., pitney bowes inc., we)greens, and wells fargo. non-conventional wisdom contrary to conventional wisdom, here are some surprising revelations that won't make a company great; 1) larger-than-life, celebrity leaders who ride in from the outside are negatively correlated with taking a company from good to great. ten of eleven good-to-great ceos came from inside the company, whereas the comparison companies tried outside ceos six times more often. 2) there is no systematic pattern linking specific forms of executive compensation to the process of going from good to great. the idea that the structure of executive compensation is a key driver in corporate performance is simply not supported by the data. 3) strategy per se did not separate the good-to-great companies from the comparison companies. both sets of companies had well-detined strategies, and there is no evidence that the good-to-great companies spent more time on long-range strategic planning than the comparison companies. 4) the good-to-great companies did not focus principally on what to do io become great; they focused equally on what not to do and what to stop doing. 5) technology and technology-driven change has virtually nothing to do with igniting a transformation from good to great. technology can accelerate a transformation, but technology cannot cause a transformation. 6) mergers and acquisitions play virtually no role in igniting a transformation from good to great; two big mediocrities joined together never make one great company. 130 journal of small business strategy vol. 14, no. 2 ealttl'inter 2003 7) the good-to-great companies paid scant attention to managing change, motivating people, or creating alignment. under the right conditions, the problems of commitment, alignment, motivation, and change largely melt away. 8) the good-to-great companies had no name, tag line, launch event, or program to signify their transformations. indeed, some reported being unaware of the magnitude of the transformation at the time; only later, in retrospect, did it become clear. yes, they produced a truly revolutionary leap in results, but not by a revolutionary process. 9) the good-to-great companies were not, by and large, in great industries, and some were in terrible industries. in no case do we have a company that just happened to be sitting on the nose cone of a rocket when it took off. greatness is not a function of circumstance. greatness, it turns out, is largely a matter of conscious choice. seven important sections section i: level 5 leadership this style of leadership is required for turning a good company into a great one. compared to high-profile leaders with big personalities who make headlines and become celebrities, the good-to-great leaders seem to have come from mars. self-effacing, quiet, reserved, even shy —these leaders are a paradoxical blend of personal humility and professional will. they are more like lincoln and socrates than patton or caesar. level 5 leaders show the following traits: i) they have ambition only for the company rather than themselves. they are not afraid to groom someone as their successor. level 5 leaders channel their ego needs away from themselves and into the larger goal of building a great company. it's not that level 5 leaders have no ego or self-interest. indeed, they are incredibly ambitious —but their ambition is iirst and foremost for the institution and concern for its success rather than for one's own riches and personal renown. level 5 leaders want to see the company even more successful in the next generation, comfortable with the idea that most people won't even know that the roots of that success trace back to their efforts. as one level 5 leader said, "i want to look out from my porch at one of the great companies in the world someday and be able to say, 'i used to work there.'" in over three quarters of the comparison companies, executives had set their successors up for failure or chose weak successors, or both. 2) they have a compelling modesty. the presence of a gargantuan personal ego is 75% responsible for the demise or continued mediocrity of the company. most executives credited luck for their successes and blamed themselves for failure. 3) they have an unwavering resolve to do what must be done. level 5 leaders are fanatically driven, infected with an incurable need to produce results. they will sell the mills or fire their brother, if that's what it takes to make the company great. an example of a cause of mediocrity in some comparison companies: nepotism. the evidence does not support the idea that you need an outside leader to come in and shake up the place to go from good to great. in fact, going for a high-profile outside change agent is negatively correlated with a sustained transformation from good to great. 4) luck. what an odd factor to talk about. yet the good-to-great executive talked a lot about luck in our interviews. level 5 leaders look out the window to apportion credit to factors outside themselves when things go well (and if they cannot find a specific person or event to 131 journal ofsmall business strategy vok /4, ltto. 2 fal!/winter 2003 give credit to, they credit good luck.) at the same time, they look in the mirror to apportion responsibility, never blaming bad luck when things go poorly. 5) they cultivate mid-level management and groom them to be level five leaders. section ii: first who...then what a 'bus'nalogy is used to represent a vehicle that is taking the company in a specific direction. it was expected that good-to-great leaders would begin by setting a new vision strategy. it was found instead that they first got the right people on the bus, the wrong people off the bus, and the right people in the right seats —and then they figured out where to drive it. the old adage "people are your most important asset" turns out to be wrong. people are not your most important asset. the right people are. conventional wisdom indicates that the first step in taking a company from good to great would be to set a new direction, a new vision and strategy for the company, and then to get people committed and aligned behind that new direction. the opposite is true. the executives who ignited the transformations from good to great did not first figure out where to drive the bus and then get people to take it there. no, executives first got the right people on the bus (and the wrong people off the bus) and then figured out where to drive it. good-to-great leaders understand three simple truths. first, if you begin with "who", rather than "what," you can more easily adapt to a changing world. if people join the bus primarily because of where it is going, what happens if you get ten miles down the road and you need to change direction? you'e got a problem. but if people are on the bus because of who else is on the bus, then it's much easier to change direction: "hey, i got on this bus because of who else is on it: if we need to change direction to be more successful, fine with me." second, if you have the right people on the bus, the problem of how to motivate and manage people largely goes away. the right people don't need to be tightly managed or fired up; they will be self-motivated by the inner drive to produce the best results and to be part of creating something great. third, if you have the wrong people, it doesn't matter whether you discover the right direction; you still won't have a great company. great vision without great people is irrelevant. they hired outstanding people whenever and wherever they found them, oflen without any specific job in mind. a quote from a good to great leader: "that's how you build the future," he said. "if i'm not smart enough to see the changes that are coming, they will. and they'l be flexible enough to deal with them." to be clear, the main point of this chapter is not just about assembling the right team —that' nothing new. the main point is to first get the right people on the bus (and the wrong people off the bus) before you figure out where to drive it. the second key point is the degree of sheer rigor needed in people decisions in order to take a company from good to great. "first who" is a very simple idea to grasp, and a very diflicult idea to do —and most don't do it well it's easy to talk about paying attention to people decisions, but how many executives (32 journal ofsmall business strategy vol l4, no. 2 fall/winter 2003 have the discipline of david maxwell (from wells fargo), who held off on developing a strategy until he got the right people in place, while the company was losing $ 1 million every single business day with $ 56 billion in loans underwater? ~ the good-to-great leaders began the transformation by first getting the right people on the bus (and the wrong people off the bus) and then figured out where to drive it. e the key point of this chapter is not just the idea of getting the right people on the team. the key point is that "who" questions come before "what" decisions —before vision, before strategy, before organization structure, before tactics. first who, then what —as a rigorous discipline, was consistently applied. ~ the comparison companies frequently followed the "genius with a thousand helpers" model will fail —a genius leader who sets a vision and then enlists a crew of highly capable "helpers" to make the vision happen. this model fails when the genius departs. ~ the good-to-great leaders were rigorous, not ruthless, in people decisions. they did not rely on layoffs and restructuring as a primary strategy for improving performance. the comparison companies used layoffs to a much greater extent. the researchers uncovered three practical disciplines for being rigorous in people decisions: 1. when in doubt, don't hire —keep looking. (corollary: a company should limit its growth based on its ability to attract enough of the right people.) 2. when you know you need to make a people change, act. (corollary: first be sure you don' simply have someone in the wrong seat.) 3. put your best people in you biggest opportunities, not your biggest problems. (corollary: if you sell off your problems, don't sell off your best people.) 4. good-to-great management teams consist of people who debate vigorously in search of the best answers, yet who unify behind decisions, regardless of parochial interests. 5. we found no systematic pattern linking executive compensation to the shift from good to great. the purpose of compensation is not to "motivate" the right behaviors from the wrong people, but to get and keep the right people in the first place. 6. the old adage "people are your most important asset" is wrong. people are not your most important asset. the right people are. 7. whether someone is the "right person" has more to do with character traits and innate capabilities than with specific knowledge, background, or skills. section iii: confront the brutal facts (yet never lose faith) a former prisoner of war has more to teach us about what it takes to find a path to greatness than most books on corporate strategy. every good-to-great company embraced what we came to call the stockdale paradox: you must maintain unwavering faith that you can and will prevail in the end, regardless of the difficulties, and at the same time have the discipline to confront the most brutal facts of your current reality, whatever they might be. ~ all good-to-great companies began the process of finding a path to greatness by confronting the brutal facts of their current reality. ~ when you start with an honest and diligent effort to determine the truth of your situation, the right decisions often become self-evident. it is impossible to make good decisions without infusing the entire process with an honest confrontation of the brutal facts. ~ a primary task in taking a company from good to great is to create a culture wherein people have a tremendous opportunity to be heard and, ultimately, for the truth to be heard. e creating a climate where the truth is heard involves four basic practices: 1. lead with questions, not answers. 133 journal of small business strategy vol. /4, no. 2 fall/winter 2003 2. engage in dialogue and debate, not coercion. 3. conduct autopsies, without blame. 4. build red flag mechanisms that turn information into information that cannot be ignored. ~ the good-to-great companies faced just as much adversity as the comparison companies, but responded to that adversity differently. they hit the realities of their situation head-on. as a result, they emerged from adversity even stronger. ~ a key psychology for leading from good to great is the stockdale paradox: retain absolute faith that you can and will prevail in the end, regardless of the difficulties, and at the same time confront the most brutal facts of your current reality, whatever they might be. ~ charisma can be as much a liability as an asset, as the strength of your leadership personality can deter people from bringing you the brutal facts. ~ leadership does not begin just with vision. it begins with getting people to confront the brutal facts and to act on the implications. ~ spending time and energy trying to "motivate" people is a waste of effort. the real question is not, "how do we motivate our people?" if you have the right people, they will be self-motivated. the key is to not de-motivate them. one of the primary ways to de-motivate people is to ignore the brutal facts of reality. section ivi the hedgehog concept (simplicity within the three circles) a hedgehog does only one simple thing really well: when confronted by an adversary, it curls up into a ball and reveals its sharp quills. to go from good to great requires transcending the curse of competence. just because something is your core business —just because you'e been doing it for years or perhaps even decades —does not necessarily mean you can be the best in the world at it. and if you cannot be the best in the world at your core business, then your core business absolutely cannot form the basis of a great company. it must be replaced with a simple concept that reflects deep understanding of three intersecting circles: what you can be the best at, what you are passionate about and what you can make money at? ~ to go from good to great requires a deep understanding of three intersecting circles translated into a simple, crystalline concept (the hedgehog concept): ~ the key is to understand what your organization can be the best in the world at, and equally important what it cannot be the best at —not what it "wants" to be the best at. the hedgehog concept is not a goal, strategy, or intention; it is an understanding. ~ if you cannot be the best in the world at your core business, then your core business cannot form the basis of your hedgehog concept. ~ the "best in the world" understanding is a much more severe standard than a core competence. you might have a competence but not necessarily have the capacity to be truly the best in the world at that competence. conversely, there may be activities at which you could become the best in the world, but at which you have no current competence. ~ to understand your economic engine, search for the one denominator (profit per x or, in the social sector, cash flow per x) that has the single greatest impact. ~ good-to-great companies set goals and strategies based on understanding; comparison companies set their goals and strategies based on bravado. ~ getting the hedgehog concept is an iterative process. 134 journal of small business strategy vol. l4, no. 2 fall/winter 2003 unexpected findings in this chapter ~ the good-to-great companies are more like hedgehogs —simple, dowdy creatures that know "one big thing" and stick to it. the comparison companies are more like foxes —crafty, cunning creatures that know many things yet lack consistency. ~ it took four years on average for the good-to-great companies to get a hedgehog concept. ~ strategy per se did not separate the good-to-great companies from the comparison companies. both sets had strategies, and there is no evidence that the good-to-great companies spent more time on strategic planning than the comparison companies. ~ you absolutely do not need to be in a great industry to produce sustained great results. no matter how bad the industry, every good-to-great company figured out how to produce truly superior economic returns. section v: a culture of discipline all companies have a culture, some companies have discipline, but few companies have a culture of discipline. when you have disciplined people, you don't need hierarchy. when you have disciplined thought, you don't need bureaucracy. when you have disciplined action, you don't need excessive controls. when you combine a culture of discipline with an ethic of entrepreneurship, you get the magical alchemy of great performance. ~ sustained great results depend upon building a culture full of self-disciplined people who take disciplined action, fanatically consistent with the three circles. v bureaucratic cultures arise to compensate for incompetence and lack of discipline, which arise from having the wrong people on the bus in the first place. if you get the right people on the bus, and the wrong people off, you don't need stultifying bureaucracy. a culture of discipline involves a duality. on the one hand, it requires people who adhere to a consistent system; yet, on the other hand, it gives people freedom and responsibility within a framework of the system. ~ a culture of discipline is not just about action. it is about getting disciplined people who engage in disciplined thought and who then take disciplined action. v the good-to-great companies appear boring and pedestrian looking in from the outside, but upon closer inspection, they'e full of people who display extreme diligence and a stunning intensity (they "rinse cottage cheese"). ~ do not confuse a culture of discipline with a tyrant who disciplines —they are very different concepts, one highly functional, the other highly dysfunctional. savior ceos who personally discipline through sheer force of personality usually fail to produce sustained results. ~ the single most important form of discipline for sustained results is fanatical adherence to the hedgehog concept and the willingness to shun opportunities that fall outside the three circles. unexpected findings in this chapter v the more an organization has the discipline to stay within its three circles, with almost religious consistency, the more it will have opportunities for growth. ~ the fact that something is a "once-in-a-lifetime opportunity" is irrelevant, unless it fits within the three circles. a great company will have many once-in-a-lifetime opportunities. 135 journal of small business strategy vol. l4, no. 2 fa!iiivinter 2003 ~ the purpose of budgeting in a good-to-great company is not to decide how much each activity gets, but to decide which arenas best fit with the hedgehog concept and should be fully funded and which should not be funded at all. ~ "stop doing" lists are more important that "to do" lists. section vi: technology accelerators ~ good-to-great companies think differently about the role of technology. they never use technology as the primary means of igniting a transformation. yet, paradoxically, they are pioneers in the application of carefully selected technologies. we learned that technology by itself is never a primary, root cause of either greatness or decline. ~ good-to-great organizations think differently about technology and technological change than mediocre ones. ~ good-to-great organizations avoid technology fads and bandwagons, yet they become pioneers in the application of carefully selected technologies. ~ the key question about any technology is: does the technology fit directly with your hedgehog concept? if yes, then you need to become a pioneer in the application of that technology. if no, then you can settle for parity or ignore it entirely. ~ good-to-great companies use technology as an accelerator of momentum, not a creator of it. none of the good-to-great companies began their transformation with pioneering technology, yet they all became pioneers in the application of technology once they grasped how it fit with their three circles and after they hit breakthrough. ~ you could take the exact same leading-edge technologies pioneered at the good-togreat companies and hand them to their direct comparisons for free, and the comparisons still would have failed to produce anywhere near the same results. ~ how a company reacts to technological change is a good indicator of its inner drive for greatness versus mediocrity. great companies respond with thoughtfulness and creativity, driven by a compulsion to turn unrealized potential into results; mediocre companies react and lurch about, motivated by fear ofbeing left behind. unexpected findings in this chapter ~ the idea that technological change is the principal cause for the decline of once-great companies (or the perpetual mediocrity of others) is not supported by the evidence. certainly, a company can't remain a laggard and hope to be great, but technology by itself is never a primary root cause of either greatness or decline. ~ across eighty-four interviews with good-to-great executives, fully 80 percent didn' even mention technology as one of the top five factors in the transformation. this is true even in companies famous for their pioneering application of technology, such as nucor. ~ "crawl, walk, run" can be a very effective approach, even during times of rapid and radical technological change. section vii: the flywheel and the doom loop those who launch revolutions, dramatic change programs, and wrenching restructurings will almost certainly fail to make the leap from good to great. no matter how dramatic the end result, the good-to-great transformations never happened in one fell swoop. there was no single defining action, no grand program, no one killer innovation, no solitary lucky break, no miracle moment. rather, the process resembled relentlessly pushing a giant heavy flywheel in one direction, turn upon turn, building momentum, until a point of breakthrough, and beyond. 136 journal of small business strategy vol. /4, no. 2 fall/winter 2003 ~ good-to-great transformations often look like dramatic, revolutionary events to those observing from the outside, but they feel like organic, cumulative processes to people on the inside. the confusion of end outcomes (dramatic results) with process (organic and cumulative) skews our perception of what really works over the long haul. v no matter how dramatic the end result, the good-to-great transformations never happened in one fell swoop. there was no single defining action, no grand program, no one killer innovation, no solitary lucky break, no miracle moment. e sustainable transformations follow a predictable pattern of buildup and breakthrough. like pushing on a giant, heavy flywheel, it takes a lot of effort to get the thing moving at all, but with persistent pushing in a consistent direction over a long period of time, the flywheel builds momentum, eventually hitting a point of breakthrough. ~ the comparison companies followed a different pattern, the doom loop. rather than accumulating momentum —turn by turn of the flywheel —they tried to skip buildup and jump immediately to breakthrough. then, with disappointing results, they' lurch back and forth, failing to maintain a consistent direction. ~ the comparison companies frequently tried to create a breakthrough with large, misguided acquisitions. the good-to-great companies, in contrast, principally used large acquisitions after breakthrough, to accelerate momentum in an already fastspinning flywheel. unexpected results in this chapter ~ those inside the good-to-great companies were often unaware of the magnitude of their transformation at the time; only later, in retrospect, did it become clear. they had no name, tag line, launch event, or program to signify what they were doing at the time. ~ the good-to-great leaders spent essentially no energy trying to "create alignment," "motivate the troops," or "manage change." under the right conditions, the problems of commitment, alignment, motivation, and change largely take care of themselves. alignment principally follows from results and momentum, not the other way around. ~ the short-term pressures of wall street were not inconsistent with following this model. the flywheel effect is not in conflict with these pressures. indeed, it is the key to managing them. we read it, we talked it, we walked it: how digital solutions, inc. implemented "good to great" there is an old saying that 'imitation is the best form of flattery'. there are many worse things you could do to your business other than incorporating and imitating the behaviors of the eleven companies highlighted in this book. at our company, we are making a concerted effort to adhere to the seven principles of great companies (please see appendix for overview of digital solutions, incorporated): level 5 leadership: this has been an ongoing process within our organization. often times, the public views the ceo as 'the company', especially if the ceo is charismatic. this can become problematic when clients bring every problem to the ceo expecting resolution. when the ceo 'fixes'he problem, it reinforces the public perception that the company is a 'company of one'nd continues the vicious cycle of thinking that the ceo is the only person that can help them. in fact, when an organization is surrounded by the right people, it becomes 137 journal ofsmall business strategy vol. l4, no. 2 eall/winter 2003 essential that the ceo directs the customer to the appropriate people within the organization and creates an aura of confidence in the company's staff. at our company, we take every opportunity to rotate our staff on all projects to introduce our customer base to our entire staff. additionally, each member of our management team has identified and groomed their replacement. at the present time, the loss of any one person on our management team would not create any di(ticulties in the execution of our strategic plan. first who...then what: this is perhaps the area that my own organization has spent the most time studying and implementing. it takes our company three months to hire a new employee. we have developed and perfected a 'hiring process'hat is outside the scope of this review because of its length, but basically it centers around the following process; appoint a hiring team with one person as the team leader, re-evaluate the job description, identify talents associated with the role, create interview questions to uncover the talents, create tests based on the skill set required for the position, advertise the position, select the most promising resumes, conduct brief phone interviews, contact references, schedule testing for the most promising candidates and then, and only then conduct a team interview for candidates who have successfully passed the testing process. if it sounds like a lot of work —it is. however, the last ten applicants we have hired using this process have been huge assets to our company. they are motivated, they do not need managed, they are strategic thinkers, they serve well in roles outside the position they were hired for, they have vision and they have a burning drive to make the company successful. we have a saying at our company: "we will teach, lead and guide you, but we will not manage you." additionally, we routinely move people between positions in our company when they are not exceeding expectations in their role. we only move once before we eliminate. there are many other projects that we are implementing in the areas of staff development such as: wide pay banding, talent reviews and testing, role expansion and the creation of special positions linked to an individual's unique skills. confront the brutal facts: the style of an executive or manager is the single biggest obstacle to determine whether or not you will learn about problems within your company or customer base (delusion is the second biggest obstacle). a stem uncompromising manager will seldom be the first person alerted to problems because staff, and often times, peers fear delivering bad news to this type of person. we have created alternate notification paths ("red flag mechanisms") and instructed all of our employees in its use, to alert the executive staff to any bad news or information that cannot be ignored. by maintaining a real open-door policy among all managers, we have created a culture in which the truth is always heard and acted upon. an entire novel could be written on how we have adopted rigorous debate (within the framework of team building) to make decisions and bury our mistakes without casting blame. hedgehog concept: this has taken longer to implement than i initially expected. we started by defining what our organization was passionate about (or what a few of us were passionate about). our company develops software for prisons and jails. in order to instill passion in our staff and educate them on the culture of our customers, we purchased a series of training tapes that are used to train and certify correctional officers. every employee of our company, regardless of position, attends a weeklong instructional seminar by ex-correctional staff. at the end of the seminar, an employee must pass a test to remain employed by our company. if our employees are not passionate about what we do, they at least understand our core business and our customer base. that brings us to the subject of understanding what we can make money at. in our business, there are many ways for us to make money: telephony applications, medical applications, food service, commissary service, pharmaceutical service, providing facility supplies, video visitation —and that's only a partial list. the only problem is that we did not know if we could become passionate about these other areas or determine whether we could be the best in the world at providing them. i believe the answer is you try to provide these additional products or services in small increments and see what happens. we have 138 journal of small business strategy vol l4, no. 2 fall/winter 2003 discovered there is a fine line between maintaining an entrepreneurial spirit and developing too many products and services. our philosophy is to start small and cut your losses quickly if they are not working. the final comment is that developing your "hedgehog concept" is truly an on-going iterative process that is never finished. p culture of discipline: in our company this philosophy boils down to a relatively simple system: create your strategic goals for three to four years, but break them down into an operating plan that has measurable quarterly goals; hold people accountable to the goals defined to each quarter; tie only success of reaching all goals to bonuses (not annual raises); get rid on non-performers quickly; make sure your managers have the discipline to hold each other accountable and finally; make sure that the executive staff has enough red flag mechanisms in place to alert you to failures before they happen. this framework sets a framework for achievement that everybody needs, but it creates freedom without undue bureaucracy. it is important that have people on your staff that are what i like to call 'shower thinkers' people that are always thinking during their downtime activities. these are people that have a need to accomplish something at the end of each and every day. technology accelerators: the first spreadsheet i ever used was called visicalc. the second was lotus 1-2-3. the companies that developed these products were pioneers in the software world and single-handedly created a market for personal computers. the creators of these products are no longer in business. why? they had great products. more importantly, they achieved the coveted 'first to market'tatus. they failed because a little company called microsoft undercut their pricing by giving the product away with their operating system and significantly discounting the product to hardware suppliers. they provided an easy way to convert spreadsheets saved in lotus and visicalc files to excel. the point is that being a pioneer in an exciting new technology guarantees nothing —it's everything else that matters most. do not purchase the most expensive or pioneering technology available on the market until you have first done due diligence and prepared a business case showing how you will wither save money or increase efficiency or improve customer service. flywheel and the doom loop: how many of us, frustrated by our lack of success, have confronted staff with passionate speeches, created new and improved vision and mission statements, tried naming our revolution against inadequacy, created grand customer improvement schemes, restructured our bureaucracy, tried motivational exercises and on and on. these are all things that i have tried and it all works —for a very short time period. the bottom line is that change occurs slowly, over a long period and it starts with hiring the right people and continues through confronting the brutal facts, defining your hedgehog concept, and creating a culture of discipline. these concepts take years to implement in your own way and your own style. in my own organization, we are about half way there. my only advice is to start now, relish the small improvements that are made along the way, maintain your level of patience and imagine where your company will be at the end of implementing the objectives in this book. that's the only way to turn the flywheel —slowly. 139 journal of small business strategy vo/. /4, /4o. 2 fall/winter 2003 anthony bambocci is a /982 summa curn laude graduate of saint francis university with a degree in mathematics. anthony has built a thriving business in blair county, creating good paying, high tech jobs in an economically depressed region and auracting employees from both inside and outside the area. as president and foumler of digital solutions incorporated (dsi/, lie and his partners have built a strong and successful software company in central pennsylvania, a geographic area not normally considered a "high tech" region. since the company's founding in /984, anthony and his partners have grown the firm from under 5500,000 in revenues and five employees to more than 8/0 million and 80 employees in 2003. his firm accomplished this by defining the company's market niches in the criminal justice sector and exploiting tliose niches to build a successful business. as an example, the firm is the lending provider of software to prisons and jails in the united states. this product enabled digital solutions to enter a market with limited competition and became extremely proficient in meeting the needs of correction officials. from the initial product (developed in l987). dsi has expandeil their product offerings to the corrections industry: prisons, jails, adult probation agencies, prosecutorsjuvenile detention agencies and criminal courts. their sofnvare is now usedin the maj on'ty of pennsylvania 's county criminaljustice agencies. among the recognitions mr. bambocci has received are the following: pa business central as one of pennsylvania 's top /00 busi nesspersons in 2004; 2003 western pennsylvania small business person of the year; 2002 central pennsylvania small business person of the year; various awards from the altoona chamber of commerce for innovation and excellence in /993, /997, 200/ and 2003. in addition, mr. bambocci is a fret/uent lecturer at business events and indiana university of pennsylvania is a member of iup business advisory council and is a board member for skills of pa appendix digital solutions, incorporated dsi was co-founded by anthony bambocci, james faith, and david perove in 1984. dsi's flagship software product is its offender management system (oms). the system was initially developed according to specifications of the pennsylvania state association of county commissioners and the pennsylvania commission on crime and delinquency. in 1992, dsi recognized the need for criminal justice information systems to integrate with and support its current offender management product line. dsi created developed subsequent products that integrated court, probation and parole, juvenile detention, prosecutor and district attorney systems. in 1993, dsi was approached by several correctional facilities and asked to develop an inmate call control system. after a lengthy investigation, dsi formed a second subsidiary company, inmate telephone incorporated (iti). iti's product fully integrates with the jail management product and provides additional services such as commissary-by-phone, inmate debit calling, and voice recording systems to the client base. the client base has expanded well beyond pennsylvania to include over 400 clients in thirtyfive states across the u.s.. as with the criminal justice community, dsi's software products are in a state of constant change and advancement as both new technologies are deployed and new state laws are enacted. dsi has grown over the years exceeding $ 10 million in sales in 2003 and over 80 employees. 140 reproduced with permission of the copyright owner. further reproduction prohibited without permission. table of contents anonymous journal of small business strategy; fall 2004/winter 2005; 15, 2; abi/inform complete pg. 0_3 entrepreneurial and market-oriented activities, financial capital, environment turbulence, and export performance in an emerging economy nathaniel boso university of leeds n.boso@leeds.ac.uk pejvak oghazi linnaeus university pejvak.oghazi@lnu.se john w. cadogan loughborough university and lappeenranta university of technology j.w.cadogan@lboro.ac.uk vicky m. story loughborough university v.m.story@lboro.ac.uk abstract this study examines the impact of the simultaneous implementation of entrepreneurial and market-oriented export activities on export success and whether this relationship depends on levels of financial capital and market environment turbulence. the findings from a study of 164 ghanaian exporting small and medium-sized enterprises (smes) indicate that high levels of both entrepreneurial and market orientation generate better export performance. the relationship is stronger when firms have greater financial capital and operate in more turbulent export market environments. these results extend existing knowledge of how smes can improve export performance by seeking fit between firm-specific capabilities and external environment conditions. keyword: exporting smes; entrepreneurial orientation; market orientation; export performance; export market turbulence; financial capital; developing economy 1 mailto:n.boso@leeds.ac.uk mailto:pejvak.oghazi@lnu.se mailto:j.w.cadogan@lboro.ac.uk mailto:v.m.story@lboro.ac.uk journal of small business strategy vol. 26 ● no. 1 ● 2016 introduction exporting is a vital strategy for many firms because it enables them to expand markets, gain new customers and improve performance (cavusgil & zou 1994; leonidou, katsikeas, & samiee 2002). for example, for firms with substantial exporting operations, there is the opportunity to leverage existing capabilities across different countries to create scale economies otherwise unavailable in home markets (leonidou et al., 2002). through exporting, new market opportunities are created to sell new products and connect with important constituencies in different markets (cavusgil & zou 1994; leonidou et al. 2002). since the seminal works of lumpkin and dess (1996) on entrepreneurial orientation (eo) and kohli and jaworski (1990) on market orientation (mo), the two constructs have taken a central position in general management theory and research (e.g. kirca, jayachandran, & bearden, 2005; rauch, wiklund, lumpkin, & frese, 2009; baker & sinkula 2009; wang 2008; ellis 2007). essentially, the two constructs are viewed as critical resources that offer firms the capability to explore evolving entrepreneurial opportunities and exploit existing product market competences (baker & sinkula 2009; bhuian, menguc, & bell, 2005; jaworski, kohli, & sahay, 2000), making the explanatory power of eo and mo activities on firm performance, in both domestic (e.g. rauch et al., 2009; kirca et al., 2005) and overseas business operations (balabanis & katsikea 2003; cadogan et al. 2009; zahra and garvis 2000; knight and kim 2009), major themes in scholarly research (e.g. kropp et al. 2006; cadogan, kuivalainen, & sundqvist, 2009; zahra & garvis 2000; knight & kim 2009). however, despite years of valuable scholarly insights and extensive managerial interests, there are at least three important areas to extend the existing literature. first, eo and mo are considered to be important within the context of exporting (balabanis & katsikea 2003; cadogan, diamantopoulos, & siguaw, 2002; ellis 2007). however, previous research has not considered how high eo and high mo activities may complement each other when firms engage in export operations. the strategic orientation literature suggests that a firm’s ability to implement high levels of eo and mo activities simultaneously may bring about greater benefits, as both orientations have advantages that attenuate for the potential drawbacks of the other (hakala 2011; hult & ketchen 2001). thus, an export strategy that emphasizes the simultaneous implementation of high levels of both orientations should enable firms to generate greater synergy between entrepreneurial abilities and market-oriented competences to enhance performance in foreign markets (atuahene-gima & ko 2001). however, despite the potential insights that this multifaceted export strategy offers for small business theory development and practice, the effects that high levels of both export eo and mo activities have on sme performance in export markets remains under-researched. second, research looking at how firms apply eo and mo capabilities in export markets has not examined key contingency factors, such as resource requirements and environmental conditions, that may shape the success of a strategy that simultaneously focuses on high levels of both eo and mo activities. importantly, the literature suggests that sme exporters may struggle to effectively convert their exporting activities into higher performance because of resource limitations and a lack of experience in foreign operations (kropp, lindsay, & shoham, 2008; knight & kim 2009). while the dominant approach in the small business literature is to test the impacts in main-effect only or two-way 2 journal of small business strategy vol. 26 ● no. 1 ● 2016 contingency effect models (e.g. lumpkin and dess 2001; alpkan, yilmaz, & kaya, 2007; renko, carsrud, & brannback, 2009; knight & kim 2009), we model the impacts of simultaneously high eo and mo, financial capital and export market environmental turbulence fit on export performance in threeway interaction models. this approach draws on the organizational configuration literature (meyer, tsui, & hinnings, 1993; ketchen, thomas, & snow, 1993; short, payne, & ketchen, 2008) and the literature on complementarities in organizations (ennen & richter 2010) to argue that the elements of simultaneous eo and mo activities, financial resources and environmental conditions may coalesce to enhance firm performance in export markets. third, given that much of the work on eo and mo has been based on relatively wealthy western economies, one could question whether the findings from these studies can be generalized to non-western economy settings (aulakh, kotabe, & teegan, 2000; alpkan, yilmaz, & kaya, 2007; wright, filatchev, hoskisson, & peng, 2005; burgess & steenkamp 2006). while there are some studies on eo and mo from developing economies, much of the latter are based on samples from asia (especially china) and a few on samples from central and eastern european countries. despite the socioeconomic and institutional similarities that developing economies may share, it is also true that widespread differences exist among them on such key issues as culture (including social norms and values) and levels of risk and uncertainty (acquaah 2007). interestingly, very few eo and mo studies focus on africa (e.g. kropp, lindsay, & shoham, 2006; kuada & buatsi 2005), even though this continent contains unique cultures (goedhuys & sleuwaegen 2000) and numerous emerging economies (hoskisson, eden, lau, & wright, 2000). thus, in view of the importance of context in theory development (hoskisson et al. 2000; wright et al., 2005), researching eo and mo activities in an african setting should be a useful extension of the existing literature, and shed new light on the relationships between firms’ strategic orientations and overseas business success. theoretical background and hypotheses the key focus of eo and mo activities is superior customer value creation and delivery relative to market competitors. although scholars have examined several aspects of strategic orientation, a firm’s ability to simultaneously implement both eo and mo is arguably a key activity for driving superior performance (webb, ireland, hitt, kistruck, & tihanyi, 2011). while export eo activity refers to a firm’s propensity to innovate, take risks, act proactively and aggressively, and encourage autonomous decision-making in export markets (balabanis & katsikea 2003), export mo relates to the processes that firms use to generate, disseminate and respond to market intelligence in foreign markets (cadogan et al. 2009). among exporting firms operating in a developing economy, empirical evidence regarding the benefits of the simultaneous implementation of entrepreneurial and market-oriented activities in export operations remains fragmented (li, zhao, tan, & liu, 2008; boso, cadogan, & story, 2012). furthermore, the literature also highlights that a firm’s ability to simultaneously implement both eo and mo is likely to be a necessary but not a sufficient condition for superior performance attainment (webb et al. 2011). although these firm-level activities may drive superior performance, firms are likely to be more successful if they seek fit between these strategic activities, financial resources and the environment (ketchen et al. 1993; meyer et al. 1993; short, payne, & ketchen, 2008). this 3 journal of small business strategy vol. 26 ● no. 1 ● 2016 configurational approach is in line with the organizational complementarity logic, which posits that when firms seek fit between two or more attributes there is the possibility that doing more of one activity may increase the value of doing more of the others (ennen & richter 2010). this is especially true in the export context, which is more complex and challenging (murray, gao, & kotabe, 2011). against this background, this study contributes to the existing literature by examining whether firms that seek to develop fit between a combined eo and mo activity, financial capital and export market environment turbulence can achieve superior performance in export markets than firms that do not. the focus on financial capital stems from the fact that both eo and mo activities consume firm financial resources (cadogan et al. 2009; voss, sirdeshmukh, & voss, 2008), therefore, their benefits in export markets may be facilitated when firms have greater access to financial capital (wiklund & shepherd 2005). according to cooper, gimeno-gascon, and woo (1994) new business opportunities should be pursued in line with resources available to firms. we define financial capital as the extent to which finances are available and accessible to the firm to fund export operations (wiklund & shepherd 2005; cooper et al. 1994). accordingly, we argue that the probability of substantial concurrent eo and mo efforts generating improvements in export performance is dependent on having a large export budget. in addition, we theorize that because high levels of both eo and mo may be required more in some environments and less in others, the success of such an export strategy may depend on the conditions prevailing in a firm’s overseas markets. the literature on contingency theory suggests that export market environmental turbulence provides an appropriate condition for greater investments in eo and mo activities (balabanis & katsikea 2003). we define export market environment turbulence as the degree of hostility and uncertainty in a firm’s foreign markets (zahra & garvis 2000). as such, we propose that high investment in both eo and mo activities is most justified in turbulent export market environments. figure 1 displays the conceptual model for this study and the following sections present the theoretical arguments and hypotheses developed. figure 1: conceptual model and hypotheses non-hypothesized and control paths hypothesized h1 export performance: -new product success -overall performance simultaneous entrepreneurial and market orientation export market turbulence h2c financial capital h2a h2b 4 journal of small business strategy vol. 26 ● no. 1 ● 2016 simultaneous eo and mo activities and export performance in the context of export operations, entrepreneurial-oriented activity captures how firms use exploratory processes to compete in foreign markets (balabanis & katsikea 2003). because entrepreneurial-oriented exporters highlight innovativeness and emphasize the intensive launch of new products in overseas markets they are often successful in targeting premium market segments, charging high prices and "skimming" the market ahead of their competitors (hult, hurley, & knight, 2004). moreover, the pioneering advantageseeking activities of eo enable exporters to get ahead of overseas market rivals through superior value creation and delivery (zahra & garvis 2000). however, there is a downside to over-emphasizing entrepreneurship in export operations: such activities are riskier and have foreign market performance consequences that can be very uncertain (zahra & garvis 2000). hence, there is a requirement for firms to combine high levels of entrepreneurial activities with stronger market-oriented processes, because market-oriented activities involve the process of improving existing market offerings to meet the needs and preferences of the existing customer base (kirca et al. 2005). with high mo activities firms can provide a buffer for more exploratory entrepreneurial export activities. however, it is equally important to note that although market-oriented export activities may be less risky and have performance outcomes that are more certain, returns on high mo activities may be lower, and firms that over-emphasize mo activities may also suffer structural inertia, reduced creativity levels, and become less receptive to new market opportunities (cadogan et al. 2009). such structural deficiencies inherent in market-oriented processes can be attenuated by entrepreneurial-oriented export activities. accordingly, there is an imperative for exporting firms to develop high levels of both eo and mo activities to attenuate for the drawbacks of each other. the call for simultaneous efforts towards both eo and mo activities in foreign markets is supported by the literature. first, the literature on complementarity in organizations suggests that there is a “beneficial interplay of the elements of a system where the presence of one element increases the value of others” (ennen & richter 2010, p. 207). second, organizational ambidexterity logic supports the view that eo and mo activities are inseparable (he & wong 2004), interdependent (he & wong 2004) and complementary organizational processes (hughes, hughes, & morgan 2007). third, strategic orientation theory proposes that firms can achieve greater success if eo and mo activities are strategically integrated (o’reilly & tushman 2008). building on these logics, we posit that eo and mo activities complement each other, such that firms implementing high levels of both simultaneously should benefit. specifically, where mo activities are high, exporting firms with greater eo will take risks and innovate in an environment with better intelligence of market conditions and of the likely responses of customers and competitors. this is most likely because mo makes exporters wiser (cadogan et al. 2009). with greater levels of mo, exporting firms are more prudent with their proactive market timing and targeting decisions due to better market understanding. competitively aggressive behavior is carefully and realistically focused, and the maverick-like behavior of employees is well targeted at well-defined export customer needs and preferences, leading to superior export performance. similarly, increasing 5 journal of small business strategy vol. 26 ● no. 1 ● 2016 levels of export mo is mainly a response to current export market demands indicating that firms that emphasize high levels of mo alone may be limited to addressing only articulated customer needs and preferences, and thus risk missing opportunities to develop stronger innovative products that export customers cannot describe (li et al. 2008; bhuian et al. 2005). such limitations may be compensated by focusing efforts on developing high levels of mo and eo capabilities simultaneously in export operations. accordingly, we hypothesize that: h1: an export strategy emphasizing high levels of both eo and mo is positively related to export performance. fit between eo and mo activities, financial capital and export environment turbulence effective implementation of high levels of both eo and mo activities in export markets requires substantial capital investments (wiklund & shepherd 2005). for example, jaworski, kohli, and sahay, (2000) argue that efforts to seek greater alignment between market-driving and market-driven capabilities require substantial capital investments in structural processes that ensure an effective balance. the literature on complementarity also indicates that the system embeddedness generated by combining heterogeneous activities can pose significant challenges for firms in terms of resource requirements (ennen & richter 2010). firms with greater financial capital are more flexible to explore and experiment with riskier entrepreneurial opportunities in export markets without worrying too much about the financial ramifications for existing export market competences. greater financial capital may reduce firms’ fears with regard to the potential failure of exploratory activities and concerns about structural inertia due to being overly market-oriented. whereas, limited financial capital may force firms to cut corners to save money, thus, reducing their capacity to grow in overseas markets. the extant literature provides some empirical evidence to support this proposition. for example, goedhuys and sleuwaegen (2000, p.123) note that “financial constraints continue to play a major restraining role for entrepreneurship and firm growth” in sub-sahara africa. additionally, arenius and minniti (2005) argue that at low levels of finance the likelihood of growing entrepreneurial ventures is reduced. accordingly, exporting smes implementing eo and mo activities concurrently in developing economies, like those in subsahara africa, may have their export budgets over-stretched, as such activities consume significant amount of resources (cadogan et al. 2009; voss et al. 2008). in this respect, the benefits of strong eo and mo efforts on export performance should increase when access to financial capital is high. additionally, it is also argued that investing in the development of export strategies is most beneficial when appropriate export environmental conditions apply (cadogan et al. 2009; zahra & garvis 2000; kropp et al. 2008). cadogan et al. (2009), for example, argue that when environmental conditions are relatively benign, greater investments in export mo activities may not be maximally beneficial in the sense that firms face fewer challenges that require the use of these activities. similarly, zahra and garvis (2000) contend that because hostile foreign market environments have demand conditions that are constantly shifting and competitive activities that are increasingly intense and diverse, there is a greater imperative for firms in such environments to focus more on eo activities to boost performance. furthermore, firms that have high levels of both eo and mo activities may not be operating at an optimal level in 6 journal of small business strategy vol. 26 ● no. 1 ● 2016 more benign export market environments; in such environments investing less in eo and mo may improve performance. in the particular case of developing economies, it is likely that greater investments in the development of eo and mo activities may be more critical for performance improvement given that environment conditions in those economies (especially in sub-sahara africa) are less predictable compared to developed economies (acquaah 2007). however, a central premise of the configurational approach is that firms that seek fit between their strategic activities, their resources and the environment should perform better than comparable firms that only seek alignment between two of the factors (wiklund & shepherd 2005; short et al. 2008). we capture this configuration logic by modelling a three-way interaction between (a) high levels of eo and mo activities, (b) financial capital and (c) export market environment turbulence. there are some conceptual arguments backing the notion that fit between these sets of variables will produce stronger export performance outcomes. first, cooper et al. (1994) assert that financial capital can be a key resource that helps firms transform specific strategies in turbulent environments to enhance performance because financial capital is more “liquid and flexible and can rapidly be directed toward new initiatives, should new opportunities arise” (wiklund & shepherd 2005, p. 79). furthermore, some empirical evidence indicates that small businesses in developing economies struggle to convert strategic capabilities into performance in hostile and more demanding environment conditions (e.g. li et al. 2008; kropp et al. 2006). hostile activities of competitors, changes in market demand and the wider macro environment provide greater uncertainty and this may render a previously valuable strategy obsolete within a short period of time (miller & shamsie 1996). thus, firms with deeper pockets should be better able to sustain a strategy that focuses on high levels of both eo and mo in more turbulent environments. therefore, we hypothesize that: h2 (a): the relationship between the joint implementation of high levels of eo and mo and export performance increases in strength as levels of financial capital increase in magnitude. h2 (b): the relationship between the joint implementation of high levels of eo and mo and export performance increases in strength as levels of export environment turbulence increase in magnitude. h2 (c): the increase in the strength of the relationship between the joint implementation of high levels of eo and mo and export performance occurring as levels of financial capital increase is greater when environmental turbulence is higher. methodology research setting this study involves a multi-industry survey of small and medium sized enterprises (smes) exporting from ghana, a sub-sahara african country. the choice of ghana for this study is appropriate for several reasons. first, ghana is one of the very few developing sub-saharan african countries to successfully operate an open market economy, and to have benefited from the market-based programs of the breton wood institutions such as the international monetary fund (imf) and the world bank (weissman 1990). as such, ghana provides an interesting context to examine how marketbased theories regarding eo and mo generalize to developing economy contexts. second, a recent world bank group report indicates that ghana has achieved a middle income status with significant increases in 7 journal of small business strategy vol. 26 ● no. 1 ● 2016 gdp per capita (world bank group 2011). even more significant is that ghana’s growth is driven primarily by export activities of small and medium sized enterprises (abor & quartey 2010). third, the world bank 2011 ‘doing business’ survey suggests that ghana is a global top performer: access to business credits is improving, and overall, ghana has remained one of the easiest place to do business in sub-sahara africa (world bank group 2011). this means that the business environment in ghana is one of the most conducive in sub-sahara africa. thus, studying small business exporters operating in ghana provides an interesting setting to study market-based theories in a non-western economy context (acquaah 2007). data collection the sampling frame was a directory of exporters provided by the ghana export promotion authority, which is the national focal point for the development and promotion of export activities in ghana. to supplement this list, we also used the ghana business directory as it provides information on ghanaian businesses that have overseas operations, and has been used in previous studies (e.g. acquaah 2007). these directories provide names, addresses, and telephone numbers of senior company executives including chief executive officers (ceos), and are available in electronic and print formats. thus, given the difficulty in identifying a single database of smes with significant export activities (zahra, ireland, & hitt, 2000), particularly in a developing economy like ghana (khavul, pereznordtvedt, & wood, 2010), we relied on multiple data sources. in addition, given the scarcity and inaccuracy that may be associated with databases from developing countries (peng & heath 1996), we then screened the firms to ensure that the following study criteria were met: (1) that the firms were independent entities and were not part of any company group or chain (wiklund & shepherd 2011); (2) that the companies were entrepreneurial firms owned and controlled by private individuals with majority ownership (goedhys & sleuwaegen 2010); (3) that the firms had an international focus (kropp et al. 2006); (4) that the firms were smes employing between five and 249 full-time staff (goedhys & sleuwaegen 2010; wiklund & shepherd 2011); and (5) that there was complete contact information on the ceo (khavul et al. 2010). thus, included in the sample are smes that engaged in productive export business activities (kropp et al. 2006). as with previous studies in developing countries (e.g. li & atuahene-gima 2001; khavul et al. 2010), data was collected on-site, as postal and electronic mailing systems are less developed. a total of 332 active exporters qualified and agreed to be interviewed. the local branch of an international research consultancy firm was then hired to administer the questionnaires on-site and were personally briefed and supervised by a member of the research team. in the end, total useable responses were obtained from 164 firms, representing a 49.4% response rate. to corroborate the data from the ceos, telephone calls were made to 16 finance managers (10%) randomly selected from the 164 exporting firms on key firm demographic variables (annual sales volume, number of countries a firm exported to, and firm profitability). the data from the finance managers were compared with that obtained from the ceos, and non-significant mean differences were obtained (p > 0.5). the firms in our sample operated in multiple industries such as cookware, textiles and garment, food and beverages, crafts, agro-processing, security, and financial services, which are 8 journal of small business strategy vol. 26 ● no. 1 ● 2016 representative of developing economy industries. the firms employed an average of 56 full-time employees. the average percentage export sale was 61% of total annual sales. on average, the firms have been exporting for more than six years (but less than ten years) at the time of this study. instrument development we used a combination of literature-based and fieldwork insights to specify the domain of, and develop multiple indicators to tap, each construct in a systematic instrument development process. to evaluate the suitability of the questionnaire items to the ghanaian environment, a pilot test on the preliminary draft questionnaire was conducted with 20 exporters from accra, kumasi, secondi-takoradi, and tema, which are the major metropolitan areas for export activity in ghana (although tamale is a major commercial center for export activity in the northern region of ghana, this was excluded due to severe logistical challenges). collecting data from these metropolitan areas helped to ensure face validity. on the basis of the feedback obtained from the pilot study, the study items were further revised. to avoid duplication, the 20 exporters were excluded from the final data set. given our anticipation of low mail survey participation in ghana, we used face-to-face interviews whereby our trained interviewers handed in the questionnaires to the respondents to complete at their leisure and these were later collected on an agreed date. there were, however, a few occasions (nine cases) when the interviewers assisted the respondents to complete the questionnaires instantly. to ensure reliable responses, the four interviewers were trained extensively to ensure that they did not introduce any biases by prompting respondents during the interview. they were also trained to understand the objectives of the study, the importance of a number of administrative elements like assuring respondents of the confidentiality of their answers and filling in the questionnaire completely, and how to answer any clarification questions. since the interviewers clarified questions or answers on the spot, reliability of the data was enhanced. honesty of information was explicitly requested from the informants. the informants were motivated by assuring them of the complete confidentiality of their answers, the opportunity to receive a summary of the research findings and participation in a free seminar/workshop on the research results. to capture informant competency, each respondent was asked to report on a 7-point likert scale (1 = strongly disagree; 7 = strongly agree) their: 1) knowledge of the issues under examination; 2) accuracy of the information provided on the questionnaire; and 3) confidence about the answers to the questions (hultman et al. 2009). a mean score of 6.58 (std. = 0.58) was recorded for knowledge of issues, 6.46 (std. = 0.52) for accuracy of responses, and 6.66 (std. = 0.56) for confidence in answers. the approach taken in this study is in line with existing research in developing countries (wood et al. 2011; khavul et al. 2010). to corroborate the data from the in-person surveys, follow-up telephone calls were made to 10% of the 164 ceos to re-ask the questions. the results show that there are not significant differences in the answers provided. measures all items used in the current study were retrieved from the existing literature. specifically, following pre-tests, items were adapted from previous studies by making changes to words and sentences to enhance understanding in exporting context (li and atuahene-gima 2001; acquaah 2007). table 9 journal of small business strategy vol. 26 ● no. 1 ● 2016 1 indicates items that were newly developed, those that were adapted, and those that were taken verbatim from previous studies. eo was operationalized as comprising of five behavioural dimensions: product innovativeness (itself measured by product innovation intensity and product innovation novelty), risk-taking, proactiveness, competitive aggressiveness and autonomy as they apply in firm’s export operations (e.g. lumpkin & dess 1996; jambulingam, kathuria, & doucette, 2005; kuivalainen, sundqvist, & servais, 2007; hughes & morgan 2007). the product innovativeness items are developed from miller and friesen (1982), hughes et al. (2007) and calantone, cavusgil, & zhao, (2002). the risk-taking measures were sourced from jambulingam et al. (2005) and morgan and strong (2003). proactiveness measures were mostly based on those used by kuivalainen et al. (2007), covin and slevin (1989) and jambulingam et al. (2005). competitive aggressiveness was derived from the works of covin and slevin (1989), lumpkin and dess (2001) and jambulingam et al. (2005). autonomy items were developed from hughes and morgan (2007) and jambulingam et al. (2005). a single score was subsequently created for eo by averaging across the individual items that tap the five dimensions. we operationalized mo as a three-dimensional construct with subdimensions comprising of export market intelligence generation, dissemination and responsiveness using cadogan et al.’s (2009) ‘export market orientation’ scale. a single score was created for mo by calculating the average across the individual items. because we have conceptualized simultaneous eo and mo activities as the joint implementation of both eo and mo in export operations, we operationalize the simul-taneous eo-mo construct by averaging across the eo and mo scores. financial capital was operationalized to comprise of two dimensions: availability of financial resource and the level of financial resource accessible by the firms. for the access to financial capital dimensions, two items were adapted to export context from the ‘financial capital’ scale developed by wiklund and shepherd (2005). an additional item was then developed to tap the extent to which firms can easily access finances for their export operations. with respect to availability of financial capital dimension, new items were developed based on cooper et al. (1994) to reflect the extent to which export managers are satisfied with financial capital within the firm to support export operations. an overall financial capital score was obtained by averaging across financial capital accessibility and financial capital availability scores. to measure export market environment turbulence, we adapted to export context two items from adapted from jambulingam et al.’s (2005) ‘competitive intensity’ scale and one item from zahra and garvis’ (2000) ‘foreign environment hostility’ scale to assess the rate of competitive intensity and level of new product decline in firms’ export markets. export new product success is defined as the extent to which firms’ new product objectives are met in terms of revenue, sales growth, and number of new export market segments entered with new products (atuahene-gima, slater, & olson, 2005; langarek, hultink, & robben, 2004). overall export performance is defined as the extent to which overall firm profitability and sales objectives are met (racela, chaikittisilpa, & thoumrungroje, 2007). we controlled for the possible influence of relative firm size, international experience and industry types (e.g. kuivalainen et al. 2007; wang 2008). firm size was measured by the 10 journal of small business strategy vol. 26 ● no. 1 ● 2016 logarithm transformation of the total number of full-time employees. we assessed export experience by taking the logarithm transformation of the total number of years a firm had been exporting. industry type was measured as a dummy variable that comprised of manufacturing = 1, services = 2 (wang 2008). in addition, because we argue for a three-way interaction between the simultaneous implementation of eo and mo, financial capital and export environment turbulence, we also control for all lower-order interactions in accordance with the literature (e.g. cadogan et al. 2009). method bias assessment in line with the literature (e.g. podsakoff, mackenzie, & jeong-yeon, 2003; chang, van witteloostuijn, & eden, 2010), we followed several steps to check for a possible influence of common method bias (cmb). first, we estimated three competing bias models: method 1 involved estimation of a methodonly model in which all indicators were loaded on a single latent factor. the fit indexes (i.e. chi-square (χ2) = 4,909.481; degrees of freedom (df) = 779; root mean square error of approximation (rmsea) = 0.159; nonnormed fit index (nnfi) = 0.329; comparative fit index (cfi) = 0.363) produce a poor-fitting model. method 2 was a traitonly model in which each indicator was loaded on its respective latent factor. the results show excellent model fit: χ2 (df) = 832.16 (769); rmsea = 0.022; nnfi = 0.95; cfi = 0.95. in method 3, a method and trait model was estimated involving inclusion of a common factor linking all the indicators in model 2. results show a non-significant improvement in model fit: χ2 (df) = 832.15 (754); rmsea = 0.025; nnfi = 0.94; cfi = 0.95. comparison of the three models indicates that model 2 and model 3 are superior to model 1, and that model 3 is not substantially better than model 2.this shows that no single factor accounts for most of the variance in the measures, suggesting that cmb is not a problem (podsakoff et al. 2003). second, as an alternative to the single-factor test, we followed lindell and whitney’s (2001) method marker variable test to analyze the correlation between a marker variable and the constructs in our model. the marker variable used was “our export operations are diverse”, which is theoretically not related to any construct in our model. results show nonsignificant relationships, with correlations ranging from -0.02 to 0.08. third, we argue that because our model includes multiple interactive effects cmb is unlikely because respondents would find it difficult to form mental models of the relationships under study (chang et al. 2010; podsakoff et al. 2003); hence we contend that cmb does not have a substantial influence on our results. analysis measurement model assessment exploratory factor analysis (efa), using principal axis factoring extraction and oblimin rotation, was performed to select items that loaded on a factor so that preliminary scales could be provided for further validation. accordingly, items with poor loadings (<0.5) were deleted from the item bank. the final efa model produced a 14 factor solution with eigenvalues greater than 1, accounting for 79% of the total variance. subsequently, items that passed the efa evaluation were entered into confirmatory factor analysis (cfa) for further assessment using the lisrel 8.7 and maximum likelihood estimate method. results, as presented at the bottom of table 1, show that the fit for the cfa model is square value (at 5%), and with all fit heuristics falling within recommended criteria: the ratio of chisquare to degrees of freedom is 1.08, the root mean square error of approximation (rmsea) = 0.02; the non-normed fit index (nnfi) = 0.95; the comparative fit index (cfi) = 0.95; and the incremental fit index (ifi) = 0.96. 11 journal of small business strategy vol. 26 ● no. 1 ● 2016 table 1: details of measures, standardized factor loadings, reliability tests, and fit statistics item description std. load. cr ave product innovation intensity 0.91 0.77 -our business venture has produced more new products/services for our export markets than our key export market competitors during the past five years 0.89 -on average, each year we introduce more new products /services in our export markets than our key export market competitors 0.88 -industry experts would say that we are more prolific when it comes to introducing new products/services in our export markets 0.87 product innovation novelty 0.89 0.74 relative to competitors, the products/services we offer in our export market(s) are: -revolutionary 0.86 -inventive 0.78 -novel 0.91 risk-taking 0.86 0.60 -export manager in our venture, in general, tend to invest in high-risk export projects 0.75 -this business venture shows tolerance for high risk export projects 0.87 -our export strategy is characterized by a strong tendency to take risks 0.65 -taking chances is part of our export business strategy 0.82 proactiveness 0.79 0.56 -we seek to exploit anticipated changes ahead of our rivals 0.74 -we act opportunistically to shape the export envir. in which we operate 0.78 -our foresight makes us a leader in our export market 0.73 competitive aggressiveness 0.83 0.62 -we typically adopt an “undo-the-competitor” posture in export markets 0.75 -we tend to target our export competitors’ weaknesses 0.87 -we take hostile steps to achieve export competitive goals 0.73 autonomy 0.82 0.60 -export personnel behave autonomously in our export operation 0.74 -export personnel act independently to carry out their export ideas through to completion 0.88 -management approves of independent activities by our staff to develop new export opportunities 0.70 intelligence generation 0.76 0.52 -in our export operations, we generate a lot of information concerning trends (e.g., regulations, technological developments, political, economic) in our export market. 0.70 -in our export operations, we are fast to detect fundamental shifts in our export environment (e.g., regulation, technology, economy 0.74 -in our export operations, we periodically review the likely effect of changes in our export environment (e.g., regulations, technology). 0.67 intelligence dissemination 0.83 0.62 -in our export operations, too much information concerning our export competitors is discarded before it reaches decision makers. (r) 0.74 -in our export operations, information that can influence the way we serve our export customers takes forever to reach export personnel. (r) 0.89 -in our export operations, information about our export competitors’ activities often reaches relevant personnel too late to be of any use. (r) 0.65 12 journal of small business strategy vol. 26 ● no. 1 ● 2016 note: r = reversed coded item; cr = construct reliability; ave = average variance extracted; a = not significant at 5% table 1: continued item description standardized loadings cr ave intelligence responsiveness 0.81 0.59 -in our export operations, if a major competitor were to launch an intensive campaign targeted at our foreign customers, we would implement a response immediately. 0.70 -in our export operations, we are quick to respond to significant changes in our competitors’ price structures in foreign markets 0.81 -in our export operations, we rapidly respond to competitive actions that threaten us in our export markets. 0.80 financial capital availability 0.79 0.56 -export managers are satisfied with the financial capital available to them for export operations 0.66 -financial constraints do not impede our export activities 0.80 our export operations are better financed than our key competitors’ operations 0.78 financial capital accessibility 0.84 0.64 -the export unit has easy access to financial capital to support its export operations. 0.75 -we have substantial financial resources at the discretion of export managers for funding export initiatives. 0.82 -if we need more financial assistance for our export operations, we could easily get it. 0.84 export market turbulence 0.82 0.61 in our export markets there are lots of new competitors. 0.82 in our export markets products become obsolete quickly in our export markets due to competition. 0.78 -our export markets are noted for competition between companies. 0.68 export new product success 0.84 0.63 compared with your business venture’s export objectives, how well have you performed on each of the following indicators? -export sales of new products or services 0.86 -growth in export sales of new products or services 0.84 -number of new export markets entered 0.67 overall export performance 0.91 0.76 regarding your overall export objectives, how well has your business performed? -overall export profitability 0.82 overall export sales performance 0.96 overall export performance 0.81 informant quality -questionnaire deals with issues i am very knowledgeable about -my answers to the questions in the questionnaire are very accurate goodness of fit statistics χ2 (d.f.) χ2/d.f. p-value rmsea nnfi cfi ifi 832.16(769) 1.08 0.06a 0.022 0.95 0.95 0.96 13 journal of small business strategy vol. 26 ● no. 1 ● 2016 as can be seen in table 1, the completely standardized factor loadings for all items are significant at 1% level or better, and the composite reliability (cr) and average variance extracted (ave) values for each latent construct are greater than 0.60 and 0.50 respectively, exceeding the benchmarks recommended in the literature (bagozzi & yi 1988). table 2 presents summaries for descriptive statistics and inter-construct correlations for each construct studied. thus, from table 1 and table 2, we establish that all constructs studied have sufficient construct reliability (as shown by their respective cr values), and discriminant validity (as ave value for each construct is larger than the squared correlation between any pair of constructs; and as crossloadings and correlated error terms are absent from the cfa model). thus, we are confident that our measures can be used for theory testing purposes. table 2 descriptive statistics and inter-construct correlation variables mean sd 1 2 3 4 5 6 7 8 1. simultaneous eo and mo 4.80 0.67 1 2. financial capital 4.22 1.21 0.37** 1 3. environ. turbulence 4.94 1.25 0.27** 0.13 1 4. export new product success 4.56 1.05 0.34** 0.33** 0.25** 1 5. overall export performance 4.63 0.91 0.36** 0.28** 0.21** 0.55** 1 6. relative firm size 4.58 0.71 0.10 -0.05 -0.00 0.15 0.03 1 7. export experience 1.59 0.50 0.02 0.04 0.02 -0.06 -0.06 -0.04 1 8. industry type 1.13 0.34 -0.10 -0.13 -0.18* -0.09 -0.02 -0.09 0.03 1 note: ** correlation is significant at the 0.01 level (2-tailed test);* correlation is significant at the 0.05 level (2-tailed test); sd: standard deviation hypothesis testing to test our hypotheses, several multiplicative interactions were created (aiken & west 1991; ping 1995). to attenuate for potential multicollinearity problems due to our use of interactive terms, all measures involved in multiplicative interactions were residualcentered using the procedure recommended by little, bovaird, & wildaman, (2006). subsequently, we used ordinary least squares (ols) and hierarchical moderated regression analysis to test our hypotheses. first we examined factors driving export new product success, and then we assessed the effects of these same factors on overall export performance. thus, two regression equations were estimated. first, we estimated regression equation 1 to determine the impact of the independent variables on export new product success: 14 journal of small business strategy vol. 26 ● no. 1 ● 2016 equation 1: c success = α1e + i + r + f1 + f2 + [f1 x f2] + sem + [sem x f1] + [sem x f2] + [f1 x f2] + [sem x f1 x f2] + e1 where: sem = simultaneous eo and mo; f1 = financial capital; f2 = export environment turbulence; e = export experience; i = industry; r = relative firm size. having estimated equation 1 and noted the results, equation 2 was then assessed: equation 2: = α1 + e + i + r + f1 + f2 + [f1 x f2] + sem + [sem x f1] + [sem x f2] + [f1 x f2] + [sem x f1 x f2] + e1 to test the hypothesized relationships in equation 1 and equation 2, we followed tradition to perform hierarchical regression analyses (cohen et al. 2003). this technique assesses the impacts of additional variables over and above the effects of variables in previous regression models. typically, the importance of additional variables in a regression model is determined by observing the statistical significance of changes in adjusted r2 values. tables 3a and 3b present summaries of the findings of the six regression models estimated in this study. as can be seen from tables 3a and 3b, the findings indicate that the f-values for the full regression models are highly significant with values ranging between 7.42 and 8.38 (p < 0.01). none of the regression equations have multicollinearity problems: the largest variance inflation factor (vif) is 1.55, which is well within the recommended limit of 10. in the baseline models (i.e. model 1), only the impacts of the control variables on export new product success and overall performance respectively, were examined. in model 2, simultaneous eo and mo activities, financial capital, environment turbulence and lower-order interactive variables were added. in model 3, the three-way interaction involving the “simultaneous eo and mo activities x financial capital x environment turbulence” multiplicative term was added to the model. from tables 3a and 3b, it can be seen that changes in the adjusted r2 values are significant at 5%. regarding the specific hypotheses, it is imperative to note that h1 is nested within h2a, h2b and h2c, such that support is provided for h1 even if the t-values for h1 are nonsignificant and those for h2a, h2b and h2c are significant. in other words, h1, h2a, h2b and h2c are all supported if the t-value for h2c is positive and significant. the study argues in h1 that the relationship between simultaneous eo and mo activities and export performance is positive. hypothesis 1 is supported since the simultaneous eo and mo activities variable is positively and significantly related to both export new product success (β = .16; t = 1.85; p < .05) and overall export performance (β = .24; t = 2.80; p < .01). in support of h2a, h2b and h2c, findings from the study indicate that the three-way interaction between simultaneous eo and mo activities, financial capital and export market environment turbulence (i.e. h2c) is positive and significant for both export new product success (β = 0.20; t = 2.72; p < .01), and overall export performance (β = 0.22; t = 2.90; p < .01). thus, he findings provide support for our hypothesis that the impact of simultaneous eo and mo activities on export performance is stronger (and more positive) when levels of financial capital and export market environment turbulence increase in magnitude. 15 journal of small business strategy vol. 26 ● no. 1 ● 2016 table 3 ols regression results for export new product success discussions and implications this study develops and tests a model that depicts the export performance impacts of fit between simultaneous eo and mo activities, financial capital and export environment turbulence. the model is tested among a sample of smes exporting from ghana. the findings from this research indicate that simultaneously focusing on higher levels of both eo and mo leads to stronger export performance. the results also suggest that this relationship is stronger (and more positive) when firms have stronger financial capital and when firms operate in more turbulent export market environments. the findings have important research and managerial implications. first, the finding that joint eo and mo efforts are positively related to export new product success and overall export performance extends the notion that smes in developing economies must maintain a dynamic blend of entrepreneurial zeal and market-oriented activity to enhance performance in foreign markets (balabanis & katsikea 2003; kropp et al. 2006). pursuing an export strategy that emphasizes strong elements of both activities dependent variable: export new product success hypotheses model 1 model 2 model 3 unstand ardized coef. standar dized coef. tvalues unstand ardized coef. standa rdized coef. tvalues unstanda rdized coef. standa rdized coef. tvalues industry type -.23 -.07 -.95 .02 .01 .07 .05 .02 .22 export experience -.12 -.06 -.73 -.19 -.09 -1.24 -.22 -.12 -1.49 firm size .21 .14 1.79* .17 .12 1.59 .17 .12 1.63 financial capital .19 .22 2.81** .19 .22 2.87** environment turbulence .13 .15 1.97* .08 .10 1.24 financial capital x environment turbulence -.01 -.02 -.24 -.02 -.04 -.56 h1 simultaneous eo and mo .22 .14 1.65* .25 .16 1.85* h1& h2a simultaneous eo and mo x financial capital .02 .03 .31 -.01 -.01 -.10 h1& h2b simultaneous eo and mo x environment turbulence .12 .12 1.47 .15 .15 1.84* h1, h2a, h2b & h2c simultaneous eo and mo x financial capital x environment turbulence .70 .20 2.72** f-value 1.71* 6.36** 7.42** r2 .03 .22 .26 adjusted r2 .01 .18 .21 ∆r2 .19*** .04** 16 journal of small business strategy vol. 26 ● no. 1 ● 2016 helps firms to identify and explore new market possibilities while also exploiting existing export market knowledge (knight & kim 2009; webb et al. 2011). the need to connect eo processes with mo activities is particularly important for african sme exporters in the sense that focusing on both activities helps firms to tailor their entrepreneurial innovations to the needs and preferences of both current and future export market customers (lu & beamish 2004; nachum 2003). this conclusion is an extension of previous chinese context research, which argued that eo and mo activities individually contribute to superior performance in the chinese transitional economy (e.g. li et al., 2008; li & atuahenegima 2001). we contribute to the existing literature by showing that simultaneous implementation of both eo and mo activities in export operations offers exporting smes in developing economies the synergy (which comes from combining export market intelligence competences with entrepreneurial capabilities) to enhance performance in foreign markets. second, the existing literature highlights the potential costs of developing and maintaining entrepreneurial and market oriented activities simultaneously as well as the benefits involved (hakala, 2011). in extending these previous studies, findings from our study indicate that increasing levels of both eo and mo along with greater availability and access to financial capital in turbulent export market environments increase the probability of export new product success and overall export business success. this finding is important because research shows that limited credit facility is a major barrier to the success of entrepreneurial ventures in many african countries and this lack of finance tends to limit the capacity of african smes to compete in the global marketplace (bianchi 2010; abor & quartey 2010). with greater access to finances in an increasingly turbulent export markets, for example, ghanaian exporters can be more flexible and proactive in investing in high quality innovations without worrying too much about the risk of failure. greater access and availability of finance in turbulent export markets also enables investments in developing a more accurate export intelligence system to ensure proper export market positioning of entrepreneurial innovations for greater competitive advantage and performance. thus, we also add to the existing literature by showing that when export market environment conditions are more turbulent, stronger entrepreneurial and market-oriented activities are needed concurrently to keep pace with such turbulence, and greater export finances can facilitate the successful implementation of these eo and mo activities in more hostile export market environments. managerial relevance this research generates several managerial implications that need explicating. first, the finding that the simultaneous development of high levels of both eo and mo is associated with new export product success and overall export performance indicates that sme export managers in african developing economies can be confident that consistently developing and cultivating entrepreneurialand marketoriented activities in export operations, and building internal organizational mechanisms that effectively and efficiently integrate the two capabilities will deliver stronger performance outcomes in foreign markets. because of the complementarity between the two orientations, with one compensating the shortcomings of the other, the task of export managers is to ensure that no one orientation is emphasized to the exclusion of the other. 17 journal of small business strategy vol. 26 ● no. 1 ● 2016 for example, investing more in eo activities in export operations could be disruptive if such exploratory export operations fail to materialize. in the same way, paying too much attention to mo behaviors can lead to decreased creativity levels and a reduced capacity to take advantage of new export market opportunities. hence, a balanced strategy involving a joint implementation of eo and mo activities in export operations helps to tightly integrate the entrepreneurial process with marketing activities within the firm (webb et al. 2011). second, in order for sme exporters operating in developing countries to sustainably implement high levels of both eo and mo in export markets, they need greater financial supports, and there should be a strong environmental justification for such investments. in other words, because the joint implementation of both eo and mo in export operations can involve substantial resource commitment, its quality can best be maintained when firms have greater financial capital and allocate these financial resources to eo and mo activities. although we are told that financial capital is difficult to come by in many african economies and smes are particularly constrained in accessing finances (abor & quartey 2010), firms that are fortunate to have access to finances should find it much easier to exploit the benefits that high levels of both eo and mo activities bring in their export operations. the fit between investments in eo and mo activities and financial capital is even more vital when firms are operating in more turbulent export market environments. thus, export managers in subsahara africa have the responsibility to ensure that when they are faced with high export market environment turbulence they need look to gain access to financial resources that will support the joint implementation of eo and mo activities. the findings that finance availability and environment conditions have a direct influence on the success of export marketbased strategies of developing economy smes implies that policy makers in developing economies must ensure that there is greater export finance assistance to exporting smes because it helps such firms to better implement their export strategies in more turbulent export market environments. alternatively, assessment of whether an exporting sme qualifies for governmental and/or private venture capital supports may be based on whether the firm is entrepreneurial and market-oriented enough in its export operations. the injection of such a requirement is likely to encourage smes to develop entrepreneurial activities that address specific customer requirements in export markets. study limitations and direction for further research on a final note, it is necessary to highlight that although this study expands knowledge on the relationships between the joint implementation of eo and mo and new product success and firm performance in the context of exporting smes in developing countries, the results should be taken as tentative given the cross-sectional nature of the data used. collecting new product success and firm performance data from second informants or even from secondary data sources may help to further improve confidence in the relationships examined in this study. to cross-validate the results reported in this study and to further broaden our knowledge on the relationships studied here, future studies should also consider collecting longitudinal data. developing 18 journal of small business strategy vol. 26 ● no. 1 ● 2016 country smes that use other modes of international operation (e.g. licensing and joint ventures) could also be the context of future research as the nature of these modes of foreign market 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(2000). international expansion by new venture firms: international diversity, mode of market entry, technological learning, and performance. academy of management journal, 43(5), 925-950. 24 1 dilettante, venturesome, tory, and crafts: drivers of performance among taxonomic groups 1 jane s. craig university of texas at austin jcraig@mail.utexas.edu stanley w. mandel wake forest university mandelsw@wfu.edu alex stewart2 marquette university alex.stewart@marquette.edu abstract empirical research has failed to cumulate into a coherent taxonomy of small firms. this may be because the method adapted from biology by bill mckelvey has almost never been adopted. his approach calls for extensive variables and a focused sample of organizations, contrary to most empirical studies, which are specialized. comparing general and special purpose approaches, we find some of the latter have more explanatory power than others and that general purpose taxonomies have the greatest explanatory power. examining performance, we find the types do not display significantly different levels of performance but they display highly varied drivers of performance. this manuscript was invited due to its foundational nature that underpins research in this domain. keywords: taxonomy, small firms, performance, research method, apparel manufacturers 1 an earlier version of this study was presented at the national academy of management meetings. we acknowledge in particular the helpful advice of bill mckelvey regarding taxonomic method, paul reynolds regarding survey method, and roy howell regarding classification method. errors are of course of our own making. 2 corresponding author. s trateg y journal of small business journal of small business strategy vol. 22, no. 2. 2 introduction taxonomy as a foundation for empirical advances our purpose is to demonstrate that small business research can advance by adopting mckelvey’s (1982) methodology for an empirical taxonomies of firms. in opposition to the general practice in organizational research, he argued for sampling a restricted range of organizations with a broad range of variables. by using this approach, we demonstrate that the drivers of performance vary across different types of small businesses. these findings imply that further research with this approach could cumulate to a widely applicable taxonomy. our findings also include a type of firm that we call the “dilettante” type, which has not been previously reported. why does taxonomy matter? let’s imagine you are a consultant or advisor to small firms. you wish to base your counsel on empirical research as well as your experiential knowledge. many prescriptions for small business managers are found in the “implications for practice” sections of scholarly journals. however, many of these contradict one another. for example, findings about the performance effect of formal planning on entrepreneurial firms have been inconsistent (brinkmann, grichnik, and kapsa, 2010). for another example, sometimes venture capitalists contribute useful knowhow (zahra, neubaum and naldi, 2007); sometimes they do not (clarysse, knockaert, and lockett, 2007). you are left wondering which of these findings apply to the specific firms that you advise. with roininen and ylinenpää (2009, p. 517), you have noted that entrepreneurs are varied and “benefit from different kinds and degrees of assistance.” you also concur with frank’s (1993, p. 39) call for more “ ʻtailormade’ solutions” in small business consulting. unfortunately, consultants are often viewed as out of touch with the particular contexts of the clients’ small firms (dyer & ross, 2007). one reason for this is the absence of a validated taxonomy, by means of which the advisor can tailor any advice to the patterns of the type of firm in question. in short, the business advisor is confronted with the problem of taxonomy. in principle, the solution requires the specification of populations in terms of a taxonomy of organization types. absent a valid taxonomy, it is not possible to specify the types of organizations to which particular findings can be generalized. this need is recognized in many fields of science, in which taxonomy is a “prerequisite for theorizing” (bailey, 1994, p. 15; see also de queiroz and good, 1997; gartner, mitchell and vesper, 1989). in business research, most of the early efforts and many recent efforts to classify firms or aspects of firms were purely conceptual, resulting in ideal types or typologies (as in autio, 1995; hartnell, ou and kinicki, 2011). however, various researchers in the 1960s and 1970s, such as those in the aston school, also developed empirically based classifications, or taxonomies (bailey, 1994; sneath and sokal, 1973; for reviews, see mckelvey, 1982, chap. 11; rich, 1992; sanchez, 1993; short, payne, and ketchen, 2008). towards the end of this period, one methodologist, bill mckelvey, concluded that organizational scholars had much to learn from the better developed methodology of natural scientists. in a series of publications (mckelvey, 1975; 1978; 1982), he proposed a set of ambitious prescriptions for the development of organizational taxonomy. these journal of small business strategy vol. 22, no. 2. 3 publications have been cited 503 times through october 2012, according to the social sciences citation index. however, their advice has never been fully adopted, and partially so only by ulrich and mckelvey (1990). examples of citing mckelvey, but not using his approach, are articles by hornburg, workman and jensen (2002) and leask and parker (2007).3 computer searches of the management literature reveal an ongoing interest in taxonomy. however, with these few exceptions recent classifications have failed to follow mckelvey’s recommendations (sanchez, 1993) and in some cases have failed to follow any empirical approach whatsoever (doty, glick, and huber, 1993; rich, 1992). entrepreneurship taxonomies: narrow dimensions, broad samples we seek to reinvigorate empirical attention to taxonomy, which has a long tradition in the entrepreneurship field. in the earlier years of entrepreneurship research, scholars were very active in numerical classifications of small firms, new business ventures, and entrepreneurs (e.g., filley and aldag, 1978; gartner, mitchell and vesper, 1989; lafuente and salas, 1989; woo, cooper and dunkelberg, 1991). in one of the earliest of these studies, smith (1967) proposed a widely noted distinction between “craftsman” and “opportunistic” entrepreneurs, which has been adapted to varying extents by braden (1977), lorraine and dussault (1987) and smith and miner (1983). most of these classifications have used a restricted range of variables specified for a focused purpose, such as classifying firms based on strategic or entrepreneurial posture. in this focused or specialized approach, the number of variables measured is in the range of one to two dozen (e.g., anderson, 2012; aragón-sánchez and sánchez-marín, 2005; covin, 1991; covin, slevin, and covin, 1991; morris, schindehutte, richardson & allen, 2005; westhead and howorth, 2007). these studies are useful for specialized purposes, but violate the critical taxonomic principle of maximizing the number of types of variables, or “taxonomic characters,” that are measured (mckelvey, 1982, pp. 15, 354, 367; also miller, 1996). the use of a narrow range of variables would be akin to biological taxonomists classifying birds exclusively on the basis of their feeding habits. classifying birds as a function of their feeding habits could be a legitimate exercise but would not result in a classification of birds. neither is this approach well suited to a multidimensional topic such as entrepreneurship (gartner, mitchell and vesper, 1989; miller, 2011). although most classificatory studies have restricted the range of taxonomic characters, virtually all of them have attempted to sample from a wide range of types of organizations. apparently the rationale has been to emulate the taxonomist’s sampling of the full range of organisms. however, mckelvey noted (1982, p. 340) that “the total population at hand is too large for a single study” (also miller, 2011). taxonomic samples should be narrow as to geography and by industry (1982, pp. 24, 342-244). this prescription is echoed in calls for sensitivity to regional and other contexts in research (fletcher, 2011; steyaert and katz, 2004; williams, 2010). further, in the early stages of taxonomic development, the research strategy should be incremental. sampling should “begin with populations where the workplace and management competencies are fairly simple [and] thoroughly understood… small businesses such as retail stores and restaurants, schools, hospitals, [or] journal of small business strategy vol. 22, no. 2. 4 fabrication and assembly manufacturing operations” (mckelvey, 1982, p. 343). focusing on narrow populations such as these directs the research toward subtle differences at the sub-species level that are not initially obvious among populations. further, unlike heterogeneous samples, restricted samples result in sufficiently large subsamples of particular taxonomic units. a pragmatic approach to mckelvey’s method some of the practices advocated by mckelvey, such as using a stratified probability sampling plan for selecting observers, and using a non-stratified random sample from a population of all organizations (mckelvey, 1975) have been dismissed as impractical (sanchez, 1993). however, two of his prescriptions are essential in the early stages of taxomic development (mckelvey, 1982; ulrich and mckelvey, 1990; personal communications with mckelvey). these are a comprehensive coverage of taxonomic characters (variables), and a meaningful, delimited sample. for example, ulrich and mckelvey used 78 variables in a study of the united states and japanese electronic industries. in the present study, we used 135 variables in a study of texas manufacturers of women’s and children’s apparel and accessories. hypotheses the hypotheses tested are meant as explorations of the potential of mckelvey’s (1975; 1979; 1982) general taxonomic principles, as operationalized in ulrich and mckelvey (1990). first, we expect that groupings (technically, taxa) resulting from general purpose taxonomic research are distinct from groupings resulting from special purpose taxonomic research. we would be most surprised if this was not found, because it is well known that different classification criteria result in different groupings (woo, cooper and dunkelberg, 1991). h1: groupings resulting from general purpose taxonomic research are not the same as those resulting from special purpose taxonomic research. a large-scale meta-analysis (ketchen et al., 1997) proposed that general purpose taxonomies should demonstrate a stronger relationship with performance than more narrowly based special purpose taxonomies. further, this hypothesis, like h1, appears to be self-evident because the use of more variables always affords more opportunities to explain variance. this intuitive expectation might not hold, however, because each taxonomic approach independently clusters the data. it might seem equally intuitive that a clustering based upon specifically business-related variables, such as use of managerial time, might prove to be more amenable to explanations of business performance than a clustering based on a mishmash of variables. h2: the taxonomic characters that generate general purpose taxonomies have greater predictive ability with respect to the performance of firms in those taxonomies than taxonomic characters that generate special purpose taxonomies with respect to the performance of firms in those taxonomies. the literature has not settled on consensual taxonomic results at the fine-grained level of analysis used in this study. however, it has achieved a loose consensus in broadbrush formulations. perhaps the most widely used are the distinctions between organic and mechanistic systems (burns journal of small business strategy vol. 22, no. 2. 5 and stalker, 1961) and, in the entrepreneurship literature, craftsman and opportunistic entrepreneurs (smith, 1967; filley and aldag, 1978; gartner, mitchell and vesper, 1989; lafuente and salas, 1989; lee & denslow, 2005). a related distinction in taxonomic studies can be seen between more and less entrepreneurial firms (covin, 1991; khan and manopichetwattana, 1989; miller, 1983). none of these familiar approaches were based on mckelvey’s approach. therefore, we cannot predict whether our results will conform to prior theory. however, our results should be comprehensible on a post hoc basis; otherwise they would not provide scientific or practitioner support for this approach. for the general purpose taxonomic results we expect that: h3: groupings will be comprehensible on a post hoc basis. the literature on taxonomy advocates testing the stability of the primary sample by comparison with a holdout sample (bailey, 1994; harms, kraus, and schwarz, 2009; sanchez, 1993). although this test is the norm, it is no substitute for longitudinal testing. results from clustering a holdout sample are nevertheless useful as qualifications to the results from the primary sample. realistically, one cannot expect complete replicability, due to the polythetic nature of empirically derived taxa. this means that observations share most, but not all, characteristics. in polythetic taxonomy, no particular taxonomic character is necessary and it can be the case that none is sufficient to assign a unit to a grouping (or taxon) (aldrich and ruef, 2006; mckelvey, 1982, pp. 43-45). nonetheless, we expect that: h4: groupings will be stable in the sense of being replicable in a holdout sample. in strategic management research, clustering studies (such as strategic group analysis) have generally failed to find significant performance differences between populations (barney and hoskisson, 1990; zahra and pearce, 1990). between-group performance differences have most often been found, not for general organizational taxonomies, but for specialty taxonomies (e.g. customer-supplier relations in hornburg, workman and jensen, 2002), entrepreneurial orientation (jambulingam, kathuria and doucette, 2005), or technology strategies (hung, liu and chang, 2003). however, this limitation has not always held for taxonomies in organization theory (e.g., pinto and pinder, 1972) and entrepreneurship research (e.g., miner, 1997; westhead, 1990). small and entrepreneurial firms might be expected to display performance differences due to lower levels of institutionalization and homogeneity than the corporations studied in strategic management. as a result, performance may be less homogenous as well. h5: groupings will differ in organizational performance. differences in the causes or drivers of organizational performance across groupings have been found in a few prior studies (e.g., pinto and pinder, 1972, and miller, 1983). it has also been found for the strategic types of miles and snow (1978), although these findings have invoked very narrow sets of variables (such as sales force strategies in slater and olson, 2000, and ceo profiles in thomas, litschert and ramaswamy, 1991). given this scarcity of prior indications, we propose this final journal of small business strategy vol. 22, no. 2. 6 hypothesis largely as an act of faith in the taxonomic enterprise. after all, if this hypothesis does not hold, the very rationale for taxonomic study – that is, the problem of generalization of relationships – also fails to hold (miller and friesen, 1984). as miner (1997) and clark, berkeley and steuer (2001) argued, it is important to seek for different drivers of performance because only when these are known can prescriptive advice be offered that fits the organizational type. h6: groupings will differ in the causes or drivers of organizational performance. method data and questionnaire data for this study were obtained by means of a survey instrument that was mailed to the 578 firms in the industry that had tax numbers in the state of texas at the time of mailing in 1991. of the 424 firms actually reached (net of inactive firms and bad addresses), 200 provided usable responses (180 by mail and 20 by telephone). the response rate based on the sample reached was 47%. this is a relatively high response rate considering the generally small size of the firms and the length of the instrument. (see craig, 1992, table 3.1 for the instrument, and mandel, 1996 for the decomposition of the theoretical population to the ultimate sample of organizations used in this study, and many details not reported for reasons of space.) the variables reflected in the 135 items of the instrument were chosen based on four criteria. first, variables were chosen if we believed, based on the industry experience of the first author, that they have particular importance in the theoretical population (hass, hall and johnson, 1966). for example, respondents were asked about industry-specific channels of distribution and the firm’s negotiating success with these channels. second, variables were chosen for their inclusion in four scales used in special purpose taxonomies from the entrepreneurship literature. the scales incorporated into the instrument measure entrepreneurial orientation (nine items from covin, slevin and covin, 1990), strategic tactics (20 items from covin 1991), managerial time allocation (13 items from woo, cooper and dunkelberg, 1991), and reasons for business ownership (13 items adapted from scheinberg and macmillan, 1988 and shane, kolvereid, and westhead, 1991). all scales were found to be reliable with cronbach alphas of 0.76, 0.75, 0.84, and 0.78 respectively.4 third, variables were chosen so as to include all broad categories of taxonomic characters found in the literature. we included variables for all categories generally recommended for general purpose taxonomic studies, such as organizational, strategic, and managerial (process) variables (bailey, 1994: 80; mckelvey, 1982: 353-365; sanchez, 1993). consistent with both taxonomic practice (above) and entrepreneurship research, we also included items for individual and environmental variables (gartner, mitchell and vesper, 1989; lafuente and salas, 1989; woo, cooper and dunkelberg, 1991). nine categories of taxonomic characters were measured. finally, items were retained or reworded based on responses to a pilot survey. respondents were also asked three questions about perceived organizational performance. performance was meant to be used as a dependent variable and, for this journal of small business strategy vol. 22, no. 2. 7 reason, not a clustering variable. the use of subjective measures of performance is the only approach typically available in the study of small and privately held firms. fortunately there is some reason to expect convergence with objective measures (provided that, as in the present study, respondents are not asked to make external comparisons; see dess and robinson, 1984). still, the use of subjective measures is a limitation that should be borne in mind (sapienza, smith and gannon, 1988). data reduction by principal components analysis in taxonomic studies, the data are factor analyzed prior to clustering. formation of components from indicants is an intermediate step, converting raw data into a form that can be efficiently used in clustering algorithms and generating results that are easier to interpret (moreno, castillo and masere, 2007; westhead and howorth, 2007). components are a meaningful, parsimonious, and more abstract form of observables. to convert the indicants to principal component scores, we divided the dataset into nine groups for factor analysis, in order to represent the nine categories of organizational characters measured and to retain the relative weightings of the instrument. then we factor analyzed the indicants using principal components. this procedure reduced the number of clustering variables – from 135 to 32 while retaining underlying detail. determining number of clusters the next step in the methodology of taxonomy was determining the natural number of clusters in the data. after first creating a holdout sample of 50 randomly selected firms, we clustered a primary sample of 150 utilizing ward’s hierarchical clustering method. this method minimizes within cluster variance over all clusters obtained by merging two clusters from the previous generation (sas/stat user’s guide, vol. 1 and 2). no clustering method is uniquely the best. we chose ward’s method because it reproduces fairly consistent results in studies performed with known population distributions (bailey, 1994, pp. 48-49, 57; milligan and cooper, 1985) and because it has been widely used in other organizational taxonomic studies (e.g. anderson, 2012; jambulingam, kathuria, and doucette, 2005; korunka, frank, lueger, and mugler, 2003; moreno, castillo and masere, 2007; westhead and howorth, 2007). we used six smoothing parameters (k) (wong and schaack, 1982) and three criteria for selecting the appropriate number of clusters: the cubic clustering criterion, pseudo f, and pseudo t-square. determining the number of natural clusters within the data requires an interpretation of the 18 graphs so produced. four of the 18 outputs could reasonably be interpreted in two alternate ways, resulting in 22 values for the number of clusters. in nine of these cases, four clusters were identified. in five cases, five clusters were identified. in three cases, six were identified. based on our reading of the output, the modal result of four clusters was selected as most plausible. as many as six clusters may exist in the population because the number of groupings that emerge from the combined primary sample and holdout sample was also six. determining cluster membership to determine cluster membership we used a disjoint method that places an observation in only one cluster. the sas procedure fastclus employs the disjoint method by assigning an observation to a cluster by minimizing the euclidean distance from the observation to the cluster mean. journal of small business strategy vol. 22, no. 2. 8 fastclus is appropriate for procedures with known numbers of clusters (as determined above) and for large datasets. the dataset for this study is at the lower end of large. the outcome of this procedure is the computation of r-squared (rsq) and rsq/(1-rsq) across the entire dataset (150 observations). the rsq is associated with predicting the component, given the cluster. rsq/(1-rsq) is the ratio of betweencluster variance to within-cluster variance. the larger these values, the better the associated component is in explaining the separation of organizations into their respective clusters. thus, we select the clustering components that were greater than the overall rsq and rsq/(1-rsq) to help explain the meaning of various clusters. we used the remaining components secondarily to support the meanings attached to the clusters from the primary clustering variables. factclus also displays, for each clustering component and each population, means and standard deviations that were used to assign meaning to one cluster in contrast to another. (for the rationale of standardizing prior to clustering, see leask and parker, 2007.) caution is required in interpreting results of any non-overlapping clustering, such as ward’s method, because it creates an illusion of distinct or monothetic boundaries between groupings, whereas they are more realistically construed as fuzzy or polythetic. this is also a reason that any selection of cluster numbers is open to reinterpretation. it is also a reason we will use relaxed standards for reporting statistical significance. wide ranges of significance levels are used in empirical taxonomies, ranging from the relaxed to the exceedingly stringent (rosenberg, 2007). relaxed significance levels are used in cases of high variation (perry, christiansen & perry, 1997) and measurement uncertainty (capetta et al., 2010). as examples, the 85% level was used in natural science taxonomic studies by guttiérrez, franco, crossa, & abadie, (2003) and popescu, wynne, & scrivani, j. a. (2004); capetta et al. (2010) used 91% and 86% significance levels. the 85% level was used in the economics taxonomy by montobbio (2003). in the present study, the 85% level is used due to high variation and the polythetic character (fuzzy boundaries) of socially derived taxonomies (mckelvey, 1982). interpreting our results must therefore be more cautious than with more stringent levels. results hypotheses one through four: identifying the clusters hypothesis one holds that groupings resulting from general purpose taxonomic research are not the same as those resulting from special purpose taxonomic research. we tested this hypothesis by replicating the procedures for determining general cluster membership for each of the four special purpose scales incorporated in the survey instrument. because we were interested in comparing the allocation of firms to clusters based on special purpose versus general purpose taxonomy, we asked what percentage of overlap exists between the allocation of firms to cluster 1 through cluster 4 on the basis of clustering using only components derived from each of the four scales compared with using all components. for example, if we cluster on the basis of only the entrepreneurial orientation scale (from covin, slevin and covin, 1990), we find that of the 26 firms allocated to c1 using all components, the largest cluster comprises only 46% of the special purpose cluster. similarly, the maximum percentage journal of small business strategy vol. 22, no. 2. 9 of c2 firms so assigned to the same cluster is 48%; the maximum percentage of c3 firms assigned to the same cluster is 40%; the maximum number of c4 firms assigned to the same cluster is 33%. if we cluster on the basis of the strategic tactics scale (covin, 1991) the respective percentages are 58%, 42%, 40% and 34%. if we cluster on the basis of the managerial time allocation scale (woo, cooper and dunkelberg, 1991) the respective percentages are 50%, 54%, 30% and 51%. if we cluster on the basis of the reasons for ownership scale (scheinberg and macmillan, 1988) the respective percentages are 58%, 44%, 48% and 41%. we conclude, therefore, that the results support the hypothesized difference in clustering results. hypothesis two holds that the taxonomic characters that generate general purpose taxonomies have greater predictive ability with respect to the performance of firms in those taxonomies than taxonomic characters that generate special purpose taxonomies with respect to the performance of firms in those taxonomies. we used step-wise multiple regression analysis to determine the variance explained of firm performance in each of the four clusters as independently delimited by the general purpose and the four special purpose components. in interpreting the results, as presented in table 1, please bear in mind that the four populations are different for all five approaches. table 1: comparison of predictive characteristics of special purpose versus general purpose taxonomies as measured by r2 of components in step-wise regression analysis total sample cluster 1 2 3 4 general purpose 0.148*** 0.302* 0.405 *** 0.708 ** 0.590 *** entre’l oreintation 0.051 ** ns ns ns ns time allocation ns ns 0.372* ns 0.083* ownership reasons ns ns ns 0.265* 0.070+ strategic tactics 0.073** 0.128+ 0.100+ ns 0.276** key: *** p <0.001, **p < 0.05, + p<0.1 two inferences can be made based on these results. the first was unforeseen: some special purpose taxonomies have more predictive power than others in explaining performance. the strategic tactics variables from covin (1991) have the highest and most consistent explanatory power. the second finding is that, as hypothesized, the greatest explanatory power is found in the general purpose taxonomy. hypothesis three holds that groupings will be comprehensible post hoc if not in terms of existing theory. testing this hypothesis requires an interpretation of the scores on the 32 components among the four clusters found in the primary sample. scores are expressed in standardized form and presented in table 2. our interpretation follows. four populations: dilettante, venturesome, tory and craft dilettante firms. cluster 1 is composed of “texas apparel producers: dilettante firms.” this characterization holds for both journal of small business strategy vol. 22, no. 2. 10 meanings of “dilettante” in webster’s new collegiate dictionary: “1: an admirer or lover of the arts 2: a person having a superficial interest in an art table 2: the clusters as depicted by significant clustering variables component, number of variables r2 c1 (n=26) c2 (n=52) c3 (n=33) c4 (n=39) dilettante venturesome tory crafts size and legal, 4 0.41 -1.3a +0.2 +0.7 -0.3 negotiating, 4 0.33 -1.2 +0.5 -0.2 +0.0 female owner, 3 0.31 +0.7 -0.0 -0.7 +0.7 ideas; org. bldg., 2 0.28 -0.9 +0.5 -0.6 +0.1 environ. scanning, 3 0.28 -0.1 +0.6 -0.3 -0.7 compet. aggress., 2 0.25 +0.1 +0.4 -0.3 -0.9 π import. to family, 3 0.21 -1.1 +0.1 +0.3 +0.1 operations focus, 4 0.20 +0.1 +0.2 -0.8 +0.4 family tradition, 2 0.17 -0.7 -0.1 +0.5 -0.4 founded or bought, 3 0.17 -0.1 -0.3 +0.8 -0.1 admin. focus, 6 0.16 -0.8 +0.2 +0.4 -0.2 min. ext. depend, 2 0.15 -0.7 +0.3 -0.1 +0.4 ext. funding, 2 0.15 -0.4 -0.0 +0.7 -0.2 self-actualization, 3 0.14 +0.2 +0.2 -0.7 +0.1 risk and boldness., 3 0.12 -0.3 +0.1 -0.7 +0.3 advertising focus, 4 0.11 -0.4 +0.4 -0.4 -0.2 seeks recognition, 3 0.11 +0.6 +0.1 -0.5 -0.0 org. age, 2 0.10 -0.4 -0.2 +0.5 +0.0 wholesale, large ft ethnic empl. base, 3 0.09 -0.0 +0.2 +0.3 -0.5 seeks fin’l indep., 2 0.06 -0.3 +0.0 +0.4 -0.1 competes on quality, 2 0.06 -0.5 -0.0 -0.1 +0.3 fashion focus, 2 0.06 +0.3 +0.1 -0.3 -0.1 diversif. of prods, 2 0.05 -0.1 +0.2 0.3 -0.1 owner age, exper., 2 0.05 -0.4 -0.2 +0.3 +0.0 number of channels, 4 0.05 -0.1 -0.1 +0.4 -0.1 learned from multiple sources, 3 0.04 -0.1 +0.3 -0.1 -0.2 entrep’l experience, 3 0.03 -0.3 +0.0 +0.0 +0.2 product innovat., 4 0.03 -0.1 -0.1 -0.1 -0.5 customer service, 3 0.02 -0.3 -0.1 -0.1 +0.1 cohab. also in bus., 2 0.02 -0.1 -0.0 -0.1 +0.3 years of education, 2 0.02 +0.1 +0.1 -0.2 -0.2 experience in small bus. and supervisor, 2 0.01 +0.1 +0.0 -0.1 -0.1 a standardized means (μ = 0; sd = 1) for clustering components in order of significance or a branch of knowledge” – in this case, business. this characterization is based on the gestalt of the tendencies amongst the components, most of which are not significant or even marginally significant in themselves, although they may be significant in contrast with other groupings. for example, firms in this grouping are significantly smaller than in cluster 3. the 26 firms in this cluster tend to be small (z = -1.3) with female owners (z = 0.7) having relatively little experience either in their business (-0.4) or with entrepreneurship (z = -0.3). they pay relatively little attention to administration (z = -0.8) and they tend to be unsuccessful in business negotiations (z = -1.2). their firms do not play an important role in their journal of small business strategy vol. 22, no. 2. 11 families’ finances (z = -1.1), nor are their owners motivated by new product ideas or contributing to a company’s success (z = 0.9). they lack familial or other role models (z = -0.7) but do seek respect from friends, recognition for achievements, and money to be made from a hobby or craft (z = 0.6). they are the most fashion-oriented of the groupings (z = 0.3). this pattern is the most sharply defined of the four and, in the context of this industry, marks these firms as dilettantes. this cluster is original to the taxonomic literature. for example, these are not “lifestyle” firms because they do not provide financial support for a lifestyle (timmons, 1999, pp. 36-37). however, it may be that dilettante firms, as their name implies, are found in niches with room for artistic expression. soldresson, fiorito and he (1998) studied home-based textile artists and found a pattern very similar to cluster 1. the firms that they studied were overwhelmingly female and provided little financial support for their owners. the motivation for launching these businesses was “love of the work rather than [an opportunity to utilize] their business skills” (as above, p. 34). venturesome firms. cluster 2 is composed of “texas apparel producers: venturesome firms.” this modal cluster (n = 52) is operated more by professional managers and less by owners than any of the other clusters (z = -0.3), yet it is in many regards the most entrepreneurial. the managers of these firms seek to predict their industry environments (z = 0.6) and are motivated by new product ideas and contributing to a company’s success (z = 0.5). their managers successfully negotiate with stakeholders (z = 0.5), innovate and compete aggressively (z = 0.4) and advertise extensively (z = 0.4). the standard scores are rather low, but the overall pattern is a consistent one of a venturesome firm. venturesome firms share certain features with “organic” systems, (burns and stalker, 1961). burns and stalker’s typology – as befits a subtle argument rooted in fieldwork – refers to many fine-grained aspects of internal operations (systems, as they put it) about which our data are silent. nonetheless, one could argue that venturesome firms, like organic systems, cope with dynamic environments by flexibility and networking. it may be that textiles and clothing is an industry in which “entrepreneurial” firms perform the best (chell and haworth, 1992). however, the organic label does not capture the proactivity, innovation, or risk-taking dimensions found in cluster 2, whereas these properties are emphasized in studies of firm-level entrepreneurial orientation (covin, 1991; lumpkin and dess, 1996; miller, 1983). tory firms. cluster 3 is composed of “texas apparel manufacturers: tory firms.” the 33 firms in this cluster are the largest firms in the sample (z = 0.7) and are managed by male managers (z = 0.7) who are risk averse (z = -0.7). they are risk averse in the senses of steering away from risky projects, bold adaptations, or bold decision making postures. they tend to be owner-managers (z = 0.8), continue family traditions (z = 0.5), and are reliant on external financing (z = 0.67). these last two standard scores are low despite high mean scores due to high dispersion; it appears that a small number of leveraged buyouts might be driving the ownership pattern. these firms place the least emphasis on production or craft activities (z = -0.8) and instead show some tendency to focus on administrative tasks (z = 0.4). these “tory” firms share features journal of small business strategy vol. 22, no. 2. 12 with “mechanistic” and similarly face simpler environments with hide-bound administrative orders (burns and stalker, 1961). crafts firms. cluster 4 (n = 39) is composed of “texas apparel manufacturers: crafts firms.” like the dilettantes, these are female-managed firms (z = 0.7). they are averse to innovation and competitive aggression (z = -0.9) and also to prediction of their industry environments (z = -0.7). they tend to be craft and production focused (z= 0.4), to be the most likely to compete on quality (z – 0.3) and not to sell through wholesale channels (z = -0.5); that is, to sell directly or by retail. although larger than the dilettante firms they are the second smallest set of firms in the sample (z = -0.3). these firms fit the pattern of the “craftsman” entrepreneur (smith, 1967; smith and miner, 1983; we substitute the term “crafts” in order to be gender-neutral). they fit smith’s depiction very well, being relatively less educated [components 26, 31], rather oblivious to the larger business and social environment [components 5, 6, 9], but seemingly comfortable in their particular trade. on balance, they represent the “small business owner” as opposed to “entrepreneur” in the industry (carland, hoy, boulton and carland, 1984). they also represent the historical roots of the clothing industry in crafts-based firms (fletcher and hardill, 1995; compare tregear, 2005, who distinguishes “craft” from “artisan” firms). we ought not be surprised to find this match with smith’s well-known “craftsman” type, because niches for artisanal firms can be found in the particular industry sampled. stability of the clustering hypothesis four holds that groupings will be stable in the sense of being replicable in a holdout sample. a holdout sample of 50 firms was analyzed in the same manner as the primary sample of 150 firms. (components were derived from the total sample of 200.) as noted above, this test is no substitute for longitudinal testing. moreover, 50 is a rather small sample once the constituent clusters have been distinguished. therefore, the results from the holdout sample should be interpreted cautiously as qualifications to the results from the primary sample. the results of clustering for the holdout sample are broadly similar to those for the primary sample: four groupings result from each, two comprised of large firms, two comprised of small. in neither sample do we find any conservative, professionally managed firms. further, for two of the primary sample groupings the findings are replicated in the holdout. dilettante firms and venturesome, professionally managed firms emerge from both samples, with immaterial differences in the profiles. in the holdout results the dilettante firms are marginally more similar to the venturesome firms and relatively better represented (30% of the holdout and 17% of the primary sample). in the holdout results the venturesome professionally managed firms are relatively less well represented (24% of the holdout and 35% of the primary sample). in the two other groupings, the crafts firms and conservative family firms (tories), the reliability of the primary clustering is impugned. in both cases, the holdout sample reflects a much more venturesome, but otherwise similar grouping, than in the primary sample. in both samples, crafts firms comprise about one quarter of the journal of small business strategy vol. 22, no. 2. 13 firms. however, in contrast to those in the primary sample, those in the holdout sample are innovative and proactive. they register at the upper end of the scales for new ideas, product innovation and product diversity, competitive aggressiveness and networking. this finding of relatively entrepreneurial crafts firms is consistent with findings of a subset of small creative firms that could include some dilettante firms that are relatively venturesome (chaston, 2008; fillis, 2002; lee & denslow, 2005; mccauley, 1998). in both samples, relatively large family firms with concentrated ownership and valued family traditions comprise about one fifth of the firms. however, in contrast to those in the primary sample, those in the holdout sample are entrepreneurial. their owners actively scan the environment and engage in networking and bargaining activities, take risks and innovate in broad product lines, and are motivated by new ideas and organization building. this finding is consistent with the typology of modes of professional family firms in stewart and hitt (2012). based on the holdout sample results, the population of texas apparel producers may include two types of crafts firms: crafts small business owners and crafts entrepreneurs. similarly, there may be two types of large family firms: conservatives or tories, and venturesome family firms. there may also be two types of large venturesome firms: venturesome nonfamily firms and venturesome family firms. these two groupings form distinct clusters in the same aggregated sample. the venturesome family firms differ on more components than those related to family status (e.g., concentrated ownership and familial role models). they are smaller and much more committed to new ideas and organization building than their professionally managed counterparts. they are more competitively aggressive and active in environmental scanning. the managers of non-family venturesome firms have more formal education and small business experience, and are more focused than the family firm managers on advertising and product innovation. hypotheses five and six: performance implications hypothesis five holds that groupings will differ in organizational performance. the result here is straightforward. the groupings differ, with the venturesome firms performing the best and both dilettantes and tories performing the worst. our finding that the venturesome cluster had the highest performance is consistent with the finding by chell and haworth (1992) that the most “healthy” clothing firms are also the most opportunistic. however, between-group performance differences are not statistically significant, as evidenced by the mean performance expressed in z scores in table 3. this finding of insignificant between-group performance is consistent with the findings of mcnamara, deephouse, and luce (2003) and pereira-moliner, claver-cortés and molina-azorín (2011). journal of small business strategy vol. 22, no. 2. 14 table 3: variables affecting performance by cluster variables are at least very marginally significant (p < 0.15) when performance is regressed against all other (32) clustering components by (4) clusters and for the (n= 150) entire sample. cluster one, dilettante firms (n = 26) model r2 0.302 mean standardized performance z = -0.288 entrepreneurial experience parameter estimate z = -0.897 partial r2 0.100 probability > f 0.083 conformity with cluster conformity negotiating success parameter estimate z = +0.406 partial r2 0.202 probability > f 0.021* conformity with cluster nonconformity cluster two, venturesome firms (n = 52) model r2 0.405 mean standardized performance z = +0.272 ideas/org. building parameter estimate z = +0.367 partial r2 0.138 probability > f 0.034* conformity with cluster conformity negotiating success parameter estimate z = +0.400 partial r2 0.115 probability > f 0.003** conformity with cluster conformity profit for family important parameter estimate z = +0.245 partial r2 0.101 probability > f 0.072 conformity with cluster conformity competitive aggressiveness parameter estimate z = -0.251 partial r2 0.120 probability > f 0.042* conformity with cluster nonconformity number of channels parameter estimate z = +0.245 partial r2 0.109 probability > f 0.103 conformity with cluster nonconformity journal of small business strategy vol. 22, no. 2. 15 cluster three: tory firms (n=33) model r 2 0.708 mean standardized performance z = -0.140 advertising focus parameter estimate z = -0.245 partial r2 0.051 probability > f 0.049* conformity with cluster conformity quality focus parameter estimate z = +0.591 partial r2 0.209 probability > f 0.007** conformity with cluster nonconformity risk/boldness parameter estimate z = +0.803 partial r2 0.108 probability > f 0.035* conformity with cluster nonconformity administrative focus parameter estimate z = -0.586 partial r2 0.134 probability > f 0.004** conformity with cluster nonconformity external funds parameter estimate z = -0.517 partial r2 0.063 probability > f 0.090 conformity with cluster nonconformity operations focus parameter estimate z = -0.208 partial r2 0.035 probability > f 0.090 conformity with cluster nonconformity cluster four: crafts firms (n = 39) model r 2 0.590 mean standardized performance z = 0.001 small business experience parameter estimate z = -0.797 partial r2 0.090 probability > f 0.034* conformity with cluster conformity quality focus parameter estimate z = +0.317 partial r2 0.283 probability > f 0.094 conformity with cluster conformity journal of small business strategy vol. 22, no. 2. 16 diversification parameter estimate z = -0.459 partial r2 0.090 probability > f 0.052 conformity with cluster conformity multiple experiences parameter estimate z = -0.488 partial r2 0.046 probability > f 0.095 conformity with cluster conformity environmental scanning parameter estimate z = -0.219 partial r2 0.038 probability > f 0.108 conformity with cluster conformity profit for family important parameter estimate z = +0.375 partial r2 0.045 probability > f 0.119 conformity with cluster conformity owner age and experience parameter estimate z = -0.768 partial r2 0.075 probability > f 0.064 conformity with cluster nonconformity cohabitant in same business parameter estimate z = -0.434 partial r2 0.057 probability > f 0.055 conformity with cluster nonconformity key: p < 0.01 ** p <0.05 * p < 0.1  p < 0.15  17 hypothesis six holds that groupings will differ in the causes or drivers of organizational performance. it is evident from a perusal of table 3 that this hypothesis was supported. the four groupings have very different patterns of variables and hence of managerial backgrounds and activities that drive their performance. this can be seen by examining those components that have at least a very marginally statistically significant (p < 0.15) effect on performance for member firms of each of the groupings. an unforeseen finding is apparent if we compare the positive and negative drivers of performance with the mean values on those components for each grouping. for the two lowest performing groupings, dilettantes and tories, performance is enhanced by behaving as a grouping nonconformist (consistent with suggestions in harms, kraus and schwarz, 2009 and mcnamara, deephouse and luce, 2003). this is consistent with fiss’s (2011) recognition that for some organizations typological inconsistency may be preferable to consistency. for example, dilettante performance is significantly enhanced by negotiating successfully, which is on average very weak in this grouping. paradoxically, a lack of entrepreneurial experience (which is typical for this grouping) is marginally significantly associated with better performance. we could interpret this to mean that people with entrepreneurial experience would have a hard time running a dilettante firm. however, this finding might reflect a higher level of artistic ability among owners with less business experience. tory performance is enhanced by conforming to the type in terms of a relatively low focus on advertising, but by nonconforming in terms of a greater emphasis on quality, on risk and boldness, and by focusing less on administration. better performance is also marginally significantly associated with nonconformity in terms of focusing less on external funds and less on operations. for the type with average performance (crafts firms) performance is enhanced significantly by conforming to a lack of small business experiences. it is marginally significantly enhanced by conformity with a quality focus, and low levels of diversification and of multiple preparatory experiences. it is very marginally significantly enhanced by conformity with low levels of environmental scanning and a high importance placed on profit for the family. the two areas for nonconformity are both marginally significant and unlikely to be changeable in practice: performance is enhanced by being younger and less experienced and by not having a cohabitant involved in the business. for the type with the highest performance (venturesome firms) performance is consistently improved by conformity to grouping norms, with the statistically significant exception calling for less aggressive competitive behavior. nonconformity by means of increasing the number of distribution channels is very marginally significant. however, conformity with motivation by ideas and organization building is significant and conformity with successful negotiations is very significant. conformity with a high importance placed on profit for the family is marginally significant. journal of small business strategy vol. 22, no. 2. 18 discussion limitations both the contributions and the limitations of this study stem largely from the design and execution of the survey instrument. this study shares the well-known limitations of surveys, such as the crosssectional rather than longitudinal data. this is arguably especially problematic in taxonomy (mckelvey, 1982, chap. 10), although it has never been resolved in a large sample study. further, surveys fail to capture the range of everyday activities and stakeholder interactions that help shape organizational forms (steyaert and katz, 2004). it has other limitations that are not always found in surveys. the sampling frame failed to represent at least one population known anecdotally to exist in the needle trades. we failed to obtain responses from ethnic minority firms, stereotypically asian and predominantly home-based (although not all “hidden” firms are ethnic minority firms, williams, 2010). this is not a trivial lacuna for a taxonomic study. moreover, it is not probabilistic, although it is quite inclusive of texas apparel manufacturers. as with other taxonomic studies (mckelvey, 1982, chap. 11), the findings lack generalizability. they should be seen as demonstrations of the potential for taxonomic approaches as used in natural sciences and as indicators of one particular industry in texas quite some years ago. moreover, these limitations demonstrate the considerable obstacles in the way of taxonomic progress. one is the need for large samples. we were able to delineate subtypes of firms (family and non-family venturesome firms, and entrepreneurial and non-entrepreneurial crafts firms) only with the use of the full sample (n = 200 rather than 150). the need for large samples is problematic with the large numbers of items needed in the questionnaires, which depresses response rates. for example, perreira-moliner and colleagues (2011) had a response rate of 7.6%. quite possibly major progress can only be made by national statistical agencies that are mandated to collect the data. contributions despite various limitations, the pragmatic use of mckelvey’s methods has demonstrated their longer-term potential by showing that taxonomic research could guide managerial prescriptions based on the type of firm. implications for managerial actions for each type of firm are different and contribute to the question of the performance effects of conformity or nonconformity to organization norms. for example, mcnamara, deephouse and luce (2003) suggested that firms that do not fully follow the pattern or recipe of groups may outperform conformists. similarly, harms, kraus and schwarz (2009) argued that the most entrepreneurial firms might be the most nonconformist as a result of their entrepreneurial character. in the case of the dilettantes, we found little to recommend for their owners other than training in negotiations. perhaps it is unsurprising that these small and weak firms lack many means of improvement. however, our findings may well underestimate the ways in which creative business advisors could help these firms. their managerial limitations are reflective of many women-owned firms, particularly those in the “technical/crafts” area, whose owners lack either managerial or startup experience (coleman, 2002; d’souza & kemelgor, 2008/2009; lee & denslow, 2005). there is no reason to assume that journal of small business strategy vol. 22, no. 2. 19 they do not care to improve in business performance and they may well gain from training (joyner, 2005; paige, 2009). tory firms are the second worst performing, but significantly larger than the dilettantes (z = 2.0). for these firms, several recommendations are possible, all of them implying a less conservative and administrative orientation. for the average performing crafts firms, findings suggest that they should continue much as they have in the past. although it is disappointing not to find a recommendation for changes, this may not be surprising as they are the most traditional mode of apparel manufacturer (fletcher and hardill, 1995). however, for both tory and crafts firms, advisers should remember that these findings apply to the majority of such firms, whereas the holdout sample found evidence of more entrepreneurial firms that were otherwise similar to these two types. for these more innovative firms, different recommendations presumably apply. for the venturesome firms the main recommendations are to stay the course but to try to moderate their competitive aggressiveness and perhaps to seek more channels of distribution. this study has demonstrated the potential for taxonomic research based on the practices of science as advocated by mckelvey (1975, 1978, 1982). we attribute our findings of distinctive strategic recommendations based on type of firm to the unusual dataset that adhered to mckelvey’s prescriptions. therefore, the most general contribution of this study is a demonstration of a solution to a longstanding challenge: to specify the types of organizations to which particular findings can be generalized (freeman, 1986). such specification is needed both for theory development and for practical application of research. the more specific contribution is demonstrating how patterns related to performance can be determined not just at the firm level, but at the group or configuration level (short, payne and ketchen, 2008). moreover, this study has demonstrated the possibility that small firm advisers could someday be able to identify organizational types and match them with strategic prescriptions. as a result, they would be better able to offer “tailormade” rather than generic solutions to their clients. 3 baum, 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(2007). the effects of ownership and governance on smes’ international knowledge-based resources, small business economics, 29: 309-327 jane s. craig is senior lecturer in the department of textiles and apparel at the university of texas at austin. her research and teaching interests include cad for apparel design, design, and women-owned textile businesses. stanley w. mandel is professor of practice and director of the angell center for entrepreneurship at wake forest university. his research and teaching interests include entrepreneurial pedagogy, entrepreneurship and small business, and family business. alex stewart is coleman foundation chair in entrepreneurship at marquette university. his teaching interests focus on entrepreneurship for students of all descriptions; his research interests are in the anthropology of so-called family firms. reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy vol. 25 ● no. 2 ● 2015 exposing the role of gender in the performance of founding entrepreneurs john h. batchelor university of west florida jbatchelor1@uwf.edu abstract using a sample of 114 entrepreneurs, predictors of financial performance outcomes were tested related to founding status and gender. significant differences were found for founding status indicating that entrepreneurs who founded their ventures were more likely to experience higher financial performance than non-founding entrepreneurs. hypotheses relating to gender with founding status and financial performance were not supported. further, gender was not supported as a moderator of the relationship between founding status and financial performance. implications of these findings are discussed and avenues for future research on this topic are offered. 21 journal of small business strategy vol. 25 ● no. 2 ● 2015 introduction over the past decade, much attention has been given to the role of gender in entrepreneurship. for instance, the journal entrepreneurship theory and practice dedicated an entire special issue to this topic. yet, there is still much we do not understand about the role of gender (especially female entrepreneurs) in entrepreneurship (de bruin, brush, & welter, 2006). throughout this literature, multiple perspectives are used to understand the differences between male and female entrepreneurs (i.e. jungian, feminist, and moral perspective). another area of interest to those who investigate entrepreneurship is learning more about the differences between those who found their own business and those who obtain their business in other ways. that is, what are the differences between these two groups (founders and non-founders) and how does this difference influence financial performance. the purpose of this article is to increment what we already know about these two areas and bring clarity to how gender and founding status interact to predict firm performance. entrepreneurship and founding whenever there is an academic discourse related to entrepreneurship one of the first questions asked is “how do you define entrepreneurship or an entrepreneur?” there is a full spectrum of opinions on this topic. some argue that the pursuit of opportunity is the key distinction between those engaged in entrepreneurship and others (davidsson & wiklund, 2001). while others argue someone who owns a business and does not have employment outside said venture is engaged in entrepreneurship (brockhaus, 1980). yet, others argue that entrepreneurship is the “creation of new organizations” (gartner, 1988). taken as a whole, the preceding discussion concerning entrepreneurs highlights the topics of opportunity recognition, self-employment, and the creation of new businesses. these themes are used to frame the discussion in this article. recognizing unexploited opportunities and creating new businesses is not always synonymous with self-employment. this founding vs. non-founding perspective to categorizing entrepreneurs is established in the entrepreneurship literature (begley, 1995). significant differences do seem to exist between these two groups. stewart, watson, carland, and carland (1998) describe entrepreneurs as those pursuing the goals of profit and growth and who use strategic planning. they describe small business owners as people who view their business as a part of who they are (their personalities) with the interest of providing family income. in their study of 767 small business owners from 20 of the united states, they found those who identified as entrepreneurs to be higher in achievement motivation, risk-taking propensity, and more inclined toward innovation. these findings are mirrored by a similar study by begley and boyd (1987) who, using a sample of 239 business owners, identified business founders to have significantly higher scores in the areas of need for achievement, risk-taking propensity, and tolerance for ambiguity than non-founders. these findings and theorized differences between founders and non-founders seem to be substantial enough to point toward a possible performance differential between 22 journal of small business strategy vol. 25 ● no. 2 ● 2015 those who founded their business and those who obtained their business through other methods (i.e. inheritance or purchase). all else being equal individuals with a high need for achievement who actively pursue profit and growth while taking risks and planning strategically (founders) should, on average, be expected to outperform those (non-founders) who either do not engage in these behaviors or engage in these behaviors to a lesser degree than others. this leads to our first hypothesis as follows: hypothesis 1. businesses founded by the entrepreneur will have higher performance than businesses not founded by the entrepreneur. the role of gender to understand the role of gender in business formation, one must first discuss the role of gender in entrepreneurship. any time there is a discussion about salient demographic distinctions, such as gender and race, the role of perception/views of the world generally comes into play. this is especially true in female entrepreneurship literature. this explains the multiple competing perspectives on the role gender plays in entrepreneurship and the study of entrepreneurship. the key points of three of these perspectives are discussed next. first, is the jungian perspective, which articulates the masculine and feminine, often using the terms “animus” and “anima” to refer to the two, respectively. the masculine is described as discriminating, cognitive, and repressing feeling (jung, 1928; 1976). traits associated with the masculine are planning ahead and creating an ideal future (jung, 1928; 1976). the feminine is described as connective, opinionated, and sentimental. traits associated with the feminine include the maintaining of relationships. in explaining this view, jung describes that the masculine and feminine are “archetypes.” that is, no male is entirely masculine and no female is entire feminine. both men and women possess masculine and feminine qualities, a close reading of this work describes how this results from maternal and paternal influences on children at an early age. nonetheless, the jungian perspective generally associates feminine characteristics with females and masculine characteristics with males, although there can be very masculine females and very feminine males. in his 1928 work contributions to analytical psychology, jung describes how irrationality is part of both the masculine and feminine but in different ways. he describes the feminine as “irrational feeling” and the masculine as “irrational conceiving.” the implications of this on business founding will be discussed later. second is the moral development perspective. this theory centers on how men and women view the world differently along moral lines. kohlberg and kramer (1969) describe these differences where females are more “conformist” and males are more “legalistic” in nature. gilligan builds upon the work of kohlberg by taking a more dualistic approach to the differences between males and females where male moral development tends to focus on justice and respect for individuals and female moral development focuses on care and responding to needs (gilligan & attanucci, 1988). bird and brush (2002) summarize the moral development perspective well by characterizing the masculine as rule based, legal, and 23 journal of small business strategy vol. 25 ● no. 2 ● 2015 hierarchical and the feminine as relational decision making with a focus on care. this characterization works well because it incorporates aspects of both the kohlberg and gilligan perspective. while this moral perspective often takes a dualistic tone (men possess masculine and women possess feminine traits with respect to moral development), broughton (1983) revisits the interviews and other work of gilligan (e.g. gilligan, 1977; 1979; 1982) to point out that, much like the jungian perspective, men and women sometimes “speak” in the voice of the other gender. the third and final perspective presented herein is feminist theory. alcoff (1988) states, “the concept of woman is the central concept for feminist theory” (p. 405). scholars in this area often speak of “deconstructing” society, life, work, and so forth. flax (1987) describes “deconstructive” as “see[ing] to distance us [women] from and make us [women] skeptical about beliefs concerning truth, knowledge, power, the self, and language that are often taken for granted within and serve as legitimation for contemporary western culture” (p. 624). bird and brush (2002) assist in bringing clarity to this concept of deconstruction by describing it as creating a “feminine voice” for a plethora of phenomena and highlighting the importance of gender as an individual difference. they describe this “feminine voice” as valuing affiliation, developing others, pursuing social goals, and valuing the needs of individuals. male (traditional) characteristics such as individual achievement and personal power would stand in contrast to these qualities (see boyatzis, 1991 and harlos, 1995 for more discussion). thus this perspective takes the more dualistic approach (associated with gilligan’s style of moral perspective) to what is masculine and feminine. the role of gender in founding organizations although the rate of women starting businesses has increased (center for women’s business research), fewer females start businesses than males (delmar & davidsson, 2000; minniti, arenius, & langowitz, 2005). while this is an established phenomenon, this study aims to increase the cumulative knowledge of female entrepreneurship by drilling down into this fact to see if the ways female entrepreneurs start or obtain their businesses differ significantly from males. that is, are female entrepreneurs more or less likely to found their business, as opposed to some other way of obtaining a business such as purchasing or inheriting, than males. although women and men are similar in psychological skill (brush, 1990; 1992), on average, women view the act of starting a business to be more complex than do men and tend to focus on different issues than their male counterparts (bird & brush, 2002; burke, fitzroy, & nolan, 2002). it is argued that these differences affect the rate of founded business startups by female entrepreneurs. in a study of female and male entrepreneurs from many countries, langowitz and minniti (2007) found that female entrepreneurs tend to view the entrepreneurial environment less favorable than male entrepreneurs. langowitz and minniti (2007) use a behavior economics approach to understand this perceptional difference concluding that subjective perceptions (i.e. economic environment, perceived barriers) play as large of a role in 24 journal of small business strategy vol. 25 ● no. 2 ● 2015 entrepreneurial behavior as objective factors (i.e. income and education). thus the perceptional differences between males and females may influence one’s decision on how to start a business. in the following discussion, three theories commonly used to understand female entrepreneurship are explored to develop the hypotheses that female entrepreneurs may be less likely to found their new business ventures than male entrepreneurs. founding preferences as stated earlier, langowitz and minniti (2007) found that the females in their study perceived themselves and the entrepreneurial environment less favorably than their male counterparts. thus the females in their sample had less confidence in themselves and the environment in which they were starting their business. verheul, uhlaner, & thurik (2005) found that confidence is an important factor in the creation of new businesses. based on the extant literature on gender and organizational creation, bird and bruch (2002) developed a rather dichotomous typology of the differences between male and female entrepreneurs. one aspect of this framework, with reference to new venture creation, describes male (or masculine) entrepreneurs as more controlling of personal and financial issues related to their venture. taken as a whole, the research just presented characterizes male entrepreneurs as more confident and controlling than female entrepreneurs. this confidence and need for control may predispose male entrepreneurs to be more likely to found their own business than purchase a pre-existing venture or take over their family’s business. in founding one’s business, the entrepreneur should have more control over the entire business because they are creating the business from scratch themselves and are able to create it however they please (see batchelor & burch, 2011 for discussion). while founding one’s own business, or creating something from nothing (baker & nelson, 2005), offers the possibility for greater control over one’s venture it also takes much greater confidence than purchasing a business that is already up and running with established business processes that may only need to be maintained or tweaked. with relation to a family business, taking over such a venture does not usually happen overnight. many times, this process takes years, if not decades, and control is handed over slowly. thus, adequate planning is needed to ensure that the family business survives (davis & harveston, 1998). this process offers two aspects that may be perceived favorably by female entrepreneurs. first, slowly taking over an existing business in an established market is a much less daunting task than creating a venture from scratch, thus requiring less confidence in oneself and the business environment. second, this family governance control system, where control is handed over slowly from one individual or individuals to another individual or individuals, fits well with bird and brush’s (2002) description of the sharing and cultural control system preferred by female (feminine) entrepreneurs. in support of this idea vera and dean (2005) found, in a study of females who took over management of their family’s business, that females experienced good personal and professional relationships with their fathers during the succession process. this can be viewed as an example of the sharing control system discussed by bird and brush (2002) 25 journal of small business strategy vol. 25 ● no. 2 ● 2015 with regard to the three theories of gender presented herein, there is also reason to believe that male entrepreneurs will be more likely to found their venture. the jungian perspective describes men as irrational conceivers (jung 1928). to invest valuable resources into founding a new venture that will most likely fail in the first few years (statistic brain, 2014) is definitely an irrationally conceived idea. to add emphasis to the contrast between male and female entrepreneurs associated with accepting the likelihood of a new venture not surviving, langowitz and minniti (2007) found that fear of failure was negatively associated with the likelihood of females starting a business. further, this perspective describes female entrepreneurs as connective and sentimental (jung, 1976), this mentality is much more conducive to taking over a family venture or purchasing an existing venture where one either has sentimental attachment (family business) or will find connection to those already associated with a preexisting venture that is purchased. the moral development perspective characterizes females as “conformists” (kohlberg & kramer, 1969), which, again, fits well with obtaining a venture through purchase or taking over a family business because there is a preexisting set of rules or norms with which to conform. with founding a new venture, there are no such preexisting rules or norms so there is nothing to “conform” to. finally, the feminist perspective may view founding a new venture as a “masculine” action centered on spotlighting one’s individual achievement and personal power. thus founding may be viewed as contemporary or traditional entrepreneurship and once deconstructed the “feminine” would deviate from this perspective increasing the likelihood of purchase of taking over a family business. altogether, previous research and these three gender theories point to the likelihood that male and female entrepreneurs are likely to differ in how they obtain their ventures, with males more likely to found, leading to the following hypothesis: hypothesis 2. male entrepreneurs are more likely to have founded their businesses than female entrepreneurs. performance differences when looking at performance differences between male and female entrepreneurs it is first important to look at how the two groups may perceive performance differently. the feminist perspective may shed the most light on these differences. this perspective could easily argue that the traditional (masculine) perspective focuses on profit and/or growth. thus a feminine perspective would differ from this. the jungian perspective can be used to bring more clarity to what these differences may be. from this perspective, males (masculine) are characterized as goal oriented and discriminating, while females (feminine) are nurturing and accepting (jung, 1928; 1971). the moral development theory echoes this sentiment by describing the feminine as more relational than the masculine. thus, at the very heart of the discussion of “performance” male and female entrepreneurs may define “what is performance?” much differently. many studies show that males tend to focus more on profit, wealth, social recognition, power, and achievement (mcclelland, 1961: baumol, 1993; stevenson, roberts, & grosbech, 1994; ronen, 1983; hasse, 26 journal of small business strategy vol. 25 ● no. 2 ● 2015 lautenschlager, & thomas, 2012). in their “gendered perspective” of entrepreneurship, bird and brush (2002) summarize much of the existing literature on this topic. in this they find male (traditional or masculine) entrepreneurs to be rational, goal oriented, competitive, aggressive, and most important to the discussion at hand, place high value on firm and individual success. female (feminine or personal) entrepreneurs are described as emotional, cooperative, harmonizing, caring, preserving relationship, empathetic, and, with reference to performance, resistant to growth. thus taken as a whole, this discussion leads to the conclusion that male (masculine) entrepreneurs are more likely to define performance in terms of profit or growth and female (feminine) entrepreneurs are more likely to define performance in more personal terms and focus more on caring and fairness. hence, by defining performance along different dimensions it is likely that male and female entrepreneurs will focus on the performance goals set in their mind, leading to differential performance results based on resources being allocated to the dimensions one sees as most important (i.e. males to profits and growth; females to relationships and caring). with resources allocated in opposing ways, it is likely these two groups will see differences in performance. for instance females are shown to be more transformational than males (eagly & johannesen-schmidt, 2001) and females tend to emphasize more relational policies (holmquist & sundin, 1990), this could be due to females placing more emphasis on relationships than males. regardless of individual preferences, male and female entrepreneurs seem to face a different set of challenges. using a large sample from the national child development survey, burke et al. (2002) found the desire to be one’s own boss to be positively related to performance (financial) for males but not for females. they attribute this finding to the greater non-work commitments of females as compared to males. these differences in nonwork requirements will have a negative effect on the performance of female entrepreneurs regardless of their focus (financial or relational performance). there is evidence of greater work-family conflict for females than males especially with regard to overload and domestic responsibilities (duxbury, higgins, & lee, 1994; nomaguchi, 2012). female entrepreneurs may also face unique challenges when it comes to funding their businesses. in their introduction to a special issue on women’s entrepreneurship, de bruin et al. (2006) note the research of others which shows that female entrepreneurs, as compared to their male counterparts, receive very little in the way of equity investment and suffer from what they term as a “mismatch” in sources of growth funding for their business (see the following for more details greene, brush, hart, & saparito, 2001; brush, carter, gatewood, greene, & hart, 2003). although these differences in funding resources may be explained by female entrepreneurs resistance to growth and focus on relational aspects of the entrepreneurial process (as described in bird & brush, 2002), the differences are still present and will effect performance when measured in financial terms. in sum, these theories seem to indicate that female entrepreneurs tend to focus less on the financial aspects of performance than their male counterparts, and, possibly due to this lack of financial emphasis, suffer from greater 27 journal of small business strategy vol. 25 ● no. 2 ● 2015 challenges when it comes to funding their ventures. this focus combined with females experiencing a higher rate of work-family conflict than males leads to the following hypothesis. hypothesis 3. based on financial measures, male entrepreneurs will see higher performance than female entrepreneurs. first it was outlined how, on average, females and males may be likely to obtain their ventures through different methods. then research was highlighted showing that these two groups may differ in financial performance. but it is likely that this relationship may be more complex and that these three variables (founding status, gender, and performance) may interact together in a unique way. this interaction may be influenced by factors such as the following. founders have a higher need for achievement than their non-founder counterparts (begley & boyd, 1987), and females use different strategies to manage their businesses than males (carter, gartner, & reynolds, 1996). for instance males tend to focus more on profit maximization and identifying a market need (gatewood, shaver, & gartner, 1995; bird & brush, 2002) than do female entrepreneurs. these differences may influence both founding status and performance, such that the relationship between founding status and performance is different for females than males. this leads to the following hypothesis: hypothesis 4. gender moderates the relationship between how an entrepreneurial venture is obtained (founded or non-founded) and performance. methods the data used in this study is from a dataset collected by the researcher on entrepreneurship to test multiple aspects of the entrepreneurship process and to be used for multiple studies. as entrepreneurs are a traditionally difficult set of individuals to sample and due to the great cost (time and money) of data collection on these individuals, much effort was put into designing a survey that could be used for multiple studies of the entrepreneurship environment. the interaction of gender, founding status, and performance was one of the studies this dataset was designed to test. surveys were distributed to 324 business owners (self-employed) in virginia and north carolina through a small business center, a loose association of trade and service entrepreneurs in north carolina, and personal contact with entrepreneurs in virginia. of these 324 packets 114 useable responses were received and coded, for a response rate of 35.1 percent. of the 114 organizations sampled, 27 percent were female owned and 25 percent were founded. respondents ranged in age from 18 to 66 with a mean age of 48. respondents represented multiple industries. the most common industries were services (57%), retail (22%), manufacturing (13%), and construction (5%). the education level of respondents ranged from high school to ph.d. most respondents (49%) held undergraduate degrees, followed by high school diplomas (32%), graduate degrees (10%), and finally ph.d. (9%). 28 journal of small business strategy vol. 25 ● no. 2 ● 2015 measures founding status. respondents were given four response options when asked about how their business was obtained. their options were as follows: founded, purchased, inherited, or other. those who checked the box for founded were coded as founded and those who chose any other option were coded as non-founded. gender. respondent gender was identified by asking one dichotomous question, that is: “what is your sex?” two options were given, male and female, and responses were coded accordingly. performance. as respondents were assured anonymity and no financial data was available, a subjective measure of performance was used in this study. these types of measures ask respondents to rate their performance over a period of time, the past three years in this study, on how well they performed relative to similar others in their region. the measure used in this study, dess and robinson (1984) asked respondents to make this performance rating on the three dimensions of sales, assets, and overall performance. one question was asked for each dimension and the computed alpha reliability of the respondents in this study was .86. firm size. in some analyses included in this study, firm size was used as a control variable. this number was obtained by asking respondents “how many employees did you employ at any given time, on average, over the past year?” respondents were asked to fill in their response in a blank. that is, no ranges were used in this study; responses were given as tangible numbers allowing them to be coded as a continuous variable. results hypotheses 1 through 3 proposed that differences existed between groups of respondents based on either gender or founding status. these differences were tested using standard t-test to determine if the mean differences between these two groups were significant. in these tests, equal variance was assumed when the levene’s test for equality of variances was greater than .05, otherwise equal variance was not assumed. table 1 t-test results comparing founding and non-founding based on performance performance n mean sd t mean diff. sig. founded 86 6.35 1.00 2.04 .50 .04 non-founded 28 5.85 1.34 hypothesis 1 proposed that businesses founded by entrepreneurs will have higher performance than businesses obtained through other methods (non-founded). as shown in table 1, the mean performance rating of founding entrepreneurs was 6.350 while the mean performance of non-founding entrepreneurs was 5.851, this mean difference of .499 was significant at the p<.05 level (p=.043). these results fully support hypothesis one indicating that the founding entrepreneurs in this sample experienced higher performance than the non-founding entrepreneurs. 29 journal of small business strategy vol. 25 ● no. 2 ● 2015 hypothesis 2 proposed that male entrepreneurs are more likely to have founded their businesses their female counterparts. as shown in table 2, males did have a higher mean on founding (.795) as compared to that of the mean of the female entrepreneurs (.645), but this difference failed to reach significance (p=.133). thus hypothesis two was not supported, meaning that there was no significant difference in the founding rate in this sample based on gender. hypothesis 3 proposed that male entrepreneurs will score higher of financial performance than female entrepreneurs. table 3 shows the male mean performance rating to be 6.279 and the female mean to be 6.089. although males, on average, scored higher on performance, this difference failed to reach significance (p=.515). these results fail to provide support for hypothesis three and indicate that there is no significant difference, in this sample, between the performance of male and female entrepreneurs. it is important to note that differences in how the genders self-report performance may have influenced these results. implications for this are discussed in the limitation section. hypothesis 4 proposed that gender moderates the relationship between founding status and performance. moderated multiple regression was used to test this hypothesis in accordance with the steps outlined by frazier, tix, and barron (2004). because this analysis used dichotomous variables for both the independent (founding status) and moderator (gender), variables special dummy coding designed by kenny (2013) was used in this analysis. this coding consisted of the following steps. first, a two by two matrix was created using zeros and ones to code each possibility of gender and founding status. then these four quadrants were coded as (-1, 1), (-1, 1), (1, -1), and (1,1) for the independent and dependent variables respectively. for example, a male founder would be in quadrant one with basic dummy coding of 1 for founding and 0 for male. then this quadrant would receive coding of -1 for the independent variable and -1 for moderator. female founders, quadrant two, received coding of -1 for the independent variable and 1 for the moderator, then the other two quadrants were assigned in the same fashion. these four possibilities were then entered into spss and analysis was run in accordance with baron and kenny’s (1986) moderated multiple regression procedures. this analysis was run twice, one without any controls and a second time after controlling for firm size, to see if this, often included, control variable affected the results. table 2 t-test results comparing males and females on founding founding n mean sd t mean diff. sig. female 31 .65 .49 1.53 .15 .13 male 83 .80 .41 30 journal of small business strategy vol. 25 ● no. 2 ● 2015 the results of moderation analysis with and without controlling for firm size are presented in table 4. hypothesis 4 proposed that entrepreneur gender moderates the relationship between founding status and performance. in the initial running of the data without controlling for firm size, no evidence of moderation was found. that is, the coefficient of the interaction term was not significant, thus failing to support hypothesis 4. because relevant theory, presented earlier in this article, indicated that female entrepreneurs are less likely to focus on growth than male entrepreneurs, the analysis was run again while controlling for firm size. as in the first analysis, the interaction term failed to reach significance, again failing to support hypothesis 4. these results, as those of hypothesis 3, may be influenced by gender differences in self-report propensity. this is discussed in greater detail in the limitations section. discussion two main conclusions may be drawn from the findings presented herein. first, firms founded by an entrepreneur are shown to result in higher performance than non-founded firms. this finding supports the idea that those who found their ventures are more aligned with the mindset of the profit/growth seeking entrepreneur. that is, they may focus more on pursuing profit and growth and have a higher need for achievement than non-founding table 3 t-test results comparing males and females on financial performance performance n mean sd t mean diff. sig. female 30 6.09 1.48 .66 .19 .52 male 80 6.28 .95 table 4 moderated regression analysis for firm performance firm performance without controls controlling for firm size ∆r2 ∆r2 step 1: main effects .04 .07 independent variable dummy -.24 (.12) -.35 (.12) moderator variable dummy -.06 (.12) .02 (.12) step 2: interaction .03 .01 interaction dummy -.24 (.13) -.17 (.12) total r .26 .41 total r2 .07 .17 adjusted r2 .04 .13 note: standardized regression coefficients are included; numbers in parentheses are se components. *=p<.05, **=p<.01, ***=p<.001. 31 journal of small business strategy vol. 25 ● no. 2 ● 2015 entrepreneurs (stewart et al., 1998; begley & boyd, 1987). further, non-founders may align better with the conceptualization of small business owners who look at their business as an extension of their personalities. these nonfounders may focus more on the reputation of the business than growing and making the business more profitable. thus, this type of small business owner mindset may be what separates non-founders from entrepreneur minded founders who are focused on profit and growth maximization. the second major conclusion of this study is the lack of support for the hypotheses relating to differences between the genders on founding or financial performance. this finding runs completely contrary to the jungian, moral perspective, and feminist theory. with relationship to business founding, the jungian approach views females as more sentimental and focusing on personal connections than males. this suggests that females may be more likely to take over a family business, purchase an existing business, or some other non-founding option because founding a business is creating something from nothing. it would therefore be difficult to be sentimental or have a personal connection to something that does not exist. this same mentality is mirrored by the moral perspective which views females as more “conformist” than males. that is, if one inherits or purchases a venture there is a preexisting set of rules to which one can conform, no such set or rules exist when founding a new venture, thus females would be expected to favor non-founding as compared to founding options for obtaining a business. and finally, the feminist perspective focuses on deconstructing a feminine perspective that deviates from that of the traditional or male perspective. in contemporary society, the entrepreneur is someone such as sir richard branson who starts his own businesses and grows them into highly profitable firms. thus the “feminine” version would deviate from this and should favor non-founding alternatives. although these three theories are well developed streams of literature, they each failed to point in the correct direction with regard to the differences related to gender and founding status presented herein. with respect to firm performance, the three theories could easily be interpreted in the following ways. the jungian and moral perspective leads one to believe that female entrepreneurs would tend to focus more on the relationships of the individuals involved with the business venture than growth or profit and males would be more oriented toward growth and profit resulting in higher firm performance, on average, for males. the feminist perspective applied earlier to the argument for gender difference in founding status would apply in the same way to firm financial performance. again the traditional (male) entrepreneur would be an individual, such as donald trump, who focuses primarily of performance such as growth and profitability and therefore a feminist perspective would differ from this in significant ways. this mentality is echoed in the “gendered perspective” of entrepreneurship outlined by bird and brush (2002) where female entrepreneurs are characterized as focusing more on harmonizing and preserving relationships than the aggressive pursuit of goals, which are characteristics of males. thus again, these theories pointed to a significant difference in performance between entrepreneurs based on gender, which was not supported by the data 32 journal of small business strategy vol. 25 ● no. 2 ● 2015 herein. finally, gender was not found to moderate the relationship between founding status and performance. again, for all the reasons outlined earlier, theory pointed to the strong likelihood of finding support for this hypothesis but that was not the case. after first analyzing the data in this study and discovering that only one of four hypotheses was supported and none of the hypotheses related to gender were supported, i was surprised. interpretation based on theory seemed to clearly point to strong gender differences in many aspects of entrepreneurship, especially those related to founding preference and performance. after all, many studies show that males tend to focus more on power, wealth, and profit (mcclelland, 1961; baumol, 1993; stevenson et al., 1994; smith, 1967; ronen, 1983) and females tend to view the entrepreneurial environment less favorable than males (langowitz & minniti, 2007) and fear of failure is negatively associated with likelihood of starting a business for females (langowitz & minniti, 2007). i originally thought the paragraph at this stage in the article would begin with, “the relationship between gender, founding status, and performance is more complicated than simple correlational or mean differences,” then i would follow with an long discussion of how this was a moderated relationship. but the results did not support such an argument. yet, these results are just as important to the body of research on gender and entrepreneurship as results in the opposite direction. there is growing support to the notion that null results, such as these, need to be published and the lack of such reporting, or publication bias, is damaging the progress of knowledge (landis, lance, pierce, & rogelberg, 2014; landis, rogelberg, 2013). in their journal of management article on questionable research practices, o’boyle, banks, and gonzalea-mule (in press) point out the prevalence of post hoc hypothesizing and practices such as dropping non-significant hypotheses, collecting additional data to turn non-significant findings significant, adding statistically significant hypotheses resulting in an unrepresentative body of literature because enough studies are not published show unsupported hypotheses. that is, the literature is lacking studies that alert researchers when relationships are not present. this is particularly damaging to the field of metaanalysis because non-significant results are needed to determine the true population effect when summarizing effect sizes for a body of literature. so, how are these non-significant results important and what implications may they have? first, the three major theories used to understand female entrepreneurship and to predict the direction of the hypotheses in this article may not apply the same way in modern times as they did in the past, hence the times may be changing. the groundwork for much of the moral perspective was laid out decades ago and much of the jungian work is form the early part of the twentieth century. while these perspectives can still be applied to modern situations, maybe the way they should be applied has changed. further, the feminist perspective focuses of providing a female voice to traditional male dominated aspects of society where the female voice is not represented. if this study was conducted twenty years ago, possibly, there would be significant differences between founding 33 journal of small business strategy vol. 25 ● no. 2 ● 2015 habits and financial outcomes of the genders, but this was not the case in this sample. so what has changed? first, more females are obtaining business educations. for instance, females represent over forty percent of the applicant pool of most graduate management programs and increases in applications by females to these programs is outpacing that of males (gmac, 2013). further, top schools such as the harvard business school and the university of pennsylvania wharton school have females represent 39 and 45 percent of their mba population respectively (blackman, 2011). thus, the representation of females has increased dramatically over the past decades. second, female entrepreneurs are receiving more venture capital than before. a recently released study by the diana report from babson college found that the amount of early investment in companies with females on the executive team has tripled from 1999 to 2014 and found that businesses that included female entrepreneurs on the executive team performed just as well, if not better, than those only including men (brush, greene, balachandra, & davis, 2014). so here again, female are more represented in entrepreneurship and are receiving more venture funding than before. this is relevant because funding and networking are often cited reason for gender differences in entrepreneurial outcomes. some even view a female gender identity as an asset in entrepreneurship (kinyanjui, 2008). finally, in a study that looked at the lives of female entrepreneurs over a two-month period, itani, sidani, and baalbaki (2011) found that the female entrepreneurs, in their study, did not experience conflict between their entrepreneurial and personal lives. sonfield and lussier (2004) found business with predominant female ownership to have few differences, related to management activities, when compared other businesses. further, in a study of 26 owners and managers of small businesses, welsh and brich (1997) found no difference in use (and abuse) of power between the genders. these findings point toward a change in how relational conflicts are experienced by female entrepreneurs. taken as a whole, the preceding discussion highlights how the entire landscape has changed with regards to female entrepreneurs. females are very well represented in business schools, venture capital funding, their performance is increasing, and relational conflicts may be easing. with this in mind, maybe the direction of the hypotheses in this study may be reinterpreted as follows. the jungian perspective would say that the male, female, “anima” and “animus” are interwoven so it is possible that male and female entrepreneurs could see similar outcomes. to illustrate the point, look at the yin-yang symbol and see how there is a black dot in the white portion and a white dot in the black portion. the feminist perspective could say the female voice is now a more pronounced part of contemporary society; hence the new “traditional” perspective is more heavily influenced by the female voice. thus what an entrepreneur is in the modern world, more than ever, includes aspects of the male and female perspective and significant differences may no longer exist (or be less pronounced) between the two groups on founding and financial performance. and finally, the study by itani et al. (2011) finding that female entrepreneurs did not experience conflict 34 journal of small business strategy vol. 25 ● no. 2 ● 2015 between the responsibilities of their entrepreneurial and personal lives could mean that the moral perspective, which focuses on respect for individuals and responding to needs, could indicate that since female entrepreneurs are now more free to focus on relationships in and outside their entrepreneurial lives simultaneously without conflict, differences may not be as pronounced as in the past. limitations and conclusions this study suffers from the limitations of only looking at one point in time. further this is only one study, so others should be cautious when interpreting the results herein. as schmidt (1992) states, individual studies should only be looked at as a data point and viewed in the larger context when combined into meta-analysis. that is, sampling error can cause effect sizes to differ from study to study producing conflicting results where only meta-analysis can resolve these discrepancies. further, this study suffers from the limitation of a sample draws from states from the central eastern united states. for this reason, these findings may not generalize well to other regions. in this study gender differences in education and industry were analyzed and no significant differences were found relating to these two variables. this may be a function of the limited sample size (114) of this study. it is possible that a larger sample size may find significant differences between the genders on education and industry. it is also possible that male and female entrepreneurs self-report performance differently. some research in differential psychology points to females self-reporting lower performance, in some areas, when compared to the self-reports of males (see weiss, kemmler, deisenhammer, fleischhacker, & delazer, 2003). conversely, some research in the management field points to females having elevated self-ratings of performance (see tsui & gutek, 1984). thus the water is murky with regard to self-report performance inflation with regard to gender with no clear direction on how to control for such gender difference. since this study relied on self-report performance ratings, variance in gender differences with regard to selfreporters of performance is not accounted for herein. this brings attention to the need for future studies that look specifically into the self-report differences between male and female entrepreneurs. additionally, future studies should investigate the relationship presented herein to see if these relationship hold up in different contexts and across time. in conclusion, theory pointed to very distinct differences between male and female entrepreneurs. the hypotheses presented herein proposed significant differences between the venture creation preferences and financial performance of entrepreneurs along gender lines. although significant differences were supported for founding and nonfounding entrepreneurs, the differences based on gender were not supported. references alcoff, l. 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(1967). the entrepreneur and his firm: the relationship between type of man and type of company, bureau of business and economic research, graduate school of business administration, michigan state university, lansing. sonfield, m.c., & lussier, r.n. (2004). family business ownership and management: a gender comparison. journal of small business strategy, 15(2), 59-75. statistic brain (2014). startup business failure rate by industry, based on data from entrepreneur weekly, small business development center, bradley university, university of tennessee research. retrieved from http://www. 38 http://davidakenny.net/cm/moderation.htm http://davidakenny.net/cm/moderation.htm journal of small business strategy vol. 25 ● no. 2 ● 2015 statisticbrain.com/startup-failure-byindustry/. stevenson, h.h., roberts, m.j., & grosbeck, h. i. (1994). new business ventures and the entrepreneur. burr ridge, il: irwin. stewart, w.h., watson, w.e., carland, j.a.c., & carland, j.w. (1998). a proclivity for entrepreneurship: a comparison of entrepreneurship, small business owners, and corporate managers. journal of business venturing, 14, 189-214. vera, c.f., & dean, m.a. (2005). an examination of the challenges daughters face in family business succession. family business review, 43(4), 321-345. verheul, i., uhlaner, l., & thurik, r. (2005). business accomplishments, gender and entrepreneurial self-image. journal of business venturing, 20(4), 483-518. weiss, e.m., kemmler, g., deisenhammer, e.a., fleischhacker, w.w., & delazer, m. (2003). sex differences in cognitive functions. personality and individual differences, 35, 863-875. welsh, d.h.b., & birch, n.j. (1997). the ethical orientation of u.s. small business decision makers: a preliminary study. journal of small business strategy, 8(2), 41-51. dr. john h. batchelor is an assistant professor of management at the university of west florida. he currently teaches undergraduate and mba classes related to management, human resources, and planning. his research interests include entrepreneurship, meta-analysis, experiential learning, and emotions. he advises the student collaborative entrepreneurship organization and is a board member of the pensacola center for innovation and entrepreneurship. 39 http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2021, vol. 31, no. 03, 102-121 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2021 small business institute® w w w. j s b s . o rg introduction 1universidad internacional de la rioja, facultad empresa y comunicación, avenida de la paz, 137, 26006 logroño, la rioja, spain, joseantonio.clemente@unir.net 2universitat de valència, facultad de economía, departamento de dirección de empresas, av. dels tarongers, s/n, 46022 valencia, spain, sergio.camison@uv.es 3universitat de valència, facultad de economía, departamento de dirección de empresas, av. dels tarongers, s/n, 46022 valencia, spain, cesar.camison@uv.es family firm heterogeneity and tax aggressiveness: a quasi-experimental analysis of the impact of different family generations tax aggressiveness, thin capitalization rule, leverage, family firm, generation apa citation information: clemente-almendros, j. a., camisón-haba, s., & camisón-zornoza, c. (2021). family firm heterogeneity and tax aggressiveness: a quasi-experimental analysis of the impact of different family generations. journal of small business strategy, 31(3), 102121. tax planning is critical for companies and has attracted growing interest from researchers, practitioners and policy-makers (minnick & noga, 2010; shackelford & shevlin, 2001). taxes represent an important cost for the company since they result in a potential lower cashflow for the shareholders (chen et al., 2010), and influence company long-term growth and investment (sánchez et al., 2016). tax avoidance, which is a specific form of tax planning that seeks to reduce the tax payments owing and thus increase net income (frank, lynch and rego; 2009), has also captured the attention of researchers and public institutions (desai & dharmapala, 2008; hanlon & heitzman, 2010; oecd, 2013; oecd, 2015). in line with chen et al. (2010), in our study, tax aggressiveness refers to “downgrade management of taxable income through tax planning activities”. alternatively, we could use the expression tax management. following the suggestion of several authors to focus on the understudied area of family firm research (mazzi, 2011; sánchez et al., 2016; steijvers & niskanen, 2014) our interest is in determining whether tax aggressiveness varies depending on the influence of different family generations, by analysing the effect of a reduction in interest deductibility on the capital structure of family firms. although business control and ownership structure are determinants of tax aggressiveness, this topic has not been widely explored (hanlon & heitzman, 2010; shackelford & shevlin, 2001). family firms differ from other companies in terms of specific intrinsic factors; they thus represent a unique framework within which to examine the influence of ownership structure on tax aggressiveness (chen et al., 2010). family control of the business is one important factor (ferramosca & ghio, 2018), or more specifically, intergenerational transfer of family control (anderson et al., 2003; miller & le breton-miller, 2006). the importance of family control of the business relies on being part of the unique framework that family firms represent. it is a non-economic goals that, in view of sew, affect family firm decisions (gómez‐mejía et al., 2007) and sometimes against economic benefits (gallo et al., 2004). another differential is the importance of family reputation (carcello et al., 2002; gedajlovic & carney, 2010; naldi et al., 2013). there is a lack of empirical research about the level of active tax management or tax aggressiveness of family firms (desai & dharmapala, 2006; scholes et al., 2009); moreover, the literature reports contradictory results. whereas this paper analyses tax aggressiveness in family firm generations. moreover, taking into account the heterogeneity in family firms, we check whether the successive generations in control show different tax avoidance behaviour. the empirical evidence, based on the quasi-experiment of the 2012 spanish thin capitalization rule, reveals that there is a positive relationship between tax aggressiveness and successive generations. moreover, the founder and second generations follow a similar conservative tax avoidance approach, whereas the third and fourth generations are found to be more tax aggressive. josé a. clemente-almendros1, sergio camisón-haba,2, césar camisón-zornoza,3 http://www.smallbusinessinstitute.biz http://www.jsbs.org 103 j. a. clemente-almendros, s. camisón-haba, & c. camisón-zornoza journal of small business strategy / vol. 31, no. 3 (2021) / 102-121 there are studies showing a positive relationship between family firm status and tax aggressiveness (gaaya et al., 2017; koverman & wendt, 2019; lópez et al., 2019; mafrolla & d’amico, 2016;), the opposite relationship has also been found (bauweraerts & vandernoot, 2019; brune et al., 2019; chen et al., 2010; sánchez et al., 2016; steijvers & niskanen, 2014). in addition, while a large body of literature has focused on the comparison between family and non-family firms, private and public firms, or large and small private firms, few studies have analysed the extent to which the well-known heterogeneity of family firms (brigham et al., 2019; chua et al., 2012; stanley et al., 2019) may affect their tax decisions and thus influence the differences in behaviour compared to non-family firms. brune et al. (2019) found family involvement in firm management has a positive effect on active tax avoidance, compared to non-family firms. kovermann and wendt (2019) showed that tax avoidance is positively related to the percentage of family ownership. sánchez et al. (2016) found that the first generation is less active in terms of tax avoidance than the second and subsequent generations, whereas the family ownership had a negative relationship with tax management. bauweraerts and vandernoot (2019) and steijvers and niskanen (2014) demonstrated that family firms with a lower ceo ownership share show greater tax aggressiveness. another interesting issue which is worth mentioning is that most of the related literature on tax avoidance is focused on public or large companies. more detailed research is needed on family-owned small and medium-sized enterprises (smes) due to their unique features. in family smes, certain specific traits take on special relevance, such as the greater importance of socioemotional issues (for instance, reputation) and the effects of family heterogeneity (for instance, family values, family generations, different management experience and professionalization). this results in a unique attitude towards tax decisions, a fact which becomes increasingly relevant with the presence of successive family generations (sánchez et al, 2016). in addition to the above, there are certain specific influences. for instance, family smes are under less pressure from the financial markets and are less exposed to information asymmetries (kovermann & wendt, 2019). the fact that they are under less pressure from financial markets may also positively affect their dividends policy (michaely & roberts, 2012). moreover, family smes often face the challenge of limited strategic planning (zehrer & haslwanter, 2010). finally, a better understanding of tax management attitudes in family firms can be gained by studying family smes as they are the predominant type of family firm (sánchez et al., 2016; steijvers & niskanen, 2014). it is particularly noteworthy that the abovementioned branch of the literature has followed the same empirical strategy to study tax avoidance in family firms; namely the use of different measures of the effective tax rate (manzon & plesko; 2002) as a variable for tax aggressiveness. notwithstanding the sometimes contradictory empirical evidence (fama, 2011), since modigliani and miller (1963) first proposed the tax advantages of financial debt for firm value, it has been accepted that corporate taxes have an effect on corporate indebtedness decisions (feld et al., 2013). this advantage is due to the asymmetric tax treatment of equity and debt financing, since interest expenses from debt are deductible from the taxable income, reducing the tax liability. in order to address this asymmetry, governments have attempted to reduce or limit the abovementioned tax deduction by enforcing so-called thin capitalization rules (dourado & de la feria, 2008; gouthière, 2005). thus, this reduction in the deductibility of interest expenses (which means an increase in the tax liability) leads to a decrease in debt ratios (clemente & sogorb, 2016; mardan, 2017; overesch & wamser, 2010). in this context, companies that engage in tax planning, or are inclined towards tax aggressiveness, will lower their leverage ratios when they are affected by the thin capitalization rule. the importance of the tourism industry worldwide (mariz-pérez, & garcía-álvarez, 2009; su & lin, 2014), and in spain in particular (camisón et al., 2016; vacas & landeta, 2009), is beyond doubt. thus, the tourism industry needs access to more extensive knowledge about the factors affecting it (andrew et al., 2007; seguí et al., 2019); in particular, more research is needed regarding corporate governance factors in this industry (al-najjar, 2014; chen et al., 2005), government fiscal policy changes (chen et al., 2009), and specifically about firm ownership and control characteristics (mazzi, 2011). as for family firms and the intergenerational transfer process, reputation plays a critical role (gedajlovic & carney, 2010; steijvers & niskanen, 2014). in the same vein, reputation is a key factor in the tourism industry (camisón et al., 2016; correia & kastenholz, 2011; singal, 2015). accordingly, this paper aims to shed light on the effect of family firm heterogeneity, in terms of the controlling generation, on tax management in family smes. analysing this factor can provide a better understanding of their managerial behaviour (brune et al., 2019). more specifically, using a sample of 128 family smes in the spanish tourism industry, we analyse whether the first and subsequent generations show different levels of tax aggressiveness. we expect that, in family smes affected by the 2012 fiscal reform, the founder and successive generations show different reductions in their levels of indebtedness. this study contributes to the literature on the relation104 j. a. clemente-almendros, s. camisón-haba, & c. camisón-zornoza journal of small business strategy / vol. 31, no. 3 (2021) / 102-121 ship between family firm heterogeneity and tax aggressiveness in family firms in several ways. first, we focus on tax aggressiveness in a family firm context taking into account the heterogeneous behaviour of the different generations in control (chirico et al., 2011), as family firms should not be analysed as a homogeneous entity (westhead & howorth, 2007). we go beyond most of the existing research that studies the difference between private and public family firms (brune et al., 2019), private family firms and private non-family firms (koverman & wendt, 2019; monterry & sánchez, 2010), or public family firms and public non-family firms (gaaya et al., 2017). it is worth noting that generational transition is one of the most sensitive processes in family firms (miller et al., 2003; molly et al., 2010); as such, further research is needed on this topic. second, to examine the influence of the different controlling generations in the family firm on tax aggressiveness, we use the 2012 spanish fiscal reform that limited the tax deductibility of interest expenses as a quasi-natural experiment (clemente & sogorb, 2016; liu et al., 2019; overesch & wamser, 2010). as far as we know, this is the first empirical study to use such an approach in the family firm context. third, we focus on smes for several reasons: they represent 99% of all companies in europe and approximately two-thirds of the total turnover and employment (molly et al., 2010) meaning they are of enormous economic importance; most smes are family firms are smes (burgstaller & wagner, 2015); and family smes tend to be concerned with keeping family control of the company, which may result in different financial decisions (van caneghem & van campenhout, 2012) and different tax policies (bjuggren & sund, 2002). fourth, the implications of our findings could be extended to the european framework since spain is among the socalled high tax alignment countries (where financial statements are used as the reference for taxation, meaning there is a strong relationship between financial and tax reporting) such as belgium, finland and france (van tendeloo & vanstraelen, 2008). additionally, the existing literature on tax aggressiveness is predominantly us based (which is a low tax alignment country) and does not necessarily translate to high tax alignment countries such as spain (steijvers & niskanen, 2014). the rest of this article proceeds as follows. in the next section, we discuss the existing literature and develop the hypotheses. we then present the tax context for our research. the ‘data and variables’ section sets out the data used in this research, while the ‘methodology’ section explains the main model and methodology applied. the ‘empirical results’ section presents our results together with robustness tests, and the ‘discussion and conclusion’ section highlights the main conclusions and implications. theoretical framework and hypotheses tax aggressiveness can be understood as tax management aimed at reducing taxable income through tax planning decisions (koverman & wendt, 2019). this management yields the benefit of a tax saving or lower tax payment. however, opting for tax aggressiveness is a risky decision for the firm (amstrong et al., 2015) involving important costs (rego & wilson, 2012; stiglitz, 1985). the management of this tax planning is complex and thus needs time (steijvers & niskanen, 2014), which could be a potential opportunity cost. due to said complexity, tax aggressiveness may increase future transaction costs (klein & leffler, 1981), such as the cost of hiring external experts in this area (sholes et al., 2009). it could also lead to future penalties from fiscal authorities and may imply a price discount on firm shares (steijvers & niskanen, 2014). finally, firm and family reputation could also be affected (hanlon & heitzman, 2010), and shareholders may perceive tax aggressiveness as a signal of dishonesty (hanlon & slemrod, 2009). founder and descendants contribute actively in the governance and management of the family firm company, with generational transfer being a key concern (basu et al., 2009). the effects of the generation in control are one of the main sources of heterogeneity in family firms (sciascia et al., 2014), since goals in family firms are likely to change with the shift in the controlling generation (michiels & molly, 2017) thus influencing managerial decisions (cruz & nordqvist, 2012). agency theory (jensen & meckling, 1976) has been the classical approach used to study tax aggressiveness in the family firm context, but the literature shows contradictory results. whereas there is empirical evidence of a negative relationship between family firms and tax avoidance (landry et al., 2013), because the family firm owner weighs costs over benefits thus engaging in less tax avoidance, there is also evidence showing the opposite (kalm, gómez-mejía, 2016). in line with some authors who highlight the potential narrowness of agency theory (brune et al., 2019; sánchez et al., 2016; steijvers & niskanen, 2014), we seek broader explanations for the effect of the family generation on tax aggressiveness. the concept of socioemotional wealth (sew) represents the non-economic parameters in the family firm decision-making process (gómez‐mejía et al., 2007). family firms generally seek to preserve family values over a longterm horizon, where the family firm’s continuance over future generations (steijvers & niskanen, 2014) and its reputation (gedajlovic & carney, 2010) are the main concerns, even at the expense of financial goals (gallo et al., 2004; mishra & mcconaughy, 1999), such as reducing its tax li105 j. a. clemente-almendros, s. camisón-haba, & c. camisón-zornoza journal of small business strategy / vol. 31, no. 3 (2021) / 102-121 ability. the preservation of the family’s sew could help to explain why family firms’ behaviour may be different (stockmanset al., 2010). we postulate that there are several ways in which the commitment to preserving sew and its evolution over generations may weigh differently the benefits and risks of tax avoidance in family firms. first, having a long-term framework and the desire to maintain the firm for future generations maintaining future generations are determinants of sew (berrone et al., 2012). the founder’s concern with keeping control of the firm (ferramosca & ghio, 2018) may mean that he/she is more risk-adverse and shows more conservative behaviour than his/her successors (cabrera-suárez et al., 2001; gonzález, guzmán et al., 2013). despite the short-term benefits of tax aggressiveness, family firm founders may be reluctant to accept its potential costs, since they could negatively affect the sew. specifically, there is a clear connection between a firm’s concern about its reputation and tax aggressiveness (hanlon & slemrod, 2009; gallemore et al., 2014), which is particularly important in the context of family smes (sánchez et al., 2016). in addition, in their early stages, family smes may not have the knowledge and experience to engage in tax aggressive policies (steijvers & niskanen, 2014), which is especially relevant because family smes usually lack a strategic attitude (zehrer & haslwanter, 2010). as a consequence, family founders may rule out tax aggressive policies because of the adverse effect on their sew. second, the heterogeneity of family smes reflected in family generations may result in different attitudes to tax avoidance (chua et al., 2012). subsequent generations coming after the founder are less likely to be influenced by socioemotional issues, with financial factors becoming more relevant (schulze et al., 2003b; chen et al., 2010; sciascia et al., 2014). as the family firm passes down through successive generations, the influence of sew decreases (gómez‐ mejía et al., 2007), thus the controlling family’s motivations become more balanced between family and business goals (steijvers & niskanen, 2014). in this line, another factor explaining a possible positive relationship between generations beyond the founder and tax aggressiveness is the growing concern about dividends (molly et al., 2010) due to the presence of a larger number of shareholders in the following generations and less pressure from financial markets (kovermann & wendt, 2019). this makes tax savings more appealing (koverman & wendt, 2019). thus, in contrast to the founder, successive generations may tend more towards tax aggressiveness. another influential factor in family smes’ tax policies is management professionalization. as successive generations are more experienced, setting tax policy becomes a central activity, requiring the allocation of time and resources (carlock & ward, 2001; duran et al., 2016; sánchez et al., 2016). in view of the two abovementioned examples of contrasting behaviour shown by founder and descendant, we propose the following hypothesis: h1. the generation in control of the family sme has a positive relationship with tax aggressiveness. as control of the family sme passes down through the different generations, the leverage ratio decreases. the first hypothesis does not necessary imply that first and second generation are tax aggressive, but less than subsequent generations, which result in all generations being tax aggressive but at different levels. to clarify the specific tax attitude of the different generations, we need to formulate the additional hypotheses. in spite of hypothesis 1, the level of tax aggressiveness does not remain steady over the different generations in family smes (molly et al., 2010). the concept of “generational shadow” was first introduced by davis and harveston (1988, 1999) and relates to the influence of the founder on the subsequent generations, which results in an incomplete succession. this effect is especially evident in the transition from the founder to the second generation, meaning that conservative management behaviour will prevail in second generation family firms (molly et al, 2010) even though they may be expected to evolve towards a more aggressive stage. on the contrary, third and later generations show a clear risk appetite (schulze et al., 2003b) due to the higher dispersion of ownership and the fact that concerns about reputation and the preservation of sew are on a level with concerns with economic goals (steijvers & niskanen, 2014). so, from the third generation onwards, tax aggressiveness is clearly present. consistent with the above, we hypothesize the following: h2a. in the second generation, tax aggressiveness is similar to that of the founders (conservative). the second generation will show a similar debt response to the founder. h2b: the third and subsequent generations show clear tax aggressiveness, strongly decreasing their leverage ratio. tax setting under spanish corporate taxation laws, (corporate taxation is regulated by the consolidated text of the corporate income tax law, legislative royal decree 4/2004 of 5th march, and in the corporate income tax regulation, royal decree 1777/2004 of 30th july), corporate taxes are calculated as the statutory tax rate times the corporate taxable 106 j. a. clemente-almendros, s. camisón-haba, & c. camisón-zornoza journal of small business strategy / vol. 31, no. 3 (2021) / 102-121 income, which in turn is determined by revenues in the tax period minus expenses in the same period. traditionally, interest payments have been treated as expenses from a fiscal point of view, and thus considered deductible. this tax bias in favour of the use of financial debt may affect the indebtedness level in some companies. in the oecd context, (two alternative reforms implemented in oecd countries are ace allowance for corporate equity, which allows companies to deduct a return on equity as well as interest expenses, and cbit comprehensive business income tax, which fully eliminates interest deductibility), most countries have implemented policies in order to address the potential debt bias, setting limits on the deductibility of interest expenses (oecd, 2013; oecd, 2015) through the implementation of the so-called thin capitalization rule. one of the most widespread approaches is to limit tax deductibility if net interest expenses exceed a specific fraction of ebitda (earnings before interest, taxes, depreciation and amortization). the ultimate aim of such policies is to reduce the existing debt bias, thereby decreasing the use of financial debt. this effect of thin capitalization rules is reported in the empirical literature (buettner et al., 2012; clemente & sogorb, 2016; haufler & runker, 2012; hong & smart, 2010; mardan, 2017; overesch & wamser, 2010; sorensen, 2017; wamser, 2014). in 2012, the spanish government introduced a modification to the deductibility of financial expenses (royal decree-law 12/2012 of 30th march, and resolution 16th july 16/2012, of the general directorate of taxes, in relation to the limitation on the deductibility of financial expenses in the corporation tax) with effect from 1st january 2012. from that date on, all net interest expenses (interest expenses in excess of financial income) that exceed 30% of the company’s annual operating profits, (namely, ebitda) are not deductible for corporate tax purposes. nevertheless, the first million euros of net interest expenses are deductible. accordingly, net interest expenses below or equal to 1 million euros are tax deductible regardless of the company’s operating profits in any year. this measure indirectly favours business capitalization and corresponds to the current tax treatment of financial expenses on the international stage. with the thin capitalization rule, the tax base increases and then not all the interest expenses can be deducted for fiscal purposes (mardan, 2017). so, affected companies, with a tax aggressive attitude, will lower their leverage ratios to optimize the tax bill and maximize the performance (moore et al., 2017). accordingly, they will adapt the leverage ratio to the new deductibility limit imposed by the thin capitalization rule. method data and variables databases the database used in this research comes from a primary study on the spanish tourism industry. the economic activities considered to fall within the scope of tourism are those established by the institute of tourism studies (instituto de estudios turísticos, 2009) in the active population survey (encuesta de población activa, epa) on employment in tourism activities. this delimitation follows the recommendations of international organizations such as the world tourism organization (unwto) and the united nations statistical commission in the document tourism satellite account: methodological references (united nations, 2000). as of 2009, the selected branches of activity correspond to those in the national classification of economic activities (clasificación nacional de actividades económicas, cnae, 2009). the sample selection was based on the universe of spanish tourism companies listed by the central business directory (directorio central de empresas, dirce, 2009), in its 2009 update. the initial sample of 8,148 companies was selected by a stratified random procedure with allocation proportional to the representativeness of the universe by activity (considering four groups), size (taking the number of employees as a measure of the size of the company) and location. the final result of the field work, after different data cleaning processes (contacts not achieved, no activity), was 1,019 companies, representing a 95% confidence level and an error interval of ± 3.1%. this final sample reflects a response rate of 25.6%. the data was obtained using a questionnaire which was administered in 2009 through personal interviews with the ceos or general managers. in order to correct the problems that tend to affect surveys as a method of obtaining data, and in order to improve the response rate and the quality of the information, a set of recommended procedures for questionnaire-based research was used, involving a modified version of the dillman’s total design method (1978), which is widely accepted in the area of strategy research (conant et al., 1990). the field work was conducted during the months of december 2009 to march 2010. although the family firm information refers to 2009, and only to one time period, this does not restrict our research. we only use this information to classify companies as family firms or non-family firms and to control for the generation. as the literature highlight, the ownership structure of family firm tends to be stable over time (andrés, 2008; miller et al., 2011; pindado, requejo, & de la torre, 107 j. a. clemente-almendros, s. camisón-haba, & c. camisón-zornoza journal of small business strategy / vol. 31, no. 3 (2021) / 102-121 2015; zhou, 2001). the time trend extrapolation test suggested by armstrong and overton (1977) was used to check for the possible existence of non-response bias. this test is based on the comparison of the first and last respondents. it assumes that the last respondents more closely resemble the non-respondents, as they would have been non-respondents if they had not completed the second questionnaire. the results show that there are no significant differences in any of the explanatory or dependent variables. using this primary source, we classified the companies in the sample as either family or non-family businesses. from the total sample, 271 were non-family firms and 748 were family firms. we classify a company as a family firm if the founder and/or their descendants hold majority ownership and control the strategic decisions (handler, 1989; shanker & astrachan, 1996). with the aim of shed light on the conceptual ambiguity of the definition of family firm, handler (1989) identified family participation in ownership as the first dimension underlying most definitions. based on this approach, shanker and astracham (1996) elaborated a typology of definitions of family firm. they select the dimension ownership structure as the broader definition of family firm. this definition stands for “family firm” the one whose majority ownership and control of strategic decisions are in the hands of the founder or his/her descendants. this concept requires: (a) that there be family capital in the capital stock; (b) that the capital with the right to vote in the hands of the family is sufficient to grant it a majority political power on the board of directors. the minimum weight of the family has been set at 51% in privately held firms (criterion established by the european group of family enterprises and the board of family business network) (vid. camisón & monfort (eds., 2011: 59). following shanker and astracham (1996), we do not refer just to the founder, but to the family capital, which has the majority political power in the capital stock. additionally, we incorporated data from sistema de análisis de balances ibéricos (sabi), a database managed by bureau van dijk and informa d&b, s.a., in order to complete the financial information from 2009 to 2016. the sabi database compiles the economic-financial information annually submitted by spanish companies in the commercial registry. the data on dependent and control variables were sourced from this database. due to the fact that sabi does not provide complete financial information for all the companies interviewed, we eventually obtained a database with 543 companies, of which 165 are non-family companies and 378 are family companies. the next step was to exclude companies with negative book equity, yielding a total of 401 companies, of which 122 are non-family companies and 279 are family companies. then, following the european union criteria for classifying smes, we applied the definitions of micro, small and medium-sized enterprises established in commission recommendation 2003/361/ec of 6th may 2003, and separated the sample into the three different types. the criteria used are the following. for micro companies: (i) fewer than 10 employees and (ii) sales below 2 million euros or (iii) total assets under 2 million euros. for small companies: (i) fewer than 50 employees and (ii) sales below 10 million euros or (iii) total assets under 10 million euros. for medium-sized companies: (i) fewer than 250 employees and (ii) sales below 50 million euros or (iii) total assets under 43 million euros. the final result is shown in table 1. table 1 final number of companies micro small medium large total non-family 45 31 19 27 122 family 116 102 26 35 279 total 161 133 45 62 401 source: own elaboration. table 2 tourist activity variables companies observations accommodation 69 552 catering 24 192 intermediary 13 104 transport 11 88 complementary offer 11 88 total 128 1,024 source: own elaboration we focus on family smes and more specifically on small and medium-sized companies (102 and 26, respectively, giving a total of 128 companies), due to the fact that micro companies are not likely to be affected by the 2012 thin capitalization rule, given their low volume of sales and assets and thus financial debt. in order to mitigate the effect of outliers, all the variables are winsorized at 0.5% in each tail of the distribution. finally, our sample contains five sub-sectors of tourist activity: accommodation, catering, intermediary, transport and complementary offer (table 2). 108 j. a. clemente-almendros, s. camisón-haba, & c. camisón-zornoza journal of small business strategy / vol. 31, no. 3 (2021) / 102-121 variables in this section, we describe the independent and dependent variables used in our model analysing leverage and its determinants in family firms with different controlling generations. dependent variable leverage (lev). our leverage variable, lev, is the ratio of long-term plus short-term financial debt (excluding trade credit and other non-debt liabilities) to total assets (castro et al., 2016; cole, 2013; lópez-gracia, & sánchez-andújar, 2007; miller et al., 2007; molly et al., 2010; öztekin, 2015; psillaki & eleftheriou, 2015; van caneghem & van campenhout, 2010). additionally, as a robustness check, we use an alternative leverage variable: total debt to capital employed. the concept of “capital structure” or “financial structure” relates to financing issues. in line with the related literature (friend & lang, 1988; kassi et al., 2019; lin et al., 2008), we exclude trade credit for several reasons. first, we focus on financial leverage given that it produces debt interest and its tax deductibility is affected by the thin capitalization rule studied in this paper (ampenberguer et al., 2013; clemente & sogorb, 2016). second, trade credit is used for operating activities rather than financing aims (rajan & zingales, 1995; tse & rodgers, 2011). the aim of the thin capitalization rule implemented in 2012 was to reduce the asymmetric treatment of equity and financial debt in corporate taxation. a lower deductibility allowance increases the tax base (mardan, 2017). thus, companies affected by this new rule should lower their debt ratios. independent variables treatment (treat). we divide our sample into a treatment group (companies affected by the new thin capitalization rule, limiting the tax deductibility of their interest expenses) and a control group (companies not affected by it). the variable treatment (treat) is equal to 1 if the company belongs to the treatment group and 0 otherwise. in order to classify a company into the treatment group we apply the following criteria as of the year 2012 (royal decree-law 12/2012, of 30th march, which introduces various tax and administrative measures aimed at reducing the public deficit. resolution of 16thjuly 2012, of the general directorate of taxes, in relation to the limitation on the deductibility of financial expenses in the corporation tax. law 27/2014, of 27th november, on corporation tax): • net interest expenses above one million euros • net interest expenses exceed thirty percent (30%) of earnings before interest, taxes, depreciation and amortization (ebitda). tax reform (reform). tax reform (reform) is a time period dummy variable that takes the value 1 from year 2012 on, when the thin capitalization rule entered into force, and 0 otherwise. generation (gen). generation (gen) represents the generation which is currently in control or has more power. this variables takes values from 1 to 4, where 1 indicates that the generation in control is the first (founders), and 4 indicates the fourth generation and beyond (artega & menéndez, 2017; chirico et al., 2011; chirico & salvato, 2014 kellermanns & eddleston, 2007; le breton et al., 2011). control variables we include the following control variables: profitability (prof), which is the ratio of earnings before interest and taxes, ebit, to total assets (keasey et al., 2015; lópez-gracia, & sánchez-andújar, 2007; schmid, 2013); growth (growth) is growth in total assets (burgstaller & wagner, 2015; castro et al., 2016; molly et al., 2010), calculated as current total assets less total assets lagged by one period divided by total assets lagged by one period; size (size), which is measured as the natural logarithm of sales (gonzález & gonzález, 2008; lópez-gracia, & sánchez-andújar, 2007); tangibility (tang) is the ratio of fixed assets to total assets (ampenberget et al., 2013; burgstaller & wagner, 2015; gonzález et al., 2013; öztekin, 2015); and non-debt tax shields (ndts) is the ratio of depreciation expenses to total assets (clemente & sogorb, 2016; lópez-gracia, & sánchez-andújar, 2007; mackie-mason, 1990). descriptive statistics table 3 shows the descriptive statistics. the mean leverage is 34.8%, which is in line with the average indebtedness in the tourism sector in spain during the period analysed (bank of spain, 2018).. however, it is worth noting that the 75% percentile of the sample had a leverage ratio of 51.72%, which indicates that these companies are likely to be affected by the limitation on the tax deductibility of financial expenses. 109 j. a. clemente-almendros, s. camisón-haba, & c. camisón-zornoza journal of small business strategy / vol. 31, no. 3 (2021) / 102-121 table 4 shows the correlation matrix. there is a positive and significant correlation between the companies’ size and the likelihood of them being affected by the tax limitation. high levels of indebtedness are usually associated with firm size. the negative correlation between non-debt tax shields and the treat variable may be explained by the fact that companies using tax shields other than interest expenses are unlikely to use financial debt for tax purposes, and are thus less leveraged. overall, the low levels of correlation indicates the suitability of our data. we conduct a multicollinearity test using the variance inflation factor (vif). the low vif values suggest that there is no collinearity among the variables of our study. table 3 descriptive statistics variables obs. mean s.d. minimum maximum lev 661 0.34 0.22 0.00 0.92 treat 1,024 0.04 0.19 0 1 reform 1,024 0.63 0.48 0 1 gen 744 1.80 0.71 1 4 prof 899 0.04 0.08 -0.31 0.55 growth 880 0.04 0.21 -0.66 2.40 size 880 14.77 1.12 8.58 18.75 tang 889 0.48 0.31 0.00 0.98 ndts 886 0.04 0.04 0.00 0.26 source: own elaboration. table 4 correlation matrix and variance inflation factors* lev treat reform gen prof grow-th size tang ntds lev 1.000 treat 0.16 (0.00) 1.000 reform -0.05(0.15) 0.00(1.00) 1.000 gen -0.03(0.43) 0.08(1.11) 0.00(1.00) 1.000 prof -0.08(0.02) -0.03(0.27) 0.02(0.38) 0.00(0.99) 1.000 growth 0.11(0.00) -0.02(0.55) 0.00(0.99) -0.06(0.12) 0.12(0.00) 1.000 size -0.03(0.38) 0.28(0.00) -0.00(0.84) 0.03(0.36) 0.16(0.00) 0.02(0.39) 1.000 tang 0.14(0.00) -0.09(0.00) 0.00(0.91) -0.05(0.15) -0.06(0.06) -0.10(0.00) -0.23(0.00) 1.000 ndts -0.02(0.60) -0.15(0.00) -0.03(0.25) 0.06(0.08) 0.11(0.00) -0.13(0.00) -0.07(0.03) 0.31(0.00) 1.000 vif 1.23 1.01 1.03 1.12 1.06 1.24 1.22 1.16 *significance levels in brackets. source: own elaboration. in order to assess whether the different generations in family companies have different tax policies, in particular, different reactions to the thin capitalization rule, we estimate panel regressions for the period 2009 to 2016 with firm fixed effects as well as control variables. we use robust standard errors, based on the huber-white sandwich variance estimator. specifically, we estimate the following triple difference-in-differences (did) model (angrist & pischke, 2009: 243): where the dependent, independent and control variables are as described in section 2. iη represents the unobservable firm-specific fixed effects of the company “i”, and itε is the residual term. we include time dummies to capture context-specific factors which are common to all the companies (such as macroeconomic factors), vary over time and may affect indebtedness decisions (lópez-gracia, & sánchez-andújar, 2007). 4β captures the effect of the fiscal reform (treatment effect) and equals the triple did estimate (chetty et al., 2009). it represents the did estimation of the treatment effect, that is, whether the generation in control modifies the effect of the treatment (tax reform) on the variation in the family firm leverage ratio. specifically, we compare the leverage ratio of family firms with different generations in equation (1) 0 1 2 3 4 5 6 7 8 control variables it it it it it it it m it it it it it it j jit i it j lev treated taxreform gen treated taxreform gen treated taxreform taxreform gen treated gen                                      110 j. a. clemente-almendros, s. camisón-haba, & c. camisón-zornoza journal of small business strategy / vol. 31, no. 3 (2021) / 102-121 control, across the treatment companies, before and after the fiscal reform. according to our hypothesis, we expect a negative sign, which means that the debt ratio of the treated companies becomes smaller as the generation in power moves further away from the founder or first generation. did is robust approach to deal with potential endogeneity problems (abadie, 2005; cerulli, 2015; donald & lang, 2007). the technique is based on a source of exogenous variation (roberts & whited, 2013); as such, did is suitable when evaluating contexts where observations for treated (affected) and untreated (unaffected) companies are available both before and after treatment (in this case, the thin capitalization rule). the triple did framework allow us to examine how the successive generations in control react differently to the new law (hoque & mu, 2019; liu et al., 2019). it enables a better understanding of this effect than the traditional did approach, which only analyses differences by time and treatment. results main results before estimating equation (1) we check the did trend assumption using a placebo test. we want to test whether there was a parallel trend of the dependent variable between treatment and control groups before the tax reform (before the year 2012). we limit our time period to 2009-2011 and set as a placebo an artificial tax reform in the year 2011 (almeida et al., 2011; clemente & sogorb, 2016). table 5 shows the results from the triple did fixed effect regression and the placebo test. the coefficients for models i and iii are from equation (1) without control variables, whereas the coefficients for models ii and iv include control variables. our coefficient of interest barely changes when these controls are included (khandker et al., 2010: 191; oosterbeek et al., 2010). models iii and iv represent our placebo test. in the estimation of the fixed effect model of equation (1), the gen and treated time-invariant variables are not identified. table 5 estimation results explanatory variables model i model ii model iii model iv taxreform -0.061(0.049) -0.044(0.046) -0.021(0.026) -0.001(0.027) treated*taxreform 0.375***(0.096) 0.398***(0.147) -0.006(0.029) -0.051(0.043) taxreform*gen 0.017(0.024) 0.005(0.020) 0.010(0.011) 0.002(0.011) treated*taxreform*gen -0.164***(0.038) -0.167***(0.055) 0.005(0.012) 0.024(0.017) prof -0.319***(0.088) -0.375**(0.157) growth 0.224***(0.041) 0.067*(0.034) size 0.001(0.013) -0.024(0.023) tang 0.246***(0.093) 0.018**(0.072) ndts constant 0.360***(0.008) -0.210(0.289) 0.228(0.213) -1.012*(0.519) 0.670*(0.364) time dummies observations r-squared (within) f-test (p-value) yes 482 0.05 8.69(0.000) yes 459 0.31 6.89(0.000) yes 199 0.01 2.45(0.053) yes 191 0.23 3.37(0.001) notes: triple did fixed effects panel regression coefficients estimated with robust standard errors in brackets. lev is the dependent variable, long-term plus short-term financial debt to total assets. taxreform is a time period dummy that takes the value 1 from year 2012, when the thin capitalization rule entered into force. treat is equal to 1 if the company belongs to the treatment group and 0 otherwise. gen takes values from 1 to 4, where the number indicates the generation in control. prof is the ratio of earnings before interest and taxes, ebit, to total assets. growth is growth in total assets. size is measured as the natural logarithm of sales. tang is the ratio of fixed assets to total assets. ndts is the ratio of depreciation expense to total assets. year dummies included but not reported. superscript asterisks indicate statistical significance at 0.01(***), 0.05(**) and 0.10(*) levels. 111 j. a. clemente-almendros, s. camisón-haba, & c. camisón-zornoza journal of small business strategy / vol. 31, no. 3 (2021) / 102-121 the coefficient of the interaction treated*taxreform*gen captures the extent to which companies in the treatment group modify their leverage ratio when they are affected by the tax reform of 2012, depending on which generation is in control. this coefficient is negative (-0.164 and -0.167) and statistically significant at the 1% level, with or without control variables. in addition, the hierarchical variable entry test (hayes, 2018) yields the same significance as the triple interaction (p=0.003). this negative coefficient suggests that the leverage ratio of companies affected by the tax reform will decrease more as the generation in control moves further away from the founder. in short, later generations are likely to react more aggressively. this finding confirms our first hypothesis. in models iii and iv the treatment effect is not statistically significant. this means that the difference in debt ratios between control and treatment groups is not significant for any generation before the tax reform of 2012. that indicates that there is a parallel trend before the year 2012. as a way to visually test the first hypothesis, we graph the triple interaction showing the difference in the leverage ratio for each generation before and after the fiscal reform. figure 1 depicts how the different generations react after the fiscal reform, that is, their different tax aggressiveness. it can be seen that tax aggressiveness increases as the generation in control moves further away from the founder. whereas the founder and second generations are not aggressive (they do not decrease the leverage ratio), the third and fourth generations are notably tax aggressive, clearly decreasing the company’s leverage ratio. figure 1. treated * taxreform * gen in order to test the next two hypotheses, we apply the analysis of slopes (hayes, 2018: 249). we test the effect of taxreform on lev moderated by treated for the four values of gen. the p-values show that for the founder, the effect of taxreform on lev is significantly (p=0.016) moderated by treated. in other words, significantly different tax behaviour is observed for those companies affected by the reform. however, for the second generation, this effect it is clearly not significant (p=0.2433). finally, the effect for the third and fourth generations is significant (p=0.0405 and p=0.002 respectively). as can be seen in figure 1, the tax reaction for the founder and second generation can be labelled as conservative. however, while the slope of the second generation shows conservative behaviour, as proposed in hypothesis h2a, it is not significant. consequently, even though we can confirm h2a graphically, it is not confirmed statistically. conversely, hypothesis h2b is confirmed both graphically and statistically, given the statistically significant negative slopes for the third and fourth generations. 112 j. a. clemente-almendros, s. camisón-haba, & c. camisón-zornoza journal of small business strategy / vol. 31, no. 3 (2021) / 102-121 robustness of the results in order to check our main results, we perform different robustness tests. first, we use an alternative dependent variable. welch (2011) asserts that the traditional debt-toasset ratio is not a suitable variable for capturing changes in debt, especially when it is used in capital structure research. he argues that the total assets measure contains non-financial liabilities, which are then treated as equity. instead welch (2011) suggests an alternative measure that is appropriate in our research framework. the debt-to-capital employed ratio does not include non-financial liabilities (e.g. trade payables), which basically relate to operating activities rather than corporate income tax effects and capital structure issues. in table 6 we run the same models as in table 5, and the results are similar. table 6 shows the results from the triple did fixed effect regression and the placebo test with the alternative dependent variable. the coefficients for models i and iii are from equation (1) without control variables, whereas the coefficients for models ii and iv includes control variables. our coefficient of interest barely changes when these controls are included (khandker et al., 2010: 191; oosterbeek et al., 2010). models iii and iv represent our placebo test. table 6 estimation results explanatory variables model i model ii model iii model iv taxreform -0.040(0.049) -0.217(0.050) -0.026(0.032) -0.005(0.034) treated*taxreform 0.218***(0.054) 0.262***(0.085) 0.018(0.033) -0.035(0.058) taxreform*gen 0.013(0.024) 0.004(0.024) 0.014(0.013) 0.006(0.013) treated*taxreform*gen -0.088***(0.025) -0.101***(0.024) -0.003(0.014) 0.018(0.022) prof -0.495***(0.127) -0.402**(0.190) growth 0.192***(0.025) 0.080(0.057) size 0.003(0.014) -0.049(0.039) tang 0.146(0.117) 0.153(0.101) ndts constant 0.431***(0.009) -0.683*(0.356) 0.342(0.234) 0.430***(0.004) -0.988(0.609) 1.131*(0.589) time dummies observations r-squared (within) f-test (p-value) yes 482 0.01 151.48(0.000) yes 459 0.23 8.15(0.000) yes 199 0.01 3.66(0.008) yes 191 0.23 2.27(0.022) notes: triple did fixed effects panel regression coefficients estimated with robust standard errors in brackets. lev is the dependent variable, debt-to-capital employed ratio (welch, 2011) (long-term plus short-term financial debt divided by the sum of long-term plus short-term financial debt and book value of equity). taxreform is a time period dummy that takes the value 1 from year 2012, when the thin capitalization rule entered into force. treat is equal to 1 if the company belongs to the treatment group and 0 otherwise. gen takes values from 1 to 4, where the number indicates that generation in control. prof is the ratio of earnings before interest and taxes, ebit, to total assets. growth is growth in total assets. size is measured as the natural logarithm of sales. tang is the ratio of fixed assets to total assets. ndts is the ratio of depreciation expense to total assets. year dummies included but not reported. superscript asterisks indicate statistical significance at 0.01(***), 0.05(**) and 0.10(*) levels. second, we employ an alternative empirical strategy based on propensity score matching did (psm-did) (khandker et al., 2010: 198; lins et al., 2013). using this approach, we can examine the assumption that, if there had been no fiscal reform, the average leverage ratio for treated and control companies would have followed parallel trends. this strategy allows us to deal with the potential endogeneity regarding time-invariant unobserved effects and to strengthen the parallel path assumptions, thus controlling for time-variant pre-treatment observables. we use the nearest neighbour approach, taking the control variables from equation (1) as covariates in the matching process. first, we estimate a propensity score model with the initial data to make sure the comparison group is similar to the treat113 j. a. clemente-almendros, s. camisón-haba, & c. camisón-zornoza journal of small business strategy / vol. 31, no. 3 (2021) / 102-121 ment group. second, we estimate triple did in the matched sample. so, we first conduct nearest-neighbour psm with replacement, where we match each treated company with its 4 nearest neighbours (we also conducted nearest-neighbour psm with 1, 2, 3 and 5 matches, obtaining the same results in table 7 and in table 8),, that is, firms in the control group with the closest propensity score (lemmon & roberts, 2010; liu et al., 2019). table 7 exhibits the mean values of treated and control companies in both the original and matched sample, with a t-test on the differences in the mean values between the two groups. the results show that psm successfully balances the covariates (almeida et al., 2011; chang & shim, 2015; neckebrouck et al., 2018). table 7 estimation results explanatory variables model i model ii t-test treated control p-value prof unmatched matched 0.013 0.013 0.039 0.013 0.253 0.983 growth unmatched matched 0.042 0.042 0.039 0.043 0.969 0.989 size unmatched matched 16.333 16.409 14.724 16.167 0.000 0.526 tang unmatched matched 0.014 0.012 0.046 0.009 0.001 0.376 notes: mean values of treated and control companies in both original and matched samples, with a t-test on the differences in the mean value between the two groups. prof is the ratio of earnings before interest and taxes, ebit, to total assets. growth is growth in total assets. size is measured as the natural logarithm of sales. tang is the ratio of fixed assets to total assets. ndts is the ratio of depreciation expense to total assets. year dummies included but not reported. superscript asterisks indicate statistical significance at 0.01(***), 0.05(**) and 0.10(*) levels. we then run our triple did fixed effect regression again, using the psm matched sample. table 8 shows the results of using the two alternative dependent variables (long-term plus short-term financial debt to total assets and debt-to-capital employed ratio), reporting similar values. as can be seen, the number of matched observations is smaller than the original (liu et al., 2019). finally, the results from table 5 hold when we use alternative control ariables such as the ration of ebit to total assets for the prof variable, growth in sales for the growth variable, and log of total assets for the size variable. discussion and conclusion we analyse tax avoidance in family firms from the perspective of the generation in charge of the company. research on tax aggressiveness has attracted a great deal of attention recently. however, despite some interesting empirical evidence (deai & dharmapala, 2006), the results are contradictory on this issue. the main approach adopted has been to distinguish between public and private family firms (mills & newberry, 2001), large and small family firms, or simply between family and non-family firms (chen et al., 2010). nonetheless, only a limited number of studies have been conducted on smes, with very few taking into account the heterogeneity in family firms (chua et al., 2012). in light of this, the present paper examines the effect of different family generations on tax avoidance in a sample of family smes in the tourism industry, taking advantage of the unique opportunity of the quasi-experiment that the 2012 spanish thin capitalization rule represents. our results provide empirical evidence on family firm heterogeneity and its effect on corporate management, more specifically in regard to tax management decisions. the different motivations and goals of successive family generations influence the tax aggressiveness of the family firm. agency theory has been used to probe that family firm ownership structure influences tax aggressiveness. in the light of this theory, family firms are more risk averse than non-family firms, resulting in a lower tax aggressiveness (desai & dharmapala, 2006). they argue that family firms are more concerned about costs of tax aggressiveness (chen et al., 2010). however, the contradictory results found in the literature show that agency theory may fail when explaining tax aggressiveness in family firms, especially in 114 j. a. clemente-almendros, s. camisón-haba, & c. camisón-zornoza journal of small business strategy / vol. 31, no. 3 (2021) / 102-121 family smes. apart from agency theory based on family’s risk perspective, further research from other perspectives (sánchez et al., 2016). for instance, explaining unique motivations from different family generations and its relationship with family tax aggressiveness needs new approaches. as can be seen in figure 1, as the number of generations involved in the firm increases, their specific tax behaviour changes. third and subsequent generations include economic concerns in their decisions (steijvers & niskanen, 2014), show a clear risk appetite (schulze et al., 2003b) and are more experienced (sánchez et al., 2016). family founders’ risk perception, which is based on agency theory, cannot explain this different behaviour. the specific existing motivations of both generation in charge (non-financial and financial goals) and family smes (higher ownership concentration, lower experience, and higher concern about family values – cabrera-suárez et al., 2014) may result in different tax policies (bjuggren & sund, 2005). using a triple differences-in-differences method with fixed effects, we show that the leverage ratio decreases as the firm passes down through subsequent generations. as can be seen in figure 1, the first generation shows conservative tax management, a finding which is statistically significant. the founder’s desire to maintain sew is reflected in his/her concern about keeping family control and passing the company on to his/her descendants. as a result, the founder’s attitude towards risk can be considered as conservative, attributing more weight to the potential cost of tax aggressiveness, such as a negative impact on reputation, than on the tax savings. the second generation also displays conservative tax behaviour, as shown in figure 1. the so-called “founder’s shadow” exerts an influence on the second generation, fostering the same conservative attitude (molly et al., 2010). although figure 1 graphically depicts that influence, the results are not statistically significant. the increasing importance of financial issues, a higher number of shareholders and more accumulated experience table 8 estimation results explanatory variables model i model ii model iii model iv taxreform -0.055(0.051) -0.056(0.045) -0.036(0.051) -0.035(0.050) treated*taxreform 0.350***(0.118) 0.401***(0.147) 0.198***(0.058) 0.265***(0.085) taxreform*gen 0.014(0.025) 0.009(0.020) 0.012(0.026) 0.007(0.024) treated*taxreform*gen -0.157***(0.046) -0.169***(0.055) -0.083***(0.027) -0.103***(0.035) prof -0.259***(0.077) -0.428***(0.120) growth 0.219***(0.042) 0.186***(0.026) size 0.002(0.013) 0.005(0.014) tang 0.220**(0.098) 0.116(0.124) ndts constant -0.337(0.257) 0.221(0.217) -0.830**(0.331) 0.335(0.238) time dummies observations r-squared (within) f-test (p-value) yes 456 0.04 6.01(0.000) yes 444 0.31 6.23(0.000) yes 456 0.01 17.04 (0.000) yes 444 0.22 7.24(0.000) notes: triple did fixed effects panel regression coefficients estimated with robust standard errors in brackets using psm matched sample. lev is the dependent variable. in models i & ii, lev is long-term plus short-term financial debt to total assets. in models iii / iv, lev is debt-to-capital employed ratio (welch, 2011) (long-term plus short-term financial debt divided by the sum of long-term plus short-term financial debt and book value of equity). taxreform is a time period dummy that takes the value 1 from year 2012, when the thin capitalization rule entered into force. treat is equal to 1 if the company belongs to the treatment group and 0 otherwise. gen takes values from 1 to 4, where the number indicates the generation in control. prof is the ratio of earnings before interest and taxes, ebit, to total assets. growth is growth in total assets. size is measured as the natural logarithm of sales. tang is the ratio of fixed assets to total assets. ndts is the ratio of depreciation expense to total assets. year dummies included but not reported. superscript asterisks indicate statistical significance at 0.01(***), 0.05(**) and 0.10(*) levels. 115 j. a. clemente-almendros, s. camisón-haba, & c. camisón-zornoza journal of small business strategy / vol. 31, no. 3 (2021) / 102-121 in the third and subsequent generations lessens the relevance of socioemotional issues. since economic considerations are increasingly incorporated into the decision-making process, these generations present a significant positive attitude towards tax aggressiveness in view of its economic benefits. the tourist industry differs from other industries in terms of competitiveness, leverage and risk, and these differences affect corporate decisions (singal, 2015). tourist industry is more competitive than other industries because, among others, high fixed cost, low flexibility, and high exit barriers. in that context, a lower cost of financing represents an improvement in the competitiveness (chen et al., 2009). additionally, as this industry have higher capital intensity, tourist firms usually show have leverage ratios, which is accompanied by a higher risk of financial bankruptcy. so, in the context of tourist industry, optimizing leverage ratio affects positively. firstly, due to the optimization of interest payments and tax burden, the competitiveness increases. secondly, a lower leverage ratio reduces the perceived risk. both factors are critical in a highly competitive and indebted sector. due to the sensitivity of tourist industry to competitiveness and indebtedness, this paper demonstrates that, in family firms, that the generation in control and tax aggressiveness has a relationship (positive). when the sew prevails, even though the abovementioned industry sensitivity to performance optimization and lowering debt and risk, corporate decisions in family firms tend to be led by emotional factors. however, when the sew lowers, the importance of the structural differences of tourist industry become dominant, and then, corporate decisions take them into account. although not all of our hypotheses have been confirmed, our results show that tax aggressiveness in the family firm context cannot be analysed simply from a general perspective; rather the attitudes of the different shareholders, as a reflection of their different preferences and needs, should be taken into account. family firm heterogeneity is a multifaceted issue that affects the decision-making process. therefore, we contribute to the literature by taking into account this heterogeneity (sánchez et al., 2016) when explaining potential tax avoidance. moreover, we incorporate the sew theory together with additional factors to explain the differences in tax aggressiveness. the complexity of the family firm framework cannot be explained purely by financial factors; the distinct motivations of different actors, which also vary over time, should be taken into consideration (berrone et al., 2012). whereas most of the literature related to tax aggressiveness focuses on the us context, there is little empirical evidence from the european union context. furthermore, as far as we know, this is the first time that a quasi-experiment has been used together with a triple did method to examine tax aggressiveness in family firms. this research is no exception when it comes to limitations. as our study focuses on just one sector—the tourism industry— it would be interesting to check whether this behaviour exist in other industries less sensitive to competitiveness and indebtedness, of whether the direction and intensity of the generation influence behaves in the same way. several implications can be drawn from our research. the benefit of our findings is to highlight the importance and influence of family firm heterogeneity in the marking decision-process (brigham et al., 2019), and in particular, in tax aggressiveness (chen et al., 2010). factors such as family control, family reputation have a predominant importance in the first stages of family firm evolution, and as the family evolve and subsequent generation are involved in the family firm new interests should be balanced (zellweger & kammerlander, 2015). moreover, this heterogeneity of family firms is also present in tax aggressiveness. family smes deviate from large and public family firms. they represent a unique set of characteristics that also result in specific management behaviour, such as tax aggressiveness. thus, the implication for researchers is that a more comprehensive approach is needed when it comes to studying tax aggressiveness in family firms. simple comparisons between family and non-family firms are not enough to explain this specific behaviour. for policy makers, this study encourages them to consider the potential effects of family firm heterogeneity when making fiscal decisions, in order to design effective fiscal policies that help family firms to increase their competitiveness. finally, as an implication for practice, the paper is relevant for family firms and family smes. it is necessary to consider the complexity of interests and goals in family smes. managers in their strategic decisions, such as tax management, must balance the benefits of reducing tax bill and the related socioemotional side effects for the family. for that it is important to include potential risks associated to tax aggressiveness together with approaches that aim to increase company’s competitiveness. in this vein, corporate governance could include the abovementioned heterogeneity when creating rules and mechanisms adapted to the existing specific needs ana motivations in family firms, in order to find a balanced business and family strategy. acknowledgment this study is part of a project funded by the ministry of economy, industry and competitiveness-state research agencyand feder. reference eco2016-76796-p and by the chair of enterprise and humanism from the university of valencia. 116 j. a. clemente-almendros, s. camisón-haba, & c. camisón-zornoza journal of small business strategy / vol. 31, no. 3 (2021) / 102-121 references abadie, a. 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(2001). understanding the determinants of managerial ownership and the link between ownership and performance: comment. journal of financial economics, 62(3), 559–571. http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2019, vol. 29, no. 01, 1-15 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2019 small business institute® w w w. j s b s . o rg introduction rainer hensel1, ronald visser2, 1the hague university of applied sciences, netherlands, r.w.hensel@hhs.nl 2the hague university of applied sciences, netherlands, r.c.visser@hhs.nl explaining effective team vision development in small, entrepreneurial teams: a shared mental models approach shared mental models, team vision, co-creation process organizing entrepreneurial collaboration in small, self-directed teams is gaining popularity. the underlying co-creation processes of developing a shared team vision were analyzed with a core focus on three underlying processes that originate from the shared mental models framework. these processes are: 1) the emergence of individual visions and vision integration, 2) conflict solving, and 3) redesigning the emerging knowledge structure. key in the analysis is the impact of these three processes on two outcome variables: 1) the perceived strength of the co-creation process, 2) the final team vision. the influence of business expertise and the relationship between personality traits and intellectual synergy was also studied. the impact of the three quality shared mental model (smm) variables proves to be significant and strong, but indirect. to be effective, individual visions need to be debated during a second conflict phase. subsequently, redesigning the shared knowledge structure resulting from the conflict solving phase is a key process in a third elaboration phase. this sequence positively influences the experienced strength of the co-creation process, the latter directly enhancing the quality of the final team vision. the indirect effect reveals that in order to be effective, the three smm processes need to be combined, and that the influence follows a specific path. furthermore, higher averages as well as a diversity of business expertise enhance the quality of the final team vision. significant relationships between personality and an intellectual synergy were found. the results offer applicable insights for team learning and group dynamics in developing an entrepreneurial team vision. apa citation information: hensel, r., & visser, r. (2019). explaining effective team vision development in small, entrepreneurial teams: a shared mental models approach. journal of small business strategy, 29(1), 1-15. much of the mainstream entrepreneurship literature focuses on the individual entrepreneur. however, a growing body of research acknowledges the collective nature of entrepreneurship (misganaw, 2018). in line with these research results, in practice, organizing entrepreneurial activities in small, non-hierarchical teams is gaining popularity (ernest, matthew, & samuel, 2015; hensel & visser, 2018; hmieleski & ensley, 2007; kellermanns, walter, lechner, & floyd, 2005; lukes & stephan, 2017; unger, rauch, frese, & rosenbusch, 2011). the following three points explain the growing scholarly interest in entrepreneurial teams. first, significant portions of the new ventures are founded by teams (german startups association, 2016). second, entrepreneurial teams tend to outperform solo starters (baum & silverman, 2004). and third, new venture performance in complex environments is impacted by unifying entrepreneurial behaviors in autonomous teams, embedded in flat, non-hierarchical organizational structures (cooney, 2005; hmieleski & ensley, 2007; kellermanns et al., 2005; lechner & floyd, 2012). one of the core processes in entrepreneurial teams is the co-creation of a shared team vision (dyer, gregersen, & christensen, 2008; dyer, gregersen, & christensen, 2011). a multidimensional vision on business opportunities and their associated business strategies should be regarded as pivotal in innovative entreprehttp://www.smallbusinessinstitute.biz http://www.jsbs.org 2 r. hensel, & r. visser journal of small business strategy / vol. 29, no. 1 (2019) / 1-15 neurship. innovative entrepreneurship is defined as exploring and exploiting new products and new markets, developing new business models or creating new markets for existing products (dyer et al., 2008; dyer et al., 2011). evidence indeed exists that entrepreneurial collaboration enhances innovative capacities, which again fuel entrepreneurial effectiveness. this effect is due to 1) more and better human capital, by example more (diverse) experience, knowledge and skills; 2) social capital (larger and more diverse network); 3) greater learning capacity; 4) greater risk sharing; and 5) high quality shared mental models (smms). research support exists that indeed small firm survival and success may depend on taking advantage of human, social and intellectual capital (greene, brush, & brown, 1997; sequeira, weeks, bell, & gibbs, 2018). these smms refer to the overlapping mental representation of knowledge by team members, frequently labeled as the shared cognitive map (badke-schaub, neumann, lauche, & mohammed, 2007; sarasvathy & dew, 2013; venkataraman, sarasvathy, dew, & forster, 2012). the ‘shared mental models’ (smm) framework is highly relevant in this context (mathieu, heffner, goodwin, salas, & cannon-bowers, 2000). the underlying processes in developing smms help team members to develop a multidimensional-shared team vision, which can be characterized as a shared cognitive representation of all relevant relationships and causalities (jonker, van riemsdijk, & vermeulen, 2011; klimoski & mohammed, 1994; mohammed, ferzandi, & hamilton, 2010). teams in general, whose members develop high quality, shared knowledge structures or ssms, performed better in defining strategic action and acting on it (dechurch & mesmer-magnus, 2010; xiang, lu, & gupta, 2013). the quality of these shared knowledge structures or ssms depends highly on a comprehensive, multidimensional-shared cognitive representation on strategic goals, team tasks, key work processes, and key performance indicators. moreover, a shared team vision, based on the strategic consensus on organizational goals, is considered to be a very important mechanism in the effectuation of an organizational strategy (knight, pearce, smith, olian, sims, smith, & flood, 1999). teams that perform well in ambiguous and complex circumstances need to be highly coordinated, in order to respond flexibly and deploy core competencies in a timely manner (ensley, hmieleski, & pearce, 2006). an smm is therefore a key issue, functioning as a strategically relevant coordination mechanism in innovative entrepreneurship. the close associations between the smm framework, developing a shared entrepreneurial team vision and strategic decision making in teams is probably best illustrated by the definition of smms: “smms are defined as the knowledge structures held by members of the team that enable them to form accurate explanations and expectations for the task, and, in turn, to coordinate the actions and adaptive behavior of the task in two other team members’ actions” (zhou & wang, 2010, pp. 434). although the smm framework seems helpful in understanding how entrepreneurial teams transform available resources (e.g. human and social capital) into shared team visions and business models, surprisingly few empirical studies have been conducted in the context of entrepreneurship. in this context, an additional challenge arises. individuals are attracted to entrepreneurship or participate in startups in order to develop their visions and talents in their own autonomous and authentic way (baum, frese, & baron, 2014). however, when entrepreneurship is organized in small teams or is founded by multiple entrepreneurs, individuals have to conform to the group with the consequence of being forced to give up their autonomy. this highlights the necessity of understanding the process of developing a team vision in the context of entrepreneurship in small teams or informally, non-hierarchically organized small businesses. theoretical framework scientific concerns, based on meta studies, have been expressed on the strong diversity in theoretical perspectives used in analyzing the smm framework, leading to quite some theoretical misunderstandings and a dysfunctional diversity in theoretical conceptualizations of the smm framework itself (see for an overview in dechurch & mesmer-magnus, 2010). the lack of specification of the theoretical lens in studying the smm framework is key in this criticism. consequently, a methodological claim exists. it is claimed, in the research on the smm framework, that a classification system of the core theoretical perspective should be applied (dechurch & mesmer-magnus, 2010). when applying this classification system, three major categories should be used: 1) the elicitation method, measuring the quality of the cognitive map or specific components of the emerging knowledge structure, 2) the structure of the presentation between team members, representing the degree of association of the distinct cognitive components between team members, and 3) the representation of emergence, measuring the team climate aiming at a strong shared consensus in team perceptions. in this paper, the core focus 3 r. hensel, & r. visser journal of small business strategy / vol. 29, no. 1 (2019) / 1-15 is on the third perspective, analyzing the exact nature of the co-creation process and climate, in developing a shared team vision, and studying the influence of a team climate. conflict solving, feedback mechanisms and creative elaboration and redesign mechanisms are key issues in studying the team climate. this core focus on the process and the climate of co-creating a shared team vision is also based on the following theoretical criticism: the majority of research in studying the smm framework mainly focuses on the team’s emerging knowledge structure or the quality level of association of the cognitive map, omitting highly relevant issues of the co-creation process (preller, breugst, & patzelt, 2016; van den bossche, gijselaers, segers, woltjer, & kirschner, 2011). based on the theoretical consideration of scholars kellerman et al. (2005), sarasvathy & dew (2013), van den bossche et al. (2011), and venkataraman et al. (2012), a model will be developed and tested hypothesizing that three specific phases in the co-creation process exist. the first phase is characterized by an emerging knowledge structure, its quality closely related to the creativity of the emerging individual visions and the capacity to create a holistic overview of highly diverse innovative views and perspectives. phase two is hypothesized to be a cognitive conflict phase, in which debating on differences in visions or perspectives and effective feedback mechanisms is highly relevant. the construction of a second phase is very much based on studies, revealing that the quality of the emerging knowledge structures and emerging visions only enhances a team performance when teams are able to timely activate effective cognitive conflict solving skills (van den bossche et al., 2011). however, an important distinction should be made between cognitive conflicts and affective conflicts (van den bossche et al., 2011). while cognitive conflicts refer to differences and subsequent clashes in perspectives and visions, affective conflicts are related to the underlying values and their associated emotions, which are often strong and intense. the third phase is an elaboration phase. this is based on studies and theoretical considerations that high-quality team member interactions (deep listening and intellectual synergy) should be aimed at the redesign and redevelopment of the emerging knowledge structure. the rationale of including this third phase follows research results and theoretical considerations, showing that a redevelopment and redesign of a shared team vision of the business model is highly relevant for entrepreneurial effectiveness, especially when innovative capacities are demanded (sarasvathy & dew, 2013; talaulicar, grundei, & werder, 2005; venkataraman et al., 2012). however, little is known about these insights with respect to the co-creation of an entrepreneurial vision in small self-directed teams. it should be underscored that all the above listed considerations only hold for entrepreneurial activities in complex and ambiguous environments (for an overview see: (kellermanns et al., 2005). in this sense, as previously explained, the research results of this study can only be generalized to innovative entrepreneurship that has to operate and compete in such environments. to create an overview, the three core smm processes in this study include: 1. the cognitive, emerging knowledge structure (based on innovative and creative emerging individual visions and the capacity to integrate a high diversity of visions into a team vision). 2. constructive cognitive, conflict solving and feedback. 3. team members’ interaction directed on the redesign and redevelopment of the emerging knowledge structure. these three processes will form the three major (endogenous) variables of the smm framework. it will be analyzed whether the sequence of the three smm endogenous variables impact two dependent variables or success criteria including: 1. the perceived strength of the co-creation process. 2. the quality of the final shared team vision. it is hypothesized that a specific path exists. moreover, it will be tested whether the perceived strength of the co-creation process is both a dependent and independent variable. this implies that the three endogenous smm variables will impact the perceived strength of the co-creation process, the latter enhancing the quality of the final team vision. although it is often assumed that the perceived strength of the co-creation positively influences an entrepreneurial team performance, little scientific evidence seems available to support this direct relationship, especially when the perceived strength of the co-creation process is measured by all three smm variables listed above (dechurch & mesmer-magnus, 2010). 4 r. hensel, & r. visser journal of small business strategy / vol. 29, no. 1 (2019) / 1-15 close associations of the cognitive map between team members there also exists another major theoretical complexity. as previously mentioned, the levels of association or closeness of the cognitive map between team members is frequently applied as a theoretical lens in analyzing smms. the central hypothesis in these studies is that closer associations strengthen the quality of smms (see for an overview in dechurch & mesmer-magnus, 2010). however, some research and theoretical considerations seem to contradict the scientifically grounded application of this measure. research has revealed that a close association has a mitigating effect on the team capacity to develop a team vision in a multi-faceted or multidimensional way (see for an overview in: kellermanns et al., 2005). furthermore, a diversity in opinions, a disagreement as opposed to a strong shared group conformity, as well as a continuous open discussion and disagreement have proved to have an enhancing effect on a team performance in complex environments (see for an overview in: kellermans et al., 2005). moreover, a strong conformity towards group consensus combined with conflict avoidance hampers the team performance in analyzing ambiguous information, both representing important dysfunctional group processes in complex environments (lepine, erez, & johnson, 2002). consequently, in this study, the measure of closeness of associations will be replaced by two other measures: 1) the team capacity to integrate a strong diversity of individual visions into a holistic overview, and 2) the enriching influence of an ongoing disagreement about the multi-faceted character of the shared team vision. the first variable will be used as a measure of the first phase, in which the knowledge structure emerges, and the second as a measure of the conflict-solving phase. business expertise another key issue in this paper is an analysis of the influence of business knowledge. in this methodological approach, we follow scholars such as unger et al. (2011) and zhao, seibert & lumpkin (2010), arguing that when specific entrepreneurial success criteria are analyzed, the influence of competencies or entrepreneurial qualities should be compared to the enhancing effect of business expertise. in this study, the influence of collaboration competencies originating from the smm framework will be compared to the impact of business knowledge. this is based on research showing that business expertise has a slightly higher enhancing effect on general entrepreneurial success when compared to the influence of competencies, soft skills or entrepreneurial qualities (zhao et al., 2010). intellectual synergy in the process of smm development and personality very little is known about intellectual synergy in the context of knowledge innovation, or the development of a team vision in an entrepreneurial context. an intellectual synergy, often labeled as intellectual stimulation, is a key process in developing an entrepreneurial team vision, especially when innovation capacities are demanded (dyer et al., 2008; dyer et al., 2011; sarasvathy & dew, 2013). to enhance our theoretical understanding of an intellectual synergy, we analyzed the influence of personality traits on the intellectual synergy between team members. as explained earlier, we will only study small, self-directed teams, which implies that the research results are of interest mainly for this entrepreneurial context. this is based on the following three reasons. first, a strong heterogeneity of entrepreneurial teams exists. claims of strong uniformity in entrepreneurial teams are commonly held to be a myth (misganaw, 2018), and therefore the nature of the studied team should be specified. second, innovative entrepreneurial capacities of teams relate to their levels of self-directedness and autonomy (ensley et al., 2006). and third, the co-creation process team size matters. learning and developing capacities in teams with a high number of team members are quite limited (van den bossche et al., 2011). core research question: how do the shared mental model processes relate to the perceived strength of the co-creation process and to the final team vision? sub-research question 1: what is the impact of 1) business expertise and 2) personality traits related to an intellectual synergy, on the perceived strength of the co-creation process and the final team vision? sub-research question 2: is personality related to an intellectual synergy in the process of elaborating an emerging entrepreneurial knowledge structure? method the model is based on data collected among un5 r. hensel, & r. visser journal of small business strategy / vol. 29, no. 1 (2019) / 1-15 dergraduate students (n=97, 25 teams) of an entrepreneurial business program. to design a more realistic entrepreneurial research context, 25 groups of students were allocated to real retailers. all these retailers were in great need of an innovative digital marketing strategy, with a strong focus on the use of social media (resnick, cheng, simpson, & lourenço, 2016). the major reason to select this cohort was the availability of a multi-rater judgment on expertise levels, and a very comparable level of entrepreneurial experience. ninety-eight percent of the cohort succeeded in accomplishing four courses with real entrepreneurial activities, executing entrepreneurial skills in the prelaunch and launch phases of a small, self-directed team. moreover, and maybe more importantly, by the mandatory nature of this research context the response rate was 100%. an 80% response rate is the absolute minimum for a valid and reliable team analysis, when individual scores are reciprocal interdependent (kirkman, tesluk, & rosen, 2001; mcneish, 2017). because the analysis of the co-creation process demands a small group size (van den bossche et al., 2011), the size of the allocated groups varied between three and five students (m=3.9; sd:=0.7). a questionnaire was designed to measure the three endogenous smm latent variables. its validity will be tested by a confirmative factor analysis using mplus 7.4 software. full explanation of the measures of these three endogenous smm variables are revealed in figure 1, presenting the final model. a structural equation model (mplus 7.4 software) was developed and tested to understand and explain how three processes, supporting the construction of smms, relate to the (within groups) aggregated perceived strength of the team-process, as well to the quality of the final shared team vision. the quality of the shared, final team vision is constructed by the sum of two scores – the aggregated ‘within teams’ judgment provided by the team members themselves and the supervisor’s judgment on this final team vision – divided by two. because the judgments of the individuals proved to be reciprocally interdependent, it is important to mention that the response rate was 100%. an 80% response rate is the demanded minimum for personality all participants of the study completed an entire extended version of a big 5 personality test, the measurement instrument being completely based on the official five factor model of personality (barrick, mount, & judge, 2001; mccrae & costa jr, 1997). this instrument measures the big 5 domain scales as well as the big 5 sub-scales, often labeled as the facets. the use of the facets next to the domains is based on research showing that models studying entrepreneurial behaviors, social learning and innovative behaviors should include the big 5 facets next to the domains (hensel & visser, 2018; schneider & smith, 2004). averages as well as standard deviations of the big 5 domain and facet dimensions will be included in the model. business expertise to study the influence of business expertise, the aggregated group means as well as the aggregated standard deviation (diversity) of expertise levels will be included in the model. this is with the aim to analyze whether next to knowledge levels (means) a strong(er) diversity (standard deviation) impacts the two exogenous dependent variables, being the strength of the perceived co-creation process and the final shared team vision. the grade-point average (gpa) is used to measure expertise levels. the gpa, a multi-rater judgment, is considered to be a valid and reliable measure of expertise levels (poropat, 2009; richardson, abraham, & bond, 2012). results the confirmative factor analysis (cfa) resulted in strong support for the use of the three latent variables, the three endogenous dimensions of the smm framework (rmsea:0.76; cfi: 0.96/tli:0.95; srmr:0.45). furthermore, the second order cfa of the big 5 personality test proved to have agreeable indices (rmsea:0.79; cfi:0.90/tli:0.91; srmr:0.68). the cfa of the final model revealed that the quality of the emerging knowledge structure depends highly on innovative, creative visions, but especially on the team capacity to integrate a strong diversity of individual visions into a holistic team vision (estimated factor loading: 0.65***). this also holds for the item disagreement enriching a multifaceted team vision. it proved to be an important measure of the quality of the conflict-solving phase (estimated factor loading: 0.81**). the final model proved to have acceptable and good fit indices: rmsea: 0.067; cfi: 0.95/tli:0.94; srmr: 0.064. the full model is on the next page. in table 1a, all the direct effects of the full final model are presented. table 1a reveals that no direct relationships exist between the final shared team vision and the three la6 r. hensel, & r. visser journal of small business strategy / vol. 29, no. 1 (2019) / 1-15 table 1a direct effects of the 3 smm variables on the final shared team vision (estimated (stand.) r-square = 0.66) final shared team vision on: estimated predictive strength twotailed p-value perceived strength of the co-creation process 0.61 0.00 quality emerging individual visions/vision integration -0.08 0.71 conflict solving -0.36 0.08 quality team member interaction in elaboration process 0.49 0.09 tent (endogenous) smm variables. the final model, presented in figures 1 and 2 (overview) shows that the effects of all three smm variables on the final team vision is strong, significant, but indirect. to create an overview, a selection of the three independent (endogenous) smm variables, the two (aggregated) measures of business expertise, and the two (aggregated) outcome (exogenous) variables of the model are presented in figure 2. figures 1 and 2 reveal that the perceived strength of the co-creation process is directly related to the quality of the final team vision, when 1) the quality of the emerging knowledge structure, the variables, 2) conflict solving, and 3) quality interaction in elaborating on the emerging knowledge structure are included in one model. as hypothesized, the perceived strength of the process proves to be a dependent as well as an independent variable. this implies that the positive influence of all three smm variables runs through (is completely mediated by) the perceived strength of the process. this means that after successfully executing three specific phases in the co-creation process, a significant enhancing effect is realized on the team members’ perceived strength of the process. the perceived strength of the co-creation process is directly and strongly related to the final team vision with a strong regression weight: 0.57. an overview of the specific paths of the indirect (mediation) effects is presented in tables 1b to 1d. the specific order of the smm variables in the model is illustrated by pointing out that the effect of the first smm variable, the quality of the emerging knowledge structure on conflicting solving/feedback, is direct and strong (0.91***), just as the effect of conflicting solving/feedback on the quality of team members’ interaction in the elaboration process (0.9***). the estimated proportion explained variance (r-square) of the first dependent variable, the perceived strength table 1b indirect effects of the smm variable ‘quality emerging individual visions/ vision integration’ about the quality of the final shared team vision table 1c indirect effects of the smm ‘conflict solving/feedback’ on the quality of the final rated team vision table 1d indirect effects of the smm variable ‘quality team interaction’ in the redesign and redevelopment process on the quality of the final rated team vision redesigning an emerging knowledge structure indirect effect on: final shared team vision estimated predictive strength two-tailed p-value total 0.039 0.86 indirect 0.4 0.02 specific (path) indirect: quality interaction in elaboration process strength of the co-creation process 0.4 0.02 conflict solving/feedback indirect effect on: final shared team vision estimated predictive strength two-tailed p-value total 0.39 0.20 indirect 0.37 0.53 specific (path) indirect: conflict solving quality interaction in elaboration process strength of the co-creation process 0.36 0.025 visions/vision integration indirect effect on: final shared team vision estimated predictive strength twotailed p-value total 0.57 0.000 indirect 0.48 0.014 specific (path) indirect: vision/vision integration conflict solving quality interaction in elaboration process strength of the co-creation process 0.33 0.026 7 r. hensel, & r. visser journal of small business strategy / vol. 29, no. 1 (2019) / 1-15 figure 1. the complete final model, including a comprehensive presentation of the measures of the three smm variables. 8 r. hensel, & r. visser journal of small business strategy / vol. 29, no. 1 (2019) / 1-15 of the smm co-creation process is 46 percent. for the second success dependent variable, the aggregated and combined judgment on the quality of the final team vision, the proportion explained variance is 66 percent. this is considered to be a very satisfying result (mcneish, 2017). all the direct effects are presented in tables 2a to 2c. the impact of 1) the quality of the individual visions/integrating visions on conflict solving, just as 2) conflict solving on the quality of team member interaction, and 3) the quality of team member interaction on the first dependent variable, the perceived strength of the co-creation process, is direct and strong. moreover, the proportion explained variance, presented by the standardized estimated r-square, is very high at 84% (emerging individual visions/vision integration), 81% (conflict solving/feedback), and 48% (team interaction directed on redesigning an emerging knowledge structure). intellectual synergy the final model (presented in figure 1) shows that a direct and strong relationship exists between the perceived strength of the process and an intellectual synergy. table 3 shows that, as hypothesized, relationships exist between an intellectual synergy and personality. intellectual synergy is an important measure of figure 2. overview of the final model table 2a direct effects of the smm variable quality individual visions/vision integration on conflict solving/feedback conflict solving/feedback on: estimated predictive strength stand. estimated r-square (prop. explained variance) quality emerging individual visions/vision integration 0.91*** 0.84 table 2b direct effects of the smm variable conflict solving/feedback/vision integration on quality of team interaction in the elaboration process quality of team interaction on: estimated predictive strength stand. estimated r-square (prop. explained variance conflict solving/feedback 0.90** 0.84 9 r. hensel, & r. visser journal of small business strategy / vol. 29, no. 1 (2019) / 1-15 the elaboration process, phase three. the aggregated standard deviation of the personality trait assertiveness, as well as the aggregated mean of the personality trait frustration is negatively related to the intellectual synergy between team members. the aggregated standard deviation of frustration, measuring the diversity of this personality trait, has an enhancing effect on the co-creation process, as well with the ‘within groups’ 2) aggregated standard deviations and the 3) aggre¬gated means of business expertise. table 4 reveals that a direct relationship exists between the perceived strength of the co-creation process and the quality of the final team vision. the proportion explained variance of the second exogenous dependent variable is strong (estimated r-square = 0.66). furthermore, it shows that higher aggregated team means on levels of the business expertise, as well as higher aggregated standard deviations of business expertise, are positively related to the quality of the final team vision. table 2c direct effects of the smm variable ‘quality of team interaction’/vision integration on the ‘perceived strength of the co-creation process’ strength of the co-creation process on: estimated predictive strength stand. estimated r-square (prop. explained variance) quality team interaction 0.61** 0.48 intellectual synergy on: estimated predictive strength aggregated standard deviation assertiveness -0.22** aggregated standard deviation coping with frustrations 0.2** aggregated mean coping with frustrations -0.2** table 3 estimated predictive strength of intellectual synergy (estimated (stand.) r-square: 0.7) between team members outcome variable. assertiveness measures self-initiative and assertive behaviors with a strong focus on own interests. the sub-dimension assertiveness originates from the domain dimension extraversion. the personality trait frustration measures personal effectiveness to cope with interpersonal conflicts, irritations and annoyances. higher averages on this dimension are related to dysfunctional intra-psychological and interpersonal coping behaviors with respect to conflict solving. the negative direction of the predictive strength implies that a high(er) diversity and lack of personal effectiveness with respect to affective conflict solving and coping with annoyances has a negative effect on an intellectual synergy. business expertise table 4 shows the (direct) relationships of the final shared team vision with 1) the perceived strength of the table 4 predictive strength of the perceived strength of the co-creation process, averages and standard deviation of business expertise on quality of the final team vision (estimated (stand.) r-square: 0.66) quality of the final team vision on: estimated predictive strength perceived strength of the co-creation process 0.57*** aggregated standard deviation business expertise 1.01*** aggregated mean business expertise 1.01*** discussion the most salient result of this study indicates that a smm co-creation process in small entrepreneurial self-directed teams seems to demand a sequence: first, high-quality ideas have to be expressed and the diversity of ideas has to be integrated into a holistic, shared knowledge structure. subsequently, these ideas and the holistic shared knowledge structure have 10 r. hensel, & r. visser journal of small business strategy / vol. 29, no. 1 (2019) / 1-15 to be challenged by constructive cognitive conflict or debate, with effective feedback mechanisms being highly relevant. a specific team member interaction has to emerge, characterized by intellectual stimulation and elaboration skills such as deep listening, in order to redevelop and redesign the emerging shared mental model. the impact of all three endogenous smm variables on the quality of the final result is completely mediated by the perceived strength of the co-creation process. the existence of the mediating effects pinpoints that all the latent variables have to be combined together; however a specific order seems to be necessary. this is very much in line with the majority of theoretical considerations described in the introduction and the paragraph with theoretical considerations. the practical implication for the co-creation process in developing an entrepreneurial team vision is that creative new visions have to be debated during a conflict phase, followed by an elaboration and redesign process. however, the model shows that only creative and inspiring emerging visions and vision integration impact the second phase, the conflict solving phase. this is in accordance with research that effective debates and open discussions leading to innovation demand strong visions (see for an overview in kellermanns et al., 2005; for an entrepreneurial context, see: dyer et al., 2008; dyer et al., 2011; sarasvathy & dew, 2013; venkataraman et al., 2012). this quality of the third phase, the redesign phase, demands a high-quality team member interaction, characterized by deep listening and an intellectual synergy. this will impact the team members’ perceived strength of the co-creation process, the latter again impacting the final result: the quality of the final team vision. all these theoretical considerations depend on the strength of the direct effect between the three smm variables. the quality of the emerging knowledge structure during the first phase fuels the second phase, its impact being direct and strong (0.91***). the same holds for the second indirect (complete mediation) effect, the conflict solving phase on the elaboration phase (0.9***). as explained earlier, team member interaction during the third phase should have a very specific focus: it should support the team members’ elaboration and redesign of the emerging entrepreneurial knowledge structure. this is very much in line with scholars such as dyer et al. (2008), dyer et al. (2011) and venkataraman et al. (2012). these scholars have explained to us that entrepreneurial visions have to be challenged, redesigned and reconstructed in order to be effective. in addition, their research reveals strong support that inspiring social interaction fuels redesign and intelligent elaboration on business models. the specific sequence of the model seems to suggest some imperative linear austerity or linear strictness. however, the effectuation framework, the theoretical foundation of the third phase, clarifies this to be not the case. the effectuation framework shows that innovative business visions have to be redesigned and redeveloped to be effective, especially by synergetic social interaction (sarasvathy & dew, 2013; venkataraman et al., 2012). this insight highlights the circularity of the process. during the third phase, the ‘lessons learned’ phase, the initial emerging knowledge structure is reevaluated and again debated, thus illustrating this circularity identified above. this circular theoretical conceptualization of the process is very much in line with research on knowledge innovation in teams (hu, horng, & sun, 2009). the confirmative factor analysis shows that the measure of the capacity to integrate a diversity of visions (measure of the first phase), and the measure disagreement as an enrichment of the multidimensionality of the team view (measure of the conflict solving phase), should be regarded to be important and valid components of the model. this supports a discouragement of the use and application of the level of association of the cognitive map between team members, when smms are studied in an entrepreneurial context. furthermore, and maybe more importantly, this research result is very supportive of the theoretical reflections accentuating the importance of multidimensional learning in the context of strategic decision making in teams, strategic organizational change (pieterse, caniëls, & homan, 2012), and innovative entrepreneurship (venkataraman et al., 2012). this line of reasoning is in line with research results showing that mentoring by an open and intense dialogue on strategical issues empowers entrepreneurial talents (wilbanks, 2015). however, it should be noted that most studies on the smm framework are conducted in quite a different organizational context: for example, teams that have to perform in complex high pressure situations such as airport control towers or nuclear power plants in crisis (zhou & wang, 2010). in such an organizational context, teams have to solve complex problems in a timely manner while being under high pressure with a complex team members’ interdependency. in such contexts, a strong and close association of the team members seems to be an important and relevant measure of the smm. this context differs quite distinctively to an entrepreneurial context, in which teams are involved in an evolving, iterative process with a moving target: the co-creation 11 r. hensel, & r. visser journal of small business strategy / vol. 29, no. 1 (2019) / 1-15 of a shared team vision on innovative business models or innovative marketing strategies. therefore, it seems to be justified to conclude that collaboration competencies in developing a shared team vision seem to differ when the organizational context differs. this is in line with research revealing that for designing work-related competencies, a specification of the organizational context is demanded (hensel, 2010). the model seems to offer interesting and valuable insights when a team members’ self-efficacy has to be enhanced in the co-creation process in order to develop an entrepreneurial team vision. this is useful for entrepreneurs collaborating in small, self-directed teams, for small, entrepreneurial firms with lean and flat organizational structures, as well as for business coaches and incubators, in demand of evidence-based tools to enhance the entrepreneurial self-efficacy in the co-creation process of a shared team vision. generally, a high self-efficacy demands: 1) a strong vision on those specific coping skills, which are necessary to be successful , and 2) a positive anticipation of the valence and effectiveness of applying these coping skills (bandura, 1993; bandura, 2001). the three smm variables – quality of the visions/ vision integration, cognitive conflict solving, and elaborating on emerging knowledge structures – seem to be quite useful for specifying the collaboration skills when an entrepreneurial team vision has to be developed. furthermore, it shows that these three smm variables enhance the perceived strength of the co-creation process, the latter again having an enhancing effect on the final result, the final shared team vision. moreover, the research results are in strong compliance with tuckman’s (tuckman & jensen, 1977) ‘forming, storming, norming and performing’ model. this is a very popular model for strategic human resource development programs aiming at the enhancement of team work (zwikael & unger-aviram, 2010). from a theoretical point of view, the model seems to explain to us that an integration of all theoretical considerations described in the introduction are quite relevant. it justifies the severe scientific criticism of most studies, that solemnly focus on emerging knowledge structures and the level of association of the cognitive map and is insufficient for an enhancement of our theoretical understanding of smms development, at least in this entrepreneurial context. strong alignment with the insights described above can be detected with respect to conflict solving and team cohesion. next to goal commitment, group cohesion is one of the major predictors of a team performance (van den bossche et al., 2011). effective conflict solving is one of the major important prerequisites of team cohesion (zwikael & unger-aviram, 2010). knowledge matters another important result of the study is that knowledge matters. this reveals the relevance of knowledge dissemination in developing a shared entrepreneurial team vision. the aggregated mean of the rated level of knowledge, as well as the diversity (standard deviation) has a strong impact on the quality of the final team vision. this has important implications, next to entrepreneurial competencies holding a high(er) level of entrepreneurial body of knowledge, but also including a diversity of knowledge, positively influences an entrepreneurial team performance. it should be highlighted that business expertise was only related to the quality of the final team vision, not to the perceived strength of the group process. however, positive relations exist between the diversity of business expertise, measured by the aggregated standard deviation and the quality of the final shared team vision. this is an interesting result, implying that a diversity in business expertise has a positive influence on the final team vision. this can be interpreted in the following way: differences or higher diversity in expertise levels is functional, a strong diversity probably strengthening the co-creation process. however, within the teams, expertise levels in general should never be too low as the impact of higher averages on business expertise proved to be strong and positive. intellectual synergy an intellectual synergy, often labeled as intellectual stimulation, is a key process in developing an entrepreneurial team vision, especially when innovational capacities are demanded (dyer et al., 2008; dyer et al., 2011; sarasvathy & dew, 2013). however, an intellectual synergy seems to be a highly ambiguous concept. the results of this study offer interesting perspectives, and to deepen our understanding of this concept we analyzed its relatedness to personality traits. assertiveness the negative influence of the diversity of the personality trait assertiveness on an intellectual synergy is 12 r. hensel, & r. visser journal of small business strategy / vol. 29, no. 1 (2019) / 1-15 a quite interesting one. it shows that a high(er) diversity in assertiveness can be dysfunctional. this personality trait measures assertive behaviors with a strong focus on own interests and a strong self-initiative. the model reveals that the diversity of the personality traits assertiveness is negatively related to a group performance. this again is very much in line with theoretical insights with respect to the phenomenon group think. strong differences between introverts and extroverts, without the use of specific group process interventions, cause a very limited information search process (edmondson, dillon, & roloff, 2007; mullen, anthony, salas, & driskell, 1994). this implies that to effectively develop a team vision and smms in an entrepreneurial context, team members should learn specific group process interventions. the use of these interventions should be aimed at limiting and hampering dysfunctional group processes related to a stronger diversity in assertiveness. coping with frustrations higher averages of the personality trait coping with frustrations proved to have a negative effect on an intellectual synergy. the big 5 facet coping with frustrations originates from the domain dimension neuroticism. its negative effect can be explained as follows. as described earlier, a cognitive conflict should be distinguished from an affective one (van den bossche et al., 2011). only constructive cognitive conflicts lead to high-quality smms or team visions. it seems to be righteous to assume that higher team means on this personality trait are associated with a dysfunctional conflict solving style. this dysfunctionality in coping with frustrations and annoyances hampers or mitigates team members’ conflict solving capacities. it is likely that dysfunctional conflict solving styles increase the chance that cognitive conflicts converse into affective conflicts. a cognitive conflict is related to conflicting visions or perspectives, whilst an affective conflict is related to conflicting underlying values (arnold, silvester, cooper, robertson, & burnes, 2005, p. 464; van den bossche et al., 2011). an important characteristic of a value conflict is its high chance for a fast and intense escalation. moreover, value conflicts are associated with strong emotions, which is also considered to be an important precondition of conflict escalation (arnold et al., 2005, pp. 463-466). consequently, group process interventions seem to be indicated. it demands a meta-analytical view on group processes and aligned group process interventions to fine-tune dysfunctional conflict coping behaviors into constructive, cognitive elaboration skills on emerging knowledge structures. in contrast to the aggregated mean of coping with frustrations, a strong diversity proves to have a positive relationship with the outcome variable. this means that a diversity in coping with frustrations can be used as a strength in the interactional process of elaborating on the emerging knowledge structure. limitations an important limitation is the selected cohort, a group of undergraduate students. however, the design of a realistic entrepreneurial research context (students had to design a digital marketing strategy for real retailers) could be regarded as being supportive for the generalizability of the research results in an entrepreneurial context. moreover, the research focus was on the process not on the cognitive content, and furthermore, a valid measure of business expertise is central to this study. another disadvantage is the cross-sectional character of the study. practical implications in order for team entrepreneurs to benefit from the increased pool of accessible resources, they need to understand the mechanisms that lead to the development of a shared team vision. naturally, this also holds for incubators and business coaches seeking practical tools to enhance entrepreneurial team effectiveness. studies have shown that the timely activation of entrepreneurial core competencies enhances entrepreneurial success (alvarez & busenitz, 2001). references alvarez, s. a., & busenitz, l. w. 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(2010). hrm in project groups: the effect of project duration on team development effectiveness. international journal of project management, 28(5), 413-421. http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2021, vol. 31, no. 02, 36-52 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2021 small business institute® w w w. j s b s . o rg introduction 1university of extremadura, faculty of economics and business, av. elvas, s/n 06006 badajoz, spain, orodrigo@unex.es 2university of extremadura, faculty of economics and business, av. elvas, s/n 06006 badajoz, spain, buenadic@unex.es 3university of extremadura, faculty of economics and business, av. elvas, s/n 06006 badajoz, spain, abarrosom@unex.es 4university of extremadura, faculty of economics and business, av. elvas, s/n 06006 badajoz, spain, sanguino@unex.es evaluation of the online presence of family firms: a comparative analysis between ibero-america and the us family business, online presence, website quality, ibero-america vs america apa citation information: gonzález-lópez, ó. r., buenadicha-mateos, m., barroso, a., & sanguino, r. (2021). evaluation of the online presence of family firms: a comparative analysis between ibero-america and the us. journal of small business strategy, 31(2), 36-52. the internet has consolidated as one of the main communication media for the company with its target groups (consumers, investors, community, and government). the internet offers great opportunities and numerous options in the company’s marketing strategies. the importance of marketing strategies has increased from a manufacturing aspect to a more information-centered economy in determining organizational performance. companies must monitor, evaluate, and actively implement modern marketing tools, integrating specific resources and capabilities, apply innovative marketing processes with the option for dynamic marketing, and thereby create sustainable market value (petrů et al., 2020). internet marketing is an intermediary between marketing channels and communication of information made up from the internet and commercial networks for product sales or promotions. moreover, internet marketing also provides a large amount of product and service information as a medium of communication, allowing consumers to shape the decision-making process for buying (fan & tsai, 2010). it is supported that the marketing practices adopted by a business influence the financial performance of the companies. however, limited information exists on the marketing practices of family firms and little is known about the premise of marketing a business as family-owned and how this influences business performance (farrington et al., 2018). considering the competitive business atmosphere, organizations are aiming to develop their websites and turn them into dynamic marketing tools and use them to influence the decision-making of all customers (martín & herrero, 2012). still, family business research has focused on fields like succession, entrepreneurship, management, governance, internationalization or family against non-family firms (casillas & moreno-méndez, 2017). nonetheless, there are other areas that prevail isolated and very little attention is given to them, for example, quality, marketing, identity, company website, branding, communication strategies, social media or social networking sites (babin et al., digital marketing strategies are an intermediary between marketing channels and communication of information. with the emergence of web 2.0, corporate websites’ have become the epicentre of digital marketing strategies. this study aims to fill a gap in the family business literature related to online presence and their differences between regions. using structural equation modeling (sem), the websites of the largest ibero-american and american family businesses in the world (which were included in the family business global index (fbgi)) were examined by evaluating their content, form and function, as well as their presence in social networks. a multigroup analysis was used to compare the results in ibero-america and america. one of the main results is that there is a negative relationship between website quality and a company’s turnover and a positive relationship between social networks and a company’s turnover. regarding multigroup analysis, there are no significant differences among the family firms of the two regions with respect to the online presence. this study has relevant practical implications because it highlights the importance of a global strategy of online presence since it influences the company’s turnover. óscar r. gonzález-lópez1, maría buenadicha-mateos2, ascensión barroso3, ramón sanguino4 http://www.smallbusinessinstitute.biz http://www.jsbs.org 37 ó. r. gonzález-lópez, m. buenadicha-mateos, a. barroso, & r. sanguino journal of small business strategy / vol. 31, no. 2 (2021) / 36-52 2017; miller & breton‐miller, 2014). a corporate website has become the epicenter of digital marketing strategies. through the corporate websites, the companies will present and promote themselves. in some cases, they will sell their own products and listen to the users’ opinion, serving and talking with the customer (gonzález-lópez,2014). moreover, the online presence of the company goes from being focused on a single site to being built from the interaction between both the corporate site and the profiles of the company (in different social networks). in this context, the activity of cross-cultural online communication is fundamental for business success (fujimoto et al., 2007). in spite of its significance, few studies have focused on assessing the quality of the online presence through the company’s websites and social networks and its relationship with the company’s turnover, especially in the family businesses, which are one of the most relevant types of companies that act differently to non-family firms (de massis et al., 2014). in addition, organizations should be aware of the importance of cultural differences when designing their online presence (alcántara-pilar et al., 2015). differences in communication styles across the website between high and low context cultures have been found (würtz, 2005). botero & vélez (2019) conclude that family culture is what makes family businesses different. for family businesses, these differences mean that they require different governance (monteferrante & piñango, 2011). corporate websites and profiles in social networks are particularly relevant as marketing tools, which will be indicative of the companies’ adaptation to the new technological environment and to the current consumers. however, comparative studies of the family businesses’ online presence between different regions are scarce in the current literature. thus, in this paper we are going to analyze if there are differences regarding corporate websites’ quality and their presence in social networks in family businesses from two relevant regions, america and ibero-america. therefore, this study aims to fill a gap in the literature, which is related to marketing strategies in the family businesses and their differences between regions. we pretend to cover the gap identified by au (2018), suggesting that future papers should continue to globalize family business research from conceptual and empirical ends, and this is the case in corporate websites and social networks. to achieve this goal, two research questions are asked. rq1: does the quality of a corporate website and the presence in social networks influence the family business’ turnover? rq2: are there significant differences between ibero-american and american family businesses regarding online presence, in terms of quality of corporate websites and presence in social networks? using structural equation modeling (sem), the websites of the largest ibero-american and american family businesses in the world (which were included in the family business global index (fbgi)) were examined by evaluating their content, form and function, as well as their presence in social networks. moreover, a multigroup analysis was used to compare the structural model in the two regions. one of the main results is that there is a negative relationship between website quality and a company’s turnover and a positive relationship between social networks and a company’s turnover. regarding multigroup analysis, there are no significant differences between the ibero-american and american family firms with respect to the online presence. ibero-american family firms are doing as well as american family firms. this study has relevant practical implications because it highlights the importance of a global strategy of online presence since it influences the company’s turnover. in the next sections, the existing literature regarding website quality, social networks and cultural differences is reviewed. then, the design of the research and the methodology are presented. afterwards, the main findings and results and their impact in the family business field are revealed. finally, the main conclusions, limitations and practical implications that generate useful knowledge and the possible actions to be taken are presented. theoretical background in the last two decades, the internet has become one of the communication channels that has grown the most to provide information to stakeholders, especially to customers (goode & harris, 2007; verhagen et al., 2010). today, consumers are attracted by the ease with which they can find information about products and services on the internet. for this reason, organizations are more motivated to have an online presence that offers the opportunity to communicate with customers and provide them information that can influence their buying behavior (verhagen & van dolen, 2009; ward & lee, 2000). a consumer’s online experience is an important factor in gaining confidence in the brand image of the organization (ha & perks, 2005). due to this, the content of official corporate websites has become the central step to understanding the reactions of consumers and companies (blanco et al., 2010). in the online environment, consumers are less passive and are more motivated to select the information that a company presents about their products and services, and this plays a fundamental role in the perception of con38 ó. r. gonzález-lópez, m. buenadicha-mateos, a. barroso, & r. sanguino journal of small business strategy / vol. 31, no. 2 (2021) / 36-52 sumers (laroche et al., 2005). quality of corporate websites the general quality of a website shares attributes with survey focus on the quality of both the product and the service, respectively. the purpose behind this is that, on the one hand, a website is just a piece of software (olsina et al., 2012), while on the other hand it offers to its users a wide range of services (loiacono et al., 2007; parasuraman et al., 2005; zeithaml et al., 2002). in this vein, some authors (gonzález-lópez et al., 2013) distinguish three methodologies inside the assessment of electronic quality: product quality, service quality and technology acceptance. with the aim of carrying this investigation to the business network, we have made up our minds with a practical measurement instrument to apply. for this, we have considered the corporate websites from the point of view of a software product since this perspective enables for the rapid gathering of information on process and performance. regarding the technique of collecting the measurement, there are two commonly recognized techniques for the electronic service quality’s evaluation: process-based methods and objective and subjective attribute-based techniques (totz et al., 2001). in short, this study examines the technical characteristics of corporate websites with the aim to determine whether said characteristics affect their quality. this criteria has been taken from a literature review in related areas, including the design of web pages (zhang et al., 2001), the quality of information on the web (katerattanakul & siau, 2002) and the quality of the portal data (caro et al., 2008). the technical features of a website are those aspects that must be considered in the design process. in practice, these include the content of the message, its capacity to drive communications between the site and their visitors, and the extent to which it provides wealthy sensory information (maurer & liu, 2007). specifically, cober, brown, keeping et al. (2004) make a differentiation between elements of content, structure, and functionality. content a crucial factor in corporate websites is the volume and kind of useful content offered to users. as there are no space restrictions, a better quantity of information can be delivered to the different stakeholders and the public in general. several studies have proven that the amount and quality of information in commercial messages impact the assessment of consumer brands (keller & block, 1997; kivetz & simonson, 2000). in such a manner, previous research suggests that a better utilization of content on a corporate site leads to a more optimistic attitude from the consumer (davis et al., 1996). form the way of communication on the internet is one of its characteristic features. the design of the very first websites was mainly based on text. nevertheless, technological advances, coupled with higher connection speeds, have led to a much wider range of media being included. in short, the role of form and aesthetics in a website is often preferred to the concept of intensity (vividness), and includes colour, images, sound and animation. these features are used to deliver a more plausible sensory experience and refer to both the width of the various perception channels on offer and to the depth of the sensory information, i.e. the quality of information within that perception medium (steuer, 1992). moreover, further research suggests that the design of a website, in particular the photographs, colours, videos and animations, influence the user’s perception of the information available and there for its resulting appeal (coulter & punj, 1999; coyle & thorson, 2001; edell & burke, 1987; keller & block, 1997). functionality this includes the capacity to interact and browse a web and use it to accomplish a goal (cober, brown & levy, 2004), the possibility of changing the form and function of a web (steuer, 1992) and correctly processing information (cober et al., 2000). the elemental importance of interactivity can be found in the classic typology of steuer, who describes media technology and its effect in terms of two dimensions: interactivity and magnitude (steuer, 1992). the most visited sites are the most interactive ones, and this interactivity has a great influence on the subjective experience of a site (liu & shrum, 2002; mcmillan & hwang, 2002). hence, the role of a site lies in its interactivity and value converging. similarly, designers need to find a balance between the entertainment and engagement that the user of a site needs and precisely delivering and processing the information (cober et al., 2000). functionality can be described according to a number of variables, just like its level of navigability (cober et al., 2003), enjoyment (chen & wells, 1999) and effectiveness (williamson et al., 2003). to favor online strategies, we must form a group of people who are trustworthy to the company and to the content it advertises: a community, a base of potential clients. social networks enable companies to create a community where they can interact, which will end in greater customer awareness and thoughts to ensure their loyalty. what is more, it is an extra channel of qualified visits that will enable us to spread content, manage the online reputation of the organization, probe the market and sector in which the 39 ó. r. gonzález-lópez, m. buenadicha-mateos, a. barroso, & r. sanguino journal of small business strategy / vol. 31, no. 2 (2021) / 36-52 business promotes its activity and boost the service and the level of knowledge and brand recall. the strategy in social networking sites can be participating through the creation of profiles and applications, or it can also be advertising by using these networks as the company’s media strategy (gonzález-lópez, 2014). online businesses are provided with insights regarding clients’ behaviors, shopping experiences and expectations and can promote rewarding business strategies. in order to help clients to understand their online shopping purposes in a better way, they have access to both social knowledge and experiences in making more informed and accurate purchase decisions (lee et al., 2017). consumers have started using social networking sites increasingly in order to learn more about brands while visiting retail websites. therefore, it can surely be stated that not incorporating social networks as a part of the marketing mix is not just feeble customer service but also a sure-fire manner of losing consumers (pookulangara & koesler, 2011). furthermore, the information that is generated by social networks impacts shopping intentions in a positive manner (lim & dubinsky, 2005). social media marketing must be taken as an important marketing strategy to increase the profitability of the online business (chan & yazdanifard, 2014). organizations are becoming highly aware that unstoppable communication from online communities is best done through their virtual spaces. communities should be easily formed based on special interest groups and customers should be able to share their experience and knowledge within the community in a freeway (constantinides & fountain, 2008). to an ever-increasing extent, other surveys (murugesan, 2007) are addressing the formation of social networks of people with similar interests. along these lines, the online presence of the business goes from being consolidated in a single site to being built from the interaction between both the corporate site and the company profiles (in diverse social networks). on the web, the company will be presented, promoted and, in some cases, it will sell its own products. furthermore, an explanation, basic knowledge and some help in matters related to their sector will be generated in a blog. additionally, in social networks, the company will listen to the opinions of the users, while also paying attention to and talking to the client. accordingly, it is important to define the influence that website and social networks’ quality have on a company’s turnover. tendency in cultural analysis culture is “the collective programming of the mind that distinguishes the members of one group or category of people from others” (hofstede, 2011, p. 2). for bartikowski & singh (2014), companies need to account for the importance of culture when developing international websites (sia et al., 2009; singh et al., 2005). websites frequently display cultural markers that reflect aspects of target users’ cultures (cyr, 2008). such culturally congruent websites can enhance website usability, which may generate more favorable attitudes toward the site and ultimately increase purchasing intentions. following botero et al. (2019), geographically, the latin american region extends from tierra del fuego in chile to the country of mexico, including the caribbean islands. this group of countries constitutes a rapidly growing and influential region of the world. they have a combined population that exceeds 600 million people, are major providers of strategic commodities to the world (i.e., iron, copper, and zinc), represent an important market for manufacturers, and are important partners to major players around the world (nicholson, 2011). family firms dominate the business landscape in this area of the world (fernández-pérez & lluch, 2016). however, we have very limited understanding of how family businesses work in latin american countries given that most of our knowledge is based on family firms from north america and europe (de massis et al., 2012). some precedents of comparative studies between the us and eight latin american countries can be found in misra et al. (2015), where the factors influencing the total factor productivity (tfp) gap for the period of 1970-2000 are studied. the results show that there are significant differences between innovator (us) and follower countries (latin american countries). the role played by culture, geography and infrastructure in the decision of european airlines to launch market-specific websites (shneor, 2012) justifies that location affects decisions related to the geographic neutral environment of the internet.another sector that has been studied is online education and training. for wan lee et al. (2012), a nation’s culture directly affects the way participants engage, relate and benefit from online management education/training. the results of susaeta et al. (2013) show significant differences between generations and cultures, particularly when focusing on the life project, drawing upon a sample of almost one thousand people from various ibero‐american countries. among its conclusions, the paper points out that latin america cannot be viewed as a homogenous whole in terms of individual work attitude. on the contrary, it is characterized by a significant degree of national diversity and managers should take this into account when designing initiatives to improve employee motivation. other studies suggest that retailing strategy may vary in response to cultural differences. in east asian countries that share confu40 ó. r. gonzález-lópez, m. buenadicha-mateos, a. barroso, & r. sanguino journal of small business strategy / vol. 31, no. 2 (2021) / 36-52 cian values, targeting consumer emotion through experiential cues may not yield as significant a result as it may in the us (kim et al., 2013). another example can be found in cooper & watson (2011) with the joint role of the cultural context and team behaviors in how conflict influences team performance in us and mexican learning teams. multiple group analyses in structural equation modeling (sem) were employed in order to compare the structural model in two different cultures. family businesses are present in all sectors and their participation in information technology (it) is no exception. notwithstanding that, while evidence of family businesses in the it industry is well documented in most developed economies, there is limited information about their development in web design, online presence, and social networks, specifically in latino american countries. the way people use the internet varies worldwide. these divergencies are reflected in usage frequency, number and type of contacts, interactivity, and content (goodrich & de mooij, 2014). one of the main purposes of this paper is to examine whether cultural backgrounds of nations are expressed through the web design of their companies. calabrese et al. (2014) show us the importance of the cultural adaptation of web design services as critical success factor for business excellence, doing a cross-cultural study of portuguese, brazilian, angolan and macanese websites. the findings confirm that the internet is not a culturally neutral communication medium. by providing evidences of website cultural adaptation, this study supports the use of a targeted approach to website design and provides managerial guidelines for improving business excellence of companies’ online environment. goodrich & de mooij (2014) use cultural dimensions to compare the use of social media and other information sources for consumer decision-making across 50 countries. the results indicate that the use of information sources that influence online purchase decisions strongly varies by culture. furthermore, there are major differences in online complaint behavior by country due to cultural variations. other authors (alcántara-pilar et al., 2015) chose a between-subjects experimental design, using culture (spanish vs british) as the independent variable. culture influences how humans interact and socialize (rokeach, 1973), with powerful effects on consumers’ motivations, lifestyles, and purchase decisions (de mooij, 2004). one of the first systematic cross-cultural examinations of how firm reputation functions in an e-tailing context increase market response outcomes is jin et al. (2008). in this case, the firm reputation-satisfaction-loyalty link is stronger in korea than in the us. two cultures, us (individualism, low uncertainty avoidance) and south korea (collectivism, high uncertainty avoidance) were chosen for comparison for their contrast in cultural characteristics. moreover, as luna et al. (2002) propose, a fruitful area for ongoing investigations is the potential to provide insights into the effects of “appropriate levels” of cultural adaptation. most modern developed countries are amalgams of cultures, and cultural minorities are the rule rather than the exception. thus, the next step may be to consider the role of cultural diversity within countries in terms of creating culturally congruent web content. for example, chinese consumers in canada likely use canadian websites to purchase online and encounter typical canadian references on these sites. how should a local company culturally adapt its website to target a minority population within a country but still exploit business opportunities related to the majority population? this interesting paradox provides a challenge for research to solve. method data collection procedure we used the global family business index (gfbi). this index is made by the university of st. gallen, switzerland and also by ernst and young global family business center of excellence. the largest 500 family firms around the world are represented with great evidence of the relevance and economic power of family firms. the index is based on data for 2015. this index uses two different definitions of family firm: (1) a private company is considered a family business if more than 50% of the voting rights are controlled by a family, (2) regarding publicly listed companies, this percentage is lower: 32% (30% of the votes are sufficient to dominate the general assembly in oecd countries because not more than 60% are present). in 2018, from these 500 corporate websites of family business included in the index, we focused specifically on family businesses from ibero-american countries (latin america, spain, portugal) and the united states to analyse their websites. thus, we had a sample of 47 ibero-american and 98 american family businesses, that is, 145 family businesses in total. in this research, to normalize and facilitate the measurement procedure, we have selected the method based on objective attributes. the justification is that one of the main goals of the website quality evaluation is to measure, analyze and comprehend the level of compliance of a lot of features and attributes according to the quality requirements for a given user profile and application domain that are established. 41 ó. r. gonzález-lópez, m. buenadicha-mateos, a. barroso, & r. sanguino journal of small business strategy / vol. 31, no. 2 (2021) / 36-52 descriptive analysis the sample consists of the following family businesses from the index: mexico (14), brazil (15), spain (10), chile (5), portugal (2) and colombia (1). the inclusion of spain and portugal has aimed to incorporate the concept of ibero-america into the study. in addition, 98 family businesses from the united states have been included to carry out a comparative analysis between ibero-american and us family businesses. table 1 collects descriptive data of the companies in the sample by countries. table 1 descriptive analysis country sales billion $ (average) employees (average) number of family business publicly listed (average %) firm age (average) brazil 15,94 63.916 15 53,33% 68,93 chile 9,36 57.036 5 100,00% 84,40 colombia 9,00 61.667 1 100,00% 46 mexico 11,99 64.219 14 85,71% 88,07 portugal 11,05 58.405 2 100,00% 141,50 spain 10,74 56.143 10 60,00% 62,90 ibero-america 12,60 61.338 47 72,34% 77,60 usa 20,83 56.942 98 45,92% 88,62 total average 18,16 58.367 145 54,48% 85,05 measures e-quality (e-q): the quality of a website was measured using the scale developed by (cober, brown, & levy, 2004). this construct was modelled as a reflective second-order construct, using three formative first-order dimensions: content, form and function. in each dimension, we analysed the presence or absence of a series of items through dummy variables. these items are as follows: (1) content: about us, blog, newsletter, copyright, legal disclaimer, faq/ help, news, privacy policy, trust mark/trust seal, terms of use), (2) form: animation, color background, pictures, color text, video, (3) function: search, e-mail, fax, postal address, telephone, last update, forums, languages, site map, navigation menu, register, rss. social network it was modelled as a formative first-order construct. we analysed the presence or absence of the following social networks using dummy variables: facebook, flickr, google+, instagram, linkedin, pinterest, tumblr, twitter, weibo, youtube and xing (gonzález-lópez, 2014). turnover this reflective first-order construct was measured with two numeric variables: revenue and number of employees. through this construct, we pretend to measure the business volume of the companies. control variables two control variables were included in the study as they can affect companies’ turnover: family business age and type of company. age was measured as the difference between 2018 and the year when the company was founded. type of company refers to listed and non-listed family businesses, and it was operationalized as a dummy variable (0=private company, 1=public listed company). this control variable was due to emerging economies; with weaker legal and regulatory institutions to protect shareholders, there tends to be a higher proportion of private firms than in countries with more developed institutional frameworks, in which public listed firms are more common (deng et al., 2013). data analysis in order to estimate the model and perform the multigroup analysis between ibero-america and us family businesses, we have used the partial least squares (pls) technique, a composite-based structural equation modeling (sem). the sem enables researchers to statistically examine a series of interrelated dependence relationships between theory-based latent variables and their indica42 ó. r. gonzález-lópez, m. buenadicha-mateos, a. barroso, & r. sanguino journal of small business strategy / vol. 31, no. 2 (2021) / 36-52 tor variables by measuring directly observable indicator variables. pls path modeling can be understood as a fullfledged sem method that can handle both factor models and composite models for construct measurement, estimate recursive and non-recursive structural models, and conduct tests of model fit. we have chosen pls taking the following reasons into account: (1) it works best when we try to analyze interrelations between a large set of factors and with manifest variables and when the research model is complex in terms of its number of indicators; (2) it can be used for both explanatory and predictive research; and (3) it is an appropriate nonparametric sem technique for multigroup analysis (mga) (henseler, ringle et al., 2016; richter et al., 2016). we have used smart pls 3.2.7 software. results to evaluate the model using pls-sem in the context of ibero-america and the us and to compare the results of the estimated path coefficients, this study employs a threestage approach to assess the measurement model, the structural model, and the multigroup analysis (mga). assessment of measurement model the measurement model of reflective constructs (e-quality and turnover) is evaluated in terms of reliability and validity. the rest of the constructs or latent variables (content, form, function and social network) are modeled with formative indicators. in this sense, the observed variables form, cause, or precede the construct. for this reason, traditional reliability and validity assessment have been argued as inappropriate and illogical (roldán & sánchez-franco, 2012). the first step in evaluating reflective measurement models, both first-order construct (turnover) and second-order construct (e-quality), was to assess the reliability of the items by examining composites’ loadings (hair jr et al., 2018). as highlighted by hair jr et al. (2019), a loading above 0.7 is considered adequate for each indicator. the second step was to evaluate internal consistency reliability. construct reliability enables testing whether the indicators truly measure the constructs. for this purpose, composite reliability (cr) is considered (hair jr et al., 2017; hair jr et al., 2019). the third step was to assess convergent validity through evaluation of the average variance extracted (ave) metric, which should be above 0.5 (hair jr et al., 2017; hair jr et al., 2019). convergent validity measures the extent to which a construct converges on its indicators by explaining the items’ variance. table 2 shows that the loadings of reflective constructs exceed the threshold 0.7; the reflective constructs are reliable as its composite reliability (cr) is greater than 0.7, and aves are above 0.5. the results are based on the latest guidelines proposed by hair jr et al. (2019). the last step in evaluating measurement models was to assess discriminant validity, which indicates the extent to which a construct is empirically distinct from other constructs in the model. for this purpose, the fornell-larcker (1981) and heterotrait-monotrait or htmt (henseler, hubona et al., 2016) criteria were applied. for fornell-larcker criterion, the square root of the ave value of each construct should be greater than its correlation with other constructs. htmt is an estimate of the factor correlation (more precisely, an upper boundary). to clearly discriminate between two factors, the htmt should be significantly less than one (henseler, hubona, et al., 2016). table 3 and table 4 display that all the correlations were smaller than the square root of aves, thereby suggesting discriminant validity based on fornell-larcker’s criterion. in addition, all the htmt values were less than 0.85, implying the establishment of discriminant validity based on htmt0.85 criterion. the formative constructs, namely content, form, function and social network, are evaluated differently based on testing collinearity among items, as well as the analysis of weights. a high collinearity among indicators would produce unstable estimates and would make it difficult to separate the distinct effect of the individual manifest variables on the construct. while variance inflation factor (vif) values should not be greater than 5 (sarstedt et al., 2017), values less than 3 are viewed as ideal values (hair jr et al., 2019). our formative indicators are less than 3 (table 2), indicating no cause for concern with respect to collinearity issues. next, the relevance of the indicator weights is examined. weights provide information about how each formative indicator contributes to the respective composite construct (chin, 1998). we observed the presence of non-significant formative indicators (table 2) because of the high number of indicators in each formative construct. for this reason, we decided to keep them, as removing a formative indicator would imply eliminating a part of the composite latent construct (sarstedt et al., 2017). after an evaluation of the measurement model, in which we have been able to show that it is satisfactory (reliable and valid), it is necessary to evaluate the structural model to determine the proposed relationships. assessment of structural model in the second stage of the analysis, the structural model is assessed. the procedure consists of 4 steps: evaluating the algebraic sign, magnitude and statistical significance 43 ó. r. gonzález-lópez, m. buenadicha-mateos, a. barroso, & r. sanguino journal of small business strategy / vol. 31, no. 2 (2021) / 36-52 table 2 assessment results of the measurement model loadings weights vif composite reliability (cr) average variance extracted (ave) e-quality (reflective second-order construct) 0.779 0.542 content (formative) 0.722 0.441 1.241 n.a. n.a. about us 0.433 0.590 1.499 blog -0.552 -0.654 1.061 newsletter 0.301 0.408 1.197 copyright 0.266 0.386 1.280 legal disclaimer 0.298 0.264 1.037 faq/help -0.224 -0.250 1.148 news 0.105 -0.278 1.547 privacy policy -0.073 -0.103 1.454 trust mark/trust seal 0.099 0.198 1.134 terms of use -0.124 -0.205 1.459 form (formative) 0.651 0.401 1.177 n.a. n.a. animation 0.657 0.708 1.134 color background -0.020 -0.200 1.083 pictures 0.595 0.535 1.068 video -0.379 -0.561 1.060 function (formative) 0.825 0.509 1.372 n.a. n.a. search -0.167 -0.071 1.265 postal address 0.357 0.423 1.449 e-mail 0.188 0.285 1.177 fax 0.168 0.134 1.308 telephone -0.075 -0.494 1.403 last update 0.035 -0.159 1.099 forums 0.055 -0.024 1.061 languages 0.132 0.154 1.075 site map -0.371 -0.373 1.241 navigation menú 0.469 0.597 1.163 register -0.090 -0.078 1.163 rss -0.526 -0.543 1.130 social network (formative) 1.045 n.a. n.a. facebook 0.104 -0.388 2.931 flickr -0.032 -0.010 1.064 google+ -0.203 -0.457 1.340 instagram -0.046 -0.339 1.512 linkedin 0.387 0.584 1.258 pinterest 0.629 0.968 1.497 tumblr 0.070 -0.110 1.103 twitter 0.208 0.173 2.992 weibo -0.077 -0.135 1.027 youtube 0.309 0.187 1.705 turnover (reflective) 0.978 0.957 revenue 0.980 0.535 6.045 employees 0.976 0.488 6.045 control variables type 1.000 1.000 1.057 age 1.000 1.000 1.038 44 ó. r. gonzález-lópez, m. buenadicha-mateos, a. barroso, & r. sanguino journal of small business strategy / vol. 31, no. 2 (2021) / 36-52 table 3 first-order construct discriminant validity fornell-larcker criterion htmt criterion turnover age type turnover age type turnover 0.978 age -0.065 1.000 0.067 type 0.130 -0.071 1.000 0.133 0.071 table 4 second-order construct discriminant validity fornell-larcker criterion htmt criterion e-quality age type e-quality age type e-quality 0.736 cv_age 0.024 1.000 0.130 cv_type -0.044 -0.071 1.000 0.105 0.071 of the structural path coefficients; the r2 values (variance explained); the q2 (predictive relevance) (roldán & sánchez-franco, 2012); and, finally, the value of srmr as an estimated model fit for pls-sem (henseler et al., 2016). following the bootstrapping resampling method, the significance of the path coefficients was obtained to evaluate the relationships between the constructs. in addition, in line with the new recommendations by aguirre-urreta and rönkkö (2018) in terms of statistical inference using bootstrapped confidence intervals, percentile confidence intervals were examined in this analysis (ghasemy et al., 2020). table 5 includes two main direct relationships: (1) the relationship between e-quality and turnover is negative and significant (β1 = -0.345; t-value = 3.312), while (2) the relationship between social networks and turnover is positive and significant (β2 = 0.215, t-value = 1.902) (figure 1). the r2 value of the endogenous construct (turnover) is calculated as being indicative of the model’s explanatory power (hair jr et al., 2018). the r2 value is 0.208. an r2 value of 0.2 is relatively high and acceptable by management research standards (hair jr & lukas, 2014). blindfolding was used to evaluate the model with the cross-validated redundancy index (q2) for the endogenous variable. chin (2010) suggested this measure to examine the predictive relevance of a theoretical/structural model. q2 values greater than zero imply that the model has predictive relevance. our q2 value is above 0, therefore the structural model has satisfactory predictive relevance for the endogenous construct. finally, we test the model fit through the standardized root mean square residual (srmr) as the root mean square discrepancy between the correlations observed and the model-implied correlations (henseler, hubona, et al., 2016). this approach provides the exact fit of the composite factor model, thus constituting a confirmatory composite analysis. a model has a good fit when the srmr value is less than 0.08. our model presents a good fit, since the table 5 assessment of structural model relationships path confidence intervals(bias corrected) supported e-quality turnover -0.345*** (3.312) [-0.478; -0.142] yes social network turnover 0.215* (1.902) [0.024; 0.365] yes age turnover -0.069 (1.368) [-0.156; -0.006] type turnover 0.109* (2.082) [0.024; 0.193] r2 = 0.208 q2 = 0.151 srms = 0.077 *** p < 0.001; ** p < 0.01; * p < 0.05; ns: not significant (based on t(4999), one-tailed test) 45 ó. r. gonzález-lópez, m. buenadicha-mateos, a. barroso, & r. sanguino journal of small business strategy / vol. 31, no. 2 (2021) / 36-52 smsr value is 0.077. multigroup analysis (mga) to compare the websites of ibero-american and american family firms two different non-parametric methods are used: henseler’s mga (henseler et al., 2009) and the permutation test (chin & dibbern, 2010). these techniques are considered to be the most conservative pls-sem techniques for the assessment of differences between path coefficients between two groups (sarstedt et al., 2011). before carrying out the multigroup analysis, the measurement invariance is evaluated using micom (measurement invariance of composite models), a new approach developed for pls (hair jr & lukas, 2014; hair jr et al., 2018; henseler, ringle et al., 2016). we are going to describe the process for analyzing the categorical variable “geographical area” (family firms from ibero-america vs us) as a moderating variable in the model analysis. the basic idea consists of dividing the sample into two subsamples. to this end, the observations are categorized according to whether the family business is located in an ibero-american country or in the united states. next, the path coefficients are estimated for each subsample, and finally, the significant differences between the path coefficients are interpreted as moderating effects. micom involves three steps: the configurational invariance assessment, the appraisal of the establishment of compositional invariance and the evaluation of equal means and variances. in accordance with the micom procedure, we can confirm the full measurement invariance of both groups (table 6). this means that the data of the different groups can be separated, which allows the moderator analysis (multigroup analysis) (henseler, ringle et al., 2016). table 7 displays the results of the assessment of the structural model and mga using both nonparametric methods: henseler’s mga (henseler et al., 2009) and the permutation test (chin & dibbern, 2010). henseler’s mga directly compares the specific bootstrap of each group estimating for each subsample. according to this method, a p value of differences between the path coefficients lower than 0.05 or higher than 0.95 with a 5% level of significant indicates that there are significant differences between the path coefficients of the two mga (henseler et al., 2009). the permutation test is also established from the p value. in this case, differences are only at the 5% level of significance if the p value is smaller than 0.05. the results of the multigroup analysis (mga), using the two methods, reveal no significant differences between websites of ibero-american and american family businesses (table 7). that is, there are no significant differences in any of the proposed relationships (e-quality-turnover and social networks-turnover) between both groups. however, we can see that the negative effect of e-quality on turnover is moderately lower in ibero-american family businesses than american family businesses (figure 1). discussion and conclusion researchers who have investigated cross-cultural differences in websites have stressed the importance of adapting to local customs, because this would enhance user trust and appreciation of the website. these researchers have given a prominent role to web design in achieving it (i. e. calabrese et al., 2014; würtz, 2005). however, they have not laid out how web designers can achieve the adaptation of figure 1. results of assessment model and multigroup analysis (usa/ibero-america) *** p < 0.001; ** p < 0.01; * p < 0.05; ns: not significant (based on t(4999), one-tailed test) 46 ó. r. gonzález-lópez, m. buenadicha-mateos, a. barroso, & r. sanguino journal of small business strategy / vol. 31, no. 2 (2021 / 36-52 table 6 results of invariance measurement testing using permutation construct configurational invariance (step 1) compositional invariance (step 2) partial measurement invariance equal mean assessment (step 3a) equal variance assessment (step 3b) full measurement invariance original correlation 5.0% permutation p-value original differences confidence interval original differences confidence interval e-quality yes 0.941 0.329 0.425 yes 0.001 [-0.358; 0.321] -0.068 [-1.108; 1.224] yes/yes social network yes 1.000 1.000 0.147 yes -0.013 [-0.349; 0.344] -0.037 [-0.754; 0.594] yes/yes age yes 1.000 1.000 0.346 yes -0.007 [-0.343; 0.339] -0.042 [-0.706; 0,654] yes/yes type yes 1.000 1.000 0.002 yes 0.005 [-0.354; 0.341] -0.012 [-0.107; 0.023] yes/yes step 1: normally, it is automatically established. step 2: the original correlation is higher than 5% and the permutation p-value is higher than 0.05. step 3: a) all confidence intervals of latent variable score means include the original differences value, so there is equal means. b) all confidence intervals of latent variable score variances include the original differences value, so there is equal variances. table 7 multigroup analysis results us ibero-america relationships path coefficient cis(bias corrected) path coefficient cis (bias corrected) path coefficient differences p-value henseler’s mga p-value permutation test supported e-quality turnover -0.430*** [-0.533; -0.144] -0.171* [-0.289; -0.006] 0.259 0.087 0.257 no/no social network turnover 0.212* [0.020; 0.358] 0.208* [0.015; 0.418] 0.004 0.525 0.893 no/no age turnover -0.093 [-0.194; 0.089] -0.070 [-0.315; 0.185] 0.023 0.443 0.939 no/no type turnover 0.057 [-0.069; 0.164] 0.069 [-0.252; 0.296] 0.012 0.449 0.986 no/no 47 ó. r. gonzález-lópez, m. buenadicha-mateos, a. barroso, & r. sanguino journal of small business strategy / vol. 31, no. 2 (2021) / 36-52 websites to local industry styles, nor have they effectively tested the effect of adapting such styles on user evaluations (snelders et al., 2011). this is the first attempt to link website quality and a company`s turnover in family firms’ field to consider the local industry. in this study, we have analyzed the online presence of the biggest family businesses around the globe through their websites and social networks and the relationship with the company’s turnover. moreover, we have compared the results between ibero-american and american family firms. in the evaluation of the proposed model, we have verified how all the variables (the ones related to the reliability and validity of the indicators) show values higher than those established did. to answer the first research question (rq1), our results indicate that there is a negative relationship between the quality of a website and the company’s turnover. in line with other studies (gonzález-lópez et al., 2013), this fact could be indicative that some organizations, mainly the largest ones, still do not give enough importance to their corporate websites. however, the relationship between the presence on social networks and the company’s turnover is positive, which may be due to the fact that the behavior of certain companies prioritizes the presence in social networks instead of having a higher quality corporate website. these results show that some large family corporations get most of their sales through traditional channels. therefore, their corporate websites do not have a clear commercial objective and pay less attention to the quality of the websites because of higher sales without online commerce. doubtless, family firms do sacrifice financial goals. the difference is that when family interests are the key point, firms are more aware of taking into account these costs (counter-balanced) by noneconomic utilities other than financial gains (gómez-mejía et al., 2011). regarding the differences between ibero-america and america (rq2), we performed a multigroup analysis. the results indicate that there are no significant differences between both geographical areas, so we must understand that ibero-american family firms are doing as good (or bad) as american family businesses although the initial expectation from the literature review could indicate that there should be some differences regarding online presence for cultural aspects. the two methods used in the multigroup analysis (henseler’s mga and the permutation test) confirm the non-significance of the results, providing a multi-method confirmation, thus increasing the credibility of our results (rasoolimanesh, ringle, et al., 2017; rasoolimanesh, roldán, et al., 2017). online presence is not impregnated with cultural values of the regions in question, but culturally neutral. this study provides evidence to international marketers and academics that instead of a “transnational website style” with features, images and categories common across nations, a culturally unique website style is emerging on the web, as mentioned in previous papers singh et al. (2003). our work contributes to the academic literature in several ways. first, this article fills the gap defined by miller et al. (2014). it talked about about how family businesses are currently limited when researching new topics that are related to marketing, branding, identity, communicated image on websites and social networks. second, the work aims to cover the need for the field of family business to develop operational concepts by getting appropriate measures of constructs and dimensions related to the electronic quality of websites (and social networks) and their modeling through structural equations (pls) to contrast its influence on the family businesses’ turnover. empirically, this work selects and combines a series of measures and defines specific methods to validate the concept of e-quality in the websites of the family businesses. the main implication for owners and managers is to present a new business opportunity for differentiating from the rest of firms through the online presence, as well as electronic commerce. more and more, a great amount of firms have started to build their own brand community based on online presence to involve customers with other customers and also with the brand (okazaki et al., 2015). a limitation of this study is the sample (the largest 500 family firms around the world from the gfbi), which makes some generalizations to all the population of family firms difficult. investigations in sme context would be appreciated to increase the external validity of the results. another limitation is that we have only used “geographical area” as a moderating variable to perform the multigroup analysis. finally, it would be interesting to carry out a study analyzing specifically family content (family identity, family name, family history, protocol, succession, involved generation, etcetera.). the goal of this will be to answer theoretically and empirically the question of what makes family businesses different, following the suggestion of carney et al. 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(2001). important design features in different website domains: an empirical study of user perceptions. e-service, 1(1), 77-91. doi:10.2979/esj.2001.1.1.77 strategy special section invited essays are not reviewed by the editorial advisory board of the journal vf small business strategy. opportunities for small business in the global marketplace patricia f. saikl, administrator u.s. small business administration as ihe chief execu&i&'e officer i&f ihe small business administration, patricia f. saiki direns a compreliensive array of pri&grams and services designed ii& promote and expand u.s, small businesses. she oversees policy development, management, and delivery off&nuncial and business devel&&pmeni prograns by ihe agency's 5,000 employees in nearly /00 uffices across ihe c(&ii&ll& is for today's small business owner, the question is no longer, "should i consider exporting?" instead, the proper question to ask is, "how soon can i enter the global marketplace?" the changing map of world politics along with advances in technology and transportation has created an economic environment where overnight deliveries to anywhere in the world are routine and facsimile machines can start multi-national business deals in minutes. imponantly, exporting is no longer the exclusive domain of big business. trade barriers that once made exporting especially difficult for small companies are giving way to more arrangements. for example, the unification of western europe's economic community is bringing a $4.8 trillion market of more then 340 million people under a single trade umbrella. closer to home, cross-border trade with our northern neighbors has been made easier by the u.s.-canada free trade agreement. recently the wall street journal ran an editorial that praised the advances brought by the agreement and described the particular good fortune of buffalo, new york. the article noted that "since the free trade treaty went into effect in 1989, between 400 and 700 canadian businesses have set up shop in buffalo." the editorial went on to say that "buffalo-area stores benetit from cross-border shoppers, who spent $238 million there last year." this is the kind of progress we can expect from more open trade arrangements coming into place around the globe. however, we must be prepared to participate in this exciting arena. thc sba held an international trade conference not long ago, and a speaker there talked about how our changing trade situation today is similar to develop'ments that faced american 63 companies 60 years ago. back then, markets were mostly local and regional, but national markets were evolving. a manufacturer in miami, for instance, complacent with his position in the local area, would have been quite surprised if a competitor from, say, atlanta, moved in. this type of complacency must be guarded against today. as the european countries consolidate and strengthen, only the foolish would not expect them to begin marketing their products here in the united states in our communities. small business owners must continue innovating and must sharpen their competitive edge by looking across borders and oceans for trade and investment opportunities. although our domestic market is enormous, it is limited. the united states is home to only 5% of the world's customers. world economic growth, excluding that of the united states, is expected to be 40% higher than domestic growth for the balance of this century. it is crucial for the health and progress of our economy that small business owners find success in exporting. ninety-nine percent of all businesses in the united states are small; that' more than 20 million small businesses. they employ 57% of the private work force, are responsible for 54% of all sales and generate 50% of the domestic private sector output. at the small business administration we are working to promote greater participation by small business in the world market, working to overcome many of the principal obstacles that prevent small firms from doing business overseas. we have found that a great deal of their reluctance can be traced to several factors, including a lack of knowledge about how to get involved, unfamiliarity with a foreign language, and fear of operating in a strange business environment. in actual practice, however, these uncertainties present few problems or are easily overcome. open minds and a dedication to success must prevail. the chances for success in the world market are encouraging. small companies enjoy advantages that major exporters often cannot match —primarily greater flexibility and responsiveness to the needs of customers. the best reason for small businesses to move into the international marketplace is the bottom line. exporting opens up vast new markets for sales and can extend product life economic fluctuations. perhaps most inviting, exporting can improve a company's competitiveness. promising marketing techniques can be tested as can the popularity of new products in different markets. despite these attractions, a dun and bradstreet study of businesses with fewer than 100 employees discovered that of those that do noi trade overseas, nearly l5% say their product or service is exportable. this must not continue. small businesses must be more aggressive and confident in their abilities in order to succeed in the world marketplace. we hear a great deal about germany and japan and the wonderful things being accomplished by these economic powers. but our economy is twice the size of japan's, nearly five times that of a united germany, and by most measurements larger than the entire european community. furthermore, the cost of production in america is lower than in either germany or japan; this means that our products are affordable. the president put it best when he said, "in this new world, old notions no longer apply. if we want to put people to work here at home, we'e got to expand trade and to open markets." 64 he is right; all businesses must enter into international trade. that is where the markets are, that is where growth lies, and that is where our competitors will be. firms that rest secure at home will not be secure at all. 65 fall journal   volume 20, number 2 fall/winter 2009  61            the use and content of formal rating systems in angel  group investment initial screening stages    craig s. galbraith  university of north carolina wilmington  galbraithc@uncw.edu    alex f. denoble  san diego state university  adenoble@mail.sdsu.edu    sanford b. ehrlich  san diego state university  sehrlich@projects.sdsu.edu      abstract    we examined the formal screening process of thirty‐eight angel investment groups.   within our sample, over eighty percent of the angel investment groups used a  committee of members to perform the initial screening of submitted business plans,  while the remaining relied upon the managing partner or senior director to perform the  initial screening.  of the angel investment groups that use a screening committee,  approximately half also employed a formal scoring system.  with respect to the  important dimensions used in the scoring systems, the quality/experience of the  management team and the competitive advantage of the firm’s product or service,  including strength of intellectual property protection, were consistently the most  common dimensions seen in the scoring systems examined.  a content analysis of the  scoring sheets was also performed in order to determine the various sub‐topics and  linguistic themes associated with angel rating systems.    keywords: angel investors, investment criteria, screening process    introduction  numerous researchers have discussed  the investment decision making process  of private equity investors, as well as  providing criteria thought to be most  critical to their successful decision  making (tyebjee & bruno, 1984;  macmillan, siegal & subbanarasimha,  1985; macmillan, zemann &  subbanarasimha, 1987; zacharakis &  strateg y  journal of small business  journal of small business strategy        62  meyer, 2000; mit, 2000; benjamin &  margulis, 2000; van osnabrugge &  robinson, 2000; payne & mccarty, 2002;  sudek, 2007).  while the vast majority of  past research in the private equity  literature has focused on formal venture  capital (vc) funds, the decision making  processes and selection criteria of  informal private equity, or angel  investors, has received increasing  attention in recent years.  in particular, a  number of recent articles and books  have noted the critical importance of the  perceived “quality” of an applicant firm’s  management team in angel investment  decisions, with particular emphasis on  the interpersonal style and perceived  ethical behaviors of management (e.g.,  benjamin & margulis, 2000; van  osnabrugge & robinson, 2000; payne &  mccarty, 2002; sudek, 2007, 2009).  in a  recent journal of small business strategy  article, for example, sudek (2007)  surveyed the investors at one large angel  group, and found that the three top  criteria for angel investments were  “trustworthiness/honesty of the  entrepreneur”, “management team”, and  enthusiasm/commitment of the  entrepreneur” (p. 98).  extending this  study, sudek (2009) also investigated the  direct relationship between the  personalities of the presenting  entrepreneur and the personalities of  angel members, finding that personality  does influence the investors’ interest in  taking the potential deal to the due  diligence stage.   while increasing our understanding of  the final investment process, this stream  of empirical research has focused  primarily on the complexities of angel  investors’ final evaluation based upon  their interactions with entrepreneurs,  such as during the due diligence process  or the formal presentations of business  plans to the full angel group – of which  most members haven’t even read the  presenters’ business plan prior to the  presentation.  not surprising, it is during  these formal presentations, q&a, and  the related subsequent discussions  among interested investors where the  interpersonal dynamics of the  entrepreneur/management team, such  as “passion and trustworthiness” are  assessed and debated by the members  within an angel investor group (e.g.,  sudek, 2007, 2009).  in most investment decision making  processes of angel groups, however,  there are multiple levels of screening  mechanisms, of which the formal  presentation to the angel group and  subsequent due diligence process,  described by payne & mccarty, 2002;  sudek (2007, 2009), shane (2007) and  others, are typically the final screening  steps.  for most angel groups, a number  of earlier screening mechanisms may  also be in place, and it is these early‐ stage screening reviews that actually  filter out the vast majority of applicants.   in reality, only a few applicants will  make it past these earlier screening  stages to an actual presentation before  the full angel group membership.  in  effect, the deal flow of proposals,  business plans, and applications can be  considered similar to a funnel, where  volume 20, number 2 fall/winter 2009        63    various filtering mechanisms are needed  to shrink the number of applicant  enterprises to a manageable size for final  presentations and discussions with the  full angel group membership.  similar  multi‐level screening protocols are also  used by federal granting agencies  (galbraith, ehrlich & denoble, 2006;  galbraith et al, 2007), as well as in early‐ stage corporate r&d project decisions  using a “stage‐gate” process (ozer, 1999;  linton, walsh & morabito, 2002;  ajamian & koen, 2002; cooper, 2001;  cooper, edgett & kleinschmidt, 2002).    in spite of their critical importance in  filtering out applicant business plans,  these earlier screening processes of  angel investor groups have not been  examined in detail.  we know very little  about the differences in angel investor  group initial screening processes, and  perhaps most importantly, we know  even less about the criteria used in initial  screens to filter out applicant business  plans.    a number of descriptive studies have  suggested that many of these early  assessments now involve some type of  multidimensional scoring sheet or rating  process (mit, 2000; payne & mccarty,  2002; cooper, edgett & kleinschmidt,  2002).  in fact, within the past decade  there has been a stream of complex  technology readiness check‐lists or  calibrated scoring models designed for  early stage, or “fuzzy” front‐end  assessments (mock, kenkeremath & janis,  1993; koen et al, 2002; heslop, mcgregor  & griffith, 2001; white, hertz & d’souza,  2009).     our study explores this important part  of the pre‐presentation angel screening  process and the use of formal scoring  systems for early‐stage screening and  filtering of potential equity investments  by angel groups.  the stage of screening  that we are investigating is prior to any  significant interaction between angel  investors and the entrepreneur, and is  typically based solely upon information  in the business plan or executive  summary provided to a screening  committee or panel.  thus, our study  attempts to fill an important gap in  understanding the full sequence of  actions and evaluation criteria after the  initial submission of an applicant  business plan to an angel group.    early‐stage equity investment  it is increasingly evident that informal  private equity has become a critically  important source of funding for early‐ stage firms, particularly those with a  high growth or “scalability” potential.   the venture support systems project:  angel investors (mit, 2000) notes,  “angel investing is the major source of  funding for the seed ($25,000‐$500,000)  and start‐up phases ($500,000 ‐  $3,000,000)”, (2000: 9).  similarly, the  angel capital association notes, angel  investing bridges “the gap between  “family and friends” and institutional  venture capital rounds” (2002: 1)  while  estimates of the total annual equity  funding from angels varies dramatically,  journal of small business strategy        64  it is generally agreed that angel  investment in early‐stage investments  exceeds formal venture capital funding  (sohl, 2005), with a large percentage, if  not the majority, of angel investment in  “pre‐revenue firms.”  a recent survey by  the aca of angel group members found  that about 80% indicated preferences for  investing in seed to early‐stage  enterprises, with only a minority of  members showing preferences for  expansion stage enterprises (shane,  2007).  research by wong (2002) found  that 69% of his sample of angel funded  firms were in “pre‐revenue” phases of  development, while in their analysis of  the aca survey data wiltbank & boeker  (2007) found 45% of the angel  investments were in pre‐revenue firms.  while there are many individual  investors who take equity positions as  “arms‐length” transactions in early‐stage  firms, an increasingly popular form of  organizing private equity investors is  through the formation of “angel  groups”.  angel groups are formal  networks of sec defined “accredited  investors.”  as of 2008, the angel capital  association identifies about 200 angel  groups within the united states and  canada.  most of the published literature  on informal private equity decision  making processes, however, tends to  either focus on the very large and well‐ known angel groups, such as tech coast  angels located in southern california  (e.g., sudek, 2007, 2009; payne &  mccarty, 2002), or concentrate on  investment returns (e.g., wiltbank &  boeker, 2007) and demographic  characteristics (e.g., shane, 2007) for the  broader angel member population.   very little has been published about the  screening and decision making process  of smaller, and more typical angel  groups in the united states.    most angel groups, regardless of size,  have developed a formal process of  screening, evaluating and selecting deals  (mit, 2000).  for example, a typical  multi‐level screening process is used by  the wilmington investor network (win)  angel investment group.  founded in  2003, win is located in the cape fear  coastal region of southeastern north  carolina, and is a member of the aca.   win’s current membership consists of  approximately forty‐five sec accredited  investors that invest in approximately 2  to 3 deals per year.  the median size of  the member groups in the angel capital  association is approximately 37  members, with annual investments of  around 2 to 3 deals per year (see shane,  2007 for descriptive data regarding the  recent aca’s survey of members).  this  places win as a typical, mid‐sized  regionally‐based angel investment  group.  to date win has invested  approximately $7 million (about  $1.3million for each year of operation) in  early‐stage, seed or series a financing in  nine different firms and a number of  follow‐on investments including  convertible debt bridge financing and  series b investments in the previously  funded enterprises.  several of the  funded firms are located in the raleigh‐ durham‐chapel hill research triangle  area of north carolina.  in comparison,  volume 20, number 2 fall/winter 2009        65    the often profiled and much larger tech  coast angels of southern california has  been in existence since 1997, has almost  300 members with over $85 million  invested in approximately 130 firms  (tech coast angels, 2009).  all of the firms funded by win can be  considered medium to high technology,  and include biotechnology, medical  technologies, software development, and  technology‐based services.  most of the  investments are syndicated with one or  two other angel investment groups in  the carolinas or with state supported  funding sources, such as nc idea, so that  the total investment in a particular  funding round is typically over $1million.   the screening process of win is  described below.  first the managing director of win  screens about 300 potential investments  per year.  these firms generally come  from two primary sources: a) the  managing director attends various  regional private equity forums where  companies present to a large audience of  representatives from venture capital and  angel networks – if any of the  presentations seem of interest, these are  then sent to the next level of win  screening, and b) win receives a  number of unsolicited applicants  through referrals and its web‐page – the  referrals usually originate from other  regional angel groups, vc funds, local  attorneys, and occasionally from  members.  the managing director  screens these applicants, and eliminates  those applicants that are not within the  general published interest areas of win,  such as start‐up restaurants, feature  length film and tv pilot financing  (wilmington, nc has a large film sector,  with the largest movie studio in the u.s.  outside california), and retail stores, as  well as applicants who are located  outside the geographical southeastern  u.s. region – the remaining firms are  sent to the next level of screening.   second, a screening committee of  approximately five to six win members  formally meets once per month for  breakfast.  out of the original 300  applicants, approximately 60 applicant  business plans are sent to the screening  committee per year (4 to 6 applicants  typically discussed during each  screening meeting).  all members of the  win screening committee read the  applicant’s submitted documents  (typically business plans, executive  summaries, pro‐formas, and powerpoint  presentations). the majority of applicant  documents are in the form of five to ten  page detailed executive summaries,  oftentimes combined with a separate  document describing the technology in  more detail.  detailed, long business  plans, once the dominant start‐up firm  document, appears to be falling in  popularity for submission to angel  investor groups. the win screening  committee uses a web‐based document  management system (angelsoft) to  facilitate pre‐screening on‐line  dissemination of, as well as, encouraging  on‐line discussions by the screening  journal of small business strategy        66  committee regarding the applications.  a  five question formal rating sheet is  available to the screening committee  members, primarily to organize their  thoughts for the formal screening  committee breakfast meeting.  based  upon the screening committee  discussions and recommendations,  approximately 15 to 18 firms per year are  invited to present to the full win  membership.  third, the selected candidate firms  present to the full win membership  during its monthly dinner meeting.  the  typically presentation is 30 minutes,  followed by a q&a period.  this is  similar to the average amount of time  allocated to presentation and q&a  reported in the aca survey (shane,  2007).  after the presentation, an  informal hand vote is taken to determine  the level of interest.  if there is general  interest to fund the presenting firm, this  is confirmed by follow‐up e‐mails which  also ask for specific dollar commitments  from the individual members.  win is  not a fund, so individual members  decide whether or not to invest, and how  much.    fourth, if the committed amount meets  the solicited amount from the firm, then  win performs a typical “due diligence”  procedure on the firm.  if the firm  “passes” the due diligence process, the  final agreement of valuation and  investment terms is then formalized in a  “term” sheet.  since many of the  investments are partnered with other  angel groups, win may take either a  lead or secondary role in the due  diligence process and subsequent  negotiations.  thus from a screening  perspective, approximately 30% of the  business plans that go to the screening  committee are invited for a formal  presentation, with about 5% of the  screening committee applicants actually  funded.    empirical study  in 2008, a list of u.s.‐based angel  investment groups was obtained from  angel capital association web‐page.   the list was screened to include only  member‐based angel groups (for  example, fund based groups,  government funded groups, individuals,  or organizations that typically “charge”  for a presentation were excluded).  an  electronic questionnaire was sent to the  remaining ninety‐two angel investment  groups asking for: a) a description of  their pre‐due diligence early screening  process of business plans, b) whether or  not a formal rating or scoring process  was used for their initial screening of  business plans, c) if a formal scoring  system was employed then a copy of the  scoring sheet was obtained, and d) if a  formal system was not used, what was  the general criteria that was used to  screen business plans.    a total of thirty‐eight usable responses  were obtained, for a response rate of  41.3%.  no significant response bias was  evident based upon region.  in almost  every case the respondent was the senior  director or managing partner of the  angel investment group.  in about  volume 20, number 2 fall/winter 2009        67    fifteen cases, the authors subsequently  interviewed the senior director after the  questionnaire was returned (to obtain  information regarding the use of web‐ based document management programs,  follow‐up information if survey was not  complete, etc.).  within our sample, 81.5% (n=31) of the  angel investment groups used a  committee of members (similar to the  win process described above) to  perform an early screening of submitted  business plans, while the remaining  18.5% (n=7) of the sample relied solely  upon the managing partner or senior  director to perform early screening (see  table 1).   table 1 ‐ screening process and scoring      sample  (n=38)  screening committee decision    31        scoring system with no weightings    13        scoring system with weightings     2        no scoring system    16      individual manager decision     7      of the angel groups that used a  screening committee, approximately  48% (n=15) also employed a formal  scoring system.  here we define a formal  scoring system as a likert‐style  numerical rating scheme on multiple  dimensions.  of these, however, only  two groups used a scoring system that  also employed a weighting system  reflecting the importance for the various  dimensions.  in a weighted scoring  system, for example, a ranking of “5” on  “management team” might be weighted  differently than a ranking of “5” on  “intellectual property.”  nine of the committee‐based screening  processes employed the ranking system  available in the angelsoft software  program.  in fact, within our sample, the  angelsoft program was clearly becoming  an increasingly common way to  distribute documents and allow member  feedback, including rankings, of the  business plans by screening committee  reviewers.  several respondents  indicated that they had just starting  journal of small business strategy        68  using angelsoft within the past six  months.  one angel screening  committee also reported “beta testing” a  specialized social network system as  their document management system.   all of the angel groups (except two) that  used a rating system for their early  screening, however, reported that the  rating process was not final but used as a  process to facilitate the screening  committee’s discussion, after which a  vote was taken whether or not to  forward the applicant to the general  membership.  in theory, formalized  assessment used in this manner during a  screening procedure should focus the  decision‐making process by providing a  set of cues that individuals attend to in  the evaluation of early stage  technologies.  in the case of most angel  groups, the membership of sec  accredited investors provides an  experienced, highly educated and  diverse pool of reviewers.  these  reviewers each bring different  “experience sets” that should enable  them, in principle, to recognize  antecedent patterns associated with the  success or failure of commercialization  efforts.  these patterns or cognitive  schemas presented in formalized rating  sheets should simplify the decision‐ making process and allow experts to sort  through a complex set of cues regarding  the technology’s prospects for  commercialization to quickly develop  summary judgments.   two of the angel groups reported using  a web‐based multi‐dimension rating  process as a first level screening process  to filter applicants down to a  manageable number for the subsequent  screening committee discussions.  this  first level, web‐based early screening, is  based upon an average score of the  reviewing committee (above or below a  threshold rating), thus filtering out the  majority of the applicants.  in addition,  about half of the other angel groups that  were currently using web‐based  programs for document management  also reported plans to implement a  similar web‐based rating and filtering  procedure, followed by an in‐person  screening committee meeting.   the remaining 52% (n=16) of the  committee‐based early screening process  used either a consensus or simple voting  process during a screening committee  meeting, or a simple ranking or rating  on the overall proposal (rather than on  multiple dimensions).    with respect to the important  dimensions used in the scoring systems,  table 2 indicates what dimensions were  most commonly identified within the  scoring sheet.  clearly the  quality/experience of the management  team and the competitive advantage of  the firm’s product or service were  consistently the most common broad  dimensions seen in the scoring systems  examined in this study.  this is  consistent with many of the studies that  have examined the general criteria for  selection (e.g., mit, 2000; payne &  mccarty, 2002; wiltbank, 2005; sudek,  2006).  volume 20, number 2 fall/winter 2009        69      table 2 ‐ scoring dimensions for screening      percentage mentioned  in scoring sheet  (n=15)  quality/experience of management team  100.0%  characteristics of product or service (including ip  protection)  93.3%  market and competitive characteristics  86.7%  completeness/quality of business model/strategy  80.0%  transaction/valuation characteristics   53.3%  quality of pro‐forma financials  46.7%  geographical location   26.7%  exit strategy  20.1%  prior performance  13.4%  stage of technology development  13.4%      it is also interesting to note, however,  that in the two formal weighted scoring  systems examined, the competitive  advantage of the firm’s product or  service, including strength of intellectual  property protection, were weighted  somewhat higher than the  quality/experience of the management  team.  in contrast, in the early screening  processes that did not use a formal  scoring system, the senior director or  managing partner respondent almost  always mentioned that, in his or her  opinion, quality/experience of  management team was the most  important dimension.  a “descriptive” content analysis was  performed on the various angel scoring  sheets following the process described  by neuendorf (2002) and krippendorff  (2004).  while not common, several  researchers have performed content  analysis of questionnaire wording, such  as in public opinion surveys (e.g., fan,  2003), to better understand the  importance and evolution of the  underlying dimensions employed, while  other scholars have called for more  content analysis of questionnaire and  rating instrument wording (e.g., inkelas  et al, 2000).  to our knowledge, rating  instruments and systems for private  journal of small business strategy        70  equity investments have not been  analyzed in this manner.      following neuendorf (2002), a codebook  was established for the top four  categories of scoring shown in table 2.   in general there were three types of  angel scoring sheets coded, a) scoring  sheets that simply had broad categories,  such as “management,” b) scoring sheets  that had broad categories, but with  descriptive phrases associated with the  categories, and c) scoring sheets that  had sub‐scoring or ranking under each  general category.  all three of these  scoring sheet forms were coded  according to the codebook.  due to the  relatively small sample size, the coding  analysis was done manually.  two coders  were used, with an inter‐coder reliability  coefficient (kappa coefficient) of 86.7%  for intra‐category coding (e.g., phrases  within “management” etc.), which is  generally considered good overall  agreement in content analysis studies  (kvalseth, 1989; stemler, 2001).    we then used the revised “general  inquirer” (gi) software program  originally developed by stone et al  (1966) to identify word roots and  linguistic orientations or “textual  themes” within the angel scoring  systems.  the gi analysis provides a  mapping tool with tag counts for  dictionary‐supplied categories and  themes (harvard iv‐4 dictionary;  lasswell dictionary, etc.), and is  commonly used to provide a simple  linguistic profile of statements or  phrases (e.g., gibbs, 2004; montgomery  et al, 2005) based on sophisticated word  count algorithms.  ignoring words such  as prepositions, articles, and high‐ context words, the remaining words are  stripped of their suffixes and compared  with the various gi dictionaries.  this  technique is useful to identify various  dictionary‐supplied “textual themes”  associated with the word usage in a  particular category of analysis, such as  “strong” words versus “hostile” words  versus “activity” words, etc.  in effect, gi  uses different disambiguation routines  to analyze a particular phase, then  separate words into these different  themes depending on their use within a  phrase or sentence.  since gi employs a  large library of categories and themes, it  differs from purely inductive content  analysis mapping tools such as  textsmart and various neural‐net  procedures that are sometimes used on  more voluminous, and less defined texts  such as a political speech or a novel.   based upon the gi analysis it becomes  possible to provide empirical evidence  embedded in the coding and rating  sheets as to what “textual themes”  become most important to private  equity screening committees when  analyzing a submitted business plan.    all descriptive phrases, explanations,  and other language/wording found in  the various angel scoring systems for the  categories of “management”, “product”,  and “market” were inputted in the gi  program; there were an insufficient  number of phrasings to perform a  reliable gi analysis on “business  plan/model” category.  volume 20, number 2 fall/winter 2009        71    table 3 provides a summary of the most  common sub‐factors, descriptors, or  statements for each of the top four  general early screening categories found  in the rating systems, as well as the most  common thematic root word tags from  the gi analysis.  important “textual  themes” are identified by the percentage  of tags identified by gi falling within  that theme category.  with the gi  metrics, it is possible to perform an  analysis of variance on proportions,  comparing the proportions of the  different themes between the different  categories.   table 3 ‐ content analysis: sub‐topics and “general inquirer” thematic word  tags    journal of small business strategy        72    the individual factors, or statements, for  each of the general categories are useful  to understand since they likely represent  the underlying, latent factors or criteria  that screening members use to assess  the broader categories of evaluation.   from table 3 we can see that  management experience in industry and  past experience running a business are  the primary sub‐areas with the general  category of “management.”  in addition,  from the thematic analysis, it appears  that angel screeners may be looking for  linguistic themes in the applicant  business plans that evoke “strong”  emotions, such as demonstrate,  aggressive, depth and experience,  combined with “action” themes such as  build, commit, demonstrate and  implement.  similarly, under  characteristics of product/service, the  general sub‐areas appear to be  uniqueness or differentiation,  intellectual protection, and ability to  solve market problems.  these sub‐areas  are also reflected in the thematic  language, such as “strong” word tags that  emphasize benefits, fulfilling, and  proving combined with “active” linguistic  themes, such as solving customer needs.   for the market and competitive  characteristics, the thematic categories  appeared more diverse ‐‐ six different  themes had over a 4.0% frequency, with  the dominant linguistic theme again  being “active” using related words such  as growth, demonstrate, achieve and  provide.    using a weighted average of percentages  based upon the number of words for  each sub‐topic inputted into the gi,  overall angel screening committees  appear to be grounding their analysis of  submitted business plans in the context  of “strong” linguistic themes (15.64% of  all word tags) and “active” linguistic  themes (14.3%) ‐‐ no other linguistic  theme had a total proportion greater  than 5.0% across the combine data.   however, using a test of equality of  several population proportions (e.g.,  kullback, 1968) there were significant  differences (against the null hypothesis  of equal proportions) between the  proportions of the different themes (e.g.,  strong versus active) across the  categories of management team  experience, characteristics of product,  and market and competitive  characteristics (p<0.01, χ2=19.74).  this  clearly suggests that while both “active”  textual themes and “strong” textual  themes dominate in angel screeners’  rating systems, screeners are also  certainly looking for different textural  themes, and ultimately different evoked  emotions, across the different sections of  the business plan.    conclusion and implications  all decisions for equity investment by  angel groups involve some form of early  screening.  while there have been many  recent empirical examinations of the  final investment and decision making  process for both angel and vc investors  (e.g., shepard and zacharakis, 2002;  volume 20, number 2 fall/winter 2009        73    sudek, 2006, 2009), the complexity of  the initial screening process has been  largely ignored, a somewhat surprising  phenomenon since the vast majority of  business plans and proposals are  screened out in these earlier stages.  one  of the more objective processes  employed in early stage screening is the  use of formal rating systems.  our study indicated that there were  extreme differences in opinion regarding  the use of formal scoring systems in  early stage, pre‐due diligence screening  decisions.  on one hand, a number of  angel groups utilized a formal scoring  system, with two groups even  formalizing the process to the point of  providing different weights to the  different dimensions, then ranking the  proposals based upon a weighted sum of  the ratings for the different dimensions.   other angel groups utilize ratings as a  first‐level web‐based screening process  prior to a screening committee  discussion.  and the trend appears clear  from our research – as the use of  sophisticated and dedicated document  management programs, such as  angelsoft, becomes more dominant,  more angel groups are likely to move to  web‐based early screening procedures  that utilize multi‐dimension, and  possibly weighted rating schemes, to  filter applicant business plans and  executive summaries.  on the other hand, several respondents  clearly challenged the validity of any  scoring process, or as one manager from  an angel group located in the northeast  united states wrote, “we specialize in  early stage deals and question the utility  of a scoring system in our environment.”   at another level, there was great  consistency between the angel groups  within our sample.  every group that  used a formal rating system for their  initial screening decision had  quality/experience of the senior  management team as one of their  dimensions in the rating sheet.   similarly, all the respondents of the  angel groups that did not use a formal  scoring system indicated that they  thought that the quality/experience of  the management team was most  important to the screening process.  as  one respondent succinctly argued, “i’m  sure we could quantify the weightings  but don’t because it probably wouldn’t  add much value since it would be highly  skewed to the management team.”  from a research point of view, however,  angel groups that use formal rating  systems offer an excellent objective  framework to analyze the criteria used in  initial screening, particularly since the  majority of applicant business plans are  filtered out during this stage prior to any  “face‐to‐face” contact between the  entrepreneurship and the actual  members of the private equity group.   although there have been several recent,  albeit small sample, content analyses of  business plans and subjective decision‐ making descriptions from private equity  investors (e.g., smart, 1999; diaz de leo  journal of small business strategy        74  & guild, 2003; silva, 2004; kollmann &  kuckertz, 2004; christina, cornet &  asandei, 2006), to our knowledge the  actual instruments and rating systems  for private equity investors have not  been analyzed in this manner.  and as  inkelas et al (2000) and fan (1998, 2003)  suggest, using the objective descriptions  in questionnaires and rating sheets  measures for a content analysis provide  an important foundation to better  understand the actual dimensions being  used, regardless of subjective opinions.    while there is certainly a difference of  opinion regarding formalized screening  and scoring systems for early stage  equity investment screening, there  remains an even broader question that  still needs to be answered: do early stage  reviewers, angel investors, and  screening committee members actually  have any ability to predict future  success?  this, after all, is the underlying  assumption behind all screening  meetings.  almost all empirical research to date  that attempts to examine the actual  criteria leading to successful private  equity investment is ex‐post in nature.   given the hindsight and memory decay  biases inherent in ex‐post analysis,  however, a few researchers are starting  to examine technology  commercialization and early‐stage  enterprise success within an ex‐ante,  longitudinal framework that tracks early  stage firm success years after the firms  were evaluated and rated by investors.   some of the ex‐ante research has  examined the decision making process  among equity investors, such as venture  capitalists (e.g, zacharakis & meyer,  2000; zacharakis & shepherd, 2001;  shepard & zacharakis, 2002; baum &  silverman, 2004), while other ex‐ante  research has investigated additional  early stage funding mechanisms, such as  government grants (e.g. astebro, 2004;  galbraith et al, 2006).  while only a few  ex‐ante screening studies have been  published, these findings tend to  challenge both the validity of many  early‐stage screening processes and the  importance of often‐repeated evaluation  criteria, like “management quality.”   clearly, much more ex‐ante research  needs to be accomplished in this area,  particularly in the areas of accuracy of  prediction and assessments by equity  investment investors and business plan  screeners.   regardless of whether the screening  process actually produces better  investments or not, this study provides  important information for the  entrepreneur seeking funding.  in order  to get past the initial screening stage,  entrepreneurs need to incorporate and  emphasize the top factors typically seen  in screening rating systems.  in fact,  table 3 could be used as a check list for  entrepreneurs when writing their  executive summaries or business plans  for submission to an angel network.   business plan writers not only need to  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zacharakis, a., & shepard, d. (2001).   the nature of information and  overconfidence on venture capitalists’  decision making.  journal of business  venturing, 16, 311‐332.  craig s. galbraith is a professor of  entrepreneurship and technology  management at the university of north  carolina wilmington.   he teaches in the  areas of entrepreneurship, business  valuation, technology management, and  competitive and global strategy.  he has  published 6 books, and over 100  academic papers in top journals.   as an  entrepreneur, he has been the co‐ founder of a california‐based  biotechnology firm, and is currently the  vice‐president of commercialization for  volume 20, number 2 fall/winter 2009        79    horizon vision research, inc., a start‐up  medical instruments r&d firm.   alex f. denoble is a professor and  chair of the management department in  the college of business at san diego  state university (sdsu). his primary  areas of expertise include  entrepreneurship and corporate  innovation, technology  commercialization and strategic  management. he has conducted  research in these areas and has taught  related classes in the university's  undergraduate, graduate and executive  mba programs.  sanford (sandy) b. ehrlich is the  qualcomm executive director for the  entrepreneurial management center at  san diego state university where he is  also an associate professor of  management. his teaching, research,  and consulting is focused on  entrepreneur‐investor relations,  leadership and organization design of  rapidly growing technology companies,  and business plan development. he is a  director of amistar (amta)  corporation, deep sky software, inc.,  and formerly a director of the healthy  back store.  reproduced with permission of the copyright owner. further reproduction prohibited without permission. strategy table of contents page title/author 1 beyond survival: reshaping entrepreneurial vision in successful growing ventures steven h. hanks leon r. mccarrey 13 strategy types and small firms'erformance: an empirical investigation a. bakr lbrshim 23 ventures launched after entrepreneurial education employment and income effects william c. wedley robert g. wyckham 41 ethical compatibility of small business owners/entrepreneurs and student consultants hamet stephenson sharon galbraith 59 empirical implications for small business drug policies dillard b.tinsley donald r. curtis geralyn mcclure franklin special section 71 minority entrepreneurs and the future of the american economy dayton j. watkins, acting administrator, u.s. small business administration 73 basic skills deficiencies at work: perceptions of small and large employers geralyn mcclure franklin 89 letters to the editor siixmãpe special section the role of the small business administration kn economic resurgence~ erskine b. bowles u.s. small business administration from his first day in office, president clinton has indicated that he expects this nation's economic resurgence to begin with small business. in this regard, the president has developed a ctun prehensive agenda for america's entrepreneurs, and he expects the small business administration (sba, the agency) to phy an instrumental role in promoting that agenda. the president has set four priorities for the agency. first, he has asked us to work with him to end the credit crunch that is hampering so many small business owners. to help effect this, he has been very supportive of our loan guarantee programs that provide banks with the incentive to do business with small firms. today, a portfolio of more than 176,000 loans —wonh roughly $25 billion —maktu us the largest single financial backer of u. s. businesses. guaranteed hans reached a record volume of $5.6 billion in fiscal year 1992, and we are likely to surpass that in 1993 and 1994. another source of credit for small companies can be found with the small business investment company(sbic) pmgram, the government's only venturecapital initiative. there are 189 sbics in operation across the country, with $2.6 billion in total capital resources. we also have an innovative microloan program that reaches out to individuals who have promising ideas and need relatively small amounts of money to get started. we fund intermediaries who then provide capital in the average amount of $7500. the microloan program fills an imponant niche, and in one year has managed to pump more than $6 million into local economies. numerous jobs have been created, with roughly 38 percent of the dollars loaned going to start-up businesses. as you can see, we are working on a number of different fronts to increase funding for small firms. 'ihat is our first priority. second, we are leading the charge against unnecessary paperwork and reguhtions that inhibit growth and productivity in small businesses. 4the admint'strator of the small business administration was invited to sharc his views regarding the role of the sba. invited articles are not reviewed by the jsbs editorial advisory board. 41 one of the reasons we are so intent on streamlining government is the deuimental effect shoddy fedeml operations have on the private sector. studies estimate that federal regulation costs the private sector anywhere fmm $67 billion to $510 billion annually. according to the u. s. chamber of commerce, small businesses nationwide had to dedicate 1.2billion hours just to fill out federal tax forms in 1992, at a cost of $60 billion. we are determined to help alleviate this burden. tbe office of advocacy within the sba is responsible for monitoring the regulatory flexibility act, a statute that requires every federal agency to review its new regulations and ensure that they do not inhibit the operations of small companies. we plan to be very diligent in our duties. the third priority set by the president involves restructuring, reorganizing, and minvigorating the sba so that it operates in a more efficient and effective manner. we are reinventing our own agency..something we call "entrepreneurial sba." as pan of this reinvention, we are moving resources to[he field —to our regional and district offices —where our customers are located. we are also combining departments that should be working more cooperatively and we will be looking to consolidate functions, to ensure efficient and effective program delivery. but all of the reorganizing and restructuring would be in vain without a reinvigorated organization. after four years of very public efforts to abolish the agency and eight more years of benign neglect, the sba was demoralized. that is changing with the mnewed dedication to the mission of the sba within this administration. indee4 the past year has given the agency anew lease on life. ibe president's commitment to small business and his clear message that the sba will serve as his voice for america's small bus'nesses are providing the impetus for hope and change, not only within the sba, but within the small business community. finally, the president wants the sba to be his eyes and ears in the small business community. one of the ways we have accomplished this is through a series of town hall meetings conducted across the country where we solicited ideas and suggestions of small business owners, bankers, and community leaders. as a result of what we heard at the town hall meetings, we have already instiwted a number of changes at the sba to help eliminate burdensome red tape. for example, we are currently test marketing a one-page loan application form. i will soon be reporting on the findings of the town hall meetings directly to the president, thereby ensuring that small business nas a seat at the economic table in the clinton administration. i hope it is clear that we have a president who is eager to work with the small business community. and i can promise you that i plan to make the sba the staunchest ally for small business interests in washington. 42 http://www.smallbusinessinstitute.biz w w w. j s b s . o rg a b s t r a c t keywords: journal of small business strategy 2020, vol. 30, no. 03, 86-101 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2020 small business institute® introduction concordia university wisconsin, 12800 north lake shore drive, mequon, wi 53097, usa, tiffany.strom@cuw.edu authentic leadership and relational power increasing employee performance: a systematic review of “leadership and power” as a positive dyadic relationship authentic leadership, leadership, power, relational power, employee performance, employee engagement apa citation information: strom, dba, t. (2020). authentic leadership and relational power increasing employee performance: a systematic review of “leadership and power” as a positive dyadic relationship. journal of small business strategy, 30(3), 86-101. in the practitioner space, a relationship exists between leaders and managers in a small firm that can be described as non-verbal trust with directional support and synergy—a relationship that is simply informal and respectful (kelliher & reinl, 2009; mayer et al., 1995). therefore, when a manager delegates tasks, the execution of the delegation is not seen as a negative but as a positive and empowers the employee to accomplish the task (haugh & mckee, 2004). tasks are completed efficiently and effectively without resistance in the small firm (ebben & johnson, 2005), versus in a large firm where bureaucratic processes slow task completion (adler & borys, 1996; caloghirou et al., 2004). to examine the positive leader-to-manager-to-employee relationship in a small firm, leadership and power with respect to employee performance is reviewed. evidence is provided that positive leadership and power as a relationship is a tenable concept. in the literature, leadership as a concept is seen as complex and is investigated frequently through consequential leader behavior (avolio & gardner, 2005; meindl & ehrlich, 1987). hoogervorst et al. (2012) presented the idea that more research is required in leadership with leadership as an antecedent condition in which the leader behaves in a certain tense to establish an enhanced outcome in employee behavior. the intention of this present study was to view leadership as an antecedent condition and consider leadership in conjunction with power to apprise the practitioner relationship between the leader and manager in a small firm. the leader and the manager often work together as equals in a small firm to create a balance of organizational goals and personal goals, thus creating a “power-with” relationship (barnard, 1939). the unspoken power within the dyadic relationship allows the manager to have positive power to not only empower the employees but to execute daily goals and functions within the organization. this type of power creates an organizational perception of fairness (rhoades & eisenberger, 2002) or one of procedural justice and organizational commitment (chiaburu et al., 2013), both of which can affect employee performance (van de voorde et al., 2012). given the problem of employee performance in small the objective of this study was to explore the relationship of positive leadership and positive power on increasing employee performance in the context of small firms using authentic leadership and relational power as theoretical lenses. an evidence-informed review was provided to examine the proposed objective and a systematic literature review was conducted to determine the priori model, and to present an emergent model after a synthesis of the findings. the qualitative and quantitative studies revealed four thematic topics to represent the relationship: (1) employee engagement relies on perception and trust; (2) positive characteristics of a leader need to exist in order to enhance the positive use of power; (3) positive leadership and power relationship exists in the short term through empowerment; and (4) positive leadership and power together increase the long-term outcomes of organizational identification, organizational commitment, and firm performance. this research was intended to investigate and synthesize a small firm relationship with the leader, manager, and employees as described herein, and to provide a new lens for authentic leadership and relational power by adding positivity as a part of the moral framework. tiffany strom, dba http://www.smallbusinessinstitute.biz http://www.jsbs.org 87 t. strom, dba journal of small business strategy / vol. 30, no. 3 (2020) / 86-101 organizations (blomme et al., 2015; caloghirou et al., 2004; williams et al., 2018), and in particular the problem of longterm engagement of employees (brown, 2011), there is a need to assess the relationship between the leader and the manager in order to enhance outcomes. the relationship is unique. the leader empowers the manager, and the manager uses the relationship to empower employees (aragón-correa et al., 2008). this study reports findings of the literature by examining the link between positive leadership and power, and employee performance. this study presents the relationship as inseparable, and therefore the research question reviews the concepts of leadership and power as inseparable; as being one concept. this synonymous relationship that exists in practice has not been previously examined. a comprehensive study to explore the gap was completed through a configurative systematic review. the following research question, based on the leader manager relationship, was postulated for this systematic review: what are the positive factors of leadership and power that affect employee performance in a small firm? this paper begins with an overview of the theoretical framework of authentic leadership and relational power, followed by conceptual model development. next, a summary of the methodology explaining the search criteria, analysis, and quality assessment of reviewed studies is provided. finally, the paper presents themes and synthesis of findings, along with implications for practice and research, limitations, and future studies. theoretical framework defining positive leadership positive leadership theories were considered when conducting the review of the proposed relationship. the visionary theories of transactional and transformational leadership were closely related to the objective of the study (matzler et al., 2008; rafferty & griffin, 2004; stone et al., 2004), more so than the emotional leadership, trait / behavioral, or cultural theories (turner & muller, 2005). however, these theories did not represent the positive relationship between the leader and the manager and organizational performance. the two theories that support the proposed unique relationship are leader-member exchange and authentic leadership. leader-member exchange (lmx) focuses on the relationship between the leader and followers, but not the influence of the manager. leader-member exchange measures only the quality of the relationship. the manager is not considered different than an employee; the manager is considered a follower as well (gerstner & day, 1997; hooper & martin, 2008). in addition, schriesheim et al. (1999) investigated 137 studies and summarized that there are theory, measurement, and analytic inconsistencies with lmx theory. gerstner and day (1997, p. 827) also noted that “there is unresolved ambiguity about the nature of the construct, its measurements, and relationship with other variables.” therefore, in this study the proposed lens of authentic leadership is used versus lmx theory. barnard’s (1939) study of the responsibility of leadership introduces the notion of the relationship between the operation of the business (duties of the small business manager and leader) while remaining thoughtful in their pursuit of individual excellence (behaving and growing as leaders and empowering others). this is the concept of power-with—a form of collaboration within the organization and empowerment of the individual. the relationship of equality barnard presents at the conceptual level provides a definition for the relationship between the leader and manager that needs to exist for the organization to function. in addition to the power-with relationship, an organization needs a leader who can promote-self and self-regulate (novicevic et al., 2006) and a leader that is confident and knowledgeable has the ability to create a performance organization with less conflict (zigarmi et al., 2015). in this study, the focus is on the balance of leadership from the leader and power of the manager as a positive relationship to increase employee performance. gardner’s et al. (2005, p. 6) framework depicts an organizational climate with the authentic leader and the authentic follower with positivity. authentic leadership represents the first part of the theoretical frame and develops the positivity of the proposed relationship. authentic leadership review authentic leadership is defined as having a leader who builds credibility through honest relationships with followers who value their ideas, guidance, and astute ethics. authentic leaders are positive individuals with a deep sense of self who develop openness in the organization (jones & crompton, 2009). the authentic leadership theory consists of five components that influence how the leader behaves to enhance outcomes of the organization: “self-awareness, moral perspective, balanced processing, transparency, authentic behavior” (avolio & gardner, 2005, p. 323). the literature represents not only the characteristics of the authentic leader (sparrowe, 2005; walumba et al., 2008), but also the increased positive environment of the organization through employee perception (gardner et al., 2011). salovaara and bathurst (2018) stated the components of authentic leadership increase the probability of employee engagement. authentic leadership is a link to empower88 t. strom, dba journal of small business strategy / vol. 30, no. 3 (2020) / 86-101 ment, power represented in a relationship, and the ability to guide others to accomplish tasks without coercion (avolio & gardner, 2005). therefore, this study defines authentic leadership as using one’s moral compass to make ethical choices while supporting self and organizational responsibility (gardner et al., 2011). authentic leaders put positive ethics and positive psychological capacity first, which fosters a positive self-image and positive outcomes. authentic leadership is the first antecedent condition to the positive relationship between the authentic leader and the manager, which is a dyadic relationship. the positivity of the authentic leadership translates to the non-verbal empowerment of the manager as well. the relationship allows the manager to use positive power to execute operations (chong et al., 2013) and empower employees. the positivity of power of the manager is represented by relational power in this study. positive power is the second antecedent condition to increasing firm performance. defining positive power positive power theories were also considered for this study. however, power is heavily represented in the literature as a structural phenomenon and as a basis to fulfill needs in a self-interested manner (pfeffer, 1994). for example, the person who controls the resources has the “power” (kanter, 1977). power can be defined as structural power, or a force that shapes values and beliefs in another person. a seminal study by french et al. (1959) presented structural power in the following five terms: a) referent power is based on influence and trust, b) legitimate power is authority based on position, c) expert power is influence based on knowledge, d) coercive power is the ability to punish or harm, e) reward power is the ability to reward positive outcomes. alternately, elias (2008) and zhao et al., (2016) reframes french’s et al. 1959 structural power into categories of hard or soft power, and positional or personal. soft power is defined as persuasive power. french’s et al. 1959 referent and expert power are described as soft power. hard power is defined as coercive power. french and ravens legitimate and coercive are considered hard power. positional power is defined as the authority of one’s position. legitimate, reward, and coercive are positional power. personal power is defined as action towards one’s goals. referent and expert are considered personal power. reviewing power in the literature as structural power has revealed minimal positive associations with leadership. these categories of structural power do not represent power as a positive relationship or the transaction exchange, but rather as a force that is not balanced, one person in control of another’s actions. power dependence is a concept from emerson (1962) which states that power is a characteristic of the relationship. in this study, the manager has positive power because of the relationship. in a small firm, the relationship is close, informal, trusting, and dyadic. therefore, it is crucial to understanding the positivity of the leader through authentic leadership and positivity of the manager through power dependence. each concept needs to be positive and relationship focused. in a way that is analogous to the positive friction when tires interact with road (follett et al., 1942), there is positive power when an established positive relationship exists between a leader and a manager. relational power is the outcome of power dependence. relational power represents the second part of the theoretical frame and positivity of power from the manager in the relationship. relational power review emerson (1962, 1976) emerged with the seminal view on power as a relationship through a concept of power dependence. power dependence focuses on the exchange of feelings or the relationship not on a person’s traits or skills. in addition, emerson (1962) establishes relational power as a construct. in this study, the positive concept of power is defined as relational power. relational power is used to define the manager’s position in the relationship and connection with the organization and employees. relational power is based on the power of relationships and the exchange between leaders and subordinates (zhao et al., 2016). yukl’s and falbe’s (1991) described the concept of relational power as relying on the power of relationships between the leader and the employee (any type of employee) that can be disseminated through communication and interaction. yukl and falbe also stated that relational power can promote goal attainment. chong et al. (2013) confirmed yukl and fable’s (1991) and emerson’s (1962) studies by demonstrating relational power as a construct. lastly, “unless the two parties are willing to make the effort to develop a good relationship, it will never become power” (chong et al., 2013, p. 68). “relational power by itself is neutral. when it is used for a good purpose it is more likely to generate positive results…” (chong et al., 2013, p. 68). the theoretical frame of authentic leadership and relational power is positive and represents the relationship of the research question. figure 1 illustrates the conceptual authentic leadership and relational power model with proposed positive “leadership and power” relationship. adapted from gardner et al. (2005) and chang et al. (2013). 89 t. strom, dba journal of small business strategy / vol. 30, no. 3 (2020) / 86-101 method the objective of this study was to conduct an objective literature search, analysis, and review of studies in the areas of leadership and power, and employee performance. since the studies’ data sets are heterogeneous, the researcher used the systematic literature review (slr), a qualitative method (gough, 2007). the research question was an unspecific, open-ended question, a configurative approach that aligns with a search of literature. the slr provides a summary of current existing literature related to the research question regarding finding positive factors of leadership and power that enhance employee performance. the slr is used to consolidate the most relevant information to make decisions and is now being adopted more frequently in the social sciences. an slr in management provides a comprehensive review on a specific area and critically appraises the literature (gough et al., 2017). it also follows the scientific approach, which includes: (a) defining a context, interventions, mechanisms, and outcomes (cimo) question (briner et al., 2009); (b) locating relevant work; (c) documenting the search criteria; (d) reviewing each study for applicability to the cimo question; (e) synthesizing or summarizing the evidence; and (f) providing recommendations or solutions. completing a synthesis of primary studies using an slr process minimizes bias and produces more reliable findings that help practitioners make better-informed decisions (kowalczyk & truluck, 2013). this approach is rigorous and transparent. rigor is the quality of the process used to support the research question. “rigorous research is usually defined as research that meets the standards of ‘scientific’ research” (myers, 2013, p. 12). transparency is how the process is presented to the intended audience. data transparency provides evidence to support the research questions, analytic transparency provides access to information from the data analysis, and production transparency provides access to information in regards to the methods (miguel et al., 2014). the slr process is a transparent approach that is open for critique and provides for a consistent appraisal of suitability and technical qualities for each study within the review (myers, 2013). the slr has seven steps as summarized throughout this methods section. the slr allows the researcher to find and evaluate evidence applicable to the practitioner, and then present the information in a useable format from which practitioners can make decisions based on quality information (barends & rousseau, 2018). the approach of this slr required searches relevant to studies that represented “power and leadership” as one concept and with performance as an outcome. next discussed are search method, inclusion and exclusion criteria, the literature sample, and data analysis. search methods studies for this review were identified through database searches. the databases searched were abi/inform complete, emerald insight, jstor, and proquest from the author’s university’s library system. the content provider was business source complete. the searches were completed in a systematic manner in the order of the databases as listed. all resulting studies were restricted to english figure 1. initial framework with theoretical lens 90 t. strom, dba journal of small business strategy / vol. 30, no. 3 (2020) / 86-101 peer-reviewed journals. inclusion and exclusion criteria three search strings related to the research question were used in the database searches. the boolean search included the following search terms and strings: positive (“leader*” and “power”) or “leader* and power”, leader* and power and “small firm”, “leader* and power” and sme performance or employee performance or engagement. the initial search produced 1,570 articles. a second screening was required to meet the following inclusion requirements: (a) the article was written in english, (b) publication date between 2003–2018, (c) it contained leadership and power as a theme, (d) and it investigated leadership or power in relation to firm performance. articles were excluded that did not meet the four requirements. removal of duplicates from the original data set resulted in the exclusion of 1197 studies. abstract evaluation of the remaining 373 articles were conducted to determine the final sample of scholarly peer-review journals. the remaining 373 articles were assessed for applicability to the research question, which led to the exclusion of another 358. thus, the final number of articles included in the final quality assessment review was 15. extracting data data analysis the remaining 15 articles went through a quality assessment. the weight of evidence (woe) framework was the method used to determine the quality of the retrieved articles (gough, 2007). the woe consists of four parameters: woe (a) reviews the quality of the method of the study; woe (b) reviews the method’s relevance to the author’s proposed research question; woe (c) reviews the relevance of the evidence to the research question; and woe (d) is an overall rating of the evidence. each parameter was given a rating as follows: low equal to one, medium equal to two, and high equal to three. the first three parameters woe (a, b, c) were assigned a low, medium, or high rating and the fourth parameter woe (d) was an average of the three. the journal articles for this study required an overall rating of medium or high to be included. see appendix a for detailed quality rating of the journal articles. the final quality review process resulted in elimination of one article because rigor was poor and study design was unclear, so 14 remained for synthesis. data analysis coding the research question included “leadership and power” and employee performance. a thematic synthesis was chosen for these 14 articles because of the research question (agee, 2009). thematic synthesis is the process of bringing together findings from various types of research (gough et al., 2017), in this case a qualitative literature review, qualitative conceptual studies, quantitative papers using secondary survey information, mixed-methods designs, quantitative experiments, and quantitative surveys. using the data analytics package, quirkos, firstand second-cycle coding was completed. the first cycle of coding consisted of free line-by-line coding of the results and discussion sections into themes (thomas & harden, 2008). the first cycle of coding generated 134 codes, 20 subcodes, and 3 descriptive themes. the second cycle of coding was completed to reduce the number of codes and eliminate repetition. the second cycle generated 127 codes, 18 subcodes, and 4 analytic themes (see appendix b summary table). the changes in the canvas were not in the number of codes, but in reducing and reorganizing the parent and grandparent codes to generate analytic themes. analytic themes synthesize the patterns to provide meaningful informed interpretations of the literature as a body of knowledge. results of coding after the inclusion and exclusion criteria were applied and duplicates removed, the sample size included 14 articles that were selected based on the transparency and rigor of the study (wharton, 2015). of the 14 articles, 10 were quantitative and 4 were qualitative. each included and excluded study was recorded in a prisma flow diagram (see appendix c). during first-cycle coding, descriptive themes across the 14 studies included positive leadership characteristics, positive power characteristics, and potential ideas to enhance employee performance. during second-cycle coding, analytic themes established the basis for the research question, employee engagement, positive characteristics of leadership and power together as a concept, and long-term outcomes from the positive leadership and power relationship summarizing the strength of the relationship postulated in the research question. the next sections present the results of the descriptive themes and analytic themes or synthesis of the themes as integrated knowledge. 91 t. strom, dba journal of small business strategy / vol. 30, no. 3 (2020) / 86-101 results descriptive themes how was positive “leadership and power” represented? leadership. the research question pertained to a positive “leadership-and-power” relationship. some 64% of the studies represented positive leadership-and-power. positive leadership at the individual level was represented in studies by ahn et al. (2018), he et al. (2014), and sharma and tarp (2018). these scholars discussed the common characteristics of a positive leader: “core self-evaluation, locus of control, self-efficacy, and emotional stability” (ahn et al., 2018, p. 457). the studies asserted that these traits are synonymous with the leader being ethical and moral. the authors also discussed the concept of procedural justice. procedural justice is defined as the amount of perceived fairness, as fairness is an essential trait in an ethical leader. the final leadership article by hoogervorst et al. (2012) added self-sacrifice as a characteristic to a positive leader’s profile, which creates a more positive environment. in addition, this article supports the need for more research on the antecedents of leadership, rather than the negative outcomes of leader behavior. he et al. 2014 also suggested that supervisors are an integral partner with employees and management. power. positive power was not prominent in the studies, but was represented in threads in five articles. the first article discussed power as status in learning organizations (bunderson & reagans, 2011). the authors indicated higher status levels of power lowers employee participation and that employees are more likely to follow directions without providing feedback. in a second article, foulk et al. (2018) discussed power as control over scarce resources, or as psychological power within an organization. this type of power creates a negative perception for the employee. high levels of psychological power decrease learning outcomes. however, the third article by hildreth and anderson (2016) revealed that power within the organization can lead to higher task completion and greater creativity if the person holding power is not a high-status person (e.g., is not the president of the organization). therefore, a positive power balance can be more easily achieved at lower levels of management. positive power emerged slightly in the fourth study by zigarmi et al. (2015), who showed soft power has a significant positive effect. soft power is similar to relational power; soft power uses a less authoritarian style to shape the perceptions of the organization’s fairness. the last study included relational power as “empowering, participative, and democratic” (zhao et al., 2016, p. 519). the purpose of zhoa et al.’s 2016 study was to establish relational power as a third type of power for an organization. the researchers conducted a factor analysis and found that relational power has a significant relationship with organizational commitment. both of these studies parallel authentic leadership because the studies show positive psychological capacity or positive power empowers employees, and in turn, increases employee performance and organizational commitment. therefore, these studies provide support not only for positive power but also for the use of the authentic leadership framework. these nine studies begin to establish that a positive leader, a positive manager, and positivity as a concept assists in development of empowerment within the organization. in addition, these studies define the type of moral profile and characteristics required for a leader or manager to enhance employee performance. as a result, good outcomes can be expected with balance and positivity developed within the organization, and the remaining five studies review these outcomes. how was employee performance represented? in this section, the proposed research question outcomes of positive factors of leadership and power affecting employee performance are reviewed across five studies. about 36 % of articles represented employee performance. the studies presented outcomes related to the concepts of accountability, work engagement, and team performance. rus et al. (2012) stated that if power is left unmonitored, resources will be diverted for improper purposes. in addition, the leader will display self-serving behaviors unless accountability is a factor. the results in this study show a significant relationship between accountability and sense of power. therefore, if the leader is accountable, there is a likelihood of positive followers, and in turn, engagement and organizational commitment. two studies reviewed work engagement. blomme et al. (2015) reviewed how leadership affects work engagement. work engagement is defined as being involved in the work and dedicated. engaged employees are able to direct their own career and work environment. work engagement is a positive motivational concept. to increase work engagement, positive outcomes from personal optimism and self-efficacy on the employees’ part need to be recognized. blomme et al. 2015 also noted managers have a critical role in work engagement because of the tasks that the manager directs. in addition, ahmad and gao (2018) showed a link between work engagement and ethical leadership, and a re92 t. strom, dba journal of small business strategy / vol. 30, no. 3 (2020) / 86-101 lationship between work engagement, ethical leadership, and empowerment. these authors asserted that leadership that empowers employees creates work engagement. the next two studies support options to increase team and firm performance. first, tost et al. (2013) confirmed earlier studies stating that formal power decreases task completion. in addition, they contributed a model that hypothesizes team communication and openness will increase team performance. this is the first study that considered communication as a factor for improvement. second, westhead and howorth (2006) was the only study that provided context for the small firm. the study contributes to firm performance because the researchers hypothesized that private firms with more non-family shareholders will increase firm performance, and the hypothesis was supported. the results indicate that management who were non-family members contributed to the increase in performance. the management team is an influencing factor in regard to performance in small firms. these two studies also connect the moral compass of the leader directly with the manager and employee, and therefore the increase of employee performance. the descriptive themes result in the emerging framework. shown in figure 2 emergent framework demonstrating increased employee performance through the lens of the positive relationship “leadership and power,” short-term engagement of empowerment and long-term engagement of organizational identification, organizational commitment, and firm performance. from the emergent framework, analytic themes are developed. the analytic themes are discussed in the next section. figure 2. emergent framework results of synthesis the link between positive “leadership and power” and employee performance fourteen studies explored positive “leadership and power” as a single concept with an effect on employee performance. there is support of positivity that emerges by reviewing the combination of leadership and power together as one concept. the outcomes from this study in summary are short-term engagement is represented through empowerment; and long-term engagement is represented through organizational identification, organizational commitment, and firm performance. the postulated research question was supported: “what are the positive factors of leadership and power that affect employee performance in small firms? four themes support the claim—employee engagement, positive leadership and power dynamics, empowerment with increased organizational identification and organizational commitment, and positive leadership and power as a simultaneous positive relationship enhances firm performance. employee engagement increases with positive perceptions. two studies explored employee engagement as an output. employee engagement is based not only on the characteristics of vigor and moral integrity but perceptions as well (blomme et al., 2015). positive perceptions reduce cynicism and increase trust (chiaburu et al., 2013; he et al., 2014). the absence of procedural justice leads employees to develop negative attitudes toward the organization and decrease organizational identification (chiaburu et al., 2013; clay-warner et al., 2005). negative perceptions affect turnover and produce strain with93 t. strom, dba journal of small business strategy / vol. 30, no. 3 (2020) / 86-101 in the organization (chiaburu et al., 2013). therefore, positive perceptions of individuals are key to employee performance (andersson, 1996). these studies confirm that the variables trust and attitudes of leaders and managers are needed to develop long-term engagement in the organization. positive leadership characteristics and power dynamics affect organizational commitment. seven studies found certain characteristics are essential to develop engagement (employee performance) and use power-with (authentic leadership) and power dependence (relational power) to achieve a moral balance. a positive leader in the leadership and power context is a leader who has the following characteristics: emotional stability (ahn et al., 2018; sharma & tarp, 2018 ), open communication, agreeableness (bunderson & reagans, 2011), self-sacrifice (hoogervorst et al., 2012), and accountability (rus et al., 2012). to enhance the positive relationship, employees (any employee) must have certain characteristics as well, including self-efficacy, self-esteem, positive perceptions of fairness or procedural justice, and positive organizational commitment (ahn et al., 2018). employee performance is related to the integration of these leader and employee characteristics (zigarmi et al., 2015). also, for a leader to have positivity, a decrease in structural and hard or formal power and good communication or feedback is required. the rigidity of formal power decreases trust and organizational commitment (foulk et al., 2018). the leader must communicate well (tost et al., 2013) and provide the perception of a less-rigid organizational power structure for employee performance to increase, or communication and feedback may need to be developed through the use of lower-tier power status managers because of perceived high power status of high-level individuals within the organization (bunderson & regans, 2011; hildreth & anderson, 2016; rus et al., 2012). empowerment, organizational identification, and organizational commitment increase with positive leader and positive manager. five studies attempted to identify what facets provide empowerment to the employee and increase employee engagement. a positive leader incorporates a positive manager with relational power to create authentic followers (westhead & howorth, 2006). using leadership and power as a relationship increases the probability of employee engagement and ethical followers (zhao et al., 2016). as the leader creates trust and a personal link to the employee through a relationship, the employee will be more motivated to perform for the leader. as the relationship strengthens, organizational identification increases. if organizational identification increases, the probability of organizational commitment will increase (blomme et al., 2015). organizational commitment is a tertiary outcome. if the relationship is fair, ethical, and trustworthy, empowerment will occur as an invisible relationship (ahmad & gao, 2018; he et al., 2014). empowerment is a short-term outcome of employee performance, while organizational identification and organizational commitment are long-term outcomes. positive leadership, positive power based on the dyadic relationship. leadership and power are overreaching or excessive in the literature (fleming & spicer, 2014), but by combining the concepts together to create focus in this slr, a different outcome emerges that a positive relationship can exist as an important development to increase employee performance. in this thematic synthesis positive leadership and power with employee performance exist together (salovaara & bathurst, 2018; zigarmi et al., 2015) and leadership and power empowers an individual through the use of relationships with employees (gardner et al., 2011; zhao et al., 2016). salovaara & bathurst (2018, p. 182) state new concepts in leadership should be based on “relationships – rather than authority, superiority, or dominance…”, and zhao et al. (2016) states power should come from personal relationships with others. positive relationships are significant to the functions of an organization (andersson & tell, 2009). the four themes show an interaction of traits and organizational factors that have the potential to increase employee engagement and long-term firm performance. the themes also confirm that positive leadership-power moral relationship balance is still a bit complex to define and enact within an organization (see figure 3 for the strength of support for the research question). weight of evidence (woe) depicts the strength of the research question “what are the positive factors of combining leadership and power on employee performance in a small firm?” based on the evidence of 14 articles. the evidence from the slr is moderate; there are five articles in the moderate by strong categories that support the proposed relationship. implications for practice first, although this synthesis is not all encompassing, it helps us understand in practice that perception of positivity between the leader and manager is a great influence and can be a great tool (westhead & howorth, 2006). it also helps us understand our positions within the organization greatly affect that perception. creating positive perceptions either 94 t. strom, dba journal of small business strategy / vol. 30, no. 3 (2020) / 86-101 through a display of characteristics or actions can increase employee engagement (payne et al., 2005). second, if the leader is successful and establishes a genuine relationship, the manager and employee will be empowered and have more organizational identification and organizational commitment. organizational identification is when the employee and organization have the same goals and values, power-with. employees perception of fairness through the leader-to-manger-to-employee relationship can be motivational. employee motivation can be key to increasing employee engagement (he et al., 2014). therefore, leaders must be sincere, engaged, and provide for open communication for a relationship to develop. once a relationship is established positivity and empowerment can affect performance. third, leaders with power must not only be trained to increase individualized motivation, but also be aware of different sources of power that may cause issues in the organization. leaders need to be trained on which types of power can cause problems internally and adjust their presentation of perceptions to employees; for example, be positive and less rigid versus stern and negative. leaders of organizations must realize hard power directly affects employee perceptions, and that perceptions are integral to how the employee behaves (tost et al., 2013). positive ethical leaders create ethical followers (avolio et al. 1999; avolio & gardner, 2005). leadership should be ethical with high moral integration, and give followers control and internal motivation to create power-balance within the organization. in summary, leadership and power in a non-dominant context can increase task persistence and creativity. leaders can have purposeful control by creating valued relationships and positive perceptions for managers and employees, which can affect employee performance. implications for research in examining the literature, it is clear that there is a need for further research. first, additional interdisciplinary research with leadership and power theory is needed to reduce silos (alvesson & sandberg, 2014). second, in order to examine the true effects of leadership and power in conjunction with employee engagement, additional research is needed that includes more employee engagement measures over time and how middle management affects performance outcomes. in addition, to further generalize this research examining dyadic relationships in other contexts is necessary, and interchanging relationship positivity with the concept of guanxi, (a chinese concept meaning a strong relationship with trust), to increase cultural depth. there is a need for better-designed research with greater sample sizes and additional theory integration. in addition, leadership and power were searched as one concept for the proposed relationship. a separate examination could provide another lens for employee engagement as this study did not review barriers with these concepts as stand-alone concepts. limitations although this slr was completed in a methodical manner, limitations exist in that it is not an exhaustive search of the literature. the research was limited by the fact it was not subjected to replication. in addition, the search was limited to scholarly peer-reviewed sources, in english, and in the available university library system. gray litera figure 3. weight of evidence (woe) 95 t. strom, dba journal of small business strategy / vol. 30, no. 3 (2020) / 86-101 ture was not included. other languages and gray literature may provide additional support for this study. also, the slr methodology originated in the medical field; therefore, quality appraisal tools are limited for studies in management, which are cross-sectional. synthesis of qualitative and quantitative data may improve with better quality tools. the search criteria that included “small firm” generated negligible results. in order to increase the reliability and transparency of this slr, small firm was eliminated from the search criteria to obtain more search results. however, not restricting the search to small firms allowed for more generalizable search results that can be applied to large or small firms. future studies this study adds insight to the potential of combining leadership and power as a positive concept. this concept will support future potential quantitative or qualitative studies. since there are many established measuring tools for each area, new surveys can be developed to gain a better understanding of the relationship. for example, one might recommend using walumba et al.’s (2008) authentic leadership alq measures with chong et al.’s (2013) or yukl and falbe’s (1991) relational power measures. finally, this study can assist in the continued development of interdisciplinary research. conclusion the overall contributions of this study include providing another moral relationship lens to review the concept of authentic leadership by adding positive power as an input; providing support to use positive power as another means to increase employee engagement; depicting and defining a concept that supports and defines the practitioner-proposed positive relationship between the leader, manager, and the employee; and adding to the literature base for positivity with authentic leadership and relational power. completing an slr study of the relationship between positive leadership and power provides evidence that adjusting motivators for organizational identification and organizational commitment can increase employee retention in the long term (mayer et al., 1995). leadership and power can be positive and create a dynamic that is beneficial within the organization. balance of leadership, power, self and balance of the organization goals are key to performance-related outcomes. references adler, p. s., & borys, b. 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(2018) quantitative survey 290 subordinate-supervisor employees in south korea self-verification & social exchanges theory. core self-evaluation, ethical leadership, exchange ideology, job performance keywords. displays a positive relationship between a leader’s self-evaluation & ethical leadership. also ethical leadership is positively related to task performance mediated by exchange ideology. high high high high 3.00000 blomme et al. (2015) qualitative conceptual n/a 8 propositions work engagement, leadership, organizational culture, work-related resources, & organizational performance keywords. provides a view on leadership & which factors are likely to increase employee engagement. also provides a model for future research. medium medium high medium 2.33333 bunderson and reagans (2011) qualitative literature review n/a power, status, & learning organization theory. organizational &group learning, power & status, social hierarchy keywords. upper management has greater influence on stimulating learning if their behavior is presented in a more socialized fashion. high high medium high 2.66667 foulk et al. (2018) quantitative experimental 116 professional & managerial employees enrolled in mba coursework in usa social distance theory. psychological power, abusive leadership, perceived incivility, & leader well-being keywords. leaders that are more amicable are less affected by psychological power. high level of psychological power decreases structural power. high high low medium 2.33333 he et al. (2014) quantitative survey 222 employees financial services in united kingdom procedural justice theory. moral identity, organizational identification, employee engagement & group engagement model. employee engagement is a predictor of job performance. employee engagement occurs when strong personal energy exists. increased engagement in turn increases organizational commitment. high high high high 3.00000 hildreth and anderson (2016) mixed-method survey experiment 174 participants west coast university power theory. group, status, conflict, & creativity. randomly assigned power was better for work performance than individuals with known high-power status. high high medium high 2.66667 hoogervorst et al. (2012) quantitative experiment 411 organizational supervisors study one, 402 undergraduate business students study two social exchange theory. leadership, self-sacrifice, power, inclusion, goals. leaders should promote belongingness to increase followers & acceptance of tasks. high power leaders should also promote a sense of self-sacrifice to increase goal achievement. high high medium high 2.66667 rus et al. (2012) quantitative experiment 82 dutch business students study one, 87 dutch undergraduate student study two, 66 managerial persons united kingdom power theory. leadership, accountability, self-serving behavior. leaders in high power positions must be accountable to their actions to decrease self-serving behaviors within the organization. accountability is the moderator to balance the power relationship between leader & employees. medium medium medium medium 2.00000 sharma and tarp (2018) quantitative survey secondary data 2600 non-state manufacturing enterprises entrepreneurship, smes, firm performance, personality, risk attitudes, vietnam keywords. personality traits affect performance outcomes, risk, locus of control & innovativeness are important to firm performance. medium medium medium medium 2.00000 tost et al. (2013) quantitative simulation 106 undergraduate & mba students study one, 144 students usa study two, 152 students usa study three power theory. power hierarchies, formal power, team communication, authority keywords. formal power decreases firm performance. increased open communication can moderate this relationship. power hierarchies affect team performance. high high medium high 2.66667 westhead and howorth (2006) mixed methods conceptual & survey 905 independent private companies agency theory. the management team is related to firm performance. private firms with family members as the management team does not enhance performance. medium medium medium medium 2.00000 zhao et al. (2016) mixed methods literature review & structured questionnaire 240 mba & emba students personal power theory. leader power, relational power, measurement scale development, direct relational power, indirect relational power keywords. relational power is positive & independent from position & personal power. relational power increases with open communication. relational power is likely to increase organizational performance & goals attainment. high high high high 3.00000 zigarmi et al. (2015) quantitative survey secondary data 651 members of a professional association social cognitive theory. employee affect, appraisal model, power, work intentions keywords. expert power, referent power & reward power have a positive effect on the organization overall based on the survey. hard power shapes employees perceptions. employee perceptions may be linked to organizational support. high high high high 3.00000 100 t. strom, dba journal of small business strategy / vol. 30, no. 3 (2020) / 86-101 appendix b quirkos coding and themes codes outcome theme work engagement procedural justice moral integrity organizational identification social exchange increased employee empowerment. employee empowerment increases with positivity of the leader and manager. self-efficacy locus of control perception increased employee engagement. employee engagement increases with positive perceptions of the leader and manager relationship. fairness emotional stability communications relational power power balance positive leadership characteristics. positive leadership characteristics and power dynamics affect organizational commitment. expert power informational power relational power personal power power distance soft power positive power characteristics. positive leadership characteristics and power dynamics affect organizational commitment. group performance procedural justice increases organizational commitment. firm performance through empowerment, organizational identification, and organizational commitment increases with a positive leader and positive manager. middle management empowerment power hierarchies influences firm performance. firm performance through empowerment, organizational identification, and organizational commitment increases with a positive leader and positive manager. 101 t. strom, dba journal of small business strategy / vol. 30, no. 3 (2020) / 86-101 appendix c prisma flow diagram prisma diagram. reprinted from prisma flow diagram published by www.prismastatement. org, 2009. retrieved from http://prismastatement.org/prismastatement/flowdiagram.aspx, prisma statement (2009). http://prismastatement.org/prismastatement/flowdiagram.aspx 51 organizational efficacy of small and medium-sized suppliers: the role of information quality and continuous quality improvement michael l. harris east carolina university harrismi@ecu.edu shanan g. gibson east carolina university gibsons@ecu.edu william c. mcdowell east carolina university mcdowellw@ecu.edu leo r. simpson seattle university simpsonl@seattleu.edu abstract the role of information quality and continuous quality improvement was analyzed in regards to the organizational efficacy of small and medium-sized suppliers. it was anticipated that both variables would have positive relationships with organizational efficacy. results supported these hypotheses and demonstrate the importance of firms controlling the flow of quality information and emphasizing continuous quality improvement in order to strengthen organizational efficacy. given the significant impact of efficacy on individual and group performance and the relationships confirmed as part of the current study, future research is called for such that we might better understand the qualities that characterize the successful supply chain relationships for smes. s trateg y journal of small business journal of small business strategy vol. 22, no. 2 52 introduction the success of small and medium-sized businesses (smes) in supply chain management is often dependent on the development of strategic relationships that allow partners to gain a competitive advantage. however, if smes are to be successful in partnering with larger firms they must develop a strategic approach to supply chain management (beekman & robinson, 2004). these firms must adopt practices that allow them to be viewed as reliable partners capable of creating mutually beneficial relationships, and not just short-term suppliers that are easily replaced. in addition, smes must believe themselves to be capable, authentic partners in the interorganizational relationship if they are to realize their potential. some of the potential obstacles that small suppliers must overcome include limited information processing capabilities, resource constraints, and a greater dependency on a smaller customer base (morrissey & pittaway, 2006). however, in a more positive light these perceived limitations can allow smes to invest in strategic relationships with key customers and emphasize factors such as response times and customer service (gélinas & bigras, 2004). these more intimate and personalized relationships can serve as a competitive advantage in a highly complex and competitive business environment. smes serve as important suppliers for many larger organizations and additional research is needed to better understand these potential dynamic relationships. the purpose of the current study is to examine the role of information quality and continuous quality improvement in regards to the organizational efficacy of the small supplier firms. a comprehensive understanding of the relationship among these variables will provide insight into the buyer-supplier relationship in the small business arena. this knowledge can be used to enhance the strategic business practices of smes and help them develop partnerships that are more mutually beneficial. literature review past research has demonstrated the importance of supply chain management as a strategic competency; however, there has been a call for a greater focus on its impact on small businesses (gélinas & bigras, 2004; nelson & ratliff, 2005; morrissey & pittaway, 2006; redondo & fierro, 2007). whereas large companies generally have a formal logistics function, small businesses often lack such an organized system and rely instead on the personal skills of the owners and/or managers (quayle, 2000). many business plans do not adequately address the importance of supply chain management; in fact it is not until a business has reached approximately 26 to 50 employees that someone is typically dedicated to managing supplier relationships (morrissey & pittaway, 2006). in regards to supply chain management, small businesses frequently rely on a limited processing system and a more informal managerial style and decision making process (matlay, 1999). this can cause a situation where these smaller suppliers face intense price pressure and unrealistic customer service expectations (kasouf & celuch, 1997). even as these small firms grow and mature, there is still a significant imbalance in the availability of resources in comparison with larger organizations that have a dedicated department for this function. journal of small business strategy vol. 22, no. 2 53 research by redondo & fierro (2007) produced interesting findings when comparing the buyer-supplier relationships within small businesses. they found that communication was a critical tool for relationship development, and that trust and commitment had a significant impact on the length of the business relationship. they also found that frequent inter-firm contact and firm flexibility and adaptability were key factors in developing effective supply chain relationships. beekman and robinson (2004) suggest that small business owners focus on partnering with organizations interested in long-term mutually beneficial relationships. this is critical since prior studies have shown that organizational size has a direct impact on the power dependency with the distribution channel (redondo & fierro, 2007) such that small businesses may find themselves in subordinate relationships (gélinas & bigras, 2004; mudambi, schruender, & mongar, 2004). nevertheless, when small suppliers are able to identify effective partners they can be very successful at providing personalized customer service. the flexibility and commitment of small suppliers can provide an invaluable strategic advantage to their larger customers (devins, gold, johnson, & holden, 2005; morrissey & pittaway, 2006). these supply chain management practices allow small businesses to develop partnerships with customers of all sizes, thereby creating greater dependency and growth opportunities. this creates a situation where the supply chain function becomes a competitive advantage for small businesses (ahuja 2000). supply chain management is an important area of research and practice for small businesses. both large and small organizations are constantly searching for ways to lower costs, increase efficiency and productivity, and develop a competitive advantage through the supply chain function (mentzer, dewitt, keebler, min, nix, & smith, 2001). as researchers, we must continue to examine variables that may impact business effectiveness and performance; organizational efficacy is one such variable of interest. in terms of relational variables, information quality (huber & daft, 1987) and continuous quality improvement (deming, 1975; prybutok & ramasesh, 2005) are potentially important aspects of interorganizational relationships that can potentially affect firm efficacy. organizational efficacy one construct that shows great promise when studying the performance of organizations is that of efficacy; however, there is very little research on efficacy at the organizational level. as an important element of goal setting theory, efficacy plays a major role in the motivation literature (locke & latham, 1990). furthermore, motivation is an important precursor of individual performance (vroom, 1964; bandura, 1977; allen, lucero, & van norman, 1997; jessup & stahelski, 1999; vancouver & putka, 2000). organizational efficacy, the belief that an organization is capable of performing well, is the construct of interest in the current paper. empirical findings are needed to support the idea that organizational efficacy is a driving factor in the performance of individual organizations within the interorganizational network. motivation is a broad concept which has at its core several theories that continue to drive its study and research. one area of motivation that has received significant attention is self-efficacy (bandura, 1977). locke and latham (1990) indicate that journal of small business strategy vol. 22, no. 2 54 efficacy is an important aspect of motivation because efficacy contributes to the goal-setting aspect of motivation since those individuals who experience efficacy are more capable of establishing attainable goals. self-efficacy examines the individual’s confidence in his or her ability to be successful at a given task. it implies that individuals will evaluate their own individual capabilities and make decisions on their assessment of the best possible outcome based on that evaluation. bandura emphasized that efficacy expectations, an important aspect of motivation, can lead to greater performance due to the individual’s perceived ability to execute the necessary behaviors to produce the outcomes that are desired (bandura, adams, hardy, & howells, 1980). self-efficacy is related to both the creation of individual goals and performance (vancouver, thompson, & williams, 2001). in addition, efficacy continues to have a profound impact on organizational behavior and human resource management research since it is significantly linked to performance within the leadership, selection, and training arenas (gist, 1987). while self-efficacy and efficacy expectations are prevalent in the organizational behavior literature, there is very little examination of efficacy at the interorganizational level. this presents a promising area of research. this is not to say that there is no efficacy research at higher levels within the organization. the study of groups has taken efficacy and applied it to the group performance and motivation to perform. researchers have applied self-efficacy to groups and termed it collective efficacy. the definition of collective efficacy is a group’s collective belief in their task-fulfilling competencies (parker, 1994; bandura, 1997; zellars, hochwarter, perrewe, miles, & kiewitz, 2001). empirical evidence indicates that collective efficacy is a strong predictor of team performance. gully, incalcaterra, joshi and beaubien (2002), in their metaanalysis, find that collective efficacy has a strong relationship with team performance. the results of their study further suggest that the collective efficacy-performance relationship is even stronger than the individual’s efficacy-performance relationship. thus, there is support for application of the efficacy variable to the group level. in addition to group level efficacy, gist (1987) proposes the idea of a corporate or organizational level efficacy that may be useful for examining functions at the strategic business level. the idea of corporate efficacy, however, is less developed in the literature. since the previous study of organizational efficacy only investigated the effects of leadership on organizational efficacy (bohn, 2002), there is room for examination of this variable in interorganizational relationships. for the current study, the definition of organizational efficacy is the cognitive confidence and assurance that the organization will perform well. this competency consists of the internal belief that the organization has the capabilities, judgment, confidence and intention necessary to be successful. because organizational efficacy has not been extensively examined in the existing research literature, the current study focuses on understanding potential antecedents of it within a sample of small businesses acting as suppliers to a large organizational entity. while not directly examined as part of the current study, it is posited that organizational efficacy plays a significant role in interorganizational relationships within the supply chain network. journal of small business strategy vol. 22, no. 2 55 information quality good information, or information quality, is vital to organizational success (huber & daft, 1987). the definition of information quality for this study is the degree to which the information the individual organization receives from the other organization is accurate, timely, adequate, complete, and credible (daft & lengal, 1986; huber & daft, 1987; monczka et al., 1998). effective communication through the availability of information is a vital component of collaboration through cooperation. guetzkow (1965) found that information must be systematically available for the effective completion of required tasks. not only is information exchange necessary for performance, but schuler (1979) finds support for increases in satisfaction when information is systematically available within an organization. in examining collaborative relationships, devlin and bleackley (1988) found that the exchange of quality information predicts the success of a partnership. better information flow has important benefits for interorganizational relationships. advancements in technology and data sharing enhance information flow. by utilizing advanced systems, companies are reducing costs and utilizing their resources successfully (martin, 1995). because of this, interorganizational partners are continuing to develop better methods for transferring information that are beneficial for each party (gopal & cypress, 1993). this leads to greater success because of the ability to speed up the entire transaction between the partners (murphy, 1998). these benefits are becoming more and more available to companies and supply chains, regardless of size, because of increasing technology, such as the internet, which facilitates these exchanges and thus produces greater performance (stefansson, 2002). interorganizational relationships are utilizing better information to facilitate the ability to plan more strategically and respond more successfully to the demands of the partner. in the supply chain, this ability to plan key variables, such as capacity of the supplier, through good information provided by the buyer, creates a better and more efficient chain which benefits both parties (chapman & carter, 1990; raturi, meredith, mccutcheon, & camm, 1990). this quality information exchanged between the partners plays a key role in the relationship and the performance of the supplier. because quality information allows better coordination between the actors within an interorganizational relationship and helps the supplier better plan for meeting the buyer’s needs, information quality plays an important role in enhancing performance within the relationship. agrell et al. (2004) indicate that it is a key part of the supply chain, meaning that organizations that have better information quality will have better success. in their study on supply chain relationships, ellram and hendrick (1995) find that partnering organizations continually share information needed for mutual understanding, operational information necessary for smooth operations, and information regarding high corporate level issues important for good coordination. in addition, the examination of supply chain partnerships done by anderson and narus (1990) finds that the sharing of information is very important for interorganizational relationships. what is necessary is a norm of information exchange between member firms where information that might be journal of small business strategy vol. 22, no. 2 56 useful or helpful is given and received frequently and openly (heide & john, 1992), rather than simply because of controls that try to force information exchange. building on the premise that the relationship between communication and performance is influenced by supplier attitudes and behaviors, it is suggested that greater levels of information are related to greater levels of organizational efficacy. path-goal theory (house, 1971) proposes the idea that in order for a leader to move a follower to performance, there must be good information communicated by the leader to the follower of exactly what is expected. when the follower has clear direction and a more insightful understanding of the expectations, the follower will have efficacy, or confidence, in the ability to achieve that goal. applying house’s (1971) path-goal theory to the interorganizational relationship, when the supplier receives meaningful and timely information, there will be a greater confidence in the organization’s ability to perform well, thus producing more organizational efficacy. therefore, we offer the following hypothesis: h1: there is a positive relationship between information quality and supplier organizational efficacy in business relationships. continuous quality improvement one area within organizations that continues to receive a great deal of attention in both literature as well as practice is the area of quality. the definition of continuous quality improvement (cqi) in this study is the process implemented within organizations that seeks higher quality within an organization that will lead to better products and services with lower defects and with lower costs (deming, 1975; prybutok & ramasesh, 2005). three primary factors of cqi are of interest with this definition. first is the quality of data and information gathered internally. second is the use by the organization of the internal and external quality data. third is the quality documentation by the organization internally. in his discussion of quality in the telecommunications industry, pence (1993) discusses the necessity of suppliers to subscribe to and follow a path towards quality improvement in order to maintain strong interorganizational relationships with the network partners. this emphasizes the necessity of quality programs. quality practices within an organization are significantly related to success in that organization. several areas of quality performance lead to success. magal (1991), rands (1992), and ferguson and zawacki (1993) all find that service quality is highly related to organizational success. system quality is another aspect of quality that affects success (davis, 1989). continuous quality improvement lowers costs, improves accuracy, and lowers defects. continuous quality improvement in the interorganizational setting is a type of ability because the processes and systems exist to more effectively and efficiently carry out the organization’s tasks with a minimum of waste. therefore, cqi as an ability should lead to greater organizational efficacy. processes and systems that focus on increased quality within an organization will give the organization a greater confidence in the ability to perform. based on this prior research we hypothesize: h2: there is a positive relationship between continuous quality improvement and supplier journal of small business strategy vol. 22, no. 2 57 organizational efficacy in business relationships. methodology sample an electronic survey was administered via email to the approved vendors for a large university in the southwestern united states. the respondent for each vendor was the primary contact for the university and business vendor. of the 498 accessed surveys, 156 surveys were completed indicating a 31% response rate of those accessing the survey. of the 156 completed surveys, there were 134 usable surveys that were considered smes (those having fewer than 500 employees). the average firm size was 34 employees. measures participants were asked to specify the size of the organization by giving the number of employees (kimberly & evanisko, 1981). as has been mentioned earlier, the size of the organization can impact the relationship between the supplier and the buyer (redondo & fierro, 2007). in addition, respondents were asked for the number of years the organization had been a vendor to the university to assess the degree of institutionalization, which can potentially affect the vendor’s ability to respond to customer demands (dimaggio & powell, 1983). the average length of time the organization had been working with the university is 6.39 years. they were also asked to indicate the length of time that the respondent had worked with the organization which can help to indicate the person’s tendency to observe, accept, and adopt the values and norms of the organization (chao, o’leary-kelly, wolf, klein & gardner, 1994). the average length of time the respondent had been working with the company is 9.49 years. organizational efficacy (gist, 1987; bohn, 2002) is measured in this study using an adaptation of riggs and knight’s (1994) assessment of collective efficacy belief scale (previous α=.84) and collective outcome expectancy scale (previous α=.71). this efficacy scale with nine items examines the capabilities, purpose and confidence of the organization using a seven point likert-type scale with responses ranging from strongly disagree (1) to strongly agree (7). these items, along with the items for information quality and continuous quality improvement, can be found in table 1. information quality was examined using five dimensions of information-accuracy, timeliness, adequacy, completeness and credibility (daft & lengal, 1986; huber & daft, 1987; moczka et al., 1998). if one of these items proved not to be ranked high, the quality of information may not be as good. for example, if information comes in too late that a certain product has changed, the supplier may use the wrong product in servicing the buyer. thus, the information is no longer useful. using mohr and spekman’s (1994) five questions on information quality (previous α = .910), respondents indicated their level of trust on a seven point likert-type scale ranging from (1) not timely (accurate, adequate, etc.) to (7) very timely (accurate, adequate, etc.). continuous quality improvement (deming, 1975; prybutok & ramasesh, 2005) consists of three factors: quality data and information gathering, quality internal and external data usage, and quality documentation. these factors were assessed using an adaptation of prybutok and spink’s (1999) seven items for continuous quality improvement (previous α = .852). these seven items were tested using a seven point likert-type scale with journal of small business strategy vol. 22, no. 2 58 responses ranging from strongly disagree (1) to strongly agree (7). table 1: efficacy, information quality, and continuous quality improvement items construct items organizational efficacy 1. the company has above average abilities to perform for the buyer 2. the company performs well compared to other companies doing work for this buyer. 3. my company is able to perform as expected for our buyer. 4. the employees of my company have excellent job skills. 5. it is important for my company to do good work for this buyer. 6. my entire company benefits when we do good work for this buyer. 7. my company would notice if we did not do good work for our buyer. 8. my company needs the work done for our buyer. 9. my company expects good outcomes when we perform well for this buyer. information quality 1. the information we receive from this buyer concerning what is expected from us is timely. 2. the information we receive from this buyer concerning what is expected from us is accurate. 3. the information we receive from this buyer concerning what is expected from us is adequate. 4. the information we receive from this buyer concerning what is expected from us is complete. 5. the information we received form this buyer concerning what is expected from us is credible. continuous quality improvement 1. our organization has well documented processes and techniques used to ensure data and information reliability. 2. our organization has well documented processes and techniques used to ensure data and information consistency. 3. our organization has well documented processes and techniques used to ensure data and information accessibility. 4. quality data and information gathered internally is systematically analyzed to help support our organization’s overall quality objectives. 5. quality data and information gathered externally is systematically analyzed to help support our organization’s overall quality objectives. 6. our organization adequately maintains documentation required to support its quality assurance, assessment, and improvement efforts. 7. our organization adequately uses documentation required to support its quality assurance, assessment, and improvement efforts. journal of small business strategy vol. 22, no. 2 59 data and scale analysis the data were screened and prepared using kline’s (1997) recommended procedures. after a full analysis, cases with missing data points, as well as outliers identified with the frequency distribution of standard scores, were removed. univariate normality was assessed by examining each item for skewness and kurtosis. the test showed a normal distribution. cronbach’s alpha was used to establish the reliability of the scales (nunnally & bernstein, 1994; henson, 2001). the coefficient alpha’s for each scale was well above nunnally and bernstein’s (1994) suggested reliability coefficient of .70. these reliability estimates are found in table 2. the item scores were assessed to evaluate the consistencies of the measurement items with construct validity. utilizing a confirmatory factor analysis (ahire & deveraj, 2001), lisrel was used to examine the latent variable with its corresponding items. the latent constructs were analyzed using principle components factor analysis to extract the analysis pattern. using the k1 rule (kaiser 1960), information quality and continuous quality improvement extracted only one factor. therefore, there is only one latent construct per list of variables (hattie, 1985). the initial factor pattern/structure coefficients, as well as the communalities, eigenvalues, and cronbach’s alphas, are presented in table 2. table 2: initial factor pastor/structure coefficient for efficacy, flexibility and performance variable item # organizational efficacy information quality continuous quality improvement factor 1 factor 2 h2 factor h2 factor h2 1 .825 -.283 .761 .845 .714 .847 .718 2 .576 -.163 .358 .961 .923 .867 .751 3 .869 -.036 .756 .930 .865 .860 .740 4 .769 -.349 .714 .959 .919 .848 .718 5 .834 -.222 .746 .908 .825 .802 .643 6 .821 -.152 .697 n/a n/a .915 .837 7 .735 .398 .698 n/a n/a .897 .804 8 .561 .700 .805 n/a n/a n/a n/a 9 .726 .347 .647 n/a n/a n/a n/a total variance explained 56.779 84.911 74.458 initial eigenvalue 5.110 4.246 5.212 second eigenvalue 1.071 .357 .696 alpha α = .904 α = .955 α = .942 because two items in the organizational efficacy scale fell below .7, the items in this scale were examined further. following analysis of the factor pattern/structure coefficients and examination of the questions on the scale, item eight and item two were removed from the scale. these items did not fit well with the other items and had low factor pattern/structure coefficients. cronbach’s alpha was checked as well as the factor pattern/structure coefficient for the efficacy scale. the final journal of small business strategy vol. 22, no. 2 60 factor pattern/structure coefficient resulted in a seven-item scale with one factor extracted with an alpha of .909, an improvement of almost one percent, and a total variance explained of 65.086 which is also an improvement over the original value. the final factor pattern/structure coefficient can be seen in table 3. table 3: final coefficients variable item # organizational efficacy information quality continuous quality improvement factor h2 factor h2 factor h2 1 .845 .715 .845 .714 .847 .718 2 n/a n/a .961 .923 .867 .751 3 .877 .770 .930 .865 .860 .740 4 .784 .615 .959 .919 .848 .718 5 .863 .745 .908 .825 .802 .643 6 .836 .698 n/a n/a .915 .837 7 .709 .503 n/a n/a .897 .804 8 n/a n/a n/a n/a n/a n/a 9 .714 .510 n/a n/a n/a n/a total variance explained 65.086 84.911 74.458 initial eigenvalue 4.556 4.246 5.212 second eigenvalue .758 .357 .696 alpha α = .909 α = .955 α = .942 a lisrel model assessed the fit of the individual items with the latent construct. examining the fit indices allows for a test of discriminant validity. the results of these analyses are found in table 4. a test of discriminant validity allows further investigation. first, the scale reliabilities are sufficiently larger than the correlation averages with other constructs. in addition, the interscale correlations, the correlations between items within a scale, are adequately different from one, meaning they are not perfectly correlated. in addition, for this analysis, the percent of variance extracted by the items from the scale are greater than the squared interscale correlations of the latent variable. another aspect of discriminant validity includes the examination of average item-to-total correlations of non-scale items (ahire & deveraj, 2001). the results of this analysis indicate good fit to the data. in addition, the overall means, standard deviations, cronbach’s alphas, and correlations of the latent variables are found in table 5. results this study examined the relationship of information quality and continuous quality improvement with organizational efficacy within smes. hypothesis one posited a positive relationship between information quality and organizational efficacy in smes. similarly, hypothesis two postulated a positive relationship between continuous quality improvement and journal of small business strategy vol. 22, no. 2 61 organizational efficacy. in order to test both of these hypotheses regression analysis was used. the first step included the control variables of organizational size, the length of tenure the buyer had been resourcing the supplier, and the length of tenure of the respondent as the manager of the supplier organization. the addition of information quality and continuous quality improvement came in the second step of the regression model. model one, only the table 4: construct fit indices construct χ2 d.f. cfi gfi organizational efficacy 78.80 14 .94 .86 information quality 3.37 5 1.00 .99 continuous quality improvement 174.64 14 .89 .73 table 5: means, standard deviations, cronbach’s alphas, and correlations construct means s.d. 1 2 3 organizational efficacy 6.311 .695 (.904) information quality 5.836 1.062 .531* (.955) continuous quality improvement 6.107 .893 .511* .383* (.945) note: *correlations are significant at the 0.01 level (2-tailed). reliability coefficients are presented on the diagonal. control variables with organizational efficacy, resulted in an anova with an f statistic of 1.739 that was not statistically significant (p>.05). the second model, including the control variables as well as information quality and continuous quality improvement, was statistically significant yielding an anova with an f statistic of 18.243 (p<.01). these predictor variables improved the fit of themodel with an r2 of .405, an adjusted r2 of .383, and a δr2 = .368 that was statistically significant (p < .01). additionally, the relationship of information quality and continuous quality improvement with organizational efficacy was examined using standardized and unstandardized coefficients, statistical significance, and confidence intervals. the results of this regression analysis indicate that both information quality and continuous quality improvement are statistically significantly related to organizational efficacy in smes (p<.01), thus supporting both hypotheses. table 6 provides a summary of the results. journal of small business strategy vol. 22, no. 2 62 table 6: results of simultaneous regression analysis for prediction of efficacy in smes variable b se b β 95% ci lower 95% ci upper vif step 1: # of employees .000 .000 .029 .000 .001 1.011 comp years .017 .008 .169 .000 .033 1.045 manager years .005 .007 .059 -.009 .019 1.055 step 2: # of employees .000 .000 .026 .000 .000 1.011 company years .011 .007 .111 -.002 .024 1.066 manager years .008 .006 .095 -.004 .020 1.071 information quality .234 .047 .358* .140 .327 1.191 continuous quality improvement .292 .056 .379* .182 .402 1.180 note. r2 for first model = .037 r2 for second model = .405 δr2 = .368 *p < .01 n = 134 two-tailed tests. discussion and strategic implications while there exists a significant body of literature that discusses the development of self-efficacy at the individual level (bandura, 1994; heslin, 1999; lent and hackett, 1987), this represents one of the first attempts at better understanding the antecedents of efficacy at the organizational level in the small business arena. as hypothesized, both information quality and continuous quality improvement were found to be significantly related to sme’s beliefs that they were capable of fully meeting the needs of a larger buyer. when an organization fully understands expectations, the likelihood of delivering successful results is greatly increased. similarly, when a supplier-firm has high quality information that accurately delineates the expectations of its buyer it feels more confident in its ability to effectively meet them. smes generally rely on factors such as trust, collaboration, and communication as part of their business model (redondo & gierro, 2007); this bodes well for the sharing of high quality information. as such, smes should focus deliberate effort on communicating with partner organizations in order to ensure both sides have a shared-framework of expectations and understanding of how they will be met. as an antecedent of organizational efficacy, information quality is highly aligned with bandura’s notion that psychological reactions are also associated with efficacy attainment (bandura, 1994). the finding that continuous quality improvement is an antecedent of organizational self-efficacy is consistent with the fact that mastery experiences are the primary means by which efficacy is gained (bandura, 1994). continuous quality improvement results in an organization’s processes and systems working more effectively and efficiently; it lowers costs, improves accuracy, and lowers defects. these are the organizational definition of a mastery experience. given this, it is imperative that smes continue to invest both time and fiscal resources in service and system quality improvement initiatives that will journal of small business strategy vol. 22, no. 2 63 facilitate their efforts to be both flexible and customer-oriented partners of choice to larger organizations. our results affirm the practical importance of smes capitalizing on their strengths in the supplier-buyer relationship. in particular, it is critical that smaller firms take advantage of extensive communication to ensure high quality information and implement the processes and systems that focus on increased quality within the firm. in doing so, the organization and its members will develop greater confidence in their ability to successfully perform, thus motivating its members to persist in efforts toward continued success. all organizations need to be flexible and adaptable in order to develop successful long-term business relationships. while large companies invest significant resources managing the supply chain, the practices of smes are typically less refined and focus on personal connections and communication sources (morrissey & pittaway, 2006). therefore, higher levels of organizational efficacy can directly impact the ability of smaller firms to establish interorganizational relationships and successfully manage these relationships. the advanced technology-driven logistical systems of large organizations typically lead to greater speed and efficiency, but the high levels of customer interaction provided by smes may be better suited to develop interorganizational trust and commitment, thereby increasing the likelihood of more long-term strategic relationships. as suggested by li and qian (2007), strong business alliances are built on sharing information and resources, thereby reducing the risk for all parties involved. greater organizational efficacy can allow smes to refine their information gathering and sharing capabilities through continuous improvement processes. strategic relationships play a critical role in supply chain management for all sized organizations. smes are not generally noted for their strategic approach to logistics, but perhaps this is not the case. but rather, it is the type of tools that smes use to establish strategic relationships that differ from their larger counterparts. the more informal and personalized tools used by smes can be quite effective in developing strategic relationships. although these tools are not as sophisticated as the data processing capabilities of large corporations, they can be effective if the communication process is genuine and information is exchanged in an open and mutually beneficial manner. while large companies are often more rigid and less adaptable to quick change, smes can be designed to integrate continuous quality improvement in all facets of its business operations, and quickly adapt to the rapid changes that occurs in a dynamic business relationship. there are many approaches that can lead to strong supply chain relationships; it seems that smes are more likely to use an approach to that relies on personalized collaboration and communication. therefore, it is important that owners and managers of smes be aware of the best practices for exchanging information, maximizing resources, and encouraging continuous improvement in their processes and approaches to customer service. journal of small business strategy vol. 22, no. 2 64 future research there exists significant literature supporting the notion that efficacy is positively related to performance at the individual and group levels (gist, 1987; gist et al., 1991; zellars et al., 2001; jung & sosik, 2003; tasa & whyte, 2005 ); however, efficacy has had little empirical examination at the interorganizational level. the current study begins this process by examining antecedents of organizational efficacy so that we might understand how it can be developed. unfortunately, the goals of the current study do not extend to examining the actual impact of efficacy on organizational outcomes. as such, the impact of organizational efficacy on actual supplier performance is an area of promise for future research. given the newness of organizational efficacy as a construct of business importance, future research needs to be conducted to further verify the construct and examine its applicability to broader organizational settings. in particular, other potential antecedents of organizational efficacy should be considered and examined. in addition, psychometric studies that refine its construct definition via studies of convergent and discriminant validity are of potential theoretical interest. it may also be interesting to extend this research to organizations of varying sizes and in different interorganizational relationships. the current study focused on small firms interacting with a larger buyer organization. the degree to which the antecedents of efficacy seen here translate to other types of relationships and sizes of firms should be examined. extensive research exists that supports the importance of efficacy in individual and group performance, continuous quality improvement in firm performance, and information quality in interorganizational relationships; the current study brings together these three distinct lines of research in a novel fashion. although limited to smes, by expanding the concept of individual and group efficacy to the organizational realm and exploring the concepts of information quality and continuous quality improvement as antecedents of this efficacy, greater strategic insight is gained into the qualities that characterize the successful supply chain relationships for smes. references agrell, p., lindroth, r., & norrman, a. 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(2001). beyond selfefficacy: interactive effects of role conflict and perceived collective efficacy. journal of managerial issues, 13, 483-499. michael l. harris is an associate professor and director of the small business institute® in the college of business at east carolina university. he is the current president of the national small business institute®. his research interests include entrepreneurial attitudes and intentions, rural and minority entrepreneurship, and entrepreneurship education. shanan g. gibson is the associate dean for student and faculty development and an associate professor in the college of business at east carolina university. she is the current president of the southeastern chapter of the institute for operations research and management sciences. her research interests include entrepreneurship and human resource management issues, such as work analysis and technology acceptance. william c. mcdowell is an associate professor in the college of business at east carolina university. he is the current vice-president for research and publications for the national small business institute®. his research interests include entrepreneurship, family business, and small business management. leo r. simpson is the lawrence k. johnson chair of entrepreneurship in the albers school of business and economics at seattle university. his research interests include entrepreneurship education, business analysis, and operations management. reproduced with permission of the copyright owner. further reproduction prohibited without permission. adm_69893_20120103_00005.pdf editor associate editors paul belliveau rider university editorial assistants vice president of membership: journal of small business strategy vol. 25 ● no. 2 ● 2015 journal of small business strategy vol. 25 ● no. 2 ● 2015 sbi 2015 conference best empirical research paper awarded by the small business institute® get what you give? an examination of enlightened selfinterest, philanthropic intent, and engagement in philanthropy for small firm owners whitney o. peake western kentucky university whitney.peake@wku.edu michael l. harris east carolina university harrismi@ecu.edu william c. mcdowell middle tennessee state university william.mcdowell@mtsu.edu phillip e. davis east carolina university davisp14@ecu.edu abstract prior researchers agree that small businesses are important community contributors due to their active engagement in broader social responsibility activities, such as philanthropy. despite their purported importance to charitable giving and philanthropy, little is known about the factors that motivate small business owners’ decisions to engage in philanthropic giving. we integrate enlightened self-interest theory and the theory of planned behavior to examine how enlightened self-interest influences intentions to engage in philanthropy during start-up, which in turn impacts current levels of engagement in philanthropic activities. our results suggest that intentions to engage in philanthropy at start-up do partially mediate the relationship between enlightened self-interest and engagement in philanthropy behaviors; thus, suggesting that entrepreneurs’ motivations grounded in enlightened self-interest influence intentions to engage in philanthropy and subsequent engagement in such activities. 77 mailto:harrismi@ecu.edu mailto:william.mcdowell@mtsu.edu mailto:davisp14@ecu.edu journal of small business strategy vol. 25 ● no. 2 ● 2015 introduction in his search for a contemporary definition of philanthropy, sulek (2010) notes that evolution has occurred over time in how philanthropy is viewed so as to generate a modern definition focusing on “application of private means to public ends” (2010: 201). salamon (1992) is generally credited with crafting a definition of philanthropy that has become synonymous with charitable giving, and this definition has been largely adopted by philanthropy scholars (sulek, 2010). from a corporate and business-oriented perspective, philanthropy is traditionally recognized as “giving” via donation with the intent to generate social return on investment (pepin, 2005; stroup & neubert, 1987). based on the categorizations presented by carroll (1979), philanthropy has generally been viewed as a broad form of discretionary social responsibility (besser, 1998; déniz & suárez, 2005; fitzgerald, haynes, schrank, & danes, 2010; post, 1996) for businesses, given it is not undertaken to comply with laws or regulations and has the potential to generate social returns through the betterment of communities. several scholars have examined corporate philanthropy, along with motivations, determinants, and outcomes associated with giving behaviors in the corporate context (e.g., buchholtz, amason, & rutherford, 1999; porter & kramer, 2002; saiia, carroll, & buchholtz, 2003; seifert, morris, & bartkus, 2003; seifert, morris, & bartkus, 2004; wang, choi, & li, 2008). ultimately, researchers argue that corporate philanthropy may heighten corporate reputation (brammer & millington, 2005) even if it does not improve the firm’s bottom line in the short-run (wang et al., 2008), and that firms are aware of the benefits that may accrue to them by giving. increasingly, researchers argue that firms undertake philanthropy to strategically improve both reputation and the bottom line (godfrey, 2005; ricks, 2005; saiia et al., 2003) with values of managers holding an influential role in such practices (buchholtz et al., 1999). buchholtz and colleagues (1999) argue that the firm’s upper echelon hold significant influence in setting the firm’s values towards corporate philanthropy, and scholars further contend that giving can be leveraged to gain visibility for the firm, satisfy stakeholders, increase brand awareness and image, and reach new market segments (varadarajan & menon, 1988). more recently, researchers have channeled research related to attitudes towards philanthropy via the ajzen’s (1991) theory of planned behavior (tpb) (e.g., dennis, buchholtz, & butts, 2009; smith & mcsweeney, 2007; van der linden, 2011). given the closely held nature of small firms, and the flexibility afforded by concentrated upper echelon (jenkins, 2006), managerial values and discretion are likewise expected to dictate participation in philanthropic endeavors to reach similar ends. scholars agree that small businesses play important roles in their communities (fitzgerald et al., 2010; lepoutre & heene, 2006; niehm, swinney, & miller, 2008) and in the limited studies available on small business philanthropy and social responsibility, small firms have been found to play crucial roles in their communities and beyond (besser, 1998; tietz & parker, 2014; madden, scaife, & crissman, 2006). prior researchers suggest that small businesses 78 journal of small business strategy vol. 25 ● no. 2 ● 2015 support charitable organizations or philanthropy at higher levels than their larger corporate counterparts, with data suggesting that approximately 75% to 91% of u.s. small businesses participate in some sort of philanthropy (cronk, 1988; katz-stone, 1998; preston, 2008; princeton, 2001). research has also shown that small business owners tend to be more ethical and socially responsible than corporate managers (bucar & hisrich, 2001), and have a stronger connection with the local business community (besser & miller, 2004; green, 1992; solymossy & masters, 2002). since they have a personal stake in their businesses, they also tend to be more protective of company resources (bucar & hisrich, 2001), and more likely to base decisions upon their own social value system (humphreys, robin, reidenbach, & moak, 1993; tietz & parker, 2014). because of the link with their local communities, small business owners can feel more compelled than large firm owners to balance economic gain with ethical responsibility (solymossy & hisrich, 1996), particularly if they believe the philanthropy meets a critical societal need (nell, winfree, & sherk, 2008). the limited research in this area, however, has generally overlooked the motivations for engaging in these types of activities, and little theory development has been integrated into the small business-social responsibility phenomenon. one exception is the work of coombs, shipp, and christensen (2008), which contends that entrepreneurs engage in philanthropy due to psychosocial motives, including helping future generations, striving for transcending their own existence, and leaving a legacy. like the corporate philanthropy literature, this view supports the influence of the upper echelon in dictating engagement in such behaviors (hambrick & mason, 1984). in the corporate philanthropy literature, it is widely recognized that firms may be motivated by enlightened self-interest to strategically align their giving or social involvement (e.g., keim, 1978; matten & crane, 2005; varadarajan & menon, 1988); thus, supporting the notion of impure altruism underlying corporate giving and social responsibility. although indirectly, the same undertones support the arguments of coombs et al. (2008). research on small business philanthropy and social responsibility, is generally less prevalent. even so, researchers in this area have explicitly identified enlightened self-interest as a motive for engaging in such behaviors (besser & miller, 2004; jenkins, 2006). underlying both the corporate philanthropy and small business literatures are the notion that values undergird intention to engage in such activities (e.g., tietz & parker, 2014). given both the corporate philanthropy and small business social responsibility recognition of impurely altruistic, or strategic, motives for philanthropic engagement, we integrate enlightened self-interest theory and the theory of planned behavior to underpin motivations related to small firm engagement in philanthropy, and explore how they may be related to participation in these activities. the remainder of our manuscript is organized as follows. in the subsequent section we integrate esi and the theory of planned behavior to model philanthropic engagement, and offer hypotheses related to these phenomena. we then detail our sample, measures, and methods, followed by presentation of our findings. finally, we 79 journal of small business strategy vol. 25 ● no. 2 ● 2015 address the academic and practical implications of our research, as well as the limitations that must be considered as we attempt to move forward with future research in this area. theory and hypothesis philanthropy falls under the umbrella of corporate social responsibility (buchholtz et al., 1999; post, 1996), and is considered largely discretionary for the firm. during the early 2000’s, corporate philanthropy in the united states rose significantly (wilhelm, 2006), and with this rise, scholarship related to corporate philanthropy has likewise grown. scholars have argued that philanthropy runs against classic economic assumptions of the rational profit-maximizer (friedman, 1962), since tangible performance benefits may not accrue in the short-term for socially responsible investments, including giving. however, researchers argue that improved image and long-term profitability, along with marketing benefits, make engagement in such activities worthwhile for firms, in addition to the “warm glow” the entrepreneur may obtain from undertaking philanthropy (andreoni, 1989; tietz & parker, 2014). “warm glow” is considered a personal form of altruism, which supports preservation of an individual’s identity (tietz & parker, 2014). although corporate philanthropy has received a good deal of research attention from scholars, relatively few researchers have examined the antecedents, of why such giving takes place (dennis et al., 2009). as late as 2007, scholars argued that no substantive theory-driven models existed to underpin the drivers of corporate philanthropy (dennis et al., 2009) and that further attention should be given to this pursuit. philanthropy has generally been viewed along a continuum from purely strategic to purely altruistic, with the strategic literature explaining engagement in philanthropy via enlightened self-interest or other impurely altruistic models (e.g., young & burlingame, 1996) and the purely altruistic camp placing philanthropy in a moral context (e.g., shaw & post, 1993). scant corporate philanthropy literature has integrated theory to explain the drivers of managers’ participation in such activities; however, the theory of planned behavior (ajzen, 1991) has gained some popularity (e.g., dennis et al., 2009; smith & mcsweeney, 2007; van der linden, 2011) in explaining this phenomenon. small business researchers argue that small firms are actively engaged in philanthropy (e.g., fitzgerald et al., 2010; jenkins, 2006; niehm et al., 2008), yet very limited research in the entrepreneurship/small business realm has attempted to address antecedents that may motivate participation in philanthropic endeavors (for an exception see, madden et al., 2006). better understanding what drives small business owners to participate in philanthropy and other socially responsible activities is important in understanding the social impacts generated by small businesses. like the corporate philanthropy literature, we examine the role of self-interest as an attitudinal variable that influences intentions to engage in philanthropy at start-up (brammer & millington, 2005; buchholtz et al., 1999; saiia et al., 2003; varadarajan & menon, 1988), which subsequently influences current engagement in philanthropic giving. one notable difference between the aforementioned studies from the corporate philanthropy literature and the present study is the prior studies assessed these relationships of corporate managers, whereas the present 80 journal of small business strategy vol. 25 ● no. 2 ● 2015 study will assess the same relationships of small business owners. attitudes, intentions, and the theory of planned behavior ajzen (1991) argues that intentions to engage in a given behavior significantly influence the likelihood that an individual subsequently enacts that behavior. the process in which this occurs is deliberate, and the intentions to engage in a particular behavior are influenced by attitudes, social norms, and perceived control over the behavior (ajzen, 1991). the theory of planned behavior has been successfully applied to studies in a variety of fields, including those examining entrepreneurship (krueger, reilly, & carsrud, 2000) and volunteerism (e.g., warburton & terry, 2000). the nature of these relationships suggests that intentions fully mediate the relationship among attitudes, social norms, and perceived control and engaging in a specific behavior. attitudes have been included in both the theory of reasoned action (tra) (ajzen & fishbein, 1973) and the theory of planned behavior (tpb) (ajzen, 1991). under these theories, attitudes towards a behavior are molded by expectations associated with performing the given behavior, which subsequently shapes intentions to engage in that behavior. enlightened self-interest, by nature, indicates that the owner believes that contributing to societal betterment via means such as philanthropy and community oriented social responsibility (besser & miller, 2004) will improve business or provide personal benefit; thus, representing an attitude towards enacting philanthropic and socially responsible behaviors. besser and miller (2004) argue that small business owners express interest in two distinct types of esi – shared fate and public relations (sinclair & galaskiewicz, 1997). the shared-fate view stems from the belief that a high tide raises all ships; thus, contributing to the betterment of the community and society, provides a stronger economy to support the business (besser & miller, 2004). the public relations perspective argues that engaging in philanthropy and social responsibility, when generally known by others, is good marketing (neihm et al., 2008; varadarajan & menon, 1988). thus, attitudes related to “doing good” are impurely altruistic in that business owners believe enacting the behavior will yield benefit for the business. dennis et al. (2009) examined the role of economic attitude on intentions to engage in philanthropy, but did not determine statistical significance for attitudes on intent to participate in philanthropy. it is important to note, however, that their economic attitude measure did not account for the full range of benefits firms may garner from participating in socially responsible activities, since they addressed firm performance, strategy, and the bottom line. although based in tpb, attitude is an important determinant of intentions, prior literature suggests that enlightened selfinterest attitudes towards philanthropy may impact more than the bottom line. for example, the firm owner or manager may be seeking improved image or recognition (i.e., marketing) for participating in giving (maignan & ferrell, 2004). with a broader attitudinal measures, smith and mcsweeney (2007) and van der linden (2011) found a significant effect for attitude on intentions to engage in philanthropic behavior. as such, we offer the following hypothesis: 81 journal of small business strategy vol. 25 ● no. 2 ● 2015 hypothesis 1: the enlightened selfinterest of small business owners is positively associated with their intentions to engage in philanthropy at start-up. besser and miller (2004) and niehm et al. (2008) found that esi was related to engaging in socially responsible activities within the community, although different rationales exhibited differing effects for participation in business social performance, depending on the risk involved with the socially responsible behavior (besser & miller, 2004). although esi applied to the small firm context is extremely limited, the small amount of corporate philanthropy literature tying tpb to philanthropy, likewise generally supports the relationship between attitudes (grounded in esi) and engagement in philanthropy (e.g., dennis et al., 2007; smith & mcsweeney, 2007). the tpb model put forth by ajzen (1991) suggests that intentions mediate the relationship between the antecedents to intent and engagement in the given behavior. given this model, and the additional factors that are proposed to mediate this relationship, namely subjective norms and behavior control, we anticipate that the relationship between attitude towards the behavior (esi) and current level of philanthropic engagement will be mediated by the intentions of the business owners to engage in such behaviors during start-up. hypothesis 2: a small business owner’s intent to engage in philanthropic behavior at start-up mediates the relationship between their enlightened self-interest and engagement in philanthropy. methods sample respondents were identified by students enrolled in entrepreneurship and management courses at a large southwestern university during the 2012-2103 academic year as part of an entrepreneur and manager interview project. given that students served as the initial point of contact in this snowball sampling method of survey instrument deployment, the researchers were able to identify entrepreneurs meeting certain criteria set a priori (heckathorn, 2011; spreen, 1992). snowball sampling is based on a convenience sample and has been used by a number of small business researchers (mcgee, peterson, mueller, & sequeira, 2009; schindehutte, morris, & brennan, 2003), and serves as an appropriate means of data collection for this study since entrepreneurs engaged in philanthropy are not readily identifiable from the general population (faugier & sargeant, 1997). despite the associated limitations, such techniques provide researchers the ability to reach a broader, more diverse population than would otherwise be possible (mcgee et al., 2009). as part of the entrepreneurship and management course assignments, students were required to identify business owners who were owners/founders of the business, currently engaged in the daily operations of the firm. once the entrepreneurs were identified, a survey instrument was administered to and collected from each business owner. via these techniques, a total of 345 surveys were obtained from the respondents. after removing duplicate and incomplete surveys, as well as non-employer firms, 196 responses remained for analysis in 82 journal of small business strategy vol. 25 ● no. 2 ● 2015 this study. despite the use of a non-random sample, our sample displays many characteristics of small business owners across the u.s, as can be seen in table 1. table 1 sample demographics compared to sba demographics sba 2012 (%) study sample (%) age under 35 15.9 40.2 35-49 33.2 31.8 50+ 50.9 28.0 gender male 64 62.8 female 36 37.2 education hs or less 28.2 11.8 some college 32.8 34.7 bachelor’s or higher 39.0 53.6 race white 88.5 77.5 non-white 11.5 22.5 ethnicity hispanic 10.3 10.4 non-hispanic 89.7 89.6 source: us small business administration, office of advocacy, from us census bureau, survey of income and program participation (sipp) 2008 sipp wave 13 (2012 data) in comparison to the sba 2012 data, our sample has similar numbers of women, hispanics, and respondents who have some college experience. however, our sample has a larger minority representation, higher education levels generally, and were younger, on average, than the sba sample. this is likely due to the snowball sampling technique, through which students identified entrepreneurs. students identified entrepreneurs who were more like themselves, ethnically diverse, younger, and more highly educated than average, which is not uncommon when such methods are employed (mcgee et al., 2009). we believe this sample yields important insights, despite its differences from a nationally representative sample. since our data are cross-sectional, common method bias may serve as a concern for our data. based on the recommendations of podsakoff, mackenzie, lee & podsakoff (2003), we took several measures during the data collection efforts to minimize such bias. in developing the survey instrument, the researchers carefully reviewed the survey instrument, and included two experts who were not involved with the project to review the survey ensuring language and items were clear and to the point (podsakoff et al., 2003; tourangeau, rips, & rasinski, 2000). in initiating the survey, respondents were 83 journal of small business strategy vol. 25 ● no. 2 ● 2015 ensured their privacy and anonymity would be protected and that results from the data would only be reported in aggregate form (podsakoff et al., 2003). further, as recommended by podsakoff and colleagues (2003), we attempted to create psychological separation with regards to time for the variables of interest. the esi variables dealt with motivation, the intention variables were at the start-up phase, and the philanthropy engagement variables address current participation in such activities. further, we use statistical analysis to detect for such issues, the results of which are reported in the results section. measures although our measures were informed by prior studies, they have not been previously considered as single constructs. prior to utilizing our measures in the regression models, we conducted exploratory factor analysis to ensure the constructs loaded into single factors as expected. exploratory factor analysis is generally used in situations where variables are relatively new to the literature, as are the esi and philanthropy variables. we utilized principal components analysis (pca) to examine these constructs, and since we are reviewing a small number of factors, pca was deemed an appropriate method (hair, black, babin, & anderson, 2010). the results of efa for our variables are described below. philanthropic engagement. we examine 10 items associated with philanthropic engagement, ranging from giving to medical organizations to supporting public or private schools. all philanthropic engagement options are provided in appendix 1. a principal components analysis indicates that philanthropic engagement is most parsimoniously viewed as a single measure, since all communalities exceeded 0.36 and the items loaded as 1 factor explaining 52.22% of the variance. additionally, the kaiser-meyerolkin measure of sampling adequacy is 0.912, while the bartlett’s test of sphericity χ2 is significant at the p < 0.001 level. further, the internal reliability represented by cronbach’s alpha is 0.894, which is well within the commonly acceptable levels. these results suggest that we can reliably and more parsimoniously view philanthropic engagement as a single measure. as such, we sum the philanthropy items to obtain an aggregate measure. esi. we examine 9 items associated with enlightened self-interest, which indicates an underlying motivation for prioritizing “doing good” by the business. respondents were asked to indicate to what extent each of the esi items influenced their motivation to participate in social/environmental issues or philanthropic events/organizations, on a scale from 1 = no influence at all to 7 = extremely influential. items included motivations, such as increasing the customer base to making important community contacts. a full description of the esi items are provided in appendix 1. a principal components analysis indicates that esi can be viewed as a single measure. all communalities exceeded 0.32 and the items loaded as a single factor explaining 56.6% of the variance. the kaisermeyer-olkin measure of sampling adequacy statistic of 0.890 and bartlett’s test of sphericity χ2 significance at the p < 0.001 level, support this assertion. cronbach’s alpha for these measures is 0.901, which suggests these items are internally reliable. given these results, we view esi as a single measure, and 84 journal of small business strategy vol. 25 ● no. 2 ● 2015 sum the individual items to arrive at the aggregate measure. intentions to engage in philanthropy. we use a single item to represent intentions to engage in philanthropic activities at start-up by asking respondents, to indicate the extent to which the following statement correctly describes their business, “philanthropy, or giving, has been an important part of my business since startup.” respondents rated the correctness of this statement on a 7-point likert scale, where 1 = not at all, 4 = somewhat, and 7 = very much. the intentions to engage in philanthropy variable was used in its current form and was treated as a continuous variable in the analyses. controls. to contextualize our findings, we controlled for several business characteristics. size of the firm, slack resources, and industry have all served as important considerations for the corporate philanthropy literature (e.g., brammer & millington, 2005; buccholtz et al., 1999). aligned with both the corporate philanthropy literature and entrepreneurship and small business research, we controlled for firm size via the number of employees, business age, legal organization form, and industry. additionally, we controlled for gender of the small business owner, since gender has been found to serve as an important variable in the philanthropy and giving literatures (e.g., nilsson, 2008). results table 2 reports all means, standard deviations, and correlations for the variables of interest. multicollinearity analyses suggest that multicollinearity does not threaten our results, since all variance inflation factors were below 2, and the condition index was 6.121. further, since our data are cross-sectional, we examine the data for common method bias using the harman one-factor test (podsakoff et al., 2003). principal components analysis using varimax rotation yeilds 7 factors with eigenvalues greater than one. the first factor only accounts for 25.68% of the variance; thus, no single factor appears to dominate the results. when considered with the multicollinearity analyses, our results appear suitable for proceeding with examining our hypotheses. regression results of our hypothesis tests are shown in table 3. table 2 means, standard deviations, and correlations mean s.d. 1 2 3 4 5 6 7 8 9 10 1. phil. eng. 26.81 14.12 2. # of empl. 8.73 16.31 0.13 3. bus. age 6.21 9.31 0.02 0.15* 4. sole prop. 0.39 0.49 0.06 -0.22* 0.10 5. llc 0.39 0.49 -0.05 0.13 -0.16* -0.65* 6. retail 0.15 0.36 -0.09 -0.12 0.05 0.05 0.08 7. manuf. 0.01 0.10 -0.04 -0.03 -0.06 0.02 0.02 -0.04 8. service 0.36 0.48 -0.04 -0.09 -0.04 0.20* -0.11 -0.31* -0.08 9. male 0.61 0.49 -0.21* 0.15* 0.13 -0.07 -0.05 -0.08 0.08 -0.16* 10. esi 34.15 13.03 0.32* -0.02 0.08 0.12 -0.17* 0.11 -0.10 -0.04 -0.09 11. phil. int. 4.08 2.07 0.50* 0.04 0.03 0.17* -0.09 0.01 -0.08 0.08 -0.09 0.39* n = 196, *p<0.05 85 journal of small business strategy vol. 25 ● no. 2 ● 2015 table 3 mediation analysis regression results model 1 dv = phil. intentions model 2 dv = phil. engagement model 3 dv = phil. engagement no. of employees 0.0108 (0.0089) 0.1383* (0.0606) 0.1069ᴛ (0.0551) business age -0.0028 (0.0154) 0.0056 (0.1044) 0.0138 (0.0946) sole proprietorship 0.7576 ᴛ (0.3857) 2.5989 (2.6217) 0.3909 (2.3994) llc 0.3402 (0.3805) 0.7744 (2.5863) -0.2170 (2.3994) retail -0.1105 (0.4242) -6.6836* (2.8834) -6.3616* (2.6125) manufacturing -0.7677 (1.3843) -0.9195 (9.4099) 1.3177 (8.5312) service 0.2577 (0.3163) -3.4709 (2.1502) -4.2219* (1.9512) male -0.1429 (0.2950) -6.5604** (2.0053) -6.1439*** (1.8177) esi 0.0605*** (0.0109) 0.3325*** (0.0739) 0.1562* (0.0723) philanthropy intentions 2.9143*** (0.4515) f 4.6468*** 4.8607*** 9.4975*** r2 0.1836 0.1904 0.3392 n = 196; ᴛp<0.10, *p<0.05, **p<0.01, p<0.001 table 4 mediation analysis statistics for total, direct, and indirect effects effect llci ulci total effect of x on y 0.3325*** (0.0739) 0.1868 0.4782 direct effect of x on y 0.1562* (0.0723) 0.0136 0.2988 indirect effect of x on y 0.1763*** (0.0404) 0.1084 0.2708 sobel test 0.1763*** (0.0421) *p<0.05, **p<0.01, ***p<0.001 86 journal of small business strategy vol. 25 ● no. 2 ● 2015 although most control variables play a minimal role in the model, we do find that firm size, when proxied by the number of employees, exhibits a marginally positive direct effect associated with engaging in philanthropy (β = 0.1069, p<0.10). industry does appear to be associated with lower engagement in philanthropy for businesses in both the retail (β = -6.36, p<0.05) and service (β = -4.22, p<0.05) industries. additionally, gender exhibits a significant association with philanthropy engagement, such that men (β = -6.14, p<0.001) are associated with lower levels of engagement in philanthropic behaviors than women. given the highly significant results related to gender, we further examine these effects in a post-hoc analysis in the subsequent section. post-hoc analysis interestingly, although gender is not significantly associated with intentions to engage in philanthropic activities at start-up, gender is significantly associated with the level of philanthropic engagement. given this result, we examined differences between men and women for individual philanthropic activity items. our results suggest that women are significantly more likely to engage in activities related to environmental organizations, medical research organizations, university giving, international poverty relief organizations, and community needs, such as library improvements and animal shelters. although men reported giving more to religious organizations than women, the mean difference was not significant. further, women did not report significant differences from men in terms of esi level. disscussion research in the small and family business realm suggests that small businesses are actively engaged in philanthropy and social responsibility. despite this noted interest, scholars have primarily focused on demographic factors associated with engaging in these behaviors. following trends in the corporate philanthropy literature, we work to examine small business owners’ motivations for philanthropic engagement via tpb by integrating esi for an attitudinal perspective. we believe in doing so that we provide several academic and practical contributions, as well as present several opportunities for future research based on our findings and the limitations of our study. academic implications our research draws from the small business social responsibility and corporate philanthropy literatures to examine engagement in philanthropy as comprised of planned, purposeful behaviors influenced by the attitudes small business owners attach to participating in such activities. prior small business research suggests that esi is a driver of participation in small business social responsibility; however, the relationship among esi, early intentions to engage in such behaviors, and actual participation in philanthropy has gone unexplored in this context. besser and miller (2004) thoroughly explore the role of the esi perspective in small business social responsibility, and suggest that the shared fate rationale is a dominant view in undertaking social responsibility. we further develop this work to examine esi comprised of several items, and find that both the shared fate and public relations rationale described by besser and miller, hold an important 87 journal of small business strategy vol. 25 ● no. 2 ● 2015 relationship with both initial intentions to engage in philanthropy and actually doing so currently. although several researchers in small business allude to the importance of esi in facilitating engagement in “doing good,” relatively few have tested it explicitly as a motivational element in philanthropy engagement in any context. corporate philanthropy research has begun to explore the tpb (ajzen, 1991) as an important tool in modeling firm behavior in this realm (e.g., dennis et al., 2009; van der linden, 2011). both smith and mcsweeney (2007) and van der linden (2011) find support for using the tpb in predicting charitable giving by the general public and engagement in corporate philanthropy, respectively. we use the traditional model with regards to the influence stated intentions hold with engagement in a behavior, and further examine esi as an attitude influencing such intentions. we provide a model of mediation, in which intentions to engage in philanthropy mediate the relationship between esi and philanthropic engagement, and find support for partial mediation. although we hypothesized that full mediation would be present, the partial mediation finding indicates the importance of intentions in engaging in philanthropic behaviors. partial mediation suggests that there may be other important linkages between esi and philanthropic behavior that were not assessed in the present study, which provides opportunities for future research. further, our results are an important step forward in examining tpb in the context of giving, as small business owners generally have less slack for giving behaviors, but have traditionally reported high levels of engagement. understanding that doing good helps a business perform well in a healthy local economy heightens intentions to engage in such behaviors at start-up, which significantly influences current philanthropy engagement. although the significant differences between men and women in their giving preferences was unexpected, important research implications follow from this result. our findings suggest that women, on average, report higher levels of engagement in giving, but report giving significantly more than men in the cases of environmental organizations, medical research organizations, universities, international poverty relief organizations, and local community needs. prior research suggests that women, on average, exhibit greater sensitivity to (e.g., williams, 2003) and participation in socially responsible behaviors and investing in general (e.g., bear, rahman, & post, 2010; nilsson, 2008). our results draw important distinctions between men and women in their giving priorities, providing interesting future opportunities in better gauging motivational differences between men and women engaging in philanthropy and other forms of social responsibility. interestingly, past research has shown that the small business environment can provide greater flexibility to show compassion for their employee’s personal situations. women tend to experience more work-family conflict than males counterparts (martins, eddleston, & veiga, 2002), and research has shown that they feel more ethical freedom in small businesses (batchelor, harris, gibson, & simpson, 2011). practical implications in addition to the academic implications, we believe important practical implications arise from our results. with our original model in mind, we understand that esi is a deliberative 88 journal of small business strategy vol. 25 ● no. 2 ● 2015 process formed through attitudes and intentions. appealing to the win-win with small business owners appears to be imperative in shaping motivation to engage in giving behaviors. the esi construct we use examines business owners’ involvement in philanthropy based on keeping up with competitors, improving social status, and “warm glow” effects, such as setting a good example for family. this suggests that philanthropy representatives can be most effective by appealing to these elements of “doing well by doing good.” we also understand that forming these attitudes earlyon are important precursors to giving intent and subsequently, current levels of giving. further, our post-hoc analyses suggest that women report higher levels of giving for every item in philanthropy, but significantly more for local efforts (i.e., local efforts, universities) and those in which individuals exhibit extreme need or issues that exhibit some personal threat (environmental organizations, poverty relief, medical organizations). such knowledge equips managers of philanthropic organizations and their representatives with the tools to target business owners who may find interest in particular areas of giving. there were no significant differences between men and women in giving to local schools, religious organizations, or children’s organizations, although women also reported higher levels of giving, on average, to these entities. limitations and future research although we believe the implications from our study outweigh its limitations, our results are best considered with our study’s limitations in mind. our data is crosssectional, and although our pre-data collection efforts and subsequent common method variance analyses suggest this is not a limiting factor in interpreting our results, it is an important consideration. to overcome such limitations, we attempted to create a psychological separation for the respondent by separating intentions (at the start-up phase of business) from the current level of engagement in philanthropy. additionally, our data were drawn from a limited area of collection; thus generalizability is called into question. although many of our basic demographic characteristics are similar to that reported by the united states small business administration (2012), our sample diverges quite markedly with regards to age and race. we recommend that future research employs random sample panel data in an attempt to overcome the limitations associated with cross-sectional data in our own exploration. with regards to our measures, it is important to understand the items we considered, as well as the many opportunities that remain to explore additional elements of esi and philanthropy. we likewise understand the limitation of our tpb model to the attitudesintentions relationship, but believe this assists in isolating the importance of the effects we find. like other philanthropy and giving studies employing tpb, we recommend future researchers consider the impacts of norms and perceived behavioral control moving forward to see if these elements serve as antecedents to intentions and behaviors in the philanthropic giving context. in their revised tpb examination, smith and mcsweeney (2007) found that perceived behavioral control, injunctive and moral norms, and past behavior all significantly predicted intentions, which subsequently predict engaging in giving behaviors. van der linden (2011) did not test 89 journal of small business strategy vol. 25 ● no. 2 ● 2015 the intention-behavior link, but found moral norms, past behavior, perceived behavioral control, and attitude all significantly predicted intentions to donate. these appear to be important antecedents to philanthropy; thus, we suggest that future researchers simultaneously examine attitudes along with the other proposed intentions antecedents. although esi is discussed as a precursor to engaging in a number of socially responsible behaviors (keim, 1978; besser & miller, 2004; niehm et al., 2008), it has rarely been formally tested as a measure in the small business literature. we propose a measure for esi based on prior research, and find that it exhibits validity and reliability. relatively new measures require extensive testing across contexts, and we encourage future researchers to both consider our esi measures, as well as additional measures, or more specific measures as besser and miller (2004) suggest. our results suggest that the public relations rationale, is in fact relevant, which runs counter to the findings of besser and miller (2004). we credit this to variance in both measures and contexts, and hope that our measure development extends the literature sufficiently to motivate additional research on the relationship between esi and “doing good” in the small business context. conclusion small businesses are recognized as important supporters of philanthropy, but relatively little research has explored the drivers of small business owners’ participation in giving as a form of social responsibility. the corporate philanthropy literature, although notably deficient in examining theory-driven motivations behind giving (dennis et al., 2009), has led the way in such efforts. we borrow from the broader philanthropy and corporate philanthropy literatures by integrating esi and tpb perspectives to theorize small business engagement in philanthropy, and hypothesize that esi attitudes, influence intentions to engage in philanthropy at start-up, which subsequently drives current levels of engagement in philanthropy. our results support our hypotheses, indicating that intentions partially mediates the relationship between esi and engagement in philanthropy. further, we find that men and women exhibit significantly different giving levels in general. post-hoc analyses reveal that women report higher giving in some key areas. we believe our research both paves the way for future exploration of this phenomenon in the small business context, and provides philanthropy organizers, directors, and representatives insights into small business motivations for giving. references ajzen, i. 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(1996). paradigm lost: research toward a new understanding of corporate philanthropy. in d.f. burlingame and d.r. young (eds.) corporate philanthropy at the crossroads (pp.158-176). bloomington, indiana: indiana university press. whitney o. peake is the vitale professor of entrepreneurship and assistant professor of management in the gordon ford college of business at western kentucky university. her teaching and research interests include image and legitimacy across entrepreneurship, family business, stakeholder, gendered, and social responsibility contexts. dr. michael l. harris is the chair of the department of management in the college of business at east carolina university. he is also vice-president of the national small business institute®, and editor of the small business institute® journal. his research interests include small business strategy, entrepreneurial attitudes, and entrepreneurship education. dr. william c. mcdowell is a full professor and chairholder of the wright travel chair in entrepreneurship in the jennings a. jones college of business at middle tennessee 94 https://www.sba.gov/.../understanding-charitable-giving-tax-deduction-what-can-your-small-business-write https://www.sba.gov/.../understanding-charitable-giving-tax-deduction-what-can-your-small-business-write https://www.sba.gov/.../understanding-charitable-giving-tax-deduction-what-can-your-small-business-write journal of small business strategy vol. 25 ● no. 2 ● 2015 state university. he currently serves as the president of the national small business institute® and is editor-in-chief of the journal of small business strategy. dr. mcdowell’s research and area of expertise focuses on small business and entrepreneurship. phillip e. davis is an assistant professor of management in the college of business at east carolina university. his teaching interests include: strategic management, general management, and entrepreneurship. research interests include dynamic capabilities, organizational alignment, legitimacy, and competitive advantage. appendix 1 – items for philanthropy engagement and enlightened self-interest philanthropy engagement religious organizations α = 0.894 community or civic organizations local children’s organizations public or private-school support related environmental (wwf, sierra club, etc.) medical research organizations local food pantries and/or homeless shelters university giving international poverty relief organizations local needs (library improvement, animal shelters, etc.) enlightened self-interest increasing my customer base α = 0.901 setting a good example for my family improving the bottom line for my business keeping in line with my biggest competitor’s giving behaviors improving the way i feel about how i do business improving my social status in the community fulfilling religious or moral obligation making important community or political contacts 95 summer journal how small nations fare in the global war on talent: the case of denmark rosalie l. tung simon fraser university tung@sfu.ca verner worm copenhagen business school vw.int@cbs.dk susan aagaard petersen copenhagen business school sap.int@cbs.dk abstract in light of the looming shortage of skilled professionals, companies are increasingly eager to recruit highly educated and competent employees, regardless of country of origin and nationality, in order to remain globally competitive. this paper seeks to shed light on how nations compete for the same talent pool by presenting the findings of two related studies on whether (a) chinese students who are studying in denmark choose to return to work in china; and (b) danish students in denmark are willing to work for chinese companies in denmark and/or china. despite its population of 1.3 billion, china has a critical shortage of managerial talent. the vast majority of chinese students in denmark do not plan to remain in denmark upon completion of their education, while many danish students are receptive to working for chinese companies, albeit more so in denmark than in china. the findings of this study have implications on the plight of smaller nations, such as denmark, in attracting and retaining human talent. these findings also have implications for small-sized companies in their competition with large firms for human talent. introduction the growing boundaryless nature of the workforce (defilippi and arthur, 1996; stahl, miller, and tung, 2002; tung, 1998), brought about by the globalization of the world economy and the reduction in immigration and emigration barriers to the movement of people (johnston, 1991), has contributed, in part at least, to the war on talent worldwide. the 2006 world economic forum in davos, switzerland, highlighted the magnitude of this problem by bringing together executives and academics from developed and emerging economies to focus on the human capital deficit in countries both large and small, and to discuss ways to deal with this challenge (world economic forum, 2006). as samuel a. dipiazza jr., global ceo of pricewaterhousecoopers (usa) noted, "globalization is not just something for the big guys but everybody. people coming out of college now have different horizons and they are often just as willing to start work in shanghai as their home town. there is this war for talent and we are not just talking about the top five percent" (the global talent gap, 2006). implicit in mr. dipiazza’s assertion is that this talent gap is of equal concern to all nations, regardless of size, b e c a u s e u l t i m a t e l y t h e i n t e r n a t i o n a l competitiveness of a country depends upon its ability to develop, attract, and retain a pool of highly developed human talent. an important keyword in the looming war on talent is retention, as talent poaching appears to be an expedient means to acquire and gain highly qualified professionals. 1 strategyjournal of small business mailto:tung@sfu.ca mailto:tung@sfu.ca mailto:vw.int@cbs.dk mailto:vw.int@cbs.dk mailto:sap.int@cbs.dk mailto:sap.int@cbs.dk the challenge to attract and retain talent appears to be particularly acute for countries and firms that are perceived as less enticing from the cosmopolitan’s (kanter, 1995) perspective. cosmopolitans refer to people who are rich in concepts, competence, and connections. nations that are small, economically underdeveloped, and/or politically unstable are less alluring to cosmopolitans in comparison to economies that are dynamic. the latter countries provide plenty of opportunities for growth and learning, even though these economies may still be at the emerging market stage with all its accompanying challenges. this serves to explain why china, the country that has experienced the fastest rate of economic growth in the past quarter of a century, has become a popular destination for graduates and professionals from the west (tung, 2007). at the firm level of analysis, companies that are small may also be perceived as less a t t r a c t i v e f r o m t h e c o s m o p o l i t a n s ’ perspective because they appear to present more limited opportunities for further learning and development. according to towers perrin’s 2006 global survey of 86,000 employees from 16 countries across four continents, “access to learning opportunities” emerged as one of the top ten drivers in the attraction, retention, and e n g a g e m e n t o f e m p l o y e e s w h o a r e “informed, connected, and more demanding than at any other time in history” (winning strategies for a global workforce, 2006). this paper seeks to cast some light on the war on talent by examining how denmark, a small country of 5.3 million people, stacks up to china, the most populous country in the world with a population of 1.3 billion. this research question will be examined in the context of two separate surveys: first, a study of the attitude of chinese students in denmark to return to work in china; and, second, an investigation of the opinions of danish students toward working for chinese companies in denmark and/or china. the findings of this study have implications for small-sized vis-à-vis large companies in their competition for human talent. denmark vis-à-vis china denmark denmark is a small country, both in terms of land mass and population. denmark has a total land mass of 16,629 square miles, about one-tenth the size of the state of california, and a population of 5.3 million (u.s. states: area and ranking). denmark is a welfare state; as such, roughly one-third of all taxes received are redistributed to its citizens in the form of transfer income (andersen, 2007). as such, danes enjoy high wages and generous social welfare benefits. because of the limited size of the domestic market, many danish companies are “born global” (madsen & servais, 1997). with the exception of maersk, one of the largest shipping lines in the world, most danish companies are small, employing less than 100 employees. however, the majority of them have a high export ratio compared to domestic sales. as such, most danes keep an international outlook and, despite low levels of immigration into denmark because of the homogeneity of its society and the difficulty of learning the danish language, danes have been generally perceived to be open to people of other cultures. furthermore, tuition at all levels of education was provided free to citizens and non-citizens alike until 2006. thus, denmark was able to attract a fairly large number of students from china. according to unofficial sources, there are 5,000 chinese students studying in denmark. t h e s e c h i n e s e s t u d e n t s c o m p r i s e approximately one-half of the total number of chinese living in denmark. the danish ministry of education has restricted the maximum foreign intake of students from any given country to 2 percent of the total student population in denmark. the exception to this 2 percent quota is other european union (eu) countries. however, this quota does not apply to colleges and other non-university institutions. even with the introduction of tuition fees for all students outside of the eu in 2006, tuition in denmark is still low compared with those in the u.s. for example, the tuition fee at copenhagen business school (cbs), the leading business school in that country and one of the most highly-ranked business journal of small business strategy 2 programs in europe, is around us $15,000 per year for a two-year master’s program, and us $40,000 for a one-year full-time or two-year part-time mba program. cbs offers primarily undergraduate and master of science programs, since mbas are still a relatively new phenomenon in northern europe. most chinese students who come to denmark enroll in the undergraduate and graduate programs in engineering and business. more recently, some chinese students came to denmark to attend middle school before continuing on to a university. since the general workforce is highly educated, the danish government, in collaboration with its trade unions and employers’ federation, has targeted the development of home-grown knowledgeintensive companies. thus, like other countries with a similar objective, denmark has embarked on a race to attract human talent, wherever they could be found (denmark – a knowledge society). as far as international competitiveness is concerned, according to the 2006-2007 world competitiveness index, denmark ranked number 4, ahead of the u.s. at number 6 position (world competitiveness report, 2006-2007) . china in contrast, china has a population of 1.37 billion and occupies a landmass of 3.6 million square miles, roughly the same size as the u.s. in principle, while china is still a socialist country, it has adopted many aspects of the market economy. this means that state-owned enterprises (soes) co-exist with private and foreign-invested enterprises (fies), with the latter outperforming the former. prior to the adoption of market mechanisms, tuition at all levels of education was free and the government assumed responsibility for all aspects of the social welfare of its citizenry. with the transition to a planned market economy, tuition fees have been introduced. at fudan university, a leading university in china, for example, the tuition fee for an international imba program is us $20,000 and us $35,000 for the executive mba program. at the china europe international business school, the top-ranked business program in china, the tuition for a two-year mba program is us $40,000. furthermore, with liberalization the chinese are free to emigrate and study overseas on their own accord, provided they have the means and wherewithal. according to a 2007 report by the chinese academy of social sciences (cass), there are 35 million chinese emigrants worldwide, making it the largest emigrant population in the world. in the 1990s alone, an estimated 450,000 chinese from mainland china have emigrated to the u.s. between 1978 and 2006, cass reported that over 1.06 million chinese have gone abroad to study. in 2005 alone, of the 118,500 chinese students who went overseas, 105,600 did so at their own expense. thus, most overseas chinese students are under no obligation to return home upon graduation. furthermore, according to the cass report, 70 percent of chinese students have remained abroad upon completion of their studies (watts, 2007). this constitutes a major brain drain for that country. since its open door policy in 1978, china has experienced the fastest growth rate in the world to become the “manufacturing workshop of the world.” every year since 2002, according to a.t. kearney’s foreign direct investor confidence index, china has been ranked as the most attractive destination for foreign direct investment (fdi). in 2007, china is poised to overtake germany as the third largest economy in the world. in 2006, china was the third largest recipient of fdi, after the u.s. and the united kingdom (u.k.). in 2006, china overtook japan to hold the world’s largest foreign reserves – this has enabled china to embark on its own “go global” policy where the objective is to create 30 to 50 “world class” national champions. these developments, coupled with china’s aspirations to become a “technology powerhouse” and the high stay rates of chinese students abroad after completion of their overseas studies, have resulted in an acute human talent shortage in china (tung, 2007). according to farrell and grant (2005), in 2005 alone, china had a talent shortfall of 70,000 executives. one effective way of redressing this shortfall is to appeal to the nationalistic sentiments of volume 19, number 1 spring/summer 2008 3 overseas chinese to return to contribute to economic development at home – the chinese government has done precisely that. another method is to attract qualified nonnationals to work for chinese companies within and outside of china. as noted above, this paper seeks to shed light on how a small but prosperous country such as denmark can compete with china, a gigantic country that is still plagued with lingering economic and social problems, for the same pool of talent supply in denmark. this talent pool includes danes and chinese who are currently studying in that country. the two studies reported in this paper used the same methodology and questionnaire that tung (2007) adopted in her survey of the attitudes of chinese and non-chinese students in canada to work for chinese companies in china and/or canada. where relevant, the findings here will be compared with the canadian study. the first of the two studies presented in this paper investigates the intention of chinese university students in denmark to return to work in china upon graduation. the second study explores the willingness of nonchinese students at danish universities to work for chinese firms in demark and/or china. the most visible example of a chinese presence in denmark is lenovo, the chinese multinational that acquired ibm’s personal computers’ division. these two surveys are supplemented by in-depth interviews with chinese who want to remain in denmark and those who wish to return home. together, these studies can provide a more comprehensive picture of how denmark will fare vis-à-vis china as both countries strive to compete for the same talent pool. methodology first study: chinese students in denmark sample. a modified version of a 5-page questionnaire developed by tung (2007) was used to investigate the attitudes of chinese students with regard to their return to china upon graduation from danish institutes of higher learning. information was obtained on the following: (a) whether they planned to return to china or remain in denmark, including their reasons for so doing; (b) if they intend to return to china, the types of companies they hope to work for; and (c) the most significant challenges they expect to encounter upon return. where relevant, the findings from denmark will be compared with those obtained in canada (with a population of 32.9 million) to determine if country size and other characteristics matter as far as the retention of chinese graduates are concerned. in spring 2007, the questionnaire was distributed online to members of the association of chinese students and scholars group in denmark for completion by ethnic chinese students enrolled in the engineering and business programs at danish universities and colleges. the reason for focusing on students in these two disciplines is that graduates of such programs are in demand in china. thirteen questionnaires were returned online and another 29 responses were collected at an annual job fair for chinese students in denmark at the danish technical university. thus, a total of 42 usable questionnaires were obtained. unlike the canadian sample where many have obtained canadian citizenship or landed immigrant status despite the fact that all were born and raised in china, all participants in this study were studying in denmark on a student visa. this difference might be attributed to one or both of the following reasons: one, the canadian policy on immigration and citizenship is fairly liberal. all foreign students who graduate from a canadian university program can apply for landed immigrant status provided they could find employment. once landed, the immigrant is eligible for canadian citizenship in three years’ time. two, given the cultural and ethnic diversity in canada, it has become a popular destination for emigration by many chinese. in the danish sample, the vast majority of chinese students have lived there for under five years (57 percent has stayed in denmark between two to five years, and 38.1 percent has lived there for less than two years). only 4.8 percent has been in denmark between 5 to 10 years. over one-third (38.1 percent) of journal of small business strategy 4 the respondents were female and 57.1 percent were male; the rest did not specify their gender. slightly under one-quarter of the respondents (23.8 percent) were enrolled in the undergraduate programs, while 69 percent were studying in a master’s program. second study: non-chinese students sample. for the second study, another fourpage questionnaire was adapted from tung (2007) to gather information on the opinions of non-chinese students toward working for (a) a chinese majorityor wholly-owned company in denmark, and the reasons for so doing; and (b) a chinese majorityor wholly-owned company in china. the questionnaire also sought to examine likely challenges that non-chinese students would encounter if they were to work for a chinese company, regardless of location. in spring 2007, the questionnaire was distributed online to non-chinese students enrolled in five classes at a leading business program in denmark. in this second study, 55 usable responses were obtained. about one-half (43.6 percent) of the students were female and roughly one-half (45.5 percent) of all respondents in the second study were enrolled at the undergraduate level. the overwhelming majority of the students were born in denmark. the two surveys of chinese and non-chinese students were supplemented by interviews with three chinese (two females and one male) who have chosen to remain in denmark and another two chinese who wished to return to work in china (one male and one female). these interviews were conducted in may and june 2007 and in the language of their choice (i.e., either english or mandarin). furthermore, in order to obtain qualitative data from non-chinese students about their willingness to work for a chinese company either in denmark or china, eight danish students (three males and five females) were interviewed in may 2007. each interview ranged from 45 to 90 minutes. relevant excerpts from these transcribed interviews were used to support and/or elucidate some of the issues raised in the two questionnaire surveys. findings first study: chinese students abroad 40.5 percent of the respondents expressed their intentions to return to work in china in the next five years; one-half (51.1 percent) said that they were “not sure”; and only a small percentage (2.4 percent) indicated that they “would not” return. no statistically significant difference was found between male and female respondents. compared to the sample of chinese students in canada (tung, 2007), a significantly higher percentage of chinese students in denmark expressed the intention to return (40.5 percent for the danish study vis-à-vis 32.1 percent for the canadian sample) while substantially fewer chinese in denmark (compared to those in canada) indicated that they “would not return to china” (2.4 volume 19, number 1 spring/summer 2008 5 table 1: reasons reported by chinese students for returning to china reasons mean (5= very important) better career opportunities for myself 3.91 other family related reasons 3.82 quality of life in china has improved 3.69 standard of living in china has improved 3.53 better financial remuneration in china 3.33 better career opportunities for my spouse/partner 3.33 my elevated social status in china upon return 3.30 better opportunities for my children 2.94 experienced discrimination in denmark 2.74 not used to danish lifestyle 2.66 percent vis-à-vis 29.4 percent, respectively). these statistics appear to suggest that a large country like canada, a country that espouses an official policy of multiculturalism and has a large ethnically diverse community, including a sizable chinese settlement, enjoys a better chance of attracting chinese students to remain upon graduation. respondents who indicated that they plan to return or were uncertain about returning – the overwhelming majority in this study – were asked to evaluate the importance of different reasons for their decision. table 1 presents these reasons, in descending order of importance. the means and rank-ordering of reasons for their decision were consistent with, while not identical to, that of the canadian sample. “family-related reasons” emerged as a very important reason for their decision. because most chinese respondents were single, this issue was probed further in the interviews. the interviews revealed that from the chinese perspective, “family” includes one’s parents and additional extended family, as opposed to the narrower definition of nuclear family in western countries. as such, even though the majority of chinese students did not experience discrimination nor encounter major problems in adapting to the danish lifestyle, the absence of a sizable ethnic chinese community and the difficulty of learning the danish language appears to have caused many chinese respondents to c o n s i d e r d e n m a r k a l e s s a t t r a c t i v e destination for their parents and members of their extended family. consequently, they demonstrated reluctance to settle in denmark upon completion of their studies. in-depth interviews with several chinese who have decided to return to china have shed some light on these issues. one respondent, for example, said that he “never felt that i am part of them.” the “them” here refers to danish society: while the danes are international in their outlook, in general, they espouse a paradoxically “inward” orientation toward their families and friends. the average dane has a limited number of friends and these seldom include foreigners. a chinese who has settled in denmark has declared to one of the co-authors: “i would like to have a danish friend,” thus suggesting that although he works alongside danes, he does not have any danish friends with whom he could socialize outside of the workplace. another respondent stated, “we always feel that we belong to china and should be there.” it is probably a universal concern that most people harbor fears of “non-belonging or psychological anomie in their adoptive countries” (tung, 2007). a statistically significant difference (p < 0.01) was found between the male and female respondents on the item “not used to danish life style.” apparently, females (mean of 2.07) had an easier time adjusting to danish society than males (mean of 3.06). this finding is consistent with tung’s (2004) assertion that because women still represent a minority in many professional fields, in order to advance their careers, they have to adapt to the majority, even in their home country. thus, in general, women have more experience in adapting. one interviewee concurred by stating “that women always have to adjust – in china and other places.” furthermore, women are perceived to possess stronger language skills than men, including acquisition of foreign languages. through magnetic resonant imaging scans of the brain, the blood flow to the brains of men and women were compared in terms of their language processing functions. when reading a novel, in the male subjects, “only the left hemisphere of their brains was activated. the brains of female subjects, however, showed activity on both the left and right hemispheres” (nazario, 2005), thus appearing to support the commonly-held stereotype that women tend to possess stronger language skills. greater proficiency in a foreign language can, of course, f a c i l i t a t e a d a p t a t i o n t o a f o r e i g n environment. another difference based on gender pertained to the finding that female students emphasized “improved standard of living in china” as a more significant reason for r e t u r n i n g t o c h i n a t h a n t h e i r m a l e counterparts (p < 0.01). a possible explanation for this finding could be that men tended to focus on career prospects while women were more concerned about living standards given their more nurturing journal of small business strategy 6 instincts. this difference is consistent with the observed patterns between male and female students from china (murphy, 2002). in addition, some statistically significant d i f f e r e n c e s w e r e f o u n d b e t w e e n undergraduates and graduate students regarding their reasons to return to china. c o m p a r e d t o t h e i r u n d e r g r a d u a t e counterparts, graduate students were significantly less used to danish lifestyle (p < .01). this might stem from the fact that since the graduate students were older when they arrived in denmark, they have experienced more difficulties in adjusting to the host culture. this finding thus serves to reinforce the conjecture that chinese respondents might be concerned about their elderly parents not being able to adapt to danish lifestyle in the event that they should decide to remain in denmark. when asked about the types of companies they preferred to work for upon return to china, about one-half (45.2 percent) indicated that they want to work for fies; a slightly higher percentage (47.7 percent) expressed that they “don’t know”, i.e., it depended on the opportunity upon return; and 7.1 percent wished to set up their own c o m p a n y. n o n e o f t h e r e s p o n d e n t s specifically expressed a desire to work for soes or chinese companies in the private sector. for those who planned to work for fies, they emphasized “better career opportunities” (mean of 4.21), the provision of “more training” (mean of 4.13), “better salary” (mean of 3.88), and “better working conditions” (mean of 3.82) as the most important reasons for their preference. thus, even though many chinese students have chosen to return to china, nevertheless they have indicated a preference to work for fies. given their knowledge of the danish language and its culture, these chinese students appear to be well-suited to work for danish operations in china. danish fdi in china grew from us $6.5 million in 2004 to us $33 million for the first five months of 2006 (fdi in china, 2006). in addition, some danish investments made in china are routed through hong kong as several danish companies have wholly-owned operations there. with the exception of “better salary,” the differences between females and males were significant at the p < 0.1 level. females emphasized “better career opportunities,” “more training,” and “better working c o n d i t i o n s ” m o r e t h a n t h e i r m a l e counterparts. a possible reason for this finding could be that females, in general, have less career and training opportunities in china. hence, they value these attributes in a job more so than “better salary.” over one-third (38.1 percent) of the respondents indicated that if they were to return to china, they would plan to remain there indefinitely. other respondents said that if they were to return, they would stay for under 5 years (19 percent), between 5-10 years (7.1 percent), and more than 10 years (16.7 percent). the fact that over 60 percent of the chinese respondents believe they would not remain permanently in china is an indication of their openness to leave their country of origin and settle elsewhere. this accounts for the cass finding, reported earlier, that chinese constitute the largest emigrant population in the world (watts, 2007). second study: non-chinese students when danish students were asked whether they would consider working for a majority or wholly-owned chinese company in denmark, 18.2 percent said “definitely yes” and 81.8 percent opted for “maybe/not sure.” none of the respondents said they would “definitely not” work for a chinese company. thus, it appeared that all the danish students, in this study at least, were willing to entertain the possibility of working for chinese companies in denmark. this finding might be attributed, at least in part, to two factors: one, the international outlook of most danes – this is common among people from smaller nations since opportunities appear to abound in the larger world outside as opposed to the limited domestic market. two, china has experienced the fastest rate of growth in the world in the past three decades. thus, many young people see the need to learn about that country. in comparison, 10.8 percent of the non-chinese canadians said that they will “definitely not” work for a chinese company, while 64.7 volume 19, number 1 spring/summer 2008 7 percent were “unsure” and 24.5 percent were definitely willing to do so (tung, 2007). the higher percentage of canadians who expressed clear-cut opinions (i.e., either “definitely yes” or “definitely no”) could stem from the fact that because non-chinese canadians have more experience and opportunity to interact with the chinese, they have more information to make a decision on this matter. the reasons, in descending order of magnitude, that have influenced the danish students’ responses with regard to whether they would consider working for a majority or wholly-owned chinese company in denmark are presented in table 2a. growth prospects associated with china emerged as the most important reason for choosing to work for chinese companies, while the greatest concern that danish students noted is a “disagreement with chinese government policies and programs.” even though the questionnaire probed about working for chinese companies, the fact that “disagreement with chinese government policies and programs” emerged as the primary deterrent for seeking employment with chinese firms suggests that many danes appear to consider chinese companies as inseparable from their government. in other words, this perception is analogous to the fear, yet admiration, that much of the western world had toward “japan inc.” in the 1980s. the term “japan inc.” first appeared in a 1936 fortune magazine and was later popularized by old japanese hand, james c. abegglen, to characterize the cohesiveness of government, big business and labor in japan. the remarkable harmony of mission and objectives among these three groups made possible the phenomenal growth of the japanese economy from the 1960s through the 1980s (the story of japan inc., 2002). this finding of the inability of danish respondents to distinguish between the chinese companies and the chinese g o v e r n m e n t i s c o n s i s t e n t w i t h t h e perceptions of canadians in canada (tung, 2007). however, there were gender differences with regard to attitude to working for a chinese company in denmark. in general, females were more willing to work for chinese companies (p < .05) because of the more limited career opportunities available to them. even though denmark scores high on hofstede’s femininity index (1983), women are significantly under-represented at the senior management level. in denmark, only 22 percent of corporate board memberships are represented by women (facts on gender equality, 2006). this finding that danish women are more willing to work for chinese companies paralleled the results of the canadian sample, albeit in a different manner. in the canadian sample, fewer women were willing to work for a chinese company. however, for those who did, they expressed “better career prospects” as a reason for their decision more often than their male counterparts (tung, 2007). this again points to the fact that even in countries that espouse high gender equality, such as canada and denmark, women continue to experience, whether real or perceived, a glass ceiling in their ascent up the organizational ranks. even though danish students were generally receptive to the idea of working for chinese companies in denmark, it is not surprising, given their inability to separate chinese companies from their government, that less journal of small business strategy 8 table 2a: reasons reported by non-chinese students for willingness or unwillingness to work for a chinese majorityor wholly-owned company in denmark reasons mean (5=to a very great extent) good career prospects posed by rapid growth of china’s economy 3.03 disagree with chinese government policies and programs 2.91 fascination with chinese culture 2.56 low status associated with working for a chinese company 2.29 limited employment opportunities in other companies 2.04 t h a n o n e t e n t h ( 9 . 1 p e r c e n t ) o f t h e respondents indicated that they will work “indefinitely” for a chinese company. the vast majority (58.2 percent) said they were “not sure” whether they will leave once they h a v e a c q u i r e d t h e n e c e s s a r y w o r k experience, and about one-third (29.1 percent) expressed certainty about such a career move. when the questionnaire turned to gauging danish students’ attitude toward working for a chinese majorityor wholly-owned company in china, a very different profile emerged. approximately one-third (30.9 percent) said that they “definitely would not”; another one-half (49.1 percent) indicated that they were “not sure”; and only 14.5 percent gave an unequivocal “yes.” however, even for those who were prepared to work for chinese companies in china, 41.8 percent indicated they would quit once they have gained the necessary work experience. this finding paralleled the canadian situation in which there was a greater reluctance to work for chinese companies when relocation to china was involved (tung, 2007). despite the fact that more danish students were willing to work for chinese companies in denmark as compared to those in china, the sheer fact that 14.5 percent of them responded positively to this question and almost 50 percent were “not sure” is consistent with the growing trend toward boundaryless careers (tung, 1998; stahl, miller, and tung, 2002) whereby highlyqualified professionals were receptive to relocating outside of their countries of origin in search of opportunities that could enhance their careers. given the phenomenal growth in the chinese economy, both chinese and non-chinese alike perceive the value associated with acquiring work experience there, albeit for a couple of years. in the follow-up interviews with the danish students, one danish male indicated that o w n e r s h i p d i d n o t m a t t e r t o h i m . “nationality of the firm is completely irrelevant to me. that is not important. it is all about the opportunities that the company can offer me and my career. i do not care if it is a chinese, danish, german, french, or turkish company as long as the work and the position are interesting.” although none of the danish students could identify a chinese company by name, the majority of danish respondents who were interviewed for this study echoed this sentiment by stating that ethnicity or nationality of the boss does not matter as long as the person can “build team spirit and develop his employees.” some interviewees noted that, indeed, it would be interesting to live in china for a predetermined period of time because of the allure of working in a dynamic economy, especially compared to the alternative of remaining in a stable business environment all the time. a co-author of this paper shares these students’ perspective that china does look attractive to those who come from a country that has experienced little change over the years. in the words of a danish expatriate living in china who was interviewed in 2007, “nothing is happening in denmark.” other danish students felt that if they could perform well in china, it would be a major asset on their resume. for those danish students who were willing t o r e l o c a t e t o c h i n a , t h e p r e f e r r e d destinations were shanghai, the commercial center of china, beijing, and guangzhou in the south. these are the most developed cities in china and are consistent with the preference expressed by chinese students in other studies (world hr lab survey, 2004; tung, 2007). the danish students felt that it was important to live and work in the developed cities because the sizable foreign community in these locations would help ease adjustment: “if i can work for a chinese company in denmark, i don’t see any problems with working for one in china. i would prefer to work in shanghai, beijing, or guangzhou because these places have attracted many companies and have a strong foreign community.” in general, there was little gender difference among danish students in their overall attitude toward working for chinese companies. that is, both male and female danish students were more willing to work for a chinese company in denmark and were less concerned about the nationality of the firm. in fact, one female student thought that volume 19, number 1 spring/summer 2008 9 “it sounds cool to say that one works for a chinese company.” however, by and large, the female students were more apprehensive about the prospects of working for a chinese boss. one danish female student expressed that: “it would be difficult for me to work under a chinese boss – maybe he is not used to danish women’s straightforwardness and equality.” another female interviewee elaborated on this concern: “i am probably prejudiced, but i think that chinese society is much more male dominated than society in denmark, and there are more men in leading positions than women in china. that is why it would be more difficult for me – a woman – to be promoted to the top in a chinese company with a male boss.” in other words, danish women perceive the possible existence of a glass ceiling in a maledominated country. there may be grounds for this concern – bishop and chiou (2004), for example, found that the gap between organizational/managerial ranks held by men and women has widened in recent years in china, with females losing more ground to their male counterparts. in 2006, denmark r a n k e d 1 5 t h o n t h e g e n d e r r e l a t e d development index (gdi) compared to 81st position for china. for the same year, c a n a d a r a n k e d 6 t h ( g e n d e r re l a t e d development index, 2006). yet another female interviewee expressed a different challenge associated with working for a chinese boss: “i think it would be a bigger challenge to work under a boss who is a chinese national because i would not know what to expect ... normally we (danes) talk in a casual and informal tone, and don’t really care about titles and all that stuff. perhaps with a chinese manager, this might not be appropriate. i suspect that there would b e c o m m u n i c a t i o n p r o b l e m s i n t h e beginning.” similar to the findings in the canadian sample (tung, 2007), while the majority of danish women interviewees expressed more reservations about working for a chinese company, one female respondent saw a silver lining by stating that: “career women in china definitely have a harder time. women need to be a little bit tougher, more persistent and not give up easily. however, i see that many of the students from china are women which imply that they have the will and the possibilities to have a career. the more career women there are, the better the conditions for women in general. china’s booming economy perhaps offers more job and career opportunities for women than in our part of the world – no matter how hard it is.” in fact, even women in more gender egalitarian countries, such as the u.s., perceive the advantages associated with successfully serving in an international assignment on their subsequent career advancement. in her study of a comparative journal of small business strategy 10 table 2b: reasons reported by non-chinese students for unwillingness to work for a chinese majorityor wholly-owned company in china reasons mean (5=to a very great extent) my spouse/partner may object to relocation to china 3.7 the inability to fully understand the mentality of my chinese boss and/or colleagues 3.59 perceived influence by the chinese government in the company’s operations 3.28 other family related issues 3.28 deal with more bureaucracy 3.22 corruption and other unsavory business practices 3.22 poor working conditions, such as long hours, lower compensation, less job security 2.96 glass ceiling, i.e., perception that non-chinese will have limited opportunities for advancement to the top 2.61 difficult to transfer experience to other non-chinese companies 2.16 sample of 80 male and 80 female expatriates, tung (2004) found that the women executives were more willing to undertake a s s i g n m e n t s t o c u l t u r a l l y t o u g h , economically less developed and politically unstable countries as long as they were not precluded from performing the duties associated with their job. furthermore, in the interest of career advancement, women were more willing to make personal sacrifices, including accepting an overseas posting even if their family objected to the assignment. these findings have led tung (2004) to raise the specter that women may be the ideal global manager. when asked about the challenges that they would most likely encounter if they were to accept employment to china, the danish students expressed many concerns. these c h a l l e n g e s , i n d e s c e n d i n g o r d e r o f significance, are presented in table 2b. four of the six challenges had a mean score above 3, the neutral point, suggesting that these concerns were quite significant. in the canadian sample, all six challenges received mean scores of over 3. furthermore, most of these concerns pertained to family issues and perceived problems of dealing with the chinese bureaucracy. the spouse’s possible objection to relocation was identified as the most significant challenge. thus, the danes appear to be as equally concerned as the chinese students with family issues. this finding might stem from their awareness that successful adjustment to living and working abroad is very much a family affair, a point that has been repeatedly made in the e x p a t r i a t i o n l i t e r a t u r e ( tu n g , 1 9 8 1 ; garonzik, brockner, and siegel, 2000; hutchings, 2003; spector, cooper, poelmans, allen,o’driscoll, and sanchez, 2004; tung, 1998). one danish respondent bluntly stated that he would not relocate for any company, regardless of its nationality: “no! i don’t think that i would consider moving to china to work. not for a chinese or a danish company or any other company for that matter. i am too attached to denmark. my girlfriend, family, and friends are all here.” aside from members of the immediate family who will usually relocate with the expatriate, the sentiment expressed by this danish respondent here exemplifies the paradoxical “inward” orientation that many danes have toward their family and friends discussed earlier. as far as the perceived problems with the chinese bureaucracy is concerned, one danish respondent noted as follows: “i think there would be more bureaucracy in a chinese company compared to a danish one. the former communist countries that i have visited have all been very cumbersome and bureaucratic. i have never been to china, so this is just a feeling. you need a stamp on everything and you have to pay to get your papers stamped. i suspect china and chinese organizations are also like that too.” another female interviewee elaborated on her concerns as follows: “another challenge would be to understand how business operates in china. i suspect that although the economy is roaring, there are still areas where things are not as developed as in the west. for instance, i hear that it is most important to know the right people. china is still a totalitarian regime and companies need to have much more contact with the authorities and that probably means a lot of red tape, etc. business does not quite operate according to that in the west.” another reservation about working in china that emerged in the interviews pertained to perceived problems of communication: “language is also important. that is another reason for not considering china. i want to be able to speak the local language if i were to live in a certain place.” this concern was elaborated upon by another interviewee: “language is important to make you feel that you belong in a place. if you cannot speak to the local people in the local language, then you will never belong and always remain an outsider. i don’t want that.” discussion and conclusion this paper has used the case of denmark to illustrate the challenges that a smaller nation has in attracting and retaining human talent. this analysis was couched in the context of two related studies: a sample of chinese students in denmark who could choose to return to china, opt to stay in denmark, or volume 19, number 1 spring/summer 2008 11 relocate elsewhere upon graduation; and a sample of danish students about their attitude toward working for the world’s most dynamic economy even though it is still fraught with growing pains. the two studies revealed that: one, an overwhelming majority of chinese students did not plan to remain in denmark. however, most chinese students preferred to work for fies in china. two, many danish students were receptive to the idea of working for a chinese c o m p a n y, a l b e i t i n d e n m a r k , a n d substantially fewer of them were willing to relocate to work in china. however, for the minority of danish students who were open to working in china for a while, they were attracted by the excitement of gaining work experience in a fast-paced environment where “change” appears to be the only constant. in surmising the findings of both samples reported in this paper, coupled with the study of chinese students in canada and nonchinese canadians’ attitude toward working for chinese companies (tung, 2007) which inspired the surveys at hand, several important conclusions can be drawn about the global war on talent, with implications for smalland medium-sized enterprises (smes): first, the war on talent is here to stay. with the dawning of the knowledge-based economy, those companies that can attract and retain the best and most qualified professionals will thrive. thus, it is imperative that companies, regardless of size, seek to recruit talent from wherever they could be found. however, just as companies can readily recruit highly qualified professionals from other countries, given the growing boundaryless nature of the workforce, they have to be cognizant that it is just as easy to lose these cosmopolitans to other firms, both domestic and international. hence, the key here is not just attraction, but retention of cosmopolitans. as shown in the two studies reported in this paper, companies in both denmark and china have to compete for the same talent pool, in this case danish and chinese graduates in business and engineering. second, consistent with the 2006 towers perrin survey on “winning strategies for a global workforce” (towers perrin, 2006) reported earlier, the chinese students i d e n t i f i e d o p p o r t u n i t i e s f o r c a r e e r development, i.e., acquiring valuable experience on the job, as one of the principal reasons for returning to china. the same motivation applied to danish students if confronted with an offer to work for a chinese company. thus, it appears that from t h e p e r s p e c t i v e o f h i g h l y q u a l i f i e d professionals, regardless of nationality and country of origin, the “job of choice” is one that offers abundant opportunities for learning and development. this is so because the skills and competencies that they acquire can be readily transferred to another position and locality, if they so choose. by virtue of their size, smes appear to be wellpositioned to do this since the employee would have more opportunity to learn about different aspects of the organization as compared to their larger counterparts. third, similar to the findings of the canadian samples (tung, 2007), the two studies reported in this paper showed that while men and women both look for challenging positions and opportunities for learning and development, their concerns about accepting a position tend to be different. in general, women are more concerned about the existence of a glass ceiling. because of the “personal touch” and flatter organizational hierarchy typically associated with smes, many women may find them to be more attractive as prospective employers (worm, 1997). fourth, a larger country such as canada that embraces cultural and ethnic diversity has a b e t t e r c h a n c e t o a t t r a c t a n d r e t a i n cosmopolitans from around the world. however, size does not appear to matter as much as cultural diversity since canada has only one-tenth the population of the u.s. thus, openness to members of other ethnic groups appears to be more salient. since many immigrants have a more difficult time i n f i n d i n g e m p l o y m e n t w i t h l a rg e r organizations in their adoptive countries, smes might have a better chance of attracting them (chung, 2002). journal of small business strategy 12 future research based on a larger and more diversified sample should, of course, explicitly test these assertions to determine how smes would fare vis-à-vis large companies in the global war on talent. references abegglen, j. 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(http:// www.enchantedlearning.com/usa/ states/area.shtml). rosalie l. tung is a chaired professor of international business at simon fraser university (canada). she served as the 2003-2004 president of the academy of management. verner worm is professor of chinese business and development and director copenhagen business confucius institute at copenhagen business school. his main research is cross-cultural management and international human resource management related to china. susan aagaard petersen has a ph.d. in business economics from copenhagen business school and is currently a lecturer of chinese language. journal of small business strategy 14 http://education.guardian.co.uk/students/internationalstudents/story/0,2093749,00.html http://education.guardian.co.uk/students/internationalstudents/story/0,2093749,00.html http://education.guardian.co.uk/students/internationalstudents/story/0,2093749,00.html 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http://www.enchantedlearning.com/usa/states/area.shtml http://www.enchantedlearning.com/usa/states/area.shtml reproduced with permission of the copyright owner. further reproduction prohibited without permission. s sustainability as a small business competitive strategy abbas nadim university of new haven anadim@newhaven.edu robert n. lussier springfield college rlussier@spfldcol.edu abstract in our global village, sustainability has been an important topic for all countries, and small businesses can create a competitive advantage through developing sustainability strategies. this conceptual article extends the current literature by presenting the case for small businesses to become integrated in the surrounding community and to make sustainability a strategic long-term competitive advantage and a critical co-producer of its long-term success. implications and the need for further research are discussed. keywords: small business, community, sustainability, sustainable strategic management (ssm) introduction cohen and winn (2005) found the entrepreneurship literature on sustainability to be rather thin, and the changes achieved today are only incremental. our literature search for “small business and sustainability” and “entrepreneurship and sustainability” resulted in hundreds of matches. however, reviewing the abstracts indicates that most of them do not address small business and sustainability as a competitive advantage for long-term success. in 2008, the international journal of sustainable strategic management started publication. however, a review of the articles found that the focus is on large businesses’ sustainable strategic management (ssm); no articles were found regarding small business ssm. current research primarily focuses on environmental and ecological points of view (parnell, 2008). more to the point, many of the articles focus on corporate social responsibility issues and are not based on u.s. data. generally, the perception of many small business owners is that they have more pressing issues to deal with in order to stay  trateg y   journal of small business  79 mailto:rlussier@spfldcol.edu http://www.inderscience.com/browse/index.php?journalid=244&year=2008&vol=1&issue=1 http://www.inderscience.com/browse/index.php?journalid=244&year=2008&vol=1&issue=1 journal of small business strategy volume 21, number 2 alive and be profitable, and that sustainability is not a strategy that they might actively pursue. in this article, we present the case for small business to get integrated in the local community and to make sustainability a foundation for competitive advantage and a critical coproducer of long-term success. we begin with a foundation explaining the importance of community and the need to sustain it through the relationship with small business by developing sustainability strategies that contribute to the success of both entities. the second section describes sustainability and sustainability entrepreneurship. the third section discusses sustainable development including codes of environmental conduct and examples of green management strategies. our last section provides discussion and implications with recommendations for further research. community and sustainability strategies the need for local community relations. in jsbs, michael porter (1998) discussed the importance of the local community and the need for small business to create competitive advantage. community benefits from small business have been well documented (arikan, 2010; kobeissi, 2009). the use of community collaborative relationships with external parties as a competitive advantage has been strongly supported by researchers (de clercq & rangarajan, 2008; fitzgerald, haynes, schrank, & danes, 2010; niehm, swinney, & miller, 2008; pirolo & presutti, 2010; sorenson, folker, & brigham, 2008). community relationships are needed to acquire resources to meet small business needs (sorenson, et al., 2008), as small businesses need both equity and social capital to succeed. the need for equity capital has been well documented, and community relations with local bankers can help small businesses get funding (ames, romano, & pham, 2002). the need for social capital, including collaborative network relationships in the local community, has also been well documented (pirolo & presutti, 2010; sorenson, et al., 2008) as effecting small business performance. an important part of the larger community relations is customer relations (de clercq & rangarajan, 2008). achua and lussier (2002) found that when national discount chains come to town, small business try to compete head on by lowering prices unsuccessfully, rather than focus on community/customer relations. hockerts and wüstenhagen (2010) stated: “we suggested that in the early stages of an industry’s sustainability transformation, new entrants (‘emerging davids’) are more likely than incumbents to pursue sustainability-related opportunities” (p. 481). litz and stewart (2000) found that personalized customer relationships have a positive effect of small business performance; it is a sustainable small business competitive advantage when competing against scale-oriented competitors. community and sustainability can contribute to small business success. entrepreneurs start business ventures to generate economic wealth, but many don’t succeed (fiore & lussier, 2009; lussier, 1995; lussier & pfeifer, 2000, 2001). success of a venture is uncertain (carter & van auken, 2006); failure is a norm (jiao, welsch, & moutray, 2009). in the u.s. there are over a half million new startups, and around the same number close each 80 journal of small business strategy volume 21, number 2 year (sba, 2011). understanding of why firms fail or succeed is crucial to the stability and health of the community and economy (lussier & corman, 1996; michael & combs, 2008; pompe & bilderbeek, 2005; van auken, kaufmann, & herrmann, 2009). to date, there is no universal agreement on the causes of small businesses success or failure (rogoff, lee, & sub, 2004) because there is great discrepancy in the literature as to which variables do in fact lead to success and failure (lussier & halabi, 2008, 2010). the major gap in the current literature is twofold. first, the current focus of success vs. failure research is primarily on identifying a list of internal environmental factors. organizations face both internal and external obstacles that make survival difficult (miller, besser, & riibe, 2007); however, success vs. failure research tends to focus on the internal environment, such as capital and management. research supports that the external environment affects the success of small business (de clercq & rangarajan, 2008; lim, morse, mitchell, & seawright, 2010) and that both internal and external factors must be addressed to build sustainable success (smith, discenza, & baker, 2006). secondly, as already discussed, research supports the importance of the local community to the success of small business. however, we have not found any research that includes the external local community as a variable in a success vs. failure study. thus, an important missing factor may be the external factors of the local community and sustainability. the need for community oriented sustainability strategies. the need for scanning the environment has been found to influence small business success (stewart, may, & kalia, 2008). research also supports the importance of the local community environment on small business success (miller, et al., 2007) and the need for strategic planning for company success (hodges, & kent, 2007). there has been a call for small business and entrepreneurship research to address issues that really matter and make important contributions to making the world a better place (wiklund, davidsson, audretsch, & karlsson, 2011). shepherd and patzelt (2011) stated that “sustainable development is perhaps the most prominent topic of our times” (p. 137). thus, to be sustainable, small business needs the local community, and vice versa. to these ends, we present the case for small business to engage in local community relations and sustainability as strategic initiative for long-term success. based on the need for a local community sustainability foundation, let’s discuss sustainable entrepreneurship. sustainable entrepreneurship social and sustainable entrepreneurship (sse) has become one of the most exciting and fastest growing areas of entrepreneurship (dacin, dacin, & matear, 2010; di domenico, haugh, & tracey, 2010). in 2004 there were 23 schools in the u.s. that had established centers for social and/or sustainable entrepreneurship. since then, there has been an explosion of courses in the u.s. and abroad. in addition, there are a growing number of college majors and minors in the field (brook & steiner, 2008) and the academy of management learning & education had a special issue on sustainability (aom, 2010). the importance of these fields presents a unique strategic choice for small businesses and their success. community and small businesses are the two sides of the same coin. local communities and small businesses should 81 journal of small business strategy volume 21, number 2 work together for their long-term sustainability (shepherd & patzelt, 2011). sustainability. “the phase corporate sustainability is increasingly prevalent in both the industry press and management journals” (gallo & christensen, 2011, p. 315). society expects sustainability; . . . “people expect managers to use resources wisely and responsibly; protect the environment; minimize the amount of air, water, energy, minerals, and other materials found in the final goods we consume; recycle and reuse these goods to the extent possible rather than drawing on nature to replenish them; respect nature’s calm, tranquility, and beauty; and eliminate toxins that harm people in the workplace and communities” (marcus & fremeth, 2009, 17). like many concepts and constructs, there is no one universally agreed upon definition of sustainability. however, one of the most, if not the most, commonly cited definitions of sustainability was developed by the brundtland commission. “sustainability is meeting the needs of today without sacrificing future generations’ ability to meet their needs” (brundtland, 2009). the brundtland commission, formally the world commission on environment and development (wced), was convened by the united nations in 1983. the commission was created to address growing concern "about the accelerating deterioration of the human environment and natural resources and the consequences of that deterioration for economic and social development." in establishing the commission, the un general assembly recognized that environmental problems were global in nature and determined that it was in the common interest of all nations to establish policies for sustainable development” (wbcds). what is sustainable entrepreneurship? shepherd and patzelt (2011) called sustainable entrepreneurship a new field of study. sustainable entrepreneurship research has emerged from the larger body of business environmental and social responsibility research. it views entrepreneurship as a potentially potent tool in shifting socio-economic institutions, both private and public, towards an orientation that contributes to sustainable development. it is a merger between the entrepreneurship and sustainable development agendas. conceptually, it draws on knowledge from conventional entrepreneurship studies, newer research into social entrepreneurship, and business and environment studies, among others. cohen and winn (2007) also called sustainable entrepreneurship an emerging field. they stated that sustainable entrepreneurship “enables founders to obtain entrepreneurial rents while simultaneously improving local and global social and environmental conditions” (p. 29). gibbs (2009) “focused on investigating the role that sustainability entrepreneurship may have in engendering a shift in the practices and operations of contemporary capitalism” (p. 63). sustainopreneurship is a concept that has emerged from earlier conceptual development social entrepreneurship and ecopreneurship, via sustainability entrepreneurship (shepherd & patzelt, 2011). among the co-producers of these movements, the ecopreneurs “environmental entrepreneurs who are utilizing green issues as a competitive advantage for their firms” have come to prominence as one of the key players. gibbs (2009) “focused on a subset of sustainable entrepreneurs termed 'ecopreneurs' who seek to combine business practice with 82 http://en.wikipedia.org/wiki/natural_environment http://en.wikipedia.org/wiki/social_development http://en.wikipedia.org/wiki/sustainable_development http://en.wikipedia.org/wiki/sustainable_development http://en.wikipedia.org/wiki/sustainable_development http://en.wikipedia.org/wiki/sustainable_development http://en.wikipedia.org/wiki/sustainable_development javascript:__dolinkpostback('','ss%7e%7ear%20%22gibbs%2c%20david%22%7c%7csl%7e%7erl',''); http://en.wikipedia.org/w/index.php?title=ecopreneurship&action=edit&redlink=1 javascript:__dolinkpostback('','ss%7e%7ear%20%22gibbs%2c%20david%22%7c%7csl%7e%7erl',''); javascript:__dolinkpostback('','ss%7e%7ear%20%22gibbs%2c%20david%22%7c%7csl%7e%7erl',''); journal of small business strategy volume 21, number 2 sustainable development and so transform their business sectors” (p. 63). gibbs stated that “sustainability entrepreneurs are increasingly seen as being in the vanguard of a shift to a new form of capitalist development that can help to address fears over global warming, climate change and their associated negative environmental impacts” (p.63). the concept of sustainable entrepreneurship is about creating business organizations to solve problems. small business can utilize social and environmental sustainability as a strategic objective and purpose. in other words, it is a “business with a cause,” where the world problems are turned into business opportunities by deployment of sustainable innovations. in short—it is entrepreneurship and innovation for sustainability. contributing to this new field of study, shepherd and patzelt, (2011) offer the following definition: “sustainable entrepreneurship is focused on the preservation of nature, life support, and community in the pursuit of perceived opportunities to bring into existence future products, processes, and services for gain, where gain is broadly constructed to include economic and non-economic gains to individuals, the economy, and society” (p. 137). in a briefer definition, parrish and foxon (2009) stated: “sustainability-driven entrepreneurs design ventures with the primary intention of contributing to improved environmental quality and social well-being in ways that are mutually supportive” (p. 47). martine, jouhaina, and viviane (2011) compared entrepreneurs’ individual values between sustainability-driven and less engaged firms in canada, tunisia, and cameroon and found individual value differences. sustainability-driven entrepreneurs are more inclined to implement sustainability strategies. entrepreneurship based on the principles of sustainability goes beyond a narrow financial scope to a more integrated environmental and social form of wealth (tilley & young, 2009), as sustainabilitydriven entrepreneurs focus on the triplebottom-line adding profits to create value for their stakeholders (schlange, 2009). however, external stimuli, such as profitability through savings and government incentives, do help motivate sustainability strategies (martine, et al, 2011). government incentives are being used successfully to encourage sustainable strategies e.g. “washington state department of ecology” (goetz, 2010). based on our foundation of sustainable entrepreneurship, we now offer a discussion of sustainable developmental strategies. sustainable development strategies “environmental, social and economic sustainability is interconnected from the local to global scale. how we use our natural resources impacts business and society and its natural environment on a global bases on an ongoing and sometimes destructive basis” (call, 2009: 312). environmental issues are now a major social concern (berrone & mejia, 2009), and sustainable development has become one of the foremost issues facing the world (ambec &, lanoie, 2008). “sustainability, or multifaceted long-term quality of life, may be the most complex yet vital phenomenon of our time” (call, 2009: 312). “concern about whether the socialecological processes that provide for human wellbeing can be sustained has given rise to sustainable development as a broad social goal. as a dynamic force for change, entrepreneurship is increasingly expected to 83 journal of small business strategy volume 21, number 2 contribute to this goal” (parrish 2010, p. 510). proactive sustainability strategies can be used to create a competitive advantage (delmas, hoffmann, & kuss, 2011). entrepreneurial sustainability strategies can create value for multiple stakeholders (o’neill, hershauer, & golden, 2009), and “sustainability entrepreneurs could potentially be the true wealth generators of the future” (tilley & young, 2009, p. 79). in fact, york and venkataraman (2010) proposed entrepreneurship as a solution to, rather than a cause of, environmental degradation because entrepreneurs are often likely to supplement, or surpass, the efforts of governments, ngos and large firms to achieve sustainability. business, society, and governments all need to work to sustain our environment through sustainable development (call, 2009). the field of strategic management has seen a rise in the concept of sustainability (lester, 2008). sustainable strategic management (ssm) is concerned with the development and implementation of strategies that are sustainable from both market and environmental perspectives (parnell, 2008). the term ssm is evolving from a rudimentary idea towards a more mature framework for managing business organizations in the 21st century as the concept of ssm moves from its simple competitiveness-advantage roots, to doingwell-by-doing-good corporate strategies of today (stead & stead, 2008). again, there is a lack of literature on small business ssm. dean and mcmullen (2007) stated that “entrepreneurship can help resolve the environmental problems of global socioeconomic systems” (p. 50). in this section, we discuss the world business council for sustainable development (wbcsd), codes of environmental conduct, and green management with examples. world business council for sustainable development (wbcsd). one of the leaders in the global effort to promote sustainable business practices is the world business council for sustainable development (wbcsd). its mission is “to provide business leadership as a catalyst for change toward sustainable development, and to support the business license to operate, innovate and grow in a world increasingly shaped by sustainable development issues” (wbscsd, 2011). the wbcsd is a ceo-led global association of 200 companies from more than 30 countries and 20 different industries, including ibm, nokia, deutsche bank, honda, infosys, and cemex dealing exclusively with business and sustainable development (wbscsd, 2011). the wbcsd challenges businesses to manufacture and distribute products more efficiently, to consider their lifelong impact, and to recycle components. it believes that the more eco-efficient companies are more competitive and more environmentally sound. eco-efficiency is defined as companies that add the most value with the least use of resources and pollution. for more information about wbcsd, visit its web site (www.wbcsd.org). codes of environmental conduct. in line with codes of conduct, organizations also develop codes of environmental conduct, which are helping sustainability (osagie, 2008). many companies have developed their own codes or follow the codes developed by other organizations. here are some example organizations of codes of environmental conduct that small firms can use and/or adapt to their own businesses.  iso 14000 certification is given to firms that meet a series of voluntary international global environmental 84 http://www.wbcsd.org/ journal of small business strategy volume 21, number 2 performance standards. it has 161 members from around the globe. for more information on the international organization for standardization (iso) and its iso 14000 certification standards, visit its website (www.iso.org).  the international chamber of commerce (icc) has developed the business charter for sustainable development, which has 16 principles that identify key elements of environmental leadership and call on companies to recognize environmental management as among their highest corporate priorities. for more information, visit its website (www.iccwbo.org).  others. in addition to these two multiindustry organizations, there are also industry specific organizations that have codes of environmental conduct including: equator principles (financial industry), forest stewardship council principles (forest products industry), the marine stewardship council (fishing industry), and the u.s. green building council (it certifies green building practices for the construction industry).  sustainability reports. some businesses, primarily large firms, are reporting to what extent they meet their sustainability goals (piechocki, 2004). green management. should businesses undertake sustainability strategies referred to as green management? some people state that businesses should only engage in green management activities that complement the business and pays for itself (siegel, 2009). green management pays for itself when the expense of the activity slashes costs and/or boosts efficiency (plant, 2010). on the other side, some people state that businesses have a moral obligation to go green, whether it pays is only partly relevant (marcus & fremeth, 2009). in another approach, some entrepreneurs have started business ventures to help firms go green. the question is, is a green business a sustainable business (cosper, 2010)? today, most businesses view greening of the environment and greening of economics and financial returns as going hand in hand, hence they are embracing green management (bennett, 2009). within the last few years a new title has emerged— chief sustainability officer (cso). linda fisher is the cso of dupont, and her job is twofold. first, it is to keep operations in compliance with the law and, going beyond that, to reduce our footprint; to increase efficiency and reduce cost. the second part is to find market opportunities that are going to evolve through societal needs— new ventures (covin, 2009). we need sustainability going “from natural resource extraction through manufacturing and service delivery processes to material and energy reuse and waste.” “organizations have advanced sustainability by implementing the following green management activities: by reducing energy consumption, conserving water supplies, improving air quality, and preserving eco-systems and other community ills.” firms are going “green” by: “constructing energy-efficient buildings, installing or upgrading recycling systems, using renewable energy, purchasing environmentally preferable equipment and supplies, and working with one another and with surrounding communities to advance sustainability values” (call, 2009: 312). brief examples. fedex, a global supply chain organization, is viewed as an example of a business that has weathered many storms to remain a vital and sustainable 85 http://www.iccwbo.org/ journal of small business strategy volume 21, number 2 competitor in a fast maturing industry (lester, 2008). here are a few specific examples of green management practices by different companies. we realize that the examples are from large businesses, but the literature review did not find any examples from small businesses. however, as stated with the examples, small business can use these ideas as a springboard to generate their own ideas on how they can develop sustainable strategies.  wal-mart has been building green stores for a while now, its latest activity is a new “green” environmental labeling program for the products it carries. this program could redefine the design and makeup of consumer goods sold around the globe. the rating will boost costs for suppliers and customers. customers will eventually see the ratings alongside prices for everything from t-shirts to televisions (bustillo, 2009). when building new facilities small businesses can consider going green.  dell computer has designed its pcs with many recyclable parts and offers free recycling to its customers. many old computers are taken apart, rebuilt, and sold as refurbished machines (lawrence & weber, 2011). small businesses can recycle their computers.  volkswagen designs cars for eventual disassembly and reuse. old cars can be taken apart in just three minutes. plastics, steel, precious metals, oil, acid, and glass are separated and processed. many materials are used again in its new cars (lawrence & weber, 2011). small businesses may be able to become outsourcing candidates for part of this process.  nissan ceo, carlos ghosn, hopes to be a first mover by leapfrogging the hybrid cars. the all electric batterypowered leaf gets 100 miles before it needs to be recharged (ramsey, 2010). are people willing to pay more for more sustainable products? by and large the answer is no (colvin, 2009). so will drivers buy the leaf? nissan has invested more than $5 billion in the first version of the leaf. ghosn expects the leaf to be profitable with global sales of $500,000 in 2013. only time will tell if the leaf will turn into a green profit opportunity, or red losses (ramsey, 2010). small businesses can buy and sell energy efficient products. amazon.com. below are the categories of “amazon and the environment.” small businesses may be able to copy some of these ideas. for details of each area, go to www.amazon.com and click “amazon and our planet.”  frustration-free packaging (eliminates hard plastic "clamshell" cases and those annoying plastic-coated wire ties, commonly used in toy packaging)  reducing packaging waste (reduces excess packaging in its shipments and uses recyclable packing materials)  environmentally friendly packaging (use of recycled material and shipped containers are 100% recyclable)  earth kaizens (environmental and energy initiatives across all parts of the company.)  eco-friendly building design (new corporate headquarters in seattle will consist of eleven sustainable, ecofriendly buildings, and the campus will include leed-certified interiors and exteriors )  green products (including epeat® (the electronic product environmental assessment tool), energy star®, watersense and usda organic. 86 http://www.amazon.com/b/ref=gw_m_b_corpres?ie=utf8&node=13786321 http://www.amazon.com/b/ref=gw_m_b_corpres?ie=utf8&node=13786321 journal of small business strategy volume 21, number 2 discussion and implications our discussion here complements the current scholarly and consulting activities on small businesses. we urge our colleagues to look at the interaction of the parts of a small business (employees, technology, etc.), the whole (the businesses itself and the way it innovates, plans and creates a competitive advantage), and the way it interacts with its stakeholders and the larger system (the local community.) this complementary approach requires recognition of the need and awareness by the small businesses of its local community in which it operates, and steps they can take to create a sustainable enterprise and a sustainable large community system to depend on. because of the interdependence of the small business and its local community, future research can expand the definition of small business to include local community involvement. also, as discussed, because the local community is proposed as a critical success factor of small business, future research is needed to support or refute the proposition. to this end, further research needs to determine success vs. failure by changing from a strictly internal focus to include other stakeholders, especially the local community and sustainability. for example, future studies could compare differences between those small businesses that were engaged in the local community and used sustainability strategies to firms that did not. there is a need for further research in sustainable strategic management (ssm) (parnell, 2008). mccann and holt (2010) found that “the concepts of ssm remain complex and confusing for employees, leaders and organizations to grasp.” “it is a challenge for today's organizations to define these concepts and to be able to measure them” (p. 04). for example, the generally accepted definition of sustainability is “meeting the needs of today without sacrificing future generations’ ability to meet their needs.” this is a very broad statement. therefore, another area for further research is developing an operational definition of sustainability, specifically for small businesses. a major challenge in further research on ssm is accurately assessing and measuring the extent to which sustainability strategies are actually implemented efficiently and effectively (carraher, buckley, & carraher, 2008). researchers need to determine how to measure sustainability. also, the definition of a sustainability strategy needs to be measured as a variable to determine relationships with other variables, such as performance and profitability in small businesses. from the small business owners’ position, they need to define sustainability as part of their sustainable strategies. “some pundits have gone as far as to suggest that sustainability represents a shift equal in magnitude to the industrial revolution. while perhaps an audacious claim, sustainability nonetheless is capturing the attention of business firms, governments and consumers. consumers, for example, place the highest burden on business to address sustainability. surprisingly, however, many executives appear to be unclear as to what their longterm strategy should be, given sustainability” (galbreath, 2009: 303). thus, small business owners need to determine their sustainability strategies. the main purpose of any entity, profit or not-for-profit, is to remain viable—to sustain itself and stay alive. it does so by creating and maintaining a competitive 87 http://www.inderscience.com/search/index.php?action=basic&wf=author&year1=1995&year2=2007&o=2&q=%20m.%20ronald%20buckley http://www.inderscience.com/search/index.php?action=basic&wf=author&year1=1995&year2=2007&o=2&q=%20charles%20e.%20carraher journal of small business strategy volume 21, number 2 advantage. as discussed, the local community and sustainability are proposed as critical success factors that can create competitive advantages. thus, we recommend the adoption of these strategies by small business owners and those who consult to them. by adopting these strategies, the small business and local community, as well as other stakeholders, all benefit. however, faced with ever increasing competition, the continuing challenge is to maintain the edge. it requires creativity, innovation, social responsibility, taking roots in the local community and sustainability. as discussed, there has been limited research in small business and sustainability, and none focusing on sustainability strategies used by small firms. also, the examples in this article of sustainability are taken from large businesses because we found no literature providing examples in small firms. therefore, further research is needed. case studies of small businesses that do use sustainability strategies could provide researchers and practitioners, and those who consult to small businesses, with strategies and examples of successful stories that can lead to benchmarking and best practices. also, as stated earlier, some business advisers and banks interfere with the pursuit of sustainability practices (schick, marxen, & freimann, 2002,) thus they need to be educated to understand that sustainability strategies can be a competitive advantage and help small business develop and implement sustainable strategies. sustainability is generally regarded by small businesses as not necessary or fundamental reason for prolonging the life of a business and ensuring its viability. one main reason is the cost associated with obtaining sustainability certificate. because of the complex and costly procedure, sustainability has been the domain of large and mostly manufacturing companies and, to an extent, ignored by small businesses as a competitive strategy. our recommendation here is to change the attitude, and again, adopt sustainability as a competitive advantage. let’s further discuss the need and benefits of adopting sustainability as a strategy. first we discuss the positive side of being proactive, and secondly being forced to engage in sustainability—so why wait? for the practitioners and owners of small businesses, and those interested in starting or consulting to one, our message is that sustainability through community is both a strategic approach and an instrument for long-term viability. there are strong indications that adapting the stakeholder’s theory (sustainability) of an enterprise will prepare the small business to move from an inactive, reactive, proactive stance towards sustainability to an interactive posture (freeman, 1984). the aim of the business will expand from making profit for the owner to delivering value to the stakeholders, one of whom is the owner and another important one, the community at large. a sustainable business then aspires to deliver value to the stakeholders in terms of economics, environmental, social, ecological, people, and the planet. “r. paul herman has developed a research method to determine the comparative profitability of companies that have adopted sustainable business models.” “these companies have outperformed the s&p 100 benchmark by more than 400 basis points” (plant, 2010: p. 6). the approach identifies five areas a company should be focused on if it seeks to build a sustainable business practice and strategies. these areas are health, wealth, earth, equality and trust. in 88 journal of small business strategy volume 21, number 2 short, there is a correlational, not causal, relationship supporting that sustainability strategies can be profitable (plant, 2010). however, research questions the ability to measure sustainability strategy effect on firm performance, thus further research is needed to support herman’s conclusions (walls, phan, & berrone, 2011), firms are facing growing pressure to become greener in order to achieve longterm sustainability. large businesses are embracing sustainability and they in turn are pressuring small business to do so as well to do business with them. in the same fashion that larger companies now require that their suppliers be iso certified, they will soon demand that their small business suppliers be sustainable certified. this pressure offers sustainability as a unique and necessary longterm competitive weapon, demanded by the stakeholders and imposed by the larger publicly held company that is doing business with small businesses. the concept of sustainability score gained popularity when wal-mart began to assess it suppliers using its “sustainability index,” which considers everything from packaging materials and waste disposal, to energy efficiency and greenhouse gas emissions. procter & gamble, kaiser permanente, patagonia, and whole food have had similar policies for quite some time. major corporations can push environmentally friendly practices down to their suppliers’ level and create a reputation as environmentally friendly at the same time. similarly, local communities can demand the same from local small businesses as a condition for buying their goods and services. small businesses can accomplish both simultaneously by sustainability planning, and by adopting sustainability policies and strategies. in today’s global supply chain, most large companies are supplied by small businesses where they can utilize the first mover advantage to work with large companies in order to gain their business over small business competitors. small businesses that wait too long to go green can become unsustainable. it will be only a matter of time before most of the stakeholders, community members and customers at large gravitate towards businesses that are more socially responsible, are concerned about environment, act as responsible member of business community, and are taking action to create sustainable businesses through sustainable communities. so why wait to be forced to change? as presented throughout, sustainability is no longer the domain of big manufacturing or publicly held companies. it is applicable to all businesses irrespective of size or legal form of ownership; it is mostly the question of the context and competitive arena. for large businesses it is part of the global competition and for small business it is taking roots in the community and relying on their support for success. small businesses have the opportunity to use the same approach and enjoy a greater advantage and leverage, because of their locality. schick, et al. (2002) suggested that a sensible starting point for environmental management is by taking opportunities to implement more sustainable business practices from the very beginning of new business ventures. therefore, future research on start-up business and sustainability strategies is needed to make it clear to business advisers and banks that recommending and supporting sustainability strategies can help long-term small business success. 89 journal of small business strategy volume 21, number 2 it is no longer a question of “should a small business follow local community sustainability strategies?” it is beneficial for all the businesses, regardless of size, to do so. it makes moral sense: being socially responsibly, environmentally friendly and pushing for sustainability is good business, and makes good business sense: it increases the small business probability of long-term success. references achua, c. f. & lussier, r. n. 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(2010). the entrepreneur-environment nexus: uncertainty, innovation, and allocation. journal of business venturing 25(5), 449-463. abbas nadim is a professor of management at the college of business, university of new haven. his research interests are interactive planning and application of systems approach to entrepreneurship, leadership, and sustainable innovations. robert n. lussier is a professor of management at springfield college. his research interests are small business success vs. failure prediction and family business. reproduced with permission of the copyright owner. further reproduction prohibited without permission. http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2020, vol. 30, no. 01, 68-82 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2020 small business institute® w w w. j s b s . o rg introduction 1university of gävle, kungsbäcksvägen 47, gävle, sweden, sarah.philipson@hig.se and linnaeus university,, universitetsplatsen 1, 352 52 växjö, sweden, sarah.philipson@hig.se 2lund university, tycho brahes väg 1, lund, sweden, elisabeth.kjellstrom@fek.lu.se when objects are talking: how tacit knowing becomes explicit knowledge tacit knowing, externalization, reflected knowledge, boundary objects apa citation information: philipson, s., & kjellström, e. (2020). when objects are talking: how tacit knowing becomes explicit knowledge. journal of small business strategy, 30(1), 68-82. the understanding of how tacit knowing is externalised and becomes reflected external knowledge has been very problematic in extant management literature. it is important how such new knowledge is created, as “organizational adaptation is also likely to be characterized by periods of dramatic revolution in which there are reversals in the direction of change across a significantly large number of variables of strategy and structure.” (miller & friesen, 1980, p. 593). these changes are the response to new knowledge: “…scientific revolutions are inaugurated by a growing sense …that an existing paradigm has ceased to function adequately in the exploration of an aspect of nature to which that paradigm itself had previously led the way.” (kuhn, 1970, p. 92; miller & friesen, 1980, p. 608). organizational innovation and organizational learning “…jointly to promote organizational entrepreneurship and to increase competitive advantages.” (garcıa-morales, llorens-montes verdu-jover, 2006, p. 35). however, extant literature normally presumes the fundamental micro-foundations of business research, without exploring them as such or how they function. instead research focuses on the effects of these “given” on various phenomena. examples of this are the use of “intuition” in saiz-álvarez, carlos cuervo-arango and coduras (2013), how information is transformed to knowledge, ‘learning”, how individuals in organizations learn (pett & wolff, 2016). in contrast, in this paper the objective is to develop a framework for one of these micro-foundations, how new knowledge is developed in an organizational context. building on concepts in philosophy, psychology, pedagogics, organizational science, and engineering, we build a model of how the externalization is done and exemplify this. the objective of this paper is to build a model of how tacit knowing is externalised and becomes reflected external knowledge. knowledge management (nonaka, 1991, 1994; nonaka, toyama, & konno, 2000) is an important field in business administration. based on the model provided by nonaka and his colleagues (nonaka, 1994; nonaka & takeuchi, 1995; nonaka et al., 2000) researchers and practitioners have fallen into the pipe dream that employees’ tacit knowing can be coded and canned in computers (structural capital), eventually leading to the enterprise without humans. earlier critics (gourlay, 2002, 2006; gourlay & nurse, 2005, grant, 2007; philipson, 2016, 2019) of the knowledge management paradigm have shown that it does not understand polanyi’s concept tacit knowing and that it is much more complicated to “externalize” such knowing than presumed by km. the understanding in extant management literature of this process has been very problematic. building on concepts in philosophy, psychology, pedagogics, organizational science, and engineering, a model is built and exemplified. this paper develops a theoretical framework for how tacit knowing can be externalized, what is required for such an externalization, and discusses the problems in such externalization, limiting it. sarah philipson1, elisabeth kjellström2 http://www.smallbusinessinstitute.biz http://www.jsbs.org 69 s. philipson, & e. kjellström journal of small business strategy / vol. 30, no. 1 (2020) / 68-82 the text is organised by six major headers: knowledge, individual learning, knowledge in an organizational context, learning in an organizational context, the creation of new knowledge in an organizational context, and finally conclusions. litature review knowledge is explicit knowledge that we can talk about, as it has a negotiated meaning in smaller or larger circles. then how knowledge is acquired, learned, is discussed. explicit knowledge knowledge means to understand the relations between cause and effect. it is the result of personal experience, socialization, and formalized study. the definition of knowledge is often not precise, as “…people use different definitions of knowledge.” (starbuck, 1992, p. 715). explicit knowledge is readily communicable, because it has a negotiated meaning in smaller or larger social circles; at least within a community of practice. but meaning is only temporal (schalow, 2013). how is knowledge acquired, learned vygotsky (1970, 1987, 1993, 1994, 1997a, 1997b, 1998, 1999) focused on the affective aspect of learning: without the exploration of the relationship of the word to motive, emotion, and personality, the analysis of the problem of ‘thinking and speech’ remains incomplete (mahn & john-steiner, 2002). it pays attention to motivation and incentives of the individual human actor and to the operation of everyday activities within different contexts and time and requires “…researchers to engage in the core logic of how practices are produced, reinforced, and changed.” (feldman & orlikowski, 2011, p. 1241; pentland, feldman, becker, & liu, 2012, p. 1484). “vygotsky believed that affect and intellect are not two mutually exclusive poles, but two inseparable mental functions” (levykh, 2008, p. 85). he emphasized that culturally developed emotions are socially constructed and internalized. they play a key role in shaping motivation and thought (levykh, 2008; mahn & john-steiner, 2002). the individual emotional experience seems to be foundational (consciously, subconsciously, and unconsciously) to the person’s perception, attention, memory, decision-making, behavioural mastery, and overall world orientation (levykh, 2008). motivation is the mediation between emotions and thought. motive gives birth to thought, to the formation of thought itself, to its mediation in internal words, to the meanings of external words, and finally to words themselves (mahn & john-steiner, 2002,) knowledge is arising from practice (dietzgen, 1973). knowledge is internalized using psychological tools, as products of socio-cultural evolution, to which individuals have access by being actively emerged in the practice of the communities, of which they are part (john-steiner & mahn, 1996). knowledge and knowing emerges through the network of interactions and is distributed and mediated among the interacting humans and their tools (cole & wertsch, 1996, as cited in lipponen, 2002). “learning is based on long-term collaboration, because participants need to feel safe enough to enter what could feel as a strange community” (jones & issroff, 2005, p. 403). learning communities grow out of the recognition that the human mind is limited, making collaboration with other humans and with things a necessity, rather than a luxury. through conversation, learners construct knowledge, filter it, discover individual differences and strive toward mutual understanding. mutually agreed-upon concepts become community assets (hung & nichani, 2002). individual learning under this header we discuss how tacit knowing is acquired and what tacit knowing “is”. acquiring tacit knowing sensory cues and the actions of the individual and others in the communities of practice, in which they participate, leads to experiences, nodes in the brain. these nodes are related in labile mental structures, based on the commonalities between different nodes, be they cognitive, emotional, colours, odours, or all other parts of the memory of the experiences. cognitively unrelated phenomena can be related by a common odour or a colour, which years later can make the individual sensing that the two phenomena are related. sensory cues evoke mental imagery, based on earlier experience (holbrook, 1982). this imagery is the essence of the concept tacit knowing. the sense of a word is the aggregate of all psychological facts [gestalt] that arise in our consciousness, provoked by the word (wertheimer, brett, king, peckler, & schaef, 1992). polanyi (1962) is drawing on gestalt psychology in his attempt to establish the logic of tacit knowing. sense is a dynamic, fluid, and complex formation that has several zones that vary in stability. meaning is often conceptualized as external and sense as internal. meaning can be viewed as explicit knowledge and sense as tac70 s. philipson, & e. kjellström journal of small business strategy / vol. 30, no. 1 (2020) / 68-82 it knowing. the way we endow our own utterances with meaning and our attribution of meaning to the utterances of others are acts of tacit knowing. they represent sense-giving and sense-reading, within the structure of tacit knowing (polanyi, 1962). meaning is only the most stable and precise zone of sense (mahn & john-steiner, 2002). tacit knowing conscious tacit knowing. it is not readily communicable, even if the holder wants to communicate it, as it has yet no, or not enough, shared meaning with those they want to communicate. to negotiate meaning is itself a difficult task, facing the designer who wants to interact within their community of practice. to theorize is to focus on those entities and relationships in reality that are believed to be central to the phenomena observed – and largely to ignore the rest (nelson & winter, 1982). such focusing means that we try to grasp tacit knowing by delimiting the focused experiences from the rest of the tacit knowing, in which it is embedded. unconscious tacit knowing. it is not accessible for the individual herself. it is not in, what polanyi (1962) calls, focal awareness. it must be revoked by means unknown to the individual and it is even more difficult, if not completely impossible, for another person to provoke the making conscious of such knowing (cf. the role of the psychotherapist). intuition fills the gap left open in the dynamics of tacit knowing (polanyi, 1962). there is no absolute distinction between conscious and unconscious knowing. as the individual’s experience grows and deepens, old experiences retreat to the background and new ones take the foreground. neither is there a garbage can at the end of this displacement, other than dementia. subdued unconscious knowing can come to the foreground again, provoked by new experiences or tacit inferences to old ones. the distinction between explicit, conscious, and unconscious tacit knowing is therefore fuzzy. this is illustrated in figure 1. explicit knowledge, conscious tacit knowing, and unconscious tacit knowing. however, “…polanyi… said little about the processes of acquiring or learning tacit knowledge.” (taylor, 2007, p. 61), which is why we need a psychological theory. knowledge in an organizational context what is knowledge in an organizational context? does it differ in character from the knowledge of individuals? in contrast to huber (1991), we hold that knowledge is not information. the latter can be described as “food for thought”, but is not knowledge. the knowledge-based apfigure 1. explicit knowledge, conscious tacit knowing and unconscious tacit knowing, own. unconscious tacit knowin 71 s. philipson, & e. kjellström journal of small business strategy / vol. 30, no. 1 (2020) / 68-82 proaches argue that organizations have capabilities for creating and sharing knowledge that cannot be readily gathered through markets. knowledge is built around the recurrent tasks performed by the organization and shaped by the paths chosen in the past. a competence or resource-based theory of the firm focuses on concepts, such as core competence (prahalad & hamel, 1990), core rigidities (leonard-barton, 1992), and core capabilities (teece, pisano, & shuen, 1997). assets, even when they are a manifestation of economics of scale in a mature market, seldom lead to competitive advantage, because assets that can be bought in the marketplace as commodities do not have the potential to differentiate the company as a basis for competitive advantage (grant, 1996). capabilities are often seen as associated with a specific plant or equipment of the firm and derive from the firm’s coordination of individual and functional expertise (nahapiet & ghoshal, 1998). knowledge of an organization is thus a system of coordination that combines relations and tasks into productive performance (nelson & winter, 1982). knowledge is created through generation and selection of skills, processes, and products in an internal procedure, even if it reflects external factors (loasby, 2001). high-performance-work-systems, play an important role in the resource-based view. they found dynamic capabilities, increase organizational ambidexterity and increase innovation (coder, peake & spiller, 2017). what we explore here, communities-of-practice of professional teams, can be considered high-performance work systems. knowledge of an organization should therefore be discussed in terms of both the competences of the individuals, i.e., the tacit knowing and the organizing principles that structure and coordinate individuals and teams. knowledge about specific applications of technology is based on both tacit knowing and explicit knowledge (zander & kogut, 1995). however, structural capital is costly to keep, and the knowledge of an organization is different from the knowing possessed by the individuals. penrose (2009) held that the expectations of an organization and how it interprets its environment is a function of how internal resources are operated. internally generated knowledge is necessary to give organizations the tools to achieve, create and allocate resources efficiently. the knowledge structures consist of individual ‘schemata’, which are representations of persons, things, and events as well as “scripts”, consisting of frequently occurred events that have been stored in the memory (o’reagan & o’donell, 2000). learning in an organizational context then what is learning in an organizational context? does it differ in character from individual learning? the conditions for organizational learning are discussed under the header professional teams with learning intentionality; communities of practice. learning is seen as the alteration of behaviour as a result of experience. cognitive, emotional, and environmental influences, as well as prior experience, play a part in how understanding is acquired or changed, as well as how knowledge and skills are retained. “the term learning is comprehensive, covering a wide range of activities and modes of learning: learning by trial and error (thorndike, 1874-1949), learning by conditioning (pavlov, 1849-1936; skinner, 1904-1990), learning by insight, i.e., by understanding or perception of the situation (köhler, 1887-1967), and learning by imitation (miller, 1909-2002; john dollard, 1900-1980).” (kjellström, 2019, p.112). organizational learning has hitherto been viewed as ‘bundles’ of individual learning under the monitoring of top management. march’s (1991) concept of organizational learning is based on a view, where the individuals are more or less unrelated competitors in the organization. several factors influence the probability to learn, such as corporate culture, strategies allowing flexibility, and structures promoting innovativeness and environmental insights (fiol & lyles, 1985). learning is to a large extent achieved within the social and collaborative processes that involves the development of shared experiences in communities of practice, within which learning takes place (lam, 2014; lave & wenger, 1991; wenger, 1998). communities of practice are “… groups of people informally bound together by shared expertise and passion for a joint enterprise.” (wenger & snyder, 2000, p. 139). the individuals’ learning activities are facilitated or inhibited by organizational learning (argyris, 1977). the difference between individual and organizational learning corresponds to the difference between knowledge memorized in the mind of the individual, and the memory housed in a project group or stored in documents or computer files. for an extensive treatment of organizational learning see kjellström (2019). organizational learning organizational learning has been defined as “…the capacity …to maintain or improve performance based on experience.” (dibella, nevis, & gould, 1996, p. 363). 72 s. philipson, & e. kjellström journal of small business strategy / vol. 30, no. 1 (2020) / 68-82 organizational learning has hitherto been viewed as “bundles” of individual learning under the monitoring of top management. organizational learning refers to processes by which information is found, acquired, and used (hedberg, 1981). to further qualify organizational learning, it could be seen as enabling new opportunities to be identified and thereby defined as “…the process within the organization by which knowledge about action outcome relationships and the effect of the environment on these relationships is developed…” (weick, 1991, p. 120). argyris’ (1977) definition of organizational learning as the process of ‘detection and correction of errors’, must be seen as paying attention also to the capacity that implicitly knows if and when the process is unable to detect and correct errors. trouble arises when the technology is ineffective and fundamental assumptions underlying the existing ways of doing work must be questioned (senge, 1992). the increasing uncertainty of the environment requests an organization able to focus on ‘double-loop learning’ (argyris, 1977; argyris & schön, 1978) or ‘generative learning’ that anticipates goals and processes, reacting to changes and complexity. double loop learning “… will confront the validity of the goal or the values implicit in the situation”, which “…confronts the basic assumptions behind ideas or present views and that publicly tests hypotheses.” (argyris, 1976, pp. 32, 34) to communicate and understand relevant knowledge, the organization relies on its accumulated experience (zander & kogut, 1995). the organization’s knowledge and its information processing capabilities are shaped by the nature of the tasks and the competitive environment that it faces. “the term “capabilities” emphasizes the key role of strategic management in adapting, integrating, and reconfiguring internal and external organizational skills, resources, and functional competencies to match the requirements of a changing environment” (teece, pisano, & shuen, 1997, p. 515). cohen and levinthal (1990, p. 128). hold that “… the ability to exploit external knowledge is a critical component of innovative capabilities.” they argue that the ability to evaluate and utilize outside knowledge is largely a function of the level of prior related knowledge. absorptive capacity, the ability of a firm to recognize the value of new information, assimilate it, and apply it to commercial ends, is critical to the firm’s innovative capabilities. cohen and levinthal (1990) only discuss this phenomenon as a function of individual or organizational knowledge. they characterize the factors that influence absorptive capacity at the organizational level, how an organization’s absorptive capacity differs from that of its individual members, and the role of diversity of expertise within an organization. organizational learning, as based on march (1991), is based on a view where the individuals are, more or less, unrelated competitors in the organization. there is no real collaboration in his theory. the classical theorists of organizational learning see the importance of identifying the incongruities in routines or reacts to them. the team is absent. contrariwise, we hold that it might even be more productive to employ teams, rather than individuals! professional teams with learning intentionality, communities of practice what are the circumstances required for organizational learning to be achieved? we hold that when professional teams in for-profit organizations have a mutual intention to learn they are communities-of-practice, even though wenger (2000) holds otherwise. knowledge does not reside in the individual’s head, but in the communities of practice, in which they participate. the concept of community of practice (wenger, 2000) indicates a functioning team, a group of professional individuals, together performing a set of organizational tasks, where there is a collaborative learning; in contrast to march (1991), where the knowledge attribution is made by socially unrelated individuals; a robinson crusoe way of learning. these collaborative processes are necessary to be able to understand complex organizational problems because different settings provide different opportunities for learning that “…are more fluid and interpenetrative than bounded, often crossing the restrictive boundaries of the organization to incorporate people from outside.” (brown & duguid, 1991, p. 49). a team and a community-of-practice are different concepts. the distinction is that a community of practice is a group of specialists that learn together, while a team is defined by the joint task they must accomplish (farnsworth, kleanthous & wenger-trayner, 2016; pandey & dutta, 2013; wenger & snyder, 2000). communities of practice are emergent, they exist within a business unit or stretch across divisional boundaries (wenger & snyder, 2000). learning involves becoming “…a member of a community of practice through apprenticeship.” (kolb & kolb, 2005, p. 200). it means that teams of employees and groups of professional individuals are exposed to collaborative learning, while they perform routines of organizational tasks in the light of others’ tacit knowing. tacit knowing plays an important role in all individual and group thinking, being the enabling condition for explicit knowledge. this has not been clearly developed in knowledge management that did not fully respect the subjective side of polanyi’s (1961, 1962, 1968) tacit knowing as it 73 s. philipson, & e. kjellström journal of small business strategy / vol. 30, no. 1 (2020) / 68-82 had the roots in nonaka and takeuchi’s (1995) theory “… that undermined the claim to pure objectivity.” (mooradian, 2005, p. 105) in line with psychological research, we recognize that knowledge and learning are to a large extent only achieved within a community of practice (borthick, jones, & wakai, 2003; brown & duguid, 1991; kinginger, 2002; lave & wenger, 1991, as cited in amin & roberts, 2008; orr, 1996; vygotsky, 1999; wenger, 1998). when teams have the intentionality to learn, they are communities of practice, in which the individual can tentatively try to externalize fragments of her tacit knowing and negotiate a common meaning, to formulate a collectively reflected externalized knowledge. knowledge does not reside in the individual’s head, but in the communities of practice in which they participate. “learning is thus a process of becoming a member of a community of practice through legitimate peripheral participation (e.g. apprenticeship)” (kolb & kolb, 2005, p. 200). it is not as simple as to observe and be part of, as nonaka (1991), seems to believe, but to negotiate meaning in this community of practice. i.e. internalize the experience of the other, to get a more objective experience. this negotiated understanding is explicit knowledge. a community of practice is a system of relationships between people, activities, and the world which is developing over time and in relation to other communities of practice (lave & wenger, 1991). learning on a team level is not possible without the sharing of intentionality, i.e. sharing the goals, as the team is intended for common action, practice, the team members must share a common intentionality for the shared actions, which are the objective of the learning. wenger (1998, 2000) traced the link between situated practice and learning/knowing to three dimensions of “community” – mutual engagement [negotiated meaning, our comment], sense of joint enterprise [intentionality, our comment] and a shared repertoire of communal resources [a set of tools – embodied or not – for common action, our comment]. (amin & robert, 2008, p. 354). our use is at odds with wenger (2000), who holds that “community-of-practice” and “team” are different concepts (farnsworth et al., 2016), where a team is defined by a joint task that they must accomplish together, while a community of practice is a learning partnership related to a domain of practice. thus, such a learning partnership around a practice is a different structuring process than working on a joint task according to wenger (2000). nonetheless, many teams consist of professionals that themselves interpret their professionalism. and it is just for this reason that they have certain tasks in the organization. their relative independence from management is a necessary qualification for their job. yet, even when management sees the personnel as arms and legs, rather than thinking and learning beings, the employees often are not satisfied with playing this role. this is the case recognized by the third wave of routine studies (feldman 2000; feldman & pentland, 2003; pentland & feldman, 2005; pentland & rueter, 1994), in that the performance of routines is not completely “managed”. wenger’s (2000) requirement of a common intentionality in the community of practice might be modified by a statement by the originator of the concept, star (2010, p. 604), who tells that her “…initial framing of communities-of-practice was motivated by a desire to analyse the nature of cooperative work in the absence of consensus.” we propose the introduction of a new concept, “conditional intentionality”, similar to the concept “conditional trust”, introduced by philipson and philipson (2016, p. 320). it would mean that humans participate in a community-of-practice with a conditional intentionality of the community as a learning environment. only if experience in the team negates such conditional trust of common intentionality will it cease. “shared collective behaviour is a genuinely social phenomenon, and that it is present in almost all social behavior” (shotter, 1995, p. 70; emphasis in original) another issue, with which we disagree with wenger (2000), is that he holds that management has power over the team, but does not subsume them (farnsworth et al., 2016). this is pure idealism. it is evident that he does not understand the concept “subsum”. everything is subsumed. even leonardo da vinci, the most well-known artist of all time – and already in his time – had to do paintings for money, to be able to pursue “pure” art. previous business research has largely pursued the individualistic myth of the great genius as the source of creativity. however, scholars of innovation, such as dougherty (2006) and schumpeter (1942), recognize that innovative outcomes seldom are the product of individual genius, but a collective and systematic approach (farjoun, 2010), or least as part of a community of dialogue, as in the case of newton and leibniz, corresponding about their common and parallel discovery of the calculus (sastry, 2006), the discussion between newton and goethe (fine, 2015), renoir father and son (crêpy-boegly, 2018), or mattisse and picasso. the latter two continuously dialogued both in real life and in reference to the other’s paintings (scemama, 2018). behr, negus and street (2017) give ample examples on how classic and modern masters have sampled music of previous composers. the mind-set of practice has little room for heroic autonomous individuals. a well-developed organization, capable of reliable performance, is thoroughly social and built on interpersonal skills that enable people to represent and 74 s. philipson, & e. kjellström journal of small business strategy / vol. 30, no. 1 (2020) / 68-82 subordinate themselves to communities of practice (weick & roberts, 1993); wenger, 2000). our approach corresponds to what dibella et al. (1996) calls informal collective learning. thus, to understand organizational learning, the team as the level of analysis, which is almost always absent in business research, is actually essential. the creation of new knowledge in an organizational context how is new knowledge created in organisations? the dominating paradigm is knowledge management, which has major shortcomings. specifically concerning the issue of how tacit knowing can be transformed into explicit knowledge. we hold that an immediate transformation is not possible and that hence mediators are required. as a consequence of the hitherto discussion a framework for externalizing tacit knowing is presented. knowledge management and its shortcomings knowledge management (km), is an important field in business administration. the paradigm of the field was founded by (nonaka, 1991, 1994; nonaka et al., 2000). knowledge management tend either to understand “knowledge as an asset” or “knowing as a process” (empson, 2001), a view also referred to as “product versus process view” (massingham, 2014a, 2014b, p. 1077). furthermore, knowledge management disregards the external context. the knowledge-based approach, seeing the firm as a bundle of heterogeneous resources (foss & foss, 2000), focuses on how firms themselves can create and improve resources, rather than rely on resources that are purchased on the factor markets (grant, 1996; teece et al., 1997). however, stored knowledge does not have much meaning until it is used by someone for some purpose, “… knowledge requires active participation of the knower and is hence knower dependent.” (virtanen, 2013, p. 122) even the questions remain whether and how tacit knowing is regarded in the processes of creating or purchasing resources. to establish a difference that could be sustained, the competitive advantage must grow out of the entire system of activities (philipson, 2016). km view of tacit knowing is flawed. earlier critics of the knowledge management paradigm (gourlay, 2002, 2006; gourlay & nurse, 2005, grant, 2007; philipson, 2016, 2019) have shown that nonaka (1991, 1994) and nonaka et al. (2000) do not understand polanyi’s (1961, 1962, 1968) concept tacit knowing. it is much more complicated to “externalize” such knowing. grant (2007) examined some 60 papers from three major knowledge management journals and demonstrates that polanyi’s work on tacit knowing has been misinterpreted, especially by nonaka and takeuchi (1995), who just extended the personal knowledge to organizational knowledge in a corporate organisational setting. transferability without participation of a knower is a misinterpretation of the texts of polanyi that misguided the whole knowledge management literature and practice (chauvel & despres, 2002; crane & bontis, 2014, 2002; gourlay, 2006; virtanen, 2013). of all citations in three major km journals (from first publication to the end of 2003), polanyi’s (1961, 1962, 1968) works were collectively the second most cited source after the works of nonaka (nonaka, 1994; nonaka & takeuchi, 1995; nonaka et al., 2000) in the meta-review of serenko and bontis (2004). of all the km articles in the same journals “…only about one third of the papers demonstrated clearly that polanyi’s work had been read and almost half (42%) were unlikely to have read it, based on their use of the related concepts. further, some 23% seem to significantly misrepresent polanyi’s work.” (grant, 2007, p. 176) “… where polanyi saw tacit and explicit as different but inseparable aspects of knowledge, the de facto use of the seci model was dualistic, rather than dialectical.” (snowden, 2002, p. 4). km view on externalizing tacit knowing. the externalizing tacit knowing is very problematic and not just a simple mimicking of the master, as in nonaka’s 1991 baking example: “the osaka international hotel had a reputation for making the best bread in osaka. …tonaka trained with the hotel’s head baker to study his kneading technique. she observed that the baker had a distinctive way of stretching the dough. after a year of trial and error, working closely with the project’s engineers, tanaka came up with product specifications – including the addition of special ribs inside the machine – that successfully reproduced the baker’s stretching technique and the quality of the bread she had learned to make at the hotel. the result: matsushita’s unique “twist dough” method and a product that in its first year set a record for sales of a new kitchen appliance.” (nonaka, 1991, p. 98). this classic narrative has led several generations of knowledge management researchers and managers to the very simplistic view that tacit knowing can easily be converted into structural capital – conveying the ardent pipe dream of companies without employees. km view on context, ba. “for organizational learning more important is the concept of how groups create new knowledge.” (nordberg, 2007, p. 7). nonaka introduced 75 s. philipson, & e. kjellström journal of small business strategy / vol. 30, no. 1 (2020) / 68-82 the term “ba” as a shared context, in which knowledge is shared, created, and utilized (nonaka et al., 2000, p. 14). the authors ascribe ‘ba’ to the japanese philosopher kitaro nishida in 1921. nonaka et al. (2000) are conscious that communities of practice and ba are related, but they fail to identify the real source of knowledge in “communities of practice” (cf. nonaka et al., 2000), and sets out to identify the difference between them. however, because of the profound lack of understanding of both knowledge and “communities of practice”, they fail to do so. all the characteristics that they ascribe as particularities of ba, except the presumption of a physical space, are present in vygotsky’s concept “zone of proximal development”, which is vygotsky’s term for the community of practice of a student group (kolb & kolb, 2005; kinginger, 2002). the zone of proximal development is a social space and not a physical space (nordberg, 2007; schalow, 2013). km view of organizational learning and canned knowledge. based on the model provided by nonaka (nonaka, 1994; nonaka & takeuchi, 1995; nonaka et al., 2000) researchers and practitioners have fallen into the trap to dream that employees’ tacit knowing can be coded and canned in computers (structural capital), eventually leading to the enterprise without humans. “…as malhotra, majchrzak, carman, and lott (2001) conclude, rather than focusing on systems to codify knowledge, we should instead concentrate on systems that facilitate collaboration between knowledge holders and those needing the knowledge.” (taylor, 2007, p. 71). philipson (2016) has shown that employees’ critical tacit knowing must be retained by empowering them, rather than canning their knowledge in information systems. mediators for externalizing tacit knowing (cf. phillpson, 2019) making explicit is to externalize (borthick et al., 2003). tacit knowing can partly be transformed to explicit knowledge through externalization. externalization is made in written or oral language, visualization, and behaviour; even with odour, fragrance, scent, and aroma. however, such transformation is always incomplete; we cannot transfer the rich sense of tacit knowing into explicit knowledge, since the latter becomes a mere shadow of the former. to be able to show how tacit knowing is transformed to explicit knowledge, we use the concept of sketches, introduced by ferguson (1992). a sketch is the engineer’s, the architect’s, or the artist’s endeavour to make an illustration, based on her tacit knowing. ferguson identifies three kinds of sketches to identify the role of sketches in creative design groups: the thinking sketch, the talking sketch, and the prescriptive sketch; showing how imagination is a creative transforming activity, which moves from one form of concreteness to another (vygotsky, 1998). images may prove to be powerful means for calling forth, exciting, and relieving different feelings (vygotsky, 1999). that drawings are usually accompanied by verbalizations, supports the idea that sketches only partially represent ideas in the mind. in general, a drawing act in sketching is not an attempt to represent a solution as such, rather it is a notational device that helps its creator to reason with complex and labile mental structures (van der lugt, 2005). thinking sketches refer to designers making use of the drawing surface in support of their individual thinking processes (ferguson, 1992). engineers use the thinking sketches to focus and guide nonverbal thinking (van der lugt, 2005). authors writing and rewriting of text, are examples of such thinking sketches. the externalization of conscious or semi-conscious tacit knowing creates a virtual “other”, with which to dialogue. this dialogue can provoke semi-conscious and unconscious tacit knowing to surface to higher level of consciousness. “doodling, drawing, modelling. sketch ideas and make things, and you’re likely to encourage accidental discoveries. at the most fundamental level, what we’re talking about is play, exploring borders.” (kelley, 2001, p. 38) talking sketches refer to designers making use of the (shared) drawing surface in support of the group discussion. talking sketches, spontaneously drawn during discussions with colleagues, will continue to be important in the process of going from vision to artefact. such sketches make it easier to explain a technical point, because all parties in the discussion share a common graphical setting for the idea being debated (ferguson, 1992). the discussions between what has been perceived as “lone geniuses” are examples of discussing around talking sketches. a pregnant example of talking sketches are the “crime scene doll-houses”, with which frances glessner lee revolutionised criminology in the 1940s and 50s (atlas obscura, 2017). around such crime scene models, criminal investigators discussed how the scene had evolved (francetvinfo, 2018). of course, these models are today digitized. this process is the negotiating of meaning; it is to be able to express and dialogue around previously individual conscious tacit knowing, but now (as explained above) made explicit knowledge, in a limited community of practice, a team. the characteristics of the team as a community of practice is that it has a very detailed and profound negotiated meaning, developed from a common professional education and common practice. for others in the group, an intervention might provoke a discourse based on explic76 s. philipson, & e. kjellström journal of small business strategy / vol. 30, no. 1 (2020) / 68-82 it, conscious tacit knowing, or provoke unconscious tacit knowing to surface to consciousness. this dialogue can develop new knowledge, but the discourse itself is limited by what can be made explicit. prescriptive sketches. refers to the designers communicating design decisions to persons outside of the design process, hence outside the community of practice referred to earlier. the communication must be based on a negotiated meaning, limited by a common culture. the architect builds a physical model of the proposed building; and with present computer-generated imaging, it is possible to walk around in the building before it exists. this is also why early prototyping is advantageous for the success of innovations. visualization techniques that support the involvement of diverse stakeholders in the process, a user-centred approach to complement top-down methods, fast prototyping to rapidly test models in practice (mulgan 2009, as cited in hillgren, seravalli, & emilson, 2011). good prototypes don’t just communicate – they persuade (kelley, 2001). carlile (2004) presents a framework of boundary objects between teams, cf. prescriptive sketches, but does not problematize how and whether knowledge is built in the teams. thus, his framework is focused on management according to the theory of constraints. the same holds true for verbal externalization; first we write for ourselves; then we need to communicate it in a community of practice, whether it is family, kinship, or close friends for everyday experiences, or a community of professional practice for a scientific article under construction. finally, we need to communicate through a prescriptive text or speech for a broader audience. the talking sketches and their language equivalents are the mediation between tacit knowing and explicit knowledge. the essence of the dialogue in this mediation process is problematizing (alvesson & sandberg, 2011, 2013) or problem-probing. these mediators, whether sketches, words, gestures, body language, or what else, are boundary objects. boundary objects do not convey unambiguous meaning, but have a kind of symbolic adequacy that enables conversation without enforcing commonly shared meanings (boland jr & tenkasi, 1995). framework for externalizing tacit knowing in table 1 our framework for externalizing tacit knowing is presented. organizational learning, competitive advantage, and the role of routines in building and ultimately exploiting learning, cannot be understood without introducing the team, the community of practice, as the focal point of study. this idea is not completely new, as these patterns of intertable 1. framework for externalizing tacit knowing, own level state-of-mind activity type of knowledge boundary objects outcome organization; bundle of routines enabling; supporting strategizing: identifying competitive advantage in newly externalized tacit knowing boundary between community-of-practice and organisation or outside world prescriptive sketches knowledge transfer community-ofpractice; functioning professional teams; routines conditional intentionality, leaning problem probing; externalizing tacit knowing by negotiating meaning in discourse on all senses reflected knowledge; externalized tacit knowing with common meaning boundary between individuals in the community-of-practice talking sketches reflected explicit knowledge externalization of tacit knowing thinking sketches explicit knowledge individual; micro foundations of routines intentionality; leaning living experiences tacit knowing; sense 77 s. philipson, & e. kjellström journal of small business strategy / vol. 30, no. 1 (2020) / 68-82 action are resident in group behaviour, though certain subroutines that may be resident in individual behaviour (teece et al., 1997). the term “resident” seems to indicate that they do not see the team to be the active part in developing these routines. however, we hold that without a common intentionality, learning on the team level is not possible. top-down managerial control will necessarily be questioned as a result. individuals, the ego, are social animals, the id, developed within a first community of practice, the superego (freud, 1974), by internalizing (vygotsky, 1970, 1987, 1993, 1994, 1997a, 1997b, 1998, 1999) the community of practice (bourdieu, 1976; dietzgen, 1973; john-steiner & mahn, 1996; weick & roberts, 1993; wenger, 2000), and its symbolic representations. the mass of the experiences in all the communities of practice that each individual has participated in, before and concurrently now, constitute their tacit knowing (polanyi, 1961, 1962, 1968), or sense (mahn & john-steiner, 2002; polanyi, 1961, 1962, 1968; wertheimer et al., 1992). tacit knowing includes conscious and unconscious tacit knowing, as well as explicit knowledge, embedded in and understood within tacit knowing. to modulate ideas and thoughts, the individual needs to externalize them, objectify them with psychological tools, such as language, symbols, drawings, etc. (herrenkohl & guerra, 1998; herrenkohl, palincsar, dewater & kawasaki, 1999; levykh, 2008; palinscar & herrenkohl, 2002), to negotiate meaning with oneself; cf. thinking sketches (ferguson, 1992; van der lugt, 2005). these tools are mediators for the individuals negotiation of meaning and sense (mahn & john-steiner, 2002), prior to the negotiation of meaning in a community of practice. the complete framework in figure 2 shows how the individual, as a result of internalizing the practice of the first community-of-practice, the family, and other communities-of-practice (including in education) in the lived experience, develops a tacit knowing of the world as they know it. actions acquire their meaning in relationship to prior and figure 2. the framework, own 78 s. philipson, & e. kjellström journal of small business strategy / vol. 30, no. 1 (2020) / 68-82 subsequent actions (lebaron, christianson, garrett, & ilan, 2016). to externalize the tacit knowing and negotiate a common meaning in the professional community, the team, and other members of the team need mediators, in the form of sketches, prototypes, gestures, symbols, and a probing discourse. going outside of the community-of-practice of the team the team needs other boundary objects to effectively communicate with people, who don’t share the team’s common understanding. when negotiating meaning within the community of practice, the tool needs to be constructed with an understanding of the other, empathy, as a conduit; cf. talking sketches (ferguson, 1992; van der lugt, 2005). the learning within the community of practice is consequential of the quality of the dialogue, collaborative sketching, and experimental work in the community of practice. the negotiating of meaning normally results in the individual’s need to reconcile the “truce” (nelson & winter, 1982) with tacit knowing – or to re-negotiate. to negotiate a common meaning with other communities of practice in the organization at large, the dialogue takes place over boundary objects (boland jr. & tenkasi, 1995), or talking sketches (ferguson, 1992; van der lugt, 2005. boundary objects are at once temporal, based in action, subject to reflection and local tailoring, and distributed throughout all of these dimensions (star, 2010). when an individual identifies an anomaly in the output of a part of the routine, not perceived as the mere result of faulty performance, they try to use (1) explicit knowledge or (2) tacit knowing to formulate the problem (problem probing). when the problem is recognized as new and not resolvable based on earlier experiences, (3) the individual must take the problem to the community of praxis. in many cases (3a) the existing explicit knowledge of the group, or (3b) the tacit knowing of some member of the group can frame the problem and eventually solve it. conversely, when the problem is genuinely new, it is difficult for the individual not only to formulate, but to describe the problem. they must first dialogue with themselves, by means of thinking sketches, even to be able to try to give meaning to what they sense. in most cases this process is not straight-forward, and they must revise it in a series of thinking sketches – (4) the final of which is becoming a talking sketch, when presented in the community of practice to dialogue around; to negotiate a common meaning in formulating the problem. as is the case for the individual, it will usually require a series of talking sketches made by the original identifier that there is a problem, or by other members of the community of practice. (5) finally, if the dialogue is successful, the problem is formulated in a prescriptive sketch, a “boundary object”, that is used to mediate, to negotiate a common meaning in multiple communities of practice in the organization, often including the organization’s commitment of resources to resolve the identified problem. as a consequence of our framework, we hold that: a. learning in organizations occurs when teams, communities of practice with a common task, discover glitches in routines. b. analysis implies that teams not only solve problems, but formulate them, and probe for them. c. to learn, teams must develop boundary objects, in sketches, prototypes, symbols, gestures, and language. d. boundary objects are necessary tools to externalize tacit knowing, in negotiating common meaning of hitherto unarticulated experiences. e. common intentionality is a prerequisite for learning. conclusion the implications of the need of boundary objects to externalize tacit knowing are fundamental to the understanding of organizational functions regarding knowledge and innovation. teams that meet the conditions discussed here, can identity incongruities, learn what problem(s) these result from and thus innovate the routines to manage a changing world or create new offerings. sensory-rich and extensive experiences build tacit knowing, with potential to create innovations. extensive means experiences in many communities of practice, different cultures, and physical environments. sensory-rich experiences allows a more complex network of synapsis that relates different experiences, and makes it possible to retrieve experiences from non-active memory. to build on tacit knowing to create new knowledge, the individual must create a virtual other in the form of a boundary object, to play with the implications of ideas that occur from the synapsis between seemingly unrelated experiences. based on ferguson (1992), we call such a boundary object thinking sketches. however, the thinking sketch is still completely embedded in the individual’s tacit knowing. to externalize the tacit knowing the individual, after a series of sketches, presents the most developed idea in the form of a talking object in her community of practice. both 79 s. philipson, & e. kjellström journal of small business strategy / vol. 30, no. 1 (2020) / 68-82 to negotiate meaning and to provoke the externalization of other team members tacit knowing. the dialogue around many team members’ talking objects, leads to a negotiated meaning in the form of externalized knowledge; the team’s knowledge. communicating outside the community-of-practice, with the organization at large or with the public, requires a prescriptive sketch, the object of which is not to develop the idea, but still to communicate to people’s tacit knowing, as it represent new knowledge, which cannot necessarily be readily understood in the context of their existing knowledge. references alvesson, m., & sandberg, j. 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(1995). knowledge and the speed of the transfer and imitation of organizational capabilities: an empirical test. organization science, 6(1), 76-92. http://pages.cs.wisc.edu/~sastry/hs323/calculus.pdf http://pages.cs.wisc.edu/~sastry/hs323/calculus.pdf http://larepubliquedelart.com/dialogues-avec-picasso/ http://larepubliquedelart.com/dialogues-avec-picasso/ https://doi.org/10.1177%2f0162243910377624 https://doi.org/10.1177%2f0162243910377624 http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2020, vol. 30, no. 03, 16-32 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2020 small business institute® w w w. j s b s . o rg introduction 1park center for business and sustainable enterprise, school of business, ithaca college, ithaca, ny, usa, nkasiri@ithaca.edu 2park center for business and sustainable enterprise, school of business, ithaca college, ithaca, ny, usa, hormoz@ithaca.edu 3park center for business and sustainable enterprise, school of business, ithaca college, ithaca, ny, usa, slamoureux@ithaca.edu sustainability engagement or not? u.s. smes approach environmental sustainability, sustainability in operations, small and medium-sized enterprise (sme), sustainability in smes apa citation information: kasiri, n., movassaghi, h., & lamoureux, s. (2020). sustainability engagement or not? u.s. smes approach. journal of small business strategy, 30(3), 16-32. small and medium sized businesses (smes) are the backbone of the u.s. economy in job creation and generation of economic growth. the u.s. small business administration (sba) (2004) data shows that small businesses (i.e., independent businesses having fewer than 500 employees) represented 99.7% of all employer firms, generating 58.9 million jobs or 47.5% of the total u.s. private payroll in 2015. furthermore, between 2000 and 2017, they created 65.9% of the new jobs (sba office of advocacy, 2018). indeed, the most recent sba report shows that small businesses account for 44% of u.s. economic activity and create two-thirds of the net new jobs. between 1998 and 2014, the contribution of small businesses to gdp has grown by about 25% in real terms, or 1.4% annually (sba office of advocacy, 2019). globally, smes account for more than half of all formal jobs (ifc, 2013). while the economic strength of communities is derived from smes, their negative environmental performance is alarming. smes are held responsible for 64% of pollution in europe, and account for 60% of carbon dioxide and 70% of all industrial pollution globally (ashton et al., 2017; sáez-martínez et al., 2016; tutterow, 2014; walker et al., 2008). such record calls for urgent need by smes to engage in adoption of sustainability solutions, such as energy conservation, use of local resources, and reusing/recycling, to mitigate their negative environmental impact. prior research shows firm size usually has a significant effect on the degree of environmental proactivity and that small firms, which have a better record of environmental performance, are also the most successful financially (aragón-correa et al., 2008; clemens, 2008), though the relationship between environmental and financial performance is significantly influenced by the measures used and the sector(s) studied (albertini, 2013). majority of large corporations have recently made significant efforts to demonstrate their corporate social responsibility and the environmental plans they are committed to through published annual or semi-annual sustainability reports. most smes, however, have not engaged in such reporting, though efforts are underway to help smes in developing countries to understand the benefits of sustainability reporting (gri, 2018). in the extant literature on smes’ sustainability engagement, relatively little research has focused on the us compared to europe. our study is based on semi-structured interviews with a large number of manufacturing and services firms (75), from big and small cities in new york state, investigating the major drivers and barriers to smes’ sustainability and whether such initiatives paid off. findings show owners/managers’ sense of moral obligation to reduce negative environmental impact as well as their levels of sustainability education and awareness have played major roles in driving sustainability. gaining competitive advantage, need for regulatory compliance or financial incentives offered by governmental agencies were mentioned, but not deemed as key influencers. major barriers included cost and limited resources, though more than two-thirds of the firms’ owners/mangers believed that sustainability engagement had paid off. these results aim to help policy makers learn about the impact of their decisions and adjust them to be more effective. smes’ owners/managers can also learn about common drivers and barriers in adopting sustainability and plan accordingly. narges kasiri1, hormoz movassaghi2, sarah lamoureux3 http://www.smallbusinessinstitute.biz http://www.jsbs.org about:blank 17 n. kasiri, h. movassaghi, & s. lamoureux journal of small business strategy / vol. 30, no. 3 (2020) / 16-32 research on sustainability strategies of smes date back to the early 1990s. as shown by parker et al. (2009) and wiesner et al. (2017), majority of the published work on smes’ sustainability is focused on europe, particularly the uk and germany, with some studies also on other countries such as the netherlands, sweden, austria, australia, canada, hong kong, israel, japan, new zealand, s. korea and malaysia. while some research has also been done on the u.s. smes (becherer & helms, 2014; langwell & heaton, 2016; theyel & hofmann, 2012 ), the number of the u.s. studies compared to european countries is not adequate or proportional to the size of the sme sector in the u.s. and their contributions to pollution. becherer & helms (2014), for instance, conducted a research with 240 small businesses in the u.s. and identified the factors that significantly influenced the small business’ environmental goals. alvarez jaramillo et al. (2019) analyzed the top 46 most influential studies on smes sustainability and reported 60% of those studies focused on europe while none had been conducted in the u.s. furthermore, the scope of studies on u.s. smes is limited in the type of the sustainability behaviors investigated and are typically industry specific (ashton et al., 2017). in earlier research, we queried the participants in the present study on whether the governmental regulations and/ or incentives at any level (federal, state or local) played any role in their adoption of sustainability practices (lamoureux et al., 2019). in this paper, we delved deep into learning the motives and obstacles that ny based smes had encountered in their efforts to build or expand their sustainability programs and their perception as to whether such initiatives were rewarding, financially and otherwise. our contributions to the literature rest on taking a broader and more comprehensive approach in investigating the major drivers of and barriers to smes’ sustainability adoption by interviewing 75 such firms in the u.s. our pool of smes come from small towns as well as big cities and across different industries (manufacturing to services such as food, healthcare, etc.). as discussed before, many of studies of the drivers and barriers in the literature are based on smes outside the u.s. the purpose of this study is to expand our knowledge of the u.s. smes’ sustainability drivers and barriers. since many external drivers such as regulations and standards are specific to each state in the u.s., we decided to limit our focus to one state (ny) and study the variations in smes’ behavior within a state with different counties that implies different constituencies. unlike many other similar studies, we have also inquired about the variety of environmental solutions that our participating smes had adopted and whether or not their sustainability engagement had paid off in general, and whether it did so through reducing cost and/or increasing the profit in particular. lastly, since the sheer number of the firms that we interviewed (75) is significantly larger than similar types of exploratory qualitative surveys conducted in this area (e.g, langwell and heaton, 2016 study was based on 18 interviews from 8 organizations in iowa), our findings are likely to be more representative of smes sustainability behavior in new york state. in addition to reviewing the literature in order to validate and enhance the potential contributions of our study, we shared the focal points of our study with four sustainability experts who are very experienced and involved in business sustainability in new york state or at the regional level. these experts were not aware of any previous practice-oriented research like ours, which not only integrates several of these dimensions, but also focuses on the experience of small businesses in this region. given their feedback, we realized that our research could identify both successes and gaps in the sustainability efforts among small businesses. these experts believed that our study would provide baseline data that could benefit both the owners/managers of such businesses as well as the state and local government agencies in identifying resources and tools that these businesses need for sustainable development. the rest of this paper is organized as follows. in the next section, we review the literature on sustainability in smes followed by the method section where we describe the process of how we selected the participating firms as well as how we collected and analyzed the data. in the results and discussion sections, we report on and discuss some of our key findings and conclude the paper with a discussion of the implications and limitations of our study and suggest directions for future research. literature review earlier research on smes’ motivations for engagement in sustainable business practices has uncovered a range of internal and external factors. for example, in their study of new zealand smes, lewis and cassells (2010) found reduction in cost, enhanced profit, and corporate social responsibility as the most important determinants of companies’ sustainability engagement, along with the need to comply with regulatory requirements and responsiveness to business customers. similarly, baden et al. (2009) and johnson (2015) found owners/managers’ personal values and their social/environmental commitments as their main motivators. ashton et al. (2017) conducted a survey of 59 smes in the tool and dye manufacturing industry in midwestern u.s. and found a majority of the firms to be more driven by internal motives to implement green practices 18 n. kasiri, h. movassaghi, & s. lamoureux journal of small business strategy / vol. 30, no. 3 (2020) / 16-32 than social responsibility considerations; cost and competitiveness seemed to influence sustainability engagement decisions of these firms more than the external coercive pressure from government or customers. drawing on survey data from sme wineries and vineyards in italy, france, denmark, and the u.s, tyler et al. (2018) found managers’ perceptions of competitive pressures to be positively associated with the adoption of environmental practices and improved firm performance. among studies focused on developing countries, agana et al. (2013) surveyed 500 turkish manufacturing firms and found the most influential driver affecting environmental improvement to be the expected benefits resulting from enhancement in companies’ image, reputation, and brand. chan (2011), surveyed 48 sme hotels in hong kong on barriers to the implementation of environmental management systems and found the following factors hindering such adoption: implementation and maintenance costs, lack of knowledge/skills, low sense of urgency, paucity of qualified consultants and ambiguity of standards. many meta-analysis studies also analyzed drivers and barriers in the sustainability adoption of smes (johnson & schaltegger,2015; parker et al., 2009; walker et al., 2008). walker et al. (2008) reviewed 351 publications with a primary emphasis on identifying the main barriers and drivers to environmental management among smes. they noted three barriers that prevented such firms from engaging in good environmental practices. first, smes’ characteristics in general (heterogeneous industry nature, size, urban/rural divide, managers’ varying educational and ethnic background/gender) made targeted communication and coordination of technical assistance difficult. second, resource constraints (financial, human, and time) made perceived cost the most important reason why smes did not engage in environmental management. third, owners/managers’ limited knowledge of, interest in, and motivation to adopt environmental management prevented them from viewing environmental issues or the need to act responsibly paramount, sometimes based on the belief that their adverse environmental impact was small or insignificant. parker et al. (2009) reviewed nearly 50 journal articles published between 2003 and 2008 with a primary focus on developing environmental improvement intervention strategies that would be most effective for various subsets of smes. they listed the following factors as the main drivers/ barriers of sme environmental improvement: regulation, environmental commitment, business performance commitment, financial incentives, external demand, environmental knowledge, and assistance/education. in their analysis of the role of sme suppliers in implementing sustainability, meqdadi et al. (2012) provided a synthesis of the earlier studies on the barriers and drivers in sustainability initiatives for smes vs. their supply network. among drivers, they listed beliefs, values and sustainability commitment of the top management, environmental awareness, cost savings, competitive advantage, availability of financial and technical resources, and possession of infrastructure for compliances with environmental standards. barriers included lack of top management commitment, time and awareness, perception that their impact on environment is minimal, high cost of environmental programs, lack of financial resources, lack of skills, know-how and technical expertise. drawing on 84 journal articles published between 1987 and 2010, klewitz and hansen (2014) found smes’ strategic sustainability behavior to range from resistant, reactive, anticipatory, and innovation based to sustainability-rooted and identified innovation practices at product, process, and organizational levels. in their review of literature, they refer to most of the major factors listed by the studies referenced earlier. johnson and schaltegger (2015) reviewed 112 studies to identify the specific sustainability management tools designed for smes and reasons why they were or were not implemented. they noted the following as the normative considerations for why smes should implement these methods: managing legal compliance and stakeholder relationships, performance improvement, organizational learning, and innovativeness. as for barriers, they listed lack of awareness on sustainability issues, absence of perceived benefits, lack of knowledge and expertise, and lack of human and financial resources as major internal obstacles. insufficient external drivers and incentives, the unsuitability of formal management tools in informal sme structures, the complexity of internationally designed standards and instruments emerged as major external impediments. aghelie (2017) explored the drivers and barriers to smes sustainable green business practices and uncovered 21 drivers and 35 barriers. the drivers were classified into seven categories among which “social influences”, such as improving company’s image, having long term relationships with consumers by earning and returning their trust, were the most important drivers. “training and knowledge” was the least important driver. the barriers were divided into six groups among which “government and legislation” was found to be the most challenging for smes to implement. more specifically, the absence of government support and enforcement or limited budget/financial incentives to support green sustainable projects dissuaded firms from engagement in sustainability. the meta-analysis and primary studies reviewed showed that the number of studies conducted on u.s. smes 19 n. kasiri, h. movassaghi, & s. lamoureux journal of small business strategy / vol. 30, no. 3 (2020) / 16-32 were only a few compared to many studies conducted in europe and asia (alvarez jaramillo et al., 2019; johnson & schaltegger, 2015; wiesner et al., 2017). there is a need for much more investigation of u.s. businesses that have a large sme sector and huge sustainability impact, as the u.s. is one of the top polluters in the world. method we selected the interview method as an exploratory approach in our study. although there are many studies on drivers and barriers on smes’ sustainability adoption, just a few of them have been done in the u.s. all smes are unique and so are their internal and external environments that need to be studied. interviews allowed the researchers to better gain insights on the potential drivers and barriers in smes’ sustainable operations in the u.s. the sample of participating smes was constructed from mostly local and regional small businesses that were primarily chosen through referrals within the wider network of contacts with researchers (modified snowball) throughout the new york state region (atkinson & flint, 2001). some businesses were also contacted using information provided by the chamber of commerce or online business directories and listings, including the small business administration’s dynamic small business search database. the sba’s (2004) database produced a randomized selection of small business contact information based on location criteria specified by researchers. seventy-five smes participated out of over 100 smes invited. the study was conducted over a period of one year and was completed in spring 2018. qualitative methods have been used in many studies of smes’ sustainability behavior (aghelie, 2017; del giudice et al., 2017; langwell & heaton, 2016; rekik & bergeron, 2017). rekik and bergeron (2017), for example, interviewed 15 smes from canada, tunisia, and morocco with less than 45 employees, to assess the motivators for sustainability practice adoption. as shown in the literature, many external factors, such as government regulations and consumer trends, as well as internal factors, such as businesses’ culture and values, are shaped by forces within countries, states, and regions. therefore, studies should focus on certain geographical boundaries to be able to identify the drivers and barriers for smes in a region and develop guidelines that are effective for the corresponding constituencies. we focused on exploring smes’ sustainability behavior and strategies in new york and conducted interviews with smes in this area. the ny smes come from mega, large, and small cities that broadens the mix of the participants in this study. in addition, the ny government supports sustainable operations and initiatives by smes which allows this study to analyze the impact of the government’s role. the researchers who conducted this study are also located in ny and had better access to smes in this state. the interview instrument consisted of open-ended questions, which were formally developed after reviewing existing literature along with preliminary discussions with several sme experts, consisting of owners/managers of such companies with long and extensive industry experience as well as industry association and chambers of commerce officials working with such companies. interview questions prompted owners/managers to discuss topics including: their familiarity with sustainability and how they learned about it, their implementation of sustainable business practices (e.g., renewable energy, recycling, local sourcing, etc.), their motivations for being sustainable (e.g., values, regulations, incentives, consumer behavior, competitors, etc.), barriers preventing adoption of sustainability solutions in their business (e.g., awareness, cost, etc.), future sustainability plans as well as any other relevant information they may have liked to share. data was collected via 75 semi-structured interviews with managers/owners of smes operating in new york state. smes were defined as small to medium-sized enterprises with 250 or fewer full-time employees. to improve generalizability, the interviewed businesses varied across industries to include manufacturing, retail, farming, restaurant, and health. table 1 shows the sectoral distribution of the 75 participating smes. table 1 smes by industry sector industry count % retail trade 15 20% accommodation and food services 14 19% manufacturing 12 16% professional, scientific and technical services 10 13% construction 5 7% healthcare and social assistance 4 5% administration, business support and waste management 3 4% arts, entertainment and recreation 3 4% other services 9 12% interviews were conducted over the phone, in person or through video conference and were up to an hour in length depending on how much information the interviewees wanted to or were able to share, their awareness or knowledge of sustainability, or the extent of sustainable 20 n. kasiri, h. movassaghi, & s. lamoureux journal of small business strategy / vol. 30, no. 3 (2020) / 16-32 solutions implemented by their business. prior to the interviews, participants were provided a brief overview of the study, the interview questionnaire and the informed consent forms so that they could acknowledge their understanding of the purpose and the voluntary nature of the participation in our research. utilizing the interview guidelines that detailed potential responses and follow-up questions, interviews were conducted by researchers. after interviews were conducted, content analysis of the interview transcripts was completed by the researchers. this was done by carefully reading through the transcripts and coding responses to each question into a spreadsheet, organized into columns for each of the open-ended questions and sub-questions asked in the interviews. ms excel was used to conduct the content analysis of the interviews. using the grounded theory approach, researchers identified several categories in the data as they emerged in the interviews themselves to create coded terms (strauss & corbin, 1990; williamson et al., 2006). when researchers discovered a response within a transcript that did not fit any of the already defined terms, they defined a new term to describe the response. terms were defined by the researchers to match common interviewee statements. for example, many interviewees mentioned that the costs of sustainable solutions were too high, so researchers coded such statements with the term “cost”. researchers mainly identified categories and terms by reviewing the terminology used in prior research regarding business sustainability (robinson & stubberud, 2013; wiesner et al., 2017). terms were coded on the basis of whether they related to or impacted “environmental sustainability”, defined as “being profitable through well-planned, socially, and environmentally sensitive practices” (wiesner et al., 2017). for instance, the term “feel good” was adopted in the current study to describe sustainable solutions that had paid off for businesses through intrinsic and personal benefits (robinson & stubberud, 2013). each new term and its definition were recorded in a shared list between researchers to improve the inter-rater reliability of the researchers’ coding. initially, 115 terms were defined to identify recurring concepts within the interviews such as “family influence”, “cost”, and “limited resources”. recognizing the overlap in the definitions of some of the terms, the researchers grouped the related terms into categories, reducing the total number of terms to 85 in an iterative process. findings types of sustainability solutions adopted among the nearly 10 sustainable solutions presented, the most frequently adopted was recycling / waste reduction. in total, 78% of the respondents, 62 engaged in “recycling efforts or took initiatives to reduce waste generation” (figure 1). below are a few qualitative remarks from our interviews in this area: figure 1. implemented solutions by new york state smes the second most prevalent solution was renewable/ efficient energy. in total, 63% of respondents, 50 noted “utilizing efficient energy technologies such as leds, reducing energy consumption, or implementing renewable energy technologies.” new york state, excluding ithaca and new york city, were above average in this category with a 74% “we recycle everything. the recycling center here … really helps with that. we don’t have to do much sorting (plastic sheeting, paper, cans, plastic jars all go together). and there is compostingwe do most of it ourselves, and some of it is brought to the recycling plant.” “we are always trying to reduce our waste stream, and we’ve worked with … solid waste, to change our practices. for example, wax-cardboard used to not be recyclable, which we have managed to get into the compost stream. so now we are at the point where only 6% of our waste is landfill. everything else is either composted or recycled. and our facilities manager measures this and keeps track of all of that.” “i am constantly doing the math on how to reduce waste on my job site. (…) i try to get my guys to take the products out in a way that makes them reusable and salvageable for people.” 0 10 20 30 40 50 60 70 support other sustainable businesses reduce carbon footprint organic/natural products sustainable suppliers reduce/reuse water technology improvements external evaluation thinking local reusable materials renewable/efficient energy recycling/waste reduction implemented solutions 21 n. kasiri, h. movassaghi, & s. lamoureux journal of small business strategy / vol. 30, no. 3 (2020) / 16-32 (29) engagement rate. following are select comments from the participating smes justifying their focus on this area: drivers of sustainability strategies as noted in the literature review, a variety of internal and external factors such as owners/managers’ education, businesses’ self-motivation and regulations are among the major drivers behind small businesses’ decisions to implement sustainability (johnson & schaltegger, 2015; parker et al. 2009; tilley, 1999; walker et al., 2008). at the same time, studies have shown several barriers such as the cost of implementing sustainable solutions and resource limitations often preventing smes from utilizing such solutions. below we discuss the key findings of our study with respect to the prominent drivers and barriers identified by new york state smes. environmental awareness fifty percent of our interviewees noted that education, whether formal or informal (e.g., professional seminars, schooling, journal articles), contributed to their decision to implement sustainable solutions. in addition to education, 31% stated that their communities or networks allowed them to learn about adopting sustainable solutions (figure 2). some other notable sustainable solutions that participants engaged in included reusable materials (“using materials or products that can be reused”) was mentioned by 38% of respondents, thinking local (“working to improve local community, sourcing from local suppliers, or supporting local economy”) by 34%, and utilizing external evaluations (“utilizing third-party sustainability audits or achieving sustainability-related accreditations”) by 23%. other solutions included such activities as technology improvements, reducing / reusing water, incorporating sustainable suppliers into the supply chain, and switching to organic / natural products. the following comments provide a few specific examples of how our responding smes went about executing these strategies: “… solid waste will come in and evaluate, so they did the evaluation of the recycling and all that. and when you meet their criteria, then you can become a re-business partner, and then they will start sharing; you get on an e-mail list and they share ideas and try to keep track of you to make sure that you stay on track.” “[we] also get some of their fruit like peaches and berries from local gardens. another interesting thing that [we] participate in is the use of other local businesses’ products. the ice cream served at the restaurant comes from [a local ice cream shop], which also is a known user of local ingredients from … farms.” “we’ve replaced all old refrigerators in the past 10 years and are planning to replace all those refrigerators within the next 2 years to obtain our green chill certification.”“most recently we purchased our own solar farm, that will cover about 11% of power use. the other 89% is accounted for by purchasing solar certificates (purchase solar power). so basically, all our energy is renewable, which is very expensive, but that is the cost of doing business.” “lighting is a huge thing for sure, and it’s a huge energy draw, and i’m pretty sure we have gone a long way in changing the lights to led and stuff like that – but that would have been the big thing.” “our entire office is also made to be environmentally sustainable and operate in an energy efficient manner. the lights, bathrooms, resources of wood, and manufacturing process for our products use energy conservations methods.” 0 10 20 30 40 50 job requirement employee suggestions community/networks education sources of learning figure 2. sources of learning about sustainability by sme managers/owners as with typical knowledge-gaining activities, individuals turn towards formal or informal educational outlets such as colleges and journal articles as well as their peers to 22 n. kasiri, h. movassaghi, & s. lamoureux journal of small business strategy / vol. 30, no. 3 (2020) / 16-32 obtain knowledge. this was evident across several respondents’ comments such as the following: “i learned about sustainability in class.” “because you’re subjected to a community of conversation that supports that modality [sustainability], it makes it a lot easier (…). we are highly suggestive creatures, and you have to conform with your community.” “in the news, you hear talk about how small businesses are trying to wean themselves off non-sustainable resources and still keep costs down. there’s no one source to learn from – it’s a societal effort that’s been in the spotlight for a while.” values the most common motivators identified by our responding smes’ for implementing sustainability strategies related to their personal values and moral cognitions, general company values, and acting upon what they perceived to be their firms’ environmental/social responsibility, in that order. growing consumer demand for sustainable products and services seems to have also reinforced and further motivated owner/managers’ quest for adoption of sustainable solutions (figure 3). 0 10 20 30 40 e/s responsibility personal interest company values consumer demand (+) morals/values (p) values figure 3. values impacting sme sustainable solution implementation “i worked with our board of directors to come up with our mission statement which is our triple bottom line mission to enhance community, economy, and environment, through reuse. we saw our core activity to keep stuff out of the landfill, and that it also had other positive impacts.” “our motivations come from the promise of realizing a return on investment quickly. we always watch our bottom line, and we obey the law.” “i do this because it’s the right thing to do. (…) you can’t just take the easy way out, and the world is beginning to notice.” competitive advantage among the 66 owners/managers responding to this question, 59% noted that competition had no impact on their decisions to adopt sustainable solutions while 41% stated that it did. although it may appear that the actions of competitors in terms of sustainability does not impact smes’ decisions to implement sustainable solutions, the concept of maintaining competitive advantage may still apply. in relation to this research, it does not appear that adoption of sustainable solutions is impacted heavily by competition, but rather that sustainable solutions are used to inspire the competition. this can be found through comments such as: “no [our competitors’ adoption of sustainability has not motivated us], i actually look at it like i hope we motivate other people to start doing more.” “i would say it’s a mutually inspiring undertaking, and we sort of inspire each other. there is healthy competition (…) but it’s not competition in the sense that we don’t want to see them go under or out. we don’t want to put them out. we want to see a synergy.” “sustainability is not a feature that competitors differentiate themselves in our line of business.” new york state smes appear to be driven by the belief that businesses and individuals have an obligation to reduce their negative impact on the environment and society. additionally, smes feel as though engaging in such activities will allow them to improve their bottom line in the long term. this can be surmised from transcript excerpts such as the following: as to the role of consumer demand and social trends as possible external drivers for the adoption of sustainability solutions, approximately 19% and 25% respectively of the owners/managers whom we interviewed mentioned these as key influencers. there was a geographic difference in this regard; more sme owners/managers in smaller cities highlighted the importance of these forces than their counterparts in bigger cities such as new york or buffalo. 23 n. kasiri, h. movassaghi, & s. lamoureux journal of small business strategy / vol. 30, no. 3 (2020) / 16-32 regulations, compliance and incentives in the opinion of our interviewees, government regulations and incentives did not greatly impact their decision to engage in sustainability. of the 57 owners/managers who responded to this question, about 39% noted government regulations had an impact on their decision. at the same time, 41% of the 59 interviewees who commented on the role of government incentives, viewed it as an inducement. in terms of regulatory compliance, 81% of the 54 owners/ managers stated that it had no impact. overall, it appears that government programs, held little to no effect on adoption of sustainability solution. furthermore, the percentage of respondents stating lesser impact of these three areas to their sustainability decisions were much higher in the smaller cities than the bigger urban areas. for example, whereas 70% of the smes in ithaca believed that incentives offered by government, at all levels, played no part in their sustainability engagement decisions; the corresponding percent for smes in new york city or buffalo was between 44 to 50. a cautionary note is in order here in that the when grouped by clusters of geographical locations, or by industry for that matter, the sample size and corresponding number of responding owners/managers become too small for any meaningful statistical analysis and generalization. although municipal, state, or federal regulations or support can impact a business’s operations, it appears that these factors do not have a major impact on new york state smes in terms of implementing sustainable solutions. the following comment by one of the participating managers echoed views of few others who downplayed the impact of government regulations or support programs in initiating sustainability solutions: by some owner/managers; these constraints are consistent with evidence from recent studies (alvarez jaramillo et al., 2019) 0 10 20 30 insufficient technology want to learn/be educated type of business limited resources cost barriers the following comments corroborates the role of cost and resource constraints: figure 4. barriers impacting sme sustainable solution implementation “not at all, i haven’t received any kind of specific notice as to plans i should follow or things i can change about my sustainability from the government.” barriers to implementation as shown in figure 4, among our responding firms, cost rose to the top among the barriers to sustainability implementation, with 73% who noted it as a major concern. limited resources were mentioned as the next major barrier to reduce or defer their implementation. inadequate knowledge and expertise about specific activities to improve their companies’ sustainability performance and hence the desire to learn more on how to improve, be it through peer education or local government programs, was also mentioned “we are always concerned with the cost of sustainable solutions as they are quite expensive. especially utility costs of purchasing renewable certificates are 150% more expensive.” “yes, entirely, it [adopting sustainable practices] is more time consuming and way more expensive, it’s often not practical for a small business.” “we definitely wanted more energy efficiency in our space, but like i mention we are not in control of our building. it would be really great to have more energy efficient vehicles, but they are not necessarily available or affordable.” pay off when asked if the sustainability solution(s) they adopted had paid off, 68% of our interviewees responded affirmatively. in some cases, they were more specific by adding that their sustainable initiatives had resulted in reduced costs or increased profitability (figure 5). however, it was not clear if payoff had occurred in other ways such as increased sales, improved customer relations, or enhanced firms’ reputation for sustainability. below are few representative responses on the extent and nature of such payoffs: 24 n. kasiri, h. movassaghi, & s. lamoureux journal of small business strategy / vol. 30, no. 3 (2020) / 16-32 figure 5. smes that have stated their sustainable solutions have paid off discussion our findings in the context of earlier studies highlight the commonalities and areas that our research contributes. the key motivators and barriers to sustainability engagement as noted by the earlier research and our study are discussed below. environmental awareness when first considering implementing sustainable solutions in business operations, it is necessary for small business owners or managers to have some level of knowledge, awareness, or understanding as to how. this aligns with the rise of sustainability-related courses and educational opportunities offered at colleges and universities around the u.s, which expose business owners and managers to the subject (christensen et al., 2007). our finding is in concert with several previous studies which showed sme owners/managers or employees’ knowledge about how to engage in environment improvement was one of the key motivators for adoption of sustainability solutions (gadenne et al., 2008; giri et al., 2015; meqdadi et al., 2012; parker et al., 2009; walker et al., 2008). as these social sources have been linked to opportunity recognition to remain competitive with larger firms, it is plausible to conclude that learned opportunities such as reducing costs or improving customer relations seem to have impacted smes’ business owners/managers’ decisions to implement sustainable solutions (ozgen & baron, 2007). values although businesses may differ in their motivations depending on industry or market segment, their underlying motivations to engage in sustainability appear to be similar. lozano (2015) notes that smes can be motivated by a variety of factors such as organizational culture and values, customer expectations, and regulations. as it relates to management values, earlier studies have noted both the dismissive predisposition by some who do not see environmental issues or the need to act responsibly as significant for their business, believing that their impact is small or insignificant. on the other hand, some other studies found managers who believe they have a responsibility to engage in environmental improvement, proactively undertake such actions and view their business having an environmental impact (parker et al., 2009; schaefer et al., 2020; walker et al., 2008). our findings underscore the role and importance of sme owners/managers’ values and demonstrate that their commitments to sustainability engagement have made a significant difference in the adoption of sustainability by a firm. competitive advantage with 30.2 million smes in the u.s., individual businesses operate in a vastly competitive environment (sba office of advocacy, 2018). as a result, staying competitive or diversifying one’s product line or services is a top priority for business owners and managers. as it has been noted, engaging in effective sustainable efforts that help reduce costs, “yes, it has paid off. (…) we feel good about what we do and know that our products are of the best quality. as far as a monetary pay off, well…no one will ever look at our products and point out bad ingredients, or bad business practices, or say that we pollute too much. they can only say something good. in the long run, that is priceless.” “yes! the composting machine has definitely paid for itself already with only three years of operation and all the money we have saved on taking out the waste. yeah it’s a big expense up front but of course, so is opening up any business. and not only economically but we feel like we’re doing our part in helping the planet.” “we’ve tracked a lot of data through the arch of our growth, and so we have kind of this data driven history. including tons diverted, dollar sales, we’ve had a monthly trends document that we’ve had since 2009. (…) and i feel like we are not even close to reaching our full potential, so we have long ways to go.” 0 10 20 30 40 50 60 feel good (p) too soon to tell profit cost reduction yes sustainability solutions paying off 25 n. kasiri, h. movassaghi, & s. lamoureux journal of small business strategy / vol. 30, no. 3 (2020) / 16-32 increase innovation/creativity, improve risk management and optimize business operations have led to strong competitive advantages (aghelie, 2017; fink & whelan, 2016; laszlo & zhexembayeva, 2017; meqdadi et al., 2012). while some of the earlier studies on external drivers of sustainability adoption have identified the necessity to keep up with the key competitors’ business practices (cantele & zardini, 2018), based on our findings, we believe this to have been traditionally the case more so with the larger companies. as the competitive landscape broadens and consumers obtain greater power in influencing business decisions, it has become essential for firms wishing to remain competitive to engage in corporate social responsibility activities such as giving back to the community, sourcing from sustainable suppliers, or providing adequate living wages (juščius & snieška, 2008). coupled with a continuous growth in the environmental movement since the mid 1900s, business owners and managers have become more aware of the necessity of intertwining their operations with sustainability to limit negative impact while maximizing their operations (dunlap & mertig, 2014). as sustainability engagement becomes more mainstream among smes, competitive positioning and innovations in differentiation with other competitors, small or large, is bound to gain momentum among smes. regulations, compliance and incentives over the past few decades, there has been an increase in government assistance provided to businesses not only for general economic growth purposes, but also for sustainability activities such as climate investments (stiglitz, 2016). however, new york state smes did not appear to consider the regulations having a key role in their adoption of sustainability. findings of the earlier studies on the role of government regulations, compliance, and incentives in companies’ sustainability decisions have been mixed. for example, parker et al. (2009) found extensive regulations to force smes sustainability improvement, financial support to offset the costs, or penalties to discourage negative environmental impact were all impactful on companies’ sustainability decisions. johnson and schaltegger (2015) and aghelie’s (2017), on the other hand, found that the absence of government support or limited financial incentives offered to support green sustainable projects were among the major barriers to the firms’ adoption of sustainability. government intervention and involvement in business practices have been prevalent in the u.s. for quite some time. graafland and smid (2017) argues that direct government regulations and involvement, although helping to improve environmental performance, should be used in conjunction with other factors such as social license pressures in order to be effective. barriers to implementation aside from the various motivations that encourage smes to implement sustainable solutions, there also exists barriers that inhibit sustainability implementation. luthra et al. (2015) identified 28 barriers to sustainability for smes across seven core dimensions including economical and financial, market, awareness and information, technical, ecological and geographical, cultural and behavioral, and political and government issues. the high cost of environmental programs and lack of financial resources have been among the most frequently cited barriers to the adoption of sustainability programs, particularly among the smes making such investment unaffordable and/or highly risky (aghelie, 2017; chan, 2011; chasse & boiral, 2017; johnson & schaltegger, 2015; meath et al., 2016; meqdadi et al., 2012; walker et al.,2008). for the new york state smes who participated in this study, these barriers, though unique to each organization based on size and industry, primarily included costs due to the capital intensity of sustainable solutions, such as solar panels, and a general lack of resources, such as time and space or employees. these top barriers are also listed as major impediments in the most recent findings by alvarez jaramillo et al. (2019), bakos et al. (2020) and shields and shelleman (2017). shields and shelleman’s (2017) study indicated that unclear or delayed payback and resource constraints (financial, time, staff, technology expertise, organizational) are major barriers. however, some barriers discussed in the literature did not emerge as such in our study. for example, lack of education and awareness is listed as a top barrier in both alvarez jaramillo et al. (2019) and bakos et al. (2020) studies, specifically shown in the developing countries. the new york state smes, even those who had not implemented sustainability, did not find the lack of education and awareness as barriers. conclusion the u.s. smes have not been adequately studied in the literature. this study took a comprehensive approach by investigating the drivers and barriers of smes’ sustainability in the u.s. through in-depth interviews with 75 smes across different sectors, our goal was to understand u.s. smes’ strategies and the environment in which they make their sustainability decisions. our research identified important internal and external drivers of the sustainability adoption in u.s. smes. inter26 n. kasiri, h. movassaghi, & s. lamoureux journal of small business strategy / vol. 30, no. 3 (2020) / 16-32 nal drivers, such as a sense of moral obligation to reduce negative environmental impacts, lower costs and potential future liabilities (cleanup costs), or the possibility of lower long-term operating costs, like the cost of gas or electricity, were all positively influencing adoption decisions of smes. among external drivers, majority of smes did not consider competitive advantage, regulatory compliances, or financial incentives as important influencers of sustainability adoption strategies. further analysis of this finding can help public policy makers to either extend the government regulations or make them more effective in advancing smes’ sustainability engagement. meanwhile, social trends, such as customers valuing socially responsible products, were considered important factors. in addition, any formal or facilitated education as external drivers, such as workshops, seminars, conferences, or environmental audits, played a positive role. this calls for planning and developing more formal education at colleges and universities or informal programs at places, such as chamber of commerce, that can strengthen smes’ ability to adopt sustainable solutions. our study also identified the barriers such as cost and limited resources that prevent smes’ adoption of sustainability. with its focus on one state’s smes only and given the methodology and the sample size used in this study, the generalizability of our results is clearly limited. we conducted a qualitative research study to explore and understand important factors influencing new york state smes’ sustainability behavior. our results are based on analytical and not statistical inferences. one possible direction for future research would be to develop an online survey and collect data from hundreds of smes across new york state and/or other states and further analyze the data by firms’ size, age, industry and location (e.g., urban vs. rural), among others. the online survey would gather more objective structured data to conduct statistical analysis of the importance of various factors and their relationships that should lead to gaining deeper insights on smes’ sustainability behavior. acknowledgements we would like to thank all students at ithaca college who helped us in this research. in addition, we acknowledge and thank hsbc for funding this research. we are also grateful to the anonymous reviewers whose constructive comments helped improve the rigor of this manuscript. references agana, y., acar, m. f., & borodin, a. 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(2006). drivers of environmental behaviour in manufacturing smes and the implications for csr. journal of business ethics, 67(3), 317-330. about:blank https://www.sba.gov/sites/default/files/advocacy/2018-small-business-profiles-all.pdf https://www.sba.gov/sites/default/files/advocacy/2018-small-business-profiles-all.pdf https://www.sba.gov/sites/default/files/advocacy/2018-small-business-profiles-all.pdf https://www.sba.gov/sites/default/files/advocacy/frequently-asked-questions-small-business-2018.pdf https://www.sba.gov/sites/default/files/advocacy/frequently-asked-questions-small-business-2018.pdf https://www.sba.gov/sites/default/files/advocacy/frequently-asked-questions-small-business-2018.pdf about:blank about:blank about:blank about:blank about:blank about:blank about:blank 29 n. kasiri, h. movassaghi, & s. lamoureux journal of small business strategy / vol. 30, no. 3 (2020) / 16-32 appendix # term definition 1 ahead consider themselves ahead or usually ahead of regulations or competition 2 community/ networks learn from other businesses, past employers, or organized groups of businesses they are a part of; supported by/learn from the community 3 company values mention of impact from mission statement or company goals; founded for sustainability 4 competitors they are motivated by their competitors (want a competitive advantage, learn from them, partner with them, and/or use them as a comparison for evaluating their sustainability 5 complex solutions solutions are too complex/difficult to understand to implement 6 consumer demand (negative) consumers are not currently interested or concerned with their solution or service; customers are not willing to commit to such endeavors at this time; customers want certain products that cannot be made sustainably 7 consumer demand (positive) customers want/expect certain sustainable or environmentally friendly products/services; customers suggest/inform business about sustainable options 8 consumer price sensitivity consumers are concerned with cost of adoption and/or the product because it may impact sales and make profit difficult to obtain 9 convenience adopting certain sustainable practices was made convenient for their business or was more convenient than other alternatives 10 cost solutions are too expensive; cost is too high 11 cost reduction want to reduce costs; sustainable practices have paid off by actually lowering expenses 12 cost will decline believe the price of implementing solutions will go down over time 13 customer incentives they give consumers incentives to be more sustainable 14 customer retention has increased customer base and retention from sustainability 15 customer satisfaction value customer satisfaction; feel that their sustainability efforts have improved customer satisfaction 16 data driven motivated by measurement/data to reach goals or maximize potential 17 different priorities/ goals they are focused on other goals or have other priorities that are keeping them from improving sustainability 18 environmental/ social responsibility the company takes on responsibility for the impact they have on the environment and society because they feel that it is important as a business to contribute 19 educating sustainability the business or their customers feel that it is important to include labels on products to show/educate consumers about product’s sustainability; provide educational opportunities for individuals, companies, or communities to learn more about sustainability; view education about sustainability as important 20 education attended (and maybe influenced by) conferences and/or presentations that educated them on sustainability; have a degree or have taken courses that relate to sustainability or the environment; conducted external research that is either informal (books, internet, magazines, etc.) or formal (literature reviews, published journals; learned about sustainable practices from advertisements, motivated by relevant ads they have seen, and/or have learned about sustainable practices on tv, etc. 30 n. kasiri, h. movassaghi, & s. lamoureux journal of small business strategy / vol. 30, no. 3 (2020) / 16-32 21 employee satisfaction employees are happy with sustainability efforts 22 employee suggestions other employees/interns suggest/inform business about sustainable options 23 external evaluation they have received accreditations or similar forms of formal recognition; they have assessed their sustainable practices through formal evaluations (such as energy consumption, usage, and recycling system evaluations); they perform/receive periodic environmental audits (by choice or because it is mandated) 24 family influence learned from family members; influenced/motivated by family 25 farming property tax returns they benefit from getting tax returns from farming property 26 federal influenced influenced by federal laws, regulations, incentives, etc. 27 feel good feel satisfied/happy with what they have done for the environment; feel like they have made a positive impact 28 government info learn about sustainability from info shared by any level of government (regulations, recommendations, etc.) 29 green financial services provide solutions for businesses to value environmental costs/impact and apply it to financial statements 30 growth opportunity paid off financially so they were able to expand (new locations, more employees, etc.); gain (real or perceived) opportunities from adopting sustainable practices 31 health code regulations influenced by health code regulations (particularly relevant to food/farming industry) 32 health/safety concerns use environmentally friendly products primarily because they are safer for consumers (not necessarily because they are more sustainable) 33 image enhancement want to improve company image by supporting/engaging in sustainable practices; enhanced their image through sustainable practices 34 impact they believe they have an impact on the environment, but may not do anything further to reduce their impact 35 improve/invent sustainable practices they want to be innovative and create new/improve sustainable solutions for their own business or for other businesses to adopt 36 incentives policies relating to incentives are a motivating factor (tax incentives, accreditations, networking opportunities) 37 incentives don’t apply feel that most incentives don’t apply to their business (incentives aren’t motivating) 38 increase impact (positive) do more good, not less bad 39 industry trends motivated by trends in their specific industry 40 insufficient technology do not have the necessary technology for solutions they want to implement 41 job requirement there is an expectation to be sustainable; sustainability is part of job description or part of what they do in work 42 lack of control (leasing) business feels like they cannot be in control of all sustainable practices because they are renting or leasing their property 43 lack of new solutions not aware of new solutions that are available or that they are capable of implementing 31 n. kasiri, h. movassaghi, & s. lamoureux journal of small business strategy / vol. 30, no. 3 (2020) / 16-32 44 limited resources have a limited capacity in regard to available resources (space, materials, time, money, etc.) 45 little/no impact feel as though their business has little to no impact on the environment or that implementing sustainable practices will have little to no impact 46 loans/grants motivated by grant support they receive or intend to receive; limited by the loans/ grants they cannot receive 47 local policies influenced mostly by local policies (over state or federal) 48 morals/values motivated by own personal beliefs, morals, or values 49 more involvement want more businesses and municipalities to commit to sustainability 50 negative/limiting view view regulations as limiting to their practices; have a negative view/opinion of regulations 51 new recommendations get recommendations from outside sources (term used if outside source was not specified) 52 no machines they do not use machines for production 53 not aware of regulations/ incentives they aren’t aware of or haven’t heard of any regulations or incentives to influence their decisions 54 organic/natural products ingredients/products have no chemicals or are naturally/organically made 55 other businesses they learn from or are influenced by other businesses that aren’t competitors; they don’t explicitly say that these businesses are part of their community or network 56 performance want business to be successful based on performance in terms of sales, productivity, etc. 57 personal interest interested in sustainability for reasons other than morals/values; may have an educational interest or fascination with sustainability 58 previous work experience learned about sustainable practices through previous jobs/work experiences 59 product redesign redesigned their product(s) to be more sustainable 60 profit motivated by the profit they make; has paid off in profits 61 quality create products that are higher quality, so they last longer; sustainability paid off because they believe that their products are of the highest quality (since they are sustainable/natural) 62 recycling/waste reduction they compost, recycle electronics/basic materials (paper, plastic, cardboard, etc.); “upcycle” (resell used/refurbished goods); used term if they talked about “reducing waste” in general 63 reduce carbon footprint they have reduced emissions or pollution; used term if they specifically said they reduce carbon footprint without elaborating 64 reduce impact have a primary goal to reduce the impact that they have on the environment (can be a personal or business goal) 65 reduce/reuse water reduce how much water they use; they reuse water (i.e. save rainwater) 66 regulations influenced by regulations to not be sustainable 67 regulations don’t apply feel that some regulations don’t apply to their business or don’t really affect them (regulations aren’t motivating) 68 renewable/ efficient energy use renewable forms of energy (i.e. wind, solar power); they have made their energy more efficient or reduced energy consumption (i.e. improved lighting, better heating) 69 reusable materials they reuse their materials or choose to use reusable materials 32 n. kasiri, h. movassaghi, & s. lamoureux journal of small business strategy / vol. 30, no. 3 (2020) / 16-32 70 scale reduction reduced size of operations to reduce impact/waste 71 small/delayed pay off they believe that implementing sustainable solutions is not necessarily worth it because the benefits/pay off would not be immediate or would be too small 72 social trends feel obligated to adopt sustainable practices because of local culture, social media, other trends; pressure to conform 73 state influenced influenced by specifically state laws, regulations, incentives, or other form of motivator 74 support other sustainable businesses they support other sustainable businesses by exchanging ideas or resources for sustainable solutions 75 sustainability leadership educate/inspire community; model for other businesses/people; view their business as a leader in sustainability; view business as successful in inspiring other businesses/consumers to be more sustainable; inspire consumers to be more sustainable or to support sustainable practices 76 sustainable suppliers source goods from suppliers that have sustainable practices 77 sustainable wages they believe in paying their employees enough to live in current market/economy (certain living standard based on need) 78 technology improvements bought better/more efficient machines; improved technology in a way that is more efficient/sustainable 79 thinking local have a positive impact on the local community; products/materials are made locally or within the country; they think it is important to support their local economy (buy locally and offer/share sustainable solutions with other local businesses) 80 too soon to tell company is not able to gauge the success of sustainable initiatives yet 81 transportation improvements improved distribution methods 82 type of business they feel that the type of business they are in prevents them from being able to adopt more or any sustainable solutions 83 unnecessary they feel as though implementing sustainable solutions is unnecessary for the success of their business 84 want to learn/be educated they want to learn more about sustainable practices because they value sustainability, but don’t know how to improve 85 way of life have always been interested in sustainability, doing sustainable practices http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2019, vol. 29, no. 03, 46-59 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2019 small business institute® w w w. j s b s . o rg introduction timothy l. pett1, john francis2, james a. wolff3 1rollins college, usa, tpett@rollins.edu 2san diego state university, usa, francis2@sdsu.edu 3wichita state university, usa, jim.wolff@wichita.edu the interplay of strategic orientations and their influence on sme performance small and medium enterprise performance, entrepreneurial orientation, market orientation, learning orientation apa citation information: pett, t. l., francis, j., & wolff, j. a. (2019). the interplay of strategic orientations and their influence on sme performance . journal of small business strategy, 29(3), 46-59. learning has long been an important topic of interest to organizational researchers (cohen & levinthal, 1990; hedberg, 1981; nonaka, 1994). the premise underlying an organization learning capability is that it facilitates flexibility, opportunities for growth, and overall better performance in those firms that possess such a capability (maes & sels, 2014; real, roldán, & leal, 2012). learning capabilities are thought to facilitate organizational adaptation in the face of negative and positive exogenous forces. the ability to learn may be particularly important to small and medium-sized enterprises (smes) in their quest for survival and growth. however, the internal dynamics in sme learning processes that lead to increased performance remain a rich area of research. literature examining firm abilities to learn have focused on various strategic orientations that direct and influence the activities of businesses and inform their behaviors aimed at exploiting opportunities in order to gain and sustain competitive advantage (hakala, 2011). these orientations have included ‘learning’ orientation (sinkula, baker, & noordewier, 1997), ‘entrepreneurial’ orientation (covin & slevin, 1986; miller, 1983), and ‘market’ orientation (kohli & jaworski, 1990) which have been suggested as drawing the most attention from researchers (schweiger, stettler, baldauf, & zamudio, 2019). gnizy, baker, and grinstein (2014) suggest that these three strategic orientations are important aspects of a firm’s proactive learning culture and are mutually dependent and synergistic. the term ‘orientation’ as employed in organizational research is a common descriptor with an imprecise connotation. the american heritage dictionary (2007) defines orientation as “the act of orienting or the state of being oriented” (emphasis added). to ‘act’ is the process of doing, while ‘state’ is condition with respect to attributes. in organizational research, numerous constructs are articulated as orientation. from each orientation label one cannot determine this paper examines the role that learning orientation plays with respect to entrepreneurial orientation, market orientation, and, ultimately, the performance of small and medium-sized enterprises smes. previous research indicated mixed findings in regards to the relationship of these strategic orientations and firm performance. instead of just direct influences to performance, we examine if learning orientation is an antecedent to market and entrepreneurial orientation. we suggest that in this way, their influence to sme performance would be more accurately predicted. we argue that learning orientation reflects the overall values of the organization, whereas entrepreneurial and market orientations are more action-oriented firm behaviors. learning orientation would likely set the stage for the requisite actions implied in market and entrepreneurial orientation. direct effect and mediated effects hypotheses between these strategic orientations are tested on a sample of sme manufacturing firms and their performance. findings indicate that learning and entrepreneurial orientation directly influence sme performance. however, when learning orientation and its effects are mediated by market and entrepreneurial orientation, direct effects disappear when testing this model. the study offers insight into relationships between various strategic orientations, as to how and when they might influence sme performance. http://www.smallbusinessinstitute.biz http://www.jsbs.org 47 t. l. pett, j. francis, j., & j. a. wolff journal of small business strategy / vol. 29, no. 3 (2019) / 46-59 whether it is an action or a state construct. absent a careful, clear, and consistent articulation of a construct based on its original conceptualization, empirical tests and analyses can yield spurious or confusing results which muddy rather than clarify our understanding. two situations illustrate the issues that arise when logical inconsistencies occur in research. the first situation develops when researchers operationalize and measure theoretical constructs with dimensions that confuse or mix the “action” or “state” notion of an orientation construct. as it was originally conceptualized by sinkula, et al. (1997) learning orientation (lo) is a set of values that an organization holds toward learning and influences how likely it is to develop a learning culture. as such, values and culture represent a condition of being, therefore lo is a state construct as originally conceptualized. the second situation (more fully developed in the sections that follow) and a contribution of our paper is where the relationship between ‘orientations’ are considered with respect to a dependent variable. though researchers have examined the various orientations and performance relationship performance (see baker & sinkula, 1999; 2009; farrel & oczkowski, 2002; real et al., 2014; wolff, pett, & ring, 2015), most of this research has focused on direct effects, combinations of two orientations only or the complementarity of the orientations (schweiger et al., 2019). there has been limited theoretical development and analysis of the interplay of these three strategic orientation constructs and their influence on each other and firm performance (raj & srivastava, 2016; wales, beliaeva, shirokova, stettler, & gupta, 2019). specifically, there has been a lack of theorizing the relationships between the three strategic orientations. previous examination of these variables is akin to attitude-consequence research which goes without examining intermediate behavioral action variables. in other words, attitudes do not by themselves lead to consequences. it is only when attitudes lead to behavior that consequences result. similarly, when referring to the interplay of orientations, we do not expect an organizational state to lead to performance in the absence of organizational actions. we propose the generalized conceptual model that is illustrated in figure 1. in this model, we argue that organizational values influence organizational actions, which, in turn, yield organizational outcomes. we examine these internal dynamics by building on research, examining market orientation (mo) (kohli, jaworski, & kumar, 1993), entrepreneurial orientation (eo) (covin & slevin, 1986), and the relationship between mo, eo and sme performance (baker & sinkula, 2009). we suggest that learning orientation (lo) (sinkula et al., 1997) is an antecedent construct to these actions and create the necessary internal organizational environment for mo and eo to be effective influencers of sme performance. lo is a set of values exhibited by the organization that demonstrates whether or not the organization is likely to develop a learning culture (sinkula et al., 1997). absent a learning culture, it is axiomatic that organization learning would likely be reduced if not missing entirely. the purpose of the paper is to explore and empirically test the notion that firm values when coupled with appropriate behaviors can lead to enhanced performance. specifically, we examine in the following sections the relationship between lo, mo, eo and the growth of small firms. while eo, mo and lo have received much research attention (brettel & rottenberger, 2013; hakala, 2011), a contribution that this research makes is to link theoretically and to test empirically the relationship between three constructs discussed above. frishammar and andersson (2009) argue that there are problems linking eo and mo to sme performance. other researchers have found no relationship between organizational learning and sme growth (altinay, madanoglu, de vita, arasli, & ekinci, 2016). we suggest how these complex relationships interact with each other and link to organizational growth. a second important contribution of our research is to argue for clarity at the meta-construct level that more accurately specifies theoretical relationships that model important organizational processes. research has become interested in the complimentarity of various strategic “orientations” in order to mirror organizational complexities (schweiger et al., 2019). we argue that significant confusion exists in the literature with respect to the term ‘orientation.’ as we show, some strategic ‘orientations’ in the literature are philosophical and values-based constructs and some ‘orientations’ are behavioral and action-based constructs. we present a general model that illustrates the intervening role of two behavioral meta-constructs (mo and eo) between organizational values (lo) and organizational performance. the paper initially presents our rationale to the values-behavior-performance explication of orientation and the confusion that exists with respect to this term. we present theory underlying the constructs and our arguments for the hypothesized relationships between them. we discuss our empirical methodology, the operational measures of the constructs, and the statistical analysis used to test the hypothesized relationships. we provide the results and interpretation of our analysis, and a discussion of the implications, limitations and directions for future research. theory and hypothesis development the principal concern of this study is to examine the interplay of three strategic orientations and firm performance. 48 t. l. pett, j. francis, j., & j. a. wolff journal of small business strategy / vol. 29, no. 3 (2019) / 46-59 strategic orientation refers to a “firms’ philosophy of how to conduct business through a deeply rooted set of values and beliefs that guides the firms’ attempt to achieve superior performance” (zhou, yim, & tse, 2005). many studies have found that the orientations of lo, eo and mo have both direct and indirect influences on performance. however, there is a lack of theoretical development or consistency in findings regarding how the relationships between these factors play out. learning orientation learning orientation has been conceptualized as the values an organization has that influence firms to create and use knowledge, particularly in regards to questioning long held organizational norms (baker & sinkula, 1999; schweiger et al., 2019). of importance to organizational learning research is that these values enable firm’s adaptability in dynamic environmental or competitive conditions (moingeon & edmundson, 1996). lo specifically refers to the idea that firms should question existing assumptions and beliefs about the firm and its environment so that it can adapt appropriately (wales et al., 2019). conceptually, lo is a construct that is comprised of three constituent elements: a commitment to learn, open-mindedness, and shared vision (canlantone, cavusgil, & zhao, 2002). a commitment to learn at the organization level is expressed by a philosophy-in-use and culture regarding learning and refers to the value a firm places on recognizing new knowledge (sinkula et al., 1997). the second element of lo, open-mindedness, is a precondition to the learning process because firms must be willing to question routines and assumptions that comprise their mental models (senge, 1990). third, shared vision captures the notion that learning results in some changed perception or an insight not previously identified that yields a changed pattern of action by a part or the whole of an organization (sinkula et al., 1997). absent the cultural values that reflect a commitment to learning, learning and adaptation is not likely. hence, lo, at minimum, requires the elements of open-mindedness and a commitment to learning as a precursor for organizational learning and ultimately successful adaptation. the notion that organization learning—as a broadly construed construct—can yield performance improvements is logically appealing and is an important element with respect to understanding organizational function. research has demonstrated that lo firms are better able to adapt to environmental complexities and improve their performance (lonial & carter, 2015; zhou et al., 2005) and the organizational values inherent in having a learning orientation serve as the focal construct in our research. entrepreneurial orientation fundamental to entrepreneurial orientation (eo) is that firms behave in different ways in regards to entrepreneurial values and practices (real et al., 2014). entrepreneurial orientation (eo) has come to be most closely associated dimensions being risk taking, innovativeness, and proactivity (covin, green, & slevin, 2006; covin & slevin, 1991; miller, 1983). entrepreneurs are generally regarded as risk takers in terms of their decision-making and business activities and may view risk differently than non-entrepreneurs (busenitz, 1999; palich & bagby, 1995). innovativeness relates to the degree to which firms create new products or processes (covin & miles, 1999) through the pursuit of creative or novel solutions (knight, 1997). proactivity is similar to competitive aggressiveness (covin & slevin, 1991) and involves behaviors that take the lead vis-a-vis competitors and perceived business opportunities (wiklund & shepherd, 2003). while most studies indicate that eo has positive performance influences (for example, see lee, lee, & pennings, 2001; pett, errami, & sie, 2018; zahra & covin, 1995), there has been some research with negative or insignificant effects (rauch, wiklund, lumpkin, & frese, 2009). schweiger et al. (2019) suggest this variation may be due to the need to align eo with other constructs, namely mo and lo. we argue that this is due to the equivocation with respect to state or action in language used to articulate the dimensions of eo. miller’s (1983) original work rooted the construct in behavioral action. in addition, lumpkin and dess (1996) indicate that eo refers to the processes, practices, and decision-making activities which articulates eo as an action construct. as suggested earlier in the paper, we adopt the notion that eo is a behavioral action construct and its influence on firm performance is not merely a direct relationship, but part of the larger set of strategic orientations that firms possess. market orientation narver and slater (1990) specify that mo is the ability of an organization to produce behaviors that lead to the creation of value for buyers and increased performance for the business. a firm’s market-oriented behaviors include three components: customer orientation, competitor orientation, and inter-functional coordination. these components must be supported by a relevant culture (grinstein, 2008). a strong customer orientation is the depth of knowledge and understanding for customers in order to deliver superior 49 t. l. pett, j. francis, j., & j. a. wolff journal of small business strategy / vol. 29, no. 3 (2019) / 46-59 value to them. competitor orientation are behaviors related to gaining and acting on understanding competitor’s capabilities and strategic direction. inter-functional coordination includes utilizing and coordinating firm resources to create superior value for customers (narver & slater, 1990). implied in these components of mo dimension is the need for continuous actions designed and executed to create significant marketing insight for the firm. ultimately, mo research suggests that it is important for firms to orient themselves to market demands so that they can grow (zahra, 2008). many researchers have found that the components of mo contribute to firm performance (grinstein, 2008; schweiger et al., 2019). however certain studies have nonconclusive or alternative findings (ellis, 2006). the influence of mo directly on firm performance may be more complicated than originally predicted. for example, researchers have found that mo’s influence is mediated by or complimentary to other orientations (deutscher, zapkau, schwens, baum, & kabst, 2016; schweiger et al., 2019). growth firm growth has been associated with the ability to better withstand environmental shocks (hannan & freeman, 1984) and is a core element underlying the resource-based view of the firm (barney, 1991) where theorists propose that resource endowments are the crux of a firm’s ability to grow (penrose, 1959). growth as measured by revenue and employee growth is particularly important in the study of small firms. what stinchcombe (1965) termed a “liability of newness”, freeman, carroll, and hannan (1983) concluded was also comprised of a “liability of smallness.” bruderl and schussler (1990) proposed that new firms only possess a stock of resources that will sustain them through startup and adolescence, however the stock of resources may run out after this. therefore, the growth of the firm is critical so that it can generate the resource flows necessary for survival. we expect that these resource flows are made possible by a growth in revenues and employees for small firms. hypotheses given the globalization of markets, the pace of technological change (ireland & hitt, 1999) and other exogenous environmental changes that inevitably challenge small firms, a coping mechanism is to gather information, analyze information and learn what decision avenues or opportunities may be open to them. the process of information gathering, analysis and gaining insight into dynamic conditions is organization learning (fiol & lyles, 1985). therefore, a key process in the successful strategic management for any firm may be its ability to learn. learning may provide the means by which small firms successfully negotiate difficult environments and overcome liabilities of newness (stinchcombe, 1965), smallness (freeman et al., 1983), or adolescence (bruderl & schussler, 1990). implicit in narver and slater’s (1990) content specification of mo is the notion of learning. in their discussion of customer orientation and competitor orientation is the idea of understanding. to understand complex and dynamic entities such as customers and competitors with respect to current and future needs and actions requires the firm to have a proclivity for information gathering, processing and interpretation—essentially a culture for learning. firms that value learning are much more likely to enact the behaviors that comprise mo. similarly, entrepreneurship researchers propose that learning in various manifestations is an important element in the opportunity recognition process (dutta & crossan, 2005; lumpkin & lichtenstein, 2005) by entrepreneurs and entrepreneurial firms. recognized opportunities provide options for strategic renewal or new product/new venture efforts (lumpkin & lichtenstein, 2005), both of which may provide a firm the path to enhanced performance. the parallel between strategic management and entrepreneurship is the idea that opportunity provides the avenue for a firm to grow and prosper. firms with an orientation or the values present to learn may be better able to successfully establish performance enhancement mechanisms (baker & sinkula, 1999). hypothesis 1. learning orientation is positively related to sme performance. to the extent that an eo allows sme firms to be more efficient in their activities, cater to customer needs in superior ways, or be faster to market than competitors, firms may be able to create competitive advantage and hence superior performance (covin et al., 2006). given the relative consistency in empirical support from other research studies that examine the eo/performance relationship (deutscher et al., 2015; wiklund & shepherd, 2003) we anticipate a direct effects relationship between eo and small firm growth. hypothesis 2. entrepreneurial orientation is positively related to sme performance. the relationship between mo and performance has been the subject of much empirical research in larger firms (narver & slater, 1990), smes (kara, spillan, & deshields, 2005) and chinese smes (li, zhao, tan, & liu, 2008). the 50 t. l. pett, j. francis, j., & j. a. wolff journal of small business strategy / vol. 29, no. 3 (2019) / 46-59 idea that firms with higher reported levels of the mo construct demonstrate greater levels of performance is generally supported in the literature. this outcome should not be surprising given that mo effectively measures how well a firm understands its customers, its competitors, and how well it coordinates its value creating activities throughout the firm to (more effectively than competitors) meet its customers’ needs. hypothesis 3. market orientation is positively related to sme performance. while there is logical and empirical support for the presence of a positive main-effects relationship between both mo and eo with firm performance, there is also logical and empirical support for a significant positive interaction effect between mo and eo on sme performance. as shown by li et al. (2008) in their study of transition economy smes there was a significant positive interaction effect between mo and two of the three dimensions of the eo construct (proactiveness and innovativeness). interestingly the risk-taking dimension was positive but not significant. this outcome may be an artifact of the stage of development in the chinese economy from which the sample was drawn (li et al., 2008). irrespective of the outcomes reported by li et al. (2008) the notion that mo and eo may be complementary constructs that have a multiplier effect with respect to sme performance has logical and intuitive appeal and, thus, should be examined across a spectrum of sme conditions. the complementary nature of mo and eo can be illustrated by the following discussion. the component dimensions of mo combine create within a firm the necessary knowledge to understand deeply customers, competitors, and how to effectively combine the internal organization to maximize value creation (narver & slater, 1990). as previous research pointed out (bhuian, menguc, & bell, 2005; li et al., 2008) this is a necessary condition for higher performance levels in firms but it may be insufficient for the highest levels of performance. absent behaviors that provide a firm the capability to recognize opportunities and act on perceived opportunities performance improvement may be limited. conversely, past research has shown that the presence of eo in firms is positively related to performance (covin & slevin, 1991). however, while eo may signify that a firm has the knowledge base to recognize opportunities and the willingness to act on perceived opportunities, in the absence of a deep customer understanding, knowledge of their current and future needs and how to marshal organizational resources to satisfy needs, the full performance benefits from eo may be attenuated. recent research has shown that strategic orientations may have complementary effects on business performance, and firms that combine orientations outperform those that have one orientation alone (beliaeva, shirokova, wales, & gafforova, 2018; deutscher et al., 2015; ho, plewa, & lu, 2016; lonial & carter, 2015). hence, we expect there to be a mutually reinforcing positive relationship between mo and eo with respect to sme performance. hypothesis 4. market orientation and entrepreneurial orientation interaction is such that higher levels of each yield a significantly positive relationship to sme performance. to this point we have discussed the main effects relationship of lo, eo, and mo with performance and the interaction effects between eo and mo. in addition to these relationships there is a logical link that exists between the cultural values present in a firm, the actions taken by the firm and the resultant organizational outcomes realized by the firm. specifically, we expect there is a relationship between lo (values), eo and mo (actions), and the performance (outcomes) of smes. learning is a process (crossan, lane, & white, 1999). knowledge, the desired result of the learning process, is that which facilitates innovation or the solution to problems (nonaka, 1994). crossan, lane and white (1999) proposed the 4i framework for organization learning—intuiting, interpreting, integrating and institutionalizing. the last two of these activity components can be argued to comprise the conversion of learning to knowledge. integrating and institutionalization (the third and fourth i respectively) represent the transition from learning to organizational knowledge. given these arguments we propose that the presence of a lo within the firm will yield more usable knowledge with which the firm can innovate or generate marketplace solutions to problems. lo represents a set of specific values that may guide the firm in what it does (sinkula et al., 1997). lumpkin and dess (1996, p. 136) state that “eo refers to the processes, practices and decision-making activities” exhibited by a firm. consistent with this reasoning is the argument that eo represents the actions that may be shaped by the values of the firm. an eo is an organization-wide predisposition to act in a way that reflects innovation, risk-taking, and pro-actions regarding how a firm operates (lumpkin & dess, 1996). a firm with an eo must learn to be able to innovate and act ahead of competitors. therefore, a firm’s lo is antecedent to an eo and may shape the actions that firms take. in other words, there are indirect effects of the lo/performance relationship such that eo will mediate the effects of lo on performance. 51 t. l. pett, j. francis, j., & j. a. wolff journal of small business strategy / vol. 29, no. 3 (2019) / 46-59 with respect to mo, customer orientation and competitor orientation include all of the activities involved in acquiring information about these entities and then disseminating this information throughout the business (narver & slater, 1990). similar to the eo discussion above mo requires an organization-wide predisposition to act in a manner consistent with the elements that comprise the mo construct. hence there is likely to be present in a firm that exhibits a strong mo the values that shape the culture or climate to acquire information, disseminate information, process information into knowledge, and use that knowledge to coordinate an organization-wide response to create value for customers. lo is antecedent to mo and shapes the actions taken by the firm to yield outcomes (performance) realized by the firm. reinforcing these arguments is the premise that organizational values work through other factors (attitudes, climate, and task organization) to impact organizational performance (marcoulides & heck, 1993). hypothesis 5. high levels of market orientation and high levels of entrepreneurial orientation will mediate the effects of learning orientation on sme performance. lastly, we examine the differences between low and high performing smes. the constructs examined here and in previous research (baker & sinkula, 1999; covin & slevin, 1991; narver & slater, 1990) are purported to be significant contributors to firm performance in many different contexts. according to barney (1991) valuable, rare, hard to imitate, and non-substitutable resources are likely the source of competitive advantage. each of the constructs examined in this research can be viewed as resources that meet the criteria for being the source of superior performance. as argued earlier, lo generally refers to values or culture within an organization which we refer to as a state of being. eo and mo orientations are more behaviorally and action aligned. we expect that the combination of a learning culture along with a strong market and entrepreneurial proclivity within a firm should associate with better performance. this logic is similar to that of baker and sinkula (2009) who found that mo and eo had a complimentary impact on small business profitability. alternatively, firms without the presence of these orientations would be lower performing. hence, lower performing smes should exhibit lower levels of each of these resources than will high performing smes. hypothesis 6. there will be significant lower values for learning orientation, entrepreneurial orientation, and market orientation for low performing smes than are present in high performing smes. the hypotheses stated above are a specification of the relationships among the constructs we examine in this study. figure 1 illustrates the proposed hypotheses that we have formulated in a path diagram that shows the dimensions of each construct and the various paths of influence the hypotheses represent. method the study uses a survey method approach for data gathering to test the proposed relationships. a sample of 700 randomly selected smalland medium-sized firms were identified from a midwestern state directory of nearly 2,000 business firms published by the largest newspaper and all of them were b2c businesses. the sample represented a broad cross-section of smes from a wide array of industries across the state. a mail survey and cover letter soliciting a response to an enclosed questionnaire was addressed to the owner, ceo or president from each firm in the sample. we provided respondents a self-addressed stamped envelope for returning the completed survey. a postcard reminder was mailed three weeks after the initial survey was distributed. a total of 138 key-informants responded to the survey, while 117 provided complete information for a 17% response rate. the approach and response rate are consistent with similar studies that survey top management (hambrick, geletkanycz, & fredrickson, 1993). a total of 96 of respondents in the study reported being the owner or ceo of the business. smes reported having from 7 to 500 employees with the average size being 93 employees. the average tenure for respondents was 19 years with the firm, which also could be viewed as a proxy of firm age. as for gender, the population sample was overwhelming male with 96 reported, while 82 of the smes reported being a family-controlled business. measurement performance. smalland medium-sized private firms are often reluctant to provide specific information regarding performance. because of the sensitive nature of the performance construct and following prior research (chandler & hanks, 1994) in this area, we employed a categorical approach to assess firm performance. we asked respondents to answer three questions concerning their firm’s performance when compared to similar firms in their industry. each item used a five-point likert scale format ranging from 1 ‘lowest 20%’ to a 5 representing the ‘highest 20%’ which was used as a measure of relative performance levels. the questions 52 t. l. pett, j. francis, j., & j. a. wolff journal of small business strategy / vol. 29, no. 3 (2019) / 46-59 asked respondents to compare their firm to the industry for growth in sales during the past three years, growth in assets over the last three years, and growth in number of employees during the last three years. this construct was labeled “growth” and deemed a valid measure because of the single factor loading from a confirmatory factor analysis and high coefficient alpha 〈 = .82. entrepreneurial orientation. eo was measured using a modified version from covin and slevin (1991) and based on prior works of covin and slevin (1986) and miller (1983). the construct was measured by asking respondents twelve (12) questions relating to each dimension proactiveness, innovativeness and risk-taking. each dimension included four items. for example, in the case of the innovativeness dimension, we asked respondents ‘compared to others in the industry our company emphasizes’: ‘being first to the market with innovative new products/services’; ‘developing new processes’; ‘recognizing and developing new markets’; and ‘being at the leading edge of technology.’ each of the twelve items used a seven-point lickert scale with 1 representing ‘strongly disagree’ to 7 representing ‘strongly agree’. a confirmatory factor analysis was utilized to establish the presence of the multidimensionality of the construct. as expected and similar to past research (covin & slevin, 1991), three dimensions emerged from the analysis with an overall scale reliability of 〈 = 0.86. learning orientation. following previous research such as the work of baker and sinkula (1999), we measured learning orientation construct, we also examined the multidimensional of the constructs two dimensions, commitment to learning and open-mindedness. the respondents were asked the degree in which they either agreed or disagreed with eight questions relating to learning. for example, ‘commitment to learning’ was composed of the following: ‘the ability to learn is the key to our competitive advantage’; ‘learning is a basic value throughout our organization’; ‘employee learning is viewed as investment, not an expense’; and ‘learning is seen as a necessity to guarantee the firm’s survival.’ a seven-point lickert scale ranging from 1 – ‘strongly disagree’ to a 7 ‘strongly agree’ was used. as expected the results of a confirmatory factor analysis yielded two dimensions with an overall reliability of 〈 = 0.93. market orientation. consistent with previous research, we selected the markor scale developed by kohli et al. (1993) to assess market orientation. respondents indicated the extent of their disagreement or agreement, on a seven-point scale (“1 = strongly disagree” to “7 = strongly agree”), with each item reflecting market orientation. these items are consistent with previous research measuring a firm’s market orientation (kohli et al., 1993). the overall scale reliability was 〈 = 0.87. control measures. we created three distinct control measures, firm size, firm age and tenure. the first two control measures provide firm-level measures while the last provides an individual control measure. we measured firm size with an open-ended question asking the number of employees currently employed by the firm; the log of employees was used and labeled firm size. we also asked the respondents the year the company was formed, we subtracted this number from the current year; the log of the total was learning orientation entrepreneurial orientation market orientation performance h1 h2 h3 h4 h5 h5 figure 1. hypothesized relationships between learning, entrepreneurial and market orientation to performance 53 t. l. pett, j. francis, j., & j. a. wolff journal of small business strategy / vol. 29, no. 3 (2019) / 46-59 used and labeled firm age. firm size and age provide control measures of the firms. finally, we asked respondents how many years they were at the company; the log was used and labeled tenure. we believe tenure provides a control for the individual respondents.” results the means, standard deviations and correlations are reported in table 1. analysis of the data with respect to skewness and kurtosis in the dependent variables fall within the boundaries of normality (shapiro & wilk, 1965) and thus allow for parametric tests of significance. the hypotheses presented above were analyzed using both hierarchical regressions and anova analyses. the results of the regression analyses are displayed in tables 2. the table provides the results concerning the proposed positive relationships between lo, eo and mo to sme performance. to better understand the relationships, we added the three control measures including firm size, firm age and tenure. we ran all three-regression models and then repeated all three of the regression models using a bootstrap method, which was based on 1000 bootstrap samples in spss. this technique provided an approach for testing stability given the relatively small sample size in this study; the technique uses the original sample to provide estimates for resampling with replacement cases. the final results from the bootstrapping technique are similar to the original sample results and are presented here. the first regression model found strong support for lo and performance, supporting hypothesis 1. hypothesis 2 suggested a significant relationship exists between eo and performance, while hypothesis 3 suggests that mo would explain performance. the result of the second regression (model 2) supports hypothesis 2 (eo) but does not support hypothesis 3 (mo). finally, model 3 examined if there is a positive interaction between eo and mo on performance. the direct effects for the relationship between eo were found not to be significant as in the previous model but once the interaction effect is entered into the analysis the direct effects of eo disappears, confirming hypothesis 4. the results support hypothesis 4, that the interaction of eo-mo on performance would be positive. we conducted post-hoc tests to ensure reliability of the results. the durbin-watson test provided evidence that the variables are relatively normal in the regressions (1.82) as well as the coefficients outputs from the collinearity statistics. hypothesis 5 proposed that eo and mo might mediate the effects of lo on performance. the results of the regressions indicate that the strength of the direct relationship of lo to performance relationship were attenuated, though not eliminated, when the interaction of eo and mo were included in the regression model. we interpret this result as support for hypothesis 5. table 1 descriptive statistics and correlations variable mean (s.d.) 1 2 3 4 5 6 1.performance 3.63 (0.85) 2. firm size 3.98 (1.04) 0.179 3. firm age 3.47 (0.87) -0.170 0.228* 4. tenure 2.72 (0.87) 0.032 -0.100 0.297** 5. learning orientation 5.74 (0.97) 0.262** 0.010 0.039 0.026 6. entrepreneur orientation 4.76 (0.88) 0.284** 0.154 0.141 0.174 0.515** 7. market orientation 5.49 (0.75) 0.234* 0.083 0.027 -0.005 0.736** 0.517** *p < 0.05; **p < 0.01 54 t. l. pett, j. francis, j., & j. a. wolff journal of small business strategy / vol. 29, no. 3 (2019) / 46-59 the final hypothesis suggested that there would be significant differences between lowand high-performing firms in relation to lo, eo and mo. the anova results are reported in table 3. the performance measure was split at the mean (3.63) resulting in 51 low performing and 68 high performing classified firms. anova analysis was than completed on both performance groups and the independent constructs. the findings found significant differences for each independent measure (lo, eo, and mo) and performance; we also found a significant difference for the interaction term (eoxmo). overall, the findings support hypothesis 6. discussion and implications the primary rationale for this research has been to examine the relationships between different types of firm orientations that have been posited in the strategy literature as important for performance (deustscher et al., 2016). the study makes two distinct empirical contributions. first, from a sample of small businesses we examined the direct influences of learning, market and entrepreneurial orientations on their performance, in terms of sales, asset and employee growth. we take a knowledge base view of the firm by suggesting that the organizational capabilities of eo, mo and lo are important for determining appropriate courses of action for small businesses and the resulting firm performance (joshi & anand, 2018; real et al., 2014). some authors have noted the tenuous relationship between various strategic orientations and performance (deutscher et al., 2016; frishammar & andersson, 2009). the results of our study also provide mixed evidence of the influence these orientations. we found that learning and entrepreneurial orientations are related to higher sme performance. alternatively, our findings did not support a direct relationship between market orientation and small firm growth. one explanation for these different results lies in the nature of the orientations themselves and in the liability of smallness for our sample of firms. as stated earlier, we conceptualize lo as an organizational value, whereas mo and eo are more action-oriented capabilities. while eo and mo are similar in this action orientation, they are different, as they require distinct resources, actions and commitments from the organization. eo actions are related to being proactive, taking risk and innovating within the context of the overall business. mo is more specific in that it involves external information processing activities for the purpose of learning new knowledge about customers, consumers and competitors (sinkula et al., 1997). whereas eo actions can be present throughout a firm’s overall value chain, mo actions are vested more narrowly in the firm-customer interface. additionally, the table 2 impact of lo, eo, and mo on performance variables model 1 model 2 model 3 constant 2.271*** 2.181*** 6.292*** firm size 0.210*** 0.188** 0.180** firm age -0.353*** -0.364*** -0.357*** tenure 0.171 0.139 0.128 learning orientation (lo) 0.221*** 0.163 0.194* entrepreneurial orientation (eo) 0.180* -0.758 market orientation -0.039 -0.800 entrepreneurial orientation x market orientation 0.332** r2 .169 .192 .214 adjusted r2 .139 .147 .162 change in r2 .023 .021* f-value 5.608*** 4.282*** 4.154*** * p < .10; ** p < .05; *** p < .01 55 t. l. pett, j. francis, j., & j. a. wolff journal of small business strategy / vol. 29, no. 3 (2019) / 46-59 markor scale that was used in this study to measure a firm’s mo focuses on activities that require resources and effort. mo includes actions aimed at gaining information about customers, activities that disseminate the information throughout the organization, and time spent developing marketing strategy and implementing the strategy. to execute the required mo activities described above, there is a resource requirement that might not be available for many small businesses. we expect that the liability of smallness in smes that can contribute to a lack of time, manpower and financial resources necessary to execute many of the mo activities are present in our sample firms and influence the lack of findings for this variable. a second distinct contribution of this research to the small business management literature lies in our addressing the combined and simultaneous effects of these orientations on the performance of small businesses. we believe that direct effects do not fully capture the relationships between the orientation constructs and performance. similar to many researchers who have called for more research in understanding how organizational growth is impacted by strategic orientations (baker & sinkula, 1999; deutscher et al, 2016), we maintain that more sophisticated approaches to examining how lo, eo and mo complement each other is needed. researchers have previously argued that strategic orientations may be complimentary (beliaeva et al., 2018; hult, hurley, & knight, 2004). in addition, others have worked to unravel how certain orientations influence sme learning processes (brettel & rottenberger, 2013). we argued that the unique nature of these different orientations as described by previous research can aid our understanding of how these orientations relate to each other. our basic argument suggesting that learning orientation is a state or value-based capability, whereas market and entrepreneurial orientations are more decision or action-oriented capabilities, aided us in hypothesizing that lo is an antecedent to the other dimensions embodied by market orientation and entrepreneurial orientation. this is contrary to other researchers who have argued that market or entrepreneurial orientations set the stage for organizational learning (dess et al., 2003; real et al., 2014; slater & narver, 1995). the results of our data analysis support the antecedent relationship between learning orientation and entrepreneurial orientation. we suggest that the value an organization places in learning (lo) actually is what provides the foundation for these other orientations to occur. our research supports this position and provides guidance as to how these strategic orientations interact with each other to support sme performance. the study illustrates that eo and mo likely interact with each other to influence performance. in addition, the results indicate that influence of lo is mitigated by eo and mo suggesting that learning is an important precondition for these other orientations. these findings offer insights into what should be important to the owners and managers of smes. first, the study clearly implies that small business managers and owners should focus on developing a set of dynamic capabilities that enhance their business performance; specifically entrepreneurial and learning orientations. we recognize that many small business owners are constantly dealing with interruptions, customer demands, employee issues, while spending time on executing their businesses. in light of these many business constraints, researchers calling for smes to make sure they are constantly learning or innovating may seem obtuse or esoteric. we want to make sure that our implications focus on the idea that learning activities are not merely reflections of more “to do’s”. instead, we are suggesting that sme owners and managers need to be developing and encouraging their belief systems regarding these learning and entrepretable 3 comparison of lo, eo, mo and eo x mo between high and low-growth smes dimension performance mean s.d. sig. lo learning orientation low 5.24 1.06 0.04 high 5.91 0.87 eo entrepreneurial orientation low 4.50 0.90 0.00 high 4.96 0.82 mo market orientation low 5.36 0.82 0.08 high 5.61 0.69 eoxmo entrepreneurial orientation low 12.20 3.55 0.00 x market orientation high 14.08 3.57 56 t. l. pett, j. francis, j., & j. a. wolff journal of small business strategy / vol. 29, no. 3 (2019) / 46-59 neurial orientations. hess (2014) argues that organizations must value learning in today’s environment and provides recommendations for developing learning cultures. he suggests that leaders must create open, emotionally positive cultures and allow for trial and error and that those working for the firm must stay emotionally engaged. ultimately, learning facilitates the exploration of new facets of topics and techniques and individuals with learning orientation demonstrate the perseverance to learn over a long period of time about a topic and its techniques and gain expertise. our research clearly shows that smes that develop and encourage values that constitute “commitment to” and a “sharing of” learning, outperform those that do not. in addition, as our study investigates the interplay between various orientations, how they should be considered simultaneously also has implications. firms that value learning should recognize the importance of other key resources that might assist its development and they have a synergistic impact on the firm’s growth. our research suggests that smes who value shared learning and open mindedness are more likely to have other capabilities that influence performance. firms who are open to new knowledge may be better able to exploit other abilities such as risk taking or innovativeness. in addition, their attention to customers and competitors and learning from these may pay off to better performance. as these must be core values of the organization, steps to either support already existing values or developing new ones must be taken this question takes on an added importance because most sme managers or owners do not view themselves as learning facilitators and they believe that they lack the required skills. limitations and future research when interpreting the research findings, several limitations should be taken into consideration. first, the data may have a social desirability bias with the small business owner or manager. in addition, the threat of common method variance can be present when utilizing a survey instrument as we did in the study. lastly, it is difficult to establish causality from cross-sectional research designs. in light of these limitations, we also suggest recommendations for future research. for example, in order to fully confirm our findings longitudinal research should be conducted. in addition, various contexts could provide different environments that may increase or lessen the importance of strategic orientations. rapidly changing environments often require firms to adapt. understanding the importance of lo, mo and eo in industries or markets varying on industry characteristics might provide deeper insight into when it is even more critical for firms to having a learning or entrepreneurial orientation. other future research opportunities lie in understanding the development and intensity of strategic orientations in smes. in smes the organizations ability is closely linked to the owner’s capabilities, but often ignored are the capabilities of the employees. investigating learning, risk taking and other capabilities by sme employees would aid our understanding strategic orientations and the management practices that development them. the literature on strategic orientations addresses what are the important values and actions managers should build into their organizations. this research suggests that smes with managerial values regarding 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(2005). the effects of strategic orientations on technology and market-based breakthrough innovations. journal of marketing, 69(2), 42-60. https://doi.org/10.1016/j.jbusres.2018.12.019 https://doi.org/10.1016/j.jbusres.2018.12.019 s the impact of public assistance programs on small businesses: strategic planning, entrepreneurship resources usage, and market orientation as mediating variables rami schayek ben-gurion university of the negev sehyek@bgu.ac.il dov dvir ben-gurion university of the negev dvird@som.bgu.ac.il abstract this paper draws upon a quantitative empirical longitudinal study of small trade and service businesses that participated in a coaching program initiated by the ministry of industry, trade and labor in israel. the purpose of the study is to improve our understanding of the ways public assistance programs affect small businesses and improve their business results. a mediating model developed during the research enables the evaluation of the direct and indirect effects of public assistance programs on small businesses. findings show that public assistance programs have a significant direct positive effect on small businesses performance. the indirect effect is mainly due to the reinforced market orientation induced by the assistance program, and to a lesser degree the result of the level of entrepreneurship demonstrated by the business owner. keywords: small business; assistance program; strategic planning; entrepreneurship; human resources; financial resources; market orientation introduction sassone and schaffer (1978) differentiate between primary and secondary benefits that public assistance programs have on the assisted organization or business. primary benefits are those benefits inherent to the services provided by the assistance program. secondary benefits include an increase in human resources or in revenues that constitute a new addition to the economy. in line with the existing research, the present paper examines the effects of public assistance programs at the firm level (primary benefits). shapira et al. (1996) states that the implementation of assistance programs begins by transferring inputs from the assistance program to the client, then  trateg y   journal of small business  67 journal of small business strategy volume 22, number1, through a series of intermediate steps, actions are taken by the client that subsequently lead to business and economic outcomes. it is therefore possible to look at the assistance program (i.e., the consultant providing that assistance), its gist and input, as one entity, where the other entity is the client, its capabilities, aspirations and willingness. the assistance program’s effectiveness relies on both parties as well as the quality of interaction between them. in the present research a longitudinal assessment of the assistance program’s effect on performance of small businesses was conducted. the effect on performance was examined directly and indirectly through four mediating variables – strategic planning, entrepreneurship, human and financial resources usage and market orientation that were found in previous studies to affect performance of small businesses. this approach enables the identification of both direct and indirect effects of assistance programs on business performance. moreover, the utilization of operational measures in addition to financial measures enables the measurement of the assistance program’s effect, not only in retrospect; but also in the changes seen in the business operation throughout the assistance process and the chances of future success. literature review public assistance programs and small business performance following the framework of shapira et al. (1996), the public assistance program’s effect on performance of small businesses is examined taking into account the program and the client, and the interaction between them. the program. according to beach (1980) learning is a human process where skills, knowledge and attitudes are acquired and changed in a way that changes behavior. the notion of “learning” suggests that outside assistance can influence behavioral related parameters. a number of studies examined the effect of public assistance programs on firm performance where the only difference between the small businesses that receive assistance and those that do not, is the assistance itself (chrisman, 1999; felsenstien et al., 1999; chrisman and mcmullan, 2000). chrisman (1999) found that performance in firms that received assistance from the small business development center (sbdc) in the u.s. was significantly better than performance of firms that did not participate in any kind of assistance program. several studies examined the components of assistance and the type of training provided by assistance programs. jang and lee (1998) indicated the consultant’s capabilities and the manner of consultation, as well as the defined objectives and structural procedures of assistance programs, have an impact on performance. kaplan et al. (2000) examined the quantitative characteristics of assistance programs, such as the number of seminar days and workshops a business was allotted, and the number of formal and informal consultations. rice (2002) examined the nature of instruction, the amount of time allotted to assistance, the intensity of assistance (frequency and encounters duration), the range of assistance activities, and whether the consultation was reactive or proactive. wren and storey (2002) found that of the three assistance components – the size of the grant available to the firm, the cost of consultation per day and number of consultation days – only the last one had a significant effect on performance. 68 journal of small business strategy volume 22, number1, chrisman and mcmullan (2004) found significant positive correlation between the number of consultation hours provided to small businesses during the initial phases of their operation and their ability to survive. chrisman et al. (2005) found a positive, but not significant, correlation between the number of consultation hours and performance. luria and wiarda (1996) noted improvement in performance by firms that participated in assistance training (three types were examined), but here too, the statistical significance was low. the findings of these studies enable the differentiation between technical and material characteristics of assistance programs. technical characteristics are defined by the type and structure of the assistance program and material characteristics indicate the manner in which assistance is given (e.g., the period of time allotted to assistance, the intensity of assistance, the range of implemented assistance activities and the consultant’s capabilities). we may conclude that the effect an assistance program has on a firm's performance is more evident when there are differences in the material characteristics of the assistance programs, rather than in their structure. the client. a theoretical study by jang and lee (1998) enumerates three fundamental parameters which affect the success of consultation programs: consultants’ capabilities, manner of consultation and organizational characteristics of the client. according to fleming (1989), the keys to a successful consultation process are the successful implementations of the consultant’s recommendations and the abilities of the client. shapiro et al. (1993) assert that successful implementation of assistance programs depends on the level of cooperation between consultant and client. rice (2002) found that entrepreneurs that show a greater willingness to cooperate are more influenced than others in the process of business support. program-client interaction. billington et al. (2009) findings resonate with devins et al. (2005) conceptual model, suggesting that an intervention approach founded on the relationship between the business manager and the intervention agency is crucial to the successful design and delivery of a relevant service. luborsky et al. (1997) found that a true measurement of the interaction intensity should include both the interaction and its outcomes. it is impossible to learn about the interaction intensity by measuring only the contents provided by the participating parties (smith and glass, 1977; garfield, 1988; shapiro et al., 1989). how does one measure an interaction? sharpley et al. (2000) selected the level of rapport that the client experienced. the basis for choosing this measure is a wide agreement in the literature that therapeutic alliance is of paramount importance in the client’s appraisal of the consultation outcome. horvath and greenberg (1989) disassembled the therapeutic alliance into three components, bond – the level of trust and emotional closeness experienced by the client and consultant is one of them. assuming that assistance programs are in fact executed according to the principles discussed above, it is possible to formulate a general hypothesis concerning the extent to which assistance programs contribute to the success of small businesses. hypothesis 1: assistance programs directly contribute to the level of performance of small businesses.. 69 journal of small business strategy volume 22, number1, indirect effects of public assistance programs on small business performance in order to suggest an indirect effect of the assistance program on small businesses performance, we first identify possible relations between assistance programs and the potential mediating variables: strategic planning, entrepreneurship, human and financial resources and market orientation. strategic planning and performance. empirical studies show a correlation between strategic planning and the small business performance, however the findings are mixed. a survey of twenty-six experimental studies done by miller and cardinal (1994) has identified a significant positive correlation between strategic planning and small business performance. a significant improvement in the rate of sales was found by rue and ibrahim (1998) in small businesses that prepared written plans (basic or sophisticated) as opposed to businesses that did not. wijewardena et al. (2004) used three levels of planning: no written plans at all, basic planning, and detailed planning. their findings indicate that the level of planning correlates with increase in sales. yusuf and saffu (2005) also used three levels of planning in their study: low, moderate, and high. a correlation was found only between the increase in sales and the low level of planning. no correlation was found between strategic planning and the increase in market share or profitability. hodges and kent (2007) support the conclusion that planning improves performance, while kraus et al. (2006) findings only partially support previous findings. they show a significant correlation between planning formalization and small enterprises performance, whereas other aspects of strategic planning (time horizon, strategic instruments, and control) did not contribute to performance. some researchers found that non-executive directors can also have an important role in the strategic planning process of small business (rosenstein, 1988; mileham, 1995; deakins et al., 2000). finally, allred et al. (2007) conclude that both formal and informal planning is vital for small businesses success. entrepreneurship and performance. entrepreneurship as a characteristic of the organization, or a process within the organization, that has been identified by scholars as a crucial element in a firm’s success (davis et al., 1991). several empirical studies have used the definition of miller and friesen (1982) which relies on three dimensions: innovativeness, risktaking, and proactiveness and found a significant positive correlation between entrepreneurship and small businesses performance (covin and slevin, 1989, 1990; smart and conant, 1994; wiklund, 1999; wiklund and shepherd, 2003, 2005). consultation as a part of the decisionmaking process was found by harvey and fischer (1997) to enhance risk-taking. outside assistance can also influence the long-term abilities of the venture to innovate (chrisman and mcmullan, 2000). sullivan (2000) states that effective intervention that assists entrepreneurs to grow and develop, will help them learn how to deal with complex problems and not just use prescribed solutions. and deakins et al. (2000) argue that external directors can have an influence through modification of entrepreneurial behavior. human and financial resources and performance. thompson (1996) defines human resources development as one of three activities which will benefit the most out of assistance programs. chrisman and mcmullan (2000) argue that the entrepreneur can develop tacit knowledge 70 journal of small business strategy volume 22, number1, through consulting processes. outside assistance is presented as an important source for developing the entrepreneur's knowledge and experience (robinson, 1982; deakins et al., 2000) and accordingly, the main assistance provided by the counseling assistance to small business (case) organization is in hiring experienced businessmen in order to help inexperienced entrepreneurs acquire necessary skills and knowledge (ready, 1983). cooper et al. (1994) found that human resources, and especially the owner’s education, are correlated with growth. moreover, knowledge of the industry and financial resources contribute to growth as well as to the firm’s survival. according to westhead (1995), the founder’s experience affects performance and contributed to the survival of high-tech enterprises over a period of six years from the day of foundation. brush and chaganti (1999) examined small trade and service-oriented businesses. their study differentiates between two dimensions of human resources – owner resources and owner commitment. a significant positive correlation was found between the two dimensions and net cash flow, but no correlation with the log of employment growth. westhead et al. (2001) found that firms with founders that had considerable industry-specific knowledge, as reflect in starting businesses in the same industry as their last employers, are significantly more likely to report above-average profit performance relative to competitors. chrisman et al. (2005) utilized the owner’s education and prior experience as control variables. a correlation was found between prior experience and an increase in the number of employees and in sales. no such correlation was found with education. saffu et al. (2008) have shown a positive and significant correlation between the entrepreneur’s education and previous experience and tourism ventures’ performance. no such relation was found with the entrepreneurs’ family background. in regard to financial resources, premaratne (2001) indicates a correlation between subsidies granted to the firm and an increase in sales. however, he did not find a correlation between subsidies and profitability. wiklund and shepherd (2005) found a significant positive correlation between access to capital and performance. ready (1983) also claims that the counselor can help the small business owner in preparing adequate loan requests. moreover, outside assistance can develop the abilities to raise capital (bygrave and timmons, 1992). ehlan (2001) found that the most commonly reported economic impact directly attributable to the assistance program was a change in the ability to raise capital investments. market orientation and performance. the concept of market orientation places the customer at the center of the firm's activity (dalgic, 1998; pelham, 2000). market orientation enables that customer’s needs are met more efficiently, customers’ satisfaction levels are improved, and it retains a higher commitment of the employees (narver and slater, 1990). luukkonen (2002) who studied the eu assistance program, argues that the desire for enhancing market orientation motivates small businesses to participate in such programs. research conducted by kohli and jaworski (1990) enables a better understanding of the concept of market orientation and the types of behavior associated with this concept. their study focused on the market orientation of large businesses and laid the theoretical foundation for the expectation that market orientation leads to better performance. 71 journal of small business strategy volume 22, number1, studies of small businesses support this assertion and show similar results, a positive correlation between market orientation and performance (appiah-adu and singh, 1998; shun-ching and chenghsui chen, 1998; pelham, 2000; homburg et al., 2002; kara et al., 2005; green et al., 2008; baker and sinkula, 2009). boussouara and deakins (2000) suggested that non-executive directors can improve acquiring capabilities in order to achieve sustained competitive advantage through the development of market analysis and costumer relations. the empirical findings about the relation between the proposed mediating variables and business performance enable to formulate the second general hypothesis. hypothesis 2: the assistance program’s contribution to small businesses performance is mediated by strategic planning, entrepreneurship, resources (human and financial) and market orientation. method sample a quantitative empirical longitudinal study was conducted among small trade and service businesses that participated in the standard coaching program initiated by the ministry of industry, trade & labor (itl) in israel, for small and medium businesses employing between 5 and 100 workers. according to the standard coaching program regulations, a business with five to ten employees is allotted up to 100 coaching hours, while a business employing between eleven and one hundred workers is allotted up to 150 hours. the coaching program finances 75% of the cost of coaching and 25% is financed by the business. the program is operating across the entire country using a pool of thousands of counselors. each business that employs less than 100 employees is entitled to apply to participate in the program. itl is operating several other assistance programs, such as programs directed to micro businesses that employ one to four employees, or to businesses in the agriculture industry. the office of the chief scientist (ocs) in the ministry of industry, trade and labor is also assisting in the development of new technologies in israel using a range of support programs, such as technological incubators for start-ups in the pre-seed stage. in order to better assess whether the coaching program intervention contributes to the participant firm’s performance, data on the firms were gathered in two disparate surveys at the time of contact between the firm and the coaching program (time (0)) and a year after the firm entered the project (time (1)). all firms in the sample are small trade and service businesses. sampling was restricted to trade and service industries in order to control the disparities between the various industries with respect to performance and the firm's profitability (beard and dess, 1981; miller and tolouse, 1986). the investigated unit in this research is the small business, defined by four parameters: (a) number of employees – five to fifty (b) age – over two years (c) independent business (subsidiaries or units of large companies were excluded) (d) business which is not dominant in the market in which it operates. during the period between march 2004 and march 2005, 183 trade and service businesses from all parts of israel filled in the questionnaire at designated time (0). at time (1), 135 of those filled in the second 72 journal of small business strategy volume 22, number1, questionnaire. the descriptive statistics of the small businesses in the sample are: age at time (0): min, 2 years, max, 63 years, average, 14.3 years and standard deviation 12.8 years. size at time (0): min, 3 employees, max, 50 employees, average, 10.7 employees and standard deviation 7.2 employees. forty-eight small businesses did not remain with the study to its completion: age at time (0): min, 3 years, max, 56 years, average, 15.2 years and standard deviation 13.5 years. size at time (0): min, 5 employees, max, 50 employees, average, 14.2 employees and standard deviation 11.8 employees. of these, 27 dropped out of the coaching program. eleven could not be contacted or had been shut down and 10 declined to continue their participation in the study. three stages preceded the creation of the final form of the questionnaire. the initial stage consisted of a brainstorming session with scholars having considerable experience in empirical research and construction of questionnaires. the second stage consisted of interviews with the owners of five small businesses, as well as with the ministry of industry, trade and labor’s official responsibility for the standard coaching program. issues addressed during the interviews were, for example, the clarity of the questionnaire, how it corresponded to the specific industry in question, the clarification of ambiguous ideas or wording and the length of the questionnaire. an exploratory research was conducted in the third and last stage; twenty-seven questionnaires were distributed among small businesses participating in the standard coaching program. preliminary statistical checks were carried out within this framework. the final questionnaires were distributed among small business owners through fax or e-mail, followed by a phone contact. initial phone contact took place immediately after the first interaction with the firm and prior to entering the standard coaching program. measures independent and mediating variables. strategic planning: the level of strategic planning was evaluated by one primary criterion – whether the plans had been written down; and two secondary criteria – the detail and scope of strategic planning and the period of time it covers. the evaluation of strategic planning is based on a measurement instrument formulated by robinson and pearce (1983). in order to better grasp the secondary criteria we defined five levels of planning replacing the two levels of the original questionnaire. three possible time scales were introduced: up to a year, up to two years, and up to three years, instead of one time scale of three years in the original questionnaire (see appendix a). the overall score for the level of strategic planning is a product of the level of detail and the time scope. entrepreneurship: based on the instrument developed by covin and slevin (1989, 1990), entrepreneurship level was measured by six items, using a 7-point semantic differential type scale anchored by descriptive phrases (see appendix a). cronbach alpha coefficients were calculated for both measurements: time (0) α = 0.68; time (1) α = 0.56. human resources: the level of human resources was measured using five items, capturing owner resources (brush and chaganti, 1999). human resources measurement was done only at time (0). three items were specified by years of experience: prior managerial experience, previous business ownership and owner’s industry experience. the remaining two 73 journal of small business strategy volume 22, number1, 74 items examine the owner’s education: formal education – a four-point ordinal scale from 1, no formal education, to 4, ph.d. degree, and business education – a four-point ordinal scale from 1, no business education, to 4, regularly and consistently participates in various business management courses (see appendix a). the overall score for the human resources is the individual grades' average. factor analysis has identified two dimensions: owner experience (three items, α = 0.77), and owner education (two items, α = 0.36). the last two items were omitted from the research due to the low internal consistency. financial resources: previous research indicates that financial resources are defined as any source of capital – cash, stocks and assets of various levels of liquidity. furthermore, the capacity of raising funds is itself a financial resource. the measurement instrument applied to financial resources includes three items, each scored by the respondents on a likert scale ranging from 1 = low extent to 5 = high extent (see appendix a). cronbach alpha coefficients were calculated for both measurements: time (0) α = 0.76; time (1) α = 0.81. market orientation: based on the measurement instrument developed by pelham (2000), market orientation level was measured using six items. for each of these items the respondents gave a score using a 5-point semantic differential type scale anchored by descriptive phrases (see appendix a). cronbach alpha coefficients were calculated for both measurements: time (0) α = 0.78; time (1) α = 0.67. public assistance programs: the definitions and measurement of public assistance programs are based on a description of the programs’ modus operandi by means of three characteristics: the program itself, the client, and the interaction between the client and program (see appendix b). in the construction of the measurement instruments, we used ideas from previous theoretical and empirical studies whose subject matter was relevant to the current study. public assistance programs content was measured by twenty-one items, using a 7-point semantic differential type scale anchored by descriptive phrases and was carried out only at time (1). a varimax rotated factor analysis1 of the twenty-one public assistance programs measures elicited the following factors: 1. the program; quantitative component – this constitutes three measures with α = 0.73, after omitting two measures, the nature of consultation encounters and the extent to which all the issues on the agenda are addressed, and number of areas addressed within the coaching framework. 2. the program; qualitative component – this constitutes eight measures with α = 0.91. location of consultation was omitted from the initial dimension of qualitative component. following this, three of the four measures constituting the dimension communication between program and client were added. the fourth measure, relationship between consultant and firm owners, was omitted. 3. the client (i.e., firm) – this consists of three dimensions. the initial dimension of client’s willingness was divided into two sub-dimensions: submitting information (submitting information on firm activity and study and diagnosis of 1 orthogonal rotations produce uncorrelated factors; the best orthogonal rotation is widely believed to be varimax (decoster, 1998). journal of small business strategy volume 22, number1, firm activity, α = 0.93) and commitment to change (changes in manpower and changes in salaries, α = 0.84). the measure of firm representatives working with consultant was omitted. the dimension of implementation of consultant recommendations includes only one measure. dependent variable – small business performance. firm performance is a multidimensional concept in which measurement is complex (brush and vanderwerf, 1992). according to venkatraman and ramanujam (1986), financial performance represents the narrowest conceptualization of firm performance and is measured through an examination of financial indicators. operational performance consists of those key parameters which may lead to an improvement in financial performance. objective performance measures are most often financial ones. nevertheless, even when they are available, scholars face difficulties in obtaining exact measurements (dess and robinson, 1984). gathering objective data is a difficult task when small private businesses are concerned, as these data are not available to the general public (dess and robinson, 1984; west and meyer, 1998). moreover, small businesses are very sensitive regarding the disclosure of information on a firm’s performance (bantel, 1998; covin and slevin, 1989, 1990). reichel and haber (2005) utilize both objective and subjective measurement in their study. we have therefore defined the structure of small business performance to include financial and operational measures, while using both subjective and objective measurements (see appendix c). subjective assessment: for subjective assessment of performance we referred to the second part of a questionnaire modified by covin and slevin (1989) from an instrument developed by gupta and govindarajan (1984) which measures satisfaction. in both times [(0), (1)] respondents were asked to indicate on a likert-scale ranging from 1 = highly dissatisfied to 5 = highly satisfied, the extent to which they are currently satisfied with their small business performance in each of the financial and operational performance criteria. objective assessment: respondents were asked to indicate at time (1) the rate to which the business’ performance changed throughout the previous year, with relation to each of the performance criteria. for example, cash flow: below -20%, -20%, 15%, -10%, -5%, 0, 5%, 10%, 15%, 20%, above 20%. the measurement instrument initially included 13 subjective items and 5 objective items. a varimax rotated factor analysis carried out on the 13 subjective performance measures and the 5 objective performance measures elicited the following factors: 1. financial performance; subjective measurement – this consists of seven measures. cronbach alpha coefficients were calculated for both measurements: time (0) α = 0.86; time (1) α = 0.79. the measure increase in number of employees was omitted. 2. operational performance; subjective measurement – this consists of two subdimensions: creating new opportunities and human resources. creating new opportunities includes two measures, opportunities within the firm’s existing market and opportunities within new 75 journal of small business strategy volume 22, number1, 76 markets. cronbach alpha coefficients were calculated for both measurements: time (0) α = 0.78; time (1) α = 0.80. the measure customer satisfaction was omitted. human resources included two measures. cronbach alpha coefficients were calculated for both measurements: time (0) α = 0.77; time (1) α = 0.77. 3. financial performance; objective measurement – this consists of three measures: cash flow, rate of increase in sales and earnings before interest and tax (ebit). a cronbach alpha coefficient was calculated once, for the change from time (0) to time (1); α = 0.81. the measure increase in number of employees was omitted. 4. operational performance; objective measurement – this consists of one measure, fluctuation in market share, measuring the change from time (0) to time (1). 5. overall success; subjective measurement – this is an overall subjective performance measure of the small business, taken twice at time (0) and time (1). control variables. age and size of the small business: age and size are the two control variables most commonly used. in most cases, the two variables are treated as one comprehensive control unit. firm age and size can affect both its management techniques and the accuracy of the firm’s performance measurement. in this study age is measured by the number of years a business exists and size is measured based on the number of full-time employees. environment: this study relies on a measurement instrument used by lumpkin and dess (2001) and includes two variables: dynamism, developed by miller and friesen (1982) and hostility, developed by covin and slevin (1989). both dynamism and hostility were measured by three items, using a 7-point semantic differential type scale anchored by descriptive phrases. cronbach alpha coefficients were calculated for both measurements: dynamism – time (0) α = 0.23, time (1) α = 0.52; hostility – time (0) α = 0.41, time (1) α = 0.50. in light of these findings, the control variable environment was not incorporated into subsequent analyses. note that the importance of control of environmental influence is greatly reduced in this study as the research population is highly homogeneous and the business environment is clearly defined. results descriptive statistics and correlations among the research variables are presented in table 1-3. research variables were encoded in order to simplify subsequent presentation of data: mediators: entrepreneurship (e); market orientation (mo); strategic planning (sp); human resources owner experience (oe); financial resources (fr). independent variables: public assistance programs (pa); program, quantitative (p_qn); program, qualitative (p_ql); client, data (c_d); client, change (c_c); client, implementation (c_i). dependent variables: performance (p); financial performance, subjective (fp_s); operational performance, new opportunities, subjective (no_s); operational performance, human resources, subjective (hr_s); financial performance, objective (fp_o); operational performance, objective (op_o); overall success, subjective (os_s). journal of small business strategy volume 22, number1, o s _ s .2 9 2* * .2 6 8* * 0 .1 0 .0 3 0 .2 7 5* * .6 8 5* * .3 9 7* * .2 0 2* * 1 .0 00 h r _ s -. 0 15 .3 8 2* * .0 7 0 .0 0 5 .0 8 4 .3 1 2* * .1 9 5* * 1 .0 00 n o _ s .2 1 2* * .2 5 2* * .1 7 6* .0 3 6 .2 3 6* * .3 8 7* * 1 .0 00 f p _ s .2 2 2* * .3 8 2* * .0 6 2 .1 4 2 .3 9 4* * 1 .0 00 f r .0 3 7 .0 3 1 .0 6 8 .1 4 8* 1 .0 00 o e .0 6 1 .0 1 5 .0 1 8 1 .0 00 s p .1 0 8 .1 7 4* 1 .0 00 m o .2 2 3* * 1 .0 00 e 1 .0 00 n 1 83 1 83 1 83 1 83 1 83 1 83 1 83 1 83 1 83 s .d . 1 .0 06 9 .7 6 75 3 .1 50 3 6 .6 21 0 .9 2 99 .7 7 08 1 .0 40 3 .8 7 09 .9 6 45 m ea n 3 .7 0 3 .6 3 1 .3 4 5 .6 1 1 .9 9 2 .6 7 2 .6 7 3 .3 0 3 .0 6 e m o s p o e f r f p _ s n o _ s h r _ s o s _ s t a b le 1 : m e a n s, s ta n d a rd d ev ia ti o n s, a n d c o rr el a ti o n s fo r m ed ia ti n g v a ri a b le e , m o , s p , o e , f r , a n d d ep en d en t v a ri a b le p i n m ea su re m en t t im e (0 ) * p < 0 .0 5 ; ** p < 0 .0 1 77 journal of small business strategy volume 22, number1, o s _ s .3 2 9* * .4 1 9* * .0 9 5 -. 0 02 .1 7 9* .6 2 7* * .4 5 3* * .1 9 5* .4 9 2* * .3 5 4* * 1 .0 00 o p _ o .3 0 2* * .2 5 7* * .1 7 1 .0 3 7 .1 8 8* .3 1 7* * .3 1 8* * .1 6 9 .5 4 4* * 1 .0 00 f p _ o .2 8 9* * .3 3 4* * .1 6 5 .0 7 3 .2 0 7* .5 0 3* * .3 2 8* * .2 4 1* * 1 .0 00 h r _ s .0 6 3 .3 0 2* * -. 0 69 .2 8 5* * .0 9 9 .3 9 3* * .3 2 9* * 1 .0 00 n o _ s .3 3 7* * .2 6 7* * -. 0 17 .0 9 6 .1 8 2* .3 6 2* * 1 .0 00 f p _ s .2 2 7* * .3 8 2* * .0 9 7 .1 3 0 .2 1 8* 1 .0 00 f r .0 6 8 .0 3 2 -. 0 16 .0 5 5 1 .0 00 o e -. 0 05 .0 8 2 .0 1 7 1 .0 00 s p .2 8 1* * .1 6 9 1 .0 00 m o .3 3 5* * 1 .0 00 e 1 .0 00 . n 1 35 1 35 1 35 1 35 1 34 1 34 1 34 1 34 1 17 1 18 1 34 s .d . .9 1 83 .6 4 25 3 .6 78 6 6 .6 21 0 1 .0 16 3 .7 3 63 1 .0 82 0 .9 3 78 2 .4 31 4 2 .4 85 9 .9 2 51 m ea n 3 .8 3 3 .7 8 1 .8 8 5 .6 1 2 .1 3 3 .0 0 2 .8 6 3 .3 6 7 .2 7 7 .6 4 3 .2 3 e m o s p o e a f r f p _ s n o _ s h r _ s f p _ o o p _ o o s _ s t a b le 2 : m ea n s, s ta n d a rd d ev ia ti o n s, a n d c o rr el a ti o n s fo r m ed ia ti n g v a ri a b le s e , m o , s p , o e , f r , a n d d ep en d en t v a ri a b le p i n m ea su re m en t t im e (1 ) * p < 0 .0 5 ; * * p < 0 .0 1 a o e w as m ea su re d o n ly a t m ea su re m en t ti m e (0 ). 78 journal of small business strategy volume 22, number1, 79 o s _ s .2 1 4* .1 7 4* .0 7 1 .1 1 9 .1 0 5 o p _ o -. 0 07 .0 1 3 .1 0 1 -. 1 26 .0 9 6 f p _ o .0 8 0 .2 4 3* * .2 0 5* .1 0 4 .1 7 8 h r _ s .0 9 3 .0 3 1 .1 5 5 .0 6 6 .1 3 7 n o _ s .1 2 7 .0 5 2 .0 2 6 .0 5 8 .0 7 4 f p _ s .2 2 7* * .2 1 1* .1 6 6 .. 20 9 * .0 8 3 f r -. 0 75 -. 0 48 -. 0 11 .0 2 5 -. 0 46 o e a -. 0 25 .0 8 7 -. 0 23 .0 6 8 .0 7 3 s p .1 5 9 .1 2 5 .0 4 4 .0 4 6 .0 8 6 m o .2 5 8* * .2 0 0* .3 0 1* * .1 2 3 .2 2 7* * e .1 7 0 .1 1 0 .1 2 6 .2 0 6* .1 6 7 n 1 32 1 32 1 33 1 32 1 33 s .d . 1 .5 68 7 1 .2 92 7 1 .1 75 6 1 .9 05 8 1 .6 96 0 m ea n 4 .2 4 5 .3 5 6 .4 7 4 .4 4 4 .8 4 p _q n p _ q l c _ d c _ c c _ i t a b le 3 : m ea n s, s ta n d a rd d ev ia ti o n s, a n d c o rr el a ti o n s fo r in d ep en d en t v a ri a b le p a , m ed ia ti n g v a ri a b le s e , m o , s p , o e , f r , a n d d ep en d en t v a ri a b le p i n m ea su re m en t t im e (1 ) * p < 0 .0 5 ; * * p < 0 .0 1 a o e w as m ea su re d o n ly a t m ea su re m en t ti m e (0 ). the analytic method employed for testing hypothesis 1 and 2 and capturing both direct and indirect impacts of public assistance program on performance was structural equation modeling (sem) using amos 5 software. latent constructs of public assistance programs and performance were explored. five parceled indicators (p_qn, p_ql, c_d, c_c, c_i) were used to specify the public assistance program’s latent construct. six parceled indicators (op_o, fp_o, os_s, hr_s, no_s, fp_s) were used to specify performance latent construct at measurement time (1), and four parceled indicators (os_s, hr_s, no_s, fp_s) were used to specify performance latent construct at measurement time (0). journal of small business strategy volume 22, number1, analyses were conducted in three stages. in the first stage we established the measurement model of the latent constructs of public assistance program on performance – prior to examining the structural relations between them. since the manifested indicators strategic planning, entrepreneurship, financial resources, owner's experience and market orientation were hypothesized to mediate the relationship between public assistance program and performance, we examined in the second stage the longitudinal structural relations between the public assistance program construct and the performance construct, controlling for age and size of the firm. such a direct effect model constitutes a prerequisite for testing more complex mediating models (baron and kenny, 1986). in the third stage, the entire longitudinal mediating model was tested, including the manifested indicators strategic planning, entrepreneurship, financial resources, owner's experience and market orientation – again controlling for age and size of the firm. in sem analyses, model fit was estimated using four fit indices: the non-normed fit index (nnfi) –values above .90 represent an acceptable fit (bentler and bonett, 1980), the comparable fit index (cfi) – values above .90 represent an acceptable fit (bentler, 1990), the incremental fit index (ifi) – values above .90 represent an acceptable fit, and the root mean square error of approximation (rmsea) – values below .08 represent an acceptable fit (steiger, 1980). we did not use the chisquare fit index because of its extreme sensitivity to large sample sizes. stage 1: measurement model factor loadings and correlations among the latent constructs of public assistance programs and performance are presented in tables 4 and 5, and 6 and 7, correspondingly. table 4:factor loadings of latent construct (pa), measurement time (1) p_qn p_ql c_d c_c c_i pa .519 .818 .477 .418 .685 table 5: latent construct correlations (pa), measurement time (1) p_qn p_ql c_d c_c c_i p_qn 1.000 .443** .279** .162 .346** p_ql 1.000 .390** .352** .552** c_d 1.000 .136 .336** c_c 1.000 .330** *p < 0.05; **p < 0.01 table 6: factor loadings of latent construct (p), measurement time (1) fp_s no_s hr_s os_s fp_o op_o p .771 .543 .401 .760 .662 .504 80 journal of small business strategy volume 22, number1, table 7: latent construct correlations (p), measurement time (1) fp_s no_s hr_s os_s fp_o op_o fp_s 1.000 .362** .393** .627** .503** .317** no_s 1.000 .329** .453** .328** 318** hr_s 1.000 .195** .241** .169 os_s 1.000 .492** .354** fp_o 1.000 .544** *p < 0.05; **p < 0.01 stage 2: direct effect model before testing the mediating properties of the manifested indicators strategic planning, entrepreneurship, financial resources, owner's experience and market orientation we analyzed a direct effect model to examine the patterns of unique longitudinal associations between public assistance programs and performance, controlling for age and size of the firm. the model fit the data well (tli = .911, cfi = .937, ifi = .942, rmsea = .043). the results are presented in figure 1. public assistance programs have a significant positive effect on performance (β = .277, p < .01). hypothesis 1 is supported; public assistance programs do positively contribute to the level of small business performance. figure 1: direct effect model: standardized parameters of the longitudinal effect of public assistance on performance in measurement times (0) and (1), controlled for firm age and size **p < 0.01 stage 3: indirect effect model the manifested indicators – strategic planning, entrepreneurship, financial resources, owner's experience and market orientation were added to the direct effect model in order to examine whether they mediate the longitudinal association between public assistance programs and performance. as in stage 2, the model controlled for age and size of the firms. the model fit the data marginally well (tli = age (1) performance (0) size (1) performance (1) .277** public assistance (1) r2 = .357 81 journal of small business strategy volume 22, number1, .796, cfi = .846, ifi = .858, rmsea = .055); the results are presented in figure 2. public assistance programs have a modest positive direct effect on performance (β = .172, p < .092), significant positive correlation with entrepreneurship (β = .225, p = .05) and market orientation (β = .335, p < .01), low and insignificant positive correlation with strategic planning (β = .168, p < .1), insignificant correlation with owner's experience (β = .078) and insignificant negative correlation with financial resources (β = -.032). three mediating indicators have significant positive correlations with performance: entrepreneurship (β = .202, p < .005), market orientation (β = .321, p < .001), and financial resources (β = .241, p < .001). the other two have insignificant negative correlations with performance: owner's experience (β = -.001), strategic planning (β =-.026). a sobel test was conducted to indicate whether the mediating variables carry the influence of public assistance programs on performance: mediating effect of entrepreneurship through public assistance program, pa(1) >> entrepreneurship e(1) >> performance p(1) found to be not significant; p = 0.094. mediating effect of market orientation through public assistance program, pa(1) >> market orientation mo(1) >> performance p(1) found to be significant; p = 0.014. no mediating effects were found through strategic planning, financial resources and owner's experience. hypothesis 2 was partially supported; public assistance programs do contribute positively to the level of small business performance. the significant positive direct effect of public assistance programs on performance becomes more moderate when the indirect model is applied and reveals that the effect of public assistance programs on performance originates mainly from the mediating effect of market orientation, and to a lesser degree is the result of entrepreneurship. discussion and conclusions the direct effect model supports hypothesis 1 and strengthens previous research findings, such as chrisman (1999), which claims that the mere presence of public assistance programs is sufficient for establishing a higher level of performance in small businesses. the correlation matrix (table 3) suggests some interrelations between the indicators used to define public assistance and performance. the positive significant correlation between the quantitative elements of the program (p_qn), financial performance (fp_s) and overall success (os_s) support the empirical findings of chrisman et al. (2005) and wren and storey (2002) and also justifies the inclusion of quantitative assistance components when assessing the contribution of assistance programs to performance (kaplan et al., 2000; rice, 2002). similarly, the positive significant correlation between the qualitative elements of the program (p_ql), financial performance (fp_s and fp_o) and overall success (os_s) reinforces the relevance of including qualitative components in the discussion on the contribution of assistance programs to performance (jang and lee, 1998; rice, 2002). these findings support the claim that a more accurate and profound examination of the public assistance programs' effect on the performance of small business should include both quantitative and qualitative elements of assistance. it is possible that findings of previous studies such as those of luria and wiarda (1996) were not conclusive, due to the fact that the examination of the 82 journal of small business strategy volume 22, number1, 83 differences between various assistance courses has not been detailed enough to adequately incorporate all inputs of the assistance program that could affect performance. moreover, the longitudinal nature of the study and the control for firm age and size enhance the credibility of the findings. figure 2: indirect effect model: standardized parameters of the longitudinal effect of public assistance on performance in measurement times (0) and (1), through strategic planning, entrepreneurship, market orientation, financial resources, human resources–owner experience and controlled for firm age and size entrepreneurship (1) 0.1 > +p > 0.05; 0.05 > *p > 0.01; **p < 0.01 age (1) performance (0) size (1) public assistance (1) .172 + r2 = .472 market orientation (1) .206* .225* financial resources (1) .335** -.032 .319** .240** human resources owner experience (1) strategic planning (1) performance (1) -.026 .168 + .078 -.001 journal of small business strategy volume 22, number1, the indirect effect model partially supports hypothesis 2. the decrease in level and significance of the assistance program’s effect on performance in the indirect effect model in comparison with the direct effect model illustrates the routes through which public assistance programs affect performance. outside assistance is presented as an important source for developing the entrepreneur's knowledge and experience (robinson, 1982; deakins et al., 2000). however, contrary to expectations, owner experience (oe) does not have significant correlation with performance, showing that the mediating effect of that variable does not exist as well. strategic planning is one of the activities which can benefit the most out of assistance programs (thompson, 1996); our study’s outcomes partially support this statement, public assistance programs have a modest positive correlation with strategic planning. however, the lack of evidence for correlation between strategic planning and performance, contradicts miller and cardinal’s (1994) findings, which found a significant positive correlation between strategic planning and small business performance. our findings also contradict more recent findings (hodges and kent, 2007 and allerd et al., 2007), claiming that both informal and formal planning is vital and necessary for small business success. our findings indicate that financial resources have a significant positive correlation with performance, but do not mediate between the public assistance program and performance. if access to capital is itself a financial resource (wiklund and shepherd, 2005), it is possible that high expectations on the part of clients that the assistance program will improve their access to capital and/or lack of attention by the consultant to that issue, may explain this finding. according to the indirect effect model, more financial resources result from efforts to improve fundraising capabilities of the client and thus contribute to performance. one important contribution of this study is revealing that the effect of public assistance programs on performance originates mainly from the mediating effect of market orientation and, to a lesser degree, is the result of entrepreneurship. these findings support numerous studies suggesting a significant positive correlation between market orientation and performance (appiah-adu and singh, 1998; shun-ching and cheng-hsui chen, 1998; pelham, 2000; homburg et al. 2002; kara et al. 2005). findings of more recent studies (green et al., 2008; baker and sinkula, 2009) single out market orientation as one of the most important factors in improving intervention programs’ results. the study also supports previous findings on the positive correlation between entrepreneurship and business performance (covin and slevin, 1989, 1990; smart and conant, 1994; wiklund, 1999; wiklund and shepherd, 2003, 2005). moreover, the positive correlation between public assistance programs, market orientation and entrepreneurship enhances our ability to address the notion of learning (beach, 1980) as a vital ingredient of outside assistance programs. the public assistance program’s effect on small business performance is measured in most studies by means of two financial performance measures: increase in number of employees and increase in sales. adding financial and operational measures allows a more comprehensive and accurate assessment of the effect on performance. increase in number of employees, used in both types of measurements, subjective and objective, was omitted by the factor analysis. the question regarding whether or 84 journal of small business strategy volume 22, number1, not an increase in number of employees does in fact serve as a relevant measure of performance deserves further investigation. based on venkatraman and ramanujam’s (1986) statement that financial performance represents the narrowest conceptualization of firm performance, we tried to establish a more comprehensive performance construct adding operational performance measures. findings, however, do not support the relationship between the five indicators of public assistance program and operational performance. this may suggest that operational performance measures are limited while trying to measure changes in small businesses performance or that consultants should focus not only on improving basic financial parameters such as cash flow and level of sales, but also on operational parameters. on a practical level, the study can help better allocate budgets to assistance programs that support economic activity of the important sector of small businesses. the basic research model shows that a greater amount of the quantitative elements of the assistance (hours of consultation; frequency of consultation; range of issues incorporated into the consultation) and the quality of the assistance program (professional understanding of the subjects of consultation; organization and planning of the consultation process; level of trust, commitment and understanding between the consultant and the business owner), may increase performance of small businesses. when adding the indirect effects, we can learn that small businesses’ performance is primarily affected by encouraging the business owner to take risks, be attentive to their customers, understand the changes in their preferences and the need to keep them satisfied and respond to the their complaints. the consultant should raise the small business owner’s awareness of the need to innovate and make the necessary changes required to stay competitive in today’s turbulent environment. the client’s capital raising capabilities are vital for expanding the business and improving performance. learning about the possibilities of raising capital from banks or other financial institutions should be an integral part of assistance programs. the research also emphasizes the important role of the client (business owner) in the intervention process. as we have seen, the relationship between the business manager and the intervention agency is crucial to the successful design and delivery of relevant services. the more involved and active the business owner becomes in the intervention process, the more beneficial will be the assistance he gets. since our findings do not support the claim that both informal and formal planning is vital and necessary for small business success, the effort invested in preparing formal strategic plans of high detail should be limited, and consultants need to mainly focus on those factors found to affect performance directly and indirectly, namely market orientation, entrepreneurship and improving accessibility to financial resources. finally, assistance organizations and governments should pay attention to the way they assess effectiveness of assistance programs. a more accurate and profound examination that includes both quantitative and qualitative elements of assistance should be applied to screen out the less efficient programs and consultants, and thus better utilize the limited public resources. 85 journal of small business strategy volume 22, number1, limitation and future research this study is based on a quantitative empirical longitudinal research of small trade and service businesses that participated in a coaching program initiated by the ministry of industry, trade and labor in israel. its findings must be interpreted with care, as it was conducted only within specific industries and focused on a specific coaching program conducted in israel; therefore, it is uncertain whether its findings on assistance programs for small businesses can be applied outside israel. the measurement instrument applied to public assistance programs is based on ideas from theoretical and empirical studies and was not validated in previous empirical studies. the latent constructs of public assistance programs and performance used in the sem analysis, have not been used in previous research. theoretical and empirical literature usually mentions operational performance in relation to large businesses. it is possible that operational performance measures that are suitable for large businesses do not fully fit for small businesses. results indicate that only 23% to 30% of subjects implemented some form of strategic planning. the significant positive correlation between strategic planning and financial performance (fp_o) in this population in measurement time (1) (n = 35, p = 0.037, β = .354) suggests the need in future research to take into consideration the effect of strategic planning on performance, despite mixed results in literature (yusuf and saffu, 2005). previous research findings in regard to the effect of human resources on performance are inconclusive (pena, 2004; chrisman et al., 2005; haber and reichel, 2007). we believe that this study’s findings that have not shown a very significant correlation with human resources are a result of technical problems of clarity and structure of the questions, and the manner of data gathering and, therefore, further investigation is needed in order to establish a more accurate measurement instrument that will allow the assessment of the effect of human resources on the small business performance. although we used a valid instrument for the measurement of environment as a control variable, we had to omit environment from the statistical analysis due to poor internal consistency, which could have been a result of the homogeneous research population. environment should not be dismissed from the research models of future research on public assistance programs. the research outcomes pose several questions to be answered in future research: first is it advisable to incorporate operational measures for measuring performance in small business? second should the construct public assistance programs include the client’s dimensions (c_d, c_c, c_i)? if so, are the measures used in this research the most suitable? third subsequent to the factor analysis, interaction between program and client was embedded into the qualitative elements of the program (p_ql). it is important to investigate what is the effect of the interaction between program and client as an independent variable on small business performance. fourth a longitudinal research approach was used in order to grasp the temporal effect of public assistance programs on performance. future 86 journal of small business strategy volume 22, number1, research may examine the need for maintenance coaching to preserve the positive results of the initial coaching provided by the assistance program. references allred, a., addams, h. l. & chakraborty g. 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(2002). evaluating the effect of soft business support upon small firm performance. oxford economic papers, 54(2): 334-365. yusuf, a. & saffu, k. (2005). planning and performance of small and medium enterprise operators in a country in transition. journal of small business management, 43(4): 480-97. rami schayek is managing and coaching small trade and service businesses. his current research interests include critical success factors and organizational performance in smalland medium-sized businesses. dov dvir is a professor of management at the ben gurion university of the negev. his research interests include project management, entrepreneurship, technological innovation and management of technology oriented organizations. journal of small business strategy volume 22, number1, appendix a mediating variables questionnaire: strategic planning does your firm have a written strategic plan (circle the correct answer)? yes no if “yes”: the following are five different possible descriptions of strategic planning (a-e). circle only the description which best represents the strategic plan implemented by your firm a. our firm’s strategic plan includes 1. specification of objectives and goals. b. our firm’s strategic plan includes 1. specification of objectives and goals. 2. selection of strategies required for achieving objectives. c. our firm’s strategic plan includes 1. specification of objectives and goals. 2. selection of strategies required for achieving objectives. 3. assessment of resources required for implementation of strategies. d. our firm’s strategic plan includes 1. specification of objectives and goals. 2. selection of strategies required for achieving objectives. 3. assessment of resources required for implementation of strategies. 4. procedures for identifying and preventing failure of the plan implementation on a continuing basis. e. our firm’s strategic plan includes 1. specification of objectives and goals. 2. selection of strategies required for achieving objectives. 3. assessment of resources required for implementation of strategies. 4. procedures for identifying and preventing failure of the plan implementation on a continuing basis. 5. an attempt to account for factors outside the immediate environment of the firm. indicate the period of time covered by the strategic plan indicated by you. circle one option – │→ up to one year up to two years up to three years 93 journal of small business strategy volume 22, number1, entrepreneurship how many new lines of products or services has your firm marketed in the past 3 years? no new lines of products or services 1 2 3 4 5 6 7 very many new lines of products or services changes in product or service lines 1 2 3 4 5 6 7 changes in product or service have been mostly of a minor nature lines have usually been quite dramatic in dealing with its competitors, my firm …. typically responds to actions which 1 2 3 4 5 6 7 typically initiates action which competitors initiate competitors then respond to typically seeks to avoid competitive 1 2 3 4 5 6 7 typically adopts a very clashes, preferring a 'live and let live' posture ‘undo-the-competitors’ posture in general, in my firm, there is … a strong proclivity for low-risk projects 1 2 3 4 5 6 7 a strong proclivity for high-risk (with normal and certain rates of return) projects (with chances of very high returns) when confronted with decision-making situations involving uncertainty, my firm… typically adopts a cautious, ‘wait-and 1 2 3 4 5 6 7 typically adopts a bold, see' posture in order to minimize the aggressive posture in order to probability of making costly decisions maximize the probability of exploiting potential opportunities human resources does the firm owner (present director) have: a. prior management experience (indicate number of years in management, except for the current firm) _______. b. prior ownership of a firm (indicate number of years as other firm/firms’ owner) _______. c. prior experience in the industry (indicate number of years that the owner has worked in the industry which the firm’s operates in, except for the current firm) _______. d. an academic degree (circle one of four options): 1 none. 2 first degree. 3 second degree. 4 third degree. 94 journal of small business strategy volume 22, number1, e. a business education (circle one of four options which best describe the owner’s business education): 1none. 2attended lectures on business management related issues. 3participated in a business management course. 4regularly and consistently participates in various business management courses (at least once a year). financial resources for each of the three following descriptions, indicate the extent that your firm possesses financial capability (1 = ‘very little’, 5 = ‘very much’), circle only one option – a. compared to the competitors, has better financial resources – money; stock; assets 1 2 3 4 5 b. addressed by banks or other financial institutions for fund raising through them 1 2 3 4 5 c. compared to the competitors, capable of raising funds with relatively low interest 1 2 3 4 5 market orientation a. our firm gives a (moderate 1 2 3 4 5 extreme) amount of attention to aftersales service. b. our firm is (somewhat slow 1 2 3 4 5 very fast) in detecting fundamental changes in customer preferences, competitive strategies, and other major changes in our industry. c. our firm responds (somewhat slowly 1 2 3 4 5 very fast) to negative customer satisfaction information. d. our firm measures customer satisfaction (occasionally 1 2 3 4 5 frequently). e. we (occasionally 1 2 3 4 5 frequently) take advantage of targeted business opportunities to take advantage of competitors’ weaknesses. f. in our firm we understand how the entire business can contribute to creating customer value (disagree 1 2 3 4 5 agree). 95 journal of small business strategy volume 22, number1, appendix b public assistance program structure prior to factor analysis structure multi-dimensional cluster dimension item public assistance program program quantitative components number of encounters intervening periods of time between consultation encounters sum total of coaching hours nature of consultation encounters and the extent to which all the issues on the agenda are addressed number of areas addressed within the coaching’s framework qualitative components consultant’s level of knowledge in the field of consultation consultant’s contribution to success of coaching definition of objectives in the process of coaching creating a procedure framework of issues addressed in the process of coaching order and plan of operation in the process of coaching location of consultation client client’s willingness submitting information on firm activity study and diagnosis of firm activity changes in manpower strength changes in salaries firm representatives working with consultant implementati on of consultant’s recommendat ions extent of implementation of consultant’s recommendations interaction between program and client communicati on between program and client mutual trust between consultant and firm owners relationship between consultant and firm owners commitment to the success of coaching degree of agreement between coaching objectives and the methods of attainment 96 journal of small business strategy volume 22, number1, 97 appendix c performance structure prior to factor analysis structure multidimensional cluster dimension item measurement method performance financial performance profitability return on investment (roi) subjective earnings before interest and tax (ebit) objective efficiency return on sales (ros) subjective sales to number of employees ratio subjective growth rate of increase in sales subjective; objective increase in number of employees subjective; objective solvency rate level of sales subjective cash flow subjective; objective operational performance creating new opportunities customer satisfaction subjective opportunities within the firm’s existing market subjective opportunities within new markets subjective human resources correspondence between skills and tasks of employees subjective quality of employee professional development subjective market share fluctuation in market share objective other overall success subjective reproduced with permission of the copyright owner. further reproduction prohibited without permission. stvza7xpã servi(l'es markeying for the smai.i.er firm edward w. wheatley ernest b.uhr east carolina university abstract concepts being developed in the field ofservices marketi ng ma nagerne ra con be applied by the smaller firm. the small firm can be more responsive, flerdble and personal than the larger competi tor. the authors believe that small service firms may be able to leverage these competi ti ve advantages by utilizing marketing strategies and actions designed to copitolize on the unique characteristics of services. the marketing strategies of dramatization, demand management, process engineering, and relationship management offer the small service firm significant opportuni ties for competin've advantage. "service managers'ction guidelines" are presented in an effort to assist small firm managers in implementing services marketing techniques. guidelines are based on four charocteristics which strategically differentiate the marketing services from products. four strategies are recommended to assist managers in taking advontage of strategic service differences and opportunities. several action recommendations are overed for each strotegy. introduction the growing discipline of services markeung blossomed during the 1970's and 80's. the literature of this specialized area is rich and complex. it features theory, research, analysis, and case studies in both periodical and book formats. the american marketing association has developed an extensive biography cataloguing the literature (fisk & tansuhaj, 1985). the majority of services marketing articles appear in academic journals such as the journal of marketing, the journal of services marketing, the journal of professional services marketing and the journal of the academy ofmarketing science. a growing number of services marketing texts such as those by lovelock (1991), bateson (1989), sasser, hart & heskett (1991) and gronroos (1990) and others are used by business school faculty teaching services markeung courses. the popular press has published a variety of books capitalizing on the growing interest in services ranging from the business best sellers service america and at americas service to more specialized offerings such as service quality. however, a review of periodical literature and of the publications produced by the small business administration produced no articles or materials dealing with service marketing strategy and tactics for the smaller firm. to assist managers in utilizing services marketing in the small service firm, the authors have developed "service managers'ction guidelines". the guidelines are based on four key characteristics that strategically differentiate the marketing of services from the marketing of 1 products. four basic marketing strategies are offered to assist managers in taking advantage of strategic service differences and opportunities. for each service marketing strategy several specific schon recommendations and examples are presented that can lead to more success in the highly competitive market place of the 90's. what the manager needs to know about service vs. product differences at first glance, differentiating products i'mm services appears straightforward. a product is a physical article that has tangible properties. a service is an act performed by the business on behalf of a consumer. services are intangible. however, in the world of business, consumers purchase solutions to needs and/or desires. these solutions usually consist of combined product/ service components. for example, a business traveler may be hungry and stop for dinner at a local restaurant. the need to eat and the desire for a particular type of food is satisfied by a combination of tangible products (food and beverage items are the physical facilities of the restaurant) and less tangible services (valet parking, hostess greeting and seating, wait staff actions, cooks, dishwashers, and so on). shostack (1977) illustrates this combination of tangible and intangible elements using a continuum. figure 1 illustrates business offerings ranging from a commodity product, such as salt, to a personal service, such as consulting or teaching. salt is high in tangibility attributes, teaching is more intangible. figure 1. the goof/s-services continuum ocncttaas ccotocdca fsn-food oodcts fntsnddtto tsttttlble fast-food ad„~ futun as cccnoldnd t~ why is the continuum concept important to the small firm manager? thinking of business offerings as combinations of tangible and intangible components helps the manager focus on both the product and service aspects of their offerings. marketing management strategies and actions for services must be adjusted to account for the differences in product and service characterisucs. as processes, services have many intriguing characteristics. judd (1964),rathmell (1974), shostack (1977),bateson (1977),and sasser, olsen, a wyckoff (1978) were among the first to ponder the implications of service intangibility, service perishability, product/consumption simultaneity, and consumer participation in service processes. they found that traditional markeung, with its goads-bound approaches, was not helpful in process design, process modification, or process control (shostack, 1977). 2 figure 2 presents specific recommended marketing strategies for the small firm manager. 'these strategies can be utilized to deal with the suategic service characteristics of intangibility, perishability, purchase/consumption simultaneity, and the interactive producer/consumer relationship. specific marketing management action guidelines are offered to help the small firm manager implement the recommended marketing strategies. 3 figure 2. service management snafegies and acnon guidelines service ln ibili perishability purchase/consumption fur«ective rdatitmships charactcsis 'ntangibility simulumcity producer/consumer marftcting 0 u rou rdationship sttetcgy mensgcmcat engineering mensgcmcnt l hkadfy consumer auvkc itrpll«ciciiu, attrcnt , iuld pccutkm 1. provide wrincn/video i 'umyra idtnfuy md soph l coadua maga tcseelte m dcsaip6cas of savitc fcstunu hhtouyemnumcr~ ~mdmskm md bciicfill wcch. mash, snd sess«, ole ~ ives 2. bkclcittt plasosl «cststba 2. ti ~loco etocremcca 2 bait«l sales for to«re cyst«« tahe sr«ms snslyas 3. dcsige sml mdmek pc«cond m de«attn punning periods. ~snd comaaitas. cavke meospbcrks fcr sn ph/steel cocl /poa 3, budsa end cssttp hue«a sad s. badse serve» sysam deuto us plrducc ienoolutllacicii ~ pleural tcamtcct lo clutch mssimlse speed/tpdhy, 4, hha6/y hcy i«ansi ceaomcr dasiling scrvi«saiora mhm ptronsgc dassnd psnans. coa/queue, snd canpaidve srionships. mar/feting on bchslf of ««sumac, ~dvasage funcdccs. induding eel« mppat 4. supplaeau pest paled aetf 5. develop snd implcmcnt lnhisl management litcrsture. dc«~ sal snd tesurocs through ivom 4. design snd implcmcnt an ~nd cantlnumm test«ca savice action poa savit» cvidntec use training, temps, snd ksscd i~igoelg atsllty sacer«an trslnlns flu cmcmsl snd imcmsl pephlc snd video fcrmsts if cuulpoclrt/kdnbcl pogrsm gnenaing fccdboch cusloalcil posable. ~nd amlysis of: f. use pomodonsl pricing snd a quslitsdvc kcuns c.g. 6. dcvdcp snd im places ress 4. dcslglt aid ullplanan poa baafit utdling io chin dec atd iscnuinct peepthcm thee complshn snd coamd purchssc ootssa des onmming fran peck paiods. intansl auumcr tmolufhm po«shura isencdme benefhs. 6. ofia mm eaviccs with b. qmuitsdve foacm lc, 7. gcac mlvi«provider humect 5. dispky scrvhn pcmonnel caepfisuatay daesod psnans. resp«ac time. dclivay nducdta program. ctcdsisk. ntnc, ctclplallt ttsckttg ~ulcc snd coa mslyaa g. censidtr qusfity drdc or outcr oe.going anployce pmgrsm lo loshltan tocucutdtaucn, probkm «iagnitka. snd service marketing strategy discussion intangibility/dramatization since services are less tangible than products, customers may not recognize, appreciate, or be anxious topsy for the work that was done on their behalf. lack of tangibility also makes it more difficult for consumers to evaluate potential service providers during the shopping process. for example, the purchaser of an automobile is dealing with a highly tangible, product-specific purchase. the purchaser of an annual tuneup from a small business tuneup center is involved in a relatively intangible service purchase. the tuneup customer drives the car to the shop, leaves it for the day, and returns to find the car waiting in the parking lot and the bill waiung at the cashier's office. while the car buyer has constant tangible feedback concerning the goodness of the purchasing decision, the purchaser of a tuneup service may have difficulty evaluaung the purchase. most of the tuneup work has been performed behind the scenes. quality is based on the performance of highly technical equipment and the subtle diagnostic and repair skills of the auto technician. the consumer has been absent during the service and, even if present, would likely be unable to evaluate the process. in order to meet the challenges that intangibility presents, the tuneup center should damatize their actions. dramatization is the process of explaining in detail ("acting out") what work has been performed on the customer's behalf and demonstrating the expected benefits of the work performed. dramatization action recommendations are presented in the third column of the marketing management action guidelines (figure 2). dramatization can improve current customer satisfaction, increase return business and referral behavior. the materials and pmcesses used in dramatization can be passed on by customers to other potential customers. price objections will be reduced as customers gain a clearer understanding of what the smau business service provider has done for them. dramatization helps make services more tangible. consider the following example. a customer enters a small television (t.v.)repair shop to pick up her repaired set. she is handed a bill for $127 which simply says "t.v.repair". she writes achedi and leaves feeling $ 127 was a lot to pay. she is suspicious that she was unfairly charged. a customer of another repair business has a different experience. first, the owner tests the t.v. when the customer brings it in discussing the symptoms, probable cause, and what next steps will be taken. after finding the tmuble, the owner calls the customer explaining in detail the additional testing performed, the results, and the time, parts and costs involved in the repairs. the customer decides to have the unit fixed. when the set is picked up the customer receives a detailed invoice, an explanauon of invoice entries, a plastic bag containing old parts, and a demonstration that the set is functioning. the bill is $ 130. however, due to the dramatization skills of the owner the customer understands the charges. her confidence in the skills and integrity of the firm causes her to recommend the business to others. perishability/demand management a small business service provider often finds that demand is seasonal or variable. if the organization is not pmperly configured and staffed to provide the correct level of service at the correct time, sales are lost. when this occurs, the business faces double jeopardy. not only is the sale lost, but the service customer's needs may be met by a competitor with the possibility of the customer being lost indefinitely. services are perishable. they cannot be inventoried or placed in a warehouse until the exact moment of demand. if the service provider does not have the facilities and the staff to meet the service demand, unserved customers are lost. if the service 5 provider has capacity and resources that are in excess of actual service demand, firm esources are squandered. a demand management strategy can be applied in most service firm seuings. to the extent possible, the service provider must match service offerings to fluctuating demand periods. under extreme conditions the firm may offer special incentives to shift demand from peak periods to slower periods. cross training of personnel to do more than one job, use of temps, and short-term leasing of service equipment can modulate the cost of demand pattern swings. owners of a popular 30-table family restaurant have become effective demand managers. they have extended business hours to cater to early and late dinners. attractively priced "early bird" and "late dining" specials am offered and promoted to spread peak load demand over a more manageable time span. personnel are cross-trained to be proficient in at least two job specialties. "prep cooks" have been added to prepare staple food items prior to opening to allow concentration on entree preparation and to speed service. menu item demand pauems are analyzed weekly and printed out in gtaphic form as a byproduct of the finn's computerized cash register and inventory conuol system. menu complexity is matched to anticipated demand patterns to manage food, beverage, and service quality. in food service, the business frequenuy manages the owner. in the example presented, the owners have gained control and improved service utilizing demand management techniques. purchase/consumption simultaneity most service firms only get one chance to "get it right". the purchaser of a large-screen stereaff.v. will have many years to interact with and leam about the product. a couple dining at a local restaurant offer a one-hour window of service opportunity from the time of restaurant selection until the completion of the meal. there is only one goal in service marketing and that is "perfection". of course, perfection is seldom anainable. however, because services are often performed in a highly compressed ume period, the service provider must constantly strive toward that unattainable goal. customers who have abed experience with a service provider are not likely to give the firm a second chance or be sympathetic to excuses and explanations. since services are delivered in a compressed time span, the small service firm has a limited opportunity to create a satisfied customer. the strategy of process engineering and careful service planning require that the service system be developed, refined, tested, and evaluated to achieve maximum efficiency and customer satisfaction. the service system must then be continuously evaluated and re-engineered to ensure lasting customer satisfaction. service providers who engage in initial and ongoing process engineering can develop a strong competitive advantage in the market place. a nursery/plant sales business was disappointed by its lack of growth in volume and profits. after talking to customers, the owner found dissatisfaction with speed of service, quality of products, facility layout, and getting shrubs and plants to their vehicles after the purchase. the owner applied a systems approach to analyzing their business. with help from a local university, they flow charted their operations: based on customer comments and their flow charts, the owner changed both layout and operation. related products were grouped based on frequency of demand. an additional check-out locauon was provided. the firm furnished cans to hold products and facilitate transport to customer vehicles, placed parking closer to larger items such as shrubs and large potted plants, and improved plant watering and feeding sequences. the firm also implemented a biweekly inventory inspection procedure. by breaking their customer service process down to individual steps and using flow chaning to visualize how these steps could be reconfigured, the finn used process engineering to help customers and improve business. 6 interactive relationships/relationship management services are highly personal. the way in which a customer is treated can be as important to customer satisfaction as the service being purchased. to the service customer, the service provider is the organization. if the relationship is positive, pleasant, and efficient, the firm may enjoy return purchase loyalty as well as positive recommendations. if the service customer has a bad experience with a service provider, it matters linle that the other aspects of the finn are perfectly managed. jan carlzon, the president of scandinavian airlines system, characterized the critical period of interaction between the service customer and service provider as a "moment of truth". he pointed out that at scandinavian airlines there are over 65;000 moments of truth each day as airline employees interact with customers (boone jk kurtz, 1992). in avery real sense the small service firm's only reason for existence is to successfully orchestrate these moments of truth. firms that manage each customer service encounter to produce maximum customer satisfaction increase their probability of long-term success. smaller firms usuauy can be more responsive, more flexible, and have a greater knowledge of customers. personalization of service is a key competitive advantage for the smaller firm. there is another important player in a firm/customer relationship, the "internal customer". internal customers are members of the firm who support each other in delivering service to the final consumer. local health club customers may have primary interaction with an aerobics instructor. however, the success of the class depends on more than the skill of the instructor. the instructors'uccess also depends upon the recruiting efforts of club owners, the biuing and membership records personnel, individuals who clean and maintain the physical facility and equipment, and other employees of the organization. successful service is a team effort. employees who serve each other well serve the customer well. relationship management is an important service marketing strategy. the relationships tobe managed include those between the customer and the service provider and those among members of the small firm employee team. facing competition from a newly opened mass merchandiser, the manager of a local appliance store focused on improving customer loyalty. floor sales staff received initial and continuous training on interpersonal customer service skills. the topics included customer greeting and eye contact, dress, gtooming, spending time with the customer, making friends not just sales, relationship building, telephone service and complaint resolution. prior training had been limited to technical product features. sales persons became owners of long-term customer satisfaction and took an active role in coordinaung major repairs, emergencies, and use of loaner equipment. 'ihe roles of clerical, repair, and delivery staff were redefined from being isolated specialists to members of a customer team. regular "team" meetings were insututed with interactive problem and solution discussions that included management, sales and support personnel. building and maintaining positive customer relationships and a more effective customer service team was seen as the best way to compete against the impersonal service of the mass merchandiser. implementing marketing strategy a case example the following case is based on an auto repair and service business. the firm employed dune full-time and one part-time mechanic and one full-time and one part-time mechanic's helper. in addition, a full-time employee handled afl receptionist, administrative, and bookkeeping duties while sharing the parts and supplies purchasing duties and work scheduling with the owner/ mechanic. the facility featured three bays for regular automotive repair and one bay that housed 7 a front-end alignment/mufger, bake installation, and repair facility. tbe application of recommended marketing management strategies and actions follows the sequence in figure l. dramatization was used to make services more tangible. time was dedicated to explanation and demonstration of work and benefits. brochures discussing and illustrating the importance of preventative maintenance were furnished by parts suppliers. these and other brochures concerning engine rebuilding, transmission repair, front-end alignment, etc., were placed in the customer waiting area. brochures were also used in mailings, in credit customer bills and were given to customers with written estimates. all employees attended customer service seminars offered at a local community college and a program offered by a vendor of automotive replacement parts. mechanics were required to pursue continuing technical training and certification. mechanics'elpers attended a local technical college's auto repair courses and clinics. certifications and diplomas for these personnel were displayed in the customer waiting area with the exception of routine maintenance for regular customers, the owner/manager carefully discussed work to be performed and the expected benelits with each customer prior to the work being authorized. a detailed written estimate was prepared and signed. if unexpected problems occurred during the repair, the customer was contacted, the problem carefully explained, and alternatives outlined. on completion of the work, the customer received a legible, detailed, machine-printed invoice explaining alt labor procedures and pans utilized. wherever possible, parts that were replaced were returned or shown to the customer. demonstrations were used when possible. for example, the mechanic physically demonstrated the looseness in a wheel bearing, pointing out bearing/surfaces that had begun to roughen due to lack of pmper lubrication. enlarged schematic drawings of major automotive systems were hung on the walls of the shop. these included cutaway drawings of engines, t'ransmissions, drive trains, front-ends, cooling and electrical systems. mechanics were required to spend a few minutes with each customer explaining the nature of the problem and illustrating what had been done to their vehicle in the repair process. these additional steps added only minutes to each service encounter. a telephone and postcard reminder system was utilized for routine preventative maintenance appointments. for all major repairs, the receptionist called the customer one week after the car was delivered to ensure the customer was satisfied. if not, a follow-up visit was scheduled. the owner handled all follow-ups by reviewing what was done, supervising follow-up work, if required, and conducting a subsequent road test. dming the first few years of operation the owner was reacting to demand rather than attempting to manage it. demand management approaches were implemented to modulate extremes in demand panerns. analysis of past invoices revealed peak and slack demand periods. business hours and work schedules were realigned to increase capacity during high demand and reduce overhead during low demand periods. mechanics were required to develop at least one additional specialty. for example, someone skilled in engine maintenance and rebuilding developed front-end alignment skills. a backup person for the receptionist/administrator wasidentified and trained. this retired individual was used part-time as needed. arrangements were made with a rental finn to provide addiuonal tools and equipment on short-term notice. customers were offered discount coupons and add-on products, e.g., a free oil filter and services and free tire rotation for having regular preventative maintenance performed during slack periods. 8 process engineering involved a "clean sheet of paper" approach to identifying service offerings and the pmcedures to be used in service delivery. ongoing market research took the form of customer comment cards left on the seat of every completed vehicle. a car wash and waxing service was initiated based on feedback from customers expressing their wishes for a clean car at the end of the repair cycle. flow chans were prepared tracking events beginning with telephone inquiries to the presentation of the completed vehicle and invoice. all employees met to review the work flow diagrams an suggest ways of improving efficiency and quality of service. improved use of mechanics'elpers to do routine work as well as tear down and finish procedures reduced cost and increased capacity. the customer check-in ticket and the mechanic's work order were combined into one form which became the final invoice. assessment of customer perceptions was done on a continuing basis through verbal feedback, the use of customer comment cards, and the customer callback program. an employee incentive program was implemented to stimulate ongoing process improvement. as one would expect in a small finn, producer/customer relations and working relationships among employees were generally good. service was highly personalized and many regular customers had first name relationships with their mechanic and the owner. to protect and enhance these relationships additional action was taken. on an annual basis, a random sample of customers were asked to complete a two-page questionnaire evaluaung key components of the firm. these included physical facilities, personnel, pricing, responsiveness, customer confidence, and other service variables. based on negative feedback concerning the physical appearance of some employees and the facility itself, the firm began utilizing a uniform leasing service. changes were made to the physical facility to improve its interior and exterior appearance. a 100 percent customer satisfaction policy was adopted and implemented. for all major reps'he owner and/ or the lead mechanic road tested the vehicle to verify repair results. whenever possible, the owner road tested the vehicle with the customer present discussing the specifics of the repair and what had been done. finally, a bimonthly friday morning employee breakfast round table was instituted. it was hasted by the owner and all employees were required to participate. these regular meetings featured an equal dose of praise and analysis of ways of improving repair quality and customer service. it was also recommended that the owner/manager take uuining in quality circle implementation and in team building. management and marketing seminars and reading materials were available at a regional small business center and community college. the marketing strategies of dramatization, demand management, process engineering, and relationship management, (recognizing both external and internal customers,) offered this small service firm opportunities for competitive advantage. conclusions while the application of specific marketing management guidelines vary by firm and industry, the concepts being developed in the field of services markeung management can be applied with positive results for the smaller firm. 'ihe small firm can be more responsive, flexible and personal than the larger competitor. 'ihe authors believe that small service fums may be able to leverage these competitive advantages by utilizing marketing strategies and actions designed to capitalize on the unique characteristics of services. 9 references jownal ofr la.'cademy ofmarketing services, jai press, 55 old port road, no. 2, po. box 1678, greenwich, cl'6836-1678. allrecht, k. (1988).at americas service. homewootk il: dow jones irwin. alhecht, k. & zemke, r. (1985).service america. homewood, il: dow jones irwin. bateson, j. e. g. (1989).managing services marketing. chicago, il: the dryden press. boone l e.& kurtz d. l (1992).coruemporary marketing. fl wonh tx: the dryden press, 375. brown, s. w., et al (1991).service quality. lexington, ma: lexington books. fisk, r. p. & tansuhaj, p. s. (1985).services marketing an annotated bibliography. chicago, il: american marketing association. gronroos, c. (1990). service managemeru and marketing, new york, ny: the free press. lovelock, c. h. (1991).services marketing. englewood clilfs, nj: prentice-hall. journal of marketing, american marketing association, 250 s. wacker drive, chicago, il 60606. journal of professional services marketing, the haworth press, 10 alice street, binghamton, ny 13904-1580. sasser, jr., w., christopher, e., hart, w. l., &. heskett, j. l. (1991) the service management course. new york, ny: the free press. journal ofservi ces marketing, grayson associates, 108 lorna media road, santa barbara, ca 93103. shostack, g.l.(1977). breaking free from product marketing. journal ofmarketing, april, 77. shostack, g.l.(1987). service positioning through structural change. jownal ofmarketing. 51, (january) 34. 10 27  the moderating effect of family-ownership on firm performance: an examination of entrepreneurial orientation and social capital jeffrey m. campbell the university of south carolina jcampbell@hrsm.sc.edu nathan line the university of tennessee, knoxville nline@utk.edu rodney c. runyan the university of tennessee, knoxville rrunyan@utk.edu jane l. swinney oklahoma state university jane.swinney@okstate.edu abstract within the small business literature, a number of recent studies have examined the importance of entrepreneurial orientation (eo) and the development of social capital (sc) as each contributes to a firm’s performance. while it is generally accepted in previous studies that each of these constructs positively affects firm performance, relatively less attention has been paid to potential moderating factors that can affect these relationships. the purpose of our research is to address one such moderator, family ownership. using structural equation modeling (sem) to test the moderating effect of family ownership on the relationships among entrepreneurial orientation, social capital, and firm performance, our results show that the effects of eo and sc vary depending upon whether the firm is family-owned or non-family owned. implications of these findings and future research directions are provided. keywords: family ownership, entrepreneurial orientation, social capital, firm performance. introduction within entrepreneurship literature, the respective roles of social capital and entrepreneurial orientation as predictors of firm performance have been pursued extensively. concerning social capital (sc), a recent meta-analysis of 65 articles published over the last 15 years found strong s trateg   y  journal of small business  mailto:jcampbell@hrsm.sc.edu mailto:nline@utk.edu mailto:rrunyan@utk.edu mailto:jane.swinney@okstate.edu journal of small business strategy volume 21, number 2 28  evidence for a link between sc and firm performance at the general firm level (westlund and adam, 2010). the particular domain in which this construct is explored, however, is often quite specific. prior research has tended to model the relationship between sc and firm performance, making such varied analytical distinctions as spatial dimensions (schutjens and völker, 2010); industry (maurer and ebers, 2006); firm size (wei-ping and alicia, 2005); strategic growth initiatives such as initial price offerings (florin, lubatkin, and schulze, 2003); and economic conditions (manev, gyoshev, and manolova, 2005). the emphasis on varying dimensions of firm categorization suggests that such distinctions are important and that the relationship between sc and firm performance may vary, based upon the domain in which the study is conducted. thus, the generally accepted positive relationship between the two constructs may not be generalizable to every type of firm. additionally, a number of recent studies have demonstrated the importance of entrepreneurial orientation (eo) as it relates to a firm’s performance (kreiser and davis, 2010; runyan, droge, and swinney, 2008; wiklund and shepherd, 2005). again, the preponderance of the literature suggests a positive relationship between the two. similar to the findings for social capital, it is generally accepted that higher levels of eo are also associated with increased firm performance. runyan, huddleston, and swinney (2006) found a positive relationship between eo and sc as predictors of firm performance, but found no significant differences between maleand female-owned firms. research by naldi, nordqvist, sjöberg, and wiklund (2007) also considered potential moderators of the eo and firm performance relationship, reviewing both family and non-family firms. the researchers indicated that the organizational context is an important determinant to this relationship, and noted that risk-taking does not always lead to increased firm performance for family firms. within the context of new venture performance, stam and elfring (2008) determined that elements of social capital, such as network relationships and bridging ties, moderate the relationship between eo and performance. later work by kreiser and davis (2010) suggested that future research should consider other factors, such as organizational structure, as possible moderators of the eo/firm performance relationship. these findings suggest the importance of testing for moderation in the relationship between eo and firm performance. in sum, while the relationship between social capital and firm performance has generally been found to be positive (e.g., morris, kocak, and ozer, 2007), research on this relationship has been constrained to specific domains. additionally, the relationship of entrepreneurial orientation to firm performance is more ambiguous, especially when considering the effects of moderating variables such as organizational structure. in our assessment, the moderating conditions in which the relationships of eo, sc, and firm performance have heretofore gone underresearched represent a theoretical gap within the entrepreneurship literature. to address such a gap, we seek to add to the literature by exploring the roles of sc and eo, as each directly relates to firm performance in an important, but previously underdeveloped domain--that of the family-owned business. we consider the effect of family ownership structure because of the family firm’s relative dominance in the u.s. economy (morck and yeung, 2004). family firms have been estimated to employ up to 80 percent of america’s workers and contribute 40 to 60 journal of small business strategy volume 21, number 2 29  percent of the country’s gnp (neubauer and lank, 1998; sharma, chrisman, and chua, 1996). despite such figures, explicit study of the family firm has only begun to receive widespread attention in the past decade (chrisman, chua, and sharma, 2005). previously, the assumption appears to have been that the results of general business research, including research on sc and eo, were equally generalizable across familyowned (fo) versus non-family-owned (nfo) enterprises. recent research, however, has shifted away from this assumption (arregle, hitt, sirmon, and very, 2007; chrisman et al., 2005). the research presented here follows the spirit of this shift in suggesting that the impact of sc and eo on firm performance is not the same across family vs. non-family ownership structure and that differences relating to strategic practices, processes and performance should be reviewed between family-owned and nonfamily-owned businesses (ibrahim, angelidis, and parsa, 2008). in consideration of the above, the purpose of our research is twofold. we first seek to test the generally accepted roles of sc and eo in a model that incorporates the two constructs simultaneously. to our knowledge, no previous research has examined these constructs as concurrent predictors of firm performance. naldi et al. (2007) did not address the role of sc in the study on family versus non-family firms while stam and elfring (2008) tested sc only as a moderator of the eo and firm performance relationship. both social capital and entrepreneurial orientation, however, are believed to be important independent determinants of firm performance when firms can leverage their resources into a strategic competitive advantage. as the benefits of social capital may be realized indirectly through increased productivity (florin et al., 2003), or by creating business opportunities that support entrepreneurial-oriented behaviors (stam and elfring, 2008; ireland, hitt, and sirmon, 2003), there is a need to test both determinants of sc and eo simultaneously. second, we explore whether these relationships remain constant when differentiating between fo versus nfo businesses. we test our hypotheses via the use of structural equation models by proposing a model to test the generally accepted positive relationships between sc, eo, and firm performance. we follow with a two-group analysis to assess the potential differences in this relationship when distinguishing between fo versus nfo enterprises. following a discussion of these analyses, practical implications are considered and directions for future research are proposed.  theoretical background resource based view of the firm general theoretical foundations from the resource based view of the firm (barney, 1991) suggest that competitive and sustainable advantages can be achieved by using resources and capabilities such as information, knowledge, human resources, and operational strategies (chrisman et al., 2005; runyan, huddleston, and swinney, 2007; droege and dong, 2008). accordingly, habbershon, williams, and macmillan (2003) argued for a systems approach in defining and analyzing the performance of family-owned businesses that encompasses interactions, strategic intent, and wealth creation that may result from a rbv strategy to create unique and intangible resources. of particular importance to family-owned businesses are the embedded systematic resources not easily transferable (miller and shamsie, 1996), but available within the firm. habbershon et al. (2003, p.459) referred to such resources as “path dependent resources, idiosyncratic organizational journal of small business strategy volume 21, number 2 30  processes, behavioral and social phenomena, or leadership and strategy making capabilities.” unfortunately, research attempting to delineate between fo and nfo firms through operational or strategic approaches have produced limited results (chua, chrisman, and sharma, 1999; gudmundson, hartman, and tower, 1999), with even less empirical consideration of the effects of firm ownership on performance (lee, 2004). social capital bourdieu (1980) defined social capital as “the aggregate of the actual or potential resources which are linked to possession of a durable network of more or less institutionalized relationships of mutual acquaintance or recognition” (p.2). further conceptualization of social capital as group action expectations (portes and sensenbrenner, 1993) or reciprocal relationships among members within a specific community (runyan et al., 2007) suggests that social capital is a type of convertible resource that can increase competitive advantage for those who utilize it, particularly when group members and individuals benefit from the relationship (adler and kwon, 2002). segregation of social capital into both family and organizational factors (arregle et al., 2007) suggests that differences may occur in the levels of interaction, interdependence, and potential stability typically associated with family membership and that these relationships may differ across organizational settings. accordingly, it becomes important to consider the nature of the family business and whether inherent characteristics influence social capital generation. our research operationalizes social capital in the family-owned firm as the composite of reciprocity (bubolz, 2001; rudd, 2000) and homophily (mcpherson, smith-lovin, and cook, 2001). the concept of homophily, through which “social interactions tend to take place among similar lifestyles and socioeconomic characteristics” (lin, 2001 p.39), is thought to be embedded into sc through normative interaction principles reflecting the individual and network actors that create the social relationships (lin, 2001). as a result of these interactions, nahapiet and ghoshal (1998) argued that the development of social capital facilitates the creation of intellectual capital, which in turn, manifests itself in important organizational outcomes such as firm performance. similarly, tsai and ghoshal (1998) determined that “investing in the creation of social capital inside a firm eventually creates value” (p.473), which subsequently leads to positive effects on firm innovation as well as firm performance. research by cooke and wills (1999) supports the notion that innovation and firm embeddedness are created through increased social capital and lead to positive firm performance. given these findings, we hypothesize that: h1: a positive relationship exists between the level of social capital present in a firm and the firm’s performance. entrepreneurial orientation miller (1983) suggested that entrepreneurial orientation characterizes firms that “engage in product-market innovation, undertake somewhat risky ventures, and [are] first to come up with proactive innovations, beating competitors to the punch” (p.771). as such, entrepreneurial orientation is reflected in three strategic tendencies; innovativeness, risk taking, and proactiveness (covin and slevin, 1989; miller, 1983). miller (1983) found significant relationships between entrepreneurship and the three dimensions of eo across different firm types. subsequent journal of small business strategy volume 21, number 2 31  research relating eo to firm performance (covin and slevin, 1989; runyan et al., 2008; wiklund and shepherd, 2005) has similarly operationalized eo as a composite of these three dimensions. accordingly, our study utilizes this composite operationalization of eo to understand the relationship between eo and firm performance as follows: innovativeness: early work by schumpeter (1934) suggested that entrepreneurial innovation is the force behind economic development. cole (1946) considered innovation to be a key strategic process that helps businesses to survive by differentiating their product or service from competitors. correspondingly, our research conceptualizes innovativeness as the commitment to “engage in and support new ideas, novelty, experimentation, and creative processes that may result in new products, services, or technological processes” (lumpkin and dess, 1996, p.142). risk taking: baird and thomas (1985) argued that the level of strategic risk taking and risk estimation varies across entrepreneurial operations. risk taking reflects the “degree to which managers are willing to make large and risky commitments i.e., those which have a reasonable chance of costly failure” (miller and friesen, 1982, p.923). busenitz (1999) determined that the use of heuristics and biases helps entrepreneurs to deal with the risk associated with the implementation of new ideas. our research adopts the above conceptualization as proposed by miller and friesen (1982) to determine the extent to which these heuristics and biases differ in fo vs. nfo businesses.   proactiveness: lumpkin and dess (2001) defined proactiveness as an “opportunityseeking, forward-looking perspective involving introducing new products or services ahead of the competition and acting in anticipation of future demand to create change and shape the environment” (p.431). they found proactiveness to be a distinct construct, and identified its positive relationship with firm performance. however, although hausman (2005) identified a number of factors that affect innovativeness in family-owned firms, it is unclear if the effects of innovativeness on firm performance differ across firm ownership structures. in sum, eo is generally agreed upon as a three-factor structure as discussed above. from the preceding discussion of its component parts, we hypothesize that: h2: a positive relationship exists between the level of entrepreneurial orientation present in a firm and the firm’s performance. family-owned versus non-family-owned businesses in defining the family-owned business, our study utilizes litz’s (1995) conceptualization that “a business firm may be considered a family business to the extent that its ownership and management are concentrated within a family unit” (p.101). while sirmon and hitt (2003) extended the principles of the resource based view of the firm to the domain of fo businesses, subsequent research has not adequately addressed whether ownership structure impacts the manner in which the strategic and operational resources associated with the resourced based view affect firm performance. chrisman, steier, and chua (2008) noted, however, that the influence of family can have a moderating impact on company strategy and performance. lee (2004) reviewed performance measures of fo versus nfo businesses and determined that increased performance of fo businesses over journal of small business strategy volume 21, number 2 32  nfo was related to efficiencies created in the organization, but did not necessarily translate into profitability. further studies including miller, le breton-miller, and scholnick (2008) compared small family and non-family businesses under the strategic perspectives of stewardship (network building) and stagnation (slow-growth, shortlived entities). their findings determined that fbos utilize stewardship more effectively than nfos, although no significant differences existed for stagnation measures. additionally, pearson, carr, and shaw (2008) noted that the close interactions, networks ties, and information sharing may be greater for family firms. the results of such research suggest the importance of social networks in the strategies and practices of family-owned businesses, but do not adequately address other important strategic orientations (such as eo) that could help the business grow and increase performance. in sum, characteristics unique to fo versus nfo ownership structures may affect the relationships between sc/eo and firm performance, depending upon the strategies that the f rms undertake. we therefore hypothesize that: i   h3: the type of business (family-owned vs. non-family-owned) positively moderates the relationship of (a) social capital and (b) entrepreneurial orientation to firm performance, and (c) the moderation effect of family ownership will be larger for social capital than for entrepreneurial orientation. methodology sampling procedure the sampling frame for this study was restricted to non-urban rural communities of small or medium size. we selected two midwestern states, from which we took a sample of such cities. the cities included in the sample met the criteria outlined by the u.s. census bureau (u.s. census factfinder, 2004) for such a designation. that is, all towns had populations from 2,500 to 30,000 inhabitants and were located more than 30 miles from the nearest msa. within these cities, we chose to administer our questionnaire to business owners in each city’s downtown area, because communities of this size are unlikely to have a wide variety of shopping and entertainment choices outside this geographic boundary (gorodesky and mccarron, 2003; levy and weitz, 2003). additionally, we wished to make sure that business owners in each city were not so spatially removed from other owners so as to restrict their ability to answer questions concerning inter-firm social capital. in order to achieve more generalizable results, franchises were not excluded from sampling. all downtowns that fit our criteria in each state were identified, and the downtown development authority (dda) director for each city was e-mailed. a total of 21 downtown areas agreed to participate. in order to increase response rates, a prenotification and an incentive were issued for participation in the study (dillman, 2000). each downtown’s dda director provided an announcement of the upcoming study in either a weekly email, or a printed weekly update letter. as an incentive to increase participation, business owners were informed that the results from the local study would be provided to the dda free of charge, supplying valuable statistical feedback. we advised the dda directors that their enthusiastic participation would greatly increase response rates, rendering data gathered much more usable for their downtown. directors who agreed to participate thus became project “champions,” journal of small business strategy volume 21, number 2 33  notifying firms of the study and advising owners that their participation was important to the downtown area as an economic entity. dda directors collected the surveys at a prespecified date. on this date, owners who had not completed the survey were given the option to complete it while pick-up continued, or to simply drop by the director’s office at a later time for submission. all surveys were distributed and collected over a three-week period. relevant sample characteristics are reported in table 1. of the 2,300 surveys disseminated in the 21 participating communities, 503 were returned for a response rate of 22.0 percent. this is a respectable response rate, compared to those achieved in similar endeavors (e.g., conant and white, 1999 at 13.1 percent; runyan et al., 2008 at 23 percent). table 1: sample characteristics (n = 503) sample characteristic frequencies percentage male 256 50.9% female 225 44.7% gender no response 22 4.4% 40 or less years 11 2.2% 41 to 50 years 50 9.9% age 51 years and over 442 87.9% high school graduate 60 11.9% some college 132 26.2% college graduate 120 23.9% post-graduate degree 121 24.1% education other (or no response) 70 13.9% yes 353 70.2% family business no 150 29.8% 6 or less 113 22.5% 7 to 15 93 18.5% 16 to 30 159 31.6% years business has existed 31 or more 138 27.4% 6 or less 159 31.6% 7 to 15 92 18.3% 16 to 30 153 30.4% years in downtown 31 or more 99 19.7% 6 or less 160 31.8% 7 to 15 187 37.2% 16 to 30 118 23.5% years of current owner 31 or more 38 7.5% none 34 6.8% 1 to 2 198 39.4% 3 to 5 205 40.7% full-time employees 6 or more 66 13.1% none 44 8.8% 1 to 2 158 31.4% 3 to 5 243 48.3% part-time employees 6 or more 58 11.5%   journal of small business strategy volume 21, number 2 34  measurement of sc scales designed to measure the level of social capital generated by individual firms were developed according to focus group research conducted in four u.s. cities and subsequently operationalized in the runyan et al. (2008) study. the results of this research indicated two important kinds of social capital; that which is built between the business and the consumption community, and that which is built between the business and other small business owners. social capital built within the consumption community was measured by business owner perceptions of local customer behaviors and motivations. from the focus groups, the concept of reciprocity emerged as a common theme in the assessment of social capital built within the consumption community. reciprocity was measured by four items including ‘we do favors for each other from time to time’ and ‘these people patronize my business because i support the community.’ responses were made on seven-point likert scales anchored by strongly disagree and strongly agree. cronbach’s alpha for the items measuring consumption community reciprocity was .74. social capital among fellow business owners was measured by owner reports of their relationships with other small business owners in the area. two dimensions of inter-firm social capital were identified: homophily and reciprocity. these constructs were measured using the same rating scales as discussed above. participants were asked to respond to questions keeping in mind their fellow business owners. the four items measuring homophily were designed to capture the perception of similarity to other business owners. response items included ‘i am similar to these people in terms of my outlook on life’ and ‘i am similar to these people in terms of my business philosophy.’ the items measuring reciprocity among owners were the same as those discussed above regarding perceptions within the consumption community. cronbach’s alpha for the 12 total items measuring sc was .84. measurement of eo the measurement of entrepreneurial orientation was based on scales previously operationalized by covin and slevin (1989). within a small business setting, these scales have been operationalized by many researchers (rauch, wiklund, lumpkin, and frese, 2009). in accordance with popular conceptualization, we operationalize eo as reflected in three factors; innovation, proactiveness, and risk-taking. three items each measure these factors, yielding a nineitem unidimensional structure for the measurement of eo ( = .87) similar to the findings of covin and slevin (1989). measurement of firm performance we chose to operationalize firm performance with subjective measures rather than objective financial measures, in order to decrease the incidence of nonresponse. because small businesses often are reluctant to divulge financial information, subjective measures may be more effective in increasing response rates (droge, jayaram, and vickery, 2004). additionally, studies suggest a relatively high level of concordance between subjective and objective measurements of firm performance (dess and robinson jr., 1984; venkatraman and ramanujam, 1986). that is, findings are similar whether one uses subjective measurements such as those discussed above, or more objective measurements such as roa, roi, and ros. richard, devinney, yip, and johnson (2009), in a review of performance measurements across a variety of academic management journals, argued that the context through which the research is being completed should dictate whether subjective journal of small business strategy volume 21, number 2 35  or objective measures are most appropriate, and that strong construct validity can still be obtained through subjective measures. based on such findings, we determined that little to no substance would be lost in the subjective measurement of firm performance. respondents described the overall performance of their firm (1) compared to the previous year; (2) compared to major competitors; and (3) compared to other similar firms in the industry. because results of the focus group indicated a common practice among business owners of going to neighboring downtowns to “shop the competition,” it is not surprising that respondents were able to answer performance questions without difficulty. indeed, no respondent neglected to answer these items. the three items measuring firm performance were answered according to seven-point semantic differential scales, anchored poor to excellent ( = .87). measurement of family ownership within the survey, respondents were asked, “is this a family owned business?” with categorical responses ranging from ‘yes’ (n = 353) to ‘no’ (n = 150). the specific degree of family ownership within each business was not solicited as part of this research study, as it was believed little differences in responses relating to sc and eo would occur between complete family ownership of the firm (100%) versus majority ownership (> 50%). analysis amos 18.0 structural equation modeling (sem) software with maximum likelihood estimation was used to evaluate and test the measurement model, structural model, and moderation model fits. sem is considered an important analysis technique in both the confirmation of theory and in hypothesis testing, and is often preferred when simultaneously testing high level abstract hypotheses with multiple latent variables (byrne, 2001; kline, 2005). maximum likelihood is identified as a robust estimation technique (kline, 2005) that requires normal distribution of data, a relatively large sample size, and use of a continuous scale in measurements in order to be useful (byrne, 2001). as our data met all of these criteria, we subsequently employed a two-step approach suggested by anderson and gerbing (1988) that included completion of confirmatory factor analysis prior to testing the structural model. to assess both the fit of the measurement and structural models, a number of diagnostic statistics were evaluated. these included the χ² statistic, the “discrepancy between the unrestricted sample covariance matrix and the restricted covariance matrix” (byrne, 2001, p.79), root mean squared error of approximation (rmsea), comparative fit index (cfi), and normed fit index (nfi). the cfi and nfi are incremental indexes that compare the hypothesized model to a baseline model, and that above .9 is considered a reasonably good fit (kline, 2005). the rmsea is affected by model complexity and is thus indicative of parsimony. a value of .08 or below is suggested as a reasonable model approximation (browne and cudeck, 1993; kline, 2005). these values were established as our cutoff criteria for good model fit. additionally, we also reviewed standardized residuals and modifications for suggested ways of improving the fit of hypothesized model. covariance values above 2.58 for the standardized residual matrices were investigated (jӧreskog and sorbom, 1988), as were modification indices above 10.0. only those suggested modifications that were supported by face journal of small business strategy volume 21, number 2 36  validity or prior theory were considered for adjustment. measurement model results the measurement model was fit using the specified measurement variables for eo and sc. results from the model (2 = 506.058, df = 176, p-value = .000, cfi = .914, nfi = .876, rmsea =.061) indicated a good model fit. the specified indicators for both eo and sc loaded only on their respective constructs, thus eliminating the possibility of cross-loading on multiple constructs. to assess the convergent validity of the model, the average variance extracted (ave) for each latent construct was measured. values larger than .50 suggest convergent validity (fornell and larker, 1981). the ave for eo (.512) and sc (.528) indicated convergent validity for each construct. to test for discriminant validity, the squared correlation coefficient (shared variance) between eo and sc (.003) was compared to the ave values. fornell and larker (1981) noted that the squared correlation (shared variance) should be less than the ave values to ensure that high inter-correlations between the observed measurement items do not exist across latent constructs. a comparison of the shared variance (.003) against the ave values (.512, .528) indicated that this condition was also met. we therefore achieved adequate discriminant validity within the measurement model and no further model re-specification was necessary. all parameter estimates were significant at p < .05, a further indication of validity. standardized parameter estimates and tvalues for the measurement model are shown in table 2. structural model results (h1 and h2) upon establishing the measurement model, we then fit the data to the proposed structural model. specification. the standardized parameter estimate of sc ( = .403, p = .102) as a predictor of firm performance was not significant at p <.05. therefore, h1 is not supported. however, the standardized parameter estimate of eo ( = .915, p < .001) as a predictor of firm performance was found to be significant at p <.05, thus supporting h2. standardized parameter estimates and t-values for the structural model are provided in table 3. moderation model results (h3) to test our hypotheses regarding the effects of sc and eo as moderated by ownership type, we specified a two-group nested sem model. group 1 (n = 353) included fo businesses, while results from the model (2 = 604.570, df = 235, p-value = .000, cfi = .921, nfi = .878, rmsea = .056) yielded a good model fit and did not require regroup 2 (n = 150) reflected nfo businesses. the two-group nested model was fit to determine if type of ownership (family versus non-family owned) moderates the relationships between eo and sc and firm performance. first, factor loadings for the measurement items and error covariances were specified and constrained as equal across both groups. next, two separate models were created. the first model constrained the proposed structural paths between eo → fp and sc → fp as equal between the two nested groups (2 = 988.516, df = 508). in the second model, these paths were allowed to freely estimate (2 = 981.962, df = 506). the difference in chi-square values was 6.554 (df = 2), which is significant at p < .05. for the fo businesses, the eo → fp path reflected a large standard estimate (.883), and t-value (2.511), indicating a significant effect upon firm performance (p < .05). the sc → fp path was not significant ( = .117, t = .335). for the nfo businesses, eo had a large effect on firm performance, with a standard estimate journal of small business strategy volume 21, number 2 37  ( = .958, t = 2.242) indicating a significant effect at p < .05. for nfo businesses, sc also had a large and significant effect ( = .863, t = 2.991) on firm performance (p < .05). table 2: parameter estimates for measurement model indicator standardized estimate t-value* p < .05 eo-1 .289 5.659* eo-2 .467 9.540* eo-3 .463 9.460* eo-4 .489 9.424* eo-5 .684 14.708* eo-6 .581 12.213* eo-7 .616 13.053* eo-8 .480 9.782* eo-9 .439 8.842* sc-1 .192 4.003* sc-2 .165 3.424* sc-3 .272 5.732* sc-4 .237 4.967* sc-5 .237 4.956* sc-6 .758 18.466* sc-7 .729 17.453* sc-8 .769 18.964* sc-9 .794 19.778* sc-10 .551 12.423* sc-11 .470 10.303* sc-12 .491 10.863* (2 = 506.058, df = 176, p-value = .000, cfi = .914, nfi = .876, rmsea =.061)   based upon these results, we conclude that the type of business (fo vs. non nfo) has differential effects on the relationship of sc and eo to firm performance. for fo businesses, social capital (sc) did not have a significant positive effect on firm performance, but for nfo businesses a significant positive relationship was found. thus, h3a is supported. the results however, were different for entrepreneurial orientation (eo): both fo businesses and nfo businesses showed a significant positive relationship between eo and firm performance, with the standard estimates ( = .883 for fo;  = .958 for nfo, p < .05) suggesting that eo is a strong predictor to overall firm performance. given that both effects were found to be significant, but different in value, we could conclude that the type of business only moderates the magnitude of the effect. therefore, h3b is only partially supported. finally, the difference in standard estimates for social capital (sc → fp) in fo vs. nfo businesses (δ = .746) was larger than the difference for entrepreneurial orientation (eo → fp) in fo vs. nfo businesses (δ = .075). this supported the h3c hypothesis of a larger moderation effect of ownership type (fo vs. nfo) for social capital and firm performance than that of entrepreneurial orientation and firm performance. . journal of small business strategy volume 21, number 2 38  table 3: parameter estimates for structural model indicator standardized estimate t-value* (p < .05) eo → fp .915 3.409* sc → fp .403 1.638 eo-1 .291 5.448* eo-2 .464 8.394* eo-3 .463 8.390* eo-4 .489 10.380* eo-5 .684 eo-6 .580 10.061* eo-7 .618 10.524* eo-8 .481 8.612* eo-9 .437 7.907* sc-1 .194 4.020* sc-2 .164 3.389* sc-3 .273 5.686* sc-4 .238 4.941* sc-5 .237 4.920* sc-6 .757 16.342* sc-7 .729 15.642* sc-8 .769 16.781* sc-9 .793 sc-10 .553 11.853* sc-11 .472 9.996* sc-12 .492 10.475* fp-1 .120 3.010* fp-2 .160 4.730* fp-3 .193 (2 = 604.570, df = 235, p-value = .000, cfi = .921, nfi = .878, rmsea = .056) note:   variables eo-5, sc-9, and fp-3 were constructed as reference variables in amos 18.0 and set to a value of 1.0, thus no t-value was calculated. discussion for the overall sample, eo had a significant and positive effect on firm performance. these results support prior research (e.g., kreiser and davis, 2010; runyan et al., 2008; wiklund and shepherd, 2005), identifying eo as an important predictor of firm performance. however, we proposed that firm ownership type might moderate this relationship, considering the value of social capital to the small firm (macpherson and holt, 2007; manev et al., 2005; runyan et al., 2007). the two-group model revealed differences between the fo and nfo groups with respect to the effect of eo and sc on firm performance. although the relationship between eo and firm performance was significant for both groups, parameter estimates for this relationship were higher for nfo businesses. in contrast, the effects of sc on firm performance were only significant for nfo businesses. journal of small business strategy volume 21, number 2 39  thus, for fo businesses, eo is a better predictor of firm performance than sc, perhaps because many fo business owners have been running the business for a relatively short period of time. our data indicate that the average time that fo business respondents had owned their businesses was 14 years, while the average time the business had been in existence was 28 years. many respondents, then, were running businesses started by others (although we do not know if the previous owner was a family member). because the development of sc is a discrete phenomenon, sc created by a previous business owner is likely to be tied to that owner and not necessarily transferable to a new owner (in contrast to a brand name for example). therefore, new firm owners faced with little sc upon which to rely are more likely to adopt eo as a strategic posture than more established owners (see also runyan et al., 2008). in such cases, a strategic posture emphasizing eo would be more important than other strategies (e.g., the creation of social capital). note, however, that we do not suggest that development of social capital is unimportant in these scenarios. rather, a business owner engaged in innovative and risk-taking behavior is likely to be more inwardly focused on his/her business’ growth (runyan et al., 2008) than on establishing social capital ties in a community. in contrast to fo businesses, we found that sc in nfo businesses had a significant effect on firm performance. anecdotal reports point to companies with local managers (e.g., franchise chains, etc.) encouraging or requiring managers to join local trade and business groups (teixeira, 2011) to build relationships with the local community, which results in social capital accumulation. in such cases, building social capital within the community may be a more effective way for nfo managers to increase their firms’ performance compared to fbos. considering the larger effect size of the relationship between eo and firm performance for nfos, it appears that these small business managers are good at creating social capital as well as acting entrepreneurially. implications the study concluded that while the level of a firm’s entrepreneurial orientation (eo) significantly impacts firm performance, the impact of social capital (sc) depends on family ownership. from these findings, a number of implications arise. first, based on ownership type (family-owned versus non-family owned), fo businesses have more success when they adopt an entrepreneurial posture. specifically, new family owners who take over an existing business, and embrace risk to make innovative changes will likely increase firm performance. as mentioned earlier, many of the family-owned business respondents were relatively new owners that were running businesses started by others. being owners, they were perhaps more likely to assess the risk and make strategic decisions to help grow, rather than simply maintain, the business through entrepreneurial endeavors. thus, our results suggest that, especially in the beginning years of ownership, family-owned firms should adopt an eo strategic posture. such firms should note, however, that as tenure of ownership increases, building social capital may become more important to increasing firm performance. next, concerning nfo businesses, our research suggests that, although adopting an eo similarly increases firm performance, establishing social capital within both the business and consumption community is a journal of small business strategy volume 21, number 2 40  critical strategic component. because nfo managers may have less freedom to implement innovative or risk taking strategies (i.e., take on an eo posture), they should seek to establish community capital ties through trade organizations in order to increase social awareness and establish themselves within the community. managers of nfo businesses should recognize that building these relationships might be more important to overall firm performance than acting in an entrepreneurial manner, provided that they are able to effectively leverage this capital into tangible financial gain for the firm. however, nfo owners/managers should also understand that eo is a long-term strategic posture, and that once social ties have been created, adopting an eo perspective may further enhance performance. limitations and future research directions the researchers acknowledge limitations to the study. primarily, the sample (n = 503) was drawn from only 21 small cities within two midwestern states and may not adequately generalize across larger cities, urban areas, or states such as california or new york. also, results may differ when compared to businesses located in a suburban area or shopping ‘mall-based’ setting, given that demographics unique to these environments may influence the impact of eo and sc on firm performance. further research into other areas of the country may allow for comparative studies and provide insight into factors that are similar or different across cities, states, or area types (rural vs. urban). another limitation is that the study considered only the moderating effect of family-owned versus non-family owned businesses, and did not address other potentially important moderators to the model, such as how firm longevity impacts the relationships of sc and eo to firm performance. firms that increase in age and become more established in their respective communities may alter their strategies to become less entrepreneurial and growthoriented and more concerned with maintaining their business and social connections. understanding the moderating role of longevity for future studies may help to identify whether a particular ‘threshold’ of age influences the relationships of eo and sc on overall performance. conclusion our study tested three hypotheses based upon theoretical relationships among eo, sc, and family versus non-family-owned businesses and their relationships to firm performance. hypotheses one and two were based upon literature supporting the positive relationship between sc and eo, respectively, as each relates to firm performance. results of our analysis found support for hypothesis two only. that is, eo was found to significantly affect firm performance, while sc was not. hypothesis three tested these relationships for the moderating effect of family ownership. we expected that a model that allowed relationships among the constructs to covary across groups would yield a better overall fit to the data. for both groups, eo remained a significant positive predictor of a firm’s 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(2004). http://factfinder.census.gov/ (accessed december 3, 2004). dr. jeffrey m. campbell is an assistant professor in the department of retailing at the university of south carolina. his teaching interests include the areas of retail strategy, small business organization and operation, and category management. his research interests include the areas of business strategy, consumer behavior, and social capital created between retail firms. nathan line is a ph.d. candidate in the department of retail, hospitality, and tourism management at the university of tennessee. his teaching interests include hospitality marketing, destination marketing/management, and entrepreneurship. his research interests include destination marketing organizations, sustainable tourism, and strategic orientations of hospitality and tourism firms. dr. rodney c. runyan is an associate professor of retail and consumer sciences at the university of tennessee. his teaching interests include entrepreneurship, small business management, and retail technology. his research interests include small business, downtown retail districts, entrepreneurship, and international retailing. dr. jane l. swinney is an associate professor of merchandising at oklahoma state university. her teaching interests include merchandise analysis and product innovation. her research interests include social capital, community social responsibility, and family business performance. http://factfinder.census.gov/ reproduced with permission of the copyright owner. further reproduction prohibited without permission. si%xtxvy kmperecae. empe.ecateons poir smiae.e. biljsenkss driug poileceks donald r. curtis dillard b. tinsley geralyn mcclure franklin stephen f. austin state university abstract the results of empirical smdies of small and large businesses parallel each other regarding the characieristics of drug policies. drug policies affect organizational performance, including improved productivity and reduced accidents. eaps are an effective approach to drug policies, and ourside contractors are common sources of information and services. pre-employment testing is usuutty combined with other types of testing, but careful aueniion is needed to meet 'egalrequiremems. employees with positive tests may cause difficulties, but, overall, employee morale rises. sinall businesses without drug policies are increasing their competitive risks. an increasing array of laws and regulations requires organizations to institute formal drug policies (humphreys, 1990). small businesses are often exempted from such requirements, but drug abuse is a significant problem in many small businesses (huneycutt & wibker, 1989). nobile (1990) assens that all businesses, even small ones, can benefit from formal drug policies. however, more research is needed. for example, harris and heft (1992)have made a comprehensive review of publications on alcohol and drug use in business, listing more than 125 useful sources. however, their analyses led them to assert that business scholars "...have conducted relatively little research on this topic" (harris & heft, 1992, p. 239). drawing from a nation-wide study, axel (1990) has characterized the drug policy programs of large corporations. to develop such empirical implications for small businesses, this article presents the results of a more recent study that primarily involves small businesses. this study focuses on one region of one state, but its results parallel the results of the large corporations study closely enough to allow generalization. detailed statistics are given because of the lack of research on this aspect of small businesses. inferences are drawn regarding drug policies'bjectives. problem areas, testing programs, employee assistance programs (eaps), and legal aspects. small business study in early 1991, 1000 questionnaires were mailed to organizations in the east texas region between tyler, the nonhern suburbs of houston, and the louisiana state line. the respondents returned 429 usable questionnaires. the president/ceo answered 41.3% of the questionnaires; general/plant managers 29.6%; personnel/human resources directors 21.7%; and 7.4% were 59 table l drug policy status versus industry type percent of respondents in each industry total number responding with or implementing a drug policy in each industry manufacturing 669o 162 oil orchemical 86% 42 retail 47% 36 utility 89% 28 engineering/construction 47% 19 healthcare 61% 18 food production/packaging 60% 15 government 82% 11 restaurant/entertainment 80% 10 professional 40% 10 transportation 719o 7 other 72% 71 completed by other executives. respondents included 237 firms (55%) with a drug policy, 54 (13%) currently implementing a drug policy, and 138 (32%) without any drug policy. table 1 shows the total number of respondents with the percentage by industry that either have a drug policy or currently are implementing a drug policy. table 2 indicates (hat the likelihood of formal drug policies decreases for smaller organizations. 60 table 2 drug policy status versus number of employees number of employees &50 50-100 101-250 251-500 &500 number of firms 127 65 67 90 80 in each group with policy or 37% 66% 72% 86% 96% implementing without 63% 34% 28% 14% 4% chi-square = 117.43039, d.f. = 8, significance = 0.0000 the presence of drug policies is a function of the number of employees. policies of organizations of the 237 organizations with drug policies, 91% had a policy that had been in place for 3 years or less. only 18% of these organizations reported any union influence on their drug policies. table 3 indicates that the most common reason for instituting drug policies was employee security and safety, but many organizations had more than one reason for their policies. larger ones are more likely to seek lower costs/improved productivity than smaller ones, whereas small organizations are less likely to have a drug policy simply because other companies have them. 61 table 3 reasons why drug policies instituted (respondents could report more rhan one reason.) in group percentages total &50 50-100 101-250 251-500 &500 respondents = 237 29 32 40 65 71 reasons employee safety 71% 62% 72% 80% 63% 78% and security lower cost/ 27% 14% 25% 20% 32% 31% improve productivity required by 24% 28% 19% 30% 23% 21% customers/regulators other companies 10% 3% 6% 8% 12% 14% have drug policy curb drug traffic 8% 10% 16% 5% 8% 6% most of these organizations reported more than one result from instituting their drug policies. beneficial results and percentages of the 237 that reported each result are as follows: decreased workplace accidents —49%; increased employee morale —44%; increased productivity~i%; decreased worker compensation claims —33%; decreased absences —30%; and decreased insurance rates —16%. a negative result of decreased employee morale was reported by only 2%. the benefit responses are not listed according to the number of employees because organizations with 500 or fewer employees comprise more than two-thirds of these 237 respondents. compared to the large corporations study (axel, 1990), this regional study can be seen as a small business study. the east texas region has only a few companies of the size considered by the corporations study. (the 11 government agencies of the sample should not unduly bias results.) the benefits listed above for this small business study parallel the benefits (axel, 1990, p. 34) for large corporations: safer work environment —63%; fewer drug problems in the workplace —56%; improved employee morale —54%; and better job performance —43%. the corporations also reported improved quality of applicants —77%; better image in the community —58%; and increased credibility and use of eaps —54%. both small and large businesses must consider these benefits as goals for staying competitive; for example, productivity gains are reported in both studies. of course, these beriefits 62 could be "hawthorne effects," which result from company managers'aking special interest in employees. as axel (1990) notes, questions do exist about the validity of the claims of benefits from drug policies. however, harris and heft's comprehensive literature review (3992) reveals that "pre-employment drug testing... does seem capable of affecting drug use and may provide significant returns to an organization" (p. 260). both the corporations study and the small business study involve large numbers of respondents. in addition, many of these benefits are associated with each other. for example, the small businesses report increases in employee safety/security with decreases in workplace accidents, worker compensation claims, absences, and insurance rates. drug testing both studies report increased employee morale even though 49% of the corporations use drug testing (axel, 1990,), as do 91% of small businesses with drug policies. the difference in testing rates is probably caused by the fact that 28% of the corporations were in the finance and insurance industries, which had a testing rate of only 13%. table i shows few such firms in the small business study. another consideration is that younger employees tend to exhibit more resistance to drug, testing. also, employees are more accepting of drug tests in the south and the midwest, and less tolerant on the east and west coasts (ga)lup organization, 1990,). the small business study was in the south, and the corporation study was a national test that had a little more weight on the north central and south (axel, 1990, p. ix). morale problems may be more serious than indicated. however, harris and heft (1992) found that if drug testing is properly conducted on job applicants, they "...will not be offended by drug screening" (p. 261). in order to fully address drug abuse, pre-employment testing must be combined with other types of testing. blum (1990) asserts that even with pre-employment screening programs "... drug problems do emerge among employees and their family members, the effects of which are not left outside the work site, and show up m eap caseloads even in organizations that pre-employment screen" (p. 17). of the 237 small businesses with drug policies, 82% reported pre-employment testing, 60% testing for cause, 45% random testing, and 16% testing with scheduled physical examinations. table 4 shows the combinations. 63 table 4 types of testing by 237 organizations (9/% with testing but only 87% reported types) scheduled physical 1% pre-employment examinations alone alone 11% random alone 1% with scheduled physicals 2% for cause alone 3% with random 12% with for cause 21% with for cause and random 23% with for cause and physicals 4% with for cause, random, and physicals 9% the small business study also indicated that policies vary when an employee has a positive test. re-test was the policy of 45% of the 237. dismiss on first offense was the policy of 28%; 9% dismiss on the second offense. a case-by-case approach was used by 24%. no data on policies for handling positive tests were given by 19% of the respondents; this number may indicate that these small businesses may have deficiencies in this area. when dealing with a positive-testing employee, 57% of these 237 small businesses reported no problems with the employee; 9% did have problems. another 17% did not respond to the question about such problems; this may indicate a reluctance to admit any problems. only 17% reported no positive test results. when asked if they thought that other companies were hiring their employees who had failed drug tests, 3% said "yes," 12% "no," and 74% "not sure." axel (1990) reports that 92% of the corporations use pre-employment tests, usually combined with other types (e.g., 74% also use "for cause"). overall, 12% of them had been challenged in courts regarding drug tests, and about 24% were in arbitration. most, however, have dealt with only one or two cases. 'the newness of most drug testing programs and the focus on applicant testing may help explain why relatively few firms have faced legal cr v"rontations to date" (axel, 1990, p. 35). harris and heft's (1992) comprehensive review found that properly conducted urinalysis gives few, if any, false positives and that "...despite the number of court cases involving drug cases, many of these have been decided in favor of the organization" (p. 261). eap usage in the small business study, 24% of 237 with drug policies refer employees to counseling, including some of the organizations that dismiss on first offense. either internal or external 64 eaps are used in substance abuse matters by 62%. an inference is that many companies allow employees to enter the programs before they have positive tests. the availability of eaps for substance abuse did vary according to the number of employees. only 24% of organizations with fewer than 50 employees had them, compared to 38% with 50 to 100 employees; 58% with 101 to 250 employees; 70% with 251 to 500 employees; and 89% with 500 or more employees. the large corporations study found that 76% of the companies with drug testing and 58% of the non-testing companies had eaps. it attributes the rise in eaps to the rise in illegal drug use and the growth of firms that contract eap services to businesses. "a majority of the employee assistance programs in this study are of recent origin —53 percent were formed after 1982—and a majority are services provided by an outside contractor" (axel, 1990, p.14). hams and heft (1992) report that nearly all the fortune 500 companies have eaps with 44% internal and 56% external. this use of external contractors is supported by beilinson (1991), who asserts that 70% of eaps are external contractors. the wide use of external eaps by corporations implies that small firms will be able to select professionally qualified eaps from external sources. although eap effectiveness has not been evaluated in a rigorous, systematic study, efficacy is "almost universally accepted" (harris di heft, 1992, p. 255.) parliman and edward (1992) see "strong evidence" that eaps are "highly" effective for substance abuse problems, asserting that eaps are "unequivocally" worth the legal risks (p. 593; 599). blum (1990) asserts, "eaps can... address drug abuse and pmblems related to drug usage if the eap is adequately implemented and integrated into the employee culture, the line management, and the human resource management function of the organization" (p. 16). for such effectiveness, however,"...middle management support is very important during the continuing implementation and program evolution stages" (blum, 1990, p. 15). eaps and personnel some corporation administrators fear that drug testing will damage employee relations (axel, 1990,). morale increases in both the corporations study (54%), and this small business (44%) study should help alleviate such fears. however, employee willingness to use eaps requires their familiarity, trust, and easy access to an eap (harris dt heft, 1992). this implies an effective training program on a firm's eap. in fact, harris and heft (1992) recommend training in the "perils" of drug and alcohol use for all employees because "...coworkers and supervisors may play a crucial role in the extent to which on-the-job substance abuse occurs" (p. 261). effectiveness also requires training'for supervisors in how to identify employees for eap referral (beilinson, 1991). unfortunately, denial of drug problems occurs in drug users, their families, and their co-workers, including some supervisors (blum, 1990). even trained supervisors may "cover up" for employees, so companies must take steps to develop supervisor trust in eap effectiveness and confidentiality (beilinson, 1991). training is especially needed because of legal requirementa. pttrliman and edwards (1992) recommend that in order to prevent invasion of employee privacy, only eap personnel, who 65 must be qualified professionals, should have access to employee records of eap use. such records should be separate from all other records. recent decisions by federal courts assert that businesses can be interested only in drug use that impairs job performance. diem (1992) asserts that in some cases drug tests are not justified by past convictions, off-duty use, one witness to drug use, or even erratic behavior. because erratic behavior can be caused by a number of factors such as family or physical problems, segal (1992) recommends that all employee performance problems be addressed in the same way through established procedures without treating suspected substance abuse in any different manner. any eap mentions must be made in reference to the eap's full spectrum of services, not just its substance abuse services. the confrontation method of encouraging problem employees to use an eap is the most common, and there is insufficient evidence as to its efficacy (harris 4 heft, 1992). such confrontation, moreover, is legally dangerous. care must always be taken so that an employee cannot claim that severe emotional distress resulted from the employer's attempts to induce use of an eap's services (parliman & edwards, 1992). for example, segal (1992) says that reasonable-suspicion testing is desirable but that care must be taken in how it is done. even when an employee is obviously impaired, witnesses and written records are mandatory. segal suggests that an obviously-impaired employee be told of the manager's judgment of unfitness and offered the option of testing to refute this judgment. the recent americans with disabilities act (ada) asserts that it does not protect someone who is currently using illegal drugs but that someone cannot be rejected for employment if he/she is an alcoholic who is noi a current user (halevy, 1992). the ada says (hat drug testing is not a medical test, so drug testing is not as restricted as medical tests. however, records confidentiality is made even more important by the ada. if drug testing reveals some non-drug medical problem, it cannot be used to reject employment. the ada involves all medical-related issues, so "...employers need to be knowledgeable of the ada's restrictions before implementing any medical examination or enforcing a drug or alcohol policy" (halevy, 1992, p, 837). in addition, states are enacting more laws on drug testing, so both state and federal legal knowledge is required (harris gt heft, 1992). implementation by subject firms only 54 organizations in the small business study were in the process of implementing drug policies. one-third of them had fewer than 50 employees, and the overall responses of the 54 as a group do not differ markedly from those of these smaller organizations. their responses are revealing in comparison to those of other respondents. startup problems were similar for both the 237 firms with policies and the 54 currently implementing in tha( approximately 20% in each group reported contradictory information and 20% a lack of information. approximately 10%of both had some union or employee opposition. the 54 implementing were also asked what information they were lacking on drug testing. there were 24% not lacking any information, 44% lacking information on legal aspects, 24% on costs, and 10% on methods. although still developing their policies, 72% had definitely decided to use drug testing. pre-employment testing had been chosen by 67%. only 1% reponed 66 table 5 reasons tttttty organizations developed drug policies (respondents could report more than one reason) respondents (number) currently implementing with a drug a drug policy (54) policy (237) reasons employee safety/security 70% 71% lower cost/improve productivity 57% 27% required by customers/regulators 41% 24% other companies have drug policies 24% 10% to curb drug traffic 24% 8% that they had decided against testing of any sort. also, 39% had decided to use some type of eap with 13% deciding against any such program. table 5 shows some very interesting findings on why the 54 are implementing drug policies, as compared to the reasons of the 237 with drug policies (from table 3). employee safety/security is the primary reason for both groups. the lower ranked reasons have not changed in rank order; however, significantly more of the currently implementing organizations have set these reasons as explicit goals. the increases in organizations that seek the lower-ranked reasons imply that the value of drug policies for improving company capabilities is increasingly recognized and sought. the large increase in those seeking improved lower cost/higher productivity implies improved competitive capabilities. as noted above, the corporations study parallels these results, and it also reveals additional benefits (axel, 1990,). these results may lead to strategic disadvantages for small businesses without drug policies. no drug policies there were 138 respondents without a drug policy and making no effort to develop one. of these, 80 (58%) had fewer than 50 employees; thus the responses strongly reflect small business attitudes. overall, 67% had not even considered a drug policy, and 29% were unaware of what other companies were doing about drug testing. only 6% perceived employee opposition to drug testing. however, 48% were not sure of employee attitudes, and 26% saw employees as undecided. union influence was present in only 5%. table 6 presents the reasons given by these 138 organizations for choosing to do without a drug policy. although costs are a concern, most of the reasons relate to acquiring information 67 table 6 reasons for no drug policy (/38 responding organizations) costs z7% lack of information 17% legal concerns 25% employee rights 16% no interest 22% no present problems 13% lowering employee 20% morale about drug policies (i.e., legal concerns, employee rights, and lack of information). the results of this study should lessen the concern about lowering employee morale because 44% of the small businesses with drug policies have increased employee morale versus 2% with lowered morale. the corporations study reported improved employee morale in 54% (axel, 1990). such findings should help overcome any lack of interest regarding drug policies, especially in view of the reports of increased productivity and decreases in accidents, absences, and insurance rates. the "no present problems" response cited by the respondents in table 6 needs further consideration. first, small businesses should be seeking the improvements implied by the results for the organizations with drug policies, which are reported by both corporations and small businesses. second, there is the question of people applying to an organization because they know that they will not be tested for drugs. of the 138 small businesses without a policy, 73% said that they did not think that their "no testing" status would attract applicants who were trying to avoid drug tests. only 4% thought that it might happen. also, 78% did not think that they were hiring any applicants who had failed drug tests given by other organizations. this view was reported by 84% of those with fewer than 50 employees. such views do not seem realistic in light of substance abuse conditions in the united states (gleason, veum, & pergamit, 1991; harris & heft, 1992). implications virtually all the businesses in the regional study are smaller than those in the corporation study (axel, 1990), but the results of the studies parallel each other. therefore, several implications can be reasonably drawn. in both studies the respondents with drug policies think that these drug policies have provided positive benefits such as increased employee morale. the benefits directly related to competitive strength are also being recognized, as shown by the increased percentages which seek to lower costs/improve productivity through their drug policies. in addition, recognition of the benefits of drug policies is implied when an organization's customers or regulators require it to institute drug policies. table 6 indicates that information about the benefits and the characteristics of drug policies need to be better communicated. the 138 smaller businesses without drug policies do not have appropriate levels of interest in drug testing. three-quarters of them do not think that their "no test" policies have led them to hire people who want to avoid drug tests. drug policies, however, seem to result in better quality job applicants for large corporations (axel, 1990,), and only 17% of the small businesses reported no positive results from their drug tests. this may imply that applicants who are lower quality or drug test failures will eventually be employed by small organizations without drug policies. 68 drug policies do not seem too complex for small businesses to implement, and 47 of the organizations with fewer than 50 employees are doing so. eaps are an appropriate approach for small businesses to address drug policies, and 62% of the 237 with drug policies use internal or external eap services in drug abuse matters. outside contractors are a likely source of valuable aid, especially in view of the reported majority of the corporations that use outside contractors for eap services on drug matters (axel, 1990,). the problem of employee opposition is significant enough to warrant special attention when developing drug policies. proper implementation should not cause undue problems with employees, especially when first-line supervisors are well trained and trust eap effectiveness. problems may be more likely with younger employees or on the east and west coasts (gallup organization, 1990). small businesses which move now to develop drug. policies may gain an advantage by integrating such policies into their organizational cultures before the "younger generation" constitutes a significant percentage of their employees. both studies seem to indicate difficulties with employees who have tested positive. therefore, all company procedures and legal requirements need careful attention; therefore outside contractors for eap services may be especially helpful to small businesses. lack of information, including legal aspects, is a problem area for some small firms. legal requirements can pose problems for any business on the issues of drug testing, especially because of varying state laws, the americans with disabilities act, and federal court decisions that reflect fourth amendment privacy rights for employees. for example, table 5 shows that some companies have an objective of curbing drug traffic. what are the legal implications of holding this objective in view of court rulings that reject off-duty drug use as a sufficient reason for drug testing? drug testing "...in the workplace per se is not intended to outlaw the use of drugs outright" (liem, 1992, p. 57). in any situation the key requirement is for management to focus on the employee's level of job performance. conclusion because of the lack of research on small businesses and drug policies, this article gives relatively detailed statistics. dividing these statistics into "with policies," "currently implementing," and "without" will assist future analyses of the processes by which drug policies move into small businesses. drug policy requirements are being increasingly extended and clarified, especially with federal government involvement (aalberts & rubin, 1991).eventually, requirements for instituting a formal drug policy may be extended to include all small businesses by legal mandates or by business arrangements. the benefits, problems, and characteristics of drug policies in small businesses parallel those of the large corporations study (axel, 1990). these empirical studies imply that drug policies can yield benefits for organizations of all sizes. such benefits seem to foster competitive advantage over businesses without drug policies. small businesses that ignore formal drug policies would seem to be at increased competitive disadvantage. 69 references aalberts, r. j., & rubin, h. w. (1991).court's rulings on testing crack down on drug abuse. risk management, 38(3), 36-41. axel, h. (1990). corporare experiences with drug testing programs. research report dt 941. new york: the conference board. beilinson, j. (1991). are eaps the answer? personnel, 68(l), 3-4. blum, t. c. (1990).the presence and integration of drug abuse intervention in human resource management. business insights, 6(2), 8-17, 35. gallup organization. (1990). willingness to take a pre-employment drug test. saddle brook, new jersey: accountants on call. gleason, p. m., veum, j. r., & pergamit, m. r. (1991). drug and alcohol use at work: a survey of young workers. monthly labor review, l l4(8), 3-7. halevy, a. k. (1992). drug and alcohol policies: ada concerns. texas bar journal, 55(9), 836-839. harris, m. m., 8z heft, l. l, (1992). alcohol and drug use in the workplace: issues, controversies, and directions for future research. journal of management, 18(2), 239-266. humphreys, r. m. (1990).substance abuse: the employer's perspective. employment relations today, /7( i ), 45-82. huneycutt, a. w., &. wibker, e. a. (1989). managerial responses to drug abuse in the workplace. journal of small business management, 27(2), 63-67. liem, s. a. (1992). the fourth amendment and drug testing in the workplace: current u.s. court decisions. labor law journal, 43 (i), 50-57. nobile, r. j. (1990). the drug-free workplace: act on it! personnel, 67(2), 21-23. parliman, g. c., & edwards, e. l. (1992).employee assistance programs: an employer's guide to emerging liability issues. employee relations law journal /7(4), 593-602. segal, j. a. (1992). to test or not to test. hrmagazine, 37(4), 40-43. 70 the small business institute directors'ssociation sbida 1991-92 officers president vice-president publications gwen fontenot janet bradshaw 10030 glenrio lane center for business & dallas, tx 75229 economic services (214) 9791712 office troy state university (214) 904-0808 home bibb graves 107 tsu fax (214) 979-1761 troy, al 36082 (205) 670-3524 office president-elect (205) 566-1159 home lynn hoffman fax (205) 670-3636 department of management university of northern colorado secretary-treasurer greeley, co 80639 david adams (303) 351-2088 office marywood college fax (303) 351-2500 department of business and managerial sciences vice-president programs 2300 adams avenue robert a. kemp, c.p.m. scranton, pa 18509 department of management (717) 348-6274 office drake university fax (717) 348-1817 des moines, ia 50311 (515) 271-2807 office past president (515) 223-6504 home don bradley, hi fax (515) 271-2001 marketing & management dept. university of central arkansas conway, ar 72032 (501) 450-5345 office (501) 329-2403 home ~u dq b s i o ef dc strategy about the authors a pnrctical appmach to determining when to expand and when to stabilize sales paul dunn (ph.d., university of arkansas) is distinguished professor of small business and entrepreneurship at northeast louisiana university, monroe. he has served as president of ssbia and sbida. dr. dunn writes a weekly column, "small business questions and answers," for the newstar world, directs the northeast louisiana university sbi and sbdc, and serves on the editorial board of the journal of business and entrepreneurship. leo r. cheatham (ph.d., university of arkansas) is associate professor of finance at northeast louisiana university. he was a research economist with mississippi state university for 13 years. camle cheatham (c.pa., ph.d., university of arkansas) is professor of accounting at northeast louisiana university. dr. cheatham serves on the editorial boards of the journal of business and enrrepreneurship, delta business review, and the woman cpa. she is the author of cost management for profit cemers. reward stnttegies for ftanchising organizations dr. robert t. justis (d.b.a., indiana university) is professor of management and director of the international franchise center at louisiana state university. his latest book (co-authored with richard judd) is franchising (southwestern publishing co.). dr. pt.ng s. chan (ph.d., university of texas, austin) is associate professor of management at california state university at fullerton. his research interests include strategic management, franchising, and entrepmneurship. dr. jim werbel (ph.d., northwestern university) is associate professor of management at louisiana state university. his r search interests include career management and compensation. factors that restrict exports ofsmall and medium-sized firms: the role ofexport financing dr. charlie e. mahone, jr. (ph.d., university of michigan, ann arbor) is associate professor of international business at the howard university school of business. his research interests include management and international activities of small and medium-sized companies. strata'bout the authors (int.) a longitudinal study of the utilization of production management techniques by small electronics firms stanley e. fawcett (ph.d., arizona state university) is assistant professor of logistics and international management at michigan state university. his research interests include logistics, manufacturing strategy, and international operations. john n. pbarson (ph.d., georgia state university) is associate professor of operations management at arizona state university. are small businesses falling through the gaap? janet l. dye (c p a., ph.d. candidate in accounting). she has presented at several international and national conferences in the areas of small business and accounting. james e. carland (c.m.a., c.pa., ph.d., university of georgia) was co-founder of two microcomputer software development companies. his experience includes management in banks and in the georgia sbdc. he and jo ann c. carland have co-authored a textbook on small business management. jo ann c. carland (ph.d., university of georgia) is a cdp and was co-founder of two microcomputer software development companies. entrepreneurial opportunities in the wholesale sector: a predictive model david a. baucus (ph.d., indiana university) is a faculty member at the university of kentucky. his research interests include executive compensation, franchising, and risk analysis. john c. palmer (ph.d. candidate, university of kentucky) is a faculty member at sangamon state university. his research focuses on innovation in small businesses. donald gudmundson (ph.d. candidate, university of kentucky) is a faculty member at the university of wisconsin-oshkosh. his research focuses on strategic decision-making in small businesses. s y journal of small business trateg editor gerald e. hills bradley university associate editors bruce h. kemelgor university of louisville eugene fregetto university of illinois at chicago managing editor james foley bradley university editorial assistant elizabeth knapinski bradley university sarah gangl bradley university editorial review board semra ascigil middle east technical university joe r. bell university of arkansas at little rock david brennan university of st. thomas shawn carraher indiana wesleyan university eugene fregetto university of illinois at chicago joseph geiger university of idaho armand gilinsky sonoma state university michael goldsby ball state university michael harris east carolina university david lyn hoffman metropolitan state college of denver jeffrey hornsby kansas state university cathleen (folker) leitch wilfrid laurier university robert lussier springfield college matthew r. marvel western kentucky university brian mckenzie california state university, east bay thaddeus mcewen north carolina a&t state university abbas nadim university of new haven john e. prescott university of pittsburgh neal pruchansky keene state college jeff shields university of southern maine leo simpson seattle university matthew c. sonfield hofstra university harriet stephenson seattle university jude valdez university of texas at san antonio dianne welsh university of north carolina — greensboro special thanks to miao ren for her high quality editorial work, commitment, and devotion to creating a great product. thanks also to james foley and jennie hale that, through their excellent leadership, have ensured a high quality publication. copyright 2015 small business institute issn 1081-8510 editor associate editors managing editor editorial assistant editorial review board 404 not found ~ g the small business institute directors'ssociation sbida 1991-92 officers president vice-president publications gwen fontenot janet bradshaw 10030 glenrio lane center for business & dallas, tx 75229 economic services (214) 979-1712 office troy state university (214) 904-0808 home bibb graves 107 tsu fax (214) 979-1761 troy, al 36082 (205) 670-3524 office president-elect (205) 566-1159 home lynn hoffman fax (205) 670-3636 department of management university of northern colorado secretary-treasurer greeley, co 80639 david adams (303) 351-2088 office marywood college fax (303) 351-2500 department of business and managerial sciences vice-president programs 2300 adams avenue robert a. kemp, c.p.m. scranton, pa 18509 department of management (717) 348-6274 office drake university fax (717) 348-1817 des moines, ia 50311 (515) 271-2807 office past president (515) 223-6504 home don bradley, iii fax (515) 271-2001 marketing & management dept. university of central arkansas conway, ar 72032 (501) 450-5345 office (501) 329-2403 home b s i qo ch'an strmtef y about the authors service characteristics and yellow pages advertising effectiveness dr. kenny chan is associate professor of marketing at california state university, chico. dr. chan received his m.b.a. and ph.d. from the university of massachusetts, amherst. he has four years of experience in television commercial production and program administration. his research interests are primarily in advertising management and strategies. dr. chan is a an active member of the american marketing association, the association for consumer research, and the american academy of advertising. he was recently selected by the advertising educational foundation as a 1990 visiting professor, and assigned a summer position with the account group at ddb needham worldwide, new york. dr. shekhar misra is professor of marketing at california state university, chico. dr. misra worked for six years in advertising and marketing before entering academia in 1982. he has a ph.d. in marketing from the university of oregon. his research and consulting interests are primarily in marketing and international business. he has published in the journal of advertising, the journal of the academy of marketing science, the journal of business research, and in psychology and marketing, as well as in several conference proceedings. he is a member of several professional associations. don't mistake business plans for planning bill parks is professor of business and director of the small business institute at the university of idaho and president of northwest river supplies, inc., a distributor of paddling sports equipment. philip d. olson is professor of business at the university of idaho. his research interests include entrepreneurship, organization theory and strategy. donald w. bokor is an mba student at the university of idaho. strategy about the authors (cont.) pricing strategies and fee structures in franchising organizations dr. robert t.justis (d.b.a.,indiana university) is professor of management and director of the international franchise center at louisiana state university. sometimes called "the father of franchising," dr. justis has published over fifty articles in journals such as academy of management journal, academy of management executive, journal of small business management, and journal of small business strategy. he is the author of managing your small business (prentice-hall), and his latest book, with richard judd, is entitled franchising (southwestern publishing co.). dr. peng s. chang (ph.d., university of texas, austin) is associate professor of management in the department of management, school of business administration and economics, at california state university at fullerton. his research interests include strategic management, franchising, and entrepreneurshi p. he has published in journals such as academy ofmanagement executive, journal of small business management, and journal of the academy of marketing science. dr. ben kedia (ph.d., case western reserve university) is chaired professor of international business at memphis state university. his research interests include international management and small business strategies. his articles have appeared in journals such as academy of management journal, columbia journal of world business, and handbook of business strategy. marketing strategies for small service businesses: applications of expectations/performance gaps professor timothy wilson teaches marketing and marketing theory courses at clarion university. his research interests include the areas of business development, industrial marketing applications, and service satisfaction implications. he actively consults with small businesses; he is a principal consultant in michigan tech's bureau of industrial development programs and is a member of the incubator advisory board associated with the small business development center at clarion university. mr. james hainault is manager of business development in the bureau of industrial development at michigan technological university. in this position his responsibilities are threefold: he manages and provides consulting services to entrepreneurs; he manages the small business institute program, and he designs and offers training programs to the business community on michigan's upper peninsula. strategy about the authors (cont.) assessing the value of professional practices dr. john b.wallace is associate professor of management and director of the small business institute at marshall university. he was for 12 years the head of research in management development for the international labor organization, based in geneva, switzerland. his ph.d. was granted by the university of florida in economics and business administration, and he has published widely in the field of cost-effective approaches to management development. mr. george d. stollings is president of his own consulting firm specializing for the past five years in business valuation and performance improvement of professional practices. he has a degree in dentistry from west virginia university, managed his own dental practice for over 10 years, and served on the faculty of the wvu dental school. he has published in journals such as dental economics and dental management. the benefits of the sbiprogram: perceptions of former students dr. gwen fontenot is a marketing researcher and strategist with the southwest regional office of ernst & young in dallas. dr. fontenot earned her ph.d. in marketing from the university of north texas in 1988. she was an assistant professor of marketing at the university of northern colorado and an adjunct professor at dallas baptist university. dr. fontenot has served as director of both small business institute programs and a small business development center. she is currently the national president of the small business institute directors'ssociation. ms. michelle haarhues is a graduate of the university of northern colorado with a bachelors degree in marketing. ms. haarhues is currently pursuing a masters of business administration at the university of north texas. dr. lynn hoffman is associate professor of management and management department chair at the university of northern colorado (unc). he received his ph.d. from the university of iowa. dr. hoffman has been the director of the small business institute program at unc for 12 years. he is currently serving as national president-elect of the small business institute directors'ssociation. st*rate gy about the authors (cont.) strategic planning and the family firm: an sbi consulting perspective dr. charles h. matthews is assistant professor of business policy and small business institute director at the university of cincinnati. dr. matthews earned his ph.d. in management from the university of cincinnati, 1990. he has published in the journal of small business management and has presented numerous papers at professional meetings, nationally and internationally. getting started overseas: eximbank working capital financing for small business exporters toni lester is an assistant professor of business law at babson college in wellesley, massachusetts. her areas of research include international law and trade, with a special focus on export finance. she was formerly an attorney in the office of the general counsel for export-import bank of the united states and has her undergraduate and law degrees from georgetown university. sãk wi x'wk a practical approach to determining when 7o expand and %hen to stabilize sae.ks phnl dorm dr. leo cheatham dr. carole cheatham northeast louisiana university abstract a successful young firm experiencing rapid sales growth can suddenly encounter declining profits due io decreasing contribution margins because of production capacity limitations. expansion is noi an automatic solution because ii increases fixed costs and raises ihe first breakeven point. this paper is designed to provide strategies for planning for the combined effects fixed costs, variable costs, revenues and sales will have on profits if additional sales growth is attempted. rapidly increasing variable production costs signal the need io consider expansion, bui produci demand strength and life cycle stage affect the decision. ei rher of these can be responsible for declining coniribuiian margins resulting in lower than aniicipared profits at higher sales levels. because of higher fixed costs caused by expansion, ihe business cannot return ro sales levels thai were profitable before the expansion. why is it possible for a prosperous small business experiencing rapid sales growth to begin encountering declining profits even though sales continue to increase? traditional breakeven analysis illustrated in exhibit 1 implies a path of "smooth sailing" once a firm is able to generate sufficient volume to reach the critical "bieakeven" hurdle. in fact, this concept has been a major source of deception because it implies that the only requirement for an increase in profits is an increase in sales. unfortunately, the inexperienced entrepreneur tends to view the sales volume/profit relationship in this simplistic manner, forgetting about two key limitations of linear breakeven analysis. total revenue is depicted as a straight line based on the assumption that prices of products sold do not change regardless of volume, while total cost is shown as a straight line based on the assumption that variable cost per unit sold is constant and is not affected by the level of sales (tt). i exhibit 1 comparative profit implications of traditional linear breakeven analysis vs. nonlinear .analysis revenue/costs traditional linear breakeven analysis total revenue profits l breakeven point total costs i total variable costs total fixed costs losses 0 quantity revenue/costs nonlinear breakeven analysis total costs m loss breakeven ~ total revenue profit loss breakeven total fixed costs 0 quantity 2 economists'ersion of breakeven analysis goes to (he other extreme regarding these variables with the assumptions that both selling price and variable cost per unit are constantly changing as sales volume changes. this results in revenue increasing at a decreasing rate and total cost increasing at an increasing rate as sales increase, producing two breakeven points as shown in exhibit i. price declines occur because of the "law of demand," which states that price reductions are necessary to generate more sales (5). variable cost per unit eventually rises because fixed assets, reflected in fixed costs, eventually limit production efficiency and capabilities (5). at least the nonlinear analysis approach recognizes the possibility that profits can decline as sales increase; and, if sales are pushed too far without increasing fixed assets, losses rather than profits are produced. first hand experiences of many small business operators who have had to contend with this phenomenon are a testimony to the fact that there is probably some validity to this concept. both approaches focus on the key relationship between fixed costs and "contribution margin," defined as the difference between selling price and variable cost per unit. linear analysis is based on the assumption that contribution margin is constant and each unit sold after reaching breakeven will contribute the same amount of revenue dollars. on the other hand, nonlinear analysis is based on the assumption of a constantly changing contribution margin which eventually begins to decline and finally becomes negative if sales are pushed too far. failure to consider the possibility of declining contribution margins, once profit begins, is a common problem among small business entrepreneaurs. the building blocks oif a planmng tooi. a review of the literature reveals an extremely limited mpertoire of tools to aid small business managers in planning for the effects increases in sales will have on profits. while the concepts used in nonlinear breakeven analysis can explain a common situation faced by many growing young firms, few attempts have been made to incorporate them into techniques suited to small business applications. di pietro and shawhney's study is one of a few which even considers the possibility of two breakeven points (4). results of their study revealed failure rate's to be much lower among managers who recognized that they were operating under economic constraints which confined their profitable production level to a limited range of output between two breakeven points. using concepts provided by nonlinear analysis, these authors explain the importance of management response to changes in economic climate. they also observed that management competency, reflected in the ability to recognize and adjust for changes in economic variables affecting sales or costs, tends to improve with a manager's experience. evidence in the literature also leaves little doubt that changes in general economic conditions affect the sales volume of most businesses. typical findings ate reflected in studies such as the one conducted by rao, kreighbaum, and hawes in 1983 (8). their survey of small businesses showed 67% experienced sales decreases during recessions. only 16% reported "no effects," while 17% observed sales increases. most of the firms reporting sales increases were among small manufacturers producing products that either improved efficiency or cut costs. 3 findings of both of these studies suggest that the small business manager encounters some predictable relationships between variable costs, prices, fixed costs, sales volume, and the resulting profit. most firms facing a recession can expect sales volume to decline. di pictro's study implicitly recognizes the role of the contribution margin and its relationship to fixed costs as sales volume changes. however, this study revealed that only experienced small business managers have been able to use this information, and they apply it only through a "seat of the pants" approach. one breakeven point or two? differences between the conflicting assumptions concerning price and variable cost behavior must first be reconciled before a practical tool can be provided for the small business entrepreneur. ln the everyday operating environment for most firms, these economic constraints exhibit behavior patterns representing combinations of the characteristics of the opposing views expressed in the two theories. eventually of a lower revenue line a( start up, the typical small business does not have to reduce prices as a prerequisite to sales increases. most new firms are supplying such an insignificant share ol'he total product market that their production level cannot affect price. studies of the role of the stage in a firm's life cycle also reveal another reason that a start up firm does not have to contend with declining product price (6). young firms which do succeed do so because they offer products and innovations which are readily accepted in the marketplace. at start up'nd during early growth stages, the new venture is operating with limited competition because it is offering something different. during these stages there is no price competition because potential competitors have not had time to begin copying the successful formula; and the new firm enjoys a period of time during which its product is successfully differentiated, thus avoiding price competition (6). to assume that a new firm can produce unlimited quantities of a product and not have to deal with declining product price is an erroneous assertion that can lead to incorrect planning decisions and overexpansion. unless the new firm has some type of monopoly protection, which is highly unlikely, it will eventually have to contend with competition from other firms offering similar products or services. exhibit 2 illustrates the most likely pattern for a small business revenue curve. demand for products allows sales increases without altering price up to some, usually unknown, limit at which the product market becomes saturated and price reductions become necessary to push sales to a higher level. hank's classification and analysis of the stages in a flirm's life cycle support the logic of the product demand and resulting revenue curve shown in exhibit 2 (6). he identifies the five stages of (l) start up, (2) expansion, (3) consolidation, (4) revival. and (5) decline. during the start up and expansion stages, the entrepreneur does not have to be concerned with product price. major and frequent product innovations occur in the stan up stage and incremental innovations continue through the expansion stage. however, the consolidation stage occurs because innovations that 4 exhibit 2 shape of the revenue schedule for a typical small business unit price ($) product demand curve for a small business begin reducing price to increase sales 0 quantity total revenue total revenue from product demand projected actual breakaway point 0 quantity 5 keep a firm abreast or ahead of competition become scarce. boag and dastmalchian discovered that, in addition to innovations, greater contact with customers together with knowledge of their needs is one way to gain a non-price competitive advantage (3). however, even this strategy only extends the expansion period. because of an inability to compete through non-piice means, price competition becomes the strategy for maintaining and increasing sales volume. the revival stage occurs for those firms which successfully regroup and either find a new way to market a product or simply move on to other products. however, even at this stage, prices do not return to their old levels. to avoid the predicament of having to competitively price a product, a firm has to be successful at market segmentation and product differentiation. this task becomes increasingly difficult as the firm and product mature. the breakaway point concept shown in exhibit 2 identifies the location on the revenue curve at which the assumption of constant price of linear breakeven analysis ends and the assumption of required price mduction to stimulate sales begins. while small businesses face demand and sales revenue schedules with patterns such as those shown in exhibit 2, the sales level at which the "breakaway point" on the revenue line occurs will shift over time, depending on the extent and implementation of available product innovations and the life cycle of the firm. for a start up firm in a new industry the breakaway point may be so far up the revenue line that it can be ignored. as product markets become saturated and innovations become scarce in a maturing industry, the breakaway point begins to drop to lower sales levels. sales levels at which prices were constant before result in price competition and lower total mvenue as a consequence. tyebjee and others trace the stages of marketing strategies in growth firms and provide evidence of another reason that prices may be voluntarily reduced to achieve higher sales levels ( io). small manufacturers catering primarily to retail firms at start up become enticed by high volume sales to wholesale distributors. however, price per unit is reduced while the firm is often forced to close the door on sales to retail firms to prevent conflicts of interest. with the lower mark-up on cost, the firm now must sell a larger volume just (o survive. inevitability of rising production costs production costs do not rise just because prices of labor and/or materials have increased. these costs also rise because of inefficient use of variable input factors. inefficiency sometimes occurs because a business attempting to increase sales tries to produce more than the capability of plant and equipment. fixed assets impose capacity limitations, and a firm experiencing high sales growth can tax the capabilities of these assets as it attempts to get more production by hiring more workers and purchasing more materials. 6 achieving higher sales levels eventually requires a plant expansion. blue and others discuss the effects of expansion on total costs using breakeven concepts (2). because of higher fixed costs, total costs increase. each successive expansion and accompanying increase in fixed costs moves the linear breakeven point to a higher sales volume. a major negative implication of an expansion is that a firm must constantly maintain sales at new levels. the firm cannot go back and produce at lower levels which were profitable before the expansion because of the increases in fixed costs resulting from the expansion. fixed assets not only limit maximum production capacity and partially determine the minimum sales level necessary to reach breakeven but also dictate an efficient production range. for example, a 20,000 square foot grocery store could not be operated very efficiently with only one employee. on the other hand, there is a limit to the number of employees and amounts of groceries which will continue to produce sales increases without expansion to larger facili(ies. for any size grocery store there is an efficient sales volume range. as shown in exhibit 3, total cost is partially a function of efficiency created by mixing labor, merchandise, and facilities in compatible combinations. continued attemp(s to increase sales by adding more workers eventually causes costs to increase more rapidly than production and sales. using changes in cost accounting data as fnformation signals entrepreneurs faced with the inevitability of rising variable costs, as attempts to increase sales strain limits of production facilities, can determine when cost changes occur and use this information for expansion planning purposes. exhibit 3 illustrates a very simple and practical approach for applying this economic concept using readily available accounting data. actually, the tabular data shown in the exhibit is the type of worksheet that can be prepared to determine how sales increases are affecting variable costs and what effect this is having on profits. the diagram in the exhibit is simply a graphic presentation of the figures from the table. the primaty function of the graph is to illustrate the purpose of procedures used in the table as they relate to the economic theory being applied. for management purposes only the table is needed because it provides the sales level information that enables entrepreneurs to determine when they must begin considering either expansion or sales stabilization. the figures on the worksheet am accessible from accounting records although additional analysis may be required to break down fixed and variable categories for overhead and for selling and administrative expenses. companies which prepare performance reports based on flexible budgets (budge(s adjusted to the level of production) will have the overhead broken down into fixed and variable categories. likewise, companies that compute spending or budget variances for variable overhead will have the breakdown. for companies which do not have overhead categorized as variable or fixed, or for selling and administrative expenses which are no( broken down, the company's accountant can obtain this information by the "account sort" method. the account sort method means that the accountant examines the account and determines whether the expense is variable or fixed by the way it behaves. the information should be assembled for the worksheet each time a significant sales increase occurs. once an initial determination of the fixed and variable categories is made, adding new data to the worksheet is a routine task that can be performed easily. 7 1 exhibit 3 acme company information points revenue/cost dts tgs total revenue @ $1.25 //4 (tr2) f/3 t)t2 total cost total revenue 8 $1.00 (tr1) effects of fixed asset constraints on variable costs and profits of the acme company ¹ ¹ variable total total total revnnwost info. contrib. nbrkets pwdneed x cost per = variable + sited aesenne = prn/ixns points margins unit costs costs (¹ i/unit) 10 100 $ .900 $ 90 $ 100 $ 100 ($90) $ . 10 20 240 .750 180 100 240 ( 40) .25 28 350 .714 250 100 350 0 41 .286 30 390 .692 270 100 390 20 .308 35 470 .670 315 100 470 55 42 .330 40 520 .692 360 100 520 60 .308 44 570 .702 400 100 570 70 t3 .280 50 610 .738 450 100 610 60 .262 56 635 .787 500 100 635 35 .213 60 640 .844 540 100 640 0 f/4 . 156 70 650 .969 630 100 650 (80) dt5 .031 80 640 1.125 720 100 640 (180) k6 -.125 8 such analysis provides management with a useful planning tool that shows them the relationship among sales increases, production inputs, variable cost per unit, and limitations of attempts to continue to increase sales when facilities become inadequate. the sample worksheet in exhibit 3 is based on the assumption that units are sold for $ 1 each and price does not change for all sales levels listed. this revenue schedule is illustrated as tri in the graph. contribution margin, which is the difference between price per unit and variable cost per unit, is a key factor affecting profits. however, as shown by the graph, a higher selling price of $ 1.25 (tr2) would not alter the changing cost schedule which is a function of production efficiency, not product markets. on the other hand, the larger contribution margins with tr2 provide management with additional time to consider the expansion decision. as acme manufacturing company begins operation, it will incur losses due to the $ 100 of fixed costs. at a production level of 100 units it receives a contribution margin of $ .10 ($ 1 price —$ .90 variable cost). the size of the contribution margin increases until a production level of 470 units is reached and variable cost per unit is at its lowest amount of $ .67, producing a contribution margin of $ .33. this pattern of declining variable costs reflects improving efficiency due to favorable elements such as specialization at tasks among workers and so on. however, when production rises to 520 units, variable costs per unit begin to rise and contribution margin begins to decrease. this pattern of decreasing contribution margin will escalate as sales increase due to rapidly rising variable costs. acme will encounter a second breakeven point at 640 units before it reaches absolute capacity of 100%. production at capacity will result in losses of $80 if selling price is $ 1 per unit. prices of labor, materials, and other variable inputs are assumed to be in constant dollars for exhibit 3. this leaves differences in production efficiency as the only explanation for changes in variable cost. this pattern in variable costs is created by limitations imposed by fixed assets. managers of rapidly growing small businesses must especially note the fact that the squeeze on the contribution margin begins before production reaches full capacity. information iptoints and decision signals there are six points on the total cost curve and on the worksheet in exhibit 3, identified as "information points"; these coincide with various levels of sales. poinr pf is the first breakeven quantity. this point marks the location at which profits begin. increasing output will result in increasing profits as long as production efficiency increases. point p2 marks the end of increasing efficiency, identified by the fact that variable cost per unit is at its lowest value, $ .67 for the existing assortment of fixed assets. additional production and sales will result in higher variable cost per unit, causing total costs to begin rising at a faster rate 9 than sales. accounting data would normally not reveal the location of point tg2 until "after the fact" when an actual increase in variable cost per unit is observed as production goes above 470 units. this turning point in the trend can be located in mtrospect from the worksheet illustrated in exhibit 2 but still soon enough to be useful. poinr gt3 identifies the sales level which will result in the highest profit level without expansion. producing more than 570 units will reduce the contribution margin resulting in decreasing total profits. like point ff2, this information point can be identified only after sales have increased above the level for the point. point ff4 is the second breakeven point. increasing production and sales above 640 units will result in operating losses because total costs exceed total revenue if selling price is $ 1. point ff5 is capacity output. no additional output can be produced with the existing assortment of fixed assets. however, variable costs can continue to increase if production increases are attempted. poinr re is in the mgion of declining output. future attempts to produce more will only increase costs. the illustration for the acme company represents a compressed production function in that output changes do occur more gradually for most small businesses, spreading the cost effects shown over a broader range of sales. this compression was intentional for illustration purposes to reduce the calculations necessary to show the effect. in all businesses, the limitations of fixed assets on production capabilities and costs are real and eventually create the contribution margin squeeze illustrated by the worksheet. fortunately for small business operators, this problem begins to reveal itself more gradually than is shown for the acme company. the expansion decision point and response strategies entrepreneurs should be watching for point ff2 once the business has reached the initial breakeven stage at point ffl. this is the point of maximum contribution margin. point 4t3, the sales level maximizing profit, will follow shortly for a firm experiencing sales growth. point ff2 is easily identified by the fact that total variable cost per unit will be lower than at any other sales level. recognition of point tt2 can be referred to as the "expansion iyecision point" for the firm. note that the sales level at which actual recognition occurs will be higher than the sales level producing point 4t2. only after sales have increased to a level high enough to cause variable cost per unit to increase and contribution margin to decline does point ff2 become identifiable. point ff3, the sales level producing maximum profit, may have already been exceeded when this recognition occurs. the declining contribution margin which starts after point 4s2 signals declining production efficiency with existing facilities and the need to consider expanding to larger facilities that would shift the efficient range of the cost curve to a higher sales level. io expansion does not occur automatically just because management realizes the expansion decision point has been reached. expansion increases fixed costs and shifts the initial breakeven point to a higher sales level. a business with low fixed costs can sustain declines in sales volume and still make a profit while the same sales decline would cause losses for firms with larger investments in plant and equipment and higher fixed costs. three options are available at the decision point. strategies include: i) retain current facilities and adjust sales to the level which maximizes profit; 2) plan for expansion but delay financial commitments while continuing to increase sales. this "wait and see" approach allows the business to test product demand strength at higher sales levels and through more highly developed stages of the product life cycle. since plans are ready, once the market has been tested, the plan can be implemented if needed; or 3) expand to larger facilities as quickly as possible so the firm will have the profit and advantages of operating in the efficient production range for the larger facility. this action should only be taken when the evidence indicates that there is no question of the ability to generate adequate sales to utilize the larger facilities. for the young firm blessed with rapid growth, strategy 3 will lead to larger profits if sales continue to increase. if a young firm is operating in a new product market, it is important to move quickly to gain market share before competition strengthens. also, the firm will already be operating near the maximum profit level for existing facilities once the expansion decision point is reached. the contribution margin will be declining as sales increase during the delay period required to bring the new facilities into operation. profits can be increased over the long run by shifting to larger facilities as soon as variable cost per unit shows evidence of increasing. inherent risks of strategy 3 are greater than for either strategies i or 2 because it results in a non-reversible choice. the flow diagram in exhibit 4 illustrates why the first two alternatives do not "close doors" as does strategy 3. exhibit 4 flexibility of choices at expansion decision point two way street one way street strategy 1 strategy 2 strata~3 identify maximum plan for expansion expand immediately profit output level but make no committto gain market share with existing facilities ment. produce at in growing market. and adjust production higher than maximum to that level. profit level to gain irreversible choice market information. 11 lf strategy i is chosen, focus is on identifying point dt3, the sales level that produces the highest profit. this identification requires computation of profit data for various levels of sales to locate the specific point. data should be prepared for small sales volume increments after information point dt2 is reached because contribution margin will begin declining at that point and maximum profit will not occur at sales levels less than those at point dt2. uncertainty concerning strength of product demand is probably the main reason for choosing strategy 2. this strategy entails a testing of market strength without having to choose the nonreversible course of strategy 3. however, management must be aware of profit sacrifices since profits will decline with increases in sales as long as existing facilities are used. attempts to push this strategy too far will result in losses, which may occur under some circumstances before capacity is reached. strategy 2 should be considered only as a temporary choice to gain market information before selecting either strategy i or 3. market assessment at the expansion decision point while most expansion decisions of the new firm can be based on the assumption of constant selling prices, management must not forget that at some sales level prices may have to be reduced to increase sales. instead of a linear revenue line, the breakaway point may occur, causing a lower total revenue curve, as discussed earlier in this paper. before choosing the course of expansion in strategy 3, small business entrepreneurs must carefully assess the market demand for their products to determine if moving to a larger sales volume will place them at a sales level where they must engage in price competition to increase sales. if this occurs, the contribution margins will be lower, resulting in lower than anticipated profits. overexpansion not only exposes the small business to the risks created by a higher breakeven point but also places the firm in a position from which it is more likely to have to compete on the basis of price because it has to maintain a larger sales volume. exhibit 5 shows why failure to correctly identify the breakaway point on the revenue line is a serious oversight. if the acme company decides to implement strategy 3 and build larger facilities so that it can continue to increase sales and do so efficiently, the total cost curve will shift as shown in exhibit 5. acme makes the decision based on the assumption that a price reduction will not be necessary to generate the additional sales. based on this assumption, management realized that profits may drop at first because of the effect of additional fixed costs due to purchases of plant and equipment, but it expects higher profits eventually because the spread between selling price and variable costs is greater for the larger, more efficient size plant. this efficiency improvement is reflected in the distance between information point dt3 and the projected total revenue line directly above those points for the respective cost lines for each size facility represented in exhibit 5. 12 exhibit 5 implications of stabilization /expansion revenue/cost 14 12 projected breakaway projected point total revenue 10 0 actual revenue f 6 c ual total costs, new breakawa point e 3 a profit 4 3 total costs, old 0 0 14 sales level there are two pitfalls associated with this expansion. acme must now produce at higher sales volume just to make a profit. breakeven points for existing facilities are a and b and profits can only be produced between these two sales levels. for the expanded facilities, assuming constant prices, management expects the projected breakeven points to shift to c and d, producing a larger profit range with larger profit margin potential. note that due to higher fixed costs, acme will incur losses if a recession or other event causes its sales to decline below level c. at present, acme can actually maximize profits by producing below this level. to be successful with the expansion, sales must increase enough to reach the efficient operating range of the larger facilities. in the illustration shown, a large increase in sales is necessary just to make as large a profit as the firm can produce with the smaller facilities already in use. the second pitfall which acme's management overlooked with their assumption of constant price is that of smaller contribution margins due to reduced prices required to sell increased production. since contribution margin is the difference between selling price and variable cost, declining prices will reduce the margin and total profit at the higher sales volume with the expanded facilities, will be much lower than anticipated. in fact, exhibit 5 illustrates that profit potential is no grgater than with existing facilities, but the firm must almost double sales just to make as much profit as it would if it did not expand. actual second breakeven point for the expanded facilities becomes f rather than d, so the range of sales between which profit can occur is e and f, which is slightly less than the c and d sales range projected. 13 exhibit 5 also points out why most small businesses should select strategy 2 when the expansion decision point is reached. operating at sales levels above point ds3 of maximum profit with current facilities provides a test of product markets for higher levels of sales before expanding. if acme attempts to push sales above this point with existing facilities, it begins to encounter price competition and is informed of the fact that the total revenue line will take the shape shown and will not continue as a straight line. the enuepreneur will discover that there is a size niche where it has been successfully operating, and it should maximize profits by remaining at that size. the firm may have a sufficient number of customers who prefer acme's products and services and are willing to pay the same or higher prices than those charged by competitors for substitute products. however, there are not enough new customers with this same perception of the product. to generate additional sales requims acme to engage in price competition. this lowers contribution margin on all sales because the company will also have to lower prices for the old, faithful customers who would have paid more for the products. summary and application possibilities traditional breakeven analysis oversimplifies cost and revenue behavior by ignoring changes in fixed and variable costs and selling prices. on the other hand, the economists'urvilinear breakeven analysis assumes these variables change constantly and is tlifficult to apply in a practical situation. this paper presents a middle-of-the-road approach to breakeven analysis that more accurately reflects the reality faced by most small businesses. moreover, it illustrates how small businesses can assemble the necessary data to assess their position. rather than just identify one or even two breakeven points, a business person can determine six strategic information points including i) an initial breakeven point, 2) the point where variable cost per unit begins to increase, 3) the point of highest profit without expansion, 4) a second breakeven point beyond which losses will result if production is increased, 5) maximum capacity without expansion, and 6) the region of declining output. faced with increasing sales, a small business operator can use one of three strategies: i) elect to retain existing facilities and adjust sales to the level which maximizes profits, 2) plan for expansion but delay financial commitments while continuing to increase sales ("wait and see"), or 3) expand to larger facilities immediately. with proper market assessment and knowledge of his or her six information points, a small business manager can determine the strategy which will maximize long run 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"decision thresholds and developmental stages in the expanding business," journal of business and enrrepreneurship (march, 1989), 20-29. 14 3. boag, david a., and ali dastmalchian. "market vulnerability and the design and management of the marketing function in small firms," journal of small business management, 26 (october, 1988), 37-43. 4. di pietro, william, and banshi sawhney. "business failures, managerial competence, and macroeconomic variables," american journal of small business, 2 (october, 1977), 4-15. 5. ferguson, c. e. microeconomic theory (homewood, illinois: richard d. irwin, 1966). 6. hanks, steven h. "organization life cycle: integrating content and process," journal of small business strategy, i (february, 1990), 1-12. 7. rice, g. h., and r. e. hamilton. "decision theory and the small businessman," amehcan journal of small business, 4 (1979), 1-9. 8. rao, c. p., mark a. kreighbaum, and jan m. hawes. "international market involvement and the business cycle," journal of small business management, 21 (october, 1983), 31-37. 9. stephenson, harriet b. "the most critical problem for the fledging small business: getting sales," american journal of small business, 9 (summer, 1984), 26-33. 10. tyebjee, tyzoon t., albert w. bruno, and shelby h. mcintyre. "growing ventum can anticipate marketing stages," harvard business review, 61 (jan.-feb., 1983), 62-66. 11. weston, j. fred, and eugene f. brigham. essentials of managerial finance (new york: the dryden press, 1987), 309-30. 15 reproduced with permission of the copyright owner. further reproduction prohibited without permission. the venture fry, fred journal of small business strategy; fall 2004/winter 2005; 15, 2; abi/inform complete pg. 105 book review the venture by jeff cox 1997 isbn: 0694518581 reviewed by fred fry, editor, journal of small business strategy it may seem odd that i would personally review a book for jsbs, more odd that i would review a novel, and still more odd that it is eight years old. i recently found it while browsing the book store, read it, and decided that the book would be good for summer time reading for jsbs readers and perhaps even to discuss in an entrepreneurship club. jeff cox manages to put virtually every entrepreneurial concept in the novel and even includes some drama and occasional sex to keep you interested. the book is, indeed, old; the characters occasionally step into a phone booth rather than getting out their cell phones. but if you overlook the few anachronistic happenings, the book really does bring concepts to life as the characters strnggle from getting laid off from their company, forming their own business, and trying to create enough sales to keep the business afloat. cox calls this a business novel, and that is probably appropriate. it clearly is a novel and a pretty lightweight one at that. but it is an interesting one if for no other reason than to see how cox weaves the concepts into the story. the main character, michael degabriel, leads a group of video production technicians who get downsized. they decide to start their own company in competition with their old company. organizational politics get in the road of key sales opportunities, and the ragtag group almost falls completely apart before finding yet another idea and doing some bootstrap financing to stave off their creditors. michael's wife eventually also gets laid off from her executive job and gets suckered into joining a business rnn by a pretty obviously unscrupulous person. (again, this is not the epitome of classic literature; it is a lightweight novel about entrepreneurship.) the evildoer has in mind capturing michael's business by stealing software to run a virtual exercise bike. but she and her boss get their comeuppance through some clever software protection by one of the video techies. all in all, the venture was fun reading. it includes start-up issues, marketing, financing, partnerships gone awry, office romance, espionage, ethics, and a fair amount of sage advice by an older ex-executive who happens to show up at a bar at opportune times. it is what i call an airplane book. you can read it on a couple long flights, and it will make the flight go faster. but it also hooks you in so that you want to keep reading to find out either what the next plot twist is or just to see which entrepreneurial concept cox cranks into the book. 105 table of contents 1 special invited manuscript: dilenttante, venturesome, tory, and crafts: drivers of performance among taxonomic groups jane s. craig university of texas at austin stanley w. mandel wake forest university alex stewart marquette university 27 what can drive successful entrepreneurial firms? an analysis of inc 500 companies. erick p.c. chang arkansas state university ersa memili university of north carolina greensboro james j. chrisman mississippi state university dianne h.b. welsh university of north carolina greensboro 51 organizational efficacy of small and medium-size suppliers: the role of information quality and continuous quality improvement michael l. harris east carolina university shanan g. gibson east carolina university william c. mcdowell east carolina university leo r. simpson seattle university 71 effect of participation in business membership organizations on the size and occupational diversity of entrepreneurs’ core business discussion network lee j. zane rider university michele k. masterfano drexel university 93 book review: womenpreneurs: 21st century success strategies frances m. amatucci slippery rock university of pennsylvania s trateg y journal of small business reproduced with permission of the copyright owner. further reproduction prohibited without permission. jovrnai of small rosiness trateg editors'ote until now the journal uf small bu.riness srraregy has been published by the small business administration and sbida, and edited by dr. gwen fontenot. commencing with this issue the journal will be published by barry university's andreas school of business and sbida under our editorship. our first order of business must be to acknowledge the major contribution of dr. gwen fontenbt, who almost single handedly produced the prior issues. we would like to acknowledge her gracious assistance in making the transition as smooth as possible. our foremost task was to get this issue out on time, and we are extremely pleased to have succeeded in the face of all the unusual pressures. at the same time, we have managed to answer all the telephone calls from concerned authors and to bring all of the files up to date. shortly, we will be assisted by computerization, which should allow the processing and decision time for all papers to be reduced. beginning with the spring issue, we plan to include one invited anicle by a distinguished scholar or practitioner in the field of small business strategy. this will not reduce the customary number of juried publications, and we believe that it will add a new dimension for the reader. also, future contributors should note that we have adopted the apa style for all submitted essays commencing with the spring issue in order to promote uniformity and to provide adequate stylistic guidelines. finally, we would like to acknowledge the support of dwayne and inez andreas; their name is a part of our school of business. we are particularly appreciative ol'he leadership given to barry university by inez andreas, the chair of our board of trustees. it is with deepest gratitude that lloyd d. elgart, d.b.a., j.d., dipl. in law editor -.-a~elil lian schanfield, ph.d. associate editor strategy table of contents page title/author 1 "service characteristics and yellow pages advertising effectiveness" kenny k. chan shekhar misra 15 "don't mistake business plans for planning" (it may be dangerous to your financial health) bill parks philip d. olson donald w. bokor 25 "pricing strategies and fee structures in franchising organizations" robert t. justis peng s. chang ben l. kedia 35 "marketing strategies for small service businesses: application of expectations/performance gaps" timothy l. wilson james m. hainault 45 "assessing the value of professional practices" john wallace george stollings 56 "the benefits of the sbi program: perceptions of former students" gwen fontenot michelle haarhues lynn hoffman 72 "strategic planning and the family firm: an sbi consulting perspective" charles h. matthews 81 "getting started overseas: eximbank working capital financing for small business exporters" toni lester http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2020, vol. 30, no. 01, 1-17 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2020 small business institute® w w w. j s b s . o rg introduction 1alliance manchester business school, the university of manchester, booth street west, manchester, uk, jacob.salder@manchester.ac.uk 2birmingham city business school, the curzon building, 4 cardigan street, birmingham, west midlands, uk, mark.gilman@bcu.ac.uk 3mount royal university, 4825 mount royal gate sw, calgary, alberta, canada, sraby@mtroyal.ca 4birmingham city business school, the curzon building, 4 cardigan street, birmingham, west midlands, uk, aineias.gkikas@bcu.ac.uk beyond linearity and resource-based perspectives of sme growth smes, development, growth, integrated, determinants, resource-based view apa citation information: salder, j., gilman, m., raby, s., & gkikas, a. (2020). beyond linearity and resource-based perspectives of sme growth. journal of small business strategy, 30(1), 1-17. the role of small and medium-sized enterprises (smes) is prominent in academic debate. rooted in seminal works on firm growth (penrose, 1959), entrepreneurship (schumpeter, 1911), employment (birch, 1979), and regional development (see storey, 1984), a growing literature has called for greater understandings of sme growth and its key determinants (davidsson & wiklund, 2013; wiklund, patzelt, & shepherd, 2009). a paucity of empirical and theoretical research exists explaining these critical components (wiklund et al., 2009), with limitations of current literature shaped by framing the sme growth debate around questions of how much over how or why (mckelvie & wiklund, 2010). through this debate, the sme sector and policies supporting it prioritise high growth sub-samples such as ‘gazelles’ (birch & medoff, 1994) or the ‘vital 6 per cent’ (nesta, 2009). this tendency has compounded limited understandings of smes. in the theory of the growth of the firm, edith penrose explicitly outlined plural connotations of the term ‘growth’; the objective increase in specific metrics is interchangeable with a broader understanding of an “improvement in quality as a result of a process of development” (penrose, 1959, p.1). desire amongst researchers, policy-makers, and businesses to uncover a ‘silver bullet’ to the cumulative growth question has subverted progression of more granular understandings about the relationship between determinants of growth and their contribution to sme improvement (bennett, 2008; dobbs & hamilton, 2007). this paper contributes to calls for a broader understanding of sme growth in both academic and policy circles, with specific focus on this question of process over outputs. previous works have progressed such understandings (coad, 2007; dobbs & hamilton, 2007; gilbert, mcdougall, & audretsch, 2006; macpherson & holt, 2007; shepherd & wiklund, 2009), yet tend to focus on singular aspects (i.e., knowledge and learning, new venture development). this study extends such understandings through an integrated approach considering multiple determinants recent debates have seen increased interest in the growth of smes. most research however follows a limited remit, focusing on specific subsets and employing narrow, resource-based perspectives. a consequence is our knowledge is limited on how sme growth occurs more broadly and the critical determinants in this process. this paper addresses this gap, examining sme growth as a multidimensional process rather than an output. the paper operationalises a four dimensions conceptual model through a systematic literature review of 36 studies on the growth process. it identifies a broader set of determinants supporting a multidimensional approach, the pluralistic nature of sme growth embedded in distinctive contexts. evidence suggests a greater reliance on firm-based characteristics and environmental factors in supporting growth, providing critical inputs into forming and reinforcing networks through which firm-based resources are activated. we emphasise the need to test these propositions through more sme research using qualitative and longitudinal methods. jacob salder1, mark gilman2, simon raby3, aineias gkikas4 http://www.smallbusinessinstitute.biz http://www.jsbs.org 2 j. salder, m. gilman, s. raby, & a. gkikas journal of small business strategy / vol. 30, no. 1 (2020) / 1-17 and contexts (baum, locke, & smith, 2001; weinzimmer, 2000). to achieve this, it uses a four dimensions conceptual model, classifying determinants of growth as either characteristics, assets, strategy or environment. it addresses three key research questions; which determinants and dimensions are key in the growth process, how do these determinants and dimensions interact and interrelate, and how do these key determinants manifest in relation to firm environment? the paper progresses through the following sections. first, it analyses key debates on the process of sme growth using classic and more contemporary literature. here it explicitly positions the concept of growth and offers a conceptual model capable of affording simplicity in analysing literature on the growth process. second, it discusses the method and the systematic literature review (slr) technique applied in testing the conceptual model. third, it reviews key findings from the slr and applies these to the conceptual model. fourth, it considers the utility of our approach, outlines key findings and defines research, policy and practice implications. defining the process of sme growth: an integrated approach sme growth research has developed several critical insights over the years. certain limitations however persist, with three particularly pertinent. first is a tendency toward output-based approaches and the pursuit of formulae capable of predicting, and therefore designing in, growth (mckelvie & wiklund, 2010). second, debate is typically framed within broader political-economic desires to underwrite growth through empirical, quantitative, and cost-based language familiar to policy-makers and investors, thus shaping growth objectives and their measurement (bennett, 2008; dobbs & hamilton, 2007). third, contextual dimensions of time and space are often ignored, metrics remaining constant whilst business practice evolves (chen, 2005; oinas, trippl, & hoyssa, 2018). such limitations in existing research have seen approaches to sme development founded upon partial understandings and narrow objectives. to address this issue, further analysis enhancing our understanding of the growth process is necessary to uncover how evolving socio-spatial relations inherent in sme development interact to deliver growth (achtenhagen, naldi, & melin, 2010; hudson, 2001; leitch, hill, & neergaard, 2010). a shortage of empirical studies examining the sme growth process exist, yet significant theoretical work has debated how sme growth occurs and its relationship with specific determinants. this section outlines some of these key debates, positioning how growth is interpreted in our analysis alongside its critical foundations, before moving on to form a model for progressing empirical analysis. the growth process growth, and therefore the growth process, has been conceptualised in many ways. one common interpretation has articulated growth as a linear and cumulative phenomenon inevitable in the business process, primary objectives of business development bound to increases in a firm’s size (grenier, 1972). growth occurs through crisis points as organisational practice is challenged by business trajectory, albeit moderated by industrial sector. such cumulative models presume ongoing growth within a firm, principally in employee numbers or turnover. whilst escalation of operational processes and internal capabilities possess face validity, positioning these within a singular linear model fails to recognise the contested trajectory of firm development. alternatively, a firm’s growth trajectory is seen as cyclical. such cycles however represent multiple overlapping longand short-wave tendencies focused on maximising profit and product advantages (markusen, 1985; vernon, 1966) and disrupting key practices and technologies (kondratiev, 1925). within either set, a retraction in firm activity is integral in refining product, process or practice (kuznets, 1955; schumpeter, 1911; shleifer, 1986). such cycles are not uniform (coad, frankish, roberts, & storey, 2012). firms function as open systems (harney & dundon, 2006), variation in environmental conditions influencing internal capability and related outputs. growth is therefore stochastic and unpredictable (storey, 2011); in response growth becomes an autodidactic phenomenon involving constant horizon scanning and evolutionary processes (nelson & winter, 1982). the phenomenon of growth, and the growth process can therefore be conceptualised as concurrently structured and stochastic. for the purposes of this paper, an integrated interpretation is taken. we posit the growth process as transitional, played out through a set of structured but separate longand short-term cycles. as a result, the development process is highly periodised, involving development and adoption of distinct tactics utilising multiple inputs from within and outside the firm to identify and respond to changeable conditions. this periodisation makes it crucial to understand these multiple inputs contributing toward growth. determinants of growth: beyond the resource-based view exploration of critical determinants in the sme growth 3 j. salder, m. gilman, s. raby, & a. gkikas journal of small business strategy / vol. 30, no. 1 (2020) / 1-17 process often applies reductionist tendencies, research progressed on examining association between a narrow set of theoretically-determined factors as opposed to focusing on more holistic understandings (daft & weick, 2001; grant, gilmore, carson, laney, & pickett, 2001). sme growth depends on the availability and exploitation of multiple determinants (baum et al., 2001; weinzimmer et al., 2000). these determinants can be identified at multiple levels within, across, and outside the sme, high levels of variance occurring in their individual and collective influence on growth (storey, 1994). smes are thus proposed as heterogeneous entities, the contextual dynamics of operating environment integral (gilman, raby, & pyman, 2015; marom, lussier, & sonfield, 2019). heterogeneity of the firm is a fundamental of the resource-based view (rbv), individual competitive advantage rooted in the unique resource configurations accessible to a firm (barney, 1991; wernerfelt, 1984). rbv has become a foundation in sme analysis, focused on firm-based acquisition, activation, and management of resources capable of offering sustained competitive advantage (barney, ketchen jr, & wright, 2011). the definition of resource however remains ambiguous. framed through core characteristics of value, rarity, inimitability, and appropriation, resources are conveniently reduced to those within a firm’s ownership or control (barney, 1991; 2001a; teece, pisano, & shuen, 1999; wernerfelt, 1984). the influence of rbv’s on sme development debates has thus been fundamental in narrowing explanations and understandings of the growth process. rbv remains cognisant of diverse forms in which resources manifest; tangible and intangible, socially complex, causally ambiguous and path dependent (barney, 2001b). it similarly acknowledges resources can be accessed and appropriated by a firm yet situated and controlled outside the entity itself (priem & butler, 2001) as externalities of industrial agglomeration or state investment (bettencourt, lobo, helbing, kuhnert, & west, 2007; capello, 1999; piore & sabel, 1984). key characteristics of value and rarity are externally determined, dependent on market conditions (barney, 2001a) and production factors (phelps & alden, 1999; potter & moore, 2000). neither possession nor access alone yield competitive advantage; also necessary are appropriate processes of application (ray, barney, & muhanna, 2004), identification (barney et al., 2011; nelson & winter, 1982) and evolution (maritan & peteraf, 2011; markman, gianiodis, & buchholtz, 2009) making explicit the link between internal and external components (coff & kryscynski, 2011). to this extent, determining resources as tangible or intangible assets within the ownership or control of the firm through rbv offers partial understandings of the complex mix of determinants involved in the sme growth process. such internal resources and capabilities are crucial, particularly in smes where their limitation remains a recognised growth barrier (baum, calabrese, & silverman, 2000; mcauley, 2010; oecd, 2009). the internal however depend on interaction with a further portfolio of resources temporally acquired, partially integrated, or wholly separate, yet critical to building or maintaining competitive advantage. it is therefore necessary for rbv analysis of the sme growth process to interpret resources not within the firm but within the context of the firm, incorporating a number of suband supra-firm level resources through dynamic capabilities of sensing and understanding change in the external environment (teece et al., 1999). in developing this interpretation, a model can be derived presenting resources in four distinct forms. building on work by storey (1994), we categorise resources through four key dimensions of characteristics, assets, strategy, and environment, with consideration of advances in research refining these definitions. characteristics can be identified within but not always attributed to the sme as an independent entity. a set of structural characteristics, including age, size, industry and ownership, determine the firms’ capacity for, ability in, and commitment to growth (covin & slevin, 1991; cowling, liu, ledger, & zhang, 2015). structural characteristics also determine sme behaviour (dobbs & hamilton, 2007), compensating internal limitations in resource and experience through tendencies toward innovation, risk-taking and experimentation (hannan, 1998; shane & venkataraman, 2000). collectively these determinants represent the structural and behavioural characteristics which shape firm performance (cowling et al., 2015; dobbs & hamilton, 2007). alongside these characteristics, a set of internal assets shape the growth process. acquisition and embedding of organisational resources, such as finance, intellectual property and human capital (hayton, 2005), and those capability-based (barney & hesterly, 2015; pett, francis, & wolff, 2019) combine to create a distinctive suite of assets for utilisation by smes (boxall & steenveld, 1999). these internal resources and capabilities are dynamic, evolving through transformation in inter-firm experience levels (andren, magnusson, & sjolander, 2003; chebo & kute, 2019; love & roper, 2015; schenkel, farmer, & maslyn, 2019) and extra-firm inputs (clarysse & moray, 2004; lepak & snell, 1999) to achieve competitive advantage. asset utilisation depends on developing and implementing a clear firm strategy (dobbs & hamilton, 2007; koryak et al., 2015; moreno & casillas, 2008; williams jr, manley, aaron, & francis, 2018). strategy may be more emergent and crafted than planned in smes (harney & 4 j. salder, m. gilman, s. raby, & a. gkikas journal of small business strategy / vol. 30, no. 1 (2020) / 1-17 dundon, 2006), responses emerging through developing strategic behaviours rather than strategic planning (covin & slevin, 1991) and embedded in tendencies toward value-adding activities (hilmersson, 2013; oviatt & mcdougall, 2005). strategy is found in multiple forms at firm and sub-firm level, representing planned and behavioural responses to evolving environmental conditions (bamiatzi & kirchmaier, 2012; chebo & kute, 2019), contributing toward improvement in resources and capabilities to meet environmental challenges. evolving environments represent a further set of determinants. firm development is not isolated from macro-economic trajectories, structural transformation, or geographical resources (davidsson, achtenhagen, & naldi, 2007; hilmersson, sandberg, & pourmand hilmersson, 2015; moreno & casillas, 2008). regional, national and global economic trajectories impact sme growth, changing resource environments critical in providing human and social capital, knowledge and communications infrastructures, and cultural-economic institutions (capello, 1999; cooke & morgan, 1998; hall & soskice, 2001; hawawini, subramanian, & verdin, 2002; love & roper, 2015; smallbone, deakins, battisti, & kitching, 2012). similarly, tendencies for growth and demand display regional and industrial variation, linked to product cycles, trade practices, infrastructure investment, and regulation (sapienza, autio, george, & zahra, 2006). tendencies to frame the key determinants of growth through rbv has led to a proliferation of theories focused specifically on firm-based resources. yet, the resources firms rely on to grow occur similarly outside of the sme. this mix of internal and external determinants can be attenuated into four distinct dimensions: structural and behavioural characteristics, composed of determinants attributed singularly to the firm; assets, composed of tangible and intangible determinants within the ownership or control of the firm; strategy, composed of management plans and aptitude development, and environment, representing extra-firm determinants of macro-economic, industry, and infrastructural context. these dimensions are here operationalized in a four dimensions conceptual model (fdcm) to analyse the sme growth process (figure 1). positioning growth as a concept in the previous two sections this study has outlined the theoretical foundations of how smes grow and, when considered as a body of knowledge, how empirical studies produce a multidimensional conceptual model. it has argued the growth process to be dynamic and transitional involving periodised elements and enacted via multiple determinants within and external to the sme. this phenomenon is articulated as four dimensions of characteristics, assets, strat •infrastructure / institutions •regulation / support •market / industry •human / cultural capital •human capital •finance •tacit knowledge •network relations •structural age, size, sector •behavioural learning, networking, innovation •product development •process development •personnel development strategy characteristics environmentassets figure 1. the four dimensions conceptual model source: adapted from various authors 5 j. salder, m. gilman, s. raby, & a. gkikas journal of small business strategy / vol. 30, no. 1 (2020) / 1-17 egy, and environment. in this section, the positioning and application of the fdcm to examine the process of sme growth is discussed. research on growth has tended to capture it as an outcome metric (mckelvie & wiklund, 2010), thus detaching research from the reality of sme practice, where growth is punctuated via a periodised rather than linear process. this paper considers growth from an alternative perspective; the context of the developmental process. this perspective allows for two critical distinctions from other studies. first, it shifts focus from the conceptualisation of growth as an increase in metrics to the less commonly examined process of development (penrose, 1959). second, it views growth as part of, rather than separate from, a firm’s long-term sustainability. some strands of the growth literature separate these two objectives considering strategies for growth and sustainability fundamentally different (sapienza et al., 2006). adaptation to ensure sustainability is a critical aspect in firm development and growth, and therefore as worthy of study as growth metrics and outputs. in this section we have outlined a broad set of determinants of growth attenuated into four key dimensions; the fdcm. the relationship between these determinants and dimensions and the growth process is the central consideration of this work. the growth process is not a singular phenomenon but depends on the integration of multiple determinants (baum et al., 2001; weinzimmer et al., 2000). the critical question examined in this paper is therefore how these key dimensions and determinants interact in the sme growth process, whilst taking account of variation between firms and the contextual understanding of the growth process adopted. this gives rise to a second question exploring the relationship between determinants / dimensions and the specific environment in which the firm functions. due to the spatial and temporal spread of the papers used in the slr a geographical perspective is adopted, interpreting environment as institutional context through groupings of national economy. this study therefore addresses the following research questions: q1: which determinants and dimensions are key in the growth process? q2: how do these key determinants and dimensions interact and interrelate? q3: how do these key determinants manifest in relation to firm environment? method to build stronger understanding of the growth process, the study employs a systematic literature review (slr) technique. the slr is appropriate here for its clear process of identification, evaluation and analysis, and ability to explicitly link this process to a research question (macpherson & holt, 2007; zahedi, shahin, & babar, 2016). undertaking this method involved two elements; setting the study selection parameters, and implementing the analysis framework and interpreting the data. search process and study selection the literature search involved a six-step process identifying and refining published work (table 1). the search was conducted using the web of science (wos) database, used for its advanced search refinement options, extensive social sciences catalogue, and citation-linked coverage (aghaei chadegani et al., 2013; fingerman, 2006; jasco, 2005). step one focused on a string of keywords: ‘sme’, ‘growth’ and ‘process’ combined with a limitation placed on publication date. search terms were selected for their relationship to the objective of the study. articles prior to the millennium were excluded due to changes from the mid-1990’s to the nature of support infrastructure (bennett, 2008; fritsch & storey, 2014) and the changing nature of the sme development environment considering processes of globalisation and industrial dis-integration (chen, 2005; table1 steps in the article search process step protocol criteria returns 1 keyword search sme; growth; process and publication date (post-2000) 221 2 apply discipline social sciences 156 3 apply sub-disciplines business economics; geography; social science other topics 148 4 publication review peer-review only 88 5 geographical context us/canada; uk; europe; australia/new zealand 44 6 type of study empirical only; bivariate/multivariate analysis 36 6 j. salder, m. gilman, s. raby, & a. gkikas journal of small business strategy / vol. 30, no. 1 (2020) / 1-17 oinas et al., 2018). the initial search returned 221 articles. step two limited the search to social sciences, omitting science-based disciplines. this returned 156 articles. step three refined to sub-disciplines of business economics, geography, and social science: other topics, ensuring relevant returns with the latter capturing related sub-disciplines not specified (e.g., regional science). this returned 148 articles. to ensure quality articles, step four limited the search to peer-reviewed journals. this stage returned 88 articles. step five added comparable institutional environments through geographic specifics of us/canada, uk, europe, and australia/new zealand. these criteria allowed for some continuity in institutional context, focusing on more developed countries with both more established sme support infrastructure and lower entry regulations (klapper, laeven, & rajan, 2006). this returned 44 articles. the sample works were then examined in more detail, reviewing abstract and type of study. this review was conducted on empirical studies only and on those using multivariate analysis in consideration of our objective of examining multidimensional factors in the growth process. following application of this criteria, a final set of 36 papers were identified (appendix a). the mix of studies selected in this research is worth brief discussion. following the outlined process, our study selection included both qualitative and quantitative studies. a tendency in much sme research is to focus overtly on quantitative methods, risking narrow and circular understandings more concerned with aggregated objectivity over detailed knowledge (daft & weick, 2001; fleetwood & hesketh, 2008; newby, watson, & woodliff, 2003) and method validity over appropriateness (mcdonald, gan, fraser, oke, & anderson, 2015). by fusing quantitative studies with qualitative and case study research, this research follows a more unorthodox approach in effort to move beyond such aggregated objectivity. implementing the analysis framework and interpreting the data analysis of the 36 selected studies progressed using a predominantly manual system of review, coding and analysis. this took a syncretic approach – to “unify or reconcile diverse, opposing concerns or approaches” (macpherson & holt, 2007, p.176) applying the fdcm (figure-1) to understand the relationships and interactions between key determinants in the sme growth process. a layered analysis method was applied. first, univariate analysis identified key determinants, their frequency and distribution. second, bivariate analysis examined binary associations between determinants. third, multivariate analysis explored the integrated nature of key determinants. studies were reviewed in detail and key findings for each study recorded manually. these were coded to create a set of distinct determinants and explicitly link these to the fdcm; a full list of identified determinants is included in appendix b. following this, a set of cross-tabulations tested frequency of association between determinants and dimensions. finally, qualitative data analysis software (nvivo v.10) supported a cluster analysis, identifying the extent of key determinant associations and level of integration between determinants and dimensions. through this process and in interpreting the data it was considered crucial to maintain the link between the four dimensions and the varying determinants in the sme growth process. findings key determinants in the growth process analysis of the key determinants identified through the slr showed a broad variety were critical across the studies. in total, 50 individual determinants were identified a combined 208 times. multiple determinants were identified in each article as crucial to the growth process, ranging between three at lowest and ten at highest in any individual article. recurring determinants of regulation/subsidy and access to networks/clusters were most frequent, with 9 of 36 studies identifying these as central to the growth process. regulation in particular was critical in creating a nurturing environment for entrepreneurship (cowling, 2016; mendez-picazo, galindo-martin, & ribeiro-soriano, 2012; parrilli, 2009), providing support to stimulate continual improvement (cowling, 2016; nowacki & staniewski, 2012; parrilli, aranguren, & larrea, 2010), and presenting challenges requiring adaptation and innovation to aid new market entry (fuchs & kostner, 2016; prater & ghosh, 2005). access to networks enhanced learning and development capabilities and knowledge exchange (davenport, 2005; kalantaridis, 2009) via engagement with peers, representatives, and learning or research institutions (feakins, 2004; gordon, hamilton, & jack, 2012; radas & bozic, 2009; tunisini & bocconcelli, 2009). determinants of regulation and networks were followed by firm’s commitment to learning, embedded networks, and internal capabilities, found in eight papers. commitment to learning exposed smes to broader potential in product and network development (gordon et al., 2012; madrid-guijarro, garcia-perez-de-lema, & van auken, 2016; triguero, corcoles, & cuerva, 2014; wolff, pett, & 7 j. salder, m. gilman, s. raby, & a. gkikas journal of small business strategy / vol. 30, no. 1 (2020) / 1-17 ring, 2015), embedded networks perpetually renewing external relationships served as a catalyst to new capabilities and resources (bager, jensen, nielsen, & larsen, 2015; davenport, 2005; feakins, 2004; gordon et al., 2012; madrid-guijarro et al., 2016; noke & hughes, 2010; radas & bozic, 2009; uhlaner, van stel, duplat, & zhou, 2013;), and internal capabilities represented the ability to exploit external determinants (noke & hughes, 2010; parrilli et al., 2010) and implement innovation strategies (cowling, 2016; harms et al., 2010; neirotti, paolucci, & raguseo, 2013; nowacki & staniewski, 2012). in comparison, certain determinants considered to exert a more orthodox influence on firm capacity for growth recurred less frequently. these included owner’s age, international commitment, banking relationships, technology, finance, skills/personnel, and employee involvement in firm strategy, each identified in only one of the studies. when attributed to the four dimensions (figure 1), greatest frequency was found in characteristics, representing a third (33%) of the 208 citations, followed by environment, representing 30%. strategy constituted 23% of determinant citations, while only 14% were attributed to assets. positioning determinants and dimensions as singular and independent is however misleading, as in all studies reviewed, growth occurs as an integrated process involving multiple determinants. integrated determinants in the growth process while the slr identified a broad set of determinants influencing the sme growth process, these determinants each represent an element of an integrated and multidimensional framework for growth. the extent of interaction between determinants in this framework is examined here using bivariate and multivariate association. all papers reviewed indicate the growth process depends on multiple determinants. their distribution across dimensions identified a similar consensus; only one paper cited determinants attributed to a single dimension. the remaining studies saw 11 identify determinants across two dimensions, 17 across three, and 7 all four dimensions. bivariate association linked characteristics to strategy, characteristics to environment, and strategy to environment; less emphasis was placed on assets (table 2). bivariate association between determinants displays a variable picture, with no two determinants mutually associated in more than four separate studies. in a field of 50 determinants, a total 1,225 bivariate combinations exist. for 65% (796) of these combinations, no association was identified. fewer than 9% (107) of possible combinations are identified in multiple studies; 81 combinations for bivariate association found in two separate studies, 22 found in three separate studies, and 4 in four separate studies. higher frequency of association was identified in four key binary relationships, emphasising the roles of networking, adaptation, and extra-firm inputs (autio, sapienza, & almeida, 2000; baker, miner, & eesley, 2003; chebo & kute, 2019; love & roper, 2015). this linked networking characteristics and regulatory environment, networks as resources and education infrastructure, networks as resources and network environment, and education infrastructure and network environment. links between networking characteristics and regulatory environment suggests a symbiosis between networking tendencies and state policy (macpherson, jones, & zhang, 2005; nowacki & staniewski, 2012; parrilli, 2009), networks reinforcing firm capacity through adaptive requirements (prater & ghosh, 2005). networks as resource and education institutions stimulate reflexive learning experiences, formal and autodidactic (davenport, 2005; gordon et al., 2012; radas & bozic, 2009), shaped further by the network environment utilised in linking these determinants (gordon et al., 2012; parrilli, 2009; radas & bozic, 2009). despite marginally higher frequency of network-based associations, caution should be exercised as these relationships were found in only a small number of studies. beyond bivariate association, consistent across the studies was association of multiple determinants. multivariate associations could be examined through cluster analysis. comparing determinants through association via mutual citation in studies suggests broad distribution. a key cluster however emerges associating certain more frequently cited determinants; networking tendencies, regulation-subsidy, firm-level capabilities, and innovation-r&d strategy; and business-product cycles, network clusters, education-research infrastructure, and networks. critically, this emphasises determinants outside of the firm, particularly the role of environmental or place-based determinants (capello, 1999; love & roper, 2015). to some extent bound into localised phenomena of agglomeration, policy inducement, table 2 aligning dimensions by frequency of bivariate association characteristic assets environment characteristics assets 15 environment 21 14 strategy 23 11 20 (n = 36) 8 j. salder, m. gilman, s. raby, & a. gkikas journal of small business strategy / vol. 30, no. 1 (2020) / 1-17 and social capital (parrilli, 2009), capitalising on these is not singularly about proximity but instead how firms anticipate and respond to shifting markets through identifying and exploiting opportunities at multiple scales (davenport, 2005; prater & ghosh, 2005; radas & bozic, 2009). context specific variation in the growth process: the geographical context analysis of the studies by geographic context saw higher frequency of determinant citation amongst firms based in central europe compared to other geographical areas (table 3). interesting variations also emerged here. for certain areas, some frequently recurring determinants were not observed; specifically regulation/subsidy, innovation commitment, learning commitment, and business/ product cycle in australia-new zealand; innovation commitment and growth strategy in eastern europe; (access to) networks/clusters, (established) networks, capabilities, and innovation commitment in north america; and business/product cycle and innovation/r&d strategy in the uk. alongside this, certain determinants are more strongly associated with specific areas. this saw a more positive association in australia-new zealand with innovation/r&d strategy, capabilities, sector and firm age; central europe with innovation commitment, culture, macroeconomic conditions and business/product cycle; eastern europe with financial market conditions, education/research infrastructure, knowledge, and networking tendencies; north america with growth orientation, firm age and culture; and the uk with sector, geography, growth strategy and learning commitment. such variation highlights the influence of spatial proximity and institutional environment on firm responses to growth ambitions (hall & soskice, 2001; smallbone et al., 2012). the absence of agglomeration or clustering potential for firms in certain spatial contexts stimulated active ‘search-and-adapt’ behaviours (nelson & winter, 1982), limiting intention for more localised integration. here the issue of remoteness is important, occurring at both national (davenport, 2005; terziovski, 2010) and regional levels (macpherson et al., 2005; nowacki & staniewski, 2012). this remoteness runs alongside marked differences in the role of collaborative infrastructure or public goods (capello, 1999). us and uk studies place greater emphasis on individual and firm-based characteristics and behaviours over collaborative action, compared to a central european mode of practice with development focused as part of a system. this is reiterated when considering key dimensions. geographical analysis indicated a greater importance for chartable 3 distribution of determinant citation by geographic area aus-nz c. europe e. europe n. america uk total determinant citations 17 100 29 26 31 studies 3 16 5 5 6 mean citations (per study) 5.7 6.3 5.8 5.2 5.2 (n=36) acteristics in australia-new zealand, north america and the uk; for assets in australia-new zealand and eastern europe; for environment in eastern europe; and for strategy in north america. against this distribution, for central europe the dependence was more balanced and integrated across dimensions (table 4). discussion research on smes demonstrates growth to be dependent on a variety of determinants internal and external to the firm (baum et al., 2001; weinzimmer et al., 2000). the findings of this paper reinforce this view. through application of a slr, 50 determinants were found to influence the growth process. a cross-study analysis reveals high variance in determinants, the most frequently recurring evidenced in only one-in-four articles. such diversity should be placed in the context of the studies included in the analysis and their level of rigour, which cannot be guaranteed. studies were selected on the basis of multi-variate analysis of the sme growth process. what is important here is that despite this approach, many studies retained a narrow agenda, examining determinants rather than the growth process holistically. it should thus be noted studies typically exclude several relevant determinants influencing growth. this paper sought to address three research questions. first, what determinants and dimensions are important to the growth process? uncovering the recurrence of multiple 9 j. salder, m. gilman, s. raby, & a. gkikas journal of small business strategy / vol. 30, no. 1 (2020) / 1-17 determinants across the studies reiterates the growth process as a multidimensional construct. such recurrence is neither uniform nor formulaic. five specific determinants recur more frequently: regulation/subsidy; clusters; learning commitment; networks; and, capabilities. together, these determinants represent 20% of all citations. moving from determinants to higher-level thematic dimensions, cumulative determinants cited across all studies suggest dimensions of characteristics and environment are most commonly involved in the growth process, and assets within the firm itself less influential. the second question sought to understand how key determinants and dimensions are interrelated as part of the growth process. high variation between studies revealed 65% of determinants had no identified association. where dependencies occurred, these were broadly and unevenly distributed. cluster analysis indicates while certain common determinants were closely associated across studies specifically regulation/subsidy, clusters, networks and capabilities other common determinants were more fragmented. the third question considered how key determinants manifest considering context variations, in this study defined as institutions created by geo-political environment. diversity in approaches to growth were observed across the sample when exploring institutional contexts. determinant analysis indicated higher dependence on those attributed to the characteristics dimension in english-speaking settings, with emphasis on growth orientation and structural determinants of firm size, age and industry particularly in us-canada and australia-new zealand. in contrast, european firms highlighted values of learning, innovation, and clarity of vision as of greater importance. this paper has sought to consolidate additional evidence on and understanding of sme growth through a process lens to contrast the metric-based model principally favoured in research on sme growth (mckelvie & wiklund, 2010). in so doing, this paper accommodates both the multiple determinants perspective (baum et al., 2001; weinzimmer, 2000) and the role of contextual dynamics (gilman et al., 2015; marom et al., 2019). several findings here extend debates on the sme growth process; in particular, the need to better understand how critical determinants integrate in the growth and development process of smes. in this analysis the study uses the fdcm to retrospectively frame determinants influencing the growth process as either characteristics, assets, strategy or environment. the importance of these dimensions is not even. on citation basis, most critical are characteristics and environment, with assets less important. further analysis using bivariate association found key interfaces between characteristics, environment and strategy, again placing assets as less influential. these finding raise an interesting question. the role of resource limitations in sme development has been widely discussed (baum et al., 2000; mcauley, 2010; oecd, 2009). to compensate, firms evolve to function in more networked capacities enabling access to broader resources without associated cost through consolidation, appropriation and application of a collection of suband supra-firm level assets (cooke & morgan, 1998; love & roper, 2015). this type of firm behaviour represents an extension to archetypal rbv, reconfiguring resources outside of those simply confined to ownership/control of the firm (priem & butler, 2001). firm performance may be determined by resources within the firm’s influence (barney & hesterly, 2015; pett et al., 2019); this influence extends beyond those within its immediate ownership into broader public goods (capello, 1999), enabling utilisation of a wider framework of inputs. this expansion of inputs presents significant challenges for resource-based approaches to understanding sme growth, reiterating calls for conceptualisation accommodating process over metric-based formulae. the first of these challenges relates to the fdcm. these four dimensions have become key cornerstones for understanding what influences sme growth. the process of determinant classification and separation may however be counterproductive, these four dimensions better interpreted as elements of a broader resource framework smes need to understand and utilise to achieve growth. second, this reconfiguration of table 4 distribution of dimension citations by geographic area aus-nz c.europe e.europe n.america uk all areas characteristics 35% 32% 21% 42% 35% 33% assets 24% 12% 24% 0% 16% 14% environment 24% 32% 41% 23% 26% 31% strategy 18% 24% 14% 35% 23% 23% source: various authors (n = 36) 10 j. salder, m. gilman, s. raby, & a. gkikas journal of small business strategy / vol. 30, no. 1 (2020) / 1-17 the fdcm suggests that focusing on identifying specific critical determinants of the growth process and their acquisition or exploitation may be misguided. instead, the critical consideration is the integration of such resources and their combination in specific conditions and contexts. to this extent, linking separate resources through network involvement, and perhaps more importantly networking capabilities, is integral. finally, the importance of networks not only makes an explicit focus on process over determinants but also leads to a transition in how the functioning of firms is conceptualised from a resource-based to a network-based view. in an era of increasing start-up activity, accelerating technological interaction, barrier reductions, and ongoing vertical dis-integration of production activities, networks have become prominent. network creation, utilisation and exploitation links critical resources to create distinctive responses to specific market challenges – an epitome of the unique configurations on which competitive advantage is founded (barney, 1991; wernerfelt, 1984). network-based approaches have become increasingly popular in fields such as regional studies and economic development, focused on innovation or knowledge-based networks as critical components in building entrepreneurial and resilient regional economies (see huggins & thompson, 2013). applying such an approach to the entity of the sme may provide new insight into questions of growth and the critical set of interactions and dependencies which underwrite this process. conclusion this paper discusses the issue of the growth process in smes. a broad literature exists considering firm growth, yet with limited focus on the process of sme growth. using a conceptual model informed by classic and contemporary debates, recent empirical work has been examined. the study employs a slr through which relevant works on the process of sme growth are identified, examined and analysed. a growing debate around smes posited their development as multidimensional, neither refined to a singular set of critical inputs nor homogenised due to broad contextual dynamics at play within firms (baum et al., 2001; gilman et al., 2015; marom et al., 2019; weinzimmer et al., 2000). this analysis supports such propositions, indicating a broad mix of determinants in the process of growth. in total, 50 were identified, classified within a fdcm as characteristics, assets, strategy or environment. this analysis has critical implications for much research and interpretations of sme practice informed by rbv. our results give weight to calls for a broader perspective on how resources are defined in the context of sme growth, incorporating those outside the sme’s ownership as integral. the analysis includes indications that development processes are highly dependent on determinants occurring at sub-firm or supra-firm levels. integral here are certain characteristics which shape how firms utilise internal and external resources (dobbs & hamilton, 2007; hannan, 1998; shane & venkataraman, 2000). although integral to adopted working practice, these characteristics additionally depend on broader environment determinants that shape resource availability such as labour and knowledge transfer (capello, 1999; cooke & morgan, 1998). findings suggest lower dependence amongst smes on embedded internal assets; a finding consistent with behaviours showing the need for high levels of integration with resources outside the firm, and to establish working practices and strategies for their effective integration and exploitation. to this extent, integration of disparate resources becomes dependent on networks and networking capabilities, and thus sme growth less a question of resource-based and more of network-based approaches. this paper contributes several potentially significant developments in how the growth process of smes is understood, with implications for policy and practice. focus to date on singular models of understanding sme growth ‘gazelles’ or the ‘vital 6 per cent’ presents a partial picture of the overall process. this study has sought to extend and expand this picture, in response to the call for research accommodating more holistic and multidimensional understandings (davidsson & wiklund, 2013; wiklund et al., 2009). as such, it has implications for methods academics use in sme research, reiterating calls for more longitudinal and qualitative approaches but also the need for more tools and techniques capable of integrating smes themselves in the research process. similarly, this suggests the need for revised policy models and support mechanisms, specifically around formation and reinforcement of communities of practice in both structured and autodidactic learning, knowledge transfer, and collaborative partnerships. specifically, this requires moving beyond not only ‘one-size-fitsall’ but also ‘one-factor-solves-all’ approaches. while presenting an argument for theorising growth as an integrated process alongside a set of proposals on how this may be conceptualised, methodological limitations should be recognised. principal here is limitations in the studies reviewed. although identified systematically, these works are deductive rather than inductive and syncretic. considering the scope of the analysis undertaken by each, it would be reasonable to assume certain determinants may have been missed. in addition, the identification of determinants does not make any statement of their weighting and similarly works on presumption they have positive effects on sme 11 j. salder, m. gilman, s. raby, & a. gkikas journal of small business strategy / vol. 30, no. 1 (2020) / 1-17 growth. although the case in the sample studies, several determinants could equally exert negative influences. the limited sample of studies included in the analysis should also be acknowledged. this sample reinforces the core criticism of limited research focused on the growth process in smes, but equally has implications on the validity of results which require more rigorous testing in further empirical work. each study can be considered multidimensional, yet the deductive nature limits this extent with the majority adopting quantitative and positivist approaches. this orthodoxy limits holistic and multiple determinant understandings of the growth process (baum et al., 2001; 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(2016). a systematic review of knowledge sharing challenges and practices in global software development. international journal of information management, 36(6), 995-1019. 16 j. salder, m. gilman, s. raby, & a. gkikas journal of small business strategy / vol. 30, no. 1 (2020 / 1-17 appendix a overview of selected studies ref # author(s) year research subject geographical context research method analysis type p1 bager et al. 2015 sme, cross-sectional, growth-oriented denmark case study / controlled analysis quantitative p2 belás, vojtovič, and ključnikov 2016 sme, cross-sectional czech survey quantitative p3 cowling 2016 sme, cross-sectional uk survey quantitative p4 davenport 2005 sme, production nz case study qualitative p5 deschrynere 2014 all firms, incl. smes, cross-sectional, sales & r&d conditions finland panel study, longitudinal quantitative p6 eggers, hansen, and davis 2012 micros, cross-sectional us panel study quantitative p7 feakins 2004 banking sector (smes as clients) poland discourse analysis, case study qualitative p8 feindt, jeffcoate, and chappell 2002 baby gazelles small e-commerce eu countries content analysis qualitative p9 fuchs and kostner 2016 sme, exporters austria survey quantitative p10 gordon et al. 2012 small, cross-sectional uk longitudinal qualitative p11 harms et al. 2010 sme, cross-sectional, growth oriented germany survey quantitative p12 kalantaridis 2009 sme, cross-sectional (rural) uk survey quantitative p13 levy, powell, and yetton 2002 all firms, cross-sectional uk case study qualitative p14 macpherson et al. 2005 small, manufacturing uk case study qualitative p15 madrid‐guijarro, garcía‐pérez‐de‐lema, and van auken 2013 sme, manufacturing spain survey quantitative p16 madrid-guijarro et al 2016 sme, manufacturing spain survey quantitative p17 mendez-picasso et al. 2012 entrepreneurship, innovation, and governance relationships 11 developed countries panel study quantitative p18 neirotti et al. 2013 sme, manufacturing, wholesale retail, business services, logistics italy survey quantitative p19 noke and hughes 2010 sme, manufacturing uk case study qualitative p20 nowacki and staniewski 2012 sme, cross-sectional poland survey quantitative p21 parrilli et al. 2010 sme, manufacturing france/spain case study mixed methods p22 parrilli 2009 sme, manufacturing italy case study mixed methods p23 prater and ghosh 2005 sme, manufacturing us survey quantitative p24 radas and bozic 2009 sme, manufacturing, service croatia survey quantitative p25 rakićević, omerbegović-bijelović, and lečić-cvetković 2016 sme, cross-sectional serbia documentary analysis mixed methods p26 randelli and lombardi 2014 sme, manufacturing italy case study qualitative p27 romano, tanewski, and smyrnios 2001 sme, cross-sectional australia survey quantitative p28 schmieder, marsch, and forster-van aerssen 2010 sme, cross-sectional germany panel study quantitative p29 spence, orser, and riding 2011 sme, cross-sectional canada survey quantitative p30 terziovski 2010 sme, manufacturing australia survey quantitative p31 triguero et al. 2014 sme, manufacturing spain longitudinal quantitative p32 tunisini and bocconcelli 2009 sme, manufacturing italy case study, longitudinal qualitative p33 turner, ledwith, and kelly 2010 sme, cross-sectional europe survey qualitative p34 uhlaner et al. 2013 sme, cross-sectional netherlands survey, longitudinal quantitative p35 wolff and pett 2006 sme, cross-sectional us survey quantitative p36 wolff et al. 2015 sme, cross-sectional us survey quantitative (n=36) 17 j. salder, m. gilman, s. raby, & a. gkikas journal of small business strategy / vol. 30, no. 1 (2020) / 1-17 appendix b identified determinants in slr process dimension determinant characteristics growth orientation firm size education learning commitment leader / manager experience risk acceptance firm age entrepreneurial orientation owner age customer orientation networking tendencies international commitment sector flexibility innovation commitment ownership / structure long term vision assets networks technology capabilities employees bank relations finance knowledge environment education / research infrastructure geography business/ product cycle communications infrastructure macro-economic conditions networks/ clusters financial market conditions technology regulation / subsidy culture hostility skills/personnel strategies management development it strategy employee development marketing financial acquisition product adaptation innovation / r&d financial / price strategy product innovation communication/ distribution process innovation export / outsourcing growth strategy employee involvement fall journal determinants of b2c ec success on market performance of different sizes of firms in taiwan’s e‐brokerage sector may‐ching ding yu da college of business vian0520@yahoo.com.tw kuang‐wen wu feng chia university kwwu@fcu.edu.tw sheng‐wen liu transworld institute of technology swen1993@hotmail.com abstract guided by a financial model, this study is the  first to integrate miles and snow’s (1978)  strategic typology as an external industry effect and the resource‐based view of the firm as  an internal effect to  explain market performance  of  different firm  sizes  in business‐to‐ consumer  e‐commerce  firms.  factors  such  as  strategy  types, ceo commitment  to  e‐ commerce,  web  site  design,  and  it  system  integration  capabilities  were  empirically  investigated.  findings  showed  that  prospector  strategy  utilized  by  large  e‐brokers  significantly outperformed  analyzer, defender,  and  reactor  strategies  in online  market  share. top managers of small‐to‐medium enterprises (smes) should choose defender or  analyzer strategies to gain market performance. large firms indeed outperformed smes  in online  market share. in addition, large firm’s ceo commitment to e‐commerce, web  site design and it system integration capabilities and web age were explanatory factors  for  online  market  share  but  had  no  effect  on  both  market  performances  for  smes.  managerial implications and future study are recommended. keywords:  keywords: b2c ec, strategic typology, web site design, it system  integration capability, market performance introduction is  electronic commerce (ec) the way for  business  to  succeed?  some  business‐to‐ consumer  (b2c)  firms  have  failed  but  others  have  prospered.  despite  the  bursting  of  the 2000  “e‐bubble,” b2c ec  online  shopping  has  demonstrated  continued  growth  (braddock,  2001).  when  the  number  of  u.s.  broadband  users  reached  49  million  in  2005,  ec  experienced  a  29%  increase  in  growth  (oecd  broadband  statistics,  2005).  consumers,  especially  the  younger  generation,  are  moving  into  a  virtual  world;  thus,  they  are  demanding  more  online  products  and  services.  retail  e‐ commerce christmas holiday sales rose to  us  $22.9  billion,  up  23%  in  the  fourth  quarter of 2005 from the fourth quarter of  2004  (u.s.  census  bureau,  2006).  forrester  research  predicts  that  online  volume 19, number 2 fall/winter 2008/2009  17 strategyjournal of small business shopping  in the  united states  will enjoy  an annual growth rate of 19%  until 2008  (rush, 2003).  online  sales  growth  can  also  be  seen  outside the united states. in taiwan, the  b2c ec market surged  to  us  $1.1  billion  (nt$34.72  billion),  up  57.2%  in  2004  (find,  2005).  further,  the  market  was  predicted to  triple to  nearly us$3 billion  (nt$95.22  billion)  by  2008  (find, 2005).  clearly,  ec  is  expected  to  continue  to  grow and develop not only in the united  states, but also in taiwan.  in  spite  of  ec  growth  and  advantages,  31.47%  of  online  stores  in  taiwan  lost  money  (institute  for  information  industry, 2005). researchers also provided  evidence  demonstrating  that  ec  has  no  influence  on  financial  performance  (epstein,  2004;  kamssu,  reithel,  &  ziegelmayer,  2003).  dynamic changes  in  ec  have  made  online  retailers  struggle  with  the  question  of  how  to  generate  revenues  (wang, head, & archer, 2002).  hence,  there  are  conflicting  results  of  ec’s impact on firm performance.  what  is  the  difference  between  those  online  stores  who  succeeded  and  those  that  failed?  is  internet  technology  the  answer  to  online  success?  what  distinguishes  one  online  store  from  another in its ability (internal firm‐effect)  to  attract  customers  or  a  traditional  business  strategy  (external  industry‐ effect) also critical for success in ec? does  firm  size  play  a  role  in  a  firm’s  performance?  do  large  and  small‐to‐ medium  enterprises  (smes)  utilize  different  strategies  and  perform  differently?  porter pointed out that “it is  more important than ever for companies  to  distinguish  themselves  through  strategy”  (porter,  2001,  p.  63)  and  the  winners  will  be  those  that  leverage  the  internet to  help a  firm  do  what  it does  best  to  gain  the  competitive  advantage.  the  internet  can  complement  and  enhance value by integrating information  technology to the value chain, “the set of  activities  through  which  a  product  or  service  is  created  and  delivered  to  customers” (porter, 2001, p 74). to answer  these questions, this study:  • investigated whether different  strategy types resulted in different  levels of market performance for  taiwan’s large and smes in e‐ brokerage sector, and • examined the influence of b2c  factors, web age, ceo commitment  to ec, strategy types, web site  design, and it system integration  capabilities on taiwan’s large and  smes in e‐brokerage sector.  literature review schendel  and  patton’s  (1978)  financial  model  provided  a  clear  framework  and  showed that financial results are affected by  strategic  management  decisions  of  goal  setting, resources allocation, and by external  environmental  constraints.  in  general,  a  firm’s  goal  setting  is  profit‐oriented.  further,  “financial  performance  is  in  the  form of measures of individual relationships  in  models  linking  various  hypothesized  causal  variables  to  various  performance  measures” (capon, farley, & hoening, 1990,  p. 1143). in other words, the financial model  can  be  explained  by  linking  those  causal  variables  from  a  firm’s  internal  resources  and  capabilities  to  a  firm’s  external  environment.  concurrently, rumelt  (1991)  attributed  performance  variation  across  firms to both internal and external factors.  hence, this financial model provides logic  by which to integrate the strategic typology  framework  as  an  external  factor  with the  resource‐based view as an internal factor in  order to explain market performance. journal of small business strategy    18 strategic typology many strategy  theories  appeared  in  the  late  1970s  and  1980s.  generic  strategies  built  by  miles  and  snow  (1978)  and  porter  (1980)  are  representative  of  the  work  being  done  in  the  strategic  management field (gibbons, kennealy, &  lavin, 2003; grover & saeed, 2004; kim,  nam,  &  stimpert,  2004;  parnell  &  hershey,  2005).  strategic  groups  are  “groups  of  organizations  that  exhibit  patterns  of  consistency  in  strategic  orientation”  (grover  &  saeed,  2004,  p.  25).  both  miles  and  snow’s  (1978)  and  porter’s  (1980)  typologies  are  based  on  the belief that strategic processes can be  simplified  by  seeking  patterns  of  organizational  behaviors.  as  strategic  groups  help  identify  clusters  of  businesses  with  similar  strategies,  scholars have utilized strategy typologies  as  a  theoretical  basis  to  categorize  and  examine  strategic  groups  in  relation  to  the  performance  of  traditional  firms  (aragon‐sanchez  &  sanchez‐martin,  2005;  garrigos‐smith,  marques,  &  narangajavana,  2005;  gibbons  et  al.,  2003; matsuno & mentzer, 2000; parnell  &  hershey,  2005;  parnell  &  wright,  1993). in addition, scholars assumed that  traditional strategies would be applicable  in  the  “new  economy.”  the  results  supported  the  belief  that  traditional  strategy  types  can  be  useful  and  influential  on  firm  performance  in  a  virtual world (grover & saeed, 2004; kim  et al., 2004; saini & johnson, 2002).  strategic  group  theory  analyzes  the  competitive  structure  of  industries  (barney  &  hoskisson,  1990).  miles  and  snow  (1978)  offered  a  theoretical  framework,  an  integrated  dynamic  system  that  relates  organizational  strategy, structure, and process, to  align  with  organizational  environment.  in  particular, the framework emphasizes an  adaptive cycle, dealing with and solving  entrepreneurial,  engineering,  and  administrative  problems.  first,  an  entrepreneurial problem centers on how  managers  define  and  commit  resources  into  their  organizational  domain  in  specific  products  and  services  (a  target  market).  second,  an  engineering  problem  can  be  solved  by  creating  a  system  in  which  managers  choose  a  technology to produce and distribute the  organization’s  products  and  services.  such  a  system  can  further  integrate  information,  communication,  and  control for internal operations. third, an  administrative  problem  reduces  uncertainty  primarily  by  rationalizing,  formulating,  and  implementing  the  system  that  enables  an  organization  to  innovate.  such  an  innovative  system,  according  to  miles  and  snow,  is  distinguished  by  its  ability  to  utilize  technology  (such  as  ec)  to  produce  or  distribute products and services and has  an  adaptive  cycle  to  deal  with  ec’s  rapidly  changing  environment  (saini  &  johnson,  2002).  therefore,  miles  and  snow’s  strategic  typology  is  more  suitable as  a theoretical basis to  explain  b2c ec firm performance.  miles  and  snow  (1978)  identify  four  strategy types: the defender, the  reactor,  the  analyzer,  and  the  prospector.  each  type  has  its  own  strategy  coordinating  with  its  organization’s  technology,  structure, process and environment. first,  defenders  serve  in  a  narrow  product‐ market  environment  and  focus  on  improving  operational  efficiency.  as  a  result,  defenders  rarely  change  their  strategy,  structure,  technology,  and  operation  in  their environment.  second,  prospectors are the opposite of defenders.  they  are  pioneers  in  search  of  market  opportunities  and  usually  the  first  to  respond  to  an  emerging  market.  consequently, prospectors are sometimes  the  market  creators  of  change  that  competitors  can  only  follow.  third,                                                                                    volume 19, number 2 fall/winter 2008/2009   19 analyzers try to balance defenders (stable  market)  and  prospectors  (changing  market). thus, they are  concerned  with  both  operational  efficiency  and  rapid  responses  to  competitors  and  the  environment. fourth, reactors are unable  to  respond  to  environmental  changes.  they  adapt  their  strategy  and  structure  only  because  environmental  pressures  force them to do so (miles & snow, 1978).  this  theoretical  framework  has  traditionally  proposed  that  prospectors,  analyzers,  and  defenders  are  likely  to  outperform  reactors.  several  empirical  studies  tested  miles  and  snow’s  (1978)  typology and provided reliable and valid  support  for  the  typology  in  traditional  organizations  (aragon‐sanchez  &  sanchez‐martin,  2005;  garrigos‐smith,  et  al.,  2005;  gibbons  et  al.,  2003;  matsuno  &  mentzer,  2000;  parnell  &  hershey, 2005; parnell & wright, 1993).  studies  found  significant  differences  among  prospectors,  defenders,  and  analyzers,  all  of  whom  outperformed  reactors  in traditional  markets (aragon‐ sanchez  &  sanchez‐martin,  2005;  garrigos‐smith  et  al., 2005;  gibbons  et  al.,  2003).  ec  firms  operate  in  an  environment  that  specifically  requires  adaptive  capabilities  in  dealing  with  rapid  technological  advancement  (mckee,  varadarajan,  &  pride,  1989;  saini & johnson, 2002). among the four  strategy  types, prospector  firms  tend to  have  the  highest  level  of  adaptive  capabilities  (mckee  et al., 1989;  saini &  johnson,  2002).  as  a  result,  saini  &  johnson  (2002)  empirically  tested  the  miles  and  snow  strategic  typology  framework  but  found  that  prospectors  had  higher  performance  levels  than  did  analyzers, defenders, and reactors in b2c  ec  firms.  thus,  strategies  chosen  by  large  e‐brokers  and  smes  can  have  different results on market performance.  resource‐based view of the firm parnell  and  hershey  (2005)  stated  that  scholars  were  aware  of  their  inability  to  elucidate  performance  variances  within  an industry. further, critiques of strategy  typologies have focused  on  their  relative  neglect  of  the  unique  idiosyncratic  resources  at  the  individual  firm  level  (barney  & hoskisson,  1990).  as  a result,  strategists have moved their  attention to  firm‐level resources, such as the resource‐ based  view  (rbv).  penrose  (1959)  contributed to the resource‐based view of  the  firm  by arguing  that a firm  is  more  than  an  administrative  function;  it  is  a  collection  of  productive  (both  physical  and  human)  resources  that  are  determined  by  managerial  decisions  on  how to use productive resources to ensure  a  firm’s  profit  and  growth.  accordingly,  human  resources  are  one  of  the  productive  resources  that  determine  a  firm’s profitability. in other words, firms  with more human resources are likely to  perform  better  financially  than  smaller  firms because  of  economics of scale and  market  power.  organizational  size  has  been recognized as one of the significant  factors  affecting  firm  performance  (hatfield & kohn, 2001; smith, guthrie, &  chen,  1989).  empirical  studies  of  firm  sizes indicated that firms of different sizes  showed  different  levels  of  financial  performance  (collis,  young,  &  goold,  2003;  osteryoung,  constand,  &  nast,  1992).  as  a  result,  this  study  explored  market performance differences between  large firms and smes.  scholars  considered  that  barney  (1991)  provided  a  complete idea  of  the  modern  resource‐based  view  (rbv)  of  the  firm.  barney built on the prior assumptions that  strategic resources are heterogeneous and  immobile among firms in an industry (or  group)  and  that  the  unique  assets  and  capabilities  some  firms  have allow  those  firms to sustain competitive advantage. as  journal of small business strategy    20 a  result,  the  rbv  accentuates  strategic  choices  by  a  firm’s  top  management  to  identify, develop (or create), and deploy a  firm’s  unique resources  to  maximize and  attain  above‐average  returns.  the  resource‐based  perspective  emphasizes  strategic  exploitation  of  firm  assets  and  capabilities (teece, pisano, & shuen, 1997).  firms  looking  to  create  performance  advantages  can  attain  above‐average  returns  by  bundling  or  assembling  resources  to  create greater  organizational  capabilities  (penrose,  1959;  peteraf,  1993;  wernerfelt, 1984; zhu & kraemer, 2002).  the  rbv  theory  provides  promising  research  direction  for  future  study  because researchers  can  easily construct  and  test  a  firm’s  resources  and  capabilities.  empirical  studies  have  utilized  the  theory  to  understand  the  value of ec firms. most ec studies used  this model to understand and assess b2b  net‐enabled  business  value  (barua,  konana,  &  whinston,  2005;  barua,  konana, whinston, & yin, 2004;  zhu &  kraemer,  2002).  researchers  who  have  used  this  model  to  assess  b2c business  value  include  auger  (2003),  colton  (2004),  and  saeed,  grover,  and  hwang  (2005). their findings showed a positive  relationship  between  ec  resources  and  capabilities and firm performance.  the rbv of the firm posits that integrating  a firm’s resources and capabilities creates  competitive  advantages  that  lead  to  superior  returns.  scholars have perceived  ec  as  a  new  capability  to  gain  a  competitive  advantage  through  value  creation (ravichandran & lertwongsatien,  2005; rayport & sviokla, 1995; saeed et al.,  2005; yeung & lu, 2004; zhu & kraemer,  2002).  value  creation  is  based  on  the  internet’s ability to provide value to online  shoppers,  through  online  trading,  new  products  and  services,  and  information  (amit & zott, 2001; oetzel, 2004) that is  made  possible  by  it  system  integration  throughout the value chain (ravichandran  & lertwongsatien, 2005; zhu  &  kraemer,  2002).  rooted in an rbv, several variables  of  it  r e s o u r c e s  a n d  c a p a b i l i t i e s  ( o r  competencies)  have  been  proposed.  as  information  system  (is)  researchers  adopted  this  theory,  some  ec  scholars  have begun to apply a resource‐based view  by  linking firm resources  (chief executive  officer’s  commitment  to  ec)  and  capabilities  (web  site  design  and  information  technology  [it]  capabilities)  to firm performance (business value) in e‐ businesses (barua et al., 2004; saeed et al.,  2005; zhu & kraemer, 2002). scholars are  trying  to  understand  the  impact  of  it  system  integration  on  firm  performance  (barua  et  al.,  2004;  ravichandran  &  lertwongsatien, 2005; saeed  et al.,  2005)  and  the  results  are  encouraging.  in  addition,  web  site  design  features  are  perceived  as  a  process  that  constantly  upgrades  its  design  capabilities  to  add  value  for  customers  (auger,  2005).  by  exploiting the internet, companies are able  to  integrate  systems  internally  and  to  create value externally in the value chain.  employing  an  rbv,  these  scholars  proposed a model of how a firm’s ability to  combine  and  coordinate  its  resources  to  create  online  information  capabilities  enhances  operational  and  financial  performance. previous  empirical  studies  found  that  ceo  commitment  to  ec  as  a  firm  resource  and  web  site  design  and  it  system  integration  as  ec  capabilities  were  the  major  contributors  to  firm  performance  (auger,  2005;  graham,  cannice, & sayre, 2002; huizingh, 2002;  karayanni  &  baltas,  2003;  lee  &  kim,  2002; liang, lin, & chen, 2004; lohse &  spiller, 1999; oetzel, 2004; ranganathan  & grandon, 2002; saeed et al., 2005; saini  & johnson, 2002; saini & johnson, 2005;  sung & gibson, 2005; zhuang & lederer,                                                                                    volume 19, number 2 fall/winter 2008/2009   21 2004).  however,  these  b2c  ec  factors  were  all  investigated  separately  to  explain their effects  on firm (or market)  performance  from  either internal (firm‐ level)  or  external  (industry‐level)  analyses. consequently, this study is the  first  to  integrate  all  of  these  b2c  ec  factors  from  internal  firm  effect  and  external  industry  effect  to  explain  b2c  ec market performance. in  addition,  this  study  included  web  age.  strategic  management  and  ec  research  have  suggested  that  web  age  has been an important b2c factor in the  strategy‐performance  relationship  (auger,  2005;  saini  &  johnson,  2002).  firms  that  launched  their  web  sites  earlier  are  likely  to  enjoy  first‐mover  advantage  (auger,  2005;  saini  &  johnson,  2002).  by  combining  all  of  these  b2c  ec  factors,  this  study  explored their relationship with market  performance  in  large  e‐brokers  and  smes.  theories of strategic management concur  with  schendel  and  patton’s  (1978)  financial  model of  the firm  that reflects  three strategic decisions: the goals of the  firm  (generally  profit‐oriented),  the  available  means  or  a  firm’s  resources  allocations (internal variables) that relate  to  rbv,  and  environmental  constraints  (external  variables)  that  are  associated  with the strategic typology framework. in  addition,  rumelt  (1991)  attributed  performance  variation  across  firms  to  both internal and external factors. hence,  this  financial  model  provides  logic  to  integrate  the  strategic  typology  framework  and  the  rbv  to  explain  firm  (market) performance.  methodology the  rationale  for  choosing  the  online  brokerage  sector  was  that  its  industry  offers  financial products  and information  that  can  be  digitalized  and  sold  online  instantly (dubelaar, tsarenko, & gabbott,  2003; lee & kim, 2002; lin, 2002; oetzel,  journal of small business strategy    22 figure 1 an integrated model of b2c ec factors in explaining market performance 2004).  the online  brokerage sector  is an  indicator of  the  internet’s  success  in  the  united  states  and  taiwan  (chang, 2004;  saini & johnson, 2005). in addition, online  brokerage is taiwan’s second‐largest sector  in terms  of  online  market scale  and the  only  sector  that  has  enjoyed  significant  growth  in  taiwan  (department  of  commerce,  2005).  taiwan’s  e‐brokers  conduct  their  brokerage  services  (buying  and  selling  financial  products)  over  the  internet. sample a  complete  target  population  list  was  downloaded  from  the  taiwan  stock  exchange  and  taiwan  securities  association  web  sites.  in  september  2006, there were approximately 61 online  securities  brokerage  firms  (trading  department  of  taiwan  stock  exchange,  2006).  additionally,  they  provided  the  basis  for  market  performance  data,  obtained through secondary analysis.  in addition, top managers from these 61 e‐ brokerage firms were a target population.  top managers, one and two  levels  below  the  ceos,  have  frequent  contact  with  ceos  and  were  recruited  for  this  study  because  of  their  thoughts  on  ceo  commitment  to  ec,  corporate  strategy  types,  web  site  design,  and  it  system  integration capabilities. surveys were sent  to  440  identified  division  heads  and  assistant  managers.  data  were  collected  using  a  combination  of  phone  calls  and  mail surveys in order to have the highest  possible response rate.  of  the  440  managers,  187  participated,  but only 166  returned the mailed survey.  seven  of  these  surveys  were  either  incomplete or invalid. this resulted  in a  total  of  159  usable  responses  for  data  analysis, representing  a  response  rate of  36.14%. as for the firm performance data,  a total of 61 e‐brokerage firms comprised  the  accessible  population.  only  52  e‐ brokerage  firms’  financial  data  (online  sales and market share) out of the 61 firms  in  the  sector  were  used  in  this  study,  representing 85% of the population. measurement a six‐part questionnaire with a total of 33  items was used in this study. these parts  dealt  with,  respectively,  organizational  characteristics,  top  managers’  profile,  ceo  commitment,  strategy  types,  web  site  design,  and  it  system  integration  capabilities.  top  managers  have  the  authority  to  lead  and  set  strategic  directions  for  organizations  and  “work  toward the organization’s goals  using  its  resources  in  an  effective  and  efficient  manner”  (mcnamara,  1999,  p.  3).  the  profile  of  top  managers  contained  four  items—gender, age, education level, and  tenure—all of  which were  developed  by  the  researcher.  miles  and  snow  (1978)  defined  strategy  as  a  pattern  of  an  organization’s  critical  decisions  and  actions.  further,  miles  and  snow  identified a typology that consists of four  strategy  types:  prospectors,  defenders,  analyzers, and reactors.  an instrument of miles and snow (1978)  strategy types was developed by snow and  hrebiniak (1980). different strategy types  respond  differently  to  the  external  environment.  according  to  miles  and  snow  (1978),  prospectors  constantly  search  for  market  opportunities.  prospectors  are  usually  the  first  to  respond  to  emerging  markets  and  thus  they create the change (set the tone) that  their  competitors  can  only  follow.  in  contrast,  defenders  serve  in  a  narrow  product‐market  environment  and  focus  on  improving  operational  efficiency.  analyzers  prefer  a  hybrid  strategy  that  balances defenders and prospectors in the  interests  of  operational  efficiency  and  effective  response  to  environmental  changes.  finally,  reactors  do  little  more                                                                                    volume 19, number 2 fall/winter 2008/2009   23 than respond to  environmental changes.  the  instrument  took  a  categorical  approach—four  descriptive  paragraphs  that represent the four strategy types. top  managers  were  asked  to  select  the  descriptive paragraph (unlabeled strategic  types) that seemed closest to their firm’s  strategy.  ceo  commitment  to  ec  refers  to  the  level of committing passion and resources  in  ec.  this  part  of  the  questionnaire  included  three  items  to  measure  ceo  commitment to ec, developed by powell  and  dent‐wicallef  (1997)  and  revised  by  zhuang  and  lederer  (2004).  a  5‐point  likert scale with three items was used and  the  answers  ranged  from  “strongly  agree” (5) to “strongly disagree” (1).  a  comprehensive  web  site  design  that  incorporates  the  features  internet  technology  uses  to  create  web  site  capabilities  is  defined  as  possessing  ec  capabilities  (zhu  &  kraemer,  2002;  zhuang  &  lederer, 2004).  the  web site  design capabilities questionnaire that was  developed by zhuang and lederer (2004)  consisted  of  six  dimensions.  the  first  dimension  is  interactivity: an  interactive  site  is  user‐friendly  (fast  responses  to  customers).  the  second  dimension,  transaction application  capability, allows  online customers to conduct transactions  with  security  and  order  tracking.  the  third,  catalog  application  capability,  provides  up‐to‐date  information  about  products  and  services  that  meet  customers’  needs.  the  fourth  is  the  interface,  which  refers  to  the  ease  of  navigation  and  customization.  fifth  is  publishing  application  capability,  which  provides  the  company  policy  and  information to create customer trust. the  sixth  dimension  is  server  performance,  which  is  a  site’s  download  speed  and  frequent system crash.  it system integration refers to it systems,  such  as  erp,  scm,  and  crm,  that  are  coordinated  to  allow  online  information  sharing  and  transaction  execution  across  the value chain. the construct, developed  by the researcher, has one item, measured  by a 7‐point scale, ranging from “no system  integration  at  all”  (1)  to  “completely  integrated” (7).  in addition, one control variable  of  web  age  was  also  included.  web  age  is  the  number of years that b2c ec online firms  have been in operation (saini & johnson,  2002). web age was measured by the time  that  e‐brokers  have  been  in  operation.  firm size indicates its level of operational  resources (auger, 2005). it was measured  by  the number  of  employees. this  study  adopts  the  u.s. definition  of  a company  with  more than  500  employees’  number  as large,  and those with fewer  than  500  employees  as  small  smes  in  this  study  (holmes & gibson, 2001).  market  performance  (the  dependent  variable)  was  measured  by  online  sales;  this  is a widely applied financial measure  (auger,  2005;  garbi,  2002;  motiwalla,  k h a n ,  &  x u ,  2 0 0 5 ;  r a j g o p a l ,  venkatachalam,  &  kotha,  2001;  saini  &  johnson, 2005). online market share  has  been  applied  in  research  of  e‐brokerage  firms  (saini & johnson, 2005). an annual  growth rate was calculated for online sales  from the period of july 2005 to june 2006  and online market share (oms) only used  the  june  2006  figure  (an  accumulated  financial measure). data for both measures  were  obtained  from  taiwan  stock  exchange’s trading department.  convergent and divergent validity of the  instrument  was  established  using  factor  correlation  matrix  (r  <  .6).  in  addition,  construct validity using exploratory factor  analysis  was  established  for  web  site  design features with factor loading higher  than .4. reliability for other  instruments  journal of small business strategy    24 was also assessed by internal consistency  and inter‐rater reliability estimates and all  had met the minimum requirement (α > . 7 and kappa > .7). results descriptive  analyses  of  the  final  data‐ producing  sample  are  presented  first.  characteristics  of top managers  (gender,  age,  education  level,  and  tenure)  are  presented. as shown in table 1, most of  the  managers  (65%)  were  males.  fifty‐ three  percent  of  them  had  bachelor’s  degrees  and  43%  had  master’s  degrees.  the mean age of the managers was 38.96  years, ranging from 32 to  48  years of age  with  a  standard  deviation  of  2.63.  the  largest age group (45.9%) was between 38  and  40  years  old,  and  the  smallest  age                                                                                    volume 19, number 2 fall/winter 2008/2009   25 table 1 sociodemographic characteristics of top managers by gender, age, education level, and tenure demographic  variables frequency percent mean standard  deviation gender female 56 35.2% male 103 64.8% total 159 100% education associate’s degree 6 3.8% bachelor’s degree 84 52.8% master’s degree 69 43.4% total 159 100% 2.4 0.56 age 32‐34 12 7.6% 35‐37 40 25.2% 38‐40 73 45.9% 41‐43 28 17.6% 44‐48 6 3.8% total 159 100% 38.96 2.63 tenuretenure 1‐3 24 15.1% 4‐6 69 43.4% 7‐9 47 29.6% 10‐12 12 7.6% 13‐15 5 3.1% 16‐20 2 1.3% total 159 100% 6.32 3.08 group  (3.8%)  was  between  44  and  48  years of  age. the majority (88.6%)  were  between 35 and 43 years old. the mean of  managers’  tenure  was  6.32  years  with  a  standard  deviation  of  3.08.  most  top  managers  had  been  with  the  same  company for 4‐6  years  (43.4%), followed  by 7‐9 years (29.6%), 1‐3 years (15.1%), and  10‐12 years (7.6%).  means  and  standard  deviations  of  web  age  and  market  performance  for  both  large  firms  and  smes  are  presented  in  table 2. according to firm size (cut point  of less than or exceeding 500 employees),  95 e‐brokers were identified as large and  64 designated as smes. taiwanese large e‐ brokerage  firms  had  a  mean  of  89.47  months  (approximately  7.5  years)  to  generate online sales, ranging from 46 to  108  months with a  standard deviation of  12.58 months. among smes, web age had  a mean of 70.27 months (5.9 years) with a  standard  deviation  of  19.19  months,  ranged from 22 to  104  months operating  online.  large  e‐brokers  entered  the  ec  earlier than smes. in terms of online sales  growth rate (osgr), large companies had  a mean of 4.11 with a standard deviation of  2.21.  as  for  smes,  their  mean  and  standard  deviation  were  4.27  and  2.45,  respectively.  not  much  difference  was  found between large and smes for osgr.  in  terms of  oms  as  in  june  2006, large  companies  had  a much  higher  mean of  6.15  than  smes’  2.47  with  a  standard  deviation of 2.32 and 1.43, respectively.  participating  managers  were  asked  to  select the paragraph that best represented  their  firm’s  strategy  from  among  four  descriptive paragraphs (representing four  unlabeled strategy types). table 3 showed  means and standard deviations of large e‐ brokers  and  smes  in  terms  of  market  performance. comparing large and smes,  22  and  6  top  managers,  respectively,  perceived  their  company’s  strategic  type  as  prospector.  thirty‐six  (large)  and  33  (smes) managers identified their strategic  type  as  defenders.  thirty  (large)  and  12  (smes)  recognized  their  corporate  strategy  to  be  analyzers.  the  smallest  group  identified was  the  reactors, which  made up 7 large and 13 smes. in general,  smes  with  prospectors,  defenders,  and  analyzers had higher means than large e‐ brokers  in  terms  of  osgr.  in  contrast,  large  firms  had  much  higher  means  of  oms  than smes  across all  four strategy  types.  participating  managers  were  asked  to  respond  to  three  items  about  their  top  executives’ commitment to ec. each item  journal of small business strategy    26 table 2 means and standard deviations of web age and market performance for large e‐brokers and smes descriptive  analyses   web age (month)web age (month) osgr (in %)osgr (in %) oms (in %)oms (in %)descriptive  analyses   large smes large smes large smes n (valid) 95 64 95 64 95 64 mean 89.47 70.27 4.11 4.27 6.15 2.47 std. deviation 12.59 19.19 2.21 2.45 2.32 1.43 minimum 46 22 ‐41.90 ~12%‐41.90 ~12% 0~0.1%0~0.1% maximum 　 108 104 above 100%above 100% 0.55~1.5% 10.01~18% was rated on a  5‐point likert scale from  “strongly  disagree”  (1)  to  “strongly  agree”  (5).  table  4  shows  the  percent  distribution  of  response categories, item  means,  standard  deviations,  and  dimension scores  for  ceo  commitment.  the  measurement  of  ceo  commitment  had  a mean  score  of  3.61, ranging  from  item one at 3.12 (the lowest), to item three  at  4.11  (the  highest),  with  a  standard  deviation of 0.73. top managers perceived  item  one  as  the  most  neutral  (35.22%),  followed by agree (32.70%), and disagree  (25.9%).  for  items  two  and  three,  the  degree  of  ceo  commitment  perception  was elevated. most top managers  agreed  that  ceos  had  either  supported  ec  (49.69%) or shown that ec was important  (55.97%).  the  mean  for  item  three  was  the  highest  at  4.11  (between  agree  and  strongly agree). overall, the measurement  had a mean dimension score of 10.83.                                                                                   volume 19, number 2 fall/winter 2008/2009   27 table 3 means and standard deviations of strategy types for large firms and smes strategy types nn meanmean std.  deviation std.  deviation 　 meanmean std.  deviation std.  deviationstrategy types large smes large smes large smes 　 large smes large smes osgrosgrosgrosgr omsomsomsoms prospector 22 6 3.55 4.67 1.90 2.07 7.36 2.67 1.84 1.37 defender 36 33 4.33 4.45 2.51 2.41 6.00 2.85 2.16 1.50 analyzer 30 12 4.03 5.50 1.94 2.78 6.17 2.08 2.15 1.24 reactor 7 13 5.00 2.46 2.58 1.39 3.00 1.77 2.31 1.17 total 95 64 4.11 4.27 2.21 2.45 　 6.15 2.47 2.32 1.43 table 4 percent distribution of top managers’ perceptions of ceo commitment response categories  (percent distribution) response categories  (percent distribution) response categories  (percent distribution) response categories  (percent distribution) response categories  (percent distribution) mean std. dev. item strongly  disagree disagree neutral agree strongly  agree ceo commitment 1 2 3 4 5 3.61 0.72 1. our top executives  have clearly indicated  their commitment to ec  1.89% 25.79% 35.22% 32.70% 4.40% 3.12 0.91 2. our top executives  have supported ec  within the company 1.89% 10.69% 25.16% 49.69% 12.58% 3.60 0.91 3. our top executives  have shown that ec is  important to the  company 0.63% 1.89% 12.58% 55.97% 28.93% 4.11 0.73 dimension score (range  3‐15) 10.83 for the web site design construct, which  has 6 dimensions, the average mean score  of  the  instrument  was  3.79  (between  “neutral” and “agree”). the highest rated  dimension  was  publishing  application,  which had a mean of 3.99 (close to agree)  and  the  lowest  rated  dimension  was  catalog application, which had a mean of  3.38  (close  to  neutral).  further,  the  dimensions  of  interactivity  and  transaction  application  had  the  same  mean  of  3.97  (close  to  agree).  interface  dimension  had  a  mean  of  3.73  and  the  server  performance  dimension  had  a  mean of 3.70.  top  managers  in  the  e‐brokerage  firms  were  asked  to  rate  the  effectiveness  of  their  it  system integration capability. it  system  integration  had  a  mean  of  3.65  (between  31%  and  70%  of  system  integration) with a standard deviation of . 47.  thirty‐nine  top  managers  perceived  their  it  system integration to  be 31%  to  50%,  representing  24.5%  of  the  total  sample.  another  33  top  managers  believed that their  it  system integration  had  reached  51%  to  70%,  making  up  20.8% of the total sample. additionally, 14  top  managers  perceived  no  it  system  integration at all, while two top managers  believed their it system to be completely  integrated.  for  all the above independent variables,  means  and  standard  deviations  were  further  grouped  into  large  firms  and  smes in (table 5). those scale measures  ranged  from  2.94  to  4.13  (“neutral”  to  “agree”). in general, variables of  large  e‐ brokers had higher means than smes.  market  performance  (the  dependent  variable) was assessed by secondary data  using  online  transaction  value  (online  sales) and market share. an annual osgr  had a mean of 4.16 and standard deviation  of  2.30. in addition, online market share  had  a  mean  of  4.67  with  a  standard  deviation  of  2.70.  the  skewness  of  the  dependent variables  was  under  +1  or  ‐1,  meaning  that  the  sample  was  normally  distributed  (leech,  barrett,  &  morgan,  2005).  strategy types and market performance one‐way  anova  test  with  post  hoc  multiple  comparisons  using  lsd  was  conducted (table 6). in terms  of  annual  osgr,  no  significant  differences  were  found among strategy types in large firms  but  defender  and  analyzer  strategies  significantly  outperformed  reactors  in  smes. in contrast, prospectors of large e‐ brokers had a significantly higher mean of  oms  than  analyzers,  defenders,  and  journal of small business strategy    28 table 5 means and standard deviations of b2c ec variables for large firms and smes ceo  commit. it system  integ. web site designweb site designweb site designweb site designweb site design 　 　 ceo  commit. it system  integ. interface publishing catalog intera&serv transaction large firm (n=95)large firm (n=95)large firm (n=95)large firm (n=95)large firm (n=95)large firm (n=95)large firm (n=95)large firm (n=95)large firm (n=95) mean 3.76 4.13 3.74 4.05 3.48 4 4.05 std. dev. 0.69 1.31 0.59 0.66 0.66 0.47 0.5 smes (n=64)smes (n=64)smes (n=64)smes (n=64)smes (n=64)smes (n=64)smes (n=64)smes (n=64)smes (n=64) mean 3.39 2.94 3.34 3.84 3.02 3.79 3.87 std. dev. 　 0.72 1.48 0.63 0.59 0.71 0.45 0.41 reactors.  defenders  and  analyzers  had  significantly  higher  means of  oms  than  reactors,  but  significantly  lower  mean  than  prospectors  for  large  firms.  moreover, no  significant mean difference  was  found  between  defenders  and  analyzers of large e‐brokers. as for smes,  defenders  significantly  outperformed  reactors in terms of oms.  b2c ec factors and market performance  of large firms versus smes one‐way  anova  (f  test)  showed  no  significant difference between large firms  and smes in terms of an annual osgr. in  contrast,  large  firms  indeed  had  a  significantly  higher  oms  than  smes.  additionally,  hierarchical  multiple  regression  models  were  further  investigated  to  see what  b2c ec factors  contributed  to  market  performance  in  different  firm  sizes.  among  large  e‐ brokers, the result showed the adjusted r2  value in model 1 was .07, meaning that 7%  of  variances in  osgr  was  explained but  the model was not significant (p < 0.14).  however, when web age was added, the  adjusted r2 increased to .15 (f = 2.14, p < . 015)  in  model  2,  meaning  that  15%  of  variances  in  osgr  were  predicted.  among  all  independent  variables,  the  beta weight of catalog capability (β = .37)  of  web  site  design  was  positively  significant  but  it  system  integration  capability (β = ‐.38) and web age (β = ‐. 34)  were  negatively  significant  and  contributed  to  osgr  in  model  2.  for  smes,  the  adjusted  r2  for  both  models  were .15 and .14, so adding web age had  no effect on model 2. even though both  predication  models  were  significant,  no  independent  variable  contributed  significantly to  osgr. overall, the effect  size of these models  in predicting osgr  was rather small.  the oms was another financial indicator  used as the dependent variable. for large  firms, the results of hierarchical multiple  regression models demonstrated that the  combination of all independent variables  (f=4.83,  p<.000)  significantly  predicted  with the adjusted r2 value at .36, meaning  that 36%  of  the  variances  in oms  were  explained  in  model  1.  again,  catalog  capability (β = .32 in model 1 andβ = .31 in  model 2) of web site design contributed  positively  and  significantly.  in  model  2  adding  web  age,  the  adjusted  r2  increased from .36 to .60 (f = 10.32, p < . 000), meaning that 60% of the variance in  oms  in  large  firms  was  predicted.  the  increase  in  the  adjusted  r2  in  model  2  indicated  that  the  web  age  (a  positive  and  significant  contributor)  explained  24%  of  the  additional  variances  in  the  oms.  it  system  integration  capability  became a positive factor (p < .07) but had  no  significance  in  predicting  oms.  overall, the  effect size of this  model  (in  predicting  oms)  was  considered  to  be                                                                                    volume 19, number 2 fall/winter 2008/2009   29 table 6 significant differences of strategy types for large firms and smes in osgr and oms: lsd test strategy types osgrosgr 　 omsoms strategy types large smes 　 large smes prospector p>a>d>r defender d>r d>r d>r analyzer a>r a>r reactor 　 r<d<a<p large. as for smes, neither model (osgr  or oms) was significant.  discussion  based on the financial model, this  study  combined  the  resource‐based  view  to  explain firm‐specific effect (firm resources  and  capabilities)  with  miles  and  snow’s  (1978) strategic  typology as  the  industry  effect to respond to external environment  for  firms  of  different  sizes.  dramatic  differences  were shown  in  the results of  strategic  choices  and  b2c ec  factors  in  osgr  and  oms  between taiwan’s  large  e‐brokers and its smes.  top  managers  of  smes  should  adopt  defender and  analyzer  strategies  if  their  purpose is to increase online sales within  a  year  and  should  choose  defender  strategies if  their  intention is to increase  long‐term  accumulated  online  market  share. it  is  easier  for  smes  to  sell  new  products  and  services  online  in  a  niche  market  that  can  be  built  using  limited  funds  and  result  in  a  quick  return.  however, it is  harder for smes  to  reach  higher  market  penetration  that  might  require continuous heavy investments in  advanced technologies or internet‐related  technologies.  overall,  smes  should  first  strive  for  a defender strategy that works  on  improving  cost  efficiency  as  a  long‐ term goal to  gain market penetration; at  the same time they might also try to be an  analyzer  in  creating  a  niche  market  to  gain online sales in the short run.  for  oms,  the  prospector  strategy  significantly  outperformed  analyzer,  defender, and reactor strategy types in the  e‐brokerage sector.  the result  coincided  with saini and johnson’s findings in 2002.  in  addition,  prospector,  defender,  and  analyzer all outperformed reactor strategy  type,  consistent  with  theoretical  proposition  (miles  &  snow,  1987)  and  prior  empirical  studies  (aragon‐sanchez  &  sanchez‐martin,  2005;  gibbons,  kennealy, & lavin, 2003). to be a winner,  top  managers  of  large  e‐brokers  should  first choose to be prospectors, which have  the most adaptive capabilities and market  competence  (mckee  et al., 1989; saini &  johnson, 2002), to deal with a constantly  changing environment. to survive in the  virtual  reality  created  by  ever‐evolving  information  technology,  adaptability  (innovation)  and  market  competence  become  two  of  the  most  influential  factors  in determining  long‐term success  (saini  &  johnson, 2002). large e‐brokers  have needed funds  that afford  them the  opportunity to make risky investments in  evolving  high‐technology  and  if  they  succeed, the winner takes all. as a result,  followers  are  likely  to  have  a hard time  catching  up  with  the  leader  who  has  already penetrated the market.  firms  of  different  sizes  had  different  levels of market performance. on the one  hand,  large  firms  outperformed  smes  because  they  have  more  to  invest  in  productive  human  resources,  to  reach  economies  of  scale, and to  have  market  power. on the other hand, smes have less  capital to  invest, find it harder to attract  talented  human  resources,  and  have  weaker  bargaining  market  power  than  large firms. thus, large firms are likely to  have  a  higher  market  penetration  rate  (accumulated  oms  in  this  study)  than  smes.  a  further  investigation  looked  into  b2c  ec  factors  in  relation  to  market  performance  among  firms  of  different  sizes  and  found  that  the  catalog  application capability of web site design  was  the  only  factor  that  contributed  positively  and  significantly  to  the  two  regression  models  (annual  osgr  and  oms).  this  indicated  that  providing  updated  information  about services  and  products  that  match  customers’  need  through the internet is critical in taiwan’s  e‐brokerage sector. investors (customers)  journal of small business strategy    30 are likely to perceive updated investment  information  as  creating  added  value  for  them.  as  a  result, top  managers  should  focus  on  building  and  strengthening  catalog application capability.  organizational characteristics of web age  had significant and positive contributions  to oms in large e‐brokers. the earlier and  longer  the  firm  operates  online,  the  higher  the  oms,  indicating  that  first  movers enjoy a certain advantage for large  firms.  this  is  consistent  with  current  literature  (auger, 2005; saini & johnson,  2002).  in  contrast,  web  age  had  a  significant  and  negative  impact  on  an  annual  osgr.  this  might  be  because  constant  high‐tech  investment  in  web  age might erode  short‐term online  sales,  but as market penetration increases, costs  are spread, and as  time passes, web age  takes effect (on oms).  in  the  short  run,  all  of  the  variables  investigated  in  this  study  could  explain  annual osgr but with  limited effect for  smes.  additionally,  no  variables  were  found  to  explain  oms  for  smes.  this  might be because the theories used in this  study  were  suitable  for  large  firms.  researchers  should look  for  a  theory  to  explain  market  performance  of  smes  (gilinsky, stanny, mccline, & eyler, 2001).  overall,  prospector  strategy,  ceo  commitment to ec, and web site design  and  it  system  integration  were  all  positive  explanatory  factors  for  oms  in  large firms. this supported the belief that  value creation  is based  on  the  internet’s  ability to provide value to online shoppers  through online trading, new products and  services, and information  (oetzel, 2004),  all  of  which  are  made  possible  by  it  system  integration  throughout the  value  chain (barua et al., 2004; ravichandran &  lertwongsatien,  2005;  zhu  &  kraemer,  2002). e‐brokerage firms  in taiwan need  to be able to do all things in order to have  higher  online  market  share.  doing  only  one thing well is not enough to succeed in  the virtual world. in order  to  succeed in  the rapidly changing ec environment, top  managers  of  taiwan’s  e‐brokers  should  consider  prospector  strategy  and  invest  firm  resources  into  ec,  bundle  and  leverage  ec  web  site  design,  and  it  system  integration  capabilities  to  create  value  for  customers  and  build  a  sustainable  competitive  advantage  over  competitors. this  study  was  the  first  to  integrate  strategy  types  with  resources  (ceo  commitment  to  ec)  and  capabilities  (web  site  design  and  it  system  integration), in addition to the web age,  to  explain  the  performance  of  firms  of  different sizes. the results indicated that  the  regression  model  (oms)  was  largely  explained by these factors (adjusted r2 = . 60)  in large firms  but not in smes. the  reason might be that theories in strategy  are mainly built for large firms. therefore,  it might be interesting  for a future study  to  construct  a  theory  that  specifically  explains sme’s firm performance.  no study is without its limitations. due to  cost  and  time  constraints,  the  study  applied  a  “one‐time  survey,”  whereas  a  longitudinal approach might be better for  a study of firm performance. the findings  in  this  study  cannot  be  generalized  beyond  e‐brokerage  firms,  due  to  the  different  characteristics  of  each  sector.  specific  online  firm  performance  in  e‐ brokerage  firms  was  difficult  to  obtain  beyond online sales and market share in  taiwan. as a result, perceptual indicators  such as unique visitors to the site, average  site traffic, and conversion rate could not  be  tested  in  this  study.  top  managers  were the only participants from taiwan’s  e‐brokers  and  their  perceptions  of  strategy types, ceo  commitment to  ec,  and  web  site  design  and  it  system                                                                                    volume 19, number 2 fall/winter 2008/2009   31 integration  capabilities  may  not  be  representative of all e‐brokers.  recommendations  for  future  study  are  intended  to  extend  the  scope  of  this  study.  the  perceptions  of  top  managers  might  be  biased  in  favor  of  their  company. thus, a study  using  customer  perception  should  be  considered  as  a  follow‐up  to  this  study  as  it  might link  customer loyalty to  market performance.  additional  perceptual  indicators  of  ec  performance such as average  site  traffic,  unique site  visitors, and conversion rate,  should be added to financial indicators to  measure  b2c  ec  performance  more  accurately.  different methods of data analyses, such  as  structural  equation  modeling  (sem),  should  be  conducted  to  examine  mediating factors such as strategy type or  ceo commitment to ec to see how they  affect  or  interact  with  web  site  design  and  it  system integration  capabilities as  well  as  firm  performance.  other  influential  factors  such  as  knowledge  management can be added to explain firm  performance  better.  finally,  a  cross‐ country  comparison  of  the  e‐brokerage  sector  can  be  conducted  to  see  how  different factors  affect  firm  performance  in different countries.  the findings  of  this  study contribute  to  the  understanding  of  b2c  ec  market  performance for both large and small‐to‐ medium enterprises and provide practical  insights  for  top  managers  to  gain  sustainable  competitive  advantages  in  pursuit  of  superior  performance.  in  addition,  study  results  may  also  be  applied  to  the  fields  of  marketing  and  strategic management. references amit, r. & zott, c. (2001). value creation  in e‐business. strategic  management journal, 22(6/7), 493– 520.  aragon‐sanchez, a. & sanchez‐marin, g.  (2005). strategic orientation,  management characteristics, and  performance: a study of spanish  smes. journal of small business  management, 43(3), 287–308.  auger, p. (2003). an empirical  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http://www.tse.com.tw/ch/about/company/service_contact.php http://www.tse.com.tw/ch/about/company/service_contact.php http://www.tse.com.tw/ch/about/company/service_contact.php http://www.census.gov/mrts/www/data/html/05q4.html http://www.census.gov/mrts/www/data/html/05q4.html http://www.census.gov/mrts/www/data/html/05q4.html http://www.census.gov/mrts/www/data/html/05q4.html reproduced with permission of the copyright owner. further reproduction prohibited without permission. an overview of rural entrepreneurship and future directions | published in journal of small business strategy loading [contrib]/a11y/accessibility-menu.js jsbs menu articles articles all for authors editorial board about issues ethics statement sponsors search sorry, something went wrong. please try your search again. × articles blog posts rss feed enter the url below into your favorite rss reader. https://jsbs.scholasticahq.com/feed × articles vol. 31, issue 4, 2021 november 16, 2021 cdt an overview of rural entrepreneurship and future directions dennis barber iii, ph.d., michael l. harris, ed.d., jeffrey jones, rural entrepreneurship ccby-4.0 • https://doi.org/10.53703/001c.29468 photo by sincerely media on unsplash jsbs barber iii, d., harris, m. l., & jones, j. (2021). an overview of rural entrepreneurship and future directions. journal of small business strategy, 31(4), 1–4. https://doi.org/10.53703/001c.29468 save article as...▾ pdf xml citation (bibtex) view more stats abstract prior research shows that rural entrepreneurship has its own distinct elements and deserves additional attention within the research community. the frameworks and methodologies from studies focused on high-growth and technology-based entrepreneurship are often used to explore rural entrepreneurial activities. this incongruence limits our understanding of the true impact entrepreneurship can have on rural communities. the articles in this special issue help advance our knowledge of rural entrepreneurship as a distinct field of study, and add to our understanding of its impact in the rural context. additional research avenues are suggested. this rural entrepreneurship special issue comes on the heels of multiple movements in the entrepreneurship research field around similar topics. the united states association for small business and entrepreneurship has hosted a special interest group for rural entrepreneurship for two years and is piloting a rural research fellows program. the academy of management in 2021 had a professional development workshop around the topic of small-town ecosystems. the research interest in this field is expanding. contextualizing rural as its own unique framework, instead of romanticizing the rural or urbanizing it, will take researchers employing new theoretical approaches and questioning the underlying assumptions of other types of entrepreneurship research before they are blanketly be applied to the rural context. the special issue begins to demonstrate the nuances of this field. rural research themes and contributions this special issue includes nine papers with authors from five countries employing a variety of empirical and descriptive approaches. the first three papers rely on empirical analysis of datasets from entrepreneurs or small businesses. the first paper, “rural entrepreneurship success factors: an empirical investigation in an emerging market” by prince gyimah & robert n. lussier examines the factors of business success using the lussier prediction model of firm success in ghana. the findings suggest that entrepreneurs in emerging markets have several important success factors including managerial experience, record keeping, financial controls, adequate capital and having parents with business ownership experience. record keeping and financial controls exert importance in nigerian business critical success factors (adeola et al., 2021). implications are discussed for advocacy organizations in ghana working with rural communities where the model can help ngos and governmental organizations in support of rural enterprises. the second paper in the special issue, “an examination of rural and female-led firms: a resource approach” by marcos segantini and lori a. dickes leverages the panel study of entrepreneurial dynamics to look at rural vs non-rural and female-led firms. in this study, monitored external funds is negatively related with the likelihood of firm termination in rural communities supporting that external funding for a rural entrepreneur could operate as a strategic resource. female firms in rural areas tend to be smaller and less productive, in general (rijkers & costa, 2012). the next paper, “lifestyle entrepreneurship and innovation in rural areas: the case of tourism entrepreneurs” by álvaro dias and graça miranda silva investigates the relationship of innovation to place. by looking at a sample of lifestyle entrepreneurs from rural areas in portugal, findings suggest relational capital contributes positively to firms’ knowledge absorption. the study has practical implications for the development of mechanisms which provide more contacts and networking opportunities to enhance the social capital of entrepreneurs. policymakers often neglect innovation policy evaluation at the regional level and finding the right policy mix presents a challenge (magro & wilson, 2019). the next two papers investigate the impact of and access to educational and service programs for rural small businesses. the first in this section, “developing a small business educational program for growing rural businesses” by timothy pett, john francis, and wendy veatch describes the design of a small business certificate program offered in rural kansas. the paper discusses the program structure, feedback on the program, and impacts on the businesses which participated. presently, 378 firms have participated with an 80% survival rate. in addition, these businesses have strategically enhanced their regional networks. this is a timely program as there exists a recent call in the entrepreneurship literature for the development of training, education, and curricula geared towards rural entrepreneurs (crawford & barber, 2020). the second paper, “small business development centers and rural entrepreneurial development strategies: are we doing enough for rural america?” by timothy dunne, katie toyoshima, and michael byrd analyzed data from small business development centers (sbdc) in idaho, largely rural, to uncover the differences between outcomes for businesses in rural versus urban areas. the findings suggest that most firms utilizing sbdc services are in urban areas. the implications of the study are that better access to training through technology can overcome some of the issues and that training should be better tailored to the needs of rural businesses. for example, there is a gap in education opportunities around succession and exit planning strategies for rural entrepreneurs (crawford & barber, 2020). the outcomes of these two papers suggest a gap in services offered, though the impact of these services on rural businesses depends on the entrepreneur’s capacity to implement recommendations and strategies (barber et al., 2021). the next paper, “the value of social media advertising strategies on tourist behavior: a game-changer for small rural businesses” by nory b. jones, patti miles, and tanya beaulieu, presents results from the consumers’ online brand-related activities model to investigate social media strategy. the findings suggest that social media advertising by rural businesses can significantly increase engagement with consumers. this type of engagement generates tangible and intangible benefits. social media interactions contribute to the development of social capital, a valuable intangible resource in rural markets (son & niehm, 2021). “fostering entrepreneurial ecosystems and the choice of location for new companies in rural areas – the case of germany” by matthias liedtke, dr. reza asghari, and dr. thomas spengler presents the case of germany to investigate entrepreneurial ecosystems by contrasting rural and urban. the authors propose that the lack of collaboration opportunities, access to investment, and little focus of policy initiatives present stronger challenges to rural businesses. to overcome these obstacles, an entrepreneurial governance structure aimed at regional policymaking to foster entrepreneurial development could be implemented. any attempt to build small town ecosystems benefit from an entrepreneurial approach to attracting, viewing, and utilizing resources (roundy, 2017). the final two papers in the special issue employ qualitative methodologies and investigate venture capital financing and entrepreneurial resilience respectively. jeff stambaugh and andy yu’s paper “why small deals don’t get done: evidence from rural entrepreneurs” utilizes a mini-case approach providing qualitative insights from 20 companies that did not close potential investment deals. the authors found issues with the buyers and sellers that led to failures. the most common dealbreakers involved company valuation and the reduced likelihood that rural businesses could be relocated. this paper stands as one of the few which investigates small deal acquisitions for rural businesses. large deals, involving firm headquarters, in rural areas generate favorable market reactions but involve a longer time to completion (bick et al., 2017). “flexing the leadership muscle: an international study of entrepreneurial resilience in rural communities during the covid-19 pandemic” by karise hutchinson, rachael fergie, emma fleck, georgann jouflas, and zen parry finishes out the special issue by employing a multi-stage analysis. the qualitative results highlight the existence of personal and business experience of crisis, positive mindset, personal faith, learning and leading, and relationships as being vital for entrepreneurial leadership and resiliency. over a third of these rural business leaders’ business models suffered and created significant internal pressure due to a reduction in business during the initial stages of the pandemic lockdown. psychological states of stakeholders in a region following a crises or disaster influence recovery efforts and emerging opportunities (gur et al., 2020). discussion and future research the diverse topics covered in this special issue showcase the multitude of research opportunities available within the context of rural entrepreneurship. early research by wortman (1990) called for the study of rural entrepreneurship and highlighted its importance as a viable economic development tool. similarly, fortunato (2014) argued that rural entrepreneurship is its own “distinct area of entrepreneurship research and practice” with unique elements that differ from traditional research focused on high-growth or high-tech ventures (p. 387). in order to better understand the transformative potential of entrepreneurship within rural communities, researchers must develop methodologies that appropriately fit within this context. while research has indicated that rural regions often have less access to financial and technological resources, there is also evidence that entrepreneurship and small business can become a key economic driver with these communities (ribeiro-soriano, 2017). rural regions have unique economic and structural opportunities available for prospective entrepreneurs. the development of more connected entrepreneurial networks within these regions may be necessary for these opportunities to materialize. rural ecosystems can provide the needed structure to allow entrepreneurship to become a catalyst for regional transformation. this can include access to creative capital sources, incubation and retail space, mentorship, and social opportunities that build a more interconnected entrepreneurial community. additionally, it is critical that service providers in rural regions have an intimate knowledge of these resources and related systems in order to effectively meet the needs of these business clients. the articles within this special issue provide important research and practical implications for rural entrepreneurship. these findings build upon our understanding of the uniqueness of entrepreneurship in the rural context and provide multiple avenues for future research. we encourage researchers to continually explore rural entrepreneurship and identify new frameworks, strategies, and methodologies that showcase the distinct elements of this field. these studies should examine both individual-level characteristics of rural entrepreneurs and entrepreneurial ventures, as well as macro-level elements needed to develop a robust community or regional ecosystem. in addition to advancing the literature, future studies should provide practical implications and best practices for rural service providers, practitioners, and policymakers. research-based solutions are necessary to develop programs that help level the playing field between urban and rural entrepreneurs. business success should not be dependent on your geographical location. we expect the articles in this special issue to help drive future research in these directions. references adeola, o., gyimah, p., appiah, k. o., & lussier, r. n. (2021). can critical success factors of small businesses in emerging markets advance un sustainable development goals? world journal of entrepreneurship, management and sustainable development, 17(1), 85–105. https://doi.org/10.1108/wjemsd-09-2019-0072 google scholar barber, d., iii, harris, m. l., & paynter, s. (2021). a model to increase the impact of student consulting projects in rural communities. in c. h. matthews & e. w. liguori (eds.), annals of entrepreneurship education and pedagogy (pp. 116–132). google scholar bick, p., crook, m. d., lynch, a. a., & walkup, b. (2017). proximity to urban centers in mergers and acquisitions. managerial finance, 43(11), 1292–1308. https://doi.org/10.1108/mf-01-2017-0014 google scholar crawford, a., & barber, d., iii. (2020). the gap in transition planning education opportunities for rural entrepreneurs. american journal of entrepreneurship, 13(1), 92–125. google scholar fortunato, m. w.-p. (2014). supporting rural entrepreneurship: a review of conceptual developments from research to practice. community development, 45(4), 387–408. https://doi.org/10.1080/15575330.2014.935795 google scholar gur, a. g., bendickson, j. s., madden, l., & mcdowell, w. c. (2020). entrepreneurial opportunity recognition in the face of disasters. international journal of entrepreneurial behavior & research, 26(4), 671–693. https://doi.org/10.1108/ijebr-09-2019-0537 google scholar magro, e., & wilson, j. r. (2019). policy-mix evaluation: governance challenges from new place-based innovation policies. research policy, 48(10), 103612. https://doi.org/10.1016/j.respol.2018.06.010 google scholar ribeiro-soriano, d. (2017). small business and entrepreneurship: their role in economic and social development. entrepreneurship & regional development, 29(1–2), 1–3. https://doi.org/10.1080/08985626.2016.1255438 google scholar rijkers, b., & costa, r. (2012). gender and rural non-farm entrepreneurship. world development, 40(12), 2411–2426. https://doi.org/10.1016/j.worlddev.2012.05.017 google scholar roundy, p. t. (2017). “small town” entrepreneurial ecosystems: implications for developed and emerging economies. journal of entrepreneurship in emerging economies, 9(3), 238–262. https://doi.org/10.1108/jeee-09-2016-0040 google scholar son, j., & niehm, l. s. (2021). using social media to navigate changing rural markets: the case of small community retail and service businesses. journal of small business & entrepreneurship, 33(6), 619–637. https://doi.org/10.1080/08276331.2021.1871711 google scholar wortman, m. s., jr. (1990). rural entrepreneurship research: an integration into the entrepreneurship field. agribusiness, 6(4), 329–344. https://doi.org/10.1002/1520-6297(199007)6:4 google scholar powered by scholastica, the modern academic journal management system stratecy marketing strategies for small businesses: applications of expectations/ performance gaps timothy l. wilson clarion university james m. hainault michigan technical university abstract service businesses have been especially at tractive as small businesses. researchers and practitioners agree that service quahty involves a comparison of perceptions of performance and expectations prior to consuming the service. a simple technique is illustrated that may be used to capture the essence of the "expected" versus "actual" quality gap that frequently exists in services and appears to be overlooked in establishing small service business strategies. establishment of a particular marketing strategy that was developed in an s bi case as a consequence of this approach is discussed. introduction service-producing industries continue to dominate the u.s. economy in terms of both employment and output, and because of growth rates this dominance over goods-producing businesses is likely to continue into the next century (13,15). further, services have been especiagy attractive as small businesses. the very nature of services imply that capital investments tend to be low, and because of the close relationship between service provider and client, individuals tend to have a very good chance of succeeding. additionally, production skills learned by individuals within corporate structures translate very well when these individuals elect to form their own firms. due to classification schemes, these individuals frequently become "service" providers of these same skills in their own small businesses. clearly, due to expected continued growth in this sector, strategies appropriate for small businesses should be of concern, and marketing strategies, in particular, should receive attention. bradley and saunders, for instance, in a study of bankruptcies over an eight year period concluded that lack of marketing skills could be listed as a major cause of most of these note: a portion of this study was part of a cooperative sb1project. the contributions of the students in conducting the work is thus acknowledged, and the authorization of the supporting firm to publish this paper is greatly appreciated. hlso, the roork was conducted while one of the authors was on a sabbatical stay at michigan technological university. the combined financial support of the school of business and the bureau of lndustnal development is therefore noted. 35 bankruptcies (3). likewise, other studies have cited marketing problems as the most numerous for sbi clients (4,18,19). fortuitously, the development of service marketing theory and practice has evolved with this need. although there is some question about where to start measurement of service development, publications over the past two decades have been appreciable (5). nevertheless, it is not clear that this body of literature has found its way into current small business strategy. reasons might be dted for this apparent deficiency. hartman indicated that there are differences between planning as it is done in large versus small businesses. smafl business planners appeared to have a preference for simple techniques that fit the specific needs of the small business (10).the purpose of this pa per is to illustrate the application of a simple technique that is believed to be useful in directing strategic marketing efforts. the technique is directly oriented toward understanding customers, which is acknowledged as essential in service design (2). in particular, customer satisfaction receives focus, which has been identified as one element essential in successful ventures (17). implications conceivably could be dramatic; sonfield indicated that 72 percent of the firms studied could identify a specific strategic decision as being importantin theirsuccess,and of this portion,61percent said thataspecificchangein marketing focus, operations, services, or product was the specific strategic move that was important (16). background researchers and practitioners agree that service quality involves a comparison of perceptions of performance and expectations prior to consuming the service (12). gronroos has described a model that relates service quality perception to a gap that exists between expected service and perceived service. this formulation implies that the provider of a service will have to match the perceived service with the expected service in ord er to achieve customer satisfaction (7). both technical quality (know-how) and functional quality (attitudes and appearances) impact service image, which relates to this gap. traditional marketing activities (advertising, public relations and word-of mouth communications) reflect on expectations and thereby impact any gap that may exist. this model is shown in figure 1. figure 1. gronross model of service perceptions (7) expcctcd pcrcci cd ~ vh pcrceivcd smvicc quality ~ms am 1 traditional m~edug ~ctivities (ad crtising, pcmonal setrutg, pr, pricing); and rxmma nlflu cucc hy lludlllolls, ideology. md warder?-mouth tcchnical atliludcc ~ol tivms mmi us customer bcha iourcontacts knowtcchnical p cdmtfl h quality hty a ceca dhg hy scr icamindedoms comp ut mixed ~?mrms wh t? ho 7 36 this model has a solid intuitive base and has tended to receive experimental confirmation. garland,although results werenotinterpreted in termsofthismodel,hasprovided confirmatory evidence that users of a specific service in fact do make post-usage evaluations and these evaluations are associated with the functional and technical quality of the offering (6). likewise, parasuraman's work on quality was built on an expectation/perception gap and exploratory research offered insight into consumers'erceptions of service and quality (14). performance versus expectations that relate directly to the model can be evaluated if it assumed that respondent interpretation of measurement scales for preference and performance are identical, the usual assumption. a simple diagram that illustrates the rating of meaningful parameters on a likert type scale is frequently used to facilitate comparisons. this type diagram is used in this paper to illustrate the present results (figure 2). depending on the author, and/ or approach, these diagrams receive different names, but they are most frequently referred to as image diagrams or perceptual maps. the graphic manner in which they make comparisons possible among competitors, or potential user expectations, accounts for their popularity in positioning services (1l20). methodology the particular study used to illustrate expected versus actual service differences as a basis for marketingstrategy wasbrought toourattentionby the office managerofalocal healthcenter. this center was one of two clinics run by a group of local physicians who collectively staffed these installationsonarotatingbasis. thisparticularclinicwasuniqueinsofarasitwassubcontracted by a university to service the needs of students. five years previously the university had opera ted the center itself, but had made the decision to get out of this type of operation. although changes had been made in clinic operation during the five years of private management, an evaluation had not been made of its operation. this study was, thus, part of an initial evaluation. the attributes that were to be evaluated were developed after discussions with the office manager and a committee of university representatives. five items were thought essential in evaluating the performance of the clinic in addition to an overall rating of the services rendered. the five items that were evaluated were: staff treatment of clients was it courteous and professional? personal demeanor of physicians was it courteous and professional? discussion of ailment or problem was it full and complete? services offered by the clinic were they full and complete? prices charged for services were they within expected range? with regard to the particular attributes selected, it is worth noting that berkowitz has identified these five at tributes, at least, as being important in selection decisions (1). bowen has further substantiated this selection by noting that employees, employee/customer contact, and person-oriented services were most important of nine characteristics rated for both physician examinations and hospital stays (2). a questionnaire was developed that incorporated basic semantic differential scales for the five attributes that were to be studied into five objective questions plus an overall quality rating item. a sixth question, "would you recommend the health center to others?" on a "definitely" to "never" scale was included because it was anticipated that word-of-mouth communication might be important in publicizing the capabilities of the health care center. additionally, demographic information on the respondents was collected. 37 the student enrollment of the university was the population selected for survey because health center users were invariably students —files showed 2900 clients, of which 2800 were students, the rest were spouses and children of students. demographics of interest were the year of present enrollment, sex, housing location (on or off campus), and usage (had the center been used by the respondent?). questionnaires were distributed in the evenings in two different locations —residence dormitories and the student union. dormitories were accessed to obtain on-campus resident responses whereas student union responses primarily accessed off-campus respondents —it was common for off-campus residents to meet at the union to do assignments in the evening. this sampling approach also helped to balance enrollment year responses —underclassmen tended to live in the dorms while upperclassmen tended to live off campus and congregate in the union. response rates were high —over 90 percent. this response was undoubtedly helped by the fact that the questionnaire was only one page long and the students handling the assignment waited inthevicinityuntilthequestionnairewascompleted. therelativelyfewrejectionstoparticipation were primarily accompanied with comments concerning a need to complete work and not any rejection of cause. possibility of duplicate responses was low because an approach question was used to determine if potential respondents had previously completed a questionnaire. responses were collected over a three week period in which actual data were collected in several evenings. the total sample size was 347 respondents and tended to reflect the demographics of the university population. actual results are shown in table 1 along with information supplied by the health care center. the enrollment balance tended to be reflected in the sample; results at worst were two percentage points off the population base. sample responses, however, tended to contain a few more female and resident hall inputs, which probably was responsible for the reversal in the user/non-user ratio that was obtained in the sample as compared to the student population at large. despite the possible bias, results were thought usable —especially as they reflected user/non-user perceptions. ln this context, responses of non-users have been labeled as "expected" perceptions and user responses as "actual" perceptions of service in subsequent discussions. table 1. demographics of sample in comparison with university population and clinic users university clinic sample year no. no. no. 1 1715 26 980 35 94 27 2 1433 22 840 30 76 22 3 1507 23 560 20 80 23 4+ 1985 30 420 15 97 28 sex female 1588 24 1120 40 97 28 male 5052 76 1680 60 250 72 residence on campus 2374 36 1008 36 163 47 off campus 4266 64 1792 64 184 53 usage users 2800 42 2800 100 201 58 non-users 3840 58 0 0 146 42 totals 6640 2800 347 38 results results of the survey indicated surprising satisfaction with actual service quality among users of the clinic. the personal demeanor of the physicians was ranked highest among the attributes surveyed (4.28 where 5.00 = perfect), followed by staff treatment of clients (4.13), ailment or problem discussion (3.75)and services offered (3.55). all these items were above the "average" rating of 3.00. only price, among the five attributes studied tended to have a negative association. at 2.35, prices were perceived to be higher than might be expected. these average ratings, along with calculated standard deviations, are shown in table 2. table 2. summary of observations (standard deviations in parentheses) attribute users non-users t-test staff treatment of clients 4.13 3.12 0.005 (1.01) (1.07) personal demeanor of physicians 4.28 3.26 0.005 (1.04) (1.53) ailment or problem discussion 3.75 3.26 0.005 (1.20) (0.98) services offered 3.55 2.87 0.025 (1.08) (1.04) prices charged 2.35 2.44 n.s. (1.20) (1.07) table 2 also shows the relative ratings of non-users, which represents "expectations" of the clinic. all attributes except price tended to receive lower ratings among non-users; price perceptions were virtually identical for the two segments. the lower ratings on non-users of the other four attributes were statistically significant. thus, the expectation among non-users was that the clinic offered a fairly low quality service. in fact, among non-users "services offered" received a below average rating. among o ther items both staff treatment and personal demeanor illustrated the largest variation from actual perceptions. the profiles of service quality perceptions, which capture these observations, are shown in figure 2. 39 figure 2. image diagram of sbi clinic staff treatment unsatisfactory +-——+————-+ ——+ satisfactory 1 2 3 4 5 n — t p tdt physicians'emeanor unsatisfactory +———+-—— —-p —-+ satisfactory 1 2 3 4 5~users (actual) ailment discussion unsatisfactory +———+——— --+——-+ satisfactory 1 2 4 5 services offered unsatisfactory +———+—+——-+—--+ satisfactory 1 2 3 4 5 prices charged unsatisfactory +——-+——-+-——+——-+ satisfactory 1 2 3 4 5 clearly the clinic had an "expectations" problem, which was further reflected in table 3. although users gave the service a better than average rating, non-users perceived it to be less than adequate. these ratings were reflected in the tendency to recommend the services offered by the clinic. although users would tend to recommend usage, non-users showed a statistically significant lower tendency. table 3. overall ratings and recommendations mean of means 3.61 2.99 0.005 overall rating 3.42 2.82 0.005 (1.05) (0.07) would recommend 3.52 2.92 0.025 (1.19) (1.42) lt might be noted with regard to table 3 that there was a degree of internal consistency in the study. the "mean of means", the average of individual attribute ratings, and the overall quality rating for each segment surveyed were about the same. likewise, the overall rating and "recommendation" ratings were nearly identical. these observations indicate some validity in 40 supposing the attributes used in the questionnaire did capture the items that go into the overall evaluation, and that the ratings do affect the decision to recommend. in this regard, the overall perceptions of price, which received the lowest rating among each segment, cannot be overlooked and must be factored into the recommended marketing strategy for the clinic. discussion the purpose of this paper was to illustrate the use of this approach in developing a marketing strategy for a small service firm. the clinic in this case appeared to have two major problems. first, non-users appeared to have consistently lower perceptions of service quality than users had. this problem had two ramifications. it had the potential of delaying trial— potential clients might literally lie sick before using the facility, and second, the relatively large portion of non-users (approximately 58 percent in the population) undoubtedly led to bad wordof-mouth communications concerning the service offering. the second major problem concerned the perception of price, and its implication on the overall evaluation of the service. prices on the offering were actually very reasonable in terms of regional comparisons; in this context, purchases by inexperienced consumers probably contributed to their relatively negative perceptions. with the problems recognized, solutions were fairly straightforward. a five-fold communication strategy was recommended. it was primarily educational in content and fairly general in coverage. it would serve primarily to educate the non-user, while serendipitously serving as a reminder for users. an apparent reasonable set of elements in a communication strategy would focus on: 1. testimonial ads from satisfied users, 2. "expert" ads from physicians on staff concerning ailments of timely interest, 3. "real friends don't let their friends lie sick" campaign, 4. direct mail to parents, and 5. direct marketing to hall counsellors. these communications would serve to narrow the expectations gap —especially as it related to staff. because of technical content, print ads would receive primary use, but radio ad would receive complementary utilization to add a certain degree of "warmth" to the campaign as conditioned by human voices. in the particular circumstances, readership and listenership were well known and campus instruments fit well the needs of this campaign. the general appreciation of the importance of advisory personnel in the election to seek health care suggested an additional element for this campaign, which incorporated some twostage communications. the "real friends" campaign would encourage former users, in particular, to have their friends seek help when it was required. all three of these ads were to receive first of term, plus heavy illness periods, emphasis. both price and "advisor" inputs were approached through a direct marketing campaign. mailings were directed to parents during the first of term with reminders during cold and flu seasons. it turns out that students frequently call home for advice in times of duress, so information on services, staff and fees could be put to timely use in this situation if the informa41 tion was in the proper hands. fees were especially attractive in comparison to downstate rates. thus, no recommendation was made to lower fees. rather, it was left up to someone more experienced in health care purchases, in this case the parent, to explain the realities of life to the student. tours, seminars and educational pamphlets were recommended for hall counselors to acquaint entry students of facility availability and capabilities. counselors were recognized as an important link in establishing early trial, and efforts were thus directed toward communicating expectations of their role. it might be noted that although these strategic elements were very specific to this case, these elements came from a very general treatment, which is believed to be essential in establishing marketing strategies for small service firms. it also might be noted that these efforts were external to the firm. gronroos, in the development of the model, was much concerned with internal communications, the communications to the providers of services within the firm (7a,9). internal communications are never to be overlooked. they are essential to controlling quality, but become critical when "actual" perceptions are lower than expected —the opposite of what was observed in this case. in fact, a situation where expectations exceed actual may be the more common case— especially among small service firms. it is this case that gronroos treats in his three stage purchasing process. in the third stage, the consumption process, the customer's final move is determined. if the firm fails to render an acceptable total service offering, the perceived service quality may not be good enough and the customer does not return. on the other hand, a customer-oriented and successful management of the contacts during this third process of the customer relation life cycle may lead to repeat purchases, enduring customer contacts, increasing cross-selling opportunities, and moreover, improved internal relations. during the consumption process the technical quality of figure i is transferred to the customer. likewise, the functional quality, which is frequently even more important as a means of competition, is produced and felt by the customer (7). whereas marketing departments can exist as separate entities in goods-producing companies, gronroos argues that the marketing function has to be truly integrated into operations if service companies are to excel. case studies from a bank, a shipping company, and a cleaning company were used to illustrate this point (7). marketing managers in these idealistic systems must become coordinators —internal training is important and all employees must be put in touch withcustomerexpectations.coachingisimportantsothatactualand expected performance do coincide. results in this paper were, of course, affected by sample selection and possible biased results. hence, limitations exist on use of the paper. the authors certainly would not suggest that the implied strategies be used generally, or indiscriminately, in service businesses. the paper is written instead to illustrate use of a technique. the paper suggests that small service business managers consider the four step approach that was used: identify those characteristics essential in describing service performance from the customer's viewpoint; o develop an instrument that will permit measurement of service perceptions among users and non-users in the relevant market; 42 ~ conduct a significant study in the relevant market to distinguish perceptual differences; ~ establish a strategy that promises to narrow significant perceptual gaps. it is believed that strategies developed and implemented from this platform will tend to be successful. conclusion an image analysis approach has been used to assess the status of a small service business. once problems were understood, a basis for a marketing strategy appeared straightforward. although the elements of the strategy were very specific with regard to the case, the approach has generality. it is felt that this approach in one form or another is essential in suggesting meaningful marketing strategies for small service businesses. the convenience aspect of sample selection used here is not suggested by the authors. instead, techniques that will lead to a more random selection are suggested. this study was sponsored by a faculty research grant from the american marketing association. references 1. berkowitz, eric n., "health care marketing: issues for future development," in marketing of services, eds. james h. donnelly and william r. george (chicago il: american marketing association, 1981), 151-154. 2. bowen, john, "development of a taxonomy of services to gain marketing insights," journal of the academy of marketing science 18-1 (1990),43-50. 3. bradley,don b.and homersaunders,"retailandservicebusinessvulnerabi)ities that could lead to bankruptcy,'%u mal of business and en i repreneurshi p 1-1 (march, 1989), 83-95. 4. felham, alfred m., "small business consulting needs and opinions of consultants," proceedings: small business institute directors'ssociation, ed. jack e. brothers (1985), 88-98. 5. fisk, raymond p. and patriya s.tansuhaj, services marketing-an annotated bibliography (chicago, il: american marketing association, 1985). 6. garland, barbara c. and robert a. westbrook, "an exploration of client satisfaction in a nonprofit context," journal of the academy of marketing science 17-4 (fall, 1989), 297-304. 7. gronroos, christian, "innovative marketing strategies and organization structures for service firms," in emerging perspectives on services marketing eds. leonard l. berry, g. lynn shostack and gregory d. vpah (chicago il: american marketing association, 1983), 9-21. 43 8. gronroos, christian, "internal marketing —theory and practices," in services marketing in a changing environment, thomas m. bloch, gregory d. upah and valarie a. zeithaml (chicago il: american marketing association, 1985), 41-49. 9. gronroos, christian, "internal marketing —an internal part of marketing theory," in marketing of services, eds. james h. donnelly and william r. george (chicago il: american marketing association,1981), 236-238. 10. hartman, sandra j.,olof lundberg and michaelwhite,'planning insmall versus large business: do managers prefer different tools?" journal of small business strategy 1-1 (march, 1990), 13-24. 11. kotler, phillip, marketing management: analysis, planning, implementation and control, 6th ed. (englewood cliffs, nj: prentice hall, 1985), 592-594. 12. lewis, robert c. and bernard h. booms, "the marketing aspects of service quality," in emerging perspectives on service marketing eds. leonard l. berry, g. lynn shostack and gregory d. upah (chicago il: american marketing association, 1983),99-107. 13. moore, james p., "highlights of the 1989 u.s. industrial outlook," in li.s. industrial outlook (washington, dc: u.s. department of commerce, 1989), 16-23. 14. parasuraman, a., valarie a. zeithaml and leonard l. berry, "a conceptual model of service quality and its implications for future research," journal ofmarketing49-4 (fall, 1985), 41-50. 15. plock, ernest d., "services: their importance in the domestic economy grows as foreign competition stiffens," in u.s. industrial outlook (washington, dc: u.s. department of commerce, 1990), 12-15. 16. sonfield, matthew and russel m. moore, "innovative turning points in the path to entrepreneurial success," journal of small business strategy 1-1 (march, 1990), 60-64. 17. susbauer,jeffreyc.androbertj.baker,jr.,"strategiesforsuccessfulentrepreneurial ventures," journal of business and entrepreneurship 1-2 (october, 1989), 56-66. 18. tinsley, dillard b.and alicia briney gresham, "sbiconsulting needs in small towns and rural areas," journal of business and entrepreneurship 1-2 (october, 1989), 75-80. 19. tinsley, dillard b. and danny r. arnold, "small retailers in small towns: is marketing the key?" journal of small business management (january, 1978), 7-12. 20. urban, glen l and john r. hauser, design and marketing of nero producls (englewood cliffs, nj: prentice hall, 1980), 297-300. 44 http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2020, vol. 30, no. 01, 18-30 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2020 small business institute® w w w. j s b s . o rg introduction 1university of bayreuth, chair of strategic management and organization, universitätsstr. 30, 95447 bayreuth, germany, roman.barwinski@uni-bayreuth.de 2university of bayreuth, chair of strategic management and organization, universitätsstr. 30, 95447 bayreuth, germany, qiu_yixin@outlook.com 3university of bayreuth, chair of strategic management and organization, universitätsstr. 30, 95447 bayreuth, germany, mahmood.aslam@uni-bayreuth.de 4witten/herdecke university, faculty of management and economics, alfred-herrhausen-straße 50, 58448 witten, germany, thomas.clauss@uni-wh.de changing with the time: new ventures’ quest for innovation innovation seeking, coworking, coworking-space, new venture, information seeking apa citation information: barwinski, r. w., qiu, y., aslam, m. m., & clauss, t. (2020). changing with the time: new ventures’ quest for innovation. journal of small business strategy, 30(1), 18-30. new ventures are known to suffer from liabilities of newness because they have limited internal resources and no established connections to external actors (brunswicker & vanhaverbeke, 2015; ceci & iubatti, 2012; edwards, delbridge, & munday, 2005). these limitations affect their search for internal and external knowledge and information, which are essential for innovation (owen-smith & powell, 2004) and build the foundation for new business models (chesbrough, 2010). current literature emphasizes the importance of search in order to be innovative (cohen & levinthal, 1990; katila, 2002; leiponen & helfat, 2010). also suggesting that every additional external link to information sources benefits the potential innovation outcome (love, roper, & vahter, 2014). a broad variety of external information sources increases the likelihood of innovation (leiponen & helfat, 2010; roper, du, & love, 2008), by (1) increasing the flow of external knowledge and (2) increasing the chances of complementarities between external and internal knowledge. but there are limits to the usefulness of external knowledge (katila, 2002; rosenkopf & nerkar, 2001). broad external knowledge search leads to high opportunity costs as it takes away attention and resources from internal matters (laursen & salter, 2006). this is especially problematic for new ventures with limited resources. therefore, extensive amounts of external search might cripple their capacities. although facing limitations new ventures are known to be the drivers of innovation and industry change due to their often innovative and creative solutions (acs & audretsch, 1987; kraus, roig-tierno, & bouncken, 2019). the reasons are unique advantages such as high flexibility regarding new usees of existing resources and the lack of limiting structures (katila & shane, 2005). the concept of innovation search has so far focused on established companies (dahlander & gann, 2010; lakhani, jeppesen, lohse, & panetta, 2007; laursen & salter, 2006) or small and medium-sized enterprises (vahter, love, & roper, 2014), neglecting new ventures. new ventures build on social capital and the existnew ventures are often based on new ideas and innovation. for creating and improving the innovation new ventures can draw on internal and external resources, to which they often have limited access. our study analyses how new ventures can improve their innovation search by entering collaborative workspaces, so-called co-working spaces. in our qualitative study, we use participative observation and analyze 8 cases of new ventures operating in a coworking-space. key findings are that forms of innovation search differ with respect to the venture’s life cycle. the new ventures search focus alternates between internal and external search, depending on the current stage of the venture. in general, the co-location of ventures in collaborative workspaces offers rich opportunities for social interactions, information exchange, and collaboration which are especially important for early-stage ventures. roman w. barwinski1, yixin qiu2, mahmood m. aslam3, thomas clauss4 http://www.smallbusinessinstitute.biz http://www.jsbs.org 19 r. w. barwinski, y. qiu, m. m. aslam, & t. clauss journal of small business strategy / vol. 30, no. 1 (2020) / 18-30 ing networks of the entrepreneurs (konsti‐laakso, pihkala, & kraus, 2012; zhang & li, 2010;). our study empirically investigates new ventures dealing with the challenge of generating innovations from a limited resource base. we answer the following research questions: how do new ventures generate innovations using internal and external sources for innovation? what role do coworking spaces play in the process? we chose the setting of a local coworking-space (cws) for our study. in cws entrepreneurs share office spaces with other businesses (bouncken & reuschl, 2018; gandini, 2015). entrepreneurs can easily build relationships and seek knowledge and information on different topics from various actors (bouncken & aslam, 2019). they can further learn from their competition (bouncken, laudien, fredrich, & görmar, 2018) and become part of the local community (garrett, spreitzer, & bacevice, 2017). we conducted a two-stage qualitative research, starting with two months of participative observation in a local chinese cws. during this time we realized that the ventures could be grouped into two distinctive subgroups. we chose four ventures for each group and conducted eight semi-structured interviews. we investigated how the ventures used external and internal resources to generate innovations. our results indicate that there are different stages of innovation seeking in new ventures. we find that nascent ventures seek innovation resources through serendipitous connections in an open process. growing ventures focus on restricted external sources and internal development in organizational evolution. established ventures gain allocable resources to seek opportunities both internally and externally. the effects of cws on the ventures’ innovation search strategy changes according to the venture’s stage. and cover a range from radical to incremental with ambiguous outcomes at the established stage. our results add to the literature on innovation seeking (cohen & levinthal, 1990; dahlander, o’mahony, & gann, 2016; katila, 2002; leiponen & helfat, 2010), by displaying, that new ventures begin their external search with a broad unstructured approach to innovation search. they look for serendipitous connections and resources, which build the basis for innovation. in the second stage, the focus changes to a deeper search with limited but close external partners. this process opens up after the venture reaches a stage of establishment. we thereby reveal that the search strategy of ventures follows the organizational life cycle (chandler, 1962). we further find that the co-location of entrepreneurs in collaborative workspaces offers a multitude of connection possibilities which are highly important for early-stage ventures. theoretical background external search for knowledge, information, and innovation the term ‘innovation’ in entrepreneurial ventures describes a problem-solving activity of ventures in which they solve identified problems through the combination of knowledge elements to create new products, solutions or business models (katila, 2002). innovation search can take place in internal sectors (e.g. knowledge created within the venture) and external sectors (e.g. knowledge created by others) (katila, 2002; rosenkopf & nerkar, 2001). the search for knowledge and new ideas within the internal sector is limited and is often less likely to generate new technological solutions (rosenkopf & nerkar, 2001; dearborn & simon, 1958). previous research suggests that only exposure to diverse sources of information (e.g., owen-smith & powell, 2004; powell, koput, & smith-doerr, 1996) provides the required variety of knowledge and ideas needed to create innovation. solutions and discoveries are usually reached when a unique breadth of knowledge and experience is combined with the ability to draw knowledge from seemingly unrelated areas (maggitti, smith, & katila, 2013). innovation search in the external sector has been further differentiated according to the breadth and depth of the search (katila & ahuja, 2002; laursen & salter, 2006). external search breadth relates to the variety of different knowledge sources outside of the venture. search depth is related to the intensity with which each source is penetrated (katila & ahuja, 2002). various studies demonstrate that the breadth and depth of external search have positive effects on innovation performance (foss, lyngsie, & zahra, 2013; rosenkopf & nerkar, 2001). a broad search for innovation increases the likelihood of a successful payoff given the risk and uncertainty associated with innovation endeavors (joshi & anand, 2018; leiponen & helfat, 2011). this idea is known as the variance hypothesis. according to gouldner (1957) individuals who are in contact with a broad external network will gain greater knowledge and excel at taking advantage of it. these individuals benefit from the expertise generated from external ties. research also highlights that a diverse range of expertise excels the application of solutions from the old to new domains. this enhances the efficiency of the innovation search (gruber, harhoff, & hoisl, 2013; singh & fleming, 2010). a broad search approach goes along with access to unique information and knowledge resulting in a broader vision. it can be used for innovation of products, processes and business models (bouncken, kraus, & roig-tierno, 2019). 20 r. w. barwinski, y. qiu, m. m. aslam, & t. clauss journal of small business strategy / vol. 30, no. 1 (2020) / 18-30 a broad external search scope can benefit ventures in three major ways. first, in order to innovate ventures require a huge amount of information. information regarding other firms’ product offerings and innovation activities can make opportunities more visible to new ventures (ahuja, 2000). second, a broadened external search scope can enrich a new venture’s knowledge pool and provide more choices for the venture. this enables the venture to solve problems in new ways (katila & ahuja, 2002). there is a limit to the number of innovations that can be created by using the same set of knowledge elements. search with a broad scope can increase a venture’s innovation scope adding new elements to its knowledge pool. this improves the possibility for the venture to find new useful combinations of elements (katila & ahuja, 2002). third, a broadened external search scope can help new ventures locate external complementary resources and capabilities that are critical for their innovation (porter, 1998; wolpert, 2002). however, external search for knowledge and information does have its limits. it is recognized, that broad and deep external innovation search goes along with opportunity cost as it takes attention away from other activities relevant to the firm (dahlander et al., 2016). this is especially limiting for new ventures who lack the depth of resources. challenges for new ventures new ventures have a short history and suffer from liabilities of newness (mas-tur & soriano, 2014; stinchcomb 1965), such as limited financial, organizational, or human resources (williams jr, manley, aaron, & daniel, 2018). their capacity for internal innovation search is limited and external search becomes more important (brunswicker & vanhaverbeke, 2015; ceci & iubatti, 2012; edwards et al., 2005). prior research suggests, that new ventures can greatly profit from external ties and resources when searching for innovation (angelsberger, kraus, mas-tur, & roig-tierno, 2017; zhang & li, 2010; baker & nelson, 2005; starr & siverson, 1990). especially ties to established firms, research institutes or universities (baum, calabrese, & silverman, 2000; shan, walker, & kogut, 1994) have positive impacts on their innovations. although external ties and knowledge search are important for new ventures, they may face difficulties building up connections with established organizations. the reason lies in their short history, lack of proven performance record, limited financial and human resources, limited legitimacy and status (stinchcombe, 1965). this often leads to limited trust (massaro, moro, aschauer, & fink, 2017). they, therefore, tend to have a narrow external search scope because they typically have limited external contacts (stinchcombe, 1965). these ventures rely upon their immediate and often personal networks for identifying opportunities (baker & nelson, 2005; starr & siverson, 1990). new ventures can further be handicapped in external innovation search by increasing search costs. even modest external search can be too costly for ventures in terms of financial and organizational resources as well as time consumption. while facing many disadvantages new ventures have unique advantages in benefiting from an external innovation search. new ventures do not have existing specialized structures and routines allowing them to use existing resources in new ways (katila & shane, 2005). they are therefore often able to integrate and recombine various forms of external knowledge to create innovations, implement them and create new forms of value (bouncken, fredrich, & kraus, 2019). method we applied a two-step qualitative approach for which we selected the setting of a cws. cws are specifically designed to cater to the needs of entrepreneurs and new ventures, who are trying to generate innovations (bouncken & reuschl, 2018). these hubs also provide technical, financial, and networking services that new ventures usually cannot afford individually (saxenian, 1990). they further build on a wide network of linkages facilitating the flow of knowledge and information. thus, entrepreneurial firms located in a cws provide a unique realm to examine the impact on external innovation search. we selected a single cws to minimize the influence of distinct contextual factors and focus on the research question. research settings new ventures need to focus on external knowledge sources and information and need relationships and collaborations. we believe that collaborative workspaces (e.g., accelerators, cws or innovation hubs) where entrepreneurs share office spaces with other businesses (gandini, 2015), are a great starting point for our study. entrepreneurs can easily build relationships and seek knowledge and information on various topics (bouncken, laudien, et al., 2018). they can interact and collaborate with external partners and can employ external knowledge and resources and become part of a community (garrett et al., 2017). increasing and improving entrepreneurship is a major motivation for users of cws (fuzi, 2015). the location was deltahub the biggest innovation hub in china which embraces diverse entrepreneurial ventures rather than focus on one field, deltahub is further famous 21 r. w. barwinski, y. qiu, m. m. aslam, & t. clauss journal of small business strategy / vol. 30, no. 1 (2020) / 18-30 for its efficient resource integration and influential entrepreneurial activities and events. this environment allows for an active search for external innovation. data collection we conducted a two-month field study observing how users work in the cws, participating in their events and workshops, and talking with users. aiming to describe processes of ongoing impacts from external actors. we selected a research design including participant observation, semi-structured interviews, and secondary data analysis. participant observation. two researchers started the observation within deltahub, from august 2018 through to october 2018. they worked as observers who witnessed and recorded all daily activities. they did not reveal their role as researchers to not bias the interaction. only the hub coordinators knew about their role and supported them by inviting them to join all the events and public meetings, as well as providing basic information about all the entrepreneurial teams in the hub, including team size, founding date, directions of their current projects. the researchers tried to minimize the influence of their presence by doing nothing except watching and recording (edmondson & mcmanus, 2007). one researcher worked in the open space and recorded each interaction between team members, among teams, and with external actors (out of deltahub). due to the openplan and loft design of the innovation hub, all the activities could be tracked. the other researcher recorded interactions in workshops and events. after one month of observation and ongoing analysis of the records more than 100 pages of field notes were generated and a substantial difference in practices between entrepreneurial teams began to emerge: early ventures, who are looking for ideas, were constantly interacting and discussing with other team members while entrepreneurial teams which already had a business focus and structured organization mostly focused on communication within the team and to resources outside of the innovation hub. records from workshops, meetings, and events consolidate this finding. the distinct attitudes toward resources in the cws and external resources imply their different business logic as well as various effects derived from external sources. to further analyze how these distinct groups of ventures applied external innovation search strategies we purposefully selected 8 cases and conducted semi-structured interviews with key informants. semi-structured interviews. we followed suggestions from case study literature and selected 8 case teams in deltahub (miles & huberman, 1994), 4 cases in the early entrepreneurial phases and 4 for the later phase. to fulfill the study’s objective to study external innovation search, we selected the 8 cases based on four criteria:1) it was an entrepreneurial team or venture project. 2) the team/firm had resided in deltahub for no less than 6 months. 3) the team/firm took advantage of the shared space by approaching experts or taking part in activities. 4) there should be an equal number of cases representing each entrepreneurial phase. more details on the 8 cases are provided in table 1. we conducted interviews with the founders of each case team because they have the most comprehensive view of their business and innovation strategy (eisenhardt, 1989). to ensure interview data captured the concept of searching for external sources of innovation, we develop our guideline based on prior literature with similar research context or research objects. all interviews were conducted in october 2018 by two researchers at deltahub and lasted about 75 minutes on average. a combination of all the recorded data implies that the entrepreneurial teams and deltahub frequently interacted with some big firms in multiple ways. for example, big firms initiated some events, collaborated with entrepreneurial teams or invested in some new ventures. this allowed us to understand how big companies leverage innovation hubs as external sources for knowledge and information. archival data. additionally, we identified and analyzed websites and 4 online video interviews of case teams. for those early entrepreneurial teams which had not been reported by media yet, we were granted to access their documents and data collected by coordinators of deltahub as they regularly recorded status and needs of each team. data analysis the full data-set consists of more than 300 pages of interview transcripts and field notes. we managed this data using maxqda 12. we started analyzing the data during the collection and observation process, as advised by strauss and corbin (1998). we follow a grounded theory approach indicating important and interesting quotes (corbin & strauss, 1990). we started by writing down all our field notes and carefully transcribing the interviews, sending the finished transcript to the interviewees for confirmation. next, we analyzed the data by building individual case studies for early and later stage new ventures going back and forth between interviews, field notes, and secondary data once new insights regarding innovation search emerged. as suggested 22 r. w. barwinski, y. qiu, m. m. aslam, & t. clauss journal of small business strategy / vol. 30, no. 1 (2020) / 18-30 by eisenhardt (1989) we conducted a cross-case analysis, which helped us gain retrospective insights of the development and unique patterns of each case and also facilitates a comparison of influence among cases with distinct features. we compared the cases to find common challenges and refine unique aspects of each case. from the comparison, an initial logic started to emerge, which we followed up on in an iterative process to develop our results. results when analyzing the interviews and research notes it became evident that entrepreneurial teams in different stages hold distinct opinions. we discern three disparate impacts that external resources exert on the entrepreneurial process. we structure these in the following section and discuss more intensively towards theory development afterward. nascent ventures seek innovation resources through serendipitous connections at the very beginning of venture projects, entrepreneurs face the problem of limited immediate resources, including network, information, sources of ideas, which are important for shaping their business logic. as es2, who has rich experience in several start-up projects, stated, es2: “since we have only a few team members, we are eager to share our workspace with other companies, so that we can have business interactions with other companies and get connected to the market.” many early ventures are like es2 and put emphasis on broadening their connection with external actors, in order to seek complementarities for their initially limited resources and accumulate social capital for the development of their business. in cws, the geographic assemblage of entrepreneurs with various backgrounds offers them an excellent platform to search for sources of knowledge and innovation. for instance, an entrepreneur who just started a project said, es3: “in fact, entrepreneurs bear tremendous stress, but starting in these hubs may be easier because entrepreneurial teams gather here doing various business. you won’t fear how small your team is because you can always ask them for help. and when facing some troubles, it is also possible to ask others because they might have experienced the issue you are struggling with.” table 1 description of interviewees and case firms start-up team industry/ domain focus stage team size* background of the founder/ ceo** es1 big data and medical technology start-up 3 • worked in an innovative sector of state-owned company • worked at home when the project just set up • move to cws since febrary 2018 es2 data collection and processing start-up 1 • worked in a company • started his own project in 2016 es3 online overseas shopping platform start-up 3 • have tried 4 start-up projects in the cws • now is working on the fifth one es4 application development start-up 2 • worked in a company as a software developer • worked in several other cws before move to wespace is1 network service system growth 5 • worked in an international company as an engineer • now is developing a new system with her teammates is2 professional image management and education growth 6 • was a professor in a university • had rented a traditional office for 1 year • moved to wespace since january 2018 is3 online jewellery store growth 6 • worked in a big company • moved to wespace for a start-up project is4 online media businesses growth 8 • worked in a big company as a journalist • started up his own project and moved to wespace since 2016 * at time of interviews ** type of office/place worked in 23 r. w. barwinski, y. qiu, m. m. aslam, & t. clauss journal of small business strategy / vol. 30, no. 1 (2020) / 18-30 expanding their initial business network through physical assemblage with other entrepreneurial teams is a strategy many interviewees mentioned. they can efficiently get in contact with like-minded people and gain awareness of potential partners as es2 stated: “it is really helpful to know each other and know other peoples’ business”. es1, es2, and es4 mentioned that it is an essential driver for the establishment of their business to communicate and interact with other teams with similar backgrounds. es1: “we are so different from big firms since we have less communication with our team or even strangers, which makes you socially isolated. but it’s different here (in the cws). you can meet different people with some greetings and chats, and then you have the sense of what they are doing, and you can follow up with the latest information from them.” es3: “the most important thing is the interaction with each other. you are never smart enough to know all the opportunities, and you are always the one who can’t recognize the weakness of your ideas.” es4: “it’s good for entrepreneurs to improve their knowledge, develop their mind, and learn from each other by communication, helping each other and talking about the status of this industry.” while broadening the breadth of their external search, entrepreneurs at a nascent stage described their practice to strategically construct their network or build up connections with certain organizations in their ecosystem. the development of their entrepreneurial projects asks for resources relating to certain areas, but the constraint of initial and internal resources is not able to cover all of them, so they have to seek certain sources out of the sphere of their teams. es4: “i knew abc company usually holds some entrepreneurial roadshows and it is one of the reasons i chose their space. i told their operation team yesterday to deliver my wish of meeting their vcs because we need more funds though we already got financing once.” es1: “we found there are various companies in this space like companies doing program writing. we may have more interactions with them to outsource part of our projects. in that case, we can easily communicate and share knowledge with each other during daily work, for we are in the same space.” the accumulated external resources may finally impact the business logic of entrepreneurial projects. from one side, some entrepreneurs internalize externalities and adjust their business ideas accordingly, which could further affect their internal innovation. an entrepreneur stated: es2: “here (in the cws) when i talked with people about the application i am developing, they gave me some feedbacks like our price is too low, and they also told me their demand in using this type of app. these comments are really supporting us as a nascent team!” from the other side, the increasing number of ties with multiple external actors also raises the possibility of collaboration with other organizations, which is an essential factor in their business model development. all of the nascent entrepreneurial teams we interviewed realized the substantial impacts of external resources. as one of them told us, es4: “it’s useful for us to get the others to know about your business because it possibly bridges you and a chance to cooperate with a partner. this is still a matter of communication.” also, entrepreneurs who have been through this process, when talking about the initial stage of their projects, also admitted the importance of connecting with external resources. is4 described “for novices who have never been a ceo, it is crucial to working together with people outside of the team. the network they build up and investors they know will play an important role in the later stages.” growing ventures focus on restricted external sources and internal development the interviewees in growing teams emphasized that they already have an established and clear business goal, as well as a substantial connection with organizations in their ecosystem. so, for them, it is not as important to expand their external resource sphere. a founder of a start-up project with 5 members stated: is1: “when i first started up a project, this (looking for external resources) can be quite helpful, with the information you can get from others, workshops where you can learn knowledge for running a project and activities to build up your network. but for me now, since i have already experienced all of them, and now it is quite clear for our team about what to do and how to handle most of the problems, it 24 r. w. barwinski, y. qiu, m. m. aslam, & t. clauss journal of small business strategy / vol. 30, no. 1 (2020) / 18-30 is not as valuable for me as those beginners.” additionally, we find entrepreneurs leading “on track” ventures hold a distinct attitude toward looking for external possibilities with those at previous stages; they exhibit the need to make a trade-off between external search and internal development. in other words, while entrepreneurial teams grow from identifying ideas to developing the idea into a business, they experience a switch of attention from external to internal. for instance, a founder who leads a team informed us: is2: “even though i communicated a lot with other teams when i was in my nascent stage, i find it is not that useful now. because getting your own business well done is of the highest importance, and then you can gain the potential to attract resources in your ecosystem. attending too many workshops or activities is kind of meaningless because they are doing projects in various fields which is nothing to do with you. socialization is a time-consuming practice, and i am trying to decrease my ineffective social activities.” is2: further shared the reasons of this trade-off: “maybe everyone has a limited time for various reasons. since our team is still young and small, we can’t manage to develop a deep contact with too many organizations. we have to focus on the development of existing projects.” for developing teams, the creation of a business logic and organization structure is a hard undertaking, which might involve some trial and error. so, this process asks for a substantial effort to focus on the internal implementation of their innovative ideas: is4: “most of my teammates have only one purpose of handling their tasks in hands because everyone somewhat has more than one hat... i don’t think we have much extra energy to interact with people here (in deltahub). the switch of attention doesn’t mean that growing teams are isolated from external organizations. rather, the relatively established network changes their allocation of attention. when talking about the team’s need for external search, is4 further explained, is4: “even if our marketing colleague may have such a need (of talking with external actors), they have already a targeted group of people… and for me (the ceo), effective communication is really important, i would prefer to decrease unproductive talks.” therefore, we learned from is4 that the reason for the shift from external search to internal development comes from two aspects, the need to shape their own business landscape and the accumulated accessible resources. this finding is also in line with the story of is3, who has initiated an online jewelry store project, is3: “we’ve got in touch with many mature suppliers and design studios. we will first visit them to decide which designs have potential for sale… we also give them feedback about the defects and imperfections of their design. benefited from the communications with them, we have more knowledge about the market, which can be more effective than just randomly talking with someone out of this field.” starters who actively interacted with external parties also recognized the distinct demand for big teams and potential changes in the future after their projects develop and get mature. an entrepreneur working for his venture alone described, es2: “it’s more appropriate for our tiny teams to have this cooperating relationship and interaction than to work alone. obviously, that’s not suitable for big teams with an established organization. because they have much internal business and they don’t need to worry about requirements, for the requirements they have are too much to be solved. when my project grows probably, i will face this shift.” established ventures gain allocable resource to seek opportunities both internally and externally from the conversations with the coordinators of deltahub we learned that established ventures who are residing outside of the cws still keep in contact with the hub in order to search for ideas from new ventures. one entrepreneur told us about his earlier contact with cws as he was still working for a state-owned company: es1: “i had contacts with several of these spaces, like soho in wangjing, which offers services for designers and creative people, and co-working factory, which is mainly a business incubator and shared office. because i was in an innovation department in that state-owned enterprise, which made me keep in touch with these spaces frequently.” intensive conversations with the managers of the cws also informed us that they are receiving many applications 25 r. w. barwinski, y. qiu, m. m. aslam, & t. clauss journal of small business strategy / vol. 30, no. 1 (2020) / 18-30 from external companies and investors to come and host events for the new ventures working in the cws. these external companies are often global players with their r&d or innovation units being in charge of external innovation search. some companies are even considering letting their innovation units work in the cws as a cws employee told us: “the big companies are really interested in what we are doing, they want to host events on a regular basis, to get in touch with the startups. these events are good for both sides, as the entrepreneurs get access to established companies and might raise funding, and the established companies stay in touch with all the new ideas. company x is also working on a plan to put their team into our location.” what es4 told us also consolidates the statement of this coordinator as the roadshows and active venture captial activities were the key attraction of residing in this cws. therefore, another finding here is that big firms, in spite of the richness of their internal resources, are still expanding their external searching sphere. in order to dig into the impacts of external innovation search on big firms, we contacted a manager of company x. the manager told us a creative unit of company x is in a specific need to work in deltahub: “the unit is quite independent because their work is more creative rather than routine-based, and we have new customers in this city. we got to know deltahub from an event we held here and then thought about moving the unit here. at very first, we were attracted by the various activities here, because for us it is also a new market, we have to know more about it. later, we found the cws is filled with an entrepreneurial atmosphere, which matched the work of this unit… with a branch in this city, we are able to collect feedback from markets and new customers and transmit the information to our headquarters.” discussion past research has revealed a trend among firms to pursue external innovation search in various forms, such as open innovation (chesbrough, 2003). there is rich research on how the breadth and depth of external search improve ventures’ innovation performance (foss et al., 2013; leiponen & helfat, 2011; rosenkopf & nerkar, 2001), giving them more options and a variety of knowledge to use for their innovations. at the same time, dahlander et al. (2016) demonstrate that external innovation search includes significant costs. people engaging in external search are only successful when they spent all their time on this task. they also show that internal innovation search can be very successful along with lower transaction costs. few studies such as brunswicker and vanhaverbeke (2015) or vahter et al. (2014) investigated the innovation search process within small and medium-sized manufacturing firms. zhang and li (2010) show that network connection is of high importance for new ventures in technology clusters. research has also studied the effects of entrepreneurial characteristics (unger, rauch, frese, & rosenbusch, 2011) and social capital (baron & tang, 2009) on the performance of new ventures. additionally, literature suggests that new ventures need to focus on external innovation seeking (ceci & iubatti, 2012; edwards et al., 2005). the literature though does not cover how the ventures are supposed to deal with external innovation search while facing restrictions due to limitations of smallness and newness. our results show, that new ventures go through different stages that influence which resources they apply to seek innovation. dahlander et al. (2016) have shown, that internal innovation seeking has benefits for firms and external innovation seeking is only successful when pursued with high resources. in the following we discuss the insights we found in light of previous research, structure them and provide a matrix of our results. early-stage ventures new ventures at a very early stage suffer from limitations of smallness and newness (stinchcombe, 1965; brunswicker & vanhaverbeke, 2015; ceci & iubatti, 2012; edwards et al., 2005). they can only rely to some extent on internal resources to generate innovations. literature shows that, in general, they are better off seeking external innovations (ceci & iubatti, 2012; edwards et al., 2005). ties to established companies, service intermediaries or general network building demonstrate positive effects on new ventures’ innovation performance (mas-verdú, ribeiro-soriano, & roig-tierno, 2015; zhang & li, 2010). new ventures whose business models are often not fully established and offer more flexibility towards change, new knowledge can often be the starting point for the creation of a completely new business model. our results show a high breadth of innovation search for new ventures at this early stage. we demonstrate that ventures are trying to get in contact with as many external sources as possible. thereby building their network and trying to find inspiration. the process appears 26 r. w. barwinski, y. qiu, m. m. aslam, & t. clauss journal of small business strategy / vol. 30, no. 1 (2020) / 18-30 to be unstructured and the entrepreneurs stated that they were trying to talk to as many sources as possible. our observation showed that this group was much more communicative, attending meetings and events, also actively contacting sources in the cws. this stage indicates the biggest impact of external innovation search on the new ventures. according to the information and knowledge they gather and resources they can obtain, their business will change to fit the new resource base. growth stage ventures when new ventures leave the first stage, they have accumulated additional resources and started an internalization process. the venture focusses on growth rather than expanding the breadth of external networks. for growing ventures with limited human resources, it is critical to balance the needs and costs of information search (irwin, gilstrap, drnevich, & tudor, 2019). prior research indicates that opportunity costs are a downside of extensive external innovation search and can lead to disadvantages in the daily business (laursen & salter, 2006). with the information and network ventures cultivated in the initial phase of wide external innovation search, they have founded the basis to start a phase of productivity. at this stage, the time required to continue a broad innovation search and maintain close outside relationships increases significantly (dahlander et al., 2016; tushman & nadler, 1978) and takes away time from earning money. we find that new ventures at this stage focus their attention and available resources on the ideas gathered from external resources and try to internally develop these ideas further, using a local innovation search strategy (chebo & kute, 2019; hansen, 1999). we also find, that ventures at the growth stage hold contact to few specific external partners, whom they use for deep innovation search. this finding is supported by adam, strähle, and freise (2018) who show that long-term relationships and external knowledge sources are essential for success. our interviews and observations prove that a switch takes place from a broad and unstructured external innovation search to a structured, very restricted, deep external search. further research indicates, that identified opportunities, accumulated social capital, the further development of a project and innovation need to be integrated into the firm to become functional (dahlander et al., 2016). second, the growth of an entrepreneurial team also requires the creation of some form of organizational structure and organizational processes which are a huge endeavor and take up a substantial proportion of limited resources (stinchcomb 1965). at this stage the business model of the venture is stable and the input from deep and internal innovation search is used to incrementally develop current products and business. established ventures established ventures distinguish themselves from prior-stage ones by mature business logic and a structured organization (teece, 2010). our study indicates that residing in a network with rich sources and comprising more members, ventures compile more manageable resource which enables them to allocate attention between internal and external opportunities for innovation search. thus, they are not restricted to a monolithic approach to search. rather, organizations can adopt a distributed approach to seek possibilities in various domains (fleming & waguespack, 2007). thus, they are able to develop their competitive advantages and simultaneously adjust innovation activities with dynamic demand from the external market. we found that established ventures who are residing outside of the cws keep in contact with cws in order to search for ideas from new ventures. establish companies enter cws by offering events or even placing part of their teams in them. table 2 gives an overview of internal and external search efforts at the different stages. venture life cycle we propose that the innovation search process follows the life cycle of the venture, with the early stage being characterized by broad and very open external search, the productivity stage by internal and deep, focussed external innovation search. the venture reentering a broad external search once it is established and can free up resources. the idea of a life cycle describing the development and different stages of an organization was first introduced by chandler (1962) who suggested that organizations evolve and change as they grow. the concept has had great influence with researchers giving evidence that managerial priorities (smith, mitchell, & summer, 1985), indicators of organizational effectiveness (quinn & cameron, 1983), as well as organizational pressures, threats, and opportunities, vary with changes in life cycle stages (anderson & zeithaml, 1984; dodge & robbins, 1992). we now add that the stage of the life cycle has a significant influence on how new ventures engage in innovation search. our results further add to research on innovation seeking (rosenkopf & nerkar, 2001), by indicating, that depending on the stage the innovation seeking strategy differs and ventures set different foci according to the situation they find themselves in. we also demonstrate that restricted resources play a very important role in the choice of innovation search strategy as opportunity costs are a very 27 r. w. barwinski, y. qiu, m. m. aslam, & t. clauss journal of small business strategy / vol. 30, no. 1 (2020) / 18-30 important factor, especially for new ventures. we believe that the extended time required for external innovation search can only be afforded at later stages once the venture is established and is able to free up resources to apply to full-time external search. balancing productivity and broad external search appear to be too much of a challenge for growing ventures and the entrepreneurs running them. we give a first answer to the question klotz, hmieleski, bradley, and busenitz (2014) raise regarding the extent to which new ventures build on social capital to substitute financial, human and psychological resources. we show that once the venture has secured the right resources and enters a phase of productivity, broad social capital is not as important as stable and deep connections. limitations and future research although our research did not focus on the effects of cws or collaborative workspaces, we found that the co-location helps new ventures build important relationships, access knowledge, and ideas as well as secure resources. we believe that the study of collaborative workspaces as a mechanism, to broaden the search for innovation offers many potentials, especially to entrepreneurs and ventures. cws further offer the opportunity to analyze the effects of socialization and trust (pesch & bouncken, 2018) on the innovation search. our study has some limitations which give directions for future research. the current research on innovation search mainly studies established and big firms, which have the resource capacity to make active decisions on which information sources to seek. small and especially new ventures face different limitations and might not be aware of their search strategy as much as established ventures. the dynamic setting of cws enables studying the effects of knowledge exchange with competition (bouncken, fredrich, ritala, & kraus, 2018) and the effects of shared identities (bouncken & barwinski, 2020) on the success of innovation search. references acs, z. j., & audretsch, d. b. 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(2010). innovation search of new ventures in a technology cluster: the role of ties with service intermediaries. strategic management journal, 31(1), 88-109. developing a small business educational program for growing rural businesses | published in journal of small business strategy loading [contrib]/a11y/accessibility-menu.js jsbs menu articles articles all for authors editorial board about issues ethics statement sponsors search sorry, something went wrong. please try your search again. × articles blog posts rss feed enter the url below into your favorite rss reader. https://jsbs.scholasticahq.com/feed × articles vol. 31, issue 4, 2021 november 16, 2021 cdt developing a small business educational program for growing rural businesses timothy l. pett, ph.d., john francis, ph.d., wendy veatch, rural small business education training ccby-4.0 • https://doi.org/10.53703/001c.29476 photo by sincerely media on unsplash jsbs pett, t. l., francis, j., & veatch, w. (2021). developing a small business educational program for growing rural businesses. journal of small business strategy, 31(4), 50–56. https://doi.org/10.53703/001c.29476 save article as...▾ pdf xml citation (bibtex) data sets/files (3) download all (3) figure 1. initial rural certificate program download table 1. program participants download figure 2. model of double-loop learning for rural communities download sorry, something went wrong. please try again. if this problem reoccurs, please contact scholastica support error message: undefined × view more stats abstract this paper elaborates on the development of a small business certificate program in rural kansas. researchers and local practitioners suggest that there are differences between rural and urban small businesses and that most educational programs do not account for these differences. after exploratory research, the university team identified specific needs facing local businesses and tailored a program for their needs. a program structure and set of topics, paired with faculty experts was developed and implemented. topics focused on developing an entrepreneurial orientation, as well as certain business fundamentals that were deemed critical to small rural businesses. each topic was oriented toward the rural context where face to face business is more essential. a feedback loop was implemented leading to a shorter 8-week timeframe and some topic adjustments. to date, 378 firms have participated in the program and have shown an 80% survival rate. specific feedback has indicated that business growth has occurred and that the respondents do perceive development in their entrepreneurial orientation. in addition, specific skill areas related to unique businesses have been improved. lastly, the program participants have grown their regional business networks, which has been shown to be an important factor for rural business success. introduction throughout rural america, there are tremendous pressures on small businesses and their survival. these include large scale urbanization and a changing competitive marketplace. in addition, many small businesses face higher costs of goods and services, shortage of available qualified workers, poor broadband, competition from big box retailers, and a lack of expertise in social media marketing. these problems have been exacerbated by the covid-19 pandemic in the past year with the crisis creating a disproportionate toll on underserved rural areas (love & powe, 2020). rural firms have often been overlooked, with limited attention to their innovation and exporting practices, their ability to secure business advice and support, or their aspirations and performance (phillipson et al., 2019). to assist in advancing rural communities, small businesses are often looking for new and improved ways of executing their business models and for finding business tools applicable to their needs. this paper outlines a process developed in a rural community that attempts to begin addressing some of these needs. in addition, the paper provides an outline of a program that provides technical assistance and exposure to the latest practices for running and growing small rural businesses. the paper discusses a learning process used to create a strategy for the delivery of a certificate program as well as for creating a network for rural small businesses. setting the stage in 2007, an ef 5 tornado completely wiped out the entire town of greensburg, kansas. reports indicate that the tornado was over 1.5 miles wide and demolished most, if not all the buildings in the town. greensburg is located on a major east-west highway that experiences high traffic counts and was home to a number of interesting stores and historical stops before the tragedy. typical of rural america, the residents decided to stay and rebuild using the latest technologies, opening a new hospital and school. over a two-year time period, the town slowly redeveloped following a leed certificate strategy and became one of the leading small rural energy efficient towns in the us. small businesses slowly returned during this time, but were having issues growing customer bases and promoting their products and services. poor performance was exacerbated by the 2008 economic recession and its carryover. in 2012, greenberg city and county economic officials explored options for helping small businesses grow. a request was made by local government to a midwestern university in close proximity to greensburg to develop an educational program for small businesses. focused strategic interventions at the community and business level have long been posited as an important tool for assisting distressed communities (emery et al., 2004). after some exploratory research, a working agreement was completed around the concept of launching a “growing rural business” certificate program designed to help small businesses in the region. as part of the research, the university team visited local establishments and conducted small focus groups for the purpose of understanding the pressing issues facing these businesses and an examination of their practices and learning. next, they examined and vetted training program offerings in the region and state. none were found to provide the technical and face-to-face training business owners wanted to receive. thus, the university, along with other state partners collaborated in creating the certificate program. the program was developed along the lines of other similar programs designed to meet business needs with processes that fit into program constraints (garrido-lopez et al., 2018). determine needs – community research and discussions with rural business owners through our research efforts, we identified needs of rural businesses from a technical assistance and program delivery perspective. in addition, we learned from the community economic development leader the need for better techniques on how to run a business specifically as a rural ‘clan’ community. from our discussions with her (the economic development coordinator), many of these business owners/operators were familiar with online development opportunities, but felt that face-to-face learning was what they really wanted in their community. in addition, she suggested that rural businesses face challenges that are different from those in an urban setting and the resources available to them are limited. for example, in rural locations, business is mainly conducted in face-to-face business transactions. however, many business owners in the rural community were looking for virtual or online methods for expanding their revenues and offset growing competition without having the skills or means to accomplish these goals. researchers have long suggested that rural areas need to be viewed as unique contexts with specific needs (farja et al., 2017; martin et al., 2013). according to brookings institute data, rural small businesses face additional challenges different from urban businesses such as the lack of access to capital, limited broadband connectivity, and being clustered in industries inordinately impacted by the pandemic such as retail, bars and restaurants (love & powe, 2020). in addition, research on rural business owners indicate that they perceive problems differently than urban entrepreneurs. for example, rural firms are more likely than urban firms to see regulation as a problem, which may impact their motivation for business growth (lyee & cowling, 2015). by accounting for the unique challenges facing rural businesses, we explored these differences as the foundation for creating and structuring the educational training program. other researchers found that creating a competitive advantage could be achieved for rural businesses by creating a value-orientated strategy that is combining cost controls with unique products and/or services (rubach & mcgee, 2001). available federal and state programs so, what government training and programs are available to rural businesses? at the same time as the focus groups were conducted, researchers conducted database searches to identify programs and understand the types of assistance that federal, state and local governments provide for small rural businesses. there are a number of federal programs currently available including subsidies, grants, and loan programs across the united states. farm subsidies are often highly debated politically, but for the rural community, the impact has been to sustain the family farm as a rural business while maintaining a consistent food supply. subsidies are used to by farmers and agribusinesses to supplement income, manage the supply of agricultural commodities, and influence the cost and supply of such commodities (usda rural development-subject, 2014). from the nonprofit sector, there are various entities such as farm aid, which raises funds by working with famous musicians, such as willie nelson, and provides information and opportunities for farmers to receive grants. farm aid works with local, regional and national organizations to promote fair farm policies and grassroots organizing campaigns designed to defend and bolster family farm-centered agriculture (farm aid, 2014). programs geared specifically for non-farm related rural businesses are more limited, but are also available. they include the us general services administration also sponsors workshops, classes, seminars, meetings and training programs for small business owners (how gsa helps small businesses, 2014). another federal program is the small business development centers (sbdcs), which provides a vast array of technical assistance to small businesses. sbdcs are organized through state government organizations and are administered normally through university and/or colleges. the sbdcs are made up of a unique cooperation of sba federal funds, state and local governments (galli-debicella, 2020). however, these sbdc centers can be overwhelmed with clients and programs that are difficult to customize to individual rural business needs. another large federal program is the usda rural grant development assistance program (usda rural development-subject, 2014), which aids through direct or guaranteed loans, grants, technical assistance, research and educational materials for qualified small businesses. the usda rural development program in kansas specifically supports community-managed lending pools and provides technical assistance to help agricultural producers, such as cooperatives, improve the effectiveness of their operations. under the community empowerment initiative, the program emphasizes broad-based citizen participation, emphasizing minority or low-income members of the community that may have been traditionally underserved (usda rural development-ks homepage, 2014). state governments with dispersed rural populations understand the importance of rural business for sustaining rural communities beyond farming. rural communities are in a unique position for small business growth, because of the entrepreneurial spirit and the need to survive exhibited throughout most of these communities. vibrant small towns and main streets attract new residents and stabilize a tax base for county operations. however, most states mainly rely on existing organizations and training programs that provide standard approaches for assisting small businesses. for example, the kansas department of commerce (kansas department of commerce, 2014) offers a number of unique programs including the kansas capital multiplier loan matches up to 9% of private equity invested through a partner network to eligible businesses in communities across kansas. funding is provided through the united states treasury via the state small business credit initiative (ssbci). additionally, at the state level network kansas resource partners provide business-building services to entrepreneurs and small businesses. working with a network kansas resource partners helps businesses get the prompt, local assistance they need to access all types of resources to start or grow their business (networkkansas, 2020). network kansas offers a statewide resource referral service that enables entrepreneurs and small business owners to connect with the resources they need whether it is in their local community or across the state. local economic development agencies vary by communities across states with most having some focus on economic development issues for rural businesses. a number of them offer some general advice on starting a business, training and resources. they also aid in gaining loans, grants and tax-exempt bonds. business location and site selection assistance, employee recruitment and training assistance are sometimes available. many communities also have not for profit organizations that provide general business information including chamber of commerce’s and rotary organization to name a couple (the u.s. small business administration, 2019). although there are a number of resources available for rural businesses, many of these services have a broad generalist approach and often lack the basic business insight needed by these types of businesses. current programs aid small businesses with general needs, such as getting access to capital, but do not address the importance of unique local attributes such as the need to be regionally connected to in dispersed, rural markets (vey & love, 2019). ultimately, few of the government programs accounted for these types of differences and while the greenberg tornado was the original impetus for aiding the rural business community, the team’s research provided additional support for a new program that offered “street-level solutions” to small rural businesses. based on these findings, network kansas collaborated with the university to support the creation of a rural certificate program initially aimed at aiding businesses in greensburg, ks. research method and results as part of the initial decision on whether to develop a program and subsequent assessments on how to structure it, university researchers conducted exploratory interviews with local officials and development agencies in an effort to gain insight for the need of an assistance program that addresses the differences that rural businesses face. exploratory research was emphasized due to the desire to tailor the program specifically to the local business community, as well as the lack of agreement by the research community on what skills are most necessary for local rural entrepreneurs to succeed (dahlstrom & talmage, 2018). after these initial interviews, focus groups were conducted with local business owners. the focus group comprised of nine small business leaders from the surrounding community, of which four were female and five were male. on average, their companies were over 33 years old and the managers/owners had been in their positions an average for fifteen years. the number one concern voiced by this group focused on getting and keeping customers, and the limited size of the local target market. the second group of concerns centered on the economy, timing of cash flow, and ability to attract skilled workers. lastly, the group raised issues regarding limited resources, technology, financing, and issues facing remote location like limited broadband. to some extent, these are similar issues facing all small businesses in some form or another, however the issues seemed to be of greater importance for rural businesses because of the structural realities of the rural market and the lack of available educational and training for business owners. overall, the exploratory research indicated thirty-one topics as areas to develop programmatic content for acquiring rural business expertise. for example, one topic included how to fire in a positive manner. word-of-mouth in a rural market is critical and to dismiss or fire in a positive light is important for dissipating negativity among the community. other topics included: negotiation, buying skills (win-win and game theory) nuts and bolts of advertising, purchasing and ad placement, developing a press release, grasping how to structure business financials to avoid pitfalls of combining personal and business financials, and joint marketing to establish an identity for the community and the business. the university team developed these topics into a structured model clustering relevant material into marketing, management, and financial modules. the purpose was to provide an organized approach that allowed the participants to learn the required topics and to be able to synthesize them together to create deeper understanding. the figure below provides the overall map and logic associated with the program as it was initially developed from the research. figure 1.initial rural certificate program the exploratory interviews and focus groups were developed in conjunction with other secondary research, which aimed at identifying rural business needs and the types of government assistance programs that were available for the rural business community. the initial outcome of this research served as a confirmation for creating the program. in addition, the data served as the basis for developing the structure and orientation of the new program. a certificate program for rural kansas the team developed the training model as a certificate program, delivered by university topical experts, so that rural business owners to walk away from the program with a structured resource guide to refer to during and after the program. the new certificate program provides practical, applied information and examples necessary for today’s rural communities. in addition, the program was developed into a model that could be reapplied to multiple rural business communities in an effort to scale the business learning. the model is a customized eleven-week certificate program that is delivered through the regional university, in conjunction with business faculty. session were offered each week, lasting about 3½ to 4 hours, with time for one-on-one discussions with facilitators. a key element for delivering a successful program was faculty involvement. all the faculty put in time needed to develop their topics in relation to the rural business setting. in total eight faculty members participated in the delivery of the certificate program. the first program centered on developing the necessary mindset of being an entrepreneur in a rural setting. this orientation was a cornerstone element throughout the program’s timeline. next, topics were developed around marketing/consumer behavior and merchandising issues. these were raised as important issues by both the local economic development coordinator and the focus group. in addition, topics related to operational issues employees/legal/finance were grouped together and provided. lastly, the program was concluded by synthesizing previous topics as the participants worked on their business strategies. the program was designed so that the previous sessions learning outcomes were built on the following week. participants were expected to ‘work on their business at home’ after each session. a small celebration of completion followed the last session with family and guests, including local officials. instructor schedules and time pressures did play a role in the delivery of the programs. a decision was made early to keep costs and fees to participants at reduced rates due to the rural nature of the businesses and their resource constraints. to successfully recruit participants and enhance learning opportunities in multiple communities across the state, we coordinated with community and state resource partners to help deliver the program. all partners believed it was important that participants have some ‘skin in the game’, but costs were offset so as not to be onerous and to provide the most opportunity for the greatest number of businesses. sustaining the program the program became successful and was replicated once or twice a year in various rural communities. each year an appropriate amount of time was established for faculty time and travel, marketing of the program through local economic development officials and the distribution of program materials in the communities. the table 1 provides the number of programs and number of small rural businesses served since 2012. table 1.program participants program date location number of business spring 2012 greensburg 21 fall 2012 augusta 17 spring 2013 dodge city 20 winter 2014 dodge city 22 fall 2014 colby 20 winter 2015 clay center 23 fall 2015 marion 21 garnett 32 spring 2016 phillips county 23 fall 2016 mcpherson 14 scott county 22 fall 2017 el dorado 16 cowley 24 spring 2018 leavenworth 16 fall 2018 rawlins county 18 spring 2019 thomas county 15 fall 2019 allen & neosho 23 spring 2020 rooks & ellis 17 fall 2020 montgomery 14 total to date 378 the team of certificate program facilitators who had worked previously with entrepreneurs and small businesses throughout kansas viewed the program as a viable model for the entire state of kansas contributing to the long-term success for each community. continuous feedback and adjustment creating a double-loop process for program development and community support (senge, 2006) has been used to modify and adjust to individual community needs. the feedback has provided valuable input about program content and as a result, the certificate program was resized to eight modules. some information was combined, while other information was eliminated as suggested by program participants and in discussion with instructors over a number of sessions. the revised eight-week program has been more desirable by participants due to taking less time away from work, community and family members. the current program model is illustrated in figure 2. figure 2.model of double-loop learning for rural communities over the duration of the certificate program, businesses are encouraged to build their networks through sharing services and doing business with one another. these actions help foster a larger rural business network to include program participants. events and activities included annual meetings to discuss best practices and networking gatherings across the state. program delivery lessons learned in addition to continuing to evolve the content and length of the program, there have been lessons learned regarding how the program is delivered to achieve the best outcomes, both for our participants and for growing the program. these are summarized below: program hours and timing offer programs during off-hours to accommodate business owners who are one-person firms. programming time that seems to be best is february through april/may or august through early november. late november through january are not ideal programming times. promotion and distribution of literature marketing efforts need to consist of locally respected entrepreneurs, not from the university who is neutral in community. also, local economic development person who has a solid reputation of making personal visits to businesses in the community has worked well. identify local entrepreneurs to assist in participant recruiting. offer partial scholarships when companies send more than one participant. provide one-year free programming of niche topics for business owners. partnering state agencies vested in rural businesses are key for success, such as network kansas. local perception is that chambers of commerce or local economic development agencies normally do not go outside of their office to engage local businesses. approach local commercial lenders and hold informational luncheons for businesses who are requesting funding or have recently received funding and offer program to these qualified prospects. personal visits in community is critical to enrolling participants in program. program outcomes feedback regarding the certificate program has been overwhelmingly positive from the participants since its inception. since its start in 2012, 80% of program participants are still in business. although rural new businesses tend to have higher survival rates than their peers in urban communities (deller & conroy, 2017), this compares favorably to the small business administration’s (sba) (2019) statistics regarding failure rates. sba data suggests that the national failure rate of 1st year businesses failing at 20% rate to fifth year businesses failing at roughly 50%. participant reaction to the program has come in many forms. we received feedback regarding the quality of the educational experience. for example, renee of clay center, ks commented, “this program was life changing for me and my business. after each class i would take information back to my business and apply it the very next day.” other reactions were more specific to the usefulness of certain types of material. troy from andover, ks said, “i thought all sessions especially the contracts session gave us information that could save us lots of money and better inform us when it comes to reading and making contracts.” in general, we received four basic types of positive feedback from participants that can be categorized in the following manner: 1. the program led to better overall business outcomes. researchers have not collected comprehensive data, but based on an examination of a subset of 32 firms from one regional area, seventeen indicated revenue growth, adding employees or expanding locations since their participation in the certificate program. 2. the program addressed specific elements of the business that helped the participants adjust and improve as aspect of their business. these areas included understanding contracts and legal issues, budgeting, merchandising, and marketing. an example of the type of response. “the session on merchandising gave me a background on the importance of visual displays, i will be able to now critically observe merchandising displays and more effectively design my own.” cindy, augusta, ks. 3. the program advanced the entrepreneurial mindset of the participants by developing their skills in identifying opportunities, learning from setbacks and determining how to succeed in a variety of settings (kuratko, fisher, audretsch, 2020). as doreen from dodge city, ks indicated, “i no longer buy self-help books, instead business books because i now see myself as an entrepreneur!” 4. the program helped participants build their network of local entrepreneurs by introducing them to business people that were interested in the same things or had the same issues to address. “sharing ideas among attendees of what has worked for them is as valuable as a business owner! it has made me realize how we are all in the same boat.” susan, greensberg, ks discussion the need for rural regions to strengthen their local innovation systems in developing enterprises has been suggested as an important area for improving regional competitive advantage (rowe, 2009). this study contributes to the existing understanding regarding the importance of programmatic interventions in rural communities by providing locally relevant education and develop entrepreneurial skillsets. in particular, this paper provides three important learning takeaways. first, there are differences between rural and urban small businesses. we used an exploratory methodology to develop a program that tried to uniquely address the unique contexts of local rural business owners. designing any program must take into consideration the local area needs. in addition, while we noted some literature that acknowledged these differences, there is not a wide scale development of what these differences are or how to properly take these into consideration. one recent addition to the literature provides a nuanced typology of the differences between rural and urban regions based on such factors as the extent of remoteness and land use of various regions (laurin et al., 2020). they suggest that remoteness, not just a broad characterization of rurality, is an important aspect of firm difference that must be considered in order to understand performance and skill attainment. we believe that more research studying rural vs. urban sme’s is needed, to inform policy makers, educators and business practitioners. second, after developing the initial certificate program structure, it was determined that incorporating feedback for continuous program evolution is important as small business needs continuously change or have unique attributes in different regional areas. this can be challenging for universities and educators who look to benefit from the development of learning economies that come from standardized or routinized learning content. however, for the programs to continue to be received well in the rural communities, programs must be adaptable and delivered in real time using relevant content. this requires extensive faculty schedule coordination and a strong desire to have ensure expert faculty is available. lastly, a key outcome of the program is the development of stronger network relationships between regional business owners. geographic proximity to a business network or cluster has been shown to have important performance implications for rural small businesses. social capital developed through a network of regional network partners is related to relational and informational benefits that can be used by small businesses (steinfield et al., 2010). in addition, proximity or engagement with a business network provides an entrepreneurial ecosystem for firms to be benefit from knowledge spillovers, common labor pools and value chain clusters (scorsone, 2002). we feel the added benefit of working and learning with other rural business owners as co-participants of the program has proven to be invaluable to the 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programs fax (817) 898-3198 joseph c. latona small business advancement college of business administration national center university of akron center director akron, oh 44325 don b. bradley hi (216) 972-7337 office college of business administration (216) 666-4419 home university of central arkansas fax (216) 972-6588 u.c.a. p.o. box 4983 vice-president publications conway, ar 72035 pamela s. schindler (501) 450-5300 office business administration fax (501) 450-5360 wittenherg university springfield, oh 45501 (513) 327-7904 office (513) 864-7693 home fax (513) 327-6340 ev b s i http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2019, vol. 29, no. 02, 58-71 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2019 small business institute® w w w. j s b s . o rg the ability to secure financing is critical for startup companies to be able to grow and survive (desa & basu, 2013). in addition to commonly used personal and familial funding, startup capital is available via multiple sources, including angel investors, venture capitalists, banks, the small business administration (sba), credit cards, among others. and, while some small businesses leverage equity financing, the relatively higher costs to equity financing often forces them to rely on debt financing. moreover, the relatively high cost of debt for small businesses, as compared to large ones, can make for a fragile economic situation for a small firm. while the impacts of the cost of debt are great for entrepreneurial ventures, and therefore the desire to decrease that cost is high, our understanding of the factors that help small firms to minimize it is incomplete. the goal of this study is to explore how small firms can achieve lower costs of debt. specifically, we aim to determine the impact that disclosure of information about corporate social responsibility efforts has on the cost of debt financing for small firms. starting a business is a risky venture, with volatile successes that result in over 70% of startups failing before they make it 10 years (small business administration, 2012). reasons for failure are numerous, since many small businesses lack organizational systems that are essential for improving performance (bendickson, muldoon, liquori, & midgett, 2017), but the most common reasons relate to under-capitalization and/or inability to access financing (speights, 2017). thus, it would be beneficial for entrepreneurs to understand how to reduce factors contributory to increasing the expense of debt financing. in addition to the practical reason mentioned above, this study also adds to our understanding about small and medium-sized enterprise (sme) financing through an agency lens (ang, 1992) and the relative financing cost associated with information asymmetry. agency costs, which have been firmly established by jensen and meckling’s (1976) seminal work and numerous other studies are relevant for companies of every size. therefore, this phenomenon of attempting to align shareholder and management desires has introduction timothy c. dunne1, garrett a. mcbrayer2 1boise state university, usa, timothydunne@boisestate.edu 2boise state university, usa, garrettmcbrayer@boisestate.edu in the interest of small business’ cost of debt: a matter of csr disclosure corporate social responsibility, esg disclosure, information asymmetry, cost of corporate debt traditional understanding is that small firms pay more in debt related expenses than larger firms with a history of financial performance. in the current study, we examine the impact that corporate social responsibility (csr) disclosure has on the cost of debt for small firms. using data from bloomberg 2014 on csr disclosure, we find that the cost of debt for small businesses decreases as firms increase their csr disclosure transparency. specifically, firms who disclose more social responsibility information faced reduced costs to debt financing. we argue that disclosure of environment, social, and governance (esg) records provide value relevant information for lenders to use to mitigate the magnified information asymmetry inherent to lending to firms earlier in their lifecycle. our results suggest that disclosure of esg information corresponds with improved information transparency, which leads to less costly debt for small businesses. apa citation information: dunne, t. c., & mcbrayer, g.a. (2019). in the interest of small business’ cost of debt: a matter of csr disclosure. journal of small business strategy, 29(2), 58-71. http://www.smallbusinessinstitute.biz http://www.jsbs.org 59 t. c. dunne, & g. a. mcbrayer journal of small business strategy / vol. 29, no. 2 (2019) / 58-71 garnered a great deal of attention in the finance literature. however, the issues related to agency concerns are different for small, privately held, firms than they are for large firms (ang, cole, & lin, 2000; bendickson, davis, cowden, & liguori, 2015; murphy & tocher, 2017). indeed, the information asymmetry gap impacts small businesses as well as startup financers to a greater extent, due to the fact that market forces often credited with reducing information asymmetry (e.g., credit ratings, analyst following, more developed investor relations, etc.) are less apparent with these firms. a common result of this imbalance is the high cost of debt associated with small business loans. research has found some evidence that small businesses can decrease the cost of debt, such as through accrual accounting (cassar, ittner, & cavalluzzo, 2015). however, our understanding of other factors that influence this relationship is incomplete. we propose that environment, social, and governance (esg) disclosure can help to minimize the cost of debt by acting to mitigate issues of information asymmetry. when investors with asymmetric information characterized markets, market participants price protect themselves thus increasing transaction costs (hellwig, 1980; grossman & stiglitz, 1980; kyle, 1985, amihud & mendelson, 1986; amihud, 2002). one such causal factor of information asymmetry arises from inadequate disclosure (verrecchia, 2001). prior literature argues that complete and transparent disclosure acts to mitigate the issues associated with information asymmetry (diamond & verrecchia, 1991; welker, 1995). dhaliwal, li, tsang, and yang (2011) argue that this effect extends to both mandatory and voluntary disclosure so long as the disclosure is value-relevant. studies exploring the impact of esg disclosure on various facets of corporate financial performance suggest that corporate esg disclosure is one such type of value-relevant, voluntary disclosure (orlitzky, schmidt, & rynes, 2003; al-tuwaijri, christensen, & hughes, 2004; dhaliwal et al., 2011; reverte, 2012; kaymak & bektas, 2017; arrive & feng, 2018; egginton & mcbrayer, 2019). dhaliwal et al. (2011) and reverte (2012) find that voluntary esg disclosure is associated with reductions in a firm’s cost of equity capital. egginton and mcbrayer (2019) find that equity trading costs are significantly reduced for firms with transparent esg disclosure practices. further, the authors find that the most pronounced effects are for firms without analyst following (i.e., those firms who, arguably, suffer from greater information asymmetry). in this study, we seek to explore the findings of dhaliwal et al. (2011), reverte (2012), and egginton and mcbrayer (2019) in the context of debt financing. specifically, we study the relation between complete, transparent esg disclosure policies and corporate debt costs. our findings are consistent with the literature, that small businesses pay a much higher price for business loans. additionally, regression analysis results suggest that disclosure of esg does, in fact, have a positive impact on small firms for minimizing the cost of debt. in the next section, we provide a theoretical development – applying agency costs – to hypothesize positive effects on debt financing for esg disclosure for small firms. the method applied to the study is explained, along with the results of the analysis. discussion and limitations of the study are included, along with a conclusion of our research. theory and hypothesis development entrepreneurial financing can take many forms, but generally involves the interaction of one party providing funding (investor) to another party who requires capital (entrepreneur or small business owner) to get a company off the ground or to help it to be able to continue to operate as it progresses toward making a profit. research has found that entrepreneurial financing comes from many sources, such as business angels, venture capitalists, banks, credit cards, institutional investors, family and friends, as well as other places. most of these relationships can be described from an agency-based perspective, whereby there are asymmetries that exist regarding the information possessed by the entrepreneurs and that possessed by investors (gregory, rutherford, oswald, & gardiner, 2005). as a result, the investor, assuming more financial risk, attempts to mitigate that risk by implementing some form of control over the business. since our interest here is small business lending by banks, we will focus on their main type of control, which is the interest charged on the debt offered. it is obvious that greater costs of debt, due to higher interest rates, is negatively related to profits. thus, all else equal, companies prefer to have the lowest in60 t. c. dunne, & g. a. mcbrayer journal of small business strategy / vol. 29, no. 2 (2019) / 58-71 terest rates possible (felício, rodrigues, & samagaio, 2016). however, due to the risky nature of startup businesses, banks minimize the risk associated with high default rates, by trying to recoup their investment capital more quickly by charging high-interest rates. older and larger firms generally can achieve lower interest on debt acquired than younger, smaller firms. this phenomenon exists because the amount of information these firms can supply to debtors is greater and more complete. we propose that disclosure of esg information provides value-relevant information to investors that helps minimize risk associated with information asymmetries. however, the disclosure of esg information is costly for firms (prencipe, 2004) and is in most cases voluntary (mcbrayer, 2018). therefore, firms must determine the costs and benefits of such disclosure. for small businesses relying on debt, the cost of disclosure must be offset by decreases in the cost of debt. research has found that esg disclosure is beneficial enough in equity markets to make up for the costs associated with disclosure (egginton & mcbrayer, 2019). we reason that debt backed businesses would experience similar benefits from esg disclosure due to the value-relevant information it provides to banks providing financing. environment, social, and governance disclosure provides information about the positive and negative information about a company, providing valuable information to lenders. since esg information disclosed provides valuable information to banks, their risk is mitigated, allowing them to apply lower debt costs. therefore, we propose that the value-relevant information that esg disclosure provides decreases information asymmetry between small firms and banks, leading banks to provide cheaper debt in the way of decreased interest rates. the contribution of this study is to advance our understanding of value relevance of complete, transparent esg disclosure in the process of debt financing. given the extant literature, we hypothesize that: small firms will face higher costs to debt financing; that firms with more complete, transparent esg disclosure policies will have reduced interest costs of debt financing; and, that the reduction in debt costs for firms with transparent esg disclosure policies will be most pronounced for small firms with transparent disclosure. we test these hypotheses in three ways. first, we examine how corporate debt costs differ for smaller, more entrepreneurial firms relative to larger firms, which are later in their lifecycle. second, we explore how esg disclosure transparency relates to corporate debt costs. finally, we investigate how debt costs differ for firms who are both smaller and more entrepreneurial yet have more complete, transparent esg disclosure policies. hypothesis 1. small firms face higher debt costs. hypothesis 2. firms with more transparent esg disclosure strategies have reduced debt costs. hypothesis 3. the reduction in debt costs for firms with transparent esg disclosure policies is most pronounced for small firms with transparent disclosure policies. method data on esg disclosure come from bloomberg data services (bloomberg, 2014) over the period january 1st, 2005 through december 31st, 2015. bloomberg’s 2014 esg group provides a proprietary score based on the “extent of a company’s environmental, social, and governance disclosure.” bloomberg 2014 provides yearly composite scores for each firm followed by its esg group, as well as scores for the three components of esg, i.e., environmental, social, and governance scores. the methodology bloomberg uses to compute its scores is proprietary to the firm, however, they do provide resources indicating the types of factors considered in its construction. figure 1 provides a listing of the categories of factors considered by bloomberg 2014, by esg component, in creating the score. though the categories are broad, the figure does provide insight in the types of considerations bloomberg 2014 uses in their scoring. the esg score (esg score) measures the completeness, or transparency, of a firm’s disclosures across a number of industry-relevant esg dimensions, and not the firm’s esg performance, or esg quality. it is this characteristic of the bloomberg’s esg score (i.e., the fact that the score quantifies disclosure completeness, or transparency, and not necessarily firm “goodness”) which makes it score an ideal measure to explore the association between corporate esg transparency and 61 t. c. dunne, & g. a. mcbrayer journal of small business strategy / vol. 29, no. 2 (2019) / 58-71 corporate debt costs. bloomberg’s esg score ranges from 0.1 for firms who disclose a “minimum amount of esg data” to 100 for “those that disclose every data point collected by bloomberg.” bloomberg records a score of “n/a” for firms that do not disclosure any information pertinent to the construction of esg score or for firms which are not followed by the esg group. the esg score is also tailored to different industries so that each company is only evaluated in terms of the data that is relevant to its industry sector. as such, the data, by construction, limit cross-industry comparison without including appropriate controls. further, an additional characteristic of the bloomberg data, which makes it preferable in our setting is the fact that the data are gathered for a large subset of firms regardless of their preferences for inclusion. in this way, we are able to avoid many of the selection bias issues faced by prior studies. the bloomberg data contain the annual composite measure of disclosure transparency by firm as well as disclosure scores for the individual components of esg [i.e., environmental disclosure score (environ), social disclosure score (social), and governance disclosure score (govnce)] where available. we collected data on corporate debt costs from compustat over the same period. our measure of corporate debt costs is constructed as the ratio of a firm’s interest expense, as reported on its income statement, scaled by a firm’s total interest-bearing debt (interest exp). the denominator in our measure of debt is the sum of the firm’s short-term and long-term debt. by using the total interest expense of the firm we are able to mitigate, to some extent, factors associated with any specific issue, which may potentially confound our analysis (e.g., debt covenants, flotation costs, etc.). in addition to the data on corporate debt costs, we collected data on firm characteristics for the firms in our sample to inform our analysis and to act as control variables in multivariate testing. consistent with prior studies exploring esg disclosure (e.g., gamerschlag, moller, & verbeeten, 2011; huang, 2013), we excluded firms in the financial sector. from our analysis and construct measures of firm size (total assets), firm age (age), the firm’s use of debt (leverage), the existence of a corporate credit rating (rated), firm growth opportunities (marketto-book), corporate investment (capex), profitability (ros), and of the tangibility of the firm’s assets (tangible assets). a detailed description of variable calculations is provided in appendix a. descriptive statistics on the sample are provided in table 1. the result of our sample identification data and matching procedures results in a final sample of 16,113 firm-year observations for 3,018 unique firms. esg score for the mean (median) firm-year in our sample is 19.520 (13.223). of the observations in our sample with esg scores, 5,908, 9,789, and 16,101 firm-year observations have data for environ, social, and govnce, respectively. panel b of table 1 presents the distribution of firm-year observations by year (left half) and fama and french (1997) 17-industry classification (right half). esg scores are highest in the first two years of our sample period leveling afterward. the distribution by fama and french (1997) 17-industry shows that our roughly 34% of our sample is from the oil, machinery, transportation, and retail industries. cross-industry comparison of esg score provides little insight as the score is tailored to specific industries such that data are collected only for “industry relevant” esg factors. environmental social governance carbon emissions supply chain cumulative voting climate change effects discrimination executive compensation pollution political contributions shareholders’ rights waste disposal diversity takeover defense renewable energy human rights staggered boards resource depletion community relations independent directors figure 1. categories considered by bloomberg 2014 in esg scoring this figure describes the categories of factors considered by bloomberg in esg scoring. the table is recreated from a table contained in a publication released by bloomberg entitled ‘look beyond’. 62 t. c. dunne, & g. a. mcbrayer journal of small business strategy / vol. 29, no. 2 (2019) / 58-71 table 1 descriptive statistics panel a: summary statistics variable n mean meadian std dev min p25 p75 max esg score 16,113 19.520 13.223 13.279 0.826 11.157 21.901 86.777 environ score 5,908 23.788 20.155 18.397 0.775 6.977 37.985 93.798 social score 9,789 21.082 14.035 17.491 3.125 8.772 31.250 96.875 govnce score 16,101 50.867 50.000 7.437 3.571 48.214 51.786 85.714 panel b: esg scores by year/industry year n mean meadian industry n mean median 2005 138 27.528 24.273 food 615 21.981 14.876 2006 295 26.893 25.283 mining 489 27.232 19.422 2007 85 20.880 14.050 petroleum 1,200 21.231 14.108 2008 1.121 20.020 14.050 clothing 231 17.639 13.876 2009 1.310 20.452 14.050 durables 283 17.369 11.984 2010 2.002 18.190 12.810 chemicals 533 23.558 15.289 2011 2.162 18.219 12.076 consumer goods 780 22.408 13.223 2012 2.191 18.976 12.919 construction 646 18.483 13.223 2013 2.175 19.418 12.919 steel 277 11.984 11.984 2014 2.210 19.547 13.223 fabricated products 158 15.480 11.984 2015 1.659 19.890 13223 machinery 2.333 13.223 13.223 automobiles 374 21.263 14.050 transportation 918 18.902 13.223 utilities 758 27.383 22.264 retail 1.003 17.847 13.876 other 5.515 16.860 11.984 panel c: financial characteristics n mean meadian std dev min p25 p75 max interest exp 16,113 0.111 0.056 0.363 0.000 0.039 0.077 3.677 total assets (mil$) 16,113 8.392 1.926 15.288 0.000 0.460 7.433 66.010 age 16,113 24.982 20.000 17.556 2.000 11.000 36.000 66.000 leverage 16,113 0.270 0.246 0.234 0.000 0.119 0.369 7.343 rated 16,113 0.471 0.000 0.499 0.000 0.000 1.000 1.000 market-to-book 16,113 1.891 1.277 3.266 -23.346 0.769 2.186 62.062 capex 16,113 0.156 0.043 0.536 0.000 0.022 0.104 7.500 ros 16,113 -0.472 0.095 6.427 -107.552 0.037 0.159 0.636 tangible assets 16,113 0.307 0.227 0.252 0.000 0.099 0.472 0.960 this table presents descriptive statistics on the sample of firm-year observations included in the period january 1, 2005 through december 31, 2015. our sample includes all firms with esg data available from bloomberg and complete financial characteristics data from compustat. esg score and its component scores are obtained directly from bloomberg. panel a presents descriptive statistics on esg measures. panel b presents statistics on esg score by fiscal-year end and fama and french (1997) 17-industry classifications. panel c presents descriptive statistics on firm characteristics remaining variable definitions are provided in appendix a. 63 t. c. dunne, & g. a. mcbrayer journal of small business strategy / vol. 29, no. 2 (2019) / 58-71 empirical results univariate analysis. table 2 presents a pairwise correlation matrix covering the variables in our analysis where pearson (spearman) correlations are presented below (above) the diagonal. in a univariate setting, we find that esg score is negatively related to interest exp consistent with our second hypothesis that firms with more transparent esg disclosure strategies have reduced debt costs. the pearson (spearman) correlation between interest exp and esg score is -0.065 (-0.111) and is significant at better than the 1% level. the correlation results provide evidence consistent with our first hypothesis that small firms face higher debt costs. specifically, corporate interest expense is negatively related to total assets. for the remainder of the firm characteristics in our sample, we find that interest expense is negatively and statistically significantly related to age, leverage, rated, ros, and tangible assets and that it is positively related to market-to-book. as for esg score, the correlation results suggest that larger, older, credit rated, firms with higher profitability and greater asset tangibility have higher esg scores. to further examine the association between debt costs, esg disclosure transparency, and firm size, we split our sample into two groups based on firm size using the number of individuals employed by the firm as our measure of size. we construct an indicator variable, small, which takes on a value of one if the observation is for a firm-year where the firm employs less than 500 people, and zero otherwise. we then split our sample into two subsamples based on this measure and examine how firm characteristics differ across the two groups. the results of this analysis are presented in table 3. the left third of table 3 presents descriptive statistics for firm-year observations where small equals one and the middle third where small equals zero. the right-third presents the differences in means and medians by small and provides statistical results on the differences from t-tests for means and k-sample tests for medians. the differences in means (medians) for interest exp is consistent with hypothesis one, i.e., smaller firms face higher interest expenses. at the mean values, firms where small equals one are younger, are less likely to be credit rated, have higher growth opportunities, have greater capital expenditures, and are less profitable. these results are consistent at median values as well. table 2 correlation matrix pearson (spearman) correlations below (above) diagonal (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) interest exp 1.000 -0.111 *** -0.137 *** -0.086 *** -0.038 *** 0.030 -0.131 *** -0.058 *** -0.172 *** 0.025 *** esg score -0.065 *** 1.000 0.675 *** 0.329 *** 0.041 *** 0.443 *** 0.009 0.162 *** 0.279 *** 0.200 *** total assets (mil$) -0.072 *** 0.659 *** 1.000 0.329 *** 0.254 *** 0.662 *** -0.084 *** 0.237 *** 0.409 *** 0.240 *** age -0.068 *** 0.281 *** 0.291 *** 1.000 -0.014 * 0.328 *** -0.104 *** -0.055 *** 0.134 *** 0.102 *** leverage -0.136 *** -0.021 *** 0.019 ** -0.046 *** 1.000 0.354 *** -0.078 *** 0.173 *** 0.109 *** 0.236 *** rated -0.111 *** 0.394 *** 0.430 *** 0.350 *** 0.228 *** 1.000 -0.091 *** 0.129 *** 0.259 *** 0.182 *** market-tobook 0.047 *** -0.031 *** -0.034 *** -0.089 *** -0.008 -0.079 *** 1.000 -0.002 0.240 *** -0.212 *** capex 0.011 -0.053 *** -0.032 *** -0.099 *** 0.098 *** -0.022 *** 0.050 *** 1.000 0.223 *** 0.688 *** ros -0.082 *** 0.057 *** 0.051 *** 0.062 *** -0.048 *** 0.083 *** -0.148 *** -0.481 *** 1.000 0.141 *** tangible assets -0.076 *** 0.113 *** 0.097 *** 0.060 *** 0.177 *** 0.153 *** -0.109 *** 0.292 *** 0.064 *** 1.000 table 2 presents a correlation matrix of the esg score and firm financial characteristics used in our analysis. statistical tests on the relation between variables are performed for both measurements of correlation with the results are presented to the right of each correlation statistic. variable definitions are provided in appendix a. *, **, and *** indicate statistical significance at the 10%, 5%, and 1%, respectively. 64 t. c. dunne, & g. a. mcbrayer journal of small business strategy / vol. 29, no. 2 (2019) / 58-71 multivariate analysis. univariate results provide evidence consistent with our first two hypotheses, i.e., smaller firms and firms with less transparent esg disclosure strategies pay higher interest expenses. however, the univariate analyses also present significant heterogeneity in our sample. to account for the difference in the financial characteristics of the firms in our sample, we conduct a set of cross-sectional, time-series regressions on the relation between interest expense, firm size, and esg disclosure. we use the following regression model in our analysis: 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑖, = 𝛼 + 𝛽1𝐸𝑆𝐺 𝑆𝑐𝑜𝑟𝑒𝑖, + 𝛽2𝑆𝑚𝑎𝑙𝑙𝑖, 𝑡 + 𝛽3𝐸𝑆𝐺 𝑆𝑐𝑜𝑟𝑒 𝑥 𝑆𝑚𝑎𝑙𝑙𝑖, 𝑡+ 𝜸𝑪𝒐𝒏𝒕𝒓𝒐𝒍𝒔𝒊, 𝒕 + 𝜀𝑖, 𝑡 (1) where interest exp is our primary measure of corporate debt costs; 𝐸𝑆𝐺 𝑆𝑐𝑜𝑟𝑒𝑖, 𝑡 is firm i’s esg score at time t; 𝑆𝑚𝑎𝑙𝑙𝑖, 𝑡 is firm i’s value of small at time t; 𝐸𝑆𝐺 𝑆𝑐𝑜𝑟𝑒 𝑥 𝑆𝑚𝑎𝑙𝑙𝑖, 𝑡 is the interaction of esg score and small for firm i at time t; and, 𝜸𝑪𝒐𝒏𝒕𝒓𝒐𝒍𝒔𝒊, 𝒕 is a vector of control variables which includes total assets, age, leverage, rated, market-to-book, capex, ros, and tangible assets. all regression specification include fixed effects for fama and french (1997) 17-industry classification to account for the industry adjustment inherent in bloomberg’s 2014computation of esg scores. further, we include fixed effects for year and compute robust standard errors clustered by industry where indicated. the results of these regression analyses are presented in table 4 with t-statistics reported in parentheses below the coefficient estimates. the coefficient estimates on esg score are negative in all four regression specifications and are statistically significant at conventional levels for three of the four specifications. the statistical results on esg score are economically meaningful as well. the coefficient estimate in our fully specified model suggests that a one standard deviation increase in esg score translates to a reduction in interest exp of nearly 40 basis points (13.279 * −0.0003 = 0.0040), roughly 3.6% of the mean interest exp. the coefficient estimates on small are all positive and statistically significant at better than the 1% level. in the fully specified model, firms where small equals one have a value of interest exp that is 9.72 percentage points higher controlling for other factors. the coefficient estimates on small and esg score provide evidence consistent with hypothesis one (i.e., that smaller firms face higher interest costs) and hypothesis two (i.e., that firms with table 3 descriptive statistics conditioned on firm size small firms large firms difference n mean median n mean median mean median interest exp 2,531 0.1720 0.0656 13,582 0.0992 0.0549 0.0728 *** 0.0107 *** esg score 2,531 11.8095 11.1570 13,582 20.9570 14.0496 -9.1475 *** -2.8926 *** total assets (mil$) 2,531 0.8490 0.1344 13,582 9.7975 2.6644 -8.9485 *** -2.5300 *** age 2,531 15.7867 14.0000 13,582 26.6950 21.0000 -10.9084 *** -7.0000 *** leverage 2,531 0.2731 0.1910 13,582 0.2698 0.2536 0.0033 -0.0626 *** rated 2,531 0.1063 0.0000 13,582 0.5387 1.0000 -0.4324 *** -1.0000 *** market-to-book 2,531 2.7746 1.5849 13,582 1.7260 1.2371 1.0486 *** 0.3479 *** capex 2,531 0.4642 0.0484 13,582 0.0982 0.0427 0.3661 *** 0.0057 * ros 2,531 -3.3761 0.0073 13,582 0.0693 0.1034 -3.4454 *** -0.0961 *** tangible assets 2,531 0.3107 0.1362 13,582 0.3068 0.2368 0.0039 -0.1006 *** table 3 reports descriptive statistics on esg score and firm characteristics for the sample firms conditioned on firm size. to construct our two subsamples, we create an indicator variable, small. statistical significance on differences in means and medians is computed using t-tests for mean estimates and k-sample tests for median estimates. variable definitions are provided in appendix a. *, **, and *** indicate statistical significance at the 10%, 5%, and 1%, respectively 65 t. c. dunne, & g. a. mcbrayer journal of small business strategy / vol. 29, no. 2 (2019) / 58-71 table 4 interest expense and esg score dependent variable = interest exp. (1) (2) (3) (4) esg score -0.0018*** -0.0013*** -0.0003 -0.0003* (-8.205) (-5.781) (-0.956) (-2.112) small firm 0.1368*** 0.1020*** 0.0972*** (4.829) (3.598) (3.769) esg score x small firm -0.0064*** -0.0059*** -0.0057** (-2.811) (-2.603) (-2.755) total assets (mil$) -0.0006** -0.0006*** (-2.387) (-3.947) age -0.0008*** -0.0007*** (-4.253) (-6.163) leverage -0.1984*** -0.1913*** (-15.451) (-5.791) rated -0.0226*** -0.0235*** (-3.238) (-3.433) market-to-book 0.0023*** 0.0026 (2.615) (1.395) capex -0.0145** -0.0130 (-2.165) (-1.348) ros -0.0033*** -0.0032 (-3.270) (-1.353) tangible assets -0.0622*** -0.0651** (-4.106) (-2.919) constant 0.0048 0.0052 (1.277) (0.626) year controls n n n y industry controls y y y y clustered errors n n n y observations 16,113 16,113 16,113 16,113 adj. r2 0.004 0.008 0.039 0.042 table 4 reports coefficient estimates from ordinary-least-squares regression tests on the association between interest exp, esg score, and a vector of control variables. specifications include fixed effects for fiscal year and industry using fama and french (1997) 17-industry classifications and compute robust standard errors clustered by industry where denoted. t-statistics are presented in parentheses below the coefficient estimates. remaining variable definitions are provided in appendix a. *, **, and *** indicate statistical significance at the 10%, 5%, and 1%, respectively. 66 t. c. dunne, & g. a. mcbrayer journal of small business strategy / vol. 29, no. 2 (2019) / 58-71 less transparent esg disclosure strategies pay higher interest expenses), respectively. to explore our third hypothesis, that the reductions in debt costs for firms with transparent esg disclosure policies is most pronounced for small firms with transparent disclosure policies, we include the interaction term. if the benefits to transparent esg disclosure policies are most pronounced for small firms, then we would expect a negative coefficient estimate on the interaction term. our regression results confirm this conjecture in all three specifications. coefficient estimates on the interaction term are negative and statistically significant at better than the 5% level. in economic terms, a one standard deviation increase in esg score is associated with a reduction in interest exp of 797 basis points [13.279 * (−0.0003 + −0.0057) = 0.0797], roughly 46% of the mean interest exp paid by small firms. stated differently, the effect of a one standard deviation increase in esg score for small firms almost completely offsets the increased debt costs suggested by the coefficient estimate on small. the regression results suggest that debt costs are reduced for firms with transparent esg disclosure strategies and that the result is most pronounced for smaller firms. given that bloomberg’s 2014 esg composite score encapsulates three dimensions of esg disclosure (i.e., environmental, social, and governance disclosure), the question remains as to what dimension(s), if any, in particular, are responsible for the result. to explore this question, we examine our results against the component disclosure scores. the number of observations varies across this series of tests as a result of data availability limitations by bloomberg 2014. consistent with our prior, fully specified model specification, the component specifications include fixed effects for fiscal year and fama and french (1997) 17 industry and compute robust standard errors clustered by industry. the results of these tests are presented in table 5. the first column of table 5 presents the results from the fully specified model displayed in table 4 for ease of comparison. the remaining three columns present the results where environ, social, and govnce are substituted into the specification, respectively, as the measure of esg. higher esg component scores are associated with reductions in interest exp across the three specifications, though, the association is not statistically significant. consistent with our prior tests, firms where small equals one face higher debts costs. this relation is significant at better than the 5% level for the component specifications using social and govnce as their measure of esg disclosure transparency. finally, the coefficient estimates on the interaction term are negative and statistically significant in the specifications using social and govnce. we interpret this result as evidence that transparent social and governance disclosures are responsible for the observed relation on the composite score. firms with complete and transparent disclosure strategies pertaining to social concerns and governance quality seem to face reductions in debt costs. discussion our study contributes several important elements in regards to entrepreneurial financing. first, it provides practical advice for small business owners who aim to minimize the cost of debt-financed prospects. results suggest that small businesses can create the opportunity to decrease interest rates on their loans by providing more complete, more transparent esg disclosure. therefore, if entrepreneurs who seek financing can mitigate risk for banks, by decreasing information asymmetries through esg disclosure, their ventures can decrease overall costs and improve their economic position. our results also expand the literature on entrepreneurial financing by highlighting the impacts of esg practices on small business debt costs expanding our understanding of agencybased issues that have long impacted small business capitalization. according to agency theory, financers of business startups impose various types of controls on those small businesses in order to mitigate the risk associated with having incomplete information. the most common means for banks to impose such control is through higher interest rates on small business loans. high interest rates, however, decrease the overall operating ability for small firms, whose financial position is typically constrained. our findings suggest that reporting of esg information provides value-relevant information to banks, which minimizes information asymmetry concerns, resulting in lower interest rates charged on small business loans. 67 t. c. dunne, & g. a. mcbrayer journal of small business strategy / vol. 29, no. 2 (2019) / 58-71 table 5 interest expense and component esg disclosure scores dependent variable = interest exp. esg score environ score social score govnce score esg variable -0.0003* -0.0000 -0.0000 -0.0005 (-2.112) (-0.538) (-0.087) (-1.372) small firm 0.0972*** 0.0008 0.0565** 0.2738** (3.769) (0.061) (2.756) (2.818) esg variable x small -0.0057** 0.0001 -0.0026** -0.0052** (-2.755) (0.144) (-2.312) (-2.586) total assets (mil$) -0.0006*** -0.0005*** -0.0006*** -0.0007*** (-3.947) (-3.199) (-3.685) (-4.575) age -0.0007*** -0.0005*** -0.0006*** -0.0007*** (-6.163) (-3.761) (-5.042) (-5.777) leverage -0.1913*** -0.2409*** -0.2156*** -0.1919*** (-5.791) (-5.978) (-6.437) (-5.758) rated -0.0235*** -0.0168* -0.0160* -0.0238*** (-3.433) (-1.893) (-2.211) (-3.355) market-to-book 0.0026 -0.0011 0.0023** 0.0026 (1.395) (-0.737) (2.255) (1.395) capex -0.0130 0.0039 -0.0463*** -0.0139 (-1.348) (0.682) (-3.654) (-1.416) ros -0.0032 0.0102 -0.0125 -0.0033 (-1.353) (0.286) (-1.806) (-1.385) tangible assets -0.0651** -0.0368*** -0.0194 -0.0669** (-2.919) (-4.024) (-1.205) (-2.947) constant 0.1840*** 0.1841*** 0.1822*** 0.2037*** (10.622) (7.896) (8.439) (9.583) year controls y y y y industry controls y y y y clustered errors y y y y observations 16,113 5,908 9,789 16,101 adj. r2 0.042 0.038 0.056 0.043 table 5 presents the results of ordinary-least-squares regression testing on the relation between interest exp, esg component scores, and a vector of control variables. t-statistics are presented in parentheses below the coefficient estimates. variable definitions are provided in appendix a. *, **, and *** indicate statistical significance at the 10%, 5%, and 1%, respectively. 68 t. c. dunne, & g. a. mcbrayer journal of small business strategy / vol. 29, no. 2 (2019) / 58-71 our prediction that small firm and firms with less transparent esg reporting would suffer from higher interest rates on debt financing, was supported by our analysis. we also found support for the prediction that increased transparency through esg reporting would decrease debt costs and that this improvement would be magnified for smaller firms. these results contribute to the entrepreneurial finance literature, and agency costs for small businesses, by showing a direct relationship between esg information disclosure and the cost of debt. while these results do not test the mechanism through which esg disclosure mitigates information asymmetry, several explanations are worth noting. one such explanation is that information contained in the disclosure itself could decrease uncertainty on the part of financers. as the party who otherwise would suffer the risk of information asymmetry, it could be that the information provided in the disclosure minimizes the information disparity therefore leading lenders to lessen restrictions on the borrower via lower debt. another explanation is that it is the act of disclosing information voluntarily that is rewarded. in this sense, voluntarily releasing information signals a transparent culture, whereby the borrower indicates a willingness to mitigate information asymmetries. following this logic, the information provided may not minimize the disparity of information possessed by the two parties, but minimizes their concern all the same. while we are not able to distinguish between these two factors with the bloomberg 2014 data, either outcome provides justification for increases in esg disclosure. limitations and future research. our study provides a framework for future research to examine the role of csr, and specifically the elements of esg, along with other similar reporting (mcmillan, dunne, aaron, & cline, 2017; shields, welsh, & shelleman, 2018), on small firms’ ability to decrease the cost of debt. while we see esg reporting on bloomberg 2014 as a strong proxy for information that is relevant for mitigating lending institution risk, it is possible that esg disclosure has a positive effect through another signal that helps to improve debt costs. thus, future studies could seek to uncover the mechanisms through with value-relevant information of esg disclosure is observed by banks. further, the interest rate charged by debt financiers is one means by which debt investors are able to influence the actions of firm management and impose control, debt contract characteristics and covenant are another. further study is needed on the association between esg disclosure transparency and debt covenant costs. conclusion the cost of debt faced by many small businesses is a challenge, and in some instances contributes directly to the failure of entrepreneurial ventures. our results, however, show a direct link 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https://www.usatoday.com/story/money/business/small-business-central/2017/05/21/what-percentage-of-businesses-fail-in-their-first-year/101260716/ https://www.usatoday.com/story/money/business/small-business-central/2017/05/21/what-percentage-of-businesses-fail-in-their-first-year/101260716/ https://www.usatoday.com/story/money/business/small-business-central/2017/05/21/what-percentage-of-businesses-fail-in-their-first-year/101260716/ https://www.usatoday.com/story/money/business/small-business-central/2017/05/21/what-percentage-of-businesses-fail-in-their-first-year/101260716/ https://www.usatoday.com/story/money/business/small-business-central/2017/05/21/what-percentage-of-businesses-fail-in-their-first-year/101260716/ https://www.usatoday.com/story/money/business/small-business-central/2017/05/21/what-percentage-of-businesses-fail-in-their-first-year/101260716/ 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https://www.usatoday.com/story/money/business/small-business-central/2017/05/21/what-percentage-of-businesses-fail-in-their-first-year/101260716/ https://www.usatoday.com/story/money/business/small-business-central/2017/05/21/what-percentage-of-businesses-fail-in-their-first-year/101260716/ 71 t. c. dunne, & g. a. mcbrayer journal of small business strategy / vol. 29, no. 2 (2019) / 58-71 appendix a variable definitions variable definition esg score bloomberg’s 2014 proprietary score based on the extent of a company’s environmental, social, and governance disclosure. the score ranges from 0.1 to 100 with higher numbers reflecting greater esg disclosure. environmental score bloomberg’s 2014 proprietary score based on the extent of a company’s environmental disclosure. higher values reflect increased environmental disclosure. social score bloomberg’s 2014 proprietary score based on the extent of a company’s social disclosure. higher values reflect increased social disclosure. governance score bloomberg’s 2014 proprietary score based on the extent of a company’s governance disclosure. higher values reflect increased governance disclosure. interest exp. the ratio of a firm’s interest expense, as reported on its income statement, scaled by the sum of the firm’s short-term and long-term debt measured at fiscal year-end. small an indicator variable which takes on a value of one if the firm employs less than 500 individuals in a given year, and zero otherwise. total assets total book assets expressed in millions of dollars as reported by compustat at fiscal year-end. age a count of the number of years the firm has been tracked by compustat. leverage the sum of total long-term debt plus the current portion of long-term debt scaled by book assets at fiscal year-end. rated an indicator variable which takes a value of one if the firm has an s&p long-term issuer rating, and zero otherwise. market-to-book the market value of a firm’s equity at the fiscal year-end scaled by its book value of equity. capex the capital expenditures for a firm at fiscal year-end scaled by the firm’s total revenues. ros ebit scaled by total revenue at fiscal year-end. intangible assets total book assets less intangible assets all scaled by total book assets at fiscal yearend. strategy table of contents page title/author i a practical approach to determining when to expand and when to stabilize sales paul dunn leo r. cheatham carole cheatham 16 reward strategies for hnchising organizations robert t. justis peng s. chan james d. werbel 24 factors that restrict exports of small and medium-sized hrms: the role of export hnancing charlie e. mahone, jr. 35 a longitudinal study of the utilization of prsnluction management techniques by small electronics brms stanley e. fawcett john n. pearson 50 are small businesses phging through the gaapt janet l. dye james w. carland jo ann c. carland 56 entrepreneurial opportunities in the wholesale sector: a predictive model david a. baucus john c. palmer donald gudmundson strategy service characteristics and yellow pages advertising effectiveness kenny k. chan shekhar misra california state university, chico abstract adverlisingin the yellow pages often constil utes an important corn ponenl of promotional strategy for many small businesses. for some, these directories may be their sole means of advertising. this study examines the role of consumer yellow pages in the information search patterns of an increasingly important market segment, young adults, for a selected group of ten services. findings from this study suggesl that yellow pages are more likely to be used as an information source when subjects are searching for certain services than for other services. furthermore, results indicate that certain characteristics of a service may influence the likelihood of a consumer consulting these directories. practical implications on how to make the most out of yellow pages advertising are discussed. introduction the yellow pages have been gaining ground as a valuable source for consumers in their external information search efforts. in fact, these directories may be the fastest-growing major advertising medium in the country. since many small businesses may rely on them as a major means of advertising, it is important that these firms —especially those with a limited promotion budget —realize that the yellow pages has its unique capabilities and unique audience characteristics. often, proper use may mean the difference between success and failure. hence, this paper attempts to address the significance of making a conscious effort to evaluate the appropriateness of the yellow pages as a viable media alternative, before including it in one' strategic plan. background according to an independent research commissioned by the american association of yellowpagesadvertisers,98percentofconsumersused the yellowpagesanaverageof36times per year in 1985; and among those with multiple directories, 70 percent used more than one yellowpages(9).consumersreported that theyregard thesedirectoriesasa generally unobtrusive, inoffensive medium that can help find products and services conveniently. the success in revitalizing the image and acceptance of yellow pages directories is directly attributable to some of the recent improvements made by their publishers on what has been regarded as a basically mature product (3). through expansion of the directories to include useful consumer and community information, and introduction of "specialty" publications note: this study was sponsored by a faculty research grant from the american marketing association. 1 geared towards women and ethnic populations, yellow pages publishershave high expectations in their ability to emerge as a viable advertising medium. in fact, yellow pages revenues have grown over the last decade from $2.9 billion to the 1990 level of $8.3 billion (22). the type and extent of yellow pages advertising, however, differs substantially across product classifications, and within product classes from one business to the next. while some advertisers have used the yellow pages to carry most of their advertising loads, others seem reluctant to accept these directories as anything more than a medium —with a low profile and almost no top-of-mind awareness —that does not lend itself to heavy use for timely information (23). yellow pages are used by these advertisers mainly to complement advertising in other media —what the industry refers to as directional advertising in the media mix. this perception of yellow pages directories as merely a "directional" medium implies a major barrier for their continuing success. the creative media —television, radio, magazines, newspapers —claim that yellow pages are not designed to create brand awareness or a desire to buy, a fact even their publishers readily acknowledge (3, 12). these critics argue that consumers referring to a yellow pages directory have already decided to make a purchase, e.g., an owner of a new camera needs service from a "factory-authorized" service center (9). can yellow pages directories be used as a primary means to advertise a business? what types of services are best suited for this medium? it is imperative that service providers know the answers to these questions before including the yellow pages in their media mix. interestingly, while effective advertising maybe difficult to create, the choice of media for efficient dissemination of information relating to one's service offerings is largely within a provider's strategic control (7). it simply requires proper attention to achieve a balance between resources and results, and it could make all the difference in the outcome of an advertising effort. the purpose of this paper is twofold. one goal is to examine how often consumers rely on a particular media alternative, the yellow pages versus other sources of information, in their purchase decisions. it is reasonable to expect that a consumer's propensity to consult the yellow pages might vary as a function of the service needed. a second objective is to address the "situational" perspective of yellow pages'ffectiveness. it is possible that certain characteristics of a given needed service might influence the probability that the yellow pages or some other sources will be consulted. these two hypotheses were examined in the context of an increasingly important market segment, college students. there are 13 million college students nationwide, many of them affluent. nevertheless, these consumers are tricky to snag because they are seldom reachable through mainstream channels (i). trans world airlines inc. had advertised a special discount card through travel agencies —what they thought was a "cost effective" technique —with dismal results. reason: many students don't use travel agents. tambrands, marketer of first response home pregnancy test, originally ran ada for the product in university directories. upon learning that directories are better suited for products like computers and calculators, the company moved their ads to college newspapers instead. this study intends, among other things, to shed some light on the information search patterns among these inherently skeptical and increasingly sophisticated consumers. 2 method a survey wasconductedtoinvestigateifdifferencesacrossserviceattributesmightaccount for variation in young-adult consumers'ropensity to rely on a particular medium as a primary source of information for that service. one hundred and eighty-two undergraduate students from a western university were recruited to serve as participants. each subject completed a questionnaire (appendix a) as part of a class exercise. in the first part of the survey, subjects were asked in an open-ended question to indicate which one source of information they would most likely consult when they needed: a physician, a chiropractor, a dentist, urgent medical care, a florist, a travel agency, pet grooming service, air conditioning repair, auto repair service or a plumber. subjects were then asked to rate each of thesetenservicesalongasetoftencharacteristicsona7-pointscale. tablel isa summaryofthese attributes. table 1. summary of service characteristics exact same::::::::differentunessential:::::::: essential familiar to me::::::::unfamiliar to me easy to choose::::::::difficult to choosesafe::::::::unsafe i 2 3 4 5 6 7 analysis subjects'esponses to the question on preferred source of information were contentanalyzed and categorized into one of four groups: yellow pages; media advertising (television, radio, newspapers, and magazines); personal advice from friends and relatives; and other sources (e.g. consumer reports magazine, better business bureau, referral services). given the exploratory nature of this study where little is known about the sample population, a confidence level of .95 was used to test the statistical significance of their relationships. a crosstabulation of these ten services by preferred source of information is presented in table 2. as can be seen, a chi-square of 492 69 with 27 degrees of freedom (p & .000) indicates that subjects would consult the yellow pages and other information sources with different likelihoods depending on the service needed. interestingly, these college students did not seem to regard media advertising as a primary source of information for any of the services tested. only seven percent of the subjects said they would refer to media advertising for information when looking for a travel agency. the percentages were much lower for the other nine services. twenty-five to thirty percent of the subjects said they would consult the yellow pages when they needed a personal care provider (physician, a chiropractor or a dentist), while thirty-five 3 percent of them would consult the yellow pages when they needed auto repair service. nevertheless, the majority of them exhibited a high propensity to turn to personal advice from friends and relatives when they needed information on such services. the yellow pages would be most likely consulted as a primary source of information when subjects needed a florist, a travel agency, pet grooming service, air conditioning repair, a plumber, or urgent medical care. table 2. crosstabulation of service by preferred information source information source yellow personal media other row type of service pages advice advtg. sources total (%) (%) (%) (%) (%) 1. physician 24.2 61.8 0.0 14.0 100 2. chiropractor 30.6 50.3 1.1 18.0 100 3. dentist 26.7 58.9 1.1 13.3 100 4. urgent medical care 44.7 25.3 1.8 28.2 100 5. florist 83.4 11.6 3.3 1.7 100 6. travel agency 61.1 29.2 7.0 2.7 100 7. pet grooming 69.2 20.3 3.3 7.2 100 8. air conditioning 79.6 14.0 1.6 4.8 100 repair 9. au to repair 34.9 55.4 2.7 7.0 100 10. plumber 72.0 26.9 0.0 1.1 100 chi square = 492.685 with 27 degrees of freedom (p & .000) next, weexplored whethercertainintrinsiccharacteristicsofaservicemightrenderit more suitable for advertising in the yellow pages. all responses indicating a predisposition towards using the yellow pages as a primary source of information were pooled. the remaining responses impli ca ting all other forms of information as primary sources constituted the comparison group. t-tests were performed to determine if these two groups of respondents differ significantly in their perceived attributes of the services. the intent was to investigate whether this difference in percephon might have contributed to subjects'hoice of primary information source when deciding on the purchase of a needed service. table 3 presents a summary of the results. 4 table 3. comparison of service-characteristic perceptions between users of yellow pages and other sources primary source of information service attribute'ellow pages other sources significance 1. expensive 5.544 5.865 .000 2. different 4.597 5.187 .000 3. essential 4.868 5.504 .000 4. important 4.968 5.560 .000 5. unchangeable 3.094 3.354 .000 6. interesting 3.839 4.259 .000 7. unfamiliar to me 4.056 3.600 .000 8. difficult to choose 3.514 4.112 .000 9. poorly regulated 3.802 3.653 .022 10. unsafe 2.994 3.050 .376 a. all of the adjectives listed are the high end anchors (7 in a scale of 1 to 7) in their respective adjective pairs. the higher the reported mean score, the closer the average response approaches the corresponding description of the anchor adjective stated here. b. statistical significance (p-value). consumers were more likely to consult the yellow pages than other information sources for products which are perceived to be significantly: less expensive, less differentiated between offerings from competing providers, less essential, less important, more easily changeable, less interesting, less familiar to the purchaser, easier to choose, and less well regulated. these results suggest that the yellow pages may not be suitable for some types of service such as health care, financial planning, jewelry, and auto repair to name a few. before ad ver ti sing in these directories, owners of such businesses should pay special attention to the search process through which their target consumers select providers, so as to ensure more effective and efficient media planning. implications for small businesses the 1990s promise more intense competition for retailers of products and services because entry barriers will remain relatively low (13).marketers rather than merchants will be the key movers of retail businesses (11).for most small service providers, resource poverty mandates a keen adherence to the marketing concept and solid comprehension of one's competitive activities(10).oneareawhichsmallbusinessownerscannotafford tooverlookismedia strategy. the increasing number of media choices has made the media planning process more and more complex. to date, there is a magazine (or more) for each possible demographic segment or special interest. for example, american express co.'s publishing unit started mailing out a new 5 quarterly called connections to student cardholders on 600 campuses. we have also seen the entry of the fox network and many more cable channels, and a proliferation of highly specialized directories such as silver pages for senior citizens and a chinese-language yellow pages in san francisco. an astute business owner must recognize that information search patterns may be more product/service specific than was traditionally expected. challenge yellow pages'it into a media mix this study has established that different media types may not lend themselves equally to consumers as primary information sources for all of their purchases. the findings suggest that the choice of media may be equally important as the message content (6); especially for personal health care providers contemplating the use of yellow pages or media advertising. the results reflect an interesting departure from a prevailing contention that yellow pages is an appropriate communication medium for health-care providers such as physicians (27, 2). furthermore, findings from this study seem to confirm the prudence of those older, established dentists who were reported in becker and kaldenberg's 1990 study (4) to have relied mainly on word-ofmou th for attracting new patients. perhaps these seasoned practitioners have already discovered that media advertising would neither increase the demand for their services nor assist new patients in their information search for dentists. it may be true that more than 1 billion consumers consult the heading "physicians and surgeons" in the yellow pages every year to select a doctor (27). one must question if these browsers were picking a provider based on their credentials listed in these directories, or simply locating the address or phone number of a recommended physician. it is imperative that one closely monitors and evaluates each media type's appropriateness in order to get the most out of an advertising dollar. this applies to yellow pages as well, particularly when there is no generally accepted, independent and objective information to prove distribution and usage (19, 22). examine credibility of distribution and usage claims the multiplicity of available media types and vehicles overwhelms many service providers, causing them to feel uncomfortable making professional media decisions. hence, many rely on the advice and assistance of media sales representatives on creative ideas and media selection. clearly, this situation is bound to produce a biased program. each salesperson is compelled to focus on one's ability to help build store traffic for the client's business, while de-emphasizing the potential usefulness of other media. while television and radio have their iqielsens and arbitrons to certify their ratings, and direct mail can document its measurable responses, yellow pages currently lacks such comparable independent measures to substantiate its effectiveness claims (19). for example, a yellow pages publishers association proprietary study examined the relationshipbetweenproduct/service purchasedecisionsand the use of the yellow pages in1989 (28), and reported that yellow pages advertising could lend a strong supportive influence on the reach of the other media. specifically, the study reported that when used alone, newspaper advertising by chiropractors, dentists and physicians had an average reach of 5 percent; television, 2.3 percent; and radio 1.3 percent. when supported by advertising in the yellow pages, the reach of these media increased dramatically to 10.1percent, 7.9 percent, and 7 percent respectively. 6 the study had failed, however, to address the overall low reach achieved by media advertising with or without the support of the yellow pages. this observation is consistent with one of the crucial findings highlighted in this study —only a small percentage of our student consumers look to the yellow pages or media advertising for information when they need a physician, dentist or a chiropractor. these respondents would be more likely to consult personal advice from friends, relatives or other referral services. it suggests that the preferred advertising medium for this category of services is neither media advertising nor the yellow pages directories, but through word-of-mouth publicity. fortunately, the yellow pages publishers association's market & media research committee is collaborating with the advertising research foundation in setting standards that willpave the way toward credible yellow pages usage research. service providers owe it to themselves to demand independent, third-party research data on yellow pages effectiveness before committing any investment in this medium. ideas on improving yellow pages efficiency demand guaranteed results. both nynex information resources and donnelley directory have taken the first step toward offering guaranteed results to gain a competitive advantage against other directories (12).they are testing guarantees to businesses, which purchase at least a quarter-page ad in their directories within certain markets, that their advertising will deliver results or nynex will reimburse the advertiser an amount ranging from 40 to 100percent of the annual cost of the ad. this idea is nothing new. television networks like nbc have offered rating guarantees to up-front buyers. even ddb needham, an international advertising agency, announced earlier this year that it too would be offering interested u.s. and canadian clients a "guaranteed results" program. the agency expects to be able to offer the same arrangement throughout the rest of its world wide network by 1991.as costs to advertise in yellow pages directories continue to sky-rocket, business owners need to be more assertive in demanding more accountability for their advertising dollars. ask for rebates. some yellow pages publishers have incentive programs which literally pay their customers to advertise in other media (22). the advertiser receives a rebate of its directory advertising costs if its tv or radio spots mention its ad in the directory. this way, a small-business owner can stretch one's budget farther to increase a media plan's overall reach and efficiency. conclusion if indeed an economic slowdown in the early 1990s is inevitable, many businesses will look to cut their advertising expenses as an easy means to scale back. this is in direct contradiction to the marketing logic —advertising must be treated as the fuel for, not the result of sales. promotion is especially crucial in a slow economy. any cutback from these activities will result in a self-fulfilling decline in sales. unfortunately,there islittleevidencetosuggest thatsmallbusinessesconductcareful media planning regularly. efforts are needed to impress upon them the notion that proper advertising planning is an essential step towards successful marketing. given the fact that media costs often 7 account for up to 90 percent of a small business'nnual advertising budget, any discussion of an advertising program without considering the importance of external information sources, as perceived by consumers, would be incomplete (22). several studies have already begun to investigate the knowled ge of planning in smag firms (4, 11,12, 19).we hope this study will serve as a catalyst for more research in this area. specifically, three research extensions await exploration. since the participants in this study represent a narrow segment of college students with a rather homogeneous profile, the generalizability of their opinions may be limited. future research involving a larger and more representative sample would prove useful. secondly, the present study has only approached the issue of information search from the consumers'erspective. a follow-up study can explore if small businesses are aware that their customers'earch patterns are product/service specific, hence necessitate a customized media mix. finally, this study has identified some common patterns in consumers'earch efforts which suggest that service characteristics may be more important determinants than industry classification in media selection. can these findings be generalized to other services not examined in this study? answers to these and other questions should help small businesses operating in similar settings identify more appropriate media mixes for their promotion programs. references l. alexander, suzanne. "marketers find college crowd a tough test," wall street journal (april 16, 1990), bl. 2. allen, bruceh., richard a. wright,and louise.raho. "physicians and advertising," journal of health care marketing 5 (fall, 1985), 39-49. 3. american association of yellow pages publishers. yellow pages update (1987). 4. becker, boris w. and dennis o. kaldenberg. "advertising expenditures by professionals: an exploratory investigation of dental practitioners," journal ofadvertising 19 (no.l, 1990), 23-29. 5. cobb-walgren, cathy j. and halina sleszynski. "responses to physician advertising in the yellow pages," current issues and research in advertising (1987), 123-152. 6. cooper-martin, elizabeth and debra lynn stephens. "aids preventions through consumer communication: ideas from past and current research," in advances in consumer research, eds. marvin e. goldberg and gerald gom, vol. 17 (provo, ut: association for consumer research, 1990), 288-293. 7. crane, f.g. "choice criteria and cue usage in selecting lawyers," journal of professional services marketing 5 (no.l, 1989), 113-121. 8. dollinger, mare j., "environmental contact and financial performance of the small firm," journal of smal! business management 23 qanuary, 1985), 24-31. 9. fletcher, alan d., yellow pages advertising (american association of yellow pages publishers, 1986). 8 10. gumpert,davide."growingconcerns,"harvard businessreview(july-august,1981), 18-32. 11. levy, walter k., "the end of an era: a time for retail perestroika/%u mal of retai1ing 65 (fall, 1989), 389-395. 12. link, the magazine of the yellow pages medium, "a new twist on yellow pages— satisfaction guaranteed," 2 (may/june, 1990), 6. 13. lusch, robert f. and patrick dunne, retail management (west chicago, il: southwestern publishing co., 1990) 14, miller, d. and j. toulouse, "strategy, structure and performance in small firms," amen'can journal of small business 10 (no.l, 1986), 47-62. 15. patterson, r. a., "strategic planning for small businesses," in handbook of strategic planning, eds., j.r.gardner, r. rachlin and a. sweeny, (new york: john wiley, 1986), 24.124.20. 16. robinson, r. b.,j. e. logan and m.y. salem, "strategic versus operational planning in small firms," american journal of small business 10 (no.l, 1986), 7-16. 17. robinson, r b.and ja. pearcell, "research thrusts in small firm strategic planning," academy of management review (no.l, 1984), 128-137. 18. rogers, michael and fl john steinbreder, "when the going gets tough, advertise" fortune 114 (august, 1986), 9. 19. schneck, edward. "a question of credibility," link, the magazine of the yet!ma pages medium 2 (may/june, 1990),56. 20. shrader, charles b., charles l. mulford and virginia l. blackburn, "strategic and operational planning, uncertainty, and performance in small firms," journal of small business management 27 (october, 1989),45-59. 21. smeltzer, larry r., gail l. farm and v. neal nikolaisen, "environmental scanning practices in small business/%urnai of small business management 26 (july, 1988), 5562. 22. taff, john f.d. "first and ten —the yellow pages tackle the other media," link, the magazine of the yellow pages medium 2 (september/october, 1990), 23-27. 23. tunnicliffe, guy and kurt wildermuth, yellow pages advertising (american association of yellow pages publishers 1987). 24. u. s. department of commerce, bureau of the census, census of retail trade (washington, d.cz u. s. government printing office, 1987). 9 25. u. s. senate committee on small business, small business issues and priorities (washington, d.c.:u. s. government printing office, 1987). 26. welsh, john a. and j.f.white, "a small business ls not a little big business," harvard business review 59 (julyaugust, 1981), 18-32. 27. wyman, jack. "medical specialists get rx from the abms," link, the magazine of the yellow pages medium 2 (march/april, 1990), 22. 28. yellow pages publishers association. 'yellow pages and the media mix," (1989). appendix a survey questionnaire your opinions please please answer all the questions in the survey. the completeness of each questionnaire is vital to our study. we are interested in your opinions. since we want your opinions, there are no right or wrong answers to any of the following questions. something about information search below is a list of purchase scenarios. please indicate for each scenario which source of information you will most likely consider when deciding on the purchase of the specified service. list your answers in the spaces provided. 1. if you were new in town, and you needed a personal physician, you would most likely consult 2. if you were new in town, and you needed a chiropractor, you would most likely consult 3. if you were new in town, and you needed a dentist, you would most likely consult 4. if you were new in town, and you needed urgent medical care service,you would most likely consult 5. if you were looking for a florist, you would most likely consult 6. if you were looking for a travel agency, you would most likely consult 10 7. if you were looking for pet grooming service, you would most likely consult s. if you were looking for air conditioning repair service, you would most likely consult 9. if you were looking for auto repair service, you would most likely consult 10. if you were looking for a plumber, you would most likely consult something about these specific services for each service listed below, please indicate your rating by placing a check mark between each pair of adjectives, above one of the spaces that best describes your impression. for example, if you were asked to rate "doublemint gum" on such a scale, the 7 places between each pair of adjectives should be interpreted as follows: tasty:; x :tasteless the position of the above check mark would indicate that you think doublemint gum is quite tasty. 1. i think physicians are: exact same::::::,:differentunessential:::::::: essential borin::::::::interestin g familiar to me::::::,:unfamiliar to me easy to choose::::::::difficult to choose well regulated::::::::poorly regulatedsafe::::::::unsafe 1 2 3 4 5 6 7 11 j 2. i think chiropractors are: exact same::::::::differentunessential:::::::,. essential familiar to me:::::::,unfamiliar to me easy to choose::::::::difficult to choosesafe::::::::unsafe 1 2 3 4 5 6 7 3. i think dentists are: exact same::::::::differentunessential:::::::: essential familiar to me::::::::unfamiliar to me easy to choose::::::::difficult to choosesafe::::::::unsafe 1 2 3 4 5 6 7 4. i think urgent medical care services are: exact same::::::::differentunessential:::::::: essential familiar to me::::::::unfamiliar to me easy to choose::::::::difficult to choosesafe::::::::unsafe 1 2 3 4 5 6 7 12 5. i think florists are: exact same::::::::differentunessential:::::::: essential chan cable::::::::unchan cable familiar to me::::::,,unfamiliar to me easy to choose::::::,.:difficult to choosesafe::::::::unsafe i 2 3 4 5 6 7 6. i think travel agencies are: exact same::::::::differentunessential:::::::: essential unim rtant::::::::im ortantpo p chan cable::::::::unchan cables familiar to me::::::::unfamiliar to me easy to choose::::::::difficult to choosesafe:;::::::unsafe 1 2 3 4 5 6 7 7. i think pet grooming services are: exact same::::::::differentunessential:::::::: essential familiar to me::::::::unfamiliar to me easy to choose::::::::difficult to choosesafe::::::::unsafe 1 2 3 4 5 6 7 13 8. i think air conditioning repair services are: exact same::::::::differentunessential:::::::,. essential familiar to me::::::::unfamiliar to me easy to choose::::::::difficult to choose safe::,.:::::unsafe 1 2 3 4 5 6 7 9. i think auto repair services are: exact same:::::::,differentunessential::,::... essential familiar to me:::::::,unfamiliar to me easy to choose:,:,::,:difficult to choosesafe::::::::unsafe 1 2 3 4 5 6 7 10. i think plumbers are: exact same::::::::differentunessential:::::::: essential familiar to me::::::::unfamiliar to me easy to choose:::::::,difficult to choosesafe::::::::unsafe 1 2 3 4 5 6 7 14 sfxiivmpy beyond survival: reshaping entrepreneurial vision in successful growing ventures steven h. hanks l. r. mccarrey utah state university abstract this paper addresses the role of vision in the management of organization growth. effective growth management requires that founderstexecuti ves envision the firm as a larger entity and anricipate critical changes which will need to occur. a fiv part strategy for expanding entrepreneurial vision in the growing firm is proposed. elements of that straregy are as follows: (a) get to know the territory, (b) recognize that change is inevitable, (c) revise your vision in anticipation of increased size, (d) update your business plan, and (e) share the vision at every appropriate opportunity. ...the managers of most such (rapid growth) companies are building a company for the first time. this is about as easy as navigating unchartered waters with an inexperienced crew while surrounded by a school of sharks. (ramholtz, 1986) in building a business venture, entrepreneurs face a number of significant challenges. the immediate, all encompassing challenge lies in establishing the company as a successful business venture. once early success is achieved, a subsequent challenge emerges —the management of organization growth. growth brings a new series of problems, requiring different management skills, priorities and structural configurations (adizes, 1989; flamholtz, 1986; greiner, 1972; hambrick & crozier, 1985; hanks, 1990; kazanjian, 1988; kazanjian gt drazin, 1991). furthermore, new perspectives may be called for by changes in the market place. the founders'nitial vision of the firm must change in light of new organizational and environmental imperatives. leading an organization through the growth process is a difficult managerial task. entrepreneurial founders, while generally well trained in the technical aspects of their job, often have limited training and experience in leading organizations and find themselves unprepared to manage the transition process effectively. effective management of organization growth requires new vision on the part of the eirm's leadership. hambrick and crozier (1985) in their study of rapid growth firms found that the ability of 'the chief executive to "envision and anticipate" the firm as a larger entity was crucial to its success. the objective of this paper is to discuss the role of vision in the management of organization growth. the paper is integrative in nature, drawing ideas from the literatures 1 1 of organization growth, entrepreneurship, leadership and change. the basic premise is that change-i~rvitabie ig the.-growing firm. the paper begins with the concept of vision, which is defined, its roots explored, and its role in the entrepreneurial process discussed. next, our attention turns to the dynamics of organization growth and its impact upon the organization and its leadership. finally, we will suggest some practical techniques for expanding entrepreneurial visioit in the growing firm. vision the vision construct can be explored through the leadership literature. kouzes and posner (1989) in their study of several hundred leaders identified "inspiring a shared vision" as one of five critical leadership dimensions. similarly, bennis and nanus (1985) identified "vision" as one of four key leadership characteristics. jaffe et al. (1986) noted that "the skill of visioning underlies each of the key elements of creating inspired performance" (p. 97). kouzes and posner (1989) describe vision this way: "visions, then are conceptualizations. they are images in the mind. they are impressions and abstractions.... just as architects make drawings and engineers build models, leaders find ways of giving expression to their hopes for the future" (p. 88). vision is important in the leadership formula for two reasons. firstly, it identifies the future direction of the organization as a state of being the organization wishes to achieve in the future. secondly, vision becomes a rallying point for followers. bennis and nanus describe thi's dimension of vision as follows: their visions or intentions are compelling and pull people toward them. intensity coupled with commitment is magnetic. and these intense personalities do not have to coerce people to pay attention; they are so intent on what they are doing that, like a child completely absorbed with creating a sand castle in a sandbox, they draw others in. (p, 28) jaffe et al. (1986) contend that an effective leader is one who has a powerful sense of meaning and who uses this (o inspire others. vision, then, refers to a mental image or picture, which defines the future direction, position or agenda of the organization and serves as a rallying point for organization members. vision and enlrepreneurship vision plays a vital role in the entrepreneurial process. it is the vision of the entrepreneurthe ability to identify significant needs in the market place and develop a business concept designed to meet those needs —which leads to the establishment of the organization in the first place. these are clearly visionary skills. the genesis of most organizations can be traced to an idea —the business concept or vision. if the idea shows promise, the founders begin to act upon that vision, marshalling the necessary resources, developing the product or service and presenting it to the marketplace. supportive of this notion, mcmullan and long (1990) identify entrepreneurial vision as the precursor of organization creation: 2 the creative process involves two main developmental phases; first, that of previsualizing a desired outcome and, second, that of impressing one's creative vision upon a chosen medium by accessing necessary resources and allocating them to the task. that is, as a creative actor, an entrepreneur will first attain a holistic vision of the venture to be created and, second, he or she must mobilize the resources from the environment to transform and elaborate that vision within the venture medium. (p. 134) thus, simply put, entrepreneurship comprises two essential elements, vision and action. vision ,without action is simply dreaming. action without vision remains but a shot in the dark. for true entrepreneurship to occur, both vision and action must be present. entrepreneurial vision is often a vital motivator of employee performance. entrepreneurs generally lack the resources to provide substantial financial incentives to employees. instead, they must inspire exceptional performance by rallying their workers around a compelling vision. often extraordinary levels of performance are attained by very ordinary individuals because of a special challenge or idea. in such cases people frequently expend considerable personal time and energy to make the entrepreneurial vision a success (jaffe, 1986). the roots of vision where does vision come from? research on this question has yielded three primary sources of vision: first, personal experience of the leader; second, learning from others; and third, the creative process of linking known concepts in new combinations. one clear source of vision is the personal experience of the leader. kouzes and posner (1988) identify intuition as the "wellspring of vision" (p. 93). intuition flows from intimate, hands-on knowledge of the situation, or experience: the longer we spend in an organization and an industry, and the more varied our experiences, the broader and deeper our understanding is likely to be. often, when presented with an unfamiliar problem, we consciously (or unconsciously) draw upon those experiences to help us solve problems. we select relevant information, make relevant comparisons and integrate experience with the current situation. for the experienced leader, all of this may happen in a matter of seconds. but it is the years of direct contact with a variety of problems and situations that prepare the leader for unique insight. listening, reading, smelling, feeling, and tasting the business improve our vision(p. 94) often it is not the leader but someone else who is the source of the vision. kouzes and posner asked leaders to identify their "personal best" leadership experience. they found that in more than half of the cases the idea was initiated by someone else: historians tend to write about great leaders as if they possessed great genius, as if they were capable of creating their visions and sense of destiny out of some mysterious inner resources. perhaps some do, but upon closer examination it usually turns out that the vision did not originate with the leader personally, but rather from others. (p. 95) accordittg to bennis and nanus (1985), effective leaders tend to be great listeners, learners and adapters. mcmullan and long (1990) supported this notion, stating, "entrepreneurs need to learn their art somewhere, usually from other entrepreneurs" (p. 1341. 3 vesper (1990) in his review of the literature identified several sources of new venture ideas including prior employment experiences, hobbies,'social encounters, pedestrian observations, invitations from others, obtaining rights from others and, finally, deliberate search. while this list is extensive, each source as noted above stems from either the experience base of the entrepreneur or learning from someone else. vision is often the result of a creative process wherein known ideas or processes are transferred to a new context or applied in a new, unique way (schumpeter, 1934). a good example of this is the case of microfridge, a start-up venture, whose product consists of a miniaturized refrigerator-freezer-microwave oven combination, designed for college student dorms and motel rooms (mamis, 1991). while the products themselves are not innovative, it is the combination of these (accommodated in a small space, requiring only one regular wall plug) which has allowed microfridge to create a new niche in the marketplace. in its first full year of sales microfridge earned over $ 1 million in profit on $ 15 million in revenues. finally, it must be recognized that the development of vision is often an iterative process. timmons (1990), citing the case of howard head, who went through 40 different prototypes in the development of the metal ski, noted that new venture ideas often evolve through a series of trial and error iterations: ...the new business that simply bursts from a flash of brilliance is rare. what is usually necessary is a series of trial-and-error iterations, or repetitions, before a crude and promising product fits with what the customer is really willing to pay for. (p. 34) ln summary, the roots of vision can be,traced to three primary sources: (a) the experience base of the entrepreneur or entrepreneurial team, (b) the gleaning of ideas from other people, and (c) the creative process of applying known ideas in new contexts or settings. visions often evolve iteratively and crystalize over time as the entrepreneur or leader begins to test and refine his or her ideas. expanding entrepreneurial vision we have thus far discussed the vision construct, its role in the entrepreneurial process, and the roots of vision. just as vision plays a vital role in the entrepreneurial process, it is equally important in the commencement of organization growth. a guiding but oft-revised vision can do much to facilitate smooth organization growth. rockey (1986) in his study of "visualization" found instances of entrepreneurs envisioning many different aspects of organization growth, including identifying a product or service, selecting and constructing a facility, securing capital, selecting personnel, creating a structure for the organization, designing equipment and mechanical procedures, designing operational procedures, designing decor, expanding the enterprise, and selling the business. vision, in the context of the growing firm, has been characterized as follows: the "anticipation of bigness" is the term that best describes the mentality and actions of firms which deal effectively with the problems of instant size. instead of waiting until the firm is bigger and struggling with its increased size, these firms look ahead to those problems qpd lay an early foundation for managing a larger enterprize. (hambrick & crozier, 1985, p. 36) 4 in an effort to assist founders and executives of growing 'firms, we propose a five part strategy. components of the strategy include the following: (a) get to know the territory, (b) recognize that change is inevitable in the growing firm, (c) revise your vision in light of present or anticipated changes, (d) update your business plan, and (e) share the vision at every appropriate opportunity. get to know the territory effective management of organization growth starts with a knowledge of the territory. the authors have been impressed with the intensity with which would-be entrepreneurs, and entrepreneurs-in-process acquaint themselves with the entrepreneurship process. often this involves a near total immersion in the liturgy of organization creation. similarly, executives of fast growing firms must become students (with equal intensity) of organization growth. they must understand the territory through which they are about to lead their organization. certainly the pattern of growth in every firm has unique elements, driven by the personalities involved as well as other organizational and market dimensions. on the other hand, there are patterns and challenges which are common to most growing firms at various stages of the organization lifecycle. anticipation of these can help the firm to avoid some common stumbling blocks associated with growth. getting to know the territory begins with an understanding of the dynamics of organization growth. excellent reviews of the dynamics of organization growth may be found in adizes (1989), bamholtz (1986), and hanks (1990). figure i presents the hanks (1990) model of organization growth and decline. this model highlights some of the more significant dynamics impacting the growth and decline of organizations. as illustrated in the figure, growth is driven by increasing market/environment acceptance of the firm's products or services. as an organization experiences increasing market acceptance (assuming growth is desirable to organization founders), it must scale up to meet increasing product demand, hiring additional people and increasing production capacity. as the organization increases in size, it increases in complexity, creating new demands and often rendering existing organization structures and systems ineffective. thus, if the firm wishes to continue along the growth cycle, organization structure and systems must be reconfigured to better fit the company's current size, complexity and focal problems. a failure to properly reconfigure generally results in an overload of organization systems, negatively impacting the ability of the firm to effectively serve the marketplace, ultimately detracting from market acceptance, halting the growth process, and forcing the organization into a pattern of stagnation or decline. in the growing firm reconfiguration generally involves increased formalization of organization processes, greater decentralization of decision making, greater specialization of roles within the organization, and additional levels of management. hanks (1990) argued that each stage of the organization life cycle is represented by a unique configuration of these dimensions. growth from start-up to a large diversified organization generally involves multiple developmental stages or reconfigurations (miller & friesen, 1984). 5 figure 1. model of rirgoniza/ion grum/h and decline. idea organization formed product/ service developed overload yes no reconfig oration y reduced ability growth on iguraf/on cycle increased market complexity & size yes yes market/environment acceptancey proser/ve no no renewal stagnation loop or decline renews/ downward cycle sp/ra/ realignment'2 yes no adaptation innovation diversification 'renewal reconfiguration death note. from "the organization life cycle: integrating content and process" bv s. h. hanks, 1990, journal of small business s/ra/egy, j(l), p. 4. recognize that change is inevitable recognizing the need for change and new vision is often difficult for those leading s»ccessful new ventures. there are several reasons for this. first, the hectic pace of day to day affairs leaves little time for thoughtful contemplation. second, when things are going well, them is little incerrtive to change (tushman, newman & romanelli, l986). thus, most organizations continue operating as they have until they reach some crisis point (i.e. a configuration crisis or loss of a major account) which provides a wake-up call, signalling the need for immediate dramatic organization change. 6 change is inevitable in growing ventures and, as illustrated in figure i (above), two major types are typically required. the first, reconfiguration, is driven by increasing organization size and complexity, discussed above. hambrick and crozier (1985) argued that these factors should be incorporated in the leader's vision of the firm: only if the larger firm is envisioned can there be any hope of readying the firm for that state. the process of readying the firm can be substantive —hiring, reorganizations, opening new facilities. but it is also psychological —mentally and emotionally preparing everyone for a very different setting. (p. 42) thus, size-driven changes are inevitable in the successful growing venture. wise leaders can anticipate these changes as the organization grows and incorporate them in their vision of the future organization. other factors driving change, many external to the firm, occur in a less predictable fashion. stevenson, roberts and grousbeck (1989) identified a number of these unexpected changes which can impact the successful, growing firm: one thing is certain —circumstances will change over time, particularly if the venture is successful. this success will create all sorts of pressures on performance, including imitative competitors, product substitutions, changing technology, changing customer preferences, personnel turnover, and changing relationships with both suppliers and buyers. (p. 23) thus, periodically changes occur in the marketplace. response to these changes generally involves some kind of realignment —efforts to better position the firm's products or services in the marketplace. failure to realign in response to environmental change leads to stagnation and ultimately decline and organization death. these external changes, at best, can be anticipated based on subtle cues and trends in the market place. nevertheless, these too must be monitored and signift&vnt changes incorporated into the leader's vision. longitudinal studies at columbia (tushman et al., 1986), and mcgill universities (miller & friesen, 1980) have revealed that organizations seldom change when all is going well. thus, it can be expected that most firms will continue with the current mode of operations until they experience either an organization crisis (system overload) and/or find themselves out of alignment with the marketplace, placing the organization involuntarily on the renewal cycle (see figure 1). however, it is also possible that a firm could voluntarily enter the renewal cycle as an extension of the growth cycle (proactive renewal loop). this is accomplished by proactively anticipating needed realignments in it products as well as internal configuration, thus averting stagnation and decline. thus, change is inevitable in the growing business venture. two primary drivers of change include (a) increased size and complexity which demands periodic reconfiguration of organization systems and processes, and (b) environmbntal changes, which demand periodic realignment of organization products and services. firms which are able to anticipate and make these changes continue along the growth cycle. in circumstances where change does not occur, growth is ultimately derailed, and the organization enters a period of stagnation or decline. 7 revise your vision once the need for change is recognized, leaders of growth ventures must begin the process of creating a vision of the firm as a larger entity. as noted earlier in this paper, the roots of vision can generally be traced to the experience base of the leader or team. for growth firm executives having significant experience in larger firms (particularly if the present venture is in the same industry), envisioning their emerging firm as a larger entity may come quite easy. on the other hand, for executives with little large firm experience, this might represent a significant challenge. thus, if the vision of the founder is to be expanded, we must begin by expanding the experience base of the founder and/or the executive team. this can be accomplished internally by broadening the experience base of the founder and/or externally by hiring individuals with large firm experience. expanding vision rbrough benchmarking. one approach for expanding the vision of the founder or management team is the practice of "benchmarking." while long employed as a tool for product development and quality improvement, benchmarking can be equally effective as a tool for expanding the experience base and vision of growth venture executives. altany (1991)described benchmarking as follows: 'the essence of benchmarking is really to seek out, leam, and incorporate new operational approaches by exchanging information with top-performing non-competitors" (p. 13). applied to the growing firm, benchmarking involves the identification, study, and incorporation of ideas, systems, and processes from larger firms. the process of benchmarking generally involves three steps; (a) identification of a role model firm, (b) study of the targeted practice(s) of the role model firm, and (c) bringing the ideas (adapted if necessary) inside your own firm. the power of benchmarking as a tool for expanding entrepreneurial vision lies in the clarity and the richness of the images generated. real life examples provide powerful role models for emerging business ventures. one approach involves identification of a "just-like competitor," a successful firm in their same industry (often a leader in the passing generation of technology) or a similar industry which exemplifies where the firm would like to be in three to five years (multrop, 1990). the model firm's history, growth, development, strategy and tactics should be carefully studied as a baseline for the benchmarking firm's development. benchmarking is easier if the role model firm is not a direct competitor of the benchmarking firm in that the role model firm is generally more willing to share information and allow site visits under such circumstances. a recent article in inc (hyatt, 1991)highlights the successes of manco, inc, in benchmarking larger firms. jack kahl, the ceo of manco, identifies the benefits of studying multiple role models in their benchmarking efforts. manco studied walt disney co. to learn merchandising and marketing techniques, they adopted leadership and communication techniques from walmart, measurement of innovation from rubbermaid, and recruitment strategies from pepsico. says kahl: "all i know is that if i study excellent companies, i come up with excellent ideas" (hyatt, 1991, p. 56), and "i take every opportunity to see a good company" (hyatt, 1991, p. 57). by studying successful, big companies, kohl expands his experience base and his vision as well. 8 hiring a vision. a second vital tool for expanding the experience base (and thus, vision) of the management team is hiring executives with significant large firm experience. hambrick and crozier (1985) noted the benefits of this approach: we have found that a substantial proportion of the successful high-growth firms had brought in one or more senior level executives with big-company ekperience to complement the owner founder, or that the chief executive had willingly departed or had been replaced either by an outsider or some other insider who had earlier experience in a major firm. in conuast, among the firms that stumbled sharply, the founder ceo was almost always in place at the onset of the stumble... (p. 44) thus, two important resources in creating a vision of the firm as a larger entity are benchmarking the practices of larger firms and hiring executives with larger firm experience. update your business plan the importance of a business plan in the development of a new business venture is well established. the business plan plays a vital role in crystallizing entrepreneurial vision and in developing specific plans of action for acting upon that vision. beyond start-up, timmons (1990)noted that the business plan becomes important "as a means of guiding growth" (p. 330). a business plan can be particularly helpful after start-up... as a means of guiding growth. one can think of developing a business plan as a flight simulator. the consequences of different strategies and tactics and the human and financial requirements and the building the venture can be determined and worked through without the risk and cost of working these out in real time. (p. 330) timmons further recognized the need to update the business plan in light of changing circumstances as the organization evolves: in any case, creating a business plan is more a process than simply a product, and the resulting plan is not immutable. by the same token, the business plan for a business is not "the business." a business plan is analogous to a pilot's crosscountry flight plan in that it defines the most desired, most timely, and least-hazardous route to a given destination. yet, innumerable factors, such as unexpected weather and traffic, can significantly alter the course of the actual flight. similarly, for new companies, it is common for the actual course of the business to diverge from that originally developed in a business plan. (p. 330) an excellent activity for translating growth vision into reality is updating the business plan, creating a chart to guide the firm's transition to the next stage of development. the comprehensive nature of a business plan allows for a thorough testing of your growth vision before implementation. this allows growth executives to identify places where their vision remains vague and to develop a well rounded plan for managing growth. 9 share the vision the final element of a growth strategy must include plans for sharing the vision. it is important to realize that the organization's purpose must be constantly clarified. if visionary leadership is to become a reality, it must permeate all facets of the organization (jaffe et al., 1986). all within the organization must share the same vision. sharing the vision of the firm is often easy while the firm is small, simple and informal. in this setting the leader or founder works side-by-side with employees, interacting on an ongoing basis. however, as more and more people are added to the firm, sharing the vision becomes a much more complex task, requiring more formalized techniques, and at times, symbolic events which convey important messages to employees. certainly one technique for sharing growth vision is to involve employees in the development of the vision in the first place. as the organization becomes more complex and organization members and stakeholders become more diverse, this sense of shared purpose or vision should not be imposed upon them by the leadership. gaffney (1984), citing peter senge, has observed that it needs to emerge through a process of collaboration: "as the process of individual visioning unfolds among a group committed to a common endeavor, the underlying purpose and vision of the group begins to emerge.... it is the organization's vision, not the individual's vision, that matters here" (p. 47). one technique for creating a shared vision is to involve employees in benchmarking activities. let them go, see and share the ideas they have observed. take a few "folks" along with you when you go to visit a larger firm..consider institutionalizing benchmarking in your organization, encouraging employees at all levels of the organization to be involved in benchmarking activities for their functional department. as the firm becomes larger, face-to-face contact between (op executives and employees becomes less common. thus, it becomes important to share the vision when such contacts occur (i.e. management meetings, general employee meetings, interpersonal contacts). many chief executives make the error of assuming that a vision need only be communicated once, when in reality it must become the central topic of conversation in the organization. as the vision crystallizes, it is important to begin sharing important articles, stories, pictures, graphs and charts with subordinates. these activities help to keep the focus on various aspects of the firm you wish to become. vse displays, videos or any media you can to get your message across and reinforce that message. symbolic events and recognition of individuals/units which undertake activities to move the organization in the right direction are also very important. sharing the vision allows employees to catch the dream and become a part of creating the future organization. summary comments vision plays a vital role in both new venture creation and growth. a vision is an image, a blue-print for organization growth that becomes a rallying point and a target for organization members. as a firm grows, the founder's original vision must change, and to the degree 10 possible, every effort must be made to envision the firm as a larger entity and anticipate changes which must inevitably occur. to facilitate expansion of entrepreneurial vision, a five part prescriptive strategy has been proposed. its implementation could do much to prepare organization founders and members for the difficult challenges associated with growing a business venture. references adizes, i. (1989). corporate tifecyclesi how and why corporations grow and die and what to do about ir. englewood cliffs, nj: prentice hall. altany, d. (1991, july 15). share and share alike: benchmarkers are proving the wisdom of mother's reproach. industry week, pp. 12-17. bennis, w., & nanus, b. (1985). leaders: the strategies for raking charge. new york: harper & row flamholtz, e. g. (1986). managing the transition from an entrepreneurshi p to a professionally managed firm. san francisco: jossey bass. gaffney, r. (1984). systems thinking in business: an interview with peter senge. revision, 7(2). greiner, l. e. (1972). evolution and revolution as organizations grow. harvard business review, 50(4), 37-46. hambrick, d.c., & crozier, l.m. (1985). stumblers and stars in the management of rapid growth. journal of business venturing, l, 31-45. hanks, s. h. (1990). the orgamzation life cycle; integrating content and process. journal of small business straiegy, l(1), 1-12. hyatt, j. 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(1986). convergence and upheaval: managing the unsteady pace of organizational evolution. cafifvrnia managemem review, 29(l), 29-44. vesper, k. h. (1990).new venture strategies (rev. ed.), englewood cliffs, nj: prentice hall. 12 http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2019, vol. 29, no. 03, 1-15 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2019 small business institute® w w w. j s b s . o rg introduction ronda m. smith1, shruti r. sardeshmukh2, imran syed3 1ball state university, usa, rmsmith@bsu.edu 2university of south australia. australia, shruti.sardeshmukh@unisa.edu.au 3ball state university, usa, aisyed@bsu.edu *the authors would like to acknowledge the peer and professional support given to this paper by terrence c. sebora, emeritus associate professor, nebraska college of business, university of nebraska-lincoln, dr. j. robert baum, associate professor emeritus, and robert h. smith school of business, university of maryland. additionally, the authors would like to thank the editorial team and the anonymous reviewers who provided very helpful feedback to the development of this paper. an earlier version of this paper was presented at the annual meeting of the midwest academy of management in fargo, nd. building self-efficacy for entrepreneurial careers: new resource skill entrepreneurship education, new resource skill, entrepreneurial self-efficacy, proactive personality apa citation information: smith, r. m., sardeshmukh, s. r., & syed, i. (2019). building self-efficacy for entrepreneurial careers: new resource skill. journal of small business strategy, 29(3), 1-15. while the ability to garner resources is key to entrepreneurial pursuits, there is little research concerning potential entrepreneurs’ resource acquisition skills or how these skills might be related to psychological and cognitive factors important for successful entrepreneurial behavior. using data collected from two survey-based independent samples of undergraduate college students from two midwestern universities, this research tests mediational hypotheses utilizing structural equation modeling techniques with bootstrapping. the findings, consistent across the two studies, indicate that new resource skill does indeed mediate the relationship between proactive personality—a personality characteristic—and entrepreneurial self-efficacy—a key cognitive antecedent of entrepreneurial intentions and behavior. entrepreneurship involves the coordination and leveraging of resources (alvarez & barney, 2005) to exploit an opportunity (stevenson & jarillo, 1990; stevenson, roberts & grousbeck, 1989); as such, resources and the resourcefulness of the entrepreneur have long been acknowledged as key factors in the success of new ventures (brush, greene, & hart, 2001; greene, brush & brown, 1997; morris, webb, fu & singhal, 2013b). for the entrepreneurial venture, resources are essential to achieving a competitive advantage (barney, 1991), to mitigating the risks of failure, and to increasing the venture’s probability of survival (shane, 2008). stevenson and jarillo’s (1990, p. 23) definition of entrepreneurship, which states that entrepreneurs “pursue opportunities without regard to the resources they currently control” is a starting point from which to examine how aspects of human capital contribute to an entrepreneur’s ability to be successful and thereby perform the many roles and tasks they will encounter in the future. human capital theory suggests that knowledge and skills (schultz, 1961) are a result of investments in education and work experience (becker, 1975). despite the importance of resources to the field, and a renewed attention to skill development in entrepreneurship (chell, 2013), there is still insufficient research on how entrepreneurs actually assemble, acquire, manage and leverage resources for their organizations (brush et al., 2001; morris et al., 2013b) creating a void in the research literature. a skill that defines entrepreneurship is how one gains access to resources one does not necessarily own or control (morris et al., 2013b). proactive personality may explain some of this ability, but a construct introduced by baum and locke (2004) in their study of practicing entrepreneurs called “new resource skill” may offer a way to measure the skill of seeking and acquiring resources. since a goal of entrepreneurship education (edelman, manolova, & brush, 2008), is to understand which skills help students prepare for entrepreneurial careers (burton, sørensen, & dobrev, 2016), we argue it is important to also test these relationships among college students and potential aspiring entrepreneurs. in this study we examine new resource skill and proactive personality in relationship with entrepreneurial self-efficacy, an important outcome variable in entrepreneurship research. entrepreneurial self-efficacy has been shown to be related to entrepreneurial intentions (prabhu, mcguire, drost, & kwong, 2012), venture initiation and http://www.smallbusinessinstitute.biz http://www.jsbs.org 2 r. m. smith, s. r. sardeshmukh, & i. syed journal of small business strategy / vol. 29, no. 3 (2019) / 1-15 entrepreneurial performance (e.g., engle et al., 2010; laviolette, radu lefebvre, & brunel, 2012; miao, qian, & ma, 2017; murphy, tocher & burch, 2019). this paper focuses on developing a better understanding of how an entrepreneur’s personality characteristics might impact his or her skills which in turn might serve as antecedents to the entrepreneur’s cognitions with respect to entrepreneurial self-efficacy. as such, this paper makes the following contributions: first, the testing of the measure of new resource skill in this context allows the creation of a link between the definitional understanding of entrepreneurship (stevenson & jarillo, 1990; stevenson et al., 1989) and a measurable entrepreneurial skill. second, while personality characteristics are relatively stable, skills can be acquired. by articulating the skill-based mechanism through which proactive personality is related to entrepreneurial self-efficacy, this research also contributes to entrepreneurship theory. third, to the best of the researchers’ knowledge, the measure of new resource skill, while tested in the field with practicing entrepreneurs has only been tested in baum and locke’s (2004) study. this paper tests whether the measure of new resource skill previously tested with practicing entrepreneurs generalizes to aspiring and potential entrepreneurs. literature review and hypotheses the goal of many undergraduate programs is to prepare students for a career in their respective field. like other programs, entrepreneurship programs prepare students for an entrepreneurial career, whether that be to start a business or to take advantage of entrepreneurial opportunities (burton et al., 2016). today, more than 3,000 schools include entrepreneurship offerings ranging from a single course to a popular or competitive major, and in some schools, entrepreneurship has even emerged as a required component of the business school curriculum (morris, kuratko, & cornwall, 2013a). through educating the students in the entrepreneurial process and by helping build skills required for starting a business and taking advantage of entrepreneurial opportunities, entrepreneurship programs develop entrepreneurial self-efficacy in students (wilbanks, 2015; wilson, kickul, & marlino, 2007). it is this kind of self-efficacy, a confidence in one’s abilities, which has been shown to have a positive relationship with higher entrepreneurial intentions and new venture performance (baum & locke, 2004; prabhu et al., 2012). when aspiring entrepreneurs are developed in this way, they may have an advantage over others. to develop entrepreneurs requires an understanding of how entrepreneurs think, act, and behave (carland, carland & stewart, 1996). to study an individual in his or her environment is to study individual differences as they relate to entrepreneurship. within the field of entrepreneurship, linking individual differences to the process or outcomes of entrepreneurship is not new (cooper, gimeno-gascon, & woo, 1994; lamine, mian, & fayolle, 2014; rauch & frese, 2007a; taormina & kin-mei lao, 2007; ucbasaran, westhead, & wright, 2008; unger, rauch, frese, & rosenbusch, 2011), but merely understanding how entrepreneurs think, act and behave does not necessarily provide the action-oriented information needed to develop aspiring entrepreneurs to be successful in their careers over time. in order to better develop aspiring entrepreneurs for success in their careers it is important to understand what role entrepreneurial skills play in this process. to further make this connection to an entrepreneur’s success, when it comes to the concept of job performance and ultimately the performance of their organization, it is useful to consider where and how precedence for linking individual differences to processes, outcomes, or performance exists in other research areas. for example, personnel psychologists have a long history of examining how individual differences and aspects of human capital (knowledge, skills, and abilities) contribute to job performance over time and in various work contexts (borman & motowidlo, 1993; motowidlo, borman, & schmit, 1997). similarly, entrepreneurship researchers (i.e., cooper et al., 1994; ucbasaran et al., 2008; and unger et al., 2011) have applied becker’s (1975) human capital distinction between general and specific human capital as it relates to the jobs and tasks associated with entrepreneurship. new resource skill is an example of such a specific skill associated with entrepreneurship. new resource skill resources and the skill to marshal resources are important for entrepreneurial pursuits (brush et al., 2001; morris et al., 2013b). as hannan and freeman (1984, p. 152) point out, “creating an organization means mobilizing several kinds of scarce resources.” the idea of acquiring and leveraging resources is key to entrepreneurship, such that one of the well-cited definitions of entrepreneurship revolves around pursuing opportunity “without regard to the resources they currently control” (stevenson & jarillo, 1990. p. 23; stevenson et al., 1989). just as it is not very probable to start a business without a recognized opportunity, it is not very probable to start a business without resources. entrepreneurial resources may take various forms, and may include financial resources, human resources, and/or social capital resources (de clercq, lim, & oh, 2013). it is rare that an entrepreneur, especially when acting on his or her own, will have access to all the resources they need at the time they decide to start their business. therefore, leveraging and accessing resources they do not necessarily own, or control, is an important skill for entrepreneurs (morris et al., 2013b). as a skill, this could encompass: utilizing creative approaches to leveraging resources, determining new uses for existing resources, and using the resources currently owned by others (morris et al., 2013b). however, merely having the skills, or the human capital is not enough, entrepreneurs must also have the confidence, 3 r. m. smith, s. r. sardeshmukh, & i. syed journal of small business strategy / vol. 29, no. 3 (2019) / 1-15 or self-efficacy, to utilize these skills effectively when faced with tasks and challenges. human capital theory suggests that both knowledge and skills (schultz, 1961) are attainable and therefore the result of one’s investments in education and work experience. they can be generalizable and therefore applicable to multiple jobs, tasks or contexts or specialized to a specific job, task or context (becker, 1975). it has been well documented in the context of new ventures, that the ability of a founder to navigate the early period of finding and deploying resources or hiring someone who can (timmons, 2000) is critical to not only the new venture’s success (smith & smith, 2000) but can also be the linchpin for the organization’s ultimate survival (baum & locke, 2004). unique to this context, baum and locke (2004) argued for a specific kind of skill stating that the ability or inability to effectively systematize and organize resources in a start-up can literally “make or break” the organization. they introduced new resource skill (nrs) based on the work of stevenson (1985), defining the construct as “the ability to acquire and systematize the operating resources needed to start and grow an organization” (baum & locke, 2004, p. 589). they found several significant positive relationships between new resource skill and the new venture’s performance six years later. these included entrepreneurs’ self-efficacy, communicated vision, stated goals, tenacity and the new venture’s actual growth. proactive personality the influence of personality has long been of interest to the study of entrepreneurship (rauch & frese, 2007b; uy, chan, sam, ho, & chernyshenko, 2015). it is acknowledged that personality characteristics may impact an individuals’ knowledge and skills (rauch & frese, 2007b) as well as their entrepreneurial attitudes and behaviors, ultimately affecting entrepreneurial performance. critical to the agentic nature of entrepreneurship is the personality characteristic of proactive personality, defined as having a personal disposition of demonstrating proactive behavior (bateman & crant, 1993). proactive behavior consists of “taking initiative in improving current circumstances or creating new ones; it involves challenging the status quo rather than passively adapting to present conditions” (crant, 2000, p. 436). a person with a proactive personality can be characterized as “one who is relatively unconstrained by situational forces, and who effects environmental change” (bateman & crant, 1993, p. 105). as such, someone with proactive personality is likely to engage in proactive behavior (crant, 2000) or “behavior that directly alters environments” (bateman & crant, 1993, p. 104). past research has demonstrated how proactive personality and proactive behavior are positively related to job performance (crant, 1995), leadership effectiveness (bateman & crant, 1993; crant & bateman, 2000), and entrepreneurship (becherer & maurer, 1999; cools & van den broeck, 2007; kickul & walters, 2002; prabhu et al., 2012; zampetakis, kafetsios, bouranta, dewett, & moustakis, 2009). proactive personality can explain variance in individual performance beyond the big five personality traits (crant, 1995; crant & bateman, 2000). furthermore, proactive personality has been demonstrated to be important to both aspiring and practicing entrepreneurs. in the context of entrepreneurship education, proactive personality has been found to be related to “an additional 17% of the variance in entrepreneurial intentions over and above variance accounted for by gender, education, and entrepreneurial parents” (crant, 1996, p. 46) in college students. in their meta-analysis on personality and entrepreneurship, rauch and frese (2007a) concluded that proactive personality (bateman & crant, 1993) is profoundly related to an entrepreneur’s business success. they highlighted the importance of proactive personality to entrepreneurship, stating, “by definition, entrepreneurs have to be self-starting and influence their environment by founding new organizations and by identifying and acting upon opportunities” (rauch & frese, 2007a, p. 359). acting on opportunities in this context requires that entrepreneurs draw on resources not necessarily in their control. the process of acquiring resources to pursue entrepreneurial opportunities requires that individuals have the human capital, or the skill, to acquire these resources. therefore, individuals with proactive personality will be more likely to take initiative and acquire the necessary resources for their opportunities, demonstrating greater new resource skill. drawing on this connection between proactive behavior in entrepreneurship and individuals’ proclivity to take initiative in their environment, we propose the following hypothesis: hypothesis 1. proactive personality will be positively related to new resource skill. entrepreneurial self-efficacy the concept of self-efficacy comes from bandura’s (1999) social cognitive perspective. self-efficacy is an individual’s belief that he or she can successfully perform a behavior, and “efficacy beliefs influence how people feel, think, motivate themselves, and behave” (bandura, 1993, p.118). people’s self-efficacy beliefs have a strong effect on their behavior through their choice of tasks as well as the motivation and effort they apply to accomplishing those tasks, making it an important predictor of performance (chen, greene, & crick 1998). when talking about self-efficacy it is not uncommon for the concept of generalized self-efficacy to be distinguished from other types of task or domain specific to self-efficacy. in contrast to generalized self-efficacy, entrepreneurial self-efficacy (ese) assesses the extent to which the individual believes that he or she is capable of performing the roles 4 r. m. smith, s. r. sardeshmukh, & i. syed journal of small business strategy / vol. 29, no. 3 (2019) / 1-15 and tasks necessary in an entrepreneurial context (boyd & vozikis 1994). entrepreneurial self-efficacy is a well-established cognitive antecedent of entrepreneurial behavior, including venture initiation and entrepreneurial performance (e.g., engle et al., 2010; laviolette et al., 2012). over time, entrepreneurial self-efficacy has become a “proxy for other more ‘objective’ measures of entrepreneurial performance” (arora, haynie, & laurence, 2013, p. 363) because we are not always able to measure entrepreneurial performance of students post-graduation. for example, it has been found to be positively related to entrepreneurial intentions (prabhu et al., 2012); outcomes of entrepreneurship education (edelman et al., 2008); and the entrepreneurial performance among both habitual and nascent entrepreneurs (miao et al., 2017). in a meta-analysis of practicing entrepreneurs, rauch and frese (2007a), identified generalized self-efficacy and proactive personality as strong predictors in the likelihood of business startup and venture success. they concluded that those with higher generalized self-efficacy were more likely to create new business ventures and those with both proactive personality and generalized self-efficacy were more likely to be successful in those businesses. this research highlights the consistent findings that these two constructs influence entrepreneurial success. in a study of students from china, finland, russia and the united states, prabhu et al., (2012) tested the relationship between entrepreneurial self-efficacy, proactive personality and entrepreneurial intentions. they found that entrepreneurial self-efficacy both mediated and moderated the proactive personality to entrepreneurial intentions relationship. this further suggests a need to better understand the relationship between proactive personality and entrepreneurial self-efficacy. entrepreneurial self-efficacy is an example of a domain-specific application of self-efficacy and is defined as an individual’s self-confidence in their ability to successfully perform entrepreneurial roles and tasks (chen et al., 1998; zhao, seibert, & hills, 2005). it is influenced by human capital such as prior experience and education (zellweger, sieger, & halter, 2011; zhao et al., 2005). building upon this idea, forbes (2005, p. 601) argued that understanding entrepreneurial self-efficacy is important “because it can affect individuals’ willingness to engage in entrepreneurship as well as the behavior of those who are already entrepreneurs.” entrepreneurial self-efficacy is positively related to several entrepreneurial attitudes and behaviors including: perceptions of opportunities (krueger & dickson, 1994); opportunity identification, (barbosa, gerhardt, & kickul, 2007); entrepreneurial intentions (chen et al., 1998; zhao et al., 2005); the decision to pursue an entrepreneurial career (kickul, gundry, barbosa, & whitcanack, 2009); and entrepreneurial performance (baum & locke, 2004; hmieleski & baron, 2008). it has been found to differentiate between those that start businesses and those who do not. for example, markman, balkin, and baron (2002) in a study of patent holders, found those who had greater self-efficacy were more likely to have started their own business. in a longitudinal study of practicing entrepreneurs, new resource skill was directly related to entrepreneurial self-efficacy and the entrepreneur’s self-efficacy had the strongest relationship (λ = .34) with venture growth (baum, locke, & smith, 2001; baum & locke, 2004). to test whether these relationships will generalize among collegiate aspiring entrepreneurs, we propose the second hypothesis: hypothesis 2. new resource skill will be positively related to entrepreneurial self-efficacy. in the literature, entrepreneurial self-efficacy is closely related to entrepreneurial behaviors including entrepreneurial orientation (cools & van den broeck, 2007), and performance. meta-analysis results indicate that personality is indeed related to the entrepreneurial behaviors of both business creation and business success (rauch & frese 2007a). for example, prabhu et al., (2012) focused on the role entrepreneurial self-efficacy can play in the relationship between proactive personality and entrepreneurial intent. building on their work, we argue that the effect of dispositional variables such as proactive personality on entrepreneurial self-efficacy is likely to be mediated by acquired skills such as new resource skill. entrepreneurial self-efficacy is not a dispositional trait. entrepreneurial self-efficacy originates from various experiential sources, including enactive mastery, vicarious experiences and modeling among others (forbes, 2005). in other words, entrepreneurial self-efficacy is acquired, through acquisition and mastery of skills related to the tasks of entrepreneurship. we argue that the relationship between the dispositional personality factors to entrepreneurial self-efficacy is mediated through skills related to entrepreneurship. we focus on the skill related to resource acquisition, i.e., new resource skill. while new resource skill is in fact, positively related to proactive personality, we argue that the skills and abilities are what drive the efficacy cognitions. we thus unpack the link between proactive personality and entrepreneurial self-efficacy. this research tests whether these relationships will generalize among collegiate aspiring entrepreneurs with the final hypothesis: hypothesis 3. new resource skill will mediate the effect of proactive personality on entrepreneurial self-efficacy. method participants study 1. data used for study 1 was collected from undergraduate business students of a midwestern university. 5 r. m. smith, s. r. sardeshmukh, & i. syed journal of small business strategy / vol. 29, no. 3 (2019) / 1-15 in all, 169 students participated in the larger study and out of that, 152 responses were found to be complete for this study. among the participants, 49% were women, and 51% were men. the average age was 22.5 years, with an average of 5.9 years of work experience. in this study, most of the participants were seniors (72.8%) and juniors (20.1%), with freshmen and sophomores constituting 3% each and fifthyear seniors constituting 1.2%. study 2. study 1 was replicated using a sample of undergraduate business students from another midwestern university. in study 2, we followed the exact same process as study 1 to recruit students. in this study, 155 students participated, and out of that, 139 responses were considered complete for this study. among the participants, 54.2% were women, and 48.8% were men. the average age was 22.4 years, with an average of 5.2 years of work experience. in this study, most of the participants were seniors (51%), followed by freshmen (25%), juniors (14.2%), and sophomores (9%). procedure the same procedure for collecting data was followed for both studies. the research team negotiated with course instructors in the respective colleges to find courses that would be willing to give their students extra credit for participating in research. the research team then made class announcements in each of these courses and allowed students to sign up for one of the 75-minute sessions via a signup sheet. students (at each of the two universities) then came to the designated computer lab at the date and time of their session. only those students, who volunteered to participate and reported to the study location, were given access to the study materials. since all the respondents volunteered for the study for extra credit, it is not possible to calculate the response rate for the surveys. the study was conducted in a computer lab. the scales that were consistently presented to all participants and used in this study were administered online using the qualtrics online survey tool. additional activities that were part of a larger study were administered via a paper-and pencil packet of scenarios. the packets were used to facilitate the random assignment of instructions for different scenarios and exercises throughout the packet. in order to mitigate the common method variance related issues at the design stage, we followed the recommendations of podsakoff, mackenzie, lee & podsakoff (2003). we reviewed the items carefully and made sure that they were clear and understandable. (podsakoff et al., 2003; tourangeau, rips, & rasinski, 2000). as mentioned before, this study was a part of a larger study, where some variables were recorded on a paper-and pencil survey while some were recorded in an online survey. by separating the variables in this fashion, we also created psychological separation among different variables (peake & d’souza, 2015; podsakoff et al., 2003). the hypotheses related to proactive personality, new resource skill, and entrepreneurial self-efficacy were tested using survey research. using a two-study design whereby study 2 was planned as a constructive replication of the results in study 1. both focused on the entrepreneurial self-efficacy of undergraduate students likely to form the pipeline of next-generation entrepreneurs. such constructive replication can be useful in establishing the validity of results (lykken, 1968) and “enriches the data relevant to the theory tested and increases confidence in generalization” (eden, 2002, p. 842). overall, constructive replication provides greater strength to the findings. drawing the sample from undergraduate business students increases the internal validity of the findings because the participants are all relatively homogeneous. as such, this research is generalizable to similar populations for the purpose of encouraging entrepreneurial self-efficacy among potential entrepreneurs. validating the sample the studies were similar as both were tested on student samples from two midwestern universities, but the samples were slightly different. descriptive statistics indicated that in study 1, the respondents had an average of 3.66 years of education, with an average of .38 entrepreneurship courses completed, while for study 2, the respondents had an average education of 2.9 years, with an average of .28 entrepreneurship courses completed. a t-test performed to test whether the differences in respondents of the two studies were statistically significant found that differences in education (p < .01, t =6.7) and number of entrepreneurship courses completed (p < .05, t = -2.4) were both statistically significant. no other variables included in the study showed any statistically significant differences. table 1 shows results of the t-tests. measures entrepreneurial self-efficacy. entrepreneurial self-efficacy was measured using zhao’s et al. (2005) four-item scale, which assessed participants’ confidence (1 = not at all confident, 5 = very confident) in undertaking various entrepreneurship tasks such as “identify new business opportunities” and “creating new products.” the cronbach’s alpha for the scale was 0.817, which is consistent with the 0.766 reported by zhao et al. (2005). new resource skill. baum and locke (2004) measured new resource skill using five items from the scale. sample items included “i am good at organizing people and machines for new projects” and “i know how to find the resources that we need.” the cronbach’s alpha for the fiveitem scale was 0.689. proactive personality. proactive personality was 6 r. m. smith, s. r. sardeshmukh, & i. syed journal of small business strategy / vol. 29, no. 3 (2019) / 1-15 table 1 means and t-tests study 1 mean study 2 mean t-statistic statistical significance age 22.50 22.40 -0.27 0.79 gender .51 .46 -0.91 0.36 education 3.66 2.90 -6.71** 0.00 work experience 5.91 5.22 -1.65 0.10 experimental condition 1.51 1.48 -0.45 0.65 entrepreneurship coursework 0.26 0.38 2.47* 0.01 proactive personality 5.18 5.33 1.54 0.13 new resource skill 21.43 20.99 -1.10 0.27 entrepreneurial self-efficacy 3.62 3.64 0.30 0.76 measured using the shortened 10-item scale used in seibert, kraimer, and crant (2001). cronbach’s alpha for this measure was .90. control variables and demographic data. based on previous research, this analysis controlled for several demographic self-reported variables, including age, gender, education (years in college), entrepreneurship coursework, and years of work experience. both study 1 and study 2 used the same measures. analytical approach both studies followed the same procedure for data analysis. first, a measurement model using mplus was developed that included the three latent factors of entrepreneurial self-efficacy, new resource skill, and proactive personality, the residuals on the two similarly worded items in the new resource skill scale were allowed to correlate. no other error variances were correlated. consistent with previous use (greguras & diefendorf, 2010; li, liang, & crant, 2010), the proactive personality scale 10 items were assigned randomly to four parcels. two parcels had three items each, and the other two parcels had two items each. we then conducted confirmatory factor analyses on both the samples. the models for both studies indicated adequate fit; study 1 (x2 = 102.207, df = 61, cfi = 0.954, srmr = 0.051, rmsea = 0.063 and study 2 (x2 = 76.452, df = 61, cfi = 0.984, srmr = 0.042, rmsea = 0.040) indicating construct validity (bagozzi, yi, & phillips, 1991). as a best practice, we incorporated measures to mitigate common method bias in our study design, we also undertook further statistical testing using the single unmeasured latent method factor approach recommended by podsakoff et al. (2003). a cmv factor was added to the confirmatory factor analysis model, and paths were specified from each of the items to the common method factor. the correlation between all the latent factors and the common method factor were restricted to zero. however, the model could not converge, which is not uncommon for such a model (podsakoff et al., 2003). for convergence reasons, all the factor loadings to the common method factor were constrained to be the same and the model showed a good fit for both studies (study 1: x2 = 99.017, df = 60, cfi = 0.957, srmr = 0.054, rmsea = 0.062; study 2: x2 = 76.025, df = 60, cfi = 0. 0.983, srmr = 0.043, rmsea = 0 0.042). comparison with the original models revealed that the models with cmv were not statistically significantly better than the model without cmv in either study (study 1: δ x2 = 3.19, δ df = 1, ns; study 2 δ x2 = .427, δ df = 1, ns). see table 2 for cmv testing the validity of the sample data set. results the means, standard deviations, reliabilities, correlations and the relationships among the variables for study 1 and study 2 are presented in tables 3 and 4. to test the hypotheses, a structural model was defined which included both the latent variables (entrepreneurial self-efficacy, new resource skill, and proactive personality) and the control variables (age, gender, work experience, education, and experimental condition and entrepreneurship coursework). in both studies, paths were drawn from all the control variables to both the mediator (new resource skill) and the dependent variable (entrepreneurial self-efficacy). a path was also drawn from proactive personality to new resource skill, and from new resource skill to entrepreneurial self-efficacy, hypothesizing full mediation. the model indicated a very good fit in both studies. study 1: x2 = 161.545, df = 117, rmsea = .055, cfi = 0.944, srmr = .063. study 2: x2 = 148.837, df = 117, rmsea = 0.044, cfi = 0.962, srmr = 0.059). based on the reviewer feedback, we also tested the model in a combined sample (x2 = 199.292, df = 117, rmsea = 0.049, cfi = 0.949, srmr = 0.046). 7 r. m. smith, s. r. sardeshmukh, & i. syed journal of small business strategy / vol. 29, no. 3 (2019) / 1-15 table 2 fit indices with and without cmv study 1 cfa study 1 cfa with cmv study 2 cfa study 2 cfa with cmv χ2 102.207 99.017 76.542 76.025 df 61 60 61 60 cfi 0.954 0.957 0. 984 0.983 srmr 0.071 0.054 0.040 0.042 rmsea 0.063 0.062 0.042 0.00 table 3 means and correlations study 1 mean std. deviation 1 2 3 4 5 6 age 22.50 1.70 1.00 gender 0.51 0.50 0.05 1.00 work experience 5.91 2.90 .25** 0.01 1.00 education 3.66 0.70 .48** 0.10 -0.03 1.00 proactive personality 5.18 0.87 0.02 -0.08 -0.06 -0.04 1.00 new resource skill 3.49 0.66 0.04 -0.11 0.11 -0.10 .47** 1.00 entrepreneurial self-efficacy 3.62 0.71 -0.05 -.179* -0.02 -0.15 .42** .45** **. correlation is significant at the 0.01 level (2-tailed). *. correlation is significant at the 0.05 level (2-tailed). listwise n = 152 table 4 means and correlations study 2 mean std. deviation 1 2 3 4 5 6 age 22.40 4.37 1.00 gender 0.46 0.50 0.00 1.00 work experience 5.22 4.30 .82** 0.04 1.00 education 2.90 1.28 .36** 0.08 .37** 1.00 proactive personality 5.33 0.79 0.03 0.07 0.11 0.01 1.00 new resource skill 3.43 0.67 -0.16 0.12 -0.10 0.15 .43** 1.00 entrepreneurial self-efficacy 3.64 0.74 0.07 -0.04 .18* 0.10 .59** .50** **correlation is significant at the 0.01 level (2-tailed). *. correlation is significant at the 0.05 level (2-tailed). listwise n =139 8 r. m. smith, s. r. sardeshmukh, & i. syed journal of small business strategy / vol. 29, no. 3 (2019) / 1-15 since the overall structural model fit well, we proceeded to test the hypotheses by observing the significance of the path coefficients on the hypothesized paths. to test hypothesis 1, which stated that proactive personality would be positively related to new resource skill, we investigated the loading on the path coefficient from proactive personality to new resource skill. the path coefficient was positive and statistically significant in both samples, supported (study 1 b = 0.36, p < .01; study 2 b = 0.32, p < .01; combined sample b = 0.35, p <.01), indicating support for hypothesis 1. to test hypothesis 2, which stated that new resource skill will be positively related to entrepreneurial self-efficacy, we investigated the loading on the path coefficient from new resource skill to entrepreneurial self-efficacy. the path coefficient was positive and statistically significant in both samples (study 1, b = 0.76, p < .01; study 2, b = 1.15, p < .01; combined sample b = 0.86, p < .01). therefore, we concluded that hypothesis 2 was supported. hypothesis 3 predicted that new resource skill would mediate the effect of proactive personality on entrepreneurial self-efficacy. this hypothesis was tested by examining the indirect effect of proactive personality on entrepreneurial self-efficacy as mediated through new resource skill. in the past, mediation was often tested using variations of the baron and kenny (1986) four-step procedure. more recently, mediation testing best practices have pointed towards sem analysis (baron & kenny, 1986; kenny, 2008; lebreton, wu, & bing, 2009; mackinnon, 2008; mackinnon & fairchild, 2009). we have therefore followed the more recent recommendations to undertake sem analyses rather than using the baron and kenny (1986) procedure. we also used the mplus indirect effect calculation, which uses the delta method as articulated in the mackinnon (2008). as cheung & lau (2008) argue, indirect effects do not follow a normal distribution and that bootstrapping offers a more robust approach to testing statistical significance. following their advice, we used 1000 bootstrap draws for constructing the confidence interval and report the llci and ulci in the tables. the indirect effect was statistically significant (study 1, b = .28, p < .01; study 2 b =.37, p < 0.01; combined sample, b = .30, p < .01). therefore, we concluded that hypothesis 3 was supported. discussion finding support in the literature for the influence of both proactive personality, and entrepreneurial self-efficacy on positive venture outcomes, as well as support for the relationship between new resource skill and entrepreneurial self-efficacy in practicing entrepreneurs the presented studies demonstrated (using two independent samples) that dispositional variables (e.g., proactive personality) can influence entrepreneurial skills (e.g., new resources skills) which in turn can influence entrepreneurial cognitions (e.g., entrepreneurial self-efficacy). the studies thus highlighted the mediating role of entrepreneurial skills related to resources – new resource skill. it follows from stevenson and jarillo (1990) that the skills related to resources are highly valuable entrepreneurial skills. hypothesis 1 argued for a relationship between proactive personality and new resource skill. the hypothesis was supported, indicating that those who are more proactive by disposition also tend to have greater new resource skill, a key skill for entrepreneurial careers. in other words, an individual who has a more proactive personality would be more likely to take initiative in everyday situations when compared to others, and such initiative extends to acquiring resources for entrepreneurial pursuits. by linking the research on proactive personality (bateman & crant, 1993; uy et al., 2015) to new resource skill (baum & locke, 2004), this paper also contributes to the research conversation on how figure 1. model with standardized path coefficients 9 r. m. smith, s. r. sardeshmukh, & i. syed journal of small business strategy / vol. 29, no. 3 (2019) / 1-15 personality variables can contribute to development of skills in the context of entrepreneurship (rauch & frese, 2007b). hypothesis 2 argued for a positive relationship between new resource skill and entrepreneurial self-efficacy and was supported in both samples. those who have the skills related to resource gathering, i.e., new resource skill, are more likely to have entrepreneurial cognitions. entrepreneurial self-efficacy can help differentiate those who start a business from those who do not and may at times be the best predictor of future entrepreneurial performance (arora et al., 2013) in a context like entrepreneurial education. while entrepreneurship research has long articulated the importance of skills related to gathering resources, there is little research articulating the role of resource related skills in development of entrepreneurial cognitions. by linking new resource skill (baum & locke, 2004) to entrepreneurial self-efficacy cognitions (chen et al., 1998; kickul et al., 2009; zhao et al., 2005), this paper connects two important areas of entrepreneurship research. the third hypothesis argued for the role of new resource skill as a mediator between proactive personality and entrepreneurial self-efficacy, both of which are related to entrepreneurial intentions. the combination of skills and confidence can help potential entrepreneurs overcome some of the barriers to starting their own ventures. it is thus possible that those with proactive personality, through their own initiative, will acquire skills and develop the needed efficacy to pursue an entrepreneurial career. when combined, these two studies found that new resource skill mediated the relationship between proactive personality and entrepreneurial self-efficacy. this is important to entrepreneurship education and also to the development of aspiring entrepreneurs of any age. by building on an existing construct in the entrepreneurship literature and linking it to both proactive personality (bateman & crant, 1993; uy et al., 2015) and entrepreneurial self-efficacy (chen et al., 1998; kickul et al., 2009; zhao et al., 2005) the authors develop potential points of interventions that can help develop entrepreneurial skills. conclusion the present study investigates how a skill related to performance of entrepreneurial ventures (new resources skill) contributes to the relationship between proactive personality and entrepreneurial self-efficacy and discusses why attention should be paid to such a skill. this paper makes several different contributions. it argues for attending to a new construct new resource skill in the development of entrepreneurial self-efficacy while taking into account the influence of an individual’s level of proactiveness as measured by proactive personality. most studies in the entrepreneurship literature involve samples of entrepreneurs or nascent entrepreneurs (i.e., individuals who have already expressed entrepreneurial intentions). while these studies are important for understanding entrepreneurship, it is difficult to untangle the effect of entrepreneurial intentions, prior knowledge, and entrepreneurial self-efficacy. however, by using a sample of college students, the effect of new resource skill and proactive personality on entrepreneurial self-efficacy can be better isolated. theoretical implications this paper was motivated by baum and locke’s (2004) research investigating how new resource skill was related to entrepreneurs’ self-efficacy and venture growth. the purpose of this paper was to better understand how new resource skill, proactive personality and entrepreneurial self-efficacy are related in a sample of college students and potential aspiring entrepreneurs and whether the construct of new resource skill would generalize into the domain of student preparation. the studies presented in this paper advance knowledge of entrepreneurship and entrepreneurship theory in several ways. first, this paper aligns the concepts of skills and job performance as outlined by researchers with the goal of preparing students for entrepreneurial careers. second, it introduces a specific skill that is unique to the accepted definitions of entrepreneurship as one that has been shown to be linked to the performance of actual entrepreneurs. third, it explores the extent to which the construct of new resource skill could be relevant to the entrepreneurship student, thus extending its generalizability from the domain of performance into the domain of preparation or training. practical implications the skill set of new resource skill includes finding and organizing resources to start new organizations and solve business problems or anticipate future needs in existing businesses. opportunities to develop this skill set exist through classroom instruction, discussion, movie clips and experiential activities. a course lecture introduction on the concept of “resources not currently controlled” and how to identify a students’ own social capital and social network could get students started thinking about what resources they personally have access to and how they might go about borrowing, leasing, renting, buying, or bartering for resources from their social network. a case could be used as an opener to that class conversation. this classroom-based conversation could then be followed by scenario prompts that give students a real or fictitious situation with a person or a business that needs to “find money or people to start a new organization or program” or “reorganize people or machines for a new project”. movie clips could be used to augment this class discussion. two examples of movie clips include one from the movie, new in town (brooks & elmer, 2009) with renee zelleger and harry connick, jr, and the other from the founder (handfeld & hancock, 2016) with michael keeton, nick offerman and john caroll lynch. at the end of the new in town movie, the plant 10 r. m. smith, s. r. sardeshmukh, & i. syed journal of small business strategy / vol. 29, no. 3 (2019) / 1-15 table 5. unstandardized results from study 1 & study 2 study 1 study 2 combined sample nrs ese nrs ese nrs ese age 0.02 (0.033) 0.00 (0.041) -0.03 (0.028) 0.01 (0.04) -0.05* (0.022) 0.02 (0.018) gender -0.03 (0.107) -0.13 (0.123) 0.15 (0.1) -0.31 (0.128) 0.05 (0.076) -0.19* (0.086) work experience 0.04 (0.02) -0.03 (0.023) -0.01 (0.03) 0.05 (0.038) 0.02 (0.018) 0.01 (0.019) education -0.10 (0.093) -0.07 (0.089) 0.13* (0.051) -0.10 (0.066) 0.09 (0.044) -0.06 (0.041) entrepreneurship coursework -0.10 (0.108) -0.08 (0.144) -0.15 (0.104) 0.18 (0.142) -0.11 (0.072) 0.04 (0.088) pp 0.36** (0.102) 0.32** (0.064) 0.35** (0.064) nrs 0.77** (0.217) 1.15** (0.333) 0.86** (0.15) r-square 0.53 0.51 0.55 0.76 .49 .57 indirect effect of pp (x) on ese (y) as mediated through nrs (m) .28** (0.083) 0.37** (0.081) 0.30** (0.062) llci (lower .5%) 0.077 0.16 0.161 ulci (upper .5%) 0.49 0.566 0.476 **. correlation is significant at the 0.01 level (2-tailed).*. significant at the 0.05 level (2-tailed). 11 r. m. smith, s. r. sardeshmukh, & i. syed journal of small business strategy / vol. 29, no. 3 (2019) / 1-15 is facing a shut down, but the manager finds a way to seek outside investors to buy the plant for the employees and the employees find a way to reconfigure their production facility to produce a new product that was developed by one of the employees. this would be an example of finding money to start a new organization or to find the resources we need. additionally, in the movie, the founder, the mcdonald’s brothers demonstrate rapid prototyping and the ability to organize people and machines for new projects when they share with ray kroc how they devised the “speedee service system” (mcdonald’s corporation, n.d) by orchestrating the system to their employees on a chalked out layout of their new kitchen drawn on a tennis court. in terms of course activities, immersive learning projects that involve working with real clients in existing organizations (garrido-lopez, hillon, cagle, & wright, 2018) or experiential learning activities (canziani, welsh, hsieh & tullar, 2015) such as simulations can provide opportunities to deliberately practice developing new resource skill. in this way the development of new resource skill could be an additional objective added to existing course activities through one or more of the following ways: a) project teams are given instruction to think about resources that the organization needs regardless of what it currently controls or has access to; b) classroom based brainstorming or nominal-group activities where students deliberately practice asking questions using creative problem-solving strategies. instead of listing the solutions to the problems, have students reframe the situation by asking questions, starting with; how can i? how can we? where can we? where can they? … gain access to items needed to solve the problem. this type of engagement with others allows for the student to exercise their own capability while observing the ability of others to come up with ideas to the same problem. these studies have practical implications for entrepreneurship education. with respect to this research, it is well established that entrepreneurship programs help enhance students’ entrepreneurial self-efficacy (harris, gibson & taylor, 2007; wilson et al., 2007). however, to best prepare undergraduates as aspiring entrepreneurs, educators must also thoughtfully consider the knowledge and skills that are contextually relevant, or specific to the work (or the job per se) of entrepreneurship. by their very nature, skills are teachable and thus something students can learn. similarly, identifying those who demonstrate a proactive personality and encouraging them to develop new resource skill will increase their entrepreneurial self-efficacy. in an economic environment fraught with uncertainty, those who are able to seek out or take advantage of opportunities will be more successful. jobs are not what they used to be; they are not as permanent. developing skills like new resource skill can in turn develop entrepreneurial self-efficacy, which increases the chances they will have entrepreneurial intentions and eventually act on those intentions. as a result, new resource skill also fills a gap in the available measures of assessing what is taught in entrepreneurship. opportunities exist to influence educational programs. while efforts are being made, it is unclear how effectively knowledge is translating into program objectives of entrepreneurship education. as entrepreneurship education continues to evolve, it could benefit from a comprehensive documentation of all the required knowledge, skills and abilities needed to be successful in the various vocational tasks that could be experienced in such a career. teachers can then do a better job of understanding how their course objectives, class exercises, and training experiences affect the relevant knowledge, skills, and abilities that are known to be correlated with entrepreneurs’ actual work experiences. the current study helps with this goal of comprehensive documentation by highlighting the mechanism (i.e. new resource skill) that translates a personality variable into entrepreneurial self-efficacy. entrepreneurial self-efficacy is an important antecedent of both entrepreneurial intentions and entrepreneurial performance. if research can clarify these skills in a way that they can be clearly measured and developed, then entrepreneurship, as a career will be easier to define. only through diligence in both research and the design of curriculum can it be claimed that students are truly being prepared for entrepreneurial careers. limitations and future research limitations studies 1 and 2, when combined, capture single respondent data in a cross-sectional format, and while the two-study design has other strengths, single respondent cross-sectional nature of the data is a limitation of this study. similarly, while statistical approaches demonstrated that common method effects did not bias the results, future studies could implement advanced design approaches including temporal separation and multi-respondent data to mitigate common method bias (podsakoff et al., 2003). a longitudinal study, one conducted on a more diverse sample and investigating entrepreneurial performance in the context of decisions and outcomes, can further advance knowledge about the interplay of personality factors related to entrepreneurship performance and new resource skill. future research future research can build on this work by identifying the moderating and mediating role of other individual difference variables, on entrepreneurial intentions and behaviors. similarly, experimental interventions including classroom instruction or experiential exercises can further clarify the causal mechanisms underlying the relationships. future studies could also extend the base of skills to be evaluated and follow students beyond graduation thereby not just examining end of program goals, but actual future entrepreneurial behaviour. these hypotheses could also be 12 r. m. smith, s. r. sardeshmukh, & i. syed journal of small business strategy / vol. 29, no. 3 (2019) / 1-15 tested among aspiring entrepreneurs who are not currently in college and those that have never attended college, further identifying the effects of experience and education. assessing these relationships with participants who are experiencing different contexts will help develop evidence-based interventions for entrepreneurial training and education. studies like these will better inform the impact of specific skills, such as new resource skill on entrepreneurial behaviors, and performance. edelman et al. (2008, p. 57) challenged the domain of entrepreneurship education when they asked, “are our current entrepreneurship educational practices relevant to what actual entrepreneurs are practicing?” in other words, is what is needed or what is applicable to performance in the discipline of entrepreneurship really being taught? directing more attention towards the actual performance and vocational tasks of practicing entrepreneurs would clarify how well students are prepared for similar tasks. such an analysis would identify the appropriate knowledge, skills, and abilities to include in entrepreneurship curricula. by their very nature, skills are teachable. if the goal is to prepare students for entrepreneurial careers, then developing skills related to the acquisition and leveraging of resources is essential. references alvarez, s., & barney, j. 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(2005). the mediating role of self-efficacy in the development of entrepreneurial intentions. journal of applied psychology, 90(6), 1265-1272. doi:10.1037/0021-9010.90.6.12 strategy are small businesses falling through the gaap? janet l. dye james w. carland jo ann c. carland western carolina university abstract professional accountants have tong recognized ihe need for a change in ihe reporring requirements for small businesses because standard sening agencies focus on large firms and promulgate gaaps which ignore special problems of small firms. we propose a procedure which may correiv the problem in the united states and which could provide a model for use in other counrries. introduction discussions questioning the universality of accounting pronouncements have been common in the united states, england, australia and other countries for a number of years (i.e. i. 2, 5). the issue has been whether generally accepted accounting principles (gaap) as established by accounting regulatory agencies can or should recognize differences between businesses based on firm size. no clear answers have emerged. consequently, accounting regulatory bodies have been uncertain about (he desirability of differentiated reporting requirements. the response of the financial accounting standards board (fasb) in the united states has been to consider explicitly the impact of proposed reporting standards on smaller companies. although it has been opposed to differences in recognition standards or measurement principles, the fasb has distinguished between supplementary disclosure requirements for small and large firms in several instances (9, io). it is our position that such steps on the part of the fasb represent an inadequate response to the needs of small business. we believe that a similar situation exists in other countries; however, for purposes of this paper we will focus on the fasb and its impact on united states small businesses. should the approach outlined in this paper prove successful in the united states, it may serve as a model for use in other countries. 50 professiional dissatisfacyion wiith thk fasis the accoun(ing profession has demonstrated a great dissatisfaction with the fasb and its refusal to mitigate reporting requirements for small firms. louis hams and associates conducted opinion surveys with cpas in )980 and again in 1985. the focus of the surveys was whether respondents felt the needs of small business were being met by fasb pronouncements. the results of the first survey were so negative that the fasb responded by taking several steps to rectify the problem. as a result of their efforts, the follow up survey reflected a somewhat higher level of satisfaction but still displayed significant concerns. ln the 1985 survey only 28% of the responding cpas felt that the needs of small business were being adequately addressed in fasb pronouncements and the body of gaap (9). those cpas in small practices were the most negative in their views. these practitioners wem those who performed few attest engagements, although it would be reasonable to posit that these small cpa firms have the largest contact with small businesses. the fasb responded to the criticism inherent in the survey by pointing to its recently formed small business advisory group. that group was intended to improve the board's knowledge of small business concerns regarding proposed accounting standards so that future promulgations might better reflect their needs. nevertheless, the fasb maintains that it is still opposed to differentiation in reporting requirements except for supplementary disclosures. furthermore, the board discussed the lack of data on areas where separate accounting standards might be beneficial and reaffirmed its position that financial statements must be focused to meet the general information needs of outside users (11). apparently the board felt that such requirements forestall any effort to differentiate the treatment of small firms. problems iin fass response to small susiinkss needs several factors make it difficult for the fasb to respond to the small business problem. one major limitation is the composition and outlook of the board itself. the membership of the fasb consists of individuals from public accoun(ing, academe, government and finance and is drawn mainly from large firms and institutions. the source of board membership is designed to allow for a greater breadth of experience regarding financial issues. nevertheless, the background of board members and the process of selection of their replacements reduce the likelihood that any members will have recent or extensive contact with small businesses. consequently, board members have a lessened appreciation for the special problems which fasb pronouncements can create for small firms. there are additional problems in responding to small business needs. the accounting standardsetting environment is highly political (7). the board is under constant pressure to emphasize the reporting needs of large companies. the current climate of increased accountability and the visibility and notoriety of claims of audit failure in major firms contribu(e to the pressure. such pressure may be understandable from both an economic and social viewpoint, but it complicates prospects for small firms. clearly, the fasb's creation of (he small business advisory group is a positive move and indicates a willingness to consider the impact of any resulting standards on small business. nevertheless, the realities of the political environment make remote any probability that the regulators will be able to devote much of their time to reporting areas which are of concern mainly to small companies. 51 the fasb has little energy to devote to the specific reporting needs of small business because it clearly believes that accounting problems are universal across all types and sizes of business. if one accepts a focus on the needs of external users of financial statements, the orientation of the fasb may seem understandable. however, such a focus may fail to consider the impact of reporting requirements on sinall firms and the development of data which small business owners need for internal decision making. special needs of small businesses small businesses have similar information needs as those of larger firms. however, large companies usually have an accounting staff and a professional management team, while most small businesses have little expertise or staff time to gather or utilize accounting information. furthermore, small firms do not have large numbers of shareholders who require protection of their investments and reports on financial status of their firms. consequently. the board's focus solely on external users of accounting information may not be appropriate. the financial statements of small firms are likely to be used by three groups of people; owners, creditors, and tax authorities. tax authorities are self serving in that they have their own reporting requirements separate from those established by accounting regulators. compliance with these requirements is a separate issue from gaap. study results have shown that the information required by creditors may not be significantly different for companies of various sizes (8). from that perspective a uniform treatment may seem justigiable. however, lenders involved in small business credit are accustomed to the frequent absence of acceptable financial statements and are able to compensate with the use of internally prepared reports and schedules. such users are clearly competent to protect themselves, absent any regulatory requirements. furthermore, creditors of small firms tend to be short term lenders which would imply better service from financial statements which emphasized liquidity rather than income generation as is presently the case (5). the owners of small companies are generally also managers of the business. their information needs are not limited to the data normally provided to external users (6). consequently, this group of users is under-served by existing regulations. furthermore, their lack of accounting expertise and the absence of internal accounting staffs make the probability of internal development of valuable accounting information unlikely. small firms need accounting pronouncements which are simple, & lear and understandable. this is perhaps the greatest failing of the fasb from a small firm perspective. one single pronouncement of the fasb, rules concerning leases, filled more pages than all of the pronouncements of its predecessor body, which existed from 1939 through 1959 (5). this is particularly relevant when one considers the importance which leases have to capital-poor small firms. the direction of gaap development is not toward conciseness or simplicity. finally, the expense of compliance with accounting regulations may not be significant for large firms with internal accounting staffs but is clearly a problem for many small firms. in fact, the present regulatory environment encourages small firms not to use external accountants because of 52 the expense and the perceived lack of value of the resulting information. one survey indicated that small firms paid outside cpa fees of $3,300 per $ 1 million in sales compared to $ 1,500 per $ 1 million in sales paid by large firms (4). this imbalance may well result from the presence of internal accounting professionals in large firms, but it repmsents a tremendous burden which most small firms cannot support. the failure of regulators of the accounting profession to adequately address the reporting needs of small firm owner/managers may be partially responsible for the high failure rate of small businesses, in that the regulatory environment clearly does not provide them significant assistance. while it may appear that impact on small firms should not concern the fasb since their stated domain of concern is external users, if the accounting profession is to be of value to the entirety of the business population, that domain of concern must be broadened to include the special needs and problems of small businesses. recommendations in an attempt to increase the amount of relevant data provided to the owners of small firms, the american institute of cpas (aicpa) should consider the establishment of a permanent, separate small bsuiness accounting section to explicitly address the information needs of the owner/managers of such businesses. the aicpa is a more appropriate entity for developing a small business appreciation because it is outside the political environment in which the fasb must function. by studying the specific areas vital to the continued viability of the small firm, the section could design recommended supplemental reports for use by accountants serving small business clients and educational materials explaining the relevance of the additional data. for example, since cash management is especially critical for small companies, expanded cash flow reporting for such firms may be beneficial. additionally, with the high failure rate of small business, it may be helpful to do more research with bankruptcy prediction models based specifically on small companies to determine factors which may be useful to the owner/manager in assessing business risk (3). such information may also be useful to creditors in their small business loan decisions. the models currently available are based mainly on financial information pertaining to medium or large companies which may not be valid for small business (12). finally, should the research of the small business section identify a potential reporting improvement or needed additional external disclosure for small businesses, it could draft a recommendation for consideration by the fasb. this would explicitly address the stated lack of data on small business needs, which has apparently limited the responsivness of the fasb to date. such an arrangement would appear to be beneficial to the accounting profession by responding to the information needs of small businesses, reducing the burden on the board and researching the need for differential reporting. 53 clearly the fasb must be responsive to reports from the aicpa small bsuiness section in order to make this recommendation effective. the aicpa has previously formed temporary bodies whose charges were to examine small business needs. committees were formed in 1974, 1978 and 1981. all of these committees recommended changes in regulations for the benefit of small firms (5). the board did respond somewhat by modifying supplementary disclosure requirements. however, the fasb has not made significant changes in disclosure requirements for small firms, despite the fact that it has long recognized the need for specialized reponing requirements for individual industries. nevertheless, the recent actions of the board in establishment of a small business advisory group may be an indication that it is now more willing to react favorably to specific recommendations from the aicpa. this approach would capitalize on existing agencies and avoid the inherent difficulties of legislative involvement. it can also serve as a model for other countries. furthermore, the aicpa has historically strived to serve the needs of its members cpas and the accounting profession. we believe that establishment of a permanent small business section has potential for success and we encourage the aicpa to consider this action. should the fasb continue to prove uncooperative in adopting aicpa recommendations, it may well become appropriate to establish the small business section as a standanl setting body for small business. potential conflicts between aicpa and fasb promulgations could then be handled in the same negotiating manner as legislative differences, i.e., through the work of a joint committee of the two agencies. before such a dramatic step is taken, however, the fasb should be afforded the opportunity to establish itself as the single authority on gaap standards for all businesses regardless of size. should the board prove recalcitrant, stronger steps will be mquired to close the gaap for small business reporting. references l. accounting standards committee, abc report, "accounting standards help small companies," accounrancy, 101 (june, 1988), 173. 2. gibson, r. "differential reporting for small business entities," the chartered accountant in ausrralia, 58 (september, 1987), 16-18. 3. keasey, k. and r. watson. "the prediction of small company failure: some behavioral evidence for the uk," accounting and business research, 17 (winter, 1986), 49-57. 4. knutson, d.l, and h. wichmann. "gaap disclosures: problem for small business?" journal of small business management, 22 (january, 1984), 38-46. 5. lippitt, j. and n. oliver. "big gaap, little gaap: financial reporting in the small business environment," journal of small business managemem, 21 (july, 1983), 52-57. 6. robinson, r. "the importance of 'outsiders'n small firm stmtegic planning," academy of managemenr journal, 25 (1982), 80-93. 7. solomons, d. 'the political implications of accounting and accounting standard setting," accounting and business research, 13 (spring, 1983), 107-18. 54 8. stanga, k, and m. tiller. "needs of loan officers for accounting information from large versus small companies," accounting and business research, 14 (winter, 1983), 63-70. 9. "the fasb responds to small business," the cpa journol, 57 (january, 1987), 16ff. 10. upton, w. "the fasb and small business: an update," journal of accountancy, 163 (june, 1987), 136-40. 1 l. upton, w. and c. ostergaard. "the fasb response to small business," journal of accountancy, 161 (may, 1986), 94-100. 12. zavgren, c. "the prediction of failure: the state of the art," journal of accounting literature (spring, 1983). 55 http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2020, vol. 30, no. 02, 26-34 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2020 small business institute® w w w. j s b s . o rg introduction western connecticut state university, 43 lake avenue ext, danbury, connecticut, 06811, usa, gallidebicellaa@wcsu.edu the efficacy of sba loans on small firm survival rates small business, small and medium size enterprises, sba, financing, capital availability, firm survival apa citation information: galli-debicella, a. (2020). the efficacy of sba loans on small firm survival rates. journal of small business strategy, 30(2), 26-34. small firms have an extremely high rate of failure— the average rate of survival for new firms is only two years and only 44% survive at least four years (headd, 2003; knaup, 2005; sonfield, 2007). moreover, 81% of small firms fail within ten years (dawitt, 1983). because of the inherent risk of starting a new venture, many suppliers of capital (e.g., banks, capital markets, venture capitalists) are wary to fund many small firms—particularly historically under-represented demographics like women and minorities. the u.s. federal government established the sba to provide capital to small firms that otherwise could not obtain it (craig et al., 2009). moreover, the sba maintains a special focus on providing capital to certain underserved groups like women and minorities (dilger & gonzales, 2012). the sba also offers a host of consulting and other services (e.g. training and education) that it claims helps entrepreneurs survive (sba, 2019a). the results of studying sba loan effectiveness have important implications for both theory and practice. areas of theory impacted include small business success, capital availability, and minorities-in-business literature. practical results for the sba could include knowledge of the effectiveness of their programs and possible suggestions for changes to make their loans and services more effective. however, the effectiveness of sba loans in improving small business survival rates has not been extensively analyzed in the academic literature. do sba loans improve the survival rates for a small business? do they positively impact minority and women owned firms? if so, what are the underlying causes of the positive impact— does the sba do a better job of selecting successful entrepreneurs, or does the loan and related consulting services actually improve the likelihood of small firm survival? through combining the theoretical background on small firm success with empirical evidence around small firm survival, this paper attempts to address these questions. specifically, this paper will look at whether sba-aided small firms experience greater survival rates over the general population. this paper begins by understanding the underlying mission and programs of the sba itself is required. then, the paper explores small firm survival rates and the reasons why small firms fail, which will set up the analysis of sba effectiveness in improving small business survival rates. in addition, the literature around capital availability leads to an analysis of whether the size of sba loans affects survival rates. lastly, the paper discusses the special situations facing minority and women entrepreneurs, which will setup the analysis of sba effectiveness for these traditionally challenged groups. in an attempt to support entrepreneurs, the u.s. small business administration (sba) offers loans to small firms. the sba claims that it not only offers capital to small firms, but that it offers services and support to help them build capabilities. this study investigates whether the empirical evidence demonstrates an improvement in four-year survival rates for sba-aided firms over the general population of small firms, and if there is any correlation between loan size and survival rates. additionally, the study examines if women and minority-owned sba-aided small firms (who are a traditionally under-represented demographic) improve their four-year survival rate. the results suggest that small firms that receive sba loans do improve the four-year survival rate over the general population of small firms. however, loan size was not correlated with higher survival rates. the results also suggest that women-owned small firms experience a similar increase in survival rate, while minority-owned small firms do not receive a statistically significant increase. alexandra galli-debicella http://www.smallbusinessinstitute.biz http://www.jsbs.org 27 a. galli-debicella journal of small business strategy / vol. 30, no. 2 (2020) / 26-34 the united states sba small firms are an important part of the u.s. economy, as they represent over 99% of all firms and 44% of u.s. economic activity (sba office of advocacy, 2019b). according to sba office of advocacy (2019b), there were approximately 30.7 million small firms in the u.s. in 2016. despite their strong presence, small firms face great difficulty obtaining financing by securing capital (ang, 1992; jarillo, 1989; petersen & rajan, 1994; stinchcombe, 1965; vesper, 1990; weinberg, 1994). in order to provide greater assistance to small firm development, the sba (2019a) was developed as a part of the small business act passed by congress in 1953. the main purpose of the sba is to “aid, counsel, assist and protect the interests of small business concerns, to preserve free competitive enterprise and to maintain and strengthen the overall economy of our nation” (sba, 2019a, para 2). since its creation, the sba has provided assistance for small firms to obtain loans and access its services. between the fiscal years of 1991 and 2000 alone, the sba has assisted approximately 435,000 small firms in obtaining an estimated $94.6 billion in loans (carruthers & ariovich, 2010). sba loans are not directly provided by the sba, but by banks with a guarantee from the sba. as a result of the guarantee, the loans become less risky and more attractive for banks—thus increasing access to capital for small firms. the sba also offers several programs, including their venture capital program and the minority small business program, to help small firm owners to start and operate successful firms. moreover, they offer numerous training and counseling services (such as mentoring) around the country through their local offices, targeting both the general population of small firm owners as well as specific groups (such as native americans and women) through their office of entrepreneurial development (sba, 2019b). academic research has looked at small firms and the differences that may influence their growth and survival, but very little research has focused directly on the sba itself. instead, research has concentrated on the factors that contribute to small firm performance (dodge & robbins, 1992; kalleberg & leicht, 1991; rasheed, 2005), growth (burns & dewhurst, 1996; morrison et al., 2003; muse et al., 2005), and failure (dawit, 1983; headd, 2003; watson, 2003) in order to determine the support needed for small firms to survive. although the literature has addressed small firm survival against many variables, the literature has not extensively explored the sba and its direct impact on small firm survival. small firms and survival rates defining small firms. small firms (also referred to as “small businesses”) have numerous and sometimes conflicting definitions in the academic literature. most researchers utilize certain variables to define small firms, traditionally classified by its size of revenue per year or the number of employees. for the purposes of this paper, the classification provided by the sba will be followed. the sba office of advocacy (2019a) identifies small firms as those with less than 500 employees. small firm success. the definition of “success” has been discussed and observed by the academic literature through different outputs, whether through market share, profit increase, or increase in stock value (d’amboise & muldowney, 1988; robinson & pearce, 1984). however, there is disagreement whether success for a small firm is the same as for large firms or publicly held firms. there are numerous traditional ways of defining success for large firms, such as high revenue growth, above industry average profits, and other financial levers like roi (buzzell & gale, 1987; mahajan et al., 2002; sharma & mahajan, 1980). although small firms may define success by means similar to large firms (e.g. roi, ability to gain a specific percentage of market share), they may also use other factors such as survival, access to capital, positive cash flow. some authors believe that survival is not enough to call a small firm “successful”. although the probability of a firm’s closing declines with age, merely staying open without being able to generate a positive cash flow or gain access to capital for expansion cannot be called success in terms of growth strategies (kalleberg & leicht, 1991). however, continued existence is often seen as the outcome of self-sustaining success (d’amboise & muldowney, 1988). indeed, survival is the prerequisite for any other form of success (e.g., growth, positive cash flow). therefore, for purposes of this paper, i measure survival rate as the “base case” of small firm success, as no other success is possible without it. impediments to small firm survivorship. despite small firms’ considerable presence in the u.s. economy, small firms have a very low rate of survival. some research has found the average rate of survival for new firms is approximately two years and 44% survive at least four years (headd, 2003; knaup, 2005). according to sba office of advocacy, the average one-year survival rate for new businesses from 2008 to 2018 is 78.7% (september 2019). major factors that influence survival rates include a sufficient capital supply, the fact that a firm is large enough to have employees, and the education level of the owner (headd, 2003). the literature concerning the survivorship of small firms also focuses on the small firms’ need for access to sufficient personnel and financial resources (headd, 2003; knaup, 2005). small firms lack dedicated personnel resources, as they cannot hire specialists. their limited resource pool normally forces every employee to be somewhat of a generalist—doing roles across traditional functions such as sales, marketing, finance, and general management. thus, the lack of job specialization prevents the firm from creating competitively differentiated competency in certain areas (mintzberg, 1979; 1983). smaller firms also tend to have 28 a. galli-debicella journal of small business strategy / vol. 30, no. 2 (2020) / 26-34 a loose division of labor as there are less formal practices present, such as training or strategic planning (d’amboise & muldowney, 1988; robinson & pearce, 1984; welsch & white, 1981). in addition, academic studies have positively connected the educational level of the owner to both firm performance and survivorship (bates, 1990; coleman, 2004). small firms typically rely on a “one-person strategic apex” whereby the owner and founder is also the chief executive officer who maintains all of the control and decision making (mintzberg, 1983, p. 158). many small firms face a major impediment when the owners are unaware of their own limitation in regards to their personal knowledge, vision and ability. moreover, small firms generally lack the financial resources required for expansion opportunities (ang, 1992; jarillo, 1989; petersen & rajan, 1994; stinchcombe, 1965; vesper, 1990; weinberg, 1994). specifically, small firms find it difficult to access more than a small amount of capital, especially long-term capital, due to certain requirements of the capital market. venture capitalists offer a few select firms’ large amounts of capital, but most of these have large aspirations of growth. many small businesses have desire to grow, and thus need to turn to banks for capital—banks which typically have a relatively low tolerance for lending to risky new businesses (fabowale et al.,1995). small firms are thus unable to seize opportunities that could facilitate advancement of the firm (e.g. acquiring needed resources). sba loans and survival rates. as the academic literature shows, small firms encounter several challenges to their survival deriving from a lack of financing and human talent (headd, 2003; knaup, 2005; sonfield, 2007). sba loan effectiveness can be defined in a number of ways for a small firm—as providing capital they otherwise could not get, as helping build management capabilities through consulting services, or as choosing the best and brightest to receive additional government support. however, the most fundamental difference an sba loan might make is improving the survival rate for a small firm. therefore, this paper looks at sba loan effectiveness and if there is a difference between survival rates for those companies that get loans from the sba in their first four years of incorporation. specifically, this paper suggests: hypothesis 1. small firms that receive an sba loan within their first four years of operation have higher survival rates than the general population of small new firms. capital availability and small firms small firm survival is highly dependent on access to capital, which is necessary to provide sufficient cash to overcome critical issues (such as a crisis or turnaround) or to make investments (such as marketing, operations, or additional personal). in one study, it was found that closure rates for new firms with no starting capital was high, while firms with at least $50,000 in starting capital had lower closure rates (headd, 2003). despite the importance of access to capital, small firms are usually unable to access the public capital markets due to their size and limited influence. moreover, small firms tend to be perceived as “more risky” by banks (ang, 1992; coleman & cohn, 2000; d’amboise & muldowney, 1988; dilger & gonzales, 2012; jarillo, 1989; petersen & rajan, 1994; stinchcombe, 1965; vesper, 1990; weinberg, 1994). small firms may also be unable to access capital due to their geographic location. in immergluck and smith’s (2003) study, the results showed that a disparity existed between small firm lending to firms in higher and lower income areas indicating that small firms in lower income areas face greater difficulty in obtaining loans. small firms need to maintain sufficient cash flow in order to cover the firms’ expenses as well as their near-term cash obligations (d’amboise & muldowney, 1988; dilger & gonzales, 2012; weinberg, 1994; welsch & white, 1981). generating sufficient cash flow also generates additional capital that can be reinvested in order to help the firm not only survive, but grow (weinberg, 1994; welsch & white, 1981). however, maintaining sufficient cash flow is a major issue for small firms, often limiting their chance for growth (dodge & robbins, 1992). moreover, a study by dodge and robbins (1992) found that small firms with cash flow issues early on would not only continue to have those issues throughout its life cycle, but also find the need for additional capital in order to cover the daily expenses of the firm. for that reason, the size of the sba loan may be correlated with survival rates. larger loans may improve survival rates as they improve liquidity for the small firms. if capital availability is one of the main benefits of sba loans, one would expect that survival rates (within first four years of operation) would be positively correlated with the size of loans that small firms receive. therefore, the paper suggests: hypothesis 2. small new firms with higher sba loan size (within their first four years of operation,) have higher survival rates than small new firms with lower sba loan size. women and minorities entrepreneurs in small firms according to the sba office of advocacy (2017), in 2012 there were approximately 9.9 million women owned small firms producing an estimated $1.4 trillion in sales, and approximately 1.1 million minority owned small firms producing approximately $1.3 trillion in total annual receipts. despite these impressive figures, women and minority owners of small firms experience difficulty in obtaining financing as they tend to confront issues concerning education, financial skills, racism, social norms, and family conflicts (cavalluzzo & cavalluzzo, 1998; cohn & coleman, 2001; coleman, 2002; 2004; goffe & scase, 1983). some studies show that although men and women are just as likely to receive loans, women are less likely to ap29 a. galli-debicella journal of small business strategy / vol. 30, no. 2 (2020) / 26-34 ply for them in the first place (cavalluzzo & cavalluzzo, 1998; coleman, 2004). in another study, the researcher found that women owners of small firms were less likely to acquire external financing as compared to men owners (coleman, 2002). women entrepreneurs are also likely to start businesses in less capital-intensive industries, and therefore receive less loans (fabowale et al., 1995; watson, 2003). these results may be partially explained by general dissatisfaction women owners of small firm have with accessing capital and contending with banks (coleman & carsky, 1996b; fabowale et al., 1995; neider, 1987). some research has also shown that women were treated differently than men when receiving loans, such as being asked to provide collateral or pay a higher interest rate (coleman, 2000; 2002; riding & swift, 1990). some studies have implied that cultural biases may still exist when it comes to providing loans. in a study by susan coleman (2004), she investigated the relationship between the firm owner’s education level and ability to secure loans. coleman (2004) found that even when the differences of education were controlled, black men were significantly less likely to be approved for a loan. in another study, the results showed that both hispanic and asian owners of small firms experienced discrimination in accessing credit when compared to white male owners (cavalluzzo & cavalluzzo, 1998). the sba recognizes the needs of the underrepresented women and minority small firm owners and specifically seeks to help these groups. the sba offers specialized assistance to women and minority owners through their services, in addition to securing loans, from their several programs. in particular, the minority enterprise development provides information and guidance on procurement opportunities to minority owned small firms (sba, 2019c). moreover, the office of women’s business ownership offers counseling and business training in addition to access of capital for women owned small firms (sba, 2019d). helping traditionally underrepresented groups has always been a mission of the sba. special categories of loans are set aside for minority owned businesses to help them gain access to capital that might otherwise not be available to them. in the sba definition, “minority owned firms” may be owned by racial minorities or by women. for that reason, this paper looks at these unique populations and whether sba loans significantly help the survival rate of female and minority owned firms. therefore, this paper suggests: hypothesis 3. women owned small firms that receive an sba loan within their first four years of operation, have higher survival rates than the general population of small new firms. hypothesis 4. minority owned small firms that receive an sba loan within their first four years of operation, have higher survival rates than the general population of small new firms. method sample in constructing the study sample, the original database provided by the sba consisted of 233 firms who received loans in the year 1999. however, the original data did not include the year the firms were founded since the sba does not require, nor inquire about that information. therefore, the founding years of the firms (e.g. year the firm was founded in) were collected by the author using the records from local government offices and those obtained from the office of the secretary of the state of connecticut c.o.n.c.o.r.d.’s website (which maintains legally required documents of the formation and changes to firms in connecticut.) of the 233 firms, 67 firms were unusable because no founding year of the firms were recovered. an additional 65 firms were unusable because their founding date was beyond the four years prior to 1999 (e.g. firms founded in 1994 and earlier) and thus had already succeeded in exceeding the four year survival rate. in order to verify the status of the 101 small firms in the sample as either failed (e.g. no longer in existence) or survived (e.g. still in existence), several methods were employed. it is worthwhile to mention that discontinuance of the firm is a common measure of small firm failure (bates, 1990; watson, 2003). five methods were used to check the firms’ existence in 2003: (a) local phone books and other forms of telephone directory assistance (b) personal company websites on the internet with a clear indication of the webpages’ current year such as posted press releases or newspaper articles; (c) local newspapers, both paper and electronic versions, that featured the firm and its date of publication; (d) a public website that shows loans approved by the sba; and (e) the office of the secretary of the state of connecticut c.o.n.c.o.r.d.’s website which provides the status of the firm, changes in the firms’ name, merges/ buy outs with another firm (which there were none in the sample,) and other relevant information about the firm. the combination of methods resulted in providing data for the firms’ existence in 2003. measures and results data analysis consisted of the non-parametric method of yates’ chi-square and logistic regression. the results are displayed in the tables of the appendix. chi square tests were used since we compared observed proportions against an expected proportion, with an alpha at 0.05 for all analyses (sheskin, 2000). for the purposes of our paper, the expected value is based on previous academic literature that states 44% of new firms survive four years after their “birth” (headd, 2003; knaup, 2005). moreover, to correct for the limitations associated with using chi square with only two categories (or in other words because there is only one degree of freedom) we apply yates’ correction for continuity to our data (siegel & castellan jr., 1988; upton, 2000). there is a significant difference from the expectation when 30 a. galli-debicella journal of small business strategy / vol. 30, no. 2 (2020) / 26-34 the value of the calculated chi squared (x2) is greater than the critical value of chi squared (x2). to test the first hypothesis concerning sba loan effectiveness, we tested our ratios of survival rates for firms that received loans from the sba in their first four years of incorporation (e.g. the observed value) to the survival rate of small new firms in the general population (e.g. the expected value). the calculated chi squared (x2 equals 36.3) is greater than the critical value of chi squared (x2 equals 3.84) at the 0.05 level of significance as well as the critical value of chi squared (x2 equals 10.83) at the 0.001 level of significance, indicating that the result is statistically significant. to test the second hypothesis, binomial (or binary) logistic regression was used in order to estimate the explanatory power and strength of the independent variable loan amount for the dichotomous dependent variable of survival (hosmer & lemeshow, 2000). as shown in table 1, there is no significance between loan amount and survival as the p-value (0.864) is greater than the critical value (0.05). 44% 74% 0% 10% 20% 30% 40% 50% 60% 70% 80% general population sample figure 1. comparative survival rates for small firms for the first hypotheses regarding loan effectiveness, several explanations exist for why firms have such a high survival rate when they receive sba loans. first, increased capital availability might improve survival rates. small firms may seek capital for expansion efforts against competitors—for anything from marketing to increased operations to hiring personnel. if they do not have access to capital, their better-funded competitors may be more likely to take advantage of market opportunities. sba loan availability may help small firms have a greater survival rate by allowing them to pursue their strategies. to further test this explanation, an analysis of the underlying cause of small firm failure would need to be conducted. specifically, one would want to examine whether lack of capital is a greater reason for failure among the general population than among small firms receiving sba loans. second, improved management capabilities may imtable 1 loan amounts and survival rates – logistic regression chi square df significance step 0.029 1 0.864 block 0.029 1 0.864 model 0.029 1 0.864 table 2 non-parametric method of yates’ chi-square firms survived firms failed calculated chi square critical value of chi square hypothesis 1 (all) 75 26 36.3** 3.84 hypothesis 3 (women) 17 6 7.2* 3.84 hypothesis 4 (minorities) 11 6 2.2 3.94 * significant at the 0.05 level of significance ** significant at the 0.001 level of significance to test the third hypothesis concerning sba loan effectiveness, we tested our ratios of survival rates for firms owned by women that received loans from the sba in their first four years of incorporation (e.g. the observed value) to the survival rate of small new firms in the general population (e.g. the expected value). the calculated chi squared (x2 equals 7.2) is greater than the critical value of chi squared (x2 equals 3.84) at the 0.05 level of significance, which again shows statistical significance as well as displays a departure from expectation. to test the fourth hypothesis concerning sba loan effectiveness, we tested our ratios of survival rates for firms owned by minorities that received loans from the sba in their first four years of incorporation (e.g. the observed value) to the survival rate of small new firms in the general population (e.g. the expected value). the calculated chi squared (x2 equals 2.2) does not exceed the critical value of chi squared (x2 equals 3.84) at the 0.05 level of significance, which shows that it is not statistically significant. table 2 presents the results for hypothesis 1, 3, and 4. discussion based on the analysis of 101 companies in new haven county, connecticut, some conclusions can be drawn around effectiveness of sba loans. figure 1 presents the small firm survival rates for the sample and general population. 31 a. galli-debicella journal of small business strategy / vol. 30, no. 2 (2020) / 26-34 prove survival rates. the sba offers a number of consulting services, mentoring, and business training through several programs including their small business training network (sba, 2019e). increased management capabilities could lead to better business plans and execution, and hence a higher survival rate. to further test this explanation, a qualitative study of successful and failed small firms could be conducted in both populations (i.e., companies with and without sba loans) to determine if the owners feel they tangibly increased their skills through interactions with the sba. third, the sba might simply be better at picking “winners” in screening their loans. the sba may target those small firms who are most likely to succeed and be able to pay back the loan—based on their business plan and management capability. in order to believe this is true, one would have to believe that the sba is better at picking winners than private banks or other sources of capital. small firms may prefer the sba over other sources of capital because of preferential capital costs and the perceived usefulness of their services, and thus the sba may attract the best applications relative to private banks. the sba loans and consulting services themselves may have no effect on survival rates—the sba simply picks the cream of the crop. for the second hypotheses, no significant relationship existed between the size of the sba loan and the survival rate. while this might at first appear to be counterintuitive given the academic literature around capital availability, several explanations may exist for the observed phenomenon. academic literature discusses how firms in general increase their probability of survival when they have more working capital (dodge & robbins, 1992; headd, 2003). firms are able to survive downturns in business or unexpected negative events if their current assets are significantly greater than their current liabilities. furthermore, small firms are especially vulnerable to failure due to a working capital shortage (gaskill, van auken, & manning, 1993). even a single negative event can cause a small firm to fail if it is not properly capitalized. given this academic literature, one would expect a larger loan to improve survival rate because it would improve working capital for the small firm (all else being equal). however, the size of the sba loans does not necessarily correlate to survival, and there may be several reasons for this. first, the sba loans are likely not maintained for working capital. small firms may seek loans to utilize for marketing, operations, or other business needs (dodge & robbins, 1992). they are likely to be expended rather than used to increase working capital. thus, capital availability may not actually be improved by the loans. second, the capital needs of small firms is not homogenous where some firms will have a “burn rate” of $10,000/month in working capital while others would have $100,000/month. one would expect that firms would adjust their request for the size of the loan based on their underlying business needs. thus, the size of the loans would not correlate with success because the size is not an independent variable, as firms have pre-adjusted their requests to their business needs. third, our data may be inherently limited due to the size of and specific geographic location of the small firms in the sample. while further empirical testing is needed to determine if any of these explanations are true, they do demonstrate how the results of our analysis are not in conflict with the existing literature on capital availability. for the third hypotheses, women-owned firms saw a statistically significant improvement of their survival rate over the generate population (74% vs. 44%). improved management capabilities targeting women owned small firms may improve survival rates. the sba offers a number of services (including mentoring and training) that focus on the needs of women small firm owners through the office of women’s business ownership (sba, 2019d). increased management capabilities could lead to better business plans and execution, and hence a higher survival rate. further research should be conducted to determine if the sba actually addresses these issues that are specific to women-owned firms, or if they help women-owned firms in the same ways that they help male-owned firms. for the fourth hypotheses, minority-owned firms did not see a statistically significant improvement of their survival rate over the general population (65% vs. 44%). while the actual rate appears to be much higher, perhaps the sample size of 17 was too small to identify the result significant. even though the improvement of 21% appears to show a large improvement, statistically it cannot be concluded. figure 2 presents the firm survival rates for women and minority-owned firms in the sample. 44% 74% 64% 0% 10% 20% 30% 40% 50% 60% 70% 80% figure 2. small firm survival rate by segment 32 a. galli-debicella journal of small business strategy / vol. 30, no. 2 (2020) / 26-34 limitations though the present study provides support for the existence of sba loan effectiveness and loan effectiveness for firms owned by women, it has some limitations. specifically in regards to the geographic setting and additional data availability. while the sba generously provided information on loan recipients, the study uses small firms explicitly located in one county (new haven county in connecticut). it is possible that the county may not be representative of the country as a whole, and having more respondents in additional counties would improve the confidence in the findings. moreover, data in the study was limited in that the sba did not provide any additional information like whether the firms in this sample received additional support (e.g., consultative services) from the sba and whether these were effective. it is possible that having this additional information could have influenced the results. implications the concepts and results of the present study have important implications for both research and practice. specific areas of research impacted are small business success, capital availability, and minorities-in-business literature. small firm success literature has traditionally focused on the factors that determine if a company succeeds or fails (dawit, 1983; headd, 2003; watson, 2003). the results of this sba effectiveness study could lead research into the qualitative impact that sba loans and consulting services have on firm success. specifically, additional literature can review what loans are used for and how consulting services may improve management capability. capital availability literature needs to address why a correlation does not exist with size of sba loans and survival—and potentially address some of the explanations in this paper. for example, capital availability theory may only hold true for firms that require a certain level of working capital to survive. minorities-in-business literature could also be impacted by further delving into the qualitative reasons that minority-owned businesses did not see a significant increase in survival rate (although further testing is also needed to determine if this was merely a sample size issue). practical results for the sba include an acknowledgement of the impact their services have. more important for the sba would be follow-up research into the specifics of what makes their loan program successful and what changes might be made to improve their services. although the literature has extensively discussed the barriers to small firm survivorship, the effectiveness of sba loans in improving small business survival rates has been overlooked. the aim of this paper attempts to address that deficiency. specifically, the results of the present study show support concerning sba loan effectiveness and sba loan effectiveness for firms owned by women. although, the results also found that sba loan size and sba loan effectiveness for minority owned firms were not supported. while further investigation is needed, the results provide an indication of the effectiveness of sba loans and the need for additional empirical research around this important topic. references ang, j. 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(1981). a small business is not a little big business. harvard business review, 59(4), 18-32. strategy the formal and informai. venture capital industry w. keith sehilit university of south florida abstract this anicie examines the narure and acti viry of the formal and informal venture capital industry. combined, there is a pool of nearly $/00 billion in formal and informal venture capital in this country rhat is avai table for investment in emerging growth businesses. although traditionally venture capital investmems were targeted to early stage —and often "high tech"— companies, there has been a growing tendency on the part of venture capitalists to invest in "low rech," later stage businesses as well as in lbos. this anicie also examines the criteria used by venture capitalists in making investment decisions. introduction most of us have heard of such names as kleiner, perkins; hambrecht & quist; warburg, pincus; and hillman ventures, yet we may know little about these venture capital firms or about their industry. we know that they invest in some emerging growth ventures. but, how actively do they invest? what are their typical investments'? how do they make investment decisions? finally, aside from the "formal" venture capital firms, what is the impact of "informal" venture capital investments on entrepreneurial development? these are the issues addressed in this article. the formal venture capital industry venture capital firms the formal venture capital industry in the united states is characterized by several hundred venture capital firms. these firms, which are also referred to as "venture companies," "venture firms," "venture funds," "venture partnerships" or "venture capital pools" resemble mutual funds, to some extent in terms of their investment activity although not in terms of their investment philosophy. structure and fee arrangement of venture capital firms. the venture capital firms are usually structured as limited partnerships with a group of investors, called "limited partners," and a group of managers of the fund, called "general partners." they share in the profits in ratios disproportionate to their capital contribution. typically, the general parmers, who manage the portfolio but do not necessarily invest in the ventures themselves will usually receive a percentage of the profits plus an annual management fee. management fees alone can amount to 20% of the total capital raised over the life of a fund. for example, e. m. warburg, pincus & co. will receive over $200 million in management fees alone for managing the $ 1.2 billion fund it raised in 1986, if the fund is in place for its full lifetime.'9 although the fee structure can often bc justified due to the tremendous amount of time spent by the general partners in researching their investments and in assisting the entrepreneurial companies on matters related to long term growth, there is always thc fear that as thc funds grow larger in size, venture capital firms may become driven primarily by management fees, rather than by the potential profits of their investments. obviously, the size (i.e., percentage) of the management fee was very appropriate with funds in the $ 10 million to $50 million range. however, as the funds have grown so large (i.e., in thc hundreds o[ millions of dollars and upwards), the limited partners are beginning to question the fee structure. venture capital firms vs. muiuul funds. clearly, the investor-fund manager-investee situation for venture capital investments is far different than it is for mutual fund investments in publicly-held companies, in which the research demands by the mutual fund manager are far less and the managerial assistance demands are virtually non-existent. as noted by bruno et al. (1985) and by gorman & sahlman (1986), venture capital investments are more than monetary; the venture capitalist serves as a "resource manager" to the emerging growth businesses by providing them with assistance on such issues as recruitment and planning. as noted by john pappajohn, president of pappajohn capital resources in des moines, iowa, "i'm really in the business of putting together good ideas and good people with money, of financing companies at start-up and then keeping close tabs on them until they go public" (kravitz, 1985, p. 11). although venture capitalists are unlikely to get involved in the day-to-day operations of the business, they will often get involved in strategic planning, marketing, and other long range issues. pappajohn, who plays an active role in companies in which he invests, adds, "i call them every day and i make them millions." time demands of venrure cupiialisis. of course, some venture capitalists have a different view of the process; they find themselves devoting more time to raising capital from investors than they do (o assisting the ventures in which they invest. this has been more evident among venture capital firms that invest in early stage ventures, which spend a large ponion of their time fund raising for subsequent rounds of financing; it becomes even more pronounced during periods of stock market declines, at which time there are fewer ipos. we have used the term "venture capital firms" very broadly to include not only the traditional venture capital limited partnerships but also the publicly-held venture capital companies, which are called "business development companies" (bdcs), small business investment companies (sbics), venture capital subsidiaries of larger corporations and so forth. we are referring to any of these managed pools as a "venture capital fimi," a "fund," a "partnership," or a "pool." furthermore. once the venture capital firm makes an investmcnt in a company. it is the venture capital firm rather than the limited partners which is referred to as the "investors." the size of the venture capital industry a decade ago the venture capital industry's total capital under management was approximately three to four billion dollars. today the pool is approximately 10 times that size. currently there are over 2,000 professionals in the "formal" venture capital industry as compared to about 600 in the late 1970's; they work for more than 600 formal venture capital firms (including sbics and venture capiial subsidiaries of larger corporations). the sire uf the individual venmre capital firms. a decade ago the largest venture capital firm was about $40 million, and the average fund was approximately $ 15 million. in 1982 the 40 first of the "mega-funds" (i.e., those with paid-in capital of $ 100 million or more) was created when kleiner perkins caufield & byers raised $ 150 million. today the mega-funds are commonplace with several of these funds (such as warburg pincus, hambrecht & quist, john hancock venture capital, first chicago venture capital, ta associates), each having over $ vt billion in paid-in capital. venture capital firms are becoming even larger. in 1990 warburg, pincus completed a $ 1.8 billion venture capital fund which not only dwarfed its previous $ 1.2 billion fund but also was three times the size of any other venture capital partnership at the time. this is indicative of the trend towards larger venture capital funds that has emerged over the past few years. in recent years the large venture capital firms have gotten larger, partly because of the larger investments of pension funds. such investments by pension funds, however, have been very selective; the pension fund managers, in keeping with their fiduciary responsibility and their aversion to risk, have primarily invested in the larger, more diversified, more established venture capital firms. of course, the "rules" of the venture capital game have changed as the stakes have gotten higher and as the funds have increased in size. in some cases heavy institutional investment has been detrimental for the industry. for example, some of the large institutional investors have put pressure on venture capital firms to take the venture capital-backed companies public too soon. by shortening the time'from venture capital funding to ipo funding from five or six years to two or three years, investors can get their money out sooner. however, this often upsets the normal growth pattern of the venture capital-backed company, thereby making it vulnerable in the process. moreover, this is often in direct conflict to the philosophy of the role of venture capital firms in "building companies." nonetheless there have been numerous positive results, as evidenced by the successes of such venture capital-backed companies as apple computer, compaq, federal express, digital equipment and tandem. amount of capital raised by venture capital firms. one measure of the growth of the venture capital industry is the amount of money raised each year from investors —that is, the limited partners (wealthy individuals and families, pension funds and corporate investments). in 1977 the venture capital industry raised a total of $39 million. since that time there has been a significant but fairly steady increase in funds raised by venture capital firms. according to venture economics, which tracks such statistics, it reached $ 1/2 billion in 1979, then increased to $2 billion in 1982 and to $5 billion in 1987. since that time, however, due to market conditions and several other factors, there has been a significant decline in the amount of money raised by venture capital funds in a given year to about $3 billion in 1988 and to less than $ 1 billion in the most recent year. as noted earlier, the total pool that has been raised is in excess of $35 billion. nature of venture capital investments once the funds are raised, what kinds of investments are made by venture capitalists? throughout the 1980s computer hardware and systems companies were consistently the largest recipients of those investment dollars. this has been reflected by their relatively large representation (generally 30-40%) on the "inc. /00" list, which is a listing of the fastest growing, small publicly-held companies in this country, most of which have gone public within the past few years. that situation has begun to change somewhat in recent years, since service businesses, 4t such as consumer-related/retail and health care have received a greater portion of venture capital funding than the computer and related companies; a similar pattern is seen among thc "inc. 500" list, which is a listing of the fastest growing, small, private/& held companies in this country. (the "jnc. 500" companies, which are privately held, generally are smaller, earlier stage ventures than the "inc. 100" companies, which are publicly held.) moreover, recently there has been a trend among venture capitalist towards greater specialization by industry (bygrave, 1987) and by geographic location (libecap, 1986); two of&he emerging trends have been in "low tech" businesses and leveraged buy-outs [lbosb gengrnpltic crntcenrra/intr. as may be expected, venture capital i'irms are regionally concentrated in this country with the greatest number located m and around new york city (which has about onc-third of the largest venture capital firms), san francisco/ silicon valley (15% of the venture capital firms), and boston ((5'7n of the venture capital ttrms). ol'he 100 lurgest venture capital ltrms in this country. two-thirds are located in just three areas: this suggests an extremely disproponionatc distribution of venture cupital i'irtns throughout the nation. the three leading states in which venture capital firms are located. ncw york, california, and massachusetts, are also the three leading states tn which venture capital funds are disbursed, however, not in the same order. crtlifrirrtirt. the greatest number and the largest dollar value ol'enture capital commitments are in california. this should not be surprising since california has produced the greatest success stories among entrepreneurial companies over the past decade. specifically. since 1980 or so california has had 21 companies —mc 1uding sun mic rosy stems (mountain view), businessland (san jose). ast research (irvine). softsell computer products (inglewood), lsi logic (milpitas), maxtor (san jose). evercx systems (fremont). and 3 com corp. (santa clara)— go from start-up to the 5100 million level in revenues in fewer than 10 years; no other state has had more than five. californiu venture capital i'irms have made significant investments in high tech industries over the past two decades. hambrecht & quist (san francisco). sierra ventures (mcnlo park), sequoia capital (menlo park). and klciner perkins caulield & byers (palo alto) are some examples of such venture capttal firms that have invested heavily in high tech companies in the silicon valley area. there are over two dozen venture capital i'irms which specialize in high tech investments in a single location in menlo park. they are located in a complex at 3000 sand hill road, which has become known as one of the leading high tech starter locations in the world. over 75'7o of the venture capital investments by california venture capital firms remain in the state. in addition, entrepreneurial companies located in california receive a substantial amount of venture capital from other states. thus, calitornia is a "net recipient" of venture capital. /v/axrac/arse//s. after california, mass'tchusetts companies have been the next biggest recipients of venture capital. similar to calti'ornia, there is a high tech focus among many of the venture capital ttrms in massachusetts, especially those located around the famous route 128 near boston. combined, companies in california and massachusetts receive about 50'7r of the total dollars invested by venture capital funds in this country. a1 new york. there are several dozen venture capital companies located in new york, with the majority located in new york city. many of the new york city based firms have links with financial institutions, such as commercial banks (for example, citicorp, irving trust, chase manhattan) and investment companies (for example, merrill lynch, salomon bros., donaldson lufkin jenrette). new york is a "net provider" of venture capital; more than 80% of the investments of venture capital firms based in new york go to companies located outside the state. other regions. in many ways the venture capital climate in illinois is similar to that of new york. many of the venture capital firms in illinois are linked to financial institutions (for example, first chicago venture capital company, first capital corp. of illinois, continental illinois venture corp.). other regions have been prominent in the venture capital area. texas has historically funded energy related companies. this has resulted in problems due to the recent slump in energy prices. minnesota has had its share of technology investments by venture capital firms located in that state. a good example is the funding of control data corp. (minneapolis, mn), which spun off from the sperry univac project in the 1950s and which later gave rise to cray research. control data has since become an investor in early growth technologies, as was the case with its acquisition of vtc, inc. (bloomington, mi), which manufactures high performance integrated circuits. (more recently, control data sold 80% of vtc, which was unprofitable, to privately held seattle silicon.) locations for business grvwrlt. the data on locations of venture capital investments provided above should not be surprising since it parallels somewhat the locations of business growth in this country. out of the 500 fastest growing, small private companies included in each of the recent "inc. 500" lists, the greatest number has been in california (which had 84 in the most recent listing). in each of the last few years california, new york and massachusetts have been among the six states with the largest number of "inc. 500" companies. one point is critically imponant when it comes to location: although the data just presented may suggest that location can dictate the success of the financing effort of a company, it is the quality of the company rather than the city in which it is located that will ultimately determine the future success of the venture. (see the last section of this article on "how venture capitalists make investment decisions.") ini esimenrs based on stage of rfevelopmenr. over the past decade there has been a decrease in the relative level of investment in early stage ventures with a corresponding increase in the level of investment m later stage ventures and lbos. for example, in 1983 start-up ventures represented 27% of the investments of the "100 largest capital venture firms in this country" or more than double their current amount, and lbos represented 14% of their investments or less than half of their current amount. the change in lbo mvestments during that time has been dramatic, especially from 1983 to 1988, when there was a nearly five-fold increase from $280 million tu $ 1.32 billion. wlrrtr prompted ibis change in im esnneni pirrlixriip)tv? one of the reasons for this change m investment philosophy is the size of the venture capital funds. as several of the funds have increased in size to the hundreds of millions of dollars in paid-in capital, the trend has been away from start-ups in favor of more established companies. 43 this should cenainly not imply that all large venture tirms have abandoned stun-ups. for example, e. m. warburg, pincus & co., whose $3.4 billion in paid-in capital easily makes it the largest venture capital firm in this country, has always made its investments in three distinct types of situations; undervalued assets, developing/expanding companies, and start-ups. the company uses the following framework to balance the risk/reward levels of these three types of investments: (a) undervalued assets represent 50% of the fund's dollars of capital but only 20% of the number of deals; (b) developing/expanding companies-35% in terms of dollars and 30% in terms of number of deals; and (c) start-ups —10-15% in terms of dollars and 50% in terms of number of deals. cenainly, warburg, pincus has not abandoned stan-ups, as evidenced by the $ 180 million it invested in 51 start-up situations over the past decade. the result of this investment philosophy has been quite appealing to thc limited partners of warburg, pincus. the firm had a 25% compounded annual return for its investment portfolio over a 20-year period from the time it was formed in 1971 through the end of the decade of the '80s. thus, the trend away from start-up investmcnus has been more evidenced by the drillars imesred than by the nmnher of deals funded by the venture capital firms. as noted by frederick m. haney, of 3i ventures in newport beach, california, "when you have that much money, the tendency is to put it out in large chunks. very little is likely to go to early stage companies" (gupta, 1989). nonetheless, many of the larger venture capital companies are investing more actively in later stage investments, particularly in lbos and less actively in start-ups. many "purists" in this industry are quite upset by this evolution in investment philosophy. certainly, a strong case can be made in support of lbos, as evidenced by the creation of jobs, economic gains through increased taxes and so forth. however, the typical argument against funding lbosand often rightly so —is that the process has resulted in many venture capitalists'ecoming strictly investors rather than investors/advisors. this clearly runs counter to the classic philosophy of venture capitalists whose objectives were clearly to build companies. lf)o investments. venture capital firms, even the "traditional" venture capital firms, are investing increasingly larger percentages of their portfolios in lbos. bain capital of boston, for example, which is well known for its early stage investment in staples, a newton, massachusetts based retailer of office supplies, has earmarked more than 75% of its recent investments for buyouts. several other venture capital firms, which were formed with the intent of funding early stage ventures, invest either primarily or exclusively in lbos. the leading investors in lbos among venture capital firms include first chicago venture capital, boston banc capital, schroder ventures, security pacific capital, manufacturer's hanover venture capital and chemical venture partners. it should be noted that even though venture capital firms are investing more in buyouts, they will often assist management in the same way as they do for early stage ventures; in that way, they are building companies. for example, hambro international, a new york-based venture capital firm, recently invested $3.6 million in the buyout of building technologies corp., a manufacturer of metal building systems, from southwestern general corp. (cincinani, oh). hambro also raised another $40 million in a combination of straight debt and subordinated debt. it is hambro's plan to work with management over the next few years to streamline the company and to expand its markets. of course, in some cases, venture capital firms have virtually ignored the newer, smaller companies in their portfolios, which can become even more prominent as selected investments 44 in lbos and later stage ventures become even larger. for example, consider the case of an early stage "high tech" manufacturing company in new england, which was recently able to raise nearly $ 1 million from a leading venture capital firm located just a few miles from the company. unfortunately, the amount raised represented less than 1% of the venture capital birm's paid-in capital, with the vast majority of its investments being targeted to later stage ventures and lbos. despite the fact that the venture capital firm is represented on the company's board, the company claims that it has received very little from the venture capitalists other (han a "large check to help scale up production." the informal venture capital industry "angels" the structure of the formal venture capital industry, which includes the major venture capital firms which raise money from investors and invest in growth-oriented companies, is fairly well defined. however, recently, many entrepreneurs have sought funding from "angels," wealthy individual investors who are most interested in providing capital to start-up businesses. the notion of "angels" is nothing new. after all, in 1903 henry ford's automobile company was started partly as a result of five angels who invested $40,000 in the venture. the idea is commonplace today. countless ventures get their start through the funding by such angels. for example, when ben bush of st. petersburg, florida launched brass letters & logos, inc., he relied on personal contacts (as well as self funding) for the necessary start-up capital. the company used the capital to enhance its manufacturing process and to expand the distribution network for its merchandise. (brass letters was recently acquired by a large distributor.) angel nenvvrks. angels, which are also referred to as "adventure capitalists," can be found in private clubs throughout the nation. joseph mancuso, director of the center for entrepreneurial management in new york, has organized "angel" chapters in several large cities. in addition, professor william wetzel of the university of new hampshire has developed the venture capital network (vcn), a computerized database to link entrepreneurs with investors. the impact of "informal investors" according to wetzel (1988). who is the leading researcher in this country on informal investors, if mstitutional venture capitalists finance fewer than 1000 start-ups annually, where do the other 24,000 (give or take a few thousand) find their equity capital? wetzel suggests that informal investors probably fund 20 times more ventures than do established venture capital companies. frank swain, chief counsel for advocacy of the small business administration (sba), reponed in a recent issue of the journal vf accountancy (1988) that self funding and informal investments account for 75% of all equity investments in small business. a large pool available for start-up capital wetzel indicates that there may be as many as 250,000 informal investors (as compared to the approximately 2,000 formal venture capitalists) in this country, responsible for a $50 billion pool of venture capital (as compared to the $ 35 billion pool of formal investors). moreover, as suggested by gaston (1989), who was coinmissioned to do a study for the small business administration (sba), informal investors are the major sources of start-up capital, investing approximately $27 billion per year, primarily in stan-up deals. 45 as indicated earlier, established venture capital companies have been devoting a larger portion of their portfolios to later stage investments at the expense of start-ups. that has made informal investors prime candidates for the funding of early stage ventures; in fact, the informal investors tend to favor the ekrly stage investments over later stage ones as they feel they can get involved in the growth of the company as early as possible, as noted by seymour & wetzel (1981) and by brophy (1982), informal investors, who are often the financial backers of technology stan-ups, are often interested in funding the following ventures: (a) which are seeking approximately $20,000-$50,000 in start-up capital; (b) which are in close proximity ,to where (hey live; (c) in which they can also play an active consulting role; and (d) which are appealing in terms of product features and potential returns. how venture capitalists make investment decisions the nature of the venture capital investment decision the classic study involving the "modeling" of the venture capital decision process was conducted by tyebjee and bruno (1984). the model describes the following sequential process of venture capital investment activity: (a) deal origination —by which deals enter into consideration as investment prospects, some of which, particularly technology ventures, are actively sought by investors (timmons & bygrave, 1986), but most of which enter into contention via the referral process; (b) deal screening —in which prospects which are likely to number over 1000 per year for an established venture capital company are narrowed down in series of stages to a few for in-depth evaluation; (c) deal evaluation —in which prospects are evaluated based on their relative levels of perceived risk and expected return; (d) deal srrucruring —which describes the negotiation for equity position; and (e) post investment activities —which includes management recruiting, strategic planning, locating expansion financing and assisting in the "cashout." according to bruno and cooper (1982), more than 50% of such ventures that go through the formal venture capital process are likely to either go public, merge, or be acquired. factors considered by venture capitalists when making investment decisions. researchers have also examined the factors considered by venture capitalists in funding entrepreneurial ventures. the study by tyebjee and bruno just noted found that venture capitalists make decisions regarding funding of ventures based on product market attractiveness, product differentiation, management capabilities, resistance to environmental threats, and cash-out potential. several practitioner books and articles dealing with securing venture funding provide support for this research (e.g., mancuso, 1985; rich & gumpert, 1985; schilit, 1990). factors considered to be most important. the "popular" books and anicles noted above all stress the importance of management in securing funding. this is consistent with the research of macmillan and his collagues (1985). who found that the two most important factors considered in the funding process were management related —the entrepreneur's staying power and the entrepreneur's familiarity with the target market. furthermore, they found that five of the 10 most important criteria in determining funding were related to the entrepreneur's experience or personality. the likelihood of receiving venture capital funding. consistent with the popular notion of the difficulty of obtaining venture funding, maier 46 & walker (l987) found that i'ewer than 5% of the proposals received by venture capitalists were funded. therefore, we would expect that entrepreneurs would have to look elsewhere for funding. this is supported by a recent study conducted by the national federation of independent businesses infibi, which found that 72% of new businesses get at least part of their financing from friends and relatives (bartlett, 1986). turning on investors duc to the riskiness of the venture business (only a limited number of investments provide adequate returns) investors set rigorous standards in evaluating venture proposals. a large majority of proposals are rejected, due either to the nature of the product or service, the quality of the business. the capabilities of management, or the preparation of the business plan itself. there are several specific guidelines to follow in order to "tum on" investors. this necessitates that the entrepreneurial team demonstrate the following four features: (a) a clear definition of the business: (b) evidence of marketing capabilities; (c) evidence of professional management; and (d) an attractive financial arrangement. definition of ihe busiiiess. there are three basic questions regarding the business that, when answered, provide a working understanding of the definition of thc business this is also known as the mission or scope of operations of the business (i.e., what business are you in?; in other words what is the product or service? what is the industry? what is the target market?). no small business venture can be "all things to all people." thus, in the earliest stages of a business it is critical that the company develop a logical, somewhat stable business definition or strategy and avoid any dramatic changes to it. any alteration of one or more of these three features —the product or service, the industry, or the target market —results in a new and riskier strategy for the firm. of course, as the business expands, the only way to accomplish significant growth will be to alter its current business definition, whether by expanding the product line, entering a new industry, or seeking a new market for a given product or service. investors, however, will want to see some initial stability in the company's strategy or business definition. marketing capabihiies. a company's marketing capabilities are evidenced by the product's benefit to the user and by its marketability. demonstrating user benefit will necessarily strengthen the entrepreneur's contention that the company can generate sales and will, therefore, be an attractive investment opportunity. benefits to the user vary considerably from product to product. however, there are a few guiding questions to demonstrate this characteristic: will the product save the customer money? will it save time? will it provide status? will it enhance the customer's lifestyle? how long will it take to pay for itself? even if the product has benefit to the user. a critical question is whether enough customers will buy it. a well recognized market can certainly enhance the likelihood of obtaining funding. investors generally want to see some indication that customers or clients have used the product or service —even if only on a trial basis (for example, a prototype) —and are happy with it. obviously, the best mdicator of whether there will be customers in (he future is if the business has had customers in the past. as a general rule, most investors prefer to fund companies with some operating history (this provides some assurance of success) although it is not necessary that the venture be operating profitably. stated another way, investors would prefer to have their money used for production and selling. rather than for product development and market research, thereby reducing the risk and accelerating the time span for profits to be generated. 47 prafessiona/ management. investors would much rather fund experienced managers who can work together as a managerial team than sole entrepreneurs. the management team should have a demonstrated track record and competences in each of the critical functional areas— marketing, finance, product design and production, control, and personnel. investors generally agree that the most important factor in evaluating a venture capital opportunity is the management of the company. investors will almost always prefer a first rate management team with a second rate product over a first rate product with a second rate management team. financial arrangemen/. inves(ors prefer to see a structured arrangement presented by the entrepreneurial team which describes the capital needs of the venture and which proposes a fair equity agreement for the two parties involved. investors maintain a (ime horizon of five years (or a range of three to seven years) in which to realize their returns on their initial investment. during that time period, they expect their inves(ment to increase in value by 5-15 fold, net of inflation. what dictates the return on investment expected by a typical investor? essentially, it is based on the riskiness of the investment. thus, the higher the riskiness of the investment, the greater the expected return for the investor. riskiness is generally based on two factors which were discussed earlier: (a) the nature of the product or service; and (b) most importantly, the quality of the management of the venture. newly developed ideas are more risky than established products or services; investors generally wish to see products or services that are already being used and have been accepted by customers. (having exclusive rights to a product or process via copyrights or trademarks, however, will make even a new product seem attractive in the eyes of the investor.) similarly, individual entrepreneurs are seen as more risky than are established management teams. conclusion we examined the nature and activities of the formal and informal venture capital industry, an industry that has had a tremendous impact on the development and growth of entrepreneurial companies. in summary, the formal venture capital industry includes several hundred venture capi(al firms that raise capital from investors and that use that capital to invest in privately held emerging growth companies; the venture capital industry has grown 10-fold over the last dozen years or so with several individual venture capital firms over sl/2 billion in size; although traditionally venture capitalists invested in early stage "high tech" businesses, there has been a movement towards investments in "low tech," later stage ventures as well as in lbos; the informal venture capital industry may be larger than the formal venture capital pool and is an especially important source of funding for early stage ventures; and investors, be (hey formal or informal venture capitalists, tend to make investment decisions based on the definition of the business, marketing capabilities, management capabilities, and the attractiveness of the financial arrangement. footnotes 'the reader should no( be misled by the $200 million figure in management fees for the warburg, pincus fund. firstly, warburg, pincus would receive that amount only if the fund were in place for its full lifetime of 12 years; this has not occurred for any of its previous funds. in addition, contrary to the practice of many other venture capital firms, warburg, pincus does not take any investment banking or other transaction fees from its funds. 4b references banlett, s. (1986, november 3). it will get a bit easier to find startup cash. business week, pp. 100-104. brophy, d. (1982). venture capital research. in c. kent, d. sexton, & k. vesper (eds.), fiicyclr&pedia vf enirepreneurship. englewood cliffs, nj: prentice hall. bruno, a.v. & cooper, a. (1982). patterns of development and acquisitions for silicon valley startups. technovaiion, 275290. bruno, a.v., tyebjee, t.t., & anderson, j.c. (1985). fmding your way through the venture capital maze. business morieviis, 27: (i) 12-19. bygravc. w.d. (1987). syndicated investments by venture capital firms: a networking perspective. journal of business veiiiuriiig, 2 (2): 139-154. gaston, r. (1989).finding pri vare venture capiial for your firm. new york: john wiley & sons. gorman. m., & sahlman, w. a. (1986). what do venture capitalists do? prvceedings: babson resenrcli conference, 414-436. gupta, u. (1989, september 7). venture capital funds grow larger and larger. the wall street journal, p.ci (col.2). kravitz, l. (1985). what venture capitalists want. in venture's guide iv international venrure capital. new york: simon and schuster. libecap, g. d. (1986). the dialogue on venture capital markets. in g. d. libecap (ed.), advances in the study of enirepreneurship, innvvaiion, & econvmic grvwih. greenwich, ct:jai press. macmilian, i. c., siegel, r., & subba narasimha, p. n. (1985). criteria used by venture capitalists to evaluate new venture proposals. journal of business venturing, i: 119-128. maier, j. b. & walker, d. a. (1987). the role of venture capital in financing small business. journal of business venturing, 2: 207-214. mancuso, j. r. (1985) how io wrire a winning business plan. englewood cliffs, n,j.: prentice hall. rich, s. r.. & gumpert, d. (1985). business plans ihai win $$$. n.y.: harper &. row. schilit, w. k. (1990).the emrepreneur's guide iv preparing a winning business plan & raising venture capital. englewood cliffs, n.j.: prentice hall. seymour. c., & wetzel, w. e. (1981).informal risk capitalin new england. durham: unh. staff. (1988, december). journal vf accountancy, /66(6), 17. timmons. j. a., & bygrave, w. d. (1986). venture capital's role in financing innovation for economic growth. jvurnal of business venturing, i: 161-176. tyebjee. t. t.. & bruno, a. v. (1984). a model of venture capitalist investment activity. management science, 30(9). 1051-1066. wetzel, w. e. (1986). informal risk capital. in d. l. dexton, & r. w. smilor (eds.), the ari anil science of enirepreneurshi p: (pp. 85-117).cambridge, ma: ball inger publishing co. 49 fostering entrepreneurial ecosystems and the choice of location for new companies in rural areas – the case of germany | published in journal of small business strategy loading [contrib]/a11y/accessibility-menu.js jsbs menu articles articles all for authors editorial board about issues ethics statement sponsors search sorry, something went wrong. please try your search again. × articles blog posts rss feed enter the url below into your favorite rss reader. https://jsbs.scholasticahq.com/feed × articles vol. 31, issue 4, 2021 november 16, 2021 cdt fostering entrepreneurial ecosystems and the choice of location for new companies in rural areas – the case of germany matthias liedtke, reza asghari, thomas spengler, startup ecosystems rural entrepreneurship regional entrepreneurship innovation system ccby-4.0 • https://doi.org/10.53703/001c.29480 photo by sincerely media on unsplash jsbs liedtke, m., asghari, r., & spengler, t. (2021). fostering entrepreneurial ecosystems and the choice of location for new companies in rural areas – the case of germany. journal of small business strategy, 31(4), 76–87. https://doi.org/10.53703/001c.29480 save article as...▾ pdf xml citation (bibtex) data sets/files (13) download all (13) table 1. definition of the term startup ecosystem download figure 1. characteristics of an entrepreneurial ecosystem download figure 2. main actors of an entrepreneurial ecosystem download table 2. nationwide support programs for business start-ups in germany download figure 3. number of startups by type of region (nuts1-level) download figure 4. number of startups by type of region (nuts2-level) download figure 5. number of startups by type of region (nuts3-level) download figure 6. proportion of startups located in rural areas by state (in %) download figure 7. proportion of rural entrepreneurship (nuts2-level) download figure 8. evaluation by region (nuts2-level) download figure 9. evaluation of regional startup ecosystem download figure 10. collaboration with other startups, firms or research institutes (by area, in %) download figure 11. average number of collaborations (by area) download sorry, something went wrong. please try again. if this problem reoccurs, please contact scholastica support error message: undefined × view more stats abstract startup ecosystems have become a popular field of research in recent years, not only for researchers but also for regional policy makers. contemporary research on startup ecosystems generally focuses on urban areas and hubs such as silicon valley, berlin, or tel aviv. however, little is known about startup ecosystems in rural areas. to fill this research gap, the research objective of this paper is to analyse disparities between entrepreneurial ecosystems in urban and rural areas in general and specifically in germany. the major aim of this study is to examine the importance and development of startups in urban and rural areas and to identify challenges and opportunities for rural areas in order to set the right impulses. the research focus of this paper is to discuss which stakeholders and determinants affect the founders in their location decision. using german startup monitor (dsm) 2019 data, it is found that the lack of network ties and opportunities to collaborate with established corporations; availability of qualified personnel; access to venture capital; an investment and economic policy initiative appear to be obstacles that prevent founders from starting up in rural areas in germany. the results also confirm the findings of other studies that entrepreneurship tends to be an urban event. this study also provides suggestions for future research. introduction entrepreneurship makes an important contribution to the development of an economic region. due to their influence on competitiveness, innovation and knowledge transfer, entrepreneurial activities have an immediate impact on regional economic development and is considered an engine of regional growth. consequently, there is an academic and political interest in understanding entrepreneurial activities in general and the regional factors that influence emergence and development of entrepreneurial ecosystems, in particular (ács & szerb, 2007; fornahl, 2003; stam, 2009; sternberg, 2009). several studies show that the subject of regional entrepreneurship is a complex topic with multiple independent variables as well as dependent variables and interactions among them playing an important role in entrepreneurial processes. only a few studies have focused on analysing regional variations or specific entrepreneurial ecosystems in the context of entrepreneurial activities in germany (e.g. baron & harima, 2019; kuckertz et al., 2018; sternberg & litzenberger, 2004; stuetzer et al., 2014; tamásy, 2006; wyrwich et al., 2016). in germany, the few studies that focus on interregional differences in entrepreneurial activities have mainly used secondary data sets collected for other purposes (tamásy, 2006). as we still know little about how entrepreneurial ecosystems function and what the associated policy challenges are, it is important to explore the key elements of entrepreneurial ecosystems and their specific roles within these ecosystems in more detail (audretsch et al., 2019; autio & levie, 2017; tripathi et al., 2019). besides analysing key stakeholders of entrepreneurial ecosystems, it is also of utmost relevance to examine and identify other determinants, such as particular pull factors (autio & cao, 2019; baron & harima, 2019). the purpose of this paper is to examine the importance and development of startups in urban and rural areas in germany and to identify challenges and opportunities for rural areas in order to set the right impulses. it also focusses on the determinants that affect the choice of location for startups in rural areas. the three central research questions in this paper are: how do rural areas differ from urban areas in the context of entrepreneurial activities? what factors affect the regional distribution of startups? what measurements need to be taken in order to foster entrepreneurial ecosystems in rural areas? this paper contributes to the existing entrepreneurship literature by further opening the black box regarding entrepreneurial ecosystems in rural german areas. a special focus is hereby put on the key stakeholders and dynamics that lead to innovation activities and to the transformation and growth of these regional entrepreneurial ecosystems (doloreux & dionne, 2008). in this paper, we present an empirical analysis of the entrepreneurial landscape in germany with a particular focus on entrepreneurial ecosystems in rural areas. we begin with a brief literature review and a description of a regional entrepreneurial ecosystem. in the next sections we elaborate on key definitions and key stakeholders of startup ecosystems. after the presentation and discussion of the results, we finish with the sections policy implication and conclusion, limitations and future research. literature review starting up a business is considered a regional or local event. the existing literature emphasizes the relationship between entrepreneurial activities and regional development. however, it is important to note that entrepreneurial activities are not evenly distributed across countries or regions (armington & ács, 2002; stam, 2009; sternberg, 2009; stuetzer et al., 2014). most research done on entrepreneurial ecosystems focuses on the national level (sternberg & litzenberger, 2004), urban areas or entrepreneurial hotspots such as silicon valley (pique et al., 2018), berlin (baron & harima, 2019) or tel aviv (fraiberg, 2017). current research highlights the necessity to analyse the development, differences and governance of entrepreneurial ecosystems because a better understanding of entrepreneurial ecosystems is of high political interest (ács et al., 2018; audretsch et al., 2019). of the total number of all cities in the federal republic of germany, 80 cities are assigned to the “large city” category. the remaining cities in germany are medium-sized or small cities (statistisches bundesamt (destatis), 2018). these medium-sized and small cities are primarily located in rural areas. even though the majority of startup activities in germany take place in the metropolitan areas of large cities, current entrepreneurship research shows that not only large cities, but also medium-sized and small towns have the potential to establish themselves as successful technology locations in the future due to various influencing factors (e.g., more favourable rents and land prices) (fritsch, 2019; kollmann et al., 2019). with reference to the german federal institute for research on building, urban affairs and spatial development rural areas in germany are defined as regional areas with a population density of less than 150 inhabitants per km². there are many reasons why startups prefer to locate in metropolitan areas in germany. the founding of a company is considered a regional or local event. founders usually start their own company where they feel a local connection. this can be either the place of birth, the workplace, the place of residence or the embedding in social networks (stam, 2009). bosma and sternberg conclude that startups are more common in urban regions based on perceived opportunities than in non-urban areas (bosma & sternberg, 2014). whereas in the usa, the motto “fail often, fail fast, and fail cheap” is well known, in germany failures or insolvencies create a socially stigmatized situation. in addition, in comparison with the usa, germany is lagging in terms of willingness to found new businesses. another major difference between the us startup landscape and the german startup landscape is that german startups are forced to expand early, due to the fact that germany has a relatively small domestic market (konrad adenauer stiftung, 2011; mckinsey & company, 2018). developing prosperous innovation regions is a common goal of policy makers in germany at a national but also regional level. in this context an entrepreneur creates an innovation and has the ability to fully implement it on the market (autio et al., 2014; florida et al., 2017; kollmann et al., 2019). research indicates that it takes more than just top-down policy interventions to foster entrepreneurial activities and to build entrepreneurial ecosystems (boschma, 2009; mason & brown, 2014; sternberg, 2012). bottom-up actions, such as increased network activities between regional startups and other stakeholders, are sometimes more effective (mason & brown, 2014; thompson et al., 2018). a well-functioning innovation region has the capability to strengthen and renew itself in the long term (etzkowitz & klofsten, 2005). defining entrepreneurial ecosystems in order to understand the determinants that affect the founders’ choice of location, it is crucial to have a common understanding of the term entrepreneurial ecosystems. entrepreneurship research lacks a commonly accepted definition of the term “entrepreneurial ecosystem” (audretsch et al., 2019; brown & mason, 2017; molina & maya, 2017; stam, 2014). table 1 highlights a few selected definitions which also apply to german startup ecosystems. table 1.definition of the term startup ecosystem source definition ács et al., 2014 “dynamic, institutionally embedded interaction between entrepreneurial attitudes, ability, and aspirations, by individuals, which drives the allocation of resources through the creation and operation of new ventures.” cohen, 2006 “[…] a diverse set of inter-dependent actors within a geographic region that influence the formation and eventual trajectory of the entire group of actors and potentially the economy as a whole [which] evolve through a set of interdependent components which interact to generate new venture creation over time” isenberg, 2011 “entrepreneurship, to be self-sustaining, requires an ecosystem, and an ecosystem requires proximity so the different domains can evolve together and become mutually reinforcing. entrepreneurship education can support capital formation, and capital formation can support government reform.” stam, 2015 “a set of interdependent actors and factors coordinated in such a way that they enable productive entrepreneurship.” though several different definitions of the term “entrepreneurial ecosystems” exist, most definitions commonly emphasize the relevance of proximity and interdependencies among different stakeholders and key factors within the entrepreneurial ecosystem (brown & mason, 2017). as each entrepreneurial ecosystem has its own network structure, it is different and unique. this also leads to the issue that fostering entrepreneurial activities is a complex process (kuckertz et al., 2018; roundy et al., 2018). an entrepreneurial ecosystem can be described by six significant characteristics (see figure 1). it is a network that includes several interdependent actors within a geographic region whose interactions lead to knowledge transfer and new venture creation (ács et al., 2014; brown & mason, 2017; cohen, 2006; isenberg, 2011). entrepreneurship research almost exclusively focuses on ecosystems in urban areas. research shows that entrepreneurship tends to be higher in urban areas than in other areas (bosma & sternberg, 2014). however, many unknown world market leaders, so-called “hidden champions” are based on rural areas (lehmann et al., 2019). figure 1.characteristics of an entrepreneurial ecosystem even though research on entrepreneurial ecosystem has increased significantly over the last decade, many aspects regarding the concept of entrepreneurial ecosystems remain unclear (autio & levie, 2017). to understand how an entrepreneurial ecosystem is structured and how it evolves, it is necessary to identify the stakeholders of this system. based on existing literature we identify eight relevant actors within an entrepreneurial ecosystem as shown in figure 2 (isenberg, 2011; malecki, 2018; tripathi et al., 2019). figure 2.main actors of an entrepreneurial ecosystem figure 2 shows that the startup at the heart of the entepreneurial ecosystem can be directly linked to all other stakeholders involved in the ecosystem. startups do not necessarily have to build relationships with all stakeholders. however, the more relationships that a startup builds with other stakeholders, the higher the chance of surviving (cukier & kon, 2018; mason & brown, 2014). relevant actors and factors of german entrepreneurial ecosystems with reference to the triple-helix-model by etzkowitz & klofsten (2005), universities, industries and policy-makers play a crucial role in building entrepreneurial ecosystems. in germany, higher education institutions (hei) are mainly universities, universities of applied sciences, and colleges of art and music. most hei in germany are financed by the federal government and the 16 federal states. many of these hei offer entrepreneurial education and help students develop entrepreneurial skills. however, whereas in the usa hei can be described as startup hubs and are considered excellent financial resources for startups, in germany, no university funds with sufficient capital and adequate risk aversion and startup affinity exist (konrad adenauer stiftung, 2011; mckinsey & company, 2018). the importance of entrepreneurship for the development of national and regional economies is widely recognized by politicians in germany. consequently, since the early 1990s, there have been numerous national and regional policy initiatives aimed at promoting startups and their growth (tamásy, 2006). besides, network activities are very important in new and existing startups and firms. in the early stage, startups in germany strive to build regional network ties before engaging in nation-wide network activities. established companies have a significant influence on the development and existence of entrepreneurial ecosystems, as many of them not only implemented accelerator programs, innovation-labs and startup hubs, but they also collaborate with startups. however, small and medium-sized enterprises (sme) seem to have not yet fully recognized the relevance of collaborating with startups even though collaboration might be considered beneficial for both in many cases (baharian & wallisch, 2017). regarding the financing sector, compared to the usa venture capital is less common in germany (national venture capital association, 2020; white star capital, 2020). for startups in germany, several funding sources exist on a national and regional level. however, particular funding schemes for startups settling in rural areas are very rare. a selection of examples for funding schemes on the national level is show in table 2. table 2.nationwide support programs for business start-ups in germany type titel funding organisation grant exist start-up grant project management agency jülich grant exist research transfer project management agency jülich grant financial support by consulting services for handicraft enterprises chamber of crafts grant funding of entrepreneurial know-how through information and training events/workshops federal office of economics and export control (bafa) grant invest grant for venture capital federal office of economics and export control (bafa) loan erp start-up loan universal kfw banking group loan erp capital for start-ups kfw banking group loan rp/eif fund european investment fund (eif) loan european angels fund (eaf) european investment fund (eif) source: piegeler & röhl, 2015 to foster entrepreneurial ecosystems in a german region, it is necessary to attract a sufficient number of startups which are mainly responsible for building an entrepreneurial culture and network structure within a region (wallisch et al., 2019). this is considered a great challenge for policy makers in german rural areas. regional entrepreneurship and innovation systems in a rural context pato & teixeira (2018) explain that “[…] rural spaces extend over regions and areas presenting a variety of activities and landscapes that comprise natural countryside, farmland, villages, small towns, regional centers and industrialized rural areas and incorporate a wide range of activities like farming, commerce, services and small and medium industries.” compared to urban areas, rural areas face particular problems regarding fostering entrepreneurial activities. these challenges include geographical, institutional, social, funding deficiency, poor infrastructure, marketing issues, technical support problems, difficulties in the procurement of raw materials and of human resources (pato & teixeira, 2018; singh, 2020). with reference to figure 2, knowledge transfer, for example, through network interaction or capacity building at higher education institutions is a key element of the entrepreneurial ecosystem approach. specifically, the transfer of tacit knowledge requires a high degree of personal interaction, innovation systems and entrepreneurial ecosystems that are embedded in the regional context (arnold et al., 2014; assenza, 2016). in the literature, however, there are different views on how to understand the importance of spatial proximity in terms of knowledge transfer and innovation creation. lundvall & borrás (1998) see a direct connection between proximity and the development of human capital, network formation, knowledge spill overs and synergy effects (lundvall & borrás, 1998). proximity can help minimize uncertainties through personal trust, which is established through face-to-face contact. in addition, tacit knowledge is often linked to a specific person or location. physical proximity to this tacit knowledge can result in gaining strategic advantages. regarding the relationship between innovator and user, physical proximity can create stronger ties (koschatzky, 2009). regional innovation systems (ris) have increased in relevance as policy has placed a greater focus on localised learning processes in order to give regions a competitive advantage (doloreux & parto, 2005). the transfer of knowledge is a key characteristic of a ris. according to dreger & erber (2011), innovation systems can be described as “processes of interactions between people, companies and other institutions [… ] by means of information, technology and knowledge exchange using financial resources to jointly create innovations.” as part of their “third mission” to commercialise research and promote the growth of local economies, universities have been given a central role in ris (brown, 2016). the fast-moving competition among companies is strongly influenced by globalisation. to this reason, it is particularly important for companies to maintain or distinguish themselves in the marketplace through their competitive advantages, among other things. chung (2002) sees ris as a "complex of innovation actors and institutions (universities, industrial enterprises, and public research institutions) in a region that are directly related with the generation, diffusion, and appropriation of technological innovation and an interrelationship between these innovation actors. despite the different definitions, it can be concluded that ris involve different actors, whose interaction plays a significant role in the creation of innovation. large firms engage in the search for and/or the production of economically useful technological and entrepreneurial knowledge as inputs for their ongoing innovation processes (karlsson & nyström, 2011). in line with the concept of ris, entrepreneurial ecosystems are systems in which the degree of collaboration and networks outweigh competition (audretsch et al., 2019). data and results this section presents the results for the questions posed about how rural areas differ from urban areas in the context of entrepreneurial activities. data collection and methodological approach our analysis is based on micro data from the german startup monitor (dsm) 2019. the german startup monitor is a survey being executed every year. it captures the status quo of the development of startups in germany and describes the german startup ecosystem (kollmann et al., 2019). 1,933 startups participated in the seventh round of the german startup monitor survey. data were collected between may and june 2019. the dsm was created in 2013 as the first comprehensive study of the startup ecosystem in germany. in order to compare the startup activities and entrepreneurial context between rural and urban areas, we added variables on nuts 2 level and nuts 3 level to the micro data set to indicate whether a startup survey in the german startup monitor 2019 study is located in an urban or rural area. nuts (nomenclature des unités territoriales statistiques) is a regional classification. for germany, nuts 1 subdivides the entire area of germany into 16 regional areas according to its 16 federal states. nuts 2 covers 38 regional areas and nuts 3 more than 400 regional areas (districts) (brandmueller et al., 2017). in a second step, the data were analysed using a geographic information system (gis) application. results the descriptive analyses have given a clear picture of how the entrepreneurial landscape in germany looks like. according to the german startup monitor 2019 most startups are located in the state north rhine-westphalia (398 startups) followed by berlin (311), bavaria (250) and baden-württemberg (241). these states are also among the top five in germany regarding gdp in 2019 (statista, 2019). the states with the lowest numbers of startups are saarland (17), mecklenburg-vorpommern (19) and saxony-anhalt (23). according to the gdp in 2019, these states were, besides bremen, the states with the lowest gdp (statista, 2019). this may lead to the conclusion that regional gdp matters for the choice of startup location. moreover, except the state saxony (55), the so-called “new states” of germany of mecklenburg-vorpommern (19), brandenburg (24), saxony-anhalt (22) and thuringia (23) are amongst the five states with the lowest number of startups according to the dsm survey 2019. this is another indicator for the divergence between the new states of germany and the old states of germany. figure 3.number of startups by type of region (nuts1-level) data source: german startup monitor 2019 the analysis of nuts 2 regions (figure 4) shows that currently five startup hubs exist in germany. these hubs are located in berlin, hamburg, munich, the rhine-ruhr metropolitan region (cologne, düsseldorf, arnsberg, münster) and stuttgart/karlsruhe. as the number of startups in the regions of frankfurt and hannover are also amongst the top startup regions, it can be assumed that the economic situation of the prospect location matters for startup founders. figure 4.number of startups by type of region (nuts2-level) data source: german startup monitor 2019 analysing the entrepreneurial landscape on the nuts3 level (figure 5) we identify regional clusters of startups. it also becomes clear that startups are spread out, but not evenly distributed across the federal states with many federal states accounting for not more than five startups. as the dsm 2019 shows and figure 5 reveals, many counties reported no startups. as startups are important for the economic development of regions, regional politicians need to find ways to foster entrepreneurial activities. figure 5.number of startups by type of region (nuts3-level) data source: german startup monitor 2019 the results confirm the findings of bosma & sternberg (2014) that entrepreneurship tends to be an urban event (bosma & sternberg, 2014). as the results depicted in figure 6 show, most startups surveyed in this study are located in urban areas. nationally, only 7.1 % of the startups are located in rural areas. however, the numbers vary across states and geographical location. the amount of rural entrepreneurship is higher in northern states with the highest proportion in mecklenburg-vorpommern (68.4 %), brandenburg (58.3 %), schleswig-holstein (39.6 %) and saxony-anhalt (31.8 %). figure 6.proportion of startups located in rural areas by state (in %) data source: german startup monitor 2019 these results become even clearer when taking a closer look at regions at nuts 2 level (figure 7). entrepreneurial activities appear to be more in the northern and eastern regions in germany and less in the western and southern parts. looking at the proportion of startups located in rural areas at the nuts 2 level, the findings reveal that the regions with the highest proportion (≥ 50 %) of startups in rural areas, with at least 10 startups, are mecklenburg-vorpommern (68.4 %), brandenburg (58.3 %) and lüneburg (50 %). to understand why startups are more likely to locate their business in urban areas, it is necessary to take a closer look at determinants that affect the evaluation of regional entrepreneurial ecosystems. figure 7.proportion of rural entrepreneurship (nuts2-level) data source: german startup monitor 2019 figure 8 depicts the evaluation of the regional entrepreneurial ecosystem by nuts 2 regions. it clearly shows that many regions have been rated “good” or “very good” on average, whereas other regions have received lower scores. figure 8.evaluation by region (nuts2-level) data source: german startup monitor 2019 the reasons for this divergence are manifold. taking a closer look at the overall rating separated by startups located in rural areas and startups located in urban areas, the results show that entrepreneurial ecosystems have received a significant higher score (3.64) than entrepreneurial ecosystems in rural areas (2.91). the survey asked the respondents to rate the overall regional entrepreneurial ecosystem as well as several determinants and stakeholders of the regional entrepreneurial ecosystem. these questions covered the topics such as digital infrastructure, network to other startups, collaboration opportunities with established companies, proximity to higher education institutions, and the availability of qualified personnel. in all key questions related to the evaluation, entrepreneurial ecosystems in urban areas are rated higher than entrepreneurial ecosystems in rural areas. all questions used a 5-point likert scale response that ranged from strongly poor (1) to very good (5). a summary of the measures used is outlined below (figure 9). figure 9.evaluation of regional startup ecosystem data source: german startup monitor 2019 figure 9 shows that regional politicians and startups in rural areas face several challenges regarding the development of their business, as does the entire regional entrepreneurial ecosystem. with the exception of the availability of affordable office space significant differences exist between rural and urban areas regarding all other items. according to this question, major challenges that startups in rural areas face are collaboration opportunities with established companies (2.77), the availability of qualified personnel (2.57), access to capital and investment (2.4) and economic policy initiatives such as regional startup hubs (2.87). the results show that most startup ecosystem in rural german areas cover only a few startups. the reasons for this are multifarious. it can be considered a chicken or egg causality dilemma. as these results reveal, startups are more likely to commence their businesses in regions where they see high market potential, a certain easy of entry and economic stability. as discussed earlier, startups usually need access to other stakeholders of the entrepreneurial ecosystem, as well as financial support. without the existence of such particular actors, it is less likely that an entrepreneur would start up a business in such an area. additionally, rural areas need to increase the number of local startups in order to build and sustain an entrepreneurial ecosystem. as previously described, networks play a crucial role in the success and development of startups and entire entrepreneurial ecosystems. the survey asked respondents whether they collaborate with other startups, established firms or research institutes. the results are shown in figures 10 and 11. startups in urban areas and in rural areas are aware of the importance of collaborating with other stakeholder of the entrepreneurial ecosystems. however, the share of startups which collaborate with other startups (48.4 % vs. 57.3 %), established firms (65.6 % vs. 67.2 %) and/or research institutions (45.7 % vs. 55.3 %) tends to be lower in rural compared to urban areas. figure 10.collaboration with other startups, firms or research institutes (by area, in %) data source: german startup monitor 2019 figure 11.average number of collaborations (by area) data source: german startup monitor 2019 taking the average number of collaborations with other startups, established firms and research institutions into account shows that even larger regional disparities between startups located in rural and urban areas exist. whereas startups located in rural areas collaborate on average with 1.32 other startups, 1.89 established firms and 0.67 research institutions, startups in urban areas collaborate on average with 1.94 other startups, 2.81 established firms and 0.96 research institutions. this indicates that the network ties of startups located in rural areas are weaker than startups in urban areas. this also leads to the conclusion that the overall network structure of entrepreneurial ecosystems in rural areas is less strong compared to those in urban areas. collaboration with other firms and research institutions is crucial for the transfer of knowledge and the creation of innovation; startups in rural areas should strive to strengthen their network ties. policy implication with this paper we investigate the determinants of the choice of location for startups. as the analyses in this article have demonstrated, there is a positive relationship between urban regions and the comparatively high number of startups as well as the better evaluation of the regional entrepreneurial ecosystem. the results pave the way for several policy implications. it must be the aim of rural communities to support new businesses ventures. the overall results show that a high potential exists for startup ecosystems in rural areas. reaching a sufficient number of startups appears to be a major problem for rural areas in the context of building startup ecosystems. one action could be the establishment of a local business incubator or close collaboration with an already existing incubator in a nearby region (see george, 2015). as the analyses show, physical and digital infrastructure play an important role for the development of startup ecosystems in rural areas. however, the recognition of these factors requires local policy makers to promote and execute a specific mix of policy instruments for a particular combination of contexts. such an approach requires a more detailed assessment of the regional state of the art and is a rather complex process. this can ultimately contribute to more effective policies (autio et al., 2014). an entrepreneurial governance structure would help regional policy makers in their aim to foster regional entrepreneurial activities (colombelli et al., 2019). conclusion, limitations and future research the purpose of this paper is to examine the importance and development of startups in urban and rural areas and to identify challenges and opportunities for rural areas. as the results depicted in the results section show, it can be concluded that the results align with the research questions. rural areas in germany differ from urban areas because of several different factors that affect entrepreneurial activities. besides factors concerning the digital and physical infrastructure, network ties to other actors within the regional startup ecosystem play a crucial role. as the results also highlight, collaborating with other startups, firms or research institutions are crucial for the success and development of startups. young enterprises and established firms should be aware of the advantages of joining forces with one another. established companies as well as sme should strive to work together with startups. in particular, many sme still miss out on opportunities that lie with collaborating with startups (baharian & wallisch, 2017). our results presented are based on a rather small sample of startups in rural areas in germany covered by the german startup monitor 2019. the presentation of this research is based on the dsm 2019. as this survey does not cover data for all districts in germany and therefore not all urban and rural areas, analyses on nuts3 level were limited. as a result of our research, it could be shown that further investigations of the relevance of entrepreneurial ecosystems in rural areas will be promising. future research could take a closer look at the network ties within entrepreneurial ecosystems with a special focus on the distinction between urban and rural area. moreover, as many startups are located in rural areas, even though urban areas appear to be more appealing as location for startups, motives for the decision to startup a business in rural areas should be further examined. despite the recent progress made in this research area, some research gaps remain. to better understand the structure and development of entrepreneurial ecosystem an existing black box is how the critical mass of startups required for developing a self-sustaining entrepreneurial ecosystem can be defined. currently, no clear definition exists of how many startups a startup ecosystem should cover at the minimum level. in addition, our study only focused on germany. future 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(2016). entrepreneurial role models, fear of failure, and institutional approval of entrepreneurship: a tale of two regions. small business economics, 46(3), 467–492. https://doi.org/10.1007/s11187-015-9695-4 google scholar powered by scholastica, the modern academic journal management system fall journal   volume 20, number 2 fall/winter 2009  1            disproportionate distribution of stock ownership among  initial founders in startup ventures: survey results and a  ranking of factors     joseph r. bell  university of arkansas at little rock  jrbell@ualr.edu          abstract    to date little research has been performed as to how founders of startup ventures  determine initial distribution of ownership.  in many instances, distribution of  ownership is proportionally divided, even though individual contributions to the  venture may vary widely. in these circumstances, a disproportionate distribution of  ownership would be more reflective of individual contributions to the venture, and  more importantly, determine the appropriate incentive (or “reward”) for each founder.   a survey of business owners was administered, and counter to much of the existing  literature, a significant percentage of the respondents divided ownership  disproportionately.  the survey provides a ranking of factors that can contribute to  disproportionate distribution of ownership.    keywords: founders, division of ownership, ownership, equity, distribution, dilution    introduction  distribution of ownership is important  for all businesses, for it ties to not only  motivation of team members and their  potential financial rewards, but also, in  some instances, to control and decision‐ making for the venture.  for the focus of  this paper, distribution of ownership  among the founders of a venture  becomes important when the objective  of the business is to significantly grow  the business and create a harvest or exit  event.  for a business to grow, it often  requires a founding team comprised of  members with diverse and  complementary skill sets necessary to  move the business forward.   this paper is designed to stimulate  discussion and research in determining  which factors contribute to the  disproportionate distribution of initial  ownership.  past research has discussed  disproportionate distribution of initial  s trateg y  journal of small business  journal of small business strategy        2  ownership but has not attempted to  establish a ranked order of the factors.   the paper sets forth a ranked order of  factors based upon the results of a  survey (“business ownership survey” or  “bos”).  this research begins a dialog to  assist entrepreneurs with divergent skill  sets and backgrounds to knowledgeably  allocate stock ownership on a  disproportionate, yet fair and  appropriate basis.   initially, the paper covers a review of the  literature by explaining the role of team  contribution to the venture and why  disproportionate distribution is  important.  it then goes on to cover the  different factors for the disproportionate  distribution of ownership while  proposing a ranked order for the various  factors based upon the bos results.  the  conclusion provides recommendations  for future research.    literature review  the importance of a team  cachon (1990) concluded that the lone  entrepreneur is a mythological being,  suggesting that most entrepreneurial  organizations require entrepreneurial  teams in order to function effectively,  while chowdhury (2005) suggests the  battle of the “lonely hero” is giving way  to a prevalence of entrepreneurial teams  as an emerging economic reality.  the  entrepreneurial team has been defined  as the group of people involved in the  creation and management of a new  venture (forbes, et al, 2006: cooper and  daily, 1997: kamm, et al 1990).  for an  entrepreneurial venture to successfully  raise external capital often depends  upon whether or not it is headed by an  effective venture management team  (vanaelst, et al, 2006).  additionally,  research has shown that the  management team is predominant in the  venture capital evaluation process  (zopounidis, 1994).  as forbes (2006) points out,  organizational behavior research about  teamwork has focused largely on  behavior in existing work teams and in  teams without hiring authority, ignoring  team formation.  thus, there is little  existing theory regarding  entrepreneurial team formation.    ensley, carland and carland (1998)  require three criteria be met in defining  the entrepreneurial team:  they (1) have  to jointly establish a firm, (2) have a  financial interest, (3) have a direct  influence on the strategic choice of the  firm.  other researchers have made the  equity stake condition stricter and have  imposed a minimum contribution before  one can be considered a member of an  entrepreneurial team (ucbasaran, et al  2003).    disproportionate distribution  kamm, et al (1990) identified  distribution of ownership as an  important cost of assembling effective  entrepreneurial teams.  according to  neal (2004), the default position for too  many entrepreneurial companies is to  divide stock ownership on a  proportional basis.  this position was  previously discussed by timmons (1975)  volume 20, number 2 fall/winter 2009        3    within the commune approach,  whereby founders demonstrate their  equality with such democratic  trimmings as the equal stock ownership.   while he noted that there are  temptations by team members to treat  each partner equally, however, this  should be considered a serious red flag.   timmons (1975) implied that  distribution of ownership is of serious  importance because it affects both the  founders internally and its interpretation  by investors externally.  timmons (1979) later stated that team  members who have much in common in  background and experience may  faithfully adhere to their peer status  when it comes to distribution of stock  and salary levels, and therefore, they  may insist that all of them receive the  same amount.  they unrealistically  assume that equality is best and make  little effort to address the complex  implications for motivating and  rewarding contributions to the budding  company.  the most successful ventures,  in contrast, intuitively or by design, do  not treat everyone equally (timmons,  1979).    the objective of disproportionate  distribution among initial founders is to  appropriately recognize the  contributions each team member will  make to the venture, and to adequately  motivate, or incent, their optimal  performance.  some refer to this  distribution as magic (barry, 2007).   timmons (1975) suggests that an  outsider experienced in these matters  can contribute significantly to an agreed  disproportionate distribution of stock  ownership among founders.  because  each venture is unique, it is preferable  for team members to reach a reasoned  decision concerning sensitive issues  [such as distribution of ownership],  rather than trying to apply some  predetermined model, but timmons  (1975) goes on to suggest that weighing  the criteria to determine disproportional  distribution of stock ownership can be  facilitated by an outsider familiar with  both proven approaches and the  behavioral dynamics that will emerge  and must be dealt with.  though  timmons (1975) dismisses a formula‐ based solution to disproportionate  distribution, he does recognize that  factors which contribute to  disproportionate distribution have  differing impacts (“weighing”) on how  much ownership should be allotted to  each founder.   franke et al. (2006) surveyed 51 venture  capitalists (“vcs”) and asked them to  rank founding teams based upon seven  different criteria.  the criteria included  factors such as prior experience, age,  level of education, field of education,  industry experience, etc.  their findings  held that vcs rank the importance of the  team characteristics as mirror images of  their own characteristics.  from this  paper’s standpoint, these findings do  two things:  first, the findings validate  that criteria or “factors” can be  journal of small business strategy        4  important in securing external  investment, and second, that vcs have  preferences in regard to those factors.  in  other words, first, factors are important  and second, as timmons (1975) and  franke, et al (2006) point out, different  factors can be regarded as having  differing levels of importance to the  success of the venture.  this is also  discussed later by dimov and shepherd  (2005), watson, et al (2003) and others.    importance of ownership: internal  some research has taken place  identifying ranges of ownership by  founder position within a venture.  the  2005 compensation and  entrepreneurship report and  information technology sponsored by  wilmer, cutler, pickering, hale and  dorr, ernst & young, and j. robert scott  (2007) and, the 2006 compensation and  entrepreneurship report and  information technology sponsored by  wilmerhale, ernst & young, and j.  robert scott, (2007), represent the sixth  and seventh annual compensation  reports.  through their research, they  establish a range of ownership for  founding team members (e.g., ceo,  cto, etc.) during different stages of  equity financing by financing round.   they begin by premising that there is  very little compensation data available  on private companies (compensation  and entrepreneurship report and  information technology, 2006).  their  studies involved 260 private companies  in 2005 and  over 300 private companies  across five industry segments in 2006.   the studies were performed to provide  an understanding of distribution by  position and financing round to assist  ventures in attracting, rewarding, and  retaining key personnel.   for example, the studies found that  prior to, or at the time of, the first round  of funding, a founder ceo in the year  2005 study retained an equity position  somewhere between 11.35% and 28.50%,  and in the 2006 study between 10.45%  and 50%.  and again, for example, the  foundering chief technology officer  (cto) for the years 2005 and 2006  should range between .34% and 2.00%,  and 4.00% and 15.00%, respectively.   this survey data establishes equity  ownership ranges by funding round and  founder position within the venture.   this paper proposes that the range  associated within each founder position  (e.g., ceo) is due, at least in some part,  to perceived individual backgrounds or  “factors” that can create the variances  within the range and across positions  held by all founders within the venture.    distribution of ownership becomes very  important since during a first round of  external investor funding, the venture  can expect to part with between 20%  and 40% of the overall ownership in the  venture, depending upon the pre‐ and  post‐money valuations ( headapohl,   2007).  by the time the founding group is  at ipo, the founders should expect to  have parted with somewhere between  70% and 80% of their ownership in the  venture (robbins, 2005).    volume 20, number 2 fall/winter 2009        5    to the founders this means that as the  companies mature their slices of the  ownership pie get smaller.  the  expectation, and hope, is that the overall  value of the pie has increased  substantially and the remaining founder  ownership interest is adequately large  enough to continue to incent  performance.  founders should therefore  be hyper‐sensitive to the initial  ownership distribution since their  ownership percentage at harvest may be  significantly diluted.    importance of ownership:  external  new venture teams can communicate  value through signals to potential  investors (busenitz, fiet and moesel,  2005: leland & pyle, 1977).  lester, et al  (2006) discussed signaling theories  employed by the top management teams  where investors look for clues which  might lead to increasing the odds of  picking a high‐quality firm.  by  increasing firm organizational legitimacy  through signaling, there is the belief that  individuals ascribe different values,  skills, and abilities to status  characteristics such as education,  contacts, and experiences.  some  examples of those characteristics  concluded that early‐stage investors  place a high value on educational  prestige while previous board experience  was not a critical factor.  also, investors  are interested in general experience  rather than experience confined to a  specific industry or situation.      prasad, burton, and vozikis (2000) add  that an entrepreneur’s shareholding  level as a signal of value may not always  provide an accurate perception because  an entrepreneur’s limited initial wealth  and consequently low shareholding level  could not adequately reflect the true  value an entrepreneur expects from a  project.  but what prasad, et al. (2000)  go on to state is that a more reliable  measure of the value of a new venture is  the proportion of the initial wealth of  the new venture team members vest in  the venture.  in other words, they  suggest that there are significant  founder contributions to a venture other  than just capital.  the ownership interest  held by the each member of the new  venture team can communicate the  value each member represents to the  overall venture.    signaling means that it is not only  important for the founders to  understand the underlying factors that  lead to disproportionate distribution of  ownership, but it also can communicate  a degree of competency to an external  funding group.  this would seem to  support the earlier contention by  timmons (1975) that equal treatment of  founders should be considered a serious  red flag, and in our example here, a  serious concern to external funders.    factor discussion  as neal (2004) and timmons (1975)  pointed out, in general, when founders  come together to form a business  venture, division of ownership will fall  journal of small business strategy        6  directly proportional to the number of  individuals that form the venture.  for  example, if four founders establish a  venture, each would share equally in  ownership and result in a 25%  ownership position for each founder  (neal, 2004).  this suggests that a  number of factors that should come into  play to evaluate true contribution, and  correspondingly division of ownership,  are often ignored.  more importantly,  when external funding is sought, it  “signals” prospective investors that the  founding team has not addressed the  issue of disproportional distribution.  is  this reflective of other difficult decisions  the team will face as the venture  matures?    researchers recognize that financial  capital is only one of the necessary  resources for startup firms (chandler,  1998, prasaad, parton and vozikis, 2000)  and of all resources available to firms,  human resources are perhaps of most  importance (chandler, 1992).  the  human capital provided by founders’  abilities is an important contributor to  the success of the firm (cooper, gimeno‐ gascon and woo, 1994).  dimov and shepherd (2005) found that  human capital provides for significant  variations in the overall firm  performance.  they suggest that a  significant contribution to the literature  may be provided by future research that  focuses upon the differences in skill sets  required to ensure success of venture.   watson et al. (2003), determined that  work experience, education, and  interpersonal functioning played a  significant role in understanding the  success of a venture.  they then went on  to state that human capital, in the form  of education and work experience,  positively influences firm performance  and should be a part of the equation for  evaluating venture potential.  the  combination of education and  experience provides a skill set that is  more relevant to the demands of  planning for and executing growth.  and  they conclude that these considerations  should be equally important to partners  and venture capital institutions when  making decisions concerning business  initiation.  beckman et al. (2007)  determined that entrepreneurial teams  are complex combinations of  experiences and affiliation and this can  significantly affect firm outcomes.   these factors become important in  attracting the attention of venture  capital firms in deciding whether or not  to fund a new venture.    timmons and spinelli (2007) suggested  that a good reward system reflects the  goals of the venture and places it in a  good position for valuation and raising  external capital.  they go on to suggest  issues that should be considered in a  quality reward system include  differentiation of contribution,  performance (outcomes) rather than  effort, and flexibility, in that rules may  change or even be eliminated.   considerations of value would include:  volume 20, number 2 fall/winter 2009        7    • the idea  • business plan preparation   • commitment and risk   • skills, experience, track record,  or contacts   • responsibility      they suggest that early contributions,  such as the originator of the idea or  significant contributions to the business  plan, have historically been overvalued.   robbins (2003) suggests the earlier,  bigger, or longer the contribution to the  company, the more equity a founder  should receive.  other factors in  considering disproportionate  distribution of stock ownership include  decision‐making control over the  business, early monetary contributions,  and in‐kind contributions.  robbins  (2005) also suggested that there are  several factors which need to be taken  into consideration including timing,  size, and duration of the individual  contribution.  as pointed out earlier, neal (2004)  asserted that too many entrepreneurs go  to the default position of proportional  distribution of stock ownership.  he  goes on to list criteria to argue  disproportional distribution of stock  ownership including:  • how much time has each of the  founders put into the company  before the formation of the  legal entity?  • how much sacrifice has each of  the founders endured to make  the company’s formation a  reality?  • will each founder be joining  the company on a fulltime basis  when the entity is formed?  • what skills does each of the  founders bring to the company?  • what are the relative values of  the skills that the founders  possess?  • how much capital, if any, has  been contributed by each  founder?    research design  for the target population, going‐concern  companies receiving counseling services  from the arkansas small business and  technology development center were  identified.  this created a population of  2807 clients, based on march 2008  records.  the author used a simple  random sampling strategy.  companies  that met the criteria of having started  their operations at the beginning of 2006  or earlier and who were still in the  business at the time of the survey were  accepted as the sampled population for  this study, which created an a priori  sample population of 1476 clients.    the author then developed the internet  survey instrument and placed it on‐line  with assistance from the arkansas small  business and technology development  center (asbtdc).  prior to the release of  the survey, three email messages were  written and sent to the selected survey  journal of small business strategy        8  population.  the researcher provided  asbtdc with text of the email messages  and the asbtdc contacted persons via  email regarding this study.  the first  email was sent a week before the survey  was available to potential respondents.   the second email was sent when the  survey was available and requested that  potential respondents complete the  survey.  the third email was sent the  following week as a reminder that the  survey was on‐line and available for  responses.  as required by institutional review  board guidelines, potential survey  respondents were assured of  confidentiality and anonymity.  it was  also noted that participation was strictly  voluntary among those contacted.  no  incentives of any kind were offered by  the researchers or asbtdc for  participation in the survey.  the  researchers are unaware of the identities  of the respondents and to the  researcher’s knowledge, are not  personally involved with any  respondents of this study.  after collecting the data, the respondent  pool was revisited.  cases of duplicate  respondents from the same company  were sorted and the primary respondent  was retained.  between these duplicates  and bounced e‐mails, 173 of the potential  client population (equal to 11.7% of the  total clients sampled) were removed  from the a priori sample population.  a  total of 162 survey responses were  collected among the 1303 remaining  valid e‐mails, which equates to a 12.4%  response rate.  survey respondents were asked to review  and complete a 28‐item survey  instrument.  the survey items of interest  to this paper include items one through  three which asked about founders’  ownership of, and allocation of equity  within, the firm.  the remainder of the  survey dealt with questions related to  the owners’ knowledge level concerning  business financing as well as their  financial contributions to the business  startup, external funding for the firm,  the company’s current capital structure,  owner attitudes toward funding options  for the firm, both historical funding and  potential future resources, and finally,  use of business planning and whether  they had used the plan for raising funds  in the past.  this paper focuses upon  questions one through three of the  survey (see appendix 1).    the data was assessed to determine  statistical significance of the responses  to question 3 using anova analysis.  it  is assumed that the data is normally  distributed; homogeneous covariance  and the samples are independent.  the  null hypothesis mean ranks of factors  determining ownership are equivalent;  alternative mean ranks are not  equivalent.  the null hypothesis is  rejected at p < .0001 and f = 6.02.  the  findings are that the results of the survey  were unlikely to occur by chance and the  anova analysis supports the ranked  order conclusions discussed in the  paper.  (see also, appendix 2)  volume 20, number 2 fall/winter 2009        9    business ownership survey  results  in stark contrast to the existing research,  when single ownership is factored out of  the response to question 2 of the bos  (“business ownership survey”), over  40% of the respondents (n=36) divided  ownership disproportionately.  all  respondents completed question 2.   question 2 asked respondents if they  divided ownership equally or  disproportionately.  in total, 126  responded to having distributed  ownership equally while 36 responded  that their distribution of ownership was  disproportionate.  question 1 asked for  the respondent to identify the number of  founders in the firm.  when the 79  single owner firms are factored out, 47  respondents indicated equal distribution  of ownership.    figure 1 – responses to survey question 2  the bos results of question 3 asked  respondents to rank the following  factors when considering  disproportional distribution of stock  ownership among initial founders.   figure 2 displays the results of survey  question 3 as an average from a 7‐point  likert scale with 7 representing most  important and 1 being least important.        0 10 20 30 40 50 1 2 47 36 how did you divide the original ownership in the  business? 1. equally 2.  disproportionately journal of small business strategy        10    figure 2 – survey results from question 3 – distribution criteria      financial contribution of the founders is  the first ranked factor when assessing  disproportionate stock distributions.    monetary contributions represent a very  critical component, not only when  estimating distribution of initial  ownership, but also for subsequent  valuations when raising external capital.   stevenson, roberts, and grousbeck  (1994) stated that investors perceive, and  rightly so, that the individual  entrepreneur will be more committed to  the venture if she or he has a substantial  portion of personal assets invested in the  venture.  investors view monetary  contributions to the business by  founders very favorably and refer to it as  the founder having skin in the game.   but with an early stage venture, in  general, little money has been infused  into the business by the founders while  the vast majority of ownership value will  come from more nebulous sources, as  chandler (1992) and cooper, et al (1994)  referred to as human capital.  the originator of the idea or inventor  founder(s) is the second ranked factor  when assessing disproportionate stock  distributions.    max levchin, the founder of paypal  believes an idea represents 5% of the  success of a company, whereas execution  represents 95% (cringely, 2005).   absent, additional, or ongoing  contributions to the venture, this is not  0 1 2 3 4 5 6 1 2 3 4 5 6 7 8 9 10 11 5.4 5.2 4.8 4.9 4.0 4.9 4.7 3.6 2.6 4.8 3.3 1.  financial  contribution 2.  inventor 3. time already  committed 4.  experience  industry 5.  prior startup  experience 6.  expected future  commitment 7.  experience  position 8.  education 9.  age 10.  controls  decisionmaking 11.  other volume 20, number 2 fall/winter 2009        11    an uncommon allocation of ownership  set aside solely for the inventor or idea  generator.   there seems to be a significant disparity  between the bos results and the  research, e.g., cringely (2005) and  timmons (2007), in regard to the  importance of the original idea or  inventor as compared to the survey.   since in most instances the individual  that responded to the bos was the  originator of the idea, there exists  potential for strong personal bias in the  responses.  the future research  suggested later in this paper addresses a  number of issues regarding  disproportionate distribution of initial  ownership, but importantly, this  particular result.  expectation of future time committed to  the venture (execution) by the founders  and past experience in the industry are  tied as the third ranked factors when  assessing disproportionate stock  distributions.    timmons (2007) suggested that early  contributions to the venture are  overvalued and ownership needs to be  tied to performance or execution.  those  individuals who quit jobs to devote their  full energies to the success of the  venture are obviously of significant value  versus individuals who are unwilling to  commit time or only assist with the  venture on a part time basis.   kor (2003) suggested that apart from  those individuals that are required for  the development of the technology,  experience in the industry is an  important contribution an individual  can make to an early stage venture.  kor  (2003) also asserted that industry  specific management experience  contributed to the competence of the  management team and is useful in  creating entrepreneurial growth.   roberts and berry (1985) found that  familiarity with the technology and the  market being addressed is the critical  variable that explains much of the  success or failure in new business  development.  ronstadt (1984) furthers  the criteria by noting that managerial  experience without product and market  experience can be illusory.  and  beckman et al. (2007) stated that having  broad functional industry experience  signals that the management team has  the requisite skills and capabilities and  provides access to venture capital  investment.  or, a bit to the contrary, as lester et al.  (2006) stated earlier, general experience  is more important than industry‐specific  experience, and cliff et al. (2006) found  that experienced entrepreneurs were  more “imitative”, while those with less  experience were more innovative.  this  obviously lends credence to the fact that  there are differing viewpoints as to how  important certain factors are and where  they might be ranked.  past time committed to the venture by  the founders, and who controls the  decision‐making, are tied for the fifth  journal of small business strategy        12  ranked factors when assessing  disproportionate stock distributions.    what historical contributions do for  ownership is to create overall value in  the company.  in other words, as the  value of the company, prior to an  external investment, increases, the  proportion of ownership that is retained  by the founders is greater.  therefore,  time committed to the venture to date  directly affects the ownership interests  of the entire founding team.  but, from  the investor perspective, the valued  contribution is not so much positioning  the company for funding but executing  the plan to the point of an exit or harvest  event (timmons, 2007).    robbins (2003) suggests that those who  make the decisions for the venture  should be entitled to additional  ownership.  past experience in the position by the  founders is the seventh ranked factor  when assessing disproportionate stock  distributions.    significant value would be placed upon  the individual bringing vast experience  to the venture (wasserman, 2003;  amason  et al. 2006).  it is also  contended that entrepreneurs are  generalists and benefit from a diversity  of previous experience (rubenson and  gupta, 1996).  beckman et al. (2007)  found that prior management  experience helped the firm obtain  venture capital and ultimately go public.  participation by the founder in top  management is more important to the  economic success of the firm than  industry‐specific management  experience. when participation and  industry specific experience are bundled,  it creates a significant competitive  advantage (kor, 2003).  not only is industry experience  important, specific skills of the new  venture team are also important in the  development of the new venture (roure  and keeley, 1990).    prior entrepreneurial endeavors by the  founders is the eighth ranked factor  when assessing disproportionate stock  distributions.    wright, westhead and sohl, (1998)  suggest that prior business ownership  creates assets which may include,  managerial and technical skills required  for subsequent venture success,  including marketing and financial  expertise, as well as the ability to  identify and serve market segments that  have both growth potential and profit  possibilities.  experience may bring a  range of contacts that can be built upon  in subsequent ventures.  they go on to  state that experienced entrepreneurs  owning a new business in the same  sector as their previous or current  venture are likely to be in a relatively  stronger position by virtue of that  experience than novice founders.  birley  and westhead (1993) defined a  “habitual” founder as having established  at least one other business prior to  volume 20, number 2 fall/winter 2009        13    starting a new independent venture.   case study evidence shows that habitual  entrepreneurs perceive clear benefits in  negotiating further details because of  their prior entrepreneurial experience  (wright et al. 1997).  ennico (2002) states that investors want  now, more than ever, to invest in people,  and they want to invest in people with a  track record.  rubenson and gupta  (1996) conclude that prior  entrepreneurial experience is one of the  best predictors of entrepreneurial  success.  interestingly, beckman et al.  (2007) found that prior startup  experience decreases the rate of  obtaining venture capital, but increases  the rate of initial public offerings.  having served in a leadership position in  prior entrepreneurial ventures creates an  undeniable track record.  this factor  alone can drive the investment decision.    once again, the bos results skew quite  negatively toward the importance of  prior business startups, ranking it eighth  out of 11 topics (see table 2).   there exist additional factors which may  influence the disproportionate  distribution of stock.    the following factors may also play a  role in a disproportionate distribution of  ownership among initial founders.  in  deference to the length of the bos that  respondents were asked to complete, not  all of the following factors were  requested as a part of the survey  instrument.  each factor is identified  with a brief explanation as to their  impact:  • highest level of education as  related to the position  (coleman, s., 2007, amason , et  al, 2006) – should someone with  a ph.d. receive a higher  proportion of ownership interest  than someone who does not  possess that level of educational  attainment?  what if the  education is not company or  industry specific?  dimov and  shepherd (2005) found a strong  positive relationship between  education as a proxy for general  human capital and firm  performance.  they found that  teams with higher specific  human capital – mba, law  education and consulting  experience – have lower  proportions of bankruptcies.  or  again as lester et al. (2006)  pointed out earlier, would  education play a different role if  your degree was from a notable  institution, or for that matter,  the same institution as the vc  principal?  the respondents of  the bos ranked level of  education as the ninth most  important factor (see table 2).  • age (amason  et al. 2006;  levesque and minniti, 2006;  chowdhury, 2005) – when the  founders of a venture are  journal of small business strategy        14  relatively young it has been said  that the presence of a “gray hair”  can significantly increase their  credibility.  should someone’s  experiences or wisdom count  toward a disproportionate  amount of ownership interest?   or, as pointed out by rubenson  and gupta (1996), consistent  [research] results are that youth  is associated with growth,  innovation, and risk taking,  while older general managers  are more conservative.  as  mentioned earlier by  wasserman (2003), significant  value is placed upon individuals  that bring vast experience to the  venture.  the respondents to the  bos ranked age as the least  important factor in regard to  disproportionate distribution of  initial ownership (see table 2).  • total number of founders  (chandler, 2005) – are certain  members of the founding team  disincented because the  ownership interest is spread  across a large number of  founders?  should the  percentage of ownership  received by one founder affect  the percentage of ownership  received by other founders?  • expected growth in  revenue/returns – should the  ultimate size or valuation of the  company play a role in  disproportional ownership  interests?  • dilution – when subsequent  rounds of funding are raised,  existing ownership interests are  diluted or reduced.  should  disproportional ownership  interests be considered in light  of possible future dilution and  possible loss of control,  decision‐making, or outright  ouster of part or all of the  management team? (wu et al.  2007; wasserman, 2003)  • industry – do different  industries lend themselves to  differing distributions, for  example technology or  bioscience?  • team diversity – what affects, if  any, does team diversity have on  distribution of ownership?  (chaganti et al. 2008; beckman  et al. 2007; becker‐blease and  sohl, 2007; chowdhury, 2005)    conclusion  this paper attempts to create a ranked  order for the importance of factors that  can support the disproportionate  distribution of ownership among initial  founders.  a number of previous  discussions initiated by timmons  (2007), robbins (2005), neal (2004), and  others have taken place illuminating  some of the factors that might  contribute to disproportionate  volume 20, number 2 fall/winter 2009        15    distributions, but none have attempted  to suggest which factors are more  valuable to the success of the venture.    this paper establishes factors in ranked  order and goes on to identify additional  factors, though secondary, that may  influence the disproportionate  distribution of ownership.  the  discussion of these factors is supported  by the aforementioned researchers and  is of importance to both the  entrepreneur and investor when the  outcome of ownership is incenting  performance and execution of the  business model.    the bos survey seemed to identify a  number of the factors ranked close to  what the qualitative research seemed to  suggest.  for example, future time  committed to the venture and past  experience in the industry were rated as  a very important contributing factors to  determination of distribution (4.9 on a  scale of 7) while cash contributions to  the venture ranked first (5.4).   these  rankings seem very much in line with  the existing research commentary.    factors identified within the survey  results that seem to be valued of greater  importance by the respondents than that  identified in the prevailing literature  include past time committed to the  venture (4.8) and the originator of the  idea or inventor (5.2).  a factor identified  within the survey results that seem to be  valued of less importance by the  respondents than that identified in the  prevailing literature includes prior  entrepreneurial experience (4.0).  this  result was well down on the scale and is  somewhat troubling since the emphasis  in the literature, and within the  investment community at large, seems  to place prior entrepreneurial experience  as being of significant importance.  overall, the bos may have  demonstrated that more entrepreneurs  are disproportionately distributing  initial ownership among founders, but  they may not always be doing so based  upon the correct factors.  this leads to a  discussion of the limitations of the bos  and future opportunities to expand upon  the research.    limitations of the resaerch  and future research  implications  to date, no other research has  attempted to place in ranked order of  importance factors that may affect  disproportionate distribution of stock  ownership among initial founders. the  selected rankings are chosen based upon  bos results. the paper suggests that  additional primary research needs to be  performed to give credibility to the  ordering and possible weighting of the  factors.  existing research seems to  support disproportional ownership  among initial founders and has  concluded that most founders  distributed ownership on a proportional  basis.  but the bos results seem to  counter the thought that most founders  distribute disproportionately, with over  40% of the bos respondents indicating  journal of small business strategy        16  they distributed ownership  disproportionately.  the news on that  front is good.  a concern seems to enter  the picture when the factors are ranked  in comparison to the existing qualitative  research perspective where some of the  survey results seem to be out of sync  with the research.  for example,  timmons et al. (2007) and others put a  very high emphasis upon past  entrepreneurial experience, yet the  survey group ranked it as eighth in  importance.  again, the inventor or  original idea person was ranked second  in importance whereas timmons et al.  (2007) suggests that the vast majority of  value is in the execution, and cringely  (2005), in quoting max levchin, the  founder of paypal, stated that the idea  represents 5% of the success of a  company whereas execution represents  95%.    the survey also neglected to ask why the  distributions were disproportionate.   this could skew the results.  for  example, if someone made a small cash  contribution to the venture and received  only a small ownership interest based  solely upon that cash contribution, what  they would receive would be  disproportionate, but only because they  were considered a “cash‐only” founder  and not a part of the ongoing  management team.    entrepreneurs in general, or for that  matter anyone, when surveyed and  asked to rank factors that they may,  and/or may not possess, will act much  like the vcs discussed earlier.  there  franke et al. (2006) observed the vc  response tended to reflect what they  look like (“mirror images”) rather than a  more neutral or unbiased opinion.    future efforts can look to two other  groups of respondents.  the first is to  identify serial or habitual entrepreneurs,  those who have repeatedly gone through  the process of business formation,  raising capital, and creating a harvest  event, and who may utilize  disproportional allocation of founder  ownership interests based upon certain  factors.  this group of entrepreneurs is  far more finite and more difficult to  identify and survey than the respondents  in the bos.  second, the author believes it may be  more appropriate, rather than targeting  entrepreneurs, that there may be a  greater appreciation for a  disproportional distribution of founder  ownership interests from the perspective  of the investor.  because investors are  driven by return on their investment,  they may have strong feelings about an  appropriate disproportional incentive  across not only the founders, but the  entire management team.  savvy  investors are well aware of incenting to  motivate performance to achieve desired  results.  the caveat seems to be the  results franke et al. (2006) encountered  with the “mirror image” results when the  vcs were surveyed.   this paper attempts to set a baseline for  factors which contribute to  disproportional ownership interests  volume 20, number 2 fall/winter 2009        17    among initial founders.  additional  primary research could sustain  assertions made herein or create new  viewpoints regarding disproportional  ownership interests.  the results and  assessment from this research could  demonstrate the following:  • garner a greater understanding  of the value/ranking investors  place upon differential factors  • identify new or additional  differentiating factors   • 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factor on a scale of 1 to 7, with 7 most important.  • financial contribution  • inventor or original idea person  • time already committed to the venture  • experience in the industry  • prior business startup experience  • expectation of future time committed to the business  • experience in the position  • level of education  • age  • whoever controls the decisions of the business  • other                      journal of small business strategy        22  appendix 2 – level of response    question 3  n  mean  std dev  a  28  5.500000000  2.02758751  b  29  4.724413793  2.15013700  c  29  4.37931034  2.19437256  d  29  4.62068966  2.07732302  e  29  3.51724138  2.02287345  f  29  4.55172414  2.16442349  g  29  4.24137931  2.08146879  h  29  3.48275862  1.63926573  i  29  2.17241379  1.25552964  j  29  4.96551724  2.16271586  k  11  3.09090909  2.25630430    joseph r. bell is an associate professor  of entrepreneurship at the university of  arkansas at little rock.  he is also the  associate director for business  development at bioventures, the  commercialization and technology  transfer arm of the university of  arkansas for medical sciences.  his  research focuses upon timely and  practical issues affecting  entrepreneurship and covers early‐stage  fundraising, entrepreneurship course  work, and case writing. his research  appears in such publications as  entrepreneurship theory and practice,  the entrepreneurial executive, and the  new england journal of  entrepreneurship. he has also written a  book entitled, “finding an angel investor  in a day: get it done right, get it done  fast”.  in addition, he has played a key  role in numerous technology and  bioscience startup ventures while  serving at the “c” level in four ventures.  reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy vol. 25 ● no. 2 ● 2015 journal of small business strategy vol. 25 ● no. 2 ● 2015 sbi 2015 conference distinguished teaching paper awarded by the small business institute® what pedagogical methods impact students’ entrepreneurial propensity? bonnie canziani university of north carolina, greensboro bonnie_canziani@uncg.edu dianne h. b. welsh* university of north carolina, greensboro dhwelsh@uncg.edu yuchin (jerrie) hsieh rochester institute of technology yhsieh@rit.edu william tullar university of north carolina, greensboro wltullar@uncg.edu abstract there is a dearth of research that investigates the effectiveness of different pedagogical methods for teaching entrepreneurship. this paper focuses on three learning design choices: experiential learning, use of teamwork, and focus on quantitative methods. the paper examines pedagogical variables that could contribute to raising student scores on constructs of change, risk taking, goal setting, feedback, and achievement as measured by our customized entrepreneurial propensity survey. results offer moderate evidence to confirm effects of experiential learning designs for goal-setting and weak evidence for feedback. additional findings suggest the need for rethinking the role of teamwork in entrepreneurship courses. keywords: entrepreneurship pedagogy, experiential learning, entrepreneurial propensity 97 journal of small business strategy vol. 25 ● no. 2 ● 2015 introduction the enormous economic, social, and educational benefits resulting from entrepreneurship have caused the proliferation of entrepreneurship education programs in colleges and universities around the world. in the u.s. alone, more than 1,500 colleges and universities offer entrepreneurship-related training in different formats (charney & libecap, 2000). the exponential growth of entrepreneurship education is a challenge to educators, and prompts more thinking and research on what to teach and how to teach entrepreneurship in a classroom setting. the entrepreneurship education literature highlights two dimensions relating to the outcomes of entrepreneurship education. one is the development of an individual’s skill set (e.g., the skill to identify opportunity and to set up a business and manage its growth), the other is to build an “entrepreneurial mindset”, meaning to mold an individual’s entrepreneurial personalities or attributes (e.g., an individual’s creativity, innovation, and risk-taking) (fayolle, gailly, & lassasclerc, 2006; garavan & o’cinneide, 1994; weber, 2011). some scholars (müller & gappisch, 2005; roberts, 1998; stormer, kline, & goldenberg, 1999) emphasized the second dimension and argued that entrepreneurship is a personality trait: a combination of personality and talent that can be cultivated and trained.cognitive declarative knowledge, individuals who are goal-setters, who need achievement, and who are risk takers, tend to become successful entrepreneurs (welsh & tullar, 2014). entrepreneurship education can strengthen individual’s entrepreneurial attitudes (harris, gibson, & taylor, 2007/2008). to train and cultivate entrepreneurial traits requires an integrated learning and teaching strategy that aligns intended learning outcomes with the effective selection of pedagogy. there is a strong belief that the most effective pedagogical approach to teaching entrepreneurship is action-oriented and experientially based learning that embeds hands-on project-based activities (minniti & bygrave, 2001; sherman, sebora, & digman, 2008). although researchers and educators have extolled the alleged benefits of entrepreneurship education, there has been little rigorous research on its effects (gorman, hanlon, & king, 1997; mcmullan, chrisman, & vesper, 2002). specifically, how effective is such an experiential approach in enhancing students’ entrepreneurial propensity? do experientially based activities have an impact on students’ intent to become entrepreneurs? and is the extent of the impact positive or negative? to date, there is a dearth of research that investigates the impact or effectiveness of different pedagogical methods for teaching entrepreneurship (honig, 2004; winslow, solomon, & tarabishy, 1999). this paper focuses on the impacts on critical measures associated with entrepreneurial propensity of three learning design choices: experiential learning, use of teamwork, and focus on quantitative methods. the paper aims to unlock the pedagogical variables that could contribute to student scores on constructs of change, risk taking, goal setting, feedback, and achievement as measured by our customized entrepreneurial propensity survey (welsh & tullar, 2014). 98 journal of small business strategy vol. 25 ● no. 2 ● 2015 background literature entrepreneurial propensity/intention for entrepreneurship the basis for our entrepreneurial propensity survey (welsh & tullar, 2014) is to measure student task motivation in entrepreneurship courses. the constructs measured are: change, risk taking, goal setting, feedback, and achievement. we follow the task motivation theory (miner, smith, & bracker, 1989) in designing the survey. task motivation theory is largely synonymous with mcclelland’s (1961) work on the need for achievement which has been widely recognized as one of the first good predictors of entrepreneurial success. miner and colleagues recast mcclelland’s (1961) concepts into task motivation theory (miner et al., 1989). task motivation theory (miner et al., 1989) follows a more holistic approach to the entrepreneurial role. while it measures achievement motivation, it also measures risk taking, feedback of results, personal innovation, and planning for the future. task motivation theory (miner et al., 1989) holds that the pushes and pulls of sanctions are built into the entrepreneurial task itself. control over a person’s behavior does not proceed from superiors, or professional norms, or peer group members, but rather it comes from the work itself and the way it is structured. entrepreneurs expect financial rewards, status in their communities, and personal satisfaction. at the same time they experience the threats of business failure, personal ruin, and bankruptcy. five constructs essential to entrepreneurial propensity were drawn from the above theories. the first of the five constructs is change. the pull of individual achievement works only to the extent that the individual can attribute change to something the individual has done him/herself. original or creative changes have a distinctive quality that makes it easier to identify them as one’s own and to take personal credit for them. a desire to introduce such changes is more likely to make task inducement function as it should. the next construct is risk taking. the successful entrepreneur must face considerable challenge and the prospect of being overextended. to accept this, an individual must have a desire to take risks; tasks that the individual already knows well don’t exert any pull because there is no sense of achievement in accomplishing them. in addition, the desire to take risks where personal effort cannot ultimately reduce the risk is not part of the entrepreneurial mindset. in neither case can a person anticipate a sense of individual achievement with any reasonable probability. entrepreneurs desire to take risks where they can have an influence on the outcome. goal setting is a hallmark of the entrepreneurial mindset. the entrepreneur is pulled by the prospect of anticipated future rewards. s/he must approach life with a strong future orientation. such a person must have a desire to plan and to set personal goals that will signify achievement. having set the goal, the entrepreneur must plot ways to attain the goal. the entrepreneurial mindset is future oriented without inordinate fear of failure. feedback is generally a need of entrepreneurs. feedback on the amount and results of one’s performance are the only way to attribute any degree of success to one’s efforts. 99 journal of small business strategy vol. 25 ● no. 2 ● 2015 entrepreneurs need to know whether they have succeeded or failed. consequently, the individual must be motivated to seek out results-oriented feedback in measures such as profitability, productivity, waste, course grades, etc. the last and most recognizable of the constructs is achievement. based on mcclelland’s seminal work, achievement has been shown related to entrepreneurial success in a wide variety of contexts (cf. mcclelland, 1961). the major source of this motivation is an intrinsic desire to achieve through one’s own efforts and ability and to experience the enhanced feelings of self-esteem and selfworth that achievement affords. individuals high in this motive typically look for situations where the risks that they take and their hard work can produce tangible results that they can tell themselves they have caused. these five separate motives may substitute for one another in producing an overall index of task motivation (locke & henne, 1986). the thematic apperception test (tat) was developed by henry a. murray and christiana d. morgan at the harvard clinic at harvard university during the 1930s (for a history, see morgan, 2002). although mcclelland’s work was based on a single construct, the need for achievement (mcclelland & winter, 1969), the scoring of tat stories for need for achievement included some risk taking, feedback, and innovation, but these factors were not measured separately. task motivation theory (miner, smith, & bracker, 1989) is based on the notion that it is necessary to measure each of these five features of the entrepreneurial role separately which is the approach used in this paper. experiential learning the concept of experiential learning is not a recent phenomenon. there is a long history of ideas regarding the importance of experiential learning, rooted in the early work of john dewey (1910, 1938). dewey believed learning and democracy would be advanced if people were engaged in “active, real world problem-solving” combined with “reflective thought and action” (harkavy & benson, 1998, p.16). dewey integrated the idea of experiential learning into traditional higher education, believing that experiential learning could be used as a bridge between the academic and the practical. scholars such as kurt lewin, jean piaget, william james, carl jung, paulo freire, and carl rogers helped to model the theory of experiential learning (kolb & kolb, 2005). carl rogers differentiated between two types of learning: cognitive and experiential; and indicated that experiential learning focuses on the needs of the learner, and is conducive to personal change and growth (rogers, 1969). these scholars believed that learning is a holistic process of adaptation to the world, resulting from synergetic transactions between the person and the environment, and it is the responsibility of education to connect student learning to the real world. kolb’s experiential learning theory. kolb’s experiential learning theory is one of the best known educational theories in higher education, and defines learning as "the process whereby knowledge is created through the transformation of experience. knowledge results from the combination of grasping and transforming experience" (kolb, 1984, p. 41). the theory presents a cyclical model of learning, consisting of four stages. the first stage, concrete experience, is where the learner actively experiences an activity. the second 100 journal of small business strategy vol. 25 ● no. 2 ● 2015 stage, reflective observation, is where the learner consciously reflects back on that experience. the third stage, abstract conceptualization, is where the learner attempts to conceptualize a theory or model of what is observed. the fourth stage, active experimentation, is where the learner tries to plan how to test a model, theory or plan for a forthcoming experience. a person passes through these modes repeatedly in a way that helps them learn from the past and take new information into future learning situations (kolb, 1984). benefits of experiential learning. experiential learning focuses on learning by doing, which is regarded as one of the best instructional techniques to provide students with opportunities to internalize material, and is understood by a great number of students (meyers & jones, 1993). experiential learning is student-centered instruction, rather than teacher-centered instruction, since the student’s progress through the four experiential learning stages facilitates and drives the education process (kolb, 1984). active participation of the learners in the learning process often results in deeper and more robust learning than is gained from just reading or listening to lectures. in the experiential learning classroom, even students who are passive in learning are provided with opportunities to facilitate their own learning by actively applying the material at hand (krueger, 2007). the experiential learning classroom also provides the opportunity for students to receive immediate feedback in classroom discussions, and to realize the importance of participation in group activities, which helps eliminate the competitive atmosphere that occurs when students are not given opportunities to work together to achieve a common goal (meyers & jones, 1993). it is also found that real-life experiences have a lasting effect on students (okudan & rzasa, 2006). experiential learning in entrepreneurship scholars have argued that for an entrepreneurship education program to be effective, it must teach in entrepreneurial ways (i.e., honig, 2004; kuratko, 2003; politis, 2005; welsh & tullar, 2014). although classbased knowledge input is a vital component of learning, the traditional lecture-based didactic pedagogy alone is not sufficient (cooper, bottomley, & gordon, 2004). sherman, sebora, and digman (2008) pointed out that traditional approaches such as reading the text have little impact on a student’s decision to choose entrepreneurship as a career, while activities that are more experiential in nature, or with more hands-on activities, pique students’ interest in becoming entrepreneurs. to achieve real understanding of the meaning of entrepreneurship, new pedagogical approaches that embrace active and experiential learning, such as student business start-ups, live cases and simulations, should be incorporated into teaching (honig, 2004; kuratko, 2005; ronstadt, 1987). studies reviewing entrepreneurship programs around the world found experiential activities have been widely utilized to increase the depth of the program, including guest speakers focused on entrepreneurship/small businesses; business plan competitions; student club/organizations focused on entrepreneurship/small businesses; internships focused on entrepreneurship/small businesses; on-site visits focused on entrepreneurship/small 101 journal of small business strategy vol. 25 ● no. 2 ● 2015 businesses; and feasibility studies (wilbanks, 2013; winkel, vanevenhoven, drago, & clements, 2013. research also has demonstrated that experiential learning opportunities increase students’ desire and intention to become an entrepreneur (fiet, 2000; peterman & kennedy, 2003); enhance their self-awareness and recognition of their entrepreneurial abilities and weaknesses (fuchs, werner, & wallau, 2008, harris & gibson, 2008; matlay, 2006); increase their skills in identifying opportunities (corbett, 2005); and develop their social skills (dhliwayo, 2008). an experiential learning approach can be delivered in different forms to expose students to concrete experience. the most common approach used by college educators is the creation of business plans (ronstadt, 1987). many entrepreneurship courses include activities such as visiting small businesses, guest speakers, case studies and projects related to the development of a business that give students the opportunities to grasp the real work of entrepreneurship (gorman et al., 1997; vesper & mcmullan, 1988). business ventures on campus, entrepreneurship internships, or co-operative education, also allow students to develop their skills and knowledge in entrepreneurship. for the purpose of this paper, three core instructional design factors were hypothesized to have effects on the entrepreneurial propensity of students studying entrepreneurship at the university: experiential learning (el), teamwork, and quantitative focus. these have been hypothesized to have independent effects on the five task motivation constructs outlined in this paper. the following hypotheses were tested: hypothesis 1 there are statistically significant differences in entrepreneurial propensity between students exposed to courses adopting experiential learning and those exposed only to traditional learning designs. specifically, achievement, change, feedback, goal setting, and risk taking scores will be higher for experiential learning courses than for traditional learning designs. hypothesis 2 there are statistically significant differences in entrepreneurial propensity between students exposed to courses with team-work and those without team-work learning designs. specifically, achievement, change, feedback, goal setting, and risk taking scores will be higher for teamwork-based courses than for nonteamwork based learning designs. hypothesis 3 there are statistically significant differences in entrepreneurial propensity between students exposed to quantitative courses and those exposed only to non-quantitative courses. specifically, achievement, change, feedback, goal setting, and risk taking scores will be higher for quantitative courses than for nonquantitative courses. methodology sampling the setting of the data collection was the experiential learning pilot at the university of 102 journal of small business strategy vol. 25 ● no. 2 ● 2015 north carolina at greensboro. the b.s. in entrepreneurship launched in the fall of 2009 and the reconfigured minor for business and non-business students launched the fall of 2008. the purpose of the entrepreneurship program is to produce graduates that are globally ready by equipping them with entrepreneurship skills for the 21st century (welsh, 2014). an innovative curriculum was built on existing faculty strengths in the business school and across the university. students have the opportunity to choose a profile based on one of seven entrepreneurship areas based on research by one of the authors on where careers are headed for the next twenty years: creative industries entrepreneurship, family business, franchising, health care entrepreneurship, international entrepreneurship, science, innovation, and technology, and social entrepreneurship. as of fall 2014, there are 46 undergraduate and graduate courses available in 26 departments with three more being proposed for 2015, which will bring the total to 49 courses in 26 departments. majors, minors, and graduate students have the opportunity to take elective courses in the above areas. to our knowledge, this is the second largest number of crossdisciplinary courses developed at a school of our size and stature in the united states; washington university in st. louis, missouri has the most courses available. it is the largest cross-disciplinary program in the state of north carolina. as of fall 2014, there are approximately 130 majors and 90 minors, business and non-business students, in the program. sample design. as noted, student scores for five constructs, change, risk, goal-setting, feedback, and achievement, were obtained from students at the end of their entrepreneurship courses. for the purpose of this study, the initial dataset was refined in multiple ways to ensure the usability of the input data for analysis. the final dataset resulted in the following proportions by course: • ent 200 intro to ent finance (n=13) • ent 201 creativity, innovation (n=13) • ent 240 intro to the ent experience (n= 7) • ent 300 feasibility analysis (n=55) • ent 337 family business (n=16) • ent 342 international entrepreneurship (n=15) three major learning designs emerged from a manual content review of the sample course syllabi: experiential learning, teamworkoriented learning, and quantitative-focus learning (see table 1). the determination of where to place each course on these instructional design factors was made based on manual content analysis of the course syllabi by two researcher faculty with follow up expert validation with course instructors. the seven courses were assigned systematically a value of either 1 or 0 for each instructional design factor; for example. ent 300 and ent 337 were assigned a 1 for experiential learning and all other courses were assigned a value of 0. 103 journal of small business strategy vol. 25 ● no. 2 ● 2015 in projecting which of the courses followed an experiential based design, we evaluated the percentage of graded work falling into experiential activity versus traditional assessment (tests, quizzes). two courses, ent 300 and ent 337, had respectively only 32 and 35 percent of course grades attributed to tests and quizzes, reflecting a strong use of experiential activities for teaching and assessment purposes. the other courses each has 70 percent or more of course grade being based on tests and quizzes. teamwork and quantitative methods were determined by verifying the teaching methods and stated learning outcomes, again reviewing syllabi to assign courses to each category on these two variables. table 1 classification of entrepreneurship courses on learning designs course # course topic experiential team quantitative ent 200 ent finance x ent 201 creativity/innovation x ent 240 the ent experience x ent 300 feasibility analysis x x ent 337 family business x x ent 342 international ent instrument development for collection of dependent variable student scores the constructs measured are: change, risk taking, goal setting, feedback, and achievement. our constructs are based partly on mcclelland’s need for achievement (1962) scoring system and partly on the miner sentence completion scale form t. task motivation theory (miner et al., 1989) usually deals with the fit between a person’s motivation and the organization. in this case, it is more appropriate to examine the fit between the person’s motivation in class and the entrepreneurial role (miner et al., 1989). while we believe that task motivation theory (miner et al., 1989) is a good approach, we argue that miner and colleagues’ measure is not entirely suitable for the measurement of students. the sentence stems include items such as, “when i fill out my tax return . . .” and “profit and loss statements . . .” obviously, these are things that traditional students have little or no experience with. in order to follow this approach, we found it necessary to change many of the sentence stems. we converted the sentence completion feature of the revised miner et al. (1989) measure to a multiple choice format. this was done to make our measure more readily usable across curricula. 104 journal of small business strategy vol. 25 ● no. 2 ● 2015 the sentence completion format takes a considerable amount of training to score, and scoring, even after training, is always a laborious process. we revised the dimensions by miner et al. (1989) somewhat to make the test more “student friendly.” we made up sentence stems to fit the constructs using some of miner’s wording and some of the wording from mcclelland’s tat scoring instructions. we gave these sentence stems to a sample of 80 mba students. the students were instructed to complete the sentences with the ending that first occurred to them. then we took the most common student completions and had a group of 12 different mba students scale the completions on a five point scale from most positive to most negative. from the scale scores, we were able to find the two most positive statements to go with each sentence stem, the two most negative statements to go with each stem, and two statements that showed no affect at all but were merely statements of fact. in doing this, we had a 40 item multiple choice assessment which yielded scores on the five constructs mentioned above. each construct is measured with eight different sentence stems, so a construct score could range from -8 to +8. we attempted to get the negative and positive statements to be approximately equal in deviation from zero. validity and reliability. the validity of the task motivation theory scales relies on the work of miner & colleagues and mcclelland. our items are directly derivative of miner’s mscs form t constructs. we argue that they are content valid in that they include most of the same verbal content as miner’s scales. we also had six mba students sort the items from our entrepreneurial propensity scale into the various scale categories. they sorted the items with a 91% success rate into each of the nine scale categories. we have had two i/o psychologists sort the items into the scale categories. they had an 86% success rate of classifying the items as we have. on the basis of where the items derived from and the ability of students and professionals to recognize where the items fit, we argue that the scales are content valid.the descriptive statistics for the constructs are shown in table 2. the alphas are somewhat low, but we argue that given this method of measurement, it is difficult to produce higher alphas. this is so because the participant taking the assessment would have a hard time understanding what is being measured. we also tried to make the social desirability of the choices approximately the same even though some of them are undesirable as entrepreneurial answers. for instance, in answer to the stem “inventing something new . . .” the possible answers are a. is very difficult, b. is something i excel at, c. is good for the market, d. is fun and exciting, e. is something i’m not interested in, and f. is important for economic growth. choices a and e are scored 1. clearly, people who choose these two options are not interested in inventing a new product. choices c and f, while positive, are just statements of fact and are therefore scored zero. choices b and d show positive affect toward inventing something new and are therefore scored as +1. each construct is measured with eight different sentence stems, so a construct score could range from -8 to +8. we attempted to get the negative and positive statements to 105 journal of small business strategy vol. 25 ● no. 2 ● 2015 produce approximately equal in deviation from zero. however, as may be seen in table 2, we have a positive bias in our scales. this may be due to the fact that all our participants are entrepreneurship students. we might expect students with other majors to score lower on these scales, closer to zero. table 2 descriptive statistics of entrepreneurial propensity constructs (n = 1076) construct mean standard deviation cronbach’s alpha change 1.45 2.46 0.627 risk taking -0.09 2.13 0.680 goal setting 2.43 2.22 0.560 feedback 3.77 2.52 0.589 achievement 2.52 2.51 0.652 table 3 shows the correlations among the constructs. the strongest correlation is between feedback and achievement. the fact that these two scales are moderately correlated is not surprising given the emphasis on feedback in most of the literature on n achievement. with a sample this large, significance is not much of an issue since even small correlations are significant, but risk taking is only related to change significantly. that correlation is very small at just .08 and the other three correlations are very close to zero. table 3 intercorrelations among the entrepreneurial propensity constructs (n= 1076) construct risk taking goal setting feedback achievement change .080* .152* .223* .284* risk taking .030 -.036 .052 goal setting .336* .289* feedback .402* * p < .05 results and discussion t-tests were utilized to determine whether any statistically significant differences exist in terms of students’ entrepreneurial propensity scores among the three learning designs. considering table 4, we find moderate evidence to confirm hypothesis 1 effects of experiential learning designs for goal-setting and weak evidence for feedback, but not for the change, risk, or achievement scores. 106 journal of small business strategy vol. 25 ● no. 2 ● 2015 we found very slight evidence (see table 5) for hypothesis 2, i.e., that teamwork affected achievement in a negative direction. we found no evidence (see table 6) for hypothesis 3, i.e., that a heavy quantitative focus of a course impacted any of the five entrepreneurial propensity measures in any significant way. table 4 experiential learning versus non experiential learning courses ent propensity measure experiential learning non experiential learning t value p value × sd n × sd n change 1.79 2.376 66 1.98 2.881 44 -.376 .708 risk -.18 2.246 66 -.39 2.212 44 .471 .639 goal-setting 3.17 2.116 66 2.27 2.039 44 2.202* .030 feedback 4.35 2.587 66 3.41 2.433 44 1.910** .059 achievement 2.52 2.362 66 2.70 2.673 44 -.391 .697 *p<.05; **p<.1 it is notable that experiential learning produces greater goal setting motivation. apparently, the more tangible aspects of experiential courses boosts a student’s need to set goals. in addition, it appears that feedback needs are considerably higher in experiential learning courses. table 5 team-based versus non team-based courses ent propensity measure team-based learning non team-based learning t value p value × sd n × sd n change 1.73 2.485 83 2.26 2.863 27 -.917 .361 risk -.24 2.223 83 -.33 2.270 27 .187 .852 goal-setting 2.89 2.130 83 2.56 2.118 27 .713 .477 feedback 4.10 2.658 83 3.59 2.223 27 .888 .376 achievement 2.36 2.518 83 3.30 2.267 27 -1.716** .089 **p <.1 107 journal of small business strategy vol. 25 ● no. 2 ● 2015 the only significant, albeit weak, result in table 4 is that of achievement. it is not surprising that achievement motivation is higher in courses where students are not assigned to teams. individual achievement is what is measured by our achievement scale, and such a motive cannot be taught well in a course that emphasizes group work. table 6 quantitative versus non quantitative courses ent propensity measure quantitative learning non quantitative learning t value p value × sd n × sd n change 2.23 3.492 13 1.81 2.451 97 .545 .587 risk -.38 1.938 13 -.25 2.269 97 -.208 .836 goal-setting 2.62 1.557 13 2.84 2.192 97 -.349 .728 feedback 3.92 1.553 13 3.98 2.669 97 -.111 .913 achievement 3.23 2.166 13 2.51 2.517 97 .990 .324 in the comparison of quantitative with nonquantitative courses, we find no significant differences. this is not unexpected. whether or not a course is quantitative has little to do with the motivations of our five constructs. in the distinction between quantitative and non-quantitative, we are focusing on cognitive knowledge acquisition rather than motive strength. we argue that courses that create affect are more likely to show differences in our motives. the present results provide limited evidence for the proposition that experiential learning produces greater levels of entrepreneurial motivation. this makes logical sense and reinforces a trend that has been growing in recent years. cognitive declarative knowledge may well improve an entrepreneur’s chances of succeeding, but it does only a little to help him/her to want to succeed in his/her own business. experiential learning is more motivationally directed, so we should not be surprised that it has an effect on student motivation. on the other hand, team-based courses may actually inhibit the achievement motive. this is a finding that needs further investigation. if it is true, and if it is also true that achievement motivation is a good predictor of success in entrepreneurial activity, then we may need to rethink our pedagogical strategies for teaching entrepreneurship courses. assigned group work may dampen the achievement motive because the student doesn’t have the opportunity to produce results that are identifiably his/her own—and thus the pull of achievement cannot be found. the literature also indicates that entrepreneurs view interpersonal relationships largely as ways to assemble needed skill and funding resources 108 journal of small business strategy vol. 25 ● no. 2 ● 2015 and tend to prioritize competence of others over other social traits (stuart & sorenson, 2007). thus, when teams are created without careful communication of the added value of teammates on a project, students may view teams as hindrances rather than helpful. we should not be at all surprised that cognitive declarative knowledge in the form of quantitative vs non-quantitative courses shows no difference in terms of motives. cognitive declarative knowledge and motivation are different things. implications for academic faculty and business practitioners experiential learning has been a growing idea in entrepreneurship education in recent years. these data provide good reasons to think this trend is good for students in entrepreneurship courses. though very preliminary, it does appear that experiential learning courses in our sample foster entrepreneurial motivation better than other styles of pedagogy. two ways in which one commonly assesses or monitors student’s development of entrepreneurial propensity in courses have been noted in the academic field: rubric-driven instructor feedback and self-reported student profile instruments. this paper sought to validate the latter as a tool to compare different pedagogical techniques. such forms of assessment keep students/teams aware of their academic mission and remind them that course experiential activities have academic learning goals beyond the resume worthy experience and networking opportunities. since the instructor cannot completely control the learning environment during some experiential activities, the type and quantity of instructor monitoring of results become vitally important. the goal is to promote systematic feedback to students on constructs relevant to entrepreneurship by specifically addressing the five relevant constructs of change, risk, goal-setting, feedback, and achievement. in our case, this set of constructs has been converted into sets of behavioral and attitudinal scale items that students can use to self-report on their propensity for entrepreneurial thinking and motivation. the implications for faculty are that these scores can be used to examine instructional pedagogies and refine them in order to promote increased entrepreneurial propensity in students. the onus on academic programs in entrepreneurship is to prepare students for future careers and innovative activity leading to the creation of new businesses. with this in mind, we believe that the careful examination and continuous improvement of academic pedagogies in entrepreneurship will yield more and better entrepreneurs and intrapreneurs for the variety of business fields that our students will enter. we also believe that by linking entrepreneurial propensity improvements to experiential learning activities involving entrepreneurship experts and partner businesses, we strengthen the potential for strategic partnerships between the academe and the field of practice. conclusions and recommendations as noted, there is a dearth of research that investigates the impact or effectiveness of different pedagogical methods for teaching entrepreneurship. this paper focused on 109 journal of small business strategy vol. 25 ● no. 2 ● 2015 closing that gap by studying the impacts on critical measures associated with entrepreneurial propensity of three learning design choices: experiential learning, use of teamwork, and focus on quantitative methods. experiential learning was defined as studentcentered instruction through the use of active participation of students, rather than teachercentered instruction via lectures and testing. the constructs measured comprised change, risk taking, goal setting, feedback, and achievement following the tenets of task motivation theory. as discussed, we found moderate evidence to confirm effects of experiential learning designs for goal-setting and weak evidence for feedback. while an 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(2013). the structure and scope of entrepreneurship programs in higher education around the world. journal of entrepreneurship education, 16(1), 15-28. winslow, e. k., solomon, g.t., & tarabishy, a. (1999). empirical investigation into entrepreneurship education in the united states: some results of the 1997 national survey of entrepreneurial education. proceedings of 1999 usasbe conference. dr. bonnie farber canziani holds a ph.d. from cornell university in hotel administration. her teaching and research spans services management and marketing, revenue management, and wine industry strategy and marketing. she has held numerous positions relevant to academic assessment and the furtherance of teaching and learning excellence in higher education. additional research areas include assessment of complex competencies such as critical thinking in student consulting projects, entrepreneurial propensity, sustainability, and global competence. dr. dianne h.b. welsh is the hayes distinguished professor of entrepreneurship and founding director of the entrepreneurship programs at the university of north carolina greensboro. she is the 2015 fulbright-hall distinguished chair for entrepreneurship for central europe. dianne is a recognized scholar in family business, international entrepreneurship, women-owned businesses, and franchising and has seven books and over 150 publications. her books include creative cross-disciplinary entrepreneurship, published by palgrave-macmillan, and the 2nd edition of global entrepreneurship and case studies in global entrepreneurship. dr. yuchin (jerrie) hsieh received her ph.d. in hospitality and tourism management from purdue university in 2004. prior to joining academia, she worked for five-star hotels in taiwan and the netherlands. her research interests include hospitality-related human resources, and hotel employees’ occupational health. dr. william tullar is a professor of management at the university of north carolina greensboro where he has taught for 40 years. he obtained his ph. d. in industrial/organizational psychology from the university of rochester. professor tullar has been a fulbright scholar to germany, and a visiting scholar in moscow, russia, worms, germany, ludwigshafen, germany, and chisinau, moldova. he has consulted widely both in the u. s. and in europe. he has published numerous articles and book chapters on various aspects of management, most principally on human resource management and development. 113 sz%~vx't"'"i'tmcai. compatibii.ety op smajljl business owners/entrepreneurs and student consui tants harriet bnckman stephenson sharon galbraith seattle university abstract this study focuses on value judgments and ethical positions of student consultants and small business ownerlentrepreneur clients. the value judgments, ethical positions and underlying value orientations of the two groups are quite similar. however, the expressed perceptions of the ethical values of others are considerably different from the respondents'wn values. the potential impact of these differences on the effectiveness of the consulting process is explored. ways to clarify perceptual difference are proposed. the findings from this study should have direct implications for consultants, small business owners, entrepreneurs, educators, and other individuals involved in small business practices. thousands of small business owners are consulted each year by 100,000 student consultants.'n small business institutes (sbi's) alone, over 6,500 small business owners are being exposed to at least 16,000 student consultants annually (i. bebris, small business institute national director, washington, d.c., personal communication, october 31, 1991). the perception that clients have of the student consultants may have a negative effect on the consulting process. for example, sbi clients have reported that student consultants do not always seem to have the necessary age and maturity, technical experience or background and knowledge to be credible and to do quality consulting (douglas & lamb, 1986; o'onnor & rogers, 1988; weinstein, 1990; ramocki, 1987). trust and believability are critical ingredients in the consulting relationship, and similar value structures are important in building that relationship. if the ethics or value orientations of student consultants and sbi clients are not similar, then communication and credibility problems could hamper the productivity of the consulting experience. this issue is important for a number of reasons. firstly, if the two groups are not ethically compatible, they may find little in common regarding how a business should be operated, what its goals should be, and how to interact with various entities within the firm and its environment. in other words, the two groups may not share the same ideas about what is right and wrong 41 behavior in the business arena. this could result in a frustrating and unproductive consultation experience for all parties involved. secondly, this is an important area of inquiry because entrepreneurs are often described as unique individuals along many different dimensions (hornaday, 1990; brockhaus, 1982; brockhaus & horwitz, 1986; cunningham & lischeron, 1991). various researchers have attempted to define entrepreneurs'nique psychological or value orientations, with the only point of consensus being that an acceptable definition may be difficult if not impossible to construct. hebert and link (1989) have concluded, however, that entrepreneurs are individuals whose judgment differs from the norm, if this is so, we need to examine how entrepreneurs might react to certain ethical situations and how their responses may differ from those of student consultants in an effon to understand any dil'ferences.' third reason for pursuing this study is that the requisite managerial mmd-set for the 1990's may be entrepreneurial in nature due to increased competition and a rapidly changing environment. chittipeddi and wallett (1991) have noted that the traits and behaviors that fuel success in entrepreneurial firms and small businesses are vital for success in the 1990's, even for large international corporations. underlying an individual's traits and behaviors are his/her ethics and value structures. thus, differences between the way entrepreneurs and student consultants handle ethical situations could also exist between corporate executives and consultants. finally, we have undertaken this study because the issue of the ethics of small business owners is virtually unexplored. longenecker, mckinney, and moore's (1989) comparison of attitudes concerning ethical issues between large and small firms excluded owners or entrepreneurs from the sample. their study concluded that while members of small business organizations were more demanding (and less permissive) in their ethical attitudes compared with big business counterparts, the small business respondents could not be charactenzed overall as more or less ethically strict. prior studies that compared the ethical standards of business students versus business practitioners measured the ethical values of corporate executives and not those of small business owners (arlow & ulrich, 1980; budner, 1988; kassarjan & kahn, 1989; stevens, 1984; sturdivant & cocanougher, 1973). in addition. these studies showed mixed results regardmg the similarities or differences of ethical and value orientations between the two groups. this study the objective of this study was to determine if there were significant differences in ethical decisions of student consultants and small business owner/entrepreneur clients. the methodology was a survey in which a questionnaire was administered to student consultants and their sbi clients. the student consultant group was a census of graduating seniors from an aacsb accredited university. the questionnaire was administered during the students'inal quarter of study. all of the students had used sbi in-depth consulting cases for their capstone business course during their last year of study. the course, business policy and organization, is the required senior synthesis course for business students. the second group was a census of the sbi clients who had worked with the student consulting teams during that iiciulcmic year. 42 exhibit i questionnaire part 1: instructions: for each vignette, please check one response for (a) and (b). l. virginia stone, a member of the board of directors of scott electronics corp., has just learned that the company is about to announce a 2-for-i stock split and an increase in dividends. stone personally is on the brink of bankruptcy. a quick gain of a few thousand dollars can save her from economic and social ruin. she could purchase the stock now to sell in a few days at a profit. a. do you think virginia stone would purchase the stock to sell at a profit? yes no b. what would you do if you were stone? buy not buy 2. brian george is a new salesman for sweep soap company. with commissions, his salary usually comes to about $36,000 per year. george could supplement this to the extent of about $ 1,800 per year by charging certain unauthorized personal expenses against his expense account. he feels that this is a common practice in his company. a. do you think brian george would supplement his income? yes no b. what would you do if you were brian george? supplement income with personal expenses not supplement income with personal expenses 3. wallace brown, treasurer of lloyd enterprises, is about to retire and contemplates recommending one of his two assistants for promotion to treasurer. brown is sure that his recommendation will be accepted, but he also knows that the assistant not recommended will find promotion opportunities seriously limited. one of the assistants, william grimes, seems to him the most qualified for the new assignment, but the other assistant, sylvia leonard, is the niece of the president of lloyd's biggest customer. brown feels leonard's relationship with her uncle will help lloyd'. a. would wallace brown choose: grimes or leonard ? b. would you choose: grimes or leonard 'i 4. jenkins manufacturing company is faced with the necessity of closing down one of its two los angeles plants. this will necessitate laying off about 100 employees. another 100 employees will be transferred to the other plant in the same area. though the company is not unionized, generous allowances have been set aside for separation pay. the problem which mr. howard jenkins, company president, faces is whether to discharge older and more highly paid workers who have been with the company a number of years. or the 43 younger and less highly paid workers who have less seniority. the industry is a competitive one, and mr. jenkins is concerned about his company's ability to compete. a. would jenkins discharge the older workers or the younger workers '7 b. would you discharge the older workers or the younger workers ? 5. the board of directors of the boldt manufacturing company has decided to close down its eastbrook plant in four months. the plant employs 200 workers in a michigan town of 30,000. at a recent board meeting, pauline belcher, company treasurer, has urged that the employees not be informed of this decision until the actual day of their dismissal. if this is not done, she argues, absenteeism and productivity declines will seriously hamper output. henry roscoe, personnel director, feels that the employees should be given some advance notice in order to plan necessary adjustments, even at the cost of absenteeism and productivity decline. a. would the company: keep the planned shutdown a secret ? or notify the employe s ahead of time 'i b. would you: keep the shutdown a secret ? or notify the employees ahead of time ? 6. i arry d. brown is president of the st. clair importing company, a us firm that wholly owns a subsidiary that is a canadian importing company. the canadian subsidiary has been offered the opportunity to merchandise a number of products manufactured in cuba. the cuban price of these products is so attractive that the canadian firm estimates it will be able to increase substantially the usual mark-up and still sell the products at a retail price below canadian prices. brown has contacted the us state department, and while it would be illegal and against public policy for the american firm to market the products in the us, there is no prohibition for the canadian subsidiary to sell them in canada. a. would brown distribute the products through the canadian subsidiary? yes no b. would you if you were brown? yes no 7. the dodd textile company wants to make shirts in a large western city. because of the severity of competition, the company feels it would be forced to hire employees from immigrant and other under-privileged groups that accept sub-standard wages. recently union officials have accused such plants as this of maintaining "sweat-shop conditions." cheryl dodd, the owner, admits conditions are not ideal and that employees can hardly make sufficient wages for a minimum living standard but says that dodd textile would at least provide some employment for people who would otherwise probably be unemployed. dodd feels entitled to profits which would not be received if wages were raised. 44 a. would dodd pay substandard wages? yes no b. would you pay substandard wages? yes no 8. mary raines, vice president of westerly chemical company, feels that sending expensive christmas gifts to customers compromises their position as buyers, and thus is a form of bribery. however, raines knows that this is a common practice among competitors and that sales are likely to be adversely affected by failure to conform to the traditional practice. a. would raines decide to send the gifts? yes no b. would you send the gifts if you were raines? yes no part 2: which of the following two individuals would you prefer to work with? please circle a or b, a. susan white: "i think that if a person joins a reputable company and then remains sensitive to the ethical values of her colleagues, she won't stray far from the ethical ideal." b. sharon easton: "i have some strong ethical commitmehts i'e formulated through the years, and i'l resign before i compromise these principles." the first part of the questtonnaire contained etght vignettes adapted from the business ethics scale developed by clark (1966). vignettes (short descripttons of situations) have been found to be a reliable, less biased method of measuring human attitudes and values than abstract questions that attempt to probe the construct of interest directly (alexander & becker, 1978: clark. 1966). vignettes from clark's scale have been used over the past 25 years by numerous researchers (e.g., stevens, 1984). thts scale has been as enduring because of the important business issues the vignettes descobe and the timelessness of many of the sttuattons depicted. issues such as insider trading, padding an expense account, notifying employees of a plant shutdown or sending gifts to clients are as relevant today as they were in the mid 60's when clark developed the scenarios. clark's original instrument contained 17 vignettes. since n was necessary to keep the questionnaire concise, we used only a subset of the 17 vignettcs-eight vignettes that we felt represented important broad ethical issues in business and werc particularly relevant in today's business world. after each vignette the respondents were asked two questions. question (a) tusked respondents whether they thought the person in the scenario would or would not take a certain action. question (b) asked respondents whether they thought they themselves would or would not take the action. 45 the second part of the questionnaire contained a question, also from the clark study (1966), asking respondents to choose which of two individuals they would prefer as a co-worker. one individual, white, was described as adhering strongly and strictly to ethical standards (noncompromising). the other individual, easton, was described as sensitive and responsive to the values of co-workers (flexible). this question was included to determine if there was any difference between the student consultants and the sbi clients in the preference of ethical conduct of business associates. the last part of the questionnaire was a short demographic section. results data was analyzed with spss-x. the profile of the respondents from the demographic section is in exhibit 2. 46 exhibit 2 profile of sample * sbi student clients consultants number; 28 112 gender: male 13 (46%) 66 (59%) female 15 (54%) 43 (38%) age: &20 0 0 2030 3 (11%) 90 (80%) 31-40 12 (43%) 17 (15%) 41-50 9 (32%) 0 51+ 3 (11%) 0 vpercentages do not always add to 100 because some respondents did not answer some questions in the demographic section. there is a greater proportion of males in the student consultant sample than in the client sample. ages are different for the two groups, with the majority of consultants (80%) in the 20 to 30 age range and the largest percentage of clients (43%) falling in the 31 to 40 age range. results of part one the responses from question (a) of the vignettes, asking respondents what they felt the person in each scenario would do, are presented in exhibit 3. two interesting results emerge: (a) for virtually every situation, the majority of respondents felt the person in the scenario would make the unethical choice (the one exception [t(s5) dealt with a plant shutdown), and (b) with one exception (ã5 again), the percentages of student consultants and clients in each sponse category were almost identical 47 exhibit 3 results of question at number (percentage) tif sb/ cli ents and student consultants responding to what rhe person in each scenabo would do. sbi student clients consultants chi-square ¹1 purchase stock 19 78 (73%) (70%) *not purchase stock 7 34 (27%) (30%) p = 1.0 ¹2 supplement income 15 65 (54%) (58%) *not supplement income 13 47 (46%) (42%) p = .82 ¹3 choose leonard 16 70 (contacts) (57%) (63%) *choose grimes 12 41 (qualibted) (43%) (37%) p = .695 ¹4 discharge older 14 73 (64%) (68%) *discharge younger 8 35 (36%) (32%) p = 1.0 ¹5 shutdown secret 8 71 (29%) (65%) *notify employees 20 39 (71%) (35%) p = .001 ¹6 distribute in canada 25 105 (93%) (95%) *not dist, in canada 2 6 (7%) (5%) p = 1.0 ¹7 pay substandard wages 25 94 (89%) (86%) *not pay subst, wages 3 15 (11%) (14%) p = .936 48 ffg send gifts 25 90 (96%) (81%) *not send gifts i 21 (4%) (19%) p = .115 *ethical choice a chi-square test was used to determine if there was a statistically significant difference between the two groups in their responses to question (a) for each scenario. the only scenario that elicited a response difference at a statistically significant leve! was gt5 (p = .001). in this question the majority of clients (71%) felt that the company would give advance notice to its employees of the upcoming plant shutdown (the ethical decision), while the majority of student consultants (65%) felt the company would keep the shutdown a secret until the day of closure (the unethical decision). the responses to vignette ffg, though not statistically significantly different, suggest that there was virtually no question in the clients'inds (96%) that the vice president of the company would send christmas gifts to customers, whereas a smaller percentage of the student consultants (81%) felt that the vice president would do so. the results of part one, question (b) of the vignettes, asking respondents what they themselves would do in each situation, are presented in exhibit 4. 49 l exhibit 4 results of question b: number (percentage) of sbi clients and student consultants responding to what they themselves would do. sbi student clients consultants chi-square ¹1 purchase stock 13 40 (50%) (36%) vnot purchase stock 33 72 (50%) (64%) p = .2604 ¹2 supplement income 0 19 (0%) (17%) *not supplement income 28 93 (100%) (83%) p = .0418 ¹3 choose leonard 3 20 (contacts) (11%) (18%) *choose grimes 25 91 (qualified) (89%) (82%) p = .519 ¹4 discharge older 9 39 (41%) (36%) *discharge younger 13 69 (59%) (64%) p = .855 ¹5 shutdown secret 1 ll (4%) (10%) *notify employees 27 99 (96%) (90%) p = .497 ¹6 distribute in canada 22 91 (82%) (82%) *not dist. in canada 5 20 (18%1 (18%) p = 1.0 ¹7 pay substandard wages 7 31 (25%) (28%) vnot pay subst. wages 21 78 (75%) (72%) p = .846 50 p8 send gifts 14 75 (54%) (68%) *not send gifts 12 36 (46%) (32%) p = .244 *ethical choice number 2, dealing with an expense account, was the only scenario that produced a statistically significant difference between the student consultants and the sbi clients. about ttt2 none of the clients said he/she would supplement his/her income with unauthorized personal expenses, while 1 9 of the consultants (17%) said they would (p = .04), and about vignette ttt8, a lower percentage of the student consultants (32%) responded that if they were the company vice president, they would refrain from sending gifts to the buyers, compared with 46% of the entrepreneurs. this difference is not statistically significant, however. exhibit 5 included only those respondents who thought the persons in the scenarios would make the less ethical choice and reports what they themselves (the respondents) would do. 51 l exhibit 5 those who thought person in scenario would do the less ethical actions what would respondent him/herself do? owners consultants chi-square ¹ i purchase stock 12 38 (63%) (49%) *not purchase stock 7 40 (37%) (51%) p = .382 ¹2 supplement income 0 16 (0%) (25%) u not supplement income 15 49 (100%) (75%) p = .073 ¹3 choose leonard 3 19 (contacts) (19%) (27%) *choose grimes 13 51 (qualified) (81%) (73%) p = 1.0 ¹4 discharge older 9 36 (64%) (49%) udischarge younger 5 37 (36%) (51%) p = .462 ¹5 shutdown secret i ii (13%) (15%) u notify employees 7 60 (87%) (85%) p = 1.0 ¹6 distribute in canada 22 90 (88%) (86%) *notdist. incanada 3 15 (12%) (14%) p = 1.0 ¹7 pay substandard wages 7 27 (28%) (29%) *not pay subst. wages 18 67 (72%) (71%) p = 1.0 ! 52 ds8 send gifts 14 69 (56%) (77%) *not send gifts ii 21 (44%) (23%) p = .0738 *ethical choice there are no significant differences between the two groups and no particular trend in the data, although vignettcs y/i, 42, y/4, 4t8 are interesting. in y/i (insider trading), 63n/o of the owners who thought the person in the scenano would buy stock would buy the stock themselves, but only 49% of the consultants would. in y/2 (padding the expense account), none of the owners would do so, even though every one of them thought the person in the scenario would. in contrast, 25% of the consultants said they would pad the account. in y/4 (discharging older workers) there was a somewhat greater tendency for the siii clients who felt the company would discharge older workers to say they themselves would do so (64a/o), compared with the consultants (49%). in p8 (gifts to clients), more of the consultants who felt the person in the scenario would send gifts responded that they themselves would send gifts than did thc clients (77% vs. 56%). 53 ffgure irk. )g of clients cboosbtg f~ 19. sh of consultants cbontdng eddcat other and ethical self. etbkat other and ethkal self. 120 100 100 8 8 tg gt i 80 p) u gt 40 s 40 40 m w 20 0 0 qt q2q304qsqdq-7 qa q-10-20-3q4qs q6q7qa quostim numbers legend ~ other ethical iri self athteal i other athhat g sett bthhei figure i presents this result from a slightly different perspective. it shows the percentage of sbi clients (figure ia) and student consultants (figure i b) who selected the ethical choice for the person in the scenario and for themselves. in every scenario, borh groups thought rhe person in rhe scenario would behave less ethically than they rhemselves would. the potential implications of this important finding are presented in the discussion section below. results of part two exhibit 6 presents the results from the question asking respondents to select a preferred co-worker. the majority of student consultants (57%) and a larger majority of sbi clients (71%) preferred to work with the non-compromising individual, easton. the alternative choice showed that a greater percentage of the student consultants (43%) preferred to work with the more flexible individual, white, than did the clients (29%), differences between the two groups as to their choice of co-worker were not statistically significant. l 34 exhibit 6 responses of sbi clients and student consultants to preferred co-worker prefer white prefer easton total (flexible) (non-compromising) sbiclients 8 20 28 (29%) (71%) (100%) student 45 61 106 consultants (43%) (57%) (100%) total 53 81 134 chi-square: p = .23 distl'us sign there does not appear to be much difference in how the student consultants and the small business owners/entrepreneurs responded to the questionnaire. their perceptions of the ethical behavior of others and what they themselves would do in ethical dilemmas appear to be relatively similar. there was a strong significant difference between the two groups in only one scenario. this was in vignette ¹5, where the issue dealt with a pending plant shutdown and the time to notify employees. the majority of student consultants (65%) felt the company would keep the shutdown a secret, whereas the majority of small business owners (71%) thought the company would notify employees ahead of time. this question may be affected by the fact that employers are legally bound to give employees 90 days notice of an impending plant shutdown. it is likely that the sbi clients would be more aware of that regulation than would the student consultants. although we did not question our subjects as to their knowledge of the regulation, we offer this as a possible explanation for the difference in responses. in the cases of padding the expense account and sending gifts to customers, the consultants reported that they might be more inclined to do so than the c/ients. this may be leaning toward a more "flexible" or situational definition of ethics where one's ethical standard is not absolute but rather dependent on the situation. this is also reflected in exhibit 6, where a gmater percentage of the student consultants preferred the more flexible co-worker (43%) than the sbi clients (29%). more important than the differences between small business owners and student consultants is the strong tendency for both groups to say that although they themselves would act in an ethical way, they felt that the person in the scenario would not (figure i). this is very important and potentially very dangerous. if business people in general feel that other individuals in the business arena are acting less ethically than they themselves, there will always be an attitude of distrust. in addition, if business people feel that everyone else is acting unethically, then 55 they may ask themselves "why not me tooy" (roberts, 1987). this is an especially critical issue for the graduating business student consultants who participated in this study who might have felt they were entering a busineas environment permeated by unethical behavior. their four year education has painted a gloomy picture of business and perhaps even society in general. our finding tends to corroborate a body of research that indicates this is a growing concern both domestically and internationally (tyson, 1990; mcdonald & zepp, 1988; pitt & abratt, 1986; ferrell & weaver, 1978; brenner & molander, 1977). yet, to the degree that there is a general perception that others are less ethical than one's self, more communication is needed between clients and student consultants (as well as within student consultant teams) during the consulting process. this should help clarify each participant's values and to build trust and respect, leading to a more effective consulting process. the actual differences between the values and ethics of student consultants and small business owners may be trivial compared to differences in perceptions between one's own and others'alue systems. clarifying the owner's goals, objectives, and values for the business must be done at the beginning of the consulting process. effective consulting will start from clarifying the actual values and attitudes of an individual small business owner, not what the consultant thinks they are or should be. it will then continue to build when consultants understand their own perceptions, values and decision criteria. quality consulting will be based on incorporating the owner's values into meaningful goal statements and then into recommendations consistent with the owner's actual values. conclusion while it does not appear that there are significant differences in this sample in the self-reported value orientations of the student codsultants as a group and the small business owners as a group, any individual's values could differ greatly from the mean of the group's values. this is true for any research study and for any client/consultant situation. additionally, it may not be possible to generalize this study's findings as far as the actual values of all small business owners versus all student consultants. this study used student consultants and the small business owner/clients of those students from a single sbi program. whether the same findings would be found in other client/consultant relationships or situations is uncertain. this study points out the need to clarify perceptions of the values of clients and consultants. it also clearly points out an area in need of further research. footnotes 'this is a conservative estimate by the authors based on the fact that students in business programs taking marketing research, entrepreneurship, small business management, policy, production and operations management, human resource management, information systems, and accounting are often engaged in consulting pro)ects as part of their educational experience. iwe do not attempt to deal with the issue of who exactly entrepreneurs, may be or the differences among them. there seems to be little consensus on that subject (cunningham & lischeron, 1991). 56 iwe made minor modifications to some of the vignettes to update them to current standards. both male and female decision makers are used. when clark developed the vignettes in 1966, the business world was composed almost exclusively of males. in another vignette the salary figure is increased to reflect current salaries. references alexander, c. s., & becker, h. j. 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(1987, spring). measured effectiveness of client-sponsored consulting projects in the marketing research course. journal of marketing education, 9, 24-30. roberts, t. (1987, december 2). the absence of ethics. computerworld focus, 4& stevens, g. (1984, fall). business ethics and social responsibility: the responses of present and future managers. akron business and economic review, 6-11. sturdivant, f. d., & cocanougher, a. b. (1973, november-december). wha( are ethical marketing practices'? harvard business review, 176, 10-12. tyson, t. (1990). believing that everyone else is less ethical: implications for work behavior and ethics instruction. journal of business ethics, 9, 715-721. weinstein. a. (1990).students as marketing consultants: a methodological framework and client evaluation ol'he small business institute. small business lnsrirure directors'ssociation nnri rrrurl prot'eedi ngs, i 22-128. 58   1      balancing exploration and exploitation in a declining industry: antecedents to firm adaptation strategy and performance     william j. burpitt, jr. elon university wburpitt@elon.edu matthew valle elon university mvalle@elon.edu abstract this paper utilizes the theoretical framework of raisch and birkinshaw (2008: 381) to investigate the performance implications of three strategic adaptation approaches (exploitation, exploration, and organizational ambidexterity) in 94 small firms supplying tools and materials to the u.s. based furniture industry. we measured four organizational antecedents to strategic adaptation as well as the performance outcomes associated with adaptation choice. results demonstrate that organizational deftness, group potency, elements of communication and cooperation within the firm, and low centralization were significantly related to organizational ambidexterity, and that ambidexterity was positively related to revenue and profit growth. the implications focus on steps that organizational leaders can take to improve the ambidextrous posture of their organizations. keywords: strategic adaptation, ambidexterity, sme’s, exploration/exploitation introduction the problems confronting small firms facing an irreversible rise of low-cost, highquality global products and services are stark (burpitt & fowler, 2007; liao, welsch & stoica, 2008). this increasingly dynamic and competitive global s trateg y   journal of small business  mailto:wburpitt@elon.edu mailto:matthew.valle@usafa.edu journal of small business strategy                                  vol. 21, no. 1 spring/summer 2010        2    environment has been described as global competition’s “perfect storm” (rousseau & batt, 2007: 16). some firms facing this competitive storm will choose to stick with their existing business and focus on improving efficiencies (ebben & johnson, 2005). others will explore new domains and focus on the development of new products, new services and new markets (ebben & johnson, 2005). managers in this situation commonly frame their strategic dilemma as a choice between two alternatives, to exploit old certainties or explore new possibilities (gupta, smith & shalley, 2006; levinthal & march, 1993; march, 1991; raisch & birkinshaw, 2008; wang & li, 2008). unfortunately, reducing the options to a choice between these two strategic alternatives obscures the more difficult challenge confronting such firms. for immediate survival, and for long term health, organizations must balance the need to do both – that is, they should be ambidextrous (gibson & birkinshaw, 2004; levinthal & march, 1993; raisch & birkinshaw, 2008; tushman & o’reilly, 1996). while the advantages that should theoretically accrue to the ambidextrous firm appear straightforward, there has been remarkably little empirical research exploring the construct (he & wong, 2004; raisch & birkinshaw, 2008), and none to date that focuses on smes. this research investigates the emergent strategies of smes facing industry decline, including the antecedents to strategy choice and the consequences of those choices. specifically, we measured four organizational antecedents to strategic adaptation (one structural, two contextual, and one leadership-based antecedent), three possible strategic adaptation approaches (exploitation, exploration, and organizational ambidexterity), and the performance outcomes associated with adaptation choice in 94 smes supplying tools and materials to the u.s.based furniture industry. the timeframe of this research corresponds to a period of decline within the industry as many u.s. based furniture manufacturers either closed, retrenched significantly, or transferred operations to off-shore locations (burpitt & fowler, 2007). this dramatic and difficult period of environmental dynamism and competitive dynamics forced the small firms that had staked their businesses on supplying the large furniture makers to reevaluate their products, markets, and ultimately, their approach to strategy formulation and implementation. the findings provide practical advice for sme leaders as they consider the nature and development of the necessary organizational resources for success in a changing world. strategic adaptation and smes michael porter’s (1980) theory of generic competitive strategy has been recognized as the dominant paradigm in strategy research and practice for three decades. however, some research suggests that cost leadership and differentiation act as nothing more than high-level discriminators of competitive strategy designs (campbell-hunt, 2000), and contribute only tangentially to what has become the challenge of achieving a temporary competitive advantage (d’aveni, dagnino & smith, 2010). there is also a stream of research within the entrepreneurship/small business literature journal of small business strategy                                  vol. 21, no. 1 spring/summer 2010        3    which suggests that porter’s generic designs do not apply well to smes (lee, lim, & tan, 1999), do not predict significant differences in performance in smes (rubach, cangelosi, bradley & mcgee, 2002), and do not adequately describe the strategy formulation and implementation processes in small firms (ebben & johnson, 2005). an alternative perspective on strategy formulation and implementation is that offered by ebben and johnson (2005), who suggest two ideal forms (“efficiency” and “flexibility”) to better capture the range of strategy choices available within smes. along these same lines, droege and dong (2008) suggest that entrepreneurial firms enact either an imitation (efficiency) or substitution through innovation (flexibility) strategy, and this theme mirrors the broader work of march (1991), benner and tushman (2003), and others with regard to exploitation and exploration. these two fundamentally different classes or categories of activities require different managerial attention, organizational configurations and organizational resources. the assumption of the efficiency versus flexibility thesis is that the appropriate match between strategy and environment leads to success, and those relationships have proven robust over the course of much empirical research (ketchen et al., 1997). the question one might ask, then, is “what happens if the environment changes?” this insight into managerial cognition provides us with a better understanding of firm behavior and performance in the face of changing conditions. the concern here is that strategy per se matters less than strategic adaptation, or the response of a firm to changes in its competitive environment. it matters not what strategy a firm has, but which strategy is appropriate to the situation. a persistent theme in much of the strategy literature is that firms achieve success only when they learn to balance continuity (exploitation) and change (exploration). in this way, they may enact efficiency/imitation/exploitation or flexibility/substitution/exploration strategies when the competitive environment warrants such a strategic shift (raisch & birkinshaw, 2008). this balance has been referred to as ambidexterity (tushman & o’reilly, 1996). balancing exploration and exploitation we take the view, consistent with march (1991), gupta, smith and shalley (2006), and others (cf., raisch & birkinshaw, 2008) that exploration and exploitation involve varying degrees of organizational learning. exploration involves “experimentation with new alternatives” (march, 1991: 85), thus increasing variance and generating internal variety (beckman, 2006). exploration involves radical innovation, creating new markets and products, experimentation, broad search, frequent change and discovery (beckman, 2006, katila & ahuja, 2002; miner, bassoff & moorman, 2001; rosenkipf & nerkar, 2001). march (1991) considered “the refinement and extension of existing competencies, technologies and paradigms” the essence of exploitation (1991: 85). beckman (2006) and benner and tushman (2003) suggest that exploitation involves variance decreasing activities involving incremental innovation, implementation, refinement, routinization, local search, and efficiency. journal of small business strategy                                  vol. 21, no. 1 spring/summer 2010        4    many will choose the more cautious of the two and for reasons that are explicable, reflecting habits and cognitions deeply ingrained in organizational forms and customs (march, 1991; prahalad & bettis, 1986). faced with discontinuous change arising from outside the firm, many firms may be unable to initiate the fundamental departure from traditional practices that is often called for (gilbert, 2005; christensen & bower, 1996; wang & li, 2008). this may be because managers did not recognize the need for change until it was too late (weitzel & jonsson, 1989) or, if aware, lacked the capabilities needed to “integrate, build, and reconfigure internal and external competences” (eisenhardt & martin, 2000: 1106) that are needed to pursue new markets and new products with a new suite of capabilities. the effort required for such a transformation is arduous, path dependent, and freighted down by existing resource endowments (lavie & rosenkopf, 2006) and the sticky nature of organizational capabilities (helfat, 2003). a balanced approach to exploration and exploitation, by contrast, is the essence of the ambidexterity hypothesis (tushman and o’reilly, 1996), something that march (1991) considered essential to organizational survival. while there are tensions associated with the competing use of resources (for exploration or exploitation), he and wong (2004) suggest that the strategic logic of keeping both processes in play was unassailable. if firms are to “outrun” (he & wong, 2004: 483) environmental selection pressures, they must maintain their capabilities to compete in mature markets (where cost and efficiency are critical) while simultaneously developing their capabilities to create new products and markets (where innovation and flexibility are critical). on this imperative, there is near perfect consensus (gupta, smith & shalley, 2006). given this discussion, one would expect the relationship between strategic adaptation and firm performance to be in favor of a balanced approach (ambidexterity), such that firms which simultaneously engage in variance-reducing (exploitation) and variance-inducing (exploration) activities would experience better performance. therefore, the following hypothesis is offered: h1: firms that engage in an implicit ambidextrous strategy experience greater performance than firms with an exploitation or exploration strategy. organizational antecedents to adaptation strategy even though ambidexterity is believed to bestow substantial benefits on the firm, march (1991) believed that enacting exploration and exploitation simultaneously in an organization led to a zero-sum game wherein both approaches compete for scarce organizational resources. alternately, gupta, smith and shalley (2006) suggest that not all types of “resources” in organizations need be finite. shapiro and varian (1998), for instance, suggest that information and knowledge can be considered boundless, and powell, koput and smith-doerr (1996) suggest that external resources are available to many firms as a result of strategic and business alliances. therefore, depending on the premise you start with, the debate can be journal of small business strategy                                  vol. 21, no. 1 spring/summer 2010        5    summarized as a choice between viewing exploration and exploitation as two ends of a continuum (e.g., katila & ahuja, 2002; march, 1991), or as orthogonal variables (e.g., beckman, haunschild & philips 2004). if your perspective is the former, the appropriate empirical test for the beneficial effects of balance would be an inverted ushaped relationship between degree of exploration/exploitation and performance. if the latter, then the proper test of the relationship between strategy and firm performance would be a test of the interaction of the two approaches. given the fact that our study context is firms in a declining industry, subject to scarce and declining resources, we take the view that exploration and exploitation are two ends of the same continuum (wang & li, 2008). this view is consistent with behavioral theory (cyert & march, 1963) which suggests that risky and less risky options are equally appropriate for a firm with scarce resources. such a resource-based view of the firm leads us to believe that some firms possess specific internal resources to enact an ambidextrous strategy with regard to innovation, and some do not. therefore, it may be worth exploring the firm-specific antecedents which predict the choice of adaptation strategy within firms in a declining industry. a number of researchers have suggested factors affecting adaptation strategy choice, including the availability of tacit knowledge (ahuja, 2000; miller, zhao and clantone, 2006; powell, kiput and smith-doerr, 1996), the ability of individuals and teams to apply that knowledge (taylor & greve, 2006), founding team composition (beckman, 2006), status differentiation in teams (perrretti & negro, 2006), and absorptive capacity and organizational inertia (lavie & rosenkopf, 2006). however, beckman (2006) suggests that an even more important antecedent to exploration or exploitation exists: organizational leaders who create the conditions, via supportive structures and organizational contexts, for adaptive strategy. in a further refinement, raisch and birkinshaw (2008) suggest that elements of leadership, context and structure are the most important determinants of adaptation strategy. therefore, we extend the literature to four possible antecedents that may enable a firm to manage the difficult balance of exploration and exploitation. the proposed antecedents are organizational deftness (mcgrath, 2001), group potency (guzzo, yost, campbell & shea, 1993), characteristics of cooperation and communication within the firm (lester, meglino & korsgaard, 2002), and degree of centralization (jaworski & kohli, 1993). organizational deftness is proposed as a leadership-based antecedent, group potency and the cooperation/communication capacity of the firm are proposed as contextual antecedents, and centralization is proposed as a structural antecedent (raisch & birkinshaw, 2008). organizational deftness. while team composition and tacit knowledge are important determinants of organizational performance (perretti & negro, 2006), it is often more important to determine how those elements combine to contribute to organizational functioning and success. in an attempt to explain how individuals within an organization can act journal of small business strategy                                  vol. 21, no. 1 spring/summer 2010        6    independently and heedfully (weick & roberts, 1993) to produce sustained positive outcomes, mcgrath (2001) and others describe this concept of the “group mind” as deftness. lubatkin et al. (2006) similarly refer to this cognitive and behavioral integration as the management team’s wholeness and unity of effort. organizational deftness (mcgrath, 2001; mcgrath, macmillan & venkataraman, 1995) then is the joint activity of organizational members to know what is required and to do it skillfully and purposefully. organizational members who possess deftness are able to consolidate information and resources and execute work in a reliable and successful fashion. it follows that an organization that possesses deftness is able to execute both exploration and exploitation (ambidexterity) at the appropriate times, depending on situational contingencies. therefore, one would expect deftness to be related to ambidexterity. h2: greater levels of organizational deftness are positively related to an ambidextrous adaptive strategy. group potency. as organizations increasingly de-layer and use self-managed teams for a variety of organizational tasks, there is a corresponding need for managers to understand how to create and manage high performing work teams (mathieu et al., 2008). researchers have recently turned their attention to investigating antecedent factors which might help predict work team effectiveness (lester, meglino & korsgaard, 2002; mathieu et al., 2008). a construct which has attracted attention in this field is group potency or the jointly held belief that the group can be effective (guzzo & shea, 1992; guzzo et al., 1993; de jong, de ruyter & wetzels, 2005). proposed as a group level variable similar in nature to individual self-efficacy (bandura, 1982), group potency is the shared belief that the group can accomplish important tasks successfully (guzzo et al., 1993). lester, meglino and korsgaard (2002) found that group potency was associated with subsequent group satisfaction, group effort, and group performance. therefore, we posit a positive relationship between group potency and ambidexterity, such that management teams which possess group potency will be more likely to engage in the strategic adaptation necessary to explore or exploit their environments for success. h3: greater levels of group potency are positively related to an ambidextrous adaptive strategy. cooperation and communication. high performing work teams are distinguished by their ability to successfully engage in interactive communication and task-focused cooperation in order to achieve team goals (campion, medsker & higgs, 1993; mathieu et al., 2008). typically, high performing work teams have had time to develop processes of mutual support and communication, and the behavioral scripts needed to guide effective group interactions (janz, colquitt & noe, 1997). kauffeld (2006) and mathieu et al. (2008) found that groups that were adept at communication were more competent overall and lester, meglino and korsgaard (2002) found that the level of communication and cooperation exhibited by a group contributed positively to group functioning by improving the journal of small business strategy                                  vol. 21, no. 1 spring/summer 2010        7    conduct of task-related and maintenancerelated activities. it would also seem that groups which are adept at communication and cooperation should be able to more easily master the complex processes of adaptation and adjustment necessary for exploration and exploitation. based on this discussion, the following hypothesis is offered: h4: greater levels of management communication and cooperation are positively related to an ambidextrous adaptive strategy. centralization. centralization is the degree to which decision making power and control are concentrated among a top management group in a firm. intuitively, it would seem that an organization characterized by a high degree of centralization would be limited in its ability to adapt its strategic orientation, and that the spatial separation of units would be more conducive to engaging in simultaneous exploration and exploitation (raisch & birkinshaw, 2008). jaworski and kohli (1993) found that certain characteristics of organizational structure, including high centralization, acted as barriers to strategic adaptation. conversely, an organic organization with low centralization would seem to possess the organizational dexterity needed to shift resources effectively between exploitation and exploration. raisch and birkinshaw (2008) noted that strategic integration across units could be more easily accomplished by coordination at the senior management level and via a strong, widely shared corporate culture. thus, sub-units and processes devoted to different learning orientations (exploration or exploitation) could indeed exist in a decentralized organization, as long as simultaneous processes of integration existed to coordinate outcomes. h5: greater levels of centralization are negatively related to an ambidextrous adaptive strategy. methods data and sample. the firms sampled in this study provide supplies, tools, services and materials to the furniture industry, including such products and services as plastic injected parts, textile dying and finishing, wooden furniture parts, foam rubber products, and a wide variety of tools and materials used in furniture manufacturing. the benefit of a single industry focus is noted by researchers (rouse & daellenbach, 1999; miller, greenwood & hinings, 1997) who point out that working with a single industry sample can help control for common factor markets and inter-industry variance (barney, 1986; gordon, 1991; mascarenhas & aaker, 1989). the subjects were selected from a manufacturing directory listing firms, products, years of operation, annual sales ranges, and number of employees. selection was based on two criteria. to ensure that the firm’s responses to industry change were made at the level of the target firm only, stand-alone firms were chosen. subsidiaries or divisions of larger firms were excluded. second, only firms that had been in operation a minimum of seven years were included. journal of small business strategy                                  vol. 21, no. 1 spring/summer 2010        one hundred forty-eight firms met these criteria. phone contact was made with one hundred thirty-six firms on the list. twelve firms had closed or been absorbed into another firm since publication of the firm directory. of the one hundred thirty-six who were contacted, one hundred seventeen agreed to participate. two sets of surveys were distributed in each firm. firm owners completed questionnaire items measuring changes in revenue and profit and their firm’s primary strategic emphasis (exploitation, exploration, or ambidextrous). members of the firms’ management teams completed questionnaires measuring organizational deftness, communications, potency and centralization. an average of three members of the management team per firm completed the surveys. completed surveys were returned from ninety-four firms. participating firms averaged 29 employees each and had been in operation a minimum of 10 years. all firm owners and 201 of the 255 managers were male and averaged slightly more than 15 years experience in their respective industries. these firms averaged $7 million in annual sales. strategic orientation. the classification of the firms as primarily exploratory, exploitative or ambidextrous was accomplished by comparison of the responses of the firms’ owners to an eight item scale developed by he and wong (2004). this scale, shown in table 1, includes four items that describe an exploratory strategy and four that describe an exploitation strategy. table 1-objectives for undertaking product or process related initiatives in the last three years (he & wong, 2004). exploratory emphasis exploitation emphasis introduce new generation of products improve existing product quality extend product range improve production flexibility open new markets reduce production cost enter new technology fields improve yield or reduce material or time the firm owners were asked to rate the relative importance of each item using a 5point likert scale, where 1 = of no importance to firm, 2 = of limited importance to firm, 3 = of some importance to firm, 4 = of considerable importance to firm, and 5 = of great importance to firm. their responses to each set of four were averaged to create an “exploratory” score and an “exploitation” score for each firm. a firm was categorized as exploitive if its score on the exploitative scale was higher than 4.0 and its score on the exploratory scale was 2.0 or less. in reverse of this, a firm was characterized as exploratory if its score on the exploratory scale was higher than 4.0 and its score on the exploitative scale was 2.0 or less. limiting inclusion in 8    journal of small business strategy                                  vol. 21, no. 1 spring/summer 2010        9    either the exploratory or exploitative category to firms whose scores were at the extreme ends of the 5-point likert scale (4 or 5) was done to make it more likely that the resultant grouping would delineate firms with a clear, unambiguous emphasis on one or the other strategy. a firm was characterized as ambidextrous if its score on both the exploratory and exploitative scale averaged 3.0 or higher. this categorization follows he and wong (2004) who note that a firm can be defined as ambidextrous if it scores high on both exploratory and exploitative strategies or if it has relatively equal emphasis on both. applying these requirements resulted in 39 firms defined as exploitative, 31 as exploratory, and 24 as ambidextrous for a total of 94 firms. performance measures. the owners were also asked to provide information on any changes in revenue and profit over the preceding three year period. revenue and profit change was measured by having owners select one of five statements that best described any changes in revenue and profit within their firms. the responses were scored as such: decline greater than 10 percent = 1, decline up to 10 percent = 2, no appreciable change = 3, increase up to 10 percent = 4, and increase greater than 10 percent = 5. measures of the firms’ financial performance and the firms’ strategy were taken from the firms’ owners as these individuals would have the most accurate information. deftness, potency, communication/cooperation, and centralization. organizational deftness within the firm was measured with a 19item scale developed by mcgrath, macmillan & venkataraman (1995). managers within each firm were asked to indicate their perception of their firm’s position on each of the 19 statements on a 5-point scale between two semantic differentials. a score of 1 would indicate lack of deftness while 5 would indicate maximum deftness. organizational potency was measured using an 8-item scale developed by guzzo, yost, campbell and shea (1993). respondents selected a number from 1 to 5 that indicated their agreement with each of the 8 items on the potency scale, where 1 = no agreement whatsoever and 5 = complete agreement. communication and cooperation within the firms was measured using an 8-item scale developed by lester, meglina and korsgaard (2002). as with potency, subjects indicated the extent of their agreement with each of the 8 items by selecting a number from 1 to 5. finally, the degree of organizational centralization was measured using a 5-item scale developed by jaworski and kohli (1993). here again subjects indicated the extent of their agreement with each of the 5 items by selecting a number from 1 to 5. measures of deftness, potency, communication and cooperation, and centralization were provided by the managers within each firm, for a total of 272 responses from 94 firms with an average of 3 responses per firm. centralization was reverse coded. the scores of the managers from each firm were averaged to produce an organizational level mean score. the averaging of individual scores to derive a firm level score is a commonly used methodology (gibson, randel, & earley, 2000; earley, 1993). the firms’ owners did not provide an assessment of these four constructs. this journal of small business strategy                                  vol. 21, no. 1 spring/summer 2010        10    was done to minimize the likelihood of common method variance, which can occur when the same subjects assess both dependent and independent variables. results the results of our analysis are provided in tables 2 and 3.  anova results provided in table 2 suggest that ambidextrous firms experienced more growth in revenue and profit over the three years leading up to the study than would exploitative or exploratory firms. this finding supports hypothesis 1. table 2-anova: revenue and profit variable group n mean s.d. f sig. exploitative firms 39 2.61 .67 10.154 .000 exploratory firms 31 2.87 .72 ambidextrous firms 24 3.51 .93 revenue total firms 94 2.92 .83 exploitative firms 39 2.38 .63 13.518 .000 exploratory firms 31 2.29 .74 ambidextrous firms 24 3.21 .78 profit total firms 94 2.56 .80                        anova results provided in table 3 also reveal that measures of the four antecedent variables (deftness, potency, communication and cooperation, and centralization) are higher (lower for centralization, which was reverse scored) in ambidextrous firms than in either exploitative or exploratory firms. again, these data support our hypotheses. discussion and implications for smes this research sought to extend and support the model developed by raisch and birkinshaw (2008) by analyzing four organizational antecedents to learning orientation/ adaptation strategy selection and subsequent effects on firm performance. consistent with that model, we found that leadership-based, contextual, and structural antecedents were associated with the selection of an ambidextrous adaptation strategy. specifically, we found that organizational deftness, or the unity of effort embodied in the concept of a “group mind” is a powerful determinant of the organization’s learning orientation. journal of small business strategy                                  vol. 21, no. 1 spring/summer 2010        11    additionally, management teams which possess potency, or the shared belief that they can achieve great things, suggests that group attitudes toward the simultaneous pursuit of exploration and exploitation are important prerequisites to adaptation and, ultimately, performance. another organizational contextual variable that is related to learning orientation is the degree of communication and cooperation in the organization. table 3-strategy and organizational antecedents variable group n mean s.d. f sig. exploitative firms 39 2.90 .25 58.92 .000 exploratory firms 31 3.02 .36 ambidextrous firms 24 3.81 .24 deftness total firms 94 3.17 .47 exploitative firms 39 2.54 .31 123.76 .000 exploratory firms 31 3.02 .33 ambidextrous firms 24 3.85 .18 potency total firms 94 3.03 .59 exploitative firms 39 3.32 .45 6.60 .000 exploratory firms 31 3.42 .51 ambidextrous firms 24 3.74 .37 communication and commitment total firms 94 3.46 .47 exploitative firms 39 2.63 .39 66.08 .000 exploratory firms 31 2.95 .37 ambidextrous firms 24 3.79 .42 centralization total firms 94 3.03 .61   one might argue that while deftness and potency represent the potential to succeed with an ambidextrous learning orientation, elements of communication and cooperation represent the degree to which organizational interaction and interdependence are manifestly enacted in pursuit of this difficult strategy. finally, while the spatial separation of sub-units (decentralization) is believed to contribute to the development of the exploratory and exploitative processes essential to survival and prosperity, consistent with gibson and birkinshaw (2004), structural forces alone may be inadequate to the task. it is perhaps worth exploring the interactive nature of the antecedents (cf. raisch & birkinshaw, 2008) to determine subsequent effects. journal of small business strategy                                  vol. 21, no. 1 spring/summer 2010        12    how might small business practitioners interpret and act upon the results? from a larger perspective, this research mirrors the findings of o’regan, ghobadian, and sims (2005) which suggests that when firm leadership style matches firm strategy, the result is higher firm performance. and more directly, o’regan et al. (2005) found that a balanced transformational and transactional leadership style is likely to lead to higher performance in all situations. in other words, when exploitation is called for, a transactional approach to leadership is most appropriate. when exploration is called for, a transformational approach to leadership is most appropriate. and when the organization needs to be ambidextrous, a balance of styles is preferred. in this study, we found that leaders who create the conditions necessary for organizational deftness (mcgrath, 2001; mcgrath, macmillan & venkataraman, 1995) develop within their organizations members who know what is required and know how to do it skillfully and purposefully. organizational members who possess deftness are able to consolidate information and resources to exploit organizational efficiencies and work in a reliable and successful fashion. they are also able to simultaneously explore and innovate because they possess a “group mind” (mcgrath, 2001) and can more easily see a wider range possibilities in any given situation. the development of deftness may occur over time as management teams work together on common (and uncommon) problems. it is worth noting that the managers in this study had been with each other for an average of 15 years. in addition to time, deftness may be the result of the development of trust between the leader and the management team. heedful interactions can only occur if each member of a system trusts the inputs of the other members of a system (weick & roberts, 1993). managers would be well advised to give management teams the time and space necessary to develop heedful interactions. leaders also shape the context in which organizational activities are conducted. the jointly held belief that the group can be effective, or group potency (guzzo & shea, 1992; guzzo et al., 1993; de jong, de ruyter & wetzels, 2005), is a powerful predictor of subsequent success. leaders can build group potency by acknowledging and supporting group performance and celebrating group successes. knowledgeable leaders know to start with small group tasks and build upon each success until the management team is capable of tackling increasingly challenging and important organizational activities. attention must be paid to group and team development, and policies aimed at increasing functional communication and cooperation are essential. systems, tools, and processes should be developed to support and speed decision making in turbulent environments, and those tools should also free individuals for more important duties when exploiting known efficiencies. finally, good leaders know when to “let go” – trust is developed when decisions are decentralized, and the wisdom of teams can only flourish when given the room to explore. the myth of the heroic leader dies a slow death, but the data clearly indicate that a controlling style of leadership only works in an efficiencyoriented environment. journal of small business strategy                                  vol. 21, no. 1 spring/summer 2010        13    the strengths of this research are that it investigated similar firms competing in a very dynamic competitive environment, it used multiple measures of organizational antecedents to adaptive strategy choice, and that it extended and supported the theoretical model proposed by raisch and birkinshaw (2008). consistent with lubatkin et al. (2006), we believe that the leadership-based antecedents are important determinants of organizational learning orientations, and that particularly for small firms such as those investigated in this study, leadership and top management team deftness, potency and communication are essential to enacting an ambidextrous strategy. we also found indirect support for the notion, developed and supported by jansen, van den bosch and volberda (2005a), that firms competing in highly dynamic and competitive environments are more likely to pursue an ambidextrous learning orientation. the principle limitation of this research is that the relationships presented represent data from a one-time collection and therefore longitudinal assessments of firm performance are not included. it may be the case that all firms gravitate toward an ambidextrous strategy over time out of necessity, and that firms who fail to make the transition, especially in highly dynamic environments, cease to exist. it should be noted that the study is limited to a single industry which may limit one's ability to generalize. finally, these results may be applicable to or informative for practitioners in declining industries, but not necessarily relevant to all small firms (i.e. those in mature or growth industries). the results of this research add weight to the emerging consensus that firms can successfully react to environmental dynamism and competitive dynamics by engaging in simultaneous processes of exploration and exploitation. the need to do so is becoming more of an imperative every day, yet the organizational resources necessary to enact such a strategy may be limited, especially for small firms. organizational deftness and group potency seem to be firm-specific human capital that vary widely between organizations, and appear to be the result of value-based leadership and organizational cultures that support individual growth and team learning. of additional interest is the leadership climate within these firms where, presumably, a strong and principled leader sufficiently empowers organizational subunits to explore and exploit, to learn and progress, with sufficiently decentralized processes for doing so and sufficiently integrated mechanisms for communicating and coordinating the work to produce superior results. references ahuja, g. 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(1989). decline in organizations: a literature integration and extension. administrative science quarterly, 34(1), 91-109. william j. burpitt, jr. is a professor of management at elon university and has produced, directed and managed radio and television stations. he received a bachelor's degree from the university of georgia and a doctorate from the university of north carolina at chapel hill. he taught at peace college and meredith college before coming to elon. at meredith, he served as the mba director. matthew valle is a professor of management at elon university, a graduate of the u.s. air force academy, and a former air force pilot. he received an m.s. in operations management from the university of arkansas, an mba from the university of massachusetts, and a ph.d. in business administration from florida state university. an award winning teacher, dr. valle has more than 60 refereed publications. he has consulted with boeing, raytheon, bombardier aerospace/learjet, gates rubber co. and conagra, among others. reproduced with permission of the copyright owner. further reproduction prohibited without permission. innovative turning points in the path to entrepreneurial success matthew c. sonfield russell m. moore hofstra university abstract ln a study of highly successful privately owned firms, a very large percentage of ceos reported a specific strategic turning pointin their companies'i. tories that was instrumental toward their success. this paper proves this phenomenon and relates it to existing theories of organizational innovation and organizational life cycles. introduction a recent research project conducted by the business research institute and the small business institute at hofstra university, in conjunction with peat marwick main & co. and the long island business news, identified the fifty largest privately owned companies headquartered on long island, new york (5). (ranking was by 1986 sales revenues, ranging from $532 million to $14 million.) while this research generated a variety of data and findings, a particularly interesting result was that 72% of the respondents (21 of the 29 who answered the relevant questions in the survey instrument) were able to describe a specific strategic decision or turning point in their companies'istories that was critical to their success. thus, rather than a smooth and fairly even path to success, there was instead some critical incident that accelerated the firm in that direction. two areas of organizational theory can be related to this research finding. one is the theory of "organizational innovation." this research focuses on the idea that some firms tend to be more innovative than others, and research in this area usually aims to identify factors that can be correlated with such innovation, and perhaps be identified as causal to innovation, a second area of research relating to the study reported on in this paper involves the concept of an "organizational life cycle." this research area focuses on whether firms tend to follow a cycle of stages in their histories, and whether these stages are universally consistent in type and sequence. 60 strategic turning points the companies identified in this research study provided a good cross-section of highly successful firms. as the top fifty privately owned companies in a region of 2.7 million people, having a "gross regional product" of over $40 billion, these are indeed very successful firms. furthermore, they represent a wide variety of industries and vary considerably in number of employees (4200 to 16) and in age (72 to 2 years). these firms, and their ceos, were initially identified through a publicity campaign using direct mail and the media. the resulting listing was audited and verified, and judged by experts to be at least 90% complete. a personal interview was conducted with a 20% stratified sample of the ceos, and a followup mail survey was then conducted with the entire set of fifty firms. thirty-five of the fifty firms responded to this mail survey with no unusual patterns of non-response. not all respondents answered all survey questions. while most of the responses and findings were consistent with the existing literature, the data on "turning points" stands out. as previously stated, 72% of the mail survey respondents answered "yes" to the question: "can you identify a specific strategic decision or turning point in your company's history that was critical to its current success?" for example, one ceo related that the unexpected loss of his firm's major customer forced him to become more aggressive and innovative and this led to sales and profits much greater than before. another ceo told how the decision to computerize his firm's entire operations enabled him to serve his customers with a level of quality and speed that could not be matched by his competitors. other critical turning points included a move from consumer to commercial target markets, and being the first firm in an industry to satisfy a new market demand created by a change in a state commercial code. while it is not feasible in this paper to list or summarize each and all of the critical incidents reported, some summary analyses can be made. we can categorize the ceos'esponses by type of strategic decision (some ceos reported more than one): specific change of marketing focus, operations, services, products, etc. 14 diversification, acquisition, growth strategy 4 new general level of effort, aggressiveness 4 other (specific person hired) 1 thus, most of the turning points involved a specific strategic move —a new target market, product line, type of service offered, operational method, etc. broader strategic moves in the form of growth or expansion, or more general and less specific increases in corporate energy were less common. we can further categorize these turning points into those that were internally generated versus those that were the result of an external impetus: external impetus 3 crisis situation 1 internally initiated 17 61 most of these strategic moves were not implemented because some external factor forced the company's management to reactively respond, but rather were the results of unforced innovative and proactive thinking by management. only three of the reported critical incidents were the result of a specific and fully-developed external opportunity presenting itself to management (example: the opportunity to become the american distributor of a new foreignmade product, which subsequently became a huge seller), and only one strategic move was forced upon management in response to a crisis (the loss of the primary customer mentioned above). organizational innovation theory much has been written in the area of innovation in organization. this research and writing is part of the broader discipline of strategic management. most researchers conclude that innovation is basic to all organizations, but to varying degrees. miller and friesen conclude that momentum is a pervasive force in all organizations, and innovative actions by management are part of this momentum (2). quinn refers to this process as '1ogical incrementalism" and discusses "precipitating events" that lead to organizational innovation (6). these events might be external or internal, over which management may have little or no control, and they have significant impact on the strategic decisions of the organization. examples given by quinn include decisions forced upon general motors by the 1973-74 oil crisis, and the opportunity presented to hatoid corp. (later xerox) by the invention of xerography. the writings in this area present a wide variety of findings and conclusions, with many different resulting listings of factors that may correlate with or precipitate innovation. after analyzing the various innovation theories, miller and friesen conclude that this variation in findings is due to the fact that there are two basically different types of firms, and that innovation theories and precipitating events appropriate to one type are inappropriate to the other (3). one type of firm is "conservative" and these firms innovate only in response to challenges, which are usually external. the other type of firm is "entrepreneurial" and innovation here is a natural and internally-generated process, and will continue as long as resources are not being squandered in the process. as will be discussed further on in this paper, this model works well in the analysis of this current study. organizational life cycle theory this area has also seen much research and resultant writings. greiner, an early writer in this field, concluded that organizations tend to move through five stages of growth in a life cycle; "creativity," "direction," "delegation," "coordination," and "collaboration (1)."these stages tend to follow this particular sequence, and thus greiner po. tulates that managers should identify the stage they are currently in so that they can anticipate the following stages and the appropriate strategic actions. subsequent writers developed similar models of life cycle stages, but often with a different number of stages and/or different descriptive designations. as in innovation theory, such models often included events or factors that correlated with or precipitated these stages. miller and friesen have here, too, attempted to analyze and consolidate these various writings (4). their research concluded that five separate stages do exist: "birth "growth," "maturity," "revival and "decline," and that for each stage there are correlations with certain factors of environment, strategy, structure, and decision making methods. however, they also conclude that the sequence of stages is not set, but can vary among different organizations. 62 analysis and conclusions we can relate the findings of this current research study to the previous findings in organizational innovation theory, the innovation reported by this current sample of firms seems to be both natural and internally generated, as in miller and friesen's "entrepreneurial model" and in opposition to the externally-generated innovation in their "conservative" model. however, while "entrepreneurial" firms are supposed to generate frequent innovation, the majority of firms in this current sample reported only one clear strategic turning point in their histories. furthermore, few of the reporting firms'eos were able to identify a precipitating factor leading to the innovation. these differences between the current sample and the "entrepreneurial" model may be due to the fact that these current firms are privately owned, while most previous research studied publicly traded companies. these latter firms may have a greater pressure from, and obligation to, their stockholders to constantly innovate and grow, while privately owned firms are usually not under such pressure. also, the absence of reported precipitating factors does not mean that such events did not occur; and it is quite possible that these reporting ceos, being unaccustomed to frequent innovation, simply did not recognize such events. we can also relate these current findings to organizational life cycle theory. most of the firms in this study can be characterized as having passed through miller and friesen's synthesis life cycle "birth" stage, with simple and informal structures, domination by their owners, and much struggling. most also then moved on to a subsequent "growth" stage, with the firm establishing distinctive competencies, some product-market success, rapid sales growth, larger economies of scale, functionally-based organizational structure, more formal procedures, and some authority delegated to non-owner middle managers. a number of the higher-ranking firms in the sample have now entered the "maturity" stage of the life cycle, with sales volume stabilizing, innovation in the past, a more bureaucratic structure, and goals more conservative than in the "growth" stage. finally, only a very few firms at the top of the listing seem to have reached the "revival" stage, with diversification and expansion of product-market scope, generally accomplished through acquisitions and/or mergers. none of these firms appear to be in a "decline" stage of the life cycle. thus, this current sample seems to fit the miller and friesen model, both in life cycle stage type and sequence. of course, a further and deeper probing of this sample would be desirable. ideally, indepth personal interviews with all of the firms'eos would provide better data than the mail survey instrument did, and would thus strengthen these conclusions. still, this research is of value in that it provides data from a type of business firm rarely studied —the successful yet still privately owned firm. this data indicates that these firms, while not identical to publicly traded firms, with their pressures to grow, do seem to fit many aspects of current theories of organizational innovation and life cycles. the authors are currently engaged in further research and analysis in this area. references 1. griener, larry e., "evolution and revolution as organizations grow," harvard business review, july-august 1972, pp. 37-46. 2. miller, danny and peter h. friesen, "momentum and revolution in organizational adaptation," academy of management journal, 23, 1980, pp. 591-614. 63 3. miller, danny and peter h. friesen, "innovation in conservative and entrepreneurial firms: two models of strategic momentum," strategic ivianagement journal, 3, 1982, pp. 1-25. 4. miller, danny and peter h. friesen, "a longitudinal study of the corporate life cycle," management sciehce, october 1984, pp. 1161-1183. 5. moore, russell m. and matthew c. sonfield, factors in the business success of long island's top 50 privateiy owned companies. (hempstead, ny: hofstra business research institute, 1988). 6. quinn, james brian, strategies for change: logical incrementalism. (homewood, il: irwin, 1980). 64 strategy an empirical examination of managerial competencies among black women entrepreneurs and black women corporate executives~ joe singer university of missouri kansas city abstract the new economic reali ty of the l 990's is clearly the notable enirepreneuri ol pursuits of women business ownersin general and black women ennepreneursin parncular. this paper reports on the managerial colnpetencies and perceived skill development needs ofblack women entrepreneurs and contrasts their profile wuh black women corporate managers. managerial competencies were assessed through the use of the "leadership competency inventory" (lcii. the lci provides feedback on 55 competencies arranged in four cotegories: (i)socio-economic environmeiu of business, (2) technical and operational methods, (3) human resource and interpersonal communication ski lls, and (4) vision and en vi ronmen tal coa li gnmeiu scanni ng abilities. upon testi ng for si gnificance, the conclusions indi cote tluu a rehui vely dr/creat and disunct competency profile exists and illusirates the developmental needs for black women managers nui cipanng stepping offthe corporate track in favor ofthe entrepreneurial al ternati ve. as for black women emrepreneurs, they continue to display mixed perceptions of thei r ski lls ond abiluies wi th some areas idennfie as very weak and others very positi vely viewed. introduction aspiring black women entrepreneurs and corporate businesswomen have always faced numerous unique batriers, even when compared to other minority group members. yet, experts anticipate a continuing growth trend for black women's labor force panicipauon; reaching a 65 percent net growth rate through the year 2000 (brand, 1988)and representing 5 6 percent of jobs (hudson, 1987).ironically, the black women's successes in the 1980's, particularly the corporate beneficiaries of desegregadon, have created a rift between women in professional and managerial jobs and those black women entrepreneurs who are among the fastest growing segment of the small business formation population (reskin k roos, 1990).this may contribute to diminishing the number of black women who have been leaving their corporate employers in large numbers to seek the entrepreneurial alternative (morrison, white, gt van, 1987). one challenge that the vtais article received the distinguished paper award at the l993 national sb/da conference in san diego. it was noi reviewed by the isbs editorial advisory board. 43 mnainder of the 1990's will bring both occupational groups is to create a united politicaleconrxnic basis for demanding enhanced gender and race equity. such a basis should be keyed to transcending the economic barriers and disproportionate institutional support between the more and less favored black businesswomen. 'ibe possibility for building effective soci~omic coalitions supportive of the training, positioning and development needs of black women, rests with a clearer understanding of the managerial competencies, styles and motive profiles of black women entrepreneurs and black corponue businesswomen. (diffley, 1983).the newest emerging group of modern black women e trepreneurs is most likely to be small business owners with prior corporate business experience, a strong need to be independent, and a selfwmpowered will to succeed (birley, 1989, brush k. hisrich, 1988). often identified in the literature as the "second generation" modem women entrepreneur, (gregg, 1985), this new source of black small businesswomen comes to the challenge often prepared with technical operative knowledge and managerial planning skills, a network of contacts and a 1990's orientation to creating a customer (drucker, 1986) through inventing new markets (sehuan dt izxxtg, 1992). having utilized her previous corporate managerial environment as a skills and competency building incubator (cooper k dunkelberg, 1987),she seeks the entrepreneurial alternative to bridging the occupational and career queueing gaps, in order to reach for newly emerging opportunities in today's fresh approaches to the global marketplace. if women business owners are truly the fastest growing "new breed of entrepreneurs" (moriya,yudd, 41 file, 1988).then understanding the competencies and skills necessary to make the transition from the corporate to entrepreneurial environment would be of considerable value (rescuer, 1989).although numerous research studies have examined the women entrepreneur (ksrich, 1986),very liule attempt has been made to isolate the characteristic skills, problems and perceptions of the black women entrepreneurs. objectives lite purpose of this paper is (1)to examine the managerial orientations and competencies of black women entrepreneurs compared to black businesswomen holding executive and managerial positions in large corporations, as well as (2) to explore the developmental needs of both groups in order to enhance the survival and growth of minority firms and inform management assistance consultants and educators regarding developmental factors among the largest potential pool of future black women entrepreneurs. 'ihe failure of legislators, administrators, and the feminist movement to address the working concerns of black women is currently receiving political attention and engendering widespread discussion in white women's organizations (glenn, 1992).although racial ethnic schohrs have auempted research focusing on racial ethnic women in relation to family, community and labor force participation, those studies have not explicitly recognized the specitic competencies of black women in the two fastest growth fields of employment; professional and managerial occupations (especially small business formation). clearly, a necessary next step is to understand and develop a theoretical and conceptual framework for analyzing the socio-economic competencies and occupational development needs at the interacuon of race and gender stratification within the process of enuepreneurship. hopefully a staning point for developing such a theoretical framework would appear to lie in the 44 assessment of contrasting business skills and abilities among black women entrepreneurs and coporate managers. such information should assist small business development educators and administrators in fcamulating minority business assistance strategies. research design following the suggestions of pj.hoffman (1960),mitcheb & beach (1977) and michael j. stahl (1986), that a behavioral decision theory modeling approach (see stahl, 1983, pp. 775789) be used to study managerial competencies, a skills inventory assessment approach was developed. an advantage of such an approach is that scores based on the action-oriented behavior of subjects as reported by superiors, peers and subordinates can be combined with subject's selfreports of their perceived competencies. the research design therefore presents a rigorous experimental testing methodology (a triple replicate of a 2 x 2 x 2 full factorial) with regression analysis of each subject's perceived managerial competencies. the clear advantage of such a cmss-scoring approach is that testing for nonsignificant regression equations highlights inconsistent data. then errors in the separate data set models can be compared with the coors in the model run on the full sample. although instrument test-retest reliabilities are not a focus of this study, the average testretest reliability for principal advisor/boss samples was .86, for self-reports .84 and for peer/ subordinate .81.the test-retest reliability coefficient for the composite managerial competence measures for all samples averaged.72. keep in mind that suchreliability coefficientsareconsiderably higher than the often employed mcclelland's (1965)tat instrument (.30). data collection obtaining an accurate assessment and comparison of black women entrepreneurs'anagerial competencies with black corporate businesswomen managers, was a difficult undertaking. to locate entrepreneurs and businesswomen for this study, a number of sources were employed. these included ~ national directory of minority-owned business firms (1992) ~ the directory of women entrepreneurs (1991) ~ national minority business directory (1990) ~ the women's business initiative, inc. (association) ~ the society of women engineers (association) ~ women in management division of the american academy of management (association) ~ the network of women in business directory (1990) ~ national association of family business directory (1992) an initial stratified random sampling plan was employed to identify and select a proportionate number of black women entrepreneurs and black businesswomen executives who would consent to study panicipation. from these two groups a final sample was constructed to balance business type, geographic location, business size, duration, and industry. data for this study were obtained on each of the 55 (5 = high; i = low) competency components from the panicipating entrepreneur and manager, her closest business advisor or her immediate superior, and fmm four to six "observers" equally split at the peer and subordinate 45 levels. in every case, the participants were to select people who were very important to them in doing their job and on the basis of "people whose opinion you value." each participant selected for the study was provided with a complete set of questionnaues (coded), instructitxts and postage paid return envelopes in order to preserve the confidentiality of the assessment process. 'ihe 55 managerial ctaupetencies (see the appendix to this paper) assessed by each group pmvided the following data sets: 1. the participant enuepreneur and corporate manager established the most "important competencies" for her job and identified their most critical areas for improvement ("needed improvement" ).complete data sets were assembled for 88 enuepreneurs and 102 businesswomen executives or managers. 2. for black women entrepreneurs, a principal business advisor (mentor) or board chairperson provided feedback on competencies "important" to the job and "needs for improvement." the same set of questionnaires was received for participating black businesswomen managers. 3.the selected "observers" perceptions of important managerial competencies and need for improvement, included 348 survey instruments for participating entrepreneurs and 520 quest'naires, returned for participating corporate businesswomen. research hypotheses 'ihe hypothetical constructs developed for this research effort are a first attempt at identifying creative development strategies for scholars, practitioners, and small business ctxrsut chants, who, based upon the suggestions in the literature, believe that in order to succeed, entrepreneurial owner-operators need a broad and balanced spectrum of managerial competencies. in addition, it has been pointed out, time and again, that most corporate black businesswomen move, quit-working, or pursue their independent business because they perceive themselves discriminated against, thwarted and ~in their careers, even by other women (nkomo, 1988).yet, by their achievements, skills, creativity and talents, they represent the largest pool of potential black women entrepreneurs in the history of our nation. paying heed to the managerial canpetencies and needs for impmvement among these two groups of minority women, is an essential, necessary and sufficient condition for the continuing success of entrepreneurial organizations in the united states and abroad. therefore, based upon theory and previous research, the following hypotheses were developed: hypotheses i: bladi women owner-operator entrepreneurs will exhibit a significant difference in managerial competencies when compared to black businesswomen corporate executives or managers; on the competencies perceived as "important". hypotheses 2: bladi women owner-operator entrepreneurs will exhibit a signiticant difference when compared to black businesswomen corporate executives or managers, in the perceptions of "need for improvement" as evaluated by their own self-assessments, their principal business advisors, or immediate superiors, and "observers" selected at peer and su ordinate organizational levels. 46 based upon years of experience in teaching minority businesswomen programs, a number of sub-hypotheses are possible relative to motivauonal characteristics, value systems and personafity types. expectations are that entrepreneurs will perceive part i and part iv dimensions of signiticantly higher importance than their advisors and observers. on the other hand, black coporate businesswomen managers wifi be highly task focused (part ii) and truly interested in human resource management issues (part iii). survey results respondents to the leadership competencies inventory were presented a five point scale upon which to indicate both major (5) and minor (i) importance and developmental needs for improvemenl the compiled data is presented in the following tables and ranked by the magnitude of difference between entrepreneurs and corporate managers. after first testing each data set for homogeneity of variance, student't" tests (as modified by the kendefl tau statistic) were applied to examine significance in group means at the .01 (vv) and .05 (v) levels. in addition, although all observations were employed, only the significant data for the upper and lower quartiles are presented. high priority and low priority development needs are also indicated by other study paftlcipallts. table i summarizes the highest and lowest quartile dimensions of managerial competencies considered important (unimportant) by the participating black women entrepreneurs and their counterpart black businesswomen corporate managers. at a.01 level of significance, women entrepreneurs ranked profit management and control and monitoring, as the most important success skills along with competitor awareness and skill in managing creativity (.05 levels). of least importance and significantly different than corporate businesswomen managers (.01)were legal requirements and organizational blending. not surprisingly, group process skills and conflict resolution abilities were ranked higher (signifiicantly different at the .05 level) by black corporate businesswomen executives. in examining the highest quartile, which includes the greatest relative comparative importance selections by enuepreneurs, it should be noted that 70 percent of the competencies represent part i and ii dimensions or the "mechanics" of management (skills) rather than the "humanics" (process abilities) or dimensions from parts iii and iv). of critical importance to any business person is feedback relative to what "competencies" their immediate supervisor or principal business advisors (mentors) consider most important to doing a good job. table 2, reports the assessments of business advisors and the bosses of participating corporate managers. in comparison with corporate businesswomen managers, seven competencies, including 1.02-profit management, 4.10-managing creativity, 2.11-control and monitoring, and 1.03 cost and cost control, exhibit significant difference, while 1.06competition awareness, 3.07-personnel/staffing and 4.11-entrepreneurship are significant at the .05 level again, among the thirteen highest ranked competencies, eight out of thineen represent the "blocidng and tadding" on mechanics of operating a business. the mentors of participating corporate managers regarded 1.01-monetary conditions, 1.08-organizational culture and 4.05sense of timing as more critical areas of managerial competency. 47 table i parncipant's select/oust important competencies item ¹ dimension description entrepreneur manager signif. ( lowest quartfle ) 1.12 legal requirements 2.9850 3.5033 1.07 impact 2.5110 3.0438 4.04 organizational blending 3.7210 4.1315 1.01 monetary conditions 2.2888 2.7037 u 3.14 group process skills 3.7200 4.0645 3.02 resolving conflicts 3.9535 4.2840 ns 4.14 policy formulation/implementation 3.2500 3.5598 ns 1.09 internal structure and operation 4.2631 4.5750 ns 1.08 organizational culture 3.8370 4.1157 ns 1.04 business conditions 3.1167 3.3733 ns 3.09 performance management 4.2248 4.4728 ns 4.05 sense of timing 3.8761 4.1158 ns 2.09 time management 4.3800 4.5092 ns ( highest quartile ) 1.05 customer / client awareness 4.3025 4.2167 ns 2.08 delegation 4.4965 4.3878 ns 2.07 implementation 4.6901 4.5750 ns 4.13 managing change 4.0310 3.8943 ns 4.11 entreprenetnship 3.7598 3.6227 ns 4.12 risk tahng 3.8373 3.6567 ns 1.11 social and political 2.5583 2.3472 ns 2.12 proposal preparation 3.4883 3.1805 ns 1.06 competition awareness 3.2947 2.9423 3.07 personnel / staffing 4.0698 3.6737 ns 4.10 managing creativity 4.2248 3.6738 1.02 profit management 4.6989 4.1448 2.11 control and monitoring 4.5103 3.9557 t ~ 48 table 2 business advisor / mentor selections: iinpononr conrpeiencies item tt dimension description entrepreneur manager signif. ( lowest quartile ) 1.01 monetary conditions 2.2392 2.6768 ~ 4 1.08 organisadonal culture 2.5613 2.9644 v 1.07 impact 3.5067 3.8965 ns 2.14 information management 3.7618 4.1510 ns 4.05 sense of timing 3.8618 4.2510 4 4.14 policy formulation / implementation 3.0895 3.4525 ns 1.12 legal requirements 3.1302 3.4353 ns 4.07 pmblem solving 3.6992 3.8778 ns 3.14 group process skills 4.3497 4.5068 ns 1.10 international awareness 3.8618 4.0137 ns 4.13 managing change 1.9922 2.1430 ns 1.11 social and political 2.1953 2.3132 ns 3.11 stress management 3.8212 3.9287 ns ( highest quartile ) 2.08 delegation 3.8620 3.6567 ns 2.04 objective setting 4.4715 4.1837 ns 1.05 customer / client awareness 4.7155 4.3878 ns 4.03 resource blending 4.5528 4.1498 ns 3.09 performance management 4.7155 4.3027 ns 2.12 proposal preparation 3.6178 3.1973 ns 4.11 entrepreneurship 4.1870 3.7417 3.07 personnel / staffing 4.1870 3.6905 1.03 cost and cost control 4.6342 4.1328 44 2.11 contml and monitoring 4.8008 4.2993 44 1.06 competition awareness 3.4147 2.7725 4.10 managing creativity 4.2683 3.5203 1.02 pmeit management 4.7355 3.9847 tbe participating women entrepreneurs and corporate managers, in this study, were asked to distribute and equal number of assessment questionnaires (at the peer and subordinate levels) to "observers" whose opinions were valuable to them in doing their jobs. these observers were to be in a position to judge which managerial competencies are of critical importance to the manager and entrepreneur and what improvements or developmental needs they would recommend. while the identification of important competencies, as reported by the participants and their mentors demonstrated some similarity, the data provided by selected observers clearly displays a highly discriminate difference in imponance, as shown in table 3. 49 table 3 observer's se/ecnonsi irnporarnr competencies item ¹ dimension description entrepreneur manager signif ( lowest quanile ) 1.10 international awareness 2.4870 3.1708 vv 4.04 ganizational blending 2.8675 3.4850 1.12 legal requhements 2.9102 3.5070 4.14 policy formulatkut/implementation 2.9103 3.3150 1.04 business condititats 2.6858 3.0490 1.07 impact 2.4783 2.8308 1.01 monetary conditions 3.7565 3.9847 1.08 organizational culture 4.1623 4.3532 3.14 group process shgs 1.9862 2.1655 ns 1.11 social and political 3.8333 4.0025 ns 4.09 vertical communication 2.8757 2.9932 ns 3.11 stress management 3.3592 3.4627 ns 4.08 lateral communication 2.3143 2.3688 ns ( highest quanile ) 3.07 personnel / staffing 4.1968 4.0872 ns 2.11 control and monitoring 4.7495 4.6378 ns 4.10 managing creativity 3.8170 3.6955 ns 2.12 proposal preparation 4.7495 4.6268 ns 2.09 time management 4.3955 4.2720 ns 1.03 cost and cost conuol 4.7063 4.5648 v 3.09 performance management 4.3265 4.1500 ns 2.03 decision making 3.1952 2.9970 ns 1.05 customer /client awareness 4.4042 4.1980 1 1.06 competition awareness 4.0587 3.8027 vv 3.10 development / coaching 4.5078 4.2350 2.10 budget management 4.0328 3.6733 1.02 profit management 3.9910 3.5727 observers of black women owner-operator entrepreneurs identities eight competencies at significantly lower critical importance; three-fourths of which are dimensions defined in part i (soci~onomic environment) of the assessment questionnaire. they rated competencies in the areas of sound financial management control, as well as, a suong marketing orientation to customer and competitor, as the highest priority skills and abilities. one significant competency (.01 level) that had not appeared before was the development and coaching of employees. turning now to managerial competencies which are identified as areas for "needed improvement", tables 4, 5, and 6, summarize the participant's, mentor's and observer's selecdats. 50 table 4 participant's selections: areas for needed improvement item ¹ dimension description entrepreneur manager signif ( lowest quartile ) 3.01 managing motivation 2.7558 3.6501 44 2.08 delegation 3.0917 3.6167 1.07 impact 2.9845 3.3503 4 3.04 effective listening 3.0233 3.3673 4 1.10 international awanness 2.8295 3.1463 4 3.06 effective presentation 2.8297 3.1295 ns 3.12 information sharing 3.1395 3.4353 ns 2.13 organizing systems and structures 3.2945 3.5545 4.03 resource blending 3.0620 3.2993 ns 4.10 managing creativity 3.0233 3.2483 ns 4.05 sense of timing 3.0232 3.2485 ns 1.12 legal requirements 3.2945 3.5033 ns 4.06 problem perception 2.7520 2.9422 ns ( highest quartile ) 1.05 customer / client awareness 3.4108 3.3503 ns 2.02 problem analysis 3.5658 3.5033 ns 2.10 budget management 3.1017 3.0272 ns 3.03 empathic response 3.1395 3.0612 ns 3.05 influencing 3.2945 3.2143 ns 1.02 profit management 3.0233 2.9422 ns 2.11 control and monitoring 3.0620 2.9762 ns 4.04 organizational blending 3.6820 3.5885 ns 4.13 managing change 3.6822 3.5373 4 2.04 objective setting 3.5272 3.3163 4 1.06 competition awareness 3.2170 2.8862 3.10 development / coaching 3.7322 3.3327 4.14 policy formulation/implementation 3.5043 3.0631 44 participating entrepreneurs appear to believe that they need little improvement in 3.01managing motivation and 2.08 delegation, for which they exhibit a significant difference (.01) when compared to women managers. yet, they seem to recognize a need to impmve their employee coaching and development skills. other areas of significance in terms of impmvement needed include 4.14policy formulation and implementation ( 01), 1.06-competition awareness, 2.04 -objective seuing and 4.04 -organizational blending or the systematic bahncing of tasks. both the men tora (table 5) and observers (table 6) tend to agree that controlling costs (1.03, 2.10,2.11)and competitor/customer/client awareness are criucal areas for needed improvement. 51 two dimensions that have not previously received high priority rankings. 4 01-networking ( 01) and 4.05-sense of timing, show upas mentor selections for improvement and observers give time management a high order of priority for needed improvement. table 5 business advisor //rfentor selections: areas for needed imttrovement item tt dimension description entrepreneur manager signif ( low priority ) 3.03 empathic response 2.6830 3.1293 3.13 diffaentiating individuals 2.8862 3.2993 v 3.01 managing motivadon 2.6017 3.0102 v 3.11 stress management 32113 3.5713 ns 2.14 information management 2.7235 3.0782 v 3.02 resolving conflicts 2.6830 2.9932 ns ( high priority ) 1.03 cost and cost control 3.0082 2.8062 ns 3.10 development/coaching 3.0488 2.8232 ns 4.05 sense of timing 3.4553 3.2143 ns 1.06 competition awareness 3.4187 3.1086 1.05 customer / client awareness 3.5833 3.2230 4.01 networking 3.6857 3.3081 vj tables 7 and 8 simply present the top priority competency ranking (rather than comparatively addressed as in the previous tables) as provided by study entrepreneurs and corporate managers. both groups of participants give primary weight to part ii, technical and operational skills (40 percent and 50 percent respectively) with the corporate managers displaying a stronger association to human resource management and interpersonal communicauon skills (part iii), 40 percent of managerial competencies. what is perhaps more remarkable, and not necessarily unexpected, is the balance of managerial competencies selected by entrepreneurowner-operators. having identified the critical managerial competencies for success, women entrepreneurs seek help in improving their 2.09 ume management skills, 4.13change management abilities and their 1.05 customer/client awareness strategies (table 9) employment development and coaching and organizational blending are among their top five identified needs for improvement. bhck women corpomte managers share three areas of need improvement (table 10):2.09 time management, 4.13 managing change and 2.02 -problem analysis with participating entrepreneurs. however, delegation, management of motivation, and managing performance represent areas of needed improvement that they also regard as critical managerial competencies in their careers. 52 table 6 observer's selections: areas for needed improvement item ¹ dimension description entrepreneur manager signif ( low priority ) 3.03 empathic response 2.3057 2.6275 44 1.08 organizational culture 2.8325 3.0780 4 1.01 monetary conditions 2.7462 2.9712 4 3.14 group process skills 2.2625 2.4870 44 3.13 differentiating individuals 2.7807 2.9860 1.10 international awareness 2.7893 2.9897 4 ( high priority ) 2.09 time management 3.1852 2.9997 ns 4.03 resource blending 4.6011 4.4117 ns 2.10 budget management 4.3267 4.0048 4 2.12 proposal preparation 3.1958 2.9549 4 2.11 control and monitoring 4.5078 4.1989 44 1.06 competition awareness 4.0328 3.5431 44 table 7 table 8 ranking of most important ranking of most imporuuu managerial competencies managerial competencies by black women entrepreneurs by black businesswomen managers item dimension description mean item dimension description mean 1.02 profit management 4.6989 2.02 problem analysis 4.7960 42.07 implementation 4.6901 2.01 situation analysis 4.6938 4208 delegation 4.4965 3.01 managing motivation 4.6935 3.05 influencing 4.4573 3.04 effective listening 4.5918 2.11 contmland monitoring 4.5013 «2.07 implementation 43750 2.09 time management 4.3798 1.09 internal strucuue tk operuion 4.5750 1.05 customer/cflent awareness 4.3025 2.03 decision making 4.5578 4.10 manag'ug creativity 4.2248 3.09 performance management 4.4728 3.07 personnel / staffing 4.0698 42.08 delegation 4.3878 4.13 managing change 4.0310 3.10 development/coaching 4.3707 53 table 9 table 10 ranking ofmost important ranking of most important needs for /mprovemenr by needs for improvement by black women entrepreneurs black businesswomen managers item dimension description mean item dimension description mean ~2.09 time management 3.7340 «2.09 time management 3.7245 3.10 devektpment/coaching 3.7322 3.01 managing motivation 3.6501 '4.13 managing change 3.6822 2.08 delegation 3.6167 4.04 organizational blending 3.6800 4.04 organizational blending 3.5885 «2.02 problem analysis 3.5658 3.11 stress management 3.5715 2.04 objective setting 3.5272 2.13 organizing systems 1.03 policy formulation / dt structures 3.5545 implementation 3.5043 3.09 performance management 3.5373 2.05 strategic planning 3.4450 «4.13 managing chance 3.5373 1.05 customer / client awareness 3.4108 «2.02 problem analysis 3.5033 1.06 competition analysis 3.2170 1.12 legal requirements 3.5033 discussion as with the case of all entrepreneurial ventures in general, a number and variety of influences can be expected to affect survival. for minority-owned firms operated by black women, patt isocio-economic business knowledge, and part ii technical and operational skills tend to dominate their "focused-in" approach to needed impmvement and their identitication of critical managerial competencies. although black businesswomen corporate managers agree on the significance of part h skills, they display a more "focused-out", (part iii human resource management and interpersonal conununications skflls) developmental need and critical competencies. both the mentors and observers for each group of participants, strongly support this picture of strengths andw~. the fact that there were a number of signiticant differences among entrepreneurs and corporate managers, in the nature and direction of competency development, suggests that strong joint-pnnership alliances may be warranted. as an example, rather than attempting to become more of a generalin (moving from part i/ii to part iii/iv in shlls development), enuepreneurs could reach into a significandy large and growing pool of executive business talent among corporate businesswomen managers to form mutually beneficial co-parmerships (see table 11). work-tule performance could be greatly enhanced without puuing the survival of their firms ahead of personal time and values, while complementing creativity and offering greater potential for empowering and anracting good employees. 54 table 11 employment of women in managerial and professional occnpadons black women white women occupation 1970 1980 1990 1970 1980 1990 total employed 3.7 mm 4.7 mm 5.1 mm 25.5 mm 26.7 mm 37.1 mm pmfessional 11.0% 14.2% 21.6% 15.3% 15.1% 28.2% managerial 13% 4.7% 20.0% 3.8% 8.4% 20.9% source: u.s.bureau of the census of the populations. 1970, 1980, 1990. characteristics of the population.vot i, part i, u.s summary. worthy of note are the consistendy higher mean importance scores given by black businesswomen managers to part ii and part iii competencies, indicating that they attach greater significance to rational order and motivation strategies associated with defined objectives and job performance expectations (also, apparently producing high stress levels). corporate management participants, for example, identify "fmnt-end" operational management skills such as situation analysis, problem identification and decision making as the most critical competencies (part ii), while entrepreneurs stress implementation, delegation and control and performance monitoring pmcess skills (apparently pmducing time management problems for them). one remarkable finding is the perception of both gmups of participants regarding their most critical areas for impmvemenl corporate management participants identify delegation, time management and system ~onal skills as impmvement needs. women entrepreneurs, on the rnher hand, recognize the need to develop problem analysis, objecuve seuing and strategic planning ("front-end") skills. once again, these findings clearly show how well the study participants complement each other as potential team players. conclusion tire exploratory research results presented in this paper serve to suggest that a unique interaction of race and gender isa viable, challenging,and rewarding area of research that has been generally ignored in the women manager and entrepreneurship literature. clearly, educators and organizational development consultants interested in understanding the status of women in organizations and ownerapemted firms must begin to recognize that the study of both race and gender is a key pivotal point in establishing, developing, and advancing educational programs and government policies to enhance that status. as for the first hypothesis proposed in this study, that black women owner-operator entrepnmeurs will exhibit a significant difference in managerial competencies when compared to black businesswomen corporate executives or managers, the results are clear. overall. entrepreneurs hold those components of leadership relauvely more important that are "focused-in" and "focused-on" task performance. there were signiticant differences in concern for profit management and conuol and monitoring skills. therefore, the first hypothesis was well supporuxl 55 tbe second hypothesis proposed that black women owner-operator entrepreneurs will exhibit a significant difference when compared to black businesswomen corporate executives or managem, in the pemeptions of "need for impmvement" as evaluated by their own selfassessments, their mentors, and "observers" selected at the peer and subordinate levels. the data provides some relative support for this view, but with mixed results. entrepreneurs self-select employee coaching and development along with policy formulation and implementation skills as most critical. yet, their mentors and observers identify customer and competitor analysis, as well as, a need for greater netwoddng. black businesswomen corporate managers fared much better in their self-selections relative tomentors and observers. their areas for impmvement include resource blending, monitoring and control and the ever present problem of time management. overall, therefore, the second hypothesis was supported, but not well supported. perhaps the greatest surprise, although not posed as an hypothesis, was an intuitive expectation that entrepreneurs will perceive part i and part ii dimensions of signilicanuy higher importance, as well as, developmentally needed, in concurrence with their advise and observers, and that black corporate businesswomen managers will be highly task focused (part li) and truly interested in human resource management issues (part iii). study results demonstrate that entrepreneurs, in a relative sense, regard part i and part ii as most important competencies and areas ofdevelopmental need. black women managers showed a strong concern for part ii and part iii sh1ls and abilities. thus, both groups exhibit minimal concern for "big picture", part iv abilities. those associated with organizational vision, mission and environmental co-alignment issues. while this might be easily explained for entrepreneurs, it may suggest that organizations place black women managers in highly visible, showcase type jobs without external job challenges or future mobility. nevertheless, black women managers and entrepreneurs need to maintain more proactively in defining their own criteria of success. in the final analysis, the findings and implications of this study must be evaluated within the context of its design and methodology. although funher specific entrepreneur case study research would reveal more micro-specitic competencies and developmental needs, interesting observations and conclusions have been made in this study that should serve as a clear basis for further research. previous research, it seems, has produced only generalizations about black women enuepreneurs that serve toobscure differences in how they perceive themselves within the context of managerial competencies and especially the pauerns of knowledge they regard as critical to their development. only by continuing to study black women entrepreneurs'nd black businesswomen corporate managers'xperiences, can we afford a unique opportunity for understanding the effects and pardcular developmental needs 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(1982).evolution and validation of behavioral decision theory measurement. journal of applied research. 67(2), 744-751. 57 appendix leadership competency inventory self-assessment exercise your knowledge and understanding about business, economic, social, organizational, and poliucal condiuons, and their impact on present and future business decision-making and performance. 1.01 monetary conditions -understanding of cash flow, capital market conditions, interest rates, invesunents, and fiscal and monetary policies. 1.02 profit management -understanding the time value of money relationship and its impact of return on capital, sales, profit margins, growth rates, return on assetsflinvestments. 1.03 cost and cost control -knowledge of cost of materials, labor, facilities, commodities, and services. 1.04 business conditions -knowledgeable about business opportunities, growth potential, long-range forecasts, inflationary uends, and recession or growth expectations. 1.05 customeritclient awareness -sensitivity to and awareness of customers'eeds, organizatitut, systems, characteristics, climate, and personnel 1.06 competition awareness -knowledge and understanding of competitive positions~gth, w aknesses, market share, potential, and trends. i.07 impact assesring the impact/influence of general business, economic, social, and political conditions on management of the internal organizauon. 1.08 orgamzational culture-understanding the organizational culture, values, standards, formal and informal norms, operating principles, stated and unstated values, folkways, and mythology. 1.09 ihfiernal structure and operation understanding of both formal and informal structure and systems within the organization. knows formal and informal hierarchy, power bases and decision makers. knows who to work with to get things done. 1.10 international awareness -understanding of other countries social, cultural, business and political conditions and the resulting influence and impact on management of the business. ability to effectively communicate with international customers and contempomfles. 1.11 social and political -understanding and ability to assess the impact of external social and political conditions. ability to interface with governmental and related agencies. 1.12 legal requirements knowledge of legal requirements, guidelines, restrictions, laws, and contracts, and understanding of legalimplication in management of material and human resources. this category includes the tradiuonal technical skills and business operational skills, most of which are based on classical management science concepts. the focus is on the ongoing, day-today, management function. 2.01 situation analysis ability to: identify issues, break issues into component pans, determine priorities, set goals, define appropriate action, and recognize alternatives. 2 02 problem analysis ability to define problems, analyze causes, determine corrective action, and implement solutions. 2.03 decision maigng skill of establishing criteria, gathering and reviewing information, developing alternatives, assessing risks, choosing among alternatives and choosing optimum timing for decisions. 58 2.04 objeci1ve setfing skill in determining short and long-range goals, targets, and end results. stating objectives incorporating inputs from self, boss, subordinates, clients, customers, and others. 2.05 strategic planning (long and medium range orientation) skill in developing strategies to accomplish organizational mission. ability to understand and articulate organization mission and plan for optimumuse of resources to accomplish mission. 2.06 tactical planning (short-range orientation) skill in developing an implementation plan to meet objectives determining and sequencing activities, scheduling, seeking help, getting feedback, taking corrective or contingent action. 2 07 implementationabitity to program steps and move from plan to initiating action for accomplishment of mission and goals. 2.08 delegation skill in appropriate sharing of authority accountability, responsibility, power and influence for meeting organizational and individual objectives. 2.09 time managementskill in allocation of individual and organizational time to meet individual and organizational goals. 2.10 budget management skill in establishing, negotiating, and controlling operating budget. 2.11 control and monitoring skill in effectively contmfling material and human resourcm, projects and tasks, against plans using appropriate tools, techniques, and procechms to assess status and take required action. 2.12 proposal preparationskill in preparing and documenting proposals, bids, grants, or recommendations for internal or external review and msponse. 2.13 organizing systems and structures skill in establishing organizational structure, relationships, responsibilities, systems, procedmes, and charters to meet organizational needs. 2.14 information management -knowledge of and access to relevant management information. use and understanding of communication systems, hardware and software systems, and applicable management information systems. your effectiveness as a manager or small business owner-operator depends to a large degree on the undertaking of and responses to human behavior. this category includes competencies of an interpersonal nature, especially as they relate to instilling productive behaviors in the working environm ann 3.01 managing motivation knowledge and understanding of motivational drives of self and others. ability to develop and maintain a motivated work group by appropriate management of rewards, recognition, coaching, participation, delegation, assignments, and developmental opportunities. 3.02 resolving conflicts skill in recognition, confrontation, and resolution of disputes, disagreements, differing opinions, conflict, and personality clashes at both the individual and group level. 3.03 emphatic response ability to maintain personal objectivitywhile providing understanding and sensitivity to others and enhancing others'elf-esteem. putting yourself in the other person's place. 3.04 effective listening skill in accurately hearing what others are saying and providing others with verbal and non-verbal clues that they are being heanl receptiveness to inputs and feedback from others. 3.05 influencing effectiveness in influencing the behavior and receptiveness of others, including subordinates, peers, superiors, clients, and customers. 59 3.06 effective presentation-ability to present ideas to others clearly and persuasively. 3.07 personnel/staffing skill in recruitment, interviewing, selection, and placement of personnel. 3.08 compensation knowledge of compensation practices and internal and external rates and levels. 3.09 performance management skill in evaluating performance against job expectations; identifying motivational and skill strengths and deficiencies; pmviding ongoing informal and periodic formal feedback on consequence of both good and poor perfonnance. 3.10 developing/coaching skflt in providing direction and feedback, advice, training, job opportunity, and relational interfaces to develop employees for proficiency in cunentassignment and potential future roles in the organization. 3.11 stress management -understanding the nature of stress and stressors. skill in managing the envimnment and use of coping techniques to maintain stress level of self and employees at a production level. 3.12 information sharingskill in maintaining environment ofopen communication to, from, and within work unit. ability to develop climate of two-way communication about work status, goals, and visions of the future. 3.13 differentiating individuals -ability to recognize, respect, and respond to the individuality and uniqueness of each employee. ability to recognize and reward contributions on an individual basis, ability to maximize potential of each. recognizing and taking effective action with problem performers. 3.14 group process skills ability to recognize and act on task and interpersonal dynamics that occur in group situations. v i n'eeingthe "big picture." ability to integrate hard and soft information, to orchestrate human and material resources, to utilize rational and intuitive perceptions, to respond to organizational and individual needs, and to know when to act and when to defer action. 4.01 networking ability to developand reciprocate in a network of relationships which pmvides information, technical expertise, political insights, etc. 4.02 information gathering -develops many and varied sources and ways of gaining needed information and has ability to integrate varied and conflicting information. 4.03 resource blending skill in integrating group and individual competencies, motivation, experience, tasks and responsibility to provide individual and team effective4.04 organizational blending -understands total organizational system, structure, and dynamics and effectively blends his/her work unit and its output into total. 4.05 sense of timing skill in integrating a variety of information, issues, and opinions to sense potential for problems and may take preventative action before problem becomes acute. 4.06 problem perception skill in integmting a variety of information, issues, and opinions to sense potential for problems and may take preventative action before problem becomes acute. 4.07 problem solving ability to solve problems by focusing in on specific issues and information and also by finding relationships between remote but related events and data. 4.08 lateral commubflcationabilityto effectively communicate across the organization and beyond to achieve cooperation, coordination, collaboration, negotiation, and problem solving. 60 4.09 vertical communication -ability to communicate plans, accomplishments, requirements, and recommendations, both up and down the organization. 4.10 managing creativity-understanding specific needs of creative people. setting the proper climate for creativity to emerge. arousing the creative urge in others and fostering uulovauon. 4.11 ~reneurship ability to create alternatives, perceive/accept and exploit new ideas, redirect resources, establish new directions, seek extraordinary results. 4.12 risk taking skill in defining parameters of acceptable risk taking, encouraging and supporting risk laking in others, and practicing individual risk taking. may involve operating in an environment of uncertainty and ambiguity. 4.13 managing change ability to assess current state, determine desirable future state, articulate the desired, overcome resistance, shape the political system to support the change, and provide management of the transition from the current to the desired state. 4.14 policy formulation/implementation-ability to know, interpret, implement, establish or modifycompany policies. 4.15 environmental scanning -ability to analyze current and potential change in specific segments in order to better understand the change and its implications for strategic decision making. 61 http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2019, vol. 29, no. 01, 43-54 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2019 small business institute® w w w. j s b s . o rg ieva žebrytė1, francisca fonseca-vasquez2, ricardo hartley3 1ism university of management and economics, lithuania, & universidad de la frontera, chile, ieva.zebryte@stud.ism.lt 2 local development consultant, chile, franfonsecav@gmail.com 3 universidad central de chile, chile, ricardo.hartley@ucentral.cl emerging economy entrepreneurs and open data: decision-making for natural disaster resilience entrepreneurial decision-making, natural disasters, open data, emerging economy the aim of this study is to examine the role of open data in entrepreneurial decision-making in a destination threatened by natural disasters and located in an emerging economy. the region of la araucanía, in chile, was chosen because it constantly faces the threat of devastating natural disasters and is also the poorest region of chile. primary data was collected through semi-structured interviews and awareness-building workshops, with a convenience sample of 32 entrepreneurs out of 150 registered for federation of tourism businesses (fedetur’s cet) program. the study found that local entrepreneurs are reasonably aware of the advantages and disadvantages of platforms that link supply and demand for tourism services. however, they express little interest or trust in publicly available information, and use terms like ‘internet data’ and ‘technology’ interchangeably with ‘information’ and ‘platforms’. we conclude that in order for entrepreneurs in emerging economies to strengthen their businesses’ resilience to natural disasters in the digital economy era, adjustments in their decision-making processes need to be made. tourism-dependent places situated in emerging economies rely heavily on micro and small businesses. greater awareness of how future economies are both ‘atom-enabled’ (landscape and other tourism resources) and ‘bit-dependent’ (digitalization of tourism) would benefit tourism entrepreneurs facing natural disaster-induced business disruptions by enabling timely and more appropriate responses. the study opens the academic debate on the role that open data could come to play in entrepreneurial decision-making within emerging economies when tourism businesses are disrupted by natural disasters. apa citation information: žebrytė, i., fonseca-vasquez, f. f., & hartley, r. (2019). emerging economy entrepreneurs and open data: decision-making for natural disaster resilience. journal of small business strategy, 29(1), 43-54. introduction entrepreneurs functioning in emerging economies during the digital era often encounter natural, non-digital disasters. many chilean tourist destinations constantly face threats like earthquakes, tsunamis, volcanic eruptions, flood-related calamities, and wild forest fires (gutiérrez-vega, 2013). tourism entrepreneurs at tourist destinations threatened by natural disasters must make complex business decisions. entrepreneurs whose businesses are ‘atom-enabled’ (tourist attractions are mostly built around natural amenities or tangible expressions of culture) become ‘bit-dependent’ and draw upon the digital spaces for data, information and, thus, development of knowledge. this study addresses how tourism entrepreneurs in emerging economies view the potential for incorporating open data into their entrepreneurial decision-making in the context of a business disruption caused by a natural disaster. in 2013, the united nations world tourism organization (un-wto) reported a 3% growth in inbound tourism in chile, while in 2016, chile came closer to the latin american average of 5%. sernatur (2015) reported that 43,598 businesses were providing tourism or related services, and that 96 % of them were micro (self-employed), family, or small-to-medium enterprises (based on a mix of oecd, usa, and eu classifications of businesses). chile hosts approximately 250 tourist destinations throughout its territory, most of which are emerging and 40 of which are in the consolidation stage (sernatur, 2015). this study analyzes tourism entrepreneurs based in the la araucanía region of chile, one of the country’s top 20 destinations due to the abundance of lakes, volcanoes, and national parks in the region. http://www.smallbusinessinstitute.biz http://www.jsbs.org 44 i. žebrytė, f. fonseca-vasquez, & r. hartley journal of small business strategy / vol. 29, no. 1 (2019) / 43-54 nowadays, all tourism entrepreneurs must be technologically proficient and aware of ongoing digital and technological transformations. gretzel, sigala, xiang, and koo (2015) demonstrates that data is an underlying component of ‘smart tourism’, which, aside from being a “new buzz word” (p. 179), is the “convergence of internet and communications technology (icts) with the tourism experience” (p. 181). however, there still is no consensus on how best to generate knowledge to help tourism entrepreneurs make business decisions in tourist destinations located in emerging economies and threatened by natural disasters. the definition of a natural disaster, as inspired by runyan (2006) and monllor and murphy (2017), is the likely, though unforeseen, onset of a spontaneous event of natural, geophysical causes, which, at least momentarily, disrupts business in the place exposed to it. for tourism entrepreneurs, natural disaster onsets lead to the loss of clients (tourists), the temporary cessation of services and activities, and the consequent reduction of income and productivity. previous studies of tes, smes, and informal business ventures exemplify that small tourism businesses do not choose a single path towards building-up a natural disaster resilience in their ventures (biggs, hall, & stoeckl, 2012; cioccio & michael, 2007; dahles & susilowati, 2015; orchiston, 2013; robinson & jarvie, 2008; xu, chen, & dai, 2017). however, until now, these paths have been studied by employing elements of faulkner (1999, 2001) and faulkner and vikulov (2001) tourism disaster management framework despite the fact that it was developed 15-16 years ago when the information flows were different, and the technological development did not allow generation of information of current scope and scale (žebrytė & bustos, 2017). in addition, only four studies to date have focused on tourism entrepreneurs operating in tourist destinations located in emerging economies. other studies refer to businesses in general, without regard to their scale or location in developed countries where resources as well as human, cultural, and social capital affecting entrepreneurial business decision-making differ substantially from those available in emerging economies. furthermore, as evidenced by nouri and ahmady (2018), research is still lacking on the distinct topics related to the entrepreneur decision-making. to understand tourism entrepreneurship, we rely on solvoll, alsos, and bulanova (2015), borrowing their ‘combination approach’, whereby the empirical study of tourism sector entrepreneurs feeds back into mainstream entrepreneurship theory. tourism entrepreneurs are particularly sensitive to disasters that occur at the tourist destination where they operate their businesses. moreover, entrepreneurial decision-making is a day-to-day, place-based function of a nascent tourism business venture owner-manager. for a tourism entrepreneur based in an emerging economy at a natural disaster-threatened tourist destination, being aware of and prepared for any likely natural disaster means having the tools to enact flexible patterns of action. open data is one of the tools that can be directed towards tourism business resilience. this study looks at the incorporation of open data into entrepreneurial decision-making in the context of tourist destinations constantly threatened by natural disasters. viewing entrepreneurial decision-making as a series of intertwined actions and reflections, we refer to real-life events, which highlight the absence of conceptual tools for understanding how tourism entrepreneurs in emerging economies incorporate the developments of the digital era, such as open data, into their resilience strategies. this paper is structured as follows. first, the existing knowledge on entrepreneurial decision-making, tourism business resilience, and open data is summarized as it informs our qualitative case study of emerging design. next, the research methods used in the study are detailed. then, the findings and results are presented, followed by discussion and conclusions. conceptual framework often tourism entrepreneurs’ businesses are embedded in relatively inflexible spatial, temporal, sociocultural, and socioeconomic contexts. entrepreneurial decision-making in the tourism sector is largely a placebased affair where localized relationships and resources (nouri & ahmady, 2018), such as data, play a key role. reports from empirical research on entrepreneurial decision-making in a tourist destination threatened by natural disasters and located in an emerging economy are scarce. thus, data analysis from the exploratory case study of a small group of tourism entrepreneurs based in la araucanía a region constantly threatened by natural disasters. such as volcanic eruptions, earthquakes, floods, storms, and wild-forest fires was informed by entrepreneurial decision-making theory (douglas, 2005; shepherd, williams, & patzelt, 2015) and runyan’s (2006) research on the practices and attributes of small business owners which help them prepare for, respond to, and recover from a natural disaster. taken together, the ability and capacity to overcome the ambiguity and shock of a ‘high consequence’ natural disaster onset that directly or indirectly affects the tourist destination is what characterizes a resilient 45 i. žebrytė, f. fonseca-vasquez, & r. hartley journal of small business strategy / vol. 29, no. 1 (2019) / 43-54 tourism entrepreneur (loosely based on runyan, 2006, and hall, malinen, vosslamber, & wordsworth, 2016). in other words, for tourism entrepreneurs, resilience to natural disasters is the uninterrupted practice of making decisions before, during, and after a natural disaster, that allow their businesses to withstand natural disaster-related business disruptions. two important limitations exist within the previous studies. first, runyan’s 2006 study concerns smes in a general sense, not tourism entrepreneurs specifically. however, solvoll et al. (2015) argue that there are distinctions to be made between the two groups. secondly, research conducted in australia, new zealand, and the united states, shows that social institutions as well as private and public organizations in mature economies operate differently from those in emerging, developing, or maturing economies. however, in the absence of a more appropriate conceptual framework, it was necessary for the authors of the current study to rely on these findings as well. tourism entrepreneur decision-making and natural disasters in the places where uncertainty and exposure to natural disasters is a constant threat, tourism entrepreneur resilience, rather than firm survival, is a better conceptual fit. a resilience mindset allows for the development of informed entrepreneurial decision-making prior to, during, and after the onset of a natural disaster. this latter period, in terms of information seeking for decision-making, joshi and anand’s (2018) reasonably claim that “as perceived uncertainty increases it will be more strongly related to non-routine information search rather than the routine sources” (p. 51). however, it is exactly in the routine knowledge development for resilience building, which commences markedly earlier than ex post. shepherd et al. (2015) detail three dimensions useful to the present study: “heuristics and biases in the decision-making process”, “characteristics of the entrepreneurial decision maker”, and “environment as entrepreneurial decision context” (p. 15-16). although shepherd and colleagues found that most entrepreneurial decision-making literature focuses on entrepreneurial opportunities as well as entry and exit decisions, some articles reviewed during their study looked at the factors within the three previously mentioned dimensions of decision-making. evidence on heuristics and biases in entrepreneurial decision-making reveals a heterogenous group in terms of optimism, overconfidence and reliance on experience, and “a considerable number of studies have found that entrepreneurs are more biased in their decision making than non-entrepreneurs” (shepherd et al., 2015, p. 30). further, cultural differences (in the widest sense, including gender, ethnicity, nation, minority vs. majority, vulnerable or marginalized versus dominant, privileged vs. post-colonial etc.) effect entrepreneurial decision-making in multiple ways, including emotionally. this might further exacerbate the bias involved in entrepreneurial decision-making. finally, the developed vs. developing (emerging) economy context has been proven to influence key practices of the ventures (shepherd et al., 2015). entrepreneurial response is usually focused on mitigating the direct and indirect effects of the crisis that follows a high impact natural disaster onset (runyan, 2006). biases, suppositions, self-confidence, and shifting social and economic environs play an important role in both the response and anticipatory decisions made by tourism entrepreneurs. entrepreneurial decisions are, by definition, related to risk-taking (douglas, 2005; shepherd et al., 2015). runyan’s (2006) research on the practices and attributes of small business owners, which help them, prepare for, respond to, and recover from a natural disaster, identifies the use of immediate post-emergency decision-making. however, what about situations where entrepreneurial decision-making is of anticipatory nature, where a tourism entrepreneur is aware of natural disasters threatening the tourist destination and is willing to prepare for future events? what if a tourism entrepreneur realizes that risk must be mitigated to ensure the continuation of a business or to overcome business disruptions with minimal negative impact? what resources are available to the tourism entrepreneurs of emerging economies to aid them in such decision-making? open data use in tourism entrepreneur decision-making based on the european data portal and hossain, dwivedi, & rana (2016), open data is a movement which encourages “mostly public organizations to release objective, factual, and nonperson-specific data […], to anyone, with a possibility of further operation and integration, without any copyright restrictions” (p. 14-15). “open data comprise various types of data—primary (census data) or secondary (economic trend), real-time (such as traffic or weather data) or offline (government spending), location-based (toxic waste dumps) or generic (regional healthcare costs), reports, maps, satellite photographs, pictures and paintings, the genome, medical data, scientific formula, public sector budgeting, food-safety information” and others (hossain et al., 2016, p. 15). 46 i. žebrytė, f. fonseca-vasquez, & r. hartley journal of small business strategy / vol. 29, no. 1 (2019) / 43-54 this study looked at conventional tourism entrepreneurs and their understanding of the potential of open data use to build resilience in their businesses that function in a nd-threatened tourist destination located in an emerging economy. immediately following the onset of a natural disaster onset, there is “pressure on decision makers to act sooner rather than later. this may mean decisions are made without all available information” (runyan, 2006, p. 14). natural disaster onset makes tourism entrepreneurs aware of actual and potential business disruptions, creating an opportunity for anticipatory, proactive decision-making. this is consistent with information from the european data portal about digital transformation trends and entrepreneurship (european data portal 2015; walker & simperl, 2018). research context and strategy this paper reports on an action-research case study with open and emerging design rooted in knowledge transfer-based intervention in the field (mcdonald et al, 2015; also, see henry and foss (2015) on context-embedded case study to advance entrepreneurship research). by examining the tourism entrepreneurs of the la araucanía region, in chile, this study explores how entrepreneurial decision-making in the context of natural disasters could benefit from open data use. la araucanía, in chile, as the context according to the comisión nacional para la resiliencia frente a desastres de origen natural [national commission for chile resilient to disasters of natural origen (creden, in spanish), “[o]n average, each year between 1980 and 2011, chile recorded losses close to 1.2% of its gdp, due to [reoccurring] natural disasters” (creden, 2016). meanwhile, chile is growing quickly in the use of icts, tech startups, and digital technology development (aravena, s., 2017; unctad, 2017; wipo, 2014). the division of entrepreneurship and the division of digital development are both hosted under the department of the sub-secretary for the economy of the ministry of economy, production and tourism. the growth of the tourism sector in chile is driven by thousands of entrepreneurs who are either self-employed, family, micro, or small business owners, and who operate as providers of tourism or related services. these entities and an undefined number of recently founded, informal businesses are tourism entrepreneurs functioning in an emerging economy (on chile as an emerging economy, please see geldes, felzensztein, & palacios-fenech, 2017). this case study used two factors to select tourism entrepreneurs in the region of la araucanía. the first was the frequency and variety of natural disasters that affect the fast-developing tourist destination wherein tourism entrepreneurs operate their businesses. the 2010 earthquake, 2015 volcanic eruptions, and 20152016 wild-forest fires had recently affected the emerging international tourist destination and consolidated national tourist destination of la araucanía. secondly, the regional capital, the city of temuco, has embarked on a publicly and privately funded program to become a smart city. additionally, in june of 2017, the town of pucon, located near several lakes and close to the mountain range within the region, was recognized by smart city business america (2017) as the place with the biggest potential of becoming a ‘smart destination.’ upon receipt of the award, smart tourism and smart destination concepts gained traction in local and regional politics. tourism entrepreneurs and companies were invited to imagine how they could shift their business models towards smart tourism. method and open strategy to help tourism entrepreneurs face the challenges posed by every-day and/or emergency entrepreneurial decision-making, chile’s fedetur has set up the cet program, which trains tourism entrepreneurs in the use of icts. a total of 150 tourism entrepreneurs from la araucanía have enrolled in this program. to better assess the impact of the program, fedetur invited the researchers to observe the implementation of this capacity-building program. subsequently, the researchers examined the depth and breadth of the program, in a region where the aspiration of becoming a smart destination is shared by private and public sectors, and where high intensity and high impact natural disasters onsets have and will affect the built environment, the natural surroundings, and the businesses of the destinations. as warranted by emerging and open design several research techniques were introduced after being approved by stakeholders in the action-research project. fedetur turned down the idea of applying a survey to each of the 150 entrepreneurs involved in the program. instead, the researchers decided that a convenience sample would be appropriate for this exploratory case study. the participants of the study had to be made aware of the benefits of their participating in it. thus, given that most tourism entrepreneurs are not tech-savvy or highly digitally-skilled, the intervention had to be based not only on the practitioner men47 i. žebrytė, f. fonseca-vasquez, & r. hartley journal of small business strategy / vol. 29, no. 1 (2019) / 43-54 toring program organized by the fedetur, but also on awareness building by way of which the academia could directly deliver an immediate benefit. consequently, in addition to the fedetur-organized training under the cet program, in which the researchers performed non-participant overt observation, three additional opportunities were identified as points of interaction with the convenience sample of 32 tourism entrepreneurs. first, a business administration student was designated to conduct a four-month long internship with the destination management organization (dmo), focusing on a smart destination project in which short sessions of natural disaster awareness and preparedness-building for tourism entrepreneurs took place as a response to the 2015 volcanic eruptions. second, the researchers organized a “digital tools for tourism enterprise management” workshop in september of 2017. third, a seminar on smart destinations was organized in october of 2017, as part of a strategic competitiveness-building project (with funding by the chilean government made available through corfo). on all three occasions, as part of a seminar training activity and intervention, the authors applied a simplified, semi-structured interview guide, which had been informed by the tourism business resilience and entrepreneurial decision-making literature. as for the time dimension of entrepreneurial decision-making in the context of natural disasters threat, it may be divided into a minimum of three stages: (i) before (what might be considered to be periods of normality, consisting of short, medium, or long-term intervals of general uncertainty surrounding the entrepreneurial processes in natural disaster-prone tourist destinations); (ii) during and within 72 hours of the onset of a natural disaster (immediate relief); and (iii) 72 hours and later (the business response to the event). this case study concentrated on the first and third stages, and collected data to this effect by including relevant questions in the instrument. the brief, semi-structured interviews were applied to a convenience sample of 32 tourism entrepreneurs from la araucanía tourist destinations. the sample of the informants consisted of men and women of chilean nationality who consider themselves to be tourism entrepreneurs, having operated in tourism sector value chains for anywhere between 1 and 30 years. three of the interviewed entrepreneurs provide services to stores, hotels, restaurants, or agencies in the region (b2b), while the rest declare national and international tourists whose destination is la araucanía as their final clients (or end users). to triangulate the data, secondary and tertiary data sources have also been included. technical publications such as un-wto manuals and apec reports on hazards and resilience, european data portal analytical reports on open data (european data portal 2015; walker and simperl, 2018), as well as spain’s segittur smart tourism and smart destination manuals (lópez de ávila, lancis, garcía, alcantud, garcía, & muñoz, 2015) were reviewed. further, searches in wos and scopus databases with the following key words (in diverse combinations) were run: “tourism entrepreneurs” / “tourism business” and/or “natural disaster” and “emerging destination” / “emerging economy” and “resilience / preparedness / risk mitigation / response / recovery / restoration / adaptation” / and “data” / “big data” / “open data” / “digital technology” / and/or “decision-making”. the literature was organized in double entry tables. first, a table was created with the titles ‘theory’ and ‘approach’ listed by row in the first vertical column, and ‘issue’, ‘problem’, and ‘phenomenon’ listed by column on the first horizontal row. this table hosted the summaries of findings and contributions of 49 studies identified as relevant to the research question. second, bibliometric data of the said studies was organized by journal and date of publication. studies that were published before the emergence of the contemporary understanding of open data (before the dot com crisis of the early 2000s) were discarded. thematic data analysis was carried out as co-authors gathered for in-person or telephone discussions and memo comparison. an intern iteratively tested the concepts in the field, as her internship allowed for follow-up meetings with the participants of the study. in this way, the researchers were able to test their interpretations and receive feedback from the participants of the study. such meetings had the format of observations or brainstorming sessions on what smart tourism and smart destination building projects entail. in both cases, memo writing took place. finally, when developing the main instrument (the semi-structured interview questionnaire), the authors kept in mind that normal, every-day entrepreneurial decision-making takes place in two ways: (a) bearing in mind the risk presented by natural disasters for the business, or (b) ignoring natural disasters. both types (a) and (b) influence the business after the onset of a natural disaster. furthermore, tourism entrepreneurs may make business decisions while considering the impact of the natural disasters at a specific destination, the tourism sector in general, or the world. the latter, arguably, is too broad to realistically consider on an operative, day-to-day decision-making basis, or even at times on a strategic decision-making basis, so this research does not take it into account. 48 i. žebrytė, f. fonseca-vasquez, & r. hartley journal of small business strategy / vol. 29, no. 1 (2019) / 43-54 findings and results the interviewed tourism entrepreneurs were quick and clear in noting that their clients often resolve their own needs through digital technology tools. the participants of the study were aware that their clients organized their trips using technology, mainly with information found on the internet, social media, opinion pages, or blogs and other platforms. in addition, the entrepreneurs agreed that the information handled by the customers was essential when making decisions. the tourism entrepreneurs were reasonably aware of the advantages and disadvantages of platforms that link supply and demand in the tourism sector, including booking.com, tripadvisor, trivago, expedia, kayak, despegar.com, hotwire.com, hipmonk, skyscanner, airbnb, asiatravel, travelocity, mondotees, travelandleisure.com, bookingchick, aa.com, and jetblue. however, they could not explain what kind of data or information (again, tourism entrepreneurs rarely distinguish between these two terms) could be harvested, either free of charge or upon payment, from these platforms or through these aps or websites. with respect to the use of technologies in their own businesses, tourism entrepreneurs have introduced different management tools into various processes, such as service management, promotion, and direct sales, among others. the channels that tourism entrepreneurs use to obtain data relevant to their businesses are mainly the internet and social media. they consider that the information issued by public sector entities or intermediaries is of secondary importance. further, there was no clear differentiation in use of the terms ‘data’ and ‘information’, regardless of probing and question rephrasing by the authors. the tourism entrepreneurs are aware that they can provide information about their services, solve business-related problems, sell directly to clients, and promote their businesses through icts. however, they show little interest in collecting, storing, and organizing ‘small or medium data’ relevant to their businesses. they consider that to be a task for academia, local authorities, and destination management organizations. but, at the same time, they confess distrust in any chilean entity to handle their commercial data. when the tes’ attention is drawn to the fact that the national strategy drafted by creden and approved by the chilean government stipulates the creation of a multisectoral data center, the tourism entrepreneurs say that they “might” look into this new source of digital data organized into information for decision-making. when presented with the examples of the australian tourism data warehouse [1] and the visit helsinki open data portal [2], the participants of the study manifested a negative outlook about the prospects of both public and private tourism sector stakeholders in chile ever contributing to similar open data portals or platforms. tourism entrepreneurs responded that openness is just not a part of chilean ‘character’ or ‘culture’. this assumption, however, is being challenged by the emerging discourse of open, public innovation, promoted by the government through programs like ‘laboratorio de gobierno’, corfo, and other government agencies. further, only the tourism entrepreneurs, which belong to larger tourism sector b2b networks, such as fedetur, and run an international operation, are familiar with the eu´s eurostat for the tourism sector [3] and use it for looking up current patterns and trends to better cater to foreign clients. in the same vein, when asked if they know of the information (data) available from the portals listed below, the tourism entrepreneurs reply without hesitation that, surely, chile is not providing trustworthy information: open government data of oecd members [4] and world bank open data [5]. in addition, the tourism entrepreneurs consider that comparing chile to developed countries is counterproductive. they frequent seminars and workshops where consultants from countries such as spain give out recipes for tourism development without regard to local and regional socioeconomic realities. “that is not how we do things in chile” is a reoccurring phrase when a tourism entrepreneur is asked if a training or seminar was useful or if he or she will apply what they learned to better their business management. regardless of the lack of awareness, nation-wide open data generation and delivery portals exist. they provide fractioned data which is then pooled together and processed by several university-based observatories, though not in a consistent manner. some of the chilean open data portals that provide relevant information to non-digital tourism entrepreneurs who wish to develop resilience in the face of natural disasters are: 1. servicio meteorológico de la armada [6]; 2. centro sismológico nacional, universidad de chile [7]; 3. observatorio (ovdas) and red nacional de vigilancia volcánica de chile, sernageomin; 4. registro nacional de prestadores de servicios turísticos, sernatur. these public services use facebook and twitter accounts to publish data in real time. tourism entrepreneurs cannot mine this data, but they can rely on 49 i. žebrytė, f. fonseca-vasquez, & r. hartley journal of small business strategy / vol. 29, no. 1 (2019) / 43-54 the twitter alerts and facebook posts from the related accounts. notably, when the tourism entrepreneurs are asked what they know about big data and open data use in the tourism sector, they declared a total absence of awareness about these terms and their functions. however, the interviewees do have a positive impression about the integration of icts in the management of their businesses, and they expressed a desire for free information in order to improve their decision-making, although they feel that the information should be pre-processed by an intermediary. kitchin (2014) argues, that “[w]hile not all forms of knowledge are firmly rooted in data – for example, conjecture, opinions, beliefs – data is clearly base material for how we make sense of the world” (p. 12). such sense-making is an essential part of the entrepreneurial characteristics and process, and influences (i) opportunity exploring, spotting and exploiting; (ii) risk-taking, (iv) decision-making, creating, innovating etc. (carmichael & morrison, 2011; olaison, 2014; solvoll et al., 2015). these characteristics of entrepreneurial decision-making are magnified in emergency situations (johannisson & olaison, 2007). periodically, a natural disaster may become a ‘high consequence event’ (runyan, 2006) and mark a ‘before’ and ‘after’ in terms of how tourism entrepreneurs view the tools which make their businesses more resilient. the owner-manager perspective holds special relevance here as entrepreneurs in general, and tourism entrepreneurs specifically, generally rely on their mindsets and free resources because third party mindsets (consultancy services) and/or resources (pay-per-download data, information or know how) are usually outside their financial means. figure 1 demonstrates how open data becomes relevant in tourism entrepreneur decision-making as a “touristic resource” (gretzel et al., 2015, p. 181). both kitchin (2014), in general, and gretzel et al. (2015), specifically for tourism, identify the components of the concept ‘smart’. regardless of whether the tourism entrepreneurs in the studied tourist destinations consciously aim at creating a smart tourism ecosystem (gretzel et al., 2015), open data, as a freely available and accessible resource, has one of the biggest roles to play in the wake of a natural disaster. to explain the concept of data, the authors looked to previous studies, like kitchin (2014), which defines data as the following: the raw material produced by abstracting the world into categories, measures and other representational forms – numbers, characters, symbols, images, sounds, electromagnetic waves, bits – that constitute the building blocks from which information and knowledge are created. data is usually representative in nature (e.g., measurements of a phenomena, such as a person’s age, height, weight, color, blood pressure, opinion, habits, location, etc.), but can also be implied (e.g., through an absence rather than presence) or derived (e.g., data that is produced from other data, such as percentage change over time calculated by comparing data from two time periods), and can be either recorded and stored in analogue form or encoded in digital form as bits (binary digits). (p. 1) information is categorized data with meaning and significance attributed to it by the tourism entrepreneur through management and processing. knowledge is experience acquired through previous decision-making and practices developed through trial-and-error, adjustment and adaptation. for resilient businesses, information and knowledge are essential factors for entrepreneurial decision-making prior to, during, and after the onset of a natural disaster, and cannot be cultivated without access to appropriate data. figure 1. the role of data in entrepreneurial decision-making source: developed by the authors based on kitchin (2014) •categorizing •giving it meaning data •management •processing •usage information decisionmaking practices (action + reflexivity) knowledge 50 i. žebrytė, f. fonseca-vasquez, & r. hartley journal of small business strategy / vol. 29, no. 1 (2019) / 43-54 during a natural disaster invoked emergency, many resources are limited or absent (olaison, 2014). however, the range of cultural, informational, communicational, and digital resources available to tourism entrepreneurs grows by the minute. in a cost-restrictive scenario, the accessibility of open data poses an evident opportunity for the tourism entrepreneur. the broadest understanding of openness includes “the use and reuse, reworking, redistribution, or reselling” of information (kitchin, 2014, p. 49). in other words, open data is a “valuable commodity” (see verwayen et al., 2011, in kitchin, 2014, p. 56), and an even more valuable asset or resource for a tourism entrepreneur. in addition to providing critical safety and disaster relief information, open data is relevant in an entrepreneurial setting in emerging economies because it is free and relatively easy to access. the results of this research advance the understanding of the potential of open data usage by tourism entrepreneurs, specifically in regards to business decision-making. summarizing the results, (i) the entrepreneurial ecosystems perspective has oversaturated current academic research, resulting in smaller economic units, like entrepreneurs, being overlooked by academia; (ii) the challenges are numerous for developing an open data-based decision-making framework; (iii) further empirical research is needed regarding open data usage by tourism entrepreneurs when their businesses have been disrupted by a natural disaster. the challenges indicated in point two include, for example, the size of a business venture, which can be perceived as an obstacle for process-innovation such as open data usage, and the lack of social capital available to entrepreneurs operating their businesses in tourist destinations located in emerging economies. discussion and conclusions while the wider theme of the research is not new, the object and subject of this study are both original. the usage of open data by tourism entrepreneurs in an emerging economy to make business decisions at a tourist destination frequently affected by natural disasters has not been studied previously. this research is not singular to chile, and can be applied to other emerging, small business-driven economies that are being re-oriented away from commodity exports and towards services, digitalization, and innovation. general literature on the socioeconomic impacts of non-man made or (versus) natural disasters on businesses and locations is abundant, especially on supply chain disruption and marketing challenges after a natural disaster. engineering, accounting (including insurance costs), and risk management literature offer insight on the extent of losses and the recovery speed in various industries and sectors (lópez, 2010; hall et al., 2016). studies on risk management and firm survival include themes such as the resilience of smes in the context of globalization and new technologies (gunasekaran et al., 2011) and sme recovery from natural disasters, like hurricane storms (runyan, 2006). across literature, tourism resilience includes tourist destination resilience, tourism sector resilience, tourism organization resilience, and a range of other phenomena (hall et al., 2016; lew & cheer, 2017). the tourism sector carries individual, personal, business, territorial, national, and international implications and is uniquely influenced by natural disasters (farrell & twining-ward, 2004, 2005; faulkner, 1999, 2000; hall et al., 2016). hall et al. (2016) presented a thorough review of business, organizational, sectorial (consumer demand), and destination resilience in new zealand’s urban settings after the christchurch earthquakes, and offered many themes regarding post-disaster business management, including but not limited to owner-manager decision-making. this seminal work broadens our understanding of tourism business resilience building in a mature economy setting. meanwhile, researchers such as calgaro and lloyd (2008), larsen et al. (2011), biggs et al. (2012), and falk (2012) focused on thailand’s emerging economy, looking at urban and coastal destinations, the tourism sector, and enterprise resilience in the aftermath of floods and tsunamis. gutiérrez-vega (2013) developed a tool for comparing tourist destination resilience, which was used in chile’s emerging economy setting, after the 2010 earthquake-tsunami. however, none of the literature analyzed tourism entrepreneur resilience in an emerging economy as a consequence of a series of entrepreneurial decisions made prior to, during, and after the onset of a natural disaster. bringing tourism entrepreneurship studies closer to bridging the theoretical and empirical gaps would allow a more nuanced view of the ways in which tourism entrepreneurs could strengthen the natural disaster-resiliency of their businesses in an emerging economy for which the tourism sector is a top priority. these studies could then have an impact on policy-making. for example, government programs aimed at fostering entrepreneurship and the digitalization of the economy could benefit by learning how open data usage can be incorporated in tourism entrepreneurs’ business venture recovery models as the costs of access to other types of data are often prohibitive in the emerging economy context. the ongoing open data and smart tourism move51 i. žebrytė, f. fonseca-vasquez, & r. hartley journal of small business strategy / vol. 29, no. 1 (2019) / 43-54 ments will at some point intersect. the debt, therefore, lies with the academics and practitioners who withhold or reluctantly transfer knowledge and technology to the tourism sector in a timely fashion and with necessary sensitivity to the context. further empirical studies should investigate the broader themes of access to and use of various open data platforms by tes. in this respect, language and other barriers to cognitive, interpretative, or technical skills are two pending topics on which knowledge is lacking. this claim is consistent with sonfield and lussier’s (2014) findings about entrepreneurs’ levels of education and decision-making. even though this later study looked at levels of innovation and risk, the general take-away from their study is that levels of formal education of an entrepreneur are related to their decision-making when operating a business. arguably, one important step for the entrepreneurs with respect to the open data would be ‘getting your hands on the data’, while another would be unlocking the information contained in that data and building up one’s knowledge through information usage, processing and management. the limitations of this research are in that (i) it focuses on a small sample of entrepreneurs from an emerging economy; (ii) it reviews previous research on tourism business recovery in a natural disaster context leaving aside man-made disasters; and (iii) it distances itself from the concepts of ‘tourism disaster’ and ‘tourism crises’, deeming them to be too general for nuanced analysis. furthermore, the transformative nature of open data usage in decision-making maybe duly questioned because this resource is only one of many available when responding to a natural disaster-induced business disruption. funding for this study this study has been partially financed under the diufro ini di18-0097 “tourism entrepreneur natural disaster recovery model” project of the universidad de la frontera, in chile, as well as the lmt grant p-dak-18-15 and vsf grant st-515, in lithuania. acknowledgements the authors would like to thank the municipality of pucon for its collaboration, the members of the pucon chamber of tourism for their participation, and fedetur chile for its continuous support of this study. finally, we would like to thank courtney cadenhead for her time and effort put into making this paper readable in english. acronyms and abbreviations apec asia-pacific economic cooperation corfo corporacion de fomento de la producion (in spanish) [production development corporation] cet program training program run by fedetur and aimed at improving tourism entrepreneurs’ internet and communications technology (ict) related skills. creden comisión nacional de la estrategia nacional de investigación, desarrollo e innovación para un chile resiliente frente a desastres de origen natural (in spanish) [national commission for research, development and innovation for chile resilient to disasters of natural origin] fedetur federación de empresas de turismo (in spanish) [federation of tourism businesses] sernageomin servicio nacional de geología y minería (in spanish) [national geological and mining service] sernatur servicio nacional de turismo (in spanish) [national tourism service] sme small to medium enterprise subseturismo subsecretaria de turismo del ministerio de economía, fomento y turismo (in spanish) [sub-secretary of tourism of the ministry for the economy, development, and tourism] wipo world intellectual property organization un-wto united nations world tourism organization 52 i. žebrytė, f. fonseca-vasquez, & r. hartley journal of small business strategy / vol. 29, no. 1 (2019) / 43-54 references aravena, s. 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http://ec.europa.eu/eurostat/web/tourism/data/ database [4] http://www.oecd.org/gov/digital-government/ open-government-data.htm [5] https://data.worldbank.org/ [6] http://meteoarmada.directemar.cl/prontus_meteo/site/artic/20070906/pags/20070906155715. html [7] http://www.sismologia.cl/seismo.html microsoft word front cover v20n1.docx     table of contents 1  a revised conceptual model of the firm‐level entrepreneurial process  patrick m. kreiser  ohio university   justin davis    ohio university    19  business incubators:  leveraging skill utilization through social capital  semra f. ascigail  middle east technical university  nace r. magner   western kentucky university    35  how data integration systems affect strategic decision making in small  firms  benjamin smith   oakland university   mark simon    oakland university    53  comparing nascent entrepreneurs and intrapreneurs and expectations of  firm growth  charles h. matthews  university of cincinnati   mark t. schenkel  belmont university   matthew w. ford  northern kentucky university  sherrie e. human  xavier university    81  selecting a legal structure:  revisiting the strategic issues and views of  small business owners  giles t. hertz    university of tampa   fred beasley    university of south carolina, beaufort  rebecca j. white  university of tampa    103  founder influence in family businesses:  analyzing combined data from  six diverse countries  robert n. lussier  springfield college  matthew c. sonfield  hofstra university    strategy  journal of small business  reproduced with permission of the copyright owner. further reproduction prohibited without permission. front-if_v20n1_proofed front cover v20n1_finalized.pdf inside front cover_8-09 205051 body.pdf jsbs-v20n1.pdf table of contents v20n1_finalized.pdf editorial review boad_8-09 sbiofficers from the editorv20n1_finalized blank page kreiser_80504_proofed ascigil _80701_proofed simon _80801_proofed blank page matthews _80802_proofed hertz_81202_proofed blank page sonfield _81203_ proofed submission guidelines_8-09 fall journal review draft 109.pdf submission guidelines back-ib_v20n1_proofed inside back cover_8-09.pdf backcover_8-09 strategy sbi intervention: an old problema new perspective william t. jackson stephen f. austin state university george s. vozikis the citadel emin babakus memphis state university abstract this research effort attempted ro determineif sbi intervention would change the perception of business problems by not only the business owner bui also the student consultants. this focus furiher to encompassed firms rhat could be classified in either stage i or srage ii of development. even though there were no changes in perceprion by srudent consultants, and mixed resuiis of whether stage deveiopmeni affected perceptual difjerences, strong support was given io the propositi tin that owners, overall, did change their perception of existing problems after sb/ intervention. introduction the small business institute program (sbi), implemented in 1971, was designed to provide interaction between students/faculty of local universities and small businesses. initially this interaction was intended primarily for the purpose of preventing further small business administration (sba) loan losses ("college students may teach you something," 1973). it was also envisioned that the program would evolve to specifically address all small business problems (burr & solomon, 1977). even though there has been little debate over the benefit derived by the students involved in the case analyses (burr & solomon, 1977; longnecker, 1977; hicks, 1977: judd, 1977), the value for the small businesses serviced has often been challenged. this challenge very often has related more to the ability to assess results than the performance of the sbi teams. criticism of government sponsored programs has not been limited to the sbi program. on the contrary, every program designed to provide counseling to the small business community has come under fire. the purpose of this article is not to add to'the long list of attempts either to applaud or condemn the sbi program. rather it is an effort to place the issue of the sbi in proper perspective and at the same time provide an alternative approach to the program's evaluation. to accomplish this task. a review will be made of past and current research efforts made to appraise the program's wonh. in addition, an exploratory research attempt will be presented that aspires to simplify the evaluation process. ts literature review sbi program since its introduction in 1971 the small business institute program has received considerable attention. initially this coverage was devoted primarily to the purpose of defining the relationship between the students and the small business owners (burr & solomon, 1977; hicks, 1977). as the program evolved from one dedicated to maintaining survival of sba loan recipients to a viable option for all small firms needing outside assistance, the focus of research has changed to one of evaluation. songield (1981) suggested that even though some early research efforts such as stanley smith's dissertation had found marginal results, most "...sbi student consulting programs [did) tend to provide beneficial lresultsl..." (p. 4). similar positive results were evidenced in subsequent work (hoy, 1982; solomon & weaver, 1983; elbert, anderson, & floyd, 1983; roitman, emshoff & robinson, 1984). hoy (1982), for example, praised the sbi as being even more effective with start-up firms than the sbdc. even with mixed results, solomon and weaver (1983) and kennedy, leutzehiser, and chancy (1979)claimed the sbi teams were more effective with specific problem areas. ln a series of research attempts khan and rocha (1982) and rocha and khan (1984; 1985) concluded that there was a potential problem with implementation of sbi team recommendations. others have explained these results away by suggesting that sbi teams "...may provide more satisfactory results yet lead to riskier recommendations" (nahavandi & chester 1988, p. 35) because some recommendations may need more time before it is feasible to implement them (sonfield, 1981) or because the firm is not sophisticated enough to accomplish the tasks recommended (mario &. schatz, 1980). many other authorities offer general approval of the sbi program (franklin &. goodwin, 1983; elbert, anderson, & floyd, 1983). this has been especially true in recent practitioner literature (robichaux, 1990; forbes, 1990). related programs even though the focus of this research is the sbi program, discussion would not be complete without a brief examination of the small business development center (sbdc) and other government sponsored programs. a comprehensive examination of literature on these programs is not possible within the scope of this paper (for a more comprehensive handling of the topic see robinson, 1982; chrisman & leslie, 1989; nahavandi & chester, 1988). the government sponsored program that has probably received the most attention (especially regarding its effectiveness) is the small business development center program. this is not surprising considering the extensiveness of the program coupled with the sba resources dedicated to the sbdc's operations. an early attempt at establishing the effectiveness of the sbdc program on strategic planning was undertaken by robinson (1982). the results'of (his study of 101 small business firms receiving planning assistance compared to two control groups indicated that outside consultants, focusing on planning, improved the profitability of the sample group. while some researchers such as bracker and pearson (1985) argued against this view, maintaining that 16 "extensive" outside intervention hindered planning, most researchers tended to agree with robinson. a central theme in much of the research on the government sponsored programs had focused on the need to identify the firm's problems (alpander, carter, & forsgren, 1990; kennedy, loutzenhiser, & chancy, 1979; sonfield, 1981).while some researchers have focused on location of problems (internal or external), others have dealt with specific identification issues. alpander, carter, and forsgren (1990), for example, suggest that firms in their infancy are faced primarily with internal problems, "those which can be controlled and could perhaps be solved with the application of specific managerial skills" (p. 14). similar opinions can be found in the work of chrisman and leslie (1989) as well as kennedy, loutzenhiser, and chancy (1979). this well developed theme has often led to the discussion of managerial competence (or incompetence) relating to business failures (miller, 1977;cochran, 1981;dun and bradstreet, 1981).in essence, the commonly accepted rationale is that, unless outside assistance is provided, many small businesses will fail due to poor management. other researchers maintain that (he imponance of problems in small businesses relate to identification (sonfield, 1981; hater & ambrose, 1981), or as stated by sonfield (1981), "like the students, the business owner should work to separate symptoms from true causes or problems. an attempt should be made to define the real problem..." (p. 7). this need for a focused approach is further highlighted by kennedy, loutzenhiser and chancy (1979); "in order to do this, the team must draw on broad principles of management to provide the conceptual framework for problem analysis..." (p. 13). if, then, as these and many other researchers suggest, problem identification is key to successful outside intervention, why is this process so often ignored when evaluating the effectiveness of consultants? put another way, why should economic impact be the gauge of effectiveness rather than problem identification? even with the general consensus that outside intervention was indeed beneficial, whether it was from the sbdc or any other outside influence (dadzie & cho, 1989), researchers in the field were not content to study only the process. instead, a trend of developing measurement instruments to gauge the "economic impact" emerged as the predominant concern (elstrott, 1987; chrisman, hoy, robinson, & nelson, 1987; lang & golden, 1989; chrisman & leslie, 1989; ward, 1990). some of these recent research efforts have attempted to create "sophisticated" statistical models to "test" the effectiveness of outside consulting (lang & golden, 1989; ward, 1990). although the thoughtfulness of these authors in their attempt to use "theory-based measurement instruments [and) provide construct validity evidence for newly constructed measures" (gartner 1989, p. 35) should be applauded, obvious shortfalls are evident. recent research models two specific models that have addressed measuring the performance of government sponsored programs will be discussed. the first model will be the sbi economic impact model (ward, 1990). a second model is the data envelopment'analysis (dea) model (lang & golden, 1989). even though this model is recommended in the evaluation of small business development centers (sbdcs), it is included because of the frequent synonymous treatment of the two counseling programs. 17 ward (1990)proposed a model to provide standardization for the effectiveness measurement of sbis (economic impact model). this model recommended isolating all environmental, outcome and results variables (as defined by constituents) in order to assess the programs. even though there were obvious theoretical problems with the model, they will not be discussed in this paper. rather, a matter of cost/benefit will be the primary concern of this work. measuring performance of sbdcs remains an even more frequently discussed topic. one recent attempt to measure the efficiency of these programs (not the effectiveness) (lang & golden, 1989) defines efficiency as "the ratio of outputs (results) to inputs (resources)" (p. 42). lang and golden's research relied upon a relatively sophisticated mathematical modeling technique —data envelopment analysis (dea). the dea model suggests, in short, that given a certain level of resources, all other exogenous variables being held constant, a certain level of output (counseling contacts and training attendees) should be achieved. even though lang and golden freely admit that "evaluation of the sbdc program appears to be a multi-dimensional endeavor that includes, at a minimum, client satisfaction, contribution to the economic environment of the state, and operational efficiency" (p. 48), they still praise the system as an "immediately useful management (tool) (p. 49). criticism of this approach should not be taken as a refusal to see that efficiency is important but rather as a question about mathematical meausurement. furthermore, if efficiency becomes the target for evaluation, will effectiveness be forgotten? an additional concern of this approach lies with the potential for misinterpretation of the dea model results. for example, using their own results, lang and golden determined that "over the three-year period, four iof nine) sbdcs were found to be inefficient at one time or another" (p. 46). ward (1990), on the other hand, using these same results, stated that "lang and golden studied three sbdcs and concluded each had been inefficient" (p. 66). stages of business organizational life cycle research has focused primarily on the changes a firm goes through as it grows and matures. much of the attention has centered on the number of stages in the life cycle (greiner, 1972; cooper, 1979; churchill & lewis, 1983; hambrick & crozier, 1985). other notable contributions include the relationship of stages with planning (vozikis & glueck, 1980; robinson, freeman, 8z littlejohn, 1984); performance (robinson & pearce, 1986); management of rapid growth (hambrick & crozier, 1985); and sequences of stages (greiner, 1972; quinn & cameron, 1983). it is not within the scope of this research to re-debate the issue of number of stages in the small business life cycle. therefore, cooper's (1972) well accepted typology will be used for classification of the sample. cooper described three distinct stages: (a) stage i — "stan-up"; (b) stage ii "early growth"; and (c) stage iii "later growth." stage i firms would be characterized as those firms that have either decided to enter the market or are in their initial development. these firms would be more acutely concerned with intensifying their product/market development than in profit maximization. stage ii firms can be seen as those firms feeling their way through their initial product/market strategy. these firms would attempt to increase profitability, add capable employees and maintain steady growth. 18 the most advanced group would, of course, be represented by the stage iii firms. these firms would often have multiple sites or be somewhat diversified. operational decisions would often be delegated through more levels of middle management. an emphasis on not only profitability but also enhanced productivity would be evidenced. hypotheses to determine the impact of sbi counseling on small businesses and the students conducting the intervention, four major and four sub-hypotheses were formulated. these hypotheses examined not only overall problems but also specific problem areas and stages of the firms. hl: there will be a significant decrease in the number of perceived overall problems by small business owners after the consulting intervention. h i a: there will be a significant decrease in the number of perceived management/operations/finance/marketing problems by small business owners after the consulting intervention. h2: small business owners whose firms exhibit characteristics of a more advanced stage of development (stage ii) will have significantly fewer changes in the number of perceived overall problems after the consulting intervention than small business owners whose firms exhibit characteristics of a less advanced stage of development (stage i). h2a: small business owners whose firms exhibit characteristics of a more advanced stage of development (stage ii) will have significantly fewer changes in the number of perceived management/operations/finance/marketing problems after the consulting intervention than those small business owners, whose firms exhibit characteristics of a less advanced stage of development (stage i). h3: there will be a significant decrease in the number of perceived overall problems by student consultants after the consulting intervention. h3a: there will be a significant decrease in the number of perceived management/operations/finance/marketing problems by student consultants after the consulting intervention. h4: after the consulting intervention there will be a significantly lower decrease in the number of perceived overall problems by student consultants of stage ii small businesses than student consultants of stage i small businesses. h4a; after the consulting intervention there will be a significantly lower decrease in the number of perceived management/operations/finance/marketing problems by student consultants of stage ii small businesses than student consultants of stage i small business. methodology information was collected using two questionnaires. the first (exhibit i) was used to assess the owner's background and the firm's characteristics. this questionnaire served as the mechanism to determine the appropriate classification of stages for the individual firms and was administered only to the business owner. 19 the second questionnaire (exhibit 2) was used to determine both the business owner's and student's perception of existing problem areas. of the sixteen questions on the questionnaire, four questions each were directed at the area of management (questions 1,5,9, and 13), operations (2,6,10, and 14), finance (3,7,11, and 15), and marketing (4,8,12, and 16). answers to the questions were subject to a yes/no dichotomy. the second questionnaire was administered to both the students and the owners before and after the intervention. the only variable this study attempted to investigate was whether perception changed between initial measuring and subsequent measurement after student intervention. the presence of a significant relationship between the before and after perception was tested using a chi-square goodness of fit test. in essence the important measure appeared to be whether perceptions of problems could or would change during this relatively brief period. because the period of time between measurement was short (one academic quarter), it was assumed that there was a minimal chance that many actual corrective changes would be in place and therefore that "perceptions" would be a better indicator. sample the focus of this study was on all sbi clients (small business firms) and those student teams performing the counseling intervention from a southwestern university during one academic term. in this case there were 91 such projects during the term under study. of those 91 cases there were numerous firms that were only considering starting a venture or that had only very recently commenced operations. these firms had little or no concept of their problems and were therefore omitted from the sample. even though it is assumed that the sbi teams provided valuable assistance, their inclusion would serve only to cloud the issue. the remaining sample consisted of 54 existing businesses and student teams. of the sample firms a further division was made in relation to the stage of development in which each was. stage i firms were represented by those businesses that could be classified in the "start-up" stage, stage ii those firms in the "early growth" stage, and stage hi those firms in the "later-growth" stage (cooper, 1979; robinson, pearce, vozikis, & mescon, 1984), each stage characterized by unique problem sets. in the particular sample gathered there were 43 stage i firms, 11 stage h firms, and no stage lll firms. results the first hypothesis suggested that after counseling intervention business owners would perceive significantly fewer overall problems for their firms. it was further suggested by h la that the same would be true within individual problem areas (management, operations, finance, and marketing). results in table i clearly support these hypotheses. with the exception of finance problems, all other areas including the overall perception of problems were found to be significant using vates correlated chi-square with a 95% level of probability. a ptxssible explanation of why the perception of finance problems remained unchanged is the fact that student consultants have 20 table 1 owner's view of overall problems before after x2 yes no yes no overall problems 389 471 293 567 21.928** management problems 87 131 58 160 8.101** (questions 1,5,9,13) operation problems 81 133 55 159 6.736** (questions 2,6,10,14) finance problems 121 95 102 114 3.003 (questions 3,7,11,15) marketing problems 100 112 78 134 4.270** (questions4,8,12,16) **chi-square significant at .05 probability little or no control over arranging financing for their business clients. furthermore, as has been pointed out by numerous researchers, small firms inherently function at a level of under capitalization. hypothesis 2 was offered to suggest that more sophisticated firms (stage ii) would change their perceptions of overall problems far less than the less sophisticated firms (stage i). hypothesis 2a further divided this rationale into individual problem areas (management, operations, finance, and marketing). results from table 2 indicated support for the proposition of overall problem perception reduction (h2). however, limited and mixed results are indicated for the individual problem areas. small businesses in stage i perceived significantly fewer problems in the areas of management and operations as indicated by the chi-square results. however, stage h firms demonstrated significantly fewer problems in the area of finance. there was no difference in the perception of marketing by either group of firms. table 3 provides a synopsis of the results of testing hypotheses h3, h3a, h4 and h4a. surprisingly, there were no changes in perception of problems by students after their intervention with the small business firms. a possible explanation of these results can be gleaned from examining figures i and 2. before discussing these figures, however, it is important to make two points. first, it is not within the scope of this paper to provide the theoretical background for perception concepts, nor is this the intent by presenting figures i and 2. rather, these graphic presentations are offered simply as "food for thought." figure i, the concept that small business owners are inherently optimistic, could provide the explanation that even though problems have not been resolved, just their identification bespeaks resolution. on the other hand, as is seen in figure 2, 21 table 2 owner's view vf overall problems classified by stages vf development before after x2 yes no yes no overs(l problems stage i 317 378 254 441 11.426** stage i i 72 93 39 126 13.901** managcmcnt problems (questions 1,5,9,13) stage i 70 106 50 126 4.564** stage i i 17 25 8 34 3.645 operation problems (qucstions2,6,(0,14) stage i 67 106 47 126 4.723v* stage ii 14 27 8 33 (.553 finance problems (questions 3,7,11,15) stage i 98 77 89 86 0.735 stage i i 23 18 13 28 4.011** marketing problems (questions 4,8,12,16) stage i 82 89 68 103 2.007 stage ii (8 23 io 31 2.657 **chi-stluare significant at .05 probability students may feel it is much more reasonable to consider a problem resolved only after the problems are identified, corrective action has been implemented, and the problem has been completely removed. i urthcrmore. in the case of sbi intervention students arc seldom afforded the opportunity to witness thc full impact of their counseling. that is to say, even if positive recommendations arc made, whether or not thc owner implcmcnts their suggestions is often not relayed to the students. in addition, due to the limited time involved in an sbi intervention, students are seldom if ever privy to thc linal outcome of their influence. implications and discussion in a majority of cases, when the sbi program is discussed, a very close comparison is made with the sb13c consulting effort. consideration should be given to an alternative method of evaluation of the effectiveness of the sbi intervention for several reasons. first, unlike the 22 table 3 siudents'iew af overall problems classified by stages of development before after x2 yes no yes no ovemll problems all firms 479 493 439 3. 139 stage i 404 409 380 433 1.303 stage i i 75 84 59 100 2.902 management problems (questions 1,5,9,13) a ii firms 116 101 115 102 0.000 stage i 96 81 96 81 0.000 stage i i 20 20 19 21 0.000 operation problems (questions 2,6,10, 14) all firms 108 143 95 156 1.191 stage i 90 121 80 131 0.798 stage i i 18 22 15 25 0.206 finance problems (questions 3,7,11,15) al i firms 136 118 123 131 1.134 stage i 116 98 109 105 0.337 stage ii 20 20 14 26 i .279 marketing problems (questions 4,8, 12, 16) all firms 119 131 106 144 1.164 stage i 102 109 95 116 0.343 stage ii 17 22 11 28 1.393 ""chi-square significant at .05 probability sbdc, the sbi relationship is usually for a defined period. this is true even though the number of hours dedicated to the intervention may exceed those applied in the sbdc consultation effort. this provides several obvious limitations such as lack of a continued relationship, difficulty in tracking the principles involved, and reliance on the written report as the sole source document describing the intervention. the cost/benefit relationship of conducting an evaluation would represent a second differential for comparison. sbi interventions normally cost the sba approximately $500 per case. even though some sbdc interventions cost less, the overall cost of administration for the program dictates a higher level of quality control. therefore, it seems logical that "...a trade-off must be made between the accuracy of the estimates and the accessibility and cost of the information used to derive the estimates" (chrisman et al., 1987). 23 pfpure s. a partial model of owner's perception of problem resolution. prndples prouens perccpuon prenene lneeedon reduced problems pen!pere pace puon pedcnnu pfrlure 2. a partial nodal of student's perception of problem resolution. prlndpks no reduction ~~pu of problems adios sletel prouene hnreenlor! r! r pcrapuon ore e! inc edl mop~ no reduction of problems rpcncnces 24 very closely aligned to the concern of the cost/benefit relationship in this case is whether mathematical models are appropriate at afl in evaluating government sponsored programs. the answer to providing valuable research may be that bigger is not always better. sophisticated mathematical models may not hold the key to understanding the small business owner. according to bygrave (1989), researchers should be concerned with our preoccupation with these models: ...we look for causal relationships among our variables by using sophisticated statistical tools on powerful computers. the end result frequently is a regression model that appears to have the explanatory power of a law of physics. it is heady stuff. but in our elation, we must not forget that entrepreneurship models have to be rooted in psychology and sociology if they are to have theoretical validity. those social sciences, lack fundamental principles such as the conservation laws of physics from which robust mathematical models can be deduced (p. 11). this preliminary research offers several additional research implications. first, if, as many researchers have suggested, problem identification is so important, more attention needs to be given to this area. this research strongly suggests that even intervention at the student level can play a major role in perceptual changes. this influence was conceptualized by sonfield (1981) almost a decade ago: even if the business owner has a college degree in business administration, the proximity and frequency of the "real world" problems faced tends to force him or her away from academic analytical frameworks and into more intuitive and practical ways of dealing with things. thus the student can offer an alternative approach to a problem, which in combination with the owner's way of thinking results in a stronger total approach than either method by itself (p. 5). furthermore, problem identification may very well hold the secret to reduced business failure. that is to say, accurate problem identification is more important than the problem resolution to small businesses. this point is especially important for outside consultants who need to be aware that perceived problems may not be actual problems. more research is obviously called for in the area of owner perceptions. this would highlight the fact that owners need to be.more realistic than optimistic in their evaluation of their own potential success. in measuring the effectiveness of sbi counseling on small business firm performance, the researcher should look very carefully at several key areas. first, can all the significant environmental variables be isolated and measured? if using time series data, has sufficient time elapsed for inter'vention to have made a difference? these two criteria suggest a critical trade-off. when investigating effectiveness of intervention over time, the more time that has elapsed, the greater chance of "catching" the overall impact of intervention. however, the downside of this relationship would be the greater chance there will be other casual variables to identify and explain. therefore, the methodological approach of this study was to provide measurements immediately before and after intervention. certainly the long-term effect of intervention could not be "quantified" using this approach, nor was it the intent. rather, unless the small business owner can understand his or her problems, progress for improvement cannot be made. the 25 first step in this process would naturally be perception adjustment. limitations caution should be used when viewing the results of this preliminary research attempt for future research efforts. first, the sample itself has several limitations. the sample size was obviously limited based on the number of firms requesting assistance from one university's sbi program. in addition, the sample is one based on convenience (firms that actually sought counseling). the sample could also be criticized on its inssumption that firms that request outside assistance are not similar to firms that do not request assistance. furthermore, the research would have certainly been enhanced if any firms that met the criteria of stage iii had been included with thc sample. another potential weakness of the study was thc i'ailure to include any other variables to explain the change in perception by the business owners other than sbi intervention. this was, however, an intentional (as previously discussed) design of the study. a final criticism relates to perceived versus real problems. no effon was made by this study to determine if perceived problems were, in fact, real problems. even though this area was not of concern in this study, it would present an interesting line of future rcscarch. exhibit i questionnaire ¹1 i. type of business operated: retail service wholesaling manufacturing construction other if other, specify 2. the age of principal owner/manager (president, senior partner or prime organizer) 25 or under 26 35 36 45 46 55 56 65 over 65 3. level of education of owner/ivlanager under 12 years high school diploma associate degree 26 bachelor's degree above bachelor's degree 4. number of years principal owned business: less than i i3 4-6 7-9 io or more il'ore. specify 5. number of years principal worked in other business: (not managing) less than i 1-3 4-6 7-9 io or more it'ore, specify 6. number of years principal was in other business as a manager: less than i 1-3 4-6 7-9 io or more if more, specify 7. average number of paid employees in the firm before small business institute counseling began: 10 or less 11-20 21 40 41 60 if over 60, specify exhibit 2 questionnaire ¹2 please circle whether the company does or does not have thc panicular problems listed below. i. neglect of selection and supervision of personnel. yes no 2. lack of operatmg expencncc in product buying, pricing, and handling finances. .yes no 3. lack of total capital. yes no 27 4. non-aggressive selling, promotion, and advertising. ycs no 5. lack of planning and information. yes no 6. poor record keeping and control. yes no 7. lack of financial planning and use of financial information and ratios. yes no 8. lack of concentration on result areas of products, markets, and technology. yes no 9. lack of management development. yes no 10. inventory mismanagement in terms of type and amount. yes no 11. lack of working capital. yes no 12. lack of research and development and product or service upgrading. yes no 13. lack of management techniques and coordination. yes no 14. wrong location. yes no 15. poor credit practices and overextension of credit and bad debts. yes no 16. inadequate sales. yes no 17. other (please specify) references alpander, g. g., carter, k. d., & forsgren, r. a. 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(1990). a measurement model of the economic impact of small business institutes. journal of small business strategy, l(1), 65-75. 30 1 green goals in organizations: do small businesses engage in environmentally friendly strategies? richard c. becherer university of tennessee – chattanooga richard-becherer@utc.edu marilyn m. helms dalton state college mhelms@daltonstate.edu abstract “green” environmental goals play a role in a firm’s decision making and goal setting. large firms typically consider being socially responsible or more environmentally oriented as part of their mission, but are these initiatives the same for small businesses? surveying a u.s. small business sample, this exploratory study finds firm size and industry type are the two demographic variables related to the importance of environmental business issues in small business decision-making processes. company “expertise,” an internal resource advantage, and the external factors of “competitiveness” and ‘environmental hostility,” were found to influence small firms’ environmental goals. when examining business outcomes and small firms' satisfaction with achievement of their environmental goals, all measures studied (cash flow, market share, sales, and earnings) were related to having such goals. this study extends the dearth of literature studying small firms and the role of environmentally friendly strategies in these ventures. keywords: corporate social responsibility, small business, strategic decisions, sustainability introduction while large firms are often public corporations and must answer to shareholders and other invested stakeholders, small businesses are often privately held or are responsible to one or only a few shareholders. the owner’s s trateg y journal of small business journal of small business strategy vol. 24, no. 1 2 values drive many of the goals in small to midsized enterprise (sme) (elizabeth, martens, & cho, 2010). when a small business stresses sustainable development, it is largely due to the small business owner personally having sustainable development as a business priority or a highly-motivated manager as a champion (jenkins, 2006; beaver, 2007). kechiche and soparnot (2012) believe the economic, social, and environmental impact of small business is significant given their number and size. their study found a dearth of literature on the dynamic dimensions of corporate social responsibility (csr) for smes, which limits understanding the evolution of life cycle stage of csr-related practices. in small businesses, csr may take on a different character in that the small business owner’s resources to act environmentally and socially responsible and the culture and pace of their business is vastly different from large corporations. for the purposes of this paper, csr and the subcategory of “environmental” or “green” issues is the focus of our investigation. while the broader csr framework is more inclusive, with the dearth of small company literature focusing exclusively on green issues, a review of small firm csr at least provides some insight into the role of social consciousness in strategy among smes and smaller firms. furthermore, kechiche & spoarnot (2012) note a lack of studies within the small business sector comparing implementation of csr, and they confirm the lack of resources is an obstacle. furthermore, they also recommend that tools are needed to measure the impact of campaigns and initiatives in csr for smes. similarly, vives (2006) found company practices and procedures for internal environmental and social responsibility were the most common in smes, while external social responsibility activities occur less frequently. also, in their study covering 1,300 firms over eight latin american countries, medium-sized firms were shown more socially responsible and involved in more activities than the smaller firms. obstacles to csr in the smaller companies included lack of resources, knowledge, and perceptions of environmental impact, but perhaps greater attention to social responsibility is part of the maturity process as small firms grow to medium size and gain in resources and knowledge. smes too often have a very casual business culture and structure, and they may not use formal strategy tools to measure or audit effective sustainable development practices (fassin, 2008; jenkins, 2004). small businesses may not have the budget or time to address sustainable development, which is often perceived as being outside of the core business activities (walker & preuss, 2008). this lack of time, or “discretionary slack,” has been found to be an important “antecedent for innovative and environmental behavior” but extremely lacking in smes (lepoutre & heene, 2006, p. 262). media and public opinion are less significant motivators for smes who are less visible than large firms (jenkins, 2005). williamson and lynch-wood (2001) found smes employing up to 250 e mployees are, by nature, environmentally reactive with a low commitment to environmental issues; although, many would like to improve their environmental performance. this study found less than three percent of available time was spent on environmental issues in smaller firms. journal of small business strategy vol. 24, no. 1 3 small versus large businesses most businesses are smes; yet, the primary thrust of research into social responsibility focuses on large organizations and their practices and behavior. even the acronym “csr” seems to imply the behavior takes place in large “corporations.” the large corporations are more likely to identify relevant stakeholders and meet their csr requirements through formal, specific strategies (perrini, russo & tencati, 2007). in their research, baden and harwood (2011) did find examples of positive csr practice among smes, but the burden of imposed standards creates more bureaucracy and costs and caused a “ceiling effect” with lower overall csr engagement by small businesses. similarly, laudal (2011) studied the main drivers and barriers of csr as they related to the size and internationalization of firms. this study found smes differed from larger multinational enterprises. smaller firm barriers to csr activity included capacity or the cost-benefit ratio of making a lasting environmental impact and the risk or degree of external control that could be realized. similarly, drivers for csr among smes included their sensitivity to local stakeholders, their reputation in the community, and their geographic scope, particularly if the sme has international competition. impact of owner/managers given the impact of sme owner-managers on the culture of their enterprises, fassin, van rossem, and buelens (2011) agree that corporate responsibility and ethics take a different route in small businesses. ownermanagers of small businesses are able to shape the corporate culture and enact values other than profit, often recognizing interrelationships. similarly, murillo and lozano (2006) highlighted the role of the founder’s values in implementing csr programs in smes and found that these founders have much room for improvement in informing their internal and external stakeholders of their best csr practices. wincent and westerberg (2005) noted that personal traits of the ceos in smes should be studied to better understand small firm behavior and performance, and they suggested inter-firm networking among sme participants is dependent on these traits. within smes, ahmad and seet (2010) studied gender variations in socially responsible considerations and ethical practices of entrepreneurs in malaysia and found variations in the magnitude of the green practices. more specifically, women perceived social responsibility and ethical conduct to be more important in running their businesses than their male sme counterparts. gadenne, kennedy, and mckeiver (2009) found that despite strong “green” attitudes of owner-mangers in smes, the level of implementation of environmental practices remains low. legislation was found to increase awareness of such practices, but sme owners have little awareness of the benefits that might arise from the cost reductions of such green practices. suppliers may assist them in reducing waste, but most smes lack a formal environmental management system. s mes also do n ot use environmental messages when marketing their products or services. sme owner/managers do seem, however, to be committed to environmental practices with their financial contributions to environmental organizations. lee and klassen (2008) agree the limited resources and capabilities within many smes limit their effective responses to environmental pressures. journal of small business strategy vol. 24, no. 1 4 environmental burden on small businesses lewis and cassells (2010) assert the implementation of responsible environmental practices is more burdensome for smes, and thus, they often lag rather than lead in their green initiatives (studer, welford & hills, 2006). but, because smes comprise the largest number of businesses in most countries, the impact of this lack of environmental engagement may be problematic. chen (2008), in his study of the information and electronics industry in taiwan, found the green core competence, green innovation performance, and the green images of smes were all significantly less than large corporations, further supporting the advantage of firm size for green performance. in a contradictory study of smes in the philippines, roxas and chadee (2012) found a p roactive environmentalsustainability orientation does not depend on financial resources, and they call for government policies and programs to encourage smes to emphasize sustainable issues and not just financial assistance. russo and perrini (2010) agree that idiosyncrasies of large firms and smes explain the various approaches to csr and found smes are more focused on social capital where large firms adopt a stakeholder approach to csr. i n their 2010 study of engaging small and mid-sized businesses in sustainability, elizabeth, martens, and cho found smes need particular attention to business strategies for sustainable development since their strategy is not the same as large firms. they further assert that tools to support sustainability in smes should consider that these small businesses have fewer resources and a different profile than larger firms. sme’s continue to constitute a major element in the world’s economy (ansoff, 1965) but have been left out of the sustainable development initiatives (labonne, 2006). in his study of environmental assessment tools, labonne (2006) found smes were far less likely to examine their environmental impact, largely due to financial limitations and costs associated with measurement tools designed for large firms. also noted is that smes’ lack of financial knowledge and employee resources limit the adoption of sustainable practices (condon, 2004). smes tend to be reactive in adopting sustainability strategies, largely reacting only to strong pressures from external stakeholders (bianchi & noci, 1998). smes face less pressure about their sustainability and may perceive that engaging in sustainability practices is too difficult or complex (dressen, 2009). many smes consider the environmental impact of their firm to be negligible (simpson, taylor & barker, 2004) and believe environmental responsibility should rest with the government (rutherfoord, blackburn, & spence, 2000). it is interesting, however, that other research suggests that sme’s small size and flexibility should make their environmental responsiveness easier to achieve than for larger firms (condon, 2004). environmentally and socially responsible conduct implies careful consideration of the external environment surrounding a firm. the dominance of economic concerns can be seen in the sme literature, and financial strength is alluded to as the major factor in small business survival (schafer & talavera, 2009). ascigli (2010) found size as a d etermining factor in csr activities. for example, due to their more extensive financial and human resources, larger firms journal of small business strategy vol. 24, no. 1 5 are expected to allocate resources for csr activities more easily than smes. eilbirt and parket (1973), in their seminal research on the topic, found an association between annual sales and the extent of csr-related activity. chrisman & fry (1982) found smes indicated more concern for social responsibility as compared to the general public. yet, the sme literature on csr and related business, financial, and market outcomes needs further confirmation and replication (thompson & smith, 1991; enderle, 2004). others have found sme survival depends on networks and relationships developed at the firm’s local level and that social responsibility can act as insurance within networks to develop sustainable business relationships (curran, rutherfoord, & lloyd smith, 2000). fraj-andres et al. (2012) found owner/managers’ values, laws, and market pressures to be key drivers of csr in smes and that managers expect positive outcomes from the implementation of csr. yet, their study found proactive firms may benefit from an improved image and positioning, but reactive or opportunistic firms may be penalized by stakeholders. hence, the role, importance, and strategic implications of environmental/social responsibility in smes and small businesses are an issue warranting further study. of particular significance is that the literature identified here largely focuses on smes, which are often much larger than “small” companies. this study’s research focus exclusively examines the role of “green” in the strategy of only “small” businesses. more specifically, to what extent does consideration of environmental decision making in a small business depend on the nature of the company relative to things, such as size or scope of operations, the resources the small firm has available to work with, the nature and aggressiveness, and uncertainty of the external environment the small business faces, or the level of financial and market success currently being realized by the small business? these issues could determine the extent to which environmental considerations become integral in the small businesses’ strategy, including goal setting, response to external opportunities, and their long-term aspirations. hypotheses it is difficult to categorize small firms based exclusively on the size of the company, as there are a n umber of other characteristics that differentiate small firms. these often include their industry, scope of operations, and a host of descriptive characteristics and psychographic factors associated with a small firm. traditionally, firms with 250 or fewer employees are categorized as “small businesses,” but this employee number may vary depending on the industry. p erhaps the size and nature of a small firm influences the extent to which environmental factors affect their decisions. small firms that have a broader reach may be more sophisticated or more influenced by environmental awareness trends. the scope of a s mall firm’s operations – whether it only services local, statewide, regional, national, and international customers — may influence the degree of the small firm’s environmental awareness in making their business decision. it is possible younger businesses may be more environmentally aware than businesses established for a longer time — before environmental and social topics were such a major consideration. conversely, it is possible more established small businesses can better factor environmental concerns into their goals and strategy. journal of small business strategy vol. 24, no. 1 6 additionally, the industry the small firm competes in may have more established cultural norms relative to environmental concerns. perhaps the differences between the distributor, services, and marketing industry categories may be reflected in how environmental issues influence the way small businesses make decisions and develop strategy. the size of “small business” has a wide range of definitions, and size too may influence goal setting practices. do firms at the micro-enterprise level respond differently than larger smes due to the resource disparity, or does the personal perspective of the owner in the very small business have more influence in how much concern there is for environmental issues? these issues lead to the first hypothesis, h1, which considers the extent to which a company’s descriptive characteristics influence the importance of environmental factors in a s mall business’ decision-making process. h1: the importance of environmental (green) business environment issues in a small businesses’ decision-making process is related to the descriptive characteristics of the company. secondly, large firms generally have a broader, more diverse, and richer resource base than small companies. the literature indicates the ability of large firms to recognize environmental issues in decision making is, and is enhanced by, the resources available for engaging in environmentally conscious decision making. not only are green issues a function of financial resources, but also of issues including the level of expertise large businesses have in their employment base, the depth of their technical skills, and their competitive advantages. this leads to the second hypothesis, h2, that among small firms, internal resource advantages will impact environmentally friendly company goals. h2: a firm’s internal resource advantages affect the importance of being environmentally friendly as a company goal in a small business. in addition to the internal resource environment of a small firm, the external macro-environment is both widely diverse among small businesses and vastly different than larger businesses. firms in highly competitive environments may have difficulty turning their attention to environmental concerns as they focus on maintaining market share. firms that compete in a very hostile environment, where regulatory and other forces outside their control continually make their decision process more challenging, may not have the broad view to accommodate environmental impacts in their goal setting. also, in businesses with very turbulent environments, where change is the norm, decisions have to be made quickly because circumstances are continually in flux and green goals may not be a priority. thus, the third hypothesis focuses on the impact of the external environment on the importance of environmentally friendly small company goals. h3: a small firm’s external environment affects the importance of being environmentally friendly as a company goal. it has been established in a number of prior research studies that satisfactorily achieving environmentally oriented goals is an effective part of a l arge company’s journal of small business strategy vol. 24, no. 1 7 achievement of financial and other market share related outcomes. this relationship has not been identified in small businesses however and is an important issue for further examination. if small businesses have satisfactory earnings and sales, and maintain their market-shares and cash flows, the small business feels confident and secure about these positive outcomes. the question remains if there is a link between being satisfied with the achievement of their financial outcomes and their environmental goals. thus, the fourth hypothesis: h4: there is a relationship between how satisfied a small business is with their achievement of environmental (green) goals and the financial and business outcomes they are experiencing. to investigate the role of environmental issues in small company decision making, green strategy development, and goal setting, a study was undertaken utilizing many of the same variables identified in the csr literature on smes and large companies. methodology the sample using addresses obtained from a national mailing list, a stratified random sample of 2,500 owner/operators of small businesses in the united states was created. the stratified sample included manufacturing, service, and distributor/wholesale/retail businesses with up to 50 employees (the less than 50 employee/small company category was constrained by the mailing list). each business was mailed a cover letter addressed to the owner/operator, a survey, and a postage-paid return envelope. the cover letter explained both the nature of the study and its anonymity. a second complete mailing was sent to the entire sample three weeks later encouraging completion of the survey if they had not already done so. completed questionnaires were received from 240 recipients. this was a response rate of 9.6%, which is typical for mail surveys with no previous connection with the respondents. the first 20% (n=48) of the 240 responses were compared with the last 20% (n=48) on key variables, and no significant differences in response patterns were identified. according to armstrong and overton (1977), this provides evidence that non-response bias was not a problem. as shown in table 1, the sample is diverse in company size, scope of operations, company age, and industry type. measures environment (green) company goals and decision making processes the primary focus of this research is how environment plays a role in a small firm’s decision making and goal setting. to assess the role of environmental issues in decision making, each small business respondent was asked to indicate on a five-point scale how important “environmental (green)” issues were in the small firm’s business environment and in the small firm’s decision making processes. the likert-type scale’s values ranged from “very little” (1) to “very much” (5). secondly, company goals were examined in a similar fashion. first, each respondent was asked how “important” environmentally friendly goals were in their small business. respondents were asked to respond on a five-point scale from “very unimportant” (1) to “very important” (5). in a third set of items, each respondent indicated on a fivejournal of small business strategy vol. 24, no. 1 8 point likert-type scale, how “satisfied” they were with the company’s achievement of their environmentally friendly goals. respondents were asked to indicate their response on a scale which ranged from “very dissatisfied” (1) to “very satisfied” (5). internal resource advantage factors to assess a f irm’s relative resource advantage or disadvantage as an internal factor, potentially impacting the role on importance of environmentally friendly company goals, thirteen items were included on the questionnaire representing the resources used by the small firms. these items included such resources as the “availability of capital,” “marketing expertise,” or “access to low cost labor.” for each resource item, respondents were asked to indicate on a five-point likert-type scale if each resource was a r elative advantage or a relative disadvantage for their small company. the scale ranged from a “great disadvantage” (1) to a “great advantage” (5). using factor analysis of the thirteen items, three underlying internal resource factors were identified and labeled as “expertise,” “tangible resources,” and “low cost.” table 2 presents the factor analysis that created the three internal resource factors. the factor loadings on the “expertise” factor include seven resources including “technical expertise” and “expertise in customer service.” the tangible resources factor had three resource table 1: importance of environment (green) in decision making process (anova) company size number of employees sample size (n) mean 1-5 (micro) 89 2.64 f=2.251 6-10 (extremely small) 61 2.82 p≤.08 11-20 (very small) 53 2.83 21+ (small) 31 3.29 scope of operations sample size (n) mean local 130 2.76 f=.32 statewide/regional 67 2.87 not significant national/international 37 2.92 company age years sample size (n) mean 1—10 37 2.65 f=1.19 11—20 59 2.64 not significant 21—35 93 2.95 36+ 47 2.96 industry sample size (n) mean distributor/wholesale/retail 107 2.83 f=2.604 services 88 2.65 p≤.08 manufacturing 35 3.20 journal of small business strategy vol. 24, no. 1 9 variables including “leading edge plant/ equipment/ production facilities,” and the third factor “low cost” included resources such as “access to low cost labor” and “access to low cost raw materials.” table 2: factor analysis of resource availability advantage/ disadvantage items factors item expertise tangible resources low cost technical expertise 0.633 0.387 -0.227 expertise in product/ service development 0.738 0.233 -0.122 marketing expertise 0.552 0.445 -0.341 highly productive employees 0.723 0.231 0.191 expertise in customer service 0.798 0.074 0.274 managerial expertise 0.613 0.07 0.412 employees trained to provide superior customer service 0.789 0.117 0.114 availability of capital 0.195 0.685 0.217 leading edge plant/ equipment/ production facilities 0.131 0.817 -0.016 innovative marketing people 0.483 0.562 0.304 access to low cost distribution channels 0.192 0.493 0.528 access to low cost labor 0.122 -0.035 0.845 access to low cost raw materials 0.031 0.229 0.62 alpha reliability coefficient 0.86 0.7 0.64 alpha reliability coefficient 0.86 0.70 0.64 a chronbach’s alpha coefficient was calculated for each of the internal resource factor measures. e xpertise (.86) was the highest, but tangible resources (.70) and low cost (.64) were still quite acceptable for exploratory research. external environment factors to assess how external environment impacts the importance of environmentally friendly goals, three external environment variables were identified that have the potential to influence the role of “green” priorities in a small business. t he first variable, “environmental hostility,” relates to the level of difficulty the firm faces in their business environment. t he environmental hostility measure was developed using items from previous research (chandler & hanks, 1994) and modified for this study. i tems in the environmental hostility measure are in a five-point likert-type scale in the agree/ disagree format and include “low profit margins are characteristic of my industry,” or “the failure rate of firms in my industry is high.” the environmental hostility scale included six items with a chronbach’s alpha coefficient of reliability of .62. journal of small business strategy vol. 24, no. 1 10 similarly, “environmental turbulence” (sometimes referred to as environmental dynamism) was derived from chandler and hanks (1994) and adapted to this research. it too was a five item, five-point likert-type scale in the agree/disagree format. items in the environmental turbulence scale included “the set of competitors in my industry has remained relatively constant over the past three years” and “actions of competitors are quite easy to predict.” this scale had a chronbach’s alpha reliability coefficient of .60. the third measure of external environment, “environmental competitiveness,” was adapted from the competitiveness scale of green, covin, and slevin (2008). this scale contained ten items such as “we emphasize strict quality control to remain competitive in our business” and “we engage in novel and innovative marketing techniques to remain competitive in our business.” the environmental competitiveness measure was also in a five point likert-type agree/disagree format and had a chronbach’s alpha reliability coefficient of .68. financial and business outcomes the financial and business outcome measures are based on self reports by the owner/ operators regarding how the small business is performing in four outcome categories. t he measures are based upon a five-point likert-type scale ranging from “decreasing significantly” (1) to “holding” (3) to “increasing significantly” (5). respondents were asked to indicate the response which corresponds most accurately with their business regarding “cash flow,” “market share,” “sales,” and “earnings.” findings small firm descriptive characteristics to investigate the differences in the importance of environmental issues in a small firm’s decision making processes relative to the descriptive characteristics of a company, an anova was calculated across firm size, scope of operations, company age, and industry type. relative to size, the small firms were categorized as “micro” (1-5 employees), “extremely small” (6-10 employees) “very small” (1120 employees) and “small” (21+ employees) businesses. a significant difference was identified (f = 2.251, p ≤ 0.08). this indicates there is a difference in the importance of green issues in a small business’s decision making relative to the firm’s size. a review of the mean importance scores across the four categories of small firm size indicated that the largest of the small companies (21 or more employees) believe environmental issues are much more important in their decision making processes. scope of operations was assessed by dividing firms into three categories – local (businesses that operate within their immediate vicinity), statewide or regional small businesses, and small businesses that operation on a national/international scale. no significant difference in the mean importance of environmental issues was indicated based upon their scope of operations. today, breath of operations among small firms may not create distinctive perspectives as very similar small businesses can use technology to compete anywhere. relative to company age, firms were categorized into four groupings relative to the age of the business (1-10 years, 11-20 years, 21-35 years, and 36 years and over). journal of small business strategy vol. 24, no. 1 11 no significant difference was indicated across firm ages; hence, the longevity of a firm does not appear to impact the importance of environmental issues in a small company’s decision making processes. age of a small firm may not be an influence on environmental awareness, but some firms may evolve into more green awareness as the firm matures in other ways. considering their industry, firms selfclassified their small business as distributor/wholesale/retail, service, or manufacturing. an anova, relative to industry type was significant (f = 2.604 and p ≤ 0.08). the importance of environmental issues among small manufacturing firms appears to be higher than that of distributor or services industry small businesses. thus, there is partial support for h1. both company size and industry type demonstrated significant differences. small firm internal resources small firms rich in resources have the opportunity to be more environmentally conscious and participative when determining their company goals. when firms have a great deal of financial resources, they can use these funds in a more environmentally friendly way. small firms with more expertise in technical or managerial skills, have an ability to utilize their knowledge base to be more environmentally aware in their goals and decision making. s imilarly, when a s mall business can benefit from low-cost advantages, they have better margins built into their business model that can be utilized in environmentally friendly ways as compared to small businesses that do n ot have these internal resources. to examine h2, a stepwise-regression analysis was conducted to determine if any resource advantages explain the importance of environmentally friendly goals and goal setting in small businesses. one variable emerged as significant. as shown in table 3, only expertise, as an internal resource advantage, emerged as significant (t = 3 .27 and p ≤ 0.00), thus providing some support for the influence of internal resource advantages on the importance of being environmentally friendly as a small firm goal. h2 is thus partially supported. similarly, h3 was investigated using stepwise regression with external variables includes in the analysis. environmental competitiveness indicates how aggressive the small business competitive environment is while environmental hostility investigates the level of external forces that can adversely impact the small business, and environmental turbulence is related to the uncertainty and unpredictability of the small firm’s external environment. two of these three external environmental variables emerged as significant – environmental competitiveness (t = 4.868 and p ≤ 0.00) and environmental hostility (t = 1.835 and p ≤ 0.05). environmental turbulence was not significant, indicating only partial support for h3. small businesses that enjoy positive financial outcomes are often linked to also being satisfied with their achievement of environmental goals. to investigate h4, four outcomes (cash flow, market share, sales, and earnings) were examined relative to the level of satisfaction a small company has with the achievement of their environmental goals. an anova was utilized to compare the mean satisfaction with environmental goal achievement scores across each of the outcomes, relative to whether the outcome was decreasing, holding constant, or increasing. interestingly, for all four outcomes the anova was significant, as shown in table journal of small business strategy vol. 24, no. 1 12 4: for cash flow (f = 2.73 and p ≤ 0.07), for market share (f = 3.810 and p ≤ 0.02), for sales (f = 4.08 and p ≤ 0.02), and for earnings (f = 4.11 and p ≤ 0.02). an examination of the mean values of all four outcome variables indicates the highest level of satisfaction with the achievement of environmental goals is always associated with small firms whose outcomes are either holding constant or increasing. in no instance was the cash flow, sales, market share, or earnings decreasing in firms that had a high level of satisfaction with environmental goals. in all instances when all four outcome variables were decreasing, the level of satisfaction with environmental goals was also the lowest. therefore, there is complete support for h4. table 3: stepwise analysis of the impact of internal resources and external environment on importance of environmentally friendly goals internal resources stepwise analysis dependent variable: importance of environmentally friendly goals r²=.06 f=10.68 p=≤.00 internal resources included: beta t significance expertise 0.215 3.27 0.00 not included: beta in t significance tangible resources 0.005 0.06 0.96 low cost advantage 0.093 1.28 0.20 external environment stepwise analysis dependent variable: importance of environmentally friendly goals r²=.15 f=18.887 p=≤.00 external environment included: beta t significance environmental competitiveness 0.329 4.868 0.00 environmental hostility 0.124 1.835 0.05 not included: beta in t significance environmental turbulence -0.052 -0.803 0.423 journal of small business strategy vol. 24, no. 1 13 table 4: impact of satisfactory environmentally friendly goal achievement on company outcomes (anova) cash flow f=2.73 mean decreasing mean holding mean increasing p≤.07 2.57 2.94 3.06 (n=28) (n=111) (n=98) market share f=3.810 mean decreasing mean holding mean increasing p≤.02 2.89 3.36 3.29 (n=28) (n=111) (n=97) sales f=4.08 mean decreasing mean holding mean increasing p≤.02 2.79 3.40 3.14 (n=28) (n=111) (n=97) earnings f=4.11 mean decreasing mean holding mean increasing p≤.02 2.54 3.17 2.96 (n=28) (n=111) (n=98) discussion as environmental issues continue to be an increasingly important topic impacting how all firms set goals, make decisions, and achieve outcomes, it is increasingly important to understand how environmental consciousness impacts decision making specifically for small businesses. most research in this area is focused on large firms. because small businesses are the largest class of firms, exploratory study on smaller business is important. t his study examines four distinct factors that could influence the role of environment in small business operations, studied from a number of key perspectives– the descriptive characteristics (type) of a small business, the internal resource advantages and disadvantages of the small firm, the external macro-level industry challenges faced, and finally and perhaps most importantly, the small businesses’ financial and market/growth-related realization outcomes.. t hus, the entire spectrum of small business circumstances, situational, external, operations (internal), and success outcomes, are examined in this study to provide a comprehensive and holistic view of these important topics. based on this study, small firms with more than 20 e mployees and small businesses journal of small business strategy vol. 24, no. 1 14 involved in manufacturing are more likely to consider environmental issues as part of their decision making. the “larger” small firms may have more economic momentum, meaning that they have achieved a s tability level beyond start-up that can accommodate decision issues beyond survival. once a start-up evolves beyond the chaotic early months or years, environmental issues can become a co nsideration in strategy. in general, manufacturing firms are likely to have more significant and diverse implications of environmental awareness, and they have more opportunities to be socially responsible in purchasing raw materials, managing production processes, or reducing and managing waste as compared to distribution/wholesale/retail or services businesses. the importance of the environment in decision making may be in part a function of having the opportunity to support environmental concerns as a competitive advantage. this is often inherent in manufacturing firms that are further evolved. looking internally, each small firm has a unique resource environment to call upon in making their decisions and setting realistic goals. the resource most closely related to being environmentally friendly was the expertise of the small business. a firm’s technical prowess, marketing skills, and managerial expertise were associated with the importance in a small firm of considering environmentally friendly issues as part of their company goals. firms with more expertise can better understand the environmental issues and develop strategy and decisions that are environmentally oriented. relative to external factors, many firms face difficult environments that create unique and difficult issues they must consider in making strategic decisions. firms involved in turbulent environments that are highly variable generally do not consider environmental issues as part of their goal development. the changeability and minute-to-minute decision making required in these firms do not allow for a long-term perspective that can accommodate environmental concerns. it is interesting that small businesses in highly competitive environments and hostile environments do recognize the importance of environmentally friendly goals. it could be that having an environmental consciousness in a competitive environment helps a small firm develop their strategic competitive advantage through their environmental awareness. the more aggressive or negative the external environment faced by a s mall business, the more environmentally friendly goals tends to be part of the goal setting process. this might inoculate the small firm from some of the pressure that comes from legal, social, political, weather issues, and a host of other macro-level variables that could impact them. as might be expected relative to the large firm literature, small firms satisfied with their achievement of green goals also appear to have better financial and business outcomes in earnings, marketing share, sales, and cash flow. it is likely these four outcome measures are proxies for each other. firms whose earnings and sales are increasing typically experience higher earnings and market advantages. while satisfaction with environmental goals is associated with small firms that have increasing outcome measures (in cash flow, markets share, sales, and earnings), satisfaction with achievement of environmental goals is not associated with decreases in cash flow, market share, sales, or earnings. based upon this study, being environmentally friendly is an activity only journal of small business strategy vol. 24, no. 1 15 evidenced in firms who are stable or advancing relative to their financial or market success. areas for future research clearly the data in this exploratory study have identified that even in small firms the green or environmental issues influence decision making, goal setting, and satisfaction with goal achievement. more research is needed to confirm and extend these finding as well as identify specific environmental concerns that are most associated with positive outcomes. similarly, additional research should consider how moderating variables influence attention to environmental or green strategy. both gender and time pressures in smaller business have been suggested as important factors, which may be significant moderators. additionally, research is needed to more clearly identify other internal or expertise resources, such as sales and marketing costs, that are most conducive to environmentally friendly goals. also, it is important to identify what external factors to the small business have the most impact on being environmentally oriented. further research should extend these results to larger samples and international locations, as well as examine small firms with greater than 50 employees. an exploration of differences among and between manufacturing, services, and distribution/wholesale/retailers is also needed. in-depth case studies also may better profile specific small businesses with success in achieving socially responsible goals and the factors that lead them to be environmentally oriented. finally, future research to study the 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(2006). social and environmental responsibility in small and medium enterprises in latin america. the journal of corporate citizenship, 21, 39-50. walker, h. & preuss, l. (2008). fostering sustainability through sourcing from small businesses: p ublic sector perspectives. journal of cleaner production, 16(15), 16001609. williamson, d. & lynch-wood, g. (2001). a new paradigm for sme environmental practice. the tqm magazine, 13(6), 424-432. wincent, j. & westerberg. m. (2005). personal traits of ceos, inter-firm networking and entrepreneurship in their firms: investigating strategic sme network participants. journal of developmental entrepreneurship, 10(3), 271-284. richard c. becherer, phd, holds the clarence e. harris chair of excellence in business and entrepreneurship at the university of tennessee at chattanooga. he has had extensive experience both as an academic and as an entrepreneur. h e cofounded one of the first for-profit health maintenance organizations in the united states which became a public company. he has published in numerous journals, including entrepreneurship theory and practice, journal of small business management, journal of marketing, and decision sciences. he was a f ulbright scholar at the university of economics and the czech university of life sciences in prague, czech republic in 2008. marilyn m. helms, phd, holds the sesquicentennial chair and is a professor of management at dalton state college. she works closely with the area community on research projects, seminars, and training programs. she teaches strategic management and entrepreneurship. s he is the author of numerous business articles and writes a monthly column for the dalton (ga) daily citizen newspaper. she holds a doctorate degree from the university of memphis (tennessee) and was a fulbright scholar at the university of coimbra, portugal. reproduced with permission of the copyright owner. further reproduction prohibited without permission. 82 toward an integrative research framework for new venture legitimacy judgment formation whitney o. peake western kentucky university whitney.peake@wku.edu derrick d’souza university of north texas dsouza@unt.edu abstract legitimacy is a critical resource for new ventures. yet, our review of the literature indicates that the process through which new venture legitimacy judgments are bestowed by stakeholders is under-theorized. additionally, the consequences of the legitimacy judgment for the stakeholder have not been adequately incorporated in prior research frameworks. we employ the absorptive capacity construct to address these limitations and propose an integrative research framework that includes the stakeholder in the legitimacy judgment formation process, and paves the way for empirical testing of these underlying processes. keywords: new ventures; legitimacy; stakeholders; judgment formation; absorptive capacity introduction legitimacy is instrumental in the development, emergence, and growth of new ventures (e.g., cornelissen & clark, 2010; tornikoski & newbert, 2007; zimmerman & zeitz, 2002; zott & huy, 2007), and there is much research on this topic in the field of entrepreneurship (bruton, ahlstrom and li, 2010). given the importance of legitimacy to new ventures, founders are purported to craft and deploy signals to relevant stakeholders. through these signals, new venture teams work to frame their business concept(s) in such a way that they are understood and accepted (cornelissen & clarke, 2010; lounsbury & glynn, 2001; mitteness, baucus, and norton, 2013; suddaby & greenwood, 2005). recent empirical studies focusing on new venture legitimacy indicate that both the signals deployed by new ventures and the judgments formed by stakeholders are an integral part of new venture legitimacy and ultimately, performance (e.g., khaire, 2010; le & nguyen, 2009; s trateg y journal of small business journal of small business strategy vol. 25, no. 1 83 nagy, pollack, rutherford & lohrke, 2012; pollack, rutherford & nagy, 2012; rutherford, buller & stebbins, 2009). thus, scholars suggest that both academics and practitioners may benefit from a clearer understanding of how stakeholders (evaluators) render legitimacy judgments (bitektine, 2011; lamin and zaheer, 2012; mishina, block, & mannor, 2012; tost, 2011) and encourage further theorybuilding in this realm. separately, researchers have identified four characteristics of the legitimacy judgment formation process. we believe these characteristics assist in better understanding how legitimacy judgments are formed by stakeholders and the importance of those decision-making processes to stakeholders as competitors in their respective market spaces. first, they suggest that the stakeholder must “absorb” the incoming signals before forming a legitimacy judgment (cohen and levinthal, 1990; griffith, redding, and van reenen, 2003; nagy et al., 2012; pollack et al., 2012; zahra and george, 2002). second, the stakeholder can renege at various stages of the signal absorption process, if the information crossing the threshold is viewed to hold little value (boulding, 1956; galbraith, 2001; kast and rosenzweig, 1972). third, the stakeholder will use new information to update his/her existing legitimacy judgment stance (khoury, junkunc, and deeds, 2013; kolb, 1984; tost, 2011). finally, the stakeholder reserves the right to exploit the legitimacy judgment to best serve his/her needs (bowman and hurry; mcgrath, 1999; mcgrath, ferrier & mendelow, 2004). figure 1 offers the process-based view of the new venture legitimacy judgment process. we use this process model as the starting point for the development of an integrated research framework for new venture legitimacy judgment formation. figure 1: a process-based view of new venture legitimacy judgment formation to further explore the stakeholder legitimacy judgment phenomenon in the case of new ventures, we review both the general legitimacy and new venture legitimacy literatures, with a focus on developments in the new venture legitimacy judgment realm. after conducting this review, we believe two important and journal of small business strategy vol. 25, no. 1 84 underexplored aspects of new venture legitimacy judgment formation emerge: the legitimacy judgment formation process of the stakeholder and the competitive position that the stakeholder secures by making sound legitimacy judgments. we attempt to further explore these areas by: (1) using an absorptive capacity lens to provide a theoretical model for the stakeholder legitimacy judgment process in the context of new ventures; and (2) extending the new venture legitimacy judgment literature by considering stakeholders as competitors in their own market space, who create options for exploiting business decisions through the formation of legitimacy judgments. in our attempt to introduce an integrative framework and theoretical extension of the stakeholder legitimacy judgment formation process, we first review advances made by prior researchers in defining the legitimacy judgment process. next, we review the new venture legitimacy literature to identify trends and highlight opportunities for further theorizing. then, we introduce our integrative model and discuss how absorptive capacity provides a theoretical perspective for combining the prior discussion of social judgments with the potential competitive position of the stakeholder. finally, we provide implications and directions for future research in this area. perspectives on legitimacy we begin by briefly highlighting the key attributes and applications of legitimacy found in scholarly contributions anchored in institutional theory, strategic management and entrepreneurship. from an institutional theory perspective, organizations can be viewed as legitimate entities if their actions and behaviors are adequately aligned with those considered dominant in a given context (deephouse, 1996; dowling & pfeffer, 1975; tost, 2011). viewed through the institutional theory lens, a “state” of legitimacy is associated with a lack of questioning, or lack of inquiry into the organization and credibility of its practices (scott, 1995). that is, when perceived as legitimate, an organization is argued to have obtained taken-for-granted status (meyer & scott, 1983). researchers contend that the strategic management perspective predominantly focuses on legitimacy as a resource (ashforth &gibbs, 1990; dowling & pfeffer, 1975; suchman, 1995). from this perspective, organizations work to gain legitimacy through strategically crafting and sending signals to stakeholders. according to suchman (1995), managers purposefully and carefully deploy such signals in an attempt to gain stakeholder approval and support. from the legitimacy as a resource perspective, positive legitimacy judgments beget subsequent positive legitimacy judgments and access to crucial resources (rutherford & buller, 2007; rutherford, et al., 2009). the entrepreneurship literature likewise recognizes legitimacy as a social judgment of the appropriateness, or the acceptability, of a new venture within a given context (e.g., aldrich & fiol, 1994; lounsbury & glynn, 2001; zott & huy, 2007, bruton, et al., 2010). it is generally recognized that new ventures require access to critical resources to gain legitimacy; however, without legitimacy it is often difficult to gain access to such resources (aldrich & fiol, 1994; lounsbury & glynn, 2001; packalen, 2007; tornikoski & newbert, 2007). a way to extricate oneself from this conundrum is to strategically deploy legitimizing signals, symbols, or stories that enhance firm legitimacy (bell, 2009; journal of small business strategy vol. 25, no. 1 85 delmar & shane, 2004; lounsbury & glynn, 2001; shepherd & zacharakis, 2003), thus, improving the venture’s likelihood of gaining access to key resources (zott & huy, 2007). researchers have also argued that positive initial legitimacy judgments for the firm from one influential stakeholder often generate positive legitimacy judgments from other stakeholders (rutherford & buller, 2007; voelkder and mcdowell, 2010). in sum, gaining positive legitimacy judgments and the subsequent access to crucial resources requires the new venture to convince relevant stakeholders that the firm is deserving of such an investment. thus, stakeholder perceptions of legitimacy as a social resource are argued to hold greater importance than financial performance early in the life of the venture (delmar & shane, 2004; khaire, 2010). in the subsequent section we briefly review the new venture legitimacy literature, highlighting trends that have occurred over time that point to the need for further theory development in this domain. new venture legitimacy judgements – a synthesis of prior research work in new venture legitimacy appears to have accelerated in the last decade. both lounsbury and glynn (2001) and zimmerman and zeitz (2002) provided conceptual views of legitimacy, paving the way for future conceptual and empirical work in this area. lounsbury and glynn (2001) argued that entrepreneurial storytelling facilities legitimacy, which leads to capital acquisition and ultimately improves performance. shortly thereafter, zimmerman and zeitz (2002) provided a conceptual piece highlighting propositions related to the influence of cognitive, regulative, normative, and industry legitimacy on new venture survival and growth. other theory-building contributions have focused on strategically undertaking legitimacy for resource acquisition (e.g., godwin, stevens, & brenner, 2006; packalen, 2007), the legitimacy threshold (rutherford & buller, 2007), and the mediating role of legitimacy on the relationship between new venture image and how entrepreneurs attempt to frame the venture to stakeholders (cornelissen & clark, 2010). one noticeable thread in the theoretical developments of new venture legitimacy is that this literature focuses on signaling from the entrepreneur’s perspective, and the outcome accorded to the entrepreneur from crafting such signals. such research indicates that prior theory developments related to new venture legitimacy have primarily focused on the demand side of the legitimacy equation, i.e., how entrepreneurs can work to influence legitimacy judgments, and have often viewed legitimacy acquisition from a cognitive legitimacy vantage point (mitteness et al., 2013). rutherford and buller (2007) contend that legitimacy is accorded to the firm by important stakeholders and that it cannot be forced. yet, the processing of information by the stakeholder is held constant or is assumed away in most entrepreneurship research on the legitimacy phenomenon. although discussions of legitimacy often refer to stakeholders (i.e., cornelison & clarke, 2010; drori, honig, & sheaffer, 2009; lumpkin, moss, gras, kato, & amezcua, 2011; zott & huy, 2007), mitchell (2002: 188) argues that new venture formation should be viewed as a “stakeholder-centered phenomenon,” since stakeholders serve as the deciding factor in new venture survival. donaldson and preston (1995) posit that a stakeholdercentered model has superior attributes journal of small business strategy vol. 25, no. 1 86 because it allows for the inclusion of all individuals or groups of individuals with legitimate interests in the venture. since these stakeholders are numerous and varied (i.e., investors, employees, suppliers, government, trade groups, customers, communities, etc.), individuals or groups of individuals will evaluate the firm from their unique perspective and determine its legitimacy in a particular realm, thereby, granting or withholding resources and influencing the performance of the firm. toward stakeholder-centered perspective much of the early research on new venture legitimacy has focused on entrepreneurs’ actions and the associated outcomes, thus, assuming that legitimacy is granted when some positive outcome occurs (e.g., delmar & shane, 2004; khaire, 2010; le & nguyen, 2009; maguire, hardy, & lawrence, 2004; navis & glynn, 2010; ruebottom, 2013; sine, david, & matsuhashi, 2007). however, most recently, researchers have begun to shift their analyses to provide a broader exploration of the legitimacy phenomenon. current empirical research attempts to extend the stakeholder perspective through analyses of stakeholder decisions related to legitimacy (e.g., nagy et al., 2012; pollack et al., 2012). while this is an important first step, we argue that further theorizing is needed to better understand this process. using the absorptive capacity perspective to explain new venture legitimacy judgment formation although great strides have been made in theorizing the stakeholder legitimacy judgment formation process, opportunities for refinement and extension remain, especially in the context of new ventures. absorptive capacity provides a helpful lens through which to view the stakeholder legitimacy judgment phenomenon. further, since stakeholders are argued to act in their or their referent groups’ interests (e.g., bitektine, 2011; nagy et al. 2013), we contend that viewing the stakeholder as a competitor in his/her market space is an important next step in further refining legitimacy theory. the availability of knowledge is a critical element of this process (e.g., nagy et al., 2012; zott and huy, 2007); thus, we propose that absorptive capacity provides a possible lens to view this process. the absorptive capacity construct is particularly useful in theorizing stakeholder new venture legitimacy judgments since it accounts for the following stakeholder attributes: (1) learning, cognitive limitations, and the use of heuristics, (2) the influence of the stock of prior knowledge, (3) signal-sourcing predisposition of the stakeholder, and (4) the potential gain that motivates the stakeholder to make such legitimacy judgments. the term “absorptive capacity” appears most often in research on organizational learning. researchers suggest that the need to manage change and to stay competitive requires organizations to dynamically adjust their capabilities (teece & pisano, 1994). such capability adjustments demand the acquisition and use of new knowledge that must be “learned” by the firm. cohen and levinthal (1990) proposed that the difficulty experienced by firms may occur because organizational learning is attenuated by the “absorptive capacity” of the firm. building on the seminal work of cohen and levinthal (1990), zahra and george (2002) define absorptive capacity as the “set of organizational routines and processes by which firms acquire, journal of small business strategy vol. 25, no. 1 87 assimilate, transform, and exploit knowledge to produce a dynamic organizational capability” (p. 186). interestingly, cohen and levinthal’s development of the absorptive capacity construct at the organizational level is rooted in “learning” at the individual level and draws on cooperative learning literature at the individual level (dewey, 1933; kolb, 1984; garrison, anderson, & archer, 2001; piaget, 1977; volberda, foss & lyles, 2010). cohen (1991) succinctly highlights the striking similarity between the work conducted on “learning” and “absorptive capacity” at the individual and the organizational levels, respectively. indeed, we have come full circle to find relevance of the absorptive capacity construct at the individual level of analysis, which griffith and colleagues (2003) defined as the individual’s ability to absorb and ultimately exploit new knowledge. there has been growing acceptance of the use of the absorptive capacity construct to research individual learning processes (i.e., the individual’s ability to assimilate the signal). for example, daghfous (2004) used individual absorptive capacity to explain the implementation of knowledge-intensive best practices. in a multinational study, vance and paik (2005) studied absorptive capacity in the context of host country nationals. deng, doll, and cao (2008) studied the relationship between absorptive capacity and productivity of individual engineers. hotho, becker-ritterspach, and saka-helmhout (2011) examined individual absorptive capacity through a social interaction lens, and kankanhalli, pee, tan, and chhatwal (2012) used it to study the antecedents of learning in a research context. most of the empirical research on individual-level absorptive capacity has used the four-dimensional operationalization of the construct and has employed measures similar to those offered by research at the organizational level. examples of such an approach include work by daghfous (2004), kankanhalli et al. (2012), and hotho et al. (2011), which use descriptions of absorptive capacity by cohen and levinthal (1990), szulanski (1996), zahra and george (2002), and todorova and durisin (2007) to measure absorptive capacity. hence, we extrapolate from this stream of research and apply the four dimensions of absorptive capacity to the stakeholder’s legitimacy judgment formation process. the four dimensions are: 1. acquisition encompasses the process of actively listening, identifying, and acquiring beneficial knowledge via signals from the new venture or relevant third party. 2. assimilation represents the process involved in analyzing, synthesizing, and understanding the newly acquired knowledge from the new venture or third party. 3. transformation refers to the process of rationalizing and combining the internalized knowledge with existing knowledge structures, which include adding or deleting knowledge to arrive at a new knowledge structure and a legitimacy judgment. 4. exploitation refers to the process of putting the legitimacy judgment to use through decisions and actions that create value for the exploiter (the stakeholder). journal of small business strategy vol. 25, no. 1 88 applying absorptive capacity to new venture legitimacy applied to the legitimacy judgment formation context, it can be argued that absorptive capacity of the stakeholder influences the stakeholder’s legitimacy judgment and the subsequent decision. new ventures do not have the “histories” that can be attached to more established organizations (tornikoski & newbert, 2007; nagy et al., 2012; pollack et al., 2012); thus, much of the stakeholder’s judgment of the venture is based on active evaluation and learning (pollack et al., 2012; rutherford et al., 2009). in such situations, we contend that stakeholders combine current knowledge of the industry and firm with information shared by the new venture team and other relevant stakeholders to arrive at a legitimacy judgment. although this basic process may exist for more established firms, suchman (1995) and tost (2011) indicate that new ventures often require more active and intense evaluation by the stakeholder since so little credible information exists for these entities. as will be noted later, information availability may assist the stakeholder in making valuable and potentially profitable decisions; thus, the absorptive capacity process, as a means to facilitate competitive advantage for the stakeholder, appears to serve as an interesting and useful lens through which to view the new venture legitimacy judgment process. a framework for research on new venture legitimacy judgments we highlight the development of our research framework for new venture legitimacy judgments in figure 2. prior to developing the framework and discussing our propositions, however, it is important to address the assumptions of our model. first, we focus solely on new ventures because of the unique context in which the stakeholder arrives at a legitimacy judgment. second, we assert that the judgment formation process for stakeholders is a dynamic, social process. in the following sections we provide support for our assumptions and offer propositions related to our framework. figure 2: integrative research framework for new venture legitimacy judgment formation journal of small business strategy vol. 25, no. 1 89 assumptions focus on new ventures. as a social process, legitimacy judgment formation has often been examined in the context of established firms. established organizations have financial histories, track records of performance, and demonstration of founder and manager competencies. new ventures often suffer from liabilities of newness (lumpkin, alexander, gras, and nason, 2010; rutherford and buller, 2007), since they are untested and unproven in the marketplace. even so, new ventures have a critical need for resources, without which the venture will fail (delmar and shane, 2004). with little credible information about the founders, managers, and the business available (rutherford et al., 2009), new ventures must consistently work to frame their venture as acceptable, appropriate, and worthy of resource investments from stakeholders (tornikoski and newbert, 2007). we contend that new ventures serve as a special case in terms of the legitimacy judgment process since new ventures have not yet established firm reputations and generally can provide little evidence of past success. in such a case, stakeholders must more actively evaluate the firm; thus, expending more cognitive effort in assessing the legitimacy of new ventures (tost, 2011). stakeholder judgments. some assumptions regarding the order of the absorptive capacity process, stakeholder cognitive capacity, and the feedback involved in the formation of legitimacy judgments and business decisions were made as we conceptualized our framework for new venture legitimacy judgments. first, based on the evidence from prior research, we assume that components of the absorptive capacity process are sequentially positioned (cohen & levinthal, 1990), and that they follow the order presented in prior research. secondly, we argue that a stakeholder has the cognitive capacity to determine whether or not a signal holds value – a common assumption across general models of stakeholder evaluation (e.g., bitektine, 2011). additionally, we assume that knowledge accumulation is path dependent (cohen & levinthal, 1990) and that the process will proceed until sufficient knowledge is gained by the stakeholder to make a final business decision (i.e., financing awarded versus no financing awarded; purchase made versus no purchase made; permit granted versus no permit granted) (kast and rosenzweig, 1972). these assumptions are aligned with those made by prior researchers and support the use of an integrative framework. in the subsequent section, we will use these assumptions to develop our propositions related to the new venture legitimacy judgment formation process. the signal absorption capability and legitimacy judgment formation the process framework (figure 1) indicates that on receipt of the information from the new venture or other relevant party, the stakeholder begins to process the information and integrates it with his/her existing pool of knowledge. in the context of a new venture, the stakeholder can combine knowledge acquired from other sources with his/her existing knowledge to arrive at a new perception of legitimacy of the organization. the stakeholder’s ability to create new and useful judgments about the legitimacy of an organization involves an ability to combine new information with existing knowledge into new and possibly different knowledge structures – a process that goes beyond simply attenuation of the newly acquired information. we call this the signal absorption capability of the stakeholder. journal of small business strategy vol. 25, no. 1 90 components of the signal absorption capability absorptive capacity theory suggests that the signal absorption process consists of sequential steps. zimmerman and zeitz (2002) argue that prior to legitimation, the stakeholder must first determine whether the new venture is of sufficient interest before proceeding to make a judgment. to make such a determination, fosfuri and tribó (2008) and bansal and clelland (2004) suggest that information is acquired by the stakeholder from the firm and other relevant stakeholders of the firm. that is, once the new venture team or other entities emit signals, the stakeholder must choose to expend resources (however small) to obtain the information and to determine whether the information holds value. within our framework, this point would be represented by the acquisition stage of the signal absorption capability. if the information is seen to have value, it is moved by the recipient stakeholder toward assimilation. assimilation represents the process involved in analyzing, synthesizing, and understanding the newly acquired knowledge from the new venture or other entities. it facilitates an understanding of the new information, assesses its congruence with existing knowledge structures, and allows the stakeholder to assess whether the new knowledge needs to be reconfigured for it to be usefully employed (lefkowitz & lesser, 1988). prior research suggests that other stakeholders or trusted entities may provide important information to facilitate the assimilation process, particularly in situations where information from the entrepreneur is scarce or questionable (bitektine, 2011). when trusted and reliable information is available from other parties, then the stakeholder may engage in “cognitive economy,” which suggests the stakeholder will use heuristics, when possible, to avoid the costs of cognitive processing (bitetkine, 2011; bruton et al., 2010). however, in other situations stakeholders may be motivated to perform additional information search, despite the cognitive costs involved (tost, 2011). if the acquired information is seen to have been adequately assimilated, it is moved toward transformation. during signal transformation, the assimilated information is placed in the appropriate context to determine whether differences that exist between the extant knowledge and the new information need to be addressed. this allows the stakeholder to cognitively combine the signal with his/her pool of prior knowledge (bansal & clelland, 2004; de clercq, & dimov, 2008; lane, koka, & pathak, 2006). in the context of the legitimacy judgment formation process, the assimilated information from both the new venture and relevant third parties is combined with the stakeholder’s existing knowledge structures. for example, when the new venture is seen as very similar cognitively to other ventures/firms in existence and when the stakeholder’s knowledge of these ventures is high, then this portion of the process should move more rapidly and require less effort by the stakeholder (bitektine, 2011; zott & huy, 2007). at some point in the process, the stakeholder will form an initial judgment. if a predetermined legitimacy “threshold” (set by the stakeholder) has been met, then the stakeholder may move to execution of a business decision (e.g., invest versus do not invest) (rutherford & buller, 2007). proposition 1. the signal absorption process adopted by the stakeholder will include three distinct activities labeled journal of small business strategy vol. 25, no. 1 91 acquisition, assimilation, and transformation. influence of the signal absorption capability. our development, anchored in absorptive capacity theory, suggests that the stakeholder’s ability to combine new information with existing knowledge structures influences the new venture legitimacy judgment decision. in this conceptualization, the signal absorption capability moderates of the relationship between the signal emitted by the new venture and the stakeholder’s legitimacy judgment. thus, recognizing the path dependency characteristics of social judgments (khoury et al., 2013; mishina et al., 2012), we posit that the influence of signals related to the new venture on the legitimacy judgment will be moderated by the stakeholder’s ability to acquire, assimilate, and transform these signal. hence we offer the following proposition proposition 2. the signal absorption capability of the stakeholder moderates the relationship between signals emanating from the new venture and the legitimacy judgment formed by the stakeholder. acknowledging the antecedents of signal absorption capacity researchers have identified two antecedents of an individual’s absorptive capacity: the stock of prior knowledge and the predisposition to source new knowledge. recognizing that learning is path dependent (e.g., harris, mosakowaski & dimov, 2008), researchers have demonstrated that the stock of prior knowledge influences an individual’s ability to absorb new knowledge, i.e., to learn (kole & healy, 2007; rehder & murphy, 2003; sohn, anderson, reder & goode, 2004). in the context of our research, this suggests that the stock of prior knowledge held by the stakeholder influences the acquisition, assimilation, and transformation of new information emanating from the venture (harris et al., 2008). the second antecedent of absorptive capacity is the individual’s predisposition to source “new” knowledge. researchers have identified two factors that determine this predisposition. the first is the knowledge sourcing initiative of the individual (gray & meister, 2004; kankanhalli, et al., 2012). the second is the individual’s intrinsic motivation to learn (gottfried, fleming, & gottfried, 2001). further, researchers suggest that the individual’s predisposition to access multiple sources of information influences their learning effectiveness (kankanhalli, et al., 2012). in the development of our framework, we propose that both the stock of prior knowledge and the predisposition to source new knowledge influence the legitimacy judgment formation process. these two antecedents are widely acknowledged to influence the signal absorption capability. that is, (1) the stakeholder’s signal-sourcing predisposition can influence the ability to acquire the information arriving from the new venture, and (2) the stakeholder’s stock of knowledge facilitates the ability to acquire new knowledge disseminated by the new venture or third party. signal sourcing predisposition has been argued to facilitate a more extensive search for information as the stakeholder forms the legitimacy judgment. it is believed to relate positively to the legitimacy judgment (bitektine, 2011; tost, 2011). research likewise indicates that stakeholders are expected to combine their stock of knowledge with the information transferred from the new journal of small business strategy vol. 25, no. 1 92 venture as they form legitimacy judgments (de clercq & dimov, 2008). both the stakeholder’s signal-sourcing predisposition and stock of knowledge will assist in determining the value of the information signal (bansal & clelland, 2004) and in moving towards a legitimacy judgment. thus, we expect the following. proposition 3. the stakeholder’s signal sourcing predisposition is an antecedent that significantly influences the efficacy of the signal absorption capability. proposition 4. the stakeholder’s stock of knowledge is an antecedent that significantly influences the efficacy of the signal absorption capability. until some legitimacy threshold is met by the new venture, the stakeholder may feel it is necessary to further evaluate the new venture, combining the updated knowledge set with forthcoming signals (khoury, junkunc, & deeds, 2013). mishina et al. (2012) argue that any observations or prior beliefs about the new venture will influence future assessments of information pertaining to it, since social judgments are path dependent. in this case, the updated information works to inform the stakeholder’s predisposition to source subsequent signals, via the acquisition point. in other words, this would increase the stakeholder’s propensity to source the signal via the recognition of valuable information that crosses this interface. proposition 5. past legitimacy judgment(s) formed by the stakeholder significantly influence their current and future predispositions for sourcing signals. exploiting the legitimacy judgment: creating real options for the stakeholder prior research suggests that stakeholders have ulterior motives regarding when to expend resources and form legitimacy judgments since each stakeholder will work to leverage relationships with ventures they see as beneficial to themselves, the community, or society (bitektine, 2011). nagy et al. (2012) and pollack et al. (2012) argue that ultimately, new venture teams are granted legitimacy by stakeholders who believe the firm will generate value for them. since stakeholders are also evaluated on their legitimacy judgments and business decisions, they too are involved in competition with other stakeholders to bolster their own legitimacy by choosing to legitimize firms that hold the greatest potential value and benefit. bitektine (2011) indicates that since stakeholders are subjected to social judgments from their peers, the stakeholder will be attentive to how their legitimacy judgment will be perceived by relevant others. mishina et al. (2012) argue that despite the social element of legitimacy judgments, it is possible that an individual stakeholder will evaluate the firm differently from other stakeholders, even within the same reference group. in sum, since stakeholders often make both cognitive and financial investments in evaluating the firm in hopes of potential gain, we argue that stakeholders serve as competitors in their respective market. as a competitor, the stakeholder seeks to combine prior knowledge and the information supplied by the new venture as efficiently and expediently as possible in order to maximize value (or minimize prospective loss) for the resources invested in forming their legitimacy judgment and subsequent business decision. thus, we argue that in the context of new venture journal of small business strategy vol. 25, no. 1 93 legitimacy judgments, the stakeholder acts as a competitor for the attention of potentially valuable new ventures; thus, seeking the best opportunities available for his/her resource investments. when a stakeholder determines that the firm has crossed some legitimacy threshold, legitimacy is established (or denied), and the motivation to source additional information about the new venture declines (cornelissen & clarke, 2010). the exploitation of the legitimacy judgment then occurs when the stakeholder executes some decision. this decision may be as simple as making a purchase, or as complex as joining the top management team or serving as a major financier of the venture. what is important to note is that although stakeholders make legitimacy judgments in differing contexts, all approach the execution of the decision by choosing from among several options generated as a result of the legitimacy judgment. we contend it is possible to conceptualize the signal absorption capability as a tool used by the stakeholder to create real options that later can be “exercised” or exploited. an option secures an opportunity, but does not oblige the party to act on the opportunity if it does not appear attractive (bengtsson, 2001; kogurt and kulatilaka, 2001). our development suggests that the signal absorption capability can potentially present real options to the stakeholder. the stakeholder then has the opportunity, but not the obligation, to buy into (or disregard) these options (i.e., invest versus not invest, purchase versus not purchase, etc.). option theory (bowman and hurry, 1993; kogurt and kulatilaka, 2001) informs us that this selection will be based on the expected value of the outcome and the timeframe available to exercise the option. hence, we offer the following proposition. proposition 6. the stakeholder exploits the legitimacy judgment through actions that are constrained by the available timeframe and moderated by the expected value of the business decision. work by mcgrath and colleagues (mcgrath, 1999; mcgrath et al., 2004) suggests that, in the context of new venture legitimacy judgments, the decision not to exercise an option (resulting from a negative legitimacy judgment) limits stakeholder resources expended to exercise the option and minimizes the exposure to its consequences. however, the decision to exercise the option (resulting from a positive legitimacy judgment) could open the door to subsequent opportunities with the new venture or other lucrative ventures. hence, successful option creation may allow the stakeholder to gain a competitive advantage relative to competitors in accessing and assessing opportunities (bowman and hurry, 1993). therefore, we offer the following proposition proposition 7. the judicious choice of real options that result from the efficient and effective navigation of the legitimacy judgment process provides the stakeholder with a competitive advantage in the marketplace. since social judgments are path-dependent (khoury et al., 2013; mishina et al., 2012), navigating the legitimacy judgment process regarding one new venture then informs the stakeholder’s pool of prior knowledge for subsequent legitimacy judgments related to both that venture and related ventures. journal of small business strategy vol. 25, no. 1 94 through the social process, the stakeholder obtains information about the new venture system, its top management team, and the environment or context within which it operates. additionally, the stakeholder may receive pertinent information from other relevant stakeholders. as this information is acquired, assimilated, and transformed, the stakeholder uses knowledge about the new venture, and works to form the legitimacy judgment. the information absorbed through the judgment formation process accumulates and augments the signal absorption capabilities of the stakeholder, as can be seen via the feedback loop from the exploited judgment to the pool of prior knowledge in figure 2. our feedback loop indicates that knowledge as an output from prior experiences serves as an information (i.e., prior knowledge) input for the formation of subsequent legitimacy judgments (kast and rosenzweig, 1972). researchers indicate that signals are most effective when crafted in a way that allows the stakeholder to tie the information to preexisting knowledge structures (e.g., cornelissen & clarke, 2010; elsbach & kramer, 2003; lounsbury & glynn, 2010). thus, we propose that prior legitimacy judgments inform subsequent ones and augment the stakeholder’s absorptive capacity. proposition 8. experiences that result from the exploitation of legitimacy judgment formation augment the knowledge base of the stakeholder; thus, influencing the stakeholder’s absorptive capacity in future judgments. discussion new ventures are untested, unproven, and often serve as sources of risk for interested stakeholders, yet new ventures require stakeholder support to survive. the literature related to social judgments of legitimacy indicates that stakeholders are the “grantors” of legitimacy. thus, granting of positive legitimacy judgments by relevant stakeholders may allow fledgling firms to flourish rather than falter. our review of the new venture legitimacy judgment context indicates that research is limited in its consideration of the stakeholder as an active participant in this social judgment process. hence, we offer an integrative framework for new venture legitimacy judgment formation and work to extend theory-based research on stakeholder legitimacy judgment formation by considering the stakeholder as a competitor in the market for the new venture’s attention. we believe our integration makes two primary contributions to the new venture literature. first, we argue that legitimacy judgment formation is a learning process, and integrate prior research on legitimacy judgments with that of absorptive capacity to account for the cognitive limitations of the stakeholder in assessing the legitimacy of a new venture. second, to our knowledge, this is the first study to extend this process by characterizing stakeholders as competitors for the new venture’s attention. stakeholders are interested in pursuing opportunities that will benefit them or the larger group they represent (bitektine, 2011; nagy et al., 2012; pollack et al., 2012). thus, the stakeholder may have significant human, financial, and social capital resources at stake if a positive legitimacy judgment is granted and the stakeholder decides to engage in a business journal of small business strategy vol. 25, no. 1 95 relationship with the organization. although prior research has accounted for the social scrutiny of stakeholders regarding their legitimacy judgments, the competitive advantage stakeholders may gain from exhibiting good judgment and subsequently sound business decisions has yet to be explored. in the following section, we address the theoretical implications of viewing new venture legitimacy judgments from this perspective. theoretical implications we offer what we believe to be five theoretical contributions. first, prior research suggests that stakeholders use their knowledge of industries and market spaces in executing business decisions. de clercq and dimov (2008) found that when venture capitalists invested in industries in which they had more knowledge, investments performed better than in those in which the venture capital firm had little experience. researchers argue that in cases where the stakeholder has little internal knowledge; credentials, impression management, or gaining external knowledge may be critical to forming legitimacy judgments and subsequent business decisions (de clercq and dimov, 2008; nagy et al., 2012). such studies lead us to believe that our integration incorporating the signal of the entrepreneur and relevant others with the signal absorption capabilities of the stakeholder provides an improved theoretical basis for studies of new venture legitimacy judgments. bitektine (2011) considers the use of heuristics when social judgments are enveloped in uncertainty, as in the case of new ventures. we argue that when bitektine’s work is considered in conjunction with research on the new ventures and with our current developments, the new venture legitimacy judgment formation process may best be represented by a situation in which heuristics, active evaluation, and information gathering are considered concurrently. second, we contend that the stakeholder may often be viewed as a competitor in his/her market space, since the investment of resources in wealth-generating ventures provides an opportunity for gain. if the stakeholder is a competitor in the market space for a new venture’s attention, then the stakeholder must dynamically adjust his or her capabilities (teece & pisano, 1994) to gain competitive advantage. we argue that via absorptive capacity, stakeholders learn new information about the venture from prior experiences, the new venture team, and other relevant stakeholders. in all the “noise” about a venture coming from various entities, the stakeholder must work to actively evaluate the information and determine its value. the signal absorption capability of the stakeholder then becomes valuable, since effectively and efficiently navigating the process may allow him/her to use the “new” information and prior knowledge to make sound legitimacy judgments. based on the legitimacy judgment, the stakeholder may decide to engage in or refrain from some business decision, depending on the assessment of whether the business opportunity appears attractive. by doing so, the signal absorption capability itself can be viewed as the stakeholder’s “dynamic capability” since it can reshape the stakeholder’s propensity to act and afford the stakeholder a competitive advantage over other stakeholders (fosfuri & tribó, 2008; jansen, van den bosch, & volberda, 2005) in the market space. considering stakeholders as competitors in their own market allows us to better understand the motivations of stakeholders in forming legitimacy judgments and opens the opportunity to view the stakeholder’s journal of small business strategy vol. 25, no. 1 96 business decision (based on the legitimacy judgment rendered) from a real options perspective. third, real options theory provides a lens through which the competitive stance of the stakeholder can be better understood. prior research establishes that stakeholders make self-interested decisions. we argue that each time the legitimacy judgment formation process is enacted, it creates options for the stakeholder. based on the legitimacy judgment, the stakeholder creates the option, but not obligation, to enter some business relationship with the new venture (kogurt & kulatilaka, 2001). by consistently choosing fruitful options over unfruitful ones (or consistently refraining from exercising unfruitful ones) via the signal absorption capability, the stakeholder may gain a competitive advantage in the market space. in viewing the stakeholder as a competitor for the attention of profitable ventures, we both account for the social judgments stakeholders themselves face, as well as the potential gain (loss) they may encounter from exploiting business decisions based on solid (poor) legitimacy judgments. fourth, the absorptive capacity process has been theorized as a sequential process (cohen and levinthal, 1990), and we assume it continues as such in the context of new venture legitimacy judgments. in viewing the stakeholder’s judgment formation process in this way, we likewise provide opportunity for the stakeholder to exit at any point in which information is seen to hold some value. we believe this is reflective of the tenets of system theory (e.g., boulding, 1956) and is in alignment with practice. in viewing social judgment formation as moderated by the signal absorption capabilities of the stakeholder (informed by motivation level and stock of knowledge), we account for signals from multiple sources, the cognitive capabilities of the stakeholder, the formation of the judgment based on these factors, as well as the opportunity to capitalize on sound judgments via exploitation of a business decision. if at any point a signal is seen to hold less value than the cognitive costs associated with signal absorption, then the stakeholder may choose to exit the judgment formation process. again, under this scenario, efficient and effective use of the signal absorption capability can save the stakeholder time and resources by refraining from forming poor judgments and engaging in unprofitable business relationships with new ventures. finally, researchers argue that the social judgment process is path dependent (khoury et al., 2013; mishina et al., 2012). that is, prior judgments inform subsequent ones through cognitively combining incoming signals with the stock of prior knowledge (bansal & clelland, 2004). once a legitimacy judgment is formed, and a business decision is rendered, the information gleaned from the stakeholdernew venture team interaction will become an input for subsequent legitimacy judgments (harris et al., 2008; kast & rosenzweig, 1972). this accounts for the ability of the stakeholder to provide a response, based on his/her knowledge and context (navis & glynn, 2010). in viewing the signal absorption capabilities of stakeholders as a moderating influence, we account for the influence of prior knowledge as a source of information, which assists in building the signal absorption capabilities of the stakeholder. better understanding the signal absorption capability, as well as the factors that may influence the development of this capability, are essential to moving stakeholder-centric new venture legitimacy journal of small business strategy vol. 25, no. 1 97 judgment theory forward. in the subsequent section, we address how these theoretical contributions may guide future research and shape practical application of legitimacy judgment research. future directions and practical implications we believe our work to provide practical implications, as well as important directions for future research. since small business and new venture research is often most applicable and useful when practical implication and future research are intertwined, we present them as such. in what follows, we examine the practical and research importance of stakeholder judgment processes, competitive position of stakeholders, stakeholder benefit from consistently making sound legitimacy judgments, and the real options that accrue from the stakeholder legitimacy judgment process. zott and huy (2007) argue that entrepreneurs, who are skillful in signaling, are much more likely to gain access to the resources needed by the firm. prior researchers contend that social actors can reduce the cognitive effort of the stakeholder by providing valuable information that reduces the time spent in processing the signal (e.g., bansal & clelland, 2004; tornikoski & newbert, 2007; zott & huy, 2007). due to their uncertainty, new ventures require more active processing on behalf of stakeholders to determine legitimacy. zhu, hitt, and tihanyi (2006) argue that the development of capabilities and competitive advantage in quickly globalizing markets is critical. we believe our integrative model provides a theoretical basis that explicates the most critical aspects of the judgment formation process, while also allowing for the influence of prior knowledge and motivation, threat of social scrutiny, and the stakeholder’s desire to establish competitive advantage. such a model provides a more comprehensive and compelling picture of this process, and paves the way for theory building and empirical testing of stakeholder new venture legitimacy judgments. the efficient and effective navigating of the legitimacy judgment process, exercising of beneficial options, and the receipt of positive legitimacy judgments from other stakeholders may lead to an improved competitive position for the stakeholders. for example, consider an investor who renders a positive legitimacy judgment for a new venture. the investor makes an investment, and is widely known as part of the investment team funding the venture’s activities. the new venture then becomes very profitable, yielding a considerable return on investment. after hearing of this investor’s success, other high potential new ventures seek this stakeholder out for his/her expertise; thus, further augmenting the legitimacy of this stakeholder in spotting and funding high return ventures. the same situation can intuitively apply to consultants, executives, and alliance partners. in viewing the stakeholder as a competitor, we believe motivation (liden & mitchell, 1988), social desirability (bitektine, 2011), and impression management (barsness, diekmann, & seidel, 2005; bolino, kacmar, turnley, and gilstrap, 2008) from the stakeholder perspective are avenues that may produce interesting practical application and future research on stakeholder behavior and decision making. although researchers have proposed processes for stakeholder legitimacy judgment formation, how the stakeholder may gain benefit from the exploitation journal of small business strategy vol. 25, no. 1 98 process has yet to be addressed. stakeholders are viewed as grantors of resources or support for change in an industry; however, in reality, many stakeholders grant resources to new ventures in the expectation of some personal, professional, or financial gain. for example, an angel investor would make an investment in a new venture expecting that venture to yield a considerable return. a banker would lend to a new venture in the expectation that the loan be paid back with interest. a supplier may extend credit to the new venture in the expectation of repeat orders. under the cases described, it is also feasible to assume that a stakeholder competes with other stakeholders to reap gains from legitimate entities. to our knowledge, our framework is the first to explicitly account for the exploitation of a business decision. when viewed as influencing the stakeholder’s propensity to act, signal absorption can be viewed as a capability of the stakeholder, thus, accounting for the stakeholder’s attempt to gain a competitive advantage. such a viewpoint also allows the opportunity to explore the motives and decision-making processes of stakeholders in a different light. additionally, future research in this area would likely have great practical and managerial implications since entrepreneurs could better understand the motivation or drivers of stakeholders in exploiting legitimacy signals to form their ultimate business decision. in considering the stakeholder as a competitor, the decision-making process is a critical component of legitimacy judgment formation. we view the signal absorption capability as an option-creating tool since processing the information provided by the new venture creates an opportunity for the stakeholder. based on the tenets of real options, we believe that this theoretical development can be used to explore the relationship between new ventures and stakeholders in this process, depending on the resources required to process the signal, as well as the time frame available to exercise the option. a real options lens provides a solid basis to contextualize the signal absorption capability since the speed with which a stakeholder moves through this process is likely specific to the stakeholder and the environment. further, the importance of signal types can be explored when a real options perspective is taken into account for the importance of time and resources required to create the option (i.e., pass through the signal absorption capability). conclusion although legitimacy is necessary for all ventures, the resources afforded via legitimacy to new ventures are especially critical. given their absence of track records and information on performance, new ventures necessitate additional scrutiny and evaluation on behalf of stakeholders (lumpkin et al., 2010). in an attempt to explicate the legitimacy judgment process in the context of new ventures, we review the new venture legitimacy literature. this literature suggests that there are two opportunities to further theorize stakeholder judgments in the new venture context, which we develop in our framework for new venture legitimacy judgments first, we integrate prior research on legitimacy judgments with the absorptive capacity construct to account for the cognitive processing of the stakeholder in forming new venture legitimacy judgments. second, we characterize the stakeholder as a competitor in his/her particular market space. since stakeholders are selfinterested, they pursue opportunities with new ventures they believe will benefit them journal of small business strategy vol. 25, no. 1 99 or their referent group. thus, stakeholders form a legitimacy judgment for a particular new venture, which creates an option but not an obligation to 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strategy pricing strategies and fee structures in franchising organizations robert t. justis louisiana state university peng s. chan california state university-fullerton ben l. kedia memphis state university abstract franchising,asa popular formofsmallbusiness,continuestogrmoataphenomenal ratethroughout theworld. twoofthemostimportantaspectsofthefranchisorffranchiseerelationshiparethedeterminatfon of pricing and a fee structure. these elements have a profound impact on the profitability and success of a franchise business. this study examined pricing strategies and fee structures across different types of franchising organizations. it was found thai a variety of methods were used to determine pn'cing and fee structures. franchising and the small business economy franchisingis the fastestgrowingmethodofdoingbusinessin the united statestoday, and is now rapidly spreading throughout the world (2). franchised businesses accounted fora third of all u.s. retail sales in19b7. this figure is expected to go up to 50 percent by the end of the century. destined to be "the wave of the future," more and more small businesses are adopting this business method throughout the world. the reasons why franchising is such a favored method for small businesses are many. first, franchising offers a less risky alternative to entrepreneurs who are desirous of starting their own business. in addition, the franchising method provides entrepreneurs the opportunity to developabusinessata muchmore rapid pacethanmightotherwisebepossiblewithoneperson's limited capital. last but not least, it provides the entrepreneur with the security of many individual franchise business owners who share a vested interest in the success of the business. purpose of study given the increasingly important role of franchising in our small business economy, it is essential that we understand the nature and functioning of franchise institutions. the present study represents one of several attempts undertaken by the authors to investigate important strategic aspects of franchising organizations. this particular paper focuses on pricing strategies (retail prices charged to consumers) and the determination of franchise fees (payments made to 25 franchisors by franchisees) in retail franchising organizationsa group of businesses which has been ignored in small business research. the purpose was to shed light on how pricing and franchise fee decisions are made by corporate headquarters. the nature of pricing in franchising organizations pricing has always been regarded as a critical element of business strategy in retail industries. its strategic role is assuming even greater importance today in the light of increasing competition, greater consumer awareness, and its important effects on profitability. a carefully developed pricing strategy is often a key to competitive advantage. even though the importance of pricing has been recognized (4, 11,15),only a limited amount of research exists which guides price determination in retail industries. research is even more limited when it comes to understanding pricing among franchising organization. (6). in franchising organizations, the pricing decision is usually highly correlated with the fee structure (discussed in the next section). the pricing decision enables the organization to determine the price mix that wifl result in the highest contribution of profits, considering the interplay of price, fees, and volume factors (12). the special nature of pricing decisions in franchised businesses poses several major problems for the development of a pricing strategy for such businesses (7, 14). first, the determination of appropriate pricing structures is very difficult and often highly subjective (9, 10). invariably, managers make pricing decisions by analyzing competitive prices and associated cost structures. however, it is often difficult to ascertain the relative importance of each factor in the final price determination. furthermore, a franchisee or consumer may determine a price as "acceptable-high," while another franchisee or consumer may consider the same price as "unacceptable-high" (5, 8). franchisors may sometimes attempt to prescribe or influence the retail prices established by their franchi sees. some may even monitor prices charged by the franchisee or provide "fixed" price lists. these price-related restrictions create severe antitrust problems. it has been a longheld tenet of antitrust laws that price fixing and price-related restrictions are per se illegal, that is, they will be condemned without an examination of their actual effect on the business or competition. [see united states v. northern pacific railroad co. 356 u.s. 1, 5, 1958 (13)]. as a result, most franc hi sors now avoid dictating consumer price structures to franch i sees. nonetheless, franchisors are allowed to recommend price levels to franchisees (under the colgate doctrine); however, they generally do not enforce nor "dictate" price structures to the franchi sees (1). the retail franchisees face, however, the occasional national advertisement at an advertised fixed price with the attached disclaimer: "at participating stores only." the final pricing decision is almost always left to the franchisee. the nature of fees in franchising organizations franchising organizations, unlike other forms of small businesses, are characterized by an ongoing, mutually benefidal relationship between the franchisor and the franchisee. a unique aspect of this relationship is the provision of certain fees that the franchisee is obligated to pay the franchisor, such as the initial franchise fee, royalties, and advertising fees. in return, the franchisor provides the necessary training and ongoing support to the franchisee. 26 to develop, maintain, and sustain this relationship, franchisors provide numerous services to their franchisees in return for certain payment. although the type of fees charged by the franchisor for these services are generally dictated by the industry, the initial franchise fees, royalty fees, and advertising fees are usually determined solely by the franchisor. a problem which often arises is that a variable predicting the event (a co-variant) may vary in value during the time period under consideration (3). training fees associated with a franchisee start-up are often more expensive for the first two or three franchise stores than for franchise units started subsequently. the question then arises as to which value of the predictor variable should be used in explaining the determination of the fee. salary increases in the headquarters corporation may be a "time-varying explanatory variable," while the costs of the operation and training manuals maybe a "constant-time variable," impacting upon the franchise fee structure. because pricing and fee determination are such important, yet highly related decisions for a franchising organization, we have deemed it worthwhile to investigate them simultaneously in this paper. methodology in the spring of 1989 a questionnaire was mailed to 264 franchisor organizations, all of whom were members of the international franchise association. of these, 81 questionnaires were returned. the 81 responses were representative of the 264 sent as there was fair representation from each of the industry sectors that we had sought to examine. furthermore, the nonresponses were quite random and did not represent any particular industry group or sector. all the returned questionnaires were complete and usable, and they form the data base for this research. franchisors wereasked to respond to six different typesofpricingand feestructures. these are: (i) retail pricing, (2) promotional/advertising pricing, (3) initial franchise fees, (4) royalty fees, (5) advertising fees, and (6) other fees. the respondents were asked to indicate which methods they use in determining their pricing strategy or in developing fee structures. an openended question was used to help determine franchise fees: "if your company uses a formula to determine the amount of this fee, please write and briefly explain this formula." the data were analyzed to determine the frequencies of franchisor responses. demographic information characteristicsoftherespondentsareshownin tablel. theaveragesaleofeachfranchisor was in excess of $147 million. each franchisor, on an average, operated 94 company owned stores and had franchised 259 stores. the types of businesses ranged from automobile (8 percent), fast food restaurants (24 percent), three kinds of retail outlets, and hotel chains. details of the types of business are provided in table 2. 27 table 1. demographic information on respondents mean sales level per franchisor $147,059,966 number of company-owned stores 94 number of franchised stores 259 industry type: percent retail 16 retail services for businesses 19 retail services for mass markets 19 automobile 8 hotel 14 fast food/restaurants 24 table 2. breakdown of respondents by business type business types retail: hotel: candy and confectionery hotel & motel chains convenience store campgrounds retail optical recreation resorts specialty retail retail home furnishing automobile: retail automotive parts & accessories retail services for businesses: automobile repair water treatment automotive parts computer services leak detection services fast food/restaurants: employment pizza contractors fast food security full-service restaurants business consulting retail service for mass markets: home decorating photo processing hair-care interior decorator formal-wear rental pets & pet supplies rent-to-own 28 analysis and results suggested prices on regular items from the anecdotal information we collected, approximately 60 percent of the franchise executives surveyed responded that they do suggest prices to their franchisees. most of the franchisees (about 80 percent) followed the suggested price list supplied by the franchisor. the methods used by franchisors to suggest prices to their franchisees are shown in descending order of importance in table 3. table 3. methods used by franchisors to suggest retail prices to their franchisees percent during training sessions 68.2 by memos 59.1 ln the operations manual 54.5 by newsletter 50.0 by operations director 45.5 by other methods 36.4 by salesperson 31.8 by national advertising 22.7 as table 3 shows, price suggestions through training sessions are the most commonly used. this is not surprising since training sessions are important vehicles for disseminating the company's basic policies to the franchisees. other widely used methods included memos, operation manuals, and newsletters. suggested prices on special price campaigns fifty-four percent of the respondents indicated that they had national campaigns with respect to nationwide specials on pricing. fifty-seven of the franchisors believed that these campaigns were being followed by more than 90 percent of their franchisees. the methods used by franchisors for monitoring promotional prices are shown in table 4 in descending order of importance. table 4. franchisor methods of informing franchisee about promotional pricing percent by memos 70 by national advertising 55 by newsletter 50 by operations director 40 by salesperson , 35 during training sessions 30 other methods 20 by operations manual 10 29 given the short-term nature of special price campaigns, it was not surprising to find that most of the information given to franchisees concerning price specials was done through memos, advertising, newsletters,and personal contact. based ontheanecdotal informationcollected, we found that 65 percent of the respondents have such campaigns at least once a month, while 80 percent have them at least once every three months. suggested prices by industry type industries were divided into two categories: those that typically suggest prices to their franchisees and those that do not. the results are shown in table 5. table 5. typically suggest prices do not usually suggest prices percent percent retail 100.0 hotel 80.0 automobile 100.0 business services 57.1 mass markets 71.4 fast food/restaurants 55.6 (see table 2 for group classifications) interestingly, franchisors of hotels, business services, and fast food restaurants do not usually suggest prices to their franchisees. possible reasons for not suggesting prices may be seasonality affecting prices, building costs, perishability, variability of raw material prices in different markets, and lack of uniformity across different markets (e.g., you may not be able to charge the same price for a hotel room in baton rouge as you would in los angeles). national campaign pricing by industry type industries were again divided into two categories: those that typically have special promotional price campaigns and those that do not. the results are shown in table 6. table 6. typically have campaign do not usually have campaign percent percent fast food/rest. 77.8 business services 85.7 mass markets 71.4 hotel 60.0 automobile 66.7 as expected, the fast food industry ranks high in terms of having promotional price campaigns. this maybe due to the fact that mass advertising is a distinctive trait of this industry. in contrast, the business services industry seldom offers promotional price campaigns since it cultivates a more one-on-one, personal relationship with customers. 30 frequency of promotional campaign by industry type industries were divided into two groups: frequent or heavy users of promotional campaigns (at least once a month); and infrequent (light) users of promotional campaigns (quarterly, semiannually, annually or more than once a year). the results are shown in table 7. table 7. heavy user light user percent percent automobile 100.0 retail 100.0 fast food 71.5 28.5 mass markets 60.0 40.0 business services 100.0 hotel 100.0 as the results indicate, automobile and retail industries were found to be heavy users of promotional campaign. on the other hand, business services and hotel businesses were found to be very light users of such campaigns. initial franchise fee the methods used to determine the initial franchise fee are varied. as shown in table 8, costs associated with training, screening and approving franchisees, and on-site assistance seem to be the most important determinants of the initial franchise fee. table 8. considerations for initial franchising fee percent responding "important" advertising 30 franchisor administrative salaries 53 training 84 site selection 56 accounting and legal costs 53 screening and approving franchisees 74 prior research & development 51 on-site assistance 72 store plans/layout 56 manuals 9 feasibility study 7 software 2 miscellaneous 19 not applicable 7 31 royalty fees based on the anecdotal information we collected, 84 percent of the franchisors collected royalties based on a percentage of gross revenues, and 63 percent of those coll ecting royalties did so on a monthly basis. the royalty fee varied between 2-9 percent of gross sales with 4 percent being the most common. however, approximately half the franchisors charged over 4 percent. the results are shown in table 9. table 9. franchisor royalty fees percent royalty fees percent charged to franchisees respondents 0-2 2 3 14 4 33 5 9 6 21. 7 7 8 7 9 or greater 6 advertising fees the anecdotal information collected indicated that 65 percent of the franchisors determined advertising fees as a percentage of gross revenues. advertising fees vary according to the retail outlet and the need for advertising development. the results are shown in table 10. interestingly, 56 percent of the franchisors charged 2 percent or less, while 46 percent charged 3 percent or more. this may reflect the fact that franchisees with a mobile customer group probably benefit more from franchisor-sponsored promotions while those that depend on patronage from the local geographic market are likely to benefit more from local franchisee advertising aimed at identifying local niches and combating local market competition. table 10. advertising fees charged by franchisor percent percent of franchisors 0 28 .5 4 1 8 2 16 3 10 4 9 5 14 6 7 7 2 8 or greater 2 32 other fees finally, the results of our study reported that 21 percent of the franchisors charged fees for leases of equipment. other than such fees, no other fee was found to be significant. conclusion the development of a sound pricing strategy and fee structure is critical to the success of any franchised business. in this study, a broad-based questionnaire was administered to franchisors throughout the united states. the questionnaire was used to identify the primary factors that franchisors used in suggesting prices to franchisees and in developing franchise fees. several conclusions can be drawn from the study. first, despite the fact that pricing is heavily regulated and controlled by anti-trust laws, most franchisors nonetheless provide suggested price lists for their franchisees and expect the latter to follow them. the vast majority of franchisors use training sessions, memos, and operations manuals to convey the suggested price list. many franchisors conduct national campaigns with nationwide speciale including pricing. franchisors believe that the vast majority of the franchi sees adopt these national price specials. it was also found that franchisors in certain industries such as retail, automotive, and service businesses are more likely to suggest prices than those in other industries; this probably reflects the level of price sensitivity which these particular industries encounter. there are three primary kinds of fees involved in a franchisor-franchisee relationship, namely, the initial franchise fee, royalty fees, and advertising fees. the initial franchise fee is determined by the franchisor based primarily on costs associated with training, screening and approving t'ranchisees, and on-site assistance. royalty and advertising fees are generally based on gross revenues. given the vital role played by franchising in the small business economy, more research is needed to study different aspects of franchising organizations. this study, as part of an ongoing inquiry into the business strategies of franchising organizations, has shed light on how franchisors develop their pricing strategy and fee structure. this is of paramount importance to the small business franchisee, since franchi aors have the sole discretion in determining fees and have great influence over the franchisee's pricing strategy. further research may be 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(1987), "defining and relating price, perceived quality, and perceived value," working paper no. 87-101, marketing science institute, cambridge, ma 02138. i 34 editor gerald e. hills bradley university associate editors paul belliveau rider university bruce h. kemelgor university of louisville editorial assistants rebecca nunes bradley university editorial review board semra ascigil middle east technical university joe r. bell university of arkansas at little rock david brennan university of st. thomas shawn carraher indiana wesleyan university eugene fregetto university of illinois at chicago joseph geiger university of idaho armand gilinsky sonoma state university michael l. harris east carolina university david lyn hoffman metropolitan state college of denver jeffrey hornsby kansas state university cathleen (folker) leitch wilfrid laurier university robert lussier springfield college matthew r. marvel western kentucky university brian mckenzie california state university, east bay thaddeus mcewen north carolina a&t state university todd d. mick lindenwood university abbas nadim university of new haven john e. prescott university of pittsburgh neal pruchansky keene state college jeff shields university of southern maine leo simpson seattle university joe singer university of missouri – kansas city matthew c. sonfield hofstra university harriet stephenson seattle university jude valdez university of texas at san antonio dianne h.b. welsh the university of north carolina at greensboro book review editor michael goldsby ball state university special thanks to morgan mullen, elizabeth knapinski and bridgett brzezinski for their high quality editorial work and their commitment and devotion to creating a great product. thanks also to james foley and jennie hale, who through their excellent leadership, have ensured a high quality publication. the journal of small business strategy is a joint publication of the small business institute and the foster college of business administration, bradley university. send subscription requests to journal of small business strategy, foster college of business administration, turner center for entrepreneurship, bradley university, 1501 w. bradley ave., peoria, il, 61625 or e-mail to jsbs@bradley.edu. annual subscriptions (two issues) may be ordered at $25 each (u.s. dollars only). international subscriptions add $5 annually for postage and handling. back issues may be ordered at $12 per issue. members of the international council for small business receive a 40% discount. icsb members pay $15 plus $5 for international subscriptions. copyright 2012 small business institute issn 1081-8510 s y journal of small business trateg reproduced with permission of the copyright owner. further reproduction prohibited without permission. s a resource-based view of three forms of business in the startup phase: implications for franchising dianne h.b. welsh the university of north carolina greensboro dhwelsh@uncg.edu amy e. davis college of charleston davisae@cofc.edu david e. desplaces college of charleston desplacesd@cofc.edu cecilia mchugh falbe university at albany state university of new york c.falbe@albany.edu abstract the decision to buy a franchise, start a new independent business, or buy an existing business is a critical decision faced by entrepreneurs. this study uses the resource-based view (rbv) of organizations to compare franchisees in the startup phase to both entrepreneurs who start new independent businesses and entrepreneurs who purchase established businesses. our analysis of u.s. data from the kauffman firm survey found similarities among those starting franchises and purchasing existing independent businesses. implications for future research and practice are discussed. keywords: franchisees, entrepreneurs, business startups, resource-based view certain data included herein are derived from the kauffman firm survey release 5.3. any opinions, findings, and conclusions or recommendations expressed in this material are those of the author(s) and do not necessarily reflect the views of the ewing marion kauffman foundation. trategy   journal of small business  47 mailto:dhwelsh@uncg.edu mailto:davisae@cofc.edu mailto:desplacesd@cofc.edu mailto:c.falbe@albany.edu journal of small business strategy volume 22, number 1, introduction the decision to buy a franchise, start a new independent business, or buy an existing business is a critical decision faced by entrepreneurs. research on franchising has been conducted for five decades (combs & ketchen, 2003; oxenfeldt & kelley, 1969). a majority of these studies examine franchising as an organizational form from the perspective of the franchising firm. one stream of research examines the decision by the franchisor to grow by selling franchises or establishing company owned units (brickley & dark, 1987; combs & castrogiovanni, 1994; combs & ketchen, 2003). other studies look at the survival of franchises compared to other businesses (bates, 1995, 1998). far less research is conducted from the perspective of the franchisee and even fewer studies consider the decision by entrepreneurs to select a particular business form. what is missing from the literature is a comparison of franchises in the startup phase to both new independent ventures and purchased established businesses. previous studies have compared franchises to nonfranchises, or franchises to independent new businesses (sardy & alon, 2007). our study adds to the literature by including the purchase of an existing business to the analysis of the decision of the entrepreneur. it is important for both researchers and practitioners to consider the choice by the entrepreneur to purchase an existing business. in prior studies, particularly studies of survival, franchises are most often compared to all other ventures. failure to consider the third alternative may confound the results of studies on performance and survival by grouping together different business forms (shrader & simon, 1997). established businesses offer a different set of resources than do startups. these include a local brand, reputation and set of routines; however, these resources may be less valuable than those associated with national franchises (litz & stewart, 1998). in the empirical portion of this paper, we adopt the resource-based view (rbv) to examine potential differences in resources, including inputs of human capital, among the three forms of entrepreneurship. entrepreneurial choices and the resource-based view of organizations the rbv holds that sustained competitive advantage rests on organization resources that are valuable, rare, inimitable and nonsubstitutable (vrin) in an organizational setting that has the policies and procedures to exploit the resources (barney, 1991; barney & clark, 2007; knott, 2003; kraaijenbrink, spender, & groen, 2010). a number of frameworks and theories share the rbv platform including core competencies (hamel & prahalad, 1994), dynamic capabilities (helfat & peteraf, 2003; teece, pisano, & shuen, 1997) and the knowledge-based view (grant, 1991). in addition, human capital theory is an aspect of the resource-based view that focuses attention on the knowledge and skills which individuals, both entrepreneurs and employees, contribute to competitive advantage (barney & clark, 2007; becker, 1964; davidsson & honig, 2003). in a metaanalytical review of human capital, taskrelated human capital is associated with entrepreneurial success (unger, rauch, frees, & rosebush, in press). thus, rbv looks at both individual characteristics and organizational factors to examine the source of competitive advantage. alvarez and basinets (2001) argue that entrepreneurial opportunities emerge when 48 journal of small business strategy volume 22, number 1, certain individuals have insights into the value of these resources that others do not. these resources and capabilities can be viewed as the unique combination of tangible and intangible assets that allows a firm to gain competitive advantage in the market place. in essence, each organization’s unique combination of capabilities, skills, and knowhow constitutes its resources (grant, 1991; tierce & pisano, 1994). the research literature on the effect of core competencies and capabilities in providing competitive advantage in startups is generally focused on high-tech ventures, especially those new firms with venture capital investment (arthurs & busenitz, 2006; baum & silverman, 2004; zheng, liu, & george, 2010). there are fewer studies examining the core competencies and capabilities associated with competitive advantage in non-high-tech ventures and purchased established businesses. however, this is not the case with franchising; there are a number of research studies examining the effects of core competencies and capabilities of franchising systems on competitive advantage (fladmoe-linquist, 1996; garg, rasheed, & priem, 2005). franchising: a choice for entrepreneurs the rbv is especially relevant to franchising because competitive advantage is based on those unique intangible assets and the various economies associated with operating a franchise (mariz-pérez & garcía-álvarez, 2009). in other words, the franchisor supplies each franchise with a proven business model, including resources for such competitive advantage, specific know-how, a brand name, and a management and operating system that is supported by both training and structure, all in exchange for a fee. a detailed typology of such resources (grant, 1991) can easily be applied to franchising. there are cost advantage driven resources in the form of process technology, system capacity, and access to low-cost inputs, and differentiation advantage with its brand, product technology, marketing, distribution, and service capabilities. many individuals are attracted to a particular franchise’s powerful brand, which can offer a competitive advantage in the marketplace relative to lesser-known, independent businesses that must strive to gain notice and acceptance of customers. franchisors operate under economies of scale, and therefore franchisees can obtain supplies at lower costs than if they were operating truly independently. additionally, franchises, particularly business-format franchises, often provide training, marketing support, and well-tested operational best practices (walker, 1991). these forms of intellectual, structural and relational capital included with franchises are particularly attractive to individuals who are lacking experience in either entrepreneurship or the franchise’s particular industry (watson & stanworth, 2006), providing opportunities for individuals to pursue entrepreneurship in an area different from their primary educational or work experience background. consequently, franchisors work hard to imbed best practices in an operational routine and by enforcing that routine, while franchisees develop the necessary discipline to follow such routine. the franchisor leverages its stock of strategic assets in the form of a routine while a franchisee understands the economic value of such routine, especially in the first years of operations. the decision to become a franchisee is undertaken by an individual or team of 49 journal of small business strategy volume 22, number 1, individuals that have complex and varied motivations and ambitions (kauffman, 1999). individuals seeking entrepreneurship may be attracted to the apparent success of highly visible franchises as well as aspects of the franchise system (gauzente, 2002). from a rbv a successful franchise business format is a valuable, scarce, and inimitable resource for competitive advantage. compared to wage and salary employment, franchising offers both greater autonomy and the potential to earn according to the financial success of the business (felstead, 1993; kaufmann, 1999; stanworth & kaufman, 1996). in addition, many individuals who desire self-employment might prefer the predictability and “turnkey” nature of a franchise as opposed to the ambiguity that may accompany decisions associated with starting a new independent business (i.e., everything from marketing and branding, human resource management, pricing to suppliers and distributors) (kaufmann, 1999). franchising versus independent startups the promotional literature that has long been used in the industry touting a “tried and true” or less risky method of starting a business has been brought into question by a number of academic studies, and there is an overall perception that franchising success statistics have long been overreported (piling, 1991). inaccurate and incomplete data have long plagued the franchise industry (cross, 1998). the franchise industry has suffered from being more protective and secretive than other industries so data is limited, especially data that, over time, would support or refute claims that franchising leads to higher success rates (hoy, 1994). these studies have concluded that found differences of success between franchises and independent businesses vary depending on definitions of franchises and independent businesses, the age of the businesses, and the definitions of failure and survival (holmberg & morgan, 1996). however, there have been no studies that have compared success among the three business forms—purchasing a franchise, starting a new independent business, and purchasing an existing business. few comparison studies between franchisees as entrepreneurs and independent business owners have appeared in the literature (runyan & droge, 2008). the existing research generally examines differences in success between the two types of businesses. studies look at both individual characteristics and those of the organization. individual characteristics of franchisees associated with success include risk-taking (withane, 1991); while organizational characteristics associated with success include, economies of scale. (bronson & morgan, 1998). franchising also appeared to defend market share more successfully than did independent businesses (shanghavi, 1991). none of these studies differentiated between the various types of independent businesses and or examined them in comparison to franchises. for the most part, studies compared franchises to a catch-all category of non-franchises, grouping all other types of businesses into one category, or new independent businesses to all other forms of businesses (including franchises). however, their contributions are significant because they compare either the organizational form, or the entrepreneur as franchisee, to other types of business owners. differentiation between forms of startups in many ways, franchising appears to offer resources that would provide competitive 50 journal of small business strategy volume 22, number 1, 51 advantages over new independent businesses. however, entrepreneurs may also consider a third route to entrepreneurship: purchasing an existing independent business. purchasing existing independent businesses is a major option for new entrepreneurs. the american family business survey (massmutual financial group, 2007) reported that 40.3 percent of the respondents in their national survey expect to retire by 2017. while some of these existing businesses will be passed on to the next generation in the family, many will be available for purchase— evidenced by the surprisingly low percentage of successors selected (massmutual financial group, 2007). on any given day, approximately 1.7 million small businesses are for sale in the united states (campbell, 2004); and small businesses are selling even in the most recent recessionary period (schnitzler, 2009). although rarely compared to franchises, purchased independent businesses share similar characteristics with both new independent businesses and franchises. we have summarized these similarities and differences in table 1. table 1: similarities and differences across business forms characteristic franchise purchased independent new independent brand national/ international local/regional none existing established procedures/ structural capital high high low product technology/ quality control high moderate none knowledge of suppliers and vendors/ relational capital high moderate low access to low-cost inputs high moderate low training usually possible no marketing support high none none autonomy and the ability to pursue passion low high high fees and royalties paid to others likely possible unlikely purchased independent businesses have similarities to franchises with regard to brand name, proven business model, supply chain/relational capital, structural capital/operations, and turn-key. first, although franchises can have brand names that are nationally or internationally recognized, communicating a promise of a predictable product or service in consumers’ minds, established independent journal of small business strategy volume 22, number 1, 52 businesses may have an accepted brand presence on a local or regional level that provides advantages over new independent businesses that are unknowns. second, although a new owner can make changes to the operations of a purchased business given their high level of autonomy, they frequently have the option of continuing operations in the exact manner as the previous owners.1 indeed, substantially departing from the existing business model by altering products, services, or operations may detract from the power of the local company’s brand. the owner, therefore, has fewer decisions to make and can devote less time to planning in the startup phase. the new owner may have knowledge of which individuals and organizations can serve as suppliers and vendors, sometimes referred to as relational capital and therefore does not have to seek them independently. in fact, individuals purchasing existing businesses can secure more favorable contract terms relative to owners of new businesses, depending on the track record of the established company with their suppliers and the new owner’s knowledge of the previous contract terms. a purchased independent business likely cannot take advantage of economies of scale, and therefore may suffer from liabilities of smallness. however, a purchased existing business is less likely to suffer from liability of newness (stinchcombe, 1965), in which new businesses must simultaneously struggle internally with developing routines and competencies as well as externally with established competitors and regulators. in 1 even in the event of a purchaser desiring to turnaround a struggling business, the business owner would have many existing structures, ranging from employees to business procedures to equipment that could significantly shorten the length of time from purchase to full-capacity operations relative to a new startup. fact, a new franchisee suffers more from liability of newness than a newly purchased independent business because, although its brand has legitimacy for consumers, it must find its niche in the local landscape among entrenched establishments.2 third the training and support offered to new owners of an existing business varies a great deal. in some instances, the new owners were in fact employees of the business for many years and thus have significant on-the-job training. in other instances, the new owner may shadow the previous owner for a period of time prior to purchase or the owner may remain at the business for a period of time after purchase. purchased independent businesses share two attractive qualities with new independent businesses. first, purchased independents often afford the owner with greater autonomy in decision making relative to franchises. although the owner purchasing the business often continues operations in a way that builds on the existing competencies developed in the business, the owner is also free to adapt practices to suit their preferences. in some instances, franchisees are constrained by the requirements of the franchisor to follow procedures that may incur significant costs, but not enhance sales. for many would-be entrepreneurs, franchise restrictions on product offerings and marketing, operations, and human resource 2 a possible exception when purchasers of existing businesses would not enjoy avoiding liability of newness would be in the personal services industry, in which customers may follow the owners to their new ventures or take the change in ownership as an opportunity to consider competitors. however, one does not have to assume that all customers remain when a business changes ownership for a business to benefit from an existing track record. journal of small business strategy volume 22, number 1, management would be too constraining. many are seeking not only to be their own boss, but to pursue passions, work using their own methods, and follow pursuits unavailable to them as a wage and salary worker (carter et al., 2003). indeed, entrepreneurs favoring autonomy (watson & stanworth, 2006) are predicted to be less likely to pursue franchising. second, purchased independent businesses, like new independent businesses, likely do not have to pay fees and royalties to an existing owner in the way that franchisees must pay to franchisors (kaufmann, 1999). if these costs are not adequately compensated by the high level of sales generated from the established brand and marketing support, they can undermine success. hypothesis development entrepreneurial resources next, we discuss the resources that the literature has identified as important to business form decisions. human capital resources. human capital includes skills and experience and is an important component of the rbv of organizations. numerous studies have documented that new businesses started by owners with entrepreneurial and industryspecific experience have more favorable outcomes than businesses started by less experienced individuals (bosma, van praag, thurik, & de wit, 2004; chandler, 1996, lerner & almor, 2002; reynolds, 2007; van auken, 1999; van praag, 2003). individuals who lack experience may turn to franchising as a way to overcome their inadequacy, relying on the training, brand, and proven business model of a franchise to replace their lack of experiential knowledge (watson & stanworth, 2006). further, it is argued that the perceived value of franchise ownership declines with experience, as franchisees are less in need of the structure and support of a franchise, making them more likely to leave the franchise (dant &peterson, 1990; watson & stanworth, 2006). purchased businesses also potentially attract individuals with relatively less industry experience with their forms of structural and relational capital, but a complete industry outsider is less likely to be aware of an opportunity to purchase an existing independent business than of an opportunity to purchase a franchise. based on the findings that a lack of industry and ownership experience may influence the entrepreneur’s decision to purchase a franchise, we hypothesize that: hypothesis 1: prior industry experience will be negatively associated with becoming a franchisee, such that more experienced business owners will be more likely to become owners of new or purchased independent businesses. hypothesis 2: prior ownership experience will be negatively associated with becoming a franchisee, such that more experienced business owners will be more likely to become owners of new or purchased independent businesses. an hour worked by entrepreneurs or ‘sweat equity’ is an important human capital contribution to new ventures (chaganti, decarolis, & deeds, 1995). research indicates that owners of franchises work significantly more hours than other business owners (bates, 1995). this increase in work intensity, or average hours worked on a weekly basis, may result from the need to fulfill the operational requirements of the franchise (store hour requirement) or from an increased in perceived efficacy of the business. if entrepreneurs believe their 53 journal of small business strategy volume 22, number 1, business is likely to be successful, they may work more hours than those less confident in the business’s eventual success. therefore, we hypothesize that: hypothesis 3: hours worked will be positively associated with becoming a franchisee, such that business owners working fewer hours will be more likely to become owners of new or purchased independent businesses. methodology sample the kauffman firm survey (kfs) is the largest longitudinal study of new businesses ever embarked upon (deroches, robb, & mulcahy, 2009). kfs is a panel study of 4,928 new businesses founded in 2004 that mirrored the true population, according to dunn & bradstreet. base year data was collected in 2005 using both web-based and computer assisted telephone interviews (cati) which asked many measures of specificity—including the nature of new business formation activity (franchisees, new independent businesses, or purchased independent businesses); characteristics of the strategy, offerings, and employment patterns of new businesses; the nature of the financial and organizational arrangements of these businesses; and the characteristics of their founders/partners. due to the nature of franchising, analysis was limited to service and retail industries only (2,922 cases) to minimize the potential noise created by having firms as diverse as hightech biotechnology firms alongside homebased smes. furthermore, the weight function in stata®, an integrated statistical package for data analysis, data management, and graphics (www.stata.com),was used to limit the influence of the high-tech oversample, but due to the industry foci (only service and retail were included), we did not find any significant differences in our analysis between weighted and not weighted data. as expected, the majority of the businesses in the sample (2,530 or 92.4 percent) consisted of new, independent businesses while 132 (or 4.82 percent) were purchased existing businesses and 76 (or 2.78 percent) were franchises. the franchise sample (2.78 percent of the total kfs dataset) closely matches the reported total franchise to new startup businesses ratio of 3.3 percent reported in the economic research study conducted by pricewaterhousecoopers for the international franchise association educational foundation (2008). the use of the dataset was made possible as part of the data enclave agreement between one of the researchers, the ewing marion kauffman foundation, and the national opinion research center (norc). ranges could not be reported and any cell frequencies containing fewer than ten cases had to be combined or suppressed to protect the confidentiality of the participants. the researchers elected to recode some of the variables in an effort to keep all respondents part of this research analysis. the recoding affected less than one percent of the sample. measures independent variables prior industry experience. respondents indicated the number of years of experience they had accumulated in the industry of the new business. for respondents, the researchers averaged the years of industry experience across all owners for whom the respondent provided industry experience data, a maximum of ten owners. ownership experience. respondents indicated whether any owners had prior experience starting a business. those that had at least one prior ownership experience 54 journal of small business strategy volume 22, number 1, 55 by any owner were coded as 1, and zero otherwise. because owning two businesses is not necessarily more entrepreneurial experience than owning one due to variations in length of ownership, we did not count or average the number of businesses previously owned across the owners. because of the data use agreement, maximum values, or values with a frequency less than ten, are not reported. however, because respondents could report any number of owners, there are outliers. one was used as an indicator of more than one owner, otherwise 0 was used. this captures most of the variation. average hours worked. respondents were asked to indicate how many hours per week each owner worked in the business. the researchers averaged the number of hours worked per week in the business across the first ten owners. dependent variable business form. this study examines the differences and similarities among three business forms: franchise, new independent business, and purchased independent business (an existing business that was not a franchise). this variable is called b1_bus_start_0 in the kauffman firm survey. control variables the researchers introduced control variables to help better distinguish among the three forms of business. primary business operation location. respondents were asked to select the primary location from which the business was operated. the options included residence, such as home or garage; rented or leased space; space the business purchased; or site where a client is located. the researchers ignored the latter option of “site where a client is located” due to a limited number of franchisees selecting that option. the researchers created indicators for owning a building and a home-based business, thus leaving rented location as the reference category. team. because the resources of owners are measured at the team level (hours worked, industry experience, and startup experience), we controlled for whether the business was started by one person or a team of two or more persons. means, standard deviations, and correlations are provided in table 2. statistical procedures to test for similarities and differences among the three business forms, we utilized multinomial regression analyses. multinomial analysis is an appropriate analytical technique when the dependent variable has more than two possible values and the categories cannot be rank-ordered. table 3 presents the results of the multinomial logistic regression models, which include the raw coefficients (b), the standard errors (se), and the odds-ratios (or), which are exponentiated coefficients that assist in interpreting significant comparisons. the first set of coefficients compares new independent businesses to franchises, the second set of coefficients compares purchased independent businesses to franchises, and the third set of coefficients compared purchased businesses to new businesses. the chi-square test demonstrated that the set of antecedents in our model significantly predicted differences across forms of businesses with χ2 (12, n = 2738) 154.88, p < or =.01, cox and snell pseudo r2 = .12. we eliminated 187 cases that had missing values. the data are weighted and thus the analyses produce robust standard errors. journal of small business strategy volume 22, number 1, 1 0 1 .0 0 0 0 9 1 .0 0 0 0 0 .1 6 3 3 8 1 .0 0 0 0 -0 .0 7 4 -0 .0 3 2 2 7 1 .0 0 0 0 0 .1 9 1 0 .0 2 0 6 -0 .0 3 8 2 6 1 .0 0 0 0 0 .0 4 2 2 -0 .0 7 8 2 0 .1 1 5 3 0 .0 1 7 7 5 1 .0 0 0 0 -0 .0 1 5 9 -0 .0 0 3 1 -0 .0 1 5 3 0 .0 2 7 7 0 .0 0 5 4 1 .0 0 0 0 0 .0 5 7 8 0 .0 2 8 0 .0 6 0 5 0 .1 0 9 8 -0 .0 0 5 5 0 .0 2 2 1 3 1 .0 0 0 0 -0 .2 4 6 9 -0 .3 1 5 8 0 .0 1 2 3 -0 .1 1 8 9 -0 .2 2 3 4 0 .0 9 0 9 0 .0 2 2 1 2 1 .0 0 0 0 -0 .1 9 0 4 0 .1 7 2 3 0 .0 9 7 5 -0 .0 7 0 7 -0 .0 0 0 9 0 .0 7 6 2 -0 .0 0 1 4 0 .0 3 7 1 1 .0 0 0 0 -0 .0 4 8 2 -0 .1 1 0 7 -0 .0 2 3 0 .0 6 5 6 -0 .1 0 3 9 0 .0 0 3 3 0 .0 8 6 5 -0 .0 4 9 4 -0 .0 1 5 4 s d 0 .1 8 0 .2 3 0 .5 0 .2 3 2 3 .1 8 9 .6 6 0 .5 0 0 .4 8 0 .4 7 1 8 1 6 6 4 m 0 .0 3 0 .0 6 0 .5 1 0 .0 5 4 1 .2 2 1 1 .0 4 0 .4 3 0 .3 5 0 .3 3 -1 7 6 1 .4 v a ri a b le s 1 f ra n ch is e b u si n es s 2 p u rc h as ed i n de p en d en t b u si n es s 3 h o m e b u si n es s 4 o w n b u il d in g 5 a v er ag e h o u rs w o k ed 6 a v er ag e in d u st ry e x pe ri en ce 7 o w n er sh ip e xp er ie nc e 8 t ea m s o f o w n er s 9 p ro fi t in di ca to r y ea r 1 1 0 p ro fi t a m o u nt y ea r 1 t a b le 2 : m ea n s, s ta n d a rd d ev ia ti o n , a n d c o rr el a ti o n s 56 journal of small business strategy volume 22, number 1, table 3: estimated coefficient of multinomial regression of antecedents of franchising predictor b se or new business versus franchised business intercept 2.88 0.38 home business 1.09*** 0.32 2.97 own building 1.29 0.77 3.63 average hours worked -0.01* 0.00 0.99 average industry experience 0.10*** 0.013 1.11 ownership experience 0.11 0.26 1.12 team of owners -0.79 0.27 0.46 purchased business versus franchised business intercept 0.46 0.47 home business -0.59 0.43 0.55 own building 2.3** 0.79 9.97 average hours worked 0.00 0.00 1.00 average industry experience 0.07* 0.03 1.07 ownership experience -0.13 0.32 0.88 team of owners -0.41 0.32 0.66 purchased business versus new business intercept -2.42 0.31 home business -1.68*** 0.30 0.19 own building 1.01*** 0.25 2.75 average hours worked 0.01+ 0.00 1.01 average industry experience 0.03** 0.01 1.03 ownership experience -0.24 0.21 0.79 team of owners 0.38+ 0.20 1.46 chi-square 154.88*** df 12 -2 log pseudo likelihood 1799.12 pseudo r2 0.12 sample size 2738.00 +=<.1, *=p<.05, **=p<.01, ***=p< or =.001 results hypothesis 1 predicted that entrepreneurs’ industry experience would be negatively associated with starting a franchise. the analysis demonstrated that the average industry experience of the team of owners was significant for new independent (b = .10, p < .001) and purchased (b = .07, p < .05) businesses over franchise businesses. that is, for every year of average industry experience, a business was 1.11 times more likely to be a new independent business than a franchise. similarly, for every year of average industry experience, a new business was 1.07 times more likely to be a purchased business than a franchise. therefore, the results support hypothesis 1 and franchises, and to a lesser extent, purchased businesses appear to provide an opportunity for business owners to explore 57 journal of small business strategy volume 22, number 1, new industries in which they have limited experience. hypothesis 2 predicted that entrepreneurial experience would be negatively associated with starting a franchise. the results of our analysis showed no significant differences among the three business forms with regard to the owner’s prior entrepreneurial start-up experiences. in other words, hypothesis 2 was rejected; individuals that are experienced are no more likely to choose one form or another relative to novice entrepreneurs. stated another way, the appeal of a proven business model (franchises) is not diminished for owners that have opened businesses before. hypothesis 3 predicted that franchisees would work significantly more hours than owners of new or purchased independent businesses. according to the multinomial logistic regression analysis, average hours worked by owners was found to be negatively related to owning a new independent business (b = -.01, p < .05), while not significantly predicting the selection of purchased and franchise businesses. for every one hour increase in the amount of work worked by owners each week, a business is only .99 times as likely to be a franchise relative to a new independent business. this result partially supports hypothesis 3, and indicates that owners of new independent businesses tend to work less than owners of purchased businesses or franchises. in the model presented, two business location control variables were included as predictors of business form, namely whether a business was a home-based business (home-based business = 1, not home-based business = 0) and if the business owned the building (owned building = 1, did not own the building = 0). renting a business location is the reference category. the results demonstrate that purchased businesses and franchises are similar with regard to primary business location, but different from new independent businesses. the coefficients show that the three business forms significantly differ from one another in whether the business is a home-based business. respondents operating out of their homes are only .19 times as likely to purchase independent businesses as they are to open a new independent business, consistent with conventional expectations (b = -1.68, p < .001, or = .19). although the analysis showed that home businesses were equally likely to be purchased businesses or franchises, home businesses are 2.97 times as likely to be a new independent business as they are a franchise (b = 1.09, p < .001). therefore, when new business owners favor starting a homebased business, they are least likely to purchase an existing business and more likely to start a new independent business. the results for owning a building for business operations show that owners purchasing their business location are significantly more likely to purchase an existing business than open a franchise (b = 2.3, p < .01) or a new independent businesses (b = 1.01, p < .001). those purchasing their business location are equally likely to start a new independent business or purchase a franchise. those purchasing their business location are 9.97 times as likely to purchase an existing business as they are to open a franchise and are 2.75 times as likely to purchase an existing business as they are to open a new business. franchisors often require franchisees to rent their buildings, which may account for the observed differences among the three business forms. 58 journal of small business strategy volume 22, number 1, discussion the results of this study provide insight into the difference among three business forms in the startup phase: franchises, new independent businesses, and purchased independent businesses. while the study is preliminary in nature, it is one of the first of its kind to make comparisons across these three forms and utilize the resource-based view to show the resources of competitive advantage contained within each form. as predicted, the absence of relative structural and relational capital provided by new independent startups appears to require more industry experience than franchises. purchased independent businesses, at least with regard to industry experience, appear between franchises and new independent businesses. although the structural and relational capital of franchises and purchased businesses may make up for a lack of industry experience, entrepreneurs apparently do not seek to substitute those resources for entrepreneurial experience. first-time business owners were no more or less likely to start one form of business relative to experienced business owners. the results for hours worked are intriguing. on the one hand, as argued in the hypothesis development, franchisees would be motivated to work more hours because the operational requirements of the business format franchise may necessitate a high number of hours worked and the entrepreneur may perceive a franchise to have greater chances of success than an independent new business. at the same time, independent new businesses are most exposed to liability of newness and thus founders of those types of businesses can ill-afford to under-exert themselves. this finding warrants further investigation. conclusion the rbv of organizations provides a useful framework for examining the difference among the three business forms from the resources provided by the entrepreneur in the form of human capital and the resources that are a key part of the business forms. thus, we sought to understand to what extent entrepreneurs match their background to the organizational form with complementary resources. the results of this study have direct implications for research on franchising and decision making by entrepreneurs to select a particular business form. this study is a first attempt to examine factors that influence entrepreneurs to choose from among the three forms—franchises, new independent startups, and repurchased existing businesses—an area that had not been previously researched. however, there was little support in the literature for comparison of variables across the three business forms so we were limited in the hypothesis we could test. additional research needs to be conducted comparing entrepreneurs who chose one of these three forms to provide further insights into the similarities and differences, as well as advantages and disadvantages, that may exist between the different forms of businesses that impact performance and success over time. first, as has been stated by scholars in the field, more research needs to be conducted from the perspective of the franchisee rather than the franchisor or franchising firm. this study adds to the literature by focusing on the franchisee as entrepreneur in the startup phase. limited research has been conducted in this area. second, additional research needs to be focused on decision making by entrepreneurs and the effects of the 59 journal of small business strategy volume 22, number 1, organizational lifecycle on profitability over time with longitudinal data. while the kauffman foundation has financially supported longitudinal data sets that can be used by researchers to find answers to these questions, more work is needed in the area of franchising that has historically been difficult to research due to limited access to data by the industry. additional research in this area may aid in uncovering answers as to why entrepreneurs choose a particular business form over another, including cognitive, behavioral, and environmental factors that may influence the decision making process. third, variables that affect business profitability, both in the shortand long-term, as well as various measures of success and performance, need examination. the study has important implications for the franchising field for practitioners. first, the results may reveal important factors for entrepreneurs to consider when making decisions concerning the purchase of a franchise, existing independent business, or starting a new independent business. second, this study provides some initial comparisons in the crucial startup phase between franchisees, those who purchase an existing independent business and entrepreneurs that start a new independent business that previously has not been available. this study gives entrepreneurs information to aid in their decision-making as to which form of business best fits them. with the number of existing businesses for sale at an all-time high, studies on existing businesses are crucial. third, more than a fourth of franchisee businesses in the study were home-based, which significantly differs from the other two types of businesses. this may signal the availability of new franchising options available to entrepreneurs with limited access to start-up capital. future studies should compare profitability levels across all three forms. advantages and disadvantages of the three forms in light of the entrepreneur’s characteristics and business plan should be considered from a long-term perspective to improve decision making. this may alleviate some of the concerns potential franchisee may have in terms of the added value of franchising versus the costs. by providing more information on the three forms, it is hoped that entrepreneurs can make better decisions in selecting the form that best suits them and improve their chances of success. implications and future directions one of the major limitations of this study is the database. while the available data have longitudinal information on the three forms—which is highly unusual, it is restricted in other aspects. first, only u.s. businesses are included. second, the kfs database could be expanded to include more variables pertinent to franchising. for example, the number of family members involved in the franchise, percentage owned by silent investors, the goals and decision making process of entrepreneurs, and cooperative alliances. third, as our group comparisons analysis showed, the kfs includes entrepreneurs with a diverse array of businesses within each form. for example, some franchisees may include stand-alone retail locations requiring major capital investment, whereas others may be operated out of the owners’ home with limited upfront investment. industry also has important implications for whether the customers of an existing business will continue to patronize it under new ownership. fourth, given the intriguing findings we found with regard to entrepreneurs purchasing an existing independent business, more information 60 journal of small business strategy volume 22, number 1, needs to be collected on the history of these businesses. fifth, the wording of the questionnaire allows for the category of franchisee to include owners opening a new location of a franchise along with owners purchasing rights to an existing franchise. empirically studying the differences among these types of franchisees may yield important findings. additionally, future studies could compare a wider range of types of firms to include and categorize the types of businesses. first, the results from the three forms with u.s. entrepreneurs could be compared internationally with samples in other countries to see if the results are comparable and generalizable. second, entrepreneurs’ businesses from industrialized versus emerging countries could also be compared to better understand how to improve the success rates of these three forms of businesses and what form has the greatest chance of success in emerging versus industrialized economies. third, future studies need to look at a wide variety of formats that could influence selection and success probability for entrepreneurs. for example, in franchising alone, there are various hybrid forms of franchising, home-based franchises, and family business franchises, among others. there are formats in each of the three forms that could be examined. these variations of forms need to be studied to determine if and how they impact success. fourth, an examination of the impact of ownership structures among the three forms, such as non-operating (silent) business partners, and family business partners, needs to be conducted. fifth, existing franchised businesses for sale could be examined in comparison to purchasing an existing independent business. lastly, longitudinal comparisons of business forms past the startup phase through other phases, including growth and decline, would provide valuable strategic information that could improve profitability and success. we have taken the first step in comparing franchisees to those who purchase an existing independent business or start an independent business in the startup phase over a four-year period. limited research has been conducted that compares these three forms from a rbv. more research is clearly needed to better assist 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(2003). business survival and success of young small business owners. small business economics, 21(1), 1-17. walker, b.j. (1991, january). retail franchising in the 1990’s. retail issues, 3(1), 1-4. watson, a. & stanworth, j. (2006). franchising and intellectual capital: a 64 journal of small business strategy volume 22, number 1, 65 franchisee’s perspective. international entrepreneurship and management journal, 2(3), 337-349. withane, s. (1991). franchiser and franchisee behavior: an examination of opinions, personal characteristics and motives of canadian franchisee entrepreneurs. journal of small business management, 29(1), 22-29. zheng, y., liu, j., & george, g. (2010). the dynamic impact of innovative capability and inter-firm network on firm evaluation: a longitudinal study of biotechnology firms. journal of business venturing, 25(6), 593-609. dianne h.b. welsh is the hayes distinguished professor of entrepreneurship at the university of north carolina greensboro, and founder of three successful university entrepreneurship programs. dianne is a recognized scholar in entrepreneurship, family business, and franchising. she is the editor of six books, including four on franchising, and over 150 publications. amy e. davis is an assistant professor of entrepreneurship at the college of charleston. her research interests include social networks, startup teams, biomedical entrepreneurship, and gender. she has published in entrepreneurship theory and practice, frontiers of entrepreneurship research, and work and occupations. david e. desplaces is an associate professor of entrepreneurial studies at the college of charleston where he was recently selected to lead the center for entrepreneurship in an effort to build regional entrepreneurial capacity. his research focuses on economic development, business ethics education, and case base research. his research has been published in the journal of business ethics, and organizational management journal to name a few. cecilia m. falbe is associate professor at the university at albany-suny. her research interests are in franchising, entrepreneurship, technology and human capital. cecilia is the co-editor of two books and has published in the academy of management journal, administrative science quarterly, journal of business venturing and journal of applied psychology. reproduced with permission of the copyright owner. further reproduction prohibited without permission. editor gerald e. hills bradley university associate editor bruce h. kemelgor university of louisville editorial assistants rebecca nunes bradley university editorial review board semra ascigil middle east technical university joe r. bell university of arkansas at little rock david brennan university of st. thomas shawn carraher indiana wesleyan university eugene fregetto university of illinois at chicago joseph geiger university of idaho armand gilinsky sonoma state university michael l. harris east carolina university david lyn hoffman metropolitan state college of denver jeffrey hornsby kansas state university cathleen (folker) leitch wilfrid laurier university robert lussier springfield college matthew r. marvel western kentucky university brian mckenzie california state university, east bay thaddeus mcewen north carolina a&t state university todd d. mick lindenwood university abbas nadim university of new haven john e. prescott university of pittsburgh neal pruchansky keene state college jeff shields university of southern maine leo simpson seattle university joe singer university of missouri – kansas city matthew c. sonfield hofstra university harriet stephenson seattle university jude 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back issues may be ordered at $12 per issue. members of the international council for small business receive a 40% discount. icsb members pay $15 plus $5 for international subscriptions. copyright 2013 small business institute issn 1081-8510 s y   journal of small business  trateg reproduced with permission of the copyright owner. further reproduction prohibited without permission. http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2020, vol. 30, no. 01, 83-96 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2020 small business institute® w w w. j s b s . o rg introduction university of the free state, 205 nelson mandela drive, park west, bloemfontein, south africa 9301, nenehbn@ufs.ac.za why foreignness matters: the impact of business-family interference on the exit intentions of women entrepreneur exit intentions, women entrepreneurs, family-to-business interference, business-to-family interference, foreignness apa citation information: neneh, b. n.. (2020). why foreignness matters: the impact of business-family interference on the exit intentions of women entrepreneur. journal of small business strategy, 30(1), 83-96. understanding entrepreneurial lifecycle has been an important aspect of entrepreneurship research over the years. however, for a long time, researchers have focused on understanding various aspects of venture creation, performance, and growth, with little effort being paid to entrepreneurial exit (detienne & wennberg, 2016; hsu, wiklund, anderson, & coffey, 2016). this is particularly important as entrepreneurial exit holds several implications for the entrepreneurs, their employees, the business, the industry and the economy at large (detienne, 2010; murphy, tocher, & burch., 2019). more importantly, the lifecycle of an entrepreneurial journey only fully completes with an exit (aldrich, 2015). as such, entrepreneurial exit has been increasingly recognized as a vital component in the entrepreneurial process, worthy of entrepreneurship research (detienne & wennberg, 2016). entrepreneurs exit their ventures for several reasons such as failure (i.e. forced exit), exiting to find other business opportunities, exiting to paid employment, exiting due of personal issues (e.g. health or retirement), or even exiting as a harvesting strategy (bird & wennberg, 2016; detienne, 2010; detienne & wennberg, 2016; hsu et al., 2016; murphy et al., 2019). while understanding different reasons for exiting a business is important, the present study focuses only on the intentions to exit from entrepreneurship to paid employment. this follows from the growing evidence that individuals increasingly alternate between entrepreneurship and wage work (gottlieb, townsend, & xu, 2018; manso, 2016). moreover, this is one area that has received attention in recent years (bird & wennberg, 2016; hsu et al., 2016; 2019), however, there are still some important knowledge gaps, especially for women entrepreneurs. in particular, extant research suggests that women entrepreneurs are more likely than men to exit their businesses for personal reasons (hsu et al., 2016; justo, detienne, & sieger, 2015). most often, these personal reasons have to do with the intertwined nature of the business and family domains of women entrepreneurs. it is a well-established notion that the embeddedness of the family/household with the business domain has a larger influence on women than men in the entrepreneurial process (brush, de bruin, the purpose of this paper is to examine the influence of family-to-business and business-to-family interference on the exit intentions of women entrepreneurs. additionally, the study examines the moderating role of foreignness on these associations. data was gathered from 300 women entrepreneurs operating in south africa using a survey approach. the collected data was analyzed using regression analysis to test the hypothesized associations. the results showed that both family-to-business and business-to-family interference had a significant positive influence on the exit intentions of women entrepreneurs. also, it was observed that foreignness moderated these associations such that the effect of both types of interference on exit intentions was stronger for local than for immigrant women entrepreneurs. moreover, in general, immigrant women entrepreneurs were less likely to exit their businesses than locals. this shows some valuable connections between the immigrant entrepreneurship and women entrepreneurship literature. additionally, the study presents some new control factors when examining exit intentions such as access to finance and copreneurship, which are seen to significantly shape the exit intentions of women entrepreneurs. brownhilder n. neneh http://www.smallbusinessinstitute.biz http://www.jsbs.org 84 b. n. neneh journal of small business strategy / vol. 30, no. 1 (2020) / 83-96 & welter, 2009). this also applies to exit intentions as existing evidence using the work-family interface theory has shown that both business-to-family and family-to-business interference have a higher impact on the exit intentions of women than men (hsu et al., 2016). work-family interference (also known as business-family interference) refers to a type of inter-role conflict whereby the pressures from the business and family domains are incompatible such that participation in one role makes it difficult to participate in the other role (greenhaus & beutell 1985; poggesi, mari, & de vita, 2019). while this provides new insights on how both types of interference affect exit intentions, it is imperative to recognize the fact that not all women suffer the consequences from such interferences, at least in the same magnitude. for example, neneh (2018) showed that the effect of both business-to-family and family-to-business interference on the performance of women-owned firms had some boundary conditions. this finding is important in the exit intentions literature as prior studies (hsu et al., 2016; 2019) have shown that firm performance is crucial in explaining exit intentions. as such, the present study argues that boundary conditions could also better explain differences in exit intentions among women, especially when such exit is a consequence of inter-role conflict. in particular, when examining the intentions to exit from entrepreneurship to paid employment, the present study argues that “foreignness” can play a vital role as a boundary condition in explaining how both types of interference influences exit intentions. foreignness (i.e. non-citizens operating a business in a given host country) is particularly important when one isolates and studies women entrepreneurs because immigrant women often suffer a double disadvantage when it comes to entering the labor market, which is even one of the key factors that push them into entrepreneurship (audretsch, lehmann, & wirsching, 2017; bolívar-cruz, batista-canino, & hormig, 2014). consequently, when immigrant women eventually succeed to start a business as a means to counteract unemployment and economically integrate into their host society (dencker, gruber, & shah, 2009), they might be more inclined to accept their dual roles in the family and business as the status quo and rather persist in entrepreneurship as oppose to trying to break through the double barriers for entry into gainful employment. by isolating and studying women entrepreneur’s exit intentions, this study makes a contribution to the growing literature on women entrepreneurship. most studies on exit intentions have included both men and women (e.g. bird & wennberg, 2016; hsu et al., 2016; 2019; justo et al., 2015), however, researchers have increasingly emphasized the need to isolate and study different phenomena among women entrepreneurs as this provides new insights for the women’s entrepreneurship literature (neneh, 2018; poggesi et al, 2019; welsh, kaciak, memili & minialai, 2018). additionally, by examining the role of foreignness, the study also contributes to the immigrant entrepreneurship literature by showing some fundamental differences that could shape the exit intentions of immigrant and local women entrepreneurs. theoretical background this study draws on the theory of planned behavior and the disadvantage theory to understand the exit intentions of women entrepreneurs. the theory of planned behavior (tpb) suggests that intentions are an integral part of planned behavior, with some considering intentions to be the best predictor of planned behavior (ajzen, 1991). ajzen (1991) identified three determinants of behavioral intentions: (1) an individual’s attitude toward the behavior (positive or negative evaluations of the behavior), (2) perceived social norms (social pressure from family and friends to perform the behavior), and (3) perceived behavioral control (the perceived ease of performing the behavior). the tpb is particularly important in the context of entrepreneurship as many entrepreneurial behaviors are outcomes of intentional processes. for example, entry into entrepreneurship is often an intentional process while most entrepreneurial exits also occur as an outcome of an intentional process. the present study focuses on such entrepreneurial exit intentions for women entrepreneurs. prior evidence suggests that entrepreneurial exit intentions, especially for women, could be driven by personal factors such as family-business interference (hsu et al., 2016; justo et al., 2015). family-business interference can significantly trigger the three core determinants of behavioral intentions, thus affecting the exit intentions of women entrepreneurs. for example, family-business interference is increasingly associated with emotional stress, job satisfaction and poor performance (hsu et al., 2016; jennings & mcdougald, 2007) which could affect a woman’s attitudes towards entrepreneurship and thus influence their desire to exit the venture. likewise, such interference also has an effect on other significant others who might apply social pressure on the entrepreneur to exit the venture, especially when the entrepreneur is experiencing the negative outcomes of interference. additionally, business-family interference can affect the ease of exiting the businesses especially as such exit is depended on situational factors within both the business and family domains. while the influence of family-business interference on the exit intentions is quite pronounced for women entrepreneurs (hsu et al., 2016) the effect might differ across different women segments. in particular, this study suggests that 85 b. n. neneh journal of small business strategy / vol. 30, no. 1 (2020) / 83-96 the strength of this relationship might differ significantly for immigrant women entrepreneurs when compared to local entrepreneurs. this follows from the disadvantage theory (light, 1979) which suggests that immigrants have difficulties finding paid employment and hence start a business as the only way to gain employment. this theory considers entrepreneurship an alternative to unemployment but not as a sign of success. when forced into entrepreneurship from a disadvantaged perspective, women might be more inclined to resist making an intentional exit compared to women who entered entrepreneurship due to other reasons. this is based on the premise that once the immigrant women entrepreneur has succeeded in starting a business, regardless of whatever anticipated impediments and obstacles, she might encounter from her business or family, exiting the business for labor market employment might not be plausible for most of them as opposed to a non-immigrant women entrepreneurs who have alternative options. the development of hypotheses to support these theoretical underpinnings is discussed below. work-family interference and exit intentions work and family life are two roles that are intertwined for most people and entrepreneurs in general (hsu et al., 2016) and especially more connected for women entrepreneurs (shelton 2006; loscocco & bird 2012). handling simultaneous business and family demands and responsibilities possess a continuous challenge for women entrepreneurs as it creates source work-family interference. business-family interference can be classified as either business-to-family interference (b-fi) or family-to-business interference (f-bi). women entrepreneurs often need to share their time and energy between multiple roles which puts enormous strain on them and thus reduce the time and efforts they spend on making both their businesses and families succeed. for example, at home, women entrepreneurs need to play the role of caregivers in the family (sullivan & meek 2012) while at work, they have to take charge of the survival and success of their business as well as of the welfare of their employees (poggesi et al., 2019). all these aspects have significant implications for women entrepreneurs, especially with regards to exit intentions. with respect to f-bi, researchers (petro, annastazia, & robert, 2014; waithaka, wegulo, & mokua., 2016) have indicated that many women are faced with the burden of family and household responsibilities, which in turn negatively affects the performance of their business and thus limits their ability to generate income. also when family demands or responsibilities interfere with business demands, the entrepreneur will likely experience increased stress levels and a decline in their life satisfaction or psychological well-being (jennings & mcdougald, 2007). in an attempt to restore psychological well-being, and cope with stress, the entrepreneur may decide to devote less time or energy to the business or even leave the business altogether. with respect to b-fi, once the entrepreneur perceives that the business negatively affects the quality of life with his/her family, the entrepreneur may feel pressure, as he /she becomes dissatisfied with the interference, stress and perceived inability to balance family and business demands (hsu et al., 2016). this discontentment with the family’s quality of life will most likely increase consideration of exiting the business. likewise, there is a general assumption that being an entrepreneur can be beneficial to the entrepreneur as it gives them greater freedom and flexibility to be able to balance work and family demands (poggesi et al., 2019); however, this freedom is often restricted by their responsibility to make certain their business succeeds (parasuraman, purohit, godshalk, & beutell, 1996). nevertheless, prior studies (kelly, moen, & tranby, 2011; poggesi et al., 2019) are unequivocal that b-fi is likely to arise from time commitment to work as the quest to make a business successful can be strenuous and time-consuming, thus reducing the commitments towards making the family life success. additionally, demanding work responsibilities reduces the time and energy that women entrepreneurs devote towards their family, which in turn might have a detrimental effect on parenting their children and or dissatisfaction in marriage (jennings, breitkreuz & james, 2013). overall, it is evident that both f-bi and b-fi have negative consequences for women entrepreneurs. for example, both types of interference always reduces the performance of women-owned businesses (jennings & mcdougald, 2007; loscocco & bird, 2012; neneh, 2018; poggesi et al., 2019). this plays a vital role in shaping exit decisions and poor performance has been widely recognized as a key determinant of entrepreneurial exit intentions (hsu et al., 2016; 2019). additionally, both types of conflict have been known to contribute to marital dissatisfaction, work dissatisfaction, burnout, desire to quit, poor role performance, high blood pressure and anxiety (maertz & boyar, 2011). all these factors negatively affect the health and well-being of the entrepreneur (poggesi et al., 2019; shelton 2006) and this is concerning because poor health and well-being either directly influence exit intentions or lead to entrepreneurial regret which in turn will increase the likelihood of exiting the business (hsu et al., 2019). these views have been empirically supported by hsu et al. (2016) who showed that both f-bi and b-fi had a significant positive influence on exit intentions using a mixed sample of male and female entrepreneurs. following from the above, the present study 86 b. n. neneh journal of small business strategy / vol. 30, no. 1 (2020) / 83-96 posits that the same association is likely to hold for a sample of women entrepreneurs. as such, the following hypotheses are proposed: hypothesis 1. f-bi will have a significant positive influence on the exit intentions of women entrepreneurs. hypothesis 2. b-fi will have a significant positive influence on the exit intentions of women entrepreneurs. foreignness, business-family interference, and exit intentions as previously indicated, both f-bi and b-fi influence entrepreneurs’ decision to exit a venture and move to paid employment, with this effect being more pronounced among women (hsu et al., 2016). however, the present study posits that the influence of both types of interference on women’s exit intentions is moderated by foreignness. this expectation is based on three perspectives namely: the disadvantaged perspective, the cultural perspective, and the immigration policy perspective. firstly, the disadvantaged perspective posits that it is common for immigrant women to venture into entrepreneurship because of blocked mobility in the host country’s labor market, wherein some of their qualifications and work experience obtained outside the country is not recognized, or when they are not skilled enough probably because they simply accompanied their working spouse to the host country (cherim, spence, crick, & liao, 2018). also, some immigrant’s entrepreneurs might not even be able to fluently speak the local language of the host country which greatly hinders their chances of gainful employment (bolívar-cruz et al., 2014). additionally, immigrants can easily miss out on labor-market opportunities due to the prejudices of the native population (bolívar-cruz et al., 2014; cherim et al., 2018). when faced with such disadvantages, immigrants easily turn to entrepreneurship as the best option for income generation and a means to cope with the liability of foreignness (levie, 2007; zaheer, 2002). in fact, gonzález-gonzález, bretones, zarco, & rodriguez (2011) argue that immigrant women are often pushed into entrepreneurship because of unemployment, underemployment or job insecurity. as a result, once disadvantaged immigrant women have succeeded in starting new businesses, exiting the business for labor market employment might not be plausible for most of them even when they face interference from the business or family domains as this liability of foreignness will still impede their entry into the labor market. however, because residents do not face the same disadvantages associated with labor market entry, they will be more likely to exit the venture when faced with a high level of interference from either the business or family domains given their many options for gainful employment. from the cultural perspective, some researchers argue that immigrants go into a host country mainly to start new businesses as such immigrants come from a cultural background that favors entrepreneurship as the viable career option (bolívar-cruz et al., 2014). prior research has often linked immigrant entrepreneurial culture with ethnicity, as it is believed that such immigrants harness their ethnic resources which then serve as the key factor that facilitates their entry into entrepreneurship (bolívar-cruz et al., 2014; masurel, nijkamp, & vindigni, 2004). because of their over-reliance on ethic resources, they do not only start a business for the sake of starting a business but possibly as a means to preserve their cultural identity and pass it to the next generation (sinnya & parajuli, 2012). additionally, reliance on ethic resources imposes behavioral norms on the entrepreneur and this, in turn, might influence their freedom to exit to paid employment, due to their dependence on the collective will (bird & wennberg, 2016). consequently, the desire to exit the business might be incongruent with their cultural identity and collective will and thus limit their exit intentions. this might not be the case for non-migrant women entrepreneurs who might receive support from various sources including the government and thus are not tied to any collective will or specific behavioral norms. as such, non-migrant women might have higher freedom to make exit decisions when they find that their continuance running of the business is stressful due to the inference from the business or family domain. lastly, from an immigration policy perspective, it is well known that immigrants face several immigration challenges that residents do not. for example, immigrants encounter a lot of immigration stress associated with obtaining the relevant permits to start a business in the host nation (awotoye & singh, 2018). in most countries, there are different types of immigration permits with each one allowing an immigrant to perform a specific task in the host country. in which case, immigrant women entrepreneurs in a host country will more likely hold a permit that allows them to conduct business activities. a business permit is often different from a wage work permit that allows them to seek formal employment in the labor market. as such, exiting from entrepreneurship to wage work will require changing the immigration status from a business permit to a work permit. given the fact that obtaining a new immigration permit is a daunting process that is often associated with negative symptoms like stress, anxiety, depression, and psychosomatic complaints (sternberg, nápoles, gregorich, paul, lee & stewart, 2016; yakhnich, 2008), changing from business permit to start seeking a work permit might not be worth87 b. n. neneh journal of small business strategy / vol. 30, no. 1 (2020) / 83-96 while for many immigrant entrepreneurs. while immigrants have limited control over the immigration process, the case is different from the stress imposed by interference from the family or business domains as they can easily employ strategies to manage the latter. moreover, immigrant women entrepreneurs might easily make peace with the fact that they will have to work long hours to juggle work and family responsibilities since this is really not uncommon, and many already see the combination of their reproductive life and businesses as the status quo (audretsch et al., 2017; gonzález-gonzález et al., 2011). consequently, the negative psychological state associated with the process of obtaining a new permit might even be worse than remaining in entrepreneurship and instead find a way to manage the interference coming from either the business or family domains. this will, however, not be the case for non-immigrants who experience interference from the business or family domains as they can easily switch from one role to another without needing to undergo the stress of immigration. following from the above discussion, it is evident that even though the stress and other consequences of f-bi or b-fi might push women entrepreneurs to exit into paid employment, there are several factors that impede entry into the labor market for immigrant entrepreneurs and this will likely limit the decision of foreign women entrepreneurs to exit their ventures despite the interference. as such, the present study hypothesizes that: hypothesis 3. the positive influence of f-bi on exit intentions will be moderated by foreignness such that the effect is stronger for non-immigrants than for immigrants. hypothesis 4. the positive influence of b-fi on exit intentions will be moderated by foreignness such that the effect is stronger for non-immigrants than for immigrants. method sample and data collection data was collected using self-administered questionnaires from women small business owners operating in the mangaung metropolitan municipality. the mangaung metropolitan municipality was selected as the study area because it is made up of urban, semi-urban, and rural areas that represent most of south africa and the location is also closest to the researcher. three data collectors (postgraduate students) were recruited and trained on the data collection processes including ethical issues. the questionnaires were pre-tested with 15 women entrepreneurs and where necessary the appropriate changes were made. owing to the lack of a database for registered women entrepreneurs in this area, the women entrepreneurs were accessed using two approaches. first, using a convenience sampling technique, the researcher contacted some women-focused stokvels in the mangaung metropolitan municipality and five stokvels gave permission for their members who are entrepreneurs to take part in the study. of these five stockvels, the members of one were predominantly immigrant women. a stokvel is an informal group saving scheme that offers small-scale rotating loans to its members (waghid 2014). the underlying criterion for participation in the survey was that the female entrepreneur had to own at least 50 percent or more stake in a registered business. the researcher also asked the women entrepreneurs from the stokvels for the names and location of other women entrepreneurs from diverse backgrounds operating in different industries in the area. secondly, the researcher contacted established and well-known women entrepreneurs to create a preliminary list of women-owned businesses and questionnaires were distributed to them. using snowball-sampling method, the researcher applied the referrals obtained from the initial respondents as well as the preliminary list of women-owned businesses to get access to other women entrepreneurs operating in the mangaung metropolitan municipality. questionnaires were only issued to the women entrepreneurs who provided their consent to voluntarily participate in this study and could withdraw freely from the research process at any time, without any penalty. also, the respondents were assured of the anonymity and confidentiality with which their data will be treated. moreover, the trained data collectors distributed the questionnaires to the respondents to complete at their convenience, later collected on an agreed date, and hence minimized the risk of any social desirability that could arise from faceto-face interaction. data collection occurred between july and october 2018. a total of 400 questionnaires were issued from which 300 valid responses were obtained (i.e. 75% valid response rate). the valid responses came from women in the following industries: retail (29%), bars and restaurants (15.7%), financial services (11%), education and childcare (4%), real estate (5.3%), hospitality (9%), beauty saloon (7.3%), tailoring, designing and handcrafts (9%), technology (2.7%), and others (7%). measures exit intentions. consistent with the associated hypotheses, exit intentions as the dependent variable was conceptualized and measured with regards to an entrepreneur’s desire to exit from entrepreneurship to wage work. 88 b. n. neneh journal of small business strategy / vol. 30, no. 1 (2020) / 83-96 following guidelines from prior studies (hsu et al., 2016; 2019), the respondents were asked about their likelihood to leave their businesses within a fixed period (1 year). two questions were used to measure exit intentions. in the first question, respondents were asked “how likely they were to, taking everything into consideration, make a genuine effort to find a new job within the next year and stop operating their business/working as self-employed. the response was rated on a three-point scale anchored by 1 “not at all likely” to 3 “very likely”. hsu et al. (2016) argued that this single item was sufficient in capturing intentions as it emphasized a specific time period (1 year) and the fact that the respondents had to make a genuine effort to look for a new job. however, hsu et al. (2019) established that it was also vital to include a second item that focuses on career choice when measuring exit intentions since the career choice between entrepreneurship and wage work is often used to measure entry intentions into entrepreneurship. this is also important as some individuals continually alternate between wage work and entrepreneurship (gottlieb et al., 2018; manso, 2016). as such, the second question adopted from hsu et al. (2019) was as follows “would you rather have a regular job as a permanent employee of a company or organization instead of being self-employed/operating your own?”. the responses to this question were also coded on a 3-point scale coded as 1 “no”, 2 “don’t know/maybe,” or 3 “yes.” the two items had a cronbach’s alpha value of 0.925. f-bi and b-fi. f-bi refers to when an individual’s experiences in the family domain negatively affect their experiences in the business domain, while b-fi depicts when experiences in the business domain negatively affect experiences in the family domain. both f-bi and b-fi are often measured with respect to the three sources of interference which are time-based, strain-based and behavior-based. five items were used for each of the interference constructs. the scale was initially developed by netemeyer, boles, and mcmurrian (1996) and has been widely used by research across various domains (e.g. boyar, maertz jr, & pearson, 2005; chen, wen, & hu, 2017; neneh, 2018). sample items for f-bi include. “the demands of my family or spouse/partner interfere with business-related activities” and “family-related strain interferes with my ability to perform business-related duties”. sample items for b-fi include, “my business produces strain that makes it difficult to fulfil family duties” and “due to business-related duties, i have to make changes to my plans for family activities.” the items were rated on a 5-point likert scale ranging from 1 “strongly disagree” to 5 “strongly agree”. the cronbach’s alpha for the f-bi scale was 0.894 while that for the b-fi scale was 0.891. foreignness. foreignness in the present study was examined from an individual level and treaty as a dichotomy (joardar &wu, 2017; mezias & mezias, 2007). this aimed at minimizing the complexity of foreignness by not focusing on the multilayered perspective which looks at different levels of foreignness such as being born to both foreign parents, one foreign parent and so on (e.g. see joardar & wu, 2017). the focus of this study was mainly on women entrepreneurs who emigrated from another country into south africa. as such, respondents were asked about their status in the country which was coded as “0” for residents and “1” for immigrants. control variables. similar to many entrepreneurial behaviors, it is imperative to control for factors that could produce alternative explanations of the observed behavior. as such, in order to improve the robustness of the findings, ten control variables were carefully selected and included in the study. some of the factors such as the age of the entrepreneur, education (bird & wennberg, 2016; hsu et al., 2019, 2016; justo et al., 2015), marital status (bird & wennberg, 2016, hsu et al., 2019), years in business (bird & wennberg, 2016; hsu et al., 2016; justo et al., 2015), entrepreneur status, perceived performance (hsu et al., 2019, 2016), and number of children under 18 (bird & wennberg, 2016; hsu et al., 2016) were selected from prior studies on entrepreneurial exit intentions. these authors postulate that exit intentions will be higher for (1) younger entrepreneurs, (2) those that have not been in business for long, (3) those with poor firm performance, (4) those that do not have employees, (5), those with many children under 18 years, (6) those that are unmarried, and (7) those with higher levels of education as they have the chance to pursue other opportunities such as wage work. in addition to these factors, perceived access to finance was added, as it is one of the challenges that women entrepreneurs face and might likely exit their business because of this challenge since it impedes their success and growth (neneh, 2019). also, prior status was added to identify individuals who went into entrepreneurship form wage work. this control variable is particularly important as growing evidence suggest that some individuals continually move back and forth between entrepreneurship and wage work (gottlieb et al., 2018; manso, 2016). thus, individuals who went into entrepreneurship from wage work might be more likely to return to their previous status (i.e. wage work) since they had gathered work experience and connections that they can use to enter back into gainful employment. lastly, copreneurial status was used to identify the women who jointly own and operate their businesses with their spouse. unlike the general view that some women might not want to grow 89 b. n. neneh journal of small business strategy / vol. 30, no. 1 (2020) / 83-96 their business for personal reasons, copreneurial women are known to be growth-oriented rather than simply running the business to meet their basic lifestyle needs (kuschel & lepeley, 2016). as such, the drive to grow coupled with the cohesion and support that copreneurs provide each other (daahl, van praag & thompson, 2015) might motivate them to persist in their ventures as opposed to moving to wage work. additionally, copreneurs often delineate the roles of the male and female partner to be complementary in a manner that creates value for both the business and the family (deacon, harris, & worth, 2014). as such, copreneurial women might be less likely to exit due to gender-specific personal problems that have been known to foster the exit intentions of women entrepreneurs (justo et al., 2015). data analyses and results the descriptive statistics are presented in table 1. the mean likelihood to exit was 1.90 suggesting that most of the women entrepreneurs were less likely to exit or not sure whether or not they will exit. this is, however, higher when compared to studies from the united states were entrepreneurs are less likely to exit with an average exit intention of 1.35 (hsu et al., 2016) and 1.30 (hsu et al., 2019). the levels of both directions of interference were moderate, with the respondents experience more interference from the business direction (m = 2.93) than from the family (m = 2.87). also, 33% of the respondents were immigrants while 67% were citizens. both b-fi (r = 0.47, p < 0.01) and f-bi (r = 0.50, p < 0.01) were positive and significantly correlated with the likelihood to exit. this is consistent with the arguments in hypotheses hypothesis 1 and hypothesis 2 and empirical evidence from hsu et al. (2016). looking at the control variables it was observed that immigrant status, the age of the entrepreneur, perceived performance, perceived access to finance, and copreneurial status was negatively associated with the likelihood to exit the venture. additionally, women with young children were more likely to experience both types of interference, while those who experience intable 1 descriptive statistics and correlations descriptive statistics correlations min max mean sd 1 2 3 4 likelihood to exit 1 3 1.90 0.82 1 b-fi 1 5 2.93 1.53 0.47** 1 f-bi 1 5 2.87 1.53 0.50** 0.73** 1 foreignness (frn) 0 1 0.33 0.47 -0.21* -0.07 -0.08 1 age of entrepreneur 0 1 0.53 0.50 -0.12* -0.11 -0.11 -0.02 marital status 0 1 0.56 0.50 -0.06 -0.02 -0.01 0.05 education 1 4 2.34 0.87 0.01 -0.04 -0.01 -0.01 years in business 0 24 6.76 4.97 -0.09 -0.01 -0.05 -0.03 entrepreneur status 0 1 0.46 0.50 -0.10 -0.02 -0.04 -0.01 no. of children under 18 0 3 0.61 0.67 -0.06 0.15** 0.13* 0.04 perceived performance 1 4 2.61 0.92 -0.35** -0.19** -0.22** 0.03 perceived access to finance 1 4 2.84 1.23 -0.24** -0.18** -0.23** 0.23** prior status 0 1 0.65 0.48 -0.03 0.01 0.02 -0.16** copreneurial status 0 1 0.09 0.28 -0.28** -0.09 -0.07 0.18** age: 0 less than 40 years and 1 40 years or more marital status: 1= married or living with a partner and 0 otherwise education: 1 = less than high school to 4 = postgraduate qualification entrepreneur status: self-employed=0 vs. business owners with employees=1 prior status: 1 = individuals who were previously employed in full-time wage work before starting their current business and 0 otherwise • copreneurial status: 1 = women who are copreneurs and 0 otherwise ⁎ p < 0.05 ⁎⁎ p < 0.01 90 b. n. neneh journal of small business strategy / vol. 30, no. 1 (2020) / 83-96 terference were more likely to perform poorer. these outcomes are consistent with the evidence in the women’s entrepreneurship literature (neneh, 2018). linear regression models were used to test the hypothesized associations (table 2). table 2 presents five models. the dependent variable in all of the models is the likelihood to exit. model 1 presented the base model that examined the influence of the control variables on the exit intentions of women entrepreneurs. the control factors explained 26% variance in exit intentions. also, women entrepreneurs who ran businesses that had a satisfactory performance (β = -0.33, p < 0.01), satisfactory access to financial capital (β = -0.18, p < 0.01) and run by copreneurs (β = -0.27, p < 0.01) were significantly less likely to exit. this supports prior studies which showed that exit intentions were lower when businesses performance was satisfactory (hsu et al., 2016; hsu et al., 2019). the influence of the entrepreneur’s age was significant at the 10% level suggesting that older women were less likely to exit than younger women. this is consistent with evidence from prior studies (hsu et al., 2019). model 2 and 3 focused on the main effects of f-bi (model 2) and b-fi (model 3) on exit intentions while taking into account the foreignness of the entrepreneurs. it is observed in model 2 that adding the foreignness status and f-bi increased the variance explained by the base model by 16% (r2-change = 0.16, p < 0.01). likewise, in model 3, it is seen that adding the foreignness status and b-fi increased the variance explained by the base model by 14% (r2-change = 0.14, p < 0.01). foreignness was seen to have a consistent negative influence on exit intentions in both table 2 regression models relating to exit intention model 1 model 2 model 2a model 3 model 3a control variables age of entrepreneur -0.14† -0.07 -0.05 -0.07 -0.05 marital status 0.07 0.05 0.04 0.07 0.05 education -0.06 -0.05 -0.03 -0.03 -0.02 years in business 0.01 -0.04 -0.04 -0.06 -0.06 entrepreneur status -0.08 -0.09† -0.08 -0.09† -0.08 no. of children under 18 -0.05 -0.10* -0.10* -0.11* -0.11* perceived performance -0.33** -0.24** -0.25** -0.26** -0.26** perceived access to finance -0.18** -0.06 -0.07 -0.09† -0.09† prior status 0.01 -0.06 -0.05 -0.06 -0.03 copreneurial status -0.27** -0.22** -0.21** -0.21** -0.20** predictors foreignness (frn) -0.12** -0.13** -0.13** -0.13** f-bi 0.41** 0.41** b-fi 0.38** 0.38** moderating effects f-bi x frn -0.10* b-fi x frn -0.12** model parameters r2 0.26 0.42 0.43 0.40 0.41 f-value 10.04** 17.23** 16.49** 16.07** 15.54** r2-change 0.16 0.01 0.14 0.01 f-change 39.74** 4.83** 34.58** 5.88** ⁎ p < .05. ⁎⁎ p < .01. † p < .10. 91 b. n. neneh journal of small business strategy / vol. 30, no. 1 (2020) / 83-96 model 2 (β = -0.12, p < 0.01) and model 3 (β = -0.13, p < 0.01), suggesting the immigrants are less likely to exit their ventures. with respect to the hypotheses, model 2 was used to test hypothesis hypothesis 1 while model 3 was used to test hypothesis hypothesis 2. from model 2, it is observed that f-bi had a positive and significant influence on exit intentions (β = 0.41, p < 0.01), thus supporting hypothesis hypothesis 1. likewise, in model 3, b-fi is seen to have a positive and significant influence on exit intentions (β = 0.38, p < 0.01) thus supporting hypotheses hypothesis 2. these findings are congruent with prior empirical evidence from hsu et al. (2016). it also supports the view from justo et al. (2015) that women are likely to exit their business for personal problems such as interference from the work or family domain. model 2a and 3a were used to evaluate the moderating effects in hypotheses hypothesis 3 and hypothesis 4 respectively. these hypotheses suggest that foreignness will significantly moderate the influence of both f-bi and b-fi on exit intentions such that the effect is stronger for locals than for immigrants. the results in table 2 show that the interaction term of foreignness with both f-bi (f-bi x frn) and b-fi (b-fi x frn) was significant (β = -0.10, p < 0.01 and β = -0.12, p < 0.01), thus providing partial support for hypotheses hypothesis 3 and hypothesis 4 respectively. to better provide full support for hypotheses hypothesis 3 and hypothesis 4, interaction plots were created to illustrate and evaluate the interaction effect. consequently, post-hoc analyses of the interaction effects were conducted following the guidelines from dawson (2014). figure 1 and figure 2 shows that interaction plots low f-bi high f-bi e xi t i nt en ti on citizen immigrant figure 1. f-bi x frn for exit intentions for hypotheses hypothesis 3 and hypothesis 4 respectively. from figure 1, it is observed that exit intentions increase with an increase in f-bi, however, the outcome is more pronounced in citizens that for immigrant women entrepreneurs. an analysis of the gradients of the slopes showed that the gradient for the citizen slope was 0.218 (t = 6.894, p < 0.01) while that for immigrants was 0.132 (t = 2.422, p < 0.01). the fact that both slopes are significant confirms the view that f-bi will significantly increase exit intentions for women in general, however, the gradients of the slopes clearly show that this effect will be stronger for citizens (0.218) than for immigrants (0.132). this, therefore, provides full support for hypotheses hypothesis 3. from figure 2, it is also observed that exit intentions increase with an increase in b-fi with the effect more pronounced for citizens than for immigrants. an analysis of the slopes showed that the gradient for the citizen slope was 0.206 (t = 6.514, p < 0.01) while that for immigrants was 0.111 (t = 2.061, p < 0.01). both gradients were significant, supporting the view that b-fi will increase exit intentions for women entrepreneurs, however, the differences in the gradients clearly show that when faced with such interference, citizens will be more likely to exit than immigrants (i.e. 0.206 vs 0.111). this provides full support for hypothesis 4. 92 b. n. neneh journal of small business strategy / vol. 30, no. 1 (2020) / 83-96 discussion growing evidence has increasingly shown that the family and business domains are entwined for entrepreneurs, providing both positive (enrichment) and negative (interference) outcomes. in the present study, the focus was only on interference as prior evidence (hsu et al., 2016) has established that the influence of interference on exit intentions is higher for women entrepreneurs than for men, unlike enrichment which has no distinct effect for men and women. this study evaluated the influence of f-bi and b-fi on exit intentions based on a sample of 300 women entrepreneurs in south africa. a summary of the outcome of all the hypotheses is presented in table 3. the interference from either the business or the family domains on each other has been known to negatively affect the satisfaction of entrepreneurs with work and life, their business performance, and general wellbeing (neneh, 2018; welsh et al., 2018; werbel & danes, 2010). all these negative factors can play a contributing role in pushing the entrepreneurs to exit into paid employment. as such, the present study hypothesized that both f-bi and b-fi can significantly influence the business domain such that exit intentions will be higher with an increase in interference. the results confirmed these hypothesized association (i.e. hypothesis 1 and hypothesis 2), suggesting that women who experienced a high level of each type of interference were more inclined to exit their ventures. additionally, this study examined the role of foreign low b-fi high b-fi e xi t i nt en ti on citizen immigrant figure 2. b-fi x frn for exit intentions table 3 outcome of hypotheses no hypothesis beta supported hypothesis 1 f-bi  exit intentions 0.41** yes hypothesis 2 b-fi  exit intentions 0.38** yes hypothesis 3 f-bi x frn  exit intentions -0.10* yes hypothesis 4 b-fi x frn  exit intentions -0.12** yes note: **p <0.01; *p <0.05 93 b. n. neneh journal of small business strategy / vol. 30, no. 1 (2020) / 83-96 ness as a moderating factor between the two types of interference and exit intentions. while both directions of interference influence the exit intentions of women entrepreneurs, it is also a well-known fact that women are not all the same and have some fundamental differences. the present study posits that one of such difference that could influence the decision to exit into paid employment is foreignness. generally, immigrants often venture into entrepreneurship to counteract some liabilities of foreignness such as unemployment, with entrepreneurship being their only means to economically integrate into the host country (dencker et al., 2009). as such, making an exit decision might differ for immigrants and native women entrepreneurs. thus, the present study hypothesized that foreignness will moderate the influence of both types of interference on exit intentions of women entrepreneurs such that the influence will be stronger for citizens than for immigrants (i.e. hypothesis 3 and hypothesis 4 respectively). the findings supported these hypotheses and further showed that in general, immigrants were less likely to exit into paid employment than locals. implications it is a well-established view that the interplay between the family and business domains plays a vital role in influencing the business outcomes and decisions made by women entrepreneurs (neneh, 2018; poggesi et al., 2019; welsh et al., 2018). one such decision is the intention to exit their ventures and move to paid employment (hsu et al., 2016; justo et al., 2015). the present study supports this view by showing that both f-bi and b-fi positively influences the decision of women entrepreneurs to exit their venture, a view also expressed by hsu et al. (2016). however, the present study further provided new insights regarding this association by showing that these associations are moderated by foreignness, such that the influence is stronger for citizens than for immigrants. this shows that while the family embeddedness of women entrepreneurs is instrumental in shaping their decisions and entrepreneurial outcomes, it is imperative to understand how such influences differ for immigrant and local entrepreneurs. in fact, most immigrant women enter into entrepreneurship already regarding their dual roles in the family and business as the status quo (audretsch et al., 2017; gonzález-gonzález et al., 2011) and thus might not simply make exit decisions because of interference from either of the roles. instead, they might find ways to develop coping strategies to manage and minimize the influence of the interference. moreover, still associated with the family context of women is the role of copreneurship. most women entrepreneurship studies have not controlled for the role of copreneurs despite the fact that copreneurial women might differ from others women entrepreneurs in terms of their motivations for growth (kuschel & lepeley, 2016) and how they delineate business and family responsibilities with their spouses in ways that benefits their business and families (deacon et al., 2014). the present study showed that copreneurial women entrepreneurs were less likely to exit their ventures into paid employment. this suggests the need for controlling for the copreneurial status when examining different entrepreneurial outcomes for women entrepreneurs. additionally, the decision of an entrepreneur to exit to paid employment is an important entrepreneurial phenomenon that is increasingly being studied in recent years (bird & wennberg, 2016; hsu et al., 2016; hsu et al., 2019; justo et al., 2015). however, joining the labor market is often constrained for immigrants than for locals. in particular, female immigrants often have a double disadvantage when it comes to any labor market activity (audretsch et al., 2017; bolívar-cruz et al., 2014; cherim et al., 2018). as such, they turn to entrepreneurship as the most lucrative avenue to generate income. thus, there might be significant economic consequences for immigrant women to exit into paid employment as they might face several entry barriers or even low pay. the present study showed that immigrant women entrepreneurs were less likely to exit into paid employment than their local counterparts. this finding is the first attempt to show the role of foreignness in the exit intentions literature for women entrepreneurs, suggesting that the liabilities that push immigrant women entrepreneurs might influence their long-term decisions to stay in entrepreneurship. from a practical perspective, women entrepreneurs, in general, need to increasingly find ways to manage the interference between the family and the business domains as this could influence exit decisions. many women enter entrepreneurship to have more control over their lives (poggesi et al., 2019). as such, exiting into paid employment might not be an ideal situation for them as they will have to lose such control to a certain extent. moreover, for immigrant women entrepreneurs, exiting their ventures might have significant financial implications, especially as they are highly disadvantaged to gain employment in the labor market in host countries. even though their exit intentions are significantly lower than those of native women entrepreneurs, the significant gradients of the slopes in figure 1 and 2 shows that the influence of both types of interference on their exit intentions is still significant. as such, immigrant women who see entrepreneurship as their only option to integrate into the labor market must continuously develop strategies to manage the interference between the work and family domains. secondly, spouses are known to play an 94 b. n. neneh journal of small business strategy / vol. 30, no. 1 (2020) / 83-96 important role in the life of women entrepreneurs. one area that spouses should focus on is contributing to minimizing the interference that the women entrepreneurs face. additionally, where possible, the spouse should engage in copreneurship with the female partner as this has several benefits that could reduce exit intentions (table 2) as well as help them to plan their roles in a manner that benefits both the business and family domains (deacon et al., 2014). lastly, the present showed that access to capital significantly influenced the exit intentions of women entrepreneurs. prior research has often acknowledged a lack of access to capital as a key constraint for women entrepreneurs, however, its association with exit intentions had not been established. as such, one way to minimize exit intentions for women is to increase their access to financial capital. in fact, as seen in table 1, women who were satisfied with their access to finance were not only less likely to exit their ventures but also had lower levels of f-bi and b-fi. this is because financial capital can be easily converted to other resources that could help to address some of the challenges that women have such as hiring more workforce to reduce b-fi as well as hiring domestic help top minimize the demands of reproductive labor. the managerial implications of the study are twofold. first, strategies to alleviate family-business interference should be incorporated as an integral strategy for the survival of women-owned businesses. the blurred line between the family and the business domain is quite pronounced for women (neneh, 2018) and if not managed properly it can lead to inter-role conflict which will have an adverse effect on the survival of their businesses. second, poor performance is a key concern that women entrepreneurs should pay attention to, especially as some women-owned firms are often characterized by poor performance (justo et al., 2015). in most cases, limited access to resources hinders the performance of women-owned firms. as such, women entrepreneurs and managers should join relevant networks from which resources can be tapped to sustain the performance of their businesses. additionally, such networks could also be used to share strategies on how to create a balance between the business and family domains. conclusion while it is well known that exit intentions are a vital part of the entrepreneurial process, this phenomenon has been understudied among women entrepreneurs. although some studies have shown fundamental differences in the exit intentions of women and men, researchers have always argued for the need to isolate and study women entrepreneurs to provide a better understanding of the fundamental drivers of entrepreneurial outcomes for women. this study contributes to the women’s entrepreneurship and family embeddedness literature by showing that f-bi and b-fi influence the exit intentions of women entrepreneurs. these findings are consistent with the general entrepreneurship literature (hsu et al., 2016). nevertheless, this study further integrates the literature on women’s entrepreneurship with that of immigrant entrepreneurship to show that foreignness also plays a significant role in the exit intentions of women both directly and as a moderator. moreover, the study showed that factors like satisfaction with access to capital and copreneurship were significant predictors of entrepreneurial exit in women. this provides some new insights into the factors that could influence exit intentions among women which have not been considered in the general literature on entrepreneurial exit intentions. while all the hypothesized association were supported, it is nonetheless important to acknowledge some limitations of the study. first, the study uses a convenient sampling approach which limits the generalizability of the findings as only a subset of available women entrepreneurs was 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(2002). the liability of foreignness, redux: a commentary. journal of international management, 8(3), 351-358. http://citeseerx.ist.psu.edu/viewdoc/download?%20doi=10.1.1.535.816andrep=rep1andtype=pdf http://citeseerx.ist.psu.edu/viewdoc/download?%20doi=10.1.1.535.816andrep=rep1andtype=pdf http://citeseerx.ist.psu.edu/viewdoc/download?%20doi=10.1.1.535.816andrep=rep1andtype=pdf http://www.diva-portal.org/smash/get/diva2:524818/fulltext01.pdf http://www.diva-portal.org/smash/get/diva2:524818/fulltext01.pdf http://www.diva-portal.org/smash/get/diva2:524818/fulltext01.pdf s y journal of small business trateg exploring the impact of aligning business and is strategy types on performance in small firms carol e. pollard appalachian state university pollardce@appstate.edu monica morales department of justice – technology services monica.morales@justice.vic.gov.au abstract this paper assesses the impact of miles and snow’s business strategy and sabherwal and chan’s is strategy types on business performance in small firms using the profile deviation approach. survey data collected from 93 small firms across various industry sectors throughout australia revealed an interesting mix of business strategy and is strategy types similar to those reported in large firms. results showed that while business-it alignment was positively related to performance in all 93 small firms, the difference was not significant. measuring alignment and performance within business strategy types revealed alignment was positively and significantly related to business performance for prospectors and analyzers, but not defenders. findings suggest that defenders can benefit from deploying ict in a variety of ways to enhance performance, while prospectors should focus their use of ict on quick strategic decisions, and analyzers should concentrate on using ict to facilitate comprehensive decisions and quick responses. keywords: business strategy, it strategy, miles and snow, matching, small firms, performance introduction aligning business strategy with the firm’s it strategy has consistently been one of the most important business concerns over the past two decades (luftman, 2000; luftman, 2005; luftman, zadeh, derksen, santana, rigoni, and huang, 2013; drnevich and croson, 2013). these studies of alignment between business strategy and it strategy and its impact on business performance historically have been researched primarily within large firms (sabherwal and chan, 2001, bendoly and jacobs, 2004; velcu, 2010; sabegh and motlagh, 2012). however, there is evidence that small firms 26 mailto:pollardce@appstate.edu mailto:pollardce@appstate.edu mailto:monica.morales@justice.vic.gov.au mailto:monica.morales@justice.vic.gov.au journal of small business strategy vol. 25, no. 1 fighting to gain an edge over their competitors also recognize strategic alignment as a similarly important area of concern (pollard and hayne, 1998; gibbons and o’connor, 2005). and, in their a study of 160 small firms in midwest usa, celuch, murphy and callaway (2007) found evidence that “a small firm’s ability to develop aligned information technology capabilities will affect its ability to use strategic flexibility to proactively anticipate and react to needed changes, thereby improving firm performance”. those who have studied this phenomenon in small firms have focused on different aspects of business-it alignment. for example, cragg, king, and hussin (2002) reported on the positive impact of business it alignment on performance in small manufacturing firms in the uk. gibbons and o’connor (2005) examined organizational and individual factors influencing the type of strategy formation processes adopted in 359 small firms in ireland. wong, ngan, chan, and chong (2012) focused on the influence of employee alignment on business-it alignment in small manufacturing companies in indonesia, and pandya (2013) reported on attitudes to it strategy in small firms in singapore. reflecting the importance to researchers, managers, and policy makers of information systems’ contribution to organizational performance, there is still considerable research debate on the topic. for example, in research on large firms drvenich and croson (2013) discuss the strategic roles of it at the business level, and in small firms, pandya (2013) maintains that typically small firms have misconceptions and misgivings about the impact of it strategy. exploring these phenomena in small firms in australia is considered important because the performance of small firms makes a significant contribution to its economic and social prosperity. for example, in the most current report from the australian bureau of statistics it reports that small firms represent 88% of australia’s total economy (abs, 2012). the primary aim of this research is to better understand the vexing issue of business it alignment in small firms and its relationship to perceived business performance. further, this study is motivated by the cautionary advice of previous researchers who stress the importance of small firms being informed by results generated from research conducted in small firms rather than relying on research that reports on information technology in large organizations (ein-dor and segev, 1978; malone, 1985; kyobe, 2004). while there have been studies that either theoretically evaluate or empirically report the positive relationship between is strategic alignment and firm performance (sabherwal and chan, 2001; hirschheim and sabherwal, 2001; bergeron, raymond, and rivard, 2004; adner and kapoor, 2010), the link between most actions within the organization (especially is strategic alignment) and firm performance remains an area of constant debate (olugbode, richards, and biss, 2007; drnevich and croson, 2013). to explore this concept in large u.s. firms within four industry sectors, sabherwal and chan (2001) used the profile deviation approach to develop and validate an instrument that explored the relationship between alignment and perceived business performance using the miles and snow (1984) business strategy typology and theoretically-developed profiles of it strategy types to explore this phenomenon in large firms from a socio technical perspective. the research is guided by the approach developed by sabherwal and chan (2001). in this way, 27 journal of small business strategy vol. 25, no. 1 we respond to their call to assess the wider applicability of their instrument to small firms across a variety of industry sectors outside the usa and further assess its validity and reliability. an overview of research on it in small firms is provided in the next section where the concepts of business strategy and it strategy types are explained. this is followed by a full description of data collection and data analysis procedures. then the results are presented with respect to their relevance to the research issues and hypotheses. finally, the implications of the results are discussed in light of those reported in previous studies and suggestions are offered for practitioners and researchers. background literature and hypotheses ict adoption and use in small firms historically, it is well accepted that the it challenges faced by small firms are different from those of large firms. for example, nearly 30 years ago, ein-dor and segev (1978) established that firm size was directly positively associated with information systems success, and suggested that research findings regarding the is environment in large firms cannot be generalized to small firms. it was also reported that managers in small firms have reservations regarding information systems usage in that they lack resources for is implementation, have a lack of formalized systems, and are plagued by the short management time frame characteristic of the small business environment (malone, 1985). it would, therefore, seem that the environment in which small firms exist calls for a different approach to the deployment and management of it and that typically small firms have lagged large firms in their use of it (pollard and hayne, 1998). historically, small firms have had fewer “slack” resources to spend on it (celuch, murphy, and callaway, 2007). others have reported on the increasing awareness and management of is in small firms (bergeron, raymond, and rivard, 2001; hussin, king, and cragg, 2002; kaushik 2013) and of small firms strategically leveraging their use of the internet for communication and e commerce (mkansi, qi, and green, 2010). for example, the internet has been touted as a means to reduce global advertising costs whilst increasing advertising efficiency and eroding the competitive advantage of scale economies. it also decreases information dissemination and communication costs by abolishing geographical and temporal barriers thus facilitating small firms to reach a critical mass of customers (mkansi et al., 2010). this means that the internet provides a mechanism for small firms to compete for markets and customers more equally, enhance their operational efficiency and effectiveness, and improve their level of business communication. in addition, the advent of on-demand software delivery in the form of utility computing, asps, and software-as-a-service has greatly reduced the cost and facilitated access to newer technologies that may benefit small firms. business strategy contrary to evidence collected in large firms, early research in small firms indicates that their business strategy may not always be formalized or planned, but evolves as a result of constant business decision-making (mintzberg, 1988). it has been suggested that the miles and snow (1984) typology of defenders, analyzers, and prospectors provides a useful means to measure business strategy types and that it is especially relevant in 28 journal of small business strategy vol. 25, no. 1 analyzing the strategic behavior of small firms (rugman and verbeke, 1987; olson and currie, 1992). the miles and snow typology looks upon a firm as a complete and integrated system in active interaction with its environment. as such, it would appear to be especially relevant to the study of small firms focused, as it is, on the firms’ conduct at the total-system level, rather than at the level of sub-units. in brief, miles and snow (1984) suggest that competing firms and industries display behavioral patterns that can be divided into three basic competitive strategy types: defenders, prospectors, and analyzers. each of the three strategy types is described next. defenders try to find and maintain a safe niche in a relatively stable product or service area. these firms tend to offer a more selective range of products or services compared to their competitors, and they try to defend their domain by offering better quality, superior service, and lower prices. more often than not, firms that use this type of strategy have a conservative view regarding developments in the industry – they tend to disregard industry innovations that do not directly influence current areas of operations and concentrate instead on excelling in their limited area. prospectors typically operate within a broad product-market domain that periodically redefines itself. this type of organization values being “first-in” with regard to new products and markets, despite the fact that some of these efforts do not result in high profits. the organization responds quickly to early signs regarding areas of productivity, and these responses often lead to further rounds of competitive actions. however, an organization with this type of strategy may not maintain a strong market in every area that it enters. analyzers try to maintain a stable, limited line of products or services, as do defenders, but also mobilize quickly to pursue a carefully chosen set of more promising innovations in the industry. this type of organization is seldom a major competitor in areas compatible with its established product-market base. the organization will often be “second in” and, in this way, avoid the mistakes made by the pioneers to develop a more cost-efficient product or service. table 2 shows the mapping of business strategy attributes to business strategy type to business strategy profiles developed by sabherwal and chan (2001). in keeping with sabherwal and chan’s (2001) use of the profile-deviation approach, in the present study each attribute was measured on a three-point scale of high, medium, and low. the ideal defender, analyzer, and prospector business strategies were developed based on scores on venkatraman’s (1989) six strategic orientations of the business enterprise (strobe): defensiveness, risk aversion, aggressiveness, proactiveness, analysis. and futurity. these dimensions of strategic orientation represent a broad and holistic perspective of strategy that is consistent with miles and snow’s assessment of defenders, prospectors, and analyzers. venkatraman’s (1989) operationalization of business strategy is widely used (chan, et al. 1997; croteau, and bergeron 1999; gilbert, 1995; khan, qureshi, and zaher 2012) and an integral part of the conceptual model developed by sabherwal and chan (2001). 29 journal of small business strategy vol. 25, no. 1 strobe (venkatraman 1989) no. of business strategy type* (miles and snow 1984) defensiveness 4 high low medium risk aversion 3 high low high aggressiveness 2 medium high medium proactiveness 3 low high medium analysis 3 medium medium high futurity 3 high medium medium is strategy attributes (sabherwal and chan 2001) operational support systems 6 high low medium market information systems 4 low high high interorganizational systems 4 high medium high strategic decision support systems 4 high high high ideal is strategy profile is for efficiency is for flexibility is for comprehensiveness table 1: mapping business type to strobe and is strategy items defender prospector analyze * ideal measure of six strobe attributes for each business strategy type is strategy the literature emphasizes that an is strategy should be an integral part of business planning, otherwise strategic systems would be developed in a piecemeal manner, neither contributing to strategic vision nor enhancing organizational flexibility to respond to market changes (galliers, 1991; avison et al., 1998). in their extensive review of is strategy literature, chen, mocker, preston, and teubner (201, p. 233) operationalize is strategy as the “degree to which the organization has a shared perspective to seek innovation through is.” camillus and lederer (1985) suggest that different is strategies are associated with different business strategies and others have reported that defenders, prospectors and analyzers differ in their level of it investment karimi, et al. (1996), type of business support provided (sabherwal and chan, 2001) and information management sophistication (gupta, et al., 1997). business-it alignment business-it alignment is the application of information technology (it) in an appropriate and timely way, in harmony with business strategies, goals, and needs (luftman, et al., 2013). reich and benbasat (1996) define business-it alignment as the “degree to which the information technologies mission, objectives, and plans support and are supported by the business mission, objectives, and plans”. alignment allows a firm to make the most of its it investments, and therefore increase profitability by attaining accord between its business strategies and plans. even though firms instinctively expect benefits from it alignment, many of them create a resistance to achieving alignment (chan and huff, 1993). not surprisingly, the role of it in achieving organizational strategic objectives is still one of the key issues that challenges it executives (luftman, et al., 2013), andits importance is not limited to large firms. in a study of critical is issues in small firms in canada, pollard, and hayne 30 journal of small business strategy vol. 25, no. 1 (1998) reported that “aligning the is organization within the enterprise” emerged in the top five most important issues in their list of 23 critical is issues, whereas it had not warranted a mention in a previous canadian study (rivard, boisvert, and talbot, 1988) or in an earlier study by ein dor and segev (1978), who reported that the critical issues of small firms in the us appeared to be narrower in focus and more operational in nature than those mentioned by large firms. it would appear that time may not have changed the unique needs of small firms with respect to their it needs, but the easier and less costly access to it capabilities may have changed the ways in which small firms view it investment vis-à vis organizational performance. this is particularly important because some studies have concluded that is strategic alignment impacts performance both at is and business levels (chan and huff, 1993; sabherwal and chan, 2001; hussin, et al., 2002). these findings suggest a growing need for alignment between business and it strategies in small firms and that the premise that small firms have less need for alignment and coordination in their deployment and management of it needs to explored further. to test the relationship between business strategy types, is strategy types, it alignment, and perceived business performance in large firms, sabherwal and chan (2001) developed and tested a conceptual model of business-it alignment and developed four hypotheses that tested for a positive relationship between the various constructs. their results showed that alignment affects perceived business performance, but only in some organizations. more specifically, their results indicated that alignment seems to positively influence overall business success in prospectors and analyzers, but not in defenders. given that some small firms have reported mixed impacts from it alignment their hypotheses were revised in the present study to explore both positive and negative associations between strategy types, alignment, and performance by stating the following hypotheses. h1: alignment between business strategy and is strategy is related to business performance. h2: for defenders, alignment between their is strategy and “is for efficiency” strategy is related to business performance. h3: for prospectors, alignment between their is strategy and “is for flexibility” is related to business performance. h4: for analyzers, alignment between their is strategy and “is for comprehensiveness” is related to business performance. conceptual model sabherwal and chan’s (2001) conceptual model of it and business alignment in large firms is shown in figure 1. this model was used to measure the impact of alignment on business performance using miles and snow’s (1984) business strategy typology (defender, prospectors and analyzers) and venkatraman’s (1989) strobe (defensiveness, risk aversion, aggressiveness, proactiveness, analysis, and futurity). based on these dimensions, sabherwal and chan (2001) theoretically developed four is strategy attributes and three ideal is strategy types that correspond to the miles and snow business strategy types. the specifics of these constructs are discussed further in the following sections.' 31 journal of small business strategy vol. 25, no. 1 business strategy attributes (strobe) • defensiveness • risk aversion • aggressiveness • proactiveness • analysis • futurity figure 1: conceptual model (adapted from sabherwal and chan, 2001) business strategy types • defenders • analyzers • prospectors business strategy business-it alignment h1 to h4 business performance in small firms is strategy is strategy attributes • operational support systems • market information systems • interorganizational systems • strategic decision support systems is strategy type • is for efficiency • is for flexibility • is for comprehensiveness the premise of sabherwal and chan’s framework is that greater alignment between an organization’s business strategy type and the corresponding is strategy type (shown in table 1) should lead to the development of systems that are targeted on areas critical to the firm’s success and result in improved business performance (sabherwal and chan, 2001). the model implies that defenders should utilize the ‘is for efficiency’ strategy because this kind of strategy is oriented toward internal and inter-organizational efficiencies and long term decision making. in the case of prospector firms, is should have a ‘flexible’ strategy because this business strategy type is focused on market flexibility and quick strategic decisions. finally, analyzers need the ‘is for comprehensiveness’ strategy to facilitate comprehensive decisions and quick responses through knowledge of other firms central to the nature of this business strategy type. research method data collection quantitative data were collected using the survey developed and tested by sabherwal and chan (2001) with the replacement of performance measures more suitable for small firms (khandwalla, 1977). although sabherwal and chan (2001) administered “matched” surveys to both the ceo and the cio in each of the large companies in their sample, this approach was not considered appropriate for the current study since the literature suggests that the majority of small firms do not have the resources to employ it employees and the owner/manager oversees both the business and is/it strategy. instead, a decision was made to 32 journal of small business strategy vol. 25, no. 1 administer only one survey per company. it was recognized that this approach might raise a question of common methods bias (bagozzi and yi, 1991; nunnally, 1978) since a single source of data was used within each company. however, it has been reported that owner-managers are the best placed persons to provide valid and accurate data on the business strategy, is strategy and business performance in small firms (hussin, et al., 2002; bergeron, et al., 2004). in addition, this approach is consistent with that successfully used by hussin, et al. (2002) in their study of it alignment in 256 small uk manufacturing firms and bergeron, raymond, and rivard (2004) in their study of ideal strategic alignment patterns in 110 small firms in north america. to ensure the appropriateness of the research instrument and its modified method of administration, the survey was pre-tested for content and construct validity by the owner/managers of three small firms. no changes were suggested. the survey was mailed to the owner/manager of a stratified sample of 400 firms who had 100 employees or less with a request that they personally complete the survey. the firms were randomly selected from australia online, a database of australian firms that is widely used for research in australia. the selection of small firms was purposely not limited to any specific industry or set of industries. fifty-seven (57) surveys were returned as a result of the first mailing, for an initial return rate of 14.25%. two weeks after the initial mailing, follow-up letters were mailed to all respondents in an attempt to increase the response rate. as a result of the second mailing, 36 additional surveys were returned, for a total of 93 useable surveys for an overall response rate of 23.25%. this compares favorably with other survey-based is research responses reported in the literature that cite a response rate of around 20% as a valid study according to bourque and fielder (1995) and compares favorably with the response rates of 19% and 7% for two surveys administered to large firms by sabherwal and chan (2001) in their initial test of the instrument. a t-test for non-response bias on the main variables of interest revealed no significant differences (p=.63) between early and late respondents. this allowed the data to be pooled for analysis. the data exhibited a normal distribution on all variables which enabled the use of parametric statistical analysis. measurement of constructs organizational performance is the dependent variable in the study. to measure the dependent variable, items developed by khandwalla (1977) and validated by miller (1987), raymond, pare, and bergeron (1955) and hussin, king, and cragg (2002) were used. performance was measured using a 5-point likert scale (1=very weak to 5=very strong) to assess khandwalla’s four objectives measures: long-term profitability, extent of sales growth, financial resources (liquidity and investment capacity), and public image/client loyalty. the independent variables were business strategy and is strategy. business strategy was assessed by the six business strategy attributes, defensiveness, risk aversion, aggressiveness, proactiveness, analysis, and futurity, proposed by venkatraman, (1989). each business strategy attribute was measured by multiple items as shown in table 1. 33 journal of small business strategy vol. 25, no. 1 the three theoretically derived is strategy profiles (efficiency, flexibility and comprehensiveness) were assessed by four is strategy attributes: operational support systems, market information systems, strategic decision support systems, and inter-organizational systems (sabherwal and chan 2001). operational support systems symbolize the use of it for monitoring and controlling the day-to-day operations. these systems are generally expected to assist in operational efficiency. market information systems are positively associated with management. strategic decision support systems are generally the systems that aid the organization in making strategic decisions. inter-organizational systems would, for example, provide analyzers with sales-related information to facilitate the frequently complex coordination between their marketing and production function. multiple items were used to measure each is strategy attribute as shown in table 1. all business strategy attributes and is strategy attributes were measured using a 5-point likert scale ranging from 1=strongly disagree to 5=strongly agree. table 1 also shows the mapping of ‘ideal’ business strategy (venkatraman, 1989) and ‘ideal’ is strategy (sabherwal and chan, 2001) to each of miles and snow’s (1984) business strategy types, using a parsimonious 3-point scale (high, medium, and low). for example, ideally defenders will score ‘high’ on operational support systems since their administrative system is suited for generating and maintaining efficiency (sabherwal and chan, 2001). table 2: construct reliability (n=93) independent variables dimensions items mean s.d. alpha business strategy 18 defensiveness analysis risk aversion pro-activeness futurity aggressiveness 4 4.26 3 3.56 3 3.30 3 3.49 2 3.66 3 2.57 .54 .78 .80 .74 .84 .82 .69 .74 .74 .80 .80 .62 is strategy 17 operational support systems 6 inter-organizational systems 4 market information systems 4 strategic decision support systems 3 3.93 3.48 3.26 3.45 .73 .83 .80 .74 .91 .82 .78 .77 dependent variable organization dimensions items mean s.d. alpha 4 3.81 .56 .70 performance long-term profitability 1 extent of sales growth 1 financial resources (liquidity and 1 investment capacity) public image/client loyalty 1 3.81 3.78 3.54 4.13 .74 .76 .83 .73 34 journal of small business strategy vol. 25, no. 1 the alignment or ‘fit’ between ideal profiles for business strategy (venkatraman, 1989) and is strategy (sabherwal and chan, 2001) was measured using the profile deviation approach. to systematically test the existence and effect of ‘fit’ between a theoretically or empirically derived ‘ideal profile’, venkatraman and prescott (1990) advocate the profile deviation approach, a pattern-analytic technique proposed by drazin and van de ven (1985) rather than using the reductionist approach that relies on simple interactions between the two. the profile deviation approach provides an explicit multivariate measure of alignment to examine relationships with a variety of criteria whereas the more common analytic approaches like cluster analysis (mambrick, 1984) and q-factor analysis (miller and friesen, 1984) provide only implicit concepts of ‘fit’. to determine the extent to which each responding company deviated from the ideal business and is strategy, ‘high’ and ‘low’ values for the ideal business and is strategy were operationalized as +1 and –1, respectively, and a normalized score of 0 was given to the ‘medium’ value (govindarajan, 1988; sabherwal and chan, 2001). the euclidean distance between the actual strategy score and the ‘ideal’ strategy was calculated using the following formula. distance (strategy type) = ∑{( xj − ij, st )2 } xj represents the standardized score of the jth business strategy, and ij represents the ideal scores described previously, across all strategy attributes. this process produced three distance measures for each firm, indicating the distance from its ideal profile. finally the lowest distance score was used to classify each company into one of the strategy types and values of 1 (defenders), 2 (prospectors), and 3 (analyzers) were assigned for business strategy, and 1 (efficiency), 2 (flexibility), and 3 (comprehensiveness) were assigned for is strategy. alignment was calculated by subtracting the value for business strategy type from the value for is strategy type. firms who exhibited a zero difference between the two strategies were assigned to the “aligned” group all others were assigned to the “non aligned” group. reliability and validity of constructs a summary of the reliability statistics for the constructs measured is presented in table 2. all of the constructs displayed a cronbach’s alpha greater than 0.60 as recommended by nunnally (1978) indicating that the scales were reliable and internally consistent. furthermore, the standard deviations ranging from .54 to .84 indicate a high degree of agreement among the participants on each of the constructs and dimension. to test the discriminatory properties of the constructs and their dimensions, a correlation matrix was constructed and the average variance explained was computed. discriminant validity is the extent to which items differentiate among the measurement scales. the results in table 3 demonstrate that all items within each of the eight independent variable scales were more highly correlated within the dimension they were measuring than with items in other scales. in addition, the average variance explained for all scales exceeded the .50 level recommended by fornell and larcker (1981). this demonstrates that the scale were measuring different constructs. 35 journal of small business strategy vol. 25, no. 1 table 3: inter-correlations of independent variables construct dimenson oss ios mis sdss def anal risk pro fut agg is strategy oss ios 0.91 0.59 0.82 type mis 0.43 0.66 0.78 sdss 0.74 0.58 0.50 0.77 strobe defensiveness 0.47 0.32 0.27 0.28 0.69 analysis 0.38 0.24 0.30 0.48 0.22 0.74 risk aversion 0.04 0.02 0.07 -0.03 0.02 0.19 0.74 proactiveness 0.61 0.47 0.32 0.57 0.32 0.37 0.07 0.80 futurity 0.42 0.44 0.32 0.47 0.36 0.37 0.21 0.55 0.80 aggressiveness 0.11 0.31 0.21 -0.02 -0.09 0.01 0.11 0.14 0.07 0.62 sample results the 93 responding firms had been using computers for a maximum of 31 years and a minimum of 1 year. on average, firms had table 4 shows the company profile of each of the responding companies, including the title of the informant from each company. the 93 participating firms represent all states and territories of australia, and their representation is consistent with the percentage of small firms in each state and territory. firms had been in business for 1 to 115 years, with an average existence of 19 years (sd 18.34) and represented a wide variety of industries. the data on geographic location, industry, and longevity were not collected for the purposes of segmenting the data for statistical analysis, but rather to demonstrate the proportionate representation of all states and territories across australia and the wide range of industry types and years in business represented. all firms fit the australia bureau of statistics’ definition of a small to medium-sized enterprise (abs 2013). been using computers for approximately 13 years (sd 7.47). to measure the extent of “it sophistication”, firms were classified into three levels of principle it use: operational, management control, and strategic planning. sixty-five (70%) of the responding firms used is/it primarily to support decision making at the operational level, while 24 (26%) firms used is/it to support the management control level, and only four (4%) firms reported the importance of is/it to support its’ strategic planning process. when asked about the extent of strategic planning documentation, 54 (58%) firms indicated they have a written business plan (i.e., a document that contains an analysis of the organization’s current position, where it would like to be in the future and how it plans to get there), and 23 (25%) indicated that they have a formalized is strategy (i.e., a medium or long-term is directional plan). 36 journal of small business strategy table 4: characteristics of companies studied (n=93) vol. 25, no. 1 title of “informant” n geographic location n ceo (owner/manager) 65 australian capital territory 1 business manager 19 new south wales 25 it manager 6 northern territories 1 financial controller 2 queensland 17 company accountant 1 south australia 8 tasmania 4 industry sector n victoria 22 accommodation and restaurants 7 western australia 15 communication services 3 construction 4 total number of employees n corporate re-seller 1 1-20 employees 67 education 4 21-50 employees 21 finance, insurance 6 51-100 employees 5 health and community services 3 it consultancy 2 full-time it employees n manufacturing 9 0 71 personal services 6 1-5 21 promotional services 1 5 or more 1 property and business services 25 retail trade 14 annual revenues n transport 1 < $500k 30 wholesale trade 7 $500k-$1m 13 $1m – $5m 41 >$5m 9 data analysis the survey data were analyzed using the three procedures prescribed by sabherwal and chan (2001): (1) the business and is strategy type of each business was computed, (2) the alignment between business strategy and is strategy was calculated, and (3) each hypothesis was tested. business and is strategy types calculating respondents’ business strategy type resulted in the classification of 20 firms as defenders, 30 as prospectors, and 43 as analyzers. calculating the is strategy type revealed 25 firms who used for ‘is for efficiency’, 39 for ‘is for flexibility’, and 29 for ‘is for comprehensiveness’, indicating that the greatest number of small firms used it to enhance their market flexibility and quick strategic decision making. alignment measuring the alignment between business strategy and is strategy, 36 “aligned” firms and 57 “non-aligned” firms were identified. further analysis revealed that the aligned group consisted of six defenders, 14 prospectors, and 16 analyzers, compared to the non-aligned group which had 14 defenders, 16 prospectors, and 27 analyzers. performance the mean scores of the total performance of the three groups were: defenders (3.93, sd .46), prospectors (3.73, sd .52), and analyzers (3.82, sd .63), indicating that defenders across a variety of industries performed somewhat better than analyzers, 37 journal of small business strategy vol. 25, no. 1 followed by prospectors. a one-way anova comparing total performance across the three different business strategy types revealed no significant differences (f = .71, p = .49). a similar statistical analysis of the mean scores and standard deviations for each of the four individual performance outcome items revealed no significant differences in performance outcomes across business strategy types, except for “financial resources” which were significantly different (p<.10) as shown in table 5. analyzers reported highest financial resources (liquidity and investment capacity), followed by defenders and prospectors. table 5: performance outcomes by business strategy type performance outcome defender (n=20) prospector (n=30) analyzer (n=43) f sig. mean sd mean sd mean sd total performance 3.93 .46 3.73 .52 3.82 .62 .71 .49 long-term profitability 3.90 .64 3.80 .71 3.77 .81 .22 .81 sales growth 3.85 .58 3.90 .71 3.67 .87 .86 .43 financial resources 3.60 .75 3.27 .83 3.70 .83 2.55 .09* public image/client 4.35 .67 3.97 .77 4.14 .71 1.71 .19 loyalty *p< .10 hypothesis testing when the four hypotheses were tested to assess the relationship between alignment and performance, two were supported and two were not supported (table 6). all hypotheses were tested using a two-tailed independent samples t-test in spss. to understand the amount of variance in performance as explained by alignment, eta squared (η2) was also calculated. the findings relative to each hypothesis are discussed next. 38 journal of small business strategy vol. 25, no. 1 h1 alignment between business strategy and is strategy in small firms is associated with business performance .52 no positive h2 for defenders, alignment between actual is strategy and ideal “is for efficiency” strategy in small firms is associated with business performance .13 no positive h3 for prospectors, alignment between actual is strategy and ideal “is for flexibility” in small firms is associated with business performance .02* yes negative h4 for analyzers, alignment between actual is strategy and ideal “is for comprehensiveness” in small firms is associated with business performance .05* yes positive table 6: summary of hypothesis testing hypotheses sig. support direction *p≤ .05 h1: alignment between business strategy and is strategy in small firms is related to business performance. perceived business performance of the 36 aligned firms (mean=3.86, sd 0.60) was marginally higher than that reported by the 57 firms in the non-aligned group (mean=3.79, sd 0.53). the results of the t test demonstrated the difference is positive but not statistically significant (t=.64, p = 0.52). h1 is not supported. variance explained by alignment across all business strategies was negligible (η2=.004), in that less than one percent (.4%) of the variance in performance was explained by aligning business and it strategies in small firms. h2 through h4, focused on performance differences between aligned vs. non-aligned groups within each of the three business strategy types: defenders, prospectors, and analyzers. h2: for defenders, alignment between actual is strategy and ideal “is for efficiency” strategy in small firms is related to business performance. in considering h2, although defenders in the aligned group reported higher performance outcomes (mean=4.17, sd 0.26) than the non-aligned groups (mean=3.82, s.d. 0.49), the t-test results indicated that the difference between groups was not statistically significant (t = 1.60, p = 0.13). h2 is not supported. variance explained by alignment in performance of defenders was 12.5% (η2=.125). h3: for prospectors, alignment between actual is strategy and 39 journal of small business strategy vol. 25, no. 1 ideal “is for flexibility” in small firms is related to business performance. when “h3” was tested the results of the t test show that the difference between the aligned groups (mean=3.50 sd 0.44) and non-aligned groups (mean=3.94, sd 0.50) was significant (t = -2.51, p = 0.02), and perceived business performance was lower for aligned groups than non-aligned groups. h3 is supported at the level of p <.05. approximately eighteen percent (18.4%) of the total variability (η2=.184). in perceived business performance of prospectors was attributable to it alignment. h4: for analyzers, alignment between actual is strategy and ideal “is for comprehensiveness” in small firms is related to business performance. in assessing analyzers (n=43) to test h4, the aligned group reported higher perceived business performance (mean=4.06, sd 0.67) than the non-aligned group (mean=3.67, sd 0.56). in this case, the mean difference was 0.39 (t=2.04, p 0.048). h4 is supported at the level of p <.05. however, again the variance suggested weak influence, in that only slightly more than nine percent (9.2%) of the variance (η2=.092) in analyzers’ business performance was explained by alignment of is and business strategies. discussion and implications measures of performance showed that the 93 small firms across a variety of industry sectors were performing well overall and on a number of financial and one non-financial outcome measures. not surprisingly, the highest performance score was on the non financial outcome ‘public image/client loyalty’. this is consistent with conventional wisdom that small firms typically interact with their customers in a more personal way and are more focused on creating relationships with their customers than achieving high financial returns on their investment. the 93 small australian firms reported a mix of business strategies that occurred in a similar distribution to those found in large u.s. firms in a limited number of industry sectors: banking, insurance, pharmaceutical, and manufacturing. consistent with previous studies of large firms, (zajac and shortell, 1989; sabherwal and chan, 2001) the majority of the responding small firms were analyzers followed by prospectors and defenders. when assessed across the three business strategy types, performance was not significantly different across defenders, prospectors, and analyzers. this provides further support for the applicability of sabherwal and chan’s conceptual model in the context of small firms across multiple industry sectors. is strategies were similar divers with 25 firms using is for “efficiency”, 39 for “flexibility”, and 29 for “comprehensiveness”. however, given the different numbers of firms across business strategy and is strategy types, it was clear that many were using conflicting strategies. in considering how many small firms had achieved alignment between their business and is strategies, only 39% of the 93 met this condition. thus, a large percentage of small firms were using an is strategy that differed from the “ideal” is strategy type for their business strategy type. for example, it appeared that some analyzers are using is for flexibility rather than the “ideal” is strategy, i.e., is for comprehensiveness, that allows 40 journal of small business strategy vol. 25, no. 1 comprehensive decisions and quick responses through knowledge of other firms that should be the preferred approach for analyzers. again, this is consistent with findings reported by sabherwal and chan (2001) in their study of large firms in the u.s. possibly suggesting that some differences between large and small firms with respect to is strategy are not all that different. one explanation for this may be that as small firms become increasingly sophisticated in their business acumen, and as technology becomes more easily accessible and affordable to small firms, advanced technologies are being adopted by more and more small firms. interestingly, it appears that alignment between business strategy and ‘ideal’ is strategy does not significantly improve business performance in small firms as a whole and for defenders alignment negatively impacted performance. again, these finding supports those reported by sabherwal and chan (2001), who found that an emphasis on it alignment does not improve strategy execution, and business performance in large firms classified as defenders. based on the literature review that describes defenders as ‘firms that tend to disregard industry innovations that do not directly influence current areas of operations, and concentrate instead on excelling in their limited area’, it is concluded that alignment may be inappropriate because it will not provide acceptable returns. on the other hand, the current data suggest that is alignment improves business performance for firms that are classified as prospectors or analyzers. as the mapped structure of sabherwal and chan (2001) proposes for prospectors, it is important to place increased emphasis on their use of market information systems and strategic decision support systems to achieve alignment. whereas for analyzers it is important to have their market organizational systems, interorganizational systems, and strategic decision support systems well developed and directed to their business needs. therefore, the owners of the firms classified as prospector or analyzer should be aware that the alignment between business and is strategy could significantly improve business performance in a way that would make them more competitive. alignment between business and is strategies may not be the most appropriate paradigm to manage it in today’s small firms. when you consider it in the environment in which small firms operate, this view is appealing since, to gain market share, small firms often have to be flexible and spontaneous – qualities that may be hampered by a sequential approach to establishing a business strategy and then bringing their management of it into alignment with the previously planned business strategy. instead, it might be that small firms are better served with a more seamless integration of it and business strategy that are created simultaneously and can be executed in unison rather than in tandem. considering that most small firms have few, if any, is/it employees, the idea of separately conceived plans becomes even less likely and/or desirable. in addition, it has been suggested that most models of alignment assume that organizations are mechanistic and use structured, planning oriented approaches to business objectives (avison, jones, powell, and wilson, 2004). it may be that the majority of small firms do not fit into this mold and instead approach their planning in a more informal manner, possibly blending or fusing there is strategy and business strategy as they adjust to their changing environment in an attempt to differentiate themselves in the marketplace and/or achieve more non-financial rewards 41 journal of small business strategy vol. 25, no. 1 depending on the motivation of the owner/manager, as evidenced by the finding that the performance outcome that was rated highest by small firms was public image/customer loyalty. concluding remarks this study has produced important evidence of the validity of sabherwal and chan’s (2001) theoretically derived conceptual model and the existence of their ideal business and is strategy profiles in (1) small firms, (2) a wide variety of industry sectors, and (3) companies headquartered outside north america. overall, it supports the model through the various hypotheses that were tested; however, the strength of the associations in the present study are not as strong as those previously reported. while this research contributed to the scant literature on strategy content rather than on the more commonly researched strategy process, it is suggested that future research is needed to further examine the strategic processes and paradigms to gain a better understanding about alignment in small firms. for example, studies of the processes and paradigms that guide decision making in small firms might provide useful insights into how the strategic process develops. the relatively low strength of significance of the relationship between alignment and performance (positive and negative), and the very low variance explained by alignment, provides strong evidence that other factors influence alignment in small firms. future research that investigates the functions of is/it and the ways in which it supports the differing strategy types and varying expected outcomes in small firms would appear to be warranted. this might be achieved through comprehensive case studies and/or action research to gain greater insight into alignment and business performance in small firms and explore its facilitators and barriers. 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(1989). “changing generic strategies: likelihood, direction and performance implications.” strategic management journal. 10, 413-430. dr. carol pollard is a professor of information systems at appalachian state university, boone, north carolina, usa. dr. pollard teaches in the areas of systems analysis, project management and it service management. her current research interests include business-it alignment in small firms and the environmental impacts of it adoption. monica morales is a project coordinator with technology services at the department of justice, victoria, australia. ms. morales holds a masters of information systems from the university of tasmania. her research interests focus primarily on business strategy in small firms. 45 exploring the impact of aligning business and is strategy types monica morales abstract introduction background literature and hypotheses business strategy table 1: mapping business type to strobe and is strategy is strategy business-it alignment conceptual model figure 1: conceptual model (adapted from sabherwal and chan, 2001) research method table 2: construct reliability (n=93) reliability and validity of constructs table 3: inter-correlations of independent variables data analysis alignment performance table 5: performance outcomes by business strategy type table 6: summary of hypothesis testing discussion and implications concluding remarks references 23 customer-firm interaction and the small firm: exploring individual, firm, and environmental level antecedents saurabh srivastava university of north texas saurabh.srivastava@unt.edu anat barnir university of north texas anat.barnir@unt.edu abstract customer-firm interaction (cfi) has been extensively studied in the past for its effects on customer satisfaction, new product success, and firm performance. research on the factors that facilitate or inhibit firms from interacting with their customers, however, is sparse. in this paper, we explored individual, product/service, and environmental factors that influence customer-firm interaction. analyses are based on data from 172 small firms. findings suggest that significant association exists between cfi and numerous individual, firm, and environmental factors, supporting the notion that in entrepreneurial and small firms cfi is used in a strategic fashion, to support market position. a set of post-hoc analyses showed that cfi antecedents vary by context such as entrepreneurs’ gender, experience, or firm performance. results, their implications, and future research opportunities are discussed. mailto:saurabh.srivastava@unt.edu mailto:anat.barnir@unt.edu journal of small business strategy vol. 26 ● no. 2 ● 2016 24 introduction customerfirm interaction (cfi) is considered a communication process through which firms and customers share information and knowledge (gales & mansour-cole, 1995). cfi has been considered the core of customerfirm relationship (gronroos, 2004) that plays a crucial role in building trust and relationship through communication (anderson & narus, 1990). the relationship between a firm and its customers creates a competitive setting through which firms can enjoy long term success (gotlieb, levy, grewal, & lindseymullikin, 2004, lehmann & neuberger, 2001; mills & margulies, 1980). over the past decade, much research has been done on the interaction between firms and their customers (bonner, 2010; foss, laursen, & pedersen, 2011; huffman & skaggs, 2010; ramani & kumar, 2008; song, wang, & parry, 2010). the research revolved around the nature, characteristics, and effects of those interactions. overall, research supports the notion that interaction between a firm and its customers yields positive outcomes for the firms (gruner & homburg, 2000; foss, laursen, & pedersen, 2011). the research on customer-firm interaction has been conducted in a variety of contexts. cfi has been extensively studied in the past for its effects on customer satisfaction (ramani & kumar, 2008; wang & feng, 2012), new product success (bonner, 2010; grumer & homburg, 2000; narver, slater, & maclachlan, 2004), and firm performance (moorman, 1995; ramani & kumar, 2008; skaggs & galli-debicella, 2012). however, current research is lacking in two respects. first, only little attention has been given to the antecedents of customer interaction or to the factors that facilitate or inhibit firms from interacting with their customers. second, not much research exists that focuses specifically on entrepreneurial and small firms, especially on the role that the entrepreneur’s/owners and the firm’s characteristics play in customerfirm interaction. this paper addresses those gaps. in this paper we argue that cfi is a strategic and deliberate action of a firm, and therefore, the extent to which it is used can be affected by certain factors that are unique to the firm. we specifically analyze cfi in entrepreneurial and small firms because the orientation of such firms is different from that of large firms (coviello, brodie, & munro, 2000). entrepreneurial / small firms are an ideal candidate to study antecedents of cfi because for entrepreneurs and small business owners, customer interaction is a primary source of customer information and knowledge that leads to strategic decision making. because entrepreneurs and small business owners tend to experience greater resource constraints compared to larger and established firms, interaction with customers is of special importance in that it allows for direct and easy way to gain information and knowledge (carson, cromie, mcgowan, & hill, 1995; hisrich, 2005). exploring the antecedents of cfi in entrepreneurial and small firms as a starting point, we propose that the antecedents of cfi be grouped into individual, firm, and environmental level factors. entrepreneurs often mold the structure and system of their firms. they identify their business as an extension of their beliefs and personality, and make strategic decisions accordingly. since cfi is strategic in its disposition, it is highly influenced by the entrepreneur’s individual characteristics. firm level characteristics such as the product journal of small business strategy vol. 26 ● no. 2 ● 2016 25 or service provided by the firm are another central factor around which firms weave their strategic decisions. as such, a firm’s product or service is a critical link between a firm and its customers. lastly, the environment is also a key factor affecting strategic decisions that constitute a third category in the framework. the paper thus addresses the following general research question: a) do entrepreneurs’ individual experiences affect the degree to which their firm engages in interaction with its customers? b) what is the relationship between the specific characteristics of the product/service offered and the degree of customer-firm interaction? and c) do perceptions of external environment affect the degree to which firms engage in customer interaction? a pictorial display of the research model is presented in figure 1. the paper is organized as follows: first, the literature on customer-firm interaction is discussed, followed by the development of testable hypotheses. the method section is then introduced, and results are presented. post hoc analyses are then reported to shed further light on the antecedents. the discussion of the results follows along with the implications and suggestions for future research. theoretical background and hypotheses customer-firm interaction the relationship of a business with its customer is a decisive factor in the success of a business. in turbulent markets, entrepreneurs / small business managers need to be in constant and direct contact with existing and potential customers to identify rapidly changing customers’ needs and demands. the environmental factor  environmental dynamism individual factors  user-entrepreneur  customer experience product / service factors  product newness  product/service costs  product/service switching costs customer-firm interaction + figure 1 the research model journal of small business strategy vol. 26 ● no. 2 ● 2016 26 firm’s interaction with its customers is extremely important in order to receive information that is utilized to identify customers’ requirements, needs, feedback etc. furthermore; through interacting with customers, entrepreneurs can gain information about new business opportunities, as well as on competitors or other critical players in the industry. indeed, past research on cfi and customer relationship provides extensive support for its importance in firm performance and success (gruner & homburg, 2000). the relationship between a firm and its customers helps with customer retention and satisfaction (ennew & binks, 1996) and long term success (gotlieb et al., 2004, lehmann & neuberger, 2001; mills & margulies, 1980), while communication through interaction plays a crucial role in building trust and cooperation among partners (anderson & narus, 1990). other studies show that interaction is the core of customer-firm relationship and that such interaction bears directly on the type of information and knowledge the firm has of its customers (gronroos, 2004; mills & margulies, 1980), as well as on the information customers have on the firm (mills & margulies, 1980; durkin, mccartan-quinn, o’donnell, & howcroft, 2003). interaction is associated with high quality and reliability of information exchanged and improved ability to effectively target customers by tailoring products and services to customers’ needs, identifying new opportunities for products and services, or improving customer satisfaction (hagel & rayport, 1997). cfi has also been found to be directly related to the degree of service innovation and innovation success (martin & horne, 1995) and to the reduction of uncertainties associated with the firms’ products and services (jones, mothersbaugh, & beatty, 2000). lastly, researchers also found that high customer-firm interaction is positively related to the various performance aspects of the firm (ramani & kumar, 2008). researchers dealing with the interaction between firms and their customers define the interaction patterns in various ways. bonner defined customer interactivity as “the degree to which interactions between potential customers and project team members are bidirectional, participative and involve joint problem solving” (2010, p. 486). huffman and skaggs mentioned that “customer-firm interaction occurs when there is direct face-toface contact between the consumer and the service firm” (2010, p. 152). williams, rice, and rogers referred to interactivity with customers as “the degree to which participants in a communication process have control over, and can exchange roles in, their mutual discourse” (1988, p. 10). drawing on the existing research, in this work customer–firm interaction is defined as the direct interaction between firm and its customer for the purpose of improving products or services. some of the entrepreneurship and small firm literature also addresses the role of cfi (song et al., 2010). for example, chrisman, mcmullan, and hall (2005) found that cfi has a significant positive effect on new venture success. entrepreneurial and small firms experience limited resources, different scope of operation and management practices, and different operational and structural patterns (schollhammer & kuriloff, 1979), which allow greater influence of the entrepreneur on firm activities (carrier, 1994; carson et al., 1995). indeed, research showed that entrepreneurs and small business owners have higher tendency towards developing direct relationships with their customers (coviello et al., 2000). given that the small business owners face high resource constraints and are journal of small business strategy vol. 26 ● no. 2 ● 2016 27 low on flexibility and opportunity (hisrich, 1992), they rely on personal contacts and faceto-face interactions in order to be closer to their customer base (carson et al., 1995). marketing practices of such firms are also most likely based on interpersonal relationships at individual level (coviello et al., 2000). given the theoretical justifications and existing evidence supporting the importance of cfi (e.g., biemans, 1991; parkinson, 1982; ramani & kumar, 2008; shaw, 1985), in this paper we focus on customer-firm interaction itself as an outcome variable and argue that factors influencing cfi are as important as its consequences, especially in the entrepreneurship/small business literature. accordingly, cfi is conceptualized as a deliberate activity that is performed by an entrepreneur or his firm strategically, to gain information and improve the firm’s products or services, and ultimately enhance the firm’s performance (moorman, 1995). individual level antecedents of cfi user entrepreneurs. entrepreneurs often start their venture based on an unfulfilled need or based on some unsatisfactory experience with a product or service. this type of personal experience underlies the emergent and personal nature of new venture startup. shah and tripsas (2007) coined the term accidental entrepreneurs in reference to individuals who were users of a product or service and transformed it into an entrepreneurial venture. such users realize an idea through their own use and then share that idea with other users (shah & tripsas, 2007). similar to past definitions, in this work we identify user entrepreneurs as an individual or a group of individuals who commercialize a new or modified product or service that they use / have used in their day to day life. user entrepreneurs are commonly distinguished into two categories; end-users and professional-users. end-user entrepreneurs use the product or service in their daily life and feel a need for improvement or identify beneficial improvements. such entrepreneurs start commercializing their own product or services. in contrast, professional-user entrepreneurs use the product or service in professional context or at their job, and leave their job to make changes in the product and service and commercialize it. in this study, we considered user-entrepreneur as an overarching category, reflecting both types, because the motive of an end-user or a professional-user is same – to build on a previous user experience – and once they decide on developing a product or service, their course of action will be similar (e.g., huefner & hunt, 1996; liang & dunn, 2007). past research has provided an array of evidence for effects of user entrepreneurship, and end-user research has recorded the success of end-user entrepreneurship in such areas as automobile (franz, 2005), mountain bicycle (luthje, herstatt, & von hippel, 2005), or rodeo kayaking (baldwin, hienerth, & von hippel, 2006). similarly, professional-user entrepreneurship research documented its role in ice harvesting industry (utterback, 1994), typesetting (tripsas, 2008), and probe microscopy (mody, 2006). consistent with past research, it is proposed that this individual level factor will affect customer-firm interaction. specifically, cfi level will be higher in firms started or managed by a user-entrepreneur because the personal experience associated with end-user journal of small business strategy vol. 26 ● no. 2 ● 2016 28 renders the entrepreneur more open to and appreciative of input from customers. further, former end-users turned entrepreneurs are more likely to recognize the potential benefits associated with listening to customers and incorporating their input into the firm’s existing products or services. finally, given the relatively large impact that entrepreneurs have on their firm’s processes, it is likely that those personal experiences will translate into established processes and mechanisms in the firm that encourage user productive and continuous customer and firm interaction. therefore, hypothesis 1: cfi is higher in firms started or managed by user-entrepreneurs compared to firms started or managed by individuals who were not user-entrepreneurs. entrepreneur’s/owner’s work experience. a second factor that likely affects the extent of cfi is the decision maker’s prior experience with customer interaction. prior experience affects perceptions of success feasibility and the ease with which one can engage in a behavior, making a behavior more habitual and easy to perform (ajzen, 1991; ajzen & fishbein, 2000). familiarity with the process of customer interaction will likely lead to confidence and self-efficacy towards the behavior (bandura, 1977a; bandura & wood 1989), which will influence the intentions to engage in it. further, situations that emerge and that are similar to ones experienced in the past likely trigger habitual response sequence further enhancing the likelihood of engaging in behavior in question (ouellete & wood, 1998; ajzen, 2002). it is thus posited that an entrepreneur’s / owner’s past experience in interacting with customers enhances the self-efficacy regarding managing the cfi process. entrepreneurs who have job experience specifically in areas where they come in direct contact with the customers such as customer service, sales, retail etc. will be more inclined to interact with customers. prior customer experience also provides knowledge and skills in handling the variability in cfi. since in entrepreneurial / small firmsthe entrepreneur / owner carries much influence on the policies and procedures carried by the firm, it is expected that the pattern of interaction with customers will be consistent with and reflect the interaction orientation of the key managing individual therefore, hypothesis 2: cfi is positively related to the customer experience of the firm’s key manager. firm level antecedents product/service newness. when a product/service is new and not familiar to the potential customers, it is associated with ambiguity and uncertainty regarding its features and benefits, its overall quality and usefulness, and its application. in fact, veryzer noted that resistance could develop in part, due to “products not fitting with the customers’ knowledge structure or schema for products or current consumption patterns”(1998, p. 144). the degree of incompatibility of a new product with customers’ current life or business situation increases customer resistance, and the greater the adjustment required for the new product/service on behalf of customers, the lower will be its acceptance rate (veryzer, 1998). further, when products or services are new, not only is it difficult to predict the product’s true and practical applicability but it is also difficult for the customer to provide the accurate feedback. the lack of feedback journal of small business strategy vol. 26 ● no. 2 ● 2016 29 information from the customer further increases the difficulty of understanding the use of the product in actual customer environment (narver et al. 2004). the reality of resistance and ensuing lack of communication in face of product/service newness underscores the importance and potential benefits of effective customer-firm interaction. cfi facilitates communication and sharing of feedback, and allows customers to provide input to improve and enhance new product/service development and refinement. further, cfi contributes to increasing customers’ familiarity with the new product/service and facilitates its acceptance. cfi not only enhances the validity of the new product, but also provides customers’ feedback and reaction towards the product which in turn can be used by the firm to modify and align the product based on customers’ need. accordingly, it can be argued that, because the benefits embodied in effective cfi become even more important when products or services are new, greater degrees of customer-firm activities will be expected. hypothesis 3: cfi is positively related to product/service newness. costs and investments. when firms invest a high amount of capital in producing or generating a product or service, their risk in case of failure is also greater. usually, entrepreneurs use their equity to fund their product or service. however, most of them need resources from external stakeholders at some stage of the development of their ventures (zott & huy, 2007), and when the cost of production or operation is high, the resources from external stakeholders are also at risk. when risk is high, there would be increased pressure to mitigate the risk, and it is likely that firms will seek means to lower the risk, such as by increasing interaction with potential customers to share information and product details. in other words, cfi becomes a strategic tool for entrepreneurs/owners to lower risk and increase chances for positive returns on invested costs in that it facilitate the dissemination of product or service information to the customers. accordingly, the greater the costs (and risks), the more important it is to inform customers about the associated benefits and potential value from the products/services. notably, because customers acquire a good amount of knowledge about a firm or business through cfi (mills & margulies, 1980; durkin et al., 2003), cfi alleviates the perceived uncertainties associated with the firms’ products and services (jones et al., 2000). lastly, it is expected that the knowledge disseminated through interaction will facilitate the purchase decision and may reduce customer’s hesitation due to uncertainty or prices. therefore, hypothesis 4: cfi is positively related to the cost of the firm’s product/service. switching costs. entrepreneurial/small firms face great challenges associated with drawing customers, especially when the customers already have a relationship with another competitor. consumers’ switching cost from existing product/service to the firm’s product/service can be a considerable hindrance for firm success. when consumers incur considerable costs by switching from existing provider to a new one, the costs may serve as “an indicator of consumers’ reluctance to switch from one brand to another” (lee & ng, 2007, p, 330). when consumers’ switching cost is high, journal of small business strategy vol. 26 ● no. 2 ● 2016 30 entrepreneurs/managers trying to launch product/services will have to exert extra efforts and resources to persuade buyers to buy their product (lieberman & montgomery, 1988). in such instances, entrepreneurs/managers will seek means to convey the benefits of their products by interacting with the potential customers. for instance, firms can offer training and free presentations to new users in order to familiarize with the product or service, reducing learning costs. cfi constitutes such a means to facilitate information and potentially reduce the switching costs that customers encounter. hypothesis 5: cfi is positively related to the switching cost associated with the firm product/service. external antecedents environmental dynamism. the volatility of external environment affects the nature and scope of information available to decision makers. from a decision making perspective, when making decisions in contexts of stable environments, decision makers can make optimal decisions even if few alternatives and limited information is available (mintzberg, 1973). however, environmental dynamism or volatility threatens the rationality in decision making process, and predictions become more challenging while causality becomes more ambiguous (dess & beard, 1984; priem, rashid, & kotulic, 1995). in order to make sense of the environment, decision makers must invest greater resources in studying the environment (miller & friesen, 1983). eisenhardt (1989) found that in dynamic environments, firms accentuate the cognitive processing of comprehensive decision making by collecting and using more information and seek more alternatives. using higher levels of information increases the chances of recognizing environmental changes (sutcliffe, 1994) which in turn enhances the sense of controllability over the environment (thomas, clarke, & gioia, 1993). personal contacts and face-to-face interaction with customers further become highly important in dynamic environment because of the resource constraints and low flexibility faced by entrepreneurs (hisrich, 1992). due to constantly changing customer preferences in the dynamic environment, resource orchestration becomes critical (sirmon, hitt, & ireland, 2011) hence firms need higher level of information to effectively channel the resources to the relevant activities that are crucial in a dynamic environment. therefore, we argue that cfi will increase in entrepreneurial / small firm if they perceive that the environment is highly dynamic. hypothesis 6: cfi is positively related to the dynamism of the environment in which the firm operates. method sample the data were obtained from 172 entrepreneur / small business owners. gender distribution of the participants was 122 males and 50 females. the average age of respondents was 43 years and the average work experience in their firm was 11 years. participants stated that they were owners of the business and that they were involved in the day to day operations of their business. twenty one percent of the businesses were from the retail sector, 51% were from the personal and business services sector, and 13% were from manufacturing, journal of small business strategy vol. 26 ● no. 2 ● 2016 31 construction, transportation, or technology. the remaining participating businesses were spread across various other industries such as music, healthcare, media, or multi-sectors. please see the respondents demographic in table 1. data collection procedure students in an upper level undergraduate entrepreneurship class at a large southwestern university in the united states were given a class assignment that included as one of its components interviewing entrepreneurs/small business owners. the snow ball sampling technique was used to identify the relevant respondents (heckathorn, 2011). past research, specifically entrepreneurship and small business research has used snowball sampling technique to collect the data from entrepreneurs (e.g., peake, davis, & cox, 2015; mcgee, peterson, mueller, & sequeira, 2009; schindehutte, morris, & brennan, 2003). in this technique, individuals that fall under a specified criteria are identified and are approached to get information for similar individuals. despite of lacking the randomness in the sampling, the snowball sampling technique allows to reach more diverse sample (mcgee et al., 2009). accordingly, the students were instructed to arrange for interviews with individuals who are business owners. part of the assignment was to interview an entrepreneur / small business owner and administer a survey. the interview involved going through a structured interview document that included open-ended questions as well as close-ended, scaled questions. the close-ended questions in the survey consisted of demographic and business profile questions and questions about business practices, whereas the open-ended questions pertained to the respondent’s personal experience as an entrepreneur and business table 1 respondent demographic frequency percentage gender male 122 71 female 50 29 ethnicity caucasian, hispanic 28 16 caucasian, nonhispanic 106 61 african american 22 12.6 asian or pacific islander 7 4 other 11 6.3 education high school or less 13 7.5 some college or technical training 53 30.5 associate’s degree 17 9.8 bachelor's degree 64 36.8 master's degree 17 9.8 doctorate 9 5.2 age 19 34 48 27.6 35 49 56 32.2 50 64 59 33.9 65+ 7 4 entrepreneurial experience novice 101 58 experienced 71 32 strategic orientation growth 102 58.9 family business 67 39.9 industry retail 36 21 service 88 51 manufacturing, construction, transportation, or technology 22 13 other 26 15 journal of small business strategy vol. 26 ● no. 2 ● 2016 32 owner. the typical process was one where the student contacted the interviewee, introduced him/herself and the purpose of the interview, and arranged for a meeting. in the course of the meeting the student went over the structured interview document. the interviewee either answered/completed all questions at that time, or another meeting was arranged with the student. students had approximately 4 weeks from the time the assignment was given to complete it. once due, the student turned in the assignment along with a copy of the structured interview document. the data from the survey instrument was reviewed and entered, and was then used for statistical analyses. all businesses were in the united states, and the vast majority was in the southwest. the structured interview documents were completed by an individual only if he/she fulfilled the criteria of being an owner of the business, typically a founder or co-founder of the business, and who was involved in the dayto-day operation of the business. measures dependent variable. the dependent variable was customer-firm interaction (cfi). this measure is based on the customer-firm interaction scale used by huffman and skaggs (2010) and consisted of five items asking the respondent about the extent to which she/he agrees with statements regarding the firm’s interaction with its customers (see appendix). the five items were rated on a 7-point likert type scale. the five items had a reliability of cronbach α = .84, and were averaged to create the cfi indicator. independent variables. six independent variables were used, two reflecting individual characteristics, three reflecting product characteristics, and one reflecting the environment. individual characteristics were gauged by a) whether respondent is a userentrepreneur, and b) the respondent’s prior experience interacting with customers. the user-entrepreneur indicator was measured by asking the respondent to think about the product or service around which the company was founded and to indicate a) whether a close variation of the product/service was used by the respondent or other founders for personal use – personal end user, and, b) whether a close variation of the product/service was used by the respondent of other founders at previous business or job – professional end user (shah, winston smith, & reedy, 2012). answers were coded as 1, yes and 0, no. forty seven respondents (27%) indicated yes to being an end-user, 52 respondents (29.9%) indicated yes to being a professional-user, and 7 respondents (4%) indicated yes to being both. given the distribution of the responses, user-entrepreneur was defined as a respondent who answered yes to one or both of the items, which reflected 81 individuals or 46.6% of the respondents, while a non-userentrepreneur was an individual who did not indicate being either an end-user or professional-user (92 individuals or 52.9% of the respondents. the second individual level indicator was based on the extent to which the respondent had prior experience with customer interaction. a measure was created asking the respondent to think about their work experience over the past 5 years and indicate the extent to which their work experience involved six types of behaviors associated with working with customers (see appendix). answers were coded on a 7-point likert type scale. the six items (cronbach α = .83) were averaged to create the customer experience measure. three variables were used to gauge the effect of product/service characteristics. journal of small business strategy vol. 26 ● no. 2 ● 2016 33 product/service switching costs were measured using the scale introduced by yang and peterson (2004). this scale is based on 5 items that ask respondents to indicate their agreement with various manifestations of high switching costs (see appendix). the scale was based on a 7-point likert type scale, where higher values suggest higher switching costs from competitors to the firm’s product/service. the five items (cronbach α = .77) were averaged to create the switching costs measure. product newness measure was assessed based on a measure used by the panel study of entrepreneurial dynamics. this is a single item measure where respondents were asked to indicate their agreement (on a 7points scale) with the statement “when we target new customers, they typically consider our product/service to be completely new and unfamiliar.” product/service costs is a newly developed measure which was assessed by asking respondents to assess how their firm compares to its close competitors on three items indicating the financial product or service investments (see appendix).the three items (cronbach α = .73) were averaged to create a single indicator of product costs. perceived environmental dynamism is measured using a scale developed by schilke (2014). the scale was modified in the context of present study. this scale is based on 5 items that ask respondents to indicate whether they perceive external environment highly dynamic (see appendix). the scale was based on a 7-point likert type scale, where higher values suggest higher environmental dynamism. the five items (cronbach α = .75) were averaged to create the perceived environmental dynamism measure. control variables. five demographic control variables were included. a) respondents’ work experience in the industry was assessed, measured in years; b) respondents’ highest education level was included, coded as 1, high school or less, 2, some college, or technical training, 3 associate’s degree, 4 bachelor’s degree, 5, g=master’s degree / professional, and 6 doctorate. c) company size was controlled for, measured as the number of full time employees in the firm. lastly, to control for possible industry effects, the type of venture was coded as being in the retail, service, product based sectors, or other. a dummy variable was created and was included in the analyses as control. descriptive statistics and correlations of study variables are presented in table 2. results means, standard deviation, and correlations of all the variables used in this study are presented in table 2. it is evident from the correlation table that there is merit to further evaluate the antecedents for the cfi. for example, the individual level variables customer experience and user-entrepreneur have significant correlation with cfi (p<0.01 and p<.05 respectively). also, product newness is significantly correlated with cfi (p< 0.05). although we do not see very high correlation between individual variables we examined the variance inflation factor (vif) for all the regressions, just to ensure that there are no potential multicollinearity issues. among all regressions, the range of vif values was 1.03 to 2.28 which is well within acceptable range and suggests that there are no serious problems of multicollinearity. journal of small business strategy vol. 26 ● no. 2 ● 2016 34 table 2 intercorrelation and descriptive statistics for study variables mean sd 1 2 3 4 5 6 7 8 9 10 11 12 1 industry experience 17.23 12.31 _ 2 education 3.27 1.33 .07 _ 3 firm size 24.45 110.63 .33** -.05 _ 4 sector retail 0.21 0.41 .06 -.04 .03 _ 5 sector service 0.51 0.50 .06 .03 -.13 -.52** _ 6 sector production 0.14 0.35 .07 -.04 .21** -.20** -.40** _ 7 user-entrepreneur 0.53 0.50 -.07 .02 -.16* .00 -.09 .07 _ 8 customer experience 5.75 1.25 -.05 .01 -.08 -.05 .04 .00 .10 _ 9 product/service newness 3.36 1.93 -.15 .12 -.05 .11 -.07 -.04 .00 .10 _ 10 product/service costs 3.70 1.27 .16* .06 .06 .06 .01 -.05 -.05 .06 .00 _ 11 product/service switching costs 2.34 1.17 .00 -.04 .02 -.09 .00 .09 .14 -.02 .27** .11 _ 12 environmental dynamism 4.26 1.35 -.13 .09 -.09 -.05 -.16* .07 .11 .17* .22** .09 .14 _ 13 customer-firm interaction 5.38 1.44 -.07 .11 -.04 .07 .02 .01 .18* .21** .17* .14 -.01 .22** *p<.05, **p<.01. ***p<.001. journal of small business strategy vol. 26 ● no. 2 ● 2016 table 3 presents the regression results for the antecedents of cfi. we tested four different models. the purpose of the different models was to analyze and gain information separately on individual antecedents, product related antecedents, and environmental antecedents, as well as on all antecedents in combination. we used hierarchical ols regression, where the control variables were entered in the first block, and the independent variables entered in the second block. individual level variables the first two hypotheses dealt with the effects of individual level variables – userentrepreneur and customer experience and results are presented in table 3 model 2. hypothesis 1 states that user-entrepreneurship will be positively associated with the cfi. results show that the coefficient for userentrepreneur is positive and significant (table 3, model 2, β = 0.16, p <.05). this predictor remains significant in the full model when all independent variables are included (table 3, model 5: β = 0.17, p <.05). these results support hypothesis 1. hypothesis 2 proposed that the entrepreneur/manager’s customer experience is positively related to the cfi. results show that this predictor is positive and significant (table 3, model 2: β = 0.19, p <.05). this predictor remains positive and significant in the full model as well (table 2, model 5: β = 0.13, p <.05), supporting hypothesis 2. notably, model 2 shows that the unique contribution of the individual level variables to explaining cfi variance is 10%, lending support to the research model proposing individual level variables as a relevant antecedent for cfi. table 3 regression analyses for effects of independent variables on cfi model 1 model 2 model 3 model 4 model 5 step 1: control variables industry experience -0.10 -0.09 -0.10 -.08 -.08 education level 0.12 0.12 0.09 .10 .08 firm size 0.01 0.03 -0.02 -.01 .03 industry – retail 0.20† 0.21* 0.17 .25* .22 industry – service 0.18 0.19† 0.18 .26* .25 industry – production 0.14 0.12 0.15 .15 .15 step 2: independent variables user entrepreneur 0.16* .17* customer experience 0.19* .13* product newness 0.16* .12† costs 0.15* .13* switching costs -0.07 -.09 environmental dynamism .25** .18* equation f 1.16 2.45* 1.69† 2.48* 2.82** r2 .04 0.10 .08 .09 0.17 r2 change .06 .04 .06 0.13 f change 6.13** 2.69* 10.10** 4.35** n=172 entries are βs, standardized regression coefficients. †p < .1, *p<.05, **p<.01. ***p<.001. journal of small business strategy vol. 26 ● no. 2 ● 2016 36 product/service level variables the next three hypotheses dealt with the effects of product/service related factors (product newness, product/service cost, and switching cost) and results are presented in table 3 model 3. hypothesis 3 proposed that product newness is positively related to the cfi. as shown in model 3, the coefficient for product newness is positive and significant (table 3, model 3: β = 0.16, p <.05). this result remain moderately significant in the full model (table 3, model 5: β = 0.12, p < 0.1). therefore, hypothesis 3 is supported. hypothesis 4 proposed that product/service cost is positively related to the cfi. results show that the regression coefficient for product/service cost is positive and significant (table 3, model 3: β = 0.15, p <.05). this predictor remains positive and significant in the full model, (table 3, model 5, β = 0.13, p <.05). hypothesis 4 is thus supported. hypothesis 5 posited that switching costs will be positively related to cfi. results show that the coefficient is not significant (table 3, model 3, β = -0.07, n.s., and table 3, model 5, β = -0.9, n.s.). hypothesis 5 is therefore not supported. observing model 3, we note that the variance of cfi explained uniquely by product/service predictors is 8%, which lends support to the research model proposing product/service factors as relevant predictors for cfi. environmental variable the last hypothesis deals with environmental dynamism. hypothesis 6 proposed that environmental dynamism is positively related to the cfi. results show that the regression coefficient for environmental dynamism is positive and significant (table 3, model 4: β = 0.25, p <.01). this predictor remains positive and significant in the full model, (table3, model 5, β = 0.18, p <.05). hypothesis 6 is thus supported. post hoc analyses in attempt to shed further light on why and when different antecedents play a role in the decision to engage in customer-firm interaction, we conducted a series of analyses in which the sample was parsed based on specific variables and compared the degree to which the antecedents identified indeed have an effect. we chose four variables: two individual – gender and start-up background – and two firm related factors – strategic orientation and performance. the analyses are post hoc, and are therefore exploratory in nature. they are appropriate in the present context which is characterized by paucity of research on antecedents of cfi, and are intended to provide further insights that can explain the role of the antecedents and to trigger further research. gender customer-firm interaction draws on the relationship and ongoing interaction and collaboration between two firms. in entrepreneurial/small firms, the inclination of the entrepreneur/owner likely affects the overall openness towards establishing an ongoing interaction process with partner firms. as such, the relational tendencies of the entrepreneur /owner play a role, and such relational abilities may differ as a function of gender. further; men and women differ in their business abilities and come into the business context with different sets of skills. according to the social feminist theory, a key explanation for gender differences has to do with differences in socialization processes between the genders. the implication is that men and women can develop equally effective journal of small business strategy vol. 26 ● no. 2 ● 2016 37 yet different traits (fischer, reuber, & dyke, 1993). men and women were found to have different experience and background, their objectives of starting and running a business are different, and the process of entrepreneurship is also different (verheul, van stel, & thurik, 2006). additionally, female entrepreneurs are found to be more risk-aversive as compared to their male counterparts especially when it comes to the personal assets (coleman, 2007). studies have also suggested that men and women differ in their propensity to grow the business and attitudes toward failure such that men tend to pursue a more competitive-fast pace growth whereas women tend to grow their business at slower rate (grilo & irigoyen, 2006; jennings & cash, 2006). accordingly, it is expected that different business or personal factors will affect the tendency to engage in cfi across the genders. hypothesis 7a: different antecedents of cfi will be observed in firms run by male and female entrepreneurs/owners. start-up background we wanted to explore whether the personal entrepreneurial capital and knowledge plays a role in moderating the effects of the antecedents on cfi. we suspected, for example, that experienced entrepreneurs will have greater appreciation for cfi due to their past experience. therefore, it is expected that among individuals with less entrepreneurial experience (novice entrepreneurs), cfi will be driven mainly by their personal individual experience, whereas among more experienced entrepreneurs the business and environmental factors may play a more important role in driving the cfi. hypothesis 7b: different antecedents of cfi will be observed in firms run by individuals who have started a business in the past and those who have not. strategic orientation we split the sample based on whether the firm was intended to become a growth firm focused on great profit, or whether it was primarily to provide family income. one hundred and three of the firms indicated founding purpose of high profit and growth, whereas 68 indicated the purpose of providing family income. we suspected that the factors that drive entrepreneurs/key manager to engage in cfi may differ, for example, due to increased pressures to innovate in growth oriented firms, or due to increased importance of the personal capabilities and experience of the entrepreneur/owner in the small firm. further, it may be that growth oriented firms deploy a more aggressive strategy in attempt to capture markets and because of that make different decisions regarding the nature of their interaction with their customers. hypothesis 7c: antecedents of cfi will be different between firms with growth orientation and firms with family/small business orientation. performance the last factors we explored are the performance factors. we wanted to see if high and low performing firms utilize cfi to different degrees and if the relationship between antecedents and cfi is different between high and low performing firms. our focus was on perceptions of strategic performance. we suspected that it is possible that different antecedents will have stronger effect on the firm, depending on its overall performance, and that entrepreneurs will have different pressures driving their decision journal of small business strategy vol. 26 ● no. 2 ● 2016 38 depending on the strategic and financial performance of their firms. hypothesis 7d: antecedents of cfi will be different between high and low performing firms. measures individual level factors. gender was measured by asking the respondent to indicate their gender. the sample consisted of 123 men (70.7%) and 51 women (29.3 %). personal entrepreneurial experience was measured by asking the respondent to indicate if they have ever started a business. one hundred and two respondents (58.6%) indicated they have never started a business (novice entrepreneurs), while 72 respondents (41.4%) indicated that they had started a business. firm level factors. performance was measured by three items to which the respondent indicated their agreement to on a 7-point likert type scale adapted from schilke (2014). the three items had a reliability of 0.726, and were averaged to create the performance measure. the sample was split at the median (4.51) to create the high strategic performance group (average = 5.33) and the low strategic performance group (average = 3.33). strategic orientation was measured by asking the respondents about the primary purpose for establishing the business. it was measured as a dichotomous variable with “1” representing the purpose of profit and growth and “2” represents the purpose of providing family income. results results for the post hoc analyses are presented in table 4. model 1 presents the results for the gender factor, showing that different antecedents of cfi are prevalent among men and women entrepreneurs. for males, product newness and environmental dynamism are significant predictors of cfi (β = 0.22, p <.05 and β = 0.20, p <.05, respectively) whereas, among female entrepreneurs, being a product user and higher product costs positively predict cfi (β = 0.43, p <.05 and β = 0.26, p <.10, respectively). it was also hypothesized that antecedents for cfi will be different depending on the respondents’ experience. results (table 4 model 2) show that the regression model is not significant for novice entrepreneurs, whereas for experienced entrepreneurs, having a product/service that is new is typically positively associated with increased cfi (β = 0.30, p <.05). analysis of the antecedents’ effects as a function of the firm’s strategic orientation (table 4 model 3) show that among businesses oriented towards profit and growth, being a user-entrepreneur, having higher product costs, and experiencing dynamic environment is positively associated with higher levels of cfi (β = 0.22, p <.05, β = 0.21, p <.05, and β = 0.17, p <.10, respectively) while switching costs is negatively associated with cfi (β = -0.27, p <.05). the model for businesses oriented as a family business is not significant. lastly, when analyzing the antecedents as a function of firm performance (table 4 model 4). results show that a positive association between costs and cfi and between environmental dynamism and cfi in the high performance firms (β = 0.21, p <.05 and β = 0.27, p <.05 respectively) but no significant association in the low performance firms. a summary of the hypotheses and the findings is presented in table 5. journal of small business strategy vol. 26 ● no. 2 ● 2016 39 table 4 post hoc analyses for effects of independent variables on cfi entries are βs, standardized regression coefficients. †p < .1, *p<.05, **p<.01. ***p<.001. 2-tailed. model 1 gender model 2 entrepreneurial experience model 3 strategic orientation model 4 firm performance males (n=122) females (n=50) novice (n=101) experienced (n=71) growth business (n=102) family business (n=67) lower half (n=86) upper half (n=86) step 1: control variables industry experience -.01 -.23 -.08 -.10 -.05 -.11 -.02 -.08 education level .18* .02 -.02 .21† .12 -.11 .03 .17 firm size .01 .23 .08 .03 .00 .01 -.01 .05 industry – retail .19 .26 .10 .52** .18 .41* .31* .14 industry – service .11 .48† .13 .47** .23 .43* .33* .15 industry – production .17 -.01 .03 .34** .19 .14 .35* -.07 step 2: independent variables user entrepreneur .11 .43* .19† .06 .22* .16 .14 .15 customer experience .06 .14 .20† .02 .15 .07 .15 .13 product newness .22* -.02 .02 .30* .10 .12 .18 .05 costs .08 .26† .14 .02 .21* .05 -.01 .21* switching costs -.20* -.11 -.07 -.02 -.27* .17 -.13 -.03 environmental dynamism .20* .07 .18 .17 .17† .23† .09 .27* equation f 2.55** 1.89† 1.37 2.55* 2.17* 1.42 1.30 2.28* r2 0.22 .37 0.16 .34 0.23 .24 0.17 .27 journal of small business strategy vol. 26 ● no. 2 ● 2016 40 table 5 summary of hypotheses and findings discussion & implications our research questions dealt with the factors that influence customer-firm interaction (cfi). the results support the notion that cfi is used by entrepreneurs and small business managers in a strategic fashion, to promote strategic goals and positions. the findings from our research contribute to the overall literature on cfi by developing and testing the hypotheses that connect cfi with individual, firm, and environmental factors, and have implications for management and strategy. as expected, firms owned or managed by user-entrepreneurs were found to engage in cfi to a significantly greater extent than the firms started or owned by individuals that are not end-users. this finding supports the idea that user-entrepreneurs are more open to cfi and are possibly more appreciative of its potential benefits. this result also validates the positive relationship found between prior experience in customer related jobs and cfi, and is consistent with research that shows the relationship between prior experience and managerial decision making. results for the product related variables supported the notion that firms that introduce new products or services and that firms that incur greater production costs engage in cfi to a greater degree. we hypothesized that this would occur due to the higher risk associated hypothesis independent variable & expected effect finding h1 user-entrepreneur positively related to cfi supported h2 prior customer experience positively related to cfi supported h3 product newness positively related to cfi supported h4 product/service cost positively related to cfi supported h5 switching costs positively related to cfi not supported h6 environmental dynamism positively related to cfi supported h7a antecedents will defer by entrepreneur’s gender supported h7b antecedents will differ by entrepreneurial experience supported h7c antecedents will differ by venture’s strategic orientation supported h7d antecedents will differ by firm performance supported journal of small business strategy vol. 26 ● no. 2 ● 2016 41 with investments and uncertainty in new and high-cost products, and that the risk will drive firms to try and mitigate it through customer interaction. results support this logic, and suggest that cfi may be a way for risk mitigation for small businesses. interestingly, the notion that firms may consider cfi a way to mitigate risk is consistent with the positive association between cfi and environmental dynamism. our hypothesis was based on research that showed that in turbulent and fast changing environments it is critical for firms to be proactive and dynamic in responding to the changes in order to sustain competitive advantage (rapp, trinor, & agnihotri, 2010), and we posited that cfi will facilitate environmental understanding and responsiveness on the part of the firm. the positive effects found between cfi and environmental dynamism supports the notion that, when information is changing rapidly, cfi is perceived as an effective tool for collecting information and responding to customers. as such, cfi can be perceived as a means for facilitating efficient responsiveness to market changes, and as delivering responsiveness that is critical to business success especially in dynamic and competitive contexts. we did not find support for the hypothesis that the firms whose products’/services’ switching cost is high will have higher cfi. the logic behind the hypothesis was that in instances where the costs for consumers to switch to the entrepreneurial firm are high, the firm will engage in more cfi in attempt to lower the cost to the consumer and to make it easier for them to switch. results did not support this hypothesis. it may be that the respondents in our sample considered customer commitment to established brands a strong bond to break and found no merit in trying to use cfi to win such customers. alternatively, it may be that in our sample, respondents are using methods other than cfi to overcome the barriers of switching cost. for instance, benefits to encourage switching include welcoming perks, contract termination fees, or various online activities and marketing tactics (bakos, 1997; lynch & ariely, 2000; yang & peterson, 2004). clearly, the above explanations have not been directly tested, but do warrant further research. results from post hoc analyses lend support to the notion that cfi is not universal and that its antecedents vary as a function of context. the exploratory investigation showed that cfi is triggered by different antecedents in firms run by men versus women entrepreneurs and that the effect is different for novice and experienced entrepreneurs. post hoc analyses also show that the antecedents are more predictive of cfi among firms pursuing growth orientation (compared to firms focused on lifestyle/family orientation) and that costs and environmental antecedents drive cfi among the higher performance firms compared to lower performance. these findings suggest that cfi may be related to firm outcomes such as performance or growth, and further research is needed to establish the processes underlying such effects. normative implications individual experience. our results show that prior exposure to customer interaction and that being a user entrepreneur is positively associated with cfi. both these factors are essentially characteristics of individuals who had an opportunity to gain insight on business activity from the customer perspective, either by interacting with customers or by being a user of the product/service. it appears that openness toward cfi increases among journal of small business strategy vol. 26 ● no. 2 ● 2016 42 entrepreneurs who had been in the role of customers/users in the past, and who are more aware of practical input that a firm may obtain from its customers. in other words, personal experience with customers and as userentrepreneurs likely leads to greater appreciation of the value of engaging with customers to enhance product/service value, and perhaps even provides personal skills that facilitates such interaction. this finding not only correspond to other research on the effects of prior experience (barnir, 2014; shane, 2000; venkataraman, 1997), but is also consistent with research on the value of managerial experience and its contribution to strategic decision making. from practitioners’ standpoint, the relationship between executives’ personal background and cfi can shed light on why some firms choose to engage in cfi and others do not. further, to the extent that personal experience is associated with cfi, it may also explain resistance to this process, and may suggest appropriate interventions, if cfi is a desirable strategic outcome. lastly, practitioners may wish to explore if other personal experience related factors are associated with cfi and how they can be utilized in the business context. hiring and training. evidence of the relationship between founders’ and owners’ previous user-entrepreneur and customer experience and firm cfi can be utilized by small businesses when making hiring decisions as well as for training purposes. for example, to the extent that a firm wants to promote cfi, it may want to boost its human resources with customer service experience. as such, this experience may become a factor in hiring and selection, or, alternatively training may be initiated to support such practices. further, it may be useful to explore in research or experimental fashion the source of the effect of user-entrepreneur and customer experience on cfi. does the effect stem from increased relational skills that enable improved communication and trust, or is it based more on informational resources and input received? those issues were not the focus on this investigation, but can be valuable for practitioners and managers who wish to implement cfi. innovation and product design. findings of the positive relationship between product/service novelty and cfi suggest the possibility that cfi may be a means for diffusing of innovations and facilitating new product acceptance. it is logical to assume that novelty comes with uncertainty for firms and customers, and when new products/services are being developed, a high degree of customer interactivity becomes an important factor in facilitating understanding and acceptance of the new product/service. further, high cfi also enhances understanding of customer related issues, and increases the likelihood of effective market targeting and fit between a firm’s products/services and customer needs. cfi can thus become an effective means for assisting in the introduction of new products of services. firms should thus be made aware that enhancing cfi becomes especially important when the firm is attempting to introduce new products or services, and that cfi efforts may have direct effect on the successful acceptance of innovations and innovative products or services. risk and uncertainty. the positive association between cfi and innovation, cfi and product costs, and cfi and environmental dynamism suggests that cfi may be used as a means to journal of small business strategy vol. 26 ● no. 2 ● 2016 43 mitigate risks associated with volatile environment or product related uncertainties. those effects support the notion that firms see cfi as a strategic tool that can be used to promote specific objectives. those results have managerial implications as they suggest that when new products are introduced, when costs are high, and when the environment is volatile, cfi can become a useful resource for firms. for example, when the product/service is new to the market or when the environment is volatile, firms can create more customer oriented jobs where the focus is information and feedback, or train employees to be more receptive and analytical to sift useful information. inter-firm variation. overall, findings from the post hoc analyses suggest that cfi is associated with specific characteristics of individual managers such as their gender or entrepreneurial experience, and that some individuals are more comfortable and are more likely to use it than others. similarly, the variability found in cfi as a function of firms’ strategic orientation or profitability suggests that cfi can serve strategic purposes and can be used to support strategic objectives. however, from a practical perspective, it is important for managers to recognize that cfi is not triggered by and is not associated with the same strategic factors in all firms. further research is clearly needed that provides more information as to how and why firms differ as well as to the effects of cfi, and once this information is available it could be a useful tool for managers as they make strategic decisions. limitations and future research the study explored an area that has not been studied as of yet, and has several limitations. first, in this study the focus was on main effects, to identify those categories of antecedents that affect cfi. we did not explore secondary effect of those antecedents, because our focus was on identifying the relevant antecedents. exploring indirect effects is warranted to provide a more comprehensive understanding of the effects of the predictors. second, our focus in this study was on specific factors that we considered especially relevant to understanding the construct. clearly, those factors were found to play an important role in cfi, however, other factors such as other firm or individual factors, technology, or resources may also play a role. lastly, our study focused on entrepreneurial / small firms. such firms are different from larger more established ones, and the results therefore are not generalizable beyond the scope of the types of firms investigated. it may be that the individual factors identified, carry more weight in entrepreneurial / small firms given the central role of the entrepreneur/founder compared to larger firms. those and such issues should be the focus of future studies. this study provides initial results to a model that investigates the antecedents of customerfirm interaction. our focus was on three categories of predictors – individual level, product/service level, and environment. overall, results of the study support the model. results suggest that, in entrepreneurial / small firms, the degree of a firm’s interaction with its customers is affected by the entrepreneur’s prior personal experience with customers as well as by the experience as user-entrepreneur. results also suggest that certain product/service characteristics – namely journal of small business strategy vol. 26 ● no. 2 ● 2016 44 newness and costs – are associated with enhanced cfi. the study suggests several avenues for future research. first, given that we included individual factors that explain a relatively large portion of the variance (r2 = 0.11) of cfi, it is appropriate to further explore the role of additional individual factors. for example, are other individual factors such as abilities, attitudes, or other demographics important? or, what role do relational and interpersonal skills play, if any, in affecting the extent of the firm’s cfi? second, it would be interesting to explore moderating factors to the effects of personal and product factors. for example, does industry volatility or uncertainty affect the way in which firms use cfi given personal and product characteristics? third, results from post-hoc analyses suggest that different antecedents are prevalent among men and women entrepreneurs. future research should explore these differences to see why these differences exist. for example, men may be more outward oriented and focus on market and environment whereas, women are more inward oriented and rely on their own experience. lastly, future research should expand the model used in the present study to include not only additional predictors but also additional outcomes. for example, including firm performance as a final outcome would place cfi as a possible mediating variable. in such instances, researchers could explore 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(2007). how entrepreneurs use symbolic management to acquire resources. administrative science quarterly, 52(1), 70-105. saurabh srivastava is a ph.d. candidate in the department of management at the university of north texas. his research interests include entrepreneurial and strategic decision making, competitive environment, and entrepreneurial innovation. anat barnir is an associate professor at the department of management, the university of north texas. her current research is in the area of entrepreneurship and small business, strategy, innovation, and gender. journal of small business strategy vol. 26 ● no. 2 ● 2016 49 appendix measures measure items measurement customer firm interaction please indicate the extent to which the following statements are correct and accurately depict your firm and its interaction with its key customers. in comparison to our competitors… a) …our employees responsible for producing/providing the service/product spend the majority of their daily working time in face-to-face contact with customers; b) …our company’s employees spend a lot of time dealing directly with customers; c) …our employees often meet directly with our customers to exchange information when producing the product/service; d) …the service/product we provide requires that our key customers work closely with our employees; e) …in order for our firm to produce high quality product/service, it is very important that close interaction be maintained between our company and our key customers. 7-point likert type scale ranging from not at all accurate to very accurate customer experience to what degree has your work experience to date entailed the following activities? a) explaining product/service details to customers/potential customers; b) working with customers to develop/improve products/services, c) acting as a liaison between my company and its customers, d) handling and dealing with customer complaints, e) being involved in gathering customer feedback, f) negotiating sales and terms with customers 7-point likert type scale ranging from minimal degree to very high degree switching costs please indicate your agreement with the following statements: a) it is usually quite a bit of hassle for another firm’s customer to change to our product/service; b) it takes a great deal of time and effort for customers to get used to our products/services; c) the cost, in terms of time, money, and effort, to change to our products is high for the customers; d) when new customers currently working with the competition switch to our company, they have to change costly ancillary processes (or products/services) associated with the main product/service; e) customers are required to abandon many of their existing contracts in order to use our product/service. 7-point likert type scale ranging from strongly disagree to strongly agree product / service costs to the best of your knowledge, please indicate how your firm ranks in comparison to its close competitors on a) financial investment made in the company, b) costs of tools and equipment, c) costs of operation / manufacturing 7-point likert type scale ranging from much lower to much higher st'i'm'o'y differences between women-owned home-based gt office-based businesses: an exploratory study stephanie bardwell ituneycutcnu.edu lisa d. spiller ispi iter@en u. edu john e. anderson jandersn@earthlink,net christopher newport university abstract in tliis paper, the differences between women-owned hoine-based and office-based businesses are explored through an empirical study of 150 attendees of small business workshops and conferences. honte-based and office-based business locations are compared based on an analysis of the following variables: prior industry aml managerial experience, business plan developnient, length of tiine spent planning tlie business, adequacy of starting capital, income level, self ieported success rating, and financial and personal satisfaction levels. frequency data were assembled and cliaiacteristics identified. cross-tabulations and chi square analysis of expected and actual related factors ivas performed with significant factors iilentified. results of this exploratory study suggest that women entrepreneurs with homebased businesses have less employees, work fewer hours, are more likely to hold secondjobs, are not involved in international business activity, and are most ofien located in suburban and rural geographical areas. although there were no significant differences in the business planning activities between home-based and office-bused women entrepreneurs, the study resulis indicate that home-based businesses generate less iiicome, are not perceived to be as successful, and ore not as financially satisfying to tlie entrepreneur as are ofjice-based businesses. introduction according to the national foundation of women business owners (nfwbo), women-owned businesses account for 38 percent of business ownership in the united states and hire onequarter of the american work force —which is double the number of women entrepreneurs found in the u.s. in the early 1980's (nfwbo, 1995, p. 4). in 1999 there were 9.1 million women-owned businesses in the united states, accounting for nearly half of all small businesses in the country (george and lyon, 2000, p. 7). between 1987 and 1996 the number of women-owned firms increased by 78'/o nationwide, outpacing overall business growth by 58 journal ofsmall business strategy vo/. /4, no. 2 fall/winter 2003 nearly 2-to-i (kroll, 1998). according to the u.s. census bureau, women own 17% of retail businesses and 26% of all businesses nationwide (bertagnoli, 2004). women entrepreneurs employ 27.5 million people —which is one-third more workers than the fortune 500 firms (buttner and moore, 1997, p.34). although many of these women-owned businesses are very small, each contributes to the economy. despite the significant contribution that women entrepreneurs are making to the economy, most of the entrepreneurial research has focused on their male counterparts. significantly fewer research studies have been dedicated to female entrepreneurs (mckay, 2001.) therefore, due to the rapid growth of women-owned businesses this research study will focus on women-owned small businesses. this paper presents the results of an exploratory study that compares entrepreneurial success and business planning activities of women entrepreneurs operating small businesses from their homes versus formal office settings. the decision for the female entrepreneur, whether or not to locate the business inside the home or to seek and establish an office-based location, is a crucial managerial decision and may affect business success. while numerous recent studies on female entrepreneurs have addressed motives for business launch (gundry, ben-yoseph & posig, 2002; robinson, 2001; lombard, 2001; mckay, 2001; orhan & scott, 2001) few studies have addressed home-based businesses (edwards & field-hendrey, 2002; phillips, 2002) and no such study compares the location selection decisions of women business owners. the only published study that the researchers could find related to this topic was one addressing home-based work and women' labor force decisions —which overviewed the ways that home-based work differs from other forms of employment (edwards & field-hendrey, 2002). previous research investigating why entrepreneurs start a business have found that quite similar entrepreneurial motivations exist between men and women with respect to the desire for independence and the need for self-achievement (hisrich, brush, good and desouza, 1996). however, other researchers have found some gender differences regarding a women' desire to "make a difference" in addition to pursuing economic motives (still and timms, 2000, p. 3). an explanatory model has been developed to address the many factors that motivate women to start a business. this model reports that occupational flexibility providing choice in terms of the hours worked is another important factor motivating female entrepreneurs (orhan & scott, 2001). it has been predicted that changes in the availability of the home office deduction, and other tax law changes have provided additional up-front incentives to creating and maintaining a home-based business with traditional office capabilities. fraser (1999) believes that due to technological developments and financial incentives, even growthminded small businesses are taking advantage of the home-based business model. if this is true, then profiling the similarities and differences between home-based and office-based entrepreneurs could provide strategic insight for other entrepreneurs facing location selection decisions. literature review entrepreneurial success factors there are many studies examining the success factors for small businesses, home-based businesses, entrepreneurial businesses and even small office/home office (so/ho) businesses. in a study of business success factors affecting the entrepreneur and the impact of capitalization and the selection of location, van auken, (2000) contrasts the availability of capital and sources of capital to the type of firm and community size. he concluded that size of community and capitalization are not significantly correlated. the findings of other researchers challenge the purely ratio-based business prediction model for success or failure 59 journal of small business strategy vol. /4, /4o. 2 fa!i/winter 2003 (corman and lussier, 1991).lussier (1995) identified fifteen variables in the development of his business success versus failure of small firms model. the fifteen variables are: capital, record-keeping and financial control, industry experience, management experience, planning, professional advisors, education, stafling, product/service timing, age of owner, partners, parents owned a business, minority and marketing skills. however, there is no mention of business location as a factor for business success. other studies indicate that local conditions may "predominate" in business success or failure prediction (lussier and pfiefer, 2001). however, these models do not measure location (neither home-based nor office-based), and fail to identify the selection of home based or office based as a potential predictive variables. moreover, while previous research has addressed women entrepreneurs, little has been reported on home-based versus offlce-based business location settings for this growing business segment. several researchers who have begun to study the variable of business location determine the concomitant differences between office and home-based businesses. one recent study of success factors analyzed success based upon percentage of financial support for the family provided by the home-based business (soldressen, fiorito, and he, 1998). in this study of a fairly small usable sample, several significant relationships were identified and the authors concluded that previous business experience was correlated positively with success. the decision to launch a home-based business, the issue of entrepreneurial risk-taking, and factors affecting the decision to start and continue with a businesses have been the subject of several academic inquiries, surveys and studies. van auken (1999b) examined the business launch decision through an empirical examination of individuals attending a workshop concerning screening the business idea and launching the business. his study revealed that "business related" factors including profitabihty, business conditions and customer demands were ranked as being less important to the discontinuance of a business, than were "personal" factors. his research has also revealed that in all cases, the study respondents who had not previously owned a business believed that "lack of time, risk, and lack of skill/knowledge were significantly greater obstacles to business launch as compared to individuals who had previously owned a business" (van auken, 1999b,p.51). the influence of prior business experience and ownership of a business were identified as significant factors in the business launch decision in van auken's conclusions in his companion article (van auken, 1999a). variables affecting business success in small home-based businesses have been studied and analyzed from the perspective of relationship to business satisfaction, business financial success and continued operation of the business. related research (love, 1998) indicates that home-based entrepreneurs and telecommuters who were interviewed for a success factors study demonstrated that the business idea is less important than the entrepreneurs'esire to succeed. the study also indicated that education level is not predictive of success, and that many entrepreneurs are unemployed when starting their business. prior business planning literature that discusses business planning in small businesses and the existence of a formal business plan by women entrepreneurs is extremely limited as it relates to home based businesses. birritteri (2003) contends that "the written business plan should be part of the entrepreneur's ongoing business life that evolves just as the business does." mueller and naffziger (1999) discussed the general observation that strategic planning is an important factor in small business success. although planning may be currently more widespread in small firms than in the past, there is currently insufficient evidence to conclude that a formal business plan is a significant factor in the success or personal satisfaction of home-based business owners. 60 journal of small business strategy vol. l4, no. 2 fal!/winter 2003 researchers have generally regarded conducting business planning activities prior to starting a business as positively correlated to business success (hormozi, sutton, mcminn & lucio, 2002). however, in a recent study and commentary, "the relationship between written business plans and the failure of small business in the u.s., " perry (2001) observed that there is inherent difficulty in quantifying any relationship between written business plans and success or failure. an exploration of variables related to business success and failure should include business planning efforts and the existence of a written business plan. home-based businesses the number of home-based businesses is continuing to grow —especially for female entrepreneurs. previous studies have reported that there are approximately 3.5 million women-owned home-based businesses in the united states in 1995 (kroll, 1998.) more importantly, this number was expected to grow. the number of start-up home-based businesses was dramatically on the rise in the early 1990's and is still booming, but at a slightly slower pace (dun & bradstreet, 2000). defining home-based businesses is one of the aspects of the discipline that requires further exploration and explanation. home-based business statistics generated from governmental agencies indicate that the number of these businesses is growing. non-governmental and independent tracking firms, like idc/link resources have suggested the number of homebased workers is far in excess of ofliciafly tabulated home-based workers in the bls census (laurie, 1998). however, in a recent sample drawn from dun &. bradstreet's database of 11 million u.s. businesses, only 30 percent were home-based, which is down from 50 percent the previous year (dun & bradstreet, 2000). in fact, many small business owners classified as home based or self-employed also have "jobs" as paid employees of another on-going business. many entrepreneurs work at both an office-based location as well as at a homebased office. some entrepreneurs may be operating their home-based business as "moonlighting" enterprises. even the best statistics inadequately identify, define and describe the small business, homebased, entrepreneur. the best estimates may be drawn from several reliable sources, including the bureau of labor statistics, the internal revenue service, and dun &. bradstreet. many other equally important statistical resources are available and should be included in any review of data purporting to show trends or define parameters. research studying the growth and development of businesses with a home-based location versus office-based location may trail actual practice. studies that explore the factors influencing entrepreneurial success in home-based businesses are inadequate to measure the more than one-half million home-based businesses starting up each year. thus, the need for additional empirical study is warranted. research questions an empirical study was conducted to address the issues related to entrepreneurial business location. whether an entrepreneur locates the small business inside the home or leases a formal office location is an important strategic decision. this study was based on a variety of strategic managerial factors which were self-reported by female entrepreneurs participating in the study. insight about the similarities and differences of these two business locations as provided by self-reports by entrepreneurs should prove useful to those women entrepreneurs facing location selection decisions. four research questions being investigated in this study were selected to provide insight and assistance in the formulation of a location selection business strategy. the first three questions relate to business planning factors while the final research question relates to perceived success factors. the research questions being investigated are: 61 journal ofsmall business strategy vol. /4, itto. 2 fall/ivinter 2003 are there any business planning differences in the amount ofplanning, business plan development or adequacy of starting capital between those women entrepreneurs who conduct their business from their homes versus those who utilize formal offic locations? are there any differences in the amount of prior managerial or industry experience between female entrepreneurs operaring their business from home versus an office setting? is there a difference between the adequacy of starting capital of women-owned businesses that are located in the home versus an ofjice setting? are women-owned home-based businesses more or less successful as determined by business inconie generated, degree ofpersonal and financial satisfaction, and a selfreported success rating) than offic-based businesses? methodology design and sample the primary methodology was survey research. approximately 200 entrepreneurs attending various small business conferences and workshops in southeastern virginia were personally asked to participate in the study. all surveys were administered at the conferences/ workshops and personally handed back to the researcher. data for this study were generated from the attendees of 4 conferences/workshops during a two-month time span. each of the conferences/workshops was dedicated to entrepreneurship and/or small business success. three of the four conferences/workshops were single-day events, while the other was a twoday event. the two-day conference was dedicated to female entrepreneurs. a 30-item written pre-tested questionnaire was administered to each study participant. the variables addressed on the questionnaire included business success ratings, various business planning activities, business location questions and classification data. business planning variables specifically investigated included prior industry experience, management experience, amount of planning time, the existence of a business plan and adequacy of starting capital. business success is operationally defined in this study by an assessment of personal and financial satisfaction with the business, a self-determined business success rating and business income level. a business location question determined if the entrepreneur operated their business from their home or from a formal office setting. demographic and classification variables included age, race, gender, number of employees, number of hours worked per week, amount of international business activity, and geographical location of the business (urban, rural or suburban). all survey questions were closed-ended providing a list of possible responses requiring participants to check the box that most closely represented their situation. six numerical categories (anchored at each end) were provided as the response format for the survey questions requesting the number of years spent planning the business, previous industry experience, previous managerial experience, small business operation and the number of hours worked per week. all other closed-ended questions provided a 4-point scale ( 1 =extremely, 2=somewhat, 3~at very or 4~at at all). the data were analyzed using descriptive statistics to determine the frequencies and means. chi square analysis was used to determine if any differences exist between the observed and expected frequency data reported on the two business locations. 62 journal of small business strategy vol. 14, ttto. 2 fall/winter 2003 discussion of results one hundred eighty-three attendees at small business workshops and conferences in southeastern virginia participated in the study by completing the written survey. this represents a response rate of approximately 92%, thus non-response bias did not appear to be problematic to this study. it is believed that the overly high response rate is due to the researcher's personal request for participation in the study delivered at each of the 4 conferences/workshops. however, although 183 surveys were completed, the actual study size was reduced to 150 usable surveys due to respondents who were either male or not yet "entrepreneurs" or "small business owners," but were in attendance at the conferences. frequency and numerical data were analyzed and characteristics identified. chi square and cross-tabulation analysis of expected and actual factors were performed with statistically significant factors identified. the research results proved interesting and provided answers to the four exploratory research questions posed at the onset of the study. demographic bt classification data all study participants owned and operated a business venture with fewer than 100 employees. table i presents a demographic profile of the study participants. table i —demographic profile of study participants age n less than 20 years 0 0 21-34 years 16 24 35-49 years 60 90 50-65 years 24 36 over 64 years 0 0 rack n caucasian 91 137 african american 6 9 other 3 4 location % n urban area 16 24 suburban area 57 86 rural area 27 40 in terms of age, sixteen percent were in the 21-34 year range, sixty percent were in the 35-49 year category, twenty-four percent were in the 50-65 year old range, and no respondent was younger than 20 or over 65 years old. regarding race, ninety-one percent of the respondents were caucasian, six percent were african american and three percent were "other." of those sampled, forty-four percent of office-based businesses were located in an urban area, forty percent were located in the suburbs, and fifteen percent were located in rural areas. as shown in table 2, significantly fewer home-based businesses were located in urban areas (16%), while significantly more were located in the suburbs (57%), and rural areas (27%). additionally, significantly more businesses located in formal office locations are involved in international business activities (74%) than are home-based businesses (26%). 63 journal of small business strategy vol. 74, no. 2 fall/winter 2003 table 2—business location homeofficechivariable based based square geographical location: 14.23 4 0 urban 1 6% 44% suburban 57% 40% rural 28% 15% international activity: 11.51 4 0 involved in international business 26% 74% not involved in int'1 business 74% 26% significant differences were found between home-based entrepreneurs and office-based entrepreneurs with respect to the number of people they employ, the number of hours they work per week for the business. as shown in table 3, significantly fewer individuals are employed by home-based entrepreneurs than office-based entrepreneurs. approximately 49% of home-based entrepreneurs have no paid employees in their business, compared to 16% of office-based entrepreneurs. in addition, no home-based entrepreneur reported having more than 10 employees, whereas a number of their office-based colleagues reported having more than 50 employees. table 3—hours worked and number of employees homeofficechivariable based based square number of employees: 48.72 10 0 less than i 49% 16% i to5 46% 34% 6 to 10 5% 18% 11 to 20 0% 14% 21 to 50 0% 9% more than 50 0% 8% hours worked per week: 35.89 10 0 less than 20 19% 1% 21 to 30 19% 4% 31 to 40 11% 5% 41 to 50 21% 36% 51 to 60 17% 27% more than 60 1 3% 27% also shown in table 3, home-based entrepreneurs work significantly fewer hours per week than do office-based entrepreneurs. almost 19% of home-based entrepreneurs work fewer 64 journal of small business strategy vol. )4, no. 2 fall/winter 2003 than 20 hours per week, while only 1% of offlice-based entrepreneurs work that few hours in a given week. in addition, almost 27% of office-based entrepreneurs report working more than 60 hours (on average) per week, whereas only 13% of home-based entrepreneurs work that much per week. although, home-based entrepreneurs work fewer hours per week on their small business venture, significantly more of them hold a "second job". when asked whether or not they held a paid position other than their small business, significantly more home-based entrepreneurs said "yes." in fact, approximately 59% of home-based entrepreneurs report holding a second paid position versus 31% of office-based entrepreneurs. research question it business planning of home based and office-based businesses. as shown in table 4, there were no significant differences found for the amount of time spent planning for the business venture, nor for the type of business plan prepared prior to starting the business between home-based businesses and office-based businesses. table 4—planning homeofficechivariable based based ~suare df il years spent planning: 523 8 0732 ns less than i 57% 61% 1 to 5 40% 3 1% 6 to 10 1% 4% 11 to 15 0% 3% 16 to 20 0% 0% more than 20 1% 1% type of business plan: 5.24 8 0.732 ns highly detailed plan 58% 61% general plan 41% 31% informal plan 1% 4% no plan 0% 3% the majority of female entrepreneurs spent five or fewer years planning their business venture, regardless of the location selected to house the business. in fact, over half of afl businesses included in the study (office-based = 61%; home-based = 57%) spent less than one year in any formal planning. therefore the length of planning may not be a differentiator between home-based and oflice-based businesses. table 4 also shows the type of business plan in terms of detail. no significant differences between home-based and office-based locations are found. however, what is found is that despite the less than one-year time factor these women entrepreneurs spent planning their business ventures, a highly detailed business plan is reported by both office-based (61%) and home-based (58%) businesses. this may be partially due to the fact that most entrepreneurs must present a detailed business plan in order to obtain financial support for their new venture, regardless of the location of the business. or, perhaps it is a reflection of the interpretations of what a "highly detailed plan" entails. 65 journal ofsmall business strategy voh /4, 74o. 2 fall/winter 2003 research question 2r adequacy of starting capital between women-owned home-based and office-based businesses. table 5 shows no significant difference in perception of the "adequacy of starting capital" between women-owned office-based and home-based businesses. in each case, only 4% thought the amount was "more than enough." in addition, 38% of the office-based businesses felt there was "about the right amount," with 46% of the home-based businesses thinking so. table 5—perception of adequacy of starting capital homeoflicechivariable based based square starting capital: 10 25 6 0.115 ns more than enough 4% 4% about the right amount 46% 38% less than enough 28% 44% no capital used 22% 14% research question 3t previous experience of women-business owners between home-based and office-based businesses. there were no signilicant differences in the amount of prior experience possessed by the woman business owner between the two business locations. most female entrepreneurs possessed ten or fewer years of prior managerial and industry experience. table 6 shows that over 50% of all women small business owners had fewer than five years of prior managerial experience, with 21% office-based business owners and 39% home-based business owners having less than one year of previous managerial experience. as can be seen by the distributions in table 6, there were also no significant differences in the amount of prior industry experience that home-based versus oaice-based business owners possessed. table 6—prior experience homeofficechivariable based based square prior managerial experience: 13.43 10 0.201 less than 1 year 39% 21% 1 to 5 22% 3 1% 6 to 10 10% 11 to 15 17% 13% 16 to 20 4% 7% more than 20 7% 7% prior industry experience: 8.03 10 0.626 less than i year 36% 34% i to 5 22% 24% 6 to 10 20% 24% 11 to 15 9% 10% 16 to 20 4% 3% more than 20 9% 6% 66 journal ofsmall business strategy vob l4, no. 2 fall/winter 2003 research question dt success ratings of home based and office hosed businesses. significant differences were found in response to our final research question concerning the success of women-owned home based and office based businesses. the study findings revealed that differences exist in the amount of income the business venture produced, the degree to which the business venture was found to be financially rewarding to the entrepreneur, and in the self-reported success rating placed on the business venture. the data in table 7, show striking and statistically significant differences in income received between office-based and home-based businesses. some 76% of office-based businesses yielded above $ 100,000 in income, while only 22% of home-based businesses did so. at the other end of the spectrum, 6% of the office-based businesses reported less than $ 25,000 income, while 50% of the home-based businesses reported less than $25,000 or less. in addition, 50% of the home-based business ventures investigated produced income levels below 25,000 per year, compared to only 6% of office-based ventures. table 7—income received homeofficechivariable based based square prior managerial experience: 13.43 10 0.201 less than 1 year 39% 21% 1 to 5 22% 31% 6 to 10 10% 21% 11 to 15 17% 13% 16 to 20 4% 7% more than 20 7% 7% prior industry experience: 8.03 10 0.626 less than 1 year 36% 34% 1 to 5 22% 24% 6 to 10 20% 24% 11 to 15 9% 10% 16 to 20 4% 3% more than 20 9% 6% a related success variable investigated in this research study was the degree to which the entrepreneur found their business venture financially rewarding. significant dilterences exist in the degree of financial rewards obtained from the business venture based on where the business is located. more oaice-based entrepreneurs (25%) rated their businesses "extremely financially rewarding" versus home-based entrepreneurs (15%). the majority (73%) of home-based entrepreneurs claim their business venture is "somewhat rewarding." a sizeable number (20%) of office-based entrepreneurs claimed their business was "not very" financially rewarding. also shown in table 7 is the degree of personal satisfaction that the business venture generated for the entrepreneur. interestingly, no significant differences were identified 67 journal ofsmall business strategy vol. l4, no. 2 fall/ivinter 2003 between home-based and office-based entrepreneurs. thus, regardless of the fact that homebased businesses generate less income and are less financially rewarding, the business venture still produces similar amounts of personal satisfaction for the entrepreneur. a flnal significant variable produced by this study and shown in table 7 is the overall success rating that the female entrepreneur assigned (based on self-report) to their business venture. considerably more office-based entrepreneurs rated their business more successful than did home-based entrepreneurs, with 49'/o of office-based entrepreneurs rating their business as "extremely successful" compared with 21'/o of home-based businesses. although no entrepreneur rated her business as "not at all successful", 7'/e of home-based businesses were rated "not very successful", while no office-based business received that rating. conclusions bt implications the findings of this empirical study were contrary to the expectations of the investigators in two major areas. first, the investigators had expected female entrepreneurs of home-based businesses to work more hours than those of office-based businesses. this presumption was based upon an expectation that flexibility of schedule and time management in the homebased setting would facilitate multi-tasking. if the home-based worker could intersperse trade with the home demands, the expectation was that productivity would be increased and personal satisfaction would likewise be enhanced. it was expected that productivity would benefit from a series of fine tunings rather than being continuously worked on until completion. flexibility of home-based schedules allow for these re-visitations to a task. the research results did not support this expectation. findings regarding the amount of prior experience were contrary to research expectations. based on previous research findings reported in the literature (soldressen, fiorito and he, 1998), the researchers expected to find that the years of industry experience would show significant patterns of relationship with business location. they did not. nor did prior management experience, current business experience, amount of planning time, or amount of starting capital. each of these variables was found to be independent of location of the business for female entrepreneurs. further research into business success factors and business failure factors would be facilitated by a unified approach using equivalent language as descriptors in any new survey instrument. the study results have several implications for female entrepreneurs contemplating business location strategies. the first is that similar business planning activities are taking place by all of the women small business owners included in this study, regardless of where they have decided to locate their business. second, a detailed business plan may be a necessary component to launching a business enterprise, regardless of the physical location selected for the business. this assumption is based on research findings indicating that similar types of business plans are being prepared by women small business owners regardless of where their business is located. additionally, business location does not seem to influence the length of time spent planning the business prior to launching the venture. a longer planning period is not a necessity for an entrepreneur selecting an ottice-based location for her business, even though it is outside of her home sening. third, based on this study, those entrepreneurs selecting home-business locations may need to be motivated by factors other than sheer profitability. the research results of this study indicate that home-businesses are not nearly as profitable as are office-based businesses. the 'otionthat women small business owners are not solely motivated by profitability is supported by earlier studies (gundry, ben-yoseph & posig, 2002; robinson, 2001; lombard, 2001; mckay, 2001; orhan & scott, 2001; love, 1999; van auken, 1999b) that determined 68 journal of small business strategy vol. i4, no. 2 falll)@inter 2003 that business-related factors (including profitability) are less important than are personal factors for women small business owners. fourth, women small business owners should be cognizant that home-based business locations do not generate significantly more (or less) personal satisfaction for the entrepreneur. therefore, one might assume that some of the potential disadvantages of commuting to an external office location must be olfset by potential drawbacks of using one' own home as her business location. additional research is warranted to analyze those specific positive and negative factors that are associated with business locations. finally, based on this study, female entrepreneurs facing business location decisions should bear in mind a few things. particularly, home-based business owners who tend to work fewer hours but have to hold a second paid position, don't earn as much money and are not as financially satisfied with their business. therefore, the low overhead involved with operating a home-based business may not be as much of a financial perk as one might think. while it might be assumed that a home-based business launch involves less financial burden (and personal effort) than starting an office-based business, this has yet to be determined. although home-based entrepreneurs may be personally satisfied, they are not significantly more satisfied with their business than are oltice-based entrepreneurs. while there are many resources available for home-based businesses (internet cites, newsletters, etc.) that can keep these entrepreneurs in the network with other home-based entrepreneurs, the impact of these resources has yet to be measured and determined. study limitations as with any study, this research has limitations. first, the data represents subjective selfreported perceptions of the entrepreneurs participating in the study. although self-reported perceptions are a recognized and frequently used method of data collection, they may not be as reliable as objective measures. second, all study participants were attending conferences and workshops in an effort to obtain information and networking contacts. thus, these entrepreneurs may not be representative of the greater body of entrepreneurs who do not attend such functions. third, the external validity of this study may be cautioned due to the fact that the results were obtained from entrepreneurs operating business ventures in southeastern united states. thus, results may be different for studies based in other parts of the united states or in different countries. this may be especially true for western united states —which has been dubbed by the center for women's business research as the "hot spot" for women's entrepreneurship (wease, 2004.). fourth, the small sample size of entrepreneurs (albeit larger than some reported in other published empirical studies) contributes to the questionable external validity of the study. fifth, industry classification information was not collected, thus the type if industry of each of these entrepreneurial business ventures is unknown. finally, although the survey instrument was pre-tested on a small sample of entrepreneurs, it has not been previously validated. findings from this study should be interpreted with these limitations kept in mind. areas for future research some areas fruitful for future study include investigating whether the office-based business initially began as a home-based business. thus, longitudinal research would provide the success patterns of the transition from a home-based business to an office-based visit (or viceversa). in addition, further study on why the female entrepreneur changed the location of the business from home to office or from office to home might provide insight and assistance for those entrepreneurs currently contemplating moving their business. 69 journal ofsmall business strategy vo/. /4, no. 2 fall/winter 2003 the industry type of these businesses was not investigated in the current study and could possibly be an influencing factor on the success of women-owned home-based businesses. this is another area that would prove interesting for future exploration. additional investigation comparing the average number of hours the entrepreneur works per week with self-reported measures of success and personal satisfaction is another area that may prove insightful. future research is this area may determine personality profiles or segments of successful women entrepreneurs. finally, since home-based businesses have just recently started to be measured by u.s, statistical business reporting avenues, additional research on their economic impact would be helpful to have in order for more governmental resources to be targeted toward home 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(2004). top 5 states for growth in women-owned businesses in western united states. center for women's business research. stephanle bardwell is an associate professor, director of the small business institute and department chair of management and economics in virginia at christopher newport university. she serves on the board of advisors of the hampton roads technology incubator, is a national vp of the small business instituie, member of the international academy of information management, the international atlantic economic society and sigma beta delta. she is a graduate of s.u.n.y. albany with a curn laude bachelor of arts in history and education; she holds a j.d, from golden gate university school of law in san francisco, caliform'a and a master of laws in taxation from the marshall-wythe school of law of the college of william and mary in willianisburg, virginia. she is an active member of the california bar and new york bar with interest in business law, intellectual property and international standardization concerns. llsa d. spiller, is professor of marketing at christopher newpon university. she has published and presented her setto!arly work in the areas of direct marketing, database marketing, health care marketing, entrepreneurship, and marketing ta older consumers. spiller has been a recipient of the direct marketing educational foundation 's distinguished teaching award in l997. she is a member of the academic advisory board of the direct marketing association of washington and is currently co-authoring a textbook on direci/interactive marketing that will be published by prentice-hall, inc. she served as the sbi director for cliristopher newport university for five years. spiller received her ph.d. from the university of missouri-kansas city and her mb.a. and b.s.b.a.from gannon university. her primary teaching responsibilities include marketing management, elements of direct/interactive marketing and database marketing. 71 journal ofsmall business strategy vol. )4, no. 2 fall/winter 2003 john e. anderson (president emeritus, distinguished professor of psychology, christopher newport university). receiving a ph.d. in psychology from the ohio state university, dr. anderson has taught at rochester institute of technology and florida state university. he has served as president of columbus college (georgia), and christopher newport college (virginia), where he later served as professor and chairman, department of management and marketing, and distinguished professor ofpsychology. he retired in june 2003. 72 strategy strategic planning and the family firm: an sbi consulting perspective charles h. matthews university of cincinnati abstract given the fact that approximately 90 percent of ail businesses could be classified as family-ourned or closelyheld, it is becoming increasingly important that sb1student consulting teams are sensitive to the issues surrounding family and privately-held firms. several issues regarding complexities of the family and business systems of famr1y-owned fi'rms are presented and discussed. it is posited that strategic management plays a rolein the balancing and merging of the two sometimes discordant systems and can be used by the sbi teams in the consulting process. finally, the need for researchin the areas of 1)interest in ownership succession by family members; and 2) leadership succession in the family-owned fi'rm is presented and discussed. introduction consider the following scenario: the first two meetings between the small business institute (sbi)client and the student consulting team are smooth and very productive. although the third meeting has started smoothly enough, the sbi team begins to feel increasingly uncomfortable, as they realize that tension between the owner of the firm and his son is surfacing. what has started asa typical consultation session to discuss new product development, has quickly evolved into a heated discussion between father and son as to the future direction of the company. the role of the sbiconsulting team quickly shifts from student-consultants, to neutral third parties, to referees, and finally to stunned observers as the son uses the interruption of a phone call to bolt from the room. as the above scenario suggests, it is becoming increasingly important that sbi teams are sensitive to the issues surrounding family and privately held firms. given the fact that approximately 80 to 90 percent of all businesses could be classified as family owned (1) (15), there is a strong possibility that sbi teams will be working with a family-owned business. that is, sbi teams may becalled upon to not only address issues pertinent to thebusiness system of theclient firm (management, marketing, sales, finance, accounting, etc.), but also maybe faced with issues concerning the family system of the business as well (management succession, ownership succession, family squabbles, etc.) in the past decade, there has been, and continues to be, a renewed and invigorated interest in the issues, problems, and solutions pertinent to family-owned businesses. in general, familyowned or closely-held firms are considered to be the backbone of the american economy: 72 accounting for 90 percent of all u.s. companies; 45 percent of all u.s. jobs; and 40 percent of the nation's gross national product (gnp) (19) (2). essentially, a family-owned business is one which is owned and managed by a single founder, siblings, other relatives, or a combination of family and non-family managers (20). in addition, the roles of strategic planning, in general, and management and succession planning, in particular, need to be more fully considered by the sbi teams. for example, in a survey of 107family owned firms, it is estimated that only 15percent had formal written business plans; 37 percent had informal business plans; and 48 percent had no business plan at all. furthermore, with regard to management succession, only 19 percent reported formal written plans; 23 percent reported informal plans; and 58 percent indicated that no management succession plan existed for the firm whatsoever. with regard to ownership succession,23 percent indicated that a formal written plan existed; 20 percent indicated that an informal plan existed; and 57 percent reported that no ownership succession plan exists for the firm (15). sbi teams need to be sensitive to the interrelationship of strategic planning and succession planning in family/privately owned companies. considering these facts, several questions concerning the sbiclient relationship emerge: 1) whataresomeof thecharacteristicsofthebusinesssystemand the familysystemwith which the sbi team should be be familiar? 2) how can strategic planning concepts be best utilized by the sbi team to acquaint the client with the need for formal planning, as well as for succession planning? and 3) what are some of the implications for future research in the area of strategic planning and the family firm that may advance our understanding of the complexities of managing a family-owned business. the business and the family systems although there are several ways to view the family business, one approach which may be particularly beneficial for sbi teams, centers on the relationship between family concerns and business interests (13)(18). for example, lon-genecker & moore (13)note that although families and businesses may exist for separate reasons, there is an overlap of both family concerns (nurture, development) and business interests (profitability, survival) which needs to be considered in the operation of the business (p.118). in addition, rosenblatt, mik, anderson, & johnson (18) point out that there is often debilitating tension within the family business due to conflict between the family system and the business system. that is, there are two simultaneously operating systems (business and family) that have both harmonious and discordant values and goals. furthermore, with regard to succession in family firms, beckhard & dyer (3) suggest that managing family-firm succession is often made more difficult by resistance to change by the leader. clearly, this overlap between the family and business systems is one with which sbi teams must contend. in order to better prepare the sbi team for dealing w'ith the issues raised by the overlap of family and business interests, several characteristics of the business system and the family system can be summarized. while certainly not exhaustive, with regard to the business system, nine duties of the owner/manager can be identified. these include: 1) self-assessment; 2) preparation of the firm's description, mission, objectives, strategies and policies; 3) analysis of the firm's strengths, weaknesses, opportunities, and threats (swot); 73 4) development of a management and organization plan, including personnel needs for the firm; 5) preparation of a production plan, if applicable; 6) defining a marketing strategy, including site selection, market research, niche identification, sales forecasts, and inventory needs; 7) preparation of a financial plan, including bookkeeping and financial statements; b) setting timetable for implementation and feedback process; and 9) development of contingency plan(s). while this is by no means the ultimate list of business functions of the owner/manager of the family firm, it does provide a basis for understanding the complexity of the business concerns for the family firm. in general, these nine duties are based on a combination of strategic planning and general business planning. similarly, with regard to the family system, seven issues for the owner/manager can be identified. these include: 1) planning for ownership and management succession; 2) managing personal and family conflicts arising from business demands and pressures; 3) balancing and merging family and business objectives; 4) maintaining business operations when a family member wishes to move on to new or different challenges; 5) conducting financial planning to meet family and business objectives; 6) managing firm growth, espedally when the transition from an entrepreneurial endeavor to a professionally managed firm exceeds the family members available to fill the jobs; and 7) using strategic planning to merge the needs of both systems. again, while not exhaustive, this list of issues regarding the family system of the business provides a basis for understanding the complexity of the overlap between the family and business systems. for example, at tempts to balance and merge family and business objectives may not always be easily accomplished. there may be conflict between the amount of time one wishes to devote to the family and the amount of time that the "duties" the business system are taking. in addition, it could be argued that item seven, using strategic planning to merge the needs of both systems, really is a separate category not assignable to either the business or family systems. given the strategic management foundation of the nine duties outlined above, however, it is suggested here that strategic planning may provide the overarching framework to blend the needs of both systems and needs to be considered within the context of the family system issues for the owner-manager. 74 the role of strategic management while there is no easy solution to the complexities and potential conflicts which emerge from the overlap of the family and business systems, sbi teams need to be sensitive to both systems. this is especially important with regard to the role of strategic planning in the family firm. strategic planning, especially in the corporate environment, is often viewed as an objective planning system. in the family-owned business, however, strategic planning needs to be extendedtoboththebusinesssystemandthefamilysystem. thatis,overallstrategicplanningneeds to incorporate both the business and family systems. ward (23) recommends the preparation of a family strategic plan which reflects the family's vision of the future. clearly, there are both family and business dimensions of the strategic plan for the family-owned firm. for example, specific management and ownership succession issues need to be articulated, discussed and included in the strategic plan for the family-owned firm. for the sbi team two points concerning the business and family systems and strategic planning are key: 1)while awareness of the duties and issues pertinent to the business and family systems is important, there will be tremendous variance with respect to how different family firms deal with the complexities of the two systems; and 2) the two systems must be represented in the firm's overall strategic plan, especially with regard to succession planning. while the need for inclusion of succession issues is emphasized in the preparation of the family-firm strategic plan, other areas should likewise be considered for inclusion. these include, but are not limited to: 1) financial planning to meet family and business objectives; 2) contingency planning for growth that exceeds the capabilities, interests, and size of the family; and 3) operations planning in the event that a family member wishes to move on to new or different challenges. the need for research given the nature and complexity of the problems facing family firms and the need for a greater understanding of how the family and business systems overlap in family-owned firms, two areas of potential research are suggested: 1) interest in ownership succession by family members; and 2) leadership succession in the family-owned firm. each is briefly discussed here. interest in ownership succession one of the dominant areas of interest surrounding family firms centers on the issue of management succession or managing continuity in the family business (14) (2) (1) (5). the issue of management succession is of importance to both practitioners and researchers because of the role it may play in the firm's ability to survive. despite the fact the family owned businesses occupy a prominent position in the economic scheme of things (19) (2), it is estimated that only 30 percent of the family firms in the u.s. make it to the second generation (11).ward (23) reports that in his study of 200 family-owned businesses which were five years old with a minimum of 20 employees in 1924, only 22 percent were still going concerns by 1984. in addition, beckhard & dyer (2) indicate that the average life expectancy of the family firm is 24 years, which coincides with the average tenure of the founders of the business. ambrose (1) suggests that attempts to perpetuate family-owned business might prove more useful to the continuation of small businesses and thus the overall positive impact on the economy than, "...laborious at tempts to create new businesses" (p. 49). this implies that it is both desirable and beneficial to examine factors which may influence the management succession process, particularly with regard to the second 75 generation family members. one area of study which may shed some light on the management succession process concerns the effect role models have on influencing entrepreneurs. while there has been some prior research into role models and family background of entrepreneurs influencing interest in entrepreneurship (21)(8), there has been little research into the possible connection between family background and interest in succession in the family firm. it is possible that some of the same role model factors that influence an interest in entrepreneurship may be operative in influencing an interest in firm succession. previous studies suggest that there is a strong connection between the presence of role models and the emergence of entrepreneurs (22) (9) (8). cooper (8) reports that in his search of the literature, there is evidence to support the fact that thefirm founders wereinfluencedbyrolemodelsintheirdecisiontobecome entrepreneurs. also, brockhaus & horwitz conclude that, "from an environmental perspective, most entrepreneurs have a successful role model, either in their family or the work place" (6, p. 43). in addition, family members, particularly the mother and father, are considered key, "...in establishing the desirability and credibility of entrepreneurial action for an individual" (21, p. 83). by extension, this suggests that family background or exposure to small business by a close friend or relative may be instrumental in influencing a second generation family member's interest in taking over the family firm. in addition, considerable attention has recently been focused on the role women play in the management succession of family owned firms. the cover of the august, 1987 issue of inc. magazine boldly proclaims, "why daughters are better: suddenly it's daddy's little girl who' taking over the family business." hisrich & brush (12) report that of 468 women entrepreneurs they interviewed, the majority stated that their fathers were self-employed. also, the respondents reported that their spouses held predominately professional or technical jobs. hisrich & bush suggest that this background provided, "good role models as well as a supportive, financially sound environment in which to begin new business ventures" (12, p. 32). add to this the fact that it is estimated that women are starting new enterprises at more than three times the rate of men and that women own approximately 25 percent of the nation's sole proprietorships (24) and two inescapable conclusions emerge: 1) role models may play an important part in women entrepreneurs'ecision to start their own firms; and 2) women will continue to play an increasingly important role in the management succession of family-owned firms. given theimportancethatrolemodelsmayplayininfluencingpotentialentrepreneurs,more speci fic research is needed which addresses the impact of family background on interest in owning or running one's own small business. in addition, because of the increasingly important role women will play in entrepreneurship and succession in family firms, research is needed which addresses what differences, if any, exist between males and females with respect to family background and interest in entrepreneurship. leadership succession in an attempt to better understand the family-firm succession dilemma, rutigliano suggests that two factors emerge which may shed some light on the relatively low survival rate: 1) the tendency to put the needs of the family before those of the business; and 2) the neglect of the issues and problems associated with ownership and management succession (19). further, as mentioned earlier, rosenblatt, et al. point out that there is often debilitating tension within the family business due to conflict between the family system and the business system(18). that is, there are two simultaneously operating systems (business and family) that have both 76 harmonious and discordant values and goals. in addition, beckhard & dyer suggest that managing family-firm succession is often made more difficult by resistance to change by the leader (3). longenecker & schoen propose a model of the parent-child succession in the leadership of the family firm that involves a long-term, diachronic process of socialization through seven stages, beginning in childhood (14). the stages, however, are related to two important events in the family succession process: 1) the entry of the successor into the organization as a full-time employee; and 2) the transfer of the leadership position to the successor (14, p. 4). birley notes that despite such a lengthy indoctrination, many firms still do not make it to the second generation (5). her study, however, suggests that the successor's interest in taking over the family firm may play a role in the successful transition of the firm from one generation to the next. specifically, research is needed which addresses the successor's perception of parent as leader and the child's interest in firm succession in order to advance our understanding of the leadership succession in family-owned firms. in so doing, a clearer picture of the factors influencing leader succession will emerge. research in the area of cognitive categorization and leadership (17) (7),(10) (16) may be instrumental in furthering an understanding of the relationship between entry of the successor into the firm, perception of parent as leader, and subsequent interest in taking over the family firm. for example, in the longenecker & shoen (14) model of succession in the family firm there are two major points when the successor's perception of parent as leader may influence his/her interestin ultimatelytakingover the family firm: when thesuccessor firstentersthefirmasa fulltime employee (time 1);and when the transfer of leadership from parent to child occurs (time 2). (see figure 1.) figure 1. seven stages of parent-child succession in the family firm adapted from longnecker & schoen (1978) pre-business introductory introductoryfunctional advanced early mature functional functional succession entry of transfer of successor leadership time 1 time 2 cognitive categorization of parent as: parent family member leader cognitive categorization theory suggests that category consistent leader behavior from time i to time 2 should result in an automatic cognitive categorization process; whereas, inconsistent leader behavior will result in a controlled cognitive categorization process. further, it is posited here that successor interest in assuming the leadership of the family firm will be 77 affected by the successor's perception of parent as leader at time 1 and time 2. these relationships are depicted in figure 2. accordingly, two propositions are developed: pl: at time 2, when the parent exhibits prototypical leader behavior consistent with time 1, successor categorization of parent as leader will be automatic and successor's interest in leadership of firm will be equal or greater relative to time 1. p2: at time 2, when the parent exhibits prototypical leader behavior which is inconsistent with time 1, successor categoriza-tion will be controlled and successor's interest in assuming firm leadership will be less relative to time 1. figure 2. entry of transfer of successor leadership role time 1 time 2 parent parent exhibits exhibits consistent or inconsistent leader behavior leader behavior successor successor categorizes categorization of parent as parent as leader leader according to auto. or prototype controlled successor successor interest shows in firm succession interest —maintained in —increases succession —lessens conclusion several conclusions emerge from the foregoing discussion of strategic planning and familyowned firms. first, although research interests in the issues facing family-owned firms are still in the early stages, there is a high probability the sbi teams will face the tension created by the co-existence of the family and business systems in the family-owned firm. hopefully, an awareness of the various business and family systems'haracteristics presented earlier will help the sbi team and client cope with these tensions. 78 second, the overall strategic planning process should include the various family system issues that will affect both the family and business system directly and indirectly. it is suggested here that although succession issues have a high priority for inclusion in the strategic management of the family-owned firm, there are other issues (e.g. family member departure from the firm; inclusion of non-family members in firm management) which merit attention. finally, research is needed which addresses the dimensions of both the family and business systems for family-owned firms. two areas are suggested here for future research: interest in ownership succession with regard to the successor's family background and gender; and leadership succession in family-owned firms in relation to the successor's cognitive categorization of parent as leader. hopefully, research in these and other areas of family owned firms will enhance our understanding of the ability of these firms to survive through successive generationsns, as well as provide insight into some of the sources of tension between the family and business systems of family owned firms. references 1. ambrose, d.m., 1983. "transfer of the family-owned business." journal of small business management, january, 49-57. 2. beckhard, r. & dyer, w.g., jr., 1983. "managing continuity in the family-owned business." organizational dynamics, summer, 5-12. 3. 1983a. "smr forum: managing change in the family firm issues and strategies." sloan management review, 24:3, 59-65. 4. benson, b., crego, e. & drucker, r., 1990. your family business: a success guide for growth and survival. homewood, il: dow jones-irwin. 5. birley, s. 1986. "succession in the family firm: the inheritor's view." journal of small business management, july, 36-43. 6. brockhaus, r.h. & horwitz, p.s.,1986. "the psychology of the entrepreneur." in the arl & science of enlrepreneurship (d. sexton & r. smilor, eds.), cambridge, ma: ballinger publishing company. 7. cantor, n. & mischel, w., 1979. "prototypes in person perception. in advances in experimental and social psychology, (l. berkowitz, ed.), vol. 12, new york, ny: academic press. 8. cooper, a., 1986. "entrepreneurship and high technology." in the arl & science of entrepreneurship (d. sexton & r. smilor, eds.), cambridge, ma: bal linger publishing company. 9. cooper, a. & dunkelberg, w., 1984. "a new look at business entry." san mateo, ca: national federation of independent business. 10. cronshaw s. & lord, r., 1987. "effects of categorization, attribution, and encoding processes on leadership perceptions." journal of applied psychology, 72:i, pp. 97-106. 79 11. hartman, c., 1987. "why daughters are better." inc., august, 41-46. 12. hisrich, r. & brush, c., 1984. "the woman entrepreneur: management skills and business problems." journal of small business management, january, 31-37. 13. longenecker, j. & moore, c., 1991. small business management: an entrepreneurial emphasis. cincinnati, oh: south-western publishing co. 14. longenecker, j. & schoen, j., 1978. "management succession in the family business." journal of small business management, july, 1-6. 15. matthews, c.h., 1990. "small firm strategic planning: strategy, environment, and performance." doctoral dissertation, college of business administration, university of cincinnati. 16. mount, m. & thompson, d., 1987. "cognitive categorization and quality of performance ratings." journal of applied psychology, 72:2, pp. 240-246. 17. rosch,e.,1978. "principlesofcategorization." incognitionandcategorization,(e.roach & b. lloyd, eds.), hillsdale, nj: erlbaum. 18. rosenblatt, p., mik, l, anderson, r., & johnson, p., 1985. the family in business. san francisco, ca: jossey-bass publishers. 19. rutigliano, a., 1986. "when worlds collide: problems in family-owned businesses." management review, american management association, february, 22-29. 20. the small business report, 1984. "succession planning in closely held firms." 9:11,5258. 21. shapero, a. & sokol, l., 1982. "the social dimensions of entrepreneurship." in the encyclopedia of enirepreneurship (c. kent, d. sexton, & k. vesper, eds.). englewood cliffs, nj: prentice-hall, inc. 22. timmons, j.a., 1986. "growing up big: entrepreneurship and the creation of highpotential ventures." in the art & science of entrepreneurship (d. sexton & r. smilor, eds.). cambridge, ma: ballinger publishing company. 23. ward, j., 1987. keeping the family business healthy. san francisco, ca: jossey-bass publishers. 24. wojahn, e., 1986. "why there aren't more women in this magazine." inc., july, 45-48. 80 strategy assessing the value of professional practices john wallace marshall university george stollings george stollings, inc. abstract this article describes a set of computer-based spreadsheet templates designed to assist in appraising professional practices. the templates were developed to increase the value and reduce the cost of doi ng such appraisals, essentially by comparing several complementary points of view, so as to reduce the amount of information that conventional appraisals throw away. the templates have been tested with more than twenty dental practices; and the experience suggests not only that they can be adapted for other small busi nesses, but also that they can serve as the basis for a pp raising other small business services. in addition, while the templates at tempt to overcome some of the shortcomings of typical methods of business appraisal, their use has highlighted some research questions that need to be addressed. introduction the project grew out of a search for better ways to serve small business clients, especially for ways to serve groups of small businesses that have common, unmet and challenging needs. one such need is to help buyers and sellers of small businesses negotiate. the need is large. over three million small businesses (with a median net income of $200 000) go up for sale in the united states every year (5). the development of this proposed appraisal approach was concentrated first on dental practices because dentists have expressed strong interest in valuation. for example, the number one topic of inquiry at the ada (american dental association) council on dental practice in recent years has been how to arrive at a fair market value and purchase terms. "more ada members seek information on practice valuation than on any other subject." (1) this area is challenging because there is a great opportunity to improve the methods of appraising businesses, especially professional practices, and for preparing the sellers and buyers for the decisions involved. the design of valuation services the design process began with the valuation literature of the dental profession. (for example, see reference 2 ) a design goal of reducing the time and cost of appraising a professional practice and to increase the usefulness of the resulting appraisals was set. the typical appraisal of a professional practice, using manual methods, costs clients between $1200 and $4000, about 1 percent of the price of the practice. within a year, the goal was met. the set of computer-based spreadsheet templates described in this article took three work-months to develop and test. the templates not only reduced the time and cost of making appraisals by about 20 percent, but also 45 improved their quality. the outcome of each appraisal is more objective, logical, and repeatable regardless of who performs it. the greatest benefit, however, is that the templates now serve as a database for other services (discussed in the concluding section of the paper). a major advantage of the spreadsheet templates is in reducing the effort of producing several estimates of appraised value. this is valuable because an appraisal should provide an objective estimate of the "bargaining zone" for the buyer and seller, not just a "point estimate". this zone is determined by the state of the practice and the objectives of the buyer and the seller. to appreciate this advantage, consider the purchase negotiation process. in almost all such negotiations the buyer and seller both can be considered as having high and low bargaining points. the buyer might want to purchase the business for $150,000, and would not pay more than $200,000. the seller might want $250,000, and would not take less than $175,000.if the seller insists on $250,000 there would be no sale to this buyer; and if the buyer insists on $150,000, he would not get the business. the bargaining process should eventually lead them to an agreement, and the appraiser who provides a range of appraised values makes it easier for them to reach an agreement, (and also to earn a commission for facilitating the sale.) the templates support this bargaining process by combining the results of several valuation methods using weighted averages, thus reducing the amount of information thrown away by conventional appraisals. comparing the results of several valuation methods is especially helpful in situations where one method is more applicable than another. but which methods should be used? the prime sources of advice on business valuation are the trade press and academic literature. the trade press abounds with (often eccentric) rules of thumb, often called "revenue multipliers". they are "quick and dirty" and easy to understand, but they throw away a great deal of information. consider a typical professional practice with $300,000 annual gross, $65,000 net, $58,000 worth of equipment, 1000 patients, and $150 average annual charge per patient. the range of values is almost 200 percent for six rules of thumb commonly used to appraise professional practices. 1. the equipment plus the gross: $458,000 2. most recent year's gross: $300,000 3. four (or some other number) times the net: $260,000 4. seventy percent of a recent year's gross: $210,000 5. equipment plus the net: $123,000 6. the equipment plus one-third last year's gross: $158,000 the academic literature, on the other hand, concentrates on three groups of methods: capitalized earnings methods, asset summation methods, and market methods. capitalized earnings methods look at income statements and are based on the idea that a buyer is interested in buying a stream of future income, while asset summation methods look primarily at balance sheets, and see the buyer as purchasing a bundle of functioning assets. market methods rely on recent sales of enterprises similar to the one being appraised. while market methods are potentially the easiest to apply, they are seldom used for professional practices because the market is too thin. thus the templates here result from selecting and modifying capitalized earnings and asset summation methods. 46 selecting methods: a metaphor in selecting a set of methods, it is useful to think in terms of "triangulating" or arriving at a bargaining zone from different points of view. this situation can be likened to the story of the blind men studying an elephant. the one holding the tail thinks an elephant is a rope, while the one at the trunk thinks it is a snake. another man holding a leg thinks it is a tree, while the one feeling the side thinks it is a wall. this metaphor highlights the fact that while none of the methods ignores all the available information about a business, they are all shortsighted. the methods are like the efforts of the blind men because each method puts so much effort into estimating a small portion of the final price, and so little effort into estimating a large portion of it. the blind men holding the trunk or the tail are unlikely to be aware of where the bulk of the creature is, just as each method alone misses very important "off-sheet" factors. experience with valuing 15professional practices indicates that asset summation is usually the most short-sighted. with it, 80 percent of the effort goes into adjusting the assets (these include leasehold improvements; professional equipment; office equipment and supplies; and accounts receivable, if they are to be transferred to the buyer). but these assets typically account for only 30 percent (and seldom more than 50 percent) of the final asking price of a well-run professional practice. the intangibles, on the other hand, account for 40 to 70 percent of the final asking price, depending on how well-managed the practice is. with asset summation, estimates of the intangible assets of a practice, which typically make up a large portion of the final price, are seldom precise. 'valuing a practice's intangible assets is more subjective than any other aspect of dental practice valuation." (4) despite their shortcomings, asset summation methods are sometimes the most appropriate. they are appropriate when a practice falls on hard times and must be sold by an estate, or the widow or widower of the professional. as soon as a professional ceases to practice, patients (or clients) begin migrating to other practices and the expected income stream on which the intangibles are largely based diminishes rapidly. capitalized earnings methods are of little use in such cases. but capitalized earnings methods are shortsighted as well. earnings are capitalized by discounting net earnings (defined in several ways, as discussed below) by a capitalization rate to find the net worth of a practice. the primary advantage of these methods is that they focus on what buyers and banks are most interested in: earnings that can be used to retire the debt incurred to purchase a practice. but many buyers and sellers fail to understand concept of discounting, and therefore find it difficult to accept the resulting valuation. moreover, it is often difficult to choose and substantiate a capitalization rate, a difficulty that is analogous to the subjectivity of valuing intangible assets. spreadsheet templates for practice valuation the spreadsheet templates described below attempt to overcome some of these disadvantages, as well as several shortcomings usually glossed over in text books and scholarly articles. for example, while it is common practice to adjust the balance sheet to reflect the value of assets to be sold, scholars rarely mention the importance of adjusting the income statement to reflect the types of expenses a buyer is likely to incur. instead, the literature is largely devoted to projecting income into the future, and finding capitalization rates that adjust for risk and uncertainty. (see 7 for a recent summary.) 47 capitalized earnings methods these methods are based on the premise that the fair market value of a practice is determined by the earnings that a buyer can expect to make from a purchased practice. several capitalized earnings methods exist, reflecting different definitions of "earnings". the definition used in the templates ( table 1) is based on the following logic: the buyer will use savings or borrowing, or both, to buy the practice. the earnings stream and its accompanying capitalization rate should reflect only what is being purchased, no more no less. first, the buyer is not buying gross income, because his expenses will be paid out of gross, and he is not investing in order to pay expenses. instead, he is buying a stream of net income, but not the net income shown on the seller's income statements. the net income to be capitalized should therefore accurately reflect the circumstances of the buyer (or typical buyer), and must be calculated by adjusting the seller' income statements. table 1:example capitalized earnings calculation step 1i pmject percent revised percent revenue actual of cross adjustment value of cross notes production 300,0tn 100.0 0 300,000 100.0 a. collections 290/no 96.7 0 290/no 96.7 step 21 adjust expcnscs amortization i/no 03 0 i/no 03 advertising, mktg. 1,000 03 0 i/no 03 depredation 7,400 23 ol400) 2,000 0.7 i insurance 6,000 2.0 q,000) 4,000 13 2 interest 7,000 23 (7,000) 0 0.0 3 laboratory 26,000 8.7 (4,000) 30,000 10.0 4 office expense 3,000 1.0 0 3,coo 1.0 pension 7,000 23 0 7300 23 5 profess. services 3,000 1.0 0 3,000 1.0 rent, mortgage 6,000 2.0 2,400 8,400 2.8 6 repam mtce. 5,000 1.7 0 5,000 1.7 salaries, staff 50,000 16.7 0 50,000 16 7 supplies, prof. 12,000 4.0 0 12,000 4.0 supplies, office 6,000 2.0 0 6,000 2.0 taxm 10,000 33 0 10,000 3.3 utibties 3,000 1.0 0 3,000 1.0 other 3,600 1.2 0 3,600 1.2 b. total expenses $157,000 523 0 $149,000 49.7 c. net income(a-b) $133,000 443 $141,(no 47.0 step3: estimate d. reasonable salary of buyer: $92,800 e. earnings above reasonable salary: (c d) $48,200 ito be capitalized) 5tep 4: estimate capitalization rate current rnk free rate 8.2 + premium for non-iitptidfty 3.0 + premium lor administrative burden 2.0 + lbsk m the profession (2 —6%) 4.0 + riskopedoc to this office (26%& 4.0 f. summed capitalization rate 21.2 step 5i capilauze net earnings c. earnings above salary $48,200 h. capitalmation rate 0.212 l pracdce value ( c / h ) $227,358 notes: 1. 0 p~ tl ttcsiabli bed i slussuideli cath td ~ tccsuuoywthctth i w hid m ipmettsoutny t d uh r placed.th pu m nte*pe w «m torelltctth a tthuthcbuyerw idh tom sidcto hecphuctsdp i pied t . 2. i mstsfc st fil ili ~ ndnormalop ti mw rttalmd,b ip m iwp oonalbenentswt»eum «&. s. i t wstmstswe»d lwtdbwautethtyd p cdo the prucsnd ~wdwp whmt.see tahiti. 4. lth.e p w adjusted to lou ofpmduolon, thc tl i crasc because each p imt d'd .c*pense is different. $. thief la w asconstdend on-elccti candnotadjuuedbccause scveralemploycesareco credbythcplan.and cha gl gltmlsht undulyenmursgesta(f iiiriiovcf. 6. the least has two yeats to run, after whkh thc rent for slmgar ptemlses would llhdy be over $8 on a year. 48 table 1 illustrates typical adjustments, which are explained in notes at the bottom of the table. in step 1 future revenue ("collections" ) is typically estimated by taking a weighted average of collections from the three most recent years. this assumes that the buyer could maintain the practice at an average level of the past three years, a conservative, yet reasonable assumption. in step 2, expenses are adjusted to reflect what they are likely to be for a buyer, and are based on the appraiser's knowledge of how expenses arise, and how practices are managed. the "percent of gross" column assists in making these adjustments. expenses are reduced that only provide a personal benefit to the seller (e.g., expenses to attend conventions and meetings, for a personal car, etc.) and they are adjusted to reflect the way a buyer would run the practice. to illustrate, the appraiser reduced the laboratory expenses of the seller in table 1, realizing that the seller relied on laboratory services more than would a typical buyer. these adjustments result in a projection of the income potentially available to the buyer. step 3 designates a portion of the income as "reasonable salary" of the buyer. the difference between net income and reasonable salary, often called "excess income", is then capitalizeddivided by the capitalization rate to compute an estimate of the value of the practice. these adjustments take about 70 percent of the effort, but they rarely influence the final asking price by more than 10 percent. the asking price is usually far more sensitive to the capitalization rate than it is to the adjustments of income and expense. since the capitalization rate is a return on investment provided by the excess income, it follows that it should reflect three things: (a) the buyer's cost of capital what he would forego if he financed the purchase with savings or borrowing (or both); (b) the environment where the practice residesthe factors that provide patients; and (c) the way the practice is runthe practice factors that attract and serve the patients. this isa "systems approach" where the capitalization rate is based on the cost of the money, the system that generates the patients, and the system that serves them. for the buyer's cost of capital, it is appropriate to use the current secure investment rate such as that for treasury bills or notes (8.2 percent in this example). this rate is then adjusted by three groups of factors: 1. business ifliquidity and administrative burden: the fact that the purchaser isbuying something thathe must manageandcouldnotsellasquicklyas financial instruments. 2. practice environment: a rate to reflect factors such as market growth and quality (families and high income people), and the level of competitive pressure. 3. practice management: is the location and patient mix attractive, and does the present owner use good marketing and patient retention techniques and good operating methods? these adjustments (in step 4) typically take the 8 or 9 percent return on secured investments into the neighborhood of 18 to 25 percent for a professional practice. this rate is often discussed in terms of the number of years of excess income the selling price represents. that is, a capitalization rate of 25 percent translates to four years, while a rate of 18 percent translates to about 5.55 years. in step 5, the excess earnings is divided by the capitalization rate to arrive at an estimate of the practice's selling price, which is also transferred to table 3, along with the results of other valuation methods. 49 asset summation methods with these methods, each major category of asset is valued separately, and then summed to arrive at the value of the practice. sections a through c of table 2 illustrate the calculations. the contribution of each category to the sum is shown in the right-hand side column, to illustrate the importance of balancing the effort that goes into each step against its impact on the total. table 2: example asset summation calculations a. fixed assets total percent of a.l professional and office equipment and furniture pracllce a 8 c d e f value purchase age salvage, annual undepmc. (c+ e) cost residual depmc amount valoe 2,000 2 700 200 1,600 2300 6,000 6 2,100 1,000 0 2,100 50,000 8 17500 5ma 10,000 27500 $31,900 16% a.2 leasehold improvements a 8 c d e f replace agc salvage, annual undcprec (c+ e) cost residual depreu amount value 12,000 2 4,200 200 11,600 15/do 6,000 6 2,100 i/)00 0 2,100 $17,900 9% a3 value of the lease a. amount of space you have (sq/ ft.) 1200 b. current rental rate i/sq.ft.) $5 c. current annual rent (a x b) $6,000 d. current market rent for similar space $7 e. annual market rent for similarspace (a x d) $8,400 f. difference between annual market rent and current rent (ec) $2,400 g. years renuining on lease 2 h. value of lease (f x g) $4,800 2% b. current asseis b.l accounts receivable (if in purchase agreement) category value aged account descdptton amount factor value l. insurance filed anddue to the practice 5,000 0.95 4,750 2. current and speciticpayment plans 10/)00 0.95 9~0 3.3(s60 days 8~ 0.82 6,970 4. 60.90 days 6,000 0.61 3,660 5. 90-120 days 5,000 0.20 1,000 6. 120-180 days 2/)00 0.10 200 7. over 180 days i/)00 0.00 0 total value $37500 $26,080 $26,080 13% 8 2 projected supplies on hand: professional and of(i«e a 8 c d e (8/12) (c x d) annual months of average pmjccted supply supply supply monthly suppacs category expense on hand expense on hand office 6,000 4 500 2,000 professional 12,000 3 1,000 3,000 total $18,000 $1b00 $5,000 $8/)00 2% c. intangible ass eis method a: multiplcs of gross and net revenue a 8 c d gross times .20 to 50 amounl multi puer (8 x 'q net times .5 to 15 value estimated annual gmss 290ano 035 i0i~ projected annual net) 33,000 1.00 133,000 average intangible value $h7,250 58% assei'ummation meihoix pracdce value $202,930 100% 50 section a.l, equipment and furniture: some appraisers ask equipment and furniture salesmen to visit a practice and appraise its furniture and equipment. the time and effort involved, however, is rarely worthwhile since the selling prices of professional practices are seldom sensitive to estimates of these assets. (it makes up less than 20 percent of the final value in our example). other appraisers use straight-line depreciation of the original price or estimates of replacement value. the approach shown here seems more cost-effective than seeking estimates of replacement value, depreciation or marketvalue, and consists of adding an estimate of the salvage value (usually 35 percent of the purchase price) to the undepreciated value of the equipment or furniture. also, since many professions have lots of small instruments (eg. dental tools, surgical instruments, etc.), it is often best to ask the seller to place a fair market value on these as a group, rather than draw up an inventory of odds and ends. in summary, the approach attempts to balance speed, cost, and accuracy in appraising these assets. section a.2, leasehold improvements: the same reasoning used for equipment and furniture is applied to leasehold improvements. section a.3, value of the lease: the existing lease is compared with the prevailing market price for space similar to that of the practice. the number of years remaining on the lease is multiplied by the difference between the two to arrive at the amount saved or lost for those coming years. section b.l,accounts receivable: these are valued only if they are tobe transferred to the buyer. then, if they are significant, (say, $50,000 or more), they are categorized by age and discounted by a factor that reflects their collectibility. our example practice collects from insurance, has a patient payment plan, which are discounted by 95 percent, and aged receivables that are discounted according to their age. section b.z, supplies: some appraisers take an inventory at the time of sale, but this is awkward and time-consuming, compared to its impact as a proportion of the selling price, (typically less than 5 percent). here the average inventory turnover is computed, and used to project the amount expected to be on hand at the time of sale. section c, intangible assets: since professional practices seldom have trademarks, patents, or copyrights the common intangibles of enterprises the valuation of their intangible assets is more controversial. intangible assets of such practices typically include goodwill, patient records, a covenant not to compete, telephone number and practice name, few of which have an objective cost of acquisition. since these assets are crucial to the generation of income, the two common methods for valuing themrevenue multipliers and excess earnings methods are based on the income statement. section c illustrates two revenue multiplier methods. when gross income is used, the appropriate multiplier is between 0.20 and 0.50, and when net income is used, the multiplier is between 0.5 and 1.5.although valuing intangible assets is quite subjective, it is quite important. in this example, intangibles make up more than 50 percent of the estimated practice value. as mentioned above, asset summation is most appropriate for practices that are performing poorly (eg., because of death or disability of the professional). since most of the value of such practices lie in their tangible assets, the intangibles are valued using small multipliers. larger multipliers are used for well-managed practices; which typically brings the results of asset summation methods into line with those produced by capitalized earnings methods. 51 summarizing the valuation process as shown in table 3, the results of several methods asset summation, capitalized earnings, (and various rules of thumb, if appropriate) are combined using a weighting scheme. the reasoning behind the weightings is also given. table 3. valuation summary appraisal method value weight weighted a. capitalized earnings $227,358 0.30 $68,208 b. asset summation $202,930 0.70 $142,051 c. revenue multipliers $0 0.00 $0 d. weighted average of methods $210,259 e. assessor's adjustment $1 assessor's final valuation $210,260 reasons for weightings: weighting for capitalized earnings is 0.30. since the primary reason for purchasing a practice is income, capitalized earnings is usually given the heaviest weighting. but this practice has not been able to take full advantage of its assets, due to the owner's poor hea! th. consequently, the asset summation was given a higher weighting. in this summary report, one can deal with problems that arise if different methods give widely different values. in this example, the appraised value produced by summing the assets is within 15% of the value produced by capitalizing the net earnings. in general the bettermanaged a practice is, the smaller the differences in appraised values produced by different methods. this tendency of poorly-managed practices to produce appraised values that differ widely, can be explained by considering asset turnover. a well-managed practice will have a higher proportion of intangible to tangible assets than will a poorly-managed one. since intangibles come largely from earnings, the different methods will tend to agree. at the other extreme, practices that have lost their clients will have almost no earnings to capitalize and their appraised value will be based largely on their tangible assets. checking the appraisal so far, two metaphorical "blind men" haveproduced an appraisal byanalyzing the balance sheet and the income statement. next, two other "blind men" inspect it: one takes a banker' viewpoint and produces a "purchase feasibility analysis", the other takes a manager's approach and produces a "performance indicator report". the "banker", who plays the role of the person to whom the buyer must go to finance the purchase, wants to be sure that the buyer will be able to make enough from the business to pay back the loan. 52 l the purchase feasibility analysis (table 4) does not generate a new value for the practice; instead it checks whether a prospective buyer can purchase the practice at the appraised value and succeed financially. if the buyer cannot finandally carry the practice while withdrawing a reasonable income from it, and retire the purchase debt in a reasonable time, then the practice cannot be sold at its appraised value. if this occurs, then the appraised value the asking price must be lowered. table 4. purchase feasibility analysis description source amount a.appraised value table 3 210,260 b. additional capital needed buyer 24,883 c. capital provided by buyer buyer 52,565 d. amount to finance a+b-c 182,578 e. terms of finandng (years) typical 10 e. prevailing interest rate typical 12% f. expected annual payment e,f,g 32313 g. expected gross collections table 1 290,000 h. expected operating expenses table 1 149,000 i. reasonable salary for buye table 1 92$00 j. income remaining for finance g-h-i 48,200 k. excess or shortage in cash flow j-f 15,887 the appraised price can be adjusted to a "sales asking price" that can be expected to be approved by a buyer, his advisors (accountant and attorney), and to be accepted by a financial institution where the buyer may apply for a loan. the analysis begins with appraised value. to this is added any investment that may be needed to refurbish the practice, and the operating capital needed to pay the bills until the accounts receivable begin coming in (row b). since financial institutions typically expect a buyer to invest some of his own money, the'capital to be provided (row c) is subtracted from the capital needed to find the amount to be financed. then the annual payment needed to retire the debt in a reasonable time (say, ten years) is computed (row f). the net income available to retire the debt is computed by subtracting the expected expenses and buyer's salary from the expected gross income (from table 1).the excess or shortage is then computed to arrive at a "safety factor". if the safety factor is too low, it will be important to analyze several managerial performance indicators and to suggest how the practice could be better managed, to increase income or reduce expenses, or both. otherwise, the purchase would be infeasible. the performance indicator report the fourth "blind man" takes a managerial approach and computes several performance indicators to determine how income could be improved, the assets better used, and expenses 53 reduced. typical indicators includes the familiar balance sheet and income statement ratios for liquidity, profitability, leverage, and activity, augmented by indicators specific to professional practices. for example, is office overhead more than 60 percent of gross collections? are collections less than 95 percent of billings? are too many supplies kept on hand? the example in table 5 is based on the appraiser's observation that the seller could increase the value of his practice by working more hours, improving his mix of services, and controlling his expenses better. the expected increased profit from these measures is computed in column c, and their expected impact on the selling price is in column d. table 5. example performance indicator report a b c d e mean for expected increased actual type of increase practice percent value practice profit value increase a. increase your revenue by working more hours a.l profit/hour-worked $67 $75 $3,200 $15,094 8% b. reduce your costs by controlling total costs b.l expense/collections 52% 50% $3,663 $17,280 8% summary and suggestions for future research these templates, based on the metaphor of four '1&lind men" who compare their results and "triangulate" to find bargaining zones to facilitate the sale of professional practices, provide good ways to leam about the management of professional practices. but the templates and the valuation services that they assist need further improvements. perhaps their major shortcoming is that professionals become interested in valuation at very few times in their careers when they are buying or selling a practice. few professionals think about the worth of their practices until it is too late to make changes that would enhance the worth of a practice. the expertise and insights from such service should be available to professionals earlier in their careers and for a longer time, so that they can improve their practices. it is the rare professional who manages his or her practice so as to maximize its sales value. moreover, the conventional methods of business appraisal give very little insight into what a professional can do to boost the value of the practice as he or she prepares it for sale (thus the need for the performance indicator report). by the time a professional recognizes the importance of business valuation, he or she has typically made several irreversible decisions that have reduced the potential value of the 54 practice. one young dentist put it this way: "it is essential that the dentist be the manager of his dental office. that' one of the major problems confronting solo practitioners today. we had four years of college and four years of dental school, but we didn't have one business course. the idea of managing an office and not knowing anything about business is really a very poor way of sending dentists out into the cold, cruel world. when i say 'managing your office', that doesn' just mean the expenditure of money. it means how you make moremoney,how you marketyour practice, how to advertise, how to get your patients to refer other patients to you. the day of just expecting your practice to boom on referrals alone is gone." (6) since these templates grew out of a search for better ways to serve small business clients, thought needs to be given to the design of continuing education services that use the resulting data to help professionals improve the way they manage their practices. a second question to be addressed concerns the subjectivity that creeps into crucial stages of each appraisal method. as mentioned above, intangible assets typically account for 50 to 70 percent of a practice's final asking price and yet are based on very little information about how assets are used. similarly, the capitalization rate is a very long and very flexible '1ever" whose influence is large but whose chosen value is often difficult to justify. in the example used here, for every one percent change in the capitalization rate, the appraised value changes by almost 5 percent; yet, many appraisers disagreeon these rates by several percentage points. more research is needed on the logic behind intangibles and capitalization rates. a promising direction for this research lies in performance ratios such as those in table 5, and is based on the realization that the common methods of business appraisal are based on financial statements, the realm of accounting. it seems likely that new business valuation methods based on performance indicators, including "off sheet" factors, would overcome some of the "blindness" of the methods now commonly used. references 1. domer, larry r. and randail, k. b. 'valuation of professional practices," ada news, 18, 15, (august 3, 1987). 2. domer, l. r, and randall k. b. manual of the american dental association: volume 2: successful valuation of a denial practice, chicago, ill. 1989. 3. hurst, w., "group dynamics in dental practice," agd impact, april, 1990, p. 15. 4. stollings, g. d. dental practices and their value, (privately printed, 1990). 5. thompson, t. "when it's time to sellout", u.s. neros & world report, (june 26, 1989), 62-64. 6. wilde, j., "the search for continuing education," dental economics, nov.,1990, pp.18. 7. worley, j. k. and green, f. b. "determinants of risk adjustment for small business valuationina growth industry",journalof small business management,(october, 1989), pp. 26-33. 55 sfã~vxaã syrayegv yipes and smai.i. firms'erformance: an empiricai. invesyigayion a. bakr ibrahim concordia university abstract this empirical research exammes srrategy rypes in (220) small firms and identifies a number of strategic directions and competittve devices that are associated with a high level of performance (profitabtiio). the study underscores the importance of selecting an appropriate strategy for the small firm and of building distinct competence and sustatnabie competitive advantage. the study of strategy types in the context of small business is an area of research that deserves greater attention. in particular, little is known empincally about strategic types most frequently associated with profitable small firms. while there are many strategic directions offered m the strategy literature, only a few hold promise and are relevant to small business. indeed nonavailability of key data on small businesses has contributed to the problem. the concept of strategy the concept of strategy has received much attention in the literature. chandler's (1962) pioneering research defines strategy as the formulation of long term goals and objectives of tbe organization and the implementation of these goals and objectives. andrews (1971) as well as hofer and schendel (1978) define strategy as a pattern of oblectives, purposes and goals, together with plans to implement them, m a fashion congruent with the company's existing or mtended type of business. mintzberg (1982) contends that companies may implement strategies they never intended he defines "realized" and "intended" strategy as a pattern in streams of decisions or actions. finally, michael poner (1980, 1989) distinguishes between two types of strategy: competitive and corporate strategy. competitive or business strategy refers to the distinctive competence of the firm. corporate strategy on the other hand refers to the firm's mission and the business in which it should be (ibrahim and ellis, 1990). strategic directions the strategy literature offers a number of strategic directions, some of which are relevant and which have been extensively pursued by small firms, in particular porter's (1980) generic strategies and miles and snow (1978) typology 13 michael porter (1980) identified three types of generic strategy that can be pursued by almost any organizations —namely, focus, cost leadership and differentiation, these strategies help the organization achieve, build, defend and sustain its competitive advantages. focus strategy involves concentrating on a specific, market, group of customers, product or service. the firm pursuing a focus strategy creates a competitive advantage in a narrow and well-defined niche to avoid head-on collisions with large competitors. the second generic strategy described by porter (1980) is cost leadership. this strategy implies that the firm intends to be a low cost producer, hence cost efficient. differentiation, the third strategic direction, involves the offering of a unique product or service that allows the small firm to charge a premium price. miles and snow (1978) identified three types of strategic direction that may be effective for a small business, referred to by the authors as'the 'defender, the prospector, and the analyzer. the defender-type involves the developing of a narrow product/market niche and the erection of barriers to protect it. unlike the defender, the prospector is constantly scanning the environment for new opportunities, be they new products, services or markets. finally, the analyzer is a combination of the defender and prospector in that it simultaneously defends its niche while scanning for new opportunities. i methodology the purpose of this research is as follows: (a) to identify strategy types most frequently pursued by small firms, (b) to examine whether these strategy types are associated with different levels of performance (profitability), and (c) to identify competitive devices which contribute significantly to profitability in small firms. two hundred and twenty-three out of 1240 owners and managers of small firms from new york city, montreal and toronto ret'umed usable responses (18%). a profile of the sample population is displayed in table i. owners and managers were asked to identify their own strategy using a detailed description based on miles and snow (1978) typology and porter (1980) generic strategies. 14 table 1 sample populari on profile types of business education of the owner/manager retail 16% elementary 5% distributor 99o high school 24% manufacturing 56% college 68% service 19% otaduate degree 3% (diploma, master, ph.d.) age of business: longevity sales 1-3 9% 0 150,000 6% 4-6 22% 151,000 — 250,000 26% 7-i0 46% 251,000 500,000 16% over 10 years 23% 501,000 — 1,000,000 36% 1,000,000 — 2,000,000 6% 2,000,000 — 3,000,000 4% profitability: roi 3,000,000 — 4,000,000 3% roi 4,000,000 — 5,000,000 2% 0-7% 11% 5,000,000 — 7,000,000 1% 8-10% 20% 10-12% 48% 12-14% 9% 14-16% 7% ' 6-t10% 4% over 21% 1% a major question contained in the questionnaire was "which of the following six descriptions most accurately reflects your firm's strategic direction?" table 2 presents descriptions of the different types of competitive strategy as they appeared m the questionnaire. this methodology allowed the researcher to collect data from a larger sample and focused on owners and managers'erceptions of their own strategic directions. the method was reported by snow and hrebiniak (1980). 15 table 2 description of different tipes of strategy as they appeared in the questionnaire please read thc following six descriptions of different competitive strategy and select the one which most closely describes your business activities as wel i as your philosophy of competition. i. this strategy involves concentrating on a specific market, group of customers, product or service. the firm pursuing this strategy creates a competitive advantage in a narrow and well defined niche to avoid head-on collision with large competitors. 2. this strategy implies that the firm intends to be a low-cost producer. therefore, the strategy emphasizes cost cflicicncy throughout the whole operation. this requires an in-depth study of the firm's cost structure and an efficient cost control system. cost advantages can be achieved by economies of scale and/or experience curve. 3. this strategy involves offering a unique product or service that allows the firm to charge a higher price for its product. there are different ways to differentiate the firm's product such as improved product design, features, appearance, reliability, durability, quality, faster or free maintenance and repairs service, warranty, and/or providing sufficient information to customers. 4. this type of strategy involves carving a narrow product/market domain and tries to protect it heavily. this strategy involves the following characteristics: intensive planning. centralized control systems and functional structure with a high degree of formalization and cost efficiency. 5. this strategy involves scanning the environment continuously looking for windows of opportunities such as a new market, product or service. as a result, the firm tends to be highly decentralized, flexible, less formalized, emphasize r & d activities and use flexible-type technologies. 6 this type of strategy involves pursuing two different strategic directions. that is maintaining the traditional market product domain while scanning for new opportunities. therefore, the traditional domain is highly centralized and cost efficient. while the scanner par is highly decentralized. further data collection was carried out through the use of a questionnaire designed to collect information related to the business, strategy type and level of performance. in the first section general information was sought concerning the business including type of business. level of education of the owner/manager, age of the business (longevity). sales volume and 16 rate of return on investment (roi). in the second part a number of questions were designed to reveal, albeit indirectly, the type of strategy being pursued by the firm and dealt with competitive devices such as technological superiority of product or service, pricing strategy, competition, product uniqueness, special service to customer, cost structure and marketing strategy. these strategy variables were selected from items used in the pims studies of anderson and paine (1978) and the research of dess and davis (1984) which have been previously validated. after data were collected, statistical analysis was performed. first, cross-tables were used to identify strategy types most frequently pursued by small firms. second, simple regression analysis was employed to examine the relationship between strategy and level of performance (roi). finally, a separate bivariate regression was run for each area of distinct competence (competitive device) using roi as the dependent variable. results results as shown in table 3 suggest that niche strategy is the most frequently pursued type (31.8% of total sample) while analyzer type is reported to be the least pursued strategy (0.8%). 17 table 3 number ofsmall firms pursuing diferent types ofstrategy and percentage to total sample respondents strategy types n =223 percent of total sample niche 71 31.8% defender 59 26.4 prospector 54 24.2 differentiation 31 13.9 costleadership 6 2.6 analyze 2 .8 223 concerning the relationship between strategy type and performance level, reported results ~ shown in table 4 indicate (hat profitability (roi) was significantly different (p & 0.05) under different types of strategy. strategy types most frequently pursued by small firms reported higher roi means compared to the least pursued types. niche type strategy, for example, reported the highest roi (mean = 14.1) while analyzer type reported the lowest roi on average (mean = 7.4). thus, results suggest a strong relationship between type of strategy being pursued and level of performance. 18 table 4 the mean, standard deviation and significance level of profitability under diferent types of strategy strategy types n = 223 profitability*(roi) sd" niche 71 14.1 18.10 defender 59 13.6 16.40 prospector 54 12. 1 15.55 differentiation 31 10.4 17.92 costleadership 6 9.8 15.40 analyzer 2 7.4 13.41 223 *means and standard deviation. f-value 3.05 (p = .05, df = 2,121) to further explore the relation between strategy and performance, areas of distinct competence (competitive devices) were examined in relation to profitability. a bivariate regression was run for each competitive device using roi as the dependent variable, and the results reported in table 5 clearly indicated that competitive devices such as pricing, location, uniqueness of product or service, quality of product and know-how, contributed significantly to performance (profitability). the belief that other competitive devices such as advertising or reduction in cost would help roi was not supported. 19 1 table 5 bivariate regressi'on for types of competirive device using roi as rite dependent variable types of competitive advantage beta r-square p uniqueness of product or serv ice 0.60 0.24 0.01 quality of product or service 0.55 0.22 0.02 location 0.60 0.34 0.01 know-how 0.40 0. 11 0.05 pricing 0.56 0.09 0.02 cost -0. 12 0.02 0.08 advertising -0. 10 0.03 0.07 discussion the present research suggests that focus (niche) is by far the most effective strategy for small business. previous research by ibrahim and goodwin (1986) and by watkin (1986) supports this conclusion. a small firm pursuing a niche strategy creates a competitive advantage in a narrow and well-defined niche to avoid head-on collisions with large competitors. in the present study a number of competitive devices were identified, and the extent to which they form a competitive advantage was explored in relation to performance. areas of distinctive competence identified in the present study were similar to those identified by stoner (1987) and include quality of product or service, location, know-how, uniqueness of product or service and pricing. the present study suggests that defender and prospector-type strategies are highly pursued by small business owners and managers. this seems to confirm earlier studies. for example, davig (1986) reported that small firms pursuing either defender or prospector types achieved better performance than those employing an analyzer-type strategy. rugman and verbeke (1988) reported that prospector-type strategy is the most pursued strategic direction followed by the defender-type. the researchers concluded that miles and snow (1978) typology is more appropriate for small business than porter's (1980) generic-type strategies. the present research also suggests that differentiation strategy is pursued by a large number of owners and mangers of small firms. as outlined above, owners and managers employed several means of differentiating their products or services such as improving product quality, uniqueness of product or service, pricing and location. a study by cooper, gary and woo (1986) found that differentiation strategy is as effective as a niche type strategy in small business. sandberg and hofer (1987) reported similar results and suggested that differentiation strategy could be more effective than focus-type strategy. in addition, chaganti (1987) found that differentiation-type strategy is more effective for small firms during an industry's declining stage. this study indicates that cost leadership is not a highly pursued strategy by small lirms, a result that may be surprising to some. this may be due to the fact that cost leadership strategy, 20 as the name implies, stresses cost efficiency, which can be achieved by economies of scale, experience curve and capacity utilization, aspects difficult to achieve in the context of a small firm. indeed, cost efficiency is a strong competitive advantage but only if the firm is able to sustain it over a long period of time. this may require an in-depth study of the small birm's cost structure as well as an efficient cost control system. it is interesting to note that a recent study by hughes (1984) suggests that the use of process technologies (improvement in the manufacturing process rather than research on new product development) presents little risk to small companies and results in reducing cost, thus building a strong competitive advantage (ibrahim, 1992). finally, analyzer strategy is by far the least pursued strategy and was found to be less effective than the above strategy types. earlier research by davig (1986) found similar results and suggested that this type of strategy be avoided in the context of small business because of its complex nature. indeed, analyzer implies two different strategic directions and thus requires two different implementation mechanisms. conclusion the purpose of this research is to identify strategy types most frequently pursued by profitable small firms. the present study identified four prevalent strategy types most frequently pursued by profitable small firms, namely niche, defender, prospector and differentiation type strategies. in addition, the present research identified a number of competitive devices that contribute positively to the profitability of the small business. these are uniqueness of product or service, quality of product or service, location, know-how and pricing. references anderson, c.r., and paine, f. (1978). pims: a re-examination. academy of management review, 3, 602-613. andrews, k. (1971). the concept of corporate strategy. homewood, lll: irwin. chaganti, r. (1987). small business strategies in different industry growth environments. journal of small bust ness management, 25, 52-59. chandler, a.d., jr. (1962). straregy and structuret chapter in the histon of the intlustrtal enterprise cambridge, mass. mit press. cooper, a., gary, w., & woo, c. (1986). strategies of high performing new and small firms: a re-examination of the niche concept. journal of busmess venturing, i, 247-260. davig, w. (1986). business in smaller manufacturing firms. journal of small business management, 24, 39-47. dess, g., & davis, p. (1984). porter's (1980) generic strategies as determinants of strategic group membership and organizational performance. academy of management journal, 27, 467-488. hofer, c.w., & schendel, d. (1978). strategy ftirmulationt analytical concepts. st. paul, mhh west publishing. hughes, e. (1984). responding to changes in process technology: strategies for the small business. journal of small business management, 22, 9-15. ibrahim, a.b., & goodwin, j.r. (1986). perceived causes of success in small business. american journal of small business, ll, 41-50. 21 ibrahim, a.b., & ellis, w.7(990). entrepreneurs)tip and small business management: text, readings und cases. lowe: kcndall/hunt publishing company. ibrahim, a.b., & arghyed, k. (1992). strategic inanagement, readiiigs and cases. new york; mcg raw hill. ibrahim, a.b., (1992). strategy formulation in small business: a conceptual framework. jauivia/ of small business and entrepreneursliip, 9, 71-76. miles, r., & snow, c. (1978).organizational strumure and process. new york: mcgraw hill. mintzberg, h., & waters, j. (1982). tracking strategy in an entrepreneurial firm. academy of manugemeni journo/, 25, 465-499. porter, m. (1980). competitive strategy. new york: free press. porter, m. (1989).from competiiive advantage to corporate strategy. man ard business retieie, 67, 43-59. rugman, a., & verbeke, a. (1988). does competitive strategy work for small biisiness? journa/ of smull business rind eiitrepreiieursbip, 5, 45-49. sandberg, w., & hofer, c. (1987)jlmproving new venture performance: the role of strategy, industry structure and entrepreneur. jaurna/ of business vetuuring, 2, 5-28. snow, c., & hrebiniak, l. (1980). strategy, distinctive competence, and organizational performance. administrative science quaner/y, 25, 317-336. stoner, c.r. (1987). distinctive competence and competitive advantage. jvurna/ of small business management, 25, 33-39. watkin, d. (1986).toward a competitive advantage: a focus strategy for small retailers. journal of small business management, 24, 9-15. 22 http://www.smallbusinessinstitute.biz strategy-as-coping in medium-sized enterprises: a social process of collective sensing for acquisition opportunities wilson ng1, maha al-shaghroud2 1university of roehampton, uk, wilson.ng@roehampton.ac.uk 2university of huddersfield, uk, m.alshaghroud@huddersfield.ac.uk a b s t r a c t we explore what may be learned from managerial practices of an established medium-sized enterprise (“mse”) in surviving and thriving during a recession. drawing on a strategy-aspractice (“sap”) view of managerial action, an improvised strategic process was observed in four acquisitions undertaken by the mse when its closely-knit management reacted to operational pressure by improvising ideas for potential acquisitions. this process, which we call “collective sensing”, occurred within unscheduled “get-togethers” in the workplace, when participants enacted a range of roles in a routine of sensing potential acquisitions. we explain collective sensing by viewing it as a consistent pattern of actions among top managers who used get-togethers as a creative platform for identifying a stream of potential acquisitions, including potentially valuable opportunities that have been overlooked in the market. several contributions are proposed for developing and using collective sensing in smes as a practical managerial process that can produce high-potential acquisitions. keywords: journal of small business strategy 2018, vol. 28, no. 02, 16-32 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2018 small business institute® apa citation information: ng, w., & al-shaghroud, m. (2018). strategy-as-coping in medium-sized enterprises: a social process of collective sensing for acquisition opportunities. journal of small business strategy, 28(2), 16-32. w w w. j s b s . o rg strategy-as-practice, cognition, smes, medium-sized, closely-controlled enterprises, top managers while much has been written about how small and medium-sized enterprises (“smes”) may build competitive advantage, we know considerably less about how established mses that compete with large, resource-rich firms may sustain their competitiveness (ng & keasey, 2010). a distinct competence among growing smes is in the recognition and identification, or sensing, of investment opportunities (merrilees, miller, & tiessen, 1998). for mses, this competence can be critical in sustaining their competitiveness, for example in a recession when they may struggle to survive against large firms (liao, welsch, & stoica, 2008) because of their paucity of organizational slack (latham, 2009). yet mses can face high costs from their sizeable operations (zahra, neubaum, & huse, 2000) and need continuing growth to remain competitive (gilinsky, stanny, mccline, & eyler, 2001). small businesses face similar competitive problems, for example, when large firms exploit niche markets that have traditionally sustained small businesses (dessi, ng, floris, & cabras, 2014), and these businesses may learn from the way that mses have persisted (ng & thorpe, 2010). thus far, knowledge of how firms with board-level, professional managers (“top managers”) can sense potential acquisition opportunities has focused on the personalities and capabilities of ceos based on their superior networks (cattani & ferriani, 2008), industry knowledge (maclean, macintosh, & seidl, 2015), and strategic adaptability (nadkarni & herrmann, 2010). in smes, the influence of top managers in decision-making may be limited to a subsequent “seizing” stage when they capture opportunities that have already been identified (hohenthal & lindbergh, 2005). an exception to this ceo-centric view is martin (2011), who explored collective decision-making processes in multi-business leadership groups. martin (2011) suggested that when business unit managers operate as “episodic teams” in seeking new opportunities, then those teams may build adaptable capabilities in economically uncertain periods. yet we still do not know how opintroduction http://www.smallbusinessinstitute.biz http://www.jsbs.org 17 w. ng & m. al-shaghroud journal of small business strategy / vol. 28, no. 2 (2018) / 16-32 portunities come to be identified in smes, and particularly in closely-managed mses with a substantial track record that small businesses may look to emulate (ng & keasey, 2010). our interest, therefore, is in the sensing behavior of these mses: how do their top managers sense acquisition opportunities? addressing this question may begin to illuminate how smes, by drawing on the sensing behavior of their top managers, may also thrive against larger and better resourced firms (pett & wolff, 2007). we argue that knowledge of how smes may identify corporate opportunities for acquisition is principally contained in activities of “collective sensing” that are conducted in our case firm by a tightly knit group of top managers. collective sensing involves a distinct process of sounding out (voicing and seeking responses from) those managers, and in this empirical study of collective sensing, we adopt a novel strategy-as-coping lens (chia & holt, 2006, 2009) within the sap literature in articulating a process in which top managers of a united kingdom mse in the competitive building materials industry reacted in a business downturn by collectively sensing for acquisition opportunities. in our study, this downturn occurred during the “credit crunch” between 2008 and 2012, which badly affected the debt-laden construction business in the eurozone. during this period, top managers in our case firm intensified their search for potential acquisitions by increasing the number of their “get-togethers” to explore ideas for these acquisitions. in four separate get-togethers, both authors observed how managers conducted this process and interviewed them for their reflections thereafter. while managers reacted differently in each get-together, consensus was reached in all four meetings to conduct due diligence on the single acquisition that was the focus of every get-together. in articulating this practice, our principal contribution is in suggesting how collective sensing may be framed as an improvised managerial tool for closely controlled smes to sense acquisition opportunities, including opportunities during low periods of mergers and acquisitions (“m&a”) activity. we proceed to suggest how a certain combination of roles enacted by top managers may be an important condition for collectively sensed opportunities that are potentially more cognitively distant, and therefore potentially higher yielding (gavetti, 2012), to emerge in get-togethers relative to proximate opportunities that competitors know and typically compete over (chia & holt, 2009). our portrait of the way that top managers sought acquisition opportunities under challenging market conditions suggests how a powerful managerial tool may be crafted in closely-controlled smes by drawing on extant managerial resources creatively and purposively. here, practical coping in our case firm is presented as a process of sustained interaction of ideas by “purposive improvisation” (maclean et al., 2015), wherein managers improvised potential acquisition opportunities by adopting and enacting one or more informal, “social” roles. as this improvisation implies cognitive awareness, sensing may be explained by a “cognitive view of opportunity-seeking behavior”, where managers’ experiential and knowledge perceptions (“cognition”) may influence their ability to recognize potential acquisitions. our explanation of how this process occurs advances knowledge of opportunity sensing in smes, which is presented here as a stand-alone management routine. by contrast, sensing has been regarded as part of a conjoined strategic process of sensing, seizing, and reconfiguring market opportunities (gebauer, paiola, & edvardsson, 2012; grimaldi, quinto, & rippa, 2013). we now review the strategy-as-coping and situated cognition literatures that framed our research. we then describe our case firm and four get-togethers when managers sensed four separate acquisitions. our discussion sets out our contributions to the sme literature, and we conclude with implications of collective sensing in related fields. theoretical framing sensing for acquisition opportunities is an established part of strategic development in the sme literature. for example, sensing is already recognized as an important capability of small business ceos who respond flexibly and quickly to external changes (nadkarni & herrmann, 2010), while top managers of smes typically assume the burden of identifying opportunities, with limited information, during critical periods of their corporate development (ng & thorpe, 2010). however, strategic behavior of mse managers is often viewed in the same light as their counterparts in small businesses, despite managers in mses often having to improvise to address strategic and operational issues, and to create opportunities for this in a professionally managed organization (zahra et al., 2000). these opportunities enable mse managers, potentially, to build distinctive management processes to address organizational challenges, such as high operating costs in maintaining their established enterprise that large firms can meet with economies of scale, while growth that should cover these costs has stagnated (ng & keasey, 2010), and organizational slack that may protect the mse’s business remains constrained as if it were still a small enterprise (latham, 2009). explaining how mses can address these challenges during economically challenging periods could explain how small businesses can also overcome issues that they 18 w. ng & m. al-shaghroud journal of small business strategy / vol. 28, no. 2 (2018) / 16-32 too will face as they grow and develop, such as resource constraints relative to large firm competitors and an inability, for example, to adequately process market information because of a paucity of management processes (liao et al., 2008). the paper’s focus is therefore motivated by the paucity of research in sme studies on mses as a form of organization with distinct issues and, in this paper, ways of resolving them that may also help small businesses. for example, the available literature on mses suggests that in competing against large firms, mses have retained an ability to compete under close ownership and management control (zahra et al., 2000, dessi et al., 2014), often with managerial practices that are deemed to be a weak aspect of their management. this paper contributes to understanding management practices in the sme literature based on how our mse addressed challenges that small businesses would also expect to face as they too grow and develop, including the challenge of abruptly lower market activity during a recession. in post-recession usa, construction manufacturing is a topical business, while the uk’s open economy offers a credible basis for extending the paper’s findings elsewhere. strategy-as-coping the strategy-as-coping literature is a perspective within sap that is based on strategic intent. chia & holt (2006, 2009) define strategic intent in terms of a consistent pattern of actions being immanent in the ordinary activities of individuals and groups, and strategy-as-coping concerns strategic decision-making that attends to “informal, unscripted activities” (vaara & whittington, 2012, p. 313). these activities are based on un-rehearsed, reactive practices of actors as they seek to attend effectively to (“cope” with) daily challenges, rather than on either planned or emergent strategy processes or outcomes performed by strategic actors. our “coping” perspective is consonant with the sap literature on the practice-led nature of strategic development (jarzabkowski & searle, 2004), while this view also highlights the creativity of resource-constrained managers who need to manage a substantial business. those managers “dwell” in their activities, where they engage in a form of “practical coping” and react flexibly to situational challenges by adapting extant corporate processes, including get-togethers, and by drawing on everyday objects, including corporate objects in our research, such as company lists of acquisition targets, as familiar tools that they apply, “somewhat primordially, as physical extensions” of themselves (chia & holt, 2006, p. 641). subsequently, actors who are located at different levels and areas of their organization may perform everyday purposive actions, such as in getting together impulsively and informally, and these actions become routinized because actors, as relationally constituted agents, are able to “dwell in and draw, in an unthinking way, from their available tools to tackle novel, present challenges” (p. 647). strategic implications are then inherent in their responses when experienced and well-situated actors collaborate to meet challenges in a robust manner. chia and holt (2009) go on to suggest that an organization’s actors may be engaged in local “coping initiatives” to alleviate immediate, pressing problems, with little thought for eventual outcomes of their decisions. those actors, being engaged in present, material concerns, may be unaware of any strategic outcomes of their actions, although their actions may have more impact on corporate decisions if actors’ identities were demographically and informationally diverse. here, research of top management practices has suggested the importance of managerial experience and role diversity on an sme’s strategic capacity by improving its ability to negotiate volatile environments (liao et al., 2008), and to thereby enhance corporate performance (jarzabkowski & searle, 2004). this finding of a positive impact of diverse managerial roles on the quality of their decisions is corroborated by studies with large datasets that suggest strong, positive relationships among demographic, information, and role diversity among managers as they make decisions (cannella, park, & lee, 2008). in framing our view of collective sensing, we therefore conceptualize managerial behavior behind collective sensing in terms of managers’ reactive behavior (chia & holt, 2009, 2006), while in get-togethers, processes of social interaction are viewed as being enacted among participants with dissimilar roles (jarzabkowski & searle, 2004). in smes, the subsequent interaction among closely networked managers may be reflected in “socially accomplished activities” that legitimize their ideas (jarzabkowski, 2008, p. 373), although get-togethers that host those activities would be impromptu events. the impromptu nature of get-togethers can host impactful activities because their informal nature can encourage an open exchange of ideas during get-togethers (helfat & peteraf, 2015). we suggest that recent work on managerial cognition offers an understanding of the potentially impactful nature of get-togethers by locating the purposive behavior of sme managers in an open, creative space (healey & hodgkinson, 2014). the nature of this space is conceived by helfat & peteraf (2015, p. 846) as an “informal arena within organizations” where managers know that they can 19 w. ng & m. al-shaghroud journal of small business strategy / vol. 28, no. 2 (2018) / 16-32 openly exchange personal views and yet remain off the record. this setting then focuses the get-together on the ideas behind meetings. various literatures have also suggested that managers may be influenced by the social, collective actions of management colleagues outside the boardroom (chattopadhyay, glick, miller, & huber, 1999), rather than merely within formal corporate settings. moreover, managerial processes may be shared (lave & wenger, 1991) among an organization’s wider employees (chia & mackay, 2007). situated spaces within organizations may therefore provide a suitable setting for collective sensing among their employees. for smes, this view has practical resonance for strategic decision-making as these organizations may then maximize their limited resources by including the voices of non-management stakeholders in strategic activities. but what kind of expansive thinking might take place in situated spaces? here our strategy-as-coping view may be enriched by maclean et al.’s (2015) view of “purposive improvisation” in which everyday practices can be conducted in creative ways to enhance their effectiveness as coping mechanisms. the creative element of purposive improvisation is in its nature where actors would imagine possible solutions to problems in an “improvised scenario” (maclean et al., 2015, p. 6), for example, where participants in get-togethers air and share their views on acquisitions that have been ignored because they did not meet the acquiring firm’s criteria for acquisitions (lave & wenger, 1991). in building a nuanced picture of collective sensing, we therefore locate our perspective of strategy-as-coping within a dedicated managerial space as a means of understanding the interaction between situated spaces and managerial cognition. principally, the activities of actors are “situated” in organization spaces that pursue agreed objectives among those actors. these spaces exclude institutionalized settings such as board meetings, and instead we adopt helfat & peteraf (2015)’s notion of spaces for collective activities being purposive and co-created among participants. through continuous practice, purposive activities in co-created spaces may then form a habitual basis for collective behavior. methods research context our research site was a privately-owned mse (plastica) that makes and sells plastic building products in northern england. founded by an entrepreneur, plastica had been bought out by six senior managers in 1997, all male britons, who have managed the firm since then. under this régime, plastica has become an international manufacturer of construction materials, and has continued to grow principally from corporate acquisitions. however, the business has remained closely managed by its six managers. two of these managers (business director [“bd”], and executive director 1 [“ed1”]), who played key roles in get-togethers, had attended the same school, while ceo and bd had worked together in another firm prior to joining plastica. ceo, bd, and ed1 had become friends, and their families had gotten close. a fourth manager, cfo, had collaborated with the ceo previously, and the ceo had headhunted him from a competitor. only two top managers, ed2 and ed3, who were each ten years younger than their four other colleagues, had not known anyone in plastica before they joined in the 1990s; but they too were career employees in the uk construction industry. see table 1. research design in designing our research, an interpretive case study methodology was developed to address our process-centered question, with four unconnected cases of corporate acquisitions made by our host firm, plastica, between 2008 and 2012. as the firm grew principally by corporate acquisitions, our conceptual framework for research was plastica’s approach to identifying and recognizing its acquisitions (yin, 1981). based on initial interviews with top managers, it appeared that these activities occurred in get-togethers of the firm’s managers, and many get-togethers resulted in potential acquisition opportunities. we were given access, as observers, to six get-togethers and report here on four get-togethers from this sample where managers adopted different combinations of roles and a positive outcome was reached on an acquisition in each meeting. both researchers sat in the four get-togethers and observed the actions of each participant. based on our own records of these actions, each of us then formed our own conception of the types of roles that each participant played (eisenhardt, 1989). we undertook not to record any quotes from get-togethers. we also conducted interviews with top managers and middle managers of plastica. a few interviews were also conducted with top managers of each of the four acquired firms. printed documents comprising corporate organograms preand post-acquisitions and corporate lists of acquisitions provided facts about these acquisitions between 2006 and 2012. bd had prepared these lists for board meetings, and they contained “facts” on each firm. based on observations and interviews, the authors wrote case descriptions of each get-together. based on our observations and 20 w. ng & m. al-shaghroud journal of small business strategy / vol. 28, no. 2 (2018) / 16-32 subsequent interviews, case descriptions of each get-together were written up by each researcher: data collection data on the four get-togethers were therefore obtained principally from two researchers’ in situ observations of four get-togethers, written up as case descriptions, and from 22 one-on-one interviews. interview data were used side by side with researchers’ observations mainly to probe behind the behavior that we observed. sixteen interviews were conducted with six top managers, comprising four interviews with the ceo (between 2008 and 2011) and multiple interviews with five other top managers. further interviews were conducted with two middle managers in plastica’s finance and hr departments, and with four top managers (designated as directors) of the four firms that were subsequently acquired by plastica. the scope of interviews with plastica’s top managers was to seek their views: a) of how acquisition opportunities were identified in plastica, and b) of the roles that interviewees believed plastica’s top managers played in the sensing process. managers of acquired firms were asked about the effects of the respective acquisitions on their firms. for a detailed account, see table 2. table 1 case profiles get-togethers observed acquired business activities purpose of acquisition 1 tyrica (2008) manufacture & trading of commercial building products extend uk market for commercial building products. 2 matyflica (2009) manufacture & trading of residential building products extend uk market for residential building products. 3 sylica (2010-2011) manufacture & trading of home & office ventilation equipment penetrate uk market in ventilation equipment. 4 pylica (2011-2012) manufacture construction systems & high-end building products extend product range & establish logistical base in france. table 2 research protocol data sources respondents: 12 top managers: 6 middle managers: 6 acquired firms: 4 interviewees’ roles host firm & acquired firm interviews: 22 x 0.5-2 hrs each (dates) interview topics data source(s) main topics for ceo, cfo, bd, ed1, ed2, & ed3 only: 1) sensing process of acquisition opportunities, & 2) sensing roles of top managers researchers’ observations of four get-togethers involving ceo, cfo, bd, ed1, ed2, & ed3 only ceo plastica 4 (2008-2012) additional topics: corporate vision & goals, development & practice of get-togethers interview transcripts; annual reports, 2006-2015 cfo ” 3 (2008-2010) additional topics: corporate prospects & financial constraints interview transcripts; annual reports, 2006-2015 ed1 ” 3 (2008-2010) additional topic: uk operations strategy interview transcripts ed2 ” 2 (2008 & 2009) additional topic: international operations strategy interview transcripts ed3 ” 2 (2008 & 2009) (principal topics only) interview transcripts bd ” 2 (2008 & 2010) additional topic: plastica’s acquisitions strategy interview transcripts marketing manager ” 1 (2009) acquisitions process and growth prospects interview transcript hr manager ” 1 (2009) acquisitions process and staff integration interview transcript operations director tyrica 1 (2009) post-acquisition operations interview transcript finance & operations director matyflica 1 (2010) post-acquisition prospects interview transcript marketing director sylica 1 (2011) post-acquisition prospects interview transcript operations director pylica 1 (2012) post-acquisition prospects interview transcript 21 w. ng & m. al-shaghroud journal of small business strategy / vol. 28, no. 2 (2018) / 16-32 the researchers initiated contact with the ceo, originally to study strategic decision-making in the firm. the ceo introduced us to cfo, bd, and ed1, who in turn introduced us to ed2, ed3 and mid-level operations and administrative managers. the six managers were the only participants in all four of our get-togethers, while mid-level managers followed up on each of the four acquisition opportunities. these opportunities were subsequently verified with administrators as major acquisitions during the credit crunch and the ensuing downturn in m&a activity in the eurozone. plastica therefore held a larger number of get-togethers and made more acquisitions during a low-activity m&a period in the market from 2008 to 2012 than in several years immediately before 2008 and after 2012: 1 50 40 30 20 10 0 2006 & 2007 2008 & 2009 2010 & 2011 2012 & 2013 2014 & 2015 market acquisitions (trade sales) market divestments (trade sales, mbos, flotations) plastica no. get-togethers plastica acquisitions plastica divestments uk sme construction market only sme market acquisitions (trade sales) sme market divestments (trade sales, mbos, flotations) plastica: no. of gettogethers plastica acquisitions plastica divestments 2006 & 2007 44 47 3 1 4 2008 & 2009 18 24 7 2 1 2010 & 2011 10 17 11 4 0 2012 & 2013 13 18 8 3 1 2014 & 2015 23 21 6 1 3 figure 1. m&a activity among uk sme construction manufacturers, 2006-2015 sources: uk construction products association, annual review, 2006-2015, plastica archival data, research interviews. in each interview, following questions on the sensing process in get-togethers, discussion turned to the issue of interaction among top managers: ‘how did [x idea] for acquisition come about? what was the forum in which ideas were discussed?’ and once a possible acquisition had been proposed: ‘what was the discussion [for each acquisition]? how did [managers] agree what to do? what happened next?’ in this interrogation, we drew on a “laddering” technique (easterby-smith, thorpe, & jackson, 2012) to facilitate a movement from descriptively narrating events towards a drawing out of respondents’ views on how they interacted. laddering involved methodically building a respondent’s views by “laddering up” and probing her reaction to colleagues’ views, or “laddering down” by prompting respondents to reflect on their own responses. together, talk aloud and laddering techniques encouraged introspection from respondents: “researcher: what did you think of the french acquisition [pylica]? bd: the way i’ve approached [acquisitions] is to keep looking for opportunities. but we never had an opportunity for [pylica]. then suddenly an unexpect22 w. ng & m. al-shaghroud journal of small business strategy / vol. 28, no. 2 (2018) / 16-32 ed opportunity arose for a good look. that was in july, and we decided to go for it almost immediately in august. interviewer: can you tell me about that decision? bd: our senior managers usually organize get-togethers before or after company meetings and it was during one of these meetings that i suggested this opportunity and what the steps should be for acquiring [pylica]. the timing was because not much was happening in the market, and i thought strategically this was good. researcher: but colleagues at this get-together suggested the timing for acquiring pylica was not good. and yet a consensus was reached? bd: we got together to brainstorm ideas, but because we were running a business, we had to show results. it wasn’t an academic exercise.” data analysis we first organized both observers’ notes under our single theme of the observed actions of each participant. every action (e.g., calling a get-together, challenging the value of an idea [table 4]) was set out under a three-stage timeline of each get-together: reaction, discussion, outcome (which turned out to be the consensus stage of get-togethers). we then compared each other’s notes by organizing our respective accounts of participants’ contributions, eliminating similar observations, and itemizing different or additional observations (eisenhardt, 1989). this itemization “forced” together observations that initially appeared different and prompted researchers to make sense of them. for example, the ceo in the get-together on pylica was observed to have built consensus by closing-down discussion among participants, and yet in the same get-together he cultivated open and potentially fractious discussion. by “forcing” together these observations and viewing them against the outcome of discussions we understood the prior importance of the consensus-building role over the secondary role of cultivating discussion, and we then itemized these two roles as distinct roles, and searched for further observations of each role among other participants. subsequently, a single document listing each participant’s actions in the six get-togethers was drawn up. figure 2 presents a developed list of actions following their organization under homogenous, identifiable roles across four reported get-togethers. distinguishing between roles related with our conceptual framework by enabling potentially different interpretations of collective sensing (yin, 1981), as it turned out that there were various combinations of roles that produced “collectively sensed” potential acquisitions from our four get-togethers (table 2). the implications of these roles are analyzed below. we proceeded to analyze data by coding text that reflected sets of repetitive patterns of social roles. this coding drew from gioia et al.’s (2013) organizing framework, where a “first-order” analysis was conducted with respondent-centered actions in gettogethers, followed by a “second-order” conception of social roles interpreted by researchers. in this work, our reporting of respondents and researchers’ voices enabled us to establish a level of qualitative rigor by articulating links between the data and the induction of our social roles, and to then generate insights on the nature of those roles based on their respective first-order actions. effectively, therefore, we broke down responses and organized them manually under “first-order actions” based on researchers’ observations of get-togethers and interview responses. this coding was followed by “second-order” social roles based on patterns of each manager’s actions in get-togethers and responses at interviews. common patterns of roleswhich we call social roles to distinguish them from organizational rolesin the four get-togethers were observed and compared (yin, 1984). table 3 sets out the range of roles adopted by each of six managers and their frequency of occurrence in our four get-togethers. corley & gioia (2004) explained how the induction of new, second-order themes from first-order coding of concepts may produce insights in time and process-related change when researchers identify and group themes from their data. this approach to data analysis resonated with our observation of get-togethers where roles were adopted, and where the process of identifying acquisition opportunities remained dependent on managers’ performance in enacting those roles. shaping our second-order concepts prompted us to capture common explanations (yin, 1981) in respondents’ accounts of their activities as they sought to identify acquisition opportunities. for example, managers’ practice of sensing acquisition opportunities seemed to prompt them to recall common patterns of behavior in colleagues’ responses, which they saw reflected in their collective reaction to potential opportunities as they engaged in discussion. probing those patterns prompted us to present their responses in get-togethers in terms of various unscheduled roles. we drew this technique of theoretical sampling from glaser & strauss (1967), where our data drove our inductive development of an evolving strategic process in our case firm. to achieve this, we moved back and forth from 23 w. ng & m. al-shaghroud journal of small business strategy / vol. 28, no. 2 (2018) / 16-32 our data (“actions”) to our “outcomes” of sensing (glaser & strauss, 1967, p. 115) to expose the intervening process of social role-playing (see figure 2). discussion in get-togethers and outcomes in interviews, we first sought the ceo’s views on plastica’s acquisitions process, including its sensing activities. together with our case descriptions, a detailed picture was assembled of a sensing process that the ceo and cfo had described in annual reports as supplementary to an established board procedure for targeting acquisitions. secondly, we prompted each top manager to reflect on his role and actions in the acquisitions process. the ceo said that he drew on bd’s corporate list of acquisitions to build a personal image of the internal and external contexts in which board decisions could be made to target each of the four businesses. table 3 patterns and frequency of social roles in get-togethers get-togethers for potential acquisitions social roles observed (including a few dual roles) appointed senior management roles ƒ social roles ceo cfo bd ed1 ed2 ed3 pylica proposer (p) x x 2 controller (c) x 1 facilitator (f) x 1 arbitrator (a) x 1 consultant (cs) x 1 undefined role (u) x 1 matyflica p x 1 c x 1 f x 1 a x 1 cs x x 2 u x 1 sylica p x 1 c x x 2 f x 1 a x 1 cs x 1 u 0 tyrica p x 1 c x 1 f x 1 a x 1 cs x x 2 u x 1 ƒ social roles of top managers in four get-togethers ∑ƒ social roles p = 1 p = 0 p = 1 p = 2 p = 1 p = 1 p = 6 c = 1 c = 1 c = 2 c = 1 c = 1 c = 0 c = 6 f = 1 f = 2 f = 0 f = 0 f = 0 f = 1 f = 4 a = 0 a = 1 a = 1 a = 0 a = 0 a = 1 a = 3 cs = 1 cs = 0 cs = 0 cs = 1 cs = 2 cs = 2 cs = 6 u = 1 u = 0 u = 0 u = 0 u = 0 u = 2 u = 3 24 w. ng & m. al-shaghroud journal of small business strategy / vol. 28, no. 2 (2018) / 16-32 “sponsors” get-together generates ideas for possible acquisition & seeks input proposes unusual deals follows up post get-together owner’s challenging role on value of possible acquisition part-cfo [constraining], part-ned role to provide alternative ideas “gut-feel”, passive reaction & expects proposer to persuade “subtle”, quiet lobbying role for proposals visually skilled in structuring ideas problem solver intermediary between proposer & controller adjudicates impartially in disagreements reacts with ideas as neutral party listens to & reflects on debate encourages broad discussion specialist expertise on request independent, experienced observations knowledge of markets & marketing positive, supportive role for new ideas in get-togethers proposer 2) consultant minor roles: 1) arbitrator facilitator controller collective sensing of potential acquisition opportunities based on different combinations of social roles consensus for due diligence on possible acquisition consensus to reject or hive proposal actions & reactions (quotes in table 4) “social” roles discussion in get-togethers outcomes figure 2. coding framework across four get-togethers he presented these contexts as identical across the acquisitions, with a methodical approach in selecting acquisition targets based on financial criteria and strategic fit. however, one of the four acquisitions (pylica) discussed in a get-together was not listed on bd’s corporate list, and we explored how bd came to propose this opportunity. we did so by drawing on a “talk aloud” approach (burgoyne & hodgson, 1983) to prompt bd and other managers to reflect on each acquisition. by listening to respondents and intervening with open, probing questions, respondents reflected on issues introduced in interviews. for example, respondents were asked to explain their views of each acquisition and to relate these with their corporate role. this prompted them to question their stance in get-togethers. 25 w. ng & m. al-shaghroud journal of small business strategy / vol. 28, no. 2 (2018) / 16-32 table 4 plastica’s sensing procedures and processes managerial activities representative quotes from interviews (quotes from get-togethers withheld on plastica’s request) formal executive meetings “we review quarterly the [bd’s corporate] list of acquisitions.” [ceo] “acquisitions are discussed as required to ensure we are aware of any opportunities that may arise. we have an opportunity under consideration and have made an indicative offer following a number of formal discussions to consider the relative merits of the business, its market position, and how we can improve its performance.” [ed2] “we’ve lots of [formal] meetings and often nothing much is discussed. they’re just events we’ve got have on the calendar.” [bd] “every month we have a weekly call and then we have an informal meeting.” [ceo] formal strategizing “acquisitions in terms of how we find them is one thing and for us it is actually quite straight forward because we know our focal business, we know the areas where we want to make acquisitions. we’ve got our main shopping list and good procedures for following up that list.” [cfo] “i came up with the corporate list and that’s something from my own research. that’s my responsibility to do this.” [bd] “we make [strategic] decisions on the board and that’s what boards are for isn’t it?” [ceo] due diligence “we have a [due diligence] check list and they would work through that, so there is a check list of things that we would want to go through with the target company and each of the specialist will have their own part of the checklist to go through. and on the finance side i would talk to the finance director doing the work and say i think we need to know… these are the key things that we should be absolutely sure of.” [cfo] “information gathering goes into due diligence.” [bd] “there are lots of this but it’s resource intensive and we only do any when opportunities have been identified.” [cfo] non-formal process of identifying opportunities “[bd] has come up with a list of 90 companies and [top managers] naturally started from this list. but those companies are just names and the point of get-togethers is to go beyond names and see if there’s something decent and suitable for us. colleagues also bring their own lists and that’s what’s nice about getting together in this way because we weren’t working from a prepared script.” [ceo] “it’s really just what’s in our heads rather than on the [company] list. we all know our core competence and we are looking to buy businesses in our core areas and geographies so it’s pretty simple for [top managers] to come up with suitable acquisition opportunities.” [cfo] “i can’t say i looked at the [corporate] list. i mean that wasn’t relevant because we’d not talked about it and until we did we can’t say anything about it. they were just names someone had come up with to start discussion and that’s what we did.” [ed1] “it’s a process i can get really stuck into.” [ed3] sensing in get-togethers “in get-togethers, there’s an expectation someone will say they’ve got great ideas.” [ed2] “we never set out any goals in [get-togethers]. that would be ridiculous as no one knows what to expect. but people expect to hear good things. otherwise why waste everyone’s time.” [bd] “the original get-together was when we said we’d try to go ahead [on pylica].” [ceo] “[proposer] put together a short paper explaining the business, people, and products that it makes, and that [paper] got us talking.” [bd] “we had many false starts, probably more of these than actual agreement. sometimes people were just saying things without really believing what they were saying. that changed when we got together more often and we started to take discussions more seriously.” [ed1] “we all get together knowing we’ll discuss a few ideas but we don’t know the outcome.” [ed2] findings our first finding was in the closely-knit nature of the management group in all our get-togethers. these get-togethers were orchestrated by managers with diverse skills who adopted three major roles, proposer, controller, and facilitator. here plastica’s power dynamics were deeply influenced by personal relationships. the management literature has suggested how personal relationships among sme managers and other stakeholders (such as non-executive directors, ng & roberts, 2007) may influence decision making over formal organizational dynamics based on a typical hierarchy of corporate roles when a firm remains rooted in an entrepreneurial governance system despite its growth in turnover and employees (cf. gilinsky et al., 2001; ng & de cock, 2002). in the four observed get-togethers, ceo, cfo, bd, and ed1 were often more frequently heard voices, and their combined views influenced the views of the other two senior managers. accordingly, ceo, cfo, and bd reacted quickest in get-togethers (when they were not proposing) by adopting the three major roles very quickly after the start of a get-together, while acquisitions proposed in get-togethers by ed2 or ed3 (pylica and tyrica) did not have ed1 as a major supporter. 26 w. ng & m. al-shaghroud journal of small business strategy / vol. 28, no. 2 (2018) / 16-32 secondly, we observed recurring role-related patterns of behavior across the four get-togethers. plastica’s top managers adopted five social roles consistently in all four get-togethers. we refer to managers’ social roles to distinguish them from functional roles, and this also reflected our data where managers adopted roles during get-togethers that were often inconsistent with their organizational roles. for example, the facilitator of an acquisition, matyflica, was cfo who had a reputation for resisting acquisition proposals; and yet the same manager supported matyflica’s acquisition. in get-togethers, each top manager reacted to acquisition proposals without appearing to be constrained by their organizational roles. our third finding was that the situated space of get-togethers was based on different power dynamics to the dynamics we observed in interviews. power dynamics in get-togethers were based on personal relationships, where several managers (cfo, bdd, and ed1) leveraged their strong relationships with one another by acting in get-togethers with a sense of personal authority beyond the formal boundary of their organizational roles. conversely, other managers (ed2 or ed3) played a subordinate role to other managers, even when they were proposing activities, and consensus was reached only when their more influential colleagues adopted strong supportive roles (see table 5). collective sensing across four get-togethers each of the four get-togethers began with one or more proposers outlining their acquisition idea and case for exploring it as a potential acquisition opportunity. one of the other five managers then reacted to the proposer by taking up one of two principal roles, that of a controller who questioned the proposal, or a facilitator, who supported it. these three roles proved influential in determining whether top managers, as a group, supported the proposal. for example, when we asked ed3 about sylica, he said that his “gutfeel” was to support this acquisition, and he then sought to persuade his colleagues of sylica’s strengths. this supportive behavior seemed consistent with a role of facilitating the proposal (see table 2), while bd and ed1 questioned various aspects of this proposal, which we labelled a controller’s role. in get-togethers, once these three major roles were taken up, managers who did not react to the proposal but to the subsequent discussion assumed two other, minor social roles, that of arbitrator and consultant. the arbitrator sought to find common ground between the views of the controller and facilitator, while the consultant acted as an industry expert. these minor roles appeared to be determined by participants’ alignment with either the proposer or the controller’s views, and helped to secure managerial consensus for the proposal. this routine practice of five principal, observed roles comprised the activities of collective sensing in get-togethers. those activities were distinguished either by their support of proposed acquisition ideas (proposer, facilitator, consultant), or by their challenge (controller, arbitrator). these labels for each social role therefore reflected our researchers’ observation, of the distinctive nature of each role, and secondly, of the repeated patterns of behavior in which each of the five roles was enacted in the four cases. the face-to-face, impromptu nature of get-togethers was regarded by top managers as important for sensing opportunities as they provided a familiar arena to debate personal ideas. hence, get-togethers avoided having to place discussion within any agenda, and the six top managers discussed ideas without being constrained by such corporate “objects” (chia & holt, 2006). instead, acquisition opportunities arose in get-togethers when managers presented ideas for acquisitions that were not generally known in the firm. this was the case with all four acquisitions, including pylica, which was a potentially valuable acquisition in the french construction market. however, plastica had previously considered and rejected this opportunity, while in 2008 its competitors were uninterested in it: “economically is it right to invest in france in [this recession]? [pylica] is a bit far away mentally” (ed2). pylica’s story was about how a business that was not part of plastica’s corporate list of acquisition targets came to be identified by its top managers as a potential acquisition opportunity. the idea for this acquisition came from bd who convened the get-together: “[bd] liked [pylica] because it was very promising. there were big risks, a bit like digging for gold, and in the recession, it was a bit like the wild west. but we debated the idea, and it was a constructive debate because you were arguing its potential without judging whether you’d accept or reject it” (ed3). discussion we have suggested how our mse identified potential acquisition opportunities by drawing on strategy as a consistent pattern of actions that followed from practical “coping” activities of top managers. this ability has been presented in terms of managerial engagement in purposive improvisation within specially convened settings to air and share acquisition ideas. we contend that our perspective of 27 w. ng & m. al-shaghroud journal of small business strategy / vol. 28, no. 2 (2018) / 16-32 table 5 actions in collective sensing social role representative quotes proposer (promoter &presenter; “conceptual fit”) “proposers could be any of us [top managers]. the main thing is they’re convinced they’ve got a top deal that’s only open for a limited period and they want managers to buy in.” (ceo) “the selling part in the beginning is quite important. somebody has to sponsor.” (ed2) “i guess they are part of an ideas generation process and the filtering process because they are closer to individual markets with specific knowledge. so, they are coming across businesses and ideas that wouldn’t be on my radar or the ceo’s radar, so it’s a different approach to us. in get-togethers, we tend to discuss unusual deals but there is also sort of trying to generate these ideas from within the business and again i think it goes back to a lot of people we trust.” (bdd) choice of social role: “[get-togethers] are pretty relaxedwhere we bat first thoughts about. kind of like ‘hey i think i’ve a good idea and i need your input’. so [the proposer] calls a [get-together] to think things out and we all think with him as mates and not managers with badges on.” (ed1) controller (challenger & critic; “financial fit”) “this [controller’s] role is very different from my [cfo] role. for a start [controller] can challenge any part of [the proposer’s] deal and not just the monetization of it. [controller’s] role is the owner’s role when someone asks him for approval and he’s thinking about its plusses and minuses.” (cfo) “[proposer’s] role is to challenge and to protect financially, his body language and demeanor is very politely challenging. [controller] is a kind of mish mash between cfo and my [ned] role in the company, but it made sense in get-togethers because managers set the rules from one get-together to the next. so, in [pylica] it didn’t matter that [the proposer] was [the ceo]. he still has to do the selling to persuade me to accept [the opportunity].” (ned) “an actor that plays the role of why” (ed2) “the real-life cfo played the part of mr. no all the time. but in [get-togethers] he took a different, strategic view of a few proposals and you could say this was surprising. but this is a small business and everyone’s got to take responsibility for the whole business and not just bits of it.” (ed1) choice of social role: “i took up this [controller’s] position [in pylica] not because i had to do it [as a top manager] but because my gut feel was that france was not a market for us.” (bdd) facilitator (enabler & consensus-builder) “this is a very subtle role where you get someone who likes the deal but knows that quietly addressing questions is the best way to get it through.” (gbdd) “people who build up a proposal in a get-together may not be the same people who will support the proposal outside that get-together.” (ceo) “he is very good at drawing out a structure of how things can work. he can visualise things and take a discussion and say could it look like this and he can draw it out on paper, and he is very good at putting structure to planning discussions. [sylica] is a good example.” (ed2) choice of social role: “he will always be much more about where is the fit? where are we going? does it work? what’s the market? on every occasion, he will try and make things work.” [ceo] “i liked [pylica] from the start but wanted to find a middle way between [proposer] and [controller] and not just shout my support which wouldn’t have gotten this deal through at the next [board] level.” arbitrator (adjudicator & gobetween) “the guy who sits on the fence until others commit first always attracts suspicion but if you know he’s waiting for a good opportunity to step in and say something new that gets us thinking ‘wow’ then we need this guy.” (ed1) “[arbitrator] during the debate sits back and listens carefully.” (ed2) “[arbitrator] quite often will not engage at the start of debate and so he lets the debate happen around him. he wants to encourage broad discussion to really see people’s views.” (ned) choice of social role: “you need an arbitrator when there’s disagreement.” (ed2) consultant (advisor & conciliator) “thankfully all of us have different skills in our very balanced [top management] team so usually there’s someone who actually knows if the business behind the deal is any good. this [knowledge] usually shuts everyone up.” (ceo) “if [ed3] said yeah looks alright i wouldn’t necessarily go well if he thinks it’s alright because he won’t have tested it to the same degree. but equally it doesn’t mean to say he won’t have asked a few questions and maybe because he is coming from a different angle he will spot something that the rest of us haven’t and that often happens. if somebody who is more distant can make sense of a deal then people pay attention.” (bdd) “[ned] is the wise man. his knowledge includes the market, the customer, the product, the pricing, interaction in the market. but if it comes to financial matters he often takes a passive role.” (ed2) choice of social role: “for me it was a personal decision how i’d react to proposals [in get-togethers]. i wasn’t obliged to say or do anything because it wasn’t a formal meet. we went along to listen to ideas and contribute with our experience when we could. this was our presumption when we get together and by and large this is what we’ve got. i can’t recall a [get-together] that was a waste of time.” (ed2) 28 w. ng & m. al-shaghroud journal of small business strategy / vol. 28, no. 2 (2018) / 16-32 collective sensing begins to build knowledge of reactive, coping processes of managerial decision-making in smes generally by augmenting existing knowledge of how acquisition opportunities may be identified, which remains rooted in ceo-centered sensing capabilities of small businesses. by contrast, collective sensing in our mse prioritized the ability of top managers with diverse skills to respond imaginatively to ideas that were tabled at meetings by adopting roles in which ideas were shaped and developed. out of this process, consensus was reached in each of four get-togethers to investigate four separate acquisition opportunities. positioned as a distinct, competitive routine, collective sensing may form a valuable resource for the strategic development of smes when skilled managers leverage their experience of practical coping in get-togethers by crafting a collective ability to methodically sense potential acquisitions. we strengthen this portrait of collective sensing by applying a situated perspective of get-togethers where managers’ collective ability to identify acquisition opportunities may be viewed in terms of their performance in get-togethers. drawing on helfat & peteraf’s (2015) notion of situated cognition, get-togethers were an agreed setting among managers, unencumbered by corporate rules, that enabled managers to purposively improvise by exploring ideas, including counter-intuitive ones such as pylica which had previously been rejected. managers’ coping practice in these get-togethers formed an important part of the firm’s strategic process when new (pylica) and known (matyflica, sylica, tyrica) ideas were proposed. based on this practice, the improvised action of impromptu get-togethers reflected the uncertain nature of the opportunities that proposers sought to capture in their presentations. their approach to getting together as a social, coping activity then became a managerial routine when participants repeatedly got together to discuss other acquisition ideas. this was the scenario when bd proposed pylica as an acquisition opportunity despite the timing of the recession being “far away mentally”. we contend that our consistent observations of this coping routine across four acquisition cases offers a plausible chain of evidence (yin, 1981, 1984) for further research of how potentially valuable opportunities may be identified systematically in closely managed but resource-constrained smes. firstly, all four acquisitions suggest that an expansive strategy may work well among smes, for example, during recessions (latham & braun, 2011) when entrepreneurial managers may react, not by emulating the inactivity of competitors with organizational slack, but by purposively searching for potential acquisition opportunities with their diverse skills (chia & holt, 2006). here top managers in our mse reacted creatively to turn around a low period of m&a activity; and to do so depended at least partly on the astute skill of role-playing among managers in get-togethers. we have therefore positioned the paper’s findings on management get-togethers in smes as a vehicle among closely-knit managers to search collectively for potential acquisition opportunities. to be able to sense collectively, those managers had developed different power dynamics from those of their appointed organizational roles. instead, the power dynamics of get-togethers reflected longstanding personal relationships, and these relationships were evident in the combination of three key roles in get-togethers played by four top managers, who were friends. in this scenario, the way that power dynamics played a part in discussions was in the unplanned, ad hoc manner of get-togethers, which served to “neutralize” hierarchical power, as these meetings were not organized in the way that board meetings were set up, where board members had time to prepare and react in formal, organizational roles. by contrast, managers who participated in get-togethers reacted to proposals by enacting roles that were called at short notice with papers that were tabled during meetings, and where the ability of participants to influence discussions was based, firstly, on the strength of personal relationships among the principal role-players, and secondly, on their insitu reaction to tabled proposals in thinking aloud and defending their personal views. we draw on ng & de cock (2002) in suggesting how unprepared, in situ role-playing can become an effective means of altering one-dimensional, hierarchical power dynamics among managers. alternative, influential roles may arise when skilled actors prioritize themes that resonate with other actors. among closely controlled managers, relationship-driven themes such as personal loyalty often apply, and these themes can supersede formal relational structures in organizations given overarching, informal power dynamics, such as those in our mse that are led by four friends who laid the ground rules for sensing. one way that these friends kept the power dynamics of collective sensing in check was in the ad hoc nature of get-togethers, which were called by any of our case firm’s managers. once managers agreed to attend a get-together, they tacitly agreed to play by the non-formal, nonhierarchical rules of get-togethers as they had no prior knowledge of the agenda and could only participate by offering unprepared views to help a closely managed group reach consensus (ng & roberts, 2007). accordingly, while the power dynamics of personal relationships played an important role in “neutralizing” hierarchical power, the ad hoc nature of get-togethers constrained personal relationships 29 w. ng & m. al-shaghroud journal of small business strategy / vol. 28, no. 2 (2018) / 16-32 from undermining debate during get-togethers. hence, for get-togethers to function effectively as a vehicle for collective sensing, the first rule was for participants to listen to proposals without being obliged to respond based on power dynamics in the meeting. contributions of collective sensing we have drawn on a conception of problem solving among top managers of an mse in suggesting how a stream of acquisition opportunities may be identified as a process of strategic management and development under uncertain operating conditions. in the way that this process built managerial consensus for pursuing new ideas, we have proposed that collective sensing provides a practical basis for managing and developing strategy in smes as a whole. in practice, this process involves a balance of creative improvisation (maclean et al., 2015) in an impromptu enactment of social roles and consensus-building skills (vaara & whittington, 2012) in their development as purposive group activities. the situated cognitive setting of get-togethers may then play a key part in strategic development when recursively enacted roles in this setting adopt a routine character (winter, 2012) that supports collective sensing as a familiar means of coping with operating pressures. here, the theoretical significance of collective sensing is in suggesting how our strategy-as-coping view may integrate individual and group activities as a homogenous, coordinated process, for example, in managing economic uncertainty. this is because ordinary, unscripted activities that are common in developing smes may produce competitive advantage by marrying “impromptu processes of strategy development” (chia & holt, 2006, p. 638) of their closely-knit management with formal decision-making procedures. we are conscious of our need to avoid over-extending our contributions based on a single case firm, and with data from an unusual, turbulent period. moreover, we accept that this case was convenient in that we were fortunate in obtaining deep access to the firm’s management processes. yet we believe that our data and findings are plausible (eisenhardt, 1989) and interesting (siggelkow, 2007) as they resonate in several contributions to the sme literature as well as lessons for a broad range of smes who share organizational features with our mse, principally in their closely controlled management and persistent competitive challenges in and beyond economically uncertain periods (liao et al., 2008). principally, our theoretical contribution is in building a degree of empirical support, first, in terms of fine-grained understanding of strategy processes, which strategy scholars have suggested as an important basis for crafting a more expansive conception of managerial agency, for example, to enable potentially valuable opportunities to be identified (gavetti, 2012). here our strategy process of collective sensing potentially alters the picture of what we know about the propensity for certain smes to produce significant innovations (pett & wolff, 2007), as collective sensing suggests how sme managers may: i) innovate based on certain combinations of individual skills (ghosh et al., 2001), as in the acquisition of pylica, and ii) improvise novel management processes within the constraints of their firm size (liao et al., 2008). the utility of collective sensing would be for smes to compete against larger, better resourced firms by being able to identify investment opportunities that are cognitively distant, for example where plastica is entrenched in a highly competitive sector with low levels of organizational slack (latham, 2009; latham & braun, 2008). this implication requires investigation of a broader dataset of smes, and the utility of collective sensing may, if supported, will have significance for generally because of its suggestion that certain innovative smes may develop distinct competencies in sensing superior opportunities, a competence that all firms seek (gavetti, 2012), but which smes under resource constraints are then unable to systematically develop (ng & keasey, 2010). second, we have sought to explore a practice of strategy as coping in our case firm’s get-togethers, and to contribute to this literature by articulating a routine of reacting creatively to a quiet period for m&a activity (see figure 1). in supporting this view, we have set out, from in situ observations, interviews, and published and archival data, accumulated evidence (yin, 1981, 1984) that suggests a homogenous, identifiable process of opportunity sensing across four acquisitions. the theory that we seek to build then is parsimonious in its specification, within the constraints of our single case firm, of the opportunity-focused nature of our mse’s strategy of coping (eisenhardt, 1989). yet, it is because of shared organizational features with our case firm that other, closely controlled smes may learn from apparent idiosyncrasies of our case (cf. siggelkow, 2007). above all, the astute way in which our case firm’s managers turned a potential operating decline during a recession into a series of entrepreneurial opportunities by leveraging an unremarkable platform of get-togethers suggests how other smes may turn their own, reactive strategies of coping with unexpected threats (dessi et al., 2014) into an entrepreneurial initiative. by contrast, theories of life cycle and corporate growth have suggested how smes should professionalize their management in order to survive and thrive (ng & keasey, 2010). our case suggests how smes may instead build on their closely controlled management and 30 w. ng & m. al-shaghroud journal of small business strategy / vol. 28, no. 2 (2018) / 16-32 constrained resources as a competitive strength by drawing on collective sensing. conclusion we have drawn on a strategy-as-coping perspective in suggesting how a useful managerial routine may be developed from everyday coping activities. our articulation of the nature of this form of strategy mainly in the routine practice of collective sensing differs from the praxis view of micro-strategy activities, which concerns the actual performance of activities across various formal and informal contexts, and which may not necessarily be guided by practice(s) (whittington, 2006). by contrast, we have exposed the actions of managers who are intentionally guided by “shared routines of behavior, including … norms and procedures for thinking, acting and using ‘things’” (p. 619) in a particular corporate setting. within this setting, norms and procedures for “using things” principally concern an extraordinary practice of ordinary management get-togethers. these findings may be interpreted in other, plausible ways. for example, within the sap literature we could draw on the role of meetings in the social practice of strategy research (jarzabkowski & seidl, 2008), and we may plausibly adopt an alternative conceptual lens for our get-togethers based on meetings as strategic practice. moreover, abandoning our sap interpretation and instead pursuing a purely grounded approach to theory building may have better captured the apparently contradictory nature of some of our data, for example, on different and multiple roles enacted in get-togethers. here we could have drawn on theoretical sampling (glaser & strauss, 1967) for our data to drive our development of an evolving, as opposed to a linear, process of opportunity sensing that we have offered. however, these interpretations would have contradicted the chain of evidence from our get-togethers that prioritized the roles of top managers in that setting. while acknowledging the limitations of collective sensing in systematically identifying valuable opportunities, nonetheless the process we have described turned out to be an effective means of identifying a stream of potential acquisitions. our insight here is that it may be in the very ordinariness of get-togethers that were called without any agenda that distant and counter-intuitive ideas such as pylica made sense as a collective reaction among top managers of our mse within the temporal context of an economic downturn and the relative availability of opportunities within this context. in this scenario, we believe that more popular views of strategic agency can be discounted in which either a deliberate or an emergent approach to strategizing are the only means of producing investment opportunities (chia & holt, 2009). this interpretation of collective sensing as a practical coping routine has a number of implications in and beyond the sap literature. above all, motivated by the limitations of existing conceptions of strategic agency in smes, we have articulated an expansive view of top management behavior. this view potentially advances understanding of strategic capabilities of smes where collective skills can be developed to sustain competitive advantage (teece, 2007). the resulting capability may then systematically recognize superior opportunities that lie beyond individual cognitive capabilities of the sme’s employees. moreover, our research supports the notion that size matters when conditions, capabilities, and strategic actions “fit” with corporate resources (pett & wolff, 2007). we suggest that size also matters (gilinsky et al., 2001) in a negative sense when the larger resource requirements of mses may mean that they cannot compete with large-firm incumbents at their level of competition. in order to compete, managers then need to improvise by husbanding their available resources to achieve satisfactory outcomes (pett & wolff, 2007), given the open, international markets that firms such as our case example choose to compete in. our paper suggests how managers may husband their resources in a skillful, creative way to offset their resource constraints relative to large firm competitors, without attempting to compete openly with large firms for human capital, in which case smes would typically lose out to large firms with superior resources (dessi et al., 2014). at the same time, while our mse retained the flexibility of small businesses to adapt to niche markets (gilinsky et al., 2001), it drew on learned skills, including a tendency that has been associated with mature smes, of searching effectively for opportunities (liao et al., 2008). our data may be enriched, for example, by discussions with a wider body of stakeholders. here research is needed to explore the extent to which our observations of managerial behavior are practicable in culture-bound organizations, such as patriarchal firms whose managers have little decision-making control as the firm’s power dynamics remain skewed in favor of its controlling patriarch (ng & thorpe, 2010). we believe that this further research would build on collective sensing by exploring possible ways in which top managers may purposively improvise to identify opportunities to a level where get-togethers focus managerial attention on high-yielding targets. developing this practice could then establish strategy-as-coping as a preferred corporate approach for building competitive advantage in smes, as opposed to its role we have articulated as a platform for entrepreneurial or opportunistic managers to seek 31 w. ng & m. al-shaghroud journal of small business strategy / vol. 28, no. 2 (2018) / 16-32 alternative investment opportunities. references burgoyne, j., & hodgson, v. 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(2000). entrepreneurship in medium-size companies: exploring the effects of ownership and governance systems. journal of management, 26(5), 947-976. http://www.constructionproducts.org.uk/ http://www.constructionproducts.org.uk/ http://www.smallbusinessinstitute.biz providing goods to the base of the pyramid: opportunities for micro, small and medium-sized local producers miriam borchardt1, giancarlo pereira2, claudia viegas3, diego reolon4, yuri xavier5, daniel battaglia6 1unisinos university, brazil, miriamb@unisinos.br 2unisinos university, brazil, gian@unisinos.br 3unisinos university, brazil, claudiavv@unisinos.br 4unisinos university, brazil, diegoreolon@hotmail.com 5unisinos university, brazil, yuri_xfigueiredo@hotmail.com 6unisinos university, brazil, danielbattaglia05@gmail.com a b s t r a c t the purpose of this research is to identify challenges and opportunities to micro, small and medium-sized producers that supply the base of the pyramid (bop) market through small retails concerning products features and distribution system. a case study with 30 small retailers that provide goods to bop was performed. the results indicate that for ordinary products (rice, beans, pasta, sugar), local brands have the preference and price is determinant. for aspirational products (cookies, chocolates), leading brands have the preference and local brands compete if homemade or rural taste is provided. in such cases, the local products occupy the interstices not fulfilled by leading brands. local producers adapt the size of package to bop´s money availability as well as introduce products innovation aiming to reduce production costs. local producers should invest on partnership with dealers since they influence retailers´ purchase decision. the main results contribute to fulfil some academic gaps and could support local producers to develop and supply goods to bop. keywords: journal of small business strategy 2018, vol. 28, no. 02, 80-89 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2018 small business institute® apa citation information: borchardt, m., pereira, g., viegas, c., reolon, d., xavier, y., & battaglia, d. (2018). providing goods to the base of the pyramid: opportunities for micro, small and medium-sized local producers. journal of small business strategy, 28(2), 80-89. w w w. j s b s . o rg micro entrepreneurs, small and medium-sized companies, base of the pyramid, bottom of the pyramid, local brands this research aims to answer: “how could micro, small and medium-sized local companies (msmes) that produce consumable goods better explore the base of the pyramid’s (bop) market?”. such question is relevant for many reasons. firstly, the academic literature related to consumable products development has mainly focused on leading brands and multinational companies (mncs) strategies to ingress and achieve the bop’s consumers (angeli & jaiswal, 2015; schrader, freimann, & seuring, 2012). in emerging markets, despite the mncs’ growing involvement, the real needs of the bop’s customers are not always easy to be understood by leading brands, which demand local partnerships for that (barki, 2010). this aspect could be understood as an opportunity to the local companies (e.g. manufacturer, dealers and small retailers) considering that they have experience in working together with local communities partnership (hahn & gold, 2014) and better understanding the bop’s needs and cultural specificities (blocker et al., 2013; pereira & borchardt, 2015). msmes cannot afford to make mistakes when developing products because of their greater resource constraints compared to larger and global firms (lee, lim, & tan, 1999; srivastava & barnir, 2016). secondly, bop encompasses people living at the bottom of the economic pyramid or, in other words, living in poverty. it is estimated that approximately half to two-thirds of the world´s population (pereira & borchardt, 2015), most of them living in underdeveloped or developing countries (kumar, vohra, & dangi, 2017), belong to this economic segment – bop (gupta & khilji, 2013). individually, a bop consumer is not often a viable customer for companies, but the collective purchasing power of the bop consumers represents a substantial purchasing power that deserves attention from the profit-oriented business firms (gupta & khilji, 2013; kumar et al., 2017). bop in brazil, where this research was held, represents about 149 million people (approximately 75 percent of the population) that live with an introduction http://www.smallbusinessinstitute.biz http://www.jsbs.org 81 m. borchardt, g. pereira, c. viegas, d. reolon, y. xavier, & d. battaglia journal of small business strategy / vol. 28, no. 2 (2018) / 80-89 income equal to or below u$8.00 per day (ibge, 2010). aiming at increase sales, firms continue pursuing bop (nakata & weidner, 2012). this signals the relevance of local and global companies to provide services and goods to this population. thirdly, local companies perform a strong economic and social role for the world economy (mcgregor, 2005). in brazil, small and medium-sized enterprises contribute up to 30 percent of the gdp and 60 percent of the formal jobs (ibge 2010); reinforcing the importance of msmes to the economic and social contribution to the country. the strategies adopted by local companies to develop and commercialize products to the bop market have received little attention from the academic literature (ramachandran, pant, & pani, 2012; chikweche, 2013). finally, in underdeveloped and developing countries, especially in urban areas, most bop purchases are made at the neighborhood small retailer shops (d’andrea, lopez-aleman, & stengel, 2006). in brazil, 84 percent of the population lives in urban areas (ibge, 2010) and it is estimated that more than 40 percent of the total food, hygiene, and cleaning products are sold by more than 300,000 small neighborhood retailers (euromonitor, 2016). retailers´ acceptance and perception of new products should be considered by the producers for improving products and researching opportunities (alur & schoormans, 2013). it is also important to understand how to make products available for retailers (blocker et al., 2013). the products characteristics and their distribution system linked to the bop’s customers´ purchase decision determine the mix of the products at small retailers. this research considers that small retailers can reflect the consumers´ preferences, which has been under considered in previous academic studies (wyma, merwe, van der, bosman, erasmus, strydom, & steyn, 2012). retailers that serve bop could provide significant insights to msmes about bop’s customers’ purchasing decisions (bruton, ketchen, & ireland, 2013), their preferences concerning product features, and prices. it is important that retailers can decide how to combine the presence of leading and local brands when defining the products offered (ramachandran et al., 2012). the aim of this paper is to identify challenges and opportunities to msmes that supply the bop’s market that are derived by small retailers regarding the products features and distribution system. in order to achieve this purpose, small retailers who provide goods to the bop in an emerging country were studied, giving emphasis on how the products are offered. this takes into account the presence of leading and local brands and how they can determine which product characteristics are crucial to their selection. a case study with 30 small retailers was performed, focusing on food and hygiene products that represent about 40 to 45 percent of bop’s expenses (ibge, 2010). the managerial contributions could be useful to local producers since they are related to the products’ features, their availability, and their interference in the retailing system. theoretical review micro, small and medium-sized producers: context in the bop’s market the term base of the pyramid (bop) was first coined by the us president, franklin d. roosevelt (1932), who, at the time of the great depression, said “many other millions of people engaged in industry in the cities cannot sell industrial products to the farming half of the nation”. the term was also adopted by prahalad at the end of the decade 1990, concerning low purchasing power (gupta & khilji, 2013). bop’s people, the ones who live in poverty, represent at least four billion in the world (pereira & borchardt, 2015). there is no consensus about the range of income per day that comprises bop; it may range from us$1.00 to u$2.00 (chikweche, 2013), or up to us$8.00 (guesalaga & marshall, 2008). the conventional and dominant approach related to poverty considered in this research expresses the deprivation or need of physical and material infrastructure to the extent of impacting the people’s well-being. poverty has usually been measured by indicators associated with income, consumption levels and infrastructure access (blocker et al., 2013). however, poverty is much more than low income or physical deprivation, which must reflect dignity, premature mortality, illiteracy, and undernourishment (hahn, 2012). early academic research about business at the bop emphasize the role of mncs as agents for improving the population’s quality of life through products and services (gupta & khilji, 2013). initially, at the end of the decade of 1990, prahalad and hart identified the bop as a potential business opportunity to the large global corporations (gupta & khilji, 2013). beginning in 2000, academic literature started considering the inclusion of the bop entrepreneurs in the value chain as input suppliers, distributors, designers, which effectively could make improvements in their income and quality of life (kolk, rivera-santos, & rufín, 2014). discussions have also been observed about the role of micro and small companies originating in the bop engaged in the chain of supplies of a large corporation (bendul, rosca, & pivovarova, 2016). detached from the insertion in these chains, discussions arise on how to leverage 82 m. borchardt, g. pereira, c. viegas, d. reolon, y. xavier, & d. battaglia journal of small business strategy / vol. 28, no. 2 (2018) / 80-89 the bop’s quality of life through initiatives of microcredit, cooperatives, entrepreneurship as well as the establishment of public policies and actions causing social impact (kolk et al., 2014). these discussions are aligned with other studies that examine how msmes develop, produce and sell products for the bop, leveraging the operational mode of the chain on the bop environment while easing the understanding of the needs and desires of bop’s consumers (blocker et al., 2013; gbadamosi, 2013; pereira & borchardt, 2015). consumption represents a way of facing, on a daily basis, their sense of alienation from society and their lack of material power in achieving higher standards (blocker et al., 2013; gupta & srivastav, 2015). the bop’s aspirations increase if the consumers can choose products and services that do not remind them about their poverty. for this reason, items that may be considered luxury or non-essential (aspirational goods) are sought by the bop’s consumers (kumar et al., 2017). on the other hand, some authors argue that ordinary products for the bop need to be simple, cheaper, and focused on surplus basic needs without luxury that could increase price and avoid purchasing (cheung & belden, 2013). this suggests that the bop’s consumers could have a hybrid purchase behavior, as observed in a middle-income consumer. the hybrid consumer buys cheaper generics and low-end brands on some purchase occasions, and then on other occasions trades up to premium, high-end brands and happily pays for them (ehrnrooth & gronroos, 2013). such an approach suggests that companies which do not wish to compete on price should concentrate on the emotional value of their product or service. these companies need to work to turn needs into wants by differentiating their offering, not just technically, but also on an emotional level, which may require a consideration of how the product or service gets delivered (ehrnrooth & gronroos, 2013). despite the hybrid behavior, consumers are becoming increasingly more and more demanding in their purchasing habits, aiming at more products for less money (rubach & mcgee, 2002). complementarily, bop consumers tend to be more loyal to branded products because making mistakes is unaffordable for them, since they cannot buy twice. this way, acquiring branded goods should be a guarantee of meeting the quality expressed in the advertisements (barki & parente, 2010). such bop’s consumers´ behavior may reinforce the power of leading brands to these consumers and their major presence to retailers (schrader et al., 2012). in most countries from the latin america, leading brands dominate the assortment – especially in traditional stores and small retailers where approximately 85 percent of the products are first tier brands (d’andrea et al., 2006). base of the pyramid brand strategies developed by mncs demands intensive advertisements promoting the quality and benefits of the products and services, sales schemes, and a strong sales force which promotes brand association strongly (rajagopal, 2009). in this scenario of fierce competition, msmes face severe barriers such as lack of access to capital, weak networks, precarious working conditions, limited resources and marketing, limited training, low innovation, legal issues, and lack of legal support and incentives, which leaves little room to think about strategy and professionalism (droege & marvel, 2009; christensen, parsons, & fairbourne, 2010). despite such barriers, they are more flexible than large corporations by having less organizational bureaucracy and being more familiar to their communities (zimmerman, dunlap, hamilton, & chapman, 2002) which favor the interaction with customers by allowing them to gain information and knowledge about the bop’s needs and wants (srivastava & barnir, 2016; chikweche & fletcher, 2010; reijonen, laukkanen, komppula, & tuominen, 2012). the use of local resources, both in the supply of inputs and in the distribution system, tends to be prioritized by msmes, although these companies may have difficulties in acquiring good quality raw materials at low volumes (london, anupindi, & sheth, 2010). such aspects are challenges for local enterprises that fight to occupy the interstices not fulfilled by leading brands at bop’s market. small retailers and products offering in brazil, it is estimated that the bop’s customers do 50 percent of their purchases at supermarket and 38 percent at small-scale retailers (considering the monetary value) (barki, 2010). small retailers need to understand emerging customer´s needs, which has been done very well in latin america (d’andrea et al., 2006). small retailers in emerging markets do not have space for mistakes when buying and offering products in their shops due to scarce financial resources (alur & schoormans, 2013; d’andrea et al., 2006). small retailers provide a small variety of goods because of their lack of physical capacity and limited financial resources to buy in bulk (khare, 2014). products at traditional and small self-service stores concentrates on fresh food, drinks, and basic dry goods, along with a limited selection of cleaning products, personal care items (d’andrea et al., 2006), and aspirational products (products that are desired but considered expensive and luxurious like chocolate and cookies) (angeli & jaiswal, 2015). additionally, 83 m. borchardt, g. pereira, c. viegas, d. reolon, y. xavier, & d. battaglia journal of small business strategy / vol. 28, no. 2 (2018) / 80-89 small-scale retailers effectively serve daily purchase needs by fractioning products (d’andrea et al., 2006) in order to meet the bop’s customers’ purchase capacity (kirchgeorg & winn, 2006). in the latin american retail sector, merchandise forgery is present in the region with prices 50 to 70 percent below-market price to retailers, which may lead to higher profits or artificially lower shelf prices. however, these products still represent a minor fraction of the total consumer packaged goods sector (d’andrea et al., 2006). the presence of these goods may pose a challenge to the msmes that operate in this market given all the legal requirements and taxes. products affordability sales representatives and dealers are the primary channel for goods considered by the msmes to supply small retailers. there are two kinds of direct distribution: pre-sale, in which the company first sells the products and makes the delivery afterwards usually within 24 hours since they are close to their clients (retailers); and, prompt delivery, in which sales and delivery are made simultaneously because the salesperson visits the retailers with their car full of products (barki, 2010). the main advantages of selling to small retailers through sales representatives and/or dealers include the ability to keep low costs and to establish close relationships with salespeople and distributors (barki, 2010). these salespersons interact with retailers during new product introduction to understand the hurdles they face in new product introduction (alur & schoormans, 2013). they also promote their brands relevance for the producers because local retailers make product recommendations to the end consumers (d’andrea et al., 2006). if a supplier provides a high-quality product at a favorable price and a margin with attractive advertising support that no other alternative can offer, the small retailer’s dependence on the supplier increases (chung, 2014). cash and carry stores are one option that is growing among small retailers in brazil and is a relevant channel to reach bop’s markets. these stores are easy to access, very well located, and provided up to 40 days for payment (barki, 2010). cash and carry stores and supermarket chains can require favorable quality conditions, minimal volume, and delivery conditions at a minimum price on their suppliers (figuié & moustier, 2009) which make it difficult for msmes focused on the bop market to distribute their products through these channels. such considerations indicate that msmes should choose carefully their sales representatives and maintain a close relationship that will allow them to receive the retailers´ feedback about a product’s acceptance. theoretical framework an analysis of the literature allows the organization of a theoretical framework. this framework and respective constructs are presented in table 1. methodology this research uses a qualitative method based on exploration of the practices and perceptions of the small retail establishment owner. qualitative research is oriented towards discovery, understanding relationships, and building theory, and, for that, qualitative methods are used to describe, decode, and advance the understanding of facts, activities, actors´ actions, or decisions (hlady-rispal & jouison-laffitte, 2014). in order to conduct this qualitative research, a case study was performed with 30 small retailers. the multi-case-based research methodology has been undertaken duse to the emergent nature of the bop phenomenon as well as bop environment complexity in terms of customer’s profile, and market-based competition (goyal, sergi, & jaiswal, 2016). case studies permit the investigation of a phenomenon in its context through a complete analysis of one or more objects, which allows a profound insight into the phenomenon studied (yin, 2014). sample selection this research took place in an urban area of two cities in southern brazil that belongs to the capital of the state metropolitan region. this region has about four million inhabitants with around 200,000 people in each considered city. based on the national statistics census data, two neighborhoods those with about 85 percent of the population with an average income up to $8.00 per day per person (ibge, 2010) were considered as the target of this research. these two neighborhoods are about 10 kilometers from the downtown cities. thirty small retail owners with one to four cashiers according to d´andrea et al. (2006) agreed to participate in the interview and to show their shops and internal spaces (e.g. products shelves and stock area). ten retailers have their shops in their garages or in a small room in front of their houses; the others have a small shop, typically with one room for the shop and one for the stock. all of them have a mixed assortment of grocery products, soft drinks and beverages, hygiene and cleaning products, and other products to supply local needs such as horse food, household hardware, and domestic utensils. concerning the characteristics and organizational features of the studied retailers, all of them are managed by the owner and their families. in terms of employees, 15 retailers include only the owner and/or one or two persons from the family as employees; 84 m. borchardt, g. pereira, c. viegas, d. reolon, y. xavier, & d. battaglia journal of small business strategy / vol. 28, no. 2 (2018) / 80-89 table 1 theoretical framework construct synthesis authors bop’s consumer preferences hybrid purchase behavior: consumer buys cheaper products from low-end brands and pay extra price for aspirational (premium) products from leading brands. ordinary products should be simple and cheaper; aspirational products should present emotional value. (cheung & belden, 2013; rubach & mcgee, 2002; barki & parente, 2010; ehrnrooth & gronroos, 2013). small retailers knowledge about local customers: retailers know customers’ habits and preferences, providing goods according to the customers´ needs. product recommendations focused on owners. (d’andrea et al., 2006;rajagopal, 2009; chikweche & fletcher, 2010; reijonen et al., 2012; barki & parente, 2010; cheung & belden, 2013). products offering leading brands x local brands: about 85 percent of the food and hygiene products are from leading brands. product mix: there are few options of brands and low purchase capacity in bulk. fractioning products and packages: small packages or fractionated products are preferable to serve daily purchase needs. (khare, 2014; d’andrea et al., 2006; reijonen et al., 2012; rajagopal, 2009; barki, 2010; angeli & jaswal, 2015). products affordability msmes supply retailers through dealers that use pre-sales or prompt delivery. retailers are used to buying from dealers, supermarkets, and cash and carry. dealers: dealer should help the small-retailers minimize the products purchased wrongly, reduce purchase processes costs, and establish long term relationship with retailers; they also could provide information about the products. (barki, 2010; d’andrea et al., 2006; alur & schoormans, 2013; figuié & moustier, 2009) 15 others have between three and seven employees. most retailers (27) are managed by men between 21 and 60 years old. only one owner has graduated high school while the other owners have completed only primary school or some high school. data collection and data analysis data collection was based on a protocol with semi structured interviews and direct observation. the questions and the aspects to observe were developed considering the constructs presented in table 1. direct observation was focused mainly on the retailers’ interaction with customers when suggesting new products, the products on the shelves and in the stock area (the presence of leading brands and local brands, mix of the products, shelves organization, and quantity), and on the interaction with suppliers during product delivery. photos were taken in eight retailers to capture the leading brands and local brands identification, the mix of the products, and the prices. the others retailers did not allow photos, so notes were taken in a notebook of these items. the use of the protocol provides homogeneity among the issues covered in the interviews and supports the analytical comparison among the cases as well as the discussion regarding the theoretical foundations as mentioned by kibler, wainwright, kautonen, & blackburn (2015). however, during the interviews, the wording and sequencing of the questions were kept flexible to accommodate both the situation and the interviewees’ characteristics. the data collection protocol was tested through a pilot case with two small retailers and all items/questions were clearly understood by the respondents. the interviews and direct observations were done by two researchers and lasted between 45 minutes and two hours. twenty interviews were recorded and transcribed; the other ten were written because the owners did not authorize the recording. the respondents’ names and/or the shops’ names were anonymized to protect the interviewees’ identities. after reading and re-checking each interview, the main points related to the studied constructs were organized by retailer as well as the perceptions from direct observations. a cross case analysis was then performed to identify similarities and discordances among data. the findings were then discussed considering theoretical aspects through construct and managerial implications. 85 m. borchardt, g. pereira, c. viegas, d. reolon, y. xavier, & d. battaglia journal of small business strategy / vol. 28, no. 2 (2018) / 80-89 findings and discussion most retailers know the loyal customers by name and as well as their families and shopping habits. they estimate that customers spend about $1.00 to $4.00 on average per purchase. beer, soft drink, and cigars are the most purchased products followed by salt groceries (pasta, rice, and beans), and sweet groceries (filled wafers, crackers, and peanut candies). customers primarily value the balance between price, quality/brand and attendance as the most relevant aspect to their purchase decision. relationships with customers at these small retailers are based on frequent contact over a long time period of time. such conditions allow the retailers to understand the purchase decision criteria considered by customers as mentioned by khare (2014). listening to the retailers, observing what they offer in their shops, and providing product samples allow local producers a source of insights about customers´ needs. table 2 presents the findings for each construct. in terms of products, leading brands dominate the market, especially for aspirational products as pointed out by d´andrea et al. (2006) and barki (2010). however, these retailers do not have capacity to offer greater options of leading brand products. they choose only one or two brands for each type of product (for example: powdered soap one leading brand, sometimes one from intermediate product, and one much cheaper powdered soap). contrary to barki (2010), who mentions competition between leading multinational companies and local companies, the findings of this research suggest that leading brands face great barriers to being accepted by small retailers. similar conditions exist for local brands as they struggle against tough competition. construct observed aspect findings bop’s consumer preferences purchase behavior hybrid purchase behavior: for aspirational products, in general leading brands are preferable although some local brand products with homemade or rural taste appeal have good acceptance; for ordinary products, customers prefer local brands that are cheaper than leading brands. customers´ purchase daily portions. small retailer knowledge about local customers customers trust on retailers´ opinion. product recommendations advertisement influences the purchase decision especially for aspirational products. products offering leading brands x local brands sales prices of leading brands normally are more than the double of the cheapest similar product; local brands are more profitable per unit but leading brands sell more. product mix the retailers firstly select the brand (leader, intermediate, and cheaper) and, for each brand, provide some variety of flavors and size (for example: strawberry, chocolate, or cream filled wafer of the same brand, spaghetti or screwtype, or instant pasta). it means that they have few brands but some variety for each brand. fractioning products and packages customers prefer compact or single pack. they consider the price for package; local manufacturers have adapted the size of the package fixing the price (e.g. for an inflation of 10 percent per year, the price of the product will be the same but the amount of the product will be reduced in 10 percent); fractionating food was observed for meat, cheese, ham, and cold cuts in general; leading brands usually have more attractive package and frequently use some fashionable character to induce the sales. products affordability purchase process dealers are the most important supplier for retailers, followed by supermarket and cash and carry; multi brand dealers, that supply local brands, offer more favorable payment conditions than leading brands. dealers´ behaviors and relationship with retailers trustfulness with dealers is considered relevant and multi brand dealers are closer (in terms of relationship) than leading dealers; delivery time is considered appropriated; producers supply directly the retailers, what reinforces the relationship between them and the acquisition costs to retailers; in some cases, forgery products (without label or invoice) were observed. table 2 findings 86 m. borchardt, g. pereira, c. viegas, d. reolon, y. xavier, & d. battaglia journal of small business strategy / vol. 28, no. 2 (2018) / 80-89 for ordinary products such as rice, pasta, and beans, price is important and local brands do much better. it is easier for small retailers to purchase more options of ordinary products from local brands because the suppliers are more flexible concerning quantity and payment conditions than leading brand suppliers. additionally, some retailers consider that the local producers of these products should be aware about the balance among quality, package, and the products price. a customer hybrid purchase behavior as commented by ehrnrooth and gronroos (2013) was observed. these customers look for leading brands and cheaper products according to the product purpose (pleasure and emotional or basic needs). the most demanded aspirational products include chocolates, cookies, cakes, yogurts, and tuna. for these products, whenever there is a financial availability, the consumers give preference for leading brands. local brands with similar products and with much lower prices are the option in the event of limited resources. chocolate powder offers a great example: the price for 200g from a leading brand is $1.50 and the price of 400g from a local brand is $0.70. some local brands, produced by msmes, compete through differentiation by providing products with a local taste that has higher prices than leading brands. the valorization of homemade or rural taste by the customers indicates to the msmes that the competition through differentiation may require attention to the product characteristics. it is possible that a homemade or rural taste valorization is linked to psychological needs (or memories) considering that the oldest urban bop population in brazil migrated from country and rural sites in the last 20 or 30 years. this finding is in line with ehrnrooth & gronroos (2013) and may be useful for further research that promotes strategies for the challenges faced by msmes on emerging markets (droege & marvel, 2009). it was observed that many local companies supply the small retailers with typical southern region products from brazil. examples include polenta, certain types of beans, dairy products known regionally as ordinary products; special types of cakes named ‘cuca’, colonial cheese, and typical salami with pepper as aspirational products. this suggests increasing market demand for these products as well as the influence for msmes to use local raw materials, either by geographical proximity with their suppliers or the network that is formed in which companies can develop joint strategies for operation in the market. it was also observed that, even in the provision of aspirational products, local companies have been seeking alternatives to reduce production costs and the final price to the consumer. as an example, a regional sweet peanut, called ‘rapadura’, has been in part replaced by soy, a commodity widely produced in the region and with lower cost than peanuts. this innovation reduces production costs and adds an element of differentiation since the product packaging highlights to consumers the soy benefits. this finding suggests an adaptation of local producers and the availability of regional products, which generates shorter and local supply chains. some respondents pointed out that during times of recession, the offering of non-legal products made at home increases because they are cheaper than legal products. these findings are aligned with the idea that micro-enterprise structure creates a unique net of trustfulness, which helps them adapt to circumstances which are not always favorable (blocker et al., 2013). during these times of recession, there is often a decreased access to aspirational products. firms that produce these products could attempt to expand their target market. bop is characterized by a wide range of incomes, and, just above this layer of the population, there is another group which have their basic needs met and usually have access to other opportunities (pereira & borchardt, 2015). these consumers still use and value their small neighborhood markets (barki, 2010). future studies may analyze the aspirational products acceptance by various consumers’ profiles as well as evaluate a possible price elasticity of the product depending on the consumer’s profile. besides the product characteristics, the product packaging should be attractive and affordable to the bop’s customers. some leading brands reduce the package size to provide affordable pricing per package, but not in relative terms (nakata & weidner, 2012). according to the respondents, local brands do not present attractive packages although they do offer affordable sizes and prices while reducing the quantity. the relationship with multi-brand dealers is, in general, good and based on trust. on the other hand, leading brand dealers do not provide discounts or promotions to the retailers because of the amount that they buy. this study focused on urban areas. accessibility for dealers is not a great challenge although there is a large market of the small retailers served by them. cash and carry has been a good opportunity for the retailers to buy leading goods with 30 or 40-day terms. however, msme producers rarely commercialize their goods in supermarkets. some goods have been delivered directly by the producer as an opportunity to reduce delivery costs. conclusion and implications this research analyzes the challenges and opportunities to msmes that supply the bop market through small re87 m. borchardt, g. pereira, c. viegas, d. reolon, y. xavier, & d. battaglia journal of small business strategy / vol. 28, no. 2 (2018) / 80-89 tailers. in academic terms, the first contribution indicates that the bop’s customers have a hybrid purchase behavior similar to the one identified for a middle-income consumer by ehrnrooth and gronroos (2013). it means that purchase decision considers both the uses and attributes of the products. listening to small retailers may be a relevant source of insights to local producers as they develop their products. the second finding of this research is that ordinary products from local producers have more room in the bop than leading brands. in terms of the mix of products, small retailers provide one leading brand on their shelves for each type of product. this shows that leading brands compete for this space and local producers can occupy the niches that leading brands cannot fulfill. for local producers, it was observed that local brands that offer homemade or rural tastes are preferred even if they are more expensive. these findings, together with the price elasticity accepted by the customers to these products, could help local producers in their product development strategies. local brands should balance quality and price while focusing on small packages with lower prices and reduced quantities. the third contribution concerns product availability. small retailers, in general, manage well the mix of products. the small retailers argue that there are no problems regarding product availability. these msmes supply retailers through dealers. local producers should consider dealers´ partnerships as an important source of product availability and should invest in connecting with these dealers. this research studied how local brands are present in small retailers. it is noteworthy that the msmes that serve the bop compete with leading brands. these leading brands have a great capacity to organize a global chain of suppliers and distribution channels. the msmes, on the other hand, make use of local inputs and establish partnerships with dealers to distribute their products regionally. how these msmes relate to their suppliers, form networks of enterprises to expand their capacity for acquisition and distribution, structure themselves organizationally and professionally with access or not to development and resource agencies originating from public policies, remains as a suggestion for the continuity of this work. one limitation that is noted is that this research was based on the small retailers’ point of view and their purchase choices when deciding about hygiene products, food and beverage. additionally, this study focused on only two urban neighborhoods in the south of brazil. the entire country should to be taken in account in further research as well as the cultural diversity. therefore, these results should be considered in the scope of the metropolitan region that was targeted. acknowledgement financial support through the national council for scientific and technological development (cnpq brazil), project 443156/2014-0, is gratefully acknowledged. references alur, s., & schoormans, j. p. l. 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(2002). david versus goliath: strategic behavior of small firms in consolidated industries. journal of small business strategy, 13(2), 56–74. available at http://libjournals.mtsu.edu/index.php/ jsbs/article/view/507 http://libjournals.mtsu.edu/index.php/jsbs/article/view/400 http://libjournals.mtsu.edu/index.php/jsbs/article/view/400 http://libjournals.mtsu.edu/index.php/jsbs/article/view/480 http://libjournals.mtsu.edu/index.php/jsbs/article/view/480 http://libjournals.mtsu.edu/index.php/jsbs/article/view/542 http://libjournals.mtsu.edu/index.php/jsbs/article/view/542 http://libjournals.mtsu.edu/index.php/jsbs/article/view/542 http://libjournals.mtsu.edu/index.php/jsbs/article/view/542 http://libjournals.mtsu.edu/index.php/jsbs/article/view/542 http://libjournals.mtsu.edu/index.php/jsbs/article/view/542 http://libjournals.mtsu.edu/index.php/jsbs/article/view/542 http://libjournals.mtsu.edu/index.php/jsbs/article/view/542 http://libjournals.mtsu.edu/index.php/jsbs/article/view/542 http://libjournals.mtsu.edu/index.php/jsbs/article/view/542 http://libjournals.mtsu.edu/index.php/jsbs/article/view/542 http://libjournals.mtsu.edu/index.php/jsbs/article/view/542 http://libjournals.mtsu.edu/index.php/jsbs/article/view/542 http://libjournals.mtsu.edu/index.php/jsbs/article/view/507 http://libjournals.mtsu.edu/index.php/jsbs/article/view/507 strategy publications staff editor gwen f. fontenot secretary jill burkey editorial advisory board richard dailey, university of montana joe latona, university of akron nortor1 marks, northwestern state university georg< rimler, virginia commonwealth university howard rudd, college of charleston . · leo simpson, eastern washington university harriet stevenson, seattle university mark weaver, university of alabama a publication of the small business institute' directors' association. send subscription requests to dr. gwen fontenot, editor, journal of small business strategy, department of marketing, university of northern colorado, greeley, co 80639. annual subscriptions and back issues may be ordered at.$18 each. © copyright 1990 small business institute directors' association published by southwest small business institute association & northwestern state university the journal of business & ent repreneu rship is a professional, peer-reviewed periodical with th mission of providing the participants in business and entrepreneurship a forum where eac can become better aware of the problems, methods, and disi:overies of practitioners an theoreticians. articles are solicited from all sectors of small business and/cir entrepreneurship. the ]be a tempts to publish cutting edge articles which will help small businesses, universities, an government improve small business and entrepreneurial practices. ]be publishes manuscripts which make signif icant contributions to theory, knowledge, an practice in areas of small business and entrepreneurship. both quantitative and qualitativ methods are acceptable. a complete 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strategy is a joint publication of the small business institute and the foster college of business, bradley university. send subscription requests to journal of small business strategy, foster college of business, turner center for entrepreneurship, bradley university, 1501 w. bradley ave., peoria, il, 61625 or e-mail to jsbs@bradley.edu. annual subscriptions (two issues) may be ordered at $25 each (u.s. dollars only). international subscriptions add $5 annually for postage and handling. back issues may be ordered at $12 per issue. members of the international council for small business receive a 40% discount. icsb members pay $15 plus $5 for international subscriptions. copyright 2014 small business institute issn 1081-8510 s y journal of small business trateg reproduced with permission of the copyright owner. further reproduction prohibited without permission. http://www.smallbusinessinstitute.biz from the editor we are pleased to present the second issue in the 28th volume of the journal of small business strategy. during its 28th year of existence, the journal is experiencing exciting new developments. in issue one, we instituted a new look for the articles which includes all of the information from the journal in the layout of each individual article. this constitutes a big change from the previous layout of the journal, while benefitting the researcher who downloads the articles independent of the entire journal by making the citation information readily available. many of our faithful researchers have lauded this new move. while we do believe the new format for the journal was necessary, we have also been working to increase the visibility of jsbs. our efforts are beginning to pay off as we are now much more accessible. one area of measurement for this is through the numbers of downloads per article, and more importantly, how often researchers cite our articles. we are happy to announce a strong increase in these numbers. our citation counts (as indicated in scopus) rose 300% from 2016 to 2017, and, at the time of this writing which is june of 2018, our citation counts for 2018 thus far have increased 400% in comparison to 2016. these accelerated numbers are indicative of the outstanding research that is being utilized by scholars such as you, our readers. thank you for supporting the journal of small business strategy and for continuing to find value in the articles that we publish. contributions to this issue this issue begins with a paper titled “social proactiveness and innovation: the impact of stakeholder salience on corporate entrepreneurship” by michael goldsby, donald kuratko, james bishop, patrick kreiser, and jeff hornsby. the authors draw on the tenants of stakeholder theory to examine how stakeholder salience is integral to senior manager decision making in terms of the innovative strategy of the firm when it comes to the issues of social proactiveness. the next paper, “strategy-as-coping in medium-sized enterprises: a social process of collective sensing for acquisition opportunities” by wilson ng and maha al-shaghroud, introduces the idea of “collective sensing” which allows senior level managers to potentially identify acquisition opportunities that have otherwise been overlooked in the market. the third paper, “the relationship between a comprehensive strategic approach and small business performance” by ralph williams, scott manley, joshua aaron, and francis daniel, focuses on the idea of a comprehensive strategic approach, which consists of goal setting, strategic planning, and financial ratio analysis, to lead to higher levels of small firm performance. the fourth paper, “dynamic capabilities of early-stage firms: exploring the business of renting fashion” by marcus adam, jochen strähl, and matthias freise, provides a unique look at the fashion industry in the area of small businesses and new ventures. specifically, this paper examines the share economy and how small and new firms develop a dynamic capabilities approach to servitization in traditionally manufacturing based industries. following this, mariano garrido-lopez, yue hillon, wendy cagle, and ed wright in their paper, “project-based strategic management education: a client perspective on key challenges,” develop the steps needed for project-based strategic management policy. they conclude a need for communication and interaction, project organization and student preparation, quality of work, and finally, co-creation of value, are of paramount importance. we end this issue with an interesting article by miriam borchardt, giancarlo pereira, claudia viegas, diego reolon, yuri xavier, and daniel battaglia titled “providing goods to the base of the pyramid: opportunities for micro, small and medium-sized producers.” this article examines micro-sized firms and their strategic approach towards providing goods in extremely low-income localities. i am certain you will enjoy all of these articles. thank you! i always want to end by saying, “thank you,” for your continued support of jsbs. your high quality submissions, citing jsbs articles in your own research, and words of recommendation to fellow researchers are what makes this journal a great success. please continue to submit your work, and we will continue bringing you the best possible contribution to the current literature. please always remember, the journal of small business strategy is your journal! william c. mcdowell editor-in-chief http://www.smallbusinessinstitute.biz strategy entrepreneurial opportunities in the wholesale sector: a predictive model john c. palmer sangamon state university david a. baucus university of kentucky donald gudmundson university of wisconsin-oshkosh abstract wholesaling plays a crucial role in the success or failure of smull businesses and the location decision is perhaps rhe most critical strategy decision to be made by wholesalers. yet, there is little in the way of analytical tools to help prospective wholesalers with this decision. this paper presents an empirically tested model, based on a conceptual foundation, that is intended to help entrepreneurs predict wholesaling opportunities. wholesaling trade has a major entrepreneurial component. the department of commerce reports that there are over 26,500 wholesaling stanups annually in the united states (7). the average size of u.s. wholesale firms in 1985 was 15 employees and average sales were about $3.8 million. in addition, the viability of wholesale firms is important for other small businesses in that accessible, independent wholesaling is a necessary channel for small retailers and manufacturers who compete with larger firms. small manufacturers and retailers cannot achieve the scale of operations necessary to perform their own channel functions. they depend on independent merchant wholesalers to achieve the time and place utility that larger comltetitors obtain through vertical integration. thus, there should be strong interest among small business owners in the success of wholesalers. wholesaling has oftentimes been viewed as a benign competitive arena for businesses, populated by captive firms and maintained through close personal connections. for example, in a textbook characterization, van voorhis stated that "wholesale trade represents a somewhat stable link in the trade channel ...competition is stable and predictable" (15; 127). yet, according to dun and 1)radstreet's business failure record and (he statistical abstract for the united states, tvotet the uuthors would like to thank the kentucky sbdc, .lanet holloway, direcror for financial support and cooperation in this project. 56 wholesale failure rates are similar to those of other business sectors, both in terms of causes, numbers, and ages at failure (7, 8). if, as van voorhis suggested, these failures represent losses of greater investment than retail trade, wholesaling might be more risky than generally thought; the factors affecting investment and entrepreneurial risk are not so benign. indeed, changes in the demographics of the u.s., including regional shifts in population, manufacturing, and retailing, suggest that wholesale industries are going through important changes. these changes are, however, particularly difficult for small business managers (or potential small business managers) to identify because of the low public visibility of wholesaling. for both small business managers and researchers, " ...unobservable business and the physical transfer of goods along different geographical linkages from abstract paper transactions make the nature of wholesaling difficult to record and analyze." (9: 207). too, researchers have provided insufficient normative theory and empirical tests of theory to assist small business managers in making wholesaling location choices. the work in this area has been done by economic geographers (e.g. 2, 9, i i, 16). while providing useful information on urban/regional economies for public policy, the purposes, scale, and unit of analysis of this research provide little in the way of directly usable information for strategic wholesaling decisions. thus, in the face of increasingly complex situations, small business managers are left to make strategy decisions rather myopically, based on intuition, personal contacts, or rumors. the purpose of this paper is to build a model which, rather than explaining underlying dynamics, can be used to predict geographic areas of wholesaling opportunity for small businesses. in the following section the relationships between merchant wholesalers, retailers, and manufacturers are described. then the strategic significance of location decisions is discussed, and the factors that prior researchers suggest may be used to predict wholesaling opportunities are identified. while the predictive model is based on conceptual logic, it is also empirically tested using readily available secondary data. this paper concludes with a discussion of the results, limitations, and application of this model by small business consultants and managers. conceptual logic for a prkdectevk modkl wholesalers are described as intermediaries between raw material suppliers and manufacturers, between manufacturers and retailers, etc. they include local merchant wholesalers who actually take title and physical possession to goods that require warehousing. alternatively, they may be manufacturers'ranch offices or independent brokers who work for either seller or buyer; these wholesalers often do not own or physically possess the product (11). since the purpose of this paper is to predict entrepreneurial opportunities in wholesaling, the following analysis focuses on independent merchant wholesalers. also, while it is an oversimplification (the census of wholesale trade describes eighteen kinds of business at the three-digit sic level), the functions served by merchant wholesalers are illustrated in the backwanl linkages for retailers and the forward linkages for manufacturers. irkilateonsheps weth irktaee.kirs anl9 manufactuirkrs wholesalers offer several advantages to retailers as a backward link with manufacturers. among these, wholesalers act as purchasing agents. they maintain stock at convenient points, make prompt deliveries when goods are needed, and collect materials for re-use, re-cycling, etc. (11). 57 they may supply information on products, circulate advertising material, and sometimes maintain service departments. wholesalers may even extend credit and finance inventories for small manufactumrs and retailers, enabling small clients to balance cash tlows and carry inventories during times of slow sales (14). in addition to the services provided, wholesalers offer cost advantages to retailers. first, by purchasing in large quantity and breaking bulk to meet the needs of small individual businesses, wholesalers offer substantial unit cost and transportation cost savings to customers. second, outlays for storage facilities may also be minimized through wholesalers assuming the bulk of long term storage obligations. such savings may enable small retailers to purchase inputs at costs similar to those of their larger counterparts. small firms are thereby able to maintain a competitive market position despite the potentially substantial economies of scale realized by larger counterparts. forward wholesaler linkages also offer several advantages to small manufacturers such as distribution planning, maintaining communications with retailers and other customers, providing a field sales force, monitoring tmnds in demand, and providing storage facilities for finished goods. the producer is also able to carry fewer accounts on the books, sell in larger quantities per transaction, and assume less credit risk by dealing with a few intermediaries rather than all the individual retailers, manufacturers, and institutions who purchase their manufactured goods (i). location decisions to provide these service and cost advantages to retailers and manufacturers, wholesalers must be appropriately located (12). in fact, in the wholesaling literature, location has been chief among the factors explaining the success of strong wholesaling centers (i.e. cities and standard metropolitan statistical areas) (2, 9, 16). also, researchers have argued that location can be a source of competitive advantages for both cities and firms (ll, 12). for example, it has been argued that unraveling points and gateway cities emerge in transportation networks (2, 16). unraveling points are defined as locations which represent the last point common in the distribution of goods. they are wholesaling center.'hat serve as break-of-bulk points or nodes in transportation networks (16). similarly, gateway cities are defined as locations which are in command of trade, connections between tributary areas and the outside world, and as developing between areas of differing intensities or types of production (near economic shear lines) (2). both of these definitions emphasize (he importance of the location of cities and firms in becoming major wholesaling centers. the concepts of unraveling points and gateway cities have been an important focus of research (9, 11). for instance, the gateway or unraveling role of edmonton in the distribution of products to northwest canadian markets was investigated. empirical evidence indicated that the bulk of purchases of northwest wholesalers and users are still in edmonton and that no new wholesaling centers have developed in the north to challenge edmonton's supremacy. thus, edmonton remains a gateway city and an unraveling point for northwest canada (9). in an investigation of the 40 largest standard metropolitan statistical areas in the u.s., researchers concluded that changes are taking place in the rank and status of major wholesale trade centers (ll). results indicated that cities such as philadelphia, boston, st. louis, pittsburgh, baltimore, and milwaukee have suffered precipitous declines in their ranked volume of wholesale trade. also, new york, while still the largest wholesale trade center. has experienced a decline in 58 its shme of u.s. wholesale trade from 20.3% in 1948 to 11.3%in 1977. on the other hand, dallasft. worth, houston, atlanta, and denver have increased their rank among major wholesale trade centers. the importance of early gateway cities is declining, and new gateway cities are emerging. "many early centers which functioned as important collectors of agricultural products ides moines, omaha, kansas city, and minneapolis-st. paul) have suffered this fate. houston's recent growth has been tied to petroleum and mineral wholesaling, while dallas-ft. worth has assumed the role as a major southwest distribution center for a variety of products" (ll: 57). at a lower level of analysis, location can be a competitive advantage for firms (12). in the wholesaling of fresh vegetables "...food marketing systems have resisted abandonment of traditional practices, and their distribution procedures are archaic and inefficient. this is particularly true in wholesaling; among food products the fresh vegetable industry is probably the worst of the lot in that assembly and distribution often account for 80% of retail selling prices" (12: 387). chain store organizations have been able to capture major shares of the retail outlets once served by nonchain firms in large measure because the chains realized economies in distribution processes. as these examples illustrate, location decisions are strategically important in wholesaling industries. yet, simply identifying location as a strategic decision is insufficient; it is also necessary to provide small business managers with guidance for making location choices. we now turn to identifying the factors that may predict wholesaling opportunities. pactqirs pireincting wholesaliing oppoirtuniity researchers suggest that shifts in wholesale trade activity are a function of changes in: i) population density, 2) consumer retail markets, and 3) manufacturing activity, as population densities shift, retail sales rise or fall, and as manufactumrs relocate, panerns of wholesale trade are profoundly impacted, particularly if change retlects the entry or exit of smaller manufacturing and retail firms who depend on independent merchant wholesalers. population density. two demographic trends, geographic shifts and suburbanization, illustrate the impact of changes in population density on wholesale trade. when researchers regressed the rate of growth of wholesale trade on population growth for the forty largest smsas in the u.s., they reported a correlation of .87 with a coefficient of determination value of .75 (ll). "some of the growth of wholesaling in the sunbelt smsas such as dallas-ft. worth, houston, and atlanta can be explained simply as a function of population growth. all three cities experienced population growth rates in excess of 70% and a more than five-fold increase in wholesale trade volume. by comparision ...new york and buffalo experienced a decline in population and were two of the three slowest growing smsas in wholesale trade" (ll: 58). hence, geographic shifts in population may predict wholesaling opportunities. also, accompanying the suburbanization trends of the population has been a shift of wholesaling activity away from central city locations (3) such that in new york city, philadelphia, san francisco, and washington, d.c., suburban wholesale trade employment figures now exceed those of their central city (10). transporting goods inward from the fringes of metropolitan areas often results in lower marginal transportation costs than originating all hauls at central city locations where traffic congestion problems are likely to be more prevalent. lower land rents and the availability of single story warehouse space also make suburban locations more attractive than central areas. it appears likely that wholesale trade firms will continue to favor suburban to central city locations. 59 as these examples iflustratc, shifts in population density associated with geographic relocation or suburbanization impact patterns of wholesale trade. yet, wholesalers experience shifts in population density indirectly through the growth or decline of retail trade. population and retail sales are closely related and indicate the attractiveness of wholesaling markets. reroil trode. prior research suggests that wholesale/retail trade ratios may be key variables for predicting wholesaling opponunities. significant differences in wholes,ale/retail trade ratios across cities, counties, smsas and states have been reported (13). also, county or urban levels of analysis have been identified as most important in explaining patterns of wholesale trade. "patterns of wholesale/retail sales ratios ...take on their characteristics mainly in relation to the county and urban bases; and accordingly, state patterns merely result from the various patterns originating from these smaller geographical units" (13: 24). manufocruring. manufacturing changes (changes in product mix) have also influenced wholesale trade in the 40 largest smsas between 1948 and 1977 (i i). smsas have a considerable degree of specialization. for example, nearly 63% of the wholesale trade flowing through houston is comprised of minerals, petroleum, chemicals, and machinery. the specialization of smsas can be attributed to their proximity to manufacturing or agriculture. "boih wilmington and charlote are among the top ten wholesaling centers for chemicals. wilmington's proximity to the major chemical manufacturing area is doubt the reason for its large sales volume, whereas charlotte's position is tied strongly to its central location within the textile region of the carolina piedmont." (11: 58). in sum, previous researchers suggest that shifts in population densities, changes in retail volume, and variations in manufacturing volume may have profound impacts on patterns of wholesale trade. these variables may also predict wholesaling oppoitunities. a predictive model the ability of population density. retail sales, and manufacturing volume to predict wholesaling opportunities was empirically tested. in addition, the amount of wholesaling activity (or inactivity) was investigated as an indicator of the fundamental attractiveness of areas to new wholesalers. in this study, change in the number of wholesaling firms was regressed on two predictor variables that were constructed to capture shifts in population density, changes in retail sales, existing wholesale volume, and existing volume of manufacturing. these predictor variables represent conditions which may make locations amenable to wholesale trade. counties were selected as the unit of analysis since activity within counties or cities is most important in explaining patterns of wholesale trade (13). data for 1977, 1982, and 1987 were collected for four states (california, kentucky, louisiana, and pennsylvania) from the census of wholesale trade, counry business panerns, and courrry-ciry dura books (4, 5, 6). the dependent variable for the model, the measure of wholesaling opportunity, was the change in the number of wholesale firms at the county level over a five year period. this measure was calculated as the number of wholesale firms in 1982 minus the number of wholesale firms in existence in 1977 (et)uation i). 60 ( i) entrepreneurial number of number of opportunities = wholesale firms wholesale firms in wholesaling in 1982 in 1977 prkdlt(:tor variables two predictor variables were constructed. first, (retail market change) captures variations in retail activity (and underlying changes in population density). changes in retail volume may reflect the attractiveness of wholesale markets. yet this variable may not adequately predict wholesaling opportunities if volume increases are accounted for by existing retailers and wholesalers; volume increases may even encourage backward integration and decrease the number of wholesaling firms. on the other hand, if increased retail sales are accounted for and accompanied by increases in the number of retail firms, there is a greater likelihood that the new firms will be smaller and will increase the importance and opportunity for local wholesalers. therefore, we predicted that increases in the number of retail firms combined with higher volume of retail sales will prompt new wholesale firms to enter local wholesale markets. retail market change was operationalized using equation 2, which captures both changes in the volume of local retail sales relative to national sales and shifts in population (since population is related to retail sales). in this equation, the difference in local retail sales volume in years 1977 and 1982 (divided by national sales volume in each year) was multiplied by the difference in the number of local retailers over the same time period. by including the change in the number of local retail firms, this variable accounts for the impact of large retail firms with national wholesaling operations that may reduce wholesaling opportunities. (2) o local retail local retail retail number of number of volume in 1982 volume in 1977 market = retailers retailers change in 1982 in 1977 national retail nationai. retah. volume in 1982 volume in 1977 the second predictor variable (wholesaling and manufacturing) represents manufacturing and wholesaling concentration in the county in 1977. we are attempting to predict growth in wholesaling between 1977 and 1982 as a measure of the wholesaling opportunities that existed during this time period. the amount of wholesaling activity (or inactivity) in each county at the beginning of this period in 1977 relative to that of the economy as a whole, may be an indicator of the attractiveness of an area to new wholesalers. consistent with the "gateway cities" and "unraveling point" concepts, however, more wholesaling activity is considered better than less; the area is, or is not, an established wholesaling center and has, or does not have, the infrastructure to support wholesaling. in the same way, changes in the numbers of wholesale firms should be related to the amount of manufacturing activity that existed in 1977. 61 wholesaling and manufacl'uring was calculated using equation 3, in which local wholesale sales volume per capita (divided by the national per capita wholesale volume) was multiplied by the volume of local manufacturing, relative to the volume of national manufacturing activity. all of these variables were measured for the year 1977. by including the per capita wholesale volume relative to the national per capita wholesale volume and the intensity of manufacturing, this variable represents conditions which make locations amenable to wholesale trade. (3) local national locald wholesale wholesale manufacturingwholesaling sales in 1977 sales in 1977 volume in 1977and i -------kmanufacturing local national nationalpopulation population manufacf uring in 1977 in 1977 volume in 1977 results as indicated earlier, the predictive ability of this model was empirically tested on counties from four states: california, kentucky, louisiana, and pennsylvania. these states were chosen for their geographic and economic diversity. changes in the number of wholesaling firms (entrepreneurial opportunities in wholesaling) were regressed on the two predictor variables, retail market change and wholesaling and manufacturing, for each of the four states. the empirical results are shown in table 1. the model produced statistically significant relationships in all four states, with the best performance in california (r square = .95) and kentucky (r square = .83). the coefficient of determination values (r square) for louisiana and pennsylvania were (.56) and (.52), respectively. coefficents for both independent variables were positive and statistically significant, in all states except for the measure of wholesaling and manufacturing in louisiana. also, the f-statistics were all statistically significant, which suggests that the model is a good fit with the data from these four states. to further test the model, we analyzed data for 1982 and 1987. results wem remarkably consistent with the earlier period; coefficients of determination for california and kentucky were (.98) and (.84). data for louisiana and pennsylvania produced r squares of (.71) and (.73), respectively. coefficients for wholesaling and manufacturing were positive for all states. the combination of decreasing numbers of retailers and increasing retail sales, however, produced negative coefficients for retail market change in tluee states: california, kentucky, and louisiana. a complete presentation of these results is available from the authors. discussion our results support the conceptual logic underlying the model. there seem to be significant positive relationships between wholesaling starts and the attractiveness of retail markets as indicated by changes in retail sales volume and the number of retail outlets. also, the fit of the model 62 table 1 iregression for california, kentucky, louisiana, and pennsylvania (1977-1982) cai ifornia betas f r-square f-statistic n-size retail market 429. 16.44*** .95 433.59"*v 52 change wholesaling & 22867. 21.38**v manufacturing kentucky betas f r-square f-statistic n-size retail market 3242. 5.57*** .83 181.65*** 76 change wholesaling & 26818. 8.70"** manufacturing louisiana betas f r-square f-statistic n-size retail market 1116. 5.05*** .56 26.52*** 44 change wholesaling & 6609..53 manufacturing pennsylvania betas f r-square f-statistic n-size retail market 221. 7 70*** .52 29.72*** 59 change wholesaling & 9877. 2.92** manufacturing ** p is less than .005 ***p is less than .0001 was improved by considering the existing volume of wholesale trade and the existing volume of manufacturing activity relative to national levels. the model appears to show promise as a heuristic for predicting wholesaling opportunities at a relatively fine geographic level of analysis. the model fit very well with the data from california and kentucky and explained greater than 50% of the variance in wholesaling starts in pennsylvania and louisiana. while this sample was comprised of counties from only four states, these states were chosen for their geographic and economic diversity to support the generalizability of results. the model should predict wholesaling opportunities in other samples. also, while the sample was arguably 63 small, in light of the paucity of quantitative models available to .'mall business managers for making location decisions in the wholesale sector, this should be viewed as a good first step. additional states should be analyzed; indeed, the explanation for why this model explained less variance in wholesaling in pennsylvania and louisiana may lie in examining other states. differences in the composition of manufacturing, the health of state economies, standards of living, the structum of wholesale networks, or the legal environment of wholesaling may impact the predictive ability of the model. application of the modfl the results of this model suggest that entrepreneurs who are contemplating entering wholesaling industries (or extending operations into new geographic markets) should consult readily available secondary data sources concerning i) population changes, 2) retail sales volume, 3) retail startups, 4) local wholesaling volume relative to national levels, and 5) local manufacturing volume relative to national levels to make location decisions. the procedum by which small business managers and consultants can use this model to assess the market potential for various wholesale goods is outlined below. designing the study level of analysis. while our analysis focused on counties, the same procedure can be used to predict wholesaling market potential at city, smsa, multiple county, state, or multiple-state regional levels of analysis. previous research suggests, however, that county or urban levels of analysis are most important in explaining patterns of wholesale trade. patterns of wholesale/ retail sales ratios at the state level, or above, merely result from various patterns originating from smaller geographical units (13).thus, we recommend a bine geographic level of analysis and focus on predicting entrepreneurial opportunities in wholesaling at the county level in the following discussion. sampling. in this study, retail trade, wholesale trade, and manufacturing activity were broadly defined and measured using dollar volume and numbers of firms. this analysis did not capture changes in product mix that may impact wholesale trade; greater predictive ability may be gained by targeting specific indusnies or specific products flowing from manufacturing, through wholesaling channels, and into retail markets. predictor variables. while our model was constructed to test theoretical arguments related to wholesaling location decisions, potential entrepreneurs should experiment with additional variables that may indicate growth or decline in local economic activity. expenditures on nonresidential construction within counties may predict wholesaling opportunities. construction spending data are available in the u.s. bureau of census'ounty-ciry data. yime period. since the purpose for this analysis is to predict wholesaling opponunities in the future, recent data are preferable to data from the more distant past. wholesaling, retailing, and manufacturing firms may change the composition of their prrxluct lines, change business strategies, or alter their organiz tion stmctures (creating branch offices). yet, while potential entrepreneurs may desire to use data for the current year, the time period may be dictated by the availability of data. the bureau of the census publishes county business patterns annually and the census of wftulesale trade every five years; the most recent volumes available are for the years 1988 and 1987 respectively. the most recent county city data book contains data for 1986. 64 adjusrmenis for inflation. it is not necessary to adjust for inflation in multiple regression analyses. any adjustments using the consumer price index, producer price index, or the gross national product (gnp) deflator cancel out in all equations. adjustments for inflation, however, should be included in any nonstatistical, informal analyses of the data. data analysis: formal and informal methods the results of this analysis suggest that there are significant relationships between wholesaling stans, the attractiveness of retail markets (changes in retail sales and numbers of retailers), existing wholesale volume, and the amount of manufacturing activity relative to national levels. small business managers and consultants have two avenues for using this information. they can duplicate the statistical analysis for other states by following our instructions. changes in the number of wholesaling establishments (entrepreneurial opportunities in wholesaling) is regressed on the retail market change and wholesaling and 'anufacturingvariables. this regression equation describes the relationships (regression coefficients) between changes in retail markets, the wholesaling and manufacturing context, and changes in the number of wholesaling firms across each state over the relevant time period. new wholesaling opportunities can then be identified by: l) calculating the predicted growth or decline in the number of wholesaling establishments in each county (multiplying the values for retail market change and wholesaling and manufacturing by their respective, regression coefficients, then summing these products and the constant), and 2) comparing these values with actual changes that took place in each county. opportunities may exist in counties for which actual growth in wholesaling is less than predicted levels. alternatively, small business managers and consultants can use informal methods to incorporate information about changes in retail markets (local population), local wholesaling volume, and local manufacturing volume into wholesaling location decisions. small business managers'nd consultants'ntuition regarding potential wholesaling opportunities can be improved by incorporating changes in retail sales volume and the number of retail establishments as indicators of the attractiveness of wholesale markets. also, the concentrations of wholesaling and manufacturing in each county (relative to that of the state or national economy) may indicate the fundamental attractiveness of the area as a wholesaling center. growth in wholesaling in future periods may be a function of the level of wholesaling activity or inactivity in each county at the present time. in the same manner, new wholesaling start-ups should be related to the level of manufacturing activity that cunently exists. whether formal or informal methods are used to incorporate this model into wholesaling location decisions, the model should not be viewed as a substitute for small business managers'ntuition,bu( as a complementing tool. our model is unable to assess the quality of wholesaling services provided to retailers and manufacturers; opportunities may exist for new firms if retailers and manufacturers are not receiving desired services. also, our analysis did not capture changes in strategies or organization structures of existing firms (e.g. w. w. grainger's branch office expansion program). such data were not available in this study, but surveys of retailers and manufacturers should be used to obtain information on the importance and quality of services; annual reports should be used to investigate potential advantages of national wholesaling systems relative to independent entrepreneurs. 65 references i. beckman, t. & n. engle. wholesaling: principles and pracrices (new york: roland press, 1951). 2. burghardt, a. "a hypothesis about gateway cities," annals of the associatiim of americun geogruphers, 61 (1971), 270-84. 3. carlino, g. "declining city productivity and the growth of rural regions: a test of alternative explanations," journal of urban economics, 18 (1985), 11-27. 4. department of commerce, bureau of the census. county businesc panerns (washington, d.c.: u.s. government printing office, 1977, 1982 & 1987). 5. department of commerce, bureau of the census. census of wholesale trade (washington, d.c.: u.s. government printing office, 1980, 1985 & 1990). 6. department of commerce, bureau of the census. county-city data book (washington, d,c.: u.s. government printing office, 1983 & 1988). 7. department of commerce, bureau of the census. statistical abstram of rhe u.s. (washington, d.c.: u.s. government printing office, 1989). 8. dun & bradstreet. business failure record (new york: dun & bradstreet, 1981 1982). 9. ironside, r. & d. peterson. "edmonton's wholesale relationships with northwest canada," canadian geographer, 26 (1982), 207-23. 10. levey, j. urban and metropolitan economics (new york: mcgraw-hill, 1985). 11. lord, j. "shifts in the wholesale trade status of u.s. metropolitan areas," the professional geographer, 36 (1984), 51-63. 12. jumper, s. "wholesale marketing of fresh vegetables," annals of the association of american geogruphers, 64 (1974), 387-96. 13. revzan, d. the marketing significance of geographical variations in wholesalelreiail sales ratios (berkley: institute of business and economic research, university of california, 1966). 14. rosenbloom, b. marketing channels: a management view (hinsdale: dryden press, 1978). 15. van voorhis, j. 1980. enirepreneurship and small business management (boston: allyn and bacon, 1980). 16. vance, j. the merchani's world: the geography of wholesaling (englewood cliffs: prenticehall, 1971). 66 15 the influence of socioeconomic factors on entrepreneurship and innovation maría—soledad castaño martínez university of castilla-la mancha mariasoledad.castano@uclm.es maría jesus ruiz fuensanta university of castilla-la mancha mariajesus.ruiz@uclm.es isabel martínez rodríguez university of castilla-la mancha isabel.mrodriguez@uclm.es abstract researchers have traditionally analyzed how innovation affects growth and how economic factors affect innovation. however, this paper explores how social capital, the quality of institutions, and income inequality affect product innovation on behalf of entrepreneurs. in order to do so, an empirical analysis is performed using panel data for thirteen european countries for the period 2002-2010. keywords: product innovation, entrepreneurship, social capital, institution, income distribution. introduction the specialized literature has analyzed both innovation and its effects on economic growth (holcombe, 2007; schumpeter, 1911). recently, several studies have focused on entrepreneurial activity and the importance of entrepreneurs to growth (audrestsch, 2006; fritsch, mueller, & weyh, 2005). according to schumpeter (1911), entrepreneurship implies innovation in terms of either the launch of a new product1, or in organization or processes and also involves a process of destruction. entrepreneurs create new industries and, therefore, bring about significant structural changes in the economy (nissan, galindo, 1 this product does not have to be entirely new but perceived as such by consumers. s trateg y journal of small business journal of small business strategy volume 23, number 2 16 & mendez, 2012). this paper analyzes the case when an entrepreneur introduces product innovation from a schumpeterian point-of-view. in addition, various authors, including gnyawali and fogel (1994) and shapero and sokol (1982), have suggested that economic growth and, therefore entrepreneurship, does not only depend on economic and financial factors (such as investment in infrastructure or business investment), but also socioeconomic factors. this paper analyzes the impact that three socioeconomic factors, namely social capital, institutions, and income distribution, have on entrepreneurship and innovation. in order to do so, the paper is organized as follows: the second section explores how social capital and institutions affect innovation on behalf of entrepreneurs. section three addresses the main contributions to the literature that defend the notion that income inequality stimulates innovation on behalf of entrepreneurs. the fourth section presents an empirical analysis aimed at verifying the aforementioned relationships and the last section provides some brief conclusions. social capital, institution, and entrepreneurship following worms (2003), in a narrow sense, social capital is related to social resources creation in a social group to which individuals belong voluntarily. in a broader context, those resources can emerge from the relationships that an individual establishes in groups to which he belongs voluntarily, by chance, through necessity, or by following a process of social adscription. social capital is, therefore, related to social networks and to norms established to improve the functioning of those networks (putman, 1995). more specifically, putman and goss (2003) state that social capital is a mixture of social networks and their associated reciprocity norms, which create value in the same way that physical and human capital do (p.14). furthermore, various studies suggest that entrepreneurs emerge from social networks with the purpose of furthering their economic activities in a complex economic system (cassis & papelasis 2005; swedberg, 2000). in this sense, social networks provide entrepreneurs with a variety of benefits. they provide access to resources, resource exchanges (tsai & ghoshal, 1998), relevant information (fukuyama, 2000), and access to international markets (phelan, dalgic, li, & sethi, 2006). they also foster innovation, help entrepreneurs to recognize opportunities (dakhli & clercq, 2004; kaasa, 2009; subramainiam & oyundt, 2005), create intellectual capital, and organizational education (hitt, lee, & yucel, 2002) and finally, they make it easier to acquire relevant knowledge and skills (nahapiet & ghoshal, 1998) and to boost business profits (liao & welsh, 2003; nahapiet & ghoshal, 1998). three different dimensions of social capital that favor entrepreneurial innovation can be taken from the various studies that have addressed its effects on entrepreneurship, namely structural, relational, and cognitive social capital (herrera, 2009). in the first place, the structural dimension focuses on the structure and organization of social networks (granovetter, 1973; uzzi, 1996). journal of small business strategy volume 23, number 2 17 the way these links are organized provides the necessary and sufficient conditions for the transfer of information and resources to foster business success. moreover, these networks cause synergistic effects that result in creative ideas and new combinations (subramainiam & oyundt, 2005). in the second place, the relational perspective considers the strength and quality of social ties. strong ties generate trust and help information to flow, which leads to a reduction in the cost of searching for information (fukuyama, 2000; uzzi, 1996). according to knack and keffer (1997), the more the members of a network of companies trust each other, the lower the monitoring and transaction costs. as a result, companies can use the resources they have saved for other purposes, such as innovation. finally, the cognitive dimension refers to the existence of values and models that are shared by the members of the network (nahapiet & ghoshal, 1998). this institutionalist viewpoint of social networks specifies how they provide a series of standards for acceptable behavior that entrepreneurs must abide. when individuals share similar values, it is easier to exchange ideas and resources, which can favor innovation (dakhli & declercq, 2004; kaasa, 2009). however, it is worth indicating that social capital also refers to the social behavior of individuals within institutions. hence, it is necessary to look at the role of institutions in the economic performance of societies (acemoglu, 2005; galindo, 2010; north, 1990). so, the institutional approach shows that institutions play an important role in economic operations, as they channel ideas and ideologies. these ideas and ideologies constitute subjective mental constructs which individuals use to interpret their environment and to make choices. north (1990) considers it necessary to analyze economic and political aspects together in order to understand economic operations. in this sense, if institutions, social interactions, and norms are efficient, they improve social cohesion. social cohesion is an essential component for the achievement of economic performance and development. furthermore, good institutions improve investment in machinery, human capital, and the introduction of appropriate technologies (galindo, 2010). however, in order to generate these positive effects, institutions have to satisfy the following characteristics (acemoglu, 2005; galindo, méndez & alfaro, 2010): a) they have to protect the property rights of most of society. this means that economic agents have more incentives for investment. b) they have to establish restrictions on the actions of certain lobbies and political elites which could penalize property rights, for example, expropriation. c) they must improve the equality of opportunities and expand the middle class, so that more individuals can carry out economic activities. in order to do so, it is necessary to facilitate access to better formation of human capital and financial resources which improve investment. according to fogel, hawk, and siegel (2006), the career prospects of an entrepreneur depend on the economic environment, which can be facilitative or detrimental. such factors include rules and regulations, the quality of government, the journal of small business strategy volume 23, number 2 18 availability of education, and ambient culture. for entrepreneurs, the rules and regulations that preserve their property rights are especially relevant, as is the existence of stable and non-corrupt governments able to build transactional trust and to design adequate macroeconomic policies to improve the social and economic environment. in short, social stability and the social climate encourage entrepreneurship and also innovations on behalf of entrepreneurs, together with their assimilation (galindo, méndez & alfaro, 2010). bearing in mind the foregoing theoretical arguments, we propose the following hypothesis. h1: the societies with the most social capital and the best institutions encourage entrepreneurs to innovate. income distribution and entrepreneurship at present, there are a whole host of factors that show how inequality has a positive effect on growth and private investment and, in turn, on entrepreneurship and innovations (weinhold & nair-reichert, 2009). income inequality boosts the productivity of the economy by means of creating incentives and promoting competition, which generates a greater motivation to invest (rodríguez-pose & tselios, 2010). similarly, the increase in competition stemming from inequality will provide for a greater variety of products (vosskamp, 2009), all of which will encourage entrepreneurs to set in motion innovation processes to differentiate their products from the rest. credit is a key variable when it comes to financing innovations. as a result, lending institutions must not be restrictive and must meet the funding requirements of entrepreneurs (galindo, méndez, & alfaro, 2010). the problem is that during periods when credit is tight, this is not always possible. as a result, an unequal income distribution can stimulate entrepreneurship and innovation. bearing in mind that the individuals with the most resources have greater access to credit (berhanu, 2009), they can invest, innovate, and expand their production to a greater extent than others (shin, 2012). therefore, a certain degree of income concentration in part of the population is necessary to fuel innovation processes in the presence of such imperfections in the credit market. in the same vein, bahmani, galindo, and méndez (2010) assert that if income inequality favored business people, they would have more resources to invest and innovate, which is particularly important in times of credit market restrictions. investment projects, and more specifically, entrepreneurships or the implementation of innovations, often entail high costs (garcíapeñalosa, 2008). these costs are even higher in the case of small enterprises (hall & lerner, 2009; rosenbusch, brinckmann, & bausch, 2011). in the absence of a generous market that works properly, income has to be sufficiently concentrated so that entrepreneurs can cover these costs, so that an unequal income distribution once again becomes a prerequisite for innovation (garcía-peñalosa, 2008). similarly, taking into account that those costs will more than likely result in higher journal of small business strategy volume 23, number 2 19 prices, innovation incentives will depend on whether or not there is a group of wealthy consumers who are willing to purchase the new product (rodríguez-pose & tselios, 2010). in this process, unequal income distribution can be the solution, as it will create that group of high-income consumers who are willing to pay higher prices for innovations (roy, 2012). this group will also be more prone to choosing better and more expensive technologies, due to being able to benefit from them (iacopetta, 2008; kandler & steele, 2009), as well as more expensive higher quality products (bekkers, francois & manchin, 2012). in addition, it is also important to consider that income inequality can also cause social instability, curbing the incentives for entrepreneurship and innovation (bahmani, galindo & méndez, 2010; galindo, méndez, & alfaro, 2010; knight, 2012; shin, 2012); although, this effect will depend on the degree of inequality (knight, 2012). in this sense, knight, song, and gunatilaka (2009) state that when inequality has an effect beyond an individual’s own group of reference, at either national or regional level or between urban and rural areas, it can be perceived as an opportunity to gain higher profits, which could imply an incentive for entrepreneurs and innovation processes to get on equal terms with the wealthy. given the above, we propose the following hypothesis: h2: unequal income distribution provides an incentive for entrepreneurs to innovate. empirical analysis data and methods in order to test the hypothesis formulated in the previous section, we propose the following empirical specification: init = α + β1giniit + β2bfit + β3mfit + β4ifit + β5ffit + β6peit + β7hk + β8iit + β9uit + β10topit + β11tneit + uit where subscript i denotes the country (1….i), and subscript t denotes the year, α is an intercept, the βj’s are the coefficients to be estimated, and uij is the error term. the dependent variable (in) represents the product innovation of entrepreneurs, which is measured by a response to an item in the gem questionnaire, more specifically, “tea: how many (potential) customers consider the product new/unfamiliar?” for the purpose of our research, we have chosen both options, namely “all customers” and “some customers”. as regards the explanatory variables, (gini) captures income distribution equality as measured by the gini index obtained from the eurostat database. in order to capture social capital and institutional quality, our model incorporates four components from the economic freedom index provided by the heritage foundation2. these components are business freedom (bf), monetary freedom (mf), investment freedom (if), and 2 this foundation aims to measure the consistency of institutions and public policy in different countries. the economic freedom index comprises ten economic freedom measures that assess rule of law, government intervention, regulatory efficiency and open markets (miller et al., 2010). (1) journal of small business strategy volume 23, number 2 20 financial freedom (ff), as we assume these dimensions can be closely related to the decision to innovate. in addition, (pe) is the ratio of public expenditure to gdp, (hk) is percentage of public spending on human capital, (i) is the ratio of gross fixed capital formation to gdp, (u) is the unemployment rate. these data variables have been extracted from the world development indicators database of the world bank. finally, the variable (top) collects the number of entrepreneurial initiatives whose main motivation to begin is to profit from an opportunity, while the variable and (tne) reflects the necessity of creating its own employment due to the lack of labor opportunities. these variables also belong to the gem database. descriptive statistics for all the variables are shown in table 1. as mentioned previously, the structure of the data is a panel, i.e. observations on a cross-section of individuals over several time periods have been pooled. the use of panel data has several advantages for econometric estimation. for example, it allows us to control for individual or time heterogeneity, which cannot be captured by the variables in the model. furthermore, as baltagi (2008) affirms, panel data give “more informative data, more variability, less collinearity among the variables, more degrees of freedom and more efficiency” (p.7). when working with panel data there are two issues of relevance to the selection of the form of the model. one consists in deciding between random and fixed effects, which depends on the correlation of the table 1: descriptives variable mean max min coefficient of variation in 44.57 62.30 25.06 0.185 gini 28.00 35.00 23.00 0.113 bf 83.97 100.00 70.00 0.120 mf 83.37 90.80 69.90 0.048 if 76.37 95.00 50.00 0.175 ff 73.33 90.00 50.00 0.203 pe 37.14 48.09 24.97 0.155 hk 16.23 25.67 10.67 0.235 i 20.31 34.45 11.55 0.181 u 6.81 20.10 2.30 0.433 top 4.46 11.67 1.09 0.452 tne 0.71 2.11 0.09 0.585 journal of small business strategy volume 23, number 2 21 individual/time effects with the regressors (in the random effects model the underlying assumption is the exogeneity of the unobservable effects). and the second aspect refers to the choice between a oneway or a two-way effects model, depending on whether the model incorporates only individual or time effects (one-way), or both (two-way). on the one hand, the hausman specification test for the fixed effects estimator versus the random effects estimator3 yields a value of 14.40 (p = 0.2119) with 11 degrees of freedom. therefore, we cannot reject the null hypothesis of no correlation between the individual country effects and the explanatory variables. this result leads us to select a random effects model because it is a more efficient estimator. on the other hand, cameron and trivedi (2009) point out that for short panels like ours (8 periods), it is common to let the time effects be fixed effects, by including a set of time dummies in the regressors (p.232). in this sense, the joint test of no significance of the set of year dummies (chi2 (8) = 197.06; p = 0.000) suggests that time effects are required. combining both aspects, the final specification of equation (1) is a mixed error component model with random country effects and fixed time effects. in 3 the hausman test is based on the significance, under the null hypothesis of no correlation, of the difference between a consistent and an efficient estimator. under the null, the random effects estimator is consistent but inefficient. under the alternative hypothesis, the random effects estimator is biased and inefficient, whereas the fixed effects estimator is consistent. this model, the error term uij can be expressed as: uij = μi + λt + vit where μi denotes the unobservable country effect, λt is the unobservable time effect, and νit is the remainder stochastic disturbance term. results the final model has been estimated by generalized least squares (gls) using a sample of 13 european countries over the period 2002-2010 4. the results obtained are shown in table 2. as regards the variables capturing the influence of social capital and the quality of institutions, the evidence obtained is mixed. while the coefficient for the bussines freedom index (bf) is positive and significant, the component representing financial freedom (ff) exerts a negative influence on the dependent variable and the other two, monetary freedom (ff) and investment freedom (if), have positive effects, but do not reach a minimum of significance. therefore, the thesis in fogel, hawk, and siegel (2006) can be confirmed, as the higher the quality of institution, the more innovation, especially when laws and regulations enhance business activity. this is what is captured by the business freedom index (bf), which is a measure of the degree of entrepreneurial freedom in domestic markets, i.e., a higher value of this index indicates that entrepreneurs operate in scarcely regulated markets where free trade prevails. conversely, financial regulation has a negative effect on innovation, 4 these countries are belgium, denmark, finland, france, germany, iceland, ireland, italy, netherlands, norway, spain, sweden, and the united kingdom. journal of small business strategy volume 23, number 2 22 probably due to the fact that such regulation can cause short-term credit constraints limiting the access to funding, which is essential for innovation processes, as has been mentioned. (galindo, méndez, & alfaro, 2010). moreover, according to miller, holmes, and feulner (2010), the severe effects of the recent financial crisis in those countries with greater economic freedom index, especially in european countries, many of which are experiencing serious problems to manage their public debt, has led to an increase in financial market regulations. in the short term, this circumstance determines the emergence of funding problems for businesses, which in turn is negatively affecting the economic growth of these countries. besides, we observe, as hypothesized, that unequal income distribution significantly affects the propensity of entrepreneurs to innovate. therefore, hypothesis 2 can be confirmed in correspondence with the thesis of hall and lener (2009) and rosenbusch, brinckmann, and bausch (2011). therefore, some income concentration is required for entrepreneurs to undertake new innovative projects. the size of the public sector, as measured by the ratio of public expenditure to gdp, also has a positive effect on innovation, as occurs with the share of public investment devoted to promoting human capital. the results appear to show that resources devoted to increasing the stock of physical capital in the economy also stimulate innovation on behalf of entrepreneurs. however, the associated beta coefficient is not sufficiently significant to validate this inference. table 2: estimation results note: time intercepts are included in the regressions * = p ≤10%; **= p ≤5%; ***= p ≤1% on a different note, the poor job prospects of the economy, represented by the unemployment rate, seem to operate as an incentive, judging by the positive sign of this variable. however, this result is not corroborated by the estimated coefficient variable βj standard error α -2.711* 1.531 gini 0.445** 0.234 bf 0.005*** 0.002 mf 0.007 0.007 if 0.000 0.002 ff -0.003* 0.002 pe 0.575*** 0.102 hk 0.394*** 0.129 i 0.181 0.158 u 0.162*** 0.036 top 0.110*** 0.044 tne 0.025 0.040 journal of small business strategy volume 23, number 2 23 for the variable tne. in this sense, according to the perception of the entrepreneurs themselves and the results obtained from our model, the most innovative entrepreneurs are those who decided to start a business because they recognized an opportunity. these results are consistent with the thesis in nissan and castaño (2011). conclusion this paper provides a brief summary of the foremost contributions to the literature that analyze the effects of social capital, the quality of institutions, and income distribution on entrepreneurship and, particularly, on entrepreneurs’ innovation. the empirical analysis yields the following results: the societies with the best institutions have the most innovative entrepreneurs, particularly when these institutions improve business freedom, since product innovation is higher in countries where the free market prevails. however, financial regulations are observed to hinder entrepreneur innovation, as such regulations restrict credit in the short term. in addition, the empirical analysis demonstrates that in societies where there is a greater concentration of income, there is also greater innovation on behalf of entrepreneurs. apart from the results discussed above, the study also shows that physical and human capital stock and the importance of the public sector have a positive effect on entrepreneur innovation. finally, entrepreneurs who start up a business in response to a business opportunity are innovators, whereas, this effect on innovation cannot be confirmed in the case of those who start up a business based on need. references acemoglu d. & johnson, s. 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(2003). viejos y nuevos vínculos en francia. in r. d. putnam, (ed.), el declive del capital social (pp. 273-344). barcelona: galaxia gutenberg. maría–soledad castaño martínez is phd in economics and associate professor of applied economics at the university of castilla-la mancha (spain) where she teaches courses of fiscal and monetary policy and international economic policy. her research areas are economic growth, economic policy, entrepreneurship and innovation. she has published several articles in international specialized journals and books. she is also reviewer and editorial board member of international journals. journal of small business strategy volume 23, number 2 27 maria jesus ruiz-fuensanta holds a phd in economics and is associate professor of economics at the university of castilla-la mancha, where she teaches courses of spanish economics and international economics. she has been visiting researcher in several european universities and national agencies, such as the university of florence and the spanish national energy commission. her academic work focuses on regional economics, with a special focus on the study of the dynamics of marshallian industrial districts and on policies for local and regional development. she has also conducted research in the field of energy economics, more specifically on the analysis of energy efficiency. she has published several books and articles in international specialized journals on these topics. isabel martínez-rodríguez is phd student and teaching assistant of economics at the university of castilla-la mancha, where she teaches courses of fiscal and monetary policy. her research areas are economic growth, entrepreneurship and income distribution. she has published several books and articles in international specialized journals on these topics reproduced with permission of the copyright owner. further reproduction prohibited without permission. http://www.smallbusinessinstitute.biz w w w. j s b s . o rg a b s t r a c t keywords: journal of small business strategy 2020, vol. 30, no. 03, 47-64 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2020 small business institute® entrepreneurial passion, entrepreneurial bricolage, wellbeing, micro-entrepreneur, developing countries. introduction syed abidur rahman1, seyedeh khadijeh taghizadeh2, mirza mohammad didarul alam3, golam mostafa khan4 1sultan qaboos university, al khoud, sultanate of oman, al khoud, p.o. box: 50, p.c. 123, muscat, oman, syedabid728@gmail.com 2sultan qaboos university, al khoud, sultanate of oman, al khoud, p.o. box: 50, p.c. 123, muscat, oman, taghizadeh.nastaran@gmail.com 3united international university, united city, madani ave, dhaka 1212, bangladesh, mirza@bus.uiu.ac.bd 4sultan qaboos university, al khoud, sultanate of oman, al khoud, p.o. box: 50, p.c. 123, muscat, oman, gmkhan@squ.edu.om the functionality of entrepreneurial passion and entrepreneurial bricolage on micro-entrepreneur’s wellbeing apa citation information: rahman, s. a., s. taghizadeh, k., alam, m. m. d., & khan, g. m.. (2020). the functionality of entrepreneurial passion and entrepreneurial bricolage on micro-entrepreneur’s wellbeing. journal of small business strategy, 30(3), 47-64. it has been collectively and unequivocally resonated that entrepreneurship matters for socio-economic development and for the greater prosperity of the human civilization (gries & naudé, 2011; tata et al., 2017). alongside, micro-entrepreneurship ventures also play significant role in the socio-economic development around the globe, particularly in the developing countries. yet, the micro-entrepreneurs in developing countries often face a diverse range of institutional constraints and have limited access to the required resources (khoury & prasad, 2016). therefore, micro-entrepreneurs strive to use inadequate but available resources at hand to operate their businesses. with such constricted milieu of the micro-entrepreneurial venture, varied arrays of theoretical discussions have brought into light the concept of ‘entrepreneurial bricolage’, relating to the competency-based behavioral aspects of the entrepreneurs at a limited resource setting (baker & nelson, 2005; davidsson et al., 2017a; kickul et al., 2018; kwong et al., 2019). entrepreneurial bricolage means to make or do something with whatever limited resources are at hand (baker & nelson, 2005; fisher, 2012). previously, scholars have identified that entrepreneurial bricolage is driven by entrepreneurial orientation (hooi et al., 2016), exploratory orientation (guo et al., 2016). according to cardon and kirk (2015), entrepreneurial passion increases entrepreneurs’ dedication, persistence, activities, and ability to engage fully in their venture. further, researchers have argued that passion fuels motivation, improves mental activity, and provides meaning to everyday life (cardon et al., 2013). considering the concepts and contemporary empirical relationships between entrepreneurial passion and entrepreneurial bricolage corroborated by stenholm and renko (2016), this study extends the previous work by considering subjective wellbeing as an outcome of entrepreneurial passion and entrepreneurial bricolage. recent empirical research has started to explore the effects of passion, which may channel through different outcomes (murnieks et al., 2016). therefore, existing empirical research has investigated the relationships between entrepreneurial passion and investment outcome (chen et al., 2009), entrepreneurial passion and employee’s organizational commitment (breugst this study investigates the relationships between entrepreneurial passion, entrepreneurial bricolage, and subjective wellbeing. a total of 253 usable data were collected from the micro-entrepreneurs in bangladesh and data were analyzed by sempls3.0 employing structure equation modelling. the results indicate that subjective wellbeing is significantly predicted by entrepreneurial passion and bricolage. bricolage also found to play a mediating role between passion and wellbeing. the results of the study validate that passionate entrepreneurs who embrace bricolage will achieve wellbeing through their ventures. the paper makes contribution to the knowledge domain by bridging the concept of subjective wellbeing with entrepreneurial passion and bricolage. http://www.smallbusinessinstitute.biz http://www.jsbs.org 48 s. a. rahman, s. k.taghizadeh, m. m. d.alam, & g. m. khan journal of small business strategy / vol. 30, no. 3 (2020) / 47-64 et al., 2012). different from these, this study attempted to focus on the relationship between entrepreneurial passion and subjective wellbeing. similarly, in recent times, researchers are interested to explore different outcomes of entrepreneurial bricolage. for instance, chen and fan (2015) have found outcome of entrepreneurial bricolage to be innovation speed. fisher (2012) has explored the relationship between entrepreneurial bricolage and firm’s growth. the contention of this study is to move beyond the typical focus on financial and economic outcomes that characterizes so much entrepreneurship research and to focus more broadly on human functioning, which can be gauged by the state of subjective wellbeing. generally, entrepreneurship is an exclusive and challenging human undertaking, which is closely associated with wellbeing (shir, 2015). scholars have asserted that wellbeing is an imperative indication of socio-economic improvement and institutes a significant social resource (tata et al., 2017). however, in the current unequal society, the gap between rich and poor is accelerating in many countries and particular segments of society are deprived of achieving wellbeing (george et al., 2012) and micro-entrepreneurs are not far off. researchers have identified a great deal of interest in micro-level entrepreneurship, beyond monetary profit, with a role in developing society at large (wiklund et al., 2011), which is known as ‘subjective wellbeing’. subjective wellbeing is mostly concerned with the approach and the reasons of experiencing a life in a positive way, including cognitive judgments and affective reactions (diener, 2009). however, there is doubt whether entrepreneurial passion in a resource constraint setting still can bring wellbeing to the individual. yet it is also unclear whether entrepreneurial passion and entrepreneurial bricolage would influence the subjective wellbeing of the micro-entrepreneurs. in fact, there is also a dearth of empirical evidence for the role of entrepreneurial passion and entrepreneurial bricolage on subjective wellbeing in the context of micro-entrepreneurs in a resource constrained setting, as of now and warrants further research. further, scholars have also pointed out that till yet individual-level mechanisms behind involvement in bricolage have been scantily understood (kwong et al., 2019). to shed light on the above issues, this empirical research focuses on micro-entrepreneurs operating in cottage industry in a developing country who assume to have entrepreneurial passion with wide ranges constraints and limited resources. this research contributes by introducing a novel research framework. it pays attention on entrepreneurial passion as a driver for entrepreneurial bricolage and subjective wellbeing. it will add knowledge by realizing entrepreneurial bricolage as a predictor for subjective wellbeing, and the mediating relationship of entrepreneurial passion to subjective wellbeing via entrepreneurial bricolage. it contributes by introducing subjective wellbeing as a novel outcome for entrepreneurial passion and entrepreneurial bricolage in the context of micro-entrepreneurs of a resource-constrained country. literature review and hypothesis development entrepreneurial passion and subjective wellbeing the word ‘passion’ has attracted much attention among the management and entrepreneurship scholars (fisher et al., 2018; murnieks et al., 2016). as a general term ‘passion’ is a strong inclination to engage someone in certain activities (aiken et al., 2018). numerous scholars across different domains and disciplines defined the term ‘passion’, but three basic charteristics are common in all definitions. passion is (1) associated with an intensive positive feeling, (2) controls behavioral tendency of individuals, and (3) considered as a target-specific construct (cardon, 2015; chen et al., 2015). however, acknowledging all the definitions, cardon et al. (2009) have defined the term ‘entrepreneurial passion’, a part of motivation and being treated as a positive effect, as “consciously accessible intense positive feelings experienced by engagement in entrepreneurial activities associated with roles that are meaningful and salient to the self-identity of the entrepreneur” (p. 517). in the current study, the authors consider entrepreneurial passion not as a trait, but rather as behavior of the entrepreneurs, which is in agreement with ho and pollack (2014). based on this conceptualization of entrepreneurial passion, three different role identities were developed, as entrepreneurs comprehend passion differently for their various activities, including inventing (opportunity identification), founding (business creation), and developing (business growth) (cardon et al., 2009; mueller et al., 2017). passion for inventing refers to activities accompanied by searching for new market opportunities, creating new products and/or services, and dealing with product prototypes (cardon et al., 2009). passionate entrepreneurs for inventing are actively involved and dedicated in exploring new opportunities, feeling interest to discover new product and/or service ideas, and relentlessly searching for solutions to address the existing problems (breugst et al., 2012). passion for founding reflects the entrepreneur’s passion for activities related to the establishment of a company. it focuses on the process of formation activities, including gathering and accumulating necessary resources for establishing a new venture, actual establishment of the venture, grabbing initial sales or hiring employees, and trying to become a parent of the newly created venture (cardon et al., 2009). 49 s. a. rahman, s. k.taghizadeh, m. m. d.alam, & g. m. khan journal of small business strategy / vol. 30, no. 3 (2020) / 47-64 entrepreneurs who are passionate for founding demonstrate positive affect when they involve themselves in the activities dedicated to the creation of a new venture, and specifically, to have a sense of feelings of psychological ownership of the firm that they have created (breugst et al., 2012). passion for developing focuses on post-establishment activities of a venture in the light of care, growth, and expansion. entrepreneurs who are passionate for a developing venture show positive affect when trying to enhance existing ventures beyond their early survival by involving themselves in the strategy formulation (acquiring new customers), as well as business optimization (murnieks et al., 2016). while discussing the mental wellbeing of the entrepreneurs, stephan (2018) clearly noted with surprise that there is no study so far linking entrepreneurial passion directly to the wellbeing of the entrepreneurs although could be expected. however, vallerand et al. (2007) predicted that harmonious passion of individuals may have an effect on wellbeing and later briki (2017) validated that harmonious passion predicts wellbeing while obsessive passion does not. in another study, philippe et al. (2009), argued that people who are passionate about an activity should experience higher levels of hedonic (subjective) wellbeing than individuals who do not engage in such a type of activity in their life, resulting in making a difference in their life. passion for inventing, passion for founding, and passion for developing may lead the micro-entrepreneurs to a state of satisfaction and understand the meaning of life. as such, we believe a diverse range of passion may work as a stimulus for wellbeing. though there might be a possibility of predominance of each type of passion over each other towards the wellbeing. nevertheless, the passion for inventing, founding, and developing may lead to the realization that the micro-entrepreneurs are worthwhile in the society. in the study of vallerand et al. (2007) argued that while passion may ensure dedication toward the activity, it may also be associated with positive subjective wellbeing of an individual, depending on the type of passion involved. reasoning the assertion as well, this study also argues that different ranges of passion craft optimism among the micro-entrepreneurs towards life and create a belief that micro-entrepreneurs can contribute to the happiness and wellbeing of themselves and others. taking up these logical consequences and considering holistic meanings of entrepreneurial passion and subjective wellbeing, the authors believe there could be statistical relationships between entrepreneurial passion and subjective wellbeing. hence, the authors hypothesize that: h1a. entrepreneurial passion for inventing has a positive influence on subjective wellbeing of the micro-entrepreneurs. h1b. entrepreneurial passion for founding has a positive influence on subjective wellbeing of the micro-entrepreneurs. h1c. entrepreneurial passion for developing has a positive influence on subjective wellbeing of the micro-entrepreneurs. entrepreneurial passion and entrepreneurial bricolage a recent study conducted in finland by stenholm and renko (2016) has revealed the mediating role of entrepreneurial bricolage between entrepreneurial passion and entrepreneurial survival. the research has also drawn out the association of entrepreneurial passion as antecedent of entrepreneurial bricolage as a novel attempt. according to acs et al. (2011) studying entrepreneurship across countries is always a vital attempt. therefore, it would be interesting and reasonable to test the same relationship at the resource-constrained context and it will contribute to the generalizability of the relationship. vallerand et al. (2007) argued that being passionate for an activity leads individuals to devote themselves profusely to their activity, letting the individuals to continue even in the face of difficulties. in a challenging environments with limited resources, entrepreneurs have three alternatives: (1) outsourcing resources, (2) dodging new challenges through downsizing, or (3) behaving as a ‘bricoleur’ with the notion of ‘creating something out of nothing’ (fisher, 2012). passionate entrepreneurs try to avoid the second option outlined above, as they are more likely to recognize themselves as entrepreneurs having a sense of psychological ownership of the firm (breugst et al., 2012) which is central to their self-identity (murnieks et al., 2016). unlike traditional entrepreneurs, when confronted with environmental challenges, passionate entrepreneurs view the situation positively. rather than giving up or avoiding the problems, they are likely to clinch them enthusiastically and try to come up with solutions using their inherent creativity to reinforce their self-identity as an entrepreneur (cardon & kirk, 2015; powell & baker, 2014; stroe et al., 2018). since its inception, the concept of bricolage was adopted and applied in numerous fields of study (davidsson et al., 2017b), as well as to a variety of phenomena like law-making (hull, 1991). from an organizational perspective, the application of this concept has also been widely used in a number of phenomena, including new product development (wu et al., 2017), technology innovation in smes (ferneley & bell, 2006), and entrepreneurship (baker & nelson, 2005). baker and nelson (2005) identified three basic elements of bricolage ‘making do’, ‘the resources at hand’, and ‘the combination of resources for new purposes’ –, which are in general applicable in various scholarly fields. in addition, gundry et al. 50 s. a. rahman, s. k.taghizadeh, m. m. d.alam, & g. m. khan journal of small business strategy / vol. 30, no. 3 (2020) / 47-64 (2011) have opined that bricolage encompasses the creative espousal and manipulation of humans, both social as well as financial capital resources, to overcome problems or pursue impending opportunities. rather than searching for ‘right’ resources, bricoleurs try to find workable solutions by using a hands-on approach and hence turn the rules of resources from ‘should’ to ‘could’ (senyard et al., 2009). mageau et al. (2009) have documented that highly passionate individuals are less likely to give up. in the context of least developed country, a bricoleur entrepreneur may have passion for inventing new products, processes, and opportunities through continuous searching and scanning. the passion for creating a new firm, nurturing a new business perhaps opens up the scope to instill the entrepreneurial bricolage. it may also happen that strong passion for developing the business and employees facilitates to create a bricolage. the philosophy of the capability approach theory contemplated with greater significance that people should have freedom or capabilities to choose the life they want to lead (sen, 2004). with the lens of capability approach theory, hence, it is believed that if micro-entrepreneurs possess passion for inventing, founding, and developing, they can surely make things with the limited resources and whatever they have in their hands. considering the context of the current study and above discussion, the authors strongly believe that: h2a. entrepreneurial passion for inventing has a positive influence on entrepreneurial bricolage. h2b. entrepreneurial passion for founding has a positive influence on entrepreneurial bricolage. h2c. entrepreneurial passion for developing has a positive influence on entrepreneurial bricolage. entrepreneurial bricolage and subjective wellbeing bricolage refers to the entrepreneurial behaviors that ‘make do’ by exploiting resources at hand to face new challenges (baker & nelson, 2005; salunke et al., 2013). senyard et al. (2014) defined bricolage as a fundamental means of creative re-joining of resources for a unique purpose. the capability of utilizing limited resources may also contribute to the flourishing of individual life. from a socio-psychological perspective, the capability of doing something with a specific utility and achieving the desired objectives inculcates the happiness within an individual, which is a representation of subjective wellbeing (diener, 2009). therefore, understanding this, there is a possibility that entrepreneurial bricolage may contribute to the subjective wellbeing of the entrepreneur. the synergy of creativity, limited resource utilization, and capability apparently links with the central theme of the capability approach theory. in addition, while promulgating the capability approach theory, sen (2004) argued that this theory roams around the concept of improving living conditions of individuals by not only monetary terms but also actively engaging in society and respect of others. hence, understanding the theoretical sphere of capability approach theory and literature related to entrepreneurial bricolage and subjective wellbeing, the authors shoulder on the novel hypothesis that: h3. entrepreneurial bricolage has a positive relationship with subjective wellbeing of the micro-entrepreneurs. entrepreneurial bricolage as mediator between entrepreneurial passion and subjective wellbeing passionate entrepreneurs are unlikely to give up the efforts despite limited resources (türk et al., 2019) to make their living standard better. on the other hand, entrepreneurial bricolage paves the way towards a firm’s growth (baker et al., 2003). looking from the individuals standpoint, it is important to see beyond the monetary value that includes the wellbeing of the individuals (diener et al., 2017). in developing countries, most of the entrepreneurs lack advanced or even adequate resources (naudé, 2010; rahman & das, 2005). for the micro-entrepreneurs, in fact, there is a more relevant and vicious situation where they possess very limited resources to carry out ventures. strong entrepreneurial passion leads the micro-entrepreneurs to achieve a sense of self-worth in society through the capability of creating something despite having limited resources. it is believed that the capability of creating something new with limited resources changes the living standard of the micro-entrepreneurs and is backed by entrepreneurial passion for inventing, founding, and developing. for example, in bangladesh, a substantial number of poor women in a rural village came out of poverty and lead a better life in society as they had the strong entrepreneurial passion to use whatever small amount of resources they have around them (such as handicrafts with mud or bamboo). theorizing the pragmatic fact, the authors believe that entrepreneurial bricolage must have a role between the entrepreneurial passion and subjective wellbeing, which is a novel concept in the domain of micro-entrepreneurship study. hence, the authors claim: h4a. entrepreneurial bricolage mediates the relationship between entrepreneurial passion for inventing and subjective wellbeing. h4b. entrepreneurial bricolage mediates the relationship between entrepreneurial passion for founding and subjec51 s. a. rahman, s. k.taghizadeh, m. m. d.alam, & g. m. khan journal of small business strategy / vol. 30, no. 3 (2020) / 47-64 tive wellbeing. h4c. entrepreneurial bricolage mediates the relationship between entrepreneurial passion for developing and subjective wellbeing. method the research was conducted among micro-entrepreneurs in bangladesh, who usually are engaged in retailing business and operating businesses with limited resources. this study has employed a quantitative research approach, and a structured survey questionnaire was developed for data collection. measures the measurement items were adapted from prior studies using a five-point likert scale, ranging from 1=strongly disagree to 5=strongly agree. all constructs and the items were adapted from extant literatures and were modified to suit the purpose of this study. items related to measuring entrepreneurial passion for inventing (five items); entrepreneurial passion for founding (five items), and entrepreneurial passion for developing (four items) were drawn from (cardon et al., 2013). our central focus of defining and measuring entrepreneurial passion is based on the article by cardon et. al. (2013). in this article, the authors have clearly mentioned that “in other words, we must demonstrate that the measurement of entrepreneurial passion is distinct from other cognitive and affective variables that play a role in entrepreneurship, and that it casts new light on the factors and processes that foster entrepreneurship” (p.374). entrepreneurial bricolage (eight items) were adopted from (senyard et al., 2009). entrepreneurial bricolage means to make or do something with whatever limited resources are at hand (baker & nelson, 2005; fisher, 2012), which is also distinctive theoretically. to measure subjective wellbeing, items (eight) were adopted from diener et al. (2010) which has been established to assess the flourishing, positive and negative feelings of individuals. according to diener (2009), subjective wellbeing is mostly concerned with the reasons of experiencing a life in positive way, including cognitive judgments and affective reactions. procedures back to back, translation between bengali and english of the questionnaire was carried out to ensure clarity and accuracy of the translated items. later the authors conducted pre-testing using the debriefing method of personal interviews. based on the remarks and suggestions by experts during pre-testing, the questionnaire was modified. study setting and data collection method this research warrants a study setting, where nascent entrepreneurs are operating with limited resources. therefore, the research was conducted among micro-entrepreneurs engaged in cottage industry in a developing country like, bangladesh. cottage industry deals with goods and services, which are produced with limited resources in the rural area by nascent entrepreneurs, rather than in a wellplanned manufacturing plant (rahman & kumar, 2018). although the micro-entrepreneurs of cottage industry are present in a scattered manner throughout the country, in the absence of proper sampling frame, the authors have purposively chosen five administrative districts of bangladesh (such as manikgonj, khulna, moulvi bazar, narayangonj, and rajshahi) where the cottage industries are more concentrated. however, in selecting a micro-entrepreneur for this study purpose, authors have considered two major issues especially pertinent to bricolage practices in the literature – i) micro-entrepreneurs with less than five years of business experience (davidsson et al., 2017a), and ii) entrepreneurs with less than ten working employees. in each selected area, a total of 100 questionnaires were distributed with the assistance of two well briefed enumerators; hence totaling 500 by means of judgmental sampling. in the data collection process, this study utilized the drop-off/ pick-up (dopu) method, due to the respondents’ geographic location and communication infrastructure inadequacy. rahman et al. (2017) have also carried out a similar method in a study with similar research setting. at the initial phase, in total 302 questionnaires out of 500 were returned. however, 49 responses were discarded due to incompleteness and presence of outliers. finally, 253 responses were retained for further analyses with an effective response rate of 50.6%. in the meta-analysis, rutherford et al. (2017) stated that survey samples drawn from entrepreneurs will have possibility of lower response rates than surveys of other individuals and found a mean of 39% response rate in the entrepreneurship research. data analysis in the initial analysis phase, the authors used spss to identify errors, missing values (using multiple imputation), non-response bias, and common method bias. non-response bias to assess the potential non-response bias, all the vari52 s. a. rahman, s. k.taghizadeh, m. m. d.alam, & g. m. khan journal of small business strategy / vol. 30, no. 3 (2020) / 47-64 ables included in this study were subjected to analysis of variance (independent two-group unpaired t-test) test comparing early respondents (120 respondents) and late respondents (133 respondents). the result of the test (appendix b) indicates that nonresponse bias is unlikely to be a major problem in the present data and the homogeneity between early and late data was established. common method bias as data were collected from a single source, it is important to check common method variance, as recommended by podsakoff et al. (2003). in this study, the extent of common method bias was assessed with three tests and focused on both procedural and statistical remedies before and after data collection. first, the procedural method was used by including fun facts with the questionnaire (appendix a). the procedural technique also has been used in the study of ayyagari et al. (2011). for the statistical remedies, this study used two methods; harman’s one-factor test, and correlation matrix. second, harman’s single factor test was conducted by entering all the principal constructs into a principal component factor analysis (podsakoff & organ, 1986; rahman et al., 2015). the findings indicate that the first factor explains 41.8% of the variance, which is less than 50%, as per the recommendation by podsakoff et al. (2003). further, seven factors explain 78.2% of the cumulative variance, which is higher than the suggested value of 50%. third, this research ran correlation matrix test as suggested by pavlou et al. (2007), to determine whether the constructs have extremely high correlation (more than 0.90) or not. any highly correlated variables are evidence of common method bias (bagozzi et al., 1991). as shown in table 1, none of the constructs were so highly correlated (highest correlation is r = .723). therefore, like nonresponse bias, common method bias is not a major concern in this study. table 1 correlation matrix of measures sl constructs mean sd 1 2 3 4 1 entrepreneurial bricolage 3.552 0.708 2 subjective wellbeing 3.944 0.466 0.647** 3 passion for inventing 3.675 0.553 0.723** 0.328** 4 passion for founding 3.681 0.556 0.668** 0.399** 0.466** 5 passion for developing 3.953 0.641 0.679** 0.346** 0.511** 0.453** note: **p < 0.01, sd = standard deviation the demographic profile indicates that 30% of the respondents are between 21 and 30 years old, followed by 50.6% of the respondents being in the age range of 31 to 40. in terms of gender, 59.7% of the respondents are male, and 40.3% are female entrepreneurs. the majority of the respondents (43.1%) have five family members, 30.8% of the respondents have more than five family members. the authors asked the respondents the number of years they have been involved in this business. about 62.8% of them have been operating a business for one to five years. results the authors used the structural equation model (sem) with partial least square approach using smartpls 3.0 software to assess the measurement model and structural model (ringle & wende, 2005). assessment of measurement model the quality of the measurement model was assessed for construct validity and reliability of the items through convergent validity and discriminant validity. in convergent validity, factor loadings of the items, composite reliability (cr) and average variance extracted (ave) are used to assess validity of the data, as recommended by (hair et al., 2017). while checking the item loading, five items (epf5, wb2, wb4, wb6, wb8) were dropped due to low factor loading. the factor loading of all other items were more than 0.6, the ave of all the variables were higher than 0.5, and the cr was above 0.7 as per the rule of thumb. therefore, the findings show the required presence of convergent validity of the measurement model. table 2 provides the details of convergent validity. we have assessed discriminant validity to examine whether two conceptually different concepts exhibit sufficient difference (henseler et al., 2009). in this research, two criterion are put forward to assess discriminant validity the heterotrait-monotrait ratio of correlations (htmt) and cross loadings (hair et al., 2017; henseler et al., 2015). first criterion is, if the htmt value is greater than the htmt.85 value of 0.85 (kline, 2015), or the htmt.90 value of 0.90 (gold et al., 2001), then discriminant validity is questionable. as shown in table 3, all values are below the threshold level, htmt.90, and the htmt inference shows that the confidence interval did not give a value of one on any of 53 s. a. rahman, s. k.taghizadeh, m. m. d.alam, & g. m. khan journal of small business strategy / vol. 30, no. 3 (2020) / 47-64 table 2 results of convergent validity code variables/items loading ave cr entrepreneurial passion for inventing 0.613 0.887 epi1 it is exciting to figure out new ways to solve unmet market needs that can be commercialized. 0.856 epi2 searching for new ideas for products/services to offer is enjoyable to me. 0.780 epi3 feel energized when developing product prototypes 0.732 epi4 i am motivated to figure out how to make existing products/services better 0.818 epi5 scanning the environment for new opportunities really excites me. 0.719 entrepreneurial passion for founding 0.692 0.90 epf1 establishing a new company excites me 0.916 epf2 owning my own company energizes me 0.820 epf3 i love creating a new firm 0.752 epf4 trying to convince others to invest in my business motivates me 0.832 epf5 nurturing a new business through its emerging success is enjoyable dropped entrepreneurial passion for developing 0.642 0.898 epd1 i really like finding the right people to market my product/service to 0.719 epd2 assembling the right people to work for my business is exciting 0.878 epd3 pushing my employees and myself to make our company better motivates me 0.799 epd4 i enjoy commercializing new products/services 0.912 entrepreneurial bricolage 0.625 0.937 eb1 i am confident of my ability to find workable solutions to new challenges by using existing resources 0.684 eb2 i gladly take on a broader range of challenges than others without resources would be able to 0.738 eb3 i use any existing resources that seems useful to responding to a new problem or opportunity 0.840 eb4 i deal with new challenges by applying a combination of existing resources and other resources inexpensively available to my business 0.640 eb5 when dealing with new problems or opportunities i take action by assuming that i will find a workable solution 0.870 eb6 by combining existing resources, i take on a surprising variety of new challenges 0.838 eb7 when i face new challenges, i put together workable solutions from our existing resources 0.765 eb8 i combine resources to accomplish new challenges that the resources are not originally intended to accomplish 0.871 subjective wellbeing 0.559 0.833 swb1 i lead a purposeful and meaningful life 0.704 swb2 my social relationships are supportive and rewarding dropped swb3 i am engaged and interested in my daily activities 0.784 swb4 i actively contribute to the happiness and well-being of others dropped swb5 i am competent and capable in the activities that are important to me 0.861 swb6 i am a good person and live a good life dropped swb7 i am optimistic about my future 0.620 swb8 people respect me dropped 54 s. a. rahman, s. k.taghizadeh, m. m. d.alam, & g. m. khan journal of small business strategy / vol. 30, no. 3 (2020) / 47-64 the r2 value of subjective wellbeing is 0.488 and entrepreneurial bricolage is 0.708, which is above the 0.26 value as suggested by cohen (1988), indicating a substantial model. table 4 shows the results of f2, following the guideline provided by cohen (1988), the effect size of 0.02, 0.15, and 0.35, respectively, represent small, medium, and large effects. the results show that there are large, medium, and small effects sizes on the endogenous constructs of this study. finally, the authors assessed the predictive relevance of the model through the blindfolding procedure. henseler et al. (2009) encourage using this measure to assess the research model’s predictive capability. based on the blindfolding procedure, the result indicates that the q2 values for subjective wellbeing (q2 = 0.253) and for entrepreneurial bricolage (q2 = 0.409), are more than 0. this result suggests that the model has sufficient predictive relevance. testing mediating effect the most widely used method is the causal steps approach (baron & kenny, 1986), which requires the researcher to assess each of the paths in the model and then determine whether a variable functions as a mediator by determining if certain statistical criteria are met. in structural equation modelling (sem), the mediation in path models can be assessed by examining the relationship of the direct link between two latent variables and the indirect link via the potential mediator variables (path from the predictor to the mediator and path from the mediator to the endogenous variable) (eberl, 2010). according to hayes (2009) and (preacher & hayes, 2008), mediation is considered to occur while the indirect relationship between independent and dependent variables comes out to be significant. in this regard, to test the requirements of mediation effect, a t-test via non-parametric procedure bootstrapping was conducted. in the non-parametric pls path modelling approach, a non-parametric bootstrapping procedure was administered to test the significance of the mediating effect, as suggested by (hair et al., 2017). the results show that all three indirect relationships were proven to be significant. the analysis on mediating effect revealed the importance of entrepreneurial bricolage on the relationship between entrepreneurial passion for inventing (t-value=8.459), founding (t-value=6.313), and developing (t-value=6.39) with subjective well-being. h4a, h4b, and h4c therefore were supported. the results are shown in table 4. table 3 results of heterotrait-monotrait (htmt) 1 2 3 4 5 1 ep for developing 2 ep for founding 0.561 3 ep for inventing 0.615 0.427 4 entrepreneurial bricolage 0.759 0.647 0.815 5 subjective wellbeing 0.474 0.525 0.391 0.776 entrepreneurial passion = ep the constructs. as for the second criterion based on cross loading, the loading of each indicator must be greater as compared with the rest of its cross loadings to ascertain discriminant validity (götz et al., 2010; hair et al., 2013). the results show that all the items are loaded highly with their respective theoretically defined construct (see appendix c) indicating that discriminant validity was ascertained. assessment of structural model in order to assess the structural model (path relationship), the r2 value, standard beta, t-value via a bootstrapping procedure with a resample of 5000, the predictive relevance (q2), and the effect size (f2) were considered as suggested by hair et al. (2017). table 4 and figure 1 illustrates the results of path relationships, r2, f2, and q2. h1a, h1b, and h1c predict significant effects of entrepreneurial passion for inventing, founding, and developing on subjective wellbeing. the results revealed that entrepreneurial passion for inventing with β = 0.113, p < 0.05; entrepreneurial passion for founding with β = 0.334, p < 0.01, and entrepreneurial passion for developing β = 0.228, p < 0.01. these variables have a direct positive relationship with subjective well-being. therefore, h1a, h1b, and h1c are supported. h2a, h2b, and h2c predict significant effects of entrepreneurial passion for inventing, founding, and developing on entrepreneurial bricolage. the results revealed that entrepreneurial passion for inventing with β = 0.462, p < 0.01; entrepreneurial passion for founding with β = 0.258, p < 0.01, and entrepreneurial passion for developing β = 0.323, p < 0.01. these variables have a direct positive relationship with entrepreneurial bricolage. therefore, h2a, h2b, and h2c are supported. h3 predicts that entrepreneurial bricolage has significant positive relationship with subjective well-being. the results supported h3 with β = 0.650, p < 0.01. 55 s. a. rahman, s. k.taghizadeh, m. m. d.alam, & g. m. khan journal of small business strategy / vol. 30, no. 3 (2020 / 47-64 table 4 results of structural model hs path relationship std. beta std. error t-value decision r2 f2 q2 vif direct relationship h1a ep for inventing -> subjective wellbeing 0.113 0.056 2.039* supported 0.488 0.106 0.253 2.157 h1b ep for founding -> subjective wellbeing 0.334 0.059 5.66** supported 0.583 1.531 h1c ep for developing -> subjective wellbeing 0.228 0.064 3.576** supported 0.032 1.958 h2a ep for inventing -> entrepreneurial bricolage 0.462 0.054 8.54** supported 0.708 0.525 0.409 1.415 h2b ep for founding -> entrepreneurial bricolage 0.258 0.034 7.628** supported 0.167 1.312 h2c ep for developing -> entrepreneurial bricolage 0.323 0.047 6.896** supported 0.229 1.593 h3 entrepreneurial bricolage ->subjective wellbeing 0.650 0.038 17.26** supported 3.430 mediating effect h4a ep for inventing -> entrepreneurial bricolage -> subjective wellbeing 0.301 0.036 8.459** supported h4b ep for founding -> entrepreneurial bricolage -> subjective wellbeing 0.168 0.027 6.313** supported h4c ep for developing -> entrepreneurial bricolage -> subjective wellbeing 0.210 0.033 6.399** supported entrepreneurial passion = ep, **p < 0.01, *p < 0.05 56 s. a. rahman, s. k.taghizadeh, m. m. d.alam, & g. m. khan journal of small business strategy / vol. 30, no. 3 (2020) / 47-64 discussion in the current study, the authors have attempted to validate the relationships among the variables of entrepreneurial passion, entrepreneurial bricolage, and subjective wellbeing in a resource-constrained setting. hence, the authors set out to study the direct relationships of these constructs and the indirect relationships of entrepreneurial passion and subjective wellbeing, where entrepreneurial bricolage plays vital mediating role. the current study validates the empirical link of entrepreneurial passion and entrepreneurial bricolage with subjective wellbeing. one of the novel findings to emerge from our study is the positive influential role of three dimensions of entrepreneurial passion on subjective wellbeing. previously, scholars have demonstrated that passion provides meaning to everyday work and effects feelings for activities that highlight the self-identity of entrepreneurs (cardon et al., 2009). such self-identity, which is engraved in passion, eases the way towards achieving subjective wellbeing. briki (2017) has argued that people are passionate when they would experience a sense of control over their activity and keenly accept other activities due to the psychological intrinsic needs, resulting in the experience of positive emotions and wellbeing. when entrepreneurs are passionate with any of their activities, particularly regarding entrepreneurial venture, this may fuel motivation, enhance mental activity, and provide meaning to their everyday work and life. when the micro-entrepreneurs possess the passion for inventing, it creates an excitement to solve the unmet market needs, which can be commercialized. having such excitement, motivation for inventing creates a sense of meaningful and purposeful life for the micro-entrepreneurs even though having resource limitations. this study has found that passion for inventing significantly influences subjective wellbeing. passion for inventing denotes the state of the entrepreneur to actively search for new things that will stimulate desire to carry out the venture. micro-entrepreneurs in the cottage industry are always looking forward to maintaining or expand their business. the motivation and excitement to solve the unmet market needs by figuring out how to make existing products/services better encourages the micro-entrepreneurs to achieve hedonic (subjective) wellbeing. in addition, while the micro-entrepreneurs search for innovative ideas for products such as handicrafts, households products for cottage industry, the effort offers enjoyment. such motivation, excitement, and enjoyment assist the micro-entrepreneurs to achieve a state of wellbeing. similarly, this study also suggests passion for founding significantly influences the attainment of wellbeing among micro-entrepreneurs in the cottage industry in a resource constraint setting. entrepreneurs who are passionate for founding demonstrate positive affect when they involve themselves in venture activities figure 1. results of structural model **p < 0.01, *p < 0.05 57 s. a. rahman, s. k.taghizadeh, m. m. d.alam, & g. m. khan journal of small business strategy / vol. 30, no. 3 (2020) / 47-64 (breugst et al., 2012). in developing countries where resources are inadequate, micro-entrepreneurs of the cottage industry are constrained by some limitations, though they give their best effort to overcome their economic difficulties. however, owning a venture usually excites the micro-entrepreneurs across any industry because it is a driver for economic uplift. further, owning a business gives the micro-entrepreneurs a sense of control and independence, which facilitates shaping wellbeing. it is believed that such confidence and satisfaction over the activities stimulates the state of wellbeing among micro-entrepreneurs in this current setting of research. further, the study has revealed that passion for developing has a meaningful relationship with subjective wellbeing. passion for developing bares the positive move of the entrepreneurs to go beyond mere survival (cardon et al., 2009). the sense of improving any activity falls under the premise of wellbeing. in fact, micro-entrepreneurs are motivated enough to convince others to be engaged in his/her own business that also gives a strong indication of wellbeing. indeed, their wellbeing indicates the existence of persuasive ability among the micro-entrepreneurs in the cottage industry. therefore, it is quite justifiable that the passion for developing significantly influences the wellbeing of the micro-entrepreneurs. the relationships between the dimensions of entrepreneurial passion and entrepreneurial bricolage were tested before in a finnish context (a developed country) (stenholm & renko, 2016). this study validates these previously tested relationships but in different context and in a more precise way. however, the results of this study reassure that entrepreneurial passion strongly influences enacting bricolage even in the context of micro-entrepreneurs of a less developed country as opposed to a developed country. this study is also in the same line with a recent evidence that suggest that effects of passion are channeled through entrepreneurial behaviors (murnieks et al., 2016), our results show that bricolage behaviors of the micro-entrepreneurs operating in the cottage industry are necessary for passion to impact on wellbeing of those entrepreneurs. the result can be comprehended with the assertion made by vallerand et al. (2007) who argued that basically passion leads individual to engross themselves into the activities, and continue to do what they are doing in a difficult and constrained situation. it is a very pragmatic result because due to the high extent of passion, micro-entrepreneurs in the cottage industry in bangladesh are operating their venture even with limited resources. cottage industry requires creativity with passion as they are producing products (e.g. clay made toys, crockeries, jute made bags, handbags, wallet, toys, decorations pieces) with the raw materials which are available at hand such as bamboo, jute, clay. it’s only possible to create something with limited resources, if the individuals have strong passion towards work and to create something. that’s why presumably, micro-entrepreneurs in the cottage industry kept on producing with the bricoleurs behavior. another novel attempt in this study was made to establish the relationship of entrepreneurial bricolage and subjective wellbeing. perhaps it is an interesting revelation that the resilience of creating something with limited resources can also lead towards attaining wellbeing. the current result provides evidence that to achieve wellbeing, individuals should have the capability of creating something even with constrained resources. according to easterlin et al. (2010) happiness of individuals represents the wellbeing that goes beyond monetary value. entrepreneurial bricolage, which is driven by strong entrepreneurial passion leads to the state of happiness and represents the subjective wellbeing of the micro-entrepreneurs. having the sense of confidence on one’s own ability, facing immediate challenges, and combining existing limited resources paves the way to see life in a meaningful way, to relate to society, and to contribute to societal development. most importantly, this relationship resonates the concept of the capability approach theory, where individuals functioning and having happiness were determined by the capability to do something that will give those individuals freedom to maneuver their own course of action. perhaps the novel and utilitarian finding to appear from the current analysis is the mediating role of entrepreneurial bricolage; between passion for inventing, passion for founding, passion for developing and subjective wellbeing. these are important findings in a sense that they specify a unique mechanism through which the effects of entrepreneurial passion are channeled to the wellbeing. the passionate micro-entrepreneurs use bricolage to further underpin their entrepreneurial identities and end up with social connectivity with the elements in the society. once the micro-entrepreneurs possess the passion for inventing, founding, and developing, they will tend to form positive attitudes regarding the availability of resources. for example, in the rural areas of bangladesh, there are a number of poor women who have a strong passion to create small-scale business ventures related to cottage industry. they have successfully come out of poverty and achieved wellbeing despite having limited resources. even in india, researchers have found that rural micro-entrepreneurs have achieved a state of wellbeing through utilizing existing resources driven by strong entrepreneurial passion (ghosh & bhandari, 2014). practical implications this study strongly benefits academicians, practi58 s. a. rahman, s. k.taghizadeh, m. m. d.alam, & g. m. khan journal of small business strategy / vol. 30, no. 3 (2020) / 47-64 tioners, policy makers, and other entrepreneurial advocates. academician may help aspiring students to explore their self-identities, salient capabilities, which may facilitate attaining wellbeing. students in the developing countries then might be expectant to pursue business ideas that are more strongly driven by entrepreneurial passion despite having limited resources. the result of this study is very much relevant and pivotal for policy makers, especially in the least developed countries and developing countries. policy makers should align their national and social strategies to develop a setting of entrepreneurial passion among the unemployed segments of society along with those who are micro-entrepreneurs. in fact, poverty eradication programs may consider this result to develop their module and set a strategic goal and course of action. furthermore, non-government organizations (ngos) can garner better awareness about the role of entrepreneurial passion and provide appropriate training to enhance the capabilities of creating something out of nothing. the findings may contribute to large private organizations that are enthusiastic to participate in poverty eradication initiatives. these private organizations may realize that by offering appropriate resource based support to the micro-entrepreneurs and thus craft a win–win situation. inherently our study is not without limitations. methodologically, there are few limitations. due to the political unrest in the research setting in bangladesh, many of the respondents could not participate in the survey. all the measures employed in the study were self-report in nature. the authors have tested the common method bias, which does not indicate the presence of biasness issues. still, to reduce the risks of such influences as common source and method bias via statistical techniques, future research could employ alternative designs, such as gathering data from multiple sources. the research is based on micro-entrepreneurs involved in cottage industry and the sample is drawn from the base of the economic pyramid segment. this can be overcome by widening the scope of the research by using a larger and more diverse population sample, including responses from small-medium entrepreneurs and micro-entrepreneurs based in different industries, such as agriculture, and lightweight engineering. conclusion through this study, the authors have highlighted mechanisms of passion, bricolage, and wellbeing. passionate entrepreneurial bricoleurs tend achieve wellbeing and chart a way out of poverty. this study in fact is one of the first to establish that creating something out of few things can lead to achieving wellbeing. the study reveals that the micro-entrepreneurs have strong passion to carry out business 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(2017). bricolage effects on new-product development speed and creativity: the moderating role of technological turbulence. journal of business research, 70, 127-135. about:blank about:blank about:blank about:blank 62 s. a. rahman, s. k.taghizadeh, m. m. d.alam, & g. m. khan journal of small business strategy / vol. 30, no. 3 (2020) / 47-64 appendix a procedural remedies • respondents were assured anonymity and privacy • respondents were told that there was no right or wrong answers • fun facts were introduced for separating of the theories as procedural remedies (see below table) fun facts remark do you know that there are 649 hairs in your eye-brow? placed after demographic section in the questionnaire. do you know that you can move a tanker with your one finger if you take one apple each day? placed between the measurement items of entrepreneurial passion for inventing and entrepreneurial passion for founding do you know that crocodile sweats when they are under water? placed after the measurement items of entrepreneurial passion for developing 63 s. a. rahman, s. k.taghizadeh, m. m. d.alam, & g. m. khan journal of small business strategy / vol. 30, no. 3 (2020) / 47-64 appendix b t-test group statistics late_early n mean std. deviation std. error mean eb early respondents 120 3.5574 .69903 .06381 late respondents 133 3.5472 .71795 .06225 wb early respondents 120 3.9524 .47084 .04298 late respondents 133 3.9356 .46240 .04009 epi early respondents 120 3.6850 .53870 .04918 late respondents 133 3.6662 .56768 .04922 epf early respondents 120 3.6850 .56608 .05168 late respondents 133 3.6767 .54978 .04767 epd early respondents 120 3.9317 .61930 .05653 late respondents 133 3.9714 .66248 .05744 independent samples test levene’s test for equality of variances t-test for equality of means f sig. t df sig. (2-tailed) mean difference std. error difference 95% confidence interval of the difference lower upper eb equal variances assumed .021 .885 .114 251 .909 .01021 .08927 -.16561 .18602 equal variances not assumed .114 249.536 .909 .01021 .08915 -.16537 .18579 wb equal variances assumed .027 .870 .287 251 .775 .01683 .05872 -.09883 .13248 equal variances not assumed .286 247.357 .775 .01683 .05878 -.09894 .13260 epi equal variances assumed .230 .632 .270 251 .787 .01883 .06977 -.11857 .15624 equal variances not assumed .271 250.352 .787 .01883 .06958 -.11820 .15587 epf equal variances assumed .301 .584 .118 251 .906 .00831 .07020 -.12995 .14657 equal variances not assumed .118 246.673 .906 .00831 .07031 -.13017 .14679 epd equal variances assumed .730 .394 -.492 251 .623 -.03976 .08088 -.19905 .11952 equal variances not assumed -.493 250.677 .622 -.03976 .08060 -.19850 .11897 64 s. a. rahman, s. k.taghizadeh, m. m. d.alam, & g. m. khan journal of small business strategy / vol. 30, no. 3 (2020) / 47-64 appendix c cross-loadings item\construct eb epi epf epd swb eb1 0.684 0.420 0.532 0.542 0.491 eb2 0.738 0.450 0.488 0.485 0.500 eb3 0.840 0.659 0.512 0.673 0.471 eb4 0.640 0.541 0.401 0.445 0.329 eb5 0.870 0.525 0.430 0.555 0.541 eb6 0.838 0.565 0.413 0.516 0.720 eb7 0.765 0.512 0.374 0.559 0.488 eb8 0.871 0.755 0.395 0.543 0.490 epi1 0.599 0.856 0.167 0.472 0.210 epi2 0.616 0.780 0.269 0.393 0.359 epi3 0.522 0.732 0.397 0.394 0.164 epi4 0.615 0.818 0.290 0.392 0.238 epi5 0.466 0.719 0.282 0.427 0.173 epf1 0.516 0.264 0.916 0.391 0.362 epf2 0.405 0.303 0.820 0.377 0.339 epf3 0.449 0.277 0.752 0.373 0.243 epf4 0.521 0.334 0.832 0.428 0.309 epd1 0.449 0.336 0.472 0.719 0.108 epd2 0.633 0.473 0.470 0.878 0.437 epd3 0.596 0.586 0.339 0.799 0.136 epd4 0.649 0.424 0.510 0.912 0.414 wb1 0.366 0.105 0.032 0.106 0.704 wb3 0.566 0.282 0.319 0.430 0.784 wb5 0.514 0.226 0.295 0.114 0.861 wb7 0.461 0.283 0.494 0.395 0.620 note: eb = entrepreneurial bricolage, epi = entrepreneurial passion for inventing, epf = entrepreneurial passion for founding, epd = entrepreneurial passion for developing, wb = subjective wellbeing the journal of small business strategy is an applied research journal. manuscripts should be written with the small business/entrepreneurship educator, small business consultant in mind. both conceptual and empirically-based papers are encouraged, but they must have an applied focus. all papers must have a significant literature review, be properly documented, with citations from research-based works rather than popular press or web sites. since jsbs is an applied research journal, each article should include a substantial “discussion and implications” section that details how the research findings are relevant for the journal’s readers. authors are discouraged from submitting manuscripts with extremely complex statistical analyses and/or a purely theoretical orientation. case studies are acceptable if they contribute substantial to the understanding of small business strategy and include a significantly to the understanding of small business strategy and include a significant literature review that underscores the issues in the case. we do not accept teaching or pedagogical cases. articles that have a significant strategy orientation are of particular interest. however, we do also publish articles that may address functional or operational issues. articles related to exporting or other international issues are acceptable. we have less interest in articles focusing on how small business compete in specific countries unless authors show that their results can be generalized to all small businesses. articles that have a public policy focus are generally not appropriate for the journal of small business strategy. journal of small business strategy 2018, vol. 28 no. 03 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2018 small business institute® http://www.smallbusinessinstitute.biz www.jsbs.org editors-in-chief dr. william c. mcdowell bradley university, united states dr. michael l. harris east carolina university, united states special issues editor dr. domingo ribeiro universitat de valència, spain senior editor dr. dianne h. b. welsh university of north carolina greensboro, united states managing editor dr. whitney o. peake western kentucky university, united states associate editor dr. steven t. walsh the university of new mexico, united states section editors dr. joshua r. aaron middle tennessee state university, united states dr. j. augusto felício universidade de lisboa, portugal dr. raj v. mahto the university of new mexico, united states dr. maria i. marshall purdue university, united states dr. juan piñeiro santiago de compostela university, spain editorial assistant cheryl a. peck journal of small business strategy editorial review board dr. joe r. bell university of arkansas at little rock dr. dolores botella universidad católica de valencia dr. shawn carraher university of texas at dallas dr. phillip e. davis texas state university dr. joseph geiger university of idaho dr. michael goldsby ball state university dr. david lyn hoffman metropolitan state college of denver dr. jeffrey hornsby university of missouri kansas city dr. jerry kudlats jacksonville university dr. cathleen (folker) leitch wilfrid laurier university dr. robert lussier springfield college dr. josé manuel guaita martínez valencian international university dr. matthew r. marvel ball state university dr. brian mckenzie california state university, east bay dr. abbas nadim university of new haven dr. john e. prescott university of pittsburgh dr. neal pruchansky keene state college dr. jeff shields university of north carolina at asheville dr. matthew c. sonfield hofstra university dr. jude valdez university of texas at san antonio 29 the impact of strategic focus and previous business experience on small business performance michael l. harris east carolina university harrismi@ecu.edu shanan g. gibson east carolina university gibsons@ecu.edu william c. mcdowell east carolina university mcdowellw@ecu.edu abstract this study examines whether or not having an internal or external strategic focus interacts with prior experience in small business to impact perceived organizational performance. utilizing a sample of 237 small business owners from the southeast u.s., a factorial anova and regression analysis were used to test hypotheses related to these constructs. results indicated that utilizing an internal focus was associated with higher performance among both experienced and inexperienced small business owners; however, an external focus was only positively related to performance for inexperienced business owners. no overall difference in performance was found for experience itself. keywords: entrepreneurial success, firm performance, perceived performance, prior business experience, small business, strategic focus s trateg y journal of small business journal of small business strategy vol. 24, no. 1 30 introduction comprising more than 49% of privatesector employment and accounting for 67% of net new jobs (small business administration (sba), 2012), small businesses are arguably the lifeblood of the u.s. economy. however, despite accounting for nearly 45% of private, nonfarm gross domestic product (sba, 2012), approximately 50% of all new establishments fail within the first five years (sba, 2012). s mall business owners represent a d iverse coterie of the u.s. population, and we lack unambiguous insight into why some are more successful than others. this study contributes to the research literature by examining two factors that can play a role in small business performance, specifically, the impact of strategic choices and prior business experience. small business owners come from a wide variety of backgrounds and experiences, and their firms mirror this variegation. penrose (1959) suggested that firms are a combination of resources, capabilities, and competencies. according to the resourcebased view, a distinct competitive advantage can be obtained if resources or competencies are unique and difficult to replicate (penrose, 1995). additional research has focused on blending a firm’s resources with its product or service capabilities (wernerfelt, 1984) or specialized human capital (miller & ross, 2003). in addition, other studies have emphasized the importance of business techniques and strategies (gibson, 2012; gibson, mcdowell, & harris, 2011; harris, mcdowell, zhang, & gibson, 2011; sriram, mersha, & herron, 2007) as critical factors in determining organizational performance. more experienced business owners should have greater knowledge in these areas (harris & gibson, 2008; harris, gibson, & mick, 2009; mcdowell, harris, & gibson, 2010), and this expertise can play a significant role in determining patterns of business startup and organizational performance. when equipped with more substantive insight into factors impacting small business success, law and policy makers, educators, and others dedicated to expanding small business can better do their jobs. by focusing on strategic focus and prior entrepreneurial experiences, the current study aims to advance our understanding of factors that can influence the success, or failure, of small businesses. literature review strategic focus past research has shown a connection between business resources, strategic approach, and organizational performance (mazzarol, reboud & soutar, 2009). a business has a s pecific set of resources to develop a competitive advantage. examples of resources include tangible items such as capital, equipment, geographical location, as well as managerial skills, specialized knowledge, and organizational processes. in the small business arena, the availability of resources is often directly linked to the talents and skills of the business owner (runyan, huddleston & swinney, 2006). for a new venture, the owner has the most influence on strategic orientation (becherer, finch, & helms, 2006; gilbert, mcdougall, & audretsch, 2006; lumpkin, mckelvie, gras, & nason, 2010). r esearch by bush, greene, and hart (2001) indicated that the intangible knowledge of a business owner was a key resource for business start-ups. in order to achieve success, business owners must combine their unique resources with their internal capabilities to create a journal of small business strategy vol. 24, no. 1 31 sustainable advantage. the resource-based view framework suggests that these types of differences in resources help explain firm performance. west and noel (2009) suggest that new business owners must have a “rationale or logic in mind” before investing in resources to start the venture (p. 2). this rationale involves the development of a s trategic orientation that guides the business owners in decision making and opportunity recognition. without a strategic approach there is often a waste of resources and lack of direction and sustainability. in order to become successful, business owners must create a unique position (west & noel, 2009), and strategic planning can play a critical role in achieving this objective (barney, 1991; mazzarol, reboud, & soutar, 2009). west and noel (2009) believe that new business performance is based on knowledge about the marketplace, the opportunity within the marketplace, and the business approach necessary to take advantage of the opportunity. this strategic knowledge is required in order to achieve success and long-term sustainability. similarly, wiklund and shepherd (2003) suggest that an understanding of strategic approach is one of the most important forms of knowledge in new venture creation, and this knowledge often comes from business experience in similar past situations. the strategic focus of most businesses can be categorized into one of two broad strategic directions. first, organizations can have an internally focused strategic approach. these organizations tend to focus their energies toward developing the inner workings of the organization including personnel management, structural efficiencies, and cost control (gibson, mcdowell, harris, 2011; verheul, risseeum, & bartelse, 2002). an internal strategic orientation often allows firms to emphasize product efficiency, process refinement, and financial objectives. additionally, because an internal focus can allow a firm to have a better understanding of its products, it can also lead to more product innovation and development (pett & wolff, 2007). alternatively, organizations may pursue an externally oriented strategy. t hese organizations are concerned with adopting business strategies that promote sales growth and new customer attainment (gibson, mcdowell, harris, 2011; kumar, subramanian, & strandholm, 2001; trinh & o’connor, 2002). e xternal strategies place more emphasis on relationship building, marketing, and/or customer service (pett & wolff, 2007). an external focus can allow small businesses to explore strategic relationships with other organizations and new target markets. an external strategic orientation can also be particularly effective when pursuing international expansion for small firms (pett & wolff, 2007). regardless of strategic focus, small business owners must have a k een understanding of the business environment, firm resources, and organizational capabilities. this knowledge allows them to determine the best strategic choices for their particular business. firm performance is dependent upon a co nsistent fit between a firm’s strategic orientation, internal resources, and external market conditions (pett & wolff, 2007). the findings of edelman, brush, and manolova (2005) showed that resources or strategies alone do not explain firm performance, but instead, small firms must choose the appropriate strategy based on their resource profile. a “co-alignment” between resources and journal of small business strategy vol. 24, no. 1 32 strategy is needed to achieve business growth and profitability (edelman, brush, & manolova, 2005, p. 377). prior business experience research has established a link between entrepreneurial intentions and past business experiences. t his can include direct experience in creating a new business venture or indirect experience through working in a family business. p ast studies have shown that work experience with a small business (krueger, reilly, & carsrud, 2000; peterman & kennedy, 2003; harris & gibson, 2008) or a family business (reitan, 1997; harris & gibson, 2008) can have a positive impact on perceptions of new venture feasibility and desirability. krueger (1993) suggested that past business experiences have a positive influence on an entrepreneur’s desire to start a new venture. in addition, research has shown that various entrepreneurial characteristics can be learned and often vary based on personal background and experiences (krueger and brazeal, 1994; wiklund & shepherd, 2003; west & noel, 2009). gatewood, shaver, powers, and gartner (2002) found that individuals receiving positive feedback about their entrepreneurial experiences and abilities often have higher expectations when starting a new business venture. this seems to indicate that previous business experience can play a significant role in future expectations for business success and is likely to impact future business decisions such as strategic choices and resource acquisition. research by wiklund and shepherd (2003) showed that higher levels of business experience can positively impact business start-up. other research has shown that previous related business experience can impact business development and operations (tanriverdi & venkatraman, 2005) and improve an owner’s understanding of the role of strategy in business success. greater experience can enhance both strategic decisionmaking and improve internal organization and procedures. s pecifically, west and noel (2009) found that the depth of experience in the same type of strategic approach can make a difference in firm development. however, research findings have been somewhat mixed in regard to financial performance of experienced versus inexperienced business owners. while some suggest that prior business experience can positively impact firm performance (chandler, 1996; westhead & wright, 1998; pett & wolff, 2007), d’souza and kemelgor (2008/09) found no such difference in financial performance. they argue that while serial entrepreneurs have higher entrepreneurial competence, novice entrepreneurs can combat a l ack of experience with a high level of industry experience. it is posited that industry experience helps novice entrepreneurs create businesses that perform similarly with firms started by serial entrepreneurs. hypotheses as suggested by lumpkin, brigham, and moss (2010), new firms face a s trategic asset challenge in that they may not have a codified firm-level bundle of resources. however, the strategic choices of business owners can be greatly influenced by the knowledge gained from previous entrepreneurial opportunities (harris & gibson, 2008). this knowledge provides a better understanding of the challenges and resources needed to start and maintain a successful venture. it also provides an important perspective on managing relationships and a greater understanding of strategic decision making and its impact on journal of small business strategy vol. 24, no. 1 33 business performance. successful business owners are able to best combine their individual talents and experiences with their business resources and capabilities in a manner that creates a sustainable competitive advantage (runyan, huddleston & swinney, 2006). various research has linked strategic choices with business knowledge and performance (edelman, brush, & manolova, 2005; pett & wolff, 2007; west & noel, 2009). experienced business owners are often more knowledgeable about process and structural efficiencies and financial objectives, which is more consistent with an internal strategic orientation (mitchell, smith, seawright, & morse, 2000). s imilarly, edelman, brush, and manolova (2005) found that internal strategies lead to greater performance in traditional small firms. contrarily, inexperienced business owners are generally focused more on external strategies where customer service and network relationships are important. in particular, one strategy that many new small firms adopt is to develop relationships with others to overcome resource and knowledge shortages (lumpkin, et al. 2010). as such, we offer the following hypotheses: h1a: there is a positive relationship between internal strategic focus and performance for business owners with previous business ownership experience h1b: there is a positive relationship between external strategic focus and performance for business owners with no previous business ownership experience. research has shown that business success is generally based on a co mbination of strategy choice and resource availability (mazzarol, reboud & soutar, 2009) and that strategic choices are related to previous business experience (krueger, reilly, & carsrud, 2000; pett & wolff, 2007). uncertainty can impact strategic orientation (mcmullen & shepherd, 2006; droege & marvel, 2009), and seasoned business owners generally have a g reater understanding of business development and growth. consistent with this fact, more experienced business owners are likely to have greater access to both tangible and intangible resources due to prior knowledge of the start-up process. therefore, it is anticipated that the highest levels of performance will be realized by those organizations with more experienced business owners. as such, we posit: h2: owners with prior business experience will have significantly stronger performance than less experienced owners. methodology sample small business owners who worked with the north carolina small business and technology development center were contacted via email and asked to complete an online survey that examined multiple aspects of their businesses as well as current strategic direction and performance. of the approximately 1500 requests, 270 responses were received, which indicates an 18% response rate. t here were 237 total usable responses of which 55% were male and 50% were ethnic minorities. a mong respondents, organizational size (defined as the number of employees besides the owner) ranged from 0 – 200 with an average of nine employees. in addition, the age of the owners ranged from 18 t o 75 with an average age of 49.2 years old. the journal of small business strategy vol. 24, no. 1 34 number of years the respondent had owned the current business ranged from 0 to 68 years with an average of 10.5 years. t he respondents were also asked about the industry that best described their business; 53.5% indicated that they were in service, 13.1% indicated manufacturing, 13.1% retail, 10.6% construction, 6.6% medical, and 2% not-for-profit. measures, data, and scale analysis the survey collected information on gender, age, previous business ownership experience, years of current ownership, and ethnicity. in addition, the respondents were also asked several questions that indicated strategic emphasis. t he items used were taken from gibson, mcdowell, and harris’ (2011) questions on strategic focus. in order to assess construct validity of the item scores, an exploratory factor analysis was utilized on the items assessing strategy. using factor analysis with an eigenvalue greater than one rule (kaiser, 1960), these items yielded two factors with eigenvalues one and two at 5.301 and 1.756 respectively. t he first six items indicated an internal strategic focus, and the next seven items indicated an external strategic focus. the factor pattern/structure coefficients including eigenvalues and cronbach’s alphas to examine reliability can be found in table 1. table 1. factor pattern/structure coefficients for internal and external strategy strategy item name internal strategy external strategy factor h2 factor h2 mean sd monitoring and enhancing employee satisfaction and morale .804 .646 3.42 1.383 fostering employee participation and empowerment .796 .634 3.35 1.381 incentive compensation based on team or facility performance .788 .621 2.93 1.396 attracting and retaining high quality employees .777 .604 3.58 1.413 employee profit sharing .679 .461 2.20 1.420 training and continuing education of employees .663 .440 3.16 1.356 increasing growth in revenue .774 .599 4.24 .958 improving profit margin .740 .548 4.10 1.026 continuous improvement of existing products and services .729 .531 4.41 .843 realizing returns on new products or services .724 .524 3.85 1.093 customer satisfaction .709 .503 4.68 .757 offering lower priced products or services .418 .175 2.76 1.329 advertising and promotions .395 .156 3.36 1.184 total variance explained 54.288 initial and second eigenvalue 5.301 1.756 third eigenvalue .985 alpha α = .874 α = .797 journal of small business strategy vol. 24, no. 1 35 in addition, performance was measured using 10 qu estions on performance taken from gibson et al. (2011). these items assessed satisfaction on multiple areas of performance within an organization. previous empirical evaluations have found these subjective measures are highly correlated with objective measures (dess & robinson, 1984; vernkatraman & ramanujam, 1986) used in the business literature (covin, prescott & slevin, 1990; greenley, 1995; slater & narver, 1995; subramanian, kumar & strandhold, 2009). these results also indicated a good fit to the data with the items combined into a single performance measurement. the factor pattern/structure coefficients including the eigenvalues and cronbach’s alpha for performance can be found in table 2. table 2: factor pattern/structure coefficients for performance performance items – satisfaction with… factor h2 mean sd maintaining employee morale .781 .610 3.57 1.116 pricing products/services .753 .567 3.91 .802 managing staffing needs .747 .558 3.61 1.144 communicating with employees .731 .534 3.78 1.140 retaining customers .696 .484 4.06 .938 managing expenses .600 .360 3.99 .931 developing new products or services to meet customer needs .595 .354 3.80 .982 paying debts or liabilities .579 .335 4.11 .991 collecting accounts receivables .520 .270 4.03 1.072 finding new customers .519 .269 3.68 1.067 total variance explained 43.430 initial eigenvalue 4.343 second eigenvalue 1.624 alpha α = .851 multiple linear regression was used to examine the data and test the hypotheses. the data were split according to previous experience and each group was examined independently. the control variables and the independent variables were regressed against performance in the two-step process. the control variables were first entered to see if a statistically significant relationship did exist with the independent variable, and then the strategy constructs were added. i n order to examine the effect in both models, f, statistical significance of the model, beta weights and structure coefficients, the adjusted r2, and the statistical significance of the independent variable were reported and examined. each model was tested using the research model below where y = p erformance, x1 = number of employees, x2 = number of years with the company, x3 = i nternal strategy, and x4 = external strategy. model: y = β0 + β1x1 + β2x2 + β3x3 + β4x4 + ε results the goal of the current study was to examine the relationship between strategic focus and performance for those small businesses with owners who have previous business ownership experience and those that do not. w e hypothesized that there journal of small business strategy vol. 24, no. 1 36 would be a positive relationship between internal strategic focus and performance for those who have previous business ownership experience. i n addition, we hypothesized that there would be a positive relationship between external strategic focus and performance for those who have not had previous business ownership experience. in order to test hypotheses 1a and 1b, the data were split into two groups, those with previous business ownership experience and those without previous ownership experience. first examining the previous ownership group, the results of the analysis showed good fit to the data. s tep one included entering the control variables of employee size and years of current organization operation into the model. these were included because organizational size can affect specific organizational processes such as communication and specialization, which may affect performance (indik, 1965). i n addition, previous research has found that the age of an organization can affect its ability to respond to customers’ demands due to institutionalization (dimaggio & powell, 1983). step two included entering the predictor variables into the equation. the first model consisting of the control variables resulted in an anova with an fvalue of .166 (p = .848). t he second model, with the control variables and internal and external strategy, resulted in an f-value of 5.091 (p = .001). the inclusion of internal and external strategy improved the fit with an r2 of .211 and an ∆ r2 of .207 that was statistically significant (p= .000¬). in addition, the relationship of the strategy items as predictors to performance were examined utilizing standardized and unstandardized coefficients, statistical significance, and confidence intervals. for a summary of this analysis, see table 3. the results of the regression analysis indicate that for businesses with owners who have had previous business ownership experience, an internal strategic focus is statistically significantly related to performance, thus supporting hypothesis 1a. table 3. results of regression analysis for prediction of performance for business owners with prior business ownership experience variable b se b β 95% ci lower 95% ci upper vif step 1 employees .002 .006 .047 -.010 .014 1.308 company years .001 .005 .028 -.009 .011 1.308 step 2 employees .001 .006 .025 -.010 .013 1.399 company years .000 .004 .011 -.008 .009 1.309 internal strategies .279 .063 .483** .153 .405 1.151 external strategies -.109 .107 -.116 -.323 .105 1.242 note: r2 for first model = .004. r2 for second model = .211. ∆ r2 = .207. p = .000. . **p < .001 n = 80. two-tailed tests. journal of small business strategy vol. 24, no. 1 37 when the same examination was applied to the group without previous business ownership experience, the model was again statistically supported with an f-value of 1.985 (p= .146) for the first model and an f-value of 8.743 (p= .000) for model 2. model 2 i mproved the fit with an r2 of .357 and an ∆ r2 of .299 that was statistically significant (p= .000¬). the results of this regression analysis supported hypothesis 1b in that external strategic focus was positively related to performance in those businesses owned by individuals who did not have previous business ownership experience. h owever, in this examination, we found that not only was there a statistically significant positive relationship between external focus and performance, but there was also a positive relationship between internal strategic focus and performance which was not hypothesized. table 4 provides the analysis summary. table 4: results of regression analysis for prediction of performance for business owners with no prior business ownership experience variable b se b β 95% ci lower 95% ci upper vif step 1 employees .010 .007 .192 -.004 .024 1.314 company years .004 .008 .078 -.011 .019 1.314 step 2 employees .004 .006 .074 -.008 .016 1.390 company years -.004 .007 -.068 -.017 .009 1.388 internal strategies .223 .071 .381* .081 .365 1.440 external strategies .291 .104 .316* .082 .499 1.255 note: r2 for first model = .058. r2 for second model = .357. ∆ r2 = .299. p = .000. *p < .01. n = 67. two-tailed tests. hypothesis 2 i ndicated that there would be an overall higher organizational performance among those that had previous business ownership than those that did not. utilizing a one-way anova, we found that although the mean value for those that did have previous ownership (m = 3.89) was higher than those that did not (m = .381), that this was not statistically significant with an f-value of .690 (p = .407). t hus, hypothesis 2 was not supported. t he relationship between performance and previous ownership can be seen in figure 1. discussion and implications according to the small business administration, only two-thirds of all small business startups survive the first two years and fewer than half will survive four years (ritholtz, 2012). not only do s mall businesses account for significant portions of the u.s. gdp, new job growth, and overall non-government employment, they are highly innovative. small businesses generate 16 times more patents per employee than large patenting firms (sba, 2012) and provide a path to business success for 7.8 million women-owners and 1.6 million minority-owners. given that journal of small business strategy vol. 24, no. 1 38 small businesses play such a critical role in the economy of the u.s., it is imperative that scholars continue their efforts to identify what factors are associated with the survival and success of small business enterprises. furthermore, a b etter understanding of the strategies and techniques utilized by successful small business owners can contribute to both the research realm and the ability of policy makers and service providers to support this important constituency. figure 1. organizational performance by previous business experience given that “lack of experience” is frequently cited as the number one reason businesses fail (ritholtz, 2012), it is a small inferential leap to assume that experience yields not only better understanding of sales and fiscal matters but also of operational issues and performance management. as such, the use of internal strategies was expected and found to be positively associated with the performance of experienced small business owners. experienced business owners are more often able to create internal processes that promote efficient business practices focused on financial outcomes (mitchell, smith, seawright, & morse, 2000; edelman, brush, & manolova, 2005). although not posited, this same positive relationship was also found between inexperienced small business owners who practiced an internal strategic focus and performance. perhaps this indicates that many small business owners place a great value on creating internal efficiencies, possibly due to resource limitations. as such, our findings provide additional support for edelman, brush, and manolova (2005) who found that internally focused practices are often more effective for businesses not in the high-tech sector. they also suggest the importance of aligning firm resources with strategic choices in the pursuit of business growth and profitability. journal of small business strategy vol. 24, no. 1 39 this positive relationship with internal focus may also stem from the nature of the economy at the time this data was collected. most analysts suggest that 2009 marked the turning point for the economy – whereas the national federation of independent businesses survey found it to be the worst year in decades for small business owner optimism, it was also the start of economic recovery (adp, 2012). given the outlook of small business owners at this time, having an internal focus may have been a mechanism for preparing for incremental growth (sandberg, 2003; venkatraman & ramanujam, 1986) in the coming turn-around. if this is indeed the case, future research should consider assessing to what degree incremental growth, as opposed to aggressive movement toward increased sales, has yielded success among small business owners in recent years. contrary to our hypothesis, but consistent with the findings of d’souza and kemelgor (2008/09), our results did not substantiate a significant difference is overall perceptions of performance by experienced and inexperienced small business owners. d’souza and kemelgor (2008/09) found that prior business experience did not impact firm performance. they argue that in-depth industry experience can help offset a l ack of experience in business development. we did not collect any individual information on industry expertise, so this can serve as an important area for future research. nevertheless, our findings are somewhat surprising considering that multiple studies have touted the value of previous experience as a s trategic advantage in new business development (krueger, reilly, & carsrud, 2000; wiklund and shepherd, 2003; tanriverdi & venkatraman, 2005; pett & wolff, 2007; west & noel. 2009). however, this may also be attributable to market conditions at the time of data collection. performance expectations were likely tempered in the years immediately preceding and including 2009; as such, the lack of significant differences may simply reflect the reality facing all small business owners at this time. with mean responses between 3.8 and 3.9 on a scale of one to five, no business owner reported exceptionally high levels of performance. conclusions and future research despite decades of research, no perfect formula exists for predicting entrepreneurial success. however, with each successive study, new insight is gained, and we develop a b etter appreciation for the myriad attributes that can influence the likelihood of both success and failure among small business owners. while clearly an incremental approach to theory development and practical outcomes, any knowledge gained has the potential to be useful as we strive to create and deliver better small business owner training opportunities, government programs, and, in general, stimulate the small business environment during challenging economic times. our study showed the value of more internally focused strategies during tough economic conditions. t he use of internal strategies was found to be positively associated with the firm performance, regardless of experience level. also, we found that previous business experience did not significantly impact firm performance. this may indicate that just having prior experience is not enough; it may be the type of experience that is the most important, particularly if the experience is journal of small business strategy vol. 24, no. 1 40 related to a s imilar business (tanriverdi & venkatraman, 2005) or more in-depth with the same type of strategic approach (west & noel, 2009). further research is necessary to investigate the impact of different types of business experiences on organizational performance. research has shown that the organizational success of small businesses may be impacted by a number of factors, including the two featured in this study—strategic orientation and previous business experience. t hese variables, along with firm resources, must be combined in a suitable manner for a small business to become successful. although most small businesses start with limited resources, the adoption of an effective strategy based on either previous entrepreneurial or industry experience may help reduce the impact of these resource shortages. the choice of an appropriate strategy can allow firms to develop the necessary direction needed for financial success, whether it be focused on refining internal efficiencies or creating positive external relationships (edelman, brush, & manolova, 2005; pett & wolff, 2007). research indicates that strategic choice is one of the most important forms of knowledge in new venture creation (wiklund & shepherd, 2003). additional research should continue to examine other factors, at both the individual and firm level, that may impact firm performance. other important variables to consider include owners’ industry experience and the relatedness of their prior entrepreneurial experiences, and firm factors such as industry sector, product type, and start-up resources. i n 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(1984). a resource based view of the firm. strategic management journal, 5(2), 171180. west, g.p. & noel, t.w. (2009). the impact of knowledge resources on new venture performance. journal of small business management, 47(1), 1-22. westhead, p. & wright, m. (1998). novice, portfolio, and serials founders: are they different. journal of small business management, 43(4), 393417. wilkund, j. & shepherd, d.a. (2003). knowledge-based resources, entrepreneurial orientation, and the performance of small and mediumsized businesses. strategic management journal, 24(13), 1307-1314. michael l. harris is an associate professor and director of the small business institute® in the college of business at east carolina university. he is the immediate past president of the national small business institute®. his research interests include entrepreneurial attitudes and intentions, rural and minority entrepreneurship, and entrepreneurship education. shanan g. gibson is an associate dean in the college of business at east carolina university. she is current vice-president for research and publications for the national small business institute®, and a former member of the social security administration occupational information development advisory panel. her research interests include entrepreneurship education, online training, and human resource management issues, such as job analysis and technology acceptance. william mcdowell is an associate professor in the college of business at east carolina university. he is the current vicepresident for programs for the national small business institute®. his research interests include entrepreneurship, family business, and small business management. reproduced with permission of the copyright owner. further reproduction prohibited without permission. szvi~vki"'"k a longitudinal study of the utilization of production management techniques by smali electronics firms stanley e. ifavvcett michigan state university and john n. iptearson arizona state university abstiratl't this study is a longitudinal examinarion of the changes thar have iaken place in the utilization of production management roots and techniques through rhe l98i-f988 time period. results suggest that small electronic manufacturing firms are actively attempting to improve the efficiency and effectiveness of their manufacturing process. of panicuiar inrerest is the apparent emphasis on seeking to contain costs while simplifying the manufacturing process. iintirgtducteon during the past 20 years the world has evolved toward a globally-integrated economic system. this globalization represents one of the most important and dramatic changes in the business environment of this century and without doubt has had a tremendous impact on both the nature of industrial competition and the role of production management in securing a competitive advantage. as globalization continues, there is every reason to believe tha( competitive pressures will only increase, especially as new competitors possessing some economic advantage enter the competitive arena. this intensification of competitive pressure will require that today's production managers make the most effective use of available and future resources —labor, materials, equipment, facilities, energy, and capital. 35 throughout the 1980s, thc u.s. management practice was frequently called into question as u.s. competitiveness declined in many highly visible industries. the issues of primary interest during much of the competitiveness debate focused on how management was responding to the intensifying competitive challenge through the selection and use of management techniques designed to improve manufacturing efficiency. the objective of this paper was to auempt to better understand management's competitive response during thc 1980s. achieving the effective and productive usc of the firm's resources requires that managers be awate of the different production tools and techniques available. a number of researchers have suggested that the systematic and appropriate utilization of operations/production management tools and techniques may enable a firm to enhance its competitive position in the global marketplace by improving thc firm's ability to product reliable, high-quality products at competitive prices ill, 13, 27). therefore, this research was designed to investigate the utilization patterns of many of the traditional-as well as several of the newer —production management tools and techniques. that is, the objective was to examine changes in production practices that have occuned during the 1980s, identifying the production techniques that today's manager's are emphasizing in their attempts to develop and sustain a competitive advantage based on production competence. this approachis consistent with contingency theory, which notes that management will modify its competitive strategy in response to changes in the competitive environment in order to maintain or improve the firm's competitive position. the study because the mix of production tools and techniques used by a firm has the potential to improve the firm's utilization of available resources and thus )cad to higher levels of productivity and quality, the authors have conducted a longitudinal study to obtain data on the comparative utilization of operations management tools and techniques. the originul research project was carr)ed out in 1981 with the follow-up study being conducted in 1988. these studies were designed to determine which management tools and techniques have been widely perceived by manufacturing managers to be the most valuable in the successful management of production activities. by focusing on changes in management practice from 1981 to 1988, insight into the competitive response of managers of small manufacturing firms can be gained. utililization data were collected for 40 different production management tools and techniques. the activities included in the study were selected because of their prominence in the production/ operations management literature and on the basis of their ability to help a firm manage its production process. however, because of the longitudinal nature of the study, some production techniques widely used today were not generally "available" at the time the initial survey was conducted. therefore, in addition to collecting longitudinal data for the original 40 production tools, the second survey also collected data on new production techniques that had come into popular use during the 1980s. for example, just-in-time manufacturing techniques have emerged as prominent production techniques during the past decade and have received considerable attention in both the popular and academic literature since the 1981 study. firms participating in the two studies were selected on a stratified random sample basis from thomas and american electronics association (aea) directories. both the 1981 and the 1988 studies focused on small electronics manufacturers with 100 to 500 employees. the vice president of manufacturing (or equivalent) for each electronics firm was mailed a self-administered questionnaire and was asked to indicate the firm's usage experience for each of the original 40 production tools. the firms included in the 1988 study provided utilization data for the "new" 36 techniques that have more recently become accepted as impacting on productivity and quality. a five-point scale was used to collect data with the response alternatives as follow: i) never heard of it, 2) know about, never used, 3) used but later rejected, 4) experimental or occasional use, 5) continuous or routine use. utilization totals for each technique were determined by combining the scores for experimental or occasional use and continuous or routine use (options 4 and 5). from this longitudinal data, trends in usage for each tool along with changes in rank of importance among the tools can be evaluated. respondent firms included defense and aerospace, original equipment manufactures (oem), industrial, and consumer goods producers. the respondents were equally distributed from the above industry groups. an overwhelming majority of the firms were batch manufacturers of average to low volume. the number of usable responses in each survey year were as follows: 1981 n = 120 and 1988 n = 100, which represent 35% and 30% response rates. study finimngs and discussion utilization of selected production techniques the 40 selected management tools and techniques are rank ordered in table i according to the percentage of firms utilizing each of the techniques as reported in the 1988 study. to facilitate comparisons, rankings and actual percentage utilizations for each technique for both 1981 and 1988 am provided in table i. examination of the data reported in table i indicates that seven of the operations tools listed in the top ten in 1981 also appeared among the ten most utilized tools in 1988. this observation indicates some constancy in production management practices throughout the decade despite the highly publicized need to change management practices to improve competitiveness (4, 11, 23, 24). it should be noted that the types of management technique represented by these seven tools are often considered basic to accounting for and controlling the production process. overall. the dominant theme presented by the ten most utilized techniques is the need for cost containment. three of the top four ranked management tools —formal budgetary controls, capital funds justification, and formal cost reduction programs —focus explicitly on controlling or reducing expenditures. considering the intensified competitive pressure encountered by electronics firms over the past decade, especially in the area of low-cost production, the focus on controlling or reducing costs is readily understandable. four of the remaining top ten techniques deal with inventories or the control of physical materials. given the emphasis placed on inventory management during the 1980s, this finding is not surprising. the three tools that climbed into the top ten are perpetual inventories, vendor rating systems, and profit sharing in production. the inclusion of vendor rating systems and profit sharing programs in the top ten techniques is noteworthy because of the remarkable jump in ranking for each (vendor rating improved from 22 to 8 and profit sharing improved from 26 to 9). the increase in utilization of vendor rating systems rellects a recognition of the importance of purchasing practices in improving a firm's value-added performance: purchased inputs often represent from 60 to 80% of a eirm's operating expenses as compared to 10 to 15% fox labor (17). for the firm that has not developed high-level purchasing skills, cost reductions of 10% or greater on purchased inputs are 37 table 1 rank order of selected operations tools 1988 percentage utilization 19s1 ranking management tool 1988 1981 ranking 1 formal budgetary controls 92.1 93.3 2 2 inventory obsolescence disposition and salvage 91.8 86.6 8 3 capital funds justification 90.9 94.1 1 4 formal cost reduction program 89.9 84.9 9 5 physical inventories, annual 85.7 90.8 5 6 perpetual inventories 85.7 81.5 12 7 formal systems and procedures 84.7 87.4 7 8 vendor rating systems 81.9 65.5 22 9 profit sharing, production 81.6 59.7 26 10 waste and scrap controls 80.8 92.4 4 11 gantt charts; bar charts 80.4 68.9 19 12 standardization program 78.6 76.5 14 13 economic lot size (production) 78.5 83.2 11 14 profit sharing, clerical 77.5 58.8 28 15 work measurement, job standards production 76.5 93.2 3 16 eoq (purchasing) 76.5 88.2 6 17 abc concept, inventories 76.5 58.7 29 18 product line simplitication 75.6 74.8 15 19 suggestion systems, production 75.5 70.6 17 20 internal operations audits 74.8 79.8 13 21 methods study, work simplification 74.5 84.8 10 22 learning curve 70.7 63.0 23 23 zero defects or quality control programs 70.7 58.6 30 24 value analysis/engineering 68.7 61.3 24 25 suggestion systems, clerical 63.2 67.1 21 26 internal management audits 62.6 72.3 16 27 pert charts 62.6 61.2 25 38 table 1 continued rank order of selected operations tools 1988 percentage utilization 1981 ranking management tool 1988 1981 ranking 28 cycle inventories, selective control (abc concept) 62.3 47.1 32 29 cycle inventories, a to z 59.8 36.1 33 30 break-even chart 50.0 69.8 18 31 tool control, salvage, and reclamation 49.5 67.2 20 32 inventory and disposal at end of project 43.3 24.5 37 33 wage incentives, production 41.8 52.1 31 34 math or simulation models 40.4 33.6 35 35 work measurement, clerical 36.7 59.7 27 36 abc concept, (non-inventory) 33.7 36.0 34 37 wage incentives, clerical 27.5 23.5 39 38 line of balance (lob) 25.5 20.2 40 39 queuing, waiting lines 23.2 24.4 38 40 linear programming 19.2 33.5 36 not uncommon. further, selecting the best possible supplier is essential to improving both quality and productivity. this change also represents a move toward the management of the total supply chain as suggested by porter's value-added system (22). the increased utilization of profit sharing, combined with the decreased use of wage incentives, indicates a move toward the recognition of the vital role of the firm's human resource in developing a sustainable competitive advantage. these changes suggest that the small electronics firms included in the study are adopting a longerterm management perspective with respect to the production process. the three management tools that dropped from the top ten were work measurement and job standards for production (from 3 to 15) with a decline in utilization from 93.2% in 1981 to 76.5% in 19gg, economic order quantity (eoq) in purchasing (from 6 to 16) with a decline from 88.2% to 76.5%, and methods study and work simplification (from 10 to 21) with a decline from 84.8% i to 74.5 %. the deadline in utilization of techniques such as work measurement and methods study, especially as they are associated with time and motion studies, suggests a partial move away from 39 the micro management of the production process. the decline in the use of eoq in purchasing is consistent with the increased use of vendor rating systems, tightly-coupled buyer/supplier relationships and jit purchasing practices, which rely more on sole sourcing, developing a partnership style relationship, add the fmquent use blanket orders 116,18). perhaps the most surprising finding from the data in table i is ihe absence of a quality management technique within the top ten utilized tools and techniques. throughout the 1980s, american industry has been criticized for its increasingly tarnished reputation for producing inferior quality products. during this same period, quality has consistently been cited as the single most important factor in determining long-term competitiveness (19, 20, 21). zero defects or quality control programs, (he quality management technique found in both the 1981 and 1988 studies, received a ranking of 23 in the 1988 study with a reported utilization of 70.7%. while this utilization level is not as high as the researchers had initially expected, it does represent a substantial (and statistically significant) increase in utilization from the 1981 survey. other quality management techniques that appeared only in the 1988 study and therefore were not included in table i also failed to make the top ten listing. if they had been included, their relative rankings and percent utilizations would have been as follows: total quality control (rank = 14) is utilized by 78% of the electronics firms, statistical quality control (rank = 2:&) is used by 72.8%, statistical process control (rank = 30) is used by 58.6%, and quality circles (rank = 31) are used by 53%. the consistency of utilization among the more popular quality improvement techniques suggests that a reliable measure was obtained. when the difficulties that many larger, "fortune 500" manufacturers have had implementing quality control programs during the mid to la(e 1980s are considered, the utilization levels of relatively sophisticated quality control methods such as total quality control (tqc) and statistical quality control (sqc) reported by the survey respondents appear less troubling. further, many small electronics firms act as suppliers to larger firms and thus respond to the incentives established by their key buyers. the change in supplier selection criteria from the long-standing emphasis on obtaining the lowest priced items to an emphasis on quality and "total" cost did not occur on a widespread basis until the middle of the 1980s. additionally, it is increasingly common for smaller firms to participate in their major buyers'upplier certification programs. thus, given (he resource limitations —managerial and financial —of many small firm electronics companies, they would be expected to be followers in the quality enhancement movement. from (his perspective the reported utilization levels of approximately 75% as early as 1988 indicate that the firms involved in this study ate responding to market incentives and are actively involved in quality improvement efforts. of almost equal interest to those production management tools and techniques that are most utilized is the issue of which tools are least used. the findings of the two studies are very consistent with eight of the tools receiving a ranking between 31 and 40 in 1981, remaining in similar positions in 1988. the two least used and three of the bottom ten techniques are quantitative tools that are most often classified as operations research (or) techniques-simulation models, queuing, and linear programming. daskin has suggested one reason these or techniques are not used more often —the assumptions necessary to make these mathematical models tractable make them unrealistic (7). indeed, many managers view or techniques either as overly complex and 40 unwieldy or as too far from reality. nevertheless, daskin concludes that there is a strong need to develop models tha( more closely match reality (7). according to chase, line of balance techniques are perceived by managers in much the same way-that is, as overly complicated and too difficult to implement in real world settings (5, 6). two themes are apparent among the remaining least used techniques: the perceived ineffectiveness of wage incentives and the belief that disposal and salvage activities are relatively unimportant. changes and trends in the utilization of production techniques table 2 contains information on the change in utilization for each of the 40 management tools and techniques for the time period from 1981 to 1988. changes in utilization are reported both in absolute terms and in percentage form. this information can be used to identify trends in utilization, that in turn provide insight into steps that have been and are being taken to improve competitiveness. for example, mformation in table 2 suggests that much greater emphasis is being placed on reducing costs, controlling inventory, and improving quality. this binding is consistent with much of the literature that has appeared in the past few years (8, 12, 27, 29). by contrast, less emphasis is being placed on work measurement both in production and clerical activities, tool control, salvage and reclamation, bmakeven charts, and linear programming. table 2 change in utilization between 1981 and 1988 1988 percent utlllzstlon change ln utilization (81 to 88) ranking management tool 1988 1981 point change 5s change 29 cycle inventories, a to z 59.8 36.1 +23.7 65.7 9 profit sharing, production 81.6 59.7 +21.9 36.7 32 inventory and disposal at end of project 43.3 24.5 +18.8 76.7 14 profit sharing, clerical 77.5 58.8 +18.7 31.8 17 abc concept, inventories 76.5 58.7 +17.8 30.3 8 vendor rating systems 81.9 65.5 +16.4 25 28 cycle inventories, selective control 62.3 47.1 +15.2 32.3 23 zero defects or quality control programs 70.7 58.6 +12.1 20.6 11 germ charts; bar charts 80.4 68.9 +11.5 16.7 22 learning curve 70.7 63.0 +7.7 12.2 24 value analysis/engineering 68.7 61.3 +7.4 12.1 34 math or simulation models 40.4 33.6 +6.8 20.2 38 line of balance (lob) 25.5 20.2 +5.3 26.2 41 table 2 continued change in lnilization between 1961 and 1968 1988 percent utilization change in utilization (81 to 88) ranking management tool 1988 1981 point change % change 2 inventory obsolescence disposition and salvage 91.8 86.6 +5.2 6.0 4 formal cost reduction program 89.9 84.9 +5.0 5.9 19 suggestion systems, production 75.5 70.6 +4.9 6.9 6 perpetual inventories 85.7 81.5 +4.2 5.1 37 wage incentives, clerical 27.5 23.5 +4.0 17 12 standardization program 78.6 76.5 +2.1 2.7 27 pert charts 62.6 61.2 +1.4 2.3 18 product line simplitication 75.6 74.8 +0.8 1.1 1 formal budgetary controls 92.1 93.3 -1.2 .i 3 39 queuing, waking lines 23.2 24.4 -1.2 -4.9 36 abc concept, (non-inventory) 33.7 36.0 -2.3 -6.4 7 formal systems and procedures 84.7 87.4 -2.7 -3.1 3 capital funds justification 90.9 94.1 -3.2 -3.4 25 suggestion systems, clerical 63.2 67.3 -4. i -6.1 13 economic lot size (production) 78.5 83.2 -4.7 -5.6 20 internal operations audits 74.8 79.8 -5.0 -6.3 5 physical inventories, annual 85.7 90.8 -5.1 -5.6 26 internal management audits 62.6 72.3 -9.7 -13.4 33 wage incentives, produ dion 41.8 52.1 -10.3 -19.8 21 methods study, work simplification 74.5 84.8 -10.3 -12.7 10 waste and scrap controls 80.8 92.4 -11.6 -12.6 16 eoq (purchasing) 76.5 88.2 -11.7 -13.3 40 linear programming 19.2 33.5 -1 4.3 -42.7 15 work measurement, job standards 76.5 93.2 -16.7 -17.9 31 tool control, salvage, and reclamation 49.5 67.2 -17.7 -26.3 30 break-even chart 50.0 69.8 -19.8 -28.36 35 work measuremenl, clerical 36.7 59.7 -23.0 -38.5 42 four of the largest jumps in utilization occuned in the area of inventory control. however, it should be noted that each of these four inventory techniques was ranked relatively low in utilization in the initial 1981 study. even so, when the increases in utilization of these inventory activities is combined with the prominence of other inventory control techniques in the top ten used tools and techniques, as shown in table i, the emphasis on controlling and/or reducing inventory emerges as a major trend in management practice during the 1980s. this trend fits nicely with the emergence of just-in-time (jit) manufacturing systems, which emphasize waste elimination, the synchronization of materials flow through the production process, and continual improvement (10, 26, 27). whereas not one quality control technique appeared in the top ten most used techniques, the use of zero defects or quality control programs increased substantially from 58.6% in 1981 to 70.7% in 1988. the rapid introduction and adoption of total quality control, statistical quality control, and statistical process control also indicate that u.s. managers are taking the charge to improve quality seriously. further, the 11.5 percentage point increase in utilization of gantt and bar charts can be viewed as one means of making quality increasingly visible (26). also, the rising utilization of vendor rating systems along with an increase in value analysis/engineering points to an increasing emphasis of quality throughout the entire supply chain. that is, today's managers appear to view the acquisition of quality inputs as essential to the production of quality products. two additional trends that appear to be noteworthy are the increased importance of visual approaches to production and quality control and the move toward long-term considerations. first, increases in the utilization of the pareto relationship as exemplified by the abc concept (+ 17.8 percentage points) and in the use of gantt and bar charts (+ 11.5 percentage points) indicate an effort by managers to make production and quality information more widely available and visible. this approach is consistent with the notion of making the production of quality products automatic by simplifying the manufacturing system and making performance visible. second, the jumps in utilization of profit sharing in both production and clerical activities point to an increasing emphasis of long term considerations. the increased use of profit sharing also suggests an increasing effort by management to sham gains in productivity and competitiveness with the employees who are most active in helping achieve them. utilization of newly introduced production practices many new production practices —in particular jit manufacturing and automated manufacturing systems —have become popular and increasingly utilized during the 1980s. however, the nature of a longitudinal study makes retroactive collection of comparative data for these new production techniques not feasible. yet, examining their utilization levels in the latest study does provide to revitalize their firms'roduction capabilities. information on ll of the newer or more recently empahsized production techniques is provided in table 3. four of these techniques relate to automated manufacturing; four relate to alternative manufacturing systems; two focus on the competitive dimension of quality; and one captures information about productivity programs. 43 table 3 utilization of tools introduced in the 1988 study percentage utilization management tool 1988 computer-aided design 89.9 productivity measures 88.7 material requirements planning 84.7 statistical quality control 72.8 just-in-time manufacturing 60.6 just-in-time inventory 59.6 statistical process control 58.6 material resource planning (mrpii) 58.1 computer-aided manufacturing 43.5 flexible manufacturing systems 27.3 computer integrated manufacturing 20.2 data on mrp utilization from the 1981 study shows a 89.1 percent utilization one area that has received a tremendous amount of attention in the past )0 years has been the area of automated manufacturing (3, 9, 14, 25, 30). four techniques have been of particular interest: computer-aided design (cad), computer-aided manufacturing (cam), flexible manufacturing systems (fms), and computer integrated manufacturing (cim). the data in table 3 show that of these four techniques only cad is currently widely used with a utilizastion of 89.9%.this relatively high utilization level for cad is reasonable since cad is generally considered to be the least complex and most easily implemented of the automated techniques. funher, cad can be used in isolation from o(her production activities and technologies, and implementation of cad systems does not require the capital investment associated with cam, fms, and cim. nonetheless, utilizations of 43.5% for cam, 27.3% fms, and 20.2% for cim demonstrate a relatively high commitment on the part of electronics manufacturers to improve their competitiveness through automated systems. as previously noted, building high-quality, low-cost products appears to be a requisite for success in today's global marketplace. the widespread use of statistics to assure that a quality product is manufactured as indicated by the 72.8% and 58.6% utilization of statistical quality control and statistical process control, respectively, suggests that u.s. managers of small electronics firms are actively striving to improve their quality reputation. perhaps the most significant aspect of the utilization of these two techniques is the idea that both are designed to monitor ihe actual production process, assuring that quality is built into the product rather than trying to 44 inspect quality into the product. both techniques also play a valuable role in the process of continual improvement. an important change in manufacturing philosophy is thus manifested by the utilization of these production techniques. the 88.7% utilization rate for productivity measures indicates that managers are paying attention to the issue of cost competitiveness. future studies should be performed to determine what types of productivity measures are being used and what impact they have on firm performance (28). another topic that has been discussed at length during the 1980s has been the relative merits of different manufacturing systems (i, 2, 10, 26, 31). table 3 shows that material requirements planning (mrp), which was introduced in the early 1970s, is still widely used among electronics manufacturers. however, utilization decreased from 89.1% in 1981 to 84.7% in 1988. the more sophisticated manufacturing resource planning (mrpii) is utilized at a much lower level of 58.1%. by way of comparison, just-in-time manufacturing and just-in time inventory systems have gained rapid acceptance during the past 10 years with approximately 60% utilizations by 1988. finally, because of the interest that has been generated by the perceived lack of u.s. competitiveness along with the emphasis on revitalizing manufacturing through the adiaption of jit manufacturing systems, data were collected on those components or techniques that have appeared in the literature as comprising the jit concept. utilization data for the 10 prominent components of jit are contained in table 4. the data in table 4 clearly show that the various aspects of jit have received quite diverse levels of acceptance. while cross-training employees is at the high end of the utilization spectrum at 94%, kanban control systems are utilized by a relatively few 33%. the high utilization of cross-training seems appropriate, given the high levels of interest in improving productivity and the renewed interest in making the most of the human resource. further, small firms often rely on a flexible workforce to compensate for smaller scale operations. in contrast, the traditional dominance of other control systems, in particular mrp and eoq based systems, helps explain the low usage of kanban. further, the implementation of jit systems is often seen as being incremental, with kanban one of the last elements to be implemented —only after the manufacturing environment has been simplified sufficiently through the adoption of the other jit elements for kanban to be an effective control. an incremental approach is one that is especially well suited for the small firm manufacturer. the utilization levels for the remaining jit components suggest that firms do indeed take an incremental approach to jit implementation, seeking first to reduce inventory levels, inprove quality, enahnce flexibility, and in general reduce complexity. the data also indicates that some of the jit techniques are more generally applicable to a wider set of manufacturing envrionments. ct()tnillus)(ons the results from the longitudinal study of utilization rateg of traditional and relatively new production management techniques seem to suggest that small electronics firms are actively attempting to improve the efficiency and effectiveness of their manufacturing process. of particular interest is the increasing awareness of "new" quality techniques (total quality control and statistical quality control) along with an apparent emphasis on seeking to contain costs. this trend shows that u.s, electronics firms are responding to today's competitive pressures and are indeed 45 table 4 utilization ol jit manufacturing techniques percentage utilization management tool tgaa crass-trained employees 94 total quality control 76 jit purchasing 73 reduced setup times 72 group technology 65 uniform wortdoad 65 focused factory 61 quality circles 53 total preventive maintenance 49 kanban 33 paying greater attention to the forces that are driving competition. more specifically, techniques that are cunently very widely utilized or am rapidly increasing in popularity appear to fall into four categories: general budgeting or cost containment, inventory control/reduction, quality management, and long-term human resource management. general budgeting and/or cost containment techniques continue to be important tools utilized by small electronics firms to maintain their competitive position. budgets, cost mduction programs, and formal systems and procedums in clerical and/or administrative activities indicate that small electronics firms are actively pursuing the containment and control of costs. these are important and beneficial results considering the competitive nature of the electronics industry and the importance of low-cost production to effective competition. firms that do not emphasize cost containment through the use of the above techniques may find it difficult to successfully compete. another interesting finding closely related to cost containment is the emphasis on inventory reduction. the idea that inventory is no longer viewed as an asset but rather as a liability appears to have become evident to the firms in this study. the emphasis on inventory control, vendor rating systems, and just-in-time inventory highlights the critical importance of inventory and its impact on the total production system. by controlling and reducing inventory in the manufacturing system, production inefficiencies are identified and can be managed or eliminated. efforts to identify these inefficiencies may account for the incrased utilization of visual controls. the increased emphasis of zero defect programs along with the high use of newly introduced tools of statistical quality and process control embodies the realization that quality is a necessary component of a successful firm strategy. that statistical process and quality control have gained such widespread acceptance in a 46 relatively short period of time indicates (hat small businesses are in the process of implementing techniques aimed at enhancing their ability to compete on the basis of product quality. this rapid adoption of quality control methods suggests that small electronics firms are aware of and responsive to changes in the criteria used to evaluate and select suppliers. tying cost containment, inventory reduction, and quality control together is the increasing emphasis on human resource management. this increased recognition of the value of the human resource is identified by the rapid increase in the utilization of profit sharing (both production and clerical) and the continued use of production suggestion systems. the very high utilization of cross-trained employees is also indicative of the small electronics firm's recognition that competitive success depends on the firm's human resource. indeed, effective human resource management is the foundation that leads to the successful implementation of cost containment, inventory reduction, and quality control tools and techniques. two types of techniques appear to be decreasing in popularity: those activities associated with the micro-management of production and operations research type techniques, which are perceived to lack realism and to be too complex for practical problem solving. a trend toward simplicity and the adoption of new manufacturing systems and technologies appears to be evident. this move is consistent with a suggestion by krajewski et al. that the key to manufacturing success is improving the overall manufacturing environment (15). the bottom line is that small electronics manufacturers are responding to competitive pressures and are seeking to enhance their competitiveness through the selective use of operations management tools and techniques. longitudinal studies provide a basis for evaluating the evolutionary nature of the firm. many insights and ideas can be generated from this methodology. unfortunately, few studies have effectively explored this potential. this study has attempted through a longitudinal analysis to identify the evolving nature of the production/operations management function of the firm. this study is industry and size specific, and some of the techniques may have limited applicability to electronics firms. however, electromcs firms tend to be faced with a highly competitive and dynamic environment that requires proactive management for long-term success. thus, electronics firms are often more responseive to changes in the environment and are often on the "cutting edge" of manufacturing practice. also, by controlling for industry and firm size, we believe that the results provide a relatively accurate representation of utilization patterns and trends over the time frame of this study. further, the relatively stable utilization reates and technique position ranking lend support to the techniques identified in this study. the results suggest that beneficial changes have taken and are continuing to take place in this functional area within electronics manufacturing firms. while this study basically addresses the area of production/operations, the effective utilization of the various tools discussed in this paper have significant impact on the overall success of the firm. as recent experience suggests, today's organization must produce high-quality products at a competitive cost and in a timely manner. it is a basic premise of this study that the judicious use of select operations management tools and the correct management of the productive system will contribute to the long-term success of the electronics and other types of firms. to better understand the operation of organizations, future research should emphasize the development of methodologies that document the impact ol; operations/management tools and 47 techniques on firm performance and competitiveness. such research would be the natural followup to the research presented in (his paper. additional msearch should explore the potential of longitudinal studies in a variety of industries. longitudinal studies provide nuances and understanding into the management of firms that traditional, cross-sectional, point-in-time studies fail to provide. they enable managers/owners to more effectively guide their companies, advisors and consultants to more effectively assist in the management of firms, and academics to better research and understand the characteristics and dynamics of successful organizations. references 1. aggarwal, s.c."mrp, jit, opt, fm s?"harvard business review (sept.-oct., 1985), 8-16. 2. belt, b. "mrp and kanban-a possible synergy?" production and inventory management, 28 (1987), 71-80. 3. browne, j., j. harhen, and j. shivnan. production managemenr systems: a cim perspecrive (new york: addison-wesley publishing company, 1988). 4. buffa, e. "research perspectives in operations management," journal of operations management (august 1980), 1-8. 5. chase, richard b. "survey of paced assembly lines," industrial engineering (february, 1974), 14-18. 6. chase, richard b. "strategic considerations in assembly-line selection," california management review, 18 (fall, 1975), 17-23. 7. daskin, m.s. "logistics: an overview of the state of the art and perspectives on future research," transportation research, 19a (5/6, 1985), 383-98. 8. garvin, david a. "quality on (he line," harvard business review (sept.-oct., 1983),65-75. 9. gunn, t.g. manufacturing for competirive advantage: becoming a world class manufacrurer (cambridge, mass.: ballinger, 1987). 10. hall, r.w. "ten common problems with just-in-time manufacturing," proceedings, annual meeting of the operations managemen( association (1985). 11. hayes, r.h, and s.c. wheelwright. restoring our competitive edge: competing through manufanuring (new york, 1984). 12. hayes, r.h., s.c. wheelwright, and k.b. clark. dynamic manufacturing: crearing the learning organization (new york: the free press, 1988). 13. hyer, n.l. and u. wemmerlov. "group technology and productivity," harvard business review (1984), 140-49. 14. jaikumar, r. "postindustrial manufacturing," harvard business review (nov.-dec., 1986), 69-76. 48 15. krajewski, l.j., b.e. king, l.p. ritzman and d.s. wong. "kanban, mrp and shaping the manufacturing environment," management science, 33 (1987), 39-57. 16. landeros, r. "buyer/seller relationships in u.s. manufacturing firms: an empirical study," proceedings, annual meeting of the national association of purchasing management (1986). 17. leenders, m.r., h.e. fearon, and w.b. england. purchasing and materials management (homewood, il: richard d. irwin, inc., 1989). 18. o'neal, c.r. "the buyer-seller linkage in a just-in-time environment," journal of purchasing and materials management (spring, 1987), 7-13. 19. pascarella, p. "getting a fix on your competitive position," lndusrry week (may 14, 1984), 69-72. 20. peters, t. "more expensive, but wonh it," u.s. news and world report (february 3, 1986), 54. 21. port, o. "the push for quality," business week (june 8, 1987), 131-44. 22. porter, m.e. competitive advantage (new york: the free press, 1985). 23. reuter, v.g. "becoming competitive with value engineering/value analysis," journal of systems management, 36 (1985), 17-23. 24. ri(zman, l.p., b.e. king, and l.j. krajewski. "manufacturing performance —pulling the right levsers," harvard business review (march-april, 1984), 143-52. 25. rosenthal, s.r. "progress toward the factory of the future," journal of operations management, 4 (1984), 203-29. 26. schonberger, r.j. japanese manufacturing techniques (new york: the free press, 1982). 27. schonberger, r.j. world class manufacturing: applying the lessons of simplicity (new york: the free press, 1987). 28. skinner, w. "the productivity paradox," harvard business review (july-aug., 1986), 55-59. 29. skinner, w. "what matters to manufacturing," harvard business review (jan.-feb., 1988), 10-16. 30. valery, n. "factory of the future," the economist (may 30, 1987), si-s18. 31. vollman, t e., w l. berry, and d c. whybark. manufacturing planning and control systems (homewood, il: richard d. irwin, inc., 1988). 49 strategy self-employment training programs for the poor steven balkin roosevelt university abstract asastrategytohelplmvincomepeoplecreatetheirownjobs,numerous trainingprogramshavebeen developed to assist the poor to start a small business. this effort is becoming uiidespread in both the u.s. and europe. while there seems to be a consensus of what a self-employment training program should contain, the appropriateness of the typical program, for low income people ivith severe educational deficiencies, is questioned. a typology for differentiating self employment training programsis generated and their distribution is described from a survey of self-employment training programs for loiv income people in the united states. introduction assisting low income people into self-employment activity has its american roots in immigrant and ethnic mutual aid societies (3, 23, 9). 'hey arose among diverse populations such as asians, eastern europeans, afro-americans, and west indians. these societies provided a network of business contacts, knowledge of market niches, opportunities to apprentice, loan funds, and a supportive environment that inculcated a strong work ethic. owning a business has been part of the american dream for a long time. the roper organization (30) conducted a telephone survey of adults to determine their views on ways to improve their economic situation through different types of employment. the highest rating was given to business ownership. owning a business has been used strategically in two ways: as an advancement in one' career path, and as a survival mechanism by being the employer of last resort. frequently the purpose behind business ownership is related to one's level of formal education. highly educated people are more likely to use business ownership to further their career plans while those with low levels of education and skills frequently use it to provide a survival safety net. as a public policy strategy to create jobs and alleviate poverty, there has been great interest in programs that assist low income people to start businesses. the growth in client demand for these programs is from persons who have become unemployed, underemployed, or pushed out of the labor force due to structural changes in the economy, and from people experiencing changes in life circumstances such as becoming widowed, disabled, acqui ring a criminal record, or being forced to retire. the growth in the provision of these programs isa response to this client demand and a search for alternative ways to provide job training, reduce poverty, and accomplish job creation. part of this search for providing alternative training stems from a view that many poor people already engage in commercial activities in the informal economy and selfemployment training may develop some of those underground skills into aboveground businesses (3, 12). 47 the spurt in selfwmployment training activity will be briefly described. this will be followed by the development of a typology for categorizing self-employment training programs and a description of the distribution of types of programs extant in the united states. self-employment training aci'ivity europe fifteen european countries have entrepreneurial assistance programs directed to the unemployed, as do both canada and australia (5, 6). among the most notable programs are the united kingdom's enterprise allowance scheme, france' chomeurs createurs (unemployed entrepreneurs), and italy's youth enterprise creation. in the united kingdom, adults who have been unemployed 13 weeks or longer, have 1000 pounds to invest, and intend to work full time at their business, are entitled to select themselves into the program and receive a flat-rate allowance of 40 pounds a week for 52 weeks. participants are eligible to obtain free business counseling but receiving technical assistance and preparing business plans are not mandatory for participation (6, 5). in france, a citizen who is entitled to unemployment compensation or welfare can apply to collect their cash benefits in a lump sum in order to start a business. the amount increases if additional employees are hired. receiving technical assistance is not mandatory, although participants can use any of the many publicly supported entrepreneurial outreach support programs. participants have to prepare a business proposal and pass a screening system (6, 5). in italy, a person between 18and 29 years old who resides in the southern half of italy can apply for grants and loans to start a business (26). grants can be for up to 60% of initial start-up capital; loans can be for up to 30% of start-up capital; grants are also available for part of the first three years operating expenses. businesses in the retail and food service sectors are excluded and funding can not be used for purchase of an existing business. potential participants have to prepare an elaborate business plan with the aid of a local business support group such as a chamber of commerce or trade association. a panel of business experts picksthe best plans to fund.'nited states the u.s. department of labor is currently engaged in an elaborate random assignment control group evaluation of projects providing financial capital and entrepreneurial training to recipients of unemployment insurance. the projects are in the states of washington and massachusetts and are modeled after the british and french transfer payment diversion programs for self-employment (33). the self-employment investment demonstration (seid), funded through the u.s. department of health and human services and conducted by the corporation for enterprise development and the manpower development research corporation, is another large self-employment training evaluation project. it is directed towards women on welfare and is taking place in demonstration sites in iowa, maryland, michigan, minnesota, and mississippi (15). in the first year of the program, 543 recipients of aid to families with dependent children (afdc) have attended orientation sessions and 187 people have enrolled (16).this demonstration is based on a model developed by the women' economic development corporation in minneapolis. after a rigorous process of screening and self-selection, enrollees participate in group workshops that teach business skills related to starting a business. then enrollees must complete a business plan and are encouraged to seek financing for their enterprises. most seid programs have in-house loan funds attached; participants are also encouraged to seek loans from private banks. those who open a business are exempt, for one year, from afdc regulations that would handicap the operation of a business. follow-up technical assistance is also provided (15, 17). 48 at the purely state level, numerous states are funding self-employment training programs on their own (27). the leader in the nation is illinois, which has recently spent $800,000 to fund 23 self-employment training programs in poor and distressed areas (21,-8). comprehensive employment and training act. an early modern precursor to this spate of programs occurred during the late 1970sand early1980s under the comprehensive employment and training act (ceta) (4). only a very small portion of programs that operated under the comprehensive employment and training act involved entrepreneurial training, and their existence largely went unnoticed.'nly 21 ceta programs provided entrepreneurial training that was oriented to business ownership after the program was completed. they did demonstrate that ceta eligible clients could be assisted to start their own businesses.'he programs, however, were small, and costs per participant were greater than other ceta training programs. the businesses that were started created jobs mainly for the owners. substantial "creaming" occurred and participants were generally not the poorest of the poor (4). in 1982 ceta was discontinued and replaced by the job training partnership act (jtpa), under which selfemployment training programs continue to be funded. formal of self employment training programs. there seems to be a consensus of what a selfemployment training program should do: screen applicants to pick the most likely candidates to initiate a business; provide classroom training on business skills; teach about starting businesses in general; focus on preparing a business plan; and assist a client to obtain a source of financing (19). all the u.s. programs mentioned above are of this type. contemporary self-employment training programs are more varied than those in the past, as described above. for some projects, new program elements have been introduced and some of the old elements have been rearranged. following the demise of ceta in the early 1980s, a great growth occurred in self-employment training programs targeted to the poor. a survey was conducted in 1988 to describe the distribution of the types of those self-employment training programs. a description of a program typology follows. types of self-employment training programs as a first attempt to develop a typology of self-employment training programs for low income people, projects can be classified according to the following three dimensions: target population, industry linkage, and business plan focus. from discussions with colleagues and operators of programs, these three characteristics seemed tobe the most salient for distinguishing programs. further, there seems to be more variation on these characteristics than on others. other attributes that could have been used to categorize programs are whether or not there is: a screening process, extensive academic classroom work, self-confidence improvement work, client access to a loan fund tied to the program, extensive post-training follow-up assistance, use of formal mentors, and reliance on government funding. target population programs differ on whether they target a low income population in general versus targeting clients in a specific group, in addition to the low income criteria. spedfic groups generally are categorized by demographic characteristics, type of transfer payment received, or by the cause of being low income. for example, some programs only serve women, youth, elderly, hispanics, blacks (demographic groups); welfare recipients, unemployment insurance recipients (type of transfer payment received); or dislocated workers, ex-offenders (cause of 49 being low income) (32).some programs may combine elements of the possible targeting criteria; for example, women (demographic) receiving aid to families with dependent children (transfer payment). industry linkage some programs specialize and train clients to start and operate a specific type of business versus training clients in entrepreneurship and business management in general. examples of some of the businesses that programs specialize in are: child care, street vending of food, home sewing, and horticulture. general entrepreneurship training is provided on the assumption that participants need an idea for a business to initiate and can only become a business owner if they work on their own business concept. in contrast, training for specific businesses is provided by programs which feel the trainers should specialize in only the types ofbusinesses they know best, or those that are the most feasible to start; and it is not necessary for prospective participants to have their own business ideas. business plan focus some programs focus on preparing a formal business plan as the centerpiece of the project (e.g. two year cash flow projections, projected income and balance sheet statements, formal marketing strategy) versus not requiring clients to prepare a business plan. similar to the latter, some projects interpret the notion of a business plan very loosely and make its preparation a small part of the program. the degree of focus on the business plan is likely a function of whether clients will be applying for business loans, and the educational background of the trainers. many trainers in self-employment programs were educated in university business schools or read manuals prepared by business academics. according to a survey of small business educators, 80% viewed business plan preparation as an important element in a small business course (28). program type matrix by considering all the combinations of these three program attributes, measured dichotomously, there are eight possible mutually exclusive program types. these combinations are presented in the following matrix and numbered one through eight. see figure l. figure 1. matrix of eight types of self-employment training programs for the poor specific target population general target population business plan business plan business plan business plan important unimportant important unimportant industry linked (i) (2 (3) (4) training general entrepreneurial (5) (6) (7) (8) training 50 a summary description of united states self-employment training programs serving low income people the population of programs here are those whose intentions are to assist a client in starting a business after the initial training part of the program is completed.'n 1988,as part of a research project, fifty such programs were found across the u s.that were currently operating or recently operated. the enumeration was accomplished by drawing on an extensive literature search, attending conferences on self-employment training, and using data from the corporation for enterprise development and the national conference of state legislatures. a list of all 50 programs is available from the author. descriptions of most of the programs can be found in (1, 3,,10, 11,13, 14, 19, 20, 24, 25, 27). programs that do not predominantly serve low income people were not included.'or example, there were many programs serving minorities and women but that either do not serve very many low income people or intentionally screen them out. results in table 1, the matrix in figure 1 is reproduced with the percentage inside each cell being the relative frequency for each of the eight types of programs. the cell percentages are proportions of the total 50 programs. see table 1. table 1. relative frequencies for eight types of self-employment training programs for low income people (n=50) specific target population general target population business plan business plan business plan business plan important unimportant important unimportant industry linked (1) (2 (3) (4) training 2% 12% 2% 2% general entrepreneurial (5) (6) (7) (8) training 42% 4% 32% 4% programs that target a specific low income group are slightly more numerous than ones that do not. this is observed by comparing the left half of the table (60%) versus the right half of the table (40%).programs that provide general entrepreneurial training are much more common than industry linked programs. this is observed by comparing the second row of the table (78%) to the first row (18%).programs that focus on a business plan are much more common than ones that do not. this is observed by comparing the first plus the third columns (78%) versus the second plus the fourth columns (22%). 51 the most commonly occurring program is type ¹5: general entrepreneurial training, focusing on a business plan, and serving a specific target group. forty-two percent of all the programs are of this type. pmgrams of type ¹5 and type ¹7 (serving general low income clients but also a business plan oriented general entrepreneurial program) together comprise almost three quarters of all the projects. thus, programs that provide general entrepreneurial training and focus on clients preparing a business plan are by far the most common. one reason for the predominance of the business plan focus is the influence of bankers and business academic textbook writers. business plans are important if bank financing is being sought, the business is complex, and/or substantial growth is expected to occur.'owever, if the business is very simple, the size will be limited to no or few employees, no external financing is sought, and validated easy rules-of-thumb operation are available, perhaps the requirement of c)ients preparing a business plan is not necessary. one important function that business plans serve is to act as a screening mechanism to restrict the program to those with good literacy and math skills. the purpose of this screening is to increase success rates by admitting clients who, many times, would have started their businesses anyway, without the assistance of the program. this helps to generate a high success rate when success is defined by measures such as the percent of enrollees who started a business. however, from a social policy perspective this may not be a correct strategy because it may diminish the expected degree of impact.'mpact is defined as the outcomes of the program (e.g. increased business starts, improved earning streams, greater employment stability) that would not have occurred in the absence of the program. if clients are very likely to start their businesses even without the program, there is less likelihood of finding a big difference between the program outcome and the outcomes from a similarly situated control group who did not participate.'wenty-two percent of all of the programs did not focus their assistance on clients preparing business plans. of the eleven programs that did not focus on client preparation of business plans, seven were industry linked. program types ¹2 and ¹4 are those that are industry linked and do not focus on client preparation of a business plan. essentially, these seven programs (15%of the programs) specialized in learning the essentials for operating and choosing a business in a certain industry and, therefore, could provide validated rules of operation for the business. basically they operate like a franchise, and franchises purportedly have significantly lower failure rates than other forms of business." this can mitigate against the fear that targeting clients with severe skilldeficiencies will lead to high failure rates. because of its modest demands on participants and its potential to achieve start-ups quickly, greater use of this type of program may permit more targeting on the poorest of the poor: those with very little formal education. these are people who would have great difficulty preparing a business plan and who would more likely not enter or would drop out of a self-employment training program that was classroom and analytically oriented. sometimes self-employment training programs refer to orientation sessions, where the requirement of preparing business plans is presented, as "scareoff" sessions. the franchise approach should be explored as a means to develop self-employment programs that have the potential to reduce failure rates for low income clients. this could take the form of assisting clients into low cost franchises, stimulating the number and variety of low cost franchises, and having programs and assistance organizations act like franchisors by specializing in certain industries. if there are enough of these programs, and a client wants to start a business that a particular program doesn't specialize in, he/she can be sent to one that does. with the high rate of growth for these programs, there may be enough of them in a region so that clients can be served by a network of programs, rather than by only one. 52 it is, however, still too early to tell which type of program works or works best for which type of client. a variety of programs need to be tried with extensive evaluation implemented for the most promising ones. the evaluations should include use of control groups and long term follow-up. at this point we need to experiment and evaluate. conclusion variety in self-employment training programs ought to be encouraged because there are a variety of clients who have different needs and capacities. some partidpants may be low income people but with a high level of formal education and skills who are looking for high profits and have high financial capital needs. programs that focus on a business plan and provide general entrepreneurial training may be correct for this group because they are likely to need bank financing and their businesses will more likely be complex and have growth potential. the most common type of self-employment training program for the poor was of this kind. other self-employment training participants may just want to enhance their survival capability or attain needed lifestyle flexibility. they may have a low level of academic skills, have a low tolerance for classroom education, and require little capital. birch (7) would categorize this latter group as "income substitutors" rather than "entrepreneurs". they may be best helped by programs that specialize and train for starting a business in a spedfic industry without requiring the preparation of a business plan. we need to know what works, for whom, and at what cost. while there is reason to think that self-employment training belongs in the mix of programs geared to alleviate poverty, develop human capital, and create jobs, just how much of it should be there will likely depend on the development of new types of business advisory services that can help people with educational deficiencies to start a business. if programs can effectively target the poorest of the poor, show impact, and pass a cost-benefit test, there is reason to be optimistic about their growth. endnotes 1. i want to gratefully acknowledge support from the coleman/fannie may candies foundation, the joyce foundation, the u.s. german marshall fund and roosevelt university. i also want to thank the reviewers for their helpful comments. the views expressed are my own. 2. part of the information on the italian youth enterprise creation program comes from my field notes from a research trip to italy in 1988. 3. prime sponsors were the local administrative bodies of ceta. in august 1982, an initial screen questionnaire was sent to all 524 ceta prime sponsors in an attempt to obtain a census of all ceta entrepreneurial programs. 286 responses were received, for a response rate of 53%. of these 286 responses, 17% or 49 replied that they did have some sort of an entrepreneurial oriented program. it appeared that of these 49 entrepreneurial oriented programs, only 21 were genuinely entrepreneurial in the sense of having an ownership orientation, 12 seemed to be involved in providing training in just business skills, and 16 were very marginally entrepreneurial (e.g. training employees for local businesses) (4). 4. different programs had different eligibility criteria depending on the title of the ceta law the program was under. the following are some ceta eligibility criteria: eligible ceta clients could be unemployed for 30 days or more (in areas of 7% unemployment or more, this could be reduced to 15 days); underemployed which means part-time or full-time workers whose earnings 53 were below the poverty level or persons from families receiving afdc or ssior persons working part-time but seeking full time work; long term unemployed which means persons who exhausted unemployment insurance benefits or were ineligible for such benefits or those who had been unemployed 15 or more weeks; and low income long term unemployed which means persons unemployed for at least 15 weeks and whose family income was not above the poverty level and persons in families receiving afdc without regard to their employment status. in addition, several groups were targeted to get special consideration. these included vietnam-era veterans, ex-offenders, persons of limited english language proficiency, handicapped, women, single parents, displaced homemakers, minorities, youth, older workers, individuals lackingeducational credentials (e.g. high school dropouts), migrant workers, and public assistance recipients. 5. many small businessprogramsarerunbycommunitycolleges,universities,and government agencies and are geared to provide either general business education or how-to workshops for particular types of business. but it is usually not expected that the student or client will initiate the business immediately after the course and post-program assistance is usually not provided. for a survey of community college and university programs in entrepreneurial education see solomon (29). many local private non-profit agencies and community organizations provide technical assistance, networking, and referral services for low and moderate income people who are interested in starting a business. fora directory of such organizations in chicago, see balkin (1).there are also myriad forms of for-profit private sector assistance to assist someone into selfemployment. these mostly consist of professionals, (e.g., attorneys, accountants, brokers) who will provide advice for a fee, and franchises. the most common form of assistance into selfemployment is through informal networks of family, friends, and associates. 6. in this analysis, low income people includes the newly unemployed and the long-term structurally unemployed, as well as discouraged workers. discouraged workers are not technically in the labor force but would be willing to work if suitable employment were found. these groups have different capabilities and aspirations. the newly unemployed have recent work experience, are likely to be more skilled, and have more savings, assets, and effective social networks. it would seem to be easiest for the newly unemployed to start a business,but it would be more difficult for their businesses to match their previous or potential earnings (including fringe benefits from a wage job). the long term structurally unemployed and discouraged workers maybe harder to work with to accomplish a business start,but it would be easier for their businesses to match or exceed their previous or potential earnings from the labor market. 7. the 1982 survey of business owners (31) reports that only about a third of u.s. business owners used some borrowed capital for financing their start-up. 8. the supported work experiment was a random assignment control group evaluation of a job training program targeted to four groups: afdc women, ex-addicts, youth, and ex-offenders. it found that the program had the greatest impact with the participants who were the worst off. the greatest impact occurred for groups with the lowest rate of employment and earnings, and higher crime and drug use rates (18, p. 45). 9. the poverty population is not static; people do leave poverty on their own. only a relatively small proportion are in poverty or on welfare continuously for long periods of time. (22) it is contended that many training programs "cream" by selecting clients from the "temporarily" poor segment and then claim their exit from poverty as a program success. if this is the only process operating, targeting the poorest of the poor will more easily reveal the ineffective programs. 54 10. literature, citing the international franchising association as the source, reports that franchises have the lowest rates of failure compared to non-franchises. using dun and bradstreet data, along with data from the u.s. department of commerce, i could not replicate that finding (2). 11.consideration should be given to supportive public policy and ancillary services that can enhance the success of self-employment training programs targeted to the poor. this involves such areas as expansionary macro-economic policies, welfare reform, national health insurance, day care subisidies, changes in tax reporting requirements, changes in zoning laws, incentives for outside investment in micro-enterprises, creation of micro-loan funds and rotating credit associations, incentives for business owners to act as mentors, and creation of peer self-help groups. it may be true that the poor can be effectively encouraged to enter setfemptoyment through initiatives such as the above without the necessity of training programs. references 1. balkin, s. directory of the chicago self-employment program network. (chicago, il: roosevelt university, department of economics, 1987). 2. balkin, s. franchises as potential self-employment opportunities. working papers in economics and political economy. (chicago, il: roosevelt university, 1988). 3. balkin, s. self-employmen%r lore income people. (new york, ny: praeger publishers, 1989). 4. balkin, s. and czechowski, d.e. survey of ceta entrepreneurial programs: supplement report to national commission on jobs and small business. (sprtngfield, va: national technical information service, 1986). 5. barker, p.s. self-employment schemes for the unemployed. ile notebooks no.10. (paris, france: organization for economic co-operation and development, 1989). 6. bendick, m. jr. and egan, m. l. "transfer payment diversion for small business development: british and french experience." industrial and labor relations reoieto, (july, 1987, pp. 528-542). 7. birch, d. l. job creation in america. (new york, ny: the free press, 1987). 8. chicago tribune. "business training gets funding boost." (february 27, 1990, sec-2, p. 3). 9. cummings, s. (ed.) self-help in urban america: patterns of minority business enterprise. (new york, ny: kennikat press, 1980). 10. corporation for enterprise development. the entrepreneurial economy, (june,1986,entire issue). 11. feit, r. "expanding entrepreneurial opportunity: an alternative route to self-sufficiency." background paper for the corporation for enterprise development, (washington, d.c.:1987). 12. ferman, l a., henry, s.and hoyman m. (eds.) the informal economy, special edition of the annals of the american academy of political and social science. (september, 1987). 55 13. friedman, r. e. "expanding the vision of the entrepreneurial economy."the entrepreneurial economy (december/january, 1986, pp. 2-3). 14. gould, s. and lyman, j. "a working guide to women's self-employment." the entrepreneurial economy (march, 1987, pp. 5-14). 15. guy, c.a. "overview of the self-employment investment demonstration." evaluation forum. (forthcoming, 1990). 16. guy, c.a., fink, b.and doolittle, f. self-employment investment demonstration -early implementation issues. (new york, ny: manpower development research corporation, 1989). 17. hinds, m. "door to a business of one's own can be good exit from welfare." new york times. (june 3, 1990.sec. 1, pp. 1 and 20). 18. hollister jr., r.g., kemper, p. and maynard, r.a. (eds.) the national supported work demonstration. (madison, wi: university of wisconsin press, 1984). 19. illinois department of commerce and community affairs. organizing self—employment training programs: a guide for development organizations. (springfield, il: 1987). 20. illinois department of commerce and community affairs. self-employment training programs: case studies. (springfield, il: 1987). 21. illinois department of commerce and community affairs. self-employment training program1989-1990requestfor proposals. programadministrationbureau. (springfield, il: 1989). 22. levitan, s. a. and johnson, c. m. beyond the safety net. (cambridge, ma: ballinger, 1984). 23. light, i. "immigrant and ethnic enterprise in north america." ethnic and racial studies. (april, pp. 195-216). 24. mangum, s.,tansky, j.and keyton, j. (1988)."small business training as a strategy to assist displaced workers: an ohio pilot project. " journal of small business management. october, pp.14 -21. 25. mcdermott, m. "maryland targets the disadvantaged." franchise. (may/june, 1986, pp. 42%5). 26. minister for spedal intervention in southern italy. giovani &1m presa. (june, 1987,entire issue). 27. puls, b.from unemployed to self-employed: a program analysis. (denver, co: national conference of state legislatures, 1988). 28. ryan,c.c.,etal."educator'sviewsonsmallbusinesstraining." journalofsmallbusiness management. (washington, d.cz 1987, pp. 80-83). 29. solomon, g. national survey of entrepreneurial education 3rd ed.. (washington, d.cc u.s. small business administration, 1986). 30. the roper organization. the american dream: a national survey by the wall street journal. (princeton, nj: dow jones and company, inc., 1987). 56 r 31. u.s. department of commerce, bureau of the census. characteristics of business oroners. (washington, d.ca u.s. government printing office, 1987). 32. u.s. department of labor (1989).firmstartan examination of self—employment. (washington, d.cc employment and training administration, 1989). 33. wandner, s.a. and messenger j.c. the self employment experience in the united states: demonstration projects in washington state and massachusetts. unpublished paper submitted to the organization for economic co-cooperation and development. (u.s. department of labor, 1990). 57 reproduced with permission of the copyright owner. further reproduction prohibited without permission. from the editor fry, fred l journal of small business strategy; fall 2004/winter 2005; 15, 2; abi/inform complete pg. 0_6 strategy the impact of training and development activities on small technology oriented entrepreneurial firm performance jeffrey s. braeker university of louisville debra j. cohen george washington university abstract based on prior research in training and development, planning and performance, and enrrepreneurshi p, it was predicted that formal training and development would play an i mportant role in shaping the straiegic planning process and subsequent entrepreneurial firm performance. data from 73 founder)managers of iechnoiogy oriented electronic businesses were collected and analyzed to determine the impact of t & d on firm performance. more specifically, the study investigated the reiarionships berween training and development, the perceived benefirs of rrai ning and development, and the sophistication ofa firm's strategic orientation to planning. preliminary results indicate ihat truining and development are related to firm performance. to date, most studies of outside influence on established entrepreneurs'irm performance have centered on the impact of consultants on strategic plans and subsequent performance (chrisman, hoy & robinson, 1987). this is certainly unfortunate in a country where over 30 billion dollars is spent annually on strategic management development through training and development (t & d) (camevale & gainer, 1988). the few studies that have examined entrepreneurial education and firm performance have dealt with startup firms or university-led education of potential entrepreneurs (brown, christy & banowetz, 1987; hyatt, 1989; vespar, 1985). no longitudinal empirical study has looked at the impact of t & d on strategic planning and subsequent performance in established firms run by entrepreneurs. strategic management development activities geared toward entrepreneurs and their firms can be broken down into two types: (a) programs that assist individuals in starting new firms through education on entrepreneurship, and (b) programs that assist established entrepreneurs in handling various managerial problems associated with growth. the first approach, teaching individuals to be entrepreneurs, addresses the important question: can one train a person to be an entrepreneur? advocates of this approach answer this question affirmatively, but surprisingly there has been little empirical research to determine its efficacy. moreover. anecdotal writings have hotly debated the results as to their potential contribution to participants and to the funding for such training. i our proposed study builds on the second approach. our interest is further justified by findings from recent empirical studies which have shown that many entrepreneurs lack skills requisite to managing ongoing companies to ensure their survival and growth. for instance, miner (1990) found that successful "high tech" entrepreneurs lack managerial skills such as those necessary for planning and organization. most often a viable patent or proprietary process enabled these entrepreneurs to secure funding to labnch the businesses, but most of these firms did not require significant managerial expertise in the early years of their existence. the entrepreneurs dealt more with technical concerns than with finance, marketing or management. once these administrative issues surfaced or the industry went into a retreat or a downturn, they had to deal with serious survival issues for the first time. some entrepreneurs were forced out of management or had to sell their companies for far less than they would have desired. all too often, however, the harsher reality of failure was the only option. formal training and development in the area of strategic planning allows the entrepreneur not only to benefit from the expertise of the trainer but also to learn the "ropes to skip and ropes to know" of the process, not to mention the benefit of networking with other entrepreneurs. in light of the above statements, the dun and bradstreet study, and the deluge of strategic planning program training programs available to entrepreneurs, a select group of established entrepreneurs within the electronics industry was empirically examined. literature review what ls an entrepreneur? there is no clear consensus on the definition of the word "entrepreneur" in the literature. carland, hoy, boulton, and carland (1984) argue that researchers must at the very least be able to distinguish between entrepreneurs and non-entrepreneurs. they offer the following suggestion: an entrepreneur is an individual who establishes and manages a business for the principal purposes of profit and growth. the entrepreneur is characterized principally by innovative behavior and will employ strategic management practices in the business (carland et al., (984). the salient point here is that the entrepreneur establishes and manages the business for both profit and growth. this suggests that entrepreneurs carry out a process called entrepreneurship. for the purposes of this study firms were examined that were founder/managed, at least five years old, with fewer than 100 employees, all competing in the same industry, and whose founders possessed advanced degrees in science or engineering. these firms conform to the definition of an entrepreneur and entrepreneurship mentioned earlier, have survived the rocky stan up period and should have an appreciation and desire for continual learning due to their own educational backgrounds. regardless of the time or economic nature of a firm's environment, the authors hypothesize that entrepreneurs who engage in strategic planning should not only financially outperform other firms but also successfully weather severe downturns or structural changes in their industry. the role of training and development it seems clear that entrepreneurs who participate in strategic planning training programs 2 may overcome some of the problems inherent in planning. it is further hypothesized that performance will be greater in firms whose founder/managers believed that training and development would be beneficial and took part in such activities. this hypothesis stemmed from the belief that entmpreneurs need to think these activities are going to help them in their strategic planning practices. since these individuals are characteristically different from traditional managers, they might not believe that training would hold as much promise for them (miner, 1990). some of the training literature suggests that the more voluntary a training program is perceived, the more motivated individuals will be to attend, participate, learn, and transfer learning to the work site (cohen, 1990). thus, if entrepreneurs believe that training will be beneficial, they may be more likely to want to attend and may also be more motivated in that training and development. according to keats and montanari (1986), the ability to practice and integrate strategic planning practices into normal operations is a function of cognitive development. this process would take place in a series of stages dependent upon the appropriate environmental challenge and the entrepreneur's response to that challenge. therefore, one might conclude that the training needs of an entrepreneur might be moderated by one's path to ownership, business and educational experience, or stage in the firm life cycle. accordingly, a similar group of entrepreneurs with respect to education, business background, and industry and firm type is warranted for this study. hall (1984) contends that most organizations never examine how t&d can most effectively promote organization objectives or how development activities should be altered in light of business plans. the current study attempts to close this gap by examining organizational performance in light of its strategic training and development activities. for the purposes of this study strategic management development will be defined as "the identification of needed skills and active management of employee (entrepreneur) learning for the long-range future in relation to explicit corporate and business strategies" (hyatt, 1989). according to mangum, mangum, and hansen (1990), the prevailing opinion is that too many variables may enter into profit determination to single out the impact of any incremental training expenditure. while it is true that there may be a number of variables which account for explained variance in firm performance, it may be important and relevant to know if t&d is one of the contributors and, if possible, to what extent training is responsible. it is our contention that with the correct focus strategic management development should support a company's strategy. berry (1990) stated that even when managers learn something new, it is rarely translated into increasing the organization's ability to compete. hence, instead of just providing entrepreneurs with new skills, development needs to be strategic and to place learning in context, a long-range future, as hall (1984)and keats and montanari (1986)suggest. while training may be a necessary prerequisite to getting a job done, development may be something that is only desired by an individual or an organization. development, however, cannot occur unless people participate in activities designed to introduce new knowledge, skills, and abilities (ksas). in addition, development cannot occur unless individuals and organizations know what gap exists between the current level of ksas and the desired level of ksas. small firms usually experience little resistance to planning from employees. given the size of the firm, organization members are more likely to be involved with the planning process 3 and thus to experience more ownership over its outcomes. furthermore, employees in smaller firms may be more aware that resistance to planning may lead to non-employment. relating managerial compensation to thc planning process, a major obstacle to successful implementation of plans in large firms, is rarely a problem in small firms. senior managers in small firms are generally owners and reward themselves based on performance. furthermore, the small size of these firms makes it easier to tie compensation to performance in an objective fashion, therefore making issues of non-equity moot. if a needs assessment should uncover a problem, then training might be a solution. however, if a need, desire, interest, or deficiency is uncovered, then development might be the answer. the key here for entrepreneurs and their firms is that training and development is not always the solution. however, since training and development can provide thc entrepreneur with needed ksas and can fill the gap between some current set of circumstances and some desired set of circumstances, then it is likely to be an important tool for most entrepreneurs experiencing managerial problems associated with growth. according to bracker, keats, and pearson (1988), it seems evident that the process, noi the plan, is a key component of performance in entrepreneurial firms. the introduction of and successful use of strategic planning practices are a function of the entrepreneur and his/her behavior. this, of course, favors the employment of training and development in the firm. the process of successful planning is often a result of continual refinement and adjustment of one' strategic plan. without a clear desire to think about and anticipate future outcomes some entrepreneurs will accept the status quo of their firm (if it isn't broken, don't fix it). an attidude that may eventually lead to trouble. it might be fair to say that many entrepreneurs know one thing very well, the ability to invent and bring that invention successfully to the market. this innovative behavior is characteristic of growth industries. however, as the industry becomes more dynamic and matures, this process becomes more difficult to implement (pearson, feldman, & bracker, 1991). it might be appropriate to hypothesize that many entrepreneurs are hoping that invention and not the sound management of the firm will continue them on the road to prosperity. therefore, training and development may play a central role in shaping the entrepreneur's perception of the planning process and his/her implementation of strategy. the importance of planning chrisman and leslie (1989) concluded that small firms benefit most when they conduct strategic planning with the help of an outside influence. they further point out that the type of outside assistance and firm performance have yet to be rigorously tested. a review presented by robinson and pearce (1984) suggests a positive relationship between planning and financial performance in small firms run by entrepreneurs. in a recent study that examines smaller firms and planning process importance, reid (1989) looked at firms'onformity with prescriptive planning literature by company size. he found that 20 companies (34"7o of his sample) with sales under 10 million english pounds showed high conformity with his model of strategic planning. he also found size a critical factor in strategic planning performance. it appeared that as the organization grows, so does the need to plan strategically. it also stands to reason that as a firm grows, so does the entrepreneur's need for t & d. in a content analysis of the literature relating to small firm planning practices, bracker 4 and pearson (1986) identified eight planning components: (a) objective setting; (b) environmental analysis; (c) strength, weakness, opportunity and threat (swot) analysis; (d) strategy formulation; (e) financial projections; (f) functional budgets; (g) operating performance measures and (h) control and corrective procedures. these components, when operationalized, encompass the strategic, operational and functional components of the planning process. based on these components, bracker and pearson identified four distinct levels of planning sophistication in order to study its relationship to performance. these levels were (a) unstructured (up), (b) intuitive (ip), (c) structured operational (sop) and (d) structured strategic planners (ssp). sophistication of planning process was ascertained by looking at the degree of formality, comprehensiveness of process and length and time of planning cycle. the length and time of the planning cycle component enable one to identify the planning process employed over a continuous longitudinal time frame as opposed to a cross sectional look before or after the process. the above-mentioned 'approach overcomes many of the identified weaknesses of past planning categorizations (boyd, 1989; pearce, freeman, 8i robinson, 1987). it further takes into consideration the strategic and operational nature of planning as called for by robinson and mcdougall (1985). studies of small, mature firms in a relatively stable environment and small firms in a dynamic growth industry have revealed statistically significant financial performance differences between structured strategic planners and those in all other categories (bracker et al., 1988; bracker & pearson, 1986). kalinowski, el enein and klasson (1989) studied mature wood product firms using the above-mentioned planning categorization. they found that both ssp and sop categories outperformed unstructured planners with regard to average sales and average net income. bracker and methe (1988) also found the categorization to be effective in their cross-national study of japanese, american and european "high tech" firms. these studies provide additional support for the bracker and pearson (1986) planning continuum. hypotheses based on research on training and development, planning and performance and entrepreneurship mentioned above, it seems reasonable to anticipate that training and development activities play an important role in shaping the strategic planning process and subsequent entrepreneurial firm performance. therefore, it is important to know not only whether these firms participate in training but also whether they believe it to be beneficial. in addition, the present research sought to investigate the impact of training not only on firm performance but also by strategic orientation. the literatures in both the training and development arena and the strategic planning arena imply that individually each will have an impact on firm performance. as an interdisciplinary study this investigation sought to determine if there was any sort of interaction between the two. hence, the present research tests the following major hypotheses: 1. (a) there is a significant interrelationship between planning process sophistication and training and development'as it relates to financial performance. (b) there is a significant difference in financial performance between firms that employ training and development activities and those who do not. 5 (c) there is a significant difference in financial performance between level of planning process employed and firm performance. 2. there are significant differences in financial performance within each planning orientation (ssp, sop, up) between firms that have employed training and development activities and those (hat have not. 3. (a) there is a significant difference in financial performance between entrepreneurs who believe strategic planning training programs are beneficial and those who do not. (b) of those firms that believe training is beneficial there is a significant difference in financial performance between those that trained and those that did not. (c) of those firms that believe training is not beneficial there is a significant difference in financial performance between those that trained and those that did no(. methods sample thc membership of thc american electronics association (aea) was chosen as an appropriate industry subgroup for this study. the electronics industry includes many small firms and is considered to be in the growth stage of life cycle as demand is growing at a rate in real terms greater than 10%, products and services are diverse, and the technology and competitive structure of the industry is dynamic (zeithaml & fry, 1984). the sample consisted of 217 founder/managers of electronic businesses who are members of the aea. names and addressed were obtained from the aea membership guide. survey instrument and procedure the questionnaire concerning sophistication of planning practices, participation in and perceptions of usefulness of strategic planning training programs, and background information on educational and business orientations of the entrepreneur was adapted from 1)racker (1982). members of a panel consisting of aea members, experts in thc electronics industry, and academics werc interviewed to assist in adapting the questionnaire. in addition, structured and unstructured interviews of a subset of aea members were conducted to ascertain the applicability of the questionnaire, and a pilot test for relevance, readability and completion time was undertaken before thc final instrument was developed. dillman's (1987) total design method (tdm) was utilized in developing thc format of the questionnaire and for conducting the mail survey. following dillman's method, the process consisted of three mailings at three-week mtervals and follow-up phone calls after the third mailing. a test of demographics failed to reveal any significant differences between mailings. ninety-seven firms responded to the questionnaire for a total response rate of 45%. of these 97 responses, 73 (34%) successfully completed the questionnaire. according to norton (1986), a response rate of 20-25% is an acceptable rate of return for this industry subgroup. there was no'indication of substantive differences between respondents and non-respondents. 6 firm demographics for the five-year time frame were: age, six years to 17 years (x 9.9); revenues, less than $500,000 to over $ 12,000,000 per year (x = $4,650,000); average net income before taxes, $350,000. the number of employees ranged from seven to 100(x = 66). measures and classification according to dess and robinson (1984), the consideration of organizational performance should be based on the identification of accurate, relevant and available measures. here, measures of financial performance were developed based on interviews with experts in the electronics industry, entrepreneurs who own and manage electronic firms, and published industry data sources. the resulting financial performance variables included the following: (a) growth in revenue; (b) net income growth; (c) growth in present value of the firm (including book value, patents and goodwill); and (d) ceo compensation growth over the five-year time frame. growth in revenue was the average sales growth for the first five-year time frame. net income growth was the average net income before taxes for the first five-year time frame. present value growth of the firm was the average book value of the firm, patents and goodwill for the first five-year time frame. ceo compensation growth was the average growth in ceo cash compensation for the first five-year time frame. in order to determine the growth rates over the five-year time frame, we used the initial year value, subtracted from the next year value, divided by the initial year value, to obtain the growth rate for year. these data were summed, divided by five and multiplied by 100 to determine the percentage growth rate in performance during the five-year time frame. according to bracker et al. (1988), "this approach to measurement of the dependent variables was used because it was more likey to reveal true discontinuities in year-to-year firm performance. an approach such as compound growth rates would obscure such information" (p. 595). a multiple cut-off classification system was used to determine planning sophistication (bracker & pearson, 1986; rue, 1973; vesper & mcmullan, 1988). a continuum of scores was obtained from each of the eight components identified by bracker and pearson (1986). the heuristic was then combined to form one of three categories: structured strategic planners, structured operational planners, and unstructured planners (table i). as noted by bracker et al. (1988), no ips were expected or found in this sample. likert scales and yes/no responses were used to identify prior educational and business orientation and the employment of perceptions of usefulness of t & d activities. results and discussion univariate anova tests followed by scheffe's multiple comparison technique, when appropriate, were undertaken to analyze the hypotheses. with respect to hypothesis la a significant interaction effect was found between strategic planning and training and development activities (f = 5.33 p & .01) with the overall model being significant (f = 4.85 p & .001) for growth in sales and for growth in ceo compensation (f = 3.46 p & .05 and f = 3.93 p & .01) (table 2). it was predicted that entrepreneurs who took part in t & d activities would display greater financial performance than those that had not attended such training ( i b). forty-two entrepreneurs had taken part in some form of training and development in the strategic planning area, while 7 table 1 planning orientations structured strategic planning (ssp). formalized, written, long-range plans covering the process of determining major outside interests focused on the organization; expectations of dominant inside interests; information about past, current, and future performance; environmental analysis; and determination of strengths and weaknesses of the firm and feedback. typically 3-15 years in nature. structured operational planning (sop). written, short-range operational budgets and plans of action for current fiscal period. the typical plan of action would include basic controls such as production quotas, cost constraints, and personnel requirements. unstructured plans (up). no measurable structured planning in the firm. 31 had not. anova tests failed to support hypothesis (ibi on any of the four dependent variables. however, the differences which did exist were in the predicted direction in all four cases. what may be occurring is the lag effect that montanari and keats (1986) talked about. bracker and pearson (1986) indicated that two or three iterations of the planning process are necessary before significant financial results will become apparent. then again, the training itself may not have been well conceived or extensive enough, thereby making it difficult to assess the true impact of training. the lack of significant findings may imply that the prevailing opinion that mangum et al. (1990) cite is correct: too many variables enter into profit determination to single out the impact of any incremental training expenditure. however, since the results were in the predicted direction, the authors believe that this would be a premature conclusion. statistical analysis of hypothesis 1 c revealed three sources (p & .01)of significant difference: growth in revenue, growth in the value of the firm and ceo cash compensation growth. the followup scheffe analysis revealed that ssps were more effective than any other type of planning. no differences were found among the other planning orientations (table 2). the fact that no significant results were found with regard to growth in net income is not surprising. since all these firms are privately held and founder-managed, a sound plan would stress tax avoidance through accelerated depreciation, use of tax credits when possible and increasing one's own compensation to reduce double taxation. one might hypothesize that prior business and educational orientation, size of the firm, and length of planning history may contribute to the prior findings. anova tests revealed no significant differences in business and educational orientation, size of the firm (sm/lg), or length of planning history (short/long) with regard to usage or non-usage of t & d activities. hence, it may be safe to assume that the results presented were not due to differences in the above. hypothcscs 2 revealed in the ssp group a significant difl'erence with regard to growth in sales f = 6.46 p & .05 for those that employed t & d (n =6) activities versus those who did not (n = 5). entrepreneurs herc expertenced a yearly growth rate of close to 85% compared to 8 table 2 ( lb) did t&d (t) did not t&d (nt) (42) (31) mean mean average growth sales (ags) 38.21 25.33 average net income (ani) 25.88 25.34 pv growth (pvg) 37.59 22.98 ceo growth (ceg) 36.56 26. 18 (lc) ssp (11) sop (29) up (33) mean mean mean (ags) 78.00* 29.00 22. 10 (an i) 42.60 27.20 19.04 (pvg) 69.50* 41.56 11.60 (ceg) 78.76* 33.60 16.30 *p & .01 vvp ( q5 vvvp ( iq 26% for those who did not employ t & d activities. no other significant differences were found in the other dependent variables (table 3). however, once again the direction in these other dependent variables was toward t & d. in the sop group significant differences in financial performance were found in growth in sales f = 2.76 p & .10 and ceo cash compensation f = 9.98, p & .ql for those who took part in t & d (n = 17) versus those who did not (n = 12). no significant differences were found in the other two cases, but once again the direction was toward t & d. an examination of the orientation toward planning revealed that the firms who employed t & d activities for the most part were higher up on the planning continuum than those that did not. though causality was not empirically shown, one might be inclined to believe that the implementation of t & d activities in these firms is a potential determinant of increased financial performance. the fact that many of these entrepreneurs'ash compensation grew at a rate of over 53% per year might reveal a sense of certainty and increased stability in the future due to the achievement of planned goals. with regard to the up orientation, none of the tests revealed statistically significant results. however, the results leaned in the opposite direction toward the 14 firms that had not undertaken t & d activities. this seemingly odd result was not a total surprise. when one looks at the reduced rate of cash compensation growth in the 19 firms that took part in t & d (9% compared to 26%) as contrasted with those that did not, it is clear that one of the most important results of sp training, the retention of asset base, is being practiced by these entrepreneurs. when the growth in the value of the firm, which is a representation of the total balance sheet, and intangibles in the firm were compared, no statistical difference is present. the protection of the balance sheet is crucial when the firm explores the secondary equity or debt markets. it seems clear that these 19 firms are implementing some of the components presented at an sp 9 table 3 (2) sspt(6) sspnt(5) sopt(17) sopnt(12) upt(19) upnt(14) mean mean mean mean mean mean (ags) 84.30»» 25.83 45.21*»* 21.77 18.72 28.19 (ani�) 35.00 34. 15 32.43 25. 75 17. 14 21.84 (pvg) 89.10 40.95 49.10 28.54 11.00 11.80 (ceg) 73.45 53.59 53.57» 14.69 9.69 26. 24 *p & .ol »»p 05 »»»p & 10 training and development program. of course, these firms may have gleaned (his knowledge from other sources. results of anova (3a) tests failed to reveal significant differences in financial performance between those that felt t & d was beneficial (n = 56) and those that did not (n= 27). this result was not unexpected since the total model was not significant when results of t & d activities were examined. additional tests of the group (3b) of 56 who felt t & d was beneficial revealed no significant differences between the 37 iirms that employed t & d activities and felt them to be beneficial and those 19 that did not but felt they were beneficial (table 4). the resul(s were moving in the direction of t & d. firms that employed t & d activities and felt they were beneficial on average for growth in sales, growth in value of the firm and growth in ceo cash compensation increased at a rate of over 15% per year compared to those who had not participated. five entrepreneurs who had taken part in t & d activities found them not to be beneficial while 12 who had ncvcr been exposed to strategic planning t & d activities felt they would not be of benefit (3c). though no significant difference was found on any of the financial performance measures between these two groups, the direction favored those that had taken part in training in three of the four variables. these margins were 19% greater for growth in sales, 31% greater for growth in value ol'he firm and 13% greater in ceo cash compensation. average income growth was almost 12% per year higher in thc group of firms that believed t & d was not beneficial and had never taken part in these activities. from a cash flow standpoint these entrepreneurs were taking home considerably less than the others due to double taxation. these entrepreneurs displayed a lack of knowledge in tax accounting that even a basic strategic planning t & d program would cover. this entire group of 17 entrepreneurs may feel that some breakthrough invention would carry them through hard times and that the formality they perceive in either t & d activities or planning restricts their creativity. limitation, directions for future research, and conclusions training and development as a discipline and as a 'practice has received a great deal of attention over the last decade in the assistance of entrepreneurs. tying t & d activities to firm performance will benefit both researchers and practitioners. tangible results can help researchers io table 4 (3a) t& d beneficial (t) t&d not beneficial(nt) (56) (17) mean mean (ags) 32.47 35.13 (ani�) 23.66 32.19 (pvg) 26.55 47. 30 (ceg) 31.27 35.07 (3b) t& d beneficial (t) t&d beneficial(nt) (37) (19) mean mean (ags) 37.46 22. 75 (an i) 26.23 18.68 (pvg) 32.36 15.27 (ceg) 35.60 22.84 (3c) t&d not beneficial(t) (nt) (5) (12) mean mean (ags) 48.86 29.41 (ani) 23.33 35.88 (pvg) 76.33 35.20 (ceg) 43.67 31.49 "p & .01 vip & 05 vvvp 10 and practitioners complete necessary and rigorous cost-benefit analyses. rather than looking strictly at the individual or a group's pcrformancc, an organization's performance (relative to training) should also be investigated. the evaluation of such research on established businesses is important. these firms are the future apple,. intel, medtronics, paychex's and microsofts of the future. to date, very little research has attempted to do this. in today's competitive and dynamic environment, this is becoming increasingly important. the present research breaks new ground in this direction. there are, however, some limitations which cause us to be cautious about the results but which also raise some additional and very interesting questions. first, the sample, although representing a more than adequate response rate, is fairly small. hence, exploratory analyses produced some small cell sizes, making it difficult to generalize from the data. also, the data represent only one subset of one industry. although this is an advantage from the perspective of a case analysis, it also makes generalization to other populations difficult. in addition, since the study is b&escd on entrepreneurs in only one industry, it may not be fair to claim that it was thc training which had no impact. these lirms and the individuals who tt run them are typically characterized as innovative. hence, training may not have as much of an impact on these individuals or in this type of setting. however, the fact that a difference does exist (in the predicted direction) gives hope to the fact that training might make a difference. one alternative explanation of our study's findings is that for the most part strategic management development of entrepreneurs has been flawed in many respects. for instance, many professional trainers or academics take canned large firm programs and downsize them to entrepreneurs without taking into account the differences in orientation between professional managers and entrepreneurs. this practice may have resulted from a lack of qualified individuals, both academic and entrepreneur, to train entrepreneurs. also, academics who had the ability to create meaningful learning experiences lacked firsthand knowledge of entrepreneurship necessary to communicate with entrepreneurs in most instances. more specific information as to the background of the executives participating in the study needs to be known. while it is known that they are well-educated and experienced individuals, the exact extent and nature of their previous strategic management development was not known. while most strategic management training programs encompass similar topics and methods of presentation, the respondents in the current study did not all participate in the exact same training programs. hence, in-depth speculation as to why these individuals responded as they did or why their firms performed as they did was not really possible. another area in need of research is the strategic management development process, that is, how and why does training have the impact it does. if we are to believe that there are many variables that impact the process, then we need to know more specifically what type of training (e.g, content and/or methodology) will positively impact an organization's profitability. this research also raises interesting questions regarding an organization's planning orientation. regardless of whether a firm is large or small, entrepreneurial or not, it will undoubtedly fall somewhere in the continuum of planning orientation presented in table 1. the interaction effect found in this research indicates that it may be important to investigate organizations'trategic orientation as well as their training practices when doing research in training results. organizations have become far more strategic in their orientations. hence, the linkage between training results and the organizations'bottom-lines" may be scrutinized more carefully. in the past, trainers have been most concerned about imparting knowledge, skills and abilities. while this still remains important, it is clear that the criteria for successful t & d must be expanded to include how ksas impact an entrepreneurs'rganization performance. this level of analysis has been suggested in the past, but rarely has it been a factor in training evaluation. it is hoped that the current research will open these doors so that future research and training designs incorporate the necessary data collection. references berry, j. 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(1979).the impact of comprehensive planning on financial performance. academy vf management journal, 72, 516-526. zeithaml, c.. & fry, l. (1984). an einpirical eraminaiion of mature businessesin four dynamic performance siiuaiions: ciimexiual and strategic differences. paper presented at the 44th annual meeting of the academy of management, boston. 14 http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2021, vol. 31, no. 02, 01-05 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2021 small business institute® w w w. j s b s . o rg introduction 1department of marketing and market research, university of granada, campus cartuja s/n,18071, granada, spain, manuelalonso@ugr.es 2facultad de cs. económicas y administrativas, universidad católica de la santísima concepción, alonso de ribera 2850, 409054, concepción, chile 3administration department, universidad católica de la santísima concepción, alonso de ribera 2850, 409054, concepción, chile, ollanos@ucsc.cl 4anderson school of management, the university of new mexico, albuquerque, nm, 87131, usa, rmahto@unm.edu marketing strategies in family firms apa citation information: alonso dos santos, m., llanos contreras, o., & mahto, r. v. (2021). marketing strategies in family firms . journal of small business strategy, 31(2), 01-05. family-owned firms are the most dominant form of business entities in market economies around the world (poza & dauguerty, 2013). for example, these firms represent 70% to 90% of all firms in europe, 70% of all firms in the usa and australia, and up to 98% of all firms, according to some estimates, in latin america. in african and middle eastern countries, family firms play an equally important role (basly, 2017; llanos-contreras & jabri, 2019; zellweger, 2017). family firms are central for many countries not only from an economic perspective, but also in terms of their social role in regional development (basco, 2015; llanos-contreras & alonso-dos-santos, 2018). prevalent in family firm literature is the attribution of their uniqueness to family ownership and family influence. family identity is a resource that influences consumer behavior and their response to communicational stimulus (alonso dos santos et al., 2021; sageder et al., 2015). thus, the family identity of a firm is a source of differentiation that can be commercially exploited (botero et al., 2019). while research based on socioemotional wealth acknowledges that these organizations are especially focused on protecting their reputation and family name (alonso-dos-santos & llanos-contreras, 2019; berrone et al., 2010), articles utilizing the resource-based view suggest these organizations retain valuable idiosyncratic resources that impact the lives of their customers and stakeholders (craig et al., 2008; gallucci et al., 2015; zellweger et al., 2010). furthermore, empirical findings confirm the positive benefits of communicating the family control of the firm to firm stakeholders, such customers, employees, and the local community (deephouse & jaskiewicz, 2013). the aforementioned economic and social importance of family firms, when combined with the significant communication and marketing potential of a firm being acknowledged as family owned, creates a rich area for scholarly exploration. some progress achieved in the area more recently includes: (1) understanding the strategies employed by family firms to communicate their family component/identity through websites (botero et al., 2013; micelotta & raynard, 2011), (2) identifying factors impacting firm image and types of strategic actions enhancing their family brand (binz et al., 2013; marques et al., 2014), and (3) assessing consumer response to firm communications emphasizing family nature, such as signals through a firm’s product packaging (alonso-dos-santos et al., 2019; beck & prügl, 2018; lude & prügl, 2018). family firms’ branding and reputation has attracted family firm scholars’ attention in recent years. however, the application of marketing theories to family firms has witbranding and reputation plays an important role in determining firm behaviour and outcomes. these well-known marketing concepts have attracted attention of family firm scholars as well. however, despite the significant growth in family firm literature over the last two decades, the application of marketing theories and concepts in family firm context is limited. thus, there is an urgent need for a better understanding of reputation, branding, communication, and marketing perspectives in family firms. the goal of this special issue is to enhance our understanding of marketing strategies in family firms. this special issue features 5 articles that represents the work of 12 scholars from five different countries. manuel alonso dos santos1, 2, orlando llanos contreras3, raj v. mahto4 family firms’ reputation, family business identity, family firms reputational advantage http://www.smallbusinessinstitute.biz http://www.jsbs.org 2 m. alonso dos santos, o. llanos contreras, & r. v. mahto journal of small business strategy / vol. 31, no. 2 (2021) / 01-05 nessed a slow progress in academic journals. there is an acute scholarly need for understanding the reputation management of family firms and how to make the most of it from a branding, communication, and marketing perspective. accordingly, articles in this special issue have been selected because of their contribution in making progress on this theme. this special issue is publishing five articles, which present the work from twelve scholars from five different countries and nine different universities. the articles address issues related to customer-family business relationships, perceptions of family businesses and customer behavior (purchase intention), risk aversion and marketing collaboration with other businesses, digital marketing strategies for family businesses and reputation and family identity. in terms of methods, most of them are based on quantitative data analysis with one using regression analysis and two others utilizing structural equation analysis. one article is based on a mixed research design and one is a systematic literature review. discussion and contributions the article by cuevas-lizama, llanos-contreras and alonso-dos santos entitled, “reputation and identity in family firms: current state and gaps for future research” explores the strategic value of reputation and the transmission of a family firm’s family identity. this research uses a systematic literature review approach, studying 56 articles indexed in the web of science database, to analyze the current state and evolution of the topic, the impact it has had in recent years, and to identify relevant research areas with their respective contributions and research gaps to guide future work. the analysis of this work reflected seven research topics related to reputation and family image, finding greater relevance in works that analyze the sources of advantages of the reputation of family businesses and how the priority to preserve it influences their strategic behaviors such as investments in r&d and their socially responsible activities. other papers found in this article advance study themes that the transfer of family identity effects both in financial markets, where family firms seek to be transparent in order to take care of their image, and in the consumer market, where they have a better response compared to non-family firms. finally, this work highlights opportunities for future research by considering other less studied areas that detail how family firms transmit family identity to internal groups, the diffusion strategies they have with external groups, and the effects of reputation on performance. botero and litchfield-moore make contributions by assessing the perception about family firms. based on signalling theory and the theory of reasoned action, the authors predicted that the family identity would be a signal which determines consumers’ perceptions, attitude, and intention to buy in relation to family firms. this research included four studies to respond to the question “what are the associations that customers have with products and services from “family-owned businesses”? study 1 was based on the analysis of qualitative data from a four-question survey to 87 students from introductory courses. study 2 considers data collected from a 73 item survey which was responded to by 145 college students. items in this survey allow the quantitative assessment of perceptions about family firms, attitude toward these organizations and intention to buy and work for these firms. study 3 included additional responses from another 90 college students. unlike study 2, here questions on intention to buy and intention to work were asked to different groups to make the survey shorter and easier to answer. finally, study 4 was focussed on exploring the generalizability of their previous results and included 65 working professionals (in addition to 54 new students) in the sample. results are in line with research suggesting that communicating the family identity of a firm would result in a positive response from consumers (alonso dos santos et al., 2021). botero and litchfield-moore confirm that “family-owned businesses” would have an advantage in using their identity as part of their communication and marketing strategies. results suggest that consumers would have positive perceptions about organizational values and neutral perceptions about products and services offered by family firms. the authors concluded that “as suggested by the theory of reasoned action, these perceptions affected attitudes and intentions towards family owned business.” the work from gonzalez-lopez, buenadicha-mateos, barroso and sanguino deals with the theme of digital marketing strategies in family firms. more specifically, the authors analyse the online presence and differences between ibero-american and american family firms in the world. based on information provided by the family business global index (fbgi), this article aimed to respond to the following two research questions: (1) does the quality of a corporate website and the presence in social networks influence the family firm’s turnover? and (2) are there significant differences between ibero-american and american family firms regarding online presence, in terms of quality of corporate websites and presence in social networks? the article analyses content, form, function and presence in social networks. this work is important because the profound influences of social networks and internet in communication and marketing strategies in all the different economic sectors around the world (alonso dos santos, calabuig moreno, crespo et al., 2016; alonso dos santos, calabuig moreno, rejón guardia, et al., 2016). internet is not only the one of main and more accessible communication channels for large and small businesses, but also it offers a wide range of options to develop flexible and focused marketing strategies. among other findings, this article results show that there is a negative relationship between website quality and company turnover and a positive relationship between social networks and company turnover. this is important for family firms because it provides insight into the effectiveness of different communication channels and strategies they have access to. also, the study did not find significant differences among the family firms of the two regions with 3 m. alonso dos santos, o. llanos contreras, & r. v. mahto journal of small business strategy / vol. 31, no. 2 (2021) / 01-05 respect to online presence, which suggests similar availability of this resource in both regions. thus, this work contributes to the specific topic of our special issue by making progress in the understanding of marketing strategies in family firms. the article also makes progress in family firm literature, by integrating concept and construct from the marketing research. from a managerial view point their findings are important as they shed light on the importance of enhancing family firms’ online presence, and the power of building strong family firm brands based on this online presence. the article entitled, “personalized service and brand equity in family business: a dyadic investigation of how family business owners’ time servicing customers impacts work overload: spillover effects in delivering a personalized service and in building brand equity” by velasco, lanchimba, llanos-contreras and alonso-dos santos focused on the understanding of demand and resources on the firms’ brand equity. more specifically, this research focused on answering the question of (1) how family business owners’ time in serving customers, work overload, and collaborative organizational citizenship behaviours interact and influence the delivery of personalized services in small and medium size family enterprises, and, (2) how these relationships ultimately influence these firms’ brand equity. in this way, the article made progress on the understanding of how family business owners’ time in servicing customers triggered a chain of effects (positive and negative) which finally impacted on small and medium family enterprises’ brand equity. the authors’ study is highly important and relevant because brand equity is closely related to corporate reputation and accordingly, it would not only be a good way to assess reputation in family firms, but also to understand factors that enhance or harm it. this is particularly important in family firms as the firm reputation is closely tied to the family reputation and it is one of the most salient socioemotional wealth priorities (deephouse & jaskiewicz, 2013; llanos-contreras & alonso-dos-santos, 2018). the findings in this article are relevant and make an important contribution to theory and practice. from a theoretical viewpoint, the study sheds a light on the connection between brand equity and firm reputation. it is important as it suggested that brand equity would be a good proxy to assess reputation in family firms. theoretical contributions are made also to marketing and reputation theory in family firms by integrating the analysis of resources and process to reputation theory. in this way this article goes beyond the analysis of the sole effect of communicating the family identity and integrates the study of the process which is central in the marketing strategy. from a practical viewpoint, family-business managers can learn by identifying strategic resources and processes that influence their firms’ brand equity and ultimately the family and firm reputations. controlling these resources and process would be central for managers in order to preserve their firm and family reputation. ibáñez’s paper, “inter-firm marketing collaboration in family businesses: the role of risk aversion”, explores how risk aversion in family firms influences their non-financial strategic decisions to collaborate in marketing. this research addresses two issues barely explored in the family firm literature: (1) the influence of risk aversion on the decision to collaborate to develop marketing capabilities and (2) the choice of a partner known or unrelated to the family firm for this cooperation. the author proposes that both decisions are made simultaneously. she uses a bivariate probit method to evaluate the decision to enter into a collaborative relationship and the choice of a partner in a single econometric model. results suggest that family firms that are more conservative in terms of risk-taking are less willing to engage in collaborative relationships for marketing activities. however, these firms are willing to take a risk by collaborating with a partner they do not know (rather than a known partner). this apparent dichotomy is consistent with previous research showing that family firms are both risk-taking and risk-averse in order to preserve socioemotional wealth (gómez-mejía et al., 2007). in this case, socioemotional preservation would not only be related to risk-taking decisions, but also to their priority of preserving good standing with people they have close relationships with by avoiding engaging in partnership with them. this article contributes to family business research by extending the study of risk aversion beyond the financial and economic decisions of family firms. concluding thoughts in summary, this issue of journal of small business strategy is a special issue on “marketing strategies in family firms”. the five works in this special issue significantly enhance our understanding of family firm reputation from a strategic marketing viewpoint. the studies in the special issue contribute to reputation theory in family firms, as well as to knowledge in marketing and communicational strategies for these specific types of organizations. the articles in this issue allow the readers to know the state of the art from a theoretical viewpoint, but also to analyse empirical findings in relation to the effect of communicating the family firm identity, the influence of family identity in the world wide web, the importance of small and medium family firms’ resources and demand in building brand equity, and the importance of risk-taking aversion toward collaboration on developing marketing capabilities. from a managerial perspective, this special issue provides important insight for family firm owners and managers in relation to the impact of leveraging their family identity in their marketing strategies. also, practitioners can learn about mechanisms, processes and resources which would drive the successful implementation of such strategies in these firms. references alonso dos santos, m., calabuig moreno, f., crespo, j., & núñez-pomar, j. m. 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(2010). exploring the concept of familiness: introducing family firm identity. journal of family business strategy, 1(1), 54-63. https://doi.org/10.1016/j. jfbs.2009.12.003 strategy table of contents page title/author i the impact of training and development activities on small technology oriented entrepreneurial firm performance jeffrey s. bracker debra j. cohen 15 sbi intervention: an old problem —a new perspective william t. jackson george s. vozikis emin babakus 31 the small business screen: a way to evaluate small business opportunities jerry kopf henry h. beam 39 the formal and informal venture capital industry w. keith schilit 51 developing expert systems for small business: an application for selecting a legal form of organization ronald s. rubin james m. ragusa special section 63 opportunities for small business in the global marketplace patricia f. saiki. administrator, small business administration 67 flexitime and the compressed work week: possible strategies for smaller firms to increase employee performance and satisfaction joseph c. latona flexing the leadership muscle: an international study of entrepreneurial resilience in rural communities during the covid-19 pandemic | published in journal of small business strategy loading [contrib]/a11y/accessibility-menu.js jsbs menu articles articles all for authors editorial board about issues ethics statement sponsors search sorry, something went wrong. please try your search again. × articles blog posts rss feed enter the url below into your favorite rss reader. https://jsbs.scholasticahq.com/feed × articles vol. 31, issue 4, 2021 november 16, 2021 cdt flexing the leadership muscle: an international study of entrepreneurial resilience in rural communities during the covid-19 pandemic karise hutchinson, rachael fergie, emma fleck, georgann jouflas, zen parry, leadership resilience rural businesses crisis pandemic ccby-4.0 • https://doi.org/10.53703/001c.29484 photo by sincerely media on unsplash jsbs hutchinson, k., fergie, r., fleck, e., jouflas, g., & parry, z. (2021). flexing the leadership muscle: an international study of entrepreneurial resilience in rural communities during the covid-19 pandemic. journal of small business strategy, 31(4), 100–112. https://doi.org/10.53703/001c.29484 save article as...▾ pdf xml citation (bibtex) data sets/files (5) download all (5) table 1. small business sample characteristics download table 2. regional comparison download figure 1. data analysis process download figure 2: nvivo data themes and coding download table 3. data themes and representative quotes download sorry, something went wrong. please try again. if this problem reoccurs, please contact scholastica support error message: undefined × view more stats abstract the covid-19 global crisis and the ensuing lockdown of large parts of society and economic life has been an exogenous shock to society (kuckertz et al., 2020). it is predicted the impact on the small business sector is likely to be severe (fairlie, 2020). the findings of this international qualitative study offer a first-hand and real-time account of the adversity encountered by small rural businesses during the first lockdown in the covid-19 pandemic and insight into how their leaders exercised resilience. drawing upon the evidence from 38 small business entrepreneurs and four business support organizations, the data pointed out three main challenges in terms of adversity relating to business model change, information flow and sense-making, and weak strategy. the study also brings new insight into five leadership practices and behaviors that help exercise entrepreneurial resiliency: personal and business experience of crises, positive mindset, personal faith, learning and leading, and relationships. introduction the lockdown of large parts of society and economic life resulting from the covid-19 pandemic has been an exogenous shock to small and medium-sized enterprises (kuckertz et al., 2020). while the full impact is yet known, ramifications for small businesses are likely to be severe (fairlie, 2020). in comparison to large firms, a crisis like this threatens the functioning and performance of the small business by disturbing the structures, routines, and capabilities of the organization (williams et al., 2017). therefore, for small business entrepreneurs navigating the sudden, deep, and widespread impacts of the covid-19 global pandemic, there is a need for solid leadership and resiliency that is not called forth every day, indeed rarely in most lifetimes (cook & moore, 2020). the premise of the research extends the metaphorical expression by hutchinson (2020), which sets out the pandemic crisis akin to the ‘gym of adversity’ where the leadership muscle is exercised by the entrepreneur. considering scientific evidence that confirms external resistance builds muscle strength, the hypothesis of this study proposes strength defined as resilience is dependent on how the leadership muscle is exercised. while resilience is identified as a key concept in the entrepreneurial crisis management literature (doern et al., 2019), there is little attention specifically given to crisis leadership in the context of small business. moreover, while there is recognition of the range of challenges posing resistance to small business entrepreneurs leading change in a crisis, the impact of rural location has yet to be considered. the overall aim of the study is to understand entrepreneurial leadership and resilience in rural areas during the initial lockdown of the covid-19 pandemic. the objectives of the study seek to understand in real-time, first, what types of adversity did small rural business leaders encounter at the early stages of the crisis (objective one), and second, what characteristics and practices helped these entrepreneurs exercise resiliency (objective two)? defined as rapid response research (kuckertz et al., 2020), this paper reports on the first stage findings of an international qualitative study, which involved interviewing 38 small business entrepreneurs and four business support organizations across four demographically similar rural geographical areas of northern ireland and three regions of the us (pennsylvania, montana, and colorado) during the initial economic lockdown period between april to june 2020.[1] the format of the paper is as follows; the first section defines the parameters of the study. the subsequent discussion provides a review of prior research relating to entrepreneurial leadership and resilience in the small business context. thereafter, the paper presents the research design followed by the findings and discussion of the study. in the concluding section of the paper, the limitations of the study and recommendations for future research are presented. defining the parameters of the study in this paper, a crisis is defined as a unique situation with unanticipated impacts that affect the cognitive, emotional, and behavioral aspects of leadership. the covid-19 pandemic of 2020 is deemed a unique crisis, specifically given its truly exogenous, uncertain, and global features, demanding a unique response from policymakers and business leaders (borio, 2020). while crisis can bring opportunity, there is no doubt this pandemic has brought new and unprecedented levels of adversity to the leaders of many business organizations. the economic focus of this research is the small business sector, which is predicted to be the hardest hit by the pandemic crisis (fairlie, 2020). for small businesses who operate with more limited resources and a higher propensity of risk of failure (herbane, 2010), there is no doubt a crisis such as this has called for extraordinary courage, resilience, and tough-mindedness by small business leaders beyond the ‘normal’ mini crisis states of small businesses (elkington & breen, 2015). while there is a dedicated field of study on crisis leadership, there is limited understanding of leader resiliency in a small business context. the focus of this study is not the management of processes and protocols, but rather the characteristics and practices of the small business leader that help exercise resiliency in a crisis. in doing so, this research takes account of the differences between small business and start-up organisations especially in a crisis (e.g. relationship with funding, growth aspirations, planning for exit, and operating business model). early research in the literature points to the vulnerability of new small businesses especially in the infancy period following start-up (cromie, 1991; smalibone, 1991; watson et al., 1998), that could be further complicated by a pandemic crisis. the small business literature recognizes the unique organizational characteristics not only in terms of size (such as management structure, resource attributes), but also in terms of geographical operating contexts (rural, suburban, and urban). the emerging research stream of ‘entrepreneurship in rural areas’ has found entrepreneurs do not simply operate in a rural context but are embedded in the business location (chege & wang, 2020; kalantaridis & bika, 2006; korsgaard et al., 2015). indeed, chitsaz et al. (2019) stated “the difference between rural entrepreneurship and entrepreneurship lies in the special conditions of rural areas such as the high risk, lack of facilities, and weak management”. therefore, this study will also explore the rural geographic context of the small businesses and if the location had any impact on leadership decision-making in the first phase of the crisis. entrepreneurial leadership and resilience: small businesses research to date, the concept of resilience either in an individual or organizational context has been expressed in different ways such as bouncing back from adversity (williams et al., 2017) or the ability to anticipate, avoid, and adjust to shocks in the environment (ortiz-de-mandojana & bansal, 2016). until recently, the examination of organizational resilience has focused upon larger businesses with little understanding of the small business and leader milieu (battisti & deakins, 2017; conz et al., 2017; sullivan-taylor & branicki, 2011; wishart, 2018). in a similar way, the study of crisis leadership has also primarily focused on skills, characteristics, and behaviors of large corporate or public sector organizations in extreme circumstances such as public health and safety crises (e.g., hadley et al., 2011; paquin et al., 2018, corporate and political scandals, financial crises (e.g., pang et al., 2006), and national terrorist attacks (powley & taylor, 2014). the enterprise research centre report by wishart (2018) and the literature review therein make an important distinction in defining individual or organizational resilience in the small business context. first, in terms of the characteristics that enable the continued performance under difficult circumstances, and second, the ongoing process of resilience developed over time. given the parameters of the study set out earlier, the following review will focus on two key areas of resiliency as identified by wishart (2018) relating to entrepreneurial leadership and small business organizational characteristics in a crisis. entrepreneurial leader resilience in a crisis entrepreneurial resilience is discussed in the literature in terms of traits and the development of resourceful behaviors and patterns (powell & baker, 2011). previous research has been found entrepreneurs exhibit higher levels of resilience compared to the general population (fisher et al., 2016), which has led to the idea of resilience as a precursor of entrepreneurship. the personal resilience of the small business leader is closely linked to previous life experiences (de vries & shields, 2006; doern et al., 2016) and there is strong consensus this process unfolds over time (bernard & barbosa, 2016). whether provoked by trauma early in life, failure, or business shocks (doern et al., 2016, 2019), the resilience process shapes the mindset of the entrepreneur enabling greater flexibility, motivation, perseverance, and optimism levels, which leads to a greater propensity for resilient business activity (ayala & manzano, 2014). leadership flexibility and adaptability in deploying different strategies at a time of turbulence or crisis are identified in the small business literature as critical (conz et al., 2017; smallbone et al., 2012), similar to extant studies in the crisis leadership literature (e.g., bennis & thomas, 2002; wisittigars and siengthai, 2019). recent small business research points out the role of visionary leaders and strategic decision-making (fachrunnisa et al., 2020) influencing employee behavior in a crisis (parker et al., 2015). indeed, social capital (being part of a social network) and social skills (ability to build and maintain relationships) whether formal or informal, has also been found to support opportunity recognition, access to resources, and emotional support for entrepreneurial leaders in a crisis (baron & markman, 2000; hoang & antoncic, 2003). small business organizational resilience in a crisis it is argued that small businesses are exposed to greater uncertainty and resource constraints compared to larger organizations, which pose obstacles to organizational resilience (wishart, 2018). while prior research points out the routes to small business organizational resilience may be multiple and diverse, the framework developed by weick & sutcliffe (2001) identifies four types of resilient capabilities in small businesses i.e., resourcefulness, technical, organizational, and rapidity. this research identified that small businesses fall short in all resilient capabilities except for rapidity (i.e., making decisions quickly in the face of adversity) (weick & sutcliffe, 2001). in some ways rapidity may serve as an effective approach to crisis management (reymen et al., 2015), but there is also the danger it prevents proactive planning and encourages firefighting in the face of crises (herbane, 2010). rather, it is the ability of the leader to manage change effectively which is argued as an essential precursor of resilience (ates & bititci, 2011). the ability to access finance, material assets, networking, and strategic and operational flexibility has been found to be important for resilience in small businesses especially in a crisis (pal et al., 2014). indeed, there is recent recognition that the lack of formal financial structure and forward planning in small businesses results in a greater reliance on government financial support for business survival, particularly evident during the covid-19 pandemic (kalidas et al., 2020). moreover, defined as dynamic capabilities, the ability to integrate external resources in the event of shocks is also important for small business resiliency (battisti & deakins, 2017). yet, research by mcguinness & hogan (2014) found the financial position of the small business in the run-up to an economic downturn is more important than the age or size of the company. rural entrepreneurship studies recognize the value of the remote geography, networks, employment, and natural resources for the entrepreneur and the community (korsgaard et al., 2015). further, ansari et al., (2013) acknowledged that rural entrepreneurship is considered as one of the solutions to reduce poverty, migration and develop employment in rural areas and that this form of entrepreneurship one of the most important solutions for sustainable rural development. however, the rural entrepreneurial leader is less understood and the extent to which the rural operating context yields organizational leadership resiliency has yet to be considered in the literature. on one hand, it could be an advantage given rural entrepreneurial leaders often possess a stronger understanding of resource access in their location (korsgaard et al., 2015). however, on the other hand, in rural communities, there is often a lack of economic development support, networked resources, and connectivity compared to urban and suburban areas (barber, 2020). given the dependency upon external support and resources in a crisis, not least broadband infrastructure for online selling during the lockdown, exploration of the rural ‘resilience’ factor for small businesses is worthy of attention. research design qualitative rapid response research a qualitative rapid research design was deemed appropriate to explore how the leaders of small entrepreneurial businesses were navigating the business challenges of the covid-19 crisis in real-time (kuckertz et al., 2020). previous research has shown qualitative research is not only useful in the rapid response research context (finlay et al., 2013), but appropriate for the study of crisis leadership (guptill et al., 2018; e.h. james & wooten, 2010; moore, 2018) and in areas where existing knowledge is limited (miller, 1992). qualitative semi-structured interviews were identified as a suitable method to capture in-depth data (digicco & crabtree, 2006) as well as hearing the experiences of research participants in the crisis moment (austin & sutton, 2014) instead of after the event (kuckertz et al., 2020). given the time-sensitive nature of the research study, a convenience sample of 38 small businesses operating with less than 49 employees in rural areas were identified utilizing the network of academic investigator’s contacts (jager et al., 2017). as defined by us census bureau) a rural area is characterized by large open spaces and small population settlements relative to the national context (kalantaridis & bika, 2006). convenience sampling while contested on the basis of potential low credibility (saunders et al., 2020), is also the most popular method of non-probability sampling (bornstein et al., 2019). an overview of the characteristics of the 38 businesses that participated in the study is presented in table 1. table 1.small business sample characteristics organization characteristics number of businesses industry sector retail, hospitality, and events 8 architecture, construction, environment 6 art, design, music 6 health and beauty, sport 5 education, childcare, youth, outreach 4 accountancy, consultancy 4 manufacturing 3 digital, marketing 2 n = 38 ownership (legal status) limited liability company 14 s-corporation 11 sole trader 4 self-employed 4 non-profit 4 partnership 1 n = 38 turnover* (dollars) less than $70,000 9 $70,000-$100,000 3 $100,000-$500,000 22 $500,000-$1million 1 $1million + 1 n = 36* employees (full time or equivalent) less than 5 19 5-9 10 10-49 9 n = 38 years of operation 1 year or less 1 2-5 years 8 6-10 years 11 11 + years 18 n = 38 *2 small business leaders did not disclose turnover (data extracted from interviews conducted) the study also included interviews with the leaders of 4 business support organizations who have an important stakeholder role supporting small business leaders through the pandemic, not least providing information on government regulations and sign-posting to resources. in a similar approach to the ecosystem perspective in other entrepreneurial crisis studies (kuckertz et al., 2020; spigel & harrison, 2018), their insight helped triangulate the data from the entrepreneurs. a cross-country comparison of the four regions displayed in table 2 confirmed the rural location of the research based on population density. similarities were identified in terms of key characteristics (e.g., age population, household size, poverty, and education) as well as some distinctions (household income, employment, race, and reliance on public sector employment). table 2.regional comparison northern ireland (causeway coast glens) pennsylvania (union county) montana (lake county) colorado (mesa county) population 144,838 44,923 30,458 63,374 geographic area (sq mile) 764 315 1,490 3,309 population density* (per sq mile) 189 142 20 19 average age (years) 38.5 39.4 41.8 39.1 racial groups (%): white 98.21 89.10 71.38 81.5 black 0.20 7.10 0.12 0.7 hispanic/latino 6 2.5 14.4 asian 1.06 1.80 0.04 0.9 native americans 23.79 0.9 least degree educated (% over 16) 34 25.50 28 27.4 employment rate (% over 16) 71.70 49.80 56 57.7 median household size 2.42 2.42 2.46 2.4 median household income ($) 31,086 56,023 45,488 53,683 poverty rate (%) 19 11.30 18.20 16 occupations (%): business/management 36.10 34.80 35.4 sales 18.8 19.50 21.5 production/transport 17.40 12.40 12.1 natural resources/ construction 5 9.50 12.70 13.1 service 14 20.60 17.9 public admin sector 25.0 3.25 8.65 4.2 (data extracted from the us census bureau and the northern ireland statistics and research agency) *the us census bureau defines urban and rural areas on the basis of population density. rural areas consist of open countryside with population densities less than 500 people per square mile. data collection data was collected from mid-april 2020 through early may 2020. a semi-structured interview protocol was informed by the review of the literature on small business resilience, crisis leadership, and rural entrepreneurship domains. the interview protocol was developed and reviewed by all members of the research team to ensure consistency and clarity, which was important given the international and cross-cultural context of the research. the researchers collected consent from the participants, with interviews conducted as person-to-person phone calls with notes assembled after the phone call or on the video platform zoom with recorded interviews (kuckertz et al., 2020). the semi-structured interview format with 25 open-ended questions provided a framework for discussion, which allowed for flexibility within the interview process based upon the constraints and opportunities at the time (dana & dana, 2005; m. patton, 2002) as well as the interviewee context (whether entrepreneur or business support organization leader). all respondents answered 25 questions during the interview of which, eight questions were the main focus of this paper (i.e., the adversity and impact of the crisis and leader behaviors and practices helping small businesses exercise resiliency). for confidentiality reasons, participating firms are identified with letters relating to country (ni, pn, cl, and mt) and number (1, 2, etc). data analysis interpretative phenomenological analysis was adopted in this study in a similar way to hennekam and shymoko (2020) who examined how people responded to the impact of covid-19. before the analysis process, the interviews were transcribed and analyzed on nvivo (saunders et al., 2020) by all members of the research team both individually and collectively. thereafter, a four-stage process of data analysis was carried out. see figure 1. figure 1.data analysis process (research data analysis process designed by authors) during the first stages of analysis, the researchers read the transcripts multiple times to make sense of the data (familiarization) and to gain an appreciation of the whole story (senior et al., 2002). to ensure cognitive and effective sense-making, the researchers then came together to discuss the interview data given the international and cultural differences occurring within both the research team and the respondents. the second stage of analysis (immersion and sense-making) required returning to the transcripts. moving between inductive and deductive positions, initial ideas and understandings from the data were connected by identifying and classifying preliminary themes and clusters (eatough et al., 2008). caution was taken to ensure there was no disconnection between the participants’ words and the researchers’ interpretations, including any potential differences in cultural context. the connection between higher order themes and sub-themes were then identified in the third stage of the process (see figure 2). the final stage examined key themes using literature and theory as a lens to view the analysis and make sense of the data in an iterative way (charlick et al., 2016). figure 2:nvivo data themes and coding findings and discussion the overall aim of the study was to better understand entrepreneurial leadership and resilience in a rural context during the covid-19 pandemic. the subsequent discussion is structured according to the data from 38 small business entrepreneurs and four business support organizations regarding the types of adversity encountered by small rural business leaders at the early stages of the crisis (objective one) and the behaviors and practices that helped entrepreneurs exercise resiliency (objective two). table 3 illustrates the representative quotes according to key themes emerging from the findings of the study. table 3.data themes and representative quotes themes data coding interviewee coding representative quotes business model change internal pressures business level decreased/ halted pn3 “the main business is on hold at the moment, so we do have time to talk and think through strategies at this time” ni4 “literally within 3 to 4 days everything was gone. all of our work for all of our hospitality clients, all of our events. and then all of our face to face with the public” business model change internal pressures loss of jobs cl3 “keeping core employees working [is a challenge]” mt1 “my priority is to retain my staff who all work for low wages, support families and are typical single parents” business model change external pressures lack of government support cl11 “never designed to serve all the business all at once” pn4 “however collectively, our systems have been exposed in uncomfortable ways and i am alarmed by the government’s response to certain populations. there are massive inequalities” information challenges information flow information overload cl2 "changing every day, even hourly early in the crisis" cl11 " inundated with too much information. need to spend time vetting the source" information challenges information flow confusing information ni1 "so, there’s a real, a lot of ambiguity, a lack of clarity – it’s ridiculous" mt1 "offering the loan (ppp) is good but their interpretation of the loan is confusing and how the loan will be awarded is also confusing" weak strategy financial priority cash flow ni1 "so that’s the big financial concern for me at the moment is that support that other self-employed people maybe are getting, so i’ve been having to shout a little bit about that, an unexpected leadership role" cl5 "being able to pay bills with decrease income [is a challenge]" weak strategy planning no crisis recovery planning ni4 "there was no plan as to how we could do anything else" mt2 "i have no backup plans for this situation and can only follow the state orders to self-isolate" previous crisis experience personal experience ni2 “i lost my hearing over 10 years and i had operation, so i know that this will end and a new chapter will begin at some point” previous crisis experience business experience mt2 “i am resilient and am confident i will get through this, having survived the financial crash in 2008” mindset hopeful cl6 "do you know how many blessings we still have…. [so i am] hopeful. more hopeful than ever because people true colors have come out" pn9 "therefore, i am incredibly hopeful about the future, especially some new business ventures i am gearing up to launch between april and june 2020" mindset positivity pn4 “we are productive so we are positive about what the future holds” cl1 “i anticipate coming back from the covid-19 in a stronger position than before” mindset adaptability seeing and seizing opportunity cl4 "huge opportunity. normally conversion rate 30%, now 112%. the people that come to store actually buy, not just look. lean business so good. discovered that what we were doing is entertainment, not selling. could start charging people to come in the store…for entertainment." ni10 "so, i’d like to get a couple of hundred thousand from all four jurisdictions which would allow me to buy another business that i’m after. so, i’m going to go looking for businesses to buy now because they’re frightened" cl2 "trying to diversify income stream [online]" ni8 "the third thing is all about future, it’s all about what we look like, how we do it, what we can be and what opportunities are out there" personal faith cl1 “i also first pray to god for guidance... i pray every morning for strength and joy regardless of what is going on” ni5 "my faith and power of prayer" learning personal learning ni6 "so yes, this is…there is going to be time for businesses and individuals to reinvent themselves and to retrain themselves so i definitely want to do that and depending how it goes i may actually start my italian gcse." ni10 "i’m in the middle of training. i’m always training. always training, always learning, always building networks of people that can help me round and inform me to make better judgement calls." learning business learning ni3 “i never would have thought of putting anything on myself and like why not, why not do that? playing about with different little apps, one called lapsit which takes time really quick time lapse video of you doing something” ni7 "so [they] are doing a bit of research and educating themselves about the tendering process because we found while we do have bigger projects a lot of our work is smaller clients. so these tender projects, one project would make up the income of five to ten smaller projects so it’s easier if you can get the tender in" learning not engaging in learning pn7 "this is not the time for this [learning]. i am trying to survive." mt3 "it is not important right now for me to take on new learning. i am too busy navigating the new reality as i get ready for the next normal" relationships family pn3 "my sons all went to college so i use them to gather information for me and they help me to make decisions" ni13 "i have quite a few friends that are doctors so they are sort of just waiting and i am quite anxious from that, whenever i see them starting to get through that and come out the other side, that will also be a guiding principle" relationships professional networks cl7 “we also have a strong network of leaders and advisors that we turn to for information” pn2 “we are relying on industry association people and our cpa (accountant) to help us make good decisions” relationships business to business support coaching/ mentoring cl9 "always a big believer in business and personal coaching" mt6 "our board of directors have really stepped up to share their wisdom and what they have lived through, which is an invaluable form of mentoring" (information extracted from interviews) types of adversity the small business leaders identified a range of different types of adversity at the onset of the crisis, which yielded three key challenges relating to business model change, information, and strategy. the results showed over a third of business leaders faced immediate and serious consequences to their business model, yielding significant internal pressures of reduced or redundant business due to an inability to work from home. to illustrated, one leader stated, “literally within 3 to 4 days everything was gone. all of our work for all of our hospitality clients, all of our events. and then all of our face to face with the public…”. (ni4) while some of these business leaders also noted the loss of employee jobs as a main threat to the business, many did not. the data identified a link to weak strategy and specifically, a lack of business and crisis planning, which arguably poses a threat to long-term survival for these businesses (kuckertz et al., 2020; vargo & seville, 2011). notwithstanding this, all of the same leaders (except one) remained positive or hopeful that they would survive and emerge stronger from the crisis (see figure 2: linked to a positive mindset as discussed in next section). e.g. “i anticipate coming back from the covid-19 in a stronger position than before” (cl1) the data also linked the external pressures of poor government support on business model change to financial priorities and managing cash flow, identifying public funding intervention as critical to business survival. this supports recent research that the lack of formal financial structure and forward planning in small businesses results in a greater reliance on government financial support for survival in the covid-19 pandemic (shakeel, 2020). given the research was conducted at the very early stages of the covid-19 lockdown, there was great uncertainty, confusion, and frustration in the small business sector regarding government financial support, as well significant geo-political debates. difficulties in accessing government support were evident in the research, and more so related to specific industries (e.g., the arts) and the size of business (e.g., micro business where the leader is a freelancer). noteworthy is the link between the lack of government support to business leader’s feelings of hopelessness and uncertainty about the future. pn4 clearly stated, "our systems have been exposed in uncomfortable ways and i am alarmed by the government’s response to certain populations. there are massive inequalities" the final challenge in the adversity of the crisis was information flow. on one hand, business leaders identified information overload and lack of clarity from government, media, and business support networks, which resulted in feelings of being overwhelmed. however, over a quarter of businesses interviewed were relying on information from business support organizations to overcome the challenges of information flow and clarity. information gathering and assessment is identified in the crisis leadership literature as a critical skill in navigating the challenges of a crisis (see e.g., james & wooten, 2005), but a lack of experience or skills in this area can be problematic for small business leaders. this was confirmed by the business support organizations in the study who viewed it as their priority to help small business leaders make sense of the wide ranging, sometimes conflictive and repetitive sources of information. in some cases, business leaders did not trust information sources specifically from media and government sources, referring to the ‘lies’, ‘inconsistent’ 'unclear, ‘confusing’, and ‘gaps’ in information available. this was particularly evident in the usa sample and in montana where business leaders had already begun to avoid news headlines. leader resiliency and strength in adversity the findings also provided insight into the small business leadership muscle and resiliency (as the construct for strength) in terms of how it is exercised. the findings identified five factors of resiliency: personal and business experience of crises, positive mindset, personal faith, learning and leading, and relationships. firstly, personal and business experience of crises before covid-19, whether a prior illness, trauma, economic shocks, or business failure, provided more than a quarter of the leaders with a level of strength that fuelled hope and optimism not just to survive, but to emerge stronger from the crisis. it could be argued this finding is influenced by the established nature of the businesses in the study i.e., 29 out of 38 were operating for more than 5 years. indeed, mt2 states that, “i am resilient and am confident i will get through this, having survived the financial crash in 2008” our findings provide further evidence of the entrepreneurial resilience process linked to previous life experiences (de vries & shields, 2006; doern et al., 2016, 2019; mckinsey, 2020), which shapes the mindset of the entrepreneur (ayala & manzano, 2014). similar to the concept of muscle memory, it may be argued for these survivors of previous crises, leadership resiliency was regained faster and made it easier to relearn old skills even if not used for a long time. yet for others, the learning experience was not firsthand, but rather came from observing other leaders in crisis, or indeed understanding historical crises in their own industry. learning in this capacity is important especially where personal experience is not internally derived, in order to identify warning signs and avoidance of making mistakes in a crisis (mcconnell & drennan, 2006). a positive mindset despite the shock and great uncertainty of the crisis and lockdown, was evident in over half of the leaders who spoke positively with hope for the future. in some of these cases, the mindset of positivity was so strong, the leaders believed they would come out of the crisis stronger than before the crisis, despite the uncertainty of financial sustainability. one example of this was cl1 who claimed “i anticipate coming back from the covid-19 in a stronger position than before”. for the majority of these businesses, leaders talked about seeing and seizing new opportunities in the crisis, such as taking advantage of new customers online, diversifying of the business and even embarking on new business ventures. this was further supported by business support organisations who were witnessing the adaptability of some small businesses early in the crisis. our study points out that older businesses are also demonstrating adaptability in the crisis with many of them having already moved elements of their business online or at least imminent to do so after realising the benefits of the online environment. the leader’s ability to be flexible and adaptable in deploying different strategies at a time of turbulence or crisis is identified in the literature as critical to small business leader resilience (conz et al., 2017; smallbone et al., 2012), not least during the covid-19 crisis (alves et al., 2020; doern et al., 2019). indeed, it can be argued for these small business owners who lead with a positive mindset and a readiness to embrace change are more likely to identify positive outcomes in a crisis (e.h. james & wooten, 2010). drawing on the mind muscle connection concept, which identifies the importance of the brain and body working closely together, many of the leaders are displaying a critical mental shift away from catastrophising and dwelling on the negative and adapting to the change to find a way forward. personal faith as an anchor of strength in the crisis was passionately pointed out by some of the entrepreneurs in the study and was linked to a positive and hopeful mindset, also reinforced by the business support organisational data. in many ways this is unsurprising; spiritual leadership and crisis leadership is a small but growing area of academic study (firestone, 2020). on one hand, previous research has identified faith as a religious coping mechanism associated with courage, health and well-being of an individual (dantley, 2005; pargament et al., 2004). ni15 stated that they there coping through this situation using, “my faith and power of prayer” on the other, the role of spirituality has been found to support an organization’s response in a crisis, specifically helping to motivate and inspire employees (firestone, 2020). while there is some public debate about faith-based leadership (e.g., powley & taylor, 2014) and limited knowledge of small business and leadership, this study finds faith an important representation of holistic leadership practice and resiliency beyond traits, characteristics, and skills incorporating exercise of the body, mind and soul. learning and leading even at an early stage in the crisis was a distinct practice for over half of the small business leaders despite the shock, confusion, and uncertainty. these leaders were intentionally enhancing business knowledge by acquiring new digital skills on new courses (e.g., learning new digital marketing techniques) or on their own (e.g., watching tutorials on instagram and youtube) in order to better communicate with customers, clients, and other businesses in the crisis. in this case learning was not driven by business necessity but a desire for personal and professional continuous improvement. in fact, as also found by e.h. james & wooten (2010), 19 of the 21 business who identified as learning, were more inclined to be hopeful for positive outcomes in crisis. these leaders were exercising the resiliency of the leadership muscle by stretching and challenging their existing knowledge by intentionally setting aside time for acquiring either new personal knowledge by reading, researching and attending courses (e.g., to learn a new language). yet for other businesses, leaders felt overwhelmed and reported a negative attitude to learning in the crisis. just as strength training without stretching constricts the growth of muscle, leadership without learning can inhibit the ability to see and respond quickly to the opportunities in this crisis. strength garnered from family and social relationships as well as from professional and business networks, was reported by small business leaders and support organizations. almost half of the leaders reported peer support from business-to-business networks as well as opportunities to promote your business. on the other hand, almost one-third of the business leaders reported formal support from mentors and coaches. e.g. cl7 stated that they “have a strong network of leaders and advisors that we turn to for information” it was also interesting to note how a third of the business leaders explained the ability to share concern and worries with their family as well as their professional network. in the world of fitness, the role of the personal trainer or coach is deemed critical in delivering change over time. similarly, the literature clearly points out the importance of social capital (being part of a social network) and social skills (ability to build and maintain relationships) in influencing business success over time (baron & markman, 2000), and this becomes even more critical in managing crisis (a. patton, 2007). conclusion and recommendations our rapid research study contributes to research at the interface of the small business entrepreneurship and crisis leadership fields by providing evidence of how small business leaders in usa and the uk were exercising resiliency during the first stage of the covid-19 crisis. the uniqueness of this crisis, which has dramatically changed the political and economic environment across the world, is difficult to compare to previous studies of crises (alves et al., 2020). so, it is argued this study brings new insight and learning from the 2020 pandemic in a number of ways relating to the two objectives of this study. firstly, the evidence of the challenges of the crisis-induced adversity means there is no doubt of the scale of challenge encountered by small business leaders in terms of business model change, information flow and sense-making, and financial strategy, which were found to be transboundary, both geographically and cross-industry. while there is no denying the reality of the adversity and challenges reported, there was also strong evidence of positivity and hope for the future. despite the fact this study focuses on small businesses operating in rural areas, rural location or related factors were not identified as a challenge during the crisis. secondly, the literature is clear that leaders play a critical role in handling crisis in a positive way (erika hayes james et al., 2011), yet research evidence of small business leader resiliency is negligible. addressing this gap, this study contributes fresh evidence of the behaviors and practices that help small business leaders exercise resiliency, which is not only makes an important academic contribution, but has practical managerial implications. for instance, we recommend that small business leaders invest time in exercising the five factors of resiliency as well as engage in mentoring or coaching activity to ensure accountability in the change process beyond the more typical crisis management processes and procedures. resistance builds resilience: just as medical science advocates the benefits of external resistance in building muscle strength, in a similar way, great leaders know the greatest learning is found in hard times. for many small business leaders at this time, the pandemic has brought loss and disappointment, which has hurt business (much like exercise). to avoid staying stuck at a point of failure, leaders must make the shift from avoiding fear of the future to embracing the disruption of the crisis and the learning therein in order to forge a way forward for the business. thirdly, the dependency of many of the small business leaders to provide information and advice from government and charity-based support organizations was significant in the early stage of the crisis. but, even with the temporary lifeline of government financial support for the sector, the battle to find an economically and socially viable path to the next normal requires further mitigation and intervention. therefore, policymakers must not underestimate their role in supporting small business leaders beyond financial to include soft skills interventions and other supportive measures especially for the sectors hardest hit such as retail, hospitality, and tourism. in closing, there are some limitations to this study that must be considered. first, while there was considerable homogeneity across the four regions, we recommend caution when generalizing these findings across small business sub-sectors (given how some sectors have been harder hit than others) and in other geographical jurisdictions. secondly, given our research findings suggest crisis experience and history of the business are important factors in leadership resiliency, it is important future research includes a wider range of leaders and businesses in terms of experience, including young start-up firms. finally, resilience can be short-lived, as such, we also recommend a second phase of research to revisit each business to gain a longitudinal insight into how small business leaders continue to exercise the leadership muscle during the second lockdown of the crisis and post-pandemic recovery. the second stage of the study will collect data with the same business leaders post crisis in 2021 to understand 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(2018). business resilience in an sme context: a literature review. enterprise research centre and warwick business school. https://www.enterpriseresearch.ac.uk/publications/business-resilience-sme-context-literature-review/ powered by scholastica, the modern academic journal management system strategy editor's note it is a pleasure and honor for me to introduce this first issue of the journal of small business st rategy. developing the journal has proved to be quite a challenge. it would not have been possible without the insightful suggestions of the sbida officers, the editorial advisory board, sbida members and the publication secretary, jill burkey. the sbida officers feel that communication is essential for the growth and progress of both the small business institute program and sbida. the journal is presented as another vehicle to enhance communication efforts of sbida members. this first issue consists of the best papers which were submitted for presentation at the 14th annual sbida conference in february, 1990. in keeping with the intended scope of the journal, the articles cover a wide variety of small business topics. the readers will find quality manuscripts which should prove to be helpful to small business counselors as well as small business owners and managers. sbida is currently seeking a university sponsor for the journal. until an arrangement is made, the sbida officers will continue to publish the journal. we would like to expand the journal to two issues annually. we intend to provide special sections on new books or projects which would be of interest to our readers. we would like to hear from you regarding the types of articles and information you would like to see in the journal. we encourage you to take part in the development of the journal. i look forward to hearing your suggestions. gwen f. fontenot strategy publication staff fditor dr. joe singer umversity of missoun kansas city, missouri editorial assistant david k. hensley university ol missouri kansas city. missouri fditorial advisory board dr. david m. ambrose university ol nebraska-omaha dr. chi anyansi-archibong north carolina akt state university dr. henry beam western michigan university dr. robert brockhaus st. louis university dr. sam j. bruno university ol'ouston-clear lake dr. aaron buchko bradley university dr. james j. carroll georgian court college dr. ann dickson community college of rhode island dr. mark dollinger indiana university-bloomington dr. gwen fontenot marketing solutions dr. fred l. fry bradley umversity dr. lynn ho(l'man university ol'orthern colorado dr. lawrence klatt florida atlantic university dr. charles kuehl university of missouri-st. louis dr. stephen lucas university of north carolina-greensboro dr. david newton westmont college dr. mary nicastro capital umversiiy dr. inge nickerson barry university dr. john pearson arizona state university dr. neal r. pruchansky keene state college dr. peter rainsford cornell university ms. pamela schindler winenberg university dr. herbert sherman marist college dr. richard j. stapleton georgia southern university dr. harriet stephenson seanle university dr. howard e. van auken iowa state university dr. george vozikis the citadel dr. john wallace marshall university a joint publication o(the small business institute directors'ssociation and the henry w. bloch school of business and public administration. send subscription requests to randalei ellis. c.p.a., sbida secretary-treasurer, black hills state university, 1200 university, usb 9006. spearfish. sd 57799-9006. annual subscriptions may be ordered at $ 20 each (u.s. dollars only). international subscriptions add $5 annually (or postage and handling. back issues may be ordered at $ 12 each. tct copyright 1995 small business institute directors'ssociation l issn 1081-8510 69 sme internet use: the moderating role of normative influence kevin celuch university of southern indiana kceluch@usi.edu bryan bourdeau university of southern indiana bbourdeau@usi.edu carl saxby university of southern indiana csaxby@usi.edu craig ehlen university of southern indiana cehlen@usi.edu abstract of all electronic commerce technologies, the internet is particularly relevant to smes interested in improving efficiency and competitive position. a consistent theme in the sme internet adoption literature relates to the potential importance of accounting for normative influence. we extend thinking in the area by exploring the potential moderating effect of behavioral normative influence in sme technology acceptance. consistent with predictions, owner/manager perceptions of normative internet usage are found to interact with usefulness perceptions, which moderate the relationship between owner/manager perceived usefulness and internet usage intention. specifically, when normative influence is not perceived to be prevalent in the sme’s environment, perceptions that the internet could prove useful have a strong positive effect on ow ner/manager intention to increase usage of the internet. in contrast, when the sme context is perceived to be associated with strong normative influence, usefulness perceptions do not greatly affect owner/manager intention to increase use of the internet. keywords: internet use, normative influence, technology acceptance s trateg y journal of small business journal of small business strategy vol. 24, no. 2 70 introduction over the last 25 years, the business landscape has seen dramatic technological changes. electronic commerce, including the use of the internet, holds the potential to enhance business performance through improvement in efficiency and competitive position (turban et al., 2008; porter, 2001). the internet has been viewed as a powerful tool enabling small firms to “level the playing field” when competing with larger firms; few times in the history of commerce have there been truly major changes in the way business can be conducted available to small and medium-sized enterprises (smes) (levenburg, schwarz, and motwani, 2005). indeed, this potential accounts for firms allocating approximately 50% of new capital investment in information technology (westland and clark, 2000). over this same period of time, the importance of smes has grown as they have increasingly become a key component of many countries’ economies. when considering the definition of smes for the context of this research the term, sme covers a wide range of definitions and measures. different countries adopt different criteria such as employment, sales or investment for defining small and medium enterprises. hence different sources use different criteria in compiling relevant statistics. further, the definition of an sme on the basis of a specific criterion is not uniform across countries (ayyagari, et al., 2003). there is no universally accepted definition of an sme, even within the u.s. government. this situation reflects the relative nature of the “small” and “medium” classifications, which can apply differently to firms in the manufacturing, agricultural, and service sectors (u.s. international trade commission, 2010). for this research, we utilize the size standard in number of employees as classified by the united states small business administration, which also makes our data parameters consistent with world bank parameters for small and medium enterprises (ayyagari, et al., 2003). in general, u.s. businesses qualify as smes with 500 employees or less (u.s. sba, 2012). smes represent about 90% of the total number of firms worldwide thus playing a significant role in global employment opportunities (hall, 2002). smes account for approximately 60% of the total global workforce (kotelnikov, 2007). further, many sme’s are conceived as embodying valued characteristics of organizations such as possessing flexibility and innovativeness (al-qirim, 2007; liu, chen, and liao, 2005). of all electronic commerce technologies, the internet is particularly relevant to smes interested in improving efficiency and competitive position in that they are not able to make the significant technological infrastructure investments of larger organizations. as such, the internet may allow smes to realize the benefits of electronic commerce by allowing these firms to communicate with customers and suppliers, collect market information, provide information and promote goods and services, support the ordering of goods and services, and offer after sales support (doherty and ellis-chadwick, 2003). although electronic commerce technologies, including the internet, have been widely adopted by large companies, the adoption of these technologies by smes is lagging behind that of larger firms (kotelnikov, 2007; macgregor and vrazalic, 2006; lee and xia, 2006; lee and runge, 2001). large firm it adoption studies are difficult to generalize to smes because of fundamental differences between large firms and smes including the central journal of small business strategy vol. 24, no. 2 71 role of the ceo and the focus on generalist rather than specialist skills among employees in smes (thong, 1999). clearly, the decision making of small firms may be distinct from that of larger firms (celuch, murphy, and callaway, 2007). electronic commerce adoption by smes is an important topic as evidenced by increased research attention over the past decade (cf., kendall, et al., 2001; kaynak, tatoglu and kula, 2005; al-qirim, 2007). however, while more recent studies have been conducted in other countries to examine the use of the internet by smes, similar studies focused on u.s. small firms are sparse (levenburg, schwarz, and motwani, 2005). thus, it is recognized that understanding in the area is in need of further development and refinement (parker and castleman, 2007). internet usage consists of a range of behaviors with small business sector research emphasizing two primary domains: communication and transactions. we focus on customer communication as this is a discrete behavioral domain that holds implications for a firm’s ability to operate adaptively in its environmental (murphy, celuch, and callaway, 2007). liao, welsch and stocia (2003) suggest that internet use may facilitate external knowledge acquisition and internal knowledge dissemination which improves firm responsiveness. further, internet usage for communication with customers is a potentially important component of a small firm’s market sensing activity (johnson et al., 2003). firms responding to customer information may adjust product/service offerings (evans, 1991; achrol and kotler, 1999; day, 1999) thereby strengthening their customer-company connection. evidence suggests that intentions represent the underlying motivation to future behavior (azjen, 1991). thus, we argue that examining sme intention to use the internet for managing customer communication provides a “window” into the future customer responsiveness of the sme as these intentions are likely to be associated with other behaviors reflective of a customer orientation. the purpose of this research is to shed light on understanding sme internet adoption. while multiple perspectives have been used to explore sme internet adoption, a consistent theme to emerge from the literature is the potential importance of accounting for nuanced effects associated with normative influence. further, in work related to the broader technology adoption literature often applied in larger firm contexts, normative influence, while accounted for, has not heretofore been explored as a moderator. with respect to normative influence, social psychology has increasingly advocated focusing on a behavioral norm (i.e., an individual’s belief about what significant others are doing in a given context) in models explaining behavioral intention (kashima and gallois, 1993). we believe the concept of behavioral norms is relevant to understanding information technology use, particularly for smes with limited knowledge and skill resources as they may not approach the decision from an explicit strategic orientation but may instead look to the behavior of significant environmental stakeholders (i.e., customers, competitors, and suppliers) for direction regarding internet adoption. we extend thinking in the area by not only exploring the potential moderating effect of normative influence in the sme technology acceptance domain but also by including an underutilized normative influence construct, behavioral norm, which we believe has the journal of small business strategy vol. 24, no. 2 72 potential to enhance understanding of boundary conditions associated with sme internet adoption. we next provide background in terms of the technology acceptance theory, its extensions, and reasoning for normative influence as a moderator of sme internet adoption. sme technology adoption the theory of planned behavior (tpb) (ajzen, 1991) and the technology acceptance model (tam) (davis, 1989; davis et al., 1989) were developed to explain individual-level behavior. both have been applied to small firm e-business adoption given that the owner/manager is likely to be the primary decision maker in this context (de guinea et al., 2005; premkumar, 2003). the tpb conceives of attitude, subjective norm, and perceived control as immediate antecedents of sme technology adoption intention (harrison et al., 1997). in contrast, the tam emphasizes perceived usefulness and perceived ease of use as impacting attitude and intention toward sme technology adoption (grandon and pearson, 2004). while both the tpb and tam allow for the prediction of intention and subsequent behavior, they have been critiqued for failure to account for complexities tied to the social milieu. specifically, criticism of the tam focuses on its failure to explicitly account for potential normative influence. with respect to the tpb, although the perspective explicitly includes normative influence, criticism centers on its failure to account for the effects of alternative forms of normative influence (parker and castleman, 2009; eagly and chaiken, 1993). beyond the sme e-business realm, the role of normative influence has also been a point of contention in broader technology adoption models. for example, some models have included social influence (taylor and todd, 1995) while others have not included the construct (davis et al., 1989). prior research has found effects for social influence in mandatory settings (venkatesh and davis, 2000), for less experienced women (venkatesh and morris, 2000) and for older workers (morris and venkatesh, 2000). we now turn to a review of relevant literature related to technology adoption. extensions of the technology acceptance model (tam) given that the tam was specifically developed to explain individual-level technology adoption, it is not surprising that it has been the most widely used framework to explain a range of information technology adoption. as a result, in response to critiques and in an effort to improve predictive and explanatory power as well as practical relevance the model has been revised and extended. briefly, tam2 extended tam by incorporating additional determinants (including normative influence) of one of its core constructs, perceived usefulness, and also including two moderators (experience and voluntariness) of the subjective normusefulness and subjective norm-intention relationship (venkatesh and davis, 2000). the unified theory of use and technology acceptance builds on tam and tam2 by synthesizing elements in prominent technology acceptance models (including some reviewed above) to reconfigure construct relationships as well as add gender and age as moderators (venkatesh et al., 2003). finally, tam3 extends tam2 by adding additional constructs to explain the perceived ease of use construct and positing several additional moderated relationships between antecedents and core perceived usefulness and ease of use constructs (venkatesh and bala, 2008). journal of small business strategy vol. 24, no. 2 73 overall, work related to extensions of tam confirms their explanatory power as between 40-70% of the variance in intention to adopt technology is explained by variants of tam (venkatesh and davis, 2000; venkatesh et al., 2003; venkatesh and bala, 2008). of relevance to the present research, across all models, the core constructs of perceived usefulness and perceived ease of use are significant antecedents of intention to adopt technology. with respect to normative influence, subjective norm is found to indirectly, through perceived usefulness, and directly influence intention to adopt technology for mandatory organizational contexts (venkatesh and davis, 2000). venkatesh et al. (2003) found the effect of normative influence on intention to be contingent on moderators (gender, age, experience, and voluntariness) such that its effect was nonsignificant without the moderators. finally, venkatesh and bala (2008) found the effect of subjective norm on intention to be moderated by experience and voluntariness with normative influence becoming weaker with increasing experience in voluntary contexts. in summary, the research related to extensions of the tam is impressive given its breadth of theoretical integration, ecological validity (new system introductions for a range of industries and organizations across multiple time periods), and predictive power tied to technology adoption intention and actual usage. note that, of relevance to the present research, studies examining extensions to the tam were not specifically focused on smes or internet adoption. further, they included system implementation training, which, given limited resources (time, employees, and money), smes may not be able to avail themselves of such opportunities. a case for normative influence as a moderator in sme internet adoption research confirms that smes do not always proactively and systematically (i.e., strategically) account for external factors in making e-business adoption decisions. yet we also know that pressure from customers, competitors, and suppliers are important external factors in information technology adoption, and specifically internet adoption (alzougool and kurnia, 2010; del aguilaobra and padilla-melendez, 2006; alonso mendo and fitzgerald, 2005). further, as noted previously, the notion of accounting for more nuanced effects associated with normative influence as an external factor influencing e-commerce adoption is prominent in the sme literature. in the broader technology adoption literature, subjective norm is found to, indirectly (through perceived usefulness), and directly influence intention to adopt technology for mandatory organizational contexts. in addition, the effect of normative influence on adoption intention is found to be contingent on moderators (gender, age, experience, and voluntariness). note that in this literature, studies were not specifically focused on smes or internet adoption, and they include system implementation training, which, given limited sme resources, is not always available. as noted by riemenshneider, harrison, and mykytyn, (2003), in the context of information technology adoption, smes are both understudied and unique relative to larger firms. venkatesh et al., (2003) note that despite the fact that the variance explained by the unified theory of acceptance and use of technology is high, future work should examine further boundary conditions in attempts to deepen understanding of technology adoption. one area that we journal of small business strategy vol. 24, no. 2 74 believe is ripe for further consideration is the notion of normative influence as a moderator in technology adoption, particularly for sme internet adoption. note that while extensive work has explored the notion of moderation of normative influence in technology adoption, to our knowledge, this is the first study to explore normative influence as a moderator in the sme internet adoption realm. exactly how and why might normative influence operate in the context of sme internet adoption? dick and basu (1994), in the context of customer loyalty, broached the notion that subjective norms may impact repeat patronage. they view norms as potentially complementing or contradicting the effects of attitudes and as such conceive of norms as moderators of consumer loyalty. these authors reference early work on the attitude-behavior relationship, which suggests that norms may mitigate the effect of attitudes on behavior if the norms are contrary to the attitudes (wicker, 1969; ehrlich, 1969). rook and fisher (1995) examined normative influence in the context of impulsive purchasing behavior. they posit that impulsive buying depends on a consumer’s possession of an impulsive buying trait as well as on their normative judgments associated with the impulsive purchase. thus, an impulsive consumer is more likely to engage in impulsive purchases when evaluating the purchase as normatively appropriate in comparison to an impulsive consumer who views the purchase as normatively inappropriate. results supported the contention that normative evaluations moderate the relationship between an impulsivity trait and buying behavior for student as well as in-store samples. park and smith (2007) highlight the prominence of normative influence on a range of health behaviors. they specifically focus on the impact of different types of normative influence in the context of using the theory of planned behavior (tpb) to explain organ donation. of interest for the present study is the distinction between what are often referred to as subjective norms and behavioral norms. while much research that attempts to explain individual-level decisions and behavior has utilized a subjective norm (i.e., an individual’s belief about what significant others think the individual should do in a given context), increasing attention has been focused on a b ehavioral norm (i.e., an individual’s belief about what significant others are doing in a given context) as a predictor in models (kashima and gallois, 1993). of relevance for the present research, park and smith (2007) include behavioral norms in examining relations among tpb constructs in the organ donation context and find that behavioral norms moderate the effects of all three tpb constructs (attitude, subjective norm, and perceived behavioral control) on intention to sign a state registry for organ donation. therefore, in developing a model to examine sme owner/manager internet adoption, we retain two of the most important antecedents of technology adoption, perceived usefulness and perceived ease of use, in that both have been found to be significant predictors of intention to adopt technology. based on the central propositions related to the tam and its extensions, perceived ease of use related to the internet should be positively related to the perceived usefulness of the internet. in turn, perceived ease of use and perceived usefulness should be positively related to internet usage intention. recall that subjective norm has been included in journal of small business strategy vol. 24, no. 2 75 revised tam models and has been implicated in both perceived usefulness and intention to adopt technology. we extend thinking in the area by not only accounting for the moderating effects of normative influence but also by including the behavioral norm construct. as such, we posit that behavioral norms will moderate the relationship between perceived usefulness and internet adoption intention. this thinking is consistent with eagly and chaiken’s (1993) caution against insufficient consideration of the social context of decisions as well as with literature within psychology highlighting the need for consideration of normative influences beyond subjective norms (ajzen, 2002; godin and kok, 1996; sheppard, hartwick, and warshaw, 1988). we believe the concept of behavioral norms is particularly relevant to understanding information technology-related cognitions and behavior, particularly for smes as some may not approach the decision from an explicit strategy perspective but may instead look to the behavior of significant stakeholders (i.e., customers, competitors, and suppliers) in their environment for direction regarding internet adoption. based on the prior discussion related to the tam and its extensions, if an sme owner/manager believes that it w ill not be difficult to use the internet, this should be positively related to the owner/manager believing that the internet will be useful in managing information. in turn, internet ease of use and usefulness perceptions should be positively related to owner/manager intention to increase use of the internet for managing information. thus, ease of use perceptions should have both direct and mediated effects on usage intention. therefore, it is formally hypothesized that: h1: sme owner/manager perceptions of ease of using the internet will be positively related to perceptions of the usefulness of the internet for managing information. h2: sme owner/manager perceptions of ease of using the internet will be positively related to the intention to increase use of the internet. h3: sme owner/manager perceptions of ease of using the internet will partially work through (be partially mediated by) owner/manager perceptions of the usefulness of the internet for managing information to influence intention to increase use of the internet. h4: sme owner/manager perceptions of usefulness of the internet for managing information will be positively related to the intention to increase use of the internet (please refer to figure 1). journal of small business strategy vol. 24, no. 2 76 figure 1: hypothesized mediating and moderating relationships further, for the primary contribution of this research, we argue that it is an understanding of the joint influence of sme owner/manager perceptions that the internet will be useful in managing information as well as perceptions tied to the normative behavior of key stakeholders that is posited to be important in understanding sme owner/manager internet usage intention. in looking to the behavior of significant stakeholders (i.e., customers, competitors, and suppliers), when an sme owner/manager perceives strong stakeholder internet usage, this should mitigate the influence of perceived usefulness on internet usage intention. thus, it is hypothesized that: h5: sme owner/manager perceptions related to the usefulness of the internet for managing information will interact with (be moderated by) behavioral norm perceptions tied to key stakeholders to influence intention to increase use of the internet. when normative influence is high, perceived usefulness should not significantly explain internet usage intention. in contrast, when normative influence is low, perceived usefulness should significantly explain internet usage intention. (please refer to figure 1). method sample and procedure the sample frame for this study consisted of a list of 910 smes (that is, companies with up to 500 employees) in the midwest. each company was mailed a letter explaining the purpose of the research, a questionnaire, and a postage-paid return envelope. the letter was addressed to an individual representing top management in each company, with an offer to send a summary of the study’s results if requested. one hundred and thirty nine surveys were returned representing a response rate of 15.3 percent. questionnaires were received from a variety of companies with the intention usefulness behavioral norm ease of use journal of small business strategy vol. 24, no. 2 77 majority representing the retail, construction, and financial services sectors. respondents were predominantly middleaged, male, college educated, and, as targeted, members of upper management. companies represented in the sample ranged in size from one to 500 employees with a mean of 100 employees and a median of 25 employees. approximately three-fourths of the firms had annual total revenues of less than ten million dollars. the response rate of this study is comparable to response rates typically found in business sector research. in addition, discussions with managers at area firms suggest that such response rates are typical for the geographic area surveyed. further, non-response bias was assessed by testing for differences between early and late respondents on the variables used in this research. no statistically significant differences were found between these two groups for any of the constructs employed in this study. questionnaire although using the internet encompasses a range of behaviors, small business sector research has conceived of internet use as relating to two primary domains: communication and transactions. we focus on customer communication as this is a discrete behavioral domain that holds implications for a firm’s ability to operate flexibly in its environmental (murphy, celuch, and callaway, 2007). internet use may facilitate external knowledge acquisition and intra-firm knowledge dissemination to improve responsiveness (liao, welsch and stocia, 2003). internet usage for communication with customers is a potentially important component of a small firm’s market sensing activity. johnson et al., (2003) noted the importance of market sensing activities in firms’ responses to environmental demands. of relevance to the present research, firms responding to market information may adjust product/service offerings (evans, 1991; achrol and kotler, 1999; day, 1999). prior research has shown that small businesses use the internet for customer communication and management (ramsey & ibbotson, 2006; deans, gray, ibbotson and knightbridge, 2003; adams and deans, 2001). measures for the questionnaire consisted of scales developed for constructs relevant to this research. the authors relied on literature reviews as well as knowledge of area firms in this process. early drafts of the questionnaire were reviewed and pretested for readability and understandability by area company representatives. the final questionnaire included the following measures: perceptions related to the ease of use and usefulness of using the internet, internet usage-related behavioral norms, and internet usage intention. recall that measures are oriented towards capturing the perceptions of the sme owner/manager as they are likely to be the key/primary decision maker in this context. the concluding portion of this survey consisted of individual respondent and company descriptors. measures perceived usefulness consisted of three seven-point items, with respondents providing perceptions relating to their company’s likelihood of improving its ability to obtain, share, and respond to customer information through use of the internet. perceived ease of use consisted of two seven-point items, with respondents providing perceptions relating to their companies’ confidence and lack of difficulty in using the internet for customer journal of small business strategy vol. 24, no. 2 78 communications. behavioral norm consisted of three seven-point items, with respondents providing perceptions relating to use of the internet for business communications by their companies' important stakeholders (i.e., customers, suppliers/vendors, and competitors). behavioral intention consisted of three seven-point items, with respondents providing perceptions relating to their company’s intent to increase its use of the internet within the next 12 months to obtain, share, and respond to customer information. results the purpose of this study is to test for moderated mediation, that is, from the perspective of an sme owner/manager, the mediational effect of internet usefulness perceptions on internet ease of use perceptions and internet usage intention varies across levels of normative influence. as a precursor to analyses, confirmatory factor analysis using structural equation modeling (amos 18) was used to assess the convergent and discriminant validity of measures before testing hypotheses. with respect to the measurement model, observed indicators were all statistically significant (p<.05) and evidenced large loadings on their corresponding factors. fit statistics of the measurement model were χ2 (33) = 66.20, p = .000, cfi= .97, rmsea = . 08, which suggest that the observed indicators are representative of constructs. the combination of cfi and rmsea are consistent with ranges recommended for the evaluation of model fit for small sample sizes with a small number of observed variables (hu and bentler, 1999; hair et al., 2006). further, cronbach’s alpha and composite reliabilities were above recommended thresholds (composite reliabilities for perceived usefulness = . 94, behavioral norm = .85, and intention = .90) (fornell and larker, 1981). table 1 presents measures used in this study. the amount of variance extracted (ave) for the constructs is .85 for usefulness, .65 for behavioral norm, and .75 for intention. for all pairs of constructs, the amount of variance extracted for each construct is greater than the squared correlation between constructs. these results provide support for the discriminant validity of the measures (fornell and larker, 1981). based on internal consistency and validity assessments of the measures, summated scores of the multi-item scales were used to address the research hypotheses. table 2 provides the means, standard deviations, correlations, and reliabilities for the measures used in this study. journal of small business strategy vol. 24, no. 2 79 table 1: construct measures constructs and items standardized coefficient perceived usefulness (scaled: very unlikely/very likely) within the next twelve months, using the internet will: significantly improve your company’s ability to obtain information from customers. .90 significantly improve your company’s ability to share information from customers. .94 significantly improve your company’s ability to respond to requests for information from customers. .92 perceived ease of use (scaled: strongly disagree/strongly agree) within the next twelve months: our company would not have any difficulty using the internet for customer communication. .84 our company is very confident in its ability to use the internet for customer communication. .91 behavioral norm (scaled: strongly disagree/strongly agree) over the next twelve months: most of our major customers will use the internet for a significant amount of business communication. .82 most of our major supplier/vendors will use the internet for a significant amount of business communication. .77 most of our major competitors will use the internet for a significant amount of business communication. .82 intention (scaled: strongly disagree/strongly agree) our company intends to increasingly use the internet within the next twelve months to: obtain information from our customers. .79 share information with our customers. .83 respond to requests for information from our customers. .97 table 2: descriptive statistics and correlations for study constructs mean standard deviation x1 x2 x3 x4 x1 ease of use 5.8 1.45 .78** x2 usefulness 5.1 1.51 .57** .89 x3 behavioral norm 4.8 1.48 .34** .47** .84 x4 intention 5.3 1.67 .65** .76** .39** .93 ** correlation is significant at the .01 level. a correlation is provided on the diagonal for the ease of use construct as it is represented by a two item measure. reliabilities (alphas) are shown on the diagonal for constructs assessed via three item measures. journal of small business strategy vol. 24, no. 2 80 hierarchical regression analysis, involving a series of models increasing in complexity, was used as a means of testing the hypothesized mediating and moderating relationships (cohen and cohen, 1983). in the first series of models, to test for mediation, perceived ease of use is entered as a predictor of perceived usefulness and then ease of use and usefulness are entered as predictors of intention to increase use of the internet. in the second series of models, to test the moderating effect of behavioral norm, the behavioral norm and the interaction term (usefulness x behavioral norm) are added to the first series model with ease of use and usefulness predicting intention. in order to test whether usefulness perceptions mediate the effect of ease of use perceptions on intention to increase use of the internet, three conditions must be met. 1 ) ease of use should have a significant effect on usefulness. 2) ease of use should also have a significant effect on internet usage intention. 3 ) as compared to condition #2, the impact of ease of use on intention should significantly diminish when usefulness is included in a regression model with ease of use predicting intention (baron and kenny, 1986). with respect to h1, ease of use has a significant effect on usefulness, thus, condition #1 is met. ease of use also significantly influences internet use intention, thus, condition #2 is met. lastly, the influence of ease of use is diminished (with the standardized coefficient decreasing from .65 to .32 with this coefficient still retaining significance) when usefulness is included in the regression model predicting relationship intention, meeting condition #3. in summary, consistent with predictions for sme owner/managers, perceived usefulness is found to partially mediate the relationship between perceived ease of use and intention to increase internet usage for managing customer information (please refer to table 3). we next examine the moderating role of behavioral norm as perceived by the sme owner/manager (h2). in the first step, ease of use, usefulness, and behavioral norm are entered as predictors of internet usage intention. in the second step, to test the moderating effect of behavioral norm, the interaction term (usefulness x behavioral norm) is added to the first step model. mean centering was not employed, as recent evidence suggests that there is no advantage to mean centering in terms of addressing collinearity issues or stability of estimates (echambadi and hess, 2007). table 3 presents results of the hierarchical regression analyses. predictions receive support by the data given that the usefulness x behavioral norm interaction significantly explains an additional amount of variance in relationship continuity (r2 change = . 02, significant at p< .05 level), after controlling for the direct effects of usefulness and behavioral norm, with the influence of ease of use significant. this effect compares favorably with common ranges (r2 changes .02-.03) reported for moderator effects in non-experimental studies (champoux and peters, 1987). as a precaution, variance inflation factors (vif’s) were examined to assess the effects of collinearity among the independent variables, particularly when the interaction term is a f unction of the other independent variables. note that the vif for the interaction term is above the recommended 10.0 cutoff (hair et al., 2006). as a further check, the authors also utilized the two-step procedure identifying condition indices journal of small business strategy vol. 24, no. 2 81 above 30, and for any such indices, identifying multiple variables with variance proportions above 90 percent. the condition index for the interaction term was 40.42. however, the proportion of variance accounted for by this term did not exceed .90 for two or more variables (hair et al., 2006). thus, a collinearity problem is not indicated. taken together, results support the prediction of moderated partial mediation, that is, the partial mediational effect of perceived usefulness between perceived ease of use and internet usage intention varies across levels of perceived normative influence. table 3: hierarchical regression analyses testing the mediating effect of usefulness and the moderating effect of behavioral norm on usefulness and intention model results r2 r2 change f value f value change vif mediation test usefulness = (.57**) ease of use 0.33 66.17** intention = (.65**) ease of use 0.43 101.22** intention = (.32**) ease of use + (.56**) usefulness 0.64 0.21 125.88** 87.00** 1.48 moderation test intention = (.32**) ease of use + (.57**) usefulness + (.01) behavioral norm 0.64 0 83.32** 0.02 1.7 intention = (.32**) ease of use + (.84**) usefulness + (.01) behavioral norm + (-.49*) usefulness x behavioral norm 0.66 0.02 65.29** 4.57* 20.56 note: standardized coefficients appear in parentheses. *p< . 05 **p< .01 to identify the nature of the interaction, slopes are plotted for individuals one standard deviation above the mean (mean = 6.7) and one standard deviation below the mean (mean = 2.2) for perceived behavioral norm. figure 2 displays the interaction effect on internet usage intention. as expected, under low behavioral norm conditions, stronger usefulness perceptions significantly enhanced internet usage intention (f=125.09, p < .01). in contrast, usefulness perceptions do not have this effect on internet usage intention under high behavioral norm conditions as such conditions drive stronger intention to follow stakeholder internet usage (f=1.30, p=.266). journal of small business strategy vol. 24, no. 2 82 5.0 6.4 1.3 6.7 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 0 1 2 3 4 5 6 7 in te nt io n usefulness high norm low norm figure 2: interaction of usefulness and behavioral norm on intention to increase use of the internet in summary, consistent with predictions, sme owner/manager perceptions relating to the usefulness of the internet for managing customer information are found to partially mediate the effect of owner/manager internet ease of use perceptions on their intention to increase use of the internet for managing customer information. further, owner/manager perceptions of normative internet usage are found to interact with usefulness perceptions which moderate the relationship between owner/manager perceived usefulness of the internet and internet usage intention. specifically, when normative influence is not perceived to be prevalent in the sme’s environment, perceptions that the internet could prove useful in managing customer information have a strong positive effect on owner/manager intention to increase usage of the internet for managing customer information. in contrast, when the sme context is perceived to be associated with strong normative influence, perceptions that the internet can be useful in managing customer information do not greatly affect owner/manager intention to increase use of the internet to manage customer information as the high norm is associated with a strong intention. discussion the present study extends both sme ecommerce research and research related to the technology acceptance model (tam). recall that a theme to emerge from the sme e-commerce literature related to the potential importance of accounting for nuanced effects associated with normative influence. further, work related to the tam, while accounting for normative influence has not explored the potential of the construct as a moderator and has tended to explore its application with students (in earlier work) or in larger firm contexts (in more recent work). we extend thinking in the area by not only exploring the potential moderating effect of normative influence in the sme internet adoption domain but also by including an underutilized normative influence construct, behavioral norm, which we believe has the potential to enhance understanding of boundary conditions associated with sme internet adoption. we believe this approach may help explain some inconsistencies in journal of small business strategy vol. 24, no. 2 83 findings related to core tam constructs. for example, consistent with the tam, some research has found strong effects for perceived benefits (perceived usefulness) (cf., al-qirim, 2007; kaynak et al., 2005) while some have not (tsao et al., 2004). findings support the core components of the tam in that if an sme owner/manager believes that it will not be difficult to use the internet for customer communication, this was positively related to the owner/manager believing that the internet will be useful in managing customer information. in addition, internet ease of use and usefulness perceptions were positively related to owner/manager intention to increase use of the internet for managing customer information. as expected, ease of use perceptions had both direct and partially mediated effects on usage intention. we extend thinking in the area by finding support for the notion that it is an understanding of the joint influence of perceptions that the internet will be useful in managing customer information as well as perceptions tied to the normative behavior of key stakeholders that is important in understanding sme owner/manager internet usage intention. in looking to the behavior of significant stakeholders, when an sme owner/manager perceived strong stakeholder internet usage, this mitigated the influence of perceived usefulness on internet usage intention. note that this parsimonious model explained 66% of the variance in internet usage intention which compares favorably with explained variance ranges (i.e., 40-70%) reported in the literature related to the tam. note that this research by design focuses on intention rather than current behavior as this is consistent with the theory that intention provides an indicator of willingness to perform the behavior in the future. given the rapidly changing information technology landscape, we deemed assessing future behavior as more important than assessing current behavior. further, if we had measured both current and potential behavior at the same time, we run the risk of biasing future predictions (albarracin, et al., 2001). future research could examine current behavior, which may capture sme propensity for reactivity to the past and current situation while the present study might capture sme propensity for proactivity in response to the evolving current and future environment. clearly, the present research highlights the importance of considering normative influence in sme technology adoption. more current revisions of the tam delineate antecedents of the perceived usefulness construct as a means of developing pragmatic guidance to impact technology acceptance. however, given the results of the present research, if potential technology partners or government entities in the sme ecosystem wish to encourage technology adoption, it would appear that relying on the apparently logical and time honored approach of communicating factors associated with the benefits of technology usage (perceived usefulness), under conditions of strong normative influence, would not provide return for the resource expenditure. under such conditions, effort educating the sme owner/ managers on the extent of usage by key stakeholders is likely to be a more effective approach. what might be the underlying mechanism for this type of normative influence? park and smith (2006) conjecture that subjective norms (i.e., what a person perceives important others think they should do) might have more impact in the decision to enact more socially constrained behaviors. whereas, behavioral norms (i.e., perceptions of what journal of small business strategy vol. 24, no. 2 84 important others are actually doing) might be more likely to come into play when a decision is individually oriented. this is often the difference between large organizational decision making where a group or committee is responsible for a decision versus an sme decision context where an owner/manager is the decision maker. this line of thinking would argue for the incorporation of the behavioral norm construct in further applications of the tam in the sme context. future research in the area could include more nuanced conceptualizations of the normative construct. park and smith (2006) examine conceptions of norms which include others’ expectations, approval, and behavior and find support for differential as well as interactive effects among the various types of norms. in addition, given the potential importance of family members in the small business sector, future research could include this additional stakeholder beyond the ones used in the present study (i.e., customers, suppliers, and competitors). further, some research suggests that stakeholders might exert differential influence on sme technology adoption, which argues for more fine-grained exploration of the normative influence associated with specific stakeholder groups (bharati and chaudhury, 2006). at first blush, sme adoption of internet technology under high normative influence conditions appears to contradict the strategy literature. yet, adoption of technology prior to factoring how it might be useful does not mean that sme do not “connect the dots” at a later time. celuch and murphy (2010) suggest that sme capabilities tied to aligning information technology to strategy may be related to broader action tendencies of smes in response to their environment. therefore, some smes bias for action may mean that implementation precedes strategic understanding. note that we concur with broadbent and weill (1996) that managers need to be clear regarding their strategic intent in order to more fully realize the benefits from information technology. we simply note that clarity of strategy may crystalize after initial implementation. indeed, we suggest that this is one way smes can span the strategy gap – the difference between what a firm “must do” and what it “can do” (zack, 1999). what a firm must do drives what a firm must know. zack (1999) notes the importance of bridging this related knowledge gap in order to achieve clarity in strategy. yet a firm cannot formulate strategy if it d oesn’t know what it needs to know with respect to a strategic option so experimentation through action is a way of bridging the knowledge gap. this thinking is not inconsistent with findings reported earlier that external factors sometimes resulted in small business adoption of e-business even when firms had not developed e-business capabilities (caldeira and ward, 2003; rivard et al., 2006). a potentially interesting question relates to would the same dynamics identified in the present study for using the internet for customer communication management hold for moving back up the supply chain and using the internet for supplier communication management? future research could also examine the potential of behavioral norms moderating the adoption of other information technologies in addition to the internet. as with any study employing crosssectional, self-report measures of respondent perceptions, results should be interpreted with these limitations in mind. journal of small business strategy vol. 24, no. 2 85 future 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(1999). managing codified knowledge. sloan management review, summer, 45-58. kevin celuch, ph.d., is holder of the blair chair of business science and a p rofessor of marketing at the university of southern indiana. his teaching interests relate to entrepreneurship and marketing research and strategy. research interests focus on entrepreneurial and consumer cognition and business-to-business relational strategies. bryan bourdeau, m.b.a., is an instructor of management at the university of southern indiana. his teaching interests lie in the entrepreneurship area. research interests focus on entrepreneurial cognition. carl saxby, ph.d., is an associate professor of marketing at the university of southern indiana. his teaching interests are marketing and sales management. research interests focus on utilizing electronic mechanisms to implement marketing strategies and evaluate the results of strategic decisions. craig ehlen, dba, cpa, cfe, cgma is a professor of accounting at the university of southern indiana. his teaching interests are in fraud auditing. research interests focus on auditing, behavioral accounting, and managerial cognition. reproduced with permission of the copyright owner. further reproduction prohibited without permission. http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2021, vol. 31, no. 01, 39-50 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2021 small business institute® w w w. j s b s . o rg introduction 1escuela técnica superior de ingeniería industrial (etsii), universitat politècnica de valència, camino de vera, s/n 46022 valencia, valencia, spain, mareva@omp.upv.es 2escuela técnica superior de ingeniería industrial (etsii), universitat politècnica de valència, camino de vera, s/n 46022 valencia, valencia, spain, avalles@ter.upv.es 3escuela técnica superior de ingeniería industrial (etsii), universitat politècnica de valència, camino de vera, s/n 46022 valencia, valencia, spain, jovillo0@upvnet.upv.es 4escuela técnica superior de ingeniería industrial (etsii), universitat politècnica de valència, camino de vera, s/n 46022 valencia, valencia, spain, jgarcias@ita.upv.es e-learning in “innovation, creativity and entrepreneurship”: exploring the new opportunities and challenges of technologies innovation, creativity, entrepreneurship, e-learning, teaching apa citation information: alemany, m. m. e., vallés lluch, a., villanueva lópez, j. f., garcía-serra garcía, j.. (2021). e-learning in “innovation, creativity and entrepreneurship”: exploring the new opportunities and challenges of technologies. journal of small business strategy, 31(1), 39-50. to remain competitive in the markets, to grow and to lead, companies should be able to identify challenges and opportunities, as well as to explore, define and implement new solutions in the increasingly dynamic environment. this dynamism forces firms to improve their ability to meet current and future problems in a creative way with added value, that is, to innovate. due to the increased pressure to innovate, organizations have become more interested in exploring new, collective ways to gain access to creative ideas (parjanen & hyypiä, 2019). gumusluoglu & ilsev (2009) state that innovation through creativity is an important factor in the success and competitive advantage of organizations, as well as for a strong economy. recently, castillo-vergara et al. (2018) pointed out that the importance of creativity is related to the impact on the competitiveness of business, having shown a positive correlation between teams with the best results in creativity tests and their success. creativity should be differentiated from intelligence, sometimes called divergent thinking, in contrast to convergent thinking related to the known common intelligence (esquivias, 2004). however, strong relationships between creativity and innovation have been identified (valaei et al., 2017), as well as between creativity and entrepreneurship (ludvig et al., 2016). indeed, creativity is identified as a root of innovation (amabile & pratt, 2016). individual creativity supplies the base for organizational creativity and innovation, and results thereof have been linked with business performance and survival (castillo-vergara et al., 2018; shalley & gilson, 2004). for this reason, creativity is considered to belong to the individual level, whereas innovation is linked to the organizational one (oldham & cummings, 1996). besides, creativity is also considered a characteristic of entrepreneurial success (ludvig et al., 2016). entrepreneurs companies and society demand professionals be able to provide creative solutions with added value as well as to implement them in order to face the arising challenges in the increasingly dynamic environment. although the transversal competence “innovation, creativity and entrepreneurship” is essential for engineers that should find innovative solutions to problems, teachers find many difficulties when training and evaluating their students in the scope of the regular courses: large groups, very adjusted time to technical contents. in this context, the school of industrial engineering (etsii) at polytechnic university of valencia (upv) is aware of the opportunities offered by new information and communication technologies to support teachers in this task while enhancing students’ generic outcomes. for this reason, an e-learning platform has been created on this competence, that offers valuable resources to students to implement this competence throughout the assigned course tasks, and supports teachers prompted to train and evaluate this transversal competence. with this platform, the authors aim to contribute to the still neglected educational aspect of entrepreneurship and address for the first time in an e-learning system its relationship with innovation and creativity. maría m. e. alemany1, ana vallés lluch2, josé f. villanueva lópez3, jorge garcía-serra garcía4 http://www.smallbusinessinstitute.biz http://www.jsbs.org 40 m. m. e. alemany, a. vallés lluch, j. f. villanueva lópez, j. garcía-serra garcía journal of small business strategy / vol. 31, no. 1 (2021) / 39-50 combine resources with the goal of creating something new that can be an organization, product and/or service. only when converting their ideas into reality can entrepreneurs bring about a future state (honig & hopp, 2019). entrepreneurship is, thus, a field of growing interest for economic research, because of its active contribution to economic growth (crecente-romero et al., 2016). the relationship among creativity, innovation and entrepreneurship is pointed out by (castillo-vergara et al., 2018) who stresses that creativity is an important drive for the entrepreneurial process and innovation supporting the identification of new business opportunities. along these lines, boza et al. (2014) states that creativity, innovation, and entrepreneurship deals with the mind-sets and skills associated with creativity and innovation as well as the qualities and practices associated with successful entrepreneurship. for example, entrepreneurship is the individual’s ability to translate ideas into action. it encompasses creativity, innovativeness, and risk taking, as well as the ability to plan and direct action towards the achievement of goals. it is necessary to consider how to apply these mind-sets and skills in their organization/business (boza et al., 2017). within this context of permanent change and growing turbulence, creativity, innovation and entrepreneurship have become a vital value for the survival and development of the organisations (cuenca & boza, 2015). integrated development of the innovation, creativity and entrepreneurship competence in the higher education for the reasons mentioned above, it is not surprising that there is a growing interest in the integrated innovation, creativity and entrepreneurship competence from both the professional and formative perspective. in the particular case of the engineering labour market, there is an increasing demand by companies of generic competences such as “critical and thinking out of the box capacity” and “innovation and creativity” (iie-apd, 2017). to develop these competencies in students will contribute to improve their access to the labour market and to adapt to their future unpredictable changes in jobs (cuenca & boza, 2015). one of the main university’s functions is to prepare students for the professional activity by training them in those demanded competences by firms. in this context, in order to improve its graduates’ employability, the universitat politècnica of valència (upv, spain) has defined 13 transversal competences (tcs) for all their masters and bachelor’s degrees (http://www.upv.es/contenidos/ comptran/) particularly the fourth being “innovation, creativity and entrepreneurship”. in developing this competency, it is expected that students will be able to innovate in order to effectively respond to personal, organizational and social needs and demands with an entrepreneurial attitude (upv, 2015). although this competence is essential for engineers to find innovative solutions to problems, teachers find it difficult when training and evaluating their students in the scope of regular courses. in particular, the large groups and time needed for the technical contents pose a challenge to integrate this complex competence in the higher education system. this difficult question raised to the school of industrial engineering (etsii) at upv is the question of which methodological approach allows maximizing time in the class dedicated to perform the competence. is there any previous experience from other universities to learn from? how can entrepreneurship be linked with creativity and innovation? this work sets the framework of action in the following section and presents a proposal to overcome these limitations. furthermore, future research should be aimed at the analysis of creativity studies in terms of training future professionals in various areas (castillo-vergara et al., 2018). for this purpose, the use of new information and communications technology (ict) tools embedded in e-learning systems can be very useful, even more in the framework of the current pandemic situation originated by covid-19. indeed, the provision and usage of online and e-learning systems are becoming the main challenges for many universities during the covid-19 pandemic (almaiah, 2020). alhabeeb & rowley (2018) defines e-learning as: “an approach to teaching and learning, representing all or part of the educational model applied, that is based on the use of electronic media and devices as tools for improving access to training, communication and interaction and that facilitates the adoption of new ways of understanding and developing learning”(p. 1). on his part, rodrigues et al. (2019) states that e-learning is an innovative web-based system based on digital technologies and other forms of educational materials supporting and enhancing the learning processes. the advantages of e-learning systems are that it provides learning opportunities without the typical constraints of place and time, and supports new teaching and learning approaches involving a mix of traditional learning methods and e-learning (alhabeeb & rowley, 2018). the internet and the increasing growth of open educational resources (digitized materials, free and open) for teachers and students are challenging the assumptions of traditional teaching methodologies attempting to affirm ‘openness’ as a necessary default (ponti, 2014). three elements are identified to integrate e-learning systems (fee, 2009): technology, learning content and e-learning design. ghiringhelly and quacquarelly (2003) 41 m. m. e. alemany, a. vallés lluch, j. f. villanueva lópez, j. garcía-serra garcía journal of small business strategy / vol. 31, no. 1 (2021) / 39-50 considered the e-learning design a complex process integrated by four stages: identification of training objectives, detection of training needs, creation of design team and selection of learning content. islam et al., (2015) and urh et al. (2015) pointed out that universities have paid very little attention to e-learning design connected to the educational aspect, especially for courses on entrepreneurship. gentile et al. (2020) identify that e-learning systems in universities has been strong on technology and learning content, whereas e-learning design has not been studied. after a deep literature review, they state that there is a scarcity of research on e-learning design and more specifically on the didactic dimension in universities. after their empirical investigation to find out the way in which universities perform the learning design, they conclude that their attention was focused on the different professional figures involved in the construction of the course, rather than on the e-learning design process across the four phases (ghiringhelly & quacquarelly, 2003). in addition to the above, despite the strong relationship of entrepreneurship with innovation and creativity, there is not to date any e-learning system linking these three competence dimensions. for the case of upv, some material on tc04 has been developed to assist teachers, but there is no material oriented to students. to fill the commented gaps, the school of industrial engineering (etsii) at upv has created an e-learning platform with digital resources on the tc04. innovation, creativity and entrepreneurship mainly oriented to students (https://www.etsii.upv.es/competencias/innovacion.php). in this paper the application of an e-learning design methodology for the didactic dimension of the tc04 is reported. the resulting e-learning platform is also described. to the best of the authors’ knowledge there is no other web containing e-learning material with these characteristics -or structured in a similar way being, therefore, a relevant contribution. theoretical framework foundations the incorporation of key competences in academic curriculum frameworks has been evident for some time (boza et al., 2017,). indeed, the royal legislative decree 1393/2007, of 29th october 2007 proposes as a priority objective to achieve the acquisition of skills by students without excluding the content-based approach. figure 1 shows the structural model of competences which becomes the theoretical foundation of the web design and which is aligned with the upv strategy. the goodness and validity of this model has been demonstrated by the results obtained in the context of five institutional innovation and educational improvement projects (pimes) at upv and published in several papers as reported below. as it can be observed in figure 1, it is assumed that the degrees’ curriculum is defined in terms of the student’s figure 1. structural model of competences and its relationship with five institutional innovation and educational improvement projects (pimes) for the tc04 at upv (adapted from (alemany et al., 2016)) curriculum competences learning outcomesrubric learning objects activities and experiences include joint measure it is achieved through it is achieved through m m 1 m m m m m m m strategic plan polytechnic university of valència (upv) pime a31/16 validation and selection of indicators tc04 oaice project learning objects recicre project rubric definition daice project design activities diaice project design learning pathways 42 m. m. e. alemany, a. vallés lluch, j. f. villanueva lópez, j. garcía-serra garcía journal of small business strategy / vol. 31, no. 1 (2021) / 39-50 competences achievement. competences can be defined as the complex knowhow resulting from the integration, mobilisation and adaptation of capacities and skills to situations sharing common characteristics (incode, 2012, as cited in cuenca et al., 2015c). differentiation between specific competences (sc) and tcs has been done in the sense that the scs belong to a certain field or degree and are aimed at achieving a specific graduate profile, while tcs are generic and transferable in a wide variety of contexts contributing to all the degrees of a university (cuenca et al., 2016a). according to aneca (2013), it is considered that learning outcomes are concretions of the competences for a certain level and constitute the overall result of the teaching-learning process. learning outcomes are statements of what a student is expected to know, understand and / or be able to do at the end of a learning period. therefore, to acquire competences, certain learning outcomes are established, which must be met. when assessing the level of achievement of the tcs, rubrics have demonstrated their validity. rubrics facilitate the measurement of student performance in those areas that are complex to evaluate, through a set of graded criteria for assessing learning, knowledge and/or skills gained by the student. rubrics present advantages from the teachers and students’ point of view. rubrics show the students the aspects to be met at different domain levels and allow for teachers an objective, fair and impartial evaluation by a scale that measures the skills and student performance (alemany et al., 2016; prats-montalbán et al., 2016). along these lines, the aim of the recicre project was to develop a tool for assessing the tc04 in bachelor and master degrees, by the definition of different levels of mastery and aspects that should be taken into account when evaluating this competence. the results of this project can be consulted in cuenca et al. (2015a, 2015b, 2015c, 2016a). the a31/16 project continues the work of recicre by means of the proposal of a methodology to objectively select the items related to a specific competence, from a set of potentially related ones (prats-montalbán et al., 2016). furthermore, the weights associated to the items are determined in order to assess the level of achievement of the competence. this was carried out by applying a multivariate statistical projection method such as partial least squares (pls), embedded in a cross-validation process and was applied to the tc04. to achieve the learning outcomes, access to appropriate learning resources is crucial that, in turn, could be reused and adapted to the different educational needs of students (alarcón et al., 2015). with this aim, learning objects can be adopted to assist different teaching-learning methodologies. the vast majority of definitions identify a learning object with an entity, atom, building block, learning unit or resource. an underlying concept of an independent and minimal element that can form part of bigger ones is behind (cuenca et al., 2016a). in this context, the objective of the oaice project was, on one hand, to clarify the learning object definition and its classification to define the main elements associated to the learning objects, such as metadata, repository and different methodologies, and on the other hand, to propose learning objects associated to the tc04. the extended results of this part of the project can be found in alarcón et al. (2015); fernandez-diego et al. (2015). to complement the learning objects, the daice project designed activities to be developed in the classroom with the purpose of promoting the acquisition of the learning outcomes associated to the tc04 (cuenca et al., 2016b; ruiz et al., 2015). the diversity of student levels detected in the classroom for the transversal competences, in general, and for the tc04 in particular, led to the proposal of an itinerary of appropriate activities for each level in the diaice project. in this project, boza et al. (2019) built a map of learning activities where each activity is appropriate to cover a specific level of the tc04 (figure 6). the structure of the rest of the paper is as follows. based on the previous theoretical framework, section 2 reports the methodology application for the e-learning design of the platform for the tc04. in section 3, we describe the resulting e-learning platform for the tc innovation, creativity and entrepreneurship and its contents. in section 4, we report the discussion and implications of the e-platform and its use. finally, in section 5 we provide the main conclusions as regards to the key findings, the advantages and limitations of the e-platform and the future research agenda. methodology for the e-learning design of tc04 the methodology of ghiringhelli and quacquarelli (2003), in nacamulli adapted by gentile et al. (2020) was applied for the e-learning design of the platform with asynchronous material. this methodology consists in four phases: 1) identification of training objectives, 2) detection of training needs, 3) creation of a design team and 4) selection of learning content. identification of training objectives the training objectives of the e-platform are strongly related with the strategic challenges and opportunities detected in the educational innovation context at upv, in general, and at etsii, in particular. along with these lines, during the last years, the upv has launched several initiatives to align with the approaches of the european higher 43 m. m. e. alemany, a. vallés lluch, j. f. villanueva lópez, j. garcía-serra garcía journal of small business strategy / vol. 31, no. 1 (2021) / 39-50 education area (ehea) and remain at the forefront in terms of educational innovation. the actions currently being carried out at the upv can be framed in four dimensions as seen in figure 2: competences, assessment, active methodologies and technological resources. the upv strategic plan includes a project for master’s and bachelor’s degree being one of the main challenges to become a leader in high quality teaching and training oriented to the needs of the society. this strategy marked, among other objectives, to incorporate competences into all curricula (bachelor’s and master’s degrees), and increase the level of their internationalization (alemany et al., 2016). in this context, one of the most relevant actions carried out by the upv to adapt to the ehea was the upv transversal competences (tcs) project. this tcs project aimed to respond, on the one hand, to the feedback received from employers regarding the need to incorporate tcs into the profile of the graduates and, on the other hand, as a way to facilitate the process of accreditation of the degrees for obtaining international quality accreditation such as eur-ace, eur-inf and abet. in this institutional tcs project, 13 transversal competences (also named generic competencies, generic outcomes or transferable competences) were singled out and listed: tc-01. understanding and integration, tc-02. application and practical thinking, tc-03. analysis and problem solving, tc-04. innovation, creativity and entrepreneurship, tc -05. design and project, tc-06. teamwork and leadership, tc -07. ethical, environmental and professional responsibility, tc-08. effective communication, tc09. critical thinking, tc-10. knowledge of contemporary figure 2. general overview of the current educational innovation situation at upv problems, tc-11. permanent learning, tc-12. planning and time management, tc-13. specific instrumental. figure 3 defines three ways to train and assess these tcs: through the curriculum, the thesis and extracurricular activities or specific courses. through the curriculum way, each subject is designed to be control point of different tcs being in charge of training and assessing the achievement of them by students. three domain levels are defined: level 1 for 1st and 2nd courses of bachelor’s degree, level 2 for 3rd and 4th courses of bachelor’s degree and level 3 for 1st and 2nd courses of master’s degree. the grade is defined on the scale a (outstandingly achieved), b (satisfactorily achieved), c (partially achieved) and d (not achieved), and in levels 2 and 3 the grade obtained for in the bachelor and master theses, respectively, is additionally included. the score obtained for each tc and level is reflected in the student record jointly with the grade obtained by the third way, which allows the students to accumulate points with each 44 m. m. e. alemany, a. vallés lluch, j. f. villanueva lópez, j. garcía-serra garcía journal of small business strategy / vol. 31, no. 1 (2021) / 39-50 figure 3. three ways of training and assessing tcs at upv extracurricular activity or course on the matter. other priority lines of the upv are the active learning methodologies, understood as such those methodological approaches that cover both project-based learning, problems, or cases, and that include the necessary ingredients of cooperative learning to the development of both tcs and specific competencies (scs onwards). active methodologies are, therefore, complex and close to reality situations, which favor learning experiences of high educational impact, knowledge integration, transfer of learning to professional reality, etc. it is noteworthy that due to the pandemic situation provoked by the covid-19, upv has significantly boosted the use and development of technological resources and e-learning systems. the etsii at upv was aware of these challenges and the need of teachers to train students in some tcs, considered by them as difficult to achieve or to work in the framework of a regular course, even before the pandemic covid-19 situation. for this reason, from the vice dean of educational innovation of the etsii a teaching innovation team was formed that considered the possibility of using the flipped teaching methodology for autonomous learning of students in these tcs, particularly the one dealt with herein, tc-04. innovation, creativity and entrepreneurship, guided by teachers and driven by the possibilities offered by icts, through the development of an educational platform related to tc04. the objectives pursued by the etsii when developing this platform were manifold: • to provide students with friendly material for self-training in tc-04 (e-learning). • to assist teachers with resources that facilitate training and evaluation in this tc-04 for applying active methodologies in classrooms. • to use the platform as a mean of methodologies coordination between subjects belonging to the same degree. detection of training needs the training needs on tc04 have been detected from different perspectives. as commented in previous sections, it was identified as an important requirement of employers, society and international quality accreditation agencies. besides, instructors of engineering degrees find some obstacles for integrating the tc04 with scs during their classes, being necessary to provide them with more support. finally, the marks obtained by the students for the tc04 are lower than those obtained for other tcs. more specifically, the percentage of students with a and b mark for the tc04 is below 70% of the total students for eight of the thirteen bachelors’ and masters’ degrees at etsii. therefore, it is necessary to continue training our students not only in scs but also in this tc together. in this context, it will be necessary to have previously worked and evaluated knowledge related to both specific scs and tcs that will subsequently be developed, expanded and integrated together, using active learning methodologies. that is why these active learning methodologies are not incompatible, but rather should be complemented with activities that allow knowledge and training in tcs and scs in a comprehensive manner. 45 m. m. e. alemany, a. vallés lluch, j. f. villanueva lópez, j. garcía-serra garcía journal of small business strategy / vol. 31, no. 1 (2021) / 39-50 in fact, as garcia (2008) points out, one of the three features that characterize competences is that they are also learned: the fact of having certain innate intelligences is a good starting point, but it does not guarantee to be competent. the competences must be developed with initial training, with permanent training and with experience throughout life. that is, it is not enough for teachers to put the framework in their subjects for students to develop or enhance their tcs, but training is also necessary, through methodologies with increasing complexity, in this type of competences to promote an adequate mastery of them that guarantees academic and professional success in our students. in addition, the implementation of active learning methodologies such as pbl (project-based learning or problem-based learning) will almost certainly require a redistribution of classroom and seminar theory credits and even content revision, which could require combining the pbl with blended learning or flipped-classroom. in this sense, the flipped-classroom is a pedagogical model that transfers the work of certain easier learning processes outside the classroom and uses class time, together with the teacher’s experience, to facilitate and enhance other processes of acquisition and practice of knowledge of greater complexity within the classroom (monteagudo fernández et al., 2017). during flipped classroom, the use of information and communication technologies (ict) are combined with didactic strategies that substantially increase the main role of students and the applied aspects of the training curriculum. through the flipped classroom, the bridge between the methodological aspect and technological resources is established. in this context, new opportunities but also new challenges appear because the implementation of active methodologies will require, in turn, the development of material for students’ autonomous work. this material can be written or audiovisual through the network (e-learning) to make possible the integration of tcs and scs in the context of developing each degree. although some material on tcs has been developed by upv to assist teachers, there is no material oriented to students trying this e-platform to cover these detected training needs. creation of the design team the design team was created by the vice dean of educational innovation of the etsii to cover the different aspects of the e-learning system, and the professional figures involved in the design team come from different fields. the dean of the etsii jointly with the vice dean of educational innovation at etsii and two teachers with recognized expertise in innovation projects form the innovation team. the implementation of the e-learning platform and the technologies adopted were carried out by the innovation and communication vice dean jointly with computer technical staff. throughout the process, support was received from the institute of education sciences (ice) at upv. selection of learning content the learning content of the e-platform was selected according to its defined structure. taking as a basis the structural model of competences presented in figure 1, the e-platform was first designed by structuring it in different sections (figure 4). second, learning objects were searched for each of the web’s sections and third, the ones of most interest were selected in order to include them in the platform. searchers for information included an extensive bibliographic search on the topics of each section in different contexts and levels. the search included both upv-owned materials (e.g. the upv institutional repository, riunet) and external materials. among the own materials are all those previously generated by teachers from the same university, as well as those provided by the institute of educational sciences (ice) of the upv itself. the ice is an institute to assist teachers during their teaching-learning process. within the external materials that were collected, we can find materials from other universities, youtube videos, videos relating students’ experiences on these tcs, articles and congress papers, both theoretical and practical. the selec what is innovation, creativity and entrepreneurship? why is it important for you? what aspects should you promote to acquire it? what is my level? do you want to know some methodologies that will help you improve? entrepreneurship at upv other links of interest other ways to improve my level in transversal competences figure 4. structure of the e-learning platform in innovation, creativity and entrepreneurship 46 m. m. e. alemany, a. vallés lluch, j. f. villanueva lópez, j. garcía-serra garcía journal of small business strategy / vol. 31, no. 1 (2021) / 39-50 ted material was intended to be friendly for students. for this reason, audio-visual learning objects were prioritized. the result is a collection of learning objects properly arranged and structured taking into account the three levels of achievement for the tc04 in higher education at upv. as described below, these three levels are based on the upv institutional rubrics for this competence. these learning objects are expected to be applied and reused in different activities and experiences in the subjects integrating the bachelors’ and masters’ degrees. results the resulting e-learning platform for the tc04 can be consulted at https://www.etsii.upv.es/competencias/innovacion.php. this platform presents eight different sections (figure 5) to structure and guide the student learning process. provided is the following brief description of each section. in the section “what is innovation, creativity and entrepreneurship?” the upv institutional video presenting this competence has been inserted. then definitions for each of the terms of innovation, creativity and entrepreneurship is provided accompanied by different videos defining them and providing essential relationships among them. the section “why is it important for you?” aims to show students that this transversal competence is one of the most valued by spanish companies, additionally to the scs required from engineers (iie-apd, 2017). the section “what aspects should you promote to acquire it?” is based on the dimensions defined by the upv in institutional rubrics designed for each domain level for this tc (http://www.upv.es/contenidos/comptran/info/956667normalc.html). this section contains by level the following information: level 1: if you are in a 1st or 2nd grade course, you should be able to question reality, identifying improvement needs and ideas that can add value. • question reality. • come up with ideas. •definition of competences and their relationship what is innovation, creativity and entrepreneurship? •hightlight the competence in their laboral future why is it important for you? •what you need to improve on based on your level what aspects should you promote to acquire it? •self-assessment tests what is my level? •guidelines not only to students but also for teachers in the use of different methodologies to work the competence. these methodologies include, among others: brainstorming, six thinking hats, brainwritting or 6-3-5 methodology, 6-3-5 extended methodology, jigsaw, canvas’ model, empathy model, scamper and scamper-3-5, etc. do you want to know some methodologies that will help you improve? •ideas institute of upv to promote and develop the entrepreneurial culture in the upv entrepreneurship at the upv other links of interest •courses offered by the institute of education sciences (ice) at upv other ways to improve my level in transversal competences figure 5. structure and sections of e-learning platform to guide the student learning process 47 m. m. e. alemany, a. vallés lluch, j. f. villanueva lópez, j. garcía-serra garcía journal of small business strategy / vol. 31, no. 1 (2021) / 39-50 • formally capture those ideas using the appropriate tool and / or technique (business model canvas -bmc-, mind map, a structure, model, drawing, canvas, etc.). • identify results to measure the value of your ideas. level 2: if you are in a 3rd or 4th grade course you should be able to contribute to original ideas and approaches that add value through creativity strategies and techniques. • identify opportunities and / or aspects of improvement. • provide original ideas and approaches. • fluently use appropriate creativity methods / strategies / techniques in each case to generate and translate ideas and solutions. • analyze the results in depth and draw appropriate conclusions. level 3: if you are in a 1st or 2nd master course you should be able to propose an action plan, including a global analysis of the value of innovation. • integrate knowledge of different disciplines that generate ideas that improve existing solutions to a given situation. • adopt original approaches, generate new divergent ideas from different perspectives and provide creativity in what you do, improving systems, procedures and processes. • formal and detailed planning of an action plan, executing some of its phases. • make a report with the value analysis, in which it indicates the tools and / or techniques that have been used (e.g. qualitative and / or quantitative methods; probability analysis; consequences analysis; multicriteria techniques; indicators of efficiency, effectiveness, economic, quality, impact ...). in section “what is my level?” self-assessment tests for creativity, innovation and entrepreneurship are accessible. then in section “do you want to know some methodologies that will help you improve?” different methodologies are defined jointly with learning objects providing its description and one or several applications to different examples. the suitability of each methodology for training students depending on the domain level and dimensions or aspects to be trained appears on the e-learning platform in order to provide guidelines not only to students but also for teachers in the use of each methodology (figure 6). these methodologies include, among others: brainstorming, six thinking hats, brainwritting or 6-3-5 methodology, 6-3-5 extended methodology, jigsaw, canvas’ model, empathy model, scamper and scamper-3-5, etc. the section “entrepreneurship at the upv” presents initiatives around entrepreneurship to students by the ideas’ institute of upv. the ideas upv’s mission is to promote and develop the entrepreneurial culture in the upv, to sensitize and energize the university community in the creation and support of new companies, and to support the creation and development of innovative and technologically based companies in the valencian community, spain, mainly. in the section, “other links of interest” additional information about this competence is provided by linking to other web pages. finally, the section “other ways to improve my level in transversal competences” shows the courses offered by the institute of education sciences (ice) at upv to improve different tcs among which is tc04. discussion and implications the resulting e-learning platform on the tc-04 offers the possibility to be used in multiple ways. one way is that students self-organize themselves around the e-learning platform, which enables expanding access to different types of educational resources on the tc04. self-organized lear brainstorming 6 thinking hats 6-3-5 methodology 6-3-5 extended methodology scamper 6-3-5 jigsaw (puzzle aronson) empathy model canvans model lego serious play dafo ethical dilemmas data leakage role question reality. 🗸🗸 🗸🗸 🗸🗸 🗸🗸 🗸🗸 🗸🗸 🗸🗸 🗸🗸 🗸🗸 🗸🗸 🗸🗸 🗸🗸 come up with ideas. 🗸🗸 🗸🗸 🗸🗸 🗸🗸 🗸🗸 🗸🗸 🗸🗸 🗸🗸 🗸🗸 🗸🗸 formally capture and represent those ideas 🗸🗸 🗸🗸 🗸🗸 🗸🗸 🗸🗸 🗸🗸 🗸🗸 identify results 🗸🗸 🗸🗸 🗸🗸 identify opportunities and/ or aspects of improvement. 🗸🗸 🗸🗸 🗸🗸 🗸🗸 🗸🗸 🗸🗸 🗸🗸 🗸🗸 🗸🗸 🗸🗸 🗸🗸 🗸🗸 provide original ideas and approaches. 🗸🗸 🗸🗸 🗸🗸 🗸🗸 🗸🗸 🗸🗸 🗸🗸 🗸🗸 🗸🗸 🗸🗸 fluently use appropriate creativity methods / strategies / techniques in each case to generate and translate ideas and solutions. 🗸🗸 🗸🗸 🗸🗸 🗸🗸 🗸🗸 🗸🗸 🗸🗸 control results. 🗸🗸 🗸🗸 🗸🗸 integrate knowledge of different disciplines. 🗸🗸 🗸🗸 🗸🗸 🗸🗸 🗸🗸 🗸🗸 🗸🗸 🗸🗸 🗸🗸 🗸🗸 🗸🗸 🗸🗸 adopt original approaches in contents and processes. 🗸🗸 🗸🗸 🗸🗸 🗸🗸 🗸🗸 🗸🗸 🗸🗸 🗸🗸 🗸🗸 🗸🗸 propose and perform an action plan, 🗸🗸 🗸🗸 🗸🗸 🗸🗸 🗸🗸 analyze the innovation value 🗸🗸 🗸🗸 🗸🗸 level 1 level2 level 3 figure 6. contribution of some methodologies for the tc04. innovation, creativity and entrepreneurship per domain level (based on boza et al. (2019)) 48 m. m. e. alemany, a. vallés lluch, j. f. villanueva lópez, j. garcía-serra garcía journal of small business strategy / vol. 31, no. 1 (2021) / 39-50 ning can be defined as a learning method students undertake independently without following prescribed curricular requirements or without reliance on teachers (ponti, 2014). in this sense, the platform can be considered as a mean to self-organized learning consisting in a form of self-directed informal learning. besides, the e-learning platform offers valuable resources to students to implement this tc throughout the assigned course tasks, and supports teachers prompted to train and evaluate this tc. for instance, in a flipped classroom, teachers can direct students to specific sections on the platform in order to train in certain methodologies or concepts previously to classes. later, students will put in practice this tc through actively implement different active methodologies in classrooms or in course works integrating the application of this tc jointly with scs of the corresponding degree. acting in this way teachers can save time in training students in this tc alone and invest more time in activities that jointly develop scs and tcs. another alternative of use is that students can be directed by teachers to target sections or methodologies on the platform in order to level the knowledge and capacities of students at the beginning of a course. when a teacher starts his or her activity with a new group of students, in some cases it is assumed that the students possess a determined domain level for each competence and they develop activities according to these “assumed” level (cuenca et al., 2018). finally, the platform can be used as a tool for the coordination of methodologies among subjects of the same degree. indeed, this is one of the current work lines at the higher school etsii at upv. in practice, the resulting e-learning platform offers valuable resources to students to implement the tc-04 throughout the assigned course tasks, and supports teachers prompted to train and evaluate this tc. as a result, it is expected to provide society with better-trained graduates on this competence, more capable to address future society and business challenges successfully. conclusions and future research in this paper an e-learning platform for the detected need of training engineering students in tc04: innovation, creativity and entrepreneurship, jointly with the scs of each degree, has been described after setting its framework in the contexts of the demand from skilled employees and higher education area. different studies show that when developing e-learning systems, emphasis has been put on the technology and learning content more than on e-learning design. indeed, the literature revised highlights the scarcity of research on e-learning design and more specifically on the didactic dimension in universities. this applies even more for the tc04 where the integration of the entrepreneurship with creativity and innovation has not been found. from the research point of view, this paper covers the previous gaps by the application of an e-learning design methodology for the didactic dimension of the tc04 and the resulting e-learning platform. although the authors cannot be certain of having found all the existing material, they have no knowledge to date about other e-learning material with these characteristics or structured in a similar way. from the practical viewpoint, the resulting e-learning platform presents several advantages pointed out by students and teachers. it enhances the value of the tc04 in the labour context for students and links three competence dimensions that are strongly connected: creativity, innovation and entrepreneurship. it offers valuable resources to students to implement this tc throughout the assigned course tasks jointly with the specific competences. it supports teachers prompted to train and grade the students’ performance of this tc and to coordinate the methodologies used to train the tc. in this way, teachers could focus on activities that are more practical during their classes, reducing the time spent in theoretical concepts and the description of methodologies. its modular design integrated by learning objects allows their reuse in different contexts by instructors. last but not least, this e-learning system intends to contribute to the achievement of the new challenges originated by the covid-19 pandemic situation. as the main result, it is expected to provide society with better-trained graduates on this tc, more capable to address future society and business challenges with success, as well as more satisfied teachers. in regards to the limitations of this study, it must be acknowledged that the e-platform design has been made taking into account the specific context of the upv degrees and transversal competences. the authors cannot ensure that this design is the most suitable for other university contexts. despite this, the modular design provided by the learning objects can be reused by other e-learning platform designs based on other structural models. as regards to the content of the web, the authors have noted a lack of suitability of audio-visual resources for this tc when applied to engineering. evidence is needed about the effectiveness of the e-platform in the achievement of the objectives pursued. to address these drawbacks, future research lines are underway in the framework of institutional innovation and educational improvement projects (pimes) to generate more engineering-specific audio-visual resources for this tc, while organizing them by domain levels. finally, the impact assessment of the e-platform on the level of acquisition of tc04, as perceived by students and faculty, should be made by conducting student activities and their corres49 m. m. e. alemany, a. vallés lluch, j. f. villanueva lópez, j. garcía-serra garcía journal of small business strategy / vol. 31, no. 1 (2021) / 39-50 ponding evaluation in different subjects and through questionnaires for students, faculty and employers. acknowledgements the authors acknowledge the financial support partly from the etsii of upv and partly from the universitat politècnica de valència through the “coordinación metodológica a través de webs de apoyo en las titulaciones de la etsii para las competencias transversales” pime/19-20 ref.150, ref.151 and ref.152 projects. references alarcón, f., alemany, m. m. e., boza, a., cuenca, l., gordo, m. l., & ruiz, l. 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(2017). examining learning strategies, creativity, and innovation at smes using fuzzy set qualitative comparative analysis and pls path modeling. journal of business research, 70, 224–233. doi: 10.1016/j.jbusres.2016.08.016. https://www.iies.es/single-post/2018/02/20/apd-iie-encuesta-competencias-ingenieros https://www.iies.es/single-post/2018/02/20/apd-iie-encuesta-competencias-ingenieros https://www.iies.es/single-post/2018/02/20/apd-iie-encuesta-competencias-ingenieros https://doi.org/10.1016/j.compedu.2019.03.007 http://www.upv.es/entidades/ice/info/proyecto_institucional_ct.pdf http://www.upv.es/entidades/ice/info/proyecto_institucional_ct.pdf http://www.upv.es/entidades/ice/info/proyecto_institucional_ct.pdf strategy editors'ote we were pleased with the comments we received about our first special section, and this encouraged us to ask the administrator of s.b.a. for a contribution to jsbs. she consented to do a series of three articles, the first of which appears in this issue and deals with international opportunities for small business. this will be followed by essays on minorities and women in small business. we are extremely grateful to administrator saiki for her contributions, and we look forward to the participation of other entrepreneurial leaders in future issues. again, we would appreciate your comments on articles published in either section. lloyd d. elgart, d.b.a.,j.d.,dipl. in law editor lillian schanfield, ph.d. associate editor strategy don't mistake business plans for planning (it may be dangerous to your financial health) bill parks philip d. olson donald w. bokor university of idaho abstract most academic research concerning business plans suggests that business plans improve the performance of new firms, and virtually all textbooks related to small business advise entrepreneurs to prepare plans before starling a business. a survey of the chief executive officers (ceo) in the !nc. 500 (america's 500 fastest growing, privately held small firms) suggests otherwise —fewer than troenly percent of the respondents indicated that they had prepared complete business plans before start-up. furthermore, firms which prepared business plans were less profitable when entering the rapid growth phase than those which did not. this article explores benefits and limilations of business plan prepara lion. introduction several years ago at a regional sblda meeting a friend asked me if northroest river supplies had a written plan. no,wehadn't. thefriend reminded meoftwofirm: onehad not grown appreciablyin the last 15 years, and the other (taco time) was wildly successful. taco time had a business plan and the other didn'! his implication, "it's not too late —even fora sinner like you —if you at least create a five year written plan." somehow we never created that plan. ls northwest river supplies forever doomed to mediocrity for w'ant of a plan? —bill parks few people have contested the value of business plans for small business start-ups. ln fact, over the last 10 years increased advocacy for business plans has paralleled increased offerings of entrepreneurship and small business management courses in the academic community. virtually every small business textbook lauds the business plan as the map for the future. the purpose of this article is to explore the benefits and limitations of preparing a complete business plan and to argue that a business plan is not a substitute for planning. survey results will be presented showing the use of business plans by rapidly growing firms. these results cast doubt on the finality with which many authors advocate the preparation of formal business plans. why are business plans important? 15 successful small business management by megginson et al. is a typical small business text: the business plan could be the most important document you ever put together: it may be your "road map to riches." when you are up to your neck in the details of starting the business, the plan keeps you on target, keeps your creativity on track and concentrates your power on reaching your goal.... it provides a detailed blueprint for the activities needed to finance the business, develop the product, market it, and otherwise manage the new business (4, p. 155). business plans are blueprints and projections of what we imagine the prospective firm will find in the market and what effort and resources will be necessary to create and sustain that firm. the failure rate of new business has caused small business researchers, counselors, and consultants to search fora divining rod to identify prospectivefailures. the many failures associated with starting poorly conceived businesses, virtually doomed from the start, cause not only economic loss, but many personal tragedies as well. yet even business experts have great difficulty forecasting which prospective businesses will succeed and which will fail. though the common recommendation, "have a positive attitude," is critical for surmounting the bad times, it can generate euphoria and leaves little room for cautionary advice. however, a prospective business needs a realistic appraisal of its prospects before starting up. business plans can fill that need. without negative connotations, the business plan functions as a filter to ward off failure by reducing the number of poorly conceived new businesses. but discouraging bad business is not the same as increasing the level of success for good business. aside from raising money, a business plan's most appropriate use is to expose faulty reasoning and unrealistic assumptions. survey results just howcommonistheuseofbusinessplansamongrapidlygrowing firms —theonesmost likely to need a plan for external financing? questionnaires were sent to 442 firms from "the1987 inc. 500: america's fastest-growing private companies" published by inc. in december 1987. these companies were the fastest growing firms based on percentage of sales increases between the years 1982 and 1986. hence, 1982 was the latest year that firms could have started and still be included in the survey. naturally the majority of these firms started earlier. one hundred twenty usable replies were received to a question regarding the preparation of a formal business plan. business plan preparation was measured by asking if a formal business plan had been developed prior to start-up. a business plan was defined as a written document summarizing start-up information about a venture idea including an industry analysis, a marketing plan, financial needs, key personnel, etc. the listed possible answers were: 1) no formal plan was developed, 2) a partial plan was created, and 3) a complete plan was developed. results showed that fewer companies in the inc. 500 used business plans than small business experts would have assumed. in fact, 50 percent of the businesses had no formal plan. this result is consistent with an earlier study which found 50.7 percent had not prepared a business plan (8). in the present study 32 5 percent generated a partial plan, and only 17 5 percent completed a formal plan. thus, 82.5 percent of these highly successful firms responding to the questionnaire did not create complete plans. 16 another part of this study focused on examining the relationship between business plan preparation and profit performance. the hypothesis was that business plan preparation (i.e., formal strategic planning) should improve profitability. this position seemed reasonable even though some research disputes this reasoning (2,7). for the firms in the current study, 1982 profit rates (profits as a percent of sales) were obtained from finandal statistics in the december 1987 issue of inc.. al though 1986profit rates were also available in the inc. issue,1982 information was employed because there would likely be a more direct (contemporaneous) relationship between a business plan developed prior to start-up and performance in 1982 than 1986. in other words, less time would have lapsed between business plan preparation and resulting performance. in table 1 firms were classified by their profit rate and whether they had a complete, a partial, or no written business plan before start-up. observe that the percentage of firms with losses was lower for firms without plans than for those with complete plans. furthermore, on the profitability side, of those firms that were profitable, average profitability was substantially greater for firms without plans than for firms with complete plans. table 1. firms classified by business plan preparation and 1982 profits as a percent of sales breakrow 16%+ 11-15% 6-10% 1-5% even loss total no plan 6 4 13 19 3 15 60 /% 10% 7% 22% 32% 5% 25% 101% partial plan 2 6 5 11 4 11 39 /% 5% 15% 13% 28% 10% 28% 99% complete plan 0 0 i 6 3 11 21 /% 0% 0% 5% 29% 14% 52% 100% column total 8 10 19 36 10 37 120 notes: i) firms were from1 to 10 years old in 1982. to maintain the integrity of the original purpose of the study, data was only collected from firms founded after 1972. 2) percentages were calculated based on each row total and may not add to 100% due to rounding. the next step in the analysis was to explore why firms in table 1 with complete plans had a higher percentage of losses than firms having no written business plans. (firms with partial plans were excluded from the analysis because the survey question did not distinguish between a plan that was only a rudimentary sketch and one that was substantially complete.) initially it was thought that the year in which the firms were founded might account for this unexpected result. perhaps a good number of the 21 firms with complete plans were founded in more recent years and, hence, their younger age was the reason such a high percentage (52 percent) were unprofitable. in like manner, perhaps many of the 60 firms with no business plan were older and that their age related experience was the reason such a low percentage (25 percent) were unprofitable. 17 to evaluate this reasoning, firms were separated into two classes: those founded in 1981 or 1982 and those founded before 1981 (i.e., 1973 1980). table 2 contains the contingency table results for each of the two time periods. note that 51 of the 120 firms started in 1981 or 1982, and of these firms 7 had complete plans and 25 had no plans. further, 69 firms were started before 1981 and 14 had complete plans and 35 had no plans. as is evident, the results did not support the proposed reasoning. when comparing firms with complete plans to those having no written plans, the percentage of firms with losses was higher for firms with complete plans in both periods� (86 percent versus 36 percent in the 1981 1982 period, and 36 percent versus 17 percent in the 1973 -1980 period). as expected, firms in business for a longer period were less likely overall to have losses. however, their age did not explain the differences in loss percentages between firms with and without business plans in table 1. table 2. the effect of firm age on the plan —profitability relationship founding year 1981 1982 breakrow 16%+ 11-15% 6-10% 1-5% even loss total no plan 1 2 7 5 1 9 25 /% 4% 8% 28% 20% 4% 36% 100% partial plan 1 4 3 4 2 5 19 /% 5% 21% 16% 21% 11% 26% 100% complete plan 0 0 0 0 1 6 7 /% 0% 0% 0% 0% 14% 86% 100% column total 2 6 10 9 4 20 51 founding year 1973 1980 breakrow 16%+ 11-15% 6-10% 1-5% even loss total no plan 5 2 6 14 2 6 35 /% 14% 6% 17% 40% 6% 17% 100% partial plan 1 2 2 7 2 6 20 /% 5% 10% 10% 35% 10% 30% 100% complete plan 0 0 1 6 2 5 14 /% 0% 0% 7% 43% 14% 36% 100% column total 6 4 9 27 6 17 69 18 the founding ceo's prior management experience was another factor that could have affected the business plan and performance relationship. one might expect (hypothesize) that ceos with prior management experience would plan more effectively than ceos without prior management experience. their management experience and familiarity with business plans would combine to produce profitable results. to test this proposition, results from another survey question were utilized. each inc. 500 ceo was asked whether or not the firm's founding ceo had management experience prior to starting the firm. the contingency table results for these two groups are contained in table 3.this table shows that of the 120 firms of which 35 were started by ceos without prior management experience, 4 had complete plans and 24 had no plans. also, 85 firms were started by ceos with prior management experience and 17 of these firms had complete plans and 36 had no plans. the results did not support the hypothesis that management experience would combine with business plan familiarity to produce profitable results. in particular, different patterns were not observed for the two groups. that is, when comparing firms with complete plans to those having no written plans, the percentage of unprofitable firms was higher for firms with complete plans for both groups (75 percent versus 33 percent for ceos without prior management experience, and 47 percent versus 19 percent for ceos with prior management experience). therefore, founding ceo prior management experience was also not helpful in explaining the table 1 results. table 3. the effect of management experience on the plan— profitability relationship management experience: no breakrow 16%+ 11-15% 6-10% 1-5% even loss total no plan 3 2 5 6 0 8 24 /% 13% 8% 21% 25% 0% 33% 100% partial plan 1 1 2 2 1 0 7 /% 14% 14% 29% 29% 14% 0% 100% complete plan 0 0 0 1 0 3 4 /% 0% 0% 0% 25% 0% 75% 100% column total 4 3 7 9 1 11 35 management experience: yes breakrow 16%+ 11-15% 6-10% 1-5% even loss total no plan 3 2 8 13 3 7 36 /% 8% 6% 22% 36% 8% 19% 99% partial plan 1 5 3 9 3 11 32 /% 3% 16% 9% 28% 9% 35% 100% complete plan 0 0 1 5 3 8 17 /% 0% 0% 6% 29% 18% 47% 100% column total 4 7 12 27 9 26 85 19 another reasonable hypothesis was that a firm's technology (product versus service orientation) might affect the business plan performance relationship. product-oriented firms often require more preparation to start than service-oriented firms. it could then be argued that the unprofitable firms which had complete plans were more likely to be product-oriented and the complexity of their technology was the cause of their unprofitability. the survey question that was employed to examine this hypothesis asked ceos if their firms were primarily productor service-oriented. table 4 contains the contingency table results for these two groups. again, the results did not support the pro posed reasoning. when comparing firms with complete plans to those with no written plans the relationship was the same —the percentage of firms with losses was higher for firms having complete plans in both groups. table 4. the effect of firm type on the plan— profitability relationship product firms breakrow 16%+ 11-15% 6-10% 1-5% even loss total no plan 2 2 7 1 0 3 15 /% 13% 13% 47% 7% 0% 20% 100% partial plan 0 1 1 3 2 7 14 /% 0% 7% 7% 21% 14% 50% 99% complete plan 0 0 0 3 2 3 8 /% 0% 0% 0% 38% 25% 38% 101% column total 2 3 8 7 4 13 37 service firms breakrow 16%+ 11-15% 6-10% i "5% even loss total no plan 4 2 5 18 2 12 43 /% 9% 5% 12% 42% 5% 28% 101% partial plan 2 5 4 8 2 4 25 /% 8% 20% 16% 32% 8% 16% 100% complete plan 0 0 1 3 1 8 13 /% 0% 0% 8% 23% 8% 62% 101% column total 6 7 10 29 5 24 81 a final factor which might help explain table i is the size of the firm (number of employees) at start-up. the surveyed firms were separated into two classes: very small firms with three or fewer employees at start-up and larger firms with four or more employees at start-up. the hypothesis was that very small ventures would not need a complete (written) plan in order to become profitable because in these businesses important information usually can be analyzed and communicated with little resort to paper. in larger businesses, however, formalized plans would be needed to partially structure or control the planning-profitability relationship. 20 the contingency table results for these two groups are contained in table 5. observe that when comparing firms with complete plans to those with no written plans a different pattern or relationship existed between the two groups. the percentage of firms with losses was lower for firms with complete plans among the very small firms (17percent versus 25 percent) and higher among the larger firms (67 percent versus 25 percent). this different pattern, however, was opposite the results that were expected to occur given the hypothesis. that is, it was believed that the preparation of a formal business plan would be more effective in reducing losses among the larger firms than the very small ones; hence, although these results are worthy of further interpretation, the hypothe-sis was not supported. table 5. the effect of firm size on the plan— profitability relationship three or fewer employees at start-up breakrow 16%+ 11-15% 6-10% 1-5% even loss total no plan 4 3 10 9 1 9 36 /% 11% 8% 28% 25% 3% 25% 100% partial plan 2 3 3 4 3 5 20 /% 10% 15% 15% 20% 15% 25% 100% complete plan 0 0 1 2 2 1 6 /% 0% 0% 17% 33% 33% 17% 100% column total 6 6 14 15 6 15 62 four or more employees at start-up breakrow 16%+ 11-15% 6-10% 1-5% even loss total no plan 2 1 3 10 2 6 24 /% 8% 4% 13'/o 42'/o 8% 25% 100% partial plan 0 3 2 7 1 6 19 /% 0% 16% 11% 37% 5% 32% 101% complete plan 0 0 0 4 1 10 15 /% 0% 0% 0% 27% 7% 67% 101% column total 2 4 5 21 4 22 58 discussion although the profitability of the firms in this study was examined for only one year (1982), the results are still striking. perhaps it has been assumed that firms with business plans would naturally succeed and those without plans would fail. of course, many firms have succeeded without business plans: "after all, everybody gets lucky now and then" (9, p. 290). but when 82 5 percent of the successful small firms didn't develop a complete plan, perhaps it is time to reexamine the assumptions. one could even conclude that when an overwhelming majority of 21 rapidly growing small businesses reject advice to produce a business plan, such advice cou!d be irrelevant to their success. this overwhelming rejection is even more striking because of the pressure from venture capitalists and banks to create a business plan. regarding the business plan-profitability relationship in table i, it was not expected that firms with complete plans would have a higher percentage of losses than firms with no business plans. further, given the variables examined in this study, only firm size produced patterns that might help explain this relationship. although the firm size results were also not anticipated, they deserve discussion. firms frequently need to adapt or change during their early years because of market uncertainties. that is, it is difficult in a business plan prepared before start-up to predict perfectly what will occur after start-up. planning is a continuous activity that does not end with the completion of a business plan, and ceos need to have proper attitudes concerning changes in a firm. perhaps many ceos of the larger firms with business plans in table 5 did not make the necessary adjustments after start up; whereas ceos of the very small firms with business plans did adjust. a negative side of a formal business plan is that it can lead to rigidity in a business unless the ceo is constantly anticipating and adjusting. no matter how carefully investigated, most plans are obsolete before they can be implemented. both napoleon —"he who knows from the first whither he is going surely will not gofar" (3,p. 226)—and george 5.patton jr.—"...successful generals make plans to fit circumstances, but do not try to create circumstances to fit plans" (5, p. 235)—captured the essential notion of effective strategy. unfortunately, implementing strategy contained in business plans is liable to make the circumstances fit the plans. of course, business-plan proponents would suggest the simple solution of revising the business plan. but those who have endured the stress and tension of a business start-up know that the requisite energy and time are unlikely to become available. instead, the plan is more likely to remain the guide even when events have outstripped its reality. perhaps the word "plan" rather than the substance of its meaning has misled us. what is the relationship of plans to planning? if planning is viewed as learning, then the value of a business plan may end with its completion. in other words, learning occurs when the plan is being prepared and perhaps it should be destroyed shortly after completion. proactive business plans are environmentally based, but the environment changes, and if plans are not revised, businesses become isolated from their environment. it is doubtful that a business plan is the right vehicle with which to practice planning as learning. business plans tend to be revised only in times of crisis, resulting in a reactive instead of proactive business. "the challenge, therefore, is to recognize and react to environmental change before the pain of a crisis" (i, p. 71). if someone takes as valid this argument for learning as the essence of long term survival and success, then it is possible to see the potential danger implied in a business plan. tom peters is one advocate of the need for change in our perception of planning: the long-range strategic plan, of voluminous length, is less useful than before. but a strategic "mind-set," which focuses on skill/capabilitybuilding (e.g., adding value to the work force via training to prepare it to 22 respond more flexibly and more quality-conscious), is more important than ever. sound strategic direction has never been more important ....yetstrategic planning, as we conventionally conceive of it, has become irrelevant, or worse damaging. what is a good strategic plan? there is none. but there is a good strategic planning process.... flexibility is the necessary watchword (6, pp. 394, 510). consider further the remarks robinson and pearce make concerning their recent research. they studied small banks and measured "formality" of planning by the degree to which sophisticated written documents emanated from strategic planning. they stated: a major implication for small firm executives concerned with the design of their firm's strategic planning system is that little benefit can be expected from employing a highly formal process. small firms without a formal planning process performed as well as their formal planning counterparts. ...effective informal planning systems in small firms mainly de-emphasize the need for formal written documentation, reports and activities as a means for deformalizing their strategic planning system....but perhaps most important, the success of 'informal'lanners does not mean less planning is necessary. of six dimensions common to strategic planning systems, informal planners placed an emphasis equal to their formal planning counterpartss on every dimension (scanning environment, identifying d is tin cti ve compe-tence, concern for authority relationships in the organization, deployment of financial and physical resources consistent with strategy, and monitor/control strategy implementation) except goal-setting; they just did so with less formal written procedures (7, p. 206). conclusion the literature suggests that business plans are appropriate for two main purposes: to raise capital fora proposed or new venture and to examine the feasibility (and profit potential) of a new venture before making substantial time and capital commitments. an appropriate secondary purpose may be to use a business plan as a partial guide to organizing a firm's resources. the results of this study showed that, of the inc 500 firms surveyed, fewer companies used business plans than would have been expected based on the majority of the small business literature. in fact, 50 percent of the successful businesses had no formal written plan, 32.5 percent generated a partial plan, and only 17.5 percent completed a formal plan. another part of the study focused on examining the relationshipbetweenbusinessplanpreparationand profitability. although the profitability of the firms in this study was examined for only one year, the results were still striking: the percentageof firms with financial losses was lower for firms without plans than for those with complete plans. several variables were examined to try to explain this study outcome. only the firm size variable produced patterns that might suggest reasons for the unexpected results. additional research in the area is definitely needed. a limitation of the current study was that entrepreneurs who developed business plans were not asked why plans were developed or 23 the degree to which the plans were used. the assumption throughout the study was that developed plans influenced profitability. future research could also investigate the rigidity issue. it could well be that start-up business plans written by some entrepreneurs are implemented (followed) with little, if any changes, even though the environment has changed or is different than originally perceived. and this may be particularly true for larger versus very small new ventures. a negative side of the formal business plan is that it can lead to rigidity in a business unless the ceo is constantly anticipating and adjusting (planning). business plans should complement planning, they are not a substitute for it. we believe it is important for researchers to identify the characteristics that relate plans to profitability so that practitioners and counselors can be more effective in reducing start-up losses. perhaps, when entrepreneurs stubbornly refuse advice to create a formal business plan, they know something their advisors don'. references 1. degeus,artep.,"planningaslearning,"harvard businessreview,vol.66,no.2,1988: 70-74. 2. gasse, yvonne, "management techniques and practice insmall manufacturing firms," proceedings of the international council on small business, 1979, quebec city, canada. 3. ludwig, emil, napoleon (new york: pocket books, inc., 1961). 4. megginson, leon c.,charles r. scott, jr., lyler. trueblood,and william l.megginson, successful small business management, fifth edition (piano, texas: business publications, inc., 1988). 5. patton, george s. jr., war as i knew it (new york: houghton mifflin, 1947). 6. peters, tom, thriving on chaos (new york: alfred a. knopf, 1987). 7. robinson, richard b.jr., and john a. pearce ii, "the impact of formalized strategic planning on financial performance in small organizations," strategic management journal, vol. 4, 1983: 197-207 8. shuman, jeffrey c., john j. shaw, and gerald sussman,"strategicpianninginsmaller rapid growth companies," long range planning, vol. 18, no. 6, 1985:48-53. 9. tootelian, dennis h., and ralph m. gaedeke, small business management, second edition, (glenview, illinois: scott, foresman and company, 1985). 24 strategy the benefits of the sbi program: perceptions of former students gwen fontenot ernst & young michelle haarhues university of north texas lynn hoffman university of northern colorado abstract thisstudy focuses onanevaluationofformerstudents'perceptionsoftheskillsgained rohenserving as a consultant on an sbi case. the sbi course was compared to the capstone (policy) coursein an effort to determine the effectiveness of the sbicourse in enhancing specific skills in the students. by comparison, students found the policy course to be more effective in developing analytical skills and to be more usefulin their careers than the sbicourse. on the other hand, the sbicoursewas perceived to be more effective in developing interpersonal skills and operational skills than the poh'cy course. the sbi course was found to be effective in developing analytical skills, operational skills, and in terpersona! skills. students also recommended the sbicourse for other business students and found the course to be useful to them in their careers. introduction employers are looking for skills in today's business graduates that seem to be lacking. there is a concern that college business graduates do not have the interpersonal, leadership, and problem-solving skills that employers require. business owners and managers attribute the inadequacies of college graduates to the nature of most business curricula, wherein there is sometimes a lack of practical training where students can acquire actual business problemsolving experience. today's employers want more than just technical training in the studen ys area of concentration (6). employers are demanding employees with skills in leadership, problem solving, oral and written communication, along with attributes of motivation and assertiveness (5). business people believe such skills can be developed in students through student internships and specialized courses (9). a feeling exists among the business community that educators need to do more to relate their curricula to the reality of the business world (4). through their business curricula, universities can assist students in developing the skills being required by employers. harmon and butaney suggest that class projects and internships should be used to develop analytical and problem solving skills in students(3,8,10). the small 56 business institute (sbi)program is another tool business schools can use to assist students in this endeavor. the sbi program is designed to provide students with experience in problem solving and critical thinking. it allows students to apply their theoretical and conceptual abilities to practical business problem-solving situations (i). in project-oriented courses such as business policy and the sbi course, students utilize the case method of instruction to gain skills which will be used in the workplace. studies have shown that when students are allowed to integrate theory with practice through real experience, such as actual consulting cases, the students'echnical skills and interpersonal relationship skills are enhanced(7). the sbi course and the policy course are both designed to provide such opportunities for students. the major difference between the sbi course and the policy course is that actual businesses are assisted in the sbi course whereas textbook or written case studies are often utilized in other courses. research question the purpose of this research was to determine former students'erceptions of the effectiveness of the sbi class project. the business policy course was used as a basis of comparison in evaluating the skills developed and knowledge acquired in the sbi course. research methodology a questionnaire was administered to 504 students of various majors, the majority being business majors, who had been enrolled in an sbi course at a participating school in the united states. a skills/usefulness scale, developed by hoffman, fontenot, and viswanathan (2), was modified to include a comparison between sbi and the capstone course as well as additional demographics. the scale was used to measure the perceptions of skills and knowledge acquired in the sbi class as compared to those acquired in the capstone course. t-tests were used to measure the differences in mean responses between the sbi and policy students. the responses of the sbi students were factor analyzed to identify a set of skills the students perceived were developed in the sbi course. a multivariate analysis of variance (manova) and univariate f-tests were then used to test the effect of six independent variables on the resulting factors. survey instrument the modified instrument presented the 20 original scale items twice. respondents were first asked to respond to the statements as they pertained to their experience in the sbi program. then, if the respondents had not conducted the sbi project in their capstone course, they were asked to answer the same 20 questions related to the capstone course. (see appendix a for questionnaire). sample the sample for this study was drawn from students across the united states who had previously participated in the sbi program. a letter requesting the names and addresses of sbi student alumni was mailed to 502 sbi schools throughout the united states. from the results of this request, a data base of 504 sbi student alumni was created. a total of 15 questionnaires were returned due to an incorrect mailing address and 162 useable questionnaires were received. this is equivalent to a 32 percent response rate. the sample includes a representation of alumni who had attended schools in 22 different states and graduated between the years of 1974 to 1990. the 57 majority of respondents had worked on their sbi project while working towards a bachelors degree. the number of members per team varied among respondents, the majority being groups of 2. (see appendix b for demographics of respondents.) analysis of results comparison of course effectiveness students who had participated in the sbi program were asked to indicate their level of agreement with 20 statements beginning with the phrase "the sbi project/policies-strategies course helped me develop skills/knowledge in this area." students responded to the same scale separately for each of the two courses. a five-point likert scale was used with a "1"being "strongly agree" and a "5" being "strongly disagree." the ratings of the sbi course and the business policy course were statistically compared by means of a t-test. the mean scores on each statement for the sbi and policy courses are shown in table 1. the scale items are categorized into four factors in the table: analytical skills, interpersonal skills, operational skills, and career usefulness. these four factors were generated in the original study of sbi effectiveness using the same scale(5). responses of the sbi and policy students were significantly different on 11 of the 20 statements. significant differences were found in each of the four factor areas. in the area of analytical skills, on the items in which there were significant differences between the responses of students in the two courses, the students felt that the policy course was slightly more effective than the sbi course in developing these skills. the skills included were the abi i ity to conduct a situation analysis, to conduct an industry analysis, and to identify the rootof the problem as opposed to the symptoms of the problem. although the policy course was rated higher on these items, the students agreed or strongly agreed that these skills were developed in both courses. the sbi class was more effective in developing interpersonal skills than was the policy course. there were significant differences between the responses of sbi and policy students on all interpersonal skills items. the students'atings on the policy course were neutral on all four items while the students agreed that their interpersonal skills were developed or enhanced in the sbi course. students rated the sbi class as more effective in providing some of the operational skills necessary to run a business. the marketing and management skills appeared to be equally developed regardless of the course. however, entrepreneurial skills and personality traits needed to run a business were indicated as being present in the sbi course more so than in the policy course. although there was a significant difference between the responses of the sbi and policy students in the area of better understanding of the work environment, the students agreed that both the sbi class and the policy class helped in this area. they indicated that the policy class gave themaslightlybetterunderstandingoftheirworkenvironment. theothersignificantdifference among the items in the career usefulness area was whether the course should be a requirement for business majors. students indicated more strongly that the policy course should be a requirement than they did the sbi course. however, it should be noted that students agreed that the sbi course should also be required. their recommendation of this requirement was not as strong for the sbi course. also, many students noted that the policy course is already a requirement. this could account for the higher rating on this item. 58 table 1. comparisons of skill development in sbi course and business policy course mean scores scale items sbi policy analytical skills the sbi/policy project helped me recognize and identify problem situations in a business. 1.81 1.65 the sbi/policy project helped me conduct a situation analysis of the business under study. 1.95 1.78'he sbi/policy project helped me analyze the industry of the business under study. 2.16 1.81'he sbi/policy project helped me analyze the competitive situation of the client under study. 1.98 1.95 the sbi/policy project helped me identify the root of the problem as opposed to the symptoms of the problem. 2.04 1.65'he sbi/policy project helped me search for relevant information from within and outside the business. 1.66 1.90 sample mean 1.93 1.79 interpersonal skills the sbi/policy project helped me interact with client personnel. 1.86 3.08'he sbi/policy project helped me develop good rapport with the business owner/manager. 1.77 3.08'he sbi/policy project helped me deal with colleagues in the workplace. 2.08 2 84'he sbi/policy project helped me relate with individuals in the business world. 1.78 2.94'ample mean 1.87 2.99 59 table 1. comparisons of skill development in sbi course and business policy course (continued) mean scores scale items sbi policy operational skills the sbi/policy project helped me develop the entrepreneurial skills needed to run a business. 2.06 2.54'he sbi/policy project helped me develop the marketing skills necessary to run a business. 2.24 2.35 the sbi/policy project helped me develop the management skills necessary to run a business. 2.23 2.24 the sbi/policy project helped me develop the personality traits that may be necessary to run a business. 2.16 2.43'ample mean 2.17 2.39 career usefulness this course helped me better prepare myself for the job market. 2.15 2.06 this course has helped me develop a better understanding of my work environment. 2.34 2.03' use many of the skills i acquired from this course on my current job. 2.77 2.63 i found this course to be extremely useful 1.90 1.87 i feel this course should be made a requirement for all business majors. 2.27 1.56' will definitely recommend this course to other students. 1.68 1.73 sample mean 2.19 1.98 'indicates significant difference between groups at .05 level 60 sbi course evaluation the students'esponses of their perceptions of the sbi course were factor analyzed to determine if the same skills were developed by these students as were in the original pilot study conducted by hoffman, fontenot, and viswanathan (5). four factors emerged in the original study: analytical skills, interpersonal skills, operational skills, and career usefulness. all items in the current study loaded identically to the original study with the exception of two, which loaded on a separate factor. the additional factor was identified as course endorsement. the two items loading on this factor had originally loaded on the career usefulness factor. these two items included "i feel this course should be made a requirement for all business majors," and "i will definitely recommend this course to other students." the five factors and the items loading on each factor are shown in table 2. a factor loading of .50 was utilized as a minimum loading. table 2. sbi course factor analysis scale items analytical skills the sbi project helped me recognize and identify problem situations in a business. the sbi project helped me conduct a situation analysis of the business under study. the sbi project helped me analyze the industry of the business under study. the sbi project helped me analyze the competitive situation of the client under study. the sbi project helped me identify the root of the problem as opposed to the symptoms of the problem. the sbi project helped me search for relevant information from within and outside the business. interpersonal skills the sbi project helped me interact with client personnel. the sbi project helped me develop good rapport with the business owner/manager. the sbi project helped me deal with colleagues in the workplace. the sbi project helped me relate with individuals in the business world. operational skills the sbi project helped me develop the entrepreneurial skills needed to run a business. the sbi project helped me develop the marketing skills necessary to run a business. 61 table 2. sbi course factor analysis (continued) scale items operational skills (continued) the sbi project helped me develop the management skills necessary to run a business. the sbiproject helped me develop the personality traits that may be necessary to run a business. career usefulness this course helped me better prepare myself for the job market. this course has helped me develop a better understanding of my work environment. i use many of the skills i acquired from this course on my current job. i found this course to be extremely useful. course endorsement i feel this course should be made a requirement for all business majors.' will definitely recommend this course to other students.'items loaded on different factor than on original scale. effect of independent variables on factors six independent variables were analyzed separately to determine whether they had an effectonthefivefactors. amanovaandunivariatef-testswereusedforthisexamination. the six independent variables included (i) the students'ajor (2) the degree (graduate or undergraduate) being sought when the sbi project was completed (3) the grade received in the course in which the sbi project was completed (4) the grade received on the sbi project (5) the course in which the sbi project was completed, and (6) the number of team members working on the sbi project. a significant difference was found only in the major and the course grade. the average f-value and the p-values from the manova and univariate f-tests are shown in table 3. 62 table 3. analysis of independent variables on factors degree course project project ¹ team major level grade grade course members analytical skills 0.821 0.793 0.018'.118 0.449 0.155 interpersonal skills 0.009'.425 0.255 0.370 0.667 0.971 operational skills 0.243 0.275 0.376 0.384 0.349 0.502 career usefulness 0.036* 0.444 0.005'.052 0.510 0.400 course endorsement 0.251 0.868 0.274 0.595 0.822 0.520 average f 0.009'.781 0.007'.166 0.806 0.672 'denotes significance at the .05 level. the students'ajor and the course grade were further examined to determine where the differences were between responses of the sbi and policy students. nine categories were provided to describe the students'majors. the differences among majors were significant on the interpersonal skills and the career usefulness factors. mean scores for the various majors on these two factors are shown in table 4. on interpersonal skills, the mean score for the entire sample was 1.881.it appears that the major differences were with the marketing, non-business, and general business majors. the marketing (1.417)and non-business (1.250) majors'ean scores indicate that they felt more strongly that the sbi course helped develop interpersonal skills. on the other hand, the general business majors (2.200) felt less strongly that these skills were developed during the course. table 4. analysis of major on interpersonal skills and career usefulness mean scores major interpersonal skills career usefulness accounting 2.125 2.937 computer information systems 1.875 1.938 finance 2.111 2.722 management 1.918 2.305 marketing 1.417 2.000 other business 1.943 2.250 non business 1.250 2.875 double major 2.037 2.262 general business 2.200 2.500 sample mean 1.881 2.306 63 the ratings of the management majors (2.305), other business majors (2.250), and those students with double majors (2 262) on the career useful ness factor were inl inc with the sample mean of 2.306. the computer information systems (cis) (1.938)and marketing (2.000) majors indicated more strongly that the course was useful to them in their careers. the accounting (2.937), finance (2 722),non-business(2 875), and general business(2 500) majors revealed that they did not perceive the sbi course to be as useful to them in their careers as did the entire sample. these findings are consistent with the findings of the original study, conducted by hoffman, fontenot, and viswanathan, which indicated that the quantitatively-oriented students found the course less useful than the non-quantitatively-oriented majors (5). all students sampled who had enrolled in an sbiclass received a course grade of c or better. table 5 provides the mean scores by course grade on the analytical skills and career usefulness factors. the differences between the groups (grades a, b, and c) appear to be in the c group. students who earned a c in the course were neutral (2.667) in their response as to whether they developed analytical skills in the course. unlike the entire group of respondents (2.304), students who received a c in the course did not feel that the sbi course was as helpful to them in their careers (3.5). table 5. analysis of course grade on analytical skills and career usefulness mean scores course grade interpersonal skills career usefulness a 1.901 2.273 b 1.983 2.267 c 2.667 3.500 sample mean 1.937 2.304 discussion although sbi courses and consultations are sometimes approached differently among the participating schools, students who have participated in the program agree that they have benefitted from the experience. the shortcomings of the sbi program appear to be in the development of analytical skills and the usefulness of the experience in the students'urrent careers. therespondentsindicatedthat thesbiexperiencedidnotallowasgreatanopportunityfor the development of analytical skills as did the policy course. the approach used by some sbi programs could explain this finding. students in the sbi program are often presented with a predetermined problem which is to be solved. this denies the students the opportunity to examine the situation from an unbiased perspective. the students'nalytical skills could 64 possibly be better enhanced if they were presented with an overview of the company much like that in a written case and allowed to identify the symptoms and problems without the benefit of the sbi directors'r business owners'rior influence. the career paths of the respondents were not traced in this study. consequently, no conclusions can be drawn as to the perception that the sbi course was less useful in the respondents'areers. one possibility is that the respondents may have been employed primarily by large corporations and had little use for the entrepreneurial skills developed through the sbiprogram. the types of cases analyzed in both policy and sbi courses could have also impacted responses as to the usefulness of the sbiprogram. many times sbicases are extremely focused while many textbook cases are written to provide a broad perspective for analysis. when examined more closely it was found that variation in responses existed between studentsof variousmajorsas well asbetweenstudentseamingdifferentgradesinthesbi course. analytical skills and operational skills appeared to be developed equally as well among all majors. however, marketing majors and non-business majors found the sbi course especially beneficial in utilizing or developing their interpersonal skills. computer information systems and marketing majors found the sbicourse to be more useful in their careers than did the other majors. non-business majors and accounting majors found the course to provide the least amount of career usefulness. the differences in responses could be due to the types of cases the students were assigned. non-business majors may be employed in areas where none of the aforementioned skills are utilized. the accounting students may have worked on cases with problems other than accounting issues. also, if they were assigned to accounting cases, many times those cases involve the organization and establishment of a recordkeeping or accounting system. if the accounting students are performing audits or providing tax assistance in their current accounting positions, the work done in the sbi course could have been very different from the work performed in their current jobs. the grade the studentsearned in the course had an effect ontheir perceptions of analytical skills developed and career usefulness of the course. those students earning a grade of c in the course did not feel that the course was as useful to them as did other students. the students who made a c also felt less strongly that they had developed analytical skills in the course. considering that a c is the lowest grade earned by the students responding to this survey, these students may not have received the same benefits from the course as other students. this could be partly due to their lack of effort in working on the project. perhaps the backgrounds of these students were not as strong as those who earned higher grades. conclusion the students who enrolled in an sbi course felt that they developed interpersonal skills, analytical skills, and operational skills in the course. they also indicated that the course was helpful in their careers and they endorsed the course as part of the business curriculum. the students enrolled in sbi courses felt they had enhanced their interpersonal skills and operational skills more so than in the policy course. while students indicated strong agreement that interpersonal skills were gained through the sbi course, they were neutral in their opinions as to whether the same skills were gained in the policy course. 65 sbi students perceived that the sbi course helped provide them with the operational skills needed to operate a business. they noted particularly that their entrepreneurial skills and personality traits were enhanced through the sbi course. while students acknowledged that they learned analytical skills in the sbicourse, they felt that those skills were developed more strongly through the policy course. overall, the students found the capstone course to be more useful in their careers than the sbi course. in future studiesthescaleshouldbe revised toexamine thedevelopmentofotherskills such as communication skills. the analysis should be expanded to examine the effect of age, current job position, gender, school size, the clients'eaction to the students'eport, and the year the studentsgraduated. also,byutilizingfollow-uptechniques,theresponserateinthisstudycould have been increased. bibliography 1. ater, e.c. & k.j. coulter (1980). "consumer internships: encouraging consumer/ business dialog." journal of business communications, 17(2), 33-39. 2. hoffman, lynn, gwen fontenot & r. viswanathan (1990). "an exploratory evaluation of the effectiveness of the sbi program as perceived by quantitative and nonquantitative majors." proceedings, 80-85. 3. harmon, g.d. & g. butaney (1985). "marketing classes need taste of the real world." association management, 32(2), 46-50. 4. laidlaw, william k. (1989). "newsletter: us business schools." multinational business, autumn, 62+. 5. lantos, g p. & g. butaney (1985). "marketing classesneed tasteof the real world." marketing news, 19(15),3,6,8. 6. laser, s.a. (1980). "customize your education program to meet members'eeds." association management, 32(2), 46-50. 7. lawrence, edward c. (1990).'t.earning portfolio management by experience: university student investment funds." the financial review 25, 165+. 8. napier, h.s. & h.c. johnston (1988). "the president-professor: business reality in the classroom." arkansas business and economic review, 20(4), 1-4. 9. perry, phillip a. (1989)."firms want more frommarketing schools." marketing news, 23, 1-2. 10. wensley, r. (1983). "teaching marketing strategy: pretentions or practical?" quarterly review of marketing, 9(1), 9-14. 66 appendix a section ¹1a alumni perceptions about the small business institute(sbi) project please fill out this section which has a few statements relating to some of your experiences working on a sbi project. for each item, please indicate your extent of agreement with the following statement by circling the number which best corresponds to your answer. "the sbi project helped me develop skills/knowledge in this area" ncttttcr strongly agrcc nor strongly agree agree disagree disagree disagree 1. how to identify the root of the problem as opposed 1 2 3 4 5 to the symptoms of the problem........... 2. how to recognize and identify problem situations 1 2 3 4 5 in a small business............... 3. how to conduct a situation analysis of the small 1 2 3 4 5 business under study............... 4. how to analyze the industry of the small business 1 2 3 4 5 under study.................... 5. how to relate with individuals in the business world.. 1 2 3 4 5 6. how to search for relevant information from within 1 2 3 4 5 and outside the small business.......... 7. how to analyze the competitive situation of the 1 2 3 4 5 client under study................. 8. how to develop good rapport with the client..... 1 2 3 4 5 9. how to interact with client personnel... 1 2 3 4 5 10. how to deal with colleagues in the workplace..... 1 2 3 4 5 11. the marketing skills necessary to run a small business i 2 3 4 5 12. the entrepreneurial skills needed to run a small 1 2 3 4 5 business...................... 13. i use many of the skills i acquired from the sbi project 1 2 3 4 5 on my current job................... 14. the management skills necessary to run a small 1 2 3 4 5 business....................... 15. the personality traits that may be necessary to run a 1 2 3 4 5 small business................... 16. i feel a sbi project should be made a requirement for 1 2 3 4 5 all business majors.................. 17. this project helped me better prepare myself for the i 2 3 4 5 job market....................... 18. this project has helped me develop a better i 2 3 4 5 understanding of my work environment.......... 19. i found the sbi project to be extremely useful.... i 2 3 4 5 20. i will definitely recommend the sbi pretext to other 1 2 3 4 5students....................... 67 section ¹ib background 1. what is the name of the school where you worked on the sbi project? 2. in which state is the school located? 3. i worked on the sbi project in a: policies class sbi class small business management class entrepreneurship class other (explain) 4. was this class required or an elective? required elective 5. i worked on the sbi project while working towards my: bachelors degree masters degree doctorate other (explain) not working toward a degree 6. when did you graduate? (if you have graduated more than once since working on the sbi project, please give the graduation year closest to the time when you completed the sbi project) 7. what was your major? acmunting computer information systems finance management marketing other business major (spedfy) non-business major (specify) 8. what was your final, overall grade point average (cpa) 9. what grade did you receive on the sbi project? a b c d f don't remember other (specify) 10. what grade did you receive in the course in which the sbi project was completed? a b c d f don't remember other (specify) 11. how many student team members, including yourself, worked on the sbi project? 1 2 3 4 5 or more 12. what were the major issues in your sbi project? (check more than one if applicable) marketing issues computer information issues management issues finance issues acmunting issues other (spedfy) 13. what is your current job title? 14. who is your employer (firm name)? 15. how many years have you worked with this firm? i f the sbi project was done in your business policies/strategies (capstone) course, please end here and mail in your questionnaire. otherwise, continue with the next two pages of the questionnaire. 68 section ¹2a alumni perceptions about the business policy/strategy course thisadditional sectionisjust for thosealumni who had abusinesspolicy/strategycourse which did not include a sbi project. these statements relate o~nl to your experiences in the business policy/strategy (capstone) class. for each item, please indicate your extent of agreement with the following statement by circling the number which best corresponds to your answer. "the policies/strategies course helped me develop skills/knowledge in this area" neither strongly agree rior'trongly agree agree dlsagrce dlsagrec dlsagrcc 1. how to identify the root of the problem as opposed 1 2 3 4 5 to the symptoms of the problem........... 2. how to recognize and identify problem situations 1 2 3 4 5 in a business.................. 3. how to conduct a situation analysis of the business 1 2 3 4 5 under study.................... 4. how to analyze the industry of the business under 1 2 3 4 5 study........................ 5. how to relate with individuals in the business world.. 1 2 3 4 5 6. how to search for relevant information from within 1 2 3 4 5 and outside the business............. 7. how to analyze the competitive situation of the 1 2 3 4 5 client under study................. 8. how to develop good rapport with the business 1 2 3 4 5 owner/manager.................... 9. how to interact with client personnel... 1 2 3 4 5 10. how to deal with colleagues in the workplace..... 1 2 3 4 5 11. the marketing skills necessary to run a business... 1 2 3 4 5 12. the entrepreneurial skills needed to run a business 1 2 3 4 5 13. i use many of the skills i acquired from thecapstone 1 2 3 4 5 course on my current job................ 14. the management skills necessary to run a business.. i 2 3 4 5 15. the personality traits that may be necessary to run a 1 2 3 4 5 business...................... 16. i feel the capstone course should be made a 1 2 3 4 5 requirement for all business majors......... 17. this course helped me better prepare myself for the 1 2 3 4 5 job market...............,....... 18. this course has helped me develop a better 1 2 3 4 5 understanding of my work environment.......... 19. i found the capstone course to be extremely useful.. 1 2 3 4 5 20. i will definitely recommend the capstone course 1 2 3 4 5 to other students.................. 69 section f)2b background 1. was this class required or an elective? required elective 2. i worked on the business policy/strategy project/case while working towards my: bachelors degree masters degree doctorate other (explain) 3. when did you graduate? (if you have graduated more than once since working on the business policies/strategies (capstone) project/case, please give the graduation year closest to the time when you completed the policies/ strategies project/case) 4. what grade did you receive in the business policy/strategy course? a b c d f don't remember other (specify) 5. how many student team members, including yourself, worked on your projects/cases? 1 2 3 4 5 or more thank you very much for your cooperation 70 appendix b demographics the following questions were used to obtain demographics from the survey respondents. their responses to the specific questions are provided below. i worked on the sbi project while working towards my: degree percent bachelors 82.7 masters 16.7 not working towards a degree 0.6 when did you graduate? year percent 1974 to 1988 21.0 1989 35.0 1990 44.0 what was your major? major percent accounting 5.6 computer information systems (cis) 2.5 finance 6.2 general business 6.2 management 35.2 marketing 16.7 other business major 13.6 non-business major 1.9 double major 12.3 how many student team members, including yourself, worked on the sbi project? number percent 1 17.3 2 45.1 3 21.6 4 11.1 5 or more 4.9 71 summer journal re-examining firm size and exporting: an empirical analysis of south carolina firms j. kent poff north georgia college & state university kpoff@ngcsu.edu kirk c. heriot columbus state university heriot_kirk@colstate.edu noel d. campbell university of central arkansas ncampbell@uca.edu abstract mittlelstaedt, harben, and ward (2003) and wolff and pett (2000) offer contradictory evidence on the impact of firm size (by employment) and the propensity to export. using a data set very similar to that of mittelstaedt et al., we re-examine the issue. although we find that firm size has a significant impact on export propensity, we fail to find a threshold at twenty employees, as mittelsteadt, et al., did. our findings are more supportive of wolff and pett, who argue very small firms are capable of exporting. this paper concludes by considering the implications for researchers and policymakers. introduction exporting by small firms is a significant economic activity. the u.s. bureau of census indicates that over 239,000 firms exported goods in 2005. small companies account for 97 percent of all u.s. exporters, a percentage that has risen slightly since 1995. small exporters exported goods valued at $228 billion, which represented 29.1 percent of total u.s. goods exported (u.s. census bureau, 2007). mcdougall and oviatt (1999) are credited w i t h i d e n t i f y i n g a l i n k b e t w e e n internationalization and entrepreneurship. however, they expressed caution that the “born global” phenomenon was universally appealing to all firms, regardless of size. their caution was guided by the fact that they noted that there was largely no empirical support for the recommendation that firms internationalize. given figures such as these, it is unsurprising that the academic literature explores the relationship between firm size (by number of employees) and exporting (see wolff and pett, 2000, and mittelstaedt, harben, and ward, 2003). although there any many ways for firms to internationalize, like much of the literature, we focus on exporting. the findings are inconsistent in this area. some studies identified a positive relationship between firm size and export success (e.g., lall and kumar, 1981; kaynak and kothari, 1984). other studies found no relationship (e.g., czinkota and johnson, 1983; and moini, 1995). finally, another group of studies found an inverse relationship (e.g., cooper and klienschmidt, 1985). mittelstaedt, harben, and ward (2003) argued that firms with fewer than 20 employees (hereafter, micro firms) fall below a critical threshold and will face so many major obstacles to exporting that they should not attempt to export. however, their conclusions contrasted with wolff and pett (2000), who argued that micro firms are capable of exporting, and with mcdougall, shane, and oviatt (1994) and oviatt and mcdougall (1995) and others (e.g., autio, sapienza, and almeida 2000; rialp-criado, urbano, and vaillant 2003), who argued that 63 strategyjournal of small business mailto:kpoff@ngcsu.edu mailto:kpoff@ngcsu.edu mailto:heriot_kirk@colstate.edu mailto:heriot_kirk@colstate.edu some new ventures are created with an intent to sell internationally. the purpose of this paper is to revisit the relationship between firm size and export propensity, focusing on micro firms, using mittlelstaedt et al (2003) and wolff and pett (2000) as our antithetical backgrounds, and using a data set very similar to that of mittelstaedt et al. we argue that mittelstaedt et al. did not prove that micro firms are i n c a p a b l e o f e x p o r t i n g , b u t i n s t e a d demonstrate that micro firms are less likely to export. their 20-employee threshold is not an absolute value, but is the result of the specific method mittelstaedt et al. used to analyze their data. although we find that firm size has a significant impact on export propensity, we fail to find a threshold at twenty employees. instead, we find that the evidence supports the existence of a “threshold” at any arbitrarily chosen partition value; that is, the evidence fails to support the existence of a threshold at any particular number of employees. our findings are supportive of the wolff and pett argument, which said very small firms are capable of exporting. this is not a trivial result. where there are inconsistent results in the literature— inconsistencies in what we know—there is the increased likelihood of poor public policy and poor business strategy decisions. the two practical end products of academic research in business are advice for public policy makers and advice to business strategy makers. academic research would fail in this regard if, for example, micro business owners or business assistance professionals fail to pursue exporting until a firm has grown to a certain threshold size because of a mistaken academic result. academic research would fail in this regard if, for another example, policymakers fail to pursue the idea that economic development can occur through exporting by micro firms because of a mistaken academic result. we do not claim to have conclusively resolved the empirical inconsistencies in the relationship between firm size and exporting. however, we do provide another piece of evidence that moves us in that direction. in the next section, we provide a brief review of the literature on exporting by small firms with a particular emphasis on size as a determinant of exporting ability. then, we describe our research design and discuss our results using a sample of firms obtained from a database of over three thousand firms m a i n t a i n e d b y t h e s o u t h c a r o l i n a department of commerce. in the final section, we discuss the implications of our findings and make suggestions for both future research and public policy officials. literature review small firms and micro firms have emerged as one of the most widely researched topics of the last 30 years (wright, 1993; autio, sapienza, and almeida, 2000; baird, lyles, and orris, 1994; aitken, hanson, and harrison, 1997; and oviatt and mcdougall, 1995). this section will emphasize particular research relevant to firm size as a determinant of exporting. while other forms of market entry are available to small firms, exporting remains a significant means of foreign market entry (pett and wolff, 2003; hollenstein, 2003) and is the focus of this paper. several studies have measured performance outcomes in terms of export performance or export intensity, with mixed results. some studies found a positive relationship between firm size and export success (e.g., lall and kumar, 1981; kaynak and kothari, 1984). other studies found no relationship (e.g., czinkota and johnson, 1983; and moini, 1995). a final group of studies found an inverse relationship (e.g., cooper and klienschmidt, 1985). a study from the first group, baird, lyles, and orris (1994), found that international firms are larger and tend to be industrial firms rather than retail or service firms. dhanaraj and beamish (2003) confirmed this finding using a resource-base theory of the firm (penrose, 1959; barney, 1991) in a sample of canadian firms. wo l f f a n d p e t t ( 2 0 0 0 ) , h o w e v e r , demonstrated that small firms are capable of exporting. they concluded that small firms use a different decision process to export than do large firms. they argued that the journal of small business strategy 64 resource-based view of the firm may serve as a useful explanation for the success of these small exporters. very small firms in their study appeared to capitalize on unique r e s o u r c e s t h a t w e r e i n d e p e n d e n t o f economies of scale or other cost efficiencies. the results of mittelstaedt et al. (2003) and mittelstaedt and ward (2005) are in sharp contrast to those of wolff and pett (2000). using a sample of manufacturing firms in south carolina, they found that micro firms are far less likely to engage in exporting than small firms with between 20 and 500 employees (mittelstaedt et al, 2003). significantly, they found that firms behave as if 20 employees is a minimum threshold, b e l o w w h i c h f i r m s d o n o t e x p o r t . mittelstaedt et al. concluded that micro firms simply do not have the resources to engage in exporting. they concluded that “firm size serves as a necessary as well as a sufficient c o n d i t i o n f o r e x p o r t i n g success.” (mittelstaedt, harben, and ward, 2003) they reasoned that “if minimum firm size is a necessary condition for export success, then exporting firms will be larger than non-exporting firms” in the same industry (mittelstaedt, harben, and ward, 2003). our interpretation of their work is that t h e y v i e w e d e x p o r t i n g s u c c e s s dichotomously rather than intensively, wherein if a firm self-reported any amount of exports, then that firm is coded as a success. to test their hypothesis, they calculated the exporting conditional probabilities of firm size distribution within a given industry. t h e y c o m p a r e t h e c a l c u l a t e d s i z e distribution with the actual size distribution of exporting firms to determine whether c e r t a i n s i z e s o f f i r m s a r e “underrepresented” (mittelstaedt, harben, and ward, 2003). they found that small firms are less likely to export than are large firms. thus, they write, “in the united states, how small is too small to export? the answer appears to be 20 employees,” (2003), and “the bad news for most firms with fewer than 20 employees is that they appear to be too small to acquire the knowledge or experience necessary to engage in the exporting process.” (2003). a more recent study by mittelstaedt and ward (2005) also found a significant positive relationship between firm size and the propensity to export. however, in this study, the authors noted that their model captured not only a difference in export propensity between small and large firms, but also between micro firms and small firms. researchers exploring the relationship between firm size and export propensity have continued to produce contradictory findings. for example, thomas, and grosse (2005) also suggested that firm size matters. thomas and grosse (2005), used size as an indicator of resource availability. their initial hypothesis is consistent with mittelstaedt et al (2003). they argued that “firms that possess higher levels of resources are more likely to engage in exporting to exploit them” (thomas and grosse, 2005). however, their results did not show a positive relationship between firm size and export propensity. they identified a positive r e l a t i o n s h i p b e t w e e n f i r m s i z e a n d importing. they point out that their study was limited to the study of the largest mexican firms. thus, the authors noted the range restriction of their measure for firm size as a limitation, but noted that range restrictions are a significant problem with much of the research on internationalization, exporting, and firm size. finally, a recent study by hollenstein (2005) argued that size may be a determinant of exporting, but only up to a certain size threshold (firms with up to 200 employees). hollenstein’s analysis of a sample of swiss firms was divided into three sub-samples to capture subsets based upon three primary size categories: small, medium, and large firms. firm size was not found to exert an independent influence on internationalization in the sub-sample of large firms (greater than 200 employees). the contradiction between the conclusions of wolff and pett (2003) and thomas and grosse (2005), and the conclusions by mittelstadt et al. (2003), hollenstein (2005), and others, is more appearance than substance. we argue that mittelstaedt et al. did not conclusively demonstrate that micro firms are incapable of exporting. rather, they demonstrated that micro firms are less likely to export than larger firms. we argue volume 19, number 1 spring/summer 2008 65 that the 20-employee threshold is not an absolute value, but is the result of the specific method mittelstaedt et al. used to analyze their data. methodology and results we examined data from the 2000-2001 south carolina industrial directory to determine whether firm size serves as a necessary and sufficient condition for export success among small manufacturing firms. we used data drawn to replicate the mittlelstaedt et al (2003) study. 1 more current versions of the south carolina industrial directory are available, but we used the 2000-2001 edition to remain consistent with the prior study. we believe this is a methodological strength for us, as it allows us to test their conclusion that 20 employees are a necessary condition for exporting, using what is essentially their own data set. we examined the data to determine whether south carolina firms with fewer than 20 employees export. if 20 employees is a necessary condition for exporting, then one should be unable to observe firms with fewer than 20 employees actually exporting. after sorting the dataset by sic code, we conducted chi-squared tests after partitioning the sample using arbitrarily chosen firm sizes. if, using a chi-squared test, we find evidence that an “exporting threshold” exists at an arbitrarily chosen cut-off number of employees, then the similarly derived evidence for a threshold at 20 employees will fail to persuade. mittelstaedt et al. examined 2,848 firms from 49 three-digit sic industrial sectors. the current study from the same data set uses 3,771 firms. the specific 49 sectors were not listed in the first paper, so our data could not be restricted to these sectors. we wish to emphasize what constitutes an “exporting firm” for the purposes of this paper, given the dataset we used. the data recorded self-reported answers measuring whether a firm exported during the year, on a “yes” or “no” basis. thus, if a firm reports exporting, we coded that firm as an export success. the data did not allow us to measure sales volume or profit volume of exports, nor did it allow us to measure export intensity or export intentions. it is helpful to plot the data, as shown in figure 1, to obtain a general understanding of the data. figure 1 shows the percentage of firms that export by the number of employees in the firm (from 0 – 500 employees). figure 2 is identical to figure 1, except it emphasizes very small firms (0 – 50 employees). as most research suggests, figure 1 shows that larger firms are more likely to export than smaller firms. the figure shows that 15 percent of firms with one employee export and this percentage gradually increases with no discontinuities until 37 percent of firms with 500 employees export. figure 1 and figure 2 plot the number of employees against the cumulative percentages of firms that export. for example, 37 percent of all firms with up to 500 employees export. the cumulative percentage is used to reduce random fluctuations in the exporting percentage of firms with different number of employees. the random fluctuations make interpreting the graph very difficult. visual observation of the raw data does not appear to support the mittelstaedt et al. conclusion that micro firms with fewer than 20 employees cannot export. although larger firms are more likely to export, micro firms in south carolina do export over the observation period, and the data show no unusual patterns around the 20-employee mark. figure 2 emphasizes very small firms and shows that 44 percent of firms with zero employees export. a firm with zero employees would be a self-employed person with no additional employees. remember, a self-employed person is not an employee of the firm. this export percentage is higher than the average export percentage of any other level of employment. this observation is consistent with anecdotal evidence that micro firms with a web site or ebay presence will export. the results are qualitatively journal of small business strategy 66 1 the data sets used by the other researchers (e.g., hollenstein, 2005 and thomas and grosse, 2005) were not available to the researchers. volume 19, number 1 spring/summer 2008 67 figure 1. figure 2. unchanged if we censor our sample to exclude zero-employee firms. although the percentage of exporting companies falls after censoring the data, it never dips below 15 percent of firms. whether we include or exclude zero-employee firms in our sample, the evidence indicates that a sizeable portion of micro firms are exporting. mittelstaedt et al. sorted the south carolina firms by three digit sic codes and then partitioned each selection of firms into four groups: micro (fewer than 20 employees), small (20-99 employees), medium (100 – 4 9 9 e m p l o y e e s ) , a n d l a r g e ( 5 0 0 + employees). they counted firms that export and firms that do not export by sic classification within each size group. they performed chi-square tests on each sic classification. they found 31 of the 49 sic classifications studied have statistically significant differences across firm sizes. mittelstaedt et al. gave a very helpful example on pages 71-72 of their paper, in which they demonstrated their analytical technique in detail for one business sector, rather than simply reported 49 chi-squared test results. we followed their lead, and also analyzed one sector in detail, as an illustrative example of the general procedure. the example concerns sic code 355 (special industry machinery and equipment) which has a total of 120 firms, which they partitioned by number of employees. please see the left-hand side of table 1, wherein we offer a similar example, with the data partitioned as mittelstaedt et al. did. the left-hand side of table 1 shows the numbers of firms that export and do not export in each partition, and also shows the calculation of the chi-square test. we calculated the expected values by assuming that the average percentage of firms exporting within the sample will be the same as the average percentage of firms that export within each partition. this is what one would expect if there were no relationship between firm size and export propensity. for example, 63.33 percent (76 firms out of 120 firms) of the firms in this sic classification choose to export. therefore, 63.33 percent of firms will export in each partition. of the 70 micro firms, we expect that 44.33 of these firms will export. this analysis creates an allocation exercise; therefore, the actual value minus the expected value is a zero sum calculation. that is, the actual number of firms that export (and do not export), minus the expected number of firms that export (and do not export), sum to zero across the columns and down the rows. therefore, when firms in some categories export more than average (i.e., large firms), then it follows that firms in some other category will have to export less than average (i.e., small firms). we then calculated the sum of squared errors. the test statistic was formed by the total sum of squared errors, and takes a chi-squared distribution. figure 1 and figure 2 show that small firms export less, therefore any partition of firms according to sic code will show that smaller firms export less than larger firms. this is what table 1 shows: statistically, significantly fewer firms than expected export within the “under 20 employees” partition. our conclusion is that size matters, and we reject the hypothesis that there is no relationship between firm size and export propensity. rather than demonstrating that firms with fewer than 20 employees are too small to export, this example (and the original examples in mittelstaedt et al.) shows that micro firms do export; albeit a smaller percentage of these firms export than would be expected based upon the average of all firms in sic code 355. this argument is consistent with the evidence obtained from figure 1 and figure 2. contrary to the mittelstaedt et al. assertion (2003), firm size is not a necessary condition for exporting success, whether firm size is fewer than 20 employees or more than 20 employees. the mittelstaedt et al. finding that firms with fewer than 20 employees are too small to export is a result of their particular partition of the dataset at 20 employees. to demonstrate this, we partitioned the data using arbitrarily chosen threshold figures, to determine whether the data also supports any arbitrarily chosen partition as an export threshold. we partitioned the data from sic code 355 into firms with fewer than 100 journal of small business strategy 68 volume 19, number 1 spring/summer 2008 69 table 1. example of chi-squared tests of partitioning the sample at different values sic code 355, special industry machinery and equipment initial partition into four sizes of firms an arbitrary partition into four sizes of firms actual values <20 2099 100499 500+ total <100 100200 200500 500+ total export 39 25 10 2 76 64 8 2 2 76 don't export 31 13 0 0 44 44 0 0 0 44 total 70 38 10 2 120 108 8 2 2 120 expected values total total export 44.33 24.07 6.33 1.27 76 68.40 5.07 1.27 1.27 73.47 don't export 25.67 13.93 3.67 0.73 44 39.60 2.93 0.73 0.73 42.53 total 70 38 10 2 120 108 8 2 2 116 actual expected values total total export -5.33 0.93 3.67 0.73 0.00 -4.40 2.93 0.73 0.73 0.00 don't export 5.33 -0.93 -3.67 -0.73 0.00 4.40 -2.93 -0.73 -0.73 0.00 total 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 test statistic sum sq errors sum sq errors 0.64 0.04 2.12 0.42 3.23 0.28 1.70 0.42 0.42 2.83 1.11 0.06 3.67 0.73 5.57 0.49 2.93 0.73 0.73 4.89 8.80 7.72 pvalue* pvalue* 0.032 0.052 * p-values indicate statistically significant differences in export propensity across differently-sized firms, indicating that smaller firms are significantly less likely to export than larger firms. however, as the right-hand column indicates, the number of employees at which this threshold occurs is arbitrary, and at the choice of the analyst. employees, firms with 100-200 employees, firms with 200-500 employees, and firms with more than 500 employees. we report the results on the right hand side of table 1. this example shows that 4.40 fewer firms with less than 100 employees export than would be expected. the test statistic reveals statistically significant differences. the pvalues indicate statistically significant differences in export propensity across differently sized firms, and indicate that smaller firms are significantly less likely to export than larger firms. however, as the right-hand column indicates, the number of employees at which this threshold occurs is arbitrary and at the choice of the analyst. therefore, the data provides the same support of the existence of a threshold at an a r b i t r a r y d i v i s i o n o f t h e d a t a ( 1 0 0 employees) as it does for the mittelstaedt et al. division of the data at twenty employees. the evidence for the existence of an exporting threshold at 20 employees is not compelling, and we view the existence of an exporting threshold at 20 employees as possible, rather than conclusive. our analysis of a very similar data set fails to support the mittelstaedt et al. conclusion that “firm size serves as a necessary as well as a sufficient condition for exporting success” (2003). our evidence does support the conclusion of wolff and pett (2000) and others who conclude that even micro firms are capable of exporting. research and policy implications although we find that firm size has a significant impact on export propensity, we fail to find a threshold at twenty employees. in fact, we find that even the smallest firms —those with zero or one employees—are capable of exporting. we find that 20employee threshold is not an absolute value, but is a result of the specific partition of the dataset. we find that the evidence supports the existence of a “threshold” at any arbitrarily chosen partition value; that is, the evidence fails to support the existence of a threshold at any particular number of employees. our evidence fails to support the mittelstaedt et al. (2003) findings; however, our evidence is consistent with the findings of wolff and pett (2000), autio et al. (2000), and others. with this paper, our contribution to the literature is an additional set of results showing that all firms, even very small firms, are capable of exporting. with this finding, we help dispel some of the inconsistencies regarding the relationship between exporting and firm size reported in the literature. we have not conclusively resolved the empirical inconsistencies in the relationship between firm size and exporting, but we do provide another piece of evidence that moves us in that direction. like olson and gough (2001), we conclude that future studies would be more useful if researchers pursue the performance implications of exporting by very small firms, rather than pursue more correlation studies of the sort we have presented in this study. mittelstaedt et al. (2003) also offered suggestions to policy makers based upon their conclusions about firm size and export activity. they argued that policy makers should focus on fostering domestic growth strategies rather than exporting growth strategies for micro firms, given their result that micro firms are too small to effectively export. given our inability to support their research finding, we conclude that this advice may be misguided to the extent that it is based upon their empirical finding. large firms usually start as small firms and grow over time. rather than growing in a consistent and predictable fashion, small firms follow many different paths toward growth. furthermore, export activity is not neatly described in a simple 1-2-3 fashion. early research accepted the stages model of internationalization (johanson and vahlne, 1977), which argued that small firms gradually began exporting and escalated their efforts as they grew and gained experience. bilkey (1978) and others essentially argued that exporting is a process of development. however, more recent r e s e a r c h q u e s t i o n s t h i s p e r s p e c t i v e . mcdougall, shane, and oviatt (1994) and oviatt and mcdougall (1995) argued that some ventures are created with the intent to sell internationally. autio, sapienza, and almeida (2000) and rialp-criado et al. journal of small business strategy 70 (2003) label this the “born-global” trend, whereby new ventures are launched with cross-border business activities in mind. given our findings that micro firms can and do achieve export success, we argue that if policy makers continue to assist micro firms with their exporting efforts, then these firms may grow to become large firms. our results have a practical message for business owners and business assistance professionals. our results imply that business owners should not be dissuaded from exporting simply because their firm is very small. we find no evidence of a minimum size below which exporting is necessarily a losing proposition for firms. what we find is that the smallest firms are capable of exporting, even if fewer micro irms export than do larger firms. our results have a similar message for business assistance professionals. given the ability of micro firms to export and the absence of a minimum size threshold for exporting ability, business assistance professionals should not hesitate to recommend or support micro firm exporting, on general principle. a micro firms’ exporting success will depend on the firm’s particular market and on the skill and strategy of the business strategist, but not on the number of employees. references aitken, b., hanson, g.h., & harrison, a.e. (1997). spillovers, foreign investment, and export behavior. journal of international economics, 43: 103–132. autio, e., sapienza, h.j., & almeida, h.j. (2000). effects of age at entry, knowledge intensity, and immitability on international growth. academy of management journal, 43: 909. baird, i.s., lyles, m.a., and orris, j.b. (1994). the choice of international strategies by small businesses. journal of small business management, 32: 48. barney, j. (1991). firm resources and sustained competitive advantage. journal of management, 17: 99–120. bilkey, w.j. (1978) an attempted integration of the literature on the export behavior of firms. journal of international business studies, 9: 33–46. burpitt, w. & rondinelli, d.a. (2000). small firm’s motivations for exporting: to earn and learn? journal of small business management, 38(4): 1–14. cooper, r.g. & klienischmidt, e.j. (1985). the impact of export strategy on export sales performance. journal of international business studies, 16: 37–55. czinkota, m. & tesar, g. (1982) export management. new york: praeger publishers. czinkota, m.r. & johnson, w.j. (1983). exporting: does sales volume make a difference? journal of international business studies, 14: 147–153. dhanaraj, c. & beamish, p. (2003). a resource-based approach to the study of export performance. journal of small business management, 41(3): 242–261. hollenstein, h. (2005). determinants of international activities: are smes different? small business economics, 24: 431–450. johanson, j. & vahlne, j. (1977). the internationalization process of the firm–a model of knowledge development and increasing foreign market commitments. journal of international business studies, 8(spring-summer): 23–32. kaynak, e. & kothari, j. (1984). export behavior of small and medium-sized manufacturers. management international review, 2: 61–69. lall, s. & kumar, r. (1981). firm level export performance in an inward looking economy: the indian engineering industry. world development, 9(5): 452–463. leonidou, l. (2004). internationalization, strategic behavior, and the small firm: a comparative investigation. journal of small business management, 42(3): 245–262. levesque, m. & shepard, d.a. (2002). entrepreneurs’ choice of entry strategy in emerging and developed volume 19, number 1 spring/summer 2008 71 markets. journal of business venturing, 19: 1–26. mcdougall, p., shane, s., & oviatt, b.m. (1994). explaining the formation of international new ventures: the limits of theories from international business research. journal of business venturing, 9(6): 469–487. mcdougall, p. & oviatt, b.m. (1999). new venture internationalization, strategic change, and performance: a follow-up study. journal of business venturing, 11(1): 23–40. mittelstaedt, j.d., harben, g.n., & ward, w.a. 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(2005). explaining imports and exports: a focus on non-maquiladora mexican firms. multinational business review, 13(1): 25–40. u.s. census bureau (2006). accessed 21 may 2006. http:// www.census.gov/. u.s. census bureau (2007). a profile of u.s. exporting companies, 2004-2005. press copy. 10 january 2007. u.s. department of commerce. office of international trade (2004). accessed 21 june 2004. http://www.sba.gov/oit/ export/useac.html. u.s. general accounting office (1992). export promotion: problems in the small business administration’s programs. washington, d.c. report #gao/ggd-92-77. u.s. general accounting office (2001). export promotion: government agencies should combine small business export training programs. washington, d.c. september 2001, report #gao-01-1023. venkataraman, s. (1997). the distinctive domain of entrepreneurship research: an editor's perspective. in: katz, j. & brockhaus, r. (eds), advances in entrepreneurship, firm emergence, and growth, 3: 119–138. greenwich, ct: jai press. wolff, j.a. & pett, t.l. (2000). internationalization of small firms: an examination of export competitive patterns, firms size, and export performance. journal of small business management, 38(2): 34–47. journal of small business strategy 72 http://www.scexports.net http://www.scexports.net http://www.scexports.net http://www.scexports.net http://www.census.gov http://www.census.gov http://www.sba.gov/oit/export/useac.html http://www.sba.gov/oit/export/useac.html http://www.sba.gov/oit/export/useac.html http://www.sba.gov/oit/export/useac.html wright, p.c. (1993). the personal and the personnel adjustments and costs to small businesses entering the international market place. journal of small business management, 31: 83. j. kent poff is an associate professor of accounting at north georgia college and state university. he teaches accounting and tax with an emphasis on tax issues for micro businesses. his current research interests i n c l u d e e x p o r t i n g a c t i v i t y b y s m a l l businesses, mathematical analysis of tax issues, and legal analysis of tax issues. kirk c. heriot is an associate professor of management and the crowley chair in entrepreneurship at the turner college of business at columbus state university. his c u r r e n t r e s e a r c h i n t e r e s t s f o c u s o n entrepreneurship under adverse conditions and exporting efforts of small firms. noel d. campbell is an associate professor of economics at the university of central arkansas. his research interests include small business entrepreneurship, state lotteries, and state public finance. volume 19, number 1 spring/summer 2008 73 reproduced with permission of the copyright owner. further reproduction prohibited without permission. sf~(vx pv ventures i,aunchkb aiftkr entrepreneiuriai. kbucatiton empiloymknt anb encomik kififkcts william c. wedley robert g. wyekham simon fraser university abstract graduates of a new enterprise program were tracked to find our what they did with their business plans. of 73 graduates, 58 launched new ventures. fifty six of these new ventures produced 225 new jobs, and 29 of them produced an incremental value added of $6.3 million. including the multiplier ejj'ect, the total economic benefits are over 338jobs and $ /0.8 million value added. younger candidates not employed by large businesses with completely new ventures past the prestartup stage are more likely to launch ventures. however, it is the more experienced candidates analyzing the project for their employers who are likely to produce greater employmenr and wealth. introduction the opportunity to be involved with the launching of new enterprises has been a major factor motivating governments and academic institutions to organize entrepreneurial education programs. based upon the premise that smaller, entrepreneurial firms are the ones that provide the bulk of new employment and income to society, many organizations, both public and private, have invested resources in educating aspiring entrepreneurs (mcmullan, 1988). yet, many of these investments are based upon faith that encouragement of entrepreneurship is a worthwhile endeavor. very little research has been done on whether the investments actually yield economic returns. some scholarly research suggests that there may be a positive return to such effort (clark, davis gt harish, 1984; homaday & vesper, 1982; mcmullan, 1988; watkins & morris, 1981; wyckham & wedley, 1989). this article adds to that body of research. it reports on a study of ventures launched by participants who took simon fraser university's new enterprise program (nep) between 1985 and 1988. a previous study of these graduates reported on factors related to venture feasibility analysis and business plan preparation (wyckham & wedley, 1990). this article undertakes a more intensive analysis by concentrating on those graduates who took their plans and went on to launch ventures. it examines demographic, vocation, and venture factors associated with new enterprise launches and the employment and value added by these enterprises. 23 in conducting the investigation, two main research questions were addressed: i. are there characteristics of entrepreneurs and their ventures which distinguish those proposaks which are launched and those which are terminated prior to startup? 2. of those ventures launched, are there traits of entrepreneurs and features of their enterprises which are associated with larger amounts of employment and value added?'he literature a review of thc literature on entrepreneurship courses indicates that the experience from such courses can have a number of positive outcomes. as shown by hornaday and vesper (1982) and clark et al. (1984), the first of these outcomes is a panicipant's choice of a more cntreprencurial career. second, thc pcrccptions of preparedness to be an entrepreneur may be affected by graduation from a business school (knight, 1987). thus, even if participants had chosen their vocation prior to embarking on a course, there is a likelihood that their confidence to be an entrepreneur will be enhanced. third, entreprcneurship education encourages panicipants to undertake venture feasibility analysis and business planning (wyckham & wedley, 1990). although dimick (1986) did not find an association between entrepreneurship course participation and the eventual launching of new ventures, a number of other researchers have identified this relationship (clark et al., 1984; conner, 1985: hornaday & vesper, 1982; watkins & morris, 1981). there has also been some evidence that entrepreneurial programs improve the performance of new ventures. for example, long and ohtani (1988) found that a course which brought together aspiring and practicing entrepreneurs resulted in better returns. also, the cost of long term counseling by small business development centers was found to have been more than offset by increased taxes paid by clients (gatewood & hoy, 1987). finally, entrepreneurship course participation was one of the factors found to be related to higher levels of new venture spinoffs from universities (mcmullan & vesper, 1987). the new enterprise program the nep is an entrepreneurship education program designed for current and aspiring entrepreneurs, research and development professionals, and managers of new product development. ninety-seven participants completed the program between the spring of 1985 and the spring of 1988. being a community-oriented course, the new enterprise program appeals to entrepreneurs who have innovative new venture projects in mind. the objective of the program is to assist participants to conduct venture feasibility analyses and to develop business plans. designed to be compatible with the busy schedules of entrepreneurs, the nep, begins with three full-days of seminars which encompass a weekend. these initial seminars provide an overview of entrepreneurial characteristics, the start-up decision, mission definition, industry and market analysis, the business planning process, the entrepreneurial team, controlling the business, government services and requirements, financing options. and business strategy. '74 approximately ten days after the weekend seminars, the participants begin six weekly sessions which provide greater detail and give direction in feasibility analysis and the preparation of a business plan. these afternoon/evening sessions last six hours and include a dinner hour where participants are allowed to socialize and exchange information. the weekly topics include (a) market opportunity analysis, (b) marketing strategies, (c) financial planning and evaluation, (d) operations planning and (e) the management team. the final session accentuates the future tasks which the entrepreneur will have to undertake. each component of the program facilitates the step-by-step preparation of feasibility analyses and business plans. the course is very experiential. case studies are used, examples are drawn from the participants'rojects and experiences, and each participant prepares assignments on his/her own project. instructors (professors and consultants) and participants provide weekly feedback on each project. each entrepreneur is assigned a mentor from the business community who provides one-on-one assistance. final business plans are due two weeks after the end of the formal sessions. completed plans are evaluated by a panel of financial practitioners, and awards of excellence are presented for the best new venture plans. research methodology the population from which the sample was selected was composed of all 97 graduates of the nep. graduates were sent a questionnaire by mail and then telephoned for their responses. eighty-six completed questionnaires were obtained (89% of the population). sample data the data for this study come from the 86 course respondents. a special subset of these people, those who had been out of the program long enough (one year) to launch their ventures, was also examined. seventy-three participants fell into this category, and 58 of them had actually started their ventures. these 58 venturers were asked to provide information on the operation of their enterprise from its time of inception to 1988. data requested consisted of gross sales, cost of goods sold, number of employees, wages paid, and amounts of equity and debt. all figures were to be for the specific ventures launched subsequent to the new enterprise program and to be incremental (o any other business. these data were gathered to provide a comparison between those who launch and do not launch their projects. furthermore, employment and value-added information was gathered to determine which factors are associated with increased benefits to the economy. characteristics of the sample two thirds of all of the sample members were sole owners or partners in a small business venture at the time they entered the nep; 15% were employees of small companies; 17% worked for larger companies; and 3% were not employed. forty-six percent of respondents'entures were at the pre-start up stage (concept established and perhaps some preliminary 75 analysis done); 23% were at tne prototype stage (prototype in hand, some testing done, perhaps some initial market testing done); and 31% were at the post-start up 'stage (product or service in hand and launched into the market place). forty-eight percent of the venturers were launching an'entirely new product or service into a new market; 36% were presenting a refinement of an existing product or service to an existing market; 11% were introducing a new product or service into a market in which they were currently selling; and 6% were attempting to market a currently sold product or service into a new geographic area through a new channel of distribution or to a new end-user. one third of the nep graduates were evaluating a project for themselves with the intention of starting a new company. fifty percent were analyzing a venture for an existing company of which they were the sole owner or a partner; ahd 17% were examining a venture concept for their employer. three quarters of the respondents had had at least some experience in the industry into which they were launching their enterprise. thirty-three percent had ten or more years of experience in that industry; the median was five years of industry-related experience. feasibility determination ana business plan preparation ninety percent of the sample members who had been out of the program at least a year said they were able to deterinine the feasibility of their ventures (see table i). seventy-nine percent of those who concluded that their project was feasible said the nep helped them to determine feasibility. all of the fourteen graduates who decided that their project was not viable said that the program had assisted them in coming to that conclusion. an earlier paper reported that ventures identified as infeasible were associated with projects at the pre-startup stage and involved services rather than products; feasible projects, on the other hand, tended to be associated with participants who were evaluating a project for themselves, who had greater management experience and who were employed by a large'irm. seventy-six percent of the nep respondents reported completing their business plans. in the above-identified study it was found that business plan completers were more likely to fit the following profile: not evaluating the venture for an employer, working for a small business, examining a project aimed at the local market, analyzing a product rather than a service, the sole owner of their business, and younger (wyckham & wedley, 1990). in th'e current study we analyze those who actually launch a venture. results new venture launches of those who had been out of the program for at least a year, 29% had gone ahead with the venture that they had in mind when they entered the nep. another 30% proceeded with a variation of that venture. forty-two percent had abandoned their nep project, but half of those had proceeded with another venture. only 21% of the responding participants did not launch a venture (see table i). given the number of candidates who varied their project or changed to a new project during the course of the program, it seems likely that the nep had some influence on the type of ventures launched. 26 table 1 venture feasibility and outcome feasibility not did not outcome feasible feasible decide total launched venture 18 34 0 0 3 43 21 29 launched variation 17 32 3 23 2 29 22 30 launched different one 8 15 6 46 1 14 15 21 did not launch 10 19 4 31 1 14 15 21 53 100 13 100 7 100 73 100 total 73% 18% 10% 100% x'= 14.8, p = .02, but 8 of 10 cells have expected frequencies &5. factors related to new venture launches the factors which identify those participants most likely to launch a venture were determined by a discriminant analysis of the respondents who had been out of the program for at least six months. witks'tep-wise method with a maximum of four steps was used. the results are presented in table 2. 27 table 2 discriminanr equation launched vs. non-launched venrures correlation standardized with final discriminant discriminant variable entered'oefficients f-value function 1. pre-startup stage of development .902 15.9"" .578 2. employed by large business .597. 7.6** ,499 3. type of venture —.543 4.9** -.116 4. age of participant .433 3.6** .271 wilks'ambda = .6886 x'= 23.4 significance = .0001 eigenvalue = .45 group centroids: launched venture = -0.309 non launched venture = 1.418 statistically significant** (p &.01), 'tage of 1 = pre-start-up; 2 = prototype and testing; development: 3 = post-start-up. employed by 1 = employed by a large business at time of entry large bus.: into program. 0 = other type of 0 = refinement of an existing product or service; venture: 1 = completely new idea. age of participant: age of participant at the start of the program. the discriminant equation indicates the following: 1. when they entered the new enterprise program, those participants wno were at the pre-start up stage in the development of their project (as opposed to the prototype or poststart up stage) were less likely to launch their venture. 2. those employed by a large business were less likely to launch than those employed by small firms and those who owned their own business. 28 3. those evaluating a completely new venture (as opposed to a refinement, a launch of an established product into a new market, or a new product in an old market) were more likely to go ahead. 4. older participants were less likely to launch than younger participants. the statistical significance for the discriminant equation (pc0001) indicates that the launched and non-launched projects, as described by the four variables, are very different. this fact is reinforced by the large difference in group centroids for the two groups (-.309 for launched ventures vs. 1.418 for non-launched ventures). employment generated by launched ventures of the 58 people who had launched a venture that had been in operation for at least one year, 56 of them provided data on the number of employees added to their payroll. by 1989 the total incremental employment created by these new businesses totalled 225 (see table 3). 29 table 3 total, average and incremental number of employees by year year of taking program total increof all mental 1985 1986 1987 1988 years ¹ of panicipants'5 18 30 13 86¹ who started ventures 18 13 17 10 58 year before program; total ¹ of employees 38 13 31 17 99 0 average ¹ of employees 4.2 3.3 2.8 2.4 3.2 ¹ of firms' 4 ll 7 31 year of program: total ¹ of employees 57 34 68 29 188 89 average ¹ of employees 4.8 3.8 4.3 2.9 4.0 ¹ of firms 12 9 16 10 47 year after program: total ¹ of employees 100 60 109 269 110 average ¹ of employees 6.3 4.6 6.4 5.8 ¹ offirms'6 13 17 46 second year afterprogram: total ¹ of employees 127 75 202 42 average ¹ of employees 7.1 5.8 6.5 ¹'f firms'8 13 31 third year after program: total ¹ of employees 111 111 -16 average ¹ of employees 6.9 6.9 ¹ of fitmss 16 16 cumulative incremental number of employees 225 'umber of respondents from each year's class who participated in the survey. 'umber of respondents who provided data on the number of employees hired as a result of the venture. 'ncremental number of employees for each year class group can be calculated by subtracting from the total number of employees for one year, the total number of employees from the previous year: 1985 class = 57-38 = 19. 30 the best way to understand the employment effects of the launched ventures is to analyze specific columns of table 3. consider the 1985 class. twenty-five graduated from that class, and 18 of them launched ventures. one year before the program, nine of them were already in business employing 38 people with an average of 4.2 people per firm. at the end of the year of the program 12 of them were in business, employing 57 people with an average of 4.8 people per firm. this is an increase of 19 new employees (57-38) hired after the firm's representative concluded the program. then, one year later the number of ventures had grown to 16 firms employing 100 people, and at the end of the second year to 18 firms with 127 employees. in the third year there was a decline to 16 firms employing 111 people, two firms having ceased operations during that period. the 1985 class had added a total of 73 new jobs to their communities in the three year period following completion of the program. the columns showing the classes of other years reveal similar results. during the year of the program and for each year thereafter, the number of firms, number of employees and average number of employees increased. as compared to the base year prior to commencement of the program, 225 new jobs were created. it should be noted from table 3 that 31 of the 86 firms (36%) had actually started their ventures by employing people prior to the year of the program. this number is in line with the 31% of the participants who reported they were at the post-start up phase and 23% who were at the prototype stage. during the year they took the program and the years following the program, over half of the participants had started their ventures. except for the 1985 class three years after the program, the average number of employees per firm tended to rise even though new firms were coming on stream. the implication from these data is that firms continued to grow or else larger-size firms tended to be started. value added generated by launched ventures just 29 of the entrepreneurs gave sales and expense figures. non-responders either decided not to release this information or had not yet generated any sales. for each of the 29 who gave sales and expense data, the value added (that is, the economic value created by the new enterprise) was computed by subtracting the cost of goods sold from their gross sales. the total incremental value added by these 29 companies was $6,392,000 over the period 1985 to 1989. the results are presented in table 4. 31 table 4 total, average and incremental value added by year ($,000) year of taking program total increof al i mental 1985 1986 1987 1988 years ¹' of participants'5 18 30 13 86¹ who started ventures 18 13 17 10 58 year before program: value added (000) $ 1,544 $ 300 $344 $ 190 $2,378 0 average value added $ 259 $ 300 $ 86 $ 38 $ 148 number of firms' i 4 5 16 year of program; value added (000) $2,424 $ 940 $760 $4,124 $ 1,936 average value added $ 404 $ 235 $ 95 $ 229 number of firms' 4 8 18 year after program: value added (000) $3,570 $2,331 $5,901 $2,537 average value added $ 357 $ 259 $ 310 number of firmss 10 9 19 2nd year after program: value added (000) $5,489 $5,489 $ 1,919 average value added $ 499 $ 499 number offirms'1 ll cumulative incremental value added (000) $6,392 'umber of respondents from each year's class who participated in the survey. ii number of respondents who provided data which allowed calculation of value added. c incremental value added for each year class group can be calculated by subtracting from the total value added of one year, the total value added from the previous year: 1985 class = $2,424,000$ 1,544,000 = $880,000. 32 table 4 corroborates the employment evidence that more larger-sized firms were started. not only were more firms started each year but also, as can also be seen from the total column, the value added per firm rose from $229,000 in the year of the program to $499,000 two years after the program. from a closer inspection of table 4, it would appear that the 1987 and 1988 classes had smaller sized projects. indeed, this may be the case because the first two classes had a greater concentration of high technology ventures. statistical tests were conducted to reveal differences between years, but the results were insignificant. this lack of significance, however, may have been a function of the small sample sizes. factors related to employment and venture value added to get a better idea of the variables associated with employment and value added, three multiple regressions were performed. the first multiple regression (table 5) determined the variables important in explaining employment, while the other two looked at value added and value added per employee (table 6). a stepwise method of variable selection was used; the required minimum probability for the f-to-enter was .05. 33 table 5 afultiple regression equations for number of employees independent variables" statistics constant project project at partner years for prototype in a of employer stage business experience coefficients 1.49 9.49 -4.31 3.45 . 148 order of entry i 2 3 4 change in r'37 . i i .05 .05 t-value 1.6 5vv 3 4vv 2. 7* 2. i * f-value = 13.6**;r' .5g. statistically significant: * (p& .05) ** (p& .01) "project for employer: venture analyzed on behalf of employer project for prototype stage: venture at prototype or testing stage. not at pre-startup or post-startup. partner in a business: participant is a partner, not a sole owner nor an employee. years of experience; number of years experience in the industry related to the venture. 34 table 6 multiple regression equations for value added and value added per employee dependent years of project for variable statistics constant experience oneself average coefficients $200,720 31,328 -306,579 value order of entry i 2 added change inr'38 .18 t-value 2.4* 4 7n'v 3 4++ f-value = 16.5** r'= .56 average coefficients $20,490 3,098 value order of entry 1 added change inr'2 per t-value 2.3* 3 3 4 8 employee f-value = 11.0** r' .32 statistically significant: *(p&.05) **(p .01) the first multiple regression equation identified four explanatory vanables associated with incremental employment: 1. project for employer —ventures analyzed on behalf of employers generate more employment. 2. project at prototype and testing stage —projects at the prototype and testing stage generate less employment. 3. partner in a business —being a partner in a business at the time of entry to the program (rather than working for an employer or being a single owner) is associated with greater employment. 4 years of experience —the more experience in the industry of the venture, the greater the employment. 35 these four variables are statistically significant (pc01) in explaining employment levels of launched ventures. collectively, they explain 58% of the total variation. since not as many firms reported data on value added, a smaller number of variables entered into the multiple regression equations for average value added and average value added per employee (see table 6). for the average value added equation, two variables explained 56% of the variance: l. years of experience —those with more experience in the industry within which the new company was launched generated higher value per employee. 2. project for oneself —sole ownership ventures tended to generate less value added than projects for employers or partners. the equation indicates that a person doing a project for oneself will have a negative value added if he or she has fewer than four years of experience in the industry. the third multiple regression was designed to determine the factors associated with the value added per employee or, in other words, the quality of the jobs created. since only one significant variable (years of experience in the industry) entered into the equation, the result is not really multiple regression but bivariate regression. this single variable, years of experience in the industry, explained 32% of the variance. discussion of the 73 nep respondents who had been out of the program more than a year, 58 (79%) launched new ventures. of these new ventures, 56 of the'm produced 225 new jobs, and 29 had incremental value added of $6.3 million, including additional wages and salaries of $3.0 million. when the multiplier effect of these new jobs and economic output is considered, the impact is even greater. for example, davis (1986) calculated the income and employment multipliers to be 1.49 additional local value added per dollar of wages and salary and 54.5 additional man-years of employment per million dollars of wages and salary. the multiplier effect, therefore, is about $4.5 million value added and 163 additional jobs. this brings the total effect, both direct and indirect, to over 338 jobs and value added of $ 10.8 million. causality and benefits it is clear that those attracted to the new enterprise program are serious practicing entrepreneurs capable of generating economic benefits. what is not so clear is the contribution of (he nep to the participants'uccess. without the benefit of a matched sample of iridividuals who had not taken (he program, no claim can be made of a causal relationship between participation in the new enterprise program and subsequent employment and value added. however, it may be assumed that more enlightened decision-making results in improved economic benefits. if it is accepted that the new enterprise program assisted participants in making more appropriate launch decisions, including the decision not to launch, then it can be 36 argued that the nep played some role in ensuring or conserving economic benefits. no attempt was made in this study to calculate the savings resulting from avoiding the launch of infeasible ventures. bankruptcies and other kinds of business terminations are a drain on the economy, and if an entrepreneurial program can help deter them, then additional benefits are delivered to society. for example, i 3 of the nep participants discovered that their original projects were infeasible. accordingly, three of them modified their projects before proceeding, six launched a different venture, and four did not proceed. in the absence of the feasibilty analysis conducted during the new enterprise program, we suspect that some of these participants would have proceeded and failed. selecting candidates if one of the objectives of a new start-up program is to facilitate increased economic activity, then an important adjunct to achieving this end would be careful selection of the entrants to the program. this study demonstrates that younger candidates, not employed by large businesses, with completely new ventures past the pre-startup stage of development are more likely to launch their ventures. the data and experience in working with program participants suggest that a judicious mix of younger and older entrepreneurs and intrapreneurs is likely to produce the best output. on the other hand, it is the more experienced person studying the project for an employer who is likely to produce higher economic benefits. employer projects probably produce more economic benefits because their initial resources and undertakings are larger. the evidence, however, demonstrates that those who are creating a venture for themselves have projects which quickly grow in size. conclusions and recommendations participants in an entrepreneurship course such as the new enterprise program are very likely to launch new companies. it must be assumed that many, if not all, of these ventures would have been launched regardless of the course. it is postulated, however, that because the nep participants carried out feasibility analyses and most prepared business plans, better decisions were made. two pieces of data support this contention. firstly, more than seven in ten of those who started a new enterprise did not launch the one they were considering when they entered the nep. secondly, 18% of nep participants who had been out for at least six months had determined that their project was infeasible. it is clearly apparent that the entrepreneurship education process influenced their launch decisions. entrepreneurs and intrapreneurs with university degrees and industry-related experience appear to be the best candidates for this type of entrepreneurship education. entrepreneurs are appropriate participants if the goal is to help those most likely to launch new companies. intrapreneurs are good candidates if the objective is to assist those most likely to start enterprises which deliver large amounts of value added. 37 however, administering a course such as the new enterprise program is not an easy task. each time the program is run, new publicity must be prepared, information meetings must be scheduled, literature must be sent out, and applications taken. in particular, the publicity is extensive and expensive because budding entrepreneurs or intrapreneurs are not an easily identifiable group. before the sessions start, the course administrator must find a location which can handle both lectures and the dinners. then, once the course is started, there are feedback questionnaires for each session, mentors to be sought and matched with candidates, arrangements made for guest speakers, award sponsors solicited, and an evaluation team recruited. putting on a successful program is time consuming and requires considerable learning on the part of the administrator. thus, when an experienced administrator resigned at about the time this study was being prepared, a decision was made to terminate the program and devote the resources to other types of continuing education which were easier to offer. the high time commitment and the difficulty of raising funds for the new enterprise program caused administrators to favor other endeavors. typically, entrepreneurial education programs are not self-financing, and the new enterprise program was no exception. one source of funding was seed money from the provincial government to get the program started. by the time the program was terminated, this money had been spent. the other sources were a training subsidy which a small number acquired and a special grant for women entrepreneurs, which came from the women's secretariat. because the new enterprise program was required to become self-supporting, it had to be priced at a level which was somewhat prohibitive for some entrepreneurs. thus, the training subsidy provided the difference, which allowed some participants, particularly women entrepreneurs, to join the program. similarly, the program probably would have never gotten off the ground had the initial development costs not been covered by a government agency. however, because of the vagaries of politics and government budgets, assistance programs for entrepreneurs are tenuous. they may or may not be funded from year to year. we suspect that had the economic benefits of this study been known at the time of termination, a different decision would have been made. the results of this study indicate that strong economic arguments can and should be made to agencies providing support. it seems likely that on-going periodic analyses of the employment and income effects of the ventures being developed in an entrepreneurial education program would do much to provide a buffer against those who would cancel or reduce funding. it would also cause administrators to think twice before cancelling programs. more comprehensive programs are more difficult to offer, but they also bring greater benefits. entrepreneurial education programs that provide candidates with the skills and support to conduct market feasibility analyses and to prepare business plans also have potential benefits for other parties. besides the entrepreneurs themselves, there are the bankers and investors. anecdotal evidence suggests that many would-be entrepreneurs with prospectively excellent projects are unable to find funding because they have not done the basic work to create a plan that makes financial sense. it seems likely that bankers and others would want to be informed of the jobs and value added created by entrepreneurs going through an entrepreneurial education program. these data might encourage them to send their clients to the program in order to facilitate venture financing. they might also want to have an opportunity to offer financing to candidates in the program. 38 additionally, because the business press likes success stories, it is suggested that those managing entrepreneurial education programs would benefit from disseminating this kind of information. articles describing the income and employment effects of ventures created by graduates of an entrepreneurial education program may attract program candidates, encourage government funding, or arouse the interest of potential investors. in terms of the future, additional research is needed to determine causality between entrepreneurship education, venture launches and wealth creation. comparisons of matched samples of participants and non-participants would provide valuable insights. because entrepreneurship is a generative process (one entrepreneurial project leads to others), it would be valuable to follow participants and non-participants over a considerable period of time. differences in the number, type and productivity of ventures should be tracked. footnotes 'the authors would like to thank anne popma and lance secretan for their suggestions at the conceptual phase of this project, and david reeves for his assistance in the literature review and statistical analyses. references clark, b. w., davis, c. h., & harish, v. c. (1984, april). do courses in entrepreneurship aid in new venture creation? journal of small business management 22(2), 26-31. conner, p. j. (1985). the facilitation and stimulation of entrepreneurship of young persons in ireland through the youth enterprise programme. in j. a. hornaday, e. b. shits, jeffrey a. timmons, & karl h. vesper (eds.), frontiers of entrepreneurship research (pp. 588-608). wellesley, ma: babson college. davis, h. c. (1986). income and employment multipliers for seven british columbia regions. canadian journul of regional science, 9(1), 103-115. dimick, d. e. (1986). the first two decades: a survey of graduates. toronto, ontario: york university, mimeograph. gatewood, e., ogden, l, & hoy, f. (1987). growth statistics on small business development centre clients: a national survey. in robert g. wyckham, lindsay n. merdeith, & gervase bushe (eds.), the spirit of entrepreneurship (pp. 337-349). burnaby, bc: simon fraser university. hornaday, j. a., & vesper, karl h. (1982). entrepreneurial education and job satisfaction. in j. a. hornaday, e. b. shits, jeffrey a. timmons, & karl h. vesper (eds.), frontiers of entrepreneurship research (pp. 526-539). wellesley, ma: babson college. knight, r. m. (1987, summer). can business schools produce entrepreneurs?: an empirical study. journal of small business and entrepreneurship 5(1), 17-26. long, w. a., & ohtani n. (1988, spring). entrepreneurship education and adding value to new ventures. journal of marketing education l0, 11-20. mcmullan, w. e. (1988, fall). the economics of entrepreneurship education. journal of small business and entrepreneurship 6 (i), 8-18. mcmullan, w. e., & vesper, k. h. (1987). universities and new venture development: the spin-off phenomena. in robert g. wyckham, lindsay n. merdeith, & gervase bushe (eds.), the spirit of entrepreneurship (pp. 350-370). burnaby, bc: simon fraser university. 19 watkins, d., & monis, j. f. (1981). uk training and the development of entrepreneurs. in j. a. hornaday, e. b. shils, jeffrey a. timmons, & karl h. vesper (eds.), frontiers of entrepreneurship research (pp. 413-427). wellesley, ma: babson college. wyckham, r. g., & wedley, w.c. (eds.) (1989). educating rhe entrepreneurs. burnaby, bc: simon fraser university. wyckham, r. g., & wedley, w.c. (1990, october). factors related to venture feasibility analysis and business plan preparation. journal ofsmall business management 28(4), 48-59. 40 http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2021, vol. 31, no. 03, 33-46 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2021 small business institute® w w w. j s b s . o rg introduction florida institute of technology, college of business, 150 w university blvd, melbourne, fl 32901, usa, jreed2017@fit.edu strategic agility in the sme: use it before you lose it strategic agility, sme, firm age, firm size, environmental turbulence apa citation information: reed, j. (2021). strategic agility in the sme: use it before you lose it. journal of small business strategy, 31(3), 33-46. strategic agility is a relatively new construct in the field of strategic management which applies the notion of agility (flexibility and speed) to business strategy (doz & kosonen, 2008a; long, 2000). according to doz and kosonen (2008a; 2008b; 2010), strategically agile firms are able to change direction quickly through their heightened sensitivity to strategic developments (strategic sensitivity), making bold and fast decisions (leadership unity), and redeploying resources rapidly (resource fluidity). strategic agility is therefore a type of dynamic capability, enabling firms to reconfigure their resources and capabilities to address rapidly changing environments (teece et al., 2016; teece et al., 1997). over the past decade, more than two dozen journal articles have been published on strategic agility, creating a vibrant research stream in strategic management. much of the conceptual work builds upon doz and kosonen (2008a; 2008b). weber and tarba (2014), in their introduction to a special section of california management review on strategic agility, define it as “the ability of management to constantly and rapidly sense and respond to a changing environment by intentionally making strategic moves and consequently adapting the necessary organizational configuration for successful implementation” (p. 7). other articles in the same publication discuss how strategic agility enables multinational enterprises to operate across emerging and established markets (fourne et al., 2014), how different types of mergers and acquisitions enhance strategic agility (brueller et al., 2014), and how leadership is central to managing the paradox between the long-term view of strategy and the short-term view of agility (lewis et al., 2014). vecchiato (2015) explores linkages between strategic foresight, first mover advantages, and strategic agility. jacoby and shaw (2016) use an athletics analogy to describe strategic agility in the u.s. military. they define strategic agility as the “capacity at the global or theater level to rapidly assess complex and unpredictable security challenges and opportunities and to decide and respond quickly, effectively, and efficiently” (p. 36). kumkale (2016) argues that strategic agility is a tool for creating competitive advantage. kwon et al. (2018) find strategic agility to be characteristic of successful kothis empirical study investigates strategic agility and its relationships with firm age, firm size, and firm performance in smes. the doz and kosonen three-factor model of strategic agility is operationalized and tested in 30 firms from multiple industries located in the space coast region of florida. it is found that strategic agility decreases as firms grow older but not as firms grow larger. strategic agility and firm performance are also found to be related as moderated by environmental turbulence. specifically, performance increases with strategic agility in high turbulence but decreases with strategic agility in low turbulence. this finding is consistent with the view that dynamic capabilities like strategic agility bear a cost which may be unnecessary in stable environments. overall, the study suggests that smes may benefit from strategic agility if it used while they still have it, that is, when they are young. jonathan reed http://www.smallbusinessinstitute.biz http://www.jsbs.org 34 j. reed journal of small business strategy / vol. 31, no. 3 (2021) / 33-46 rean founders, and ivory and brooks (2018) find strategic agility to be involved in managing the paradox of corporate sustainability. relevant to the present study, arbussa et al. (2017) are interested in strategic agility in small firms. they conduct a longitudinal case study of a temporary workforce services company in spain and find two of doz and kosonen’s (2008a; 2008b) three dimensions present. but is changing strategy good for the bottom line? on one hand, firms which are strategically agile may be able to outmaneuver their rivals in competitive environments, earning economic rents. on the other hand, changing strategy too often may lead to little market traction and unnecessary cost. researchers have begun to empirically investigate the effect of strategic agility on firm performance, and the results so far appear mixed. ojha (2008) finds a negative relationship between strategic agility and financial performance in medium-to-large sized u.s. manufacturing firms. shin et al. (2015) find no relationship between strategic agility and financial performance in korean manufacturers. two very recent studies find positive relationships between strategic agility and firm performance in the turkish accommodation industry (kale et al., 2019) and german electronics firms (clauss et al., 2019). other researchers find interesting relationships between strategic agility and intellectual capital, competitive capabilities, and other constructs but not directly with firm performance (al-azzam et al., 2017; junni et al., 2015; khoshnood & nematizadeh, 2017; ofoegbu & akanbi, 2012). assuming the different empirical findings are not explained methodologically, one might ask what contingency factors are involved in strategic agility. unfortunately, little research has been conducted on the antecedents and moderators of strategic agility. this study addresses this gap by investigating the effects of firm age, firm size, and environmental turbulence on strategic agility and its relationship with firm performance. small and medium-sized enterprises (smes) were selected for the study as the sme and entrepreneurship literature suggest small and young firms are agile. the space coast region of florida was selected as the context for the study due to its recent environmental turbulence. multiple industries in this region were examined as the previous empirical studies were all single-industry based. literature review and hypotheses the concept of agility in a business context has its roots in manufacturing. researchers at the iacocca institute (nagel, 1992; nagel, & dove 1991) are most often cited as the first to use the term “agile manufacturing” in a study sponsored by the u.s. office of naval research. they argue that agility rather than mass production represented the future for 21st century manufacturing (gunasekaran, 2001). over time, the concept extended from manufacturing into supply chain management (dove, 1996; yusuf et al., 2004) and information technology (lu & ramamurthy, 2011; sambamurthy et al., 2003), where the ability to reconfigure the suppliers and systems underlying manufacturing would be beneficial. strategic agility the first use of the term “strategic agility” is found in roth (1996) although it was still used in a manufacturing context. roth defines strategic agility as “the capability to create the right products at the right place at the right time at the right price” (p. 30). long (2000) is the first to address strategic agility in the strategic management sense. he defines strategic agility as “not only maintaining the flexibility to respond quickly to changing circumstances and emerging opportunities but also concentrating on a clear strategic purpose” (p. 38). the concept of strategic agility is more thoroughly developed by doz and kosonen (2008a, 2008b, 2010). they propose that strategic agility is comprised of three dimensions: strategic sensitivity, leadership unity, and resource fluidity. strategic sensitivity represents an intense awareness of external trends combined with an internally participative strategy process. it is proactive in nature, involving an open strategy process, heightened strategic alertness, and a future orientation. leadership unity (also called collective commitment) allows the top management team to make bold decisions fast once a new strategic situation is perceived. it involves mutual dependency, collaboration, and an integrative leadership style on the part of the ceo. resource fluidity is the internal capability to reconfigure capabilities and redeploy resources quickly once a new strategic direction is determined. it involves the alignment of strategy and structure, flexible business models, and modular systems and structures which can be reorganized quickly. according to doz and kosonen, all three dimensions are required for a firm to be strategically agile. “in short, the formulation is agility = sensitivity x unity x fluidity” (doz & kosonen, 2008b, p. 111). doz and kosonen (2010) provide a framework of five underlying determinants for each of the three dimensions. each determinant is a type of leadership action that enhances strategic agility. anticipating, for example, enhances strategic sensitivity by exploring concepts for how customers might use future products and services. dialoguing enhances leadership unity by sharing strategic assumptions and hypotheses across the leadership team. decoupling enhances 35 j. reed journal of small business strategy / vol. 31, no. 3 (2021) / 33-46 resource fluidity by allowing organizational elements to operate in a coordinated but autonomous fashion. hamalainen, kosonen, and doz (2012) illustrate the application of the framework to the public sector. here, three antitheses of the strategic agility dimensions are identified: strategic atrophy, diverging commitments, and resource imprisonment. most recently, doz (2020) examines the framework from a human resources perspective. firm age and firm size are both noted here as working against strategic agility. “natural evolution leads to growing strategic rigidity as a company ages” and “achieving strategic sensitivity is even harder in the context of a large organization” (p. 3). this study follows doz and kosonen (2008a; 2008b; 2010; 2020) by defining strategic agility as the firm’s capability to dynamically change its plan for achieving sustained competitive advantage through its strategic sensitivity, leadership unity, and resource fluidity, by operationalizing their strategic agility framework, and by examining the effects of firm age and firm size more closely. contingency factors turning to the contingency factors related to strategic agility, the entrepreneurship literature supports the relevance of firm age. young firms, almost by definition, are entrepreneurial. gunter (2012) defines entrepreneurs as “individuals who, in an uncertain environment, recognize opportunities that most fail to see, and create ventures to profit by exploiting these opportunities” (p 387). kirzner (1997) defines entrepreneurial alertness as an attitude of receptiveness to available (but hitherto overlooked) opportunities. at the firm level, entrepreneurial orientation (autonomy, innovativeness, risk taking, proactiveness, and competitive aggressiveness) has been shown to be related to firm performance, particularly under conditions of environmental change (covin & slevin, 1989; lumpkin & dess, 1996). these concepts are similar to the strategic sensitivity dimension of strategic agility. young firms, led by entrepreneurs with high entrepreneurial alertness and high entrepreneurial orientation, may be quicker to recognize and exploit new opportunities than older firms. these similarities between entrepreneurship and strategic agility suggest that younger firms may be more strategically agile than older firms. this leads to the first hypothesis. hypothesis 1. firm age is related to strategic agility such that as sme firms become older, they become less strategically agile. the sme literature suggests firm size is related to strategic agility. small firms, due to their fewer resources and investments, are almost inherently flexible. small firms are found to be better than larger firms at adjusting their production output (fiegenbaum & karnani, 1991) and customizing their products (ebben & johnson, 2005) to meet fluctuating market demand. forbes (2005) finds small firms to be faster at making major decisions. small firms are found to make greater use of informal versus formal plans (allred et al., 2007). smes are less bureaucratic, enabling their managers to react quickly to new situations, stay closer to their customers, and adapt more rapidly to changing tastes (garcia-morales et al., 2007). these concepts are similar to the leadership unity and resource fluidity dimensions of strategic agility. from a theory perspective, smes are less path dependent (arthur et al., 1987) and less constrained by the smaller asset stocks they have accumulated (dierickx & cool, 1989). they may therefore be more flexible than larger firms anchored by their past decisions and capital investments. given the flexibility of small firms and the similarities between flexibility and strategic agility, smaller firms may be more strategically agile than larger firms. this leads to the next hypothesis. hypothesis 2. firm size is related to strategic agility such that as sme firms become larger, they become less strategically agile. the relationship between strategic agility and firm performance is supported by the literature on dynamic capabilities. dynamic capabilities lead to competitive advantage through the ability to acquire or reconfigure resources and competencies quickly, especially in rapidly changing environments (eisenhardt & martin, 2000; teece et al., 1997). strategic agility is a type of dynamic capability in which the firm’s strategy is the resource or competency dynamically changed. teece (2009) describes dynamic capabilities in terms of sensing, seizing, and transforming, three components similar in nature to strategic agility’s three dimensions. this leads to the third hypothesis. hypothesis 3. strategic agility is related to firm performance such that as sme firms become more strategically agile, their performance improves. however, strategic agility may not be as critical in stable environments as in conditions of environmental turbulence. stable environments allow an existing strategy to be changed slowly or not at all if firm performance is deemed acceptable. environmental turbulence challenges an existing strategy with environmental complexity, rapid change, novel challenges, and unpredictability (ansoff et al., 1984/2019). ansoff argues that strategic responsiveness 36 j. reed journal of small business strategy / vol. 31, no. 3 (2021) / 33-46 must be matched to the level of environmental turbulence. similarly, in the supply chain, stable environments place pressure on operational efficiency for enhanced competitiveness while unstable environments reward an agile supply chain (yusuf et al., 2004). high environmental turbulence may therefore enhance the effect of strategic agility on firm performance. this leads to the fourth and final hypothesis. hypothesis 4. environmental turbulence moderates the relationship between strategic agility and firm performance in sme firms. figure 1 summarizes the four hypotheses in the form of a conceptual model relating strategic agility, contingency factors, and firm performance. figure 1. hypothesized relationships between firm age, firm size, strategic agility and firm performance construct validity as this is the first study to operationalize strategic agility following doz and kosonen (2010), it is important to assess the validity of the construct. one way of doing this is to compare strategic agility to like-constructs. convergent validity is demonstrated when a construct is shown to correlate with a similar, established construct (cooper & schindler, 2014). organizational alignment was selected for this purpose. organizational alignment is the degree to which an organization’s strategy, structure, and culture cooperate to achieve the same desired goals (nadler & tushman, 1989; powell, 1992; quiros, 2009; semler, 1997). as this appears conceptually similar to strategic agility (the alignment of strategic sensitivity, leadership unity, and resource fluidity), a positive relationship between the two constructs would support convergent validity for strategic agility. criterion validity is demonstrated when a construct is shown to correlate with real-world outcomes (sullivan et al., 2009). strategy change was selected for this purpose. an organization may be strategically agile yet choose not to change its strategy during a given period of time. however, firms that are strategically agile may be expected to actually change their strategy more frequently. strategy change is not a latent construct but rather a real-world event that may be measured objectively. a positive relationship between strategic agility and strategy change would therefore support criterion validity for strategic agility. note that organizational alignment and strategy change are not positioned as hypotheses as they are used for construct validation prior to hypothesis testing. method context the space coast region of the state of florida in the united states was selected as the context for the study. this region is on florida’s east coast and is comprised primarily of brevard county, including the palm bay–melbourne– titusville metropolitan statistical area (msa). one of the reasons this region was selected is its high industry diversity. according to florida gulf coast university (2018), the palm bay-melbourne-titusville msa ranked second in the state at the end of 2018 as an industrially diversified economy. high industry diversity is desirable for a multi-industry study. another reason was that the region suffered economically from the combined effects of the national recession from 2007 to 2009 followed closely by the retirement of nasa’s space shuttle program at the kennedy space center from 2010 to 2011. unemployment in brevard county ran 1 3% higher than the national average from late 2009 to 2013, then rebounded and has been lower than the national average since early 2015 (space coast economic 37 j. reed journal of small business strategy / vol. 31, no. 3 (2021) / 33-46 development commission, 2018; 2019). these economic conditions represent a form of environmental turbulence suitable for the study. according to the dun & bradstreet (d&b) hoovers database, there are a total of 1,709 companies in six selected industry sectors in this region which are independent, for-profit, with 10 or more employees (d&b hoovers, 2018). from this population, stratified random sampling was used to generate a sample frame of 249 firms. a survey questionnaire was developed for data collection purposes and pretested and refined with seven firms from four industries. questionnaires were sent by postal mail to the ceo of each firm and responses were accepted on-line or by return mail. 34 responses were received (13.7% response rate), of which 30 were usable. the low response rate was likely due to the ceo level of the survey (bednar & westphal, 2006) and the request for financial and other information which may be considered sensitive, especially for small firms (dess & robinson, 1984). table 1 summarizes the overall population, sample frame, and responses by firm size. while no responses were received from large firms (500 or more employees), the distribution of responses from very small to medium-sized firms was good, providing sufficient range in the sample to study the effects of firm size. table 1 firm size distribution of population, sample frame, and responses firm size number employees pop. count pop. percent strat factor sample frame count sample frame percent response count response percent large 500+ 3 0.2% 100% 3 1.2% 0 0.0% medium 100 499 59 3.5% 100% 59 23.7% 7 23.3% small 2 50 99 143 8.4% 35% 58 23.3% 4 13.3% small 1 20 49 518 30.3% 10% 67 26.9% 8 26.7% very small < 20 986 57.7% 5% 62 24.9% 11 36.7% total 1709 100% 249 100% 30 100% table 2 summarizes the population, sample frame, and responses by industry sector. the construction and professional services sectors had the most responses while health/ social and accommodation/food had the fewest. comparing the response percentages to the sample frame percentages indicates potential response bias by industry, suggesting the use of industry sector as a control variable relative to bias as well as traditional industry effects (groves, 2006; rumelt, 1991). table 2 industry sector distribution of population, sample frame, and responses industry sector naics pop. count pop. percent sample frame count sample frame percent response count* response percent construction 23 314 18.4% 45 18.1% 8 26.7% manufacturing 31, 32, 33 196 11.5% 38 15.3% 5 16.7% retail trade 44, 45 199 11.6% 27 10.8% 4 13.3% professional services 54 194 11.4% 34 13.7% 8 26.7% health/social 62 289 16.9% 34 13.7% 1 3.3% accomodation/food 72 517 30.3% 71 28.5% 2 6.7% total 1709 100% 249 100% 28 100% *two responses did not report their industry 38 j. reed journal of small business strategy / vol. 31, no. 3 (2021) / 33-46 the operationalization of each variable used in the study is discussed below. firm age the age of a firm is commonly measured as the number of years since its founding (autio et al., 2000; u.s. small business administration, 2012). for independent firms, founding is defined as the year of its legal incorporation. for branches or divisions of a larger firm, founding is defined as the year of the establishment of the outlet. the age of the firm was calculated as the current year minus the founding year. firm size firm size may be measured in several ways including the number of employees, annual revenue, and assets. number of employees was used in this study due to less sensitivity to its reporting by small, private firms. no distinction was made between full-time or part-time status. strategic agility a 10-item scale derived from doz and kosonen (2010) was used to measure strategic agility, and is provided in appendix a. each item was measured on a 7-point likert-type scale ranging from strongly disagree (1) to strongly agree (7). the measures for each individual dimension were averaged to provide a composite value for the dimension. as doz and kosonen require all three dimensions to be present to achieve strategic agility, indicating an interaction between the dimensions, the three composite values were multiplied together to arrive at the final value for strategic agility. this value ranged from 1 to 343. environmental turbulence “environmental turbulence is a combined measure of the changeability and predictability of the firm’s environment” (ansoff et al., 1984/2019, p. 80). four items derived from ansoff et al. were used to measure environmental turbulence on a 5-point likert-type scale ranging from very low (1) to very high (5). these items measured the environment’s complexity, novelty, speed of change, and frequency of shifts. the average of the items was calculated as the composite value for environmental turbulence. the scale is provided in appendix a. firm performance firm performance was measured as revenue growth, profitability, and subjective performance against objectives. of these, profitability (return on sales) was found to be the most simple and reliable measure across firms of different ages, sizes, and industries, and was used as the dependent variable for the study. this is consistent with powell’s (1992) study of the relationship between organizational alignment and firm performance. profitability was measured in ranges (< 0%, 0 – 5%, 5 – 10%, 10 – 15%, 15 – 20%, 20 – 25%, > 25%) to reduce respondent concerns regarding the release of sensitive information. organizational alignment organizational alignment was measured using four items derived from semler (1997) to measure the pairwise consistency or fit between strategic goals, tactics, structure, cultural values and norms, and the external environment. the degree of alignment for each pair was measured on a 7-point likert-type scale ranging from strongly disagree (1) to strongly agree (7). the average of the items was calculated as the composite value for organizational alignment. the scale is provided in appendix a. strategy change three original items were used to measure the degree to which a firm actually changed its strategy during the last three years. using a 5-point scale, the items measured the frequency of strategy change (ranging from none to continually), the degree of change (ranging from very minor to very major), and the speed of change (ranging from no time at all to years). the average of the three items was calculated as the composite value for strategy change. industry industry was measured as a nominal value corresponding to each industry sector. as a categorical variable, it then was encoded using dummy variables for the construction and professional services industries with higher response counts, and the remaining industries were grouped into a third “other” category, for use in regression analysis (cohen et al., 2015). analysis the two primary forms of analysis were factor analysis and multiple regression. confirmatory factor analysis (cfa) was used to validate the ten survey items used 39 j. reed journal of small business strategy / vol. 31, no. 3 (2021) / 33-46 to measure strategic agility. factors were extracted using principal component analysis, as shown by table 3. the top three components, presumably corresponding to the three dimensions of strategic agility, met the rule-of-thumb criteria for eigenvalues > 1.0 and together accounted for 63.4% of the average variance explained. table 4 provides the factor loadings of the survey items, showing clean loadings for most items on the components. cfa and cronbach’s alpha were used to test the internal reliability of all five latent constructs in the study, as summarized by table 5. strategic sensitivity and resource fluidity did not quite meet the rule-of-thumb minimum of .70 for coefficient alpha (nunally, 1978). strategic sensitivity also did not meet the rule-of-thumb minimum of .60 for one of its factor loadings. however, the average variance explained (ave) and composite reliability (cr) of the constructs did meet the rule-of-thumb minimums of .50 and .80 respectively (fornell & larcker, 1981; netemeyer et al., 2003). table 3 principal component analysis for strategic agility initial eigenvalues component total variance % 1 3.336 33.364 33.364 2 1.845 18.446 51.809 3 1.164 11.635 63.445 4 811 8.115 71.560 5 695 6.954 78.513 6 684 6.845 85.358 7 609 6.094 91.452 8 439 4.386 95.838 9 291 2.905 98.744 10 126 1.256 100.000 table 4 loading of survey items on strategic agility components component item 1 2 3 sense1 .529 -.182 .458 sense2 .161 .395 .789 sense3 .047 .206 .885 unity1 .715 -.145 .202 unity2 .869 .084 .084 unity3 .751 .277 -.154 unity4 .627 .242 .133 fluid1 -.036 .808 .054 fluid2 .059 .699 .241 fluid3 .197 .670 .133 varimax rotation with kaiser normalization table 5 reliability of latent variables construct cronbach’s alpha range of factor loadings* average variance explained composite reliability environmental turbulence .766 .653 .852 .593 .852 organizational alignment .769 .701 .847 .596 .855 strategic sensitivity .695 .536 .894 .626 .827 leadership unity .764 .667 .896 .587 .849 resource fluidity .637 .751 .800 .592 .813 *unrotated results and discussion the means, standard deviations, and correlations are reported in table 6. firm age and firm size are positively correlated with one another, as would be expected. firm age and strategic agility are negatively correlated, supporting h1. firm size and strategic agility are not significantly correlated. strategic agility is strongly positively correlated with both organizational alignment and strategy change (p < .01), supporting the anticipated construct validity of strategic agility. none of the variables show a statistically significant correlation with firm performance. the results of the regression analysis of strategic agility on firm age and firm size are shown in table 7. hierarchical regression was used to model industry control variables first, followed by the addition of firm age and firm size. model 1 shows that industry alone accounts for 16.5% of the variance in strategic agility. model 2 shows that firm age is still negatively related to strategic agility under industry control, adding 8.8% to the proportion of variance explained. hypothesis 1 is therefore supported. model 3 shows that firm size is not significantly related to strategic agility, providing no support for hypothesis 2. model 4 shows that the relationship between firm age and strategic agility is independent of firm size as well as industry. 40 j. reed journal of small business strategy / vol. 31, no. 3 (2021) / 33-46 the results of the regression analysis of firm performance on strategic agility and environmental turbulence are shown in table 8. model 1 shows that the industry controls account for only 4.4% of the variance in firm performance, and model 2 shows that adding strategic agility has little effect. hypothesis 3 was therefore not supported. model 3 shows that adding environmental turbulence has little effect. however, model 4 shows that the interaction between strategic agility and environmental turbulence is statistically significant and adds 10.5% to the proportion of variance explained. this supports hypothesis 4. figure 2 graphically depicts the moderating effect of environmental turbulence. under high turbulence (3.97), as strategic agility increases, so does firm performance. under low turbulence (2.78), as strategic agility increases, performance actually decreases, suggesting that firms may be penalized for their strategic agility in stable environments. probing the interaction (hayes, 2018) at multiple levels of turbulence shows that the point at which the relationship between strategic agility and performance switches between positive and negative is approximately 3.4 on the 5-point turbulence scale ranging from very low (1) to very high (5). table 6 descriptive statistics and pearson correlations variable mean (s.d.) age size agility turb perf align change ctrdum srvdum age 26.33 (16.15) 1 size 72.87 (93.02) .441** 1 agility 136.80 (58.30) -.434** -.042 1 turb 3.37 (0.60) -.092 .061 .253 1 perf 3.97 (1.73) .050 -.183 .064 -.123 1 align 5.58 (0.84) -.332* .066 .589*** .255 -.200 1 change 2.34 (0.85) -.403** .109 .486*** .334* -.047 .449** 1 ctrdum 0.27 (0.45) .315* .019 -.355* -.029 -.210 -.175 -.368** 1 srvdum 0.27 (0.45) -.359* -.064 -.313* .068 .056 .305 -.038 -.364** 1 *p <.10, **p < .05, ***p < .01 (2-tailed) table 7 relationships of firm age and firm size with strategic agility dependent var: agility independent vars model 1 controls model 2 age model 3 size model 4 age and size ctrdum -.278 -.209 -.248 -.193 srvdum .212 .120 .210 .109 age -.325* -.397* size -.024 .143 r2 .165 .253 .166 .269 δr2 .088 .001 .016 std. error 55.222 53.236 56.256 53.704 sig. .088 .052 .188 .087 values are standardized coefficients *p < .10, **p < .05, ***p < .01 41 j. reed journal of small business strategy / vol. 31, no. 3 (2021) / 33-46 the performance penalty for strategic agility in stable environments is consistent with winter’s (2003) view that dynamic capabilities are not always warranted given their greater cost in comparison to ordinary capabilities (routines) and ad hoc problem solving. according to winter, dynamic capabilities involve a carrying cost for the specialized resources which enable it to change lower-order capabilities. firms without dynamic capabilities can still accomplish change through ad hoc problem solving, the costs of which generally disappear when there is no problem to solve. therefore, when the need for change is sparse, the added cost of dynamic capabilities may not be matched by corresponding benefits. in summary, the hypothesis that firm age is negatively related to strategic agility (h1) was supported by the study. as firms became older, they became less strategically agile. this is consistent with prior research in the areas of path dependency, asset stock accumulation, and structural inertia table 8 relationships between strategic agility, environmental turbulence, and firm performance dependent var: agility independent vars model 1 controls model 2 agilty model 3 turb model 4 agiltyxturb ctrdum -.218 -.220 -.210 -.229 srvdum -.023 -.022 -.021 -.008 agility -.008 .030 -2.029 turb -.135 -1.078* agilityxturb 2.483* r2 .044 044 .061 .167 δr2 .000 .017 .105 std. error 1.754 1.788 1.807 1.738 sig. .542 .752 .800 .462 values are standardized coefficients *p < .10, **p < .05, ***p < .01 figure 2. plot of moderating effect of environmental turbulence 42 j. reed journal of small business strategy / vol. 31, no. 3 (2021) / 33-46 (barney, 1991; dierickx & cool, 1989; hannan & freeman, 1984). the hypothesis that firm size is negatively related to strategic agility (h2) was not supported, despite the correlation found between firm age and size. while surprising, previous studies have also found the effects of firm age and firm size to be separate and independent (esteve-perez & manez-castillejo, 2006; freeman et al., 1983; gopalakrishnan & bierly, 2006). the hypothesis that strategic agility was unconditionally related to firm performance (hypothesis 3) was also not supported. however, the hypothesis that environmental turbulence positively moderates the relationship between strategic agility and performance (hypothesis 4) was supported. as firms became more strategically agile, they performed better in turbulent environments and worse in stable environments. this negative impact in low turbulence might be called the “winter effect” after sidney winter, who argued that dynamic capabilities are expected to carry additional costs that may be an unnecessary burden in low turbulence (collis, 1994; winter, 2003). this finding may also help explain the mixed results in prior research on the relationship between strategic agility and firm performance. implications, limitations, and future research this study contributes to theory in two ways. first, it operationalizes the doz and kosonen (2010) framework describing strategic agility and finds it to be valid both internally through cfa and externally through convergence with similar constructs. the resulting scale may prove useful to researchers investigating strategic agility and may lead to more consistent findings in the future. second, two contingency factors related to strategic agility are identified. firm age is found to be an antecedent of strategic agility, and environmental turbulence is found to be a moderator of the relationship between strategic agility and performance. these findings help to “build out” our conceptual understanding of the role of strategic agility. the study also has two significant managerial implications. young firms may be able to leverage strategic agility as a source of competitive advantage, particularly when competing against older firms. however, they should bear in mind that they may lose strategic agility as they grow older. that is, they should use it before they lose it. firms may therefore wish to use the scale to monitor their strategic agility and to maintain it through exercise or develop it through training. second, firms may enhance their performance by matching their level of strategic agility with the level of turbulence in their environment. high strategic agility appears to pay off in high turbulence, whereas low strategic agility appears to pay off in low turbulence. this suggests that the ability to dynamically adjust strategic agility is a useful second-order dynamic capability (winter, 2003). there are several limitations in the study. the generalizability of the results is limited by the focus on firms located in a specific region of one state. the results may therefore not apply to other geographies which are markedly different in industry mix or environmental factors. the study is also limited by its small sample size. while statistically significant results are found, stronger relationships and results involving firm size may be found with a greater number of firms. finally, the study is limited by the use of single-rater survey data as opposed to multiple, more objective sources of data. while the behavioral nature of strategic agility requires a questionnaire, some constructs such as firm performance and environmental turbulence might be collected from public filings or industry databases. multiple raters for each firm might also be used to reduce bias and increase the sample size. each of these limitations warrants additional research. the study should also be expanded to include large firms. large firms generally have greater resources, more products and services, larger market share, economies of scale, and other advantages over sme firms (penrose, 1959). however, these advantages may become disadvantages when it comes to strategic agility. large firms may not be able to shift their resources or market focus as easily or quickly as small firms. grantham et al. 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(2004). agile supply chain capabilities: determinants of competitive objectives. european journal of operational research, 159(2), 379-392. 46 j. reed journal of small business strategy / vol. 31, no. 3 (2021) / 33-46 appendix a – latent variable scales strategic sensitivity 1. my organization anticipates future products and services needed by customers. 2. my organization uses experimenting (e.g., prototypes, pilots, in-market tests) to probe the future. 3. my organization considers a wide range of potential products and services by viewing our business in abstract terms. leadership unity 1. the leaders of my organization engage in open dialogue and welcome differences of opinion. 2. the leaders of my organization operate as an integrated, interdependent, value-creating team. 3. the leaders of my organization are aligned around a common interest through a compelling mission, aspirational vision, shared values, and emotion. 4. the leaders of my organization are caring and demonstrate empathy and compassion for others. resource fluidity 1. my organization’s underlying business systems and processes are modular and easily changed. 2. my organization uses multiple business models for different market segments or products. 3. my organization adopts new ways of doing business from other companies. environmental turbulence 1. how complex is your company’s external environment? 2. how rapidly do challenges evolve in the external environment? 3. how novel is each challenge in the external environment? 4. how frequently does the external environment shift between being stable and unstable? organizational alignment 1. there is a rational flowdown of goals within my organizational structure. 2. the cultural values of my organization are consistent with our strategic goals. 3. the cultural norms for behavior in my organization are consistent with our tactics. 4. there is good fit between the demands of the external environment and our strategic goals and tactics. sf'rate gy the effect of operational and strategic planning on small firm performance larry r. watts joseph g. ormsby stephen f. austin state university abstract unlike largecorporations,small businesses facesmultiplicity of problems thatcould spellimmediate doom for theorganization. as a result,an increasing body of research addressing small business problems has been noted in the literature. this research study investigated the effect of operah'onal and strategic planning on small finn performance and found that both roere positively related to performance. practical implications of these research fi'ndi ngs are provided for small businesses. introduction the state of small firm planning literature has progressed rapidly over the past five years. through the efforts of dedicated research teams our state of knowledge can no longer be considered "woefully inadequate" (12, p. 128). an accumulation of evidence has strongly suggested that small firms benefit from substantive, informal planning that incorporates outsider input (3, 9, 11). however, as noted by robinson, salem, logan and pearce, "a firm can be advised no more specifically than to 'engage in a high level of planning'r to 'plan regularly'r to 'include some written documentation'n the hope of achieving higher performance" (13, p. 20). directly addressing the dearth of prescriptive information, robinson, salem, logan and pearce (13)and robinson, logan and salem (10)investigated the speci lie planning activities that comprised effective small firm planning. robinson, salem, logan and pearce (13) found that a significant amount of the variation in performance was explained by high levels of involvement with the activities of analyzing possible changes among target customers, analyzing major competitors, setting sales targets, preparing cash flow projections, setting labor cost standards, and reviewing the adequacy of inventory levels. robinson, logan and salem (10) found that extensive operational planning was strongly related to performance, while engaging in strategic planning alone was not. even though engaging in strategic planning was not singularly related to performance, firms with both operational and strategic planning outperformed all remaining firms. building on these two key studies, the intent of this investigation is to extend our understanding of the contribution of operational and strategic planning to small firm performance, and to assess the efficacy of specific planning activities. 27 methodology sample the target population for this study included all community banks operating in the mountain states of arizona, idaho, montana, nevada, utah and wyoming. using the industry classification of community banks, 170 small independently owned and operated banks were identified. from these institutions, the chairman of the board was selected as the appropriate individual to receive the questionnaire. the study was limited to only small firms operating in one industry and one geographic region to control for extraneous influences on planning practices and performance outcomes. three mailings yielded 83 usable questionnaires (48.8 percent response rate). the target population of 170 community banks had an average asset level of $36.6million, an average net interest margin of 5.22 percent, and an average return on assets of 0 56 percent. the respondent population of 83 community banks had an average asset level of $32.6 million, an average net interest margin of 520 percent, and an average return on assets of 061 percent. the substantial response rate (48.8 percent), and similarity of financial performance data suggested that a representative sample of the target population had been obtained. furthermore, the average asset level of respondent banks, $32.6 million, when compared to the industry average of $194 million per bank suggests that respondents were small businesses. measures planning. to measure the planning practices of small firms, several techniques were employed to develop an appropriate instrument. first, the planning literature was surveyed to identify planning practices clearly assodated with operational and strategic planning. the assembled list of activities were then grouped into related clusters of activities and submitted to a panel of small firm planning experts. the panel of experts assessed the content validity of the instrument and provided additions and corrections. after reviewing the recommendations of the panel, structured interviews were scheduled with a select number of small bank owners and managers. the interviews further refined the content, form and readability of the questionnaire. to establish a firm's planning efforts, clusters of activities necessary for operational and strategic planning were assembled. the clusters of strategic planning activities were drawn from the work of hofer and schendel (6). as shown in figure 1, these clusters include: (i) assessing the firm's strategic position, (2) identifying opportunities and threats, (3) identifying resources and skills, and (4) identifying strategic issues. evidence that small firms engage in, and benefit from, these strategic activities has been provided by bracker (1), bracker and pearson (3), bracker, keats and pearson (2), and robinson and pearce (11). the clusters of operational activities were drawn from the work of pearce and robinson (8). as shown in figure 2, these clusters include operational activities in: (1) marketing, (2) finance, (3) personnel, and (4) operations. evidence that small firms engage in, and benefit from these operational activities has been provided by robinson, logan and salem (10)and robinson, salem, logan and pearce (13). to assess the extent of involvement with the activities, fredrickson's (4, 5) concept of comprehensiveness was used. for each planning activity an associated measure of comprehensiveness was included. a firm that was very comprehensive in dealing with the activities might: (1) form a group of special members, (2) conduct extensive analysis, (3) allow unlimited expenses, (4) involve people with diverse backgrounds, and (5)consider all possible implications and options. on the other hand, a very non-comprehensive firm might rely on the ideas and experiences of one individual. 28 figure 1. strategic planning activities strategic posture assess the relative competitive position of the bank. assess the financial condition of the bank. assess the financial health of the bank. assess the stage of the product/market evolution. opportunities and threats identify changes in the market and industry. identify changes in the sources or conditions of supply. identify changes in actions of competitors. identify changes in environmental trends. resources and skills identify principle resources and skills. identify major competitive strengths. identify major competitive weaknesses. identify major advantages over competitors. strategic issues identify the influence of market change on the bank. identify the influence of industry change on the bank. identify the influence of competitor change on the bank. identify the influence of environmental change on the bank. figure 2. operational planning activities marketing identify the customer need to be filled by your service. identify your market coverage and service levels. identify the mix of advertising, media, promotion and personal contact. identify your pricing approach. finance identify sources of internal funding. identify debt capadty. identify sources of external capital. identify liquidity requirements. personnel identify staffing requirements. identify training and development requirements. identify promotion and compensation requirements. identify employee performance requirements. operations identify core deposit requirements. identify equipment requirements. identify product or service quality requirements. identify capacity of your operations. 29 to indicate the extent of involvement with operational and strategic planning activities, the scores for each planning area were summed. with four clusters of planning activities, and four associated measures of comprehensiveness for each cluster (scored from 0 to 5), the resulting index could range from 0 to 80 for operational and strategic planning. a score of 0 would indicate no involvement in planning activities, while a score of 80 would indicate a very comprehensive involvement in all planning activities. as shown in table 1, the actual range was between 17and 77 for operational planning and between 14 and 77 for strategic planning. computation of cronbach's alpha for operational (0.7554)and strategic (0.8695)planning indicated an acceptable level of reliability. table 1. summary of planning practices standard minimum maximum mean deviation value value operational planning marketing 12.5 2.93 4 18 finance 12.4 3.63 2 20 personnel 11.7 3.10 4 20 operations 12.7 2.31 7 19 strategic planning strategic position 13.6 3.39 4 20 opportunities & threats 10.7 2.90 4 18 resources and skills 12.2 3.21 4 19 strategic issues 11.1 3.57 2 20 performance. to measure organizational performance, an industry specific approach was used. as noted by bracker and pearson (3), this approach is recommended for planning research and avoids the use of meaningless performance measures. industry experts and published documents were surveyed to determine the specific measures of success in the banking industry. two performance measures, net interest margin and return on assets, were identified from this process. net interest margin was viewed as an important indicator of bank effectiveness in obtaining and lending funds to its customers. net interest margin was defined as interest income less interest expense, as a percentage of average earning assets. return on assets, on the other hand, was viewed as an important indicator of efficient utilization of bank resources. to reflect the influence of planning on performance, four years of data were collected on each bank for both performance measures. this time period was consistent with the typical three to five year time period prescribed in the planning literature (12, 15), and served to define the target population as established banking organizations. results planning and efficiency to accommodate analysis with two measures of the dependent variable, separate tests were conducted for each performance measure relative to the planning focus of interest. 30 regressing return on assets separately on operational planning practices and strategic planning practices produced intriguing results. operational planning evidenced a negligible relationship with return on assets (f = 1.43, p = 0.2311,r2 = 0.02), while strategic planning evidenced a significant, but weak, relationship with return on assets (f = 8.01,p = 0.0059, r2 = 0.09). openr tional components. the finding that operational planning was only negligibly assodated with organizational effidency was intriguing and prompted further inquiry. to explore its underlying nature, operational planning was disaggrega ted to reflect its component activities. return on assets was regressed separately on marketing, finance, personnel and operations activities. as shown in table 2, personnel evidenced the strongest relationship with return on assets, followed in turn by finance, marketing, and operations. apparenfly, comprehensive attention to the personnel activities of staffing, training and development, promotion and compensation, and employee performance standards are of basic importance to organizational efficiency. this finding would appear to verify the dictum that people are a business'ost important asset. comprehensive attention to financial and marketing activities were also important to organizational efficiency. apparently, comprehensive attention to the financial activities helped reduce costs, while comprehensive attention to the marketing activities hei ped increase revenues. the negligible relationship between operations activities and efficiency is probably a result of industry influences. in the banking industry, state and federal regulatory agencies mandate banking practices, including reserve levels. thus, core deposit requirements, capacity of operations, and product quality are externally controlled for this industry. table 2. summary table for regression of return on assets on planning component activities operational planning component ss df ms r f' marketing 0.0311 82 0.0311 0.04 3.36 0.0704 finance 0.1099 82 0.1099 0.13 11.70 0.0010 personnel 0.3049 82 0.3049 0.22 22.61 0.0001 operations 0.0169 82 0.0169 0.02 1.93 0.1690 strategic planning component ss df ms r p' position 0.0591 82 0.0591 0.08 7.13 0.0091 opp/threats 0.0708 82 0.0708 0.06 5.43 0.0223 res/skills 0.0686 82 0.0686 0.07 6.29 0.0141 issues 0.0250 82 0.0250 0.02 1.92 0.1693 31 strategic components. to further explore the relationship between planning and efficiency, strategic planning was also disaggregated to reflect its component activities. return on assets was regressed separately on the activities of identifying and assessing strategic position, opportunities and threats, resources and skills, and strategic issues. of the four activity groups, assessing the bank's strategic position had the strongest relationship with return on assets, followed in turn by identifying resources and skills, identifying opportunities and threats, and identifying strategic issues. apparently, comprehensive attention to identifying and assessing the organization's current position, opportunities and threats, and resources and skills are important to organizational efficiency. understandably, an organization that knows where it is at, where it should compete, and what it has to compete with can more efficiently use its resources. the negligible relationship between identifying strategic issues and efficiency may be a result of industry influences, or more probably, the long-term time horizon of strategic issues. planning and effectiveness to assess the relative contribution of operational and strategic planning to organizational effectiveness, net interest margin was regressed separately on operational and strategic planning practices. both operational (f = 122.78, p = 0.0001,r2 = 0.60), and strategic planning (f = 94.43, p = 0.0001, r2 = 0.54) evidenced a significant relationship with net interest margin. inspection of the two coeffident of determination (r2) values suggested that when considered separately, operational planning contributed slightly more to the explanation of net interest margin than did strategic planning. this, and the strength of the relationship between a summated measure of operational and strategic planning practices and net interest margin (f = 175 01, p = .0001,r2 = 0 68), suggests that the influence of planning is cumulative. thus, while operational planning and strategic planning are singularly important to performance, in combination they pmduce a more pronounced impact on organizational effectiveness. operational components. to further explore the relationship between planning and effectiveness, operational and strategic planning were further disaggregated to reflect their component activities. net interest margin was regressed separately on marketing, finance, personnel and operations activities. as shown in table 3, finance had the strongest relationship with net interest margin, followed in turn by personnel, marketing, and operations. apparently, comprehensive attention to all the operational planningactivi ties is of importance to organizational effectiveness. considering the industry-specific financial performance measures used to assess organizational effectiveness, this finding is understandable. with net interest margin being calculated as the difference between interest income and interest expense divided by average earning assets, each of the operational planning component activities influence a portion of the equation. comprehensive attention to financial activities and marketing activities influence the value of the numerator. financial activities directed at reducing interest expense and marketing activities directed at increasing interest income, would both have a positive influence on net interest margin by increasing the value of the numerator. similarly, comprehensive attention to operational activities directed at controlling the level of assets would positively influence net interest income by reducing the value of the denominator. finally, comprehensive attention to personnel activities would positively influence net interest margin by providing a competent staff to accomplish the various activities. 32 table 3. summary table for regression of net interest margin on planning component activities operational planning component ss df ms r p' marketing 2.5423 82 2.5423 0.78 292.8 0.0001 finance 8.9670 82 8.9670 0.91 787.0 0.0001 personnel 7.8730 82 7.8730 0.82 376.6 0.0001 operations 0.6786 82 0.6786 0.49 77.4 0.0001 strategic planning component ss df ms r p' position 3.8161 82 3.8161 0.87 522.4 0.0001 opp/threats 3.0042 82 3.0042 0.75 239.9 0.0001 res/skills 4.6835 82 4.6835 0.84 411.2 0.0001 issues 12.1184 82 12.1184 0.92 964.9 0.0001 strategic components. net interest margin was regressed separately on the strategic planning component activities. of the four activity groups, identifying strategic issues had the strongest relationship with net interest margin, followed in turn by identifying strategic position, identifying resources and skills, and identifying opportunities and threats. apparently, comprehensive attention to all of the strategic planning activities is important to organizational effectiveness. considering that each activity group contributes information necessary for determining the future direction of the organization, this finding is reasonable. understandably, an organization that knows its competitive environment, its competitive strengths, and where to compete can be more effective. discussion conducted in the framework of contingency theory, the results of this study hold both practical and theoretical value. consistent with the admonitions of schendel and hofer (14), jauch and osborn (7), and shrader, taylor and dalton (15), this study took a limited domain contingency approach to the planningperformance relationship. the domain of this study was purposely limited to small, independently owned banks operating in a moderately dynamic environment. research attention was focused on operational and strategic planning practices relative to industry specific financial performance measures. within the confines of its domain, this study found a positive relationship between planning and performance. while these findings cannot be generalized to other settings, they do provide an incremental contribution to contingency theory. as noted by shrader, et al., the complexity of the planning-performance relationship "makes research focusing on specific contingencies necessary before concrete conclusions and statements about planning and performance can be made" (15, p. 166). the results of this study hold practical significance for the survival and success of small and growing businesses. the positive relationship found between planning and performance should be of particular interest to small business owners and managers intent on enhancing their firm's 33 performance. the relationship between planning practices and organizational effectiveness evidenced in this study would suggest comprehensively engaging in the basic operational and strategic planning activities. this does not mean to suggest, however, that the generation of highly formalized written documentation is appropriate. rather, it means that the small firm owner/manager should devote adequate financial and human resources to both levels of planning activities. this would mean attending to the various planning activities by forming special groups as needed, involving people with diverse backgrounds, providing ample funding, conducting a thorough analysis, and considering many implications and options. the relationships between operational planning and efficiency, and between strategic planning and efficiency, also offer practical suggestions. first, the finding that strategic planning, not operational planning, was significantly related to organizational efficiency verifies the value of strategic planning. this does not, however, suggest that emphasis be placed solely on strategic planning activities. rather, it suggests the value of progressing beyond an operational perspective to include a broader strategic view of the organization and its environment. apparently, attention to strategic planning activities facilitates a more efficient adaptation to the changing demands of the environment. a final practical suggestion provided by the analysis would be to comprehensively attend to the personnel function of the organization. small banks that comprehensively dealt with the personnel issues of staffing, training and development, promotion and compensation, and employee performance standards were significantly more efficient. in conclusion, while the results of this study have been most encouraging, certain limitations must be recognized. first, the design of the study precludes any inferences of causality. its non-experimental methodology and cross-sectional data are insufficient to establish temporal antecedents. even though this study did empirically establish a relationship between planning and performance, it did not establish the causal sequence of the relationship. therefore, while it might be reasonable to presume that increased involvement with planning activities leads to enhanced organizational performance, the relationship may be otherwise. also, the ability to generalize the findings of this study to and across other populations is severely restricted. the intent, and design of this study focused on a narrow segment of a single industry operating in a specific geographical region. while these design parameters enhanced control over extraneous influences, they also reduced the generalizability of the findings beyond the target population. claims of external validity beyond the target population would be spurious. only through systematic replication and extension will the boundaries of applicability be established. references 1. bracker j.s.planningandfinancialperformanceamongsmallentrepreneurial firms: an industry study (unpublished doctoral dissertation, atlanta, ga: georgia state university, 1982). 2. bracker, j. s., keats, b.w., & pearson, j. n. 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"toward an integrated theory of strategy, academy of management review (volume 6, 1981),491-498. 8. pearce, j. a., & robinson, r. b. strategic management: strategy formulation and implementation (homewood, il: richard d. irwin, 1988). 9. robinson, r. b. "the importance of 'outsiders'n small firm strategic planning," academy of management journal (volume 25, 1982), 80-93. 10. robinson, r. b.,logan, j. e., & salem, m. y. "strategic versus operational planning in small retail firms," american journal of small business (volume 10(3), 1986), 7-16. 11. robinson, r. b., & pearce, j. a. "the impact of formalized strategic planning on financial performance in small organizations," strategic management journal (volume 4, 1983), 197207. 12. robinson, r. b.,& pearce, j. a. "research thrusts in small firm strategic planning," academy of management review (volume 9, 1984), 128-137. 13. robinson, r. b.,salem, m.y.,logan, j. e.,& pearce, j. a. "planning activities related to independent retail firm performance," american journal of small business (volume 10(2), 1986), 19-26. 14. schendel, d. e., & hofer, c. w. "research needs and issues in strategic management," in d. e. schendel and c. w. hofer (eds.), strategic management: a new view of business policy and planning (boston, ma: little, brown and company, 1979, 515-530). 15. shrader, c. b.,taylor, l., & dalton, d. r. "strategic planning and organizational performance: a critical appraisal," journal of management (volume 10, 1984), 149-171. 35 http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2021, vol. 31, no. 03, 19-32 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2021 small business institute® w w w. j s b s . o rg introduction indonesia banking school, jl. kemang raya no.35, kebayoran baru, jakarta selatan 12730, indonesia, fermico.karambut@ibs.ac.id the effect of marketing mix perception on the intention of online merchant financing e-marketplace, intention, microcredit, marketing mix, online merchant apa citation information: karambut, f. (2021). the effect of marketing mix perception on the intention of online merchant financing. journal of small business strategy, 31(3), 19-32. micro, small, and medium enterprises (msmes) are the backbone of the national economy. however, indonesia msmes are typically unable to access capital to invest in business development and increase their business potential (capri, 2018). about 60-70% of msmes do not have access to bank financing because there are no assets used as collaterals (bank indonesia, 2015; ing bank, 2016). most micro-merchants save money at home because it is comfortable and practical to immediately use for business or personal purposes (pulse lab jakarta, 2018). lack of access to basic funding remains a major challenge for msmes in indonesia (capri, 2018). therefore, in 2007, the government launched a microcredit scheme named kredit usaha rakyat (kur) to open financing access to un-bankable msmes (indonesian government, 2015). to attract financial institutions to participate in financing programs, the government plans to channel kur through e-commerce (indonesian government, 2017). microcredit channel through e-commerce is considered safer for financial institutions because the borrower and his business are verified. the borrower is more flexible because the application is easy and practical. the e-marketplace platform provides facilities to submit the credit application. with this feature, online merchants can apply for working capital loans to financial institutions such as banks, leasing (finance companies), and technology finance (peer to peer lending) companies. financial institutions have to register to become an e-marketplace partner to display their credit products on the platform sites. examples of online marketplaces in indonesia that show microcredit facilities include tokopedia (https:// www.tokopedia.com), bukalapak (https://www.bukalapak. com), lazada (https://pages.lazada.co.id), and matahari mall (https://super.mataharimall.com). prospective borrowers who registered as online merchants have verified names, addresses, and product types. financers can analyze transaction turnover at any time since the system recorded all the transactions (karambut et al., 2019). investigating online financing intention is essential to help the financial institution identify the factors affecting online financing intention and predict the impact of the marketing mix perception on e-marketplace merchant intention. to maximize the effectiveness of sales and attract more customers, marketing mix elements, which are generally known today as the 4ps, play a significant role in the financial and banking sector to create awareness regarding their services to the public (ennew & waite, 2007; kotler & armstrong, 2012; mccarthy, 1960). pogorelova et al. (2016) identified a change in the marketing mix elements in e-commerce following e-business trends and internet technology. previous researches had shown that these variables with a large number of micro, small, and medium enterprises (msmes), indonesia has an opportunity to pioneer the development of new digital services, especially advanced mobile financial service and e-commerce. therefore, the government recommended e-marketplaces as a channel to provide micro-financing msme registered as an online merchant. financial institutions are more secure in offering credit facilities to merchants in e-marketplaces because it is easier to verify borrower status and transaction records. this paper aimed to examine the role of the marketing mix (product, price, place, and promotion) perceived in submitting microcredit’s online application. research on the intention of online merchants in e-marketplaces used the modified decomposed theory of planned behavior (dtpb) model approach. data were collected from indonesian online seller associations using a convenience sampling approach, and the research hypotheses were tested by applying structural equation modeling. the results showed that besides having a significant effect on online financing intention, the marketing mix’s perception could also be developed by mediating subjective norms. fermico karambut http://www.smallbusinessinstitute.biz http://www.jsbs.org 20 f. karambut journal of small business strategy / vol. 31, no. 3 (2021) / 19-32 have a good relationship with online purchase intention. in terms of relationships, product, price, promotion, and place (distribution) offer a positive and moderate relationship with online purchase intention (baltes, 2016; sulaiman et al., 2017). for the multi-sided platform (msp) firms with business-to-business (b2b) or business-to-consumer (b2c) business models, their open innovation practice commonly starts with the inbound process. for instance, sme sellers provide inbound new products/services to the platform, third-party logistics provides the solution to innovate the fulfillment process (santoso et al., 2020), and financial institutions offer online credit facilities (karambut et al., 2019). service quality was a crucial indicator for increasing browsers and sales amount (wang & kim, 2018). research using e-commerce data and financial institution data is generally only used for internal purposes. so far, there has been no analysis that measures how effective it is to offer microcredit to merchants through e-commerce. hence, even though credit facilities through e-commerce have been available since 2014, there has never been any published data to show credit distribution’s success rate. this research is the first to conduct a large-scale empirical investigation to measure marketing mix activity’s effectiveness through e-marketplaces media. the exploratory study aimed to scrutinize the online merchants’ intention model in applying for microcredit as an initial step in financial institutions’ marketing strategy. taylor and todd (1995) indicated that a better understanding of the relationships between the belief structures and antecedents of intention requires the decomposition of attitudinal beliefs. this research used a model approach of the decomposed theory of planned behavior (decomposed tpb), modified with marketing mix variables. we considered both direct and indirect effects of marketing mix perception to understanding the online merchants’ intention model. the empirical findings provided the marketing mix matrix for managerial implication as initial information for the financial institution. literature review according to the american marketing association (ama), the definition of marketing cited by kotler and keller (2016) is an organizational function and a series of processes for creating, communicating, delivering, and providing added value to customers, partners, and other broader parties. the marketing mix is the set of controllable variables that the firm can use to influence buyers’ responses (kotler & keller, 2016). the marketing mix regarding kotler and armstrong’s (2012) definition, is a tactical marketing tool, including product, price, promotion, and place (distribution) combined by the company to produce the desired response in the target market. the rise of e-commerce has remarkably altered the product element of the marketing mix. when marketing experts developed the marketing mix in the 1960s, commerce did not use the internet or technology (mccarthy, 1960). the e-marketing mix, namely e-product, price intelligence (price sensitivity), delivery risk (place), and promotional intelligence, influences consumer buying-decisions in online markets (sriram et al., 2019). in the original definition, products mean physical goods or services. according to kannan and li (2017), digital technologies changed the products in three ways. first, they combine actual products with digital services. second, digital technologies make it possible for products to the network, which releases the products’ inner value. third, they transform products into digital services. the price is defined as the money that customers exchange in terms of services or products, or the value they receive (kotler & armstrong, 2012). price discrimination has become popular since pricing is described as dynamic (hussein & attia, 2019; ighomereho & iriobe, 2019; mccarthy, 1960). placewise, the purchase is no longer connected to a physical place as shopping is possible 24/7 in online stores (heikkinen, 2018). promotion focuses more on the effectiveness of such new media and its incremental contribution over traditional media in building brands and affecting outcome variables of interest, not only online and mobile but also sub-channels within each of these environments such as social channels, search engines, and e-mail (kannan & li, 2017). marketplaces are the solution to current and future e-commerce demands. an electronic marketplace is a virtual, online space on which buyers and sellers meet to carry out transactions involving goods or services (corrot & nussenbaum, 2014). capri (2018) described e-commerce as all transactions made in the digital space on platforms that connect buyers, sellers, and other service providers. mckinsey & company (2018) estimated that there were about 30 million online shoppers in indonesia. around 40% of e-commerce sales in indonesia are estimated to conduct through b2c/b2b e-commerce sites (business-to-consumer/business-to-business), 30% sales through c2c sites (consumer-to-consumer), and the remaining 30% through social media, blog stores, and messaging applications (hoppe et al., 2016). the intention of conducting e-commerce transactions or purchases s defined as buyers’ intention to exchange through shopping sites, such as sharing information, maintaining business relationships, and making business transactions (dachyar & banjarnahor, 2017). creating the technological infrastructure around these online frameworks has 21 f. karambut journal of small business strategy / vol. 31, no. 3 (2021) / 19-32 revealed a shortage of resources, including a lack of service in indonesian financial institutions (capri, 2018). according to the regulation of the coordinating minister for the economy, the definition of microcredit is credit/financing of working capital or investment to individual borrowers/ individuals, business entities, and business groups that are productive and feasible but do not yet have collateral (indonesian government, 2015). regarding ing bank’s (2016) definition, micro, small, and medium enterprises (msmes) financing can simply be described as providing money to a micro-entrepreneur now based on their commitment to repay at a later date. small business loan availability may help small firms have a greater survival rate by allowing them to pursue their strategies (galli-debicella, 2020) many researchers and practitioners have attempted to explain and introduce a theoretical perspective for a user’s acceptance and adoption of ict (information communication technology). intentional theories previously used, for instance, are the theory of reasoned action (tra) (fishbein & ajzen, 1975), theory of planned behavior (tpb) (ajzen, 1991), technology acceptance model (tam) (davis, 1989), and the decomposed tpb (taylor & todd, 1995). based on taylor and todd’s examination, the decomposed tpb model has better explanatory power for behavioral intention, attitude, and subjective norm than the tra and pure tpb models. decomposed tpb is an excellent model to predict it usage behavior by decomposing the belief structure and adding several tam related factors (momani & jamous, 2017; lai, 2017). hypotheses attitude, according to ajzen, is the psychological tendency expressed through favorable or unfavorable evaluation of a particular entity (ajzen, 1991). in general, the more favorable a person’s attitude is towards individual behavior, the more likely it is that the person will want to engage in the behavior. research has shown that attitude directly influences online shopping intention was conducted by ye and zhang (2014) on online buyers in e-marketplace taboo.com in china and by bahrun et al. (2015) on students in malaysia. based on the previous technology acceptance model (tam) researches, perceived ease of use caused a positive influence on perceived usefulness. both perceived usefulness and perceived ease of use caused a positive impact on attitudes (al-mamary et al., 2016; davis, 1989). in the context of e-commerce, definition of perceived usefulness (pu) is the degree to which a customer believes that engaging in online shopping will improve his effectiveness (baharun et al., 2015; changchit et al., 2018). perceived ease of use (peu), defined as purchasing a product online, would be free of effort (gangwal & bansal, 2016; reynolds et al., 2020; ye & zhang, 2014). marketing mix activities influenced attitude, referring to the findings of mosavi’s research (2012) related to online shopping and mbengo and phiri’s study (2015) regarding bank selection. as stated earlier, the e-marketplace platform’s mechanism is a medium of online transactions between online buyers, and online sellers are the same as a medium for credit applying between online sellers (merchants) and financial institutions. based on previous observations, here are the proposed hypotheses: h1a. attitude behavior (ab) influences the intention of online merchant financing (iomf). h1b. perceived ease of use (peu) influences the attitude toward behavior (ab). h1c. perceived usefulness (pu) influences the attitude toward behavior (ab). h1d. marketing mix (mm) mix influences the attitude toward behavior (ab). subjective norm (sn) terminology is the perceived social pressure to perform or not to perform the behavior. it suggests that people have certain expectations regarding their significant others’ perceptions of their engaging in the behavior in question (ajzen, 1991). the following studies by taylor and todd (1995) found that both internal (family/ household) and external (friends/neighbors) normative beliefs significantly influence subjective norms. aziz and afaq (2018) and maulana et al. (2018) have undertaken a study of intention to adopt islamic banking that has taken place in indonesia and pakistan, respectively. the studies conducted in financial services have shown the validity of normative belief and subjective norms on the intention. research by aziz et al. (2017) and husin and rahman (2015) also prove that information/marketing mix through mass media influences subjective norms in the family takaful scheme. therefore, the hypotheses proposed in this research: h2a. subjective norm (sn) influences the intention of online merchant financing (iomf). h2b. normative belief (nb) influences the subjective norm (sn). h2c. marketing mix (mm) influences the subjective norm (sn). perceived behavioral control (pbc) refers to a person’s perceptions of the ease or difficulty of performing a particular behavior. in other words, an individual’s confidence in achieving a specific task significantly influences 22 f. karambut journal of small business strategy / vol. 31, no. 3 (2021) / 19-32 intention and behavior (ajzen, 1991). studies conducted in mobile banking have shown the validity of pbc on the intention to adopt certain services. gangwal and bansal (2016) and kazemi et al. (2013) have undertaken a study that has taken place in india and iran, respectively. decomposed pbc into three constructs: self-efficacy, resources facilitating condition, and technology facilitating condition (taylor & todd, 1995). however, this study only adapted two of the constructs; self-efficacy and resources that were enabling conditions, as founded by kazemi et al. (2013) in research on mobile banking adoption intentions in ishafan, iran. in a study on the intention to choose a vehicle, perceived behavior control is also influenced by the social marketing mix, as examined by dolatabadi et al. (2013), and digital marketing, as investigated by dahiya and gayatri (2017). thus, this study postulated the following hypotheses: h3a. perceived behavioral control (pbc) influences the intention of online merchant financing (iomf). h3b. self-efficacy (se) influences perceived behavioral control (pbc). h3c. facilitating condition (fc) influences perceived behavioral control (pbc) . h3d. marketing mix (mm) influences perceived behavioral control (pbc). in financial services, the marketing mix must recognize and respond to the distinctive features of service products. in particular, when managing the elements of product, price, promotion, and place, marketers in the financial services sector need to pay specific attention to the people delivering the service, the process of the service, and the physical evidence which represents the service (ennew & waite, 2007). research by pour et al. (2013) in saderat bank (kermanshah provinces, iran) and aqrobaee et al. (2014) in mehr eqtesad bank (isfahan provinces, iran) proved that the marketing mix variables have a significant positive effect in attracting customers. hartoyo et al. (2019) argued that online seller perception of the marketing mix was statistically significant with the intention to apply for microcredit through e-commerce platforms in indonesia. thus, the following hypothesis needs to be substantiated: h4. marketing mix (mm) influences the intention of online merchant financing (iomf). previous studies of the determinant of intention to apply for the credit generally use the theory of planned behavior (tpb) model as a theoretical basis. with control ability of required resources by users, tpb variables mostly focus on users’ traits or subjective awareness but do not have specific suggestions on the marketing of technology products. this study tried to confirm the effect of the marketing mix (mm) on the intention of online merchant financing (iomf) toward the e-marketplace platform using the modified decomposed theory of planned behavior model (dtpb). based on a study of previous research, a conceptual model of research can effectively elicit marketing mix perception directly or indirectly through the construct of attitude toward behavior (ab), subjective norms (sn), and behavioral control (pbc), as presented in figure 1. figure 1. the conceptual research model 23 f. karambut journal of small business strategy / vol. 31, no. 3 (2021) / 19-32 method the type of this paper used quantitative research with designs and techniques from the explanatory approach. we used survey sampling through an online interview to minimize the questionnaire’s misinterpretation. we conducted an online interview with members of the indonesian online sellers association (apoi) with criteria that have run an online business at e-marketplace sites for at least six months. apoi is a non-profit organization that aims to help msme entrepreneurs develop their business online. apoi was founded in 2008 and has members spread across 11 major cities in indonesia. the survey collected 456 respondents or 46.20% of 987 apoi members who fulfilled the criteria and successfully contacted. after excluding incomplete and questionable responses, 235 sets of data were used for analysis. the developed questionnaire consists of 32 items of questions as indicators of 10 research constructs: perceived ease of use (peou), perceived usefulness (pu), attitude toward behavior (ab), normative belief (nb), subjective norm (sn), self-efficacy (se), facilitating condition (fc), perceived behavior control (pbc), marketing mix (mm) and intention of online merchant financing (iomf). the study used five points likert type scale, where the lowest was strongly disagree = 1 and the highest strongly agree (ss) = 5. the method technique used purposive sampling and analyzed by software linear structural relationship (lisrel) version 8.80 software to describe the structural equation model (sem). sem can calculate and explain the relationship between exogenous latent variables on endogenous latent variables to examine the causal effect’s influence, based on confirmatory factor analysis (cfa). furthermore, this study provides novelty on managerial implications by building a marketing mix matrix based on research findings. nine senior managers of financial institutions as practical expert were interviewed with the focus group discussion (fgd) method to discuss the research objectives (marczak & sewell, 2006). participants responses were provided on the matrix to confirm the effect of the research findings on marketing strategy respondent demographics the demographics of online seller respondents in this study were the majority of those under the age of 37 years (70.21%), male sex (72.77%), bachelor graduation (51.91%), married (73.19%), javanese (37.87%), muslim (71.49%) and still have status as an employee or received a salary (42.98%). regarding the characteristics of online sellers, the majority of respondents have already run the business for more than two years (85.11%), dominated by distributors/resellers (83.40%), already had a credit facility at a financial institution (53.62%), had experiences in applying for credit online (53.62%), made online transactions > 30 times per month (60.43%), had a transaction value < 1 million rupiahs (74.89%) and had a monthly working capital needs of < 25 million rupiahs. structural model analysis the structural equation model (sem) with an application of linear structural relationship (lisrel) version 8.80 was used to test the conceptual model and its hypotheses. according to hartoyo et al. (2019), a reflective measurement model should be evaluated by interpreting their reliability and validity before performing an sem. results validity test the first testing stage was to test the validity or match test of the measurement model between latent variables and indicators. a variable has a good valid test for the construct or latent variable if its standardized loading factor (slf) ≥ 0.50 and t-value ≥ 1.96. based on table 1, only 27 indicators were declared valid or explained the latent variables measured in the study (slf at 0,5 or greater). reliability test the method used in the reliability test is the split-half method with the cronbach alpha formula. the set minimum threshold for establishing reliability is ≥ 0.60, while the set threshold for composite reliability is ≥ 0.70. regarding table 2, in this study the cronbach’s alpha values ranged from 0.73 to 0.93, representing relatively higher internal consistency among the questionnaire items. structural model test based on the results of testing the structural model, the intention of credit online (ico) only has a relationship or is significantly influenced by attitude (ab), subjective norms (sn), and marketing mix (mm) where t-count > of t-table are 1.96. the indirect path of the marketing mix (mm) to intention through attitude (ab) and behavior control (pbc) were not significant since the marketing mix (mm) does not affect attitudes (at). in contrast, behavior control (pbc) does not affect intention. table 3 below shows the results of the structural model testing of the 11 paths of relationships between latent variables in this study. 24 f. karambut journal of small business strategy / vol. 31, no. 3 (2021) / 19-32 table 1 the result of the validity test of latent variable indicators codes latent variable indicators slf* t-value remarks peu (perceived ease of use) peu1 the flow process of online financing is easy to trace 0.69 9.41 valid peu2 online financing application is easy to learn 0.77 7.87 valid peu3 online financing requirement is easy to fulfill 0.94 15.25 valid pu (perceived usefulness) pu1 there are features to display credit product options 0.92 11.67 valid pu2 financial data and credit history for online financing is not necessary 0.74 6.02 valid pu3 the possibility of online financing to be approved is higher 0.46 5.91 not valid ab (attitude toward behavior) ab1 online merchant financing is a wise way 0.41 4.69 not valid ab2 online merchant financing is the right alternative 0.90 13.34 valid ab3 online merchant financing is a simple and practice way 0.86 15.03 valid nb (normative belief) nb1 other merchants recommend online financing 0.89 20.79 valid nb2 the merchant association recommends online financing 0.89 26.66 valid nb3 parents/families suggest online financing 0.87 21.19 valid sn (subjective norm) sn1 people who influence behavior convince me to apply for online financing 0.53 6.72 valid sn2 people who are important argue that i should apply for online financing 0.86 19.63 valid sn3 information in the media directing me to apply for online financing 0.65 10.05 valid se (self efficacy) se1 i have enough knowledge to apply online financing 0.77 13.93 valid se2 i have fulfilled the criteria to apply for credit financing 0.35 5.06 not valid se3 i will feel comfortable applying for online financing 0.89 10.21 valid fc (facilitating condition) fc1 the e-marketplace platform supports online financing practice 0.67 12.92 valid fc2 the e-marketplace is setting up facilities to enable the use of online financing 0.96 14.35 valid fc3 the e-marketplace platform ensures effective usage of online financing 0.79 9.21 valid pbc (perceived behavior control) pbc1 i am confident having the knowledge and the capacity to apply online financing 0.57 11.92 valid pbc2 i am capable of applying for online financing 0.46 7.05 not valid pbc3 i can control all things relevant for applying for online financing 0.69 8.21 valid mm (marketing mix) mm1 customized credit package with the business type (product) 0.69 11.48 valid mm2 the interest rate in online financing is lower (price) 0.24 3.01 not valid mm3 simulation and comparison of credit package (promotion) 0.78 11.36 valid mm4 online financing through e-marketplace is a suitable way to apply for credit (place) 0.55 7.50 valid iomf (intention of online merchant financing) iomf1 i start utilizing the merchant feature in the e-marketplace website 0.93 19.13 valid iomf2 i will look for online credit packages on the e-marketplace website 0.93 18.84 valid iomf3 i’m going to start comparing online financing packages on the marketplace website 0.96 19.50 valid iomf4 i’m soon / immediately applying for online financing through the marketplace website 0.53 6,28 valid * standardized loading factors 25 f. karambut journal of small business strategy / vol. 31, no. 3 (2021) / 19-32 good of fitness test the result of the compatibility test of the whole model can be seen in table 4. the model’s comprehensive compatibility test produced a chi-square value of 283.86, with a p-value of 0.033. the measure of good of fitness (gof) test for p-value is ≥ 0.05; therefore, we can conclude that the model has marginal compatibility; however, the chisquare statistical test is not the only basis for determining the suitability of the data with the model. another compatibility test of the whole model (ncp, rfi, ifi, cfi, and pnfi) showed good results (good fit), which means that the hypothesized model fits the empirical data well. therefore, this model is suitable for an interpretation, as shown in sem figure 2. table 2 the result of the questionnaire reliability test latent variables cronbach’s alpha cut off value remarks pu (perceived of usefulness) 0.73 ≥ 0.60 reliable peou (perceived ease of use) 0.82 ≥ 0.60 reliable ab (attitude toward behavior) 0.70 ≥ 0.60 reliable nb (normative belief) 0.93 ≥ 0.60 reliable sn (subjective norm) 0.78 ≥ 0.60 reliable se (self efficacy) 0.72 ≥ 0.60 reliable fc (facilitating condition) 0.90 ≥ 0.60 reliable pbc (perceived behavioral control) 0.83 ≥ 0.60 reliable mm (marketing mix) 0.77 ≥ 0.60 reliable iomf (intention of online merchant financing) 0.80 ≥ 0.60 reliable table 3 the result of structural model test endogen variable eksogen variable relationship slf* t-value hypothesis iomf (intention of online merchant financing) ab (attitude toward behavior) ab  ico 0.23 3.49** h1a accepted sn (subjective norm) sn  ico 0.21 2.14** h2a accepted pbc (perceived behavioral control) pbc  ico -0.02 -0.21 h3a rejected mm (marketing mix) mm  ico 0.32 3.93** h4 accepted ab (attitude toward behavior) peu (perceived ease of use) peou  ab 0.32 3.33** h1b accepted pu (perceived usefulness) pu  ab 0.33 3.43** h1c accepted mm (marketing mix) mm  ab 0.03 0.39 h1d rejected sn (subjective norm) nb (normative belief) nb  sn 0.51 7.36** h2b accepted mm (marketing mix) mm  sn 0.28 4.57** h2c accepted pbc (perceived behavioral control) se (self efficacy) se pbc 0.12 0.86 h3b rejected fc (facilitating condition) fc pbc 0.39 5.68** h3c accepted mm (marketing mix) mm pbc 0.42 7.08** h3d accepted * standardized loading factors, ** significant figure 2. the structural equation model path coefficients 26 f. karambut journal of small business strategy / vol. 31, no. 3 (2021) / 19-32 discussion structural model interpretation the path in figure 2 shows that the marketing mix (mm) was the most dominant latent variable affecting intention with path coefficient 0.32 (hypothesis 4 was proven). consumers now require individual products (heikkinen, 2018). online merchants need tailored credit facilities (products) that fit with their business type, as producers or resellers. moreover, the e-marketplace feature allows online merchants to compare several credit packages offered by each financial institution (promotion). micro merchants will compare a digital financial service against other accessible options (pulse lab jakarta, 2018). this study’s results support the previous research of aqrobaee et al. (2014), and pour et al. (2013), where mm variables have a significant positive effect on intention (attracting customers). the price indicator was the only element of the marketing mix that is not valid. the finding was consistent with the result of reynolds et al. (2020) that a small-medium enterprises (sme) in the united states with a higher market orientation might have a higher level of adoption of technologies, despite being cost-conscious. d’attoma and ieva’s (2020) research findings on enterprise-level manufacturing and service in germany also show that introducing a change in the pricing strategy does not support successful innovation. regarding pulse lab jakarta (2018) and hoppe et al. (2016) report that micro-merchants prefer convenience over cost (price). banks usually require borrowers to have a credit history, collateral, or a permanent job. online financing through e-marketplace (place) was more convenient for micro-merchants, as it does not require administrative requirements or collateral. the study also tried to confirm the indirect relationship of the marketing mix (mm) perception on the intention of online merchant financing (iomf), as a development of the decomposed theory of planned behavior (dtpb) model. this research tested the role of attitude (ab), subjective norm (sn), and perceived behavioral control (pbc) as the mediator between marketing mix perception and online financing intentions. the normative belief and marketing mix’s effect on sn was positive and significant supporting hypothesis 2b (loading factor 0.51) and hypothesis 2c (loading factor 0.28). the impact of sn on the intentions was significant and positively supported hypothesis 2a with a path coefficient of 0.21. thus, the structural equation model path showed that only sn plays the role of the marketing mix mediation of online financing intentions via the e-marketplace platform. all of the latent variable indicators of subjective norm and normative beliefs were valid. online merchants or users signed up for a service to follow others’ footsteps (merchants) in their neighborhood (pulse lab jakarta 2018). research by maulana et al. (2018) and aziz and afaq (2018) had similar proof that indicated particular reference to the parents, siblings, peers, and colleagues (normative belief) was perceived as an essential referent group to affect clients’ subjective norms to participate in islamic banking. these findings were also consistent with the previous research of aziz et al. (2017) of factors determining intentions towards the adoption of family takaful where antecedents of subjective norms were a word of mouth (normative belief) and mass media references (marketing mix). in a study on the plan for replacing single-occupant vehicles with urban public transport, dolatabadi et al. (2012) have provided a significant positive effect of the social marketing mix on intentions, both directly and through normative beliefs. table 4 the result of the compatibility test of the overall model (goodness of fit) gof tests gof criteria value description absolute fit measures chi square the smaller the better (p-value ≥ 0.05) 283.86 (p = 0.033) marginal fit ncp the smaller the better 41.86 good fit incremental fit measures rfi rfi ≥ 0.90 good fit 0.96 good fit ifi ifi ≥ 0.90 good fit 1.00 good fit cfi cfi ≥ 0.90 good fit 1.00 good fit parsimonious fit measures pnfi the bigger the better (0 ≥ pnfi ≥1) 0.85 good fit 27 f. karambut journal of small business strategy / vol. 31, no. 3 (2021) / 19-32 among the three antecedents of attitude toward behavior (ab) in this research, perceived ease of use (peu) with loading factor 0.32 (hypothesis 1b approved) and perceived usefulness (pu) with loading factor 0.33 (hypothesis 1c approved) were statistically significant. according to davis (1989), this result shows that pu and peu positively impact attitudes. in the scope of e-commerce, these results support the previous investigation by baharun et al. (2015), changchit et al. (2018), gangwal and bansal (2016), reynolds et al. (2020), and ye and zhang (2014). the third antecedent of attitude toward behavior (ab) was the marketing mix. this exogenous variable did not significantly affect the attitude, or hypothesis 1d was not supported (t-value 0.39). the finding was partially in line with sriram et al. (2019) that price intelligence (price) and delivery risk (place) do not affect attitude towards e-commerce websites’ popularity. pulse lab indonesia (2018) reports that most micro-merchants are reluctant to read information or advertise on digital financial services (promotion). they respond much better to specific use cases than product knowledge. peu is the perceived effort required to learn and use the system, and pu is a user’s belief that using a proper tool will enhance his job performance (davis 1989). this finding is in line with the results of research by ye and zhang (2014), who examined whether and how sales promotion affects online buyers’ purchasing intention in c2c e-commerce transactions. the results suggest that sales promotion doesn’t impact purchasing attitude and purchasing intention directly, but it influences peu. thus, peu is a mediating variable, which in turn impacts purchasing intention. the research finding was different from prior studies where the marketing mix generally influences the attitude, as proven by mbengo and phiri (2015), and mosavi (2012). as an exogenous variable, the marketing mix had the most substantial influence on perceived behavioral control (pbc) of online merchant financing, with a path coefficient of 0.42 (hypothesis 3d proven). the results of previous research about the intention to choose a vehicle and social marketing mix also found that digital marketing (dahiya & gayatri, 2017) and the social marketing mix (dolatabadi et al., 2013) were significant determinants of pbc. however, the findings revealed that pbc did not affect the intention of the merchant pbc in determining intention financing (hypothesis 3a rejected). these research findings were consistent with aziz and afaq (2018) and bizri et al. (2017) results, who researched the intentions of adopting islamic banking/finance in pakistan and lebanon. the conclusion also inlines with kajenthiran et al. (2016), who examine youth’s intention in the northern part of sri lanka in applying for microcredit to create a startup business. however, the findings of tolba et al. (2016) provide contradictory results where pbc factors influence egyptian msme owners’ intentions in taking commercial bank loans. the finding of this study supported hypothesis 3c, which reveals that facilitating condition (fc) positively and significantly affects the pbc (loading factor 0.39), but it did not automatically affect pbc toward financing intention (iomf) since hypothesis 3b was not supported or self-efficacy (se) has no significant influence on pbc (t-value 0.86). online merchants’ self-efficacy was not significant because we found that the level of confidence to use the online finance feature in the e-marketplace platform was still low. as is the case with accessibility for digital financial services users, micro-merchants need to trust their ability to use the technology to adopt them (pulse lab jakarta, 2018). this finding did not support previous research where se usually influenced pbc significantly (gangwal & bansal, 2016, husin & rahman, 2015; kazemi et al., 2013; maulana et al., 2018). implications the intention model of online merchants in the e-marketplace provides several managerial implications for financial institutions. this research is the first to conduct a large-scale empirical investigation to measure marketing mix activity’s effectiveness through e-marketplaces media. the study showed that the perception of the marketing mix (mm), attitude toward behavior (ab), and subjective norm (sn) has a significant effect on the intention of online merchant financing. research findings described that online merchants did not perceive the marketing mix through attitude because they responded much better to specific use cases than the introduction to product knowledge. the financial institutions have been more focused on pricing, whereas, based on research findings, it was not an essential indicator of the marketing mix’s perception (sriram et al., 2019). most financial institutions have not considered the online merchants’ attitude as a strategic marketing factor. the opposite findings showed that third parties (online merchant association, other online merchants, and family) were the prominent influencers (subjective norm) in online merchants’ perception of the marketing mix. financial institutions have started to approach through associations when implementing a marketing mix strategy. the online merchant association has a role in introducing the online business model to micro small and medium enterprises (msmes). as trusted peers, the association plays a position as an antecedent of the subjective norm. in order to apply the results of research to make a matrix of a perceived marketing mix based on research finding, 28 f. karambut journal of small business strategy / vol. 31, no. 3 (2021) / 19-32 fgd (focus group discussion) is conducted, involving nine practitioners from financial institutions (credit expert) consisting of three bank managers, three general manager of a leasing company and three directors of a fintech company (marczak & sewell 2006). representatives from e-marketplaces and online seller associations were also present in this discussion to provide an overview of the existing system. the fgd discussed how to apply the research findings by formulating the marketing mix strategy (product, promotion, price, and place) practically in the real market. the marketing mix perception has a significant effect on the intention to apply for microcredit, both directly to online merchants and through third parties’ perception (subjective norm). the study found that attitude toward behavior also affects the intention. however, most financial institutions have not considered the online merchants’ attitude as a strategic marketing factor. the fgd (focus group discussion) compiled a combination of marketing mix elements (product, promotion, price, and place) with independent variables (attitude towards behavior and subjective norm) that significantly influence the intention of online financing, as shown in the following matrix (table 5). kannan and li (2017) discussed how the internet provides multiple new ways to reach customers and promote products. unfortunately, most micro-merchants are reluctant to read information or advertising on digital financial services. they respond much better to specific use cases than the introduction to product knowledge, which they often find overwhelming. (pulse lab jakarta, 2018). therefore, financial institutions’ cooperation with e-marketplaces needs to be enhanced. promotions and place (platform) should display an interactive feature of credit products. the marketplace platform could demonstrate an easy online trial to apply for microcredit (perceived ease of use) and show an online comparison engine to compare and choose credit (perceived usefulness). table 5 summary of managerial implications based on research findings construct latent variable/indicators managerial implication product price promotion place (platform) attitude toward behavior perceived ease of use/ easy requirement credit application with simple document requirement interest rate is not an issue, as long as the system is easier, faster, and simpler than the conventional way an easy online trial to apply for microcredit credit application features on an easily accessible online platform perceived usefulness/ feature of creditor option credit with choice options that suit with merchant’s need online comparison engine to compare and choose credit credit simulation feature on the platform to fit suitable products subjective norm normative belief/ association influence customized credit product based on a recommendation from influencers interest rate is not an issue, as long as the system is easier, faster, and simpler than the conventional way socialization or training from the association seminar by inviting e-marketplaces to instruct sign up guidance for online applications normative belief/other merchant influence testimony from a successful merchant approach agent of financial institutions to socialize the online credit applications system through e-marketplaces normative belief/family influence review from the millennial generation 29 f. karambut journal of small business strategy / vol. 31, no. 3 (2021) / 19-32 based on the most significant indicators on the exogenous attitude variable, the market considers microcredit applications with simple document requirements (perceived ease of use) and application with choice options that suit the merchant’s need (perceived usefulness) as the right products. according to wang and kim (2018), in the e-commerce market, a strong store reputation and high service quality were crucial indicators for increasing browsers and sales amount. the price (interest rate) is not an issue, as long as the system is easier, faster, and simpler than the conventional way. financial institutions can apply a flexible pricing policy as strategic price discrimination (ighomereho & iriobe, 2019; mccarthy, 1960). they could charge a different interest rate for a credit product with a loose requirement or for one that has been customized. e-commerce benefits consumers in terms of price by facilitating price comparisons, and meanwhile, companies can gain a competitive advantage with pricing (heikkinen, 2018). in many markets, consumers make the leap from the physical to the online retail world in search of the cheapest deal. that is not the case in southeast asia, where digital shoppers are more likely to mention their experience (review) or the available choice than the price they paid (hoppe et al., 2018). therefore, credit packages (products) should be customized based on a recommendation from influencers, such as associations, other merchants, or families. d’attoma and ieva (2020) confirmed that the technological development and introduction of a new product could benefit from innovation in marketing to meet customers’ changing needs. advertising through neighbors, family, or friends as the agent of financial institutions will be more effective. they are emotional mediators of technological change and behavior (pulse lab jakarta 2018). demographic data shows that respondents who had experience in applying for credit online reached 53.62%. this data indicates that more than half of online merchants repurchase/reapply credit intentions. they have the capacity to become agents because they can provide reviews and testimonies about the benefits of online financing (promotion). the agents, user communities, or supporting partner firms’ management practices could enhance leverage contingency (experimentation) toward innovation performance (hussein & attia, 2019; santoso et al., 2020). promotion by providing application trial reviews from millennials and testimonials from successful merchants will increase the intention of applying for online credit. online seller associations have a role in introducing online businesses to micro small and medium enterprises (msmes) by providing seminars, training, and mentoring to an online businesses. msmes require fast and easy access to information regarding training and skills acquisition (capri, 2018). as trusted peers, the association acts as the interface of a digital financial service to adopt them. for this reason, associations can act as intermediaries by inviting e-marketplaces to instruct sign up guidance for online applications. the concept is similar to hossain’s (2020) research, where private organizations’ support plays a role as a moderation variable. organizational support in terms of information and training for generating financial and non-financial growth of small firms in bangladesh. the association also acts as an information channel (advertising) for financial institutions to disseminate online financing benefits for business development. the harnessing of the digital technology economy, such as e-marketplace, has the potential to develop small enterprises to the digital global economy (capri, 2018). with a large number of msmes, indonesia has an opportunity to pioneer the development of new digital services, especially advanced mobile financial services and e-commerce. the governments/regulators need to work together with the associations, e-marketplaces, and financial institutions in designing policies and regulations. this policy will support the plan to use e-marketplaces as one of the media for channeling microcredit. implementation regulations need to monitor and make sure the program demonstrates an improvement in msmes (galli-debicella, 2020). conclusion and future research the current research results offer valuable insights for financial institutions and the government in microcredit distribution plans through e-commerce media. online merchants’ perceptions of the marketing mix are still limited to the promotion of financial institutions. the intention to apply for microcredit can be developed by establishing a subjective norm through associations, neighbors, family, or friends. they are emotional mediators of technological change and behavior (pulse lab jakarta 2018). academically, these findings contribute to broadening our understanding of intention in the context of marketing strategies. using the decomposed theory of planned behavior (dtpb) model, the study’s result showed that subjective norms play the role of marketing mix mediation of online financing intentions via the e-marketplace platform. this research limitation is restricted in indonesia-based entrepreneurs using apoi (indonesian online sellers association) members as initial research to obtain a general overview of online sellers in the e-marketplace. further research involving the e-marketplace using an online merchant database can provide an accurate intention model with detailed information about the size and business model 30 f. karambut journal of small business strategy / vol. 31, no. 3 (2021) / 19-32 and types of selling goods or services. the study has not included field latent variables that might significantly influence the intention of reapplying, such as risk perception, credit system compatibility, and experience. the monitoring and research on actual behavior and level of satisfaction post-approval/disbursement of credit facilities needed to measure the potential for repurchase intention. further research using the unified theory of acceptance and use of technology (utaut) model will provide an overview of online merchants’ actual behavior in applying for online microcredit application through e-marketplaces platform. acknowledgment the authors would like to thank indonesia online sellers association (asosiasi pebisnis online indonesia/apoi) for data support in providing research respondent information. the author funded the research at his own expense and did not receive funding from any other funder. references ajzen, i. 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(2014). sales promotion and purchasing intention: applying the technology acceptance model in consumer-to-consumer marketplaces. international journal of business, humanities and technology, 4(3), 1-5. http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2020, vol. 30, no. 02, 72-92 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2020 small business institute® w w w. j s b s . o rg introduction samia el hanchi1, lamia kerzazi2 1mohamed v university, ecole mohammadia d’ ingénieurs, avenue ibn sina, bp765, agdal, rabat, morocco, samia.elhanchi@gmail.com 2mohamed v university, ecole mohammadia d’ ingénieurs, avenue ibn sina, bp765, agdal, rabat, morocco, lamia_kerzazi@yahoo.fr startup innovation capability from a dynamic capability-based view: a literature review and conceptual framework innovation capability, dynamic capability, startup, entrepreneurship apa citation information: el hanchi, s., kerzazi, l. (2020). startup innovation capability from a dynamic capability-based view: a literature review and conceptual framework. journal of small business strategy, 30(2), 72-92. innovation has been associated with entrepreneurship since the seminal work of schumpeter (1934) and work from recognized management scholars such as drucker (1985) along with studies in entrepreneurship theory (stevenson & jarillo, 1990). additionally, there are overlapping boundaries and multidisciplinary approaches to both concepts (zhao, 2005). the success of startups, as new entrepreneurial ventures, is dependent on their ability to innovate (alvarez & busenitz, 2001; pellegrino, et al., 2012; velu, 2015). much has been said in the psychological school of entrepreneurship regarding the motivations, traits, and profiles of entrepreneurs as drivers for innovation or entrepreneurial success, but this perspective cannot explain, in an isolated manner, entrepreneurial behavior (stevenson & jarillo, 1990; venkataraman, 1997). in the innovation management field, several measurements of innovation and its determinants at the firm level have been studied (adams et al., 2006; becheikh et al., 2006; hult et al., 2004; romijn & albaladejo, 2002), and innovation audits (björkdahl & börjesson, 2012; chiesa et al., 1996) have been devised. but while startup innovation capability (ic) definitions and components are often implicitly addressed in different research fields, ic is barely identifiable as a distinct construct (lawson & samson, 2001). explicit accounts conceptualizing ic often adopt a capability-based view, building on organization capability theories and the strategic management field (christensen & overdorf, 2000; crossan & apaydin, 2010; narcizo et al., 2017; o’connor, 2008; smith et al., 2008). however, an emergent stream of research applies a dynamic capability (dc) perspective (barreto, 2010; helfat, 2011; helfat & peteraf, 2009; teece, 2007) to address ic (forsman, 2011; kindström et al., 2013; lawson & samson, 2001; lin et al., 2016; salunke et al., 2011; wu, 2016). while there is a rich body of literature on innovation, the concept of innovation capability (ic) is barely identifiable as a distinct construct. startup ic is tacitly covered in innovation management, entrepreneurship, or small business literature. we suggest a dynamic capability (dc) approach to study innovation as a distinctive capability of startup firms. a semi-structured literature review of 125 articles combining various theoretical backgrounds is discussed, including the ic conceptualizations and operationalization that we extracted and clustered into a comprehensive yet synthetic framework. this paper suggests an ic construct as a higher order dc composed of three dcs—sensing, seizing, and transforming—and three layers of foundations—core ic, supporting ic, and startup entrepreneurial capabilities. this work adds to the emerging capability-based view of the innovation stream by addressing the specific case of startups. it recognizes their entrepreneurial nature and the important role of the entrepreneur’s capabilities and behaviors. it also contributes to the entrepreneurship theory by identifying the capabilities contributing to opportunity sensing and seizing and the capabilities required for transforming and shaping new opportunities. for practitioners, the ic framework offers a practical tool to assess startup ics and identify strengths, weaknesses, and external complementarities. http://www.smallbusinessinstitute.biz http://www.jsbs.org 73 s. el hanchi, & l. kerzazi journal of small business strategy / vol. 30, no. 2 (2020) / 72-92 moreover, most research on ic, and dc as well, concern large or established firms with existing resources and organizational capabilities. startups, with their newness and small size, have received less attention, with scarce and often exploratory studies (zahra et al. 2006). thus, knowledge about capability development in new ventures is still limited (mckelvie & davidsson, 2009). the objective of this review is to contribute to the emerging capability-based approach to ic by applying a dc lens and developing a comprehensive ic construct considering the idiosyncrasies of startups. at the intersection of innovation management, strategic management, and entrepreneurship research, this paper seeks to advance our understanding of the ic required for startup firms. in this paper, we will review the literature for definitions and extant conceptualizations of ic to understand its nature and components. we then discuss the congruence of dc as a framework for studying ic, and we identify startup characteristics and challenges for ic capability building. after this narrative, we describe a more structured method for building a startup ic framework, outlining its components, and then discussing its implications and further research agendas. literature review innovation capability (ic) definitions ic is often addressed implicitly in the literature, but an emerging stream attempts to offer an explicit definition. narcizo et al. (2017) reviewed 19 definitions addressing ic from three different perspectives: innovation results, processes, and the organizational capabilities involved. ic is seen as a firm’s aptitude to turning market opportunities into real advantages (oecd/eurostat, 2005), identifying new ideas (aas & breunig, 2017a) and transforming them into new products, services, or processes with economic value (noordin & mohtar, 2013) or a benefit to the firm (aas & breunig, 2017a) and its stakeholders (lawson & samson, 2001). accordingly, ic is defined as the aptitude to permanently transform knowledge, ideas, technological conditions, and market conditions into new products, processes, or systems (lawson & samson, 2001; lazonick, 2000). rajapathirana and hui (2018) viewed ic as the ability to identify current and future customer needs and to respond appropriately while applying internal organizational conditions and supporting culture. fernez-walch and romon (2006) coined the term “innovation potential” to refer to the set of knowledge and know-how that an enterprise can leverage to launch innovations. in sum, ic explains why “some firms prove to be better at reproducing innovation success than others” (aas & breunig, 2017a, p. 8). as such, ic is not a single event but rather an organizational capability that can be fostered in a dynamic and sustainable manner through a continuous and conscious learning process, allowing for a robust and repeatable innovation process or an innovation engine (aas & breunig, 2017a; albort-morant et al., 2016; camisón & monfort-mir, 2012; cheng et al., 2016; christensen et al., 2002; forsman, 2011; lawson & samson, 2001). ic has been addressed from several perspectives, with no dominant theory (lawson & samson, 2001) to date, but through these definitions, we can see an agreement on the existence of a tacit intrinsic organization ability, aptitude, potential, or capability to continuously innovate. however, an emerging body of research adopts a capability-based approach to the study of ic (aas & breunig, 2017a, 2017b; lawson & samson, 2001; narcizo et al., 2017; salunke et al., 2011; tesfaye & kitaw, 2018; ukko et al., 2016; vicente et al., 2015), with the increasing use of a dc perspective. in the following, we provide a brief literature review on dc and explain its relevance as a framework for studying ic. dynamic capabilities (dc) as an innovation capability (ic) framework dc is defined as a “firm’s ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments. dcs thus reflect an organization’s ability to achieve new and innovative forms of competitive advantage” (teece et al., 1997, p. 516). for dc scholars, competitive advantages do not rely solely on the possession of resources and capabilities but build on them to develop specific new capabilities to seize opportunities in order to respond to changes in dynamic environments and even to shape the environment (teece, 2007). as a relatively new branch of the literature, dc research has suffered from heavy criticism for its ambiguity, presumed link with success, poor operationalization, and lack of empirical evidence (barreto, 2010). to overcome such criticisms, teece (2007) proposed one of the most influential models of dc, outlining its nature and detailing its micro-foundations. in this model, dc is described as three groups of interrelated capabilities: (a) sensing opportunities, (b) seizing opportunities, and (c) transforming capabilities. we selected dc as the theoretical framework for studying ic for two main reasons. first, dc is a conceptualization of a firm’s intrinsic capabilities in relation to a desired state. second, we find that dc thinking is strongly linked with the innovation concept not only because innovation contributes to competitive advantage (kay, 1995) but also for the emphasis dc scholars put on continuous renewal 74 s. el hanchi, & l. kerzazi journal of small business strategy / vol. 30, no. 2 (2020) / 72-92 and innovation (brown & eisenhardt, 1995; eisenhardt & martin, 2000; helfat, 1997; mckelvie & davidsson, 2009). while innovation is central to dc, the relationship between ic and dc is not explicitly stated, and they often overlap (aas & breunig, 2017a). an increasing number of authors agree on a strong association between ic and dc (aas & breunig, 2017b; chen & jaw, 2009; dixon et al., 2014; kindström et al., 2013; lawson & samson, 2001; lin et al., 2016; michailova & zhan, 2015; narcizo et al., 2017; o’connor, 2008; pavlou & el sawy, 2011; salunke et al., 2011; strønen et al., 2017; wu et al., 2016), but they consider this relationship in different ways. in the first perspective, dcs support and explain innovation (teece, 2014). as a collection of competences and capabilities, dcs support the creation of new products and processes as well as responses to dynamic market conditions (helfat, 1997; zahra et al., 2006). this relationship has been established in some exploratory empirical studies (kindström et al., 2013; lin et al., 2016; salunke et al., 2011; wu et al., 2016). a second perspective views ic as a component of dc, where ic is seen as an ordinary capability (winter, 2003), or a first-order capability, that is acted upon and reconfigured through dcs (pavlou & el sawy, 2011). in this case, ic is described as the processes of product development rather than as a comprehensive construct of ic. with the third perspective, ic is considered to be a dc. innovation is, per se, a dc that integrates with, modifies, and extends other dcs (breznik & hisrich, 2014; dixon et al., 2014; eisenhardt & martin, 2000; helfat, finkelstein, mitchell, peteraf, singh, teece, & winter, 2007; kay, 1995; lawson & samson, 2001; o’connor, 2008; strønen et al., 2017). in this case, ic is conceptualized as a higher order capability integrating and configuring key resources and capabilities to achieve innovation (lawson & samson, 2001; michailova & zhan, 2015). michailova and zhan (2015) present ic as a third-order dc consisting of second-order dcs, which are, in turn, composed of basic or first-order organizational routines and processes. we will adopt this view because we are interested in finding an explanation of ic and identifying its lower order components. while we confirm the congruity between the dc framework and the ic concept, its applicability for the case of startups could be questioned since the dc approach was initially rooted in large, established firms with existing resources and capabilities. some scholars have, however, bridged the gap between dc and entrepreneurship by addressing the dc of new ventures (george et al. 2004; mckelvie & davidsson, 2009; newbert, 2005; zahra et al., 2006). for mckelvie and davidsson (2009), the resource flow, or the changes in resources, is more important than the stock of resources in new ventures. according to zahra et al. (2006), new ventures have few, simple, and rapidly changing dcs versus the many, complex, and resistant to change dcs in established firms. a new venture’s dcs are based on improvisation and trial and error, versus the planification and accumulated learning of an established firm’s dcs. new ventures develop and reconfigure their dcs to overcome limitations and seek growth opportunities, whereas established firms leverage and stretch their existing capabilities. startup characteristics in relation to ic and capability development will be discussed later in this paper. ic conceptualization and dimensions several scholars, drawing on numerous research perspectives and on the field of innovation management, in particular, have identified different overlapping and complementary sets of ic dimensions (christensen & overdorf, 2000; crossan & apaydin, 2010; forsman, 2011; lawson & samson, 2001; o’connor, 2008; smith et al., 2008; tidd er al., 2006). this includes innovation processes, technological capabilities, culture and leadership, managerial capabilities, knowledge and learning, organizational structure, resource management, external linkages, strategies, and marketing capabilities (see table 1). forming an integrated system supporting innovation (o’connor, 2008), these interrelated capabilities (smith et al., 2008) illustrate the multidimensional aspect of ic and the difficult task of separating it from its supporting practices (lawson & samson, 2001). an emergent stream of research applies a dc perspective to address ic as a capability (forsman, 2011; kindström et al., 2013; lawson & samson, 2001; lin et al., 2016; salunke et al., 2011; wu et al., 2016). in table 2, we identify 11 conceptual models where ic is considered to be a dc, is a result of dcs, or is an ordinary capability interacting with dcs. in all cases, dcs related to innovation have been identified, including (a) sensing capability, opportunity-recognizing capability, and exploration capabilities; (b) seizing capability, opportunity capitalization capability, and exploitation capabilities; (c) reconfiguring, integration, combinative, and coordination capabilities; (d) knowledge capability, learning capability, and absorptive capacity; (e) relational capability, and (f) entrepreneurial capability. lower order capabilities have also been identified from the listed models, forming an interrelated set of micro-components of ic. this new stream is still at an exploratory stage, and there is a pressing need to reach a consensus about proper conceptualization and a comprehensive set of ic drivers (aas & breunig, 2017a; narcizo et al., 2017). startup ics and dcs have gained less attention than those in large firms 75 s. el hanchi, & l. kerzazi journal of small business strategy / vol. 30, no. 2 (2020) / 72-92 table 1 organizational capabilities supporting innovation organizational capabilities examples of works resources (christensen & overdorf, 2000; crossan & apaydin, 2010; lawson & samson, 2001; oecd/eurostat, 2018; salunke et al., 2011; smith et al., 2008) innovation process (christensen & overdorf, 2000; crossan & apaydin, 2010; forsman, 2011; kline & rosenberg, 1986; lawson & samson, 2001; oecd/eurostat, 2018; smith et al., 2008; tidd et al., 2006) technological capability (kline & rosenberg, 1986; lawson & samson, 2001; oecd/eurostat, 2018) culture & leadership (christensen & overdorf, 2000; crossan & apaydin, 2010; forsman, 2011; hult et al., 2004; lawson & samson, 2001; o’connor, 2008; oecd/eurostat, 2018; smith et al., 2008) knowledge & learning (alegre & chiva, 2008; calantone et al., 2002; chesbrough & appleyard, 2007; crossan & apaydin, 2010; d’souza & kemelgor, 2008; forsman, 2011; hult et al., 2004; johannessen et al., 1999; lawson & samson, 2001; smith et al., 2008; tidd et al., 2006) organization (crossan & apaydin, 2010; forsman, 2011; smith et al., 2008; tidd et al., 2006; yam, guan, pun, & tang, 2004) external linkages (chesbrough & appleyard, 2007; d’souza & kemelgor, 2008; evers et al. 2012; forsman, 2011; lawson & samson, 2001; oecd/eurostat, 2005) strategy (adams et al., 2006; boly et al., 2014; crossan & apaydin, 2010; lawson & samson, 2001; smith et al., 2008; yam et al., 2004) marketing capability (evers et al., 2012; forsman, 2011; hult et al., 2004; kline & rosenberg, 1986; leal-rodríguez & albort-morant, 2016) 76 s. el hanchi, & l. kerzazi journal of small business strategy / vol. 30, no. 2 (2020) / 72-92 table 2 innovation capability (ic) models from a dynamic capability (dc) view authors dcs and their micro-foundations/components research setting lawson and samson (2001) dynamic ic: vision & strategy, harnessing the competence base, organizational intelligence, creativity & idea management, organizational structures & systems, culture & climate, & management of technology case study: large high-tech firm focus: innovation management o’connor (2008) major dynamic ic: organizational structure; interface with the mainstream organization, exploratory processes; talent development, governance, & decision-making; performance metrics; culture & leadership conceptual: established firms focus: radical/significant innovation salunke et al. (2011) dynamic relational learning capability, dynamic episodic learning capability, dynamic client-focused learning capability, dynamic combinative capability, service entrepreneurship case studies: service organizations focus: service innovation lin et al. (2016) relational capability, sensing capability, absorptive capacity, integrative capability quantitative: chinese manufacturing firms focus: management innovation wu, chen, and jiao (2016) opportunity-recognizing capability: customer’s needs detection, competitor monitoring, cooperation with suppliers, technology monitoring, knowledge transfer opportunity-capitalizing capability: options selection, integration, learning, reconfiguring networks, operations redesign, organizational structure quantitative: chinese multinationals focus: international diversification kindström et al. (2013) sensing: customer-linked sensing, system sensing, internal service sensing, technology exploration seizing: customer interaction & co-creation, delivery process, service development process, new revenue mechanisms reconfiguring: orchestration, balancing product & service innovation, service-oriented mental model qualitative: established manufacturing firms focus: service innovation in product-centered firms michailova and zhan (2015) dynamic knowledge capabilities: generative capabilities, sourcing capabilities, integrative capabilities conceptual: mnc subsidiaries focus: knowledge capabilities driving innovation dixon, meyer, and day (2014) dynamic ics: 1) exploration processes: search, experimentation, risk taking; 2) implementation processes: project selection, funding, project implementation case study: russian oil company focus: innovation in a transitioning economy pavlou and el sawy (2011) sensing capability: generating, disseminating, & responding to market intelligence learning capability: acquiring, assimilating, transforming, & exploiting knowledge integrating capability: contribution, representation, & interrelation of individual input coordinating capability: resource allocation, task assignment, & synchronization; new product development (npd) capability (as ordinary capability); technical capability, marketing capability, managerial capability quantitative: npd business units focus: npd forsman (2011) ic: entrepreneurial capabilities, networking, utilization of knowledge, risk management, change management, business development, customer & market knowledge quantitative: finnish small manufacturing & services firms focus: service vs. manufacturing comparison mckelvie, wiklund, and short (2007) absorptive capacity: market/technological knowledge acquisition, assimilation, transformation, exploitation quantitative: swedish new tech ventures focus: absorptive capacity and innovation 77 s. el hanchi, & l. kerzazi journal of small business strategy / vol. 30, no. 2 (2020) / 72-92 and, in some respects, even those in small established firms. we argue that the construction of a comprehensive startup ic construct should consider the intersection of traditional innovation management (with the identified organizational capabilities), the dc view (with the higher order generic capabilities), and entrepreneurship theory to properly address the context of startup firms, with their challenges and entrepreneurial characteristics. ic and startup characteristics since capability-based research focuses primarily on large established firms with an existing base of resources, organizational capabilities, and innovation processes (zahra et al., 2006), we argue that the study of startup ic should draw from the entrepreneurship literature to identify startup characteristics in relation to ic. startups and the liabilities of smallness and newness we define startups as new innovation-driven entrepreneurial ventures seeking a scalable business model (blank, 2013), that have been in business for less than 10 years, were created by individuals as a “stand-alone firm” (oecd/ eurostat, 2018), and are not a subsidiary of an established company (hvide & meling, 2019). at the birth of a new business, startups can be compared to small businesses due to similarities in terms of size and scarce resources: a simplistic organization with limited capital, few employees, and few, if any, alliances (freeman & engel, 2007). the relationship between firm size and innovativeness is controversial. most empirical results see size as an advantage for large firms with access to more resources for r&d and marketing and more room for risk taking. however, other study results find a negative relationship explained by more efficiency with innovation development in smaller firms (becheikh et al., 2006; camisón-zornoza et al., 2004). yet other studies reveal no remarkable effect of size on a firm’s ic (becheikh et al., 2006; saunila & ukko, 2014). reflecting a complex size–innovation relationship, these diverging results are explained by contextual factors, such as the country, the industry, or the innovation network (becheikh et al., 2006), as well as by innovation operationalization as a quantitative outcome. but there is a lack of research on the relationship between size and the intangible ic concept (saunila & ukko, 2014). what we can conclude, however, is that there is a lack of resources and a need for effective management for startups, as small sized enterprises. this is referred to as the “liability of smallness” (freeman & engel, 2007). similarly, startups all suffer from a risk of failure or mortality in the first years due to low efficiency, lack of experience, nonexistent reputation, absence of innovation processes, need for cooperation and social relations with external actors, and dependence on the external macro environment (abatecola, er al., 2012; burns, 2016; freeman & engel, 2007; liao, welsch, & moutray, 2008; stinchcombe, 1965). yet the chances of a startup’s survival is influenced by their ic (alvarez & busenitz, 2001; pellegrino et al., 2012; velu, 2015), supported by learning from external sources, networking, and raising funding as a means of overcoming their liabilities (becheikh et al., 2006; burns, 2016; irwin et al., 2019; liao et al., 2008). startups as innovative and entrepreneurial firms new ventures and small businesses share several characteristics and constraints, but what differentiates startups is their entrepreneurial nature and their capacity to create, discover, and exploit opportunities to create new products, services, or business models (alvarez & barney, 2013; burns, 2016; foss & klein, 2017; shane & venkataraman, 2000; zahra et al., 2006). this capability is central to the entrepreneurial firm (zahra et al., 2006), as is the role of the entrepreneur (alvarez & busenitz, 2001; burns, 2016; d’souza & kemelgor, 2008; venkataraman, 1997). for shane & venkataraman (2000) and venkataraman (1997), entrepreneurship involves the “nexus” of entrepreneurs and opportunities. the cognitive and behavioral capabilities of the entrepreneur determine their ability to discover and exploit opportunities (alvarez & busenitz, 2001; shane & venkataraman, 2000). this includes innovativeness, risk taking, proactiveness (naman & slevin, 1993; weerawardena, 2003), leadership, knowledge acquisition (chang et al., 2015), education, experience (baptista et al., 2007), intuition, and vision (carland, 2015). an entrepreneur’s role is also recognized in the creation and use of dcs through the perception of opportunities, willingness to embrace change, and ability to implement it (zahra et al., 2006). aside from these entrepreneurial capabilities, sensing, seizing, and transforming dcs are also supported by a founder’s/manager’s dynamic managerial capabilities (dmcs): perception, attention, problem solving, reasoning, communication, and social cognition (helfat & peteraf, 2014). another characteristic of entrepreneurial startups, as opposed to rent-seeking small conservative businesses, is their strong ambitions for growth and innovation by continuously spotting and exploiting opportunities (burns, 2016; carland, 2015; carland et al., 2007; murphy et al., 2019; sonfield & moore, 1990). startups go through several stages from inception to maturity, with different challenges for entrepreneurs at each 78 s. el hanchi, & l. kerzazi journal of small business strategy / vol. 30, no. 2 (2020) / 72-92 stage (burns, 2016; churchill & lewis, 1983; greiner, 1972; scott & bruce, 1987). this evolution in a firm’s size and structure goes together with an evolution of the firm’s ic (christensen & overdorf, 2000) and dc development (zahra et al., 2006). the capabilities required at the early stages of startup are different from those needed for running the business over the long term (freeman & engel, 2007). startup capability development while exploiting and reconfiguring existing capabilities is key to a dc view, the absence of formal capabilities can be a source of entrepreneurial advantage, according to entrepreneurship research (autio et al., 2011). for drucker (1985), entrepreneurship is about developing new capacity from limited resources, starting from what is available in a kind of “bricolage” to overcome a scarcity of resources (baker & nelson, 2005). this is in line with sarasvathy’s definition of effectuation, where the entrepreneurial process starts from given resources by opposition to managerial causation, which starts with an end state and select means to achieve it in a predictable manner (berends et al., 2014; chandler et al., 2011; sarasvathy, 2001). in the early stages, a startup’s ic and dc development follows an effectuation logic, leveraging the entrepreneur’s own resources and individual capabilities in a creative way to identify opportunities, while collaborating with stakeholders for complementary external resources, to create and develop new capabilities (alvarez & busenitz, 2001; autio et al., 2011; baptista et al., 2007; berends et al., 2014; christensen & overdorf, 2000; evers et al., 2012; freeman & engel, 2007; mckelvie & davidsson, 2009; saiz-álvarez et al., 2013; zahra et al., 2006). as they grow, new ventures, may turn to causation logic, with more planning, formalism (berends et al., 2014; read & sarasvathy, 2005), structure, standardized activities, internal processes, planification, decision-making, coordination, and reconfigured capabilities (christensen & overdorf, 2000; evers et al., 2012; freeman & engel, 2007), thus transforming an entrepreneur’s individual resources into an organizational resource base and dcs (alvarez & busenitz, 2001; brush et al., 2002). at the maturity stage, the startup transforms into an established business with capabilities becoming rooted in the enterprise values and culture, which can constitute rigidities and barriers to innovation (christensen & overdorf, 2000; freeman & engel, 2007) if the entrepreneurial orientation is not nurtured (burns, 2016; wiklund & shepherd, 2003). startups and external dependence to survive and to innovate, startups depend on access to external and complementary assets (berends et al., 2014; paradkar et al., 2015; rajapathirana & hui, 2018). they need financing to grow (burns, 2016; freeman & engel, 2007), they must gain support and legitimacy from stakeholders (cornelissen & clarke, 2010; zahra et al., 2006), and they have to absorb technical knowledge from external sources since they have no formal r&d activities (mckelvie et al., 2007; pellegrino et al., 2012). startups operate with cost-consciousness and risk-sharing with similar organizations and rely on research and financial institutions (antolin-lopez et al., 2015). to tackle all of these issues, it is a priority for startups to develop relationship capabilities, build their networks (paradkar et al., 2015; spender et al., 2017; teece, 2010; van de vrande et al., 2009), and adopt open innovation (oi) as a means of overcoming the liabilities of smallness and newness (spender et al., 2017). as opposed to the traditional resource-based view (rbv), for the oi school, enterprises are not required to rely solely on their own resources to innovate; rather, they need to seek opportunities outside of their boundaries (baranès et al., 2009; chesbrough, 2003; chesbrough & appleyard, 2007). initially targeted at large firms, the oi concept (chesbrough, 2003) is also appropriate for startups to acquire knowledge from external networks (spender et al., 2017; van de vrande et al., 2009) and to form alliances, broadening their possibilities by leveraging external capabilities using an effectuation logic (frederiksen & brem, 2017; sarasvathy, 2001) and tapping potential synergies with large companies (burns, 2016). based on the capabilities of exploration of the environment, opportunity identification, and opportunity exploitation (baranès et al., 2009), oi is strongly adapted for entrepreneurship. using dc terminology, we can state that oi consists of “sensing” and “seizing” opportunities and transforming a startup’s capabilities by integrating internal and external capabilities. method: building the conceptual framework we used a semi-structured literature review on ic, combining: (a) a non-structured literature review, (b) a systematic review, and (c) an iterative search (figure 1). in the non-structured literature review, we conducted searches in the areas of innovation management and dc using various sources such as science direct and google scholar, as well as innovation and entrepreneurship journals, applying backward and forward snowballing techniques (jalali & wohlin, 2012; webster & watson, 2004). the second step was a systematic search (tranfield et al., 2003) in the science direct database, including journal articles in business, management, and accounting, ranging from 2001 to 2016. the search keywords were “innovation” and “capability” in title, abstract, and keywords: (innovat* or “product de79 s. el hanchi, & l. kerzazi journal of small business strategy / vol. 30, no. 2 (2020) / 72-92 velopment”) and (capabilit* or capacit* or abilit* or competenc*). we used these keywords initially to capture relevant work on ic in general before digging further and progressively combining them with startup-specific keywords to zoom in on startup ics: (start*up, sme, “small business,” “new venture,” “young firm,” entrepreneur*). this wide inclusion strategy of both startup and non-startup related publications is explained by the emerging nature of the ic construct in general (aas & breunig, 2017a, 2017b; forsman, 2011; lawson & samson, 2001; narcizo et al., 2017) and the scarcity of capability-based startup ic research. we also considered articles on small business, given the similarities with startups in terms of resource limitations and the overlapping entrepreneurship and small business research. as a result of the combination of structured and non-structured searches as well as the inclusion of recent updates, we analyzed a total of 125 articles from various journals, including technovation, journal of strategic management, journal of small business strategy, and journal of entrepreneurship management and innovation, to name a few. using a qualitative approach to suit the conceptual aim of this paper, the theoretical background, methods, research setting, and relevant findings were scrutinized. ic models and components were extracted and summarized. idiosyncratic startup or small business capabilities were identified. the following steps were followed for building the ic framework (figure 2): • identifying all ic and dc components found in definitions, findings, or measurement variables from each article (step 1). • clustering of all identified capabilities into the three dcs (sensing, seizing, and transforming) from teece’s (2007) framework. each component was assessed against teece’s “micro-foundations” and mapped accordingly to one of the three dcs (step 2). for example, customer needs detection is considered a component of the sensing capability, while problem solving is part of the seizing capability. table 3 illustrates an example of capabilities clustered into the seizing dc. • clustering all of the capabilities identified in step 1 into meaningful groups. each item was examined through the dimensions outlined in table 1 as a starting point for creating categories. other dimensions emerged from the literature, such as learning capability, cited by 30% of authors in our sample. other dimensions that are more relevant to large or established companies were reviewed and adapted with an entrepreneurship theory lens, generating new dimensions, such as the founder’s entrepreneurial and managerial capability. after a few iterations, we obtained nine fundamental themes we call ic foundations (step 3). table 4 illustrates an example of capabilities clustered into relational capabilities as one of the identified ic foundations. • mapping capabilities belonging to the intersection of each dc and each ic foundation and constructing a 9 × 3 matrix (step 4), where ic foundations form the first dimension (lines) and dcs the second (columns). for example, customer needs detection belongs to the intersection of sensing dc and marketing capability. individual components of the matrix cells are called micro-components in the remainder of this paper. • several iterations were necessary to reach a synthetic view and reduce redundancies. as a result, a total of 111 micro-components were generated, constituting the lowest order of ic. • for readability, the ic foundations were grouped into three capability domains, and the matrix was subdivided into three sub-matrices for each capability domain (step 5) (cf. findings section and tables 5–7). figure 1. hybrid literature review systematic literature review snowballing non structured literature search figure 2. conceptual model construction capabilities identification clustering capabilities to dcs and ic foundations mapping ic foundations microcomponents to dcs synthesizing the ic framework 80 s. el hanchi, & l. kerzazi journal of small business strategy / vol. 30, no. 2 (2020) / 72-92 table 3 excerpt of capabilities clustering into a dc—example of seizing capability capability d e s c r i p t i o n , variations authors identified components se iz in g opportunity capitalization teece (2007) barreto (2010) eisenhardt and martin (2000) teece (2018) forsman (2011) helfat and petraf (2014) tidd et al. (2006) christensen and overdorf (2000) cooper and kleinschmidt (2007) rohrbeck and gemünden (2011) kindström et al.(2013) chen and jaw (2009) wu et al. (2016) adams et al. (2006) forsman (2011) sulistyo and siyamtinah (2016) boly et al. (2014) branzei and vertinsky (2006) leal-rodríguez & albort-morant (2016) solution & business model design adopting new revenue mechanisms, defining boundaries and complements, building loyalty and commitment decision-making protocols, timely decision-making, market-oriented decision-making, strategic decision-making, selecting options capability commit resources; defend intellectual property risk management capabilities, business development capability problem solving and reasoning strategic alignment, product strategy, innovation strategy, strategic guidance, shared vision technological concept creation through engineering and r&d execution capability (npd project management), implementation capability, product development process, project management, strategy deployment capabilities: innovation, commercialization, differentiation processes: patterns of interaction, coordination, communication, and decision-making) managing innovation portfolio service interactions: managing the service delivery process, structuring the service development process, aligning routes to markets business development capability, commercialization transfer external knowledge, integrate knowledge empowerment: decision-making authority, information sharing, shortand long-term planning design market orientation 81 s. el hanchi, & l. kerzazi journal of small business strategy / vol. 30, no. 2 (2020) / 72-92 table 4 excerpt of capabilities clustering into an ic foundation—example of relational capability capability description, variations authors identified components r el at io na l c ap ab ili ty relationships and social capital linkages relational learning networking capabilities lin et al. (2016) christensen and overdorf (2000) oecd/eurostat (2005) romijn and albaladejo (2002) urueña et al. (2016) sulistyo and siyamtinah (2016) saunila and ukko (2014) paradkar et al. (2015) rothaermel and hess (2007) chang et al. (2012) lall (1992) fan (2006) salunke et al. (2011) nassimbeni (2001) kazadi et al. (2015) eisenhardt and martin (2000) eisenhardt and martin (2000) caloghirou et al. (2004) albort-morant et al. (2016) forsman (2011) antolin-lopez et al. (2015) boly et al. (2014) tidd (1997) becheikh et al. (2006) relationships with suppliers, distributors, and customers linkages: with institutions, private sector, universities, other firms external interactions stakeholder networking relational capital: relationships with customers, institutions, suppliers, shareholders, and investors external sources for information access to complementary resources from alliances: distribution, finance, manufacturing, r&d capabilities, software, hardware components, brand strategic alliances, firms’ acquisitions openness capability linkage capabilities: use of knowledge from external sources external alliances relational learning: from networks and external linkages interorganizational relationships: cooperative supplier relationship, cooperative customer relationship, affiliation to consortia, external services utilization stakeholders co-creation stakeholders competence mapping, networking capability, relational capability, knowledge management capabilialliancing leverage external networks strategic alliances, collaboration, openness relationship learning capability: information sharing capability, joint sense-making capability, knowledge integration capability networking capabilities cost-economizing and risk-sharing logic cooperation network management, customer relations management position within innovation networks relationships with other organizations, networking 82 s. el hanchi, & l. kerzazi journal of small business strategy / vol. 30, no. 2 (2020) / 72-92 this representation offers an operationalization of the ic construct as a third-order dc (michailova & zhan, 2015), aggregating three second-order dcs—sensing, seizing, and transforming (teece, 2007)—and nine first-order capabilities (foundations), in turn composed of micro-components as zero-order capabilities. findings we analyzed the body of literature according to our operationalization of ic as a third-order capability. for the second order, we adopted the three dcs from teece (2007), and for the first order, we built mainly on the previous research synthesized in table 1 to cluster the identified capabilities in nine ic foundations. we also used entrepreneurship theory as an interpretive lens to identify startup-related capabilities and select or reformulate appropriate micro-components (zero order). the sensing capability included all micro-components related to scanning the environment, opportunity recognition, and knowledge acquisition. the seizing capability covered all micro-components supporting implementation, opportunity capitalization, project execution, and so on. the transforming capability is concerned with micro-components involved in startup growth, scalability, business development, and profound transformations to adapt to and create change. in terms of foundations, we distinguished three capability domains: core ic, defining the ability to produce and manage innovations; supporting ic, constituting strong drivers and enablers; and startup entrepreneurial capabilities, which are specific to the startup context and entrepreneurial behavior. core innovation capabilities core ics are directly involved in the creation of innovation outputs, considering the different and interrelated types of innovation: technology, product, process, and business model innovations (el hanchi & kerzazi, 2019). drawing from the extensive literature on new product development and stretched to include different innovation typologies, this domain, which is synthesized in table 5, includes the following ic foundations: • technology ic relates to all capabilities required for sensing technology, conducting research and development, seizing technological opportunities, exploiting new technologies, and managing technologies to respond to change and shape new technological situations. • product and process ic includes all capabilities allowing the detection of product/process opportunities; generating ideas; seizing opportunities through design, conception, development, and implementation of new products and processes; and transforming product strategy to respond to and shape new market conditions. • business model ic encompasses all capabilities supporting the identification, development, and transformation of new business models. supporting innovation capabilities the learning perspective stands out as a common background for ic, particularly through the absorptive capacity concept supporting the knowledge acquisition, assimilation, and transformation required for innovation (cohen & levinthal, 1990; zahra & george, 2002). similarly, linkages and networking are present as main capabilities in several ic models and reported as priority for startups due to external dependencies. marketing capability and market orientation are also acknowledged as important enablers of innovation and new market creation (leal-rodríguez & albort-morant, 2016; weerawardena, 2003). moreover, these capabilities are often interrelated in the literature, with some overlap. for instance, learning capability includes the ability to source (market) knowledge from external sources (partners), thus involving relationship capability and contributing to marketing capability. the interlay of these three capabilities offers a support base for the core ics (table 6). three ic foundations are covered in the supporting ics domain: • learning capability includes all capabilities by which new knowledge is identified, acquired, exploited, and transformed. • relational capability refers to all capabilities involving networks and linkages. it goes from sensing opportunities and obtaining knowledge from the network, developing alliances, and accessing external resources to transforming and shaping the network. • marketing capability covers all capabilities geared toward the customer and the market. it starts from sensing the market and customers’ needs to market experimentation, innovation, commercialization, and brand and social media capabilities, to reconfiguration of marketing strategies for developing barriers to competition and shaping market conditions. startup entrepreneurial capabilities in the case of startups and their “liabilities of newness 83 s. el hanchi, & l. kerzazi journal of small business strategy / vol. 30, no. 2 (2020) / 72-92 table 5 core innovation capabilities sensing seizing transforming technological ic sensing technology detecting emerging technology r&d exploiting technology technical solution development design experimentation acquisition of technology licenses technology management defend intellectual property focus on core technologies manage technology portfolio product and process ic detecting opportunity ideation understanding customer needs concept creation solution design product differentiation experimentation implementation operation design production capability improvisation imitation outsourcing extending product range product and process flexibility business model ic identifying new business models customer needs sensing solution and business model design adopting new revenue mechanisms managing the service delivery process business development reinventing business model table 6 supporting innovation capabilities sensing seizing transforming marketing capability market sensing competitor sensing customer needs sensing experimentation customer relationship management go to market innovation commercialization market-oriented decision-making customer service brand innovation product differentiation advertising effectiveness sales and distribution management social media capability developing barriers to competition internationalization and market extension learning capability acquiring knowledge assimilating knowledge exploiting knowledge trial and error transforming knowledge learning from past projects improving the knowledge base and skills relational capability acquiring knowledge from external sources detecting opportunity from networks identifying complementarities and synergies information sharing networking capability co-creation alliancing, partnerships development getting support from the ecosystem information sharing accessing external resources risk-sharing cooperation cost-economizing cooperation customer and supplier involvement reconfiguring the network network positioning shaping the ecosystem 84 s. el hanchi, & l. kerzazi journal of small business strategy / vol. 30, no. 2 (2020) / 72-92 and smallness” (abatecola et al., 2012; freeman & engel, 2007, p. 94), a startup’s ability to construct a resource base including human capital and financial capital is fundamental for ic. research on entrepreneurship focuses on the individual capabilities of the entrepreneur and the capability to transform the founder’s resources into organizational assets through effectuation (alvarez & busenitz, 2001; brush et al., 2002; burns, 2016; d’souza & kemelgor, 2008; mckelvie & davidsson, 2009; shane & venkataraman, 2000; venkataraman, 1997). this capability domain builds on entrepreneurship theory and includes startup capabilities that are necessary for building and managing innovative and entrepreneurial startups (table 7). this category replaces the widely recognized set of organizational capabilities of large, established firms consisting of organizational structure and resources, culture, and management team, with appropriate startup management capabilities and entrepreneurial individual capabilities. three ic foundations are included: • innovation funding capability involves capabilities for identifying, attracting, and managing funding opportunities to finance innovation and startup growth. • resource management capability includes capabilities to identify, attract, and develop resources and to transform individual resources into organizational assets. • founder entrepreneurial and managerial capability builds on entrepreneurial behavior theory and the dmc and covers a set of entrepreneurial and managerial capabilities, competences, and attitudes of the startup founder. the startup innovation capability (ic) framework finally, we present the startup ic as a bi-dimensional and multilayered framework (figure 3). the ic construct consists of capabilities for sensing the environment for opportunities and knowledge, seizing opportunities through innovation development and commercialization, and transforming founders’ individual capabilities into organizational assets through effectuation. these dcs are supported by a system of interdependent foundations: (a) core ics, including technological ic, product ic, and business model ic; (b) supporting ics, recognizing the role of marketing capability, learning capability, and relational capability; and table 7 startup entrepreneurial capabilities sensing seizing transforming founder’s entrepreneurial and managerial capability entrepreneurial orientation risk taking creativity attention and perception proactiveness decision-making strategy leadership collaboration problem solving and reasoning communication social cognition management experience industry experience agility entrepreneurial capability vision values flexibility innovation funding capability detecting opportunities attracting investors startup funding investment decisions equity decision-making investor alignment growth funding resources management capability attracting resources identifying needed resources constructing a resource base managing resources and competences human capital development integration of internal and external resources and competences stakeholders’ competence mapping engaging resources transforming individual resources into organizational resources transformation of competences new competence acquisition evolution of resources 85 s. el hanchi, & l. kerzazi journal of small business strategy / vol. 30, no. 2 (2020) / 72-92 (c) startup entrepreneurial capabilities, covering the founder’s entrepreneurial and managerial capabilities, innovation funding capability, and resources management capability. figure 3 shows a macro representation of the proposed capability-based ic, and table 6 and table 7 represent detailed views of the framework, mapping the ic foundations to the dcs. discussion and implications theoretical contributions from a conceptual perspective, this paper has three contributions. first, it offers a theoretical background for studying ic from a capability-based view, recognizing innovation as a dc of the entrepreneurial firm and a higher-level construct aggregating and integrating different foundations and components (lawson & samson, 2001; michailova & zhan, 2015). this capability-based view conceptualizes ic as the internal innovation engine (christensen et al., 2002) that transforms opportunities into innovation outcomes. we developed a comprehensive yet synthetic ic framework combining literature in the fields of dc, innovation management, and entrepreneurship and adding to the emerging capability-based stream of research on innovation (forsman, 2011; kindström et al., 2013; lawson & samson, 2001; lin et al., 2016; salunke et al., 2011; wu et al., 2016). second, the paper adds to the entrepreneurship theory by focusing on startups as innovative and entrepreneurial firms. startups generally start small with a strong growth mindset (burns, 2016; carland, 2015; carland et al., 2007; freeman & engel, 2007; murphy et al., 2019; sonfield & moore, 1990). while innovation management and dc research consider large corporations and involve organizational factors such as culture (adams et al., 2006; cooper & kleinschmidt, 2007; lawson & samson, 2001), management team (becheikh et al., 2006; cooper & kleinschmidt, 2007), and resource allocation (yam et al., 2004), research on entrepreneurial firms focuses on the founder’s individual capabilities and human capital (alvarez & busenitz, 2001; baptista et al., 2007; burns, 2016; d’souza & kemelgor, 2008; mckelvie & davidsson, 2009; romijn & albaladejo, 2002; shane & venkataraman, 2000; venkataraman, 1997), as well as on opportunity discovery, creation, and exploitation (baranès et al., 2009; zahra et al., 2006) and on the entrepreneurial process, allowing the firm to do more with less through effectuation (baker & nelson, 2005; chandler et al., 2011; sarasvathy, 2001). our contribution to entrepreneurship theory is to combine ics from both the enterprise level as a unit of analysis and the entrepreneur level, using entrepreneurship theory. at the early stages, ic will be mainly related to the founder’s individual capabilities. figure 3. a proposed framework for startup innovation capability (ic) from a dynamic capability (dc) perspective     startup entreprenrurial  capabilities sensing seizing transforming technological ic product and process ic business model ic innovation capability marketing capabilty learning capability relational capability supporting capabilities founder entrepreneurial and managerial capability innovation funding capability resources management capability 86 s. el hanchi, & l. kerzazi journal of small business strategy / vol. 30, no. 2 (2020) / 72-92 the growth will be dependent on the ability to transform the founder’s resources and capabilities into startup dcs (brush et al., 2002; mckelvie & davidsson, 2009) by following an effectuation logic. in our framework, the founder’s entrepreneurial and managerial capability, innovation funding capability, and startup resource management capability are considered building blocks for developing a firm-level capability, thus bridging the gap between dcs and entrepreneurship. third, the ic framework builds on, and adds to, the oslo manual guidelines for innovation surveys (oecd/ eurostat, 2005, 2018). by considering startup-specific capabilities such as the founder’s entrepreneurial and managerial capability and innovation funding capability, surveys on startup innovations would be more comprehensive and tailored to this category of firm. in addition to these conceptual contributions, this work has practical implications as discussed in the following. practical implications the ic framework offers a practical and simplified multidimensional tool for entrepreneurs to assess their startups’ ics and identify their strengths and weaknesses. it will also help them identify complementarities and the external support required to address the liabilities of smallness and newness. the framework also highlights the capabilities required to transform a startup for growth. in fact, by applying the three dcs, the focus is not only on how to detect (sense) and grasp opportunities (seize) for innovation but also on how to reconfigure (transform) on a continual basis to grow and maintain the ic of the startup at different stages of its development. for ecosystem stakeholders, the ic framework provides a common ground to identify and close the gap between the current state and a desired startup ic in a given country or region. the ic framework can also be used as a basis to develop evaluation criteria considering the various and interrelated ics for the selection of eligible startups for a given program or funding opportunity. future research this paper offers a conceptual contribution to the research on ic. it is based on a combination of a structured and a non-structured literature review. while this method reduces researcher bias, it presents some inherent limitations. mainly, it does not guarantee an exhaustive collection of works will be included in the review. although we selected the science direct database for its richness and its large span of subjects, and we also completed the search using google scholar and snowballing searches, we might have omitted a significant number of works. we are confident, however, about the comprehensiveness of the concepts because we have reached theoretical saturation (glaser & strauss, 1967) due to redundancy of the concepts encountered during the analysis. this review can be completed by including other databases and more entrepreneurship and new venture sources. this work offers multiple venues for research. the framework offers a 9 × 3 matrix of ics and their individual micro-components. each element of the matrix offers a venue for specific research questions to study a well-framed aspect of ic and advance the knowledge about this construct. the ic framework can be used to conduct exploratory studies within startups to understand their ics at different stages of their life cycle. it can also support qualitative research and detailed case studies. additionally, we have identified many relationships between the nine ic foundations during our analysis of the literature, but we did not include them in the present paper for reasons of length. the framework can be further developed by including these relationships to develop a detailed conceptual model and build hypotheses for conducting quantitative research on specific ics and how they interact to shape a startup’s overall ic. note references include only authors cited in this paper. other articles not directly cited in the present document were included in the hybrid literature review selection (as shown in the excerpt in table 3 and table 4). references aas, t. h., & breunig, k. j. 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(2005). exploring the synergy between entrepreneurship and innovation. international journal of entrepreneurial behaviour & research, 11(1), 25–41. https://doi.org/10.1108/13552550510580825 19 the influence of the entrepreneur’s education level on strategic decision making matthew sonfield hofstra university matthew.sonfield@hofstra.edu robert n. lussier springfield college rlussier@springfieldcollege.edu abstract the entrepreneurship literature includes many studies focusing upon antecedents of entrepreneurial behavior and performance, but a specific focus upon education as an antecedent has been minimal. this study of 184 small businesses specifically tests the relationship between two variables: 1) the owner/manager’s level of formal education and 2) his or her choice of entrepreneurial strategies for the business. to measure strategy, the entrepreneurial strategy matrix, a situational model which suggests appropriate entrepreneurial strategies for both new and ongoing ventures, was utilized. as discussed below, certain limited relationships between these two variables were found. the implications of these findings and the opportunities for future research are presented. this study and its conclusions advance the literature of entrepreneurship and offer implications for those who study and/or assist small business owners and managers. keywords: education level, entrepreneurs, strategic decisions, strategy introduction and literature review since the 1970s, as the study of entrepreneurship has developed, many researchers have focused upon the antecedents of entrepreneurial behavior and performance. w hat external variables are related to, and perhaps impact, entrepreneurs and their business endeavors – strategies, performance, etc.? one category of these variables or antecedents has been the background and experiences of the entrepreneur (brush & hisrich, 1991; gibson, 2011; griese et al., 2012; harris et al.; hult et al., 2004; klein & maher, 1966; menon et al., 1999). more specifically, some of this earlier research focused upon education as an s trateg y journal of small business journal of small business strategy vol. 24, no. 1 20 antecedent variable. for example, vesper (1990) found the education level of the new venture entrepreneur strongly related to the venture’s performance. c ooper et al. (1988), studying business survival factors, found that survivors were more often college graduates than were non-survivors. on the other hand, lorrain and dussault (1988) found a negative relationship between the entrepreneur’s education level and the performance of new technology firms. in a study of “deliberate practice” (individualized self-regulated and effortful entrepreneurial activities aimed at improving performance), unger et al. (2009) identified education level as an antecedent of such behavior. boeker (1987), focusing specifically upon education and strategy, found a significant relationship between the level of formal education and the degree to which the entrepreneur followed a “f irst mover” marketing strategy. focusing specifically on women entrepreneurs, pathak et al. (2013) found that education level was a statistically significant predictor of becoming an entrepreneur. yet cope and watts (2000) found education less important as an antecedent to entrepreneurship than were entrepreneurially-related “critical incidents” in one’s past experience. however, most of the studies that considered “education” as a p ossible antecedent to entrepreneurial behavior and performance looked specifically at a narrow subset of education: namely entrepreneurial workshops, courses, and similar training pedagogies, rather than formal education at the broader level – university degrees, etc. and the overall level of educational attainment. for example, hansemark (1998), jack and anderson (1999), mazzarol et al. (1999), schayek and dvir (2012), and wilbanks (2013) each focused on government-sponsored entrepreneurial skills training programs or university-based student field-work programs (often their own programs), concluding that such programs are of benefit in fostering selfemployment, small business, and entrepreneurship in the economy. as jack and anderson concluded, “the intended outcomes [of their program] are reflective practitioners, fit for an entrepreneurial career.” yet these prior studies are generally limited in focus or in clear conclusions, and some are quite dated. only a few of these prior investigations of antecedents to entrepreneurial activity focused on formal and broad education as an antecedent, and in more recent years, research focuses on antecedents have been targeted largely in other directions rather than education. thus, the existing body of literature is insufficient to allow for a general consensus, let alone for the development of entrepreneurship theory. t hus, there is a need for and a value in the current study. research objectives as previously noted, this study of 184 small businesses specifically tests the relationship between two variables: 1) the owner/manager’s level of formal education and 2) his or her choice of entrepreneurial strategies for the business. t he entrepreneurial strategy matrix (lussier et al., 2001; sonfield & lussier, 1997; sonfield & lussier, 2000; sonfield et al., 2001) was utilized as the basis for this current study. this matrix is a situational model, which suggests appropriate entrepreneurial strategies for both new and ongoing ventures, in response to the identification of different levels of venture innovation and venture risk. such journal of small business strategy vol. 24, no. 1 21 identification leads to the placement of the venture into one of four cells of a matrix, each cell denoting a strategic situation, and appropriate strategies are then presented for that cell. s ee figures 1 and 2. the acceptance of this model is confirmed by its inclusion in a wide variety of textbooks, trade books, and entrepreneurship web sites. (a google search of “entrepreneurial strategy matrix” [using quotation marks] will provide over 5000 separate results.) figure 1: the entrepreneurial strategy matrix innovation risk more specifically, the entrepreneurial strategy matrix (esm) was developed by sonfield and lussier to provide an alternative to more complex contingency models then available, such as lumpkin and dess’ (1996) “entrepreneurial orientationperformance” model or to models more appropriate for large non-entrepreneurial organizations, such as the boston consulting group matrix (hambrick et al., 1982). the four cells in the esm derive from the two axes: innovation (the creation of something new and different) and risk (the probability of major financial loss). thus, the top left cell of the matrix (“i-r”) is the most desirable cell for an entrepreneurial venture, with high innovation and low risk, the top right cell (“i-r”), being more risky, is less desirable, and so forth. the esm suggests to both new and ongoing entrepreneurs that some ventures are more desirable than others, in terms of likely outcome success and rewards. furthermore, it suggests strategy modification so as to move within the matrix from a less desirable cell to a more desirable cell (as indicated in figure 2.) as discussed below, a sample of 184 s mall businesses was generated and investigated, with the objective of determining whether significant relationships existed between the formal education level of the business owner/manager and the cell of the entrepreneurial strategy matrix, which identified his or her entrepreneurial strategy. although for many years the literature has often highlighted differences between “entrepreneurship” and “small business” and between “entrepreneurs” and “small businesspersons,” the two concepts are generally still highly interwoven and the i-r high innovation low risk i-r high innovation high risk i-r low innovation low risk i-r low innovation high risk high low low high journal of small business strategy vol. 24, no. 1 22 terminologies are used interchangeably in this article (carland et al., 1988; longenecker & petty, 2010). figure 2: the entrepreneurial strategy matrix: examples of appropriate strategies hypotheses there is a relationship between an entrepreneur’s level of education and that entrepreneur’s chosen business strategies. methods design and sample as explained above, this study focused on the entrepreneurial strategy matrix (esm), developed by sonfield and lussier (1997). a national random sample of 2,500 small business owners, representing a f ull range of business types and industry groups, was prepared by a mailing list company. the list was stratified to ensure adequate representation in all nine dunn & bradstreet industry groups and was then cut to 900 for survey mailing. of the 900 questionnaires mailed, 98 were returned as nondeliverable, and 78 were returned completed. follow-up telephone interviews with non-respondents produced an additional 116 c ompleted questionnaires, but 10 were discarded for too many missing answers. thus, the sample size was 184, for a response rate of 23%. addressing non-response bias to address non-response bias, a test of differences was run between the original mail responses and the follow-up telephone responses from mail non-respondents. no significant differences (p < .05) were found between responses of the mail and i-r  move quickly  protect innovation  lock in investment and operating costs via control systems, contracts, etc. i-r  reduce risk by lowering investment and operating costs  maintain innovation  outsource high investment operations  joint venture options i-r  defend present position  accept limited payback  accept limited growth potential i-r  increase innovation; develop a competitive advantage  reduce risk  use business plan and objective analysis  minimize investment  reduce financing costs  franchise option  abandon venture? journal of small business strategy vol. 24, no. 1 23 telephone surveys on any of the questions were found. thus, non-response bias should not be problematic. measures and statistical analysis to test the hypothesis, the measurement dependent variable was the number of years of education (on a scale of 1 = grade school, 2 = high school. 3 = some college, 4 = t wo years of college, 5 = four year college degree, 6 = graduate school, 7 = doctorate). the independent variable was the cell in the four-cell esm, which best defined the overall strategy of the entrepreneur and his or her business, as shown in figure 2 and table 2. r espondents were asked to identify their business strategies from a listing of various possible strategies, and this self-identification then allowed the researchers to place each respondent into one of the four esm cells. a copy of the survey instrument is available upon request from either of this article’s authors. t he one-way anova was used to test the hypothesis, followed by the tukey hsd post hoc tests. f or this statistical testing, the terms “independent variable” and “dependent variable” do not imply causality or the direction of the relationship, but are used as the established terminology for the testing methodology, comparing the mean level of education by the strategy group selected. this research treats education level as a p otential antecedent to entrepreneurial strategic decision-making. results descriptive statistics see table 1 for descriptive statistics of the sample. as noted, the sample size was large (n = 1 84) and well balanced with approximately a 70/30 split between retail/services and manufacturing, a 60/40 split of men to women, and 34 us states were represented in the sample. the means for the sample were approximately 15 years in business, 10 years in the present business venture, and 20 employees. based on the descriptive statistic means, see table 2, the strategy used most frequently by the small business owner/managers with the highest level of education was the high innovation/low risk (“ir”) strategy (m = 5.54, 5 = co llege degree), followed by the high innovation/high risk (“ir”) strategy (m = 5.15), the low innovation/low risk (“ir”) strategy (m = 4.52, and the low innovation/high risk (“ir”) strategy (m = 4.35). hypothesis testing see table 2 for the results of hypothesis test. as a model of the relationship between education and the strategy used by the small business owner/managers, the model anova was significant (f = 3.194, p = .025) at the .05 level; there were significant differences among the four strategy groups by education. however, when comparing the four strategies selected using the tukey hsd post hoc tests, none of the four individual t-tests of differences were significant at the .05 level. nevertheless, two of the strategies selected were significantly different at the .10 level of significance. the high innovation/low risk strategy (“ir”) was significantly different than the low innovation/high risk (“ir”) strategy (p = .09) and the low innovative/low risk (“ir”) strategy (p = .08). the reason for the discrepancy in the level of significance going from .05 down to .10 was based primarily on the level of the statistical testing. the one-way anova compares differences among all four strategies by level of education, whereas the post hoc test essentially runs the simple comparisons between each group of two (or journal of small business strategy vol. 24, no. 1 24 one-on-one) with the t-test. this commonly happens with regression models. thus, the entire model can be significant, while none of the individual independent variables is significant (lussier, 2011). table 1: descriptive statistics variable (n=184) mean / sd frequency / percentage years in business 14.72 / 14.29 years in venture 9.66 / 8.27 no. of employees 19.71 / 51.51 satisfaction with business very satisfied 7-1 very dissatisfied 4.96 / 1.57 education 1 = grade 7 = doctor 4.86 / 1.24 industry retail / service manufacturing 130 / 71% 54 / 29% product offering product service both 27 / 15% 75 / 41% 81 / 44% gender men women 109 / 59% 75 / 41% state of business operations respondents represent 34 states (65% of america), ranging from alabama to wyoming. discussion and implications this empirical analysis indicates some possible relationships between the formal education level of the entrepreneur and the strategies chosen by that entrepreneur. furthermore, since the entrepreneurial strategy matrix is based upon the levels of innovation and of risk in the business venture, these relationships to education level are also relevant to the type of venture that the entrepreneur has chosen. more specifically, there appears to be a positive relationship between an entrepreneur’s greater level of education and a higher level of innovation in the entrepreneur’s venture, with a stronger relationship with higher innovation but lower risk than higher innovation and higher risk. thus, this might indicate that a greater level of education tends to move an entrepreneur toward ventures involving greater innovation, but preferably with lower risk. since the “high innovation/low risk” cell is the most desirable cell in the entrepreneurial strategy matrix (see a full discussion of this in sonfield & lussier, 1997), this implies that a greater level of education leads to choosing “better” entrepreneurial innovation/risk situations and their appropriate entrepreneurial strategies. journal of small business strategy vol. 24, no. 1 25 table 2: level of education used by strategy f p-value 3.194 .025 tukey hsd post hoc tests strategy one strategy group selected as the major strategy mean/sd level of education frequency/% strategy selected strategy selected comparison p-value high innovation / low risk (i-r) move quickly protect innovation lock in investment 5.54 / 1.50 24 / 13% i-r i-r = .79 i-r = .09 i-r = .08 high innovation / high risk (i-r) lower investment costs maintain innovation joint venture 5.14 / 1.83 63 / 35% i-r i-r = .79 i-r = .23 i-r = .20 low innovation / high risk (i-r) increase innovation lower costs franchise option abandon venture 4.35 / 1.92 26 / 15% i-r i-r = .09 i-r = .23 i-r = .98 low innovation / low risk (i-r) defend present position accept limited payback accept limited growth 4.52 / 1.81 66 / 37% i-r i-r = .08 i-r = .20 i-r = .98 bold significant at the .10 level of course, this study’s statistical analysis cannot test causality but only relationship, and thus the above implication is only that. still, if one is observing, studying, or assisting an entrepreneur and his or her venture, this study’s findings might lead one to expect that entrepreneurs with greater levels of education might be engaged in ventures involving higher levels of innovation and also lower levels of risk. conversely, a l ower level of education might be associated with less innovation and/or higher risk. this might enable the observer or consultant to better understand the entrepreneurial situation and, if needed, provide better assistance. the more one understands the individual characteristics and situation of a b usiness’s owner/manager, the better one can tailor both analysis and assistance. for example, a business consultant or team of consultants might be wise to know the level of the client’s education prior to investigating the client’s entrepreneurial venture or ventures. knowledge of the education level might allow the consultant(s) to focus more or less on the choice of venture, as opposed to the journal of small business strategy vol. 24, no. 1 26 implementation of the venture. how viable is the client’s venture, and are the levels of innovation and risk appropriate and acceptable? thus, knowledge of the client’s level of education might facilitate and improve the consulting process and effectiveness. yet as the levels of statistical significance are not strong, when looking at the individual strategy cells (tukey hsd post hoc tests), there is clearly a n eed for further investigation of this issue. does a higher level of education indeed lead to, or relate to, an entrepreneur choosing better and more preferable innovation/risk situations and, in turn, the appropriate strategies for those situations? seven levels of education were used as the measure in this study – would a greater number of measured levels in a future research study provide more refined conclusions? certainly, future, more in-depth research is needed before any clear conclusions can be reached and any meaningful models developed. researchers are encouraged to move beyond this first-stage investigation. what other entrepreneurial outcomes besides choice of entrepreneurial strategy might be related to the entrepreneur’s level of education? w hat other antecedents are worthy of investigation? and the entrepreneurial strategy matrix is but one of many ways to obtain the strategy measurements necessary for such future research. what other strategy measures might be utilized in future research studies? in the meantime, this current research study indicates that there is some level of relationship between an entrepreneur’s level of formal education and his or her choices of business venture and strategy, and this finding is important and of value in our overall objective of theory development in the field of entrepreneurship. references boeker, w. (1987). strategic origins and environmental imprinting at founding, academy of management proceedings – best papers, 150-153. brush, c., & hisrich, r. (1991). antecedent influences on women-owned businesses. journal of managerial psychology, 6(2), 9-16. carland, j., hoy, f., & carland, j. (1988). who is an entrepreneur? is a question worth asking. american journal of small business, 12(4), 33-39. cooper, a., dunkelburg, w., & woo, c. (1988). survival and failure: a longitudinal study. proceedings, conference on entrepreneurship, 225-237. cope, j. & watts, g. (2000). learning by doing – an exploration of experience, critical incidents and reflection in entrepreneurial learning. international journal of entrepreneurial behaviour and research, 6(3), 104-124. gibson, s. (2011). the influence of strategic focus & gender on performance: an examination of small business. journal of small business strategy, 21(2), 47-58. journal of small business strategy vol. 24, no. 1 27 griese, i., pick, d., & kleinaltenkamp, m. (2012). antecedents of knowledge generation competence and its impact on innovativeness. journal of business and industrial marketing, 27(6), 468-485. hambrick, d., macmillan, i., & day, d. (1982). strategic attributes and performance in the bgc matrix – a pims-based analysis of industrial product businesses.academy of management journal, 25(3), 510531. hansemark, o. (1998). the effects of an entrepreneurship programme on need for achievement and locus of control reinforcement. international journal of entrepreneurial behaviour and research, 4(1), 28-50. harris, m., gibson, s., taylor, s. (2008). examining the impact of small business institute participation on entrepreneurial attitudes. journal of small business strategy, 18(2), 57-75. hult, g., hurley, r., & knight, g. (2004). innovativeness: its antecedents and impact on business performance. industrial marketing management, 33(5), 429-438. jack, s., & anderson, a. (1999). entrepreneurship education within the enterprise culture: producing reflective practitioners, international journal of entrepreneurial behaviour and research, 5(3), 110-125. klein, s. & maher, j. (1966). education level and satisfaction with pay. personnel psychology, 19(2), 195208. longenecker, j. & petty, w. (2010). small business management: launching and growing entrepreneurial ventures. mason, oh: southwestern. lorrain, j. & dussault, l. (1988). relation between psychological characteristics, administrative behaviors, and success of founders at the start-up stage. proceedings, conference on entrepreneurship, 150-164. lumpkin, g. & dess, g. clarifying the entrepreneurial orientation construct and linking it to performance. academy of management review, 21(1), 135172. lussier, r. (2011). research methods and statistics for business, long grove, ill, waveland press. lussier r., sonfield, m., corman, j., & mckinney, m. (2001). strategies used by small business entrepreneurs. mid-american journal of business, 16(1), 29-38. mazzarol, t., volery, t., doss, n., & thein, v. (1999). factors influencing small business start ups: a comparison with previous research. international journal of entrepreneurial behaviour and research, 5(2), 48-63. journal of small business strategy vol. 24, no. 1 28 menon, a., bharadwaj, s., adidam, p., & edison, s. (1999). antecedents and consequences of marketing strategy making: a model and a test. journal of marketing, 63(2), 18-40. pathak, s., goltz, s., & buche, m. (2013). influences of gendered institutions on women’s entry in entrepreneurship”, international journal of entrepreneurial behaviour and research, 19(5), in press. schayek, r. & dvir, d. (2012). the impact of public assistance programs on small businesses: strategic planning, entrepreneurship resource usage, and market orientation as mediating variables. journal of small business strategy, 22(1), 67-97. sonfield, m. & lussier, r. (1997). the entrepreneurial strategy matrix: strategies for new and ongoing ventures. business horizons, 40(3), 73-77. sonfield, m. & lussier, r. (2000). innovation, risk, and entrepreneurial strategy. international journal of entrepreneurship and innovation. 1(2), 91-98. sonfield, m., lussier, r., corman, j., & mckinney, m. (2001). gender comparisons in strategic decisionmaking: an empirical analysis of the entrepreneurial strategy matrix. journal of small business management, 39(2), 165-173. unger, j., keith, n., hilling, c., gielnik, m., & frese, m. (2009). deliberate practice among south african small business owners: relationships with education, cognitive ability, knowledge, and success. journal of occupational and organizational psychology, 82(1), 21-44. vesper, c. (1990). new venture strategies, englewood cliffs: prentice hall, 27-55. wilbanks, j. (2013). mentoring and entrepreneurship: examining the potential for entrepreneurship education and for aspiring entrepreneurs, journal of small business management, 23(1), 93101. matthew c. sonfield is the robert f. dall distinguished professor in business at hofstra university. his publications are in the fields of entrepreneurship, small business, family business, minority business, and automotive business history. robert n. lussier is professor of management at springfield college. his ongoing scholarship focuses on small business success vs. failure prediction and family business reproduced with permission of the copyright owner. further reproduction prohibited without permission. strategy editor's notf. while budget balancing has bccn the driving i'orce behind much ol'he activity in congress, small business owners continue to institute real and meaningful changes to streamline their businesses. much of the focus of this issue supports ef'forts to address cost containmcn&, thc cfl'cctivc use ol external resources and to reduce the burdens placed on small businesses by government regulation. in the lead article roy cook and janet wolvcrton provide a praciical hands-on small business perl'ormance scorecard to help small business owners un&lertakc, a comprehensive review of operations. in a similar manner, as large public accounting firms rediscover the greater signilicance ol'mall business and entrepreneurship, drs. wolk and wootton provide a meaningful guide to service and compctitivc cnhanccmcnt availahlc to small firms. professor scherr shows how small businesses can adopt and modil'y traditional credit management strategies while outsourcing others to costly to be cffcctivcly supported. addressing thc ridiculous burdens placed on small businesses hy litigation cxpcnscs, mare lampc and scth ellis show how small i'irms can avoid costly litigation by resolving disputes through mediation and arbitration. in another cost assessment article, suzanne milburn, ray siehndel and i collaborated in presenting ncw cost containment health care insurance practices i'or small businesses. in an exploratory study that extends thc research i'rontiers of'new venture strategy, jim chrisman and gcorgc danforth seek to explain how outsiders can best be used to assist new ventures with growth management planning. another cutting edge article by ravi ijchara and david gundcrscn, deals with susiainahle competitive advantage issues and the application of a contemporary strategic thinking model that has proven to he a ncw approach to help small business firms realize their future. the last article in this issue by prot'essors strong and winchell tackles the controversial cfl'cct&vcncss of market intervention by the federal govermnent &n creating small business technology partnerships. although designed as a means of assisting small business in becoming competitive in ncw markets, such partncrism may very well be wrought by bad science. in total, with the end ol'our sixth year ol'publication, we continue &o bring our readers articles to keep them abreast of new knowledge and practical applications for small business and entrepreneurial success. joseph f. singer, ph.d. editor rural entrepreneurship success factors: an empirical investigation in an emerging market | published in journal of small business strategy processing math: 100% jsbs menu articles articles all for authors editorial board about issues ethics statement sponsors search sorry, something went wrong. please try your search again. × articles blog posts rss feed enter the url below into your favorite rss reader. https://jsbs.scholasticahq.com/feed × articles vol. 31, issue 4, 2021 november 16, 2021 cdt rural entrepreneurship success factors: an empirical investigation in an emerging market prince gyimah, robert n. lussier, rural entrepreneurs success failure sustainable development emerging market ghana ccby-4.0 • https://doi.org/10.53703/001c.29470 photo by sincerely media on unsplash jsbs gyimah, p., & lussier, r. n. (2021). rural entrepreneurship success factors: an empirical investigation in an emerging market. journal of small business strategy, 31(4), 5–19. https://doi.org/10.53703/001c.29470 save article as...▾ pdf xml citation (bibtex) data sets/files (5) download all (5) table 1. lussier model variables download table 2. a comparison of variables identified in 44 articles as contributing factors to business success versus failure download table 3. descriptive statistics and test of difference (n = 230) download table 4. correlation matrix download table 5. logistic regression model test results (n = 230) download sorry, something went wrong. please try again. if this problem reoccurs, please contact scholastica support error message: undefined × view more stats abstract small businesses in rural communities play a key role in achieving global sustainable economic development because they are the driving force of poverty reduction, job creation, resiliency, and economic development. this study examines the factors that drive the success or failure of small businesses in rural communities in an emerging market. the methodology is survey interview research using a logistic regression model to test the lussier success vs failure prediction model with a sample of 230 businesses (successful n = 120, failed n = 110) from the rural communities in an emerging market. this study supports the lussier model validity (p < 0.01) with a high overall accuracy of 71% in predicting a venture as successful or failed. capital, industry experience, staffing, and marketing skills are the most significant (t-values < .05) factors that distinguish successful from failed rural businesses in an emerging market. the findings can help future, and nascent rural entrepreneurs avoid failure and successfully contribute to economic development. implications for government agencies, public regulatory bodies, financial institutions, investors, suppliers, educators, professional institutions, and society, as well as limitations and future research, are presented. this study also contributes to the international validity of the lussier model that can be used in both advanced and developing economies, and it contributes to the development of theory. introduction extreme poverty in rural economies is one of the world’s most pressing problems, and more governments and other organizations are turning to entrepreneurship to grow rural economies (abebe & gebremariam, 2021; yeboah-asiamah et al., 2015). why entrepreneurship and why rural entrepreneurship? rural entrepreneurs are different from other types of entrepreneurs, as they utilize and develop local resources to grow the local economy (korsgaard et al., 2015; müller & korsgaard, 2018; soleymani et al., 2021). small businesses in rural communities play a key role in achieving global sustainable economic development because they are the driving force of poverty reduction, job creation, resiliency, and economic development (achua & lussier, 2014; blankson et al., 2018; boohene & agyapong, 2017; a. crawford & barber, 2020; fortunato, 2014; paynter et al., 2021). for instance, rural entrepreneurs in emerging markets employ 60% of the workforce (borchardt et al., 2018) and contribute over 50% to the gross domestic product (oppong et al., 2014). although rural small businesses play a significant role in emerging markets, most do not survive for more than five years and have a high failure rate (deller & conroy, 2017; nikolić et al., 2019). therefore, the prediction of business failure or success has become an imperative research topic to entrepreneurship, and other relevant stakeholders such as international and government agencies, public policymakers, investors, suppliers, educators, and consultants (dennis & fernald, 2001; galli-debicella, 2020; gyimah et al., 2019, 2020; gyimah & adeola, 2021; halabí & lussier, 2014; lussier & corman, 1995). thus, knowing the critical factors that contribute to the success or failure of rural businesses is crucial to the attainment of sustainable development (salder et al., 2020). however, the literature reveals a great inconsistency of the factors contributing to the success or failure of businesses (abebe & gebremariam, 2021). to date, there is no theory (adeola et al., 2021; lussier et al., 2016; marom & lussier, 2014). there is a need for further research to understand better and predict the success versus failure of rural businesses due to their significant role in emerging markets (baidoun et al., 2019; hyder & lussier, 2016). the purpose of this study is to examine the factors that drive the success or failure of small businesses in rural communities in the emerging market of ghana that has over 43% of the total population living in rural areas. the study contributes to the theoretical literature and provides practical implications for entrepreneurs and public policymakers. for instance, the study contributes to the understanding of the critical success factors of businesses that can reduce the failure rate in emerging markets. it, therefore, has practical implications for start-up ventures and established small business owners and managers. also, government agencies, public policymakers, investors, suppliers, educators, and consultants can use the model to aid in their decisions. moreover, this study has practical implications that can also strengthen the businesses by contributing to a holistic approach in achieving the united nations sustainable development goals (sdg); including no poverty (sdg 1); and decent work, and economic growth (sdg 8). finally, since there is no universal theory or model for predicting small business success or failure (lussier & pfeifer, 2000; marom & lussier, 2014), this study further validates the lussier (1995) model as an international predictor of small business success or failure that can be used in other developing and developed countries. literature review rural entrepreneurship context poverty, unemployment, and lack of economic growth remain daunting issues for most developing economies, especially in sub-saharan africa (abebe & gebremariam, 2021). to solve these challenges, support for rural entrepreneurship is needed (soleymani et al., 2021; yeboah-asiamah et al., 2015). eighty-seven years after joseph schumpeter’s seminal book on the economic development theory, entrepreneurship continues to dominate business literature because of its immense contribution to poverty eradication, employment, economic development, and growth (abebe & gebremariam, 2021; barber et al., 2019; blankson et al., 2018; a. crawford & barber, 2020; fortunato, 2014; pato & teixeira, 2018). despite the significant importance of entrepreneurship, there is no universally accepted definition of entrepreneurship due to its multifaceted context. thus, rural entrepreneurship has diverse definitions and meanings (pato & teixeira, 2018; saadatmand & barber, 2019). wortman (1990) first defined rural entrepreneurship as “the creation of a new organization that introduces a new product, serves or creates a new market, or utilizes a new technology in a rural environment.” mcelwee & smith (2014) further defined it as firms that engage indigenous individuals, deploy indigenous services and generate revenue for the rural environment. the rural entrepreneurship concept advocates that the activities of businesses should add value to the socio-spatial aspects of the rural regions (pato & teixeira, 2018). this is attained by developing new value from local resources and linking to the features and rareness of the indigenous to produce goods with value (pato & teixeira, 2018). the study focuses on the creation and development of micro, small and medium businesses in a rural setting that is community-based that uses local resources in their business activities. despite an emergent prominence on rural entrepreneurship, how rural enterprises grow remains uncertain (deller et al., 2019), and very little is known about rural entrepreneurship (muñoz & kimmitt, 2019; pato & teixeira, 2018). extant literature on rural entrepreneurship in advanced economies focused on agricultural perspective, skills requirement for local economic business, gender and family studies, farm diversification, and social capital (koyana & mason, 2017). however, studies on rural entrepreneurship investigated policy application on how rural areas can be developed in emerging markets, focusing on women and youth (koyana & mason, 2017). this present study extends the literature by examining the critical factors that contribute to the success or failure of rural enterprises in an emerging market, an important but neglected area of research. success vs failure variables a number of studies have investigated the contributing factors to the success or failure of businesses in both developing and developed countries (ciampi et al., 2021; habersetzer et al., 2021). in developed countries, habersetzer et al. (2021) concluded that industry experiences contribute to the success of firms in rural regions. skuras et al. (2005) also found that human capital accumulation practices such as managerial experiences or education and training predict business success in rural communities. halabí & lussier (2014) found that adequate capital, record keeping, and financial controls, use of the internet and professional advice, owners having parents owning a business, partners, and marketing skills contribute to the success or failure of businesses. blackwood & mowl (2000) also found that the success or failure of businesses depends on the behavior of business owners, social behaviors, and the economic factors of the environment. other scholarly researchers in developed economies assert that entrepreneurial characteristics such as owner’s age (barkham et al., 1996; bosma et al., 2000; bruins et al., 2000; cooper et al., 1990; duchesneau & gartner, 1990; kangasharju, 2000; lussier, 1995; lussier & pfeifer, 2001; marom & lussier, 2014; storey, 1994); culture, external business factors, technology (peake et al., 2019); managerial skills, experience, training and business environment (barsley & kleiner, 1990; covin & covin, 1990; dess et al., 1997; dun & bradstreet, 1995; postma & zwart, 2001), owner’s competencies and quality (miskin & rose, 1990), and innovation (dunne et al., 2016) contribute to the success or failure of businesses. for developing economies, environmental conditions and entrepreneurial skills are the key determinants of the performance of small businesses (benzing et al., 2005; chu et al., 2007; ghosh et al., 1993; huck & mcewen, 1991; yusuf, 1995). financial support, demographic factors, age at which the new business venture is undertaken, use of family loans, and the initial size of the firm are all instrumental in subsequent business success. adeola et al. (2021) found that for businesses in developing countries to be successful, entrepreneurs should start with adequate capital, have marketing skills, keep financial records, and follow professional advice. similarly, baidoun et al. (2019) reported that capital, record keeping, and financial controls, and the use of professional advice are the drivers of the success or failure of businesses in emerging markets. neshamba (2000) also found that previous managerial experience, understanding of customers’ needs, capital accessibility, and hard work contribute to the success of a business. the literature reveals a great inconsistency of the contributing factors to the firm’s success or failure, and to date, there is no theory (adeola et al., 2021; lussier et al., 2016). with the lack of consistency of success versus failure variables, there is a need for further research to understand better and predict the success versus failure of rural businesses in emerging markets. prediction models the last three decades have provided quantitative models for predicting the success or failure of businesses. failure prediction models are based on large public firms due to the availability and accessibility of financial data (gyimah et al., 2020). financial data, however, can be manipulated using some accounting policies, and it is unrealistic to use financial information to predict the failure or success of a business (rosner, 2003). financial models also use prior sales and profits to predict failure. however, start-up firms have no financial history, and thus, financial models cannot be used with nascent firms. therefore, researchers are calling for non-financial prediction models that can better predict the success or failure of businesses (appiah, 2011; appiah et al., 2015; gyimah & boachie, 2018). this study adopts the lussier (1995) model that has been validated for the prediction of success or failure of businesses (halabí & lussier, 2014; teng et al., 2011). the lussier (1995) model consists of 15 non-financial variables that were selected from 20 prior studies identified as contributing factors to the success and failure of small businesses. table 1 includes the lussier (1995) success versus failure prediction variables. there are now 44 articles discussing the variables in the model; see table 2. table 1.lussier model variables success versus failure variables capital (capt). businesses that start undercapitalized have a greater chance of failure than firms that start with adequate capital. record keeping and financial control (rkfc). businesses that do not keep updated and accurate records and do not use adequate financial controls have a greater chance of failure than firms that do. industry experience (inex). businesses managed by people without prior industry experience have a greater chance of failure than firms managed by people with prior industry experience. management experience (maex). businesses managed by people without prior management experience have a greater chance of failure than firms managed by people with prior management experience. planning (plan). businesses that do not develop specific business plans have a greater chance of failure than firms that do. professional advisors (prad). businesses that do not use professional advisors have a greater chance of failure than firms using professional advisors. more recent sources of professional advisors are venture capitalists. education (educ). people without any college education who start a business have a greater chance of failing than people with one or more years of college education. staffing (staff). businesses that cannot attract and retain quality employees have a greater chance of failure than firms that can. product/service timing (psti). businesses that select products/services that are too new or too old have a greater chance of failure than firms that select products/services that are in the growth stage. economic timing (ecti). businesses that start during a recession have a greater chance of failing than firms that start during expansion periods. age (age). younger people who start a business have a greater chance of failing than older people starting a business. partners (part). a business started by one person has a greater chance of failure than a firm started by more than one person. parents (pent). business owners whose parents did not own a business have a greater chance of failure than owners whose parents did own a business. minority (mior). minorities have a greater chance of failure than non-minorities. marketing (mrkt). business owners without marketing skills have a greater chance of failure than owners with marketing skills. table 2.a comparison of variables identified in 44 articles as contributing factors to business success versus failure scholars capt rkfc inex maex plan prad educ staff psti ecti age part pent minor mrkt adeola et al., 2021 f f n n n f n n f n n n f n n baidoun et al., 2019 f f n n f f n n n n n n n n n barsley & welner, 1990 f f f f f bosma et al., 2000 f f bruins et al., 2000 f f n n f bruno et al., 1987 f f f f f f f f carrero-morales, 2015 n n n n n n n f f n n n n f n cooper et al., 1990 f n n f f n f f f f f cooper et al., 1991 f f n f f n n n n f f crawford, 1974 f f f n n cressy, 1996 f f dun & bradstreet, 1995 f f f f f flahvin, 1985 f f f f f f gaskill et al., 1993 n f f f f f n n f guzman & lussier, 2015 n n n n n n n n n n n n n n n gyimah & adeola, 2021 f n n n f n n n n n n n n n f gyimah et al., 2020 f n n n n n n n n f n n n n f hoad & rosko, 1964 f n n f f houben et al., 2005 n n n f f f n n f f n f n n f hyder & lussier, 2016 f n n n f n n f n n n f n n n kennedy, 1985 f f f f lauzen, 1985 f f f f f lussier & corman, 1996 f f f n f f f f n f n n f f n lussier & halabi, 2010 n n n n n n n n n n n n n n n lussier & pfeifer, 2001 n n n n f f f f n n n n n n n lussier, 1995 n n n n f f f n n n n f n n n lussier, 1996a n f n f f f n f n f n f f n f lussier, 1996b n f n n f f n n f f f n n n n lussier et al., 2016 n f n n f n f f n f marom & lussier, 2014 f f n n f f n n n n f n n n n mcqueen, 1989 f f f f rauch et al., 2005 f f f reynolds & miller, 1989 f f f n n f n f reynolds, 1987 f f f n f n sage, 1993 f f f santarelli, 1998 f f schutjens & weaver, 2000 f f sommers & koc, 1987 f f f teng et al., 2011 n n n n n n n n f n n n n n f thompson, 1988 n f f f f vesper, 1990 f f f f n f f f f f f wight, 1985 f f f f wiklund & shepherd, 2003 f f wood, 1989 f f f f f f total f 24 16 14 19 23 18 11 11 12 11 5 8 4 4 10 total n 12 11 17 19 8 7 18 13 12 14 17 14 13 14 12 total 8 17 13 6 13 19 15 20 20 19 22 22 27 26 22 f supports variable as a contributing factor. n does not support variable as a contributing factor. does not mention variable as a contributing factor. methods sample and model this survey interview research study uses quantitative analysis to test the lussier success vs failure prediction model. the study adopts the lussier (1995) model questionnaire that has been previously validated in multiple studies. following adeola et al. (2021); lussier and halabi’s (2010) studies, this study uses a simple random sampling technique to select rural businesses in ghana. trained professionals administered 500 questionnaires to local businesses in the rural communities; however, 230 completed the survey resulting in a 46% response rate. of the respondents, 120 are categorized as successful and 110 as failed businesses. this study replicates previous studies using binary logistic regression to test the lussier (1995) prediction model variables (e.g., adeola et al., 2021; gyimah et al., 2020; hyder & lussier, 2016; lussier, 1995; lussier et al., 2016; lussier & halabi, 2010; teng et al., 2011). the model is: log(success/failure)=δ0+δ1capital+δ2record keeping financial control+δ3industry experience+δ4management experience+δ5planning+δ6professional advice+δ7educational level+δ8staffing+δ9product/service timing+δ10economic timing+δ11age of owner+δ12partners+δ13parents+δ14minority+δ15marketing skills+έ variable measures the dependent variable is dichotomous (success or failure). following prior studies methodology (see hyder & lussier, 2016; lussier et al., 2016; lussier & halabi, 2010; teng et al., 2011), this study uses profitability levels to categorize businesses into success or failure categories. therefore, rural business is considered as a success if the profit level is average or above the industry average profit; and rural business is considered as a failure if the profit level is less than average profits. using a 4-point scale, business owners are asked to select the appropriate level of profits, 4 – profit is above the industry profit, 3 – industry average profit, 2 – profit is below the industry average, and 1 currently not making a profit. entrepreneurs or business owners that selected 1 and 2 are coded as 0 to represent failure, and those that chose 3 and 4 are coded as 1 to represent success. for the independent variables, the ratio number of years is used to measure three of the variables; industrial experience, managerial experience, and owner’s age. a 7-point scale is used to measure nine variables: capital (1 adequate – 7 inadequate), record keeping and financial records (1 poor – 7 good), planning (1 specific – 7 no plan), professional advice (1 used – 7 not used), educational level (1 none – 7 doctorate), staffing (1 difficult to recruit – 7 easy), product/service timing (1 introduction – 7 decline), economic timing (1 expansion – 7 recession) and marketing skills (1 unskilled – 7 skilled). nominal measures coded as 1 or 2 are used for partners (1 owner – 2 partner), parents (1 yes parent-owned business – 2 no), and minority (1 foreigner/minority – 2 ghanaian). results descriptive statistics and test of differences of lussier model variables table 3 provides the descriptive and inferential statistics of the 15 model variables for 230 entrepreneurs in the rural communities in ghana. t-test and chi-square are used to determine whether there are any significant (p < 0.05) differences between failed and successful businesses. table 3.descriptive statistics and test of difference (n = 230) model variables failed mean (n = 110) failed s.d. success mean (n = 120) success s.d. 1. capital (1 adequate – 7 inadequate)a 5.85 2.66 4.39 1.71** 2. record keeping and financial (1 poor – 7 good) 4.33 1.49 4.56 1.59 3. industry experience (number of years) 8.11 5.60 10.92 6.79** 4. management experience (number of years) 7.69 5.39 9.69 6.43** 5. planning (1 specific – 7 no plan)a 3.75 1.91 3.76 1.30 6. professional advice (1 used – 7 not used)a 4.29 1.86 4.01 1.69 7. education (1 none – 7 doctorate) 1.86 0.86 1.75 0.73 8. staffing (1 difficult – 7 easy) 5.51 1.22 6.59 3.78** 9. product/service timing (1 introduction – 7 decline)a 3.18 1.35 3.04 1.14 10. economic timing (1 expansion – 7 recession)a 3.39 1.21 3.33 0.91 11. age of owner (number of years) 33.51 9.35 31.91 10.51 12. partners (1 owner 49.5% 2 partners 50.5%) 1.20 0.41 1.23 0.41 13. parents (1 yes parent owned business 45.7% 2 no 54.3%) 1.80 0.39 1.86 0.35 14. minorities (foreigners) (1 yes 15.9% – 2 no 84.1%) 1.96 0.18 1.99 0.09 15. marketing ( 1 unskilled – 7 skilled) 4.25 1.60 4.91 4.43* a note that these are reverse scale items. therefore, a lower number is preferred/expected. significance level ** p < 0.01 * p < 0.05 of the 15 tests of differences, the successful rural businesses have 13 greater levels of resources than failed rural businesses. though the failed rural businesses have 2 greater levels of resources (age and educational level of owners) than the successful rural businesses; the differences are not significant (p > 0.05). thus, the small insignificant differences do not suggest waiting to start a business or that less education improves chances of success. five variables are significantly different at the .05 level, as discussed here. (1) capital. successful businesses in rural communities started with significantly greater capital (m = 4.39) than failed businesses (m = 5.85). as stated as a note under table 3, capital is a reverse scale, and a lower value is preferable. (3) years of industrial experience. the successful rural business owners have a significantly greater number of years of industrial experience (m = 10.92) before commencing their business than that of failed rural business owners (8.11). (4) management experience. successful rural business owners have a significantly greater number of years of managerial experience (m = 9.69) before starting their business than failed rural business owners (m = 7.69). (8) staffing. the result shows that successful rural businesses have significantly fewer difficulties recruiting and retaining quality staff (m = 6.59) than that of failed rural businesses (m = 5.51). (15) marketing skills. successful rural business owners have significantly higher levels of marketing skills (m = 4.91) before commencing their business than failed business owners (m = 4.25). correlations the pearson correlation matrix in table 4 reports 105 correlations, and 33 (31%) are significant correlations (p. < .05) between variables. part of the reason for the high rate of correlations is the sample size. the great the sample size, the more likely the r-value is to be significant, and vice versa (lussier, 2005). the reason why some of the variables are significant is because of faced, near, or just multicollinearity. this happens when an independent variable depends linearly on one or more other independent variables, and without them, the estimate would not occur. for instance, industry experience, management experience, and age of owner are likely to be highly positively correlated. another important consideration is the issue of collinearity. r-values greater than 70% (r = 0.700) indicate high collinearity that is problematic in regression models (lussier, 2005). for the pearson correlation matrix (table 4), we found only one correlation greater than 0.700; (3) industry experience and (4) management experience (r = 0.95). as expected, industry and management experience are collinear since it is not likely to have several years of managerial experience without several years of industry experience (lussier & pfeifer, 2000, 2001). therefore, multicollinearity and collinearity issues should not be a problem for the study, and unlike a simple test of differences, running logistic regression addresses these issues. table 4.correlation matrix 1 2 3 4 5 6 7 8 9 10 11 12 13 14 1. capital 1.00 2. record keeping and financial control -0.13** 1.00 3. industry experience 0.03 -0.29** 1.00 4. management experience 0.03 -0.27** 0.95** 1.00 5. planning 0.09 -0.07 0.03 0.03 1.00 6. professional advice 0.08 -0.21** 0.19** 0.18** 0.26** 1.00 7. education -0.05 0.18** -0.12* -0.12* -0.08 -0.28** 1.00 8. staffing -0.06 0.05 0.07 0.07 0.04 0.10 -0.14** 1.00 9. product/service timing -0.19** 0.01 -0.04 -0.03 -0.08 -0.11* -0.05 -0.02 1.00 10. economic timing 0.18** -0.16** 0.11* 0.07 0.08 0.18** -0.17** -0.01 0.00 1.00 11. age of owner 0.02 -0.01 -0.32** -0.30** 0.01 -0.03 0.12* -0.02 0.14** 0.01 1.00 12. partners 0.03 -0.14** 0.14** 0.10 0.07 0.02 -0.06 -0.04 0.11 -0.06 -0.07 1.00 13. parents 0.02 0.07 -0.10 -0.14** -0.01 -0.05 0.01 0.01 -0.06 0.01 -0.13* -0.13** 1.00 14. minority 0.03 -0.09 0.08 0.03 0.02 0.08 0.00 0.02 0.06 0.14** 0.21** 0.01 0.01 1.00 15. marketing skills -0.11 0.12** -0.01 -0.04 -0.06 0.04 0.04 -0.01 0.01 -0.07 -0.03 0.18** 0.03 0.03 significance level ** p < 0.01 * p < 0.05 logit results of the lussier model table 5 reports the logistic regression of the lussier model with a sample of 230 businesses from rural communities in an emerging market, ghana. the appropriate test for the overall significance of the model is measured by a large -2 log-likelihood (ll) statistic, chi-square, and predictive power. the -2 log ll measures the goodness of fit of the model. chi-square tests whether the combined effects of all the 15 variables in the model are different from zero. thus, if the significant level is less than 0.05 (95% confident interval), with a high accuracy rate, then the model’s explanatory power is robust. table 5.logistic regression model test results (n = 230) model parameter estimates variables name model β model t-sig. 1. capital -0.205 0.034 2. record keeping and financial control -0.138 0.229 3. industry experience 0.197 0.041 4. management experience -0.152 0.121 5. planning 0.067 0.547 6. professional advice -0.032 0.733 7. education 0.825 0.693 8. staffing 0.934 0.000 9. product/service timing -0.127 0.293 10. economic timing -0.004 0.405 11. age of owner -0.073 0.812 12. partners 0.516 0.856 13. parents owned a business -0.567 0.234 14. minority 1.015 0.427 15. marketing 0.239 0.041 constant -7.775 0.016 model test results -2 log likelihood 257.424 model chi-square 59.68 model significance 0.000 pseudo r square 0.1882 classification results correctly classified cases       success       failed overall 71.20% 71.15% 71.18% the results in table 5 report the logistic regression results of the model -2 ll statistics 257.424 (p = .000), chi-squared 59.68 (p = 0.000), and overall accuracy rate of 71.8%. this supports that the lussier (1995) model is a valid predictor of the success or failure of rural businesses in emerging markets. the model is significant as it will predict a group of businesses as successful or failed 99% of the time, and the model will accurately classify a specific business as successful or failed greater than 70% of the time. therefore, entrepreneurs in emerging markets that start with adequate capital, maintain good record keeping and financial control, have industrial and managerial experiences, have specific plans, seek professional advice, educated, have little difficulties recruiting and retaining quality workers, have better product or service and economic timing, have partners, have parents who owned businesses and have marketing skills before starting their businesses can increase their chances of success. significant variables there are four significant t-value variables (p. < .05) that distinguish successful from failed businesses in the rural economy. the variables are: (1) capital (p = 0.034), (4) industry experience (p = 0.041), (8) staffing (p = 0.000) and (15) marketing (p = 0.041). the reduced model function for rural businesses in an emerging markets is: s = f (capital, industry experience,staffing, and marketing skills). the implication here is that these four variables are the most critical success factors for rural businesses in emerging markets. thus, it is recommended that entrepreneurs should start with adequate capital, have industrial experience, with the ability to attract and maintain quality staff, and should have marketing skills before starting their business. discussion the findings of the study support the model validity of prior studies on businesses by lussier (1995), lussier & halabi (2010), marom & lussier (2014). guzman & lussier (2015), hyder & lussier (2016), lussier et al. (2016), and baidoun et al. (2019). one of the most significant variables is capital that contributes to the success of rural businesses in emerging markets. capital is also a significant contributing variable for the success of small businesses in nigeria (adeola et al., 2021; gyimah & adeola, 2021), and other current studies by baidoun et al. (2019) and hyder & lussier (2016); as well as earlier studies by p. d. reynolds (1987), p. reynolds & miller (1989), cooper et al. (1990), and cooper et al. (1991). the study also finds that the industry experience of entrepreneurs can increase the chances of success of rural businesses in emerging markets. earlier studies by barsley & kleiner (1990), copper et al. (1991), g. l. crawford (1974), dun & bradstreet (1995), flahvin (1985), gaskill et al. (1993), hoad & rosko (1964), lussier & corman (1996), mcqueen (1989), rauch et al. (2005), vesper (1990), and wood (1989) also supported that entrepreneurs that have more years of experience in the industry increase their chances of success. in terms of staffing, studies by lussier (1996), lussier & corman (1996), lussier & pfeifer (2001), hyder & lussier (2016), and lussier et al. (2016); as well as earlier studies including bruno et al. (1987), flahvin (1985), lauzen (1985), sommers & koc (1987) and thompson (1988) also found that quality staffing increases the success of businesses. marketing skills, which is also is a predictor of the success of rural businesses in emerging markets, was also significant in earlier studies by bruno et al. (1987), gaskill et al. (1993), and mcqueen (1989); as well as studies conducted by lussier a (1996 a), lussier et al. (2016) and teng et al. (2011) that found that business owners with marketing skills before starting their business contributes significantly to the success of the business. our result confirms prior studies outcomes but also highlights substantive gaps in capacity and resources for rural entrepreneurs, especially those in developing countries. practical implications the study examines the factors that contribute to the success or failure of small businesses in rural communities in an emerging market. capital, industry experience, staffing, and marketing skills are the most significant (t-values < .05) factors that distinguish successful from failed rural businesses in an emerging market. the study concludes that future and nascent rural entrepreneurs should use the model and start businesses with sufficient capital, have industrial experiences with adequate marketing skills, and have qualified staff to increase the chance of being successful. this can help future, and nascent rural entrepreneurs avoid failure and successfully contribute to economic development. moreover, public advocacy organizations in ghana, such as national board for small scale industries (nbssi) and microfinance and small loans centre (masloc), and other ngos working directly in the rural communities should provide capital support by giving low-interest credits or loans to rural entrepreneurs. the ongoing public-private partnership policy on “the one district one factory” initiative in ghana should focus on rural enterprises since they contribute massively to the un sustainable development goals of poverty reduction (sdg 1) and good jobs and economic growth (sdg 8). again, government agencies in developing economies can use the model to assist them in providing training and resources to successful rural businesses and for new ventures that have the potential to be successful so that they can contribute to economic development. government should also provide industrial mentors with vast industrial experiences to rural entrepreneurs to help grow, expand, multiply, and replicate their businesses. likewise, business advisory centres (bacs) of nbssi in the local communities in ghana should organize seminars on how to support entrepreneurs in marketing their products or services that contribute to economic development. furthermore, educational and professional institutions should teach the model and key success factors behind rural entrepreneurship in emerging markets. for instance, technical and vocational education and training (tvet) institutions, senior high schools, training colleges, and universities in developing countries should use the validated lussier model to teach apprentices or learners about the drivers of rural entrepreneurship. lussier’s success vs failure prediction model should be included in entrepreneurship programs and seminars of professional and educational or training institutions. additionally, potential investors or future rural entrepreneurs can use the model to evaluate investment decisions. through the entrepreneurial use of the model, society can benefit directly through job creation and indirectly through local economic growth and development. tax revenues from new ventures can be used by the government to invest in infrastructure to future develop the needed infrastructure to stimulate continuing economic growth. additionally, public regulatory bodies and policymakers should keep stimulating entrepreneurship in times of economic downturn. current and prior bankruptcy and default prediction models are usually based on historical financial records or performance. nascent and future ventures have no prior history, and this strengthens the value of the lussier (1995) model that can be used to evaluate the success or failure of rural businesses in other emerging and developed markets. limitations and suggestions for further research as with all research, there are limitations to this study, so we present limitations here with suggestions on how to improve on these limitations in further research. first, the study only uses a ghanaian sample to represent rural businesses in emerging markets, excluding other emerging or developing countries. future studies can duplicate this study using datasets from other emerging countries to improve the generalizability of the findings in predicting the success or failure of rural businesses in emerging markets. another limitation is the measure of the dichotomous dependent variable (success or failure), where the profitability level is used to categorized failed and successful rural businesses. entrepreneurs must make a subjective judgement on their level of profitability. a similar approach by prior studies by adeola et al. (2021), hyder & lussier (2016), lussier & halabi (2010), lussier et al. (2016), and teng et al. (2011) used the profitability levels due to lack of records of failed businesses. although using profitability is an acceptable methodology when there is a lack of sample information, future studies are encouraged to use the more robust methodology in the original lussier (1995) study. lussier used a two-step sampling process. first, government public record information on chapter 11 and bankruptcy was obtained to identify failed businesses. step one of data collection surveyed failed business owners. the second sampling of successful firms used a matched pairs sampling by locating a successful business in the same industry and area matching it with a previous respondent failed business that completed the survey. thus, the total sample had the same number of successful and failed businesses from the same industry and local area of the country. the subjective measure of the independent variables is another limitation. a 7-point scale is used to measure nine of lussier’s model variables. so judgment is needed, such as rating each variable as high, medium, or low to determine its effect on success or failure. also, when using the model, entrepreneurs are subject to self-perception bias responses that can lead to over-rating the chances of success that can fail. thus, further research should consider developing more objective indicators for measuring the model independent variables, and additional variables can be added to make the model more robust. stakeholders such as government agencies, public regulatory bodies, financial institutions, investors, suppliers, educators, and professional institutions, and entrepreneurs can use the model to evaluate the failure or success of new and nascent businesses. however, based on its subjectivity in the judgement of variable measurement, it is better to use other prediction methods in addition to the lussier model when making decisions to improve the accuracy of the prediction. additionally, the study excludes cultural, regulatory requirements, and economic factors that can affect the success or failure of rural businesses in various countries. further research can include those indicator factors as moderating or mediating or control variables to assess their effect on the probability of success or failure of businesses. conclusion this study statistically tested the lussier success vs failure prediction model in a rural developing country. the logistic regression results are significant (p = .000), and the model will predict a group of businesses as successful or failed 99% of the time, and the model will accurately classify a specific business as successful or failed greater than 70% of the time. this study contributes to the international validity of the lussier model that can be used in both advanced and developing economies, and it contributes to the development of theory. references abebe, g. k., & gebremariam, t. a. 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(1995). critical success factors for small business: perceptions of south pacific entrepreneurs. journal of small business management, 33(2), 68. google scholar powered by scholastica, the modern academic journal management system 61 how do entrepreneurial growth intentions evolve? a sensemaking-sensegiving perspective dev k. dutta 1 university of new hampshire dev.dutta@unh.edu stewart thornhill university of western ontario sthornhill@ivey.uwo.ca abstract in this paper, we develop a process model to explain how growth intentions evolve over the venture’s life cycle. adopting an inductive approach, we use case study data from 30 small and medium enterprises (sme) with an explicit focus on venture growth over five years. three waves of data were collected from the same set of lead entrepreneurs in these firms to identify if and why their intentions to grow their businesses changed over the timeframe. using grounded theory development, we formulate a model characterizing entrepreneurial growth intentions. the model incorporates a sensemaking-sensegiving perspective and is recognized in terms of its constituent 3ps (precursors, process and product), serving to capture the essential dynamic of the entrepreneurial growth intention process over time. keywords: firm growth, entrepreneurial orientation, small business 1 corresponding author acknowledgement: we would like to express our appreciation to the social sciences and humanities research council of canada for providing financial support (mcri grant #412980025) and to the entrepreneurs who participated in this longitudinal study. s trateg y journal of small business journal of small business strategy vol. 24, no. 1 62 introduction while high-growth entrepreneurial firms widely vary across size, sector, and age characteristics, they all need a high level of commitment from the lead entrepreneur to achieve growth (gilbert, mcdougall, and audretsch, 2006; smallbone, leigh and north, 1995). yet, as gilbert et al. (2006) note, research by barringer, jones, and neubaum (2005) shows only 3.5% of the new ventures started each year in the u.s. actually evolve into large firms. entrepreneurs differ widely in terms of their attitudes towards growth (cliff, 1998), need for wealth attainment (amit, maccrimmon, zietsma and oesch, 2001), and willingness to grow (davidsson, 1989). much of what unfolds in course of the history of an entrepreneurial venture is inextricably linked with entrepreneurial intention, i.e. what entrepreneurs think with respect to their ventures and how they act on these thoughts (bird, 1988, emphasis our own). intentions characterize entrepreneurial action and are affected by individual and contextual factors such as social, political, and economic factors, personal history, current personality, and abilities of the entrepreneur, and experience and satisfaction with current job (lee, wong, foo and leung, 2011). intentions are also influenced by the entrepreneur’s rational analytic, as well as, intuitive holistic thinking frames and structures used to make sense of the environmental potential that exists with respect to creating and making a success of the new business (palich and bagby, 1995). focusing our attention on factors that influence the process of evolution of entrepreneurial growth intentions can help to inform us why some ventures achieve growth while others do not do so. therefore, in this paper, we study how entrepreneurial growth intentions evolve over the venture’s life cycle, by utilizing insights from gioia and chittipeddi’s (1991) sensemakingsensegiving perspective. according to cornelissen and clarke (2010), new venture creation requires the entrepreneur to not only develop mental models of the market, so as to identify and act on opportunities, but also situate such understanding in a wider social environment, evoking meaning in line with political interests that matter as far as realization of the entrepreneurial opportunity is concerned. to do so, the entrepreneur: (i) must construct a reality based on his/her beliefs about an emerging opportunity and (ii) be able to articulate the reality to other stakeholders that matter as far as launching and growing the venture is concerned (vaghely and julien, 2010). together, these tasks involve a dynamic process of sensemaking-sensegiving on the part of the entrepreneur (bettiol, maria and finotto, 2012). gioia and chittipeddi (1991) developed the sensemakingsensegiving framework to explain how organizations accomplish strategic change. the first process, sensemaking, is how the organizational leader searches information relating to the internal and external environments and engage in meaningmaking, in order to identify strategic imperatives and a plan for action. the second process, sensegiving, relates to how the leader communicates his/her understanding to organizational members and influence the latter’s meaning-making process. because our study is concerned with change in entrepreneurial growth intentions over time, we adopt the sensemaking-sensegiving framework to understand how this process of change evolves and factors that influence the process. in doing so, we arrive at the 3p model, which suggests three sets of factors journal of small business strategy vol. 24, no. 1 63 drive the evolution of growth intentions over time: precursors, process, and product. growth intentions and entrepreneurial sensemaking-sensegiving new venture growth is a complex process. it is affected by a range of factors: (i) the entrepreneur’s personality, motivation, aspirations, knowledge, and experience; (ii) resources available, from the entrepreneur as well as external sources; (iii) industry and geographical context the venture is located in; (iv) organizational structure and processes adopted; and (v) the venture’s strategy for achieving growth (delmar, davidsson and gartner, 2003; gilbert et al., 2006). entrepreneurial growth intentions exhibit differences, at least in terms of outcomes resulting from them. not all entrepreneurs keep their venture on a continuing growth path. some aim for a target growth in the business and then are engaged in maintaining this level of performance. yet others may exit from the business and having done so, may or may not set up another new venture. thus, the entrepreneurial intention to launch a business is usually followed by decisions associated with growing and stabilizing performance, or the decision to exit the business, as the entrepreneurial firm progresses in its life cycle. when faced with equivocal information or risky situations in identifying and enacting opportunities, entrepreneurs adopt unique categorization and choice processes (palich and bagby, 1995). they use simplified cognitive processes to form perceptions, even though these may cause distortions in viewing reality. in fact, the entrepreneur’s cognitive elements seem to act as enablers, directing the entrepreneur’s efforts in a specific direction (sommer and haug, 2011). thus, potential biases can occur, in that entrepreneurs may exhibit excessive optimism in situations where nonentrepreneurs demonstrate pessimism or risk aversion. cognitive processes, far from being completely rational, tend to overload the information-processing capacity of entrepreneurs dealing with varying situations, thus subjecting them to cognitive bias (baron, 1998). for instance, doern (2011) finds that the ways in which entrepreneurs perceive and interpret barriers have an influence on their intentions to grow their businesses. while these barriers do arise based on the entrepreneur’s disposition, personality characteristics, and prior experience, factors external to the entrepreneur also play a role. for instance, diaz-casero, ferreira, mogollon and raposo (2012) have highlighted the influence of the entrepreneur’s institutional environment where the entrepreneur is based, which has an impact on the entrepreneur’s intention, specifically with regard to the desirability and feasibility of a business idea. entrepreneurs constantly engage in sensemaking and sensegiving as they create and lead the venture through its formation, growth, and survival (bettiol, maria and finotto; hill and levenhagen, 1995). sensegiving and sensemaking are interpretive processes engaged in by the leader, in order to affect organizational change (gioia and chittipeddi, 1991). according to gioia and chittipeddi, “…‘sensemaking’ has to do with meaning construction and reconstruction by the involved parties… [while] ‘sensegiving’ is concerned with the process of attempting to influence the sensemaking and meaning construction of others toward a preferred redefinition of organizational reality” (1991: 442). sensemaking arises when leaders scan the organization’s internal and journal of small business strategy vol. 24, no. 1 64 external environment, in order to discern trends and signals that have the potential to affect the organization, and engage in meaning-making for themselves. sensegiving is the counterpart process that involves the leader’s efforts to shape the meanings of other organizational members, such that the leader’s suggested vision and path of organizational change can be followed. existence of sensemaking and sensegiving as processes characterizing human interpretation, understanding, decision making, and action in systems that involve individuals, groups, and organizations has been well-recognized in prior literature (e.g. craig-lees, 2001; daft and weick, 1984; gioia and chittipeddi, 1991; weick, 1979; weick, 1995). for the leader, sensegiving is triggered by issues he/she perceives as ambiguous, unpredictable, and spanning across multiple stakeholder domains (maitlis and lawrence, 2007). yet, as the leader engages with and responds to these triggers, frequent modification of the leader’s opinions on these issues can give rise to inconsistencies between sensemaking and sensegiving (bartunek, krim, necochea and humphries, 1999). this problem can become especially compounded in entrepreneurial settings, which are characterized by high levels of uncertainty with regard to the market, product, and organizational survival and growth prospects. therefore, for the present study, we adopt the twin concepts of entrepreneurial sensemaking-sensegiving and apply them in the inductive setting of a field study, in order to arrive at insights about the process guiding the changing nature of growth intentions as the firm evolves. the present study approach to the research the present study was conducted on the belief that entrepreneurial intention, being the primary force that guides the action by smes in a volatile environment, is critical in the overall process of entrepreneurial sensemaking and sensegiving. our presupposition is that entrepreneurial intentions itself would emerge as part of the broader process of entrepreneurial interpretation and enactment. growth, evolution, survival, and decline of the sme can be conceptualized as being elements of a broader process of organizational change affecting the firm encapsulated in a wider business environment. prior literature has suggested organizational change involves a dynamic interplay of forces along three distinct but inter-related dimensions – context, content, and process (pettigrew, 1987; barnett and carroll, 1995). context is the situation surrounding the firm the field of forces in which the firm finds itself, which creates conditions for the “why” of change. content and process reflect the internal forces operative in the firm as it responds to change, or the “what” and “how” of change, respectively (pettigrew, 1987). organizations have been classified as interpretive systems, with interpretive processes within the organization shaping its realities (daft and weick, 1984). being the prime driving force within the sme, the entrepreneur’s role in the process of sensemaking-sensegiving can hardly be overemphasized. mental models of individuals allow them to perceive environment on a scale that goes beyond the range of their immediate perception (barr, stimpert and huff, 1992; linan, santos and fernandez, 2011). it is this change schema that guides an individual’s attitude toward change (lau and woodman, 1995). journal of small business strategy vol. 24, no. 1 65 as research methodology, we adopted grounded theory development (glaser, 1992; glaser and strauss, 1967; martin and turner, 1986; strauss and corbin, 1998). grounded theory provides a recognized technique of inductive theory development by giving the researcher ways of developing in-depth explanation of a phenomenon. we agreed with orlikowski (1993) that the three characteristics of grounded theory development – inductive, contextual, and processual – are well suited to developing an inductive understanding of the phenomenon, which within itself incorporates content, context and process elements. following the traditions of grounded theory research (e.g. beyer and hannah, 2002; eisenhardt, 1989), we adopted only a few central a priori themes to inform the research design and data collection process, thus allowing the data to speak for itself. primarily, the following two themes were taken to serve as guideposts to the study: (i) entrepreneurial intentions are modified by the entrepreneur’s sensemaking and (ii) entrepreneurial sensemaking is a dynamic process that changes character with time. with these core themes to guide us, we progressed with three waves of interview data collection by following up with the same group of entrepreneurs. research setting and data collection the research design incorporated a longitudinal, multi-site case study of thirty smes located in western canada. a unique feature of these smes is that just before the commencement of the first wave of data collection, they had secured subordinated debt for working capital from a single venture capitalist, which indicates an explicit intent to grow their ventures. given their focus on venture growth, our chosen sample satisfied the criterion of theoretical sampling appropriate for grounded theory (draucker, martsolf, ross and rusk, 2007). data was collected at periodic intervals (2001, 2003 and 2005) through in-depth interviews by the two authors. all the entrepreneurs have been interviewed repeatedly during each cycle of data collection process. the interviews were deliberately kept unstructured except that the broad domain of questioning included the following pointers: (i) venture’s current profile, (ii) intention towards growth in the upcoming 2-3 years, (iii) involvement of other organizational members on discussions about the firm’s growth strategies, and (iv) constraints that could affect the intended growth. every interview was recorded on tape and then transcribed verbatim. the participants were explained the longitudinal nature of the project as well as assured of complete confidentiality of the data collected. the interview data was supplemented with archival case data on each company. these documents described the company’s history, performance statistics, and web-based data available on the company’s homepage, as well as due diligence reports prepared by the investment managers from the mezzanine financing agency. also, the company’s financial statements were made available to the researchers every quarter during the timeframe of the study. data analysis an independent professional agent (who was otherwise unconnected with the study) transcribed the interview data individually collected by the two authors over the study timeframe. transcription of the data was completed within a month of each wave of data collection (in 2001, 2003, and 2005). each interview transcript thus formed a data file and had a name that incorporated the month and year the interview was conducted as well as the name of the respondent firm. journal of small business strategy vol. 24, no. 1 66 content analysis of the interview data was carried out by both authors, independent of each other. having identified central themes and associated patterns from the data, the authors compared notes, discussing the similarities as well as distinctiveness associated with the patterns. this process of triangulation (jick, 1979; labianca, gray and brass, 2000) allowed us to narrow down the original set of themes into a reduced set containing common themes suggested by several entrepreneurs. in line with established practice in grounded theory development (e.g. gioia and chittipeddi, 1991; labianca et al., 2000), we engaged in both first-order and second-order analysis of the data. “the first-order analysis … tries to faithfully reflect the events that occurred … through the participants’ eyes … this is followed by second-order analysis … in which several themes and schemas are linked in a model of how change occurred. in second-order analysis, the researcher offers and interpretation of what transpired that goes beyond that offered by the informants in the first-order analysis” (labinca, gray and brass, 2000: 242). first-order findings based on the study, the following first-order findings emerged. entrepreneurs begin with an intention to launch or acquire a business. this is almost immediately followed by an intention to consolidate and grow. in terms of their affinity for growth, entrepreneurial intentions may be classified as falling along a continuum – from maintaining stability to going for unbridled growth. at a later stage, there may emerge an intention to diversify or expand the business -in terms of products/services and or geographies. alternatively, some entrepreneurs seem not to adopt the expansion/diversification route but exit from the business. thus, intentions follow a range of growth choices: (i) stability (or zero growth) can be followed by (ii) expansion (or positive growth), (iii) diversification (growth with variety), (iv) consolidation and/or (v) exit. having launched the business, most entrepreneurs focus their attention on the intention to stabilize operations of the new venture and overcome its liabilities of newness and adolescence (bruderl and schussler, 1990). the idea is to develop a sense of security in the business, test the waters as it were, and find out if the venture is going to be profitable and whether setting it up was the right thing to do. thus: “i guess just almost, like, at that stage, it was just about establishing the viability of it. like, on a really basic level, ‘could this happen?’ like ‘could this work?’ and so, the funny part is though that my original business plan has in large part turned out to be accurate, and it’s just funny that it has happened that way.” or: “you don’t know whether a product will be successful or not, so it’s a little harder to plan completely for it … so that’s one of the few things that i see really – we’ve got the representation in place, we’ve got the product, i think, is starting to attention, we’ve got very attractive new buying … getting to the right people ... well, obviously you have to recognize that uncontrolled growth is very dangerous. if you don’t have that understanding, you’re in deep, deep trouble.” some entrepreneurs are intent on expanding their business right after the time the venture is launched. they set ambitious growth targets and seem to believe that it is journal of small business strategy vol. 24, no. 1 67 possible to maintain rapid growth on a continuing basis. thus: “and i wanted to create something that made a difference, but also that was growing… one of the things that we decided is to grow rapidly, to really get a much bigger piece of the pie.” having expanded and stabilized the business, many entrepreneurs aim for further expansion of the business through either product and/or market diversification. this appears to follow a process of successive consolidation and expansion. sometimes, the intention to diversify may arise as a direct outcome of the intent to survive and grow by going up the valuechain. thus: “yes – the company went from what has been described as anything for money, it will undertake any contract where they would be getting paid for their services to one where they evolved to try to develop a product strategy and they had a couple of products, one of which had a competitive advantage and one they didn’t, and then focusing on where they had an advantage… what we decided to do was to expand geographically.” or: “i would say this would cease to be a viable operation if within a year or so we don’t have revenues in excess of two or three million dollars. and to do that we actually need to expand the scope of the services, either geographically or through product lines. and we’re addressing both of those issues as we speak.” having gone through the stages of launch, stability, growth, and possibly diversification, there occurs the stage when the entrepreneur has the intention to exit or intention to divest from the business. the intention may arise because in the opinion of the entrepreneur the business has lost its relevance or because the entrepreneur has found an alternative business idea or venture to henceforth focus his/her energies on. thus: “i’m not sure how long… my personal strategy, which i’ve communicated to all the shareholders, is to actually retire in four to five years.” or: “my personal goal is to back out within two to three years of active day to day and set the company up so the employees can buy it and take over. where do i go from there?… um, well i have some other plans… another passion you can say – that i have been nurturing. and i would like to pursue that as a new business.” to summarize, it appears that after the initial intention to launch the business has been achieved, entrepreneurial intentions do not disappear or remain static. rather, they continually evolve and change with time. while intention to launch is usually followed by intention to stabilize, expand, diversify, and exit at some point in time, these in-between stages may overlap and reinforce each other. for example, an intention to stabilize may actually be motivated by an intention to expand, or an intention to diversify may be adopted as a way of achieving expansion. even an intention to exit a product line or journal of small business strategy vol. 24, no. 1 68 geographical market may be motivated by a need to stabilize and grow the business. having noted that entrepreneurial intentions follow a dynamic process and change over time, the question that arises is why do they change? we find that the change happens as an outcome of interaction of several factors – environment, organization, and the individual entrepreneur. the first category of factors relates to the external environment, i.e. the industry, market, and competition. thus: “the market dictates the products this company develops… it can be episodic at times… if we are successful in endeavors we’ll put more time and resources into it, otherwise not… in this case, the decision was that we were not going to be able to make money, so we decided it was appropriate to close this facility and redeploy the resources elsewhere.” or: “most of it is market driven. it’s based on customers’ needs and the way you address them. if the customers’ needs change, then you have to change with them… you can’t hide in a box… because you are not stuck in some little world, you’re out in everybody’s world all the time and you learn a lot. i mean, the ways other people run their businesses. and they love talking about it. and a lot of them want to share that.” or again: “without resources and team, your growth aspirations remain on paper. you develop a growth plan, but you have to convince your employees about the vision, and then get them to help you achieve it.” in other words, a second category of factors are those relating to the entrepreneurial organization itself. these may include factors such resource availability, the experience, and involvement of the entrepreneur’s management team, the internal organizational processes and capabilities, and learning efforts within the firm. thus: “it goes in cycles. technical side was first. i have an idea how to make that work – how do we turn it from my head into a tangible product? and you see that the evolution of hiring in this company really tells the story as to what was most important… then the next phase comes with: we built technology, proved the concept, we need money. then you hire more people who can harden it off, costs money, now i need more and more money. in the meantime, we had to hire some business development people – sales people – to be able to start looking outward. now we’ve got this product, how are we selling it, who are our partners, how is that happening? then we need more financing because we’re building new generation of products and we now need to enhance who we’re going out to. so it kind of goes around and around in a big circle. but every time it gets more complex, every time. and bigger… and it’s starting to happen simultaneously.” finally, there exist a third set of factors that affect entrepreneurial intentions. these include factors relating to the personal disposition of the entrepreneur or his/her evolving personal situation. some of the factors that we identify in this category are: the entrepreneur’s risk perception, personal journal of small business strategy vol. 24, no. 1 69 involvement, ability to let go of some of the personal involvement with time, and competing entrepreneurial desires such as achieving a balance between work and personal life. the quotes below exemplify this: “so the key thing that’s been important for me, from being hands on this is my baby i keep feeling like i’m taking off jackets every other day… and i have a wonderful management team who is incredibly capable and as we move forward, continue to find exact areas in which they can focus and really add value and i can set that part off in my mind. so, i keep taking off all these jackets and i don’t have to wear them all anymore… i can take some new directions.” or: “i have let go some of the hold in the company… you can’t do everything by yourself – you have to believe in the team you have assembled… and once you realize this, it creates in you a desire to move on and do something different.” second-order findings as part of this analysis, we develop an understanding of the process issues that seem to be driving entrepreneurial intentions in the group of firms comprising our sample. our analysis suggests that the twin processes of sensemaking and sensegiving (gioia and chittipeddi, 1991; weick, 1979) seem to operating in development of entrepreneurial intentions as well as changes in them over time. in their study, gioia and chittipeddi (1991) found that during initiation of strategic change in firms, the twin processes of sensemaking and sensegiving by the firm’s ceo vis-à-vis his/her associates assume critical importance. in view of the fact that in the smes studied by us the entrepreneur performs the most central role and in effect serves as the ceo of the firm, we find a similar set of processes to be operating. however, in addition to what was already noted by gioia and chittipeddi (1991), we find that the twin processes of sensemaking and sensegiving operate in a contextual space spread across multiple levels: the environment, organization, and the entrepreneur. therefore, in our view, the overall model of evolution of entrepreneurial intentions may be characterized as being 3p, i.e. precursorsprocess-product. this is depicted in figure 1. figure 1: the 3p model of evolution of entrepreneurial growth intentions precursors environment entrepreneur organization process sensemaking sensegiving product intention journal of small business strategy vol. 24, no. 1 70 precursors the first p or “precursors” denote those operating contextual factors that we noted in our study. these arise at multiple levels (environment, organization, and entrepreneur) and act as inputs to the next stage, i.e. the “process” of development of intentions over time. this wider context not only includes the individual entrepreneur (in terms of personal disposition, preferences, motivation, aspiration, and skills) but also the environment in which the entrepreneur operates as well as the pre-organization and the organization the entrepreneur helps create. at the same time, these contextual factors continually interact with each other and not just through the entrepreneur, even though the entrepreneur occupies the central position in this classification of contextual factors. for instance, at the pre-organization stage, the entrepreneur combines multiple responsibilities and closely interacts with the environment (customers, competitors, venture capitalists, and banks). however, after the creation of the new venture, the environment interacts with the organization not only through the entrepreneur but also directly. thus, entities operating in the environment such as the venture capitalist or the bank work with the entrepreneur as well as with other organizational members such as the firm’s management team. it is important to recognize the existence of multiple inter-linkages amongst the precursor variables, because this helps us to conceptualize the complex nature of the precursor influences on the process of intention formulation and its evolution and change over time. process the second p or the “process” comprises the actual process of intention development and modification as engaged in by the entrepreneur under the influence of precursors, and in association with his/her employees. we found that the actual process of evolution of entrepreneurial intention involves a circular relationship between sensemaking and sensegiving, even as it operates within the wider contextual arrangement of the three precursors (environment, organization, and entrepreneur). thus, on the one hand the entrepreneur is engaged in interpretation and sensemaking of external stimuli (e.g. opportunities) as well as his/her internal aspirations with respect to creating a new venture. on the other hand, the entrepreneur must engage in sensegiving towards other critical stakeholders (e.g. venture capitalist, bank, government, customers, and employees) who help and support are required in this process of creation of the new venture. we also found that the twin processes of sensemaking and sensegiving not only influence each other but also feedback on to the precursor factors. thus, for instance in view of sensemakingsensegiving the entrepreneur’s personal disposition and/or motivation to create a new venture may undergo change. if the market conditions are interpreted to be extremely hostile at that point in time the entrepreneur may decide to give up the objective of creating a new venture. similarly, if an entrepreneur believes that support from a venture capitalist is difficult to come by, he/she may decide to scale down the operations of the venture to be created and commence operations on a smaller scale than what was anticipated before. product the third p or the “product” is the intention. in our conceptualization, product denotes not only the intent in the mind of the entrepreneur to create, expand, or exit from a venture but also the resulting action. not only is the process of emergence of intention highly dynamic (arising as the outcome of the circular sensemakingsensegiving loop) but, in turn, it also feeds journal of small business strategy vol. 24, no. 1 71 back into the prior stages (precursor and process). for example, having developed an intention to launch a venture, the entrepreneur may be successful in ensuring a supply of critical resources from partners in the external environment (e.g. venture capital, human resources, and supplies). similarly, having recognized an intention as it emerges and taking a series of action that lead to certain outcome, the entrepreneur’s subsequent sensemaking and sensegiving may be affected. conclusion contribution in this paper, we used an inductive, grounded theory approach to explain how entrepreneurial growth intentions evolve as a process. our longitudinal study of the same group of entrepreneurs over a fiveyear timeframe suggests that: (i) entrepreneurial intentions are not static but follow an evolutionary path, (ii) the overall process of evolution of entrepreneurial intentions is characterized by three stages or the 3ps (precursors, process, and product) with associated feedback loops, and (iii) the overall model is complex and incorporates inputs from multiple levels (environment, organization, and entrepreneur). by focusing too much attention on the initial entrepreneurial intention leading to creation of a new venture, extant research has rather neglected the issue of how or why intentions change with time, especially regarding the growth aspirations of the new venture. we believe that the first contribution of our study is in attempting to bridge this gap in the current state of the research on entrepreneurship theory. the inductive, longitudinal nature of our research allows us to study the dynamics associated with entrepreneurial intention as it evolves over time through a process of entrepreneurial sensemaking-sensegiving. our second contribution is in developing the 3p process model, which serves to capture the essential dynamic of the entrepreneurial growth intention process. specifically, this is achieved through the 3ps precursors, process, and product – of intentions as well as in terms of the interactive loops and feedback linkages that are depicted in the model. in developing the 3p model, not only are we able to trace the evolutionary path of entrepreneurial intentions but also comment about its multidimensional nature that spans across multiple levels of analysis environment, organization (which also includes the preorganization), and the entrepreneur. we believe that this opens up exciting possibilities for future research, both toward theory building as well as empirical testing of relationships of antecedents of entrepreneurial growth intentions and contingencies on the process. directions for future research given its exploratory nature, the present study has concentrated its efforts in developing an indicative, overall model of how intentions emerge in entrepreneurial firms. the resulting conceptual model developed is anchored in field-level data gathered over a five-year timeframe. as such, it provides us with a description of the processes engaged in by entrepreneurs in our study. at the same time, our study does not propose any specific hypothesis to speculate upon the nature of specific relationships between the chosen constructs. we suggest that this can be taken up in a subsequent study. as a follow-up research, the following directions are proposed. first, it may be worthwhile to conduct a qualitative study that focuses on understanding the precise nature of the relationships within as well as journal of small business strategy vol. 24, no. 1 72 between the 3ps. more specifically, the challenge will be to understand how these relationships cross multiple levels of analysis. similarly, it will be important to understand how the twin processes of sensemaking and sensegiving relate with each other across multiple levels (individual entrepreneur, organization, and the wider environment incorporating the venture’s external stakeholders). future research could take this up. limitations our study has several limitations. first, given its exploratory nature, it is a “macrolevel” study that aims to identify the overall process characterizing a phenomenon of interest (entrepreneurial intentions). to achieve this overall understanding, the study sacrifices “micro-level” detailing of specific relationships that may exist between the constructs identified in the model, which we have suggested can form the basis of future research on the phenomenon. second, in order to isolate the characteristics of the phenomenon under study, we concentrated on a small, purpose sample: fast-growing entrepreneurial firms based in one canadian province that had accessed mezzanine financing from a single venture capital agency. this makes it difficult to generalize to the population based on the sample. it is possible that entrepreneurial firms in other operating contexts may exhibit a somewhat different process of actual evolution of entrepreneurial intentions over time. finally, the sample of firms that we studied has a survivor-bias in that we have not been able to investigate the process of intention formulation in companies that have gone out of business. even within our sample, while we expected to find instances of exit decisions (at least with respect to market segments and/or product lines), we noted that very few entrepreneurs talked about the intention to exit. this perhaps is a characteristic of our sample. as our study is based on a sample of high-growth firms, by definition intention to exit would not prevail in such firms at the time of conduct of the study. insights for practice our research has several implications for practitioners. first, it suggests that even though an entrepreneurial firm is launched by achieving a match between the initial vision and motivation of an entrepreneur and opportunities identified in the external environment, entrepreneurial intentions do not remain static but evolve with time based on a complex process that incorporates several parameters. in that sense, the continued existence of an entrepreneurial venture is very much an outcome of interaction of a series of environmental, organizational, and entrepreneurial factors. in other words, our study reiterates the importance of incorporating into assessment of new venture creation and sustenance factors that transgress the individual entrepreneur. second, our study clearly suggests the importance of understanding the process nature of the phenomenon. therefore, practicing entrepreneurs stand to gain if they focus not just on the expected outcomes of their decisions but also the processes associated with them. specifically, it becomes extremely critical to understand how the twin processes of sensemaking and sensegiving operate and not just within the entrepreneurial mind but in the wider cognitive system incorporating other external stakeholders as well. we believe that entrepreneurs intuitively do this already. however, our research indicates possible reasons behind why entrepreneurs may be doing so. it also indicates what the results of such deliberations may be, as far journal of small business strategy vol. 24, no. 1 73 as evolution of entrepreneurial growth intentions over time is concerned. references amit, r., maccrimmon, k.r., zietsma, c., & oesch, j.m. 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(1979). the social psychology of organizing. reading, ma: addison-wesley. dev k. dutta is an associate professor of strategic management & entrepreneurship in the management department at the peter t paul college of business and economics, university of new hampshire. he brings with him about fifteen years of professional experience as a strategist and about twelve years of academic experience in strategy and entrepreneurship research. he research has been published in many peer-reviewed journals, including the journal of business venturing, entrepreneurship: theory & practice, and the international entrepreneurship and management journal. he regularly presents his research at national and international conferences such as the annual meetings of the strategic management society, academy of management, academy of international business, and the babson college entrepreneurship research conference. stewart thornhill, executive director of the pierre l. morrissette institute for entrepreneurship, is associate professor of strategy and entrepreneurship at the richard ivey school of business, western university, canada. a leader in executive education, dr. thornhill is faculty director for the maple leaf leadership academy, industry canada's executive learning initiative, and the atco strategic leadership program. other corporate clients include the toronto dominion bank, bell canada, newalta, magellan aerospace and the globe and mail. he also works with entrepreneurs leading canada's fastest growing companies through the annual quantumshift™ executive development program. reproduced with permission of the copyright owner. further reproduction prohibited without permission. str'ateoy credit management strategies for small firms frederick c. scherr west virginia university abstract when a small finn sells goods or services to another firm, ir generally grants trade credit to tlie buyer fvr these purchases. while the academic and practitioner literature on credit management for large firms is voluminous, rhere is little in ibis literature which suggests appropriate credit invnagenient strategies, given the particular characteristics of the small finn. set eral characteristics of small firms can lead to advantageous credit policies which are differenr from larger firms. among these are rerurns-to-scale problems in adopting several credit management strategies, manogement which iias limited erperrise iii finance, and resrricied access to ourside financiiig. in this paper, the effecrs vf these differences oii trade credit straregy are considered. pour areas of credit strategy are analyzedi credit investigatioii arid risk assessment, credit-granting decisions, cvllectivns, and bearing credir risk. the paper irresents and cririques trade credit policie~ for the sniall firinin each vf these areas, iiicluding pvlicy alternatives which invvlve the outsourcing vf one or niore aspects of credir management. introduction when one business sells to another, the buyer typically purchases on trade credit. the accounts receivable created when trade credit is granted is a major asset for those small firms who sell to other businesses, and the selection of appropriate strategies for the management of these receivables can enhance the firm's chances of survival and growth. there is little in the litcraturc to guide the small firm's owner/manager in the selection of advantageous credit managcmcnt strategies. articles in academic and practitioner small business journals usually outline the basics of credit management (for example, atkinson, 1992; knowles, 1989; and faria, 1976) or descnbe the credit management methodologies used hy larger lirms, ignoring the imponant differences between large and small firms (for example, "effective credit policics: maximize sales and minimize bad debts," 1987). further. texts in the linancial management of small 1mns tend to treat credit managcmcnt lightly, concentrating instead on the problems of raising funds and of evaluating capital investments.'n this 'or example, walker and petty, 1986, devote 10 pages to credit managcmem, 122 pages to raising funds (exclusive o( capital structure decisions, which are discussed separately), and 31 pages to capital hudgcting. 33 nonnativc paper. wc prcscnt some prescriptions i'or advantageous credit management strategies for small linns. drawing from the larger literature on credit managcmcnt i'or large lions and contrasting strategies between large and small. the paper deals cntircly with the granting of credit rather than the inanageinent of credit received i'rom other firins. characteristics of small firms which influence credit policy there are several differences between small firms anil large which make small i'irms'redit policy decisions unlike those of larger fiona. the i'irst crinccrns a rctuins-to-scale problem in employing inany credit managcmcnt icchniqucs. crct)it inanagcmcnt strategy largely concerns thc control of credit-related costs. two major types ol audit-rclatcd costs are had debt expense and accounts rcccivablc carrying costs, both ol'hich arc proportional to the dollar value ol'hc firm's receivables portfolio. bad debt expcnsc rcprcscnts thc portion of'ccountsrcccivahle that go uncollcctcd because customers dcl'suit. thc largm'hc accounts rcccivablc ponfolio, the greater thc number of such defaults and thc highm thc dollar bad debt expcnsc. accounts receivable carrying costs rcprcscnt the time value of money for investmcnt in thc accounts receivable asset, and are coinputed as a required return times the dollar investment in accounts receivable. thus, the larger the portfolio, thc greater arc accounts receivable carrying costs. (for morc discussion of these costs, sce schcrr, 1989a, pp. 159-165.) many credit strategies reduce these costs but rcquirc that the lirm bear other costs which arc lixctl in nature (a good exainple of this is thc hiring of a professional credit manager to make credit decisions). since the receivables ponfolio of the small lirm is sinaller in dollar amount than that of the larger i'inn, the smaller lirm is at a returns-to-scale disadvantage in reducing bad debt and accounts receivable carrying costs by employing credit strategies entailing such i'ixcd costs (mian & smith, 1992). the second difl'ercnce concerns the expenisc ol'he small 1irm's owner/manager. the owner/manager's knowlcdgc is typically centered in the product or scrvicc sold. few iiwncr/managers of small firms have thc level ol''inancial cxpcrtisc necessary to perl'orm thc type of'crctlit analysis undcrtakcn at large lmns. this is partly because owner/managers seem to firn) thc credit i'unction particularly distasteful and avoid it (grahowsky, 1976). i.inally, hccausc of agency problems and problems in thc transmission of information and in monitoring thc firm, small linus will have higher costs of cxtcrnal capital than larger linus of the same business and iinancial nsk. owners of small limis have both a grcatcr ability to alter the i'inn to bcnclit themselves to the detriment of outside investors and a grcatcr incentive do so. also, outside investors typically have less ability to assess thc risk ol'he small liim than thc larger finn bccausc the small finn does not gcneratc the plethora of audited linancial suucmcnts and other reports that larger firms do. investors musi price these factors, and thus charge morc for funds. (see pettit and singer (1985) and ang (1991/1992) for literature rcvicws of these and other differences in financing large and small firms.) the result is that, for small firms, internal cash liows arc by far thc least expensive source of'inancing; small lirms follow the pecking order i'inancing strategy dcscribcd by 34 myers (1984). however, unlike external ltnancing, the amount of internal linancing available is lirniled, as it comes from the firm's cash f)ow stream. the result is a considerably greater concern for safeguarding the cash flow stream, a concern which needs io be manifest in the i'inn's credit policies. credit strategies for small firms mian and smith (1992) define credit management as involving the i'ollowing i'unctions i. credit investi ation and risk assessment: who performs this and how investigation and assessment are performed (what sources of information arc used, ctc.). c~dh i: h d id. hi h ppii" . k' 'i,h hi.d is suade, how much credit is granted, and thc terms under which credit is granted. 3. collection: who perl'onus it and how it is to hc performed (what collection strategies arc lo bc used and the tnning ol'hcsc straicgies). ~a'»dk:hksh issih.»dr thc selling finn has many altcrnativcs in managing each ol'hese i'unctions. these altcrnativcs arc of two general types. thc lirst arc internal alternatives: dilfercnt ways of performing the lunction in-house. the second arc outsourcin alternatives: contracting out all or part ol'a particular function. mian and smith (l 992) consider thc outsourcing alternatives. they point out that thc outsourcing aspect of credit policy has lo do with the costs and risks of credit-granting and who bears these costs and nsks. the ltmi may choose to bear these or it may contract with an outside ugcnt, paying thc agent to bear them. whether it is advantageous for thc lirm to do this depends on whether it has a comparative advantage in bearing the costs or risks itscll'. (that is, whcthcr it can do the job morc cheaply than an outsider.) the amount ol this comparative a&lvantagc, we will argue, is greatly affcctcd by thc characteristics ol'mall i'irms previously discussed. mian and smith reason that thc various institutional arrangements which sun'ound trade credit arc actually mechanisms lor all stealing costs and nsk between the firm and outside contractors. they generate a very interesting table which relates some institutional outsourcing alternatives to the four credit i'unctions previously discussed; these relationships arc presented in table i. mian and smith also consider another dunenuon ol'radlit ntnnagentent, who finances the accounts reccivahle nsset. while finanmng consideratioiis are imponant to thc hnrdu firm, wc wish to concentrate solely on the asset manngement rather than linancmg aspects of credit pohcy. and thus exclude such considernuons from our analysis. 35 while these institutional strategies are i'amiliar to most readers, this table is very uscl'ul i'or thinking ah&iut credit manag«ment policy decisions which involve outsourcing;u&d their relationship to thc lirm's crisis and risk. thc polar opposites are "crcncral corporate crctfii", i'or which nothing is outsourccd (the seller performs all the functions and bears all thc costs and risks) and "non-recourse factoring," where everything is outsourced. note also that some of these stratcgics are not mutually exclusive, and that the firm can combine them to change the allocation of costs and risk. for example, the linn can use a credit information l&rm tn collect information and a credit insurance linn to bear risk while retaining thc other func&iona. onc imponani consideration in formulating credit policy regarding thc four credit i'unctions is whether to utilize an outsourcing alternatives or to employ an internal mechanism to manage thc funciion. credit investigation and risk assessment the first ol'hc four functions is credit investigation and risk asscsstnent, which involves the collection and evaluation of information rclcvant to the customer's ability io pay and its policies with respect to making payment. this information is accumulated, then analyzed to provide an assessment of likely payment time and credit risk. ~c'di t st:&».t:.g'''dt lt:., t;hdh':h acumen, payments to thc trade, the linancial health ol'hc business and ilh owners, and so finch are collected. some informaiitm of this sort will have bccn accumulated as pa&t ul'hc selling prt&cess; contacts bctwecn salespeople and the buyer allow thc seller to acquirc insight into th« buyer's competency. this knnwledge can come from thc seller's intimacy with thc marketing channel in which it operates (smith «c schnuckcr, 1994), or because the salesperson visits the account regularly and is able to monitor its credit worthiness on a continuing basis (mian 8c smith. 1992). such knowledge can provide valuable clues regarding credit risk. when the scllcr knows that "they have to pay because their hank won't give them i'inancing without sccing 'paid'nvoices" or that "they have to come hack hccausc wc have the best puces on sheet rock," credit risk is less &lain it woultl be othcrwisc.i however. when thc amount ol'credit to hc granted is large, it is advantageous to accumulate other data on thc buyer, including inl'om&ation on financial health and payments to thc trade. onc alternative is i'or thc scllcr to make inquiries directly to other suppliers, the buyer's bunk, court records. and other inl'onnation sources. unlike inl'ormation gleaned as a byproduct of the selling process, such efforts are ct&stly in iimc and money. large sellers frequently make such direct inquiri«s in the management of their credit risks. alternatively, ihe scllcr may employ credit inl'onnaiiot& vendors (such as dun and brads&rect or trw) to colic«& all or parts of this inf'ormation. for tl&e small i'irm, this strategy is likely to he less costly than accumulating this inl'ormation in-house (for discussion, sce 'hese and &nher examp&eh uf small husiness credit pmctice used in this paper uere suggested hy an annnynutus i'h'vlltt'cr. 36 golob, 1987). there are huge returns to scale tn credit data gathering, making the per-unit costs of data gathering by the small firm considerably higher than for the commercial data vendor or for the large firm with many customers to investigate. however, information collected by credit information vendors is neither as timely nor as need-specific as when the small firm itsell'ollects information at the time the credit decision is being made. blending specific credit information with that obtained i'rom credit information vendors may be necessary to offset these madequacics. risk assessment. this process turns credit information into an assessment of credit nsk. internally, the owner/manager can perl'orm this task or can hire a credit professional to perl'orm it. again, returns-to-scale are an important consideration. prot'cssional credit managers turn credit information into a risk assessmcnt by applying reasonably sophisticated analysis (christie & bracutt, 1986). in general, thc owner/manager will not have this expcrtisc, and will make errors in credit decisions that someone with this expcrtisc would not make. these errors are costly in terms ol'ad debt loss and accounts receivable carrying cost, both of which are proportional to the size of the receivables portfolio. the smaller the receivables port('olio, the less likely that expenditure ol'hc lixed cost ol'employing a credit analysis is advantageous. (il'his is so, smaller firms should recognize the tradeoff and bear greater bad debt costs and carrying costs than larger firms. there is empincal evidence that such costs are. in fact, higher for smaller firms; scc grabowsky, 1976.) if a credit manager is not hired, the owner/manager or some other internal employee can perl'onn thc risk assessment task. however, there is an outsourcing alternative some connncrcial suppliers of credit inf'onnalion also provide indices of credit nsk which are intended to summarize the information they provide into a smgle risk score. (good examples ol'his are the dun and bradstreet "paydex" score or dun and bradstrcct rating.) by employing these indices as assessments of'redit risk, the small firm avoids the problem of inexpert in-house risk assessment.'owever, there are two dilficulties in basing the lirm's assessment ol'redit risk on these commercial indices. first, these indices are only rough indicators ol'credit risk. en'ors in credit risk assessmcnt (relative to what would be best for the finn if a complete credit analysis were performed), and consequently in credit decision-making, are a likely result. second, when risk assessment is outsourced. there is no direct way for the owner/manager to incorporate the special knowledge gained during the selling process mto the risk assessment. credit granting decisions credit grantmg decisions arc based on the tradeoff between the costs and risk of granting credit (credit risk and accounts receivable carrying costs) and the benefits of making the sale. these benefits may include short-term profitability considerations ("they are buying 'ee "the nnpnct of online business mformatton on the commercial user" ( l 987) i'or n case study of a small firm's credit approval system based on such indices nore that non-recourse factonng also performs the credit mvesttgauon and assessment funcuons, but also requires that the firm give trp other credit funcnons we defer discussion of non-recourse factonng to a specml section later in this paper 37 last year's model and we need thc warehouse space") or longer-tenn benefits ("we haven't sold in that rcginn before, and we can talk about it to other customers"). the firm must decide whether credit is to be granted, how much credit is to be granted (thc "credit linc" or "credit limii"), and thc terms under which credit is to be granted. who cts credit and how much credit is ranted. during this step ol'he credit evaluation process, thc risk assessment is turned into an assessmcnt of credit-worthiness. like risk assessment itscl1', the prot'cssional credit manager is likely to make more advantageous decisions than the small firm's owner/tnanager, hut at a substantial fixed cost. however, there arc strategies which allow thc seller to cl'i'ectively outsource the credit-granting decision. numerous pc-based commercial decisirm support systems arc m&w available to aid decision-makers in making credit-granting and medit-linc decisions.s these systems vary greatly in complexity; some utilize expert systems technology to replicate the judgment ol'n experienced credit manager (for discussion sec srinivasan dz kim, 1988) or give resulhs based rm previously-dcvelripcd siatisticul credit-scoring models (such us altman's z score; altmtut, 1968) some require exlensivc credit investigation, while others employ only a few pieces of credit inl'ormation in their decision methodology. these decision support systems arc not without their drawb;u:ks. the major cost of employing these systems to make credit decisions is not the system's acqui si ti on or application, hul the coal of the inappropriate decisions thai sometimes result iroin these systems, relative to what a cnmpctcnt credit manager would recommend. a wide variety oi'types of information can be rclcvant to credit-granting decisions, but any credit decision support system must inevitably incorporate assumptions io limit this domain. these tassumptions may or may not bc appropriate for specific decisions, and thcsc systems have no "cr&mmon sense" tri make thc necessary adjustments (coats, 1988). credit tet&t&s. while thc small business must generally meet its competition in tcnns of the number ol'days it allows buyers io take before payment, a ma)or question is whether thc sellm should oflcr a "cash" discr&unt for payment made in a shorter lcl1glh of time (i'tn example, a two percent discount i'or payment made in 10 days).'wo differences between small »nd large firms argue that small i'irma should i'ind thc use ol'cash discounts to bc more attractive than lurger iinns, despite the very high cost of such discounts (the yearly cost ol'hc discouni i'or terms of 2 percent 10 days nct 30 days is over 40 percent). the iirst dilference has to do with thc small firm's great&r reliance rm internal cash ilows. because cxternul iinancing is very cxpensivc, the small firm needs to recoup cash from 'for rcccnr revi ws of tive such syuernv, sec ecredtt vconng and armlysrs. 1999 sofrwarc reviews," 1999 meall 1199&) also presents overviews ol several computer-hnsr:il sysrcrns intvrtded to aisisr,mall husrrmsvcv wnti crerlit-grantmg decisinnv nnd other cre&hr i'uncrions * 'gcttrng customers ro pay on rirnc how ro rricrease your cash tlow and profits," 1990, suggcsrs that offcnng cash discounts is an ailvantagcous straregy for small firms 38 sales as quickly as possible to linance itself. therefore small firms should be more willing to bear the substantial cost ol'hc cash discount than larger firms second, when lacking thc expertise of a credit manager. ihe small linn's assessment of buyers'redit risk is less accurate, and the taking or skipping of thc cash discount provides an important and useful signal concerning thc buyer's true credit nsk (smith. 1987). collection decisions in practice. thc collection function is dichotomized into two types of collections: routine collections from ongoing customers and collections from accounts which are no longer purchasing from the scllcr and for whom standard collection efforts (tclcphone calls, letters. etc.) have failed (scc christie and bracuti. 19b6, pp. 495-499). unlike many of the other credit functions. where financial expertise, returns to scale, or cash liow considerations arc imponant, routine collections can usually be economically performed hy thc small firm, and only in special cases is it cost effective to outsource this function. thcrc are a i'cw special collection methods that sometimes produce better results, but most of'hc basic collection techniques are straightf'orward (for dcscnption, sec christie & bracuti. 19g6, pp. 479-514). however, once standard collection tcchmques have bccn exhausted, it is advantageous for thc small firm to utilize a collection agency in i'unhcr anempts to collect the debt. when routine collection cl'i'orts i'ail. the next steps generally involve special expcrtisc in collections (visiting thc debtor to prr:ss i'or payment, ctc.) or suing the debtor i'or payment. most small firms do not have the legal aiul collection expertise necessary to perform these functions in-house, but collection agcncics specialize in such matters. (for more on collection agencies and what they do, scc christie and bracuti, 19gfx pp. 497-499 and 513-514.) bearing credit risk ol'all the contrasts bctwcen appropriate credit policies for large and small firms, the greatest difl'ercnce occurs with rcspcct to bearing credit risk. because their costs of external capital are so much higher than large linns, small linus must rely morc heavily on cash inliows from sales, which come to the linn via the collection of trade receivables. the default of a debtor rcduccs these collections. the small linn should therefore be much more averse to credit risk than thc large lirm thus. while thc laige finn may choose simply to hear the credit risk. the small firm should be morc inclined to lind a hcdgc against this risk. both external and internal hedging strategies arc availablc. externally, thc linn can outsource the bearing of this risk by purchasing credit insurance. credit insurance is available for thc firm's entire receivables portfolio or i'or specific customers, ihough such insurance is costly (mian & smith, 1992). another alternative is to accept business purchasing credit cards or personal credit cards in payment i'or iradc purchases. acceptance ol'hese cards is predominant in retailing, where most small i'irms have adopted them in lieu ol'ther credit arrangements. 39 while the credit card issuer bears the credit nsk and pays quickly, thc principal disadvantage of thcsc cards is their cost, which is typically 1.75-2.5 percent ol'ales for business purchasing credit cards (blcaklcy, 1995) and 3-4 percent of sales i'or personal credit cards (wcredit cards and small business," 1987). accepting these cards for purchases is equivalent to advance non-recourse factoring, a topic to be discussed in detail later in this paper. there are also internal policy mechanisms that can be used to limit credit risk. the most common is to impose a credit limit on each debtor and enl'orcc this limit by requiring payments il'he debtor's balance excccds the limit.'he cost of this, siratcgy is lost sales. ii' debtor places an order which results in its balance exceeding ihs crfxlit limit, cvcn though the debtor's account is not past duc, enforcement of thc credit limit requires that thc debtor make a payment to reduce the balance. from a cash flow standpoint, rather than make the payment the debtor is better off ordering from a competitor, and i'requently docs. when thc amounts ol'hese lost sales arc large (as when the debtor is a major customer but cntails substantial credit risk), the purchase of credit insurance may offer morc advantage than enforcing the credit limit, even allowing i'or the cost of this insurance. when the buyer is incorporated, another mechanism which can he used to limit risk is to obtain a personal guarantee of the debt from the owner. this guaruntce enhances thc likelihood ol'collecting the debt and increases thc recovery if the buyer del'aults. (sce scherr, 1989b, i'or analysis of the cfl'ects ol'ersonal guarantees and similar strategies on credit-granting.) on non-recoi)rsye factoring prior discussion suggcstcd that, while there arc internal strategies which will achieve many ol'he same results, there are advantages to thc small i'inn in outsourcing all credit functions except routine collections. using non-recourse factonng outsources all of thcsc i'unctions (though routine collections are also passed on to the facior). yct only a tiny fraction ol'mall non-retailing firms usc i'actoring." why don't more small lions usc non-recourse factoring'? one possibility is that small firms may iind advantage in retaining some credit i'unctions but not others. another explanation is that, because thc factor's margin on the sale is less than the selling i'irm's, the i'actor can bear less credit risk. as a result, factors'redit-granting policies may be too conservative i'or many sellers. 'ee reranek and schcrr 11991)for discussmn of the venous types ol credit limits and then use hy large firms nn&l scherr (1992) for discussinn of credtt tom ts stralcgy and development of a mathernancal model for settmg crcdn ltrntts "the federal keserve's annual statistical ruttettn estnnates that only 888 billion irt rccetvables, whtch ts a very small fracrton of tourt business rccctvahles, were lactored in 198s; see mian and smnh, 199', p. 1911 40 still another explanation may lie with the reputation of factoring as a high-cost strategy (farringer, l986). when i'actoring is discussed, the costs typically quoted are for advance non-recourse factoring. in advance i'actoring, in addition to performing credit functions, the factor buys the receivable on a discounted basis and pays immediately, providing financing for the linn. the fees for this financing function, along with i'ees for credit functions, result in fairly large total costs (see smith & schnucker, 1994. for discussion of this point). however. the rclcvant cost i'or credit management services only is much lower; farringer (l986) estimates that the typical factor's i'ee for credit functions is only one percent of thc face value of the receivable. despite the problems in differing incentives and consequent credit-granting decisions bctwccn thc finn and the factor. this is a reasonably auractive level of cost for many stnall firms in return for performing credit investigation and risk assessment, making credit granting decisions, performing collections, and bearing credit risk. implications for practice several factors make thc small firms'hoice ol'redit stratcgics quite different from that of larger linns. small firms have limited cxpertisc in financial analysis, face returns-to-scale disadvantages in managing credit, and have morc difficulty in raising funds externally than do large firms. thc challcngc to thc small fimi's owner/manager is to formulate an effective credit strategy that reflects these factors. this strategy can utilize mechanisms internal to the firm or can cotnbinc thcsc with outsourcing alternatives. this article generates policy recommendations for small firms based on the trade credit literature. the resulting recommendations, minus their rationales (which are given in the body ol'he paper), are presented in table 2. this table assumes that the seller does not employ a professional credit manager and that the seller chooses not to accept corporate credit cards or utilize non-recourse factoring, each of which extcrnalizes all credit functions. 'in any case, the small firm needs to consider carel'ully the benefits and costs of alternative credit management policies in developing its credit strategy. 41 tahle i inrlinnirma! oulsaarcing a!ternati l es fnr credit managelnenr credit managcmcnt who docs who makes who docs who bears strategy credit credit collections? credit investigation granting risk' and risk decisions? assessment'! general corporate firm firm i' l'nl i irm crctlit usc ol'a credit credit firm i'i l'nl ftfn1 inlol'nnnlon irllln inlollrnnton i irm use of a collection firm fl i'irl collection firm agency agency usc ol' credit fi i'nl finn inl i'nl credit insolllncc conlptnly hlsalanlcc conlpany rccoui'sc i'aclol'ing firm fiml factor f1 sin non-rccoufsc i'actol factor factor i actor fucioi1flg scarce: adapted i'rom mian and smith (l992k 42 table 2 trade credit policy recomntendationsfor smrtll firnis policy reconnncndation 1. credit investigation and risk assessment a. investigation purchase credit inf'onnation from commercial credit inf'ormation vendors whmtcver possible. b. risk assessment usc a commercial index (fmb rating, paydex. etc.) to summarixc many aspects of credit risk. 2. credit granting a. who gets credit usc commercial decision softw«re to make credit-gr«nting decisions and to assign credit limits. but bcwarc of thc limited dmnain of these systems. b. credit terms usc cash discounts, even if larger coinpctitors do not, to spccd collections and provide inl'ormation on the credii worthiness of'uyers. 3. collections a. routine collections perl'orm thcsc in-house. b. collections from outsource these to collection «gcncics. defaulted buyers 4. bearing credit risk i:mploy crctlit limits to limit losses in dcl'suit. howcvclx wlit'll clilof'ci fig ii credit limit icsults in lost sales i'rom a major customer, use credit insurance instead. consider requiring incorporated buyers to provide personal guarantees. 43 rfferences altman, e.i,, (1968). financial ratios, discriminant analysis and th«prcdiction ol corporate bankruptcy. journal of finance, september, 589-609. ang, j.s. (1991/1992). on a theory of finance for privately held lirms. journal of small 13usincss finance, l(3), 185-203. atkinson, j.a. (1992). giving credit where it's due. small business~re orts, junc. 15-19. beranck, w.b., 41'c i .c. schcrr (1991). on the signilicance of'rade crctlit limits. financial practice and etlucation, fall/winter, 39-44. blcaklcy. f.r. (1995, junc 14). when corporate purchasing goes plastic. wall sticct journal, b-l, b-9 christie, c).n., 8t a.e. brucuti (1986). credit executives handbook. columbia, mdz credit research foundation. coats, p.k. (1988). why expert systems fail. financiul mana ycmcnt, autumn, 77-86. c d -. dx i: il6 xl .;. j)947).c~nmzaa, iyh;my. j3). credit scoring and analysis: i c/95 software reviews (1995). businchs crctlit. may. 20-23. ef'fcctivc credit policics: maximize sales and minimize had tlchts (1987). small business ~rc orts. july, 50-53. faria, a.j. (1976). reducing bad-check losses: some practical guitlclincs. journal ol'small 13usincss mana emcnt, january, 7-11. farringcr, e. (1986). factoring accounts rcceivahlc. journal of cahh mana einent, march/april, 38-42. geuing cusiomers to pay on tiinc: how to increase your cash i'low and prolith (1990). prof'it-buildin strate ics for small business. july, 5-7. 9 i h. a. )i9n7). th dl d i . ~cdi m 6 "«, )7 6: 9-3f). grahowsky, 13.j.(1976). mismanagcmcnt of accounts rcccivable hy sinall business. journal ol'small business mana cment, october, 23-28. 6 i:,l)w t)9n9) c ii » 9 nt . i i ".htl . mua)i~n. ':ll »:,j ly. 45-47. mcall, i . (1993).taking the pain out of debt colleciing. accountan)~, scptcmhcr, 59-(i2. mian, s.l., /k c.w. smith jr. (1992). accounts rcccivahlc managcmciit: theory anil evidence. journal ol'inance, march, 169-200. myers, s. (1984). thc capital structure puzzle. journal of finance, .iuly, 575-592. pcttit, r.rm ctk r.f. singer (1985). small business finance: a rcscarch agenda, i.inancial ~m:: «,a « .47-6tl. schen, i .c. (1989a). modern workin ca ital mana ement text and cnscs. englewood cliffs, n,jz prentice-hall. schcrr, i .c. (1989b). bargaining in trade credit granting: a preliminary analysis. journal ol'he midwest finance association, volutnc 18. 29-36. schcrr, fc. (1992). credit-granting decisions under risk. en inccrin ~ economist, spring, 245-262. smith, j.k. (1987). trade credit and inl'or)national asymmetry. journal of finance, september, 863-872. 44 smith, j.k., & c. schnucker (1994). an empirical exammation ol organizational structure: the economics of the factoring decisions. journal ol'co orate finance, march. 119-138. srinivasan, v., & y.h. kim (1988). desigmng expert financial systems: a case study in credit management. financial mana ement, autumn. 32-44 the impact ol'nline business inl'oonation on the comincrcial user (1987). creditm~,rb y,18tl. walker, e.w., & j.w. petty ll (1986). financial mana ement of thc small firm. englewood cliffs. n.jz prentice-hall. 45 1 validation of a measuring instrument for the relationship between knowledge transfer and entrepreneurial orientation in family firms ascensión barroso martínez universidad de extremadura abarrosom@unex.es tomás m. bañegil palacios universidad de extremadura tbanegil@unex.es ramón sanguino galván universidad de extremadura sanguine@unex.es abstract family businesses are created due to the entrepreneurial behavior of one or more founders, who find and exploit one opportunity. it is necessary that this entrepreneurial orientation (eo) is transmitted to the next generation. we argue that knowledge management within the family business is positively related to entrepreneurial orientation and, therefore, related to firm performance. a scale for measuring the knowledge transfer has been defined in order to determine the degree of relationship between the above elements. the measuring instrument is original because previous measuring scales do not exist in the literature which measure, on the one hand, the subconstructs that might lead knowledge transfer and, on the other hand, the relationship between this and the other variables. as a result of causal relationship analysis, it concludes with a scale, with a sample of spanish family firms, and it is the first empirical validation of these dimensions we know so far. keywords: knowledge transfer, entrepreneurial orientation, family firm, measuring scale, performance s trateg y journal of small business journal of small business strategy volume 23, number 2 2 introduction to grow and survive in this environment characterized by markets globalization, technological developments, advances in information, and communication technology (hall, et al., 2001; pistrui, et al., 2001), it is necessary that the founder’s entrepreneurial behavior is transmitted to subsequent generations (cruz, et al., 2006; casillas, et al., 2010). thus, entrepreneurship is seen as an important element in the survival and growth of family firms because it helps to create jobs and wealth for family members (kellermans, et al., 2008). research in the area of the knowledge based view suggests the importance of transferring, through generations, the tacit knowledge, networking and social capital, passion and entrepreneurship, and competitive advantages that these transfers mean for family firms. in fact, the ability to manage knowledge is currently regarded as the greatest strength in achieving competitiveness. however, there is a gap in the understanding of an effective way to transfer these resources across generations; actually, existing studies on knowledge management in family businesses are scarce (giovannoni, et al., 2011). for this reason, in this study we focus on family members’ knowledge transfer, both intergenerational and intragenerational. the literature on family businesses needs more research on entrepreneurial processes, especially in the family firms’ entrepreneurial orientation (nordqvist, et al., 2008). it is also necessary to develop more knowledge about the conditions under which family businesses are able to maintain and increase the transgenerational entrepreneurial behavior to survive and grow (casillas, et al., 2010). it is essential to promote the entrepreneurial orientation and support the family business’s continuity. for this, the paper aims to define a scale for measuring the knowledge transfer in order to determine the degree of relationship between entrepreneurial orientation and performance. the measuring instrument is original because previous measuring scales that exist in literature could not measure. to achieve this objective, the paper is organized as follows. first, we describe knowledge-based view theory by focusing on knowledge management. next, we define the concept of entrepreneurial orientation and outline the connections between knowledge management and entrepreneurship. then, we explain all the methodological approach (method, measures, data analysis). finally, we show some conclusions. knowledge management with the evolution of resource-based view emerged the knowledge-based view, where knowledge is the company’s key or strategic asset (barney, 1991). this approach provides the theoretical support of this work, both from a content perspective, to analyze the specific knowledge possessed by family firms, and from the analysis of the characteristics that allow family businesses to maintain their competitive advantages over time. knowledge management is the function that plans, coordinates, and controls the knowledge flows produced in the company in connection with their activities and their environment (bueno, 1999). knowledge management creates essential competencies, as largely explained by the resource and capability theory (habbershon and williams, 1999). these knowledge flows journal of small business strategy volume 23, number 2 3 are critical resources, on which depends the company competitiveness. the results of the efficient management of these resources constitute the company intellectual capital or personal, organizational, and technological competence set and relations with their environment (bañegil and sanguino, 2007). in addition, knowledge management also allows companies to take advantage of the information and knowledge incorporated in the organisation’s employees, documents, processes, and practices in order to produce better, greater, and more rapid innovation in its products and services (zahra, et al., 2007). one of the great dilemmas of family businesses is that there should be a symbiotic and synergic relationship between family and business to be sustainable in time; it is expected that the company generates value for the family, and this adds value to the company, so the creation of this value is impossible without the family involvement (chua, chrisman, and steier, 2003). in this regard, knowledge management is significant, because during value generation also is generated a creation knowledge process, that is interesting to achieve business competitiveness and the same time to ensure the business sustainability . knowledge management in family businesses should emphasize the important role of the founder, learning, and succession (cabrera-suarez, et al., 2001). we should consider the founder as the person capable of transmitting the culture that led him to set up the company and continue the business, being the main source of knowledge in the family business. in this way, if the founder is for a long time linked to the company, this will enable the knowledge transmission, causing learning by children who, from an early age, work in the family firm and listen to the family talking about it (moores, 2009). then, when the succession process is organized and produced, knowledge will be transferred from generation to generation, configuring the company’s culture (chirico and nordqvist, 2010). entrepreneurship a crucial aspect of entrepreneurship involves the recognition of emerging business opportunities, which are often exploited through the creation of new firms, being a very important socio-economic reality. audretsch, et al. (2008) suggest that entrepreneurship is also determined by the ability and willingness of innovative entrepreneurs to develop new products and processes based on new knowledge. it implies the search for opportunities beyond the resources that someone really controls (pistrui, et al., 2001). thus, entrepreneurship is a useful concept that leads to companies on how to participate in the change and in the processes renewal in order to maintain and improve their competitiveness (cruz, et al., 2006). entrepreneurial orientation (eo) is one of the most studied concepts in the literature of entrepreneurship, which focuses on decision-making styles, practices related to the entrepreneurial activity of business (nordqvist, et al., 2008). miller (1983) suggests that the degree of eo in a firm can be viewed as the extent to which it innovates, takes risks, and acts proactively. these are the main dimensions of entrepreneurial orientation, which we will use in this work. lumpkin and desk (1996) added two more dimensions to the concept of entrepreneurial orientation: autonomy and competitive aggressiveness. journal of small business strategy volume 23, number 2 4 the strength of eo and the possible results may vary depending on the context of the enterprise and the type, size, ownership, and age of the company (nordqvist, et al., 2008). this leads us to think that family businesses are going to influence the force and results. family firms constitute a unique context for entrepreneurship due to the specific characteristics of family businesses. these companies have characteristics that can foster entrepreneurial behavior in the company through the ongoing objectives, valuable social relationships, survival and long-term orientation, reciprocal altruism, and so on. conversely, they have features that can restrict this behavior, such as their aversion to risk, different perception of environment depending on the level of family generations involved, higher levels of ownership concentration, intentions to maintain family control of the business, etc. (nordqvist, et al., 2008; memili, et al., 2010; kellermans, et al., 2008). the differences of eo in the different generations (kellermans, et al., 2008; casillas, et al., 2010) could be explained by knowledge management; that is, we assume that in some cases there is less knowledge sharing than in others. in order to not diminish this, the eo is necessary for effective knowledge transfer. knowledge transfer and entrepreneurial orientation tacit knowledge transfer is important to preserve and extend competitive advantage, since the success of a family business is often based on the unique experience of predecessors, being important to extend this experience to all the family firm members (cabrera-suarez, et al., 2001). an effective knowledge transfer is considered as the key to the organizational processes and outcomes, including the best practices transfer, new product development, speed learning, and organizational survival. lin et al., (2009) point that knowledge transfer is a form of organizational innovation. through socialization and learning processes, knowledge transfer has the potential to generate new ideas and develop new business opportunities. recent empirical research supports this relationship, not in the specific field of family business, but in the company in general. for example, brachos, et al., (2007) concluded that organizations that promote the processes of sharing and transferring knowledge are more successful at innovation at the organizational level. however, these processes are not often developed successfully in organizations, and, as result, performance and entrepreneurship do not improve (hsu, 2008). camelo, et al. (2010) confirm that the degree to which knowledge is shared among organization members is positively related to company innovative performance. hence, innovation involves an extensive process of knowledge sharing among employees, which will contribute to the implementation of new ideas, processes, products, or services. the context and processes affect organizational entrepreneurship. individual characteristics of the members may be an inherent barrier to the introduction and spread of entrepreneurship. in our case, family business (context) and the knowledge transmission (process) should also influence entrepreneurship. in family firms, knowledge transfer among its members is easier due to their common life in the company and the family. journal of small business strategy volume 23, number 2 5 nevertheless, non-family firm members often resist to sharing what they know or even being willing to do so; knowledge is not easily transmitted because to share it is a complex task that requires effort and time (ardichvili, 2008). in the same way, moores (2009) suggests that a climate that promotes a learning orientation in a firm has the capacity to create new knowledge, and subsequently, such knowledge enables the firm to be innovative and thereby improve its performance (chirico et al., 2011). methods the population used in this study consists of spanish family firms associated to territorial associations of family business. in spain there are 16 associations. however, due to the data confidentiality, we only have had information to eight of them. a total of 480 family firms were identified from web pages of associations and invited to participate. the information was collected via online survey. the collection of information took place over four months, from september to december 2012. the unit of analysis for the study was a successor of the firm, that is, a member of the second or later generation. in all, 57 questionnaires were returned, yielding a response rate of 11.88 % although the structural equation model (sem) values in a single, systematic, and inclusive analysis two aspects, the measurement model and the structural model, this paper focuses on the first part. this is because the design of this model is broad and ambitious as to consider that which deserves an independent study (cepeda-carrion, et al., 2012). the questionnaire design was based on the literature review described above. we modeled knowledge transfer (kt) and entrepreneurial orientation (eo) as formative second-order constructs. we measured kt by ten first-order factors or dimensions. oe was measured using three first-order factors or dimensions. one question that arises when taking a multidimensional approach (using secondorder measures) is whether these constructs (kt and eo) should be modeled as reflective or formative indicators. this choice therefore depends primarily on whether the first-order factors or dimensions are viewed as indicators or causes of the second-order factors (chin, 1998). we opted to use a formative structure for our two second-order constructs. in this way, an increase in the level of one dimension does not imply an increase in the level of the other dimensions. measures previous to the empirical analysis, it is necessary to clarify what we understand by family firm. although there is no general consensus in the literature with regard to their conceptualization (neubauer and lank, 1998), the different definitions that scholars have proposed can be grouped, following neubauer and lank, (1998), into three widely used definition criteria. first, there is a large number of works that define family firms as those organizations whose majority of stock belongs to the members of one family. other authors, on the contrary have preferred to take a more subjective point-of-view linked to the perception of the business as a “family business” (gasson et al, 1988). thirdly, the family business has also been conceptualized according to who really is in control, taking into account the extent to which management of the business is in the hands of the members of a single journal of small business strategy volume 23, number 2 6 family. in this work, the concept of what constitutes a family business is based on a single criterion. we have opted for the ownership structure as the distinguishing criterion that allows for a wide, more objective discrimination than that proposed by gasson et al. (1988). this study mainly used existing scales taken from the literature. the following questionnaire constructs were used. knowledge transfer (kt) as described above, this construct comprises ten dimensions: trust between family members, commitment to the family business, intergenerational relationships, intragenerational relationships, psychological ownership of the family business, successor’s aspects and training, predecessor involvement in the successor’s training, relationships with family business associations, organizational culture, and joint decision making (cabrera-suárez, et al., 2001; chirico, 2008; kellermanns, eddleston, barnett y pearson, 2008; zahra, neubaum y larrañeta, 2007; naldi, nordqvist, sjöberg y wiklund, 2007). items were measured using a seven-point likert scale from many studies. entrepreneurial orientation (eo) entrepreneurial orientation was measured using the dimensions proposed by miller (1983): innovation, risk, and proactivity; which have dominated research on eo (casillas, et al., 2010; chirico, et al, 2011). performance performance measured by asking respondents to compare the performance of their firm with the performance exhibited by their two main competitors in terms of profit, sales growth, cash flow, and growth of net worth. the scale has been validated in previous research (naldi, et al. 2007). data analysis the questionnaire was validated using partial least squares (pls), a structural equation modeling (sem) technique employing a principal-component-based estimation approach (chin, 1998). pls was selected because of the characteristics of our model and sample. our model uses formative indicators, and our data is nonnormal. other techniques of structural equation modeling (e.g. the covariancebased model performed by lisrel or amos) cannot be applied in these circumstances. this study uses smartpls software version 2.0.m3. to analyze the relationships between the different constructs and their indicators, we have adopted the latent model perspective, in which the latent variable is understood to be the cause of the indicators and we therefore refer to reflective indicators for first-order constructs or dimensions (cepeda-carrion, et al., 2012). the model contains one reflective construct: performance. two constructs, kt and eo, are modeled as second-order formative constructs. we began by assessing the individual item reliability of the measurement model (table 1). the indicators exceed the accepted threshold of 0.505 for each factor loading (falker and miller, 1992). there are 59 initial indicators, and in order to do an iterative procedure to obtain the final 53 indicators, we decided to eliminate those with lower factor loadings. from an examination of the results, shown in table 2, we can state that all of the constructs are reliable. their values for both the cronbach alpha coefficient and composite reliability are greater than the value of 0.7 required in the early stages of the research and the stricter value of 0.8 journal of small business strategy volume 23, number 2 7 required for basic research. the ave should be greater than 0.5, meaning that 50 % or more variance of the indicators should be accounted for. all constructs of our model exceed this condition, except successor concerning cronbach alpha (0.69) and composite reliability (0.79) (table 2). to assess for discriminant validity, we compared the square root of the ave (the diagonals in table 3) with the correlations between constructs (the non-diagonal elements in table 3). on average, each construct is more strongly related to its own measures than to others. table 1: factor loadings of reflective constructs item factor loading item factor loading item factor loading aef1 0, 87 dec4 0, 80 proact2 0, 89 aef2 0, 82 dec5 0, 73 proact3 0, 81 aef3 0, 73 innov1 0, 79 psic1 0, 71 aef4 0, 94 innov2 0, 85 psic2 0, 78 aef5 0, 92 innov3 0, 72 psic3 0, 87 comp1 0, 91 inter1 0, 87 psic4 0, 70 comp2 0, 83 inter2 0, 78 psic5 0, 87 comp3 0, 85 inter3 0, 64 rend1 0, 75 conf1 0, 70 inter4 0, 87 rend2 0, 56 conf3 0, 87 intra1 0, 83 rend3 0, 80 conf4 0, 85 intra2 0, 88 rend4 0, 75 cult1 0, 79 intra3 0, 60 riesg1 0, 92 cult2 0, 73 intra4 0, 88 riesg3 0, 89 cult3 0, 74 pred1 0, 77 suc1 0, 84 cult4 0, 90 pred2 0, 81 suc2 0, 51 cult5 0, 81 pred3 0, 86 suc4 0, 89 dec1 0, 82 pred4 0, 54 suc5 0, 53 dec3 0, 74 proact1 0, 91 journal of small business strategy volume 23, number 2 8 table 2: descriptive statistics mean cronbachs alpha composite reliability ave gc 5, 89 n.a. n.a. n.a. compromiso 5, 99 0, 83 0, 90 0, 74 confianza 5, 49 0, 74 0, 85 0, 66 psicolog 6, 37 0, 85 0, 89 0, 62 interg 5, 57 0, 80 0, 87 0, 63 intrag 5, 68 0, 81 0, 88 0, 65 predecesor 6, 02 0, 74 0, 84 0, 57 sucesor 6, 00 0, 69 0, 79 0, 51 aef 5, 84 0, 91 0, 93 0, 74 cultura 6, 03 0, 86 0, 90 0, 64 decisiones 5, 27 0, 77 0, 86 0, 60 oe 5, 52 n.a. n.a. n.a. innovacion 6, 15 0, 70 0, 83 0, 62 riesgo 4, 40 0, 78 0, 90 0, 82 proactividad 5, 43 0, 84 0, 90 0, 76 rend 5, 27 0, 69 0, 81 0, 52 j o u rn a l o f s m a ll b u sin e ss s tra te g y s p e c ia l in te rn a tio n a l e d itio n table 3: correlation matrix note: the bold numbers on the diagonal are the square root of the ave. off-diagonal elements are correlations between constructs. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 1 aef 0,86 2 comp 0,14 0,86 3 conf -0,06 0,31 0,81 4 cult 0,42 0,38 0,39 0,80 5 dec 0,07 0,37 0,43 0,48 0,77 6 gc 0,31 0,74 0,64 0,73 0,65 n.a. 7 innov 0,09 0,18 -0,01 0,19 0,12 0,22 0,79 8 interg 0,02 0,37 0,72 0,39 0,56 0,72 0,13 0,80 9 intrag 0,11 0,36 0,57 0,35 0,46 0,70 0,21 0,66 0,81 10 oe 0,16 0,38 0,08 0,24 0,14 0,43 0,72 0,34 0,35 n.a. 11 predec 0,09 0,57 0,35 0,36 0,25 0,58 -0,11 0,23 0,27 0,10 0,75 12 proact 0,27 0,37 0,13 0,26 0,09 0,46 0,45 0,34 0,37 0,91 0,16 0,87 13 psic 0,16 0,72 0,25 0,44 0,29 0,71 0,31 0,26 0,35 0,44 0,39 0,46 0,79 14 rend 0,08 0,27 0,14 0,04 -0,10 0,19 0,34 0,16 0,20 0,51 0,14 0,52 0,15 0,72 15 riesgo -0,13 0,28 0,01 0,00 0,17 0,21 0,15 0,29 0,17 0,56 0,11 0,38 0,11 0,19 0,90 16 sucesor 0,25 0,41 0,15 0,43 0,32 0,57 0,04 0,33 0,23 0,25 0,39 0,26 0,37 0,02 0,24 0,71 9 journal of small business strategy volume 23, number 2 10 j o u rn a l o f s m a ll b u sin e ss s tra te g y s p e c ia l in te rn a tio n a l e d itio n the evaluation of the formative dimensions of two high-order constructs, kt and eo, is not the same as for the reflective dimensions. the appropriate procedure for formative dimensions is through an examination of the weights, which is a canonical correlation analysis and provides information about how each indicator contributes to its respective construct (see table 4). weights do not need to exceed any particular benchmark because a census of indicators is required for a formative specification. the concern with regard to formative dimensions is the potential multicollinearity with overlapping dimensions, which could produce unstable estimates. results of a collinearity test show that the variance inflation factor scores of each second-order construct for all dimensions are far below the commonly accepted cut-off of 10 (<1.92). we also confirmed the validity of the formative dimensions, using the procedures suggested by fornell and larcker (1981) (see table 4). table 4: weights of formative constructs weights student's t kt commit 0,168293 4,98 trust 0,115483 3,82 psicolog 0,222427 4,59 interg 0,179504 5,34 intrag 0,188878 7,17 predec 0,112858 4,31 sucesor 0,096676 3,39 aef 0,107319 2,12 cult 0,207144 5,59 dec 0,118629 3,34 eo innov 0,390682 6,50 risk 0,262865 4,06 proact 0,631893 9,19 discussion and implications it is necessary to put into action the knowledge accumulated in the organization to generate new knowledge that allows them to improve, innovate, and be more competitive. a growing body of research suggests that family firms have to adapt to changing markets to survive, obtain profit, grow, and create wealth. in this way, to have a greater entrepreneurship is a good way for family businesses to thrive. therefore, this research has determined that, although entrepreneurship depends on many factors at different organizational levels, the willingness of people to share their knowledge plays an important role in the entrepreneurial capacity. we conclude that the entrepreneurial orientation involves an extensive process of sharing knowledge among family members. the analysis presented is a step towards the validation of the structural model that demonstrates the link between knowledge journal of small business strategy volume 23, number 2 11 j o u rn a l o f s m a ll b u sin e ss s tra te g y s p e c ia l in te rn a tio n a l e d itio n transfer, entrepreneurial orientation, and performance. the validation of the model that includes these linkages that are empirically reliable help entrepreneurs and successors to understand why they should pay attention to issues of knowledge management and what to expect from the efforts they make towards entrepreneurship, even beyond economic performance. the kt scale defined and validated in this work how to determine the extent to which guidance through kt is an explanatory variable of spanish family businesses performance and eo. it is considered that the present work has come to define a set of indicators that define the kt, as a result of a dynamic process of relationships between family members, rather than the end in itself of the organization. the large scale set for the initial kt of 59 indicators has been reduced to 53 indicators that maintain the balance between the family and the business aspects. it also indicates that work should continue using the validated measurement scale for the testing of a structural model that analyzes the causal relationship of kt, eo, and performance. the results of this model will show that if kt influences or largely explains family firm competitive success, it will be an interesting strategy to be developed by these companies. references 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(2008). “transgenerational entrepreneurship: exploring entrepreneurial orientation in family firms”. en landström, h., smallbone, d., crijns, h., & laveren, e. (eds.): entrepreneurship, sustainable growth and performance: frontiers in european entrepreneurship research, p. 93-116. londres: edward elgar. pistrui, d, huang, w., oksoy, d., jing, z., & welsch, h. (2001): “entrepreneurship in china: characteristics, attributes and family forces shaping the emerging private sector”. family business review, vol. 14, nº. 2, p. 141-152. zahra, s., neubaum, d., & larrañeta, b. (2007): “knowledge sharing and technological capabilities: the moderation role of family involvement”. journal of business research, vol. 60, p. 1070-1079 ascensión barroso martínez, phd has attended the best family business conferences and she has published articles in indexed journals. his doctoral thesis entitled “the importance of the knowledge management in the entrepreneurial orientation in family firms”. she current teaches quality management, business economics. tomás m. bañegil palacios, phd has over 25 years teaching undergraduate and postgraduate in different european universities, as well as brazil argentina, and ecuador. he has published some articles in very prestigious journals. he’s currently director of the department of journal of small business strategy volume 23, number 2 14 j o u rn a l o f s m a ll b u sin e ss s tra te g y s p e c ia l in te rn a tio n a l e d itio n business administration. finally, he has directed more than 10 doctoral theses. ramón sanguino galván, phd has more than 12 years teaching undergraduate and postgraduate in different european universities, as well as in brazil and columbia. he has published some articles in very prestigious journals. his research interests are related to knowledge management, city competitiveness, entrepreneurship, and family business. reproduced with permission of the copyright owner. further reproduction prohibited without permission. strategy volume 1, no. 1 february, 1990 1 the organization life cycle: integrating content and process 13 planning in small vs. large business: do managers prefer different tools? 25 the eximbank state/city pilot initiative for small business exporters: goals, achievements, and the path ahead for export-finance support at the local level 37 issues in managing small business information systems 44 the status of computerized accounting sof tware in small american businesses 52 management policy in franchising operations: a preliminary study 60 innovative turning points in the path to entrepreneurial success 65 a measurement model of the economic impact of small business institutes journal of small business~ tra teg+ digital divide: impact on hispanic-owned small businesses cecilia temponi texas state university-san marcos c.rem poni@ctstate, edu jaime chahin texas state university-san marcos tc03@txstate. edu abstract information inequity creates a major gap between minority and non-minority businesses in the areas of business opportunities, communication, and information technologies. the purpose of tliis study is to survey the technological potential of hispanic-owned small businesses (hsbsj to engage in e-commerce, specifically in e-procurement. the nanies of the hsbs were requested from tlie ofiice of small business administration, whicli provided a national database of 9,800 businesses. a total of l,200 businesses were randomly selected to receive the survey. results indicate that small businesses haveissues ofconcern regarding ihe process to access the internet. hsbs find limitations in gaining access to e-commerce and its elements. some limitations relate to financial constraints to buy computers; other liniitations relate to iniernet access methodology and ability to hire information technology personnel. assisting hsbs to gain access to financial resources is crucial towards narrowing the digital divide and therefore reducingleliminating its ejfects on the long-term sumival of hispanic small businesses. government agencies and non-profit and private business organizations should develop financial and outreach opportunities to enhance participation of hispanicowned small businesses. introduction information inequity creates a major gap between minority and non-minority businesses in the areas of business opportunities, communication, and information technologies. the technological gap or "digital divide" defines the disparity between people or communities that are able to effectively utilize information technology and those who do not have that ability (benton foundation 2001a). more recently, a new term, "business divide" was introduced to refer to the issues in the technology inequity debate. a study of minority-owned small businesses reported by pr newswire (2002) shows that only two percent of african american small businesses and six percent of hispanic small businesses have an e-commerce strategy, compared with that of 35 percent of non-minority small businesses. today, e-commerce (which is defined by chan and swatman (1999) as one that involves the undertaking of normal, commercial, government, or personal activities by means of computers 73 journal of small business strategy vol. /4, no. 2 fall/winter 2003 and telecommunications networks; and includes a wide variety of activities involving the exchange of information, data or value based exchange between two or more parties) is one of the fastest growing segments of the economy. concerns have evolved over the infrequent participation and use of e-commerce by minority-owned small businesses. these concerns are not unfounded. ferguson (2000) reported that more communications are being conducted over the internet than over the telephone. he states that 50 percent more mail is being delivered via a private online carrier, america online, than via the u.s. postal services everyday. ferguson cites that 65 percent of all medium size businesses use the internet, and 41 percent of businesses have a web site. the numbers of electronic transactions through e-commerce by businesses and individuals have increased by more than 100 percent since the year 2000. this trend is continuing mainly due to rapidly changing business markets and a decrease in procurement and operating costs (manor, riolli-saltzman & luthans, 2001; robson et benett, 1999; hecht, 2001). however, brush (2000) states that businesses that employ less than 100 people are more likely to have little or no use of the internet as part of their business operations. the tomas rivera policy institute (trpi) reported that 31 percent of hispanic adults have never used a computer; 71 percent of these who have never had the opportunity to connect to the internet had a household income below $25,000, and 84 percent did not have a college education. nevertheless, some researchers also believe that the issue of information inequity is not so much about physical or financial capability as it is about education and internet access (the economist, 1998). this issue has been also addressed in research by cutler (2001), ong (2001), and nute (2002). the situation of infrequent participation and use of e-commerce by minority-owned businesses might be anributed to a complex combination of factors. these factors are explored by wallace (1999), la noue (2000), kennard (1999), krasnow (1999), twist (2001), yudowsky (2001), borgida, sullivan, oxendine, jackson, riedel & gangl (2002), black, robison & schweitzer (2001), and benton foundation (2001a, 200 lb). according to these authors, some of the factors/problems preventing a small business from participating in e-commerce include the lack of: ~ knowledge and manpower to take on the scope of changes that the internet and ecommerce bring to a business. ~ capital to invest in costly systems that allows them to be ready for participation in ecommerce. ~ trust in the security of the method uncertainty about the transaction process, especially the security of personal information on the internet. ~ direct access to products and opportunities available only through costly internet systems. ~ administrative and technical support that can assist in the development of ecommerce. ~ friendly systems with language-specific content on the internet to accommodate non-english speaking communities. a few researchers (garcia, 2001; la noue, 2001; lorek, 2002) found that the digital divide appears to be closing for hispanics. their views are based on the hispanic population that is logging on to the internet. however, the studies show neither the percentage from this group with their own internet access or the type of users. nevertheless, these studies recognize the complaints from hispanic users regarding language-specific content on the internet that is not addressing the hispanic population's needs. this brings to light the core issue of lost opportunities for hispanic-owned small businesses and the lack of internet access for hispanic customers. 74 journal of small business strategy voh /4, no. 2 falllwinter 2003 the objective of this research is to explore the perceptions of hispanic-owned small businesses, hsb hereafter, regarding the impact of the digital divide on their ability to maintain a competitive business position and to actively participate in government procurement, which is significantly conducted through the internet —electronic procurement. the article is organized as follows: in section one, literature review of the digital divide and of the financial issues that relate to minority-owned businesses is presented. the methodology and survey sent to hispanic-owned small businesses is presented in section two. results from this study are discussed in section three. based on these results, section four provides conclusions and recommendations to private businesses, government, and communities to develop strategies that can decrease the digital divide of hispanics-owned small businesses. literature review digital divide small businesses are the backbone of the u.s. economy; they are the ones that help keep productivity, creativity, and employment flowing (twist 2001). however, potential of small businesses, especially hispanic-owned small businesses, is being undermined by the problems dby h dlbl ldl ld . k dll999ll dl lh «h d~iiddl ld 9 ly b inequality in access to technology but also about the unequal access to opportunities to participate in the ownership and management of these vital companies. the benton foundation (200la) has defined the digital divide as the disparity benveen people or communities who are able to utilize information technology effectively and those who do not have that ability. more recently, business divide has been defined as the disparity between minority-owned small businesses that use technology at rates far lower than non-minority small businesses (pr newswire 2002). in spite of these divides in the state of information access in the v.s., there is a general myth that all minority-owned businesses (mob) know about the internet. but in reality, many mobs have no experience with the internet and do not have financial and technical resources for full access. even though the internet can help mobs provide consumers with better service, create faster productivity, and keep track of business interactions, many hispanic-owned small businesses face additional problems of access and education. these businesses are struggling to stake a claim on technology while the challenges they face are unique to the underlying technology and its rapid changes (ford-livene, 1999). among the issues related to the underlying technology and its rapid changes, three core items are: qh~bd lbl«h* l,qy lhd 9, and specific software for development of applications. v the human resources to support the technical aspects of e-commerce, e-procurement, and other items as they relate to the fast and constant technological changes. v the financial resources to gain and maintain internet access. it can be argued that any business must address these core problems when it comes to the digital divide; however, entrepreneurs who own small businesses and are minorities face even more problems when it comes to the digital divide. not only do they struggle to get customers, raise capital, and comply with government regulations, but they also struggle to leam new computer skills and to become e-commerce literate. ford-livene (1999), twist (2001), hecht (2001), cutler (2001) and chaston, badzer, mangles tk sadler-smith (2001) pointed out that mobs must also realize the potential of the business-to-business (b2b) and the internet. it is difficult for business owners to pursue opportunities if their business operations absorb most of their cash inflows and leave them with a little or no surplus 75 journal of small business strategy vo/. l4. no. 2 fall/winter 2003 resources. additionally, the digital divide has not been narrowed due to community/cultural and logistics/methodology reasons (wa)lace 1999, borgida et al 2002, kennard, 1999, black et al., 2001). dodge (2000) recognizes that the impact of the digital divide on the ability of minority citizens to compete and operate a successful business is interconnected to class inequality. minorities (african american and hispanics) are about 35 percent less likely to have internet access at home than other americans, and hispanics seem more resistant to the internet use due to the lack of a technology access-friendly culture (hecht, 2001). many small businesses are struggling to capitalize on the emerging opportunities of an internet based economy. they lack the time, money, expertise, and internet access needed to develop their information technology (it) capacity in a timely and strategic manner (twist, 2001; hecht, 2001; robson ec benett, 1999). according to the u.s. census bureau, minority groups have $ 1.3 trillion in annual buying power. this will continue to grow over the next 45 years. most business transactions will be more likely to happen over the internet. but little more than half of minority-owned businesses use computers, and of this half, less than half use e-mail, and fewer than that use it to conduct business (benton foundation, 2001b). therefore, for minority-owned businesses, the digital divide is expected to remain a problem in the near future. e-commerce activity is estimated to increase, but numbers show that mobs are going in the opposite direction (cutler, 2001). this is because many mob owners believe that they do not need the technology; there are no business opportunities on the internet; and/or small profits do not justify internet investments to stay in business. on the other hand, mobs need to understand that in order to survive and stay in business, they must get on to the internet, not only to obtain a competitive edge, but also to help other mobs stay afloat (chaston et. al. 2001). some of these important issues are the result of economic circumstances and the negative predisposition to the status quo, which may have been caused by cultural sentiment or past experiences (twist, 2001; dodge, 2001). research by hecht (2001), benton foundation (2001b), the economist (1998, 2000) indicates that internet access is more than a convenience. it is about opportunities for businesses and education and training for those having electronic access. financial issues every business owner has to take into account her/his access to capital; specifically, funding limits or liquidity constraints. liquidity constraints impact businesses with respect to their start-up and their performance following the inception period and thereafter. reacting to funding constraints, small business owners supplement insufficient funds with funds from informal sources (personal funds and/or family loans) as well as formal sources (bank loans, government loans, and trade credits). suppliers occasionally extend trade credit to preferred businesses when their personal funds are not sufficient. huck (1999a) conducted a study about financial issues for hispanic-owned small businesses and found that only 57.6 percent of hispanic business owners were offered trade credit and only 44.4 percent of hispanic business owners took it. however, this percentage value was based on a pool of hispanic business owners who were offered trade credit. on the other hand, martinez (1999) suggests that hispanics are less inclined to loan money within their own communities, be it out of distrust or lack of adequate collateral. another source of formal funding available to mobs and small businesses is the u.s. small business administration (sba). sba provides loan guarantees and other help programs to small businesses. these programs have been specifically designed to improve access to capital by small and disadvantaged businesses. however, information channels regarding these funding opportunities serve to only accentuate the gap. some businesses have the knowledge 76 journal ofsmall business strategy vol. l4, no. 2 fall/)vinter 2003 and skills necessary to access the information while other businesses, especially hsbs, lack of both to access this information (huck, 1999a, 1999b; la noue, 2000). as a result, small businesses continue to face difficulties in obtaining the sufficient capital necessary for operating in their particular industries, some of which are capital intensive (ford-livene, 1999). minority-owned businesses represent 12 percent of all the nation's businesses, but they receive only 2 percent of all private equity investments. discrimination by banks and other financial institutions and the lack of research on the economic potential of minority-owned businesses are some of the challenges faced by many minority owned businesses (benton institute, 200 la; black et, al., 2001). additionally, recent court decisions have eliminated some crucial economic assistance programs, which once helped small businesses obtain additional capital one of the most recent and most devastating decisions was the congressional ruling to eliminate the federal communication commission's minority tax certificate program. before its elimination in 1995, the program sought to create opportunities for minority ownership in the communication industry by, among other things, allowing sellers of ownership interest in a minority-owned firm to defer the payment of capital gains taxes. the elimination of tax breaks, and other forms of assistance, has contributed to the continuing barriers faced by minority-owned businesses in accessing supplemental capital (krasnow, 1999). on the other hand, there are non-profit as well as private groups advocating for tax incentives to mobs that want to make investments in internet and e-commerce technology and training (borgida et al., 2002; brush, 2000; ferguson, 2000; manor et. al., 2001; robson & benett, 1999). research aimsandmethodology the main objective of this research is to explore the perceptions of hispanic-owned small businesses regarding the impact of the digital divide on their ability to maintain a competitive business position and to actively participate in electronic procurement. the term electronic procurement is also used as electronic commerce, in this paper. two main research questions are formulated. research conducted by nute (2002); benton foundation (200la, 2001b); cutler (2001); chaston et al. (2001); ford-livene (1999); robson & benett (1999), and ferguson (2000) facilitated the formulation of the first research question: ql hispanic-owned small businesses believe that the digital divide has an effect on their ability to stay competitive. proposltlon 2: increased additional capital to satisfy bid requirements by hispanicowned small businesses should lead to an increased level of accessibility to eprocurement opportunities. proposition 2i increased personnel training to access electronic information by hispanic-owned small businesses should lead to an increased level of accessibility to e-procurement opportunities. proposition 3i obtaining and improving internet access by hispanic-owned small businesses should lead to an increased level of accessibility to e-procwement opportunities. research issues explored by borgida et al. (2002), dodge (2000), benton foundation (200 la, 2001b), cutler (2001), chaston et al. (2001), twist (2001), la noue (2000), ford-livene (1999), and huck (1999a, 1999b) led to the formulation of the second research question: 77 journal of small business strategy vol. 14, no. 2 fall/winter 2003 e}2 hispanic-owned small businesses believe financial constraints impair their ability to participate in electronic procurement and electronic commerce. in order to accomplish the main objective of this research data was gathered from interviews with the u.s. department of agriculture, usda hereafter, and other government personnel as well as hispanic-owned small business owners already engaged in businesses with the usda. this data was used to develop the survey instrument to be sent to hsbs across u.s. the names of hsbs were requested to the office of small business administration (sba) through the usda, who supported part of this study. the usda request criterion to sba was on hispanic-owned small business from us continental states and with special emphasis on california, texas, florida, midwestern states, the east coast and the commonwealth of puerto rico. we received a database with over 9,800 hsbs names. from this population of hsbs, we selected the sample to receive the survey. a simple random selection process was used for the selection to ensure an adequate sample population. a total of 1,200 businesses were selected from the database received from the usda. in the survey, the questions used were mostly objective and multiple-choice. some questions required a selection from a five-point likert scale. see appendix i for a sample of questions sent out to hsbs. once the form and structure of the survey were established, we solicited critiques and comments from various groups, including faculty who specialize in statistics, survey development, and issues pertaining to procurement programs. graduate students also contributed with suggestions regarding the structure and content of the survey. a subset of hispanic-owned small businesses was also selected to provide input on the survey instrument. after several revisions, the final survey was mailed out through u.s. postal service to the randomly selected hsbs. the span of elapsed time between the mail-out date and the dueback date was three weeks. the rate of response remained generally constant throughout the three weeks scheduled period of time. a follow-up message with a reminder regarding the due-back date of the survey was sent a week and a half after the survey had been mailed. this follow up was done by an e-mail message to everyone who was sent the survey and who had an e-mail address. hsbs participating in the study and without an e-mail address were sent the message via u.s. postal services. the message was identical for both groups; the ones who were reached by e-mail and the ones contacted by regular us postal services. the response rate for the survey was approximately 22.33 percent. since there were 220 surveys returned due to erroneous addresses, the final and adjusted response rate was 27.55%( 28%). several barriers were present throughout the course of the development and administration of the surveys. in the developmental stage, feedback from various groups was delayed due to schedule conflicts. the most commonly encountered problem seemed to be the time constraints people and businesses had to respond to our inquiry. other limitations were related to logistics in the process of administration of the surveys. for instance, some business addresses drawn from the database provided by the small business administration were not current. consequently, 220 surveys were returned due to non-existing or invalid addresses. also, some of the selected businesses refused to return the survey due to negative feelings with one of the sponsoring government organizations, as stated in the business call of these businesses to the authors. there were about 12 calls of this type. no adjustment was incorporated for this situation. data received were processed in a spreadsheet format, and analysis was performed using spss™data analysis program. data entries were checked twice for each returned survey to ensure accuracy and diminish error in coding. the analyses were performed using 78 journal of small business strategy vol. /4, no. 2 fall/winter 2003 frequencies, means, correlations, analysis of variance, and regression. the results of these analysis are discussed next. results the responses from the states surveyed were distributed as follows: california (22%), texas (17.2%), florida (9.3%),and new mexico (7.8%).the responses from midwestern states, the east coast, and puerto rico accounted for 36.6 %. there were 7.1% responses with no state declared. the most widely represented industry in the sample was the construction industry with 28.7% response. the manufacturing of food and machinery industry was represented by a combined value of 4.5%. the remaining 66.8% responses were from a variety of businesses, such as printing, translation, consulting in a variety of technical and business fields —meaning software, hardware, advertising —janitorial services, and waste management design/services. a consistent combination of two-industry type was reported by nine (3.27%) businesses that participated in the survey. the combination was construction and engineering services. the businesses'nnual revenue and the type of additional funds used to supplement capital were requested in the survey instrument. table i reports the distribution of each category. this distribution indicates that about two fifths of the companies have less than $0.5 million in annual revenues, and businesses with $0.5-1.0 million as well as $ 1.0-5.0 million represented about one fifth, respectively. those in larger annual revenue brackets (& $5.0 million) represented a small percentage of the sample population (12.7%). businesses that needed additional funds to supplement capital see table i used bank loans (67.5%), personal funds (47.5%), trade credit (16%), and government loans (14%). by pearsnn's correlations and statistical counts, it was observed that 35% of these businesses supplemented capital with two different types of funds, and 12% of these businesses supplemented capital with three different types of funds. the most favored combinations of types of funds are bank loans-government loan, and trade credit-government loans. the pearson correlations were significant at a p & 0.01 (i-tailed). nevertheless, hispanic-owned small businesses (hsbs) that used personal funds were less likely to pursue government loans; the pearson correlation was significant at p & 0.01 (i-tailed). information regarding electronic commerce (e-commerce capacity) and its components was requested from hsb. electronic commerce components (kennard, 1999; yudowsky, 2001; benton foundation, 2001b) include owning computers; access to personnel trained in computers, electronic commerce and internet use; direct internet access; and other items that could be business specific. responses indicated that these businesses have access to internet (85%), knowledge about internet usage (70%), and trained personnel (50%). businesses that owned computers (90.3%) were also more likely to have knowledge on internet usage, internet access and trained personnel. this was assessed by pearson correlations, which were significant at a level of 0.01 (i-tailed). almost 50% of the respondents indicated that they did not have trained personnel in electronic commerce and its components due to cost issues. thus, small and disadvantaged hispanic businesses seem to lack necessary financial resources to take full advantage of e-commerce opportunities. it was observed that small business owners listed equipment such as computers as part of their personal possessions and part of their businesses as well. it was also observed that a large number of businesses in printing, manufacturing, and construction had more computer 79 journal of small business strategy vol. /4, no. 2 fall/winter 2003 equipment and elements of e-commerce than business in other industries. the first research inquiry is discussed next. table li hispanic small business collected data frequency categories a. industry type construction 28.7 food man%cturing/machinery 4.5 other 66.8 construction-engineering services 3.27 b. average annual revenue less than 5500,000 40.7 benveen 50.5-i.omillion 20.5 benveen $ 1.0-5.0million 26.1 morc than 55.0million 12.7 c. type of additional funds brink loans 67.5 government loans 14.2 trade credit 15.7 personal funds 47.5 others (line of credit, credit cards, personal funds, etc) 6.3 not applicable (have not pursued them, etc.) i 1.9 d. electronic commerce components own computers 90.3 trained personnel 50.4 internet access 85.1 know-how internet usage 70.3 no component 4.9 percentages do not add up to a l00% because respondents were allowed to choose more than one answer. qi hispanic-owned small businesses believe that the digital divide has effect on their ability to stay competitive. hsbs were asked to rate from very important to less important issues related to the internet, its components and access to the internet to conduct business with the government and private businesses. the government and private businesses have moved a significant portion of procurement to an electronic mode (ursery, 2003; dillehay, 2002; norris, fletcher gc holden, 2001; mitchell, 2000; anonymous, 2000b), which is also known as e-procurement. a sample of some of the items queried include: making the right contacts, learning the procedures to access information, attaining additional capital to satisfy bid requirements, having trained personnel to access electronic information, obtaining and/or improving internet access, and improving computer hardware. the complete list of survey items is presented in appendix l. the responses indicate that 86.6% of the participants believe that making the right contacts to conduct business with the government is very important, and 76.9% believe that learning the procedures, usually on the websites of government and private businesses, is also very important. the issue of attaining additional capital to satisfy bid requirements is believed to be very important by 69% of the respondents and the remaining respondents indicated it was moderately important (18%) or unimportant (12%). results for training personnel to be able 80 journal of small business strategy vol. l4, no. 2 eall/winter 2003 to access e-information for doing business was reported as very important by 79% of the respondents. the issue of improving computer hardware shows that 55.9% of the respondents believe this dimension is very important in the process of enhancing their ability to do ebusiness. the category of obtaining/improving of internet access is considered as very important by 53.3%of the respondents. stepwise multiple regression was conducted to determine which independent variables (contacting the appropriate offices/agents, finding out/learning basic requirements and procedures, locating/receiving bid solicitations, attaining sufficient capital to satisfy bid requirements, making the right contacts, learning the procedures, attaining additional capital to satisfy bid requirements, training personnel to access usda information, improving computer hardware, obtaining/improving internet access) were the predictors of level of accessibility of e-procurement opportunities to hsb. the dependent variable, level of accessibility, was defined as the ability of hsb to conduct electronic procurement with the government. the equally weighted average of four main items gaining access to a computer, gaining access to internet, conducting internet research, and improving internet skills, determine level of accessibility (dillehay, 2002; norris et al., 2001; benton foundation, 2001a; anonymous, 2000b). these items all have a significant correlation at a p ( 0.01 (itailed) and were consistently rated by the respondents as very important. for each item, frequencies of very important responses were obtained in the range of 70% to 90%. level of accessibility composite measure has an internal consistency measured by the cronbach's alpha of 0.835 at a significance level less than 0.000, and an average inter-item correlation of 0.601 (garson, 1999; nunnely, 1978). the scales of related questions as well as the composite measure of level of accessibility were mapped to an interval-scale measure by frequency analysis of the variable. items were recoded to reflect very accessible = 5, accessible = 4, moderately accessible = 3, rarely accessible = 2, and inaccessible = 1. the composite variable level of accessibility was mapped as low = less than 2.20, low-medium = 2.21 —2.90, medium = 2.91 —3.59, medium-high = 3.60-4.12;high = above 4.13. models were developed with criterion of probability-of-f-to-enter 0.050, and probabilityof-f-to-remove 0.100. the model that better explained the overall variance of the level of accessibility of e-procurement opportunities to hsb is a model of three predictors (obtaining/improving internet access —obt//mp/ntdccess, attaining additional capital to satisfy bid requirements attainingdddcapital, training personnel to access usda information having trainedpersonnefl. model 3 from table 2 has an r = .688, i.e. model 3 accounted for 68.8% of variance in the level of accessibility explained by the independent variables. table 2: model summary ri std. error of themodel estimate i .799'639 .4036 2 .822 .675 .3845 3 .829'688 .3790 a predictors: (constant), obt/implntaccess b predictors; (constant), obt/lmplntaccess, anainingaddcapital c predictors: (constant), obt/implntaccess, attainingaddcapital, havingtrainedpersonnel 81 journal of small business strategy vol. /4, /i/o. 2 fall/iv(nrer 2003 results from the regression analysis are presented in table 3. the overall model f (3, 105) = 77.094 at p & 0.001 —indicates that the probability of determining the level of accessibility of e-procurement opportunities for hsb could be determined at least by one of the predictors (obtaining/improving internet access, attaining additional capital to satisfy bid requirements, training personnel to access usda information). table 3: regression analysis (anova) source sum of degrees of mean f sig. squares freedom square p&.001 regression 33.218 3 11.073 77.094 .000 residual 15.081 105 .144 total 48.298 108 table 4a presents the coefficients of the final model. the coefficients of the independent variables are significant at p & 0.001 and p & 0,05 when evaluated together. table 4a: coefficients'f the model 5% confidence nterval for b source coefficient std. error t sig. lower upper bound bound (constant) .707 .263 2.684 .000 .185 1.229 obt/implntaccess .677 .049 13.821 .000 .580 .774 attainingaddcapital .113 .030 3.742 .004 .053 .172 havingtrainedpersonnel .0689 .034 2.101 .033 .002 .136 'ependent vanable: level of accessibility. table 4b: individual contributions of the study variables to the dependent variable source df sse mse f part corr (constant) obt/implntaccess i .754 27.458 27.458 190.68 attainingaddcapital i .204 2.010 2.010 13.96 having trainedpersonnel i .117 0.661 0.661 4.59 significant at p = 0 001; significant at p =.05 the level of accessibility intercept bii computed as .707, estimates the expected level of accessibility in a given time if the predictors did not exist. however, these values of the predictors are outside the range of obt/implntaccess, attainingaddcapital, havingtrainedpersonnel, and are nonsensical. the value of bii (.707) has no practical interpretation. assessment of the individual contribution of the independent variables on the level of accessibility is performed by the part correlation and f test (see table 4b). for the predictor obt/implntaccess, the partial f-test statistic (190.68) is significantly greater than the critical value f (.005, i, 105) 8.18.the expected level of accessibility is expected to increase by .677 units for each unit of obt/implntaccess (b, computed as .677) for a given amount of the 82 journal ofsmall business strategy vo/. /4, no. 2 fall/winter 2003 other two independent variables, which supports proposition 3. for the second predictor, attainingaddcapital, the partial f-test statistic (13.96) is much greater than the cntical value (-8.18) and then the predictor (attainingaddcapital) significantly improves the level of accessibility model already containing the other two predictors. the value of bi is .113 and this means that for a given amount of the other two predictors, the expected level of accessibility is estimated to increase by .113 units for each unit change in attainingaddcapital, which does support proposition l. the partial f-test for the other predictors havingtrainedpersonnel indicates that adding this independent variable also improves the model (4.59 & 3.92 at p = 0.05). the slope of having trainedpersonnel, bi .0689 indicates that increases in this predictor will also increase level of accessibility, which supports proposition 2. each of the three independent variables significantly contributes to improve the model after the other independent variables have been included. the level of accessibility model should include all three variables obt/implntaccess, attainingaddcapital and having trainedpersonnel. the level of accessibility to e-procurement opportunities for hsb can be expressed as: level of accessibility = .707 +.677 obtllmpln/access +.//3attainingaddcapital + .0689 having trainedpersonnel for a hsb reporting that obtaining and/or improving internet access (obt/lmplntaccess) was unimportant (= i), attaining additional capital to supplement a bid (attainingaddcapita/), and having trained personnel to access internet information (havingtrainedpersonnel) were unimportant (= i) respectively, the composite level of accessibility of e-procurement opportunities will yield a low level of accessibility of 1.5659. however, for a hsb reporting that obtaining and/or improving internet access (obt/lmplntaccess) was important (= 5), attaining additional capital to supplement a bid (attainingaddcapital) and having trained personnel to access internet information (ha vi ng train ed personnel) were unimportant (= i) respectively, the composite level of accessibility of e-procurement opportunities will yield a high level of accessibility of 4.2739. the analysis performed on the regression model as well as the contribution of individual independent variables to the dependent variable assist in supporting that the digital divide has an effect on hsb's ability to stay competitive. hsbs are well aware of the importance and impact of the digital divide on their long-term success. if hsbs have adequate level of internet access and/or the ability to improve their existing internet access and have access to trained personnel, then hsbs have the opportunity to access critical information from the government and private companies. government and private companies have moved their procurement to internet base (ursery, 2003, dillehay, 2002, norris et al., 2001, mitchell, 2000, anonymous, 2000b). additionally, once the opportunity is located, small businesses need additional capital to support bid requirements and adequate trained personnel not only to navigate the websites, but also to facilitate the bidding process, which also has become an internet based process. hsbs want to mcrease their ability to participate in e-procurement with the government and private businesses. the issue of opportunities to hsbs and their financial constraints is developed on the second research issue. q2 hispanic-owned small businesses believe financial constraints impair their ability to participate in electronic procurement and electronic commerce. analysis of the data through cross tabulations of each type of financing (bank loans, government loans, trade credit, personal funds, others) and the annual average revenue were performed. also, similar analysis was conducted with each component of electronic commerce (computers, trained personnel, internet access, knowledge about computers) and 83 journal of small business strategy val. 14, na. 2 fall/winter 2003 the annual average revenue. results show the following: bank loans are the largest type of financial funds used by hsb (67.8%). a contingency table of 2 x 4 on hsb that used bank loans and the hsb's annual average revenue (aar) indicates that businesses with an aar of less than $0.5 million are very likely to use bank loans (expected count is 73.2 out of a total count of 108 hsb that have such aar). table 5a shows the results of the 2 x 4 contingency table. hsbs with annual average revenue of $ 1 to $5 million, $.5 to $ 1.o million, and $5 to $ 10 million were also likely to pursue bank loans as additional source of capital (41 out of 71, 38 out of 56, and 17.6out of 26 respectively). the value of chi-square is 15.273 at a p & .005. it was also observed that hsb's preferred choice to pursue additional capital is personal funds. businesses with average annual revenue of less than $ 1 million seem to be the most inclined towards personal funds as source of additional funds. this was not significant at p & 0.10. table 5: relationships of annual average revenue of hsb a. type of funds vs. aar bank loans &$0.5 m $0.51.0 m $ 1.0-5.0m & $5.0 m total yes count 64 33 58 22 177 expected count 73.24 37.98 48.15 17.63 no count 44 23 13 4 84 expected count 34.76 18.02 22.85 8.37 total 108 56 71 26 261 x i.dds,dt-i) cntical & 15.273 &$0.5 m $0.51.0 m $ 1.05.0 m & $5.0 m totalfunds yes count 58 30 29 9 126 expected count 52.14 27.03 34.28 12.55 no count 50 26 42 17 135 expected count 55.86 28.97 36.72 13.44 total 108 56 71 26 261 x ci,dt-» critical & 5.416 b. e-commerce components vs. aar having trained &$0.5 m $0.5i.om $ 1.0-5.0m &$5.0m totalpersonnel yes count 43 27 43 22 135 expected count 55.77 29.19 36.49 13.55 no count 64 29 27 4 124 expected count 51.23 26.81 33.51 12.45 total 107 56 70 26 259 x.odd,df 3 critical & 19.880 84 journal ofsmall business strategy vol. )4, no. 2 fall/winter 2003 hsb's e-commerce capacity components and the aar were also cross tabulated, table sb. results indicate that hsbs with an aar of $ 1.0 to $5.0 million and above $5.0 million are the ones with the highest capacity as it relates to trained personnel. their relative advantages are 61.4% and 84.6%, respectively. hsbs with aar below $0.5 million and $0.5 to 1.0 million seem to be at a significant disadvantage (40.2% and 48.2% respectively). each pair had statistical significant at p & 0.001. it appears that hsbs with smaller aar have a more difficult time attracting qualified and knowledgeable employees to assist with issues related to electronic procurement and therefore opportunities with the government. although all surveyed hsbs used primarily bank loans, it seems that the hsb with annual average revenue of less than $0.5 million tends to rely more on personal funds. furthermore, other types of funds (government loans, trade credit, and others such as line of credit, etc.) are not being utilized as much by hsbs to supplement capital. it should be noted also that the need for additional capital to supplement bid requirements was one of the dependent variables complementing the model for level of accessibility to e-procurement opportunities. claims of research issue 2 should be rejected. this is further supported by the fact that a significant number of hsbs participating in the survey have an aar of less than $0.5 million (40.7%from table lb) and these hsbs are the ones with less access to trained personnel. these are also issues reported as barriers to participate in e-commerce by la noue (2000), kennard (1999), and benton foundation (2001a, 2001b). this situation seems to produce a cycle such that if hsbs have financial constraints then they cannot improve the digital divide disparity and effectively utilize technology to take advantage in e-procurement opportunities. conclusions and recommendations responses from hsbs indicate issues of concerns regarding effective deployment of information technology to pursue e-procurement opportunities with the government as well as with private companies. a complex scenario develops when the digital divide and hsb's financial resources interplay. hispanic small businesses have difficulties to secure additional sources of capital. these businesses have limited financial resources to pursue the hiring of qualified personnel. hsbs are in a disadvantage to keep pace with the constant technological changes and therefore to keep afloat with e-commerce opportunities. hispanic small businesses are well aware of the importance of bridging the gap of the digital divide. hsbs want to be part of the technology wave and are making efforts to diminish the effects of the digital divide; nevertheless, more assistance to these businesses is necessary to speed up the process. for instance, a hispanic internet study (lorek, 2002) finds that just over 50 percent of hispanics in the united states are on line. consequently, vendor programs need to strategically plan outreach activities using hispanic or minority databases in order to increase participation rates. geographically, the outreach should focus on california, texas, and florida. these states were reported in the 1997 economic census as having the largest revenues generated by hispanic businesses. responses from our survey were also higher in these three states. agency contractors need to disseminate their requirements on their own home pages to minority databases. if agencies are seriously going to increase hsbs participation in ecommerce, these agencies need to proactively increase their outreach by internet and by sharing information with the membership of national organizations such as the national hispanic chamber of commerce. direct contact with the national hispanic chamber of commerce and its state affiliates, who have national databases stratified by services, would be an effective mean for improving outreach services. 85 journal of small business strategy vol. /4, no. 2 fall/winter 2003 private and government agencies need to hold small business fairs throughout the country. the business fairs should facilitate workshops that emphasize how to do business and e-procurement with the government. private and federal agencies could partner with state and local hispanic chambers of commerce that are located in states and communities throughout the country to promote the business fairs. in addition, national organizations like the hispanic chamber of commerce, national council of la raze and the league of united latin america citizens could also facilitate internet related workshops during their annual national meetings. hispanic small business organizations and small business organizations should collaborate with foundations and corporations that have funded website development for some inner city businesses. hsbs could strengthen their e-commerce capacity and access to opportunities by creating and/or enhancing their websites with the assistance of such foundations, but also other sources such as institutions of higher education with small business development centers should be explored for such endeavors. university business students, small business assistance centers, and corporate staff on loan at universities should be able to assist in enhancing the utilization of information technology of hsbs. a joint effort among government, businesses (large, medium and small size) and communities should be initiated. such efforts will develop partnerships that could increase access to technology training and small capital to buy and build hsbs technical capacity (technical personnel, attaining capital to enhance e-commerce technology related issues as well as bid requiremems) as well as to respond and access external markets and opportunities. collaboration with non-profit as well as private groups advocating for tax incentives to hsbs that want to make investments on internet and e-commerce technology and training should be strategically explored and developed. mutual partnerships between large corporations and small businesses, once identified, should enhance the technological capacity of hsbs and provide technical support to hsbs. reducing the digital divide will determine the participation level of minority businesses in eprocurement/e-commerce opportunities. hispanic small businesses need to enhance their technical capacity in order to access and compete for contracts that are being solicited by government agencies. technology is critical to access information and to partner with business organizations with similar interests. thus, government intervention is critical to enhance the opportunities of hispanic small businesses and therefore hsbs level of accessibility to government e-procurement. assisting hsbs to gain access to financial resources is crucial towards diminishing the digital divide and its effects on the long-term existence of hispanic small businesses. the model developed to assess level of accessibility of hsbs to e-procurement opportunities indicates that minority small businesses'apacity is significantly impacted by the business'bility to obtain/maintain internet access, by their ability to attain additional resources to support bid requirements, and by their difficulties in accessing trained personnel this empirical investigation places in perspective a combination of factors and also provides a better understanding of the causes of the digital divide for hispanic owned small businesses. having a better understanding of these issues facilitate policy and strategy development by a wide array of interested parties —government, private organizations, small business owners, and non-profit organization. since financial resources impact hsbs ability to secure trained personnel and to increase e-procurement opportunities, a comprehensive program to diminish the digital divide should account be developed by government agencies and private corporations seeking to increase small business participation. 86 journal of small business strategy vol. /4, na. 2 fall/winter 2003 these findings should be the beginning point of collaborative efforts that can effectively address the specific needs of hsbs and mobs at large towards narrowing or completely bridging the gap in the effective use of information technology. references anonymous. (2000a). minority owned businesses show steady growth. jacksonville: free press. anonymous. (2000b). a guide to government and e-commerce: the digital future of government. public management, 82, 1-8. benton foundation. (200 la). digital d/v/de basics. retrieved april 7, 2001, from http: //www. dig its 1 divide network.org/content/sections/index.c fm? key=2. benton foundation. (2001b). the dig/ta/ world of hispanics in the united states. retrieved from http: //www.digitaldividenetwork.org/content/stories/index.cfm?key=1 l. black, h., robinson, b., & schweitzer, r. (2001). do lenders discriminate against lowincome borrowers? review of black political economy, 28, 73, 22. borgida, e., sullivan, j. l., oxendine, a., jackson, m. s., riedel, e., & gangl, a. (2002). civic culture meets the digital divide: the role of community electronic networks. the journal ofsocial issues, 58, 125-142. brush, k. (2000). new study finds that small business missing out on internet opportunities. retrieved july 25, 2000, from http: /iwww.businesswire.corn. chan, e. & swatman, p.m.c. (1999). electronic commerce: a component model. 3rd annual collector conference on electronic commerce. retrieved from http: //citeseer.nj.nec.cont/chan99electronic.htm. chaston, i., badger, b., mangles, t. & sadler-smith, e. (2001). the internet and ecommerce: an opportunity to examine organizational learning in progress in small manufacturing firms. international small business journal, /9, 13-20. cutler, r. (2001). tomas rivera policy institute's digital steppingstones. retrieved from http: //www.digitaldividenetwork.org/content/stories/index.cfm? key=125. dillehay, b.h. (2002). e-government as virginia's vision. spectrum, 75, 24-29. dodge, r. (2000, october 15). minority businesses tackle digital divide, ilearn to use internet. da/ias morning news, p. ih. ferguson, k. (2000). sba and cisco systems link up to bridge the digital divide. las vegas business press, /7, 29-30. ford-livene, m. (1999).the digital dilemma: ten challenges facing minority-owned new media ventures. -federal communications law journal, 5/, 577-608. garcia, k. (2001). crossing the digital divide. hispanic magazine, 80-82. garson, g.d. (1999).retrieved from http: //www2.chass.ncsu.edu/garson/pa?65/reliab.htm¹intraclass. haves and have-nots. (2000, june 22). the economist, 355, 23-26. hecht, b. (2001). bridging the digital divide. journal of housing and community development, 58, 14-18. huck, p. (1999a). how do minorities fund small business start-ups? two chicago neighborhoods offer insight. the region, minneapolis, /3, 10-15. huck, p. (1999b). small business finance in two chicago minority neighborhoods economic perspectives. chicago, 23, 46-63. kennard, w. (1999).equality in the information age. federal communications law journal, 5/, 553-557. krasnow, e. g. 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(2001). is your local government plugged in? highlights of electronic government survey 2000. public management, 83, 4-10. nunnelly, j. c. (1978). psychometric theory (2nd ed.). new york: mcgraw hill. nute, d. (2002). net eases government purchasing process. american city & county, l /7, 810. ong, p. (2001). set-aside contracting in sba's 8(a) program. review of black political economy, 28, 59-63. pr newswire. (2002). national journalists and technology experts examine the digital divide. retrieved may 5, 2002, from http: //www.newscom.com/cgibin/pmh/20000822/msaiogo. robson, p. j. & benett, r. j. (1999). central government support to smes compared to business link, business connect and business shop and the prospects for the small business service. regional studies, 33, 779-787. the keenest recruits to the dream. (1998, april 23) (1998).the economist, 346, 25-29. twist, k. 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(biographies and appendix on following pages) 88 journal ofsmall business strategy vol. /4, no. 2 fa/iiiyinter 2003 cecilia temponi received a phd in industrial engineering from the university of texas at arlington, ms from louisiana state university, mba from st. mary's university, and bs in chemical engineering from universidad de el zulia, venezuela. she is currently an associate professor of management at the college of business of texas state university. she has over ten years of national and international industry experience in several sectors of the economy —oi i, software, and consulting —at various levels of management. she has authored numerous published articles in cross-disciplinary fields, with over 30-refereed publican'ons. her work has been published in the european journal of operational research, international journal of production economics, journal of contemporary business issues, journal of knowledge, culture, and management. her current research includes impactlimp/ications of technology access, enterprise modeling and process improvements, quality management and supply chain management, and technology outsourcing-prof ect management. jaime chahin, dean of the college of applied arts and associate professor at texas state university-san marcos, has over twenty-six years of varied experiences in education. he received the "ohtli " award from the secretary of exterior relations of mexico in july 2002. he was executive producer ofa documentary, the forgotten americans, a film about colonias in the u.s. mexico border, which premiered at the smithsonian and on pbs on december 14, 2000. the documentary received a first place award from the national council of families. his principal research interests involve cultural and public policy issues that impact access and equity in higher education. his most recent publications include the following articles: "las colonias, entre dos mundos" (2003); "latino deinographics and education in the us. southwest" (2003); "the educational and occupational aspirations of colonia children" (2002); "reflections of a migrant farmworker" (2000); "lessons learned in the development of human capital" (/999). dr. chahin received his ph.d. in education admim'stration in /977 and his m.s. iv. in /975 in administration and policy from the university of micliigan. his b.a. degree in sociology and political science was awarded in l974 from texas a & i university. (appendix on following pages) 89 journal of small business strategy vol. l4, no. 2 fall/winter 2003 appendix sample of survey sent to hispanic-owned small business (hsb). 1. what type of products/services do you offer? (mark all that apply with an x) fruitsnegetables food manufacturing construction other (specify): machinery manufacturing if you have a specific industrial code (sic), please specify 2. what is your average annual revenue in dollar amount? less than $500,000 $500,000-1,000,000 $ 1,000,001-5,000,000 $5,000,001-10,000,000 more than $ 10,000,000 3. if you have needed additional funds to supplement your capital, what type of funds have you pursued? (mark all that apply with an x) bank loans personal funds government loans trade credit other (specify): n/a 4. how many employees does your business currently have? less than 100 101-400 401-700 701-1,000 more than 1,000 5 a. have you tried to acquire usda contracts? yes no b. if yes, were your attempts successful? yes no (briefly describe the problems): 6. indicate afl essential components of electronic commerce that you and your business possess. (mark all that apply with an x) do not possess any internet access computer(s) knowledge about internet usage trained personnel other(specify): 90 journal ofsmall business strategy vol. /4, ato. 2 fall/winter 2003 for uestions 7 cib marh with an x the box thatindicates our ratin or each cate o /actor within each o the uestions. 7. indicate the level of accessibility you have in doing the following: category very a .bl accessible moderately rarely .bl a .bl inaccessibleaccessible accessible accessible gaining access to a ; computer gaining access to internet : conducting inteniet , research improving your internet skills g. indicate the level of difficulty you have encountered in the process of contracting with the usda. category very easy easy d ff i difficult slightly very difficult dtncult contacting the appropriate offices/agents finding out/learning basic requirements and procedures locating/receiving bid solicitations attaining sufficient capital to satisfy bid requirements 9. indicate how important each of the following factors is in enhancing your ability to do business with the usda? very moderately barelyfactors important unimportantimportant important important making the right contacts learning the procedures attaining additional capital to satisfy bid requirements training personnel to access usda information improving computer hardware obtaining/improving internet access 91 strategy getting started overseas: eximbank working capital financing for small business exporters toni lester babson college abstract this article focuses on preexport financing options offered to small business exporters by the us. export-import bank. financing is provided in the form of guarantees on commercial bank roorki ng capi lal loans to small business exporters. the paper discusses the program itself as well as relevant federal statutory law goverm'ng the program's establishmenl and operation. introduction the small business community currently faces several major economic hurdles. shrinking domestic markets and continued consumer preferences for cheaper foreign products are pushing many companies into bankruptcy. one way in which companies can meet this challenge is to target their sales and marketing efforts overseas. increased exports can contribute critically to the success of the small business community and the u.s. economy as a whole. exports can make the dollar stronger and help increase the number of available jobs domestically. in one year alone new england produced $10 billion in exports sales creating 135,000 jobs (10).despite the essential role they play in the health of the economy, small businesses (especially companies seeking to enter the international marketplace for the first time) are often confronted with commercial banking policies which prevent them from getting the financing necessary to launch their overseas efforts. to encourage private banks to lend to small business exporters, the federal government, through the export-import bank of the united states ("eximbank"), has developed a program that guarantees commercial bank working capital loans to small business exporters. this paper discusses eximbank's "working capital guarantee program" (the "program" ) and the extent to which it meets the needs of small business exporters. after a brief discussion of the mechanics of commercialbank working capital financing, the paper covers the program itself. this includes a discussion of relevant statutory directives, and program guidelines and requirements. 81 commercial bank export working capital financing companies use export working capital loans to finance the purchase of raw materials needed to produce exports or to help them market their products abroad. this type of financing is especially useful for companies trying to compete internationally for the first time. export working capital loans are commonly set up in two ways. the commercial bank may either fund a specific export transaction (such as the sale of 100cars) or open a revolving line of credit in favor of the exporter that can be used for several transactions over a period of time. revolving lines provide great flexibility to the exporter because outstanding amounts already used can be paid off at any time and interest due will decrease as a result (11). unfortunately, it is often very difficult and expensive for small business exporters to get export working capital loans. as a recent publication by eximbank explains, "lack of working capital financing is one of the biggest barriers small and medium-sized companies face when trying to export" (7). banks may charge floating rates as high as three percent over prime and a two percent service charge. they also require that inventory and accounts receivable be assigned as collateral. banks justify these requirements by pointing to the high expenses associated with mon i toring inventory and accounts receivable and the perceived poor credit worthiness of small business exporters. to make matters worse, many exporters only have their foreign receivables to offer as collateral and lenders are reluctant to assume the risks associated with these types of receivables. risks here include war and local restrictions on the buyer's ability to get the necessary foreign exchange to pay the u.s. exporter in dollars (9). eximbank's statutory mandate with the help of eximbank, small business exporters may now be able to counter conservative commercial bank lending policies. established in 1945 pursuant to the export-import act (i), eximbank's primary purpose has been to help v.s.exporters compete internationally. over its 55 year history, the bank has financed approximately $200 billion in u.s.exports (6).this was usually done by giving large loans directly to foreign buyers to purchase u.s. exports, or by guaranteeing commercial bank loans to foreign buyers (12). although eximbank programs were primarily directed in the past towards helping large u.s exporters with proven international track records, the prospects for small business access to eximbank financing has changed drastically over the past few years. as a result of increased pressure from the small business community, congress passed legislation in 1983 directing eximbank to also guarantee loans given by commercial banks directly to exporters. the legislation also mandated that spedal efforts be made to guarantee loans to small and mediumsize businesses (3). eximbank's working capital guarantee program general purpose in response to the 1983 statutory directives, eximbank established the program, whose stated purpose was to help "small companies obtain commercial financing for export-related purposes, such as production, inventory purchases or export marketing'6, p. 33,34). by 1987 there were approximately $18.6 million working capital guarantees authorized under the program. in 1988 authorizations jumped dramatically to $75 million (6, p. 16). 82 j eligible lenders financial institutions and commercial banks with business lending experience are eligible to apply under the program (7).the bank has also given guarantees to state government agencies offering working capital financing to local exporters, including the los angeles local development corporation and the massachusetts office of international trade and investment. eligible exporters at first, it would appear that the program's eligibility requirements are very flexible. small businesses applying for an eximbank guarantee must simply show that they have "exporting potential" and need financing "to produce or market goods for sale overseas" (7). however, the actual application form for the program implies that the bank has more stringent eligibility requirements. it asks exporters to submit financial statements for the past three years, if they are available (4). it would thus appear that the bank would prefer to avoid providing start up financing for brand new companies. three years of financial statements should help eximbank credit officers substantiate a company's claims that it has "exporting potential". a typical applicant under the program has already unsuccessfully tried to get a working capital loan from its commercial bank. the commercial bank's refusal to lend may be based on a hesitancy to accept the exporter's foreign receivables as collateral or the fact that lending limits with the creditor have already been reached by the exporter on prior transactions. eximbank's legislation was designed to provide financing alternatives to exporters facing this predicament. the law directs eximbank to take into account the extent to which "the private credit market is not providing adequate financing to enable otherwise creditworthy ...exporters to consummate export transactions" (3). furthermore, when "such guarantees would facilitate expansion of exports which would otherwise not occur" (3), the statute directs eximbank to seriously consider authorizing a guarantee. covered activities eximbank guaranteed loans can be used for a wide range of export related activities, including labor costs associated with producing goods for export, purchasing raw materials, export marketing or overseas business development activities (7, p. iii-2). this would probably cover overseas travel, room, board, and the fees needed to hire a foreign consultant. types of financing covered and lender risk guaranteed by eximbank exporters can apply to get an eximbank guarantee for loans covering a specific export transaction or revolving lines of credit covering a three month period. eximbank will reimburse the lender for up to 90 percent of the exporter's outstanding loan balance plus any past due interest and principle (7. p. iii-3,4). security security requirements under the program also seem to be very flexible. the legislation states that eximbank can guarantee working capital loans "when such loans are secured by export accounts receivable, inventories of exportable goods, accounts receivable from leases, performance contracts, grant commitments, participation fees, member dues, revenue from publications, or such other collateral as the board of directors may deem appropriate..." (my emphasis) (3). 83 eximbank further requires that all collateral must be perfected on a first lien basis, and shared between it and the commercial lender on a pro rata basis (i.e., eximbank 90% and commercial bank -10%) (7, p. iii-2 to 4). costs of the eximbank guarantee although eligibility and collateral requirements tnay seem to be lenient, many small business exporters may find that the fees charged for using the program are prohibitively high. eximbank charges three different fees. although two out of the three are charged to the lender, most commercial lenders will pass these charges on to their clients. the lender is charged a "facility fee" of one-half of one percent on the loan amount which is due within 90 days of the eximbank formal approval of the guarantee. the lender is also charged a one-quarter of one percent "usage fee" which is payable quarterly on the outstanding balance of the loan until the loan period ends. a $100 "processing fee" is also charged to the exporter for having its application reviewed (8). although these fees may seem steep, eximbank is limited by other legislative mandates which require it to charge fees in order to remain fiscally responsible. on the one hand, eximbank must offer financing that will "neutralize the effect of ...foreign credit on international sales competition" (2). this means that if a competing foreign export finance agency (i.e., the eximbank's counterpart in france or britain) finances a local export by charging below market rates, eximbank must consider offering a similar low rate on the financing for the competing u s. export. in this way, eximbank'hopes to make product quality and price (not the financing package) the main factor influencing the foreign buyer's purchasing decision. congress further directs eximbank to also consider "its average cost of money as one factor in its determination of interest rates ..."(2). since eximbank is not a grant-giving agency, it must thus charge fees and rates to cover its own borrowing costs. currently the federal financing bank loans eximbank the money to finance its loans, and rates charged by exi mba nk on its loans and guarantees are less than the rates charged by the federal financing bank to eximbank. thus, there is an ongoing decline in eximbank's reserves. eximbank must, therefore, try to earn money in a variety of ways to make up for the negative spread between its cost of funds and its return on loans and guarantees. it is therefore highly unlikely that processing, usage or facility fees under the program wi i i be red uced anytime in the near future. conclusion while poor financial support from eximbank and the commercial banking industry in previous decades prevented many small business exporters from getting adequate financing, eximbank's working capital program may now provide one hopeful alternative for small businesses. although program fees may in some instances be prohibitive, the program still offers many companies a real chance to expand or begin developing their international marketing and sales efforts. references 1. the export-import bank(hereinafter referred toss" eximbank") act of1 945,12 united states code, section 635 (1945). 2. eximbank amendments of 1978, 12 united states code, section 635(b)(1)(b) (1978). 84 3. eximbank act amendments of 1983, 12 united states code, section 635a-4 (1983). 4. eximbank: application for working capital guarantee, eib form 84-1 (as rev. 1987). 5. eximbank: program selection guide (1989),p.l. 6. eximbank, 1988 annual report (1988), p.2. 7. eximbank, financing and insuring exports: a user's guide to eximbank and fcia programs (1989),p. ill-l. 8. eximbank: program selection guide (1989),p.l. 9. warren glick and r. mckinsey, the export-import bank of the united states, in 2 international financial lars (r. rend ell ed., 2nd ed. 1983), p. 144. 10. house committee on banking, finance,and urban affairs, h.r. report no. 290,97th congress., 2nd session 3, reprinted in u.s. code congressional ge administrative news (1983),p.2471. 11. mccann, term lean handbook, a.b.a. section corporations, banking, business law (new york, harcourt, brace, jovanovich, 1983), p.ll. 12. edward reed, richard cotter, edward gill and richard smith, commercial banking (new jersey, prentice hall 1980), p. 448. 13. rendell, robert, export-import bank financing and the role of the export-import bank of the united states, 2 journal of international iaw and economics (1976), p. 92. 85 http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2019, vol. 29, no. 03, 60-77 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2019 small business institute® w w w. j s b s . o rg introduction abdela k. chebo1, idris m. kute2 1kotebe metropolitan university, ethiopia, abdikosa@gmail.com 2debre berhan university, ethiopia, idrisko21@yahoo.com strategic process and small venture growth: the moderating role of environmental scanning and owner-ceo strategic, scanning, ceo, growth apa citation information: chebo, a.k., kute, i. m. (2019). strategic process and small venture growth: the moderating role of environmental scanning and owner-ceo. journal of small business strategy, 29(3), 60-77. small firms contribute to the development of most economies. ethiopia is among the developing countries in which most of the people’s livelihood is dependent on agriculture. earlier, the country developed the agricultural development led industrialization policy. recently, micro and small enterprises are receiving attention, because small firms are the main contributors to successfully transforming the agricultural led economy to industry-led economy. however, for the successful transition of small firms, appropriate strategies are required for the growth of ventures. but, some small firms are competing against larger firms and facing challenges in developing sustainable strategies for building and maintaining relative competitiveness against these larger firms (bianchi, winch, & cosenz, 2012). as previous research states, many small firms fail at an early stage and do not get a significant growth route (storey, 1994). this happens because most of these small businesses are serving local markets with imitative businesses (reynolds, bygrave, & autio, 2004). similarly, mckaskill, 2010 stated that the majority of these firms have not gained traction to proceed to the next phase. in ethiopia, many small firms fail at an early stage. for instance, ageba and amha, (2006) surveyed 11,000 micro and small-scale enterprises and found that most of them have constraints such as working space constraints, credit and finance constraints, rigid regulatory framework, poor techniques of production, input constraints, information constraint, lack of skill, poor strategy, lack of interest in training and workshops. majority of the above problems were associated with poor strategy development. by adding more outputs and stimulating competition in the market, the growths of new ventures have created more opportunities for employment and improved the quality of life (mcdougall & robinson, 1990). further, the developthe strategic processes that were followed by small firms are the main contributors to the growth of these firms. therefore, the aim of this study is to investigate the contribution of the strategic process to the growth of ventures by taking environmental-scanning and owner leadership as a moderator. in order to achieve this objective, a sample of 210 firms grown to emerging medium enterprises has been selected and used to obtain primary data. the findings of the study show that the growth of ventures and strategic process practices among these firms are moderate. the strategic processes employed were the main contributors to the growth of ventures. when trends and events in the environment are understood, the strategic process dimensions that include participating in strategic decision-making, modes of forming a strategy, and learning from mistakes strategically will be intensified towards influencing the venture’s growth. venture growth is better among the firms who were led by owners themselves and learn from their failures. as firms scan their environment, they tend to exploit and practice suitable strategies that contribute to the growth of the ventures. as a result, the owners/managers of these small ventures should advance their current practices of strategic processes by encouraging workers to participate in decision making, developing effective planning, and learning from their mistakes by scanning both the external and internal environments. http://www.smallbusinessinstitute.biz http://www.jsbs.org 61 a. k. chebo, i. m. kute journal of small business strategy / vol. 29, no. 3 (2019) / 60-77 ment of ventures can be considered as a revitalization device for developed country’s markets and a forceful instrument for emerging markets (li & atuahene-gima, 2001; zhao & aram, 1995). accordingly, the required high growth creates a business that supports the high growth firms (mckaskill, 2010). among the different factors that influence the venture’s growth, one is the strategic process followed by small ventures. these are the strategy processes that concern the way business starter’s deal with situations including its applicability to any content (van gelderen, frese, thurik 2000). accordingly, the presence of the aforementioned processes has little consequences if they cannot progress the performance of firms (verreynne, 2005) and growth of ventures. according to menzel & günther (2012) strategy formulation is successful in small enterprises when it is developed in relation to the factors such as personal, firm, and external environment in which the firms operate. while the complexity of various organizational tasks simultaneously increases, organizational growth brings an enforceable strength of that hands-on capability (sophia & owuor, 2015). however, aligning the strategic orientation of the organization to its environment has paramount importance for success (o’regan, kling, ghobadian, & perren, 2012). therefore, there is a high necessity to scan the environment (jogaratnam & law, 2006). in this action, both a resource-based view (campbell & park, 2017; runyan, huddleston, & swinney, 2006; wiklund & shepherd, 2005) and external factors (liao, kickul, & ma, 2009; campbell & park, 2017) should be considered in scanning the environment. this is because, strategic planning is considered a rational process used to uncover the opportunities and threats created by the environment of the business and to identify the strength and weakness of the business (williams jr., manley, aaron, & daniel, 2018). additionally, by serving as ceos, founders of the firms have continued to put pressure on the strategies and pursue their distinctive goals (jaskiewicz, block, combs, & miller, 2017; chua, chrisman, & bergiel, 2009). on the other side, risks and forecasting problems of instability of the current economic condition is increased because of intense competition (ndirangu & mukulu, 2014). one reality is that competitors with larger pools of strategic resources have greater flexibility in managing their external environments (bianchi et al., 2012). this is because the benefits from the new innovation will not be successful without sufficient finance, marketing, production competencies (mazzarol, 2004) and other resources. several studies conducted and examined on testing the impact of entrepreneurial orientation (strategy content) on small venture growth and performance were discovered, even if little is done on strategic processes. however, covin, green, and slevin, (2006) used strategic process dimensions as moderators in testing the influence of entrepreneurial orientation on the growth of sales. therefore, this paper is among the first to test the influence of strategic process dimensions such as participation in strategic decision-making, modes of strategy formation, and learning from mistakes strategically as the main effect. moreover, the study used environmental scanning and venture leadership as moderators in the above relationship, which were not identified from previous studies. as a result, it’s hoped that this study may put the debate further on the issue of the strategy process and growth of small ventures under the circumstance of environmental scanning and firm founder. theory and hypotheses entrepreneurship and strategic management in line with understanding the growth of ventures, the conceptions of the entrepreneur share the same common goal with strategic management (ireland, hitt, & sirmon, 2003; weezel, 2009). even though they are different in focus, both concepts of strategic management and entrepreneurship are inevitably interrelated and support each other (ireland et al., 2003). for instance, entrepreneurs who have the character and behavior of innovation tend to use strategic management (okhomina, 2010). accordingly, some scholars suggest integrating the two fields, while others have developed independently of each other despite the shared focus (hitt, ireland, camp, & sexton, 2001). van gelderen et al., (2000) stated that strategies are used differently in different ways of combinations and preferences in different situations. various theories of strategic management were associated with large firms since the subject is largely associated with large corporations (mazzarol, 2004). however, there are a significant group of small companies competing against multinational firms in major markets (bianchi et al., 2012). therefore, the entrepreneurial ventures require the use of strategic management to strategically plan and organize the combination of product and market (mazzarol, 2004). strategic processes in small firms strategy making is an organizational-level process that takes in different activities of the firms that used to plan and act out the firm’s goals and strategic missions (dess, lumpkin, & covin, 1997). we can also consider strategies as an individual level plan of action that influences the way of performing things (van gelderen et al., 2000). various scholars examined the strategic process and contents (eg. 62 a. k. chebo, i. m. kute journal of small business strategy / vol. 29, no. 3 (2019) / 60-77 dess, et al., 1997; hart, 1992; olson & bokor, 1995; van gelderen & frese, 1998). that is, the strategy used by small businesses can be studied by both strategy content (what they do) and strategy process (how they do it) (van gelderen & frese, 1998). according to olson & bokor (1995) the strategy process is the way in which strategic content is formulated and implemented. the strategy can be studied from the perspective of a process (gibcus & kemp, 2003). depending on organizational-level research of the strategic process, janczak, (2005) confirmed that the school of decision-making development focus is moving from a content to a process. this is because the manner of dealing with situations and their applications to content has been concerned with the strategy processes (van gelderen et al., 2000.). earlier, strategy formulation can be considered a process of a firm by itself, rather than the skill commencement of a single mind (andrews, 1971). here, the strategic process research can be categorized as the process of choice (making decision strategically) and the process of implementation (strategic change) (pettigrew, 1992). therefore, the organizational level aspects of strategy making include the planning, decision making, analysis, and other issues of the organization (hart, 1992). later, covin et al., (2006) classified the strategy processes as participativeness in strategic decisions, the modes of strategy formation, and strategically learning from mistakes. the influence of strategic processes on venture growth regarding the growth of ventures, little is done on using growth as an indicator of performance growth (omar, lim, & basiruddin, 2014). however, there are different views and thoughts among researchers on the growth of ventures. some of these researchers argue that the path of the growth that the small firms are using is predictable, while the others argue that this growth is opportunistic rather than the predictable one (gupta, guha, & krishnaswami, 2013). to attain superior growth, organizations must be efficient and effective in achieving their objectives (wu, 2009). the strategic decision literature shows that decisions can directly affect not only the success of the firm, but also the nature of the firm as a whole. hence, strategy and strategic decisions can have paramount importance in determining the outcome of the firm performance (janczak, 2005). accordingly, the combination of resource-based view, as well as stakeholder approach with strategic management, will contribute better to the performance of small firms (campbell & park, 2017). specifically, the growth and successfulness of the firms depend on the strategic process. more specifically, ketchen jr, snow, and street et al (2004) stated that the success of ventures are improved when managers give considerations to the extent of participation and decision making comprehensiveness. hence, the presence of strategy processes followed by small enterprises has little consequence with the absence of a potential used to progress the performance of firms (verreynne, 2005). the contribution of each strategic process to ventures success and growth has been discussed below. the influence of strategic decision making participativeness on venture growth with consideration to the actions that maintain strategy (janczak, 2005), the way of decision-making in relation to strategic issues has an implication on the behavior of entrepreneurs (weezel, 2009). similarly, with consideration of creating wealth, the integration of entrepreneurial and strategic perspectives can be examined (hitt et al., 2001) for contributing to the venture’s survival and growth. there are differences in strategic issues, which could affect the extent of top-level management participation in making decisions (gündüz, 2014) that in turn influence the growth and success of small ventures. particularly, participativeness in strategic decision-making is the amount in which decisions are made by consensus or by top executives (covin et al., 2006). the owners/managers decision making participativeness is an important factor that determines processes of decision making successfulness since they can be affected by the lower-level people (bower, 1970, janczak, 2005). strategy making in combination with strategy and environmental issues is most strongly related to the firm’s performance (dess et al., 1997). similarly, janczak (2005) states that strategic decisions are the decisions made by top-level people infrequently and have an impact on performance and growth. as a result, they are making decisions through consensus, the management tends to overcome few of their strategic problems (gündüz, 2014). according to frese, van gelderen, & ombach, (2000), strategy making through participation is one of the highly related factors with the success of the firms. likewise, ketchen, et al (2004) finds that the success of the firm will be improved when the amount of participation and all-inclusiveness in the process of decision is supported by managers. parnell and crandall (2001) also identifies the possibility that strategic decision-making participativeness will enhance the quality of decision and organizational effectiveness. accordingly, the level of strategy making participativeness is related to the improvement of firm performance (verreynne, 2005). from this, we propose that strategic decision making participativeness positively influences venture growth. 63 a. k. chebo, i. m. kute journal of small business strategy / vol. 29, no. 3 (2019) / 60-77 hypothesis 1. strategic decision-making participativeness positively influences ventures growth. the influence of strategy formulation mode on venture growth even if the question of whether a strategy is the result of formal planning or emergent remains still, the formation of strategy has been considered as a heart of strategic management for more than three decades (wongsawan, 2009). if well implemented by the firm, strategic planning is effective towards growth (sophia & owuor, 2015). that is the reason for which many entrepreneurs tend to comprise different strategic perspectives in their activity (kraus & kauranen, 2009). in most cases, the formulation of strategy requires different factors associated with a firm, personal, and external environment (menzel & günther 2012). therefore, the formulation of strategy can be considered as a process (janczak, 2005). previous studies have not considered the specific activities in the process of strategic planning (arasa & k’obonyo, 2012). authors such as sophia & owuor, (2015) state that the separation of the process of a perceived strategy planning from the action and being unrealistic becomes an obstacle for the growth of firms. likewise, kraus, harms, and schwarz, (2008) also discover that the extent of formalization has a significant positive effect on the firm’s performance. that means, the personal strategies used by leaders influence the performance of their firm (van gelderen et al., 2000). small to medium enterprises (smes) are more likely to use planned versus emergent strategies when founders perceive high uncertainty in the competitor environment (droege & marvel, 2009). as covin et al., (2006), comparatively strategies that are emergent help to keep successful operations under the conditions of easily unknown defensible and planned strategic paths. therefore, we tend to use emergent strategy formation mode as a determinant of a firm’s growth. hypothesis 2. the use of emergent strategies positively influences venture growth. strategic learning from failure and performance without utilizing their strength, small ventures become susceptible to large companies’ competition (lobontiu, 2002) and learn from their failure. covin et al. (2006) defined strategic learning from failure as the firm’s self-reported proficiency at identifying its strategic mistakes or failed strategies, the causes of those failures and the lessons of those failures. more clearly, strategic learning involves a process in which firms continuously creating and reformulating strategies (voronov & yorks, 2005). strategically learning from mistakes is about discovering and detecting the difference between the past and current situations with their causes and effects (carmeli, tishler, & edmondson, 2012). accordingly, the firms are learning from their strategic mistakes by considering the knowledge they gained from past experience and using them as a foundation for further making of decisions (covin et al., 2006). this learning from failure will enhance the growth of small ventures. from this, we proposed the following hypothesis. hypothesis 3. strategically learning from failures positively influences venture growth the moderating role of environmental scanning both new opportunities and threats emerge when uncertainty is growing and the speed of change is increasing (shane & venkataraman, 2000). therefore, the soul of entrepreneurship is on discovering and exploitation of the opportunities, while the way these opportunities are transformed into a competitive advantage is the soul of strategic management (kraus & kauranen, 2009; kuratko, ireland, covin, & hornsby, 2005; venkataraman & sarasvathy, 2001; zahra & dess, 2001). the need to improve strategic decision is linked to changes in the current environment and the difficulty that managers in decision-making (papulova & gazova, 2016). as a result, the scanning of the environment is used to detect the trends of business opportunities and challenges to organizational success (jogaratnam & law, 2006). in order to have a successful integration of competitive strategies and requirements of the environment as well as exceptional performance achievements, effectively scanning the environment is a necessary condition (karami, 2008). that is, integrating strategic orientation with the environment has paramount importance for the success of ventures (o’regan, et al., 2012). this is because the necessity to adjust the organization to its environment is undertaken by a way of strategy that needs the firms understanding about what happens around them (de lorenzi cancellier, junior, & rossetto, 2014). as a result, scanning the environment is an essential task that needs to be considered in times of a firm’s growth. since organizational growth brings an inevitable dilution of hands-on capability (sophia & owuor, 2015), a great necessity to environmental scanning and to the act of anticipating different factors that affect change (jogaratnam & law, 2006). strategic planning can be considered as a 64 a. k. chebo, i. m. kute journal of small business strategy / vol. 29, no. 3 (2019) / 60-77 rational process of uncovering the external threats and opportunities, as well as internal strength and weaknesses in order to use the tracked information for formulating a plan that aligns the firm to its environment towards enhancing a firm’s performance (williams et al., 2018; tell, 2012). internally, a resource-based view (rbv) considers strategies are derived from resources internal to the environment (campbell & park, 2017; runyan et al., 2006; wiklund & shepherd, 2005) that holds sustained competitive advantage rests on organization resources (priem & butler, 2001). however, there is a lack of sufficient resources among many small ventures decision-makers to create a formal system of environmental scanning that helps them (liao, et al, 2009). this is because small business performance is influenced by the importance of society, external stakeholders, and corporate social responsibility (campbell & park, 2017). primarily, the way of acquiring information from external environments is through the process of scanning the environment (jain, 1984; jogaratnam & law, 2006; olsen, murthy, & teare, 1994). however, there is a lack of study that integrates the approaches of resource-driven and approaches of relation-driven, or an integrated study that includes a resource-driven to strategic management (campbell & park, 2017). hence, this study focused on integrating the resource-based view and external environment to scan the environment. the successful formulation of a strategy of small ventures associated with different factors including the personal, firm and external environmental factors (menzel & günther 2012). according to dess et al., (1997), entrepreneurial strategy making is more strongly related to a firm’s performance in the case it was integrated with strategy and environmental situations. particularly, the process of planning is inflexible and rigid because of its operation in the changing environment, in which unfavorably affected by the weak adaptation to environmental change (sophia & owuor, 2015). in coping with an uncertain environment, it requires inclinations toward planned strategy while an attempt to capitalize on opportunities arising from this uncertainty requires inclinations toward emergent strategy (droege & marvel, 2009). as eisenhardt & martin (2000), comparatively, the firms situated in less dynamic environments can perform detailed and stable processes than their counterparts (o’regan et al., 2012). besides, there are studies that consider strategic planning occurred with a formal written plan only (williams et al., 2018; gibson & cassar, 2005). in general, environmental scanning is about learning the different events and trends in the organization’s internal and external environments (hambrick, 1981). as a result: hypothesis 4. environmental scanning intensifies the influence of (a) strategic decision making participativeness (b) using emergent strategy and (c) strategic learning from failure on ventures growth. the moderating role of owner-ceo there are researches that suggest the organizational structure designed by the owners/founders have influenced the performance of the firms (baron, hannan, & burton, 1999). abebe & alvarado, (2013) stated that the performance of firms led by the founders themselves is significantly different from the firms led by employed managers. this omnipresent influence and dominance in decision making by firm founders brings equivalence in the individual and organizational level analysis (dickson & weaver, 1997). despite the fact that the owners of firms are influencing their strategies and pursuing their goals, they should hire non-owner ceo who will not fully fulfill the owner’s goals (jaskiewicz et al., 2017; chua et al., 2009). among the different findings, abebe & alvarado, (2013) find that firms led by non-founder firms performed better than firms led by owner ceo’s. conversely, zhang, wang, he, wang, mei, and lian, (2010) found that the turnover of founders has a significant and negative effect on the performance of the firm. ceo relational leadership (carmeli et al., 2012) is a key to supplement trust that facilitates learning from failure. besides, kaplan & reishus (1990) and gilson (1990) state that firms who were more likely take the non-founder leadership performs higher than their counterparts and cowling, (2007) found that the non-owner ceo is positively associated with the growth prospects. therefore, the strategies developed by small business owners have a relationship with the firm’s performance (van gelderen et al., 2000). from these, we propose that: hypothesis 5. the influence of (a) strategic decision making participativeness (b) use of emergent strategy, and (c) strategic learning from failure on ventures growth were intensified when the owners themselves led firms. control variables the strategic process and firm’s performance was varied because of the firms age, firm size, and their sectors (lumpkin, & dess, 1996; shirokova, & sokolova, 2013; van doom, jansen, van den bosch, & volberda, 2013; wales, gupta, & mousa, 2013; shirokova, bogatyreva, & beliaeva, 2015). the researches on small ventures tend to equate the individual and the firm level of analysis because of the dominant influence of the founder on their firm (van gelderen & frese, 1998).therefore, both individual-level 65 a. k. chebo, i. m. kute journal of small business strategy / vol. 29, no. 3 (2019) / 60-77 analysis (gender and educational level) and firm-level analysis (firm age and size) were used to control the relationship. for instance, the gender of the founder played a role in influencing small ventures growth (lorunka, kessler, frank, & lueger, 2011). accordingly, many of the studies revealed that females are less likely to become entrepreneurs compared to their male counterparts (minniti & nardone, 2007; allen, elam, langowitz, & dean, 2008; wagner, 2007; bernat, lambardi, & palacios, 2017). on the other hand, other authors stated that many of the determinant factors in entrepreneurship are not different among male and females (bernat et al., 2017). the small firm’s strategic management behavior will be affected by the owner-manager educational level characteristics (olson & bokor, 1995). despite the fact that the findings on the impact of education are not the same, the studies conducted in developed countries reveals that there is a significant positive coefficient for the education variable (bernat et al., 2017). particularly, pajarinen, rouvinen, and ylä-anttila (2006) stated that entrepreneurs who have better academic background tend to be innovative in doing their business (gupta et al., 2013). that means, as the entrepreneurs are educated more, they are thinking and acting strategically than their counterparts (kraus et al., 2008). similarly, gibson and cassar, (2002) stated that ceos who have degrees from university tend to plan more repeatedly compared to others. small firms strategic planning seems to depend on the size of the firm (stonehouse & pemberton, 2002) because the complexity and style of the strategy-making process may be affected by firm size (dess et al., 1997). regarding this strategic planning, small firms are more flexible than the larger firms, but they lack the experiences and knowledge required for planning in advance (ramanujam & venkatraman, 1987). that means, the larger firms tend to involve more in planning and also tend to follow more complicated procedures in planning (masurel & smit, 2000). according to rue and ibrahim (1998), for larger firms, a time period of three years is used for strategic planning. however, among small firms, a shorter time can also be used for strategic planning (kraus et al., 2008). regarding the age of the firm, the older firm has more hierarchy and inertia that motivates them less in shifting the direction of the organization through new product and service innovation (huergo & jaumandreu, 2004). accordingly, luo, zhuo, & liu, (2005) found that the older firms were less likely to reveal strategic behavior than younger firms. conversely, younger firm leaders that do not have strong and well-established business processes, knowledge of the market, and established norms, faced diminished capacity in linking their strategies with performance (slevin & covin, 1997). generally, the overall framework of this study was provided in figure 1 below. figure 1: conceptual model h1 h2 h3 h4 (a-c) h5 (a-c) sdm participativeness strategy formulation mode strategic learning from failure ventures growth controls firm age firm size gender education environmental scanning owner-ceo 66 a. k. chebo, i. m. kute journal of small business strategy / vol. 29, no. 3 (2019) / 60-77 method for this research, descriptive and explanatory research designs were used to analyze information gathered through a questionnaire. a total of 226 sample respondents from small firms owners/managers were selected using two-level multi-stage sampling, from which the response of 210 firms were validated and used for analysis. the data used for this study was gathered through a structured questionnaire from small firms in ethiopia. in addition, the micro and small enterprises development strategy manual document was assessed. instruments for this study questionnaire and information obtained from annual reports of micro and small scale development offices were used. the questionnaire was partly developed using a seven-point likert scale and distributed to small firm owners/managers. the questionnaires consist of three parts and fulfills the required variables for the validity and reliability of the research result have been distributed to the selected respondents. accordingly, the first part of the questionnaire is about the general information of the respondents such as gender, educational level, firm size, age of the firm, and whether the firm is led by the founder or not . for gender 0 is coded for females and 1 is coded for the male. kosa, mohammad, & ajibie, (2018) measured firm age as owners/managers self-reported years when they were established. firm age is a dummy variable, which is coded as 0 for firms that are younger than ten years, and 1 for firms older than 10 years. to determine the size of firms, we tend to use the total number of employees (both permanent and temporary) in the enterprise. this dummy variable is also coded as for enterprises whose total number of employees are less than 30 and 1 for enterprises whose total number of permanent and temporary employees are 30 or more. enterprises in manufacturing and construction sector have employees of more than 30 work forces since it is mandatory to have this number to grow to medium enterprise, while many of the firms in other sectors such as service trade and urban farming have less than 30 workers. the next section of the questionnaire measures the strategic process followed by small ventures, in which different authors use different item and scales. for this research, a 13item questionnaire developed by covin et al, (2006) which can be categorized along three dimensions, strategic decision-making participativeness, strategy formation mode, and strategic learning from failure have been adopted. many researchers have suggested different approaches for measuring the firm growth. compared to financial measures, taking growth as an indicator of performance is more accurate (wiklund & shepherd, 2005). accordingly, the owners of firms may use various criteria including the number of workers and firm’s expansion capacity in judging organizational growth (sophia & owuor, 2015). on the other hand, sales growth has been used as a measure of a firm’s growth. for instance, firms with better practices tend to sell more and grow larger that leads to hiring more employees (mckenzie & woodruff, 2017). smes firm growth is measured using growth in sales, growth in employment, new product/service introduction, and entering a new market (omar, et al., 2014). as a result, the subjective measure of performance may provide better and complete data than the financial one (covin & slevin, 1989). for this study, therefore, we tend to measure the performance of ventures subjectively by responses to four non-financial performance indicators, which are assessed using a seven-point likert scale ranging from “much worse” to “much better”. these items include profitability growth, sales growth, resource growth, and employee growth. the last part is the environmental scanning, on which its items were adopted from barringer, and bluedorn (1999), which includes two dimensions; the internal and the external environment. it is measured on a seven-point likert scale ranges from “never” to “frequently”. results and discussion firms strategies and growth in terms of capital and employment most of the small firms failed at the early stage in ethiopia as well as in africa. among firms that have grown a majority of them are concentrated in cities. as we see in figure 2a, the largest number of firms that have grown are in oromia, followed by addis ababa, which is a single city. this reveals that firms established in the capital town and larger cities have more advantages to grow than firms established in regional states. regarding the sectors in which firms are involved, the majority of the manufacturing ventures have grown, followed by service and construction. on the other hand, the number of firms that grow to emerging medium-sized enterprises is increasing throughout the year. as we see figure 2b the number of different sectors have not indicated much variation except the urban farming sector, which is very low. however, when we see the variation between the sectors in cities and towns the involvement is dominated by the manufacturing and construction sector. the figure below takes the firms in addis ababa to show this variation. figure 3a specifically shows the firms that have grown to medium enterprise in addis ababa. throughout 67 a. k. chebo, i. m. kute journal of small business strategy / vol. 29, no. 3 (2019) / 60-77 all the years, the number of manufacturing industries more than all other sectors followed by the construction sector. in terms of employment creation construction sector overweigh the other sectors (figure 3b). regarding the capital level of firms, the capital recorded by manufacturing is higher than the others (figure 3c). regarding growth measures, different countries have developed different criteria to transit enterprises form one level to the next level. in ethiopia, there are three stages of growth, which are start-up, growth and maturity stage. these stages are applied for both micro and small scale enterprises and for each stage the federal micro and small enterprises development agency (femseda) developed different criteria’s. for our case, we have summarized growth criteria to grow to start-up medium enterprises as follows. the permanent job opportunity created by the en 0 5000 fig 2a: number of enterprises grown to start up medium level 2011/12 2012/13 2013/14 2014/15 2015/16 0 500 1000 1500 2000 2500 2010/11 2011/12 2012/13 2013/14 2014/15 manuacturing construction urban farming trade service figure 3a. firms grown to medium enterprise figure 3b. small firms employement creation figure 3c. growth in capital in the last 5 years man trad 0 100000000 200000000 300000000 ic cc ic cc ic cc ic cc ic cc 2010/11 2011/12 2012/13 2013/14 2014/15 man cons svs trad uf 2011/12 2012/13 2013/14 2014/15 0 100 200 2011/12 2012/13 2013/14 2014/15 0 1000 2000 3000 4000 5000 pe r te m p pe r te m p pe r te m p pe r te m p pe r te m p 2010/11 2011/12 2012/13 2013/14 2014/15 manufacturing construction service trade urban farming figure 2a. number of enterprises grown to start up medium level figure 2b. enterprises grown in terms of sector 68 a. k. chebo, i. m. kute journal of small business strategy / vol. 29, no. 3 (2019) / 60-77 terprise must exceed 30 including the founding members, while temporary job opportunity should lie between 20 and 30 employees. regarding the enterprise’s sector, the manufacturing industry is the highest of others. trade, service, and construction sectors also play a large role. more specifically, the manufacturing sector alone accounts for approximately half of the entire sector. this result reveals that the manufacturing sector is more successful than the other sectors in the larger cities. manufacturing and construction have been given more attention since they support the economy more than the other sectors by creating more employment opportunity and generating more revenue. that is why the government is emphasizing and encouraging the owners of firms that have grown to emerging medium enterprises to join these two sectors. strategic process practices even though the firms that have grown to medium-sized enterprises are following a good strategy comparatively, the strategies currently applied is not adequate for further growth. for example, an employee’s participation in decision-making is insufficient. that is, the strategic decision-making participativeness, which helps to generate new ideas and products are not sufficiently practiced. similarly, the mode of strategy formation and strategically learning from failure are moderately practiced among these firms. table 1 shows the descriptive statistics result. the highest correlation is between ventures growth and strategic decision making and between ventures growth and strategy formation mode that is (.777, 000) and (.730, 000) respectively. even though the current strategic process practices were poor, there are small firms who used strategy formation in planning their work activities and there are owner-managers who encourage their workers to take part in the planning process. small firm owner-managers also started to take lessons from their failure and include improvements in the next planning process. these strategic processes highly contribute to a small firm in achieving their firm’s missions and goals. therefore, the practice of a strategic process contributes to survival and the growth of small firms since it helps to meet the stated objectives. the mean of strategic decision-making participativeness is 3.4333, while its standard deviation is 1.3547 that is the level of worker participation in decision-making is moderately low. its deviation is also the lowest compared to other dimensions, which shows that approximately all firms are practicing strategic decision-making participativeness less moderately. the owner/manager of the small firms were making both strategic and operational decisions. this is one drawback of these firms, which hinders them from generating a substantial profit and innovating new products and ideas. to some extent information and power were shared in making decisions, that is comparatively these grown enterprises strategies in decision-making participation is better. that does not mean the level of employee participativeness in decisions is adequate, because the leaders take a lion share in decision making related to developing new product, introducing a new product and looking for a new market. the participation of organization members in decision-making helps in generating new product idea and market, but the actual practice is not adequate to win the next competition. the mean of strategy formation mode is 3.3952 and its standard deviation is 1.4414, which was moderately low. this means that the activities performed by the firms were not sufficiently following the strategic and operational plan. these firms’ strategies depend on trial and error. there is no planned business unit strategy that leads to competitive action. in practice, only a few firms led by plan and developed a strategy, specifically written plan and strategy. while planning is important in achieving the stated objectives, these firms are not taking benefits. large corporations have strategic and operational plans for each specific unit of the organization, while these emerging medium enterprises lack specific plans for each department. even though emergent strategies are bases for firms to be flexible and meet with the changing situation, the absence of this planning is one challenge that hinders the firms to transit to the next level and competing against large and matured medium enterprises. finally, these firms tend to try without detail study and plan. most of these firms focus on the operational issue rather than strategic. they lack the strategic mission, goals, and plans. this is because of a lack of knowledge of strategy formation and formal planning. the mean of strategic learning from failure is 3.0381 and its standard deviation is the highest among the dimensions of a firm’s strategic process, which is 1.6481. this indicates that firm owners/managers are moderately learning from their failure. the highest standard deviation shows the highest variation of response among owners/managers. the strategies that did not work and why they are not working is moderately identified. even though strategic learning from failure is moderate, there are firms who failed and came back again by improving their mistakes. these firms are now transited to an emerging medium enterprise level by overcoming the strategic mistakes. therefore, the firm’s strategic learning from failure is crucial for the further growth of enterprises since they learn one-step from the failure they faced. however, the problem here is learning from failure has been vested only on owners/managers of 69 a. k. chebo, i. m. kute journal of small business strategy / vol. 29, no. 3 (2019) / 60-77 table 1. descriptive statistics result variable mean st. dev. 1 2 3 4 5 6 7 8 9 10 growth 4.1238 1.79950 1 age .4048 .49202 .176** 1 size .3857 .48793 -.153** .024 1 gender .3238 .46905 -.025 .010 .142** 1 education .3905 .48902 .021 .076 -.093 -.074 1 sdp 3.4333 1.34408 .759** .117* -.147** -.064 -.069 1 sfm 3.3952 1.44135 .704*** .158** -.089 -.056 -.118 .692*** 1 slf 3.0381 1.64810 .610*** .028 -.102 -.059 .000 .684*** .558*** 1 es 3.4429 1.41051 .813*** .065 -.166** -.037 .012 .628*** .554*** .571*** 1 o-ceo .8476 .39810 .107 .072 -.115* .009 .135* .106 .014 .133* .155** 1 ***p < 0.01 **p < 0.05 *p <0.1 source: spss output 2017 70 a. k. chebo, i. m. kute journal of small business strategy / vol. 29, no. 3 (2019) / 60-77 small firms in ethiopia. small firm’s growth the result from the above table indicates that a mean of 4.1238 indicates that the growth of the firms was moderate on average. despite the fact that the selected ventures were those grown to emerging medium enterprises, they rate their performance as moderate. specifically, there is profitability growth, but it is less when we compared it with other growth measures, while employment growth, sales growth, and resource growth are good. these firms have grown to the medium-sized enterprise because of their growth in terms of capital and employment level. these capital and employment levels are recorded when they are in a small enterprise. therefore, their performance is better compared to small firms but not against medium-sized and large enterprises. the majority of the ventures that have grown to emerging medium enterprises were the ventures led by men comparative to the female counterparts females. the mean value of firm age is .4048 with a standard deviation of .49202. the number of younger ventures that transited to emerging medium enterprises are of the older ventures. the other item used to determine the growth of the ventures is the size of the firm, which is measured by the size of both permanent and temporary employees. its mean value and a standard deviation are .3857 and .48793 respectively. this figure reveals that the number of workers for most of the enterprises were over 30 workers. this happened because of the large number of respondents from the manufacturing and construction sector that contained many enterprises that grew to emerging medium enterprises. the mean of an educational level is .3952 that is most firm owner/managers have not graduated from a college or university. the educational level of the firms indicates that less than half of owners/managers have graduated from a college or university. in addition, the mean of environmental scanning and owner ceo is 3.4429 and .8286 respectively. that is, approximately closer to 90% of the enterprises are run by their founders, not hired employed managers. the influence of strategy on venture growth diagnostic tests for regression analysis were undertaken. first, the values of tolerance were above 0.01, while the vif was less than 10. therefore, multicollinearity is not a concern in this test. when the residuals are not evenly scattered around the line, it indicates the presence of heteroscedasticity. in this case, the test result indicates that the residuals are evenly distributed. therefore, there is no evidence for the presence of heteroscedasticity. it increases the predictor r square from 67.7% to 81.9% when the moderator variables environmental scanning and owner-ceo were added. this value shows that participativeness in the strategic decision, strategy formation mode, and strategically learning from the mistake will explain the growth of venture 67.7%, while it explains 81.9% when the moderator’s, firm founder and educational level is added. the reduction of standard error shows that the introduction of moderators improves the relationship between the firm’s strategy and venture growth. we also see that the independent variables significantly influence the firm’s growth at a 99% confidence level in model 1 and 3, and at 95% in model 4. table 2 reveals that, in the first model, among the control variables age of the firm and firm size significantly influences the venture’s growth, but they have no significant influence after the moderators were added. the coefficient value of the variable firm size -.650 reveals the firms with a higher number of employees grow more than their counterparts. after the first model, among the control variables, only firm age significantly influenced the venture’s growth. that means, firms that were established recently have grown more than that of firms established earlier. one might expect that firm size can significantly influence ventures growth, but we find that the relationship is insignificant except in the first model. even if the educational level is an important factor in strategy formation, planning, and practicing participative decision making, we did not find a significant influence of educational level on the firm’s performance. we observed that so many enterprises, which are led by managers that did not graduated from any educational institutions, which were successful. the second model reveals that among the independent variables participativeness in strategic decision-making and strategy formation mode has a significantly positive influence on the venture’s growth at the 0.01 significance level and strategic learning from failure significantly influence ventures growth at 1% significance level. after the moderators were added in the third model, both environmental scanning and owner-ceo influences the venture’s growth. strategic decision-making participativeness is the variable that influences ventures growth higher than the other variables (β = .543, 000). from this, we understand that the more firm members participated in strategic decision making, the more the venture’s grew. strategy formation mode also has a significantly positive affect on the venture’s growth (β = .453, 000). the more the firms use plan and forming different strategies the more the growth of the venture. similarly, strategic learning from failure has a significantly positive influence on the venture’s growth (β = .241, p < 0.000). this 71 a. k. chebo, i. m. kute journal of small business strategy / vol. 29, no. 3 (2019) / 60-77 table 2: regression analysis result model variables independent variables sdp sfm slf m1 age .658**(2.642) .658***(2.642) .658***(2.642) size -.579*(-2.282) -.579**(-2.282) -.579**(-2.282) gender -.020(-.075) -.020(-.075) -.020(-.075) education -.028(-.112) -.028(-.112) -.028(-.112) adj. r2 (f-value) .037 (3.014**) .037(3.014**) .037(3.014**) m2 age .306*(1.845) .218(1.206) .588***(2.970) size -.160(-.947) -.325*(-1.780) -.365**(-1.803) gender .128(.733) .126(.665) .088(.420) education .239(1.432) .343*(1.882) .006(.031) independent variable 1.004***(16.338) .874***(13.986) .651***(10.987) adj. r2 (f-value) .581(58.93***) .506(43.824***) .392(27.963***) m3 age .334**(2.703) .278**(2.179) .469***(3.364) size -.025(-.195) -.079(-.606) -.099(-.684) gender .096(.742) .091(.685) .064(.437) education .154(1.221) .190(1.468) .029(.203) independent variable .543***(9.327) .453***(8.581) .241***(4.779) es .612***(11.861) .543***(13.378) .687***(13.581) o-ceo -.163(-1.051) -.033(-.207) -.189(-1.074) adj. r2 (f-value) .767(99.45***) .756(93.523***) .701(70.968***) m4 age .348**(2.907) .265**(2.096) .505***(3.662) size -.038(-.304) -.079(-.617) -.136(-.954) gender .198(1.537) .153(1.145) .090(.622) education .151(1.237) .163(1.276) .022(.161) independent variable 1.122***(6.286) .842***(5.492) .788***(4.037) es 1.158***(9.276) 1.026***(9.728) 1.093***(9.608) o-ceo -.247(-.621) .247(.529) .176(.513) sdp_es .153***(3.958) sdp_o-ceo .034(.318) sfm_es .088***(2.745) sfm_o-ceo -.054(-.443) slf_es .095**(2.293) slf_o-ceo -.159**(-1.206) adj. r2 (f-value) .782(84.33***) .764(76.159***) .710(57.876***) ***p <0.01 **p <0.05 *p <0.1 source: spss output 2017 72 a. k. chebo, i. m. kute journal of small business strategy / vol. 29, no. 3 (2019) / 60-77 means the firms that learn from their mistakes and failure will grow more. firms want to survive in the market and grow by increasing their sales growth, market share, and generating sufficient revenue. this happens by satisfying customers and meeting the expected objectives by using appropriate planning, which is participating and learning from failures. more generally, the strategic processes used by firms help in improving market share and sales growth by creating wealth. firms that practice appropriate strategy perform better than that of their counterparts. strategic decision-making participativeness moderately and directly affect the growth of the firms, that means as employees are participating in organizational decision making, the firm’s growth will be increased. in this situation, the skill and capacity of more peoples are combined to achieve a better outcome. different workers may generate different ideas that may help the organization to develop new products, new processes and to attract new customers. the contribution of this effort by all workers of a given firm makes a firm perform and grow more. practicing autocratic processes in strategic decision making hinders the venture’s growth in terms of sales, employee, and share of the market. the strategic decisions to be made will be better when there is participation from workers by reaching consensus. the idea generated and discussed by all the group members contributes to the effectiveness of the strategic decision-making process than that of ideas generated by a leader’s single mind. firms use either formal planned strategy for the action they can accomplish or emergent strategy to respond to the changing environments. the finding of strategy formation mode with growth is not consistent with the findings of covin et al., (2006). planning is important for any activities performed to achieve a better outcome. the firms that plan their activities can perform better since planning simplifies the procedure followed and increases effectiveness and efficiency. firms that are using a formal planned strategy were more successful than their counterparts. when strategies are successfully formulated, firms successfully accomplish their tasks. they know how the tasks will be done. therefore, these firms are successful in achieving their target. the achievement of the target leads to the survival and growth of ventures. there is no successfulness at one trial. in relation to the strategic learning from failure, enterprises that fail to learn from their failure have faced difficulty in identifying the alternative way and better opportunities that exist. that is why firms should learn from mistakes done and try to take lessons from their mistakes by identifying the causes of failures. decision-making will also be improved because of the experience gained from failure. therefore, the firms that are reformulating their strategy by including lessons learned from failure were more successful and grow more than their counterparts. as a result, enterprises grow more when they learn from their previous mistakes by identifying the new profitable line and/or business. the moderating role of environmental scanning and owner-ceo environmental scanning positively and significantly influences venture growth (β = .612, 000), (.543, 000) and (.687, 000) respectively when participativeness in the strategic decision, strategy formation mode, and strategically learning from mistakes are used as independent variables, respectively. during scanning of the business environment, we look for both opportunities and threats. the identification of both opportunities and threats and understanding the environment helps to develop a successful strategy. also, it considers the resources of the firm that support the growth of ventures. when trends and events in the environment are understood, the strategic processes including participativeness in strategic decision-making, strategy formation mode, and strategically learning from mistakes will be affected which in turn influences the growth of ventures. as firms scan their environment, they tend to exploit and practice suitable strategy that contribute to the growth of the ventures. the firms that scan their environment can identify how the strategic decision participativeness is practiced among successful and larger businesses. the participativeness in decision-making is more successful when both the resources of the firms and the external environment were scanned successfully. strategies were properly formulated and planned when information about the existing resources and the external environment is known because the planning process directly includes the existing organizational resources. regarding the external environment, the market condition is known through scanning. the political, demographic, technological, economic and other situations were also considered in the planning process. they also, compare their strategic and operational plans against their competitor by gathering information about the market from suppliers and customers. the strategy planned in consideration of these environments will influence the venture’s growth more. therefore, aligning the strategy formation process with environmental scanning will make the firms more successful. when firms analyze both their external and internal environment, they learn why they will fail from competitors, suppliers, consumers, and their actual strategy. similarly, when planning is reformulated in con73 a. k. chebo, i. m. kute journal of small business strategy / vol. 29, no. 3 (2019) / 60-77 sideration of the failures and changes in the environment, the firm’s growth will be more successful. the process of learning from failures should be allied with environmental scanning in order to make the firm successful. as the environment is frequently scanned participation in decision-making influences the growth of small ventures more. similarly, when the use of formal planning is in the frequently scanned environment, the growth of small ventures is better. finally, firms that are learning from their failure by frequently scanning the environment grow more than their counterparts. surprisingly, we found that the owner ceo leadership will not significantly influence the venture’s growth, except when it is combined with strategic learning from failure. this indicates, when firms are led by the owner themselves rather than hired managers, they tend to learn more from their failures. therefore, the growth of ventures is better among firms that were led by owners themselves and who learn from their mistakes. this is not consistent with the finding of abebe & alvarado (2013) that indicates the existence of significant difference among firms led by founders and firms led by no-founders, which is firms that are led by founders perform worse than their counterparts. but, it’s consistent with the finding of zhang (2010) that says founder’s turnover will significantly affect the performance of the firm negatively. this is because the owners consider this their enterprise; they are not looking outside for employment at an increased salary. conclusion and implications the study of a firm’s strategic and ventures performance is crucial in entrepreneurship research. in this research, the firm’s founder and the environmental scanning used as the moderators. therefore, our study contributed to the literature by using these additional variables to the study. besides its contribution to the existing literature, the study will help the government in improving and strengthen small ventures to use different strategies that contribute to their growth. only a few of the ventures were transited to the emerging medium enterprises in ethiopia. the growth level of emerging medium enterprises is moderate. the practice of strategic decision-making participativeness and strategy formation mode is also not attractive and adequate to grow and compete with larger enterprises that follow appropriate strategy. regarding the management, many of the enterprises are managed by the founders themselves who have not graduated from any educational institutions. the firms that practice better in decision making participativeness, forming plans and strategies, and learn from their previous mistakes and failures, grows more than the firms who poorly practice these strategic processes. firms that are in a suitable environment and led by the owners grew more than their counterparts. finally, the younger ventures with new idea and effort as well as the ventures with a larger number of workers grew more than the firms who were small and have a smaller number of employees. practical implications among the major problems observed in government support to small firms, its policies and practices are not equivalent and the strategy designed is not appropriately undertaken. it is widely recommended that small enterprises use a strategic process to grow their ventures sufficiently. besides, there are other variables that facilitate the better practice of the strategic process which makes more to influence the venture’s growth. the level of influence varies differently for different ventures that are operated in different situations. the strategies developed and followed is not adequate to compete against larger enterprises, therefore the owner/managers of these firms should adequately practice participative decision-making, form an appropriate and sufficient plan of strategies, and learn from their mistakes to survive and grow. the strategy also successfully influences venture growth when the firm is run by owner/founder, thus owners/managers should lead their business themselves by giving full consideration to be successful. future research for this research, the environmental scanning measurement, both the internal and external environment was measured in aggregate, but it is helpful if the contribution of internal and external environments were differentiated. therefore, future researchers should measure and differentiate the extent of contribution separately for internal and external environments. finally, we recommend for further researchers to compare failed firms against 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(1995).networking and growth of young technology-intensive ventures in china. journal of business venturing, 10(5), 349-370. https://vtechworks.lib.vt.edu/handle/10919/28298 https://vtechworks.lib.vt.edu/handle/10919/28298 editors-in-chief the journal of small business strategy is an applied research journal. manuscripts should be written with the small business/entrepreneurship educator, small business consultant in mind. both conceptual and empirically-based papers are encouraged, but they must have an applied focus. all papers must have a significant literature review, be properly documented, with citations from research-based works rather than popular press or web sites. since jsbs is an applied research journal, each article should include a substantial “discussion and implications” section that details how the research findings are relevant for the journal’s readers. authors are discouraged from submitting manuscripts with extremely complex statistical analyses and/or a purely theoretical orientation. case studies are acceptable if they contribute substantial to the understanding of small business strategy and include a significantly to the understanding of small business strategy and include a significant literature review that underscores the issues in the case. we do not accept teaching or pedagogical cases. articles that have a significant strategy orientation are of particular interest. however, we do also publish articles that may address functional or operational issues. articles related to exporting or other international issues are acceptable. we have less interest in articles focusing on how small business compete in specific countries unless authors show that their results can be generalized to all small businesses. articles that have a public policy focus are generally not appropriate for the journal of small business strategy. editorial review board associate editors senior editors william c. mcdowell bradley university, united states michael l. harris east carolina university, united states domingo ribeiro universitat de valència, spain dianne h. b. welsh university of north carolina greensboro, united states joshua r. aaron middle tennessee state university, united states j. augusto felício universidade de lisboa, portugal raj v. mahto the university of new mexico, united states juan piñeiro santiago de compostela university, spain whitney o. peake western kentucky university, united states semra ascigil middle east technical university joe r. bell university of arkansas at little rock shawn carraher university of texas at dallas phillip e. davis texas state university eugene fregetto university of illinois at chicago joseph geiger university of idaho armand gilinsky sonoma state university michael goldsby ball state university david lyn hoffman metropolitan state college of denver jeffrey hornsby university of missouri kansas city jerry kudlats jacksonville university cathleen (folker) leitch wilfrid laurier university journal of small business strategy 2018, vol. 28 no 01 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2018 small business institute® http://www.smallbusinessinstitute.biz www.jsbs.org robert lussier springfield college matthew r. marvel ball state university brian mckenzie california state university, east bay abbas nadim university of new haven john e. prescott university of pittsburgh neal pruchansky keene state college jeff shields university of north carolina at asheville leo simpson seattle university matthew c. sonfield hofstra university harriet stephenson seattle university jude valdez university of texas at san antonio http://www.smallbusinessinstitute.biz strategy table of contents page title/author(s) i a scorecard for small business performance roy a. cook janet bear wolverton 19 how accounting firms can help the small business owner carel m. wolk charles w wootton 33 credit management strategies for small firms frederick c. scherr 47 strategy as a determinant of the perceived value of outsider assistance to new ventures: an exploratory study james j. chnsman george w. danforth 69 small business transformation: the meds approach ravi s. behara david e. gunderscn 85 resolving small business disputes through mediation merc lampe scth r. ellis 97 lessons for small business: incentive health care and risk rating practices suzanne milburn ray d. siehndel joe singer 109 a comparison of small and large business managers'ttitudes towards innovation and the rule of government in promoting technology kelly c. strong michael winchell table of contents 1 green goals in organizations: do small businesses engage in environmentally friendly strategies? richard c. becherer university of tennessee – chattanooga marilyn m. helms dalton state college 19 the influence of the entrepreneur’s education level on strategic decision making matthew sonfield hofstra university robert n. lussier springfield college 29 the impact of strategic focus and previous business experience on small business performance michael l. harris east carolina university shanan g. gibson east carolina university william c. mcdowell east carolina university 45 the impact of foreign direct investment (fdi) on women’s entrepreneurship kaustav mirsa saginaw valley state university ersa memili university of north carolina – greensboro dianne welsh university of north carolina – greensboro hanquig (chevy) fang mississippi state university 61 how do entrepreneurial growth intentions evolve? a sensemaking sensegiving perspective dev k. dutta university of new hampshire stewart thornhill university of western ontario s trateg y journal of small business reproduced with permission of the copyright owner. further reproduction prohibited without permission. http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2018, vol. 28, no. 03, 31-47 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2018 small business institute® w w w. j s b s . o rg while the positive (and negative) outcomes of racial diversity in large organizations are widely known, literature on small firms (firms with fewer than 15 employees) is particularly sparse (ash, 2007; headd, 2015; stoner, hartman, & arora, 1996). important differences between small and large organizations (e.g. presence of formal systems, agility, business environment, goals, and objectives) make generalizability of these outcomes unclear. the “liability of smallness” increases the risk of firm failure because small firms lack economies of scale and cannot raise as many funds to overcome unexpected changes in the market (headd, 2015; lumpkin, mckelvie, gras, & nason, 2010). in addition, firms that are eight years old or younger (new firms) also experience the “liability of newness,” which involves the risk of firm failure because organizational routines are not yet well developed, and customers do not yet know or trust the firm, rendering the firm less able to compete (freeman, carroll, & hannan, 1983; lumpkin, et al., 2010; stinchcombe, 1965). we focus on the unique combination of new and small firms, and argue that employees of such firms may possess stocks of knowledge that if fully leveraged early, could enable the firm to develop an inimitable competitive advantage. because there is not much research on the impact of diversity and inclusion in new, small firms, we will use evidence from both “new” and “small” firms to support our ideas. the preponderance of small firms and the changing demographics of the u.s. labor force underscore the importance of racial diversity in small firms. between 1993 and 2011, small firms were responsible for 67% of net new jobs and employed 17 million individuals (census bureau 2016; small business administration (sba), 2013). eighty six percent of the approximately 5.7 million firms in the united states employed fewer than 15 employees (census bureau, 2016). the vast majority of small firms are owned by white introduction jennifer m. sequeira1, kelly p. weeks2, myrtle p. bell3, sherrhonda r. gibbs4 1university of southern mississippi, usa, jenseqtnt@yahoo.com 2rhodes college, usa, weeksk@rhodes.edu 3university of texas at arlington, usa, mpbell@uta.edu 4university of southern mississippi, usa, sherrhonda.gibbs@usm.edu making the case for diversity as a strategic business tool in small firm survival and success diversity, race, small business, intellectual capital although human resource managers have long realized the impact of diversity on organizational outcomes, most of the research to date has focused on large organizations. very little consideration has been given to small firms in the united states with fewer than 15 employees, which are not required to comply with federal equal employment opportunity legislation. we propose that by valuing racial diversity and creating an inclusive organizational climate from inception, new small firms with growth objectives can increase their competitiveness, leading to better performance and long-term survival. anchoring our arguments in intellectual capital theory, coupled with cox and blake’s seminal work on valuing diversity, we provide testable propositions that detail why new small firms should pursue and view racial diversity as a strategic business tool, even when they are not legally required to attend to these issues. we offer practical recommendations for small firms seeking to create an affirming climate for racial diversity and strategies that can be used to recruit, select, retain, and benefit from a racially diverse workforce. apa citation information: sequeira, j. m., weeks, k. p., bell, m. p., & gibbs, s. r. (2018). making the case for diversity as a strategic business tool in small firm survival and success. journal of small business strategy, 28(3), 31-47. 32 j. m. sequeira, k. p. weeks, m. p. bell, s. r. gibbs journal of small business strategy / vol. 28, no. 3 (2018) / 31-47 men, and employees in these firms are largely homogeneous in race (ferguson & konig, 2018; holzer, 1998). it is interesting to note that, while only 7 percent of u.s. small firms are owned by african americans, these firms are also racially homogenous (ruef, aldrich, & carter, 2003). by 2020, it is estimated that minorities will comprise 40 percent of the overall labor force (toossi, 2012). potential problems with homogeneous workforces are well documented (see apfelbaum, phillips, & richeson, 2014), and possible remedies to these problems include hiring a racially diverse workforce and creating inclusive organizational climates. there is some evidence that performance in small firms with diverse workforces is higher than in small firms that are not diverse (hartenian & gudmundson, 2000). if small business owners understood the potential implications and benefits of diversity in areas of communication, creativity, recruitment, persuasion, and turnover (among others), they might be able to maximize their organizational success (ash, 2007). in other words, firm survival and success may partly hinge upon taking advantage of these demographic changes and developing a diverse base of intellectual capital for all small businesses. however, in the united states, these firms are not typically subject to equal opportunity legislation (i.e., executive orders on affirmative action and title vii of the civil rights act) due to employing fewer than 15 people. such legislation has been shown to stimulate inclusion of those who might otherwise be intentionally or unintentionally excluded from the workforce (kalev & dobbin, 2006). without the impetus of legislative compliance, small firms may need other motivations to pursue racial diversity. when compared to older small business counterparts, new small firms are in a particularly precarious position. fifty percent of new, small firms fail within five years. scholars point to underdeveloped organizational roles and routines, and lack of trust relationships and established customers as being primary causes of new firm failure (lumpkin et al., 2010). new, small firms are constrained by limited resources and limited stocks of human and social capital (lumpkin et al., 2010). new firm founders and policymakers stand to benefit from an exploration of how a racially diverse workforce might reduce risk, build community reputation, and increase the social and intellectual capital of new firms. this would provide new firms with a competitive advantage, promoting business growth, and survival. new small firms which employ a racially diverse workforce early in the firm’s development can enhance the quality of their intellectual capital, which potentially enhances firm success and long-term survival. to proceed, we examine how intellectual capital theory informs arguments about why racial diversity is important for new small firms. then, we incorporate the importance of intellectual capital for new small firms into cox and blake’s (1991) well-known diversity framework, culminating in testable propositions which consider how inclusive organizational climates lay a strong foundation for firm competitiveness, performance, and survival. we conclude with recommendations that may be applicable to new small firms seeking to diversify their workforce. intellectual capital researchers often use the resource based view (rbv) theory as a lens through which the resources in a firm can be strategically viewed and managed (richard, 2000; teece, 2000; welsh, davis, desplaces, & falbe, 2011). resources can be tangible or intangible and include financial, social, human, and physical assets, as well as firm capabilities and competencies. the rbv theory assumes that each firm within an industry has heterogeneous resources that are not easily transferred (or are immobile) from one firm to another. in addition, the theory suggests that the resources a firm holds can be strategically used to drive the firm’s direction and give it a sustainable competitive advantage, if these resources can be characterized as valuable, rare, difficult to imitate, difficult to substitute, and if the firm has established procedures and policies to leverage its resources (barney, 1991; wernerfelt, 1984). the knowledge based view (kbv) of the firm, an extension of the rbv, holds that knowledge is one of the firm’s most strategically significant resources (juma & mcgee, 2006; spender, 1996; wiklund & shepherd, 2003), and this resource results when individuals in the firm interact. according to spender (1996, p. 59), the kbv “can yield insights beyond the production-function and resource-based theories of the firm by creating a new view of the firm as a dynamic, evolving, quasi-autonomous system of knowledge production and application.” thus, it is the collective knowledge that results from employee interaction that becomes a leveragable resource. this resource is referred to as intellectual capital (kong & thomson, 2009; youndt & snell, 2004). intellectual capital has been identified as a critical factor that influences a firm’s ability to create long-term profits, be innovative, and perform well in the knowledge-based economy (hsu & fang, 2009; martin-de-castro, delgado-verde, lópez-sáez, & navas-lópez, 2011; subramaniam & youndt, 2005). intellectual capital is multidimensional, with the initial theory comprising three components: 33 j. m. sequeira, k. p. weeks, m. p. bell, s. r. gibbs journal of small business strategy / vol. 28, no. 3 (2018) / 31-47 human, relational, and structural capital (stewart, 1997). over time, these constructs have evolved and today are more commonly labeled human, social, and organizational capital (youndt & snell, 2004). each component of intellectual capital is interrelated and acts synergistically to enhance the value of the firm. human capital, the principal component, refers to the explicit and tacit knowledge, skills, experiences, attitudes, and abilities of the firm’s employees (mention, 2012; stewart, 1997; youndt & snell, 2004). human capital is observed by many scholars as an antecedent of innovation, enhanced performance, and competitive advantage (edvinsson & malone, 1997; hayton, 2005). organizational capital is comprised of firm processes and strategies that support employee productivity, such as organizational structure, organizational culture, routines, intellectual property, and databases (hsu & fang, 2009; youndt & snell, 2004). organizational capital enables management to disseminate the firm’s collective knowledge. lastly, social capital refers to the knowledge that emanates from the firm’s connections with internal and external stakeholders and includes elements such as customer satisfaction, customer loyalty, market share, customer and supplier relationships, corporate reputation, and image (hsu & fang, 2009; kaplan & norton, 1992; youndt & snell, 2004). social capital is a critical resource for new small firms as their size may limit access to a broad social network and the benefits that arise from network resources. new, small firms are susceptible to a variety of internal and environmental forces such as fragile financial structures, dependence on a few customers, and competition (pena, 2002). to counteract the effects of these deficiencies, scholars suggest that small firms leverage their intellectual capital to build a sustainable competitive advantage (kemelgor & meek, 2008; scarborough & cornwall, 2016). one way to increase intellectual capital is by diversifying the employee base early in the development of the firm, while continuously valuing inclusivity as a key strategic human resource management goal (mcmahan, bell, & virick, 1998). however, because most employees of new small firms are relatively homogenous, the intellectual capital that would be available to them from a diverse employee base is not utilized. in addition, small businesses often lack a dedicated human resources manager, and therefore these duties may be left to the owner of the firm. research has shown that integrating a high-performance work system into the structure of a small organization while also utilizing the intellectual capital of the employees can lead to more success (coder, peake, & spiller, 2017). thus, despite not having formal hr managers, firms can be more competitive in both the short and long-term (hormiga, batista-canino, & sánchez-medina, 2011) if strategies are put in place to manage the firm’s intangible assets early, when it is most critical to do so (lichtenstein & brush, 2001; messersmith & guthrie, 2010). to fully realize these benefits, however, new small firms must create inclusive organizational cultures, which “demonstrate value for all employees, as human resource practices are aligned with and supportive of diversity” (scott, heathcote, & gruman, 2011, p. 740). the foundation for a diverse workforce: an inclusive organizational climate racial diversity alone does not create the environment for organizational productivity (gonzalez & denisi, 2009); nor do diversity programs alone create such an environment (herdman & mcmillan-capehart, 2010; scott et al., 2011). diversity can be a “double-edged sword” if it is not accompanied by a climate that values diversity (cox & blake, 1991; roh & kim, 2016), giving rise to more negative outcomes, such as interpersonal discrimination and conflict, less coordination among work groups (boehm, dwertmann, kunze, michaelis, parks, & mcdonald, 2014; milliken & martins, 1996; pelled, eisenhardt, & xin, 1999), lower employee satisfaction, more employee turnover (greenhaus, parasuraman, & wormley, 1990; scott et al., 2011), and lower performance (joshi & roh, 2009). proper care must be taken in organizations that have specific diversity initiatives designed to improve inclusivity, as the way they promote these initiatives can determine their effects (kidder, lankau, chrobot-mason, mollica, & friedman, 2004). consequently, researchers have called for more research on the performance results of companies with hr policies that are inclusive, fair, and diverse at all levels (e.g., joshi & roh, 2009; kulik, 2014). factors leading to more inclusive climates for diversity include perceptions of justice in human resources policies (buttner, lowe, & billings-harris, 2012; mor barak, cherin, & berkman, 1998), voice and participation in decisions (bell, özbilgin, beauregard, & surgevil, 2011; chrobot-mason, 2003), social integration of minorities and women at work (mckay, et al., 2007), and equal access to opportunities (chrobot-mason & aramovich, 2013), among others. a positive diversity climate has been linked to lower interpersonal discrimination among employees, which leads to better workgroup performance (boehm, et al., 2014). a positive diversity climate has also been linked to higher psychological empowerment, higher “identity freedom”, a climate for innovation, and higher or34 j. m. sequeira, k. p. weeks, m. p. bell, s. r. gibbs journal of small business strategy / vol. 28, no. 3 (2018) / 31-47 ganizational identification (chrobot-mason & aramovich, 2013). this suggests that a positive diversity climate will increase organizational outcomes for all employees, not just minorities. we are not aware of research on diversity climate which specifically examines new small firms, however, boehm et al. (2014) found that smaller work groups tend to have less discrimination, presumably because work group members get to know each other on a more personal level, learning shared deep values (daft, 2016). although boehm et al. (2014) were examining small groups within a larger organizational context, these ideas could be applied to small businesses as well. because small businesses have fewer employees, these individuals will likely know each other on a more personal level and be able to communicate more effectively. therefore, small businesses may have an easier time integrating diversity-related values than their larger counterparts. in addition, richard, roh, and pieper (2013) argued that “smaller firms are more flexible and experience less inertia, leading to more effective implementation of dem (diversity and equity management) practices as well as greater ability to adapt and change the demographic composition of management” (p. 234). new small business owners have a unique opportunity to be proactive and positive in their diversity approach, creating a diverse and inclusive climate (shore et al., 2009) at inception and maintaining it, rather than implementing diversity haphazardly as the firm grows. proposition 1. new, small firms with inclusive organizational climates from inception will experience positive organizational outcomes, such as higher levels of job satisfaction and commitment, and lower turnover rates as they grow. valuing diversity in new small businesses many corporate leaders agree that there is value in having a diverse workforce and investing in initiatives to achieve that outcome, given the potential benefits of doing so and the costs of not doing so (chavez & weisinger, 2008; roh & kim, 2016). however, many of these organizations are large and have the financial resources to invest in diversity initiatives that fit their organizational cultures. it is important to examine the differences in large and small firms to determine how and if small firms will also benefit from incorporating diversity initiatives into their company culture from the outset. we propose that the diversity focus will give the new small firms an advantage in a variety of competitive areas. specifically, cox and blake’s (1991) seminal work proposed that six key dimensions of business performance, namely (1) costs, (2) acquisition of human resources, (3) marketing, (4) creativity, (5) problem-solving, and (6) system/organizational flexibility can be positively influenced by the management of cultural diversity. these ideas are particularly relevant to the dynamic and competitive environment in which new small firms operate. because small firms are typically focused on the objectives and vision cast by the owner, and because the policies and relationships are more informal than in larger companies (jennings & beaver, 1997), small firms may be able to capitalize on the intellectual capital they receive from beginning with a diverse workforce and focus on an inclusive culture. the intellectual capital accumulated by new firms with racially diverse employees could be viewed as a unique bundle of resources (barney, 1991; wernerfelt, 1984) that can help the firm reduce costs, solve problems effectively and efficiently, attract employees, develop new products, services, and marketing ideas, and build external relationships that may help a new, small firm survive and thrive. accordingly, these resources may be rare, valuable, and inimitable with cultural experiences that enrich new small firms. in the following sections, we consider how cox and blake’s (1991) key dimensions for managing diversity to obtain a competitive advantage apply to new small firms that are committed to cultivating a climate that supports and embraces racial diversity. diverse workforce knowledge and its influence on organizational and cognitive flexibility. most research to date has examined the strategic choices of firms from the perspective of large organizations. large firms can use their various sources of capital (financial, organizational, physical, and social) to create a competitive advantage in the marketplace (barney, 1991). less is known about the strategies utilized by smaller firms, but one thing is clear: new, small firms do not have access to the same resources, and must focus on some resources more than others (coder et al., 2017). we argue that properly utilizing their human resources will help increase their chances of survival and success. whereas large firms face challenges because of rigid structures and bureaucratic procedures, small firms may be able to access external social networks and utilize internal knowledge of employees with more efficiency because of their flexibility (lumpkin et al., 2010). small organizations also have flatter hierarchies and easier communication (wilkinson, dundon, & gugulis, 2007), resulting in less formal procedures, which could lead to more 35 j. m. sequeira, k. p. weeks, m. p. bell, s. r. gibbs journal of small business strategy / vol. 28, no. 3 (2018) / 31-47 innovative ideas (peetz, muurlink, townsend, wilkinson, & brabant, 2017). the more diverse their employee base, the more likely they will have knowledge to draw from and multiple external networks to tap into, which could translate into more organizational flexibility overall. in addition to organizational flexibility, cognitive flexibility has been associated with the “ability to excel in performing ambiguous tasks” and divergent thinking (cox & blake, 1991, p. 51) which can be used as tools to help the organization look at problems differently thereby creating new solutions to those problems. more diversity in the workforce could lead to more cognitive flexibility with a variety of perspectives interacting and creating firm benefits. of course, this flexibility will likely only be recognized if the climate for diversity is strong and translates into an organization where individual ideas are heard and incorporated. as the new small firm encourages and manages the various perspectives emerging from its diverse workforce, it will likely become even more flexible (gardenswartz & rowe, 1998). in addition, as the new firm learns and makes use of information gathered through its diverse employee base, it can modify existing practices and processes to efficiently and effectively target offerings to specific market segments (madhavaram & hunt, 2008). this increased ability to respond to changing environments may increase the new small firm’s chances of survival in an increasingly competitive marketplace. proposition 2. early racial diversification of a small firm, combined with a climate that values diversity, will lead to more organizational and cognitive flexibility. diverse workforce knowledge and its influence on human resource acquisition. in comparison to larger firms, new small firms are often at a disadvantage when recruiting and hiring employees since they tend to have limited human resource personnel, smaller recruiting budgets, lower salaries and benefits, and liabilities of newness and smallness (cardon & stevens, 2004; patel & cardon, 2010). sixty percent of small firm owners and managers view finding skilled workers as their greatest challenge (howart, 2013). the national federation of independent businesses found that “locating qualified employees” was the third biggest concern for u.s. small businesses, and it was also the concern that has increased the most over the last five years, right after “finding and keeping skilled employees” (wade, 2016). small firm owners are often not trained in executing human resource practices, and as a result, their firms may lack formal human resource policies or programs (kotey & slade, 2005; patel & cardon, 2010). these business owners are also time constrained (klaas, mcclendon, & gainey, 2000) which could result in hiring the first applicant deemed eligible. small firms, particularly very small ones, rely primarily on inexpensive and convenient sources, such as direct applicants and employee referrals for recruitment of new employees (deshpande & golhar, 1994; hornsby & kuratko, 1990). employee referrals tend to lead to racial homogeneity or replication of the current workforce, since friends and family who would be referred tend to be demographically similar (mouw, 2002; pager & shepherd, 2008). with a diverse workforce, the firm has access to relational capital usually unavailable to small firm owners (nahapiet & ghoshal, 1998; robinson, 2006), which can improve access to potential employees (fernandez, castilla, & moore, 2000; liao & welsch, 2005). in addition, there is evidence that high quality applicants are looking for job characteristics that small businesses may be able to provide, such as challenge and variety in the job, autonomy at work, and the presence of friendly, supportive coworkers (froelich, 2005). therefore, there is hope that if small firms focus on diversity early in their formation, they may reap a competitive advantage in recruitment and selection of high quality, diverse employees. proposition 3. early racial diversification of the small firm, combined with a climate that values diversity, will position the new firm to effectively recruit and hire more diverse employees in the future as the firm grows. diverse workforce and reduced costs. in addition to difficulties with recruitment, new small firms have many disadvantages when it comes to controlling costs. because most new small firms are generally not well funded, the cost disadvantages can be enormous, and likely lead to the higher failure rate of new small firms (audretsch, 1991). typical strategic foci of large firms (diversifying products, increasing economies of scale, differentiating through brand image) are more difficult with the limited resources of small firms. in addition, some sought-after applicants value good pension and health insurance benefits (froelich, 2005) and because small firms often cannot afford the same type of benefits or salary as larger firms, they may lose key employees. small firms may lack the ability to accumulate rare and valuable resources in the form of finances, but they may be able to utilize their flexible structures and social networks to cultivate human resources even more than larger firms 36 j. m. sequeira, k. p. weeks, m. p. bell, s. r. gibbs journal of small business strategy / vol. 28, no. 3 (2018) / 31-47 (lumpkin, et al., 2010). in other words, utilizing the intellectual capital of a diverse workforce may be a method for new small businesses to reduce operations and transaction costs and compete with larger firms. however, this asset must be proactively developed and managed. costs associated with not valuing and properly managing racial diversity may include lower levels of job satisfaction, increased turnover, and absenteeism among minority employees (chrobot-mason & aramovich, 2013; downes, hemmasi, & eshghi, 2014; greenhaus et al., 1990). the more intellectual capital an employee brings to the firm, the more costly it is to lose that person (kemelgor & meek, 2008). in addition, as an organization’s diversity level increases, white employees are more likely to turnover than minorities (tsui, egan, & o’reilly, 1992) and the costs of rehiring and training new employees is high. however, chrobot-mason and aramovich (2013) showed that white men resist diversity initiatives less when the organization focuses on diversity for competitive advantage as opposed to when the diversity initiatives are framed as critical to adhere to affirmative action laws (kidder et al., 2004). therefore, it is important to ensure that all workers are valued (scott et al., 2011), and diversity is approached in a positive, beneficial manner. even when minority employees perceive discrimination, their intentions to quit are reduced and commitment is enhanced if the organization sincerely supports diversity (triana, garcía, & colella, 2010). the majority of the research on reducing turnover for diverse firms is focused on large corporations, and very little has been done on the reduction of turnover costs in small businesses. regardless, this seems to be an area where the costs are borne for both small and large firms, and all firms are searching for ways to keep valuable employees. using their flexibility and ability to adapt quickly, new small firms should begin with a climate that values racial diversity and a commitment to building a diverse employee base, so that as they grow they reap savings resulting from increased employee satisfaction, lower turnover, and greater productivity. proposition 4. early racial diversification of a small firm’s workforce combined with a climate that values racial diversity will lead to lower costs and more savings for the organization. diverse workforce knowledge and its influence on creativity, innovation, and problem-solving. clearly, an organization’s ability to innovate is related to its access to resources. for a new small firm, those resources tend to be the knowledge that the firm’s employees and owners have and share. this knowledge may come from previous experiences and it may be developed through employee training and a culture that values learning (macdonald, assimakopoulos, & anderson, 2007). for small firms (especially in family-owned firms, but also in other small firms) employee commitment has been shown to be related to firm innovativeness, indicating that employees are willing to build knowledge and take risks to benefit the firm (ahluwalia, mahto, & walsh, 2017). many new small firms are known for their innovative products and ideas, which likely launched them into the market; whereas older and larger firms face problems of rigid structures and loyalty to the status quo. small firms face a precarious balancing act between being creative and innovative and fitting in with industry norms in order to gain legitimacy (lumpkin et al., 2010). in addition, larger firms have the resources available to invest in innovative ideas, and smaller and younger firms often do not. with respect to the employee relations literature, a similar balancing act has been found. new small firms have less rigid structures to deal with and therefore can try new and innovative employment practices, including the way their policies and procedures are formatted, the way their physical space is utilized, and the way employees and employers interact (peetz et al., 2017). however, research shows that these new small firms seem to quickly adapt to similar employee relations techniques as the older firms (peetz et al., 2017). one reason for this is that new small firms are likely too busy focusing on everyday issues of survival that they neglect to develop the intellectual capital of their workforce. in fact, one study showed that a high performing work system, which includes focused human resources practices, combined with an emphasis on developing the intellectual capital of the workforce, can produce an increase in sales growth, profit growth, and perceived success in small businesses (coder et al., 2017). we posit that one way to increase the intellectual capital and subsequently the innovativeness of a small business is through employee racial diversity. employee diversity is an important antecedent to knowledge creation due to the firm’s access to knowledge resources (lauring & selmer, 2013) through the various forms of intellectual capital. human capital is the facet of intellectual capital which focuses on the specific knowledge, skills, and abilities that individual employees bring to the workforce, and social capital focuses on the relationships and interactions between employees in the organization (youndt & snell, 2004). the facets of intellectual 37 j. m. sequeira, k. p. weeks, m. p. bell, s. r. gibbs journal of small business strategy / vol. 28, no. 3 (2018) / 31-47 capital interact with each other to impact the innovativeness of the firm (coder et al., 2017). a diverse workforce likely increases human and social capital for a firm through the effect of diverse perspectives on creativity and innovation. for example, minority opposition stimulates consideration of issues from multiple perspectives, leading to improved performance and decision-making (moscovici, 1985). creativity and innovation are interrelated, as innovation stems from creativity (glover, boocock, champion, & daniels, 2016). specifically, creativity is the generation of novel and useful ideas while innovation is the implementation of these ideas into new products/processes (sarooghi, libaers, & burkemper, 2015). innovation is highly correlated with intellectual capital (ngah & ibrahim, 2009) and the innovative capacity of a firm and the innovation process (opportunity recognition and exploitation) are positively influenced by knowledge-based resources (rigby & zook, 2002). small firms’ innovative capacity can be negatively impacted if they are unable to access important resources from the external environment (glover et al., 2016). just as creativity and innovation are related, problem-solving has been shown to precede innovation (glover et al., 2016). although not all diversity research has shown a positive relationship between diversity and problem-solving (e.g., bowers, pharmer, & salas, 2000), a study by chatman, polzer, barsade, and neal (1998) concluded that an inclusive culture strengthens the relationship between diversity and work processes, supporting the notion that organizational culture, an aspect of structural or organizational capital, is a moderator in the relationship between diversity and work outcomes. a long-term perspective may also be important. watson, kumar, and michaelsen (1993) found that in the early stages of group development, ethnically homogeneous groups interacted and performed more effectively than heterogeneous groups. over time, however, heterogeneous groups outperformed homogeneous groups resulting in more effective problem-solving and idea generation. in a similar study, mcleod, lobel, and cox (1996) discovered that ethnically heterogeneous groups outperformed homogeneous groups on a brainstorming task. the ideas produced by diverse groups were of higher quality and more effective and feasible than those of homogeneous groups. diverse groups engage in more divergent thinking and resist pressure for conformity (cummings, 2004). although many of the studies described above used student samples, they are still useful in making the case that diversity is related to higher performance. these findings imply that organizations of all sizes would benefit from diverse perspectives when embarking upon idea generation and problem-solving activities. the importance of diversity in perspectives has been accepted in the research focusing on large organizations (e.g., chrobot-mason & aramovich, 2013), and we posit that small firms would also see benefits from utilizing a diverse workforce within a culture that values diversity. proposition 5. early racial diversification of a small business combined with a climate that values diversity will lead to more creative ideas, more innovative products and services, and enhanced problem-solving. diverse workforce knowledge and its influence on marketing. while new small firms may not be able to achieve low cost strategic goals as easily as larger firms, they may instead be able to compete using a differentiation strategy (lumpkin et al., 2010). small firms often lack the legitimacy that larger organizations build over time, which can inhibit the brand image that customers may rely on. in addition, small firms may not be able to be the first to market with as many new products as large organizations. however, lumpkin et al. (2010) point out that small firms can compete through the quality and convenience of their products. additionally, because small firms tend to be closer in proximity to their customers, they often build personal relationships with these customers that help them gain useful knowledge about the customers’ unique needs and how to meet these needs (haksever, 1996), and this may help them develop quality products that are exactly what customers are looking for (dewan, jing, & seidmann, 2003). this close proximity will also likely lead to a faster exchange of knowledge between customers and the firm (wong & aspinwall, 2004). proximity could also help a new small firm compete by differentiating themselves on convenience, which is a key driver of the strategy of differentiation (miller, 1988). however, because small firms also tend to have fewer and more homogenous employees, their external networks to valuable customers may be limited. consequently, a firm with a pool of racially diverse employees can have a clear strategic advantage in reaching out to customers. by using the knowledge stocks of workers from racially diverse backgrounds, a new small firm can specifically tailor its product offerings and better serve a variety of markets within a certain vicinity, and thus leverage its relational capital and its convenience for these customers. as the demographic makeup of the workforce changes, so does the marketplace. projections indicate that minorities 38 j. m. sequeira, k. p. weeks, m. p. bell, s. r. gibbs journal of small business strategy / vol. 28, no. 3 (2018) / 31-47 will play an increasingly significant role in the u.s. economy in terms of purchasing power, and minority customers may prefer to patronize or support organizations that have a racially diverse workforce who understand their needs, culture, language, and preferences (altinay, saunders, & wang, 2014). prospective clients may also question an organization’s diversity record before they are willing to begin a business relationship (gardenswartz & rowe, 1998). in fact, mckay, avery, liao, and morris (2011) found that having a climate that values diversity is directly related to customer satisfaction a year later. although these findings were in large organizations, we expect the finding will be similar in small firms. additionally, compared with large organizations, new small firms may have fewer resources allocated to marketing, so their need to maximize return on investment and leverage relational capital is greater. were small firms able to capitalize on the advantages associated with racially diversity among employees, they could obtain a greater return on investment of marketing funds. positive reputations and image are strategic assets (fombrun & shanley, 1990) and subcomponents of relational capital. a reputation as an employer of racially diverse workers, and provider of convenient, relevant products and services may enable the new small firm to gain loyal customers who intentionally choose to do business with the firm. this will contribute to a positive community image with customers and other stakeholders. overall, the literature points to racial diversity as being a critical knowledge resource which may serve as informal advertising, leading to increased visibility and reduced marketing costs. proposition 6. early racial diversification of a small business combined with a climate that values diversity will increase the marketing capabilities of the new firm. since competitive advantages in small firms often revolve around human assets (simpson, tuck, & bellamy, 2004), and the firm’s intellectual capital, it is important for new small firms to recognize the benefits that can come from a diverse workforce. cumulatively, we proposed that new small firms that hire racially diverse workforces, value racial diversity, and implement inclusive organizational environments may enhance their intellectual capital, leading to better performance (for example, reduced costs, more creative ideas, greater profit, organizational flexibility, etc.) and higher survival rates. small firms that do not hire racially diverse workforces, value diversity, or implement inclusive environments could risk the long-term sustainability of their firms. consequently, it stands to reason that workforce diversity, particularly with respect to race, should be viewed by new small firms as a strategic human resource management tool which is critical for long-term business survival and better performance. implications for practice and research we have proposed that when new small firm owners recognize the importance of racial diversity and a climate that values racial diversity, this will allow their firms to be more responsive and adaptive to customer needs, develop innovative products, and build a sustainable competitive advantage. the intellectual capital gained from new and diverse employees can be shared with all organizational members so that the organization learns collectively as individuals are socially, contextually, and relationally embedded with each other and with the firm (granovetter, 1992; nahapiet & ghoshal, 1998). new small firms, often overlooked in diversity and human resources scholarship, may benefit from and be well-equipped to manage and value the contributions of a racially diverse workforce due to the firm’s size and flexibility. the large numbers of small firms, the millions of people employed by them, and the increasing diversity of the u.s. population make these ideas particularly important. as shown in table 1, we provide several recommendations to help new small firms create an affirming climate for diversity. we have chosen recommendations that even the smallest (and youngest) firms can begin to adopt. after examining their current (and projected) talent and knowledge resources, existing and potential customer base, and desired knowledge/skills, small firm owners should create a diversity plan that is tied to key performance indicators. small firm owners can begin to make diversity a priority by writing diversity-related values into their mission statements, communicating the importance of racial diversity for their competitive advantage, and framing their values in such a way that all employees feel included and have mutual respect for fellow employees (kidder et al., 2004). small firms’ size and flexibility can easily lead to increased employee voice and participation in decision making, which has been shown to increase the feelings of being accepted and valued in an organization (bell et al., 2011; chrobot-mason, 2003). new small firm owners should make sure that human resource policies are fair, objective, and formalized to the greatest extent possible given the resources available. this may be a long-term process, but it should start early with clear job descriptions and require39 j. m. sequeira, k. p. weeks, m. p. bell, s. r. gibbs journal of small business strategy / vol. 28, no. 3 (2018) / 31-47 ments for jobs in advertisements, objective selection measures and performance appraisals, as well as fair compensation for employees with the same experience, irrespective of race. fair hr policies should include ongoing education and training for all employees as money and time become available. once a plan for creating an affirming climate for diversity is developed and worked into key areas of the firm, small business owners should consider ways to assess and evaluate diversity initiatives. while this measurement process is likely the most expensive part of a comprehensive diversity initiative, keeping tabs on the success of objective human resource policies, and perceptions of fairness, and inclusive climates can be invaluable for firms. such initiatives allow firms to determine how to continuously propagate inclusive climates which will utilize the intellectual capital of employees and become a sustainable competitive advantage. by starting with a commitment to racial diversity, strong recruitment, and objective selection processes, new small firms can make significant progress toward ensuring a racially diverse workforce. mcmahan et al. (1998, p. 201) proposed that a “deeply embedded strategy of workforce diversity would require the interplay of all hr functions (for example, recruitment and selection, performance evaltable 1 recommendations for developing an inclusive diversity climate in small businesses climate strategy details of strategy source develop commitment to diversity owners, managers, and employees need to gain an awareness of and value diversity at all levels. (avery & mckay, 2006; herdman & mcmillan-capehart, 2010) develop diversity strategy tie the diversity plan to the mission statement and values, as well as key business results, such as firm performance. (jayne & dipboye, 2004; konrad, yang, & maurer, 2016) transparent communication and framing communicate reasons for diversity initiatives as creating a competitive advantage rather than to fulfill affirmative action laws. (kidder et al., 2004; scott et al., 2011) allow employee voice and participation allow employees to participate in decision making and voice dissatisfaction, especially as it relates to culture and climate. (bell et al., 2011; chrobot-mason, 2003) ensure human resource policies are fair and objective make sure that selection practices, performance appraisals, promotion practices and compensation are fair, objective and as formalized as possible, given scarce resources. (knouse, 2009; mor barak et al., 1998; roh & kim, 2016) ongoing diversity training (long-term plan) create an ongoing diversity education and training program for firm owners, and then for all employees, as the firm grows. (roberson, kulik, &tan, 2013; shen, chanda, netto, & monga, 2009) assessment and evaluation (long-term plan) develop a plan to assess human resource policies and climate for diversity. regularly evaluate the effectiveness of all diversity initiatives, making changes as needed. (jayne & dipoye, 2004; konrad et al., 2016) 40 j. m. sequeira, k. p. weeks, m. p. bell, s. r. gibbs journal of small business strategy / vol. 28, no. 3 (2018) / 31-47 uation, compensation and benefits) and would interact with other organizational functions (that is, marketing and customer support) to create inimitability”. high performing work systems such as these may be longer-term goals for small firms, but research shows that they can be successful (coder et al., 2017). table 2 provides recommendations that help new small firms recruit and select a diverse workforce as these are two of the more critical areas where new business owners encounter challenges (cardon & stevens, 2004; froelich, 2005) and are critical areas for racial diversity and inclusion. given that smaller businesses tend to use word-ofmouth recruiting and employee referrals, the profile of workers that currently exists in the firm is maintained since individuals tend to associate with similar others, as mentioned earlier. thus, we encourage new small firms to incorporate non-traditional ways of recruiting racially diverse workers. college/community college campuses with racially diverse student bodies, community and ethnic newspapers, and professional associations are just a few of the options that may provide inexpensive leads for recruitment of employees from racially diverse backgrounds. to attract a more racially diverse pool of applicants, firms should consider adding pictures of racially diverse employees on the firm’s website, in employment advertising materials (mckay & avery, 2005), and a diversity statement on all job advertisements. minorities are attracted to firms that use such recruitment practices (goldberg & allen, 2008). however, if there is not an affirming climate for racial diversity, these recruitment techniques can backfire, creating table 2 recommendations for recruitment and selection of diverse employees to small firms recruitment strategy description of strategy source recruit from a variety of sources recruit from colleges with diverse student bodies, advertise in minority newspapers or journals, and professional associations, etc. (newman & lyon, 2009; roach, 2006) recruit from a diverse applicant pool start by recruiting racially diverse employees, but also consider a variety of ages, workers with disabilities, lgbtq workers, etc. (ebrahimi, saives, & holford, 2008; meyers & degges-white, 2007) develop job advertisements that attract diverse applicants diverse demographics of actors in pictures or on website; use a specific statement about how the firm values diversity in recruitment materials, but only if accompanied by an affirming diversity climate (as outlined in table 1) (avery, hernandez, & hebl, 2004; goldberg & allen, 2008; knouse, 2009; lambert, 2015; perkins, thomas, & taylor, 2000) use objective and fair hiring techniques use semi-structured interviews with job-related questions (rather than unstructured interviews), and objective rating scales. use the same questions for all applicants. (huffcutt & roth, 1998; mccarthy, van iddekinge, & campion, 2010; mcdaniel, whetzel, schmidt, & maurer, 1994) regularly assess recruitment and selection techniques (long-term plan) use yield analyses, quality scores and hr data to track how well recruitment sources yield high quality, diverse applicants who are hired and retained; track effectiveness of selection measures to make sure that selected employees perform well. (carlson, connerley, & mecham, 2002; konrad et al., 2016) 41 j. m. sequeira, k. p. weeks, m. p. bell, s. r. gibbs journal of small business strategy / vol. 28, no. 3 (2018) / 31-47 feelings of dissatisfaction, disappointment, and intentions to quit (chrobot-mason, 2003; mckay & avery, 2005). in contrast, combined with supportive climates, these suggestions often cost little and are creative ways to attract more qualified employees who would be assets to the firm. along with effectively recruiting a racially diverse applicant pool, new small firm owners should ensure that current selection techniques are as objective and bias-free as possible. since interviews are the most common technique used to hire employees, it is important to focus on reducing the likelihood of a similar-to-me bias and making the interviews more predictive of future performance. interviewers should use structured interviews, asking job-related and situational questions (mcdaniel et al., 1994), which can eliminate racial similarity bias (mccarthy et al., 2010), along with increasing the likelihood of finding the most qualified applicants for job vacancies. choosing the most qualified person is particularly important to small firms who have few employees and are less able to afford hiring mistakes. academic implications and future research ideas practitioners and researchers alike need a deeper understanding of how intellectual capital functions to increase small firms’ performance. prior studies have demonstrated the value of intellectual capital for large firms, but examining new small firms will add significantly to our knowledge in this area. as we have noted throughout, there are important differences between large corporations and new small firms. new, small firms often experience a lack of legitimacy in the community, a lack of resources for marketing, recruiting, or high-level human resource policies, and a focus on survival that can engulf other strategies. while some of the theories and findings on larger corporations may help inspire new small firms to plan for the future, more research is needed to determine what would actually be beneficial and predict a competitive advantage for the firms as soon as possible. therefore, we next outline a plan for a research program to address the significant gaps in the literature to date. there has been a call for more mixed methods designs when studying psychological issues in business (e.g., eid & diener, 2006). combining qualitative and quantitative methodologies would be a good way to gain both the depth of the personal experiences and stories of individual business owners with the generalizability of quantitative methods (johnson & onwuegbuzie, 2004). for example, qualitative interviews with small firm owners about their strategies for diversity and inclusion would likely reveal specific struggles with survival as a focus to the detriment of employee inclusivity. new small business owners could explain their struggles, while also sharing practical ideas that have worked for them. it would be interesting to compare the experiences of new small firms that have a homogenous workforce and want to diversify with those that do not believe diversifying in the early stages would be helpful. in addition, a comparison between homogenous and heterogeneous small firms could also highlight the particular strengths and struggles of each. it may be beneficial not only to compare the diversity (in terms of numbers of employees from different racial groups) of new small firms, but to also compare the levels of inclusive climate indicators, objective hr policies for recruitment and selection, and ongoing training and assessment techniques across a variety of new small firms. researchers could use the in-depth knowledge gained from the qualitative interviews to develop quantitative studies that would reach a wider participant pool, and therefore be more generalizable. for example, a survey might include questions about how well the owner feels that he/she communicates diversity initiatives to employees, specific struggles that might be affecting the company’s ability to be more inclusive, and the extent to which they are able to incorporate objective human resource policies into their daily existence. in addition, questions could revolve around recruitment and selection policies that we have suggested in table 2. finally, questions related to the utilization of intellectual capital would help determine how much employees’ knowledge and networks are used to increase innovation within the company as well as reach new customers outside the firm. based on our comprehensive arguments, we believe that new small businesses that attempt to be more inclusive will show better firm performance rates over time than those that are not. another fruitful stream would be to compare the owners’ desire for inclusivity with their employees’ perception of the positives and negatives of such a strategy. clearly having buy-in about the importance of the inclusivity strategy is important for a small business. owners may see backlash from employees if the strategies are not communicated clearly and connected to the firm’s mission and values. many of the ideas above could benefit from longitudinal studies. for example, tracking firms that begin with a racially diverse workforce and an inclusive diversity climate and comparing them to firms that did not have a diversity plan from the outset would be interesting. we believe that the racially diverse new firm will reap performance benefits earlier and stronger than firms that try to implement racial 42 j. m. sequeira, k. p. weeks, m. p. bell, s. r. gibbs journal of small business strategy / vol. 28, no. 3 (2018) / 31-47 diversity plans later in their development, or firms that do not implement diversity plans at all. conclusion given the scant scholarly literature on diversity in small firms, we encourage researchers to empirically examine the relationship between new small firms’ racial diversity, intellectual capital and performance. the current arguments contribute to the literature about the benefits of a racially diverse workforce that is managed within an inclusive climate for diversity, and set the stage for future researchers to fill the gap in the literature between the ways that large and small firms must approach diversity and inclusion efforts. first, we brought to light the importance of studying diversity in new small firms using findings from extensive diversity research on large organizations. second, we proposed that, if properly combined with a climate that values racial diversity, small firms can benefit as much as, if not more than, large organizations by employing a racially diverse workforce. a racially diverse workforce will lead to more intellectual capital and knowledge resources, which helps new small firms develop innovative ideas, solve complex problems, and recruit and retain more qualified employees as the 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(2004). human resource configurations, intellectual capital, and organizational performance. journal of managerial issues, 16(3), 337-360. http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2021, vol. 31, no. 01, 105-117 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2021 small business institute® w w w. j s b s . o rg introduction 1departamento de análisis económico, universitat de valència, avd. de los naranjos, s/n 46022 valencia, spain, paz.rico@uv.es 2departamento de análisis económico, universitat de valència, avd. de los naranjos, s/n 46022 valencia, spain, bernardi.cabrer@uv.es management practices and business labour productivity management practices, business performance, labour productivity, human capital, r&d apa citation information: rico, p., & cabrer-borrás b. (2021). management practices and business labour productivity. journal of small business strategy, 31(1), 105-117. management practices play an important role in explaining the heterogeneity in business performance (bloom et al., 2014). however, until recently, empirical literature has been scarce and research findings inconclusive (siebers et al., 2008). as bloom and van reenen (2007) point out, empirical economic research to date has not focused on management practices as determinants of labour productivity differences across firms, sectors and countries. the lack of data on management practices could explain why empirical literature has so far been sparse. bryson and forth (2018) indicate that the proposal that management practices could explain differences in business performance is not a new idea. in fact, the more recent development of datasets on management practices has enabled analysis of the relationship between management practices and business performance with a greater degree of formal scrutiny. the world management survey (wms) project collates management practices data at firm level across different sectors and countries (bloom and van reenen, 2007; bloom et al., 2014). one of its objectives is to show that management practices can explain the growth of output per worker that the capital factor cannot. solow (1957) found that around 88% of the growth of output per worker in the us was due to factors other than capital accumulation. among these factors, management practices play a significant role. as bruhn et al. (2018) points out “capital alone cannot explain the entirety firm growth; `managerial capital´ is needed to know how to employ the capital best” (p. 635). in recent years, a growing body of evidence has emerged which shows a positive link between management and business performance (bloom et al., 2014). in fact, recently, the literature has been focusing on employers’ interest in investing in management practices and services aimed at creating and maintaining a happy workforce, leading to better business results (bellet et al., 2019; oswald et al., 2015). this research uses data collated through the wms, specifically, a sample of firms from france, germany, greece, portugal, spain and the united kingdom (uk). the aim of this study is to analyse whether there are differences in the response of labour productivity to management practices between countries. as the external environment affects firms’ behaviour, this study takes into account the characteristics in terms of intangible capital of the country where the firm is located. finally, this study also analyses which this study examines the impact of management practices on business labour productivity, taking into account the externalities of intangible capital endowment of the country in which the firms are located. management practices are also analysed to see which are more likely to explain productivity differences between firms. for this purpose, a sample of european firms from france, germany, greece, portugal, spain and the united kingdom is used. data of management practices comes from the world management survey. the main empirical results show that management practices have a strong positive and economically significant impact on the labour productivity of firms. differences in the labour productivity of firms and therefore, of countries can be explained, in part, by differences in the score given for their management practices and by differences in local intangible capital endowment. finally, incentives management and target setting prove to be the most relevant management practices in improving firms’ labour productivity. paz rico1, bernardí cabrer-borrás2 http://www.smallbusinessinstitute.biz http://www.jsbs.org 106 p. rico, & b.cabrer-borrás journal of small business strategy / vol. 31, no. 1 (2021) / 105-117 management practices are the most relevant for business labour productivity. the contribution of this study is to examine the impact of management practices on firms’ labour productivity by considering the externalities of the production process, such as technological endowment, human capital and entrepreneurship where the firm is located. those spillovers are factors that act as catalysts for firms’ labour productivity. the theory is that the presence of high endowments of intangible assets in a specific area enhances productivity since they generate positive externalities to the localized firms. in general, the empirical literature encounters a serious weakness in the lack of connection between the micro and the macro approach, and this study aims to consider both. in addition, in spain, the empirical evidence on management practices that uses data from spanish firms is scarce. therefore, this study analyses whether spanish firms behave differently in terms of management practices in relation to other countries. furthermore, the effects of different areas of management practices on business productivity are examined separately. most of the literature focuses on management practices as a whole, making no distinction between the different areas into which management practices can be divided. in this regard, this study considers the areas proposed by bloom and van reenen (2007): operations management, performance monitoring, target setting, and incentives management. broszeit et al. (2019) group’s management practices into just two areas: incentives and targets (i&t) and data driven performance management (ddpm), and these are also considered in this study. finally, given the relevance that innovation has for business labour productivity, this study also takes into account management practices related to innovation, technical innovation and process innovation. the paper is laid out as follows. following this introduction, section 2 presents the theoretical framework and proposes the hypothesis. section 3 outlines the methodology. section 4 analyses the data used and definition of the variables. section 5 presents the empirical results and, finally, section 6 discusses the main findings and presents conclusions. theoretical framework management practices management practices can be defined as organizational and control activities that aim to improve the productivity and competitiveness of the firm. as riley and robinson (2011) indicate, “intangible assets are those inputs into the production process for which there is little evidence in a standard accounting sense” (p. 5). therefore, intangible assets include knowledge and organisational characteristics that might affect the firm’s productivity. shahzad et al. (2016) conclude that the processes of knowledge management lead to organizational creativity and enhanced business performance. according to bryson and forth (2018), there are two lines of research. the first line of research focuses on the impact of human resource management (hrm) practices on business performance (arthur, 1994; guthrie, 2001; huselid, 1995; ichniowski et al., 1997; koch & mcgrath, 1996; lin & shih, 2008; macduffie, 1995; michie & sheehan, 2005; sels et al., 2006). this strand of literature argues that improvement in hrm practices can maintain, or even increase, a high level of business performance. arthur (1994) is one of the first to provide empirical evidence of the effects of human resource systems on manufacturing performance and turnover. huselind (1995), with a cross-sectional sample of us firms, finds a positive relationship between hrm practices and firm productivity. macduffie (1995), using a comprehensive international sample of 62 automotive assembly plants, provides strong statistical evidence of a positive relationship between innovative hrm practices and economic performance. koch and mcgrath (1996) show that investments in hrm practices are positively associated with labour productivity. ichniowski et al. (1997) demonstrates that manufacturing lines using a set of innovative hrm practices achieve higher levels of productivity than do lines with a more traditional approach. guthrie (2001) demonstrates, for a sample of new zealand firms, a positive relationship between the application of high-involvement work practices and productivity. michie and sheehan (2005) show positive relationships between hrm practices and objective financial performance. sels et al. (2006), focusing on small businesses, show both productivity and profitability enhancing effects as well as a cost increasing impact of hrm intensity. finally, lin and shih (2008) investigate the mechanisms through which strategic hrm promotes firms’ competitive advantage. the second line of research focuses primarily on operations management practices and performance incentives (bryson & forth, 2018). in this strand, the research studies carried out by bloom and van reenen (2007, 2010) and bloom et al. (2012a, 2013, 2014 and 2017b) are notable. bloom and van reenen (2007, 2010) and bloom et al. (2012a, 2013, 2014 and 2017b) focus on the performance effects of 18 management practices that can be grouped into four headings: operations management, performance monitoring, target setting, and incentives management. these management practices are viewed as being akin to “a technology”, being an intangible capital input that increases productivity (bloom et al., 2014, 2017b). 107 p. rico, & b.cabrer-borrás journal of small business strategy / vol. 31, no. 1 (2021) / 105-117 using data from the wms, bloom and van reenen (2007, 2010) show that firms with better management practices tend to have better performance. these results are confirmed by bloom et al. (2012a), who use a sample of the same survey, and by bloom et al. (2012b), who look at developing countries of central asia. these papers use different measures of business performance such as labour productivity, profitability, probability of survival, tobin’s q, and sales growth. in 2010 the census bureau carried out the management and organizational practices survey (mops) for over 30,000 firms in the united states. using this survey, bloom et al. (2013, 2017a) show a strong positive correlation between management practices and business performance. using data collected by the census bureau for 2005 and 2010, brynjolfsson and mcelheran (2016) focus on what they call data driven decision making practices (ddd). they find that firms that adopt ddd practices show a better performance than those that do not. broszeit et al. (2019) carried out a similar survey to mops among firms in germany and they show a robust positive and economically significant association between management practices and labour productivity. mckenzie and woodruff (2017) focus on the relationship between management practices and small business performance in developing countries and show that variation in management practices explains variation in business performance. finally, bryson and forth (2018) examine the impact of management practices on business performance among smes in britain over the period 2011-2014. they conclude that management practices help firms to grow and to increase their productivity. as can be seen, recent research studies use surveys that consider a wide range of management practices such as operations management, performance monitoring, target setting, and incentives management. however, empirical evidence usually only uses the average of all these management practices. this study looks at the different areas, separately, with the aim of analysing if some of them are more advantageous than others. in addition, intangible assets that characterise the local external environment where the firm is located are taking into account. local external environment according to marrocu et al. (2012), business performance can be affected by the local external environment. therefore, it is crucial that the role, and impact, of the local environment in labour productivity of firms is taken into account. the endowment of intangible assets generates positive externalities that enhance business productivity. the higher the local endowment of intangible assets, the more productive the local firms are. this study considers that the endowment of intangible assets includes human capital, technological capital and entrepreneurship capital. a nation’s human capital endowment includes the knowledge, skills, capabilities and experience of the workers. as such, human capital endowment is one of the most important determinants of a nation´s long-term economic success (benhabib & spiegel, 1994; kato & honjo, 2015; mankiw et al., 1992; sevilir, 2010; vila et al., 2015). the existence of a skilled workforce in an economic area enhances firms’ productivity. lynch and black (1998) show that firms that recruit better-educated workers have appreciably higher productivity. dearden et al. (2000), (2006) state that increasing the proportion of trained workers increases the added value per worker. sala and silva (2013) find that training invested in each employee is associated with an increase in the rate of productivity growth. knowledge is valued as public good but, as jaffe (1986) points out, its impact is geographically bounded. therefore, only firms located in the region benefit from a locally available higher knowledge level. according to riley and robinson (2011), technological externalities may be regarded as knowledge spillovers. rosenthal and strange (2004) recognize that identifying knowledge empirically can be difficult. likewise, griliches (1992) points to the difficulty of directly measuring knowledge and presents a review of the literature that quantifies knowledge using indirect methods. investment in r&d has been one of the most widely used variables as a proxy for knowledge or innovation. goodridge et al. (2017) present an extensive literature that shows the spillover effect of investment in r&d, but also argue that it is widely recognised that expenditure on r&d is only part of what is considered investment in knowledge. rico and cabrer-borrás (2019), using regional data from spain, find that total factor productivity of spanish firms is affected by r&d expenditure in the region. in this study, technological capital is measured by the expenditure on r&d in the country. with respect to entrepreneurship, block et al. (2017) provide a comprehensive review of the literature on innovative entrepreneurship. they point out that the benefits of entrepreneurship are linked to so-called schumpeterian entrepreneurs, referring to schumpeter’s early theory on creative destruction (schumpeter, 1934). innovative entrepreneurship turns new ideas into marketable products and services and can be a source of individual and regional generation of wealth (acs et al., 2009, 2013; block, et al., 2013). evidence supports the knowledge spillover theory of entrepreneurship (acs et al., 2009, 2013; audretsch, et al., 2012; eisingerich et al., 2012; holtz-eakin & kao, 2003), 108 p. rico, & b.cabrer-borrás journal of small business strategy / vol. 31, no. 1 (2021) / 105-117 which argues that knowledge spillovers from innovative activities create entrepreneurial opportunities. this study uses the opportunity entrepreneurship activity index, with the view that an opportunity entrepreneur can be considered a schumpeterian entrepreneur. method management and firm productivity according to bloom et al. (2017b), a cobb-douglas production function for firm i is considered: the aim is to verify if the location has an impact on the labour productivity of firms and if the effect of management practices is still detectable after including these variables. the following hypotheses are proposed: h2. human capital endowment positively affects labour productivity. h3. the higher the r&d expenditure, the greater the labour productivity. h4. entrepreneurship has a positive impact on labour productivity. areas of management practices and firm productivity the score of management practices is also analysed by its components. the score is based on 18 questions related to four aspects of management: operations management, performance monitoring, target setting, and incentives management (bloom & van reenen, 2007). furthermore, in line with broszeit et al. (2019), the practices are also divided up into two broad aspects: i&t and ddpm. technical innovation and process innovation are also considered. the aim is to analyse their individual impact on productivity. in order to do so, different econometric models are estimated to test the following hypothesis: h5. different types of management practices have different effects on firm productivity. finally, differences between countries in the response of labour productivity to management practices are also considered. for this purpose, dummy variables of the countries, using a multiplicative approach with the different areas of management practices, are included in second equation. the hypothesis to be tested is: h6. there are significant differences in the response of labour productivity to management practices between countries. data and variables a sample of firms from six european countries (france, germany, greece, portugal, spain and the uk) is used, with the data being obtained from a range of institutions. the data of management practices come from the wms that collates firm-level data across different sectors and countries. the wms methodology is described in detail in bloom and van reenen (2007). wms uses an interview-based evalu𝑌𝑌𝑖𝑖 = 𝐴𝐴𝑖𝑖𝐾𝐾𝑖𝑖𝛼𝛼𝐿𝐿𝑖𝑖 𝛽𝛽𝑒𝑒𝛾𝛾𝑋𝑋𝑖𝑖𝑒𝑒𝛿𝛿𝑀𝑀𝑖𝑖 (1) where: yi is real production, ai is productive efficiency (excluding management practices), ki is the physical capital, li is the labour, xi is a vector of additional factors, and mi is the score of management practices. the score of management practices and xi control variables appear as simple exponential functions so that after taking logarithms they are in levels rather than logarithms. furthermore, α is the elasticity of production for the physical capital factor and β the elasticity of production for the labour factor. dividing by labour and taking logarithms, equation (1) is rewritten as the following econometric model: (2) where the dependent variable is the natural logarithm of labour productivity, calculated as sales per worker. the productive efficiency term (ai) has been substituted for a constant term and a stochastic residual after a review of the literature, the hypothesis proposed is: h1. management practices have a positive influence on labour productivity. location and firm productivity the characteristics of each country in terms of intangible assets are added to the model shown in the previous section. these characteristics include technological endowment, human capital and entrepreneurial capital of each country. the productive efficiency term (ai) is now substituted for a vector that includes intangible capital (ii) variables and a stochastic residual i: i. 𝑙𝑙𝑙𝑙 (𝑌𝑌𝑖𝑖 𝐿𝐿𝑖𝑖 ) = 𝜃𝜃 + 𝛼𝛼𝑙𝑙𝑙𝑙 (𝐾𝐾𝑖𝑖 𝐿𝐿𝑖𝑖 ) + (𝛽𝛽 + 𝛼𝛼 − 1)𝑙𝑙𝑙𝑙𝐿𝐿𝑖𝑖 + 𝛾𝛾𝑋𝑋𝑖𝑖 + 𝛿𝛿𝑀𝑀𝑖𝑖 + 𝜗𝜗𝐼𝐼𝑖𝑖 + 𝜀𝜀𝑖𝑖 (3) 𝑙𝑙𝑙𝑙 ( 𝑌𝑌𝑖𝑖 𝐿𝐿𝑖𝑖 ) = 𝜃𝜃 + 𝛼𝛼𝑙𝑙𝑙𝑙 ( 𝐾𝐾𝑖𝑖 𝐿𝐿𝑖𝑖 ) + (𝛽𝛽 + 𝛼𝛼 − 1)𝑙𝑙𝑙𝑙𝐿𝐿𝑖𝑖 +𝛾𝛾𝑋𝑋𝑖𝑖 + 𝛿𝛿𝑀𝑀𝑖𝑖 + 𝜀𝜀𝑖𝑖 109 p. rico, & b.cabrer-borrás journal of small business strategy / vol. 31, no. 1 (2021) / 105-117 ation tool that defines and scores from 1 (worst practice) to 5 (best practice) across 18 key management practices. the management practices are grouped into four areas: 1) operations management, 2) performance monitoring, 3) target setting, and 4) incentives management. the operations management section focuses on how the firm handles a process problem, for instance a machinery breakdown. in addition, this section also includes any modern manufacturing processes which have been introduced by the management team. the performance monitoring section focuses on how well firms monitor what happens within the firm and how they use this for continuous improvement. the target setting section examines the type, legitimacy, transparency, range and interconnection of targets. finally, the incentives management section includes promotion criteria, pay and bonuses, and the remedying or dismissal of underperformers. data from the most recent surveys for france, germany, greece, portugal, spain and the uk are used for this database. broszeit et al. (2019) classify management practices into two groups: i&t and ddpm. the first group refers to incentives and targets. incentives refer to the use of performance bonuses, promotions and how underperforming employees are managed (broszeit et al, 2019). targets are communication of production objectives to managers and non-managers, the time frame of the objectives and the degree of effort required to achieve them. the second group, ddpm, refers to the recording and reviewing of key performance indicators, the use of production displays boards and problem solving in the production process. in this study, the 18 wms management practices are also grouped in line with broszeit et al. (2019). likewise, technical innovation and process innovation are also considered, and these incorporate the first and second practices, respectively, of the 18 key management practices considered by wms. technical innovation refers to introduction of modern manufacturing techniques. process innovation refers to motivation and impetus behind changes to operations. the orbis database provides information on the economic and financial accounts of the sample firms. after eliminating the observations with no information, the sample consists of 767 observations. for each of the firms in the sample, orbis gives information on the number of employees, assets, sales, profitability and the productive sector to which the firm activity belongs. the assets of the firms are used as a proxy for physical capital in the production function. the dependent variable in the specified model is the logarithm of annual sales per worker for 2014. variables that characterize the firms include the age of the firm which is the period in years since its establishment until the date of the wms survey. this variable is provided by the wms survey. another variable, provided by the wms survey takes the value 1 if the firm is a multinational company. profitability is measured through the return on capital employed (roce), which is defined as the quotient between the profit before interest and taxes and the total capital employed. finally, data from eurostat, global entrepreneurship monitor (gem) and world economic forum (wef) are also used. eurostat gives information on the r&d expenses per gdp of each country. wef, in its human capital report, provides the human capital index (hk). this index evaluates the levels of education, skills and employment for the population of each country. the total entrepreneurship activity indicator (tea) is obtained from the gem. tea assesses the percentage of the population of working age involved either in the process of starting an entrepreneurial activity or active as owner-managers of enterprises for less than three and a half years. this study uses tea opportunity, which only includes opportunity-driven entrepreneurs, excluding necessity-driven entrepreneurs. results table 1 shows the descriptive statistics of the score of all management practices and of its components. as can be seen, germany, france and the uk present the best management scores in all areas of management practices. the low score of incentives management in all countries is concerning but particularly in spain, which has the worst score. the models have been estimated by least squares using the method proposed by white (1980) in order to obtain consistent estimators with the existence of heteroscedasticity. in addition, in line with bloom and van reenen (2010), the models include interview noise variables to mitigate bias. column 1 in table 2 shows the estimation of the baseline model, which corresponds to equation (2). it follows from the results that there are no returns to scale in the proposed production function, since the coefficient of the employment logarithm is statistically significant. likewise, management practices are seen to have a positive and significant impact on labour productivity, verifying compliance with the first hypothesis. the logarithm of the assets of the firm weighted by the number of workers, the logarithm of employment and the profitability of the capital employed are also probabilistically highly significant. in addition, the statistical significance of the variable representing whether a firm is multinational allows us to conclude that multinational firms have a positive differential effect on labour productivity compared to the rest of the firms considered. 110 p. rico, & b.cabrer-borrás journal of small business strategy / vol. 31, no. 1 (2021) / 105-117 table 1 management practice scores by country overall management operations management performance monitoring target setting incentives management mean std. dev. mean std. dev. mean std. dev. mean std. dev. mean std. dev. france 2.95 0.46 2.91 0.85 3.45 0.63 2.89 0.54 2.60 0.49 germany 3.30 0.56 3.44 1.23 3.64 0.74 3.16 0.68 3.08 0.43 greece 2.71 0.57 3.03 0.84 2.94 0.82 2.55 0.69 2.54 0.53 portugal 2.81 0.57 2.81 0.64 3.20 0.78 2.73 0.69 2.55 0.52 spain 2.76 0.61 2.85 0.87 3.12 0.87 2.65 0.63 2.51 0.57 uk 2.99 0.47 3.06 0.71 3.58 0.64 2.96 0.60 2.69 0.46 i&t ddpm technical innovation processes innovation mean std. dev. mean std. dev. mean std. dev. mean std. dev. france 2.73 0.44 3.29 0.63 2.88 0.97 2.93 0.85 germany 3.12 0.46 3.59 0.84 3.41 1.37 3.48 1.28 greece 2.54 0.53 2.97 0.75 3.01 0.94 3.04 1.02 portugal 2.63 0.55 3.08 0.69 2.62 0.92 3.00 0.55 spain 2.57 0.54 3.04 0.83 2.79 0.92 2.91 0.95 uk 2.81 0.46 3.27 0.61 3.17 0.88 2.96 0.71 note: overall management is the average score in across all 18 questions of the survey (bloom &van reenen, 2010). source: compiled by the authors from the world management survey (wms). table 2 management practices and labour productivity (1) (2) (3) (4) (5) (6) constant 1.254*** 0.760*** 1.089*** 0.126*** 0.989*** 0.727*** overall management 0.117*** 0.073*** 0.086*** 0.085*** 0.093*** 0.097*** asset per worker (ln) 0.604*** 0.632*** 0.637*** 0.636*** 0.632*** 0.627*** employment (ln) 0.097*** 0.080*** 0.079*** 0.084*** 0.081*** 0.071*** age 0.001* 0.001 0.001 0.001 0.001 0.001 roce 0.002*** 0.002*** 0.002*** 0.002*** 0.002*** 0.002*** multinational 0.184*** 0.138*** 0.123*** 0.132*** 0.111*** 0.127*** r&d 0.296*** hk 0.385*** tea 0.015*** country dummies no no no no yes yes industry dummies no no no no no yes settlement dummies yes yes yes yes yes yes noise controls yes yes yes yes yes yes r-squared 0.601 0.632 0.632 0.626 0.641 0.674 adjusted r-squared 0.594 0.625 0.626 0.619 0.633 0.662 akaike info criterion 1.526 1.447 1.446 1.464 1.431 1.363 observations number 767 767 767 767 767 767 note: *** and * denote 1% and 10% significance, respectively. the estimate is consistent with the existence of heteroscedasticity in the sample. note: overall management is the average score in across all 18 questions of the survey (bloom & van reenen, 2010). source: compiled by the authors. 111 p. rico, & b.cabrer-borrás journal of small business strategy / vol. 31, no. 1 (2021) / 105-117 in order to explain the effect of the location of a firm on its labour productivity, the following strategy is used. first, the different socioeconomic characteristics of each country, such as the r&d, hk, tea allocations are used as location proxy variables. secondly, a dummy variable is introduced for each of the countries. the impact of more than one variable related to location cannot be analysed simultaneously as there is a high degree of collinearity between them. the estimates of these models are shown in columns 2 to 5 of table 2. the results show the existence of externalities generated by allocations of r&d, hk and tea in the country in which the firms are located. these results verify the second, third and fourth hypotheses. however, the results suggest that these allocations, individually, do not account for all the externalities or spillovers attributable to the location, since the model that presents the best results is the one that uses a dummy variable for each of the countries (see column 5). the results also verify that management practices maintain a positive influence on the labour productivity of firms. the effect of the productive sector to which the firm belongs on labour productivity is estimated and the results, presented in table 2 column 6, indicate that the productive sector to which the firm belongs is a determining factor in its productivity. therefore, it can be confirmed that differences in labour productivity of firms is seen between the different productive sectors. the influence of management practices remains statistically significant and positive, indicating that the better the management practices, the greater the labour productivity of the firm. thus, since spain presents, on average, worse results in management practices than germany, france and the uk, it is not surprising that the labour productivity of spanish firms is lower than that of other countries. once the influence of management practices on the labour productivity of firms is verified, the analysis moves on to look at the importance and contribution of the different types of practices, thus testing hypothesis 5. different models are estimated, which are presented in table 3. as mentioned previously, three criteria for grouping management practices are considered: those proposed by bloom and van reenen (2007); the classification proposed by broszeit et al. (2019); and the analysis of technical innovation and process innovation. the results obtained are presented in columns 2 to 5 of table 3 and follow the grouping proposed by bloom and van reenen (2007). in this case, performance monitoring and target setting are highly significant, while operations management and incentives management are only probabilistically significant with a probability of 90%. these results are in line with those obtained by broszeit et al. (2019) in the case of germany. the classification proposed by broszeit et al. (2019) is presented in columns 6 and 7 of table 3. the results indicate that both ddpm and i&t are probabilistically highly significant. finally, the results of the analysis of both technical innovation and process innovation in isolation are shown in columns 8 and 9 of table 3. the results show that technical innovation is probabilistically significant while process innovation is not. having looked at the effect of management practices on productivity, the study moves on to analyse whether the behaviour of the different management practices is the same in all countries. table 4 shows the estimates of the models that include the different management practices for each country. it can be seen that for greece and portugal none of the management practices are statistically significant. in other words, management practices and their components do not influence the variations in productivity of firms in these two countries. however, management practices and their different components, including process innovation, do influence labour productivity of firms in the other countries. in order to quantify the importance of the types of management practices in labour productivity, the average elasticities for each of the areas of management practices in the countries studied are calculated. table 5 column 1 shows that, at the aggregate level, the average elasticity for management practices for france is 0.58, for germany 0.60, for the uk 0.50 and for spain 0.36. therefore, in spain management can be seen to positively affect the labour productivity of firms but to a lesser extent than in germany, france and the uk. for both greece and portugal, management are seen not to be statistically significant. of the types of management practices, i&t practices are particularly notable, with an average elasticity similar to that of all management practices (see table 5 column 7). this evidence implies that the joint action of incentives management and target setting has a greater impact on labour productivity than each one separately. in addition, this evidence is consistent with studies that point out that combining different management practices has synergy effects (battisti et al., 2010; black & lynch, 2001; bresnahan et al., 2002; brynjolfsson & hitt, 2000; brynjolfsson & mcelheran, 2016; caroli & van reenen, 2001; dorgan & dowdy, 2004; huselid, 1955; ichniowski et al., 1997). the joint incorporation of different management practices leads to better business performance. therefore, management practices can be complementary and improve business productivity. 112 p. rico, & b.cabrer-borrás journal of small business strategy / vol. 31, no. 1 (2021) / 105-117 table 3 management practices and labour productivity: type of practices (1) (2) (3) (4) (5) (6) (7) (8) (9) constant 0.727*** 0.756*** 0.789*** 0.753*** 0.735*** 0.776*** 0.707*** 0.764*** 0.779*** overall management 0.097*** operations management 0.046* performance monitor 0.050*** target setting 0.074*** incentives management 0.060* ddpm 0.059*** i&t 0.098*** technical innovation 0.052*** processes innovation 0.020 asset per worker (ln) 0.627*** 0.629*** 0.628*** 0.627*** 0.630*** 0.628*** 0.627*** 0.629*** 0.631*** employment (ln) 0.071*** 0.078*** 0.076*** 0.076*** 0.079*** 0.074*** 0.074*** 0.074*** 0.084*** age 0.001 0.001 0.001 0.001 0.001 0.001 0.001 0.001 0.001 roce 0.002*** 0.002*** 0.002*** 0.002*** 0.002*** 0.002*** 0.002*** 0.002*** 0.002*** multinational 0.127*** 0.139*** 0.138*** 0.134*** 0.142*** 0.136*** 0.130*** 0.134*** 0.149*** country dummies yes yes yes yes yes yes yes yes yes industry dummies yes yes yes yes yes yes yes yes yes settlement dummies yes yes yes yes yes yes yes yes yes noise controls yes yes yes yes yes yes yes yes yes r-squared 0.674 0.673 0.673 0.674 0.673 0.674 0.674 0.674 0.672 adjusted r-squared 0.662 0.661 0.661 0.662 0.660 0.661 0.662 0.662 0.660 akaike info criterion 1.363 1.367 1.367 1.364 1.368 1.368 1.366 1.363 1.371 observations number 767 767 767 767 767 767 767 767 767 note: *** and * denote 1% and 10% significance, respectively. the estimate is consistent with the existence of heteroscedasticity in the sample. note: overall management is the average score in across all 18 questions of the survey (bloom & van reenen, 2010). source: compiled by the authors. 113 p. rico, & b.cabrer-borrás journal of small business strategy / vol. 31, no. 1 (2021) / 105-117 table 4 management practices and labour productivity: countries and type of practices overall operations performance target incentives technical process management management monitoring setting management ddpm i&t innovation innovation constant 1.009*** 1.088*** 1.026*** 1.038*** 1.061*** 1.035*** 1.010*** 1.092*** 1.061*** france 0.196*** 0.128*** 0.136*** 0.178*** 0.166*** 0.144*** 0.206*** 0.127*** 0.139*** germany 0.192*** 0.115*** 0.142*** 0.179*** 0.157*** 0.144*** 0.194*** 0.115*** 0.123*** greece 0.010 -0.044 -0.021 -0.011 -0.040 -0.019 0.003 -0.037 -0.008 portugal 0.080* 0.007 0.037 0.061 0.035 0.039 0.079 0.016 0.014 spain 0.130*** 0.062*** 0.078*** 0.113*** 0.087*** 0.083*** 0.132*** 0.065*** 0.070*** uk 0.165*** 0.096*** 0.110*** 0.144*** 0.133*** 0.116*** 0.170*** 0.093*** 0.110*** asset per worker (ln) 0.623*** 0.626*** 0.623*** 0.622*** 0.626*** 0.624*** 0.623*** 0.626*** 0.623*** employment (ln) 0.072*** 0.082*** 0.078*** 0.076*** 0.080*** 0.077*** 0.075*** 0.083*** 0.080*** age 0.001 0.001 0.001 0.001 0.001 0.001 0.001 0.001 0.001 roce 0.002*** 0.002*** 0.002*** 0.002*** 0.002*** 0.002*** 0.002*** 0.002*** 0.002*** multinational 0.128*** 0.148*** 0.140*** 0.133*** 0.147*** 0.138*** 0.131*** 0.145*** 0.154*** country dummies no no no no no no no no no industry dummies yes yes yes yes yes yes yes yes yes settlement dummies yes yes yes yes yes yes yes yes yes noise controls yes yes yes yes yes yes yes yes yes r-squared 0.668 0.663 0.660 0.662 0.669 0.665 0.666 0.668 0.665 adjusted r-squared 0.655 0.650 0.647 0.649 0.656 0.652 0.654 0.656 0.652 akaike info criterion 1.382 1.398 1.407 1.400 1.382 1.394 1.388 1.382 1.393 observations number 767 767 767 767 765 765 767 767 767 note: *** and * denote 1% and 10% significance, respectively. the estimate is consistent with the existence of heteroscedasticity in the sample. note: overall management is the average score in across all 18 questions of the survey (bloom & van reenen, 2010). source: compiled by the authors. 114 p. rico, & b.cabrer-borrás journal of small business strategy / vol. 31, no. 1 (2021) / 105-117 these results verify the fifth and sixth hypotheses since the influence on labour productivity of the various management practices is different and there are differences between countries. the study concludes that, for portugal and greece, management practices do not prove to be determinants of the labour productivity of their firms, but they do for france, germany, spain and the uk. the results highlight that management practices and each of their specific components are essential for improving the labour productivity of firms in france, germany, spain and the uk. furthermore, management practices positively affect the labour productivity of firms in spain but to a lesser extent than in germany, france and the uk. these results could also help explain the differences in productivity in spanish firms compared to german, french and uk firms, given that the score of management practices and the response of labour productivity to management practices is smaller in spain than in the aforementioned countries. discussion and conclusions it is widely recognized that management practices contribute to better business performance. but, given the limited information on business management practices to date, there is little quantitative research although with more information emerging on business management practices, a more thorough analysis of the relationship between management practices and business results is becoming possible. this study, using wms data, focuses on analysing whether management practices are factors that can explain the differences in business productivity between firms and countries. it also looks at which areas of management practices are the most relevant using a sample of firms from france, germany, greece, portugal, spain and the uk to see whether there is evidence of a differential behaviour between firms and countries. the analysis also takes into account the factors that characterize the location of the firms, in terms of intangible capital, so that the results do not show bias due to the omission of possible externalities. the results obtained confirm that management practices have a positive and significant impact on the labour productivity of firms. this result is robust since it is maintained when variables representative of the location of the firms and the productive sectors to which they belong are included in the models. the location of the firms is a determining factor of their labour productivity. also, hk, r&d spending and entrepreneurial activity have a positive impact on the labour productivity of firms. this would explain, in part, the differences in the labour productivity of firms between countries. in all countries considered, apart from portugal and greece, management practices positively affect the labour productivity of firms. thus, the lower score of management practices in spain compared to germany, france and the uk, and the fact that the response of firms’ labour productivity to management practices is less in spain than in the other countries, would explain the lower labour productivity of spanish firms. among the management practices analysed, incentives management and target setting practices are the most relevant, contributing significantly to the labour productivity of firms. this evidence implies that the joint action of incentives management and target setting has a greater impact on labour productivity than each one separately. therefore, firms should improve both management areas at the same time. this is consistent with evidence that combining different management practices has synergy effects. there are a number of reasons why not all firms have good management practices, even though they lead to productivity gains. these reasons include costs, regulations and reduced level of competition and human capital. as indicated by bloom and van reenen (2007), although a management practice may be beneficial for productivity, table 5 medium elasticities by countries and type of management practices overall management operations management performance monitoring target setting incentives management ddpm i&t technical innovation process innovation france 0.58 0.38 0.47 0.52 0.43 0.48 0.56 0.37 0.41 germany 0.60 0.37 0.49 0.54 0.47 0.49 0.58 0.36 0.40 greece 0.03 -0.14 -0.06 -0.03 -0.10 -0.06 0.01 -0.11 -0.02 portugal 0.23 0.02 0.12 0.17 0.09 0.12 0.22 0.05 0.04 spain 0.36 0.17 0.24 0.30 0.22 0.25 0.34 0.18 0.20 uk 0.50 0.30 0.37 0.44 0.37 0.39 0.49 0.30 0.33 note: overall management is the average score across all 18 questions of the survey (bloomand reenen, 2010). source: complied by the authors. 115 p. rico, & b.cabrer-borrás journal of small business strategy / vol. 31, no. 1 (2021) / 105-117 there are also costs to consider. upgrading management is a costly investment and some firms may find that these costs outweigh the benefits of adopting better practices. so, although improving management practices increases productivity, profits will not necessarily increase. one way for governments to improve the business management of firms would be to establish subsidies for firms that present adequate plans to improve their management practices. regarding regulation, broszeit et al. (2019) consider that the relatively low flexibility of the labour market makes the use of some management practices related to human resources more difficult, for example, hiring and firing, promotion or bonuses. therefore, guaranteeing a flexible labour market could lead to improvements in business management and business performance. in addition, high levels of collective bargaining, union coverage and works councils can have similar limiting effects on management practices. it is therefore crucial that unions and works councils are sufficiently informed to understand the importance of business management. finally, as bloom and van reenen (2010) indicate, the quality of management practices can be affected by the level of competition and training of the human capital of firms. reduced competition can perpetuate firms with low productivity in the market, whereas greater training of workers and greater preparation of managers in business could lead to improvements in management practices. promotion of training at all levels in business is therefore crucial to help improve productivity. in order to consolidate the conclusions made, it would be necessary to supplement the database used to corroborate the stylized facts presented here, since the database from the wms survey has certain limitations mainly that it shows a predominance of medium-sized and large firms, and includes only a small number of firms per country. acknowledgment paz rico would like to thank the consellería d’innovació, universitats, ciència i societat digital for its support through project aico/2020/217. references acs, z. j., braunerhjelm, p., audretsch, d. b., & carlsson, b. 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(1980). a heteroscedasticity consistent covariance matrix estimator and a direct test of heteroscedasticity. econometrica, 48(4), 817-838. s~mnzgy lessons for small business: incentive health care and risk rating practices suzanne milburn state of kansas ray d. siehndel washburn umversity joe singer university of missouri-kansas city abstract as the healrh care sysrem reform debare continues, the central challenge of bringing nearly 38 million umttsured american worl'ers under a ttuattty healtlt care plan remains the goal. attotlter ob)ecttve tlmt retttat'ns clear is thar the plan to be implemented will follotv the employerbased model whiclt americans'mp(o&ers have crafted for over fifty years. small business owners will be mandated to provide ltealth insurance ro all workers, inchrding those who work part tinte. this paper examines the health cttre incentive measures and risk rett'ng practices perceived to be effective cost control meclumisms for small business firms, conclusirms concerning a well-tlesigned incentive program are offered tvithin the contert r&f the americans with dtsabiliries act. introduction large double-digit annual increases in health care costs have taken place over the last tcn to fifteen years resulting in proportional, profit-draining expenditures by nearly all american businesses (hurri ingcr, 1985; vickery, 1994). health care expenditures in 1985 cost employers an average of 1,724 per employee. u.s, employers now spend an average of $3,573 per worker to purchase health insurance and it is predicted that this ftgure will exceed $4,800 by the end of 1995 (nations business. 1992). forecasters have observed that "if current laws and practices continue, health expenditures in thc united states will reach $ 1.7 trillion by the year 2000, an amount equal to 18.1 percent of the nation's gross domesttc product (gdp). by the year 2030, as america's baby boomers enter their 70s and 80s, health spending will top $ 16 tnllion, or 32 percent of gdp" (burner, 1992). as u.s. companies continue to face ever greater competitive challenges from tntemational markets and uncertain health system reform, business owners arc i'ocusing more attention on containing health care costs. small business cmpfoycrs are studying and implementing a range of strategies to control the rising health costs (vaughan and reed, 1992). the cost-control strategies typically adopted address the supply side of the medical econotntc equation and result in "bene(it take-aways" from employees (william, 1992). these include lttnitations on access to providers, pre-hospitalization certtfication, mandatory second 97 opinion, concurrent utilization review iuld cost shifting through higher deductibles for employees. however, health promotion is a cost containment stnatcgy that address thc demand side ol'hc. c(ist cqu&ltion. health promotion is broadly def'ined as "any combination of'ducational, organizati(inal, economic and cnvironmcntal supporls i'or behavior c&mducivc to health" (green and johnson, 1983). "contnlry lo other reports on cost managcmcnt initiatives, studies show th,'u health promotion is perccivcd hy mnployees as a valuable hcncl'it and typically has very lbw of thc negative;lssociations of other cost control strategies (pmwkovcr. 1989). in addition to a warm reception hy employccs, studies show promising results on thc cc&momic impact ol'orp&iratehealth promotion programs (warner, 1988). cost control measl)res ovm'he lust several years, a i'cw small business firms have;itteinp&c&l to icveragc then health promotion stratcgics by implcmentin ~ programs with i'uijo(.'hll inccnllvcs (aml disincentivcs) to motivate their employees to change their "unhcaltf)y" lil'cstyle habits ainl maintain good health habits (muchnick-baku, 1992). these inccntivc programs target risky employee health hchaviois that c&iukf potentially cnd up costing boih thc owner and cmployce nloncv. thc practice of requiring employees with high risk behaviors to shoulder a greater sharc ol'he&i healih care costs has bccomc i'nown as "risk rating". risk i ating can hc applied in the i'onn of diltcrential premium contributions, copayments, dillcrcntial dcductihlcs, cost sharing structures or other benefit cnhanc(nncnts hrcsed upon an individual's m&idi1'iablc health risk chaiacteristics, (chapman, 1992). specific. cxamplcs of'tnall business risk-rating strategies include insurance discounts or su&charges, cash rcbates or awards i'or meeting individual or group itcalth goals, contributinns to an employcc's health (sire spending account and preadmission rcvicws, second opinion options. thc addition or subtraction of vacation days (vaughan and reed, 1992). sonic conlpanlcs ch(nisc lo i)dopt only onc or two ol'hcs« stratcgics while other companies intcgratc all of &bein into onc plan. trends in risk ra&in ~ soli&if business tnsu&c&'s i'cpoi't &hilt anunlg clicnl lirms, 12 percent cithcr oitcr a discouu& ol'nip(isc j sui'chal'gc (ml clnploycc contributions to lil'e or health insui"ulcc plans based upon ccitain hchuviors (woolsey, 1992). in addition, f) pcl'cent phul lo;idopl soirlc type of'inancial incentives over the next two years, and another 19 percent arc considci ing it. thcrc i» lit(lc published data documenting thc outcomes of risk raling by small business i'lrms, hul preliminary data i'rom several business insurcrs with cstablishcd small business risk rated health insurance progrmns indicate that thc cost savings may hc quite i'avorablc (muchnick-baku, 1992). the adolph coors company estimated an average annual medical cost reduction of'$150 per "at-risk" employcc three years af'tcr their risk-rated program was inlroduccd, other firms which impl(nncnted health incentive plans in the mid 8(ys, rcport 98 cxpenencing a five percent increase in thc cost of their health care plan since 1987 compared to 20 pcrccnt &ncrcascs experienced by non-incent&ve plan employers (muchnick-baku, 1992) the foldcraft company cited less i'ormal results i'rom the implementation of their program in 1990 but states that the "donut index" had decreased signil'&cantly. that &s the number of donuts ordered as an incentive for injury i'ree work weeks was reduced by half and the "i'ruit mdex'ncreased proportionately when a health promot&on and risk rating incentive program was launched (muchmck-baku, 1992). reasons for risk ratin fscalating health care costs arc thc main reason that small business firms arc exploring additional cost containmcni strategies. a number of reports cstabl&sh a clear link between carta&n health characterist&cs and health care costs (brink. 1987 and ycn. ct. al, 1991). these characteristics, or "risk i'actors". arc directly linked to the behaviors an individual voluntarily choose to adopt, such as exercise, seat bcl& usc, smoking and alciihol consumpt&on (golaszewski, 1992). a highly regarded 1987 study of control oata employees shows a clear sc&cntil'ic association between the prescncc ol'specil'ic nsk factors and health care costs. this study concluded that a signil'icant diffcicncc exists in the utilization and cost of medical care by health status. generally, high-risk persons utilize morc medical care than other persons and generate higher claim costs (brink, 1987). as a result busmess insurers and small business employers have begun to define employees with "high risk'&festyles or health status as i'inancially burdensome and have structured their health plans to ensure that these employees will pay more i'or their projected expenditures. in addition to cost contamment, other reasons oltcn cited for implcmcnt&ng riskrated health insurance and benel'it inccntivc programs are: i) to protect or improv« thc health ol individual employees, 2) to beucr serve customers and to protect or improve the health of'he entire group, and 3) to fairly distnbute thc costs associated with risk behavior (priestcr, 1992) of thcsc reasons, cosi containment and employee health improvcmcnt are ihc n&ost frcttuently cited re&usi&ns for implementing risk-raiing strategies in the small i'irm. small business work lace rece tion as with most ncw ideas, risk rat&ng has rcce&vcd mixed rcv&ews i'rom cmploycrs and employees. it has been cmbraccd by new-agc employees as a creative and el'i'ective strategy i'or motivating healthier behaviors and distributing health care costs more cttuitably among the most likely users. however, risk rating has also bccn severely critic&zed i'r discriminating against vicums of poor health or unfortunate genetic inheritance. these employees iccl risk rating unfairly shifts costs to employees on the basis of insulticient research, and some i'eel it is a "deliberate rupture of the health insurance contract" (priester, 1992). 99 small business risk-rating: the pros ani) cons cost containment in considering risk rating for cost containment purposes, there is convincing cvidcncc that risky lifestylcs and unhealthy behaviors do indeed result in higher health care costs. for example, the state ol'kansas cinnparcd i'or three years the medical claims ol'smokers arid nonsnu&kcrs. the study showed that smokers incurred 33 percent morc hospital admissions than non-smokers, also, smokers avenigcd 41 percent morc days in thc hospital than non-smokers. and smokers hail total average medical claims that were approximately $ 300 a year higher (penner, 1992). in addition to smoking, other lil'estyle habits imp;ict health care costs as well. onc study i'ound that persons whi& d&d not excrcisc had 114 pcrccnt higher non-maternity medical claims costs, used 30 pcrccnt more hospital days. and werc 41 pcrccnt morc likely to have annual claims ol'orc than $5,000 than those who modcratcly excrciscd, (c.g.. the c&tui valent of climbing 15 (lights ol'stairs or walking 1.5 miles thrcc or moiu times a wcck) (brink, 1987). thcrc arc several snags in the cost contaimncnt argument which small business employers shi&uld hc aware of in their examination ot'risk rating. one important consideration is thc extra (invcstmcnt) cost ol'conductmg and maintaining a risk rating program. if'hc cost of thc incentives needed to stimulate and vcril'y thc behavior change is grcatcr than thc savings i'rom a diffcrencc in lil'cstylc, then risk rating may actually add to thc total cost ol'ealth care (kaclin, 1992). additionally, thc costs of'supponing and maintaining healthy employee habits at thc worksite must be considered if a health prom&&&ion program is not already in place. these lifcstylc management programs might include weight management, smoking cessation or subsidixing healthier i'ood choices in vending machines. a pitl'all in the cost containmcnt argument is thc premise that thc "unprcvcntahlc claims" which would rcplacc thc "prcvcntable claims" would be cheapm, i.c., healthy lif'estylcs may merely change the causes ol'death and discase to those which are not prcventablc (kaclin, 1992). these ncw causes ot'disc isc and death may gcncratc addi&&onal health care costs. risk rating for small business f&rms may bc a justifiable 1&iotlcl of inini&nixing and/or spreading health care costs. howcvcr, thcrc &s much lusufication for not focusing solely upon cost col&tail&lrlcl&t o&&teel»cs ill thc cvaluati(mi of dsk tati&&g. voluntariness lt is csscntial, cspccially mnong small bus&ness iinns, to examine thc voluntary nature of'risk in thc assessment of'isk rating. establishing the voluntary nature ol'sk is critical to thc dctcnnination ol'inancially fair incentives. if'ehavior is not under one's control, it would he difficult to be held accountable and even more difficult to enforce penalties for those behaviors. 100 most believe that health behaviors are under one*s control, however, there are a large number of observers who believe that this is not thc case (priester, 1992). many argue that one's hereditary makeup is a major determinant of lilcstyle and that lil'estyles are really not freely chosen at all. for example, it could bc argued that alcoholism is a disease, not willfully chosen. therefore, a cnterion ol'moderate alcohol consumption" may not be within the control of the alcoholic. also, a recent study based on a survey of twins, links smoking with an individual's genetic history (stone, 1993). these voluntary behaviors seem to be heavily impacted by social norms, family and work pressures, as well as economic and political environments (eiscnberg, 1987). others believe that behavior is virtually all self-determined with little or no influence i'rom any internal or external i'orces a case for this belief is made by pointing out that lifestyle behavior vanes widely i'rom individual to individual within i'amilies as well as within social classes (veatch, 1980). thus, if'ehavior is strictly hereditary. one would find the same lifestyle behavior among i'amilies and classes. since this is not true, social i'actors and hereditary factors cannot by themselves explain lifestyle. therefore, these health behaviors are at least partially free-will choices. onc group ol'bclicvers in the i'ree-will concept. take the argument one step i'urther by casting a moral quality upon onc's lifcstylc decisions. as onc commcntaior writes, "why spend money on a system which taxes thc virtuous to send the improvident to the hospital'" (knowles. 1977) similarly, another writes, "the concept of insurance is to spread risk from unknown causes, but not to subsidize the exorbitant costs of those who, through their own decisions, i'ail to take reasonably good care of themselves" (williams, 1992) another problem, especially in small groups of'mploycrs, is thc rewarding ol'ndividualswho meet certain standards but arc not practicing positive lif'estyle behaviors. for example. one employee may happen to have healthy genes and is allowed to rcccivc an incentive for meeting thc standard while doing nothing to contribute to their healthl'ul state. there is no definitive answer on whether hfestyle risks are freely chosen. however, it is certain that small business financial incentive health care programs should be based upon behaviors that are clearly voluntary with allowances for behaviors which may bc hereditary in nature. for this reason, "cafctcria plans" were considered relatively effective and "somewhat surprising given thc frequent complaint of'igh administrative costs for small employers adopting cal'eteria plans (vaughan and reed, 1992). ~pb hilit rxi k a third issue to be considered by small business employers in evaluating the fairness ofrisk rating is the relationship between risk i'actors and probability ol'disease. a risk factor does not cause a condition to occur. risk is not a causal condition, but is merely an indicator that one probability may be greater than another (stone. 1981). even genetic markers do not predict with certainty whether a person will in i'act develop thc disease or disorder in question. ioi lt is common i'or cpidcmiologist, physicians and insurance health care policy makers to treat an cstimatc o( the likelihood of something happening (a risk i'actor) to an individual as though it were a i'act (terry, 1991). these estnnatcs or predictions become auributcs and tfualitics hy which employccs arc judged. for example, an employee with hyperlipiifemia is commonly treated as a "high-risk" employcc. this is because individuals with cholcstcrol levels above 200 arc considcrcd to have 10 times thc risk of an individual with levels below 200. yct there arc individuals with extremely high cholesterol levels who will not dcvclop athcrosclcrosis or any other ponn of'ascular disease over their lil'ctime. many indivitluals with unhealthy lil'estyles habits will never contract thc discascs assigned to their risk category, or si&meonc thought not to bc at rial& who contracts thc disc;isc or illness, r..,..the nim-smoker who contracts lung cancer (terry. 1991). since it is impossible to predict the occurrence of a disease, it sccms unl'air to charge companies and individual» morc i'r health insurance when their actual health expcricncc may never warrant it. risk measurement and standards still another issue to cxtnnine in the scrutiny of'mall i'irm risl'ating practices is the mcasurrnnent and cstablishmcnt ol'small group risk standards and behaviors who acts the standards by winch risk is mcasurcd'& many pro(cssional health and medical associations diff&a in their screening guidelines and health rccommcmlations. for cx:implc, some health experts assert that obesity slu&uld not he considered a health nsk unless it is accompanied by other primary risk factors or is coupled with thc prcscncc of'related chronic health problems (terry, 1992). yct, many of'hc risk-&ated programs usc percent body i'at and weight-height ratios as part ol'he nsk i'onnula. health standards arc c&mtinually being motlified as ncw data becomes availablc. the american head association has recently clcvatcd a scdcntary lif'cstylc i'rmn that of a secondary risk i'actor (or heart discase to that of' primary risk i'actor along with smoking, hypertension and clcvatcd cholcstcrol. thcrcl'orc, lack of'cxcrcisc is now considered an cvcn greater risk lor heart disease th:m it has been in thc past. given thc ahscncc of onc gcncrally accepted standard, it may hc unfair to hold cmployccs to a standard thai is not universally rccognixed or not supported by sufyicient cvitlcncc. clixscly linked with thc need to sct i'air standards is thc nccd to tfuanti(y these standards. i.or cxtunple, using height-weight tables or body mass index is thc subject of'reat debate among expetts. many argue that thcrc arc not measures ol'besity that are practical and rcliahlc enough to predict health risks. spccif'ically, height-weight tables cannot provide inf'ormation about the percent ol'body i'at or where the i'at is stored. both of'hich arc thought to inllumice the development of chronic health problems. 102 legal issues and considerations discrimination the question of possible discrimination is certainly a factor that must be examined by the small business owner in light of'hc recent americans with disabilities act (ada) and the current wave of corporate nsk ratinih the ada is essentially designed to open up employmrnit opportunities for disabled americans (brislin, 1992 and lewis, 1992). onc potential concern is thc ability of smokers, obcsc individuals, or other high-nsk employees, to use the ada to strike down adverse decisions regarding their employmcnt. under the ada, an employee (or prospective employee) is protected if they are rejected or treated diflerently because hc or she is "regarded as having an impairment" (sugannan, 1992). an employcc who is treated differently bccausc of'mall business cmploycr fears that higher costs in the i'uture from health claims, absenteeism or turnover t'rom conditions brought about from a smoker or an overweight cmploycc may bc scen as having an impairment and protected by the act (branncn and bcglcy, 1995). most cxpctxs believe that it is still too soon to tell how the courts will treat thcsc types of problems. some experts have suggested that in cnl'orcing the ada, the eeoc will. in the early years, focus on those who arc clearly disabled now, and will tend to steer clear of'he "regarded as having a disability provision" (sugarman, 1992) there is specific language m the ada which may exempt certain insurance or health plan pricing practices that have actuarial validity. thus, small business employers who might bc at nsk under the ada i'or refusing to hire someone, may be able to charge that person a higher, risk-rclatcd premium. it is also possible that small business firms will avoid trouble il'hey offer lower rates to those with currmit healthy lifcstylcs habits, and those who arc participating in programs to try to decrcasc their risk lcvcls. onc additional consideration would be a waiver or exemption i'or those people with disabilities who do not have "normal" par mieters, e.g., blood prcssure, weight, etc. (brannen and begley, 1995) along with the ada, title vll of the 1964 civil rights act may also be invoked to prevent small business firms i'rom imposing risk rated health insurance premium charges on employees if, 1'or example, black employccs or oldm. cmployecs could show that differential premiums for smokers or non-smokcrs, or for those with high and normal blood pressure, have a disparate, impact on them, the use of these premium dil'fcrcntials mivhi consutute illegal cmploymcnt discrimination (sugarman, 1992) ~privac along with discrimination and the accompanying potential for legal difliculties, is the issue of privacy and risk rating. employers who try to rcgulaic cmployecs ol'f-duty conduct inay be impinging upon the distinction between pnvate life and work life a variety of laws recently passed m 21 states prohibit cmploycrs from basing cmploymcnt-rclatcd decisions on a worker's off-duty behavior or lifestyle (woolsey, 1994). 103 critics of risk rating plans state that the fact that cenain lilbstyles increase or dccr&ntsc ltcalth care costs has nothing to do with how many widgcts (a worker) can turn out in onc hour. thc ibar is that small business (small group) cmploycrs &von't just draw tltc linc at the obvious, well-documented risks hut will encroach upon any health risk as i'air game. woolsey writes, woncc you start down that road of'egulating oflzduty conduct, you have almost a limitless supply ol'areas of discrimination: alcohol usc, red-meat dicta, cvcn recreational activities like hang gliding or mountain climbing." it is clear that much work will need to be done before there arc definitive answers to thc many questions regarding thc application of nsk rating plans in small husincsscs and thc potential i'or discrimination in thc i'acc ol'hc ada and title vii. it is obvious that slrltlll ltrms walk a i'inc linc between helping cmployccs attain bcttcr health and intcrfcring with their personal i'rccdom. in reducing health ccrc costs, small business owners must carefully select their standards and take gtcat care in thc design of small group risk rated programs to hc i'ail and avnid costly, time consuming legal problems. conclusions cotnpetitivc choices an&i trade-nlfs for small business lions today, clearly involve the ability to ol'i'cr cmployecs health insurance benefit plans. in an cra of double-digit annual incrcascs in health care cosnu thc fear ol'ot hctng able to alford nccde&l medical trcatmcnt (long the problem ol'hc uninsured) cont'ronts the currently insured small business owners and their cmployecs. a well-dcsigncd cost cmttainment inccntivc progr:mt can bc designed) to take into consideration thc many pros aml cons assoctated with a i;tir risk rating plan i'or small business &onployees. as morc small business insurers cxperimcnt with policy design and financial incentives of all types, additional knowledge will hc gained that may i'acilitatc &icsigning thc best and i'aircst utilization of risk rating as a positive instrum«nt. until morc research has been done, thc following rccomtnendati&&ns for small business owners and their cmployccs can scrvc as a uscf'ul starting point in thc designing a risk rating plan: i. incentives should be habit-based rather than risk-based. to hc cf(ective and lair, risk rating should emphasize only those behaviors over which an individual has uhimate control. examples of these types of habits arc: scat belt usc, cxercisc, regular medical checkups, diet arul smoking. 2. employees who are at risk hut arc attending classes or are actively engaged in reducing their risk through changing behavior should not he penalized i'or their current risk level. adcquatc time should he allowed i'or employccs who arc wnrking on bchavi&tr change and risk reduction. 3. program llexihility should allow gtr individual or special group considerations. examples ol'his would be allowing pregnant wotnen a cenain length of time to return to original weight and physiological conditions hcfotc mccting standards, or creating special standards for handicapped or disabled individuals in terms of exercise and ccnain physiological parameters. i 04 4. consideration should be given to the impact that risk standards may have on types of mdividuals within the firm. care should bc taken so that discnminatory standards arc not set that will affect certain demographic groups in a disparate, manner. 5. in order to be safe and fair, incentive plans should reinforce long-term behavior change rather than inducing short-tenn behavior. getting realistic time frames for employees to meet certain rcquircments is highly recommended. for example, allowing short time frames within which employees must meet certain weight standards may lead employees to fast or use crash diets, either of which can have a severely negative effect on overall health. while on the surface meeting thc requirement of'he risk rating plan, the actual outcome may bc more costly to the individual and to the plan. presently, little data is available supponing the fairness of small business attempts at risk rating plans. with pending national health care reform and as risk rating becomes morc pervasive, there will be a continuing need to address thc financial, medical, legal and ethical issues these programs create and to reline them accor&lingly. this will bc especially true as we learn more about how the americans with disabilities act will he applied to small business firms. regardless of what happens with the concept of risk rating, small business owners can hope that healthy lifestylcs will bc embraced on their own merit rather than as something to bc forced onto an unhealthy workforce. il'both small business employees and employers value and work hard at achieving and maintaining health promoting practices, with or without risk rating programs, the competitive enhanccmcnt and payof(s can hc immense. 105 1 references brink, s. health risk and behavior the im act on medical cohis (brookl'icld wisconsin. 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"associations bctwcen health risk appraisal scores and employee medical claims costs in a manufacturing company american journal ol'ealth promotion 6 ( i) (1991):46-54. 107 108 from the editor it is a great pleasure to present two exceptionally talented scholars who were invited to co-edit this special issue. on behalf of all of us at jsbs, we thank you for this valuable research. gerald e. hills editor bradley university letter from special edition editors welcome readers! on behalf of domingo enrique ribeiro-soriano and me, we would like to thank you for reading this special issue of jsbs from the 2nd annual gika conference held at the university of valencia, spain. the conference increased from approximately 70 papers and presentations the first year to more than 225 the second year. featuring papers focused on entrepreneurship and strategy, we have chosen papers from the conference that fit our mission and readership. these papers come from a variety of disciplines and countries but all focus on small business, strategy, and entrepreneurship. we hope you will enjoy reading these articles from around the world. in “validation of a measuring instrument for the relationship between knowledge transfer and entrepreneurial orientation in family firms,” barroso martínez, bañegil palacios, and sanguino galván perform an empirical study to reflect the validity and robustness of their knowledge transfer measurement scale. the goal of this scale is to determine the nature of the relationships between knowledge transfer, entrepreneurial orientation, and performance. the measuring instrument is innovative because previous measuring scales are unable to measure the aforementioned relationships. this research reveals that, although entrepreneurship depends on many factors at different organizational levels, people’s willingness to share their knowledge plays an important role in entrepreneurial capacity. the authors conclude that entrepreneurial orientation involves an extensive process of knowledge sharing among members of family-run businesses. castaño-martínez, martínez-rodríguez, and ruiz-fuensanta’s paper,“the influence of socioeconomic factors on entrepreneurship and innovation,” contributes to the analysis of the factors that encourage entrepreneurs to innovate in their businesses. a broad range of elements condition entrepreneurial innovation. in this paper, however, the authors devote their attention to studying the role of socioeconomic factors such as social capital, institutions, and income distribution. these elements, which shape the environment in which businesses operate, can act as important incentives for innovation, or, conversely, s trateg y journal of small business may hinder the entrepreneurial behavior of economic agents. to accomplish their research aims, the authors estimate an econometric model for a sample of 13 european countries for the period 2002–2010. the results confirm that factors of this kind do indeed modify organizations’ innovative potential. in “entrepreneurial strategy, innovation, and cognitive capabilities: what role for intuitive smes?,”saiz-álvarez, cuervo-arango, and coduras contribute to the study of how intuition affects entrepreneurship in smes. the main goal of their paper is to build an index capable of estimating the degree of “entrepreneurial intuition”, in an attempt to yield the behavioral variables that characterize an intuitive entrepreneur. specifically, the authors seek a response to the questions of whether intuition is more prominent in the early stage of entrepreneurship, and if higher degrees of intuition are linked to necessitydriven entrepreneurs. the role of intuition in entrepreneurship remains an underresearched issue. the present paper represents progress in this research field, through the authors’ proposal and testing of an indicator to measure the degree of intuition of entrepreneurs at the early and consolidated stages of businesses. “performance and risk as signals for setting up a franchised business” shows that, despite divergences of opinion among academics as to franchising’s status as a form of entrepreneurship, franchising is currently offering business opportunities to franchisors as well as creating employment for budding entrepreneurs through the opening of franchised outlets. in short, franchising is creating wealth. thus, calderón-monje and huertazavala’s paper may serve to aid the decision-making processes of potential franchisees who wish to choose a franchise that ensures high returns and low risk. signaling theory offers a possible solution for reducing information asymmetries between franchisors and franchisees. it is a pleasure and honor of the co-guest editors to present highly interesting and quality papers that provide relevant and rigorous insights into the critical issues of smes, innovation and entrepreneurship, and franchising in the special issue of the journal of small business strategy. the conference was very successful in the sense that it gathered scholars from more than 40 countries, including 450 participants and speakers who present their articles and obtain the criticism and feedback from international editors. practitioners and researchers shared empirical research, including comparative case studies, as well as applied studies relevant to smes, entrepreneurship, and innovation. sincerely, domingo enrique ribeiro-soriano and dianne h.b. welsh special issue editors (please see the following page for the bios of the special edition editors.) dianne h.b. welsh is the hayes distinguished professor of entrepreneurship and founding director of the entrepreneurship program at the university of north carolina greensboro. dianne is a recognized scholar in entrepreneurship, family business, and franchising and has six books and over 150 publications. she is chair-elect of the technology and innovation management division of the academy of management and president of the small business institute. she is the past president and fellow of the u.s. association for small business & entrepreneurship and served as a presidential appointee to the u.s. air force academy. she is the 2014 recipient of the leavey award for private enterprise education by the freedoms foundation. domingo ribeiro soriano is a professor of management at university of valencia in spain. he has been published in international journals, including the journal of business research, small business economics, international small business journal, journal of small business management, international journal of technology management, cornell hotel and restaurant administration quarterly, and managing service quality. soriano has also served as a reviewer and guest editor from prestigious journals published by wiley, emerald, and blackwell-wiley. he was editor-in-chief of the isi-ranked journals management decision and the international entrepreneurship and management journal, as well as editor and associate editor of the service industries journal. soriano was president of gika (global innovation and knowledge academy), has worked in ernst & young consulting, and was director of european community programs. reproduced with permission of the copyright owner. further reproduction prohibited without permission. http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2019, vol. 29, no. 03, 78-96 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2019 small business institute® w w w. j s b s . o rg introduction mario situm university of applied sciences kufsein, austria, mario.situm@fh-kufstein.ac.at corporate performance and diversification from a resource-based view: a comparison between small and medium-sized austrian firms diversification, profitability, resource-based view, risk, smes apa citation information: situm, m. (2019). corporate performance and diversification from a resource-based view: a comparison between small and medium-sized austrian firms. journal of small business strategy, 29(3), 78-96. diversification is a potential measure that can be used to reduce risk, which is also of relevance for small companies (carter & ram, 2003). it is defined as the process whereby different assets are distributed among different investment classes (northcott, 2011). therefore, it is understandable that mses attempt to diversify their business in order to decrease unrewarded risk (everett & watson, 1998). based on the portfolio theory, diversification can be achieved when diverse and uncorrelated investments reduce the risk of the whole portfolio (solnik & mcleavey, 2009). chang and thomas (1989) pointed out that the diversification strategy of a firm may be explained by four components, each of which contributes to risk reduction. the four components are: the inherent risk of the industry in which the firm is competing, the number of industries in which the firm competes, the size of the firm, and the generic diversification strategy which is chosen. smes also face these risks and according to hamelin (2013), small firms displayed greater wealth under-diversification, meaning that they have a higher exposure to firm-specific risk. petrakis (2004) and weinzimmer, fry and nystrom (1996) explained that some risk should remain, because a business without risk has no association with entrepreneurship. they went a step further and postulated that the risk taken by a business agent could be an appropriate proxy to determine the level of entrepreneurship in an economy. that being said, amit and wernerfelt (1990) outlined three motives for reducing business risk: a.) conflicts between shareholder and agents, b.) uncertainty about operational cash flows and c.) transaction costs. finally, risk (systematic which describes the extent to which the cash flows of the company are affected by economy-wide or non-company specific factors, whereas unsystematic risk describes the risk specific to an individual company (lumby & jones, 2011) affects the overall performance of the firm (aaker & jacobson, 1987). therefore, a strategy of diversification may be undertaken to reduce risk, but it is not a measure aimed at avoiding risk. this means that diversification will not guarantee a firm’s survival, as empirically confirmed by sheppard (1994), but it can contribute to the reduction of firm-specific (unsystematic) risk (aaker & jacobson, 1987; manrai, rameshwar & nangia, 2014; rumelt, 1982) and can be an important basis to protect against different threats the effect of diversification on corporate performance has shown controversial results in prior research, ranging from the potential to improve performance to the risk of performance reduction. the aim of this study is to explain separately the effect of diversification and some selected variables on the profitability of smalland medium-sized austrian firms and to test some research hypotheses based on prior research. for this study 1,095 observations were analyzed for smalland medium-sized firms over a three-year period. the resource-based-view (rbv) has been chosen as the theoretical framework of this study. the results provide no clear evidence as to whether related or unrelated diversification leads to higher profitability, because it depends on how profitability is measured. this result holds for smalland medium-sized firms (smes). additionally, there is no significant reduction in risk for diversified companies. only related diversification exhibited a significantly lower risk when compared to non-diversified medium-sized firms. finally, the rbv can only partially explain and predict diversification strategy and its outcome on profitability and risk. http://www.smallbusinessinstitute.biz http://www.jsbs.org 79 m. situm journal of small business strategy / vol. 29, no. 3 (2019) / 78-96 (morris, schindehutte, richardson, & allen, 2006). the results of prior studies concerning the relationship between diversification, corporate success and risk have provided different results, meaning that from a scientific viewpoint, the impact of diversification strategy on profitability, enterprise value and risk cannot be reliably explained. additionally, murphy and tocher (2017) emphasized that small firm diversification is a topic of critical importance despite being poorly understood. in their study observing three decades of research, palich, cardinal, and miller (2000) concluded that the nature of how diversification relates to performance is the most important and unresolved question in this regard. this was the main motivation for this study. the aim was not just to reconsider prior research, but also to analyze some additional variables, which were not considered in earlier studies. additionally, the aim was to test how well the resource-based view could be used as a theoretical framework to explain the diversification attempts of smalland medium-sized companies. based on the results obtained in the study, specific recommendations for managers shall be provided relating to how diversification should be integrated into corporate strategy and which variables should be considered for this decision. this paper is structured as follows. first, a literature review is provided concerning diversification and corporate success, highlighting the effects of diversification on profitability, risk reduction and firm value. here, the theoretical foundation (resource-based view) is also discussed and linked with certain aspects of diversification. second, the development of hypotheses is presented. third, methods relating to the research methodology, variables of the study, model specification and sample description are highlighted. fourth, the results and findings are displayed and discussed including the results of hypotheses testing. finally, the paper concludes with a summary of the main results, its implications for practice, contributions for research, the most relevant limitations and propositions for future research. empirical and theoretical background: diversification under resource-based-view differentiation can be made between related and unrelated diversification. related diversification is said to occur when a company extends its existing portfolio with similar services or products, whereas unrelated diversification refers instead to the inclusion of new services or products, which are not related to the existing portfolio (fitzroy, hulbert, & ghobadian, 2012). generally, diversification may be seen as a positioning strategy to reduce cashflow variances (pearce & michael, 2006). this leads to the conclusion that corporate performance could be increased, with a decrease in accompanying risk (bilginsoy, 2015). the resource-based view (rbv) was used as a potential theoretical framework to explain the interrelations between diversification, profitability and risk because it is suitable for predicting and explaining certain relationships between the decision for diversification and corporate success. in their extensive literature review, hauschild and zu knyphausen-aufseß (2013) emphasized that the resource-based view is a promising paradigm to explain the successful diversification attempts of companies. in an earlier study, chatterjee and wernerfelt (1991) concluded that rbv could adequately explain their results concerning the link between resources and the type of diversification. generally, under the rbv the differences between the performances of companies can be explained by differences in efficiency, the individual firm´s resources and its capabilities (foss, knudsen & montgomery, 1995; lenox, rockart & lewin, 2011). the first things to be secured by managers are therefore resources and capabilities, which can be accumulated over time and result from prior strategic choices. this is the basic method of determining future performance over time and of developing competitive advantage for profit generation (esteve-pérez & manez-castillejo, 2008; lumpkin, mckelvie, gras, & nason, 2010; pfeffer & salancik, 1978; shapiro, 1989). this competitive advantage can only be achieved when the company is in the position to exploit the resources optimally and/or differently to the competitors on the market (castaldo, 2007; maruso & weinzimmer, 1999; mcivor, 2005). the theoretical framework of rbv therefore provides a good explanation of the boundaries that prevent a firm from reaching specific performance goals (lockett & thompson, 2001). additionally, the basic is given to create core competencies, which are defined as the sum of certain capabilities bundled into a new integrated and difficult to imitate capability (armstrong & shimizu, 2007; becker & meise, 2008). the resources and the capabilities of the firm may enable diversification. companies, which are in the position to exploit these resources and capabilities for diversification, can generate additional income (alesón & escuer, 2002). this is supported by the findings of wernerfelt (1984), who also emphasized that diversified firms can be seen as a portfolio of resources and taking this view, the potential growth perspective can be much more accurately identified. based on these pre-conditions, the key for operational efficiency is the creation of competitive advantage (grant, 1996) and this can lead to superior returns (deb, 2009). the availability of resources and capabilities is the precursor to the possibility of diversification and the effect of diversification on profitability provided mixed results in pri80 m. situm journal of small business strategy / vol. 29, no. 3 (2019) / 78-96 or research. these differences may be explained by the different measures applied in the studies, the different samples and time periods which were observed, the different types of companies studied, as well as the different countries in which the analyses took place. datta, rajagopalan, and rasheed (1991) also concluded that different theoretical and methodological reasons resulted in a diversity in findings. dubofsky and varadarajan (1987) went a step further and concluded from their causality analysis that diversification does not affect performance. according to their results, it seems instead that the opposite may be true, namely, that company performance affects how companies choose to diversify, a result also reported by grant, jammine, and thomas (1986). holder and zhao (2015) expanded on prior results and explained in their empirical results that the traditional view of diversification leading to inefficiencies in asset allocation and management capabilities is not well founded. instead, they concluded that companies performing below average can increase their value and companies performing above average can decrease their value through diversification. the published results are an explanation of collective outcomes, which do not necessarily explain the relationship between diversification and the development of a firm’s value. everett and watson (1998) emphasized that the purpose of diversification is not to increase returns. rather, it is a strategic decision which is taken to minimize fluctuations in returns and to reduce risk, which is the concept already described in the introduction to this paper. following from this statement, it is not necessarily the case that higher returns can be observed for diversified firms when compared to non-diversified firms. according to these aspects, the firm can guarantee a long-term oriented and sustainable development (brahma & chakraborty, 2011; chisholm & nielsen, 2009). this seems to be more difficult for smaller smes, because they face larger constraints on their resources when compared to bigger smes (shields & shelleman, 2015). rangone (1999) extended this view by valuing strategic options within two dimensions, named strategic consistency (defined as the ability of resource strategy to contribute to the achievement of strategic intent) and strategic value. in his opinion, only high strategic consistency and strategic value contribute towards strategic intent. in all other cases (combinations), the resource utilization cannot lead to a long-term competitive advantage. what is relevant is how well the resources are managed and aligned with strategic intent. montgomery (1985) reported that highly diversified firms do not possess strong market positions and that such companies tend to compete in less attractive markets when compared to firms with relatively low levels of diversification. this result is refuted entirely by wilson (1992), who concluded that diversification might augment market power and provide a strategic and tactical advantage to the firm. berger and ofek (1995) computed that the enterprise value of diversified companies is about 13% to 15% lower than non-diversified firms. campa and kedia (2002) were not able to provide a clear answer on this topic. based on their results, diversified firms displayed higher values than existing firms in their industry, but lower values than other firms in the industry that did not diversify. according to hyland (2008), the size of the firm plays an important role in that context. small-diversified firms tend to destroy firm value in the long run, whereas large firms can improve their value through diversification. ferris, sen, and thu (2010) and shyu and chen (2009) reported in their studies that diversified firms exhibited reduced values, which is a similar observation by berger and ofek (1995). however, colak (2010) found no evidence that diversification leads to changes in a firm’s value. in his opinion, other factors such as poor performance, lack of innovation, an unfavorable industry or economic conditions are more suitable for explaining a firm’s attempt to diversify. erdorf, hartmann-wendels, heinrichs, and matz (2013) reached the same conclusion in their review as was reached in this study. the critical comment was that there appears to be no clear answer regarding the benefits of diversification on a firm’s value and that the discussions lead to controversial results. according to the highlighted results and the different outcomes of the selected studies, it can be concluded that the association between diversification, profitability, enterprise value and risk is not reliably founded, justifying further research attempts in order to increase the practical and scientific knowledge base in this area. markides and williamson (1996) emphasized that exploitation is only possible when strategic assets are used which are valuable, rarely available, imperfectly tradable and difficult to imitate. superior performance can therefore be generated by related diversification (amit & livnat, 1989; schommer, richter, & karna, 2019; turner, 2005; wan, hoskisson, short, & yiu, 2011) as it is a precursor for economies of scope (hoskisson, 1987; markides & williamson, 1994). in the case of unrelated diversification, the transfer is much more difficult or almost impossible to bring about, because in many cases the relevant resource and capabilities are not available, meaning that they have to first be established before this type of diversification can be initiated. dawley, hoffman and brockman (2003) and ben-zion and shalit (1975) put forward the argument that it is not known which type of diversification (whether related or unrelated) should be used in order to best reduce business risk. 81 m. situm journal of small business strategy / vol. 29, no. 3 (2019) / 78-96 hypotheses development the size of the firm appears to be a very significant variable in explaining the performance and the risk level of a company. size can be seen as a measure of a company’s past performance and as an indicator of its future performance and its risk level (ben-zion & shalit, 1975). based on hamelin (2013), the firm-specific risk for small companies is higher when compared to bigger companies. this also explains why the probability of bankruptcy is relatively lower for bigger companies (chava & jarrow 2004; lennox, 1999; theodossiou, kahya, saidi, & philippatos, 1996). therefore, small companies require higher internal rates of return for investments in order to be compensated for this risk, which are rarely available in practice. this is why they tend to prefer withdrawing investments, taking into account that they generally obtain lower profitability. the reason for the differences in profitability can also be explained by the fact that bigger firms have the ability to adapt to new innovations as well as being able to create new innovations due to an excess of resources and capabilities (jovanovic & macdonald, 1994). they can also differentiate themselves from their competitors and this differentiation can itself reduce rivalry in an industry (madrid-guijarro, garcia-perez-de-lema, & van auken, 2011). profitability is a measure of management efficiency (dambolena & khoury, 1980) and managers may only work profitably when they can utilize company assets efficiently (castaldo, 2007; maruso & weinzimmer, 1999; mcivor, 2005). madrid-guijarro et al. (2011) showed empirically that a significant positive correlation exists between resource-generating capacity and profitability. pervan and visic (2012) showed in their study that bigger companies exhibited higher profitability when compared to smaller ones. all of these results support the rbv view that increased resources and capacities (proxied by company size) lead to higher profitability. based on this evidence, the following hypothesis was defined, which shall be tested for an austrian case. hypothesis 1. small firms have a significantly lower profitability when compared to medium-sized firms. the discussion about diversification displayed controversial results concerning whether related or unrelated diversification may provide higher benefits for risk reduction and/or increases in profitability. following the resource-based view, it is much more straightforward for a company to engage in related diversification, as this requires the use of resources and capabilities that have already been developed and obtained (chen, jiang, wang, & hsu, 2014). this in turn means that without additional efforts, profits can be generated with higher efficiency, which in turn should be beneficial for profitability (iacobucci & rosa, 2005; turner, 2005; wan et al., 2011). additionally, it must be considered that unique capabilities and resources can only be developed over time and according to the association between time (measured as a company’s age) and the size of the firm (jovanovic, 1982; thornhill & amit, 2003), diversification may only be valuable for medium-sized firms. hypothesis 2. for medium-sized firms, related diversification makes a significantly higher contribution to corporate performance when compared to unrelated diversification. in accordance with the second hypothesis, a more general view was taken for the third hypothesis, which was split into two sub-hypotheses. alesón and escuer (2002) described that companies that are able to exploit their resources are in a position to generate additional income. such exploitation is only then possible if a certain level of unique resources is available (holder & zhao, 2015). more specifically, diversification is only then possible if the firm possesses an excess capacity of resources (peteraf, 1993). this does not appear to hold true for small firms. murphy and tocher (2017) pointed out that small firms are willing to diversify, but are unable to do so due to their small size. under rbv, this small size may be associated with less resources and capabilities in order to pursue diversification attempts (shields & shelleman, 2015). small companies trying to diversify despite a lack of resources and capabilities cannot do so efficiently, which negatively affects their profitability. according to madrid-guijarro et al. (2011), profitability can be viewed as a measure of resource-generating capacity. due to their size, medium-sized firms are more capable of exploiting resources and capabilities compared to small firms, meaning that they should be able to achieve higher profitability as a result (lumpkin et al., 2010). such a conclusion does not undermine the results of other studies (doring & gooderham 2008; sandvig & coakley 1998), where it was found that small firms could maneuver resources equally effectively compared to bigger firms. however, these results must not be seen as a divergence to rbv, because first, the size of small companies differs in practice, and second small firms will only diversify after they have first established a strong foundation in their primary line of business, so that they can effectively concentrate their efforts on diversification attempts (robson, gallagher, & daly, 1993). if these findings are connected to the theoretical framework of the resource-based view, then only firms 82 m. situm journal of small business strategy / vol. 29, no. 3 (2019) / 78-96 with a certain size can increase profitability through the use of diversification. hypothesis 3a. diversification has a significant positive effect on profitability for medium-sized firms. hypothesis 3b. diversification has no significant effect on profitability for small firms. generally, a positive linear relation between company size, age and profitability can be assumed (karadag, 2017; serrasqueiro & nunes, 2008). however, studies have found a non-linear relationship between profitability and certain control variables (nunes, serrasqueiro, & leitao, 2010; qian, li, li, & qian, 2008; vannoni, 2000). this means that to a certain extent, the relationship between the control variables and profitability is linear and turns into a non-linear relationship, meaning that profitability decreases with the increase of the control variables. mckee and lensberg (2002) also confirmed the complex interrelation between liquidity, size and profitability. this complexity means that a simple linear relationship may not be assumed between company size, age and profitability. a potential reason for a (negative) non-linear relationship between size and profitability may be explained by the fast growth of the company, which cannot be controlled by the manager accordingly. this therefore leads to a reduction in profitability (glancey, 1998). there seem to be an optimal balance between growth and management capabilities. if these conditions are not present according to the previous statement, companies will experience diminished performance (serrasqueiro & nunes, 2008). the potential of utilizing economies of scale seems to be limited, meaning that there is an optimal level of diversification (benito-osorio, colina, & zuniga-vicente, 2015). a similar problem can occur between age and profitability. older firms can have established processes and procedures, which may not function efficiently anymore or have become obsolete, leading to them experiencing lower profitability (glancey, 1998). based on these prior results, the following hypotheses were developed and shall be particularly tested for austrian companies. especially interesting in this context is that the hypotheses are tested for small and medium-sized firms separately and that the results can therefore be compared. hypothesis 4. there is a non-linear relationship between company size and profitability. hypothesis 5. there is a non-linear relationship between company age and profitability. method sample selection and variables this study focused on smalland medium-sized companies in austria as defined by the classification framework of the european union (2003/361/ec). over the three-year period in question, 619 observations were obtained for small companies and 476 observations for medium-sized companies. the distribution of the companies across industries and years can be found in table 1. the data for the companies was derived from the creditreform database and a firm was deemed to have entered the sample when all selected variables were available for the various years of observation (2013, 2014 and 2015). the selected variables for the study are shown in table 2. the variable int_ass measures the relationship between intangible assets and total assets and is based on the resource-based view that companies with a higher level of unique resources tend to benefit more from diversification than firms with less unique resources (holder & zhao, 2015; serrasqueiro & nunes, 2008). this appears to be a suitable variable, because strategy can be defined as the distribution of a firm´s resources and the distribution of its output, which is the case for diversification (lecraw, 1984). the different tests for non-linearity were based on the findings in previous papers. method and model specification linear regressions were computed for hypotheses testing, where the variable roa (ebitda to total assets) was used as the dependent variable. regression analysis was beneficial in the context of this research as it can deliver constant changes for the dependent variable, when the independent variables change (allen, 1997; greene, 2003). additionally, it is possible to integrate non-linear independent variables, thereby allowing for an increasing or decreasing effect by the independent variables on the dependent variable (kahane, 2008), which seems necessary within this study due to the assumption of the non-linear behavior of age and size in relation to performance. the aim was to detect which independent variables are significant for explaining corporate profitability and the role played by diversification in this context. in total, twelve models were computed in three separate versions: for all firms together, for small firms only and finally for medium-sized firms only. the results were tested for robustness and for this purpose, the regressions were repeated using ebit to total assets as the dependent variable. as a second method, tests for differences based on the 83 m. situm journal of small business strategy / vol. 29, no. 3 (2019) / 78-96 table 1 sample description 2013 2014 2015 industry small firms medium-sized firms ind risk small firms medium-sized firms ind risk small firms medium-sized firms ind risk a 3 1 2 1 + 1 1 + b, c 55 55 + 16 18 + 17 19 + d, e 7 7 + 5 4 3 5 + f 36 21 27 11 21 12 g 92 73 34 39 + 26 30 + h 29 12 9 8 + 9 6 + i 5 17 + 5 4 + 4 6 + j 17 9 + 10 7 + 10 6 + l 13 5 + 7 3 + 10 2 + m, n 66 28 + 32 18 + 24 19 + p, q 7 8 + 3 4 + 2 5 + r, s 7 6 1 3 + 4 3 total 337 242 151 120 131 114 the industry classes were based on the austrian önace 2008 codes: a = agriculture, forestry & fishing, b = mining & quarrying, c = manufacturing, d = electricity, gas, steam & air condition supply, e = water supply, sewerage, waste management & remediation activities, f = construction, g = wholesale & retail trade & repair of motor vehicles & motorcycles , h = transporting & storage, i = accommodation & food service activities , j = information & communication, l = real estate activities, m = professional, scientific & technical activities, n = administrative & support service activities, p = education, q = human health & social work activities, r = arts, entertainment & recreation, s = other services activities. the figures show the numbers of companies that were taken into the sample per observation year. for the variable ind_risk a “+” or (“-“) denotes that the respective industry contributed to an increase (decrease) in gdp for the respective year and therefore displays a lower (or higher) risk (altman, brady, resti, & sironi, 2008). u-test were computed in order to detect statistically significant differences for the selected variables between the two types of firms. this was applied in order to determine the differences between firms engaging in different types of diversification. the u-test is a non-parametric approach, which should be applied when non-normally distributed data are present (ho, 2006). finally, correlation analyses were computed in order to prove multi-collinearity and to recognize associations and detect significant relationships between the selected variables. the following equation displays the basic model of linear regression for this study and is then extended by the different variables presented in table 2. the variables for each relevant year (2013, 2014 and 2015) had been modelled as dummy variables, in order to control for year-specific effects (kahane, 2008). model i = 𝛼𝛼1 + 𝛽𝛽1 ⋅ 𝐴𝐴𝐴𝐴𝐴𝐴 + 𝛽𝛽2 ⋅ 𝑆𝑆𝑆𝑆𝑆𝑆𝐴𝐴 + 𝛽𝛽3 ⋅ 𝐿𝐿𝐴𝐴𝐿𝐿 + 𝛽𝛽4 ⋅ 𝑆𝑆𝐼𝐼𝐼𝐼_𝐼𝐼𝐴𝐴 + 𝛽𝛽5 ⋅ 𝑆𝑆𝐼𝐼𝐼𝐼_𝑅𝑅𝑆𝑆𝑆𝑆𝑅𝑅 + 𝛽𝛽6 ⋅ 𝑈𝑈𝐼𝐼𝑅𝑅𝐴𝐴𝐿𝐿_𝐼𝐼𝑆𝑆𝐿𝐿 + 𝛽𝛽7 ⋅ 𝑅𝑅𝐴𝐴𝐿𝐿_𝐼𝐼𝑆𝑆𝐿𝐿 + 𝛽𝛽8 ⋅ 𝐼𝐼𝑆𝑆𝐿𝐿 + 𝛽𝛽9 ⋅ 𝑌𝑌𝐴𝐴𝐴𝐴𝑅𝑅 = 2013 + 𝛽𝛽10 ⋅ 𝑌𝑌𝐴𝐴𝐴𝐴𝑅𝑅 = 2014 + 𝛽𝛽11 ⋅ 𝑌𝑌𝐴𝐴𝐴𝐴𝑅𝑅 = 2015 (1) based on everett and watson (1998), there are three types of risk a company may face in its business activities. each of these three risks are captured by the respective variables within this study. the first risk is the economy-based risk, which describes the risk associated with the economy in which the company is located. the second risk is the industry-based risk, which refers to the riskiness of the industry in which the company operates. finally, firm-based risk describes the risk that the individual business itself will fail. the variable ind_risk is a proxy for the insolvency rate of the industry as proposed by altman et al. (2008) and can therefore be seen as an indicator of both industry-based risk as well as economy-based risk (everett & watson, 1998). chang and thomas (1989) used a similar variable in order to describe the riskiness of the industry in which the firm is operating. lev may be seen as a measure of individual risk according to the concepts of financial theory and explicitly here in the trade-off theory of finance. it is a variable, which can be used to determine the default risk of a firm (almeida & philippon, 2007; hopwood & schaefer, 1988; ro, zavgren, & hsieh, 1992). 84 m. situm journal of small business strategy / vol. 29, no. 3 (2019) / 78-96 table 1a results of regression analyses – robustness check variables model i model ii model iii model iv all small medium all small medium all small medium all age 0.000 -0.009 0.000 0.032 0.033 0.026 0.032 0.038 0.029 0.034 (0.031) (-0.602) (0.054) (1.503) (0.990) (1.677) (1.306) (1.054) (1.388) (1.398) size 0.031*** 0.059*** -0.008 0.555*** 0.871*** 1.150 0.546*** 0.893*** 0.613 0.617*** (6.043) (6.171) (-0.680) (9.850) (7.850) (1.104) (9.259) (7.606) (0.594) (8.479) lev -0.237*** -0.345*** -0.057*** -0.265*** -0.355*** -0.057*** -0.274*** -0.371*** -0.054*** -0.269*** (-9.723) (-9.228) (-3.190) (-11.198) (-9.873) (-3.232) (-11.317) (-10.076) (-3.095) (-11.028) int_ta 0.054 0.220 -0.124* 0.010 -0.010 -0.125** 0.010 -0.030 -0.116* 0.001 (0.466) (1.033) (-1.991) (0.091) (-0.047) (-1.996) (0.090) (-0.145) (-1.875) (0.007) ind_risk -0.028 -0.033 -0.010 -0.017 -0.021 -0.012 -0.016 -0.021 -0.009 -0.017 (-1.458) (-1.043) (-0.855) (-0.925) (-0.704) (-1.020) (-0.846) (-0.680) (-0.751) (-0.870) unrel_div -0.010 -0.025 -0.003 -0.001 0.011 0.014 0.031 0.125 0.078 0.043 (-0.448) (-0.656) (-0.223) (-0.058) (0.296) (1.085) (0.373) (0.920) (1.210) (0.514) rel_div -0.014 -0.032 -0.019 -0.021 -0.006 0.000 0.011 0.105 0.070 0.024 (-0.697) (-0.942) (-1.523) (-1.062) (-0.170) (.) (0.125) (0.742) (1.060) (0.279) div 0.000 0.000 0.000 0.000 0.000 -0.018 0.000 0.000 0.000 0.000 (.) (.) (.) (.) (.) (-1.470) (.) (.) (.) (.) year=2013 0.000 0.000 0.000 0.000 0.000 0.000 0.007 0.000 0.009 0.000 (.) (.) (.) (.) (.) (.) (0.318) (.) (0.633) (.) year=2014 0.000 0.024 -0.013 0.000 -0.004 -0.014 0.000 -0.011 0.000 -0.008 (0.001) (0.666) (-1.033) (0.005) (-0.123) (-1.059) (.) (-0.295) (.) (-0.361) year=2015 0.019 0.054 -0.009 0.019 0.025 -0.008 0.019 0.019 0.006 0.011 (0.848) (1.447) (-0.654) (0.873) (0.693) (-0.629) (0.819) (0.514) (0.471) (0.486) age² -0.007* -0.006 -0.005* -0.005 -0.003 -0.004 -0.004* (-1.784) (-0.873) (-1.796) (-0.980) (-0.418) (-0.906) (-0.938) size² -0.019*** -0.031*** -0.034 -0.018*** -0.032*** -0.018 -0.021*** (-9.354) (-7.352) (-1.111) (-8.844) (-7.195) (-0.601) -(7.878) div_age -0.027 -0.034 -0.018 -0.029* (-1.596) (-1.294) (-1.416) (-1.693) div_size 0.003 -0.001 -0.002 0.003 (0.622) (-0.133) (-0.573) (0.550) comp_class 0.049* (1.663) constant -0.260*** -0.538*** 0.254 -3.874*** -5.809*** -9.503 -3.802*** -5.948*** -5.040 -4.235*** (-3.456) (-4.354) (1.243) (-9.935) (-8.031) (-1.086) (-9.327) (-7.722) (-0.583) (-8.723) r² 0.116 0.166 0.044 0.186 0.236 0.053 0.180 0.236 0.052 0.182 adj. r² 0.109 0.154 0.026 0.178 0.222 0.030 0.170 0.219 0.025 0.172 f-statistic 15.816*** 13.467*** 2.390** 22.486*** 17.056*** 2.356*** 17.746*** 13.867*** 1.917** 16.704*** durbinwatsonstatistic 2.038 1.988 1.979 2.037 2.037 1.970 2.030 2.043 1.949 2.039 number of obs. 1,095 619 476 1,095 619 476 1,063 599 464 1,063 the table shows the regression results for the different models. as dependent variable ebit_ta (profitability based on ebit) was used. the f-statistics were used to test the null-hypothesis that there is no linear relationship between the predictors and the dependent variable (ho, 2006, p. 258). as in all cases, the f-statistics showed statistical significance, the null-hypotheses could be rejected. the values in brackets denote the values from t-statistics. the values of durbin-watson-statistics are all close to the value of two, so that no serial correlation and independence of error terms is given (ho, 2006, p. 248). in model iv the variable comp_class was added, which is a dummy variable containing the value of zero for small firms and one for medium sized firms. significance level: *p < .10 **p < .05 ***p < .01 85 m. situm journal of small business strategy / vol. 29, no. 3 (2019) / 78-96 results and findings preliminary analyses the first analysis displays the descriptive statistics for the observations, differentiated into small companies and medium-sized companies as well as in total. the results are visible in table 3. none of the variables indicated normal distribution (all p-values below 0.01; not reported here in detail). a first test was carried out to ascertain whether there are differences in the variables of the study between small and medium-sized firms. the results can be seen in table 4. the data does not support the assumption that medium-sized companies have significantly higher profitability. instead, the median-values provide evidence that small firms will have higher profitability, regardless of whether it is measured with ebit or ebitda. therefore, the first research hypothesis of this study must be rejected. statistically significant differences between the two types of companies can be found for the variables age (age), leverage (td_ ta) and intangible assets (int_ta). medium-sized firms are generally older in age, have a lower leverage and use more intangible assets. concerning risk, (lev) the results provide evidence that specific risk is higher for small firms when compared to medium-sized firms, which is in congruence with the reported results of hamelin (2013) and herranz, krasa, and villamil (2015). regarding the variables measuring diversification, unrel_div and div were statistically significant. in both cases, the mean rank sums (not reported here in detail) are higher for medium-sized firms, providing evidence that this type of firm tends to diversify their businesses when compared to small firms (robson et al., 1993). this would arguably support the rbv, because such companies tend to possess the required resources and capabilities to allow them to engage in diversification. the correlation analysis (table 5) indicated some statistically significant correlations, which are mostly on a low level. based on the data, no evidence of multi-collinearity can be found as the correlations are below 0.8 (hill, griffiths, & judge, 2001), meaning that a proper application of linear regression can be assumed (ho, 2006). there is a positively significant relationship between a firm’s size and its age. this aspect is in congruence with jovanovic (1982), who stated that firms could only grow over time and this satisfactorily explains why medium-sized firms tend to be older than smaller ones. ben-zion and shalit (1975) pointed out that company size is a measure not only for past but also table 2 variables of the study variable type variable code variable name computation dependent variables roa return on assets ebitda/total assets control variables age age of the firm ln(age of the firm) size size of the firm ln(total assets) independent variables lev leverage total debt/total assets int_ass intangible assets intangible assets/total assets rel_div related diversification 0 = if the company is not displaying related diversification; 1 = otherwise unrel_div unrelated diversification 0 = if the company is not displaying unrelated diversification; 1 = otherwise div diversification type 0 = if the company is not diversified; 1 = if the company is diversified interaction variables div_type x age interaction between diversification & age variable div multiplied by the age of the firm div_type x size interaction between diversification & size variable div multiplied by the size of the firm non-linear variables age² square of age (ln(age of the firm))² size² square of size (ln(total assets))² macroeconomic variables ind_risk industry risk 0 = if the industry of the firm provided a negative contribution to the gross value added of the economy; 1 = otherwise 86 m. situm journal of small business strategy / vol. 29, no. 3 (2019) / 78-96 for future performance. as time progresses, they should therefore exhibit higher profitability, which was shown to be the case in pervan and visic (2012). however, this result is not supported by this study due to the insignificant differences in the profitability ratios between the two types of firms based on table 4. the correlations between age and leverage (used as a proxy for firm-specific risk based on (almeida & philippon, 2007; hopwood & schaefer, 1988; ro, zavgren, & hsieh, 1992) for medium-sized firms is negative and significant, indicating that older firms carry less risk. this finding is in congruence with jovanovic (1982), jovanovic and macdonald (1984) and bates (1990). the effect of diversification on leverage was not found to be significant. a closer inspection table 3 descriptive statistics all firms (n = 1,095) small firms (n = 619) medium-sized firms (n = 476) variable mean median std.-dev. mean median std.-dev. mean median std-dev. ebitda_ta 0.085 0.083 0.295 0.073 0.091 0.379 0.102 0.079 0.115 ebit_ta 0.036 0.042 0.292 0.021 0.044 0.375 0.056 0.038 0.109 age 2.848 2.906 1.062 2.706 2.786 1.137 3.032 3.111 0.927 size 15.390 15.892 1.798 14.354 15.149 1.766 16.737 16.698 0.409 lev 0.673 0.683 0.345 0.710 0.714 0.379 0.624 0.652 0.287 int_ta 0.021 0.001 0.072 0.019 0.000 0.066 0.024 0.002 0.080 unrel_div 0.223 0.000 0.416 0.192 0.000 0.394 0.263 0.000 0.441 rel_div 0.314 0.000 0.464 0.315 0.000 0.465 0.313 0.000 0.464 div 0.537 1.000 0.499 0.507 1.000 0.500 0.576 1.000 0.495 table 4 test for differences small firms (n = 619) medium-sized firms (n = 476) results from u-test variable mean median mean median z p-value ebitda_ta 0.073 0.091 0.102 0.079 -0.546 0.585 ebit_ta 0.021 0.044 0.056 0.038 -0.468 0.640 age 2.706 2.786 3.032 3.111 -4.681 0.000** lev 0.710 0.714 0.624 0.652 -3.696 0.000** int_ta 0.019 0.000 0.024 0.002 -5.432 0.000** unrel_div 0.192 0.000 0.263 0.000 -2.772 0.006** rel_div 0.315 0.000 0.313 0.000 -0.071 0.944 div 0.507 1.000 0.576 1.000 -2.248 0.025* due to non-normally distributed data, the differences in values were computed based on the u-test as recommended by ho (2006). significance level: *p < .05 **p < .01 87 m. situm journal of small business strategy / vol. 29, no. 3 (2019) / 78-96 of firms, which are differentiated between different types of diversifiers (table 6), provides a more profound conclusion. related diversified medium size companies exhibited a significantly lower leverage when compared to non-diversified companies (la rocca, la rocca, gerace, & smark, 2009), indicating that diversification can lead to a decrease in company-specific risk. however, non-diversified companies are not riskier than unrelated diversifiers. therefore, it can be concluded that the type of diversification does indeed matter when considering the extent to which firm-specific risk can be reduced, which is a result that differs with the findings of bettis and hall (1982) and chang and thomas (1989). however, the comparison to the first named study must be made with caution, because they used the standard deviation of roa as a proxy for risk instead of leverage. regression results the regression results can be found in table 7. leverage (td_ta) is the most important variable to explain a company´s profitability throughout all computations. in all cases, a negative sign was obtained for this variable, indicating that companies with lower leverage are more likely to achieve higher profitability. this result is in congruence with several other studies such as frank and goyal (2009), myers (2001), myers (1993) and psillaki and daskalakis table 5 correlation analyses all firms (n = 1,095) ebitda_ta age size lev int_ta unrel_div rel_div div ebitda_ta 1 age ,126** 1 size ,174** ,393** 1 lev -,267** -,127** -0,009 1 int_ta 0,058 -0,043 0,012 0,025 1 unrel_div 0,039 0,016 ,104** 0,013 ,067* 1 rel_div 0,026 ,213** ,152** -0,044 -,069* -,362** 1 div 0,057 ,211** ,228** -0,030 -0,008 ,497** ,628** 1 small firms (n = 619) ebitda_ta 1 age ,147** 1 size ,204** ,479** 1 lev -,300** -0,073 ,105** 1 int_ta 0,064 -0,009 -0,021 -0,018 1 unrel_div 0,028 -0,021 ,084* 0,022 ,094* 1 rel_div 0,054 ,199** ,279** -0,020 -0,057 -,331** 1 div 0,072 ,168** ,325** -0,001 0,021 ,481** ,668** 1 medium-sized firms (n = 476) ebitda_ta 1 age 0,028 1 size -0,072 ,096* 1 lev -,150** -,189** ,097* 1 int_ta 0,075 -,102* 0,010 ,099* 1 unrel_div ,090* 0,038 0,043 0,027 0,038 1 rel_div -0,073 ,245** -0,018 -0,087 -0,082 -,403** 1 div 0,012 ,264** 0,021 -0,058 -0,044 ,512** ,580** 1 the correlations were computed firstly for all firms together, then for small firms and finally for medium-sized firms. significance level: *p < .05 **p < .01 88 m. situm journal of small business strategy / vol. 29, no. 3 (2019) / 78-96 (2009). therefore, for the purposes of this study, its relevance as an aspect which does not support the validity of static-trade off theory in finance (companies with higher profitability exhibit lower leverage ratios) is confirmed (similarly to cai & ghosh, 2003; drobetz & wanzenried, 2006; titman & wessels, 1988). the selected variables of this study are more relevant for explaining the profitability of small firms, which is visible in the higher r²-values. for medium-sized firms, it seems that there are other variables which are of interest in order for the regression models to achieve a higher explanatory power. the size of the firm is only seen as being a significant variable to explain profitability for small firms and here, a positive sign can be observed. this indicates that higher profitability can be reached through an increased firm size. this behavior cannot be detected for medium-sized firms. additionally, the squared size exhibited a negative and statistically significant value, thus indicating that the relationship between size and profitability is non-linear in nature. the negative sign provides evidence that at a certain threshold of size for small firms, profitability decreases again. such a finding is not observable for medium-sized firms at all (the sign of size² is negative, but the value is statistically insignificant). this result is very similar to the empirical evidence reported by serrasqueiro and nunes (2008). they argue that as the size of a small company increases, the performance increases, however the increase occurs at a decreasing rate. for medium-sized firms, age (model ii) is a statistically significant variable to explain profitability. profitability generally increases with company age, but the squared age variable showed a negative sign, thus indicating that the relationship is non-linear in nature. there is also a certain point in the age of a medium-sized firm where profitability decreases again (glancey, 1998). the variable int/ta is statistically significant and shows a positive sign for the base model. the availability of intangible resources seems beneficial for increasing profitability, which is in congruence to the assumptions of the rbv (serrasqueiro & nunes, 2008) however, when the variables of diversification were entered into the regression functions (models ii and iii) the view then changed. in these cases, the variable int/ta only displayed statistically significant values for medium-sized firms and remained without importance for small firms. this result is in congruence with the expectations of rbv, namely that for companies with a certain size, the ability to use capabilities and resources from profit-generation is higher and therefore the relation between profitability, intangible assets and diversification (measured in different terms) is a given (degryse, de goeij, & kappert, 2012; holder & zhao, 2015). the results provide evidence that a higher proportion of intangible assets is a trigger or pre-condition for diversification (chatterjee & wernerfelt, 1991; miller, 2006). the variable ind_risk was not significant in any of the computed models, meaning that there is no evidence that the performance of the industry in which the firm operates or the respective risk of that industry has an impact on the profitability of a single firm. therefore, the assumption of industry-dependence of companies on profitability cannot be supported by this study. the findings are broadly in congruence with spanos, zaralis, and lioukas (2004), who concluded that success is more dependent on firm-level conditions than on industry conditions. the variables taken as proxies for diversification were only relevant for explaining the profitability of medium-sized firms. here, the variable unrel_div had explanatory power (model ii), whereas the variables div and rel_div can be totally ignored in this context and seems unsuitable for modelling purposes. generally, diversification is not a relevant variable to explain profitability of small and medium-sized firm, which is also visible in the robustness test exhibited in table 1a. when profitability was defined as ebit_ta none of the variables measuring diversification was significant in any of the computed models. this result is in congruence with the findings of dubofsky and varadarajan (1987) and everett and watson (1998). a reflection on the resource-based view indicates that this result is in contrast to the expectations, because it is normally assumed that under this view, related diversification should lead to higher profitability, as companies can make use of their pre-developed and available capabilities and resources (chen et al., 2014). finally, the interaction terms were all insignificant. the decision to diversify is therefore not coupled with a firm´s size or age. further investigations concerning this aspect are visible in table 6. here, the medium-sized firms were divided into related diversifiers, unrelated diversifiers and non-diversified. the results support the findings from regression analysis, namely that unrelated diversifiers can achieve higher profitability (measured in terms of ebitda) when compared to related diversifiers as well as to non-diversified, which is in contrast to the findings of bettis and hall (1982). there is no evidence that there is a significant difference in profitability between the three types of firms, when profitability is measured in terms of ebit. in this case, none of the variables measuring diversification showed statistical significance (see table 1a), meaning that similar results to those of bettis and hall (1982) were found. this check for robustness (table 1a) of the previous analysis reveals that the definition of profitability as a de89 m. situm journal of small business strategy / vol. 29, no. 3 (2019) / 78-96 pendent variable substantially affects the estimation results. independently of the chosen profitability measure, both the non-linear behavior in size for small firms and the non-linear behavior in age for medium-sized firms remain. the final behavior may be explained by the findings of table 6, as there are statistically significant differences in age for all three types of diversifiers. non-diversified firms are younger than unrelated diversified firms, whereas related diversified firms tend to be the oldest firms. the same is valid for the variable ind_risk, which is also not significant table 6 analyses for different types of diversification medium-sized firms (n = 476) descriptive statistics tests for differences non-diversified (n = 202) unrelated diversifiers (n = 149) related diversifiers (n = 125) nondiversified vs. unrelated nondiversified vs. related related vs. unrelated variable mean median mean median mean median p-value p-value p-value ebitda_ta 0.100 0.077 0.119 0.104 0.089 0.072 0.043* 0.565 0.006** ebit_ta 0.060 0.043 0.059 0.038 0.049 0.036 0.823 0.478 0.851 age 2.747 2.743 3.090 3.147 3.368 3.421 0.000** 0.000** 0.006** size 16.727 16.682 16.767 16.753 16.726 16.685 0.289 0.969 0.311 lev 0.643 0.697 0.637 0.648 0.587 0.628 0.435 0.021* 0.269 int_ta 0.028 0.002 0.029 0.002 0.014 0.002 0.333 0.609 0.146 small firms (n = 619) descriptive statistics tests for differences non-diversified (n = 305) unrelated diversifiers (n = 119) related diversifiers (n = 195) nondiversified vs. unrelated nondiversified vs. related related vs. unrelated variable mean median mean median mean median p-value p-value p-value ebitda_ta 0,045 0,071 0,095 0,116 0,103 0,104 0,007** 0,005** 0,545 ebit_ta 0,002 0,039 0,023 0,052 0,049 0,051 0,158 0,069 0,963 age 2,512 2,665 2,657 2,541 3,038 3,129 0,284 0,000** 0,007** size 13,771 14,315 14,657 15,410 15,081 15,500 0,000** 0,000** 0,150 lev 0,710 0,724 0,727 0,715 0,699 0,705 0,814 0,456 0,334 int_ta 0,018 0,000 0,032 0,001 0,014 0,002 0,006** 0,000** 0,039* the firms were categorized into related and unrelated diversifiers as well as non-diversified. this was one in order to detect potential statically significant differences between the three types of diversifiers. a u-test was applied due to non-normally distributed data. significance level: *p < .05 **p < .01 90 m. situm journal of small business strategy / vol. 29, no. 3 (2019) / 78-96 table 7 results of regression analyses variables model i model ii model iii model iv all small medium all small medium all small medium all age 0.009 0.005 0.003 0.047** 0.048 0.038** 0.045* 0.053 0.033 0.047* (1.039) (0.339) (0.486) (2.157) (1.436) (2.327) (1.820) (1.438) (1.528) (1.905) size 0.026*** 0.051*** -0.017 0.545*** 0.851*** 1.148 0.531*** 0.866*** 0.730 0.598*** (4.962) (5.327) (-1.303) (9.480) (7.513) (1.055) (8.844) (7.229) (0.675) (8.075) lev -0.227*** -0.328*** -0.062*** -0.254*** -0.338*** -0.063*** -0.264*** -0.355*** -0.061*** -0.259*** (-9.140) (-8.623) (-3.314) (-10.537) (-9.202) (-3.384) (-10.738) (-9.467) (-3.337) (-10.466) int_ta 0.265** 0.387* 0.122* 0.221* 0.159 0.123* 0.217* 0.133 0.133** 0.209* (2.247) (1.781) (1.866) (1.945) (0.754) (1.885) (1.896) (0.625) (2.058) (1.817) ind_risk -0.024 -0.032 -0.001 -0.014 -0.020 -0.003 -0.013 -0.020 0.000 -0.013 (-1.240) (-0.987) (-0.059) (-0.7189 (-0.658) (-0.240) (-0.656) (-0.633) (0.013) (-0.677) unrel_div 0.014 0.005 0.017 0.023 0.041 0.031** 0.042 0.137 0.059 0.054 (0.626) (0.124) (1.315) (1.072) (1.075) (2.212) (0.498) (0.986) (0.867) (0.629) rel_div -0.006 -0.019 -0.015 -0.012 0.008 0.000 0.005 0.099 0.033 0.018 (-0.314) (-0.540) (-1.187) (-0.623) (0.230) (.) (0.058) (0.683) (0.470) (0.202) div 0.000 0.000 0.000 0.000 0.000 -0.014 0.000 0.000 0.000 0.000 (.) (.) (.) (.) (.) (-1.111) (.) (.) (.) (.) year=2013 0.000 0.000 0.000 0.000 0.000 0.000 0.007 0.000 0.009 0.000 (.) (.) (.) (.) (.) (.) (0.295) (.) (0.626) (.) year=2014 0.003 0.026 -0.010 0.003 -0.002 -0.011 0.000 -0.012 0.000 -0.007 (0.133) (0.717) (-0.730) (0.131) (-0.047) (-0.779) (.) (-0.322) (.) (-0.335) year=2015 0.024 0.058 -0.005 0.023 0.030 -0.004 0.021 0.020 0.006 0.013 (1.047) (1.539) (-0.351) (1.072) (0.810) (-0.327) (0.886) (0.527) (0.443) (0.581) age² -0.008** -0.006 -0.007** -0.005 -0.003 -0.004 -0.005 (-2.040) (-0.935) (-2.322) (-1.167) (-0.454) (-0.997) (-1.128) size² -0.018*** -0.030*** -0.035 -0.018*** -0.031*** -0.022 -0.021*** (-9.083) (-7.088) (-1.070) (-8.537) (-6.896) (-0.691) (-7.568) div_age -0.027 -0.034 -0.018 -0.028 (-1.543) (-1.288) (-1.327) (-1.633) div_size 0.004 0.000 0.001 0.004 (0.776) (0.024) (0.225) (0.708) comp_class 0.047 (1.550) constant -0.182** -0.448*** 0.415* -3.762*** -5.637*** -9.412 -3.647*** -5.713*** -5.917 -4.057*** (-2.373) (-3.557) (1.942) (-9.468) (-7.634) (-1.030) (-8.787) (-7.273) (-0.652) (-8.208) r² 0.108 0.155 0.047 0.176 0.221 0.060 0.170 0.220 0.059 0.172 adj. r² 0.101 0.142 0.029 0.168 0.207 0.037 0.159 0.203 0.032 0.160 f-statistic 14.590*** 12.376*** 2.551*** 21.011*** 15.688*** 2.682*** 16.482*** 12.691*** 2.176** 15.497*** durbin-watson statistic 2.018 1.964 2.018 2.020 2.014 2.010 2.026 2.033 2.025 2.034 number of obs. 1,095 619 476 1,095 619 476 1,063 599 464 1,063 dependent variable ebitda_ta (profitability based on ebitda) was used. the f-statistics was used to test the null-hypothesis that there is no linear relationship between the predictors and the dependent variable (ho, 2006). as in all cases the f-statistics showed statistical significance, the null-hypotheses could be rejected. values in brackets denote the values from t-statistics. the values of durbin-watson statistics are all close to the value of two, so that no serial correlation and independence of error terms is given (ho, 2006). in model iv, the variable comp_class was added, which is a dummy variable containing the value of zero for small firms and one for medium sized firms. significance level: *p < .10 **p < .05 ***p < .01 91 m. situm journal of small business strategy / vol. 29, no. 3 (2019) / 78-96 when using ebit_ta as a dependent variable. leverage (td_ta) was also detected as the most important variable for explaining profitability (measured in terms of ebit). discussion and implications the results of the study indicate that growth in size is not always beneficial for profitability. even managers of small firms can obtain higher profitability compared to medium-sized companies. potential explanations could include the possession of a certain uniqueness of product or service, the quality of a product or service, location, know-how and pricing (ibrahim, 1993). if they exceed a certain size (indicated by the negative sign of the statistically significant variable size²), then they decrease their profitability again. this could be explained by the fact they are on the verge to be classified as medium-sized firms and this step seems to demand for additional investments, which is affecting profitability. it could also be associated with growth attempts not being realized efficiently (denis, denis, & yost, 2002). in that stage, diversification (related or unrelated) may not be a potential measure to improve profitability, which is congruence with the studies of el mehdi and seboui (2011), everett and watson (1998), goll and sambharya (1995) and paul (1986). it is therefore from a managerial perspective not to diversify to increase profitability and to reach an optimal risk-return level (bausch & pils, 2009; bettis & mahajan, 1985). this occurrence may be explained by the assumptions of amit and livnat (1989), mcdougall and round (1984), and porter (1987), who emphasized that diversification adds costs and constraints to business units. however, one should keep in mind that diversification strategy might be helpful to reduce firm-specific risk. grounded on table 6 it is observable that lev in median is lower for diversified companies compared to non-diversified ones, but not at a significant level, (only for medium-sized firms related diversification leads to lower risk compared to non-diversified ones). aaker and jacobson (1987) postulated that companies with higher risk should provide higher returns. it was not able to prove that assumption in this study. concerning the hypotheses of this study h1, h2 and h3a must be rejected based on the given results, which are not in congruence with the expectations of rbv. smaller firms do not exhibit lower profitability when compared to medium-sized firms, indicating that operational efficiency in resource utilization is a key factor in explaining this result (deb, 2009; grant, 1996). according to doring and gooderham (2008) and sandvig and coakley (1998), small firms can exploit their resources equally effectively when compared to bigger firms. using ebitda, unrelated medium-size diversifiers exhibited higher profitability when compared to related diversifiers, which is an observation that is not in congruence with the theoretical expectations (chen et al., 2014). in the case of ebit, no significant differences in profitability were visible among the different types of diversification. hypotheses h3b, h4 and h5 could not be rejected. diversification was not observed to significantly influence the profitability of small firms, which is a result in contrast with some studies, which indicated that small companies could not optimally exploit the effects of diversification, leading to a negative impact on profitability (lumpkin et al. 2010; murphy & tocher, 2017; shields & shelleman, 2015). a non-linear behavior was found to exist between size² and profitability (for small firms) and age² and profitability (for medium-sized firms), supporting prior results that there is an optimal balance between performance, managerial skills in exploiting resources and corporate growth (glancey, 1998; serrasqueiro & nunes, 2008). therefore, even if rbv may be a promising paradigm to explain diversification strategies of companies (hauschild & zu knyphausen-aufseß, 2013), there are only some results in congruence with the predictions. the critique of montgomery (1994) that rbv does not provide an optimal amount of diversification, where its net present value is zero seems to be true. the results also support the statement of wan et al. (2011) that rbv should be combined with other theoretical perspectives in order to achieve a reliable explanatory framework. this is the first known study conducted for austrian companies in this field using the research design of a comparison between small and medium-sized firms. for company managers and owners in austria, the results indicate some relevant practical implications. generally, for small companies, achieving a growth in size (i.e. to be classified as medium-sized) is not a strategy to pursue in order to achieve higher profitability, but it can lead to lower risk. if this is the aim, then they will experience a decrease in profitability during their growth period due to the non-linear behavior between size and profitability. this means that reaching the next level in size is costly and may result in a non-optimal usage of existing resources and capabilities. for small firms, engaging in diversification, independently of the type, leads to higher profitability (in mean and median – even if only partially significant based on the calculations), which is not generally true for medium-sized firms. according to the results, managers and owners can estimate how strategic decisions may be affected regarding growth and diversification. 92 m. situm journal of small business strategy / vol. 29, no. 3 (2019) / 78-96 limitations without doubt, the results of this study are not without their limitations. even allowing for the fact that 1,095 observations have been used for a three-year period, the selection of samples is always a problem in statistics. the sample size is high when compared to other studies, but there is the general view that with a higher sample size, the quality of the results improves and may be much more accurate in replicating the behavior of the whole population. the measured r² are quite low for the regression functions, indicating that a high proportion of variances remain unexplained. on the one side, this may be reasoned by the non-inclusion of other potential independent variables, which are able to explain the performance of companies. on the other side, it must be considered that the chosen variables were all non-normally distributed, which may affect the estimation procedure for the regression functions. nevertheless, the results of the study revealed some interesting aspects, which are of value for practical application, when considering the implementation of a diversification strategy in small and medium-sized firms in austria. references aaker, d. a., & jacobson, r. 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(1992). an analysis of the profitability of businesses of diversified companies. review of industrial organization, 7(2), 151-185. small business development centers and rural entrepreneurial development strategies: are we doing enough for rural america? | published in journal of small business strategy loading [contrib]/a11y/accessibility-menu.js jsbs menu articles articles all for authors editorial board about issues ethics statement sponsors search sorry, something went wrong. please try your search again. × articles blog posts rss feed enter the url below into your favorite rss reader. https://jsbs.scholasticahq.com/feed × articles vol. 31, issue 4, 2021 november 16, 2021 cdt small business development centers and rural entrepreneurial development strategies: are we doing enough for rural america? timothy c. dunne, katie toyoshima, michael byrd, rural entrepreneurship small business development center strategy ccby-4.0 • https://doi.org/10.53703/001c.29493 photo by sincerely media on unsplash jsbs dunne, t. c., toyoshima, k., & byrd, m. (2021). small business development centers and rural entrepreneurial development strategies: are we doing enough for rural america? journal of small business strategy, 31(4), 57–63. https://doi.org/10.53703/001c.29493 save article as...▾ pdf xml citation (bibtex) data sets/files (3) download all (3) table 1. percentage of consulting and impact to rural sbdc clients download table 2. five-year average of sbdc clients and the services they receive download table 3. differences in services between rural and urban sbdc clients download sorry, something went wrong. please try again. if this problem reoccurs, please contact scholastica support error message: undefined × view more stats abstract many states across the united states have significant rural populations, which typically face different sets of challenges than those closer to urban populations. this is particularly evident in the different types of opportunities that small businesses face in those rural areas. in recent years, various efforts both at a national and local level have been taken to increase those opportunities for rural small businesses. however, those efforts have not always produced the results that are envisioned. utilizing information about small business development center (sbdc) strategies to serve small businesses in both rural and urban areas, we highlight the efforts that work to aid rural entrepreneurs as well as those that fall short. introduction entrepreneurship and small businesses account for a significant proportion of the u.s. economy comprising 99% of u.s. firms (small business trends, 2021). the impact of these small businesses offers employment opportunities, as well as both economic and community benefits (peake et al., 2020). moreover, within this context, urban entrepreneurship and small business ownership is a key component of the general economy, and especially important in many parts of the united states. in fact, in some states, such as the sample for our study, rural entrepreneurship makes up about two-thirds of the businesses in the state (cicero, 2018). and, while both national and local agencies attempt to provide resources to these under-resourced rural businesses, the positive impacts have not been as numerous as those provided to more urban entrepreneurs. in this paper, we seek to highlight some of the shortcomings of efforts aimed to help rural businesses. america’s small business development centers (sbdcs) offer many resources to help aspiring entrepreneurs and small business owners across the country. hosted by academic institutions, and funded partially by the u.s. congress, sbdcs offer zero-cost business consulting to small business partners to help resource strapped entrepreneurs get up and running. and, while sbdcs deploy resources specifically focused towards helping rural entrepreneurs, there are some things they do that are not having the same impact in rural settings as they are having closer to urban centers. the purpose of this paper is to examine those strategies that are used by sbdcs to help rural entrepreneurs, and highlight aspects about those strategies that are ineffective or can be improved upon. while the literature has struggled to agree on a single definition of entrepreneurship or to delineate between small business and entrepreneurial endeavors (howorth et al., 2005), our interest here is more about the services that sbdcs provide to both of these groups. thus, the definition of entities in this study falls within the u.s. small business administrations mission that “the office of entrepreneurial development’s mission is to help small businesses start, grow, and compete in global markets.” sbdc small business assistance the sbdc provides assistance through technical advice and business consulting to small business owners though local development centers. the centers provide no charge face-to-face consulting, training programs, business plan development, marketing strategies, regulatory advice, and access to capital networks. across all of the country’s 62 sbdcs, they report helping aspiring entrepreneurs get access to $5.6 billion in financing, with a return of $123.5 million in federal or state revenues (chrisman, 2019). in addition to economic impacts, the businesses that america’s sbdcs help created over 99,000 new jobs during the 2017 2018 period, bolstering the health of many communities across the country (chrisman, 2019). sbdc strategies to help their clients include specialized consulting and other services that target specific needs of aspiring entrepreneurs and small business owners (america’s small business development center, 2021). these services may range in complexity and scope depending on the individual needs of the business or entrepreneur seeking assistance. for example, sbdcs may help an aspiring entrepreneur, who has a good idea, but little experience in industry, develop a detailed business plan. or, they may help a small business owner struggling with sales, help to better understand the profile of their customers, leading to more targeted and efficient marketing strategies. while many of these services may seem identical for rural and urban businesses, we have found this to be false as often as it is true. moreover, it seems that the implementation of these strategies are more effectively adopted when sbdc consultants are more familiar with the communities, which is more common closer to urban centers. we have also observed slightly different mindsets in areas where these rural businesses are located, which can result in a lack of understanding of the nuances associated with these rural enterprises. sbdc requirements for rural assistance under section 5.1.3.3 of the 2020 osbdc funding opportunity announcement, sba requires sbdcs to assist “small businesses in rural areas in an effort to increase their participation in exporting, government procurement, tourism, access to credit, incubators, innovation and technology and other small business programs, in cooperation with the u.s. department of commerce (doc) and other relevant federal agencies” (u.s. small business administration office of small business development centers, 2019). additionally, in the rural development guidelines section, 8.2.14, it states that “sbdc applicants must make a full range of business development and technical assistance services available to small businesses located in rural areas. these services will be designed to increase rural small business participation in exporting, government procurement, tourism, access to credit, incubators, innovation and technology and other small business programs.” (u.s. small business administration office of small business development centers, 2019). in the 2020 osbdc funding opportunity announcement, providing “counseling and training to rural entrepreneurs and small business owners” is included on a list of the most important priorities for grant recipients in 2020 (u.s. small business administration office of small business development centers, 2019). in summary, sbdcs are required to make the same assistance available to rural communities as is already available to urban communities but by no means held to any tangible metrics or targets to develop training and consulting methods to specifically serve rural entrepreneurs or small businesses. it seems that sba would like sbdc’s to market to and target rural entrepreneurs and small businesses but they implement no standards or goals to ensure that this “priority” is actually met. with this lack of metrics as the backdrop, we seek to explore areas of sbdc service that can potentially help rural entrepreneurs more effectively. the context of our study most of our analysis will focus on the state of idaho due to its large proportion of rural areas. however, the strategies discussed can be applied on a larger scale and many of the socioeconomic issues plaguing our rural communities are similar to those in other predominantly rural states. rural idaho makes up greater than 90% of the state’s geographical area and comprises 37 of idaho’s 44 counties (morrow, 2017). all but six of idaho’s counties are under the population threshold of 65,000 needed for the american community survey to release annual estimates and are only included in the 5-year estimates. in fact the average population of idaho’s seven urban counties is 173,000, while the average in the other 37 counties is approximately 15,500. the stark differences highlighted above are part of the reason why idaho was chosen as a focal sbdc. in addition, we were given access to employees of the isbdc, which helped to make sense of the data reported. in recent years, idaho has experienced a unique and growing split between rural and urban communities in the midst of two phenomena: a steep rise in job creation and growth in urban areas of the state and the retirement of the baby boomer generation in mass to rural areas (tacke, 2016). migration patterns show that working‐age residents are leaving rural counties for cities (mansfield, 2016). at the same time, retirement‐age residents are moving into rural areas of the state, effectively stagnating population growth in rural communities but at the same time depleting the eligible workforce (tacke, 2016). exponential growth in job creation is seen almost entirely in the state’s urban counties (tacke, 2016). while urban counties are seeing a greater influx of young and educated workers in high-tech industries like robotics, the rural workforce in idaho has become increasingly older, less educated, and is still heavily invested in traditional industries like mining, farming, and forestry (tacke, 2016). with the depletion of their human resources by urban counties, the rural workforce has had to become more entrepreneurial, diverse, and is more likely to work in small businesses (tacke, 2016). rural idaho is remote and has very few ways to travel in terms of major freeways. for example, electric vehicle corridors are distinguished nationally and typically along major interstates but in idaho, concessions had to be made for highways due to the very few ways to travel throughout the state. we now turn to examine how sbdc services differ between urban and rural areas, and detail strategies to overcome some of the challenges faced in rural settings. strategies to serve rural businesses in the last five years, on average, only 23.7% of idaho sbdc clients have been located in rural areas. on average, rural consulting has only encompassed 20.0% of total consulting hours. rural sbdc clients have accounted for 21.0% of all new business starts, 33.7% of all capital raised, 28.5% of all jobs created, 21.4% of all jobs retained, and 29.8% of all sales in the past five years. tables 1 and 2 below depict percentage differences in services provided to rural sbdc clients as compared to urban clients. as a reference, the sbdc served 2,158 business in 2020, of which 550 were rural businesses. in this section we discuss several areas of sbdc client services we think attribute to these differences. table 1.percentage of consulting and impact to rural sbdc clients 2015 2016 2017 2018 2019 2020 % of rural clients 20.99% 24.67% 25.07% 22.58% 25.15% 25.52% % of consulting hours 20.65% 19.56% 17.84% 17.07% 24.86% 21.47% % of total rural impact from all sbdc clients business starts 25.30% 14.29% 17.48% 26.73% 21.00% 38.46% capital raised 13.58% 26.83% 30.52% 55.00% 42.45% 29.40% jobs created 20.09% 27.03% 43.17% 25.30% 26.66% 21.32% jobs retained 10.98% 25.00% 33.12% 26.73% 11.21% 24.58% sales growth 32.37% 44.59% 25.01% 27.21% 19.57% 20.17% table 2.five-year average of sbdc clients and the services they receive 5-year average % of rural clients 23.7% % of consulting hours 20.0% % of total rural impact from all sbdc clients business starts 21.0% capital raised 33.7% jobs created 28.5% jobs retained 21.4% sales growth 29.8% traditional vs. distributed staffing models while the extent of rural environments in many states is significant, the percentage of rural clients that the sbdc serves is low in comparison. many networks strive to serve the entire state, and have espoused the goal of serving or providing aid to at least one entrepreneur or small business in every county regardless of population. up until 2020, this was not a standard that sbdc centers were hitting consistently. this unofficial goal was only recently achieved, due to the overwhelming amount of assistance needed by small businesses due to the coronavirus pandemic. how sbdcs structure their staffing is different in a couple of important ways. traditional staffing models a traditional staffing model consists of a centralized office where consultants and other administrative staff work. in this model, consultants rarely, if ever, leave the office to meet with clients. instead, clients come into these offices to receive the services they provide. if clients are unable to travel to the office of the consultant, consultants may use video communication software like zoom or skype for business provided by the network to meet with clients. however, under normal circumstances, this is very rare. that said, due to the unusual circumstances surrounding the coronavirus pandemic, since march of 2020, all offices of the sbdc are actively using zoom as a means to meet with clients, regardless of the normal method of interacting with their clients. typically, traditional staffing models work best in regions with high population density and more consistent means of infrastructure in terms of travel. in short, the regions that use this staffing model are usually located in urban environments working with entrepreneurs and small business owners that are likely to be more educated and have easier access to technology and resources. the services and training that they provide can be the same or similar to a distributed staffing model but can also vary based on education and industry. distributed staffing models a common sbdc practice in states with large rural populations is to have several regional offices that have a distributed staffing model, whereby business consultants are either remotely located in rural areas or travel to rural areas to consult. often, these regions have offices that are located within overwhelmingly rural communities or located in more urban centers that nationally speaking would be considered rural. these regions using the distributed staffing model also have small budgets and work on a reduced amount of staffing. this approach has allowed the sbdc consultants to be more responsive to the needs of local companies, build stronger community relationships, and deliver quality consulting. almost all of these rural consultants have deep-rooted ties to their communities; they’ve grown up there, raised a family there, owned a prominent business there or are involved with their county’s myriad of different network partners. in regions that use a distributed staffing model, it is mandatory that consultants not only have the technical know-how and industry knowledge but that they truly care about the communities where they work. in interviews with both directors in idaho, they stressed that community is one of the most important factors when working with rural regions. often times, consultants in these regions become an incredibly integral part of their client’s small business but it may take longer for consultants to gain their clients trust than in a traditional staffing model in an urban area. in addition to recruiting consultants with community ties, they also rely on the communities themselves for marketing purposes. in these regions, word of mouth and personal referrals are the largest forms of marketing. in 2019, 26.5% of electronic requests for counseling came from these sources (word of mouth referrals are those that come from business-to-business sources). in 2020, the number of referrals from these sources increased slightly to 27.0%. region directors leverage their region’s network partners and community leaders who champion the sbdc. these individuals and companies are crucial to the inflow of new clients and ultimately pivotal to the survival of small towns. on occasion, network partners become consultants for our regional offices. as of september 2019, there were three rural consultants who are also community leaders and economic development corporation directors in their respective areas. the common factor shared by both idaho’s rural and urban communities is that small business employment consists of half of all employed people (cicero, 2018). in idaho, there is approximately one small business for every 11 people and over 99% of businesses are small businesses (cicero, 2018). in addition to being the largest source of the state’s employment, about two-thirds of rural idaho small business owners are dependent on the incomes of their small businesses for the majority of their living expenses (cicero, 2018). level of service medium while sbdc centers strive to provide the same beneficial services to all clients, both urban and rural, there are some differences in the medium used for most of the client meetings between these two populations. among the most significant differences is the disparity in the percentages of meetings that are completed face-to-face. in 2019, our sbdc sample conducted 10.3% of client meetings with entrepreneurs in urban areas in a face-to-face format, while only 5.25% of meetings with rural clients were in person. additionally, 21.7% of meetings with urban clients were conducted via video meetings, while 14.2% of meetings with rural clients used video communications. conversely, 35.3% of communications with urban clients used phone or email, while the number was much higher (43.5%) for rural clients. taken together, this shows that the richness of consulting time spent with urban entrepreneurs is significantly greater than that spent with rural ones. these statistics in tandem with the lack of technology access and lower level of education in rural areas demonstrate the need for sbdcs to conduct more intensive outreach and marketing that are different in terms of medium and message than that used to target new urban entrepreneurs. expertise in training some of the areas of services that sbdcs offer involves training on how to use various business-related technologies. those technologies vary by the business, but often include applications such as quickbooks and square. sbdc clients are offered low-cost trainings to learn how to use these programs, which should make managing certain aspects of the business more efficient. however, without knowledge about how to use these various technologies or related technologies, they are of little use, and instead may end up eating up valuable resources as business owners struggle to learn them. moreover, general observations from sbdcs are that entrepreneurs in urban areas are much more likely to have experience with and knowledge about those types of technologies, while entrepreneurs in rural areas are less likely to have experience and know how. this is further perpetuated by rural flight by younger generations and the increase in retirement age populations migrating from the surrounding states, effectively stagnating the population and decreasing the eligible workforce in one fell swoop. rural businesses that previously would have been passed down are more often than not closing because there is no new generation to run them and their owners have no means to learn the infinite number of intricacies of new technology. in a similar vein, guidance on the use of social media platforms has parallel challenges. many small businesses use social media to help with various marketing efforts (fachrunnisa et al., 2020). in fact, it has been found to be a relatively inexpensive and efficient way to market. however, as with the technologies mentioned above, there is a disparity in fluency on these platforms between urban and rural entrepreneurs. while these technologies can both be quite useful for new business owners, sbdc consulting on them is limited. additionally, the training that is offered is generally geared towards and helps with those who have some experience with the technologies or something similar, working to only compound the varying benefits to these two populations. access to capital one of the primary services offered by sbdcs is access to their network of lenders. moreover, one of the most important factors in determining the success of getting past ideation, is the cost and acquisition of startup capital (dunne & mcbrayer, 2019). in terms of differences in access to capital, data present a mixed outlook. as can be found in table 1, over a period from 2015 through 2020 rural entrepreneurs only received a yearly average of 33% of the total capital received by sbdc clients. that being said, the average loan amount in 2020 was $103,888 for rural businesses while it was $76,525 for urban clients. while this is promising for rural entrepreneurs, we are examining further what other factors might be contributing to that higher average for rural clients. for example, we will look for outliers, such as one or two rural clients that might be skewing that average. that said, the current information paints a positive picture of access to capital for rural entrepreneurs. time while it has already been explained that rural entrepreneurs receive less face-to-face as well as video communications with sbdc consultants, it is also worth noting that the amount of time spent with rural clients is lower. on average sbdc consultants spend .56 hours per meeting with rural clients, while meetings with urban clients last .61 hours on average. taken together with earlier observations about differences in the services received, we see additional shortfalls of service to rural clients. ppp loans in addition to the above differences, which occur similarly on an ongoing basis, we also briefly analyzed an element of sbdc service that was specific to the landscape surrounding the coronavirus pandemic. specifically, there were some differences in access to paycheck protection programs (ppp) loans offered by the sba. interviews with sbdc personnel in the idaho sbdc found that their rural clients waited longer to receive ppp loans and that the process was more complex and difficult for them. one possible explanation of this observation is that many rural clients tend to be in the traditional industries, typically mining or agriculture. at the beginning of the pandemic, any business that fell under the wide umbrella of agriculture was directed to get their relief from the united states department of agriculture (usda) and was unable to apply for a ppp or economic injury disaster loan (eidl), which contributed to the complexity and length of time to receive assistance and relief. usda’s relief was also less publicized and took longer to start accepting applications because it’s infrastructure was smaller than that of its sba counterpart. it is worth noting that this has since changed. the loan forgiveness process has also been extremely difficult to navigate for both rural and urban entrepreneurs. while it is unknown, the process for loan forgiveness is likely to be more difficult for rural clients due to the observed differences mentioned earlier. table 3.differences in services between rural and urban sbdc clients point of difference rural urban staffing models distributed model traditional model level of service medium 5.25% of meetings face-to-face 14.2% via video 43.5% via phone or email 10.3% of meetings face-to-face 21.7% via video 35.3% via phone or email technology expertise / training less experience with technologies, so need more training with technologies provided. more experience with technologies, so benefit more from the technologies access to capital receive 33% of capital raised average loan = $103k receive 67% of capital average loan = $76k time average consultation meeting lasts .56 hours average consultation meeting lasts .61 hours ppp loans longer period to receive and more complex process to apply shorter period to receive and more streamlined process proposed solutions while the different outcomes rural versus urban sbdc clients receive cannot be entirely managed, we propose practical changes sbdcs can adopt the improve this difference and better achieve the goals of providing better services to rural entrepreneurs. better use of metrics for rural populations. while there are stated goals, at national and local levels, to accelerate business success for rural entrepreneurs, there is currently little done in the way of instituted metrics for use with rural clients. sbdcs may be held to different standards or goals by other stakeholders like host institutions (colleges and universities), state board of education, etc. but the goals are merely checkpoints with no consequences if not met. currently, sba holds sbdcs to several standard key performance indicators (kpis) of economic impact as an overall program: jobs supported, jobs retained, jobs created, business starts, capital raised, and sales increase. but there are no metrics collected related to rural entrepreneurs even though there is a sba stated focus area of rural entrepreneurship and development. the data we collected from sbdcs shows a lack of success measures being collected for these businesses thus, we believe it would help rural entrepreneurs for sbdc consultants to institute kpi metrics that they can use with rural clients. for example, it would be helpful to see year-over-year growth in services provided, for both urban and rural clients, as well as better metrics of impact, such as company revenues, growth, etc. face-to-face consulting. as this research highlights, the level of service and richness of consultative communications provided to rural sbdc clients is lacking compared to their urban counterparts. due in part because of the obvious physical distance challenges, rural entrepreneurs receive much less face-to-face consultative services than urban entrepreneurs. we believe one way to help in this regard is to institute more distributed staffing models in sbdcs in states or regions where large rural populations exist. this staffing model, partially used in the population studied here, has resulted in more opportunities for in-person consulting for rural clients and a greater amount of impact recorded in rural communities. therefore, we propose that this staffing model is expanded in those regions and instituted in sbdcs that do not currently use them. targeted marketing efforts. in addition to expanding face-to-face consulting in rural areas, it is also important the sbdcs utilize appropriate methods to target and market to rural business owners. much of sbdc marketing efforts rely on social media. thus, if rural businesses are less actively engaged on technology platforms, they may not have the initial contact with the centers. accordingly, we recommend sbdcs that serve more rural areas, utilize marketing efforts that are more specific to the areas they serve. for example, these centers could utilize trade shows or attend community events, where rural business owners may be present. better access and training with technology. this recommendation is a two-part suggestion. we propose that sbdcs offer more access to different technologies for rural entrepreneurs. providing improved technologies to entrepreneurs in rural areas could improve their ability to receive help from sbdc consultants in the form of more rich video communications. in combination with more distributed staffing models, this could help improve the amount of face-to-face and/or more rich communications methods, which in turn could improve the amount of overall time spent helping rural clients. the second part of this recommendation is to improve training for rural sbdc clients on how to use the various technologies to which they are given access. by providing more training (both hands-on and virtual) on the efficient uses of such technologies, clients in rural settings could benefit more from them and sbdc consultants could spend more time providing other valuable consulting services. accelerator opportunities for rural entrepreneurs. many sbdcs located in urban centers also run, or have access to business incubators and accelerators, to help entrepreneurs get their businesses started successfully. while moving these types of accelerators into rural areas may not be possible, we propose that sbdcs encourage their rural clients to utilize these opportunities. in fact, because of the success of these offerings, we would like to see sbdcs initiate some type of program aimed at getting rural entrepreneurs involved with accelerators. conclusion as the workforces in rural areas across the country become even more depleted, and small businesses struggle to have access to other important resources, it is extremely important that entities such as the sba, usda, and sbdcs continue to reach out and assist rural entrepreneurs. and, even though limited resources are a reality, the significance of these rural businesses to local communities, makes it imperative to assist in revitalizing these economies, particularly in states with significant proportions of rural communities. the current research highlights several areas where rural entrepreneurs are at a significant disadvantage when compared to their urban counterparts. however, we believe that by addressing these shortcomings, this important population of business owners can be successfully serviced. by using effective marketing strategies, and leveraging community leaders, the sbdc has and will continue to help slow and reverse rural flight and simultaneously help to educate the rural community. by utilizing more distributed staffing models and increasing the number of rural consultants, the sbdc can expand its reach to all areas they serve and increase the number of face-to-face consultation meetings they provide. additionally, by furthering their marketing efforts, and instituting better metrics for assessing impact on rural entrepreneurs, they will be better suited to addressing the unique needs of that population. providing better access to helpful technologies, as well as implementing a strategy to provide more technology training to rural clients will also help sbdcs be more accessible to our rural populations. we see this as an important step in serving the rural populations in a more effective way, and in the way that is espoused by the sba and sbdcs across the country. references america’s small business development center. (2021). sbdc services. https://americassbdc.org/ google scholar chrisman, j. j. (2019). sba; and the “economic impact of small business development center counseling activities in the united states: 2017-2018.” google scholar cicero. (2018). idaho small business development center rural small business analysis and awareness study. dunne, t. c., & mcbrayer, g. a. (2019). in the interest of small business’ cost of debt: a matter of csr disclosure. journal of small business strategy, 29(2), 58–71. google scholar fachrunnisa, o., adhiatma, a., ab majid, m. n., & lukman, n. (2020). towards smes’ digital transformation: the role of agile leadership and strategic flexibility. journal of small business strategy, 30(3), 65–85. google scholar howorth, c., tempest, s., & coupland, c. 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(2016, december 22). rural idaho today: an overview of components impacting its economy. idaho department of labor. https://idahoatwork.com/2016/12/22/rural-idaho-today-an-overview-of-components-impacting-its-economy/ u.s. small business administration office of small business development centers. (2019). small business administration. osbdc funding opportunity fy/cy 2019. https://www.sba.gov/sites/default/files/resources_articles/2019_sbdc_funding_opportunity_final.pdf powered by scholastica, the modern academic journal management system http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2020, vol. 30, no. 02, 35-58 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2020 small business institute® w w w. j s b s . o rg introduction bangladesh institute of bank management (bibm), mirpur 2, dhaka 1216, bangladesh, mosharref@bibm.org.bd financial resources, financial literacy and small firm growth: does private organizations support matter? small firm growth, finance, financial literacy, private organizations support, theory of resource based view. apa citation information: hossain, m.m. (2020). financial resources, financial literacy and small firm growth: does private organizations support matter? journal of small business strategy, 30(2), 35-58. research on small and medium enterprises’ (smes) growth has gradually increased as they are considered to be the backbone of any economy and the engine for economic growth and employment generation (li & rama, 2015; love & roper, 2015). small enterprises (ses) play a significant role in the developing economy in terms of sustainable growth, employment creation, development of entrepreneurship, and contribution to export earnings (mamun et al., 2013). in bangladesh, the small firm sector occupies the highest position in terms of number among micro, small, medium, and large firms. according to the bangladesh bureau of statistics [bbs] (2013), 10.66% of firms are micro, 88.07% are small, 0.73% are medium, and 0.54% are large firms among the total firms in bangladesh. in terms of employment, among the categories, small firms rank highest with 58.25%, followed by large (30.59%), medium (6.23%), and micro (4.93%) (bbs, 2015). therefore, it is evident that the contribution of small enterprises towards the economy is higher than the other business segments. the bangladesh economy is characterized by a large population, low per capita income, high level of unemployment and underemployment, mass poverty, and high income disparity (mamun et al., 2013). at present (up to december, 2017), the total population of bangladesh was more than 164 million, making it the eighth most populated country in the world (worldometers, 2018). the current (up to november, 2017) per capita income of bangladesh is $1,610 (dhaka tribune, 2017). bangladesh has maintained a remarkable track record on economic growth and development. the gdp growth rate in bangladesh was 7.05% in 2016 and 6.55% in the year 2015 (ieconomics, 2017). however, the real gdp growth in bangladesh was 5.7% even during the world financial crisis (2007-2008). the unemployment rate of bangladesh is 5%, underemployment rate is about 40%, and 31.51% of the total population is below the poverty line of which a large proportion lives in extreme poverty (world fact book, 2014). in these circumstances, higher growth of small enterprises may reduce poverty levels in bangladesh to a moderate level by creating employment for skilled and unskilled manpower in this sector. unfortunately, the industrial sector in bangladesh is not well developed mainly due to the lack of required capital and technological efficiency (rana, 2014). at presstudies on small firm growth in many countries focused on some specific factors, and no comprehensive research on this issue is available to draw the conclusion. based on the concept of the theory of resource based view (rbv), a research framework is formulated in order to examine how resources like finance and financial literacy of the owner-manager affect financial and non-financial growth of small firms operating in bangladesh. data was collected through self-administered questionnaires from 407 owner-managers of small firms operating in three divisions of bangladesh where most of the small businesses are concentrated. using partial least squares analysis, the paper found that both finance and financial literacy have positive and statistically significant relation with small firm financial and non-financial growth. the paper also showed that private organizations support moderates the relationships between finance, financial literacy and small firm financial and non-financial growth. from the findings, it is evident that if small firms have better access to financial resources and can earn required financial literacy and at the same time get proper and adequate support from private organizations, they will contribute more to the economy by achieving their financial and non-financial growth. md. m. hossain http://www.smallbusinessinstitute.biz http://www.jsbs.org 36 m. m. hossain journal of small business strategy / vol. 30, no. 2 (2020) / 35-58 ent, the service sector produces more than half of the total production, the contribution of the industry sector is almost 30%, and the balance 20% of the gdp is produced in the agricultural sector (rana, 2014). the industrial sector of bangladesh has contributed significantly to the country’s economy. during 2001-2011, the industrial sector of the country grew by 7.6% per annum on an average. the average growth of the service and agriculture sectors were 6.1% and 3.6%, respectively during the same period. in bangladesh, the number of large and medium enterprises are few, but they can attract lenders easily by fulfilling the financial needs for growth. on the other hand, there are special institutions for developing micro enterprises. many definitions of se exist. since each country has its own way of defining ses, the definitions found in the literature are heterogeneous in nature. some countries define ses in terms of their sales volume or number of employees; some are based on asset size; and some are considered in terms of capital size. in bangladesh, the central bank (bangladesh bank), provided a circular (bangladesh bank, 2015) to update the definition of small enterprises for three sectors of manufacturing, trading and service sectors. all financial institutions adopted the definition. according to the bangladesh bank circular, a small manufacturing business would be a firm with total assets at cost, including installation of fixed asset and excluding land and building, from tk. 5 million – 100 million and/or number of employees ranging from 25 to 99. a service concern would be a firm with total assets at cost, including installation of fixed asset and excluding land and building, from tk. 0.5 million – 10 million and/or number of employees ranging from 10 to 49; and a trading concern would be a firm with total assets at cost, including installation of fixed asset and excluding land and building, from tk. 0.5 million – 10 million and/or number of employees ranging from 6 to 10. the main characteristics of a small firm in bangladesh include: operated by a family or close group, owner of the firm is the day-to-day decision maker, mostly found in labour intensive businesses, the number of women entrepreneurs are very few, formal business records are rare, available information about a business may not be accurate and audited, technology usage is simple (mamun et al., 2013). despite the various problems of small firms, the researchers believe that the small firm sector is one of the best options in bangladesh for increasing the growth rate of gdp, reducing poverty level, and generating more employment with a minimum level of investment (begum & abdin, 2015, mamun et al., 2013). this paper mainly aims to examine the impact of financial resources and financial literacy of owner-manager on the growth of small firms. a number of reasons motivate this research. first, in bangladesh, the contribution of small and medium enterprises sector to the gdp is 25% (adb, 2015) which is lower than some other neighbouring countries. for example, 60% in china (pandey, 2015 ), 40% in india (weerakkody, 2015), 37% in thailand (rojanasuvan, 2014), 30% in pakistan (shahzad, 2014), more than 50% in sri lanka (weerakkody, 2015), and 33.7% in malaysia (“smes on track to contribute to gdp,” 2014). second, in consideration of the contribution of small-scale industries to the national gdp, bangladesh is not remarkable. according to moazzem (2011), the share of small-scale industries in the gdp from 2008 to 2012 remains almost the same at only 5.2%. third, the imf (2011) report indicates that the performance of micro, small and medium enterprises (msmes) in bangladesh were not outstanding in terms of revenue earnings, equipment use, capital-labour ratio, and growth of value added except for labour-productivity in some instances. fourth, in the last two decades, the growth of small firms in bangladesh has been a horizontal expansion rather than changing in a pyramid (moazzem, 2011). however, increasing the number of small firms does not necessarily mean that the sector is growing in terms of success and performance of production, revenue, employment, value addition among others are also important (connolly et al., 2012). fifth, most studies on business growth are based in developed countries and on small and medium-sized firms together. thus, it is also important to examine the impact of growth factors separately for the small business sector in the context of developing countries. throughout the last 50 years, very few studies have focused on the growth of small and medium enterprises in different perspectives (gupta et al., 2013). moreover, in consideration of small firms specifically, the literature on growth issues is limited and inconsistent (andersson & tell, 2009; fadahunsi, 2012). this therefore creates the opportunity to conduct research on small firm growth. the growth of a firm has been addressed from the theoretical and empirical perspectives in diverse fields of economics, finance, psychology, management, and others. still, there is confusion as to why some small firms grow and others do not when they operate their activities in a similar situation (anderson & eshima, 2013; demartino et al., 2015; eijdenberg et al., 2015; wiklund & shepherd, 2003). since firms can grow in different ways (for example, through expansion of sales or asset size, increasing employment, and so on), a set of multidimensional factors affect their growth. no comprehensive research on these factors is available to draw a conclusion. for example, scholarly evidence reveals the relationship of owner-managers’ traits (hansen & hamilton, 2011; mazzarol et al., 2009; storey, 1994), 37 m. m. hossain journal of small business strategy / vol. 30, no. 2 (2020) / 35-58 business characteristics and strategy (blackburn et al., 2013; lechner & gudmundsson, 2014; storey, 1994), human capital and institutional quality (krasniqi & mustafa, 2016), size and age of business (blackburn et al., 2013; coad & tamvada, 2012; gjini, 2014; hamilton, 2012; obeng et al., 2014), assets of a firm (davidsson et al., 2006), growth motivation (delmar & wiklund, 2008; eijdenberg et al., 2015), entrepreneur orientation (lechner & gudmundsson, 2014; wiklund et al., 2009; wolff et al., 2015), social capital (stam et al., 2014), innovation (audretsch et al., 2014; boermans & roelfsema, 2015), and internationalization (boermans & roelfsema, 2015) with small firm growth. despite growing research, the volume of studies on small firm growth is dominated by those concentrated on the institutional determinants of firm growth, rather than internal factors, for example, literacy or managerial capacities (krasniqi & mustafa, 2016). besides, considering the small firm specifically, previous literature also lacks the nexus of finance and growth. in bangladesh, like many other developing countries, small firms face severe constraints while financing their start-up, operations and growth. their access to formal credit is not easy compared to medium and large enterprises (zaman & islam, 2011). thus, this financing problem hinders the potential of future growth (chowdhury & ahmed, 2011; islam et al., 2014; khan et al., 2012; mamun et al., 2013; uddin & bose, 2013). there is some evidence in bangladesh on small and medium enterprise financing (haider & akhter, 2014; islam et al., 2014; uddin & bose, 2013; zaman & islam, 2011). however, this previous research emphasized financing problems and shortcomings rather than the impact of finance on small firm growth. financial literacy, an important characteristic of owner-managers, enhances knowledge, skills, financial qualities and capabilities of owner-managers to manage other important resources especially financial resources effectively. financial literacy enhances the strategic decision-making power of owner-managers to identify better financing sources in order to acquire low cost funds with better terms and conditions, which can also help to establish control over expenditure. such strategic decisions ultimately make the firm more competitive and profitable. however, chowdhury (2007) identified that the lack of financial knowledge among entrepreneurs in bangladesh results in limited access to formal credit. in other research, choudhury (2014) argued that the promotion of financial literacy among micro and small business owners in bangladesh can remove the obstacles of access to finance and ensure sustainable sector growth. moreover, some existing findings of the finance, financial literacy and growth nexus in both developed and developing countries are mixed and inconclusive (mahmood et al., 2017). accordingly, once there are conflicting findings, the same study can be replicated to expand the boundary of knowledge (li, 2010). this research considers private organizational support as the moderating variable. due to smallness, small firms all over the world face severe constraints in their growth and success. for the business start-up, small firms require various types of support from private supporting institutions. in bangladesh, private organizations that provide support include: the commercial banks, non-bank financial institutions (nbfis), national association of small and cottage industries of bangladesh (nascib), some business bodies like the federation of bangladesh chambers of commerce and industry (fbcci), the bangladesh women chamber of commerce and industry (bwcci), the women entrepreneur association of bangladesh (weab), the micro industries development assistance and services (midas), and the jubo unnoyan adidaptar, business consulting organizations.. since any kind of financial support is included under the ‘finance’ variable, non-financial support like information and training of the private organizations is considered here. after reviewing a large number of studies, delberg (2011) claimed that most smes in developing countries face problems in obtaining financial capital and many other non-financial obstacles and therefore suggests further research with public and private sector interventions. in addition, botha (2014) argued that support services can largely solve the problems of limited access to finance, personal difficulties, and lack of proper training and guidance of smes. therefore, this research considers private organizations’ support as the moderating variable with the expectation that private organizations support will enhance the growth of small firms in bangladesh. objective of the research this paper explores the impact of resources on the financial and non-financial growth of small firms operating in bangladesh. the specific objectives of the paper are to: i. examine the relationship between financial resources, financial literacy of the owner-manager and small firm financial and non-financial growth; and ii. examine whether the support from private organizations enhance the relationships between financial resources, financial literacy of the owner-manager and small firm financial and non-financial growth. 38 m. m. hossain journal of small business strategy / vol. 30, no. 2 (2020) / 35-58 literature review small firm growth growth of a firm follows a predetermined path (churchill & lewis, 1983; greiner, 1972; hanks et al., 1993; kimberly, 1979). however, research shows that the growth of a firm is heterogeneous, mainly due to the intrusion of multiple internal and external factors (aislabie, 1992; phelps et al., 2007; rutherford et al., 2003; stubbart & smalley, 1999). thus, it can be said that the growth of small firm is not unidimensional rather it is a multidimensional phenomenon. many researchers considered the success or performance of small firm in both financial and non-financial ways. for example, ahmad et al. (2011) considered both financial and non-financial aspects for measuring entrepreneur business performance. according to hilmi et al. (2011), seven indicators may be used to measure firm performance: number of complaints, sales growth, return on investment, productivity, financial performance, customer satisfaction and employment satisfaction. wijetunge and pushpakumari (2014) advocated financial and non-financial measures to show the performance of smes. finance and small firm growth according to rbv, financial resources are the most significant resources for growth and performance of a small firm (wiklund et al., 2009). these resources include the ability of the firm to generate internal funds and the capacity to borrow from external sources as well as other financing mechanisms that includes cash balances, supplier credit, advance receipts, venture capital, leasing, factoring, and others. small firms are generally financed both from internal and external sources (osei-assibey, 2013). in order to foster economic growth and development, it is critical to ensure the profitability and growth of the small and medium enterprises sector and access to finance is the precondition for such growth (abdulsaleh & worthington, 2013). beck et al. (2008) showed that financial development of a country has an excessively positive effect on small firms. a large body of literature on different countries shows that there is a good association between finance and the growth or performance of small firms. some studies highlight that the availability of finance is the prime factor for the success and growth of smes (cook, 2001; chittenden et al.,; ou & haynes, 2006). mambula (2002) and yazdanfar (2012) identified that the main barrier of growth for micro and small firms is the lack of finances. many researchers concluded that financing constraints have negative influence on the firm growth (ayyagari et al., 2008; beck et al., 2005). although multiple studies confirmed positive association between access to external finance and the growth of small firms, some others found that the relationship is inconsistent (akoten et al., 2006; johnson et al., 2000; mcpherson & rous, 2010; yazdanfar, 2012). moreover, there is evidence of a moderate effect (coad, 2007) and also negative effects (hardwick & adams, 2002). these kinds of relationship may result in a large number of unexplained variations in terms of growth rate (coad, 2007). financial literacy of owner-manager and small firm growth realizing the importance of financial literacy, many studies have been conducted from different perspectives. for example, agarwal et al. (2015) focused on financial literacy and financial planning; brown and graf (2013) focused on retirement planning; prast and van soest (2016) considered retirement preparation; deepak et al. (2015) emphasized on investors; chinen and endo (2014) highlighted on students; beckmann (2013) focused on household savings; zokaityte (2016) on consumer and retailers; almenberg and dreber (2015) considered stock market participation; and hastings et al. (2013) on economic outcomes. many studies have been conducted on financial literacy and the growth of smes together in different contexts and found positive associations between the constructs (bruhn & zia, 2011; christelis et al., 2010; dahmen & rodríguez, 2014; drexler et al., 2014; nyamboga et al., 2014; siekei, juma & aquilars, 2013; wise, 2013). however, empirical evidence on financial literacy of owner-manager and small firm growth nexus are limited with some exceptions (lusimbo & muturi, 2016). although several studies found a positive association between financial literacy and small firm growth, eresia-eke and raath (2013) confirmed the insignificant relationship between financial literacy of entrepreneurs and the growth of small, micro, and medium enterprises. private organizations support and small firm growth small enterprises face many problems including inadequate managerial skills, limited access to information, support services, business development support, etc. (cancino et al., 2015). to address such problems, private organizations play a very significant role for developing small enterprise sectors (mamun et al., 2013). scholars recognize that the support of the private sector can be used to improve small firm performance (massey, 2003; matlay et al., 2005). for example, fouad (2013) found that most small firms suf39 m. m. hossain journal of small business strategy / vol. 30, no. 2 (2020) / 35-58 fer from the shortage of proper knowledge and skills that result in poor performance. zindiye et al.(2012) found that government and private organizations’ positive support influenced the performance of small and medium enterprises. islam (2013) showed the significant positive association between business development services and small firm growth. private organizations’ support in terms of business training enhances the ability of entrepreneurs which subsequently increase the performance of firms (du plessis et al., 2010). many researchers argue that more training should be given to small business entrepreneurs in order to have better success (chandy & narasimhan, 2011; naqvi, 2011; ojala & heikkilä, 2011). mashenene and rumanyika (2014) found that inadequate business training highly affects the growth of small firms. like training support, information support is another important factor for growth and performance of small firms. hence, access to information is an important tool for entrepreneurs to make their business successful (hernandez et al., 2012). recently, chowdhury et al. (2013) suggested that the owner-managers require training and skill development program from government and other supportive private organizations to facilitate their growth. research model and hypotheses resource based view (barney, 1991) theory considers the firm as the bundle of resources and argues that the resource firms directly and indirectly affect firm’s performance and growth by generating competitive advantages. the current research uses two important resources, financial resources and financial literacy of owner-manager, as the independent variables to find out their impact on the growth of small firms and considers the rbv approach. figure 1 shows the research model. the model focuses on the direct relationship between resources and small firm growth and also uses private organizations’ support as the moderating variable with the expectation that it may enhance the positive relationship between resources and growth. as financial resources are the fundamental requirements for the firm growth, the framework shows that there must be some association between financial resources and small firm financial and non-financial growth. if a firm is able to access financial resources, it may positively affect the financial and non-financial growth of the small firm. it is a common problem for small firms to have better access to the formal financial sector, and therefore, the lack of such resources hinders their normal business operations and growth (mertzanis, 2017). without adequate access to financial resources, the health of the firm is likely to be weak and its potential growth is jeopardised (adomako et al., 2015). therefore, keeping with this conservative wisdom, researchers have concluded that the relationship between access to financial resources and firm growth could be considered positive (rahaman 2011; storey 1994). empirically, it has been tested by different researchers in many countries to find out the association between finance and small firm growth (financial and non-financial). a vast majority of previous studies found that financial resources, both internal finance and external finance, and the growth (financial and non-financial) or performance of small and medium firms are significantly and positively correlated (ahmed & hamid, 2011; ayyagari et al., 2008; franco & haase, 2010; islam et al., 2014; rahaman, 2011; raravi et al., 2013; yazdanfar, 2012). in bangladesh, like in many other developing countries, small firms’ access to formal credit is not easy compared to medium and large enterprises. thus, this financing problem hinders their normal financial resources financial literacy private organizations support small firm growth ▪ financial growth ▪ non-financial growth figure 1. research model 40 m. m. hossain journal of small business strategy / vol. 30, no. 2 (2020) / 35-58 business operations that subsequently hinders the potential of future growth (chowdhury & ahmed, 2011; islam et al., 2014; khan et al., 2012; mamun et al., 2013; uddin & bose, 2013). therefore, the paper expects that if small firms operating in bangladesh can have better access to financial resources according to the business requirements, it will enhance their financial and non-financial growth and recommends the following hypothesis: h1. there is a positive relationship between financial resources and small firm financial growth in bangladesh. h2. there is a positive relationship between financial resources and small firm non-financial growth in bangladesh. financial literacy is one of the important characteristics of the owner-manager that enhances the knowledge, skills, financial qualities and the capabilities to effectively manage the other important resources, especially the financial resources. in order to manage the financial activities, proper investment and dealing with the external financial environment, financial literacy of the owner-manager is the precondition. the business environment is very complex and most owner-managers of small businesses face several problems while making important financial decisions in order to operate their businesses. in this regard, financially literate owner-managers can effectively manage the firm’s financial resources and can end up with a better plan for the future expansion and growth of the business. financial literacy is a significant tool for managing business finance (miller et al. 2009). on the other hand, a low level of financial literacy negatively affects the firm’s growth (nunoo & andoh, 2011). previous studies found that there is a positively strong relationship between financial literacy and firm growth (bruhn & zia, 2011; lusardi & mitchell, 2011; siekei, 2013; smith, mcardle & willis, 2010; yoong, 2011). however, there is also evidence that financial literacy has no impact on business outcomes (karlan & valdivia, 2010). eresia-eke and raath (2013) also report an insignificant relationship between financial literacy of entrepreneurs and the growth of small, micro, and medium enterprises. since, there is no standard format to measure financial literacy, scholars derive and explain their findings as per their measurement and context. therefore, this research further examines such relationships in the context of bangladesh and proposes the following hypotheses: h3. the financial literacy of the owner-manager is positively related to the financial growth of small firms. h4. the financial literacy of the owner-manager is positively related to the non-financial growth of small firms. due to their characteristics of smallness and the larger number of small firms, they deserve more help from the government as well as the private sector for developing themselves and subsequently to contribute to the economy. therefore, in many countries, either developed or developing, private organizations play a pivotal role for developing the small firm sector. many of the previous studies found that the growth or performance of micro, small and medium enterprises depend on the support they receive from private organizations (botha, 2014; islam, 2013; zindiye et al., 2012; fouad, 2013). some studies claim that private organizations’ support through business training enhances the ability of entrepreneurs to operate businesses which subsequently increase their performance (chandy & narasimhan, 2011; du plessis et al., 2010; naqvi, 2011). other studies argue that private organizations’ support in terms of access to information is one of the important factors for the growth or performance of small firms (kamunge et al., 2014). therefore, it is evident that for the growth and survival of small enterprises, private organizations play a very significant role. such a notion motivates the use of private organizations’ support as the moderating factor. here, it assumes that if private organizations provide the required support to small firms, it will moderate the relationships between resources and small firm’s financial and non-financial growth. thus, the paper postulates the following hypotheses: h5. private organizations support significantly enhances the positive relationship between financial resources and small firm financial growth. h6. private organizations support significantly enhances the positive relationship between financial resources and small firm non-financial growth. h7. private organizations support significantly enhances the positive relationship between financial literacy and small firm financial growth. h8. private organizations support significantly enhances the positive relationship between financial literacy and small firm non-financial growth. 41 m. m. hossain journal of small business strategy / vol. 30, no. 2 (2020) / 35-58 method sample and data collection based on the research objectives and hypotheses, the current research adopts a quantitative method to examine the relationship as well as the moderating effect of an interacting term. survey research design was employed, and a structured questionnaire was used as the research instrument. a cross-sectional analysis is done as data has been collected at a specific point in time. to collect data, an interview was conducted through a structured questionnaire among owners or managers where owners were absent from their business operation. the target populations of the study were the small businesses operating in three major divisions (where most small firms are concentrated) out of seven divisions (dhaka, rajshahi and chittagong) of bangladesh. the sme foundation has identified 177 sme clusters within 7 divisions in 51 districts (out of 64 districts) of bangladesh. among the 177 sme clusters, most small businesses (71%) are located in dhaka (the capital city), chittagong (the commercial hub) and rajshahi divisions (abdin, 2015). therefore, the paper focused on these three broad areas for data collection, and data was collected from both the rural and urban areas to be able to generalize the results. the bangladesh bureau of statistics (bbs) (2013) published the total number of small enterprises (859,318) in bangladesh, but the definite list of small enterprises, including their addresses, is absent. hence, the paper considered a non-probabilistic sampling technique. here the krejcie and morgan (1970) table is considered to determine total sample size. out of the total number, 598,645 small businesses (70%) are located in three selected divisions. hence, based on krejcie and morgan table, 384 small businesses were selected as the sample size. however, to reduce the sampling error and to minimize the non response ra te, the total sample size was multiplied by two (hair et al., 2008). therefore,768 questionnaires were administered. the survey followed the drop off and pick up method to collect data. the whole survey process consisted of two or more visits to the premises of small firms in different locations within the study area. out of 768 questionnaires, the researcher received 426 questionnaire within the survey time. from 426 questionnaires, researcher found 19 questionnaires unusable, and finally used 407 questionnaires for the analysis. the response rate of this survey was 55.47%. measures to measure financial resources, the study considered both internal and external sources of finance, including financial terms and conditions. shariff and peou (2008) conducted a study by using firm financing as independent variable to test its relationship with sme performance from the sample of cambodia. the study adapted 11 items used by them and modified some items as per the contextual requirement. two items were deleted and another two items were added from the study of federico et al. (2012), according to expert opinions. the final list of items is shown in appendix a. the study measured financial literacy by adapting 10 questions from different categories which were used in a previous study of lusardi and mitchell (2007) and evaluated with 10 marks (appendix b). to measure private organization support, two important dimensions, namely the information support and the training support, were considered. the first dimension, information support, was measured by four items that were adapted from indarti and langenberg (2004). the second dimension, training support, four items were adapted from chen (2003) and geringer et al. (2002). appendix c shows the list of items. the dependent variable of the study is small firm growth which is measured both from the financial and non-financial growth perspectives. as shown in appendix d, the four financial growth measures were adopted from wickham (2006) and three non-financial growth measures was adopted from the previous study of federico et al. (2012), ahmad et al. (2011) and arrighetti (1994). respondents were asked to rank all the variables, except financial literacy, on a 5-point likert scale, which ranges from 1=strongly disagree to 5=strongly agree. data analysis a cross sectional survey method is used that indicates all kinds of data were collected from a single respondent within a firm which may create the problem of common method bias (podsakoff, mackenzie et al., 2003). hence, harman’s single factor test was performed to identify the potential problem. for this purpose, an un-rotated factor analysis was conducted for all measurement items that extracted factors with eigenvalues equal to one. the total five factors contribute 58.50% of the total variance. the first factor accounted for 21.559% of the variance which is lower than the recommended 50% threshold (podsakoff et al., 2003). therefore, it is concluded that the common method bias is not the major concern for this research. structural equation modeling (sem) is used to test the research objectives, and to analyze the measurement and structural model (ringle and wende, 2005). there are two primary methods for estimating the relationships in a cb-sem (covariance-based) and plssem (variance-based) approach. the goal of cb-sem is 42 m. m. hossain journal of small business strategy / vol. 30, no. 2 (2020) / 35-58 theory testing, theory confirmation and the comparison of alternative theories. pls-sem is used for the theory confirmation, theory development and most suited for proposition development by relationship between variable (urbach & ahlemann, 2010). rather than focusing covariance (i.e., explanation of the relationships between items), pls-sem aims on maximizing variance (prediction) of the dependent variable that are explained by the independent variables (haenlein & kaplan, 2004) and therefore improves the predictive power. pls-sem approach demands fewer requirements compared to cb-sem and delivers consistent estimation results (götz et al., 2010). as opposed to cb-sem that can handle only the reflective data, pls-sem can go with both reflective and formative constructs even if it contains in one structural equation model. moreover, pls-sem is regarded as a soft modeling method for its more relaxed assumptions which are required to fulfil as compared with cb-sem (hair et al., 2011). as the objective of this research is to explore the relationship among variables and predict key target constructs as well as to test the moderating effects, smartpls software has been used for achieving the research goal. the measurement model (validity and reliability) and structural model (testing the relationship among variables) are tested to finalize the outcome. measurement model evaluation in this research, all measurement items of each variable are reflective, both theoretically and statistically. according to hair et al. (2011), reflective measurement model should be evaluated through interpreting their reliability and validity. therefore, the measurement model is assessed through convergent and discriminant validity (chin, 2010). convergent validity is assessed by using factor loadings, average variance extracted (ave) and composite reliability (cr) (hair et al., 2010). for items loading, the study considered minimum loading value of 0.6 as recommended by (chin, 1998). all the loadings were more than 0.6. the cut-off value for ave should at least 0.5 and higher that indicates a satisfactory convergent validity (hair et al., 2014; henseler et al., 2009). the convergent validity in terms of ave shows the satisfactory result as all the constructs have more than 0.5 of minimum threshold. the study found cr higher than the recommended value of 0.7 (hair et al., 2014) for all the constructs. finally, it can be said that the measurement model satisfied all the requirements of convergent validity that is shown in table 1 and figure 2. fornell-larcker criterion has been put forward in order to assess discriminant validity (hair et al., 2013). according to fornell and larcker (1981) criterion, the correlations between constructs should be compared with the square root of the ave for that constructs and all the diagonal value of the constructs must be greater than the corresponding figure 2. measurement model 43 m. m. hossain journal of small business strategy / vol. 30, no. 2 (2020) / 35-58 table 1 convergent validity first order construct higher order construct item type item loadings ave cr financial resources reflective fin1 0.7444 0.514 0.921 fin2 0.7653 fin3 0.6781 fin4 0.762 fin5 0.7473 fin6 0.7663 fin7 0.7393 fin8 0.6644 fin9 0.7491 fin10 0.7451 fin11 0.733 financial literacy reflective finlit 1 1 1 private organizations information support reflective pois1 0.7185 0.640 0.877 pois2 0.7141 pois3 0.7771 pois4 0.7445 private organizations training support reflective pots1 0.7366 0.600 0.856 pots2 0.7334 pots3 0.7702 pots4 0.6149 private organization support 0.906 0.951 small firm financial growth reflective sffg1 0.8878 0.582 0.847 sffg2 0.9943 sffg3 0.8265 sffg4 0.8098 small firm non-financial growth reflective sfnfg1 0.7746 0.602 0.817 sfnfg2 0.8577 sfnfg3 0.9121 44 m. m. hossain journal of small business strategy / vol. 30, no. 2 (2020) / 35-58 off-diagonal constructs (chin, 2010). the results of the discriminant validity which is exhibited in table 2 show that all the diagonal values of the constructs are greater than the corresponding off-diagonal constructs. therefore, the results signify the adequate discriminant validity of the measurement model. in addition, the study also used cross loading, for assessing discriminant validity which suggests that the loading of each indicator should be higher compared to other cross loading to ascertain discriminant validity (hair et al., 2013). the study found no item of its construct column that highly correlated with any other construct item. structural model evaluation to assess the structural model, first of all, the coefficient of determination (r2) is used, based on chin (1998) and cohen (1988), to measure the variance explained in the outcome variable, by the predictor variables. then, the significance and relevance of the structural model is evaluated, based on the value of path coefficient, statistical t-values and standard error. to estimate the statistical significance of the path coefficient, 1000 re-sampling for bootstrapping procedure was used (hayes, 2009). beside the basic measures, the study also reported the predictive relevance (q2) and the effect size (f2) as suggested by hair et al. (2014) and soto-acosta, popa, and palacios-marqués (2015). the r2 is found to be 0.251 for financial growth and 0.174 for non-financial growth (table 3); these are moderated as recommended by cohen (1988). the values of these r2 indicate that the 25.1% of the variance in financial growth and 17.4% of the variance in non-financial growth of small firms can be explained by the two independent variables (financial resources and financial literacy). the study found that both financial resources (β = 0.156, p < 0.01) and financial literacy (β = 0.474, p < 0.01) had significant positive relationship with financial growth of small firms. therefore, hypotheses h1 and h3 were supported that are summarized in table 3. table 3 also shows that all the independent variables such as financial resources (β = 0.187, p < 0.01) and financial literacy (β = 0.370, p < 0.01) were positively related with non-financial growth of small firms and are statistically significant. thus, the results show that hypotheses h2 and h4 were statistically significant and supported. as suggested by hair et al. (2014), the study assessed effect size (f2) to show the substantive significance. the statistical significance like a p value can only show whether an effect exists and does not reveal the size of the effect and thus in reporting and interpreting results, both the substantive significance (effect size) and statistical significance (p value) are essential (sullivan & feinn, 2012). cohen (1988) provided the guideline for measuring the magnitude of the effect size and suggested that 0.02, 0.15 and 0.35 represent small, medium and large effect sizes respectively. according to this guideline, both of the relationships showed substantive impact (table 3). however, financial resources showed small effect and financial literacy showed moderate effect with both financial and non-financial growth. the study also logged on the predictive relevance (q2) that regarded an additional assessment of model fit (duarte & raposo, 2010). this assessment is performed by using the blindfolding procedure. according to hair et al. (2014), the blindfolding procedure should apply only for endogetable 2 discriminant validity of measurement model fin finl gs sffg sfnfg fin 0.714 finl 0.032 single item pos -0.022 0.002 0.750 sffg 0.169 0.476 0.053 0.763 sfnfg 0.191 0.373 0.049 0.625 0.776 table 3 structural model hypothesis relationship std beta std error t-value decision r2 f2 q2 h1 fin -> sffg 0.1566 0.027 5.863** supported 0.029 h2 fin -> sfnfg 0.1877 0.027 6.985** supported 0.041 h3 finlit -> sffg 0.4744 0.022 21.601** supported 0.251 0.290 0.139 h4 finlit -> sfnfg 0.3708 0.023 16.314** supported 0.174 0.150 0.068 **p < 0.01 fin = financial resources, finl = financial literacy, sffg = small firm financial growth, sfnfg = small firm non-financial growth. 45 m. m. hossain journal of small business strategy / vol. 30, no. 2 (2020) / 35-58 nous constructs that have a reflective measurement. for the blindfolding setting, the study used omission distance (od) of seven as suggested by hair et al. (2012). the value of q2 greater than zero (0) indicates that the model has predictive relevance for a specific endogenous construct whereas the value of q2 lower than zero denotes lack of predictive relevance (hair et al., 2014). thus, the results (table 3) of q2 0.139 with financial growth and 0.068 with non-financial growth indicate that the model has sufficient predictive relevance. moderating effect for the interaction effect of a moderator, the study used a product indicator approach as both the endogenous (small firm financial and non-financial growth) and moderator variables (private organizations support) are continuous variable. to test the significance of the interaction effect, the study used 1000 bootstrapping re-sampling. the overall results showed that the hypotheses for 4 (four) interaction effects of private organizations support with financial and non-financial growth were supported. table 4 summaries table 4 moderating effect of private organizations support hypothesis interaction effect std. beta std. error t-value decision h5 fin * pos -> sffg 0.9675 0.1372 7.0503** supported h6 fin * pos -> sfnfg 0.7641 0.1512 5.0527** supported h7 finlit * pos -> sffg 0.4419 0.1036 4.2649** supported h8 finlit * pos -> sfnfg 0.6466 0.0939 6.8878** supported **p < 0.01 fin = financial resources, finlit = financial literacy, pos = private organizations support, sffg = small firm financial growth, sfnfg = small firm non-financial growth. the results of the moderating effect of private organizations support. the interaction effect of private organizations’ support with finance and financial growth (β = 0.967, p < 0.01) and financial literacy and financial growth (β = 0.441, p < 0.01), were statistically significant. therefore, the hypotheses of h5 and h7 were supported. all the hypotheses assumed that the relationships between the independent and dependent variables would be higher when small firms receive private organizations’ support. appendix e shows the interaction effects. the graph of these interaction effects shows that private organization support is of minor importance when finance and financial literacy are low but it becomes more important with the increase of finance and financial literacy to generate small firm financial growth. besides, the interaction effect of private organizations’ support with finance and non-financial growth (β = 0.967, p < 0.01) and financial literacy and non-financial growth (β = 0.441, p < 0.01), were also statistically significant. therefore, the hypotheses of h6 and h8 were supported. appendix e shows the interaction effects. the graph of these interaction effects shows that private organization’s support is of minor importance when finance and financial literacy are low but it becomes more important with the increase of finance and financial literacy to generate small firm non-financial growth. therefore, with high financial access and high level of financial literacy small firms can generate more financial and non-financial growth if they receive higher support from private organizations. discussion and conclusion this article examined the relationship between financial resources, financial literacy and small firm financial and non-financial growth through the structural model. as expected through hypotheses development, the findings showed a strong positive and statistically significant association between financial resources and small firm growth in terms of both financial and nonfinancial parameters in the context of bangladesh. many of the previous studies also confirmed similar relationships in different contexts with financial growth (adomako et al., 2015; coluzzi et al., 2012; guariglia et al., 2008, 2011; musso & schiavo, 2008; osei-assibey, 2013; yazdanfar, 2012) and non-financial growth (brown et al., 2005, 2011; rahaman, 2011).the findings indicate that when small firms are able to access an adequate amount of funds for their business, it positively influences their financial and non-financial growth. this result will help policy makers and other stakeholders for their policy initiatives to ensure small firms access to financial resources. the findings of the research are supported by the statement of many scholars who state that finance is one of the major resources that leads to the growth or performance 46 m. m. hossain journal of small business strategy / vol. 30, no. 2 (2020) / 35-58 of small and medium enterprises (fraser et al., 2015; shariff et al., 2010; storey, 1994). it facilitates small firms entering the market, continue smooth operations, reduces the riskiness of firms, helps in innovation, and captures opportunities for future growth. with sufficient financial resources, firms become more capable of experimenting with innovation and pursuing new growth opportunities (mercandetti et al., 2017). therefore, it can be said that without sufficient access to finance, the staying power of the firm and its potential for growth is endangered. the study also found a very strong positive relationship with financial literacy and small firm financial and nonfinancial growth in bangladesh. the findings of this paper indicate that financial literacy is an important driver for generating financial and non-financial growth of small firms in bangladesh. many previous studies have also supported the aforesaid finding (bruhn & zia, 2011; christelis et al., 2010; dahmen & rodríguez, 2014; drexler et al., 2014; nyamboga et al., 2014; siekei et al., 2013; wise, 2013). financial literacy allows owner-managers of small firms to acquire significant knowledge and skills to make timely and accurate financial decisions. these facilitate the required production, service creation or buying of stock. financial literacy increases the strategic investment choice of firm to capture market opportunities to ensure financial and non-financial growth. also, private organization support is used as the moderating variable. as expected, the results reveal that private organizations’ support in terms of information and training enhanced the positive relationships between finance and small firms financial and non-financial growth. for facilitating the growth or expansion, small firms need different information related to capital availability, financial products and services, cost of capital, terms and condition of lenders, re-financing and pre-financing schemes of government, documents needed and preparation, proper financial plan and others. previous studies also acknowledge that access to information (hernandez et al., 2012; kamunge et al., 2014) and business training (du plessis et al., 2010) are the essential tools for the entrepreneurs to make the business successful. private organizations’ support moderates the relationships between financial literacy and small firm financial and non-financial growth. the result revealed that with required financial literacy, if owner-managers of small firms receive sufficient information and training support from the private organizations, they can increase their financial and non-financial growth. the information and the training received from private organizations increase their technical and interpersonal abilities that facilitates to improve the product and service quality to increase sales and profitability, gain customer satisfaction or extend market share. access to information facilitates the ability of firms to grab opportunities for business start-up and success. from the finding, private organizations that are trying to provide support services must have some idea about the requirement of small firms and can offer relevant, accurate and need based services. limitations and future research the paper followed the cross-sectional study rather than a longitudinal approach. the longitudinal approach provides a better position to draw causal conclusions. therefore, the results may not be assumed to be in a similar fashion and consistent over time. the scope of the paper was limited to three broad divisions. although most of the small firms are concentrated in these three divisions and the nature of small firms all over bangladesh is the same, the characteristics of firms or their owner-managers in terms of financial resources accumulation, strategy adoption, financial literacy, and managerial capability may differ based on the location and region. therefore, the generalization of the findings may be limited in a true sense for the whole country. in this research, only two important resources, finance and financial literacy are used which cannot generalize the impact of resources on small firm growth. thus, more resources, both tangible and intangible, maybe included in a model to study in the future. like private organizations, government and many ngos also work for small business development. therefore, further research can be done by using such variables as moderator. the paper considered only the growth of small business. similar study can be done for micro or sme together to see the impact of finance and financial literacy on their growth. references abdin, m. j. 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including the refinancing scheme of government. fin 5 alternative sources of finance (advances, deferred payments, second-hand equipment, leasing and factoring) fin 6 banks require many conditions fin 7 higher requirements of collateral fin 8 high interest rate fin 9 financial institutions do not deal with smes fin 10 use of financial report standard fin 11 control over finance 55 m. m. hossain journal of small business strategy / vol. 30, no. 2 (2020) / 35-58 appendix b questions category for measuring financial literacy of owner-manager no category no category 1 probability 6 risk and return 2 division 7 stocks and bonds feature 3 interest rate 8 investment 4 time value of money 9 insurance 5 risk diversification 10 inflation 56 m. m. hossain journal of small business strategy / vol. 30, no. 2 (2020) / 35-58 appendix c items for measuring private organizations support dimension item code items information support pois 1 pois 2 pois 3 pois 4 information for marketing the products information on capital sources information on technologies information on government rules and regulations training support pots 1 pots 2 pots 3 pots 4 training support to improve technical abilities. training support to improve interpersonal abilities. training support to help understanding the business. training support to enhance personal productivity. 57 m. m. hossain journal of small business strategy / vol. 30, no. 2 (2020) / 35-58 appendix d small firm financial and non-financial growth measurement indicators growth dimensions item code items financial growth sffg 1 sales volume sffg 2 profit volume sffg 3 total asset size sffg 4 capital position non-financial growth sfnfg 1 employment sfnfg 2 market size sfnfg 3 satisfied customers 58 m. m. hossain journal of small business strategy / vol. 30, no. 2 (2020) / 35-58 appendix e interaction effects of moderator (private organizations support) 1 1.5 2 2.5 3 3.5 4 4.5 5 low fin high fin sf fg low pos high pos 1 1.5 2 2.5 3 3.5 4 4.5 5 low finlit high finlit sf fg low pos high pos 1 1.5 2 2.5 3 3.5 4 4.5 5 low fin high fin sf n fg low pos high pos 1 1.5 2 2.5 3 3.5 4 4.5 5 low finlit high finlit sf n fg low pos high pos microsoft word front cover v20n1.docx   volume 20, number 1 spring/summer 2009  35              how data integration systems affect strategic decision  making in small firms    benjamin smith  oakland university  brsmith@oakland.edu     mark simon  oakland university  simon@oakland.edu      abstract    small  companies  increasingly  use  computer  information  systems  to  gather  data  to  improve  decision  correctness.  therefore,  it  is  important  to  determine  if  a  type  of  information system  is effective.   we  focused on systems which  integrate data  from  multiple  sources.  although  unquestionably  aiding  large  firm  managers,  integrated  data systems may not help smaller firms.  the managers may have better knowledge  across  functional  areas.    we,  therefore,  explore,  in  a  small  company  context,  the  relationship  among  data  integration  systems,  information  availability  and  strategic  decision correctness.  we collected data from the managing partners of 97 small accounting firms, and found  that  data  integration  systems  increased  information  availability,  which,  in  turn,  increased the correctness of decisions.   the control variables, aligning systems with  strategy  and  technological  strength  enhanced  information  availability,  but  surprisingly, greater  investment  in systems actually decreased  it.   collectively, these  findings suggest the type of system is more important than the amount invested.  keywords: data integration systems, information availability, strategic decisions    introduction    as information systems have evolved  and decreased in cost they have become  more readily available to small  companies (cragg & zinatelli, 1995).  the  rate of adoption of computerized  information systems by small firms has  grown rapidly (delvecchio & anselmi,  2006).  similarly, the types of available  software packages have also grown. yet  almost all research on types of computer  information systems has been conducted  on large firms, not small (montazemi,  2006; ein‐dor & segev, 1978).      these findings may not apply to smaller  companies because they face unique  challenges and operate quite differently  strateg y  journal of small business  journal of small business strategy      36  (montazemi, 2006; ein‐dor & segev,  1978).  small firms also often possess less  knowledge of, and skills regarding,  information systems (foong, 1999;  igbaria, zinatelli & cavaye, 1998;  premkumar and robers, 1999).   levenburg, schwarz and motwani’s  (2005) finding that micro, small and  medium size firms use the internet  differently from each other also suggest  a firm's size may influence how it  benefits from technology.     furthermore, a recent paper by  delvecchio and anselmi (2006) stressed  that it is especially important for  managers of small firms to choose the  right type of information system because  the investment often represents a  significant portion of the firm’s scarce  resources. thus it may be important to  examine whether specific types of  information systems are advantageous to  small firms, and what specific benefit  they may provide.    one potential benefit of information  systems is that they may lead to making  more correct strategic decisions.   correct strategic decisions are essential  in business.  by definition, they enhance  firm performance and have substantial  ramifications for the future (eisenhardt,  1989). in particular, making correct  strategic decisions may require that  managers can easily obtain the concrete  information they deem relevant to the  decision, which we refer to as  information availability.  naturally, a  firm may look to a computer‐based  information system to meet its  information availability needs.     data integration systems may enhance  information availability. specifically, a  data integration system is defined as a  system that facilitates combining  information from multiple sources into a  unified view (march & hevner, 2007).   the systems may also facilitate  transaction processing and data  collection within firms. for example,  there is one major type of data  integration systems mechanism, known  as an enterprise resource planning  system. this system houses all data in a  single, easily accessible database, often  coordinating data use across business  functions and thereby generating real  time data from many functional areas  (ranganathan & brown, 2006).    an abundance of research on the data  integration systems of large firms has  indicated they increase performance  through their ability to improve  information availability and strategic  decision‐making (law & ngai, 2007;  hendricks, singhal & stratman, 2007).   this research, however, may not be  applicable to small companies.  in larger  firms, data integration systems may be  needed to overcome the fact that  employees have highly specialized tasks  which constrains the flow of information  among different areas.  in contrast, small  companies may not have a similar need.   seminal works (e.g., blau & schoenherr,  1971; galbraith, 1977) indicate that small  organizations have structures that are  more informal and contain employees  with less specialized roles.  these  characteristics may facilitate  communication, making data  integration systems less relevant.     this assertion, however, is far from a  given. research (e.g., simon &  houghton, 2003) indicates the cognitive  capacity of managers of small firms is  more taxed than the cognitive capacity  of managers in large firms because the  former face more uncertain  environments.  thus, these managers,  volume 20, number 1 spring/summer 2009      37    rather than their larger firm  counterparts, may have a greater need  for integrated data systems to help them  cope by “automatically” providing real  time information from diverse areas.    resolving this issue is crucial for at least  three reasons.  first, researchers need to  identify factors that make information  more available to make correct strategic  decisions, given its importance to long‐ term company performance (hofer &  schendel, 1978).  second, the vast  majority of small companies are  overwhelmingly purchasing prepackaged  computer applications which handle  only one function in isolation.  this  common practice may be a major  mistake if we find that integrated data  systems enhance information availability  and increase the correctness of strategic  decision‐making. finally, even though  computer information system costs have  decreased, they still may represent a  large proportion of a small company’s  resources. thus, the investments and  risks for small companies are quite large.   given these points and the paucity of  research exploring computer  information systems in small firms, we  empirically explore the following two  research questions:    rq1  what  are  the  effects  of  integration  on  information availability  in small  companies?    rq2 what are the effects of information  availability  on  strategic  decision  correctness in small companies?    the following section describes the  study's theoretical background and  presents the hypotheses. the research  methods are then detailed and the  empirical tests of the hypothesized  relationships are reported. finally, the  article discusses the study's findings and  implications.    integration,  availability  and  strategic decision‐making     as noted, there has been substantial  research on factors that may influence  the successful implementation of  information systems and on the  relationship among different types of  information systems and company  performance (montazemi, 2006; ein‐dor  & segev, 1978).  these factors include  task interdependence, employee  training, technical complexity, and  strategic alignment (e.g. levy, powell &  yetton, 2001; hendricks et. al., 2007; law  & ngai, 2007; sharma & yetton, 2007).   to the best of our knowledge, however,  no study analyzed the effects of data  integration systems and information  availability on strategic decision  correctness as it relates to small  companies. to explore this issue, we will  first discuss the expected relationship  between data integration systems and  information availability, and then  explore whether or not one should  expect the relationship to hold true in  small companies.  next, we will talk  about the possible connection between  information availability and making  correct strategic decisions, followed  again by an exploration of whether the  discussion would apply in a small firm  context.     information availability, that is, being  able to easily obtain concrete  information deemed relevant to a  strategic decision, can be achieved by  focusing on three main components:  time, efficiency and scope.  an  important feature of data integration  journal of small business strategy      38  systems is that they can provide data in  real time.  real time data collection  occurs when firms gather data on a  continuous basis and can easily access it.   this is in contrast to right‐time data,  which involves compiling data as it is  needed to make a specific decision.   some researchers argue that human  beings make snap decisions because they  are impatient and avoid using data if it  involves extensive effort (e.g., todd,  2005).  thus, using a system that collects  real time data will lead to information  that is more current, accurate, and  detailed when making strategic  decisions (eisenhardt, 1989).  it follows  that the ability of data integration  systems to easily generate relevant data  increases the likelihood it will be  available for decision making. in other  words, it increases data availability.    another characteristic of data  integration systems, such as erps, is that  they often store data in a centralized  database, thereby providing efficient  access to data related to many different  firm operations. practitioners and  scholars alike agree that this closely  represents the ideal model of an  information system, whereby software  applications in different business areas  access a sole database. this type of  system provides for the least amount of  data duplication and increases data  storage efficiency. in contrast, without  such centralized storage, a firm would  need to manually compile any data from  across areas, a process they may forgo.   thus data integration systems can more  efficiently store and retrieve data,  suggesting that the data would be more  available when needed, because entering  and recalling it takes less effort.    data integration systems also influence  the scope of data.  more specifically,  such a system collects and combines  data from different functional areas.   today’s businesses are divided into any  number of functions including human  resources, accounting, marketing,  operations, and finance.  as decisions  become more strategic, they often  involve more functional areas (hofer &  schendel, 1978).  it logically follows that  the inclusion of data from different  functional areas also leads to greater  data availability.    thus,  it appears that the ability of data  integration systems to efficiently collect  data  in  real  time  from  different  functional  areas  will  increase  information availability in general.   the  question  remains  though,  will  they  significantly  increase  information  availability in smaller firms?  one could  argue  that  managers  in  small  firms  are  less  specialized.    this,  in  turn,  could  provide  them  with  increased  real  time  information from more functional areas,  decreasing  the  need  for  an  integrated  data system.    it is likely, however, that this is not the  case. many factors may decrease  communication within small companies,  making data integration systems more  important.  the constant growth present  within many small companies can strain  communications within the firm,  thereby affecting information availability  (street & meister, 2004).  moreover, the  information possessed by employees  within the firm may not align with the  particular strategic decisions that they  must make at any given time.  delvecchio and anselmi (2006), argued,  for example, that even sales people in  small companies needed, but often did  not have, information from several  different areas. this might suggest that  integrated data systems could provide  volume 20, number 1 spring/summer 2009      39    the information even small firm  personnel might need.  furthermore,  smaller firms may especially benefit  from integrated data systems, given that  they can utilize quick access to  information, which could allow them to  outmaneuver larger competitors  (delvecchio & anselmi, 2006).  they  therefore may have a greater need for  assistance from data integration systems  to increase their information availability.  data  integration  systems  in  small  companies  could  possibly  facilitate  the  use of information across firm functions,  as well as introduce the capability of real  time  data  presentation.  we  therefore  propose the following hypothesis:  h1:   in small firms, use of data  integration systems is positively  associated with information  availability.  there is substantial evidence that  information availability should improve  strategic decision‐making. it has long  been a cornerstone of business strategy  that rigorous analysis of a company's  data is crucial to decision‐making (hofer  & schendel, 1978).  extending this belief,  eisenhardt (1989) argues that real time  information, such as concrete internal  information generated from actual  operations, leads to decisions that are  quicker and more correct.  furthermore,  in recent years, there has been a  proliferation of large companies, such as  e & j gallo winery, john deere and bank  of america, which collect and use  massive amounts of operating data to  increase decision‐making correctness  and company performance.  arguably,  the source of capital one, harrah's and  netflix's entire competitive advantage  stems from their analysis of information  to make more correct decisions.   some might argue, however, that  obtaining concrete data may be less  important to making correct decisions  for managers of small firms.  for  example, one could assert that small  firm managers can operate more by the  seat of their pants. they may have such a  deep understanding of their companies  that they do not need more objective  information.   we do not believe these assertions are  borne out by the facts. specifically, small  firm managers are more prone than  large firm managers to exhibit cognitive  biases. they may have a “hunch” about  objective information, and believe they  are correct, but in fact, are frequently  mistaken (forbes, 2005). in more  general terms, to a greater degree than  managers of larger firms, managers of  small firms often do not have the  cognitive capacity to deal with their  decision environments and make poor  choices as a result (simon & houghton,  2003;  simon, miree, setzkorn, & figon,  2003).  also, and just as important, they  have fewer slack resources, so the cost of  these errors can be devastating. it then  logically follows:  h2: in small firms, information  availability leads to more correct  decisions.  methods  we chose to examine public accounting  firms, because other firms often turn to  them for guidance regarding  information system and computer  technology selection (nadel, 1988).   since accounting firms are often the first  stop for information system consulting  and advice, the information system  knowledge and practices that they  journal of small business strategy      40  themselves employ and understand  becomes increasingly important.     specifically, we targeted public  accounting firms across the united  states with fewer than 100 employees.  one hundred employees is generally  considered the cutoff point for small  enterprises (karagozoglu & lindell,  2004; robey & sales, 1994; simon &  houghton, 2003).   each firm's managing  partner responded to the questionnaire,  given that he oversees day‐to‐day  operations, and is most often the largest  shareholder in the firm.  also, the  managing partner generally has the  strongest influence on the firm’s  decision‐making.    we obtained a list of 1400 u.s. based  accounting firms from  www.cpafirms.com, including e‐mail  addresses and the names of the  managing partners.  we conducted two  mass e‐mailings to the managing  partners of all the firms.  one hundred  thirty four responded, providing a 10%  response. those firms with greater than  100 employees were removed from the  results, leaving 97 respondents.     measures    appendix a details the specific items we  used in our survey.  we captured data  integration systems by measuring the  extent to which data collected once was  accessed by multiple functional areas.    the functional areas were chosen based  on an adaptation of chang’s (2006)  research on data integration systems.   we employed four items utilizing a five  point likert scale to capture the  construct.  we then averaged the  manager's response to the four items  (α=.83).    information availability was measured  using five questions.  survey  respondents indicated the level of  information available for decision‐ making in general, and in each of the  four functional areas.  for each question,  a five point likert scale ranged from  “rarely having information available” to  “almost always having information  available.”  we used the average of the  manager’s responses (α=.78).      to measure the dependent variable,  strategic decision correctness, we asked  respondents to indicate the extent to  which they felt that the firm made the  correct strategic decisions. this too was  measured on a five point likert scale.    controls    this study utilized several control  variables. we used a single item measure  to capture technology investment, that  is, the firm’s expenditure in information  technology as a proportion of total firm  expenses. this variable should influence  information availability and the  correctness of strategic decisions. we  also used single items to capture the  firm’s level of technology training and  technological strength, as both could  also have an influence (e.g., brostrom,  olfman & sein, 1990; compeau, olfman,  sein & webster, 1995). in addition, we  controlled for strategic is planning, that  is, the extent to which the firm was  strategic in planning its information  systems implementation, using two  items (α=.86). strategic is planning  could affect both information availability  and strategic decision correctness.      also since executives in larger firms may  have  less  access  to  all  the  information  flowing within the company, we control  for firm size, using the log of the number  volume 20, number 1 spring/summer 2009      41    of  employees  (shrader  &  simon,  1997).  finally,  we  measured  job  specialization  using  a  single  item  measure  as  it  also  might affect the amount of information  executives have available.    analysis  this study used regression to test the  hypotheses.  specifically, to examine h1,  we regressed data integration systems on  information availability after controlling  for the effects of technology investment,  technology training, technological  strength, strategic is planning, firm size  and job specialization. to test h2, we  ran a separate regression.  first, we  analyzed the effects of technology  investment, technology training,  technological strength, and strategic is  planning on strategic decision  correctness.  next, we entered the  independent variable, information  availability.   results    table 1 presents the means, standard  deviations, and correlations among the  study variables. the values in the tables  suggest that multicollinearity is not a  problem, with all correlations lower than  .5 (mcnamara & bromiley, 1999).  table  2 contains the results of the two  regression models used to test the  hypotheses.  model 1 tests hypothesis 1  by first regressing the control variables  and then the independent variable, data  integration systems, on the dependent  variable, information availability. the  results of model 1 indicate the overall  equation is significant (adj. r2=.20,  p<.001).  furthermore, there is a  significant positive relationship between  data integration systems and  information availability (ß=.31, p=.001),  supporting hypothesis 1.  information  availability, as expected, was also  positively associated with the control  variables strategic is planning (ß=.25,  p=.01) and technological strength (ß=.19,  p<.05).  surprisingly, in contrast,  technology investment actually  decreased information availability,  although the relationship was only  marginally significant (ß=‐.13, p<.10).     model 2 regresses the control variables  and the independent variable,  information availability, on strategic  decision correctness. the overall  equation was significant (adj.  r2=.10,  p<.01).  furthermore, as hypothesis 2  argued, information availability  increased strategic decision correctness  (ß =.22, p<.05).  while technological  strength was marginally significant  (ß=.16, p<.10), the remaining controls  had no effect on the dependent variable,  strategic decision correctness.    discussion  research has indicated that  computerized information systems may  improve information processing,  planning, control, and even lead to  competitive advantages (cragg & king,  1993; chau, 1995; levy et. al., 2001;  harrison, mykytyn & riemenshneider,  1997).  yet little of this research has  examined small firms, which are  purchasing systems at an increasing rate,  even though these systems may  represent significant proportions of a  firm’s budgets and can be difficult to  implement.   this research indicates, even for small  firms, that data integration systems are  associated with greater information  availability.  in turn, greater information  availability increases strategic decision  correctness. these relationships suggest   journal of small business strategy      42              volume 20, number 1 spring/summer 2009      43    table 2: results of regressions           dependent variable  independent  variables/controls  model 1     information  availability  model 2   strategic  decision  correctness  info availability    0.22*  data integration  systems  0.31***    strategic is planning  0.25**  0.12  technology  investment  ‐0.13†  ‐0.01†  technological  strength  0.19*  0.16  firm size  ‐0.05    job specialization  ‐0.14    technology training  ‐0.45  0.05        f statistic  4.34***  3.10*  r2  0.25  0.15  adjusted r2  0.20  0.10  n=97 all parameter coefficients are standardized  estimates  †  p<.10,   *  p<.05,    **  p<.01, ***p<.001  all tests are one tailed.    that although small firms may have  more informal structures and less  specialized employees, they still may not  communicate enough among functional  areas to aid in their strategic decision  making without data integration systems  to increase information availability.    this conclusion is consistent with, and  complements, two previous studies of  small businesses.  delvecchio and  anselmi’s (2006) study found that  employees in small firms often do not  have adequate information available,  while simon and colleagues (2003)  determined that managers of smes often  make major decision errors due to a lack  of cognitive capacity.  our research  findings may help managers overcome  these limitations.  they imply that  journal of small business strategy      44  integrated data systems’ ability to  produce readily available, concrete, real‐ time, internal firm information that is  shared by multiple functions can help  generate more information and greater  strategic decision correctness.   it could  be that managers using these systems  gather internal data so efficiently that  they have more free time to gather and  blend data external to the firm which  they use to make more correct strategic  decisions.  clearly though, future studies  should strive to identify the precise  dynamics that explain how integrated  data systems aid firms in strategic  decision making.   while many findings about technology  may be contingent upon firm size  (levenburg et al., 2005), it appears that  findings about the usefulness of  integrated data systems may be robust.  we further explored the robustness of  relationships between integrated data  systems and information availability, as  well as between information availability  and correctness of strategic decision  making by limiting the sample to firms  with less than 50 employees.  using this  more stringent cut‐off, the overall  regression equation testing h1 was still  significant (adj. r2=.25, p<.001) as was  the specific relationship between data  integration and information availability  (ß=.35, p<.001).  similarly, our test of h2  still yielded a significant regression (adj.  r2=.15, p<.01) and a significant  association between information  availability and strategic decision  correctness (ß=.27 p<.01).  given these  results, it seems reasonable to conclude  that the study’s results were not  sensitive to the specific size of firms  examined.  regarding the control variables, neither  job specialization nor firm size affected  information availability.  possibly the  lack of relationships may stem from a  lack of enough variance in specialization  and size because all the firms in the  sample were relatively small.   in  contrast, strategic is planning may help  small firms get the most out of their  systems. our findings complemented  that of olsen and saetre (2007) who  determined that strategic is planning  was critical to niche companies when  implementing erps, regardless of their  size.  likewise, our findings may indicate  that the unique operations of small  companies, regardless of whether they  are serving a niche, may gain from is  planning.   interestingly, though, the  strategic alignment of information  systems does not directly lead to correct  strategic decisions, but instead has an  indirect effect through its influence on  information availability.   like strategic is planning, the  technological strength of members of  the firm may also aid in the decision  making process.  specifically, we found it  was significantly related to information  availability and marginally significantly  related to strategic decision correctness.    it should be noted that these findings  seem to parallel those of park, suh, and  yang’s (2007) research on large firms’  use of integrated data systems.    however, unlike park and colleagues  (2007), one of our findings was only  marginally significant.  further research  might want to investigate whether  differences in size of firms, differences in  measures used, or another factor  generated the divergence in the  magnitude of significance between the  two studies.   unexpectedly, the control variable,  greater investment in information  technology, actually marginally  decreases information availability, and  was not related to making more correct  volume 20, number 1 spring/summer 2009      45    strategic decisions.  this could occur if  greater expenditures generated more  data indiscriminately, making it difficult  to convert into available information  useful for strategic decision making.   this is consistent with todd (2005) and  olsen and saetre’s (2007) assertion that  firms with more data may not make  more correct decisions than firms with  less, unless it is the right information.   the technological strength of a firm was  marginally significant to the degree of  information availability.  this confirmed  park, suh, and yang’s (2007) finding  which indicated that an individual user’s  understanding of how information  systems work, in their case an erp  system, does affect the information  systems performance.    limitations and future  research  this study was subject to a number of  limitations.  first, the research examined  only one industry, albeit an important  one.  future studies may want to analyze  the effects of integration in multiple  industries including those that are  product‐oriented.  another limitation  stems from the study's focus on  primarily one aspect of computer  information systems, data integration  systems and its effect on the correctness  of strategic decisions.  future research  needs to examine other aspects of  systems.  the subjective nature of our measure of  strategic decision correctness may also  limit the authority of these findings and  may introduce concerns about common  method biases.  it should be noted,  however, that consistent with the  suggestions of scholars (cooper & artz,  1995; chandler & hanks, 1993), we  sought responses from the highest  executives in the firms who were most  familiar with a decision outcome.  it may  also be of concern that strategic decision  correctness was measured using a single  item, even though several researchers  (e.g., bergkvist & rossiter, 2007;  scarpello & campbell, 1983) argue that  single items sometimes perform as well,  or better, than multi‐item scales. the  complexity of strategic decision  correctness, however, might require  more than a single question (loo, 2002).   scholars, therefore, might want to  replicate our findings utilizing a multi‐ item dependent variable.   the reader should also note that an  underlying assumption of our study is  that roles in smaller firms are less  formalized and contained less  specialized tasks (blau & schoenherr,  1971; galbraith, 1977).  we argued that  given these differences, research needs  to explore whether small firms would  benefit from data integration systems,  finding that they did.  conversely, we  argued the exponential firm growth that  is possible for small companies can  inhibit communications and information  availability (street & meister, 2004).  we  never directly examined degree of  formalization or growth, however,  omissions future research should avoid.     although studies with a response rate of  about 10 percent are not unusual  (lussier, sonfield, corman & mckinney,  2001), and often published in very well  respected journals (e.g., mcdougall &  oviatt, 1996, mcdougall & robinson,  1990; shrader & simon, 1997), a higher  response rate is more desirable. to  confirm that our sample was  representative, we tested for non‐ response bias by comparing the survey  answers of early respondents to those of  later respondents, who are often used as  journal of small business strategy      46  surrogates for non‐respondents  (nwachukwv, vitell, gilbert & barnes  1997).  there was no difference at the  10% level of significance on any of the  nine variables used in the study.  nevertheless, future research should  seek higher responses.  future research may also want to  investigate relationships between  information availability and the  cognitive capacities of small firm  management as mentioned in our  research.  one suggestion would be the  analysis of the result of utilizing  information systems that integrate  across small firm functions as a method  of increasing cognitive capacity of  management for the search of external  information for strategic decision  making by removing routine internal  information processing and analysis  from their responsibilities.  managerial implication  in delvecchio and anselmi (2006) study  of smaller companies, they argued that,  “given the investments associated with  the various forms of software and  hardware, firms need to know which  forms will make a difference.”   this  study helps fill this need and has several  implications for managers.   first, they  should look into obtaining systems that  involve data integration systems.   second, they should spend upfront time  considering strategic issues related to  these systems.  lastly, if they follow the  two suggestions above, they do not  necessarily need to invest a greater  proportion of their assets in the systems  they purchase.  in fact, indiscriminate  investment in systems may actually be  decreasing the amount of usable  information they produce. managers  may be facing data overload.   importantly, most managers appear to  be acting in ways that are contrary to  this study's findings.  many small  companies have turned to packaged  computer applications to handle their  information needs (chau, 1995).   packaged software programs are  typically purchased off the shelf. each  software package is usually designed to  accommodate a specific business  function in either a broad range of  industries or one specific industry.    small companies usually purchase these  applications piece by piece to fit specific  needs as they arise, and rarely consider  strategic issues (levy et al., 2001).  the  resulting piecemeal information system  is likely to be a number of applications  that do not communicate with each  other, or, in other words, are not  integrated. consequently, firms lose the  synergistic opportunities available from  the integration of data.  alternatively, even small companies may  wish to investigate erp packages.  these  packages represent some of the most  integrated cross‐functional information  systems available. the findings of  amrani, rowe and maronnat (2006)  demonstrated that the part of erp  systems that are already implemented  gain additional utility each time a new  erp module is introduced.  managers often face significant  resistance when trying to adopt new  systems such as data integration  systems.  however, one of the keys to  overcoming this resistance is helping  users perceive that a system is useful and  offers benefits (levenburg et al., 2005).   it is, therefore, our hope that this paper's  finding about integrated data systems  aids in their adoption.  this study also brings to light another  practice of managers that may be  volume 20, number 1 spring/summer 2009      47    erroneous.  chau (1995) found that most  small business owners ranked the price  of software packages as one of the least  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simon, m., and houghton. s. (2003). the  relationship between overconfidence  and the introduction of risky  products: evidence from a field  study. academy of management  journal, 46(2), 139‐149.    simon, m., miree, c., setzkorn, k., &  figon, a. (2003). managerial errors in  product introduction decisions: what  were they thinking? journal of small  business strategy. 14(1) 30‐52.    street, christopher t., and meister,  darren b. (2004).  small business  growth and internal transparency:  the role of information systems. mis  quarterly. 28(3), 473.    todd, peter m. (2007). how much  information do we need?. european  journal of operational research.  177(3), 1317.    benjamin r smith is an accountant at  clayton & mckervey, p.c. in southfield,  mi.  his research interests include small  businesses and information technology.    mark simon is an associate professor of  management at oakland university. he  has published articles related to  entrepreneurship, small business, and  cognitive biases.          appendix a  measures    data integration system: 1=do not  access and 7=almost all access     1. to what extent do other business  function applications directly access  the data captured in your client  relations and marketing  applications?  2. to what extent do other business  function applications directly access  the data captured in your financial  applications?  3. to what extent do other business  function applications directly access  the data captured in your human  resource applications?  4. to what extent do other business  function applications directly access  the data captured in your client  planning and engagement  applications?    information availability: 1=almost  never available and 5=almost always  available    1. to what extent is the information you  need readily available for making  strategic decisions for your firm?  2. to what extent is the client  relations and marketing  information you need readily  available for making strategic  decisions?  3. to what extent is the financial  information you need readily  available for making strategic  decisions?  4. to what extent is the human  resource information you need  readily available for making strategic  decisions?  volume 20, number 1 spring/summer 2009      51    5. to what extent is the client  planning and engagement  information you need readily  available for making strategic  decisions?    strategic decision correctness:  1=strongly disagree and 5=strongly agree    1. in hindsight the firm should have  changed very few of the important  decisions it made.    technology investment: : 1=strongly  disagree and 5=strongly agree    1. expenses related to information  technology comprise what amount of  the firm's total expense…    technology training: 1=strongly  disagree and 5=strongly agree    1. the firm provides extensive training  in regards to its technology.    technological strength: 1=strongly  disagree and 5=strongly agree    1. as a whole, the firm’s staff’s technical  ability is strong.    strategic is planning: 1=strongly  disagree and 5=strongly agree    1. applications were designed/bought  and implemented as part of a  coordinated, firm level, information  system plan.  2.  the firm's strategy and mission was  considered when designing and  implementing the information system  applications.    reproduced with permission of the copyright owner. further reproduction prohibited without permission. http://www.smallbusinessinstitute.biz how entrepreneurs anticipate the future market: an initial approach of a future market anticipation model for small businesses maria r. rita1, sony h. priyanto2, roos k. andadari3, jony o. haryanto4 1satya wacana christian university, maria.riorita@staff.uksw.edu 2satya wacana christian university, sonecid@yahoo.com, (corresponding author) 3satya wacana christian university, roos.kities@staff.uksw.edu 4president university, jonyharyanto@yahoo.com *special appreciation to the ministry of research, technology and higher education of the republic of indonesia for giving us permission and financial support during this research in 2014-2016. we are also grateful to all of those with whom we have had the pleasure to work during this and other related projects. a b s t r a c t this research examines and presents a new model concerning how small entrepreneurs predict what markets will be like in the future through considering the competitors, prices, finances, labor costs, raw materials, and progress of the asean economic community. this study applies a descriptive explanatory technique. it also utilizes a quota sampling method with a structural equation model and qualitative descriptive technique. the research results reveal that companies’ entrepreneurial actions and backgrounds had a positive influence on anticipating the future. next, future anticipation had a positive effect on the additional effort, market performance, and consumer value. it was also discovered that the entrepreneurial learning process consisted of three stages for employers. the learning process was done through parents as employees and from their direct exposure as entrepreneurs. this is considered hybrid entrepreneurship. this study attempts to fill the research gap pertaining to the lack of models on future market anticipation (fma) by providing an appropriate quantitative research framework and new perspectives on exploring research into fma for smes. future studies need to focus on examining the function of the learning process as it pertains to hybrid entrepreneurship, as examined from a number of viewpoints. keywords: journal of small business strategy 2018, vol. 28, no. 01, 49-65 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2018 small business institute® apa citation information: rita, m. r., priyanto, s. h., andadari, r. k., & haryanto, j. o. (2018). how entrepreneurs anticipate the future market: an initial approach of a future market anticipation model for small businesses. journal of small business strategy, 28(1), 49-65. w w w. j s b s . o rg future market anticipation, small and medium enterprises, hybrid entrepreneurship, entrepreneurial actions introduction future anticipation deals with how consumers perceive a company’s doings to respond to customers’ future needs and desires. this study utilizes a futuristic (futurology) approach, which examines prospects for the future. this approach has become increasingly popular for academicians (mello, bhadare, fearn, galaviz, hartmann, & worrell, 2009). even though this method has great implications for the marketing field, studies and related theories on the future are seldom covered in the marketing sphere (haryanto & priyanto, 2013; loveridge, 2008). from the explanation above, it is clear that future market anticipation is not a primary concern of marketing management, but it does have entrepreneurial aspects. future anticipation is the crossroads between entrepreneurship and marketing. this juncture is frequently referred to as entrepreneurial marketing. this is dissimilar to marketing management, in that entrepreneurial marketing must be decisive, informal, and intuitive (collinson & shaw, 2001). entrepreneurial marketing also deals with having an entrepreneurial orientation, which consists of an entrepreneurial mentality, chance, and opportunity emphasis. these aspects are affected by relationships and entrepreneurial capital. it impacts how entrepreneurs can visualize innovations, chances, and market driving behavior (schindehutte, morris, & kocak, 2008). according to these facets, it is strongly believed that a connection exists between entrepreneurship and future anticipation, which has not been extensively covered. past studies on future anticipation did not delve into the connection between future anticipation and several other features like additional effort, market performance, and customer value. studies carried out by morales (2005) and cardozo (1965) only examined the link between future anticipation and additional effort. next, kandemir, yaprak, and cavusgil (2006) just observed the connection between future anticipation and effort results. then flint, blocker, and boutin (2011) were interested in comparing future anticipation with consumers’ wants and values. fontela, guzmán, pérez, and santos (2006) performed a study by applying a trend analysis, extrapolation, and anticipation connected with a structural model about the future to recognize events of the past and situations that developed.. then conjectures could be made about their likelihood of occurring in the future. considering this situation, more research is needed on this topic. schatzel and calantone (2006) tested their market anticipation models on various participants and objects to fulfill the generalized http://www.smallbusinessinstitute.biz http://www.jsbs.org 50 m. r. rita, s. h. priyanto, r. k. andadari, & j. o. haryanto journal of small business strategy / vol. 28, no. 1 (2018) / 49-65 conditions. jones and rowley (2009) constructed the emico framework, which provides a better manner of evaluating how small technology-oriented entrepreneurship businesses utilize a qualitative method. this can be beneficial in comprising a quantitative scale analysis in the future. jones and rowley (2009) suggested that the emico context can be applied in quantitative research. as a product of indonesian culture, batik was originally made during the royalty period by the palaces in approximately the 8th century b.c. it was not only a business venture, but it primarily was done to provide attire for the royal princesses. batik is officially considered an indonesian heritage by unesco. this implies that batik can play a prominent role globally, especially in asean. as agreed upon by the asean economic community (aec), batik should be viewed as a primary indonesian product to be sold within the aec. therefore, central java needs to address this global situation. central java province has a reputation for producing batik. javanese batik is mostly made in solo, yogyakarta, and the surrounding areas. batik made outside the solo and yogyakarta regions is commonly called coastal batik. coastal and non-coastal batik vary in terms of colors and designs. most central java regions produce batik in varying degrees with the biggest producers in pekalongan, solo, and lasem. related with future anticipation and the empirical issues that arise in the batik business, there is a research gap in examining future anticipation connected with the precursors and consequences, in respect to the research participants and objects. with that in mind, this research was conducted to fill that gap. mccardle (2005) examined the ability to predict markets at the product level. even at the organizational level, having a market foresight ability can be beneficial. companies which possess the knowhow to alter market conditions are able to predict and act appropriately in the face of changes, since rising associations inside companies may have specific abilities that are not fulfilled by the companies (mccardle, 2005; morgan, 2012; tsoukas & shepherd, 2004) previous literature revealed that various researchers conducted studies connected with entrepreneurship, entrepreneurial experience, and future anticipation. the research also examined how possessing future anticipation was related with additional effort, market performance, and customer value. tambunan (2011) claimed that the primary obstacles tackled by smes are financial and marketing difficulties. financial restraints are mostly due to having a lack of access to official credit sources. this obstacle can also be a source of marketing difficulties, as most smes do not have capital to explore or expand their markets. this limitation is actually connected to entrepreneurship from small business entrepreneurs. stiglitz (1996) revealed that southeast asian small and medium enterprises are able to expand due to entrepreneurial ability, marketing spillover, and technological knowledge. therefore, these three facets are essential in order to be able to successfully compete internationally. in addition, market appeal, business strategies, and resource-based capabilities (for markets, technology, and entrepreneurship) are all connected with venture performance (chandler & hanks, 1994; greene, brush, & brown, 2015). the first research objective is to scrutinize the effects of batik entrepreneurs’ experiences and entrepreneurial activities on future anticipation. the second research objective is to discover the effects of anticipating the future on the additional effort, market performance, and customer value. the third research objective is to comprehend how entrepreneurial skills are formed, in order that entrepreneurs can make predictions about their firms. literature review entrepreneurship definitions entrepreneurship has a long history. entrepreneurs attempt to predict and act upon change within markets while bearing the uncertainty of market dynamics. entrepreneurs were required to perform such fundamental managerial functions as direction and control (knight, 1921). having a business until it is able to grow and develop is inseparable from an individual’s initial idea/concept to start a business. this idea can surface when an individual sees a business opportunity that is perceived as having good prospects and is able to produce profit in the future. an early idea to start a business will eventually be transformed through the creation of an organization to create that opportunity. so, the entrepreneurship process involves all functions, activities, and actions that are related with a perception towards opportunity, and in creating an organization to bring that opportunity into realization (bygrave & hofer, 1991; maine, soh, & dos santos, 2015; sarasvathy, 2001). shane, locke, & collins, (2003) stated that the ability to assemble resources is greatly influenced by the entrepreneurial motivation and cognitive factor. individuals who possess a life vision, a need for achievement, a desire for independence supported by knowledge, expertise, and capability – with the support of a conducive environment like entrepreneurial opportunity and environmental condition – will be able to recognize opportunities, develop ideas, and follow through on those ideas (digan, kerrick, cumberland, & garrett, 2017). based on the definitions above, it can be concluded that an entrepreneur can be defined as a person who has a need for high achievement, acceptance of risk and failure, independence, creativity and innovation, and knowledge, particularly with respect to a business. additionally, an entrepreneur has the ability or the technical expertise to run a business (mitchell, 1996; priyanto & sandjojo, 2005). future market anticipation future market anticipation deals with how consumers perceive the activities of producers who want to fulfill con51 m. r. rita, s. h. priyanto, r. k. andadari, & j. o. haryanto journal of small business strategy / vol. 28, no. 1 (2018) / 49-65 sumers’ wants and needs in terms of model, price, labor, material, competition, and asean anticipation (haryanto & priyanto, 2013; mccardle, 2005). adam (2008) revealed that a company must strive to predict the future. this can be done to acquire profit and become competitive. next, humans and companies have the right to create and shape their futures. in other words, companies can participate in altering the future. in fact, companies allocate a great deal of financial resources for research and development to give future consumers the best quality. companies use innovation to anticipate the future. companies which do not take this action will end up in demise. one such example is nokia, which led the cellular phone market for decades. nokia did not do as much as it should have done in terms of future anticipation. eventually, iphone and blackberry were able to chip away at nokia’s market. deroo (2013) stated that material, social, and political actions are done to predict the future. this is connected with the social environment, since individuals want to envision what the future will be like. this is related with funding, as companies need to utilize financing to predict future trends. from a political perspective, companies strive to determine the market to make themselves more competitive. even though the future is rather multifaceted to examine, predictions can still be made about it. various multinational companies like pizza hut and united colors of benetton have done studies through conversing with and accompanying youths for a predetermined period of time to comprehend what they need now and realize their future preferences. these actions are done in an effort to realize what the future may hold. by knowing what the future may look like, company ceos can better anticipate to acquire advantages (adam, 2008). for future anticipation, chang, hung, and ho (2007) devised a means for searching for possible consumers by analyzing future needs. this method begins with devising a customer profile based on loyalty. then it is necessary to find prospective consumers. after this, studies need to be carried out to know consumers’ future needs. chang et al. (2007) exhibited the significance of recognizing sales patterns for the main products and consumers’ upbringings to comprehend their profiles. afterwards, possible buyers should be examined as well as their backgrounds to know what purchases they may make. finally, the current data can be utilized to know what purchasing opportunities may be present later to project the potential consumers. this kind of an analysis is necessary for smes, since they seldom recognize sales patterns and customer profiles (andadari, priyanto, & haryanto, 2016). when companies can understand current sales patterns and consumer profiles along with consumers’ future needs, then their market will expand, leading to better marketing for smes. relationship between entrepreneurship and future anticipation entrepreneurs are distinguished from non-entrepreneurs based on their perspectives of the world (allinson, chell, & hayes, 2000; gaglio & katz, 2001; gartner, 2002; krueger, 2003; mcgrath & macmillan, 1992). successful entrepreneurs see opportunities while taking into account the risks in environmental changes (begley & boyd, 1987; collinson & shaw, 2001; dyer jr., 1994; linstead & hytti, 2005; littunen, 2000). entrepreneurial activity emphasizes the art of future anticipation and exploration (abebe & angriawan, 2014; hätönen & eriksson, 2009; lumpkin & dess, 1996; sauka, 2008). there is a strong correlation between entrepreneurial ownership and one’s ability to anticipate the future (foss, foss, klein, & klein, 2007). future anticipation is determined based on the ability of entrepreneurs themselves in terms of creation, courage, and imagination (fontela et al., 2006; lumpkin & dess, 1996; lumpkin & dess, 2001; okoye & eze, 2010; okpara, 2007). when an entrepreneur seizes new opportunities, new market potentials are created. if an entrepreneur creates new products, he/she will create the possibility of complementary products and increase the demand for inputs into new products. this may, however, also reduce the demand for other goods. if an entrepreneur finds a better process for producing an existing product, he also creates opportunities for potential input suppliers. thus, this means that any entrepreneurial activity will create opportunities in the future, allowing entrepreneurs to get opportunities in the future (holcombe, 2003). from the definitions of entrepreneurship above, it appears that people who have an entrepreneurial mindset may also have the ability to anticipate the future. on the other hand, schumpeter (1961) identified that an entrepreneur was characterized by having an initiative, responsibility, or authority and being forward-looking (hopeful =foresight). in addition, schumpeter (1961) said that an entrepreneur has the ability to recognize a combination of productive factors to be processed and to do so before others. this view is similar to the view of john bernard say. mcclelland (1961) revealed that entrepreneurs exhibit characteristics such as moderate risk taking as a function of skill, energetic and/or novel instrumental activity, individual responsibility, knowledge of the result of the decision, anticipation of future possibilities, and organizational skills. an entrepreneur is a person who has a creative action that builds the value of something that has not been visible before. it is an opportunity to pursue acts without regard to the resources or lack of resources at hand. it requires vision, interests, and a commitment to lead others to achieve this vision. entrepreneurship also requires a willingness to calculate and take risks (timmons, spinelli, & tan, 1994; lambing & kuehl, 2000). an entrepreneur has characteristics of being fond of doing business, being strong even in failure, being confident, being self-determined or the locus of control, managing risks, seeing a change as an opportunity, being tolerant of many options, taking an initiative and having the need for achievement, being creative, being a perfectionist, having a broad view, considering time as precious, and having strong motivation (carland jr., carland, & carland iii, 2015; 52 m. r. rita, s. h. priyanto, r. k. andadari, & j. o. haryanto journal of small business strategy / vol. 28, no. 1 (2018) / 49-65 lambing & kuehl, 2000). stevenson (1983) conceptualized entrepreneurship as a management approach with a great desire to have the opportunity to pursue and exploit opportunities without regard to currently controlled resources. a stronger form of indeterminism emphasizes that the future is not merely unknown, but unknowable. that said, however, it is emphasized here that “the future is unknowable, but not unimaginable” (lachmann, 1976). entrepreneurship is seen as a human action that creatively formulates and solves new problems (antonites, 2003; buchanan & vanberg, 1991; klein, 2008) hypothesis 1. entrepreneurship has a positive impact on future anticipation. entrepreneurial background and future anticipation according to hisrich and peters (1992), personal aspects consist of childhood family environment, education, personal values, age, and work history that together become the determining factors of a person’s entrepreneurship. in another case, this aspect is also related to the ability to anticipate the future. education. lee and tsang (2001) said that although there are many successful entrepreneurs who dropped out of school but still managed to become successful businesspeople, education is still needed to be a qualified businessperson because of the increasing complexity of the business world environment. the level of education, especially for those in large companies, is positively related to the growth of the business. cooper and dunkelberg (1987) reported that employers in canada and the united states had a higher education than others around the world. robinson and sexton (1994) found that one’s education level is positively associated with business growth. lee and tsang (2001) and ahluwalia, mahto, and walsh (2017) said that people who are better educated will have a stock of knowledge that is broader and with a lot of information, which enables them to find opportunities and anticipate the future in conducting their businesses. a properly designed educational curriculum will enable students to integrate past experiences and anticipate the future in the form of an action plan. daily ecological practices allow the student to make a connection with past experiences and the future by setting goals, delaying immediate gratification, anticipating future problems, learning from past experiences, and evaluating action (strauss, 1998). age. the correlation between a person's age and entrepreneurial success has been investigated carefully. in evaluating this, it is important to distinguish between entrepreneurial age and chronological age. entrepreneurial age is identified as the length of business experience, while chronological age refers to when an entrepreneur started one’s business. in general, a successful entrepreneur has started his or her business in the age range of between 2225 years old (hisrich & peters, 1992). in this regard, age also affects a person in performing future anticipation. work experience. an entrepreneur’s experiences are divided into three components: entrepreneurial, industrial, and managerial. entrepreneurial experience points to the involvement of a number of previous venture and management roles at other ventures (stuart & abetti, 1990). industrial experience means experience in the industry in which the venture exists. managerial experience is the total experience in management, no matter what type of industry it is. various studies have focused on managerial and industrial experiences. gasse (1982) showed that an entrepreneur’s experience may positively/negatively affect the business growth. past experiences can infuriate people if bad strategy changes occur. van de ven, hudson, and schroeder (1984) put forward a positive impact on industrial experience; dyke, fischer, and reuber (1992) reported a positive impact of industrial and managerial experiences; duchesneau and gartner (1990) used the concept of the managerial experience breadth that combined industrial and managerial experiences and found that the combination had a successful impact on the business. it seems that the evidence supports a positive correlation between a businessperson’s experience and performance (lee & tsang, 2001). extensive and long work experience will construct the entrepreneur’s background of a person as well as how they anticipate the future (delmar, 1996; matthews & moser, 1995; matthews & moser, 1996; priyanto, 2006; priyanto & sandjojo, 2005; watson, hogarth-scott, & wilson, 1998). hypothesis 2. an entrepreneur’s background affects future anticipation. future anticipation, customer value, marketing performance, and extra efforts customer value is concerned with how consumers perceive what they obtain and what they have to give up to get it. when a company understands customer value, it can innovate to acquire better perceived customer value (kotler, keller, & lu, 2009). related with this, businesspeople can establish customer value to know what should be provided to consumers. flint et al. (2011) indicated that consumers’ perceptions of what product value is given by the companies is a significant aspect for building emotional ties. companies frequently invest a great deal of money and time to predict the wants and needs of consumers in the future. nevertheless, it will be pointless if consumers do not appreciate this, because it does not match with what they desire or require. flint et al. (2011) did a study on a wide range of industries and discovered that customer satisfaction and loyalty was positively affected by engaging in consumer future anticipation. these results conveyed the necessity of smes and industries to engage in doing future anticipation, in order to give the best customer value, make customers appeased, and establish customer loyalty. similarly to the above, kandemir,yaprak, and cavusgil (2006) did research on smes in the usa to comprehend 53 m. r. rita, s. h. priyanto, r. k. andadari, & j. o. haryanto journal of small business strategy / vol. 28, no. 1 (2018) / 49-65 the need for future anticipation. because increasing competition makes everything more complicated and unstable, smes should strive for breakthroughs and innovations to advance their market performance. by engaging in partnerships with current stakeholders, especially with suppliers and challengers, smes can have an advantage over others to predict the future. next, mische (2009) revealed that by attempting to comprehend the future, entrepreneurs can connect companies with consumers. this will assist consumers in their purchase decisions. when smes and bigger companies attempt to predict the future, their efforts will be esteemed by consumers (morales, 2005). this is because the businesses place the consumers in the forefront when making business decisions. if consumers recognize this effort, they will be more willing to engage in business with these firms. this concept can be understood through the persuasion and the attribution theory. businesses should engage in future anticipation as a marketing strategy connected with customer persuasion. various research has been carried out regarding a company’s ability to persuade consumers (campbell & kirmani, 2000; cardozo, 1965; kirmani & wright, 1989), while the attribution theory has also been researched through various studies (folkes, 1988; weiner, 2000). in spite of this, a limited number of studies have been done on company persuasion and additional effort (morales, 2005). preliminary research was carried out by morales (2005) on a company’s additional efforts, as it connected neutral motives and persuasion. nevertheless, researching the extra effort done by companies has been done before. cardozo (1965) did research that revealed that in particular situations, expectations had an effect on how the product and purchasing experience were evaluated. when a product or service does not match up with its expectations, then it will be ranked low. when more effort is made to improve the shopping experience, it may curtail these effects or even be contrary to a poor shopping experience. obviously, exerting a high degree of effort results in a better product evaluation. in addition, cardozo (1965) also found that consumer expectations have an effect on how a product or service is evaluated. if a product or service has high expectations, then it will be more challenging for the company or service provider to meet that satisfaction. if a product or service has low expectations, then it will be easier to meet consumer demands. attribution theory was applied in morales’ study (2005), which claimed that customers will be appreciative for the extra effort done by a company in general. customers’ expectations for particular attributes are related with the failures or negative results (folkes, 1988). likewise, this also applies for successful or positive outcomes. related with this, weiner (1974) said that when a behavior is controllable, then individuals with moral and emotional opinions will be motivated to support or disavow it. if a behavior is connected with a company’s additional effort, then customers will react negatively to companies that do not meet their expectations and react positively to companies that go the extra mile. weiner (2000) further revealed that the whole attribute searching process is integrated with the rationale for feelings which are then acted upon. equity theory was also applied by morales (2005). this emphasizes the reciprocity principle (adams, 1965). based on this theory, individuals tend to respond positively to those who do acts of kindness to them (regan, 1971). moreover, individuals do not desire to be indebted to others. if kindness is connected with additional effort, then customers will repay the good deed (a company’s extra effort) by buying a product or service or at least have a good opinion of it. this theory claims that customers will repay a good deed if they think they have direct or personal advantages. differences between equity theory (which claims that customers only repay a positive action if they receive direct and personal benefits) and attribution theory (which postulates that customers will repay good deeds in general) motivated morales (2005) to do a further study. this research revealed customers were still grateful for a company’s additional effort, even if it was only done in a general manner and did not have an immediate or personal impact on the customers. another finding of the study was that customers were still appreciative of the additional effort of a company even if it had neutral and non-persuasive motives. in addition, the study found that being appreciative facilitated the extra effort, while a feeling guilty increased when extra effort was exerted. related with persuading customers, campbell and kirmani (2000) acknowledged and studied aspects that encouraged the use of persuasive knowledge by customers. if customers had unlimited resources, then persuasive knowledge would be used to affect the persuasion motives and a salesperson’s evaluation. the persuasion knowledge model (pkm) was utilized with the primary idea that customers acquire insights into persuasion and apply it to compete with the persuaded aspects. as a result, persuasion knowledge is used based on how accessible the persuasion motives are. therefore, customers will not be appreciative to a company in terms of additional effort if the company is considered to have a persuasive motivation. morales (2005) only examined the additional efforts made by the company, even though the quality was unaltered. the results conveyed that customers would be more willing to purchase from a company that did extra effort even if the quality did not improve. this was related to a study done by kirmani and wright (1989) who devised the method by which the alleged advertising cost influenced the quality. folkes (1988) accentuated the significance of attribution theory as it relates to customer behavior. the suggestion was proposed to better comprehend customer perception and causal relationships as they related to customer behavior. marketers could then apply it to marketing activities. folkes (1988) clarified that customers bought the products or services due to the cause-effect relationships. examples include a customer who purchases a deodorant that claims to improve one’s social life, sports shoes to improve performance, and medicine to alleviate pain. folkes’ literature review (1988) of attribution theory 54 m. r. rita, s. h. priyanto, r. k. andadari, & j. o. haryanto journal of small business strategy / vol. 28, no. 1 (2018) / 49-65 showed that it is a detailed and advanced approach in terms of consumer behavior issues. various research on attribution covers when customers give good product reviews to other potential customers or when they complain about a product aspect. attribution theory is actually a combination of two theories that have similar basic assumptions. based on attribution theory, individuals will search for the reasons behind a particular occurrence (kelley, 1967). if a company is considered as providing additional effort, then, based on attribution theory, customers will feel grateful for the company’s additional effort provided to them, even if it is general in nature (haryanto & priyanto, 2013; hesaraki, 2015; lichtenstein, ridgway, & netemeyer, 1993). morales’ research results (2005), which guided this study and support attribution theory, show that customers have a positive image of a company when it puts forth additional effort for customers, even if it is general in nature and does not affect customers in a direct or personal manner. kruger, wirtz, van boven, and altermatt (2004) discovered that a company’s efforts were frequently used by customers to know the product, service or quality given. when a company exhibited greater effort, then the customers considered it as having higher quality. similar with morales (2005), even if the quality does not show a marked improvement, customers will still have a more favorable impression of the company’s product or service due to the extra effort provided (stajkovic & luthans, 2001; wells, 1995). hypothesis 3. future anticipation positively affects the extra effort. hypothesis 4. future anticipation positively affects the customer value. hypothesis 5. future anticipation positively affects the market performance. method this study is descriptive and explanatory research. it targets the characteristics of variables and relationships between variables, a deeper understanding of the correlation between existing variables, and an explanation of the cause and effect relation (blaikie, 2009). as a causality study, we aim to analyze the causal relationship between the variables associated with future anticipation, such as entrepreneurship and entrepreneurs’ background, that affect batik (cloth dyeing) business performance through hypothesis testing (sekaran, 2000). the population of this research was batik entrepreneurs in solo, lasem, and pekalongan. the three locations were chosen since these regions have many batik smes, whether or not they are involved in export activity. the exact number of this population was not known. however, it was identified that these batik entrepreneurs had similar criteria. most of them were high school graduates and used these batik businesses as their main income. questionnaires were distributed with a likert scale of 1-7 to obtain respondents' perceptions of the variables examined in this study. a snowball sampling method was used in this study with 50 respondents from each city, with a total of 150 samples obtained. however, 6 respondents were eliminated due to invalid data, so only 144 respondents were used in this research. a pre-test was conducted with 30 respondents to check the validity and reliability. data was then processed with a structural equation modeling (sem) method and amos 5.0 software to test the hypothesis. related variables and measurements were formulated for the following components of each variable, ie: entrepreneurship was measured on the need for achievement, risk taking, independence, creativity, and innovation. entrepreneurial background was measured by gender, age, education, expenditures, experience, batik and non-batik training completed, training in anticipation of the future, social networks, government support, and a support association. anticipation of the future was measured from the model anticipation, anticipation of materials, labor anticipation, anticipation of competition, anticipation of the development of the asean countries, and the anticipated price. the consequences of ownership anticipation of the future were comprised of three variables: extra effort, customer value, and performance marketing. extra effort was measured by providing solutions from consumer needs, responsiveness, extra service, empathy, and reliability. customer value was measured from having a good product, a better product than competitors, excellent service, attractive pricing, and benefits for consumers. market performance was measured by sales competitiveness, sales targets, sales growth, market shares, market growth, and sales performance. all variables were measured using a likert scale of 1 to 7 in order to acquire the data. the variables involved in this study were independent latent variables, dependent latent variables, measurable variables/indicators/manifests, as well as exogenous and endogenous variables. independent latent variables were formed from the measured variables. the correlation between these variables was recursive, meaning that the correlation was not two-way but the correlation was in the same direction. this means that the correlation was causal. these variables can be explained from the research model that was tested in this study as it appears in the figure below. data analysis and findings pekalongan batik smes’ profile besides solo, one of the cities that affect the batik industry in central java is pekalongan. just like solo, pekalongan is a batik manufacturer. in fact, the batik artworks from pekalongan have been exported to australia, the usa, and the middle east. bright colors are used to make pekalongan batik blended with various patterns as a sign of the multicultural diverse cultures that exist in pekalongan: the chinese, malay, japanese, dutch, and arabic cultures. pekalongan batik motifs are influenced by ancient cultures that once lived in 55 m. r. rita, s. h. priyanto, r. k. andadari, & j. o. haryanto journal of small business strategy / vol. 28, no. 1 (2018) / 49-65 this city. the pekalongan batik floral pattern is influenced by european flowers, japanese flowers, and arabic calligraphy as well as by the original pattern of pekalongan such as a pattern named jlamprang. the beauty of pekalongan batik is illustrated by its ability to combine seven colors that are blended together in a generated pattern. lasem batik smes’ profile lasem batik is a different batik that has its own uniqueness compared to the other two types of batik. the difference and uniqueness lie in the history underlying the formation of this batik, including the pattern. lasem batik is created as a result of the influence of two cultures of two countries, namely javanese and tionghoa culture originating from china. the two different cultures produce batik with distinctively different and unique designs compared with batik from other regions. one other well-known pattern of lasem batik is three states batik. this batik consists of three colors: red, blue, and soga (brown). the three colors are representative of three cities of batik producers, and each color describes the characteristics of each city. the red color comes from the city of lasem, the blue color comes from the city of pekalongan, and soga (brown) comes from the city of solo. batik coloring with three different colors is not only done in lasem, but also in three different cities based on the color origin. lasem batik is the one that shows indonesian batik is not only able to express local culture, but also able to collaborate with other cultures of indonesia and other countries as in china's culture through the tionghoa ethnic group, of which its members are currently settled in many parts of indonesia. solo batik smes’ profile as a cultural product, batik reflects the situation of the community. although most of the styles are called batik, if its history is traced, there are differences among the three batik types from solo, pekalongan, and lasem. for the solo region, the populations involved in the batik production activities were courtiers who were trained to make batik for jarik (the fabric used for men and women as outer garments fastened around the waist and hanging down around the legs) and scarves. therefore, the solo batik pattern is closely related to the pattern that is often used by the royal palace family. the royal palace determines the tastes, both in java and in various other places in the archipelago. the best results from the crafters will be ordered by the royal family and will be used by themselves. this creates a major impact on art, especially the art of batik. the royal palace can be said to play a major role in moving the refinement of the art of batik. model testing after the data collection was performed, it was processed and analyzed using sem, which obtained the following results: future market anticipation extra effort marketing performance customer value entrepreneurship h1 h5 h2 h3 h4 entrepreneur's background figure 1. research model. entrepreneurship future market anticipation entrepreneur's background innovativee5 .63creativee4 .66 independencye3 .48 risk takinge2 -.14 need for achievemente1 .32 association supporte16 .73 government supporte15 .76 social networke14 .62 anticipation traininge13 .76non batik traininge12 .62 batik traininge11 .56 experiencee10 .21 expendituree9 .22 educatione8 .11 agee7 .14 gendere6 .20 model anticipation e18 .68 material anticipation e19 .43 labor anticipation e20.57 competition anticipation e21 .81 asean anticipation e22 .64 price anticipation e23 .10 .31 .31 z1 figure 2. results of the future anticipation antecedent. 56 m. r. rita, s. h. priyanto, r. k. andadari, & j. o. haryanto journal of small business strategy / vol. 28, no. 1 (2018) / 49-65 entrepreneurship had an impact on the future anticipation of the batik entrepreneurs. taken together, variables such as motivation to always move forward, be independent, be creative, and be innovative, influence future anticipation with a regression coefficient of 0.31. the variable, risk taking, is not taken from the entrepreneurship of the owner because the company is usually run through family lines. batik is a cultural product where almost every owner of the batik industry is in a high risk-taking environment. meanwhile, for entrepreneurial backgrounds, all measuring variables were significant except the measuring variables of age and education. for age, it was spread flat or in straight lines that did not match the principle of normality. meanwhile, for education, on average the respondents were less educated. the data was not normally distributed. from the hypothesis test results, the entrepreneur’s background positively and significantly affected the future anticipation with a regression coefficient of 0.31. entrepreneurship values such as the desire to move forward, independence, creativity, and innovation could make someone continue to pursue a variety of ideas. mcclelland, (1961) stated that a person who has an entrepreneurial spirit will have the ability to anticipate the future associated with a variety of things, including the future anticipation of the market. lambing and kuehl (2000) said that an entrepreneur is a person who has a creative action that builds the value of something that was not visible before. it is an opportunity to pursue without regard to resources or a lack of resources at hand. they have a vision, interest, and commitment to lead others to achieve the vision. entrepreneurship also requires a willingness to take and count risks related to the upcoming events. if someone has an entrepreneurial spirit and an adequate background associated with business, then the entrepreneur will be able to anticipate the future in terms of a model or design. entrepreneurs are also able to anticipate the type, quantity, sources of raw materials, and auxiliary materials they will need and they want to buy. on the other hand, they will also be able to take over the management of the workforce that they will use related to the qualifications, competence, quantity, and direction of development of human resources in their companies. choi and shepherd (2004) stated that entrepreneurs were more likely to exploit opportunities when they perceived more knowledge of customer demand for the product, more fully developed enabling technologies, greater managerial capability, and greater stakeholder support. the favorable perceptions of more knowledge of customer demand for the product, more fully developed enabling technologies, and greater slakeholder support were further enhanced when the new product has a long lead time. they are also able to anticipate the future related to the possibility of competition that may occur and adjust themselves to the conditions of the competition. competitive equity is related positively to market anticipation (schatzel & calantone, 2006). entrepreneurship can equally be considered an important factor in the development of established firms increasingly beset by competition (gupta, macmillan, & surie, 2004). the competitive scope is likely to be affected by the entrepreneur’s competencies in interpreting environmental conditions (sánchez, 2012). an entrepreneurial orientation is critical. firms with an entrepreneurial orientation adapt their capabilities to meet emergent competition through flexible resource deployment, which allows the firm to use or expand the company’s resources and thus raise long-term capacity (kanter, 1981). entrepreneurially oriented firms are capable of corporate transformation by effectively translating emergent options into platforms for continuous value creation (ghoshal & bartlett, 2000). this allows them to move fast to gain first-mover advantage in emerging new products or markets (kuratko & hornsby, 2001). they will also be able to design and set prices that allow consumers to be satisfied and loyal to them, and they are able to set prices that will increase the brand image and imagery as well as the brand position of the product and company. the quality of marketing management related to price is supported by the dimension of entrepreneurship (carson, gilmore, cummins, o’donnell, & grant, 1998). an owner or manager who is entrepreneurial will be able to set the price right in the future. most of the future will be a direct result of goal decisions taken in the present. achievements and future events are influenced by anticipation, interpretation, and vision of the present (thaler, 2000). future orientation can be a powerful motivator of current behavior (greene & debacker, 2004). if the context of the rationality limits the setting, the future of the anticipation context will place limits on the efficacy of entrepreneurial rationality. the anticipation context requires more than competence in rationality; it also requires competence in entrepreneurial decision-making aesthetics. there is a close correlation between entrepreneurial skills and how to anticipate the future (koellinger, minniti, & schade, 2007). when information is not disseminated equally and uniformly, it can cause a different perception among individuals in the society. this situation is the result of each individual’s product opportunity set differing from others table 1 analysis results of the future anticipation antecedent hypothesis hypothesized association p-value (un)/supported h3 h1: entrepreneurship à future anticipation .01* supported h5 h2: entrepreneur’s background à future anticipation .00** supported * significant at the .05 level, ** significant at the .01 level. 57 m. r. rita, s. h. priyanto, r. k. andadari, & j. o. haryanto journal of small business strategy / vol. 28, no. 1 (2018) / 49-65 (michaels, 2000). altered types of cognitive biases can possibly appear in a diverse situation (gaglio & katz, 2001). whatever the personality of an individual, whether someone is proactive, reactive, or indifferent to what they see, sometimes different conditions will shake idea creation. entrepreneurs might not accept things as take it for granted, but as something they can do something about (hunter, 2013). a different business will offer dissimilar underlying thinking surroundings that improve thoughts or increase bias and impede individuals’ decision making. choi and shepherd (2004) stated that entrepreneurs can take time and gather information to reduce uncertainties and build the firm's resources and capabilities before making the decision to enter the market and exploit the opportunity. alternatively, entrepreneurs can exploit the opportunity now to lengthen their lead time. lead time refers to the period of monopoly for the first entrant prior to competitors entering the industry. entrepreneurs who have anticipated future markets are influenced by entrepreneurial marketing (fillis, 2000; rezvani & khazaei, 2013). entrepreneurial marketing is influenced by market, entrepreneurial and technological orientation. these three aspects are influenced by capital relations derived from the environment or market factors and entrepreneurial capital derived from firm-specific factors (schindehutte et al., 2008). an organization’s assets, competencies, and also selfsight will significantly affect the member’s image and beliefs about the future. so an organization really needs a strong leader to determine the future trajectory of the business (bass, 1985; conger & benjamin, 1999). such conditions require entrepreneurial leadership (o'regan, ghobadian, & sims, 2004). the actions that entrepreneurial leaders precipitate in pursuit of their vision constitute proactive enactment of new combinations of capabilities in the organization—reconfigured and focused to forge an entirely reconstructed transaction set for the firm (gupta et al., 2004). entrepreneurship is driven by continuous change and perception towards potential opportunities (baron & ensley, 2006; singh, 2001). an individual has to perceive an opportunity as a media to grow abilities, resources, and links into strategies to create a firm opportunity. the opportunity must encounter the social and infrastructural circumstances for it to be feasible in society (ozgen & baron, 2007). it needs to see the ground directions about exchanges between different units within the environment according to how they should be implemented, where a shared belief can be recognized between the members within the environment. future market anticipation .71 competite18 .84 .23 laborante19 .48 .27 materiale20 .52 .14 modelante21 .38 .37 extra effort .49 customer value .15 market performance .13 goodprod e29 .35 .02 productc e30.15 .24 excellen e31 .49 .05 attracti e32 .22 .31 benefits e33 .56 .62 salescom e34 .79 .55 salestar e35.74 .30 salesgro e36.54 .57 marketsh e37 .76 .20 marketgr e38 .45 .00 salesper e39 -.07 .61 .70 .57 solution e24 .75 .43 responsi e25.66 .42 extraser e26 .65 .18 emphaty e27 .42 .10 reliabil e28 .32 z2 z3 z4 .68 aseanante40 .82 .51 priceante41 .72 .39 figure 3. results of the future anticipation consequences. 58 m. r. rita, s. h. priyanto, r. k. andadari, & j. o. haryanto journal of small business strategy / vol. 28, no. 1 (2018) / 49-65 based on the analytical results above, it was found that future anticipation had a positive impact on extra effort. in the third hypothesis test, it was found that the future anticipation done by the company made the company give extra effort for customers. this is in line with the opinion of morales (2005), who stated that companies that put the customers as the focal point would give extra effort for the customers. companies that viewed the future anticipation by looking at the political, social, economic, cultural, and technological factors would make companies conduct extra effort to meet the needs and desires of their customers. the future anticipation also had a positive impact on customer value. in the fourth hypothesis test results, it is revealed that companies which anticipated the future would provide superior customer value for their customers. the companies would understand the changes in customer tastes and changes in the social structure, so that the companies would provide the best service for their customers, as reflected in the value of the customer. this research is in line with findings from kandemir et al. (2006) who stated that if a company was oriented to the future, the customer value provided by the company would be better. batik entrepreneurs who understand the future will provide superior customer value to their customers through the unique creation of batik motifs or batik designs. in addition to the results above, it was also established that future anticipation had a positive impact on market performance. future anticipation undertaken by a company would be appreciated by customers. the customers conveyed their forms of appreciation through customer satisfaction and loyalty to the company. this, of course, had an impact on repeat purchases, which means an increase in sales led to an increase in company profits. thus, the company perceived as performing future anticipation would positively impact the company's market performance. this is in line with research conducted by flint et al. (2011), who stated that future anticipation would have a positive impact on customer satisfaction and loyalty. loyalty is what will lead to repeat purchases and also positive word of mouth to other customers to improve the market performance. the findings of this study support mccardle (2005), who revealed that the effect of information processes on the competency of market anticipation is reliant on a business’ learning culture (upcoming orientation and learning orientation) and also connections among departments. they can strongly encourage the harmonization and integration of information between performers in the business environment. a business can achieve long-term competitive advantage and build a structure of valuable resources by using the foresight understanding of its market. it means that a business has to exploit its capability in anticipating variation through the improvement of a new product and service offerings to satisfy the customers. having a higher capability in market foresight creates fascinating new product creativity, rapid penetration into the market, and finally superior market-entry timing. these brand-new product results of market anticipation capability are more conjectured to raise the financial performance of businesses as long as they can take advantage of market chances. hence, organizational inertia quietly supports the connections between market foresight capability and the results of new products. conclusion the true entrepreneur does not live merely in the context of the present. the entrepreneur and the enterprise exist now, but always with a view to the context of the future. the implications of today’s decisions are realized tomorrow (thaler, 2000). this means every entrepreneur must have a future orientation in terms of products, technologies and markets. to have this, the entrepreneur must have the ability to have market driving behavior that will enable him to see his future market. to have market driving behavior, the entrepreneur must have entrepreneurial marketing, which is formed from market and entrepeneurial orientation plus technological orientation. in order for the entrepreneur to have this, he must have relational capital and entrepreneurial capital, which can be obtained from the market and the company (schindehutte et al., 2008; van zyl & mathur-helm, 2007). an ability in entrepreneurial leadership is also required to embody ideas and move into successful business activities (chen, 2007; gupta et al., 2004; van zyl & mathur-helm, 2007). if the entrepreneurial context is shifted from the present to the future, all decision making becomes more complicated and potentially less rational. it requires consideration of uncertain market developments, undiscovered technologies, changing organizational patterns, and ever-shifting financial options (thaler, 2000). this study used a structural equation model to deepen the earlier view that there is a strong correlation between entrepreneurship, entrepreneurial background, and future anticipation. entrepreneurship and entrepreneurial background greatly affect the ability to anticipate the future. table 2 analysis results of the future anticipation consequences hypothesis hypothesized association p-value (un)/supported h3 future anticipation à extra effort .00** supported h4 future anticipation à customer value .00* supported h5 future anticipation à market performance .00** supported * significant at the .05 level, ** significant at the .01 level. 59 m. r. rita, s. h. priyanto, r. k. andadari, & j. o. haryanto journal of small business strategy / vol. 28, no. 1 (2018) / 49-65 if employers have entrepreneurship, they will be able to anticipate the future in six aspects. ardichvili and cardozo (2000) stated that entrepreneurial awareness and alertness, information asymmetry and prior knowledge, opportunity discovery, networking, and creativity, which are the dimensions of entrepreneurship, affect successful opportunity recognition. the perceived opportunities available are also influenced by an intention-driven process determined by various personal variables (greene et al., 2015; krueger, 2003; sánchez, 2012). meanwhile, family background also positively affects the future anticipation of batik entrepreneurs (lindquist, sol, van praag, & vlădășel, 2016; matthews & moser, 1995). other results associated with the ownership of the ability to anticipate the future showed that the fma model could improve the extra effort, customer value, and marketing performance. in the process of establishing batik entrepreneurial enterprises, there are at least three learning resources for batik entrepreneurs. the first is a learning source from parents. the second is a learning source from other entrepreneurs as employees, and the third is a source of personal experience as businesspeople. this model is often referred to as hybrid entrepreneurship. further research the study is limited to the efforts of explanation in a cross-sectional approach and entrepreneurship in general aspects so that the process of future anticipation as expected by fontela et al. (2006) cannot be found. research is still very open to explore the correlation between the creative and innovative processes, independence, courage to take risks, as well as passion to move forward either by the cycle stage or longitudinally. additionally, the role of information technology is very important in the process of future anticipation, which has not been studied in this study. recently, information technology has been widely used in order to improve capability and cost efficiency. the challenges of changes in it are very dynamic as seen in firms with a greater it presence (internet) and firms whose websites are far more likely to have a mobile optimized website than those who do not (voelker, steel, & shervin, 2017). if a company can combine this with a corporate culture to be more aware and accepting of it, such change can push it into an increasing strategic role in more organizations. this condition has encouraged the importance of managing it in these organizations. benemati and lederer (2000) stated that understanding the challenges of managing today’s rapidly changing it can escalate the comprehension of the future’s challenges. therefore, future researcher should investigate the role of information technology in future anticipation. one study that deserves to be explored is the role of e-marketing in strengthening future anticipation. in this context, little research has been done. the findings of this study are interesting because, in the learning process, there is more than one model that allows individuals to be batik entrepreneurs. these iclude through parents, working as employees, or through personal experiences, which is called the hybrid entrepreneurship model. previous studies indicate that the model has become an entrepreneurship learning model, even though the pattern, system, and mechanism are still unclear. unfortunately, this study has not touched upon the learning process of this model. thus, it is suggested that further research should observe the dynamics of the hybrid entrepreneurial learning process as viewed from various aspects. folta, delmar, and wennberg (2010) state the hybrid entrepreneur is an individual who engages in self-employment activities while simultaneously holding a primary job in doing wage work. there are two reasons why entry into hybrid entrepreneurship might be unique compared to self-employment entry or wage work. first, the decision to eventually enter self-employment may be endogenous to the hybrid entry decision. a positive signal about prospects of performance may arouse hybrids to abandon wage work and choose self-employment, whereas a negative signal may induce abandonment of their self-employment activity. second, the factors that generate hybrid entry may be systematically different from those that lead individuals to enter self-employment or remain in wage work. they have done a longitudinal data study and performed it on a macro scale for a high technology intensive industry. further research should test this study for a cross-sectional comparison on a micro, individual, and personal scope and also for a cultural based industry. references abebe, m. a., & angriawan, a. 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(1995). meta-cognition and worry: a cognitive model of generalized anxiety disorder. behavioural and cognitive psychotherapy, 23(03), 301-320. appendix descriptive statistics of the future anticipation antecedent variable m sd 1 2 3 entrepreneurship 2.61 .22 1 entrepreneur’s_background 2.11 .36 .08 1 future_market_anticipation 5.18 .62 .21* .36** 1 * p< .05, ** p< .01 regression weights of the future anticipation antecedent independent variable standardizedestimation unstandardized estimation s.e. c.r. p entrepreneurship .31 .99 .40 2.51 * entrepreneur's_background .31 .36 .12 2.99 ** *p< .05, ** p< .01 descriptive statistics of the future anticipation consequences variable m sd 1 2 3 4 extra effort 5.93 .75 1 customer value 5.58 .71 .56** 1 market performance 5.58 .76 .48** .54** 1 future market anticipation 5.45 .70 .55** .33** .32** 1 * p< .05, ** p< .01 64 m. r. rita, s. h. priyanto, r. k. andadari, & j. o. haryanto journal of small business strategy / vol. 28, no. 1 (2018) / 49-65 regression weights of future anticipation consequences variable independent standardizedestimation unstandardized estimation s.e. c.r. p extra_effort .61 .64 .11 5.79 ** customer_value .70 .35 .11 3.14 * market_performance .39 .50 .13 3.95 ** * p< .05, ** p< .01 regression weights of future anticipation antecedent: (group number 1 default model) estimate s.e. c.r. p label future_market_anticipation <--entrepreneurship .99 .40 2.46 .01 par_20 future_market_anticipation <--entrepreneur's_background .36 .13 2.68 .01 par_21 innovative <--entrepreneurship 1.00 creative <--entrepreneurship 1.17 .30 3.94 *** par_1 independency <--entrepreneurship 1.40 .36 3.88 *** par_2 risk taking <--entrepreneurship -.41 .31 -1.33 .18 par_3 need for achievement <--entrepreneurship .66 .25 2.68 .01 par_4 association support <--entrepreneur's_background 1.00 government support <--entrepreneur's_background 1.00 .12 8.57 *** par_5 social network <--entrepreneur's_background .70 .11 6.62 *** par_6 anticipation training <--entrepreneur's_background 1.03 .12 8.34 *** par_7 non batik training <--entrepreneur's_background .85 .13 6.50 *** par_8 batik training <--entrepreneur's_background .66 .11 5.95 *** par_9 experience <--entrepreneur's_background .21 .09 2.28 .02 par_10 expenditure <--entrepreneur's_background .54 .22 2.43 .02 par_11 education <--entrepreneur's_background .11 .10 1.17 .24 par_12 age <--entrepreneur's_background .16 .10 1.54 .12 par_13 gender <--entrepreneur's_background .19 .09 2.19 .03 par_14 model anticipation <--future_market_anticipation 1.00 material anticipation <--future_market_anticipation .97 .21 4.62 *** par_15 labor anticipation <--future_market_anticipation .69 .11 5.97 *** par_16 competition anticipation <--future_market_anticipation 1.15 .16 7.43 *** par_17 asean anticipation <--future_market_anticipation .92 .14 6.44 *** par_18 price anticipation <--future_market_anticipation .23 .21 1.10 .27 par_19 standardized regression weights of future anticipation antecedent: (group number 1 default model) estimate future_market_anticipation <--entrepreneurship .31 future_market_anticipation <--entrepreneur's_background .31 innovative <--entrepreneurship .63 creative <--entrepreneurship .66 independency <--entrepreneurship .48 risk taking <--entrepreneurship -.14 need for achievement <--entrepreneurship .32 association support <--entrepreneur's_background .73 government support <--entrepreneur's_background .76 social network <--entrepreneur's_background .62 anticipation training <--entrepreneur's_background .76 non-batik training <--entrepreneur's_background .62 batik training <--entrepreneur's_background .56 experience <--entrepreneur's_background .21 expenditure <--entrepreneur's_background .22 education <--entrepreneur's_background .11 age <--entrepreneur's_background .14 gender <--entrepreneur's_background .20 model anticipation <--future_market_anticipation .68 material anticipation <--future_market_anticipation .43 labor anticipation <--future_market_anticipation .57 competition anticipation <--future_market_anticipation .81 asean anticipation <--future_market_anticipation .64 price anticipation <--future_market_anticipation .10 65 m. r. rita, s. h. priyanto, r. k. andadari, & j. o. haryanto journal of small business strategy / vol. 28, no. 1 (2018) / 49-65 regression weights of future anticipation consequences (group number 1 default model) estimate s.e. c.r. p label extra_effort <--future_market_anticipation .64 .11 5.79 *** par_13 customer_value <--future_market_anticipation .35 .11 3.14 .00 par_14 market_performance <--future_market_anticipation .50 .13 3.95 *** par_21 competit <--future_market_anticipation 1.00 laborant <--future_market_anticipation .57 .10 5.76 *** par_1 material <--future_market_anticipation .88 .14 6.19 *** par_2 modelant <--future_market_anticipation .56 .13 4.40 *** par_3 goodprod <--customer_value 1.00 productc <--customer_value .55 .42 1.31 .19 par_4 excellen <--customer_value 1.24 .44 2.83 .00 par_5 attracti <--customer_value .85 .47 1.81 .07 par_6 benefits <--customer_value 1.49 .51 2.93 .00 par_7 salescom <--market_performance 1.00 salestar <--market_performance .85 .10 8.34 *** par_8 salesgro <--market_performance .54 .09 6.09 *** par_9 marketsh <--market_performance .91 .11 8.45 *** par_10 marketgr <--market_performance .48 .10 5.02 *** par_11 salesper <--market_performance -.12 .16 -.74 .46 par_12 solution <--extra_effort 1.00 responsi <--extra_effort .87 .13 6.48 *** par_15 extraser <--extra_effort .96 .15 6.41 *** par_16 emphaty <--extra_effort .48 .11 4.40 *** par_17 reliabil <--extra_effort .43 .13 3.30 *** par_18 aseanant <--future_market_anticipation 1.22 .11 10.92 *** par_19 priceant <--future_market_anticipation .81 .09 9.19 *** par_20 standardized regression weights of future anticipation consequences (group number 1 default model) regression weights: (group number 1 default model) estimate extra_effort <--future_market_anticipation .61 customer_value <--future_market_anticipation .70 market_performance <--future_market_anticipation .39 competit <--future_market_anticipation .84 laborant <--future_market_anticipation .48 material <--future_market_anticipation .52 modelant <--future_market_anticipation .38 goodprod <--customer_value .35 productc <--customer_value .15 excellen <--customer_value .49 attracti <--customer_value .22 benefits <--customer_value .56 salescom <--market_performance .79 salestar <--market_performance .74 salesgro <--market_performance .54 marketsh <--market_performance .76 marketgr <--market_performance .45 salesper <--market_performance -.07 solution <--extra_effort .75 responsi <--extra_effort .66 extraser <--extra_effort .65 emphaty <--extra_effort .42 reliabil <--extra_effort .32 aseanant <--future_market_anticipation .82 priceant <--future_market_anticipation .72 strategy skyline chili: a case for small business growth and management daewoo park bema a. krishnan xavier university abstract skyline chili produces the secret-recipe chili for its restaurants and severe/pozen chili productsfor local grocery stores in cincinnati, ohio and other areas. an interview with mr. kevin mcdonnell, new ceo ofskyline chili in the case discusses the past present, and future ofthe company. can the company sustain its growth and competitivenessin the /990s? /f so, what can you recommend for the company? small business growth and management small businesses account for more than half of total us. workforce and over eightyseven percent of employment growth in the past decade. they also embrace ninety-seven percent of the enterprisesin the u s. thus, small businesses are truly the mainstay of the u s. economy (handbook of small business data, 1988). recognizing the preponderance and relative impact of small businesses as major contributors to job creation and economic growth, academic research on small business management practice has grown dramatically over the past decade. in particular topics of'strategic growth'f small businesses have received much attention from researchers (bygrave, 1994; jennings, 1994). presenting the past and present of skyline chili, therefore, this study examines the topic of small business growth and management. 0'farrell and hitchens (1988)examined the alternative models/perspectives of small business growth and tried to find the characteristics of successfully growing businesses. portraying the characteristics of successful small businesses, they emphasized that small businesses should be able to identify the key criteria upon which to compete in certain segments. then they must build a competitive advantage based upon these criteria. according to them, many small businesses employ different types of growth strategy as a way to achieve their competitive advantages. previous literature on small business growth has yielded three groups of studies: (1) a group of studies examining the relationship between certain management/organizational characteristicsand business growth(bracker, keats & pearson 1988; covin 1991;lyles, baird, orris, & kuratko, 1993); (2) a group of studies examining the relationship between management/organization characteristics and various stages of growth (birley & westhead 77 1990; hanks 1990; kazajian & drazin 1989); (3) a group of studies examining the relationship between the dynamics of growth and various aspects of management of that growth (fombrun & wally 1989; shuman & seeger 1986). using an interview with a small business executive as well as secondary sources of information (annual reports and industry data base), the current study attempted to reveal the relationship between management and small business growth. merz and sauber (1995) provide several reasons why it would be appropriate to investigatethe managementactivities(includinga formulation and implementation of growth strategies) of executives in small businesses. first, it extends the 'upper echelons perspective'rguing that a firm's strategic, structural choices and performance levels are inlluenced by top managers'characteristics(hambrick and mason 1984). second, it is consistent with the trend in small business research emphasizing the executives'ehaviors and activities instead of their personal characteristics (stevenson and jarillo 1990). third, the use of managerial activities as a predictoror an indicatorof future strategy has a greater applicabilityin understanding the strategic growth and success of small businesses (d'amboise and muldowney 1988). skyline chili, inc. skyline chili inc. was founded in 1949 by the i.ambrinides family. nicholas lambrinides, a former cook for railroad workers and native of kastoria, greece, used his culinaryexpertiseto open the chili restaurant in downtown cincinnati. today, skyline chili produces the secret-recipe chili [see exhibit i] for its restaurants and several frozen chili products for local grocery stores. "cincinnati-style" chili is defined by its presentation: a plate of spaghetti with sauce and shredded cheddar on top. native cincinnatians know it simply as a "3-way." lf onions are added, it's called a "4-way." the addition of beans makes it a "5way." skyline restaurants are located throughout greater cincinnati and in dayton, indianapolis, louisville, indianapolis and columbus. the company also operates five restaurants in florida, including two in ft. lauderdale and one each in clearwater, ft. meyers and naples. of'the 82 skyline storesoperating now, 30 are company-owned, and the rest are franchises. skyline chili opened its first franchised store in 1958. its major competitors are empress chili which has been in existence since 1922 and goldstar chili with 118 outlets. skyline became a publicly traded company in 1986 in an offering that raised about $4 million. skyline currently has 500 employees. additional information such as selected financial data is provided in the appendix. 78 exhibit l how we built a legend 100% real cheddar cheese zesty diced onionsd~~ delicious small red beans our secret-recipe chili made from 100% top gradec beef and spices from around the world. 100% semolina wheat flour spaghetti. interview with mr. kevin mcdonnell (ceo, skyline chili) question l: could you give me a brief overview of skyline's history? mr. mcdonnett skyline began in 1949 at the price hill location in cincinnati. this location overlooks the cincinnati skyline, hence the name of the company. the first expansions came in downtown cincinnati where it experienced good growth and success. to improve its customer base, the company expanded into the suburbs. in the late fillies, skyline began franchising throughout cincinnati. by 1965, the company had expanded its service by becoming a supplier of frozen products to grocery stores. skyline's stock went public in the mid eighties at $4.50 a share and has since bounced around. today we are experimenting with new strategies for growth outside the cincinnati area. question 2: when did skyline go public and why? mr. mcdonnetk we went public in the mid eighties for mainly two reasons. first, we were looking for ways to gain furthercapital for expansion into new markets. second, a portion of the company funds were used to retire the debt from two of the five brothers who wanted to sell their interest in the company. question 3: what do you consider to be skyline's greatest strength? 79 mr. mcdonnell: our greatest strengths are the quality of our products coupled with good service. this is evident in the recent surveys where consumers rated our product quality as the primary reason for coming back. question zfl how do you break down the business for strategic management efforts? mr. mcdonnell: we have three distinct channels of product flow. one segment is our company-owned stores which utilize; the largest amount of assets and as a result, offers the least amount of gross margin. our second channel, the franchise segment, uses less capital and provides a higher opportunity for growth. our third channel, the grocery store frozen food segment, is a high growth, low capital channel. since 1990, we have been striving to maximize our strategic management efforts in afl these segments. question 5: what are your strategies for growth for markets outside of cincinnati? mr. mcdonnell: ln the late fiflies we had the philosophy that as a result ofhaving a great product which had proved itself in cincinnati we should be able to sell it in any market. we had the philosophy that "ifyou build it they will come." therefore, we entered markets such as pittsburgh, cleveland, indianapolis, and columbus. we recognized that, although there would be a desire for quality products, we could not expect the high volume that we enjoyed in the cincinnati market. therefore, we decided to open smaller stores in low cost spaces, such as strip mafls. we controlled costs in these locations through tight controls on marketing expenses and by excluding table service. we found this to be a mistake. recent surveys reveal that, in addition to product quality, customer also value table service. furthermore, locating our restaurants in strip mails did not create as much awareness among consumers as we were able to create by locating our restaurants in a free standing building. "consumer awareness. " that's our fight. that's our challenge. question 6: how do you plan to leverage these findings in a new strategy for growth? mr. mcdonnell: we are currently focusing on expansion outside of cincinnati through the efforts of our "project mousetrap." we are testing this strategy in columbus at our companyowned stores. we are operating in free standing stores which provide both table and drivethrough service. we have contracted with a design firm to create a new look which will attract attention through 'tasteful garnishment.'hey are decorated in checkerboard and outlined in neon, creating an attractive and eye-catching image. in our attempts to implement "project mouthtrap," we have added spaghetti with red sauce and fettucini, gyros, and hot dogs in order to attract the skeptic. these items not only broaden our product-line but also involve little additional investment by way of new raw materials or preparation procedures. the intention is to soon wean them off the odd products and sell only traditional skyline items that are ofhigh quality. customers like the design of the new store and have begun experimenting with our chili. although we are happy that our customers have adopted the new items, we have continued to focus on our traditional items 80 which constitute more than 85'/o of the total sales. we have no intention of diverting from the traditionalskylinemenu. we are in the businessofcincinnatichili and that is wherewe intend to stay. question 7: who are your major competitors in cincinnati? mr. mcdonnell; goldstar chili currently has twice as many stores in the cincinnati area as skyline chili. however, skyline has a higher trattic rate. the one thing that differentiates skyline over the other chili restaurants is the quality of our products as our research shows. skyline has approximately twenty-two million dollars in revenues and about sixteen and a half million in assets, of which, nine million dollars have been invested in one asset, a single food preparation facility. this new facility allows us to utilize economies of scale by processing our chili in one large process and from there distributing it to our stores or the supermarkets. in cincinnati our chili has the second fastest turnover for frozen food items, second only to orange juice. these factors have allowed us to make a very good impact in the cincinnati market. question 8: how does skyline attract potential franchise investors? mr. mcdonnelt today the market for investors is extremely competitive. there are so many different marketing options. in order to successfully attract potential franchise investors, you first need to learn the business so that you may be a knowledgeable teacher. this means that company stores are required to test the market and learn the potential risks and niches in any new market. it also helps by allowing increased expenditures on advertising which helps attract investors. in the fast food industry there are many strategies for the mix of franchise stores and company owned stores. subway is 100'/o franchise, whereas bob evans is 100'/v company owned. we desire to maintain company owned stores but realize that our future growth will greatly be increased through franchising. the price to start up a franchise is also a factor which allows investors many options. an outback steakhouse costs around two million dollars to begin, a mcdonald's about one point two million dollars, and a rally's eight hundred thousand dollars. skyline is able to initiate a franchise with eight or nine hundred thousand dollars. the current strategy of our management is to maximize efforts in our three channels of product (low, company stores, franchise, and grocery, with the major growth reliance upon franchising. question 9i finally, could you describe your managementand leadershipstyle as well as skyline's culture? mr. mcdonnell: when i was in mba program, i took the mbti (myers-briggs type indicator) test. according to the analysis,l am nt (intuition-thinking) type executive. that is, i tend to be possibilities-oriented, impersonal, ingenious, and integrative. however, i have tried to employ sf (sensation-feeling) style and blend it with my nt style in my business management. i have recognized that it is very important to be a 'coach'(a typical characteristc of sf style) as well as a 'strategist'a typical characteristic of nt style) in business. my colleagues, managers, and employees have also provided similar assessments. several years ago, i attended a seminar ("the one minute manager" ) emphasizing the role of coach in 81 today's business environment. i learned a lot from the seminar. in managing my organization, i really want to be "one minute manager." i also try to develop and sustain "one minute management" type corporate culture for skyline chili. only good corporate culture can attract and keep good employees. high employee turnover is typical in this industry. there seems to be an ever-increasing number of jobs chasing a shrinking pool of people willing to work in service environments like restaurants. while finding affordable new sites is terribly difficult with all of the chains competing for attractive locations, the real battle is over employees. that's why i introduced "one minute management" type culture for skyline chili. assignment questions i. what impresses you about this company? is it well-managed? why or why not? using skyline chili's financial data (appendix i), analyze internal strengths and weaknesses. 2. how successful was skyline chili in defining the business and cratting a strategy to achieve performance objectives? 3. can skyline chili executives stand the tests of time and growth? 4. what issues does skyline chili face in the years ahead? what would you recommend skyline chili do to successfully confront these issues? 82 table i ~ol i lti ill l dollar amounts in thousands, except per share data years ended october29, 1995 octobcr30, 1994 october31, 1993 selected income data: total revenues $25,772 $24,496 $21,626 income from operations 1,986 1,346 1,191 net income 980 532 431 net income per share 0.29 0.16 0.13 selected balance sheet data: current assets $4,535 $4,889 $3,175 total assets 19,013 18,423 16,902 current liabilities 3,180 3,293 2,190 total non-current obligations 6,569 6,846 7,070 shareholders'quity 9,264 8,284 7,642 8 table 2 selected financial data i3otlar amounts in thousands, except per share data 1995 1994 1993 1992 1991 operations: commissary sales $ 10,331 $ 10,817 $9.809 $ 10,327 $9,792 restaurant sales 14,231 12,507 10,646 9,914 9,278 franchise fees and royalties 1,210 1,172 1,171 1,217 1,217 total revenues 25,772 24,496 21.626 21,458 20,287 income from operations 1,986 1,346 1,191 1,076 1,434 nct income 980 532 431 327 839 capital expenditures',484 1,537 1.845 1,517 7,586 per share: net income" 0.29 0 16 0.13 0.10 0.25 finnncinl position: total assets 19,013 18,423 16,902 16,409 16,812 propeny and equipment, nct 13,825 12,876 13,056 12,599 12,736 long-terra debt 6,100 6,459 6,799 7,114 7,970 shareholder's equity 9,264 8,284 7,642 7,127 6,644 ratios: current ratio 1.43 1.48 1.44 1.61 1.52 total liabilities to equity 1.05 1.22 1.21 1.30 1.53 interest coverage 3.83 2.43 2.15 1.84 5.62 restaurant data: company-craned 31 30 29 28 27 franchised 52 50 49 50 51 total restaurants 83 80 78 78 78 other datn: weighted average shares 3,419 3,390 3,363 3,350 3,342 outstanding" (in thousands) number of employees at year-end full-time 153 167 140 139 137 part-time 468 404 378 344 291 total 621 571 518 483 428 84 table 3 consolidated statements of income years ended october29, t995 october 30, t994 october3t, t993 revenues: sales: commissary $ 10431,000 $ 10,817,000 $9,809,000 restaurants 14,231,000 12,507,000 10,646,000 franchise fees and royalties 1,210,000 1,172,000 1,171,000 25,772,000 24,496,000 21,626,000 operating costs and expenses: cost of sales-commissary 7,497,000 8,211,000 7,610,000 restaurant operating costs: cost of food and paper 3,945,000 3,569,000 3,220,000 payroll costs 4,266,000 3,629,000 2,942,000 occupancy and other expenses 3,078,000 2,690,000 2,292,000 selling, general and adminstrative 5,000,000 5,051,000 4,371,000 23,786,000 23,150,000 20,435,000 income from operations 1,986,000 1,346,000 1,191,000 other income (expense): interest income 92,000 93,000 96,000 interest expense (541,000) (583,000) (607,000) other income (expense) (7,000) (24,000) 21,000 (456,000) (514,000) (490,000) income before income taxes 1,530,000 832,000 701,000 provision for income taxes 550,000 300,000 270,000 net income $980,000 $532,000 $431,000 net income per share $0.29 $0.16 $0.13 weighted average common and common equivalent shares 3,419,000 3,390,000 3,363,000 outstanding 85 table 4 consolidated balance sheets years ended october 29,1995 october 30, 1994 assets current assets: cash and cash equivalents $ 1,910,000 $2,709,000 accounts receivable 1,074,000 726,000 inventories 1,224,000 1,043,000 prepaid expenses 121,000 213,000 deferred income taxes 206,000 198,000 total current assets 4,535,000 4,889,000 property and equipment, at cost: land 1,469,000 698,000 buildings and improvements 1 1,451,000 10,556,000 equipment and fixtures 7,409,000 6,753,000 construction in progress 61,000 52,000 20,390,000 18,059,000 less accumulated depreciation 6,565,000 5,183,000 net property and equipment 13,825,000 12,876,000 intangible assets-net 501,000 534,000 other assets 152,000 124,000 $ 19,013,000 $ 18,423,000 86 table 4 consolidated balance sheets years ended october 29, 1995 october 30, 1994 liabilities and shareholders'quity current liabilities: accounts payable $ 1,505,000 $ 1,406,000 accrued salaries and wages 664,000 1,032,000 accrued interest 65,000 117,000 income taxes 101,000 other accrued liabilities 485,000 398,000 360,000 340,000 total current liabilities 3,180,000 3,293,000 deferred income taxes 469,000 387,000 long-term debt due after one year 6,100,000 6,459,000 shareholder equity: common stock, no par value: 5,400,000 shares authorized; issued and outstanding, 3,345,000 shares 5,267,000 5,267,000 additional paid-in capital 19,000 19,000 retained earnings 3,978,000 2,998,000 total shareholders'quity 9,264,000 8,284,000 $ 19,013,000 $ 18,423,000 87 table 5 onsolidated tatements of cash flows years ended oerober 29, i993 ouober 3a, 2994 ociobcr 3 i, t993 operating activities: net income 5980,000 $532,000 $431,000 adjustments to reconcile net income to net cash provided by operating activities: depreciation and amortization 1,553,000 1.373.000 1,399,000 dcl'erred income taxes 74,000 101,000 52,000 amortization of stock mvard compensation 84,000 decrease (increase)in: accounts receivable (348,000) 403.000 11,000 inventories (181,000) (504,000) 3,000 prepaid expenses 92,000 41,000 (37.000) increase (decrease) in: accounts payablc 99,000 536,000 99,000 income taxes payablc 101,000 accrued liabilities (333,000) 542,000 40,000 other-net (27,000) (66,000) (1,000) nct cash provided by operating activities 2,010,000 2,958,000 2,081,000 investing activities capital evpenditures (2,484,0uu) (1,537,000) (1,845,000) payments for businesses acquired (301,000) (295,000) proceeds from sale ofproperty and equipment 54,000 903,000 3,000 decrease in unexpended bond procccds 173,000 additions to intangible assets (39,000) (47,000) (19,000) net cash used by investing activities (2,469,000) (982,000) (1,983,000) i'inancing activities ltepayments of debt (340,000) (315,000) (300,000) net cash used by financing activities (340,000) (315,000) (300,000) net increase (decrease) in cash and cash equivalents (799,000) 1,661,000 (202,000) cash and cash equivalents at beginning of year 2,709,000 1,048,000 1,250,000 cash and cash equivalents at end of year $ 1,910,00u $2,709,000 $ 1,048,000 88 table 7 consolidated statements of shareholders' ni 'fears ended 10/29/95, 10/30/94, and 10/31/93. common stock additional unamortized total number paid-in retained stock award shareholders'fshares amount capital earnings compensation equity balance, october 25, 1992 3,113,000 5,157,000 19,000 2,035,000 (84,000) 7,127,000 amonization of stock award compensation 84,000 84,000 net income 431,000 431,000 balance, october 31, 1993 3,113,000 $5,157,000 $ 19,000 $2,466,000 $7,642,000 issuance ofcommon stock 232,000 110,000 110,000 net income 532,000 532,000 balance, october 30, 1994 3,345,000 5.267,000 19,000 2,998,000 8,284,000 net income 980,000 980,000 balance, october 29, 1995 3445,000 $5,267,000 $ 19,000 $3,978,000 $9,264,000 89 references birley, s. & westhead, p. 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(1988). alternative theories of small-firm growth: a critical review. environment and planning, 20, 1365-1382. shuman, j.c. & seeger, j.a. (1986). the theory and practice of strategic management in smaller rapid growth firms. anierican journal of small business, 3, 7-18. stevenson, h.h. & jarillo, c.j. (1990). a paradigm of entrepreneurship: entrepreneurial management. strategic management journal, 11, 17-28. 90 microsoft word front cover v20n1.docx   volume 20, number 1 spring/summer 2009  53              comparing nascent entrepreneurs and intrapreneurs and  expectations of firm growth    charles h. matthews  university of cincinnati  matthech@ucmail.uc.edu     mark t. schenkel  belmont university  mark.schenkel@mail.belmont.edu    matthew w. ford  northern kentucky university  fordmw@nku.edu    sherrie e. human  xavier university  human@xavier.edu        abstract    while  both  entrepreneurial  and  intrapreneurial  processes  yield  new  ventures,  similarities and differences between these two initiation processes and their impact on  subsequent  venture  performance  may  be  substantial.   operating  factors  that  are  typically influenced by the founder, such as expectations for growth, activity such as  formal  business  planning,  perceptions  of  environmental  uncertainty,  and  risk  preference within the context of new venture initiation processes are explored in this  study.   we  find that nascent entrepreneurs and  intrapreneurs are  largely similar  in  terms of their risk tolerance and perceptions of environmental uncertainty.   nascent  intrapreneurs,  by  contrast,  appear  to  be  more  sophisticated  planners  than  their  counterparts and perhaps more aggressive in their expectations for financial growth.  these  findings  enter  significantly  into  a  path  model  of  nascent  founder  growth  expectations that should provide a useful foundation in future investigations.  keywords: nascent entrepreneur; nascent intrapreneur; planning; uncertainty; risk  tolerance     strateg y  journal of small business  journal of small business strategy      54  introduction    entrepreneurship involves making  judgmental decisions about the  coordination of scarce resources in the  creation of new enterprises (casson,  2003; low & macmillan, 1988) seeking to  exploit profitable opportunities (shane &  venkataraman, 2000).  while both  entrepreneurial and intrapreneurial  processes yield new ventures, theory  suggests that differences between these  two initiation processes and their impact  on subsequent venture performance may  be substantial.  for example,  organizational theory suggests that  entrepreneurs acting independently  confront a lack of organizational  legitimacy (freeman, carroll & hannan,  1983) making the acquisition of scarce  yet necessary resources difficult in early  venture stages and the venture’s demise  more likely as a result (laitinen, 1992).   in contrast, while intrapreneurs acting  on behalf of their respective  corporations may have access to a  relative wealth of resources in the  absolute sense, they may elect to pursue  only certain types of strategies (i.e.,  those consistent with existing  organizational processes) as they seek to  develop new opportunities for economic  enterprise (shrader & simon, 1997).  despite theoretical evidence suggesting  that important systematic differences  may in fact exist, our knowledge of  nascent  venture  activity remains  limited due to the sparse and largely  anecdotal nature of research to date.  as  a result, researchers often struggle to  explain paradoxes frequently observed  between the entrepreneurial and  intrapreneurial contexts.  for example,  while a resource laden, protected  corporate environment seems more  conducive for nurturing a nascent  intrapreneurial venture than does the  wide‐open environment of the stand‐ alone entrepreneurial startup, evidence  suggests that corporate ventures often  underperform independent startups in  similar industries (e.g., christensen,  1997).  in short, the comparative  evidence to date suggests that our  current understanding of the nascent  stages of the new venture creation  process, in general, and the antecedents  of expectations of firm growth, in  particular, remains quite limited.  while  a number of researchers have addressed  the issue of the relationship between  planning and performance, the logical  extension of how these variables may or  may not be relevant in the realm of early  entrepreneurial activity especially with  regard to growth expectations remains  underdeveloped.  consequently, our  ability to provide prescriptive guidance  to those seeking to support, nurture or  promote the development of individuals  engaged in nascent entrepreneurial  activity also remains limited (honig,  2001).  given the crucial nature of decision‐ making and these preliminary  observations of systematic differences  during the early stages of ventures, this  paper seeks to take a step toward  extending previous theory and research  by focusing explicitly on antecedents  influencing growth expectations across  nascent entrepreneurs (nes) and  nascent intrapreneurs (nis).   specifically, this study addresses four  research questions.  first, do nes and  nis possess different expectations for  firm growth, and if so, how?  second, do  nes and nis engage in different levels of  planning formality?  third, do nes and  nis perceive environmental uncertainty  differently, or possess different risk  tolerances, and if so, how?  lastly, do   the relationships between uncertainty  volume 20, number 1 spring/summer 2009      55    perceptions, risk tolerance, planning  formality and expectations for firm  growth differ for nes and nis, and if so,  how?   conceptual background and  hypothesis development    “high achievement always takes place in  a framework of high expectation.”— charles f. kettering (1876‐1958)    entrepreneurship theory has evolved  over time from streams of  entrepreneurial, small business and  family business research into broader  and parallel research agendas that tend  to focus on either the individual (e.g.,  casson, 1982: 2003) or organizations  (e.g., sharma & chrisman, 1999) engaged  in the pursuit of profitable economic  enterprise1.  while figure 1 undoubtedly  oversimplifies the overlap and the  multidirectional nature of each of these  elements, it highlights an important area  of common interest for scholars and  practitioners alike.  specifically, it  highlights the idea that understanding  the process by which individuals, either  alone (nascent entrepreneur) or  conjunction with others (nascent  intrapreneur), form and act upon  expectations about future economic  conditions is central to the advancement  of entrepreneurship theory (casson,  2003; kirzner, 1999; schumpeter, 1934;  shane & venkataraman, 2000).  building  on extant research, nascent founders are  defined as ne status if they answered  “yes” to the following question during  the initial telephone screening interview:  “are you, alone or with others, now  trying to start a new business?”  nascent  founders were assigned ni status if they  answered “yes” to the following  screening question: “are you, alone or  with others, now starting a new business  or new venture for your employer?  an  effort that is part of your job  assignment?” (reynolds, 2000)  thus, we  operationally define and distinguish  between the conceptualization and  action of nascent entrepreneurs and  intrapreneurs individually or on behalf  of an existing organization. figure 1 also  draws attention to the intuitive  presumption of many researchers that  while some commonality is likely to  exist, there are likely also important  theoretical differences when such a  process occurs among a collection of  individuals (reich, 1987).  in addition, it  provides a framework upon which both  researchers and practitioners can  visualize the growing facets of  entrepreneurism in multiple forms.  it  has been suggested (e.g., honig, 2001)  that the preponderance of our current  theoretical understanding of  entrepreneurship as a phenomenon has  evolved from the study of individual  entrepreneurs.  the study of  entrepreneurs has generally shifted over  time from an occupational perspective  toward a behavioral perspective  (gartner, 1988).      1although a third perspective emphasizing social purpose of new venture creation has recently begun to  emerge (e.g., wallace, s. l. 1999. social entrepreneurship: the role of social purpose enterprises in  facilitating community economic development. journal of developmental entrepreneurship, 4(2): 153‐ 174.), its distinct theoretical contribution and distinctiveness as a field of inquiry remain controversial  spear, r. 2006.  social entrepreneurship: a different model? international journal of social economics,  33(5/6): 399‐410.  thus, a discussion of this particular perspective is beyond the scope of this investigation.     journal of small business strategy      56    figure 1: evolution of theoretical perspectives of entrepreneurship      in most recent times, the focus of  much research has been particularly on  nascent activity.  nascent activity has  been defined as serious activity, such  as planning, resource acquisition,  networking and organizational  registration, intended to culminate in a  viable new firm (reynolds, 1994) .   because of its proximity to the  underlying cognitive process  frequently suggested as fundamental to  the formation of entrepreneurial  expectations (e.g., casson, 2003;  kirzner, 1999; schumpeter, 1934; shane  & venkataraman, 2000), the study of  nascent activity is arguably crucial to  advancing theoretical development.   while a substantial body of theoretical  insight and empirical evidence has  accumulated focusing on independent  entrepreneurial activity (honig, 2001),  interest in nascent intrapreneurship has  only begun to intensify in recent years.   this growth of interest is attributable,  at least in part, due to the variety of  pressing problems confronting today’s  corporations (kuratko, montagno, &  hornsby, 1990) as the economic  landscape continues to become  increasingly turbulent and competitive  (bettis & hitt, 1995).  for example, the  widespread diffusion of technology in  the marketplace has forced corporations  to place greater emphasis on innovation  to avoid stagnation and decline (miller  & friesen, 1982).  simultaneously,  innovative‐minded employees  disenchanted with bureaucratic  organizations have become increasingly  willing to leave their respective  corporate positions in order to develop  new ventures with environments more  conducive to innovative activity  (kanter, 1985).  consequently, it comes  as no surprise that researchers and  managers alike have increasingly sought  to assess and to understand the  theoretical dimensions that predict,  explain and are ultimately used to  enhance the likelihood of creating an  organizational context where  organizational individual  small  entrepreneurial  family  volume 20, number 1 spring/summer 2009      57    entrepreneurial activity can, and does,  flourish.  extant intrapreneurship research has  focused predominantly on the  organizational environment in which the  intrapreneur operates.  for example,  kanter (1989) associated reporting  structure, information flow, culture and  climate, and reward systems with  successful intrapreneurial ventures.   additional studies (e.g., hornsby,  naffziger, kuratko, & montagno, 1993)  extended this early work by focusing on  identifying common characteristics of  entrepreneurially oriented  organizations.  this work has shown  that organizational factors such as  management support, work  discretion/autonomy, time availability,  clear organizational boundaries, and the  use of reward systems are associated  with entrepreneurial activity.  they are  also are consistent with miller’s (1983)  seminal work on strategic posturing,  which attempts to establish a  relationship between firm‐level  corporate entrepreneurial characteristics  (e.g., level of risk taking, pro‐activeness,  and radical product innovation).    although much of this intrapreneurship  research has been largely conceptual and  case‐based (e.g., duncan, ginter, rucks,  & jacobs, 1988; morse, 1986; norburn,  manning, & birley, 1986), a small yet  emerging stream of empirical research  has sought to compare intrapreneurial  factors to entrepreneurial factors.  for  example, shrader and simon (1997)  found that the two types of ventures  emphasized different resources in  developing competitive strategy.  carrier  (1994) found that structural and system  variables, such as performance and  reward systems, favored success in  entrepreneurial ventures over  intrapreneurial ventures.  such  comparative research has been shown to  be useful because it exploits a relatively  sophisticated knowledge base of the  stand‐alone startup as a baseline for  extending theoretical insights.  because resources have been linked to  strategy, and strategy to performance of  new ventures in turn, researchers have  also compared the financial performance  of intrapreneurial and entrepreneurial  ventures (e.g., biggadike, 1979; fast, 1981;  weiss, 1981).  interestingly, a general yet  seemingly paradoxical theme resulting  from this work is that despite greater  access to superior resources at the  outset, intrapreneurial ventures  generally tend to perform less well than  their entrepreneurial counterparts.   however, shrader and simon (1997) note  that this finding is by no means  conclusive.  specifically, they argue and  find support for the notion that both  types of ventures can be equally  successful, even if they follow different  roads to success.  given this potential for interpretive  ambiguity in previous research, it is  interesting that little comparative work  has been pursued further.  one potential  explanation for a lack of further  comparative research may be because  scholars may not view the differences  between these two groups as compelling  enough to motivate formal study.   hisrich and peters (1998: p. 51), for  example, listed characteristics of the  intrapreneur that included: good grasp  of the environment, visionary and  flexible, creates management options,  encourages teamwork, enables open  discussion, builds a coalition of  supporters, and persistence.  yet  entrepreneurs are also commonly  presumed and/or portrayed as  journal of small business strategy      58  possessing similar characteristics (e.g.,  luchsinger & bagby, 1987).  similarly,  carrier (1996) reviewed the literature  and concluded that most studies have  implied no significant difference  between the two groups.  in short, such  work portrays intrapreneurs and  entrepreneurs as possessing or  employing similar cognitive and  behavioral characteristics.    however, some observers have proposed  that entrepreneurs and intrapreneurs do  indeed differ in important ways.  for  instance, luchsinger and bagby (1987)  suggested that, because intrapreneurs  operate in established organizational  settings, intrapreneurs have less control  over their respective environments and  therefore assume less financial risk.   moreover, they suggest that although  intrapreneurs have access to more  administrative and operational resources  than do entrepreneurs, they must be  able to assume a simultaneously  subordinate role as they seek internal  sponsorship while enduring almost  certain internal resistance and criticism.   in a study comparing strategic decision‐ making characteristics, shrader and  simon (1997) found that intrapreneurs  emphasized internal capital sources,  proprietary knowledge, and marketing  expertise in strategic decision making,  whereas independent entrepreneurs  emphasized external capital sources,  technical expertise, and development of  brand identification.  similarly, honig  (2001) has observed that intrapreneurs  and entrepreneurs employ different  learning strategies in the nascent stages  of new venture creation in sweden.   specifically, he found that intrapreneurs  utilized learning strategies that focused  on organizational consensus, while  entrepreneurs utilized learning  strategies that were more flexible and  adaptive in nature.    collectively, our review of the literature  suggests three important implications  for research.  first, research to date  highlights the importance of, and is  consistent with, the notion that  entrepreneurial activity involves the  continuous formulation of venture‐ related expectations based on the  assumptions of individual decision‐ makers and the availability of  information (e.g., bird, 1988; brimer,  1989; casson, 2003; covin & slevin, 1989;  eisenhardt, 1989; shrader & simon,  1997).  second, research suggests that  such processes not only appear  particularly important in the nascent  stages of the new venture creation  process, but that it is reasonable to  presume that nascent intrapreneurs  (nis) are likely to differ from nascent  entrepreneurs (nes) along a number of  cognitive and behavioral dimensions  (e.g., shrader & simon, 1997).  third, this  review suggests that despite such  likelihood for differences to exist, our  theoretical understanding of such  differences remains inconclusive, largely  anecdotal and often struggles to explain  the paradoxes frequently observed  between the entrepreneurial and  intrapreneurial contexts.  consequently,  this review suggests that additional  research focusing on comparisons of  founders as the primary level of analysis  offers the potential to extend extant  entrepreneurship theory in a meaningful  way.   accordingly, this paper seeks to take a  step toward extending previous theory  and research by focusing explicitly on  comparing the factors postulated to  influence the process of growth  expectation formation across nascent  entrepreneurs (nes) and nascent  volume 20, number 1 spring/summer 2009      59    intrapreneurs (nis).  specifically, we  draw upon extant literature focusing on  perceptions of uncertainty (e.g.,  ballantine, cleveland, & koeller, 1993;  pfeffer & salancik, 1978; sharma &  chrisman, 1999), risk tolerance (e.g.,  kilhlstrom & laffont, 1979; stewart,  watson, carland & carland, 1999), and  planning formality (e.g., harris &  ogbonna, 2006; matthews & scott, 1995)  to develop a model of cognitive and  behavioral factors that have been shown  to be associated with the formation of  growth expectations.  the following four  research questions guided this process.   first, do nes and nis possess different  expectations for firm growth, and if so,  how?  second, do nes and nis engage in  different levels of planning formality?   third, do nes and nis perceive  environmental uncertainty differently,  or possess different risk tolerances, and  if so, how?  lastly, do nes and nis differ  with respect to the relationships  between uncertainty perceptions, risk  tolerance, planning formality and  expectations for firm growth, and if so,  how?    growth expectations    expectations for growth represent  psychological attitudes relating to the  future course of an economic time  series, and are controllable to the extent  that the individual forming the  expectation thinks he or she can  influence the outcome via his or her  actions (brimer, 1989).  by implication,  this suggests that expectations are a  function of information related to causal  factors and controllable factors, and  assumptions related to past behavior  and related factors.  it also suggests that  expectations are important to  understand because they are based on  forecasts, which provide the foundation  for future planning and ultimately the  choice of action individuals elect to take  (ajzen, 1991; bandura, 1986; casson,  2003; locke & latham, 1990; shane &  delmar, 2004).      in general, researchers have found that  the actual performance of small, growth‐ oriented company firms tends to exceed  the performance of larger firms in  similar industry contexts (biggadike,  1979; fast, 1981; weiss, 1981).  of course,  a nascent firm’s position on the growth  curve (e.g., timmons, 1999: 242) implies  expected potential for large year‐over‐ year percentage gains in revenues and  employees when compared to larger,  more mature organizations.  research  has also suggested that entrepreneurs  may have a disproportionate tendency to  be overconfident about their own  relative abilities (camerer & lovallo,  1999; geroski, 1995), suggesting that  they may also be somewhat overly  optimistic in the relative formation of  growth expectations.    by contrast, operating nis inside of an  existing organization may succumb to  managerial herd behavior pressure  (palley, 1995).  this may lead decision‐ makers to be responsible for creating  value to gravitate toward considering  opportunities that are typically better  developed from an industry standpoint.   such pressure, in turn, would be  expected to temper nis’ relative growth  expectations largely because of the  increased competitive pressure that  results from increasingly shared  perceptions of value.  in addition,  matthews & human (2000) found that  more sophisticated planning tempers  expectations of growth.  given nis’  environmental propensity for planning  and the previously observed tempering  journal of small business strategy      60  effect of planning on growth  expectations, they could have more  reasonable expectations for growth.   stated more formally,      h1:  nis will have lower growth  expectations than nes.  business plan formalization    a review of more than three decades of  research suggests that there is relatively  widespread agreement among theorists  that strategic planning, whether formal  or emergent in nature, generally has a  positive influence on a venture’s  performance (miller & cardinal, 1994).   the planning‐performance relationship  may be particularly acute for nascent  ventures because of the substantive  impact decisions made early in the  lifespan of a venture can have on its  developmental process.  brodsky (1995)  has observed, for instance, that many  entrepreneurs fail not because their  business is undercapitalized, but rather  because they misuse the capital they  have raised.  thus, it is likely that a lack  of planning compromises the discipline  and flexibility necessary to avoiding  resource misallocations, which can  ultimately threaten the survival of new  ventures (bhide, 1992).  shane and  delmar (2004) also point out that  planning as a mental process helps to  guide human action because most  human behavior involves forethought  about desired future states and the ways  in which goals can be achieved  (bandura, 1986).  in short, this work  suggests that formal planning is an  important connection mechanism for  communicating expectations to those  who provide and utilize resources alike,  which in turn allows for the integration  of goals into subsequent behavior.  although research specifically seeking to  confirm the linkage between small  business planning and performance has  produced mixed results (e.g., bracker,  keats, & pearson, 1988; orpen, 1985;  robinson jr. & pearce ii, 1983), scholars  tend to agree that small firms do not  conduct as much formal planning as  larger firms (e.g., robinson jr. & pearce  ii, 1984; unni, 1981).  this finding is  particularly interesting given that  anecdotal evidence (i.e., casson, 2003)  suggests both nes and nis perceive the  importance of formal business planning,  and both report frustration by what they  perceive to be a gap in their effectiveness  when the planning process is not fully  engaged.    yet there is substantive theory and  research to suggest small firms confront  influential barriers to the planning  process associated with liabilities of  newness (freeman, carroll, & hannan,  1983).  specifically, small entrepreneurial  firms are less likely to possess the slack  resources (cyert & march, 1963)  perceived as necessary to engage in the  planning process.  by contrast, given the  planning orientation and discipline that  evolves in many corporate  environments, it is reasonable to expect  that nis are inherently more exposed to  formal planning processes.  managerial  control in intrapreneurial contexts is  also likely to be based on multiple  review levels (sykes, 1986).  thus, it is  further reasonable to expect that nis will  also be more motivated to engage in  formal planning because they are more  likely to confront pressures associated  with balancing a variety of political and  corporate objectives during the resource  acquisition and transformation  processes (fast, 1981).  consistent with  this observation, research has also  suggested that once management elects  volume 20, number 1 spring/summer 2009      61    to invest time and resources into  planning, such efforts are highly likely to  be carried through to completion (harris  & ogbonna, 2006).  therefore:   h2:   nis will be more prone to formal  business planning than nes.  academics and consultants have been  advising nascent entrepreneurs for years  that they need to do a better job of  planning for the future (e.g., baker,  addams, & davis, 1993).  however, a  close look at the relevant research does  not reveal clear‐cut support for the  planning‐performance relationship (e.g.,  bracker et al., 1988; orpen, 1985;  robinson jr. & pearce ii, 1983; schwenk  & shrader, 1993).  lumpkin, shrader, and  hills (1998) concluded that in the small  business context, “planning is sometimes  useful and sometimes not” (p. 198).    formal planning should be particularly  cumulative to nascent firms.  after all,  decisions made early in an organization’s  or industry’s life significantly influence  subsequent decisions and performance  (david, 1985; teece, 1990).  at the  nascent stage, planning should be  related to expectations of firm growth.   however, the causal order of this  relationship is not perfectly clear.  it  could be argued that it is the founder’s  expectation of firm growth that is the  spark that ignites the planning process.   that is, it is not so much a model of  “plan and perform” (or in the case of  nascency “plan and expect to perform”),  as “expect to perform and plan to  achieve the expectation.”  indeed, the  more aggressive the expectations for  firm growth, it is plausible that more  sophisticated planning is specified.    while it is interesting to consider the  order of planning and performance, for  the purposes of this inquiry, we focus on  the extent that business planning is  thought to improve the founder’s ability  to effectively acquire and utilize  resources.  accordingly, we should  expect formal planning to ultimately  affect performance and, in the  meantime, influence the founder’s  outlook of future performance.   therefore,    h3:   business planning formality will be  positively related to a nascent  founder’s growth expectations.      perceived uncertainty    firms seek control over their  enviroments to reduce uncertainty and  to enhance survival (pfeffer & salancik,  1978).  indeed, research suggests that the  founder’s perception of the environment  plays a key role in the firm’s chances of  success (bruno & tyebjee, 1982; luo,  1999).  small firms are exposed to  uncertainty on many fronts, including  financial, human resources and  structural uncertainties (ballantine,  cleveland, & koeller, 1993; sharma &  chrisman, 1999).  because nascent firms  frequently operate in the early stages of  industry growth curves, they also  confront high degrees of uncertainty  associated with the potential of great  variability in the industry evolution  process (timmons, 1999).  thus,  acquiring resources can also be difficult  (starr & macmillan, 1990), at least in  part, because new ventures are  frequently perceived as lacking  legitimacy by potential resource  providers (freeman et al., 1983).    by contrast, managers in established  organizations are relatively insulated  from financial, human resource and  structural uncertainties (ballantine et  journal of small business strategy      62  al., 1993).  an argument can be made,  however, that there will be competitive  pressures for internal resources that  result from the combination of differing  objectives and scarcity (fast, 1981).  even  with these internal pressures, the  presence of organizational routines can  provide the ni with mechanisms to  address this competitive pressure.  for  example, nis are likely to have easier  access to critical resources as they find  key influential internal sponsors that act  to insulate nascent activity they endorse  (sharma & chrisman, 1999).  this  insulated state should be expected to  carry over to the ni, especially in terms  of viewing the environment as less  threatening than nes.  therefore:   h4:   nis will perceive less uncertainty  than nes.  research suggests that increased  perceived uncertainty is met with  increased planning in the context of  large existing firms (lindsay & rue,  1980).  this is likely to result, at least in  part, because management review and  control pressures are not only more  widespread in intrapreneurial contexts  (sykes, 1986), but also because they are  typically directed toward extending or  developing momentum in the context of  existing resources (stevenson, 1999).  by  contrast, for small and entrepreneurial  oriented ventures, evidence suggests  that as uncertainty increases,  sophistication of planning tends to  decline (matthews & scott, 1995,  matthews & human, 2000).  this  suggests that resource constraints make  such a response less likely in  independent nascent ventures  (patterson, 1986), and the lack of  resource pool size in nascent ventures  would suggest that momentum would  not be a primary focus in the early stages  (stevenson, 1999).  consequently, this  would seem to suggest that under  conditions of high uncertainty, nascent  entrepreneurs may favor other activities  that permit more immediate  exploitation of perishable opportunities  in lieu of planning  (bhide, 1994).   therefore, we posit that:    h5:   higher perceived uncertainty by a  nascent founder will result in less  planning formality.  risk tolerance    economic theory has long suggested  that entrepreneurs have a higher risk  tolerance, or motivation to undertake  the risks associated with new venture  creation (e.g., kilhlstrom & laffont,  1979).  stewart and roth (2001) note  that, “…more risk‐tolerant individuals  are likely to ‘self‐select’ into  entrepreneurial careers, whereas more  risk‐adverse individuals choose  contractual employment.”  consistent  with this notion, stewart, watson,  carland, and carland (1999) found that  propensity for risk‐taking differentiated  the entrepreneur from small business  owners and corporate managers.   however, this finding conflicts  somewhat with earlier studies that  suggested entrepreneurs are risk averse  and leave little to chance (e.g., miner,  1990), as well as with studies that have  found that risk preference is not a  distinguishing characteristic between  entrepreneurs and the general  population (e.g., brockhaus, 1980;  masters & meier, 1988).    an entrepreneur’s risk tolerance may  possess a temporal element, however.   mccarthy (2000) suggests that an  entrepreneur’s perception of risk and  risk‐bearing capacity might evolve over  the course of business development.  if  volume 20, number 1 spring/summer 2009      63    true, then the more mature business  environment in which intrapreneurs  typically operate may actually, over time,  lead the ni to be more open to risk  tolerance.  working against this  premise, however, is the observation  that decision‐making in established  organizations tends to revert to the  status quo, often to avoid risky  outcomes (e.g., silver & mitchell, 1990;  staw, 1981).  although stewart and roth  (2001) found some evidence to suggest  that entrepreneurs generally have a  greater risk propensity than managers,  overall the extant research suggests no  clear direction in this regard.  therefore,  we hypothesize that:    h6:   there will be no significant  difference in risk tolerance between  nis and nes.    while no difference in risk tolerance  may exist between nis and nes, the  relationship between risk taking and  performance is central to the theory of  the firm (knight, 1921).  in general, while  little research has directly addressed the  relationship between risk tolerance and  planning, intuitively, a relationship  appears to exist.  planning assists in the  decision making process and research  suggests that decision makers who are  less risk averse tend to have more  confidence in their decisions (ghosh &  ray, 1997).  higher risk taking  propensity has also been shown to  reduce role‐related stress and to  improve performance perceptions in  entrepreneurial ventures (teoh & foo,  1997).  thus, founders with higher risk  tolerance may be more likely to plan in  order to obtain a better reward profile.   more specifically:  h7:    nascent founders with higher  risk tolerance will conduct more formal  planning.    little extant research exists surrounding  the possible links between risk tolerance  and growth expectations.  of the  empirical research that does exist,  however, distinctions between  entrepreneurs and managers, risk  propensity, and income expectations are  mixed due to sample issues (stewart &  roth, 2001).   however, the basic  underlying financial premise of “more  risk, more reward” suggests that higher  risk tolerance will be positively related  to greater expectations for growth.   these individuals may also be more  likely to be more optimistic and  aggressive in their growth forecasts as  they factor in riskier but potentially  more rewarding actions into their  expectations of firm performance.   therefore,    h8:   nascent founders with higher risk  tolerance will possess higher growth  expectations.  methods  procedure and sample    data from the entrepreneurship  research consortium panel study of  entrepreneurial dynamics i (erc/psed  i), a national panel study of nascent  business founders, are used for this  investigation.  the erc/psed project  gathered data from more than 800  randomly selected nascent business  founders utilizing both telephone  interview and mail surveys methods.   the reader is referred to reynolds (2000)  for a detailed account of this database’s  development and content.   journal of small business strategy      64  in the psed i database, nascent  founders were assigned an ne or ni  status. for those respondents who went  on to complete the phone and mail  portions of the survey, over 780 nes and  about 130 nis were obtained.  however,  more than 80 respondents answered  “yes” to both of the  screening questions,  meaning that they were classified as  both nes and nis.  this was problematic  for our study, since we desired “clean”  samples of nes and nis for comparison  purposes.  therefore, we excluded those  respondents that answered “yes” to both  screening questions.  the final sample  for this study consisted of 767 nes  (those that answered “yes” only to the  ne screening question) and 48 nis  (those that answered “yes” only to the ni  screening question).    variables and measures    expectations of financial growth.      a single item of the phone interview  asked, “we would like to ask about your  expectations regarding the future of this  new firm.  first, what would you expect  the total sales, revenues, or fees to be in  the first full year of operation?  and  what about in the fifth year?”  the fifth  year estimate of revenues was used as  the owner’s estimate of financial growth  over the five‐year horizon.  since the  near term revenue base in most nascent  enterprises frequently approaches zero,  calculating expected revenue growth  rates from years one through five  produced an unacceptable amount of  noise in the data.  therefore, a log  transformation was performed on the  fifth year value in order to approximate a  normal distribution for the regression  analysis.      business plan formalization.      two items from the telephone portion of  the survey were used to assess business  planning.  one item asked, “a business  plan usually outlines the markets to be  served, the products or services to be  provided, the resources required ‐‐  including money ‐‐ and the expected  growth and profits for a new business.   has a business plan been prepared?”   the responses were coded as (1) yes, (2)  no.  for those who responded that a  business plan was prepared, a second  item was then asked, “what is the  current form of your business plan –  unwritten or in your head, informally  written, formally prepared, or something  else?”  responses were coded as (0)  something else, (1) unwritten in head,  (2) informally written, (3) a combination  of (1) and 2), or (4) formally prepared.      perception of environmental  uncertainty.      an 11‐item measure in the mail survey  using a five point likert response scale  was used to assess the respondent’s  perception of environmental  uncertainty.  this scale focused on state  uncertainty (see milliken, 1987) referring  to the inability of the nascent  entrepreneur to understand or to predict  the state of the environment due to a  lack of information.  the directions read,  “considering the economic and  community context for the new firm,  how certain are you that the new  business will be able to accomplish each  of the following?”  the response scale  was anchored by very high (5) to very  low (1) including a category for “does not  apply.”  the items were reverse scored to  be consistent with prior literature on  environmental uncertainty.    volume 20, number 1 spring/summer 2009      65    a factor analysis performed by matthews  and human (2000) found that the eleven  items loaded on one of three factors  which the researchers labeled as  financial (chronbach’s alpha = .77),  competitive (chronbach’s alpha = .71),  and operational (chronbach’s alpha =  .53) uncertainty.  we group the  uncertainty items similarly here using  those three factor labels.    risk tolerance.    two questions from the mail survey  were used to capture the founder’s  degree of risk tolerance.  one question  asked, “consider two types of new  businesses.  assuming you are the sole  owner, which situation would you  prefer? (1) a business that would provide  a good living, but with little risk of  failure, and little likelihood of making  you a millionaire, or (2) a business that  was much more likely to make you a  millionaire but had a much higher  chance of going bankrupt.  the other  question asked, “i enjoy the challenge of  situations that many consider ‘risky’.”   the response scale was anchored by  completely true (5) to completely untrue  (1).  in both cases, higher scores imply a  greater degree of risk tolerance or risk  seeking preference.  control variables.    in addition to the independent variables,  we also included three demographic  variables: age, gender, and years of full‐ time work experience.  gender is of  particular interest due to the  controversial nature of its influence in  the nascent process.  for example,  although there is some evidence to  suggest that such a relationship may be  attenuating (e.g., masters et al., 1988),  research has historically suggested that  female entrepreneurs have been found  to possess a tendency toward taking less  risk than their male counterparts (see  hisrich & peters, 1998).  given this  tendency, we would also expect that  lower risk tolerance will likely temper  female founder’s growth expectations as  well.    results    correlations for the variables used in the  regression analysis appear in table 1.   descriptive statistics for the ne and ni  groups appear in table 2.  the  differences in gender, age, and  experience are not statistically  significant.  a comparison of the ne and ni groups  using measures of growth expectations,  planning formality, perceived  uncertainty and risk tolerance appears in  table 2.  somewhat surprisingly, results  suggested higher growth expectations  among nis than nes—the reverse of our  h1 prediction.  evidence provides  support for nis as more sophisticated  planners (h2) and for no difference in  risk tolerance between nis and nes  (h6).  no significant support could  found for hypothesized differences in  perceived uncertainty (h4), although  the differences between the means were  consistent across each measure with the  notion that nis perceive less uncertainty  than nes.    hierarchical regression with list‐wise  case deletion was used to test  hypothesized relationships to founder  growth expectations.  of the two  previously noted measures of business  plan formalization, only the question  that assessed the business plan’s  formalization on the zero to four scale  was utilized in the regression analysis.   journal of small business strategy      66                                                                                                  volume 20, number 1 spring/summer 2009      67    table 2: descriptive statistics and means comparison of nes and nis   along key dimensions    descriptive  ne  ni  diff  n  767  48    gender (0 = male, 1 = female)  .49  .38  ‐.11  age  39.5  39.6  .10  years f‐t paid work exp  17.3  18.1  ‐.80    comparison    ne    ni    diff  growth expectations        estimated 5 yr sales (log)  5.13  5.45  *‐.33  planning formality        prepared business plan  1.42  1.27  *.13  degree of business plan formalization  2.51  3.08  **‐.57  perceived uncertainty (higher = less  certain)        financial  2.93  2.83  .10  competitive  1.88  1.80  .08  operational  2.34  2.32  .02  risk tolerance        preference for working in growth  venture  1.17  1.26  ‐.09  enjoy challenge of risky situation  3.42  3.44  ‐.02               t‐test sig.          t p < .10  * p < .05  **p < .01  *** p < .001          the five models that appear in table 3  depict the effects of sequentially  entering groups of variables into the  equation.  model 1 examines ne/ni  effects; model 2 adds the business plan  formalization variable; model 3 adds the  three perceived uncertainty variables;  model 4 adds the group of demographic  control variables; model 5 adds the two  risk variables.  the five regression models were  significant, and the significance level  increased as more variables were added.   the coefficient of determination of the  final model was rather low (r2 = .184).    the largest incremental improvement in  r2 came from addition of the  demographic variables in model 4  (change in r2 is significant p<.001).   although not hypothesized, gender’s  highly significant beta suggests a strong  relationship with founder growth  expectations (also supported by path  analysis, see figure 2). business plan  formalization was also significantly  related to growth expectations, which  supports h3.    journal of small business strategy      68      table 3: regression analysis predicting expectation of financial growth    variables  model 1  model 2  model 3  model 4  model 5  ne/ni status  t.113  .091  .097  .085  .093  business plan formalization    **.209  **.211  **.163  **.157  financial uncertainty      .023  ‐.025  ‐.046  competitive uncertainty      ‐.094  ‐.111  t ‐.118  operational uncertainty      ‐.009  .023  .036  years ft work exp        .099  .102  age        .024  .029  gender        ***‐.302  ***‐.309  preference for venture  startup          .063  enjoys risky situations          ‐.068  r2  .013  .056  .065  .178  .184  adjusted r2  .008  .047  .042  .146  .148  δ adjusted r2    **.039  ‐.005  ***.104  .002  f  t 2.73  **6.25  **2.87  ***5.52  ***5.04    t p < .10  * p < .05  **p < .01  ***p < .001               the uncertainty variables were not  significant, with the exception of a  minor relationship between operational  uncertainty and growth expectations.   finally, we note that the ne/ni status  variable was found marginally  significant in model 1, but then turned  insignificant as other variables entered  the model.  the positive beta coefficient  continues to suggest that nis expect  higher growth than nes (the reverse of  h1).  finally, the path diagram in figure 2  expresses a model of founder growth  expectations using the variables and  relationships proposed by this study.   the six variables specified in figure 2  are represented by one indicator each  and their associated correlations from  table 3.  from the two items used to  reflect business planning formality, the  question that required response on a  zero to four scale was employed in the  path analysis.  operational uncertainty  was selected to represent perceived  uncertainty due to previous research  that suggests operational uncertainty as  significant in the context of expected  growth (see matthews & human, 2000).      hypothesized relationships found to  garner little or no support from the  previous analysis, nis and perceived  uncertainty (h4), nis and risk tolerance   volume 20, number 1 spring/summer 2009      69      figure 2: path analysis results                                (h6), and nis and growth expectations  (h1) were not included in the path  model to reflect our improved  understanding of how these variables  relate.  to test these relationships, path  analysis using the structural equations  modeling methods of lisrel 8 (joreskog  & sorbom, 2001) was conducted.  results  of the path analysis reveal that, with the  exception of the path between  operational uncertainty and planning  formalization, all parameter estimates  were significant at the .01 level or better  (figure 2).  the squared multiple  correlation for the growth expectations  structural equation was .11—rather low  but consistent with the r2 values from  the hierarchical regression analysis.   goodness of fit statistics2 suggest that  the model fits the data well.  the chi‐ square of 11.15 was significant (p = .048).   other measures of absolute and  incremental fit, including the root mean  square error of approximation (rmsea =  .042), goodness of fit index (gfi = .99),  adjusted goodness of fit index (agfi  =.98), and normed fit index (nfi =  .92)exceeded common benchmarks (see  hair, anderson, tatham & black, 1998).   2we utilize several commonly reported goodness of fit indicators and the thresholds suggested by hair et  al. (1998) as desirable.  χ2 is the chi‐square statistic (a non‐significant p‐value of at least p > .01 is  desirable).  rmsea is root mean square error of approximation (< .08).  gfi is goodness of fit index (no  consensus threshold but .90 often viewed as minimum acceptable value). agfi is adjusted goodness of fit  index (> .85).  nfi is normed fit index (> .90).         **.11 (h8)  ***‐.16   ‐.06 (h5)  ***.13 (h2)  ***.14 (h3)  planning  formality  growth  expectations  risk  tolerance  gender  operational  uncertainty  ne/ni   status  ***‐.25   ***.15 (h7)  t p < .10  * p < .05  **p < .01  journal of small business strategy      70      table 4: summary of support for hypotheses a        hypothesized relationship  comparison  of means  hierarchical  regression    path  analysis  h1  ni (‐) growth expectations  reverse  reverse    h2  ni (+) formal planning  strong    strong  h3  formal planning (+) growth  expectations     strong  strong  h4  ni (‐) perceived uncertainty  n.s.      h5  perceived uncertainty (‐)  formal planning      weak  h6  ni = ne regarding risk  tolerance  strong      h7  risk tolerance (+) formal  planning      strong  h8  risk tolerance (+) growth  expectations    n.s.  strong            a blank space indicates relationship was not tested in this mode of analysis    results of the path analysis support  many of the relationships hypothesized  in this investigation.  the degree to  which the analyses support the  hypotheses posited in this investigation  is summarized in table 4.      discussion    this study extends previous theory and  practice by focusing explicitly on  comparing the factors postulated to  influence the process of growth  expectations across nascent  entrepreneurs (nes) and nascent  intrapreneurs (nis).  specifically, we  draw upon extant literature to develop a  model of cognitive and behavioral  antecedents that have been shown to be  associated with the formation of growth  expectations.  it also provides a rare  empirical comparison of nascent  entrepreneurs and intrapreneurs as they  begin their entrepreneurial journey.   our findings suggest that both groups of  founders appear similar in terms of their  perceived environmental uncertainty  and risk tolerance.  nascent  intrapreneurs appear to be more  sophisticated planners, which is  reasonable given the structured  organizational environment of the  intrapreneur.  an interesting finding was  that nascent intrapreneurs appear to  harbor higher growth expectations than  their entrepreneurial counterparts.   when viewed in a holistic model of  growth expectations as portrayed in  figure 2, however, this may be an  indirect effect of the nascent  intrapreneurs’ higher planning  sophistication, and formal planning’s  positive relationship to growth  expectations.      volume 20, number 1 spring/summer 2009      71    an additional finding of interest was the  impact of gender on founder growth  expectations.  this is especially  interesting given the growing body of  evidence which suggests that gender  bears a significant influence on interest  in business ownership (e.g., brush, 1992,  1997).  while there appear to be  important differences, the literature is  relatively silent on the underlying  processes which may account for these  differences (bird & brush, 2002).   although not a central variable of this  investigation, it is hard to ignore the  effects of gender as reported in our  models of growth expectations (table 3,  figure 2).  in particular, it is interesting  to note that in the sample of nascent  entrepreneurs, women are less risk  tolerant.  the mechanism appears  related to females’ aversion for risk,  which appears to temper growth  expectations directly and indirectly as  portrayed in figure 2.      an additional contribution of this study  is the development of a path model of  founder growth expectations (figure 2).   as suggested by the path analysis  results, the configuration of this model  garners significant empirical support.   linking the antecedent variables of risk  tolerance, uncertainty, planning, gender,  and founder type to firm performance  extends the inquiry of matthews and  scott (1995) and other researchers  regarding how these variables are related  in the small firm context.  while the fit  of this particular model was acceptable,  the low path coefficient values and the  low percentage of variability explained  suggest that other variables may exist  that will improve the explanatory power  of this model.  it would be interesting,  for example, given the distinction in  both the literature and in practice, to  examine the effects of a variable relating  to venture type (i.e., “small business  venture or lifestyle business” or  “entrepreneurial venture or aggressive  growth business”) on this model.  in  addition, another interesting variable to  consider in this context would be the  influence of social networks. working   perhaps as a moderating effect,  an  entrepreneur's social network can  help  validate the venture concept or mentor  the ne as (s)he develops the business  model.    implications for practice    as noted above, our findings suggest  that both groups of founders appear  similar in terms of their perceived  environmental uncertainty and risk  tolerance.  nascent intrapreneurs,  however, appear to be more  sophisticated planners, especially in the  structured organizational environment  of the intrapreneur.  when combined  with the finding that nascent  intrapreneurs appear to harbor higher  growth expectations than their  entrepreneurial counterparts, there are  clear implications for practice.  for  example, recent evidence suggests that  writing, or even simply completing a  business plan, results in an entrepreneur  being six times more likely to get into  business (liao & gartner, 2007).   moreover, they also note that there is no  evidence to suggest that planning  detracts from the involvement in  entrepreneurial activities, or is  detrimental to the successful  development of a new business.  our  findings extend this work and signal  practitioners that planning is not only  important to the initial launch, but also  to a venture’s capacity for subsequent  growth.  we note that planning  journal of small business strategy      72  generally fosters higher growth  expectations among founders in both  independent and intrapreneurial  settings.  however, these findings also  appear to suggest that the sophistication  of planning efforts is particularly  important to the development of growth  expectations in intrapreneurial contexts.   we suspect that this result reflects the  need to build momentum towards  growth by explicitly seeking more  widespread institutional and resource  support through formal planning  efforts.  the development process is  iterative and cyclical.  as ardichvili,  cardozo, and ray (2003) note,  entrepreneurial ventures are made, not  found.  as a result, our findings suggest  that those considering nascent  entrepreneurial activity consider  carefully how the planning process,  especially sophistication thereof, and the  context, especially institutional context,  impact the intended launch and growth  of their nascent venture.  future research    a primary focus of this study is on the  expectation of firm growth as the  dependent variable that is the outcome  of the planning process.  we chose this  focus in part because the concept of  planned behavior (ajzen, 1991) has  begun to gain traction in recent  entrepreneurship research (e.g., krueger  jr. & carsrud, 1993; orser, hogarth‐ scott, & wright, 1998).  thus, future  research focusing on empirically testing  the notion that intentions relate to  actual behavior is central to the theory  of planned behavior (ajzen, 1991).  in  addition, considering the role of  opportunity recogntion in both nascent  small business ventures and corporate  ventures could be desirable.  in fact, the  combination of both opportunity  recognition and intentionality could  shed additional light on the nexus of  seeing an opportunity and acting upon it  in either a small business and/or  corporate setting.    it is important to note that one potential  limitation of this study is that we have  relied on a cross‐sectional design to test  our ideas.  a more persuasive test of the  idea that nis may harbor higher growth  expectations than their ne counterparts  as an indirect result of the ni’s tendency  toward higher planning sophistication  would require the use of a longitudinal  research design.  therefore, future  research that examines the directionality  of the relationship observed between  growth expectations and planning  sophistication here, and the relationship  between a nascent founder’s growth  expectations and actual future firm  performance is also suggested.      another potential limitation of this  study concerned the ni sample.  the  small sample size of nascent  intrapreneurs relative to entrepreneurs  weakens the power of this study’s  statistical inferences.  an additional  concern is related to the ni group itself.   the large number of nascent  intrapreneurs discarded in this study  due to answering “yes” to both ne and  ni screening questions casts an  interesting doubt about the ability to  discriminate between these two groups  of founders.  for example, someone  answering “yes” to the ne screening  question (“are you, alone or with others,  now starting a new business or new  venture for your employer?  an effort  that is part of your job assignment?”)  may have been a member of a stand‐ alone venture startup team who  reported to a head founder.  this  experience suggests that future studies  volume 20, number 1 spring/summer 2009      73    of these two groups should ensure better  discrimination between entrepreneurs  and intrapreneurs.  for example, the  research presented here provides  evidence that it would be valuable to  pursue samples from a known  population of intrapreneurs that could  ensure an appropriate stock of legitimate  nis for comparative investigation.  for  future research, we would recommend  that in order to secure sufficient  numbers of nis, an oversample of  potential nis be conducted in addition  to the representative sampling.      also, while this study does not address  the question of industry specific growth  potential and/or differential, an  interesting future research question  might be, “do certain industries appear  as higher growth opportunities than  others acrosss both nes and nis?”   further inquiry directed at these issues  as well as overall size, risk, and type of  venture would extend the findings  presented here and contribute to the  growing body of knowledge focused on  both entrepreneurial and intrapreneurial  ventures.    one final issue that future research may  want to address is the order entry of the  control and independent variables.  in  examining various articles, there seems  to be several approaches to the entry  order of the variables. becker (2005)  notes that in psychological studies, the  “common” practice that the effects of  these variables should be controlled for  before investigating the predictive power  of the variables of interest may not  always be the best approach.  he further  notes that the inclusion of control  variables and the order of entry, like all  other variables in the regression analysis,  should be justified theoretically.  in this  case, we are not asserting a causal order  for the well‐established predictors we  propose.  rather, the issue of variable  order in this case is more of a practical  one given the central focus of this  research.  specifically, we are concerned  with the relationships of these variables  between nes and nis supported by  theory (and logic) and with ruling out  alternative explanations, not necessarily  with establishing an ‘a priori’  comprehensive causal model.  of course,  the sem analysis now suggests what  such a model looks like for future  research.    conclusion    the cross sectional test and small  sample of nis does suggest that caution  be applied when interpreting the  findings.  that said, this investigation  does constitute a rare formal comparison  of entrepreneurs and intrapreneurs  using factors often linked to firm  performance.  as such, it contributes to  our understanding of nascent firm  behavior and should motivate further  inquiry into differences between the  stand‐alone startup and the corporate  venture.  moreover, clearly when pursing  a new venture start‐up, the bottom line  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weiss, l. a. (1981). start‐up businesses:  a comparison of performances. sloan  management review, 23(1), 37‐53.    charles h. matthews is a distinguished  teaching professor and the executive  director of the center for  entrepreneurship education & research  and director of the small business  institute® at the university of cincinnati.   his research interests include strategic  planning, decision‐making, and  leadership succession in small,  entrepreneurial, and closely held firms.    mark t. schenkel is an assistant  professor of entrepreneurship at  belmont university.  his teaching and  research interests include  entrepreneurial cognition, opportunity  recognition, strategic decision‐making  and corporate entrepreneurship.    matthew w. ford is an associate  professor of management at northern  kentucky university.  his research  interests include strategic operations,  quality management, entrepreneurship  and the management and control of  change.                  sherrie e. human is an associate  professor of management and  entrepreneurship at xavier university.   she was the inaugural holder of the  castellini chair in entrepreneurial  studies.  her research interests include  new venture initiation, entrepreneurial  careers, and entrepreneurial and  interorganizational networks.                                                                              reproduced with permission of the copyright owner. further reproduction prohibited without permission. strategy total quality management, just-in-time, and their effect qn small manufacturers feraidoon (fred) raafat milton chen san diego state university abstract this paper examines components of tqm)jit as they relate to small manufacturers. particularly, those components that specifically relate to small volume manufacturing firms are discussed within the framework of the authors'xperiences with small manufacturers in southern california. common difficulties encountered in small businesses in their effort to implement tqm)jit are examined. introduction the nature and the rules of competition are changing as rapidly for small businesses as for the large ones due to increased domestic competition and the competition from such countries as japan, korea, taiwan, and others. this has put increased pressure on u.s. managers to adopt the same strategies and tactics as their foreign competitors in their manufacturing operations. many small businesses are striving to use technological and managerial innovations to increase their productivity and competitiveness by adopting new methodologies or technologies in product, process and operational control of their enterprise. developing global standards for service, quality and pricing is now a requirement, especially when considering changes that are taking place in the far east and in europe. deregulation in the fields of transportation and communicationsand advancesin computers and informationprocessing systemshavehighlighted the need for small businesses to enhance the efficiency and effectiveness of their operations. mittelstadt succinctly states, as reported in industrial engineering (8i: "the importance of small business to the economic and social vitality of the country makes it essential that the same means of achieving greater efficiencies increasingly employed by the large manufacturers be brought within practical reach of the thousands and thousands of shops and plants —small industrial concerns —that support local communities all across the land." however, small businesses are encountering problems in their implementation efforts which are different from those faced by larger organizations. small businesses typically lack the financial and human resources, technical expertise, and the lower volume nature of their manufacturing, making it more difficult to capitalize on the benefits of tqm/jit. smaller traditional companies are increasingly threatened by foreign competition. to be a world competitor, products and services will have to achieve high quality, reasonable cost, and ! 58 excellent on-time-delivery. total quality management (tqm) and just-in-time (jit) are the current management and industrial philosophies and methodologies that aim to achieve the above objectives simultaneously. tqm and jit are mutually supportive and form an integrated system. small and large japanese manufacturers have been most successful in applying the twopronged approach (6). total quality management represents a structured approach to improve quality and productivity. it requires participation by everyone in the company, from top to bottom, cooperation with suppliers and dealers, and usage of statistical process control. jit attempts to produce or procure products and services at the right time in the right quantity in the right place. it emphasizes reduction in: 1) inventory and space requirement, 2) production and delivery leadtime, 3) set-up time, 4) lot size, and 5) defective rates. both tqm and jit rely heavily on teamwork. major corporations such as ford, hewlett packard, motorola, ibm, and xerox are undertaking the implementation of tqm/jit and are requiring their suppliers to do likewise. motorola, in particular, is now encouraging its suppliers to compete for the malcolm baldrige national quality award. in 1988,motorola and a division of westinghouse received the coveted bald rige award; the winner in the small business with outstanding quality category was globe metallurgical (5). milliken and a division of xerox won the 1989award (22). however, no small business was awarded the prize in 1989! small businesses will have to do more in quality improvement. most of the fortune 1000 companies have some kind of jit efforts underway (24). in a national survey of manufacturing managers, respondents agreed by a two-to-one margin that broad based improvement systems such as tqm, jit, and cim (computer integrated manufacturing) offer the greatest potential for improving quality and reducing manufacturing costs (17). according to manoochehri, "small companies, as well as large ones, in variety of industries, could be adopting jit. in fact, many toyota suppliers that have adopted jit are very small companies, as are many suppliers of hewlett-packard, ge, ford, and xerox (19)." jit manufacturing is a philosophy and a practice with a solid history of success in japan and growing success in the u.s.. jit is a manufacturing control system that impacts all sectors of a manufacturing enterprise. however, when managers of a number of small manufacturers were asked if they implemented jit in their organization (29), the unanimous response was "we do not carry enough financial clout to make demands of our suppliers the way our jit customers do of us." additionally, small manufacturers are subjected to a variety of demands from their larger customers who demand documented proof for quality compliance. however, even when documents do exist, they are mainly inspection related and do not tell the whole quality story. finally, capital expenditures that are needed for successful implementation of productivity improvements systems are always in short supply in small manufacturing companies. this article examines components of tqm/jit and their effect and applicability as they relate to small manufacturers. particularly, individual components of tqm/jit that specifically relate to small volume manufacturing firms are discussed within the framework of the authors'xperiences with small manufacturers in southern california. common difficulties encountered in small businesses in their effort to implement tqm/jit are examined. 59 total quality management and small businesses tqm is a system for planning and implementing quality ateach stage of design, production, sales and service. we have summarized the main features of tqm/jit in table 1. the objectives of tqm can be approached from different vantage points. however, deming has formulated a consistent system of continuous improvement that applies to large manufacturers as well as small businesses (8). deming emphasizes: create constancy of purpose toward improvement of product and service and adopt a new philosophy of continuous improvement. cease dependence on inspection; build quality into the product. end the practice of awarding business on the basis of price tag. instead, minimize total cost and move toward a single supplier on a long-term relationship of loyalty and trust. institute rigorous program of training, education, and self-improvement. provide leadership to help people and machines to do a better job and eliminate numerical quotas, rigid goals and management by objectives. drive out fear, so everyone may work effectively for the company. break down barriers between departments. remove thebarriers that robthe employeeofhisorherright toprideof workmanship. put everyone in the company to work to accomplish the transformation. table 1. the important attributes of tqm/jit company-wide qc functional and cross-functional qc top-down boitom-up qc circles/quality teams tqm for cooperating companies statistical process control source-inspection & self inspection andon or visible control system foolproof design small lot produci1on mixed model production jidoka or sl'opping operation when problems arise multi-skill training and assignment inventory and kanban control multi-functional training and assignment set-up time reduciion single minutes exchange of dies group technology and cellular manufacturing u-shaped layout jit purchasing and delivery 60 our experience and research indicates that the implementation of tqm for small companies usually moves forward along the time table as depicted in table 2. table 2. a prototype tqm implementation schedule for small businesses month items time 1 top management sessions 2 days tqm concept, methodology and practice corporate philosophy and policy 2p middle management sessions 2 days tqm concept and methodologies statistical process control group dynamics and teamwork 3,4 professional and technical personnel 3 days 4,5 qc team facilitators i day 6 tqm introduction: kick-off announcement: selection of projects 8 tqm for cooperating companies 11,12 qc presentations, quality fair 14 follow-vp/review setting goals for next year 18 intermediate review and feedback by top management feedback on improvement 23, 24 long-range review and feedback just-in-time and small businesses jit consists of a set of manufacturing techniques/philosophies that affects all areas of manufacturing. jit attempts to eliminate unnecessary activities and inventories by making only what is needed. different authors emphasis distinct aspects or methodologies of the jit system. gun (11),for example, has identiged major components of jit as: multi-functional employees and employee involvement, workplace organization for performance and good housekeeping, preventative maintenance, standard containers, and minimizing setup time. based on our own experiences, we believe the following techniques/methodologies are useful for small businesses. inventory control system inventory has always been used as a buffer for production variation. jit used to be viewed primarily as an inventory reduction technique. however, it is also related to the questions of how and when to automate and how to take advantage of new technology in a manufacturing setting. 61 it considers inventory to be one of the wastes in manufacturing and the cause of major expenditure in excess storage facility, material handling equipment, expensive information and control software (e.g., mrp systems), pilferage, obsolescence and even excess taxes. jit avoids relying on inventory stocks to provide a steady workload, but instead relies on demand to "pull" the products through the production line using the kanban system (kanbans are cards that authorize production or withdrawal of products at each stage of manufacturing process (25). in actual practice, the work-in-process (wip) inventory does not decrease very much for small manufacturers since majority are operating under a make-to-order environment; however, there is some reduction in purchased (raw) material inventory. in any case, most small manufacturers try to keep minimal inventories because of cash flow constraints. a smooth production schedule is necessary for jit to function, otherwise, buffer inventories will be needed to avoid material stockouts. however, under this system, deviations in excess of 10% in the production schedule have an adverse impact on jit implementation and the system begins to break down. jit tries to eliminate or minimize the sources of uncertainty and variation in the production and distribution system. jit uses a less than full capacity to schedule production to ensure that the daily production satisfies the demand requirement. furthermore, this allows for stopping the production line and rectifying difficulties should problems arise. the lower production puts a lesser demand on the workers, machines, tools, and the support staff. multi-functional workers cross-training of employees, both vertically and horizontally, is an aspect of jit that is equally applicable to small manufacturers as to large ones. often, this occurs naturally since there are fewer employees to accomplish a variety of tasks. multi-trained employees provide employers with greater flexibility to accomplish day-to-day activities. surprisingly, it seems the cross-training is not as extensive as one might expect in many small businesses. for example, in one company with over twenty employees, workers are divided into three major classifications of machinist, painters and welders with very little cross-training among the groups. the management considered the skills to be totally different and cross training not justified at all. one of the most important aspects of jit is the production line workers ability to stop the line. the concept focuses on the workers identifying problems or defectives from previous work stations and defective material parts from suppliers. if there are any perceived problems, the worker is allowed and encouraged to stop the work on the line and then begin to solve the problem. the most important element in problem solving is the line worker; he/she has the most experience on the machine since the day by day observations makes the machine worker an "expert." setup time one of the greatest benefits derived from a jit system is in the area of machine setup times. any machine shop whether large or small can reap economical benefits by reducing its machine setup times. the shorter setups reduce the lot sizes. the biggest advantage of a small lot size is that problems can be identified soon before any defective products are made. a major impediment to setup reduction in small businesses has been lack of technical and engineering supportsuchasindustrialandmanufacturingengineers. thisismainlyduetocostconsideration and not having the proper or adequate staff. for example, in one company the numerically controlled milling machines had to be re-programmed for the slightest change to each part moving through the machining station. considering the pure cost pressure, there is an inadequate number of employees to perform this task efficiently. furthermore, many small 62 j businesses use equipment that are very old, e g., 20-40 yearold equipment is not unheard of with setup processes that can not or have not been altered since the equipment was first purchased. this can be a great opportunity for instituting setup time improvements. group technology and cellular manufacturing the goal of group technology (gt) is to reduce the amount of material movement within the plant. the benefits of gt include reduced material handling equipment and transportation time between operations. gt uses parts classification coding to eliminate redundancies and to describe the part by its manufacturing process. the important contribution of group technology is that once the manufacturing process is defined the machines can be arranged to produce the part. this means that the set-up time is reduced since the same machine can work on a family ofproducts. although, conceptually,groupingofmachinery maybeuseful in small manufacturers as in larger ones, the experience shows this to be untrue. small manufacturers tend to be classified as job shops, i.e.,having low volume and high variety products. under this circumstance the application of jit is more difficult than in flow shop environment. contrary to arguments made by manoochehri (19),it maybe more difficult to implement group technology in a small company than a large or medium size company because of the limitation in the number of equipment and resources. more often than not, a small company can not convert to a more repetitive operation. it is, however, possible to reduce production lead time which can in turn help increase flexibility for production planning purposes. in practice, except for minor changes or revision to layout, the job shop environment usually does not change very much. purchasing and delivery whether jit is introduced to a small or a large business, some of the changes most likely to occur will be experienced in the area of purchasing. one of the goals of jit is to ultimately eliminate all receiving inspections. this requires a good, close working relationship with suppliers. the primary attributes to be considered include: 1. developing longer-term contracts with smaller and more frequent deliveries 2. shrinking the supplier base. 3. taking an active role in the selection of transportation. 4. establishing a close buyer-supplier relationship. 5. establish a system of negotiated prices small manufacturers need to analyze and identify high volume, high dollar parts that lend themselves readily to jit environment since it can increase the financial benefits. in general, many small manufacturers do not spend much effort on supplier relationships because they rightly assume there is not sufficient leverage to make this a viable relationship. although increased communication is helpful, this is not sufficient to change the approach to the production processes of their suppliers. under the jit philosophy, price considerations becomes less important than adherence to delivery schedules and quality standards. since deliveries become more frequent under jit, the issue of transportation becomes more important. the potential transportation costs incurred can beenormous. thirtypercentofmotorcarriersarecurrentlyofferingservicestomeetjitdelivery standards� (4). since zero quality defects and on-time deliveries are two of the cornerstones of jit, price takes on less importance when evaluating suppliers. additionally, by coordinating the 63 compatibility of in-plant containers as well as supplier's containers and material handling equipment, substantial cost savings can be recognized. only stock items that can be purchased off-the-shelf can usually be made to be delivered on schedule for small manufacturers. many of the sole sources are not geared to schedule orders closely nor provide precise delivery times. one must realize that prices of items that are negotiated are not only determined by the quantity of the order but also the release schedule accompanying the orders. the longer the supplier has to cany the inventory the higher the price. conclusions small manufacturers have a number of disadvantages with respect to larger ones in their quest to fully utilized a jit system. generally speaking, small manufacturers do not have much leverage with their own vendors. however, because of deregulation and increased competition in the trucking business it is possible to obtain fast delivery (jit delivery) provided one is willing to accept the additional costs that are involved (4). also by reducing the number of suppliers to as few as possible and by approaching small suppliers, one can obtain a certain degree of leverage that might otherwise be minimal or non-existent. because of the smallness of the business, training multi-skilled workers is relatively easier and more beneficial. when ordering from suppliers, not all orders need to be processed immediately but can be delayed to increase the uniformity of production plans. one of the main advantages of jit for small manufacturers is its rather simple information system requirement. often times a full module mrp package is not required and a data base of parts and prices would suffice for determining the required inventory and financial data. many small businesses often insist that their operations are non-repetitive, and processoriented; hence, tqm/jit would not apply. many techniques of tqm/jit are appropriate regardless of the type of manufacturing (2). the proper attitude should be to investigate those tqm/jit approaches that are most pertinent and attempt to adopt them for a particular operation. listed below are some suggestions for use in the application of tqm/jit techniques: 1. recognize repetitive procedures that are most appropriate for jit application. 2. expand market to realize a high volume repetitive production. 3. use statistics that are more appropriate for short-run production, including run charts and c-charts. 4. examine tqm/jit techniques that are appropriate for job shop operations, e.g., company-wide quality management, source inspection, foolproof design, multi-functional training and assignment, group technology and cellular manufacturing, small lot production, reduction of set-up time and lead time, and cooperation with suppliers. a schematic of the evolutionary steps of tqm/jit is depicted in figure 1 to indicate the direction of the implementation process. competitiveness is the aggregation of management know how, process capability, and employee expertise and discipline. small manufacturers, as larger ones, can improve their competitive position by improving their quality, shortening their lead times and improving their flexibility [see for example, simmers, priest, and gary (26)j. although employeeing jit concepts is very useful, small businesses must proceed with caution. because of the advantage that a large company may have in pressuring a supplier, small suppliers are at a relative disadvantage and there is a definite need to cooperate in the tqm/jit undertaking to benefit both. 64 ! the introduction of tqm/jit should be gradual training and informational seminars should precede any actual physical implementation. it is important to establish ownership of tqm/jit internally before approaching suppliers. the transition stage to tqm/jit is a difficult process at best and it can take a long time without any guarantees of success. a successful tqm/ jit implementation provides for a more flexible, balanced and simpler production process. as a result it may become easier to implement an automation project such as robots, automated guided vehicles (agv's), etc. small businesses must strive to meet the requirements of their customers who are putting pressures on them to comply with tqm/flt implementations. figure 1. chain reaction of tqm/jit improvement reduced inspection: less rework and scrap beiter on-time deliveries fewer misi'akes, fewer delays, implement tqm/)it snags reduced lead times reduced inventory and space requirements beiter teamwork higher morale beti'er communication improved corporate culture productivity increases cost decreases capi'ure the market with beiter quality si'ay in business and lower price grow steadily provide jobs higher standard of living 65 references 1. aggarwal, s.c., "mrp, jit,opt, fms? making sense of production operations systems," harvard business review, (september-october 1985). 2. ashton, james e. and frank x. cook, jr., "time to reform job shop manufacturing," harvard business review, (march-april, 1989). 3. avery, s., "quality is the key to jit: purchasing is the key to quality," purchasing, (february 27, 1986), p. 31. 4. avery, s., truckers take to the road with jit," purchasing, (october 10, 1985), pp. 70-73. 5. business america, "three companies get malcolm baldrige award," (december 5, 1988), pp. 2-14. 6. chen., milton m., "japanese quality and productivity," q.c. trends, (november 1986), pp. 8-9. 7. chen, milton m., "phase-in implementation of total quality management," a paper to be presented at the 44th annual quality congress, american society for quality control, (may 1990). 8. deming, edward w., out of the crisis, (center for advanced engineering study, mit, cambridge, massachusetts, 1986). 9. edosomwan, j. a., and c. marsh, "streamlining the materials flow process for justin-time production," industrial engineering, (january 1989), pp. 46-50. 10. feigenbaum, a. v., total quality control (new york: mcgraw-hill, 1983). 11. gun, t.g.,manufacturing for competitive advantagebecoming a world class manufacturer (ballinger publishing co., 1987). 12. hall, r. w., attaining manufacturing excellence (dow jones-irwin, 1987). 13. industrial engineering, "ie news front," (march 1988), p. 6. 14. ikezawa, tatsuo, the do'and don'ts of total quality control, juse, tokyo, japan, 1981. (english translation by milton chen in 1988) 15. ishikawa, kaoru, guide to quality control (tokyo: asian productivity organization, 1976). 16. ishikawa, kaoru, what is total quality control? the japanese way (prentice-hall,1985). (translated by david j. lu) 17. jackson, j., "planning activities offer potential for company improvement industrial engineering, (february 1989), p. 8. 18. i u ran j.m.and f.m.gryna jr., quality planning and analysis (new york: mcgraw-hill, 1980). 19. manoochehri,g.h.,"jit for small manufacturers,'%urnalofgmall businessmanagement, (october 1988), pp. 22-30. 66 20. manoochehri, g. h., "improving productivity with the just-in-time system," journal of systems management, january 1985), pp. 23-26. 21. meredith, j. r., "the strategic advantages of new manufacturing technologies for small firms," strategic management journal, vol 8, (1987), pp. 249-258. 22. monden, y.,toyota production system (norcross, georgia: industrial engineering and management press, 1983). 23. reimann, curt w., "the malcolm baldrige national quality improvement award quality progress, (january 1988), pp. 71-73. 24. schonberger, r.j.,"an assessment of just-in-time implementation," readings in zero inventory, apics 27th annual international conference proceedings, (october 9-12, 1984), pp. 57-59. 25. schonberger, r. j., japanese manufacturing techniques (free press, 1986). 26. simers, d., j. priest and j. gary, "just-in-time techniques in process manufacturing reduced lead time, cost; raise productivity, quality," industrial engineering, (january 1989), pp. 19-23. 27. steiner, m. p. and o. solem, "factors for success in small manufacturing firms," journal of small business management, january 1988), pp. 51-56. 28. stratton, brad, "xerox and milliken receives malcolm national quality awards," quality progress, (december, 1989), pp. 17-20. 29. tomich-liz, r., just-in-time and its effect on small business, unpublished masters thesis, san diego state university, (summer 1987). 30. walleigh,rc.,'what'syourexcusefornotusingjit? harvard businessreoiero,(marchapril 1986). 67 s y journal of small business trateg investigating the impact of a small business consulting course on entrepreneurial attitudes eugene fregetto university of illinois at chicago (retired) abstract this study uses the entrepreneurial attitudes orientation (eao) survey to determine whether students enrolled in a small business consulting course changed their attitude towards entrepreneurship. the eao survey was used in a pre-test at the beginning of the semester and a post-test at the end of the semester, and four other key factors (age, intention to own a business, hours worked, and semesters as full-time students) are also used to search for an explanation of change in students’ attitude towards entrepreneurship. the eao survey was administered to students in a small business consulting class as well as marketing classes, used as a control group, for seven consecutive semesters. no significant attitude change was found for the small business consulting course in the overall eao. however, the eao measure did find a significant change in attitude among students who aspired to own a business and who possessed a strong work ethic. keywords: eao, student consulting, sbi, entrepreneurship education, entrepreneurial attitude introduction until the early 1980s entrepreneurship education was not taken seriously at the majority of colleges and universities in the u.s. and forced entrepreneurship educators to fight an uphill battle for legitimacy in higher education. the following statements from the book the the organization man by william h. whyte (1957) regarding the importance of major corporations in our economy while expressing negative opinions of entrepreneurship reflects the prevailing attitude towards entrepreneurship during the 1950s and 1960s when the first entrepreneurship courses were taught. the fact that a majority of seniors headed for business shy from the idea of being entrepreneurs is only in part due to fear of economic risk. . . . the entrepreneur, as many see him, is a selfish type motivated by greed, and he is, furthermore, unhappy. the big -time operator as sketched in fiction eventually so loses stomach for enterprise that he finds happiness only when he stops 46 journal of small business strategy vol. 25, no. 1 being an entrepreneur, . . (whyte, 1957) small business is small because of nepotism and the roll-top desk outlook, the argument goes; big business, by contrast, has borrowed the tools of science and made them pay off. it has its great laboratories, its market-research departments, and the time and patience to use them. the odds, then, favor the man who joins big business. (whyte, 1957) needless to say, entrepreneurship education stimulated little interest among academics, universities, and business leaders at that time. entrepreneurship education remained a low priority in higher education until the late 70s and early 80s when the belief that entrepreneurship can be taught and learned, “. . . led to an unprecedented growth in entrepreneurship education . . . as evidenced in the increase in the number of endowed positions in entrepreneurship and in the number of colleges and universities in the united states offering entrepreneurship courses” (florin, karri & rossiter, 2007). in 1975, 104 colleges and universities had entrepreneurship courses. by the mid 1980s, nearly 600 undergraduate schools had courses in entrepreneurship. today, more than 5,000 courses are offered at 2,600 schools, and entrepreneurship education has achieved the legitimacy it sought since the 1970s. the growing acceptance of entrepreneurship education was challenged by a long list of questions that continues to place its legitimacy at risk as an academic discipline. katz (2003) wrote an excellent article, “the chronology and intellectual trajectory of american entrepreneurship education: 1876-1999,” that records the academic struggle for legitimacy and development of a respected research stream. due to the commitment of many professors, a rising core of young scholars entering the study of entrepreneurship, and the commitment of many leading universities, entrepreneurship education became a legitimate academic discipline. today, it would be hard to find any college or university without at least one course in entrepreneurship. in fact, major corporations consider entrepreneurship as a cornerstone to their success in today’s dynamic and highly competitive markets reversing the perspective presented in the organizational man. in spite of this progress, the question of the unique contribution of entrepreneurship education still remains. studies such as the meta-analytic review by jun bae et al. (2014) re-enforce our doubt regarding the effectiveness of entrepreneurship education. we certainly know that higher education does matter in the students’ professional careers as average incomes for people with a bachelor degree is significantly higher than those with only a high school degree. as florin et al. (2007) state: despite this growth, the question of whether individuals can be taught to be entrepreneurial continues to generate debate in academic and practitioner circles. whether curriculum initiatives are effectives or useful in addressing the need to develop an entrepreneurial mind-set among students is far from clear. thus a key question arises: ‘can we define a so-called entrepreneurial perspective that can be taught throughout the curriculum? furthermore, can we measure such a construct to assess 47 journal of small business strategy vol. 25, no. 1 our efforts at teaching it? (florin, karri & rossiter, 2007). so higher education does matters, but what is the impact of one course in entrepreneurship? this study examines the impact of an experiential learning course for aspiring entrepreneurs, and offers some insights, pedagogical recommendations, and suggested research based on its findings. fostering entrepreneurship fostering entrepreneurship through education to produce well-educated entrepreneurs has become a high priority in public policy, because “. . . entrepreneurial talent is important to sustaining a competitive advantage in a global economy that is catalyzed by innovation” (raguz & dulcic, 2011). raguz and dulcic emphasize the need to understand the process of becoming an entrepreneur and the factors that influence students’ attitude towards entrepreneurship. at least eleven other studies have also researched the influence of students’ attitude towards entrepreneurship: van gelderen et al., 2008; soluitaris, zerbinati and al-lahan, 2007; harris, gibson, taylor, 2007/2008; kerrick, 2008; wilson, kickul, and marlino, 2007; florin, ranjan, and rossiter, 2007; gibson, harris, walker, and mcdowell, 2014; krishnan and kamalanabhan, 2013; vanevenhoven and ligouri, 2013; peterman and kennedy, 2003 and ismail, jaffar, and hooi, 2013. equally important to attitudes are intentions to start a business and perception of desirability and feasibility. two studies have found that entrepreneurship education has a positive impact on both attributes: vanevenhoren and liqouri (2003) and perterman and kennedy (2003). based on the theory of planned behavior (ajzen, 2002), attitude towards entrepreneurship is recognized as an antecedent to the intent to start a business and perception of desirability and feasibility. consequently, an important research question is to determine the extent to which educational programs positively affect the development of entrepreneurial attitudes (florin, karri, and rossiter, 2007). harris, gibson, and taylor (2007/2008) used the entrepreneurial attitudes orientation (eao) survey to examine the change in students’ entrepreneurial attitude who were enrolled in a small business consulting courses. their results supported the notion that completion of the course had an impact on the students’ entrepreneurial attitude. byabashaiha and katono (2011) found small but significant changes in attitudes and a significant mediating role of attitudes in their study of the impact of college entrepreneurship education on entrepreneurial attitudes. krishnan and kamalanabhan (2013) found a direct relationship between entrepreneurial attitude related constructs and entrepreneurial competencies related factors, leading to entrepreneurial success, and life satisfaction among micro entrepreneurs. a recent study by fayolle and gailly (2013) showed that the impact of entrepreneurial training programs on entrepreneurial intentions is strongly impacted by the students’ initial level of intention and prior exposure to entrepreneurship. interestingly, de jorge-moreno, castillo, and triguero (2012) found that student’s entrepreneurial intention decreased in the business students when they progress in their studies and they are closer in contact with the business reality. despite evidence indicating the impact of entrepreneurship education, some scholars are still doubtful regarding the impact of 48 journal of small business strategy vol. 25, no. 1 entrepreneurship education. in a meta analytic review, jun bae et al. (2014) found that “. . . the relationship between entrepreneurship education and post education entrepreneurial intentions was not significant” even when they “. . . analyzed moderators, such as the attributes of entrepreneurship education, students’ differences, and cultural values.” hatten and ruhland (1995) used the eao survey to examine the change in students’ entrepreneurial attitudes and used a sample from several universities; they found that students possessing high internal locus of control did develop a more positive attitude towards entrepreneurship than students with lower internal locus of control in the same entrepreneurship program. however, they did not find any other differences with the other scales of the eao survey. a third source of doubt regarding the impact of entrepreneurship education is expressed by the sba in a 2006 report: a review of recent research measuring the impact of general education on entrepreneurship and entrepreneurial performance suggests three key generalizations. first, the evidence suggesting a positive link between education and entrepreneurial performance is robust. second, although the link between education and selection into entrepreneurship is somewhat ambiguous, evidence suggests that when “necessity entrepreneurship” and “opportunity entrepreneurship” are considered separately, and when country differences are considered, the link is less ambiguous. finally, the relationship between education and selection into entrepreneurship is not linear in nature. the highest levels of entrepreneurship are linked to individuals with at least some college education. education beyond a baccalaureate degree has generally not been found to be positively linked to entrepreneurship (sba advoacy, 2006). even though there is doubt regarding the direct link between entrepreneurship education and practicing entrepreneurship, de jorge-moreno et al. (2012) claim that entrepreneurship education does have an impact: “based on a study done by kolvereid and moen (1997), it is shown that those students who have taken a major in entrepreneurship have revealed greater interest in becoming entrepreneurs; and these students act more entrepreneurial than other students in taking up the challenge to start up a business. thus, it is suggested that although it may not be possible to develop entrepreneurship from education exclusively, to a certain extent, education has an effect to alter and contribute to the formation of entrepreneurship.” without a doubt, entrepreneurship is a complex subject to teach, because it depends on the individual’s self-regulated action and on characteristics that are not easy to influence. consequently, the debate continues due to the lack of well-defined methods for assessing the effectiveness of entrepreneurship education (de jorge morena et al., 2012). study’s underlying premise uncertainty regarding the impact of entrepreneurship education remains, 49 journal of small business strategy vol. 25, no. 1 however, it is widely accepted that a positive attitude with the requisite skills are essential for success in any career; entrepreneurship being no exception. as noted earlier, the theory of planned behavior has become an accepted theoretical framework to assess entrepreneurial intention and to use that assessment to predict entrepreneurship. also accepted is that a positive attitude towards entrepreneurship will increase a person’s intention to engage in entrepreneurial activities. this study has three underlying premises: (1) entrepreneurship education provides skills and changes attitudes that encourage and support entrepreneurship. (2) entrepreneurship skills and a positive attitude towards entrepreneurship must be acquired prior to the formation of entrepreneurial intentions. (3) entrepreneurship intentions are likely to lead to successful business venture. attitude and the skills form a solid basis upon which perception of desirability and feasibility as well as intentions are; once built, intentions are followed by action as shown in figure 1. figure 1 the model shown in figure 1 posits that entrepreneurship education does not directly affect a student’s intentions to start a business. instead, entrepreneurship education provides both the skills necessary to start a business and changes the student’s attitude towards entrepreneurship. in addition, this model posits that both the requisite skills and a positive attitude are required to create the perception of desirability and feasibility. as such, specific entrepreneurial skills and entrepreneurial attitudes are prerequisites, to entrepreneurial intentions. also shown in figure 1 are the factors understudy to explain the impact of a small business 50 journal of small business strategy vol. 25, no. 1 consulting course on students’ attitude towards entrepreneurship. the other factors include marketing courses used as a control group and lifestyle and demographic variables that could also explain change in a student’s attitude towards entrepreneurship. as de jorg-mareno et al. state “. . . entrepreneurship education is more than business management, it is about ‘learning’, which means learning to integrate experience, skills and knowledge, to get prepared to start with a new venture.” p 421 another key point illustrated in figure 1 is that the courses and other factors are operating within the context and mediating role of the university. this suggests that the impact of the factors under study is due, in part, to the particular context the university provides to support its professors and students. the important and dynamic nature of the role that the university should play in the education of tomorrow’s entrepreneurs is well stated by de jorge-moreno et al. (2013): in line with some authors, we think that the university must have a triple role: incentive; encouraging students to start their own business, developer; informing students when they express a desire to create their own business and, finally, a training role; passing on knowledge and bringing students into business models. therefore, the role of the university should not be confined to mere academic education, but be able to develop the necessary skills in students. there is a need for creation an atmosphere that encourage students to become entrepreneurs. additional support for the university’s role and the importance of attitude and skills in entrepreneurship education come from by fayolle, gailly, and lassas-clerc (2006) who state that entrepreneurship education consists of “any pedagogical or process of education for entrepreneurial attitudes and skills.” wong, ho and low (2014) examined the influence of university entrepreneurship education on students’ entrepreneurial behavior, and its ability to create higher levels of intention causing students to become more involved in venture creation. they found that a student’s attitude towards entrepreneurship is a measure of the student’s behavioral beliefs, and they also noted that the connection between attitude and behavior is supported by ajzen’s theory of planned behavior. peterman and kennedy (2003) examined the effect of participation in an entrepreneurship education program on students’ perceptions of desirability and feasibility of starting a business. they found “. . . participants reported significantly higher perceptions of both desirability and feasibility,” however, the change in perception was positively related to prior experience. in a 2009 article, schwarz, et al. identified “. . .three fundamental attitudinal antecedents of intent: personal attitude toward outcomes of the behavior, perceived social norm, and perceived behavioural control (self-efficacy).” schwarz et al. also noted that attitudes are less stable than personality traits and can be changed across both time and situations. “therefore, entrepreneurial attitudes may be influenced by educators and practitioners” (schwarz, et al., 2009). consequently, attitude is posited to be an antecedent of intentions and intentions an antecedent of behavior, i.e., venture start-up. carsrud et al. (2009) simply stated the importance of attitude when they found that people shape their intentions to become entrepreneurs when 51 journal of small business strategy vol. 25, no. 1 they possess favorable attitudes towards entrepreneurial acts; van gelderen et al. (2008) reported that students’ intentions and propensity to start a business are shaped by their attitudes towards entrepreneurship; and lüthje and franke (2003) found that attitude toward entrepreneurship is an important prerequisite for entrepreneurial intention. it is impressive that so many scholars have focused on the attitude-intention-behavior linkage in an effort to explain the source of entrepreneurship as well as to predict the occurrence of entrepreneurship. a key challenge facing entrepreneurship education is how to modify, change, or revolutionize the traditional academic approach to education in order to create a new generation of entrepreneurs. research questions the study’s principal question: does an experiential learning course positively impact a student’s attitude towards entrepreneurship? this is an important question in light of the prevailing uncertainty regarding the impact of entrepreneurship education as well as the important role that attitude plays in the formation of a new venture. in order to answer the question, this study focuses on the impact of a 16-week small business consulting course using a pretest and posttest research design. in order to improve the study’s reliability and validity, a control group is included along with four additional factors that could also explain change in attitude towards entrepreneurship. the control group is marketing courses taught by the same professor who teaches the small business consulting course. the four additional factors are: age of student, number of semesters the student has been a full-time student, hours the students worked during the semester, and the student’s intention to own a business. the control group is important as business courses are designed to provide business skills but are not designed to emphasize the new venture creation process (liñán, 2008). conversely, entrepreneurship graduates have been reported to be three times more likely to start a new business (charney and libecap, 2000). the above two sources in addition to the literature review provided earlier in this paper provides support for the first two hypotheses: h1: students in a small business consulting course will experience a significant increase in their eao scores. h2: students in marketing courses will not experience a significant increase in their eao scores. the basis for hypotheses regarding the four additional factors need support from other sources as eao research focused principally on the effects of entrepreneurship education. however, some studies did reports finding that can provide support for hypotheses regarding age, semesters as a full-time student, hours worked during the semester, and intention to own a business. intention to own a business the essence of this study is based on the belief that there is a strong relationship between students’ intention and students’ attitude. research reported earlier in this paper clearly supports a strong linkage between attitudes and intentions. therefore, 52 journal of small business strategy vol. 25, no. 1 age h3: there is a positive relationship between students’ intentions to own a business and their eao score. entrepreneurship research that examines the causal relationship between age and entrepreneurship. there are reports that show the occurrence of entrepreneurship among various age groups. at most, the none of the eao studies reviewed for this paper focused on age as an explanatory factor. in addition, it is rare to find analysis of age is a report showing the basic frequency analysis as show below. pie graph 1: occurrence of entrepreneurship among age groups a kauffman foundation blog, growthology, provides some additional insight regarding age: “at any age, you have a mix of entrepreneurs who really wanted to start a company and have wanted to do so for a long time and those who opportunistically became entrepreneurs.” adeo resso (2011) adds another perspective concerning age and entrepreneurship: it does not take but one minute to look around the world and prove any thesis of a peak tech founder age incorrect. there are countless entrepreneurs over the age of 30, . . . we have romanticized the idea of a young founder because, well, it’s a great story, but these stories are not the norm. in the end, classic biases of gender, race, and age need to be discarded for a real science of success. a third perspective is contributed by melissa anders (2013) 53 journal of small business strategy vol. 25, no. 1 an aarp survey found that 12 percent of members age 50 and older in michigan are seriously considering starting a business. nationally, about 25 million people, or one in four americans ages 44 to 70, are interested in launching a business or nonprofit in the next several years, according to a 2011 report funded by the metlife foundation. as age appears to neither hinder nor explain the occurrence of entrepreneurship, it is hypothesized that there is no relationship between age and eao. h4: there is no relationship between a students’ age and their eao score. semesters as a full-time student as previously stated, de jorge-moreno et al. found that student’s entrepreneurial intentions decreased in the business students as they progressed in their studies and they are closer in contact with business reality. …the entrepreneurial intention efficiency decreases when the students of business progress in their studies and they are closer in contact with business reality. maybe due to personal and family pressures to seek income with less uncertainty. moreover, the judgments inherent in the university education system in relation to lack of motivation are conveyed to students in business creation. (de jorge-moreno et al., 2012). h5: there is a negative relationship between the students’ eao score and the length of time being a full-time student. hours working as a full-time student as reported by gibson, harris, walker and mcdowell (2014), there is a positive link between entrepreneurial attitudes and intentions and past business experience and exposure: research has established a link between entrepreneurial attitudes and intentions and past business experience and exposure. this link may include direct work experience or indirect experience through a family business. h6: there is a positive relationship between the students’ eao scores and the number of hours they work as a full-time student. these hypothesis will be tested under five different scenarios: (1) students enrolled in only a small business consulting course using pretest and posttest, (2) students enrolled in only marketing courses using pretest and posttest, (3) aggregate responses of all students in both courses using pretest and posttest, (4) students enrolled in a small business consulting course versus students enrolled in marketing courses comparing only pretest responses, and (5) student enrolled in a small business consulting course versus students enrolled in marketing courses comparing only posttest responses. in addition, this study tests the four additional hypotheses regarding the impact of age, semesters as a full-time student, hours worked, and intention to run a business on the students’ attitude towards entrepreneurship as measured by the eao scale. 54 journal of small business strategy vol. 25, no. 1 eao scale measuring entrepreneurship is the first order of business for scholars and policy advocates. how much entrepreneurship do we have? how can we get more entrepreneurship? these are the two meta questions that dominate entrepreneurship research and policy making. at the heart of these two questions is the question of how do we explain entrepreneurship? where does it come from? the eao scale (robinson et al., 1991) has been used frequently to help answer these questions. since its publication in 1991, thirty-two papers have been published using the eao scale to explain entrepreneurship. in order to investigate the influence of a small business consulting course on the students’ attitude toward entrepreneurship, the eao survey developed by robinson, et al., (1991) is used as a pre-test and post-test to measure change in attitude. as stated in the introduction, after decades of scholarship and advocacy, entrepreneurship is finally viewed as an economic resource for all types of economies from emerging to mature economies. decades ago, entrepreneurship faced the legitimacy challenge. today, entrepreneurship faces the question of how do we get more of it. since we know that entrepreneurship is a phenomenon of individual aspiration and achievement, early research focused on understanding the demographic profile and personality of those who practiced entrepreneurship. although this research produced some interesting findings, demographic and personality research failed to provide a causal explanation for entrepreneurship which would help identify method for creating more entrepreneurship and creating entrepreneurship in places where it is most needed. robinson, et al’s, attitude approach published in 1991 pointed scholars in a new and refreshing direction to answer important questions about entrepreneurship that the demographic and personality approaches could not answer. neither approach provided a useable way to influence the development of entrepreneurship and predict the occurrence of entrepreneurship, because both approaches consider factors that are static or established in the past; the majority of a person’s demographic profile cannot be changed and personality is greatly influenced by your early childhood. most importantly, neither approach included the effect and/or influence of the environment, especially entrepreneurship education that became established as a legitimate approach to stimulating entrepreneurship by the 1990s. robinson, et al.’s, proposed attitude approach not only overcomes the many shortcomings of the demographic and personality approaches, but also “offers both theoretical and practical benefit to the study of entrepreneurship” (robinson, et al, 1991). the work of robinson, stimpson, huefner, and hunt (1991) was one of the first to use an attitudinal scale to predict entrepreneurial activity: . . . robinson, stimpson, huefner, and hunt (1991) developed the entrepreneurial attitude orientation (eao) model to measure entrepreneurial attitudes. the subscales of the eao measure individuals’ attitudes on four constructs: (1) achievement in 55 journal of small business strategy vol. 25, no. 1 business (referring to the results of starting and growing a business venture); (2) innovation in business (using innovative methods in business activities); (3) perceived personal control of business outcomes (individual’s control and influence on his/her business); and (4) perceived self-esteem in business (self-confidence and perceived competency in business affairs). (harris, et all, 2007/2008) the first known published study using the eao was in 1993 followed by a study published in 1995 and two studies in 1996. since then 32 additional papers have been published using eao including two phd dissertations and two studies that have re examined the reliability and validity of the eao scale. the scale has been used to measure entrepreneurial attitude in five foreign countries, malaysia (ismail et al., 2013), spain (dejorge-moreno et al., 2012), caribbean (esnard, 2011), china (miao, 2012), and india (krishnan and kamalanabhan, 2013), as well as in the u.s. in addition, the eao scale has been used to develop two new scales: entrepreneurial opportunity recognition (eor) (mcclaine, bhat, and baj, 2000) and entrepreneurial drive (ed) (florin, karri, and rossiter, 2007). the wide use of the eao scale provides support for it reliability and validity in explaining entrepreneurship from an attitude perspective. recent study of particular interest of particular interest to this study is research by harris, gibson, and taylor (2007/2008) that found a small business consulting course to have a positive impact the students’ attitude towards entrepreneurship as measured by the eao scale. harris et al. study is of particular interest to this study, because it is the most recent study of the impact of a small business consulting course on students’ attitude towards entrepreneurship using the eao scale. in fact, harris et al. study is only the second study found in literature using the eao scale to study the impact of a small business consulting course. the other study was reported in 1995: hatten and ruhland (1995). this study follows the same basic methodology to study a similar small business consulting course at a major university located in the midwest, and there is a lot of commonality between the two studies: both are examining the same phenomenon, change in attitude, caused by a small business consulting course using the same instrument. both courses are taught using the same approach recommended by sbi®. the professor who taught the courses included in this study starting teaching the small business consulting course in 1982 and taught the course at the same university every semester until 2012, several years after the completion of the study period. the difference between the two studies is the manner in which this study included a control group and measured change at the student level. harris et al. study measured change in attitude for six courses taught at different universities during one semester, but they did not include a control group and had no method to ensure that all students completed both the pretest and posttest eao survey. although their findings are notable and should be taken into consideration, their findings could be biased for the following five reasons: (1) the average impact could be skewed by one or two exceptional professors rather than the content and experience of the course. (2) 56 journal of small business strategy vol. 25, no. 1 the average impact could be skewed by the university context of one or two of the universities which are exceptional and will pull the average measure of the impact upward. (3) the results from a cross sectional snapshot, i.e., one semester, are more prone to the impact of extraneous factors than a study performed over several semester where the impact of extraneous factors could cancel each other out. (4) harris, et al. included no control group by which to compare the change found among students of a small business consulting course and other business courses. finally, the survey did not code student responses that would confirm whether students completed both the pretest and posttest survey. in order to improve the research design, this study administered the eao survey to courses taught by the same professor, administered the eao survey to students enrolled in both the student consulting course and three different marketing courses during the same semester, all courses were taught at the same university over a three-year period, and students were required to identify themselves to assure completion of the pretest and posttest surveys. confidentiality of student’s individual responses was protected. following is a brief explanation of why the particular control variable improved the research design for this study. first, harris, et al. (2007/2008), study performed a pre-test and post-test of students enrolled only in a small business consulting course. they did not have a control group, i.e., students not enrolled in a small business consulting course, to determine whether the change in the students’ attitude is equally likely to occur with students taking other business courses. in other words, their study lacked any control measure to account for the likelihood that other college courses could have an equal impact on entrepreneurial attitude. without a comparison to other courses, the effectiveness of a small business consulting course to change eao will remain debatable. second, they did not measure the change in attitude at the individual student level ensuring that each student in the data set completed both the pre-test and post-test. instead, their study used an aggregate pretest-posttest comparison where 216 students completed the pretest and 142 students completed the posttest. in addition, their paper did not claim that all 142 students who took the posttest completed the pretest as some students could have enrolled late in the course or simply forgot to take the pretest but completed the posttest. they did report performing a t-test to compare the pretest sample of responding students with the posttest sample of responding students and found no difference on the criteria used to compare the two samples. however, no analysis was reported on the missing 74 students, i.e., 34% of their pretest sample. with over a third of the original students missing from the posttest, it is very likely that their findings would be significantly different had the 74 students responded. at this time, the impact of the “missing students” is only hypothetical. for instance, their significant findings could be due to the “drop-out” of 74 students whose interest in entrepreneurship was not stimulated by the consulting course thereby increasing the overall average of the 142 students who did have a positive experience and responded to the posttest. in order to overcome the response shortcoming, this study included only students who completed the both pretest and the posttest so that the measurement of change is the difference 57 journal of small business strategy vol. 25, no. 1 between the individual student’s responses given on the pretest with the responses the same student gave on the posttest. third, harris, et al. (2007/2008), study includes students from six different universities. although there are some inherent advantages to this type of sample, the major disadvantage is the possible extraordinary effect from one or two universities and/or professors. conversely, this study controlled for both the unique effect of the university and professor by assessing courses taught by the same professor at the same university over seven semesters rather than measuring the effect of six different professors on six different campuses during one semester. the fourth difference between the studies is the duration of the study. harris, et al, study included courses taken at six difference universities but for only one semester. a valid hypothesis is that a longer study duration would minimize the impact of any extra-ordinary or uncontrolled event in the environment during one semester as well as lessen the influence of the professor as he or she might extend extra effort during the testing period to ensure positive results. the occurrence and/or impact of any extraordinary event during the one sixteen week period was not reported in harris, et al, study neither did their study claim that any extraordinary event occurred during the test period. regardless, this study’s design minimizes the impact of any one environmental event during one semester by measuring change in attitude over seven semesters. with the above changes to the research design, the measure of change in eao in this study will be an improved measure of the net change between students taking the small business consulting courses and students taking marketing courses. eao scale modification the eao scale is constructed from a base of 75 questions, 13 of which are reverse scale. diagram 1 shows the number of questions used to measure each sub construct (affect, behavior, and cognitions) as well as the four constructs used to measure to measure eao. 58 journal of small business strategy vol. 25, no. 1 diagram 1: eao measure showing constructs, sub-constructs, and number of questions for each sub-construct. two variations were made to the original eao measure. the 1991 article reported that the respondents were asked to indicate how much they agree with the 75 statements by “circling a number between ‘1’ and ‘10’ where ‘1’ indicates that you strongly disagree with the statement and ‘10’ indicates you strongly agree with the statement.” (robinson, stempson, huefner, and hunt, 1991). based on this instruction, it implies that researchers used an unlabeled scale. due to the nature of the population under study, it was decided to modify the scale by using a labeled scale rather than an unlabeled scale. second, students were given the option to enter a “no opinion” response, because the scale was originally designed to measure the eao between entrepreneurs and non-entrepreneurs and no to differentiate the eao among undergraduate college students. therefore some of the questions may not apply to students in their academic setting, and students were given the opportunity to skip any question by indicating “no opinion.” a similar modification was also used in a study of student’s entrepreneurial attitudes. florin, karri, and rossiter (2007) modified the eao scale before administration, because they believed several questions did not apply to students: given our focus on undergraduate business education, we adapted the entrepreneurial attitude orientation (eao) scale developed and tested by robinson et al. (1991). as the eao scale was constructed with entrepreneurs and nonentrepreneurs in mind, we made changes where necessary to suit the school context. scale items that were highly specific to practicing entrepreneurs were eliminated or modified so that the object was the school environment and not the work environment. (florin et al., 2007). it is believed that giving the students the option to opt-out of answering the question if they do not believe it fits their particular situation, produced a more reliable and valid measure of the students’ attitude rather than forcing them to express an attitude when they may not have the experience or situation to express such an attitude. the following scale shown in 59 journal of small business strategy vol. 25, no. 1 figure 2 was used to measure the students’ attitude. figure 2 label strongly disagree disagree moderally disagree slightly disagree slightly agree moderally agree agree strongly agree no opinion coded value 1 2 3 4 5 6 7 8 9 for data analysis, “9” was coded as a missing value so it could be eliminated from the statistical analysis of the eao measure, however giving the missing value a real number allowed the “no opinion” responses to be analyzed. the following tables provide a summary of the analysis of the “no opinion” responses. table #1 summarizes the number of questions that had “no opinion” responses, and table #2 provides the six questions that were skipped by 10% to 15% of the time. table 1: summary of questions with “no opinion” responses % of question with “no opinion” selected number of questions with % of “no opinion responses number of respondents with “no opinion” less than 1% 5 1-3 1% to 4.9% 42 4-19 5% to 9.9% 22 20-33 10% to 15% 6 40-61 maximum percent: 15.17% total: 75 questions maximum: 402 responses1 table 2: questions skipped 10% to 15% question position in questionnaire questions number of times a “no opinion” response” was given. 41 of 75 questions 43 of 75 questions 47 of 75 questions 64 of 75 questions 68 of 75 questions even though i spend some time trying to influence business 50 events around me every day, i have had very little success. most of my time is spent working on several business ideas 40 at the same time. i usually delegate routine tasks after only a short period of 58 time. i take an active part in community affairs so that i can 61 influence events that affect my business. my knack for dealing with people enables me to create 43 many of my opportunities 76 of 75 i enjoy being a catalyst for change in business affairs 51 questions 1 402 “no opinion” responses represent 2.7% of the total possible responses from the 201 respondents included in this analysis: 201 respondents times 75 questions/respondent = 15,075 possible responses. 60 journal of small business strategy vol. 25, no. 1 as will be discussed later in this paper, the students are enrolled in the college of business from an urban university in the midwest; approximately 75% work at least 10 hours per week during the semester of which 40% work 20 hours or more while going to school full-time. in addition, the students are undergraduate junior and senior; half are 22 years old and over with only 3.7% are 30 or older. consequently, it is expected that a significant percent of the students would have relevant business experiences and be able to answer most, if not all, of the 75 questions. however, forty six percent of the students are 21 or younger and 27% work fewer than 10 hours per week so it is equally likely that a significant number of students will lack sufficient business experiences to answer all 75 questions. methodology participations are students enrolled in a small business consulting course and marketing courses at an urban university located in the midwest during seven different semesters starting with the 2008 fall semester and ending with the 2011 spring semester, including one summer semester, 2009 summer. the students are representative of an undergraduate school student population. table 3 reports that 46% of the students aged 21 or younger; 49.8% aged 22 to 29; and only 3.7% aged 30 or older reflecting the expected age range for undergraduate business students. table 3: respondents ages range frequency percent valid 21 or younger 187 46.5 22 81 20.1 23 49 12.2 24 12 3.0 25 17 4.2 26 11 2.7 27 3 .7 28 13 3.2 29 4 1.0 30 or older 15 3.7 total 392 97.5 missing system 10 2.5 total 402 100.0 the graph 1 reports number of semesters the students have attended the university under study as full-time students and shows the sample is fairly representative of new students to experienced students at the particular university. 61 journal of small business strategy vol. 25, no. 1 graph 1: frequency distribution of semesters as full-time students2 2 graph 1 includes students who entered the university as freshman as well as students who transferred to the university from community colleges or other 4-year universities. since all students in the courses under study are junior or seniors, it is likely that students with four or fewer semesters are transfer students. 62 journal of small business strategy vol. 25, no. 1 a third attribute shown in table 4 reports that the students at this urban university regularly work during the semester thereby gaining business experience through internships, part-time jobs, and full-time jobs. as previously stated, many students included in the sample are likely to experience business and/or entrepreneurial situations measured by the eao. table 4: hours worked per week frequency percent valid 10 or less hours 111 27.6 11-15 57 14.2 16-20 75 18.7 21-25 52 12.9 26-30 46 11.4 31-35 21 5.2 36-40 15 3.7 40 or more 15 3.7 total 392 97.5 missing system 10 2.5 total 402 100.0 student data for this project was generated via a web-based survey of students who had the same professor for a small business consulting course and three marketing courses: marketing research, consumer behavior, and personal selling. pretest and posttest responses were collected from 201 students; fifty students were students from the small business consulting courses and 151 students from the marketing courses. in order to match the pretest and posttest responses, each student was given a unique identifier so that a t-test of the difference is measured as the actual difference in the pre test and post-test for each student rather than an average of the aggregate response of all students who took the pretest and posttest as in the harris et al. study. consequently, students who took the pretest and failed to take the posttest, were eliminated by the study, and no student who took only the posttest was included in this study. in addition, several students who did complete the pretest and posttest were eliminated from the sample, because they were students in both the small business consulting course and the marketing courses. these students were eliminated to ensure that the two samples were mutually exclusive so the average impact of the eao measure for each type of course would not be impacted by having common students. analysis as stated under hypothesis, five different scenarios are used to test hypothesis 1 that entrepreneurial attitudes of small business consulting students will be strengthen as a result of completing a semester-long student consulting course. a t-test was performed to compare the students’ change in attitude as measured by the overall eao measure and the eao constructs and sub-constructs were used to continue the effort to search for differences at all three levels of the eao scale. the following five scenarios were used as a basis for analysis: (1) students enrolled in only a small business consulting course 63 journal of small business strategy vol. 25, no. 1 comparing pretest versus posttest results. (2) student enrolled in only marketing courses not related to the small business consulting course or other entrepreneurship courses comparing pretest versus posttest results. (3) aggregate differences for all students comparing pretest and posttest results. (4) students enrolled in a small business consulting class versus students enrolled in marketing courses comparing only pretest results. (5) students enrolled in a small business consulting class versus students enrolled in marketing courses comparing only posttest results. in addition to testing the above five scenarios, an analysis was made to determine the extent to which other factors could explain change in a student’s attitude towards entrepreneurship. a t-test was used to determine the differences on four other variables: age, semesters as full-time students, hours worked while going to school, and their intentions to own a business. as a follow-up to the t-test analysis searching for differences between the students enrolled in the two different types of courses, a correlation analysis is used to verify the t-test findings as well as to gain a better understanding of the strength of the relationships. results the first row of table 5 reports the relationships between the change in students’ attitude towards entrepreneurship as measured by the eao scale and the six factors under study. four of the six hypotheses regarding the eao scale and the factors under consideration are supported by these findings: h1: students in a small business consulting course will experience an increase in their eao scores. this hypothesis is not supported as the analysis did not find any significant change in the students’ attitude towards entrepreneurship as a result of completing a small business consulting course. h2: students in marketing courses will not experience a significant increase in their eao scores. this hypothesis is supported as this analysis did not find any change in the students’ attitude towards entrepreneurship as a result of taking marketing courses. h3: there is a positive relationship between students’ intentions to own a business and their eao score. this hypothesis is supported as this analysis did find a change in the students’ attitude towards entrepreneurship if they aspired to own a business. h4: there is no relationship between a students’ age and their eao score. this hypothesis is supported as the analysis did not find any relationship between age and attitude towards entrepreneurship. 64 journal of small business strategy vol. 25, no. 1 h5: there is a negative relationship between the students’ eao score and the length of time being a full-time student. this hypothesis is not supported as no relationship, either positive or negative, was found between the students’ academic tenure as a student and their attitudes towards entrepreneurship. h6: there is a positive relationship between the students’ eao scores and the number of hours they work as a full-time student. this hypothesis is supported as the analysis did find a change in the students’ attitude towards entrepreneurship and the hours they worked. the results provide do not support for the principal hypothesis of this study (h1) that a small business consulting course will have a positive impact on a student’s attitude towards entrepreneurship. for some, this finding may be disappointing, however, the self-selection bias, which will be discussed later, offers an explanation for this finding and is worthy of further consideration. in regards to marketing students’ change in attitude towards entrepreneurship, the finding of no impact was expected and found. as previously discussed, other eao studies have used the eao scale to search for an explanation of attitude towards entrepreneurship caused by other factors than courses offered in an entrepreneurship program. also as previously reported, a number of relationships were found with factors that had nothing to do with entrepreneurship education. likewise, this study also found a positive relationship with two factors, intentions to own a business and hours worked. as shown in tables 7 and 10, students were placed into one of two groups regardless of the course enrolled. therefore, the students’ intentions and work ethic explains the students’ change in attitude towards entrepreneurship rather than a particular course. this finding is consist with the findings of other studies discussed earlier in this paper that entrepreneurship education must consider and in some way include the background, experiences, and aspiration that students bring to their college campus. 65 journal of small business strategy vol. 25, no. 1 table 5: eao, eao construct, and eao sub-construct t-tests five difference scenarios four variable analyses column number 1 2 3 4 5 6 7 8 9 st ud en t i n c on su lti ng c ou rs e st ud en ts in m ar ke tin g c ou rs es a ll st ud en ts : pr ete st v s. po st -t es t pr ete st : c on su lti ng vs . m ar ke tin g po st -t es t: c on su lti ng vs . m ar ke tin g in te nt io n to o w n a b us in es s a ge se m es te rs fu lltim e st ud en t h ou rs w or ke d pe r w ee k eao .013** .005* achievem ent .020** affect .037** .087*** .015** behavior .098*** cognition .029** .024** innovation .085** * .085*** .023** .000* .068** * .052*** affect .090*** .014** .005* behavior .038** .074*** .031** .000* .027** cognition .022** .002* .084*** personal control .009* .035** affect .000* .036** .089*** behavior .014** cognition .054*** .061*** self esteem .080*** .012** affect .098*** behavior .003* .002* cognition .055*** .017** 99% confidence level * 95% confidence level ** 90% confidence level *** the results are reported at the 99% and 95% confidence level as well as the 90% confidence level. due to the exploratory nature of this study and the relatively small sample size, results found at the 90% confidence level should be considered in future studies and therefore is provided in the table. even though no significant relationship at the 90% confidence level or higher was found using the eao scale for seven of the nine scenarios, the eao constructs and sub constructs can be used for further analysis. as discussed in the eao scale section, the eao scale is compressed of four constructs: achievement, innovation, personal control, and self-esteem. at the construct level of analysis, seventeen significant relationship were found among eao’s constructs and sub-constructs levels although no significant relationships were found at the 99% confidence level. instead seven relationships were significant at the 95% level and the remaining ten relationships are significant at the 90% level. table 5a reports the mean values for all the significant relationships reported in table 5 for the five scenarios shown in columns 1-5 and provides an interpretation of each significant relationship. 66 journal of small business strategy vol. 25, no. 1 achievement behavior 0.098 37.49 38.52 increased after the course innovation 0.085 6.44 6.34 both measures decreased innovation-behavior personal control cognition 0.074 0.054 45.63 16.27 44.00 after the course. 17.03 bother measures self-esteem cognition 0.023 27.02 increased after the course. 27.78 mean: mean: sign. consulting marketing students student 0.087 52.77 54.62 0.061 16.11 17.18 0.098 26.89 25.82 0.017 26.37 27.63 table 5a: mean values for significant relationships reported in table 5, columns 1-5 scenario #1: student enrolled in only a small business consulting course eao construct or sub-construct sign. pre-test mean post-test mean interpretation achievement-affect 0.037 55.53 52.77 both measures decreased self-esteem cognition 0.055 27.67 26.36 scenario #2: students enrolled in only marketing courses after the course. eao construct or sub-construct sign. pre-test mean post-test mean interpretation innovation 0.085 6.24 6.37 all measures increased innovation-behavior 0.038 43.25 44.70 innovation cognition 0.022 55.18 56.54 scenario #3: all students: pre-test versus post-test after the course. eao construct or sub-construct sign. pre-test mean post-test mean interpretation scenario #4: pre-test only students in a small business consulting versus marketing courses eao construct or sub-construct sign. mean: consulting students mean: marketing student interpretation innovation 0.023 6.51 6.24 students in the small business consulting innovation-affect 0.090 47.00 45.69 innovation-behavior 0.031 45.87 43.26 course had higher pre-test averages for all three measures. scenario #5: post-test only students in a small business consulting vs. marketing courses eao construct or sub-construct interpretation achievement-affect personal control cognition self-esteem-affect self-esteem cognition marketing students had higher averages for three of the four post-test measures. 67 journal of small business strategy vol. 25, no. 1 in addition to the interpretation provided in table 5a, the following four conclusions can be drawn: (1) marketing courses had a positive impact on students attitude towards innovation while the small business consulting course was found to have no impact; (2) the small business consulting course had a negative impact on students’ attitude towards achievement and self esteem; (3) neither course had an impact on personal control; (4) the overall, pre-test versus post-test analysis showed that both types of course work did have some impact on all four eao constructs suggesting a multi-discipline approach will have a greater impact on attitude. in an effort to determine the extent to which students in the small business consulting class differ from students in marketing classes, a t-test was also used. table #6 shows that age and the intent to own a business someday are significant differences between the two student groups whereas no difference was found between the number of semesters the student was a full-time student at the university and number of hours the student worked during the semester. table 6: difference between consulting and marketing students variable student groups mean sign. interpretation intention to own a business consulting students marketing students 2.34 1.61 0.000 students in the consulting course have a stronger intention. age consulting students marketing students 4.21 2.69 0.000 students in the consulting course are older. semesters as full-time student consulting students marketing students 5.81 5.37 0.104 no difference hrs/wk worked during semester consulting students marketing students 3.31 3.11 0.403 no difference note: see table 7 through 10 for the frequency analysis of each of the above four variables in order to interpret the mean value. the findings reported in table 6 support the “self-selection bias” noted by several scholars of entrepreneurship education (liñán, 2004, mcmullan & long, 1987; noel, 2002) as well as jun bae et al. who reported the “selection effect of pre education entrepreneurial intentions” in their 2014 paper: there is one further possibility that could be considered in order to understand the entrepreneurship education-entrepreneurial intentions relationship, which is reverse causation. first, research on entrepreneurship education rests on the assumption that students enrolled in entrepreneurship courses are randomly selected. however, it is possible that a student who desires to be an entrepreneur would purposely enroll in entrepreneurship courses. although entrepreneurship education in our study assumes that students do not have experience starting their own business, some scholars have redirected our 68 journal of small business strategy vol. 25, no. 1 attention to the role of beliefs prior to enrolling in entrepreneurship education (oosterbeek et al (2010).; von graevenitz et al). for example, von graevenitz et al. demonstrate that there is a strong and positive correction between ex-ante beliefs and ex-post intentions. in addition, changes in intentions during entrepreneurship education are less likely to occur if a student’s perceived, pre-course feasibility of launching a business is strong and consistent (e.g. negative or positive). these empirical findings show that students may not change their initial entrepreneurial intentions due to the entrepreneurship education they receive. the above quote from jun bae et al. paper and the findings as reported in table 6 that students in the small business consulting course have significantly stronger intentions to own a business than students in marketing course does offer an explanation why the small business consulting course had no positive effects on entrepreneurial attitudes; because they already have a strong positive attitude towards entrepreneurship, significantly higher than students enrolled in the marketing courses as shown in table 6. in fact the pre-course condition of having a high attitude toward entrepreneurship, i.e., owning one’s own business, could explain why the only significant effect of the small business consulting course were negative for two of the eao sub-constructs (achievement affect and self-esteem-cognition) as the experience of trying to solve actual business problems of small business owners may have dampened their enthusiasm a bit as the difference between the pretest and posttest is small but significant. bringing a touch of reality to the dreams and aspirations of young entrepreneurs is one of the goals of a small business consulting course, and these negative findings may provide proof that the small business consulting course is achieving its objectives. in addition, table 6 reports that the students in the small business consulting course are significantly older than students in the marketing courses. this finding suggests that the students in the small business consulting course have more years of work experience even though they work the same number of hours during a semester. consequently, their attitudes towards entrepreneurship would be more established do to their age and additional work experience and less likely to effected by one college course. other factors explain eao a binary variable was created for and intention to own a business, age, semesters as a full-time student, and hours worked in order to determine whether the eao scale and its constructs/sub-constructs could reveal differences between students on these attributes. tables 7, 8, 9, and 10 show how the four variables in table 6 are re coded in order to test for the impact of these variables on student’s eao. the results of the eao analysis with these four variables are shown in table 5, columns 6-9. 69 journal of small business strategy vol. 25, no. 1 table 7: i will run my own business someday frequency recoded value valid percent cumulative percent valid definitely not 5 1 1.3 1.3 probably not 40 1 10.2 11.5 maybe 111 1 28.3 39.8 probably yes 93 2 23.7 63.5 definitely yes 143 2 36.5 100.0 total 392 100.0 missing system 10 total 402 table 8: age frequency recoded value valid percent cumulative percent valid 21 or younger 187 1 47.7 47.7 22 81 2 20.7 68.4 23 49 2 12.5 80.9 24 12 2 3.1 83.9 25 17 2 4.3 88.3 26 11 2 2.8 91.1 27 3 2 .8 91.8 28 13 2 3.3 95.2 29 4 2 1.0 96.2 30 or older 15 2 3.8 100.0 total 392 100.0 missing system 10 total 402 70 journal of small business strategy vol. 25, no. 1 table 9: semesters as a full-time student frequency recoded value valid percent cumulative percent valid first semester 14 1 3.6 3.6 2nd semester 32 1 8.2 11.7 3rd semester 48 1 12.2 24.0 4th semester 36 1 9.2 33.2 5th semester 61 1 15.6 48.7 6th semester 50 2 12.8 61.5 7th semester 80 2 20.4 81.9 8th semester 40 2 10.2 92.1 9th semester 18 2 4.6 96.7 10th semester 9 2 2.3 99.0 11 semesters or more 4 2 1.0 100.0 total 392 100.0 missing system 10 total 402 table 10: hours/week of work frequency recoded value valid percent cumulative percent valid 10 or less hours 111 1 28.3 28.3 11-15 57 1 14.5 42.9 16-20 75 2 19.1 62.0 21-25 52 2 13.3 75.3 26-30 46 2 11.7 87.0 31-35 21 2 5.4 92.3 36-40 15 2 3.8 96.2 40 or more 15 2 3.8 100.0 total 392 100.0 missing system 10 total 402 the results of the t-test analysis of the eao measure with the above four binary variables is reported in table 5, column 6 through 9. the results show a positive relationship between the eao scale and intentions to own a business and the hours 71 journal of small business strategy vol. 25, no. 1 the student worked during the semester. the t-test used to compare the pretest and posttest entrepreneurial attitude of all students based on the above four variables does reveal that intentions and how work during the semester, work ethic, does have a significant impact on students’ entrepreneurial attitudes during the one semester at the same university with the same professor regardless of course. this finding implies that the change in the students’ entrepreneurial attitude was not due to the particular course, the university, or the professor. instead, this finding implies that the change in entrepreneurial attitude as measured by the eao scale is due to their intentions to own a business and the number of hours the students worked during the semester as table 5 reports in the first row of column 6 and 9. in addition to the significant relationship with the overall eao measure, the students’ intention to own a business was positively related with two of eao’s constructs and five sub constructs. however, the strongest connection with the eao measure is shown by the number of hours per week students worked as this variable shows a significant relationship with all four of eao’s constructs and six of its twelve subcontracts. this last finding is an exciting finding: one can see that full-time student, working 20-30 hours per week while studying to meet the university’s academic standards, to be “hitting on all cycles” that drive a positive attitude towards entrepreneurship. this finding also support the hypothesis that the students with the strongest attitude towards entrepreneurship are those who are active on campus and off campus. as will be discussed later, this finding supports the use a blended learning context supported with the best available digital technologies and media. interestingly, age shows a relationship with eao’s innovation construct, two innovation sub-contracts, and one personal control sub construct, while semesters as a full-time student was only related to eao’s self esteem construct and one self-esteem sub construct. this finding may attest to the personal value of completing a college education to a person’s sense of self-worth. one final analysis was performed using the eao measure. since the four variables used to differentiate the two student groups are measured on the interval scale as is the eao scale, eao constructs, and sub constructs, a correlation test was used to verify the t-test relationships reported in table 5 and to gain a better understanding of those relationships. 72 journal of small business strategy vol. 25, no. 1 table 11: correlation analyses with eao, eao constructs, and eao sub-constructs intention age semesters work eao .216 .155 .001 .023 achievement affect behavior cognition .125 .020 innovation .261 .000 affect .164 .126 .002 .020 behavior .242 .116 .000 .043 cognition .172 .002 personal control .195 .136 .001 .021 affect .237 .000 behavior .131 .135 cognition .023 .019 self-esteem .150 affect .007 behavior .154 -.118 .128 .003 .024 .014 cognition -.136 .009 the correlation analysis is reported in table 11. the findings are consistent with the t test reported in table 5 as intention to own a business and working while attending college are both positively correlated with the eao scale as well as many of eao’s constructs and sub-constructs. one additional finding of interest is that all the correlations are very weak even though all are significant at either the 95% or 99% confidence level. this finding of a weak correlation is expected from the perspective that many factors influence a change in attitude as de jorge-moreno et al., (2012) state: “certainly, entrepreneurship is considered a complex subject to study in the context of teaching and learning because it depends on the individual’s self-regulated action and on characteristics that may not be easy to influence.” it is unlikely that the students’ intentions or work ethic are the only factors that would have an impact on a student’s attitude. certainly we know that some events in life do have significant, life 73 journal of small business strategy vol. 25, no. 1 changing, impact on our attitudes, such as, a birth of a child or the death of a spouse. however, none of the variables measured in this study would be consider as a life changing event, and it is not unexpected to find that these variables have little impact on the students’ attitude towards entrepreneurship. conclusions and implications the dual focus on attitude and skills for entrepreneurship education ascribed to by many scholars quoted in this study may have a more extensive impact on entrepreneurship education than shown in the basic model proposed in figure 1. placing attitude as equally important to skills, or more important than skills as reflected in the following quote, places a considerable challenge on the shoulders of faculty in their attempt to educate future entrepreneurs. the importance of attitude as central to entrepreneurship education is clearly stated by florin, karri & rossiter (2007): in other words, learning a relevant skill is not sufficient to promote action; students need to perceive that the application of the skill is feasible and that an entrepreneurial approach is desirable. thus, a focus on developing a positive attitude towards entrepreneurial behavior appears to be central to entrepreneurship teaching and learning. byabashaija & katono (2011) drew the following conclusion in their paper that studied the impact of entrepreneurship education on attitudes and intentions by providing similar implications regarding the need to focus on the qualitative aspects of education: “the curriculum of entrepreneurship education needs to be structured in ways to demonstrate feasibility of entrepreneurship as a career. from the study, it is clear that of all the variables investigated, it is perceived feasibility that drives entrepreneurial intentions more than others.” higher education has been teaching skills, i.e., models, principles, and strategies, since its existence while attitude has remained the responsibility of the student and his or her family. higher education has well-developed methods for assessing skill development resulting from a particular course, curriculum, or college major. if a student’s skill is found to be deficient, remedial action can be prescribed to help the student become proficient in a particular skill. entrepreneurship education enjoys no such luxury as it takes on the challenge of teaching attitude, if of course, attitude can be taught. the good news is that this study found that students’ attitude towards entrepreneurship can change during one semester, and the change in attitude occurred within the university context. the bad news for entrepreneurship educators is that the change was not found to be a related to the students’ particular coursework whether the courses are marketing courses or a small business consulting course. instead, the students’ change in attitude is explained by intentions to own a business and work ethic they brought to the college campus rather than the skills acquired in any course. one positive finding for entrepreneurship educators to build upon is the finding that the university courses did have a positive 74 journal of small business strategy vol. 25, no. 1 impact on several eao constructs and sub-constructs suggesting that skill focused courses have at least a partial impact on attitude. in fact, the small business consulting course is not designed to change a student’s attitude toward entrepreneurship. instead, the course is designed to develop the students’ analytical skills by having them apply financial, management, marketing, and strategic models to solve the small business’ particular problem. following is the statement of purpose from the small business institute® website: the purpose of the sbi program is to provide high quality business consulting to clients requesting assistance while providing an extraordinary learning experience for college and university students through the field case consulting model . . . high quality business consulting the object f the sbi program is comprised of direct contact between the student team and the client, detailed analysis of the client’s business/concept, thorough research, and a useful case/project report. each report the ultimate product of the program -is tailored to the individual client’s business and embodies sound business management principles by the client’s actual business needs. the goal is to have students learn the inner workings of a small business and its strategic challenges by working directly with the owner. the student’s final consulting report is expected to conform to exacting standards followed by a formal and professional-level presentation to the owner. increasing a student’s attitude towards entrepreneurship is not a stated goal of the sbi program nor is the direct intent of engaging students in performing consulting work for small businesses. skill development and learning to apply business model to solve the problems for the small business owner are two worthy goals of the course. so it should not be surprising to find that the student’s attitude towards entrepreneurship was not impacted as the course is not designed to allow students to pursue their own business venture. one conclusion that can be drawn from the findings is that students’ attitude towards entrepreneurship are impacted more by what professors do not teach than what professors teach. many educators who read this statement may be dismayed by such a claim as every professor teaches with the belief that their courses do make a difference for their students. however, the feeling of dismay may be misplaced for entrepreneurship courses as our initial belief that an entrepreneurship course should increase the student’s positive attitude towards entrepreneurship is only a function of our expectations in this case. before being consumed by the dismay, we need to step back and re-consider the insights provided by jun bae et al. (2014) when they discussed the likelihood that students’ interest in entrepreneurship courses is due to an already existing positive attitude towards entrepreneurship. consequently, students on our campuses arrive with a positive attitude towards entrepreneurship. most likely they are looking for “something else” from their university courses and campus experiences. as previously stated, a way to incorporate their off-campus activities and interests with their campus courses and experiences would be to use a blended approach for entrepreneurship 75 journal of small business strategy vol. 25, no. 1 education as the tools of distance learning have become advanced and user friendly. instead of expecting entrepreneurship courses to change a student’s attitude towards entrepreneurship, we need to examine other expected outcomes from entrepreneurship courses and design courses to achieve those outcomes. in an effort to answer this question, florin et al. (2007) conducted a focus group of graduating students to discuss their experiences during their college tenure. the students were asked to list the opportunities that they felt helped them develop a positive attitude towards entrepreneurship. the list of opportunities was classified by the authors as shown below: o initiatives that show entrepreneurial proactive behavior: • membership in the entrepreneurial club • participation in the elevator pitch competition and business plan competition • course taken in starting and growing a small business • creating or leading student organizations • participating in extracurricular activities such as organizing school wide events • taking more courses than required for graduation • pursuing a double major o academic initiatives that provide opportunities for ed (entrepreneurial drive) development: • participate in the study abroad program • taking course with simulation game competitions where students had to start and manage the growth of a business • taking courses that develop people skills, such as personal selling • taking organizational behavior course that use experiential learning tools • doing internships at local businesses where students work for the business and conduct a project supervised by a faculty member for credit. o outreach initiatives that provide for entrepreneurial drive: • participating in the study abroad program • doing volunteer work at nationally recognized nonprofit organizations as part of a sociology course for credit a full discussion of the above education experiences is beyond the scope of this paper. however, the list of opportunities certainly go beyond the traditional academic approach of the university, and the list include many elements found in today’s leading university entrepreneurship programs. entrepreneurship education needs a different paradigm than offered by the traditional academic approach. although the academic approach is still needed, it is clear that universities need to develop an educational program that is specific to building both the skill as well as the attitudes necessary for the success of today’s aspiring entrepreneurs. what makes entrepreneurship education especially challenging is the importance of attitude, intentions, perceived desirability, and perceived feasibility. what creates a need for a new paradigm for entrepreneurship education is that our students must also be 76 journal of small business strategy vol. 25, no. 1 proficient with all the business skills. the top entrepreneurship programs are working hard to create a new paradigm for entrepreneurship education. it is an exciting time for entrepreneurship educators! future research certainly, there is a need to understand the sources of entrepreneurial intentions at the student level as it is crucial for educators and policymakers to develop appropriate educational policies and programs to improve the performance of entrepreneurship education. should entrepreneurship education follow the same basic academic model of other business disciplines of accounting, marketing, management, and finance that focus on knowledge and skill development and work under the assumption that students will find a job and excel by working within the confines of an established corporation? another question is how do we measure the success of an entrepreneurship education? do we measure the success course-by course, e.g, the impact of a small business consulting course on students’ attitude towards entrepreneurship or are there more relevant measures of success? or, do we simply measure the number of students who start a business after graduation? these are tough questions to answer, but the answers to these questions are the essential to the underpinning of entrepreneurship education and cannot be ignored. within the framework of this study, the following research questions should be explored: (1) to what degree is the eao scale an accurate measure of entrepreneurial attitude among college students? as stated earlier, the eao scale measures the difference between practicing entrepreneurs and non entrepreneurs. however, two studies did specifically modify the eao scale to measure attitude change for students taking a college course. in addition, the eao scale is used to measure attitude change in five different countries, but the scale’s author never claimed that the scale is valid for multi-cultural analysis. there appears to be a need to develop a scale specifically designed to measure change in attitude among college students as well as change across cultures. (2) how do we measure the effects of entrepreneurship education if skills are only part of the solution? as de jorgen-moreno et al. (2012) state, “. . . the possible effectiveness of entrepreneurship education for university students should be measured not just in terms of the acquisition of entrepreneurial skills, but in increased motivation, development of creativity, self confidence . . .” how do we measure motivation, creativity, and self-confidence. grading based on skill proficiency will certainly underestimate any achievement in the other three requisite capabilities. (3) given the understanding that there is something unique about the entrepreneur who can profit in the midst of market chaos, what drives some to pursue entrepreneurship and success while others either fail or never begin? this is a difficult question to answer, but may be at the heart of entrepreneurship education. which is the most effective explanation: skill or attitude, or should it be both? 77 journal of small business strategy vol. 25, no. 1 (4) considering the importance of skills and attitude, a productive research question would investigate the hypothesis that students in a small business consulting course will experience a greater increase in skills than a change in attitude. as previously discussed, the small business consulting course is focused on applying the most appropriate marketing, management, and financial models to assess a small business than it is focused on changing the students’ attitude towards entrepreneurship. if true, this research should find a significant increase in the students’ skills rather than attitude. entrepreneurship education is entering a new and exciting period of growth and development supported by leading universities willing to try new paradigms. universities are also able incorporate the benefits of today’s digital age that facilitates engagement beyond the university context. for those universities who continue their effort to reach beyond the campus, to engage students, to give students both the skills and the motivation to succeed, they will accomplish their goal to educate the next generation of entrepreneurs! references ajzen, i. 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(1998). essentials of entrepreneurship and small business management. upper saddle river, nj: prentice hall. eugene fregetto, phd, clinical associate professor of marketing at uic (retired 2014). started teaching entrepreneurship in 1982 at depaul university and uic; co-developed depaul’s mba entrepreneurship program in 1985, taught the small business consulting course at uic for 30 years, serve on the editorial board for several journals, usasbe justin longnecker fellow. operated a successful home-based business for seventeen years while completing a 25-year career as a government contract officer. minority contracting is a top research interest. 81 investigating the impact of a small business consulting course on entrepreneurial attitudes abstract introduction fostering entrepreneurship study’s underlying premise figure 1 research questions intention to own a business age pie graph 1: occurrence of entrepreneurship among age groups semesters as a full-time student hours working as a full-time student eao scale recent study of particular interest eao scale modification diagram 1: eao measure showing constructs, sub-constructs, and number of questions for each sub-construct. figure 2 table 2: questions skipped 10% to 15% methodology analysis results table 5a: mean values for significant relationships reported in table 5, columns 1-5 scenario #2: students enrolled in only marketing courses scenario #3: all students: pre-test versus post-test scenario #4: pre-test only students in a small business consulting versus marketing courses scenario #5: post-test only students in a small business consulting vs. marketing courses table 6: difference between consulting and marketing students other factors explain eao table 11: correlation analyses with eao, eao constructs, and eao sub-constructs conclusions and implications future research references http://www.smallbusinessinstitute.biz internationalization strategies of family firms: challenges and perspectives editorial notes dear readers, we are pleased to have the special issue on “internationalization strategies of family firms: challenges and perspectives” addressing timely topics that family firms are facing as globalization continues to present opportunities and challenges. this is in conjunction with the family enterprise research conference (ferc) held in june of 2017 in asheville, north carolina, dr. dianne welsh, academic chair. the aim of this special issue is to broaden discussions on family firms’ internationalization strategies. these firms represent the backbone of the countries’ economies and their stability is critical to global economic growth. (hacker & dowling, 2012; hoy & sharma, 2010; ramadani & hoy, 2015; welsh, memili, rosplock, roure, seguardo, 2013). the prevalence of family firms documents both the economic and social impact they have (brigham, 2013; ramadani, bexheti, rexhepi, ratten, & ibraimi, 2017). to keep their dominance and relevance in economy and society, is the internationalization of their activities (ratten, dana, & ramadani, 2017). internationalization is related with the process in which firms operate in international markets (dana 2004; rammal, 2005; rexhepi et al. 2017). family firms’ owners are continuously looking for models and strategies to successfully internationalize their businesses. many studies had shown that usually entrepreneurs need different approaches and strategies in reaching this markets in comparison with those used in domestic markets (dana, hamilton, & wick, 2009; ratten, dana, han, & welpe, 2007; ratten et al. 2017). internationally, family firms operate in environments with very different rules and practices from those of domestic markets. family business entrepreneurs need to analyze in detail every difference that they can face with. they need to consider details, such are those related to general strategy, human resources strategy, consumers’ behavior, local rules and regulation, policies, location, brand recognition by locals and internationally, etc. the success will depend from the entry models and entry strategies that they select (ratten & dana, 2015; rexhepi, ramadani, rahdari, & anggadwita, 2015). some family firms are less interested in international markets because of their risk aversion, which means that a small number of family firms will be resistant to international opportunities because of the perceived inflexibility of the global marketplace (sharma, chrisman and chua, 1997). in addition, the disparate family goals and values of some firms make it difficult to focus on internationalization efforts (ward and dolan, 1998). some other family firms facilitate growth by quickly focusing on international opportunities. this can be difficult for some family firms as the international market can be a hard process that is complemented by large resource requirements needed to achieve success (ratten et al., 2017). the special issue contains six articles that focus on different aspects of internationalization strategies. the first article addresses if family firms should consider going international in the first place and is entitled, “should family firms internationalize? evidence from the survey of business owners” by mark heileman and timothy pett. the article explores the characteristics and performance of family-owned businesses that go international. the next article looks at antecedents of successful internationalization. the article is entitled, “antecedents of successful internationalization in family and non-family firms: how knowledge resources and collaboration intensity shape international performance” by philipp stieg, beate cesinger, gerhard apfelthaler, sascha kraus, and cheng-feng cheng. the article examines the differences in antecedents of international performance between family and non-family firms drawing from the revised uppsala model of internationalization from 2009 and socio-emotional wealth literature. this article is followed by “internationalization propensity in family-controlled http://www.smallbusinessinstitute.biz editorial notes journal of small business strategy / vol. 28, no. 1 (2018) public firms in emerging markets: the effects of family ownership, governance, and top management” by chiung-wen tsao, miao-ju wang, chia-mei lu, shyh-jer chen, and yi-hsien wang. the authors develop a conceptual framework that draws on socio-emotional wealth and upper echelon perspectives to examine the association among family heterogeneity, top management, and international propensity in publicly traded companies in taiwan. the fourth article look at a case in thailand and is entitled, “innovativeness in thai family smes: an exploratory case study.” the authors, pongsakorn pitchayadol, danupol hoonsopon, achara chandrachai, and sipat triukose look at the link between innovation and familiness in small-medium family businesses to illustrate the role of the family in business innovation and how to bring a competitive advantage to family firms. our fifth article is entitled, “how entrepreneurs anticipate the future market: an initial approach of a future market anticipation model for small businesses” and is authored by maria r. rita, sony h. priyanto, roos k. andadari, and jony o. haryanto. the article presents a new model of how entrepreneurs predict future markets, concentrating on start-ups. the article fills the gap concerning the lack of models on future market anticipation by providing a new framework. the last article by jeffrey shields, dianne h.b. welsh and joyce shelleman examines sustainability reporting as global performance metric for family businesses and is a new topic yet to be published. the article explains why family businesses should be concerned with environmental sustainability and what is required for competing in the international marketplace to take a leading position. the paper covers reporting frameworks that family businesses can use to get ahead of the curve on sustainability reporting. we hope you enjoy the special issue and find ideas for future research! sincerely, dianne & veland dianne h.b. welsh, ph.d. hayes distinguished chair and professor of entrepreneurship founding director, entrepreneurship programs university of north carolina at greensboro senior editor, jsbs veland ramadani, ph.d. associate professor of entrepreneurship and management faculty of business and economics, south-east european university, macedonia editorial notes journal of small business strategy / vol. 28, no. 1 (2018) references brigham, k. h. (2013). social and economic impact of family business. in r. l. sorenson, a. yu, k. h. brigham, & g. t. lumpkin (eds.), the landscape of family business (pp. 78-92). cheltenham, uk: edward elgar. dana, l. p. (2004). handbook of research on international entrepreneurship. cheltenham, uk: edward elgar. dana, l. p., hamilton, r., & wick, k. (2009). deciding to export: an exploratory study of singaporean entrepreneurs. journal of international entrepreneurship, 7(2), 79–87. hacker, j., & dowling, m. (2012). succession in family firms: how to improve family satisfaction and family harmony. international journal of entrepreneurship and small business, 15(1), 76-99. hoy, f., & sharma, p. (2010). entrepreneurial family firms. upper saddle river, nj: pearson prentice hall. ramadani, v., & hoy, f. (2015). context and uniqueness of family businesses. in l. p. dana & v. ramadani (eds.), family businesses in transition economies (pp.9-37). new york: springer, cham. ramadani, v., bexheti, a., rexhepi, v., ratten, v., & ibraimi, s. (2017). succession issues in albanian family businesses: an exploratory research. journal of balkan and near eastern studies, 19(3), pp. 294-312. rammal, g. h. (2005). international business negotiations: the case of pakistan. international journal of commerce and management, 15(2), 129–140. ratten, v., dana, l. p., & ramadani, v. (2017). internationalisation of family business groups in transition economies. international journal of entrepreneurship and small business, 30(4), 509-525. ratten, v., dana, l. p., han, m., & welpe, i. (2007). internationalisation of smes: european comparative studies. international journal of entrepreneurship and small business, 4(3), 361–379. ratten, v., & dana, l. p. (2015). indigenous food entrepreneurship in australia: mark olive ‘australia’s jamie oliver’ and indigiearth. international journal of entrepreneurship and small business, 26(3), 265–279. rexhepi, g. (2015). entering new markets: strategies for internationalization of family businesses. in l. p. dana & v. ramadani (eds.), family businesses in transition economies (pp. 293-305). new york: springer, cham. rexhepi, g., ramadani, v., rahdari, a., & anggadwita, g. (2017). models and strategies of family businesses internationalization: a conceptual framework and future research directions. review of international business and strategy, 27(2), 248-260. sharma, p., chrisman, j. j., & chua, j. h. (1997). strategic management of the family business: past research and future challenges. family business review, 10(1), 1–36. ward, j., & dolan, c. (1998). defining and describing family business ownership configurations. family business review, 11(4), 305–310. welsh, d. h. b., memili, e., rosplock, k., roure, j., seguardo, j. l. (2013). perceptions of entrepreneurship across generations in family businesses and family offices: a stewardship theory perspective. journal of family business strategy, 4(3), 213-226. sza7ixcy flexible benefits as a strategic tool: supporting the use of human resources as a distinctive competency jeffrey s. hornsby donald f. kuratko douglas w. naffziger ball state university abstract changes in marketplace competi ii veness haveforced the small business owner to recognize the benefits ofi mplementing sound management principles. two areasof management that have gained increasing aaention in the small business research are business strtuegy and human resource management. this paper suggests tiuu smaller firms can gain a competuive edge through developing a distinciive competency in the human resource area. one human resource tool flezibfe benefits plans, is descri bed and a strategi c model is suggested that outli nes how they can be used to help develop afiirm's human resources as a distinctive competency. introduction fundamental changes in the marketplace, such as changing consumer preferences, popuhtion shifts, the evolution toward a service economy, and record numbers of new business startups, have given increasing importance to the use of progressive management techniques by small firm owners. managers of large fums have long placed a priority on the use of strategic management techniques as a key competitive tool. however, the use of strategic management principles may also enhance the competitive position of many smaller firms. early studies on the use of strategic management by smatter firms indicated a lack of widespread adopuon (sexton & van auken, 1982; robinson & pearce, 1984);however, naffziger and kuratko (1991) found that small finn owners do, indeed, spend a great deal of time with planning activities. benefits of strategic planning several benefits accrue to smaller firms engaging in strategic planning (stoner & fry 1987). among them are: (1)strategic planning helps focus on the competitive nature of the firm, both externally and internally; (2) strategic planning helps set a formal direction for the finn; and (3) strategic planning allows employees to see the direction of the firm more clearly. in addiuon, numerous studies verify the influence of strategic planning on small firm performance (miller & toulouse, 1986; orpen, 1985; sexton & van auken, 1985; robinson, fszgan, & salem, 1986). porter (1980) suggested duce generic suategies are available to firms: differentiation, cost 31 leadership. and focus. a differentiation strategy seeks to establish a distinctive competency within a firm that clearly distinguishes that firm from its competitors, thus creating a reason for patronizing the firm rather than others (miller tk toulouse, 1986). stoner and fry (1987, p. 89) defined a distinctive competency as "any area, factor, or consideration that provides a business a meaningful, competitive edge over its business rivals. distinctive competencies represent those sets of factors that positively distinguish a firm from its competitots." distinctive competencies can be developed and utilized as the foundation of a firm's competitive strategy. oppoitunifies for distinctive competencies within small businesses may include product or service quality, location, filling a special niche, flexibility and adaptability, strong consumer orientation, reputation and image, price, and human resources (stoner gt fry, 1987). a distinctive competency has value to the firm only if customers perceive and place a value on it. tbe strategic use of one or more distinctive competencies for a finn depend upon key factors in the marketplace such as customer demands and the competition. human resources as a distinctive competency a human resource focus can serve as a distinctive competency that will allow a firm to differentiate itself from the competition and serve as a cornerstone of the firm's competitive suategy in the marketplace. in support of human resources as a distinctive competency and a strategic tool, mcevoy (1983, p. 32) commented "there is little doubt that the effective management of human resources is a key element in the success of smaller businesses." according to stoner and fry (1987, p. 93) personnel, or human resources, can be a distinctive competency for a fum if "management and employees have extensive experience or knowledge, and lmow how to help the customer. when customers recognize these strengths and believe it is superior to the strengths of other businesses, a distinctive competency exists". homsby and kuratko (1990) pmvide evidence of the importance of human resources in small firms. their research examined the critical issues in human resource management confronting small business owners. wages and benefits, as well as the availability of quality workers, were consistently cited as the most criucal issues by the small business owners. this suggests that human resource management is an area that should be given great attention by organizations in the 1990s. owners of businesses that are highly dependent on quality personnel, such as retailers and service providers, would do well to focus on the development and use of their human resources as a distinctive competency. small manufacturers needing specially trained, highly skilled workers will benefit if they can retain their better employees, especially if they compete for employees against larger firms with higher wage scales. in order to achieve and maintain their competitive advantage, firm owners must pursue human resource policies that auract and sustain an excepuonal workforce; however, the auraction and retention of competent workers has long been a recurring problem for small firms. schuler and ladison (1987)cited a link between poner's competive strategies of innovation, quality enhancement and cost-reduction, and role behaviors. specifically, they cited12 role behavims that are important to the implementation of these strategies. these role behaviors include: creative, innovative behavior, long-term versus short-term behavior, independent, autonomous behavior, concern for quality; concern for quanuty; risk taking; concern for results; preference for responsibility; flexibility; tolerance of ambiguity and unpredictability; skill application; and job involvement. 32 according to schuler and jackson (1987), six human resource "menus" can be chosen to reinforce desired role behaviors that lead to the implementation of competitive strategies. these menus include choices in planning, staffing, appraising, compensating and training and development. in the area of compensation, the importance of the choices that can be made when designing a competitive compensation package is emphasized. one important decision is the choice between a "standard fixed package" ofbenelits versus a "flexible package" of benefits. while this is not the only compensation choice, the identification of the link between type of benefit package and desired role behaviors seems to be pertinent to the implementation of human msources as a distinctive competency. tlus paper focuses on a specific human resource management tool, flexible benefit plans (fbps), which may help smafler firms auract and especially retain qualitied workers. owners seeking to establish human resources as a distinctive competency may find flexible benefits tobe a viable tool. figure i presents a model, based on stoner and fry's (1987)model, designed to illustrate the important considerations in using flexible benefit plans as a disunctive competency. it contrasts flexible benefit plans with traditional benefit plans as well as the strategic formulation and implementation of each method. 'ihese benefit alternatives will impact the employees, the organization, and the firm's strategy diffefenuy. figure l. implementing flexible benefit plans as a distinctive competency: an lllastrati pe hfodel. soatettic human csources suatedic ~ dodec nn type cf fx 'wa'y pap pmlltlci ~ survey cmtdoyrm ~ c u.bvatuatim of 'clcntilm ceccdvonss rctevam omice of aerate aunncss hr m a ~ed rosin distinmive ml cffcctlvc frinindm ~ provide security ~ lulisullucu complemty.amaa minimasy quarirmd pmsmmct the model has signiticance for firms pursuing a business opportunity where the firm's owner has chosen to pursue human esources as a distinctive competency and the accompanying strategic goals are to atuact and retain a high quality eflective workforce. in order to achieve success in certain business situations, human resources can serve as an important part of business strategy. it is proposed that benefit packages are among the tools available to accomplish the strategic goal of attracting and retaining a quality workforce. 'ihe model contrasts the human resource objectives under both benefit systems and the outcomes that result from pursuing human resources as a distinctive competency duough the use of a traditional benefit system and a flexible benefit system. 33 finally, the model compares the suategic implementation of each type of benelit plan. in the use of fbps the important steps revolve amund surveying employee needs and preferences, deciding on the type of fbp to initiate, maintaining effective communication with the employees and, finally, evaluating the effectiveness of the plan. in contrast, the primary concerns of a traditional benefit phn revolve around minimizing administrative complexity, minimizing costs of the plan, and developing the bureaucratic mechanism to administer the plan. while those are concerns of the fbp as well, an fbp will look beyond administrative concerns to higher~ strategic performance goals and concerns of the organization. this paper, as illustrated by the model, proposes that fbps will lead to the more effective accomplishment of the goal of human resources as a distinctive competency by improving the likelihood that the fum will be able to attract and retain top quality employees. to more fully understand the use offbps as a disunctive competency, the following sections discuss the general role of employee benefits and the types of fbps available. role of benefits schuler, beutell, and youngblood (1989) identified seven outcomes organizations seek through the use of benefits or indirect compensation. these are to: (1) attract employees, (2) increase morale, (3) reduce turnover, (4) increase job satisfaction, (5) motivate employees, (6) enhance the fum's image, and (7) remain cost effective. when an organization considers the package of benefits to offer, it must remember that there are mandatory benefits which are required by hw such as wodunan's compensation, and voluntary benefits that an employer may elect to offer or not. exhibit i indicates many of the benefits offered by employers. exhibit i commonly overed benefus mandatory benefits social security worhnan's compensation disability unemployment voluntary benefits pension/retirement plans health maintenance organization vacation time (hmo) fees sahry continuation plans psychiatric services gmup life insurance profit sharing group hospital, surgical deferred compensation/ and medical insurance stock plans dental insurance executive dining rooms accidental death and holidays dismemberment insurance recreation facilities 34 traditionally, organizations have allocated benefits to all employees in the same fashion; that is, each employee receives the same benefits. the quantity of some benefits, such as vacation, may be related to factors like seniority or tenure within the organization (swanson, 1984); however, companies have recently begun trying a flexible approach to benefit packages. a flexible approach to the adminisuation of benefits means the firm is allowing the employee more control over those benefits he/she receives and their quantity, recognizing that not afl employees ate in the same position in life nor do they place the same priority on all benefits. rexible packages, by virtue of their design, should facilitate a firm's ability to achieve the gmds mentioned by schuler, et. al (1989). flexible benefit plans a flexible benefit plan is any plan that allows participants to choose some or all of their benefits, whether the choice be among different levels of one type of benefit or among different types ofbenefits. according to foster (1986,p. 155)an essential element of a flexible benefit plan is that it offers "an individual combination of benefits to each employee, rather than a standard program that covers all employees in the same way." during the 19&os, a great number of large firms switched to fbps. by 1986, 28 of the fortune 100companies and 70percent of the fortune 500 companiesof tered flexible beefitplans (finlayson, 1986). in 1983, the conference board identified three important reasons that motivated employers to adopt a flexible benefit plan: (1) to accommodate varying employee needs, (2) to help control benefit costs, and (3) to help control rising costs of health insurance (mccaffery, 1988). the hewitt associates'986 survey of flexible compensation programs and practices found that meeting diverse employee needs and containing costs were still the number one and two reasons, at 90 and 80 percent respectively, for implementing flexible benefit plans ("cost management works...", 1987,p. 66). other commonly stated reasons are to increase the number of satisfied workers in an attempt to improve employee relations and worker morale and to increase worker retention and productivity. by using fbps, employers are trying to make employees mom aware of the value-to-cost ratio of the benefit plan and pmvide greater individualized auention. smaller firms that have implemented fbps have tended to select one of five main types: (1) the reimbursement account, (2) the additional allowance or aden approach, (3) the mix and match option, (4) the core carve out plan, or (5) the modular plan ('flexible benefits...for you?", 1985, p. 21; foster, 1986; "fundamentals of ...programs", 1987, p. 18&; johnson, 1986; kameman & kahn, 1987;mccaffery, 1988,p. 174). exhibit 2 summarizes these fbpvariations. 35 exhibit 2 characteristics of principle flexible benefit plan types type of plan chief characteristics reimbursement account simplest, plan pays certain expenses not covered by (flexible spending account) basic plan with pm-taxed dollars. additional allowance supplements core benefits with options based on length (aden appmach) of service; employee receives "flexible credits"; excess may be invested in 401(k) plan. mix and match plan also supplements basic plan but allows for different coverage levels on various options; employee may buy additional coverage at own expense. core carve out plan simihr to additional allowance plan; current package is reduced to create two part plan with a core and flexible portions; core provides basic floor coverage; credits are used to by additional coverage. modular plan premesigned, pre-packaged modules; each module is designed with paidcular type of employee in mind; modules have same range of benefits but with varying levels of coverage. it is important to recognize that there are some important issues which confront companies when considering the selection of a flexible benefit plan. it is true that several potential barriers to successful implementation of fbps do exist. there will usually be an initial expenditure for the development of the plan, such as the retention of a human resource consultant or legal advisor. along with the cost will be concern for addiuonal time devoted to the development and administration of the plan. tax and other legal considerations must be dealt with and unions may not whole-heartedly endorse the use of an fbp. finally, employees may need benefit counseling in order to fully understand their opuons and appropriate choices. research on flexible benefit plans litere is a growing amount of research that has investigated the use of fbps by smaller firms. hornsby, kuradco, and waflingford (1991)surveyed 67 smaller firms (e.g.,companies that employ 500 employees or less) concerning their benefits administration procedures. companies were asked 14 questions ctxtceming type of plan offered (e.g., flexible or traditional plans), types of benefits to be included in their plans, the impact of their plans, and their satisfaction with the plans. 36 while only 17 percent of the responding companies currently utilized fbp's, their responses were supportive. companies that use fbp's cited the need to accommodate diverse employee needs, the need to improve employeeappreciation of and satisfaction with benefits, and the need to contml benefit costs as masons for phn implementation. on the other hand, the majority of smaller firms that did not use fbp's cited profit maximization, lack of priority, and lack of expertise as reasons for not using this method of benefits administration. regarding the impact of fbp's, 40 percent of the companies using them actually reported a reduction in overall benefits cost and 40 percent reported no change in costs. tbe remaining 20 percent reported that they did not keep track of the costs. in addition, the companies that utilize fbp's were slightly more satisfied with their plans than those who used traditional plans. the entire sample was asked to suggest changes in their current phns. one of the most frequently reported comments was the need to offer different levels of coverage to employees based on their needs and their willingness to pay for increased benefits coverage. additional support for fbps is found in a recent survey conducted by grant thornton accountants (october, 1991). in a survey of 1,825 smaller firms (i.e. less than 500 employees), 31 percent utilized some form of fbp. furthermore, the study indicated that the firms offering flexible benefit plans were more inclined to provide the extra health care benefits such as dental coverage, hmos, ppos, and wellness programs. the grant thornton study also found that health care costs in the fums studied have escahted an average 18.3 percent per year. however, the firms offering fbps spent only 7.5 percent of payroll costs while other firms spent 7.9percent ofpayroll costs on benefits. therefore, in addition to being able to offer a larger variety of health care benefits, fbps allow them to be delivered at lower cost to the company. this finding is consistent with the findings of hornsby, et. al. (1991). a 1990 study conducted by life insurance marketing research association also supports the use of fbps in smaller firms. a survey of 770 small business owners found that companies who did not choose an fbp did so because of administrative complexity. however, of the respondents who utilize an fbp, only 10 per cent stated that the plan was difficult to administer. in summary, while only a few studies have been conducted which investigate the utilization of fbps in smaller firms, these studies suggest that smaller firms are beginning to recognize the importance of addmssing employee benefits needs. furthermore, fbps may serve as a mechanism to reduce the cost of benefiis. conclusion most of the reasons cited for not adopting fbp's are based on the firms'ack of understanding of the benefits that could result from their implementation. firms surveyed cited the need for developing procedures for varying benefit levels based on need and willingness to pay. ibe choice of a fbpmay be the solution to this neetl funhermore, if auracting and retaining competent employees is a critical issue for the 1990s (hornsby tk kuratko, 1990),smaller firms may need to select compensation options that may improve their ability to attract and retain good employees (schuler, beutell k youngbtood, 1989). 37 ttus paper does not auempt to suggest that fbps are the only mechanism capable of maintaining human esources as a distinctive competency. higher wages, training programs, job enrichment, and bauer overall benefit plans may also contribute to better retention of key employees. however, it is hypothesized that the use of a flexible benefit plan will lead to more effective accomplishment of the goal of making human resources a distinctive competency than will traditional benefit plans because of the more positive approach they take toward dealing with workers in today's envimnment. for firms that find themselves depending on high quality employees for competitive success, those techniques thatenable them to retain top workers should be given every consideration. evidence indicates that fbps can be successfully implemented in smaller firms. in summary, fbp's may be an important tool for developing human resources as a distinctive competency. more empirical research is needed to ascertain the impact of these plans on management and employees. however, small firm owners and managers must first recognize the need to emphasize their human resources and develop a strategy that will help them reach their desired competitive level too often this aspect of operations is overlooked or given little auention in smaller firms. researchers and consultants in this area can help companies prosper by increasing the emphasis on human resources as a distinctive competency. references cost management works in flexible benefits plans. 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(1984). compensation options forsmallbusinessmanagemenl journalof small business management, october, 31-38. 39 seeing what's not there: the enigma of entrepreneurship joann c. carland james w. carland western carolina university wayne h. stewart university of north texas abstract the process is clear: entrepreneurs initiate business ventures. what is not clear is why they do so. the debate continues to rage about entrepreneurial behavior and this singular act of individual volition which is so vital to a nation's economic health and well being. the drives and personalities continue to be debated. gartner (1988) asks, "can one know the dancer from the dance?" is it even important to try? carland, hoy and carland (i 988) think it is essential because one cannot understand the dance without understanding the dancer. we think that the dance takes on the personality of the dancer. it is the dancer who interprets the dance and each artist makes the process his or her own. if we seek to understani the entrepreneurial process, we must have some insight into the entrepreneurial psyche. this is especially true if we wish to design educational and training programs for prospective and practicing entrepreneurs. in this work, we empirically examine 502 owner/managers of small businesses. we identify entrepreneurial vision, the ability to see what is not there, as their commonality. we empirically/ink that vision to the entrepreneurial psyche and use that to build insight into the entrepreneurial enigma, the process of entrepreneurship. introduction the process is clear: entrepreneurs initiate business ventures. what is not clear is why they do so. the debate continues to rage about entrepreneurial behavior and this singular act of individual volition which is so vital to a nation's economic health and well being. the drives and personalities continue to be debated. gartner (1988) asks, "can one know the dancer from the dance?" is it even important to try? carland, hoy and carland ( 1988) think it is essential because one cannot understand the dance without understanding the dancer. we think that the dance takes on the personality of the dancer. each artist makes the process his or her own. the outcome of the process of entrepreneurship is obvious for all to see: the creation of a new venture. that the venture may be the culmination of the dreams ofa life time seems unimportant in the face of the incontrovertible: the tangible outcome of the process. but we cannot lose sight of an another fact that is beyond debate: the trigger of the act is an individual. the key is that individual, the initiating force, the one who sees the opportunity, the challenge, and the one who takes that challenge. if we would understand the enigma of entrepreneurship, we must begin to circumscribe the behavior of the entrepreneur. herron and sapienza ( 1992) avow that the individual entrepreneur is the most salient unit of analysis in entrepreneurship research and theory. the value of the phenomenon of entrepreneurship is well established, both in terms of economic vitality and research and development. we may be interested in supporting and facilitating the process in the interests of national well being, economic development, or advancing the standard of living. we may be concerned about designing and administering entrepreneurial education and training programs to inculcate the skills and abilities required for success. in either event, but particularly so in the latter case, we must begin by understanding the initiator: the entrepreneur. how can one design a training program or a curriculum of entrepreneurship education if one does not understand the drives and characteristics which lead to the decision to initiate a venture, to concentrate on its growth, to take it public, to strive to dominate an industry? to teach the dance, one must teach the dancer. here, then, is our effort at understanding the dancer, at unraveling the enigma of entrepreneurship. characteristics of entrepreneurs much of the research in entrepreneurship has been founded upon the premise that entrepreneurs embody distinctive personality characteristics which can be identified (cooper & dunkel berg, 1987), and used to indicate a potential for entrepreneurship (lachman, 1980). these approaches have been criticized because they tend to be difficult to operationalize (gartner, 1988). nevertheless, one must approach the explication of a gestalt by describing its contributory factors. ·the earliest identified entrepreneurial characteristic was risk taking. cantillion (circa 1700) portrayed an entrepreneur as the individual who assumed the risk for the firm (kilby, 1971 ), a perspective echoed by mill (1848). palmer(l 971) proffered that risk assessment and risk taking are the primary elements of entrepreneurship. risk includes not only financial considerations, but also career opportunities and family relations (liles, 1974). yet, researchers are undecided about the role of the risk taking propensity of entrepreneurs (brockhaus, 1987). some studies have indicated no significant differences in risk taking propensities for entrepreneurs as compared to the general population (brockhaus, 1980; sexton & bowman, 1983). others have discovered a higher propensity for risk taking among entrepreneurs (sexton & bowman, 1986; carland, carland, carland & pearce, 1995), particularly when confronted with business risk (ray, 1986), but moderated by business experience, age, education, and type of business (schwer & yucelt, 1984). research has also shown that entrepreneurs evidence low uncertainty avoidance irrespective of culture (mcgrath, macmillan, & scheinberg, 1992). schumpeter (1934) posited that the burden of risk was inherent in ownership, and since entrepreneurs were not necessarily owners, the propensity for assuming risk should not be included as an entrepreneurial trait. instead, according to schumpeter, the central characteristic of entrepreneurship should be innovation. 2 . ,r11' ;.. : • ,. ·~-' • \ schumpeter's view of entrepreneurial innovation was rooted in the classic theories of economists such as say and marshall (hornaday, 1992). in the literature, innovation remains a frequently identified functional characteristic of entrepreneurs (e.g., mcclelland, 1961; hornaday & aboud, 1971; timmons, 1978; brockhaus, 1982; carland, hoy, boulton & carland, 1984; gartner, 1990). timmons(l 978) suggested that creativity and innovation were conditions inherent in the role of entrepreneurship. drucker (1985) actually defined entrepreneurshipas innovation in a business setting as the entrepreneur generates new capacity for wealth from limited resources. olson (1985) included invention, an activity analogous to innovation, as a primary entrepreneurial activity. this contention was intensified by carland, hoy, boulton and carland (1984) who proposed that innovation was the critical factor in distinguishing entrepreneurs from managers and small business owners. hornaday ( 1992) deftly illustrated that while innovation is a necessary element of entrepreneurship, alone it is insufficientto fully circumscribeentreprenetrial behavior because of the broad parameters of the function. despite the often stated significance of creativity and innovation vis-a-vis entrepreneurs, relatively few studies have empirically investigated the proposed relationship. perhaps the most ubiquitous entreprereurial characteristic is the need for achievement. this insight was initiated by the work of mcclelland (1961 ). in a study of behavior in young men, mcclelland (1961, 1965) concluded that a high need for achievement would influence the self selection of an 'entrepreneurial' position, defined as a salesman, company officer, management consultant, fund-raiser, or owner of a business. thus, these studies did not actually link need for achievement with the founding or ownership of a business. numerous subsequent studies have shown a positive relationship between achievement motivation and entrepreneurship (hornaday & bunker, 1970; hornaday & aboud, 1971; decarlo& lyons, 1979; lachman, 1980; begley & boyd, 1986). other studies have shown that need for achievement is not the most important variable for predicting the likelihood of starting a business (borland, 1974; hull, bosley, & udell, 1980). johnson (1990) suggested that because of the variabilityofthe samples, different operationalizations of the achievement motive, and convergent validity problems in instrumentation, more research is necessary to prove a definitive link between achievement motivation and entrepreneurship. the ability to identify and solve problems seems endemic to the entrepreneurial process. jung ( 1971) posited that one's view of a problem is a function of how one perceives the world and assesses information. jung labeled perception modes as sensation or intuition, and thought processes as either thinking or feeling. according to jung, decision making that is based upon the thinking mode is methodical, while decision making based upon feeling is characterized by impulsiveness. myers and briggs (1962) extended the original work of jung to develop further the orientation toward perception and judgment. a preference for one mode over another was considered to be an attitude. four attitudes resulted: extroversion versus introversirn and perception versus judgment. these attitudes combined with four functions, sensation versus intuition and thinking versus feeling, produce sixteen permutations of preferences known as personality types or cognitive styles. these typologies are indicated by the myers-briggstype indicator (mbti). keirsey and bates (1984) used the mbti types to identify four primary temperaments which represent the major cognitive distinctions among people. 3 carland and carland (1992), drawing largely upon the work of jung (1971 ), myers and briggs ( 1962), and keirsey and bates ( 1984), analyzed the problem-solvingstyles of managers, entrepreneurs,and small business owners. using the keirsey and bates temperaments of sp, sj, nf, and nt, the authors explored the differences of innovation, risk and achievement by cognitive type and concluded that temperament did indeed go far toward explicating the phenomenon of entrepreneurship. the entrepreneurial gestalt hornaday's observation about the inability of innovation to circumscribe entrepreneurship(l992) is a result of the gestalt nature of the phenomenon. even ifneed for achievement, preference for innovation and risk taking behavior are endemic to the entrepreneurial psyche, operationalizing the insight is problematic because each trait is normally distributed. to illustrate, figures i, 2 and 3 display graphs of the distributions of scores for the group of502 small business owners which we will be examining in this study. the scores illustrated are those on established instruments which measure the need for achievement, the preference for innovation and the propensity for risk taking. figure 1 need for achievement need for achievement score figure 3 risk taking propensity risk taking score figure 2 praforence for innovation ~ .. nr:=====-i "m--~ ;.".....--!!! .. ll innovation score the graphs may not visually resemble the bell shaped curve, but a statistical examination is required to determine whether the three distributions are normally distributed. for this purpose, we applied the kolmogorovsmimov test under the lilliefors option (wilkinson, 1990). this stat1st1c assumes no prior distribution but standardizes the variables and tests whether the standardized versions are normally distributed. the results, displayed in exhibit i, show a high probability that the scores are normally distributed. 4 exhibit i kolmogorov-smimov test for standard normal distribution variable n maximum difference lilliefors probability achievement score 502 .181 .000 innovation score 502 .140 .000 risk taking score 502 .085 .000 the conceptthat behavior traits of entrepreneurs are normally distributed is far reaching. it implies that prediction of individual behavior will be complicated by the relative strength of that individual'spersonalityorientatirn. this difficulty may well be the primary source of the confusion of results which seem to confound the advancement of the discipline. it is not surprising that different samples of entrepreneurs can be examined with totally different outcomes if one recognizes that the members of that sample may lie anywhere in a broad distribution of trait strength. this problem led us to focus this research on an empirical analysis of the interactions of the classic portrait of an entrepreneur. if entrepreneurship is a gestalt, we must study it as such in order to grasp the significance and practical applicability of our findings. we immediately face two basic questions in this quest. are there any commonalities in entrepreneurial behavior? is there some unifying perspective that has the potential to provide a structure for researching the phenomenon? the literature is rich in both process and trait work. although the discipline seems at times disjointed, there is one perspective that seems to us to be common to all of the insights produced over the years: entrepreneurial vision. whether we call it innovation and creativity, or the process of creating a venture, the commonality is that all ofus recognize that the entrepreneur had the ability to see what is not there. the vision is the key. it is the insight to identify an under-served market; the intuition to design new products, services or methods which can capture markets; the sixth sense that leads to an understanding of time, place, product and market. it is entrepreneurial vision that guides the act of volition which culminates in all of the phenomenon which we study: the creation of a venture; the guidance and nurture of a venture; and, the growth and development of a venture. the most promising approach to examining entrepreneurial vision, we felt, was the use of cognitive typologies. recognizing that a major aspect of an individual's temperament is intuition, we decided to investigate whether typologies had the potential to form the structure for examining the entrepreneurial gestalt. to that end, we employed the myers-briggs type indicator (myers & briggs, 1962) to the subjects in this study and partitioned them into the four major temperaments which keirsey and bates ( 1984) espouse: nf, intuitive-feeling; nt, intuitive-thinking; sj, sensingjudging; and, sp, sensing-perceptive. the immediate question is do the four temperaments display differences in the strength of the key traits, need for achievement, preference for innovation, or risk taking propensity, which are so well establisha:i in the literature? if they do, then we may have found a basis for understanding the interaction of the established personality traits in supporting entrepreneurial vision. 5 as a matter of fact, the temperaments do indeed, display differentstrengthson these traits. pictured in figures4, 5 and 6 are graphs illustrating that the two intuitive temperaments, the nf and nt cognitive groups of small busine&5 owners displayed higher scores on the need for achievement, preference for innovation and risk taking propensity than did the sensing based temperaments. figure 5 innovation preference by temperament e 0 11 ~,. f c .. :8 u .. " ~ 11 c" .e temperament figure 4 need for achievement by temperament e 0 .. 11 ~ u c .. ~ u " ~ 12 " :c 10 ~ temperament figure 6 risk taking by temperament temperament this rather unscientific insight led us to choose cognitive typology as a structure for investigating the entrepreneurshipgestalt. that is, we intend to employ cognitivetemperamert as a foundation for statistical examination of the need for achievement, preference for innovation and risk taking propensity. we are now ready to begin our investigation of the enigma of entrepreneurship. recognizing that advancing our understanding requires an empirical foundation, we designed a research methodology to pursue the heffalump (hull, bosley & udell, 1980). research methodology the researchers in this study designed an instrument which contained established measures of the need for achievement, preference for innovation, risk taking propensity, and cognitive typology. demographic and strategic questions rounded out the survey. graduate business students selected the participants of the study on a convenience basis. the students solicited responses from employers, employers of their parents, acquaintances, or from individuals with whom they had some other form of contact. participants in the study came from 30 states, however, most respondents lived in the southeastern united states. although the sample is convenience in nature, there are several benefits from this sampling technique. first, the sample was not anonymous, and the data set was controlled. 6 the questionnaires were examined upon submission, and incomplete questionnaires could be returned for completion. the lack of anonymity also ensures that the appropriate individual in the business actually completed the survey. second, the rate of response was greater than that of the typical mail survey. less than one in twenty individuals who were approached declined to participate in the study, suggesting that individuals participated in the survey who might not otherwise have responded. therefore, while still existent, nonresponse bias is not as problematic as with the typical mail survey. third, the technique supported the ability to generate a large sample size. the sample includes 502 active owner-managers of small businesses. the central limit theorem (mason, 1982) suggests that, due to the sample size, the level of confidence of this sample approaches that ofa random sample. the businesses selected for study fit the small business administration guidelines, i.e., a small business is independently owned and operated, and not dominant in its field. moreover, the numberof employees and volume of sales of the firms complied with the small business administration's guidelines for assistance. consequently, every individual in the study was the principal owner and manager of a qualifying small business. demographic information concerning the individual respondents and size and industrycharacteristicsoftheir firms is displayed in exhibit 2. the achievement scale of the personality research form (jackson, 1974) was used to measure the need for achievement. jackson (1974) reported that the test-retest reliability (n=l35) was .80, and odd-even reliability (n=l92) was reported to be .77. jackson and guthrie (1968), testing for validity, reported correlations with self ratings and peer ratings of .65 and .46, respectively. the authors concluded that the instrument contained convergent and discriminant validity. risk taking propensity and preference for innovation were measured using the risk taking scale and innovation scale of the jackson personality inventory (jackson, 1976). for risk taking propensity, jackson (1976) tested the internal consistency reliability with two samples (n=82 and n=307), and reported values of .93 and .91 using bentler's coefficient theta, and .81 and .84 using coefficient alpha. testing for validity (n=70), jackson (1976) reported correlations with the completion ofan adjective checklist, with selfrating and peer ratingof.75, .77, and .20 respectively. the internal consistency reliability of the innovation scale produced values of .94 and .93 using bentler's coefficient theta, and .83 and .87 using coefficient alpha. validity was checked using the completion of an adjective checklist, with self rating, and peer rating of .79, .73, and .37, respectively. reliability for the instruments pertaining to risk taking propensity, preference for innovation, and need for achievement were analyzed in the current study using cronbach's alpha. the alphas were .76, .77, and .72, respectively. these scores suggest that the instruments accurately measure the characteristics, and that the individual items on the tests produce comparable patterns of responses over all cases. 7 exhibit2 demographic data (n = s02) type of company retail 19% wholesale 3% manufacturing 43% construction 2% service 29% organization proprietorship 79% partnership 11% corporation 10% sales less than $ iook 12% $100k to $sook 10% $sook to $im 6% over$1m 64% employees less than 10 24% io to so 11% si to 100 6% ioi to 2so s% over 2so 49% age of the owner under 2s 4% 2s to 3s 33% 36 to 4s 36% 46 to ss 20% over ss 6% sex of the owner male 76% female 24% race of the owner majority 96% minority 4% education of the owner less than 12 years 3% 12 years 19% 13to!syears 17% 16 years 46% over 16 years 13% the 32-item forced-choiceshort form of the myers-briggs type lndicator(mbtl)(myers & briggs, 1962) was included to measure the cognitive typology of the respondents. mendelsohn (i 96s) reported that the tf (thinking versus feeling), sn (sensation versus intuition), and el (extroversion versus introversion) scales are independent, while the jp (judging versus perceiving) scale is consistently correlated with the sn scale. internal 8 consistency reliabilities were reported in the range from .75 to .85, and a 14-month test-retest correlation of. 70 was reported. as advised by myers and mccaulley ( 1985), the mbti scores were converted to continuous distributions for each of the four pairs of characteristics. these scores are the basis for the determination of the four fundamental temperaments. scores less than 100 imply a preference for the first letter in the scale, while scores greater than 100 indicate a preference for the second letter in the scale. this conversion also supports the use of the scores in parametric statistical operations. re sul ts of the analysis using the mbti scores to partition the data set resulted in identifying nfs, nts, sjs, and sps in proportions displayed in exhibit 3. interestingly, these proportions do not fit the national population distribution of38% sjs, 38% sps, 12% nfs and 12% nts (keirsey & bates, 1984 ). small business owners may not be a mirror of the national population. nts are represented in this sample at more than twice the expected level. sjs and nfs are slightly higher herethan in the national population, while sps are dramatically under represented. this may have to do with the relative satisfaction of various temperaments under normal conditions of employment. temperament sjs sps nfs nts exhibit 3 distribution of mbti scores number percent 222 44% 56 11% 77 15% 147 29% normal percent 38% 38% 12% 12% the first step in the statistical analysis was the examination of the scores which each of the four temperament groups produced on each of the three personality profile instruments. that is, we examined the scores for need for achievement, preference for innovation, and risk taking propensity, for each of the groups, nfs, nts, sjs, and sps. the first step was to examine each of the distributions for normality. as was the case with the overall scores, the individual distributions were normal, with one exception. exhibit 4 shows the results of the kolmogorov-smimov test under the lilliefors option (wilkinson, 1990) for each of the four temperaments. as the table shows, all three instruments produced normally distributed data for each of the four temperament groups except for risk taking among sps. 9 exhibit4 kolmogorov-smirnov test variable n maximum difference lilliefors probability nfs achievement score 77 .186 .000 innovation score 77 .175 .000 risk taking score 77 .116 .012 nts achievement score 147 .186 .000 innovation score 147 .188 .000 risk taking score 147 .079 .024 sjs achievement score 222 .177 .000 innovation score 222 .106 .000 risk taking score 222 .119 .000 sps achievement score 56 .163 .001 innovation score 56 .118 .049 risk taking score 56 .109 .097 the second step in the statistical analysis was a search for differences in the scores which each of the four temperament groups produced on each of the three personality profile instruments. descriptive statistics are displayed in exhibit 5. the mean scores in the table are more revealing in light of the range of scores which each of the instruments produces. the need for achievement instrument produces a range of scores from 0 to 16. the preference for innovation scale produces a range of scores from 0 to 20. the risk taking propensity instrument also produces a range of scores from 0 to 20. the table shows that the two intuitive groups, nfs and nts, displayed higher mean scores on all three instruments than did the sensing groups. the descriptive statistics do not indicate whether differences in scores are statistically significant, consequently, the next phase of the investigation involved analysis of variance (anov a) on the scores of each of the instruments for each of the temperaments. the results of those statistics are displayed in exhibit 6. the table shows that the scores on each of the three instruments are significantly different for the various cognitive temperaments. in fact, the level of significance is quite high. 10 exhibit 5 descriptive statistics n mean score variance std deviation nfs achievement 77 13.260 6.353 2.520 innovation 77 15.013 17.671 4.204 risk taking 77 11.779 26.806 5.177 nts achievement 147 16.605 4.542 2.131 innovation 147 16.517 9.430 3.071 risk taking 147 12.980 19.705 4.439 sjs achievement 222 12.707 7.131 2.670 innovation 222 12.599 21.906 4.680 risk taking 222 7.874 22.645 4.759 sps achievement 56 12.607 8.788 2.965 innovation 56 12.214 18.171 4.263 risk taking 56 8.482 20.181 4.492 exhibit 6 analysis of variance achievement n=502 squared multiple r: 0.026 source sum of squares df mean square f ratio p temperament 85.789 3 28.596 4.443 .004 error 3205.246 498 6.436 innovation n=502 squared multiple r: 0.159 source sum of squares df mean square f ratio p temperament 1621.830 3 540.610 31.450 .000 error 8560.443 498 17.190 risk taking n=502 squared multiple r: 0.196 11 source sum of squares df mean square f ratio p temperament 2680.718 3 893.573 40.349 .000 error 11028.636 498 22.146 the last finding led us to examine whether the actual cognitive scores could shed any more light on the entrepreneurship function. accordingly, we turned to converted mbti scores for el, sn, tf and jp. these scores, as reported above, had been converted into continuousdistributionsto support statistical examination (myers & mccaulley, 1985). the first step in the examination was a correlation statistic. exhibit 7 displays a pearson correlatirn matrix and the statistical significance for each cell. exhibit 7 pearson correlation matrix ach inn risk ei sn tf jp achievement 1.000 innovation 0.375 1.000 risk taking 0.241 0.414 1.000 ei score -0.146 -0.249 -0.294 1.000 sn score 0.176 0.485 0.510 -0.336 1.000 tf score -0.095 -0.092 -0.084 -0.063 o.i56 1.000 jp score 0.070 0.164 0.352 -0.113 0.506 0.228 i 1.000 bartlett chi-square statistic: 697.28i df=21 probability= .000 matrix of probabilities ach inn risk ei sn tf jp achievement 0.000 innovation 0.000 0.000 risk taking 0.000 0.000 0.000 ei score 0.001 0.000 0.000 0.000 sn score 0.000 0.000 0.000 0.000 0.000 tf score 0.033 0.040 0.060 o.i58 0.000 0.000 jp score 0.i 18 0.000 0.000 0.012 0.000 o.ooo i 0.000 12 as the table shows, scores on the need for achievement were significantly correlated with the el, sn, and tf scales of the mbti, as well as the scores for preference for innovation and risk taking propensity. in fact, the preference for innovation was significantly correlated with all of the other measures. risk taking propensity scores were also significantly correlated to everything except the tf scale. from the perspectiveofthe temperamert scores, the sn scale performed the best in terms of significance for all three of the personality trait instruments. these findings led us to speculate about the ability of the cognitive temperament to drive the personality traits. the theoretical underpinning of our empirical analysis involved an understanding of the value ofintuition in explaining entrepreneurial vision. the sn scale of the mbti explicitly measures the degree of a respondent'sreliance upon intuition in his or her cognitive processes. accordingly, we conducted regression analyses employing the three personality traits as dependent variables and the sn score as independent variable. the results are displayed in exhibit 8. exhibit 8 regression analyses dependent variable: achievement squared multiple r: 0.031 variable coefficient std error std coeftolerance t p constant 11.040 0.516 0.000 21.414 .000 sn 0.021 0.005 0.176 .iooe+oi 3.989 .000 analysis of variance source sum of squares of mean sq f ratio p regression ioi.477 i 101.477 15.909 .000 residual 3176.465 498 6.378 dependent variable: innovation squared multiple r: 0.235 variable coefficient std error std coeftolerance t p constant 4.332 0.805 0.000 5.383 .000 sn 0.102 0.008 0.485 .iooe+ol 12.378 .000 analysis of variance source sum of squares of mean sq f ratio p regression 2381.691 i 2381.691 153.222 .000 residual 7740.957 498 15.544 dependent variable: risk taking squared multiple r: 0.260 variable coefficient std error std coeftolerance t p constant -1.848 0.918 0.000 -2.013 .045 sn 0.124 0.009 0.510 .iooe+ol 13.241 .000 analysis of variance 13 source sum of squares of mean sq f ratio p regression 3544.617 i 3544.617 175.324 .000 residual 10068.333 498 20.218 as the table shows, the sn scale was a significant predictor of the need for achievement, preference for innovation and risk taking propensity. the scale only explained 3% of the variance in the need for achievement, but it explained 23% of the variance in preference for innovation scores and 26% of the variance in risk taking propensity scores. the regression coefficients were positive except for risk taking: the greaterthe level of intuition, the stronger the need for achievement and preference for innovation. however, stronger sensing preferenoe is associated with higher risk taking propensity. this last finding is at odds with the earlier descriptive statistics which suggest that intuitives have higher mean scores on risk taking than do sensing groups. there is one final set of statistics which come to mind. if the sn score is so successful at predicting scores on the need for achievement, preference for innovation, and risk taking propensity scales, how do the other cognitive meters perform? to grapple with that question, we conducted a stepwise regression matching the four mbti scales to the three personality trait measures. the results are displayed in exhibit 9. stepwise regression is not an analytical technique which can produce conclusions because it ignores correlations among independent variables as they are entered into the regression equation. nevertheless, stepwise regression can show whether additional study is justified. if the change in percentage of variance explained by a model is significant as the result of adding independent variables, that suggests that the additional variables merit further investigation. an insignificant change in explained variance suggests that additional variables are relatively unimportant to a model. the table in exhibit 9 shows that, in comparison to the other scales, the sn scale is the dominant determinant of all three personality traits. the sn scale accounted for 26% of the variance in risk taking in step i, while the remaining three steps of the procedure only increased the r square to 33%. the story is the same with innovation. the sn scale explainoo 24% of the variance in the innovation score, while three more regression steps could only raise the explanatory power to 28%. with regard to need for achievement, the sn scale only accounted for 3% of the variance in the instrument, however, two more regression runs could only raise the r square to 6%. clearly, the sn scale is the most important cognitive factor in understanding the personality traits. we cannot lose sight of the fact that the percentage of variance explained by the sn cognitive scale is small. explaining 26% of the variance means that 74% of the variance is unexplained. in other words, there are other factors, not included in this analysis which are clearly important in determining the strength of the independent variables in these models. this is an important consideration and one which requires additional research to understand. 14 exhibit 9 stepwise regression analyses achievement step# i r square: 0.031 variable coefficient std error std coeftolerance f p sn 0.021 0.005 0.176 .ie+.01 15.909 .000 step# 2 r square: .046 sn 0.023 0.005 0.196 0.97554 19.462 .000 tf -1.016 -0.006 -0.126 0.97554 8.066 .005 step# 3 r square: .055 sn 0.019 0.006 0.162 0.86885 12.029 .001 tf ·0.016 -0.006 -0.127 0.97541 8.264 .004 el -0.014 -0.006 -0.100 0.88708 4.612 .032 innovation step# i r square: .235 sn 0.102 0.008 0.485 .ie+oi 153.22 .000 step# 2 r square: .264 sn 0.!08 0.008 0.512 0.97554 172.69 .000 tf ·0.039 -0.009 -0.172 0.97554 19.48 .000 step# 3 r square: .273 sn o.ioi 0.009 0.479 0.86885 135.84 .000 tf -0.039 -0.009 ·0.173 0.97541 19.92 .000 el -0.024 -0.0io -0.099 0.88708 5.98 .015 step# 4 r square: .276 sn 0.108 0.010 0.514 0.66375 119.96 .000 tf -0.037 .0.009 -0.162 0.94508 17.03 .000 jp -0.016 -0.011 ·0.070 0.71674 2.39 .122 el -0.023 -0.0io ·0.095 0.88221 5.41 .020 risk talcing step# i r square: .260 sn 0.124 0.009 0.5!0 .ie+.01 175.32 .000 step# 2 r square: .288 sn 0.131 0.009 0.537 0.97554 196.01 .000 tf -0.044 -0.0io -0.168 0.97554 19.20 .000 step# 3 r square: .307 sn 0.11 i 0.011 0.457 0. 74172 i i0.97 .000 tf ·0.051 -0.0io -0.193 0.94564 25.26 .000 jp 0.044 0.012 0.165 0.72069 14.01 .000 step# 4 r square: .328 sn 0.098 0.011 0.400 0.66375 78.24 .000 tf ·0.052 -0.0io ·0.197 0.94508 26.93 .000 jp 0.048 0.012 0.177 0.71674 16.59 .000 el ·0.042 -0.011 ·0.153 0.88221 15.12 .000 15 conclusions have we been able to explicate the entreprereurship enigma? not completely, but ifthe results of this study are confirmed by future research, we have made progress in .describing the dancer and understanding the dance. the results of this study suggest that entrepreneurs are not homogenous. they may well be characterized by need for achievement, preference for innovation and risk taking propensity, but some of them are more highly driven than others. in fact, any given group of entrepreneurs is likely to contain such a distribution of individuals which makes drawing conclusions about their personality traits difficult. this problem may well be the basis for those who espouse abandoning trait research because it provides no insight into the entrepreneurial process. despite the problems which normally distributed trait strengths produce for researchers, there is much of value to be gained from understanding the entrepreneurial psyche. the process ofany and all entrepreneurial action is the result of an individual'sdecision to take that action. that decision is rooted in personality and cognition. we must gain knowledge of that personality in order to support, train and educate the entrepreneur. the results of this study suggest that the core insight which can support an understanding of the entrepreneur is intuition. in every statistical test, the cognitive function of intuition served to form a basis for understanding the behavior patterns. those entrepreneurs with stronger intuition translate that vision into innovative action. they are supported in the drive to activate the vision by high need for achievement. they are less dismayed in the face of risk and may well see their actions as less risky. they see what is not there and see it extremely well. those entrepreneurs with less intuition in their cognitive typologies will prefer a more concrete approach to the entrepreneurial process. they may be less creative than their intuitive brothers and sisters, but they will be more practical in their approaches to business. it is well established that sensing typologies make better managers but intuitive types make better changeagents(keirsey& bates, 1984). both can be highly driven by need for achievement, but sensing types are more cognizant of risk and generally less risk taking. they see what is not there less well and are more apt to focus on the concrete and the here and now. the foregoing descriptions are simply of individuals at the two poles of the intuition continuum. in reality, most entrepreneurs will fall somewhere between those poles. what they see best will be what they focus upon and will form the basis for their individual approaches to the process of entrepreneurship. the process will be directed by the entrepreneurial vision. the depth and breadth of that vision varies along a normal distribution. consequently, in any given group of entrepreneurs we are likely to find a cross section of people with various intuitive strengths and levels of drives. this does not mean that we do not understand the dancer. in fact, it means that we understand the dancer quite well. like the original artist from whom we borrow this imagery (yeats, 1956) each dancer will interpret the dance differently. to teach them we must test their insight. those with stronger intuitive leanings will benefit more from educational programs grounded in reality and based on cold, hard facts. those with stronger sensing orientation will benefit more from educational programs designed to foster and support paradigm bridging actions. the former need structure 16 ....... for their vision and insight, the latter need vision and insight to which they can apply their structure. both can dance, but both can benefit from wise programs which mitigate their weaknesses and concentrate on how to make the best decisions for their future success. the entrepreneurial gestalt is truly that: a whole which is much greater than the sum of its parts and an outcome which transcends its inputs. we may never master the enigma, but we must recognize that to be ignorant of it is to forever limit our insight. absent an understandingofthe entrepreneurial psyche we are left with attempting to interpret outcomes and processes through our own cognitive typologies. those of us with more sensing orientation are likely to view the entrepreneurial process more mechanistically and to focus on the planning and strategic management processes. those of us with more intuitive leanings are more likely to interpret entrepreneurial behavior as the result of leaps of logic which sometimes defy description. like the blind men describing the elephant, each of us will be right about some things, but none of us will see the whole. if intuition is the glue which supports entrepreneurial vision, as this research suggests, then it is even more difficult than describing the elephant. we are describing the heffalump, a creature no one has ever seen (hull, bosley & udell, 1980), and we must approach the creature carefully because each of them will be different and each of them will be unique and each of us will only be able to see one small aspect of the whole. it is this uniqueness that makes entrepreneurs the same and makes them so fascinating. that is the true enigma of entrepreneurship, the gordian knot of our discipline. if we would understand these dancers, if we would interprettheir dances, if we would explore how they see what is not there, then we must look for the commonalities in our work rather than the differences. each of us contributes another piece to the puzzle. as yet, we cannot know the pattern, we cannot see the portrait, but working with and building on each other, we will solve the enigma. it is our collected minds and works which will serve as alexander's sword. 17 references begley, t. & boyd, d. 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(1990). systat: thesystemforstatistics. evanston, il: systat, inc. yeats, w .b ( 1956). among school children. in the collected poems of wb. yeats. new york: macmillan. 20 l ! s y journal of small business trateg being good for goodness sake: the influence of family involvement on motivations to engage in small business social responsibility whitney o. peake western kentucky university whitney.peake@wku.edu phillip e. davis east carolina university davisp14@ecu.edu marcus z. cox stephen f. austin state university mcox@sfasu.edu abstract small family and nonfamily firms are acknowledged to serve as important facilitators of social responsibility within their communities; however, both have received relatively little attention in the literature for these efforts or their motivation for undertaking them. grounded in enlightened self-interest (esi) and intentions, we explore motivations for participation in socially responsible behaviors and the moderating effect of family involvement. we develop measures for small business social responsibility (sbsr), esi, and sbsr intentions. our analyses indicate positive direct effects exist for both sbsr intentions and esi on engagement in sbsr. we find that family involvement strengthens the relationship between esi and participation in civic sbsr, thus suggesting that family firms may be partially motivated to “do good” in visible forms of sbsr to protect their own interests. keywords: family business, small business, social responsibility, enlightened self-interest, theory of planned behavior 1 mailto:whitney.peake@wku.edu mailto:whitney.peake@wku.edu mailto:davisp14@ecu.edu mailto:mcox@sfasu.edu mailto:mcox@sfasu.edu journal of small business strategy vol. 25, no. 1 introduction corporate social responsibility (csr) has been heavily examined in the context of large, publicly traded corporations, yet little research has focused on csr in small businesses (gallo, 2004; debicki, matherne, kellermanns, & chrisman, 2009). large corporations and small businesses likely share some similar motivations for engaging in csr activities; however, a growing body of literature draws attention to differences across factors motivating small businesses to engage in these activities. specifically, scholars argue that family firms differ from nonfamily firms in their general concern for csr issues, as well as the types of social issues they view as most salient (déniz & suárez, 2005; dyer & whetten, 2006). such research indicates that the underlying motives for engaging in small business social responsibility (sbsr) likely differ across family and nonfamily firms. traditional economic theory asserts that the role of managers is to maximize profits; however, a behavioral theory perspective of the firm (cyert & march, 1963) counters this view by asserting that managers do not have perfect information, operate in a realm of bounded rationality, and may choose to pursue non-economic goals that divert resources from profit-maximization (chrisman, chua & sharma, 2005). chrisman, chua, pearson, and barnett (2012: 268) contend that the pursuit of non economic goals, “are likely to reflect the values, attitudes, and intentions of a firm’s dominant decision-making coalition;” thus, the motives for family businesses to pursue csr activities may reflect the family’s desire to engage in activities that align with their personal values or that may be seen as instrumental actions leading to reciprocity from community stakeholders. family business scholars posit that it may be this emphasis on and pursuit of non-economic goals that distinguish family businesses from nonfamily businesses in undertaking a number of behaviors (e.g., chrisman et al., 2005; westhead & howorth, 2007), including social responsibility. we believe the extant literature in this area points to two important research questions. investments in csr activities often shift the firm’s focus from the primary profit seeking function and may require a long term orientation; thus, the question arises regarding what factors motivate small business owners to pursue such actions. additionally, since prior researchers posit that small family and nonfamily businesses differ in their interest in and propensity to participate in social responsibility, do small family and nonfamily businesses differ in their motivation for and involvement in socially responsible behaviors? in an attempt to answer these questions, we employ enlightened self-interest (esi) and intentions perspectives to propose motives for small businesses’ participation in socially responsible behaviors. further, we examine the role of family involvement for its effect on the relationships between esi and sbsr intentions and engagement in socially responsible behaviors. to investigate our hypotheses, we utilize a sample of 207 small, family and nonfamily firms with fewer than 50 employees. by definition, all firms included in our sample are small firms; thus, we follow lepoutre and heene (2006) by referring to the csr construct in this realm as small business social responsibility (sbsr). for the purposes of our study, sbsr refers to the contributions firms make for the good of their communities (besser & miller, 2004; uhlaner, vangoor-balk, & masural, 2004), since small businesses’ efforts and interests 2 journal of small business strategy vol. 25, no. 1 may be more localized than those of larger corporations (niehm, swinney, & miller, 2008). based on the current literature related to csr and sbsr, we developed items that provide three distinct measures for social responsibility – general sbsr, civic sbsr, and employee focused sbsr. our results then provide a unique perspective on sbsr, and whether family and nonfamily businesses differ with regards to salience of sbsr activities, as other researchers have suggested (déniz & suárez, 2005). the remainder of our paper is organized as follows. first, we discuss esi and intentions as relevant lenses to provide a foundation for our arguments. next, hypotheses are offered to depict how sbsr intentions and esi may spur engagement in socially responsible behaviors, as well as the role of family involvement as a moderator of these relationships. we then discuss the data and methods used to test our hypotheses. finally, we conclude with a discussion of the results and offer insights for future research. theory and hypotheses during the past 50 years, firms have come under increasing pressure from a wide array of stakeholders to improve their performance on a host of non-economic metrics, such as environmental performance, community support, charitable giving, diversity in hiring practices, and employee welfare. broadly speaking, these actions comprise a firm’s corporate social responsibility (csr), which refers to both the firm’s economic responsibilities to its owners and its ethical and legal responsibilities to society (carroll, 1991). corporate philanthropy, a component of csr, has received much attention by scholars and has been argued to aid firms in enhancing relationships with government regulators and local communities (barron, 2001), improving employee morale (greening & turban, 2000), attracting and retaining quality employees (bhattacharya, sen, & korschun, 2008), enabling the attainment of key resources from stakeholders (fombrun, gardberg, & barnett, 2000; frooman, 1999), and improving company visibility and brand image (porter & kramer 2002). lev, petrovits, and radhakrishnan (2010) found that corporate charitable giving was significantly associated with future revenue growth; thus, they conclude that “doing good is apparently good for you under certain circumstances” (198). conversely, scholars acknowledge that firms may invest in csr activities as a preventative mechanism. godfrey (2005) asserts that corporate good deeds produce “positive moral capital among communities and stakeholders” and that this capital can be used as a type of insurance in the event of future calamity (777). as such, prior research demonstrates that investments in csr activities can lead to increased financial performance and aid in loss minimization (godfrey et al., 2009) in times of crisis. while the studies referenced above focus primarily on large corporations, current research suggests that csr activities are important to small business success as well. small businesses are more likely to participate in socially responsible issues that reflect owner values, provide social legitimacy, and are perceived to lead to firm profitability (thompson, smith, & hood, 1993; uhlaner et al., 2004). additionally, dyer and whetten (2006) contend that family firms are motivated both by stewardship and the fear of negative outcomes; thus, their research indicates that 3 journal of small business strategy vol. 25, no. 1 family businesses undertake socially responsible behaviors for ethical reasons and for personal gain. although small and family businesses may be motivated by a number of factors (spence & rutherfoord, 2002), we explore sbsr in terms of enlightened self-interest and sbsr intentions, as well as the influence that family involvement may exert on these relationships. enlightened self-interest theory both keim (1978) and spence and rutherfoord (2002) posit that owning and operating a business is based on much more than profit motivation. they argue that the reasons for involvement in owning and operating a business are multifaceted, socially constructed, and focused on long term benefits. in the more general csr literature (galaskiewicz, 1985; garriga & melé, 2004; lee, 2008) and small business literature (besser & miller, 2004; niehm et al., 2008) scholars have addressed enlightened self-interest (esi) as one of the primary theories to support the motivation for firm participation in social responsibility (garriga & melé, 2004). enlightened self interest (esi) suggests that firms engage in socially responsible processes with the knowledge that they may receive benefit from such behaviors (keim, 1978; garriga & melé, 2004; lee, 2008). prior research indicates that active involvement in social responsibility efforts assists in constructing a positive reputation (moir, 2001), attracting and retaining employees (moir 2001; turban & greening, 1997), obtaining positive associations with investors (atkinson & galakiewicz, 1988), improving networks with key leaders and social movers in the community (galaskiewicz, 1985; 1997), and engendering the loyalty of customers (smith, 1994; stendardi, 1992). since the interface between the business and personal lives of small business owners often overlap (frone, russell, & cooper, 1992; loscocco, 1997; besser & miller, 2004), the attitudes and personal values of the owner/operator likely influence participation in socially responsible behaviors. what is beneficial for the business also tends to benefit the owners’ personal lives (besser & miller, 2004). further, businesses and the communities in which they operate are viewed as having a mutually beneficial relationship, since the health of the community affects the success of the business and vice versa (fitzgerald, haynes, schrank, & danes, 2010; nadim & lussier, 2010). small family and nonfamily firms are especially vulnerable to community economic health; thus, small firms are often viewed as taking an enlightened self-interest approach to social responsibility, since owner/managers have knowledge of the potential long-term benefit to the business from involvement in such activities (jenkins, 2006; niehm et al., 2008; uhlaner et al., 2004). wilson (1980) found that most small business owners in her sample were concerned with social responsibility; however, approximately 90% of respondents in her study referred to profitability in their responses. based on these responses, individuals involved in wilson’s (1980) study suggest the presence of esi, given that they participated in social responsibility to improve profit, heighten reputation, and retain customers and employees. besser and miller (2004) confirm wilson’s assertions, since over half their respondents addressed esi rationale in their responses, when esi was related to maintaining image, cooperating with other community businesses, and strengthening the local community. niehm et al. (2008) tie esi concepts to the construction of 4 journal of small business strategy vol. 25, no. 1 social capital within the community, since even impure altruism for the good of the community has the opportunity to improve both business and the community. thus, we anticipate the following. h1: there is a positive relationship between esi and participation in socially responsible activities. small business social responsibility intentions social scientists have long searched for ways of explaining human behavior. perhaps two of the most oft cited attitude behavior models used to study human behavior are the theory of reasoned action (tra) (ajzen & fishbein, 1980; fishbein & ajzen, 1975) and the theory of planned behavior (tpb) (ajzen, 1988, 1991). “both models were designed to provide parsimonious explanations of informational and motivational influences on behavior,” (conner & armitage, 1998: 1429). according to the tra, a person’s intentions to perform a behavior (e.g. stop smoking) are the most likely predictor of them engaging in that behavior. intentions are in turn comprised of the person’s attitude toward that behavior and subjective norms (langdridge, sheeran, & connolly, 2007). subjective norms “refer to perceived social pressures exerted on an individual to perform a behavior or not” (aleassa, pearson & mcclurg, 2011: 665). it is possible that small firm owners feel pressure to conform to subjective norms from fellow community members and customers by engaging in socially responsible activities and that small business owners with positive attitudes toward socially responsible activities are the most likely to engage in them. however, the tra was limited by its focus on volitional behaviors – those which the actor was able to exert considerable control over, as well as possess the needed resources, skills and opportunities. the tpb grew out of the tra and specifically addressed non-volitional behaviors – those actions which required specific resources, skills and opportunities to accomplish (e.g. engaging in csr activities). a central component of the tpb was the introduction of the actor’s perception of their ability to control the outcome of a behavior and not simply wish for an action to occur. the addition of perception control helped explain scenarios where intentions alone did not lead to desired behavior. this perception of control is referred to as perceived behavioral control (pbc) (ajzen, 1991). as conner and armitage (1998) note, “if intentions are held constant, behavior will be more likely to be performed as pbc increases” (1431). therefore, small business owners who have positive attitudes toward sbsr activities, who perceive subjective norms to engage in sbsr activities, and who believe they have sufficient resources, abilities, and opportunities to engage in csr activities will do so (cyert and march, 1963; lawrence, 2008). it may also be possible that small business owner-managers perceive they have greater latitude of the use of firm resources for the pursuit of sbsr activities than do non-owner managers. this perceived greater autonomy of resource use could lead to increased pbc, which in turn would increase the likelihood that a small business owner would engage in socially responsible activities. thus, we expect the following: h2: there is a positive relationship between sbsr intentions and participation in socially responsible activities. 5 journal of small business strategy vol. 25, no. 1 the moderating influence of family involvement as previously noted, family and nonfamily businesses have a variety of motivations for engaging in sbsr activities. in this section we identify the mechanisms by which prior research suggests that family firms differ from nonfamily firms. broadly speaking, these mechanisms can be categorized as values, communication, and control. hoffman, hoelscher, and sorenson (2006) note that family firms are unique in that the family members share what they term a moral infrastructure, which is defined as “the interpersonal structure or network that reinforces beliefs about self, family, business, and the larger community and how these entities should relate” (139). as values, beliefs, and norms are developed in the family unit, they then transfer to the business and influence the organizational culture (lussier & sonfield, 2009; sorenson, goodpaster, hedberg, &yu, 2009). since the organization’s identity is closely linked to that of the owner (ashforth & mael, 1989), a family firm’s attitude towards socially responsible activities will likely stem from the owner’s personal experiences. miller and le breton miller (2005) contend that the intentions, involvement, and values of the family coalition influence the nature of firm operations; thus, the attitude of the owner and the owning family may determine the level of engagement in sbsr. the result is that the family firm operates with a shared ethical view, reflecting family values. due to their intimacy and dual interaction at work and home, families also develop a shared language (hoffman et al., 2006) that enables family members to communicate values and expected norms. sorenson et al. (2009) observe that it is this ability to pass down shared values via their social structure that is unique in family businesses. due to this shared language and reinforced normative behavior, greater trust develops among family members. last, in order to exercise these values, family members must also possess enough control to direct the business in pursuit of goals aligned with family values. because family members in a family business often occupy both the roles of principal and agent they may have greater latitude and security in pursuing strategies that do not directly lead to profit maximization. managers in non-family firms may fear that they will be terminated if financial goals are not met and therefore may not pursue non-economic goals and can hold detrimental effects if growth and primarily economic goals are not at the forefront of the family’s objectives (lussier, sonfield, and barbato, 2009). laverty (1996) observed that managers acting as agents often suffer from “short-termism” in that they are likely to pursue actions that have greater short-term payoff, but may be suboptimal for the long term success of the firm. because in small family firms the managers are often both principal and agent, they enjoy greater goal alignment and need not worry that pursuit of non-economic goals will be punished by the principal. given the motivation to project the family name and the business in a positive light, most family business owners and coalitions avoid action or inaction which negatively influences these factors (block, 2010). as noted above, the notion of an owner’s heightened esi may influence how the firm is perceived by stakeholders. given this perspective, owners and managers of family businesses may identify more strongly with the firm as a social entity and not purely as a means for profit generation than do their counterparts in non-family businesses (block, 2010). while the owner of a family 6 journal of small business strategy vol. 25, no. 1 firm is concerned with overall profitability, he or she will likely engage in behaviors that enhance the firm’s reputation in hopes of positively influencing the firm’s bottom line. in one of the few family business social responsibility studies, niehm et al. (2008) found that family businesses likely operate under the enlightened self-interest model when engaging in socially responsible behaviors within their communities. economic perspectives of altruism, suggest that family business owners are motivated by self-interest in “doing good” since altruism concurrently addresses the satisfaction of both the “self” and “others” (schulze, lubatkin, dino, & buchholtz, 2001), which raises utility. based on the tenets of tpb, if a family business plans to engage in socially responsible behaviors, those activities are more likely come to fruition (lepoutre & heene, 2006). given its role in the greater society, belardinelli (2002) argues that intentions begin with a sense of family virtue and contends that the family unit instills values and virtues in an individual throughout his or her life. when placed in business environments, particularly those found in family firms, individuals project these virtues and values into the fabric of the organization. the planned behavior of participating in socially responsible activities becomes a tradition of the family business (lumpkin, martin, & vaughn, 2008), which becomes a routine or frequent occurrence of organizational life. therefore, to successfully execute the intentions of engaging in sbsr, family businesses must understand the role they play in the overall local environment and find a way to intricately weave sbsr activities into its overall goals and strategy (garriga & melé, 2005). prior research indicates that family versus nonfamily ownership may exert a significant influence on small businesses (campbell, line, runyan, & swinney, 2010). based on the tenets of esi and tpb, we hypothesize the following moderating effect of family involvement on the prior hypothesized relationship of esi and intentions with participation in sbsr activities. h3a: family firm involvement strengthens the relationship between esi and involvement in socially responsible activities. h3b: family firm involvement strengthens the relationship between sbsr intentions and involvement in socially responsible activities. data and methods participants in this study were obtained through an entrepreneur interview assignment in entrepreneurship and management courses at a large southwestern university during the fall 2012 semester using snowball sampling techniques (heckathorn, 2011). snowball sampling refers to a technique in which individuals informed of a particular research objective attempt to identify and obtain data from other individuals they believe to meet certain specifications set forth by the researcher(s) (spreen, 1992). although snowball sampling does not allow for a random sample, it may provide access to a more diverse sample than otherwise could be achieved (mcgee, peterson, mueller, and sequeira, 2009). prior researchers in entrepreneurship and small business have used this technique to identify nascent entrepreneurs and women entrepreneurs (e.g., mcgee et al., 2009; 7 journal of small business strategy vol. 25, no. 1 schindehutte, morris, and brennan, 2003). aligned with the procedures of mcgee et al. (2009), students served as the preliminary points of contact for the entrepreneurs involved in this study. although small business owners are not “hidden” populations as is often the case when researchers employ snowball sampling techniques, privately held small businesses involved in social responsibility initiatives are not readily identifiable via publicly available sampling lists or frames (faugier and sargeant, 1997), an important criteria in using snowball sampling techniques. thus, we consider snowball sampling an appropriate approach to access small family and nonfamily firm owners in this context. survey instruments were administered to each business owner interviewed. the primary requirements for inclusion in the study were that each individual interviewed must be an owner/founder of the business and involved in the day-to-day operations of the firm. a total of 237 surveys were collected; however, after removing duplicate and incomplete surveys, 207 responses remained. please see table 1 for the basic demographic characteristics of the respondents. gender table 1: respondent demographics frequency percentage (%) male 124 59.90 female 83 40.10 ethnicity white 135 67.16 black 21 10.45 other 45 22.39 education hs 22 10.63 some college 61 29.47 associate’s 14 6.76 bachelor’s 82 39.61 master’s 18 8.70 doctorate/professional 9 4.35 age 20-34 83 40.10 35-49 67 32.36 50-64 51 24.64 65+ family involvement 6 2.9 no involvement 77 37.20 less than 50% ownership involvement 3 1.45 50-99% ownership involvement 14 6.80 100% ownership involvement 113 54.59 8 journal of small business strategy vol. 25, no. 1 although common method variance is often a concern in field studies in which analyses rely on one respondent (podsakoff & organ, 1986), we have attempted to mitigate these issues in our data collection process and present analyses in the results section, which indicates common method variance does not appear to be a concern with our data. exploratory factor analysis the sbsr items (general, civic, and employee focused) and esi items included in our study were informed by prior research exploring csr in the small and family business context (e.g., besser & miller, 2004; fitzgerald et al., 2010; niehm et al., 2008). the theory of planned behavior served as the basis of assessing intentions both at start-up and currently for the firm. therefore, our full hypothesized research model includes five factors general sbsr, civic sbsr, employee focused sbsr, esi, and sbsr intentions. before we utilize our model for prediction purposes, we must ground our proposed model. exploratory factor analysis (efa) should generally be used in cases where the variables of interest are either newly developed, as in the case of esi, or have not been analyzed as a collective group, as in the case of the present study (bandalos & finney, 2010). we conducted efa through principal components analysis (pca) to identify the theorized constructs of interest. since we are concerned with assessing the variance in a minimum number of factors to enable model prediction, the use of pca is considered appropriate (hair, black, babin & anderson, 2010). pca can yield composite variables that represent most of the information from the larger set of items used in the study (devellis, 2012). prior to our use of the results from the efa for prediction purposes, we first assessed the quality and appropriateness of the data for pca by determining the degree of interrelatedness of these items (hair et al., 2010). the bartlett test of sphericity (χ2 = 3937.316 significance = .000) and the kaiser-meyer-olkin measure of sampling adequacy (.875) both indicate that the data has sufficient correlations to support our use of pca. given this, we can reasonably expect that the resulting efa will offer distinct, reliable factors. using varimax rotation, the pca produced a five-factor model, which accounts for 63.69% of the total variance. the resulting five factors identified all had eigenvalues greater than 1 and factor loadings that were greater than or equal to 0.50, which is necessary to be considered practically significant (hair et al., 2010). additionally, our sample size (n=207) is well above the size necessary (n=120) to obtain a .05 significance level based on a suggested power level of 80%. based on the characteristics of our data and the efa results, we believe the identified factors are distinct and suitable for prediction purposes. measures dependent variables (general sbsr, employee focused sbsr). based on prior research in social responsibility, we developed items related to involvement in socially responsible behaviors. these items covered a broad range of sbsr activities, such as providing daycare services for employees with small children, university giving, and supporting local civic efforts, to name a few. respondents were asked to what degree participation in these activities characterized their firm on a scale from 1 = not important at all to 7 = extremely important. additional related items were provided in a follow-up section in which 9 journal of small business strategy vol. 25, no. 1 respondents were asked to rate their level of involvement in activities from 1 = no involvement at all to 7 = high involvement. during the efa described previously, three factors emerged representing involvement in socially responsible behaviors: general sbsr, civic sbsr, and employee focused sbsr. the corresponding items for each factor were summed to provide a single measure. the first factor, termed general sbsr, represented general involvement in philanthropy and socially responsible activities ranging from supporting environmental causes to local needs (e.g., library improvement, animal shelters) to public or private school support. this measure consists of nine items, with a cronbach’s alpha of 0.89. the second factor, termed civic sbsr, is comprised of three items representing giving to universities or institutions of higher education, supporting the community through participation in civic organizations, and involvement in civic organizations, such as kiwanis, rotary, etc. the cronbach’s alpha for the civic sbsr measure is 0.77. the final social responsibility factor, deemed employee focused sbsr, is comprised of four items related to employee interests, such as providing a happy work environment, providing a safe work environment, treating employees fairly with sufficient wages and benefits, and providing professional development opportunities for employees. cronbach’s alpha for the employee focused sbsr measure is 0.87. enlightened self-interest enlightened self-interest generally represents the individual’s recognition that “doing good” is good for business. based on researchers’ prior discussions of esi from a public relations perspective, we developed six items that suggest an individual has some impurely altruistic motives in undertaking sbsr. respondents were asked to rate the extent to which factors influenced their motivation to participate in social/environmental issues or philanthropic events/organizations on a 7 point likert scale, from 1 = no influence at all to 7 = extremely influential. they rated the influence of the following items: increasing my customer base, improving the bottom line of my business, improving perceptions of my business within the community, keeping in line with my biggest competitors’ giving behavior, improving my social status in the community, and making important community or political contacts. these six items were summed to create the final measure, ranging from (x = 6) to (x=42). cronbach’s alpha for this measure was 0.91. sbsr intentions sbsr intentions levels were assessed at both the start-up and current stages of firm development. respondents were asked four questions related to how the following statements described their business on a 7 point likert scale from 1 to 7, where 1 = not at all and 7 = very much. the items measuring sbsr intentions are as follows: (1) social or environmental aims, such as protecting the environment, building a better community, providing a higher quality work environment for employees, etc. were a driving force in starting my business; (2) social or environmental aims, such as protecting the environment, building a better community, providing a higher quality work environment for employees, etc. were a driving force in currently operating my business; (3) philanthropy, or giving, has been an important part of my business since start up; (4) philanthropy, or giving, is an important part of the current operations of my business. these four items were 10 journal of small business strategy vol. 25, no. 1 summed to create the final measure. cronbach’s alpha for the sbsr intentions measure is 0.86. family involvement for the purposes of this study, we follow the theoretical definition of the family firm introduced by chua, chrisman, and sharma (1999), “a business governed and/or managed with the intention to shape and pursue the vision of the business held by a dominant coalition controlled by members of the same family or a small number of families in a manner that is potentially sustainable across generations of the family or families.” (p. 25). in line with prior research, respondents were first asked whether or not they considered the business to be family-owned. research suggests that the opinion of top management regarding whether or not the firm is perceived as a family firm is important in distinguishing family from nonfamily firms (barbera & hasso, 2013; cooper, upton, & seaman, 2005; craig & dibrell, 2006; westhead & cowling, 1998). since family involvement and vision are also considered important components of our definition (chrisman et al., 2012), we interacted the family business perception measure with the percentage of the business owned by the family to obtain a scale of family involvement. the family involvement measure is reported in decimal form and ranges from 0% to 100% (x = 0 to x = 1). owner, firm, and community control we controlled for gender, ethnicity, and education level, which are traditional controls in the small and family business literatures. additionally, we assessed the owner’s primary goals of the firm to see if motives such as profit maximization, family income, or lifestyle interests factored into explaining the observed variances. a measure of the owner’s long-term orientation through family succession aspirations was controlled for by whether the owner intended to pass the business on to a family member. the aspiration for family succession was measured on a 7 point scale in which the individual indicated they believed ownership would remain in the family, from 1 = absolutely disagree to 7 = absolutely agree. a number of firm-specific aspects were also accounted for in our analyses. we controlled for the size of the firm, as measured by the number of full-time employees, and the age of the firm. additionally, we accounted for the legal structure of the firm (e.g. sole proprietorship, llc, s-corp, etc.), as well as its industry affiliation. the businesses in our study operate in a wide range of communities with populations ranging from a low of 822 residents to a high of 2,099,451 residents. we controlled for population level using data from the 2010 u.s. census at the city/town level. the population was divided into three dummy variables: population less than 20,000, population between 20,000 and 100,000, and population greater than 100,000. the high and low population variables were included in the models, with the mid-range populations serving as the reference. results prior to analyzing the data, we tested for multicollinearity and common method variance. after standardizing all continuous variables (cronbach, 1987), we generated both variance inflation factor scores and condition index scores using stata 12. all measures had vif levels below 2.81, and condition index scores below 10.97; thus, multicollinearity did not appear to 11 journal of small business strategy vol. 25, no. 1 pose a concern (pedhazur, 1997; fox, 1997). we attempted to minimize common method variance throughout the data collection process and likewise tested for common method variance through efa. the first factor explained approximately 18.35% of the variance. this result suggests that common method variance does not appear to be a serious issue since no single factor appears to dominate. based on the results of these analyses, we assume the data from our sample is appropriate for testing our hypotheses. means, standard deviations, and correlations were calculated for all variables of interest, and are reported in table 2. correlations were in line with expectation; thus, no serious issues appear present, confirming the results of the multicollinearity analysis. we tested our hypotheses using linear regression with three dependent variables. results of each analysis are reported in table 3. for each dependent variable, three analyses were conducted. the first model (a) explores the effects of the controlling and independent variables. in the second model (b), the family involvement moderator was entered, and in the third model (c), the interaction effects between family involvement and intent and family involvement and esi were included. 12 table 2: descriptive statistics and correlations 13 table 3: results for moderation analyses model 1 general sbsr model 2 civic sbsr model 3 employee focused sbsr 1a 1b 1c 2a 2b 2c 3a 3b 3 -2.45 -2.34 -2.28 -1.21ɨ -1.15 -1.11 -0.33 -0.25 -0.30 -0.50 -0.70 -0.71 0.12 0.00 -0.00 0.24 0.10 0.09 0.85 0.76 0.68 -0.06 -0.12 -0.17 1.41* 1.35* 1.40 2.44** 2.50** 2.46** 1.95*** 1.98*** 1.96*** 0.92 0.96 0.96 riented goals 1.41 1.61 1.68 0.04 0.15 0.20 3.76* 3.90** 3.89 oriented goals 1.64 1.56 1.84 -0.46 -0.50 -0.27 0.74 0.69 0.70 hip 1.49 1.56 1.47 0.54 0.57 0.45 -1.03 -0.99 -1.18 1.80 2.28 2.32 0.52 0.78 0.74 0.04 0.37 0.09 0.23 0.42 0.14 1.48 1.58 1.27 1.91 2.04 1.75 000 -4.28 -4.67 ɨ -4.88 ɨ -1.04 -1.26 -1.42 -4.10* -4.36* -4.30 ,000 -1.68 -1.81 -1.75 -0.03 -0.10 -0.03 -1.64 -1.73 -1.67 -1.66 -1.82 -2.05 -0.25 -0.34 -0.51 0.42 0.31 0.39 nd. 2.26 1.16 1.42 -1.51 -2.12 -1.93 7.80 7.06 6.95 -2.03 -2.00 -1.98 -1.15 -0.13 -1.10 -0.41 -0.38 -0.32 0.99 0.93 0.90 0.32 0.28 0.24 1.49* 1.46* 1.38 est 0.09 -0.23 -0.35 -0.39 -0.57 -0.66 ɨ 0.39 0.17 0.18 5.25*** 5.29*** 5.58*** 2.16*** 2.18*** 2.45*** 2.18*** 2.21*** 2.29 2.65*** 2.71** 2.60** 1.68*** 1.71*** 1.59*** 0.76 0.65 ent 1.23 1.29 0.69 ɨ 0.73* 0.84 0.84 ent x intent -0.90 -0.88* -0.51 ent x esi 1.02 0.85* 0.03 f 5.03 4.90 4.49 7.29 7.21 7.03 3.24 3.19 2.90 r-squared 0.3249 0.3323 0.3374 0.4112 0.4229 0.4437 0.2368 0.2446 0.247 ge in r-squared 0.2384 0.0075 0.0051 0.2726 0.0117 0.0208* 0.0773 0.0078 0.002 14 journal of small business strategy vol. 25, no. 1 hypothesis tests main effects. the independent and control variables were regressed on three distinct sbsr measures: general sbsr, civic sbsr, and employee focused sbsr. we first explore the direct effects associated with hypotheses 1 and 2. our results indicate that the esi measure is significantly and positively associated with both general sbsr (β = 2.60, p<0.01) and civic focused sbsr (β = 1.59, p<0.000). thus, we find partial support for hypothesis 1. based on the results of our analyses, sbsr intentions appear to positively and significantly influence general sbsr (β = 5.58, p<0.000), civic sbsr (β = 2.45, p<0.000), and employee focused sbsr (β = 2.29, p<0.000). given these results, intentions to participate in sbsr appear to be positively associated with reported participation in all three categories of sbsr; thus, support is determined for hypothesis 2 across all models. some significant direct effects were found for both the family involvement variable and some controlling variables. family involvement was only found to directly influence civic sbsr (β = 0.73, p<0.05). education appeared to have the broadest effect of the controls, exhibiting significance in both the general sbsr (β = 2.46, p<0.01) and civic sbsr (β = 1.96, p<0.000) models. population levels of less than 20,000 residents were negatively associated with general sbsr (β = -4.88, p<0.10) and employee focused (β = -4.30, p<0.05) sbsr. this may suggest that more general and employee focused sbsr activities are less accessible or imperative to businesses in smaller communities. both the number of employees (β = 1.40, p<0.05) and the age of the firm (β = 1.38, p<0.05) are positively associated with employee focused sbsr efforts, while succession interest appears to marginally influence civic sbsr activities (β = -0.66, p<0.10). moderation effects. surprisingly, no significant interaction effects were found in the general sbsr or employee focused sbsr models. however, when civic sbsr served as the dependent variable, both interaction variables exhibited significant effects. the interaction of family involvement and esi (β = 0.85, p<0.05) positively influenced civic focused sbsr; thus, limited support was found for hypothesis 3a. family involvement strengthened the relationship between esi and participation in civic focused sbsr activities. the interaction of family involvement and sbsr intent (β = -0.88, p<0.05) was found to negatively influence participation in civic focused sbsr activities, which is contrary to the direction expected. although significant effects were determined for this interaction, the direction was not as hypothesized; thus, no support was determined for hypothesis 3b across the three models. to assist in interpretation of these interaction effects, we have plotted the interaction of family involvement and esi, as well as the interaction of family involvement and sbsr intentions. see figures 1 and 2, respectively, for an illustration of these relationships. it appears from figure 1 that when esi is low, those respondents indicating low levels of family involvement reported higher participation levels in civic sbsr activities; whereas, for higher levels of esi, respondents indicating high levels of family involvement reported greater levels of civic sbsr involvement. as shown in figure 2, when sbsr intentions are low, those with high family involvement reported greater levels of civic sbsr involvement; however, when sbsr 15 journal of small business strategy vol. 25, no. 1 intentions are high, those with lower levels of family involvement reported slightly higher levels of civic sbsr involvement. robustness check our sample included both full-time employer and non-employer firms. to ensure our results related to the employee focused measures were robust, we removed all non-employer firms, which resulted in discarding the forty-eight observations associated with firms reporting no full-time employees (n = 159). the linear regressions were analyzed again for the employee focused sbsr measure using this restricted sample. the main effects remained unchanged; thus, sbsr intentions held a positive and significant direct effect (β = 2.32, p<0.01), but no effect was found for esi or the interaction variables. in this case, family involvement held a positive, marginally significant effect (β = 1.11, p<0.10), indicating that family involvement positively influenced participation in employee focused sbsr activities when only full-time employer firms were considered. figure 1: moderating effect of family involvement on the relationship between esi and civic sbsr involvement 16 journal of small business strategy vol. 25, no. 1 figure 2: moderating effect of family involvement on the relationship between sbsr intentions and civic sbsr involvement discussion interest in social responsibility in the small and family business realm has undoubtedly grown over time (besser, 1999; besser and miller, 2004; fitzgerald et al., 2010; niehm et al., 2008; uhlaner et al., 2004); however, consideration of small and family firms in social responsibility research has been limited. it is generally assumed that family businesses exhibit more concern for social responsibility than nonfamily firms, since the family and business are intricately connected in the eyes of stakeholders (déniz & suárez, 2005). to our knowledge, however, whether small family and nonfamily firms differ with regards to involvement in socially responsible activities, has received limited attention. to address this gap in the literature, we explore the moderating effect of family involvement on the relationships between two independent variables, esi and sbsr intentions, and three measures of social responsibility -general sbsr, civic sbsr, and employee focused sbsr. we believe our study holds several theoretical implications, promise for future research, and practical implications for communities and entrepreneurs, which we detail in the following sections. theoretical implications and directions for future research we believe our work makes several contributions to the small business and family business literatures related to social responsibility, enlightened self-interest, sbsr intentions, and family involvement via esi (besser & miller, 2004) and tpb (ajzen, 1991). prior research indicates that family businesses likely have a greater interest in socially responsible efforts than nonfamily firms (déniz & suárez, 2005); however, our results indicate that whether or not family involvement plays a role in 17 journal of small business strategy vol. 25, no. 1 these relationships may depend on the type of social responsibility under consideration. in this case, family involvement strengthened the relationship between esi and participation in civic sbsr, but weakened the relationship between sbsr intentions and civic sbsr. the negative relationship of the interaction between family involvement and intentions was unexpected. this relationship appears to indicate that at low levels of intent, firms with high family involvement reported greater involvement in civic sbsr; however, at high levels of intentions, firms with low family involvement reported higher involvement in civic sbsr. based on this result, it appears that when sbsr is unintentional, greater family involvement in the firm leads to greater involvement in sbsr, but when intentions are high, firms with lower family involvement reported higher levels of civic sbsr. exploring why family firms with low intentions for sbsr may have greater levels of participation than their nonfamily counterparts poses an important area for future research. researchers argue that in family firms, the family and business must share time, knowledge, and financial resources. lepoutre and heene (2006) argue that time, as a resource, likely serves as an important antecedent to undertaking socially responsible behaviors. civic oriented activities are often time consuming, since they may require meeting attendance, presence at community activities, etc. although our data does not provide the capabilities to measure such assertions, it is possible that greater family involvement may afford family members more slack time to participate in time-intensive socially responsible activities, such as civic involvement. we encourage future research to consider the effects of slack time as this may prove useful in understanding why family firms may have a greater propensity to take on civic-oriented activities than those with low or no family involvement. we surveyed respondents related to social responsibility items from the csr and sbsr literatures. through efa, we determined three distinct factors of social responsibility involvement for small businesses: general sbsr, civic sbsr, and employee focused sbsr. general and civic sbsr both consist of activities external to the firm, while employee focused sbsr is internal to the firm, and may be less visible to stakeholders outside the firm. by exploring the independent, moderating, and control variables for their effect on each of these types of social responsibility, we can pinpoint specific types of social responsibility in which family involvement in the firm appears more or less critical. the sbsr literature has often used esi as a theory base to counter why small firms may undertake socially responsibility efforts, since the rewards for such behaviors may initially be non-economic in nature. besser and miller (2004) suggest that small business owners are aware of the many benefits they may incur from both acting responsibly and assisting in community improvement. we have developed a measure of small firm esi, which indicates the degree to which the firm participates in social responsibility based on their knowledge of benefits that may be derived from such behaviors. we believe this measure both provides interesting results in our study, and offers a basis for future research on the influence of esi on participation in sbsr. our esi measure poses significant effects on participation in sbsr external to the firm, but does not appear to significantly 18 journal of small business strategy vol. 25, no. 1 influence employee focused sbsr involvement. this result suggests that esi may be more important with regards to activities that are more visible to the community and external stakeholders. thus, some firms may do good for goodness sake, although esi appears to carry an important relationship with participation in externally oriented sbsr activities. we believe this to be an interesting finding, and fruitful area of future research. besser and miller (2004) separated esi into two dimensions the shared-fate rationale (i.e., a high tide raises all ships) and the public relations rationale. they found that the shared fate rationale increased businesses’ support of the community, while the public relations rationale did not. although our esi measures loaded into a single factor, our results appear to provide a counter perspective to those of besser and miller (2004). this may be in part due to our measures providing a public relations oriented perspective. we find that esi influences participation in external activities, which would suggest that the public relations rationale does indeed influence participation in social responsibility. perhaps differences in sbsr measures, as well as differences in social responsibility measures may be at issue here; however, we believe this area is ripe for future research, given its limited attention and potential for assisting in explaining why small family and nonfamily businesses are motivated to “do good.” additionally, based on the tenets of tpb (ajzen, 1991), it is expected that intentions to participate in socially responsible behaviors would lead to higher reported levels of involvement in such activities (dyer & whetten, 2006; lepoutre & heene, 2006). as anticipated, sbsr intentions positively and significantly influenced reported participation levels in all three categories of social responsibility, both those internal and external to the firm. to our knowledge, intentions have not been explored in the sbsr literature to explain sbsr participation, and sbsr intentions assist in assessing attitudes related to social responsibility, both currently and at start up. we encourage future research to explore additional factors that may moderate or mediate the relationship between intentions and participation in sbsr, as this may provide additional insights beyond the scope of our study. practical implications from a practical perspective, a better understanding of the factors that influence small family and nonfamily firms’ participation in socially responsible behaviors is important and may be helpful to both community development specialists and leaders of philanthropic and socially oriented organizations. if community development specialists can strategically understand how family and nonfamily firms are motivated, and how to approach small firms about participating in social responsibility, then the likelihood of success may be improved. additionally, if leaders of philanthropic organizations are better informed on how to “pitch” their opportunity for involvement, then they may see more success in recruiting local family and nonfamily business leaders to participate in their endeavors. this is good news for community leaders, since both family and nonfamily businesses appear to believe that doing good in the community ultimately benefits the health of the organization. further, community values are believed to be closely related to activities undertaken by small firms, whose owners live in the communities in which they operate (besser, 1999). our results related to sbsr intentions suggest that if these values are instilled in the community, then 19 journal of small business strategy vol. 25, no. 1 owner attitudes may be influenced (brown & king, 1982); thus, influencing their intent to participate in socially responsible behaviors throughout the life of the firm. as an owner of a small business, the implications from this study suggest that engaging in philanthropic and socially responsible activities could reap benefits for the business. building philanthropic and socially responsible activities into the company’s strategy could positively influence performance. while we did not directly assess business performance, our findings provide insight into what areas of philanthropy and other forms of societal engagement may result in a positive experience for the business. this can offer guidance to a small business owner by illustrating investment areas that could provide the greatest return. limitations several limitations of the present research effort should be acknowledged. first, the data in this study are cross-sectional, and therefore causal relationships can only be inferred. future studies should employ a longitudinal design to allow for greater testing of causal relationships. second, different definitions of family businesses have been employed by 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(1980). social responsibility of business: what are the small business perspectives? journal of small business management, 18(3): 17-24. whitney o. peake is the vitale professor of entrepreneurship and assistant professor of management in the gordon ford college of business at western kentucky university. her teaching and research interests include image and legitimacy across entrepreneurship, family business, stakeholder, gendered, and social responsibility contexts. phillip e. davis is an assistant professor of management in the college of business at east carolina university. his teaching interests include: strategic management, general management, and entrepreneurship. research interests include dynamic capabilities, organizational alignment, legitimacy, and competitive advantage. marcus z. cox is an assistant professor of management in the nelson rusche college of business at stephen f. austin state university. his teaching and research interests include human resource management, entrepreneurship, and strategy. 25 being good for goodness sake: phillip e. davis marcus z. cox abstract introduction theory and hypotheses enlightened self-interest theory small business social responsibility intentions the moderating influence of family involvement data and methods gender ethnicity education age exploratory factor analysis measures enlightened self-interest sbsr intentions family involvement owner, firm, and community control results table 2: descriptive statistics and correlations table 3: results for moderation analyses model 1 general sbsr robustness check figure 1: moderating effect of family involvement on the relationship between esi and civic sbsr involvement theoretical implications and directions for future research practical implications limitations references s1aa1 &&1 facmrs that restrict exports of smajei. and medium-sized firms: the roi.e of export jyinancing charlie e. mahone, jr. howard university abstract the purpose of this study, based on a survey of 354 florida companies, was to assess factors that limit expons, with particular focus on ihe diferent types of expvri financing thar were the most dificult to obtain and the most used. statistical analysis was used to determine the significance of responses given by dhgerent sized firms. four vf the top five factors ihat limited the ability to expvn were related either to the lack of available information on expon opportunities or the unavailabiliry of expvn financing. foreign buyer credit and various unsecured loans were the most dificult to obtain, while commercial letters of credit were the mon used. public and private sector policymakers need ro reevuluate their own exporr promotion prvgrams and make the changes necessary to eliminate the various obstacles to exponing. the role of export financing indications for some time have been that the united states has lost its ability to compete in world markets as indicated by the decline in the u. s. position in world trade and the loss of world market share in an increasing number of industries. for example, the approximately 5.5% of gnp that the u. s, exports is paltry compared to three of its major trading partners, germany (26%), canada (25%) and japan (10.5%) (10). this is particularly disturbing for a few reasons. first, there are tremendous opportunities for exponing as indicated by the fact that although the u. s. is the largest and richest single market, the gnp of the rest of (he world is four times as large (10). another reason for disappointment with u. s. export performance is the u. s. department of commerce estimate that each 5 i billion in exports generates 25,000 jobs. increasing ex ports, therefore, should be a top priority for public and private policy makers. the enthusiastic and invaluable assistance vf elizabeth gordon-mcneil in the data entry and analysis is most gratefully acknowledged. the kind assistance and support of the florida state department vf commerce is also gratefully acknowledged. and finally, thanks also to the editor and reviewers for their most helpful suggestions. 24 any substantial improvement in the u. s. export performance will require the increased involvement of small and medium-sized firms. it is estimated that only 10% of u. s. exports are generated by small businesses; moreover, slightly more than 3% of u. s. businesses account for 70% of the exports (12). but small and medium-sized businesses exhibit the fastest growth rates, which are re(lected in the generation of greater numbers of new jobs (han large firms (4, 12). small and medium businesses also produce a wide variety of goods and services, often of exceptionally high quality. they possess the greatest degree of (iexibility, which allows them to profitably penetrate small markets (and small niches in large markets) using strategies that a(e difficult for large companies to implement. moreover, these firms are able to adapt quickly to fluctuating markets. it would appear that these small and medium-sized firms have a major role to play in the global market. in many cases the export potential of small and medium-sized firms is not being reached. the purpose of this paper is to assess various factors that restrict the ability of small and medium-sized businesses to export. particular attention is given to the role of the lack of availability of export financing, mentioned by numerous studies as one of the major export obstacles. it is the position of this paper that the lessons learned from experienced exporters in regard to obstacles that limit their —ability to export —types of financing they find most difficult to obtain, and types of financing they most widely use a(e of value to: i) other exporters in terms of "comparing notes;" 2) potential exporters by identifying the hurdles that must be overcome as well as the most successful routes to take in pursuing export financing assistance (see 2, 7, 8); and 3) public policymakers by assisting them in reevaluating and fine-tuning policies designed to remove impediments and promote exports by small and medium-sized businesses. literature review a number of studies have focused on obstacles to exporting and have ranked those obstacles from most to least important. bilkey reported that the most frequent, serious obstacles to exporting were insufficient finances, foreign government restrictions, insufficient knowledge about foreign selling opportunities, inadequate product distribution abroad, and a lack of foreign market connections (i). in a 1980 survey of firms in the pacific northwest, o'ourke suggests (hat the chief drawbacks are lack of the company's own resources and lack of information. current exporters in that study were concerned about transportation costs, trade barriers, lack of surplus product, small size of the firm and limited capital, foreign competition, and red tape (11).communications, sales effort, providing repair service, information on business practices, obtaining financial information, gathering marketing information, handling documentation, financing, and providing technical advice were identified by czinkota and johnston as primary obstacles (2). edmunds and khoury reported in their study that the most common problems were establishing linguistic competence in marketing, becoming familiar with international credit instruments and foreign import regulations, and gathering knowledge of foreign markets. exogenous factors such as the s(rength of the u.s. dollar, and some export restraints imposed by several countries were listed by some respondents as problem areas, but these were not of a lasting nature (5). in a 1984 survey of new york and new jersey firms that export to europe, holden reported that problems, presen( and expected, were dollar strength, ec weakness, ec political actions, washington obstacles, lack of export finance, and third country competition (7). hester found the biggest obstacles to be the lack of knowledge of foreign markets, limited financial resources, and the strength of the u.s. 25 dollar (6). a study of the export activities of small swedish firms reported that the most important obstacles were selecting a reliable distributor, communicating with foreign customers, foreign currency restrictions in different countries, government barriers, and political instability in foreign markets. only the larger, most active exporters also considered ext&:mal factors such as foreign currency restrictions in different countries and governmental barrier., when planning their export drives (9). knowlton blames the limited amount of exporting by small-and-medium sized business on myopia (sell between the atlantic and pacific and no farther), the degree of hard work required for exporting, language, regulations, etc., financing, longer negotiations, payoffs, and foreign distribution system (10). in a study by dichtl and others, based on questionnaires and in-person surveys conducted in finland, japan, korea, and south africa, the rankings of obstacles were as follows: pricing, competitive situation, distribution system, personnel, market development costs, import regulations, language, market research, customer service, non-tariff trade mstrictions, necessary investments, and supply of information (3). and finally, kathawala et al. found that the most serious obstacles were general labor costs, the need for gmater tax benefits, fewer government regulations and trade barriers, less financing, lower dollar valuation, assistance in locating agents, and reduction of product liability costs (8). purpose aud method most studies have cited the lack of export financing as one of the major obstacles to exporting by small and medium-sized firms. the purpose of this study was to identify and assess the importance of the factors that limit the exports of small and medium-sized exporters. the primary focus was to determine and rank-order the specific types of export financing that were the most difficult to obtain and the most widely used by these exporters. this study, done in collaboration with the bureau of international trade and development of the state of florida department of commerce, was part of a larger study of the various aspects of the international activities and problems of small and medium-sized businesses. the state of florida, following the lead of other states such as california and illinois was primarily interested in gauging the n'eed fora state-supported export financing facility for small and medium-sized firms. the questionnaire was designed i) to obtain a wide range of information about the export and non-export international activities and problems of small and medium-sized companies, and 2) to encourage responses from those firms actively engaged in such activities but not from firms whose activities were exclusively domestically based. the questionnaires were addressed to the ceo's of the companies and were either completed by the ceo or his (her) designee (primarily executive vps, vps, or directors of international operations). the survey was mailed to 3,513 companies drawn from the bureau's "trade lead referral program" and "trade industry program" lists, which had no indication as to the exporting activities of the companies. of these, 406 questionnaires were returned which represents a response rate of 11.55%. it was felt that the response rate was sufficient not to require follow-up to increase the sample size. of the 406 responses, 52 were unusable for this study because of missing data, or because sales exceeded $ 100 million, or the company was not involved in exporting. 26 the small business administration defines "small business" as 500 employees or less for manufacturing firms and 100 employees or less for service firms. in this study, 32 firms had more than 100 employees and 4 firms had more than 500 employees. all of these firms were grouped in the "medium category." however, because there is no universally accepted definition of "small" (or "medium" ), many previous studies have used various schema to classify simply companies according to size (2, 5, 7, 8, 9, ll). using a similar convention, the firms in this study wem grouped into thme categories based on volume sales: 1) very small less than $ 1 million; 2) small between $ 1 and $ 10 million; and 3) medium between $ 10 million and $ 100 million. data analysis consisted of frequency distributions and statistical tests, i.e. scheffe test, spearman rank correlation coefficient, and chi-square test. table 1 profile sy size gf hrm sales volume less than $ 1 m $ 1 m-$ 10m $ 10m-$ 100m total number of firms 115 185 54 354 percentage of firms 33 52 15 100 average number of employees 5 29 203 48 average age of firm (yrs.) ll 18 31 18 average export experience (yrs.) 8 12 14 ll results firm profile. one third of the firms had sales of less than one millions dollars, and slightly more than half had sales of between one and ten million dollars. on average the companies had 48 employees, were 18 years old, and had ll years of export experience. there were, of course, differences between companies of dissimilar sizes. the larger the company, the more employees it had and, as would be expected, the older it was, and the more export volume and experience it had. factors thar limit the ability io exporr. the cmdit worthiness of the foreign buyer (related to export financing) and opportunities in the other country (possibly a function of information availability) were ranked as the two most important factors generally and by each sized group. these were followed, overall, by information on specific sales, price of u.s. goods, and availability of export financing. there was substantial variation among companies of different sizes in the levels of importance and the rankings of the remaining factors. for example, the smallest firms ranked the lack of availability of export financing third, compared to a ranking of fifth and seventh for the two larger sized firms respectively. small firms also ranked their top five factors as important to very important, while the two larger sized firms did not view the factors as quite as important. in general, it appears that the smaller the firm the more the factors were seen as obstacles. 27 table 2 factors that limit the ability to export less than $ 1m $ 1m-$ 10m $ 10m-$ 100m total mean score* (percentage of firms) credit worth foreign buyer 1.72 i.67 i.71 i.69 87% 96% 96% 93% op port, in other country i.75 1.90 2.00 1.88 84% 94% 98% 92% info on specific sales i.90 2.01 2.08 1.99 84% 91% 91% 89% price of u.s. goods 1.95 2.06 2.12 2.04 89% 97% 94% 94% avail. of fin for exp w i.79 2. 14 2.54 2.09 88% 95% 96% 93% market research 2.18 2. 32 2.26 2.27 85% 92% 98% 91% foreign trade barriers 2.43 2.29 2.28 2.33 88% 94% 93% 92% quality of u,s. products s 2.40 2.68 3.02 2.65 83% 92% 89% 88% u.s. gov't restrict on exp 2.81 2.98 2.92 2.92 85% 92% 96% 90% «(i = very significant; 4= insigniticant) scheffe test: difference between ~ is less than $ 1m and $ lm-$ 10m is significant at .05 level « is less than $ 1m ttnd greater than $ 10m is significant at .05 level '$lm-$ 10m and greater than $ 10m is significant at .10 level the scheffe test, however, showed that statistically, only thc perception of the impact of the availability of financing for exports and the quality of u. s. products differ significantly. the spearman rank correlation coefficient supports this in that there was a positive, although slight, correlation between size of firm and the availability of export financing (.23) and size of firm and quality of u. s. products (.17). 28 table 3 export flinancing assistance most difficult to obtain less than $ 1m $ 1m-$ 10m $ 10m-$ 100m total number of firms (percentage of firms) foreign buyer credit 31 56 9 96 27% 30% 17% 27% unsecured loans* 43 45 4 92 37% 24% 7% 26% working capital loans* 34 51 2 87 29% 28% 4% 25% pre-export financing* 39 43 2 84 34% 24% 4% 24% ex-im bank guarantees 23 30 4 57 20% 16% 7% 16% commercial l/c 16 34 6 56 14% 18% 11% 16% fcia insured loans* 10 26 2 38 9% 14% 4% 11% secured loans* 12 21 0 33 10% 11% 0% 9% bankers'cceptances 16 17 0 33 14% 9% 0% 9% performance/bid bond l/c** 8 21 i 30 7% 11% 2% 8% 13oc. export collection 5 14 i 20 4% 8% 2% 6% other i i 2 4 1% 1% 4% 1% chi-square test: * significant at the .05 level ** significant at the .10 level 29 finally, it is interesting to note the very low rankings given to foreign trade barriers and u. s. government restrictions. most dificult types of export financing io obtain. as was discussed above, table 2 showed that the largest firms ranked the lack of availability of export financing seventh and rated it between important and not important. this perception by the largest firms of the non-importance of the availability of financing as a factor is consistent with the generally low percentage of these firms that cite any of the various types of financing as difficult to obtain. in terms of the difficulty of obtaining specific types of financing, foreign buyer credit was ranked number one, both overall and by the two largest groups of companies. apparently, there are a desire and expectation by exporters that foreign buyers provide the financing, and these buyers have significant problems in doing so, particularly when there is no letter of credit involved. various types of unsecured loans, including working capital loans and pre-export financing, ranked second through fourth overall. for the smallest firms, unsecured loans ranked as the most difficult to obtain. export-import bank guarantees ranked fifth overall and by the smallest exporters, while ranking sixth and fourth by the next two largest firms respectively. this relatively low ranking for "ex-im" guarantees is disappointing not only because it is the bank's raison d'tre but also because of its recently stated increased focus on smaller exporters. the chi-square test shows that the differences in the rankings by different sized companies are statistically significant for six of the twelve types of export financing that are most difficult to obtain. it is shown that the smaller two groups have a much tougher time when compamd to the larger group of companies. types of export financing used. commercial letters of credit are by far the most widely used form of export financing, overall and by each group of firms. rankings by the different sized firms of the other types of financing used vary. again, the chi-square test shows that these differences based on size are statistically significant for seven of the twelve types of export financing used. secured loans, foreign buyer credit, unsecured loans and documentary export collections followed in the overall rankings. foreign buyer credit, which ranked third overall and fourth, third and second by various groups respectively, had been rated the most difficult to obtain. apparently, in this case the level of difficulty did not restrict usage to the extent that may have been expected. the smallest firms had ranked unsecured loans as the most difficuli to obtain, yet ranked them as the second most used form of financing. again, difficulty appears not to have been a total deterrent to usage. the largest firms rated some type of buyer credit, with or without letter of credit, as their top two types of financing used. rather disappointing was the extremely low usage of export-import bank guarantees and fcia insured loans. this was not unexpected in view of the extent of difficulty in obtaining "ex-im" loan guarantees, as mentioned earlier. in general, the smaller the firm the less the use of these facilities. reasons offered by the respondents for the problems that they had in obtaining export financing were as follows: no banks were interested, the difficulty in obtaining and completing appropriate forms, banks'ack of export financing expertise, and the company'. own lack of collateral. again, these comments came primarily from the smaller two groups of firms. 30 table 4 export hnancing assistance most used less than $ 1m $ 1m-$ 10m $ 10m-$ 100m total number of firms (percentage of firms) commercial l/c* 53 117 36 206 46% 63% 67% 58% secured loansv 19 53 3 75 16% 29% 6% 21% foreign buyer credit 17 35 9 61 15% 19% 17% 17% unsecured loans* 23 32 i 56 20% 17% 2% 16% doc. export collection 9 28 9 46 8% 15% 17% 13% performance/bid bond l/c 7 21 5 33 6% 11% 9% 9% working capital loans** 6 23 4 33 5% 12% 7% 9% bankers'cceptances* 3 20 6 29 3% 11% 11% 8% pre-export financing ll ll 3 25 9% 6% 6% 7% ex-im bank guarantees* 2 12 6 20 2% 6% 11% 6% fcia insured loans* 2 8 6 16 2% 4% 11% 5% other 2 3 i 6 1% 2% 2% 2% chi-square test: * significant at the .05 level ** significant at the .10 level 31 table 5 importance of financing maturity less than $ 1 m $ 1 m-$ 10rn $ 10m-$ 100m total mean score (i == very important) (percentage of firms) short term (1-6 mos.) 1.12 i.14 l. 34 1.16 63% 59% 54% 60% medium term (6 mos. 5 yrs.) l. 50 i.48 1.40 1.48 38% 33% 28% 34% long term (less than 5 yrs.) 2.70 2.85 2.83 2.79 29% 22% 22% 24% importance offinancing maturity. for this question the responses of each sized group matched the overall mnkings. in sum, the shorter the maturity, the more important the type of financing. the scheffe test and spearman rank conelation coefficient discerned no significant variation between firms of different size. conclusions this study of 354 small and medium-sized florida exporters attempted to gain insights into factors that limit the ability of these firms to export. the primary focus of the study was on the types of export financing most difficult to obtain and the types of financing most used. the major factors that limited the companies'bility to export were the creditworthiness of the foreign buyer, opportunities in other countries, information on specific sales, price of u.s. goods and availability of export financing, the most difficult types of export financing to obtain were foreign buyer credit, unsecured loans, working capital loans, pre-export financing and "ex-im" guarantees. the most commonly used forms of financing were letters of credit (by a wide margin), secured loans, foreign buyer credit, unsecured loans, and documeniary export collections. finally, the companies mostly used financing of the shortest maturity, i.e. one to six months as opposed to longer terms. responses varied according to size of firm, although many of these differences were not sta(istically significant. in general, largest firms, which were on average older and had more export experience, did not view the various factors as obstacles to the same extent as did the smaller firms. consequently, a very small percentage of the largest companies rated the various types of export financing assistance as difficult to obtain. for the smallest companies, on the other hand, many of the factors were rated important to very important, and a substantial percentage of them found most of the types of export financing assistance difficult to obtain. 32 j(mplications factors limiting exports. as has been reported in prior research, this study also found that information concerning export opportunities and available assistance for small exporters is not reaching these firms to the extent necessary and desired. in fact, when asked the general types of assistance that the state of florida could provide, trade leads and information on small business assistance programs were the most frequently given responses. this is particularly true for the smallest firms. in view of this finding, it would appear that public sector providers of this type of information need to reevaluate their programs and delivery systems and make necessary adjustments in order to address the varied needs of different sized firms. export financing. two of the top five factors cited as limiting the ability to export were related to export financing. this study was able to identify the types of financing (hat were the most difficult to obtain and the types that were the most used. the difficulty and usage were shown to vary by firm size, with the smallest firms, not surprisingly, having the biggest problems. this suggests, again, that the efforts of the banks and other financial institutions in this regard must be reevaluated and revised with a more aggressive posture. one respondent wrote that the problem revolves around "the inexperience and poor expertise of most financial institutions, bankers, and government agencies, which usually encourage your cooperation only to let you down when the real opportunity arises. it seems that they are more interested in filling in their pr to the chagrin of the exporter." when asked how the state of florida could assist in this regard, the two responses given most frequently, by far, were loan guarantees for and/or dimct loans to small businesses. perhaps states, such as florida, that are committed to increasing exports, should earnestly consider the establishment of some type of state export financing facility, as exists, for example, in california and illinois, specifically designed to meet the needs of small and medium-sized exporters and potential exporters. in summary, one respondent offered a novel suggestion which may be on the right track: 'there should be developed a tri-party export promotion program ivith exporters, [foreign] importers, and the state of florida. each would contribute funds which would be used for advertising and promotion of florida goods and services and to defray importer costs of visiting florida." it need only be added that there is a definite role for the banks and other financial institutions in this program. refeirentl" es i. bilkey, warren j. "an attempted integration of the literature on the export behavior of firms." journal of international business, 9 (spring/summer, 1978), 33-46. 2. czinkota, michael r. and wesley j. johnston. "exporting: does sales volume make a difference?" journal of international business studies (spring/summer, 1983), 147-53. 3. dichtl, erwin, hans-georg koeglmayr, and stefan mueller. "international orientation as a precondition for export success," journal of international business studies (first quarter, 1990), 23-40. 33 4. dobrzynski, judith h., john p. tarpey, and rebecca aikman, "small is beautiful," businessweek (may 27, 1985), 88-104. 5. edmunds, stahrl e. and sarkis j. khoury. -exports: a necessary ingredient of small business firms," journal of small business management (october, 1986), 54-65. 6. hester, susan b. "export trading companies: a marketing vehicle for small textile and apparel firms'" journal of small business murtagemenr (october, 1985), 20-27. 7. holden, alfred c. "small business can market in europe: results from a survey of u.s. exporters," journal of small business manugemenr (january, 1986), 22-29. 8. kathawala, yunus, richard judd, mathew monipallil, and me)inde weinrich. "exporting practices and problems of illinois firms," journal of small business managemerrt (january, 1989), 53-59. 9. kaynak, erdener, preves n. ghouri, and torbjorn olafson-bredenlow. "expon behavior of small swedish firms." journal of small business managernem (april. 1987), 26-32. 10. knowlton, christopher. "the new export entrepreaeurs," frtmune (june 6, 1988), 87-102. i i. o'ourke, a. desmond. "differences in exporting practices, anitudes and problems by size of firm," american journal of small business. 9 (winter, 1985), 25-29. 12. reagan, ronald. srare of small business: a reporr to the prest'dertr (washington, d. c.: v.s. government printing office, 1984), 298-300. 34 91 strategic maneuvering of technological factors and emergence of de facto standards lee j. zane rider university lzane@rider.edu hideo yamada waseda university hyamada@waseda.jp susumu “sam” kurokawa* drexel university abstract the emergence of a de facto standard in a product class depends on technological, competitive, and market factors. the question is whether or not a firm can strategically manipulate various factors to help determine the winner. to address this question, three factors, technological superiority, openness, and compatibility, are examined with regard to their influence on the emergence of de facto standards. hypotheses are tested with an analysis of 78 historical cases in 39 market categories. results indicate that in setting de facto standards, technological superiority is uniformly important, suggesting the logic of technological determinism. moreover, results also suggest that the influence of technological openness may be contingent on the nature of competition. thus, strategic managers may need to incorporate a contingency perspective into the selection of an appropriate strategy. keywords: competitive strategy, de facto standard, network externalities, open architecture introduction de facto standards are those standards that achieve dominant position via economic or social factors, as opposed to de jure standards which are the mandate of an authority. anderson and tushman (1990: 613) define a de facto standard, or in their term dominant design, as “a single architecture that establishes dominance in a product class.” researchers point out that once de facto standards emerge, they regulate the fundamental technological rules and specifications used for the design of all s trateg y journal of small business journal of small business strategy vol. 24, no. 2 92 related products in a product class (besen & farrell, 1994; kristiansen, 1998; srinivasan, lilien, & rangaswamt, 2006). researchers suggest that the emergence of a de facto standard not only reflects the technical and socioeconomic evolution of the industry (abernathy & utterback, 1978; tushman & anderson, 1986; utterback & abernathy, 1975), but is also due to the strategic maneuvering of firms (cusumano, mylonadis, & rosenbloom, 1992; katz & shapiro, 1994; srinivasan et al., 2006). since selecting the proper design and strategy is closely tied to firms’ success, and ultimately their survival, (christensen, suarez, & utterback, 1998; suarez & utterback, 1995; tegarden, hatfield, & echols, 1999), understanding the factors driving the emergence of de facto standards is of critical importance to all firms (large and small) that exist within the ecosystem. indeed, various factors influence the emergence of a de facto standard in a given product class (market category). for instance, pioneer’s laser disk (ld) was able to defeat jvc’s video disc (vhd) in the japanese karaoke market because pioneer’s non-contact technology was critical to users such as restaurants and bars where dust and smoke tended to damage the vhd. however, anderson and tushman (1990) point out that the emergence of a de facto standard is not simply a function of technological superiority. rather, a combination of product and technological strategic decisions intervene in the path toward the setting of such standards. for example, jvc established a de facto standard by actively licensing and cross licensing its vhs technologies to its rivals and suppliers of complementary products (cusumano et al., 1992); sun microsystems established its workstation as a de facto standard via an open source strategy (garud & kumaraswamy, 1993). thus, firms’ decisions regarding their technological strategy may influence the emergence of de facto standards. however, understanding in this area is incomplete. this paper attempts to shed light on how firms can strategically maneuver technological factors to help shape de facto standards. specifically, using 78 cases from 39 japanese and u.s. market categories in which firms competed to create de facto standards, this study examined how three of these factors – technological superiority, technological openness, and technological compatibility – may have influenced the emergence of such standards. results from this study suggest the de facto standardization process to be more intriguing than previously shown in the literature. for instance, while ample literature suggests that the selection of a de facto standard involves more than simply a technical choice as technological superiority can sometimes be offset by other factors such as network effects (anderson & tushman, 1990; barnett, 1990); this study concludes that technological superiority is indeed a major factor in choosing de facto standards. moreover, while a number of studies emphasize the significance of an open architecture (bonaccorsi & rossi, 2003; garud, jain, & kumaraswamy, 2002; garud & kumaraswamy, 1993), this study suggests that the effects of such a strategy on standardization may be contingent on the nature of competition. based on these findings, this research makes two contributions to the literature. first, this study provides an examination of the effectiveness of three important technological factors related to firms’ strategy in light of the moderating effects of competitive conditions. second, a methodology was developed to investigate empirically the effectiveness of firms’ technology strategies across various de journal of small business strategy vol. 24, no. 2 93 facto standards from two countries and multiple market categories. managerially, this research suggests that while alternative strategies to achieve de facto standard status exist, strategic managers may need to devise strategies based on a contingent perspective. theory development and hypothesis the following discussion of de facto standards draws from a variety of studies under labels such as dominant design (anderson & tushman, 1990; srinivasan et al., 2006; suarez & utterback, 1995; tegarden et al., 1999), technological trajectories (kim & kogut, 1996; lecraw, 1984; zhu, kraemer, gurbaxani, & xin xu, 2006), technological standards (besen & farrell, 1994; gandal, 1995; ostrovsky & schwarz, 2005), platforms (cusumano & gawer, 2002; economides & katsamakas, 2006; parker & van alstyne, 2005), and others. the literature suggests that the overall value of a de facto standard comes from two disparate, relatively independent, sources: standalone value and network externalities. standalone value refers to all advances in technology and consumer benefits except those derived from network effects (sheremata, 2004; srinivasan et al., 2006), also known as network externalities (economides & katsamakas, 2006; garud & kumaraswamy, 1993; parker & van alstyne, 2005). direct network externalities arise when a user’s adoption of a product per se, confers a benefit on other users while indirect network externalities arise because of increased demand for complementary products or services (farrell & klemperer, 2006; katz & shapiro, 1986). arthur (1989; 1996) points out that for markets involving significant network externalities, the increasing returns mechanism could eventually lead to the establishment of a de facto standard. accordingly, a small lead in the installed base might decide the competitive outcome because an initially dominant technology may increase users’ expected value of joining the network, and thus become more dominant as its number of users increase (bonaccorsi, giannangeli, & rossi, 2006). in other words, for two technologies that compete in the same product category, a user’s adoption of technology a instead of technology b, not only makes a more attractive to other users, but also makes b less so, resulting in a situation called winner-take-all (schilling, 2002). a platform can be defined as a technological base that coordinates the synergy and interoperability between separately developed pieces of technologies (cusumano & gawer, 2002; kim & kogut, 1996; west, 2003). important components of a platform include a modular architecture, interfaces by which modules interact, and protocols to which the design of modules must conform (baldwin & clark, 1997). when the technology of a platform is widely accepted and thus dominates the market, the platform becomes a de facto standard. most empirical work in the area consists of case studies. gawer and cusumano (2002) discuss how technology leaders such as intel and microsoft pursued a platform strategy, sharing key technologies with competitors to promote ecosystems. in another study, windrum (2004) addresses the strategic bundling of microsoft’s browser with the operating system in the standards war against netscape. other case studies have provided valuable insights on the relationship between firms’ platform strategy and technological dominance (garud et al., 2002; hargadon & douglas, 2001). in spite of the abundance of work in journal of small business strategy vol. 24, no. 2 94 this area, empirical studies to date have suffered a major limitation in terms of sample size, thus curtailing generalizability of the findings. the literature has a dearth of large scale empirical work that directly examines how a firm’s technology strategies influence the establishment of a product or platform as a de facto standard. in the next section, hypotheses are developed to address this gap. hypotheses suarez (2004) points out that the emergence of a particular platform as a defacto standard depends substantially on its technological superiority. however, given the importance of network externalities, some researchers argue that technological superiority alone may not be sufficient to gain wide acceptance — a platform owner may need to pursue an open architecture strategy to include more manufacturers in the diffusion process (bonaccorsi & rossi, 2003; economides & katsamakas, 2006; leibenstein, 1971). furthermore, since the value of a platform often depends on interoperability across technologies, a related strategic choice for a platform involves its level of compatibility with other products (sheremata, 2004). in the following pages, a discussion will take place of how each of these strategies relates to the establishment of de facto standards. technological superiority. technological superiority is defined as the technological improvements a platform delivers to users. while this concept can be interpreted from a purely design point of view to capture the merits of a given technology in certain technical dimensions (anderson & tushman, 1990), one can also reflect on consumers’ overall perception of the extent to which their desires for certain functionalities are satisfied. this perception-based view of technological superiority is particularly important as customers may have preexisting schemas and scripts for comparing the usefulness of technological alternatives (hargadon & douglas, 2001). in the innovation literature, a common belief is that superior technologies represent a competitive advantage over inferior ones (schumpeter, 1950; tushman & anderson, 1986; utterback & abernathy, 1975), and suarez (2004) argues that all else being equal, technologically advanced platforms have a higher probability of becoming de facto standards. however, research provides examples where better performing technologies failed to overtake inferior rivals. for instance, david (1985) found that switching costs prevented dethronement of the old qwerty keyboards while cusumano and colleagues (1992) studied the competitive war launched by sony in promoting its betamax product over jvc’s vhs. in this case, results suggest that the advantage gained by jvc from possessing a large installed base might have offset sony’s advantage from having superior technology. nevertheless, sheremata (2004) argues that if the technological improvement is significant, the new platform may successfully challenge the competition, even if the current leader has a significant advantage due to a large installed base. in similar fashion, katz and shapiro (1992) present the idea that a platform (and its complementary products) with high technological superiority is likely to be attractive to users, especially early adopters. they further suggest that a platform providing really significant benefits will be able to attract enough adopters to satisfy later demands for network externalities. mirroring this logic, rohlfs (2001) reports that truly wonderful products may succeed in establishing de facto standards. in this regard, shapiro and varian (1998) quote journal of small business strategy vol. 24, no. 2 95 intel ceo andy grove’s rule of thumb that a product that is ten times better, will replace an existing standard. thus, as established above, everything else being equal, a platform with a high level of technological superiority can and should establish a de facto standard. hypothesis 1: a platform offering a high level of technological superiority, within a market category, is more likely to emerge as the de facto standard. technological openness. technological openness is defined as the extent to which a platform owner shares, with other firms, the key technologies associated with the design of its platform (bonaccorsi & rossi, 2003; leibenstein, 1971; west, 2003). dahlander and gann (2010) discuss two types, or directions, of openness: inbound openness to acquire technology from outside the firm and outbound openness to reveal or license the firm’s technology. this research focuses on the outbound direction. a high degree of outbound technological openness encourages the involvement of multiple manufacturers in the diffusion process. in doing so, the platform owner extends the cospecialization network. increased participation by manufactures should in turn lead to an enlarged installed base and increased network externalities (farrell & saloner, 1986; schilling, 2002; suarez, 2005). strategies for technological openness include licensing, cross-licensing, and pre-market consortia formation. these strategies attempt to generate collaboration among firms and widespread adoption of a platform, thus leading to its successful establishment as a de facto standard (bonaccorsi et al., 2006; bonaccorsi & rossi, 2003; west, 2003). for example, palm computing established a de facto standard in the uspda market in the 90s by actively licensing its palm os to competitors. in this situation, an open architecture helped palm computing create competitive advantage by building a large installed base. nevertheless, from a resource-based view, sharing key technological designs may allow competitors to imitate the firm’s core competence, and therefore create undifferentiated rivals in the marketplace (wernerfelt, 1984). for example, bonaccorsi, et al (2006) suggests that the effectiveness of technological openness (open architecture) might be contingent on market conditions. furthermore, zhu et al. (2006) found that during periods of technological change, experience with older standards makes shifting to new technologies difficult for users even though the new technologies are open and potentially better. in addition, west (2003) argues that technological openness should be used situationally, with varying degrees of openness employed at different stages of the technology’s lifecycle. apparently, a platform’s level of technological openness is not directly correlated with becoming a de facto standard. consider the possibility that the effect of a platform’s degree of technological openness on the establishment of de facto standards is contingent on characteristics of the competition. according to the punctuated equilibrium model, two distinct types of competition may exist. on the one hand, two or more platforms may emerge in the same time frame and compete to establish a d e facto standard. on the other hand, a new platform might compete to dislodge an entrenched platform (anderson & tushman, 1990; tushman & anderson, 1986). the following paragraphs will explain how technological openness should journal of small business strategy vol. 24, no. 2 96 have different effects in each situation, starting with the competition between multiple new platforms. when all competing platforms are new to customers, the scenario normally involves the creation of a new market category (navis & glynn, 2010). navis and glynn (2010) suggest that emerging markets, and their new platforms, have a liability of newness and need to establish legitimacy. they found that, in the case of satellite radio, the two platforms competed to legitimize their technologies by sharing core technologies with partnering automobile manufacturers. in another case, sun microsystems chose to enhance the legitimacy of their new technology by pursuing an open sources strategy (garud & kumaraswamy, 1993). by opening core technologies, a platform can theoretically attract more developers to advance supporting technologies and, at the same time, reduce the threshold of adopting the new technology. some researchers argue that a key to winning a standards war is through the establishment of a large installed base by way of technological openness with other firms (stango, 2004; suarez, 2004). anecdotal evidence, such as ibm’s pc and the blu-ray dvd, shows that technological openness may help diffuse a new technology and thus lead to establishment of de facto standards. however, if the competition occurs in an existing market category with an embedded de facto standard, the role of technological openness may follow a different logic. anderson and tushman (1990) point to the difficulty of dislodging an established platform which has the advantage in distribution channels, reputation among consumers, price-performance ratios, and perhaps most importantly, availability of complementary products. however, they also point out that an older platform can be technologically inferior, and thus subject to replacement. bonaccorsi et al. (2006) suggest that if the older platform imposes high switching costs, the size of the installed base embodies a significant competitive advantage. hargadon and dougla (2001) and garud et al. (2002) further argue that standardized platforms are not only economically, but also socially, embedded and difficult to dislodge. thus, an established standard has an advantage in their installed base. while research suggests that the installed base advantage provides increasing returns to a platform, katz and shapiro (1994) suggest that a platform’s surplus from networks is maximized if the marginal benefits of including a new user, including the added network externalities, equals the marginal costs. furthermore, swann (2002) points out that networks do not always generate increasing returns, proposing that after the network reaches a certain size, diminishing returns may occur. based upon these studies, for an entrenched platform, an open architecture adds little in the way of benefits with regard to network size. instead, opening a technology may bring in more competitors and remove some first mover advantages the firm derived from its innovation (sheremata, 2004), possibly resulting in loss of market share. in addition, employing a technology openness strategy seems to be a debatable solution to a new platform’s installed base disadvantage. some may argue that technological openness can reduce the relative advantage of an older standard. we, however, argue that this strategy has several drawbacks. first, new platforms represent the technological edge, and in order to recoup high initial expenses, new platform leaders must disequilibrate the journal of small business strategy vol. 24, no. 2 97 market and seek high economic rents either through higher prices, and/or by quickly building economies of scale. opening the platform architecture is the firms’ tradeoff decision between appropriability and adoption to achieve these purposes (west, 2003). however, from a competitive point of view, the installed base of the entrenched platform works against new platforms due to first mover advantages, which in turn makes practicing such a strategy economically inefficient. in addition, bonaccorsi et al. (2006) found that producers of complementary products are less willing to switch to new platforms if they are currently working with existing standards. for these firms, the adoption of a new platform is associated with switching costs related to production facilities, experience, customer relationships, and so on. the net effect is that a technological openness strategy will gain less industry support when attempting to overtake an entrenched standard. furthermore, an open architecture will dissipate profits for all participating firms in the industry. however, profit levels may not be a problem if adequate adoption takes place due to the increasing returns mechanism. nevertheless, if adoption by users is prohibited due to switching costs, competition among the various producers of complementary products (for the same platform) may reduce these producing firms’ propensity for adoption, and thus strand early adopters. finally, firms controlling the older standard may attempt to incorporate key technologies derived from the new open platform into their own product feature set, making displacement even more difficult. these arguments lead to the following hypotheses. hypothesis 2: the stage of the market category (emerging versus mature) in which the standard-based competition occurs will moderate the relationship between a platform’s technological openness and its likelihood to emerge as the de facto standard. hypothesis 2a: in an emerging market category, a platform offering a higher level of technological openness will have a higher likelihood to emerge as the de facto standard. hypothesis 2b: in a mature market category, no relationship will exist between a platform’s level of technological openness and its likelihood to emerge as the de facto standard. technological compatibility. technological compatibility is defined as the degree to which a platform owner allows other manufacturers’ products to interoperate with its own (garud et al., 2002; sheremata, 2004). technological compatibility is different from technological openness in two primary aspects. first, the design of compatible products does not necessarily require opening key technologies. for example, a software developer may introduce an application that runs on microsoft's windows operating system based on available published interfaces without knowing the underlying technologies. on the other hand, an open architecture does not necessarily ensure compatibility. for example, while jvc’s vhs was technically open, vhs was incompatible with the competitor, sony’s betamax. thus, technological openness and compatibility represent disparate strategies. prior research posits that the extent to which a platform is compatible with journal of small business strategy vol. 24, no. 2 98 complementary products is a key decision for a platform leader in the quest to establish a de facto standard (garud & kumaraswamy, 1993; katz & shapiro, 1992; xie & sirbu, 1995). sheremata (2004) suggests that technological compatibility is an important source of a platform’s network value. the more compatible a platform is with complementary products, the more indirect network externalities the platform offers for users. increasing network externalities should in turn increase demand for the platform and ultimately the user base. for instance, the increased installed base of vhs video recorders led to an increased number and variety of videos available, which in turn increased demand for vhs recorders (cusumano et al., 1992; sheremata, 2004). the value of a platform’s compatibility design can be assessed from both the demand and supply sides. demand-side compatibility provides users benefits such as ease of communication, interchangeability of complementary products, and transaction cost savings (farrell & saloner, 1986). benefits for supply-side compatibility provides manufacturers with increased revenues from proportionally larger installed bases (gabel, 1991), increased sales of complementary products (lecraw, 1984), and economies of scale (katz & shapiro, 1986). thus, platform leaders may strategically design compatibility into their platforms in an attempt to establish a de facto standard (farrell & saloner, 1985; katz & shapiro, 1992; shibata, 1993). for instance, wordperfect, a de facto standard in word processing software in the 1980s, sought file compatibility with files produced by previous standard, wordstar, and then fought against similar file compatibility with its challengers after achieving de facto standard status. similarly, when microsoft introduced the windows xp operating system, most application software written for the older windows 98 could run on windows xp, but software written for xp could not run on the older system. in these cases, compatibility permitted the continued use of products purchased for alternative platforms; as a result, users were faced with less switching costs, which in turn made adoption more likely. based on these arguments, the final hypothesis is as follows. hypothesis 3: a platform offering a higher level of technological compatibility, within a market category, is more likely to emerge as the de facto standard. while compatibility may increase a platform’s likelihood of becoming a de facto standard, its influence on firms’ profitability is uncertain, and a host of factors may moderate the relationship. sheremata (2004) suggests that rivals may be better off if their platforms are compatible with rivals to avoid an r&d race; however, this compatibility logic is only applicable for platforms that have not already emerged as standards (garud & kumaraswamy, 1993). after a firm’s platform wins dominance, compatibility with rivals may remove some first mover advantages from the equation. therefore, challengers should prefer a strategy of compatible innovation to increase overall market size, whereas dominant firms should not as compatibility with competitors might be correlated with lower profits (sheremata, 2004). journal of small business strategy vol. 24, no. 2 99 methodology data and sample. the population for this research involves platforms that attempted to establish de facto standards. a key characteristic of these platforms is that they work (to some degree) with compatible complementary products—that is, platforms for which users can transfer or exchange data or files through compatible or complementary products with other users. since this type of architecture is utilized in both hardware and software, the population includes both. in order to construct an appropriate sample, the following procedure was utilized. first, platforms that attempted to set a de facto standard were identified – platform as. two major sources were used to find candidates for a: 1) previous research papers that discussed de facto standards or dominant designs; and 2) the lexisnexis database with the search terms: standard, de facto standard, de jure standard, standardization, competing standards, and winner-take-all. by doing so, a list of platforms that attempted to establish de facto standards was established. examples of these platforms included vcrs, 3.5-inch floppy disk drives, palm’s pda, microsoft’s ms dos operating system, and html markup language. then, each platform a was matched with a competing platform, b. the criteria for selecting b included: 1) b should be a platform that attempted to establish a de facto standard in the same product category as a; and 2) b competed with a. using the same sources mentioned above, and with the exception of two cases, a platform b was found for each a. xerox’s copy machine (with special compatible paper) and polaroid’s instant camera (with special compatible film) were excluded because of difficulties in finding apparent challengers. furthermore, in the event more than one competitor was identified, the competitor with the largest installed base was chosen as the primary competitor of a. thus, the selection process produced sets of paired cases that permitted benchmarking the characteristics of competing platforms. the sample covered the period 1972 to 2004 and included: 1) both the competition between new and established (mature) regimes and the competition between dual emerging technologies; 2) both information technology (it) and audio-visual (av) related products; 3) standards observed both in the us and japanese markets; and 4) both hardware and software platforms. the initial sample consisted of 46 pair-wise cases (92 cases). seven pairs (14 cases) were subsequently dropped from the sample for two reasons: 1) only experts seemed familiar with the standards, and/or 2) some cases had very limited relevant data available. consultation took place with several experts in both it and avrelated fields, and in both the us and japanese markets, to confirm the validity of the remaining 78 cases as a representative sample of de facto standards in the us and japan. next, the method suggested by srinivasan and colleagues (2003) was utilized to collect data on each case. the process started with the product’s entry to the market and concerned its survival, competitive strategies, and technological attributes. source data were obtained from 1) news article databases such as lexisnexis, which include all the popular business journals such as business week, fortune, etc.; 2) trade journal such as computer world; and 3) japanese newspapers and business journals such as nikkei and nikkei business weekly for japanese cases. journal of small business strategy vol. 24, no. 2 100 two authors and a graduate student (each with an academic engineering background) collected published data and documents on each case separately and then combined the collected data and documents. in some cases, interviews and phone calls with managers and engineers in charge of each standard were conducted in order to access data and gain insight on cases. data were collected for the period prior to a platform, a or b, winning the competition in order to examine the effect of the independent variables on the outcome. although great effort was used to collect as much objective data as possible, some data were not available, for example, information on licensing agreements. thus, a coding sheet with a 7-point likert-type scale was developed for use in the evaluation. overall, data collection took about one and a half years to complete. measures. dependent variable. the dependent variable (winner) is dichotomous and denotes whether a platform won or lost the competition with its primary rival in the establishment of a de facto standard. the variable was operationalized in general accordance with the definition of anderson and tushman (1990). essentially, a platform was considered a winner by satisfying two conditions. first, the platform should consist of a single configuration, or a narrow range of configurations, that occupied in excess of 50 percent of new product/process sales and maintained the 50 plus percent market share for approximately four years. second, the market share should be measured in the period in which the pair-wise platforms were competing. unfortunately, in some cases, strictly objective data was not available regarding market share data. subjective data then needed to be incorporate into the calculation by consulting with experts in the appropriate field (depending on the platform). the value of winner was coded 1 if the platform won and 0 if the platform lost. independent variables. technological superiority was estimated by joint assessment of the three evaluators. using 7-point likert scales (1= do not agree at all to 7= strongly agree), two evaluators first separately evaluated the following five items: technological superiority of the platform, technological superiority of complements, technological superiority of the platform/complement synergetic system, relative benefits of using the platform, and relative benefits of using complementary products, for all cases.1 the archival data used in the evaluation contained historical information about how users of each platform assessed the functionalities of the aforementioned technology. therefore, two coders used this accumulated information as the basis to formulate their assessments. the third evaluator reviewed the scores recorded by the first two evaluators, and in the event of disagreement, coordinated a discussion to thoroughly discuss the differences and reach consensus. technological openness was assessed with the same procedure mentioned above. using 7-point likert scales (1= do not agree at all to 7= strongly agree), two evaluators first separately evaluated the following four items: rivals’ participation in the standard-setting process, 1 a sad and unfortunate event happened. the author who coordinated the data evaluation process died prior to completion of this paper. hence, many of the original coding sheets used by the two evaluators were lost. however, data analysis was based on the full set of final evaluations reported by the consensus of the three evaluators. journal of small business strategy vol. 24, no. 2 101 technological openness with other manufacturers, technological openness with complementary suppliers, and technological openness with major customers, for all cases. the third evaluator reviewed the scores recorded by the first two evaluators, and in the event of disagreement, coordinated a discussion to thoroughly discuss the differences and reach consensus. hence, agreement was achieved among the three evaluators and the final scores determined. technological compatibility was likewise measured with the same procedure. using the same 7-point likert scale, two evaluators first separately evaluated two items: platform’s compatibility with complementary products from the same platform families and compatibility with complementary products from different platform families, for all cases. the third evaluator reviewed the scores recorded by the first two evaluators, and in the event of disagreement, coordinated a discussion to thoroughly discuss the differences and reach consensus. therefore, agreement was achieved among the three evaluators. because technological superiority, technological openness, and technological compatibility were each measured with multiple items, a confirmatory factor analysis was conducted to validate the convergent and discriminate validity of the a priori groupings. composite measures of each latent variable were derived by computing an average for the items (degree of freedom =51, chi-square = 155, p<0.001, comparative fit index=0.863). the cronbach alpha for these composite variables is as follows: technological superiority = 0.88, technological openness = 0.85, and technological compatibility = 0.76, thus confirming the constructs internal consistency. type of competition is a dichotomous variable. when a de facto standard had previously emerged in the market category, competition was designated mature, and coded 1; otherwise, competition was designated as an emerging market and coded 0. control variables. objective measures that are consistent across fields and technologies are not readily available; therefore, a number of control variables which focus on the technological specifications of the platform were employed. to develop these control variables, the two authors and graduate student read extensively the related articles in order to understand the technology, and then used 7-point likert scales to determine the value for each control variable. the assessment included the following questions: 1) to what extent is the platform related to audio-video? (as audio-video products themselves are often useless without accompanying contents such as movies); 2) to what extent is the platform a system product? (as system products may require multiple complementary products); 3) to what extent is the platform related to it? (especially strong network effects are expect with it products); 4) to what extent is the platform modularly designed? (as modular products may allow higher levels of compatibility); 5) to what extent does the platform perform as an interface? (interface platforms are more likely to be embedded in subsystems); 6) to what extent is the platform related to communications? (communication products are expected to have high levels of direct network externalities); 7) to what extent is the platform an end user product? journal of small business strategy vol. 24, no. 2 102 (as platforms used by oems may be different from those used by end users); 8) to what extent should the platform be considered hardware as opposed to software? (hardware may requires more sunk investments); 9) to what extent should the platform be considered a killer application? (as a killer application may demonstrate a different diffusion path); 10) to what extent is the price/performance ratio of the platform high? (the demand curve is expected to influence the diffusion path); 11) to what extent does the platform charge high licensing fees? (as licensing threshold may influence the diffusion of platforms); 12) to what extent does the platform generate lock-in? (as lock-in reflects the switching costs of a p latform); 13) to what extent does the platform appear to be a first mover? (first-movers may have a diffusion advantage). analysis. in selecting statistical methods to test the hypotheses, two primary considerations needed to be considered. first, the test needed to relax assumptions of normality due to the use of purposely paired cases. second, the test should provide enough power to consider thoroughly the contingencies of competition. for these purposes, a logistic regression analysis was conducted using sas. results are detailed in tables 2 and 3. in using logistic regression, concern focused on the matched pair research design because of possible dependence within these pairs, which could lead to bias in the standard error estimates. therefore, the class option of the proc genmod statement in sas was chosen (allison, 2001, p. 200). results were compared with those from using the proc logistic statement, and similar results observed. for all models, the dependent variable is a dichotomous variable (winner), which indicates whether a platform won the competition. a formal presentation of the models is as follows: ln = α0 + α1x1 + α2x2 … + αnxn + e , where ln=likelihood of becoming a de facto standard, xn= independent variables (for interaction terms xn = xl × xm ), e = the error term. results table 1 reports the mean, standard deviation and correlations for all variables used in the analysis while table 2 summarizes the study’s results. model 1 reports how the control variables influence the likelihood of establishing de facto standards. in general, results were consistent with expectation. for instance, lock-in effects were expected to provide a platform competitive advantage due to an increasing returns mechanism (auriol & benaim, 2000; liebowitz & margolis, 1995; witt, 1997), and the positive sign confirmed expectations. furthermore, results suggest that end user platforms were typically difficult to standardize. interestingly, the results suggested that platforms having the characteristics of an interface were less likely to become a standard. perhaps, because in spite of the network externalities generated, an interface by itself may not provide high value. table 1: descriptive statistics and correlations mean std dev 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 1 winner 0.50 0.50 2 audio-video 3.23 2.48 0.02 3 it standard 5.82 2.13 0.01 -.76*** 4 system product 4.12 2.08 -0.06 -0.04 -0.18 5 modular system 4.97 1.57 -0.01 -.45*** 0.62*** -.32*** 6 interface 3.34 2.34 -0.01 -0.14 0.40*** -.60*** 0.41*** 7 communication product 3.26 2.05 0.01 -0.21 0.40*** -.34*** 0.31* 0.72*** 8 earlier entrant 3.15 1.77 0 0.05 0.02 -0.13 0.05 0.13 0.19 9 end user product 6.12 1.39 -0.01 0.21 ¶ -0.23¶ 0.30* -0.30* -.44*** -0.06 -0.11 10 hardware 3.83 2.35 0.02 0.34*** 0.44*** 0.14 -0.30* 0.02 -0.11 -0.1 0.11 11 killer application 4.22 1.64 0.04 -0.25* 0.44*** -0.09 0.12 0 -0.09 0.08 -0.03 -0.05 12 price /performance 5.35 1.13 0.24* 0.01 0.14 -0.25* 0.12 0.15 0.09 -0.12 0.19 0.15 0.33*** 13 licensing fee 4.12 1.60 0.1 0.17 -0.06 -.33*** 0.18 0.18 0.03 0.03 -0.08 -0.21¶ 0.09 -0.08 14 lock-in effect 5.13 1.36 0.36*** -0.03 0.14 0.03 -0.01 -0.02 0.02 -0.04 0.18 -0.16 0.15 0.28* 0.11 15 mature market 0.46 0.50 0 -0.09 0.26* -.34*** 0.16 0.24* 0.15 0.01 -0.02 -0.16 0.14 0.22¶ 0.15 0.13 16 tech superiority 5.42 1.05 0.33*** -0.1 0.25* -0.25* 0.15 0.17 0.03 -0.18 -0.09 -0.07 0.36*** 0.43*** 0.15 0.20¶ 0.06 17 tech openness 4.63 1.73 0.07 -0.23* 0.32*** -.34*** 0.30* 0.37*** 0.19¶ 0.12 -.33*** -0.02 0.44*** 0.09 0.30** -0.02 -0.01 0.54*** 18 tech compatibility 4.57 1.20 0.17 0.38*** 0.48*** -0.17 0.37*** 0.19¶ 0.27* -0.05 0.02 -.33*** 0.22* 0.31** 0.1 0.21* 0.35*** 0.39*** 0.27* n= 78, p<.10, *p<.05, **p<.01, ***p<.001 n= 78, p<.10, *p<.05, **p<.01, ***p<.001 table 2. logistic regression of standard setting firms’ strategies model 1 model 2 model 3 model 4 model 5 model 6 intercept -0.239 -0.754 -0.336 -9.250 ** -4.124 -1.365 ** audio-video 0.006 0.002 0.011 0.083 0.042 0.005 it standard 0.045 0.034 0.054 0.325 0.174 0.031 system product -0.023 -0.018 -0.026 -0.203 ¶ -0.124 -0.031 ¶ modular system -0.027 -0.021 -0.032 -0.232 -0.137 -0.010 interface -0.098 ** -0.099 ** -0.098 ** -0.672 ** -0.462 ¶ -0.099 ** communication product 0.051 ¶ 0.054 ¶ 0.047 0.375 * 0.228 0.053 ¶ earlier entrant 0.013 0.029 0.013 0.112 0.063 0.046 end user product -0.099 *** -0.085 ** -0.091 *** -0.707 *** -0.504 ¶ -0.097 *** hardware 0.040 ** 0.043 ** 0.037 * 0.387 ** 0.216 0.072 *** killer application -0.055 ¶ -0.071 * -0.067 ¶ -0.339 -0.268 -0.052 price/performance 0.114 * 0.067 0.119 * 0.873 * 0.499 0.064 licensing fee 0.056 ¶ 0.045 0.053 ¶ 0.591 ** 0.254 0.078 * lock-in effect 0.126 *** 0.120 *** 0.128 *** 0.801 *** 0.642 ** 0.114 *** tech superiority 0.145 ** 0.146 * tech openness 0.023 0.676 *** 0.030 mature market -0.066 4.793 *** 0.784 * openness*previous standard -1.193 *** -0.160 ** tech compatibility 0.242 0.059 compatibility*previous standard -0.027 degree of freedom 64 63 62 61 63 61 chi-square 15.19 76.51 72.47 68.62 73.04 68.99 log likelihood -46.87 -41.39 -43.97 -39.14 -44.02 -42.64 journal of small business strategy vol. 24, no. 2 105 model 2 provides a test of the first hypothesis. the significant and positive sign (b=0.12, p<.001) suggests, as expected, that technological superiority has a strong positive effect on a platform’s likelihood to emerge as a de facto standard, thus providing strong support for hypothesis 1. in models 3 and 4, hypotheses 2, 2a and 2b, regarding technological openness, were tested. hypothesis 2 asserts that the stage of a market category will moderate the relationship between a platform’s technological openness and its likelihood of achieving de facto standard status. in model 3, the main effect of technological openness was tested. no statistically significant association between technological openness and the dependent variable was found. next, an interaction term (tech openness × mature market category) was added to the model (model 4). a statistically significant relationship between the interaction term and the dependent variable was found, demonstrating that the stage of market category moderates the relationship between a platform's technological openness and its likelihood to emerge as a de facto standard. more importantly, a partial differentiation with respect to tech openness suggests that mature market category reverses the relationship between tech openness and the likelihood of becoming a de facto standard. the slopes are calculated as 0.676 for mature market = 0 and -0.517 for mature market = 1 . a graphic presentation of the equation (figure 1) clearly suggests that when rivalry is in an emerging market category, technological openness enhances the focal platform’s chance for becoming a de facto standard, supporting hypothesis 2a. however, for 2b, while no relationship between technological openness and emergence of a standard was expected, when the rivalry occurs in a mature market category, a negative impact was found. therefore, by jointly considering the effects of tech openness and previous standard, strong support is found for the role of market stage as a moderator, thus supporting hypothesis 2. journal of small business strategy vol. 24, no. 2 106 hypothesis 3 states that platforms with higher levels of technological compatibilities are more likely to establish a de facto standard. in model 5, a positive but not statistically significant association exists. suspecting that the situation might be akin to technological openness (contingency based upon type of competition), an interaction term (tech compatibility × mat ure market) was added to the model (model 6) as an exploratory test. still, no statistical support for hypothesis 3 was found. discussion standard setting is a dynamic process involving a number of strategic factors. although researchers have endeavored to explore the topic, few, if any, large-scale empirical studies have been conducted, perhaps due to limited access to historical, in-depth data. this paper contributes to the literature by using data from 78 cases, from a variety of industries, and from two countries. through painstaking effort, this study contributes to the literature in the following regards. first, the study’s results confirm the notion that technological superiority is a strong factor in setting de facto standards, despite the intricacies incurred by increasing returns mechanism, network externalities, and types of competition. for managers, investing in superior technologies should always be considered a key strategy. second, the results suggest the role of technological openness is intriguing. on the one hand, an open architecture pulls in additional manufacturers from the technological community. while technological openness helps to diffuse the technology, this strategy also allows competitors to dissipate the focal firm’s technological superiority and thus may ultimately reduce technology-based differentiation. while this debate has attracted researchers’ attention (bonaccorsi & rossi, 2003; economides & katsamakas, 2006; west, 2003), this study’s findings suggest the successful outcome of technological openness to be contingent on the type of competition. specifically, for competition in emerging market categories, technological openness was significant, meaning that the platform providing a higher level of technological openness was more likely to win the competition. interestingly, for competition in mature market categories, while the expectation was for little effect of technological openness, the evidence suggests that technological openness exhibited a negative effect. perhaps this negative effect happens because in mature markets, a challenger's opening of core technologies effectively permits the standard bearer to incorporate desirable features or technologies of the new platform and thus provide little or no window of opportunity for the new platform. no direct significant relationship between technological compatibility and the establishment of a de facto standard was found. however, the possibility of some joint effect with openness, technological superiority, or some other combination of factors remains, perhaps an area of future research. how do these findings affect the many small and medium size enterprises (smes) that are either part of the ecosystem of de facto standard competitors or competitors themselves? when large competitors enter existing markets, or when new markets are uncovered, uncertainty arises as to who or what products and services will reign. a study of smes in emerging markets journal of small business strategy vol. 24, no. 2 107 (droege & marvel, 2009) found that smes lean toward planned versus emergent strategies when faced with perceived environmental uncertainty with regard to what actions competitors will take and also with regard to technology. large businesses have sufficient resources to hedge their bets in multiple markets or in developing multiple products or services to see which ones pan out (barton, 1988), while small companies often lack the slack resources necessary to play in multiple markets (nohria & gulati, 1996). droege and marvel (2009) claim a critical issue is often the investment in the production equipment needed to revamp product lines. with smes electing to stick to a plan, whether by choice or necessity, it is critical to understand the factors affecting who wins standards wars so as to get on the winning side. changes in our global society with regard to communications and transportation, combined with rapid technological change and the need for significant investment in new products and services, have forced many smes to let go of their go-it-alone strategy and instead, implement cooperative strategies with domestic or international partners (park, chinta, lee, & yi, 2010). interestingly enough, some of these partners may also be competitors in one or more markets. when firms engage in both competition and cooperation in a given relationship, a situation that may occur when part of a consortium, or otherwise working with open systems architecture, the situation is referred to as coopetition (morris, koçak, & özer, 2007). supply chains now reach around the world and many smes find themselves linking up with foreign partners, many in asia, to develop new products or services. asian countries such as japan, korea, and china have a unique culture and way of doing business that affects management practices. for example, a recent study of smes in the u.s. and korea with regard to new product development projects, found significant differences in strategic decision criteria implemented in such projects. in this study, park et. al. (2010) found that koreans (as opposed to u.s. managers) focused more on the competency of the team as opposed to the manager. koreans focused on client involvement and good communications, whereas u.s. managers focused more on monitoring and feedback, using the appropriate technology, risk analysis, and safety management. in addition, research from hitt, dacin, tyler and park (1997) claims that korean managers focus on growth opportunities, while u.s. managers focus on profitability and that many u.s. executives fail to understand these differences and how they may impact the viability of international joint projects. this study has limitations. first, the research design assumes that competition for de facto standards occurs mainly between two major competitors (the de facto standard and its number one challenger) and that the industry will eventually choose one. while these two major competitor assumptions may be reasonable, competition may actually occur among three or more platforms. in this sense, the paired cases design might not fully capture the diversity in terms of the actual competition. in addition, only cases where a standard emerged were included, precluding situations where no standard ever emerged, which might have created bias in the sampling strategy. cases were also excluded in the event clear challengers could not be identified, or sufficient information was unavailable, which again may have introduced bias into the study’s journal of small business strategy vol. 24, no. 2 108 findings. finally, the data were not wholly objective. although painstaking efforts took place in searching for objective data, the limited availability of data forced us to utilize a subjective evaluation process. however, the data was carefully considered independently by multiple parties, and a high degree of uniformity was arrived at in evaluating the various factors. while believing that the depth and breadth of the qualitative evaluation allowed us to arrive at relatively objective judgments, caution against overgeneralizing results from this study must be taken as they are potentially subject to bias. future research in future research, we should endeavor to develop methodologies that are more rigorous in order to study complex factors such as network externalities. let’s say users are queried about their reasons for buying, for example, vhs-based vcrs. could they determine, with any confidence, the degree to which they desire network externalities and/or technological superiority or reputation? another issue is that measuring direct network externalities and indirect network externalities separately is difficult because users are likely to enjoy the two simultaneously. for instance, vcrs have no value for users without cassette tapes, and cassette tapes have no value for users without vcrs. further research should also develop models to address the fundamental structure of network markets. these markets are characterized by two-sidedness with platforms as the mediator to bridge the demand-side and supply-side networks. for example, toshiba’s decision to join jvc’s vhs group, rather than sony’s beta group, was primarily based on the larger number of participants in jvc’s group. one may argue that supply-side networks not only include a manufacturer’s competitors, but all players in its ecosystem such as suppliers of complementary products and/or services (e.g., tdk, a cassette manufacture), suppliers of key parts, and distributors. such supply-side network externalities are very important in promoting de facto standards. indeed, nec’s success in the japanese pc market in the 1980s had much to do with its licensing strategy to involve in-group manufactures, key part suppliers, and complementary product suppliers such as software developers. with regard to which factors were key to determining the winner of the de facto standards wars, results point to the type of competition (emerging markets versus mature) as a boundary condition. future research should delve more deeply into types of competition as boundary conditions for these (and other) factors for their ability to effect outcomes in standards wars and other types of competition. as this paper suggests, pre-standard issues may be studied with post-standard issues from a comparison point of view to reveal the possible change of competitive dynamics related to technological cycles. conclusion overall, this paper provides several important insights to the study of de facto standards. first, the results suggest that the technological superiority of a platform has a strong influence on the outcome of competition across markets. these results also suggest that whether or not a standard setting firm should open its architecture in an attempt to derive competitive advantage from a somewhat larger installed base depends on the characteristics of the journal of small business strategy vol. 24, no. 2 109 competition. specifically, when competition occurs in emerging markets, technological openness is an effective strategy; however, such effect does not exist in mature markets where technological openness may negatively influence the outcome. the study’s findings also provide implications with regard to firms’ strategy regarding compatibility. references abernathy, w. j., & utterback, j. m. 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(2006). migration to openstandard interorganizational systems: network effects, switching costs, and path dependency. mis quarterly, 30, 515-539. lee j. zane, ph.d. is currently an assistant professor of strategy and entrepreneurship at rider university. he teaches primarily in the areas of strategic management and small business management. his research interests focus on entrepreneurship (both individual entrepreneurs and their ventures) and strategy. hideo yamada, ph.d. is currently a professor at waseda university, tokyo, japan, where he teaches and researches in the areas of competitive strategy and business models. he previously worked as a consultant at mitsubishi research institute from 1981 until 1989 and he is the past chair of the ministry of economy trade and industry’s committee for de facto standards. he has been a corporate auditor for nec corporation since 2011. susumu "sam" kurokawa, ph.d. deceased, was an assistant professor at drexel university. he taught in the area 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postage and handling. back issues may be ordered at $ 12 each. copyright 1995 srncu business tnrrhurc dircaors'rsocicuon 1ssn 1081-8510 editors-in-chief the journal of small business strategy is an applied research journal. manuscripts should be written with the small business/entrepreneurship educator, small business consultant in mind. both conceptual and empirically-based papers are encouraged, but they must have an applied focus. all papers must have a significant literature review, be properly documented, with citations from research-based works rather than popular press or web sites. since jsbs is an applied research journal, each article should include a substantial “discussion and implications” section that details how the research findings are relevant for the journal’s readers. authors are discouraged from submitting manuscripts with extremely complex statistical analyses and/or a purely theoretical orientation. case studies are acceptable if they contribute substantial to the understanding of small business strategy and include a significantly to the understanding of small business strategy and include a significant literature review that underscores the issues in the case. we do not accept teaching or pedagogical cases. articles that have a significant strategy orientation are of particular interest. however, we do also publish articles that may address functional or operational issues. articles related to exporting or other international issues are acceptable. we have less interest in articles focusing on how small business compete in specific countries unless authors show that their results can be generalized to all small businesses. articles that have a public policy focus are generally not appropriate for the journal of small business strategy. editorial review board associate editors senior editors william c. mcdowell bradley university, united states michael l. harris east carolina university, united states domingo ribeiro universitat de valència, spain dianne h. b. welsh university of north carolina greensboro, united states raj v. mahto the university of new mexico, united states whitney o. peake western kentucky university, united states joshua r. aaron middle tennessee state university, united states semra ascigil middle east technical university joe r. bell university of arkansas at little rock shawn carraher university of texas at dallas phillip e. davis texas state university eugene fregetto university of illinois at chicago joseph geiger university of idaho armand gilinsky sonoma state university michael goldsby ball state university david lyn hoffman metropolitan state college of denver jeffrey hornsby university of missouri kansas city jerry kudlats jacksonville university cathleen (folker) leitch wilfrid laurier university journal of small business strategy 2017, vol. 27 no 03 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2017 small business institute® http://www.smallbusinessinstitute.biz www.jsbs.org robert lussier springfield college matthew r. marvel ball state university brian mckenzie california state university, east bay abbas nadim university of new haven john e. prescott university of pittsburgh neal pruchansky keene state college jeff shields university of north carolina at asheville leo simpson seattle university matthew c. sonfield hofstra university harriet stephenson seattle university jude valdez university of texas at san antonio straz egy small business entry strategies: an integration of technological discontinuity and industry growth potentiai. laurence g. weinzimmer bradley university robert k. robinson the university of mississippi ross l. fink bradley university abstract technological innovations ofien create growth and profit opportunities for new firms. entrepreneurs may find it beneficial to take advantage of these opportunities. a critical decision facing any new ventureis selecting a strategy to effectively enter a market orindustry. to assist the decision makerin this endeavor, a normati ve model is offere to help entrepreneurs position themselves io take advantage of technologicalinnovaiion. specifically, the model develops four different strategic choices. these strategic choices are contingent on the magnitude of technological change and the growth potential of the industry. introduction in the recessionary climate of the 1990's, small businesses have increasingly been offered as the panacea for numerous national economic problems ranging i'rom the lack of product innovation (keats gi. bracker, 1988) to unemployment (hofer tk sandberg, 1987). despite thc anticipauon of the apparent benefits that can be gained through accelerated small business growth, the poor survivability record among small firms has continued to overshadow these aspirations. it is well documented that small businesses exhibit a discouraging failure rate. dcpcnding on the sample and industry, these rates have been reported to range from 34 percent (bates k. nucci, 1989) to 53 percent (romanelli, 1989) during the first five years of operation. some industries, like the restaurant industry, are particularly brutal on new entrants, reporting failure rates as high as 90 percent (kopf gi. beam, 1992). numerous studies have been devoted to asccrtaining thc causes of small business failures. the more commonly cited reasons i'or this lack of continuity are insufficient capital budgeting, poor money management, excessive inventory, inadequate provision for contingencies, lack of formal planning, and inability to cope with growth (laitinen, 1992; duchesneau & gartner, 1990). all of these issues can bc attributed to deficiencies in thc strategic planning process. 1 bracker, keats, and pearson (1988) have shown that strategic planning is positively correlated with the linancial performance of small businesses. counuess other studies reinforce this contention by showing that small businesses that develop strategic plans outperform those that do not (ackelsberg k. arlow, 1985; bracker 61 pearson, 1986; kopf dt beam, 1992; robinson gt pearce, 1983; shuman ik seager, 1986; shuman, shaw, & sussman, 1985; shrader, mulford, dt blackbum, 1989). one aspect of siroregic choice theory suggests that managers of an organization have the ability to proactively select the market in which to operate (astley and van de ven, 1983). this decision of selecting the market or indusuy to enter is one of the most critical strategic decisions for any new venture. child (1972) contends that this strategic choice strongly affects performance. because the success of a small business, or any size enterprise for that matter, is tied to choosing viable business-entry suategies, a normative model has been developed to provide entrepreneurs a framework for making the strategic choice of marketfindustry entry. there have been relatively few studies investigating potential small business entry strategies. one of the more noteworthy studies addressing entry strategies is vesper's (1990),in which 14 different competitive tacucs were developed for new ventures trying to enter a market that already had existing competition. this study differs from vesper's work by developing specific entry strategies based upon technological discontinuity and industry auractiveness. as stated previously, innovation has been one of the hallmarks of small business growth. drucker (1986) sees innovation as a key variable in creating entrepreneurial opportunities. he funher identifies seven sources of innovation that could encourage asmall business venture. two of these industry sources are innovation based on process needs, and changes in the industry structure. process needs focus primarily on correcting a weakness in an existing process. simply stated, an existing process possesses some inherent inefficiency, and the enuepreneur develops a solution to eradicate that deficiency. changes in industry structure imply the development of a new product or service that undermines the existing industry stattdard —e.g., the supplanting of the slide-rule by the pocket calculator. to one degree or another, these innovation opportunities involve the displacement of an existing technology by a new one, a phenomenon called technological discontinuity. thisstudydevelopsanentrystrategymodel. thismodelisofferedtofillthevoidofrelevant entry strategy models designed exclusively for small businesses. currently, no small business entry strategy model considers the impact of technological discontinuities. given the occurrence of a technological discontinuity, this model should assist small business owners in analyzing and developing appropriate entry strategies. this model is potentially important in light of the high failure rates associated with new ventures, many of which can be attributed to poor entry decisions. the entry strategy model the model developed in this study identifies entry strategies on the basis of two dimensions: technological discontinuity within a particular industry and that industry's potential for growth. the entry strategy model being proposed is presented as a two-by-two matrix in order to facilitate the reader's understanding of the interrelationship between these two environmental factors. in the model, categories of technological discontinuities are represented as the factor on the verticalaxis and industry growth potential on the horizontal-axis. 2 technological discontinuity technology discontinuity is a dimension that has profound effects on entry opportunities (foster, 1986).consequently, an in-depth understanding of the concept of technology is essential. technology is broadly defined as developments, tools, and knowledge that mediate between inputs and outputs or that create new products/services (rosenberg, 1972). technology is not only new tangible "things" like the pentium microchip, but it can also be an improvement in the way a service is provided, such as the introduction of drive-up windows at mcdonald's restaurants. the introduction of a new technology predictably affects the industry from which it emerges. sometimes the advent of a new technology affects several industries simultaneously. tushman and anderson (1986) show that technology evolves through periods of incremental change punctuated by technological breakthroughs that either enhance or destroy the competence of cuuent firms in an environment. using case studies, they show that technological progress constitutes a cumulative process interrupted by discontinuous change. these changes often offer extreme improvements over existing technologies. if the technological improvements are very significant, then no increase in scale, efficiency, or design can make older technologies competitive with newer technologies (mensch, 1979;sahal, 1981).the old technology becomes a hinderance to those firms still using it. these firms are then confronted with the choice of abandoning the old technology or abandoning the market. those firms that can make the rapid transition to the new technology are more likely to survive than the late adopters (ansoff, 1987). given the success of new ventures in dynamic environments (hofer & sandberg, 1987) and the imponance of technology as a factor influencing environmental dynamism, the proposed model provides a contextual framework for evaluating an environment sensitive to technological change. although no tools exist specifically for the identification of technological discontinuities, potential small business owners can use established environmental scanning techniques to gather the necessary information. discontinuities may be identified by such simple techniques as reviewing trade association reports (which can be found in the encyclopedia of associanons), trade magazines, and general purpose business magazines. entrepreneurs may further seek feedback from customers and suppliers. moreover, a small business owner's experience and expertise within an industry may facilitate this analysis. environmental change caused by technological discontinuity presents both threats and opportunities for individual organizations (tushman & romanelli, 1985). for those firms that are among the first to exploit this change, discontinuities alter the competiuve environment and afford first mover advantages. these first movers enhance their competitive advantage by reaping the benefits of volume and experience (macmillan gt mcmaffrey, 1984; porter, 1985). consequently, given the flexibility and adaptability of most small businesses, achieving first mover advantages should be a central objective. however, technological discontinuities pose threats as well as opportunities. as previously mentioned, those firms that are slow in adopting the new technology often find their ability to compete severely diminished. whether the inuoduction of a new technology presents an organization with an opportunity or poses a threat is dependent upon how the changes affect the firm's competitive competence. consequently, discontinuities have been classified as either competence-destroying or competence-enhancing based on the potential to desuoy or enhance 3 existing organizations in a given environment(tushman & anderson, 1986).these discontinuities are not necessarily two ends of a spectrum, but disunct environmental phenomena that collecuvely encourage the use of innovative, proactive and risk-taking strategies. these are precisely the types of strategies that have been proven to enhance the probability of success for new ventures (hofer and sandberg, 1987; romanelli, 1989). for example, apple computer proactively entered the personal computer market. as a result, apple gained first-mover advantages by establishing its product as the industry standard, therefore, due to high switching cosh they were able to compete as larger firms entered the marketplace. competence-destroying discontinuities competence-destroying discontinuities are characterized by a technological innovation so extreme that the new technology fundamentally alters the set of relevant competencies within a class. often a shift may occur in the skills and knowledge-base necessary to employ basic technologies (tushman & anderson, 1986). these major disruptions in skills and distinctive competence are associated with major changes in the distribution of power and control within the environment(chandler,1977; barley,1986). competence-destroyingdiscontinuitiesareusually initiated by new firms and are associated with increasing environmental dynamism (tushman 8t anderson, 1986). examples of competence-destroying changes are diesel versus steam locomotive and microchip versus transistor. competence-enhancing discontinuities tushman and anderson (1986) define competence-enhancing discontinuities as improvements in a product or process that build on exisung know-how within a product class. like competence-destroying disconunui ties, these developments substitute for older technologies, but do not render obsolete the skills required to master the old technologies. these improvements build on existing knowledge and provide the foundation for subsequent incremental changes (dutton& thomas,1986). examplesofcompetcnceenhancingimprovementsareelectricversus manual typewriter and ibm at versus ibm xt. industry growth potential the other dimension in our model, industry grows potential, is defined as a product of munificence and market demographics. munificence is essentially the extent to which an environment can support growth. an environment with high munificence would be characterized by fewer resource constraints on a new venture, as compared to depleted environments (dess & beard, 1984; starbuck, 1976). an environment with high munificence contains ample resources and demand to facilitate considerable grows. conversely, an environment with low munificence contains minimal resources and diminished demand which constrain or thwart organizational growth (tushman, 1977). when an environment is characterized by low munificence, resource scarcity increases the risk to organizations that remain in that environment. growth and profitability for individual firms become more difficult because ltrms must compete with each other for resources and customers needed to sustain growth (porter, 1980). for example, in the early 1970's, munificence in the air express industry was high, allowing firms like federal express to realize considerable gains without competing for common resources. as the industry became saturated, munificence declined, thus forcing many firms to leave the market. 4 munificence is considered important because it is directly affected by technological discontinuity. when a discontinuity occurs, munificence increases due to an altered environment (tushman & anderson, 1986). this point is illusuated by the development of personal computers, which made computer usage possible for wider audiences. the new markets created by this technological improvement or discontinuity resulted in tremendous growth opportunity for the computer manufacturing industry, as well as the computer software industry. in addition to technological discontinuity, other factors such as population demographics may affect industry growth potential. specifically, factors such as age, ethnicity, affluence, and other characteristics of the target market in a given industry can affect demand for products/ services in that industry. population demographics are particularly important because of their impact on the firm's environment, and because such demographic information is readily available to the entrepreneur. for a detailed explanation of calculaung munificence for a specific industry, the reader is referred to dess and beard (1984). the proposed strategic choice model integrates the interrelationship between research focusing on the environment and research focusing on the firm. more specifically, the model assists the user in analyzing the possible strategic choices and developing viable strategic alternatives. the model, as depicted in figure i, illustrates the different possible strategies given the interrelationship of technological discontinuities and industry growth potential. this model is offered as a general analytical tool and is not intended to give answers in specific situations. it isameanstoprovideaparsimoniousperspectiveonacomplexsituation. bypmvidingfourbroad entry strategies, the entrepreneur is afforded general policy guidance to avoid making market entry decisions that are potentially incompatible with environmental condiuons (defined in terms of growth and technological discontinuities). figure 1. entry strategy model technological discontinuities competenceniche avoidance enhancing strategy strategy competenceasymmetric resource destroying strategy strategy low high industry growth potential 5 niche and avoidance strategies in instances when a competence-enhancing discontinuity occurs, existing firms in the industry are in the best position to exploit the change. this is usually the case because the change caused by the discontinuity is built on existing know-how. since existing firms already have established resources and expanisc in place to take advantage of the new situation, they are more likely to gain advantages than new ventures. competence-enhtincing disconunuities tend to consolidate the industry leaders; as a result, the rich are likely to get richer (tushman & anderson, 1986). additionally, any previous entry barriers that may have made an industry impervious to new ventures may still exist. for instance, the introduction of the steel-belted radial tire is an example of competence-enhancing technological change. this new product technology allowed existing firms in the tire industry to potentially increase profits. 'however, given the capital invesunent in plant and equipment required to operate in this industry, entry barriers remained unchanged. small firms wishing to take advantage of this technological change could not benefit as these high entry barriers still remain and preclude competition in these markets. one viable alternative for small businesses is the niche strategy. this is the logical choice when a competence-enhancing discontinuity occurs and industry growth potential is low. some of the established firms may not find it attractive to alter their operations to exploit the technological change, especially if this change is costly in upgrading current fixed assets. from a benefit/cost standpoint, the projected sales of the new technology when applied to a specific market segment may not be sufficiently large to jusufy the entry of the large firm. under such circumstances, an opportunity may arise for a new venture to focus on a certain market segment, or niche, that may have been abandoned by the competence-enhancing situation. homebuilding software, used for managing new residential construction, is an excellent example of a successful niche strategy. this software was specifically tailored to the needs of this market by improving on existing technology marketed by major software companies, such as microsoft and borland. since this market does not provide high growth potential, it does not attract the larger software development companies. smaller companies, such as yardi systems, have specifically targeted their improvements for profitable operation in this niche. consequently, yardi, by employing these competence-enhancing improvements (homebuilding software), successfully serves this market segment that larger competitors have chosen to ignore. conversely, the avoidance strategy is intended for the worst possible scenario confronting a new venture. a competence-enhancing discontinuity has occurred, which means existing firms are exploiting their distinctive competence, thereby creating sizable barriers to entry. because industry growth potential is high, most established firms have a strong incentive to implement the technological change. moreover, given the nature of a competence-enhancing change, suppliers of the established firms would not be rendered obsolete since the change was buih on exisung know-how. therefore, the best strategy for a new venture in this quadrant would be to reconsider other market alternatives. the introduction of the 3.5 inch computer diskeue demonstrates the rationale underlying the avoidance strategy. larger firms in the industry, such as 3m, basf, and kodak, were able to use their current expertise, customer base, and existing distribution channels to exploit this competence-enhancing development. their economies of scale remained in tact as did their baniers to entry. small firms were precluded from compeung effecdvely, because the introduction of the 3.5 inch computer diskette did notdiminish theta'ohibitive capital required for entry into the markel 6 resource and asytnrnetric strategies as previously mentioned, competence-destroying discontinuities disrupt the existing industry structure (mensch, 1979). resources and expertise that assured industry leaders their market share, having become obsolete, are now mobility barriers. under such circumstances, new ventures founded to take advantage of the new technology will gain market share at the expense of organizations that are burdened with sunken costs, fixed capital investments and outmoded technology (hannan dt freeman, 1977). as a result of competence-destroying discontinuities, barriers to entry that had previously been considered imp"netrable are lowered to new firms (astley, 1985). in such situations, the resource strotegy calls for a small firm to be positioned to be a supplier to a larger, more established firm, or to provide supplemental or support services for an established firm's products. this strategy is a feasible alternative when munificence is high and demand supports new or continued growth in an industry. direct competition with a larger firm is generally considered a risky strategy, but considering the fact that previous technology has been discarded, the possibility exists that the interrelated communities, such as the suppliers, have also income obsolete. a viable strategy is to position and differentiate a new venture to become a primary supplier for a larger firm attracted to the new industry, or to provide supplemental or support services for their products. resource strategies, however, are not without risk. a threat may emerge as larger, financially stable firms view this as an opportunity to diversify. with their accumulated resources, such firms may be in a position to exploit a technological discontinuity much more efficiently than smaller new ventures. implementation of the resource strategy can be illustrated by the opportunities created by the introduction of computer-aided design and computer-aided manufacturing (cad/cam) systems. cad/cam systems have replaced existing technologies such as digitizers, mechanical drawing, and numerical conuol (nc) tapes. initially, larger firms, such as mcdonald douglas, became heavily involved in the development of cad/cam systems due to its large growth potential. smaller firms would have been virtually excluded from competing because of the capital and human resources invesunent needed during the developmental stages. some small firms were able to exploit this change, by providing support activities for the larger firms. in doing so, the small companies were able to capitalize on the discontinuity opportunities while avoiding direct competition with larger organizations. advanced cad/cam systems (accs), a small business founded by two engineers is an excellent example of a resource strategy in pracuce. by customizing existing software, accs filled a gap in the services offered by larger companies and also avoided direct competition. now assume that a situation has been created by competence-destroying technology in which munificence is low and population demographics do not support industry gmwth. under these circumstances, the larger firms looking to implement a diversification strategy may not be strongly attracted to this market due to the growth limitations of that industry. as a result of lower competitive pressures from large firms, the new venture would be afforded the opportunity to adopt an asymmetric strategy by entering the industry and competing with firms that possess comparable resources. 'this strategy is similar to vesper's (1990) parallel competition entry strategy in which an entrepreneur begins a venture that is similar to existing competitors in an 7 industry. if the threat of large, resource rich competitors is low as a result of insufficient industry growth potential, a new venture could auempt to establish a distinctive competence over competitors by differentiating its process or ability from similar small rival firms (stoner, 1987). one small business to attempt an asymmetric strategy is genesis automation. with only five employees, this company developed a robotics system to i:ul soft drink orders in fast-food restaurants. this technological innovation replaces the manual soft drink dispenser. since the restaurant equipment industry isa slow growth market and has not attracted large entrants, the lack of attractiveness in this industry has, so far, allowed genesis automation to operate without competition from larger competitors. implications and conclusions given the importance of small businesses to the united states'conomy combined with the high failure rates of small businesses, initial assessment of potential growth opportunities and competition is vital when considering what market to enter. the model presented in this study should assist the entrepreneur in making this decision when technological discontinuities occur. technological discontinuities create opportunities for growth and profitability for existing firms, as weg as new ventures. as has been shown, these resuliing opportunities affect industry attractiveness which, in turn, influences whether a new ventme's primary competitors wiff be large or small firms. the framing model proposed in this paper illusuates the interrelationship between industry/market entry choice and industry characteristics, given an environment ex periencing technological innovation and helping to predict the size (large or small) of potential colapeutofs. this model is presented not to prescribe a specific strategy to match a specific situation, but rather to provide entrepreneurs with broad guidance under which a number of viable strategies can be examined and implemented under suitable conditions. as such, the model is not intended to narrowly channel the decision-maker to the "one best strategy," but instead, to assess entry strategies in terms of compatibility with the potenual indusuy's level of competence-enhancing or competence-destroying technological discontinuities, and indusuy growth potential. technological discontinuities provide opportunities for sniall businesses. therefore, itcan be beneficial for small business owners to utilize scanning techniques to search for these opportunities. the model presented in the paper offers assistance in exploiting these opportunities. by assessing the type of technological discontinuity and potential growth of the market, the small business owner can employ the model to assist in the development of an appropriate entry strategy. use of the model will encourage small business owners to generate their strategy, taking into account the prominence of competitors, and the lung term orientation of the industry. this model also has practical implications for small business consultants. often, small business owners need assistance with feasibility studies for new business ventures. this model provides a framework to assist in the feasibility analysis of the new venture, as well as providing a potenual entry strategy. additionally, small business owners may identify an opportunity due to technological change. however, they may not consider thc transformation of the compeutive structure resulting from the technological changes. consequenuy, they may expose themselves to competitive risks by inadvertenuy pursuing the same market as larger organizations. this model provides the consultant with a framework to make this analysis. 8 references ackelsberg, r., & arlow, p. 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(1990). new venture strategies (rev. ed.). englewood cliffs. nj: prentice hall. 10 55 effectuation: an alternative approach for developing sustainablity architecture in small business richard c. grimm slippery rock university richard.grimm@sru.edu frances m. amatucci slippery rock university frances.amatucci@sru.edu abstract many business firms are incorporating sustainability initiatives into their business plans. sustainability integration typically utilizes a resource intensive comprehensive planning process. implementation of sustainability initiatives into a business is not likely to be equally accessible amongst firms. larger, more established firms may have greater resources to bear the costs while smaller firms may face significant impediments that preclude taking a similar approach (schick et al., 2002). thus, an alternative approach to sustainability integration is suggested to accommodate the specific issues common to smaller businesses. this study develops an alternative approach for small businesses based on the concept of effectual reasoning as described in the collective works of sarasvathy (2001, 2008). we provide a rationale for using effectuation, demonstrate how the process applies to sustainability integration within the context of small firms, and suggest roles for business consultants in the implementation of the process. introduction sustainability 1 initiatives are becoming an important issue to business organizations. the motivation for taking on such initiatives varies. firm value may be 1 sustainability is used in the context of triple bottom line as described by elkington, j. (1999) cannibals with forks: the triple bottom line of 21st century business (oxford, uk: capstone). enhanced through multiple sources of sustainability-oriented influences that go beyond financial performance, an idea that is exemplified in the holistic value proposition of o'neill et al. (2009). business risks may be reduced by firms that establish and maintain policies related to environmental, social, and governance (esg) issues (garz et al., 2007). in response, many larger firms have established departments supervised by s trateg y journal of small business eknapinski typewritten text eknapinski typewritten text eknapinski typewritten text eknapinski typewritten text eknapinski typewritten text eknapinski typewritten text eknapinski typewritten text eknapinski typewritten text mamullen typewritten text mamullen typewritten text journal of small business strategy vol. 23, no. 1 56 chief sustainability officers who develop and integrate sustainability policies and architectures into these organizations. the decision about how to integrate sustainability initiatives and create a sustainability architecture within the firm can be complicated. in this paper, we propose that in lieu of a costly and timeconsuming business planning exercise, owners of smaller enterprises can employ the effectuation process to achieve their objectives. effectuation allows small, incremental steps in choosing the ‘lowhanging fruit’ in terms of easily executed sustainability initiatives that can be gradually adopted. we provide a hypothetical example of this process and discuss the important role that management consultants can play. sustainability and small business although many individuals still argue that sustainability has become a buzzword and is the latest management fad which will fade over time, increasing numbers of practitioners, academicians and management consultants are convinced that it represents a major paradigmatic shift away from ‘business as usual’ and requires serious consideration and rethinking of traditional business practices. new ventures and smaller firms are embracing sustainability initiatives by incorporating sustainable business processes and/or by developing innovative products and services. in some cases, these firms have become prominent forces for sustainability innovations that are influencing views of contemporary capitalism (hart, 2010, gibbs, 2009, hawken, lovins and lovins, 1999) and the actions taken by larger established firms (hockerts and wustenhagen, 2010). some smaller businesses have embraced sustainability out of necessity as larger firms pressure suppliers to initiate sustainable business practices, or risk elimination from their supply chain (block, 2009). the motivation to incorporate sustainability into new and smaller firms may also be based on the founder's values and aspirations (austin et al. 2006) and the manner in which entrepreneurs perceive their stakeholder relations (schlange, 2009). building a sustainability architecture the term ‘strategic architecture’ was first introduced by prahalad and hamel (1990) in their classic harvard business review article ‘the core competence of the corporation’ (o’shannassy and hunter, 2009). they defined it as ‘a road map of the future that identifies which core competences to build and their constituent technologies.’ kiernan (1993) emphasized the need for constructing strategic architecture for corporate survival into the twenty first century. he identified the following core elements of strategic architecture: 1) organizational learning, 2) innovation/experimentation, 3) constructive contention, 4) empowerment/shared leadership, 5) optimized value potential, 6) corporate sustainability, and 7) strategic reframing. in his discussion of corporate sustainability, he initially adopted the traditional interpretation of developing a competitive advantage that is durable and is ‘sustainable’ over time. but he also discussed environmental sustainability as a second perspective of the term, and while acknowledging that corporate resistance to the environmental revolution was underway, many leading-edge environmentally conscious firms that made sustainable development the cornerstone of their strategies display healthy financial performance. roberts (2009) was one of the first to bring together strategic architecture and sustainability in introducing a planning framework that supports the development and application of industrial ecology. we journal of small business strategy vol. 23, no. 1 57 introduce the term ‘sustainability architecture’ as a firm’s basic orientation toward adopting sustainability initiatives into its business model, including interfaces with suppliers and customers. we also employ the term ‘sustainability integration’ when referring to the action of incorporating a specific sustainability initiative into a firm’s existing business plan. entrepreneurial processes recent advances in our understanding of entrepreneurial processes have led to new thinking into how business ventures evolve. sarasvathy (2001) has made a significant contribution to this topic by identifying two approaches, causation and effectuation. causation assumes a predictable environment where extensive analysis and planning are used to achieve a predetermined goal. causal reasoning implies "to the extent we can predict the future, we can control it." this approach is logical when applied to well-developed markets where incremental innovations are often employed, which is more typical in a corporate setting. in such environments, models and analysis can help guide management decisions toward achieving specific goals. entrepreneurial environments are often characterized by high levels of uncertainty and outcomes that cannot be predicted. sarasvathy (2001) found that expert entrepreneurs take a different approach when compared to ceos from predictive environments, for developing a concept into a viable business opportunity. instead of defining a goal and then pursuing it, expert entrepreneurs start out with an idea and develop the market for it. effectual reasoning assumes "to the extent that we can control the future, we do not need to predict it." this process provides them with an element of control over their environment and eliminates the need to predict outcomes that are largely unpredictable. they engage in a process that utilizes existing means, proceeds in small steps, limits financial risk, leverages contingencies, and forges strategic partnerships. textbook procedures for new venture development commonly suggest that aspiring entrepreneurs develop an idea or concept based on the causation approach. consistent with this line of reasoning, they suggest that aspiring entrepreneurs engage in extensive planning and analysis before introducing a new product to market. expending time to develop comprehensive business plans for new ventures may be a questionable practice when considering the speculative nature of such projections and that new ventures often deviate significantly from their original concepts. sarasvathy (2001) provided an alternative view of new venture development that challenges textbook treatments of entrepreneurship by making a strong case for effectuation, a process based on the manner in which expert entrepreneurs think and act. in this study, we argue that the effectuation process used by expert entrepreneurs can also be employed as an effective approach for small business sustainability integration in part, because it circumvents many impediments to implementation. robinson and pearce (1984) indicate that business owners often preclude extensive planning due to time and/or financial resource constraints. effectuation provides a remedy in that focusing on only one aspect of a new initiative and its development minimizes time allocation. the process is also less taxing mentally because it reduces the need for extensive information gathering and complex analysis that can limit the journal of small business strategy vol. 23, no. 1 58 founder's intellectual ability to correctly process information, otherwise known as bounded rationality (simon, 1997). the commitment of financial resources is also minimized by placing a ceiling on funds allocated to a smaller experimental initiative and seeking "partners" to offset costs and/or supply additional resources. in addition, effectuation incorporates the logic of control, and involves attempts to shape and create a potential market (sarasvathy et al., 2001). this aspect of effectuation may be of particular importance to sme's because the solutions that evolve can be innovative and provide a custom fit to meet the needs of the business and its customers, with the added benefit of fulfilling the owner's aspirations. lastly, although the potential benefits of planning in small business are well documented (hodges and kent, 2007), practical concerns indicate a need for a low-cost, yet effective, alternative for implementing major initiatives such as sustainability integration. effectuation effectuation begins with a set of means and allows goals to emerge contingently over time from the varied imagination and diverse aspirations of the founders and the people they interact with (sarasvathy, 2008). four general principles guide the basic process: means driven action, affordable loss, formation of strategic partnerships, and leveraging contingencies. the first principle, means-driven action, begins with introspection in order to generate an initial idea or concept. the entrepreneur performs a self-assessment of the means they currently possess. they develop answers to the questions of "who am i," "what do i know," and "who do i know." these means not only generate ideas, but also take the entrepreneur down a path of development. chandler et al., (2011) aptly describes effectuation as a process of experimentation. the entrepreneur engages in an iterative process that consists of act, learn, repeat (keifer et al., 2010). the second principle, affordable loss, determines an upper bound on the amount of funds the entrepreneur is willing to place at risk in order to start the venture (dew, et al., 2009). affordable loss is appropriate for situations where uncertainty, as opposed to calculable risk, is dominant. in the effectuation world, entrepreneurs do not assume the presence of a market for their idea. their objective is to create a market that doesn't currently exist. thus, they willingly assume knightian uncertainty, an extreme form of uncertainty characterized by unknowable distributions and outcomes (knight, 1921). in the world of causation, distributions and outcomes can be reasonably determined so that risk can be quantified and returns can be estimated. since expert entrepreneurs cannot quantify the risks of a market that doesn't exit, they mitigate the need to predict risk and return by only committing an amount to the venture that they can afford to lose. attainment of additional resources is dependent on the third principle. the third principle is to seek and form strategic partnerships. instead of assuming there is a market for their product, the expert entrepreneur takes her new product to potential customers to obtain precommitments. this step provides necessary feedback that the entrepreneur uses to refine the product offering and, in addition, provides an opportunity to obtain additional resources such as access to manufacturing capabilities, distribution channels, and additional sources of financing. this helps keep capital outlays low, and helps determine the market or markets ultimately served (sarasvathy, 2008). in addition, the ability to receive a pre-commitment journal of small business strategy vol. 23, no. 1 59 validates the entrepreneurs’ idea and serves as a proxy for market testing. the last principle is leveraging contingencies. seasoned entrepreneurs are experts at knowing how to take unexpected outcomes and leverage them into opportunities. this equates to what sarasvathy (2008) describes as the lemonade principle, as in "when life gives you lemons, make lemonade." it is based on the idea that every situation, even worse case scenarios, can become opportunities that may ultimately define the development of the final product and success. effectuation and sustainability integration the formal strategic planning process has been criticized for not allowing opportunities for learning and entrepreneurial process (mintzberg, 1987, quinn, 1980). similarly, although there are many proponents of the business plan (barringer, 2009; sahlman, 1997), many question the validity of a formal planning process in high-growth firms. allred, addams and chakraborty (2007) provide an extensive review of the literature and, based on a survey of the inc. 500, conclude that both formal and informal planning processes are important. hodges and kent (2006) found that increased planning sophistication does improve firm performance. effectuation can be a powerful alternative to expensive, timeconsuming planning processes which may inhibit quick responses to temporary windows of opportunity that require immediate attention. it can be particularly useful when developing a sustainability architecture that involves significant changes from traditional ‘business as usual’ practices. there are similarities between the effectual process as applied to concept development for a new venture, and the manner in which a new strategy initiative may be developed and integrated into small businesses. we argue that effectual reasoning offers important advantages over predictive/causal processes for developing and integrating a sustainability architecture into small businesses. we specifically apply the process within the context of sustainability integration to demonstrate how it facilitates organizational change. potential advantages of effectual vs. predictive approaches as is the case in the literature for entrepreneurship, predictive approaches form a dominant paradigm for the methods employed by business sustainability planning consultants and authors. many experts suggest that business owners go through an intensive, comprehensive planning process in order to institute the best sustainability initiatives2. these approaches place extensive demands on small businesses that may act as a deterrent to sustainability integration. in newer or smaller businesses, a comprehensive organizational make over may not be feasible or practical given resource constraints. from a risk management perspective, a dramatic transition to a sustainability architecture could result in unanticipated outcomes that are both costly and potentially catastrophic to a smaller business. effectual reasoning provides a pragmatic alternative for integrating sustainability into a new or smaller business. the attractive 2 a good example of the consultant's approach can be found in "the step-bystep guide to sustainability planning" by hitchcock and willard. journal of small business strategy vol. 23, no. 1 60 features of the effectual approach are simplicity (it is easy to understand), ease in implementation, and an affinity towards financial loss minimization from failed initiatives. the process is oriented at the individual making it particularly applicable to new ventures and smaller businesses where strategies and decisions are often developed and executed by founders. of course, the benefits of employing effectuation should be weighed against the potential benefits from using a predictive/causal approach. means assessment: who am i? in the effectual reasoning process, an important aspect of realizing a successful outcome is establishing the entrepreneur's passion for creating a new venture. this is referred to as the "who am i" question during the introspective stage of the process. in many cases, entrepreneurs have an interest in developing a business that is driven by reasons extending beyond the pursuit of acquiring wealth (austin et al., 2006). since personal aspirations often play a role in obtaining successful outcomes, it is important that small business owners understand their internal motivation for integrating sustainability into their business or business plan. a passion for sustainability will help them stick with the process and see the initiative through to the end. the following questions may be helpful in facilitating this phase of selfevaluation: who are you?: • why is sustainability important to you? practical reasons: reduces costs, brings in new customers, pressure from an important vendor who must establish a supply chain of sustainability-oriented firms. aspirations: goes beyond financial performance envelopes the "big picture" and may include a deep concern for local community and the environment. • what life experiences may have driven you to think about sustainability issues? • what is your gut feeling about sustainability in terms of: planet: the natural environment people: community, suppliers, vendors.... • what are your feelings toward altruism? do you place importance on giving to charities? would you sacrifice a percentage of profits to utilize local suppliers over less costly alternatives? how much perceived satisfaction or value would be gained by engaging in sustainable practices? • would you be willing to trade off financial performance to gain greater personal satisfaction? how much? what percentage? • would you be willing to incur a 5, 10, 20 percent reduction in income to live a more sustainably consistent lifestyle or operate a sustainable oriented business? introspection is used to ascertain the level of commitment. it is a process that reveals the underlying motives and affinity for pursuing a sustainability initiative. it does not require affirmative responses to all questions. it does not require the business owner to be a zealot for environmental issues. however, if the business owner has no compelling reasons for pursuing journal of small business strategy vol. 23, no. 1 61 sustainability aside from superficial interest, they probably should reflect harder on their ability to see a new initiative through to the end. means assessment: what do i know? entrepreneurs often develop an idea for a product or service based on possessed knowledge and/or expertise. in the effectual reasoning process, the entrepreneur performs a self-assessment of not only "who i am," but "what i know," in a similar fashion, small business owners must first understand what they know about sustainability practices. the following questions may be helpful: what do you know?: • which, if any, of your present practices may be consistent with sustainable business practices? • are you familiar with existent technologies that may reduce energy consumption or carbon footprint? • do you know how to measure your carbon footprint? • can you anticipate how your customers will react to a sustainability re-orientation? what you know can become important in determining the initial action step. effectual reasoning does not require one to become an expert in sustainability, but does require some basic knowledge and/or the ability to obtain adequate understanding of the topic. if an individual has extensive knowledge of sustainability practices, they can probably establish a more practical starting point for integration. on the other hand, a knowledgeable individual may have a propensity to take too large of an initial step that places too many resources at risk prior to obtaining feedback. if a business owner has little knowledge, they may need to spend time acquiring that knowledge through self-study, or with the aid of a consultant. means assessment: who do i know? the third part of the means phase, "who do i know," entails identifying those who can become important sources of financial knowledge, and business resources. in new venture formation, taking on partners who are willing to invest in the business helps spread financial risk. these contacts also provide important sources of information and feedback that help mitigate errors and make necessary adjustments. the same advantages can accrue to small business owners. who do you know?: • friends, relatives, other business owners, industry experts, vendors, suppliers, customers, government resources.... all constitute potential sources for idea presentations, feedback, and financial backing. affordable loss and contingencies once business owners have determined their level of commitment to sustainability integration, assessed their knowledge of the topic, and identified potential strategic partners, the next step is to determine the amount of funds they are willing to allocate to the pursuit of the new venture. a major advantage of effectuation is the treatment of uncertainty. as one proceeds forward by taking small incremental steps, the amount of resources placed at risk during each step is constrained to that constituting an "affordable loss." determining the specific amount of funds to commit to an initiative depends on the business owner's subjective assessment of competing uses for funds (opportunity cost), the perceived opportunity cost of not engaging in the journal of small business strategy vol. 23, no. 1 62 initiative, and other preferences (dew et al., 2009). it is important to determine the amount of resources to place at risk. one approach is to identify "low-hanging fruit" in order to take an initial action that requires a relatively small investment of time and resources. the formulation of ideas is highly subjective, so there is no way to definitively define a best idea other than to say it should be easy to implement and have potential for providing initial feedback that can be reflectively assessed and provide direction for future actions. as is true to situations requiring effectual reasoning, the ultimate outcome is ex-ante unknowable. once the amount of resources constituting an affordable loss has been determined, the business owner can immediately take action. she can take a first action step to test the idea, obtain feedback, and adjust the process. this also includes forming strategic partnerships in order to spread risk, gaining access to essential resources, and offering others a share in potential rewards. some ways to form partnerships may include: •utilizing vendors of sustainabilityoriented products that can provide attractive financing or leasing arrangements • negotiating a trial period with vendors to see how customers respond and/or assess the effects on business operations without capital investment • asking for discounts based on copromotions of supplier's product(s) • if the venture is newer and truly innovative, ask supplies if they would take an equity position in the firm in return for product (equity interest may be the funding wave of the future if banks continue to resist lending to all but the most credit worthy) • entering into barter arrangements (may be of particular interest to local suppliers and vendors) the last principle to employ relates to contingencies in relation to unexpected outcomes. since these are unexpected outcomes, the business owner should expect the unexpected by embracing challenges. expert entrepreneurs tend to use a frame of thinking that creates positives out of failures by using such events to generate new opportunities (sarasvathy, 2008). role of the business consultant the application of effectual reasoning to sustainability integration may appear simplistic, but execution is its biggest challenge, and this is where business consultants can plan an important role. an exciting aspect of effectuation is that it is a process that can be taught and is now being integrated into some premier university entrepreneurship programs3. our study contends that effectuation is well-suited for applications in extant small businesses, but as is the case in new venture entrepreneurship, the process must be introduced and instructed. a hypothetical case that demonstrates sustainability integration via the effectual process is included in appendix a. 3 the entrepreneurship programs at babson college have integrated effectuation (referred to as creaction) into its curriculum and also forms the basis for its entrepreneurial thought and action® paradigm. the darden school of business at the university of virginia is now promoting a new form of entrepreneurship competition based on effectual reasoning. journal of small business strategy vol. 23, no. 1 63 sustainability business consultants can play a vital role in helping founders successfully develop a sustainability architecture by employing effectuation. there are multiple roles that the consultant can play including instructor, mentor, and evaluator. the consultant can become involved in almost all aspects of the effectuation process including: • assessing current level of sustainability integration • introducing effectuation as a lowcost, low-risk alternative to extensive planning • describing how the process works • assisting the founder in assessment of means and determining an affordable loss • acting as a mentor throughout implementation • leveraging contingencies into new opportunities • identifying strategic partners • acting as a knowledge resource for sustainable practices and future developments • providing post-implementation impact assessments on financial performance, valuation, and customer/founder/employee satisfaction. in addition, there are a number of additional benefits that are likely to accrue to the consultant's own business. since effectuation follows an approach that seems natural to clients, they may demonstrate a greater comfort level with the process. this can result in added credibility for the consultant. taking a client through the means assessment of "who they are," "what they know," and "who do they know" provides the consultant with information that can lead to a better understanding of the client and also provide opportunities to work with members of the client's business network without the need to directly ask for referrals. since an important aspect of the process is the mentoring role, the consultant can build a more intimate relationship with the client that can result in higher client satisfaction and retention rates. once effectual consulting has been implemented on a wider scale, future research will be needed to properly assess our conjectures and provide better insight into the true costs and benefits of the process, especially in comparison to predictive/causal planning approaches. summary and conclusion business owners work in dynamic and uncertain market conditions that necessitate periodic changes in order to insure the future success of a firm. the introduction of any new idea and/or strategy can be a daunting task that could result in costly errors. those who seek changes or modifications to their current business models/strategies may encounter constraints that limit their ability to engage in comprehensive planning processes and exhaustive market studies that in the end, may not meet expectations. entrepreneurs who routinely develop new concepts into business ventures face a similar dilemma. they too must decide upon courses of action under highly uncertain conditions and with limited resources. studies of successful serial entrepreneurs demonstrate that these individuals supplant effectuation for predictive/causal processes during the early stages of new venture development. the effectual process uses the entrepreneur's existing means to develop a concept, limits financial risk to an affordable loss, leverages contingencies into opportunities, and utilizes strategic partnerships to access additional resources. the process is journal of small business strategy vol. 23, no. 1 64 implemented in incremental steps that enable learning through trial and error that ultimately helps the entrepreneur implement a feasible result. this study suggests effectual reasoning as a process that is particularly suitable for smaller businesses as a means of integrating sustainable business practices into the firm. utilizing this process provides business owners with a means to obtain new knowledge of customers and opportunities, develop a better understanding of their current market, and lead to the creation of new markets. effectuation provides a lowcost, low-risk alternative to predictivebased processes, especially when these new initiatives involve highly uncertain outcomes that can be descriptive of sustainability integration. business consultants can play important roles in small business sustainability integration. by implementing an effectual consulting process, they play multiple roles as instructors/mentors/evaluators that assist business owners towards the creation of an organization that more fully reflects their aspirations and may result in unforeseen opportunities. effectuation may also provide several benefits to consulting practices by helping to establish higher levels of credibility, enhanced client/consultant relationships, and provide for additional consulting opportunities. it may also lead to consulting opportunities in firms once considered too small, new, or resource poor to approach for services. this paper introduces effectuation as a viable option for sustainability integration in small businesses. the process is generically adaptable as a tool for creating organizational change and developing new initiatives in extant firms. still, effectuation is an untested process as an agent for change in small businesses. this opens the door to a variety of empirical and case studies aimed at evaluating the effectiveness of the process, identifying problem areas, performing comparative analysis with predictive methods, measuring the impacts on financial performance, and evaluating the effects on business survival rates, as a few examples. it is our hope that small business owners and consultants will consider this process as an alternative when predictive/causal approaches are not feasible, and that academics will engage in further study of this promising application. references allred, a., addams, h.l. and chakroborty, g., (2007). is informal planning the key to the success of the inc. 500?, journal of small business strategy, 18(1): 95-104. austin, j., h. stevenson and j. wei-skillern (2006). social and commercial entrepreneurship: same, different, or both? entrepreneurship theory and practice, 30(1): 1-22. barringer, b. r., (2009). preparing effective business plans: an entrepreneurial approach, upper saddle river, nj: pearson/prentice hall. block, b. (2009). wal-mart scrutinizes supply chain sustainability. eye on earth (world watch institute). retrieved september 8, 2011 from http://www.worldwatch.org/node/6 200. chandler, g.n., detienne, d.r., mckelvie, a. and mumford, t.v., (2011). causation and effectuation journal of small business strategy vol. 23, no. 1 65 processes: a validation study, journal of business venturing, 26:375-390. cook, p. and yamamoto, r., (2011). inside the mind of the expert entrepreneur: the explorer’s view of strategy, journal of management and strategy, 2(3):77-85. dew, n., sarasvathy, s. d., read, s. and wiltbank, r., (2009). affordable loss: behavioral economic aspects of the plunge decision, strategic entrepreneurship journal, 3 (2): 105-126. elkington, j. (1999). cannibals with forks: the triple bottom line of 21st century business oxford, uk: capstone. garz, h., volk, c., frank, k. (2007, february). what really counts the materiality of extra-financial factors. pan european equity, extra-financial research, westlb ag. gibbs, d., (2009). sustainability entrepreneurs, ecopreneurs and the development of a sustainable economy. greener management international, winter (55):63-78. hart, s.l., (2007). capitalism at the crossroads: aligning business, earth and humanity (2nd edition), upper saddle river, ny: wharton school publishing. hawken, p., lovins, a., lovins, l.h., (1999). natural capitalism: creating the next industrial revolution, new york:little brown. hitchcock, d., & willard, m. (2008). the step-by-step guide to sustainability planning, london, uk: earthscan publishing. hockerts, k. and wustenhagen, r., (2010). greening goliaths versus emerging davids – theorizing about the role of incumbents and new entrants in sustainable entrepreneurship. journal of business venturing, 25: 481-492. hodges, h. e. and kent., t.w. (2007). impact of planning and control sophistication in small business, journal of small business strategy, 17(2):75-87. keifer, c.f., schlesinger, l.a., and brown, p.b., (2010). action is everything: creating what you want in an uncertain world, duxbury, ma.: black ink press. kiernan, m.j. (1993). the new strategic architecture: learning to compete in the twenty-first century, academy of management executive, 7(1):7-21. knight, f. h. (1921). risk, uncertainty and profit. boston, ma, hart, schaffner, & marx; houghten mifflin co. mintzberg, h. (1987). crafting strategy, harvard business review, july. o’neill jr., g.d., hershauer, j.c., and golden, j.s. (2009). the cultural context of sustainability entrepreneurship. greener journal of small business strategy vol. 23, no. 1 66 management international, winter (55): 33-46. o’shannassy, t. and hunter, p., (2009). a management consultant’s guide to how strategic architecture can improve an organization’s ‘bottom line’, singapore management review, 31(1):33-47. prahalad, c.k. and hamel, g. (1990). the core competence of the corporation, harvard business review, may/june. quinn, j. b. (1980). strategies for change: logical incrementalism, irwin. roberts, b. h.,(2009). building a framework for strategic architecture to foster the development of industrial ecology, progress in industrial ecology, 5:482. robinson, r. b. and pearce, j. a.(1984). research thrusts in small business strategic planning, academy of management review, 9 (1):1-20. sahlman, w.a. (1997). how to write a great business plan, harvard business review, july-august, 98108. sarasvathy, s. d. (2001). causation and effectuation: toward a theoretical shift from economic inevitability to entrepreneurial contingency. the academy of management review, 26(2): 243–263. sarasvathy, s. d., dew, n., read, s. and wiltbank, r. (2001). effectual entrepreneurship expertise: existence and bounds, academy of management journal. 44. sarasvathy, s. d. (2008). effectuation, elements of entrepreneurial expertise. northhampton, ma: edward elger publishing. schick, h., marxen, s., and freimann, j. (2002). sustainability issues for start-up entrepreneurs, greener management international. summer (38): 235-251. schlange, l.e. (2009). stakeholder identification in sustainability entrepreneurship: the role of managerial and organisational cognition, greener management international. winter (55): 13-32. simon, h. a. (1997). models of bounded rationality volume 3 empirically grounded economic reason. cambridge, ma and london: mit press. richard c. grimm, ph.d. is associate professor of finance in the school of business and managing director of the sustainable enterprise accelerator at slippery rock university in slippery rock, pa. his primary research interests are in the areas of behavioral finance, entrepreneurship, and business sustainability. frances m. amatucci, ph.d. is an associate professor in the school of business at slippery rock university of pennsylvania. her primary research interests are sustainability, entrepreneurship finance, and women and minority entrepreneurship. her research has been published in venture capital, entrepreneurship theory & practice, and the journal of developmental entrepreneurship. eknapinski typewritten text eknapinski typewritten text eknapinski typewritten text eknapinski typewritten text eknapinski typewritten text eknapinski typewritten text eknapinski 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large retail chain. mary cares about the welfare of the people in her community and regularly supports charitable organizations. she is concerned about the conservation of natural resources and the preservation of resources for future generations. she wants to explore ways to align her personal values with her business operations. following a web search, she found information from several fortune 500 companies that implemented sustainability polices. mary was excited about the possibility of reorienting her business into a sustainable organization but the excitement was offset by concern. how should she proceed? does she possess the knowledge to pull this off? what would it cost? a friend of mary's referred her to bill, a management consultant who instructs business courses at the local college. during their first meeting, mary expressed concern about the potential costs of re-organizing her entire business as a sustainable enterprise. bill explained that a comprehensive planning approach, while common in larger, established organizations may not be practical or even feasible for a smaller business such as hers; but there was an alternative. he described how small businesses with limited resources can accomplish desired change by taking an effectual approach. he told mary that effectuation is a viable solution for smaller businesses because it places a limit on resources at risk, focuses on a single actionable idea, and proceeds in small steps. he said the process was successfully used by expert entrepreneurs, and can easily be applied to business owners who desire organizational change. he explained that the potential costs and risks from developing and implementing a full-scale sustainability program could sink mary's business if a large-scale initiative failed. mary nodded her head in agreement, she intuitively knew going all out was too risky, the effectual approach to sustainability integration made sense. she realized that bill's advice had just reduced a large insurmountable burden into a manageable project that she could act upon right away. mary’s level of excitement escalated, all she needed was to decide upon an idea that would immediately put her on the path of sustainability integration. but how would she determine what idea was best? bill suggested that mary develop answers to three questions, who am i, what do i know, and who do i know to help pinpoint an idea. mary answered the questions which confirmed that she held a passion for sustainability. she also felt comfortable with her knowledge of sustainable practices but also realized she could learn more by obtaining feedback from trusted resources. she made a list of people she knew including other business owners, friends, relatives, frequent customers, and suppliers to whom she could present an idea and receive honest feedback. bill also suggested that mary take time to make careful observations of her store and customers in order to generate ideas for her first initiative. he explained that a top design company named ideo used a similar procedure for generating ideas. after spending the rest of the day observing her store and customers, she decided an journal of small business strategy vol. 23, no. 1 68 easy place to start was to replace some of the incandescent bulbs in her inventory of antique lighting fixtures with energy efficient cfls. she decided to replace about 40 bulbs with cfls, which would require a relative small outlay of funds. mary set a budget of $200 for her "green lighting initiative", an amount she could fund from petty cash. concerned about the esthetic qualities of the bulbs, she decided to randomly replace them in her lamp inventory and then ask her friends and relatives to visit the shop and comment on the changes. she also asked customers for their opinions and noted their comments. once the first action step has been taken, the business owner reflects on the action and tries to learn from the feedback received. in mary's case, she examines her decision to replace incandescent lights with cfls. what were the benefits? did this choice provide the business with cost savings, are the cfls esthetically attractive, what reactions did she receive from customers? is the amount and type of light produced sufficient? how does she feel about this choice, is she satisfied? what about negative feedback? bill advised her to take negative comments as positives that can create new opportunities. the answers to these questions will help determine how she proceeds with her next action step. if her answers are largely disaffirming, she should decide what adjustments or even contemplate abandoning the idea. a month past and mary decided to reflect on her decision. she found the electric bill was reduced. she also noticed that sales of some fixtures from the 1960's and 70's era actually increased while sales of older lamps declined. she checked her notes made on customer comments. she noticed a pattern in that several customers commented on how the new bulbs complemented the more contemporary designs but detracted from the look of the older lamps. mary decided to make an adjustment. she found a supplier of cfl bulbs with a more traditional look (but much higher price tag) and also some newer decorative led bulbs that were even more energy efficient. she decided to purchase ten cfl bulbs to replace those in the older lamps and five led's for the 70's era fixtures. she also placed a sign stating "bulbs for display only". mary discovered that sales in the older lamps increased significantly with the inclusion of traditionally styled bulbs. she also noted many comment on the innovative look of the led bulbs in the more contemporary vintage lighting fixtures. she observed that on saturdays, when the local farmers' market was in operation, there was a significant increase in light fixture purchases of all varieties. through conversations with saturday customers, she discovered that most were coming to purchase local and organically grown produce and noticed the vintage light fixtures with the cfls and leds bulbs which led them into the store. they thought it was a neat idea to purchase "used" lamps because they viewed this as a purchase of a "renewable" resource with the additional benefit of energy conservation from the energy saving bulbs. mary realized her antique store was sustainability orientated all along, she simply had not thought of it in this way. as mary went forward with various action steps she compiled successes and failures that all led to new insights and occasional surprising results. three months from their initial meeting, bill stopped in for a follow up consultation. to his amazement, he found mary had repositioned her entire business by creating a market for sustainable lighting solutions. she was journal of small business strategy vol. 23, no. 1 69 quickly becoming a major retailer for vintage lighting fixtures in the region. effectual reasoning led mary to the creation of a new market for her products and established the sustainability architecture that fulfilled her aspirations she accomplished far more than ever envisioned. as demonstrated by the example of mary, the effectual reasoning process can result in a number of learning opportunities and surprises. the effectual process to sustainability integration can lead to a better understanding of sustainability initiatives, better business performance, and knowledge that can be leveraged into new initiatives. new outcomes are tailored to the needs, desires, and preferences of customers and business owners without the need to take large risks or incur extensive expenditures of time and resources. reproduced with permission of the copyright owner. further reproduction prohibited without permission. str'a t.egy mexico beckons mid-american small business: prospect for university centered export trade assistance~ joe singer university of missouri kansas city ray siehndel washburn university abstract midwestern small businessftrms are being aggressively beckoned to enter the rapidly growing mexican economy. with the recent passage of the hlomh american free trade agreement (nafta j, mexdco is ready to start spending to upgrade its quality of life. small business firms with products that can help with these improvements are being urged to scour mexico for trade leads. this study reports on a survey of j,l04 midwest-central small and medium size manufacturing firms who find it dificult to take advantage of the export opportunity that mexico may oper them. among the respondents, 287firms are in industries classified by the us. department of commerce as having the greatest potential for rapid growth in export to mexico. characteristics of survey firms are presented along wi th their manogerial ond technical assistance needs. the prospect for a university-based export assistance centeris explored along with the operan'onal dimensions for such an agency partnership. introduction since the inauguration of mexican president carlos salinas de botali in 1989,mexico has made significant modifications in the operation of its national economy. state-owned companies have been sold to private investors. the government has taken steps to reduce its budget deficit. inflation has been brought under control. foreign investment has been permitted in many industries. and, the north american free trade agreement has been negotiated with the united states (u.s0 and canada. these developments have generated a great deal of enthusiasm among north american investors and business leaders. v the autlvors of this paper were invited to subnu'tan anicle for publication in thejournal. thc article was not review cd by the jsbs editorial advisory board. 65 as a result, the united states'xports to mexico doubled, growing from $ 12.4 billion in 1986 to $28.4 billion in 1991.consumer goods exports from the united states to mexico uipled, rising from $ 1 billion to $3 billion. capital goods exports went from $5 billion in 1986 to $9.5 billion in 1990 (nafi'a, 1992). mexico joined the general agreement on tariffs and trade (gatf) in 1986, reducing its highest ad valorem duty from 100 percent to 10percent. duties currently vary between zero and 20 percent, with the average tariff on goods imported from the united states averaging 10percent. in addition, mexico reduced its 11,000import licensing requirements to 53, mainly on electronics, expecially super computers. freer trade with mexico has led to trade and is in the best economic interest ofboth the u.s. and mexico. the mexican economy grew at an annual rate of4.8 percent in 1990-1994and is the fifteenth largest economy among the nations of the world (nafi'a, 1992). the united states had a merchandise trade surplus of over $2 billion in 1992 with mexico, after a merchandise trade deficit with mexico from 1982 to 1991.currently, the citizens of mex ico import more goods per capita from the united states than do the citizens of the european community (nafi'a, 1992). president salinas instituted a liberal revision of the foreign invesunent regulation law in may, 1989. consequently, more than two thirds of mexico's economy is now open to 100percent foreign ownership of firms. united states business invesunent in mexico not only expands its markets but also helps strengthen a company's ability to meet global compeutive challenge. for example, mexico sold a 20.4 percent stake in telefonos de mexico, the nauonal telephone company, to southwestern bell corp, france telecom, and grupo carso for $ 1.76 billion. southwestern bell feels this is so important to the future of its operations that it is moving its headquarters to san antonio, texas, from st. louis, missouri. edward whitacre, ir., the company's chairman, said, 'this move will put us closer to more of our major growth markets and customets... san antonio serves as the gateway to mexico." southwestern bell's investment of approximately $950 million in mexico is currently valued at approximately $2.4 billion. privatization activities continue in mexico, as 886 government-owned businesses have already sold from the 1,155 held in 1982. these businesses include petrochemical, pharmaceutical, steel, tourist industries, and the national airlines, mexicans and aeromexico. also, mexico is returning the nation's largest banks to the private sector, new regulations require no government approval of invesunent proposals in many areas and formal responses within 45 days in the remaining areas. in 1992, the united states'irect invesunent in mexico had risen to $ 10.2 billion, a dramatic increa e from levels well below $6 billion before 1989. it is important to note that mexico remains a nation controlled by one political party. the partido revolucionario inetitucional (pri) dominates mexican politics; and, president salinas, elected in 1988 with 50.4 percent of the vote, is the leader of the pri. the potential for political and economic instability continues in mexico as the country is not a true democracy. regular elections are held, but results are widely believed to be fraudu! cnt. the atutudes of other political parties toward foreign trade and invesunent are not clear. 66 mexican presidents serve one six-year term, and president salinas will leave office in 1994. he views nafi'a as a way to lock his liberal economic reforms into an international agreement that will hamper future mexican presidents from making fundamental changes in the country' economic order. the north american free trade agreement in august, 1992, president bush announced that negotiations were complete on the north american free trade agreement. the agreement, as passed by congress in 1993, phases out tariffs and licensing requirements over a period of years. approximately 650 of the united states'ndustrial and agricultural exports will be eligible for duty-free shipments to mexico within five years. the new agreement also eliminates barriers to service trade, reduces or removes investment restrictions, and helps protect intellectual propeny rights. nafta was the culmination of a long process beginning with mexico's entry into the gati'nd continuing through a series of negotiations. business groups and economists have generally supported the agreement on the basis that the removal of barriers will incmase access to an important market for u.s.exporters and provide consumers with lower prices. many private citizens have accepted this position and supported nafi'a. naffa created the largest free market in the world and placed the united states in the middle of over 360 million consumers whose output is in excess of $6 trillion (naff a, 1992). naff a causes some concern in mexico over the possible loss of sovereignty because the regulations are enforceable by multi-national bodies. objections have also been raised by businesses producing in industries once protected from imports by tariffs and licensing barriers. however, the majority of the mexican people supported nafi'a based on the belief that it will offer greater prosperity to mexico and increased access to united states styled consumer goods. risks do exist with the implementation of the agreement. mexico has undertaken major structural change in its economy. the north american free trade agreement is the capstone of that process. the agreement is likely to contribute to the prosperity of mexico; however, if it fails, an anti-united states backlash could result. such a backlash could devastate united states exports, particularly if combined with renewed tariffs and other barriers. on a second level, a failed nafi'a could cause invalidation of the liberal market-centered reforms of president salinas and the unstable one party system may shake on its foundation. target export industries table i shows the major midwestern industries targeted by the united states department of commerce as having the potential for greater united states'xports to mexico. smalland medium-sized manufacturing firms, located in the midwest, that produce within these industries were identified and surveyed. 67 table i high growth targe[industries industry 1993 market 1990-1993 1993 imports size growth rate from the u.s. apparel $ 1.8 billion 209i) $397 million plastic materials and resins $ 1.713billion 12.9%o $360 million computers and peripherals $649 million 119b $218.5 million telecommunications equipment $322.7 million 10% $219.8 million computer software and services $416.4 million 129i) $ 174.2 million household consumer goods $563.8 million 129n $ 170.1 milhon sporung goods $525.8 million 129i) $72.3 million pollution control equipment $480.0 million 209i) $92 million business equipment (non-computer) $ 189.1 million 89o $98.8 million management consulting services $ 141.7 million 10% $ 123 i million food processing and packaging equipment $233.9 million 99o $79.1 million agricultural machinery and equipment $260 million 129b $83 million building products $94.7 million 209i) $42.4 million survey design the survey of potential export clients was conducted by the henry w. bloch center for small business and enterpreneurism during may, 1993. thirteen industries were chosen from the united states commerce department's "hot list". published &firectories of manufacturers were used to locate 1,485 companies located in the central midwest united states that produce goods within these indusuies. fourteen hundred and twenty-seven of these firms were surveyed regarding their general export experiences relative to mexico, capacity to fill orders, current sales efforts in mexico, belief regarding management assistance, whether a manufacturer's representative would augment their efforts, and interest in university-based t&ichnical assistance related to their exports to mexico. eleven hundred and four firms (77 percent) responded. 68 in addition, 103 mexican companies were identified that import and/or distribute goods in these industries. the national trade data base and other united states department of commerce sources were used in this effort. the vast majority of the importers and exporters who identified themselves to the foreign traders index of the department of commerce were located in mexico city. the concentration is probably due to the large percentage of mexico's population and economic activity that is concentrated in the capital, plus the close proximity to the center of federal government power. it is also easier for mexican im porters and distributors to contact the united states department of commerce when they are located in the same town as a consuhte. increasing trade with mexico the survey of potential export clients has identified 287 qualified leads for managerial and technical assistance. they indicated the ability to ship orders within 30 or 90 days. these firms do not have company personnel selling their pmducts in mexico nor do they have a representative in mexico. finally, 89 percent of these firms believe that the time and effort of a university-based export program, including a manufacturers representative, would benefit their sales efforts in mexico. ten percent of the firms indicated that they were in need of university-based technical assistance related to their mexico exports. figure i depicts the qualified leads from the various industries. figure 2 indicates 95 companies produce household consumer goods, 85 make building products, while 43 produce computer components and 4 make plastics. twenty firms operate in the pollution control industry and 21 make sporting goods. fifty-three companies operate in other industries. figure 1. potential expon clients qualified leads qmliftcd lcttdn other rcspondcnts 74% figure 2. qualified leads by industry poauuon conrnd 6% 6% plsstlcs other industncs 12% 16% consumer goods 26% ccmputers 12% 69 the firms are small to medium size, as depicted in figures 3 and 4. firm size was determined by its listing in published directories of manufacturers. one hundred seventy-four of the qualified leads had annual sales under $4.9 million. seventy-four achieved sales between $5 million and $9.9 million. one hundred twenty-eight of the companies were found to be employing between one and nine persons. fifty-two of the companies employed between 10and 24 people while g6 others employed between 25 and 99 people. twenty-one firms had a work force over 100 people. figure 3. qualified leads: annual sales 174 74 12 10 0 1 lo 4.9 5 lo 9.9 10 w 19.9 20 to 29.9 30 to 100 ovo 100 88 millions figure 4. size by number of employees 250 snd attovc 5 100 to 249 )6 25 to 99 86 10 to 24 52 1 to9 128 figure 5 shows that among the qualified leads who are currently exporting, 159 of the firms are selling their goods outside the united states while 12g are not. forty-two of the leads are exporting to mexico at this time (see figure 6). figure 5. qualified leads: current export stains 159 70 figure 6. qualified hadst expons to ltfexfco estss» io mos)s» ~2 (l5%) n 0 esp csls io m»tlso 245 (85%) the qualified leads appear to have excess capacity as demonstrated by their ability to ship orders within 30 or 90 days. figures 7 shows the number of firms that could fill particular dollar amounts of orders. forty-three companies could ship orders between $250,000 and $500,000 within 30 days, while 159 companies could ship this volume of orders within 90 days. seventyfour companies indicated that they could fill orders worth between $50,000 and $250,000 within 30 days and 106 firms indicated that they could meet this amount of orders in 90 days. one hundred and seventy qualified leads reported that they could fill orders between $0 and $50,000 within 30 days. this number fell to 22 firms at the 90 period as companies reported that they could meet even larger orders. figure 7. ability to ship an order within 30 or 90 days e3 30 days i 60 days 170 )59 106 74 43 22 0 io 50,000 50,000 io 250,000 250,000 io 500,000 many of the leads identified several areas where they are in need of technical assistance related to their exports to mexico (see figure 8). ~ 149 said that they needed help in the identification of partners, ~ 148 others indicated that international sales were an area of need, ~ 138 responded that they were in need of market research, ~ 138 specified tariffs and regulations as an area where they are in need of assistance, ~ 28 mentioned financial arrangements and collections, and ~ 117 identified uanslation and interpretation as an area of need. 71 figure 8. managerial and technical assistance needs tarins k rcgulaucn 4g% pins&&i ~1 arracgcmcnu 4 ccaccucns 44% translaucn gr m acrprnsuar 40% icicmaucnal s&lca sr% idccuticaucn nf psnncra st% mar&a res&arcs 4g% of all 1,104 responding firms, 220 respondents export to mexico (20 percent) and 178 companies export to countries other than mexico(16 percent). the remaining firms do not export. table 2 offers data on the sales volumes of all respondents that export to mexico, the firms that export to other countries, and the companies that do not export. table 2 sales vofume characteristics of firms that expotx to mexico respondents exporters other (nm1,104) to mexico exporters (nm 220) (n=178) $ 1 4.9 mm 629 579o 77 35% 76 43% $5 9.9 mm 220 209o 51 23% 59 33% $ 10 19.9mm 77 7% 26 12% 9 5% $2029.9 mm 99 99o 33 159o 18 10% $30-100 mm 55 5% 18 8%o 16 9% over $100 mm 22 2% 15 7% 0 0% note: sales information was obtained from published directories of firms and not from the survey. this information suggests that current exporters are larger than i irms in general and that this tendency is particularly strong in the case of exporters to mexico. figures 9 and 10 address the number of responding companies who export particular volumes of their goods to mexico. one hundred and seventy-eight firms do not export to mexico (16 percent) and 220 do export their products to mexico. figure 10 considers only those companies who export to mexico. one hundred and forty of these fi mls export less than $250,000 annually. twenty-six companies send between $250.000 and $500,0t)0, and 54 firms export over $500,000 a year to mexico. 72 figure 9. volume of exports to mexico over 500 (5%) 250 to 500 n%) 0 to 250 (13%) no ea pats (64%) no aapans to meairo (16%) $$ hundred thousands figure 10. export volume of firms exporting to mexico over 500 24% 250 w 500 12% $$ hundred tlteusenda one hundred and sixty respondents expected exports to grow at a faster rate than their domestic sales while 944 did not. given the slow growth (3.50percent) and projected growth of the united states economy, the emphasis on international business, and the higher growth rates of other nations, these results are surprising. table 3 examines the number of employees of the 160 firms that are bullish on their exports. table 4 looks at the sales volumes of these groups of companies while table 5 considers their export volume. table 3 number of employees of export bulls respondents all exporters export growth ) (n=1,104) (n=39&) domestic sales growth (n=160) 1-9 386 35% 32 89o 11 79o 10-24 243 229o 68 179o 21 13% 25 99 298 279o 135 34% 43 27% 100 249 122 119o 103 269o 53 33% 250 and above 55 5% 60 159o 32 20% 73 table 4 sales volume of export bulls respondents all exporters export growth & (n=1,104) (n =398) domestic sales growth (n=160) $ 1 4.9 mm 629 579o 151 389o 32 20% $5 9.9 mm 220 20% 111 299o 32 20% $ 1019.9 mm 77 7% 36 99o 32 20% $20 29.9 mm 99 9% 52 139o 23 14% $30100 mm 55 5% 36 99o 21 139o over $100 mm 22 2% 12 2% 20 13% table 5 export volume of export bulls all exporters export growth & (n =398) sales growth (n=160) $0 250 mm 212 53% 32 20% $250 500 mm 44 119o '20 139o over $ 100 mm 142 369o 108 67% the survey suggests that respondents who believe that their exports will grow faster than their domestic sales tend to be larger companies than other exporters and the respondents in general, both in terms of sales volume and number of employees. a higher percentage of these "export bulls", export over $500,000 per year, more than the exporters in general management and technical assistance the north american free trade agreement ensures that procedures will become simpler, but these changes are scheduled to take place gradually. a significant need revealed by this research is the establishment of university-based technical export assistance serving as the sales agent for mid-american firms'xports to mexico. the assisumce would determine the marketability of a firm's products ihrough an analysis of manufacturing costs, transportation costs, remaining tariffs, sales commissions, and resulting price. the examination would compare the firm's products relative to mexican consumers'references and buying patterns. 74 a university-based technical export assistance center would invoke a process of bringing suppliers and buyers progressively closer together. it would obtain the sales catalogue of potential supplier and published and personal company information to determine if the products merit further attention. the center staff would meet with the supplier to discuss the potential for the company's product in mexico and begin identifying distribution channels. these discussions could be the impetus for market research teams to analyze products'ales potential in mexico. initially, the university-based technical export assistance center would not be acting as a representative. however, if the discussions with distributors were positive, a sales agent contract would be established with mexico as the service territory. the university export assistance center would develop agreements with representatives, who would work in partnership with the company for the sale of goods in mexico. the center would earn a fee on sales made in mexico. the center would identify a representative to promote products in mexico and establish working relationships with those agents. the center would assist and coordinate the sales contract between the supplying firm and the end buyer. it would assure that irrevocable leuers of credit are obtained through reliable banks and would advise on arrangements for the shipment and delivery of goods. the center could not purchase goods or hold title to them; however, they would collect fees based on sales. this same service could identity mexican firms that have potential for exporting to the united states but lack a distribution channel the center would help those firms determine the marketability of their products and serve as their sales agent in the united states. the pattern of operations would be tailored to meet opportunities in the market and the needs of panicular customers. for example, some firms might be in need of only a portion of the services that a university-based technical export assistance center could provide. in such cases, the center might only handle the sale of the goods, leaving other considerations to the seller. on other occasions, they would accept market research assignments for firms who wanted to study potential in the mexican or north american markek other university-based centers could help a mexican firm establish a network of representatives throughout the united states and collect a fee on all sales. as the center develops trading relationships, it could make some sales directly to final buyers and expect suppliers to pay some fees as part of the cost of entering the international marketplace. these costs would vary based on particular cases but they would include translation and legal review of liability. a major function of a university-based technical export assistance center would be the maintenance of continual communication with representatives, buyers and other participants in the markets of mexico and the united states. the center would be reduced expenses for the supplier and would maintain a data base with accurate and current information regarding distribution opportunities, representatives, and other mauers. the center could also function openly as a representative "head hunter" to market its capacity to identify quality representatives for a particular fum's products. to mexico. summary and conclusions approximately 650 of survey respondents did not export and only 20 percent had general experience relative to mexico. the most significant finding is that approximately 90 percent of the firms believe that external managerial-technical assistance would best benefit their sales 75 efforts in mexico. the concept of a university-based technical export assistance center is not unique. the u.s. small business administration has sponsored the small business institute program and the small business development centers for over 20 and 13 years, respectively. the u.s. department of commerce has its minority business development program and university centers for economic development. the u.s. department of defense funds its procurement assistance centers on university campuses throughout the nation. the number of qualified leads suggests that no agency or individual firm is completely fulfilling the needs and opportunities revealed in this study. the research identified three individuals who broker trade between mexico and the united states, but none represent large numbers of small-to medium-sized businesses in mexico. two of the firms did express interest in panicipating in ventures that could grow out of this research. export agents are limited in the number of firms they can effectively represent, a clear and substantial demand appears to exist for this service, as many businesses whose products could have a market in mexico do not have representatives. references aguascalientes profile. 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(1993,april 21). personal interview. 77 an examination of rural and female-led firms: a resource approach | published in journal of small business strategy loading [contrib]/a11y/accessibility-menu.js jsbs menu articles articles all for authors editorial board about issues ethics statement sponsors search sorry, something went wrong. please try your search again. × articles blog posts rss feed enter the url below into your favorite rss reader. https://jsbs.scholasticahq.com/feed × articles vol. 31, issue 4, 2021 november 16, 2021 cdt an examination of rural and female-led firms: a resource approach marcos segantini, lori a. dickes, rural women psed resource theory external funding ccby-4.0 • https://doi.org/10.53703/001c.29472 photo by sincerely media on unsplash jsbs segantini, m., & dickes, l. a. (2021). an examination of rural and female-led firms: a resource approach. journal of small business strategy, 31(4), 20–39. https://doi.org/10.53703/001c.29472 save article as...▾ pdf xml citation (bibtex) data sets/files (7) download all (7) table 1. cox regression models, time-to-quit analysis download figure 1. metro women-lead nascent firms, survival curve download figure 2. rural women-lead nascent firms, survival curve download table 2. cox regression models, time-to-profits analysis download table 3. logit models, analysis of disengagement from the entrepreneurial process download figure 3. average marginal effect on survival, amount of monitored external funds received download table 4. logit models, analysis of achieving profitability status during the entrepreneurial process download sorry, something went wrong. please try again. if this problem reoccurs, please contact scholastica support error message: undefined × view more stats abstract previous studies in entrepreneurship research indicate that external funding is critical for entrepreneurial success and that spatial funding inequities between nascent rural and non-rural firms are ever-present. moreover, women entrepreneurs, rural or otherwise, receive fewer external resources than their male counterparts. to our knowledge there has been no research leveraging the panel study of entrepreneurial dynamics (psed), a representative dataset of american individuals trying to create new firms, to better understand differences between rural, non-rural and female-led firms in terms of their ability to stay engaged in the entrepreneurial process and to earn a profit. using the resource-based theory of the firm, this research will begin to examine some of the critical factors driving rural firm success and rural female-led firm success. we utilize cox and logistic regression models to analyze the time to quit, time to profit, and the likelihood of firm survival and profit generation for these firms. results reveal that externally monitored funds are a significant variable for rural firm success in comparison to non-rural firms and appear to be especially important for women-led nascent firms early in the firm gestation process. future research would benefit from further exploration of funding bias, entrepreneurial motivation and personal characteristics of rural, female-rural and their non-rural counterparts. this research adds to the literature on rural entrepreneurship by using the resource based theory of the firm in conjunction with the psed database to study the nature of firm success and firm profit for rural and female led rural firms. 1. introduction rural communities across the united states continue to experience the aftermath of industrial restructuring, globalization, the lingering effects of past recessions and the ongoing global pandemic and related impacts. the national council on state legislatures (farquhar, 2018) reports that, in comparison to suburban and urban communities, rural communities have stagnate or neglected infrastructure (roads, bridges, water, sewer, etc.) among the many challenges that they face. many rural communities are also disproportionately impacted by a wide spectrum of social and community challenges due to geography (remoteness), weak or declining tax base, lack of employment, declining population, poor community health and many other factors. these factors, in part, drove a population loss in rural areas from 2010-2016 and have also contributed to lower economic growth rates than in urban counties since the 1990s (cromartie, 2017). rural america is at a competitive disadvantage and economic and community development are obstructed by the factors identified above along with important economic development factors like access to capital and other small business development infrastructure. in fact, community banks, which often serve rural communities, have been declining for approximately 2 decades (reichow, 2017). community banks hold a larger share (35%) of small business loans as a percent of their total assets than larger banks (2%) (reichow, 2017) and as a result there are fewer small business loans being offered today than a decade ago. rural start-ups also receive less than 1% of venture capital resources (jacob, 2018). while the geographic challenges for rural communities are well known, rising spatial inequalities related to access to capital, innovation and other important small business and entrepreneurship infrastructure are a growing concern (florida, 2018). in contrast, women owned businesses in the united states have been increasing over the past several years. specifically, between 2014 and 2019, women-owned business increased 21%, employment 8% and revenue 21% (american express, 2019). respectively, women and minority owned firms have seen an 8% increase and no change in small business innovation research (sbir)/small business technology transfer (sttr) grants from 2005 to 2017 (liu & parilla, 2019). liu & parilla (2019) report that the vast majority of this funding goes to the 100 largest metropolitan areas. part-time entrepreneurship for women, often referred to as side-entrepreneurship, has increased 39% between 2014-2019 (american express, 2019). while these numbers do not highlight rural/urban differences specifically, the spatial distribution of female entrepreneurship, generally, supports the underlying challenge of gender disparities across the rural/urban spectrum (american express, 2019). entrepreneurship has long been held as one of the most critical tools to a broad based economic development approach for any community and rural communities are a critical component of our nation’s social and economic fabric. rural communities contain 72% of the nation’s land, approximately 46 million americans and 2305 counties across the nation. entrepreneurship is critically important for rural communities for all the same reasons it is for suburban and urban communities. although, as a driver of wealth creation, community reinvestment and potentially revitalization, it is of critical importance that we understand and study the landscape of rural entrepreneurship and the demographic factors related to it (foster, 2001). moreover, entrepreneurship can enhance community leadership, develop human capital, improve community pride and optimism and other key factors that support the short and long run health of a community (foster, 2001). even given the value and impact of entrepreneurship for all communities, there remain substantive gaps in our knowledge related to rural entrepreneurship and particularly gender variation(s) in conjunction with rurality. in this vein, we propose to utilize the panel study of entrepreneurial dynamics (psed), a representative dataset of american individuals trying to create new firms, to better understand differences between rural, non-rural and female led nascent rural firms in terms of their ability to stay engaged in the entrepreneurial process and to earn a profit. using the resource-based theory lens of the firm, this research will begin to characterize some of the similarities and differences driving rural firm success and rural female-led rural firm success. the psed database is the most comprehensive, longitudinal database on entrepreneurship in the united states. the geography variable in psed has not been exploited in the literature stream and provides an important lens in which to study entrepreneurship. cox and logistic regression models will be examined to understand the time to quit, time to profit, and the likelihood of firm survival and profit generation for rural, non-rural and female led-rural firms. this type of research is important to understand the unique needs of entrepreneurs in all types of settings. adds to the literature by leveraging the psed to study entrepreneurship in the context of both geography and gender. 2. prior studies on rural, women entrepreneurship and external funding previous studies in entrepreneurship research indicate that receiving external funding is critical for entrepreneurial success (hechavarría et al., 2016; liao et al., 2008). while personal wealth invested in the new venture decreases the likelihood of business’ discontinuity, external funding increases the probability of successfully creating a new firm. as liao & welsch (2003) revealed, the type of finance utilized influences a new firm’s time in gestation during the earliest phases of the entrepreneurial creation process. prior studies have also found that being funded is related to personal characteristics of the entrepreneur such as wealth, ethnicity, and other intangibles (frid, 2014; frid, wyman, & coffey, 2016; frid, wyman, gartner, et al., 2016; gartner et al., 2012). wealth, race, previous experience, and location emerged as drivers for acquiring external start-up financing. low-wealth entrepreneurs are less likely to get external funding, and even when they rec,eive funding, lower amounts are granted compared to wealthier entrepreneurs (frid, 2014; frid, wyman, & coffey, 2016; frid, wyman, gartner, et al., 2016; reynolds, 2011). in frid (2014), it is shown that race and prior start-up experience affect the source of funding acquired by nascent entrepreneurs. although with a weak significance, frid, wyman, & coffey (2016) found that nascent entrepreneurs living in rural areas are less likely to acquire external funding than those in metropolitan areas. thus, several characteristics, including the location of the entrepreneurs, may prevent them from receiving external funding. further, research shows that the more of an owner’s funds used to create a business, the greater the chances of being externally funded (frid, 2014; gartner et al., 2012). rural areas in the u.s. are by definition less affluent, with an annual median income of $57,652 for all u.s. counties from 2012-2017, $47,020 for mostly rural counties, and $44,020 for completely rural counties (guzman et al., 2018). even though rural and urban individuals in america show similar poverty rates, the former are more likely to experience persistent poverty. for over a decade, rural household median income has averaged 25% below that of urban households (bishaw & posey, 2016; usda, economic research service, 2021). consequently, on average, rural entrepreneurs may be less likely to rely on their personal funds to support their new businesses as the typical metropolitan entrepreneur. given the lack of own capital in rural settings, external funding could significantly impact the rural entrepreneur’s success, as loans constitute a key source of entrepreneurial financing (robb & robinson, 2010). the unavailability of funding to rural entrepreneurs may result in self-funding using retained earnings or family wealth. eschker et al. (2017) investigated the factors associated with rural entrepreneurs’ success and found that the reliance on external funding increased after a new rural firm operated for a couple of years. during this period of operations, personal contributions also decreased. interestingly, eschker et al. (2017) also revealed that using own or family savings combined with external funds was highly positively correlated with new rural venture profits. it also seems plausible that rural entrepreneurs, in comparison to urban counterparts, use more personal funds during the start-up gestation phase. the last appears to be especially important for minority entrepreneurs, i.e., african americans and hispanics (gartner et al., 2012). 2.1 external funding and women entrepreneurs given the critical role of external funding for entrepreneurial success and the perceived need to develop a more diverse and inclusive entrepreneurial landscape, it is crucial to review the barriers women entrepreneurs face in this regard. despite the steady growth of women-owned businesses in america (american express, 2019), they continue to face numerous obstacles to entrepreneurial success. financing new projects are one of these challenges. kwong et al. (2012) found that a more significant proportion of women are constrained by financial barriers than their male counterparts. however, other studies have found that nascent female entrepreneurs are no less likely to receive funding than men when controlling for several variables (frid, wyman, & coffey, 2016). despite this debate, on average, in 2021, women receive almost $5,000 less on total loan amounts than men in the u.s. while male entrepreneurs receive an average loan size of $43,916, businesswomen receive an average loan size of $38,942.[1] importantly, working with a national representative database of nascent entrepreneurs, coleman (2007) found that non-externally funded women-led nascent firms are significantly associated with firm growth, speculating this effect is more pronounced due to the use of their own funding. however, those same women-nascent entrepreneurs are less likely to earn profits when reluctant to seek external funding (coleman, 2007). also, coleman (2007) did not find any effect of financial capital on profitability nor growth of women-owned firms. however, financial capital resulted in being an essential factor for male-owned start-ups’ profitability and growth. as this literature illustrates, the debate remains on the effect of external funding on women-led venture performance, especially in empirical studies. also, key supply and demand factors inhibit women entrepreneurs from getting external funding. on the supply side, investors typically draw more attention to male entrepreneurs than women entrepreneurs (brooks et al., 2014). also, excluding networks (eddleston et al., 2016) and the gender biases that exist in investor and banking decision making (alesina et al., 2008) are other factors that inhibit women from obtaining external funding. boden & nucci (2000) argued that women are more comfortable with achieving stability than with growth from entrepreneurial activities and, usually have less access to external funding than male entrepreneurs. this situation leads to many women focusing their entrepreneurial intentions on service sectors that require low-level technical investments during the initial stages. looking on the demand side, women are significantly more reluctant than men to apply for a loan, even though they were no more likely to be turned down if they did apply (coleman, 2002). the “discourage borrower” phenomenon helps identify a creditworthy individual who does not apply for loans or other forms of external funding due to fear of denial. compared to men, women perceive more decisive financial obstacles to entrepreneurship, which may inhibit them from pursuing external funding (sena et al., 2012). consequently, women are more reliant on personal rather than external financial capital sources (coleman & robb, 2016). other factors associated with the inhibition of women to get external funds are less predilection to launch growth-oriented firms (bitler et al., 2001), being fewer risk-takers (sánchez cañizares & fuentes garcía, 2010), and less financial knowledge (lusardi & mitchell, 2014). different motivations towards entrepreneurship can also shape their perceived need to obtain external funds: brush et al. (2008), using expectancy theory, found that men are motivated primarily by financial gains, self-realization, and autonomy to start a company. in contrast, women have a broader set of factors motivating them to start a new company. also, manolova et al. (2012) reveal that men want to grow their new businesses to achieve financial success, while women want to achieve growth for a complex series of reasons, financial success being just one of them. 2.3 rural women entrepreneurs and external funding fostering entrepreneurship emerges as an effective strategy to expand new economic activities that can support economic growth in rural areas (li et al., 2019). as reviewed previously, external funding is a powerful resource to foster the development of new businesses. both groups, rural entrepreneurs and women entrepreneurs, struggle to get external funding. consequently, rural women entrepreneurs might face specific challenges in this regard which are worth examining. broadly, rural community characteristics can create barriers for women entrepreneurs to obtain external funds. to name a few, a low endowment of resources, such as in financial capital (kungwansupaphan & leihaothabam, 2016), human capital (prasad et al., 2013; tambunan, 2009), and social capital (prasad et al., 2013) are all necessary for entrepreneurial development for women rural entrepreneurs and may be lacking in these settings. this lack of critical resources for entrepreneurs is combined with a low population density in rural communities, limiting the local demand (dabson, 2001). thus, it should not be a surprise that female business ownership in rural communities is associated with low firm performance (eschker et al., 2017). however, research regarding how external funding impacts minorities such as rural women entrepreneurs remains absent in the american entrepreneurship research literature. external funding is a critical financial resource and understanding the role and relative importance of external funding for those entrepreneurs in rural communities is an important area of exploration. however, the lack of external funding sources for rural communities in america has been highlighted, even from the public sector (pages & markley, 2004). further, the knowledge that external funding obstacles disproportionately affect rural women entrepreneurs is well-known internationally. financial capital fosters rural women to engage in business activities and influences their strategic decisions, but its effects vary with having (or not) prior entrepreneurial experience (kungwansupaphan & leihaothabam, 2016). thus, receiving external funding could also be related to prior entrepreneurial experience, as pointed out for entrepreneurs in general by frid, wyman, & coffey (2016). internationally, microloans have often been a feasible solution for rural women entrepreneurs and their performance, especially in southern asia (afrin et al., 2009; ghouse et al., 2017; jyoti et al., 2011; kungwansupaphan & leihaothabam, 2016). however, the only assessment for developed countries comes from the study of brana (2013), who found that gender is a decisive factor in the amount of micro-credit provided to borrowers when controlling for other factors in france’s borrower firm profile. even with the clear impact of microloans for women entrepreneurs, microloans still reinforce gender inequalities among female and male-led businesses. 3. the resource-based theory applied for rural women-led businesses under the influence of edith penrose’s theory of the growth of the firm (penrose, 1959), the resource-based theory aims to answer why some firms perform better than others. in entrepreneurship research, resource‐based theory conceptualizes new firms as bearing a set of resources at their initial stages that confer them (or not) with competitive advantages (barney, 1991; hall, 1992; wernerfelt, 1984), influencing their shortand long-term performance. from the viewpoint that entrepreneurship is a creative process of combining opportunities and resources (shane & venkataraman, 2000), the individual entrepreneur creates a unique combination of tangible and intangible resources to compete against existing rivals in the market. this process begins with a business idea, and in transforming the idea into a reality, the entrepreneur moves forward until the need to identify how to acquire additional tangible and intangible resources for the start‐up (timmons, 1994). an essential resource, financial capital, often comes initially from personal, family, and friends. external funding sources are often unreachable for nascent entrepreneurs. therefore, the nascent entrepreneur’s initial capital is the one that he or she owns or can raise to go on to the preliminary stages of the firm creation process, which is especially true in rural settings (eschker et al., 2017). frid (2014) and gartner et al. (2012) analyzed new companies’ capital structure in the nascent context, demonstrating that nascent entrepreneurs tend to use personal funds as the primary financing source during the initial stages of the entrepreneurial process. hechavarría et al. (2016) challenged these results by applying event history analysis and proving that a capital structure composed of external funds (equity) is positively associated with accelerating new firm creation. hechavarría et al. (2016) also found that firms whose capital structure consists of greater amounts of external loans and or equity are less likely to disengage from the entrepreneurial process. in this sense, external capital resources could add more value to investee firms than private savings. as a result, there is an association between monitored external funding and firm creation and survival. for this reason, the first set of hypotheses in this research states; h1a: receiving monitored external funding de-accelerates abandoning the process of new firm creation for nascent rural firms. h1b: receiving monitored external funding reduces the timing for achieving profitability for nascent rural firms. h1c: the amount of monitored external funding is associated negatively with the probability of abandoning the firm creation process for nascent rural firms. h1d: the amount of monitored external funding is associated positively with the probability of achieving profits for nascent rural firms. understanding nascent business performance in rural settings through hypotheses h1a-d is the first component of this research. next, we will examine how external funding impacts the gap(s) between urban and rural female-led new businesses. in doing so, we start to narrow the focus until understanding the role of monitored external funding on female urban and female rural businesses’ performance. as aforementioned, funding is a crucial resource in entrepreneurial development. as reviewed, women entrepreneurs have difficulties in receiving external funding (alesina et al., 2008; bitler et al., 2001; coleman, 2002, 2007; coleman & robb, 2016; lusardi & mitchell, 2014; sánchez cañizares & fuentes garcía, 2010; sena et al., 2012). thus, from a resource-based theory perspective, receiving external funding reduces an entrepreneur’s need for capital and could be a strategic resource for a deprived group such as rural women entrepreneurs. thus, the following set of hypotheses seeks to test if receiving external funding affects rural women’s firm performance. h2a: women-led nascent firms that received monitored external funding are slower than those not funded to abandon the firm creation process in urban and rural nascent settings. h2b: women-led nascent firms that received monitored external funding are faster than those not -funded in creating a profitable nascent firm in urban and rural nascent settings. h2c: the amount of monitored external funding is associated negatively with the likelihood of abandoning the firm creation process for women-led nascent rural firms. h2d: the amount of monitored external funding is associated positively with the likelihood of profitability for women-led nascent rural firms from the resource-based perspective, other intangible resources are also of interest and important for this study. perhaps knowledge is the most important of these resources, whether that knowledge comes from the entrepreneur or other new firm members. knowledge is the basis for the rent-earning potential of the other resources the firm possesses (grant, 1996). knowledge is not easy to exchange: there is an essential distinction in this regard between tacit and codified knowledge (nonaka & takeuchi, 1995; polanyi, 1975). tacit knowledge is an individual’s internalized information, which is tough to formalize and communicate with other individuals. codified knowledge is formalized and standardized information that we all have access to. thus, codified knowledge is more straightforward to transfer between individuals. studies have investigated the effects of these different forms of knowledge on new firm performance through entrepreneurs’ formal education (codified knowledge) and industry‐specific, managerial, and prior entrepreneurial experience (tacit knowledge) (burton et al., 2002; delmar & shane, 2003; hellmann & puri, 2002; muñoz-bullon et al., 2015; shane, 2000; singh & crump, 2007). in summary, this research argues that where an entrepreneur has a high human capital endowment, there is a positive association with the opportunity for entrepreneurial success. consequently, human capital is a key resource that affects the entrepreneurial process, increasing the ability to exploit latent opportunities and even acquire other resources, such as external funding. frid, wyman, & coffey (2016) found that higher levels of managerial experience and education are positively associated with the reception and more significant amounts of external funding received by nascent entrepreneurs in the u.s. social capital is another essential resource, which refers to entrepreneurs’ interpersonal relationships. like any other kind of capital, this resource is accumulated through entrepreneurs’ careers (burton et al., 2002). social capital accumulation simplifies information access and identifies other tangible resources such as financing tools (casey, 2014). entrepreneurs that are more skilled in taking advantage of their networks and connections use their social capital differently from the rest (liao & welsch, 2003). thus, social capital can be a critical source of support for rural women to pursue entrepreneurial activities by simplifying their recognition of potential market opportunities and attracting external investors through their ties beyond their immediate communities. 4. methods the panel study of entrepreneurial dynamics (psed) is a representative longitudinal dataset of individuals trying to start businesses in the u.s. this dataset offers substantial advantages, such as avoiding survivorship and the recall biases observed in other longitudinal studies for entrepreneurship (gartner et al., 2012). psed-i consists of a maximum of four waves for every individual (nascent entrepreneurs) collected between 1999 and 2003, and psed-ii has a maximum of six waves for each nascent entrepreneur, collected between 2005 and 2012. psed-i and ii were matched in a single dataset, which is the source of this study. 2044 cases of nascent new firms resulted from matching psed-i and ii. however, the number of cases analyzed varies for each model since there are some considerations to account for independently (no-appropriated cases included in the analysis, outliers), and this will be explained in the analysis section. the entrepreneurial gestational phase is the period under observation in this analysis. gestation starts when a nascent firm is conceived (the conception). gestation is completed when a nascent firm disengages from the entrepreneurial process or when finally, it becomes a profitable firm. conception occurs when two intended activities to create a firm have been taken within a twelve-month window[2] (reynolds & curtin, 2008, 2011). 4.1 dependent variables the analysis focuses on the time taken from firm conception until disengaging from the entrepreneurial process, comparing non-rural, rural, and rural-women nascent firms. this event occurs when an entrepreneur reports that no one is managing the start-up anymore. the second model tests the dependent variable of the time to reach six months of profits in a row. the convention among psed analysts is to treat this variable as “firm creation”: the event occurs when the entrepreneur reports profits for the first time, defined as positive cash flow for six of the previous twelve months in psed-ii and three of the past twelve months in psed-i (reynolds & curtin, 2008). when analyzing both the disengagement from the entrepreneurial process and profitability status, those nascent firms that have not had one of these outcomes are labeled as “still trying” and will be the right-censored cases. next, the analysis aims to test the same variable but with another modeling strategy (see 4.4), focusing on how some resources of non-rural, rural, and women rural entrepreneurs affect disengagement and profitability. for this analysis, the dependent variable is dichotomous: first, quit =1 for those firms disengaged from the entrepreneurial process and =0 otherwise. the variable profits =1 for those nascent firms that reach six months of profitability during the entrepreneurial process and =0 if not. 4.2 independent variables based on resource theory, we develop variables to capture how resources impact rural and rural women-led nascent firms. in the case of financing resources, this study includes the variable mef, a categorical variable that measures whether the start-up has not received any external monitored funding (=0) or has received it (=1). the percentage of personal funding of the total funds invested in the start-up, funper, measures entrepreneurs’ personal resources in their nascent firms. frid, wyman, & coffey (2016) and gartner et al. (2012) found that the more personal funds invested in the start-up, the higher the chances of obtaining external funds, subsequently affecting positively on nascent firms’ survival. also, entrepreneurs’ household net-worth[3] (hnw, corrected for 2005 prices) is a proxy of the individual’s wealth. the last variable aimed to measure entrepreneurs’ financial resources is totfund, which is the total funds invested in the nascent firm by the entrepreneurs or group of entrepreneurs, irrespective of the source. psed-i only asks the educational level of the respondent. thus, codified human capital (formal education) is quantified using a categorical variable. the base category is high school degree or less (=0); have finished a tech, community, or have some college studies (=1), those who finished college or some graduate training (=2), holding a master’s degree, (=3), holding a ph.d. degree (=4) and this classification is just for the survey respondent. categories 3 and 4 are composed into one due to the small number of cases holding a ph.d. for models 6-13. tacit human capital is measured as follows. the variable indexp measures the number of years of experience for each owner in the same industry that the nascent firm aims to operate. similarly, stpexp, measures the number of prior start-up attempts for each entrepreneur. both indexp and stpexp are measured for each psed wave; thus, it is a time-varying variable when evaluating time-to-events since entrepreneurs leave and join the nascent firm during this longitudinal survey collecting process. the variable mang measures the entrepreneur’s managerial experience in years but measured only in the first interview, and thus, it is a fixed independent variable. following the resource-based theory, another intangible resource is social capital. the variable bonding measures the total non-owner family helpers that the entrepreneurs declare of importance for the development of their nascent firm. the variable bridging counts the number of non-family and non-friend helpers, aiming to measure the entrepreneurs’ external network. lastly, when evaluating the amounts of funding in models 6-13, different independent variables are introduced. the amount of external monitored funding, monfun, is the same applied by gartner et al. (2012), frid, wyman, & coffey (2016), and frid (2014). virtually all entrepreneurs use personal and team members’ money to invest in their projects. however, in terms of obtaining funding from external sources, gartner et al. (2012) note that two categories arise with distinct levels of oversight and involvement: unmonitored and monitored funding sources. the former involves funding coming from family members, friends, a second mortgage, or credit cards. these sources are not strictly monitored, but they are measured using the variable unmonf. also, perfun measures the amount of personal funds invested. all these variables are adjusted to 2005 prices and are measured in logs. 4.3 control variables the firm size affects disengagement from the entrepreneurial process, as carroll & hannan (2000) have shown. the last is controlled using a time-varying variable that measures the number of owners of the nascent firm. also, a categorical variable labeling the principal economic activity of the nascent firm is included. this variable is labeled 0 for nascent firms in the business service market, =1 extractive sector, =2 transforming sectors, =3 consumer-oriented sectors, and =4 for other sectors/n.a. finally, following delmar & shane (2003), an entrepreneur’s growth preference is a dichotomous variable, accounting for entrepreneurs’ over-optimistic inclinations, leading them to undervalue competition and overestimate growth aspirations. 4.4 models model results are illustrated in tables 1-2. these models utilize a cox (1972) regression analysis to examine the time to disengage from the entrepreneurial process and time to reach profitability. a cox model is essentially a regression model normally applied to explore the association between the time until an event occurs (dependent variable) and one or more independent variables. in our case, these events are the time to exit the entrepreneurial process and the time to become a profitable firm by using the definitions highlighted above. models 1-2 include rural and female-led firm dummy variables to understand the association between rurality and gender on entrepreneurial success and profitability. survival analysis of female-led nascent firms in metro and rural settings is presented in figures 1 and 2 as survival curves. these models explore the importance of external funding for rural, female-led ventures as it relates to firm survival. tables 3 and 4 present the results of logit models, which examine the hypotheses focused on disengagement from and profitability during the entrepreneurial process. three logistic (logit) models, one for all nascent firms, one for nascent rural firms, and the last one for rural, nascent, female-led firms, are analyzed for firm disengagement and profitability, respectively. logistic regressions are used to examine the relationship between a binary response probability and a set of explanatory variables. in our case, the binary response variables are quitting from the entrepreneurial process and having reached six months of profits in a row or not. model results highlight the importance of externally monitored funds and, while mixed on rurality and gender, underscore the importance of additional research on entrepreneurship’s rural and gender-related questions of entrepreneurship. 5. results 5.1 – time to close firm’s operations in this sample, 630 firms closed their operations, and 495 are censored (still trying to become profitable). table 3 presents the empirical results. model 1, table 1, incorporates the control variables plus a dummy variable, “receiving external funding.” model 2, table 1, includes all of the variables mentioned above and two dummies, rural firms, and female-led ventures. one of the independent variables at least contributes significantly to explain the event of interest’s duration. the likelihood-ratio chi-square indicates the difference between -2 partial log-likelihood for the model with 20 covariates for model 1 and 22 for model 2 and the null model with no independent variables. as its p-value is <0.001, it is feasible to reject the null hypothesis of the model’s overall significance. the aic test further allows us to say that model 2, modestly, explains a more significant portion of the variance of the dependent variable than model 1 does. table 1 reports each models’ hazard ratios and exponentiated coefficients. if the hazard ratio is greater than 1 for a variable of interest, higher levels of that independent variable are associated with a higher incidence of disengagement, controlling for other variables in the model. the exponentiated coefficients help to understand the size of the relationship between variables and time to nascent firms’ closure. table 1.cox regression models, time-to-quit analysis dependent variable: time in months, quit model 1(ß) (exp ß) model 2(ß) (exp ß) rural (yes=1) 0.224* 1.251* (0.098) female (yes=1) 0.031 1.031 (0.088) mon. external funding (yes=1) -0.489*** 0.613*** -0.495*** 0.610*** (0.126) (0.126) personal funding % -0.022*** 0.978*** -0.022*** 0.978*** (0.002) (0.002) household net-worth 0.001* 1.001* 0.001* 1.001* (0.000) (0.000) total funding invested -0.00001 1.000 -0.00001 1.000 (0.000) (0.000) educ. (1=community, or some college) -0.244* 0.783* -0.233+ 0.792+ (0.103) (0.104) educ. (2=college or some graduate training) -0.071 0.932 -0.033 0.967 (0.110) (0.112) educ. (3=master’s degree) -0.350+ 0.704+ -0.325+ 0.723+ (0.175) (0.175) educ. (4=ph.d. degree) -0.759** 0.468** -0.710* 0.491* (0.284) (0.284) industry exp. (years) -0.009* 0.991* -0.009* 0.991* (0.003) (0.003) start-up exp. (years) -0.012 0.988 -0.014 0.986 (0.017) (0.017) managerial exp. (years) 0.006** 1.006** 0.005* 1.005* (0.002) (0.002) bonding – social capital -0.025 0.975 -0.029 0.972 (0.048) (0.048) bridging – social capital 0.002 1.002 0.002 1.002 (0.032) (0.032) team size 0.007 1.007 0.008 1.008 (0.008) (0.008) growth asp. (“as large as possible” =1) 0.116 1.123 0.140 1.151 (0.093) (0.094) type of business (=1, extractive sector) -0.053 0.949 -0.121 0.886 (0.237) (0.240) type of business (=2, transforming sector) 0.264* 1.303* 0.246+ 1.279+ (0.112) (0.114) type of business (=3, consum. oriented sector) 0.145 1.156 0.143 1.153 (0.091) (0.091) type of business (=4, other sectors/na) -0.037 0.964 -0.125 0.883 (0.495) (0.496) conception lag -0.021*** 0.979*** -0.021*** 0.979*** (0.003) (0.003) lr test 633.100*** (df = 20) 638.245*** (df = 22) aic 7845.3 7844.2 note: +p<0.1; *p<0.05; **p<0.01; ***p<0.001; standard errors in parentheses models 1 and 2 indicate that nascent firms granted with monitored-external funding have the disengagement hazard of 61% of those non-funded (p-value<0.001). the inclusion of rural and female dummy variables did not change its significance or this relationship’s strength. the “female” dummy variable inclusion did not show any significant relationship with the time to disengage from the entrepreneurial process. however, nascent rural firms show a higher hazard of stopping their operations than non-rural nascent ventures: the odds of stopping operations of nascent rural ventures are 1.25 compared to non-rural ventures, holding all variables constant (p-value <0.05), confirming hypothesis h1a. models 1 and 2 also show important relationships between an independent variable and the time to close operations. the percentage of personal funding invested in the firm is crucial to understand disengagement from the entrepreneurial process. with an increase in the percentage of personal funds invested in the new venture, closing operations’ hazard goes down by an estimated 2.2% (p-value<0.001). unsurprisingly, entrepreneurs’ household net-worth is negatively associated with disengaging from the entrepreneurial process in both models (p-value<0.05). human capital variables are also of importance in understanding quitting rates. since our variable is a categorical one, every coefficient for an educational category represents a comparison to the base category (high-school or less) of the odds of disengaging. in model 1, holding other variables constant, those entrepreneurs with a community college degree or some college training show a hazard rate of disengagement of 78% of those with high school or less (p-value <0.05). entrepreneurs holding a master’s degree account for a hazard rate of disengagement of 70% of those with a high school education or less, but this relationship’s strength is weak (p-value <0.1). entrepreneurs that reached a ph.d. level show a hazard rate of disengagement of 46% of those with a high school education or less. interestingly, when female and rural dummies are entered in model 2, these relationships lose strength, reducing their significance, which might be related to a lower value of the human capital level for potentially more disadvantaged female and rural entrepreneurs. industry experience and managerial experience are both explicative of the time it takes a firm to close its operations. these tacit human capital variables are related to this outcome in opposite directions. each additional year of industry experience of the nascent venture owner reduces the monthly hazard of closing operations by -1% (p-value<0.05). in the case of managerial experience, an additional year of experience increases the monthly hazard of quitting by 0.6% (p-value<0.01). this last association could mean that entrepreneurs with higher managerial experience could be more aware of when they should close their business than those with a lower managerial experience. the only sector that accounts for a significant relationship with the time to exiting the entrepreneurial process is the transformative sector (compared to the business service sector, base category). in this case, the hazard rate of abandoning the entrepreneurial process for nascent firms in the transforming sector is 130% of those in the business service sector (p-value<0.05). the power of this relationship decreases after introducing female and rural dummies in model 2. figures 1 and 2 presents the survival curve estimates for women-led nascent ventures in metro and rural settings, respectively. the number 1 on the y-axis represents the total nascent firms. any reduction from 1 means the proportion of nascent firms that disengage from the entrepreneurial process given the time that has passed on the x-axis. based on these estimates, the survival curves of women-led firms that received external funding in metro areas are virtually indistinguishable from the non-funded (figure 1); the curves’ confidence intervals are appreciably superposed during the first five years of operations. figure 1.metro women-lead nascent firms, survival curve figure 2.rural women-lead nascent firms, survival curve for the first year and a half of operations of rural women-led firms (18 months), the survival curve of those who received externally monitored funds (green line) is significantly different and superior to the non-funded (blue line) in figure 2. as time evolves, both groups of rural women-led nascent firms tend to behave similarly: the survival curves’ confidence intervals are overlaid but more separated than the metropolitan women-led firms shown in figure 1. as a result of figure 1 and 2, it is possible to confirm, at least partially, hypotheses 2a. women-led nascent firms granted external funding are slower than those in rural areas to disengage from the entrepreneurial process, especially during the initial months of operations. 5.2 – time to become a profitable firm in the next modeling phase, we took out firms disengaged from the entrepreneurial process to analyze the time to reach six months in a row of profits. consequently, we have a sample containing 406 cases that reached profitability and 495 censored cases (to the right), trying to become profitable projects. table 2, model 3 describes the empirical results, including the control variables plus the dummy variable, receiving monitored external funding. model 4 shows a model that includes the same variables plus two dummies: rural and female-led firms. in model 3, the likelihood ratio shows a p-value of <0.001, meaning that at least one of the independent variables contributes significantly to explain the time to the profitability status, rejecting the null hypothesis of overall model significance. the same occurs for model 4. the aic test shows that model 3 explains a higher fraction of the dependent variable’s variance than model 4. table 2.cox regression models, time-to-profits analysis dependent variable: time in months, quit model 3(ß) exp(ß) model 4(ß) exp 4(ß) rural (yes=1) 0.051 1.052 (0.124) (0.124) female (yes=1) -0.057 0.944 (0.115) (0.115) mon. external funding (yes=1) 0.194 1.214 0.192 1.212 (0.111) (0.111) (0.111) (0.111) personal funding % -0.001 0.999 -0.001 0.999 (0.001) (0.001) (0.001) (0.001) household networth 0.000 1.000 0.000 1.000 (0.000) (0.000) (0.000) (0.000) total funding invested -0.000 1.000 -0.000 1.000 (0.000) (0.000) (0.000) (0.000) educ. (1=community, or some college) 0.107 1.113 0.107 1.113 (0.143) (0.143) (0.143) (0.143) educ. (2=college or some graduate training) 0.051 1.052 0.056 1.057 (0.158) (0.158) (0.158) (0.158) educ. (3=master’s degree) -0.161 0.851 -0.155 0.856 (0.205) (0.205) (0.205) (0.205) educ. (4=ph.d. degree) -0.026 0.974 -0.015 0.985 (0.272) (0.272) (0.273) (0.273) industry exp. (years) 0.009** 1.009** 0.008** 1.008** (0.003) (0.003) (0.003) (0.003) start-up exp. (years) 0.011 1.011 0.011 1.011 (0.008) (0.008) (0.008) (0.008) managerial exp. (years) -0.005+ 0.995+ -0.005+ 0.995+ (0.003) (0.003) (0.003) (0.003) bonding – social capital 0.096+ 1.101+ 0.097+ 1.102+ (0.052) (0.052) (0.052) (0.052) bridging – social capital 0.060 1.062 0.064+ 1.066+ (0.036) (0.036) (0.037) (0.037) team size 0.019 1.019 0.017 1.017 (0.027) (0.027) (0.028) (0.028) growth asp. (“as large as possible” =1) -0.141 0.868 -0.140 0.869 (0.127) (0.127) (0.127) (0.127) type of business (=1, extractive sector) -0.322 0.725 -0.342 0.710 (0.280) (0.280) (0.283) (0.283) type of business (=2, transforming sector) 0.410** 1.506** 0.400** 1.491** (0.128) (0.128) (0.129) (0.129) type of business (=3, consum. oriented sector) 0.028 1.028 0.027 1.027 (0.121) (0.121) (0.121) (0.121) type of business (=4, other sectors/na) -0.889 0.411 -0.885 0.413 (0.730) (0.730) (0.730) (0.730) conception lag -0.021*** 0.979*** -0.021*** 0.980*** (0.003) (0.003) (0.003) (0.003) lr test 104.965*** (df = 20) 105.391*** (df = 22) aic 5127.8 5131.4 note: +p<0.1; *p<0.05; **p<0.01; ***p<0.001; standard errors in parentheses other inquiries aimed to test reaching profitability through event history modeling found few variables contributing to explain this outcome (hechavarría et al., 2016). neither models 3 nor 4 show a significant relationship between the percentage of monitored external funding invested in understanding profitability. thus hypothesis, 1b should be rejected. nor was the case of rural or female dummy variables in model 4, and thus, also 2b should be rejected as well. the strongest relationship found was between industry experience and the time to reach profitability status. from models 3 and 4, it is possible to note that each additional year of industry experience of a nascent firm owner increases the hazard of profitability by nearly 1% (p-value<0.01). interestingly, social capital variables (bonding and bridging) account for a positive (weak) association with the hazard of profitability. in model 3, an additional family helper (bonding social capital) increases the hazard of profitability by nearly 10% (p-value<0.1). in model 4, this relationship remains unchanged, but after the inclusion of both rural and female dummy variables, an additional non-family helper’s contribution (bridging social capital) also increases the hazard of reaching profitability status by 6.6 (p-value<0.1). the economic activity of nascent firms was also a critical predictor in models 3 and 4. specifically, nascent firms aiming to operate in the transforming sector are about 1.5 times more likely to achieve profitability than those in business sectors (p-value<0.01). 5.3 – external funding amount on termination table 3 shows the empirical results of models 5, 6, and 7. these models aim to test the relationship between the amount of externally non-monitored funding granted and the likelihood of disengaging from the entrepreneurial process. model 5 does this for the whole nascent firms’ database, model 6 for all rural entrepreneurial firms, and model 7 shows the results for the database compressed of those businesses owned by rural women. estimates, standard errors, odds ratios, and indicators of overall fit for models 5, 6, and 7 are shown in table 4. the probability of termination of the nascent firm (quit, coded 0 for still operating firms and 1 for those who left the entrepreneurial process) was analyzed as a function of the amount of monitored external funding received and several independent variables in a simple logistic regression equation. for model 5, assumptions were met, and indicators of influence were also examined. of the initial 2044 cases combining psed-i and psed-ii databases, 445 were removed from the analysis due to being not labeled as “good cases[4].” also, 427 that became profitable firms were not considered for this analysis and were removed from the database. six cases identified as extreme outlier values were removed (z-scores higher than |6|), resulting in a substantially improved model fit when the final 1166 cases were analyzed. table 3.logit models, analysis of disengagement from the entrepreneurial process dependent variable quit = 1 model 5 odds ratio model 6 odds ratio model 7 odds ratio monitored external funding invested, amount (logs) -0.305*** 0.737*** -0.296* 0.744* -0.666 0.514 (0.072) (0.145) (0.406) personal funding invested, amount (logs) -0.248** 0.780** -0.461* 0.631* -1.266* 0.282* (0.088) (0.224) (0.555) unmonitored external funding invested, amount (logs) 0.231* 1.260* 0.158 1.171 0.098 1.103 (0.095) (0.221) (0.450) household net-worth, logs -0.012 0.988 0.015 1.016 0.289 1.335 (0.065) (0.173) (0.370) educ. (1=community, or some college) -0.194 0.824 -0.544+ 0.580+ 0.780 2.182 (0.167) (0.325) (0.741) educ. (2=college or some graduate training) -0.032 0.969 -0.917* 0.400* -0.431 0.650 (0.181) (0.432) (0.997) educ. (3=postgraduate studies) -0.597* 0.550* -0.734 0.480 0.993 2.699 (0.239) (0.533) (1.544) industry exp. (years) -0.295*** 0.744*** -0.351* 0.704* -0.760+ 0.468 (0.084) (0.164) (0.439) start-up exp. (years) -0.209+ 0.811+ -0.232 0.793 -0.588 0.555 (0.116) (0.246) (0.566) managerial exp. (years) 0.468*** 1.596*** 0.503* 1.654* 1.280** 3.596** (0.095) (0.202) (0.461) bonding – social capital -0.057 0.945 0.011 1.012 -0.157 0.854 (0.065) (0.142) (0.340) bridging – social capital 0.061 1.063 0.119 1.126 0.188 1.207 (0.066) (0.178) (0.386) team size 0.187* 1.206* 0.239 1.270 0.994 2.703 (0.073) (0.199) (0.743) growth asp. (“as large as possible” =1) 0.139 1.149 0.432 1.540 -0.339 0.713 (0.151) (0.386) (1.000) type of business (=1, extractive sector) -0.166 0.847 0.030 1.031 -1.209 0.299 (0.347) (0.518) (1.554) type of business (=2, transforming sector) 0.227 1.255 -0.195 0.823 -0.313 0.731 (0.184) (0.385) (0.891) type of business (=3, consum. oriented sector) 0.081 1.084 -0.033 0.968 -0.345 0.708 (0.143) (0.326) (0.716) type of business (=4, other sectors/na) -0.072 0.930 1.108 3.029 0.801 2.228 (0.664) (1.542) (2.473) constant 0.333* 1.395* 0.757* 2.132* 0.210 1.234 (0.162) (0.333) (0.785) observations 1,166 293 85 log likelihood -762.783 -168.654 -37.764 χ2test 103.9 (df=18, p-value <0.001) 30.35 (df=18, p-value <0.05) 30.20 (df=18, p-value <0.05) note: +p<0.1; *p<0.05; **p<0.01; ***p<0.001; standard errors in parentheses model 5 includes all nascent firms in the database, and at least one of the variables explains significantly better a portion of the dependent variable’s variance than an empty model does. (χ2 = 103.9, 18 degrees of freedom, p-value < .001). the odds ratio column of model 5 indicates that the chances of project termination decrease by 26% from a unit increase in the amount of monitored external funding received (p-value < 0.001) relative to those that did not receive an additional percent unit. also, other capital resources significantly explain the termination probability. for both, an increase in unmonitored external funding and personal funding invested influences the odds of termination. a decrease of 22% in the termination odds is expected due to a unit increase in personal funds invested (p-value < 0.01) relative to those that did not receive this type of funding. in the case of a unit increase in the amount of unmonitored external funding invested, a 26% increase in the odds of termination is expected (p-value < 0.05). recall that unmonitored external funding is capital coming from family and friends, meaning that a family or friend’s financial involvement in the project could harm its survival chances. in the case of other intangible resources, the results are the following. the proxies of codified human capital (education) are non-significant, except for postgraduate entrepreneurs: the odds of quitting his/her nascent firm is only 65% of the odds termination of a non-high school graduated entrepreneur (p-value < 0.05). tacit human capital variables also account for significant effects. in the case of having an additional year of industry experience in the same economic activity of the nascent firm, there is a 26% reduction in the odds of termination (p-value < 0.001) expected. a year increase in start-up experience is associated with an odds decrease of 22% for project termination. however, this is a weak association (p-value < 0.01) with this relationship. lastly, a year increase in managerial experience is associated with an increased odds of project termination (59%, p-value < 0.001). as mentioned previously, this can result from more experience in detecting when exiting the market is necessary compared to those with less managerial experience. the only control variable showing a significant association with the odds of termination is the size of the team: an increase in one member, the odds of termination increases by 21% (p-value < 0.05). in model 6, the analysis was completed using the subsample of rural firms. assumptions were met, and of the 2044 cases from psed-i and psed-ii combined, 480 are nascent firms in rural settings (non-rural firms were removed). we also removed nascent firms labeled as not “good cases” and those profitable ones, leaving 293 nascent rural firms in this subsample. virtually unchanged from model 5, the odds ratio of the amount of monitored external funding received shows that project termination’ odds decrease by 26% (p-value < 0.001) when this variable increases by one percent unit. thus, hypothesis 1c is confirmed. model 6 also shows that the relationship between personal funds invested and the odds of termination is expected to decrease. however, this decrease is more pronounced for nascent rural firms (37%) than for all firms considered (p-value < 0.05). while monitored external funding exerts a similar influence on nascent rural firms, the amount of personal funds invested is more critical for rural firms than their non-rural counterparts. unmonitored external funds variable did not influence rural firms, as it did when all firms were considered. model 6 indicates that in rural settings, entrepreneurs with some college training or a community college degree have 58% odds of firm closure compared to those entrepreneurs who did not complete high school (p-value < 0.10). also, a rural entrepreneur who holds a college degree has a 40% odds of exiting the entrepreneurial process compared to a rural entrepreneur who did not complete high school. in the case of tacit human capital variables, having an additional year of industry experience in the same economic activity of the nascent rural firm resulted in a 30% reduction of the odds of termination (p-value < 0.05). a year increase in start-up experience is not associated with any effect on the odds of project termination in rural settings. in contrast, a year increase in managerial experience is associated with a higher increase in the odds of a rural project termination (65%, p-value < 0.05). neither social capital nor control variables show any significant association with the odds of termination in model 6. model 7 analyses women-led firms in rural settings. the previous dataset was split to include only the 85 women lead-nascent firms (those labeled as led by a woman or a group of women). assumptions were met in model 7. beyond very few cases in this subsample, this model significantly improves the explained portion of the dependent variable’s variance compared to a model with no covariates. (χ2 = 30.2, 18 degrees of freedom, p-value < 0.05). since the amount of monitored external funds did not show any significant association with leaving the entrepreneurial process, hypothesis 2c should be rejected. only two variables indicated a significant association with the odds ratio of closing operations in model 7. first, personal funds invested reduce the odds of termination for women-led nascent firms in rural settings. an increase of one percent (unit) is associated with a decrease in project termination odds by 71% (p-value < 0.001). second, for rural women-led nascent firms, managerial experience is also of great importance. in the same way as the previous models, an additional year of managerial experience raises the odds of termination, but in this case, by 250%. figure 3 shows the marginal effects of monitored external funds on the probability of nascent firm termination for the three samples utilized: the whole dataset, rural entrepreneurs, and women rural entrepreneurs. by increasing one unit percent of monitored external funding, there is a reduction in the probability of closing operations of -0.073 in the case of rural entrepreneurs. figure 3.average marginal effect on survival, amount of monitored external funds received similarly, for all the databases of nascent firms, we estimated a marginal effect of -0.070. both marginal effects are significant, meaning that an increase in the monitored external funds prevents rural and non-rural firms from terminating their operations. it is not the case for rural women entrepreneurs: the marginal effect estimated for monitored external funding was not significant for this group of entrepreneurs. 5.4 – external funding amount on profitability table 4 shows the empirical results of models 8, 9, and 10, aiming to test the relationship between the amount of external non-monitored funding awarded on the probability of reaching six months in a row of profits (profitability status). model 8 does so for all nascent firms, model 9 for all rural entrepreneurs’ firms, and model 10 for rural women-led nascent firms. table 4 provides estimates, standard errors, odds ratios, and indicators of overall fit. the probability of becoming a profitable firm from a nascent firm (profitability status, coded 0 for still operating firms and 1 for those who reach six months in a row of profits) was analyzed as a function of the amount of monitored external funding received and several independent variables in a simple logistic regression equation. for model 8, assumptions were met, and indicators of influence were also examined. of the initial 2044, and as previously noted, 445 cases were removed due to being labeled as not “good cases.” also, 654 nascent firms that stopped their operations were not considered for this analysis and were removed from the database. additionally, six extreme outlier cases were removed (z-scores higher than |6|), improving the model fit when the final 938 cases were analyzed. after the cleaning, as mentioned above, nascent firms are included in the database for model 11. at least one of the variables significantly explains a percentage of the dependent variable’s variance than a model with no covariates. (χ2 = 76.4, 18 degrees of freedom, p-value < .001). table 4.logit models, analysis of achieving profitability status during the entrepreneurial process dependent variable profitability = 1 model 8 odds ratio model 9 odds ratio model 10 odds ratio monitored external funding invested, amount (logs) 0.146* 1.157* 0.370* 1.448* 0.237 1.267 (0.067) (0.145) (0.388) personal funding invested, amount (logs) 0.295** 1.343** 0.387 1.473 2.117+ 8.307+ (0.102) (0.292) (1.160) unmonitored external funding invested, amount (logs) 0.134 1.144 0.013 1.013 0.272 1.313 (0.093) (0.261) (0.427) household net-worth, logs -0.119+ 0.888+ 0.019 1.020 0.916 2.499 (0.071) (0.199) (0.564) educ. (1=community, or some college) 0.279 1.322 0.298 1.347 2.092* 8.098* (0.197) (0.411) (1.005) educ. (2=college or some graduate training) 0.281 1.324 0.608 1.836 1.685 5.390 (0.216) (0.504) (1.060) educ. (3=postgraduate studies) 0.095 1.100 0.692 1.998 2.642+ 14.042 (0.262) (0.600) (1.591) industry exp. (years) 0.157* 1.170* 0.011 1.011 0.695 2.003 (0.080) (0.181) (0.460) start-up exp. (years) 0.034 1.035 0.225 1.253 -0.019 0.981 (0.106) (0.229) (0.390) managerial exp. (years) -0.108 0.898 -0.113 0.893 -0.117 0.890 (0.097) (0.215) (0.541) bonding – social capital 0.083 1.086 0.131 1.140 -0.156 0.855 (0.067) (0.138) (0.306) bridging – social capital 0.082 1.085 0.328+ 1.389 0.730* 2.075* (0.070) (0.189) (0.363) team size 0.185* 1.204* 0.343+ 1.408+ 0.646 1.909 (0.079) (0.202) (0.732) growth asp. (“as large as possible” =1) -0.213 0.808 0.549 1.731 0.009 1.009 (0.176) (0.476) (1.122) type of business (=1, extractive sector) -0.609 0.544 -0.160 0.852 -1.801 0.165 (0.383) (0.595) (1.694) type of business (=2, transforming sector) 0.516** 1.676** 0.578 1.783 1.116 3.053 (0.193) (0.417) (1.043) type of business (=3, consum. oriented sector) -0.137 0.872 -0.216 0.806 1.342 3.825 (0.164) (0.397) (0.964) type of business (=4, other sectors/na) -1.061 0.346 -13.965 0.000 -15.147 0.000 (0.861) (991.1) (1,634.1) constant -0.448* 0.639* -0.977* 0.377 -3.062* 0.047* (0.199) (0.427) (1.218) observations 938 217 68 log likelihood -610.481 -126.246 -32.663 chi-square 76.4 (df=18, p-value <0.001) 30.1 (df=18, p-value <0.05) 23.4 (df=18, p-value> 0.1) note: +p<0.1; *p<0.05; **p<0.01; ***p<0.001; standard errors in parentheses the odds ratio column of model 8 indicates that we expect to see a 15% increase in the odds of becoming a profitable firm due to a one-unit percent change in the amount of monitored external funding received by an entrepreneur (p-value < 0.05). also, for an additional percent change in personal funds invested, there is a 34% change in the odds of reaching profitability status (p-value < 0.01). the household net worth of the entrepreneur shows a negative relationship with the odds of reaching six months of profits. for a percent unit increase in the entrepreneurs’ household net worth, there is a decrease in the odds of reaching profitability status by -12%. however, this association has weak power (p-value<0.1). industry experience is another variable that influences the outcome investigated here: a 17% increase in the odds of reaching profitability is expected for each additional year of industry experience in the same economic activity of the nascent firm (p-value < 0.05). the size of the entrepreneurial team and operating in the transforming sector are two controls that explain reaching profitability. an additional team member increases the odds of reaching profitability by 20% while intending to open a firm in the transforming sector, resulted in 167% odds of doing so for a nascent firm in the business service sector (base category). in model 9, the analysis was completed for 217 nascent rural firms. the number of cases is the result of removing all non-rural firms from the previous database. this model explains a more significant percentage of the dependent variable’s variance through at least one of the variables than a model with no covariates. (χ2 = 30.1, 18 degrees of freedom, p-value < .001). the odds of becoming profitable for rural firms are influenced significantly by the amount of external monitored funding received: an additional percent unit in this variable leads to an increase of 44.8% in the odds of becoming a profitable firm. consequently, hypothesis 1d is accepted. team size also exerts some influence on the odds of becoming a profitable firm in the rural setting, but its effect is weak (p-value < .1). the next goal is to test if the amount of monitored external funding influences project termination of rural women lead-nascent firms. thus, the next step was compressing the database to contain only women-led ventures in rural settings that did not leave the entrepreneurial process. the last resulted in a database containing just 68 nascent firms lead by a woman or a group of women entrepreneurs. probably due to the small number of cases, model 13 fails to significantly explain the variance better than a model with no covariates (χ2 = 23.4, 18 degrees of freedom, p-value > .1). for this reason, we cannot test hypothesis 2d. overall, models 1-10 provide important insight into understanding the nuances of rural entrepreneurial resource drivers. similar to earlier research, externally monitored funding is a significant factor for rural entrepreneur’s success. many of the drivers that impact rural firms also significantly impact female-led rural firms. however, due to the small number of cases in this sample, more research is needed on female-led rural firms. these results are important to develop our understanding of rural and female led rural firm success and profitability. however, there are important limitations to this research that should be considered in future research. following the resource-based theory of the firm, we investigate resources in terms of entrepreneur and firm endowments. however, personality traits could shed additional on this relationship. thus, another theoretical lens, such as expectancy theory, could focus on how entrepreneurial motivation might answer a broader set of questions than those answered here. in addition, our research is a descriptive one. we do not know the specific mechanisms that make monitored external funding a strategic resource or not and causality is a difficult endeavor in the social sciences. future research using a longitudinal sample could be leveraged to test causality between external funds and firm performance in rural settings. the psed database is an important nationally representative sample of business formation, however, rural and female-led entrepreneurship are relatively small parts of the overall psed sample, due to the proportion of rural and rural-female led entrepreneurs nationally. this makes it difficult to use these cases in a quasi-experimental design. thus, designing an oversample of rural entrepreneurs could help us answer causal questions and is possible considering that psed has oversamples of minority entrepreneurs, but not for rural entrepreneurs. in addition, nascent entrepreneurship is only one piece of the entrepreneurial puzzle as it is only one piece of the entrepreneurial pipeline. as such understanding the nature and stories of who chooses entrepreneurship as a career path and then moreover, more established rural and female entrepreneurs is critical for a more holistic lens of these groups. qualitative or quantitative work that explores different rural and rural-female led entrepreneurship at different stages and in different ways is critical for understanding how to effectively leverage this approach for the health and wealth of our rural communities. 6. implications and future research the resource-based theory of the firm states that having strategic resources opens opportunities to develop competitive advantages over other competitors. these competitive advantages might infer higher earnings to the firm, especially over time. firms also develop competitive advantages based on the strategic resources they exploit. in the context of capital scarcity in rural communities and lack of funding sources, receiving external funding for a nascent rural entrepreneur could operate as a strategic resource. it might be important to recall that strategic resources from penrose’s viewpoint are valuable, rare, difficult to imitate, and non-substitutable. why might external funding operate as a strategic resource for rural firms? in addition to less access to traditional small business and venture capital, rural communities also show more persistent poverty rates than metropolitan areas (usda, economic research service, 2021). consequently, rural entrepreneurs might struggle to accumulate capital more than those in urban and suburban areas on average. thus, monitored external funding is valuable by nature, but it is also rare in rural communities. this research did not find that monitored external funding is associated with reducing disengagement or becoming a profitable venture for women rural entrepreneurs. however, it does so for rural entrepreneurs (no matter gender) in the case of disengagement. this research also uncovered that externally funded and non-funded rural women entrepreneurs exhibit different disengagement rates during the first year and a half of the entrepreneurial process. after this period, they have similar patterns of firm creation whether they receive externally monitored funds or not. further research could investigate why this difference takes place. differences in disengagement time between funded and non-funded rural-women entrepreneurs could result in a broader set of entrepreneurial characteristics, such as motivation or personality traits. whether women entrepreneurs who seek external funding and avoid disengagement from the entrepreneurial process are, on average, more motivated is an important future research topic. endogenous factors related to personality could explain both phenomena. disentangling these factors is tough, but it is possible to proxy the first date of funding using the earliest interview date when the entrepreneur declares the first external fund is received using the psed dataset. additional modeling could test for the time to reach profitability and/or abandoning the firm using a repeated event modeling approach. another further research avenue that this paper opens is related to the third feature of penrose’s strategic resource definition. receiving external funds gives capital to the new firm but could also help in developing difficult-to-imitate resources. there is sufficient evidence that receiving externally monitored funds implies the development of soft managerial skills. the process of obtaining external funds often requires providing financial institutions with short or medium-term prospects about the new venture (gartner et al., 2012; hechavarría et al., 2016). the latter implies developing a methodical and systematic assessment of the entrepreneur’s business idea or financial projections (cassar, 2009), which reduces the asymmetry of information between the firm and financial agents. as such, external sources of capital add more value to nascent firms than other funding sources, such as individual savings or those coming from entrepreneurs’ families. another instrument that operates similarly in systematically assessing the new firm’s characteristics is a business plan. these plans are positively associated with the persistence and success of creating a new company (delmar & shane, 2003; liao & gartner, 2006). it is also commonly requested by financial agents at the time of evaluating a project. in this way, external funding provides an incentive for firms to establish concrete goals and objectives that signal their potential ability to succeed, in addition to contributing important financial resources. soft managerial skills and business plans are important components where existing small business development organizations and public policy might support and enable nascent firms. small business development centers, local university programs, efforts like score but highly focused on rural communities could contribute to the resource development of rural and female-led firms. we also found that the amount of monitored external funds is associated negatively with the likelihood of nascent firm termination in rural communities. however, this variable did not exert any influence on women rural entrepreneurs. this finding is important for additional research. the amount of funds granted could be related to discrimination towards women entrepreneurs in the financial system and in rural settings. as found previously, gender is a decisive factor in the amount of micro-credit granted, as the study of brana (2013) found for french rural communities. further investigation using psed or other datasets that include rural entrepreneurs and data on external funds received could add additional insight into this issue in american rural communities. as discussed earlier, research already finds a gender bias broadly as it relates to women entrepreneurs. this bias may exist for many reasons, however, may also benefit from both public and private incentives that may benefit women, rural, or other underserved entrepreneurial talent. several states have passed rural jobs programs that provide financial support to rural entrepreneurs who can document employing certain numbers of people, along with other key metrics (cromartie, 2017). this type of policy tool may exhibit some bias due to differences in the types of entrepreneurship practiced by different groups, however, this type of policy has the benefit of being “blind” to these characteristics as long as certain employment characteristics are met. federal policy programs, like the 2017 opportunity zones act and the federal new markets tax credit are targeted to serve underserved communities, including many in rural areas. programs like these are important to consider as additional tools to empower rural and female entrepreneurs across the country (cromartie, 2017). the fact that monitored external funding is associated with nascent firm termination in rural communities and its non-significance on women rural entrepreneurs opens another question: do men and women manage monitored external funds differently? through psed, new research avenues could also answer this question. again, the timing between receiving external funds and entrepreneurs’ decisions is central to answer this type of question. some of the key questions this research could explore: are there differences between women and men rural entrepreneurs in terms of investing more of their own money after receiving external funds? do differences in gender play a role in starting to work full-time in the nascent firm after receiving external funding? this is an additional area where policy makers might also consider tools or resources to allow for more understanding of this issue. for example, the us small business administration and small business development centers could provide critical knowledge and mentoring specifically for rural and underserved groups that have received external funding. these could be relatively “low-cost” services like webinars or virtual mentoring to provide additional support for the nascent entrepreneur. these and other issues are beyond the scope of this paper, but answering these questions is critical to understand the consequences of entrepreneurial gender differences in rural settings. 7. conclusions synthesizing key ideas and literature in the field of entrepreneurship, this research sought to examine issues related to rural and female-led rural firm success. largely driven by a resource theory of entrepreneurial success, this research examined the importance of “resource” oriented questions for rural vs. non-rural nascent firms generally. by adapting previous research and models of nascent firm gestation and profitability, models examine the importance of individual characteristics, social capital, externally monitored funding, unmonitored external funding, personal funding, and other key variables on rural and rural, female-led firm’s ability to stay engaged in the entrepreneurial process and become profitable. confirming earlier research, monitored external funds is a significant variable preventing rural and non-rural firms from disengaging from the entrepreneurial process. while not significant for rural women entrepreneurs, rural women-led nascent firms granted external funding are slower than female-led non-funded firms to disengage from the entrepreneurial process, especially during the early months of the gestational phase. these results confirm the importance of external resources for entrepreneurs and the nuanced relationship that female-led firms have with different types of funding sources. models results also confirm the importance of the personal funds invested for women-led firms in rural settings. this result underscores research around potential gender inequities or bias in external or formal funding streams, as well as cultural and educational gaps for women entrepreneurs in rural settings. motivation, knowledge, fear and social norms, among other factors all play a role in the likelihood of any entrepreneur, but especially a woman-led firm in a rural setting, to seek external funding sources. however, reliance on personal funds is a potentially significant limiting factor for rural women’s entrepreneurial success. in conclusion, while many entrepreneurial factors for rural and non-rural entrepreneurs are similar, there are some differences. this was especially true for rural, female-led entrepreneurs where there are some clear distinctions in model results. in general, these results highlight that rural communities are not the same as urban or suburban communities and moreover, that entrepreneurs in these communities may have similar needs and drivers but may also have unique needs and drivers. in this sense, this work underscores the importance of additional research on rural entrepreneurship to better understand the ways in which communities can enable, support and even incentivize the success of their rural and rural-female entrepreneurial base. fundera.com/resources/women-owned-business-statistics the specific date that defines gestation is the first of the two activities within the 12 months period these possible startup activities are: invested own money; began business plan developed model, prototype; purchased materials, supplies, parts; define markets to enter; promote products or services; sales, income, or revenue; leased, acquired major assets; talk to customers; financial projections; full time start-up work; saving money to invest in firm; phone book listing for business; established bank account for firm; obtained supplier credit; began to organize start-up team; first use of physical space; hire lawyer; business plan finished; model, prototype fully developed; signed ownership agreement; proprietary technology developed; invested own money; investment in legal business; know listed in dun and bradstreet; signed ownership agreement; full-time start-up work; invested own money; received patent, copyright, trademark; signed ownership agreement; signed ownership agreement; invested own money; full time start-up work; signed ownership agreement; invested own money; full time start-up work; full time start-up work. serious thought on starting a company it is an activity asked, but it is not considered to start or end counting gestations since virtually all entrepreneurs mentioned it (from reynolds, 2017). this variable was corrected by 2005 prices good cases" are those qualified as active nascent entrepreneurs for which there are one or more follow-up interviews. references afrin, s., islam, n., & ahmed, s. u. 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(1984). a resource-based view of the firm. strategic management journal, 5(2), 171–180. https://doi.org/10.1002/smj.4250050207 google scholar powered by scholastica, the modern academic journal management system 31 conflicts between venture capitalists and ceos of their portfolio companies dmitry khanin texas tech university dmitry.khanin@ttu.edu ofir turel california state university – fullerton oturel@fullerton.edu abstract prior research has established that venture capitalists (vcs) and ceos of their portfolio companies often disagree on venture policies. such disagreements can escalate into cognitive conflicts. relationship-based, or affective, conflict may also arise between vcs and ceos. this paper examines the antecedents and dynamics of such vc-ceo conflicts and their effects on ceos’ expectations as to what financial intermediaries they would like to choose for their new ventures. based on a survey of 104 ceos of vc-backed ventures, we establish that, following conflict with vcs, ceos may elect to avoid using any financial intermediaries, or to choose business angels or corporations as financial intermediaries. alternatively, ceos may decide that they still want to work with vcs in the future and strive to ameliorate their collaboration with vcs. keywords: venture capital, conflict, ceos, financial intermediaries introduction conflicts are defined in the literature as perceived incompatibilities between the parties (boulding, 1963; jehn, 1995). researchers have emphasized the multidimensional nature of conflict (pinkley, 1990; jehn, 1995). the intergroup conflict theory divides conflicts into cognitive, or task conflicts (conflicts about real issues and alternatives), and affective, or relationship conflicts (highly emotional conflicts frequently prompted by the perceived personal frictions) (priem & price, 1991; mooney et al., 2007). strategy   journal of small business  journal of small business strategy vol. 23, no. 1 32 cognitive conflicts have long been described in the literature as functional because creative discussions allow to clear the air, help to overcome the tendency for groupthink, spur innovation, and consequently, improve organizational performance. as an example, entrepreneurs may differ in their expectations for growth, and the importance of such activities as formal business planning, perceptions of environmental uncertainty, and risk preferences (matthew et al., 2009). the same could be true of vcs and entrepreneurs. for instance, vcs may be likely to emphasize the advantages of planning and exhibit greater risk aversion and tolerance for uncertainty and ambiguity than entrepreneurs. in contrast, affective conflicts have long been considered as dysfunctional due to their adverse effect on team cohesion and collaboration (amason, 1996; ensley et al, 2002). recently, though, researchers have offered a more pessimistic view of cognitive conflicts as leading to a number of negative consequences, especially because they often underlie affective conflicts (de dreu & weingart, 2003; mooney, holahan, & amason, 2007). both cognitive and affective conflicts may arise in the process of collaboration between venture capitalists (vcs) and ceos of their portfolio companies (higashide & birley, 2002; yitshaki, 2008; forbes, korsgaard, & sapienza, 2010). researchers pointed out several pitfalls in the vc-entrepreneur relationship that may result in such conflicts. first, scholars established that insufficient, or inadequate, vc assistance may cause ceo dissatisfaction with vc support and lead to vc-ceo conflicts (gorman and sahlman, 1989; sapienza, 1989; ehrlich et al., 1994; barney et al., 1996; higashide and birley, 2002; berg-utby, sorheim, widding., 2007). furthermore, research has provided evidence that vcs may pay even less attention to the venture when they are focused on quickly expanding their portfolio. as a result, vcs may end up financing too many ventures and thus diluting their resources (shepherd, armstrong, and levesque, 2005; jääskeläinen, maula, seppä, 2006). second, studies showed that vc-ceo conflicts may arise as a result of the exorbitant cost of vc financing compared to that of other financial intermediaries (hsu, 2005; florin, 2003; 2005). this may lead to conflicts of interests between vcs and ceos. such conflicts may arise when vcs and ceos disagree on venture valuations, particularly during the down rounds of investment when vcs’ equity stake often skyrockets, whereas ceos’ share plunges (forbes, sapienza, & korsgaard, 2010). on these grounds, researchers recommended entrepreneurs to choose carefully their financial intermediaries among vcs, banks, business angels and corporations or corporate venture capitalists (cvcs) (ehrlich et al., 1994; ueda, 2004; de bettignies and brander, 2007). in this paper, we address the question that has not been examined in prior research on vc-ceo conflict: what lessons do venture ceos draw from their conflicts with vcs? could they decide not to use any financial intermediaries? could they make the resolution to avoid vcs in the future, but seek other financial intermediaries, such as corporations and private investors? could they become critical of their vcs’ performance, but hope that other vcs would do a better job? or could they blame themselves, and their own inability to avoid conflict escalation? to answer these questions, we conducted a survey of ceos whose ventures had received vc financing in the 2000s (before january, 2009). survey was complemented by interviews journal of small business strategy vol. 23, no. 1 33 with ceos. in addition to answering the questions on the survey, the respondents provided useful comments that helped us better understand the causes and dynamics of vc-ceo conflicts. luckily, several ceos also volunteered to talk to us and provided some background information. the main contribution of this study is showing that vc-ceo conflicts may have a strong impact on ceos’ intentions as to whether or not to recruit financial intermediaries for their new ventures; what intermediaries to use or not to use; and how to better adjust their own behavior in the future to accommodate vcs’ requests and thus avoid conflict escalation causing harm to the venture. the paper is organized as follows. in the first section, we discuss the key causes of vc-ceo conflicts uncovered in the preceding literature on the subject. in the second section, we unveil our theoretical model of the antecedents and dynamics of vc-ceo conflicts and ceos’ intentions with regard to using financial intermediaries in the future. in the third section, we describe our methods and sample. in the fourth section, we report and discuss the results. in the fifth section, we present the conclusions. finally, in the sixth section, we point out the study’s limitations and its practical implications for vcs and ceos, and outline directions for future research. literature review: reasons for conflicts and disagreements between vcs and entrepreneurs prior research has uncovered the three main areas of vc-ceo conflicts. the first area can be described as “conflicts of interests and unfavorable attributions.” conflicts of interest address zero-sum game situations when what benefits vcs could hurt ceos, and vice versa. for instance, the higher venture’s pre-money valuation, i.e., what it is worth before vc capital infusions, the better for venture ceos and the worse for vcs. naturally, vcs and ceos fiercely argue about pre-money valuations and may never reach a consensus. negative attributions refer to biased opinions that parties hold with regard to one another. thus, ceos may view all vcs as shortterm oriented and controlling, whereas vcs may view all ceos as excessively committed to the venture and not able to soberly define its merits and shortcomings, avoiding unnecessary emotions. importantly, it is difficult for ceos to voice their actual feelings toward vc support or lack thereof because vcs wield significant power in the relationship (sahlman, 1990; wasserman, 2007). as a result, vcs may not really know what ceos think (although some vcs may not be particularly concerned about ceos’ actual feelings anyway, assuming that a certain degree of hostility is unavoidable). due to information asymmetry and imperfect, cluttered lines of communication between vcs and ceos, vcs may act in good faith and overemphasize some areas of assistance that ceos consider to be less useful while providing insufficient support in other areas that ceos may view as absolutely critical (rosenstein et al., 1993; ehrlich et al., 1994; barney et al., 1996). furthermore, vc support may be insufficient or inadequate, due to their multi-tasking, the small size of most vc firms, their cumbersome hierarchical structure, increasing portfolio size, hiring of inexperienced recruits lacking operational experience, etc. (gifford, 1997; keuschnigg and nielsen, 2004; cumming and johan, 2007). in addition, parties’ mutual perception as incompetent may be journal of small business strategy vol. 23, no. 1 34 strengthened and reinforced due to rampant negative attributions. agency conflicts between vcs and ceos (sahlman, 1990; shane & cable, 1997; 2001; gompers & lerner, 2004) arise due to the potential for opportunistic behavior on both sides (cumming and johan, 2007). therefore, agency conflicts also belong in this first category of conflicts of interests and negative attributions. finally, vc-ceo conflict may arise due to the greater attention apportioned by vcs to other ventures in the portfolio. for example, ceos may believe that vcs spend too much time helping their least successful and underperforming, or even failing companies, (timmons & bygrave, 1986; fredriksen et al., 1990; 1997; elango et al., 1995) and focus on putting out fires (fredriksen et al., 1990; 1997) while neglecting viable ventures. the second area of vc-ceo conflicts is “conflicts of inefficient collaboration.” for instance, vcs’ oversight may be too intrusive, in ceos’ opinion, –”they want to keep us on a short leash” (gomez-mejia et al., 1990; jog et al., 1991). in turn, vcs commonly believe that ceos fail to communicate relevant information to them in a timely manner or even withhold critical information on purpose (sapienza & korsgaard, 1996). therefore, not only agency conflicts, but also collaboration problems (shane & cable, 1997), could explain the reasons why vcs and ceos are in conflict. low goal congruence between vcs and ceos observed in prior research (sapienza & gupta, 1994) certainly has to do, not only with the discrepancy between these allies’ vested interests and appropriation concerns (gulati, 2007) and fear of opportunism (sahlman, 1990; cable & shane, 2001), but quite simply with ineffective communication and collaboration. these multiple reasons for vc-ceo conflict uncovered in previous studies allow deepening our understanding of the types of conflicts that may occur in the vc-ceo relationship. for instance, vc-ceo cognitive disagreements regarding their goals and policy may not only arise as a result of having different views on tasks and processes, but also because of different vested interests and agency problems. in turn, affective conflicts between vcs and ceos may crop up not merely because of personal frictions and relationship problems but also due to ineffective collaboration. finally, cognitive and affective conflicts may be closely related: what starts as a cognitive conflict may grow to become an affective conflict (higashide & birley, 2002) and what begins as an affective conflict, may spur cognitive conflict (yitshaki, 2008). for instance, cognitive conflicts may turn into affective conflicts because of the way the parties treat one another (ineffective communication and collaboration). vcs may not properly communicate to ceos the importance of generating adequate performance reports and making their management objectives transparent. as a result, ceos could view such activities as redundant and useless (ehrlich et al., 1994). vcs may also abuse their power, encroach upon ceos’ territory (macmillan et al., 1986) and be triggerhappy – ready to dismiss ceos on the spur of the moment (willard et al., 1992; flamholtz, 1994; wasserman, 2007). both vcs’ rigid control and excessive interference into venture governance and ceos’ noncompliance, insufficient feedback and paranoia with regard to imminent vc takeover could instigate vcceo conflicts in the area of inefficient journal of small business strategy vol. 23, no. 1 35 collaboration. ceos may feel that the transaction and coordination costs of operating under vc tutelage are too high, fear that vcs will replace them as soon as they develop sellable products (wasserman, 2003, 2006), express apprehension that vcs would usurp their decision making authority (steier & greenwood, 1995; botelho & jonathan, 2006), resent vcs for keeping them on a tight leash and seizing venture governance (macmillan et al., 1988), and object to vcs’ aggressive voice in response to unmet expectations (parkahangas & landstrom, 2006). the third group of conflicts can be defined as “conflicts of vc-ceo mismatch.” perry (1988) described the main types of entrepreneurs as a) inventors (interested in developing a specific product and reaping the financial rewards while leaving venture management to others); b) builders (preoccupied with creating a viable enterprise); and c) innovators (absorbed in developing an advanced technology rather than a specific business). respectively, perry (1988) categorized the main types of vcs as a) investors (focused on achieving fast financial results); b) advisors (top-tier vcs that may offer valuable counsel and advice if provided sufficient feedback); and c) partners (vcs with deep pockets willing to support an extensive search for advanced technology). perry (1988) hypothesized that conflicts between vcs and ceos may arise if such partner types are mismatched. thus, while the combinations of inventorsinvestors, builders-advisors and innovatorspartners, according to perry (1988), are ideal, an alliance between a builder and investor could lead to a conflict. other researchers have argued that since the costs of vc financing are very high (hsu, 2005; florin, 2006), ceos may find a better match with other types of financial intermediaries, such as business angels (ehrlich et al., 1994), corporations (jääskeläinen et al., 2006) and banks (ueda, 2004). in addition, studies have shown that venture ceos may have different needs in terms of the required amount of operational vs. strategic assistance (barney et al., 1996; ehrlich et al., 1994). therefore, some ceos could be better off with specialist vcs focusing on operational experience, whereas others could need generalist vcs. table 1 sums up our discussion of the causes of vc-ceo conflicts in previous research. table 1: the principal causes of vc-ceo conflicts identified in the literature # causes of conflict studies i. conflicts of interest and negative attributions: 1. vc support falls far short of ceos’ expectations rosenstein et al., 1989; 1990; 1993; flynn, 1991; 1995; bergutby et al., 2007 2. vcs’ limited attention and their decreasing support for individual ventures as a result of portfolio growth leads to ceos’ dissatisfaction with the quality of provided advice. gifford, 1997; shepherd et al., 2005; jääskeläinen et al., 2006; cumming & johan, 2007 journal of small business strategy vol. 23, no. 1 36 3. vcs and ceos disagree as to the areas in that vc support should be increased or decreased mcmillan et al., 1986; ehrlich et al., 1994; barney et al., 1996 4. parties disagree based on their vested interests on pace of growth, timing and modes of exit jog et al., 1991; ehrlich et al., 1994; wright & robbie, 1998 5. agency conflicts: ceos’ incompetence, shirking, opportunistic actions, hold-up threats, moral hazard, overspending sahlman, 1990; jog et al., 1991; shane & cable, 1997; 2001; hellmann & puri, 2002; kaplan & stromberg, 2004; gompers & lerner, 2004; parkahangas & landstrom, 2006 6. vcs spend too much time supporting troubled ventures, and thus, do not have enough time for more viable companies timmons & bygrave, 1986; fredriksen et al., 1990; 1997; elango et al., 1995 7. ceos view vcs as incompetent, especially in the areas of venture management and operations, and contributing to venture failure gomez-mejia et al. (1990); gabrielsson & huse, 2001 8. vcs view ceos as an annoyance and even as a selfish and destructive force gorman and sahlman, 1989; willard et al, 1992 9. vcs and ceos make different attributions zacharakis et al., 1999 ii. conflicts of inefficient collaboration: 1. low goal congruence between vcs and ceos sapienza, 1989; sapienza & timmons, 1989; sapienza & gupta, 1994; 2. vc support could be counterproductive due to its rigid nature, and hence, adverse effect on innovation gomez-mejia et al., 1990; barney et al., 1996; higashide & burley, 2002; wijbenga et al., 2007 3. cognitive disagreements (about goals and policy) and personal or affective frictions higashide & burley, 2002 4. ceos object to the time spent in generating performance reports and fulfilling other vc requirements ehrlich et al., 1994; jog et al., 1990 5. ceos criticize vcs for masterminding and monopolizing some of their activities and acting dictatorially macmillan et al., 1986; 6. vcs believe that founder-ceos should rather be replaced willard et al., 1992; hellmann & puri, 2002; kaplan & stromberg, 2004; wasserman, 2007; 7. ceos fear loss of flexibility and decisionmaking authority barney et al., 1996; botelho & jonathan, 2006 8. ceos bemoan the increased transaction and coordination costs steier & greenwood, 1995; botelho & jonathan, 2006 9. ceos object to vcs’ inconsiderate and aggressive behavior sapienza, 1989; parkahangas & landstrom, 2006; journal of small business strategy vol. 23, no. 1 37 iii. conflicts due to vc-ceo mismatch: 1. vcs and ceos choose the wrong type of partner perry, 1988 2. ceos would be better off with private investors freear & wetzel, 1990; ehrlich et al., 1994; osnabrugge, 1998 3. ceos would be better off with more experienced vcs sweeting, 1991; sapienza et al., 1994; smith, 2001 4. ceos would be better off with more (less) operations-focused vcs ehrlich et al., 1994; barney et al., 1996 5. ceos could be better off with corporate investors maula et al., 2005 6. ceos could be better off with borrowing from banks florin, 2000; hsu, 2005 theory development the antecedents of cognitive conflicts between vcs and ceos prior research has examined the distribution of attention inside the vc firm (gifford, 1997) and the impact of vcs’ increasing portfolio on the amount of attention allocated to individual ventures (kanniainen, keuschnigg, 2003; 2004). in addition, we suggest taking a closer look at the other side of the coin – the distribution of attention inside the entrepreneurial venture. the attention-based view of the firm (ocasio, 1997; de clercq, castaner, belausteguigoita, 2006) suggests that organizations selectively approach issues as important or less important. these preferences are situated in the organization’s procedural and communication channels and may be reified through cultural symbols, routines and interactions among organizational members. moreover, attention is structurally distributed throughout an organization so that organizational members are responsible for performing specific functions and roles integrated into clusters of activities (de clercq et al., 2007). when vcs take over, they may actively interfere with the existing distribution of attention in the entrepreneurial venture by introducing new sets of priorities. vcs typically request that a company changes itstemporal orientation by focusing on short-term reporting periods geared toward the accomplishment of certain preset goals defined as milestones (jog et al., 1991; gompers & lerner, 2004). this change in the firm’s temporal orientation and respective reporting procedures clearly represents a departure from prior organizational rhythms emphasizing exploration, that is, search for new knowledge. exploration and exploitation are different activities that companies find difficult to combine, and hence prefer to switch between the two modes (siggelkow & rivkin, 2006). vcs seek to reorient a venture from exploration to exploitation by isolating an area of activity that is most likely to be successfully commercialized, and directs ceo’s attention to such promising area to the exclusion of others. this could lead to a sea change in a venture’s strategy. while founders often endorse a broader strategy of exploration, vcs insist on narrowing a venture’s focus and pursuing a strategy of exploitation to expedite the launch of a promising product. concomitantly, vcs insist on greater journal of small business strategy vol. 23, no. 1 38 accountability and coordination. these changes could be momentous and require some adjustment and fine-tuning. although vcs may desire to redirect the process of distribution of attention inside a venture by changing its temporal orientation, focus, strategy and patterns of coordination, they may not, in fact, have enough time, or even sufficient knowledge and expertise, to assist a venture in implementing such far-reaching transformations. as a result, ceos may feel that they have not been provided enough guidance, and begin to doubt vcs’ competence as agents of change (since the latter may not possess the knowhow as to ways in which the requested changes in the venture’s system of activities can be implemented given its resources and capabilities). to sum up, ceo’s perception of the efficacy of vc support may be related to vcs’ ability to assist ceos in reallocating their attention so that ceos would be able to efficiently manage the transition. in the first section, we have summarized the main sources of vc-ceo conflicts identified in research. previous studies have shown that vc-ceo conflicts could stem from various causes. some of them can be described as cognitive. for instance, vcs and ceos may disagree on the strategic direction of the venture if ceos are more focused on exploration and vcs are more concerned about exploitation of the discovered opportunities. in addition, vcs and ceos may disagree about the pace of venture financing. while vcs practice staged investment to maintain maximum control over the venture and be able to save resources if it transpires that a venture is going to fail, ceos may desire a more concentrated investment received in a shorter period of time and fear that insufficient capitalization would put them at a disadvantage compared to the competition (gomez-mejia et al., 1990; jog et al., 1991). finally, vcs and ceos often disagree in regards to the projected exit strategy. while ceos often want to retain the venture as a standalone enterprise, vcs may prefer to sell it sooner to provide the liquidity for their own investors (harris, 2010). thus, cognitive disagreements between vcs and ceos regarding venture strategy, financing and projected exit may be quite significant. such cognitive conflicts could also be affected by ceos’ concern about vcs’ insufficient support. prior studies have shown that vcs’ attention is limited (gifford, 1997), and may not be distributed effectively (sapienza & timmons, 1989; shepherd et al., 2005). furthermore, vc attention may be diluted due to quick portfolio growth (cummings and johan, 2007; haagen, 2008). it is also known that ceos often feel frustration with insufficient levels of vc support and attribute it to vcs’ lack of experience in venture operations (ehrlich et al., 1994; barney et al., 1996). finally, ceos may become frustrated if they feel that their vcs have failed to help them with venture restructuring: while ceos are required to change the way they apportion attention inside a venture by switching from exploration to exploitation, vcs may fail to assist ceos in this transition. hence, ineffective vc support (from a ceo’s perspective) could add fuel to cognitive conflicts between vcs and ceos. to summarize: h1: ceos’ view of vc support as insufficient will be associated with ceos’ perception of the existence of cognitive conflicts between vcs and ceos focused on venture strategy. journal of small business strategy vol. 23, no. 1 39 perceived lack of attention from lead vc % equity owned by lead vc cognitive conflict h1 h2 affective conflict h3 behavioral intention to switch to another funding source behavioral intention to change own behavior h4 h5 the impact of vcs’ equity share on cognitive conflicts between vcs and ceos vcs and ceos actively negotiate before signing a contract as to what share of venture equity vcs will receive in exchange for their capital (sahlman, 1990; bell, 2009). studies have shown that top-tier vc firms’ support could be 10-14% more expensive (in terms of venture equity used to purchase it) compared to other vc firms (hsu, 2005). some vc, for instance, perkins from the famous kp, have argued that it is irrelevant how much equity entrepreneurs agree to sell in the beginning because very few ventures will need money just for the first round of investment. typically, ventures come back for more capital. moreover, with each new round of financing, entrepreneurs’ share dwindles and vcs’ share increases. in this sense, the share of equity owned by vcs is related not only to vcs’ bargaining power at the outset, but also to the venture’s subsequent need in more capital and vcs’ increasing equity share in the course of financing. obviously, as vcs acquire a greater and greater share of venture’s equity, their ability to influence the venture’s strategic direction increases. vcs’ rising influence on the venture may exacerbate the cognitive disagreements between vcs and ceos as vcs begin acting more imperially and impose their strategic vision on ceos. vcs, of course, do not run portfolio companies (except for the rare situations when vcs become interim ceos). ceos are still responsible for solving operational questions, but vcs’ rising power could make ceos more dependent on vcs so that ceos would need vcs’ approval on a wide range of operational issues. put on a shorter leash, ceos may resist vcs’ tight control leading to greater cognitive conflicts. to summarize: h2: vcs’ equity share will be associated with cognitive conflicts between vcs and ceos. cognitive conflicts vs. affective conflicts recent research has emphasized the idea of conflict transformation over time. for instance, process conflicts occurring at early stages of a relationship may have a negative and long-lasting impact (greer et al., 2008). furthermore, conflicts may influence one another. purportedly, cognitive conflicts may mediate the eruption of affective conflicts (mooney et al., 2007). while affective conflicts are associated with relationship problems (behfar et al., 2008), we believe that such conflicts may also stem from perceived injustices and improprieties attributed to certain roles and structural positions, rather than to individuals per se. for instance, it is figure 1: research model journal of small business strategy vol. 23, no. 1 40 possible that subordinates may resist the idea of being subjected to compliance procedures as not quite rational or humiliating, even though they do not have any personal problems with the particular supervisors. therefore, while cognitive conflicts may relate to disagreements regarding goals and policies (higashide and burley, 2002), affective conflicts may arise in response to perceived inequities. the second group of conflicts we identified in prior research could be especially conducive to the emergence of affective conflicts between vcs and ceos. thus, ceos may become very emotionally involved and even agitated when discussing vcs’ rigid control and interference with the venture (cumming & johan, 2007; haagen, 2008). ceos may also fear that they could be fired simply because vcs do not believe that they can learn how to manage a venture quickly enough (willard et al., 1992; flamholtz, 2004; khanin et al., 2008). vcs, though, may feel that procedural justice has been violated if ceos fail to provide them with needed information in a time manner (sapienza & korsgaard, 1996). thus, collaboration failures can lead to strong emotional repercussions. vcs and ceos may develop strong cognitive disagreements due to their discrepant vested interests that could be exacerbated by ceos’ view of vc support as insufficient. cognitive conflicts, in turn, may result in affective conflicts if vcs and ceos fail to address their collaboration problems. as a result, both parties may feel that procedural justice and their implicit psychological conflicts have been violated by rude, inconsiderate or indifferent partners (parkahangas & landstrom, 2006). thus, affective conflicts can be related to perceptions of fairness: both vcs and ceos may feel that they have acted in good faith and regard insufficient partner collaboration as unjust and offensive. the issue of control could become especially divisive due to vcs’ insistence on tight oversight combined with the failure to provide substantial help that vcs may need to change their attention allocation patterns. finally, vcs and ceos may be inconsiderate and thus thwart collaboration. that may lead to escalation of conflict when the parties begin to view each other as a “selfish and destructive force” (gorman & sahlman, 1989) that can potentially hurt the new venture. this is why intense cognitive conflicts between ceos and vcs may have adverse consequences. they may contribute to ceos’ feelings of anxiety and insecurity resulting in the perceived incompatibility between vc governance and ceos’ need to run their ventures most effectively. in turn, ceos’ inability to collaborate may cause equal dissatisfaction on the part of vcs. to summarize: h3: cognitive conflicts between vcs and ceos will be associated with affective conflicts. vc-ceo affective conflicts and ceos’ plans for the future venture capital may or may not represent the best choice of financing for entrepreneurs depending on their objectives, venture characteristics and other circumstances (maula et al., 2005). first, recent findings indicated that those founders that have resorted to vc funding have generated less wealth for themselves postipo (florin, 2005). on these grounds, florin (2005) concluded that entrepreneurs primarily motivated by wealth creation for themselves – inventors in perry’s (1988) classification – could be better off if they received financing from other financiers than vcs. ehrlich et al. (1994) compared vcs and private investors (pis) in terms of journal of small business strategy vol. 23, no. 1 41 ceos’ perception of the value of these intermediaries’ assistance, and established that while some ceos appreciated the disciplining role of vc supervision, more seasoned entrepreneurs believed that it could be redundant and even suffocating. maula et al. (2005) similarly contrasted ceos’ views on venture assistance provided by vcs in comparison to corporate venture capitalists (cvs). other studies have examined the relative costs and benefits of receiving support from vcs as opposed to banks (ueda, 2004). finally, many studies have emphasized that different vc types exists (elango et al., 1995) so that ceos that are more selective in their choice of suitable types of vc firms as financiers could achieve greater satisfaction with vc assistance (smith, 2001). in considering possible sources of financing for their future ventures, ceos (especially seasoned ceos with successful track records) may have a number of choices. they could, in fact, avoid getting involved with vcs and choose instead to finance a venture on their own, or obtain financing from banks, private investors, corporate investors, etc. if seasoned ceos decide to avoid vcs, this is certainly not a desirable outcome for vcs who prefer to deal with experienced entrepreneurs because the odds of their ventures achieving success are usually much higher (hsu, 2005, 2007). clearly, affective conflicts with vcs could steer ceos in the direction of alternative sources of financing. on the other hand, ceos may also reevaluate their own behavior and seek to improve their partner selection techniques, as well as to enhance the efficacy of their collaboration with vcs. sapienza and gupta (1994) showed the importance of openness and frequency of communication between vcs and ceos for resolving their conflicts. ceos could also seek more experienced vcs in the future that would be able to furnish quality assistance to their companies. finally, ceos might decide to work harder on resolving conflicts with vcs; be alert to vcs’ needs and provide requisite information to vcs in a timely fashion (sapienza & korsgaard, 1996; sapienza et al., 2001), as well as become proactive in building their professional relationships with vcs in order to prevent conflict eruption and enhance collaboration. to summarize: h 4a: affective conflicts will be associated with ceos’ expectation that they would be more likely to use other types of financiers than vcs and/or other vcs to fund their future ventures. h4b: affective conflicts will be associated with ceos’ expectation that they would become more active in building collaboration with vcs for the sake of conflict prevention and resolution. research design and methods procedure and sample before launching our research project, we conducted a pilot study to identify both the common areas of disagreement between vcs and ceos of portfolio companies and how ceos may react to their conflicts with vcs in terms of their future choice of financing. using venture xpert, a database of entrepreneurial ventures and vc firms maintained by thompson financial, we downloaded the entire population of ventures located in california that have received vc assistance from 2000 to 2008. subsequently, an email was sent to 750 ceos of companies residing in the neighboring counties with the request to journal of small business strategy vol. 23, no. 1 42 take part in a survey. the message contained a link to an online questionnaire. overall, we obtained a random sample totaling 104 ceos resulting in a 13% response rate. the majority of the respondents were men (91%). the vast majority had a master’s degree (48%) or a college degree (34%). only one person had no college education. seventeen individuals held phds. the sample included ventures at different stages of development in terms of the classification used by venture xpert (from seed to bridge to acquisition) and with varying performance levels. thus, 27 companies were in initial stages, 54 in an expansion phase, 8 in “bridge” phase, and the remaining 14 were being acquired by competitors. the majority of ventures were not yet profitable (70.2%). however, the remaining 28.2% have already attained profitability. only 6.8% of ceos reported that they have achieved all the milestones set by vcs. many more ceos reported that their ventures have accomplished most of the vcs’ milestones (60.2%). 33% of ceos wrote they have met only some of their milestones. further characteristics of the ceos and their companies are given in table 2. table 2: demographic characteristics of the respondents. variable mean std. dev. min max age 45.22881 6.172396 33 65 gender 1.08526 0.2793357 1 2 education 2.176782 0.6809352 1 3 experience 22.2341 5.198991 10 40 industry ys 15.11224 6.874533 3 38 technology ys 7.660886 8.481682 2 38 same team ys 3.140173 1.18509 1 7 prior ventures 2.604528 3.896883 0 20 growth rate 22.30778 143.0371 0 1000 vc equity % 30.8797 11.5851 16 70 employees 65.43304 54.08007 0 300 the survey in order to test hypothesis 1, we included questions in our survey that were related to the perceived insufficient (or lacking) attention on the part of vcs allocated to the venture (from a ceo’s perspective). specifically, we used two items: 1) we feel that our vcs have not spent enough time on-site and 2) we feel that our vcs have not spent enough time answering our questions. although we repeated these two questions both for lead vcs and non-lead vcs, only lead vcs were retained for data analysis since ceos indicated that non-lead vc support was less relevant. ceos were instructed to answer the questions using the likert-type scale ranging from 1 (highly disagree) to 7 (highly agree). we also constructed the three questions for the survey testing the emergence of cognitive conflicts between vcs and ceos. all these items are presented in table 3. journal of small business strategy vol. 23, no. 1 43 table 3: the measurement instrument construct items text behavioral intention to switch to another funding source bis1 your venture would be better off had you avoided getting involved with vcs bis2 your venture would be better off had you chosen vcs more carefully bis3 your venture would be better off had you selected more experienced vcs bis4 your venture would be better off had you worked with vcs who had more operational experience behavioral intention to change own behavior bic1 your venture would be better off had you have been more proactive in building your relationship with the vc/s bic2 your venture would be better off had you have worked more actively on resolving conflicts and disagreements with the vc/s bic3 your venture would be better off had you have been more attentive to the vc/s’ requests affective conflict ac1 our discrepancies with vcs concerned mostly fairness issues ac2 our discrepancies with vcs concerned mostly control issues ac3 our discrepancies with vcs concerned mostly relationship issues cognitive conflict cc1 our discrepancies with vcs concerned mostly strategic decisions cc2 our discrepancies with vcs concerned mostly exit decisions cc3 our discrepancies with vcs concerned mostly financing decisions perceived lack of attention la1 we feel that the vc/s have not spent enough time on-site la2 we feel that the vc/s have not spent enough time answering our questions % equity owned by lead vc pe1 % of the venture that is owned by the lead vc? based on prior research, we established that cognitive conflicts between vcs and ceos center on venture strategy (rosenstein et al., 1993), and financing and exit (sahlman, 1990; higashide & burley, 2002). the included items represent these three areas of cognitive discord that may arise due to parties’ divergent views on venturing (exploration vs. exploitation) and discrepant interests (sapienza & gupta, 1994; shane & cable, 1997; cumming & johan, 2007). in contrast, we used the items related to fairness, control and relationship issues to test affective, relationship-based conflicts since affective disagreements typically have to do with the perceived violations of equity, procedural justice, and implicit psychological contracts between vcs and ceos (parkahangas & landstrom, 2006). the item measuring percentage of equity journal of small business strategy vol. 23, no. 1 44 currently used by vcs was included in the questionnaire. percentage of vc vs. ceo equity, as we argued earlier, reflects the bargaining power of vcs at the outset, as well as their commonly increasing influence over the venture as more capital is transferred from vcs, and respectively, they become the de facto (and de jure) owners of the venture. while we were concerned about getting responses to the question, all ceos replied and clearly did not perceive this information as too private. ceos’ behavioral intention to switch to another funding source was measured first of all with the question concerning a possible avoidance of vc support in the future since ceos do have alternatives (hsu, 2005; florin, 2005). in addition, we tested vcs’ intention to seek more experienced vcs, and vcs with greater operational experience since ceos often express their disenchantment with less experienced vcs (often recent recruits) lacking knowledge of venture management (ehrlich et al., 1994; barney et al., 1996). finally, we tested ceos’ intention to choose vcs more carefully since prior research indicated that ceos that do more search feel happier with their choices (smith, 2001). the intention to change their own behavior was measured with items that emphasized some possibilities for preventing conflicts from happening by being proactive in building a relationship with vcs from the outset, the positive effects of resolving conflicts as they arise, and responding in a timely fashion to vcs’ requests in order to build collaboration. these items were generated based on the previous research on vc-ceo collaboration (jog et al., 1991; sapienza & korsgaard, 1996; sapienza et al., 2001). data analysis and results several analyses were conducted prior to testing the hypotheses with the structural model. the viability of the model’s constructs was assessed using (1) reliability estimates (chrobach’s alphas), interconstruct correlations, and descriptive statistics, and (2) a confirmatory factor analysis (cfa) procedure that employs anderson and gerbing’s two-step approach for estimating structural equation models (anderson et al. 1988). as one can see in table 4, there is sufficient variation in the constructs, and the item-tototal correlations for all constructs exceed the recommended cutoff point of 0.35 (fornell et al. 1981). the cronbach’s alphas, for almost all constructs, exceeded the commonly used cutoff of 0.7, thus demonstrating reasonable consistency and reliability. the cronbach’s alpha for cognitive conflict was slightly below the 0.7 threshold, but removing items could not have increased this value. thus, all itemsfor this construct were retained. overall, it was concluded that constructs are sufficiently consistent and reliable, and that they have ample variation for statistical modeling. second, a cfa model was specified and estimated, as the first-step in the anderson and gerbing’s procedure (anderson et al. 1988), using the structural equation modeling facilities of amos. the model included the six constructs that were allowed to freely correlate with each other. as can be seen in table 4, the fit statistics for this model were adequate and met the recommended cutoff values. particularly, comparative fit index (cfi) and incremental fit index (ifi) values of over 0.95, combined with root mean squared error of approximation (rmsea) below 0.08 indicate good fit (hu et al. 1999). the rmsea in our case journal of small business strategy vol. 23, no. 1 45 table 4: constructs’ descriptive statistics, reliabilities, and correlations * p < 0.05 ** p < 0.01 is significantly below 0.05 (p-close < 0.058), which further indicates an excellent fit. in addition, the model passed all the condition-9 tests (kelloway 1998: 28-29) since all the factor loadings were significant at p <0.00.given the viability of the cfa model as demonstrated by its adequate fit indices and significant factor loadings, it was concluded that the structural model can be assessed. this model was therefore specified and estimated with amos. the fit statistics for this model are also outlined in table 5. table 5: fit indices for the cfa and structural models χ2 df p-val χ2/df ifi tli cfi rmsea pclose cfa model (step 1) 109.2 90 0.08 1.21 0.9 8 0.97 0.98 0.045 0.58 research model (step 2) 131.2 98 0.01 1.34 0.9 6 0.95 0.96 0.057 0.31 mean standard deviation range of item-tototal (1) (2) (3) (4) (5) (6) behavioral intentions to switch 4.49 1.75 0.57 – 0.81 0.87 behavioral intentions to change behaviors 4.63 1.68 0.79 – 0.85 0.54** 0.90 affective conflict 4.60 1.65 0.76 – 0.85 0.46 ** 0.49** 0.89 cognitive conflict 4.28 1.34 0.43 – 0.50 0.54** 0.38** 0.66** 0.68 percived lack of attention 5.19 1.75 0.66 – 0.66 0.49** 0.38** 0.35** 0.35** 0.79 % equity owned by lead vc 33.82 19.41 na 0.13 0.05 0.13 0.03 0.03 1.00 journal of small business strategy vol. 23, no. 1 46 figure 2. standardized parameter estimates for the structural model * p < 0.1 ** p < 0.01 ***p < 0.001 as can be seen, the model has an adequate fit, as the fit indices meet the abovementioned criteria (cfi & ifi >0.95, rmsea< 0.05, factor loadings significant at p < 0.001). the model, standardized path coefficients and their levels of significance, correlations, and variance explained in endogenous constructs (smc = squared multiple correlations) are depicted in figure 2. to conclude, h1 and h2 posited respectively that the cognitive conflict between the ceo of a vc-backed company and the lead vc will be associated with insufficient vc attention, and the percent of equity owned by the lead vc. h1 received strong support (p < 0.001). in contrast, h2 received only marginal support (p < 0.1). however, the two hypothesized effects explain together 33% of the variation in cognitive conflict. h3 was also supported at p < 0.001. as conjectured, cognitive conflicts were also strongly associated with affective conflicts explaining 59% of the variation in affective conflict. h4 and h5 posited that the consequences of affective conflict can be (1) increased intention to switch to other funding sources, and (2) augmented intention to modify one’s behavior and prevent or resolve conflicts with vcs, respectively. both hypotheses were supported at p < 0.001. affective conflict explained 30% of the variation in financing intentions and 31% of the variation in ceos’ intention to improve their relationship with vc, respectively. conclusion the main purpose of this paper was to examine the question that has been overlooked in the extant research on vc ceo conflict (higashide & birley, 2002 forbes et al., 2010): do ceos change their intentions in terms of seeking particular types of financial intermediaries for their future endeavors in the wake of conflict with vcs in their previous ventures? this paper’s main contribution lies in demonstrating that, in reaction to conflict with vcs in their prior encounters, ceos are likely to exhibit a wide range of behavioral intentions with regard to their choice of financial intermediaries going into the future. specifically, some vcs may express the desire not to use any financial intermediaries; others may exhibit preference for business angels and cvcs rather than vcs; and still others could retain their previous intent to seek vcs as financial intermediaries, but also make the resolution to adjust their own behavior to avoid conflicts in the future. ; perceived lack of attention from lead vc % equity owned by lead vc cognitive conflict affective conflict behavioral intention to switch to another funding source behavioral intention to change own behavior 0.54 *** 0.18 * 0.77 *** journal of small business strategy vol. 23, no. 1 47 the second contribution of this study is that it emphasizes, following some recent research (zacharakis et al., 2010), the negative aspects of conflict, including cognitive conflicts frequently described in prior studies solely in positive terms (higashide & birley, 2002; yitshaki, 2008). previous researchers have approached cognitive conflicts from a positive perspective as genuine disagreements regarding venture policies that could lead to finding creative solutions for the benefit of the venture (higashide & birley, 2002; yitshaki, 2008). in contrast, we argued that cognitive conflicts can be influenced by parties’ vested interests, including their equity stake in the venture that could seriously aggravate such conflicts. vcs’ equity stake is heavily negotiated before vcs and entrepreneurs enter their relationship (sahlman, 1989; de bettignies & brander, 2006) and may further be changed multiple times depending on the degree of success of the venture and its need for new financing, often putting the entrepreneur at a disadvantage (forbes et al., 2010). not surprisingly, the divergent vested interests of vcs and entrepreneurs may underlie what appears on the surface as bona fide disagreements about venture strategies. the negative aspects of affective conflict arise not only due to the fact that relationships between vcs and ceos of vc-financed ventures may seriously deteriorate as a result of personal frictions (jehn, 1995; 1997; jehn & mannix, 2001). the negative aspects of affective conflicts, as we argue in this study, could also be due to the fact that either one, or even both, of the partners may believe that their expectations regarding procedural justice and fairness have been violated (parhankangas and landstrom, 2006; sapienza et al., 2000). overall, this study shows that conflicts between vcs and ceos should be approached seriously due to their potentially negative effect on vc-ceo collaboration and venture performance. even cognitive conflicts should not be disregarded as being entirely positive or functional, but rather analyzed as possible symptoms of unfair equity distribution, ineffective collaboration or partner mismatch. moreover, it is critical to follow the evolution of cognitive conflicts to avoid their escalation into even more intense affective conflicts that could make further collaboration between vcs and ceos all but impossible. vcs also need to change their attitude toward conflicts as being only natural (zacharakis et al., 2010) and be more alert toward the possible negative effect of conflict on their reputation, and hence, the quantity and quality of deals available to them in the future. based on this research, ceos also need to be very selective in their choice of financial intermediaries, as well as seek to ameliorate their own collaboration strategy. limitations and future research implications this study has some limitations. the reader should be aware of these limitations as they could affect interpretation of the results. first, many of our measures were based on ceos’ inherently subjective and emotional evaluations made in the wake of conflict with regard to vcs’ perceived unfairness and intentions to choose to not to choose certain financial intermediaries in the future. similar to other researchers (de clercq and sapienza, 2006), we sought to minimize such problems related to the subjectivity of used measures using established scales of different conflict types and relying on interviews with the journal of small business strategy vol. 23, no. 1 48 respondents to ensure better understanding of the underlying problems and conflictual issues in the vc-entrepreneur relationship. nevertheless, the reader needs to realize that our findings could still be impacted by ceos’ subjective views of conflict. furthermore, the reader needs to take ceos’ declarations made in response to our questions and open-ended comments on the survey, such as never to use any financial intermediaries in their new endeavors, with a grain of salt. ceos could be frustrated and disappointed with their vcs and report their unwillingness to ever form alliances with vcs in the future. still, ceos might change their mind once they receive an attractive offer from a vc. furthermore, due to the cross-sectional nature of our data, any suggestions related to the causal nature of the observed relationship can only be speculative (ylirenko, sapienza, and hay, 2001). we are hopeful, however, that future research will shed additional light on the examined situations. specifically, due to the contradictory nature of information regarding vc-ceo conflict, its antecedents, dynamics and outcomes received from vcs (higashide & birley, 2002; yitshaki, 2008; forbes et al., 2010; zacharakis et al., 2010), it would be useful, in our view, to organize vc-ceo panels that could discuss the divisive issues and seek to capture their multiple dimensions taking into account both the vantage points of investors (vcs, business angels and cvcs) and entrepreneurs. more attention could also be devoted to clarifying the nature of the outcome variables, and investigating the extent to which entrepreneurs’ (and vcs’) determinations regarding future 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(2021). industry impact on gdp growth in developed countries under r&d investment conditions. journal of small business strategy, 31(1), 66-80. the impact of industry on gdp growth is widely discussed in light of the industrial revolution that arose in the mid-18th century as the first wave of innovation. crafts and mills (2017) provided a time-series analysis of annual estimates of real gdp and industrial output covering 12701913, the period before and after the first innovation wave. their main findings were as follows: on average, the growth trend was 0.2% per year over the 500 years from 1270 to 1770; following the industrial revolution, the growth in real gdp per capita peaked at approximately 1.25% per year in the mid-nineteenth century. among the conclusions of solow (1957) based on the application of a crude production function to american data over the period 1909-1949 were that gross output per working hour doubled over the period, with 87.5% of the increase attributable to technical change and the remaining 12.5% to increased use of capital. schumpeter’s (1934) theories and the concept of “creative destruction” introduced the disruption of existing economic activity by innovations as a possibility for creating new ways of producing goods or services or entirely new industries (oecd/eurostat. (2018). the strategic stimulus to economic development in schumpeter’s (1934) analysis is innovation, defined as the commercial or industrial application of something new: a new product, process, or method of production; a new market or source of supply; and a new form of commercial, business, or financial organization. the innovational process incessantly revolutionizes the economic structure from within, incessantly destroying the old one and incessantly creating a new one (schumpeter, 1934). based on schumpeter’s (1934) work, the oslo manual (2005) defined four types of innovations that encompass a wide range of changes in firms’ activities: product innovations, process innovations, organizational innovations and marketing innovations. these efforts were furthered in the 2018 oslo manual (oecd/eurostat. (2018), and innovation was defined as a new or improved product or process that differs significantly from the unit’s previous products or processes and that has been made available to potential users (product) or brought into use by the unit (process). the impact of industry on gdp growth is widely discussed in light of the industrial revolution that arose as the first wave of innovations and has since been a common subject of theoretical and empirical research papers. however, the issue of r&d investment, industrial structure and the impact on gdp growth is still under discussion and requires much deeper investigation under conditions of globalization. the results of this paper supported the hypotheses that growth of the industry share in gross value added has a higher impact on gdp growth in well-developed industrialized countries with high gdp per capita than in industrialized countries whose gdp per capita is at a lower level under business-financed r&d investment conditions. in addition, the multiplier effect of business-financed r&d investment and its impact on economic growth depend on the economic development level of a given industrialized country. the proposed hypotheses suggest that policy makers of less-developed countries should pay more attention to enhancing the quality of industry by introducing appropriate incentives rather than to increasing the share of industry in gdp, with a particular focus on the best practices of well-developed industrialized countries. rūta banelienė http://www.smallbusinessinstitute.biz http://www.jsbs.org 67 r. banelienė journal of small business strategy / vol. 31, no. 1 (2021) / 66-80 the impacts of innovations on firm performance range from effects on sales and market share to changes in productivity and efficiency. important impacts at the industry and national levels are changes in international competitiveness and in total factor productivity, knowledge spillovers from firm-level innovations, and an increase in the amount of knowledge flowing through networks. according to the oslo manual (2018), many factors could have an impact on boosting innovations in the business sector, including internal factors, such as general resources of the firm, management capabilities, workforce skills and human resources management, and technological capabilities; and external factors, such as knowledge flows, including the diffusion of innovations and the collection of data on knowledge flows, the location of business activities, markets and environment for business innovation, public policy in the forms of regulations and government support programs, public infrastructure, the macroeconomic policy environment, and the social and natural environment for innovation. the revived interest in industrial policy comes at the time of a new technological transformation and accompanies the arrival of radical and disruptive technologies associated with the applications of artificial intelligence, automation and machine learning. industry 4.0 and the so-called “fourth industrial revolution” embody technologies such as advanced robotics, increased automation, digitalization and data exchange in manufacturing technologies supported by artificial intelligence, cyber-physical systems, platform economy innovations and cloud computing (bailey, 2019). comparable and representative data for 2015 on the deployment of industrial robot technologies show that korea and japan lead in terms of robot intensity (i.e., the industrial stock of robots over manufacturing value added). the robot intensity in these economies is approximately three times that in the average oecd country (oecd, 2017). innovative effort is on the rise as a share of economic activity. investment in knowledge has grown more rapidly than investment in machinery and equipment since the mid1990s in most oecd countries (oecd, 2007). there is no doubt that innovation is fundamental to economic development and growth. innovation enables not only firms but also industries and even countries to compete with each other (slaper & justis, 2010). innovation is the engine of economic growth: innovation and its diffusion within and across national boundaries rather than the accumulation of capital explain the economic growth rates of countries (sainsbury, 2020). the novelty of this study is its examination of the link between industry and gdp growth in developed countries under business r&d investment conditions, including the price of capital. previous research and the majority of existing models investigated the relation between gdp growth and industry without keeping in mind r&d investment conditions, as will be shown in the section “theoretical approach and empirical evidence” of this paper. the purpose of this study is to analyze the impact of industry and business r&d investment on gdp growth in oecd countries. seeking to examine the hypothesis on the relation of industry and gdp growth in developed countries under business r&d investment conditions, data for 36 oecd countries were used, and regression analysis was applied. the structure of this article is as follows: the theoretical approach and empirical evidence clarify the direction for the empirical study and model development, which is a proven novelty of this study in comparison to existing empirical evidence. the empirical background part analyzes oecd countries’ statistical data with a special focus on industry, its structure and country segmentation by gdp per capita. the part regarding the methodology, model and data describes the developed model for testing the proposed hypotheses, and the results part provides the modeling outcomes. the conclusion and discussion section summarizes the major insights of this study and highlights the implications for policy makers. theoretical approach and empirical evidence the links between technology and the economy were at the very heart of the industrial revolution, and the successful conversion of many inventions into profitable innovations in numerous small but growing firms made possible the acceleration of productivity growth in the leading sectors; this was not a linear process any more than it is in the present (freeman, 2019). fagerberg & verspagen (2020), by following freeman’s analytical framework on long-run economic development as a succession of technological regimes with quite different properties, stressed that at the core of each regime is a constellation of radical innovations, the diffusion of which generates many new applications and, for a while, strong economic growth. the relationship between innovation and economic change is conceptualized as a two-way link. on the one hand, the former is indeed a major driver of economic performance; on the other hand, specific economic and business conditions can explain the way particular innovations emerge, for example, when exports and profits shape in68 r. banelienė journal of small business strategy / vol. 31, no. 1 (2021) / 66-80 dustries’ ability to introduce product innovations (pianta, 2017). the results for manufacturing alone are somewhat different. although r&d maintains a strong influence on innovative sales, technology adoption loses its significance; manufacturing industries have been characterized by widespread processes of restructuring, and technology adoption from external sources (particularly regarding new machinery) has mainly had the effect of reducing labor use, rather than increasing innovative sales (bogliacino & pianta, 2012). denoncourt (2020), with reference to rahman et al. (2017), noted that society has changed, with the decline of traditional manufacturing and simple supply chains and their frequent replacement with digital and intellectual property (ip)-reliant business models operating in the intangible (virtual or weightless) economy. firms with new digital technologies create new markets and value networks that impact established markets, firms, products and alliances. artificial intelligence (ai) radically shortens the time needed to discover new industrial materials, sometimes from years to days (chen, 2017). currently, the greatest ai commercial potential for advanced manufacturing is expected to exist in supply chains, logistics and process optimization (chui et al., 2018). in addition to having direct uses in production, ai used in logistics enables real-time fleet management while significantly reducing fuel consumption and other costs (oecd, 2018). ulku (2007) provided an empirical analysis of the relationship between r&d intensity, rate of innovation and growth rate of output in four manufacturing sectors, namely, chemicals, drugs and medicine, electrical and electronics, and machinery and transport, in 17 oecd countries over the period 1981-1997. her findings suggest that knowledge stock is the main determinant of innovation in all four manufacturing sectors and that r&d intensity increases the rate of innovation in the chemicals, electrical and electronics, and drugs and medicine sectors. in addition, the rate of innovation has a positive effect on the growth rate of output in all sectors. coccia (2009) analyzed the relationship between productivity growth and r&d investment. the econometric analysis showed that gross domestic expenditure on r&d (gerd), as a percentage of gdp, is an important driver of productivity growth. the optimization showed that the long-run magnitude of gerd between 2.3% and 2.5% maximizes productivity growth. he stated that countries should focus their targets on r&d investment in the amount of approximately 2.3-2.5% of gdp in the long run. however, this problem is still under discussion and requires much deeper investigation through the examination of other indicators, including gdp per capita. the data collected for this study could not clearly prove or reject coccia’s hypothesis or indicate whether there is an optimum level of r&d investment, based on the relation between business r&d expenditure and gdp per capita. frick et al. (2019) argued that the differences in r&d intensity observed among subsectors of the manufacturing sector are primarily a result of differing returns to innovation and differing innovation behaviors. according to guellec et al. (2001), r&d is important for productivity and economic growth. business r&d has high spillover effects; it enhances the ability of the business sector to absorb technology coming from abroad or from government and university research. the social return on business r&d is then higher than its private return, which is a possible justification for government support of business r&d. using the innovation index and its component indexes as a measure of the innovative environment prevailing in us states, cheung (2014) found that the more innovative a state is, the higher its per capita real gdp and per capita personal income are. higher per capita personal income is associated with both the availability of human capital for innovative activities and the presence of the economic dynamics that facilitate those activities. using data on top r&d spenders in the us and the eu from 2004 until 2012, castellani et al. (2016) investigated the sources of the us/eu productivity gap. they found robust evidence that us firms have a higher capacity to translate r&d into productivity gains (especially in high-tech industries), and this contributes to explaining the higher productivity of us firms. conversely, eu firms are more likely to achieve productivity gains through capital-embodied technological change, at least in mediumand low-tech sectors. sainsbury (2020) pointed out that the growth of high value-added per capita industries is the key to economic development, and the creation of competitive advantage and production efficiency by innovation is the way firms create high value-added per capita. governments need to draw up policies that support industry in four main areas: firm financing and governance, regional policy, the national system of education and training, and the national system of innovation. guimón & paunov (2019) pointed out that three factors are particularly important for evaluating a country’s policy mix: 1) the characteristics of the business sector, 2) the characteristics of higher education institutions and pub69 r. banelienė journal of small business strategy / vol. 31, no. 1 (2021) / 66-80 lic research institutes and of their research, and 3) macroeconomic conditions. appelt et al. (2019), based on the oecd r&d tax incentives database for 36 oecd countries and partner economies, found that over the past two decades, many countries have increased the availability, simplicity of use and generosity of r&d tax incentives. empirical background seeking to investigate industry directions that have a high impact on economic growth, this analysis is based on the data of oecd countries. in the first step, an overview of all 36 oecd countries was made considering two criteria – manufacturing share in gross value added and gdp per capita. in the second step, we analyzed the data in more detail and found that 17 oecd countries could be called industrialized countries with high gdp per capita. the largest selection of countries – 13 countries whose gdp per capita is higher than $40,000 and whose manufacturing share in gross value added is 10-19.9% – included austria, belgium, canada, denmark, finland, france, iceland, italy, netherlands, new zealand, sweden, the united kingdom, and the united states. for further analysis, four countries from other segments were included: germany and japan, where manufacturing share in gross value added exceeds 20% and whose gdp per capita higher than $40,000; switzerland, where manufacturing share is in between 10-19.9% and gdp per capita is above $60,000; and ireland, whose manufacturing share in gross value added exceeds 30% and whose gdp per capita is above $60,000 (see table 1). furthermore, the industry structure in 16 selected countries by the top three industries was analyzed in more detail. differences in terms of population were accounted for, and population figures were additionally included in this step of analysis. eurostat data for the year 2017 were used for european union countries (germany, sweden and united kingdom data for 2016) and iceland; and 2016 data were used for switzerland. in addition, national statistical offices data were used for 2017 for the us, japan, new zealand, and canada (bureau of economic analysis 2019; statistics of japan (2019); stats nz (2019); & statistics canada (2019), respectively). population data for 2018 were extracted from the world bank (2019) database. ireland was excluded from this step of the analysis due to the unavailability of detailed table 1 oecd countries by gdp per capita in relation to manufacturing share in gross added value, 2017 gdp/capita manufacturing share in gross added value less than 10% 10-19.9% 20-29.9% 30% and more less than $20,000 mexico $20,000-$39,999 greece, poland, portugal, spain, turkey, chile, estonia, israel, latvia, lithuania czech republic, hungary, slovakia, slovenia korea $40,000-$59,999 australia austria, belgium, canada, denmark, finland, france, iceland, italy, netherlands, new zealand, sweden, united kingdom, united states germany, japan $60,000 and more luxembourg, norway switzerland ireland source: prepared by author, based on oecd data (oecd 2019b, 2029d). data on manufacturing share in gross value added for iceland and new zealand for 2016 and for canada for 2015. 70 r. banelienė journal of small business strategy / vol. 31, no. 1 (2021) / 66-80 data on the manufacturing structure (eurostat, 2019b). after data analysis, it was found that most of the selected countries had the manufacture of food products, beverages and tobacco products as one of the top 3 industries (13 of 16 countries; of which 5 small countries had a population under 10 million). this suggests that high-income countries should pay attention to the food industry and seek to develop a sustainable food supply with appropriate quality standards for their populations. the second most common top industry is machinery and equipment manufacturing: more than half of the selected countries (10 of 16), both small and large developed countries, have this industry as one of the top 3 manufacturing sectors. basic metal and fabricated metal product manufacturing is in third place: 8 of the 16 selected countries have developed this industry, and the importance of this industry likewise does not depend on a country’s size in terms of population. motor vehicles, trailers, semitrailers and other transport equipment manufacturing and chemicals and chemical product manufacturing are industry priorities in large countries with a population above 10 million. this could be explained by historical aspects based on the first wave of innovations and the owned natural resources that allowed the development of the transport equipment manufacturing sector in canada, france, sweden, the united kingdom, germany and japan, even though the extraction of metal ores is currently shrinking in many of these countries (materials flow analysis portal, 2019). the priority of chemical product manufacturing in belgium, the netherlands and united states could be explained by the same historical reason – owned natural resources and inventions. although this industry is not found only in large countries, there is a great difference in population between the us and belgium and the netherlands. basic pharmaceutical product and pharmaceutical preparation manufacturing and computer, electronic and optical product manufacturing are the top 3 priority industries in the selected countries, both small and large countries. in addition, this research step showed that small, well-developed industrialized countries have used their natural resources for boosting economic growth, and this is one of their top 3 manufacturing directions: for example, finland has used wood as its own natural resource for developing wood, paper, printing and reproduction manufacturing, and new zealand has developed petroleum and coal product manufacturing. however, industries based purely on countries’ own natural resources cannot be considered a trend for all selected oecd industrialized countries and were excluded from further analysis in this study. as the first-stage outcome of the data analysis, seven major manufacturing directions could be observed: 1) food products, beverages and tobacco products; 2) machinery and equipment; 3) basic metals and fabricated metal products; 4) motor vehicles, trailers, semitrailers and other transport equipment; 5) chemicals and chemical products; 6) basic pharmaceutical products and pharmaceutical preparations; and 7) computer, electronic and optical products, which could create high value added in the industrial sector, as proven by their development as top directions in oecd industrialized countries whose gdp per capita is higher than $40,000. in addition, it should be noted that only two of the seven directions – motor vehicles, trailers, semitrailers and other transport equipment manufacturing and chemicals and chemical products manufacturing – belong to the top 3 industries of large countries, whose population is above 10 million. eurostat (2019a) classified only two of the seven highlighted manufacturing sectors as high-technology sectors: manufacture of basic pharmaceutical products and pharmaceutical preparations and manufacture of computer, electronic and optical products. according to technological intensity, three of the seven manufacturing industries are considered medium-high technology: manufacture of chemicals and chemical products, manufacture of machinery and equipment, and manufacture of motor vehicles, trailers and semitrailers, and other transport equipment. basic metal and fabricated metal product manufacturing is classified as a medium-low-technology industry, and food product, beverage and tobacco product manufacturing is classified as a low-technology industry. a similar classification is provided by the oecd (2011). innovation in lowand medium-technology industries (lmts) often receives less attention than innovation in high-technology industries. however, innovation in lmts can have a substantial impact on economic growth, owing to the weight of these sectors in the economy (oecd/eurostat, 2005). method regression analysis was used for modeling based on the following equation: 𝐺𝐺𝐺𝐺𝐺𝐺 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 = 𝑐𝑐 + 𝐵𝐵𝐵𝐵𝐵𝐵&𝐺𝐺 𝐺𝐺𝐺𝐺𝐺𝐺 + 𝐼𝐼𝐼𝐼𝐺𝐺 𝐺𝐺𝐺𝐺𝐺𝐺 + 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 + 𝜀𝜀 (1) 71 r. banelienė journal of small business strategy / vol. 31, no. 1 (2021) / 66-80 here, ber&d/gdp refers to the business-financed gross domestic expenditure on r&d as a percentage of gdp, ind/gav denotes the share of industry as a percentage of gross value added, and ltir denotes the long-term interest rate. this study uses oecd data from 36 countries (see appendix). the model hypotheses (hp) are as follows: hp1. growth in the share of industry has a higher impact on gdp growth in well-developed industrialized countries whose gdp per capita is higher than $40,000 than in industrialized countries where gdp per capita is at a lower level under business-financed r&d investment conditions. hp2. the multiplier effect of business-financed r&d investment and its impact on economic growth depend on the industrialized country’s economic development level. results the panel least squares method was applied for the estimations. annual data for 36 oecd countries over the period 2014-2017 were used for modeling. three countries were excluded due to lack of data on the long-term interest rate (estonia, turkey) and on business-financed gross domestic expenditure on r&d (australia). modeling was performed using the eviews10 program. the estimation results prove the hypothesis that the growth of industry share in gross value added has a higher impact on gdp growth in well-developed industrialized countries whose gdp per capita is higher than $40,000 than in industrialized countries whose gdp per capita is at a lower level under business-financed r&d investment conditions. for the baseline estimation, data were used for 33 oecd countries, excluding 3 oecd countries due to the lack of data for australia on business sector r&d expenditure and for estonia and turkey on the long-term interest rate. the estimation covers the period 2014-2017 and includes 105 (total panel unbalanced) observations. the panel least squares method with white cross-section standard errors and covariance and fixed cross-sectional variables (dummy variables) was used for the baseline estimation as shown in equation (2). r-squared (r2) = 0.9910; adjusted r-squared (r2) = 0.9864; d-w = 1.7953. the estimation shows a positive impact of r&d investment by business sector on gdp per capita, where one additional percentage point of r&d investment growth raises gdp per capita by $8,569. in addition, an additional percentage point of industry share growth in gross added value raises gdp per capita by $1,175. a one percentage point increase in the long-term interest rate has a negative impact, leading gdp per capita to drop by $1,314 (see equation (2) and table 2). in the second modeling step, the same estimation was made for 17 industrial oecd countries whose industry share in gross value added is above 10% and whose gdp per capita is above $40,000, namely, austria, belgium, canada, denmark, finland, france, iceland, italy, netherlands, new zealand, sweden, the united kingdom, the united states, germany, japan, switzerland and ireland (see table 1). the data covers the same period, 2014-2017, and includes 49 (total panel unbalanced) observations. the panel least squares method with white cross-section standard errors and covariance and fixed cross-section variables (dummy variables) was used for this estimation. r-squared (r2) = 0.9763; adjusted r-squared (r2) = 0.9608; d-w = 1.7410. the second estimation results show the same relations as the baseline estimation: positive relationships between gdp per capita and business sector r&d investment, as well as between gdp per capita and industry share in gross value added, and a negative relation with the long-term interest rate. however, in the second estimation, the impact of business-financed r&d investment is 1.54 times higher than that in the estimation for all selected 33 oecd countries. additionally, industry share growth in gross value added has a higher impact on gdp per capita growth but only of 6.4% in comparison to the baseline estimation results. the long-term interest rate in this case is 1.45 times more vulnerable than the estimation output for all 33 selected oecd countries (see equation (3) and table 3). 𝐺𝐺𝐺𝐺𝐺𝐺 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 = 11334.92 + 13223.27 𝐵𝐵𝐵𝐵𝐵𝐵&𝐺𝐺 𝐺𝐺𝐺𝐺𝐺𝐺 + 1251.10 𝐼𝐼𝐼𝐼𝐺𝐺 𝐺𝐺𝐺𝐺𝐺𝐺 − 1912.08𝐿𝐿𝐿𝐿𝐼𝐼𝐵𝐵 + 𝜀𝜀 (3) 𝐺𝐺𝐺𝐺𝐺𝐺 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 = 13507.80 + 8568.59 𝐵𝐵𝐵𝐵𝐵𝐵&𝐺𝐺 𝐺𝐺𝐺𝐺𝐺𝐺 + 1175.38 𝐼𝐼𝐼𝐼𝐺𝐺 𝐺𝐺𝐺𝐺𝐺𝐺 − 1314.23𝐿𝐿𝐿𝐿𝐼𝐼𝐵𝐵 + 𝜀𝜀 _ _ 72 r. banelienė journal of small business strategy / vol. 31, no. 1 (2021) / 66-80 the third estimation was made for the 14 selected oecd industrialized countries whose gdp per capita was below $40,000 and whose industry share in gross value added was higher than 10%: mexico, greece, poland, portugal, spain, chile, israel, latvia, lithuania, czech republic, hungary, slovakia, slovenia and korea (see table 1). turkey and estonia were excluded from the estimation due to lack of data on the long-term interest rate. the data cover the same period, 2014-2017, and include 52 (total panel unbalanced) observations. the panel least squares method with fixed cross-section variables (dummy variables) was used for the estimation. table 2 review regression estimation: all selected oecd countries variable coefficient std. error t-statistic prob. c 13507.80 1961.109 6.887837 0.0000 ber&d/gdp 8568.587 1745.701 4.908393 0.0000 ind/gav 1175.383 38.29223 30.69509 0.0000 ltir -1314.225 435.3570 -3.018730 0.0036 effects specification cross-section fixed (dummy variables) r-squared 0.990959 mean dependent var 40001.53 adjusted r-squared 0.986373 sd dependent var 13418.09 se of regression 1566.331 akaike info criterion 17.81672 sum squared residuals 1.69e+08 schwarz criterion 18.72665 log likelihood -899.3778 hannan-quinn crit. 18.18544 f-statistic 216.0902 durbin-watson stat 1.795279 prob(f-statistic) 0.000000 table 3 review regression estimation: 17 selected oecd industrialized countries with high gdp per capita variable coefficient std. error t-statistic prob. c 11334.92 4172.468 2.716598 0.0110 ber&d/gdp 13223.27 2977.429 4.441171 0.0001 ind/gav 1251.104 59.92816 20.87673 0.0000 ltir -1912.082 163.0936 -11.72383 0.0000 effects specification cross-section fixed (dummy variables) r-squared 0.976320 mean dependent var 48442.13 adjusted r-squared 0.960805 sd dependent var 8102.611 se of regression 1604.129 akaike info criterion 17.89035 sum squared residuals 74623633 schwarz criterion 18.66252 log likelihood -418.3136 hannan-quinn crit. 18.18331 f-statistic 62.92906 durbin-watson stat 1.741032 prob(f-statistic) 0.000000 73 r. banelienė journal of small business strategy / vol. 31, no. 1 (2021) / 66-80 this estimation shows that the industry share in gross value added is irrelevant in modeling the impact on gdp per capita by equation (1) (p = 0.93). after elimination of the industry indicator from the equation, the estimation shows the same positive relation between gdp per capita and r&d investment by business sector and a negative relation to the long-term interest rate, as in the two previous estimations. the level of gdp per capita at which a one percentage point increase in business-financed r&d investment could enhance gdp per capita growth by $7,647 is more than twice as high ($27,511) as the level in the baseline and second estimations: for comparison, in the baseline estimation for all selected oecd countries, the gdp per capita starting point is $13,508, while in the second estimation for industrialized countries with high gdp per capita, it is $11,335. in addition, the impact of r&d investment by the business sector is lower (in the baseline estimation, it is equal to $8,569, and in the second estimation, it is equal to $13,223) (see equations (2), (3) and (4)). this supports the hypothesis that the multiplier effect of business-financed r&d investment and its impact on economic growth depend on the economic development level of a given industrialized country. 𝐺𝐺𝐺𝐺𝐺𝐺 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 = 27510.85 + 7647.12 𝐵𝐵𝐵𝐵𝐵𝐵&𝐺𝐺 𝐺𝐺𝐺𝐺𝐺𝐺 − 1213.18𝐿𝐿𝐿𝐿𝐿𝐿𝐵𝐵 + 𝜀𝜀 (4) r-squared (r2) = 0.9536; adjusted r-squared (r2) = 0.9343; d-w = 1.5301. in the third estimation, growth of the long-term interest rate has a negative impact on economic growth, although it has a lower negative impact than it does in the baseline ($1,314) and second ($1,912) estimations: a one percentage point higher interest rate will shrink gdp per capita by $1,213 (see equations (2), (3) and (4)). the estimations support the hypotheses that growth in the industry share in gross value added has a higher impact on gdp growth in well-developed industrialized countries where gdp per capita is higher (in this case, more than $40,000) than in industrialized countries whose gdp per capita is at a lower level under business-financed r&d table 4 review regression estimation: industrial oecd countries with low gdp per capita variable coefficient std. error t-statistic prob. c 27510.85 2429.926 11.32168 0.0000 ber&d/gdp 7647.120 3064.581 2.495323 0.0173 ltir -1213.175 271.2666 -4.472262 0.0001 effects specification cross-section fixed (dummy variables) r-squared 0.953621 mean dependent var 29684.26 adjusted r-squared 0.934296 sd dependent var 5217.581 se of regression 1337.408 akaike info criterion 17.48251 sum squared residuals 64391738 schwarz criterion 18.08290 log likelihood -438.5454 hannan-quinn crit. 17.71269 f-statistic 49.34753 durbin-watson stat 1.530123 prob(f-statistic) 0.000000 investment conditions. in addition, the multiplier effect of business-financed r&d investment and its impact on economic growth depend on the economic development level of the industrialized country. therefore, policy makers of less-developed countries should pay more attention to the rising quality of industry by introducing appropriate incentives, for example, r&d tax incentives, than to the share of industry in gdp, with a particular focus on the best practices of well-developed industrialized countries. moreover, industrial companies should focus on increasing their efficiency by implementing the best practices of well-developed countries’ industrial companies. _ 74 r. banelienė journal of small business strategy / vol. 31, no. 1 (2021) / 66-80 discussion and conclusion the problem regarding the optimum level of r&d investment is still under discussion and requires much deeper investigation to examine its relation not only to productivity but also to other indicators, including gdp per capita. the data collected for this research could not clearly prove or deny the coccia (2009) hypothesis or indicate whether there is an optimum level of r&d investment in the long run. this study highlighted that seven major manufacturing directions can create high value added in the industrial sector, as proven by their development as top industries in industrialized oecd countries whose gdp per capita is higher than $40,000. although only two of the seven manufacturing sectors belong to the high-technology sector, three are medium-high-technology industries, one is classified as a medium-low-technology industry, and one is classified as a low-technology industry. however, innovation in low and medium-technology industries can have a substantial impact on economic growth, owing to the weight of these sectors in the economy. the modeling and estimations supported the hypotheses that growth of the industry share in gross value added has a higher impact on gdp growth in well-developed industrialized countries whose gdp per capita is high (in this case, more than $40,000) than in industrialized countries whose gdp per capita is at a lower level under business-financed r&d investment conditions. in addition, the multiplier effect of business-financed r&d investment and its impact on economic growth depend on the economic development level of a given industrialized country. policy makers in less-developed industrialized countries should pay more attention to increasing the quality of industry by introducing appropriate incentives than to enhancing the industry share in gdp, with a particular focus on the best practices of well-developed industrialized countries. the research limitations are the limited scope of the variables used, which could have an impact on the relation between industry and gdp growth in developed countries under business r&d investment conditions. another limitation concerns the lack of investigation of the industrial structures of oecd industrialized countries with a lower gdp per capita. however, the estimations show that even if the manufacturing structures of countries with lower gdp per capita fully or partially reflect the manufacturing structures of well-developed industrial oecd economies, their industries do not have the same impact on economic growth. therefore, oecd industrialized countries with lower gdp should make efforts to improve their manufacturing sectors by enhancing their quality, changing their supply chains, focusing on high added value activities and transferring the other activities to less-developed countries. references appelt, s., galindo-rueda, f., & gonzález cabral, a. c. 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77 r. banelienė journal of small business strategy / vol. 31, no. 1 (2021) / 66-80 appendix data used for modeling country year gdp per capita ($, current ppps) share of industry (% of gross value added) business-financed gerd (% of gdp) long term interest rate (%) australia 2014 47639 6.74 n/d 3.66 2015 47351 6.55 n/d 2.71 2016 50263 6.21 n/d 2.34 2017 51994 6.20 n/d 2.64 austria 2014 48814 18.56 1.47 1.49 2015 49954 18.72 1.52 0.75 2016 51637 18.74 1.66 0.38 2017 53895 18.65 1.70 0.58 belgium 2014 44720 14.05 n/d 1.71 2015 45739 14.24 1.44 0.84 2016 47366 14.10 n/d 0.48 2017 49526 14.38 1.72 0.72 canada 2014 45628 10.45 0.78 2.23 2015 44671 11.08 0.74 1.52 2016 45109 n/d 0.71 1.25 2017 46810 n/d 0.65 1.78 chile 2014 22688 12.38 0.12 4.74 2015 22593 12.77 0.12 4.48 2016 22788 12.00 0.13 4.41 2017 24181 11.48 0.11 4.24 czech republic 2014 32265 26.76 0.71 1.58 2015 33701 26.81 0.67 0.58 2016 35234 26.84 0.66 0.43 2017 38037 26.81 0.70 0.98 denmark 2014 47905 13.67 n/d 1.33 2015 49071 14.29 1.81 0.69 2016 50685 14.98 n/d 0.32 2017 54337 14.41 1.78 0.48 estonia 2014 28937 16.15 0.53 n/d 2015 29260 16.01 0.60 n/d 2016 30895 16.02 0.60 n/d 2017 33493 15.65 0.56 n/d finland 2014 41463 16.90 1.70 1.45 2015 42213 17.12 1.58 0.72 2016 43730 17.03 1.56 0.37 2017 46349 17.70 1.60 0.55 78 r. banelienė journal of small business strategy / vol. 31, no. 1 (2021) / 66-80 france 2014 40144 11.47 1.24 1.67 2015 40841 11.66 1.23 0.84 2016 42067 11.51 1.23 0.47 2017 44125 11.22 n/d 0.81 germany 2014 47190 22.73 1.89 1.16 2015 47979 22.97 1.91 0.50 2016 49921 23.40 1.90 0.09 2017 52574 23.36 2.01 0.32 greece 2014 26839 9.51 0.25 6.93 2015 26902 9.80 0.30 9.67 2016 27274 10.53 0.40 8.36 2017 28580 10.81 0.51 5.98 hungary 2014 25518 23.15 0.65 4.81 2015 26356 24.41 0.68 3.43 2016 26852 23.49 0.68 3.14 2017 28799 23.16 0.71 2.96 iceland 2014 45713 12.28 0.70 3.20 2015 48857 11.61 0.79 2.66 2016 52340 10.67 0.80 2.78 2017 55330 n/d 0.77 2.22 ireland 2014 51126 21.75 0.79 2.26 2015 69147 37.16 0.58 1.11 2016 70616 35.41 0.57 0.69 2017 77679 33.93 n/d 0.79 italy 2014 36071 15.48 0.63 2.89 2015 36836 16.02 0.67 1.71 2016 39045 16.44 0.71 1.49 2017 40981 16.61 n/d 2.11 israel 2014 34228 14.23 1.46 2.89 2015 35450 14.53 1.41 2.07 2016 37475 13.99 1.61 1.88 2017 38882 13.76 n/d 1.91 japan 2014 39183 19.88 2.63 0.52 2015 40406 20.93 2.56 0.35 2016 41138 20.79 2.46 -0.07 2017 41985 20.84 2.51 0.05 korea 2014 33587 30.15 3.23 3.19 2015 35761 29.76 3.14 2.31 2016 37143 29.49 3.19 1.75 2017 38839 30.41 3.47 2.28 79 r. banelienė journal of small business strategy / vol. 31, no. 1 (2021) / 66-80 latvia 2014 23802 12.35 0.19 2.51 2015 24726 11.97 0.13 0.96 2016 25843 11.87 0.10 0.53 2017 28378 12.23 0.12 0.83 lithuania 2014 28174 19.19 0.34 2.79 2015 28910 19.27 0.30 1.38 2016 30300 18.77 0.33 0.90 2017 33325 19.12 0.32 0.31 luxembourg 2014 100934 4.44 n/d 1.34 2015 102817 5.19 0.60 0.36 2016 104702 5.91 n/d -0.18 2017 107525 5.43 n/d 0.50 mexico 2014 18168 16.87 0.10 6.01 2015 18438 18.29 0.10 5.93 2016 18969 18.20 0.10 6.19 2017 19655 18.25 n/d 7.25 netherlands 2014 49233 11.50 1.01 1.45 2015 50302 12.01 0.97 0.69 2016 51340 12.11 1.04 0.29 2017 54504 12.33 n/d 0.52 new zealand 2014 37061 12.09 n/d 4.30 2015 37158 12.36 0.54 3.42 2016 38784 10.95 n/d 2.76 2017 40121 n/d 0.63 2.99 norway 2014 65896 7.61 n/d 2.52 2015 60357 7.72 0.85 1.57 2016 57728 7.42 0.88 1.33 2017 62012 7.22 0.90 1.64 poland 2014 25298 18.91 0.37 3.52 2015 26529 19.86 0.39 2.70 2016 27406 20.44 0.51 3.04 2017 29583 19.28 n/d 3.42 portugal 2014 28747 13.49 0.54 3.75 2015 29685 13.94 0.53 2.42 2016 31042 14.14 0.57 3.17 2017 32554 14.40 0.62 3.05 slovakia 2014 28928 21.70 0.28 2.07 2015 29700 22.23 0.29 0.89 2016 30896 22.27 0.36 0.54 2017 32376 22.54 0.43 0.92 80 r. banelienė journal of small business strategy / vol. 31, no. 1 (2021) / 66-80 slovenia 2014 30847 22.87 1.62 3.27 2015 31649 23.08 1.52 1.71 2016 33191 23.32 1.39 1.15 2017 36163 23.72 n/d 0.96 spain 2014 33728 13.73 0.57 2.72 2015 35054 13.72 0.56 1.74 2016 36743 13.83 0.55 1.39 2017 39087 14.16 0.58 1.56 sweden 2014 46573 16.50 n/d 1.72 2015 48437 15.46 1.87 0.72 2016 49084 15.11 n/d 0.52 2017 51405 15.36 2.06 0.66 switzerland 2014 61902 18.99 n/d 0.69 2015 63939 18.54 2.14 -0.07 2016 64324 18.67 n/d -0.36 2017 66396 18.87 2.26 -0.07 turkey 2014 23983 18.99 0.39 n/d 2015 25728 18.96 0.39 n/d 2016 26330 18.83 0.44 n/d 2017 28190 19.85 0.48 n/d united kingdom 2014 40878 9.97 0.80 2.57 2015 42055 10.12 0.82 1.90 2016 42943 10.02 0.87 1.31 2017 44909 10.07 n/d 1.24 united states 2014 54952 12.08 1.69 2.54 2015 56718 12.05 1.70 2.14 2016 57822 11.53 1.74 1.84 2017 59879 11.56 1.77 2.33 source: prepared by author, based on oecd data (oecd 2019a, 2019b, 2019c, 2019d). ' ' . ~ strategy small businesses and comparison advertising strategies: is it worth the risk? karen russo france paula fitzgerald bone west virginia university james w. france buchanan ingersoll, p.c. abstract research shows that comparison ads can be particularlyejfectivefor businesses with relatively small market shares. however, there are legal risks associated with such strategies. therefore, in this article we overview constitutional law, common law, and statutory law as they relate to claims made about competitors in comparative advertising. we carefully exp/ore first amendn1ent rights and then examine the various causes of action in deception suits and section 43a of the lanham act. we conclude with suggestions for the small business owner using comparison advertising to gain market share. introduction the small business owner must determine how to best communicate products and services to the buyer. research suggests that firms with small market share benefit from using comparison advertising to improve customer attitudes and sales (gnepa, 1993; pechmann & stewart, 1991; shimp & dyer, 1978). a direct comparison advertisement is one in which the advertiser directly names the competition and states the advantages of the product/service over that offered by the competition. comparison ads are encouraged by government regulators, notably the ftc, because they provide an informative environment for the consumer and foster product/service improvement (beck-dudley & williams, 1989; muehling & kangun, 1985; petty, 1991; wilkie & farris, 1975). unfortunately, advertisers can run into trouble with the judicial branch of the government when using comparison advertisements (bixby & lincoln, 1989). first amendment rights regarding protected speech are being eroded in the commercial speech arena (boedecker, morgan, & wright, 1995), thereby increasing the consequences of making an inaccurate advertising claim. additionally, plaintiff companies are more likely to seek legal redress against competitors making false or misleading claims about the plaintiffs product or service (beck-dudley & williams, 1989; buchanan, 1985). the purpose of this article is to provide small business owners with information needed to make an informed decision regarding comparison advertising. we begin by overviewingthe literature on comparison ads, their execution and effectiveness. we then explore the legal environment regarding comparative advertising in which small business owners work. the conditions under which the 81 full force of first amendment rights take effect, including issues on the nature of the speech (commercial or noncommercial)and the status of the subject of discussion (private or public), are discussed. we then review the various types of deception suits and provide a brief analysis of section 43a of the lanham act as they relate to comparative advertising. finally, we provide guidelines for small business owners interested in using comparison advertising. why small businesses may wish to use comparison advertising comparison advertising is one of the most researchedadvertisem:nt-execution styles in the areas of marketing and advertising (pechmann & stewart, 1991 ). while many different types of comparisonadvertisementsexist, we will focus on the direct comparison ad in which one or more competitors are actively named in the advertising copy. a recent example of such an advertising strategy is hardee's ad comparing its fried chicken to kfc's. two specific attributes of the chicken, piece size and taste, are tackled head-on in hardee's print and broadcast advertisement;. another example is seen in an ad for a local "park n' shuttle." the ad states, "why pay ~38.50/week at the airport? park at brand x' fo! just 24.99/week." many researchers have concluded that comparison ads primarily benefit small market share holders (c.f., gnepa, 1993; shimp & dyer, 1978). for small market share holders, comparison ads have been shown to positively affect attitudes (donthu, 1992) and to have had an impact on sales and market shares (hayes, 1994; pechmann & stewart, 1991). recently, donthu ( 1992) found that a moderately intense comparison ad had the strongest positive impact on attitudes while very intense comparison ads had the most positive effect on advertisement recall. in other words, comparison ads were found to be more effective than advertisements which made no comparison to competing brands. comparison ads may create positive attitudes for one of several reasons. a small market share holder may benefit from being associated with market leaders because of favorable positioning effects (muehling, stem, & raven, 1989). for instance, coor's cutter, a non-alcoholic brew, should benefit by comparing itself with samuel adams beer, a popular premium beer. additionally, a direct comparison ad can cause the consumer to rethink a purchase--i.e.,the ad may "disrupt" purchase behavior so that the small market-share brand is considered by the buyer (muehling, stem, & raven, 1989). finally, pechmann and stewart ( 1991) found that direct comparison ads attract more attention since they are perceived to be novel and often contain the name of a well-known brand. this greater attention, in tum, increases persuasion. while increasing the persuasiveness of advertisements is a noble goal, small businesses need to use techniques which actually impact sales. after analyzing field data, pechmann and stewart (1991) concluded that consumers were more likely to choose the advertised brand over the competing brands when the advertised brand used direct comparative advertisements. according io advertising age (advertjsjng age, 1980; advertising age, 1982) direct comparison ads are responsible for market share gains made by burger king, pepsi-cola, suave shampoos, and schick electric shavers. more recently, mrs. winner's chicken & biscuits and hardee's have been successful using this technique (hayes, 1994). 82 : "~ ., jartran experienced $70 million-plus sales increase from 1979-1980 after running direct comparison advertisementssuggestingthat jartran trucks had better gas mileage, were newer, and were less expensive to rent than u-haul's trucks (beck-dudley & williams, 1989). the jartran advertisements are of particular interest since the ads were deemed deceptive by the u.s. courts. jartran was required to pay $40 million in damages and $2.5 million in attorney fees to u-haul due to the deception. such cases are likely to become more common since firms are more inclined to institute litigation as a means of vindicating their reputation or economic interests when false or misleading statements have been made about their products (buchanan & goldman, 1989). thus, we now examine the regulatory environment in which small businesses operate. regulatory environment for comparison advertisements despite the advantagesofusing comparison advertising, such a strategy may open the door to litigation brought by the competitor. for instance, in july 1986, blue cross/blue shield launched what it called a deliberately "aggressive and provocative" comparative advertising campaign designed to "introduce and increase the attractivenessof its products" at the expense of u.s. healthcare'sproducts,a competing hmo (us. healthcare inc. v, blue cross of greater philadelphia, 1990). the campaign consisted of several print, television, and radio advertisements, and a direct mail brochure. many of the ads claimed that with an hmo, the subscriber selects a primary care physician who, in turn, must give permission before the hmo will cover examination by a specialist. the print ads and the brochure stated the following: you should also know that through a series of financial incentives, an hmo encourages this doctor to handle as many patients as possible without referring to a specialist. when an hmo doctor does make a specialist referral, it could take money directly out of his pocket. make too many referrals, and he could find himself in trouble with hmo (u.s. healthcare inc. v. blue cross of greater philadelphia,1990.) two blue cross/blue shield advertisements featured a senior citizen under the banner heading "your money or your life," juxtaposed with blue cross/blue shield's description of "the high cost of hmo medicare." u.s. healthcare responded immediately to the attacks by filing suit against blue cross/blue shield. in addition, u.s. healthcare embarked on its own aggressive comparative ad campaign -to which blue cross/blue shield countersued. plaintiffs in these suits have traditionally sought relief under common law doctrines such as injurious falsehood (e.g., bose corn. v. consumers union of united states. inc., 1981; 1982; 1984; cumberland farms. inc. v. evere!!, 1991) and defamation(e.g., dun & bradstreet inc. v. greenmoss builders. inc .. 1985; u.s. healthcare. inc. v blue cross of greater philadelphi[l,1990). more recently, however, plaintiffs are turning to state or federal statutory provisions such as section 43(a) of the lanham act (e.g. castro! inc. v. pennzoil co., 1993; coors brewing company v. anheuser-busch companies. inc.,1992; johnson & johnson• merck v. smithkline beecham, 1992), and similar state statutes to seek liability for those who 83 make false or misleading claims about their products or services. however, before discussing these legal remedies, it is useful to understand the constitutional right to freedom of speech and how this right is likely to be applied to comparison ads. the first amendment--freedomofspeech vs. deceptive claims regarding competitors the supreme court has recognized that in order to further first amendment rights to engage in truthful expression, it may be necessary to allow defendants to escape liability for certain false statements. both common law and statutory law are at odds with this principle since both provide for payment of damages when false claims are made. thus, we must examine when first amendment rights are enforced fully in the u.s. court system. in the 1964 landmarkcase,new york times y. sumyan, the u.s. supreme court did not allow damages to the plaintiff even though claims made in the defendant's political advertisement were literally false. the case revolved around a one-page "editorial" advertisement entitled "heed their rising voices" which solicited financial support for a black student movement and furthered the campaign for black americans' right to vote. the advertisementstated that truckloads of police ringed the alabama state college campus after a peaceful demonstration on the state capitol steps and that "they" (the police) had arrested dr. martin luther king seven times. in actuality, the police had not ringed the campus, nor had police been deployed as a response to the peaceful demonstration. additionally, dr. king had been arrested only four times, not seven. even given the falsity of these statements, the supreme court ruled that this speech was fully protected by the first amendmentand that false statements are protected by the first amendment as long as there is no actual malice ~ york times v sullivan 1964). actual malice occurs when one makes statements known to the speaker to be false or makes the statement with reckless disregard to the statement's truthfulness. the rationale behind this landmark decision is that freedom of speech is paramount to the democratic form of government in the united states in which issues of public concern must be debated. according to the supreme court, all speech, even inaccurate speech, can contribute to the discussion of important public issues by sparking greater interest and greater participation in such debates. enforcing monetary damages for such speech could decrease debate and reduce the number of viewpoints expressed. if blatantly false statements may be protected by the first amendment, why then are inaccurate claims made in comparative advertisements subject to liability? first, while the constitution protects speech, the supreme court has "long recognized that not all speech is of equal first amendment importance" (dun & bradstreet y, greenmoss builders, 1985). for example, speech involving commercial speech receives less first amendment protection than noncommercial speech, while speech involvingpublicjigures receives heightened protection. each of these criteria is considered independently. for instance, even if the speech is determined to be commercial, but involves public figures, the full effect of first amendment defenses are available and the plaintiff must prove actual malice. we discuss each of these criterion and their rationale below. 84 '' commercial versus noncommercial speech one of the most prominent examples of reduced protection for certain kinds of speech concerns commercial speech. the supreme court has noted that commercial speech occupies a "subordinate position in the scale of first amendment values" (dun & bradstreet v. greenmoss builder:;, 1985, 158) and has held that commercial speech merits an intermediate level of first amendment protection (virginia state bd. of pharmacy v. virginia citizens consumer council. inc., 1976). the supreme court has defined commercial speech in a variety of ways. sometimes the court has defined commercial speech as expression that is solely in the economic interest of the speaker and his or her audience (central hudson gas & electric corooration v public service commission, i 980), or as expression that does no more than propose a commercial transaction(virginiastate bd. of pharmacyv. virginia citizens consumer council. inc., 1976 quoting pittsburgh press co. v. human relationscommissio[i, i 973). more recently, the third circuit defined commercial speech as an "expression related to the economic interests of the speaker and its audience, generally in the form of a commercial advertisement for the sale of goods and services" (u.s. healthcarev. blue cross of greater philadelphi!!, i 990 citing bolger v. young drug products coro., i983, 66-67). in 1983, the supreme court declared three factors to be considered in determining if speech is commercial: "(i) is the speech an advertisement; (2) does the speech refer to a specific product or service; and (3) does the speaker have an economic motivation for the speech" (bolger v young drugs product coro., 1983). why should commercial speech receive less protection? first, commercial speech is made solely for the monetary interest of the speaker or to promote the speaker's own goals (central hudson gas & electric coro v. public service commission, 1980). this differs significantly from political speech which, perhaps, has more noble goals. second, advertisementsand other forms of commercial speech are durable. additionally, commercial speakers are knowledgeable regarding their products/services and the market in which they operate; therefore, commercial speakers should be able to evaluate the truthfulness of their claims (e.g., central hudson gas & elec. com. v. public service commission, 1980; virnjnia state bd. of pharmacy v. virginia cjtizens consumer council. inc., 1976). note that in the new york times v. sullivan (1964) case, the speech at issue was an advertisement, but the courts determined that even though the defendants paid for the media space, the speech was not commercial since the subject matter dealt with a burning social issue of the time--civil rights. thus, the fact that media space was paid for by the advertiser does not necessarily deem speech to be commercial. today, it appears that the definition of commercial speech is expanding, and with this expansion, firms' first amendment rights are contracting (boedecker, morgan, & wright, 1995). for example, in the u.s. healthcare v. blue cross of greater philadelphia (1990), the two parties argued that they were providing information about health care--an issue of public 85 concern. the court, however found that "although some of the advertisements touch on matter.; of public concern, their central thrust is commercial. thus the parities have acted primarily to generate revenue by influencing customers, not to resolve 'the issues involved'." (~ hudson gas and electric coro. v. public service commission, 1980, 939). in another case, the courts classified informationpamphletsdescribingappropriateuse of condoms to help slow the spread of illness as commercial speech even though the pamphlet was developed as a public service !bolger y youngs drug product corp., 1983). given the above, the prudent small business owner should assume that any comparative advertisement will be viewed as commercial speech, even ifthe speech deals with an important public issue such as healthcare, environmental concerns, crime prevention, or other "prominent" issue. status of the plaintiff: prjyate general-puroose and limited-purnose public figures first amendment protection also depends on whether the plaintiff is deemed to be a public or private figure. the court has recognized two types of public figures. general-purpo!i! public figures are individuals "who by reason of the notoriety of their achievements or the vigor and success with which they seek the public's attention" have put themselves in the public eye (gertz v, robert welch. inc,, 1974, 342). the second type, limited-purpose public figures, are individuals who have "voluntarily inject[ed] [themselves] or [have been] drawn into a particular public controversy and thereby become public figure[s] for a limited range of issues" (gertz v robert welch. inc,. 1974, 342). both types of public figures must prove actual malice. speech regarding public figures is subject to full first amendment protection since actions of public figures should be subject to debate. this allows open criticism of govemmert officials which is critical to maintaining the american style of government. additionally, public figures have placed themselves in a position of public scrutiny and thereby invite attention and comment. finally, public figures "usually enjoy greater access to the channels of effective communication and hence have a more realistic opportunity to counteract false statements than private individuals normally enjoy" (gertz v. robert welch. inc., 1974, 344). determining whether a plaintiffis a private or public figure is guided by the gertz v, robert welch. inc. (1974) case. in~. lible was brought against a magazine publisher for describing the plaintiff (elmer gertz, a prominent attorney) as a "communist-fronter," "leninist," and participant in various "marxist" and "red" activities. the supreme court held that a newspaper or broadcaster publishing defamatory falsehoods about a private individual (i.e., one who is neither a public official nor a public figure) may not claim a constitutional privilege against liability, for injury inflicted, simply because an issue of public concern is addressed. the court held that the status of the defamed person also must be considered. unfortunately, the fact-specific nature about the public figure inquiry makes it difficultto generalize about which parties will be deemed public figures(langvardt, 1993). for instance, the supreme court has determined the classification of public figures includes persons such as political candidates.retired military generals, and well-known former football coaches (e.g., harte-hanks communications inc, y, connaughton, 1989; associated press y, ~. 1967; curtis publishing co, v, butts, 1967). however, a prominent private attorney, 86 .. .. -· ,. • l ... a wealthysocialite,an alleged spy, and a recipient of government research grants were found to be private figures (e.g., gertz v. welch lnc.,1974; time. inc. v. firestone, 1976). cases brought by commercial plaintiffs further complicate the private versus public figure determination. the supreme court has not engaged in a substantive public/private figure analysis in a suit involving a commercial plaintiff, however, the lower courts have had to decide cases brought by commercial plaintiffs (e.g., bose com. v. consumer union of united states inc .. 1981; 1982; 1984; national life ins co. v phillips publishing inc, 1992). the lower courts have found that the standards established in~ to be ill-suited to corporate plaintiff cases (langvardt, 1993). although gertz's general purpose public figure classification would seemingly encompass corporations whose names are immediately recognizable (e.g., ibm, mcdonald's),it is unclear whether a given corporation possesses the notoriety necessary to warrant public figure status. the corporation's size may not be a helpful predictor since the public may be equally or more familiar with relatively small corporations than many larger corporations whose names and business are generally unknown (langvardt, 1993). in the recent u.s. healthcare v. blue cross of greater philadelphia (1990) case, the court found neither of the parties involved to be limited-purpose public figures. in making this determination, the court looked at three factors. first, they determined whether the entities had media access; then they determined whether the parties had voluntarily placed themselves in a public forum; and, finally, they determined whether the content of the speech was selfmotivatedor was of public concern while both parties had media access and had voluntarily opened themselves to criticism, neither was deemed a limited-purpose public figure since the issue was motivated by economic rather than public interest. given the above discussion, it is clear that a corporate plaintiff will argue that it is a private figure so that the actual malice standards do not have to be met for the plaintiff to receive compensation. common and statutory law resolutions to deceptive claims in comoarativeadvertising common law doctrines and general statutory provisions come into play once the speech is considered to be commercial and the plaintiff is deemed a private figure. the focus of each cause of action is the imposition of liability for the consequences caused by false or misleading expressions. most often, direct comparison advertisements are not permitted to invoke the first amendment protection as in new york times v. sullivan ( 1964). indeed, "far more often, however, ads generate litigation over pejorative comments about products and services, comments which may damage corporate profits and reputations" (milton, wall, herbert, rubins, & strickland, 1994). several causes of action may be alleged in such cases, including: injurious falsehood, defamation, and violations of §43(a) of the lanham act. each of these causes of action is discussed below along with whether and to what extent the first amendment protection developed in new york times v. sullivan (1964) have applied. injurious falsehood injurious falsehood is the publication, with fault, of a false statement about a company's business, business practices, product, service, property, or property rights, which 87 results in harm, measured by proven special damages to the company's economic interest (keeton, dobbs, keeton, & owen, 1984 ). thus, when an advertisement makes false statements that directly disparage or demean the quality of that company's products or services, causing financial damage to the company, a specific form of injurious falsehood, known as product liability or trade libel, may be invoked (keeton, et al., 1984). the common law establishes the following elements for injurious falsehood liability: (1) publication ofa harmful false statement disparaging the quality of another's product or property; (2) intentto harm another's interest, awareness of the likelihood of such harm, or reasonable basis for such awareness; (3) knowledge or reckless disregard of falsity ("actual malice"); and (4) proofofspecial damages. under common law, a firm may compare its own goods or services to those of a competitor provided that it does not include any false statements of fact (hogue, 1993). this privilege is qualified however, and does not apply to statements made with malice or bad faith.' the heightened standard of proof required under the first amendment fully applies (see new york tjmes v. sullivan, 1964). this heightened standard of proof requires that the plaintiff prove "actual malice" by clear and convincing evidence that the disparaging statement was false and that it was made with either knowledge of its falsehood, or with reckless disregard of its truth or falsity (new york times v. sullivan, 1964 ). the leading case applying first amendment defenses in a noncommercial product disparagement case is bose corooration v. consumers union (1984) in which an article appearing in consumer reports magazine described the plaintiffs stereo speakers in disparaging terms. specifically, the article asserted that "individual instruments heard through the bose system seemed to grow to gigantic proportions and tended to wander about the room ... with orchestral music, such effects seemed inconsequential. but we think they might become annoying when listening to soloists" (bose corooratjon v. consumers unjon, 1984, 488). the first circuit, reviewing the district court's decision focused on the plaintiffs failure to prove actual malice. the supreme court, in upholding the circuit court's opinion, made it evident that when a disparaging statement is made in the context of noncommercial speech (such as a newspaper article or review), all first amendment defenses apply. this is not so, however, when the speech is classified as commercial. the supreme court has repeatedly held that while truthful commercial speech is entitled to some first amendment protection, the first amendment will not prevent the restraint -or even complete prohibition -of false or misleading commercial speech (e.g., bolgery. youngs drugs products coro,. 1983; central hudson gas & electric coro v, public seryjce comm'n of new york. 1980). until recently, all cases in which the supreme court addressed the protection due to commercial speech involved government regulation of advertising or other forms of commercial speech rather than product disparagement. the question of whether the new york times actual malice standard of proofapplies to disparagirg statements made in product advertisements or whether such commercial speech is entitled to less first amendment protection was finally addressed by the third circuit in u.s. healthcare. 88 inc. v. blue cross of greater philadelphia(l 990). the third circuit concluded that the actual malice standard does not apply to false commercial speech such as that contained in comparative advertisementsof competing companies. in other words, a company asserting any false statement may be held liable, regardless of whether the company believed the statement to be true. while actual malice has traditionally been required in injurious falsehood suits, cases involving commercial speech are clearly different. however, cases addressing this issue in other jurisdictions suggest that the answer is far from well-settled. in national life insurance co. v. phillips publishing. inc. (1992), the maryland district court distingui!hed and implicitly criticized the third circuit's decision in u.s. healthcar~ holding that the actual malice standard was applicable in this case involving defamatory statements made in the defendant'smarketingmaterials.although the national life insurance court found that the statements in question were not "commercial speech," the court held that even ifthe statements were commercial speech, the actual malice standard set forth in~ would still apply. in the national life insurance court's view, the appropriatestandanl depends upon the particular "reputation interest" of each plaintiff rather than an automatic application of a negligence standard for all false commercial speech. if the status of the plaintiff, rather than the nature of the speech, proves to be the key first amendment inquiry, then the outcome of future injurious falsehood cases involving advertising may depend on whether the plaintiff is found to be a public figure. defamation defamation is said to have occurred when the false statements reflect not only on a competitor's product or service, but actually affect the reputation of the company's officers or employees. the common law defines defamatim as the publication of a false and defamatory statement about the plaintiff! a statement is regarded to be defamatory if it "tends to so harm the reputationofanother as to lower him in the estimation of the community or to deter third persons from associating or dealing with him.4 it is this focus on reputation which separates defamation from injurious falsehood.' prior to 1964, plaintiffs defamation suits were virtually unconstrained by the defendant's first amendmentright to free speech. the united states supreme court's holding in new york times co. v. sullivan in 1964 redefined defamation's constitutional contours by attempting to strike a balance between the plaintiffs reputational interest and the defendant's competing interest in free speech. the plaintiff in new york times was an alabama police commissionerwho claimed that false statements made in a political advertisement in the new york times defamed him. the supreme court concluded that the advertisement was political speech, rather than a commercial advertisement, because of its commentary on the civil rights struggle, a major public issue of the time. the supreme court focused on the potential constitutional deficiency of defamation's strict liability standard, which the court thought likely to chill the exercise offirst amendment freedoms (langvardt, 1993). because the court believed that "erroneous statement is inevi1able in free debate" q:lew york times v. sullivan, 1964, 271) it devised a rule that would provide the essential "breathing space" necessary for free expression to flourish: 89 the constitutional guarantees require, we think, a federal rule that prohibits a public official from recovering damages for a defamatory falsehood relating to his official conduct unless he proves that the statement was made with 'actual malice' -that is, with knowledge that it was false or with reckless disregard of whether it was false or not <new york times v. sullivan, 1964, 279-280). the court provided further first amendment protection by raising the standard of proof by which plaintiffs needed to show actual malice, requiring clear and convincing evidence rather that merely a preponderance of the evidence. the common law takes a strict liability approach in defamation actions; thus, a plaintiff is not required to prove the defendant's knowledge of falsity or lack of reasonable attempts to ascertain the truth (keeton, et al., 1984). rather, ifthe advertisement is proven false, the defendant is liable even ifhe or she possessed a well-founded belief in its truth. three years after new york times y. sullivan ( 1964 ), the actual malice requirement was extended to suits brought by public figure plaintiffs, because, as chief justice warren reasoned in his concurrence, public figures resemble public officials as objects of intense public interest and potentially influential participants in public debate (curtis publishing co. y. butts and associated press v, walker. 1967, 142). however, when the court addressed the issue of the first amendment's role in defamation suits brought by private figure plaintiffs, the court initially focused on the degree of public interest or concern present in the speech rather than the plaintiff's status, but later refocused on the plaintiff's status as determinative of the appropriate extent offirst amendment accommodation( e.g., rosenbloom v, metromedia. inc .. 1971; gertz v. welch inc., 1974). the actual malice requirement, together with the heightened standardofproofnecessary,has made it extremely difficult for public figure plaintiffs to win defamation suits. therefore, plaintiffs seek to avoid being classified as a public figure whenever any ambiguity exists. lanham act since its enactment in 1946, §43(a) of the lanham act' prohibited false advertising about one's own products or services. because the original section 43(a) had a strict liability regime, containing no knowledge component or fault requirement such as those required in defamation actions, the lanham act cause of action was widely used in false advertising actions. in other words, defendants who made false statements about their products were liable under §43(a) regardless of their good faith belief that the representations were true. section 43(a) was significantly expanded in 1988 (effective 1989)7 to extend the prohibition against false and misleading advertising to false statements made by a defendant about the plaintiff's products or services. the new version of §43(a) provides: any person who, on or in connection with any goods or services, or any container for goods, uses in commerce any word, tenn, name, symbol, or device, or any combination thereof, or any false designation of origin, 90 • ·'' ., .,1, •. :false or misleading description of fact, or false or misleading representation of fact, which(i) is likely to cause confusion, or to cause mistake, or to deceive as to the affiliation, connection, or association of such person with another person, or as to the origin, sponsorship, or approval of his or her goods, services, or commercial activities by another person, or (2) in commercial advertising or promotion, misrepresents the nature, characteristics, qualities, or geographic origin of his or her or another person's goods, services or commercial activities, shall be liable in a civil action by any person who believes that he or she is or is likely to be damaged by such act. 8 thus, since a section 43(a) claim is in order when an advertiser makes false or misleading statements regarding another firm's goods, services or commercial activities, the amended section 43(a) departs significantly from the prior version which focussed solely on the claims made about one's own products or services. section 43(a) is completely outcome-driven rather than intention-driven meaning that the firm does not need to prove malice on the part of the competing advertiser. rather, the courts focus on how consumers interpret the advertisement and whether such an adverti,.,ment would have a detrimental financial impact on the plaintiff. using §43(a) of the lanham act is beneficial to the offended firm because it allows the firm to obtain an injunction against the company making false claims so that the firm can stop the decline in sales caused by the misleading ad (bixby & lincoln, 1989). section 43(a) also allows a firm to be financially compensated for any monetary damages caused by the misleading comparison (bixby & lincoln, 1989). stated: the constitutionality of the new version of §43(a) is questioned. langvardt (1993) a fundamental issue thus arises: whether plaintiffs who would be subject to first amendment-mandated proof requirements in a suit brought on defamation or injurious falsehood grounds, may evade those same strictures by bringing the same claim under section 43(a). when viewed in this manner, the issue must be answered in the negative even when the attempted evasion apparently conforms with the language congress used-or did not use. federal statutes are no less subject to the constitution than is the common law ... thus, congress erred when it enacted the "commercial defamation" component of section 43(a), by not adequately accounting for the first amendment interests at stake for speakers and their audience. courts should 91 not repeat the mistake when they decide "defamation" and "injurious falsehood" cases brought under section 43(a). (pp. 331-333) langvardt ( 1993) noted, however, that the courts have, in fact, avoided or ignored the first amendment implications of the amended section 43(a) or have dealt with them unsatisfactori~ (american express travel related services co. v. mastercard lot's. inc,, i 991; .!.!..s.. healthcare. inc. v. blue cross of greater phi!adelphja. 1990; weight watchers int's. inc. v. stouffer coro,, 1990). given the questionableconstitutionalityof the revised act, it is too early to tell its long-term effect. summary and implications for the small business manager comparison advertising is likely to become more common in the future as businesses become more aggressive due to strong competition. indeed, there are many reasons for the small business owner with a superior product or service to use this type of advertising format. these reasons include creating positive consumer attitudes, increasing sales and market share, swaying competitors' customers to try the products/servicesoffered by the small business, and positioning the small business's offering more closely to the market leader. however, as comparison advertising increases, litigation such as the u-haul v. jartran and u,s, healthcare. inc. y. blue cross of greater philadelphia may also increase. this type of litigation can be quite costly in both a time and a monetary sense. thus, we provide some suggestions for the small business strategist regarding how to avoid such litigation. several authors have suggested that a comparative advertising strategy is more frequently used by small firms compared to larger competitors ( c.f., petty, 1991 ). given this, common and statutory law and section 43a of the lanham act provides an opportunity for these larger competitors to bring suit against smaller competitors. as petty ( 1991) explains, the smaller firms would have to bear the cost of defending the suit. additionally, if a cease and desist order is given, the small firm would also have to bear the costs of designing a new ad campaign. given that the resources of major competitors are likely to be greater than those of the small business owner, litigation is a greater threat to small businesses. clearly, as detailed below, the small business practitioner will want to do everything in his or her power to ensure that a legal suit is unlikely to occur. common law and the section 43a of the lanham act could also be used by larger firms to harass smaller businesses. such suits could be used to curtail legal competitive actions taken by the small business and to increase the costs of operating the small business. however, it should be noted that any litigation which lacks a legitimate basis can be challenged by the small business under antitrust laws as "sham" litigation (hurwitz, 1985; petty, 1991) since it threatens a competitive environment (petty, 1991 ). from an advertising strategy viewpoint it is important to restate that often marketers' communicatijns are subject to strict liability standards rather than full protection of the first amendment. this means that the outcome of the comparison advertisement is important. the intent of the ad (i.e., whether the advertiser knowingly made false or misleading claims) is 92 irrelevant. petty (1991) asserts that the most important consideration in comparative advertising is "what the audience actually perceived' when exposed to such an ad. this being the case, small business owners/strategistsneed to use caution when making claims. all claims must be backed by supporting research (castro! inc v. pennzoil co., 1993). thus, it is critical that the small business owner have demonstrated consistency between the intended and received messages. s/he may want to possess evidence of how consumers perceive a particular ad be/are actually running the ad. this does not imply that the small business owner must do extensive research or hire an outside agency to do this research. a simple survey of individuals in the relevant target market regarding their perception of the advertisement would suffice. increasingly, surveys are accepted as evidence in law-suits and hearings involving advertisement perceptions (blum, 1995). blum goes so far as to state that surveys are "so established in commercial suits that judges sometimes draw a negative inference if a case doesn't include one" (1995, p. al). since the target customer's perception of the advertisement is at issue, it makes intuitive sense to ask the customer rather than relying on the "experts." additionally,surveys may be a more efficient means to present evidence than using costly expert witnesses (blum, 1995). recall the airport parking ad cited earlier in which the advertiser claimed,"why pay $38.50/weekat the airport? park at bran dx for just 24.99/week." a small disclaimer in this ad indicates that the reduced price is valid only with the advertisement and only for the first week. given that the outcome of the ad, rather than its intent, is the critical issue, this advertiser has possibly placed itselfin a precarious position by using small disclaimers that the consumer is unlikely to see. recent research shows that consumers who are not highly interested in an ad and are unmotivated to pay close attention to the ad are likely to be deceived by such disclaimers (johar, 1995). all claims that are made need to be substantiated by some amount of factual evidence or scienti fie research. we found that many small businesses make the claim that they offer "the best prices anywhere." data regarding competitors' prices, models and services on which these prices are available, and time periods or conditions that apply to obtain the price should be in the small business's files before running the ad. for instance, a local printer-cartridge/ribbonrecyclermakes the claim that "you will save up to 70% of your ribbon budget" by using the recycled ribbon as opposed to a new one. this business further states that "the only real difference between new and reloaded ribbons is the price." to make these claims, however, this business should possess not only the listings of the competitors' prices on comparable products, but also, quality evidence such as defect rate, breakage, and product life expectancy for new versus recycled ribbons. additionally,advertisingclaims must not go beyond the research. one of the longest series of suits and countersuits arising from comparison advertising concerns is american home products, the manufacturer of advil and johnson & johnson, the manufacturer of tylenol (see bixby & lincoln, 1989). johnson & johnson made the claim, "there is no more potent pain reliever than extra-strength tylenol." while this claim is true for mild and moderate pain, ibuprofen is more effective for severe pain. thus, johnson & johnson had 93 made a claim that went well beyond the medical evidence and that claim fostered false beliefs in the eyes of the consumer. along these same lines, the local printer ribbon and cartridge ribbon recyclerdescribed above may get into trouble by stating that "our substantial investment in technology pays off for you in every cartridge. we use state-of-the-art equipment and methods ... again many others just can't make that claim; and it shows in their products. we know ... we've been there!" the claim that the pay-off occurs with every cartridge may exceed any quality evidence since that claim suggests a zero defect rate. small businesses should also be aware that litigation can arise from general superiority claims even when the competitor is not actually named in the comparison advertisement. this type of comparative advertisement is called an indirect comparison ad (i.e., comparative ads in which the competitor is not explicitly named). as example, castro! inc., a major oil manufacturer and distributer, sued pennzoil company and pennzoil products company for deceptive advertising when pennzoil asserted that its motor oil" outperforms any leading motor oil against viscosity breakdown," and provides "longer engine life and better engine protection"ccastrol lnc. v. pennzoil co., 1993, 941 ). interestingly, castro! was not mentioned by name in the pennzoil ad; pennzoil merely implied superiority over all other engine oils. the united states district court for new jersey found that pennzoil's advertisementscontained claims of superiority which were "literally false" since both castro i and pennzoil products past standards adopted by the society of automotive engineers, the common market automobile constructors, general motors, chrysler, and ford. again, care must be taken to have substantiation of claims prior to making comparison. we found this type of ad to be a common strategy used by small businesses. for example, numerous ads were viewed in the local papers in which small business owners claim to be "simply the best," and to offer the "best service," or to be "distinctively better." one indirect comparison ad by a local chicken wings restaurant reads, "you've tried the rest, now try the best!" like the hardee's advertisements comparing its chicken to kfc's, this small business has put itself at risk unless it has consumer data indicating that its chicken wings are preferred over the competition. additionally, comparisons should be made on characteristics that are important to the consumer in making their decisions to buy or not buy the product. research by rogers and williams (rogers and williams, 1989) concluded that comparison ads work best when the advertised product or service has an important functional characteristic that outperforms competitors' offerings. advertisers may run into legal trouble should the ad compare irrelevant factors since such comparisons may inflate importance of the attribute leading to poor consumer choices. is comparison advertising worth the risk for small businesses? we think so. a small business should benefit by using comparison ads which stick to the facts on important issues. such ads are attention-getting, effective in changing attitudes and can create dramatic sales increases. the small business manager, however, must be sure that all claims can be substantiated prior to running the ad. it is our hope that this paper helps the small business decision-maker determine when comparison advertising will be beneficial to his/her firm. 94 ': " .. notes i.we have used brand x to obscure the true brand name of the park and shuttle. 2. restatement (second) of torts§§ 647-649 (1977). 3. restatement (second) of torts §558 (1977). t.here are two types of defamation: libel, which is defamation by written or printed word, and slander which is defamation by oral statement. id. §568. 4. id. at 559. 5. the distinction between defamation and injurious falsehood can be crucial in cases in the statue of limitations is an issue. trade libel is governed by a two-year statute of limitations applicable to infringement of property rights whereas, defamation (libel or slander) is subject to a one-year limitations period. see e.g. guess. inc. v. superior court (jeff hamilton. inc.), 176 cal. app. 3d 473, 222 cal. rptr. 79 (cal. app. 2 dist. 1986). 6. the lanham act, 15 u.s.c. §1125(a). 7. the trademark law revision act of 1988 (tlra), pub.l.no. 100-667, sec. 136, 102 stat. 3935, 3948 (15 u.s.c.§ 1051) effective november 16, 1989. 8. 15 u.s.c. §l 125(a) (1988). 95 references advertising age (1980). some comparative ads work, o&m concedes. (nov. 3). 6. __ ( 1982). burger king's challenge set for heavy drive. (sept. 13). american express trayel related services co v. mastercard lot's, inc., 776 f. supp 787 (s.d.n.y 1991). american home prod, coro v, johnson and jonson, 436 f. supp 785 (s.d.n.y. 1977), affd 577 f.2d 160 (2nd cir. 1978). associated press v, walker, 338 u.s. 130 (1967). beck-dudley,c. & williams, t. g., (1989). legal and public policy implications for the future of comparative advertising: a look at u-hal v. jartran, journal of pub!jc policy and marketing. 8. 124-42. bixby, m. b. & lincoln, d. j. (1989). "legal issues surrounding the use of comparative advertising: what the non-prescriptivedrug industry has taught us. journal of public policy and marketing. 8. 143-60. blum, a. ( 1995). once shunned surveys gain favor of courts. the national law journal. (monday, october 30, 1995). al, al 7. boedecker, k. a., f. w., morgan, f. w. & wright, l.b. 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(1984). prosser and keeton on the law of torts, (5th ed.). st. paul, mn: west publishing, co. lanham act, 15 u.s.c. §§i 125(a)(l977). langvardt, a. w. (1993). section43(a), commercial falsehood, and the first amendment: a proposed framework. minnesota law review 78, 309-40 l. milton, c. e., wall, b.w. herbertg. w., rubins, j.m., & strickland j. a. (1994),"emerging publication torts," practicing law institute, june-august, 651. muehling, d. d. & kangun, n. (1985). the multi-dimensionalityof comparative advertising: implications for the federal trade commission. journal of public policy & marketing. 4 112-28. _,stem, d. e & raven, p. (1989). comparative advertising: views from advertiser, agencies, media and policy makers.journal of advertising research 29, 5 (1989): 3848. national life ins co. v. phillips publishing inc., 793 f. supp 627, 634-43 (d. nd. 1992). new york times v. sullivan. 376 u.s. 254 (1964). pechmann,c. & stewart, d. w. 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( 1980) time. inc v, firestone, 424 u.s. 448 (1976). u.s. healthcare. inc. v. blue cross of greater philadelphia, 898 f. 2d 914, 918 (3d cir), cert. denied, 11 s. ct. 58 ( 1990). virginia state bd. of pharmacy v. virginia citizens consumer council. inc., 425 u.s. 748 (1976). warner-lambert co. v. shering-plough coro., 1991 u.s. dist. lexis 14620 (s.d.n.y. october 15, 1991). weight watchers int's inc. v. stouffer coro., 744 f.supp 1259 (s.d.n.y. 1990). wilkie, w. l. & farris, p. w. (1975). comparison advertising: problems and potential. journal of marketing, october, 7-15. 97 s y journal of small business trateg a special farewell from the editor it is a great pleasure to conclude my role as editor of the journal of small business strategy, knowing that jsbs, under bradley university, has delivered new knowledge to better understand the evolving entrepreneurship and small business discipline. indeed, in recent years we have transitioned from a "field" to a "discipline" as seen by leading scholars in this domain. it is fully documented today that small and new enterprises drive economies around the world, and this importance cannot be underestimated. i have seen an exciting evolution in my 40 years from a few researchers struggling to conceptually and empirically shed light- to hundreds if not thousands today. collectively we have made a difference. it is left to the young scholars today to continue to focus on important research questions, and not waste our intellectual capital on issues of marginal impact. a special thanks goes to previous editors here at bradley, including dr. fred fry, dr. paul stephens, and dr. ross fink. i worked intensely to make the issues current and a special issue by dianne welsh was a major contribution. of great importance, jim foley served as managing editor, and with several talented students made a huge contribution to the overall publishing of the issues. he did a remarkable job leading the myriad of activities, with support from jennie hale at the turner center for entrepreneurship, and our graduate assistant, miao ren. finally, the organizational home to jsbs, the small business institute, always provided high quality encouragement and support. those leaders are very talented and worthy of praise. the future of jsbs is bright in the changing academic publishing realm. i know that jsbs will continue to increase in quality and quantity! and, again, i thank you for the opportunity. gerry hills sfaxf.kc jf publication staff editor dr. gwen f. fontenot ernst & young editorial assistant michelle haarhues university of north texas editorial advisory board dr. david ambrose university of nebraska-omaha dr. v. v. bellur california state university-bakersfield ms. janet bradshaw troy state university dr. james carland, jr. western carolina university dr. jo ann c. carland western carolina university dr. donald clause university of west florida dr. richard dailey university of montana dr. saul diamond university of northern iowa dr. wilke english the university of texas at el paso dr. fred fry bradley university dr. robert kemp drake university dr. robert kerber illinois state university mr. chris kobler small business administration dr. joe latona university of akron dr. binshan lin louisiana state university-shreveport dr. james paradiso national louis university dr. john n. pearson arizona state university dr. george rimler virginia commonwealth university dr. robert rose central missouri state university dr. howard rudd college of charleston dr. homer saunders university of central arkansas dr. leo simpson eastern washington university dr. joe singer university of missouri-kansas city dr. matthew sonfield hofstra university dr. george solomon small business administration dr. harriet stephenson seattle university dr. mark weaver university of alabama a publication of the small business administration and the small business institute directors'ssociation. send subscription requests to the national sbida center, college of business administration, university of central arkansas, conway, ar 72032. annual subscriptions and back issues may be ordered at $15 each. "the u.s. small business administration's participation in this cosponsorship activity does not constitute an express or implied endorsement of any of the cosponsor(s)'r participants'pinions, products or services." "sba auth. ¹88-1170" copyright 1991 small business institute directors'ssociation small business consulting conference small business institute directors'ssociation 16th annual conference washington, d. c february, 1992 a conference announcement and call for papers the 16th annual sbida conference will be held january 29 -february 2, 1992 at the hyatt regency-capitol hill, washington, d.c. the conference will include an assortment of program activities related to small business and entrepreneurship. the program will consist of competitive paper presentations, plenary sessions, symposia, panels, and workshops. the conference theme is 'helping small businesses prepare for global competition in the nineties." conference tracks include small business in global competition, legal issues for smaller firms, successful financial operations, managing successful firms, smaller firms and the environment, entrepreneurship and trade, global management for smaller firms, succussful marketing in smaller firms, accounting in smaller firms, and international assistance programs. track chairs will be announced. competitive papers, symposia, panels, and workshop proposals are now being solicited on topics related to the respective tracts. submissions should focus on applied rather than theoretical research. papers should be submitted by september 13, 1991. the best papers will be reviewed for possible publication in the journal of small business strategy. contact theconferencechairpersonorthesbidanational center forfurtherinformation. dr. robert kemp sbida national center vice president-programs college oi business administration drake university university o( central arkansas, uca department oi management p. o. box 4983, conway, ar, 72032 des moines, la 50311 phone (501) 450-5300 fax (501) 450-5360 phone (515) 271-2807 fax (515) 271-2001 stk4tegy corporate governance in the small firm: prescriptions for ceos and directors catherine m. daily the ohio state university dan r. dalton indiana university abstract exami nations ofboards ofdi rector s ofsmal icr corpora ti ons have been largely absent from ihe academic li ieraiure. this study addresses this void by examining several aspecis ofcommonly prescribed board configurations for entrepreneurial (high growth) and small (stable growih) corporaii ons. specifically, we address board composition and board leadershi p structure, as well as theimpact of officer and director stock holdings andi nsii iutional holdings. srepwise multiple regression analysis reveals thai these governance vari obles significantly add io ihe explaniuion offinancial performance for boih sets offirms. the implications of these findings for chief execuii ve officers (ceos) and boards of di reciors are discussed. introduction board reform activists have gained considerable aucntion in recent years duc to their promotion of corporate governance rel'orms. specifically, these activists continue to pressure corporations to comprise their boards of predominantly outside directors and to adopt the independent board leadership structure (c.g., gcneen, 1984; kesncr, victor, gt lamont, 1986). considerable auention has also been focused on increasing officer and director stack holdings as a mechanism for aligning their interests with those of shareholders (kesner, 1987). empirical support for these trends, however, is equivocal. some of the confusion surrounding rccommcnded board rcl'orms may bc thc result of an exclusive focus on the largest of u.s. corporations. thc potcnual applications to thc smaller corporation are intriguing. perhaps it is in this domain that thc cffccts of board composition and structure are morc readily observed. an obvious issue implicit in much of this discussion is exactly how much control can any ceo, board chairperson, or board of directors, howcvcr configured, bring to bear on the modern corporation. it may be, for example, that ceos and directors are less constrained by organizational systems and structures in the smaller corporation as compared to those of their larger (e g., fortune 500) counterparts. it seems scn sible that ceos and directors may be able to morc directly influence the processes and outcomes of thc smaller corporauan. large corporations are complex with a surfeit of important internal and cxtcrnal constitucncics. 57 ...there is an implicit assumption that [management] could initiate shifts in policy or embark on mayir transition programs for the organization. this assumption may be questionable, particularly in large organizations... the sheer number of persons involved, the complexity of the organization, and a variety of vested interests both inside and outside the company represent potential constraints to successful change strategies (dalton gt kesner, 1983, p. 736, emphasis added). the following sections present the development of the rationale for adherence to prescribed governance reforms. 'ihese include increasing the proportion of outside directors on the board, separating the positions of ceo and board chairperson, and increasing the level of stock holdings for officers and directors. in addition, the impact of institutional holdings on the financial performance of the smaller corporation is addressed. why outside directors? filling the boardroom with a preponderance of outside directors is believed to ensure more active discussion and debate, a greater pool of organizational resources, and more critical assessment of management's performance (dan co & jono vie, 1981;math i le, 1988;nash, 1988). additionally, outside directors are able to provide expertise and advice to the ceo, resources that are presumably unavailable to the ceo in the cunent management and staff (anderson 8z anthony, 1986).the preference for outside directors has been noted in the popular press, as well. in an interview with steven jacobs of the wall street journal, russell n. cox, president of resort management inc., echoed the preference for outside directors by rather bluntly noting that the advice of inside directors can be had "any day between nine and five" (jacobs, 1985, p. 23). placing inside directors on the board in lieu of outside directors was seen, at best, to be a duplication of efforts adding no value to the firm. what about ceo duality? a related governance issue that has received increasing amounts of attention is the separation of the roles of ceo and board chairperson. judith dobrzynski, a business week senior editor, has been critical of the concentration of power that accompanies the dual structure where "one person rules the roost as chairman and chief executive" (dobrzynski, 1991,p. 124). don hambrick, columbia university business school professor, has commented that holding multiple titles is a sign of "power accumulation and power hoarding" (formite, 1991,p. 13).he has termed this the "idi am in phenomenon" after the former ugandan leader who assigned himself approximately a dozen of the country's top leadership positions. with one individual controlling the management and the board, it is less likely that competing perspectives will be offered for review. such concentration of power, it is argued, limits the effective functioning of the board, what about share holdings? the impact of officer and director stock ownership may also affect the financial performance of the firm. increasing officer and director ownership in ihe firms they serve may serve to align their interests with those of the shareholders (chacko, 1990;johnson, 1990).in the absence of mechanisms that align management and shareholder interests, costly self-interested behaviors such as increasing managements'alaries, adding staff, and managerial shirking are greatly increased (daily 8i dollinger, 1992). 58 stock holdings and board composition may provide countervailing effects. perhaps the distinction between inside and outside directors becomes less salient when the fortunes of corporate officers and directors are tied to the performance of the corporation. over 200 years ago adam smith noted the importance of this financial relationship when he commented that "folly, negligence and profusion" would prevail when directors became the overseers of other people' money rather than their own (wilson, 1989, p. 6&). what about institutional holdings? institutional investors have become increasingly active in the corporate governance reform movement. as evidence, these large-scale investors are actively seeking the replacement of corporate insiders with outside directors who are presumed to provide more objective expertise and counsel. perhaps the most vocal group has been the california public employees'etirement system (calpers), the nation's largest public employee pension system (e.g., foust 8c schine, 1990; kim, 1993).calpers'eo, dale m. hanson, threatened to oppose the election of directors at such fums as polaroid, dial, and conuol data if the firms did not agree to discuss shareholder issues such as board of directors composition and structure. institutional investors have successfully instituted changes toward outside director representation at lockheed corporation and sears, roebuck a co., as well as the separation of the positions of ceo and board chairperson at sears. research questions based on the rationale provided in the preceding sections, the following research questions are proposed: ~ do firms with higher proportions of outside directors have higher levels of financial performance? ~ do firms in which the ceo does not serve simultaneously as board chairperson have higher levels f financial performance? ~ are higher levels of stock holdings by officers and directors associated with higher levels of financial performance? ~ are higher levels of insutuuonal holdings associated with higher levels of financial performance? method sample in order to examine these issues of board composition, ceo duality, and stock holdings, two groups of firms were studied. the first group was selected from &heine. 100 (may 1990 issue). compared to the fortune 500, these firms are relatively small. also, these are high-growth firms that have achieved success in the past five years. the second group was comprised of 1&3 "small" (i.e.,sales of less than $20 million and 500 or fewer employees) corporations listed in standard dc poor's repons: over-ihe-counier ond american stock exchanges. all corporations meeting the two selection criteria were included in the second group of fums. as compared to the inc. firms, these are stable, small corporations with modest growth. 59 independent variables the governance data include the proportion ol'utside directors and the incidence of ceo duality. these data were collected from siandard & poor's register of corporoiions, directors, and executives. we also considered the impact of oflicer and director stock holdings and institutional holdings. these data were collected from standard & poor's reports: over-thecounter and american stock exchanges. dependent variables there is considerable debate concerning what consututes the appropriate set of dependent variables (e.g., chakravarthy, 1986). in response, cochran and wood (1984) suggest the use of measures that capture both accounting and market returns. consequently, this study relies on widely accepted indices of corporate performance representing both categories: return on assets (accounting measure) and price/earnings ratio (market measure). control variables it may be that the relationship between selected governance structures and corporate financial performance is not suaightforward. the presence of a founder/ceo, for example, may impact the composition and structure of the board (daily gi dalion, 1993).founders have been found to have management styles that significantly diverge from those of their successors (dyer, 1986).these differences may manifest themselves in preferences for governance suuctures that are not isomorphic with nonfounder ceos. size of the fum and the industry in which the firm operates, too, may affect the elecuon of alternative governance structures (e.g., daily gz dalton, 1993; dess, ireland, & hiu, 1990). the status of the ceo as founder/non founder was provided in the annual survey for the inc. 100 firms. for the s&p firms, these data were collected via phone calls to the corporate office of each firm. sales revenue was used as a measure of firm size (singh, 1986). industry categories werc created based on four-digit standard industrial classification codes. five industry categories were included: (i) manufacturing, (2) service, (3) distribution, (4) retail, and (5) miscellaneous. all data are representative of the year 1989. results table i provides the means and standard deviations for the study variables. in order to assess the impact of industry effects, a manova was conducted with the performance variables by industry category. the multivariate test of significance (wilk's) was not signilicant for both sets of firms: inc. (f=1.34,ns) and small corporations (f=1.49,ns). table i descri pii ve statistics for study variables proportion of /nc. 100 corporations small corporations outside directors mean s.d.'ean sd .56 .21 .59 .19 dual structure .56 .50 .67 .47 oflicer/direc(or holdings 25.50 19.88 33.72 18.41 institutional holdings 12.58 21.27 23.79 12.55 return on assets 8.22 12.70 8.43 9.02 price/earnings ratio .19 .27 43 .24 founder status .70 .46 .46 .50 sales revenues ($000) 88.83 126.40 13.69 5.96 'standard deviation 60 stepwise multiple regression analysis was used to examine the differential benefit of alternative governance structures in entrepreneurial and small corporations. separate regression models are provided for the inc. firms and the small corporations. this separation allows the examination of whether there are differential benefits to be realized within the more general category of smaller corporations. high growth firms may have very different governance needs as compared to their more stable small corporate counterparts. to examine the impact of the conuol variables, these variables were entered as a block in the first step of the stepwise regression. next, the governance variables were entered as a block in the second step. the results for both sets of firms are consistent. the control variables do not significantly contribute to the performance of smaller corporauons. moreover, the governance variables do significantly add to the explanation of financial performance when relying upon the accounting measure (roa). the results were not significant for the market measure (price/ earnings ratio). table 2 return on assets /roa) and corporate governance for smoll corporations r r +2 p control variables: founder .26 .07 .07 ns sales revenues / governance variables: outside director proportion .44 .19 .12 .014 ceo duality officer/director holdings institutional holdings / 61 table 3 return on assets /roa) and corporote governance for inc. 100 firms f r +2 p control variables: founder .22 .05 .05 ns sales revenues / governance variables: outside director proportion .55 .30 .25 .01 ceo duality officer/director holdings institutional holdings / table 4 price/earnings ratio and corporate governance for small corporations i' +2 p control variables: founder .19 .04 .04 ns sales revenues / governance variables: outside director proportion .37 .14 .10 ns ceo duality officer/director holdings institutional holdings / 62 table 5 price/earnings ratio and corporate governance for inc. 100 firms f r qi p control variables: founder .32 .10 .10 ns sales revenues / governance variables: outside director proportion .39 .15 .05 its ceo duality officer/director holdings institutional holdings / discussion 'ibese results provide some demonstration of the impact of corporate governance on financial performance in smaller corporations. 'ihe authors must conclude, however, that widescale prescriptions for altering boards of directors based upon empirically unsubstantiated prescriptions are ill-advised. the information suggests that firms with lower proportions of outside directors outperform their counterparts with greater representation by outside directors. this is true for both the small corporations as well as the inc. 100.this is notable as it is opposite from what might have been expected relying on the admoniuons of many organizational observers. the results from the ceo duality question are in the expected direction. for both groups of corporations, higher levels of financial performance are associated with firms that have different persons serving as ceo and chairperson of the board. share holdings of officers and directors, as well as institutions, are also in the anticipated direction. higher levels of holdings by these groups are associated with higher levels of financial performance. contrary to the findings for board composition, prescriptions designed to separate the ceo and board chairperson and increasing the share holdings of officers and directors and institutions seem well placed. the authors suggest, however, that few organizational observers would be comfortable recommending that board reapportionment alone would resolve the dilemma surrounding corporate accountability and the board of directors. rather, based upon the examination of smaller corporations, the authors suggest that the distinction of outside director provides a logical and readily identifiable starting point for that difficult task of identifying those individuals who might best serve their directoral duties of service, resource acquisition, and conuol (zahra dt pearce, 1989). 63 1 directors and their roles service role the findings of this study indicate no financial benefit to a preponderance of outside directors in the small or entrepreneurial corporation. it may be that ceos are actively seeking the advice and counsel of their inside directors and that these management directors are responding to these requests. the ready access to these individuals provides the ceo with a cadre of advisors who are both knowledgeable and available on a regular basis. outside directors may be less able to remain fully informed about the intricate details of the firms they serve and are certainly not as accessible to most ceos as are inside directors. resource acquisition role inside directors appear to be as able, if not more able, than their outside director counterparts to gamer resources and/or ex peruse from the external operating environment. again, it may be that inside directors have an edge due to their specific knowledge of the firm's needs and capabilities. linking the corporation with critical external consiituents may be easier for those directors who have daily contact with the organ ization. knowing when to seek help is as i mportant as knowing who to contact for help. control role the control role of directors —monitoring management for the benefit of its shareholders and other constituencies —may be the most critical board function. in fact, prescriptions based upon the inside/outside director distinction may best address concerns regarding the board's ability to effemively monitor the management of the corporation. outside directors are arguably the only reasonable candidates to fulfill this role. it would be unreasonable to expect that the very individuals beholden to the ceo for their positions would treat this individual harshly, yet alone seek to involuntarily replace this individual. if outside directors do provide the corporation with "an edge," it would be most salient when considering the control function of directors. the advisory board these findings regarding the role of outside directors may be welcome news for many small firm owner/managers. often, the very size of the firm places resource constraints on the ability to secure an active board of directors. reliance upon current management to fill board seats may be a necessity, a significant number of small corporations may be unable to afford the average retainer of $7,000/year per board member (blush, 1988). one means for overcoming this barrier is the use of an advisory board. /nc. magazine recently chronicled the experience of one owner/manager as she utilized the services of an ad-hoc board of directors for one year (brittina, 1993).power)ink, a nonprofit organizauon, awarded anita brittina and one other female entrepreneur the board for one year as a means to help them strengthen and grow their firms. this experience has not been without its difliculties (e.g., directors failing to attend meetings), but the benefits of this cost-cree advice have been numerous. brittina's experience serves as one example of a mechanism for small firm owner/mangers to gamer the benefits of the formal board, without the cost. 64 separate is effective the findings in this study caution against reliance on the dual leadership structure. the political arena provides a nice corollary to the business environment in this circumstance (kesner gt dalton, 1986). the authors believe, for example, that most political observers would be concerned if the offices of the president of the united states and the chief jusuce of the supreme court were held by the same individual. this would violate any remote notion of some" separation of powers." perhaps more distance between the judiciary and the executive branch would lead to a somewhat objective outcome. certainly, the authors do not suggest that the modern board of directors is the corporate equivalent of the supreme court. still, a large part of the charter of the board is to.monitor and control the ceo. while the mission of the board is much broader than this, it clearly includes this function. perhaps, then, some thought should be given to the suucture of the ceo and board chairpemon role. the structural separation of these two powerful positions may engender some degree of conlidence in the effecuveness of the board and the willingness of corporate management to serve the overseers of stockholders'ealth. ownership counts 'ihe increasing trend toward compensation systems that rewards officers and directors with ownership shares of the firms they serve seems to be beneficial. the obvious goal of these programs is to encourage those entrusted with the long-term health of the organization to think like owners. based upon our study, this intent appears to be realized. higher levels of stock ownership were associated with higher levels of firm financial performance. the implicauons of these findings are clear: increasing officers'nd directors'inancial stakes may increase their interest in responsibly auending to the financial health of the corporation. owners apparenuy think and act like owners. the levels of stock holdings found in this study should please some criucs of the modern corporation. t. boone pickens, for example, stated that the "absence of financial risk is inconsistent with the free-enterprise system" (chacko, 1990, p. 75). it is not unusual for ceos, high-ranking officers, and board members to own little stock in companies they serve. absent this linkage, it is the shareholder who endures the decline in equity value. by virtue of more intensive financial relationships, officers and directors may have a greater ability to relate to and act like shareholders. a certain irony may be noted, however. when directors become major shareholders in the corporations they serve, the nouon of "outside" direction may be lost. in general, one could hardly expect a director with a large equity stake in the firm to be a dispassionate observer. the objectivity that is deemed so critical may be sacrificed for a focus on short-term gains in stock price. the impact of institutional investors is positive as well. perhaps the lack of"independence" caused by a reliance on inside directors is overcome when a powerful outside monitoring body is present. institutional investors may serve as a catalyst for keeping the smaller firm directed toward maximizing shareholder wealth. 65 prescriptions for chief executive officers and directors the authors hesitate to suggest that there exists any one governance configuration appropriate for the smaller corporation. this study does, however, provide some guidance as to those elements that may enhance the financial performance of these firms. adherence to the commonly prescribed outsider-dominated board may be unnecessary, and even harmful, for the smaller corporation. the results of this study indicate that it is the insider-dominated board that is associated with increased financial performance. another common prescription, separation of the positions of ceo and board chairp:rson, does seem well-advised. the authors find that adherence u& the separate structure is also associated with firm financial performance. the separation of these positions ensures the presence of a board member conversant in firm affairs whom the ceo may rely on for advice and counsel. the separate board chairperson posiuon also provides for some level of managerial monitoring. additionally, we would note that the independent board leadership structure has implications for the composition of the board. this separation almost certainly guarantees at least one independent director, as it would be unlikely that a subordinate to the ceo (inside director) would be placed in this position of authority. officer and directors stock holdings, too, have implications for the financial performance of the small corporation. not only do stock holdings help align insiders'nterests with those of the shareholders, they may also provide the organization a means to attract outside talent for board service. while outside directors would not be compensated on the basis of an annual retainer as is traditionally the case, they would have an increased incentive to actively serve the small firm. brittina (1993)has recently noted the difficulty of gaining and retaining the interest of small fum directors. directions for future research this study suggests the need for a finer distinction bei.ween classes of directors. past examinations of board composition have focused largely on the independence of the outside director. perhaps for the smaller firm this is less a concern than is the quality of advice and counsel provided to the ceo. it may be reasonably argued that inside directors'ay-to-day experience with the smaller firm provides them with the requisite firm-specific knowledge necessary to responsibly contribute as a board member. outside directors, whether paid or advisory, may lack the incentive of insiders to consistently attend to the special needs of the smaller firm (e.g., brittina, 1993). greater attention to the financial stakes of officers and directors of the smaller firm is also warranted. these findings suggest that stock holdings may serve to align the interests of officers and directors with those of shareholders. granting outside directors stock options in the small or growing firm may provide one means for generating active participation from outside directors with liule to no initial cash outlay. in this manner, the firm gains from the expertise and resources that the outside directors may provide and the outside director lhas some incentive for providing high quality assistance to augment the value of the stock options. 66 additional attention to the role of institutional investors in the small corporation would seem appropriate. past research has focused exclusively on the role of institutional investors in the large firm. while the level of institutional holdings for this study was something on the order of one-fourth the magnitude found in large firms (e.g., business week, 1984), these levels are likely to continue to increase. institutions may provide the level of control needed to keep management focused on the long-term and interested in the welfare of shareholders. conclusion frankly, the authors find the suggestion that today's boards are not competent to discharge their directoral duties is grossly overstated. moreover, inside dimctors appear to be responsibly meeting the dual demands of acting as caretaker for the long-term health of the corporation, as well as addressing their operational duties as managers. rather than focus on the distincuon between inside and outside directors, corporate participants and observers might focus their auenuon on the leadership of the board and financial incentive packages for directors. with respect to the financial performance of the corporation, it is these two aspects of the board that appear to be most significant. boards now —perhaps more than ever —are becoming more focused in their role, more attentive, and more assertive. recent events at general motors, ibm, and american express may underscore this contention. whatever else may be said about the structure of boards and ceos'oles, the ultimate responsibility for effectively discharging the many missions of the board resides with individual directors. with the great privilege of being a director comes a commensurately large responsibility. whether directors are "inside" or "outside" matters less than their attention to the long term objectives of the corporation and those of its multiple constituencies. rerferences anderson.c.a., /k a mhony, r.n. (1986).the new corporate di recto rs new york: john wiley. briuina, a. f. (1993,may, june). the diary of a small-company owner. inc., pp. 78-89, 116-122. business week. (1984, august 13).will money mangers wreck the economy? pp. 86-93. chacko, c. (1990).management's stock ownership: irrelevant? business horizons, 33(3),75-78. chakravarthy, b.s.(1986).measuring suategic performance. strategic management journal, 7, 437458. cochran, p.l.,gt wood, r.a. (1984).corporate social responsibility and financial performance. academy of management journal, 27, 42-56. daily, c. m., tk dalton, d. r. (1993).board of directors leadership and structure: control and performance implications. entrepreneurshi p: theory and practice, 17(3), 65-81. daily, c. m., k. dollinger, m. j. (1992).an empirical examinauon of ownership structure in family and professionally managed firms. family business review, 5(2), 117-136. dalton, d. r., gt kesner, i. f. (19&3). inside/outside succession and organizational size: the pragmatics of executive replacement. academy of management journal, 26, 736-742. danco, l. a., gt jonovic, d. j. (1981). outside directors in the family-owned business. cleveland, oh: university press, inc. dess, g. g., ireland, r. d., gt hiu, m. a. (1990). industry effects and strategic management research. journal of management, 16, 7-27. dobrzynski, j. h. (1991,november 18).chairman and ceo: one hat too many. busi ness week, p. 124. 67 dyer, w. g. (1986).cultural change in family firms. san francisco: jossey-bass. foust, d., dt schine, e. (1990, march 19).who's in charge herc? instituuonal shareholders are gaining clout. business week, pp. 38-39. geneen, h. (1984, september 17).why directors can' protect the stockholders. fonune, pp. 2832. jacobs, s.l. (1985,january 21), a well-chosen outside board gives owners peace of mind. wall street journal, p. 23. johnson, e. w. (1990).an insider's call for outside direction. harvard business review, 68(2), 46-55. kesner, i. f. (1987).directors'tock ownership and organizational performance: an investigation of fortune 500 companies. journal of management, 13, 499-507. kesner, i. f., k dalton, d. r. (1986). boards of directors and the checks and (im)balances of corporate governance. business horizons, 29(5), 17-23. kesner, i. f., victor, b.,dt lamont, b.(1986).board composition and the commission of illegal acts: an invesugation of fortune 500 companies. academy of management journal, 29, 789-799. kim, j. (1993,july 16).campbell puts heat on other companies. usa today, p. b l. mathile, c. l. (1988). a business owner's perspective on outside boards. family business review, i, 231-237. nash, j. m. (1988). board of privately held companies: their responsibilities and structure. family business review, i, 263-269. singh, j. (1986).performance, slack and risk taking in organizational decision making. academy of manogemeni journal, 29, 562-585. wilson, j. q. (1989).adam smith on business ethics. california management review, 32(1), 59-72. zebra, s. a., dt pearce, j. a. (1989).board of directors and corporate financial performance: a review and integrative model. journal of management, 15, 291-334. 68 s y journal of small business trateg table of contents 1 special distinguished commentary: doing well by doing better: entrepreneurs and sustainability annalenna parhankangas university of illinois at chicago abigail mcwilliams university of illinois at chicago rodney c. shrader university of illinois at chicago 21 customer development, innovation, and decision-making biases in the lean startup jonathan l. york california polytechnic state university jeffrey e. danes california polytechnic state university 41 doing good by telling stories: emotion in social entrepreneurship communication philip t. roundy university of tennessee – chattanooga 69 sme internet use: the moderating role of normative influence kevin celuch university of southern indiana bryan bourdeau university of southern indiana carl saxby university of southern indiana craig ehlen university of southern indiana 91 strategic maneuvering of technological factors and emergence of de facto standards lee j. zane rider university hideo yamada waseda university susumu “sam” kurokawa drexel university reproduced with permission of the copyright owner. further reproduction prohibited without permission. stratxgy publication staff editor dr. gwen fontenot marketing solutions harahan, louisiana editorial assistant donna gallagher st. francis xavier school metairie, louisiana editorial advisory board dr. henry beam western michigan university dr. don b. bradley iii university of central arkansas dr. robert brockhaus st. louis university dr. stephen brown eastern kentucky university dr. sam bruno university of houston-clear lake dr. aaron buchko bradley university mr. donald clause university of west rorida dr. richard dailey university of montana dr. mark dollinger indiana university-bloomington dr. paul dunn northeast louisiana university dr. fred fry bradley university dr. steven hanks utah state university dr. lynn hoffman university of northern colorado dr. rudy kagerer university of georgia (retired) dr. lawrence klatt florida atlantic university dr. joseph latona university of akron dr. binshan lin louisiana state university-shreveport dr. david newton westmont college dr. mary nicastro capital university dr. inge nickerson barry university dr. john pearson arizona state university dr. louis pol university of nebraska at omaha dr. peter rainsford cornell university dr. howard rudd college of charleston ms. pamela schindler whiuenberg university dr. herbert sherman marist college dr. joseph singer university of missouri-kansas city dr. matthew sonfield hofsua university dr. harriet stephenson seattle university dr. howard van auken iowa state university dr. john wallace marshall state university a publication of the small business institute directors'ssociation send subscription requests to randi ellis, c.p.a.,sbida secretary-treasurer, black hills state university, 1200 university, spcarfish, sd 57799-9006. domestic annual subscripuons and back issues may be ordered at $20 each. international subscription s and back issues are $25 each. ocopyrigtn 1994 small business lnsuiuic drrccrors'ssociaiion i g g small business institutei r directors'ssociation sbida 1994-95 officers president vice president-program assurance joseph c. latona, d.b.a. richardt. dailey, ph.d. university of akron university of montana college of business administration department of management . akron, oh 44325-4801 missoula, mt 59812-1216 office: (216) 972-7337 office: (406) 243-6644 home: (216) 666-4419 home: (406) 549-6876 fax: (216) 972-6588 fax: (406) 243-2086 president-elect secretary-treasurer john r. kerr, d.b.a. randalei ellis, c.p.a. florida state university black hills state university college of business —room 426 1200 university, usb 9006 tallahassee, fl 32306-1042 spearfish, sd 57799-9006 office: (904) 644-7869 office: (605) 642-6091 home: (904) 386-9406 home: (605) 642-7427 fax: (904) 644-4098 fax: (605) 642-6273 vice president-programs immediate past president geralyn mcclure franklin, ph.d. robert a. kemp, ph.d., c.pm. stephen f. austin state university drake university dept. of management and marketing department of management nacogdoches, tx 75962-9070 des moines, ia 50311-4505 office: (409) 5684103 office: (515) 271-2807 home; (409) 569-7267 home: (515) 223-6504 fax: (409) 568-1600 fax: (515) 2714518 vice president-publications benton (bud) e. miles, ph.d. university of north carolina —greensboro as s esf btyan school of business and economics 0od department of management and marketing greensbom, nc 27412-5001 q3 office: (910) 334-5691 b home: (910) 288-1954 s t fax: (910) 334-5580 st~ter y editors'ote .. the faculty and staff of the henry w. bloch school of business and public administration are most grateful to the members of the small business institute directors'ssociation for giving us the opportunity to sponsor and publish thc journal of small business strategy. we arc mindful of the outstanding contributions of previous editors and sponsoring organizations and expect to carry on the practical nature, as well as sound methodological research procedures comprising thc journal's contcne wc have leamcd that in publishing a journal, like success in small business, there arc no shon-cuts. thc'valuable assistance of all the members of the editorial advisory board has made a substantial contribution to getting this issue out on time. in looking forward to future issues and the continuing development of the journa! of smail business s&raregy, wc would welcome letters to thc editor, notes and comments on issues facing small business, review of ncw books in the field and insightl'ul casework or counseling notes. onc thoughtl'ul suggestion has bccn to dcvotc scvcral pages to observations by small business owners, (the "owner's comer"), who's comments can help all of us stay in the forefront of change and challcngc. wc wclcomc your comments and suggestions and look forward to working to add value in thc long-run success of'he journal. joseph f. singer, ph.d. editor strategy a comparison of small and large business managers'ttitudes toward innovation and the role of government in promoting technology'elly c. strong michigan technological university michael winchell illinois state umvefsity abstract house result((io&t 820 calls for the es(eblis(unen& r o(echnvlogy partnersldps, fivtded by (lie federal government, designed specifically tv improve smiill businesses access (v iechnology. ho(never, goverumen(-imlnstry parrnerships have been cri(icized for crea(ing a governnren(-irssis(ed vrganizativn (v compere tvith dornesric pri va(e secror firms. the critics of such paruierships a&gite ((ia( marker iirfemeniivir by (he government vfren resrilfs in con(pert'(i ve disadvantages for rhe very firniv the partners(iip was iirteirded ir& help. this stud&'ssessed the a(tiurdes of smirfl liitsi ness vwuerv and miinag err toward government directed markeri urerveniions such as rhai prvposed in hr 820. tire results suggest (har (here are svme impor(aiii drfferences between mamigers ar large corpora(ivns and small businesses on the etc(iveness r&f market inierveniion by (he governmenr, borh iir terms ofjob creatroir aud technvfogy enhancemen(. wi(hirt the .(ubsiirnple of smag firms, however, there is sharp disagreement oir (he value of government programs such ris those proposer(in h.r. 820. introduction technological innovation is a critical factor in the competitive capabilities of many small firms (lo storto, 1994). since small businesses are sigmficant contributors to the overall strength ol'he u.s. economy (butler, 1994), thc federal govcrnmcnt is concerned that inaccessibility to leading technologies may cause a competitive disadvantage to small u.s. businesses in the global marketplace. in response to this concern, the u.s. house of representatives introduced house resolution 820 i hr 820) which would establish technology centers to assist small businesses in understanding, acquiring, and implementing technological innovations to enhance their compctitivencss. whether govcrnmcnt intervention via programs such as the technology partncrships described in hr 820 is benclicial to u.s. corporations is open to debate. government initiated technology partnerships dircctcd at improving thc technological capabilities ol'arge corporations in the u.s. semiconductor industry mct with very limited success and low 'his research was (unded m pan by a grant from thc graduate programs and research department at ilhnois state umversny college o(buuness the authors also wish to acknowledge the support of the small business institute at llinois state umverstty tn the preparation of tins manuscript 109 participation rates among potential participants (mills. 19(23). potential success ol'he small husiness technology partnership outlined in hr g20 is dif'i'&cult to predict hecuusc liulc is kn()wn ahnut how small husincss owners/managers'ttitudes dilyer i'rom the large, husiness executives relating to thc rulc ol'overnment in developing technology and innovation. thc puiposc of'he cunent research is to i) investigate thc auitudcs of'mall business owners and managers regarding the imponancc nf technological innovation, 2) compare these attitudes to &hose 01'arge husiness cxccutivcs, 3) describe thc general opinions of small husincss owners on thc effectiveness ol'ovcrnmcntal programs in .',purring innovation and resulting joh growth, and 4) provide insight on thc potential impact of'r g20 in light nf'he research i'indings this study will hc presented in four parts. the first section (vill dcsciihc hr ii20 and explore hoth sides of'he dehatc over its pntential i'01'uet:lss. thc scen(10 section will discuss the research methodology uscxl to investigate husiness owners aml mangcrs'pinions on lhc importance of'technological innovation and thl'ovli'11&til'ills i'olc i(1 fil'0&notulg thc third section will rcpon thc findings of thc research, foll(iwc(l hy a i'inal section outlining thc potential impact ol'r 820 given thcsc i'imling». hr 820: the national competitiveness act of 1993 house resolution ii20 was introduced on may 24, 1993 as thc "national compc&i&ivencss act of'993" af'ter hcin ~ approved hy thc house suhc(&mmittcc on technology, environment and aviation on march 30. the hill is also part ol'hc administration's hudget plan for 1994. the introduction of'.r. 820 was hased in part on thc i'inding hy congress tlult "thc cost of'and dil'iicuhy in ohtaining invcstmcnt capital for small high technology companies arc signif'icant detcrrcnts to their i'onnation, development, and glowth" (h.r. 1&20, section 102, article 6). thc purpose of'.r. ii20 is to improve ihc compctitivcnlss (lf s&ti(iii husincsscs thlough il ntlllonwldc tcchnologv out&'ltlch ping&itin tllnlcd ilt &01plovntg tlcccss 10 lltlol'util&ion, cxpcrtisc, technology and managcmcnt practices. onc ol lhc goals of ihc technology outreach progr un proposed in hr. 1&20 is to assist small busincsscs in thc us, in their efyorts to cxpund aml accclcrate thc usc ol'cost cfycc&ivc, modern manufacturing tcchnologics aml practices. in particular, h.r. 1&20 is aimed at promoting agile m;mul'«cturing i'or 360!,000 small and medium sized u.s, businesses in order to cnhancc &heir glohal competitivcncss. thc outreach programs cnvisioncd umlcr h.r. 820 aiv. io hc estahlishcd as a partnership hetwecn the department of'ommcrce. thc states, thc private sector and other appropriate federal agcncics pioviding technology extension ccntcrs and tcchnical services acloss thc u.s. un&vcrsitics aml small husincss dcvclopment ccntcrs (among other organizations) will also he involved in thc dcvclopmcnt and opcralion ol'hc technology outreach ccntcrs. thc outrcuch ccntcrs arc to hc i'undcd through a composite ol'users''ccs, imlustry support, and continued federal investment. the plan outlined in h.r. 820, calling for 17 hillion dollars in federal support over four years (mills. 1993), has hccn cmhraccd hy prcsidcnt clinton as pal( of'is udministrat ion's overall technology pnlicy. thc civilian technology dcvclopmcnl act ol'993, which is part 110 of h.r. 820, is pa&x ol'he clinton admmistration plan to encourage mvestment &n start-ups and other small enterprises (demott. 1993; higgins, 1993). part of the financing for technology development in small businesses will come through federally provided venture capiml funds piggy-backed on the criuity capital prov&ded by private sector venture capital firms. ciovcl&1&&lent subsidized technology programs such as this have yielded some breakthroughs such as apple computer's newton portable, which uses a microprocessor developed in the u.k. with european community funds. (hudson. 1993) however, many venture capitalists believe that h.r. 820 is much too complex, overlaps existing sba programs (saddler. 1993), and comes with too many strings attached i'or the health ol'hc vcnturc capital i'irms and small businesses involved. (rodgers. 1993) thc ihrust ol'he technology pohcy outlined in h.r. 820 centers on electromcs and automobile industries, specif'ically thc dcvclopmcnt of thc inl'i&onatii&n super-highway and altcrnat&ve-tuel cars, with a subst&mtial amount of research i'unds divcrtcd i'rom defense department research programs. (davis and fussy. 1993) howcvcr, dcfcnse conversion plans, relaxation of expo&x restrictions icl't over from the cold-war era, and investments in computer networks have not been fo&rheum&ng, leading many small business cxccutivcs and technology industry leaders to criticize thc president's administration i'r unkept promises and a failure to act (nomani, 1993). onc ol the hoped i'or cflccts ol'he increase in technology spending by the federal govern&neat is an increase in jobs (healey. 1993). the cff'cctivencss and compctitivc clticiency ol'overnment programs such as those proposed in h.r. 820 has been tiucstioncd. many computer industry executives have voiced concern over thc government subsidized venture capitalism, arguing that the government should not put tax dollars toward potentially had invcstmcnts nor should it insulate stan-up companies i'rom market i'orces. (higgins, 1993) the presence of u.s. tax dollars may keep the market from opcrat&ng eft&ciently, actually costing more long tc&m jobs in thc global marketplace than the programs provide in the short run others have expressed concerns that thc vcnturc capital i'und allocation process will become politicized, i'avorin ~ i'irms in the distncts of powerful members of'ongress instead over those with higher likclihoi&d ol'success (dav&s and frissy, 1993). m&lls has argued that sematcchthc govcrnmcnt and industry consoniurn aimed at spurnng the u.s. semi-conductor industryhas bccn a failure because the majority ol'emiconductor makers decided not to join thc consortium. thts resulted in onc, organization (the government backed consortium) competing pinhaps unfairly against other organization~ (private u.s. chip makers) in thc global marketplace. (mills, 1993) this situation sccms unlikely to result in joh growth or incrcascd global competitiveness. thcrc appears to bc w&dc d&sagreement on the efficacy ol'overnment sponsored &nvestmcnt &n innovations auncd at creating jobs in thc u.s. the july survey by thc national federation ol'ndependent businesses rcportcd high levels of cont'idencc in the economy among small business leaders, but only 4e/» rated the president's pol&c&es as "good" or "excellent" and just 1% gave favorable ratings to congress and &ts policies (business week, september 5, 1994). our study was conducted to dctcnninc ihc auitudcs small business leaders and how their opinions may differ from executives at large companies regard&ng government i i i sponsored assistance programs, the inquence they may have: on innovation, and how govcrnmcnt hacked innovation programs may affect jobs. the following section outlines thc research methodology utilized to investigate these attitudes. research methodology data for this project were collected using a survey questionnaire. thc survey items were developed from thc literature on innovation and public policy which idcntilicd i'ivc factors as important in thc economic success of in&a&vations (strong, 1992). these lactors arc thc uuributcs of thc innovation itself', industry characteristics, organization capabilities, the attitudes ol'hc society in which thc innovation is being devclopcd, and the def'inition ol an innovation's success. questions werc solicited i'rom a panel ol managcmcnt researchers relating to these i'ive i'actors, and the survey was pilot tea&cd on a sample ol'wenty three executives in an evening mba program. variance restrictions and question clarity concerns resulted in thc elimination of several items. cont'irmatory factor analysis of'hc p&lot sample responses iden&if'icd only four factors, as thc innovation attribute and industry characteristics questions loaded on thc same i'actor. this is perhaps because thc attributes ol'hc inm&vation (e.g. whether they involved intense capital investment or pilot plant construction) werc very closely linked to industry characteristics. alter condensing the survey i'rom live i'actors to i'our and eliminating items based on pilo& study response, 32 attnbute items and 13 personal and i'inn demographic items remained. each item asked the &csponden& to &nd&catc icvcl ol'grccmcntwith statemenus related to innovation, such as "innovations involve a great deul ol'inancialrisk." responses werc rccordcd on a five point likert scale. six items related to innovation/indusny attributes (lactor i), nine items mcasurcd organization attributes (i actor 2), ten items addressed societal auributes (factor 3), and scvcn items rclatcd to innovation success mcasuremcnt und attitudes about govcrnmcnt involvement (factor 4). thc survey was disiributcd to a sample ol'usiness leaders as discussed in the following section. sample thc survey was mailed to strategic managers at 357 firms in an industrialized midwestern state and 122 usable responses were received for a iusponse rate of 34.2%. both the response rate and thc sample size el 122 appear adequaie i'or survey research of'his nature. because ol'hc relatively high response rate, no i'ollow-up survey was generated. the high rcsponsc rate rcduccs thc likelihood ol'rcsponsc bias, so no analytic comparison of'respondents and nonrcspondents was perl'onned. however, observation ol'means, rungcs, and variance statistics i'or both respondents and non-rcspondcnts did not rcvcal any systematic biases in ter&ns of revenue or number ol'employees. rcspondcnts werc asked to state their attitude regarding scvcraf innovation-related statements as measured using a live point likert scale ranging from strongly agree to strongly disagree. a demographic and industrial profile of thc respondents is provided in table 1. 112 table( demvgrvl&lur nnd indus/rivi prvfil» r&f res/&r&nr/e&y/s in= 1 22) pfrsonai. dfmographics aind attitudes ~ae: mean=44.27 sd=9.46 range= 27, 80(in years) 0:* i ". =-050 td=i ll lit= 3. -ll y "3 ind tenure: mean=14.19 sd=9.51 ran »=0.5, 55 (in years} c~yo mjm .» = tl 42 5d=0.50 .,=0.5, 5. jl y gender: male=99 (82 5%), female=21 (17.5%) position/title. general manager=78 ( 64. s% ) owner=21 (17.4%) other=20 (16 5%) educator=2 (1.6%) personal conce tion of "innovation" new product=s2 (46.8%) other=21 ( 18.9%) ncw manul'acturing process=20 (18.0»/n) new markets=10 (9 0%) inew managcmcnt systetti=5 (4 5% ) new distnhution method=2 ( i 8%) new orgam&ation foun=i (1.0'7o) firm dfmographics size. lt so =19 (15.6%) 51-250 = i ( 9 0%) 251-500 =5 ( 4 1%) 501-999 =14 (11.5"7r ) mt 1000 =73 (59.8%) revenue: mean=$ 3.360 mm, sd=7 326 mm. range.=$ 110 k. $40.4 miami t~t' manufacturin =43 (36.1%) other=38 (31.9%) (primarily consulting) fmancc=14 (11.8o/r) healthcare=io (8.40/0) transportation=5 (4 2%) retail=4 (3.4'/o) education=4 (3.4%) government= i (0.8'7o) t ' of technolo of primar im ortance in industr ". computer/inl'ormation=70 (59 8 "7o) other=14 (12 0%) machin»=14 (12.0%) energy=g (6.8%) commumcation=6 (5.1'/o) medical=3 (2.5%'i biologic/gicneiic= i (o.j/n/nl transportation= i (0.9'7r ) 113 as can bf'c&'.ll in table i, the average agc of respondents was slightly »vcr 44 years, with more than 20 years work experience, 14 of'hem in their cunent industry and 10 with their current company. the sample was predominantly males (82.5%) holding a position ol'eneral manager (64.5%). almost half the respondents thought o( innovation in terms ol'roduct development (46.8%). analysis of'irm dern»graph&cs reveal that about 60 percent of the linus in the sample employed more than 1000 people, while 40 employed less than 1000. mean revcnucs were 3.36 million dnllars annually. over two-thirds ol thc sample, (ir&ns werc involved in either manufacturing (36.1%)or "other" (prnnarily consuhing) (31.9%). all&'lost sixty pcrccnt ol'hc i'irma werc involved in either computer or information processing industries. ~s',";i t h the attitudes capiurcd in the i'capel&sea wel'e analyzed using cross-tabs to examine dil'(erenccs across business sii'.cs varying f'rom very large (g&cater than 1000 cmployecs). large (soo-999) medium (251-499) small (51-250) and very small (50 nr i'cwcr cmployccs). in addition, dcscnptivc statistics werc generated to i'urthcr our understanding o( thc range of'ttitudeswithin each group. thc results of these statistical analyses are pircscnted in thc next section. results of the research results ol'hc cross-tabs arc summarized in table 2. c&oss i ah i»atriccs are shown in table 3 for each of'hc statcmcnts demonstrating signif'&cant dilycrcnces thc item numbers concspond to thc question numbers on thc survey. thc l&rst six questions werc related to innovation/industry i»tributes. of these, only rcsponscs to questions 4 and 6 gcncratedl signil'icant (p(.10) dif )broncos based on s&zc of'usiness.both of'hcsc questions involve&i thc importance of individuals in thc ililiovatloli process. it appears that exccutivcs in larger i'irma arc mi&rc likely to & icw crea»vc individuals wiihin thc firn& as critical to innovation activities. employees with ncw ideas arc pcrccivc&l to be the primary drivers ol innovation in large i'il'l&is ils e&)l&&lasted &0.'&1&lllcl busilicsscs. questions 7 through i s related to organization auributes. of'hese items, &&nly question 10 achieved statistically signi(icant diff'crenec at the p&.10 level. this question addrcsscd thc role of'urrent sirategy in future innovation capabilities exccutivcs at small firms appear to view current strategy as a limiting factor in future innovation flexibility. larger pinna sccm morc coml'ortahle within thc strategic changes that may accompany innovation. questions 16 through 25 measured attitu&lcs about social attributes. only responses to question 23 werc significantly (p&.10) dif'ibrcnt across business: ize. this question dealt with the importance o( consumer judgements of'desirability of'nnovations. executives at larger i'irma sccmed much more willing to leave judgcmcnts ol innovation desirability in the hands of'onsumers than did their small business countc&parts. 114 table 2 chi square li ketihaatt tests fttr item resttmrse dtffercnces a crass itttsi ness stce classificatiuns item ¹ chi square value significance (p) innovation and industr anributes: i 16.76 .40 7 15 93 .46 3 18.40 .30 4 36.15 .00 5 11.86 .75 6 25.77 .116 or anization attnbutcv: 7 18.34 .11 8 14 77 58 9 i '7 97 .68 ip 26.22 .05 ll 16.30 .43 12 18.60 79 13 i i 92 .75 14 671 .98 15 20.08 social attributes: 16 21.01 .18 17 19.66 74 18 18.52 79 19 18.25 .30 tp 7p 53 .19 21 14 77 .58 22 12.36 7'7 23 26.86 .(14 24 19.75 .73 75 11.22 79 success attnbutes: 26 17.08 .cd 27 24.65 .07 78 21.17 .17 79 8.92 97 personal attitudes: 30 22.95 .11 31 25.46 .06 32 35.81 .00 115 table 3 cross ta/t matrices for sttltemen(s demons/ra(in¹ staristiraiiy si¹nificattt (p&./0) difjerences ( sd= strongly dlsagrce/ d= disagrcc/ n=no opinion sa= strongly ag tel / a=agl'1 c) [tem 4 i i i n1 slac rcsponscs (¹ o( emp) sd d n a sa row total lt50 5 0 2 ii 4 19 51-250 0 6 0 4 i 11 251-499 0 i 0 3 i 5 500-999 0 9 i 3 i 14 &1000 7 19 i 36 10 73 column total 12 35 4 54 17 i '1'1 item 6 firm size rcspollscs (¹ ol'mp) sd d n a sa row total ltso 0 4 0 3 12 19 51-250 0 i 0 4 6 11 251-499 0 0 0 2 3 5 500-999 0 0 i 5 i( 14 &1000 i 0 4 36 32 73 column total i 5 5 50 61 122 itfm 10 finn size responses (¹ ol'mp) sd d n a sa row total lt50 0 2 2 10 5 19 51-250 0 0 0 6 5 11 251-499 0 2 i 0 2 5 500-999 i 0 0 7 6 14 &1000 3 i i g 37 14 73 column total 4 15 11 60 32 122 116 iteiy 23 firm size responses (¹ ol'emp) sd d n a sa row total lt50 3 6 2 4 4 19 51-250 0 5 0 2 4 11 251-499 0 0 0 3 i 4 500 999 0 3 2 6 3 14 &1000 2 8 5 41 16 72 column total 5 22 9 56 28 120 item 27 finn size responses (¹ of emp) sd d n a sa row total lt50 0 14 2 3 0 19 51-250 i 7 0 3 0 11 251-499 0 2 2 0 0 4 500-999 0 10 i 3 0 14 &1000 9 30 13 is 4 71 column total 10 63 18 24 4 119 item 31 ftrm size responses (¹ ol'emp) sd d n a sa row total lt50 3 6 3 4 3 19 51-250 4 i 0 6 0 i i 251-499 i 3 0 i 0 5 500-999 2 i i 6 4 14 &1000 18 22 8 20 3 71 column total 28 33 12 37 10 120 item 32 firm size responses (¹offmp) sd d n a sa row total lt50 4 6 3 2 4 19 51-250 0 5 0 3 2 10 251-499 0 0 i 3 i 5 500-999 i 9 3 0 i 14 &1000 4 16 6 24 21 71 column total 9 36 13 32 29 119 117 questions '26 through 20 mcasurcd attitu&lcs ahout innovation success. question 27 dealing with returns on ra(3 invcstmcnts yiel&lc&l difli:rcnccs across husincss sixc distrihut(ons signilicant at thc p&.101cvcl. exccutivcs at small husincsses werc less inclined to mc;&sure an innovation's success in terms of economic returns on rkd cxpcnditures than werc cxecutivcs at larger firms, questions 30, 31, and 32 dealt spccilically with the role of govranment in job creation an&i innovation hy husincsscs. responses to (iucstions 31 and 32 werc signif'icantly different (p& 10) across business sixes and responses to &ines&ion 30 approached signilicance (p=.115). taken together, responses to thcsc thrcc (lucs(ions suggest that cxccutivc t&t la)get'on)pan)cs view governmcm intcrvcntion in markets less i'avorahly than do cxecutivcs at smaller companies. in addition, large comp;my managers do not appear to view govcn)ment progra)ns as an cf'i'ective means of'nnovation dcvclopmcnt or joh creation, at least when compared to rnanagcrs at smaller l)nns. the results ol'he data analysis suggest that thcrc arc s&une important differences hetwecn the attitudes ol'xccutivcs dcpcnding on company six«. implications of'hese findings, with an emphasis on thc potential impact on hr g20, will hc discussed in thc following section. implications for the success ok hr 820 thc results sccm to suggest that cxccutivcs at larger 1(nns look to creativity of their cmpl&&yccs i)or innovations. arc morc likely to consider innovations which extend heyond the finn's current stratcgics, and (&rc con&loltahlc allowing thc invisihlc hand ol'hc marl ctplacc to "choose" icgitimatc inm&vati(ms. they arc also more likely to internally measure thc success of an innovation in returns on rcscarch and l)cvcloptnent dollars cxpcn&lc&l. compositely, tltcsc &csults may rcficct the munilicent resource cnviromncnt i'aced hy large f&nns compared to smaller firms. in other words, large lirms have morc employees to rely on fore&cativc ideas, morc administrative slack to direct at strategic change, aml morc capital to h&vest 0) c(uudhu&tcd reseal cl'& (uul l)cv('iopn)cnt fu'ogl'ntrls. thcsc cll'cun&st(u&ccs (0'c likely to crcatc some level ol'ompetitive;ulvantagc in thc markctplacc, which may explain why large i'irms arc rn«rc inclined to rely on classic 01(ukct opcl(&t)on to dctclnuuc thl. late ol'n innovation. in addition, la&gc i'(rrns would typic;dly exert grcatcr control over thc distrihution channel» an&i hring other scale-economy pressures to hear on rnarkct actions. thcrcl'orc, they may hc chic to infhlcncc nuu'keks to then'dv;u&tr(gc ilun'c so than small husincsscs crul. thc pcrcci vcr market i nil ucncc an&i competitive advantage accruing to firn&s in larger sixc ranges may also explain why thcsc i'irms do not suppon government intcrvm&tion in pron)oth&g )nnovt&t)00 ol')oh cnh(u&ccn)cnt. attcnlpts hy thc govcrnmcnt to make resources (either capital or technology) morc readily availahlc to small husincsscs could diminish some 01'hc compctitivc advantages currently cnjoycd hy larger organixations. 1)ecausc small husincsscs appear to hc morc favorahly disposed to government involvcmcnt than larger husincsses. (nlall husincsscs'csponsc to a technology assistance program such as that outlined in h.r. i(20 may hc dif'i'crcnt than large businesses'csponsc to similar programs (c.g. scmatcch). thc reasoning hchind the programs proposed in h.r. (120 i i ii appears sound, but of course, finul judgement must bc suspended until the tricky details of impletnentation are rcsolvcd. indeed, even though thc opinions ol'small business executives are dtfferent than their large company counterparts, there appears to be much disagreement among small business leaders on the role of govcrnmcnt. thc range of responses to thc qucsttons about government programs aimed at promoting innovation, the effectiveness of'uch government programs. and thc ability of these programs to create lobs demonstrate that a substanttal number of small business leaders remain unconvinced of thc government's ability to deliver nn promised assistance. for instance, 43% of respondents tn companies ol i'ewer than 250 employees responded either disagree or strongly disagree to question 30 on the appropriateness ol'overnmentinvolvement in innovation development. similarly, 47% dtsagreed either strongly or somewhat with the statement that govcrnmcnt should be mvolved in job creation programs. over one-thtrd of small business lcadcrs bclicve that government involvcmcnt reduces the el'fective operation of markets. as a group, small business managers arc morc likely to view govermnent programs favorably than arc large company managers, but there remains a large portion of skeptical small business leaders whether or not fi.r. 820 can prove beneficial to small businesses tn the face of such skcpttcism remains to he scen. 119 references business week. (1994) u.s. small businesses see only one dark cloud: washington. september 5, 22. butler, r.d. (1994) enterprise zones and development organizations: are they the answer to economic problems. proceedin s of the small business consultin i confcrcn«c. stnall business institute directors'ssociation, san antonio. tx., 77-82. davis, b. /k m, frissy. (1993) clinton plans expanded role on tc«hnology. wall strcct journal, p.a3 dcmott, j.s. (1993) thc clinton push on technology. nation's glusincss, may, 29-32 h".i i i (1993) 31 i pl ph.i%91k "i » ij i.. c~i ~uartcrl . march 6, 501. higgins, s. (1993) congress bill would ensure startup i'un&is. pc week. itch. 15, 115 hudson, r.l. (1993) public push. wall strcct journal, junc 24, r i l. lo storto, c. (1994) an analysis of subcontracting relationships based on the sub««atra«tor/custon)er technology exchange portfolio; some empirical i'indings. procccdin s of thc small business consultin con(crea«c. small business institute directors'ssociation, san antonio, tx., 3-11. mii,m.(1993) h p i pp hill . i . hk: 9 u:. c~l quuartcrl . april 3, 835. nomani, a. (1993) high tech industry's infatuation with clinton turns to i'rustration over unkept vows, inaction. wall street journal. september 2, a14. rodgers, t.j. (1993) subsidieswith deathly strings. forbes. july 19, 20/i. saddler, j. (1993) sba, comtnercc square off on high tech i'inancing. wall street journal. junc 9, bl. strong, k.c. (1992) innovation, confonuity, and idiosyncrasy. unpublished manuscript. university ol'olorado. 120 strategy teaching note: suggestions for using the skyline chili case daewoo park hema a. krishnan xavier university the skyline chili case can be used in a variety of ways in conjunction with different areas of small business management. it fits particularly well in small business growth managment and strategy course. the case content spotlights the past and present of skyline chili as well as the role of top management. because skyline chili is competing in a fragmented industry, the case also fits into a discussion of formulating and implementing "sustained, profitable growth" strategy in fragmented industries. there is an abundance of informationabout the restaurant industry and skyline chili's competitors. therefore, skyline chili ia an excellent case for classroom discussion or for individual or group written assignment. a video ( i i/2 hour) is available with this case (mr. kevin mcdonnell's presentation in small business growth management and strategy course). also, annual report is available from compactdisclosure and compustat. teaching outline and analysis 1. what impressesyou about this company? is it well-managed? why or why not? using skyline chili's financial data, analyze internal strengths and weaknesses. this is a good opening question because you get immediate feel for what students think about skyline chili, inc. and how it is managed. the following items are strong candidates for being included: skyline chili operates successfully under a new ceo, mr. kevin mcdonnell. the challenge of guiding skyline into a thriving regional restaurantchain while increasing shareholder value has only begun for him. it is essentially the same challenge his predecessors were unable to overcome arer skyline chili went public to finance an aggressive regional expansion. mr. mcdonnell describes his task as an "intriguing opportunity." v skyline chili has managed to grow by utilizing the principles of smallscale organization. 91 skyline's track record of growth. as of 1995, there are 83 skyline restaurants. though mr. mcdonnell might like to add new stores more quickly, he is most concerned with improving the prolitabilityof the existing ones outside cincinnati. skyline chili has some internal weaknesses. for example, 3 lambrinides family members control 74.7% of ownership. also, compensation for them (as oaicers and directors) and price-earnings ratio (19 in 1994) are too high (in comparison to roe). skyline chili's roe (return on equity) was poor in comparison to other competitors: 4.7% in 1992, 5.8% in 1993,6.7%in 1994 (industry average: 10%). however, in 1995, skyline chili under mr. kevin mcdonnell's leadership reported 11%. 2. how successful was skyline chili in defining the business and crafting a strategy to achieve performance objectives? skyline chili defined the business narrowly as a company that produces the secretrecipe chili for its restaurants (company-owned and franchised) and several frozen chili products for local grocery stores. however, skyline chili did not pay much attention to crattinga strategy. it emerged from a process of trial and error. today, mr. mcdonnell pays more attention to craring and implementing a strategy with a strong growth orientation. 3. can skyline chili executives stand the tests of time and growth? skyline chili's financial management is very conservative. the company has no regular wall street analyst following because its stock is thinly traded. limited attention is given to improving shareholder value and sustaining it. given its projected growth, however, skyline chili must be a company that generates a large amount of cash to pay for the necessary expansion. growingearningsis the foundation forincreasingshareholdervalue. for skyline, that means the restaurant chain must expand outside cincinnati because it has all but saturated this market. another critical component to shareholder value is liquidity. with 75 percent of skyline chili's 3 4 million shares tied up in the hands of officers and directors, there's not much of a public float. with so few shares available, it's difficult to achieve significant price appreciation. it also limits wall street's interest because investors usually don't invest in such tiny companies. nevertheless, skyline chili has an asset: mr. kevin mcdonnell, his leadership and strategy. 4. what issues does skyline chili face in the years ahead? what would you recommend skyline chili do to successfully confront these issues? students are prone to come up with shallow answers to this question. you may have to probe and push a little to draw out the rather substantive issues skyline chili faces: v deciding how fast to grow —how many new restaurants(company-owned and franchised) to open each year and how rapidly to enter new geographic 92 areas. rapid expansion runs the risk of straining the company's ability to implement its strategy eltectively in all of its stores. skyline chili should avoid its previous mistakes in the late 1980s. for example, there were only one or two skyline chili restaurants in the new city. the stores lacked a loyal customer base and with so few locations in a city, promotion was very difficult. skyline chili had to pull out of the troubled markets such as atlanta, pittsburgh, and washington, d.c. therefore, skyline chili needs to pursue "managed growth." ~ what management actions to take to ensure that each restaurant delivers attentive and personalized customer service? it will not be easy to sustain the current strategy of customer service as the company's size and geographic scope gets bigger and bigger. special efforts need to be made to employee training and development. skyline chili's strategy cannot succeed without a cadre of dedicated, motivated, and knowledgeable store employees. therefore, skyline chili should focus on: high standards in employee selection, extensive efforts to recruit service-oriented people to staff restaurants, intensive training of all employees, and communication between management and employees. ~ can skyline chili continue to finance growth without incurring financial strains? in sum, the core issue is how to sustain the growth strategy and continue to implement it with excellence. at the end of case discussion, students can try to answer the following question: should i consider buying stock in skyline chili? 93 http://www.smallbusinessinstitute.biz from the editor the journal of business strategy continues to make great strides to assist authors and researchers in the area of small business and entrepreneurship. in 2015, jsbs transitioned to an all-inclusive online format which gives access to all of our exceptional articles for anyone seeking quality research. this format also gives our authors the assurance that their articles can be easily located, downloaded, and utilized for further research in their areas. as a result of this transition, article citations continue to increase as do our quality submissions. beginning with this issue, an important attribute of our journal is changing significantly. after 27 years of relatively no changes to the article layout, which served us well while a print-only journal, the article layout has changed significantly. most researchers download a single article for reference while conducting research. therefore, necessary changes were made to the article layout in order to facilitate this type of access. this issue highlights the new article layout. now, when a researcher downloads an article, all of the necessary article information is included on the first page of the article. this includes the title, authors, author affiliations, journal name, keywords, volume and issue number, year, and page numbers. in addition, the article reference in apa format is included at the bottom of the page. our goal is to make the journal of small business strategy the first place researchers look for support regarding small business and entrepreneurship literature. we hope you like the update! contributions to this issue this issue begins with an examination of consumer shopping motivations and how these differ across individuals. the results indicate that there are specific directions in marketing that should be addressed when reaching customers in small-town locations. this is followed by an excellent article addressing an interesting characteristic of entrepreneurs, overconfidence, and the willingness or aversion to changing incorrect beliefs in individuals who are overconfident in their new venture. the following article is one of the first to empirically address diversification in small firms in light of the ownership structure of the firm. specifically, this research addresses the small firm and whether or not that small firm has a corporate parent. the fourth article focuses primarily on small firms with an examination of innovation in those firms and the owner’s perception of the firm as either a family firm or non-family firm. finally, the fifth article presents a legitimacy threshold scale for new ventures. since the perceived legitimacy of the firm is of vital importance for judgments by key stakeholders, this scale should be beneficial for a great deal of future research. thank you! as always, i would like to say, “thank you!” thank you for your continued submissions of high-quality articles and for continuing to utilize the journal of small business strategy in your own research. thank you for sharing jsbs articles with your colleagues and suggesting articles from jsbs in your article reviews for other journals. the journal of small business strategy is your journal! william c. mcdowell editor-in-chief sr~zxcy a scorecard for small business performance roy a. cook fort lewis college janet bear wolverton oregon institute of technology abstract eva(uaring organizational performance of small businesses has frequently been a neglected managena( function. when eva(uarion efforts have been undertaken, they have ranged from simple interna( reviews to complex and often costly audits conducred by independent parties. however, most individuals working in a small bustness rarely take the time or make the effort ro undertake a comprehensive review vf their business activities. to begin the process vf answering the important question of how well a small business is performing, a straightforward approach that is easy to prepare and interpret on a regular basis is requi red. realizing thar most individuals involved with small businesses are pressed for time, an easy-to-use evaluation instrument designed to focus attention on strategic perfonnance indicators (sp)s) has been developed. these sp(s focus attention on the primary functional areas of a business: management, marketing, and fmance. each question has been designed to help the reviewer think about the importance of straregic performance indicators to the overall success of rhe business. introduction evaluating overall organizational performance has long been recognized as an important (eccles & pyburn, 1992), but often neglected, managerial function. when evaluation efforts have been undertaken, they have ranged from simple internal reviews to complex and costly audits by mdependent parties. unfortunately, many individuals associated with small businesses rarely take the time or make the effort to undertake a thorough performance review. typically, performance reviews and audits have focused on evaluating the financial area, but they can be equally appropriate and effective in identifying the need for improvement in other functional areas of a business (bogan & english, 1993). however, the literature appears to be devoid of an easy-to-use, yet comprehensive, tool that will meet small business needs. in response to this void, a performance evaluation instrument was specifically designed to be used in a small business setting. to serve the needs of small businesses, an evaluation instrument should be both universal and comprehensive in nature. it should contain common elements found in other traditional performance evaluation formats such as management audits, marketing audits, and accounting audits. the performance evaluations to be conducted in any one functional area should not be considered mutually exclusive or unrelated to those in other functional areas, since all business activities are inextricably intertwtned. evaluations should be designed to i highlight thc interrelatedness of all business activities in a anempt to achieve the ultimate goal of striving for continuous quahty improvement. small business evaluation instruments should he designed with a balanced approach in mind. to preserve their usel'ulness, they should be of limited scope and focus on strategic. pcrf'orrnancc indicators (spi) within the three primary functional areas of' business: management, marketing and i'inance. spis must be activities that are both under the owner's or manager's direct control and which can be modified to result in improved efl'icicncy and/or el'fcctivcness. therefore, selected spls in an evaluation instrument should focus on key procedures, practices or sets of'data; be comprehensive in nature; and provide an opportunity for timely corrective action. thc proposed scorecard, based on a simple "yes/no" dichotomous design, may err on the side of'ilnplicity, hut it was developed to encourage use by a broad range of'nterested parties from sole proprietors to small business consultants. thc comprehensive overview of kcy business activities encourages users to think about linkages among the. i'unctional areas reviewed. although these questions pre-suppose some basic knowledge of'usmess principles, practices and terminology, they have been eral'ted to bc "user-friendly " those individuals using the scorecard who have not acquired a general knowledge of business subjects through education or experience might need assistance completing the evaluation process the first time. this performance evaluation scorecard, developed specifically for small businesses, uses thc balanced viewpoint approach proposed by kaplan and norton (1992). individuals interes(ed in performance evaluation formats suitable for large husincsscs should see kaplan and norton (1992).'hc questions presented in the proposed perfonnance scorecard (see appendix a) are designed to be general in nature, yct limited in number to encourage periodic use and focus on business practices that can promote improved perfonnance. these questions f'ocus attention on a variety of activities and measures ranging from planning and perfonnance processes to key strategic variables. they enable the user to easily identify significant trends. they also emphasize the important, but often overlooked, task of continuously gathering information critical to the i'uture success of thc business. it is important to note that the "yes/no" answers are not designed as an end in themselves, but as a guide to i'ocusing attention on organizational performance and ways to improve that performance. either a positive or negative response to a question may indicate the need for corrective action and/or further analysis depending on the spi being evaluated. thc "action required" column allows the user to document future actions. some qucstlons, by their very nature, could guide the user to take immedialc corrective action, while others may require additional information and analysis. 'aptau, roben s aod t)avrd p. nonoa (l992) the balanced scorecard measures that dove performance. h«rv«rd b«rr«era review, 70(l ), 7 i -79. 2 spis of a management review reviews of management performance have typically been designed for large organizations and have been conducted by: i) evaluating qualitative performance standards; 2) comparing accumulated performance data to planned quantitative objectives; and/or 3) conducting surveys. due to thc importance of qualitative and quantitative strategic performance indicators, both were incorporated into this scorecard. surveys were not selected for inclusion in this evaluation instrument due to financial and time constraints facing most small businesses. however, surveys may be used on a less frequent basis to validate perceptions and i'indings obtained from the completed scorecard. brossy (1986) outlined several qualitative and quantitative performance measures for assessing chief executive officer (ceo) performance. many of these measures appear appropriate for small businesses and have, therefore, been incorporated in the proposed scorecard. although many performance criteria could be sclccied, the four strategic perl'onnance mdicators included in the proposed scorecard focusing on the functional area of management are: i strategic direction, 2. strategy implementation, 3. human resources, and 4. community/government relations. to assess the presence of an established strategic direction, attention can be focused on the i'ollowing questions: i. has the external environment in which thc business operates changed? if yes, have changes been made to align thc business with these changes? if no, how will potential changes be monitored in thc future? 2. has a mission statement (the reason i'or the business's existence) been written? if yes, does it reflect the current vision of the owner-manager? if no, when will this statement be written? 3. have specific goals been published for the next two to five years'? if yes, how much progress has been made toward accomplishing these goals? if no, when will specific goals be identified and recorded? once the strategic direction of the business has been assessed, the evaluator can then proceed to reviewing the effectiveness of strategy implementation. simply developing a well thought out strategy i'or conducting business is not enough. these plans must be put into action. successful strategy implementation requires tying performance measures to desired outcomes (grady, 1991). the effectiveness of strategy implementation can be assessed by answering the following questions: 3 4. arc cmployecs dcdicatcd to achieving the stated goals ol'he business? if ycs, how has this dedication been reinforced? if no, what changes have been planned to improve commitment'? 5. have procedures been established to insure consistency in quality and quantity of goods/services produced/provided'! if ycs, do thcsc proccdurcs still reflect thc desire to meet and/or exceed customer expectations? il'o, have time i'raines hccn sci to cithcr write and/or update these documents'? evaluating strategy implementation leads the reviewer to the next spi human resource issues. the strategic importance of human resources to overall business success was highlighted by scvcral authors (c.g., flamholtz, searfoss, & coff, 1988; grady, 1991; watts & onnsby, 1990). grady (1991) noted the importance ol'mplementing and measuring performance as a means ol'coinmunicating strategy to employees. watts and o&vnsby (1990) also identified thc need for i'ocusing attention on human resource iiisues in order to achieve organizational cff'ccuveness. flamholtz et al. (1988) focused attention on the econoinic value of human rcsourccs. kcy human resource issues may be evaluated hy asking the following questions: 6. have yield ratios and rctcntion rates bccn calculated for various recruiting sources'! ll'yes, are the most elyective sources heing used? if no, arc new sources that could he morc cl'fcctive being cxplorcd'! 7. have key individuals who are capable of assuming more responsibility been identilied'! if yes, what type of training have they rcceivcd or are they scheduled to rcccive'! ll'o, are plans being developed to retain key employees? 8. are records maintained on tardincss, abscntccism, accident frequencies, and turnover'& if yes, what steps have been taken to improve each of these areas'! lf no, arc plans heing mack to collect data necessary i'r cquitablc human rcsourcc decisions' 9. are performance evaluations and wage and salary adjustment records maintained on all employees'? if yes, are productive employees recognized and compensated on a competitive basis and poor performing employees counseled on iinproving perl'ormance and/or dismissed? if no, are plans being made to begin keeping such records? 10. have employees with extended service been given proper attention and consideration in maucrs of scheduling, vacation preference, and other available benefits? if yes, is this information being communicated to employees on a regular basis? if no, arc plans heing made to recognize the relationship hetwccn length of service and einployment benefits? the significance ol'human resource issues was highlighted by leileld (1992) who noted that "(ajggressive quality and performance goals require strong human resource plans and practices to insure that employees'aximum potential is utilized" (p. 5 i ). h is often said that employees are a business'nst valuable resource. however, unless this resource. is monitored, it may be overlooked and eventually wasted. 4 the final spi in the management area deals with community and government relations. the questions in this series provide an opportunity for the reviewer to consider relationships between the community and the business. these questions have been designed to focus auention on the critical issues of ethics and social responsibility. community/government relations issues may be evaluated by asking 1). have clear guidelines for ethical behavior been communicated to all employees? if yes, how have employees been recognized when their actions support the ethical goals of the businessv if no, is a code of conduct that reflects the ethics of the business being formulated? 12. does the business return value to the community by supporting socially responsible programs? if yes, how have these efforts been communicated to employees and other interested parties? if no, what programs are under consideration for support? providing a foundation that encourages ethical behavior and fosters social responsibility creates an environment that benefits the business, the employees, the community, and the customers. spis of a marketing review thc central role that marketing efforts play in the success of an organization is widely recognized. bonoma and clark (1990) noted that managers tend to worry more about marketing issues than those in any other functional area. they also noted that marketing strategies quickly become obsolete regardless of the amount of effort spent on planning and implementation. therefore, it is important to review periodically the effectiveness and efficiency of a firm's marketing efforts. although several approaches (berry, connant, & parasursman, 1991; bonoma & clark, 1990; brossy, 1986; kotler, armstrong, & starr, 1991; walsh, 1990) to reviewing a firm's marketing efforts have been suggested, all agree on the importance of systematically performing this task. by combining the formality found in the components of the classic marketing audit (kotler et al., 1991) with those of the service audit (berry et al., 1991), a concise and comprehensive review of marketing efforts can be achieved. in the functional area of marketing, the three strategic performance indicators included in the scorecard arc: 1. marketing orientation, 2. attracting new customers, and 3. serving customers. the proposed scorecard builds upon the approach and ideas suggested by berry et al. (1991) to develop questions designed to help reviewers assess marketing performance. those desiring to perform a more in-depth marketing perfonnance analysis should see bonoma and clark (1990). 5 the i'irst spi addressed in thc functional area of marketing, marketing orientation, examines the framework a business has laid to scrvc customer needs. according to levitt (1960), failure to assess consumer sentiments and the changing environment on a regular basis could result in marketing disasters. it is also vitally imponant in today's competitive cnviromnent to pay close attention to the service clement in a business's nperations. to assess the current marketing orientation ol' finn, it is necessary to answer the following questions: i. is marketing research directed at determining customer needs conducted on a regular basis'? if ycs, have customer responses bccn incorporated into business activities and/or plans'! if no, have plans been made to conduct basic marketing research'? are employees who do not interact with customers aware of'how their jobs might influence customer satisf'action'& if ycs, are efl'orts being made to improve customer satisfaction'& ll'o, what type of training are they scheduled to receive? an active marketing rcscarch program can be dcsigncd to provide revicwcrs with a realistic assessment of consumer expectations. although often complex, marketing research activities do noi need to be detailed, quantitative exercises. it is, however, critical to collect consumer information on cithcr a formal or inf'ormal basis. l)used on an investigation of success('ul small busincsscs, peterson ( l 992) identified scvcral marketing related factors that were closely associated with: uccess, including consumer oriented goals, positive word-olzmouth publicity and serving customer needs. the effectiveness of a firm's efl'orts to attract new customers can be determined by asking thc following questions: 3. are i'onnal strategies in place to attract ncw customers'! if yes, has thc cost ef'fectivcness of each strategy been assessed'? if no, what steps are heing taken to identify approaches for attracting new customers'? 4. are employees motivated to sell to prospective customers'& if yes, are programs in place to rccogmze and/or reward thcsc employees'? if no, are steps bmng taken to educate employees as to thc value ol'rospective customers to the future success of thc bus&ncaa/ 5. is the organization capable of delivering on the promises made to auract new customers? ii'yes, are customers being surveyed to determine their level of satisfaction? il'no, are steps being taken to ensure service quality? new customers &nay not be thc lifeblood of' successful business, but they provide an endowment for the business's i'uture growth and success. the final marketing spi to be evaluated is customer service. "the nature of the relationship betwccn a small business finn and its customer is, and must be, one of trust" (humphreys, robin, reidenbach, k. monk, 1993: p. 9). this customer orientation can be assessed by asking thc following questions: 6 6. are employees properly trained to perform their service roles? if yes, are programs in place to recognize and/or reward these employees? if no, have plans been made to train employees properly' 7. are customers offered concrete reasons for doing more business with the company? ii'yes, how have these reasons been cominunicated to customers? if no, have steps been taken to identify thc reasons customers patronize the business? 8. are customers made aware that their patronage is valued? if yes, how is this recognition communicated to customers? if no, how can customers be informed that they are important to thc success ol'he business? 9. is sufficient attention paid to solving customer problems when they occur? if yes. are records of customer coinplaints being maintained so that potential problems in the system can be solved? if no, have plans been made to train employees in customer service recovery procedures'? 10. do the facilities and communication materials of thc organization appear attractive to customers? il'es, have time tables been established to review and update current facilities and oft'erings? il'o, have plans been made to address deficiencies? 11. does the organization offer tangible evidence of the quality of its services? if ycs, how is quality communicated to customers? if no, what steps are being taken to identify ways of providing tangible evidence of quality? 12. do the products/services offered by the organization met the needs of the customer? if yes, how are these perceptions documented'& if no, are steps being taken to identify customer wants and needs? the inter-connectedness of marketing activities with business resources was highlighted by larrabee (1988) who noted that evaluating marketing plans in relation to these resources can lead to higher profitability. spis of a financial review although there are numerous financial criteria that could be examined in any business, the following strategic performance indicators have been identified for evaluation purposes since they are the most commonly used (barnes, 1987; hermanson & hermanson. 1994; lawder, 1989; yallapragada & breaux, 1989): l. budgeting, 2. ratio analysis, and 3. inflation adjusted trend analysis. budgeting is the most commonly used planning and evaluation tool. budget information allows the reviewer to identify quantifiable objectives and determine if these objectives were achieved (yallapragada & breaux, 1989). when reviewing linancial performance, a comparison of actual performance with budgeted performance or a predetermined benchmark provides valuable feedback on managerial effectiveness. budgeting can be evaluated by asking the following questions: 7 i. is a sales budget prepared foreach month of the corning year? if'ycs, is this budget updated monthly to reflect changes in the business environment? if no, what plans are heing made to dcvclop this budget? 2. is an expcnsc and purchases budget prepared i'or each month of the coming year? if yes, is this budget updated monthly to reflect significant changes? ii'o, what plans are being made to develop this budget? 3. is a capital expenditures budget prepared for each month of the coming year? if yes, have these expenditures been made to retain a competitive advantage' ii'o, what plans are being made to develop this budget' 4. is a budget of projected cash flows prepared i'or each month of the coming year? if yes, is it heing updated on a monthly basis to reflect changes in levels of business activity? if no, what plans are being made to develop and maintain this budget? 5. have performance benchmarks been established for all quantifiable pert'ormancc measures'! ll'es, have actual re: ults been compared to budgeted amounts? if no, have competitors or industry sources been identified where these performance benchmark measures can bc obtained? once thc actual results of operations have been cotnpared to the budg ted figures, the reviewer can then proceed to more detailed financial analysis. the management of cash, accounts receivable, inventories and fixed assets is important when evaluating financial performance and can be accomplished through the use of ratio analysis for predictive purposes. a ratio by itself does not provide particularly useful information. it is only when a ratio is compared with some predeiermined standard or the results from previous accounting periods that a true picture of performance can be obtained (barnes, 1987). although dozens of ratios can be calculated, the following i'our have been selected for linancial performance evaluation purposes: return on mvestment (roi), current ratio, accounts receivable turnover, and inventory turnover. appendix 2 provides examples of thc selected spi ratios with accompanying analyses. to assess financial performance, it is necessary to answer thc i'ollowing questions: 6. has the return on investment been calculated for the most recent accounting period? if yes, has this information been analyzed to determine ways of improving profitability? if no, have plans been made to analyze return on investment'! 7. has the current ratio bccn calculated for the most recent accounting period? ii'yes, do measures need to be taken to improve thc current lmancial position of the business? if no, have plans been made to analyze the current ratio? 8. has the accounts receivable turnover ratio been calculated i'or the most recent accounting period'! if yes, has thc average days in receivables ratio been calculated'! if no, have plans been made to analyze the accounts receivable turnover ratio'? 8 9. has the inventory turnover ratio been calculated for the most recent accounting period? if yes, has the average days in inventory ratio been calculated? if no, have plans been made to analyze the inventory turnover ratio'? 10. have these ratios been compared to those of past accounting periods, industry standards and/or projected ratios'? if yes, do the results meet with your performance targets? if no, what sources for obtaining comparable ratios have been identified? ratios have traditionally been used as an evaluation tool to determine a business'inancial health (lawder, 1989). however, mflationary effects on financial performance must also be taken into consideration. the final spi examines the effects of inflation on financial performance. a cursory review of year-to-year revenues can often provide a false sense of growing vitality when inflationary growth is being viewed rather than real growth. to determine the real growth of a business, it is necessary to adjust each year to constant dollars, thereby reflecting the impact of inflation. for a complete explanation of these calculations, refer to appendix 3. the following question should be answered to complete the evaluation process; 11. has a source been identified for obtaining inflation information that is appropriate for your geographic region? if yes, is this source reviewed on a regular basisv if no, what measures are being taken to locate an appropnate source of information'? 12. have the sales, cost of goods sold, net income and other relevant figures been adjusted to determine the effects of inflation? if yes, have financial performance measures been improving'& if no, what measures arc being taken to determine the effects of inflation? by adjusting for inflation, a more realistic picture of a flrm's financial performance can be obtained. although inflation information on a national basis is a good starting point for analysis, it would be more useful to identify a source containing regional of local information. summary the purpose of any type of performance evaluation process should be to review business activities and ensure that perl'ormance is as planned. the perfonnance evaluation process also provides opportunities to integrate the functional areas of a business and communicate business strategies throughout the organization. to answer the question of how well a small business is performing, a straightforward approach that is easy to prepare and interpret on a regular basis is required. in this spirit, the authors have developed a scorecard utilizing strategic performance indicators that focus on the primary functional areas of a business: management, marketing, and finance. 9 thc strategic perfonnance indicators are accompanied by questions which assess current perl'ormance levels for thc three l'unctional areas. each question has been designed to provide general guidance to help the reviewer evaluate the strategic performance indicator. the perl'onnance scorecard should be completed at regularly schcdulcd intervals. this allows reviewers to assess performance on a regular basis and usc the results for evaluation, control, and planntng purposes. small business owners and managers may lind it especially useful to have their employees complctc the performance scorecard. by comparing employee responses with their own responses, owners/managers can determine how much variance or continuity exists bctwcen perceptions of perfonnance and actual performance. peri'otmance evaluation provides one morc tool in the quest for continuous improvcmcnt. 10 references bames, p. (1987).the analysis and use of linancial ratios: a review article. journal of business finance & accountin, 14, 449-461. berry, l. l., connant, j. s., & parasuraman, a. (1991).a framework for conducting a services marketing audit. journal of thc academ ol'arketin science, 19, 255-268. bonoma, t. v. & clark, b. h. (1990).assessing marketing performance. in t. v. bonoma & t. j. kasnik (eds), marketin mana etnent text & cases. hotnewood, il: irwin. brossy, r. (1986, summer). what directors say about their role in managing executive pay. directors & boards, pp. 38-40. flamholtz, e. g.. searfoss, d. g., and col'f, r. (1988, september). developing human resource g h 4 i i pp y .~ai h i* .bp)9. d dy.m.w. )1991.1 ). p i'::i pl g» gy.~m ~a" . pp. 49-53. hennanson, d. r. & hetmanson, h. m. (1994. june). do the numbers tnake sense? accounting ly f y b ..~nbdc 8,pp. 1-4. humphreys, n.. robin, d. p., reidenbeck, r. e., and moak, d. l. (1993).the ethical decision making process of small business owner/managers and their customers. journal of small business mana ement, 31(3), 9-22. kotler, p., armstrong, g. & starr, r. g., jr. (1991).princi les of marketin, (5th ed.). englewood cliffs, nj: prentice hall. h b,m.)1988,w ).ad gh k gf i .~iiadi,pp.ib45. lawder, k. (1989, june). ratios 101: back to the basics of i'inancial analysis. business credit, pp. 28-30. fld ~ il99259 b i i.d*h bididg dg dl ..~lp»mtpp5155. peterson, r. t. (1992). a longitudinal analysis of marketing factors related to small business success. journal of business &. entre reneurshi, 4, 71-75. u.s. department of'abor bureau of'abor statistics. (1994, march). monthl labor review. walsh, e. f. (1990, november). a primer for planning. sales & marketin mana ycmcnt, pp. 7578. watts, l. r. & ormsby, j. g. (1990, october). thc eft'ect ol'perational and strategic planning on small firm performance. journal of small business stratc ~, i, 27-35. yallapragada, r. r. & breaux, a. p. (1989, january). financial statement analysis. the national public accountant, pp. 32-37. ll appendix i management performance acuon yes no re uired strategic oirection i. hai the external environment in which the business operates changed'! ll'cs, have changes been made lo align the business wuh these changes'! ll'o, how will otcntial chan es be monitored in the fuiure'! 2. hai a mission statement (the reason for the business's cxistcnce) been wrinen? if yes, does it reflect the current vision of the owner-manager? if no, when will this slatement bc written? 3. have spemlic goals been published for the next two to five years'! ll'yes, how much progress has been made loward accomplishmg these goals'! ll'o, when will s cific osis be identilied and recorded? strategy implementation 4. arc employees dedicated to nchieving the stated goals ol'he business? if yes, how has this dedication berne reinlorced'! if no, what changes have been tanned lo iin rove commilment7 5. have procedures been established to insure consismncy in quahly and quantity of goods/services produced/provided'i if yes, do these procedure~ suit rellect the desire to meet and/or exceed customer cxpectations7 if no, have time frames been set to either wnte and/or u date these documents'! human riisources 6. have yield rauos and retention rates been calculated for various recruiting sources'! if ycs, are the inosi cffi.ctive sources heing used'! lf no, are new sources that could be niore effi:ctive bem ex loredv 7. lieve key individuals who are capable of assuming morc responsibility been identilied? ii'es, what type o( traming have they received or arc they scheduled to receive? if no, are plans bemg developed to retain key em lo ees? g. are records mainmined on tardiness, absenteeism, accident frequencies, and turnover? if yes, what steps have ixwn taken to unprove each of these areas? ll'o, are plans being made to collect data necessary for eqmtable human rcsuurcc decisions' 9. arc perfonnance evaluations and wage and salary ad/ustment records maintained on all employees'! ll'yes, arc productive employees recognized and compensated on a competilive basis and poor performing employees counseled on intprovmg performance and/or dismissed? if no, are plans bein made to be m kee m such records'! 12 10 have employees wtth exlended service been given proper attention and consideration in matters ol'cheduhng, vacation preference., and other available benefits? il'es. is this in(ornmtion bemg communicated to employees on a regular basis? if iio, are plans bemg made to recognize rhe relationshi between len th of service and em lo ment benetits7 community/governiiient relations have clear guidelmes for ethical behavior been communicated to all employees? if yes, how have employems been recognized when their acuons support the ethical goals of the business? if no, is a code of conduct that reflects the ethics of the busmess bein i'onnulated'i 12. does the business return value to the community by supportmg socially responsible programsv if yes, how have these effons been communrcated to employees and other interested pames? if no, what programs are under consideration for su on? marketing performance action yes no re uired marketing orientation l. is marketing research dnected at delennimng customer needs conducted on a regular bastsv if yes, have customer responses been incorporated into business activities and/or plans? it'no, hnve plans been made to conduct basic marketin research7 2. are employees who do not iaternct with customers aware of how their jobs might influence customer satisfamton'! ll'yes, are efl'orts being made to improve customer sausfaction'! if no, what type of training are they scheduled to receive7 attracting new customfrs 3. are lormal strategies in place to attract new customers? if yes, has the cost effectiveness of each strategy been assessed" if no what steps are being taken to identif a roaches for anractin new customers? are employees molivated to sell to prospective customers? if yes, are progrmns in place to recognize and/or reward these employees" if no, are steps being taken to educate mnployees as to the value of prospective customers to the future success of the business? 5, is the orgamzation capable of delivering on the promises made to attract new customers? if yes, arc customers being surveyed to determine their level of satisfaction? if no, are ste s bein taken to ensure service uaht ? serving customers 6. are employees properly trained to perform their service roles? if yes. are programs m place to recogmze and/or reward these employees? if no, have lans been madetotrainem lo ees ro rl v 13 7. are customers of(ared concrete reasons for doing more business wuh the company'! lf yes. huw have these reasons hewn cunnnunicated tu customers? i(no, have steps been taken to identify thc reasons customers atron&re the business'! tl. are customers made aware that their pairr&nage is valued'! if yes, how is this recognition communicated to customers? ii'no, how can cus&omers he informed that thev arc im onani to the success of the husiness7 9. is suflicient attention pnid to solving customer problem& when they occur'! if yes, am records of custon&er complainis heing tnaintained so that potential problems in the system can bo solved'! ll no, have plans hewn mnde to train em lo ees m customer service recover rocedurev'! &0 do the (ac&lit&ex and communicatiun materials o( the orgt&nicotian appear anmmive to customers? if yes, have time tables been establish«d to review and update current hciliiies and offerings'! ll'no, have plans ber:n made to address deficiencies? i i. does the organization of(er langihle evidence of the quality of its services'! if yes, how is qunlity comrnumcated to customers'! i( no, what steps me bem taken toidenti( wa sof rovidm tan ibleevidcncco( unlit 7 l2. do the produas/services offerred by the organization mct the needs of the customer'! if yes, how nre these perceptions documented? if no, are steps bein taken to iden&if customer wants and needs' financial performancf. action ycs no re uired budgetin(i is a sales budget prepared (o& cnch mont&& o(thc coming ym&r'! lf yev, iv this hudgm up&in&cd tm&t&thly to &ctlcct chai&grv &i& ihe hu&inc&& cnvirorm&ent'! lf no, what lans are hem'rado &o devclo this bud'c&'! is an cxpcnsc and purchase& budget prepared iru each month of the coming ymu? if yes, is this budget uprl ~ led monthly to re&1ect vigniticanl changes'! if no, what lon& are hain 'ade to dcvclo th&s hud e&'! 3. is a aipitnl expenditures budget prepared (or each month o& the coming ycnr'! if ycs, have these expenditun:v bwn made to retain n compctitivc advnntage! l(no, what lans are hem made to develo this bud et'! ls a budget of projemed cash liow& prepared i'or each month of the commg year? if yes, is it being updated on n mr&nthly basis to rellect changes in levels of husmess activity'! if no, what plans are heing made to develop and n&ninmin this hud et? 5. have perl'ormance benchmarks been established for all quanti(iahle perfonnance measures" .if yes, have actual results been compared to budgeted amounts'! h no, have competitors or industry sourcev been identilled where these rformance benchmark measures can be obtained" !4 ratio analysis 6. has the return on mvestment been calculated for ihe most recent arcounung periods i( yes, has this in(ounation been analyzed to determtne ways of improving prolitabilityv h'no, have plans been made to analyze return on mvestmentv 7 has the current ratio been calculated for the most recent accounting periods if yes, do measures need to be taken to improve the current financial position of the business& if no, have lans been made to anal ze the current rane? g has the accounts receivable turnover ratio been calculated for the most recent accounting penodv if yes, has the average days in receivables rauo been calculatedv if no, have plans been made to analyze the accounts recmvable turnover ratio& 9 has the inventory turnover ratio been calculated for the most recent accounting period& if yes, has the average days m mventory rauo been calculated? if no, have plans been made to analyze the inventory turnover ratio? ir have these ratios been compared to those of past accounting peuods, indusuy standards and/or prolected ranosv if yes, is yes do the results meet with your performance mrgets7 if no, what sources for obuuning comparable ralios have been tdentifiedv inflation ad justmfnts ii has a source been idenufied for obtaining mflation mformation thnt is appropuate for your geographic region'! lf yes, is this source reviewed on a regular basis? if no, whai measures are being taken io locate an a ro nate source of informationv 12 have the sales, cost of goods sold, net income and other relevant figures been adjusted io determine the etl'acts of intlauonv if yes, have financial performance measures been improvingv if no, what measures are being taken to determine the ef(ects o(inflauon? 15 appendix 2 guidelines for ratio analysis ratio analysis plays an important role in evaluating the financial perfonnance of a business. four ratios have been selected for analysis in the scorecard. a brief discussion of each follows. return on investment return on investment (roi) is a measure of a business'arnings in relation to its investment in assets —margin and turnover. margzn x turnover = earn.cng power net oper acing income sal es noc operating income x sales average operacing assecs average operacing assec: (i) margin measures the amount of each sales dollar remaining after the operating expenses have bccn deducted. thc lower the operating expenses, thc higher net operating income and margin will be. turnover is a measure of the number of times each dollar of operating assets has been used to produce a dollar of sales. turnover measures a business'ontrol over investments in operating assets. the lower thc investment in operating assets, the higher thc tumovcr will be. using this information, the return on investment or earning power of the business can be improved in thrcc ways. roi can be increased by: ~ increasing sales at a faster rate than the corresponding cxpenscs increase, ~ decreasing expenses more than sales decrease, or ~ dccreastng the operating assets used without changing the sales or operating expenses. current ratio the current ratio is a measure of whether or not the cash flows from current assets will be sufficient to currenc assecs meet the current liabilities of the business. a current liabilities comparison of'hc current assets to the current liabilities shows how many dollars of current assets arc available (2) to cover each dollar of current liabilities. although a relatively high current ratio is often desired, caution should be exercised when analyzing this ratio since a very high number may suggest that too much inventnry is on hand, or that the accounts receivable are not turning over quickly enough. there are several ways to improve the current ratio; 16 o sell lixed assets and use the cash to increase current assets or pay off current liabilities, o use long-term borrowing to purchase assets or pay off current liabilities, and o use current assets to pay off current liabilities. accounts receivable turnover annual credit sales the accounts average trade accounts recei vable (3) receivable turnover shows how often thc receivables are collected during an accounting period. for example, if the turnover is six times per year, thc average waiting time for the collection of a receivable is two months; if it is four times per year, the average collection period is three months. a receivable turnover that is too high may result in money being tied up in receivables that could be put to usc in purchasing more inventory. if the receivable turnover is too low, it could indicate a credit policy that is too tight. 360 days p " ™ nc accounts recei vable tuznovez (4) measure that can bc evaluated is the average collection period on accounts reccivablc. this performance standard will indicate the average length ol'ime it takes to collect an account receivable. as the days required to collect receivables incrcascs, the owner's need for capital also increases. t cost of goods sold inventory turnover also shows how efficiently the capital invested in inventory is being uttlized and indicates how quickly it is being converted into sales. a low inventory turnover may indicate that excessive stock, obsolete stock and/or slow movtng stock is on hand. a high turnover may result in a loss ol'customers due to stockouts on popular items. however, keep in mind that there is always a trade-off between overstocking and the possibility of running out of an item occasionally. 360 days another related lneasurc days inventory on 1 enter turno (6) hand, indicates thc average length of time inventory is being kept in the business. since items kept in inventory have a tendency to lose value if retained too long, careful auention should be directed toward managing these assets. 17 appendix 3 cuidelines for inflation adjusted trend analysis the typical yardstick used to adjust for general inflation is the consumer price index (cpi), although other indices may he used. current information on the cpi can be obtained from the monthl labor review which can be found inmost libraries. any base year may be selected to review a particular time frame. it is advisable to review and adjust financial data to reflect thc impact of inflation over at least a three-year period, although a five-year period is preferable. an adjustmcnt factor can be obtained by dividing the cpi for each of the successive years by the reported cpi for a selected base year. for example, il' five-year period is selected using 1988 as thc base year, the following int'ormation on thc cpi would be used. year cpi ~ad'ustment factor 1988 354.3 i.00 1989 371.3 1.05 1990 391.4 1.10 1991 408.8 1.15 1992 420. 3 1.19 1993 432.7 1.22 once the adjustmcnt factor has been calculated, it can then be divided into reported data to obtain a more realistic financial picture. for example, reported sales figures of a firm may have shown steady growth each year from a base of $ 100,000 in 1988 to $ 122,000 in 1993. it may appear as il'he firm has grown, but, in reality, it has had stagnant sales when inflation is taken into account ($ 122 000/ 1.22 = $ 100 000). if a more detailed analysis of the effects of inflation on the finances of a firm is desired, this same process can be followed on any of the firm's reported financial data. 18 microsoft word front cover v20n1.docx       from the editor    allow me to introduce myself.  i’m paul stephens from bradley university and i am  the new editor of jsbs.  it has been a challenge learning my newest job, but the  learning curve hasn’t been too steep due to the guidance of the outgoing editor.   there are still things to understand better and perhaps improve in the future but,  for now, maintaining the quality and integrity of the publication is my primary  mission.     as the new editor of jsbs, i would like to begin by thanking our outgoing editor  fred fry.  fred did a fine job as steward of this publication over the last five years.   fred has been a mentor and friend and i want to wish him the best in his  retirement.     in this issue of jsbs, we have six new articles which are a diverse mix of topics  which i hope interest our eclectic readership.    authors kreiser and davis offer us a new theoretical framework for examining the  entrepreneurial process at the firm level.  the framework uses prior research to  establish a link between the attributes of firm‐level entrepreneurship and key  outcomes related to the entrepreneurial act.  the new framework provides a  holistic view into the entrepreneurial process within the organizational setting.    switching gears from the theoretical to the applied, our second article by ascigil  and magner examines how social capital among tenant companies within business  incubators leads to the acquisition and utilization of business skills by those  tenant firms.  the authors discover that social capital, which is built through  relationships between groups and individuals, can have a significant impact on  business knowledge and skill building early in the life of a new firm.  this is a must  read for those interested in the impacts of incubation centers on nascent firms.    smith and simon offer us a look into how data integration systems impact  strategic decision making in small firms.  prior research, which has focused on  large corporations, has clearly demonstrated the advantages of integrating data  from multiple sources in order to aid management in decision making. but, erp  may not be just for big firms after all. read this article to find out what small firm  managers should know when considering investments in data integration systems.    s trateg y  journal of small business  volume 20, number 1 spring/summer 2009    expectations about the growth of the firm, planning formality, uncertainty and  risk are highlighted in our fourth article by matthews, schenkel, ford and human.   specifically, the authors look at differences between nascent entrepreneurs and  nascent intrapreneurs.  the author’s extensive exploration reinforces theoretical  and practical contentions that the differences between the two initiation processes  are substantial both in terms of expectations and outcomes.    hertz, beasley, and white examine the topic of selecting a legal structure in small  and micro businesses.  the authors posit that when making a decision about a  legal structure, many entrepreneurs don’t fully consider the effect of their decision  on strategically important issues such as startup costs, liability, taxes and financing  options.  the paper provides readers with an insight into the decision‐making  process of firm founders in regard to selecting a legal structure.    the founders’ influence on a family business has interested researchers for years.   lussier and sonfield continue their good work in this area, adding to a list of  related articles published in a variety of outlets.  the authors, with the assistance  of faculty located around the world, collected information from almost 600 family  businesses.  these companies, which are located in six different countries, provide  the authors significant data to examine how particular family business managerial  characteristics are influenced by the founder(s) of the firm.    enjoy!    paul r. stephens  editor    reproduced with permission of the copyright owner. further reproduction prohibited without permission. 21 customer development, innovation, and decision-making biases in the lean startup jonathan l. york california polytechnic state university jlyork@calpoly.edu jeffrey e. danes california polytechnic state university jdanes@calpoly.edu abstract this paper reviews current research relevant to new product development, customer development, and the lean startup. customer development and the lean startup are a new and increasingly used form of entrepreneurship process, which rely on hypothesis testing but not in the traditional sense; the entrepreneur is encouraged to scan the environment, collect information, and form and evaluate educated guesses so as to make accurate judgments and decisions. the present research provides a review of the customer development model for entrepreneurial activities and a critique of this hypothesis testing methodology. we then consider ways in which to improve decision making within the startup via a systematic study of system 1 ( intuition) and system 2 ( reasoned and rational) decision-making styles. this paper has significant implications for entrepreneurs, entrepreneurship support organizations, such as incubators and accelerators, and entrepreneurship educators, all of whom are increasingly practicing and teaching this process. keywords: biases and heuristics, customer development, entrepreneurship, innovation, lean startup, new product development introduction this paper discusses a newly emerging and increasingly popular approach to entrepreneurial practice known as customer development and the “lean startup” process (blank, 2007; blank & dorf, 2012; ries, 2011; maurya, 2012). for purposes of this paper, the lean startup process is defined as an approach to entrepreneurial and innovative activities that emphasizes placing resources into the creation of customer value, viewing all other activity as waste until a fit is found between the s trateg y journal of small business journal of small business strategy vol. 24, no. 2 22 product and the intended market. the lean startup relies upon a process called customer development, which is a method of creating and testing assumptions regarding the end business model for the startup. the lean startup process is rapidly being adopted by university entrepreneurship programs, accelerators, entrepreneurial organizations like startup weekend, communities, and even the nsf (2012), which is employing this methodology for its innovation corps sites program. however, there has been very little if any systematic analysis of the lean startup and customer development methodologies. therefore, we place customer development within the theoretical context of new product development; the methods by which the entrepreneur determines the viability of the innovation as well as the needs, features, and functionality for the product clearly fall under the overarching framework of new product development whether in an entrepreneurial or more stable environment. we review customer development as an entrepreneurial practice within the context of earlier product development models such as cooper’s new product development (npd) (cooper 1988; cooper 2008) and koen’s (2004) new concept model for the fuzzy front end (ffe). within this theoretical framework, we turn to a key issue in customer development. more than earlier forms of npd, customer development relies heavily on hypothesis testing, but not in the traditional sense. instead, the entrepreneur is encouraged to survey the environment, collect information, and form and evaluate educated guesses so as to make accurate judgments and decisions. customer development recognizes that there may be a place for “intuition” within the entrepreneurial process and responds to the need to validate this intuition with more formal processes that make sense in the highly uncertain and time-sensitive startup environment. below we briefly review formal methods of hypothesis testing and review blank’s notion of "hypothesis testing” and find it lacking in rigor. using the concept of system 1 (intuitive) and system 2 (systematic, reasoned) thinking (stanovich and west, 2000), we then suggest methods which could be integrated into the customer development process to mitigate the significant risks of these biases, and place these in the context of entrepreneurial practice and teaching. customer development in the context of npd new product development over the past two decades has been heavily influenced by the “stage-gate” model, developed by cooper (1988, 2001). a significant benefit of the traditional npd model is its structure, allowing companies to follow a roadmap and prescriptive steps guiding their process. yet, according to cooper, the traditional new product development process was designed for incremental product development and “... may be inappropriate …” (cooper, 2001, p. 151) when applied to breakthrough and platform projects. a limitation of the early, traditional npd model is the emphasis on incremental product improvement with a cursory focus on ideation and discovery. other limitations include a defined linear process with the implication that “looping back” to an earlier stage denotes a gating mistake or gating error in development. in addition, product development cycles, sped up today by competitive markets and enabled by technologies such as rapid prototyping (even on the desktop with 3d printing for example) and internet distribution, can be slowed significantly by the traditional npd journal of small business strategy vol. 24, no. 2 23 approach. in addition, stage gate may actually lead to a d ifficulty delivering final products because each stage has higher costs and may take longer as the company moves through the process (anderson, 1993). the traditional npd model proposed by cooper (1988) and as modified (cooper, 2001) may be viewed as a very successful attempt at a very logical and coherent methodology of launching new products. cooper emphasizes the need for customerfacing activities in the earliest stages of npd, with the realization that many projects fail because of an overemphasis of the technical tasks over the marketing/business-oriented tasks during what he calls the “homework” or predevelopment stage (cooper 2011; cooper 2013; cooper, 2013a). as edgett (2011) notes, activities taken before the formal design and development of the product play a key role in determining success or failure. cooper (2014) himself has recognized the need for a more flexible process and has recently proposed “the triple a system” of an adaptive, agile and accelerated modification to stage gate (p. 21). there is an abundance of research showing how greater emphasis on the front-end activities (meeting the needs of customers) explains why some products are more successful than others (henard & szymanski 2001). in studying a number of industries, koen (2004) observed that communication and decision making is circular, nonlinear, and non-sequential, rather than following the linear model of npd. the new concept model (ncd) developed by koen (2004) was designed to emphasize that ideas are thought to flow, circulate, and iterate between and among five elements: opportunity identification, opportunity analysis, idea generation, idea selection, and concept definition. this contrasts with the traditional, sequential npd process where “looping back” may be viewed as a gating error as opposed to a reasoned, positive correction. in contrast to the traditional npd process, new concept development processes include a greater focus on idea generation activities such as in-depth interviews, brainstorming, and idea management tools (e.g., crowdsourcing) aimed at potential and current customers, lead users, employees, and other stakeholders. early innovation ffe activities are often disorganized, unpredictable, and unstructured, as opposed to the later phases of new product development which are typically a more structured and formalized process. koen defines the ffe as all activities that come before product development (stage 3) of the five steps of the traditional npd process. likewise, brentani and reid (2012) define ffe as “the time and activity prior to an organization’s first screen of a new product idea, “ (p. 70), implying the ffe “ends” at the point of traditional “product development” activities. in other words, it can be argued that npd and ffe processes are product-centric and downplay the ensuing business development activities, taking for granted that these processes are embedded in a larger company’s already existing structure. blank (2007) on the other hand carries his customer development approach all through the new product development and launch process, arguing that any functional systematization (e.g., “company building”) occurs and continues after product launch, and that customer development is essentially never truly “completed.” table 1 describes some key differences between traditional new product development (npd), the fuzzy front end (ffe) and as described by koen et al. journal of small business strategy vol. 24, no. 2 24 table 1: differences between traditional npd, ffe, and cd new product development (npd) fuzzy front end (ffe) customer development (cd) nature of work disciplined and goaloriented with a project plan experimental, often chaotic. “eureka” moments. can schedule work— but not invention iterative, with continual influx of new information processing hypotheses commercialization high degree of certainty at conclusion unpredictable or uncertain higher degree of certainty after completion of cd process funding date budgeted variable — in the beginning phases many projects may be “bootlegged,” while others will need funding to proceed only for minimum viable product until business and sales model developed revenue expectations predictable, with increasing certainty, analysis, and documentation as the product release date gets closer. often uncertain, with a great deal of speculation must know sales and pricing model for first stage introduction activity multifunction product and/or process development team individuals and team conducting research to minimize risk and optimize potential all members involved in extensive “outside of the building,” largely 1:1 customer contact measure of milestone achievement progress strengthened concept minimum viable product; product/market fit expenses increase with each stage increase with each stage revenue can begin after mvp identified decision process go/no go kill stages indeterminate pivots to new directions journal of small business strategy vol. 24, no. 2 25 (2002) and koen (2004), and customer development as described by blank (2007). customer development (cd) over the past several years, a new approach to the fuzzy front end, loosely grouped under the rubric of “customer development,” has been advocated and promoted by blank (2007) and others, such as blank and dorf (2013), cooper and vlaskovits (2013), and maurya (2012). the customer development model considers four interlocking and circular stages: 1) customer discovery, a focus on understanding customer problems and needs, 2) customer validation, the identification of a scalable and repeatable sales model, 3) customer creation, creating and driving end user demand, and 4) company building, the transitioning of the organization from one designed for learning and discovery to efficient execution. a unique feature is that, following the initial “hunches” of the entrepreneurial team regarding their business model, customer development is almost entirely a p rocess of direct contact with customers and others outside the company for knowledge acquisition and hypothesis testing (blank & dorf, 2012). all assumptions are to be challenged through the first phase of cd. a product should be launched (“put into the hands of customers”) as soon as possible to increase the level of feedback. as blank (2007, p. 21) notes, “in essence, customer discovery and customer validation corroborate your business model. completing these first two steps verifies your market, locates your customers, tests the perceived value of your product, identifies the economic buyer, establishes your pricing and channel strategy, and checks out your sales cycle and process.” only then, according to blank, does the company move to creating the full business plan and company development. proponents of customer development assert that the greatest risk for failure for any innovative product is not development of the product but the lack of product-market fit. good fit drives growth. poor fit can manifest itself in a lack of customers, and/or difficulty in identifying customers, and/or the higher costs involved in finding customers for the innovation. methods of mitigating this risk of poor fit are of considerable value to the effort. as such the focus is on the early stages of innovation. proponents of a structured cd approach (reis, 2012; blank & dorf, 2012) recommend a significant degree of “certainty” in the product-market fit before the company pursues building a formalized, complete business plan. mullins (2013) also argues for significant customer development activity prior even to the launch of a business. as well as arguing for more traditional analysis of factors such as competition and market conditions, he proposes a process of customer interviewing very similar to customer development approaches. another key feature of cd is product simplicity, often called the “minimum viable product.” in this model, the product is a set of “minimal requirements,” which meet the needs of the core group of early adopters or users. also, cash burn is kept to a minimum until creating and driving end user demand (customer creation), and unlike the traditional npd model, there are no kill gates, only continual iteration and reintroduction. using the principles of the lean startup (ries, 2011), blank & dorf (2012) argue for shipping product to early adopters rapidly and then following up with customer driven improvements, creating an iterative product development process. the lean startup methodology allows for significant changes throughout the process, often called “pivots,” (ries, 2011). journal of small business strategy vol. 24, no. 2 26 delvecchio, white and phelan (2014) note that with traditional npd, “if customer feedback indicates a major redesign is required, the product will likely cease moving on to the next stage and the gatekeeper will “kill” the development of the product.” (p. 7) customer discovery and hypothesis testing proponents of customer discovery emphasize hypothesis development and testing as an integral part of the customer development process. below we review blank’s interpretation of “hypothesis testing,” followed by a brief discussion of more formal models of hypothesis testing (frequentist and bayesian). next we make an argument that a more attainable goal is to focus on the frailties of entrepreneurial decision-making, and then consider ways to improve it. a key process in customer development is the testing of hypotheses about the problems faced by customers, the minimum feature set of the product, the product/market fit, product improvements, etc. hypothesis development is concerned with how we determine what we initially think is “true” about the world and, given appropriate information, what then appears to be actually “true” about the world. the outcome of such testing guides decision making. proponents of cd define a threestage process, which includes a first stage of generating hypotheses, followed by testing the hypotheses, and finally, using the results of testing to evaluate the hypothesis. the challenge for the entrepreneur, as blank (2013) suggests, is to generate and test hypotheses rapidly and frequently, and evaluate and reevaluate results before coming to the decision-making stage and identifying a course of action. depending on the type of new product or new business, this can be done in a completely iterative process (such as for a website that is upgraded constantly) or in a step-by-step process, such as for a physical product where prototypes must be tested regularly. for blank, hypothesis generation is essentially a founding team process based upon intuition into the market, beginning with educated guesses about the nature of the problem(s) and the target market the company proposes to address. hypothesis testing follows these intuitions about the business model and is conducted by what blank (2007) calls “getting out of the building” – in other words, talking to customers, users, and experts, to determine whether the problem, which the startup posits, is indeed significant and what the scope and characteristics of that problem may be. the hypothesis evaluation step at this stage is again one of team review and discussion, a group process. the next step is a continuation of the first, wherein a prototype or first iteration of product, what ries (2011) deems the “minimum viable product,” is exposed again to the customer and hypotheses regarding its value are again tested. for blank and other adherents of customer development, this process does not end, as each new decision involves another set of hypotheses that must be generated, tested, and evaluated. each tested hypothesis yields a decision, a course of action. for blank, this process is almost entirely derived from subjective information obtained by direct one-to-one contact with potential customers, suppliers, partners, etc. as noted, blank’s (2007) cd process is built on a continual cycle of hypothesis testing, decisions, and corrections, which lends itself well to situations of highly novel product introductions where there is direct contact with potential consumers. in this way, entrepreneurial decision-making journal of small business strategy vol. 24, no. 2 27 may indeed be viewed as a form of scientific process of discovery and learning rather than a purely intuitive process of recognition and alertness to market conditions. (harper, 1999). blank’s customer development hypothesis development and evaluation is a bayesian decision-making process, as proposed by fischhoff and beyth-marom (1983). that is, one develops hypotheses (prior belief) based upon experience or intuition, identifies data sources useful to evaluate hypotheses, observes or gathers data to evaluate the truth of competing hypotheses, aggregates data into an overall appraisal of likelihood of a hypothesis being accurate, and selects a course of action based upon that evaluation. the ultimate goal is to make good decisions. yet, as is well known, true bayesian decision making requires significant amounts of data, which the entrepreneurial environment may not provide, nor the entrepreneur be able to implement. hypothesis testing in scientific efforts is grounded in rigorous statistical thinking. formal models for hypothesis testing are logical and systematic processes. the essence of hypothesis testing is concerned with how one decides whether there is a match between what we initially think is true and what the evidence (data) shows is not true. that is, is the evidence strong enough to reject the corresponding null hypothesis? in practice, effective decision making follows from “truth” as determined by statements of hypotheses (educated guesses), the testing (evaluation) of hypotheses, and the verification of hypotheses. however, blank’s (2007) entrepreneurial hypothesis testing methods are informal and tend to rely on intuitive thinking as noted above and discussed below. blank (2007) refers to “hypothesis testing” as talking to customers, users, experts, etc., to determine whether what the startup sees as a problem is indeed one, and what the scope and characteristics of that problem may be. as we will see later, this form of informal hypothesis testing is prone to certain biases and heuristics which can impair its accuracy. there are two general types of hypothesis testing methods: frequentist and bayesian. the classical frequentist-based hypothesis testing is a formal statistical process; however, within the social context of entrepreneurial activities, classical hypothesis testing is problematic given limited information, subjective opinion, and the need for rapid decisions. on the other hand, bayesian inference is a normative method in the sense of prescribing how hypotheses should be evaluated given prior information and new information. the bayesian model is better suited to the analysis of subjective information and opinion, which makes it much more relevant to entrepreneurial decision-making and customer development. nevertheless, the data requirements are tedious and thus appear to be impractical relative to decision making in the entrepreneurial context. the complications of elementary bayesian decision making are discussed in lindley (1985). therefore, instead of focusing on hypothesis testing, either classical or bayesian, we focus on a more attainable goal, reducing the biases inherent in entrepreneurial decision making, especially in the context of customer development. risks of customer development from biases and heuristics to set the stage for reducing bias in decision making, we now examine some of the most significant biases and risks in customer development hypothesis testing and then, using the concepts of system thinking (stanovich & west, 2000), we examine research findings relevant to journal of small business strategy vol. 24, no. 2 28 reducing the bias in decision making. we then propose ways in which the practitioner of customer development in the entrepreneurial context can improve decision-making. entrepreneurs tend to be overly active, face time constraints, and hence, tend to rely on intuition. according to stanovich and west (2000), intuition as a basis for decision making is fast, automatic, effortless, implicit, and emotional (referred to as system 1). system 2 refers to reasoning, which is slower, conscious, effortful, explicit, and logical. levels of system 2 thinking include unstructured, clinical, and assisted (e.g., training). an excellent discussion of the implications of stanovich and west’s (2000) work is given in stanovich (2010) and in kahneman (2011). entrepreneurs often lack important information regarding a decision, fail to notice available information, and face time and cost constraints; hence, they tend to rely on intuitive system 1 thinking. but, reliance on system 1 thinking, intuition, has certain inherent weaknesses which may result in poor decisions. as kahnemann (2011) notes, expert intuition is most trustworthy in an environment that is regular and predictable, and where the expert has had sufficient practice to learn the regularities of this environment, scarcely descriptive of the startup situation. given that many entrepreneurial activities rely upon subjective and sparse information, this decision making is prone to significant errors in judgment. the presence of such forms of error in inquiry is well documented (tversky & kahnemann, 1974; holcomb, ireland, holmes & hitt, 2009). busenitz & barney (1997) established specific differences in two biases (overconfidence and representativeness) between entrepreneurs and managers in large organizations. schade and koellinger (2007) review a detailed list of perceptual biases and heuristics in general that affect entrepreneurial decisions, including whether to start a business. several of these biases and heuristics seem to carry the most risk for the customer development process: selection bias. in its most common manifestation, the data that an entrepreneur gathers may be biased if she looks only to friends, colleagues, and known sources for testing her hypotheses. blank argues that “getting out of the building” is a hedge against this bias, but many entrepreneurs still gravitate to comfortable and confirmatory sources. (holcomb et al., 2009) representativeness bias. in the dynamic and uncertain startup environment, it is perhaps natural to generalize from small, non-random samples of data. yet, to the extent that this bias interacts with the selection bias noted above, the validity of customer development information gathered can be severely compromised. acquiescence bias. related to selection bias, this represents the tendency of respondents to give the answers they think the entrepreneur wants to hear, rather than their unvarnished opinion. this is often referred to in the startup world as “not wanting to tell someone their baby is ugly.” confirmation bias. people tend to favor or interpret information in a way that confirms their prior beliefs. if we “believe” that a problem exists, we will listen for any evidence that “confirms” this belief and ignore all else. overconfidence bias. “overconfidence is the tendency for people to overestimate their knowledge, abilities and the precision journal of small business strategy vol. 24, no. 2 29 of their information” (bhandari & deaves, 2006, p. 5). in many ways, overconfidence is essential for the entrepreneur to be able to act in an environment of such uncertainty (koellinger, minniti & schade, 2007), but when overconfidence leads to the blocking out of new evidence or alternative perspectives, it can be detrimental to the customer development process. optimism bias. kahneman (2011) notes that optimism is an essential characteristic of the entrepreneurial mindset but that it can lead to a strong tendency to ignore the relevant evidence. cooper, woo & dunkelberg (1988) found entrepreneurs indeed experienced extreme optimism no matter the degree to which they were likely to succeed based on objective factors such as experience and the nature of the new business. in fact, optimism may be detrimental in the decisions of what kind of risk to take on, but essential in the actual implementation of the business once these decisions are made. for the startup entrepreneur, placing himself in the appropriate environment and with a group of teammates who will help temper this optimism bias in the early stages can mitigate the risk of poor decisions. slater, mohr, and sengupta (2013) note that an organizational culture which emphasizes team interaction; however informal, leads to more successful radical product innovation capability. for innovators, this means “getting outside one’s head” and allowing all input, even that critical of the idea. reducing bias in customer development processes an entire body of work has evolved over the last 20 years to illuminate the differences between intuitive (system 1) thinking and system 2, a more rational, logical and calculating approach. as we have noted above, the startup environment thrives on intuitive (system 1) entrepreneurs – without them there would be no startups. purely relying upon this intuitive and error-prone approach is too often a recipe for failure; yet the prior “system 2” methodologies used in innovation development, such as the traditional npd process, may be inappropriate substitutes for the entrepreneur due to time and information constraints, and do not take into the account the highly uncertain nature of the entrepreneurial environment. customer development seems to address this gap by offering a framework and techniques for testing the hypotheses that the startup has created through its more intuitive processes. nevertheless, even moving to a “hypothesis testing” approach in the startup does not remove the risk that these very same biases will manifest themselves in the sources of information, the type of information sought, and the interpretation of that information. in the following section, we suggest certain approaches that may help to mitigate the risks of system 1 biases in the customer development process. table 2 cross references these bias-mitigating techniques against the specific biases inherent in customer development. there is significant research that shows that system 1 thinking can be improved and that system 2 thinking can be encouraged. for example, a r eview of research by fischhoff (1982) on four strategies as potential solutions for biased decision making found extended training and feedback, coaching, and other interventions to improve judgment. in specific, they found training and feedback to be superior to (1) offering warnings about the possibility of bias; (2) describing the direction of a bias; and (3) providing small doses of feedback. however, extended training with feedback only produced only moderate improvements journal of small business strategy vol. 24, no. 2 30 table 2: bias mitigation techniques in customer development bias description mitigation techniques selection bias seeking information from “friendly" confirmatory sources resulting in unrepresentative sampling of the target market(s) founding team members pair up in “getting out of the building” and check each other’s assumptions at all times careful attention to selection of interview targets representativeness bias generalizing from small, nonrandom samples of data and/or information from respondents who do not represent the target market(s) conducting customer development interviews as an iterative and continuous process, checking previous generalizations against new data acquiescence bias respondents’ tendency to give the answers they believe the entrepreneur wants to hear carefully structuring customer development interviews to avoid “yes/no" answers; not asking respondents to speculate on future behavior, but focusing on past and current behavior confirmation bias interpreting information to confirm prior beliefs maintaining open-ended interview discussion focused on problems, not proposed solution improper linear model development to simulate data-driven decision where actual measurement data is impractical if not impossible overconfidence bias overestimating the knowledge and precision of customer suggestions and/or the entrepreneurs information engaging mentors and advisors to provide an unbiased perspective on the information gathered and to create an environment of system 2 thinking around the startup premortem exercises looking at potential causes of failure rather than assuming success; a belief that only the paranoid survive optimism bias the entrepreneur’s belief that he/she is unlikely to experience negative outcomes or fail analogical reasoning engaging in “reference class forecast" activities comparing to other similar startups"consider the opposite” activities to force more critical thinking some general bias mitigation activities include: • locating in an environment with other startups and advisors (incubator, co-working) where external feedback is readily available • undergoing training in customer development activities to strengthen information-gathering skills • conducting all customer development activities as a team • engaging a mentor or advisor to play the devil’s advocate role in all customer development activities journal of small business strategy vol. 24, no. 2 31 in decision making. the training research reviewed by fischoff (1982) may be viewed as encouraging system 2 type thinking. the training research reviewed by fischoff (1982) may be viewed as encouraging system 2 type thinking. in the startup environment, team members can provide checks and balances, in a sense offering to each other the initial training and feedback that can prevent against the injection of bias into the customer development process. in fact, blank (2005) insists that all members of the founding team, regardless of discipline, take part in the “out of the building” hypothesis testing activities in order to eliminate the natural tendency for engineers to make their assumptions, business types to make theirs, and the result to be a compromise between opinions rather than some form of “fact,” a strongly held prior belief. there are other mechanisms that tend to encourage system 2 thinking. kahneman and lovallo (1993) discuss attempting to take an outsider’s perspective, that is, trying to remove oneself mentally from a specific situation or to consider the class of decisions to which the current problem belongs. for example, an entrepreneur could look at similar type startups to get what flyvbjerg (2009) calls a “reference class forecast” of how much money it took to get to launch, how long until profitability, etc. taking an outsider’s perspective has been shown to reduce decision makers’ overconfidence about their knowledge (gigerenzer, hoffrage, & kleinbölting, 1991), the time it would take them to complete a task (kahneman & lovallo, 1993), and their odds of entrepreneurial success (cooper et al., 1988). decision makers may also be able to improve their judgments by asking a genuine outsider for his or her view regarding a decision. kahneman (2013) provides a lucid discussion of this research. to do this requires the entrepreneur to be open to negative input, not an easy task. encouraging people to “consider the opposite” of whatever decision they are about to make tends to reduce errors in judgment caused by various biases: overconfidence, the hindsight bias, and anchoring (larrick, 2004; mussweiler, strack, & pfeiffer, 2000). reduced error in judgment has also been achieved by having groups rather than individuals make decisions, training individuals in formal reasoning, and making people accountable for their decisions (larrick, 2004; lerner & tetlock, 1999). thus, while the startup team is most accountable for decisions during the customer development activities, having an outside set of advisors, or an advisory board can insert a level of bias-reduction into the process. analogical reasoning research has examined how system 2 thinking can be leveraged to reduce system 1 errors. analogical reasoning can be used to reduce bounds on awareness (see bazerman & chugh 2005). stemming from work by thompson, gentner, and loewenstein (2000), idson, chugh, bereby-meyer, moran, grosskopf, and bazerman (2004) found people who were encouraged to comprehend common principles underlying seemingly unrelated tasks improved in their ability to discover solutions in a different task that relied on the same set of underlying principles. for example, an entrepreneurial team can study the success or failure of a startup in a separate but related field to open up their awareness to contradictory rather than only confirmatory evidence. recent research on joint-versus-separate decision making indicates that people can journal of small business strategy vol. 24, no. 2 32 move from intuitive system 1 thinking toward the rational system 2 thinking if they contemplate and then choose between multiple options simultaneously rather doing the same separately for each option. research by bazerman, white, and loewenstein (1995) suggests that choice options should be evaluated jointly rather than sequentially. for example, suppose the team is considering the match between three different product embodiments with three different target markets. their research shows that evaluating the elements of the set jointly, collectively at one point in time, is superior to their evaluation sequentially at different points in time. consistent with this work, bazerman, loewenstein, and white (1992) have found people exhibit more willpower when they weigh their choices jointly rather than separately. that is, a collective decision has more resolve than an aggregation of individual decisions. the entrepreneurial environment itself can be staged to encourage better decisions given system 1 thinking. thaler and sunstein’s (2003) work on “choice architects” suggests that mentors, accelerators, and incubators can design situations so as to encourage better choices, given known decision biases. having an environment around the entrepreneurial team of people who can question the input from the hypothesis testing and provide neutral feedback can serve as a de facto “system 2” overlay upon the process. in addition, the entrepreneurs in these programs can be trained, and supported, in reducing bias in their customer development processes, and be put into cross-team situations that encourage analogical reasoning to expand bounds of awareness. an example of a technique that can be employed is the premortem method suggested by klein (2007). in essence, the entrepreneurial team “makes” a key decision in the planning stage, and then is asked to fast forward a year or two and imagine that the decision has failed disastrously. by proactively discussing the hypothetical reasons for this failure, the team can counteract the overconfidence bias. one of the most successful system 2 decision-making mechanisms is the improper linear model research associated with robyn dawes. dawes and corrigan (1974), in their seminal article, report simple linear models to be superior to clinical-type judgment and to simulate a system 2 t ype of decision making. dawes and corrigan (1974) report that simple linear models work well with input variables that have a conditionally monotonic 1 relationship with the output. numerous studies report that linear models produce predictions that are superior to those of experts across an impressive array of domains, see hastie and dawes (2010). moreover, dawes (1971) has shown that even improper linear models outperform clinical judgments. the remarkable implication of the above research shows that clinical and intuitive system 1 thinking can be transformed into rational system 2 by 1) identifying potential predictors of an outcome, and then 2) providing a guess at the weights in a linear model. the weights could be as simple as: -1, 0, or +1, for a negative, neutral, or positive relationship or be a simple rating system: 0,1,2,3,4 followed by the identification of the algebraic sign (+,-) denoting the relationship of the variable with the outcome. 1 a sequence {a(n)} such that either (1) a(i+1)>=a(i) for every i >=1, or (2) a(i+1)<=a(i) for every i>=1. journal of small business strategy vol. 24, no. 2 33 linear regression produces optimal weights; however, dawes (1971) has shown that linear models with non-optimal weights are also superior to intuitive (system 1) judgments. this holds promise for the creation of models wherein there is little possibility of fully accurate measurement. when error is introduced through measurement rather than the item being measured, deviations from optimal weighting do not make much practical difference in the quality of decisions. good predictions may be obtained by selecting variables that have some validity for predicting the outcome. an improper linear model with subjective weights guessed at by the user is likely to be just as accurate in predicting new cases as is ordinary least squares regression. the classic example is the apgar score for new born babies, as described by kahneman (2011, p. 277). “one day over breakfast, a medical resident asked how dr. apgar would make a systematic assessment of a newborn. “that’s easy,” she replied. “you would do it lik e this.” apgar jotted down five variables (heart rate, respiration, reflex, muscle tone, and color) and three scores (0, 1, or 2, depending on the robustness of each sign). realizing that she might have made a b reak through that any delivery room could implement, apgar began rating infants by this rule one minute after they were born. a baby with a total score of 8 or above was likely to be pink, squirming, crying, grimacing, with a pulse of 100 or more-in good shape. a baby with a score of 4 or below was probably bluish, flaccid, passive, with a slow or weak pulsein need of immediate intervention.” applying apgar’s score, the staff in delivery rooms finally had consistent standards for determining which babies were in trouble, and the formula is credited for an important contribution to reducing infant mortality. the apgar test is still used every day in every delivery room.” the predictive accuracy of the improper linear model, the apgar score, has subsequently been validated against extensive outcome data (moster, lie, irgens, bjerkedal & markestad, 2001; carter, mcnabb & merenstein, 1998). the amazing success of subjectively defined weighting schemes has an important practical implication for the entrepreneur as it is possible to develop a useful predictive model without any prior data collection such as that required for building a regression model. for example, a startup can develop a simple and useful improper linear model by creating a set of key variables that the entrepreneurial team feels is valuable to measure, providing a subjective weighting system to these variables, and then using the customer development process to assign scores to each of these. a core framework for this would be the business model canvas (osterwalder & pigneur, 2010) which breaks down business models into nine graphically connected segments. the startup might determine, for example, that the key variables from the business model canvas are the potential revenue models, the customer segments, and the presence of key partners in the distribution channel. by simultaneously evaluating each of its possible alternatives here, and assigning each a subjective “score,” the entrepreneurial team has essentially created a predictive improper linear model. it is critical that these evaluations be conducted in a simultaneous rather than sequential journal of small business strategy vol. 24, no. 2 34 manner; in other words, the process suffers if the company eliminates one possibility before moving on to the next instead of scoring them all. as noted, even though these items and their weights are userdefined and non-optimal, a decision based upon this process brings non-biased system 2 thinking into the process. discussion, conclusions, and future research the review and study of customer development and lean launch methodologies is important to innovation and entrepreneurial activities, as these processes are becoming well instantiated at the practitioner level. the speed required for successful innovation will not abate, and thus, both academics and practitioners will continue to seek more effective frameworks and processes. the concept of lean startups, driven by such tools as customer development, promises to remain an important part of the entrepreneurial approach. as noted, the national science foundation recently adopted the customer development approach to the commercialization of nsf funded innovation through its i-corps program (nsf, 2012), and many leading universities have restructured their innovation and entrepreneurship education curriculum around this methodology ( c.f. stanford, berkeley, mit). larger companies are starting to explore variations of this process for “intrapreneurship” activities as well (karlsson & nordström, 2012), in industries as diverse as manufacturing (blank, 2013) and healthcare (silva & nascimento, 2013.) the process of customer development is intended to not only accelerate the process of innovation (the ffe) but also reduce the risk of error by continual iteration on the product-market fit before significant investment. there is little in this process that isn’t a part of one or another of the earlier new product development frameworks, but cd’s emphasis on full team participation, continuing face-to-face customer contact, and reliance on “out of the building” work have the potential of eliminating some of the biases inherent in the innovation process. on the other hand, customer development has its own risks that need to be acknowledged and addressed. for example, there can be a tendency, especially for the first-time entrepreneur, to become more focused on the activity of customer development than the outcomes, in essence to rely too much on fine tuning these results at the expense of their intuition. in other words, customer development is no more inoculated from “paralysis by analysis” than any other npd processes. furthermore, there is a key role for actual data collection and analysis in the early stages of the startup (croll & yoskovitz, 2013) through the introduction of key metrics and testing. customer development can provide the direction for choosing these metrics, so that assumptions and hypotheses can be tested empirically wherever possible. as noted, educators are increasingly relying on lean startup and customer development activities for college and even high school level entrepreneurship courses. this provides a unique opportunity to educate their students about entrepreneurial biases, and to prepare them with the tools and techniques to minimize biases in both information gathering and decision-making. based upon the findings of fischhoff (1982), this training can be effective and will ideally translate to later entrepreneurial activities. the same can apply to entrepreneurial support groups such as incubators and accelerators and, in this case, preparing their mentors and advisors to be alert for these entrepreneurial biases can journal of small business strategy vol. 24, no. 2 35 encourage deeper system 2 approaches. even using different companies in the incubator as both a referent class for comparison as well as a friendly “check and balance” can take best advantage of the group setting. several interesting research directions also emerge from this review. the prevalence of the business model canvas and lean canvas methodologies could be studied to identify which subsets of questions in customer development are most relevant for product-market fit. is there a specific order in which the customer development hypothesis testing model increases the chances of success, and, if so, can innovators and their partners (such as venture capital firms and business accelerators) create specific programs to take advantage of this? for example, is it more effective to talk to a group of potential customers in one field at a time, or to test several customer segments simultaneously with regard to bias reduction? in addition, the use of simple linear models with customer development and lean startup offers the framework to validate the evaluation methods. just as the apgar score, an improper linear model, was validated against subsequent data, testing the improper linear models inherent in the customer development process against a set of established outcome measures would provide another means of reducing bias from the process while still recognizing the intuitive side of the entrepreneurial process. future research could focus on the development and testing of such improper linear models around a tool often used in the lean startup process such as the business model canvas. references anderson, r. 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(1974). judgment under uncertainty: heuristics and biases. science, 185(4157), 11241131. jonathan l. york, ph.d. is an associate professor of entrepreneurship in the orfalea college of business at cal poly. dr. york is also the founding faculty director of the cal poly center for innovation & entrepreneurship, and is a former serial entrepreneur whose research interests are now centered in entrepreneurial search processes and entrepreneurial cognition. he has a bachelor's degree from yale university and a ph.d. from michigan state. jeffrey e. danes, ph.d. michigan state university, is professor of marketing analytics at cal poly in the orfalea college of business and works at the intersection of psychology, probability, and behavioral economics. his expertise is judgment under uncertainty. he seeks to solve problems in product pricing, branding, new product development, and data-driven decision making. reproduced with permission of the copyright owner. further reproduction prohibited without permission. 45 the impact of foreign direct investment (fdi) on women’s entrepreneurship kaustav misra saginaw valley state university kmisra@svsu.edu ersa memili university of north carolina—greensboro e_memili@uncg.edu dianne welsh university of north carolina—greensboro dhwelsh@uncg.edu hanqing (chevy) fang mississippi state university hfl33@msstate.edu abstract women entrepreneurs around the world have increasingly contributed to innovation, employment, and wealth creation (brush & cooper, 2012; brush, de bruin, & welter, 2009). studies suggest that foreign direct investment can be an important determinant of entrepreneurship in general. however, the link between foreign ventures and women entrepreneurs remains under-researched. therefore, we suggest that the presence of foreign ventures affects women’s entrepreneurship. we develop and test our model on cross-sectional data encompassing 36 countries in 2006. the results show that foreign direct investment and women’s entrepreneurship have an inverted u-shaped relationship. implications for further research and public policy are discussed. keywords: women entrepreneurs, foreign direct investment, developing economies, under-developed economies s trateg y journal of small business mailto:kmisra@svsu.edu mailto:kmisra@svsu.edu mailto:kmisra@svsu.edu mailto:kmisra@svsu.edu mailto:kmisra@svsu.edu journal of small business strategy vol. 24, no. 1 46 introduction research suggests that entrepreneurship is the driver of economic development and growth (acs, 2006; audretsch & acs, 1994; schumpeter, 1934). businesses and institutions can provide a nurturing environment for venture start-ups and their growth (audretsch & lehman, 2005; sternberg & rocha, 2007). accordingly, studies show that the foreign ventures may be influential on entrepreneurship and economic growth in host countries (ayyagari & kosová, 2006; borensztein, de gregirio, & lee, 1998). despite the general agreement on the effects of foreign ventures on entrepreneurship in general, the impact of foreign direct investment on women’s entrepreneurship remains under explored, particularly since women’s entrepreneurship itself largely lacks research attention (brush & cooper, 2012). women entrepreneurs’ businesses are one of the fastest growing entrepreneurial populations in the world (brush & cooper, 2012). women make a substantial positive impact on economic growth through innovation, employment, and wealth generation across countries via their entrepreneurial successes (ahl, 2006; brush, carter, greene, gatewood, & hart, 2006). research suggests that women’s entrepreneurship appears to be opportunitybased in developed economies and necessity-based in less developed economies (brush & cooper, 2012). as a result, women entrepreneurs generally make a significant impact on economies in regard to job creation and innovations. in some countries (e.g. u.s.), women are starting and acquiring businesses at a faster rate than any other segment (morris, miyasaki, watters, & coombes, 2006). owing to the women’s remarkable contributions to world economies, differences from male entrepreneurs, and unique challenges they face (buttner & rosen, 1989), examining the determinants of women’s entrepreneurship is crucial both theoretically and practically. research mostly identifies the individual, sociocultural, economic, and political factors affecting women’s entrepreneurship around the world (e.g. ahmad, 2011; brush & cooper, 2012; roomi & parrott, 2008, welsh & dragusin, 2010). foreign direct investment may play an important role in women’s entrepreneurship in host countries as well. however, to date, the extent and nature of this relationship is unclear both in theory and practice, and we do not know enough about whether fdi has facilitating or restricting effects on women’s entrepreneurship. we suggest that foreign direct investment may influence women’s entrepreneurship. furthermore, we expect a more complex relationship than a linear one, which is an inverted u-shaped relationship. accordingly, we develop and test our model using panel data of 36 countries in 2006. as we expected, the results show that foreign direct investment has an inverted u-shaped relationship with women’s entrepreneurship. this paper contributes to the entrepreneurship literature in a variety of ways. first, it explores a research topic, which has both theoretical and practical significance to world economies. second, this article demonstrates the impact of the presence of foreign ventures on women’s entrepreneurship. the presence of foreign ventures can influence women’s entrepreneurship in a complex manner, both positively (up to an optimum level) and negatively (after an optimum level). third, the findings of this article have significant implications for policy makers. as this journal of small business strategy vol. 24, no. 1 47 paper illustrates, the presence of foreign ventures influences women’s entrepreneurial activities. therefore, countries wanting to encourage the formation and growth of women’s entrepreneurship should pay close attention to the determinants of women’s entrepreneurship such as the foreign direct investment phenomenon. the current support programs generally do not distinguish between male and female nascent entrepreneurs. however, when support programs consider the genderspecific challenges as well as the opportunities, the nascent entrepreneurs can be better prepared for successful venture start-up and management. we begin with providing an overview of foreign direct investment and women’s entrepreneurship. then, we develop our hypothesis. next, we present the methodology and the empirical findings. in the last section, we discuss the results and implications for future research and public policy. foreign direct investment and women’s entrepreneurship fdi net inflows are the value of inward direct investment made by non-resident investors in the reporting economy, including reinvested earnings and intracompany loans, net of repatriation of capital and repayment of loans . foreign ventures tend to have a positive impact on economic development through enhancing local firm productivity (hu & jefferson, 2001; javorcik, 2004), leading to new market development, facilitating the mobility of human capital (cheung & lin, 2004; fosfuri, motta, & rønde, 2001), enabling knowledge spillover, (borensztein, de gregirio, & lee, 1998; branstetter, 2000; fang, memili, & chrisman, 2012), and reducing the unemployment rate (braconier & ekholm, 2000; lipsey 1995). however, the link between foreign direct investment and women’s entrepreneurship is not clear in theory and practice yet, although women entrepreneurs play a critical role in world economies (brush & cooper, 2012) and is likely to be influenced by foreign direct investment. foreign direct investment in an economy may provide learning opportunities regarding foreign markets, such as a quality criterion, market structure, and consumer preferences to the host country’s nascent entrepreneurs (chung, mitchell, & yeung, 1996; blomstrom, kokko, & zejan, 1995; branstetter, 2000). moreover, purchasing goods and services from incumbent foreign firms or joint ventures within national boundaries may provide opportunities to learn advanced technologies, which accelerate the technological innovations embodied in the development of goods to meet local demands (coe & helpman, 1995; keller, 1998, 2002, 2004). while explicit knowledge is likely to flow from international trade or transactions with foreign-owned and/or joint ventures in an economy, the acquisition of implicit knowledge is comparatively difficult to pass beyond national boundaries (audretsch & feldman, 1996; branstetter, 2001; si & bruton, 1999, 2003, 2005). implicit knowledge, such as managerial experience and technological “know-how” are not always recordable (polanyi, 1967; nelson & winter, 1982). joint ventures, owned by both foreign and local entities, may provide a platform that facilitates the spillover of implicit knowledge (bartlett & ghoshal, 1989; liu, wright, filatotchev, dai, & lu, 2010). indeed, social networks may accelerate the transmission of implicit knowledge (bartlett & ghoshal, 1989; kogut & zander, 1993; nohria & ghoshal, journal of small business strategy vol. 24, no. 1 48 1997). within the framework of trustworthy closely linked networks, the transaction cost of knowledge transmission associated with opportunistic behaviors may also be reduced (williamson, 1985; ethier, 1986; teece, 1986). studies identify women entrepreneurs with unique networking skills owing to their wellconnected strong personal and family ties (e.g. dragusin, 2007; salmenniemi, karhunen, & kosonen, 2011). this can enhance women entrepreneurs’ quick learning from activities of the foreign direct investment in their countries and build upon that in their own entrepreneurial activities. additionally, foreign direct investment can provide employment opportunities primarily to the male job searchers particularly in developing and underdeveloped countries with patriarchal tendencies. indeed, studies show that foreign ventures can reap the benefits of cost reduction in a host economy through access to local labors and resources (arndt, 1997; burda & dluhosch, 2002; hummels, 2007). employing locals in underdeveloped regions can substantially reduce the operational costs of production (arndt, 1997; burda & dluhosch, 2002), while recruiting locals in advertising, broadcasting, promotion and customer service may also reduce the cost associated with new market developments (agrawal, 1995; steger, 2002). in return, the host countries can benefit from a decline in the unemployment rate. in developing and under-developed countries, male job searchers may have an advantage over women in joint ventures’ hiring. this can leave entrepreneurial opportunities to be identified and captured by the women nascent entrepreneurs who often do not have equal opportunities in job markets. moreover, owing to religious and/or cultural limitations, women’s employment at foreign ventures may not be the norm. this can motivate women to start up their own businesses. nevertheless, after an optimum number of foreign ventures in a host country, the presence of a higher number of foreign ventures can increase the competition and small businesses owned by women entrepreneurs may not have the means and capacity to be able to compete, forcing them to exit or fail particularly when broader customer and supplier networks, which are critical for growth, are male-dominated (weiler & bernasek, 2001). additionally, after a certain number of foreign ventures, the increasing volume of foreign direct investment may require even more labor than the available male population. this can lead to the allowance and acceptance of more women in the workforce. when labor market opportunities increase and are more attractive than the entrepreneurial market, women may prefer employment over selfemployment. given entrepreneurial versus job opportunities, the entrepreneur is expected to compare the opportunity cost of being self-employed with expected entrepreneurial benefits (johnson, 1986; shane & venkataraman, 2000; venkataraman, 1997). an individual prefers exploiting entrepreneurial opportunities only if he/she perceives that the entrepreneurial benefit he/she will receive exceeds the opportunity cost (amit, muller, & cockburn, 1995; shane, 2003). when a potential entrepreneur has no existing job, the opportunity cost of entrepreneurship is low or zero. this can increase the likelihood of engaging in entrepreneurship (storey, 1991). thus, at the macro level, a higher level of unemployment can cause a higher level of entrepreneurship, or so-called journal of small business strategy vol. 24, no. 1 49 “refugee effect” (i.e., unemployment push) suggested by past studies (hamilton, 1989; reynolds, miller & maki, 1995; reynolds, storey, & westhead, 1994). however, when there is an attractive job opportunity provided by a foreign venture, it is likely that the individuals would prefer the employment at the foreign venture, rather than being self-employed. if/when such opportunity appears because of increased number of foreign ventures, women entrepreneurs are also likely to join the foreign ventures’ work force rather than being self-employed. therefore, we expect an inverted u-shaped relationship between foreign direct investment and women’s entrepreneurship. h1: foreign direct investment has an inverted u-shaped relationship with women’s entrepreneurship in developing and under-developed countries, such that foreign direct investment will have positive effects on women’s entrepreneurship up to an optimum level and after an optimum level, foreign direct investment will have negative effects on women’s entrepreneurship. methods data in this study, data are collected from the world bank indicators (wbi) (2008), which is one of the largest data sources for international studies. for the analysis of our hypothesis, we employed cross-sectional data for 36 countries for the year 2006 after dropping observations with missing values. the countries include angola, argentina, bolivia, botswana, burkina faso, burundi, cameroon, cape verde, chile, colombia, congo, dem. republic, ecuador, el salvador, ethiopia, the gambia, guatemala, guinea, guinea-bissau, honduras, india, jordan, lebanon, malawi, mauritania, mexico, namibia, nicaragua, niger, panama, paraguay, peru, rwanda, swaziland, tanzania, uganda, and uruguay. this sample is representative of the population of emerging economies since it includes developing and under-developed countries. there is no particular intention to use these countries or the specified year, as it is driven by the international data availability. please visit the wbi 2008 data set for more information about the data and variables at http://data.worldbank.org/topic/labor-andsocial-protection. variables dependent variable female ownership: we used the firms with female participation in ownership (% of firms) as the dependent variable in our empirical model. this variable measures the percentage of female participation in firm ownership. on average, about 30.18 percent of firms have female ownership participation, but the range varies from 9.11 percent to 44.76 percent. control variables rural population: this variable is used in the model as a control variable. the percentage of the total population in a country that is living in a rural area is defined as rural population. on average, 50.61 percent of the total population is living in a rural area, but there are countries where the size of the rural population is very small (7.90 percent of total population), and there countries where the size of the rural population is large (89.68 percent of total population). rigidity of employment another set of control variables we included consists of the rigidity of the employment index, trade as a journal of small business strategy vol. 24, no. 1 50 percentage of gdp, and gross domestic product per capita (constant 2,000 usd). world bank developed an index to measure rigidity of employment. this index measures the regulation of employment in terms of the hiring and firing of workers and the rigidity of working hours, which ranges from 0 to 100, with 0 being the least rigid regulations and 100 being the most rigid regulations. in our data set, it varies from 7 to 78, with the mean of 43.33, which indicates there are some countries where it is very hard to become employed compared to others. gross domestic (gdp) product per capita the next control variable is gross domestic product per capita (constant 2,000 usd), which indicates a country’s economic wellbeing. each country tends to differ substantially in terms of their economic status. this variable is measured as gross domestic product divided by the midyear population. this variable provides information about economic performance over time. however, the well-being of the population also depends on other factors. for example, these include the amount of leisure time, environmental quality, crime rate, and health. nevertheless, these variables are not readily available to the public. the annual mean gross domestic product per capita is 1,937.38 dollars per person and it ranges from 90.77 dollars to 8,692.54 dollars per person. hence, there is a high level of variation among the employed countries in terms of their wellbeing (gdp per capita). we have included two variables, time and cost to create ventures, to explain the nature of country’s business environment. the time variable measures the time that is required for an entrepreneur to start up a business. we find, on average, it takes about 54 days to form a new business, but the range varies from 16 days to 233 days regardless of the gender of entrepreneurs. similarly, the cost of business start-up procedures is about 125.61 percent of gross national income (gni) per capita on average, ranging from 9.8 to 498.2 percent of gni per capita. female participation in the labor force the female labor force participation is an indicator of a country’s progressiveness. it is measured as the percentage of women in the labor force. in recent times, women have increasingly participated in the labor force, which has been driving employment trends and minimizing the gender gap in the workplace. the female participation rate in our sample is 60 percent, and varies from 29.50 percent to 93 percent. aid per capita this control variable is used to predict the dependent variable. in 2006, the countries in this sample received about 49.91 us current dollars per person and this ranged from 1.24 dollars to 266.62 dollars per person. exports of goods and services another independent variable we examined is exports. the world bank defines this variable as the net value of exports of goods and services of a country to the rest of the world as a percentage of gdp. the mean percentage of exported goods and services in the year 2006 for our sample is 34.50 percent and varies from 10.77 percent to 81.20 percent. independent variables foreign direct investment (fdi) the last independent variable is net inflow of foreign direct investment. this variable indicates the interest of foreign investors in a particular country. the world bank collected this variable as a percentage of gdp for the year 2006. on average, a journal of small business strategy vol. 24, no. 1 51 country from the employed sample received fdi of about 4.56 percent of gdp, and it ranged from -0.13 to 22.83 percent of gdp. the negative simply means that outflows of investments exceed inflows. in our sample, countries like angola and mauritania had outflows of investments that exceeded inflows and therefore have a negative sign. foreign direct investment squared (fdisq) is also calculated to test the inverted ushaped relationship. table 1: summary statistics and correlation mean std. dev 1 2 3 4 5 6 7 8 9 10 firms with female participation in ownership 30.18 9.86 1.00 percent of rural population (% of total population) 50.62 24.74 -0.28 1.00 cost of starting a business ($) 125.61 127.74 -0.42 0.40 1.00 time required to open a business (days) 53.75 43.57 -0.11 0.10 0.40 1.00 gdp per capita ($) 1937.38 2243.54 0.21 -0.79 -0.50 -0.17 1.00 employment index 43.33 19.51 -0.18 0.20 0.52 0.40 -0.30 1.00 percent of female pop. in the labor force (%) 60 17.56 0.05 0.51 0.40 0.01 -0.36 0.39 1.00 exports of goods and services (% of gdp) 34.50 18.61 -0.06 -0.25 0.05 0.33 0.17 0.03 -0.34 1.00 aid per capita ($) 49.91 53.15 0.18 -0.03 -0.06 -0.02 -0.18 -0.11 -0.33 -0.18 1.00 foreign direct investment (% of gdp) 4.57 5.41 -0.10 -0.40 -0.12 0.04 0.19 -0.19 -0.39 0.26 0.37 1.00 methodology to analyze our hypothesis, we gathered only one year of data for this paper. hence, the obvious econometric model of ordinary least squares is employed to determine the relationship between dependent and independent variables. the percent of firms with female ownership participation in a country is employed as the dependent variable and the explanatory variables include percentage of rural population, time required to open a business, cost of opening a business, gross domestic product per capita, employment rigidity index, percentage of female population in the labor force, percent of exported goods and services, aid per capita, and foreign direct investment. results table 2 presents the regression results. we employed the firms with female participation in ownership as the dependent variable in this analysis. journal of small business strategy vol. 24, no. 1 52 table 2: results: effects of fdi on female participation in ownership: ols estimates, heteroskeasticity-corrected variable control model pooled model dependent variable: firms with female participation in ownership constant 16.08 (25.81) 37.33 (26.39) percent of rural population -0.15 (0.11) -0.26* (0.13) time required to open a business 0.03 (0.03) -0.01 (0.03) cost of starting a business -0.03** (0.01) -0.03* (0.01) log-gdp per capita 0.08 (6.35) -5.17 (6.77) employment index -0.14** (0.06) -0.15** (0.07) percent of female population in the labor force 0.38*** (0.10) 0.33*** (0.11) aid per capita 0.09*** (0.02) 0.08*** (0.02) exports of goods and services 0.12 (0.09) 0.18* (0.09) foreign direct investment 1.56** (0.64) square foreign direct investment -0.12*** (0.03) adjusted r-square 0.64 0.98 asterisks (*, **, ***) denote significance at the 10, 5 and 1 percent level, respectively. in the first model, we ran the analyses with control variables. percent of rural population and cost of starting a business are the only significant variables in this model. in the second pooled model, we ran the analyses with control and independent variables. both percent of rural population and the cost of starting a business are significant in the pooled model and in the expected direction. the percent of rural population is significant at the 10 percent level, which indicates that while keeping all other variables in the model constant, percent of female owners decreased as the total number of rural population in a country increased. similarly, percent of female owners decreases as the cost of starting a business increases and this variable is significant at the 10 percent level as well. so countries with higher rural populations and higher costs of starting a business minimize the number of womenowned business startups. the female business ownership participation rates also depend upon the employment conditions in a country. this relationship is negative and significant at journal of small business strategy vol. 24, no. 1 53 the 5 percent level, which means that female business ownership participation rates significantly increase as employment conditions improve. hence, while keeping other variables constant, better employment conditions increase percentage of female ownership in businesses. the next significant relationship involves the female labor force participation rate. this variable enters positively into the equation, which means that increasing female participation into the labor force increases the interest of female entrepreneurs to participate in a business or at least it increases their chances to include themselves in businesses. the exports variable is also significantly (at the 5 percent level) related to the dependent variable. a positive relationship seems to exist between export and the percentage of female ownership, which is in the predicted direction. this means that an increase in exports will also increase the percentage of female business owners, while holding all other variables in the model constant. the rest of the explanatory variables, including aid per capita and fdi, are significant. both of these variables enter into the model with a positive sign, which indicates that higher per capita aid and fdi will increase the number of female business owners, while keeping all other variables in the model constant. interestingly, we added a squared fdi variable in our empirical model to investigate the hypothesized inverted u-shaped relationship and that variable is also significant with the expected sign. this finding supports our hypothesis suggesting an inverted u-shaped relationship. that is, to a certain extent, the net inflow of fdi increases the number of female business owners, but after a point, fdi inflow might negatively affect the female business owners in a country. variance inflation factors (vif) were calculated and did not indicate any multicollinearity problem in the dataset since the vifs did not exceed ten. the regression figures in this table are estimated using the ols estimation technique and we used the wald test to check for heteroskedasticity and we corrected accordingly. discussion and implications there has been a tendency to investigate the direct effects of foreign direct investment on entrepreneurship in general while the relationship between foreign ventures and women’s entrepreneurship is worth investigating owing to women’s critical role in entrepreneurship across countries. we suggest that foreign ventures influence women’s entrepreneurship in developing and underdeveloped countries, and this relationship is a u-shaped one. we test our model on cross sectional data of 36 countries for the year 2006. the results support our hypothesis. thus, foreign direct investment is found to impact the women’s entrepreneurship in developing and under developed countries. we hope our study will spark further research concerning women entrepreneurs. indeed, more future research is needed concerning women entrepreneurs around the world. for example, how and why women owned businesses succeed or fail is also worth investigating. therefore, crosscountry longitudinal studies examining the key success/failure factors of women entrepreneurs will be helpful to enlighten theory, practice, and policy making. additionally, research needs to be done concerning the most effective means to create public-private partnerships that empower women entrepreneurs and propel journal of small business strategy vol. 24, no. 1 54 their businesses. this should also be investigated with funding specifically in mind. optimal finance options that encourage women entrepreneurs to not only launch their business, but also grow their businesses is needed. often times in emerging countries loans are minimal and may alleviate basic start-up costs, but getting these businesses to the next level requires investment that seems to be lacking from private/public partnerships. while this may vary from country-to-country in terms of acceptance, outreach, partners, and logic, further investigation may uncover the formulas for success for specific countries, regions, ethnicities, and business types. studies generally investigate the individual, socio-cultural, economic, and political factors affecting women’s entrepreneurship around the world (e.g. ahmad, 2011; brush & cooper, 2012; roomi & parrott, 2008; welsh & dragusin, 2010). however, to our knowledge, the impact of foreign direct investment on women’s entrepreneurship in host countries has not been investigated. our empirical results provide support that the women’s entrepreneurship in developing and under-developed countries may be driven by the presence of foreign ventures up to an optimum level. however, after an optimum number of foreign ventures, the number of women owned businesses decreases. this finding can assist scholars, practitioners, and policy makers better understand how the existence of foreign ventures may foster favorable conditions for local women entrepreneurs to identify and capture entrepreneurial opportunities up to an optimum level and then after an optimum number of foreign ventures, the women’s entrepreneurship is affected negatively by foreign ventures. accordingly, the effect of foreign ventures on women’s entrepreneurship is more complex (i.e. curvilinear), rather than a simple linear one. programs and funding that promote entrepreneurship and economic growth in both the developed and developing countries are increasing (acs & szerb, 2007). however, these tend to be based on the assumption that new ventures of comparable size have similar developmental needs and potentials. accordingly, public policy programs usually segment potential firms according to size (employees and sales turnover) and/or industry as the “smes” without consideration for the demographical differences in ownership and/or management. this study emphasizes that women entrepreneurs are distinct from male entrepreneurs in economically significant ways. our theory and evidence on the impact of the fdi on women entrepreneurs is a first step toward assisting policy makers in developing a support system for economic growth that takes into account the idiosyncratic characteristics and challenges of a ubiquitous and relevant group of entrepreneurs. the better the distinct characteristics of women entrepreneurs and their venturing are understood and articulated, the better policy makers will be able to provide support programs for the growth of women entrepreneurs and their new ventures. in case of a failure to recognize the importance of women entrepreneurs, their ventures, and idiosyncratic needs, economic growth could be adversely affected. perhaps the most important message of this study to policy makers is the need to develop initiatives to support women entrepreneurs to succeed in the long run beyond the governmental support that is extensively devoted to support venture start-ups. journal of small business strategy vol. 24, no. 1 55 references acs, z. j. 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(1985). the economic institutions of capitalism: firms, markets, relational contracting, free press. new york, ny: collier macmillan. kaustav misra is an assistant professor of economics at saginaw valley state university. his primary research areas include labor economics, public economics, and family business. esra memili is an assistant professor of entrepreneurship at the bryan school of business and economics. a scholar in family business and entrepreneurship, she is the author of accepted and/or published manuscripts that have appeared in the top entrepreneurship and family business journals. dianne h. b. welsh is the hayes distinguished professor of entrepreneurship and founding director of the award-winning cross-disciplinary entrepreneurship program at the university of north carolina-greensboro. she is an internationally known scholar in franchising, family business, and entrepreneurship. hanquig (chevy) fang is currently a doctoral candidate at the department of management and information systems at mississippi state university. he is also a research fellow at the china small & medium business research institute in zhejiang university of technology, china. his research interests include family business, innovation and entrepreneurship. his work has been published in the journal of product innovation management, small business economics, and journal of family relations. reproduced with permission of the copyright owner. further reproduction prohibited without permission. strategy strategy as a determinant of the perceived value of outsider assistance to new ventures: an exploratory study'ames j. chrisman university ol'algary george w. danforth gulfnct, inc. abstract tliis study erteads the research on ou&sider assis(ance by cmnparing a venture's strategy ui(h the types of tissistaace i( received. resul(s si&gges( (ha( certain types of tlssisraace are more liiglily value&i by venmres folloiving certain types of srraregies. uufortuaa(ely, resulr& also sian v (licit iuost veri(ares do a&it recei ve rhe (ypcs of a tsi su& nce rhar best support their strategies. directions fiir emrepreneurt aad oa(sider arsis(&nice programs are offered (o address ibis problem. introduction experts suggest that outsiders —persons not associated with a business in tcnns of ownership or employment who provide it with advice or assistance (e.g., consultants, accountants, bankers. lawyers) —can bc a valuable resource for new and dcvcloping ventures (robinson & pearce, 1984; stevenson & sahlman. 1988). there is also a considerable amount ol'mpirical evidence that outsider assistance can positively inliuence new vcnturc pcrhirmancc (long & ohtani, 1986; mcmullan, long & graham, 1986; lussier g& corman, 1995; pelham, 1985: robinson, 1982). unfonunately, previous studies have, for the most part, trcatcd new ventures as a homogeneous population with similar assistance needs. however, contingency theory (hofer, 1975) suggests that it is morc likely that new vcnturcs will di1'fcr in meaning('ul ways that lead to dif1'ercnt business problems and outside assistance needs. rcscarch on the problems of new vcnturcs supports this conclusion (cf.. chrisman & leslie, 1989). seeking to expand our knowledge ol'hc issues facing new ventures and how outsiders can hest assist in the new venture dcvelopmcnt process, this study explores the relationship between ncw venture strategy, outsider assistance, and the perceived value of outsider scrviccs. as suggested above. it has already been cstahlishcd that outsider assistance, in general, can he quite valuable (chrisman, hoy. & robinson, 1987; chrisman & katrishen. 1994), especially il'it involves strategic planning (chrisman &. carsrud, 1989; robinson, 1982). what has not 'ho author~ wish to thank gary costrog&ovanni and bah(us&is for their helpful corn&nants on earlier drafts of this manuscript an earher version of this manuscnpt was prevented a& the 1993 meeong of the u.s association for sinan business and bntrepreneursh&p 47 bccn dctcnnincd, howcvcr, is il'if'ferent assistance needs arc associated with different stratcgics. this study investigates this issue. drawing from mainstremn strategic management thought, we apply business level strategy theory to dcvclop hypotheses concerning the nature ol'hc assistance that will add value to ncw ventures following dilfcrcnt strategies. wc then test these hypotheses on a large sample of ventures that received consulting assistance t'rom a small business dcvclopmcnt ccntcr (sbdc) program in onc state in the u.s, over a two year period (sec appendix). the rcmaimlcr ol'his article discusses this study. research model and hypotheses venture problems i or the purpose of this study, three broad classes of business prohle&ns wc&u idcntilicd. ansoly(1965, pp. 5-6) states that the srrnregic prul&lrm is "deciding what businesses thc lirm is in and what kinds of businesses it will seek to enter." adn&inis&ruri& e prrrblems, on the other han&l. concern the l&rm's organization (e.g., structuring of authority and &esponsihility &clat&unsh&ps, wo&k flows) and &ts acqu&s&t&on and dcvclopn&cnt ol &'csou&'ccs (c.g.. personnel training and dcvelopmcnt, linancing). finally, operuring prr&i&leo&s involve i'unctional decisions in areas such as marketing and production. although. all ventures could be expected to perceive each type of assistance to be valuable, thc strategies they pursue should inl)uence thc nature ol'hc dominant problems cncountcrc&l. indeed, a central tenet ol'he strategic managcmcnt paradigm is that the implementation ol'ilfcrent strategies lead to dif1'crcnt problems and de&nand dilyerent managcmcnt skills and organizational require&nents (chandler, 1962; galbraith &z& kazanj inn, 1986; porter, 19g0). in general, it is proposed that the types of'»ssistancc tlmt will have thc greatest positive impact on the perceived value of outsider services will vary depending upon thc competitive business strategy pursued. the im ortance of strata i simply put, business level strategy is concerned with competitive advantage (hot'er k. schcndcl, 1978; po&tcr, i 980). how a venture matches its rcsourcc; with thc i'actors critical to success in its chosen cnvironmcnt defines its strategy and dc&em&ines whcthc& a competitive advantage is i'onhcoming. because fcw firms are able to command th rcsourccs necessary to dominate competitors in every area, and because the importance of kcy success i'actors tend to vary hy market segment, there are a variety of different strategies that can lead to superior perl'onnancc (hofcr. 1975). thus, l&nns following diff'erent strategies will need diffcrcnt rcsourccs and must focus their cff'ons on strengthening dif1'erent functional areas. this is especially important i'or ncw ventures which arc usually resource poor. strategy assumes great importance during a firm's early years ol'development. a ncw venture's strategy is its pri&nary lever i'or overcoming thc "liability ol'newncss" (stinchcombe. 1965) as it attempts to gain control of essential resources ag and secure a position in the environment. because of the complexity and importance of lormulating and implementing strategy, entrepreneurs often turn to outsiders i'or assistance in making decisions concerning how to hest utilize their limited resources. the central premise of this article is that outsider assistance is most valuable to new ventures when it is provided in areas that both strengthen the resources necessary to implement strategy, and results in a strategy more closely aligned with those resources. y~tyk tu create a competitive advantage, strategy must i'irst align scarce resources in ways that create value for customers. value may be thought of as a function of the bene(its a particular product or service provides to a customer relative to its cost or price (willard & cooper, 1985). thus, there are three primary strategies firms can employ to create value (chrisrnan, hol'er, & boulton, (988). a cost strategy adds value by lowering the cost ol' given level of benefits. it is based on efficiency and attracts customers who are willing to i'orego additional benefits for a lower price. a benefit (diflcrcntiation) strategy, by contrast, adds value by increasing the benefits ol'a product or service at a given or higher cost. such a strategy emphasizes ef'i'ectiveness and appeals to customers who are willing to pay morc to obtain greater satisfactions from the product or service. a un(ity strategy uses cost and benefit weapons simultaneously fiona following this strategy seek both cf'i'ii;icncy and effectiveness advantages by adding value through lower cost and prices as well as greater bene('its. nevedheless, while such a sirategy offers the possibility of greater competitive advantage and hence greater returns, it also carries with it a greater element ol'isk, in that few firms are able to successfully difl'crcntiatc on both cost and benefit dimensions. the danger of becoming stuck-in-the-middle without advantage in either costs or benel'its has been well documented and is typically found to lead to low performance (porter, 1980). some lions, however, do not seem to be aware of the conscqucnccs of heing average and are content with merely filling imbalances between industry supply and dmnand. thus, both unsuccess('ul auempts or lack of attempts to create competitive advantage are possible. we shall refer to the strategies of such misaligned firms as shortage (vesper, 1980), because they create no advantage other than)ust "bemg there" (chrisman, ct al., 1988). strategies may be aimed at a whole mdustry or at a segment within an industry. the start-up ventures investigated in this study, however, generally employed their limited resources to address smaller clusters or segments of customers within an industry. for this reason, their strategies fall more accurately under the purview of'hat porter refcrrcd to as focus strategies. mindful of this distinction, we classilied strategies as cost, benefit, utility, and shortage i'or thc sake of simplicity. c~a«i..t ky. 1 k% u ky i p y investment (wright, 1987). thus, tight cost control, detailed product cost reports, and efficient orgamzational design are required (porter, 1980). in the case ol'ew ventures, thc means by which low operating costs can be achicvcd are limited by both size and stage of'cvclopment. unlike larger firms, few new ventures can be expected to obtain cost advantages from operational factors such as economies of scale or scope, learning effects, or high capacity 49 utilixaiion (hofer k. sandberg, 1987). 0 is much more likely that new vcnturcs will obtain low operating costs through administrative mcasurcs such as cl'fcctive organixation, supervision, aml the improvement ol nascent work iiows. at thc same time, cost data aml historical accounting information arc often nonexistent or woefully inadequate in new or small i'irms (kcnncdy, loutxcnhiscr, k chancy, 1979; khan a. rocha, 1982; rocha k khan, 1984). fvcn when accounting inf'ormation docs exist, such lions often require help wiih proiluct cost allocation (rocha k khan, 1984). i'or exatnple, potts'1977) i'ound tluit small manul'acturcrs that used outside accounting and finance services werc more successf'ul thmi tlmsc that did not. limiting thc initial investment in a venture is principally a financial task. barring a serendipitous event, such as thc availability ol'heap assets not available to compctitiirs, holding down the amount of initial invcstmcnt involves administrative issues such as whcthcr to buy or lease assets (block 8t macmillan, 1985), how to arrange payments and credit (khan k. roche, 1982), how to maximixc tax benelits, and how to minirnixc woiking capital and aggregate capital investment (van kirk fk noonan, 1982). after initial investments have bccn made, thc key is to avoid adtlitional borrowing and to minimixc "i'ixcd" comrnitmcnts (kennedy, et al., 1979). bccausc administrative mechanisms to control costs and invcsimcnts arc cssemial to a successful cost strategy for new ventures, administrative assistance should bc ol'ritical importance to new ventures following a cost strategy. as noted below. hf: thc value of outsider assistance will l&e greater tvhen ncw ventures following cost strategies receive administrative assistance. strategic assistance should also bc very bcnclicial (chrisman k carsrud. 1989; chrisman k leslie, 1989). ncw ventures arc often challcngctl with mcciing substantial and varied demands with limiictl and sometimes inadcquatc rcsouices. compctcnt strategic assistance can provide sorely needed direction to managers on how to focus and intcgraic whatever iesources and capabilities are at their command. bccausc strategy is thc critical icvcr i'or administrative activities, ventures with cost strategies that reccivc both types of'assistance should perceive outsider assistance to be more valuable than those that receive either type alone. h2: the value of outsider assistance will be greatest when new ventures following cost strategies receive both administrative and strategic assistance. ~ll f s ..g "lty. f hilby fn» « t kg vis competitors depends on the nature of the physical product, supporting services, or marketing activities (poner, 1985). in the case of a product with unique functions or i'eaturcs, the transition from prototype development to systematic production is likely to present a greater number of enginccring and production problems than would be the case with a less unique product. however. the greatest assistance needs of new ventures following bcncfit strategies may be in thc area of marketing (porter. 1980). accurate identil'ication ol'he. target market is 50 especially important to avoid direct competition with larger, morc established firms (rocha & khan, l984). equally important, a clear target inarket allows a venture to better i'ocus its scarce resources on producing specialized goods or services for a specified market niche; in this way, more cl'ficient and eff'ective use ol'advertising and promotion is possible (roche & khan, l984). from a practical standpoint, many entrepreneurs lack knowledge and skills related to distribution. advertising, and pricing. as a consequence, wc cxpcct that ventures i'ollowing benefit strategies will require operating assistance, especially in thc areas of'arketing and production (vozikis & glucck, l980). furthcnnorc. given thc importance of strategy, the combination of operating and strategic assistance should be of'reater value than assistance in either area alone. thus: hgh the value of outsider assistance will be greater when new ventures following benefit strategies receive operating assistance. h4: the value of outsider assistance will be greatest when new ventures following benefit strategies receive both operating and strategic assistance. ~sh»: s; x. a. ii t:ahu .:h 8 .h k ~ .« bcncf'it weapons. thcrcl'orc, thcrc is no a priori reason to suspect that such ventures will require a disproportionatc;unount of cithcr administrative or operating assistance. the i'uturc prolitability and indccd survival of'hortage ventures are largely detcrtnined by external and uncontrollable factors such as thc continued existence ol'excess demand or local monopoly conditions. as a consequcncc, thcsc businesses arc likely to face i'undamental strategic problems. lacking a clear business strategy, shortage ventures have many of the same strategic needs as ventures still in thc piccommercialization stage. chrisman and carsrud ( l989) found that prc-vcnturcs received sigmficantly morc strategic assistance than established busincsscs. we cxpcct to iind a similar relationship in thc case of shortage ventures. although shortage vcnturcs aie not expected to require disproportionate amounts ol'either administrative or operating assistance, thc lack of'dvantage ol'uch ventures suggests that their abilities in both areas arc lacking. it is unlikely that many shortage businesses lack competitive weapons by preference. it is conceivable that many ventures that fall into this category are failed utility ventures that are now "stuck-in-the-middle" (porter, l980). the general lack of coinpetitivcncss of shortage ventures could force many to attempt strategic or operational turnarounds which would pose a variety of strategic, administrative, and operational problems (hofer. 1980). as a conscqucncc. such ventures arc expected to need comprehensive assistance covering many areas since thc problcins causing the lacl ol'competitive advantage are likely to be imcrrelated. put dil'i'ercmly. a shortage strategy is more likely to be caused by a coinbination ol'roblems in strategic vision, inadequate i'unctional skills, and improper execution rather than one of these problems alone. thercf'orc. ventures without a distinctive competitive strategy arc cxpcctcd to nccd comprehensive assistance; shortage ventures which receive such assistance should bcncfu more i'rom the advice of outsiders than those that do not. 51 hs. the value of outsider assistance will he greatest when new ventures following shortage strategies receive comprehensive assistance. ~ll i s;:.v inly„p . pp % hy &p x p. utility strategy should rcquiic a &lisproportionate amount ol'dministrative, operating, or strategic assistance. howcvcr, such ventures could be cxpcctcd to expericncc a broad array ol'problems due to their usc of both cost and benefit weapons. however, these problems will bc somewhat diltcrent in nature than thc problems oi'shortage vcnturcs. ventures i'ollowing a utility strategy nccd administrative skills and assistance to achicvc a competitive cost structure. they will also nccd operational skills and assistance to maximize the real or perceived value of their products told services. finally, vcnturcs pursuing a utility strategy are likely to nccd strategic assistance to coordinate thcsc disparate efforts to ensure, i'or example, that cost control mcasurcs are consistent with product quality and marl cling requirements. such ventures must nnt only maintain a clear definition of the business hut also ensure that they obtain both thc cost an&i hcncfit advantages that thc utility strategy icquires (chrisman et al., 1988; porter. 1980). on thc whole, thcsc ventures must have comprehensive assistance because implementation of a utility strategy dcman&ks comprehcnsivc, skills. h6: thc value of outsider assistance will be greatest when new ventures following utility strategies receive comprehensive assistance. methodoi.ogy thc relationships hctwccn strategy, outsider;issistancc, and its pcrceivcd value were investigated via two surveys ol'1421 small businesses thai rcccivcd assistance i'rom one sbdc state system over a two year period. thc owner of each vcnturc vms contacted by mail and asked to complctc a questionnaire concerning thc areas ol'ssistance soughl, thc competiiivc stratcgics cmploycd, and the quality of'hc scrvicc rcccivcd. three mailings were conducted for both surveys yielding a total of 398 rcsponscs (28%%. howcvcr, wc conl'ined our analysis to thc 223 i'( spouses i&oui owners of vcntul'( s ih;il had hccn in oper uion eight years or less and whom provi&lcd usable strategy,:issistancc, and scrvic«rating data. an eight year cu&oit point is consistent with other studies ol silo'i(if van&utes (biggadikc, 1979; wciss, i(781). chi-square goodness-ol'-lit tests indicated that resp(mdcnts were highly i'cpfcscntal(vc ol'hc long-term client population in terms of'heir geographic location, gandcr, ethnic background, and type oi'&usincss. to teal lol''cspolisc bias, chi-square tests ol'ndependence compared rcspondcnts to tile first, sec&md, and third mailings; no cvidcnc«was i'ound that the thrcc groups difl'ered along any ol'hcsc dimensions. as oppcnheim (1966) argued, late respondents arc very similar to nonrespondcnts and a comparison betwccn ihc three groups provides reasonable assurance of thc sample's rcprcscntativcncss. onc-way anovas, chow tests (1960), and chi-square icsts i'ound no cvidcncc that the relationships of'nterest werc moderated by either thc client's type of'usiness or thc sbdc site whcrc assistance was received. in thc lirst year in which thc survey was comluctcd wc had also asked respondents whether they were thc fouiulcrs of their husin«ss an&i a variety of'questions concerning their 52 experience in management. of'he eighty-five clients who responded to the first of these questions, 72 (84.7%) were founders; the rest were senior level managers. however. no significant relationship was found between founder status and thc pcrceivnl value of outsider assistance, types of assistance received, or strategy followed. the average management experience of the 63 respondents who provided such information was 8.9 years, a figure consistent with that found in a study on cntrcprcncurial success and failure (lussier & connan. 1995). again. anovas and t-tests indicated that managcmcnt experience had no significant relationship to the value or types of assistance reccivcd, or the strategies followed by the ventures in this subsample. table i. provides a breakdown ol'hc sample in tcnns of business age, size, and industry sector. anovas were conducted to determine whether the sample was suitably homogeneous, in terms ol'gc and size. for pooling. results indicated that the mean age and total sales did not differ based upon strategy pursued. t-tests also provided evidence that neither age nor size inllucnccd thc type ol'ssistance received. classification of strate ies a venture's strategy was classified as cost, henefit, utility, or shortage based upon the cxteni to which it used cost and/or benet'it competitive weapons (see figure i). clients were asked to compare their prices, non-price benel'its of products or services, and uniqueness or newncss of products or scrviccs with those ol'heir competitors on a seven-point scale ranging from 'signilicantly lower'i) to 'signilicantly higher'(7). a midpoint response ol'(4) indicated the client was 'about the same's competitors on thc factor of interest. measurements of venture strategy via comparisons with cmnpetitors has been used in other studies (chaganti & schneer, 1994; gartncr, mitchell, & vesper. 1989). use ot a cost weapon was mcasurcd hy client rcsponscs concerning relative prices; a response ol'3" or lower indicated the, usc ol' cost weapon. such a response indicated that the venture competed on price and suggested the need i'or carel'ul cost control. usc of a benefit weapon was determined by examining clients'atings of'elative nonprice benefits and uniqueness of products or services; a response iif "5" or grcatcr on either scale indicated use of a bcncfit weapon. such rcsponscs suggcstcd that thc venture sought to dilfercniiatc its products or services based on some attribute other than prices or costs. using the breakpoints discussed above, shortage vcnturcs werc those that did not indicate the usc of either a cost or bene(it weapon; those that employed both weapons werc classified as following a utility strategy. because 16 clients provided strategy data in both of'hc yearly surveys, we were able to make a rough assessmcnt of thc reliability of the strategy measure. clients'esponses to relative price, non-price benefits, and uniqueness or newness of product were comelated at 0.84, 0.74, and 0.77, respectively. using thc scheine described above, 13 of the 16 clients reported strategies (81.3%)remained unchanged. of the three clients whose strategy responses differed, two changed from shonagc to benelit strategies, and one client moved from a benefit to a utility strategy. the diffcrcncc in strategies reported by these three clients may indicate response error or reflect a true change in competitive posuion. in all three cases. the client's 53 response inthcatcd the venture had nhtained a conqlctitivc weapon which it did not possess thc year hcf'ore. in particular, wc might cxpcct sholxage ventures to attempt to develop a basis on which to compete as a result of'he sbdc's counseling cf'i'orts. iqcvcrthelcss, thcsc three clicnm werc dropped from thc analysis leaving a sample of 220 ventures. inde endent variables managers werc asked to indicate the nreas m which outsider assistance was rcccivcd. following the distinctions made by ansoff (1965), each area of assistance was classified by the rcscarchers as pcrtalmng to strategic (strategic planning, i'easihility analysis. pro-fonna financial analysis, and business planning), administrative (linancc, accounting, pmsonncl. and gcnmal management), or operating problems (markctlng, production, invenlory control and purchasing, and operations) to mcasurc thc types of;issistancc received. a panel ol''ivc judges, i'amiliar with the cntrepreneurship and strategic managcmcnt independently classified each of'the assistance areas. thc lcvcl of'agreement between their cl lssil'ications and those of'hc researchers was 73 percent. to assess rcliabihty, the areas of assistance rcpoltctl welc compared with those documented in 17 availablc sbdc case i'iles. thc level of agrcemcnt bctwccn thc case idle data and thc survey responses was 94 percent (16 ol'7 cases), indicating that thc assistance measure was reliable. we used thc types ol';issistancc each client rccelved (strategic, administralivc. or operating) as nur imlcpcndcnt variables. vcnlures that received all thrcc lypcs ol assistance were said to have rcccivcd comptchensivc assistance, those with less than three types werc considcrcd to have rcceivcd limited assistance. ~dv d iv idd the tlependcnt variable used was clients'erceptions ol'hc value of'bdc assistance, clients were asked to rate thc sbdcs counseling services on a seven point scale ranging i'rom 'wodhlcss'i) to 'vital to success'7). in gcnmul, thc 220 clients who provided rcsponscs rated the services i'lworahly; the average rating was s.23. the use ol'his nicasurc is conststcnl with both previous rcscarch on outsider assistance to entrepreneurs (chrisn lan dtd cm srud, 1989) and studies that evaluate the elfcctiveness ol'consulting cf'i'orts ln the organizational development litcraturc (armcnakis dtx burdg, 1988). to assess reliability, clients were also asked if the services received from the sbdc werc hcncficial. responses to this question were significantly correlated with pcrccivcd scl vlcc value (i = .68; p = .000). results one-tailed t-tests werc used to test all the hypotheses cxccpting h4. because only two cost ventures reccivcd both adlninistrative and strategic assistance, a mann-whitney test was used to test that hypothesis. variable means and standard deviations are provided, by strategy, in table 2. 54 ~c& s& it was expcctcd that ventures with cost strategies that received administrative assistance would perceive the value of the assistance received to bc greater than those that did not. as table 3 shows, a one-tailed t-test i'ailcd to support h 1; thc scrvicc value ratings of those that received administrative assistance were not significantly greater than those that did not (p = 0.46). h2 was supported, however. as reported in table 3, a mann-whitney test detected a sigmficant dif1'ercncc in service value when ventures that received borh administrative nnd strategic assistance were compared to those that received either strategic or administrative assistance (p = 0 034). while we did not develop hypotheses regarding the types of assistance the ventures would bc most likely to receive i'rom thc sbdc, we thought it useful to mvestigate this issue in order to gain further insight. although one might cxpcct ihat thc assistance rcccived would conform to the assistance that we hypothesized would bc needed, this did not turn out to be the case. thus, only 30 percent of the ventures with cosi straiegics rcccivcd administrative assistance, and exactly half received strategic assistance. ~a& n as shown in table 3, ventures following bencfii strategies that received operating assistance perceived the value ol'utsider assistance to bc grcatcr than those that did not receive such assistance, supporting h3 (p = 0.011). support was also found for h4. benefit ventures receiving both operating anrf strategic assistance reported significantly higher service value ratings than those that received only one type ol'ssistance (p = 0.002). in spite ol'hc support for our hypotheses it is interesting to note that only 28 percent ol the ventures with benefit strategies received operating assistance. on thc other hand, 69 percent dtd receive strategic assistance. again, a large number ol'entures do not seem to receive the types of outsider assistance that appeal to be valued most. ~sa & s our results indicate that shortage ventures that received comprehensive assistance perceived the value of outsider assistance to be greater than those that did not (p = 0.027). thus, hs was supported (table 3). unfortunately, though comprehensive assistance appears to be valued by shortage ventures, only 13 percent received this sort ol help. this ts not altogether surprising, however. while we argued that these ventures should seek comprehensive assistance, it is reasonable to expect that they lack a strategy based on competitive advantage, in part, because they undmstand neither the value of strategy nor the value ol'he operating and admtmstrative arrangements necessary to make strategy work 'nteresungly, ventures foaowmg benefit strateg&es d&d not perce&ve admm&strat&ve ass&stance to be uf's&gn&ncant value, as ovidence&l by a laci; ul'stat&socal d&fference between those that dtd and those that d&d not receive that son of help. a sunilar lack of assumauon was found between percept&one of vert u.e value fur ventures fonowmg cost strateg&es that received operat&ng as&a&&ance 55 ! unfortunately, these results also suggest that the consultants were cithcr unablc to diagnose this need or unwilling to press thc issue with thcsc clients. ~ll 0ib s t strong support was i'ound i'or h6 (table 3). as anticipated, utility businesses that received comprehensive assistance rated the value of outsider services significantly higher than those that did not (p = 0.009). however, consistent with our oiher analyses, only a small number of'entures with utility strategies (18%) actually got this sort ol'russistance. conclusions this exploratory study examined thc relationship bctwcen ncw venture strategy, outsider assistance, and thc pcrccivcd value of assistance. the resulus provided support i'or all hut one el'he hypotheses. our contention that ventures i'ollowing a cost strategy would value administrative assistance was not supported. however cost vcnturcs that received both strategic and administrative iissistance pcrccivcd thc value ol'hat russistancc to bc significantly greater than those that rcccivcd onc or thc other alone. in addition, thc pcrccivcd value ol'ssistancewas significantly higher i'or bcnclit ventures that received operating assistance, hut was higher still when such clients received both together. finally, shortage and utility ventures that rcccived comprehensive assistance pcrccivcd thc sbdc's services to be signil icantly more valuable than those that did not, although probably for difl'crcnt reasons. thus, for all but onc of thc hypothcscs linking strategy, iypcs ol'ssistance, and perceived value of assistance, thc results werc statistically signil'icant. however, thc results also showed that, with one exception, the proponion of busincsscs that received the assistance tluit was posited to hc most benelicial was lower or no grcatcr than thc proportion of ventures that did not receive ihat suit ol'assistance. limitations of the stud this study has important implications for entrepreneurs, consultants, and future rcscarch. however, it also has a number of limitations. first, this study invcstigatcd one source ol'outsider assistance, thc sbdc, in one state among clients that rcccived counseling over a two year period. therefore, it may not be gencralizable to other settings. although our research design may have limited thc study's generalizability, it also increased the homogeneity of the population, and this wc consider to be a stivngth. thus: narrower, more, homogeneous populations would limit the generalizability ol'ny single study, hut this would be offset hy gains in thc definitiveness of'hc findings, the levels ol'ariance explained, and the applicability ol thc results to thc population. in short, solid findings about a narrower population are hetter than marginal findings of t)ucstionable gencralizability to a broadly defincil population (mckclvey, l978: 1438). 5&z second, the small number ol'cost ventures in the sample restricted our ability to test the relationships ol'intcrcst. hence, we could not ascertain the value of administrative assistance to cost ventures with as high a level of confidence as we would have wished. third, thc study focused exclusively upon the types ol'assistance received rather than thc depth ol'ussistancc in spccil'ic areas. it is possible that a measuremcnt of depth would have yielded new insights or di(l'erent conclusions. fourth, hccausc both thc indcpendcnt and depcndcnt variables were mcasurcd via the same survey instrument, this study may have been vulnerable to problems associated with common method variance (campbell k fiske. 1959; fiske, )982). when our survey mcasurcs are cvaluatcd in tcnrts of'hc potential causes o( aiti factual covariance described by podsakofl'nd org;m (19)i6), however, wc did not i'ind cvidiaice iif'ffects that would invalidate our results. our strategy measures may also be criticized on scvcral grounds. first, they were somewhat simplistic i'or the purpose ol capturing a complex construct. howcvcr, the scales cmploycd were direct, highly consistent with our conceptual frumcwork, aml undcrstandablc to clients regardless of their business sophistication. nnncthclcss, this musi be still hc cnnsidcrcd a limitation ol'his study it is also possible that respondents'ssessments of'heir competitive positions werc inflated with regard to price, non-puce benef'its, and unitlucncss. ii'uch bias was prcscnt, howcvcr, one would expect to lind a disproportionate number ol'tility ventures to shortage vcmures as thc former strategy indicates a strong position on both cost and benclit dimensions and thc latter a weak position in both areas. since thc numbers ol'utility (n = 44) and shortage ventures (n = 39) in our sample werc very similar, thc probability of this sort ol'bias seems remote. although still greater than zero. furthermore, our meihndology did not permit mcasurcmcnt ol'he appropriateness of thc stratcgics i'nllowcd by the ventures. h is possible that some ventures followed an inappmpriatc strategy. if this is true, the accuracy of our conclusions would hc open to doubt. however, given thc attention to problem diagnosis hy sbdc consultants, wc do not belicvc that this possibility was great, or that the few occasions whcrc ii might have occurred caused serious bias io the results of thc study. if it had. we would have expcctcd to see lower evaluations of thc sbdc's services than werc obtained. since there was a lag of one year between when thc assistance was provided and when thc survey was conducted, such serious strategic errors would have undouhtahly affected perfonnance and been rc(1ected in client evaluations. finally, thc study is also limited by our use of sub)ective measures of the value of outsider assistance. although subjective mcasurcs arc useful, they can not rcplacc hard data on prnfitabihty, sales growth, productivity, and so forth. while studies have shown subjective 57 measures to bc correlated with objective pert'otmancc measures (dcss & robinson, 1984), the evidence is not conclusive (sapienza, smith, & gannon, 1988). im lications for entre reneurs and ncw venture mana ers because this study involved only clients of one outsider assistance progratn in one state over a relatively short period of time, its findings should be considcrcd tentative. noncthcless, it oltcrs important implications for cntrcprcncurs and new venture managers. first, this study emphasizes the importance of strategy as well as its linkage u& the administration and functional operations of a vcnturc. although this message is not ncw its importance intlicates it is worth repeating. thus, thc principal implication ol'his study is that entrcprcncurs cun benefit most i'rom outside assistance that helps build or enhance thc critical i'unctional skills and competencies required to compctitivcly impl«ment a strategy. furthcrmotc, when this is accompanied hy strategic assistance, thc potential value is greater still. specifically, vcnturcs i'ollowing cost strutcgics seem to obtain thc most value from a comhination of'dtninistrativc and strategic assistance. i'or ventures i'ollowing hencf'it strategies. assistance in operations aml strategy sctan to provide th«greatest value. finally, ventures that employ utility strategies, or that arc stuck-in-the-middle with a shortage strategy, appear to gain the most when comprcl&ensivc nssistancc in struegic, ralministrativc, and operating areas is received. thcsc arc panicularly impottant lindings since it appcnrs tlu&t many cntrcprencurs do not seek assistance in areas that are consistent with thc strategic requirements of their vcnturcs. since strategy should bc built upon strength, it is likely that these cntrcprencurs seek assistance based not upon strategy. but upon other criteria such as perceived weakncsscs or most pressing nccds. if so, numy new businesses arc cithcr failing to recognize, t&r ineffectually addressing, thc compctitivc i'orccs in their cnviromnents. this is not to say that assistance in tmproving areas of wcakncss is not valuable or ncccssary. howev«r. using outsider assistance to simply prop up or strengthen weak functional orcus may result in incflicicnt deployment ol'carce rcsourccs to areas that arc fess critical to a venture's strategy. it may also result in a strategy that is not adequately supponed hy thc skills and tcsources required to mcct th«key succ«ss i'actors in th«cnviromncnt. theref'orc, strategy should hccomc a tlriving i'cree in thc search i'r cffcctivc outsider assistance. entrcprcncurs and ncw venture managers should he as willing to seek or accept advice in areas that arc perceived as strengths as in areas that are perceived as wcaknesscs if'hc i'ull value ot'outsid«r assistance is to be obtained. this also suggests that entrepreneurs should more actively evaluate and manage their outside advisors (stcvcnson & sahlman, 1988). entrcprcneurs should seek outside consultants who possess thc skills aml experience ncccssary to aid in thc i'ormulation of strategy and in tying specific i'unctional assistance to thc vcnturc's present or i'uturc source(s) of'compctitivc advantage. however, thc i'undamcntal linkage between strategy and outsider assistance suggested in this article indicates that care tnust be taken to ensure that advisors also possess thc requisite skills needed to diagnose thc true needs ol'he vcnturc. 58 finally, this study provides further evidence that entrepreneurs can obtain useful assistance i'roin the small business development center program in both i'ormulating and implementing a strategy. the value of this resource to ncw venture developinent should not be overlooked hy aspiring entrepreneurs. im lications for outside consultants and assistance pro rams outside consultants should not assume that entrepreneurs will always accurately perceive their assistance needs in tcnns of developing a long-term source of competitiveness. few entrepreneurs received assistance in areas most pivotal to their long-tenn success. directors of outside assismnce programs, such as thc sbdc, should therel'orc consider these findings with the aim of optimizing the impact of'heir limited resources. an analysis of a venture's strategy can idcntil'y critical areas in which outside assistance should be primarily targeted. in panicular, strategic assistance is clearly bcncficial as strategy is thc principle lever by which other critical competitive needs are identified. without a clearly r&nnulatcd strategy, the new venture's most critical assistance needs may not be understood or idcntilied. consultants should be instructed to ask questions during thc initial client meeting that will allow them to discern the strategy ol'hc vcnturc. once the strategy is identified consultants should probe for inl'ormation concerning thc kcy functional skills used by the venture to support that strategy. such a proactive stance in thc client-consultant relationship must of course bc handled with tact and patience. however. the potential btnicf its from such an approach appears to outweigh inconvenicncc in time or effort as well as any risk of alienating a recalcitrant client. a related implication is that sbdcs and other assistance programs would do well to evaluate their capability to intcgratc assistance in strategy i'onnulation with that of implementation (nahavandi k. chesteen, 1988). this would entail more detailed enviromnental analysis in areas such as customer needs, competitors'trengths, and the target market's key success factors. thc finn's specific resources and capabilities should be evaluated in light of those required to compctc succcssl'ully. in turn, assistance should hc targeted at i'uncnonal areas that best address the gap bctwccn what thc vcnturc is capable of doing and what it needs to do to compete elfcctively. to accomplish this, it may bc ncccssary to utilize a team approach to consulting because the skills of any one consultant are limited. traditionally. thc sbdc has assigned clients to a consultant who has expenise in their area of most pressing need. given the widely diverse assistance nccds ol'he new venture, however, a funher division of labor among consultants by task, rather than solely by client, may lead to more effective assistance. directions for future research this study and its conceptual foundation ofl'er rich opportunities for i'urther research. for example, thc small number ol'cost ventures identil'icd in this study highlights a relatively untapped need i'or large sample research that investigates ncw ventures that strive for low cost advantages. because entreprcncurship tends to be assoi:iated with product innovation, wc know less about thc nature and feasibility of ventures i'ollowing cost strategies. 59 in aildition, research to dctcnninc how the strategic and nonstrategic;issistance needs ol'cw ventures are identified, and how and by whom such assistance is hest provided is needed. do entrcprencurs seek to build and enhance appropriate coinpetitive strengths or do they, as this study suggests, simply look to remedy perccivcd weaknesses and short-term cxigcncicsg what part do consultants play, if any, in the idcntilication of assistance nccds? li is also p(issihlc, if not likely, that entrcprcneurs seek ()ut difterent types ()i'assistance i'rolli diltcrcnt souivcs. if this is sii, rcscarch is needed to determine thc soutrecs ol'ssistance that arc most cl'ibctivc and when. while si3dcs and other assistance programs are c&imparattvely inexpensive;mil provide coinpctcnt basic assistance, industi3 cxpcrts and other specialists may bc morc capable ol'uiding ventures in certain situations (stevenson bs sahlinan. 1988k future studies would also benefit if thc background, expcricncc, and skills ol'ntreprcncurswerc tal cn into consideration. preliminary analysis suggcstcil no relationship bctwecn management cxpcricncc, value ol'assistance, strategy, or type ol'tssistan«c receiveil. howcvcr. mitre in-depth analysis may yield additional insights. some cntrcprcncurs may pcrccive, and perhaps rightly so, that their own spccialixcd cxpetxi c in critical aieas is greater than that availablc from certain programs or consultants. i.or example, wc might expect scasoncd managers that spinoff'vcnturcs train cstablishcd corporations to rely heavily on their own cxpcnisc and resources in critical areas, and to scck solutions to less important concerns through, i'or cxamplc, the si3dc. in cimclusion, il'the economic henefiks ol'cntrcprcncurial activity arc as extensive as many experts aml observers belicvc, wc should look to discover bcttcr way» to clticiently link new ventures to thc limited rcsourccs availablc io them. as this aml other studies have (ieili(iltstl"lte(l, ()lie iilipoltalit i'cs(illl'cc is outsider assist;lltce. oui coltceptllill iippl'oacli alul lindings, tentative. as they are, suggest that ncw venture strategy may explain why cenain types or combinations ol';issist llice liiily hc nmrc valuable ill olio crise tliilli 111 illiotliel. 60 appendix: the small business development center program" started in 1978, the small business dcvelopmcnt center program in united states provides i'rcc, in-depth management assistance to resource-poor individuals who are seeking either to launch a new venture or to learn how to manage ihcir existing business morc effectively. although most of thc sbdcs clients compete in the retail or service sectors of the economy. these businesses remain vital to thc iramework of regional economies. the sbdc provides a wide range of strategic, administrative, and operating assistance to its clients in areas such as business and strategic planning, i'castbility analysis, general management, finance, accounting, pcrsonncl. marketing, production operations, and inventory control. it also offers a variety ol'ailored programs i'r exporting, government procurement, minority assistance, computer assistance, and inventor assistance. its distinctive compctcncies, however. are in the areas of business planning and i'inancial analysis. because ol' large and ever expanding client base, and because many of its clients lack sophisticated managcmcni skills, the philosophical approach of the sbdc is to guide and train its clientele rather than do thc work for them as a for-fcc consultant might. thus, thc sbdc concentrates on problem diagnosis. developing a client's management skills, and providing advice, information, and assistance. it does noi prepare a clicru's business plans, formulate its strategy, give loans. etc. thc south carolina sbdc, thc site ol'his study, employs 60 persons in 14 offices around thc state. employees include 30 i'ull-time consultants and 10 part-time consultants. the remaining 20 employees are involved in administrative tasks (e.g.. inl'onnation systems) and special assignments (e.g., procurement assistance). because ol'he importance of providing high quality assistance in a relatively short period of time (consultants spend an average of 6-7 hours per client in i'acc-to-face counseling and preparations), the hinng and training policies i'or both i'ulland part-time consultants are ngorous. part-time consultants are typically mba students who possess highly developed skills in financial analysis and marketing. once hired, part-time staff arc closely mentored for the first six weeks of their cmploymcnt and this mcntoring process continues as nccdcd for a period ol'8 months. the mcntoring process involves mccting with expcricnccd consultants hei'orc and al'tcr client contacts; furthenuorc. no new employee is pcnniitcd tti work with u client without a mentor present. the purpose ol'his mcntoring is to supplement thc consultant's quaniitaiive skills with skills in problem diagnosis and human relations. full-time consultants hired by the sbdc must also possess skills in finance, marketing and general management, as well as hold a graduate degree or have previous experience as a consultant or small business manager. these employees must also be mentored although the length of the process ls shorter than i'r part-time employees. in addition, all i'ull-time consultants must obtain prolcssional certification i'rom thc nati&mal development council. the certification process consists ol''our onc-week training courses over a 6-12 month period followed by thc successl'ul completion of a multi-part examination. 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(1985). survivors of industry shakcouts: thc case ol the u.s color television set industry. strate ic mana emcnt journal, 6, 299-31. w an, p. ))9n)). a 9 f) . fp '. s 8 .. ~r » .au~3 ;i.n,99101. 64 figure i classification of new venture strategies cost/prices low avel"age hi h high utility benel'it (n =44) (n=)17) benefits average cost shortage (n =20) (n=39) low 65 tahlc i breakcknvn of san&pie of ne»'entures by age, am&ual sales volume, m&rl ty!&e of business: frequency dis(ributions proportion variable frequency oc sa&nplc aoi.: 0-1 years 75 34 1% 2-4 124 56a1% 5-tt 21 9.51% annuai. sales ($000) 0-250 195 ii3.8% 251-500 7.1% 501-750 7 4.!% 751-1000 7 4.7% type of business retail 71 32!&% sc»' & ca 75 34.3% manul'acturing 46 20.!!% other 2tt 12.ti% 66 table 2 descriptive staustics of the independent anal depeculent variables for nen'entures by strategy cost benefit shortage utii ity ventures vfntures ventures ventures (n=20) (n=117) (n=39) (n=44) mean s d. mean s d. mean s d. mean s d. administrative 0.30 0.47 0.51 0 50 0.59 0.50 0.45 0.50 assistance strategic 0.50 0.51 0.69 0.46 0.41 0.50 0.55 0.50 assistance operating 0.20 0.41 0.28 0.45 0.38 0.49 0.41 0.50 assistance comprehensive 0.05 0.22 0.12 0.33 0 13 0.34 0.18 0.39 assistance service value 5.60 0.99 5.33 1.30 5.05 1.62 4.93 1.56 rating venture age 2.45 2.04 2.99 2.16 2.77 2.23 2.34 1.45 venture sizf. 182.94 294.19 132.83 259.69 110.78 229.39 73.89 134.80 67 tahlc 3 kelariansltip benveell types af oalsiller assistance allll i crcclvcvl vcine af onlsilll'i'ssistance test assi slancc n mean s.13. statistic significance hypothcscs firms with cost strategies athnlnlst lani vc ci 5.ci7 1.21 t = 0.17 p = 0.426 h l. not supported no alhninistrative 14 5.57 0.94 administrative and 2 7.00 0.00 a = 1.83* p = 0.034 h2. suppol ted strategic administrative or 12 5.67 0.89 strategic firms with benefit strategies operating 33 5.73 1.04 t = 2.34 p = 0.011 h3. supported no operating 84 5.18 1.36 operating and 25 5.96 0.79 t = 2.42 p = 0.002 h4. supported strategic operating or 64 5.24 i a i strategic firms with shortage strategies comprchcnsivc 5 ci.20 1.10 t = 2.34 p = 0.027 h5. supported llnlllctl 34 4 88 1.63 firms with utility strategies comprehensive 8 5.88 0.99 t = 2.62 p = 0.009 h6. supported limited 36 4.72 i.ci i * mann-whitney u-test. 68 strategy reward strategies for franchising organizations robert t. justls louisiana state university peng s. chan california state university, fullerton james d. werbel louisiana state university abstract franchising organizations have peculiar characteristics that distinguish them from other organizations. in view of this, incentive systems that are effective in some organizations may not be appropriate to franchising organizations. in this article, a model is developed for rewarding managers and executives offranchising organizations. this model is based upon the concept of the organization life cycle, and examines reward strategies from the perspective of both the franchisor and the franchisee. introduction rapid changes have taken place in the franchising field during the last quarter century. although franchising is widely known, it is still not well understood ( i). today over a third of all retail sales in the united states are handled through franchising outlets. in addition, approximately twenty percent of our gross national product is attributed to franchising operations (12). franchising is rapidly becoming one of the fastest methods of doing business throughout the world today (6). a successful franchisor depends upon highly motivated and dedicated employees who think and behave as company representatives (5). in franchising organizations reqard systems need to be established which can motivate employees and help them think and behave as company exemplaries. the reward systems that are often used in well-established or bureaucratic organiza16 tions may hamper desired performance levels in a franchising firm (2). for example, senioritybased compensation systems are often used for manufacturing firms, but such systems could easily mislead employees in a franchising firm. ln this article a model is developed which will identify appropriate reward strategies for the franchisor and the franchisee at different stages of the organization life cycle. this model is based upon our field experience with numerous successful franchises supported by findings from the compensation literature. characterestlcs of a firanchls1ng oirganiizatlon them are certain primary characteristics which set a franchising organization apart from other firms or businesses. the major differentiating characteristic is the style of organization and the partnership or relationship which is developed between the franchisor (headquarters corporation) and franchisee (local store) (4). for the franchisor, the greater the rate of growth, including the number of new units being opened, the greater the success of the organization. the franchisor is interested in developing new franchises and company-owned stores on a rapid basis. franchising allows for replication or duplication of a successful enterprise in a different location or setting (8). one of the primary reasons for franchising in the first place is to utilize the operating capital of franchisees to estalbish a large network of frnachised outlets (11,10). the franchisee acts as an entrepreneur in estalbishing a new business for the purpose of profit and growth. this entrepreneurship trait is characterized by innovative behavior, use of strategic management practices, and the desire for profit and growth in the near future (15). key employees of both the headquarters organization as well as the franchisee organization are concerned with creativity, innovation, cooperation, interactive behavior, and a desire for profit and growth of the franchising firm. employees assume different economic risks at different stages of organizational growth; and while a pattern of movement through the various stages is illustrative of general tendencies, it is not preordained (16). as such, reqard strategies should be developed that will reinforce employee behaviors that are desirable and necessary at the different organizational stages (2). there are two groups of individuals in the franchising organization which should have different rewards for their performance: (1) the headquarters organization responsible for the operations and sales of franchising units and (2) the managers and assistant managers of the individual franchisee (or company-owned) stores. the organlzatlon llfe cycle an important concept which allows us to relate reward programs to the business strategy of the franchising firm is the organization life cycle. the organization life cycle is divided into different stages which convey different organizing logic resulting in a different configuration of organizational, strategic, and situational factors (13). while the number of stages may differ, a common configuration cycle consists of four stages: (1) start-up, (2) growth, (3) mature, and (4) decline (9,14). the organization life cycle relates the developmental stages of an organization to the sales revenues and size of the organization. 17 table 1 relationship between stages in the life cycle, organization characteristics and compensation strategy for franchising firms. organization characteristics start up growth mature decline corporation years 0-3 variable, 2-10 11 plus variable size (no. of units) 1-20 21-100 101 plus variable sales revenue very small small to medium medium to large declining growth rate slow rapid moderate negaiive earnings low moderate strong weakening business focus obtaining financing, increase number of profitability survival control costs stores open pay and incentives focus attract employees, recruiting, retention consistency, layoffs innovation, motivation training motivation cutbacks risk profile high moderate low high headquaters staff; base salary below market level market level at or above at or above inarket level market level benefits below market level market level at or above at or above market level market level long-term incentives stock options stock options .',tock purchase not offered (broad participation) (limited participation) short-term incentives stock or cash bonus cash bonus cash bonus not offered franchisee, companyowned staff: base salary market level at or above at or above below market market level market level level benefits below market level market level market level below market level long-term incentives travel, profit sharing travel, profit sharing cash bonus short-term incentives cash bonus cash bonus cash bonus cash bonus the model/matrix in table i relates organizational characterisiics to the different reward strategies appropriate for both the headquarters staff and the franchisee staff. the growth rate of most franchising organizations tends to be very slow in the start-up phase (7). in addition, the number of units actually sold and opened tends to be small, and sales revenues tend to be low. the focus of the business in the start-up phase is centered on obtaining financing for the organization as well as controlling costs. the risk involved in these activities is very high, and it is difficult to attract key employees and to provide them with the motivation to develop their creativity and entrepreneurial styles. 18 as we move from the start-up to the growth stage, the growth rate expands quite rapidly. sales revenues grow, and the number of units opened increases dramatically. it is difficult now to keep up with the training and opening of stores which is required in a franchising organization. the business focus is centered primarily on the increased number of stores being sold and opened. rewanl strategies at the growth stage should be tied in to recruiting, retaining, and training key employees both in the headquarters and in the franchisee stores. the mature stage in a franchising organization generally finds the growth rate moderating as to the number of units sold and opened. sales revenues are fairly large, and the number of stores already opened is significant. the focus now turns to the profitability and earnings of the organization. reward strategies at this stage should place more emphasis on motivation, consistency, and retention of key employees. it is critical that the key employees maintain and further the development and growth of the franchising organization. otherwise, the declining stage will become a reality, and the business will slowly dissipate. the stages of the organization life cycle which are most important for formulating reward strategies are the start-up, growth, and mature stages. the growth of the organization is variable during these stages, but it is the lifeblood of the organization. reward strategies should be based on positive organization growth and the development of an organization structure that will properly sustain and develop that growth. in the declining stage, the growth level is negative, and incentives are generally irrelevant to the survival of the organization. reward strategies for the headquarters staff a start-up franchising organization is generally divided into three different offices: (i) president; (2) sales manager, and (3) operations manager. these constitute the major organizational thrust and operation of a franchising business; therefore, reward strategies should be formulated to allow these individuals to be creative, innovative, cooperative, and committed to developing the franchisor/franchisee relationship. the base salaries and benefits for these three individuals will generally be below the market level initially, but as the organization expands through the growth stage, both their salaries and benefits should be raised to a competitive market level. when the organization advances into the mature stage, these benefits should be at or above the competitive market level. the long-term incentives for these offices should generally include initial stock opetions with broad participation by a very limited number of people. as the organization grows, the stock options should become more limited as to the participants, and finally in the mature stage, a stock purchase program may be initiated, often in addition to a limited stock option program. the shortterm incentives may take the form of stock or cash bonuses initially. after a period of time, these may include profit sharing and larger cash bonuses. stock options for the start-up franchise serve as powerful inducements to key employees. these options provide great incentive for employees to be creative, motivated, and committed to making the company successful. stock options can also be used in anticipation of retaining the top talents within the organization. the most common stock options include incentive stock options (isos), non-qualified stock options (nqsos), and restricted stock (3). with the iso the employee receives 19 an option to purchase stock at a specific price at the time the option is granted (book value or market value), usually with up to tcn years to exercise such option. generally, with an iso no tax is paid when the grant is exercised; however, the gains on selling the stock will receive capital gains treatment. the non-qualiflied stock option, while similar to the iso, requires the employee to pay taxes when the option is exercised as well as when the stock is sold. the restricted, stock option generally awards shares to employees who have remained with the company for a fixed period of time, usually from three to seven years. the value of stock options becomes more attractive and more limited as the company continues to grow and increase in size. as the company grows, the eligibility for stock options becomes more restricted, and only key executives and specially targeted employees are permitted to participate during the growth and mature stages of the business. the sales manager may receive a flat commission of $500 to $2,0(t0 for each franchise sold, as practiced by franchises like merry-maids, fast track hamburgers, and drusilla seafood restaurants. this incentive is usually based on three to fifteen percent of ihe initial franchise fee (e.g. at econolodges). additionally, the cash bonus system, developed for the operations manager and his/her staff, is generally based on the percentage sales increase over the franchised and companyowned stores for which they have responsibility. reward strategies for the franchisee (or company-owned) unit with the franchisee (or company-owned) store, there are two major classifications as to who should receive salary and pay incentives. these include the store manager and the assistant manager(s). while the reward structure for most managers and assistant managers of franchising organizations is very competitive at the local market level, it is important that a new franchise store have a manager hired at a strong competitive base salary and not below the local level. the franchisee or manager is going to be primarily responsible for the succes. and profitability of the franchising unit. ideally, because of his/her important role the manager should be paid at or above competitive market level salaries throughout the start-up, growth, and mature stages of the franchise unit's development. because of the growth possibilities of franchising units, it is not as important that the benefits package be as competitive as the base salary. often the initial benefits package may be below the market level at the growth or mature stage of the organization's development. many first time managers of a franchising unit have been promoted i'rom assistant managers in other franchise businesses. examples can be seen at hardee's and 1)urger king. most managers and assistant managers in franchise units are young and generally do not have a lot of experience in management. the primary long term incentives for these managers and assistant managers may be developed through travel and profit sharing programs. travel programs may vary from year to year while profit sharing can be anywhere up to 3% of the sales of the organization. the short-term incentive program for managers and assistant managers should be based on a cash bonus system, such as that developed by kentucky fried chicken and burger king. as table 2 shows, the cash bonus or incentive systems for store managers and assistant managers may be easily developed based on the sales or percent of sales increase over a previous time period. because of the seasonality of most franchising operations, cash incentive programs are usually developed around a quarterly sales statement with an increase in the percentage of sales for 70 table 2 incentives for company-owned stores increase in quarterly sales over previous years'uarterly sales first alternative second alternative total total percent store asst. asst. store asst increase bonus mgr. mgr. mgr. bonus mgr. mgr. 02.0% no bonus 0 0 0 0 0 0 2.014.0% 400 200 100 100 340 240 100 4.016.0% 800 400 200 200 680 480 200 6.019.0% 1200 600 300 300 1020 720 300 9.0112.0% 1600 800 400 400 1360 960 400 12.01i5.0% 2000 1000 500 500 1700 1200 500 15.0118.0% 2400 1200 600 600 2040 1440 600 18.0121.0% 2800 1400 700 700 2380 1680 700 21.0up 3200 1600 8700 800 3200 2400 800 store managers: any company-owned store manager with annual sales of $500.000 or more for any continuous twelve month period between now and june 30, 1991 will receive a seven day, six night expense paid trip to hawaii for two. assistant store manager: any company-owned assistant manager with annual sales of $500,000 or more for any continuous twelve month period between now and june 30, 1991 will receive a 5 day, 4 night expense paid trip to orlando, florida for two. a particular quarter over the previous year's quarterly sales. for example, a manager who is responsible for a 13% sales increase over the previous year's quarter, should receive a $ 1,000 bonus (see table 2). during the year this bonus could easily total $4,000 to $6,000 if sales are good. a cash bonus system (short-term incentive) coupled with an employee profit sharing and travel plan (long-term incentives) along with a generous base salary and benefits package provides the franchisee (or company-owned store) with a salary and incentive structure that should enable him/ her to reach the organization's objectives. this generally coincides with previous findings from the compensation literature (2). conclusion reward strategies provide an effective tool to reinforce desired attitudes and behavior of employees in any organization. in this article we have identified those effectively used by successful franchising organizations such as mcdonald's, burger king, fast track, merry-maids, kentucky fried chicken, hardee's, econolodge, and drusilla seafood restaurants. based on our 21 experience with these and other franchising companies in diverse industries, we have developed a model that integrates reward strategies with the stage of development within an organization's life cycle. in our opinion this model should be generally applicable to all franchise organizations. this paper underscores the need for both the franchisor and franchisee organizations to have different incentive systems for their employees at different stages of the organization life cycle. it is important to have good base salary structures and to provide both shortand long-term incentives valuable to employees at each of these stages. these incentives, when properly implemented, should motivate and retain a strong operating staff for both the headquarters organization as well as the franchisee store. because franchising is such a unique meth&xi of doing business, reward strategies should be carefully designed and developed before they are implemented. references i. axelrad, norman d. and lewis g. rudnick. franchising: a planning and sales compliance guide (chicago: the commerce clearing house, inc., 1987). 2. balkin, david b. and james w. logan. "reward policies that support entrepreneurship," journal of compensation and benefits review, 20 (1988), 18-25. 3. balkin, david b. and l.r. gomez-mejia. "entrepreneurial compensation," readings in personnel and human resource managemem, 3rd ed. eds. r.s. schuler and s.a. youngblood (st. paul, mn: west publishing co., 1988). 4. boe, kathryn l., william ginalski, and debanks m. henward, iii. the franchise option (washington, d.c.: international franchise association, 1987), 5-11. 5. boroian, donald and patrick j. boroian. the franchise advantage (schaumberg, il: national bestseller corp., 1987), 203-09. 6. chan, peng s. and robert t. justis. "franchise management in east asia," academy of management executive (may, 1990), 7585. 7. justis, robert t, and richard j. judd. franchising (cincinnati, oh: south-western publishing co., inc., 1989). 8. keating, william j. franchising advisor (new york: mcgrawhill book company, 1987), 1016. 9. kimberly, j.r. and r.h. miles. the organizational life cycle (san francisco: jossey-bass, 1980). 10. martin, robert e. "franchising and risk management," the american economic review, 78 (december, 1988), 954-68. 11. mathewson, g. frank and ralph a. winter. "the economies of franchise contracts," the journal of law and economies, 28 (october, 1985), 503-26. 22 12. mccranie, burgess e. "franchising," franchising world, (july/august, 1989). 13. miller, d. and p.h. friesen. "a longitudinal study of the corporate life cycle," management science, 30 (1984), 1161-83. 14. quinn, r.e. and k.s. camemn. "organizational life cycles and shifting criteria of effectiveness: some preliminary evidence," management science (1983), 33-51. 15. tarbutton, lloyd t. franchising: the hotv-to book (englewood cliffs, nj: prenticehall, inc., 1986), 5-11. 16. whetten, d.a. "organizational growth and decline processes," annual review of sociology, 13 (1987), 335-58. 23 summer journal small business e-commerce adoption through a qualitative lens: theory and observations evan h. offstein frostburg state university eofffstein@frostburg.edu j. stephen childers, jr. radford university jchilders2@radford.edu abstract using approaches consistent with the qualitative research tradition, the authors attempt to understand the motivation behind small business adoption and exploitation of e-commerce. a theoretically grounded model of e-commerce deployment by small businesses owners is presented, which can best be explained by two theoretical lines: an economic evolutionary perspective and a sociological institutional perspective. further, our findings suggest a tie between owner characteristics, dispositions, traits, and the level of e-commerce integration achieved. we contend that understanding the drivers of e-commerce adoption, policy makers and other help agencies can tailor programs to assist firms with integrating and exploiting ecommerce in a cost effective manner. introduction the united states has a vested interest in small business. according to the small business administration (2006), small businesses constitute 99.7 percent of all employer firms and employ roughly half of all non-farm private sector jobs. the report findings also indicate that small businesses generate more than 50 percent of the u.s. non-farm gross domestic product. in 2003, only employers of 500 or fewer employees experienced a positive net change in employment, creating close to 2 million new net jobs while, at the same time, firms with over 500 employees lost close to one million employees (small business administration, 2006). these findings suggest that the success and continued contributions of our nation’s small businesses are critical to the long-term viability of the u.s. economy. however, the context in which many small businesses form and grow is remarkably different than a mere decade ago. foremost among the challenges and opportunities facing small businesses owners is the rise and use of technology, and in particular, ecommerce. for various reasons, practitioner-oriented journals and outlets advocate the use of ecommerce for small businesses (lohr, 2006; nfib, 2005a; ossinger, 2006).the primary thrust behind many of these pro e-commerce arguments is the notion that small businesses are resource constrained and that ec o m m e r c e i s a r a t h e r i n e x p e n s i v e mechanism in which to improve operations and provide customer service. by using such mechanisms as on-line advertising, e-mail marketing campaigns, and back-office support programs, small businesses can vie for business and consumers previously available only to large corporations. further, a growing body of research indicates a shift in consumer behavior and business strategy where, through the use of e-commerce, “consumers locate, evaluate, and purchase a 32 strategyjournal of small business far wider variety of products than they can v i a t r a d i t i o n a l b r i c k a n d m o r t a r channels” (brynjolfsson, hu, and smith, 2006). this “long tail” phenomena, as first identified by anderson (2004), may allow small business owners to create virtual shelf spaces where they can offer more variety, choice, and value for customers world-wide (brynjolsson et al., 2006). said differently, ecommerce may allow small businesses to go from “niches to riches” (brynjolfsson et al., 2006) by reaching larger markets while minimizing their cost structure. in turn, these improvements may lead to higher growth and wealth creation (lohr, 2006). many small business owners are taking advantage of e-commerce resources. according to one sba report, 57 percent of small businesses used e-commerce in 2002 (pratt, 2002). other estimates indicate that 82 percent of small businesses will be online by 2011 (gandhi, 2006). however, being “online” does not necessarily mean that the small business owner is taking full advantage of the possible benefits of e-commerce. further, existing survey data suggests considerable variance regarding small business owner’s acceptance of technology and innovation. a 2005 poll conducted by the national federation of independent businesses found that 16 percent of those small business owners surveyed indicated that they try to avoid technology (nfib, 2005b). these survey findings suggest that researchers and policy makers must better understand the motivations and uses of ecommerce tools by our nation’s small business owners in order to successfully integrate e-commerce prescriptions. given the perceived importance of small business e-commerce use by owners, mixed survey data regarding its use, and a notorious lack of theory in small business research (zahra and dess, 2001), the purpose of this study is to begin building theory aimed at better understanding the phenomenon of small business e-commerce adoption and usage through the lens of the small business owner. indeed, the primary role of theory and theory building exercises is to help scholars and practitioners understand, explain, and predict a given phenomenon (pedhazur and schmelkin, 1991). in p a r t i c u l a r , t h e r e s e a r c h q u e s t i o n s investigated in this study are: (1) why do small business owners adopt an e-commerce strategy? (2) what explains why some small b u s i n e s s e s a r e m o r e e x p a n s i v e a n d comprehensive in e-commerce adoption and exploitation, and (3) in what ways does small business use e-commerce differ, and what factors explain these differences? since there is little empirical and theoretical work regarding the factors or variables that influence small businesses to pursue ecommerce strategies, the authors turned to the qualitative research tradition to provide a rich, contextual, and thick understanding of this phenomenon (eisenhardt, 1989). specifically, we analyze several sources of data via a constant comparative method to develop an initial grounded theoretical model describing and explaining why some small business owners actively cultivate ecommerce opportunities while other business owners resist. the findings of this research can be a starting point for researchers wishing to bring theory into entrepreneurship e-commerce literature (gephart, 2004; weick, 1995). also, since the success of small businesses is tied tightly with our progrowth and innovation-oriented economy, insight into this phenomenon should resonate with both basic and applied audiences. finally, the findings of our research could inform policymakers who aim to advance the success rate of small business ventures. methods i n d i v i d u a l s a t t a c h m e a n i n g t o t h e i r experiences which can be thought of as threads or textures of a blended fabric made up of the experiences of many (creswell, 1998). to get a feel for this “fabric,” the authors employed the qualitative research tradition, which many now understand as “making a substantial contribution to management theory and our field’s empirical knowledge” (lee, 2001, p. 215). the rationale for employing a qualitative research design is straightforward. first, qualitative research is appropriate when scholars wish to build theory, not test theory via hypotheses testing (creswell, 1998; seidman, 1998). given the scant theory volume 19, number 1 spring/summer 2008 33 development regarding small business ecommerce strategy, theory building as opposed to theory testing is in order. second, qualitative research is often preferred when the given phenomenon is rich, complex, and embedded amongst other social phenomena (strauss and corbin, 1990). the operations, functioning, and long-term strategy of small businesses seem to speak to these types of phenomena. in particular, a host of multi-disciplinary and anthropological forces, including affective, cognitive, social, and political forces (chell, haworth, and brearley, 1991; kalleberg and leicht, 1991; mitchell, busenitz, bird, et al., 2007; wiklund, davidsson, and delmar, 2006), affect small businesses. moreover, the issue of units of analysis in small business strategy presents a problem for traditional quantitative research since many phenomena appear to span individual, team, group, and organizational levels. some of the most esteemed social scientists recognize that these issues cause problems for quantitative research designs. for instance, cronbach (1975) noted that statistical research possesses severe limitations in its effort to take into account interaction effects and situations with multiple and higher order of abstract variables. cronbach (1975, p. 124) further stated that “the time has come to exorcise the null hypothesis” because it ignores effects that may be important but are not statistically significant.” in general, qualitative inquiry is more suited to handle and accept the complex, rich, and dynamic quality of the social world (cronbach, 1975). this sentiment also corresponds with other scholars who suggest that as advanced as quantitative research has become, there are still some social and organizational phenomena that quantitative measures cannot adequately describe or capture. third, qualitative research is the preferred mode of inquiry when the research objective is exploratory or where rich detail into a given phenomenon is sought (creswell, 1998; strauss and corbin, 1990). since both theoretical and empirical progress has been slow regarding the topic of small business ec o m m e r c e , e m p l o y i n g a q u a l i t a t i v e methodology was both necessary and c o m m o n s e n s i c a l . i n d e e d , l e a d i n g quantitative and qualitative researchers agree that qualitative research is particularly valuable early on in the development or maturation of a research stream where variables are first identified and later tested via a quantitative approach (creswell, 1998; merriam, 1998; strauss and corbin, 1990). consequently, the authors feel that there is a complimentary relationship between these two approaches and that employing them both simultaneously via a mixed methods design or in a sequential fashion may enhance the ultimate research objective of advancing knowledge and understanding of a g i v e n p h e n o m e n o n ( p e d h a z u r a n d schmelkin, 1991). finally, a practical rationale supports the use of a qualitative methodology. for small business research, it is difficult to overstate the potential contribution of qualitative research since small business owners generally resist releasing operational and financial information (brockhaus, 1994). while this study is one of a handful of qualitative research efforts aimed at small businesses, there is ample precedent to utilize qualitative research techniques to understand the small business population. for instance, chowdhury and lang (1996) used qualitative research to understand why and how small businesses decline. churchill and lewis comment that qualitative research is particularly appropriate for small business research where “the underlying concepts have not been adequately defined” (1986, p. 335). it is beyond the scope of this study to exhaustively detail the differences between quantitative and qualitative research methodologies. however, some topical discussion is necessary in order for researchers to interpret and evaluate the research and findings contained in this manuscript. the distinctions are neither comprehensive nor exhaustive, but serve to highlight the critical differences between these two approaches. at the most global of levels, quantitative and qualitative research differ according to the underlying research objective. qualitative research aims to gain a rich, deep, and detailed understanding of a given phenomena (creswell, 1998). the goal journal of small business strategy 34 is to generate ideas and theory for future evaluation. conversely, quantitative research aims to quantify data and generalize from a sample to a greater population (pedhazur and schmelkin, 1991). as such, the goal is theory testing through hypothesis testing – not theory development. assumed in the research objective are also some assumptions regarding how researchers arrive at knowledge. qualitative research is inductive, which extrapolates from observation to theory (creswell, 1998; strauss and corbin, 1990). in contrast, quantitative research is deductive, with theory arriving first and falsification attempts coming soon after (popper, 1959). in addition, each research tradition approaches the notion of “sample” differently. in qualitative research, small samples are accepted and encouraged under the assumption that a rich and deep understanding of the sample will ensue. exactly the opposite is true with quantitative research, where large samples that most resemble the population of interest are preferred. this is unlike qualitative researchers, who may purposely seek out samples that are un-representative through a technique termed “maximum variation sampling” (seidman, 1998). in regard to variables, qualitative research is recognized for investigating small samples with many variables. quantitative research prefers large samples that often have fewer variables recognized as independent, dependent, and control variables. moreover, the preferred research design to enhance inferences of internal validity and causation of quantitative research is the true experiment where subjects are assigned randomly and an independent variable is manipulated (pedhazur and schmelkin, 1991). it is also common for quantitative research to follow an established structure based on the scientific method. qualitative research abides by no such structure where no manipulation of independent variables occurs and is more emergent and interpretive than quantitative research. as it relates to data collection and data analysis, qualitative research is marked by unstructured or semistructured techniques, such as in-depth interviews (seidman, 1998). emphasis is placed on capturing the “whole” experience or phenomenon so as to try to recreate the context. it follows, then, that data analysis is non-statistical and interpretive. in contrast, quantitative researchers employ high structured techniques such as survey instruments, and little variance exists in the research design, as most quantitative research follows the scientific method. of course, data analysis is often statistical in nature with findings usually presented in the form of a correlation or regression coefficient. the two research traditions also differ markedly in how each approaches the role of the researcher. in qualitative research, the researcher is involved and actually becomes an instrument and/or participant in the research (lincoln and guba, 1985; seidman, 1998; strauss and corbin, 1990). that is why the presentation of qualitative research often involves both first and third person perspectives (creswell, 1998; m e r r i a m , 1 9 9 8 ; s e i d m a n , 1 9 9 8 ) . quantitative research expects that the researcher remain detached, and the goal is to remain as objective as possible (pedhazur and schmelkin, 1991). for all of these reasons, the outcomes associated with each type of research tradition tend to be unique. notably, qualitative research is more exploratory and investigative in nature. many argue that a meaningful outcome of qualitative research is to present a given phenomenon in such detail and richness that w o u l d b e a l m o s t u n a t t a i n a b l e b y a correlation coefficient (creswell, 1998; eisenhardt, 1989; lincoln and guba, 1985). quantitative research is more conclusive in its thrust. to better depict these key differences between these two major research traditions, a table is offered below that summarizes the above discussion and captures the sentiment of leading qualitative scholars (creswell, 1998; lincoln and guba, 1985; kennedy, 1979; merriam, 1998, mahoney, 1991; seidman, 1998, strauss and corbin, 1990). not all qualitative research is created equal, however, and the authors took careful precautions to maintain high levels of rigor in the design and execution of this study. to enhance the trustworthiness of our findings, we conducted in-depth interviews and examined physical artifacts, including existing websites (douglas, 1985; kvale, 1996; spradley, 1979). this data was then volume 19, number 1 spring/summer 2008 35 journal of small business strategy 36 table 1. tabular comparison of qualitative and quantitative research traditions* qualitative research tradition quantitative research tradition objective • gain an understanding of underlying reasons and motivations. • insights into the context and setting of a problem • generating ideas and hypotheses for future quantitative research • to more deeply and richly uncover prevalent trends in thought and opinion • detail as opposed to generalization • excels at telling a story • explore a topic broadly • illumination, understanding • generation of theory • quantify data and generalize results from a sample to the population of interest • generalization as opposed to detail • excels at summarizing large amounts of data and reaching generalizations based on statistical projections • explore more narrowly; answering narrow research questions • causal determination, prediction, and generalization • theory testing via hypotheses testing approach towards knowledge • inductive-building theory from observation • deductive and falsification- from theory looking for disconfirming observations. sample & setting • usually a small number of non-representative cases purposely selected • almost always natural setting (patton, 1990) • large number of cases representing the population of interest • randomly selected; could use a mix of settings to include natural and experimental settings variables • many; no manipulation; variance encouraged • few in the form of ivs, dvs, and cvs; manipulation of iv favored • standardization of variables preferred (lincoln &guba, 1985) data collection • unstructured or semistructured techniques such as in-depth interviews and observation • more freedom to pursue and explore emerging themes • emphasis on capturing context • collect different variables from the respondents. • highly structured techniques like survey instruments • little variance in the scientific method and falsification approach • collect same variable and measures from the sample * content of table was constructed by appealing to seminal works by several scholars to include creswell (1998), merriam (1998), seidman (1998), lincoln and guba (1995), and strauss and corbin (1990). for the more received logical positivist and quantitative approach we consulted pedhazur and schmelkin (1991). we invite our readers to consult any and all of these works for a more nuanced understanding of these research methodologies. a n a l y z e d a c c o r d i n g t o t h e c o n s t a n t comparative method, which is widely regarded as the most commonly used approach to organizing themes and concepts (creswell, 1998; holt and turner, 1970). not all qualitative research is created equal, however, and the authors took careful precautions to maintain high levels of rigor in the design and execution of this study. to enhance the trustworthiness of our findings, we conducted in-depth interviews and examined physical artifacts, including existing websites (douglas, 1985; kvale, 1996; spradley, 1979). this data was then a n a l y z e d a c c o r d i n g t o t h e c o n s t a n t comparative method, which is widely regarded as the most commonly used volume 19, number 1 spring/summer 2008 37 qualitative research tradition quantitative research tradition data analysis • non-statistical & interpretive • statistical; findings are conclusive and usually descriptive in nature data presentation • original language of the research participants • expressive description and language • correlation coefficient • factual language role of the researcher • involved; becomes instrument and/or participant of the research • detached and objective research flow • fluid, iterative, and interpretive • often cross-sectional in nature research judged or evaluated on… • credibility, trustworthiness, dependability • internal, external validity, reliability outcome • exploratory and/or investigative • findings are not conclusive and cannot be used to make generalizations about the population of interest • helps develop an initial understanding and sound base for further decision making • very deep understanding of phenomenon that would be difficult to obtain from a correlation coefficient • particularly valuable when the problem is multidisciplinary and anthropological in nature containing affective, cognitive, social, political forces • good for complex and sensitive issues • generates rich descriptions of the phenomena • used to recommend a final course of action • more conclusive in its thrust approach to organizing themes and concepts (creswell, 1998; holt and turner, 1970). participants we used in-depth interviews of six small business owners located in a semi-rural area of a large mid-atlantic state. all businesses were retail oriented. four of the small businesses could be described as offering tangible goods while two could be identified as retail service providers. of the six respondents, five were male, and one was female. all but one were the owners/ principals and original founders of the small business. in the lone exception, we interviewed the manager of the business, who was intimately involved in the strategic direction and day-to-day operations of the firm. all business models appeared to follow what could be best described as a focus differentiation strategy (porter, 1980). procedures research participants were recruited by a non-probabilistic sampling technique (merriam, 1998). while our sample was obtained largely through geographical convenience, some purposeful sampling (patton, 1990) was used to ensure a diversity of small business models and genders among s m a l l b u s i n e s s o w n e r s . h e n c e , a convenience/maximum variation criterion was used for final selection of participants. the maximum variation technique is particularly important when the purpose of the study is to build grounded theory (glaser and strauss, 1967). perhaps even more important, utilizing multiple participants tends to enhance the construct validity of the data obtained in qualitative research (beverland, 2001; merriam, 1995). small business owners tend to be reserved and reluctant when discussing operational, financial, or strategic aspects of their business. for these reasons, special care was taken to maintain appropriate levels of anonymity and confidentiality. pseudonyms were used and the authors carefully limited any information that could be used to identify the participants. protocols and procedures were reviewed and approved by an internal review board. to begin each interview session, the participant was given a verbal overview of the purpose of the study. the participant was then provided, allowed to read, and completed an informed consent form. the use of an informed consent form provides the participant a presentation of their rights during the interview process. the informed consent form can therefore be viewed as a step to insure the ethical treatment of the participant (seidman, 1998). data sources and collection each of the six small business contacts participated in a 30-90 minute semistructured interview. a copy of the interview protocol can be found in table 2. the protocol was reviewed and evaluated by colleagues and by an expert qualitative scholar who had logged more than 3,000 hours in the field. to help with verification of core themes, member checks were used throughout the process. all interviews were tape recorded and transcribed by the second author to ensure accurate interpretation of events. in addition, a memo log kept to maximize reflexivity was updated within 30 minutes of the interview with thoughts and inferences of that specific interview. this occurred before the formal transcription process was conducted. in total, six transcripts totaling about 100 pages resulted from these in-depth interviews. to increase the rigor of our methodology, we used full, as opposed to log, transcription. data analysis the authors’ objective with this research project is not to test theory, but to build theory. to achieve that goal, grounded theory techniques and methods, initially developed by glaser and strauss (1967), were utilized. in this method, data is acquired and coded as part of the analysis process (strauss and corbin, 1990). a constant comparative method was used as the dominant analytic approach during coding, as the authors constantly checked and referenced against existing literature (glaser and strauss, 1967). this method leads to improved internal validity (eisenhardt, 1989). the data analysis phase of building grounded theory starts with open coding. during this process, codes were extracted from the participants’ own language and were defined and refined across all transcribed interviews. in essence, journal of small business strategy 38 this step is used to identify, name, and file events, feelings, and descriptors provided by the participants. after identifying and defining such codes, they were methodically compared and contrasted, resulting in a listing of categories. the researchers then used axial coding, which involved building l i n k s b e t w e e n c a t e g o r i e s a n d t h e i r subcategories with the goal of identifying causal relationships. finally, through what is termed “selective coding,” a story emerges and a theoretical framework is constructed from the data. in this process, the authors identified “core” categories from which other categories and sub-themes seemed to relate (creswell, 1998). model saturation was reached when no new codes or categories could be identified from the data. creswell (1998) and mahoney (1991) encourage qualitative researchers to actively anticipate and respond to human cognitive bias—particularly that of the researcher who acts as the instrument of the study. in this regard, the first author was not involved in the direct interview process with the participants. instead, the first author was brought on to code the interview data in a more objective and analytical manner. discussions regarding bias were often intense and rich. interestingly, this author is also a small business owner and is only six volume 19, number 1 spring/summer 2008 39 table 2. interview protocol interview # (owner name)business name date strategy type: porter generic dominant product type: market: 1. describe your business to me. (includes how long have you been in business; number of employees; any other descriptions you might add) 2. how would you describe your average customer for each of the various product lines you sell? (demographics) 3. would you describe your customers as frequent or sporadic purchasers of your products? 4. what “value” do you attempt to provide for your customers? (e.g. quality, assortment; convenience; reputation) 5. when i use the term e-commerce, what does that mean to you? 6. how, if at all, has e-commerce changed your industry? why or why not? will it eventually change your industry? 7. how has the internet specifically changed your business in terms of sales; customer types; customer wants or demands; supplier relations (relations or number used); product attributes (price, quality, scope). 8. in what ways, if any, do you use the internet for your business? 9. if you do currently use the internet, describe to me any ways you have of determining whether your use is effective (accomplishing the goals that you set forth for the project). 10. how, if any, have you attempted to use the internet in any way that you feel was a failure?…a success? 11. please describe to me any future plans you have to use the internet as a business tool and why? 12. overall, do you think the internet will be a good thing or bad thing for your business? your industry? 13. is there anything you would like to tell me that i have not asked you? months into the launch of a retail business in a different mid-atlantic state with a similar rural area. we feel this unique perspective helped to interpret the rich meanings behind many of the small business owners’ words. it is important to note that the results of this analysis are bound to the particular investigators, participants, and context of this study. as is common in qualitative studies, the particular nature of the data tends to affect the external validity of the findings. accordingly, one should apply caution before applying these findings to small business owners in other settings. it is our intention to provide the reader with a rich description of the data in order for readers to make their own generalizations (kennedy, 1979). the participants in this study included joan, the owner of a small mid-to-upscale women’s clothier which has been in business for almost 30 years; bob, an owner and vice president of a retail travel agency that had been in business for over 25 years; matt, the owner of a custom framing shop that also offers civil war antique-type sales; ridge, the owner of an outdoor equipment dealership focusing on sales, parts, and service that had been open for five years; brandon, a manager of a specialty music and video store that had been in business for fifteen years in another town before opening up an additional location where the interview was conducted (this newer store had been in operation for five years); and pop, an owner of a small scale retail hardware firm that had been in operation for 20 years. participant demographics and other attributes are presented in table 3. interpretation of findings the categories identified in open coding were processed through axial coding and revealed a central phenomenon behind the relationship behind small business and ecommerce technology. the theoretical model is depicted in figure 1. notice the two-step model. in our analysis, all small businesses embraced the use of ecommerce technology. however, as the model depicts, the level of this relationship differs. specifically, we found that two of our participants were on the low end of the scale, meaning that they chose only to adopt journal of small business strategy 40 figure 1. investment and commitment to e-commerce strategies volume 19, number 1 spring/summer 2008 41 ta bl e 3. p ar ti ci pa nt o ve rv ie w “j oa n” “b ob ” “m at t” “r id ge ” “b ra nd on ” “p op ” r et ai l s ec to r r et ai l c lo th in g tr av el a ge nc y c us to m f ra m in g/ a rt o ut do or e qu ip m en t m us ic a nd v id eo h ar dw ar e sa le s an d e qu ip m en t r en ta l pr od uc t/s er vi ce u ni qu en es s h et er og en eo us h om og en eo us h om og en ou s & h et er og en eo us h om og en ou s & h et er og en eo us h om og en ou s h om og en ou s c us to m er u sa ge sp ec ia lty sh op pi ng sp ec ia lty / sh op pi ng im pu ls e/ s ho pp in g c on ve ni en ce / sh op pi ng c lie nt el e u pp er in co m e w om en p ro fe ss io na ls u pp er in co m e w om en m en w el l e du ca te d u pp er in co m e ho m eo w ne rs c om m er ci al a du lts u nd er 4 0 c on tra ct or s h om eo w ne rs r en te rs se lfr ep or te d v al ue p ro po si tio n “g oo d se le ct io n, go od q ua lit y, g oo d va lu e” fl ex ib le in m ee tin g cu st om er n ee ds ; se cu rit y “f ee l g oo d ab ou t m on ey s pe nt ” su pp or t, se rv ic e, a nd hi gh q ua lit y pr od uc t e m pl oy ee kn ow le dg e, se le ct io n q ua lit y, a ss or tm en t, co nv en ie nc e, a nd kn ow le dg ea bl e st af f in te rn et u sa ge m in im um : in fo rm at io n on su pp lie r b oa rd s e xt en si ve : r es ea rc h an d bo ok in gs l ow : e b ay s al es o f sp ec ia lty p ro du ct s e xt en si ve : sa le s, re se ar ch , or de rin g e xt en si ve : r es ea rc h, or de rin g, c us to m er co m m un ic at io n l ow : so m e sa le s an d in fo rm at io n fr om su pp lie rs d is po si tio n to in te rn et “d oe s no t e ff ec t m y bu si ne ss ” “t ou gh c om pe tit or … al lo w s m e to a dd va lu e” “p ro ba bl y a go od th in g” “i t’s c ha ng in g ou r in du st ry … ch an gi ng ev er yt hi ng ” “a d ou bl eed ge d sw or d” l ow : so m e sa le s an d in fo rm at io n fr om su pp lie rs b us in es s a ge 30 y ea rs 25 y ea rs 15 y ea rs 5 y ea rs 15 y ea rs 20 y ea rs r es po nd en t a ge m id 5 0s e ar ly 5 0s m id 5 0s e ar ly 3 0s l at e 20 s e ar ly 5 0s g en de r fe m al e m al e m al e m al e m al e m al e e-commerce. adoption is the first step of the model and is where all participants begin. for instance, joan’s adoption of e-commerce was extremely limited and barely able to meet the adoption parameters in our model. joan remarked: i don’t like it and i tried it before and i didn’t like it then and i don’t like it now. i suppose some of our customers do go to the internet to find out about a business, or find out where it is. some of the cosmetics we sell, people will go to the internet to find out where they can buy certain things. and then they call us because we sell it. viewing a business on the low end of adoption, we observe several characteristics a s s o c i a t e d w i t h e c o m m e r c e u s e . specifically, the internet is used here only to relay information. in joan’s case, she did not have her own website, but had her contact information on some of her suppliers’ and vendors’ website. interestingly, information dissemination in a one-way manner seems to be the dominant theme at this stage. it is important to note, however, that all six small business owners began at this stage. the intriguing element of this phenomenon, instead, is why some remain at this low adoption stage, while others advance to a high level of e-commerce use, which we term the exploitation stage. however, before we can examine the phenomenon of advancement to the high stage, it is necessary to better appreciate why these six small businesses chose to adopt, while many small businesses still opt to not engage in ecommerce at all. this was one of our core findings as we found that in each case, adoption was predicated on institutional pressure. brandon reflects this institutional pressure along with his music and video store’s slow and almost forced entry into ecommerce: i think that record stores are possibly the one thing that the internet can kill. i don’t mean that in a morbid type way…that i’m going to lose my job because of the internet. i just think that it’s a different way that record stores are going to have to adapt into a different means of doing things. but there is also napster burning huge, huge…i wouldn’t say taking food from my mouth or anything, but would say that it does change the way things operate. it is essentially like when people started taping songs off the radio, only it is in a much bigger way. brandon’s statement reflects one of our core findings prevalent in each and every case. namely, institutional theory is the dominant logic in understanding why the small businesses that we sampled chose to adopt ecommerce. for these reasons, it is necessary to revisit the core premise of institutional theory along with several core assumptions that accompany this theoretical perspective. institutional theory predicts that firms engage in actions, build structures, and engage in processes similar to another firm’s in an effort to achieve legitimacy (meyer and rowan, 1977). without this legitimacy, it is difficult for firms to survive, let alone pursue strategies for competitive advantage (dacin, 1997). for these reasons, institutional theory predicts mimicry type behaviors that result in s t r u c t u r e a n d p r o c e s s s i m i l a r i t y , isomorphism, between firms (meyer and rowan, 1977). matt’s explanation to adopt some limited e-commerce strategies in support of his civil war collectible business seem predicated on this institutional rationale: but as far as civil war, ebay has single handedly changed the entire scope of civil war collecting, buying, selling and shows. i bet you 25 percent of the dealers that used to go to shows no longer go to shows. they say they can make more money and spend less time putting things on ebay. why incur the work and expense of going to a show when they can sit at home and sell just as much? we see here that matt’s decision to adopt is not so much premeditated as it is following, mimicking, or copying the e-bay business model. for him, survival was a critical journal of small business strategy 42 component of his decision to adopt, since “everyone else seemed to be doing it.” another hallmark of institutional theory is what dimaggio and powell (1983) refer to a s c o e rc i v e i s o m o r p h i s m . c o e r c i v e isomorphism suggests that firms do not copy or mimic voluntarily, but are forced into adopting a structure or process by a stronger force such as government or a legal entity. interestingly, we found evidence of this coercive isomorphism in several instances. brandon was the first to suggest that his suppliers strong-armed him into adopting ecommerce technology: they like that [when i use the internet]. i think we get some sort of [price] break when we do it that way. i think they [his suppliers] are trying to open that up because i think it is just easier for them. i think we used to fax our order in. central to institutional theory is an assumption that a firm compares itself against other firms to assess its own legitimacy. we witnessed some of these comparative processes. pop, the hardware store owner, remarked candidly: well everybody got a web page. i’ve looked at some; i just wanted to see how mine compares to theirs. it’s no different to me than signage on the street, you know, as to who looks good, who’s getting the message across, that type of thing. thus, institutional pressures of conformity, which sometimes seemed coerced or forced, e x p l a i n e d w h y a l l s m a l l b u s i n e s s e s interviewed in this research project chose to adopt e-commerce. however, institutional pressures could not explain why half of our small business participants moved beyond the adoption stage to what we term exploitation. exploitation of e-commerce advanced beyond just informational flow between business and consumer. in the cases of high exploitation, we saw a full-fledged ecommerce strategy that deeply integrated ecommerce into basic and fundamental operations: both upstream and downstream processes with consumer and vendor. of the six small business participants, ridge appeared to meaningfully advance beyond the adoption stage and served as an example of what the exploitation stage may look like: we use the internet to do business with the majority of our large suppliers and we actually make decisions regarding whom to buy from based on access to electronic data interchange. i can get online and i need to be able to check stock level…that’s our other competitive advantage because we are selling the same briggs & stratton engine that you can buy at 25,000 other locations. the only reason that you are buying it from me is going to be price, some other value level of service, or guaranteed information such as that engine is in [the warehouse] right now and i can ship it to you and it will be there in 3 days and here’s the tracking number and here is this, this, and this. that’s where the technology comes into play. if we are buying from a vendor whom i can’t confirm stock levels without making a phone call and talking to two people who actually have to go in a warehouse and look, that slows us down to the point that it’s not efficient. that engine, we take the order whether it comes local or from japan. while i had the customer online or on the phone--but back to this, when i was on the phone with this guy in japan, we were talking about the engine, he wanted to know when he could get it and i was simultaneously online checking stock levels in [the warehouse] and then we just could either drop ship it from [the warehouse] or have it come here. u n l i k e i n s t i t u t i o n a l t h e o r y, w h i c h emphasized the core theme of survival, during the axial coding process we detected another theoretical perspective at work that appeared more robust in explaining why some small businesses, like ridge, made the transition to exploitation while others remained in the survival or adoption stage. captured in this more competitive vantage of e c o m m e r c e u s e w a s t h e n o t i o n o f evolutionary economics. volume 19, number 1 spring/summer 2008 43 evolutionary economics is rooted in natural science studies, in general, and biological competition, in particular (nelson and winter, 1982). the essence of evolutionary economics is that firms become more competitive by evolving through a series of incremental innovations. built upon prior knowledge and capability foundations, firm evolution is thought to consist of the altering of an organizational process or routine in response to some external or environmental challenge (nelson and winter, 1982). sometimes perceived as a threat, this environmental stimulus sparks the firm to respond in a manner that makes it more competitively viable. the factors that allow some firms to evolve into the exploitation stage highlighted in this study appear to be some of the same factors that allow larger firms to evolve and compete in other settings. for instance, scholars contend that firms that utilize component technologies (amit and schoemaker, 1993) create dynamic capabilities (teece, pisano, and s h u e n , 1 9 9 7 ) , l e v e r a g e c o m b i n a t i v e capabilities (kogut and zander, 1992), or fine tune internal managerial systems (leonard-barton, 1992) can evolve and compete better than those firms lack these skills or abilities. we found compelling evidence during our constant comparative method and axial coding process that these forces are at work in the small retail businesses that moved beyond the adoption stage to exploitation. the best example of this was bob, who experienced the environmental threat of direct-to-consumer internet use within the travel industry. a retail travel services provider, bob faced threats from his competition from such w e b s i t e s a s e x p e d i a . c o m a n d tr a v e l o c i t y. c o m . b o b f u r t h e r f a c e d disintermediation threats from airline w e b s i t e s s u c h a s s o u t h w e s t . c o m o r u s a i r w a y s . c o m . i r o n i c a l l y , b o b incrementally, but substantially, enhanced his use of the internet to combat the very threat of the internet. with the internet, i don’t think that you can stand still. i think you have to move ahead. i’m not always a great visionary when it comes to these things so i don’t necessarily see what the next step is but usually somewhere along the line you get jolted into the next step whether you want to or not so i would say the answer to that is yes. i’m just not sure what it’s going to be [long pause]. e-commerce is a very tough competitor, you know. if you had somebody who is willing to sit down and quarrel with material for hours to find something particularly the pleasure traveler as opposed to the business traveler. i wouldn’t be surprised that many times they are going to find rates as low if not lower than what we are reflecting here. but it takes a fairly sophisticated user of the internet, i think, to pull this information out. to that end, i think they [bob’s on-line competitors] have probably had some success with people who are able to just pick up and go that quickly. but the majority of people aren’t able to do that. there is, yes, there is much more information available to us[with emphasis]. and i should say immediately available to us. we’ll get a call and they’ll say what are the latest government directives on travel to here to lebanon or to the philippines or what have you and we can immediately go in [pause]; the government has a website, and all that information is right there and you can pull it up immediately and you can print it out send it along with the ticket. constant updates on visas, passports. we’re able to pull up rail schedules all around the world that used to not be readily available. so yes there is a ton of information. but you can actually garner a great deal of information about restaurants and hotels in many places. yes, there is a lot of information that we can provide that was not readily available before [and we know where to look]. ridge’s comment about the internet and his power tool business speak to the continual, b u t i n c r e m e n t a l , t h e m e s f o u n d i n e v o l u t i o n a r y e c o n o m i c s . n o t i c e t h e reference to “big box” competitors: if you don’t embrace that [the internet], you kind of get pushed aside because the customers are going journal of small business strategy 44 to constantly go to somebody they think is bigger or more knowledgeable because this big box mentality… our core findings indicate that small businesses follow a two stage model regarding e-commerce adoption and then exploitation. initially, mimicry and external pressures drove all of our participants to the adoption stage, and thus institutional theory is well equipped to explain and predict behavior. some owners remained stagnant and content in the adoption stage. across all of our participants, we found language that reinforced this notion of survival. however, those small business participants who e x p l o i t e d e c o m m e r c e s e e m e d m o r e interested in beating their competition and earning a competitive advantage than just survival. here, we found evolutionary theory could be used as a better tool to help explain the behavior of these small business owners, as they appear to be guided by economic pressures, as opposed to institutional pressures. conclusions qualitative research, unlike quantitative research, tends to involve a few cases with many variables as opposed to large sample sizes with a limited number of variables. the benefit from this qualitative approach and accounting of multiple variables is a deep, contextual, and rich understanding of the phenomenon (cresswell, 1998). as we examined the transcribed data in our axial coding process, we noted some causal conditions that helped explain the presence o f i n s t i t u t i o n a l v e r s u s e v o l u t i o n a r y economic forces. mainly, we found that the characteristics, dispositions, and traits of the business owner seem to predict whether the s m a l l b u s i n e s s s t o p p e d a t a d o p t i o n (institutional pressures only) or advanced to e x p l o i t a t i o n ( e v o l u t i o n a r y e c o n o m i c pressures). to begin with, we found that the business owner’s goals influenced adoption or exploitation. joan remarked that her use of the internet did not “make much difference” because she is in business because “it’s fun; it’s really good.” joan’s perspective of small business ownership and operation, like o t h e r s i n t h e l o w i n v e s t m e n t a n d commitment stage, or adoption stage, is that of having fun and/or pursuing the business predominantly as a hobby. in contrast to joan is bob, who sees e-commerce as a way to shave costs and to increase efficiency by “saving time.” similarly, we found indicators that the participants who adopted a pro-growth mentality tended to embrace exploitation more so than those in the adoption ecommerce stage. joan remarked that there was no need to fully exploit the internet because, “when i go or die, i’m not going to retire, but you know when somebody takes it over, if, when i’m gone, it might change completely.” when compared against ridge’s statement, we see a pro-growth o r i e n t a t i o n t h a t l e n d s i t s e l f t o t h e exploitation e-commerce stance. ridge says: yes, right now, this year, our sales mix is about [long pause] out of a million in annual sales we have about 150k originated through the internet. about 15 percent. and that number went from 0 in 1997 to quickly went to 5, 10, then 15 percent and we have been holding steady at 15 percent. these two comments reflect differing dispositions towards growth. clearly, joan is content with a status-quo orientation towards her business. conversely, ridge leans toward a more aggressive and growth orientation for his firm, a position that could aid him in “long tail” markets. this, in part, appears to explain joan’s position towards e-commerce as adoption only, while ridge has launched an exploitation e-commerce strategy. another notable difference between small business participants that appeared to explain the variance in e-commerce strategy was the participant’s risk orientation. those with risk-aversion seem content with an adoption only strategy. those with a risk-seeking disposition tend to embrace an exploitation strategy and seek out ways to deploy ecommerce more fully. interestingly, this finding appears to lend credence to shane and venkataraman’s (2000) entrepreneurial characteristic framework, which asserts that volume 19, number 1 spring/summer 2008 45 more entrepreneurially minded individuals are capable of seeing how tools can be used for an end goal, in this case the use of ecommerce to achieve business objectives. when asked about taking the risk and moving towards e-commerce, matt indicated that he did not like technology and taking that type of risk is “just not us.” matt’s framing and civil war business had only advanced marginally past the adoption stage by conducting a low volume of e-bay auctions. bob’s sentiment, however, is markedly different. when this topic arises, he argues passionately: i think overall it’s a positive…can be used as a positive force. i think that that really depends on the attitude of the merchant. you can sit there and cry about the internet supposedly stealing all your business but there are ways for you to participate and if you are willing to participate it can be a very positive thing. if all you are going to do is whine about it, then yes the internet is going to do you in. hence, from our limited sample we found a correlation between attitudes towards risk and whether the small business stopped with institutional pressures (adoption) or felt the urge to respond to evolutionary economic forces (exploitation). not surprisingly, we found a link between self-efficacy and our sample’s receptivity towards employing e-commerce (bandura, 1997). those with high self-efficacy, which is analogous to self-confidence in a person’s ability and skill-set to perform a task, were much more likely to pursue an exploitation strategy. in contrast, those with low selfefficacy towards technology, in general, and e-commerce, in particular, were more likely t o s t o p w i t h a n a d o p t i o n s t r a t e g y. interestingly, those with lower self-efficacy towards e-commerce appeared equally reluctant to hire or out-source e-commerce operations/strategy to a third party. matt aligns himself in the adoption only camp when he indicates: number one, i’m 55 and i’m not going to change. the younger kids have a lot of computerization in their shops. computerized mat cutters, computerized point of sale… more and more suppliers have websites. many of them allow you to order online. i do not do it. i call on the phone or my wife calls on the phone because we like that immediate feedback. i like to talk to somebody. i like to have somebody say, “sorry that’s out of stock” and then we have to make an intelligent choice. things that i don’t put on the net because i don’t have the capability or don’t have the knowledge to put images on the net. i don’t really want to do that. i don’t want to sit down and work at the computer. consistent with institutional prescriptions, we saw that many of our small business participants who chose and then remained with an adoption-only strategy displayed a follower or second mover mentality towards e-commerce. in contrast, those small business participants who we rated as high on the exploitation strategy demonstrated both a pioneering and market leader orientation. ridge illustrates this leader mentality and his rationale for moving towards a complete integration of ecommerce or exploitation strategy when he notes that he tries to give “the small company feel” while also providing the “appearance of being larger than we really are just for people to feel comfortable” because “people just like to do business with branded companies.” pop appeared to understand that while many large hardware and home improvement firms were using ecommerce, “we don’t put enough emphasis on it to carry it further.” he says before he decides to invest more in e-commerce usage, “someone would have to give me figures of what competitors are doing and how successful they are.” finally, we found exploiters adopted a fairly rational, detached, almost scientific approach towards improving their e-commerce strategy, falling in line with evolutionary economic theory. this trial and error viewpoint is best illustrated through a dialogue with bob who moved away from internet coupons: journal of small business strategy 46 at one time we were offering coupons: for instance with the student body, particularly in april and may, we start getting requests for euro-rail passes. they are going to go over to europe and travel around for a couple of months and then decide they want to use the euro-rail pass and we used to put coupons on the internet that they could run off for $10 savings on a euro-rail pass. it didn’t stimulate any business. i think in the 2 years that we did it i took in two coupons. we still sold a lot of euro-rail passes. it was not very effective. and it may have been our fault in that we didn’t market it as well over the internet as we probably could have. matt is considerably less reflective when we asked him about data supporting or discounting framing services on the internet. in a response bordering on dismissive, he said, “people just don’t do that on the net.” his sociological, as opposed to more rational or researched view, is more indicative of institutional rather than evolutionary economic prescriptions. in conclusion, our core findings indicate that institutional pressures encouraged all of our participants to, at the very least, adopt ecommerce. however, those that moved beyond adoption to exploitation identified and responded to evolutionary economic pressures. the characteristics of these small business participants were remarkably distinctive when compared to those who remained in the adoption-only stage. in general, those that moved to a more integrated and comprehensive strategy demonstrated characteristics and dispositions best described as leaders that were rational but risk-seeking, growth oriented with rather high self-efficacy towards e-commerce. conversely, those that remained in the adoption-only stage appeared to be more sociological as opposed to rational, more risk averse, more hobby oriented than growth oriented, and indicated lower self-efficacy towards e-commerce tasks and strategy implementation. discussion and implications shane and venkataraman (2000) call for entrepreneurial studies that identify the “sources of opportunities; the processes of discovery, evaluation, and exploitation of opportunities; and the sets of individuals who discover, evaluate, and exploit them” (218). following this directive, the findings from this study indicate that not all small businesses approach e-commerce with like goals or motives. behind these choices are institutional and evolutionary economic pressures. we found that the theoretical perspective best suited to explaining owner actions was largely predicated on the business participant’s characteristics, traits, and dispositions. possibly the best illustration of the importance and magnitude of this topic can be gleaned by studying the current agenda and expenditures of the small business administration towards technology and small businesses. given the small sample size and already noted issues pertaining to generalizability and external validity, the authors believe some policy dialogue is timely and necessary. we provide evidence that while many small businesses, even in rural areas, may wish to embrace ec o m m e r c e , p o l i c y e x p e c t a t i o n s a n d expenditures should account for differing levels of technology adoption and use. while many small businesses may be content with only informational advantages associated with e-commerce, others may wish for a fuller integration of e-commerce technology within their business model. this distinction is important since finite resources from governmental and support agencies such as the sba can be spent in a more responsible manner if these agencies know what position the small businesses gravitated toward. for instance, it would be wasteful and inefficient to spend full integration dollars towards a small business that only wishes to pursue adopt-only. however, providing adopt-only assistance to small businesses that wish to gain exploitative capability and compete in long tailed markets may actually retard the growth of this small business. a more nuanced implication is the role that education and training can play in shaping a volume 19, number 1 spring/summer 2008 47 business owner’s decision to adopt or exploit. if self-efficacy and self-confidence are important contributing variables toward exploitation as this study suggests, then government and support agencies may wish to devote some resources towards education and training, which can improve a person’s self-efficacy (bandura, 1977). this notion is particularly important since the assumption behind much of the current policy discourse is that infrastructure and high-speed access are the critical variables that explain why small, rural businesses do not engage in ecommerce (johnson, 2001; kroepsch, 2008; pociask, 2005). while this assumption cannot be dismissed, our study suggests that just providing the infrastructure alone is not enough to drive small business owners towards e-commerce. other factors such as leader versus follower mentality, orientation towards risk and growth, and personal selfefficacy all impact a small businesses chances of adopting and exploiting ecommerce. in conclusion, policy design and discourse should move beyond just the presence or lack thereof of technology infrastructure to include other variables as well. future research may wish to build on this study by continuing with the qualitative research tradition but investigate other types of businesses such as industrial services and sales. also, researchers may wish to examine the influence of type of product and/or service and the ease in which it lends itself to e-commerce. it is important to note that with our six participants, our 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(2006). what do they think and feel about growth? an expectancy-value approach to small business managers’ attitudes toward growth. in: p. davidsson, f. delmar, and j. wiklund (eds), entrepreneurship and the growth of firms. northampton, ma: elgar. zahra, s., & g.g. dess (2001). entrepreneurship as a field of research: encouraging dialogue and debate. academy of management review, 26(1): 8–10. j. stephen childers, jr. is an assistant professor of management at radford university. his research interests are in small business strategy. evan h. offstein is an assistant professor o f m a n a g e m e n t a t f r o s t b u r g s t a t e university. his research interests are in leadership, human resources, and small business strategy. journal of small business strategy 50 http://www.nfib.com/object/io_22663?templateid=315 http://www.nfib.com/object/io_22663?templateid=315 http://www.nfib.com/object/io_22663?templateid=315 http://www.nfib.com/object/io_22663?templateid=315 http://www.nfib.com/object/sbpolls http://www.nfib.com/object/sbpolls http://www.nfib.com/object/sbpolls http://www.nfib.com/object/sbpolls http://www.sba.gov/advo/research/rs269tot.pdf http://www.sba.gov/advo/research/rs269tot.pdf http://www.sba.gov/advo/research/rs269tot.pdf http://www.sba.gov/advo/research/rs269tot.pdf http://www.sba.gov/advo/research/rs220tot.pdf http://www.sba.gov/advo/research/rs220tot.pdf http://www.sba.gov/advo/research/rs220tot.pdf http://www.sba.gov/advo/research/rs220tot.pdf http://www.sba.gov/advo/research/rs220tot.pdf http://www.sba.gov/advo/research/rs220tot.pdf http://www.sba.gov/advo/stats/sbfaq.pdf http://www.sba.gov/advo/stats/sbfaq.pdf http://www.sba.gov/advo/stats/sbfaq.pdf http://www.sba.gov/advo/stats/sbfaq.pdf reproduced with permission of the copyright owner. further reproduction prohibited without permission. http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2021, vol. 31, no. 01, 81-88 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2021 small business institute® w w w. j s b s . o rg introduction 1universidad del pacífico (lima, perú), jr. gral. luis sánchez cerro 2141, jesús maría, lima perú, fuchs_rm@up.edu.pe 2esan university, alonso de molina 1652, monterrico, surco, lima perú, omorales@esan.edu.pe 3esan university, alonso de molina 1652, monterrico, surco, lima perú, jtimana@esan.edu.pe how to retain generation y employees? work-life balance, job embeddedness, generation y apa citation information: fuchs, r. m., morales, o., & timana, j. (2021). how to retain generation y employees? journal of small business strategy, 31(1), 81-88. retaining talent is a business priority because of the benefits it presents for the organization (yanadori & kato, 2009). these include maintaining the knowledge that workers possess and reducing the costs associated with recruiting, selecting and training new employees (holtom et al., 2008). according to allen et al. (2010), the costs frequently exceed the annual salary of the positions to be hired. the problem of staff retention seems to be especially important at the present time, given that the young people of the so-called generation y are increasingly the protagonists of the labor market. in fact, the consulting sector has initiated studies on generation y by detecting that companies need to take effective and rapid measures around it. a worrying fact for business reality is that this generation is attributed little commitment and little interest in job stability (manpower, 2009). ipsos peru conducted a study and found out that 72% of young people who had worked less than six months in their current job would change it if they were offered a better job (torre, 2014). likewise, phutura executive consultancy carried out a study in lima, in which 355 executives of the generation y participated, and they found that 25% of the respondents changed employment three times in the last four years (“el reto de retener a los millennials”, 2017). given the aforementioned information, it is found that avoiding voluntary turnover of young professionals is a current concern for human resources managers. researching turnover by analyzing new proposals is a consequence of the need to understand how to prevent employees from quitting. thus, in the study of the antecedents of turnover, a concept called job embeddedness (mitchell et al., 2001) has emerged. it focuses on the reasons why workers remain in the company. job embeddedness studied in young professionals is a significant contribution to the need of retaining them. in fact, lack of loyalty to the organizations in which they work is attributed as characteristic of the generation y (deal et al., 2010). it has been found that job embeddedness can explain the intention of leaving the company better than job satisfacthis study aims to understand the relationship that work-life balance and the perception of organizational support to work-life balance have with job embeddedness (construct that measures the reasons to remain in the organization) in the case of professionals belonging to generation y. a quantitative cross-sectional study was developed using instruments adapted from the literature. the sample consists of 211 members of generation y with three or more years of work experience. the results of the analysis show that there is a positive relationship between work-life balance and job embeddedness in the sample of members of generation y. the study is relevant for both academic and professional aspects. the literature reviewed did not present a consensus on work-life balance and its relationship with job embeddedness; therefore the results help to understand this relationship. likewise, this study focuses on work-life balance independently and not as the absence of conflict. in addition, in response to the demand from literature, young people from generation y have work experience in the sample. considering work-life balance as a relevant factor generates the creation of organizational retention policies. rosa maría fuchs1, oswaldo morales2, juan timana3 http://www.smallbusinessinstitute.biz http://www.jsbs.org 82 r. m. fuchs, o. morales, & j. timana journal of small business strategy / vol. 31, no. 1 (2021) / 81-88 tion and organizational commitment (clinton et al., 2012). several studies have been carried out on job embeddedness and its capacity in predicting intention to leave, finding that it is a good predictor (dechawatanapaisal, 2018; hussain & deery, 2018; sender et al., 2018). its proposal is relatively new, and the study of its possible antecedents is demanded (allen & rhoades, 2013; karatepe, 2013b; yang et al., 2011). this paper aims to meet such demand. although multiple studies show work-life balance and its effect on work behaviors, little is known about its effect on young professionals’ intention to remain in the company and on the relevance they grant this balance (casper et al., 2007; lewis et al., 2007; sturges, 2008; sturges & guest, 2004). that is why it is proposed to study work-life balance as a precedent for job embeddedness in the case of young professionals. in academic research, little has been studied on generation y about the effect of work-life balance in the intention of remaining in their company. on the other hand, in the research carried out by consulting companies, the valuation that young people give to work-life balance is mentioned frequently. in peru, a market study reveals that 65% of young people under 30 value work-life balance (whalecom, 2013). it is no coincidence that the generation of young people born since 1982 consider it vitally important that their employer offers work-life balance. stereotypes are mentioned but the characteristics of this generation have not been verified (cennamo & gardner, 2008; hershatter & epstein, 2010; kowske et al., 2010; myers & sadaghiani, 2010; twenge, 2010). bambacas and kullik (2013) suggest that research should explore how flexibility practices affect job embeddedness. some of the characteristics attributed to generation y in the work environment are preferring flexible working hours, focusing on building skills and competencies, seeking immediate feedback on work and using technology for communication (tennakoon & senarathne, 2020). also, kossek et al. (2011a) suggest that work-life balance in the latin american reality needs to be studied since most studies have focused on the american, european or asian reality. the gaps show that it is necessary to study young professionals in their work environment to know them properly and avoid establishing organizational policies based on stereotypes. the study of generations at work is desirable because there are authors like hajdu & sik (2015) who argue that there is no difference between the work values of the generations and rather that there are similarities among them. turnover intention of young people demands more research, and job embeddedness provides a way of understanding it. investigating the antecedents of job embeddedness is also demanded in the literature, as well as understanding young people’s behavior about turnover. based on the information above, the objective of this study is to understand the relationship that work-life balance and the perception of the organizational support to the work-life balance have with job embeddedness in the case of young professionals. for this purpose, a quantitative cross-sectional study was developed, using instruments adapted from the literature. the sample consists of 211 members of generation y with three or more years of work experience. self-administered questionnaires were applied online. the structure of the paper presents the theoretical framework of work-life balance, perception of organizational support for work-life balance and job embeddedness. following this, the hypotheses, the methodology, the analysis of the results, the discussion and the conclusions are presented in detail. theoretical framework work-life balance originally, the work-life relationship was studied as the work-family relationship. the term work-life balance is currently used (fleetwood, 2007; lewis et al., 2007) but was derived from the terms work-family conflict and work-family interference. work means formal and paid employment, and life means everything that is done outside the workplace (chang et al., 2010). when using the term life instead of family, it is emphasized that every individual has the need to be supported to develop a life beyond work (kossek et al., 2010). fleetwood (2007) and lewis et al. (2007) mention that the change in terminology occurred in the late 1990s. according to chang et al. (2010), the first article in which the term life is incorporated instead of family appears in 2003. in the literature it is found that there is no single terminology. the terms balance and conflict are used interchangeably. this also happens with the term family and life. throughout the literature review, the term that each author used in his research will be mentioned. according to some authors, greater clarity is necessary in the conceptual definition of the terms that refer to worklife balance (allis & o’driscoll, 2008; grzywacz & carlson, 2007; kossek et al., 2010) in order to guide researchers and organizational practices. maertz and boyar (2011) are very critical in demonstrating that the term work-life balance is treated ambiguously in the literature. they further argue that the definition should be clarified if research in 83 r. m. fuchs, o. morales, & j. timana journal of small business strategy / vol. 31, no. 1 (2021) / 81-88 this field is to progress. also, kossek et al. (2011b) demand greater clarity in terms that refer to the work-life balance construct. in this study, the definition proposed by haar (2013) that understands work-life balance as a perception and not as a time allocation will be used. it is assumed that employees who work less in order to deal with their personal affairs or those who spend more time in work activities may feel comfortable with that situation. haar (2013) presents worklife balance as a personal evaluation of the degree to which an individual manages his multiple roles. perception of organizational support for work-life balance kossek, pichler, et al. (2011) propose the importance of studying the different forms of organizational support that exist in detail, especially when the workforce is made up of more workers who value flexibility between work and life, as is the case of those belonging to generation y. these authors classify social support in the workplace as general and specific. they present four types of social support for work-family conflict: perceived organizational support (pos), supervisor support, perceived organizational support for work-family and supervisor support for work-family. the general support of the supervisor refers to signs of concern and assistance regarding the employee’s requirements to achieve his well-being and achieve effectiveness at work. the supervisor’s specific support for work-family aims to make it easier for the employee to manage work and family relationships. in this case, the supervisor cares about the individual in reference to their work and family welfare (kossek et al., 2011a). perceived organizational support (pos) refers to the degree to which an employer values its employees, supports their socio-emotional needs and provides resources to assist them in the management of one of their roles. the perception of organizational support also has a specific component called the perception of organizational support for the family. job embeddedness the concept of job embeddedness was developed by mitchell et al. (2001). job embeddedness is a construct that considers that employees are connected in a social network. this network “catches” the employee in his work (felps et al., 2009). that is to say, job embeddedness is defined as the combined forces that prevent the employee from leaving his job (yao et al., 2004 as cited in crossley et al., 2007). the connection is presented on three levels: links, fit and sacrifice. all three aspects are considered for both labor and extra-labor aspects. that is to say, job embeddedness in work and job embeddedness outside work were identified. the first refers to the forces that keep the employee “tied” to his position and the second to the aspects of personal and community life that keep him geographically stable (ng & feldman, 2010). it is necessary to mention that job embeddedness is a relatively new construct and is under development (zhang et al., 2012). hypothesis the model is based on two theories. the first one is the theory of social exchange, proposed by blau (1964). according to this theory, social exchange relationships evolve when employers care about their employees, which generates beneficial consequences (cropanzano & mitchell, 2005). in other words, the rewards and costs evaluated by the participants of a relationship will determine their behaviors and the quality of this relationship (mauno et al., 2011). social exchange involves high levels of trust and obligation and goes beyond the labor contract (murphy et al., 2003). the second one is the theory of role conflict, proposed by kahn (1964). it defines the type of conflict between roles as one in which individuals are pressured to assume different roles. on this basis greenhaus and beutell (1985) defined the conflict between work and family. the proposed model focuses on the perception of employees about themselves and about the company. when employees perceive that the company cares about them and their personal life, in a reciprocal attitude, they generate positive attitudes towards the company (butts et al., 2013). karatepe (2013a) proposes that work-life balance is one of the indicators of high performance work practices. he also argues that employees who have high-performance work practices seem to be more entrenched in their employment. with regard to job embeddedness, felps et al. (2009) mentioned that work-life balance would have a positive relationship with job embeddedness. on the other hand, crossley et al. (2007) suggest that companies that offer flexible schedules and family-friendly policies could encourage job embeddedness. it can be expected that work-life balance, once reached, will be valued, so the sacrifice of losing this balance is relevant if one thinks about changing companies. therefore, the following hypothesis is formulated: h1. work-life balance is positively related to job embeddedness in members of generation y. 84 r. m. fuchs, o. morales, & j. timana journal of small business strategy / vol. 31, no. 1 (2021) / 81-88 the perception of organizational support for work-life balance is understood as the degree to which workers perceive that their employers or supervisors care that they experience positive work-life relationships. the perception of organizational support for work-life balance will focus on the employer worrying that his employee can perform well in the workplace and in the non-work environment and on providing resources to achieve work-life balance (kossek, pichler, et al., 2011). when individuals feel socially supported at work, they feel they can handle work-life issues (kossek, pichler, et al., 2011). the relationship between organizational support and job embeddedness is based on the theory of social exchange. karatepe (2013b) indicates that employees with greater organizational social support will be more entrenched in their employment. this is because the factors that create roots are links, fit and sacrifice. the greater the links that the worker has in his network, the greater the degree of union with his employment (mallol et al., 2007). a close relationship between the supervisor and the employees generates greater links. likewise, the norms and values of an organization are a fundamental part to determine the fit (mitchell et al., 2001), or when the worker feels identified with the organizational culture. the organizational social support transmits the norms and values of the organization, so if the worker feels that he fits in that environment he will feel more embedded. regarding young people, twenge and campbell (2008) argue that organizational support is highly valued by them. likewise, felps et al. (2009) argue that the perceived organizational support positively predicts job embeddedness. according to the above, the following hypothesis is formulated: h2. perception of organizational support for work-life balance is positively related to job embeddedness in members of generation y. method the objective of this research is to determine the relationship of work-life balance and perception of organizational support for work-life balance with job embeddedness in members of generation y. a quantitative, correlational study was developed, with a dimension of cross cutting time. the survey technique was used through a certified online panel. self-administered questionnaires were applied to young people belonging to generation y with the following characteristics: were between 25 and 35 years old, had 3 or more years of work experience, were employed in medium and large companies in the city of lima (peru), and were university graduates. the survey was conducted in the city of lima during the months of april and may 2017. a response of 211 cases was obtained, with a sample error of ± 6.75%. respondents received the questionnaire virtually. some characteristics of the sample are as follows: 55% men and 45% women; 51% married, 46% single and 2% divorced; 59% have children; 55% work at baseline, 39% belong to middle management and 6% hold a management position. respondents work in various sectors of the economy, mainly in commercial, industrial, communications, educational, financial and health. measurement variable: work-life balance the literature reviewed indicates that to measure balance, conflict measures have been used. however, the researchers suggest defining balance more clearly and measuring it as an independent construct. haar (2013) defines work-life balance as the individual’s perception of his proper management of the different roles he exercises. the scale proposed by haar was used, and there are three advantages: a) the scale has been specially designed for the work-life balance construct (not for conflict as often found), b) the relationship measured is work-life and not work-family as usually found in the literature and c) the scale allows the individual to assess whether he considers his life to be balanced, as suggested by greenhaus et al. (2003). the proposed scale for the measurement of the work-life balance variable measures the perception of the respondent on his ability to handle his multiple roles. the heading proposed by the author warns: “the following statements refer to your work, family, and roles in life (if you do not have children, the family may include a couple, siblings, friends, roommates, etc.)”. the scale is composed of three items. an example of an item is “today i think i enjoy all facets of my life equally well.” the cronbach’s alpha of the scale is .87. a 5-point likert scale was used, ranging from 5 = strongly agree to 1 = strongly disagree. variable: perception of organizational support for worklife balance the scale developed by allen (2001) was used. it consists of 14 items and seeks to measure the global perception of employees to the degree to which the organization supports the family. the scale measures the beliefs of the individual surveyed regarding the support provided by his organization. the respondent is asked to what extent he considers that the statements represent the philosophy or 85 r. m. fuchs, o. morales, & j. timana journal of small business strategy / vol. 31, no. 1 (2021) / 81-88 beliefs of his organization. an example of an item is “the ideal employee is one who is available 24 hours a day.” a 5-point likert scale will be used, ranging from 5 = strongly agree to 1 = strongly disagree. variable: job embeddedness job embeddedness is a construct developed to explain why people remain at work. it was originally defined as composed of three dimensions: links, fit and sacrifice (mitchell et al., 2001). the scale developed in 2006 by holtom et al. 2006, as cited in felps et al. (2009) was used. this scale consists of nine items, and its cronbach alpha is .87. an example of an item is “at work i interact frequently with my work group.” a 5-point likert scale is used, ranging from 5 = totally agree to 1 = strongly disagree. given the characteristics of the work environment of the city of lima, it was decided not to work with questions related to the non-work environment. results the objective of the analysis is to know the relationship that work-life balance and the perception of organizational support for work-life balance have with job embeddedness of young professionals.the respective indexes were initially constructed for measurement. before carrying out the regression analyzes, it was found that the construct of perception of organizational support for work-life balance presented an incoherent measure, lacking content validity. the respective factor analysis showed that the construct was not one-dimensional. under these circumstances it was decided not to perform the measurement corresponding to hypothesis 2. regarding hypothesis 1, after performing the corresponding factor analysis, a multiple linear regression analysis has been carried out, considering compliance with the necessary assumptions. control variables considered were sex, position in the organization and seniority in the company. the regression analysis is presented in table 1. according to these results, we can say that the worklife balance index is significant at a 99% confidence level; that is to say, there is an effect towards job embeddedness which is positive. with this result, the hypothesis is accepted. discussion as you can see, the hypothesis about the positive relationship of work life balance and job embeddedness is fulfilled. this means that the greater the perception of the balance between labor aspects and personal aspects, the greater the job embeddedness. by finding the work-life balance variable significant, we find that this balance is relevant for the sample of generation y. the literature reviewed did not present a consensus on this aspect. little attention had been paid to work-life balance for people who may not have family responsibilities. the results show that it is a factor to consider if it is desired to create embeddedness in the members of generation y. additionally, it gives rise to a series of possibilities for the development of organizational retention policies. providing the policies that can generate a greater work-life balance for members of generation y will generate a positive impact on job embeddedness; that is, it will contribute to the retention of young professionals. this finding is important because the idea of balance between work and life has focused mainly on working women, and it was necessary to know if young professionals of both sexes who don’t necessarily have family responsibilities also demand it. as for the inconsistent measure of the construct “perception of organizational support for work-life balance,” an explanation is outlined. one possible reason is that respondents have answered each item considering their own opinion on each sentence and not the instructions in the statement that asked for their opinion on the company’s culture regarding organizational support. that is, the online instrument probably did not contribute adequately to the measurement of this construct. table 1 summary of the regression analysis dependent variable job embeddedness independent variables β t female sex -0.129 -2.077* position: baseline -0.051 -0.785 management position 0.079 1.226 years in the company: between one year and three 0.094 1.155 years in the company: more than three 0.273 3.303** work-life balance 0.380 6.145** r2 0.235 r2 corrected 0.213 note: * p < 0.01; ** p < 0.001. multiple linear regression analysis. control variables: sex, position in the organization and seniority in the company. work-life balance index is significant at a 99% confidence level. 86 r. m. fuchs, o. morales, & j. timana journal of small business strategy / vol. 31, no. 1 (2021) / 81-88 conclusions, limitations and future research the study contributes to the academic field and the organizational field. as for the theoretical implications, the contributions are given both in the field of work-life balance and in that of job embeddedness. regarding work-life balance, the request to study work-life balance as an independent concept and not as the absence of conflict has been met. in addition, work-life balance has been studied and not work-family balance, considering that the life and not the family approach is more inclusive in terms of the definition of work-life balance, since it also applies to people without family responsibilities. with regard to job embeddedness, it has also contributed to the request to study its possible antecedents. work-life balance has been explored as an antecedent of job embeddedness and has been found significant for the sample of generation y. the study of this generation in the workplace is a recurring request in the literature in order to stop resorting to stereotypes. additionally, the sample under study belongs to a latin american country and thus also contributes to the request to study this construct in realities different from that of the united states and europe. the latin american labor reality presents a series of particular characteristics. in peru, punctually, the working hours in the case of professionals with university studies can exceed the eight hours legally supported, so it is of interest to study aspects related to work-life balance. another important aspect about the sample is that it represents members of generation y who have three or more years of work experience. this also responds to a request of the literature about knowing not only what young people believe they will want but what they really perceive by being employed in practice. with regard to practical implications, the study allows entrepreneurs to recognize the importance that generation y gives to work-life balance, so they can generate policies or offer programs that collaborate with the worker to perceive that he is in balance between these aspects of his life. it is important that these programs should be offered not only to those who have family responsibilities but also to those who live alone as well. in this way a culture of diversity is fostered in which the importance of the personal scope is recognized for all workers, regardless of their family responsibilities. it is also relevant to consider work-life balance as an aspect that generates job embeddedness. that is, that support for this issue will not only be contributing to the welfare of the worker but to his retention through the dimensions of links, fit and sacrifice. programs to promote work-life balance would be more related to sacrifice and fit. regarding the limitations, we must mention the extension of the questionnaire since an instrument that measures five constructs was used, and for a respondent it is always better to answer a short instrument. for future research, it is proposed to study the perception of organizational support for work-life balance and the relationship it may have as a precedent for job embeddedness in the members of generation y. likewise, developing research on specific programs of work-life balance that organizations offer and that are of interest to generation y is another possible area of study. it is relevant to continue exploring the possible antecedents of job embeddedness since it is hoped to achieve the retention of this generation. references allen, d. g., bryant, p. c., & vardaman, j. m. 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(2012). a review of job embeddedness: conceptual, measurement issues, and directions for future research. human resource management review, 22(3), 220-231. sf%xi%'ay management buyouts and small business performance: an exploratory examination and research agenda garry d. bruton university of tulsa j. kay keels louisiana state university elton scifres stephen f. austin state university abstract management buyout acuvity is increasingly shifiing from large firms to small firms. however, to date, lialeis known about how such activitiesimpact the performance ofsmallfirms. this research has identified a sample of small firms that have undergone a management buyout and found that, relative to other firms in their respective industries, these small buyout firms experienced performance gains simi lar to those experiencedin buyouts of larger firms. suggestions for extendi ng this area of research are made. introduction management buyouts occur when incumbent managers, in combination with outside investors, take a firm private by purchasing all of the firm's outstanding stock (fortier, 1989). such activities have grown to be an important part of american business with an estimated $235 billion of buyouts occurring during the 1980s (zahra & fescina, 1991). additionally, similar levels of activity have also begun to occur in europe (osborne, 1990).despite this high level of activity, research on such financial restructurings has remained limited, and the need to examine their impact on business remains (bettis, 1992; fox & marcus, 1992). specifically, the effect of buyouts on smaller businesses has yet to receive significant investigation. to date, the principal investigations of small business buyouts have addressed their nature (krause, 19s6; krause, 19s7a; malone, 1989; mitton, 19s2; stancill, 1988; ) and how to evaluate whether such an activity was appropriate for a given small business (gaffin, 1986; krause, 1987b; krause, 1988; management review, 1986). management buyout activity has increasingly shifted from larger firms to smaller ones (dobrcynski, 1991); yet little is known appreci ation is expressed to dale lunsford for his helpful comments on an earlier version of this paper. 11 about what happens to the small firm's performance as a result of the buyout. this paper seeks to highlight these issues by conducting an exploratory examination of the ram ificauons ofbuyouts on small firm performance during the time that the firm is privately held. based on the tentative findings of this study, the paper concludes with a discussion of future research directions on the subject of small firm buyouts. literature review to date, seven principal articles have focused on postbuyout performance (see table i). these aructes have examined buyouts in a wide range of firms and have found generally that profitability in these firms has improved. these performance gains have been attributed to improvements in the firm's efficiency (muscarella gi vetsuypens, 1990). table 1 organ/ear/ann/ performance following a buyoiu author sample time frame post buyout performance opler (1992) 44 lbos lbos occurred " increased operating between 1985-1989, cash flows year before lbo " improved operating to 2 years after efficiency muscarefla tk 57 reverse lbo year to ipo " officers and directors vetsuypens (1990) buyouts year ownership drops by 15.99o following ipo " sales increase following buyouts singh (1990) 55 reverse 3 years prior to '" salesincreaseipoandyearof lbos ipo and year of '" inventory doh decrease ipo '" operating income increases smith (1990) 58 mbos 3 years prior to " cash flow/assets increased buyout to 2 years '" cash flow/employees after buyout increased buii (1989) 25 lbos 2 years prior to '" sales/assets increased buyout compared '" cash flow maximized to 2 years '" roe increased following buyout kaplan (1989) 276 mbos 2 years before '" decrease capital expenditures mbo to 3 years " operating income/net cash after flow improved lichtenberg gt 1,108 buyouts 2 years before:" plant productivity increased siegel (1989) buyout compared to 2 years after 12 agency theory recognizes that ownership and management in the modern corporation are separate. owners of the firm do not manage it; instead they hire professional (non-owner) managers to run the firm. the theory contends that managers in such situations maximize their own benefit rather than that of the the fum's owners or shareholders. following a buyout, managers gain a signiticant level of ownership in the firm and are thus motivated to act more consistently in the best interest of the firm (and its owners). thus, agency theory would argue that improvements in performance that occur following a buyout would be the result of the closer alignment of the firm's owners'nd managers'nterests (jensen, 1989). if this closeness of this alignment were lessened, the manager would again have less incentive to monitor or control the fum's costs as carefully as an owner would (jensen bt meckling, 1976). however, in a smaller firm, any single manager has greater influence and often a larger ownership stake as well. at the lower limit, of course, there is perfect alignment since the owner is also the only manager, which is the case in many smaller businesses. thus, a smaller firm may not suffer the same agency cost problems that a large firm does. this reduced threat of agency costs in conjunction with less organizational complexity (hannan g. freeman, 1984) may help to explain the overall superiority in efficiency often atuibuted to smaller businesses. therefore, it is not immediately clear whether agency offers a valid explanation of small buyout firm performance, as it does for larger firms following a buyout. nevertheless, there is case evidence that similar performance improvements do occur in small firms. isi systems provides a typical case example. this small finn resulted from a 1986 buyout of a division of grumman data systems corporation; the purchased division provided proprietary software applications to property and casualty insurance companies. as buyouts typically do, isi went public again in 1987. however, during the year in which it was privately held, managers discontinued the reselling of micmprocessor hardware. this action led to a four percent decrease in the cost of sales as a percentage of revenues. at the same time. isi also reduced its research and development (rjld), sales, and marketing costs. finally, while it was privately held, is i also managed to increase its revenue by 18 percent by increasing sales in other areas, and it achieved all this without adding additional personnel overall, isi made sales gains while lowering its cost of sales by six percent. thus, in the relatively brief time that isi was privately held, this small firm gained better control of its expenses and increased its sales. therefore, while the principles of agency theory may or may not hold for small firms'ost-buyout performance, experiences such as isi's indicate a substantial effect on performance. the empirical evidence gathered to date on the effects ofbuyouts on large firms and the case observations of buyout influence on small firms are compelling. they provide sufficient reason to expect performance improvements following small firm buyouts. thus, the following hypothesis will be investigated: hypothesis: management buyouts of small businesses lead to gains in performance (sales, profit margin, sgaa) while the firm is privately held. 13 method sample selection most firms taken private via a buyout tend to return to public trading (kaplan, 1991). in part, this new public stock offering represents a means for independent investors to be reimbursed for their initial investment in the buyout(academy industry program, 1990). becoming publicly owned again also provides a way for the firm's managers, who typically have risked a high percentage of their personal net worth, to reduce their own financial exposure. a buyout's return to public trading is called a "reverse management buyout". studying privately-held firms has always presented specia 1 problems (dess &. robinson, 1984; sapienza, gannon jk smith, 1988), but reverse buyouts afford researchers unique opportunities to study the same firms as both public and private entities since their ownership structure goes through these changes in a relatively short period of'time. combining both preand post-buyout information permits inferences to be drawn about the finn's activities while it was privately held. unfortunately, for a buyout turn that remains private, there is no such publicly available information for analysis. therefore, in a manner consistent with prior buyout research (muscarella gt vetsuypens, 1990; singh, 1990), this study used a sample drawn from reverse management buyouts to analyze small buyout firm performance. the exclusion from the sample of firms that failed or remained private may create bias and is open to criticism. however, the purpose of this exploratory study is to make a case for the importance of further investigation of small firm buyouts, and the results reported here are intended to serve merely as a guide for more refined studies. the enhancement of the sample is, in fact, one issue that we raise for future consideration later in this paper. additionally, the theoretical basis of this investigation, agency theory, posits an impact on performance due to the level of managerial ownership (agency). agency offers no theoretical foundation upon which to base a prediction that the performance of excluded firms would be different. the data for this study on reverse management buyouts were obtained from the securities data corporation (sdc). this for-profit corporation collects 500 data items on the filings of all initial public offerings (ipos) of united states firms. an ipo signals a firm's intention to offer its stock for public trading, buyout firms that fi lcd an ipo between january i, 1980and november 25, 1988 were included. this time span was chosen because it marked a period of significant buyout activity. in addition, choosing a ume period sufficiently in the past allowed for better retrospection. information on the identified buyout firms wa's then gathered. this information was obtained from a wide variety of public sources including annual ~eports, prospecti, standard and poor's compustat tapes, and compact disclosure. financial data were located on a total of 44 reverse buyouts. small firms to date, no definition has been established and consistently used to delineate small businesses. the definition chosen for this research is that used by the u.s. small business administration which identifies a small business as one employing 500 or fewer employees. 14 of the 44 reverse buyouts, eight were identified that met the study's three criteria for inclusion: (i) experiencing a buyout (referred to hereinafter as mbo); (2) employing fewer than 500 employees at the time of their buyout, and (3) filing an ipo during the 1980 to 1988 time period. (see appendix for a list of the sample firms.) however, to further confirm that the selected sample was indeed composed of small firms, a t-test was used to compare the sample's sales to the other 36 reverse buyout firms in the mbo and the ipo years. both the mbo (i = 2.41.df = 42, p = .02) and the ipo (r = 2.3, df = 42, p = .03) years showed significant differences in size. therefore, it is justifiable to argue that these eight firms are indeed small businesses, both by definition based on two well-accepted measures of size as well as relative to the populauon of reverse buyout firms. measures the best data available for investigating buyout performance are accounting measures. the use of market-based measures is not an option since buyout firms, as noted previously, are privately held. despite the usual concerns regarding accounung data, it has been shown that managers do not manipulate accounting data prior to buyouts to depress the buyout price (deangelo, deangelo, & rice, 1984; kaplan, 1988). funher, the accounting/tax changes associated with buyouts do not impact the results reported (bull, 1989). thus, accounting data should provide acceptable performance measures. however, the concept of buyout performance is complex, and its measurement should be multi-dimensional (bug, 1989);but there is no commonly accepted set of performance variables used by all researchers. in fact, one survey of new venture performance studies revealed more than 35 different measures of performance (brush & vanderwerf, 1992). for the present study, three measures of performance were selected for investigation —sales, profit margin, and selling, general and administrative expenses (so&a). it is possible, however, that changes detected in a buyout firm's performance are driven, not by its internal efficiency improvements, but by general economic conditions in its industry. to control for such an industry effect, changes in the performance measures were compared to the average industry performance of the relevant industry for each sample firm. the initial step in these comparisons was to calculate industry averages for the three-digit standard industrial classification (sic) code for the principal industry of each of the eight firms. the data for these averages were obtained from standard and poor's compustat data base. the primary, secondary and tertiary data tapes were used for these calculations to ensure that adequate numbers of firms were used for the comparisons. changes in performance for each of the eight sample firms were then compared to changes in performance of the corresponding principal industry. the average number of firms in each industry comparison group in the sample iirm's mbo year was 14. analysis while the small size of the sample used in this study does not prohibit an exploratory examination, it does limit the statistical strength of the analysis. use of a non-parametric statistic, specifically a mann-whitney u test, was deemed most appropriate given the small sample size. 15 results the results of the nonparametric tests indicated support for the hypothesis. compared to average industry performance changes, small business buyouts showed greater gains. both sales (u statistic = -1.79;p = .10) and sggta (u statistic = -2.10; p = .05) improved for the privately-held small businesses relative to industry averages. the small businesses experienced a mean increase in sales of 11 percent during the private period while the overall industry mean increase was only six percent. similarly, the mean increase in the sg&a costs for the industries was 11 percent during this period while the small firms'ean increase was only six percent. the increase in profitability for the small firms versus the industry group shows a larger mean gain for the small buyout firms (9.4 percent gain versus 7.6 percent gain). while not statistically significant (u statistic = -.74), these means do indicate performance somewhat beuer than the firm's relevant industry peers. discussion the results of this exploratory examination provide some indicauon that the hypothesis of performance improvements following small business buyouts cannot be rejected. small business buyouts do appear to experience performance gains while the firm is privately held that are greater than those achieved by other firms in their industry. making comparisons to a firm's industry helps to control for the impact of general economic condiuons. both case evidence and performance data point to increased growth, improved profital&ility, and better operating efficiency for small business buyouts. in the case of large firm buyouts, research has shown consistently that these financial restructurings lead to improved operating performance. however, much of this gain may be due to the reduction of agency costs in the firm. such agency costs may not pose problems for a small firm to the same degree as they do for a large firm; thus, there may not be as much opportunity for improvement in small firms as in large ones. while our results do make a preliminary case for similar improvements in small buyout performance, the question still remains whether agency theory is an appropriate explanation for these performance gains. agency-based gains would be accompanied by a substantial change in the level of managerial ownership. adequate data on ownership levels prior to the buyout were unavailable for statistically testing this proposition. however, the substantial changes in ownership levels that followed the reverse buyouts in our sample hints that agency may have played a role. in the six firms for which a determination could be made, top management team ownership went from 91 percent during the private period to 65 percent after the ipo, a drop of 26 percentage points (28.59 decrease). a change in ownership of this magnitude suggests that agency may have an effect on small buyout performance. these results demonsuate a clear need forfurthertestingoftheefficacyofagencytheory inthiscontext. compeungexplanationsshould be explored. other research needs are discussed in the following section. future research this research has been a brief exploratory examination of small firm buyouts. however, the small sample size has limited the strength of the conclusions that can be reached. future research should seek to enrich the sample and increase its size before re-examining buyout performance. 16 to date, most of what is known about buyouts is based on studies of large firms (e.g., seth & easterwood, 1993).research effort should be directed toward identifying those areas in which small and large finn buyouts differ. malone (1989)pointed out that highlighting these differences may have important public policy implications as leveraged buyouts increasingly come under legislative scrutiny. public policy designed solely around large firm buyout experiences could prove to be detrimental and even devastating for small firms. for example, a small business manager's role is frequently different in nature from that of a manager in a large business. small business managers rarely enjoy the same task specialization that their counterparts in larger businesses do; rather, they are more often called upon to be generalists. this broader perspective of the overall business may account for differences in managerial behavior with regard to buyouts. another potential difference between large and small firms is their strategic choices for restructuring the business following the buyout. prior studies have found that buyout firms undergo significant restructuring activities (muscarella & vetsuypens, 1991;seth & easterwood, 1993). however, these studies focused almost solely on large firms. small firms, however, typically have less elaborate internal structures and control mechanisms (s in gh, tucker, & house, 1986). this relative informality may influence the smaller firm's restructuring decisions in several ways. first, the small firm may require less restructuring since there is typically less bureaucratic "fat" impeding its efficient performance. whereas large firms may enjoy the luxury of slack resources, small firms rarely have such a cushion and must be efficient in order to survive in the first place. thus, efficiency gains such those detected in this investigation, may be much more difficult to achieve in the small firm. future research should examine the nature of the restructuring activities that follow a smafl business buyout and how the strategic intent of that restructuring may differ from activities and intenuons in large businesses. finally, future research should seek to identify those factors associated with successful buyouts. a potential drawback to the methodology used in this study, which relies on performance data from reverse management buyouts, is that those buyouts that do not return to public trading are automatically excluded from consideration. there may be key differences between buyouts that remain private and those that do not. seth and easterwood (1993) have suggested, for example, that the longevity of a buyout is tied to the degree of restructuring needed. future research should seek to expand buyout databases in order to compare buyouts based on the magnitude of their performance gains. attempts should also be made to gain information on buyouts that remain private as well as those that fail such studies may necessitate the collection of primary data and may have to rely on performance data abstracted from managerial perceptions. this methodology could be difficult to execute. malone (1989),for example, reported that many of the non-respondents to his survey of small company buyouts indicated that it was against their corporate policy to release such information. a number of factors such as the principal industry in which the firm competes, the size of the firm, its prior profitability, and its level of diversification may impact the success of the buyout. factors such as these should be identified and examined as well with an eye toward developing contingency prescriptions for successful small business buyouts. this paper has used some preliminary findings to build a case for future research that will help to answer these and other questions about the ramifications of buyouts for small businesses. no single study will provide all the answers; 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(1991). will leveraged buyouts kill u.s. corporate research & development?. academy of management executive, 5(4), 7-21. appendik reverse buyout sample firms buyout principal sample firm year sic a&w brands 1986 208 cal ton inc. 1985 153 continental homes 1985 152 dsp tech 1984 382 hdr power systems 1984 362 isi systems 1986 737 mbs textbook exchange 1985 594 southern elecuonics 1986 506 19 105 comparative assessment of performance differentials for maleand female-owned small accounting firms at the beginning and end of a ten year period martha a. fasci the university of texas at san antonio martha.fasci@utsa.edu jude valdez the university of texas at san antonio jude.valdez@utsa.edu sung-jin park the university of texas at san antonio sungjin.park@utsa.edu abstract the objective of this study was to determine whether the performance gap over a period of ten years between maleand female-owned small accounting firms has converged utilizing a resource-based framework to assess performance. the relevant assets for these firms included human, organizational, and entrepreneurial capital. an analysis of covariance (ancova) was used to determine whether the gender productivity gap converged over this period of time. the response rates were 30 percent and 23 percent respectively for the 1993 and 2003 investigations. an analysis of the data indicates several important findings that (1) a performance gap exists when measured by gross revenues between maleand female-owned small accounting firms, (2) this performance gap has converged after ten years, and (3) the performance gap as measured by the ratio of net profit to sales indicates that female-owned small accounting firms do better than male owned accounting firms. keywords: male and female, small cpa firms, assessment, comparative financial performance, gross revenues and net profit comparisons, longitudinal studies introduction there is a significant body of research documenting performance differentials between maleand female-owned businesses. the performance gap between maleand female-owned businesses as measured by numerous indicators has been well reported. such indicators include business revenues (fairlie and robb, 2009; s trateg y journal of small business journal of small business strategy vol. 25, no. 1 106 fasci and valdez, 1998), four-year survival rates (robb, 2002), and business discontinuance (watson 2003). explanations offered for the performance differential of maleand female-owned businesses include management style (gibson, 2011), differences in goals (rauch, wilklund, lumpkin, and frese, 2009), different capital structure due to the gender discrimination in credit market (coleman, 2002), and differences in education and experience of male vs. female owners (runyan, huddleston, and swinney 2006). while the body of research investigating gender differentials between maleand female-owned businesses is significant, we contend that very little research has been performed to determine whether this gender productivity gap is a stable or dynamic phenomenon. alternatively, we are interested in the change of performance gap over time between maleand female-owned businesses. this study investigates the implication of gender for the performance of small accounting firms at two points in time over a period of ten years. previously, fasci and valdez (1998) found that a difference in productivity exists between maleandfemale-owned small accounting firms. this study replicates the performance comparison between maleand femaleowned firms with ten-year interval and finds that the performance gap still remains. nonetheless, we find that the gender productivity gap has been narrowed down during the ten year period. we provide an explanation on the performance gap convergence. conceptual framework extant literature has discussed the determinants of performance in small firms. according to the “resource-based” view of the firm, performance differentials between maleand female-owned businesses can be attributed to the resource heterogeneity across firms (alvarez and busenitz, 2001). barney (1991) has classified firm resources into three groups: physical capital resources, human capital resources, and organizational capital resources. considering that professional service firms rely less on physical capital resources such as buildings and equipment, it becomes more critical to leverage human and organizational capital to achieve a competitive advantage and better firm performance (hitt, bierman, shimizu, and kochhar, 2001). owners’ influence on small professional service firms may not be limited to their contribution of firm resources per se. owner’s ability to identify more business opportunities and growth potential should facilitate enhanced firm performances. alvarez and busenitz (2001) name this ability as “entrepreneurial recognition”, and consider this entrepreneurial factor as a strategic resource to influence the firm performance of small businesses. the gender effect on small business performance has been widely discussed. this gender effect ranges from a relative small influence on the firms productivity (collins-dodd, gordon, and smart 2004) to that of a significant influence (chaganti and parasuraman, 1996). likewise, the gender effect on performance seems to vary among industry sectors (brush, 1992). in this study, the focus is on the moderating role of gender in the explanation of firm performance and the study examines how the moderating role has evolved throughout the ten year period. figure 1 represents the conceptual framework for the resourcebased view of performance for service firms and the moderating effect of gender. journal of small business strategy vol. 25, no. 1 107 human capital resources the role of human capital as a driver in the profitability and growth of small businesses is well-documented. dyke, fischer, and reuber (1992) identify that owner’s previous experience in small business and the particular experience in business startup are critical success factors in industries like computer-services with numerous small independent firms. in the federal reserve’s 1998 survey of small business finances, coleman (2007) finds that education level as well as prior business experience is a significant variable in explaining firm performance. similarly, fairlie and robb (2009) find that female-owned businesses are less successful because they have less human capital with prior work experiences. specifically, for the professional service industry, fasci and valdez (1998) find a positive relationship between owner’s prior work experience and firm performance in small accounting firms. in their study of professional legal service firms, hitt, bierman, shimizu, and kochhar (2001) use total experience in the firm as a proxy for the firm-specific knowledge effect of human capital. an implication from these studies is that some of the cross-sectional variation of firm performance in the professional service industry can be explained by the heterogeneity of human capital resources. considering that the client-base is a proprietary asset of accounting firms built up throughout a professional’s tenure at a specific firm, owner’s firm-specific experience becomes an important human capital resource in small accounting firms. organizational capital resources organizational capital includes a firm’s internal management system, informal relations among groups within a firm and between firms in its environments (barney, 1991). in the professional service industry where the quality of human capital is a dominant resource, the internal entrepreneurial capital human capital firm performance organizational capital gender effect figure 1: conceptual framework journal of small business strategy vol. 25, no. 1 108 management of human resources becomes a strategic resource for firm performance. estimating a production function in the public accounting industry, banker, chang, and cunningham (2003) incorporate the service diversification and the leverage into their specification of the production function. they measure the output of each accounting firm with the net revenue from three different service groups: accounting and auditing, tax services, and management advisory services. the leverage is considered with the number of professional employees and the number of other administrative personnel. in the context of accounting firms, the leverage can be defined as the total number of full-time professional employees; the service diversification may be measured by the percentage of work performed in mainly five possible practice areas for accounting firms (financial and estate planning, investment analysis, management consulting, tax, and write-up). however, in the case of small accounting firms where certified public accountants are limited, service diversification would not represent the strength of organizational capital because it may simply reflect the human resources available in the context of available capital investment to successfully complete the work. entrepreneurial capital resources although the resource-based view of the firm emphasizes the differences in the resource endowments across firms to explain performance differences (barney, 1991), the way of applying the firm resources in the production process may also influence the outcome of small businesses. entrepreneurs may be able to recognize business opportunities and to organize the firm resources effectively to exploit the opportunities. wiklund and shepherd (2005) call this attribute of entrepreneurs as “entrepreneurial strategic orientation or eo”. they argue that “eo” affects small business performance. “eo” is associated with a willingness to innovate, to exploit market opportunities, to take risks, to venture with a new product or service, to obtain first mover’s advantage, or to become more proactive to cope with emerging business opportunities and competitors (alvarez and busenitz, 2001; wiklund and shepherd, 2005). while the resource-based view is focusing on the cross-sectional heterogeneity of firm resources, “eo” focuses on the heterogeneity in an entrepreneur’s beliefs about the value of firm resources and his or her willingness to market and promote the firm. the performance implication of “eo” may be context-specific. su, xie, and li (2011) postulate that the relationship of “eo” and performance between established firms and new ventures is not comparable. without sufficient firm resources or solid organizational structures, “eo” may not be able to induce more positive firm performance. gender performance gap the question of gender effect on small business performance has continued to interest many researchers. some studies strongly acknowledge that there is a performance gap attributable to the gender of the small business owner. for instance, chaganti and parasuraman (1996) examine impacts of gender on business performance and management patterns. they find that female-owned businesses had lower sales than male-owned businesses, but significant differences existed in financial and motivation goals between female and male owners of businesses. meanwhile, collinsdodd, gordon, and smart (2004) report that gender is not a significant direct journal of small business strategy vol. 25, no. 1 109 explanatory variable for financial performance gap among accounting firms. financial performance is found to be different between female-owned sole proprietorships and male-owned ones but can be explained by practice characteristics, motivations, and individual owner characteristics. bardwell, spiller, and andersen (2003) find that female entrepreneurs with home-based businesses have fewer employees, work fewer hours, are more likely to hold second jobs, are not involved in international business activity, and are most often located in suburban and rural areas. to provide an explanation of these conflicting results on the gender performance gap, cron, bruton, and slocum (2006) argue that firm performance is determined by some resource-based factors including industry experience, hours worked, and financial motivation, and these factors are affected by gender. prior studies based on the resource-based view suggest that the difference in firm performance may be explained away by the heterogeneous endowment of firm resources. to the extent that human capital, organization capital, and entrepreneurial capital play a dominant role in the explanation of firm performance, gender might become a second-order effect that may indirectly affect the performance. in this respect, the gender effect on firm performance requires an empirical test to isolate the unique contribution of gender difference to cross-sectional variation in small business firm performances. for this, the following hypotheses are used in this study to investigate the relationship between firm performance and the gender of small business owners, controlling for variables associated with the resource-based framework for small service firms. in addition, the gender performance gap, if it still exists, is tested to see whether the gap converged during the ten year period since fasci and valdez’s (1998) finding. furthermore, to investigate the relationship between firm performance and the gender of small business owners, the study will extend its review to include how the male and female-firm performance compare on their annual profit ratio. h1: controlling for human, organizational, and entrepreneurial capital, there is no performance gap between male and female-owned small accounting firms. h2: controlling for human, organizational, and entrepreneurial capital, there is no narrowing of the performance gap over a ten-year period between maleand female-owned small accounting firms. h3: controlling for human, organizational, and entrepreneurial capital, there is no performance gap relating to the net profit ratio of the firm over a tenyear period between maleand female-owned small accounting firms. research design the primary objective of this study is to determine whether the performance gap over a period of ten years between male and female-owned small accounting firms has changed utilizing a resource-based framework to assess performance. consistent with fasci and valdez (1998), we used a field-test questionnaire to collect data in 1993 and 2003. for each year, a sample of 1000 female owners and 1000 male owners of small accounting firms was randomly selected by the american institute journal of small business strategy vol. 25, no. 1 110 of certified public accountants from their database. in the first survey, a total of 604 usable surveys were returned including 328 responses from female owners and 276 responses from male owners of small accounting firms. in the second survey, a total of 466 usable surveys were returned including 250 responses from female owners and 216 responses from male owners. response rates are 30% and 23% for the 1993 and 2003 survey, respectively. considering that our sample is restricted to individual owners of small accounting practices who face higher time cost to commit to the survey instrument, these response rates are acceptable. given that our main variables are composite measures representing human-, organizational-, and entrepreneurial capital resources, the relative response rates of 30% and 23% does not bias the inference from our analysis (curtin et al. 2000; keeter et al. 2000). the survey questionnaire included over 47 items regarding the business and owner. a profile of responses for select items is provided in table 1. table 1: 1993 and 2003 profile small accounting practices business characteristics 1993 2003 m f m f sole proprietorship 78% 81% 72% 76% home based 14% 42% 19% 47% sole practitioner 64% 82% 68% 77% age of practice 10.9 6.2 16.1 11.5 owner characteristics age of owner/principal 43.9 39.4 49.9 46.4 education – graduate degree 25% 24% 25% 30% accounting experience prior to practice 7.7 6.6 11.3 8.7 married 82% 73% 84% 76% highest salary before practice $35,840 $32,720 $46,860 $43,400 since the objective of the study is to determine whether a performance gap between maleand female-owned small accounting firms has changed over a ten year period, an analysis of covariance (ancova) method is used to evaluate the performance gap while controlling for other resource-based covariates. given that the resource-based view implicitly assumes the context of market competition, the gross revenue was selected for small accounting firms as the dependent variable because it is an unmitigated, straight-forward variable for measuring the overall performance of the small accounting service industry firms. the net profit rates of the firms was employed as a second dependent variable to indicate productivity. to make an inferential comparison over the two survey periods, the chi-square test is used to journal of small business strategy vol. 25, no. 1 111 determine the homogeneity of the groups. we find no significant difference between two surveys for the gender distribution, χ2 = 0.0329, p = 0.36. this result demonstrates that the two groups are comparable. homogeneity of groups can also be inferred from the fact that both sample years were selected from the same universe (the membership list of the american institute of certified public accountants), but at two different times. table 2 presents the mean annual gross revenue by gender and year of survey for all the small accounting firms in the study. table 2: mean gross revenue by gender and year of survey gender survey year mean standard deviation n female 1993 74,043 90.75 328 2003 114,462 108.97 246 male 1993 147,496 146.79 276 2003 207,990 197.78 213 in reporting the results of the earlier survey, fasci and valdez (1998) find that a gender performance gap existed between maleand female-owned small accounting firms. a similar performance gap is recognized in the later survey and this study indicates how the gap has changed over 10 years. in order to determine the gender differential of the small accounting firms’ performance, explanatory variables under the resourcebased conceptual framework are controlled. specifically, control variables in the ancova include the proxy variable- humcap, which represents human capital resources for the business such as the owners previous experience, type of experience, and the length of that experience; the proxy variable-orgcap, which represents organizational capital resources such as the number and type of employees, and age of firm; and the proxy variable entrcap to represent entrepreneurial capital resources. which includes the location of the business business location or home-based, the goals of the business owner, age and start-up capital. tests of multicollinearity and homogeneity of variance (levene’s test) are conducted. the results of the tests are well within acceptable research standards. in addition, a test of the homogeneity of regression slopes is conducted. the results show no evidence of violation of the equal slopes assumption. the results of ancova are presented in table 3. journal of small business strategy vol. 25, no. 1 112 table 3: ancova results of gross revenue by gender and year controlling for three resource variables variables type iii sum of squares df mean square fvalue p-value corrected model *6,065,718.44 6 1010953.07 72.45 0.000 intercept 786,253.13 1 786,253.13 56.35 0.004 orgcap 2,807,952.69 1 2,807,952.69 201.24 0.002 humcap 334,377.95 1 334,377.95 23.97 0.000 entrcap 115,969.52 1 115,969.52 8.31 0.004 gender 625,041.23 1 625,041.23 44.80 0.012 survey year 66,077.28 1 66,077.28 4.74 0.030 gender*survey year 17,197.11 1 17,197.11 3.23 0.040 error 14,734,389.55 1,056 13,953.02 total 38,574,084.56 1,063 corrected total 20,800,107.99 1,062 * r2 = .692 (adjusted r2 = .688) the variable “survey year” represents the year in which the survey was completed a ten year period between the first and second survey. the ancova supported the main effect for gender, yielding an f ratio of 44.80, p < .01. this indicates that maleowned small accounting firms’ annual gross revenue is higher than that of female-owned firms in the study. specifically, a performance gap exists between maleowned and female-owned small accounting firms, which is consistent with fasci and valdez (1998). the main effect for “survey year”, yielding an f ratio of 4.74, p <.03 is significant. this indicates that the performance change over the ten year period was significant for male and female-owned small accounting firms in the survey. hypotheses 1 can be rejected as there is a performance gap between male-and female-owned small accounting firms in both years of the study. more importantly, the interaction effect (gender*survey year) is significant, f = 3.23, p < .04, indicating that over the ten year period there has been a decrease in the gender performance gap as measured by annual gross revenue and controlling for the three resource variables human, organizational, and entrepreneurial capital. because the performance gap has decreased, hypotheses 2 can also be rejected. journal of small business strategy vol. 25, no. 1 113 the ancova estimates the means for annual gross revenue for small accounting firms in the study. the estimated marginal means for annual gross revenue for maleand-female owned small accounting firms over the ten year period are plotted in figure 2. this strongly suggests that women-owned small accounting firms in the study are closing the performance gap as measured by the firm’s annual gross revenue. figure 2: plots of estimated marginal means of annual gross revenue by year for male and female-owned firms a second ancova analysis was undertaken utilizing the net profit ratio (net profit to gross sales) as the independent variable. net profit to gross ratio demonstrates productivity of the firm, and it was felt that a second ancova analysis should reinforce the study’s hypothesis. interestingly, the net profit ratio for female accounting entrepreneurs in the sample was stronger than for male accounting entrepreneurs, yet a gap existed between the two. table 4 presents the results of the ancova analysis using net profit ratio as the independent variable. 200male 180160female 1401201008060 1993 2003 survey year e st im at ed m ar gi na l m ea ns journal of small business strategy vol. 25, no. 1 114 table 4: ancova results of net profit ratio by gender and year controlling for three resource variables variables type iii sum of squares df mean square f-value p-value corrected model *4.732 6 .676 18.547 0.005 intercept 30.936 1 30.936 848.751 0.002 orgcap .955 1 .955 26.202 0.001 humcap 2.488 1 2.488 68.270 0.006 entrcap 2.079 1 2.079 2.179 0.040 gender 1.480 1 1.480 13.180 0.010 survey year 1.682 1 1.682 18.711 0.010 gender *survey year 1.002 1 1.002 .050 0.022 error 33.751 926 0.36 total 302.328 934 corrected model 38.483 933 r squared = .599 adjusted r squared = .582 as can be seen the results and conclusions are similar to the first ancova analysis. in particular, the interaction effect (gender * survey year) is significant, f =.050 < .02, indicating that over the ten year period there has been a convergence in the productivity gap as measured by profit rates and controlling for the three resource variables. accordingly, hypothesis 3 can be rejected. figure 3 plots the estimated marginal means for annual net profit ratio for male and female-owned small accounting firms over the ten year period. journal of small business strategy vol. 25, no. 1 115 figure 3: plots of estimated marginal means of annual net profit ratio by year for male and female-owned firms .49female .48.47male .46.45.44.43.42 1993 2003 e st im at ed m ar gi na l m ea ns survey year conclusion and implications a significant body of research confirms that women have had to face different and additional challenges than men to succeed in their businesses which have resulted in different levels of performance. this phenomenon has historically been referred to as the “gender performance gap”. this study examines this gender performance gap with respect to small accounting firms. specifically, the study examines this performance gap between maleand female-owned small accounting firms over a ten year period, utilizing the same study population selected from the membership list of the american institute of certified public accountants. the small accounting firms are studied through the resourcebased framework, which views business performance and productivity (output) as a result of human, organizational and entrepreneurial capital resources (input). the implication underlying the resourcebased framework would suggest that the “gender performance gap” might be explained away once the firm’s human, organizational and entrepreneurial capital resources are held constant across all firms in the study regardless of gender ownership. nonetheless, the study finds that performance differentials continue to exist between maleand female-owned small accounting firms, even after controlling for variations in firm resources. first, we find that the performance differential between maleand female-owned businesses exists for both the initial study group and for the second study group ten years later. it is interesting to note that approximately 69% journal of small business strategy vol. 25, no. 1 116 of the variance between male and female small accounting firms is accounted for by the variables in the resource-based model. second, while a real performance gap remains between male-and female-owned small accounting firms in both study groups, we find that the performance gap has decreased or converged. this is most encouraging as women owned small accounting firms are “catching up” to their male owned counterparts. most significantly, this study further extends the comparison between maleand femaleowners of small accounting firms by exploring the comparison performance based on the firms’ net profit ratio. this additional analysis provided an interesting finding in that the female entrepreneurs achieved a higher net profit ratio in their firms’ financial performance as compared to the male entrepreneurs. this result could be explained by the different circumstances for managing the firm between the two groups. compared to the male entrepreneurs, more female entrepreneurs locate their practice in their home, more of them have been seeking a graduate degree, and more of them are sole practitioners. the changes that have occurred in this comparison are interesting and compelling. we show that, to the extent that the gaps in human capital, organizational capital, and entrepreneurial capital resources are mitigated, female-owned small accounting practices are trending towards increasing firm performance. therefore, we argue that more effort and attention should be invested on fostering the firm’s resources to promote the success of female-owned small accounting firms instead of focusing on the impact of social norm and culture. the study will be replicated to determine whether there is a continuation of the narrowing of the performance gap between these two groups in the subsequent decade. references alvarez, s.a., & l.w. busenitz (2001). “the entrepreneurship of resourcebase theory,” journal of management 27, 755-775. american institute of certified public accountants (2006). aicpa work/life and women’s initiatives 2004 research. a decade of changes in the accounting profession: workforce trends and human capital practices. new york, ny: aicpa banker, r., chang, h.,& r. cunningham (2003). “the public accounting industry production function,” journal of accounting and economics 35(2), 255-281. bardwall, s., spiller, l. d., & andersen, j. e. (2003). “differences between women-owned home-based & officebased businesses: an exploratory study,” journal of small business strategy 14(2), 58-72. barney, j. (1991). “firm resources and sustained competitive advantage,” journal of management 17(1), 99-120. brush, c. g. (1992). “research on women business owners: past trends, a new perspective and future directions,” entrepreneurship theory and practice 16(4), 5-30. brush, c.g., & r. chaganti (1998). “businesses without glamour? an analysis of resources on performance by size and age in small service and retail firms,” journal of business venturing 14, 233-257. journal of small business strategy vol. 25, no. 1 117 chaganti, r., & s. parasuraman (1996). “a study of the impacts of gender on business performance and management patterns in small business,” entrepreneurship theory and practice 21(2), 73-75. coleman, s. (2002). “constraints faced by women small business owners: evidence from the data.” journal of developmental entrepreneurship, 8(2), 151-174. coleman, s. (2007). “the role of human and financial capital in the profitability and growth of women-owned small firms,” journal of small business management 45(3), 303-319. collins-dodd, c., gordon, i. m., & smart, c. (2004). “further evidence on the role of gender in financial performance,” journal of small business management 42(4), 395-417. cron, w.l., bruton, g.d., & slocum, j.w. (2006). “professional service ventures, performance, and the gender effect,” journal of leadership and organizational studies 12(3), 53-67. curtin, r., presser, s., & singer, e. (2000). “the effects of response rate changes on the index of consumer sentiment” public opinion quarterly 64, 413-428. dyke, l.s., fischer, e.m., & a.r. reuber (1992). “an inter-industry examination of the impact of owner experience on firm performance,” journal of small business management 30(4), 72-87. fairlie, r.w., & robb, a.m. (2009). “gender differences in business performance: evidence from the characteristics of business owner survey,” small business economics 33, 375-395 fasci, m.a., & j. valdez (1998). “a performance contrast of maleand female-owned small accounting practices,” journal of small business management 36(3), 1-7. gibson, shanan g. (2011). “the influence of strategic focus & gender on performance: an examination of small businesses.” journal of small business strategy 21(2) 47-58. hitt, m.a., bierman, l., shimizu, k., & r. kochhar (2001). “direct and moderating effects of human capital on strategy and performance in professional service firms: a resourcebased perspective,” academy of management journal 44(1), 13-28. johnson, t. & owens, l.. “survey response rate reporting in the professional literature,” survey research laboratory, university of illinois at chicago, american association for public opinion research—section on survey research methods: pp. 127-133. keeter, s., miller, c., kohut, a., groves, r.m., & s. presser (2000). “consequences of reducing nonresponse in a national telephone survey” public opinion quarterly 64, 125-148. rauch, a., wilklund, j., lumpkin, g.t., & frese, m. (2009). “entrepreneurial orientation and business performance: an assessment of past research and suggestions for the future,” entrepreneurship theory and practice 33(3), 761-787. journal of small business strategy vol. 25, no. 1 118 robb, a.m. (2002). “entrepreneurial performance by women and minorities: the case of new firms,” journal of developmental entrepreneurship 7(4), 383-397. runyan, r.c., huddleston, p. & swinney, j. (2006). “entrepreneurship orientation and social capital as small firm strategies: a study of gender differences from a resource-based view,” international entrepreneurship and management journal, 2(4), 455-477. su, z., xie, e., & li, y. (2011). “entrepreneurial orientation and firm performance in new ventures and established firms,” journal of small business management 49(4), 558-577. watson, j. (2003). “failure rates for female-controlled businesses: are they any different?” journal of small business management 41(3), 262-277. wiklind, j., & shepherd, d. (2005). “entrepreneurial orientation and small business performance: a configurational approach,” journal of business venturing 20, 71-91. dr. martha fasci is an associate professor of accounting at the university of texas at san antonio. her research interests are in small business, entrepreneurship, and accounting. dr. jude valdez is adjunct professor of small business management at the university of texas at san antonio. his research interests are small business and economic development. sung-jin park is a doctoral student of accounting at the university of texas at san antonio. a business success versus failure prediction model for entrepreneurs with 0-10 employees robert n. lussier springfield college joel corman suffolk university abstract this empirical survey study presents a success versus failure (sif) prediction model (s/f = f [advisors, planning, education, minority business ownership, staffing, parents owned a business, record keeping and financial control, capital, industry experience, economic timing}). using stepwise discriminant analysis, the predictor variables explained 54% of the variance in sif. the model accurately predicted 75.00% of the surveyed 96 matched pairs firms as being successful or failed. the model will predict a group of businesses as successful or failed more accurately than random classification over 99% of the time (model p=. 0006). introduction the important role of small business suggests that an understanding of why firms fail and succeed is crucial to the stability and health of the economy(gaskill, van auken, and manning 1993). of major concern to any would-be entrepreneur is the chance of success for the proposed business. success versus failure prediction research benefits entrepreneurs, those who assist, train and advise them, those who provide capital for their ventures, suppliers, and public policy makers (altman 1983; ballantin, cleveland, and koeller 1992; cameron, kim, and whetten 1987; d'aveni 1989; dugan and zavgren 1989; koh and killough 1990; lussier l 995a&b, pech and alistair 1993; storey, keasey, watson, and wynarczyk 1987). there are many studies to better understand business success versus failure. however, as gaskill, van auken, and manning (1993) stated: there are many questions still to be resolved and warrant additional exploration ... previous studies do not provide a comprehensive or unified explanation for small firm failure ... comparisons are needed between successful and failed small business owners. prior empirical studies of failure have concentrated almost exclusively on financial ratio data, though other studies offailure usually cite managerial variables as being critical (scherr 1989). the usefulness of ratio-based business failure prediction models has been questioned (e.g., alves 1978; corman and lussier 1991; lussier and corman 1995; gilbert, menon, and schwartz 1990; shelton 1986; stockton 1989; sommers and koc 1987). for example, elzayaty (1986) found ratio models to be poor predictors of bankruptcy: of 132 businesses predicted to fail, only 5 were discontinued over a five-year period. these models had about a 21 97 percent type ii error rate. storey et al. ( 1987) indicated that qualitative data can provide at least as good predictions as traditional financial ratios. scherr ( 1989) recommended virgin research to search for links between management's ability and failure. this study is not based on financial ratios, but on quantitative and qualitative managerial factors contributing to success or failure. to date, the author has found only two majornonratioempirical studies (cooper et al. 1990 + 1991 and reynolds and miller 1987 + 1989) similar to this study. however, the reynolds and miller model cannot predict failure of a business before it starts because the age of the business, and the first year sales are needed to predict failure. the major differences between this study and the cooper et al. studies are: i. their sample includes businesses one to three years old whereas this sample includes ages one to ten. 2. their sample was limited to members of the national federation oflndependent business (nfib); this sample is not. 3. they do not survey failed businesses; this study does. 4. their sample does not include matched pairs whereas this design does. they surveyed firms conducting business; then after a year or longer, some of the firms failed. at that time, they compared the responses of the failed firms and the surviving firms to analyze the differenceswithouteverquestioningthe failures to ask them why they failed. this matched pairs design avoids comparing larger businesses to smaller ones, retailers to manufacturers or construction companies, and businesses from different locations. purpose the purpose of this research is to develop and test a generic nonfinancial model that will predict young businesses with 0 i 0 employees as successful or failed. this study adopts dun & bradstreet's(l 994: i) definitions of failure and discontinuance. business failures are firms involved in court proceedings or voluntary actions involving losses to creditors. chapter 7 and chapter 11 companies are both considered failures due to loss to creditors. chapter? companies liquidate whereas chapter 11 companies restructure their debt and stay in business. firms going out of business without loss to creditors are not considered business failures: they are discontinued businesses. to be considered a success the business must make at least industry average profits. a young firm is 0 to i 0 years old. methodological development and testing of the literature model there is no generally accepted list of variables distinguishing business success from failure. prior research has created discrepancies within the literature by reporting different variables as contributing factors to success or failure. the two most commonly stated distinguishing variables are capital and management experience. however, in 20 journal articles only 14 (70%) specifically state that these two variables contribute to success versus failure. to help clarify discrepancies, this study supports or does not support each of the major variables in the literature later in the implications section of this article. the model in this study was developed by including the fifteen major variables, identifioo in 20 journal articles, as contributing to success versus failure. see table i for an explanation 22 __ ... ,,, of the 15 variables, and table 2 for a comparison of the 20 studies that support, do not support, or do not mention each variable. table i explanation of success versus failure variables i. capital (capt). businesses that start undercapitalized have a greater chance of failure than firms that start with adequate capital. 2. record keeping and financialcontrol (rkfc). businesses that do not keep updated and accurate records and do not use adequate financial controls have a greater chance of failure than firms that do. 3. industry experience (inex). businesses managed by people without prior industry experience have a greater chance of failure than firms managed by people with prior industry experience. 4. management experience (maex). businesses managed by people without prior management experience have a greater chance of failure than firms that are managed by people with prior management experience. 5planning(plan). businesses that do not develop specific business plans have a greater chance of failure than firms that do. 6professiona1advisors (prad). businesses that do not use professional advisors have a greater chance of failure than firms using professional advisors. 7 education (educ). people without any college education who start a business have a greater chance of failure than people with one or more years of college education. 8. staffing (stall). businesses that cannot attract and retain quality employees have a greater chance of failure than firms that can. 9. product/service timing (psti). businesses that select products/services that are too new or too old have a greater chance of failure than firms that select products/services that are in the growth stage. i 0. economic timing (ecti). businesses that start during a recession have a greater chance of failure than firms that start during expansion periods. 11 age (age). younger people who start a business have a greater chance of failure than older people starting a business. l 2partners (part). a business started by one person has a greater chance of failure than a firm started by more than one person. 13 parents (pent). business owners whose parents did not own a business have a greater chance of failure than owners whose parents did own a business. 14. minority (mior). minorities have a greater chance of failure than nonminorities. l 5marketing(mrkt). business owners without marketing skills have a greater chance of failure than owners with marketing skills. 23 table 2 a comparison of variables identified in the l.iterature as factors contributing to business success versus fail.ure senior independent variables author capt rkfc inex manx plan grad educ staf psti ecti aae part pent mior mrkt cooper 90 f b!::au2lda 112 e i3s::t.dqls;l11: 112 e e yesper e e e 14 10 10 2 0 n f e e e n 14 11 3 2 e 9 0 n f n e ' 3 n ~ 5 2 f n e e e ' 1 e 5 3 f f n n ~ e e 1 3 3 1 f 1 0 f f 2 0 n e 5 1 total f total n tgtal 4 10 9 ) 7 11 11 13 13 12 16 16 19 16 14 f supports variable as a factor contributing to failure n does not support variable a factor contributing to failure does not mention variable as a contributing factor the literature model variables s/f = f (capital, record keeping and financial control, industry experience, management experience, planning, professional advisors, education, staffing, product/service timing, economic timing, age of owner, partners, parents owned a business, minority, marketing skills) discriminant function analysis is used to predict group membership when the dependent variable is nominal/categorical. therefore, discriminant analysis was used to predict the 96 sample businesses as successful or failed; based on the 15 independent variables. the stepwise procedure was run on all the variables in the model to identify those variables that do or do not distinguish success versus failure. the elimination of the variables without discriminant ability results in the development of the prediction model. descriptive statistical results the sample included approximately 20 percent from connecticut, 5% maine, 44% massachusetts, 19% new hampshire, 9% rhode island, and 6% vermont. the mean age of 24 the failed and successful firms was 5.5 and 5 .8. industry representation (as classified by dun +bradstreet) includes approximately: 2% agriculture, 14% construction, 17% finance, 10% manufacturing,22% retailing, 3% wholesale, 6% transportation and communication, and 25% services. for a comparisonofthe descriptive statistics, measurement of the 15 variables in the model, and correlation matrix see table 3. table 3 descriptive statistics and correlation matrix failed failed success success variables mean/ s.d. mean/ s.d. (measurement method) frequency 0/o frequencyo/o i. capital 4.09 1.52 4.58 1.37 (i adequate 7 inadequate) 2. record keeping and financial control 4.64 1.64 4.88 1.42 (i poor 7 good) 3. industry experience 9.20 8.26 6.74 7.15 (number of years) 4. management experience 9.22 7.78 6.26 8.15 (number of years) 5. planning 4.09 1.92 3.58 1.53 (i specific 7 no plan) 6. professional advise 3.71 1.71 4.52 1.75 (i used 7 not used) 7. education 15.84 3.28 14.54 2.53 (number of years) 8. staffing 5.13 1.56 4.48 1.80 (i difficult 7 easy) 9. product/service timing 3.84 1.49 3.90 1.33 (i intro. 7 decline) 10. economic timing 4.07 1.79 4.40 1.69 (i recession 7 expand) 11. age ofowner 36.98 8.31 35.34 9.38 (number of years) 12. partners 40% 34% (%with> i owner/part.) 13. parents 33% 44% (% parents own a business) 14. minority 7% 6o/o (o/o of minority owners) 15. marketing 4.44 1.84 3.74 1.78 (i unskilled 7 skilled 25 table 3 continued 2 3 4 5 6 7 8 9 10 ii 12 13 14 2 ·.212' 3 ·.142 ·.08 4 .,34•• -.043 39•• 5 .24' -.37" ·.04 -.07 7 ·.23' .07 ·.21' .08 ·.00 ·.05 8 -.01 .07 .10 .06 .01 -.10 ·.05 9 .07 .16 .06 ·.09 ·.17 ·.18 ·.05 .03 10 -.03 ·.16 ·.02 .05 .13 .06 ·.16 ·.05 .00 11 ·.21' .05 .21' .52" ·.09 ·.12 -.02 .01 ·.10 .10 12 ·.19+ .16 .01 .06 ·.05 ·.09 .05 ·.10 .01 ·.i i .07 13 .06 .oj .14 ·.12 .12 .03 ·.21' .02 ·.26' .05 ·.13 ·.02 14 -.04 .01 .15 .06 .01 -.ii ·.06 ·.04 .ii ·.01 ·.38".10 .07 15 ·.44" .15 .16 .49" ·.19+ ·.26' .15 .19 ·.09 ·.05 .29" .05 .01 .00 n = 45 failed, and 51 successful firms + p < .10 • p < .05 •• p < .01 sampling methodology the sample was limited to the six new england states--connecticut, maine, massachusetts, new hampshire, rhode island, and vermont. a total of i 03 questionnaires were return, but seven were dropped from analysis due to missing data. therefore, 96 usable questionnaires were analyzed: 45 from failed and 51 from successful firm owners. the combined response rate was 43%. this rate is high for a failure survey. 26 the population of failed businesses includes chapter 7 and 11 companies. due to difficulties in locating liquidated business owners, the failure sample frame was chapter 11 companies. lussier (i 995a&b) and lussier and corman ( 1995) used a sample of chapter 11 companies. the rationale for the company size of 0 to i 0 employees is the fact that a very small percentage of businesses start with more than 6 employees (cooper et al. 1990). the model was designed for young firms up to ten years old with up to ten employees. the failure sample was generated from the bankruptcy court records. the questionnaire was first mailed to each owner/ceo filing chapter 11 during the most recent year. the questionnaire was then mailed to each failed respondent's successful company match. matching was selectively based on size (number of employees o i 0), age (all firms are i 0 years old or less), location (same state and city, or city close by), and industry (same dun + bradstreet classification) to ensure relevant comparisons. each chapter 11 company owner was asked to identify the company's major competitors. estimating a 50% response rate from successful company matches, two competitors were selected and sent a questionnaire as the failed company's match. all 45 failed firms have at least one match. six additional successful companies data were also included as a second match. reliability and validity test of the sample reliability of the questionnaire the questionnaire was carefullydcvcloped through four pretests to increase reliability of the sample measurement instrument. one of the major concerns of the study was response rate. the questionnaire'slength was limited to increase the response rate; therefore, a trade-off was made. rather than having several repeat questions, the questionnaire used one open-ended question to check reliability. there was only one nonreliable response (.005%); therefore, reliability is inferred. chapter 11 firms are early representativesof closed businesses. wood ( 1990) reported less than 5% of chapter i i companies survive whereas flynn ( 1989) reported a i 0 to 12% survival rate. in this study 19% of the respondents were in chapter 7 proceedings. the responses of the chapter 7 companies were compared to the chapter 11 companies to determine differences. of the questions testing the model, none were significantly different (p<.05). therefore, i-testing implies that the dominantly chapter 11 sample is a valid representation of failures. sample representation to ensure that the sample represents the population, a comparison was made of the sample failure frequency distributions to the failure population by state and industry. the population figures include chapter 7 and chapter 11 failures (dun+ bradstreet 1993). using the chi-square test, there is no significant difference (p<.05). in other words, businesses in all six states from all industries are represented by about the same percentage in the sample as in the population which they represent. percentage representation of the sample was listed above. 27 nonresoonse bias nonresponse bias was minimized in this study by including initial nonrespondents in the sample, and by comparing statistically the initial nonrespondents' data to that of the initial respondents to ensure that there is no significantdifference.approximately i 0% of the sample includes initial nonrespondents. of the questions testing the model, no responses are significantly different (p<.05). the t-test and chi-square test results imply that the sample is not problematic due to nonresponse bias. in addition, the combined response rate of 43% is relatively high for failure studies. results and discussion of model testing testing the literature model to pevelop the startuo business success versus failure prediction model to test the 15 independent variable literature model, stepwise discriminant analysis was run in order to predict the success or failure of 96 businesses. because some of the variables are not significant, they are dropped from the literature model to form the business success versus failure prediction model. below is a list of the variables retained and those excluded from the model after step i 0 of stepwise discriminant analysis. the variables are in rank order by ability to discriminate between success and failure. the success versus failure prediction model for entrepreneurs with 0-10 employees s/f = f (professional advisors, planning, education, minority business ownership, staffing, parents owned a business, record keeping and financial control, capital, industry experience, economic timing) the following variables were excluded from the model: management experience, product/service timing, age, partners, and marketing. ten variables are kept in the model, and five are dropped from the model. for the standardized canonical discriminant function coefficients, classification results, and functional statistics of the model see table 4. the standardizedcoefficients(beta) are similar to the coefficients in regression. the standardizedcoefficientsare adjusted for unequal means and standard deviation. the absolute values of the standardized coefficients provide information concerning the relative importance of the predictor variables in the function. therefore, they are presented in rank order. however, unlike regression, it is inappropriate to interpret the signs of the coefficients (scherr 1989). the most appropriate evaluation statistic of the model is not the coefficients because they are rank ordered, and the signs should not be interpreted. therefore classification accuracy,canonical correlation, and the significance of the model are better test of the validity and reliability of the model. 28 table 4 discriminant function analysis results model standardized canonical discriminant function coefficients variable name (ranked by coefficient discriminant ability) 6. professional advisors 5. planning 7. education 14. minority 8. staffing 13. parents owned business 2. record keeping and financial control i. capital 3. industry experience i 0. economic timing ••• p < .001 classification table predicted actual group failure success overall grouped cases classified discriminant function statistics canonical correlation eigenvalue wilks' lambda chi-square model significance level failure 67% (30) 18% (9) 29 group success 33% (15) 82% (42) .54 .42 .70 30.89 __.qqqq standardized coefficients -.15••• .65*** .46*** -.37*** .3 t ••• .29••• -.29••• -.23••• .21••• -.22••• percentage correct 67.7% 82.4% 75.0% vahdity and reliability of the model the research results imply content validity, empirical validity.construct vahdity, and reliability. to address content vahdity, this study based all questions on prior research. the model includes 15 variables stated in the hterature as being factors contributing to success versus failure. there is no generally accepted list of variables/factors contributing to success or failure. therefore, a criterion is estabhshedconcurrentlywith the model. to help ensure the rehability of the model, stepwise discriminant analysis was run to ehminate collinear variables, and those with little discriminatory power. it can be inferred that multicollinearity is not problematic. empirical validity and rehability were tested three ways: i. predictive ability of the model. the model predicted 67.7% of the failed sample, and 82.4% of the successful firms correctly for an overall accuracy rate of 75%. see classification table section of table 4. if random guessing produces a 50% correct classification, then the model is 25% more reliable at classifying a specific business as successful or failed. 2. ability of the 15 independent variables to explain the variance in successor failure the canonical correlation [simply the pearson correlation between y and x, similar to r in regression] was .54 indicating a correlation between predicted and observed group membership. this is reflective of the overall 75% correct classification. 3. significanceofthe model. the chi-squareof30.89 was used to test the significance level of the model (p=.0006) [comparable to the f test in regression]. in other words, the model will reliably predict a group of businesses as failed or successful more accurately than random guessing over 99% of the time. two other discriminant function statistics shown in table 4 include: eigenvalue .42 [the ratio of the between-groups to within-groups variabihty] and wilks lambda .70 [the ratio of within-group variability to the total variability). implications use and limitations of the model there are at least seven groups that can benefit from using the prediction model developed in this study: entrepreneurs, investors, lenders, suppliers, educators, consultants, and pubhc pohcy makers. entrepreneurs can assess the probability of success or failure before starting a business. investors and lenders may be able to avoid conducting business with firms with a high probability of failure. suppliers may decline credit or limit it to high risk businesses. educators and consultants can make these other groups aware of the model and help them to use it. public policy makers can use the model when selecting assistance either to prevent failure or to promote further growth. when the seven groups use the model, it is important to reahze that the model is not intended to replace existing default risk prediction techniques. it should be used in conjuncticn 30 with the present techniques used by investors, lenders, creditors, and other groups to avoid default. the model does not provide numerical guidelines for variables distinguishing success from failure. judgment is needed when applying the model. for example, the variable "planning" states that people starting firms with a specific business plan have a greater chance of success than people without a specific plan. however, the model neither defines "specific" nor gives a sample business plan needed to be successful. the user must look at the list of variables in the model and subjectively assess the strengths of the business for each variable. use judgment when a business is strong on some variables and weak on others. when judgment is needed, the other decision criteria previously used become increasingly important in avoiding default. further research some unanswered questions require further research. why are there inconsistencies within the literature and discrepancies between the literature and this study? almost all of the major variables identified in the literature as factors contributing to success or failure have been rejected by one or more other existing studies; see table 2. management experience constitutes one major area of discrepancy between the literature and this study. fourteen of the twenty articles support this variable as a distinguishing factor between success or failure. however, management experience was not a significant variable in this perdition model. in this study ten of the 15 variables were significant predictors of success or failure (p<.00 i). of the 20 journal articles from which the variables were adapted, only cooper et al. (1990 + 1991 ), and reynolds and miller ( 1987 + 1989) developed nonfinancial empirically tested predictive models. they each developed two models based on the same data set. the following bullet list compares each of the 15 variables, tables i and 2, for these four models and this study's model (prediction model for 0-10 employees] to show discrepancies among studies. i. capita/is the only tested significant variable in their four models and this 0-10 model. 2. record keeping and financial control was a significant variable in the reynolds models and this 0-10 model, and it was not a tested variable in the cooper models. 3. industryexperiencewas a significant variable in the cooper 1991 model and this 0-10 employee model, but it was not significant in the cooper 1990 model, and it was not a tested variable in the reynolds models. 4. management experience was not a significant variable in the cooper models or this 0-10 model, and it was not tested with the reynolds models. 5. planning was a significant variable in cooper 1990, both reynolds models, and this 0-10 model, and it was not a tested variable in the cooper 1991 model. 6. professional advisors was significant in the cooper models and this 0-10 model, and it was not a tested variable in the reynolds models. 31 7. education.vas significant in the cooper 1991 model and this 0-10 model, but it was not significant in the cooper 1990 model or the reynolds and miller 1989 model, and it was not a tested variable in the reynolds 1987 model. 8. staffinb"'as a significant variable in this 0-10 model, but it was not significant in the reynolds models, and it was not a tested variable in the cooper models. 9. productlsl'tvice timing was a significant variable in the cooper 1990 model and the reynolds models, but not in the cooper 1991 model or this 0-10 model. i 0. economic timing was a significant variable in the cooper 1990 modei and this 0-10 model, but not in the cooper 1991 model, and the reynolds models did not test it as a variable. 11. age of owner was a significant variable in the cooper 1990 model; but it was not significant in cooper 1991, reynolds and miller 1989, or this 0-10 model; and it was not tested in the reynolds 1987 model. 12. having partners was a significant variable in the cooper 1990 and reynolds and miller 1989 model, but not the cooper 1991 or this 0-10 model, and the reynolds 1987 model did not test this variable. 13. parents owned a business was a significant variable in the cooper 1991 model and this 0-10 model, and it was not tested by the reynolds models or cooper 1990 model. 14. minority ownership was a significant variable in both cooper models and this 0-10 model, and it was not a tested variable in either reynolds models. 15. marketing skills was not a significant variable in any of the models, it was rejected as significant in the reynolds 1987 model and this 0-10 model, and the cooper models and reynolds and miller 1989 model did not test it. to summarize, the only variable tested and accepted by all five models is capital. the variables tested by at least three models and not rejected by any as significant include: planning, record keeping and financial control, professional advisors, and minority ownership. variables both supported and rejected as significant include: industry experience, education, staffing, product/service timing, economic timing, age of owner, and partners. the variables not supported as significant by any of the five models, and rejected by two or three include: marketing skills and management experience. with these discrepancies among studies, further predictive model testing is needed to provide reliability and validity. conclusjon the purpose of this study has been achieved. the generic young nonfinancial business success versus failure prediction model for businesses with 0-10 employees developed in this study will reliably outperform random classification of a group of businesses as successful or 32 failed over 99% of the time (model p=.0006). the model will accurately predict the success or failure of a specific business 75% of the time. the ten variables in the model explained 54% of the variance of factors contributing to success or failure. 33 references altman, e. 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(1990), "credit technique: who gets hurt by bankruptcy?" business credit 92, 44. 35 the value of social media advertising strategies on tourist behavior: a game-changer for small rural businesses | published in journal of small business strategy processing math: 100% jsbs menu articles articles all for authors editorial board about issues ethics statement sponsors search sorry, something went wrong. please try your search again. × articles blog posts rss feed enter the url below into your favorite rss reader. https://jsbs.scholasticahq.com/feed × articles vol. 31, issue 4, 2021 november 16, 2021 cdt the value of social media advertising strategies on tourist behavior: a game-changer for small rural businesses nory b. jones, patti miles, tanya beaulieu, rural business social media cobra model advertising tourist behavior ols regression. ccby-4.0 • https://doi.org/10.53703/001c.29478 photo by sincerely media on unsplash jsbs jones, n. b., miles, p., & beaulieu, t. (2021). the value of social media advertising strategies on tourist behavior: a game-changer for small rural businesses. journal of small business strategy, 31(4), 64–75. https://doi.org/10.53703/001c.29478 save article as...▾ pdf xml citation (bibtex) data sets/files (2) download all (2) table 1. descriptive statistics download table 2. regression results download sorry, something went wrong. please try again. if this problem reoccurs, please contact scholastica support error message: undefined × view more stats abstract nature-based tourism represents a growing sector within the tourism industry, and these interests could help improve the conditions of economically disadvantaged rural communities. the new digital landscape, including internet and social media usage, represents a critical strategic opportunity to inform, educate and reach these tourism segments. the present research examines the impact of social media advertising on nature-based tourism within rural communities. in this research, we utilize the cobra (consumers’ online brand-related activities) model (muntinga et al., 2011) of consumer behavior to assess the impact social media advertising plays in generating pre-consumption, consumption, creation, contribution, and engagement in rural business. the results are significant, finding that incorporating digital strategies within rural firms is beneficial. according to our research, the careful placement of a social media advertisement can statistically increase engagement components by more than 50%. in theory, this can increase tourism and economic activity in these rural, economically disadvantaged areas. introduction rural areas have unique challenges that make economic survival difficult. geographically, 97% of the u.s. land area is classified as rural, and 60 million people (19.7% of the u.s. population) live in these rural areas (u.s. census bureau, 2016). this research project takes place in one such area rural maine and investigates the challenges of many remote rural businesses. given that small businesses account for 97-99% of all businesses in the united states (sba office of advocacy, 2019), such an inquiry is certainly warranted. in maine, for example, during 2019, small businesses contributed more than $12.9 billion to the maine economy and created two out of three jobs (maine office of tourism, 2019). major challenges include sub-optimal access to broadband internet, accessing needed capital, finding and retaining qualified workers, geographic isolation, and less expertise and knowledge of digital systems, including web and social media (lane report, 2019; ncsl, 2020). these obstacles may prevent small businesses in rural areas from reaching and attracting tourists. tourism can play a significant role in rural economies nationwide. for example, the maine office of tourism reported that tourists spent about $4.8 billion, which supported approximately 90,600 jobs and created an almost $9 billion economic impact in maine. furthermore, they said that household income generated through jobs supported by tourism was more than $2.8 billion (maine office of tourism, 2019). another example is demonstrated in south dakota, where despite the pandemic in 2020, there were 12.6 million visitors, with 3.4 billion in tourist spending, which generated $276 million in state & local tax revenue accounting for 11% of state sales tax collections (dakota news, 2021). similarly, tourism in idaho is a $3.7 billion business and employs more than 45,000 people, making it one of idaho’s largest industries (robertson, 2021). in maine, rural businesses provide approximately 116,000 jobs, equating to one in six jobs, contributing $2.8 billion to the state budget through tax dollars. nationally, tourism contributes a significant amount to the economy. according to ibis world (kennedy, 2021), notwithstanding the pandemic in 2020, tourism provided $590.7 billion in revenue and employed about 5 million people across the united states. nature-based tourism is defined as leisure travel to enjoy natural environments and outdoor activities and is especially pertinent to rural tourism. we can use the national parks as an indicator for rural nature-based tourism. the u.s. department of the interior (2020) reported that in 2019, visitor spending in communities near national parks resulted in a $41.7 billion benefit to the nation’s economy and supported 340,500 jobs annually. global expenditures on tourism have increased from $456 billion to $1.4 trillion (u.s. department of the interior, 2020). digital transformation, especially in web 2.0 and social media, has become a key player in a firm’s success. however, many small and especially rural businesses have not taken advantage of these new forms of technologies. given the scarcity of resources available to rural businesses, and the lack of time to learn new technologies, rural businesses do not always risk their precious resources to engage with newer technologies or to take advantage of features, such as social media advertising. this research explores the use of social media advertising to analyze the impact on rural and nature-based tourism in economically depressed areas. the paper is organized as follows: a review of the literature provides a foundation for our research. we then propose four hypotheses based on the literature review. the methods section analyzes the impact of advertisements placed on facebook for rural businesses. the results from this study are potentially generalizable to rural small businesses on a national and international scale. literature review impact of tourism on rural economies as previously stated, tourism represents a growing and significant source of revenue in maine and other rural economies. in the united states, rural tourism is also experiencing growth as more people attempt to disconnect from urban life and focus on nature and relaxation (nault, 2020). an interesting consequence of the recent covid-19 pandemics is that people, especially younger people, are experiencing a “rebound” travel effect where they want to get outside and reconnect with nature (palmer, 2021). as the “great resignation” takes hold, individuals seek more fulfilling ways to spend their time and energy (hsu, 2021). palmer notes, "post-pandemic, 75 percent of gen z and millennial travelers aspire to plan longer trips and further afield, with 81 percent of respondents wanting to break away from standard holiday destinations " (2021). rural communities with nature-based attractions should therefore benefit as they provide these natural, authentic experiences. nature-based tourism and sustainability tourism is a broad umbrella, including a large swath of tourism-related activities such as travel, entertainment, food and beverages, travel and reservation products, and bus transportation. however, as our world has increasingly become technology-oriented, with computers and smartphones as our constant companions, some people are finding the need to unplug and disconnect from them. a growing trend involves travelers seeking unique, authentic experiences with an awareness and appreciation for good environmental practices (crest, 2019). people are beginning to recognize the benefits of a specific type of tourism labeled nature-based tourism. this type of tourism correlates with improvements in mental health, cognitive, physical, and immune response improvements, and stress reduction (winter et al., 2020). thus, it is not surprising that such tourism is a growing subset of the broader category of tourism. tourism, in general, is a growth sector of the economy in the united states, increasing 62% since 2000 (bureau of economic analysis, 2021). given this, of particular interest to this research is the growth of tourism and employment from outdoor recreation and nature-based tourism. the sharp rise in adult participation in nature-based activities such as fishing (98%) and recreational vehicle activities (48%) is also relevant to this research (bureau of economic analysis, 2021). similarly, the impact of the pandemic on nature-based activities has been significant. according to the outdoor industry association, over 8 million more americans went hiking in 2020 compared to 2019. this trend is expected to continue, with forecasted growth of 14% over the next 20 years (market watch, 2021). all of this information taken together supports the need to research nature-based tourism to help small businesses in these rural areas. interestingly, this has been exacerbated by the covid-19 pandemic as people have sought to find undisturbed uncrowded natural areas (dingfelder, 2020). we studied three regions of maine aroostook county, downeast, and western maine. they represent ideal targets for this type of tourism based on their rural locations, pristine landscapes, and outdoor activities. yet, attracting people to these areas, no matter the beauty, can be very challenging. taken together, this begs the question, how can we attract those tourists seeking a unique experience to the outskirts of rural counties? and, can the use of social media advertisements help draw out potential tourists? challenge and success factors to small businesses in rural areas therefore, we explore small businesses. according to the u.s bureau of labor statistics, about 20% of all small businesses fail within the first year, 50% by the fifth year, and 80% by the tenth year. these disturbing trends bring forth questions concerning how rural businesses can survive (charles, 2017). will digital technologies represent a way to overcome some of the challenges in reaching travelers seeking a unique travel experience and authentic scenery in sparsely populated areas? is there a difference between small business owners who embrace the internet and social media from those who do not? (fachrunnisa et al., 2020; reynolds et al., 2020). a fundamental question is whether u.s. small businesses also have an awareness of the need for social media outreach in the form of advertisement. use of digital technologies by travelers the literature supports the suggestion that travelers use the internet and social media to plan for travel destinations (nizeyimana & kalulu, 2017). similarly, because many travelers use smartphones while on the trip to search for activities, restaurants, and recommendations, they must consider providing appropriate content for these devices. research by longwoods international (2019) notes that about 55% of travelers use social media to plan, assess, and review possible locations. about 68% of the travelers use facebook and 82% who followed a social media influencer notice travel-related content. further research suggests 70% of travelers research travel on their smartphone, and 83% of u.s. adults now prefer to book their trip online (condor, 2019). in terms of social media, a report from statista showed that 36.5 percent of people use social media to plan travel, and 60 percent share photos on social media while traveling (temblader, 2020). of specific interest to the present research, the maine office of tourism (2019) reports that 65% of tourists use the internet to plan trips and search for and reserve accommodations. of these, 41% used tripadvisor, 39% google maps, and 33% online search engines for their research. airbnb was also a well-used (30%) search engine to find lodging. during their visit to maine, 84% continued to use internet searches, with 69% using their mobile devices to search. most visitors (65%) stayed in hotels, motels, or resorts during their visit, 18% in cabins/cottages, condos, 10% in inns/b&bs, and 3% in campgrounds. the average length of the stay was almost four nights. most visitors came from the mid-atlantic states (48%), followed by new england (33%) and canada (17%). of these visitors, most visited the maine beaches (23%) as well as acadia national park (bar harbor) (17%). about 14% visited the western lakes and mountains area, and only 3% saw the most rural part of maine, aroostook county. of the limited visitors, 41% were most interested in touring/sightseeing, 36% in outdoor activities (excluding water, mostly hiking), 33% in food/culinary experiences, and 27% in water activities (mostly beach). this data suggests that when planning a trip, tourists first research an area using the internet. given this, it appears keenly relevant for small businesses to harness digital strategies to reach and attract potential visitors. it also suggests that small businesses in rural areas might be best suited to provide visitors with local, authentic, friendly, high-quality experiences and guide visitors to help with outdoor activities and good food, history, and culture. impact of the internet and social media on tourism in rural areas the prior section showed the decisive impact of the internet and social media on traveler planning and usefulness during a vacation. the theory of planned behavior (tpb) (ajzen, 1985; javed et al., 2020) helps explain the underlying motivation behind social media’s impact on behavior. this theory suggests a linkage between behavioral intention and actual conduct. using tpb, javed et al. (2020) found that the internet and social media were essential in helping tourists find and then plan vacations to more remote rural areas. a fascinating insight from their research was the importance of videos in influencing traveler behaviors to visit these areas. in addition, they discovered that finding and targeting "opinion leaders’’ in potential tourist segments was very effective in motivating travel behaviors. the use of videos was especially important with millennials and perhaps with younger gen z travelers. in summary, their research showed that social media provided a significant way to reach tourists and tourism businesses and influence their travel behaviors. other researchers also find support for the relationship between proactive promotional activities, like facebook advertisements, and increased tourist behaviors showing a positive relationship between sustained, aggressive promotional activities and tourist behavior (cohen et al., 2014). they specifically noted that social media had become an increasingly important factor in influencing tourist behaviors and decisions for trip planning and selecting activities, destinations, lodging, dining, and shopping during the trip. a study by sarbu et al. (2018) found that the most influential tourism advertising uses a combination of facebook and instagram, with a maximum penetration rate when running ads on those two platforms in parallel. social media engagement and tourist behaviors it appears logical that consumers are interested in the tourism of rural areas. still, the critical component of the discussion is how to encourage customers to move from scrolling to engaging with a particular website or location. to this end, we turn to the work of vale & fernandes (2018). they define the construct of consumer engagement behavior (ceb) as the behavioral indicators of attitudes and motivations towards a brand, product, or service offerings. they suggest that ceb related activities might be defined by a typology proposed by muntinga et al. (2011) to help provide meaning to how consumers interact with online resources. the model labeled the consumers online brand-related activities (cobra) (muntinga et al., 2011) provides a model of how people engage in social media and how that might drive their behavior, precisely consumer motivation for engaging with particular brand-related content. of specific interest to the present research is the path of gradual involvement with brand-related content. the model suggests that the minimum level of engagement is consuming defined as viewing content through passive engagement. the second level is contributing, engaging with the online resource by commenting on the product, which is reflected on their own social media page. the third level is creating. creating occurs when people comment and share the content. researchers have found that the relevant motivation to consume social media rests on the desire for entertainment, integration and social interaction, personal insights, and information (papacharissi, 2007). advertising and social media advertising was first introduced in 1923 by claude hopkins in a book called scientific advertising. however, numerous strides in advertising have occurred over time and lead to the present discussion about the interaction between social media and advertising. researchers note that social media advertising is different from traditional advertisements, and consumers can exert both positive and negative influence over the product (muntinga et al., 2017). others have found that consumer involvement in the brand (reposting, sharing, liking, etc.) can positively and substantially affect the brand (manchanda et al., 2015). and such advertising methods are far more effective than the traditional push-based marketing models (trusov et al., 2009). given this, it is relevant to consider the impact of an advertisement on one’s willingness to engage in the content. therefore, our hypotheses will explore social media advertising relative to the cobra model and potential increased visits to these rural areas. research model examining the cobra typology in more detail will help define our hypotheses as the levels of engagement put forth by the cobra framework are a standard used to measure social media effectiveness (buzeta et al., 2020). the three behavioral levels are consumption, contribution, and creation (muntinga et al., 2011). the first, called consumption, is defined as passive, low-level activities such as receiving the post, looking at the posts, reading posts, perhaps clicking on the content, but not actively engaging or participating in the social media post. such behaviors are broadly passive, representing the minimum level of interaction with the post. given this passive activity level, the cobra model refers to consumption as the lowest level of engagement and the most frequent consumer activity. consumption is further specified as motivation for entertainment and tends to be an antecedent to other forms of consumption. thus, it is relevant to examine if a paid advertisement might lead to additional consumption. in the present model, we separated consumption into two categories: pre-consumption and consumption. said more formally, we hypothesize: h1. using a paid social media advertisement will positively and significantly increase the pre-consumption (receiving and reading the post) of the social media post. h1a. using a paid social media advertisement will positively and significantly increase consumption (clicking on the content). the second level in the cobra model refers to, contribution which is considered the medium level of consumer involvement. it involves the consumer interacting with the post via likes, loves, and wows over a post. it is signified by both user-to-content and user-to-user interaction. contribution appears to increase a consumer’s level of interest and loyalty. given this, it is captured in the present study as the total number of likes, loves, and wows. said more formally, we hypothesize: h2. using a paid social media advertisement will positively and significantly increase contribution (likes, loves, wow). the highest level of engagement, creation, is when consumers actively contribute to the post with comments, shares, actively engaging with others, uploading photos, or using hashtags. this activity further stimulates activity and engagement by peers. therefore, the more active the engagement (ceb) in a social media post, the more interested and engaged the consumer will be in further actions and behaviors such as purchase or travel activities. given this, we formally hypothesize: h3. the use of a paid social media advertisement will positively and significantly increase creation (comments, shares). we use the consumer engagement model specified by vale and fernandes (2018) and ferreira et al. (2020) to measure engagement from a holistic standpoint. gudigantala et al. (2016) explored the relationship between purchasing intent and conversion rates to actual purchases. while this study examined these behaviors for e-commerce stores, their findings can translate to destination advertising and travel conversions. they found that trust and satisfaction with the website had a significant positive correlation with the conversion rates. thus, we argue that social media ads will drive potential tourists to a business’s website. these ads can impact the conversion rate by motivating people to visit these areas and spend money. visiting the website and interacting with the website is a trusting action and signals trust in and satisfaction with the website, its content, and credibility (flavián et al., 2006). thus, the total interactions with the post can be a proxy for the potential of visitation or purchase (kim et al., 2017). to this end, we aggregate the previously defined variables to create an engagement variable. using this, we formally hypothesize: h4. using social media paid advertisement will positively and significantly increase the engagement rate (overall engagement with the post). methods data collection we collected data from a student-centered research project called “undiscovered maine,” which is part of the university of maine business school. this project has been working to promote small businesses in rural areas of maine over the past eight years. the project uses facebook as a vehicle to promote small businesses, activities, and places in these rural businesses. over a one-year period, approximately 120 posts were created. we accessed the data for each of these posts using facebook insights, which provided data on reach, likes, loves, comments, shares, and post clicks. the present study utilized data collected between spring 2020 to spring 2021 from the undiscovered maine project’s facebook page. the study uses this data with a deductive research approach which quantitatively analyzes a large set of independent data. specifically, over 12 months, we obtained over 100,000 separate pieces of data gathered to represent 126 different event posts over one year. in this study, 20 posts used paid advertisements on facebook, and the remaining 105 did not use paid advertisements. we then used statistics to examine differences between engagement between paid ads and no ads. for more information on how to generate such an advertisement, please see appendix 1. the sample description is in table 1. table 1.descriptive statistics n mean std. deviation std. error min max pre-consumption (reach) no ad 101 192.10 227.468 22.634 51 1442 paid ad 20 3714.55 2274.047 508.492 392 7862 total 121 774.32 1608.739 146.249 51 7862 consumption (post clicks) no ad 101 14.09 35.439 3.526 0 241 paid ad 20 370.00 292.507 65.406 17 930 total 121 72.92 179.488 16.317 0 930 contribution (likes, loves, & wows) no ad 101 16.13 35.174 3.500 0 197 paid ad 20 41.10 32.490 7.265 5 160 total 121 20.26 35.846 3.259 0 197 creation (comments & shares) no ad 101 3.74 9.392 0.935 0 57 paid ad 20 14.85 13.666 3.056 1 53 total 121 5.58 10.966 0.997 0 57 engagement no ad 96 0.86 0.651 0.066 0 4 paid ad 20 1.91 0.279 0.062 1 2 total 116 1.04 0.723 0.067 0 4 analytics the social media platform facebook provides analytics to offer insights to monitor the response to facebook posts and engagement with the content, sharing activity, and demographics and geographic information for content supported by facebook ads. we created a data set to examine the relationship between the impact of the advertisements and consumer interaction with the content. the spreadsheet captured the following facebook data: date and description of the post, paid ad (yes or no), post reach (the number of people who saw your posts in their timeline; both organic and paid ads; reach measures unique views), post clicks (the total number of clicks on a post, not including comments, likes, and shares), page views (the number of times people have viewed a page’s profile), comments, shares, and likes/loves/wows, and overall post engagement (includes all actions that people take involving your ads while they’re running. post engagements can include reacting to, commenting on, sharing the ad, claiming an offer, viewing a photo or video, or clicking on a link). in the one year of data collection, the site collected 109,107 separate user interactions, broken into the categories: pre-consumption, consumption, creation, contribution, and engagement, each described in table 1: descriptives. measures this research is an exploratory study. we seek to understand better how small businesses in rural, underserved areas can reach potential tourists via cost-effective strategies. the u.s. census describes rural regions of the united states as “sparsely populated, have low housing density, and are far from urban centers” (census.gov, 2017). social media outreach: the present research utilizes social media to assess and investigate the hypothesis put forth in this research. specifically, most of these data come from facebook, as this website enables users to indicate if they like the post and interact with the material in real-time. the analytics side of facebook then allowed us to measure and monitor these interactions over time. of specific interest to the present research is the potential ’ 'tourist’s engagement with the following site features: advertisement (ad): we boosted specific facebook posts with paid advertisements. the placement of an advertisement (ad) is the independent variable in this study. it is represented as a dummy variable where one equates to a paid advertisement for an event, and 0 corresponds to an event without a paid advertisement. ads were placed randomly across the one-year data collection timeframe pre-consumption: the number of people who saw a post in their timeline using both organic and paid ads; pre-consumption is measured by reach, which captures unique views. consumption: measured by post clicks which indicate that a person clicked somewhere within the post. this could be on a link, a picture, etc. contribution: the number of new likes, loves, and wows for the content. this represents (broadly) one’s propensity to enjoy a place promoted in the advertisement and asserts a willingness to visit this location. creation: this is the highest level of engagement with the post when people take the time to comment and/or share the post. engagement: this is a summation of consumption, contribution, and creation measured by adding together the number of post-clicks, likes, loves, wows, shares, and comments. ceb shows the overall level of involvement by people who see the post. analysis before proceeding with this analysis, the data were examined for normalcy, unexpected correlations, and the presence of outliers. as can be seen in table 1: descriptives, the data is positively skewed in all cases suggesting that a few significant data points pull out the mean, shifting it in all cases to the right of the median. however, none of the data represents significant outliers, and there is a large enough sample to suggest the data could support the usage of normal statistics. also, because the dependent variables are related by their very nature, the only independent variable in this analysis is the existence or absence of an advertisement, quantified as a dummy variable. the dummy variable is a 1 when there is a paid advertisement and a 0 when there is no advertisement. to this end, we chose to regress the dummy variable on each of the dependent variables put forth in the hypotheses. results hypothesis 1 suggests that placing a paid advertisement will increase the pre-consumption (reach) of the social media post. this hypothesis seeks to quantify the idea of consumption of social media. the relationship was explored through the use of an ols regression model. the placement of the ad is the independent variable utilized to predict the reach of the site. our results indicate that placing an ad creates a statistically significant impact on the reach of the site. utilizing an ols regression model, we find that for each paid advertisement, pre-consumption increases by about 3,522 units, which is statistically significant (t = 15.438, p < 0.01), and the placement of an advertisement seems to explain more than 66% of the variation in pre-consumption, providing support for hypothesis 1. hypothesis 1a is designed to examine the relationship between advertisement consumption (post clicks). this hypothesis seeks to add additional evidence to the idea of consumption of social media. with post clicks, the viewer has gone beyond being reached and engaged with the medium in a meaningful manner. as noted in the literature review, exploring and finding out more about a locale is an antecedent of actual visits, so this measure is important. to that end, utilizing an ols regression model, we find that consumption increases by about 356 views for each paid advertisement. such a result is statistically significant, suggesting these results are very unlikely to have been obtained by chance (t = 11.987, p <0.01). further, we find this variable explains more than 54% of the variation in consumption. thus, we find support for hypotheses 1a. hypothesis 2 examines the relationship between posting an advertisement and people contributing to the content through the process of liking, loving, or wowing the post with their friends. this sort of action on the part of the viewer is a movement towards contribution. like landing page views, the theory indicates that people who like a post are an indication of interest and a precursor that they will visit the site. thus, we utilize an ols regression model to examine the impact of the advertisement on likes, loves, and wows. when an advertisement is not present, the analysis shows that we expect to see approximately 16 like, loves, and wows per post. however, when an advertisement is present, this increases by about 156%. such a finding is statistically significant, suggesting that the likelihood of obtaining these results through a random event is less than 1% (t = 2.935, p < 0.01). also of interest is that the advertisement can explain almost 7% of the variation in likes, loves, and wows. taken together, when an ad is present, we can expect approximately 41.09 likes or loves of the location. hypothesis 3 attempts to examine the impact of placing an advertisement on a viewer creating new content as a result of the post. in this case, people are putting their own words or vote of confidence behind the post. to classify as creating, the social media user needs to comment or share the content. such an action on the viewer’s part suggests even more significant movement towards visiting the rural location, an even stronger indicator that they will visit the site. to that end, we utilize an ols regression model to examine the impact of the advertisement on creation. when an advertisement is not present, the analysis shows that we expect to see approximately four comments and shares. however, when an advertisement is present, this increases by about 175%. such a finding is also statistically significant. (t = 4.451, p < 0.01). also of interest is that the advertisement can explain more than 14% of the variation in comments and shares. taken together, when an advertisement is present, we can expect approximately 15 comments and shares. hypothesis 4 attempts to capture the broad engagement rate of the users. as opposed to the individual measures, h4 attempts to capture a combination of engagement activities that is not discoverable when analyzing each type of engagement individually. while we cannot be certain that this will lead to actual visitors to the undiscovered rural location, it is a clear indicator of interest. the engagement measure is computed through the summation of pre-consumption, consumption, contribution, and creation. in this formation, researchers can assess the actionable steps taken from a post or the overall involvement by people who see the post. it is a reliable measure of one’s actual intent to visit the physical location (schivinski et al., 2016). the measure ranges from 51 to 8,451, with a skewness of 2.7, suggesting that extreme values are concentrated in the distribution’s right tail, pulling the mean relative to the median and bulk of the data. however, given the large data set, we proceed with the actual data, which supports hypothesis 4. on average, the rural locations queried in this research are likely to see an average of 226 units of engagement (the sum of reach, consumption, creation, and contribution). however, when a paid advertisement is utilized, the same rural locations are likely to see a jump to 3,914 units of engagement. such an increase represents a significant effect, (t = 15.463, p < 0.01). this analysis also suggests that about 66.5% of the outcome can be accounted for with an advertisement. table 2 presents the results of the analysis. table 2.regression results unstandardized coefficients standardized coefficients model significance b std. error b t sig. f sig. r square hypothesis 1: paid ad on pre-consumption (constant) 192.099 92.765 2.071 0.041 238.321 0.000** 66.70% paid ad dummy 3522.451 228.173 0.817 15.438 0.000 hypothesis 1a: paid ad on consumption (constant) 14.089 12.071 1.167 0.245 143.698 0.000** 54.70% paid ad dummy 355.911 29.690 0.740 11.987 0.000 hypothesis 2: paid ad on contribution (constant) 16.129 3.459 4.663 0.000 8.616 0.004** 6.80% paid ad dummy 24.971 8.507 0.260 2.935 0.004 hypothesis 3: paid ad on creation (constant) 3.743 1.014 3.689 0.000 19.814 0.000** 14.30% paid ad dummy 11.107 2.495 0.378 4.451 0.000 hypothesis 4: paid ad on engagement (constant) 226.059 102.059 21.284 0.000 172.704 0.000** 59.2% paid ad dummy 3914.441 253.144 0.817 15.563 0.000 ** statistically significant to .01 finally, in the interest of supporting small businesses in maine, it seems important to translate one of the cobra model variables to something more tangible and easier to understand. to that end, we provide an example of the power of advertisement via facebook and the interaction with contribution. when a small business does not place an advertisement on facebook, the business generally accumulates approximately 16 contributions (likes, loves, shares, and wows). however, when the same small rural business places an ad on facebook, they are likely to gain an average increase of approximately 25 likes, loves, wows, expanding the contribution from 16 to 41. this can be seen in the equation below, and provides evidence of statistical significance and provides face validity. such results are evident. ˆy=β0+ β1 x1+ε 41.100=16.129+ 24.971 discussion the purpose of this paper was to explore feasible methods that small businesses in rural, under-served regions of maine could use to increase tourism, and thus economic development. we demonstrated the growth of nature-based tourism as a good fit for these rural areas, including aroostook county, downeast, and western maine. they all have phenomenal natural environments, a plethora of outdoor, nature-based activities, and the authentic rural experience that many tourists in these segments are seeking. customer engagement behavior (ceb) appears to be influenced by digital advertising and social media. the “cobra” model shows the relationship between different social media engagement responses and behavioral engagement. to reiterate, these researchers suggest that “consumption,” the most frequent activity, is viewed as more passive, low-level activities such as reading posts, perhaps clicking on the content, but not actively engaging or participating in the social media post. the second level, “contribution,” usually involves posts such as likes, comments, or shares. this has been shown to increase their level of interest and loyalty. the last and highest level of engagement, "creation, "is when consumers actively contribute to the post, posting reviews, comments, actively engaging with others, uploading photos, or using hashtags (muntinga et al., 2011). our data show a significant increase in all levels of engagement with paid ads on facebook. based on our analysis, we validated our hypotheses, demonstrating the statistical significance and the impact of using paid facebook ads to increase reach and subsequent engagement. more importantly, a significant increase in engagement was shown by likes, loves, wows, comments, shares, and post clicks on the web page under the ad condition. what we found interesting was the level of engagement showing the paid ad’s impact on driving people to the specific page on the website from the ad. we can infer that if people take the time to visit the web page, these behaviors can potentially lead to actions in visiting the destination as consistent with the “tourist advertising response” models (choe et al., 2017). these models indicate that tourist decisions while on vacation are influenced by destination tourism advertising, showing higher visitations and more money spent than people who did not see this advertising. we also found that more personal ads created a greater overall engagement across all criteria, including reach, post clicks, likes/loves, comments and shares. for example, an ad for a local farm created more engagement than an ad for a destination because people either knew or could relate more to the farm in a more personal way. research indicates that this type of social media engagement leads to tangible benefits such as purchases and “unacknowledged positive outcomes” in the form of intangible benefits (pelletier & horky, 2015). drawing on this literature, we can draw some conclusions about the value of tangible and intangible benefits of engagement. one measure of tangible value is through the monetization of visitor engagement, such as facebook likes. conversion rates from clicking a facebook like to making an actional purchase have been reported as likely (21%) to very likely (3%), indicating that a sizable number of likes convert to actual purchase (bushelow, 2012). there is some ambiguity regarding the value of a like with p.c. world reporting the value of a like could range from nothing to as high as $214.81 for a non-profit organization (chacos, 2012). while this is a rather large range given that the costs of our ads in the study were around $30, even at the lower end of the value range (of only a few dollars) would easily justify the use of an ad. research seems to agree that the value comes from making consumers aware of a brand and gathering information from consumers’ engagement in social media (bendle & bagga, 2016; john et al., 2017; mochon et al., 2017). customer engagement creates influence beyond monetization. for example, simple exposure (i.e., reach) builds awareness of rural business and recreation opportunities, forming a foundation for future exploration and engagement (davenport & beck, 2001). beyond awareness, gudigantala et al. (2016) found that trust and satisfaction with the website significantly correlated with conversion rates. thus, after driving potential tourists to our undiscovered maine website via social media advertising, literature shows that the conversion rate motivates people to visit these areas and spend money. this could also eventually build trust in and satisfaction with the website, its content, and credibility. from this study, we contribute to both the literature and practice. this study adds to the understudied area of business development in rural communities by exploring the connection between social media advertising and resultant actions. this field study gathered user reactions instead of less realistic settings in a simulated environment or with student populations. our study has practical implications as well. business owners and organizations in rural areas have extremely limited resources and do not always have the luxury of experimenting and trying different strategies. prior research has found that digitization improves operational efficiency and adds to market flexibility (rosin et al., 2020). we extend these findings with our study results, reassuring rural businesses and organizations that using social media ads is worth the time and effort. as exploratory in nature, our research does have a few limitations. first, the study was done in one geographic location – remote and rural maine. while we can assume that many aspects of the study will readily translate to other remote rural areas, additional studies may be warranted to confirm the generalizability. additionally, the size of the study precluded us from capturing subsequent intangible and tangible benefits, and the nature and timing of the advertisements may have influenced our results. other research could be conducted to test our assumptions based on current literature. further, future studies might also consider the role of social commerce as it relates to rural areas. the nature of the rural business’s product or target market may influence the impact of advertising, and so further studies should take place to clarify these nuances. while our study may act as a precursor to such studies, more research into the role of social commerce within rural areas would be beneficial. conclusion our data supports all our hypotheses, suggesting a statistically significant relationship between the placement of a social media advertisement and potential visitor interest and engagement with the content. this is supported by all the major metrics involved with visitor engagement, pre-consumption, consumption, creation, and contribution. while prior research in tourism suggests the relationship between consumer behavior intentions and actions, the present research is the first of its kind to test this relationship in small rural businesses. references ajzen, i. 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(2020). outdoor recreation, nature-based tourism, and sustainability. sustainability, 12(1), 81. https://doi.org/10.3390/su12010081 google scholar appendix 1 facebook ads were placed to showcase different aspects of the undiscovered maine project. these included specific activities, itineraries, small business success stories, towns and unique maine recipes. to place a facebook ad, the process includes: create a facebook post for the activity of interest click on “boost post” within the post or go into the “manage page” on your facebook page and then click in the “ad center” link in the left navigation bar and click on the blue “create ad” button on the right side. to set the parameters for the ad: a. goal: click the down arrow for options. we wanted to bring visitors to our website, we clicked on “get more website visitors” for our goal. scroll down to the “audience” section and click on the edit icon, which looks like a pencil. b. gender: specify your preferences c. location: type in the geographic areas you would like to reach d. detailed targeting: type in keywords that would be appropriate. for example, if we were promoting a hiking itinerary, we would type in keywords like hiking, nature tourism, etc. e. duration: enter how long you would like the ad to run. we used 6 days for our ads. f. total budget: enter the total amount that you would like to spend. we spent a total of $30 for each ad. therefore, with the ad running for 6 days, it cost us $5.00 per day. g. enter your payment information. when you are satisfied with the ad parameters, click on the blue “boost post now” button on the bottom right. the facebook team will review the ad and send an email when it is approved and running. to see ad results, go into your facebook page and click on “insights”. this section provides the details that were described in the prior section. powered by scholastica, the modern academic journal management system http://www.smallbusinessinstitute.biz innovativeness in thai family smes: an exploratory case study pongsakorn pitchayadol1, danupol hoonsopon2, achara chandrachai3, sipat triukose4 1technopreneurship and innovation management program, graduate school, chulalongkorn university, thailand, pongsakorn.pitchayadol@gmail.com 2department of marketing, chulalongkorn business school, chulalongkorn university, thailand, danupol@cbs.chula.ac.th 3department of commerce, chulalongkorn business school, chulalongkorn university, thailand, achandrachai@gmail.com 4chulalongkorn university big data analytic and iot center (cubic), chulalongkorn university, thailand, sipat.t@chula.ac.th *this paper is a part of a doctoral dissertation under the patronage of the 90th anniversary of chulalongkorn university fund (ratchadaphiseksomphot endowment fund) a b s t r a c t over the past decade, academic research has revealed innovativeness to be one of the core components effecting sme performance. this research aims to study the linkage between innovativeness and “familiness” in family smes. the paper employs a qualitative approach and exploratory case studies, in collecting data on three categories of firms manufacturing, trading and servicing companies in order to identify how “familiness” effects the innovativeness of their family smes. to identify how “familiness” either accelerates or decelerates innovativeness in family smes, we adopted the f-pec scale as a tool to study the connection between family and business values and also the impact of family commitments to the company. we found that power, experience and culture accelerate innovativeness in family smes. the paper illustrates the important role of family in firm innovativeness and how this can bring competitive advantage and success to family smes. keywords: journal of small business strategy 2018, vol. 28, no. 01, 38-48 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2018 small business institute® apa citation information: pitchayadol, p., hoonsopon, d., chandrachai, a., & triukose, s. (2018). innovativeness in thai family smes: an exploratory case study. journal of small business strategy, 28(1), 38-48. w w w. j s b s . o rg family business, family-smes, innovativeness, innovation, entrepreneurial marketing introduction at present, perhaps one of the greatest challenges in multi-generational family enterprise is the transition across generations. if a firm wants to survive as a practicable enterprise in a competitive marketplace and remain family-owned, the family must not only engage and educate succeeding generations, but also encourage innovation in their firm. family business studies have long emphasized that next-generation members can be a vital source of innovative and entrepreneurial ideas. on the other hand, family smes are often characterized by a type of ‘familiness’ that involves introspective personalities, weighed down by old traditions, inflexible and resistant to change (carrasco-hernández & jiménez-jiménez, 2013). familiness is incurred by the family’s possession of power, experience, and the affinity between the subsistence of culture in the family and the culture within the company (klein, astrachan, & smyrnois, 2005). this research draws upon existing theoretical and empirical studies, using the case study method in the areas of family smes and innovation. we build a theoretical framework to propose a model for conducting research of familiness in family smes and its linkage toward innovativeness in the three sectors of business that the fourth sme promotion master plan 2017-2021 (office of small and medium enterprise promotion, 2017) has been applied to support amongst thai smes: manufacturing, trading and services. this research aims to answer the question of how and why familiness enhances or decelerates innovativeness in family smes. this work begins by describing the concept of smes as family businesses and offers definitions to facilitate understanding of this research. then, the paper explains how the concept of ‘familiness’ correlates to the definition of family business. literature review family smes family business. family businesses are those which are owned and managed by members of a family (or families), who are responsible for sustaining the business from one generation to the next generation (chua, chrisman, & sharma, 1999). employees of family businesses represent http://www.smallbusinessinstitute.biz http://www.jsbs.org http://dict.longdo.com/search/theoretical 39 p. pitchayadol, d. hoonsopon, a. chandrachai, & s. triukose journal of small business strategy / vol. 28, no. 1 (2018) / 38-48 both family identities and corporate identities of their family corporation. they develop this kind of status through social interaction (li, xin, & pillutla, 2002). a family entity is best defined by their experiences in their families (golden, 2001). it can be also perceived by the status of their family’s role (yogev & brett, 1985). the main thing that makes family business different from non-family business is the intertwining and mutual relationship between the family and business systems (sharma, 2004). this intimate relationship might support the family business’s resources, profitableness and subsistence (milton, 2008; sirmon & hitt, 2003). whereas, this aspect of the family business will support them to subsist in economic regression and occasion of inconstancy, it might challenge them in period of boom and constancy as well (milton, 2008). smes. the term “smes” generally refers to small to and medium-sized enterprises, but there is no unanimous definition. definitions of smes are widely different in different regions, dependent on the stage of economic development as well as pervasive social conditions. for example, a business might be defined as an sme for the purpose of getting government aid in taiwan, even though it does not meet the general criteria (rujirawanich, addison, & smallman, 2011). furthermore, many indices are used to define the meaning of smes, such as number of employees, amount of investment, total amount of assets, sales and production volume. the thai ministry of industry classifies an enterprise as an sme when it employs less than 200 people and owns a fixed capital of lower than 200 million baht (excluding land and properties) (rujirawanich et al., 2011). therefore, in this paper, we will define a family enterprise/family sme as an ownership, partnership, enterprise or any type of a business organization which has both-no greater than 200 employees and lower than 200 million baht of fixed capital, where the main power of possession is occupied by the family and the family members are self-employed in the company and/or the family’s member is the ceo (birdthistle & fleming, 2003). about familiness ‘familiness’ is a particular word which has been used to cover why, when and how the success or failure of a family business occurs (chrisman, chua, & steier, 2005; habbershon, williams, & macmillan, 2003). it demonstrates those interactions among each family members, the family unit and the firm that result in systemic synergies. pearson, carr, and shaw (2008) identify and define the term of ‘familiness’ as “resources and capabilities that are unique to the family's involvement and interactions in the business”. using the f-pec scale (astrachan, klein, & smyrnios, 2002), we describe how the components of familiness, as the basis of a family firm, either enhance or decelerate innovative capabilities and competitive advantages that influence family smes’ performances. based on this perspective, a conceptual model, laws of interaction, and a set of propositions are provided. evaluation of innovativeness in family smes innovativeness can be understood as a learning process, divided into the categories of technology and operations. particularly, the integration of these capabilities will encourage innovation and bring competitive advantage to firms. in previous studies, innovation in family businesses has been evaluated by developments that are grounded in the integration of four basic and complementary types of capability: technological, operational, managerial and transactional (burgelman, 1994; guan & ma, 2003; yam, lo, tang, & lau, 2011). as noted, the factors themselves are not enough to explain exactly what leads to innovativeness. lawson and samson (2001) offer a model of innovation capability that can be separated into seven categories which are “vision and strategy, harnessing the competence base, organizational intelligence, creativity and idea management, organizational structure and systems, culture and climate and, finally, management of technology”. these aspects can lead to a firm’s innovations. looking first at the aspect of vision and strategy, the linkages between vision and strategy are the keystones of the efficient innovation management. strategy is the major tool that is used to determine the resources, goods, procedure and systems that enterprises impose to handle any inconsistency in their companies. this is because firms make decisions according to their strategies about what operations and sections they have to take action in and in which market. successful innovation needs an explicit integration of a common vision and the right strategic direction of the company. in addition, innovation success is necessary to have the ability of allocating resources precisely to where it needs to be (burgelman & maidique, 1988). the significant factors consist of resource management, accessibility of money sources, innovation boosters and the application of e-business. organizational intelligence is elementary knowledge of customers and rivals. burgelman and maidique (1988) emphasize that understanding of both rivals and markets is significant in innovation management. moreover, creativity can be from the significant continuous improvements by employees, or alternatively, creativity is the thing which can be the radical idea that 40 p. pitchayadol, d. hoonsopon, a. chandrachai, & s. triukose journal of small business strategy / vol. 28, no. 1 (2018) / 38-48 can change the strategy of the company or can create new businesses. successful innovation is necessary to have a business structure that is optimal to the business (burgelman & maidique, 1988). if the business structure and its process do not lead to a desirable environment, it is unlikely that other components of the innovation system will be successful. it is vitally essential to have a suitable culture and atmosphere within the organization to support both the radical and incremental innovation in order to succeed. the components underlying the culture and structure construct are vision, centralization and formalization (hoonsopon, & ruenrom, 2012). these days, technological management is very important for businesses. vadastreanu, bot, farcas, & szabo (2015) state that “the shift toward external networks and leveraging the entire corporate knowledge base has meant that we are more concerned with the management of technology within the overall organization, rather than research and development”. proposition about relationship between familiness and innovativeness family power and innovativeness. the power and ownership nature of a family corporation is obviously essential in the determination of the business goals, the shareholders’ wealth and how managers of the company can be ruled (holt, rutherford, & kuratko, 2007). the behavioral strategic controls realized through family ownership have a strong impact on innovation of the company (hsu & chang, 2011). in the same way, lichtenthaler and muethel (2012) found that a family’s participation has a positive relationship with selected dynamic innovativeness and innovation capabilities. so, we present the following proposition: proposition 1. family power supports the innovativeness in family smes. family experience and innovativeness. experience in a family business can determine the level of a son’s entrepreneurial spirit. thus, how many members of the family working for their family owned company is perceived as a key determinant of how much experience the company gains from the family (astrachan et al., 2002). in the past few years we have found that successful multi-generational family businesses intend to maintain their long-term prosperity by adopting innovation as mechanisms to convert the orientation and ensure the ‘future-proofness’ of their company. following the lead of bergfeld and weber (2011), we put forward the following proposition: proposition 2. family experience enhances the innovativeness in family smes. family culture and innovativeness. culture has a radical effect to the innovativeness of a society or a corporation. ownership of gainful cultural distinctions offers the corporation with the essential compositions to innovate (ahmed, 1998). the article about corporate innovation highlights the significance of culture as a main factor in innovative performance (çakar, 2006; herbig & dunphy, 1998; branen, 1991; feldman, 1988). so, we present the following proposition: proposition 3. family culture enhances the innovativeness in family smes. method in this research, we employ exploratory case studies in collecting data. a case study should be regarded if the research is focused on the studying of answers the ‘how’ and ‘why’ questions (yin, 2003). the case study method was chosen because the cases can generate and gather the indepth ideas of participants from those target family smes. sampling design in this research, we selected one case in each sector of business. we used this method in order to get specific information from each case which is suitable for basic understanding (flyvbjerg, 2011). miles and huberman (1994) defined the case as “a phenomenon of some sort occurring in a bounded context. the case is, in effect, your unit of analysis”. the family smes of interest were selected from among those listed by the office of small and medium enterprises promotion. research was performed within the framework of the proposition that “familiness enhances or decelerates innovativeness in the family business sector of smes”. the primary research tool was the structured question-based interview following the f-pec scale. companies selected for the study consisted of three kinds of businesses: manufacturing, service and trading. firstly, the participants were asked if they considered themselves as family businesses in the sme sector. this meant that they were family-owned. if they were not, they were disqualified. secondly, if it was a family business, they were then asked if they engaged at least two generations of the establishing family. lastly, they were asked whether at least one member of the establishing family was in a management position. this process assured that all three family businesses whose representatives we interviewed met our criteria, as shown in table i. 41 p. pitchayadol, d. hoonsopon, a. chandrachai, & s. triukose journal of small business strategy / vol. 28, no. 1 (2018) / 38-48 instrument design in this research, we adopted the f-pec scale (astrachan et al., 2002). the f-pec was first used as a model to measure the familiness of family business by holt et al. (2007), who found it to be a beneficial tool. in the f-pec model, f refers to family; p refers to power, which consists of ownership, governance and management; e refers to experience, which consists of generation of ownership, generation participated in management, generation presented on board of direction and number of participated family members; and c refers to culture, which is determined as the coincidence of the values of family and business, and family business obligation. in this study, we utilized the f-pec scale to generate open-ended research questions for use in data collection for testing our propositions with empirical research. data collection and analyzing the reliable sources for case studies consisted of documents, archival records, interviews, direct observation, participant-observation and physical artifacts (yin, 2003). in this research we adopted the structured interview method. content analysis was employed in analyzing data by using within-case and cross-case methods of analysis. results family power and innovativeness as part of the f-pec power subscale, we conducted interviews with representatives of three companies–manufacturing, trading and servicing–with structured questions about proportion of share ownership, holding company, governance board and management board, as shown in table ii. company a, a manufacturing business, has 100% proportional share of ownership held by family members and no other share ownership. company a has no share asserted in a holding company or identical entity. company a has no governance board. company a has three persons as management board members. company b, a trading business, has 100% of share asserted by family and non-family members, and no other share ownership. company b has no shares in a holding firm or identical entity. company b has two governance boards and two persons on its management board. company c, a transport service, has 100% of shares asserted by family and non-family members and no other share ownership. company c has no shares in a holding firm or identical entity. company c has three governance boards and three persons as members of its management board. all three companies thus have 100% share ownership and no holding companies in the business. this may result in positive or negative situations for the firms. regarding the question examined in the study, 100% share ownership held by the family can control the direction of the firm. the advantage is that those who play a role as a management team can take fast-moving action to propel their innovativeness, as shown in the study of hsu and chang (2011), who found that family possession is important according to behavioral strategic controls that have a significant positive impact on family’s business innovation. however, what still merits further study is that, if the family power is not realized and does not enhance innovation, then power and family involvement might not accelerate the innovativeness in family smes. for example: ‘i am the decision maker for the company and propose innovative direction for business.’ (manufacturing) ‘i myself push strategies to drive new technology adoption in the company.’ (trading) ‘no others are involved in decision making, so implementing new knowledge for business solutions is very quick.’ (service) so, the results support the proposition that family power support the innovativeness in family smes. table 1 company profile as an interviewee sector manufacturing trading service generation of management second second third year founded 1994 1995 1981 capital registered 220,000,000 10,00,000 13,200,000 number of employees 240 47 200 type of business raw palm oil printer and copier transportation servicing sale volume (2016) million baht 865,240,559.34 37,840.790.25 47,890,563.55 42 p. pitchayadol, d. hoonsopon, a. chandrachai, & s. triukose journal of small business strategy / vol. 28, no. 1 (2018) / 38-48 family experience and innovativeness for the effect of family experience as an aspect of familiness, we asked the interviewees a set of questions about the generation that owns the company, the generation that is presented in management, the generation that is presented on the board of director and the number of involved family’s members. the results are shown in table ii. company a has a second generation of ownership, and the second generation also manages the company. only the second generation is presented on the board of directors, and two members of the family participate actively in the business. there are not any family members who are not actively involved in the company but are interested. this company’s ceo performs innovation capabilities that can be described. firstly, company a’s ceo shows his visions and strategies as he focuses on both product and process innovations, particularly implementing innovations matching with the current target market. secondly, company a plays a role in harnessing the competence base, launching knowledge and experience sharing in benefit-creating innovations. in the dimension of organizational excellence, company a has accepted knowledge from its clients and always seeks information on its competitors. finally, company a sets a goal for innovation by devoting time to setting up and providing training, and totally agrees with the advantage of linking technology with innovation to facilitate business success in the dimension of its organizational structure, culture and the management of its technology. ‘as i am his son, i always adopt every comment from my dad for planning and fixing a problem or finding compatible new solution, as i believe in his experience.’ (manufacturing) company b has a second generation of ownership which also manages the company. the generation presented on the board of directors is of both the first and second generations. two members of the family are actively involved in the company, and one family member is not actively involved but is still interested in the business. moreover, there are two family members who are not interested in their family business at all. this company realizes that innovation is a keystone for the success of the company and its vision. opening wide to employees to introduce new innovations in order to reduce risk is a policy with indepth study in any matter. company b tries hard to stay up-to-date on information and benchmark it with its competitor in order to create innovation. its managers never hesitate to learn how the customers feel and listen as their customers speak. moreover, brainstorming among the employees is promoted in the company. finally, they try hard to stay caught up with technology and evaluate where it can fit and enhance the capability of the company, as a key role of their management of technology. ‘many long-terms business problems are solved by new technology in my generation as we learn to make a gap fulfillment with the combining of ideas between my uncle and me.’ (trading) company c operates with the third generation owning the company. the second and third generations manage the company and are also present on the board of directors, with three family members participating actively in the company. company c enjoys its vision of being wide open to employees’ contributing innovation in the company, by providing meetings and an open stage for idea presentations to encourage the employees toward innovation. knowledge and feedback from customers are accepted as organizational intelligence, with employees encouraged to brainstorm for solving problems and advancing further development of the company. company c also sets a goal for innovation training and encouraging continuous communication with employees to build a good working culture and climate. finally, company c tries to seek for proper technology in order to improve its business of the management of technology strategy. ‘the experience and feedback loop is a very important tool used in business problem solving when adopting new solutions.’ (service) in discussion of experience effect, all of these three companies operate their businesses with second, third and further generations. it seems as though in transferring knowledge and experience from generation to generation, all of them play a similar role in vision and strategies that focus on innovation goals. all three of them reported that they have made changes to their companies since the second generation took over and turned into more innovation-oriented businesses. the result is that all of them can generate innovation or at least realize the importance of innovation as a key factor in business success, while still keeping the core competency from the former generation, then forming a new combination in order to build their competitiveness. this bears a relevance to prior research, as with astrachan et al. (2002), who stated that experience in a family business can be determined as a consequence of a son’s entrepreneurial input. bergfeld and weber (2011) said that successful family enterprises intend to retain their long-term prosperity by using innovations as mechanisms to convert the orientation and ensure the ‘future-proofness’ of the companies. therefore, the result of this study supports the proposition that family experiences accelerate the innovativeness of family smes. 43 p. pitchayadol, d. hoonsopon, a. chandrachai, & s. triukose journal of small business strategy / vol. 28, no. 1 (2018) / 38-48 family culture and innovativeness in terms of culture, we posed six structured questions on an f-pec culture subscale to the executive directors of the chosen companies, company a, company b and company c, who are in the manufacturing industry, trading industry and servicing industry, respectively, as shown in table ii. we found that, in all three companies, the family has an influence on the business and family issues. they incorporate their family values into their business values. since all the members of the family are willing to put effort into helping the business be successful, they provide discussion among members of the family on the business issues. as a result of culture subscale, all companies that we studied feel loyalty to the family business. in addition, in our study, we found that all three family businesses agree that their family values are compatible with the value of business. the members of the family feel proud that they are involved in their family business. they also gain by working with the family business for a long period. in particular, the members of all three companies consent to the objectivity and policies of their family’s businesses. they are truly concerned about the destiny of the family business as well. all of them feel that being participants in the family business has a positive impact on their lives, and really understand and support the decision making with regard to the future of the business. with regard to innovativeness, in light of the firm’s innovation capability via the f-pec subscale for vision and strategies, harnessing the competence base, the culture and climate in table iii, the executive directors of the three companies gain strategic input from members of the family. they encourage employees to introduce innovation into the company because they believe that their innovations will bring success to the business. as the family realizes that making innovation a priority will bring success to the business, the family agrees on providing the in-house funding for the r&d to acquire and/or create innovation, an important part of harnessing the competence base. in terms of culture and climate, we found that the executive management treats employees as part of their family, which facilitates smoother communication among and helps to achieve innovation and positive learning outcomes. ‘we share the same values for business success and operate our business with unity.’ (manufacturing) ‘both management and employees rely on the same organization culture, as we are a family.’ (trading) ‘my uncle managed the business in a very professional style, and that style has transferred into the present management style. we are family but we are also professional.’ (service) table 2 interview result as the f-pec scale concept sector manufacturing trading service power proportion of share ownership by family 100% 100% 100% management board by family 3 persons 2 persons 3 persons experience generation who owns company/generations who manage company 2nd / 2nd 2nd / 2nd 3rd / 2nd and 3rd generation activates governance board 2nd 1st and 2nd 2nd and 3rd number of family members participating actively in company 2 persons 2 persons 3 persons cultures family influence on business 1st generation 1st generation 1st and 2nd generation family members agree on family values and business values all members agree all members agree all members agree family members are proud of family business all members are proud all members are proud all members are proud family members feel gaining benefit from business in long run feel gaining benefit feel gaining benefit feel gaining benefit family members agree with goals, plans and policies of family business all members agree all members agree all members agree family members put positive influence in family business put positive influence put positive influence put positive influence 44 p. pitchayadol, d. hoonsopon, a. chandrachai, & s. triukose journal of small business strategy / vol. 28, no. 1 (2018) / 38-48 in conclusion, using the f-pec culture subscale, which purposely studies the connection between family values and business values and the business commitments to the firm, we found that in all three selected companies in the manufacturing, trading and service industries, familiness influences the family business in terms measurable on the f-pec cultures subscale. from our study via the f-pec culture subscale, we found that the culture supports innovativeness. table 3 innovativeness sector manufacturing trading service visions and strategies vision on innovation focus on product and process innovation focus on operation process innovation wide open to innovation strategies to create innovation in-depth study and innovation by owner encourage employees to contribute innovation provide meeting and stage for employees to contribute innovation vision on innovation bringing success into business need to assure by in-depth study on innovation before introduction to business totally agree that innovation brings success into business totally agree that innovation brings success into business harness competence base manage existing resources to increase innovation collect information from others for creating innovation collect information and up-to-date information from others and competitors for creating innovation collect and study information from inside and outside company for creating innovation sharing knowledge and experiences between employees encourage employees to share knowledge and experiences encourage employees to share knowledge and experiences encourage employees to share knowledge and experiences funding for r&d to acquire and create innovation supported by family supported by family supported by family utilize e-commerce plan to provide website for clients utilize e-commerce as advertisement tool to display products and services no website but utilize emails as tool to contact clients and employees organizational intelligence manage client requirements learn from client requirements learn from client requirements always listen to clients aware of competitors seeking for information of competitors from public always seeking for information of competitors utilize sport rules that competition always has winners and losers. no one is always winner or loser. keep competitors as fellows recently existing innovation new process innovation for green palm oil production new service business model using incremental digital technology in-house real time tracking system for transport service level of innovation radical process incremental bmi incremental service type of r&d in-house outsource outsource 45 p. pitchayadol, d. hoonsopon, a. chandrachai, & s. triukose journal of small business strategy / vol. 28, no. 1 (2018) / 38-48 discussion when considering innovation in family smes by the type of innovation, past surveys have revealed that small firms are more likely to emphasize generation of incremental innovations than larger companies (kammerlander & ganter, 2015). however, when taking a deeper look at the family business, statistics show that they generally tend to focus on product or service innovation, followed by process innovation and business model innovation. from the case study, service and trading companies launched incremental services and business models, while manufacturing companies launched radical process innovation through implementation in their operation. the service company operates as a transporter owning more than 200 trucks with services connected nationwide. a few years ago, this company faced serious complaints by customers about the delivery time commitment. further, many parcels were either lost or stolen. the owner and team immediately identified the problem. they found that it was due to reckless control and lack of responsibility by the driver from destination to destination. later, a new service system was launched powered by gps and digital technology which was available on mobile applications. this allowed the company and customers to track the location of the trucks and get delivery status updates. the trading company is a printer and copier company that suffered from low profitability using the original business model. with increasing competition in the market, they gained a very low margin when only selling and buying against the high bargaining power of both supplier and customer. catching up to the pain point of customers made them realize that buying office equipment was a waste of spending. this company fixed the issue by offering a rental model with price charge calculated by usage. moreover, they set up an onsite service notification system in case of equipment malfunctions. this incremental innovative business model, plus the innovation in service, was well received by customers. the manufacturing company is a palm-oil production company. the r&d department undertook the development of product and production process quality control. a couple of years later, the head of the r&d department proposed new ideas concerning new production processes complying with green and zero waste technology. this company re-engineered the production process for more innovation that could significantly reduce electricity consumption by generating power from the by-product of oil palm bunches and shells. as the interview results showed, the manufacturing company was the only company getting close to radical innovation. why do small family businesses emphasize less on radical innovation? the most critical concern of a small family business is associated risk-taking. it is a common view that family businesses are declining risk and less willing to innovate, even though they have the advantage of resources to do so. this is mainly due to concerns about the possibility of a negative outcome and a consequential reduction in the family’s wealth. however, familial functions in a small family firm could advocate for the business to overcome that barrier. the power of a family business owner has a positive impact on firm innovation when they actively participate in the innovation process and dedicate to activities related to firm’s technological change (gonzalez, rodriguez, & sossa, 2017). the results from table iii show that business owners can advocate for organizational intelligence in order to support innovation by drawing on their business networks, followed by sharing industry information with the employees and competitors they have worked with over decades (hoonsopon & puriwat, 2015). relevant to previous research, family business owners can also specifically foster innovativeness by allocating budgets for long-term innovative projects under careful risk monitoring to enhance their competence base (kammerlander & ganter, 2015). in conformity with power, family culture can advocate family firm innovativeness. building an appropriate environment and atmosphere for their staff or employees, including proposing innovative shared vision and strategy, can become a good organizational culture that fosters innovation in a family firm. openness and warmly welcoming any ideas proposed by staffers is an effective practice to allow others to come up with innovative ideas for improving a firm’s products, services or processes (leal-rodríguez, & albort-morant, 2016). when this practice has become a company’s guidelines, it can ensure that every idea will be shared openly, without internal filtering from fear or any hesitation, across hierarchical levels and departments. this is accomplished by holding cross-functional, cross-hierarchical integration, both internally and externally of the firm, to achieve firm innovativeness (hoonsopon & ruenrom, 2012). family experience is one core competence that fosters innovativeness for a firm. family firms, both big and small, prefer less risk taking and dynamism, but not less innovativeness (short et al., 2009). this is under the condition when a family firm preserves enough long-term orientation on innovativeness and the willingness to innovate. preserving long-term orientation could positively propel innovativeness by mitigating risk or unexpected events that might occur from too little experience (lumpkin, brigham, & moss, 2010). without a doubt, firms can launch r&d progressively when they gain related experience from generation to generation cumulatively. subsequently, radical 46 p. pitchayadol, d. hoonsopon, a. chandrachai, & s. triukose journal of small business strategy / vol. 28, no. 1 (2018) / 38-48 innovation could be feasible, as we found from interviewing the manufacturing company. based on the interviewed case study, thai smes, especially family businesses, possess innovativeness that can be illustrated in two aspects, namely sme owner characteristics and organizational characteristics. smes owner characteristics play an important role in innovation of the firm (barnir, 2012). according to the pattern of thai family smes, business owners act as both business and family leaders at the same time. this influences their family members to absorb entrepreneurial experience collectively. firm leaders’ children work as firm employees in supporting the business, while also teaching them invaluable experience. when a family member goes for higher education, they can elaborate on prior experience with the comprehensive principles gained from studying. of course, this is a great incubation period where family members can gain a lot of innovative ideas, new networking and the fulfilment of entrepreneurship that will sustainably benefit the business. another aspect is organizational characteristics. the organizational management layer is very lean when compared to a bigger company, so smes are very agile in operational activities. smes and family smes always stay close to their customers, who help them to realize the real problems or even meet the needs of customers as a source of knowledge. this can lead to hard work for finding out alternative solutions that are innovative (hurley & hult, 1998). the interview results also illustrate the smes’ climate that led them to innovate. as previously mentioned about the agility of smes operational activities, interviewees revealed that working as a family was very effective for them. they were averse to organized work, instead choosing a relaxing and friendly working climate, such as meeting at the dinner table. perhaps because of this particular relationship, family smes tend to utilize more informal communication that is still very effective with both family and non-family employees when needing rapid business feedback and decision-making. the results show that building this kind of work climate can also eliminate barriers between business owners and employees. employees can also be engaged in the business as they feel like being a part of the business, which enhances their creativity and leads to innovative solutions for the company (hoonsopon & puriwat, 2017). last, but not least, the interview results show the relationship between research and development (r&d) and innovation, in line with previous research (kapsali, 2011). service and trading companies are not opposed to investing in r&d since perhaps they both potentially need a research base for their operation or customer solutions. unnecessary spending in r&d might be an increasingly risky investment. however, both service and trading companies are implementing outsourced developers in order to develop their in-house innovation. on the other hand, the manufacturing company established its own r&d department since the direct field graduation of second-generation family members. after returning to the company, he worked hard as the head of the r&d department, which he also set up. a few years later, this manufacturing company could implement new process innovation, which is proof of successful r&d. manufacturing revealed that the r&d role not only works as a research unit, but also as a connecting node for the company with external sources of knowledge such as universities and research institutions. this might be evidence of how important the role of r&d is for innovativeness in smes. conclusion the purpose of this research is to study whether familiness enhances or decelerates innovativeness in family smes. according to pearson et al. (2008), “familiness” is defined as resources and capabilities which are characteristic to the family’s participation and interactions in the firm. we adopted the f-pec scale as designed by astrachan et al. (2002), which describes how the components of familiness are the basis of a family firm for enhancing or reducing innovative capabilities and competitive advantages that influence family smes performance. from this study, we found that familiness with regard to family power, experience and culture exerts a significant positive influence on innovativeness in family smes. we found in our study that innovativeness in a family is dependent on the family context, which can be explained by power, experience and culture. in the cases we examined, the familiness encourages and supports the management on the innovation that will bring company success in the long term. implications this article also has direct managerial implications. this paper emphasizes the crucial role that family plays in the innovativeness of family firms. those families who are associated in business in the three dimensions of power, experience and culture must recognize this important role and not underestimate the effect of familiness. this is because they must remain innovative to make sure that there is the competitive advantage of the family’s business from one generation to the next generation. the opportunities for a further study might also include how the characteristics of the family’s business affect the management and organization that will lead to innovativeness. decision-makers of a family business can benefit advantages and diminish the weakness of the fa47 p. pitchayadol, d. hoonsopon, a. chandrachai, & s. triukose journal of small business strategy / vol. 28, no. 1 (2018) / 38-48 miliness context in order to enhance innovation processes in the firm. in addition, performers who are consultants for family business in the field of innovativeness will benefit from this further research. in particular, our research provides a suggestion that family firms should be encouraged to be aware of the other side of the coin, of how familiness contexts may provide barriers to innovativeness. this case study will urge future academic works in the new research arena of innovativeness in family smes, at the interaction of the innovation studies and family business area. this study presents merely brief facets from cases amid a very complex topic, thus we highly recommend others to continue researching in this area. references ahmed, p. 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(1985). patterns of work and family involvement among singleand dual-earner couples. journal of applied psychology, 70(5), 754-768. s y journal of small business trateg table of contents 1 being good for goodness sake: the influence of family involvement on motivations to engage in small business social responsibility whitney o. peake western kentucky university phillip e. davis east carolina university marcus z. cox stephen f. austin state university 26 exploring the impact of aligning business and is strategy types on performance in small firms carol e. pollard appalachian state university monica morales department of justice – technology services 46 investigating the impact of a small business consulting course on entrepreneurial attitudes eugene fregetto university of illinois at chicago 82 toward an integrative research framework for new venture legitimacy judgment formation whitney o. peake western kentucky university derrick d’souza university of north texas 105 comparative assessment of performance differentials for maleand female owned small accounting firms at the beginning and end of a ten year period martha a. fasci the university of texas at san antonio jude valdez the university of texas at san antonio sung-jin park the university of texas at san antonio whitney o. peake western kentucky university carol e. pollard appalachian state university eugene fregetto university of illinois at chicago whitney o. peake western kentucky university martha a. fasci the university of texas at san antonio strategy table of contents page title/author(s) 1 preparing small business for workforce 2000: a pilot study thomas d. clark anhur j. shriberg stephen r. wester 21 there are few differences between successful and failed small businesses robert n. lussicr joel corman 35 the relationship between planning and information source/media used by small firms john r. pearson larry r. smeltzer gait farm thomas 53 self-actualization: the zenith of entrepreneurship james w. carland, jr. joann c. carland james w. carland, ill 67 uganda entrepreneurs: why are they in business? edward d. bewayo 79 the americans with disabilities act: what it means to small business owners kathleen c. brannen terrence m. begley 93 the sbi program and student outcomes: a study of business policy classes william t. jackson larry watts o'tr 4tegl editor's note with this issue we proudly begin our fifth year of publication. during the past four years, the journal's audience has expanded to include not only members of thc small business institute directors'ssociation, but also individuals and organizations with an interest in applied small business research. in an effort to give the readers information that is helpful in operating or consulting with small businesses, the editor and members of the editorial advisory board continue to stress the practical nature of the journal while maintaining sound methodological procedures. this year the editorial advisory board will include small business owners and consultants in addiuon to the current board of academicians. we are making this move to further insure that the arucles presented in the journal meet the needs of both practitioner and academic readers. we appreciate the dedication ol'll mcmbcrs of thc editorial advisory board and extend special thanks to those who are retiring from the board. your service and commitmcnt to the journal have helped us build and maintain a reputable publication. in addition, we welcome the ncw members o( the board. the ncw editorial advisory board members who will serve through december 1996 include: david m. ambrose jeffrey s. bracker robert brockhaus sam bruno james j. carroll fred fry peter rainsford richard j. stapleton howard e. van auken john wallace gwen fontenot, ph.d. edhor stx6xgy publication staff editor dr. gwen fontenot marketing solutions mabank, texas editorial assistant rebecca gilmore smith eustace high school eustace, texas editorial advisory board dr. david ambrose university of nebraska-omaha dr. henry beam western michigan university dr. don b. bradley iii university of central arkansas dr. jeffrey s. bracker university of louisville dr. robert brockhaus st. louis university dr. sam bruno university of houston-clear lake dr. aaron buchko bradley university dr. james carroll georgian court college mr. donald clause university of west florida dr. richard dailey university of montana dr. mark dollinger indiana university-bloomington dr. fred fry bradley university dr. lynn hoffman university of northern colorado dr. lawrence klatt florida atlantic university dr. joseph latona ashland university dr. binshan lin louisiana state university-shreveport dr. benton miles university of north carolina-greensboro dr. david newton westmont college dr. mary nicastro capital university dr. inge nickerson barry university dr. john pearson arizona state university dr. peter rainsford cornell university dr. howard rudd college of charleston ms. pamela schindler whittenberg university dr. herbert sherman marist college dr. joseph singer university of missouri-kansas city dr. richard stapleton georgia southern university dr. harriet stephenson seaule university dr. howard van auken iowa state university dr. john wallace marshall state university a publication of the small business institute directors'ssociation send subscription requests to randi ellis, cpa., sbida secretary-treasurer, black hills state university, 1200 university, spearftsh, sd 57799-9006. annual subscriptions may be ordered at $20 each (u.s. dollars only). international subscriptions add $5 annually for postage and handling, back issues may, be ordered at $ 12 each. 4kopyright 1994 small business institute dirersors'ssoeiauon sfrxt".eay table of contents page title/author(s) seeing what's not there: the enigma of entrepreneurship joann c. carland james w. carland wayne h. stewart 21 a business success versus failure prediction model for entrepreneurs with 0-10 employees robert n. lussier joel corman 37 diversity managementin small businesses: an exploratory investigation of attitudes and actions charles r. stoner richard i. hartman raj arora 49 influencing government: what do small firms do? ronald g. cook 69 estimating the long-term contributions of small business marketing expenditures robert e. wright john c. palmer 81 small businesses and comparison advertising strategies: is it worth the risk? karen r. france paula f. bone james w. f ranee 99 assessing the independence of the board chairperson: fact or fallacy? catherine m. daily dan r. dalton s y journal of small business trateg editor gerald e. hills bradley university associate editors bruce h. kemelgor university of louisville eugene fregetto university of illinois at chicago managing editor james foley bradley university editorial assistant elizabeth knapinski bradley university editorial review board semra ascigil middle east technical university joe r. bell university of arkansas at little rock david brennan university of st. thomas shawn carraher indiana wesleyan university eugene fregetto university of illinois at chicago joseph geiger university of idaho armand gilinsky sonoma state university michael goldsby ball state university michael harris east carolina university david lyn hoffman metropolitan state college of denver jeffrey hornsby kansas state university cathleen (folker) leitch wilfrid laurier university robert lussier springfield college matthew r. marvel western kentucky university brian mckenzie california state university, east bay thaddeus mcewen north carolina a&t state university abbas nadim university of new haven john e. prescott university of pittsburgh neal pruchansky keene state college jeff shields university of southern maine leo simpson seattle university matthew c. sonfield hofstra university harriet stephenson seattle university jude valdez university of texas at san antonio dianne welsh university of north carolina — greensboro special thanks to elizabeth knapinski for her high quality editorial work and her commitment and devotion to creating a great product. thanks also to james foley and jennie hale that, through their excellent leadership, have ensured a high quality publication. the journal of small business strategy is a joint publication of the small business institute and the foster college of business, bradley university. send subscription requests to journal of small business strategy, foster college of business, turner center for entrepreneurship, bradley university, 1501 w. bradley ave., peoria, il, 61625 or e-mail to jsbs@bradley.edu. annual subscriptions (two issues) may be ordered at $25 each (u.s. dollars only). international subscriptions add $5 annually for postage and handling. back issues may be ordered at $12 per issue. members of the international council for small business receive a 40% discount. icsb members pay $15 plus $5 for international subscriptions. copyright 2014 small business institute issn 1081-8510 mailto:jsbs@bradley.edu reproduced with permission of the copyright owner. further reproduction prohibited without permission. fall journal start‐up resources and entrepreneurial discontinuance: the case of nascent entrepreneurs1 jianwen (jon) liao illinois institute of technology liao@iit.edu harold welsch depaul university hwelsh@depaul.edu chad moutray us small business administration moutray@comcast.net abstract built on the  resource‐based  view of  the  firm, this study addresses  two  major  research  questions: (1) what resources are salient in entrepreneurial discontinuance; (2) to what  extent, does the impact of resources on the odds of discontinuance vary across the nature  of startup  between high technology and non‐technology? these  questions are examined  using  830  nascent  entrepreneurs  from  the  panel  study  of  entrepreneurial  dynamics  (psed).  overall,  we  find  that  not  all  resources  are  equally  salient,  especially  when  comparing technology‐based and non‐technology‐based nascent entrepreneurs. with the  exception of education and managerial experience, human capital has limited influence on  discontinuance. our results lend no support for our social capital hypothesis. financial  capital  significantly  decreases  the  odds  of  discontinuance.  additionally,  the  odds  of  discontinuance of technology‐based and non‐technology‐based nascent entrepreneurs are  affected  by a  different set of  resources. implications and future research directions  are  proposed. keywords: entrepreneurial discontinuance, psed, technology, resource‐based view introduction new  firms  create  new  jobs,  open  up  opportunities for upward social mobility,  foster economic flexibility, and contribute  to  competition  and  economic  efficiency  (birch,  1987).  the  constant  churning  of  new  business  starts  and  closures  (commonly  referred  to  as  “creative  destruction”)  creates  an  atmosphere  where  the  success  of  a  venture  is  uncertain. such dynamism leads many to  state  that  failure  is  a  norm, rather than  the exception (dean, turner, & bamford,  1997). yet, businesses do  not fail as often  as  conventional  wisdom,  according  to  a  study by headd (2003). according to this  study, "two‐thirds of new employer firms  volume 19, number 2 fall/winter 2008/2009  1 1 an early version of the paper was presented at the 18th annual conference of the united states association  for small business and entrepreneurship, january 15 – 18, 2004 (dallas, texas) strategyjournal of small business survive at least two years, and about half  survive  at  least  four  years.  owners  of  about one‐third of  the  firms  that closed  said their firm was successful at closure."  nascent  entrepreneurs  suffer  from  the  liability  of  newness  which  refers  to  the  fact  that  start‐ups  often  falter  because  they are not able to adjust quickly enough  to their new roles and lack a track record  with outside suppliers and buyers (hagert  et al, 2006; stinchcombe, 1965). it is impossible to talk intelligently about  a theory of entrepreneurship without first  acknowledging  the  pivotal  role  of  entrepreneurial  failure  (amaral  et  al,  2007;  mcgrath,  1999).  most  of  the  entrepreneurship  literature  has  focused  on successful ventures, so  little is known  about  why  ventures  fail.  even  less  is  known  about  how  they  fail.  our  understanding  of  entrepreneurship  will  never be complete until we have a  clear  understanding  of  what  causes  its  discontinuation. similarly, timmons  and  spinelli  (2007)  raise  the  question  of  whether  there  are any exceptions  to  the  general  rule  of  failure,  or, “are we faced  with a punishing game of entrepreneurial  roulette?”  (p.  85).  developing  a  deeper  understanding  of  new  venture  failures  would  provide  critical  information  for  several key stakeholders in a new venture —individual  entrepreneurs,  venture  financiers, and government policymakers.  an increasing number of entrepreneurial  scholars  are  using  the  resource‐based  view  (rbv)  of  the  firm  to  better  understand the  role of  resources  in new  venture  creation  and  development  (i.e.,  chandler & hanks, 1994; mcgrath, 1996;  lichtenstein & brush, 2001). in the theory  of  rbv,  organizations  are  viewed  as  “bundles of resources,” which are defined  as both tangible and intangible assets that  are  tied  to  the  firm  in  a  relatively  permanent  fashion  (caves,  1980;  wernerfelt, 1984). resources include not  only  the  financial,  physical,  and  human  assets, but also the ability of the people in  each area to formulate and implement the  necessary functional objectives, strategies,  and  policies  (wheelen & hanger, 2008).  according  to  these  studies,  it  is  the  identification and acquisition of resources  (rather  than  deployment  and  allocation  activities)  that  are  crucial  for  the  early  stages of new venture development (katz  & gartner,  1988; brush & greene, 1996).  most  of  studies  using  a  resource‐based  view  so  far  have  focused  on  the  new  ventures at inception. little attention has  been  paid  to  the  nascent  stage  during  which a new venture is developed.  based on the resource‐based view  of the  firm, the  present research addresses  two  major  research  questions:  (a)  what  resources  are  salient  in  new  venture  survival or failure? and (b) to what extent  does  the  impact  of  resources  on  new  venture survival or failure vary across the  nature  of  high‐technology  and  non‐ technology  start‐ups?  this  research  mainly focuses on the venturing activities  of  nascent  entrepreneurs  and  seeks  to  predict  the  survival  of  nascent  entrepreneurs  based  on factors  that  can  be observed at the time of the initial start‐ up process. indicators  of  initial  resource  endowment  including  physical,  human,  financial and social capitals are taken into  consideration  to  determine  how  they  might  bear  upon  the  probability  of  survival over time. for example, knotts et  al. (2008) found that resources applied to  production rather than marketing led to a  higher survival rate. the  term  “failure”  in the oxford  english  dictionary  is  defined  as  “to  become  deficient,  to  be  inadequate.”  in  general,  many different terminologies are related to  business  failure,  such  as  firm  closures,  entrepreneurial exit (gimeno et al., 1997),  dissolution,  discontinuance,  insolvency,  organizational mortality, bankruptcy, and  journal of small business strategy    2 o r g a n i z a t i o n a l  f a i l u r e s .  t h e s e  t e r m i n o l o g i e s  h a v e  b e e n  u s e d  interchangeably  with  little  distinction.  normally, entrepreneurial failure is referred  to  as  the  cease of operation for financial  reasons.  since  we  examine  nascent  entrepreneurs  during  the  firm  gestation  process, one type of entrepreneurial failure  is the discontinuance of venturing  efforts  by  entrepreneurs.  here  we  define  entrepreneurial discontinuance as an action  taken  by  a  nascent  entrepreneur  to  suspend his or her venture creation effort  during  venture  gestation  process.  the  reasons  leading  to  entrepreneurial  discontinuance are multiple—the funding  may  not  have  materialized,  the  prospect  became less optimistic, or the opportunity  costs  of  leaving  a  well‐paid  job  were  difficult  to  overcome.  in  general,  entrepreneurial  discontinuance  has  a  broader connotation than venture failure.  put differently, there may only be a small  number  of  firms  that  experience  entrepreneurial discontinuance for reasons  that can be attributable to failure.  following  cooper,  gimeno‐gascon,  and  woo  (1994),  our  focus  here  is  on  the  initial resources  that have  direct bearing  on venture creation process. cooper at al.  (1994)  provide a few  convincing  reasons  why  such  a  focus  is  particularly  appropriate.  first,  the  characteristics  of  founding can determine an organization’s  strategies,  which  in  turn  weigh  on  the  capabilities developed in the new venture  and whether it survives or fails. although  there  is  a  growing  consensus  that  resource  bundles  develop  and  change  over time, the initial resource endowment  of  a  new  venture  does  make  a  great  difference in venture survival (stevenson  &  gumpert,  1985).  further,  venture  creation is  a  process  of  experimentation  characterized  by  trial  and  error.  vinogradov  and  isaksen  (2008)  found  lower  rates  of  survival  by  immigrants  versus  natives,  presumably  because  immigrants  had  fewer  opportunities  for  experimentation. initial resources may act  as a buffer against the liability of a new  and small business.  the  paper  is  structured  as  follows:  the  paper first reviews relevant research related  to entrepreneurial failure, including a wide  range of variables that have been employed  to  predict  entrepreneurial  failure.  it  is  followed  by  a  resource‐based  model  of  entrepreneurial  failure  and  a  series  of  hypotheses.  section  three  details  research  methodology, including sample description,  measures, and statistical models. the next  section provides results. finally, the paper is  concluded with discussion and implications  for future research. theoretical framework and  hypothesis development many  resource‐based  theorists  view  organizations as consisting of a basic set  of resources at the time of their founding  (e.g.,  wheelen  &  hunger,  2008;  wernerfelt,  1984),  and  these  resources  confer  competitive  advantages  in and of  themselves (e.g., barney, 1991; hall, 1992).  according  to  barney,  “firm  resources  include,  among  other  things,  all  assets,  capabilities,  organizational  processes,  firm  attributes,  information,  knowledge  controlled by a firm that enable the firm  to  conceive of  and implement strategies  that  improve  its  efficiency  and  effectiveness”  (barney,  1991,  p.  101).  resources  are  categorized  into  several  specific  typologies,  including  human,  physical,  capital,  and  technological  (grant, 1991). according to this perspective,  sustainable  competitive  advantage  exists  when  the  resources  possess  value,  uniqueness,  nonsubstitutability,  and  inimitability  (barney,  2003;,  1991;  wernerfelt, 1984).  an increasing number of entrepreneurship  scholars  are  using  the  resource‐based  theory of firms  to  better understand the  role  resources  play  in  new  venture                                                                                    volume 19, number 2 fall/winter 2008/2009   3 development (wheelen & hunger, 2008;  chandler & hanks, 1994; mcgrath, 1996).  the  process  of  entrepreneurship  begins  with a business concept envisioned by an  entrepreneur  and  proceeds  to  the  point  wherein  it  is  necessary  to  identify  and  acquire  the physical, human, and capital  resources  necessary  for  start‐up  (timmons, 1994). in essence, new venture  creation  is  a  creative  process  of  combining  opportunities  and  resources  (gartner,  1985;  shane  &  venkataraman,  2000). for the new venture to survive and  thrive, the entrepreneurs have to create a  unique  configuration  of  resources  to  compete  against  rivals  who  are  already  established in the marketplace. entrepreneurs’ human capital most researchers in the field have learned  that  the  founder  is  the  key  to  venture  survival or failure (hatch & dyer, 2004).  the studies investigated the effects of the  founder’s  education,  technical  and  industry‐specific  experience,  managerial  experience (e.g., bates, 1990a, 1980b). this  stream  of  research  is  mostly  built  on  human  capital  theory (becker, 1975) and  in general argues that high human capital  endowment of the founder decreases the  opportunity  for  entrepreneurial  failure  (bruns  et  al.,  2008).  human  capital  derives  from  investments  individuals  make  in  themselves  as  employees,  often  through  education  and  additional  training.  presumably,  the  more  specific  the human capital is to the nature of the  business start‐up, the lower the likelihood  of  entrepreneurial  failure.  conversely,  a  deficiency  in  human  capital  makes  new  firms more vulnerable.  bruderl  et  al.  (1992)  elaborated  on  two  mechanisms  by  which  human  capital  improves  firm  survival  chances  and  decreases  failure  rates. first, the  authors  argued that founders with higher human  capital  are  able  to  recognize  attractive  business  opportunities,  have  greater  knowledge  of  how  to  set  up  a  business  successfully, and are in  a better position  to  evaluate the prospects  of future firms  and to set up larger and better financially‐ equipped businesses.  the authors  called  this  “selection  effects”  (p.  229).  second,  they  argued  that  greater  human  capital  leads  to  higher  productivity  of  the  founder,  which  results  in  greater  efficiency in organizing and managing the  production  process  and  the  ability  to  attract  more customers  and  new  capital  from investors.  this  is  especially  true in  the  early  stage  of  venture  development  when  a  firm’s  legitimacy  is  in  question  and customers and bankers often use the  human  capital  of  the  founder  as  a  screening device. following becker (1975),  bruderl et al. (1992) tested the impact of  general human capital and specific capital  on  firm failure  rates in a group of  1,849  german  business  founders. the  authors  found  that  general  human  capital  characteristics  such as years of schooling  and  years  of  working  experience  significantly decrease a firm’s failure rate.  for  specific  human  capital,  industry‐ specific  experience  is  crucial.  however,  self‐employment experience, parents’ self‐ employment experience, and a  founder’s  experience  in  managing  and  directing  employees  have  no  significant  direct  bearing on firms’ failure rates.  in  his  study  of  small  business  in  the  construction sector in great britain, hall  (1994) found that human capital was the  most  pivotal  factor  in  differentiating  survived from failed firms. using a dataset  of  78,441  small  traders  from  firm  registration  and  de‐registration  in  germany during the years of 1980 to 1984,  preisendorfer  and  voss  (1990)  explored  the  relationship  between  the  founder’s  age  and  firm  morality  rate.  they  found  that firm mortality rate is low for middle‐ aged  founders  but  high  for  young  and  older founders, suggesting an inverted u‐ shaped  relationship  between  founders’  age and firm mortality. by contrast, using  data  from  the  u.s.  bureau  of  census,  headd (2000) found gender, race, and age  play a small, if  any, role in survivability.  journal of small business strategy    4 but  he  discovered  that  founders  with  college educations have a higher survival  rate.  carter et al. (1997) found that experience  starting  other businesses, working in the  industry,  starting  a  business  with  partners,  and  having  employees  all  significantly  decrease  the  odds  of  discontinuance.  their  findings  suggest  that the human capital of the founder or  founding  teams  and  the  scale  of  the  business at startup are equally important.  additionally,  the  researchers  also  found  that  after  resources  and  founding  strategies  are  controlled  for,  female‐ owned  businesses  have  a  higher  probability of discontinuance  than male‐ owned businesses.  based  on  the  above  argument,  we  hypothesize:  h1:   overall, nascent entrepreneurs’  human capital decreases the  probability of entrepreneurial  discontinuance.  h1a:  general human capital such as  education and age is negatively  related to entrepreneurial  discontinuance.  h1b:  managerial experience is negatively  related to entrepreneurial  discontinuance.  h1c:   industrial experience is negatively  related to entrepreneurial  discontinuance.  h1d:  startup experience is negatively  related to entrepreneurial  discontinuance.  social capital social  capital  has  traditionally  been  conceptualized as a set of social resources  (adler  &  kwon,  2002)  embedded  in  relationships  (e.g.,  burt,  1992).  scholars  have  espoused  a  broader  definition  of  social  capital,  including  not  only  social  relationships  but  also  the  norms  and  values  associated  with  them  (e.g.,  coleman, 1990). social capital is therefore  broadly  described  by  researchers  as  an  asset  embedded  in  relationships  of  individuals,  communities,  and  networks  or  societies  (burt,  1997;  nahapiet  &  ghoshal,  1998).  more  recently,  the  concept of social capital has found its way  into entrepreneurship research (e.g., liao  and welsch, 2003).  social capital is crucial  to  entrepreneurs,  encompassing  both  actual  and  potential  resources  flowing  through a relationship  network. social  capital  can  be  converted  into  tangible  and  intangible  benefits,  including increased trust and cooperation  from  others,  financial  capital  or  assets,  and  equipment  purchased  at  favorable  prices (kuratko & welsch, 2004). it is an  instrumental resource through  which an  entrepreneur  could  obtain  financial  support,  gain  legitimacy,  acquire  additional  social  capital,  and  facilitate  transactions. it is  conceivable that social  capital plays a significant role in affecting  a firm’s failure. based on these arguments,  we propose:  h2:   nascent entrepreneurs’ social  capital decreases the probability of  entrepreneurial discontinuance. financial capital for  nascent  entrepreneurs,  financial  resources  are  primarily  money  that  is  limited  to  whatever  the  founder  or  founding  team  is  able  to  raise,  usually  from  personal  finances,  family,  and  friends (shulman, 1997). external funding  sources  are often unavailable due to  the  small  size,  unknown  track  record,  and  future uncertainty of the firm. therefore,  the  initial  financial  capital  a  nascent  entrepreneur  has  or  is  able  to  raise  is  probably  the  sole  source  of  funds  to  overcome  the  new  venture  liability  of  newness  and  smallness.  therefore,  we  expect:                                                                                    volume 19, number 2 fall/winter 2008/2009   5 h3:   nascent entrepreneurs’ financial  capital decreases the probability of  entrepreneurial discontinuance. compared  with  non‐technology‐based  start‐ups,  technology‐based start‐ups  are  more  complex  and  have  greater  expectations  for  human  capital  of  the  nascent entrepreneurs. technology‐based  firms that have stronger resources are in a  better  position  to  survive  environmental  shocks  and  weather  the  inevitable  bad  decisions; therefore, they are less likely to  be  discontinued.  preliminary  data  from  bizminer  business  failure  rate  index  (2008)  shows  that  the  technology  industry (sic code 3500) has a lower two‐ year failure rate (22.39%) than total  u.s.  rate combined (35.56%) among start‐ups.  there is also considerable variation across  multiple industries, suggesting that there  are other phenomena at work. thus, the  relative  salience  of  resources  on  entrepreneurial  discontinuance  would  vary across our sample of technology‐ and  n o n ‐ t e c h n o l o g y – b a s e d  n a s c e n t  entrepreneurs. therefore, we hypothesize:  h4:  overall, the impact of resources on  entrepreneurial discontinuance for  technology‐based nascent  entrepreneurs would be different as  compared to that of non‐ technology‐based ones.  research method sample description the data for this study was obtained from  the  panel  study  of  entrepreneurial  dynamics  (psed).  the  psed  is  a  longitudinal data set of individuals in the  process  of  starting  businesses  who  were  identified  from  a  random  digit  dialing  telephone  survey of 64,622  adults  in the  united states who are 18 years  of  age or  older.  a  nascent  entrepreneur  is  identified if  he/she  answered  yes  to  the  following  two  questions:  (1)  are  you,  alone or with others, now trying to start a  new  business? (2) are you, alone or with  others,  now  starting  a  new  business  or  new  venture  for  your  employer?  is  the  effort a part of your job assignment? all of  these  individuals  were  considered  candidates  for  the  nascent entrepreneur  interview  if  they  met  three  additional  criteria.  first,  they  were  expected  to  be  owners  or  part‐owners  of  the new  firm.  second, they had to  have been  active in  trying  to  start  the  new  firm  during  the  past 12 months. third, the effort was still  in the start‐up or gestation phase and was  not  an  infant  firm.  follow‐up  surveys  were  conducted at 12‐month intervals to  evaluate the status of  the start‐up effort.  data related to nascent entrepreneurs was  collected  using  a combination  of  survey  and  telephone  interviews.  survey  questionnaires  included  items related to  opportunity  recognition,  entrepreneurial  climate,  start‐up  problems,  start‐up  context,  and  reasons  for  starting  a  new  venture as well as nascent entrepreneurs’  demographics, background, and personal  dispositions.  telephone  interview  questions were concerned with the nature  of the start‐up, start‐up activities, start‐up  team,  start‐up  funding  requirements,  future expectations for the new  business,  personal  decision‐making  style,  market  and  competition  assessments,  and  nascent entrepreneurs’ social networks. a  more  detailed  description  of  the  background  and  methodology  of  the  pesd data set can be found in reynolds  (2000).  the dataset used in this analysis consists  of  830  nascent  entrepreneurs,  among  which 446 are from a mixed sample, 223  from a woman over‐sample, and 161 from  a  minority  over‐sample.  the  general  public (control group) was  deleted from  the  database.  discontinued  nascent  entrepreneurs  were  identified  by  comparing the follow‐up survey with the  first‐round  survey.  missing  from  the  following  up  survey  is  viewed  as  discontinuation of venturing efforts  by a  nascent  entrepreneur.  all  nascent  entrepreneurs were also asked to identify  journal of small business strategy    6 the  nature  of  business  as  a  technology‐  versus non‐technology‐based startup.  measurement table 1  provides a summary of measures  of  dependent and independent variables.  the  identification  of  technology‐based  nascent  entrepreneurs  and  non‐ technology‐based  nascent  entrepreneurs  is based upon a self‐claimed response to  the  question,  “do  you  consider  your  business as technology‐based?” response  to yes is coded as “1”, otherwise “0”.                                                                                   volume 19, number 2 fall/winter 2008/2009   7 table 1: variable definitions and measures variable definition code item descriptions dependent variabledependent variabledependent variable entrepreneurial  discontinuance   ent_dis 1 if discontinued; 0 if survived independent variableindependent variableindependent variable general human capitalgeneral human capitalgeneral human capital education  q343 educational attachment (0 ‐ up to eighth  grade; 1 ‐ some high school; 2 ‐ high school;  3 ‐ tech or vocational degree; 4 ‐ some  college; 5 ‐ community college; 6 ‐ college; 7  ‐ some graduate training; 8 ‐ ms, mba, ma;  9 ‐ llb, ph.d, degree;  age  ncage by years management experiencemanagement experiencemanagement experience year  q341 years of managerial, supervisory and  administrative experience number of people  q342ln number of people supervised; (log  transformation) professional experienceprofessional experienceprofessional experience general working experience  q340 years of paid full time experience industry‐specific  q199 years of working experience in startup  industry startup experiencestartup experiencestartup experience personal startup experience  q200 number of businesses helped to start parent's startup experience  q362 parents: self‐employed/own a business (1 ‐  yes; 0 ‐ no) social capitalsocial capitalsocial capital  q242 number of people help with career/startup financial capitalfinancial capitalfinancial capital personal funding  q198 personal fund in startup (1 ‐ yes; 0 ‐ no) other sources  q271 asked funding from friends and family (1 ‐  yes; 0 ‐ no) models a logistic regression model is employed to  determine the relative impact of different  r e s o u r c e s  o n  e n t r e p r e n e u r i a l  discontinuance,  with  entrepreneurial  discontinuance as the dependent variable  and various resources as the independent  variables.  with  the  exception  of  age,  which  is  entered  into  the  model  as  squared to examine  its curvilinear effect,  other independent variables are examined  linearly.  let  y  be  the  dichotomous  random  variable  p(y  =  1|x)  =  π(x)  denoting  discontinued (1) versus continued (0). let  x  =  (xl, x2,  …  ,  xp‐l)  be  a  collection  of  predictors  of  various  resources.  denote  the  conditional  probability  that  the  outcome is present by where π(x) has the  form: πi = exp(β0 + βlxil + β2xi2 + … + βp‐lxi,p‐l) πi = 1 + exp(β0 + βlxil + β2xi2 + … + βp‐lxi,p‐l) the  same  logistic  model  will  be  tested  across  both  high  technology  and  non‐ technology  nascent  entrepreneurs  in  an  attempt to  examine the relative salience  of resource across different samples. results table 2 provides descriptive statistics. on  a v e r a g e ,  t h e  s a m p l e d  n a s c e n t  entrepreneurs  had  a  college  degree  or  some  college  education,  were  in  their  early  40s,  had  more  than  9  years  of  managerial  experience  and  18  years  of  working  experience.  most of  them  have  invested  personal  funds  into  start‐ups  (88%) and more than half of their parents  have had start‐up experience. as  indicated in  table  3,  the  chi‐squares  for  all  three  models  are  statistically  significant; the scores of the hosmer and  lemeshow  test  for  all three  models  are  5.931  (p  =  0.655),  11.077  (p  =  0.197)  and  8.960  (p  =  0.346) respectively.  all these  indicators  suggest  satisfactory  goodness  of fit index for all three models.  model  i  of  the  full  sample  suggests  that  most  of  the  various  types  of  resources  (human,  social,  and  financial)  are  negatively  related  to  the  probability  of  entrepreneurial  discontinuance,  even  though  not  all  of  them  are  statistically  significant.  specifically,  we  find  that  education, managerial experience, general  working  experience,  and  startup  experience have no direct relevance to the  discontinuation of startup process, lending  no  support for hypotheses  h1b and h1d.  however, we find a significant curvilinear  effect  of  age  on  entrepreneurial  discontinuance  (b  =  ‐0.308;  p  <  0.05),  providing  partial  credence  to  hypothesis  h1a. surprisingly,  industrial  experience is  positively rather than negatively related to  the  probability  of  entrepreneurial  discontinuance.  such  a  relationship  is  statistically  significant—this  finding  is  particularly  interesting  since  the  other  experience  variables  are  not  significant  (e.g.,  working,  personal  start‐up,  and  parent's  start‐up).  therefore,  hypothesis  h1c is partially supported, however, in the  opposite  direction.  overall,  our  findings  provide limited support for hypothesis h1.  hypothesis  h2  stating  the  relationship  between social capital and entrepreneurial  discontinuance  is  not  supported  (b  =  0.025, wald = 0.533, p>0.1). however, we  find  significant,  negative  impact  on  personal  funding  on  discontinuance  (b=‐1.036; wald = 5.26, p<0.05). financial  support  from  friends  and  family  is  negatively related to  discontinuance, but  statistically  insignificant.  therefore,  hypothesis h3 is only partially supported.  model  ii  and  model  iii  compare  the  relative  salience  of  resources  on  entrepreneurial  discontinuance  across  both  technology‐based  and  non‐ technology‐based nascent entrepreneurs.  we  find  education  (b  =  ‐0.26, p  <  0.1),  managerial  experience  (b  =  ‐0.136,  p  <  0.05), personal  funding  (b  =‐2.386, p  <  0.05) and financial supports from friends  and family  (b = ‐1.566, p  < 0.05) are  all  journal of small business strategy    8                                                                                   volume 19, number 2 fall/winter 2008/2009   9 t ab le  2 : d es cr ip ti ve  s ta ti st ic s  an d  c o rr el at io n  m at ri x m ea n st d .  d ev . (1 ) (2 ) (3 ) (4 ) (5 ) (6 ) (7 ) (8 ) (9 ) (1 0 ) (1 1) (1 )  e du ca ti on 4. 94 1.9 8 1.0 00 (2 )  a ge 40 .3 7 10 .12 0. 19 0* ** 1.0 00 (3 )  m an ag er ia l  e xp er ie n ce  ( yr ) 9. 23 7. 61 0. 08 4 0. 53 0 1.0 00 (4 )  m an ag er ia l  e xp er ie n ce   (n um be r) 2. 61 1.2 5 0. 06 9 0. 17 9* ** 0. 34 2* ** 1.0 00 (5 )  w or ki n g  e xp er ie n ce 18 .3 1 9. 70 0. 03 5 0. 75 5* ** 0. 55 9* ** 0. 19 6* ** 1.0 00 (6 )  in du st ry ‐ sp ec ifi c  e xp er ie n ce 10 .8 8 11 .2 1 0. 05 1 0. 45 9* ** 0. 21 0* ** 0. 17 5* ** 0. 36 2* ** 1.0 00 (7 )  p er so n al   st ar tu p  e xp er ie n ce 1.3 3 2. 19 0. 00 3 0. 14 9* * 0. 22 2* ** 0. 25 0* ** 0. 11 2* 0. 11 9* 1.0 00 (8 )  p ar en t's   st ar tu p  e xp er ie n ce 0. 57 0. 50 0. 12 2* 0. 03 6 0. 08 8 0. 03 5 0. 05 8 0. 03 5 0. 09 8 1.0 00 (9 )  so ci al  c ap it al 3. 56 4. 32 0. 06 3 ‐0 .0 49 0. 02 4 0. 12 6* ‐0 .0 93 ‐0 .0 61 0. 07 8 0. 03 1 1.0 00 (1 0)  p er so n al   fu n di n g 0. 88 0. 32 0. 01 0 ‐0 .0 09 ‐0 .0 41 0. 02 8 0. 03 8 ‐0 .0 82 0. 01 1 ‐0 .0 17 0. 02 5 1.0 00 (1 1)  f un di n g  fr om   fr ie n ds /f am ily 0. 17 0. 37 ‐0 .0 17 ‐0 .18 6 ‐0 .13 5* * ‐0 .0 64 ‐0 .17 8 ‐0 .0 58 0. 07 3 0. 15 0 0. 10 6 0. 05 3 1.0 00 ** *p <0 .0 1;  ** p< 0. 05 ; p <0 .1 journal of small business strategy    10 t ab le  3 : l o gi st ic  r eg re ss io n  m o d el s m o d el  i   fu ll  s a m p le m o d el  i   fu ll  s a m p le m o d el  i   fu ll  s a m p le m o d el  i i  t ec h  n a sc en t  e n tr ep re n eu rs m o d el  i i  t ec h  n a sc en t  e n tr ep re n eu rs m o d el  i i  t ec h  n a sc en t  e n tr ep re n eu rs m o d el  i ii   n o n ‐t ec h  n a sc en t  e n tr ep re n eu rs m o d el  i ii   n o n ‐t ec h  n a sc en t  e n tr ep re n eu rs m o d el  i ii   n o n ‐t ec h  n a sc en t  e n tr ep re n eu rs b w al d e xp (b ) b w al d e xp (b ) b w al d e xp (b ) (1 )  e du ca ti on ‐0 .12 3 2. 26 0 0. 88 4 ‐0 .2 60 2. 75 3* 0. 77 1 ‐0 .13 4 1.4 40 0. 87 5 (2 )  a ge *a ge ‐0 .3 08 5. 25 1* * 0. 73 5 0. 05 5 0. 05 6 1.0 57 ‐0 .5 89 9. 35 7* ** 0. 55 5 (3 )  m an ag er ia l e xp er ie n ce  ( yr ) ‐0 .0 47 2. 64 6 0. 95 4 ‐0 .13 6 5. 77 5* * 0. 87 3 ‐0 .0 16 0. 13 0 0. 98 4 (4 ) m an ag er ia l e xp er ie nc e  (n um be r) 0. 15 3 1.2 24 1.1 66 0. 28 0 0. 89 4 1.3 24 0. 09 3 0. 26 8 1.0 97 (5 )  w or ki n g  e xp er ie n ce ‐0 .0 08 0. 10 0 0. 99 2 ‐0 .0 14 0. 12 9 0. 98 6 ‐0 .0 34 0. 76 2 0. 96 7 (6 )  in du st ry ‐s pe ci fi c  e xp er ie n ce 0. 05 6 11 .5 47 ** * 1.0 57 0. 05 6 2. 41 5 1.0 58 0. 08 7 13 .5 49 ** * 1.0 91 (7 )  p er so n al  s ta rt up  e xp er ie n ce ‐0 .0 33 0. 17 4 0. 96 7 ‐0 .0 64 0. 11 4 0. 93 8 ‐0 .0 39 0. 13 0 0. 96 1 (8 )  p ar en t's  s ta rt up  e xp er ie n ce 0. 22 0 0. 48 7 1.2 46 0. 97 8 2. 26 8 2. 66 0 ‐0 .19 6 0. 22 8 0. 82 2 (9 )  so ci al  c ap it al 0. 02 5 0. 53 3 1.0 25 0. 11 1 2. 64 5 1.1 18 ‐0 .0 17 0. 15 8 0. 98 3 (1 0)  p er so n al  fu n di n g ‐1 .0 36 5. 26 0* * 0. 35 5 ‐2 .3 86 6. 33 9* * 0. 09 2 ‐0 .0 73 0. 01 5 0. 93 0 (1 1)  f un di n g  fr om  fr ie n ds /f am ily ‐0 .5 51 1.5 71 0. 57 6 ‐1 .5 66 3. 19 0* * 0. 20 9 ‐0 .5 67 0. 89 5 0. 56 7 c on st an t 4. 37 2 8. 05 1 79 .2 03 1.3 85 0. 24 8 3. 99 5 7. 64 3 11 .9 95 20 86 .6 13 c h i‐ sq ua re  ( df =1 1) 37 .3 44 ** * 37 .3 44 ** * 37 .3 44 ** * 22 .4 73 ** 22 .4 73 ** 22 .4 73 ** 36 .6 55 ** * 36 .6 55 ** * 36 .6 55 ** * ‐2  l og  li ke lih oo d 25 7. 26 6 25 7. 26 6 25 7. 26 6 77 .2 95 77 .2 95 77 .2 95 15 1.8 36 15 1.8 36 15 1.8 36 c ox  &  s n el l r  s qu ar e 0. 15 0 0. 15 0 0. 15 0 0. 25 3 0. 25 3 0. 25 3 0. 22 1 0. 22 1 0. 22 1 h os m er  a n d  le m es h ow  t es t (c h i‐ sq ua re )  (s ig n ifi ca n ce , d f= 8)   5. 93 1 (p =0 .6 55  d f =  8 ) 5. 93 1 (p =0 .6 55  d f =  8 ) 5. 93 1 (p =0 .6 55  d f =  8 ) 11 .0 77 (p =0 .19 7  df  =  8 ) 11 .0 77 (p =0 .19 7  df  =  8 ) 11 .0 77 (p =0 .19 7  df  =  8 ) 8. 96 0 (p =0 .3 46 , d f =  8 ) 8. 96 0 (p =0 .3 46 , d f =  8 ) 8. 96 0 (p =0 .3 46 , d f =  8 ) ** *p <0 .0 1;  ** p< 0. 05 ; p <0 .1 negatively related  to  discontinuance  for  t h e  t e c h n o l o g y ‐ b a s e d  n a s c e n t  entrepreneurs  but  not  for  the  non‐ technology group. by  contrast, age (b =  ‐0.589,  p  <  0.01)  and  industry‐specific  experience (b  = 0.087, p < 0.01) all have  significant impact on discontinuance for  the  non‐technology‐based  nascent  entrepreneurs,  but  not  for  the  technology‐based  group.  therefore,  hypothesis h4 is fully supported.  discussion researchers  who  apply  resource‐based  theory  to  the  field  of  entrepreneurship  generally believe that resources do matter  in  venture  creation  and  venture  performance.  however,  the  question  is  not  whether  resource  endowment  is  relevant or not, but how relevant resource  endowment is and which resource is most  salient.  our  examination  of  human,  social, and financial resources of nascent  entrepreneurs  shed  light  on  these  questions.  overall,  our  findings  suggest  that resource  endowment  does  decrease  the  probability  of  entrepreneurial  discontinuance.  nevertheless,  not  all  resources  are  equally  salient,  especially  when  comparing  technology‐based  and  n o n ‐ t e c h n o l o g y ‐ b a s e d  n a s c e n t  entrepreneurs. as  far  as  human  capital  is  concerned,  education and managerial experience are  mostly  salient  in  their  impact  on  entrepreneurial  discontinuance  of  technology‐based nascent entrepreneurs.  compared  with  non‐technology‐based  start‐ups,  technology‐based  startups  are  characterized  by:  (a)  a  knowledge  intensive  process, which calls  for higher  education attainment; and (b) a complex  process which requires the entrepreneurs  to  integrate  a  wide  variety  of  demands,  ranging  from  market  to  intellectual  property  laws  to  venture  capitalists.  nascent  entrepreneurs  with  managerial  experience have a vantage point.  we  also  find  an  inverted  u‐shaped  r e l a t i o n s h i p  b e t w e e n  a g e  a n d  entrepreneurial  discontinuation.  such  a  relationship  suggests  that  younger  and  older  nascent  entrepreneurs  may  have  higher probability of discontinuation. as  age  increases,  the  probability  of  discontinuation  decreases.  however,  as  age  reaches  a  certain  point,  the  probability  of  discontinuation  starts  to  increase again. our finding  is consistent  with  preisendorfer  and  voss  (1990),  which  explore  the  relationship  between  founders’ age and firm mortality rate.  surprisingly,  we  fail  to  identify  any  s i g n i f i c a n t  i m p a c t  o f  w o r k i n g  experience  and  start‐up  experience  on  discontinuance.  our  finding  is  consistent with bruderl et al. (1992), but  contradictory  to  carter  et  al.  (1997).  nascent  entrepreneurs  with  start‐up  experience  could  be  more  adaptive.  however,  quick  adaptation  may  not  necessarily  translate  into  a  higher  survival rate. for example, failed startup  experience  coupled  with  risk  aversion  propensity  may  accelerate  the  process  of discontinuance when a start‐up effort  runs  into  challenges.  on  the  other  hand,  successful  startup  experience  in  the  past  coupled  with  a  risk‐taking  propensity  may  blindside  nascent  entrepreneurs  from  recognizing  the  potential downfalls  that ultimately lead  to discontinuance.  our  finding  that  industry‐specific  experience  increases  the  odds  of  discontinuance  of  the  non‐technology‐ based  nascent  entrepreneurs  is  counterintuitive.  many  researchers  have  pointed  to  the  importance  of  industry‐ specific experience on a firm’s survival, and  it is widely held  that such an experience  would  decrease  the  probability  of  discontinuance (e.g., bruderl et al., 1992).  there are  a  few  possible explanations  to  our unique  findings. first, similar  to  the  argument  of  “strength  of  weak  tie”  (granovetter,  1985),  entrepreneurs                                                                                    volume 19, number 2 fall/winter 2008/2009   11 who have long working experience in the  industry where  the  new  venture is  being  created may be less innovative or inflexible  than  those  who  have  less  experience.  second,  an  entrepreneur  with  longer  experience  in  an  industry  may  also  entrench  in  the  existing  system  and  structure,  which  blindsides  him  or  her  from  recognizing  opportunities  and  threats.  findings from this study also suggest that  social capital plays a limited role, if any, in  entrepreneurial discontinuance. empirical  studies  suggest  that  social  capital  is  positively  related  to  entrepreneurial  growth  aspiration  for  both  technology‐  and  non‐technology–based  nascent  entrepreneurs  (liao  and  welsch,  2003).  however, the impact of social capital may  not be symmetrical. stated differently, we  can assume that lack of social capital may  definitely lead to discontinuance.  our results  illustrate the  importance of  financial  capital,  particularly  personal  funding in a firm’s survival at the nascent  stage, when the liability of  newness  and  smallness  is  great.  ample  financial  capital  enables  entrepreneurs  to  mainly  focus on building a business, rather than  being  constantly  under  the  pressure  of  balancing  cash  flows.  consequently,  well‐funded  start‐ups  should  have  a  significantly  lower  probability  of  discontinuance.  conclusions based on the resource‐based theory of the  firm, this paper makes several theoretical  and  methodological  contributions.  first,  our study is among the early research that  focuses on entrepreneurial discontinuance —an  important yet underexplored  topic.  so far, too much attention has been paid to  venture growth and venture performance.  this  paper represents  an  initial effort in  examining  the  relative  salience  of  various  resources  in  entrepreneurial  discontinuance. secondly, this study is a  step forward toward building longitudinal  entrepreneurship  failure  research.  the  nature of phenomenon of entrepreneurial  failure  calls  for  a  longitudinal  research  design,  which  traces  down  individual  firms  from  birth  to  death,  and  then  identifies  the  individual,  organizational,  and  context  factors  that may  contribute  to  a firm’s  failure. instead of seeking  out  answers  after  the  fact—post‐hoc  realization  and  rationalization  of  why  a  venture  fails—researchers  should  make  ongoing observations of the entrepreneurs,  the environments, and the firm. this study  first  identifies  a  group  of  nascent  entrepreneurs, and then tracks down four  types of nascent entrepreneurs over time:  (a)  those  who  discontinue  their venture  creation efforts; (b) those who create new  business ventures but still fail in the end;  (c) general public individuals who are not  involved in any venture creation activities;  and  (d)  those  who  continue  to  operate  and grow  their businesses. only through  this  longitudinal  study  with  a  quasi‐ experimental design approach, will we be  able  to  uncover  the  factors  that  differentiate failed group from others.  however, the current findings should be  interpreted  with  caution.  one  major  caveat to the existing study is the inability  to  draw  a  causal  relationship  between  various  resources  and  entrepreneurial  discontinuance.  additionally,  as  stated  earlier, entrepreneurial discontinuance is  an important concept for the research of  venture  gestation  and  is  different  from  venture failure. the  findings  here  could  not  pinpoint  as  to  exactly  what  causes  nascent  entrepreneurs  to  discontinue  their venture creation efforts.  notwithstanding,  this  study  also  yields  several future research opportunities. first,  the  inconclusive  findings  regarding  the  relationship  between  start‐up  experience  and  the  odds  of  discontinuance  call  for  further  research.  requiring  further  examination  is  the  moderating  effects  of  risk  taking  propensity.  additionally,  resource endowment should be examined  journal of small business strategy    12 in conjunction with  founding strategies.  researchers  have  used  “generalist”  (r‐ strategists) and “specialist” (k‐strategists)  strategies as the classification scheme for  new ventures (hannan & freeman, 1977).  the  generalists  offer  a  wide  array  of  products and services aiming at a broad  range  of  customers,  whereas  the  specialists  focus  on  a  niche  market  to  avoid direct competition with larger and  more  established  firms.  consequently,  each founding strategy may have its own  unique  configurations  of  resources. the  match  between  founding  strategy  and  resource  configuration  should  have  direct  relevance  to  firm  survival  or  discontinuance. finally, relative  salience  of  resource  in  discontinuance  should  also  take  a  venture’s  competitive  strategies into consideration. one of the  dimensions  of  competitive  strategies  is  market aggressiveness,  which is  defined  as  “the  depth  and  rapidity  of  resource‐ acquiring  activities  in  either  broad  or  narrow  market  domains”  (romanelli,  1989, p. 374). aggressive firms may seek  to  acquire  and  control  as  many  resources  as  possible,  as  quickly  as  possible. in contrast, efficient firms seek  to  protect  an  established  position  by  harbouring  scarce  organizational  resources.  therefore,  it  is  generally  expected that aggressive firms will have  a  higher  likelihood  of  surviving  their  early years than efficient firms.  references adler, p. & kwon, s. (2002). social capital:  prospects for a new concept,  academy of management journal,  january, 17–40. amaral, a.m, baptista, r., & lima, f.  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effects of early survivals.  administrative science quarterly,  34, 369–387. shane, s. & venkataraman, s. (2000) the  promise of entrepreneurship as a  field of research. academy of  management review, 25(1), 217–227. stinchcombe, a. (1965). social structure  and organization, in: march, j.  (ed.). handbook of organizations.  chicago: rand mcnally, 142‐193. stevenson, h. & gumpert, j. (1985). the  heart of entrepreneurship. harvard  business review. april/may: 85–94. timmons, j.a. (1994). new venture  creation (4th ed.). boston, ma:  irwin. vinogradov, e. & isaksen, e. survival of  new firms by natives and  immigrants in norway. journal of  developmental entrepreneurship,  13(1), 21–38. wernerfelt, b. (1984) a resource‐based  view of the firm. strategic  management journal, 5, 171–180. jianwen  (jon)  liao  is  currently  an  associate  professor  of  strategy  and  entrepreneurship  in  stuart  school  of  business at illinois institute of technology.  his  research  interests  include  venture  creation  process,  founding  team  composition and business planning. harold  p.  welsch  is  a  founder  of  the  entrepreneurship  program  and  coleman  entrepreneurship  center  at  depaul  university.  his  research  is  in  technology  commercialization,  privatization  of  c e n t r a l l y ‐ p l a n n e d  e c o n o m i e s ,  entrepreneurship career paths, formal and  informal  strategic  planning,  information  seeking  and  decision  behavior,  ethnic  entrepreneurship, economic development,  and small business problems.  chad  moutray  is  a  researcher  in  the  office of  economic research  at the  u.s.  small business administration.                                                                                   volume 19, number 2 fall/winter 2008/2009   15 reproduced with permission of the copyright owner. further reproduction prohibited without permission. s1iyii'~cy is your small business prepared for a crisis? frederic j. hebert east carolina university neil j. humphreys longwood college abstract recent well-publicized catastrophic events have increased theimportance of crisis management for many large business managers. the issue ofcrisis management for small businesses has received little auentionin the li terature. this article examines theissue ofcrisis management for small business ownerslmanagers. a small business crisis model is presented to enable business owners and consultants to consider the types of crises that might tlfect small firms. guidelines are proposed for small business owners to use to anticipate crises that might +ect their firms and to effecnvely prepare for these events. introduction in recent years, large organizations have been forced to give increased attention to the issue of crisis management. one needs only to mention such words as bhopal, chemobyl, three mile island, exxon valdez, tylenol, world trade center, branch davidian, and the los angeles earthquake to understand why crisis management is now an integral part of strategic business management. however, much of the attention in the literature has focused on how large firms can improve their crisis management planning rather than on examining this issue from a small business perspective. one reason for the lack of attention to small business crisis management might be that the size of loss is thought to be smaller for small firms than for large companies. while this may be true, the percentage losses may be greater for small firms, resulting in a more significant impact on the business. for example, in the exxon valdez oil spill, the company set aside over $ 1.25 billion in the quarter that the incident occurred, yet still made over $160 million in profits (suflivan, 1989). the oil spill caused some other problems within the company. however, exxon was able to continue its primary business operations despite the loss. a similar crisis could result in bankruptcy or a major disruption of a small company's operations. a crisis can be even more devastating fora small business than it is fora large one. a single crisis, such as a fire or a flood, could shut a small business down entirely, while it would probably only affect a small portion of a large business. yet, are small businesses prepared to manage a crisis? how can crisis management be added to the growing list of responsibilities of small businessowners? toeffectivelyanswerthesequestions,anumbcrofcrisistypesthataffectsmall businesses need to be considered along with a suggested crisis management model applicable to small firms. once small business owners begin to integrate crisis management into their firms, they will be able to prepare more el'fectively for potential crises. 1 what is a crisis and how can it be managed? a crisis is often viewed from a negative viewpoint and is considered to be an extreme situation requiring immediate action, like a fire that must be extinguished: however, webster' defines a crisis not solely as a negative event, but a "turning point 1'or beuer or worse (webster's, 1991,p. 307)." fink applies the term to business by defining a crisis as a warning event that: runs thc risk of escalating in intensity, falling under close scrutiny by the media or government, interrupting normal business operations, jeopardizing the positive public image of a company, or damaging a company's bouom line in some way (fink, 1986, pp. 15-16). the key point is that a crisis often begins before the fire starts —with the symptom or warning stage. the best crisis management is to have no crisis at all —to identify warning signs and to take action before a situation escalates in intensity. this issue has important implications for small business owners and managers. small business owners have often been identified as "here and now-iype" problem-solvers rather than "proactive" managers (hoy fk hellriegel, 1982). small business owners have much to gain by recognizing and responding to warning signs that precede crises b:fore these situations escalate in intensity. small business owners must also realize that many crises can be averted through effcctivc management planning. before the steps involved in effecuve crisis management are considered, lct's examine why crises are more prevalent in today's business environment and why they can be deadly for small business owners. can it happen to your bus]ness? ln a word, the answer to this question is yes. stevens (1992) suggests that the threat of a crisis occurring in today's society is ever-increasing bccausc of the news media's sensitivity and quick response, the public's ex pectations of ethical behavior, increased business complexity, and the heightened threats of deliberate sabotage. in addition, the rapid increase in video, satellite, and cellular phone technology has increasingly amplified the media's ability to report on developing crises. small businesses are definitely not exempt from potential crises and may have a greater risk potential than larger firms. barton (1993)conducted an extensive review of several hundred crises from 1981 to 1991 and categorized the businesses studied in terms of their susceptibiliiy to public crisis. table 1 lists the businesses in the high-risk category. with theexceptionofnuclearpowerplants and publicofficials,smallbusinessesarepresent in every entry in this risk category. although these firms have a greater likelihood of experiencing a public crisis, any business has thc potential for experiencing a major crisis if the warning signs are ignored. 2 table i businesses in the high risk crisis category manufacturers, particularly pharmaceutical and chemical banks and other financial institutions technologically sensitive businesses (software, biotechnology) public transportation: air, rail, bus, automobile, subways hotels and motels other lodging facilities: apartments, inns, and campsites nuclear power plants food producers and distributors nightclubs and casinos government agencies amusement parks, resorts public personalities: political and sports figures, entertainers soft drink and juice manufacturers helicopter, raft, shuttle boat, and other pleasure crafts real estate developers public and private utilities and airports builders, roofers, and other construcuon companies note: adapted from barton, 1993,p. 65. why is crisis management important to small businesses? a number of reasons make it necessary for small business owners to engage in crisis management. two important reasons discussed previously were the potential size of the loss and the percentage of business lost. another important reason is that many small business owners are lulled into a false sense of security by relying on insurance for risk protection. insurance agents are trained to help small business owners identify potential risks; however, their recommended solution is usually to purchase more insurance rather than exploring other prcvcniive measures. not only is insurance expensive, but many crises can be prcvcnted without relying on insurance and many risks may not be adequately covered by insurance. for example, which 'key employees'oes an owner choose to cover through insurance? what if the wrong 'key employee's chosen? even if this type of insurance is purchased and a claim is filed when the individual leaves thc business, does the settlement fully compensate for thc loss? how can a kcy employee's value be accurately estimated? if the employee starts a rival business, does the insurance fully compensate the owner for the current and future losses? further, if a claim is filed against any type of insurance, rates usually rise immediately. the owner may end up paying a greater amount in the long run through increased rates. a crisis may disrupt operations and many small business owners may not be able to shift operations to another site. consider the example of a small restaurant that experiences a fire during the night. if this location is the only business site, then the owner has more risk and cannot shift operations to another location. even if the business can be shifted to a second site, the percentage of business lost may be overwhelming. many small businesses are hand-to-mouth operations. revenue earned on monday is used to purchase goods and services on tuesday. cash flow is critically important to small businesses and if a new business docs not begin to produce positive cash flow, it usually fails. 3 the owner's age adds further importance to the issue of crisis management. unlike large firms,a small businessowneroftenopens his or her business within a narrow time window in their life. the owner may not want to start over after a major crisis. what the owner hoped to achieve at agc 25 may have been accomplished, and therefore at age 55, the window of opportunity for the future may be closed. finally, small business owners may be limited in their ability to assess potential crisis situations. for example, brighunan (19&9)analyzed the managerial decision making during the pearl harbor attack and concluded that the top officers were "sclcctive" perceivers. brightman suggests that selecuve pcrceivers view problems from a narrow pcrspcctive of their own life experiences, education, and personalities. this narrow focus may lead to major errors in judgment before and during a crisis. the previously cited hoy and hellriegel (1982) study concludes that thc problem-solving styles of small business managers primarily focus on internal problems that relate to a "here and now" perspective. this narrow focus on internal problems within a limited time horizon suggests that many small business owners may be selective perceivers. their inability to see issues from a broad perspective may limit their identificauon and assessment of the warning signs that precede potential crises. any of these issues should make crisis managcmcnt an important priority for small business owners. however, many persons today have become inscnsiiive io losses. large organizations often proclaim major losses because of write-offs and other non-cash expenses while coniinuing to produce positive cash flows. insurance, govemmcnt bail outs, and disaster loans make it appear that losses are not real. however, for most small businesses, a loss is serious and real. a loss can force the business to close within a matter of hours or days. therefore, potential crises must bc viewed in a serious light. preventive and corrective action must be taken quickly so that damage is minimized. if acuon is not taken, there is significant potential to harm the business and, ultimately, thc individual small business owner in a very real way. core types of crises that affect small businesses figure i illustrates five core types of crises that can affect small business owners. it provides a framework for small business owners to consider potential crises that might affect their own industries and companies. this framework idcntilies five crisis types: organizational, employee-related, external events, customer-related and personal. except for the external events category, most of the crises listed are internally related since they are under the small business owner's direct responsibility. organizational crises organizational crises primarily relate to situations that can disrupt business operations. they are especially applicable to small businesses because any of these crises could cause failure. examples of this crisis type are provided below. mivoff, pauchant, and shrivastava (1989) note that the top four crises experienced by organizations they surveyed between 1984 and 1986 were mechanical or product-related: equipment or product defects, environmental accidents, and computer breakdowns. however, they note that the primary catalysts of many of these crises were people. as computers and other equi pmcnt become more sophisticated and as environmental regulations become more complex, small business owners are increasingly dependent on rc liable equipment, prompt support serviceprovidcrs, backup capabiliues as well as competent employees. 4 figure l core types af small business crises organizational crises employee-related crises computer system pmblems loss of key employees supplier problems (quality, financial, other) accident/injuries accounting, marketing snd financial employee theft, sabotage, violence problems sexual harassment operational problems employee experiences with drugs, alcohol lawsuits sod legal problems employee inadequacies in stills management succession employee personal crises leadership pmblems personal crises illness, death, loss of spouse, personal problems management succession marriage and family problems external eveat crises customer-related crises nsiorsl hazards product hslnhty problems power ouisges accidents/injuries of customers bomb threats customer theft, violence chemical spills, gss leaks loss of a major customer economic crises (local, state, national) customer payment delays changes in government laws/regulations customer bankruptcy suppliers are another important potential source of business disruption. finding a good supplier for a business can be just as important as obtaining a good family physician. conversely, a bad or even a marginal supplier can create a crisis of disproportionate grief. the best suppliers are those who care about your business at least as much as they care about their own business. small organizations often become highly dependent on single-source suppliers. the owner may not know where to look for other suppliers or does not want to take the time to do so. those familiar with the murphy's law admonition of "whatever can go wrong will go wrong" know that this phrase has special meaning for the single-source supplier. a crisis at the single-source supplier can often become an immediate crisis for the small business organization. fortunately, there is an almost fool-proof way to avoid this type of crisis. do not use singlesource suppliers without some degree of backup. even if there is no other supplier in your town or state, there are other suppliers as close as an 800 telephone number. the backup supplier may take longer to respond and also could be more expensive. however, if this action avoids a potential crisis, it is worth the extra time and money to develop backup suppliers. timing is of the uunost importance in this particular situation. links should be established with backup suppliers before they are needed. this step can often be accomplished with a telephone call or a fax of your requirements. 5 accounting, marketing, financial, legal and other operating problems can easily escalate into crises for a small business owner. these core business activities are the backbone of any business operation and are the source of many daily problems. examples of such organizational crises include accounting errors, poor product selection, service problems, advertising mistakes, computer failure, pricing errors, cash flow problems, loan troubles, and legal complications. these activities are required to successfully remain in busines. the comforting fact is that small business owners generally become adept at managing operating problems. if they do not address these situations, the business will almost certainly decline or fail. management succession is a particularly important issue for small businesses to consider. this issue has been discussed extensively in the literature (christenson, 1953; davis, 1968; handler, 1990;lansberg, 1988; longnecker dt schoen, 1978). there are many examples where the transition from one owner to another has resulted in crises for employees, customers, suppliers, and other individuals. this issue can be especially volatile in family-owned businesses. the small business owner's leadership style can also produce crises in certain situations. there are a number of different leadership styles, such as autocratic, democratic, supportive, and laissez-faire. most leaders have a particular style with which they are most comfortable. a crisis may occur if there is a mismatch between their style and the particular situation. organizational crises can be especially devastating to small businesses. since they have more bargaining power with suppliers, may have integrated operations, and have professional managers who have a different perspective of management succession than a small business owner, large firms are often much better prepared than small firms for this crisis type. employee-related crises employee-related crises include any problem situation that can be traced back to the people working in a business. as noted previously, mitroff, pauchant and shrivastava (1989) indicate that the primary catalysts of many mechanical and product-related crises were people. human error, deviant behavior, and loss of confidence and trust are examples of people-related crises. this finding makes it imperative for companies to pay auention to their people. every employee plays an important role in a business. some employees, however, perform jobs where a mistake or their absence can have a devastating impact on the firm. from a crisis management perspective, these employees are the firm's key people. the owner or manager needs to take steps to "backup" key persons should they become injured or absent for extended periods of time. small business owners need to get to know key employees, their work patterns, family situations, and outside interests. for example, if a key employee owns a boat, he or she may want to take a day off during nice weather to be out on the water, leaving the small business in a crisis situation. using temporary agencies, cross-training other employees, and developing backups for key people may help prevent this type of employee crisis. all employees have crisis-creating situations in their own lives that spill over into the business. single employees have problems that differ i'rom married employees. married employeeswithchildrenhavedifferentcrisesflomsingle-parentemployees. thecommonthread in all individual crises is that they can create a crisis for the small business. several steps can be taken to minimize the negative effects of employee crises. these include: 6 ~ selecting people who are "right" for the organization and the job, ~ learning as much as possible about the backgrounds and lives of all employees, and ~ training and cross-training every employee so that he or she has the background and ability to deal with many possible crisis situations (the military has used this strategy effectively). external event crises external event crises are situauons that occur in the external environment of a small business organization. the recent los angeles eanhquakes, mississippi river floods, hurricanes in florida, and other natural disasters exemplify this type of devastating crisis. an infinite number and variety of events could occur from the external environment. the owner or manager is responsible for determining which external events could be a real crisis for the business. a short list of external events include, but are not limited to, the following: ~ natural disasters such as lightning strikes, tornadoes, hurricanes, flooding, severe wind and/or snow storms, and earthquakes may occur. each owner or manager should prepare a list that more accurately reflects his or her specific geographic area and business. ~ legal and zoning changes can affect the future viability or even existence of the business. owners need to keep abreast of local political issues to prepare for and minimize the potential effect on their businesses. ~ highway relocations may fall into the same category as zoning changes, but these are usually proposed by the state rather than local government. again, owners need to stay alert to any changes being proposed in their market area. ~ crime and other random acts of violence can tax ihe resources of any organization. crime is one of the most random external events that can affect today's organizations. no community is immune to this type of activity, even the upscale areas. small business owners need to be aware of actions that occur in other communities and prepare accordingly for this crisis. many small business owners think that their insurance can coverall types of external crises. however, the small business owner should be aware of the limitations and costs of insurance, as previously discussed. small business owners should also be aware that the impact of many external crises can be either prevented or minimized through proper planning. customer-related crises customer-related crises are those situations that can be traced back to an unhappy or unsatisfied customer. unlike other categories discussed in this section, customers are different because the business has very little control over them. unlike employees and suppliers, the customer relationship is often one-sided and the organization can do litde or nothing to "make" customers buy the goods or services. unhappy customers may simply stop patronizing a business and often the business owner does not know why. business owners must continuously strive to improve customer satisfaction, because it is quite clear that they cannot survive without customers. 7 small business owners should emphasize the development of loyal customers through their business activities. deming states that businesses should not simply seek satisfied customers. instead, they should focus on building loyal customer relationships, which are the greatest source of profit(gabor, 1990).loyal customers produce additional profits by making referrals to friends and relatives through wordwf-mouth advertising. when crisis situations occur, loyal customers can often be strong allies by continuing to patronize the business throughout the crisis and offering personal support to the owner. personal crises personal crises can be the most difficult situations for small business owneys to manage. often, the owner's personal needs become last in order of priority. the owner may focus on all types of external and internal business problems, but to whom does thc owner turn in the case of a personal crisis? 1fthe answer is "his or her family," it may well bc the wrong answer. a small business owner may have to appear tough and steady on the outside, yct he or she may be very delicate on the inside. the personal crisis potential is greatly increased when no one cares about what is going on in the owner's personal life. very little has been written about the stamina that it takes just to get up each day to run a business. further complicating these crises are the problems arising from many other areas such as family, customers, suppliers, and employees. when a crisis occurs in the owner's life, people say, "joe didn't see it coming." or they say, "sharon didn't tell us how she felt about so and so." by the time these words are spoken, the crisis has run its course and the only job remaining is to clean up thc mess and count the casualties. birley (1985)notes that small business owners often limited their information network to family, close friends, and colleagues and were either unwilling or unaware of professionals who could be more capable sources of assistance. to effectively prepare for personal and business crisis situations, owners need to develop professional relationships with persons with whom they can share their feelings. small business owners can identify potential crises by reviewing the examples given in figure 1 and considering the possibilities for their own businesses. using the model discussed in the next section, small business owners can take action when potential warning signs appear bcforc these situations escalate into major crises. a crisis management model for small businesses after small business owners consider the types of crises that might occur in their firm, a crisis management model is needed to illustrate the process of effectively managing a potential crisis situation. several authors have proposed models and steps for dealing with risks, threats, and crisis management (aspery dt woodhouse, 1992; barton, 1993; beam dt carey, 1991; bcmstein, 1990;fink, 19&6;pauchant fk mitroff, 1992; pearson 8r. mivoff, 1993;souter, 1991). in general, these models can be condensed into three stages, with additional steps within each stage. the major stages include activities undertaken prior to a crisis (prevention), during a crisis (reaction), and after a crisis (education). figure 2 illustrates the three stages and the underlying steps of each stage. each step is discussed further following this figure. 8 figure 2. a crisis management model prior to a crisis: risk warning identification preparation signs crisis reacting to a crisis: response recovery reacting to a crisis: analysis improvement 9 stage 1 —action taken before a crisis (preparation) the goals of this stage are to prepare for and hopefully prevent a crisis from occurring by being proactive in anticipating potential crisis situations. specific steps to be taken in this stage of the crisis management model include: ~ identify potenual crises that specifically apply to your business or industry. what are thc areas of potential vulnerability or risk? what risks apply specifically to firms in your geographical area, such as weather-related crises? what crises are common to your industry? what ideas do trade sources have regarding potential crises? what types of things could happen? are there any warning signs that will precede each type of crisis? ~ consider how these situations would affect your business. ~ examine current policies and procedures in effect that would minimize a potential crisis. ~ determine if you have experience in handling any of these potential crises. ~ organize a crisis management team, consisting of the owner/manager, operations person, mar keung person, administrative person, and external team members such as an, attorney and a cpa. ~ develop a crisis management procedures sheet or plan, with ieach team member's phone number and key area officials (state and local government, media, law enforcement) based on the crises that you feel has potential for your business. develop alternate sites for business resumption. keep copies of the plan at each team member's home and work locations. post the crisis management team members'ames and phone numbers at the business. head (1990)and humphreys (1992)provide outlines for a crisis management procedure manual. ~ educate and train employees in how to respond in a crisis situation. ~ review the adequacy of insurance coverage. in particular, business interruption insurance should be considered to safeguard against a loss of income if the business is shut down because of a crisis. ~ watch for warning signs that might precede a crisis. respond to warning signs with action. sheridan (1992) discusses how to be aware of symptoms from customers and suppliers that might signal a potenual crisis. ~ maintain good relationships with local and state government officials and local newspaper, radio, and television contacts. 10 stage 2 —action taken during a crisis (reaction) the main goals of this stage are to respond quickly, to express concern for customers, employees, and the public, to minimize losses, and to resume operations as soon as is feasible. specific steps to be taken in this crisis management stage include: ~ provide effective and timely communicauon with media representatives, government officials, employees, customers, suppliers, and other affected individuals or groups. this step is a crucial element of successful crisis management. many examples of failure in crisis management can be traced to poor handling of media communications. for example, the apparent lack of concern shown by exxon's management in the oil spill crisis was considered to be a major factor in the escalation of the crisis. in contrast, johnson dt johnson has been widely praised for its handling of the tylenol poisoning crisis (barton, 1993). for further advice about successfully communicating with the media during a crisis, see izatt (1992). ~ let people know that you are in control (as well as can be expected) of the situation. it is especially important for the owner to be actively involved in the crisis response. ~ be sensitive to the impact of the crisis on employees and be prepared to respond. ~ expedite emergency response to protect customers, employees, and the public and defuse the crisis as soon as possible. ~ resume business as soon as possible. if this is not possible, seek ways for customers to receive needed good and services. stage 3 —action taken after a crisis (education) the primary goal of this stage is to leam from the crisis and to determine what changes are required for future improvement. specific steps to be taken in this stage include: ~ analyze what happened and determine if any parts of your crisis management plan were inadequate. ~ determine how to improve the existing crisis management plan to reduce the possibility of future crises. 11 conclusions and implications for small businesses crisis management is an increasingly important issue that applies to small businesses as well as their large firm counterparts. small business owners have a number of unique crises that can seriously affect the survival and growth of their organizations. in addition, small business owners may lack the resources and expertise to identify potential warning signs and also to deal with crises after they occur. small business owners need to emphasize preventive measures to avoid potential crises. preventive crisis managemem is an issue for all small business owners, especially those who are "here and now-type" pmblem solvers. all small business owners need to develop a targeted crisis management plan that focuses on identifying and preparing for crises that have high potential for occurrence. an example of a small business that successfully implemented a crisis management plan is included in the appendix. this small corporation owns land and leases campsites for hunting and fishing. the corporation president developed a crisis management plan to lessen the chances of hunting accidents and to reduce the risk of shareholders being sued by someone who might be hurt on thc property (f.j.hebert, jr.,personal comm un ice non, february 24, 1 994). this case also illustrates the limitations of insurance. although the corporation president used insurance to minimize risk, he also set up a hunting club to regulate hunting activities, developed a wildlife management plan for his land, and required that hunting club members auend an annual hunter safety course. the information presented in this article could be used in several ways with small business owners. smallbusiness professionals could use the crisis types and suggested crisis management model to help small business owners identify the types of crises thai. might affect their firm, the crises they would like to cover using insurance, and the non-insurance preventive measures that could be taken to minimize potential crises. small business groups organized through local chambers of commerce or industry trade groups could use the information to identify potential crises that could affect members in their area and could generate a suggested crisis management plan for businesses in the same area or industry. further steps might involve the preparedness of the local and regional governments concerning potential crises. local and regional media and government officials could assist small business owners in identifying potential crises and in preparing a crisis management plan. classroom applications might involve student projects to assist a small business in idenufying potential crises and in developing a crisis management plan. students in a family business course could use the crisis types to identify potential crises that may affect their family' firm. presentation of the information and the example offered in the appendix could provide an impetus for existing family business managers to identify potential crises and to develop a crisis management plan for the family firm. another classroom application would be for students to evaluate an actual crisis situation by discussing what steps could have been taken to prevent the crisis from occurring. further research is needed to determine small business owners'erceptions of crisis management and to identify what approaches they are taking to prepare for potential crises. several questions could be addressed to a sample of small business owners, such as their perceptionsof theprobability ofoccurrenceof thedifferentcrisis typespresented in figure l,their perceptions of the uses and limitations of insurance, their own crisis experiences, and their views on the suggested steps included in the crisis management model pr&;sented in figure 2. 12 references aspery, j.,& woodhouse, n. (1992,november). strategies for survival. management services, 14-16. barton, l. (1993).crisisin organization: managing and communicatingin the heat of chaos. cincinnati: south-western publishing co. beam, h.h., & carey, t.a. (1991).the risk-threat matrix: key to a defensive strategy. midamerican journal of business, 6(2), 39-44. bernstein, j. (1990).the 10 steps of crisis management. security management, 34(3), 75-76. birley, s. (1985). the role of networks in the entrepreneurial process. journal of business venturing, 1(1), 107-117. brightman, hj. (1989, january-march). crisis! managerial lessons from pearl harbor. business, 3-10. christenson, c.r. (1953).management succession in small and growing enterprises. boston: division of research, graduate school of business administration, harvard university. davis, s.m.(1968).entrepreneurial succession. administrative sciences quarterly, i3,402416. fink, s. (1986).crisis management. new york: american management association. gabor, a. (1990).the man who discovered quali ry. new york: times books. handler, w. (1990).succession in family firms: a mutual role adjustment between entrepreneur and next generation family members.entrepreneurship; theory and practice, 15(1),37-51. head, g.l. (1990, may 28). crisis plans ensure companies'uture. business insurance, 39. hoy, f.,& hel1riegel, d. (1982).the kil mann and herden model of organizational effectiveness criteria for small business managers. academy of management journal, 25(2), 308-322. hum phreys, k.c. (1992, june). crisis planning: necessity, not luxury. bank marketing, 34-35. izatt, j. (1992, march 26). coping with crisis. marketing, 23-24. lansberg, i, (1988).the succession conspiracy. family business review, 1(1), 119-144. longnecker, j.g. &. schoen, j.e.(1978).management succession in family business. journal of small business managemetu, 16(3), 1-6. mitroff, i., pauchant, t. &. shrivastava, p. (1989, may). can your company handle a crisis? business & health, 4144. pauchant, t.c., & mitroff, i.i. (1992). transforming the crisis-prone organization. san francisco: jossey-bass publishers. pearson,c m.,& mitroff i i.(1993).fromcrisispronetocrisisprepared: aframeworkforcrisis management. academy of management executive, 7(1), 48-59. sheridan, j.h. (1992, february 17).the 'sick company'yndrome.!ndustry week, 14-16. stevens, m. (1992, august 27). crisis, what crisis? marketing, 26-27. souter, g. (1991, october 28). experts detail how planning minimizes losses. business insurance, 21-25. sullivan, a. (1989, july 25). exxon discloses oil-spill expenses over $ 1.25 billion. the wall street journal, p. a3. webster's ninth new collegiate iyictionary. (1991).springfield, ma:memam-webster, inc. 13 appendix example of small business crisis management planning jules a. hebert rental corporation, inc.'s crisis management plan this situation had probably happened many times before. two people who lived on the jules a. hcbert rental corporation, inc.'s property were out deer-hunting one day. one of the hunters was up in a tree stand, while the other hunter was on the ground. the two hunters were being very quiet, so each person was unaware of the other's presence. the hunter on the ground fired his gun first, and then moved toward the animal. as the uee stand hunter prepared to fire, he almost shot the hunter on the ground! a major crisis was luckily avoided. when the corporation president, mr. hebert, found out about this near accident, a cold shiver went up his spine as hc considered what would have happened if the person had liecn shot. he discussed this situation with his son, who was also a shareholder ot'he corporation that owns and manages approximately 1,000acres of property. he also discussed the situation with other area landowners who allowed hunung on their properties. the result was the decision to develop a crisis management plan that would hopefully prevent a shooting from occurring and also protect shareholders from potential lawsuits. mr, hebcrt discovered through his research that there were several insurance companies that wrote policies to protect hunters and landowners from these types of accidents; however, the insurance policies must be wriuen through a hunting club rather than for individual residents or a landowner. since his lessees were not members of a hunting club, mr. hebert realized that it would take considerable time and effort to implement his plan. he would have to create a nonprolit corporation for the hunting club, and then ask property residents to join the club for a nominal amount of dues. officers and directors of the club would nccd to be elected, and the hunting club would also have to develop policies to regulate who was allowed to hunt and where they could hunt on the property. these policies would enable the property owner to prosecute someone who hunted on the propeny without authorization from the club. after all of these steps werc completed, an insurance policy could be written to protect both hunters and shareholders. mr. hebert realized that purchasing insurance was only part of the preparation needed to protect individuals from a potential crisis. he took scvcral addiuonal precautions to prevent potential hunting accidents. the state wildlife and fisheries department was asked to develop a wildlife management program for the property. this program would require that tags be issued to regulate thc number and species of animals that could be hunted. this action would improve thc management of the property's wildlife. also, the state wildlil'e personnel were asked to present a hunter safety course for club members. club members would be required to auend the uaining course to ensure that safe hunting safety practices were being used. mr. hebert concluded that this effort would require a great deal of work to implement. however, he believed that it would help prevent a crisis from occurring and would protect property residents and the corporation's shareholders. 14 microsoft word front cover v20n1.docx volume 19, number 20 spring/summer 2009  19              business incubators:  leveraging skill utilization through  social capital  semra f. ascigil  middle east technical university  sascigil@metu.edu.tr    nace r. magner  western kentucky university  nace.magner@wku.edu      abstract    this study examines the role that social capital among tenant companies of a business  incubator plays in the acquisition and utilization of business skills by those companies.   social capital is a resource derived from the structure and content of social relations  among individuals or groups.  questionnaire data were gathered from 53 managers  (primarily owners) of tenant companies in five incubators established by the state  privatization office of the turkish republic.  as hypothesized, relational social capital  and cognitive social capital each had a significant unique and positive relationship  with skill utilization.  contrary to a hypothesis, structural social capital did not have a  significant unique relationship with skill utilization.  these results indicate that  incubator tenant companies’ skill utilization is enhanced by social capital generated  from the content of relations between the companies such as whether they trust and  identify with each other and whether they share a common language and perspective.    keywords:  social capital, business incubation, small business networks    introduction    a business incubator is a collective of  young companies that nurtures the  companies during the early phases of  their life by providing them with hands‐ on management assistance, business and  technical support services, shared office  space and equipment, access to  financing, and opportunities to network  both with other new companies within  the incubator and with external parties  such as university faculty, industry  contacts, and consultants (bollingtoft &  ulhoi, 2005; hackett & dilts, 2004;  peters, rice, & sundararajan, 2004).  the  ultimate objective of an incubator is to  increase the likelihood that tenant  companies will survive their formative  years (allen & rahman, 1985).  an  important way that incubators benefit  tenant companies is by offering an  institutional and policy framework that  supports the acquisition and utilization  strateg y  journal of small business  journal of small business strategy      20  of relevant business skills.  incubator  tenant companies may have a  compelling idea for a unique product or  service, but often are deficient in  fundamental skills in areas of business  development such as human resources,  marketing, distribution, assembly, and  financial management that are necessary  to make their ventures viable (rice,  2002).  incubators seek both to  strengthen the existing skills of tenant  companies and to enrich their skill base  by facilitating the transfer of relevant  information and knowledge to the  companies.   the purpose of the study reported here  is to examine the role that social capital  among incubator tenant companies  plays in the acquisition and utilization of  skills (hereafter referred to collectively  as skill utilization) by those companies.   social capital, which is a resource  derived from the structure and content  of social relations among individuals or  groups, has been shown to be an  important factor in explaining actors’  success in areas such as product  innovation (e.g., cooke, clifton, &  oleaga, 2005; subramanian & youndt,  2005), managerial performance (e.g.,  moran, 2005; wu, 2008), and  organizational performance (e.g.,  acquaah, 2007).  scholars have proposed  that social capital fosters an  environment that is conducive to the  exchange of information and knowledge,  such as that pertaining to business skills  (e.g., anderson, 2008; inkpen & tsang,  2005; maurer & ebers, 2006; nahapiet &  ghoshal, 1998; walter, lechner, &  kellermans, 2007; yli‐yenko, autio, &  sapienza, 2001).  the current study  tested relationships between three  separate forms of social capital among  incubator tenant companies – structural  social capital, relational social capital,  and cognitive social capital – and skill  utilization, using questionnaire data  gathered from tenant companies of five  incubators established by the state  privatization office of the turkish  republic.  in the context of tenant  companies in an incubator, structural  social capital relates to the overall  pattern of social relations among tenant  companies; relational social capital  concerns the affective nature of the  social relations among tenant  companies; and cognitive social capital  addresses the extent to which tenant  companies share a common language  and perspective (bolino, turnley, &  bloodgood, 2002; nahapiet & ghoshal,  1998).   our study makes several contributions  to the incubator management literature.   based on their comprehensive review of  incubator research, hackett and dilts  (2004) concluded that studies  addressing the impact of incubators are  scarce and recommended that future  research should place greater emphasis  on identifying incubator process  variables that predict and explain clearly  defined incubation outcomes.  they also  noted a dearth of studies that focus on  the incubator tenant company (as  compared to, for example, the incubator  itself) as the unit of analysis.  in  response to hackett and dilts, our study  empirically examines how three  incubator process variables related to  social capital among incubator tenant  companies affect an incubation  outcome, or skill utilization, for which  the incubator tenant company is the  unit of analysis.  skill utilization, which  has not been studied in previous  empirical incubator research, is a salient  incubation outcome because  strengthening and enriching the skill  base of tenant companies is a primary  volume 20, number 1 spring/summer 2009      21    role of incubators.  another contribution  of our study is that we examine the  impact of incubators in a country with  an emerging economy, turkey, whereas  previous incubator research has  generally been conducted in countries  with a developed economy, such as the  united states.  phan, siegel, and wright  (2005, p. 174) recently provided specific  support for our focus on incubation  process variables related to social capital  when, after reviewing the incubator  literature, they concluded that future  incubator research will increasingly  adopt a social network approach as  exemplified by the social capital paper  by bollingtoft and ulhoi (2005).          literature review, theory,  and hypotheses  social capital in an incubator is derived  both from internal linkages among  members of the incubator, which are  composed of the tenant companies and  professional incubator management, and  from external linkages that members of  the incubator have with outside parties,  such as consultants, financial  organizations, universities, and industry  contacts (bollingtoft & ulhoi, 2003;  buche & scillitoe, 2007).  while all of  these linkages can be beneficial to an  incubator tenant, the opportunity for  close, day‐to‐day interaction with  multiple other tenants in both business  and social contexts is particularly  important and is a service that tenants  would have difficulty obtaining through  means other than an incubator  (bollingtoft & ulhoi, 2005; lyons, 2002).   adler and kwon (2002) noted that social  capital in a collective is primarily in its  internal structure.  for these reasons,  the current study focuses on internal  linkages among tenant companies of the  incubator when addressing social  capital.  information is foremost among the  direct benefits that social capital  provides to actors involved in social  relations (adler & kwon, 2002;  subramaniam & youndt, 2005).  the  acquisition and exploitation of  information are predominately social  processes (yli‐yenko et al., 2001), and  social capital can provide actors such as  incubator tenant companies with greater  access to information and can improve  information’s reliability, relevance, and  timeliness (adler & kwon, 2002; burt,  1997; smith & lohrke, 2008; spence,  schmidpeter, & habisch, 2003).  a  particularly salient type of information  exchanged among incubator tenant  companies pertains to business skills  that will enhance the viability of the  companies (bollingtoft & ulhoi, 2005).   social capital among incubator tenant  companies has the potential to increase  the companies’ skill utilization to the  extent that it enhances their access to  skill‐related information, their  expectation that the skill‐related  information has value, their motivation  to exchange skill‐related information,  and/or their ability to recognize the  value of and assimilate skill‐related  information (nahapiet & ghoshal, 1998).     structural social capital and skill  utilization     aspects of structural social capital  among incubator tenant companies  include the extent to which the  companies are connected to other  tenants, the frequency of the  interactions, and the variety of settings  (e.g., workplace, social) in which the  interactions take place (bolino et al.,  2002; nahapiet & ghoshal, 1998).   journal of small business strategy      22  structural social capital has the potential  to enhance the skill utilization of  incubator tenant companies primarily  because it increases access to relevant  information (anderson, 2008; liao &  welsch, 2005; moran, 2005; nahapiet &  ghoshal, 1998).  for example, as a tenant  company forms ties with a larger  number of other tenants, a greater  amount of skill‐related information is  available from more disparate sources  (mcfadyen & cannella, 2004).  more  frequent interactions with other tenants  across a broader variety of settings will  also likely increase access to skill‐related  information.    h1:  structural social capital among  the tenant companies of an  incubator has a positive  relationship with skill utilization  in those companies after  controlling for relational and  cognitive social capital among the  companies.  relational social capital and skill  utilization   aspects of relational social capital  among incubator tenant companies  include the degree of trust between  tenants and the extent to which the  tenants are friendly, identify, and feel a  sense of community with one another  (bolino et al., 2002; inkpen & tsang,  2005; liao & welsch, 2005; nahapiet &  ghoshal, 1998).  one way that relational  social capital may increase the skill  utilization of incubator tenant  companies is by increasing the  companies’ motivation to exchange skill‐ related information with one another  (bolino et al., 2002; mcfadyen &  cannella, 2004; nahapiet & ghoshal,  1998; smith & lohrke, 2008).  for  example, tenant companies are probably  more willing to expend the time and  effort to exchange information,  particularly sensitive or proprietary  information, with companies they feel  they can trust and with which they have  formed a friendship and sense of  community because they will have  greater regard for the other companies’  welfare and will be less concerned with  protecting themselves from  opportunism on the part of the other  companies (dyer & chu, 2003; inkpen &  tsang, 2005; moran, 2005; rowley,  behrens, & krackhardt, 2000; wu, 2008).   relational social capital also has the  potential to increase incubator tenant  companies’ skill utilization by enhancing  the companies’ expectation that the  available skill‐related information has  value (nahapiet & ghoshal, 1998).  for  example, tenant companies are likely to  view skill‐related information as more  reliable, and thus be more likely to use  it, if it comes from companies they can  trust and with which they identify  (moran, 2005).              h2: relational social capital among the  tenant companies of an incubator has  a positive relationship with skill  utilization in those companies after  controlling for structural and  cognitive social capital among the  companies.     cognitive social capital and skill  utilization  aspects of cognitive social capital among  incubator tenant companies include the  existence of a shared language and  vocabulary and the sharing of collective  narratives (bolino et al., 2002; nahapiet  & ghoshal, 1998).  one way that  cognitive social capital may increase the  skill utilization of tenant companies is  by increasing their access to skill‐related  information.  when tenant companies  share a common language and  volume 20, number 1 spring/summer 2009      23    vocabulary, a greater amount of skill‐ related information becomes available  because language is the means by which  information is communicated (nahapiet  & ghoshal, 1998).  recipients who  cannot understand the language and  vocabulary in which information is  communicated may eschew the difficulty  and costs necessary to comprehend the  information (reagans & mcevily, 2003).   cognitive social capital also has the  potential to increase the skill utilization  of incubator tenant companies by  enhancing their ability to recognize the  value of and assimilate skill‐related  information.  for example, a shared  vocabulary and common way of looking  at things help companies to make sense  of relevant new information regarding  skills (de carolis & saparito, 2006;  grant, 1996), and narratives in the form  of “war” stories can be a powerful means  of communicating practical experience  in operating a company (wasko & faraj,  2005).         h3: cognitive social capital among the  tenant companies of an incubator  has a positive relationship with skill  utilization in those companies after  controlling for structural and  relational social capital among the  companies.  method  data were gathered with a questionnaire  completed by owners or non‐owner  managers of companies that were  tenants of one of five incubators located  in five different cities in turkey.           these incubators stemmed from a  project launched in 2000 by the state  privatization office of the turkish  republic to provide business  development support to people who had  become unemployed either directly or  indirectly as a result of the state’s  privatization initiatives.  most of the  incubators are composed primarily of  small commercial craft companies,  although one incubator houses a  significant number of computer software  companies.   we sent a packet of questionnaires to  the manager of each incubator, who  then distributed a questionnaire to each  of the incubator’s tenant companies.   respondents, who were promised  anonymity, returned their questionnaire  in a sealed envelope to the incubator  manager, who sent the sealed envelopes  back to us.    measures of primary variables  table 1 presents the items used in the  study to measure each of the three forms  of social capital among tenant  companies (structural social capital,  relational social capital, cognitive social  capital) and skill utilization.  the social  capital variables had separate 4‐item  measures that we developed for this  study to address concepts that nahapiet  and ghoshal (1998) and bolino et al.  (2002) associated with each specific form  of social capital.  skill utilization, which  addresses the extent to which  respondents acquire and use job skills as  a result of membership in the incubator,  was measured with five items developed  by kiffin‐petersen and cordery (2003).   all items included on the four measures  had a 6‐point scale with endpoints  “strongly disagree” (1) and “strongly  agree” (6).  the items for each measure  were summed and averaged.  all scale items were translated from  english to turkish when preparing the  final questionnaire.  to ensure the  validity of the translation, the translated   journal of small business strategy      24      table 1 – items measuring the three social capital variables and skill  utilization  a.   structural social capital  1. i interact with neighboring companies/tenants in the incubator on a  frequent basis.  2. i feel very connected to neighboring companies/tenants in the incubator.  3. i often interact with neighboring companies/tenants in the incubator  socially outside the workplace.  4. i actively seek to network with neighboring companies/tenants in the  incubator at work.    b.   relational social capital  1. my company and neighboring companies/tenants in the incubator strongly  identify with each other.  2. i have a high degree of trust in neighboring companies/tenants in the  incubator.  3. i feel a strong sense of community with neighboring companies/tenants in  the incubator.  4. i am a friend of neighboring companies/tenants in the incubator.    c.   cognitive social capital  1. i often share with neighboring companies/tenants in the incubator stories  about what goes on at work.  2. neighboring companies/tenants in the incubator and i share a common  language when performing our jobs.  3. i am of similar mind with neighboring companies/tenants in the incubator  when it comes to interpreting the events that affect the incubator.  4. i often relive with neighboring companies/tenants in the incubator past  events that have occurred at work.    d.   skill utilization  1. i participate in incubator training and development activities/opportunities  to learn new skills.  2. i have an opportunity to learn new skills here.  3. i use all of the skills, talents, and abilities i possess on a regular basis here.  4. i apply my skills, knowledge, and abilities to my job in a way i think is best  here.  5. i am cross‐trained to do other jobs here.  note.  each item had a 6‐point scale with endpoints “strongly disagree” (1) and  “strongly agree” (6).  volume 20, number 1 spring/summer 2009      25    items were first scrutinized by two  business people and an academician  who were fluent in english.  then the  items were back translated into english  by an academician to further ensure that  no loss of meaning occurred in the  turkish version of the items.      control variables  four variables were incorporated into  the analysis as control variables because  of their potential to either inflate or  reduce the relationships between the  social capital variables and skill  utilization.  the control variables were  gender (male = 1, female = 2), company  position (non‐owner manager = 1, owner  = 2), number of company employees,  and a categorical variable indicating the  incubator to which the respondent’s  company belonged (coded 1 – 5).   results  respondents  questionnaires were distributed to a  total of 135 tenant companies across the  five incubators involved in the study.   although 59 questionnaires were  returned to us, 6 that did not provide  data for one or more of the  questionnaire items of interest were  eliminated from the study, resulting in  53 final respondents (a 39% useable  response rate).   most of the respondents retained in the  study were male (85%) and were owners  of their company (91%).  owners are  appropriate respondents for the study  because social capital during a start‐up  company’s early development is nearly  identical to that of the company’s  founders (hite & hesterly, 2001; maurer  & ebers, 2006).  the average company  had 8 employees.  descriptive statistics, correlations,  and reliabilities  table 2 presents means, standard  deviations, and pearson bivariate  correlations for the eight variables in the  study, along with alpha internal  reliability coefficients for the multiple‐ item measures.  among correlations  involving control variables, gender had  significant (p < .05, two‐tailed)  correlations with all three social capital  variables, with women reporting less of  each type of social capital than men.   these results are consistent with prior  research indicating that women have  more difficulty accessing networks in  organizational settings than do men  (smith, 2000).  the social capital  variables had significant (p < .001, two‐ tailed) and high (range = .65 to .77)  correlations with each other, which is  consistent with nahapiet and ghoshal’s  (1998) assertion that the three  dimensions of social capital are highly  interrelated.  correlations between the  social capital variables and skill  utilization were significant (p < .001,  two‐tail) and moderate‐to‐high in  magnitude (range = .42 to .65).  alpha  coefficients (range = .70 to .83) all met or  exceeded the .70 threshold suggested by  nunnally (1978).  alpha, which is the  average of all possible split‐half  reliability coefficients that can be  obtained from the set of items  comprising a given measure, provides  the most thorough analysis of patterns  of internal consistency (de vaus, 2002;  pett, lackey, & sullivan, 2003).       journal of small business strategy      26      t ab le  2  –  m ea n s,  s ta n d ar d  d ev ia ti o n s,  c o rr el at io n s,  a n d  r el ia b il it ie s  n ot e.  a lp h a  re lia bi lit y  co ef fi ci en ts  fo r  m ul ti pl e‐ it em  s ca le s  ar e  sh ow n  in  p ar en th es es  o n  t h e  di ag on al .   m ea n s  an d  st an da rd  d ev ia ti on s  ar e  n ot  p ro vi de d  fo r  ca te go ri ca l v ar ia bl es .  *p  <  .0 5,  t w o‐ ta ile d.   * ** p  <  .0 01 , t w o‐ ta ile d.   v ar ia bl e  m   sd   1  2  3  4  5  6  7  8  1.  g en de r  –  –  –                2.  p os it io n    –  –  ‐. 23   –              3.  f ir m  s iz e  8. 02   14 .9 0  .0 4  ‐. 03   –            4.  i n cu ba to r  –  –  ‐. 14   .18   .2 5  –          5.  s tr uc tu ra l s oc ia l c ap it al   3. 93   1.0 2  ‐. 27 *  .0 9  .0 9  ‐. 04   (. 82 )        6.  r el at io n al  s oc ia l c ap it al   4. 04   1.0 7  ‐. 30 *  .14   .0 7  ‐. 13   .7 7* **   (. 83 )      7.  c og n it iv e  so ci al  c ap it al   4. 00   0. 94   ‐. 30 *  .0 9  .13   ‐. 23   .6 9* **   .6 5* **   (. 70 )    8.  s ki ll  ut ili za ti on   4. 62   0. 82   ‐. 13   .15   .12   ‐. 22   .4 2* **   .5 8* **   .6 5* **   (. 77 )  volume 20, number 1 spring/summer 2009      27      hypothesis testing   the hypotheses were tested with two‐ step hierarchical regression analysis,  with the control variables and social  capital variables as predictors of skill  utilization.  at step 1, skill utilization was  regressed on the four control variables.   at step 2, the three social capital  variables were added as a block to the  regression model.  table 2 displays the  results of the hierarchical regression  analysis.  the beta coefficients, or  standardized regression coefficients,  represent the strength of the unique  relationship between a predictor variable  and skill utilization after controlling for  the effects of all the other predictor  variables in the regression model.  the  r2 statistics represent the amount of  variation in skill utilization that is  explained by all the predictor variables  in the regression model.                    table 3 – summary of hierarchical regression analysis for control variables  and social capital variables predicting skill utilization  predictor variable   β coefficients and r2 statistics  step 1: control variables      gender                           ‐.14    position in company                            .19    number of company employees                            .21    incubator                            ‐.33**      r2                            .14      step 2:  add social capital variables      structural social capital                           ‐.30    relational social capital                            .44*    cognitive social capital                            .57***      δ in r2                            .38***      r2                            .52***  note. β coefficients are standardized regression coefficients.    *p < .05.  **p < .01.  ***p < .001.        3 journal of small business strategy      28  at step 1, the control variables as a group  did not explain a significant amount of  the variation in skill utilization.   incubator had a significant (p < .05)  unique relationship with skill utilization.  at step 2, the addition of the group of  social capital variables brought about a  significant (p < .001) increase in the  amount of variation explained in skill  utilization beyond that explained by the  control variables.  structural social  capital did not have a significant unique  relationship with skill utilization.  this  result fails to support h1, which  proposed a positive relationship between  structural social capital and skill  utilization after controlling for relational  and cognitive social capital. relational  social capital had a significant (p < .05)  and positive unique relationship with  skill utilization, which supports h2.   cognitive social capital also had a  significant (p < .001) and positive unique  relationship with skill utilization, which  supports h3.   to assess whether multicollinearity was  a serious problem in the regression  analysis, we examined the variance  inflation factors (vifs) for the seven  predictor variables in the full regression  model that included both control and  social capital variables.   multicollinearity, which relates to how  highly a given predictor variable  correlates with the set of other predictor  variables in the regression model,  increases the standard error of the  regression coefficient for the predictor  variable and thus makes it less likely the  coefficient will be statistically significant  (allen, 1997).  all seven vifs (range =  1.10 to 2.97) were far below the threshold  of 10 that is commonly used as evidence  of serious multicollinearity (e.g., cohen,  cohen, west, & aiken, 2003; hair,  anderson, tatham, & black, 1992; von  eye & schuster, 1998).        discussion and implications  our study contributes to the relatively  small body of literature that has  examined how incubation process  variables affect the outcomes of  incubators.  from a broad perspective,  the results show that social capital  derived from relations among incubator  tenant companies is associated with  greater acquisition and utilization of  business skills by those companies.   more specifically, the results indicate  that tenant companies’ skill utilization is  enhanced primarily by social capital  generated from the content of the  relations between companies – do the  companies trust and identify with each  other?  do they share a common  language and perspective? – rather than  from the structure of relations between  the companies.    our results have important implications  both for governmental policy makers  who authorize the establishment of  incubators and for incubator managers,  who serve as the governmental units’  agents in ensuring that incubators  achieve their intended objectives.   traditionally, both of these parties have  focused on providing incubator tenant  companies with conventional physical  (e.g., physical space and equipment) and  human (e.g., hands‐on management  assistance) resources.  we provide some  of the first direct empirical evidence that  social capital among the incubator  tenant companies is an important  intangible resource that supplements  these more conventional resources to  benefit the companies in terms of  desired outcomes such as skill  utilization.  thus our results suggest that  governmental policy makers and  volume 20, number 1 spring/summer 2009      29    incubator managers should actively seek  to promote relational and cognitive  social capital among incubator tenant  companies.  governmental policy  makers’ efforts will likely take the form  of macro‐level actions that are  incorporated into the legislation to  authorize incubators.  for example,  mandating that a given incubator be  composed primarily of companies  offering similar types of products or  services may enhance the extent to  which the entrepreneurs share a  common language and vocabulary and  thus have access to and can assimilate  relevant skill‐related information.   incubator managers, who can make  specific operating decisions affecting the  incubator, likely have a greater ability to  influence social capital among tenant  companies than do governmental policy  makers.  bollingtoft and ulhoi (2005),  who concluded that little is known  about the mechanisms that facilitate or  hinder internal networking in  incubators, provide some preliminary  evidence regarding this issue.  their  observational study of a danish  incubator suggests that incubator  managers can influence social capital by  placing tenants’ offices in close physical  proximity, promoting a common set of  values (e.g., cooperation) among current  tenants, developing joint activities (e.g.,  social functions, participation in  incubator decision‐making, web page  construction) to help tenants get to  know each other, and controlling the  number of tenants in the incubator.   future research should seek to identify  other specific ways, many of which likely  require few out‐of‐pocket costs, that  incubator management can promote  relational and social capital among  tenant companies.  we proposed that the relationships that  emerged between the social capital  variables and skill utilization can be  explained in terms of enhanced  information exchanged between  incubator tenant companies.  for  example, we theorized that relational  social capital increases skill utilization  due to greater motivation on the part of  tenant companies to exchange skill‐ related information and to view such  information as valuable when they trust  and identify with the other tenants.  we  also theorized that cognitive social  capital increases skill utilization due to  tenant companies having greater access  to skill‐related information and a greater  ability to assimilate such information  when they share a common language  and perspective with the other  companies.  while our explanations for  these relationships are based on existing  theory from the social capital literature  (e.g., nahapiet & ghoshal, 1998), we did  not measure, and our hypotheses did not  explicitly address, variables such as  motivation to exchange skill‐related  information, access to skill‐related  information, and assimilation of skill‐ related information.  therefore, we  cannot rule out other possible  explanations for the relationships that  we found.  in order to confirm (or  disconfirm) the explanations given here,  future research should develop and test  more complex models that specify  variables such as motivation to exchange  skill‐related information and ability to  assimilate such information as  intervening on the causal path between  social capital and skill utilization.     our finding that structural social capital  among incubator tenant companies was  not associated with skill utilization after  controlling for relational and cognitive  journal of small business strategy      30  social capital was unexpected.  it seems  that simply being connected with other  tenant companies is not sufficient to  enhance a company’s skill utilization  when those relations are not  characterized by trust, a sense of  community, and a common language  and perspective.  while a greater  number of connections likely increases  the potential amount of skill‐related  information that is available to tenant  companies, whether the companies  actually share such information with one  another and ultimately perceive the  information as valuable and assimilate it  may hinge on the content of the  connections.  developing and  maintaining a network of social relations  with other incubator tenants is costly to  entrepreneurs in terms of time invested  in, for example, social activities and  small talk that are diversions from  activities that are more directly related  to operating their business (bollingtoft &  ulhoi, 2005; nahapiet & ghoshal, 1998).   our results suggest that a cost‐effective  strategy for entrepreneurs who seek to  bolster the positive effects of social  capital on skill utilization may be to  focus primarily on enhancing the  quality, rather than the quantity, of their  social connections with other tenant  companies in the incubator.  the current study introduces skill  utilization of tenant companies as an  incubation outcome that has both  academic and practical significance.  an  important issue is the extent to which  skill utilization enhances a tenant  company’s chance of survival, which is  the ultimate outcome of interest.  in the  future, researchers might develop and  test models that link the various forms  of social capital (including structural  social capital) among tenant companies  to the companies’ survival by way of  social capital’s effects on skill utilization,  as well as via other causal paths  suggested by the literature.  while our  current results indicate that structural  social capital does not enhance skill  utilization, it may still influence the  survival of tenant firms through other  processes that do not involve skill  utilization.  our focus in the current study was on  the effects of social capital derived from  relations among incubator tenant  companies.  however, tenant companies  will likely also benefit from social capital  that arises from their connections with  incubator management as well as from  their connections with external parties  such as university faculty, consultants,  and industry contacts.  work is needed  to assess the differential contribution  that social capital from each of these  three sources makes to skill utilization  and other outcomes of incubator tenant  companies, such as their long‐run  survival.  an interesting variation on this  work would be to instead examine how  incubator management and parties  external to the incubator benefit from  their social relations with incubator  tenant companies.  for example,  university faculty members may, as a  result of social interaction with  entrepreneurs in an incubator, obtain  knowledge that enhances their teaching  and research endeavors.  care should be taken in generalizing the  results of the current study beyond its  sample of tenant companies in  incubators established by the state  privatization office of the turkish  republic.  factors specific to these  companies may have had an impact on  the results.  for example, all the  incubators in the study have a similar  governance structure and similar  political, economic, and social  volume 20, number 1 spring/summer 2009      31    objectives.  all, or virtually all, of the  respondents to our questionnaire were  raised in turkey and speak turkish as  their primary language.  future studies  should test whether the relationships we  reported between the social capital  variables and skill utilization also apply  to respondents whose companies are  located in other incubators and/or who  are natives of countries other than  turkey.  data from this proposed  research could also be used to better  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should i share? examining social  capital and knowledge contributions  in electronic networks of practice.  mis quarterly, 29, 35‐57.  wu, w. (2008). dimensions of social  capital and firm competitive  improvement: the mediating role of  information sharing. journal of  management studies, 45, 122‐146.  yli‐yenko, h., autio, e., & sapienza, h. j.  (2001). social capital, knowledge  acquisition, and knowledge  exploitation in young technology‐ based firms. strategic management  journal, 22, 587‐613.            journal of small business strategy      34  semra f. ascigil is an associate professor  at middle east technical university,  ankara, turkey.  she teaches business  ethics, corporate governance and social  responsibility, and quality management  in the business administration  department.  her areas of research  include organizational justice, corporate  social responsibility, and small‐ and  medium‐sized enterprises.    nace r. magner is the j. c. holland  professor of accounting at western  kentucky university.  he teaches  management accounting.  his primary  research interests relate to antecedents  and consequences of justice in  organizational management control  systems.    acknowledgment    the authors convey their thanks to the  state privatization office of the turkish  republic for its support and help in  collection of the data.  reproduced with permission of the copyright owner. further reproduction prohibited without permission. http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2018, vol. 28, no. 03, 1-17 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2018 small business institute® w w w. j s b s . o rg financing through the crowd is a fast-emerging alternative funding option with massive upside potential (blohm, leimeister, wenzlaff, & gebert, 2013). the number of newly launched crowdfunding platforms has risen sharply, with more than 1,200 platforms currently existing worldwide (massolution, 2015). crowdfunding benefits from an increasing number of internet users, as well as from the integration of funding platforms with social networking (o’reilly, 2007). they allow fundraisers to obtain the attention of a wide range of people through viral effects (belleflamme, lambert, & schwienbacher, 2014; thies, wessel, & benlian, 2016). the market is generally divided into four types of crowdfunding models: reward, equity, lending, and donation. backers of donation-based crowdfunding do not expect a direct financial or material compensation. reward-based projects offer a non-monetary reward to the funders (e.g. a prototype; kraus, richter, brem, cheng, & chan, 2016b). from a (financial) investor point of view, equityand lending-based crowdfunding models are interesting as they promise monetary compensation (niemand, angerer, thies, kraus, & hebenstreit, 2018). in crowdlending, the compensation is an interest on the investment. this study mainly focuses on the remaining equity model of crowdfunding, called “crowdinvesting”, which can be defined as “a method of financing, whereby an entrepreneur sells a specified amount of equity or bond-like shares in a company to a group of (small) investors through an open call for funding on internet-based platforms” (ahlers, cumming, günther, & schweizer, 2015, p. 958). this means that investors have a chance to benefit from a long-term return potential by participating in start-ups (klöhn & hornuf, 2012) or maturing businesses (beck, 2014). crowdinvesting projects are usually contracted for a number of years, so that the invested money is bound for that time. this method is often used to finance a whole new company or a specific introduction martin angerer1, thomas niemand2, sascha kraus3, ferdinand thies4 1university of liechtenstein, liechtenstein, martin.angerer@uni.li 2technical university of clausthal, germany, thomas.niemand@tu-clausthal.de 3esce international business school, paris, france, sascha.kraus@esce.fr 4university of liechtenstein, liechtenstein, ferdinand.thies@uni.li risk-reducing options in crowdinvesting: an experimental study crowdfunding, crowdinvesting, experiment, risk-reducing, options financial constraints are a striking difficulty of entrepreneurial ventures in the early stages of their development. recently, emerging crowdinvesting platforms try to fill this finance gap by involving an anonymous crowd into the funding process. due to high information asymmetries, platform providers and start-ups alike try their best to reduce the risk for investors. we therefore examine existing and thinkable mechanisms of option-based risk reduction in crowdinvesting. we use a 2x3x3 mixed subject design to manipulate the availability and characteristics of risk-reducing options and the project attractiveness. with 210 participants, we are able to show that the introduction of different risk-reducing options in crowdinvesting solely favors high quality projects and increases capital concentration in a market that was originally built to make start-up funding available to a broader range of capital seekers. we also suggest reasonable prices for options and prove them to be accurate relatively to each other. further implications for theory and practice are discussed. apa citation information: angerer, m., niemand, t., kraus, s., & thies, f. (2018). risk-reducing options in crowdinvesting: an experimental study. journal of small business strategy, 28(3), 1-17. 2 m. angerer, t. niemand, s. kraus, & f. thies journal of small business strategy / vol. 28, no. 3 (2018) / 1-17 project which creates the necessity of a minimum funding limit that needs to be reached before the project is started. crowdinvesting represents an interesting alternative to traditional funding sources for financing business ideas, particularly for entrepreneurs (manchanda & muralidharan, 2014). its popularity as funding type of choice depends very much on the jurisdiction of the crowdfunding platform. in the german-speaking countries, this is the most often used approach for funding with investment character because crowdlending is legally difficult to structure here (angerer, brem, kraus, & peter, 2017). entrepreneurs in a start-up phase usually face challenges related to collecting the capital that is required to develop and grow their companies (hahn & naumann, 2014). banks often refuse to grant loans to start-up companies because of their high credit risks and often insignificant collateral securities. financing from venture capitalists and banks is commonly available only in the later development phases of start-ups (robb & robinson, 2014). start-ups that are early in their life cycle are typically financed by the founding team’s personal resources, fff (i.e. family, friends and fools) or business angels (bruton, khavul, siegel, & wright, 2015). if not enough capital is collected, the new venture faces a funding gap (collins & pierrakis, 2012). sufficient funding is vital to prevent the start-up from failing (yallapragada & bhuiyan, 2011). in contrast to traditional financial investments, crowdfunding is open to everyone (blohm et al., 2013). scholars differentiate three kinds of actors in crowdfunding: platforms, fundraisers, and investors (tomczak & brem, 2013). investors on crowdinvesting platforms represent the crowd that decides to monetarily support a project. they bear a high risk and assume that they will obtain a certain return for their contribution (ordanini, miceli, pizzetti, & parasuraman, 2011). the crowd normally remains anonymous (kshetri, 2015; wexler, 2011). scholars have characterized investors as being intelligent and qualified (howe, 2008), although the specific qualifications one must have to participate as an investor have not been determined. investing in start-ups is a high risk investment as around 90% of all start-ups fail (patel, 2015). therefore, most crowdinvesting platforms implement a selection process to identify potentially successful start-up projects (klöhn & hornuf, 2012) to reduce the high risk of start-up financing. the perceived risk of a project plays an important role in the investment decision of potential backers, especially as information asymmetries between creators and backers are relatively high in crowdfunding (thies, huber, bock, benlian, & kraus 2018; wessel, thies, & benlian, 2017). a new mechanism to mitigate the perceived risk of an investment has recently hit the market in form of a “crowd-voting” process. inspired by this new and selectable risk-reducing option (rhotert & zwinge, 2016), we therefore attempt to investigate the effectiveness of risk-reducing options in a crowdinvesting environment in the form of an experiment. as former studies are mainly concerned with quality signals as a mechanism to reduce the information asymmetries between creators and backers (burtch, ghose, & wattal, 2013; mollick, 2014; thies et al., 2016; wessel et al., 2017), this study draws on explicit risk-reducing options. we therefore formalize our research question as follows: “does the use of risk-reducing options influence the investment of crowdinvesting backers?” the aim of this study is, on the one hand, to provide new insights of a new kind of investor protection instrument that is aimed at decreasing risk, and, on the other hand, to better understand investors’ behavior in relation to risk. thus, selectable options for reducing an investor’s risk are elaborated. theoretical background crowdinvesting crowdinvesting is seen as “a method of financing, whereby an entrepreneur sells a specified amount of equity or bond-like shares in a company to a group of (small) investors through an open call for funding on internet-based platforms” (ahlers et al., 2015, p. 958). it is the only category of crowdfunding which includes an equity-like component (bradford, 2012). the funding conditions of crowdinvesting are similar to those of the donationand reward-based models. however, the types of investors who contribute to creative projects of donation and reward-based models differ notably from new venture investors (hemer, 2011). while there is no demographic statistics specifically on equity-crowdfunding investors yet, we know that crowdfunding investors in general are on average 39 years old, work in the innovation or finance industry, and have experience in the capital market (klöhn & hornuf, 2012). they may work as venture capitalists, but backers are not commonly professional investors (beck, 2014). the crowd is thus often acting along trained investors who are bank employees, venture capitalists or business angels (belleflamme et al., 2014; kraus et al., 2016b). most crowdfunding projects are limited to a certain period, usually between 30 to 90 days (mahlstede, 2012). 3 m. angerer, t. niemand, s. kraus, & f. thies journal of small business strategy / vol. 28, no. 3 (2018) / 1-17 success factors in relation to crowdfunding a crowdfunding project is deemed successful if it reaches its targeted funding threshold (bains, wooder, & guzman, 2014). through examination of the u.s. crowdfunding platform kickstarter, scholars have discovered that projects obtain the strongest funding at the beginning and end of their campaigns; the least support occurs during the middle of a campaign. however, support for crowdinvesting projects does not have the same trajectory. instead, investments are strong at the beginning of the campaign and low at both the middle and the end. investors tend to invest early because they want to avoid the risk of not being able to contribute once the funding limit is reached (hornuf & schwienbacher, 2015). obtaining large support at the beginning has a signaling effect for potential investors (colombo, franzoni, & rossi‐lamastra, 2015; thies et al., 2016). risks in crowdfunding the main risk an investor faces is that a funded start-up will fail to pay a part or all of its obligations. investments in the early stage of a company are extremely risky (agrawal, catalini, & goldfarb, 2011); the worst case is that the start-up will go bankrupt and the investor will lose all of his invested capital. because of information asymmetries between investors and start-ups, investors have limited possibilities to assess personal risk. investors have no other choice than to trust the platforms and their start-up evaluation, as they do not have access to relevant data themselves (sannajust, roux, & chaibi, 2014). moreover, the problem of information asymmetry is barely regulated and naturally most start-ups cannot provide a track record from the past, which further aggravates the situation (agrawal, catalini, & goldfarb, 2014). furthermore, small investments lead to a low incentive for investors to undertake serious risk assessment (wilson & testoni, 2014). investment in crowdinvesting is contracted for several years and by necessity it cannot be rapidly converted into cash (european securities and markets authority, 2014). finding an equilibrium between the interests of investors and fundraisers is considered a key challenge of crowdfunding platforms, particularly in crowdinvesting (beck, 2014). perceived risk perceived risk is defined as subjective uncertainty about the occurrence of negative consequences and associated losses as a result of the purchase of the product (bauer, 1960). it is influenced by individual, product and situational determinants (dowling & staelin, 1994; kuhlmann, 2006). risk perception has been identified as a substantial and explanatory variable in consumer buying behavior (mitchell, 1992), as well as venture capitalist’s investment decisions (tyebjee & bruno, 1984). the concept of perceived risk was introduced in 1960 with regards to consumer behavior research, as a person’s perception of the situation influences his or her actions. expected consequences and uncertainty are identified as the main components of perceived risk (bauer, 1960). consumers seldom consciously weigh probabilities and consequences (cunningham, 1967). this means that without any perceived risk, consumers decide and act rationally. due to the limited processing capacity, it would cognitively overwhelm people to consciously process all information. the concept of perceived risk can be best understood when consumers have set buying goals related to each purchase. the degree of risk perception corresponds to the degree to which the user realizes that he or she might not accomplish these goals (cox, 1967). the two-component model of uncertainty and consequences appears to be the leader in reference to validity, usability, reliability and prediction when compared to other concepts (mitchell, 1999). perceived risk is classified as a multidimensional concept that encompasses financial, performance, social, psychological, physical and time related risk types (cunningham, 1967; jacoby & kaplan, 1972; roselius, 1971). risk varies across product categories including if a product is tangible (good) or intangible (service). risk theory suggests that consumers facing perceived risk are motivated to take risk-reducing measures (kraus, ambos, eggers, & cesinger, 2015), so called ‘risk-reduction strategies’. an initially perceived risk can be reduced to a residual risk by using such strategies (pohl, 2013). more precisely, the goal of a strategy is, on the one hand to reduce the uncertainty relating to the product purchase, and on the other hand, to avoid possible negative consequences (cox, 1967; roselius, 1971). this is necessary, as consumers only make an adoption decision once the perceived risk has reached an acceptable level. adoption theory describes the takeover process of an innovation of a person, from acquiring to adoption. this process involves several phases such as activating, cognitive and behavior-based phases (bauer, 1960; helm, 2001). thus, risk-reducing strategies are used when the perceived risk surpasses the personally acceptable level (dowling & staelin, 1994). this level is different for each person. therefore, personality characteristics (koudstaal, sloof, & van praag, 2015) such as risk, loss and ambiguity aversion influence risk perception. 4 m. angerer, t. niemand, s. kraus, & f. thies journal of small business strategy / vol. 28, no. 3 (2018) / 1-17 perceived risk in online environments and crowdfunding consumer buying behavior in an online setting is different than in an offline setting (alba et al., 1997). in contrast to offline shopping, online channels are completely operated by information technology and therefore the users’ ability to rate an investment. physical evaluation is significantly reduced prior to making a decision. this leads to higher information asymmetries (wells, valacich, & hess, 2011). scholars have identified four factors for consideration: online trust, website property, navigation functionality and personal variables as well as general, privacy and system security (miyazaki & fernandez, 2001; yoon, 2002). furthermore, emotions are also part of a buying decision and therefore influence the perceived risk (chaudhuri, 2006), with positive emotions leading to a lower risk associated with the product and a higher weighted value (king & slovic, 2014). a crowdinvesting backer must deal with three different types of risk: the funding-object risk, project-initiator risk and intermediary risk. funding-object risks can arise with regards to the novelty of an invention and with missing comparators. project-initiator risks occur in relation to a relative lack of reputation. intermediary risks can include the insufficient assessment of potential projects for the platform. this study focuses on the use of risk-reducing options to reduce these risks in crowdinvesting projects. the main risk for investors is that a funded start-up will go out of business and is unable to pay its obligations. if a start-up goes bankrupt, investors will lose all or most of their invested capital. typically, crowdinvesting investors are willing to take risks, have an internet affinity and are open to online financial transactions. the investors’ aim is to obtain a profit for their contribution and to this end they evaluate the start-ups’ business ideas and projects (beck, 2014). risk theory states that individuals are motivated to use risk-reducing strategies if they perceive risks (bauer, 1960; gemünden, 1985). when the perceived risk surpasses an acceptable level, a primarily perceived risk can be reduced to an odd risk by using risk-reduction strategies (dowling & staelin, 1994; pohl, 2013). the goals of these strategies are on the one hand to reduce risk created by uncertainty (risk aversion) and on the other hand to avoid possible negative consequences of an investment (loss aversion) (cox, 1967; roselius, 1971). to reduce the perceived risk of investors in crowdinvesting projects, we propose different tools which we will call “options” and which have characteristics of insurances. the name is chosen because of the optional application by investors and is not related to the financial instrument option from the class of financial derivatives. experiments as methodology to examine insurances there is a large body of literature using experiments to examine how the provision of insurance changes the behavior of decision-makers and also how they use this information (richter, schiller, & schlesinger, 2014). because we will also offer insurance-like options, some of these findings might be relevant, although they stem from a different research area. that people are willing to buy insurance also in low probability cases is shown by laury, mcinnes, & swarthout (2009) who find that people are very willing to insure against lower probability events. hansen, jacobsen, & lau (2016) show that decision-makers are willing to pay even a little more than the actuarial fair value under expected utility theory. in our experiment, subjects will not be forced to buy insurance. however, laury et al. (2009) shows that just the presence of a fairly priced insurance changes the pricing behavior of consumers. they make better informed decisions even if the insurance is not bought in the end. this highlights the need to research if the provision of risk-reducing options in crowdfunding might be influential on the willingness of people to invest. risk-reducing options we compare three different option types. each one is intended to hedge risks of investors in order to increase the perceived value of a project, which could lead to generally higher or relatively changed funding levels. because different option types have different hedging abilities, we set differing prices on the different options. note that our goal is not to compare options in respect to which one performs better. on the contrary, in lack of empirical background data, we have tried to price them in a way that one does not systematically outperform. because the choice of prices is taken this way, we will test their relative comparability in hypothesis i after the introduction to the option types to assure that our valuation differences are well specified. with the option crowd-voting, the crowd of investors decides whether after one year the full amount stays invested or if some of the invested money (which is hold back to that day) is paid back to the investors. studies show that a group of people (the crowd) is sometimes able to incorporate larger amounts of information into the decision-making 5 m. angerer, t. niemand, s. kraus, & f. thies journal of small business strategy / vol. 28, no. 3 (2018) / 1-17 process as compared to an individual (braun, 2006). however, socially subordinate group members generally have lower weighted influence in a group decision (laux, 2003). the impact of a single vote is uncertain, is minimal and has a higher level of uncertainty as compared to individual-voting. most people perceive it riskier to depend on the decision of others rather than on one’s own decision. with individual-voting, the payment of the full investment amount is also decided by a vote, similarly to crowd-voting. however, the difference is that each investor decides individually rather than making the decision as a group. in cases of uncertainty, crowd-voting is assumed to bear a higher-level of uncertainty than individual-voting due to the above-mentioned reasons. thus, it is assumed that individual-voting has a higher option value compared to crowd-voting. both voting options trigger advantageous interaction changes. they provide high incentives to increase investor reporting because companies need to convince the crowd (individual) to keep the full amount invested. they trigger communication between investors and finally they provide investors with the opportunity to reassess the project again later in time and therefore also assess the development. third, an insurance option is considered. in general, insurance is a risk-transfer instrument that guarantees complete or partial monetary compensation for the loss or damage caused by events outside the control of the protected party (harrington & niehaus, 2004). bankruptcy insurance offers a full guarantee in the case of damages and is, apart from the insurance clauses, 100% safe and therefore has the lowest level of uncertainty among the options. method experiments experiments are different in comparison to other research methods (kraus, meier, & niemand, 2016a). an experiment is defined as an investigation that manipulates, instead of only measuring, possible causes of participants’ reply and removes, controls, or randomizes for such causes. it is crucial to identify a stable connection between variables in order to evaluate cause and effect (patel & fiet, 2010). by using an experimental method, it is possible to formulate causal conclusions through controlled manipulation of variables in controlled environments (busenitz et al., 2003). the approach is complex and new. therefore, we have to make some assumptions on price parameters, which we will also point out in a detailed description of the chosen projects and the risk-reducing options. we are aware that these assumptions need to be tested on their plausibility which we will do with an extra hypothesis. because of the fact that two hypotheses also serve as controls if the setup is well specified, we deliberately choose to first present the methodology and afterwards the hypotheses, although this might be unusual. experimental design and measures we employ a within-subject design which allows us to measure effects of treatment manipulations. the big advantage of within-subject studies is a reduction in error variance associated with individual differences. this allows us to isolate the effect of treatment conditions. we let the subjects go through two decisions in the main part of the experiment. arguably the first one serves as our baseline, and the second decision as our treatment. the experiment is structured in nine stages. initially, all respondents are asked to be of age 18 or older (since crowdinvesting is limited to adult users only). second, crowdinvesting is explained, and knowledge-based questions are provided. third, scales for risk aversion (dowling, 1986), loss aversion (koudstaal et al., 2015), and ambiguity aversion (holm, opper, & nee, 2013) had to be filled out. fourth, an example page of what a project looks like on a crowdinvesting platform is shown to make respondents familiar with the characteristics of projects. this page contains an example project (‘soccer analytics’) not used in the subsequent evaluations and multiple clickable explanations of key characteristics (e.g., funding limit). fifth, the three projects are presented in random order, with the option to click on explanations of the key characteristics. sixth, the initial investment decision is introduced asking the respondents to allocate any investment between eur 0 and eur 10,000 (summed up) to the three projects. to aid with the decision-making, a comparative summary of the key characteristics for all three projects (and in the order of appearance) is depicted (see appendix). seventh, one of the three available options (termed crowd-vote, individual-vote, and insurance) is selected randomly and presented. the participants are told to choose for which of the three projects the option should be drawn (enabling zero to three applications). eighth, the investment allocation is repeated as explained earlier. respondents had the opportunity to decide whether to invest the remaining (25%) in case of the individual vote option afterwards. ninth, the attractiveness of the three projects is assessed and a summary of the investment decisions is shown for the next five years thereby 6 m. angerer, t. niemand, s. kraus, & f. thies journal of small business strategy / vol. 28, no. 3 (2018) / 1-17 providing a sense of realism for the decisions made. finally, descriptive characteristics (age, gender, education, country, employment, income) are being asked for, and participants are thanked for their patience and help. overall, the experiment has a length of about 15-20 minutes. figure 1 summarizes the main procedure of the experiment. figure 2 explains the applied research design and displays the relationships between independent and dependent variables. we use a 2x3x3 mixed subject design with project as withinfactor to manipulate the characteristics of “option used” (termed yes, no), the “option type” (termed crowd-voting, individual-voting, bankruptcy insurance) and the “project attractiveness level” (termed a, b, c). since it is common for investors to choose from multiple projects on crowdinvesting platforms (e.g. seedmatch, companisto), we also show multiple projects in our design. consequently, subsequent data analyses will consider project attractiveness as a random factor as well. age classification (18) introduction general questions about crowdinvesting scales: risk, loss and ambiguitly aversion example project project a/b/c (in random order) investment descision 1 motivation 1 risk reducing options (randomized) investment decision 2 assessment attractiveness (project a/b/c) motivation 2 investment evaluation personal data figure 1. procedure of the online experiment figure 2. conceptual framework of the research 7 m. angerer, t. niemand, s. kraus, & f. thies journal of small business strategy / vol. 28, no. 3 (2018) / 1-17 three different factors will be investigated on their effect on the dependent variable. the first factor is called “option used” and simply states whether an investor has selected a risk-reducing option or not. the second factor is termed “option type” and consists of three levels, crowd-voting, individual-voting and bankruptcy insurance. “project attractiveness” offers a visual representation of the different option types. figure 3. comparison of the three options used in the experiment the term “crowd-voting” (see figure 3) has been recently launched on the german crowdinvesting platform companisto (rhotert & zwinge, 2016). in this option, the crowd decides one year after the completion of the funding in a majority decision (weighted by investment shares) whether to fully invest their originally pledged amount or receive 25% of their investment back. furthermore, if a company goes bankrupt in the first fiscal year, 25% of the investment is secured and will be paid back to the investor. in our setting, this option diminishes the promised return by 0.5 percentage points for the total duration of the contract. thus, an investor receives only a return of 4.5% instead of 5% per year for his investment as a result of choosing this option, but in exchange knows that 25% of the investment is held back and therefore safe for the first year of business. a further advantage is that investors have the possibility to base their decision on the current economic development of the new venture and thereby obtain additional security. this supports the personal risk assessment and reduces their own perceived risk. moreover, the investor does not have to completely trust the evaluation provided by the platform. however, the risk for a single investor is that the crowd could decide not to follow his favored strategy. the second type of option is termed “individual-voting”. this idea is based on the previous option with the difference that each investor can decide individually. in this vote system, the platform retains 25% of the investment for one year. after this deadline, every investor decides individually whether to obtain the 25% of the investment back or to pledge the originally planned sum. compared to crowd-voting, an investor is able to decide independently for his or herself and therefore has full control over the investment decision. this can help to reduce the personal risk since 25% of the investment is kept safe for the first year of business. the cost of this option is 0.75% per year reducing the yearly interest rate to 4.25%. the option offers an additional choice for each investor to decide in his or her own favor. therefore, the cost for this option is higher than for crowd-voting because an individual decision causes less uncertainty. the last option is called “bankruptcy insurance” and is based on the classic idea of insurance. the purchase of this option secures 25% of the investment during the entire contract period in the case of bankruptcy. the promised return of 5% falls by 1.5 percentage points to 3.5% per year for the entire contract duration of five years. this option offers the highest monetary protection for investors and therefore also the most expensive option. the third manipulated factor is called “project attractiveness”. to increase the level of realism, we create three fictional projects which differ in terms of attractiveness. measures of attractiveness include the current invested capital, an appropriate funding threshold and limit, days remaining, funding duration, number of investors, updates, and geographic proximity. furthermore, we use two rounds of expert pre-tests to improve the three fictional projects regarding their overall realism and attractiveness. figure 4 displays the most important data of the three created projects. 8 m. angerer, t. niemand, s. kraus, & f. thies journal of small business strategy / vol. 28, no. 3 (2018) / 1-17 project a: cardata project b: intelligent power pocket project c: the world within hotel current funding status current funding status current funding status 300,000 euro invested 100,000 euro invested 50,000 euro invested 90,000 euro funding threshold 90,000 euro funding threshold 1,000,000 euro funding threshold 780,000 euro funding limit 780,000 euro funding limit 3,000,000 euro funding limit 300 investors participating 300 investors participating 25 investors participating 25 of 30 days remaining 5 of 60 days remaining 5 of 120 days remaining figure 4. comparison of the three projects used in the experiment description of the projects projects a and b are respectively rated as highly and moderately attractive and share the same funding threshold and limit as well as number of investors. all three projects have a contract duration of five years with a fixed interest rate of 5% per year. in each case, investors receive additional profit in the case of an exit or from revenue sharing (bradford, 2012). the first project called cardata (a) is based on a project of the german crowdinvesting platform seedmatch (ekoio ug, 2016). this start-up provides a working prototype of a system, which allows access to the vehicle’s data via an app and in the event of a fault, the system makes contact with a repair center. the project is considered very attractive for the following reasons: in the description, the high potential of its future market is projected. furthermore, the branch software is the most attractive (most achieved funding thresholds) among crowdinvesting projects. the funding campaign has already been successful as it has overreached its funding threshold. the average investment is eur 1,000 per backer. twenty-five days of 30 are remaining to invest in this new venture. this means, that the project gathered eur 300,000 during the first five days. a strong funding at the beginning indicates high attractiveness. furthermore, cardata informed the crowd by posts 12 times and also provides a patent for its system, trademark protection and is geographically proximate. all these factors are evaluated as highly attractive according to the available literature and the coding of seedmatch. the second project, called intelligent power pocket (b), is based on a project of the german crowdinvesting platform companisto. this new venture offers modern wallets that have the ability to charge smartphones by simply placing them on the wallet. moreover, the wallet can be located by an app. the project’s level of attractiveness is weighted as moderate because of following determinants: the startup has provided a prototype of its business idea. the crowdinvesting project slightly surpassed the funding threshold during the final phase. this indicates a moderate attractiveness level of this project. investors backed the new venture with an average investment of about eur 330, which is clearly less than the average investment by about eur 870 per backer (based on coding of seedmatch). the number of updates is four, the securities provided by the fundraiser include design and trademark protection and the start-up is geographically proximate. compared to project a, the lower investment capital per investor, the nearly completed funding period, the longer duration, the fewer number of updates and the provided securities combine to make intelligent power pocket less attractive. however, since they reached the funding threshold, this project has been successful and is therefore not regarded as unattractive. the third project is called the world within hotel (c) 9 m. angerer, t. niemand, s. kraus, & f. thies journal of small business strategy / vol. 28, no. 3 (2018) / 1-17 and is a fictional start-up. the project’s level of attractiveness is constructed to appear low. the start-up would like to build a five-star hotel chain, which offers a new-room concept for their guests. not only are the luxury suits presented in a style of a certain world region, but also the breakfast served is intended to be authentic. the world within hotel attracted a total of eur 50,000 with 25 investors. the successful funding of this project is unlikely relating to the funding duration and days left. the start-up has not posted any news about the development. furthermore, no securities are provided and the start-up is situated abroad. due to the coding of seedmatch, tourism is the least successful branch. the longer the duration of the funding and the higher the requested funding amount, the lower is the likelihood they will reach the funding threshold (bouncken, komorek, & kraus, 2015; mahlstede, 2012). these factors, as well as the higher funding threshold and limit, make this project the least attractive of the three. definition of variables dependent variable. the dependent variable is the second investment decision of the participants. this is because we want to measure the influence of an option compared to a benchmark situation in which such an option is not present. so subjects take a first decision without an option. than before the second decision occurs, one of the options is presented to the subject. based on the new situation, investors decide how to invest their capital. therefore, the second investment decision becomes apparent when participants change their behavior due to the risk-reducing options. independent and control variable. individual perception is used as a further independent variable because it could influence the investment behavior in relation to the perceived risk of investors. to investigate the individual perceptions (termed risk aversion, loss aversion, ambiguity aversion) measurement scales are included in the experiment. each of the scales included used 10 two-lottery choices given to the participant to measure their individual perception. risk aversion measures the degree to which the value of a fixed return (e.g. eur 100) is higher than the value resulting from a proposition with the equal expected return obtained with risk (e.g. eur 200 with 50% probability or eur 0) (dowling, 1986; koudstaal et al., 2015). loss aversion refers to the idea that decision-makers favor avoiding losses over obtaining gains (kahneman & tversky, 1979). loss aversion indicates that losing eur 50 will decline the value by more than the increase in value that is related with a gain of eur 50. “ambiguity aversion” is also known as “uncertainty aversion” and refers to the favoring of investors for risks with known chances above risks with unknown chances (holm et al., 2013). the other control variables used in the study (termed age, gender, education level, country, income level) are commonly used among related studies (koudstaal et al., 2015; steininger, lorch, & veit, 2014). furthermore, they are additional factors that have the potential to affect the dependent variable. the individual perception and control variables are not part of the hypothesis, but must be measured to ensure they do not have a significant impact on the dependent variable. modelling approach to investigate the research design, a general linear mixed model (glmm) is applied. glmm provides a comprehensive framework to address issues for non-normal data (bolker et al., 2009) and offers multiple ways of model comparison (akaike information criterion, aic). further, the recently proposed general r2 for glmm is used to extract the explained variance (nakagawa & schielzeth, 2013). in this study, a repeated measurement takes place, so the data record triples (projects a, b, c), since the same participant decides for each of the three projects. accordingly, the cases rise from 213 to 639. the wide format data set had to be reshaped to a long (stacked) format because the project factor (a/b/c) is repeated, and therefore could possibly cause changes through presentation order. to account for that, the glmm approach (fox & monette, 1992) is well suited and applied by using subjects and projects at random and using all manipulated factors as well as individual perceptions and control variables as fixed factors. we apply stepwise modelling (from easy to complex). the baseline model consists of the individual perception, control variables, and the three project types as categorical variables. model 1 includes the baseline model plus whether an option is used. model 2 includes the effects of the different option types. model 3 is the final model, which comprises the previous models and is intended to show main as well as the interaction effects of the usage of an option and the project attractiveness. experimental implementation data for this research project was gathered through an online questionnaire using simple script conditions to ran10 m. angerer, t. niemand, s. kraus, & f. thies journal of small business strategy / vol. 28, no. 3 (2018) / 1-17 domize the project presentation order. the applied software to develop the online questionnaire was limesurvey and for the statistical data analysis the software r. the experiment was not monetary incentivized. the final sample of 210 full observations was collected within the german-speaking area of germany, switzerland, austria and liechtenstein through promotion on social media channels and private networks. it is constructed in a way that it closely reassembles the typical crowdfunding investor in terms of age and gender. hypotheses development with our first two hypotheses, we test if our model is setup correctly and well specified. to this end, we start by looking at the attractiveness levels of the three provided projects. if the experiment is specified well, subjects should invest the highest amount into project a, but also more into b than c because of the different levels of attractiveness. hypotheses 1. investments are highest in project a, second highest in project b and least in project c. next we test whether the different types of options are valued differently by investors and, if this is the case, whether they show the relative preferences that we have tried to model in the pricing. to this end, we use the different prices of the options as a valuation mechanism. if options are valued equally, a difference in the according prices should lead to investments shifting to the option that is relatively cheaper and vice versa. using this logic, we expect no shift in investment if two conditions are simultaneously met. first, options are indeed valued differently. second, the difference in value corresponds to our price ranking. based on these arguments, the following hypotheses are constructed: hypotheses 2a. if the option “individual-voting” is presented this does not change the overall investment amount compared to a presentation of “crowd-voting”. hypotheses 2b. if the option “bankruptcy insurance” is presented this does not change the overall investment amount compared to a presentation of “crowd-voting”. extensive literature supposes a positive relationship between quality and price. consumers are expected to use the price as an indicator for quality, because the quality of a product is commonly not easy to detect (niemand, tischer, fritzsche, & kraus, 2015). in the case of usage of an option (option obtains selection), the price of an option (sacrifice) should indicate the benefits (quality). this is also referred to as the ‘price-performance ratio’. projects involve risks that can be hedged by options, which reduce potential losses and thus in turn increase the perceived value of a project for a risk-averse investor. if the value of a project can be increased by options, investor will contribute more willingly, assuming all other variables remain the same. we therefore hypothesize: hypotheses 3. applying risk-reducing options increases the overall investment amount of projects. the next hypothesis concerns the interaction between options and attractiveness. the offering of options reducing risks highlights that a monetary risk is involved. this might induce a more conscious risk management, which could make options a means of increasing the level of attractiveness of a project. it is assumed that investors tend to direct their investments towards safer projects. this means that if an option is purchased, projects with a low level of attractiveness receive less funding while highly attractive projects receive more money. in simpler words there is a positive relationship between price and quality. a more conscious risk management could lead to an overall lower perceived risk. once again, it is assumed that the overall investment in less-attractive projects decreases because the price (investment) and quality (attractiveness) relationship (dodds, monroe, & grewal, 1991) is not regarded as balanced. therefore, investment in a less-attractive project will be reduced until the quality is seen as high. based on this assumption, the following hypothesis is constructed: hypotheses 4. the offer of a risk-reducing option decreases the overall investment amount in less attractive projects. results sample characteristics the age of the participants ranges from 20 to 73. the average subject is 35 years old (m = 34.85, sd = 11.26). typical crowdfunding investors are 39 years old (klöhn & hornuf, 2012). over two-thirds of all participants are men 70.6%. to evaluate the individual perceptions (independent variables) towards risk, we use scales (koudstaal et al., 2015) which apply a multiple pricelist (mpl). participants are asked to disclose their preferences for each offer to in11 m. angerer, t. niemand, s. kraus, & f. thies journal of small business strategy / vol. 28, no. 3 (2018) / 1-17 dicate their switching point. as an example, for risk aversion, a 0 10 scale is used, where 0 stands for “not willing to take risks” and 10 for “very willing to take risks”. the respective mean and variance values for the measures are for risk aversion (m = 6,38; sd = 2,87), for loss aversion (7,03; 2,21) and ambiguity aversion (4,53; 3,45). deriving the correlation between the scales we find only risk aversion and loss aversion significantly correlated (d = .31, p < .001). therefore, the higher a person’s risk aversion, the higher the loss aversion and vice versa. hypothesis 1 – project attractiveness table 1 shows that participants on average invest the most in the most attractive and least risky project a, followed by project b and finally c, as we have expected because of the different attractiveness levels. we also determine whether there are any statistically significant differences between the means of the independent groups (a, b, c). the overall difference (anova) for both investments (pre-option and past-option) are highly significant (pre-opinitial investment (pre-option) second investment (past-option) project m sd m sd a 3,554.66 2,931.16 3,566.94 2,943.19 b 2,846.00 2,800.12 2,882.52 2,752.69 c 1,118.75 2,057.02 1,130.61 2,133.90 tion: f (2, 639) = 48.78, p < .001 and past option: f (2, 639) = 48.75, p < .001). this indicates that the groups in the sample differ. also a tukey’s hsd test shows that groups in the sample differ significantly (rasch, friese, hofmann, & naumann, 2014). the relative differences (tukey hsd) are shown in table 2. table 3 indicates that project a and b for both investments are significantly different (p < .05). a and c as well as b and c show a highly significant difference (p < .001). to find out whether the investments differ between the initial and second investment, a welch t-test is applied because there are two independent samples with unequal standard deviations (sd) in both basic populations (auer & rottmann, 2015). table 3 shows that for all projects, there is no significance (p > .05) evident between the initial and second investment. therefore, the means (m) of the both investments do not differ. we conclude that we can find support for hypothesis 1 that subjects do perceive project a more attractive than project b, and that project c is the least attractive one. table 1 results initial vs. second investment the mean amount of investment and it`s standard deviation into each of the presented projects before an option is presented and after an option is presented. table 2 relative differences between initial and second investment results of the tukey hsd test on differences between investments. initial investment (pre-option) second investment (past-option) project d p d p a vs b 708.67 p < .05 684.42 p < .05 a vs c 2,435.91 p < .001 2,436.33 p < .001 b vs c 1,727.24 p < .001 1,751.92 p < .001 initial vs second investment a t(425.99) = -.04 p > .05 initial vs second investment b t(425.88) = -.14 p > .05 initial vs second investment c t(425.88) =-.14 p > .05 table 3 relative differences in initial and second investment of each project results of t-test of relative differences between first and second investment. 12 m. angerer, t. niemand, s. kraus, & f. thies journal of small business strategy / vol. 28, no. 3 (2018) / 1-17 hypothesis 2 – option price calibration the main model comparison in table 4 contains four models. the baseline model consists of the individual perception project types (a/b/c) and control variables. model 1 includes the baseline model plus the manipulated factors. model 1 and 2 illustrate the main effects of whether and what option was used, and the different option types. model 3 is the final model and comprises the previous models and shows the proposed interaction effects. in model 3 the akaike information criterion (aic) as well as the bayesian information criterion (bic) show the lowest rate, which implies the highest quality (burnham & anderson, 2004). r2 shows what is explained through random and fixed effects and therefore, the higher the result the better is the model explained (auer & rottmann, 2015). option type. we find no statistical significant effect of individual-voting and bankruptcy insurance on investment. the two results suggest that the three option types are perceived differently in their additional utility and are priced well, relatively to each other. accordingly, hypotheses h2a and h2b can both be supported. hypothesis 3 and 4 – overall investment and risk awareness option used. hypothesis 1 proposed that when an option is selected, the overall investment increases. the results in model 1 show that the overall investment is not affected when an option is selected. there is no substantial growth in investment. in the second investment decision, the participants invest slightly more compared to the initial investment. based on these findings, hypothesis 3 needs to be rejected. interaction effects. in this study, more than two manipulated independent variables are involved. thus, the effect of one independent variable on the dependent variable may not be the same at all levels of the other independent variable. to test the third hypothesis, the interaction between the levels of option used and the project’s attractiveness is investigated. we assume that if an option is selected, the overall amount of investment in the less attractive projects decreases. regarding the choices of the investors, 35% decided consistently over all three project types, to use a risk-reducing option when making their investment decision. the overall main effect of option used (model 1: estimate = 233.54, p >.1) indicates no increase of investment after options are introduced. but, looking at the interaction effects in model 3 both, project b and c show negative coefficient for their respective interaction terms, meaning that less attractive projects suffer from the availability of options. based on these findings, hypothesis 4 can be confirmed. discussion and conclusion in crowdinvesting, the main incentive for investors is to obtain a certain return for their contribution. in most cases, investors bear a high risk of losing their investment (ordanini, et al., 2011). this study contributes new insights on the behavior of crowdinvesting investors by adding risk-reducing strategies (by means of an option type) to decrease the perceived risk and increase the attractiveness of a project in order to enhance the chance of receiving pledges of potential investors. we provide evidence that our experiment is calibrated well in terms of project attractiveness and pricing of the risk-reducing options. investors consistently invest more in the projects that are set up to be more attractive which we also prove statistically in the analysis of hypothesis 1. in our second hypothesis we test simultaneously if the options are experienced differently in their value to the investor and if our pricing of the options is accurate. we show that the options indeed are valued differently and can conclude that the type of option does matter to investors as they do differ in their cost. generally, we find no effect from offering of risk-reducing options on the sum of total investments. we therefore looked at the differential effects for different option types and attractiveness levels of projects. we also show that when options are offered, a shift from less attractive projects to the most attractive project happens. the offered options obviously highlight the riskiness of the projects per se and lead to higher risk awareness. this induces investors to concentrate even more on the very attractive projects. platforms must be cautious to not undermine the original idea of crowdinvesting, which is to provide financing to a variety of different projects. the introduction of risk-reducing options might do more harm than good. our experiment is a first step into evaluating the influence of options in crowdfunding. we argue that our setting seems well fitted as the objective attractiveness of projects is subjectively perceived equally by the participants in our study. as a side result of hypothesis 2, we show that our pricing of the options relative to each other also seems well adjusted. we encourage further modifications of the 13 m. angerer, t. niemand, s. kraus, & f. thies journal of small business strategy / vol. 28, no. 3 (2018) / 1-17 table 4 llm with random effects baseline model 1 model 2 model 3 role variable level coeff. p se coeff. p se coeff. p se estimate p se intercept intercept 4.773,55 *** 1.336,14 4.627,98 ** 1.336,96 4.568,81 ** 1.334,43 4.194,52 ** 1.340,67 main effects manipulations option used used 233,54 173,52 209,83 173,25 1.272,02 ** 416,11 option type individual vote 209,44 198,32 209,44 198,32 insurance 394,13 205,31 394,13 205,31 project b -649,83 * 302,72 -649,83 * 302,72 -649,83 * 302,72 -147,76 372,48 c -2.458,93 *** 269,31 -2.458,93 *** 269,31 -2.458,93 *** 269,31 -1.929,82 *** 329,71 interaction effects manipulations option used * project used * b -1.424,81 *** 627,48 used * c -1.501,54 ** 555,43 individual perceptions risk aversion -45,84 30,90 -47,82 30,86 -44,28 30,77 -44,28 1.340,67 loss aversion 12,75 40,80 15,79 40,78 14,43 40,76 14,43 30,77 ambiguity aversion -25,05 24,92 -20,35 25,13 -18,46 25,17 -18,46 40,76 control variables gender yes age yes education yes employment status yes income yes model aic 11.362,71 11.350,81 11.326,66 11.294,09 bic 11.503,68 11.496,12 11.480,67 11.456,77 r2 (marginal)1 0,16 0,16 0,16 0,18 largest gvif 1.50 (age) 1.50 (age) 1.51 (age) 2.54 (option used) linear mixed model with random effects for subject and project. repeated measure data for n = 210 (630). p: *** = ,001; ** = 0,01; * = 0,05; else > 0,05. estimate: unstandardized fixed effect. se: standard error for estimate. contrast categories for base: not used (option used), crowd vote (option type), a (project), male (gender), professional practice (education), trainee (employment), < 50,000 € (income). gvif: generalized variance inflation factor. 1: r2 is calculated from nakagawa, and schielzeth (2013). 14 m. angerer, t. niemand, s. kraus, & f. thies journal of small business strategy / vol. 28, no. 3 (2018) / 1-17 approach to especially look deeper into the motivations of investors to take options. overall, our study provides insights into the effects of risk-reducing options in crowdinvesting. our central finding is that seemingly less attractive projects suffer from the introduction of risk-reducing option, independent of their type, leading to more concentrated funding. motivated by the introduction of such options in practice, we showed that varying kinds of option types are valued discriminatively by investors. furthermore, we showed that less attractive projects see a decline in investments, after options are introduced. therefore, several implications can be drawn from this study. first, crowdfunding platform providers should be aware that the introduction of options might hurt project creators that offer riskier investment opportunities. still, the introduction could also serve as a motivator for creators to enhance their project proposals, and discourage creators of less attractive projects to enter the market. implication for the project creator are likewise important. joining a crowdfunding platform that offers risk-reducing options is only attractive for projects that offer a high level of attractiveness. project creators that offer very risky project should consider alternative platforms that do not offer risk-reducing options for their investor, in order to avoid discrimination. even though this study offers contributions to research and practice, some limitations should be acknowledged when interpreting the results. still, we believe most limitations offer avenues for future research. first, caution is advised when conclusions are drawn from a single study. as the crowdfunding industry is particularly young and highly dynamic, new methods and features such as options are constantly evolving and should be thoroughly examined. consequently, the observed effects of risk-reducing options for crowdinvesting might not be directly transferable to other funding models. secondly, we only assessed three types of options. other forms of risk-reducing mechanisms should therefore be considered in future studies. third, in an experimental study, a number of biases could influence the results. such could be a hypothetical bias because subjects did not really invest money and therefore were not really exposed to potential consequences. second, we might be vulnerable to a self-selection bias, meaning that only subjects with a natural interest could have chosen to participate and use their time to do the experiment. however, we are confident that with the fully automated online approach we have chosen 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(2011). small business entrepreneurships in the united states. journal of applied business research, 27(6), 117-122. appendix summary statistics of subjects and their decisions variable distribution age 20-29: 46.7% (100) 30-39: 19.2% (41) 40-49: 19.6% (42) 50-59: 9.8% (21) 60+: 3.3% (6) gender female: 71.4% (150) male: 28.6% (60) education vocational training: 23.8% (50) school leaving examination: 12.9% (27) bachelor’s degree: 33.8% (71) master’s degree: 24.8% (52) phd: 4.8% (10) country austria: 14.8% (31) switzerland: 66.2% (139) germany: 13.3% (28) liechtenstein: 5.7% (12) annual income less than eur 50,000: 28.1% (59) eur 50,000-eur 74,999: 19.5% (41) eur 75,000-eur 99,999: 19.5% (41) eur 100,000-eur 124,999: 14.6% (31) eur 125,000-eur 149,999: 6.2% (13) eur 150,000-eur 174,999: 5.7% (12) eur 175,000-eur 199,999: 1.4% (3) eur 200,000 and more: 4.8% (10) options chosen per project (chosen/not chosen) crowd-voting: 12.4% (26) / 21.4% (45) individual-voting: 11.0% (23) / 23.8% (50) bankruptcy insurance: 12.4% (26) / 19.0% (40) (same for all projects) http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2021, vol. 31, no. 03, 88-101 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2021 small business institute® w w w. j s b s . o rg introduction 1vivekanand education society’s, institute of management studies and research, hashu advani memorial complex, 495/497 collector’s colony, chembur, mumbai, india, sushma.verma@ves.ac.in 2corresponding author, institute of management, nirma university, sarkhej gandhinagar highway, gota, ahmedabad, india, samik@ nirmauni.ac.in 3institute of management, nirma university, sarkhej gandhinagar highway, gota, ahmedabad, india, aakruti@nirmauni.ac.in financial preferences of listed smes in india: an empirical study small and medium enterprises, nse emerge exchange, panel data regression, pecking order theory (pot), trade-off theory (tot) apa citation information: verma, s., shome, s., & patel, a. (2021). financial preferences of listed smes in india: an empirical study. journal of small business strategy, 31(3), 88-101. small and medium-sized enterprises (smes) have been globally recognized for promoting sustainable economic growth and development across nations (ariyo, 2000; srinivas, 2013). smes are defined as a distinct category of firms which are quite different from large companies. capital constrains, limited managerial expertise, lack of information and other intangible assets are much more in smes as compared to large companies (hollenstein, 2005; pradhan & sahu, 2008). however, smes have greater operational flexibility, faster decision making and also niche business strategy when compared to large companies (zucchella & palamara, 2006). they are considered the growth engines of any economy for their contribution to industrial production and exports (asare, 2014). smes’ contribution in poverty alleviation is also very crucial considering their potential to create employment opportunities (green et al., 2006). india is also of no exception to this phenomenon. with more than 63.4 million smes all over the country, it employs more than 120 million people. smes in the manufacturing sector alone produce more than 6,000 different types of products and account for approximately 45% of the total industrial production in india. similarly, their total contribution to the service sector is around 31%. as of now in india, smes are contributing approximately 29% to india’s gdp and 49% in country’s export. like any other organization, it is important for smes also to have the availability of finance and access to various financing sources on suitable terms and conditions. this is vital for growth and development of smes (osano & languitone, 2016; shikumo & mwangi, 2016). however, there is a substantial number of existing literature identifying the financial issues faced by sme sector both in developed as well as developing countries (beck et al. 2011; jagoda & herath, 2010). smes in many cases are not able to keep pace with dynamic technological innovation and are often found using obsolete technology because of the fund constraints (abdulsaleh, 2015; yoshino & taghizadeh-hesary, 2018). oecd report (2016) also states that many smes are facing credit constraints though there is an improvement in sme small and medium-sized enterprises (smes) play a very significant role in boosting sustainable economic growth and development of any country. the present study examines various firm-specific determinants that have an impact on the financing choice of the listed indian smes. it also studied the financing practices of the listed smes in india and tried to find out if their financing pattern follows the established theories of corporate finance. the study selected 113 smes listed on the nse emerge exchange for the period between 2014 and 2018. to examine the problem, empirical analysis is done with the help of panel data regression. the study finds that for meeting financial requirements of listed smes, they prefer current liabilities first, then total reserves, thereafter short-term borrowings and lastly the long-term borrowings. among the independent variables chosen based on an extensive literature survey, most of them are statistically significant but are depicting lower explanatory power. hence, it leads to the possibility of some other firm-specific factors or macroeconomic factors being more relevant in deciding the listed firm’s financing choices. the study concludes that no single theory like pecking order theory (pot) or trade-off theory (tot) can explain the financing behaviour of listed smes completely. it contributes to the extant literature on listed smes by attempting to examine the impact of listing on the financing patterns of the smes. sushma verma1, samik shome2, aakruti patel3 http://www.smallbusinessinstitute.biz http://www.jsbs.org 89 s. verma, s. shome, & a. patel journal of small business strategy / vol. 31, no. 3 (2021) / 88-101 lending. reasons like lack of transparency in book-keeping and non-availability of audited financial statements many a time act as a hindrance in the way of bank financing (liu & yu, 2008). as a result of these drawbacks, the banks become cautious in their lending which often leads to financial crunches for smes. in fact, this inability of smes to access funds from banks and financial institutions is recognized as one of the major factors coming in the way of their growth and expansion and threatening their existence (abe et al., 2015; adeyele, 2018). in india, smes receive approximately 16% of the total bank credit. considering the significance of smes for overall inclusive growth, government of india is taking several steps to promote sme growth by attempting to increase the credit availability to this sector. reserve bank of india (rbi) has mandated the scheduled public sector banks for doubling the credit flow for them. rbi has also included the sme sector in priority lending category. the government has also established exclusive exchanges for sme on bombay stock exchange (bse) and national stock exchange (nse). it has also started the promotion of venture capital fund available through public sector banks and also through various developmental financial institutions. according to stevenson and botzung (2012), smes rely on informal sources and self-financing for approximately 78% of its financing needs. the remaining 22% of funding needs are met by banks and nbfcs. this dependence of smes on informal sources of finance may be due to the limitation of formal lenders to lend to smes. several reasons have been identified for limited funding from banks and nbfcs. one of the reasons, widely recognized in academic literature, is poor record keeping and non-availability of audited financial statements (liu & yu, 2008; storey, 1994). other reasons include information asymmetries, high transaction cost, institutional factors and, many a time, poor project quality (vasilescu, 2014). smes are perceived to be high risk lending propositions by lenders, and because of this, very few of them are able to access finance from formal sources (ambrose, 2012). within emerging and developing economies, many a time, prevailing regulations are also very rigid to accommodate the financial needs of small firms (lucey et al., 2016). the securities and exchange board of india (sebi) issued guidelines in 2010 stating that separate exchange for smes are to be set up to provide them with an efficient and transparent platform for raising equity financing. nse emerge is the exclusive sme platform launched by national stock exchange of india. it is a marketplace that brings together the investors and evolving business houses registered in india. now, considering the listing requirements, nse emerge requires the track record of the company in terms of its financial statements for a minimum of three years and positive earnings before depreciation and tax (ebdt) in the preceding two years. it is expected that information asymmetry of listed firms should come down. this should logically lead to a relatively easy access to debt finance for listed smes as compared to non-listed ones, resulting in a changed financing pattern. in view of the above discussion, the purpose of this paper is to study the financing practices and trends of listed indian smes. the research objectives of this study are: (a) to find out the current financing trend of listed smes; (b) to examine the effect of firm-specific factors of the listed smes on their financing decision; and (c) to assess if the financing choice of listed smes are following the established corporate finance theories (trade-off theory and pecking order theory). this study can help smes in making a decision about listing. it can also assist policy makers by providing them with a detailed understanding of the financing preferences of smes in framing appropriate policies for improving the financing situation in india. the existing literature on financing decisions clearly shows the dominance of large firm-specific studies (chakaroborty, 2010; handoo & sharma, 2014; rajan & zingales, 1995). results of these studies cannot be generalized for smes because of the fundamental difference in their organization (bas et al., 2009). there is limited research in the field of sme financing despite the growing interest of researchers in this particular field. this study is different from the previous studies as it tries to analyse the impact of listing on the financing choices of smes. this paper is organized into the following sections: review of literature describes the existing theoretical and empirical literature on sme financing. the method section discusses, in detail, the research methodology employed. findings of the study along with its analysis is being done in analysis and results. discussion and hypotheses validated are in discussion and validation of hypotheses. identification of the limitations of the study and its future scope is presented in limitations and future scope followed by concluding remarks. review of literature since the 1950s, capital structure decisions have become the focus area of researchers in the field of finance. it all started with modigliani and miller’s (1958) landmark ‘irrelevance theory’ highlighting the irrelevance of capital structure in a company’s valuation. it means that a firm’s value is not affected by any change in financing decisions. the major limitation of this theory is its assumptions of a perfect capital market, which is not an economic reality. this theory was revised in 1963, and it stated that capital 90 s. verma, s. shome, & a. patel journal of small business strategy / vol. 31, no. 3 (2021) / 88-101 structure does affect the company’s valuation when tax benefit of the interest component of debt is taken into consideration. after this, there has been several remarkable studies in the field of capital structure leading to the development of a few path-breaking theories like trade-off theory (tot), pecking order theory (pot), agency cost theory (act) and market timing theory (mtt) among others which were based on set of relatively more realistic assumptions. the two rival theories, in literature, are the tot by kraus & litzenberger (1973) and pot by myers (1984). tot focuses on the concept of optimal capital structure. as per tot, optimum capital structure, which has just the right or optimum amount of debt, can be achieved by balancing the tax benefit of debt with the cost of financial distress. pot does not believe in the concept of optimum capital structure. as per this theory, there is a particular order of financing preferred by the managers. internal sources of funds are preferred to external sources and within external sources of funds, debt is preferred to equity. act, proposed by jensen & meckling (1976), is based on the concept of agency problem. it refers to the conflict of interest between managers and shareholders and also between the shareholders and lenders. another theory proposed by baker and wrugler in 2002 in the field of capital structure planning is mtt, which believes in the role of timing of the market for debt or equity issues. tot, though considered to be the mainstream theory of capital structure, could not explain the prevailing corporate behaviour at several instances. pecking order hypothesis as an alternative could explain some of the observed patterns in corporate financing. however, in existing literature there has been mixed evidence about applicability of these two theories. as per datta & agarwal (2009), internal funding is more significant for indian companies confirming pot, but they also indicated the applicability of tot in a few instances. following these theoretical developments, several studies have been conducted to identify various factors affecting the financing decisions of the firms. as per titman & wessels (1988), based on their study of us firms, size, profitability and growth are some of the important factors that have a bearing on the financing choices of the firms. graham & harvey (2001), based on their study on us and canadian firms, garnered moderate support for the concept of target debt ratio. this ratio is set by the management or lenders to ensure that the business is not highly leveraged. bhaduri (2002) deduced that the growth, cash flows, and size are some of the prominent factors influencing the capital structure planning in indian firms. fauzi et al. (2013), based on their study on 79 firms in new zealand over a period of four years from 2007 to 2011, inferred that firm size significantly influences the choice of financing source. according to them, large firms in terms of market capitalization employ more long-term debt. singhania & seth (2010) established a negative correlation between leverage of a firm and its growth and liquidity and a positive correlation between leverage and firm size. khan (2010) shows a positive correlation between debt ratio, tangibility and firm size and negative correlation between leverage and profitability. similarly, odit & gobardhun (2011) observed a significant difference in the financing choices of large firms and smes. small firms were found to depend more on short-term borrowings as compared to large sized firms. various studies have also been conducted to understand the reasons behind the financing choices of smes. several researchers have empirically concluded that tot is unable to explain sme financing patterns in both developed as well as developing countries (klapper et al., 2006; watson & wilson, 2002). kremp et al. (1999) conducted a comparative study on 15,000 french and 9,000 german smes, and benito (2003) conducted a similar study on smes in the uk and spain and concluded that smes follow pot of financing. sanchez-vidal & martin-ugedo (2005) studied spanish smes, and daskalakis & psillaki (2008) studied smes in france and greece and concluded the same. however, there are several studies indicating the allegiance to the opposite phenomenon. as per wu et al. (2008), pot could only partially explain smes’ financing patterns. yartey (2011), on the basis of their study on smes of ghana, highlighted the greater usage of external debt as compared to internal sources of funds. odit & gobardhun (2011) studied the smes in mauritius and stated that smes were observed to be following asset matching principle; that is, long-term debt was used to finance long-term assets, and short-term debt was used to finance short-term assets. michaelas et al. (1999) studied 3,500 smes of the uk and showed that the size and future growth prospects influence the quantum of debt for smes. there are several studies conducted on indian smes also. de (2010) highlighted the problems faced by indian smes in arranging for short as well as long-term finance. love & peria (2005) studied the financing pattern of smes in india from 1994 to 2003 by comparing it with large firms. dogra & gupta (2009), showed that the age, level of competition, and quantum of capital investment are some of the important factors that have a bearing on financing choices of smes in india. they also concluded that indian smes rely more on internal funds and less on borrowed money. srinivas (2013) conducted a study on smes from 2007 to 2011 and concluded that they use more owned funds than borrowed funds. as per kulkarni & chirputkar (2014), the listing of smes should promote fundraising. kumar & rao 91 s. verma, s. shome, & a. patel journal of small business strategy / vol. 31, no. 3 (2021) / 88-101 (2016) studied the financing pattern of smes for a period between 2006 and 2013 and observed that smes rely more on short-term debt. rao et al. (2018) empirically analysed a few factors which may have an influence on the financing choices of smes. from the literature review, it has been summarised that there are ample studies exploring financing choices of firms and capital structure planning, but very few studies have been specifically related to smes. moreover, most of the studies are conducted in developed countries. as per dalberg (2011), sme financing continues to remain an under-researched area especially in developing economies. focussing on india, it is observed that there is an increasingly growing interest among researchers on smes, and many studies have also been conducted on them, but most of these studies have focussed on financing choices of smes. there is a dearth of literature on sme listing and its implications on various aspects of sme financing. hence, this study will add to the extant literature on smes by attempting to examine the impact of listing on the financing patterns of smes and to find out if only established firm-specific factors have a bearing on the financing choices or there are some other influential factors also. method a detailed methodology of this study, starting from an explanation of variables to the discussions of tools and techniques used, is explained in this section. research design this study is done in an indian context by including the companies listed on nse emerge exchange. this platform was incorporated in 2012 as sme exchange by national stock exchange (nse) to assist small emerging companies to raise external capital. in 2019, there were 149 companies listed on this platform. financial companies have been excluded from the study as the calculations and interpretations of their ratios are quite different from their non-financial counterparts. further, in non-financial firms also only those are considered for which the data is available for the whole duration of the study i.e. between 2014 and 2018 (five years). after performing the data cleaning, 113 firms are selected, out of which 93 of them are involved in manufacturing activities while the rest are in service-rendering business. based on the detailed literature review, various internal factors that have an impact on the financial pattern of the smes are identified. the financial data related to selected sample companies is collected from ace equity database. it is an updated corporate database that provides financial and non-financial information of indian companies. for analysis, the balance panel data method has been used by applying both fixed and random effect models. description of variables and framing of hypotheses this study takes leverage as the dependent variable as it is the major factor in judging the financing pattern of the companies. leverage (debt) can be broadly divided into two categories based on their maturity: short-term and longterm. the research on dependence of smes on short-term or long-term debt are inconclusive. rao et al. (2018) concluded during their study that the major source of finance for smes is short-term in nature while kumar (2014) found otherwise. this study calculates leverage in two different ways: dependent variables leverage1 = total debt/total assets. the ratio measuring leverage1 shows the amount of external debt used by the company to purchase its assets. it considers the overall company’s debt (short-term as well as long-term) and not only long-term borrowings in the form of loans, bonds and debentures among others (cassar & holmes, 2003; chakraborty, 2010). leverage2 = short-term debt/total assets. as concluded in many previous studies (cassar & holmes, 2003), short-term debt is the major source of finance for smes. hence, this ratio is an important measure of leverage in the study on smes. independent variables liquidity. smes mostly depend on more liquid shortterm financing i.e. current liabilities (kaur & rao, 2009; moosa et al., 2011; singhania & seth, 2010). current ratio is used to measure liquidity of smes. new and growing smes maintain higher liquidity and do not rely more on borrowings. therefore, the first hypothesis of the study is: h1. liquidity and leverage are inversely related. non-debt tax shield. it is measured by dividing the amount of depreciation by total assets. huang & song (2006) observed during their study that companies prefer debt financing as the cost of this finance gives tax advantage. hence, the hypothesis made is: 92 s. verma, s. shome, & a. patel journal of small business strategy / vol. 31, no. 3 (2021) / 88-101 h2. there is a negative relationship between non-debt tax shield and leverage. size of the firm. khan (2010) concluded during their study that the greater the size of the firm, the easier the availability of external financial support and that too at lower cost. in literature, it was found that the size is measured either with the help of sales of the entity, assets possessed by the same or market capitalization (in case of listed companies) (khan, 2010; rao et al., 2018). here, it is measured with the help of a log of sales. generally, log is taken to reduce the effects of outliers in the data. the hypothesis made for this variable is: h3. there is positive relationship between the size of the firm and leverage. tangibility. the tangible assets possessed by the firms can be used as collateral to raise external financing. these assets are valued by the lender before it grants credit to the borrower (huang & song, 2006; khan, 2010). the proportion of tangible fixed assets a firm possesses, vis-a-vis its total assets is a ratio that measures tangibility of the firm. so, the hypothesis is: h4. tangibility and leverage are positively related. profitability. it can be expressed in two ways: operating income (prof). it is the ratio of profit before depreciation, interest and tax to total assets. over the years, profitability is mostly studied with the help of operating income ratio (bhaduri, 2002; khan, 2010). it is believed that smes rely more on internal resources and profitability is a major contributor of internal funds. h5. profitability measured in terms of operating income and leverage are negatively related. return on equity (roe). it is a relatively less studied variable in the study on sme financing (madan, 2007; rao et al., 2018). pecking order hypothesis may explain the relationship between the roe and leverage. the firm would prefer to use retained earnings in the situation of asymmetric information. h6. there is a negative relationship between roe and leverage. cash flows. according to mateeva et al. (2013), the higher the cash flows, the lower the need for borrowings for a business. to calculate the cash flows ratio, depreciation and profit after tax are added and then the sum of the two is divided by the total assets. the hypothesis related to cash flows is: h7. there is a negative relationship between cash flows of the firm and leverage. table 1 shows the list of variables and some of the literature using these variables: table 1 summary of variables variables chosen existing literature using these variables dependent variable: leverage1 cassar & holmes (2003); chakraborty (2010) dependent variable: leverage2 cassar & holmes (2003) independent variable: liquidity kaur & rao (2009); singhania & seth (2010); moosa et al. (2011) independent variable: non-debt tax shield huang & song (2006) independent variable: size of the firm khan (2010); rao et al. (2018) independent variable: tangibility huang & song (2006); khan (2010) independent variable: profitability bhaduri (2002); khan (2010) independent variable: roe madan (2007); rao et al. (2018) independent variable: cash flows mateeva et al. (2013) source: authors’ compilation table 2 summarizes the implications of the tot, pot and that of few empirical evidences from existing literature about the relationship between leverage and the chosen independent variables. proposed models based on above identified variables and their relationship with dependent variables, the following two models have been proposed for further analysis: 93 s. verma, s. shome, & a. patel journal of small business strategy / vol. 31, no. 3 (2021) / 88-101 model 1 lev1it = αi+ β1liqit + β2ndtsit + β3 sizeit + β4tangit + β5profit + β6roeit + β7cfit + εit model 2 lev2it = αi+ β1liqit + β2ndtsit + β3sizeit + β4tangit + β5profit + β6roe2it + β7cfit + εit where, levit = leverage of i-th firm at time t prof = operating income tang = tangibility ndts = non-debt tax shield liq = liquidity cf = cash flows roe = return on equity αi = intercept εit = error term tools and techniques for statistical analysis of data, statistical package for social sciences (spss) and stata have been used. a multiple regression model for panel data is used for empirical analysis. ols, fixed effect and random effect models have been used for the study. results as seen in table 3, a decreasing trend has been observed for both the leverage ratios throughout the period of the study. it may be due to an increase in number of listed companies resulting in increased equity capital. it also shows that debt has not increased in the same proportion. it is very much in line with the existing literature about smes’ lesser usage of debt financing and external borrowings (kumar & rao, 2016). table 2 relationship between explanatory and explained variables as per tot and pot independent variables relationship with leverage as per trade-off theory (tot) relationship with leverage as per pecking order theory (pot) liquidity (+) long & malitz (1985) (-) griner & gordon (1995); singhania & seth (2010) non-debt tax shield (+) bradley et al. (1984) (-) huang & song (2004); griner & gordon (1995) size of the firm (+) chittenden (1996); huang & song (2004); khan (2010) ; singhania & seth (2010) (-) rajan & zingales (1995) ; titman & wessels (1988) tangibility (+) dammon & senbet (1988); khan (2010) (-) huang & song (2004); lang et al. (1996) profitability (+) givoly et al. (1992); petersen & rajan (1994) (-) booth et al. (2001); khan (2010); shyam-sunder & myers (1999). roe (+) dammon & senbet (1988); givoly et al. (1992) (-) khan (2010); murinde et al. (2004); shyam-sunder & myers(1999). cash flows (+) dammon & senbet (1988) (-) kester (1986) source: authors’ compilation table 3 mean values of overall, long-term and short-term debt to total asset 2014 2015 2016 2017 2018 ltd/ta 0.15 0.13 0.12 0.11 0.09 std/ta 0.23 0.23 0.21 0.17 0.10 td/ta 0.38 0.36 0.33 0.28 0.19 source: authors’ calculation the trend of sme financing across various sources of funds in india is illustrated in figure 1. it can be observed that current liabilities, total reserves and short-term borrowings are the most preferred sources of finance by smes. the listed smes depend significantly on current liabilities as it can be easily created. for further requirement of funds, they opt for retained earnings accumulated in the form of reserves. retained earnings are the major internal source of finance available without much effort. then after, they opt for short-term borrowings. usually, smes do not prefer to raise funds via issue of equity shares as it is a costly and time-consuming affair. hence, share capital is seen at a 94 s. verma, s. shome, & a. patel journal of small business strategy / vol. 31, no. 3 (2021) / 88-101 steady level throughout the period of the study. in the last year, the level of share capital increased significantly due to a rise in the number of listed smes. long-term borrowings are also not found to be at a very low level. therefore, it can be inferred that smes may opt for it during their expansion phase to have some tax advantage. the further discussion in this section is on statistical analysis of data. descriptive statistics of the selected variables are presented in table 4. the total number of observations are 565 as the study is conducted on 113 firms for the period of five years. smaller mean values of both leverages indicate lesser use of debt by the smes. this is in accordance with existing literature (srinivas, 2013). it can be inferred from the mean values of both the dependent variables that smes rely more on short-term borrowings. this also supports existing literature (kumar & rao, 2016; odit & gobardhun, 2011). the value of standard deviation is higher in case of leverage2 as compared to leverage1. this indicates a higher degree of fluctuations in the ratio of shortterm debt to total assets across companies and time. the correlation matrix of the explained and corresponding explanatory variables is depicted in table 5. a high correlation of 0.812 is found between cash flows and operating income. the roe is also strongly correlated with the cash flows and operating income. again, a high positive relationship is observed between cash flows and ndts. one of the major limitations of multiple regression analysis is the problem of multicollinearity when a high degree of correlation is witnessed between independent variables. in both the models, the test of variance inflation factor (vif) has been conducted to verify the problem of multi 5494.9 16518.0 9019.9 10941.3 17365.4 5643.37 17701.53 9586.73 11797.10 19708.74 6000.16 19229.54 10299.40 12726.80 21563.74 6978.60 21441.31 12168.90 13573.96 21936.09 9660.81 26922.71 10062.50 13559.16 25166.00 0.0 5000.0 10000.015000.020000.025000.030000.0 share capital total reserves long-term borrowings short-term borrowings other current liabilities & provisions share capital total reserves long-term borrowings short-term borrowings other current liabilities & provisions share capital total reserves long-term borrowings short-term borrowings other current liabilities & provisions share capital total reserves long-term borrowings short-term borrowings other current liabilities & provisions share capital total reserves long-term borrowings short-term borrowings other current liabilities & provisions 20 14 20 15 20 16 20 17 20 18 inr in million y ea r figure 1. sources of finance in smes in india source: based on the data collected from ace equity table 4 descriptive statistics variables mean median std. deviation observations lev1 0.31 0.51 0.24 565 lev2 0.20 0.33 1.08 565 liq 1.81 1.29 1.79 565 ndts 0.07 0.05 0.08 565 size 3.70 3.79 1.19 565 tang 0.49 0.44 0.45 565 prof (op income) 0.33 0.27 0.21 565 roe 0.20 0.15 0.24 565 cf 0.17 0.14 0.15 565 source: authors’ calculation 95 s. verma, s. shome, & a. patel journal of small business strategy / vol. 31, no. 3 (2021) / 88-101 collinearity. the value of vif, as shown in table 5, for operating income, roe, ndts and cash flows variables are less than 10 (neter et al., 1996), and so these variables have been considered to be a part of these models. according to wansbeek (1992), as panel data considers time dimension, an autocorrelation problem often occurs between the residuals of the same units. this study used the durbin-watson test to identify if this problem persists here. the test statistics for model 1 and 2 are 1.71 and 1.54 respectively, and it is within the accepted range (gujarati, 2009). analysis of model 1 to interpret the results of panel data regression, the paper analysed each model separately. coefficients for ols, fixed effects and random effects for model 1 are estimated and presented in table 6. pooled ols ideally should be employed when different samples are observed for each period of panel data (wooldridge, 2010). furthermore, as various assumptions of pooled ols were rejected, the study focused on the results of fixed and random effect models. the hausman test was performed to identify which model is likely to be the best estimate for the current study. it is inferred from the values in table 5 that the variables viz. liquidity, size and cash flows are inversely related to leverage in model 1. similarly, the operating income, roe, tangibility and non-debt tax shield are positively related to leverage. for model 1, it can be observed that all variables, except for liquidity and tangibility, are significant at 95% confidence level. table 5 pearson correlation matrix lev1 lev2 liq ndts size tang prof (op income) roe cf vif lev1 1 lev2 0.059 1 liq -0.209** -0.147** 1 1.188 ndts 0.069 0.044 -0.170** 1 3.639 size -0.075 -0.033 -0.185** -0.025 1 1.066 tang 0.213** 0.172** -0.251** 0.388** -0.015 1 1.262 prof (op income) -0.170** 0.375** -0.156** 0.548** 0.102* 0.288** 1 7.188 roe -0.053 0.371** -0.035 0.157** 0.052 0.181** 0.739** 1 3.968 cf -0.227** 0.177** -0.075 0.671** 0.034 0.304** 0.812** 0.731** 1 7.618 source: authors’ calculations note: ** at 90% level of significance; * at 95% level of significance. table 6 coefficients for ols, fixed effects and random effects for model 1 variables (pooled ols) (fixed effects) (random effects) tdta tdta tdta liq -0.012*** -0.003 -0.008* (0.005) (0.004) (0.004) roe 0.009*** 0.005*** 0.006*** (0.001) (0.001) (0.001) tang 0.109*** 0.030 0.106*** (0.026) (0.034) (0.028) size -0.014** -0.092*** -0.040*** (0.006) (0.012) (0.008) ndts 2.292*** 1.461*** 1.685*** (0.187) (0.205) (0.183) prof (op income) 0.205** 0.202* 0.251** (0.097) (0.120) (0.103) cf -2.534*** -1.653*** -2.020*** (0.185) (0.203) (0.184) constant 0.385*** 0.671*** 0.468*** (0.033) (0.050) (0.038) observations 565 565 565 r2 0.419 0.344 no. of companies 113 113 source: authors’ calculation note: standard errors in parentheses. *** p < 0.01, ** p < 0.05, * p < 0.1 96 s. verma, s. shome, & a. patel journal of small business strategy / vol. 31, no. 3 (2021) / 88-101 from the results of the hausman test (table 7), it is inferred that a null hypothesis which states no correlation between individual effects is rejected. therefore, in this study, the fixed-effect model is the best estimate. to total assets ratio – leverage2. table 9 depicts the results of the hausman test for model 2. the null hypothesis states no correlation between individual effects. observing the numbers in table 9, the null hypothesis stands rejected, concluding that the fixed effect model is more relevant. to summarise the results, it can be observed that smes are depending more on short-term liabilities as compared to long-term external liability (figure 1). it also implies that listing is not giving any significant boost to smes in terms of debt financing. from the interpretations of statistical models, it is concluded that the explanatory power of both the models is found to be low due to lower r-squared values (table 6: 34.4%: model 1 and table 8: 45.9%: model 2). the reason may be due to the impact of some external factors that are beyond the scope of existing study or some other firm-specific factors. table 7 hausman fixed random coefficients (b) fixed (b) random (b-b) sqrt difference (diag (v_b-v_b)) s.e. liq -0.0034 -0.0075 0.0042 ndts 1.4605 1.6847 -0.2241 0.0918 size -0.0924 -0.0401 -0.0523 0.0084 tang 0.03044 0.1062 -0.0757 0.0196 prof (op income) 0.2017 0.2510 -0.0492 0.0620 roe 0.0050 0.0057 -0.0007 0.0001 cf -1.6533 -2.0203 0.3670 0.0861 source: authors’ calculation note: b= consistent under h0 and ha; obtained from xtreg; b= inconsistent under ha, efficient under h0; obtained from xtreg. test: h0: difference in coefficients not systematic chi2 (7) = (b-b)’[(v_b-v_b)^(-1)] (b-b) = 333.18 prob > chi2 = 0.0000 (v_b-v_b is not positive definite) since in table 6, r-squared value is 0.344, it implies that the independent variables only explain 34.4% engagement in the explained variable (here, leverage1). in this study, leverage is explained as the ratio of total debt to total assets. analysis of model 2 for model 2, it can be concluded from the signs of coefficients and t-values for each independent variable in table 8 that liquidity, cash flows and size are negatively related to the leverage. whereas profitability, roe, tangibility and non-debt tax shield are positively related to the dependent variable. all the variables are significant at 95% confidence level, except liquidity. another important inference from table 8 is the r-squared value of 45.9%, which is slightly higher compared to the r-squared value in model 1 (table 8). it indicates that the explanatory variables in model 2 have more power to explain the dependent variable – short-term debt table 8 coefficients for ols, fixed effects and random effects for model 2 variables pooled ols fixed effect random effect stdta stdta stdta liq -0.003 -0.007 -0.009 (0.021) (0.021) (0.019) roe 0.028*** 0.029*** 0.028*** (0.003) (0.003) (0.003) tang 0.175** 0.234** 0.266*** (0.087) (0.104) (0.088) size -0.111*** -0.284*** -0.157*** (0.029) (0.061) (0.037) ndts 4.313*** 5.037*** 4.208*** (0.799) (1.072) (0.846) prof (op income) 6.469*** 5.716*** 6.387*** (0.447) (0.646) (0.500) cf -11.966*** -10.356*** -11.506*** (0.837) (1.085) (0.885) constant 0.076 0.568** 0.161 (0.143) (0.252) (0.171) observations 565 565 565 r2 0.426 0.459 no. of companies 113 113 source: authors’ calculation note: standard errors in parentheses; *** p < 0.01, ** p < 0.05, * p < 0.1 97 s. verma, s. shome, & a. patel journal of small business strategy / vol. 31, no. 3 (2021) / 88-101 discussion and validation of hypotheses this study intends to examine the influence of selected firm-specific factors on the financing pattern of the listed smes in india. it considers leverage as explained variable and liquidity, tangibility, size, profitability, roe, cash flows and non-debt tax shield as explanatory variables for statistical analysis. the summary of the outcomes of the hypotheses formulated and tested to evaluate the relationships among selected variables and the applicability of tot and pot based on the results obtained are presented in table 10. non-debt tax shields and tangibility are positively related to financial leverage as concluded from the statistical analysis, and it is in line with trade-off theory. on the other hand, cash flows, operating income and roe are negatively related with the dependent variable, which is in favour of pot. hence, no single theory of finance is found to be capable of explaining sme financing behaviour completely. limitations and future scope every research is subject to certain limitations and so is this study. in this section, shortcomings and future scope of the present study have been discussed. first limitation is table 9 hausman fixed random coefficients (b) fixed (b) random (b-b) sqrt difference (diag (v_b-v_b)) s.e. liq -0.0067 -0.00925 0.0025 0.0203 ndts 5.0365 1.8631 3.1735 1.0581 size -0.2836 -0.0431 -0.2405 0.0608 tang 0.2337 0.0432 0.1905 0.1028 prof (op income) 5.7162 0.2868 5.4294 0.6382 roe 0.02936 0.0060 0.0234 0.0032 cf -10.3559 -2.1330 -8.2229 1.0701 source: authors’ calculation note: b = consistent under ho and ha; obtained from xtreg; b = inconsistent under ha, efficient under ho; obtained from xtreg. test: h0: difference in coefficients not systematic chi2 (7) = (b-b)’[(v_b-v_b)^(-1)] (b-b) = 358.13 prob > chi2 = 0.0000 table 10 summary results of hypotheses no. hypotheses model 1 model 2 tot pot 1. h1. liquidity and leverage are inversely related. (ns) (ns) (–) (+) 2. h2. there is a negative relationship between non-debt tax shield and leverage. rejected*** rejected*** (+) (–) 3. h3. there is positive relationship between the size of the firm and leverage. rejected*** rejected* (–) (–) 4. h4. tangibility and leverage are positively related. (ns) accepted *** (+) (–) 5. h5. profitability measured in terms of operating income and leverage are negatively related. rejected* rejected*** (+) (–) 6. h6. there is a negative relationship between roe and leverage. rejected*** rejected*** (+) (–) 7. h7. there is a negative relationship between cash flows of the firms and leverage. accepted*** accepted*** (–) (+) note: ns: not significant * significant at 90% confidence level; ** significant at 95% confidence level; *** significant at 99% confidence level. 98 s. verma, s. shome, & a. patel journal of small business strategy / vol. 31, no. 3 (2021) / 88-101 the availability of data. for some smes, it is available for a shorter duration post listing while for others, it is available for a longer duration. second, obtaining the authentic sme data through a secondary source is a challenge. third, the sample includes only those smes which are listed on nse emerge exchange, so, the outcomes of the study may not be generalisable. the limitations of the study provide the scope for future research. similar study can be conducted with a larger sample size with an increase in the listing of smes over time. india is a bank dominated economy. difficulty in raising debt finance in such an economy needs to be studied further in detail. apart from that, declining debt-equity ratio in the capital structure of smes despite having tax advantage demands detailed investigation. further, to improve the explanatory power of the models, some more firm-specific as well as external variables can be explored which may affect the financing choices of smes. external factors may include government initiatives for smes or some macroeconomic factors like interest rates and inflation, which impact the capital structure of any business. concluding remarks the study attempts to examine the key factors having influence on the financing pattern of the smes listed on nse emerge exchange in india. in other words, the study contributes to the extant literature on listed smes by attempting to examine the impact of listing on the financing patterns of smes and to find out if only established firm-specific factors have a bearing on the financing choices or there are some other influential factors also. here, the leverage has been calculated in two ways: (a) total debt/total asset and (b) short-term debt/total asset. among the independent variables chosen based on an extensive literature survey, most of them, like tangibility, size, ndts, operating income, roe and cash flows, are statistically significant, but the small values of r-squared in both the models depict lower explanatory power of independent variables to predict the dependent variables. this is in contrast with various previous studies conducted on smes (chakraborty, 2010; mateeva et al., 2013; rao et al., 2018). it suggests that there may be some other firm-specific factors or macroeconomic factors that influence the listed firms’ financing choice. debt is considered to be the least preferred source of sme finance. srinivas (2013) and kumar & rao (2016) encountered the opposite conclusions during their study though on non-listed smes. in a bank dominated economy like india, difficulty in raising debt finance needs to be studied further in detail. several studies have suggested that difficulty in raising finance for smes may be due to lack of proper book-keeping and non-availability of audited financial results (liu & yu, 2008; storey, 1994). as the present study considers only the listed smes and they get their financial statements audited regularly, hence it is expected that these firms have high creditworthiness in the market. despite having tax advantage, their declining debt-equity ratio demands detailed investigation. the study also concludes no single theory of finance is found to be capable of explaining sme financing behaviour completely. as per serrasqueiro & nunes (2012), pot and tot cannot be considered to be mutually exclusive. as per them, these theories should be studied independently with reference to smes. lesser use of debt finance by the listed smes is the issue worth investigating in india if it is due to unavailability of funds for them. if it is so, the situation of the unorganized smes can be easily understandable. ultimately, it raises the questions about the quality and fundamentals of companies listed or to be listed and the success behind sme exchanges. thus, the present study strongly feels the urge to identify other firm-specific variables and macroeconomic factors to explain the financing decision of listed smes. it also concludes that listing does not give any significant boost to smes in terms of debt financing. references abdulsaleh, a. m. a. 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(2006). niche strategy and export performance. in a. rialp & j. rialp (eds.), international marketing research: advances in international marketing, vol. 17 (pp. 63-87). https:// doi.org/10.1016/s1474-7979(06)17002-7 http://hdl.handle.net/11540/9483 http://hdl.handle.net/11540/9483 https://www.emerald.com/insight/search?q=antonella%20zucchella https://www.emerald.com/insight/search?q=giada%20palamara https://doi.org/10.1016/s1474-7979(06)17002-7 https://doi.org/10.1016/s1474-7979(06)17002-7 lifestyle entrepreneurship and innovation in rural areas: the case of tourism entrepreneurs | published in journal of small business strategy loading [contrib]/a11y/accessibility-menu.js jsbs menu articles articles all for authors editorial board about issues ethics statement sponsors search sorry, something went wrong. please try your search again. × articles blog posts rss feed enter the url below into your favorite rss reader. https://jsbs.scholasticahq.com/feed × articles vol. 31, issue 4, 2021 november 16, 2021 cdt lifestyle entrepreneurship and innovation in rural areas: the case of tourism entrepreneurs álvaro dias, graça miranda silva, lifestyle entrepreneurship rural tourism innovation place attachment local knowledge ccby-4.0 • https://doi.org/10.53703/001c.29474 photo by sincerely media on unsplash jsbs dias, á., & silva, g. m. (2021). lifestyle entrepreneurship and innovation in rural areas: the case of tourism entrepreneurs. journal of small business strategy, 31(4), 40–49. https://doi.org/10.53703/001c.29474 save article as...▾ pdf xml citation (bibtex) data sets/files (5) download all (5) table 1. composite reliability, average variance extracted, correlations, and discriminant validity checks. download table 2. structural model assessment. download table 3. bootstrap results for indirect effects. download figure 1. the transformation process of local knowledge into innovation download construct indicators download sorry, something went wrong. please try again. if this problem reoccurs, please contact scholastica support error message: undefined × view more stats abstract lifestyle entrepreneurs play an important role in innovation and sustainability in rural destinations. their competitiveness depends largely on how they explore their link to the place and generate innovation. to analyze the relationship between the link to the place and innovation, this article uses survey data from a sample of 221 rural lifestyle entrepreneurs. using pls-sem modeling, the results indicate that place familiarity and relational capital positively influence innovation. furthermore, place familiarity reveals as an important factor for improving relational capital. in its turn, the degree of relational capital contributes positively to the small firm’s knowledge absorption. the results also reveal that, although there is no direct relation between knowledge absorption and innovation, relational capital mediates the relationship between place familiarity and innovation and that there is an indirect relationship between relational capital and innovation, through the mediating effect of knowledge absorption. these results provides important elements for rural tourism destination decision making on innovation and competitiveness. 1. introduction in the universe of small businesses, lifestyle entrepreneurs (le) represent a significant portion (getz & carlsen, 2000; thomas et al., 2011), being associated with innovative and more sustainable practices when compared to large companies (bosworth & farrell, 2011; stamboulis & skayannis, 2003; wang et al., 2019). nevertheless, research on this class of entrepreneurs is still scarce (dias et al., 2020a; hoarau, 2014). they represent a specific class of entrepreneurs, distinguished from others by the fact that they combine (or even substitute) financial objectives with other non-financial indicators, such as lifestyle, independence, social or environmental (thomas et al., 2011). this particularity reveals that traditional models of entrepreneurship must be reviewed to identify the specificities of these entrepreneurs. one of their essential characteristics is their strong link to the place (carlsen et al., 2008; kibler et al., 2015), which provides them with a source of differentiation where they support their competitiveness compared to large companies (komppula, 2014). in rural context, the interplay between the entrepreneur, the regional setting, and the place‐specific qualities, constitutes a key driver for change and innovation (korsgaard et al., 2015; xiong et al., 2020). however, this link to the place where they develop their activity still remains little explored (kibler et al., 2015), especially in the relation and contribution to innovation (hjalager et al., 2018). research on le has focused on the characteristics of entrepreneurs, and it is clear that entrepreneurial processes are still under-explored (fu et al., 2019). in particular, it is necessary to extend the existing knowledge regarding the transformation of this link to the place into innovation and to understand the basis of the competitiveness of these entrepreneurs ((dias et al., 2020a; garcía-rosell et al., 2019). this knowledge is very useful to create local development strategies, to create jobs and attract investment and tourists and visitors to rural areas, avoiding imitating tourist attractions that cause the homogenization of the value propositions of the rural destinations. thus, this study has as objectives (i) to perceive the implications of the link to the place and the relational capital in the innovation generated by le in rural areas; (ii) to identify the role of knowledge absorption in the innovation generated by le. to achieve these objectives, this study focuses on a specific sector where there is a strong predominance of these entrepreneurs tourism in rural areas. the article is structured as follows. the following section presents the theoretical framework. section three details the methodology. section four presents the results and the discussion. finally the conclusions, limitations and future research guidelines are outlined. 2. theoretical framework 2.1. place familiarity and local knowledge for this research sake, place familiarity can be defined as the perception of how much an entrepreneur knows about a destination (tan & chang, 2016). tourist experiences can benefit in authenticity and degree of immersion in local culture by combining the practice and distinctive features of the place (anderson, 2012), in its idiosyncrasy of natural and cultural attractions and of narratives, stories, and legends (bosworth & farrell, 2011) and customs (valtonen, 2009), with a strong personal imprint (hoarau, 2014). the uniqueness of the place thus holds a potential for differentiation and value creation in tourist experiences (cooper, 2015), the basis of le competitiveness compared to large companies (komppula, 2014). however, this requires a step ahead, i.e. that entrepreneurs should be able to access and appropriate this knowledge and transform it into new narratives and meaningful destination-specific experiences (stamboulis & skayannis, 2003). the problem is that local knowledge is tacit (hoarau, 2014) and practice based (arias & cruz, 2019), requiring an ability to interpret symbolic and non-verbal information dispersed across a multiplicity of sources (hall, 2019). by being embedded in the local community there is a unique opportunity to access this local knowledge (bredvold & skålén, 2016). the mere fact that they are integrated into the local social structure (bredvold & skålén, 2016; jack & anderson, 2002) and live in a specific location (valtonen, 2009) facilitates socialization processes (zhang et al., 2015). in addition, participation in the local community not only facilitates involvement in social practices but also tracks the continuous evolution of local knowledge (garcía-rosell et al., 2019) through observation, listening and development of joint activities (valtonen, 2009). at the same time, by being embedded in the local community, le have the opportunity to involve and stimulate the collaboration of local stakeholders, resulting, on the one hand, in access to more and better knowledge (czernek, 2017) and, on the other, in the possibility of engaging them in the realization of their own tourism experiences, which represents an important basis for innovation (garcía-rosell et al., 2019). thus, the link to the place, allow forming and using essential arguments for the competitiveness and innovation generated by le, being an essential source of business opportunities (yachin, 2019), which are materialized in innovative ways of ‘selling the place’ to tourists (schilar & keskitalo, 2018). furthermore, the literature recognizes that place familiarity cannot be sufficient to generate innovation because it depends on the ability of the entrepreneur to transform the opportunities and knowledge resulting from the link to the place (dias et al., 2020b). as such, we hypothesize: h1. place familiarity positively influences innovation h1i. relational capital mediates the relationship between place familiarity and innovation h2. place familiarity positively influences relational capital 2.2. relational capital and innovation besides the link to the place, we argue that relational capital of the le also plays an important role on innovation. relational capital, in this study context, is defined as the close interaction at the personal level between partners (kale et al., 2000). in the same way, innovation can be defined as the process of introducing new ideas to the firm which result in increased firm performance (rogers, 2004). the process of innovation in tourism is described as complex (cooper, 2015)resulting in additional difficulties for small-scale businesses (dias et al., 2021; hoarau, 2014). however, le can boost their small scale in their favor, as it allows greater proximity to the various stakeholders. in the case of customers, it allows them better understand the demands of tourists (ateljevic & doorne, 2000) and to deliver more immersive and tailor-made experiences (andersson cederholm & hultman, 2010; richards, 2011; shaw & williams, 2009) developed through co-creation processes (hall & williams, 2019). they also show a greater involvement in community activities (marchant & mottiar, 2011). furthermore, together with being locally embedded, their small size also allows them to be closer to other local stakeholders (yachin, 2019), which is essential in the current context of tourism where the traditional value chain gives place to intricate networks of actors (richards, 2011). operating a business in this context requires the ability to articulate with a network of partners who contribute to the total tourism experience, where innovation is increasingly tied to a non-separation between demand and supply (binkhorst & den dekker, 2009). this can be a major setback since most of the rural entrepreneurs are lonely riders (komppula, 2014). in this context, the ability to innovate is strongly linked to the personal competencies and life and market experience (ioannides & petersen, 2003), especially that of developing his network through relational capital (bredvold & skålén, 2016; thomas et al., 2011). in this way, le brings the entrepreneurial spirit to which morrison refers (2006) and that provides vitality to the experiences of a touristic destination (kibler et al., 2015). hall (2004) identified that the existence of a shared environment is essential for the exchange of knowledge and innovation of entrepreneurs. however, having a good relational capital maybe insufficient to generate innovation in these small firms (cooper, 2015). it will depend on the ability of the entrepreneur to absorb knowledge and opportunities resulting from these links to local partners (dias et al., 2020b). as such, knowledge absorption can act as a mediator in the relationship between relational capital and innovation. furthermore, as the place acquires an essential role in le opportunity recognition and innovation (arias & cruz, 2019; yachin, 2019), local embeddedness developed through relational capital plays an important (bosworth & farrell, 2011). accordingly we hypothesize: h3. relational capital positively influences innovation h3i knowledge absorption mediates the relationship between relational capital and innovation h4. relational capital positively influences knowledge absorption 2.3. knowledge absorption and innovation previously we addressed the importance of local knowledge in innovation. however, the literature also states that the transformation of knowledge into innovation depends on the ability to absorb this same knowledge, that is, its integration into the processes, products and services of the firm (weidenfeld et al., 2010; yachin, 2019). in the context of this study, knowledge absorption is defined as is the firm’s ability to identify, assimilate, and explore the knowledge gained from external sources (pinheiro et al., 2021). in a competitive environment where local knowledge is continuously evolving (garcía-rosell et al., 2019), knowledge absorption supports innovation (shaw & williams, 2009). as such, le should not only be able to acquire new knowledge (czernek, 2017) but also to transform it into marketable experiences (eikhof & haunschild, 2006). the processes through which knowledge is transformed into innovation present some particularities in the case of le (kibler et al., 2015). in most cases, the processes are spontaneous and unstructured (cooper, 2015) such as informal cooperation (marchant & mottiar, 2011) or community centered activities (dias et al., 2020a). nevertheless, they do not fail to incorporate a certain degree of market-oriented creativity and innovation [(ateljevic & doorne, 2000; morrison, 2006). thus, we propose the following hypothesis: h5. knowledge absorption positively influences innovation 3. method 3.1. sample and data collection the target population for this study are lifestyle entrepreneurs who operates in tourism activities in rural areas of portugal. the entrepreneurs were selected based on the following inclusion criteria: (i) have a tourism related business (e.g., hotels, hostels, restaurants, tour operators, and visitor attractions) as indicated by hallak, assaker, and lee (2015); (ii) the main activity is performed in a rural area; and (iii) to identify lifestyle entrepreneurs we followed thomas et al. (2011) definition, meaning that the business are run using financial and non-financial objectives simultaneously or just non-financial objectives. the data collection took place during the last quarter of 2019, through a face-to-face survey. since the sampling frame is difficult to define, a non-probabilistic purposive sampling was used to ensure that respondents fit the previously defined criteria. the questionnaire was completed on site by the respondents, obtaining a final sample of 221 valid questionnaires. we also checked if the respondents come from unique businesses to avoid multiple respondents per business. 3.2. measures and instrument we adopted pre-existing measure to operationalize the variables. as such, to measure knowledge absorption we adopted the six-item scale from jansen et al. (2005). place familiarity was adapted from lalli (1992), consisting of four items. the relational capital measure was adapted from besser & miller (2001), consisting of seven items. innovation was measured using kropp, lindsayand and shoham’s (2006) measures. all the scales were measured using seven-point likert-type scales ranging from 1 = strongly disagree to 7 = strongly agree. the construct indicators are described in appendix a. these reflective measures were analyzed by a panel of academics specializing in tourism and entrepreneurship. the initial version of the questionnaire was pre-tested on a group of eight lifestyle entrepreneurs to validate the wording and eliminate any ambiguity and errors. 4. results and discussion to test the conceptual model we used structural equation modelling (sem), more specifically, a variance-based structural equation modelling technique named partial least squares (pls). as such, we used smartpls 3 software (ringle et al., 2015). to test the model we followed a two-step procedure. first, we assessed the reliability and validity of the measurement model and, second we analyzed the structural model. for the first step, we assessed the indicators of reliability, convergent validity, internal consistency reliability, and discriminant validity to evaluate the quality of the measurement model (hair et al., 2017) (see table 1). the results revealed that the standardized loadings of all the items of the variables were all significant at p < 0.001 and higher than 0.6 (ranging from 0.614 to 0.919), providing evidence for reliability of the individual indicator (hair et al., 2017). we used cronbach alpha and composite reliability (cr) to evaluate the internal consistency of the variables. all surpassed the cut-off of 0.7 (hair et al., 2017). table 1.composite reliability, average variance extracted, correlations, and discriminant validity checks. latent variables α cr ave 1 2 3 4 (1) innovation 0,738 0,849 0,653 0.808 0.644 0.584 0.821 (2) knowledge absorption 0,873 0,914 0,726 0,533 0.852 0.253 0.719 (3) place familiarity 0,859 0,890 0,538 0,488 0,244 0.733 0.293 (4) relational capital 0,828 0,887 0,666 0,715 0,614 0,280 0.816 note: α -cronbach alpha; cr -composite reliability; ave -average variance extracted. bolded numbers are the square roots of ave. below the diagonal elements are the correlations between the constructs. above the diagonal elements are the htmt ratios. the convergent validity was evaluated using three approaches. first, the standardized loadings of all the items were positive and significant on their respective variables. second, the cr values were superior to 0.70. third, the average variance extracted (ave) for all constructs exceeded the threshold of 0.50 (bagozzi & yi, 1988). to assess the discriminant validity, we used the fornell and larcker criterion, meaning that the variables’ square root of ave was superior to its biggest correlation with any construct (fornell & larcker, 1981). for discriminant validity, we also used heterotrait-monotrait ratio (htmt) criterion (hair et al., 2017; henseler et al., 2015), which were below the threshold value of 0.85 (hair et al., 2017; henseler et al., 2015). as such, these values provide more evidence of discriminant validity. to evaluate the accuracy of the structural model we calculated the significance of the structural path coefficients; the dimension of r2 value for each endogenous variable, and the stone stone-geisser’s q2 values (hair et al., 2017). we previously evaluated the collinearity (hair et al., 2017). as such, we checked the vif values, which were inferior to the threshold of 5, as recommended by hair et al. (2017) (ranging from 1.00 to 1.653). these values indicated no collinearity. the r2 (coefficient of the determination) for the three endogenous variables of innovation, knowledge absorption, and relational capital were 61.0%, 37.7%, and 10.7%, respectively, and were superior to the threshold value of 10% (falk & miller, 1992). the q2 values for the three endogenous variables (0.37, 0.27, and 0.05 respectively) were above zero, providing evidence of the predictive relevance of the model. to test the hypothesis, we used bootstrapping with 5,000 subsamples to evaluate the significance of the parameter estimates (hair et al., 2017). the results in table 2 show that place familiarity has a significantly positive effect on innovation (β =0.303, p < 0.001) and on relational capital (β =0.607, p < 0.01), and that a relational capital has a significant effect on innovation (β = 0.560, p < 0.001), and on knowledge absorption (β = 0.614, p < 0.001). these results provide support for hypothesis h1 to h4, respectively. the relation between knowledge absorption and innovation was not significant (β = 0.115, n.s.), meaning that h5 was not supported. table 2.structural model assessment. path path coefficient standard errors t statistics p values place familiarity → innovation 0,303 0,053 5,697 0.000 place familiarity → relational capital 0,280 0,083 3,388 0.001 relational capital → innovation 0,560 0,077 7,317 0.000 relational capital → knowledge absorption 0,614 0,064 9,536 0.000 knowledge absorption→ innovation 0,115 0,070 1,651 0.099 to test the mediation hypotheses (h1i-h3i), we followed the recommendations of hair et al. (2017; p. 232). thus, we used a bootstrapping procedure to test the significance of the indirect effects via the mediator (preacher & hayes, 2008). table 3 presents the results of the mediation effects. the indirect effects of a place familiarity on innovation via the mediator of relational capital (β = 0.156; p < 0.01) and relational capital on innovation via the mediator of knowledge absorption (β = 0.215; p < 0.001) are significant. these results provide support for h1i and h3i. table 3.bootstrap results for indirect effects. path path coefficient standard errors t statistics p values place familiarity → relational capital → innovation 0,156 0,052 3,013 0.003 relational capital → knowledge absorption → innovation 0,172 0,057 2,996 0.003 the results reveal that the place familiarity and relational capital influence the innovation generated by le in rural areas. this means that the degree of integration in the community and the degree of local knowledge provide a basis for both the creation of new products and tourist experiences based on the uniqueness of the space where they develop their activity. these results also expand in two ways the existing knowledge in identifying the determinants of innovation generated by le in rural areas. first, previous research has focused on the determinants of the context and characteristics of the company (elena et al., 2015) or the mechanisms of acquisition and assimilation of knowledge (dias et al., 2020a). this study extends to knowledge by highlighting the combined contribution of the link to the site and the relationship within the community with the innovation generated. secondly, this study analyses a specific category of entrepreneurs in the rural context, contributing to the reduced number of studies in this field. although its importance for innovation in the rural context is recognized (komppula, 2014), this study helps to better understand which factors may increase this capability. the results also extend knowledge about the role that relational capital plays both in absorbing knowledge and in transforming the link to the site into innovation. although place familiarity contributes to innovation, the data suggest that this element is enhanced if there is a high degree of relational capital, which can contribute at several levels. first, the sources of innovation associated with the place, such as traditions, legends and stories, can be enhanced through a close relationship with the local community, facilitating access to this tacit knowledge as proposed by dias et al. (2020a). second, because it allows access to other local stakeholders, who can contribute or even be an integral and valuable part of the experiences offered by le (hoarau, 2014). third, they promote better commercial and marketing performance with other stakeholders in the rural value chain, as suggested by yachin (2019). the role of knowledge absorption was also identified in its mediating role between relational capital and innovation. this means that it is not enough to access local knowledge and develop the network of contacts in the community and other stakeholders. le must be able to appropriate that knowledge, integrating it into their products and experiences in a meaningful and market-oriented way. le should be able to translate the natural and social environment as well as local traditions, stories and legends into innovative narratives and solutions that empower the rural context in which they are inserted. this ability to ‘translate’ is related to the capacity of these entrepreneurs to be close to clients and to develop personalized experiences (andersson cederholm & hultman, 2010; shaw & williams, 2009), where the tourist can learn and touch the local culture (richards, 2011). figure 1 depicts the underlying process. the connection to the site and the relational capital provide access to local knowledge. however, it must be integrated into the processes, narratives, products and experiences delivered by le through knowledge absorption. under these conditions, knowledge transformation occurs and innovation is generated. figure 1.the transformation process of local knowledge into innovation 5. conclusions 5.1. theoretical contributions this study aimed to extend existing knowledge about innovation antecedents such as the link to the place and relational capital in the context of rural le. the results indicate not only that both factors positively influence innovation, but also that they leverage each other, revealing that rooting in the local community together with the ability to establish a network of local contacts represent essential elements for the competitiveness and innovation of these small businesses in rural areas. to our best knowledge, this is the first study to empirically establish this relationship. another objective of this study is to identify the role of knowledge absorption in the innovation generated by le. during this study, some mediating relationships were analyzed, in particular of social capital and knowledge absorption. it was found that both play a role in fostering innovation, revealing that there is interdependence between the variables, suggesting that there is an accumulation of factors that contribute to the innovation of le in rural areas. thus, this study contributes to understand the mechanisms associated with innovation which, although they cannot be understood as formal and structured processes, presents a sequence that begins in the access to knowledge through knowledge absorption. 5.2. managerial and policy making contributions the results of this study point to important insights for destination managers and local and regional policy makers. considering that these entrepreneurs represent an important contribution to the innovation and vitality of the destinations, it will be important to enhance their innovative capacity. according to the results of the study, familiarity with the place is important, which is valid for locals as well as for entrepreneurs from abroad. the stimulation of deepening knowledge about history, traditions, physical and environmental characteristics, among others, is a way to broaden the range of opportunities to innovate in the experiences, paradoxically, based on knowledge that is likely to be ancestral, but which enhances the genuineness of the experiences delivered. the creation of formal and informal mechanisms that provide more contacts and networking will be another important initiative to develop, such as fairs, contests, events, or social networks are mechanisms that favor the exchange of knowledge and the development of the social capital of entrepreneurs, providing important opportunities to access new knowledge or create collaborative networks to deliver more immersive and creative experiences. a third important aspect is the development of knowledge absorption skills, which can be achieved through training, documentation, collective or local brands, or other repositories where knowledge can be learned and interpreted. 5.3. limitations and future research this study presents some limitations and points to avenues for future investigations. first of all, the sample concerns a country. although portugal is in the upper quartile of global entrepreneurship, which allows us to analyze the results in the context of other countries, it will always be interesting to understand the cultural differences and the implications they have on the model studied. secondly, the convenience sample resulted from the fact that not all le are known in a rural context. the exploration of different segments of entrepreneurs could bring important insights to the results of this study, such as gender, place of birth, age, or employment situation. with a more robust sample, it will be interesting to study the hypothesized relationships variation between different business types. future research can also explore some moderating effects. for example, the hypothesized relationship between knowledge assimilation and innovation was not statistically supported. however, knowledge assimilation acts as a mediator in the relationship between relational capital and innovation. although this relationship adheres to the literature, it might act also as a moderator. references anderson, j. 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(2015). tacit knowledge spillover and sustainability in destination development. journal of sustainable tourism, 23(7), 1029–1048. https://doi.org/10.1080/09669582.2015.1032299 google scholar appendix construct indicators constructs and items innovation (1 = no confidence, 5 = totally secure) indicate your degree of confidence in yourself… successfully identify new opportunities create new products think creatively market an idea or a new solution knowledge absorption (1= strongly disagree; 7= totally agree) consider the following statements and indicate your agreement… we participate in events or training on local habits or traditions we obtain knowledge through informal means (lunches ...) we learn new ideas and services with clients. we consult local people about local habits and traditions. we quickly turn opportunities into new services. we quickly see the changes that occur in the market. place familiarity (1= strongly disagree; 7= totally agree) consider the following statements and indicate your agreement… i feel that i belong to this place this place is very familiar this place is very important for my daily life i live this place intensely relational capital (1=less important; 7=very important) please indicate the importance of the following activities… i seek to strengthen and improve the local community i seek to improve my image with the local community i am addressing clients that are not served by other local companies i cooperate with other companies / local entrepreneurs i'm involved in local festivals and other events i support local projects powered by scholastica, the modern academic journal management system http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2021, vol. 31, no. 01, 01-09 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2021 small business institute® w w w. j s b s . o rg introduction esic business & marketing school. av. valdenigrales s/n 28223 pozuelo de alarcón, madrid. spain, mariano.mendez@esic.edu headquarters location decisions under conflicts at home: evidence from a configurational analysis location decisions, headquarters location, family firms headquarters, fuzzy set qualitative comparative analysis, fsqca apa citation information: méndez-suárez, m. (2021). headquarters location decisions under conflicts at home: evidence from a configurational analysis. journal of small business strategy, 31(1), 01-09. except when the firm faces severe conflicts at home, the decision of relocating headquarters (hq) is rare, and has substantial impact on both the old and new hq sites as it would require replacing many individuals working in specialized roles who may not be willing to relocate (k. e. meyer & benito, 2016). but apart from the relocation of individual employees, hq relocation affects the whole business operation (gregory et al., 2005) and for the regions, losing hq induces employment losses, decreases in the quality of labor markets (strauss-kahn & vives, 2009) and worsens the image trademark of a city or place (clouse et al., 2020). however, this complicated decision was taken by more than 3,000 companies (garijo, 2017) that relocated their hq during 2017 to other spanish regions due to the unprecedented rise in political uncertainty due to the catalonian illegal secessionism referendum (reid, 2017). the impact of uncertainty was especially severe on big banks, which suffered a huge increase in liquidity risk due to the mass withdrawal of bank deposits until they relocated. other well-known companies of different sectors, including auto, distribution, food, fashion, pharmaceuticals, and others, decided to maintain the sites of their hq despite the high level of political uncertainty. even though it was a risk, many companies decided to change the location of their hq and a large number of other companies decided to stay. this provides a database of great value to be able to analyze the phenomenon of the location of the headquarters of companies in troubled times. based on this data, the present research tries to answer the following research questions: • which reasons/conditions were necessary or sufficient for the firms to maintain hq in catalonia in a period of high economic and political uncertainty? • were the reasons the same for all the companies that maintained their hq? in line with other authors who study location problems, instead of isolating regional factors, the present research addresses the problem in a holistic manner (cui et al., 2020) using fuzzy-set qualitative comparative analysis (fsqca) methodology (ragin, 2008). the methodology permits to empirically identify and interpret the identity, socio-psychological, and economic configurations associatthis study identifies the necessary and sufficient conditions to relocate firms’ headquarters (hq) under circumstances of high political and economic risk (the illegal referendum of catalonia in 2017). one of the most promising advances in the discussion of relocation decisions lies in combining non-economic conditions with traditional production factors. we use fsqca methodology to test the model. qca is a method based on set theory in which the outcome depends on combinations of elements, that have the nonlinear property and permits that certain conditions act in opposite ways under different circumstances. using a database of 42 companies of different sectors, 28 of them that maintained hq and 14 that relocated, the study provides evidence that family firms under similar circumstances may make decisions to stay or relocate as a function of the origin of the founders and the production factors of the relocation region. second, we found that relocation decisions of subsidiaries under political and economic uncertainty are not affected by economic factors and there is inertia in their behavior. mariano méndez-suárez http://www.smallbusinessinstitute.biz http://www.jsbs.org 2 m. méndez-suárez journal of small business strategy / vol. 31, no. 1 (2021) / 01-09 ed with the outcome of the permanence of the firms hq in catalonia. the methodology infers causality from set-theoretic relations rather than correlations (fiss, 2011; ragin, 2008). the fsqca provides enhanced methodological rigor to multi-case analysis by allowing the researcher to systematically analyze a far greater number of cases than can be subjectively assessed (fainshmidt et al., 2017). the present research makes several important contributions in the design of the propositions, because it acknowledges the nonlinearity property of configurational approaches (fiss, 2007; meyer et al., 1993), so variables found to be causally related in one configuration may act in the opposite way in another configuration causing the opposite outcome. that is, under the same circumstances, similar environments, and political-economic situations. the same condition may cause firms to make opposite decisions, to either maintain or relocate hq. additionally, following the call from jain et al. (2016), we include the impact of the governance structure, family firms and subsidiary, to determine location choice. additionally, this study contributes to extant literature by identifying the different sets of conditions that explains the different motives and typologies of firms that maintain hq sites in periods of high political and economic turbulence. the article is organized into several sections. the next section provides the theoretical background to support the research propositions. the data and methods are presented in the third section, followed by a discussion of results in the fourth section. finally, concluding remarks are presented. theoretical background to select the conditions that caused the outcome of staying or relocating hq, this study acknowledges the limitations of considering only economic factors (musteen, 2016) and integrates non-economic conditions such as those related to the origin and if the firm is a family business or not. conditions related to the firm’s position towards separatism, including support for independence and the referendum and purely economic conditions, as if the firm is a subsidiary of a multi-site firm and purely economic factors as those represented by the european regional competitiveness index of the region in which the hq are located after the outcome decision. in the design of the propositions, the present research acknowledges the nonlinearity property of configurational approaches (fiss, 2007; meyer et al., 1993), so variables found to be causally related in one configuration may be unrelated or even inversely related in another. that is, the same condition may cause firms in similar environments to respond differently to the situation created by the referendum and either to stay or relocate its hq. origin and family business empirical evidence suggests that for the largest firms the corporate head office mostly remains located in the original home base irrespective of the firm’s subsequent growth in geographic footprint (coeurderoy & verbeke, 2016). most founders are people embedded in their home environments, with personal ties, close to family and friends (meyer & benito, 2016) and preserving their corporate identity (desai, 2009). in fact, firms are deeply rooted in their home countries, to their customers, employees, investors and suppliers (ghemawat, 2011). there is evidence that founders have a substantial impact in the inertia of companies to maintain their original hq location (lussier & sonfield, 2009). business people develop an emotional attachment to their place of origin and feel responsible toward the community that enabled them to grow (meyer & benito, 2016). furthermore, family firms are usually part of the social network at the local level, sponsoring associations and activities related to the community and pursuing the welfare of the locality (berrone et al., 2010) and relating the firm’s success to the origin of the founders (castillo & wakefield, 2006). regarding risks, family firms are likely to place a high priority on maintaining family control even if this means accepting an increased risk of poor firm performance. they may also act more conservatively by avoiding business decisions that may increase variability even at the price of a business failure in the future (gómez-mejía et al., 2007). research based on behavioral economics has empirically shown that family firms’ risk willingness or risk aversion depends on the scenario and the way in which each scenario might threaten these firms’ priorities (llanos-contreras et al., 2020; stieg et al., 2018). these arguments lead to the following proposition: proposition 1. the origin of the founders is relevant and has a positive influence in the decision to maintain its hq. being a family business may influence the decision to stay when considering the roots of the family but also may influence the decision to relocate considering the perceived risks for the business. support for independence and the referendum catalonia is a territory where part of the population declares a catalan national identity, defined as the attachment that subjectively links individuals to the nation (rodon & guinjoan, 2018). although the support for independentism and the referendum was not majoritarian, the stronger association with catalan identity made some business associa3 m. méndez-suárez journal of small business strategy / vol. 31, no. 1 (2021) / 01-09 tions give explicit support to the referendum and independence (el nacional, 2017). on the opposite side and because of the polarization of society regarding those issues, other associations or companies declared against the referendum and independentism. for some companies, the institutional support for the referendum may be considered a decrease in quality of the legal and regulatory regime and make them consider relocating their hq. however, other companies, which explicitly support the referendum, may consider this fact as a positive change in the regulatory and legal regime. the configurational approach supports the apparently contradictory conditions that may lead to opposite outcomes, leading to the following proposition: proposition 2. support for independence and the referendum may be relevant to the decision of maintaining their hq, but for companies not supporting the referendum nor in favor of independence, it may be relevant to make the decision to relocate their hq. subsidiary and regional competitiveness index there are important reasons to maintain the location of subsidiaries for multi-site firms, such as the relations with local suppliers and customers (mccann & mudambi, 2005). other key aspects in the location decisions are the closeness to the different sites, to minimize transport costs, or those related to management optimization around the world (desai, 2009). for the owners of subsidiaries, the decrease in institutional quality in the host region increases the likelihood of relocation to another place, moving away from local governments with unfavorable policies that increase the institutional uncertainty (valentino et al., 2019). regarding factors of production, previous research finds relevant to the location decision their abundance and quality including the physical, human and financial resources available to firms in a given region. the quality of infrastructure provided by the economy’s transportation, communication, education and healthcare systems, as well as access to advanced factors of production, such as a scientific base and highly skilled labor (cui et al., 2020). additionally, relevant factors include the quality of air services, proximity to large markets and specialized providers and the availability of skilled labor (bel & fageda, 2008). the regional competitiveness index (rci) in europe analyzes the quality of those factors for regions across the european union measuring, with more than 70 comparable indicators, the ability of a region to offer an attractive and sustainable environment for firms and residents to live and work (annoni & dijkstra, 2019). these arguments lead to the following proposition: proposition 3. being a subsidiary of a multi-site company is relevant to maintain its hq. considering rci is relevant to location decisions. method data based on the analysis of the main corporations that operated in catalonia prior to the year 2017, we selected 42 companies in eleven sectors, 28 of them with the outcome of interest that maintained their hq in catalonia, and 14 that relocated. the conditions that influence the decision to remain in catalonia were drawn from the literature review presented earlier and divided into three groups. the first group, related to the attachment to catalonia, includes the catalonian origin, not of the company founders (ori) and if the company was or was not a family business (fam). the second group, related to separatism that includes two conditions, if the managers of the company made public statements in favor of independence (ind) or in favor of the referendum (ref). the third group includes two conditions related to economic decisions, if the company is or is not a subsidiary of a multi-site company (sub) and if the european competitiveness index (rci) represents the economic variables that affect the hq location discussed in the previous section. all the dichotomous variables denoting whether the company is fully in or out (i.e. remained in catalonia or not) have the form of a crisp set (ragin, 2008). to obtain firm-level data to codify the crisp variables, a manual name search using the year 2017 was conducted using three data sources: (1) the companies’ web data sources; (2) the orbis database to ascertain if the firm was a single unit firm or a subsidiary of a multi-unit organization; and, (3) analysis of newspaper information. following rasel et al. (2019), we drew up a list of keywords that represent valid markers for the identified variables (table 1). information on the position of the company about independentism and the referendum and complementary information about the company was then identified through a comprehensive web and archival search of key news sources (e.g., el país, la razón, la vanguardia the fuzzy variable rci corresponds to the hq location after 2017. it is based on the 2019 rci report from the european commission (annoni & dijkstra, 2019) elaborated 4 m. méndez-suárez journal of small business strategy / vol. 31, no. 1 (2021) / 01-09 with data collected on 2017. all the relocation regions except madrid’s community had a rci lower than catalonia. to codify this variable using ragin’s (2008) method, regions with a value of 0.20 or greater are considered as fully in, 0 corresponds to the cross over point, -0.20 or below are considered as fully out (garcia-alvarez-coque et al., 2019, p. 7). table 2 shows the calibration of all the variables included in the analysis. table 1 keyword dictionary and sources keywords news sources sample other sources catalan origin expansión https://www.tous.com/es-es/about/historia family business el confidencial https://www.grifols.com/es/history position on independence el periodico https://www.codorniu.com/es/origenes-cava/ support referendum la razón https://www.sanmiguel.es/historia/ boycott el mundo https://www.planeta.es/es/el-grupo-planeta relocation of headquarters crónica global https://www.oryzon.com/es/empresa/resumen public statements about independence la gaceta https://www.cuatrecasas.com/es/firma.html catalan origin el economista https://www.celsagroup.com/conocenos/companias/ company family europapress https://www.ferrero.es/una-historia-familiar independentism bolsamanía referendum el español libertad digital el país note: keyword spanish translation by the authors table 2 calibration table outcome/conditions codification fully in crossover fully out max min mean std. dev. stay (outcome) crisp value 1 0 1 0 0.67 0.47 ori crisp value 1 0 1 0 0.50 0.50 fam crisp value 1 0 1 0 0.43 0.49 ind crisp value 1 0 1 0 0.14 0.35 ref crisp value 1 0 1 0 0.12 0.32 sub crisp value 1 0 1 0 0.43 0.49 rci fuzzy value 0.2 0 -0.2 0.30 -0.88 -0.15 0.27 analysis we performed the analysis using the fsqca software (ragin, 2016) and the r package setmethods (oana & schneider, 2018). this methodology is widely used in different studies (bell et al., 2014; crilly et al., 2012; llanos-contreras et al., 2020; mas-verdú et al., 2015; palacios-marqués et al., 2017; stieg et al., 2018) and has a strong theoretical development (ragin, 2008; schneider & wagemann, 2012). a configurational perspective is especially suited to analyze the problem at hand, because the decision to maintain or relocate hq depends on the alignment or conflict among interdependent attributes (misangyi et al., 2016) and the outcome may have more than one cause or even the combination of different conditions. additionally, fsqca allows nonlinear relationships to be analyzed: individual causal configurations may have different or inverse effects on the opposite outcome; more than one condition can lead to the same outcome, because outcomes rarely 5 m. méndez-suárez journal of small business strategy / vol. 31, no. 1 (2021) / 01-09 have a single cause; the outcome can be reached through a combination of conditions; and fsqca permits small samples to be used to analyze multiple conditions (llanos-contreras et al., 2020). the combinations of conditions that are present in subsets of companies that remained in catalonia illustrate the recipes that lead to maintain the hq. to offer additional insights, we also included the configurations sufficient for the companies to relocate hq from catalonia to other spanish regions. the proposed models can be specified as follows: model a: stay = f(ori, fam, ind, ref, sub, rci) model b: ~stay = f(ori, fam, ind, ref, sub, rci) in ‘model b’, the symbol (~) indicates the absence of an outcome. findings and discussion a necessary condition is always present when an outcome occurs, in other words, the outcome cannot occur if the condition is absent. considering the aforementioned attributes, the only necessary condition to maintain the hq in the original location (stay) found in the analysis is not considering the economic factors (~rci) of the location of the hq. the necessary condition has values of 0.93 for consistency, 0.81 for coverage and 0.62 for relevance of necessity (ron), which are above the thresholds of 0.90, 0.60 and 0.60 respectively (thomann et al., 2018). with respect to the negation of the outcome, or the relocation from catalonia to other regions (~stay), the company’s absence of public support for the referendum (~ref) with a consistency of 1. above 0.90, could be the only necessary condition, but ron of 0.18 and coverage of 0.38, below the thresholds, make this condition a trivially necessary condition (schneider & wagemann, 2010) because the companies that relocated did so in part because of the referendum call, and some of them even warned about the relocation of their hq in case the referendum was called. table 3 depicts the values of necessary conditions. table 3 analysis of necessary conditions presence of the outcome absence of the outcome consistency ron coverage consistency ron coverage ori 0.50 0.75 0.67 0.50 0.60 0.33 fam 0.46 0.76 0.65 0.50 0.63 0.35 ind 0.14 0.95 0.67 0.14 0.90 0.33 ref 0.18 1 1 0 0.88 0 sub 0.46 0.83 0.72 0.36 0.65 0.28 rci 0.07 0.80 0.20 0.57 0.94 0.80 ~ori 0.50 0.75 0.67 0.50 0.60 0.33 ~fam 0.54 0.74 0.68 0.50 0.57 0.32 ~ind 0.86 0.33 0.67 0.86 0.20 0.33 ~ref 0.82 0.26 0.62 1.00 0.18 0.38 ~sub 0.54 0.67 0.63 0.64 0.55 0.38 ~rci 0.93 0.62 0.81 0.43 0.28 0.19 note: ori = if the origin of the company founders is catalonia or not; fam = if the company is a family business or not; ind = if the company made public statements in favor of independence; ref = if the company made public declaration in support of the referendum; sub = if the company is a subsidiary or not of a multinational company. rci = european regional competitiveness index corresponding to the region in which the hq are located after 2017. to understand why different subsets of companies maintained their hq, we calculated the different configuration of conditions that are sufficient for the outcome to occur, as well as the configuration of sufficient conditions for relocating their hq. in both cases, the consistency cutoff is 0.80 (bell et al., 2014) with a frequency threshold of 1. from the three possible solutions that fsqca brings, we show the parsimonious and intermediate solution in table 4 using fiss’s (2011) notation and the format of stieg et al. (2018) where the rows represent the different configurations sufficient for the outcome, and the columns the different conditions. with a solution consistency above 0.80 (eng & woodside, 2012) both models are informative, ‘model a’ (0.89) 6 m. méndez-suárez journal of small business strategy / vol. 31, no. 1 (2021) / 01-09 for the outcome of maintaining the hq and ‘model b’ (0.88) for the outcome of relocating the hq. this value means that in both models more than 80% of the cases present the outcome of interest. solution coverage is equivalent to variance explained in a regression; the three configurations of ‘model a’ explain 90% of the cases. in ‘model b’, the coverage decreases to only 50% of the cases. both solutions also show a high level of consistency for each one of the different configurations, i.e. paths, with values above the 0.75 threshold (ragin, 2009). for each one of the causal configurations, raw coverage measures the proportion of cases with the outcome explained by the formula, and unique coverage the proportion of cases explained exclusively by this combination. configurations 1a, 2a and 3a, describe paths to maintain the hq in catalonia. configuration 1a explains 16% of the cases of firms which maintained the hq, and includes companies that publicly supported the referendum with a weak causal relation to the origin of the founders. in this case, the decision to stay is clear because they consider that they are receiving the support of the institutions by calling for the referendum. configuration 2a explains 32% of the cases of the companies that remained in catalonia; firms in which the origin of the founders is catalonia, they are family firms that did not support independentism that compose this configuration. in the case of 2a, this configuration suggests that the linkage to the origin is very strong and that the roots of the founders is an important condition to consider because of the emotional attachment to the place of origin (meyer & benito, 2016). regarding family firms, the decision not to relocate may be related to personal pride and the self-concept of family members, which tends to be intimately tied to the roots of the business and due to fear of a loss of control of the family principals to establish a monitoring system that ensures that non-family executives in distant locations will act in accordance with family wishes (gómez-mejia et al., 2011). the effect of local roots under family ownership blurs the distinction among family, society, and business, as family owners become well known to individuals in their communities, making the decision to relocate harder (berrone et al., 2010). rooted family business owners may choose to take significant risks and accept short run lower performance in order to retain control over their businesses, those risks may be related to the political situation and the uncertainty generated by the referendum (gonzalez et al., 2017). the third configuration for not relocating, 3a, explains 43% of the cases and comprises companies that were subsidiaries and that did not consider the rci of the hq’s location. this configuration may be explained because subsidiaries employing a significant portion of the local population may be deeply anchored in the community (gómez-mejia et al., 2011). this linkage may also be related to factors such as the closeness of the different locations to minimize transport cost or to management optimization around the different sites (desai, 2009). the optimization may influence dismissing economic factors to relocate to table 4 causal configurations for maintaining or relocating hq from catalonia outcome path ori fam ind ref sub rci raw coverage unique coverage consistency solution coverage solution consistency model a: stay 1a ● ⬤ 0.16 0.13 1 0.90 0.892a ⬤ ⬤ ⊗ 0.32 0.29 0.90 3a ⬤ ⊗ 0.43 0.43 0.86 model b: ~stay 1b ⬤ ⬤ 0.21 0.21 0.77 0.50 0.88 2b ⬤ ⊗ ● 0.28 0.28 0.86 note: as per fiss’s (2011) notation, the solutions are grouped by their “core” structures, where filled circles (⬤) indicate the presence of the condition; crossed-out circles (⊗) indicate the absence or negation of the condition. large circles indicate a core condition (i.e., the condition appears in both the parsimonious and the intermediate solution) that exhibits a strong causal relationship with the outcome. small circles indicate peripheral conditions (i.e. the condition only appears in the intermediate solution) that exhibit a weak causal relationship with the outcome. blank spaces indicate a “don’t care” situation in which the causal condition may be present or absent (i.e., it is irrelevant). ori = if the origin of the company founders’ is catalonia or not; fam = if the company is a family business or not; ind = if the company made public statements in favor or independence; ref = if the company made public declaration in support of the referendum; sub = if the company is a subsidiary or not of a multinational company. rci = european regional competitiveness index corresponding to the region in which the hq are located after 2017. 7 m. méndez-suárez journal of small business strategy / vol. 31, no. 1 (2021) / 01-09 places with higher rci. configurations 1b and 2b describe the causal configuration of the companies that relocated their hq from catalonia. configuration 1b explains 21% of the cases in this situation and comprises family businesses that considered the rci of the place in which they relocated. in this case, the risk management reaction of family firms depends on the scenario and the way in which each scenario might threaten these firms’ priorities (llanos-contreras et al., 2020; stieg et al., 2018). this may imply that for family firms taking the risk of relocating their hq this will guarantee the long-term survival of the firm (gonzalez et al., 2017). this configuration, as opposed to 3a, includes the analysis of rci of the destination site, and the consideration of economic factors to relocate to places with higher rci representing the ‘traditional’ sources of location advantages (i.e. agglomeration economies, market access and labor market conditions), or choosing locations with lower rci that could be more attractive due to lower wage levels (strauss-kahn & vives, 2009). configuration 2b explains 28% of the cases comprise of companies in which the origin of the founders was catalonia, but did not support the referendum and with a weak causal consideration of rci of the destination site. this case may include companies with strong roots in catalonia but opposed to the political situation and the movement may be related to the increase in risk caused by political uncertainty. conclusion our study explores six relevant antecedents – origin and family business, support for independence and the referendum, and subsidiary and rci relevance – with the purpose of revealing different causal configurations that could explain the decision to maintain or relocate the hq in a period of high economic and political uncertainty. based on the results of the analysis, with fsqca, we found the existence of three different paths for maintaining the hq and two different paths to relocate. our data and analysis not only shows that there is more than just one single path to maintain the hq in catalonia, but that we were also able to identify clear differences in those paths considering corporate governance by differentiating between family and non-family firms. additionally, with the use of fsqca, the study captured the nonlinear nature of configurational analysis with the same conditions causing firms in similar environments to respond differently that is either to stay or relocate the hq. this nonlinear nature of complex configurations is affected especially by the conditions of origin and family business and helps to explain the behavior of firms that maintained their hq and firms that relocated. the present research adds insights for the governments of origin and destination regions when problems of relocation arise considering that the influencing factors for a company to move their headquarters are multi-layered. the article contributes to a better understanding of the relevance of the origin of the company and if it is a family company or not in the relocating decision. from our findings, in the decision to stay, the critical role of the origin of the company, and being a family business without support for independence for staying in catalonia emerges (configuration 2a). continuing with the decision to stay, this study found evidence, contrary to previous research (baaij et al., 2015; holt et al., 2008). the role of different economic variables, such as taxes, political situation, services or clusters for some companies, are not so relevant in the decision to locate their hq, especially when the firm is a subsidiary of a multi-site firm (configuration 3a). our study also contributes to the relocation literature highlighting the importance of the economic factors when relocating for family firms (configuration 1b). more research is needed on relocation strategies in the case of situations of high political and economic risks; the present paper studied only a small set of companies that maintained or relocated their hq, but the information at hand is much richer, considering that at least 3,000 companies relocated their hq from catalonia versus about 600,000, which remained. another limitation is that from the companies analyzed, all of them relocated to other regions of spain, but not to other surrounding countries. acknowledgements the present research was supported by esic business & marketing school under project grant 1-m-2019 references annoni, p., & dijkstra, l. 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(2019). leaving home: an institutional perspective on intermediary hq relocations. journal of world business, 54(4), 273–284. https://doi.org/10.1016/j. jwb.2018.08.004 strategy pre-export planning and start-up export performance for small electronics manufacturers philip d. olson university of idaho newell cough boise state university donald w. bokor business consultant abstract an increasing number ofsmall businesses are seeking customers in foreign countries. at this time, however, out knowledge of small business successful export practices is limited. to increase our export understanding, ii has been suggested that research should examine in more depth the relationship between export planning and performance. based on a'sample ofeighteen small firms in the electronics industry, weak suppom was found for the hypothesis ihat the level offormal export planningis positivelyrelated to export performance. areas for future research and limitations of the study are also discussed. introduction a growing number ofbusinesses are becoming involved in the international area. that is, firms today are increasingly seeking customers in foreign countries rather than just domestic ones. this is true even for small businesses. a recent survey conducted for the small business administration "revealed that 37 percent of u.s, firms with less than 500 employees are engaged in exporting, and that roughly 25 percent of all exporters, or more than 16000 firms employ fewer than 100 people" (agmon & drobnick, 1994, p. 9). thus, a significant proportion of small businesses export and a significant proportion of exporters are small businesses. the fact that small businesses have been exporting has stimulated researchers over the years to conduct studies in this area. our understanding of small business exporting, and exporting in general, however, is still limited (aaby & slater, 1989; kamath, rosson, patton & brooks, 1987; miesenbock, 1988). indeed, arer over twenty-five years of research, our knowledge and explanation of successful export practices is still rather fragmented and unclear. i to increase our export understanding, research on the export planning-performance relationshipwould appear to be important. past studies on this topic are limited because early export research found that export pre-planning was rare (bilkey, 1987). some researchers (aaby & slater, 1989;ayal & raban, 1987; bijmolt & zwart, 1994), however, have suggested that planning is an important factor for success in exporting and that additional studies are needed. the purpose of the current study is to examine, from a strategic management perspective, the export planning-performance relationship for a set of small electronics manufacturers. background a number of studies have been published on the planning-performance relationship in the strategic management iield. most of this research has focused on large firms and their domestic rather than international operations. consequently, in the current study planningperformance research of large firms is reviewed first before turning attention to small business strategic managementstudies and export studies. also included in this section is information about formal export planning conceptual and methodological issues. plannin -performance research lar e business tudies. among the schools of thought on strategic management (mintzberg, 1990), there is general agreement about the difference between strategic content and process. content research has focused on specific decisions: choices of entry and exit; product and market differentiation; and degrees of vertical integration, diversification, and interfirm cooperation. in contrast, process research has dealt with the development (formulation) and use (implementation) of strategies (pettigrew, 1992). noting the logical framework that relates formulation, strategic content (choice), and implementation to performance, it is clear that the role of process activities in strategic management is substantial of primary interest in this study is the relationship between export strategy process activities and export performance. strategy process research can be divided into a number of major divisions. huff and reger (1987), in their review of the literature, discuss eight classes, one of which is planning practices. early work in this area has focused on whether certain planning methods enhance firm performance, and a significant issue in this stream of research has been the impact of "formal" planning on firms'erformance (robinson and pearce, 1984; shrader, taylor & dalton, 1984). formal is defined in different ways by researchers. armstrong(1982) mentionsthe use ofan explicitgoal achievementprocess,while fredrickscn (1984) emphasizes the use of a comprehensive planning process. although a number of empirical studies support the positive effect of formal planning on performance (fredrickson, 1984; karger & mal ik, 1975; pearce, robbins & robinson, 1987; rhyne, 1986),some strategy researchers have called attention to the pitfalls of formal planning. findings of negative relationships between formal planning and perfonnance are attributed to the dysfunctions of over-formalization, inertia, and institutionalized responses. bresser and bishop (1983)proposed that a high degree of formal planning may cause conflict within the organization, impeding successful performance. mintzberg (1994) warned of the "fallacy of formalization," maintaining that formal strategic planning is not identical to 2 strategic thinking. the former can process more information, but cannot adapt or learn; its rigidity may adversely affect performance. it may be preferable to "loosen up the process of strategy making rather than trying to seal it off by arbitrary formalization" (mintzberg, 1994, p. 114). small business studie . the themes found in studies of large businesses are also observed in small and entrepreneurial businesses. for instance, covin and slevin (1991)have proposed a model of the relationship between a firm's entrepreneurial strategy process and its performance. further, lyles, baird, orris and kuratko(1993) have provided a review of work supporting the positive relationshipbetween planning activities and the performance of small businesses. and in limited corroboration of mintzberg's warning, small business researchers have found contradictory results on the effect of formalized planning. hand, sineath, and howle (1987), in an empirical study, determined that formal prior planning had a negative eitect on the performance of retail service outlets. ~e* d .r h h *p pl g-p f i i hpf ii d, in particular, small firms is limited. early export research showed that random eventsunsolicited export orders —played a major role in the initiation of exporting by firms (bilkey, 1987) and that export pre-planning was relatively rare (brasch & lee, 1978). more recent, however, are works that suggest planning is an important prerequisite for success in exporting. ayal and raban (1987) state that, for firms developing high technology products with short life cycles, waiting for unsolicited export orders is not feasible. that is, in the context of dynamic industries or environments, selecting foreign markets, adapting products to these markets and determining ways to enter foreign markets have to be planned before a product is developed. further, aaby and slater (1989) and bijmolt and zwart (1994) suggest that planning in a systematic way appears to be an important discriminatorbetween successful and unsuccessful exporting iirms. other researchers, however, have not found a positive relationship (miesenbock, 1988). ex ort plannin conce tual issues one issue that can lead to variability in research results is the use of diiyerent definitiom of the formal planning concept. hence, in each planning-performance study it is important to define the concept. it has also been proposed in the strategic management field (bracker, keats & pearson, 1988)that formal planning be conceptualizedon a continuum, ranging from a low to a high level. this suggestion is consistent with a position taken by suzman and wortzel (1984) in their study of export marketing (i.e., planning) strategies. these authors proposed that firms can adopt, from a continuum that closely corresponds to a strategic management formal planning continuum, any one of three export marketing strategies. ex ort plannin methodolo ical issues given the early stage of research that links exporting with strategic management issues, not only are. there conceptual and theoretical modeling concerns (i.e., concerns about definitions and which export strategic management issues/concepts should be studied as well as how these issues/conceptsare related) but there are also methodological issues that impact study results. two such research methodological issues are: the operationalization of the 3 export formal planningconcept(measuring levels of formal planning); and timing periods for the variables (appropriate measurement lags). 0 erationalization of formal lannin . one way to gauge the formality of planning is to measure the degree to which the planning process generates written documentation. this formalitymeasurecan be tracedto weber's(1947) concept ofbureaucracy. basically, weber proposed written documentation as a bureaucratic tool to help large organizations become rational and efficient. most small business researchers have continued this convention of using written documentation(e.g., the completeness of a business plan) to measure formal planning (e g., bracker keats & pearson, 1988; gilmore, 1971;robinson & pearce, 1983; still, 1974). in these instances, planning is often measured either as a dichotomy referring to the absence or presence of a written plan, or as a planning corn prehens iveness cont in uum where such levels as no written plan, partial written plan, and complete written plan are included (pearce, freeman & robinson, 1987). some researchers, however, question whether large firms prescriptions are relevant to small firms (robinson, 1982). in this vein, data exists which suggests that written business plans are not being used as extensively by small businesses as business experts might believe (parks, olson & bokor, 1991; shuman, shaw & sussman, 1985). for example, parks, olson and bokor found in a survey of 120 inc. 500 firms that only 17.5%had a complete written plan, 32.5% had a partial written plan, and 50% had no written plan at start-up. another way to operationalize the formality of planning is to measure the degree to which external and/or internal counsel is relied upon in the strategic planning process. robinson (1982) has proposed that "outsider" involvement in planning indicates a serious commitment to a formal strategic planning orientation in small firms. outsider involvement refers to both boards of directors and management consultants —people who would appear to be able to supplement a small firm leader's lack of skills in, and time for, formal planning. robinson found that profitability and improvement in effectiveness were higher for small firms which engaged in outsider-based strategic planning than for firms which did not. timin ofmeasurement. buildingon past planning-performancestudies(e.g., schwenk & shrader, 1993;shrader, taylor & dalton, 1984), as well as on past export studies (e g., aaby & sister, 1989; madsen, 1987), one caveat in the export planning-performance research area concerns the use of cross-sectional data where a firm's values for its dependent variable (perfonnance) and its independent variable (planning) are from the same point in time. this practice is questionable because the results or outcomes associated with a plan that is, for example, developed in period one may not be observed until period two or even later. instead, studies relating data about past events to more recent outcomes require a longitudinal design. impleinenting a longitudinal design to collect information often means a choice between using a panel survey (administering a questionnaire at different points in time) or a retrospective questionnaire. limitations of panel surveys include: additional planning and patience on the part of researchers; a longer delay until data are available for analysis; higher research costs; and participants being less willing to commit themselves and their organizations to multiple data gathering points in time. 4 these limitations may be avoided by using a retrospective survey. however, objections have been raised concerning the construct validity of variables measured by recall responses (brockner, grover, reed, & dewitt, 1992). several issues impact the accuracy of recalled in formation and hence, its validity (auriat, 1993;howard & dai icy, 1979; van de ven, 1992). factual information is more likely to be recalled accurately and without biases. the saliency of a past event —its importance as a turning point or landmark, the degree to which it provokes emotion, and its financial impact-is positively associated with recall accuracy. also, a questionnaire constructed in chronological order affects positively participants'ccurate retrieval of past information. d~hhhh two contextual factors that can influence the effectiveness of export formal planning strategies are a firm's environment and its goals. contextual issues have become an important strategic management research area in recent years because of inconsistencies in past study results. pearce, freeman and robinson (1987) suggest that researchers conducting strategic planning studies should include information about environmental and flrm contextual issues. of interest in this study are those firms that operate in a dynamic environment and that have growth as a goal. given this context and the prior export formal planning-performance information, the following hypothesis is proposed: hi: level of formal export planning is positively related to export performance for small iirms that operate in a dynamic environment and that have growth as a goal. methodology ~sam le a sample of firms was obtained by surveying small, exporting, manufacturing firms (less than 100 employees at export initiation) in the electronics industry (standard industrial classification(sic) code 36). the firms were located in idaho and eastern washington. four trade directories were used to obtain a list of 55 firms: the idaho manufacturin direct (19933, h id h i «i i d lh 3993-l9 4319933, h ~ld h tr de direct 1994-1 5 (1994), and the s okane washin t n rea ex orters directo ~194i 5 (1994). information for the study was gathered through a structured telephone interview with each firm's ceo or some other knowledgeable seniorexecutive during the last part of 1993 or early part of 1994. the interview was structured in the sense that each interviewee was asked to respond to a set of pre-determined questions. there were two time periods of interest for the current study: the year immediately preceding export initiation (pre-export), and the year following export initiation (export start-up). of interest during the pre-export year was in formation about level of formal planning, and of interest at the end of the export start-up year was export performance. hence, a time lag existed between export planning and performance measures to allow for implementation of export plans. 5 in this study, one contextual condition that firms needed to satisfy was to exist in a dynamic external environment at export start-up. although many exporting firms in the electronics industry were thought to exist in dynamic environments, some firms may have been part of an industry sub-category that was considered stable at their export initiation. in like manner, not all exporting electronics firms would necessarily have growth as a key goal during export start-up, the other contextual condition for the study. accordingly, inforination was gathered from surveyed firms about these two factors, and seven of the firms did not meet one or both of these contextual conditions. on that account, they were excluded from the study. eighteen of the 55 firms met both contextual conditions and also agreed to participate in the study for a response rate of 33%. in terms of age and size characteristicsof the 18 firms, they were on average 13 years old and they had an average of 29 employees when they were interviewed. note, however, that most firms had began exporting earlier than the year in which the interviewtook place. in fact, during their first year of exporting the firms were on average eight years old and they had an average of 14 employees. thus, the typical firm in the sample started exporting five years before the interview was conducted and doubled in work force size. to detenninethe representativenessof the 18 lirms in the sample, when compared to the remaining 35 firms that did not participate in the study. one test was performed. in particular, a t-test was conducted to determine if a difference existed between the two groups in employee mean size. no statistical difference was observed. a test to determine if a difference existed between the tsvo groups regarding mean age was not conducted because the ages for some of the 35 firms that were not in the sample were not available in the trade directories. measures building on armstrong(1982), formal planning is defined in the current study to be the use of an explicitgoal achievement process. further, it is proposed along the lines of bracker, keats and pearson(1988) that formal planning be conceptualized on continuum ranging from a low to a high level of explicitness. given this definition of formal planning and the accompanying notion of a continuum. it is suggested here that the continuum be sub-divided into three export planning levels: reactor, followerand explorer. the rationale for these levels builds on suzman and wortzel's (1984) export marketing strategies. firms adopting the reactor stance undertake limited or little formal export planning. another way to characterize these firms is to state that they are "reactive" exporters because their foreign business arises from unsolicited orders. as such, these firms begin with very little investment in exporting. the reactor stance or planning strategy is not likely to be highly effective for firms pursuing growth as a goal. suzman and wortzel (1984) state that this stance should usually be viewed as a first step leading to a higher level of export involvement by a iirm's leaders. unsolicited orders are unpredictable and uncertain; all of a firm's foreign orders may originate from one country, or they may be diversi fied geographically. although growth is possible with 6 this strategy, investing time in a higher level of formal planning (i.e., spending time gathering information about and analyzing different foreign markets, in a more explicit, systematic manner) would offer a better chance for growth. the follower stance is one where some or moderate formal planning takes place before export decisions are made. in this case foreign business is likely to result from both planned and unplanned (unsolicited) orders. firms employing this strategy, when compared to the reactor stance, can be characterized as "active" exporters. planning in this situation frequently revolves around pursuing foreign opportunities that a firm's domestic competitors are exploiting. implementing this strategy requires more investment in time than the reactor strategy. the explorer planning level is opposite the reactor class. in this case extensive formal planning is undertaken prior to important export decisions and, like the follower strategy, foreign business will probably result from both planned and unsolicited orders. while the reactor strategy is reactive and the follower is active, the explorer strategy is "proactive" in the sense that leaders in a firm employing this strategy pioneer the search for new foreign customers. because of the pioneering nature of this strategy, a considerable investment in time isorennecessary. this investment, however, could lead to significant foreign sales in a new market which would not have to be shared with other exporters for some time. firms with growth goals in dynamic industries probably find this strategy ettective. that is, dynamic industries often mean short product life cycles; hence, selecting foreign markets, adapting products to these markets and deciding how to enter the foreign markets have to be planned early, if a firm desires to maximize its products'ales (ayal ec raban, 1987). information used to measure each firm's level of export formal planning was obtained by asking each survey participant to respond to two questions. the first question asked if, in the decision to first export, counsel had been sought from advisors (e.g., stakeholders, trusted experts, consultants,or members from a firm's board ofdirectors). the responseswere: i) no, and 2) yes. the second question asked if a business plan —a written document summarizing strategic information about the firm including an industry analysis, a marketing plan, etc.-that included exporting had been developed prior to export initiation. the responses were: i) no business plan that included exporting was developed, 2) a partial business plan that included exporting was developed, and 3) a complete business plan that included exporting was developed. using these two questions, it was decided that the reactor level of formal planning would be evident if firms did not seek counsel from advisors and they had no or just a partial business plan that included exporting prior to exporting. further, the follower level of formal planning would exist if firms did not seek counsel and they had a complete business plan; or if firms did seek counsel and they had no business plan. finally, the explorer level of formal planning would be evident if firms did seek counsel and they had a partial or a complete business plan. the performance measure used for the firms was the percentage of export sales to total sales (export intensity) at the end of the first year of exporting. export intensity is a frequently used performance measure in the export iield (aaby & stater, 1989). 7 survey participantswere also given the opportunity to ofter additional details about their initial export experiences. in particular, another survey question asked them to respond with any other information they deemed important about their export start-up planning-per formame relationship. results in table i, frequencies, export intensity means, and export intensity standard deviations are presented for the three formal export planning levels. observe that there is an increasing trend in the export intensity mean values from reactors to explorers. however, a test of significance concerning these mean values (anova) was not conducted for two reasons. first, only two of the 18 firms were at the explorer level. second, a test was conducted concerning equality among the three variances (an anova test assumption), and it was rejected at the .05 level of significance. table i reactor follower and ex lorer plannin level results planning export intensity export intensity level n mean standard deviation reactor 9 6.93 7.71 fo i i ower 7 14.43 11.68 explorer 2 19.15 20.01 the next step in the analysis was to combine the explorer and follower levels into a single formal planning level. this classification scheme is consistent with macharzina and engelhard's(1991) comparison of reactive (reactor) and active (follower/explorer) exporters. in table 2, frequencies, export intensity means, and export intensity standard deviations are presented for the adjustedclassificationscheme. the dilterence between the means, based on a t-test, was significantat the .io level. hence, there was weak support for the hypothesis that the level of export formal planning is positively related to export performance. table 2 reactive and active plannin level results planning export intensity export intensity level n mean'tandard deviation reactive 9 6.93 7.71 active 9 15.48 12.38 'ifference between means is significant at less than the .10 level. 8 a final study result concerned the open-ended responses that survey participants provided about their salient export start-up planning-performance experiences. most respondents did not comment on this question. of those who did respond, one ceo stated that it was not written plans that contributed to this firm's high export intensity but "attentiveness to customers'needsp "carefully following our noses," and "communicating with customers in order to change designs and tactics." two other surveyed individuals replied that collaborationswith other exporting firms were extremely helpful during their export start-up period. another participant commented that his initial export plan changed after he found that resourcesdid not exist to implement the plan. he mentioned further that this change in plans, in turn, influenced his export performance. hence, his position was that planned or "intended" ideas should not always be viewed as being "implemented" or carried out. discussion plannin level pre uencies consider first the number of firms at different planning levels in table i and, in particular, the finding that only two of the 18 electronics firms were at the explorer level. it was originally believed that more firms would be classified at this level, given that these businesses operated in dynamic environments and that they had growth as a goal. it may be, however, that other contextual factors not considered in this study might have an impact on the frequency of firms at difterent levels of formal planning. for example, keats and bracker (1988)have proposed a contingency model of small firm performance within which the effect of planning (behavioral strategic sophistication) on performance is moderated by managerial traits (cognitive strategic sophistication) and by environmental characteristics (task environment factors). maybe future export research should also control for managerial traits in addition to environmental and organizational traits. plannin -performance relationshi ~md ii i f *«hl dy'yp h i d h i«h ly k support was found for the proposed positive relationship between export formal planning and performance. perhaps, as was mentioned when discussing the frequency data, the model employed in this study was not properly specified, and more complex models are needed when studying the export planning-performance relationship. again, other contingencies, such as managerial traits and forms of rivalry, might be explored in future export studies. .a h p lhl *pl lhl dy'yp h i i ( d also the frequency findings) concerns the measurement of formal export planning. building on prior background information, the existing convention of using written documentation(e g „ a written business plan) to measure export formal planning may not be appropriate for some or even many small firms. if this is true, using it to measure formal planning would not provide meaningful information. in a post hoc sense, this suggestion was empirically explored by first separating the two survey questions used to measure formal planning and then examining each question with 9 respect to its relationshipwith perfonnance. the results of the relationship between levels of written business plans and export sales intensity are presented in table 3. the results were not significant. table 3 written plan results planning export intensity export intensity level n mean'tandard deviation no wrinen plan 14 10.89 11.09 partial or complete written plan 4 12.33 14.13 'ifference between means is not significant at less than the .10 level. 'wo of the firms had partial written plans and two had complete written plans. the results of the relationship between the use of advisors (the other formal planning measure) and export sales intensity are presented in table 4. the findings here were significant. given these analyses, it is suggested that formal planning measures for small firms also be a topic of additional study. table 4 advisor results planning export intensity export intensity level n mean'tandard deviation did not use advisors ii 6.67 8.01 used advisors 7 18.33 12.41 'ifterence between means is significant at less than the .05 level. to further document concerns about the measurement of formal export planning and. in particular, the use of written plans, consider robinson and pearce's (1983) study. they found that written plans may be de-emphasized in small firms for reasons other than that the firms did not have time to plan, or that they viewed planning as unimportant. interestingly, they found some firms de-emphasized written plans to "deformalize" planning. perhaps the use of written documentation to measure planning in small firms does not measure the true intent ol'planning. ther plannin -performance i ue in this section the open-ended responses that were presented in the results section concerning survey participants'nitial export experiences are discussed. 10 customer focus. the insight by one ceo in the study that it was not written plans that contributed to his high export performance but rather "attentiveness to customers'eeds," corroborates a recent management literature focus. peters and waterman (1982), for example, list "staying close to customers" as an attribute of excellent firms. a customer focus is also consistent with recent advances in total quality management (tqm) that suggest meeting or exceeding customer needs is the centerpiece of successful businesses(gouillart & sturdivant, 1994). naumann and shannon (1992) extend this concept by identifying customer-driven marketing as the most important management innovation for competing in the 1990s and beyond. this innovation is based on total customer integration (tci) and it includes the involvement of representatives from key customers in a firm's product design process. the goal of using both tqm and tci concepts within firms is to help them meet or exceed their customer needs and expectations. tqm and tci concepts suggest that a high level of formal planning, in the traditional sense, may not lead to improved performance when a iirm does not both acquire accurate in formation about and achieve active involvement with its customers. on the other hand, a low level of formal (written) planning may exhibit above average performanceas long as firms stay close to their customers. because of the potential relationships between tqm, tci and export formal planning, future studies might also explore these linkages. researchers who decide to move in this direction, however, face the fact that staying close to foreign customers is likely to be more diflicult than domestic ones. some research suggestions here are: at the conceptual level, include as part of the formal planning concept the notion of staying close to customers; and concerning measurement issues, examine ways to gauge the notion of staying close to foreign customers. ~chb id .a h t hy b i f * f t about their experiences was that their initial export orders were linked to past collaborations with other exporting firms. one executive reported instances where foreign customers had become acquainted with his firm's product while it was being used by another american firm. another executive stated that his iirm's product complemented a product being exported by a larger iirm with extensive export experience. here, an agreement or alliance was established that allowed the small firm to include its promotional material in the export packaging of the larger firm-whose ultimate customers did respond by ordering products from the small iirm. this "piggybacking,"then, was an innovative way to overcome entry barriers in foreign markets as well as being effective at sales generation. because of these two examples, one recommendation for small firms that are active (fol lower or explorer) pre-export planners is to encourage them to seek linkages with firms exporting complementary products or with businesses which use their products overseas. intended versus emer ent trate ies also important, when discussing the planningperformance relationship, is the idea that classifying firms by their initial export planning strategy may imply that exporters become locked into or tied to a particular strategy. in the case of firms using a reactive(or reactor) planning process it would mean the ceos "intended" and "carried out" a strategy to let export opportunities come to them before expending ll resources. in the case of active (follower or explorer) firms it would mean they intended and carried out a strategy that committed resources before foreign orders existed. interestingly, the actual behavior of the sample firms during the investigated time periods (i e., pre export to the end of the first year of exporting) revealed that not all strategic intentions were realized or carried out, an issue which could have had an impact on this study's results. the pertinent point in this discussion is that strategy implementation, in addition to formulation, can influence performance. this point was mentioned by one executive when he commented on his experiences. he not only had developed a business plan that included exporting, but had invested signiflcarx effort in the pre-export period (1991) by: filing two world-wide patents, registering with barclay's bank as an exporter to european markets, and engaging in extensive counseling on export markets for his electronic product. such behavior clearly signalled the intentions of an explorer strategy. but faced with dissonance within his firm, due to lack of resources and organizational control (the export window of opportunity had not changed), the firm's emerging export position quickly became that of a reactor —just accepting unsolicited orders during the first year of exporting. a further twist in this saga, although it is outside the investigated time periods of this study, is that the ceo is currently realigning resources so that the explorer export strategy can again be employed. of further interest here is that this firm's changes can be linked to current strategic management research. mintzberg (1990) argues that intentions and planning can lead to inflexible implementation, he proposes that, in reality, adaptive or emergent strategies may be more successful. adaptive behavior occurs when firms are beyond intentions and in the midst of directing resources toward markets. although the performances of firms with highly vacillatingexport strategies are likely to be mediocre or weak over time, the performances of firms with flexible export strategies that match internal resource strengths with export opportunities are likely to be strong. conclusion study limitations, in addition to those mentioned in the discussion section, include generalizability of the findings, contextual variable measurement issues, and retrospective survey biases. because the sample contained only 18 firms, and further because it was restricted geographicallyand industrially, the current results may have limited applicability to other firms. also, single-rather than multiple-ittm measures were used to obtain information about the environmentaland the goal contextual variables. further, retrospective surveys can be vulnerable to inaccurate and biased recall responses and, hence, cause problems with construct validity. in summary, this study was designed to empirically explore the hypothesis that the level of formal export planning will be positively related to export performance for small firms that operate in a dynamic environment and that have 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(1947). the theory ofsocial and economic organi=ations (a. m. henderson & t. parsons (trans.). new york: free press. 16 assessing the independence of the board chairperson: fact or fallacy? catherine m. daily purdue university dan r. dalton indiana university abstract corporate observers have recently devoted increased effort at encouraging corporations to separate the positions of ceo and board chairperson. the primary rationale driving this action is that board chairpersons who do not also serve as ceo are believed to be more independentfromjirm managementthan are those board chairpersons who also serve as ceo. separation of these positions may be especially important in entrepreneurial firms where the founder often remains active in firm affairs. an investigation of inc. 100 corporations indicates that separate chairpersons do, in fact, differ with respect to tenure as ceo, tenure with the company, stock holdings, and founder status when compared to ceos who serve simultaneouslyas chairperson of the board. on two additional dimensions (extent of familial relationships, inside/outside succession), however, separate and joint ceo/board chairpersons can not be distinguished. introduction the popular press has recently documented an increased attention to ce os who concurrently serve as board chairperson (joint board leadership structure) in their firms. the more notable accounts have primarily focused on large corporations; however, firms of all types and sizes are subject to increased scrutiny on this issue. despite apparent pressure to adopt the separate board leadership structure (the ceo does not also serve as board chairperson), few ceos are eager to sacrifice the control and prestige of holding both of these powerful corporate positions (dobrzynski, 1991 ). ceos of entrepreneurial firms may be particularly reticent to sacrifice the additional measure of control which accompanies the joint board leadership structure (daily & dalton, i 992a). despite increased attention to this issue, relatively few studies have addressed the nature and impact of board leadership structure. the few studies that do exist provide little guidance regarding which structure (joint or separate) best serves firm owners. an additional concern is a predominate focus on large (e.g., fortune 500) firms. those studies which have focused on small and/or entrepreneurial (high growth) firms have yielded conflicting results (e.g., daily & dalton, 1992a, 1993, 1994). 99 it would be fair to state that the majority of corporate observers favor the separate board leadership structure. interestingly, the majority of firms employ the joint structure, in which ceos serve simultaneously as board chairperson. this is apparent whether the firm is large, small, or entrepreneurial(e.g., daily & dalton, i 992a, 1993; lorsch & maciver, 1989). what, then, accounts for this conspicuous divergence of practice and prescription? the rationale repeatedly relied on reflects a common theme: as their roles are potentially conflicting, there is a pressing need for independence between the board chairperson and ceo. a separate structure facilitates that independence.a timeless adage holds that the person doing the "counting" should not be doing the "accounting." despite the prevalence of the independence view to which we have referred, no one has examined the extent to which separate equals independent in entrepreneurial firms. our focus on entrepreneurial firms is driven by a number of considerations. first, strategic leaders are more likely to impact firm processes and outcomes in the relatively smaller firm (eisenhardt & schoonhoven, 1990; reinganum, 1985). smaller firms, for example, are generally characterized by centralized decision making control which is dominated by the ceo (begley & boyd, 1986, 1987; whisler, 1988). the scale and complexity which characterize the large firm often temper the discretion of the ceo and may limit subsequent actions (dalton & kesner, 1983; norburn & birley, 1988). the smaller firm, however, may facilitate ceo power and more narrowly focus firms' planning, core business knowledge, and environmental scanning processes and systems (e.g., baysinger & hoskisson, 1990; smith & gannon, 1987). a second consideration in adopting the separate structure in the entrepreneurial firm is the need for independent oversight. this is a common prescription to those who wish to create and maintain a high growth business (e.g., hartman, 1990). independence may be especially important where the founder is the ceo. even in entrepreneurial corporations, the founder commonly remains active in the management of the firm. one of the reasons investors may be interested in such firms is because of their faith in the founder's ability to effectively guide the organization. a concern with these founders, however, is that they often experience difficulty in separating themselves from the firms they created. this study relies on a sample of entrepreneurial(/nc. i 00) corporations to empirically investigate the extent to which the separate board chairperson (not also serving as ceo) is more independent than the joint ceo/chairperson. this examination may provide some understanding regarding the independence dimensions of ceo/chairperson structures in high growth firms. separate and independent? a primary concern with the joint board leadership structure is that having the same individual serve as ceo and board chairperson encourages the potential for conflicts of interest between management and owners. to address this issue, corporations are required to maintain a board of directors which serves as the representative of shareholders. the board's role can be significantly more difficult, however, when the ceo also serves as board chairperson. without formal separaticn between management and the board, managers may more easily operate in a manner which best serves their interests, often at the expense of shareholders' interests (see 100 e.g., fama & jensen, 1983; jensen & meckling; 1976 for agency theory arguments in support of this point). in this situation, directors may feel unable to "ask the right questions, raise the right issues, or make the right judgments" (dobrzynski, 1991: 124). the separate board leadership structure provides a formal separation between the board and management. this separation is expected to provide enhanced monitoring of managerial actions, effectively tempering the opportunity for managers to pursue actions which are in conflict with the best interests of firm owners (e.g., kesner & dalton, 1986; dayton, 1984). with more effective monitoring, then, directors will direct managers' attention to actions which enhance shareholder (owner) value. in addition to enhanced monitoring, shareholders may benefit from the separate structure as a result of the additional guidance provided by an outside chairperson. walter mardis, a partner with mercer management consulting in new york city, recently commented on this issue for entrepreneurial firms: "the truth is, a lot of companies run into trouble because the ceo believes that he or she can run it totally without any kind ofoutside guidance or help even though it has gotten substantially larger and more complex, and they resist any kind of outside involvement" (geddes, 1994: 69). the joint structure may also simply be a function of the ceo's need for control, which may prove detrimental to creating value for firm owners. c. charlie bahr, president of bahr international inc. of dallas, has provided some perspective on this issue by noting of the positions of ceo and board chairperson: "often the roles are kept combined for the forceful ego needs of the senior person who has not yet decided to yield authority,responsibilityor control,or visibility to other than himselfor herselr' (geddes, 1994: 69). not all observers, however, embrace the separation of these two positions. ce os have strongly advocated the joint structure (lublin, 1992). supporters of the joint structure suggest that combining the positions of ceo and board chairperson provides a unified focus in the firm (anderson & anthony, 1986). this centralized leadership may signal that the firm has a strong leader and eliminates the potential for conflict between the leadership of management and the board since the same individual serves in this capacity. walter mardis has provided some perspective on the perceived benefits of the joint structure as well. he notes that unifying the positions of ceo and board chairperson save the entrepreneurial firms money, avoids conflict from having multiple decision makers, allows for quicker turnaround, and results in improved communication at the senior level (geddes, 1994). still, advocates of the joint structure recognize that independence and accountability may be sacrificed when the ceo also serves as board chairperson. we have identified five indicators which we believe may distinguish board chairperson independence. these include: (i) a succession to the position of board chairper.cn from outside of current officers and directors of the firm, (2) tenure as ceo, (3) tenure with the company, (4) equity holdings, and (5) familial relationships between the chairperson and officers and directors of the firm. each indicator is discussed in tum. ioi succession the chairperson'sappointment from within the organization or from outside the ranks of current officers and directors may provide some evidence of independence from firm management.outside successions, however, are relatively uncommon events (vancil, 1987). in the most common scenario,chairpersonsassume their role either during their tenure as ceo or upon retiring from the position of ceo. these progressions, while prevalent, have been widely criticized by those advocating chairperson independence( e.g., sherman, 1993; wriston, 1993). the primary concern with these typical succession processes is that the presence of an ex-ceo as chairperson may significantly inhibit the incumbent ceo's ability to initiate changes (levy, l 993b; lorsch & maciver, 1989; vancil, 1987). this may be particularly true in the case where the chairperson also founded the firm. it has been reported that founders often exhibit considerable difficulty in making the transition from active management to an oversight position (e.g., sonnenfeld & spence, 1989). in addition to compromising ceo effectiveness, this succession process may impair the effectiveness of the chairperson who may hesitate to provide the appropriate amount of leadership in order to avoid appearing to be power hungry (levy, 1993b). still another potential concern is that the chairperson who ascended from the position of ceo very likely hand picked his or her successor. it is likely in this situation for the chairperson to feel conflicted should the ceo fall short of the board's expectations (vancil, 1987). it would appear, then, that an inside succession to board chairperson may compromise the effectiveness of both management and the board on several dimensions (e.g., sherman, 1993). the far greater frequency of inside successions suggests that there are benefits to having a former executive serve as board chairperson. one such benefit is continuity (vancil, 1987). a second benefit is that the former\:eo may be uniquely qualified to advise the current ceo (sherman, 1993). wriston ( 1993), however, has suggested that no formal structure is necessary to realize this benefit. should incumbent ceos wish the advice of their predecessors, they need only ask. the issue here is whether the chairperson who concurrently serves as ceo goint structure) is more or less likely to be brought in from outside the organization as compared to the chairperson not concurrently serving as ceo (separate structure). if the separate chairperson is more likely to have succeeded to this position from outside the organization as compared to the joint ceo/chairperson, there would be some affirmation of independence. h 1: separate chairpersons will be less likely to have succeeded to their pos1t1on from within the organization as compared to joint ceo/chairpersons. 102 tenure the chairperson's tenure, both as ceo and with the organization, may also provide some evidence of independence. pfeffer (i 982) has found that tenure tends to foster organizational "cohort" groups. cohort membership, especially over an extended period of time, would provide some indication of shared values among group members (alderfer, i 986). these shared values may lead to a sense of allegiance with firm executives (fredrickson, hambrick, & baumrin, i 988). organizational tenure may also increase members' resistance to change by increasing their commitment to established organizational practices and policies (e.g., buchanan, i 974; katz, i 982). here, the issue is whether the separate chairperson differs in the amount of organizational tenure as compared to the joint chairperson. because tenure as ceo is likely to be strongly related to the succession process, we also consider the chairperson's overall tenure with the organization. assessing both aspects of tenure may also be important because distinguishing between chairpersons with no formal ties to the organization as compared to those who have served the firm in some formal capacity may be difficult. it may be, for example, that all chairpersons will have served the firm for some period of time. our approach allows us to assess relative levels of independence between separate and joint chairpersons. h,: separate chairpersons will have less tenure as ceo as compared to joint ceo/chairpersons. h,: separate chairperson will have less organizationaltenure as compared to joint ceo/chairpersons. equity ownership the amount of equity which the chairperson holds in the firm may also provide some evidence of their independence from firm management. consistent with agency theory arguments, increased equity positions should facilitate an alignment between the chairperson and owners' interests (oviatt, 1988). chairpersons with significant ownership stakes in the firm may be more likely to take an active role in monitoring management's performance, particularly since their wealth is directly related to the firm's stock performance. this is an especially salient issue in examinations of entrepreneurial firms where the founder typically maintains both a formal position in the organization and a substantial equity position. not all observers agree, however, that outside directors should hold equity in the finns they serve. some have suggested that in order to remain truly independent, the chairperson should maintain no ties, including ownership, to the firm (see e.g., daily & dalton, 1992b). equity ownership may serve to increase the chairperson's interest and involvement in firm affairs. this increased involvement may ironically erode the ability of the chairperson to behave independently. an additional concern with equity ownership is that it may serve as an entrenchment mechanism, thereby, decreasing the likelihood of shareholder-oriented behavior (daily & 103 dalton, l 992b ). while there is clearly no consensus on the !inn-level benefits to be gained from chairperson equity ownership, the fundamental point is whether the joint ceo/board chairperson has more or less !inn equity as compared to the separate board chair counterpart. h,: separate chairpersons will have less equity holdings in the !inn as . compared to joint ceo/chairperson. familial relationshios the presence of familial ties between the chairperson and officers and other directors of the !inn may also provide some evidence of independence, or lack thereof. the existence of familial relationships would presumably jeopardize the chairperson's independence(kosnik, 1987). few would expect chairpersons whose relatives are officers and/or directors of the !inn to dispassionately assess their contributions. typically, when family and business systems overlap, the family system dominates decision making processes (ward, 1987). the primacy of the family system manifests itself in a number of ways. small family !inns, for example, rely to a lesser extent on fonnal internal control mechanisms to monitor !inn processes and outcomes than do their professionally-managed counterparts (daily & dollinger, 1992). also, the succession process in the family firm is typically dictated by the readiness of the succeeding generation to assume control of the !inn (e.g., vancil, 1987). lastly, familial relationships may also lead to entrenchment and increased family control of the !inn (e.g., morck, sh lei fer, & vishny, i 988). the important distinction here is whether it can be determinedthat ceo/board chairpersons differ in the number of familial relationships as compared to separate chairpersons. sa mole h,: separate chairpersons will be less likely to have familial relationships with officers and directors of the firm as compared to joint ceo/chairpersons. method all !inns listed in the 1993 inc. 100 ranking were considered for inclusion in this study. these !inns were chosen because they are high growth, entrepreneurial !inns. each year, inc. magazine ranks the 100 fastest growing small public !inns according to the following criteria: ( 1) firms must be publicly held, independentcorporations,not subsidiariesor operatirg divisions of other companies; (2) !inns must have gone public no later than december 31, 1992; (3) firms' stock must be actively traded; and, (4) firms must have reported 1988 revenues of at least $100,000 but not more than $25 million (inc. 1993: 140). finns whose 1991 revenues were lower than 1992 and !inns operating in the following areas were excluded from consideration in the selection of the inc. i 00: utilities, oil and gas exploration, banks, insuranre carriers, real estate developers, holding companies, and other investment offices. 104 the focus on public corporations is critical, as it allows for access to the governance data. still, of these 100 firms, 19 did not file a corporate proxy report with the securities and exchange commission for the 1992 fiscal year. the vast majority of these non-filing firms went public in either 1991 or 1992. also, i 0 of the remaining 81 firms did not employ a board chairperson and were consequently excluded from this sample. of the original i 00 firms, then, 71 are included in these analyses. to ensure that the 29 firms which are not included in this study do not differ from the 71 firms for which we have full data, we conducted !-tests on those variables for which complete data were available. these include: five year sales growth, revenues, net income, number of full-time employees, year the firm went public, ceo compensation, whether the founder is also ceo, and ceo equity holdings. the only significant difference noted is that, on average, those firms which could not be included in these analyses were younger (t= 2.17; p = .05) than the firms for which we have full data. table i provides the means and standard deviations of these variables for the full sample, as well as for those firms employing the separate board leadership structure and those firms employing the joint board leadership structure. table i descriptive statistics for board leadership structures and full sample separate board joint board leadership leadership full sample structure structure variable mean (stnd. dev.) mean (stnd. dev.) mean (stnd. dev.) sales growth 2384.48 (1532.35) 2611.87 ( 1883.03) 2531.80 (1759.68) 1992 revenues 99996.32 (112871.37) 64495.43 (63384. 77) 76995. 75 (85 !02.08) 1988 revenues 6175.92(7718.80) 4014.26 (5637.38) 4775.41 (6476.00) net income 12609.48 (22796.97) 1428.17 (10719.64 5365.25 (16762.55) full-time employees 626.68 (954.81) 488.13 (638.17) 536.92 (760.80) incorporation date 1988.84 (3.387) 1988.37 (4.86) 1988.54 (4.38) ceo compensation 257119.64 (148514.92) 276848.54 (176940.85) 269901.75 (166670.12) founder/ceo .40 (.50) .67 (.47) .58 (.50) ceo equity 5.95 (7.45) 11.12 (9.76) 9.30 (9.30) industry representation health care 48.00 % 23.91 % 32.39 % computer 36.00% 34.78 % 35.21 % 105 consumer 8.00% 15.22% 12.68% telecommunicati 4.00% 13.04 % 9.86% ons environmental 0.00% 2.18 % 1.41 % miscellaneous 4.00% 10.87% 8.45 % variables duality is a binary variable coded as 0 for those firms employing the separate board leadership structure and i for those firms employing the joint structure (e.g., daily & dalton, 1993). lnside/outsidesuccession is binary as well, with a chairperson from outside the firm coded 0 and a succession from within the executive or director ranks coded i. we also rely on two measures of organizational tenure to assess the independen:e of the chairperson. the first is the tenure of the chairperson as ceo. the second is the tenure of the chairperson, in any capacity, with the firm. chairperson's ownership position is measured as the percentage of common stock holdings in the organization. the tenure and equity ownership variables are interval level. familial relationships between the chairperson and officers and directors of the firm were also noted. this is a binary variable. if no family relationships were present this variable was coded as 0. if the chairperson was related to an officer or director of the firm, this variable was coded as i. we also include the status of the board chairperson as founderofthe firm as a control variable. founders may exert significant influence over firm processes and outcomes (e.g., begley, 1994; begley & boyd, 1986); therefore, independence may be less likely when the founder holds the position of board chairperson, irrespective of who holds the position of ceo. even when founders are no longer active in current management, they seldom completely withdraw from the firm (e.g., dyer, 1989; rosenblatt, de mik, anderson, & johnson, 1985). any objective assessment may be difficult for founders, who often have difficulty separating the firm from themselves (sonnenfeld & spence, 1989). data were collected from the inc. 100 and corporate proxy statements. all data are reflective of the year 1992. analyses and re sul ts given the binary dependent variable, and the nature of the independent variables, the hypotheses may be simultaneously assessed with logistic regression analysis. in order to 106 ,. control for the founder chairperson, we rely on hierarchical logistic regression analysis and enter this control variable first, followed by the independent variables. table 2 provides the descriptive statistics and inter-item correlations for the study variables. table 3 illustrates the results of the simultaneous assessment of the hypotheses. in the following sections, reports of support for hypotheses, or otherwise, and their significance distributions refer to results noted on table 3. table 2 means, standard deviations and inter-item correlations for study variables variables mean s.d. (i) (2) (3) (4) (5) (6) (i} chairperson founder .59 .50 status (2) inside/outside .85 .36 .36" succession (3) tenure as ceo 4.24 3.77 .18 -.14 (4) company tenure 6.76 3.43 .q7 .13 .43° 00 (5) stock holdings 11.47 13.18 .13 .13 .17 -.ii (6) familial .23 .42 .31" .23° .03 .07 .02 relationships (7) joint structure .65 .48 .23° .. 23• .62°" .. 07 .09 -.03 'p < .05; •• p <.oj; ••• p < .001 107 table 3 logistic regression results independent coefficients standard wald df sig. variables error chairperson founder status 1.89 1.03 3.37 i .03 [control variable) tenure as ceo 1.09 .27 16.23 i .00 company tenure -.67 .24 8.07 i .00 stock holdings -.06 .03 3.74 i .03 familial -.04 1.24 .00 i .49 relationships inside/outside -1.39 1.54 .81 i .19 succession h, posited that separate chairpersons would be less likely to have succeeded to their positions from within the firm as compared to joint ceo/chairpersons. these data provide no support for this hypothesis (logistic coefficient, -1.39; ns). from these data, it can be determined that (i) even when the position of the ceo and chairperson are separately held, chairpersons are likely to have been selected from within the organization and, (2) there is no difference in the percentage of inside/outside successions as a function of the separate, joint ceo/chairperson distinction. h2 and h 3 relate to chairperson seniority. h 1 suggesting that separate chairpersons will have less tenure as ceo compared to joint ceo/chairpersons, is strongly supported (logistic coefficient 1.09; p < .00 i). separate chairpersons had served as ceo an average of 1.08 years compared to 5.96 years for joint ceo/chairpersons. h3 is also statistically significant, but opposite to the direction hypothesized. the average organizational tenure for separate chairpersons is longer(7.08 years) than that of their joint ceo/chairperson counterparts (6.59 years). while the differences in tenure are statistically significant (logistic coefficient -.67; p < .0 i), we doubt that this period of six additional months or so of chairperson seniority constitutes a substantively meaningful distinction. h4 suggests that separate chairpersons will have jess equity holdings in the firm compared to joint ceo/chairpersons. this, too, is supported (logistic coefficient-.06; p < .05). 108 separatechairpersonsown 9.87 percent of the firm's equity, while joint ceo/chairpersonshold 12.35 percent. the last hypothesis (h,) noted that separate chairpersons would be less likely to have familial relationships with officers and directors of the firm. there was no support for h, as there was no difference in the incidence of these relationships. separate chairpersons had familial ties in 21.74 percent offirms; those servingjointly as chairperson and ceo had family relationships in 24 percent of the organizations. these differences are not statistically significant. ' in summary, separate chairpersons, as compared to those with joint ceo/chairperson roles, were characterized by (i) less ceo tenure, (2) more tenure with the firm, and (3) less equity in the firm. with regard to proportions of inside/outside succession and familial relationships, there were no differences. discussion the results of this study illustrate three indicators which distinguish separate board chairpersons from joint chairpersons.can the results reported here be responsibility interpretal as evidence that separate board chairpersons, as contrasted with officers that serve as ceo and board chairperson simultaneously,are more independent? that is not a conclusion with which we would be comfortable. we find the most compelling arguments regarding the independence issue to be associated with familial relationships and inside/outside succession. we would concede that results demonstrating that joint ceo/chairpersons have far more familial relationships with other officers and directors of the firm, as compared to the separate board chairpersons, might be an indictment indicating low levels of independence. the inc. i 00 data which comprise this study do not establish this tendency. we are also persuaded that board chairpersons and ceos appointed from outside the firm, i.e., outside successions, are probably more independent of the firm and more dispassionate in their judgement at least with regard to prior relationships with current personnel in the firm. if it could have been determined that separate chairpersons were more likely to have been appointed from outside the firm as compared to joint ceo/chairpersons, that, too, might be interpreted as evidence of more independence. these inc. i 00 data do not support that view. the data do suggest that joint ceo/chairpersonshave more firm equity than separate chairpersons. separate chairpersons own 9.87 percent of the firm's equity compared to the 12.35 percent held by ceo/chairpersons. while these data are clear, we are less certain of the appropriate conclusion. we could agree that a chairperson with little or no equity in the firm may well be dispassionate regarding certain fiscal policies and may be more willing to entertain investments and strategies for returns in the longer term. an alternative perspective, however, suggests that board chairpersons should have substantive equity positions in the firm which presumably aligns their interests more closely with those of the shareholders. we 109 recognize, however, that substantial equity holdings may jeopardize the very independence which is sought under the separate board leadership structure. we should also add that while the nearly i 0 percent equity holdings of separate board chairpersons is statistically different from the 12.35 percent of the joint ceo/chairpersons, both of these constitute substantive equity positions. we wonder if actual differences in strategy would be likely between the two groups of chairpersonsgoint, separate) based on this relatively modest difference in equity position. it is also true that the chairperson groups differ on tenure as ceo and tenure with the firm. as noted earlier, the difference between these groups with regard to tenure with the firm amounts to some six months. it would be difficult to sustain an argument for major differences in board chairperson independence based on that distinction. there is, however, a more meaningful difference in the comparison of tenure as ceo. limitations and applications the nature of these data precluded capturing the extent to which either the separate chairperson serves as a "puppet" to the ceo, or vice versa. this is likely to occur in any number of situations. this situation has also been referred to as "marionette management" (wheelen & hunger, 1990). vancil's ( 1987) work on executive succession, for example, may provide some perspective on this issue. during the succession process it is not uncommon for the position of ceo to be temporarily filled, or even remain vacant for some period of time. during this time the board, specifically the board chairperson, may adopt a hands-on approach to firm management. this may be especially prevalent in the case ofa founder/chairperson. wheelen and hunger ( 1990: 75) recounted a typical example of marionette management which occurred at winnebago industries in 1986. the 72 year old founder, john k. hanson, served as chairperson in 1986 and removed the title of ceo from ronald haugen, but left him as president of the firm. concurrently mr. hanson, without assuming the title of ceo which he held for many years, resumed the responsibilities of the ceo while formally holding only the position of board chairperson. this situation clearly illustrates that even when the positions of ceo and board chairperson are formally separated, the separation may be purely illusory. we might also note that the results of this study may not apply to those firms that are stable, small businesses or to privately-held firms. these findings do, however, provide guidance for the entrepreneur and for those who might work with entrepreneurs in some capacity (e.g., small business counselor, lawyer, cpa, educator). these "independence" issues, for example, may be fundamental as the smaller firm contemplates expansion. potential investors might take note of these relationships. if the smaller firm should at some point go public, the issue of ceo/chairperson/founderindependence might come under close scrutiny. geddes ( 1994) has suggested a list of questions that entrepreneurs should ask when considering the issue of board leadership structure. we would suggest that these questions would be equally appropriate for those working with or for entrepreneurs as well. the 110 ·-• i . "l' questions include: "is anything falling through the cracks? how are relations with shareholders? what are the company's objectives? what constituencies need to be served in the company? what am i trying to accomplish? who is this organization? who could and should be in the organization?what are the tradeoffs between keeping the functions combined in one individual versus separating them?" (geddes, 1994: 69). conclusion there are those who have forcefully argued that, as a matter of policy, the positions of ceo and board chairperson should be separated (e.g., committee on the financial aspects of corporate governance, 1992; dobrzynski, 1991; levy, i 993a; lorsch & maciver, 1989). based on these inc. i 00 data, we find little justification for the prescription. we have not been able to determine dimensions of independence on which separate chairpersons and joint ceo/chairpersons differ sufficiently to warrant such a recommendation. even so, fast-growing,entrepreneurialcompaniesshould carefully the consider choice of the ceo/chairperson structure. past research has suggested that adoption of the joint structure may be a means for founders of entrepreneurial firms to retain some measure of control withoutsacrificingperformance(daily & dalton, i 992a). enhanced control may occur at the cost of access to external funds which may be needed to continue firm growth. the centralized structure has the potential to deter the involvement of venture capitalists who often prefer for the board to be more powerful than firm management (e.g., jarillo, 1989; rosenstein, 1988). many venture capitalists elect to "grow" the ceo of an entrepreneurial organization under their tutelage (rosenstein, 1988, p. 163). this mentoring would likely be more difficult where the ceo also serves as board chairperson. consequently, even though performance may not be adversely affected by the joint structure, the ability of the firm to pursue aggressive growth opportunities may be hampered by a lack of funding opportunities. 111 references alderfer, c. p. 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(1993). resist the desire to stay on. directors & boards, ll(3), 35. 114 st'ratzv,y'ow accounting firms can help the small business owner'arel m. wolk university of tennessee at martin charles w. wootton eastern illinois university abstract this paper discusses the types of services (hat ore offered by public accounting firms to the small business client. some items to consider when choosing an accoimting firm, or deciding which type of service would be mosi appropriate, are also examined. the changing market for the services of public accounting jinns is addressed, along with how accounting firvns are actively pursuing small businesses as clients. introduction until recently, large industrial companies were considered the engine for economic growth in the united states. today, while many of the country's largest corporations are busy downsizing to improve their competitive advantage, small and mid-size companies are busy creating jobs —almost six million new jobs between 1987 and 1992 (byrne, 1993). business week (byrne, 1993) reported that, in 1993, "small business [was] expected to generate an additional 1.7 million jobs, while companies with 25,000 or more employees [would] shed 300,000 people" (p. 12). a growing appreciation for the opportunities afforded by smaller companies has not eluded the attention of public accounting firms. whereas in thc past, accounting firms sometimes focused their marketing efforts on larger corporations, accounting firms today are actively pursuing small businesses as clients. this article addresses three issues related to accounting firms and small business. first, the range of public accounting services available to the small business is discussed. second, major factors to consider when choosing an individual accounting firm or specific services are reviewed. and finally, some of the issues in the consultant/client relationship are addressed. previous research (c.g., ctobeli & seville, 1989) has indicated that the relationship between an accounting firm (or any consultant) and a small business client should be an mterface. that is, the small business owner must make the accounting firm aware of its goals and the services it needs. in turn, the accounting finn must strive to help the small business 'he authors would like to rhank the three anonymous reviewers for their helpful comments on earlier drafts of the paper. 19 achieve thcsc goals and ensure that thc small business remains compeiitivc. this idea is expanded throughout the article. why does a small business need an accounting firm? about two million ncw businesses are started each year in the united states. of these, about 20% arc one or two person operations (o'reilly, 1994). although studies of small business i'ailurc rates come up with somewhat different findings, all agrcc that the i'ailure rate is very high (c.g., vcrspcr, 1990; phillips & kirchhoff, 1988; o'eil k. dukcr, 1986). a widely quoted rulc of thumb is that about half of the new businesses i'ortn&d each year will ccasc to exist in thrcc years. while a variety of reasons exist for business failures, "onc importani rooi cause is a lack of good management information —especially financial infionnation" (gobeli k. seville, 1991, p. 17). thc imponance of financial inl'ormation was shown in a study of'mall business failures conducted by gaskill, van auken. and manning (1993).speci( ically, 71% of small business owners discontinued their business due to financial dil'ficultics, compared to 29% that discontinued for personal reasons (health, conflicts, retirement). an important issue to inany businesses, there('ore, is how to obtain the iinancial information that would help them avoid being one of the casualties. with liinited resources available to produce the quality inl'ormation necessary to attain success, many sinall businesses turn to outside consultants for assistance. often, small businesses rely on accounting lions to fill this role. in fact, over 40% of small business owners in a recent survey (hock, 1993) listed accountants as their most trusted outside source i'or business advice. consulting or advisory services can bc of great bcncltt to thc small business-but only if understood and used appropriately. the role of, and services provided by, the public accounting firm should grow and change as the small business grows and changes. initially, if thc company is quite small, without a full-time controller and ticcounting personnel, the public accounting finn can be called upon to serve as business advisor or part-time controller, handling hank and other linancing arrangements, giving input inio management decisions, and providing projections (person, 1993). it should be emphasized that while ihc accountant scrvcs as a consultant, final decisions on all matters must bc made by managcmcnt. this initial consulting rotc can bc very important to getting a ncw business ol'i'he ground. dirsmith and kunitakc (1988) reported, for example, that in a study of 5,000 private companies, 69% of the chief operating officers (who often were the owners) had no financial or accounting background. as thc business grows and a i'ull-time controller and accounting personnel are hired, the public accounting firm takes on a different role. more specifically, the accounting firm's role may involve a wide array of services and supports for the expanding small business. 20 most large and inany smaller accounting firms have developed separate components of their practices to serve smaller clients, with personnel specifically dedicated to meet the unique needs of small businesses. much of the personnel's training is directed toward dcvcloping small business specialists with the understanding necessary to help the small business client in all facets of the business. upon completion of training, these small business specialists are assigned to an area often referred to by the accounting firm as the emerging market, midmarket, or middle market area whose purpose is to attract and provide services to small business clients. public accounting services available to small businesses in a survey designed to identify the major problems faced by small business owners, franklin and goodwin (1983) classified problem areas into three types: external factors, internal factors, and financial factors. eight of the top ten major problems reported by small business owners were related to external factors: inflation, government regulations, costs, taxes. several financial factors were also perceived by small business owners to be major problem areas: cash flow. operating capital, and debt collection problems. important internal problem areas for small businesses included: employee motivation, personnel training, and fringe benefits packages. gobeli and seville (1989), in an examination of the interface between small businesses and cpas, asked small business owners/managers what services they needed from accounting firms. nearly 100% of thc respondents stated they needed help with tax returns. nmety percent wanted tax planning services while 85% wanted help with the preparation of financial statements. seventy-five percent wanted financial planning services. the following sections discuss specific accounting services that can help the small business owner address many of these problem areas. the discussion is based on input from (as well as marketing information provided by) national, regional, and local accounting firms, in addition to a review of previous studies dealing with accounting lirms and small businesses. potential issues that may impact the consultant/client relationship are presented in a later section. accountin and auditin services table i lists some of the common accounting and auditing services provided by public accounting firms. the service area that has traditionally provided the foundation for a relationship between the accounting firm and the small business owner relates to the company's financial statements. it is often a request for financial statements by a bank or other lender that prompts a small business to first seek the services of an accounting finn. there are three levels of financial statement related services: audit, review, and compilation. it is important for the small business client to understand the differences between the three types of service as well as some of the factors that should be considered in deciding what level of service is most appropriate in the circumstances. choosing an inappropriate level of service can be a costly lesson for the small business owner. 2( an audit rcprcscnts the highest level nl'scrvicc. only an imlcpcndcnt (not associated with the business) certil'ie&f i'ublic accountant can audit financial slatmnent and issue an opinion on them. an audit involves thc auditors collecting suff'icicnt evidcncc to support their opinion that the financial statcmcnts are fairly prcscntcd (i'rce of'ale&1&0 n1&sstalcments) and follow generally acccptcd accnunting principles. thc cml product nf'n audit is the independent auditor's rcport that states what thc auditors did and thc. conclusi&m they reached. although it is sometimes assumed by thc gcncral public, an audit docs not guaramcc or certify 100&% accuracy of'hc imancial staiemcnts. morcnvcr. &m audii's major puiposc is not to detect fraud, although thc auditor is required to plan thc audit in such a manner as to assess the possibility ol'aterial fraud. table i audiiin 8& accnuntin services audits rcvicws if& compilations assistance with accounting iiunctions dcvclopmcnt ol accounting &x& control systems spccialixcd internal audits regulatory requircmcnts compliance &x& tax planning implcmcntation of accounting sysiems gcncral ltalgcr i'rcparati&m pcrsonncl training in accounting or bookkccping depreciation b'& amnrtixatinn schedules bank reconciliations payroll prcparati&m an audit of'ts i'inaneial statements can he a tiinc consuming and cxpcnsivc undertaking i'r a small business. howcvcr, an audit may nni hc rcquircd. in many cases a creditor or icmlcr will hc satisfied with a lower level ol'inancial statement related service. two other levels of service, a compilaiion or a rcvicw, arc dcsigncd i'or smaller, nonpublic colupailtes. a review of'inancial statements involves procedures which arc substantially less in scope than those required i'r an audit, hut morc extcnsivc than those required for a compilation. thc accountant must umlcrstaml thc client's business and nature ol'ts transactions. in addition, a review involves making inquiries ol'anagcmcnt and perl'onning analytical procedures to dclcnnine il'anything in the fin;mcial statcmcnts looks "nut of'ine." the review report gives what is known as "ncgativc assurance" —stating that nothing came to the 22 accountant's attention which would indicate that any material modifications should be made to thc statements for them to conl'orm with generally accepted accounting principles. a compilation simply involves an accounting firm presenting the client's financial inl'ormation in financial statement foun. in a compilation report, thc accounting lirm does not express any opinion or assurance on the financial statements. the accountant should understand thc client's business and nature of its transactions and should be alert for (and follow through on) any obvious omissions or errors. as a general rule of'humb, public accounting lirms estimate that a review takes about half the time of an audit, and a compilation takes about a third the time of an audit (dirsmith k. kunitake. 1988). il'the small business can gct by with a level of service below a full audit, it is certainly cost beneficial to do so. however, the small business owner should consult with prospective lendcrs before contracting for compilation or review services to veri('y these services will be adequate. dirsmith and kunitakc (1988) asked sixteen commercial hank lending officers to repon on the level of "comfort" they derived from each of these three levels of service. using a scale of i to 10 (with io being thc highest comfort), thc average score was 4.0 for compiled statements. 6.3 i'or revicwcd statements, and 9.5 for audits. so, the requirements of users ol'he linancial statements will tend to dictate the required level of assurance preferred. often a new business is small enough that a lender or other user is satisl'icd with compiled financial statements, but as the business grows, revicwcd and then audited statements will be required. the reason for this is that as the business grows, its records and mtemal controls become more complex, and its investment in inventories and plant assets becomes more substantial, such that a more thorough examination (such as an audit) of the company is necessary. there arc three other considerations in regard to the audit; (i) auditors assume thc most legal liability for audited financial statements, (2) in addition to the audit rcport, auditors will provide a management letter, which makes suggestions for improvements, and (3) audited financial statcmcnts for the prior three years are required if the company decides to go public. in addition to the preceding services, a small busmess may use an accounting firm to review its mtemal control procedures and help it to implement or revise its accounting system. as small compames grow, it is not uncommon for them to outgrow their accounting system or their system of internal control. while auditors assess a client's internal control structure as part of the audit, the emphasis of this assessment is on risk and on how thc system will impact the type of evidence that will bc gathered. and when it will be gathered. small businesses therefore often find it help(bi to cngagc the accounting finn to rcpon spetn (ical ly im their internal control structures from tnne to tnne. here, the accountants will test and evaluate the whole system and ol'i'er suggestions for improvement. it is quite common for a new small business to contract with an accounting finn to keep its hooks and prepare its financial statements. nearly all accounting firms, regardless of size, have service divisions that will prepare payroll, reconcile the bank statements, prepare and post general ledger entries, as well as prepare the financial statcmcnts for the company. in this 23 way, a small business can avoid the cost of'establishing an accounting departmmit and help ensure that it will meet the i'iling deadlines ol'tate and federal regulatory bodies. tax services today, most small businesses employ accounting lirms to help theta with preparation of their federal, state, and local tax returns. this assistance can range i'rom answering spccilic questions on a complex tax issue to thc actual preparation of the tax return itself. table 2 summarizes some popular tax-related services offered by accounting firms. table 2 tax services preparation of federal & state income tax returns family & estate tax planning comprchcnsive business tax planning compensation & retirement tax planning acquisition & disposition tax planning irs ruling requests compliance assistance flexible spending cafeteria plans deferred compensation plans family and estate tax planning is an imponant area in which small businesses should seek tax advice from their accounting lirm, tax attorney, insurance agent, or banker, i'or the vast majority of small busincsscs are partnerships or closely held corporations. in i'act, 90% ol'all v.s, businesses arc family controlled (francis, l 993). in these cases, the death of an owner of the business can result in an immediate and often massive tax liability to thc estate. therefore, business owners should ensure they have minimized their estate's future tax liability when the business is organized. periodic reviews and updates of these tax plans should be undertaken to rellect changes in the tax codes. accounting firms also can help the small business owner in the area of employee compensation. as tax laws become more complex and tax rates increase, proper compensation plans for employccs can mean tax savings for both the employee and einploycr. many accounting firms can help a small business establish its own 401(k) or similar retirement plan. one tax service area in which many firms offer help to small busine: ses is in establishing flexible cafeteria plans for their employees. these plans provide einployees more flexibility in deciding how their tax-free income is spent. small businesses often use accounting firms for comprehensive tax planning for the business itself as well as for its top executives. accounting firms can assist in all aspects of compliance assistance, as well as preparing ruling requests 24 from the internal revenue service, in which the small business requests the irs's opinion on the tax implications of a prospective transaction. mana ement advisor services the service area that has provided the greatest growth for accounting firms in rcccnt years is management advisory services (mas). many of the more popular services offered are listed in table 3. today. most accounting firms provide a wide variety of mas services to small businesses. these small business services normally fall into four categories: (i) information and technology consulting, (2) financial consulting, (3) operational and productivity consulting, and (4) human resource consulting. the mas area that has been demanded most consistently by small business in recent years has involved information and technology issues. thousands of small businesses have relied on accounting lirms to assess the adequacy of'heir present computer systems and/or to recommend a new one. in addition, accounting firms often install and activate these computer systems. accounting firms are very involved with small businesses in hardware and software selection. several firms have developed their own specialized payroll or accounting packages that they make available to smaller businesses. moreover, many firms conduct on-site personnel training programs for small businesses on the usc of computers and software. small businesses that employ accounting firms traditionally have used thcsc firms to help them develop long-range financial forecasts. as these businesses increase in size, accounting firms often are employed to develop a pension and/or profit sharing plan for them. a growing service area that several firms provide involves helping small businesses identify sources of financing. accounting firms can provide the initial contact with banks or investment companies that are potential sources of capital. furthermore, they can help small businesses put together a business plan (including linancial statements and growth forecasts) to present to potential lenders. along with management consulting firms, many accounting lirms i'urnish consulting services related to the production phase of the business. they are hired by smaller busincsscs to conduct production and efficiency studies of their operations. often, these firms are involved in developing and implementing an appropriate cost accounting system for a specilic production process. and as computers become crucial to thc production process, accounting firms can analyze and recommend appropriate equipment for computer assisted manufacturing. 25 1 tahlc 3 mana cmcnt adviso services information & technology consulting microcomputers & networking management information systems hardware & sol'twarc selection hnplcmcntation of co&nputcr system pcrsonncl training on computers & so(&werc analysis 0( co&nputer & information systems i inancial consulting identification of sources ol'capital financial l.orecasts &. budgeting cash management credit & collection policics pension & prot'it sharing plans appraisals &. valuations invcstmcnt & risk managcmcnt bankruptcy &. trouhlcd company assistance operational &. productivity consulting production &. inventory control production & el'ficicncy studies cost acct&unting systems marketing & distrihution plans computer assisted manufacturing productivity improvcmcnt plans implcmct&tation ol production proccsscs human resource consulting organization planning &. analysis managetncnt developmmu executive search & stafl'ing assistance pcrsonncl policics succession & strategic planning compensation programs pcrfonnancc evaluations organization efficiencies studies 26 of the four mas areas, the one in which businesses may be the most reluctant to utilize accounting firms is human resource managcmcnt. business owners tend to think of accounting firms as providers of numbers or technical support. however, over the last few years, many accounting firms have devclopcd an array of human resource services they can provide to the small business. today, businesses rely on accounting firms to find needed personnel for their company, especially when technical expertise is required. other small businesses rely on accounting firms to establish traimng and perfomiance evaluation programs for their employees. the relationship between accounting firms aivd small business clients accounting i irma are only one of many sources avai fable to help thc small business owner. accounting firms can provide a strategic benefit, howcvcr, in thc array ol'crviccs provided. specifically, il'hc accounting firm helps the small business develop an effective accounting system, that firm is probably in a better position —through its knowledge of'hc client's financial information nccds-to expand into other areas, such as tax planning and the implementation ol' new computer system. accounting firms of'tcn employ personnel other than accountants (bdp specialists. tax attorneys. etc.) to provide thc breadth of talent necessary i'or service beyond traditional accounting. strategic use ol'ccounting fiona, as with any consultants, involves the small business owner taking an active part in communicating his or hcr needs, and in providing inputs inio ihe decision at hand as well as i'eedbacl. to the consultant. accounting firms have bccn consistently ranked hy small businesses as their most frequently used external consultant (fields, 1993; smeltzer, van hook, g: hutt, 1991; arnold. cherry, diamond, k walker. 1984) and often cited as their most trusted advisor (hock. 1993; i.iclds. 1993). recently. however, there have been some majoi criticisms leveled at the service provided to small business by accounting firms. especially the big six firms. in a tvidely cited front page article in thc wall strcct journal. benon (1994) rcportc&l that an increasing number of smaller clients were complaining about the decline in the level of scrvicc they were receiving from the big six accounting fiona. many of these businesses werc iurmng to non big six firms for their accounting needs. among the complaints werc rising accounting fees, frequent turnover among the accounting personnel assigned to work with them, and a belief that thc major accounting firms were concentrating on their larger clients at their cxpcnse. moreover, in a 1994 study of the responsivcncss ol'major industries (c.g., airlines, hanks. telecommunications) to the needs ol'small business, accounting firms rankc&i ninth among the twelve industries surveyed ("big firms." 1994). what seems to bc called i'or is an appreciation of the appropriate "1st" between the accounting finn and the small business client. the responsiveness of accounting firms as well 't should he noted that a cpa finn is re&furred to rerram from perrormmg the rollowmg mas for its sec audit clients: esecuuve recrunmcnt, psychologicat tesung, puhhc opmion polis, merger arxl acttutsttton asststnnce for a lirxler's ree and actuarml services to insurance cornpnnies similarly, a cpa tirrn cannnr provide hookkeeping services anrl conduct an aura& rot the same sec chcrtt 27 as thc quality and inix ol'services they provide varies. as with any corn&nudity or service, the business owner nccds to shop around to find thc accounting firm that supplies thc mix of scrviccs and pcrsonncl that most directly matches the need of his or hcr small business. there arc over 45.000 accounting firms and sole practitioners in thc united states (aicpa, 1994), so some general guidelines to narrow the search are provided. factors to consider in selecting an accounting firm there arc dil'i'crcnt sizes of accounting firins: big six, national, large icgional, small regional, as well as local i'inns and sole practitioners. thc big six i'inns (ernst k. young, 13«loittc k touche; kpmg peat marwick; arthur andersen; price watcrhousc; aml coopers k i.yl&raml) arc international firms who count their rcvcnucs in ihc billions. national i'irma have olliccs in m&xst major cities throughout the united states. liirgc regional i'inns h;ivc ol'liccs in major cities in several states. small regional and local lirms have one or a fcw offices employing relatively few professionals. thcrc arc scvcral factors to consider before deciding whcthcr to go with a large or a sliiilll ilec&iunting limi. firsi ol'all, thc smaller linn will tend to charge lower li:es. for example, ~a» i t a: tpn.: 1991hi. k a i o99(l. y hi a i dix& i a a% r hourly billing rates i'or partners were as i'ollows: $235 for big six, $ 202 i'or national, $ 150 lor large regional, and $ 142 and $ 117 i'or medium and small local, rcspcctivcly. rcmcmbcr, these arc cstimatcd billing rates for partners. most accounting scrviccs arc handled by non partners, so actual billing rates usually are lower. while smaller firms may have a lower ibe structure, they someiimcs may not be able to provide thc full range ol'services required by the small business. many smaller accounting firms have csiahlishcd numagcmcnt advisory services i'airly rcc«ntly, and some i'irma do not have thc personnel (or want to take on the potentinl legal liability) rcquircd i'or «&mdu«ting linen«ial statcmcnt audits. some of'he very small accouniing linns may, thcrcl'orc, restrict the scrviccs ihcy ol'fcr to tax and bookkeeping scrviccs. thc alii«i&cillt institute ol'cpa's (aicpa) has devclopcd an mas data base, which provides smaller accounting i'irma the opp&irtunity to exchange managcmcnt consulting inl'onnation and scrviccs. this may help bridge the gap between thc range ol'crvic«s offered hy small an&i large accounting i'irms. also, some smaller i'irms arc a«tivcly specializing in restricted services (i.c., carving out a "niche" that gives them a competitive advantage with certain types of clicnis or certain types of scrviccs). some small businesses preter a smaller accounting lirm because of perceptions of morc personalized service. as previously mentioned, there have been instances where small business clients felt that increased competition ainong the big six fimis had rcsultcd in a dcclinc in thc icvcl of scrvicc provided (berton. 1994). overhll, howcvcr, thcsc major firms have made a conccrtcd clyort to ovcrcomc pcrccptions that they pay less ancntion to their small clients. moreover, many large fiona have focused their marketing strategy on thc concept ol'crsonalizcdservice and ready access to personnel at the partner level. 28 some small businesses like to stan out with a smaller accounting iirm, where they feel more valued, and then change to a larger lmn when they nccd a morc comprehensive array of services. others i'eel that changing accounting firms as they grow is not cost beneficial because of thc "start-up costs" of bringing new accountants up to speed in familiarizing them with their business. in addition to size considerations. it is very important that thc small business owner usc an accounting firm that is knowledgeable in his or her industry. in a survey of more than 500 owner/managers, arnold et al. (1984) found that the expertise of thc accounting firm was cited by thc owners as the most iinportant i'actor m their selection ol'an accounting firm. wordof'-mouth references from members of thc business community, especially those m the same industry, are an important method of'ocating high-quality i'irms with specific industry cxpcrtisc, local bankers and attorneys are also good sources i'or rccommcndations. after the search has bccn narrowed to about a half a dozen possibilities, written proposals and in-person interviews should be requested from each firm bef'orc a decision is made. six iinportant issues to ask about are: l. qualitications of those who will be providing services most firms arc willing to supply resumes of the partner and manager level personnel that will bc providing services. these individuals should give some indication of their availability to answer questions throughout thc year and how much time they will bc spending, personally, on thc specific engagement (having u well qualif'icd partner in charge ol'our audit, for example, is of little value to you, if you rarely scc that individual). 2. types of support services available the availability of suppon services is an important issue if you are considering going with a sinaller accounting lirm. it is helpf'ul to try and project the types of scrviccs you think you might need over the next five years, and then make sure that you can obtain those services from the firm you arc considering. small businesses sometimes engage a i'inn initially to maintain their hooks and prepare periodic financial statcmcnts. howcvcr, it is not too long bef'orc they find they also need help with tax planning or assistance with a computer system analysis. if the accounting i'irm does not off'er this variety ol'ervices, the company will need to consider changing firms or plan to work with different firms, which may not always bc the most ef'ficient alternative. however, soine small businesses prcl'cr to use two or morc fimis. with one accounting lirm rcsponsiblc i'or onc area (e.g., the audit) and another finn responsible i'or another area (c.g., mas). 29 3. result of most recent peer review thc aicpa has established a quality review program to monitor adhcicncc to professional standartls regarding audits, compilations,;mil rcvicws. in order to hc a member of'icpa aml practice public accounting, an individual must practice in u i'irm that is enrolled in this quality rcvicw program. an accounting i'irm should bc willing to disclose when their last pccr rcvicw was perl'ormcd, who thc peer firm was, and whether thc rcport of'hc review team was unqualified, qualified, or adverse. if'he firm is noi willing to sharc this inf'onmuion, it inight indicate some problems with their procedures i'or assuring quality and adherence to professional standards. 4. prior or pending legal actions the popular and business press has done an excellent joh at kccping thc coumiy inl'onncd about thc liability crisis that is faced by public accounting i'irma. a record number ol'awsuits have hccn i'iled, and many arc still pending. michael knight in inc, magaxinc (i raser, 199 la), recommcmlcil that thc small business owner should hc sensitive to the financial viability of an accounting i'irm bcforc cntcring into what is expected to hc a inng-term relationship. hc, suggests asking il'hc firm has ever been suctl and what thc outcome was aml il'hcic arc;my outsmnding legal claims against the i'il lit (especially any dealing with malpractice). 5. references asl the accounting i'irm i'or thc names ol'some of their clients wlumi they consi&ler comparable to you —cspccially thc numcs ol'irms in your imlustry. contact those rel'crcnccs aml ask about their satisfaction with thc services they have received. although all inl'ormation provided to an;u:counmni is cimfidential, a i'ew busincsscs chixisc not to hc audited by an accounting lirm who audits a compctiior. 6. fees it is imponant to gci a good understanding ol the fee structure of thc firms that are under consideration. this avoids unpleasant surprises later. ask i'or a detailed breakdown of'hc cstimatcd hours and billing rates i'or thc personnel that will bc perl'onning the required service. pay particular aucntion to the amount ol'ime that thc accounting lima includes for partner aml management level personnel. inquire about other items that will bc included in thc i'ee structure, like thc accountants'ravel time, telephnne expenses, and charges t'or advising and consultation throughout the year. as mcntioncd piuviously, choosing an accounting firm, like many other business decisions, tends to comedown to a "lit" of'thc pcrsonalitics involved the rr lationship bctwccn 30 the small business and the accounting firm is most beneficial to both if the parties feel comfonable with one another. many small business owners recommend including key management personnel in the selection process (frascr, 1991bh these are the people that will often be working most closely with thc accountants. they will feel more comfortable, and bc morc cooperative, if they feel they had input into thc decision. concluding comments over thc last half century, potential services oft'cred by accounting firms to help the sinall businesses have expanded dramatically. from once olfcring only accounting and tax scrviccs, accounting liims now provide a full complcmcnt of management and financial services to small businesses. however. accounting linns are only onc of several outside sources availahlc u& help small business owners. other sources include: small business development centers. sinall business institutes, consulting firms. individual consultants, bankers, auorneys, stock brokerage firms, software spemalists. insurance agencies. and college l'acuity meinbers. each of these outside resources olfcrs a different mix of cxpcrtisc that can give the small business owner a grcatcr chance of success during the critical cai ly years of operation. whichever type is pret'erred. it is important to engage the consultant bel'ore major problems arise. quite of'ten, small business owners fccl they cannot afford an outside consultant in thc carly stages of their business. however, it is in the early years that l'ailure is most likely to occur. hiring someone after linancial problems have dcvclopcd is often too late. thc good news i» that as accounting firms and other consultants have i'ocuscd on the small business client, thc market has become significantly morc ci&mpctitivc —which, hopelully. will drive ilown thc cost of services. 31 references a(cpa (a»ita i t i ~ f c if d p hll a). (1994). t~h ~ s a'' i c.d'«dh 9 df phd a'' iar ':-1994.n* york, ny: aicpa. arnold, j. l., cherry, a. a., diatnond, m. a., k walker, j. a. (1984). small business: an area ripe for practice development. journal of accountanc 158 (2), 74-82. bcrton, i.. (1994, april 21). big accounting firms, striving to cut costs, irritate small clients. thc wall street journal pp. ai, as. illp ii » ' .'.' .'p . i . (1994 a i . 17) ~phil a i 9 9» is (is) s. byrnc, j. a. (1993).i:ntct)nisc: how cntrcprcncurs arc rvhhaping thc cc(momy-arnl what big companies cats learn. (special issue, november). businchs wcck 10-18. dirsmith, m. w., f(k kunitakc, w. k. (1988). how to choohhc cpa services for thc growing company. business 38 (4), 13-21. ficldh, w. c. (1993).small business client satisfacti(m with outside cshictancrs mid-american journal ol'usiness 8 (2). 45-51. francis, b. c. (1993). family business succession planning. journal ol'achcountanc 176 (2) 49-51. i ranklin, s. g., c(k goodwin, j. s. (1983).problems of small busif)l'ss t(t)tl s(tus'ccs ol ttss(stat)cc: a survey. journal of small business mana emcnt 21 (2), 5-12. icraser, j. a. (1991a).thc accountant safety test. inc. 13 (5). 99-100. i rascr, j. a. (199 1 b). shopping for a new accountant. inc. 13 (10), 196. ciaskill, l. r., van aukcn. h. e., (1'c manning, r. a. (1993). a i'actor analytic study of thc perccivcd causes of small business failure. journal ol'mall business mana cmcnt 31 (4), 18-31. gobcli, d. h., k. seville, m. a. (1989).the small business-cpa intcrl'acc. journal of small business mana cmcnt 27 (4), 8-16. gobcli, d. h.. i('c scvillc, m. a. (1991). small business: ptoblcms and opportunities i'or accounting firms. thc woman c.p.a. 53 (4), 17-21. 9 i s (199),sp uh d)s llhsl ...i h i cpa.'.a~it i: 7((7), pp. i, 30. o'neil, h. m., a. dukcr, j. (1986). survival and i'ailurc in small husinchs..loun)al ol'mall business mana cmcnt 24 (i), 30-37. o'rcilly, b. (1994, may 2). thc new face of'small business. fortune 129 (9), 82-88. person, s. (1993). cpa i'irmh can help manage clients'usinchscs without losing their imlcpcndcncc. journal ol'accountanc 175 (5), 91. phillips, b., ffk kirchhofl, b. (1988). an anal sis of new finn survival and rowth. bahson entreprcncurship rcscarch conl'erence, calgary. smcltzcr, l. r., van hook, b. l., k hutt, r. w. (1991).analysis ol'hc usc of advisors as information sources in venture startups. journal of small business mana ement 29 (3), 10-20. vcspcr, k. h. (1990).new venture strate ies (rev. ed.). englewood cliffs, nj: prentice hall. 32 strategy the relationship between planning and information source/media used by small firms john n. pearson larry r. smeltzer arizona state university gall faun thomas naval postgraduate school abstract the oh/ective of this study was to examine information sourcestmedia used by small business managers and their relationships to the planning process, entrepreneurial intensity and firm performance. a signi/leant positive relationship between informarion source/media used and planning process sophistication was found among 165 small business managers by means of semi-structured, in-depth interviews. in addition, high-performing companies revealed different information sourcestmedia than low-performing companies. finally, no relationship was found benveen entrepreneurial ituensity and information sourcestmedia used. implications for future research and small business managers are presented. introduction an argument can be made that the development of strategy is quite different in the small firm than in the large firm (robinson, 1982; welsh & white, 1981). a distinction between small firms and large organizations is that large firms generally have functional specialists. one departmem may be responsible for production planning, another for marketing research and so forth. in addition, many large firms may even have a specialized planning department. in the small firm, however, a general manager may be responsible for each of these activities concurrently. as a result of this difference, the manager in the small firm plays the role of a general manager that is quite unlike that of the top executive in the large firm. aguilar (1988), kotter (1982), and drucker (1973) have all emphasized the unique nature of the general manager's position. as each of these authors highlights the variance among managers in different types of firms, the researcher emphasizes differences in the sources and uses of information as well. two themes that can be detected in each of these author's writings are: (i) small business managers are highly reliant on information obtained from diverse sources/media and (2) planning is patt and parcel of the small business manager's position. several streams of literature support the contention that information sources/media vary as a function of organizational differences. in one stream, tushman and nadler (1978) present a contingency approach to organizational design and information processing. according to these authors, size is an important variable on which information needs are 35 dependent. they state that as organizations grow, they differentiate and develop economies of scale and benefits of specialization and each subunit has unique information needs. this approach is supported by the work of daft and weick (1984) in which they state that organizational differences are related to the manner in which information is obtained and used. related to this is the research that indicates internal managerial communication patterns vary as a function of the type of organization (luthans, rosenkrantz, & hennessey, 1985; smeltzer & faun, 1989). a second stream of literature investigates the organization's interaction with its environmena this literature is particularly pertinent for this research because planning is thc linking mechanism between the organization and the environment. in this stream of literature, both thc open systems theory and the ecological theory posit that differing organizations have varying information requirements to adapt to their environments (betton & dcss, 1985; katz and kahn, 1966). in addition, daft and lengel (1986) propose that information needs vary as equivocality and uncertainty increases. large organizations generally have specialized buffering departments to reduce uncertainty. small firms do not have these buffcrs; consequently, the managers must handle more environmental uncertainty. because of these difl'erences, it is difficult to answer questions about managers'se ol'nformation sources/media without considering the nature of the organization. as is the case with most management literature, a greater amount of research on media has been conducted on these variables within large, rather than small organizations (podsakoff and dalton, 1987). managers use a variety of informaiion sources/media to assist them in making decisions about their firms'uture courses of action. what sources/media do small business managers use with respect to information acquisition? do small business managers who are more sophisticated planners use different information sourceshnedia than less sophisticated planners? do small business managers of higher performing firms use dil'ferent information sources/media than those of lower performing firms? the answers to these questions are imponam with respect to better understanding and responding to small business managers'nl'ormation needs. the auempts to answer these and related questions have generally focused on managers in large, formal organizations. this research in large organization has provided some valuable insights but limits the ability to generalize to managers in small firms. small business managers may operate in significantly different environments than managers in large, formal organizations. accordingly, the research reported here analyzes the sources/media used by managers in small cirms. this research tests the general hypothesis that thc relationship between planning and information sources/media used by small cirms di(fcrs i'rom that relationship in large firms. more specifically, this study focuses on small business managers'nformauon sources/media used for one critical managerial activityplanning-and its impact on lirm performance, as well as the impact of entrepreneurial intensity on information sources/media used. 36 prior research on information sources and uses of information by managers in large firms a review of the small firm literature indicates a lack of research concerning the information sources/media used by small business managers. consequently, the following literature review generally relies on research directed at information sources/media used by managers in large firms, however, it helps develop the foundation for the research questions analyzed in this study. mana er's search for information m dia and sources managers have limited cognitive capacities for information search; therefore, they regulate the amount and type of information they acquire. scanning frequency is the number of times executive review or scan the environment directly or obtain information from others inside the organization (daft, sormenen, & parks, 1988; hambrick, 1981; farh, hoffman and hegarty, 1984). previous research indicates that senior executives scanning frequency varies and that they use different information sources/media. sources are classified as either external or internal to the organization (aguilar, 1988; rhyne, 1985; keegan, 1974). media refers io channel selected to transfer the information, such as personal (e.g. face-to-face interaction) or written (e.g, memo, report) (rice, 1992). plannin so histication managers must process information to identify opportunities, detect and interpret problem areas and implement strategic adaptations (jemison, 1984; tushman, 1977). scanning provides information that policy-makers use in planning decision-making and strategy formation (hofer and schendel, 1978; rhyne, 1985). fahey and narayanan (1986) state that information should facilitate and foster strategic thinking in organizations. consequently, it would seem logical to argue the reciprocal: strategic thinking should foster acquisition of information. planning sophisucation varies among managers (ansoff, 1979; miles, snow & pfeffer, 1974). lorange and vancil (1976) explained an evolutionary development of planning systems within organizations. they proposed that as the planning effort matured, the characteristics of that effort would shift, reflecting the management's increased familiarity with the planning process. higgins (1981) noted that 'mature'lanning systems addressed different problems in comparison with recently imroduced systems. a fcw empirical studies have investigated the relationship of information sources to levels of planning sophistication. one of the problems is that researchers have generally failed to conceptualize and operationalize strategic planning practices. this is especially true for smaller firms —the focus of this study (keats & bracker, 1988). however, recent studies have begun to make progress in this area (bracker & pearson, 1986; ramanijam, venkatraman &. camillus, 1986). because of the apparent relationships between planning and information and the recent efforts to operationalize the strategic planning process, the following research question is presented. 37 resfarch qufstion i: as planning sophistication increases, does the irequency of information sources/media used increase? level of entre reneurshi information sources used for planning may differ betwexm ceos in large firms and managers in small firms; however, differences may also exist among small business managers. in particular, some managers are oriented toward maintenance of the organization and stress administrative competence and caretaking. meanwhile, others are more opportunisuc or entrepreneurial (pinchot, 1985). there has been considerable interest in the ability to identify managerial traits and characteristics to determine how those who are more entrepreneurial differ from those who are caretakers. various writers have offered such traits as judgment, ambition, need for achievement and locus of control (keats &. bracker, 1988). the extant research indicates that differences exist tietween the entrepreneurial manager and the administrative caretaker. meanwhile, differences in information use among individuals with different managerial orientation have not been well defined (martin and martin, 1989; wonman, 1987), it would seem that a caretaker would seek less information than an opportunist. shafer (1990) confirmed this in small service businesses, (physical therapists), however, it is not known if this relationship holds uue in other types of small businesses. consequently, a second question is presented. research question ?h do small business managers with an enuepreneurial/opportunistic orientation use more information sources/media for planning than a caretaker-type manager? or anizational performance and sources of information with reference to organizational strategy research, hambrick (1980) and lenz (1981) have argued that the most obvious and useful research questions should address the factors and linkages that influence performance. information acquisition cannot be directly related to performance because performance is attributable to numerous factors (kanter & brinkerhoff, 1981; hambrick, 1983; white & hamermesh, 1981); however, a comparison of highand low-performing firms may indicate a pattern of inl'ormation acquisition that is consistent with high-performing firms. therefore, the following research question is presented. research question 3: does the relationship between planning sophistication and the small business manager's use of information sources/media for planning have a greater correlation i'or high-performing companies than for low-performing companies? 38 in summary, this research is investigating if small business managers'se of information sources/media for planning will vary based on planning sophistication and entrepreneurial intensity. additionally, will high-performing companies use more information sources/media than low-performing companies? research methods quantitative and qualitative information concerning the five research questions was collected from 165 general managers of small firms in a southwest and a midwest metropolitan area. ~sam le the criteria for lirms to be included in the sample was: less than 50 employees less than $ 1 million annual revenues also to reduce within group variance, only service or retail lirms were included. the general manager of each firm also met these criteria: at least 51 percent ownership in the firm full-time management of the firm owner of an independent firm, not a franchise individually responsible for the planning process of the business in both metropolitan areas a random sample that met the criteria was drawn from local telephone books. firms that did not meet the sample criteria after selected from the telephone books were omitted. such a sample may be considered a convenience sample and the we randomness could be questioned. but we are confident the sample generally represents the universe identified for this study as the objective was to analyze a sample of small business managers. after omitting firms that did not meet sample criteria, the average age of the firms in this study was 11 years. the average revenue per year was $300,000. the average number of employees was eight. ~rh d the first step was to develop an interview protocol. a pilot study of 26 small business general managers was used to develop an interview protocol or format that contained quantifiable measures and possessed construct and content validity as well as reliability. a group of three researchers expcricnced in qualitative research worked together to assure the interview results were reliable. construct validity was achieved by developing the interview format with the assistance of researchers doing similar research. content validity was assured by thoroughly discussing the interview format and explaining the research questions and rationale with two of the general managers who were involved in the pilot study. 39 according to fielding and fielding (1986), "qualitative work can assist quantitauve work in providing theoretical framework, validating survey data, interpreting statistical descriptions and describing puzzling responses" (p. 27). qualitative assessment is largely the product of the interaction of the judge with the phenomenon. validity lies in the qualificauon of the judges (huberman and miles, 1994). the judges in this study had extensive experience in qualitative assessments. they had received specialized training, published research and taught courses on qualitative research procedures. the qualitative data gave meaning to the responses, aided in validating the quantitative data, and allowed for exploration for future research. personal interviews of 165 small business general managers were conducted to collect the data. this approach was used because personal interviews are advantageous for handling complex questions, collecting large amounts of data and obtaining in-depth information (tull &. hawkins, 1980, p. 131). the questions posed to the general managers were considered complex and required explanation. each interview lasted from one to two hours. initially, the general managers were asked to explain how the business was started and why they went into their business. after a positive rapport was established, a semi-structured format approach was used to assure all the specific questions for this study were addressed. the interviewers consisted of three experienced interviewers who had specialized training in research interviews. as mentioned when discussing the pilot study, the initial interviews were conducted in teams to assure reliability and validity in data interpretation. measurements the researchers used the four measurements discussed nex(. in each case the research showed the scale to the small business manager and explained the variables involved. in other words, self-ratings were used but the researcher thoroughly explained the measurements to thc managers to avoid ambiguity. information sources/media were measured by asking the owners to indicate the extent to which they used the following sources/media of information for planning: written external sources including trade magazines, local or national newspapers, newsletters, information services, written internal sources including special studies, reports, memos, management information services, personal external comacts including business associates, officials, customers, friends, family, personal internal contacts including salespeople, staff, and other subordinates. these measures are similar to those developed by hambrick (1982) and culnan (1983) and validated by farh, hoffman and hegarty (1984). 40 a sample of the rating scale format is presented in figure l. figure i rating scale personnel internal contacts (subordinates, salespeople, staff people). less few than times once daily weekly monthly a yr a yr 5 4 3 2 i level of planning sophistication was measured by an adaption of the rating established by bracker and pearson (1986). the pilot study of 26 managers indicated the scale had to be adapted because it was difficult to definitively differentiate between levels of structured strategic, operational and intuitive plans. as a result, strategic planning was deleted from the scale for this study while measurements of operational planning were developed more extensively. this was similar to other studies that found it difficult to operationalize structured strategic planning for small firms (shrader, mulford and blackburn, 1989; watts and ormsby, 1990). the final version of the scale, like bracker and pearson's (1986), was based on a content analysis of the literature addressing small business planning practices. eight distinct components emerged from the literature review: objective setting; environmental analysis; strengths, weaknesses, opportunities and threats analysis; strategy formulation; financial projections; functional budgets; operating performance measures; and control and corrective procedures. based on these eight components, a seven-point scale of planning sophistication was developed (sce figure 2). evidence such as budgets and interview comments were used to determine the manager's level of planning sophistication as measured by the scale. the firm's financial performance was determined by asking the owner for the projected revenues over the next two years and percentage of revenue growth over the past three-year period. in total, the growth covered five years: the aggregate of the past three years and projections over the next two years. most of the firms in this study were privately-held firms, so profitability data were not publicly available. although self-report is by no means a perfect measure, dess and robinson (1984) found that where objective, public data were not available, self-reports by managers were very reliable. 41 level of fntrepreurship was determined by asking how the firm was established and its goals at the time. the extent to which managers are entrepreneurial or administrative has been figure 2 level of planning sophistication hi 7 wriuen short range operational budgets. plan for current fiscal period. extensive cash-rolling budgets. 6 invemory analysis beyond several months. p & l or cash liow analysis quarterly. more sophisticated budgets. 5 4 monthly or quarterly output quotes. monthly expense projections. inventory analysis budgets accounting reports monthly. basic p gt l analysis. 3 scheduling of personnel and inventory needs for periods of less 2 than a month. no measurable structured planning in the firm. seem to think low i from day-to-day only. categorized in many ways. managers have been classified as "craftsman entrepreneurs" or "opportunistic entrepreneurs" (smith, 1967; smith and miner, 1983), as craft promotion, or administrative types (filley and aldag, 1978) and as "caretakers" and "managers" (braden, 1977). in an attempt to operationalize enuepreneurial intensity, braden (1977) used four questions and filley and aldag (1978) used 10 questions. meanwhile, covin and slevn (1986) used three classifications as did shafer (1990). these various categories made it difficult to use a universally accepted operational definition for levels of entrepreneurship, during the pilot study, it was found that the interviewees most easily related to a classification system developed by cooper and dunkelbcrg (1986). they drew from the extant literature to develop four categories of entrepreneurial intensity: i) starters, 2) purchasers, 3) inventors and 4) those promoted or brought in. in this categorization system, one is the highest level of entrepreneurship while four is the lowest. in terms of research 42 question 2, the entrepreneurial manager would be a i-starter-while the 4 would be a caretaker. the researchers were able to reach agreement during the pilot study on the placement of the small business managers in one of these four categories, therefore, these four classifications were used to classify entrepreneurial intensity for the present research. results the means and standard deviations for frequency of information sources/media used by the managers are presented in table i. personal internal information is used most frequently, and written internal is used least frequently. table 1 means and standard deviations of information sources/media used for planning information sources/media means st. dev. written external 2.23 .83 written internal 2.17 1.09 personal external 2.63 1.07 personal internal 2.86 1.28 all written 2.18 .79 all personal 2.74 1.04 all internal 2.51 1.00 all external 2.43 .78 i = infrequent use 5 = frequent use the first research question stated: as planning sophistication increases, does the frequency of information sources/media used increase? the correlation coefficients between planning sophistication and information sources/media used by managers are presented in table 2. all correlations are positive and statistically significant at the .001 level. this indicates that small businesses who conduct more sophisticated planning use both internal and external information sources/media more frequently. the second research question asked: do small business managers with an entrepreneurial/ opportunistic orientation use more information sources/media for planning than a caretaker-type manager? an anova of information sources/media by entrepreneurial intensity revealed no significant differences. 43 table 2 correlation analysis between level of planning and information sources/media used for planning informauon sources/media wriuen external 3353iii written internal 3632itv personal external .2025~~~ personal internal .2966~v'll written .4246~~~ all personal .2840**» all internal .3912~~~ all external .3197++ all sources .4044'i*i'~~ p ( .001 the last research question asked: does the relationship between planning sophistication and the small business manager's use of information sources/media for planning have a greater correlation for high-performing companies than for low-performing companies? high performing companies were selected by determining the median performance measure and assigning those above the median to the high-performing group and those below to the low-performing group. a comparison of the correlations is presented in table 3. most correlations are greater for the high-performing companies and four coaetations are significant. they are: (i) wriuen external, (2) written internal, (3) all wriuen and (4) all internal. interestingly, no correlations were significant in the lowpcrforming companies. summary and discussion this study examined information sources/media used by small business managers and their relationship to the planning process, entrepreneurial intensity and firm performance. overall, personal sources of information, both external and internal, were used more frequendy than wntten sources of information. this finding is supported by a number of studies both in large and small firms that have found top-level managers'reference for informal, human sources of information (hambrick, 1981; johnson dt kuehn, 1987; mintzberg, 1973; smeltzer, farm /k nikolaisen, 1988). 44 table 3 correlations between planning sophistication and information sources/media used for planning by highand low-performing companies information sources/media high-performing low-performing (n=53) (n =47) wriuen external .362» .178 wriuen internal .359» .210 personal external .075 .133 personal internal .269 .212 all written .438*» .251 all personal .203 .214 all imcrnal .396'246 all external .252 .198 *p & .05 **p & .01 the primary finding in this study was the positive relationship between planning sophistication, firm performance, and information sources/media used for planning. this sample of small businesses used all sources/media of information more frequently as the level of planning sophistication and performance increased. this finding is supported by rhyne's (1985) study of managers in large organizations. in general, these two findings indicate no differences exist between managers in large and small lirms in the relationship between information/media use and planning. however, unlike rhyne's study that found a strong relationship between planning sophistication and external and informal (personal) sources, this study revealed that internal and written sources of information related most strongly to the level of planning sophistication. this is a distinct difference from the results in other studies involving managers in large firms. several reasons may exist for these differences. rhyne examined large public manufacturing firms from the fortune 1000 list. we suggest that large firms have special staffs for planning and for scanning, whereas in all probability our research sample-small business managers-did most if not all planning and scanning themselves. in addiuon, they engaged in operational planning, not strategic planning. several studies (aguilar, 1967; daft, sormunen, dk parks, 1988; keegan, 1974; rhyne, 1985) reveal that even if sophisticated mis systems and formal information services are available, 45 top-level managers use personal, external sources of information. another finding of this study is that as general managers of high-performing companies increase their level of planning sophistication, they tend to seek more written sources of information than those general managers of low-performing companies. this may mean that these general managers are using more formal information systems to supplement their informal inlormation systems for the planning process. finally, no significant relationship existed between level of entrepreneurial intensity and information sources/media used for planning. entrepreneurial intensity is difficult to measure, so perhaps more sensitive measures techniques need to be used to gain further insight into the possible relationship between these variables. in addition, more consistent use of operational definitions may be helpful. we believe more work is needed by small business scholars to develop a universally accepted operational delinition of entrepreneurial intensity. a limitation of this study is the self reponed behavior of managers. to overcome this limitation, trained observers could monitor managerial behavior through a period of time. however, tomlinson (1987) noted a variety of hurdles to observation in organizational studies including: (a) physical or space barriers, (b) time barriers, and (c) the effect of the researcher on normal behaviors. an additional problem when dealing with information sources is that it is a cognitive process, lt cannot be observed. to overcome this problem, cognitive mapping has received extensive use as a research tool in recent years. but aldag and stearns (1988) state, cognitive mapping also has limitations. it relies on the respondent's sell'nsight and may be influenced by rationalization, social desirability and other contaminants. aldag and stearns (1988) also state that it seems unlikely that any foreseeable technique will overcome all the limitations associated with currently available methods. this may be why self report by managers remains a viable and popular research procedure. the difference between the research reported here and that of daft et al (1988) and rhyne (1985) may largely be auributed to differences between large and small firms. the present research leads to the conclusion that much more research should be conducted with managers who operate within different comexts. this is consistent with the conclusion of huff and reger (1987) when they state that an important area for future strategic process research is to consider the organizational and environmental context. not umil much more is known about thc affects of organizational differences will it be possible to develop a comprehensive theory of managers'cquisition of information. in addition to organizational differences, task differences must also be analyzed. does a significant difference exist between operational and strategic planning processes in relation to information acquisition? this question relates to saunders and jones'1990) suggestion to examine various information sources and media for different decision processes. information acquisition panerns may vary depending on the type of decision, and various sources and media may be more appropriate at differem points in the strategic decisionmaking process. however, information acquisition is a difficult process to analyze. it may bc necessary to investigate concepts and research from related areas-another recommended direction for research presented by huff and reger (1987). for instance, it may be valuable 46 to investigate information sources and media from a perspective of organizational learning. organizational learning typically involves data collection about the environment through scanning (daft & weick, 1984). shrwastava (1983) developed a topology of systems for organizational learning in which information acquisition is a key aspect. much may be learned within the context of organizational learning that could be applied to what we currently know about small business managers'nformation acquisition. a critique of this research and discussion may be that it takes a limited functionalist viewpoint. that is, the social reality of information sources is viewed as objective and orderly. the phenomena is treated as a concrete, materialistic entity. it may be more fruitful if subsequent research took less of a positivism orientation and more of a social construction perspective (fulk, 1993). a need exists to study information sources in planning as a set of symbols. we recommend future research integrate both a functional and a social construction theoretical perspective. implications for entrepreneurs one of this studies'ajor findings relevant to government officials and the small business administration (sba) is that a broad sample of small business managers does not utilize written information. however, most government assistance with respect to managerial action is in the form of wriuen communication. even the various business information centers, bulletin boards and networks provide information in the written format. the results indicate that many small business managers may receive this written information; however, its impact may be minimized by their failure to read or even ignore the information. the belief that personal information is richer, more reliable, and produces greater results with less effort may be why small business managers fail to fully use written information. this study suggests that there should be a careful evaluation of the type of information (written/personal) provided by governmental agencies to small business. an agency's review of media use may have a positive impact on the implementation of government programs, consulting and assistance provided to small business managers. but what is a government agency to do? it would be ludicrous to think that the sba could disseminate information personally. however, the use of strictly written media techniques does not appear to be the best strategy. a difficult dilemma exists. two recommendations emerge. first, agencies should not be overly optimistic that written messages will be highly effective or efficient. this limitation leads to the second recommendation. as new technologies develop, strategies for using these innovations must be considered. one innovation that probably should be considered is the possible use of internet. because this technology is advancing so rapidly, it is difficult to determine all of its possible applications and limitations at this time. another possibility might be the use of educational television. as more wide range cable networks develop, new video alternatives for information dissemination may emerge. 47 the results also highlight the possible need of small business managers to be more aware of the contribution written information may have on the management and performance of their businesses. it appears likely that at some time in the life of the small business, the need for wriuen information becomes a necessity. those managers who cannot learn to use wriuen information to the lirm's advantage may fail to make die transition from mangers of small entrepreneurial firms to a larger, more traditional, business organizations. additional research on informauon use may be a fruitful avenue that sheds light on the reason some enuepreneurs can manage their firms throughout their life cycle while others falter from one organizational stage to the next. another important finding with respect to the entrepreneur was the relationship between greater information acquisition and planning sophisucation. the link between small business planning sophistication and enhanced cirm performance appears to be fairly well established (schwenk and shrader, 1993). thus, the acquisition of information in general has important consequences for the small business managers with 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(1987), entrepreneurship: an integrating topology and evaluation of the empirical research in the field. lournal of mana emen, 13, 259-279. 52 strategy table of contents page title/author i small business entry strategies: an integration of technological discontinuity and industry growth potential laurence g. weinzimmer robert k. robinson ross l. fink 11 management buyouts and small business performance: an exploratory examination and research agenda garry d. bruton j. kay keels elton scifres 21 assessing the impact of operational planning on small business retail performance luann rickeus gaskill howard e. van auken hye-shin kim 37 establishing the value of a business: how the practitioners do lt fess green joel worley a. edward corley 45 strategic implications of current small business waste reduction programs masoud hemmasi lee graf kelly c. strong michael w. winchell 57 corporate governance in the small firm: prescriptions for ceos and directors catherine m. daily dan r. dalton special section 69 rethinking the business plan paradigm: bridging the gap between plan and plan fxecution michael d. ames str4tegy editor's note this issue of the journal marks the completion of our fifth year of publication! we appreciate the support we continue to receive from small business institute directors'ssociation members, individual subscribers, libraries, and the large number of authors who submit their manuscripts for publication. the articles published in this issue present diverse topics that impact the small business owner and consultant. many small business owners unfortunately operate in a reactive rather than proactive mode. the authors published in this issue encourage small business owners to take a different approach —plan ahead. in the past year, small businesses across the united states have faced numerous crises ranging from devastation of their businesses by hurricanes and earthquakes to legal actions against the company by key employees. the lead article stresses the importance of developing a crisis management plan while the second article helps small business owners develop a plan to avoid or eliminate sexual harassment within the workplace. the third article presents issues faced by minority business owners when seeking financing for their ventures. the objective is to help minority business owners overcome these problems and operate prosperous businesses. the fourth article examines an alternative to help displaced workers re-enter the workforce upon release from prison. the special section contains the distinguished paper from the 1994 national sbida consulting conference and an invited paper. the distinguished paper examines subcontractor relationships across a variety of industries. the invited paper focuses on the passage of the north american free trade agreement and its impact on small business. the authors present a means of assisting small businesses in becoming competitive in this new market through university-sponsored centers. in addition to strategically-oriented articles, a forthcoming issue of the journal will contain a number of articles directly related to entrepreneurship education and small business institute program management. as our subscription base expands to include small business owners, we also hope to receive submissions from those readers. i want to express special thanks to the reviewers. you did an outstanding job once again. the following reviewers complete their tenure at the end of the year, .toe latona, lawrence klatt, donald clause, binshan lin, harriet stephenson, howard rudd, richard daily, inge nickerson, don bradley, and benton "bud" miles. we hope you will review for us again in the future. gwen fontenot, ph.d. editor http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2021, vol. 31, no. 03, 47-58 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2021 small business institute® w w w. j s b s . o rg introduction 1makerere university business school, p.o box 1337, kampala, uganda, gahimbisibwe@mubs.ac.ug 2makerere university business school, p.o box 1337, kampala, uganda, jntayi@mubs.ac.ug 3makerere university business school, p.o box 1337, kampala, uganda, mngoma@mubs.ac.ug 4makerere university business school, p.o box 1337, kampala, uganda, gbakunda@mubs.ac.ug 5makerere university business school, p.o box 1337, kampala, uganda, jcmunene@mubs.ac.ug 6makerere university business school, p.o box 1337, kampala, uganda, tesemu@mubs.ac.ug entrepreneurial mindset: examining the contribution of deliberative and implemental mindsets to sme internationalization deliberative mindset, implemental mindset, internationalization, smes, uganda. apa citation information: ahimbisibwe, g. m., ntayi, j. m., ngoma, m., bakunda, g., munene, j. c., & esemu, t. (2021). entrepreneurial mindset: examining the contribution of deliberative and implemental mindsets to sme internationalization. journal of small business strategy, 31(3), 47-58. in this paper, we explore whether each of the entrepreneurial mindset dimensions (deliberative and implemental mindsets) contributes significantly to the internationalization of small and medium-sized enterprises (smes) in a developing country context like uganda. the participation of smes in international business has been increasing in the last two decades as they strive to diversify their risks and to remain competitive in the global economy (misati et al., 2017; ndiaye et al., 2018; o’cass, & weerawardena, 2009). the available evidence indicates smes account for about 52% of global output and contribute to over 40% of gross domestic product (gdp) for most world economies (ayyagari et al., 2011; ndiaye et al., 2018). consequently, interest in explaining the participation of these firms that were once considered passive actors has also increased. one area that has emerged strongly is the cognitive research largely focused on establishing the influence of a mindset on the internationalization of small and medium-sized enterprises (acedo & jones, 2007; felicio et al., 2012; zahra et al., 2005). the review of these studies indicates that the individual’s cognitive positioning affects the internationalization capabilities of the firm. for instance, acedo and jones (2007) post that some mental processes are always present when making decisions to internationalize. zahra et al. (2005) also observe that cognitive predispositions tend to influence entrepreneurs’ responses to their external environments, risk preferences and recognition of emerging foreign market opportunities while the influence of an individual’s cognitive positioning in firm internationalization is documented so far, extant studies have not shown how entrepreneurial mindset (state of mind that orients human conduct towards entrepreneurial activities and outcomes) influences the internationalization of small and medium enterprises (smes). specifically, studies have not explicitly investigated the contribution of each entrepreneurial mindset dimension (deliberative and implemental mindsets) as conceptualized by mathisen and arnulf (2013; 2014) in the context of sme internationalization. it is not even clear whether both deliberative and implemental mindsets contribute equally to sme internationalization. this is quite surprising since sme internationalization is regarded as an entrepreneurial activity where the multidisciplinary role of entrepreneurs the purpose of this study was to establish the contribution of deliberative mindset and implemental mindset to sme (small and medium enterprises) internationalization. this study employed cross-sectional and correlational research designs. data were collected through a questionnaire survey of exporting sme owners and managers. data was analyzed with the help of statistical package for social sciences (spss) and smartpls. results suggest that implemental mindset significantly contributes to variances in sme internationalization unlike deliberative mindset. the findings in this study imply that increased levels of internationalization among smes in a developing country like uganda can be achieved by those managers and owners who possess an implemental mindset. this study provides initial empirical evidence of the contribution of deliberative and implemental mindsets to sme internationalization using evidence from uganda – a developing country. godwin m. ahimbisibwe1, joseph m. ntayi2, muhammed ngoma3, geoffery bakunda4, john c. munene5. timothy esemu6 http://www.smallbusinessinstitute.biz http://www.jsbs.org 48 g. m. ahimbisibwe, j. m. ntayi, m. ngoma, g. bakunda, j. c. munene, & t. esemu journal of small business strategy / vol. 31, no. 3 (2021) / 47-58 and their mindsets is a key determinant in the foreign expansion process (felicio et al., 2012). in this study, we acknowledge the existing gap in the literature, and we close it using evidence from uganda--a developing country. uganda offers a unique study setting since the international participation of its smes that contribute about 20% of gdp (hatega, 2007; ladu, 2019) is very mixed. some reports indicate that their participation in both regional and international markets has been on the rise since the implementation of structural adjustment programs initiated by the world bank and the international monetary fund (jaimovich & kamuganga, 2010). other reports indicate that some smes in uganda continue to be slow and less aggressive in exploiting regional and international market opportunities. particularly there are concerns that even with the opening up of regional markets such as the east african community (eac), common market for east and southern africa (comesa) and other trade preferential treatments such as the african growth opportunity act (agoa), most smes are still reluctant to fully commercialize their operations in international markets (nakaweesi, 2016). given the mixed behavior of smes in as far as exploitation of international opportunities is concerned, the study setting seems to be relevant in exploring how the entrepreneur’s state of mind influences the internationalization of smes in uganda. such evidence is important since it provides smes in developing countries with information on the state of mind that is relevant to their successful foreign expansion. we achieve our aim through a questionnaire survey of 197 exporting smes. results indicate that implemental mindset contributes significantly to sme internationalization while the deliberative mindset doesn’t. the rest of the paper is organized as follows: section 2 is the literature review. this is followed by section 3 that provides a detailed methodology. section 4 presents results. section 5 is the discussion. section 6 presents the conclusions and implications of the study. lastly, section 7 presents limitations and provides directions for future research. literature review theoretical underpinning the concept of entrepreneurial mindset is rooted in the mindset theory of action phases (gollwitzer, 1990). the theory assumes that the pursuit of goals is made up of different phases, and each phase is accompanied by a distinct mindset. the first phase is the pre-decisional phase, which is characterized by a deliberative mindset that conditions individuals to evaluate the feasibility of all competing ideas or business opportunities. accordingly, the deliberative mindset should be able to position an individual to select an opportunity based on the expected benefits (gollwitzer, 2011). the second phase is the post-decisional phase characterized by the implemental mindset where individuals initiate actions to implement the selected goal (taylor & gollwitzer, 1995). by and large, the deliberative mindset is more linked to procedures of weighing the pros and cons of the available opportunities whereas the implemental mindset is related to actions taken to seize the most feasible opportunities (armor & taylor, 2003; gollwitzer 1990; mcmullen & kier, 2016). by extension, we posit that internationalizing smes with entrepreneurial-inclined managers and owners should be well-positioned to evaluate competing international business opportunities and design appropriate actions to seize them. in line with this reasoning, it is possible to suggest that the decisions taken during the process of the international expansion of smes will largely depend on the mental positioning of their owners or managers at a given point in time, and this will influence the speed of market entry, the scope of operations in international markets and the extent of involvement in the foreign markets. this supposition is consistent with the views of ngoma et al. (2017), who allude to the fact that the entrepreneurial positioning of individuals has the potential to influence the international expansion of smes. unlike in the past where internationalization was considered to be a preserve for large multinational companies, evidence indicates that this view is no longer valid as many smes have successfully set up activities beyond their home markets (ruzzier et al., 2006). the term “internationalization” is associated with the international expansion of a firm’s economic activities across national borders. whereas this is true, several definitions have been advanced in international business-related studies to try and explain its nature. for instance, johanson and mattsson (1993) define internationalization as the process of adapting a firm’s operations (strategy, structure, and resources) to international activities. internationalization is also defined by calof & beamish (1995) as a process in which firms increase commitment to foreign activities in foreign markets. oviatt and mcdougall (2005) take an entrepreneurial perspective and define internationalization as the discovery, enactment, evaluation, and exploitation of opportunities across national borders to create future goods and services. welch & luostarinen, (1993) describe internationalization as the outward movement of a firm’s international operations. given the context of this study, the definition by welch and luostarinen, (1993) seems to be more appropriate to depict sme internationalization in uganda. we adopt this definition because of two reasons. first, consistent with most studies on sme internationalization, this study concentrates 49 g. m. ahimbisibwe, j. m. ntayi, m. ngoma, g. bakunda, j. c. munene, & t. esemu journal of small business strategy / vol. 31, no. 3 (2021) / 47-58 on uganda’s exporting smes that largely produce domestically and sell/export their products or services outside the national borders thus capturing the outward outlook emphasized in the definition. secondly, most smes inherently suffer from resource poverty, and therefore the outward movement where firms simply produce domestically and export seems to be the cheapest way to expand and access foreign markets when compared to high-cost foreign market entry modes such as joint ventures and wholly-owned subsidiaries (tesform & lutz, 2006) deliberative mindset, implemental mindset and sme internationalization. conceptually, entrepreneurial mindset is a multidimensional concept composed of a deliberative mindset and an implemental mindset (mathisen & anulf, 2013; naumann, 2017). although there has been little research addressing how these mindsets directly contribute to firm internationalization, several lines of investigation suggest that these could have a positive contribution to both predictions and outcomes (armor & taylor, 2003). in line with this view, it is possible to postulate that both deliberative and implemental mindsets could have a significant influence on the internationalization of smes. first, the deliberative mindset which conditions individuals to evaluate the desirability and feasibility of the available competing opportunities (taylor & gollwitzer, 1995) could be critical in the internationalization process of smes. this assertion is based on the view that international expansion is characterized by many businesses and individuals with such a state of mind may be able to take decisions in international markets based on informed evaluation of the opportunities at hand. this evaluative mindset drives individuals to pursue the best international business opportunities since they tend to evaluate all potential opportunities from a set of competing ideas (gregoire et al., 2008; williams, 2010). because of this, wood and williams (2014) suggest that whereas identifying an opportunity is a necessary step, it is insufficient for entrepreneurial action. the authors posit that after the identification of an opportunity, managers and entrepreneurs must evaluate the viability of an opportunity before taking any action. indeed, nadikarni et al. (2006) postulate that the mindset is an important human resource in international success because firms are likely to use the mindsets of their managers and owners to scan international opportunities, diagnose constraints imposed by the foreign markets and guide alternative internationalization choices. regarding implemental mindset, there are submissions that the possession of such state of mind will orient individuals towards formulating actions necessary to seize the perceived opportunities (mathisen & arnulf, 2014; mcmullen & kier, 2016; naumann, 2017). based on this view, it is possible to suggest in this study that implemental-minded individuals are well-positioned to exploit opportunities in international markets. this understanding is consistent with the submissions by gregoire et al. (2010), who indicated that organizations operate in complex and dynamic environments that are increasingly characterized by rapid and significant changes where gains in profit, growth and competitive positioning can only be made by those individuals and organizations that can initiate actions aimed at exploiting the opportunities that arise in such changing environments. thus, we extend this argument and assert that smes will be able to generate substantial returns and venture into multiple markets by initiating actions required to exploit the perceived opportunities in such an environment. in support, lindstrand and hanell (2017) stress that actions related to the exploitation of international business opportunities determine firm growth and international expansion of smes. from the foregoing discussion, we believe that sme managers with a deliberative mindset will be able to explore international markets. we also argue in this study that sme managers with implemental mindsets are likely to explore international markets. thus, we hypothesize that: h1. a deliberative mindset significantly contributes to sme internationalization. h2. an implemental mindset significantly contributes to sme internationalization. method research design, population, and sample size this study’s design was cross-sectional and correlational. we adopted a cross-sectional design because data was collected at a particular point in time. the study was correlational because it aimed at establishing relationships between the study variables. this study targeted a population of 390 exporting smes in the central districts of uganda (kampala, wakiso, and mukono) where most exporting smes (uganda export promotions board database, 2018) are. the yamane (1973) sample size selection model n = n/ 1 + n (℮) 2 was utilized to determine the sample size. based on this, a sample size of 197 exporting smes was generated. we used a sample random sampling technique to select the particular exporting smes using a table of random numbers to pick the required sample of 197 firms. our unit of analysis was an sme while our units of inquiry were sme owners and managers. data was therefore aggregated to a 50 g. m. ahimbisibwe, j. m. ntayi, m. ngoma, g. bakunda, j. c. munene, & t. esemu journal of small business strategy / vol. 31, no. 3 (2021) / 47-58 level of an sme. out of the 197 exporting smes sampled, usable responses were received from 144 exporting smes, representing a response rate of 73%. the high response rate is attributed to the ample time given to the respondents to complete the questionnaire. respondents were given three months to complete the questionnaire. however, after every two weeks, respondents would be contacted to find out whether the questionnaires with them had been completed. results from the survey indicate that the majority of the respondents were males (75.1%), the majority were aged between 27 to 37 years (51.3%), the majority had attained a bachelor’s degree (44.4%) and the majority were managers (76.7%). the results further indicate that the majority of the smes that participated in this study were active in the manufacturing sector (38.9%). the majority (37.5%) had operated in international business for 6-10 years. the majority (59.7%) employed between 1-49 employees, which fit in the category of small-sized firms while the rest (40.3%) employed between 50249 employees, fitting in the category of medium-sized enterprises. the respondents’ and firm characteristics are indicated in table 1. this study used a questionnaire with close-ended questions. the questionnaire was used because it is appropriate for collecting data from a large sample (sekaran, 2003). the questionnaire was also used because of its capacity to capture primary respondents’ opinions. the questionnaire contained close-ended questions. whereas open-ended questionnaires are known for enabling respondents to express their opinions on the subject matter as much as possible, we intended to obtain the mean ratings of the statements in the questionnaire, and therefore, open-ended responses were inappropriate. the reliability and validity of the measurement scales were computed using smartpls statistical software. for reliability values, we relied on composite reliability estimates and all the values were found to be above 0.7 (deliberative mindset = 0.88, implemental mindset = 0.87, sme internationalization= 0.89), as shown in table 2. moving forward, we tested for convergent validity to assess the degree to which measures of the same construct were correlated. we followed the criteria by fornell and larcker (1981), which posits that to ascertain convergent validity, the factor loadings should be above 0.5 and the average variance explained (ave) should exceed the cut-off point of 0.5. the results in table 2 indicate that these criteria were met confirming that the measures of each of the study variables were sufficiently correlated. to establish whether the constructs were conceptually different from each other, a discriminant validity test was performed. we considered the heterotrait-monotrait ratio of correlations (htmt) criterion as recommended by henseler et al. (2015). the htmt test was preferred since the most celebrated fornell-larcker test is not accurate enough in detecting discriminant validity (henseler et al., 2015). accordingly, the value of two reflective constructs should be below 0.85 (kline, 2011). the results in table 3 indicate that all the htmt values were below 0.85, ascertaining that the constructs were distinctively different from each other. measurements of variables in measuring the study variables, we based this process on the previous studies. the items for the independent variables were anchored on a six-point likert scale ranging from 1 “strongly disagree” to 6 “strongly agree” to avoid response indecision associated with middle neutral points (ntayi et al., 2012) while those of the dependent variable were anchored on a six-point interval scales to match the scale of predictor variables. the dependent variable for this study is sme internationalization, which we operationalized in terms of speed, scale, and scope to capture the outward shift of smes’ foreign operations. this is consistent with previous studies (see, for example, bakunda, 2003; lu & beamish, 2001; hsieh et al., 2019; ngoma & ntale, 2014; sullivan, 1994). we defined speed as the length of time between the firm’s inception and its first foreign activities. we defined scale as the extent to which a firm is exposed to international markets compared to the domestic market. finally, we defined scope as the territorial spread/coverage of the firm. the independent variables are the deliberative mindset and implemental mindset. we measured deliberative mindset based on measures such as ‘we reflect whether we have the financial capacity for international operations.’ we defined a deliberative mindset as the state of mind that is oriented towards evaluating the feasibility of competing opportunities. for implemental mindset, we used measures such as, “we make sure that enough finances are mobilized to pursue our business ideas in foreign markets” to operationalize it. such measures were adopted from the works of mathisen & arnulf (2014) and modified to fit in the context of this study. we defined implemental mindset as the state of mind oriented towards initiating actions to seize the available business opportunities. we controlled for firm size, sector, and export experience to ensure that our model only represented the hypothesized relationships. the firm size (ngoma, 2009; yang et al., 2015), export experience (andersen & buvik, 2002; tolstoy, 2019), sector (lindstrand & hanell, 2017) have largely been used as control variables in international business studies. firm size was measured by the number of permanent full-time employees in the firm, the export ex51 g. m. ahimbisibwe, j. m. ntayi, m. ngoma, g. bakunda, j. c. munene, & t. esemu journal of small business strategy / vol. 31, no. 3 (2021) / 47-58 table 1 respondents’ and firm characteristics individual characteristics frequency percent gender male 142 75.1 female 47 24.9 total 189 99.5 age 18-26 16 8.5 27-37 97 51.3 38-48 43 22.8 49-59 30 15.9 60 & above 3 1.6 total 189 100.0 education level secondary 12 6.3 certificate 17 9.0 diploma 46 24.3 bachelor’s degree 84 44.4 masters &above 30 15.9 total 189 100.0 position owner 19 10.1 manager 145 76.7 owner-manager 25 13.2 total 189 100 firm characteristics frequency percent sector agriculture 36 25.0 manufacturing 56 38.9 services 31 21.5 arts and craft 19 13.2 minerals & rare earth 2 1.4 total 144 100.0 export experience 1-5 years 31 21.5 6-10 years 54 37.5 11-15 years 30 20.8 3.50 1 .7 16-20 years 16 11.1 21 & above years 12 8.3 total 144 100.0 52 g. m. ahimbisibwe, j. m. ntayi, m. ngoma, g. bakunda, j. c. munene, & t. esemu journal of small business strategy / vol. 31, no. 3 (2021) / 47-58 table 2 factor loadings, composite reliability (cr) and average variance explained (ave) constructs items factor loadings cr ave deliberative mindset 0.828 0.616 we reflect on whether we have the financial capacity needed for international operations 0.849 we always consider whether we have the skills necessary to undertake the available international opportunities 0.745 we reflect on both negative and positive information when making decisions to undertake a given business opportunity 0.757 implemental mindset 0.791 0.654 we make sure that enough finances are mobilized to pursue our business ideas in foreign markets 0.788 we obtain the necessary know-how needed for international expansion 0.829 sme internationalization 0.823 0.695 how long did it take this company to make its first entry into international markets? 0.788 how long did it take this company to open up its first sales foreign branch 0.808 when compared to domestic sales, how much do export sales contribute to the overall sales? 0.876 how many countries in the world are you currently exporting to? 0.859 table 3 heterotrait-monotrait ratio (htmt) item deliberative mindset implemental mindset sme internationalization deliberative mindset 1 implemental mindset 0.19 sme internationalization 0.41 0.23 1 note(s): the figures in bold are htmt values. threshold of htmt is < 0.85. 53 g. m. ahimbisibwe, j. m. ntayi, m. ngoma, g. bakunda, j. c. munene, & t. esemu journal of small business strategy / vol. 31, no. 3 (2021) / 47-58 perience was measured by the number of years previously spent in exporting, and the sector was measured by the five sectors of agriculture and agro-processing, manufacturing, services, arts, and crafts as well as minerals and rare earth as specified by uganda export promotions board. control for common methods bias to minimize bias from the respondents, we controlled for common methods bias common in survey-based studies (gorrell et al., 2011). accordingly, method biases are a problem because they are one of the main sources of measurement error that normally threaten the validity of the conclusions made about the relationships. we controlled the bias by following the procedural recommendations advanced by podsakoff et al. (2003). thus, we targeted at least three respondents from each firm to eliminate social desirability bias. we also ensured that the dependent variable and independent variables were not similar in content. also, we assured the respondents that there were no right or correct answers to prevent them from editing the initial responses to be more socially desirable. more so, we avoided double-barreled questions. lastly, we tried to keep the questions as simple, specific, and precise as possible. results descriptive statistics the descriptive statistics in table 4 indicate the level of perceptions on both the dependent and the independent variables. statistics on sme internationalization (dependent variable) indicate a mean of 3.83 out of a maximum of 6, suggesting that managers and owners in uganda perceive internationalization among their exporting smes to be above average (> 50%). for the independent variables (deliberative mindset and implemental mindset), the results indicate mean scores of 4.78 and 4.47 on a scale of 1-6, suggesting that more than 75% of managers/owners of exporting smes in uganda recognize high levels of both deliberative and implemental mindsets among their firms. the mean scores for the main study variables fall between 3.93 and 4.78 on an anchor of a six-point scale. in comparison to the mean, the standard deviations range from 0.61 to 0.70. given that the standard deviations as compared to the mean values are small, the results imply that the study sample is an accurate reflection of the population and the participants in this study have a closer understanding of the study variables. table 4 descriptive statistics for independent variables and the dependent variable item n min max mean sd median deliberative mindset 144 3.00 5.88 4.78 0.61 4.75 implemental mindset 144 2.68 5.47 4.47 0.70 4.68 sme internationalization 144 2.30 5.32 3.93 0.69 3.82 source: primary data correlation analysis we ran the pearson correlation coefficients as shown in table 5. we found that deliberative mindset is not significantly associated with sme internationalization (r = 0.044, p > 0.01). this means that positive changes in deliberative mindset may not necessarily improve sme internationalization. we found that implemental mindset is significantly associated with sme internationalization (r = 0.367, p < 0.01). this means that a positive change in implemental mindset may cause positive changes in sme internationalization. hierarchical analysis having obtained the correlation analysis results which provide preliminary evidence on the association among the study variables, we ran the hierarchical regression analysis to establish the contribution of each independent variable to the dependent variable. hierarchical regression analysis was preferred since it can analyze the effect of predictor variables on the dependent variable while controlling for confounding factors (field, 2009). besides, hierarchical regression can establish the incremental contribution of each predictor variable to the dependent variable (sekaran, 2003). moving forward, we entered the control variables 54 g. m. ahimbisibwe, j. m. ntayi, m. ngoma, g. bakunda, j. c. munene, & t. esemu journal of small business strategy / vol. 31, no. 3 (2021) / 47-58 into model i. model 1 is the baseline model. we found that the control variables and deliberative mindset are not significant. the control variables included the sector of belongingness, size of the exporting firm, and experience of the exporting firm. the control variables only contributed 1.8% of the variances in sme internationalization. the finding that control variables are not significant is an indicator that our model is not affected by the confounding factors. in model 2, we entered the deliberative mindset. we find that deliberative mindset is not significant and thus contributes an additional 0.6% of the variance in sme internationalization. model 3 is our final model. in model 3, we entered an implemental mindset, and we found that it was significant. implemental mindset contributes to 11.8% together with the deliberate mindset and the control variables to variances in sme internationalization. this means that implemental mindset comes with an additional 9.4%. the regression analysis shows that h1 is not supported, but h2 is supported. the hierarchical analysis results are presented in table 6. table 5 correlation analysis results variables deliberative mindsets implemental mindsets sme internationalization deliberative mindsets 1 implemental mindsets 0.078 1 sme internationalization 0.044 .367** 1 **. correlation is significant at the 0.01 level (2-tailed). table 6 hierarchical regression analysis results item model 1 beta coefficients model 2 beta coefficients model 3 beta coefficients constant 3.706 2.296 2.128 independent variables deliberative .009 .020 implemental .385** control variables sector .021 .020 .026 firm size .001 .008 .147 export experience .031 .034 .083 model summary f .146 .175 4.833** r2 .003 .005 .149 adjusted r2 .018 .024 .118 f change .146 .264 23.356** r2 change .003 .002 .144 durbin-watson 1.654 note(s): **p = 0.01 55 g. m. ahimbisibwe, j. m. ntayi, m. ngoma, g. bakunda, j. c. munene, & t. esemu journal of small business strategy / vol. 31, no. 3 (2021) / 47-58 discussion the study sought to establish the contribution of entrepreneurial mindset dimensions (deliberative mindset and implemental mindset) to sme internationalization in uganda. it is evident that the deliberative mindset does not contribute significantly to sme internationalization (r = 0.044, p > 0.01). these results suggest that as sme managers/ owners increasingly orient their minds towards deliberating on the feasibility of every available opportunity in international markets, their level of internationalization does not change significantly. our findings seem to be at variance with the previous studies (gregoire et al., 2008; nadikarni et al., 2006) who had earlier observed that seizing international opportunities requires an evaluative mindset to be able to pursue the best alternative out of the several potential opportunities available in international markets. however, our results are consistent with the view of mathisen and arnulf (2013), who indicated in their findings that deliberations on the feasibility of competing opportunities may encourage more thinking and doubt subsequently increasing the gap between intention and action. in line with this reasoning, it’s possible to imagine that the key players in uganda’s exporting smes tend to evaluate the available competing opportunities but perhaps fail to take steps to exploit the most viable one. the findings also reveal that that implemental mindset is positively and significantly related to sme internationalization in uganda (r = 0.367, p < 0.01). this means that a positive change in implemental mindset is associated with a positive change in sme internationalization. in the context of this study, these results imply that sme managers and owners who mobilize the necessary financial resources and recruit the employees with skills and know-how within their exporting firms will realize the high speed of foreign market entry, will expand into several markets, and will be able to generate substantial revenues from foreign markets. consistent with these findings, our study lends support to earlier studies by lindstrand & hanell (2017), who observed that actions oriented to the exploitation of foreign opportunities determine the international expansion of smes. conclusion and implications the contribution made by deliberative mindset and implemental mindset to sme internationalization is now known. among the dimensions of an entrepreneurial mindset (deliberative mindset and implemental mindset), it’s the implemental mindset that has a significant positive relationship with sme internationalization in uganda. this suggests that higher levels of sme internationalization are dependent upon those managers/owners who are oriented towards initiating actions needed to pursue foreign expansion. thus actions, such as mobilization of financial resources and obtaining the necessary know-how, are very critical in enhancing the level of internationalization among smes in uganda. these actions not only leverage firms to enter into international markets faster but also to generate substantial revenues from sales as well as to venture into multiple markets. this paper, therefore, offers several implications. theoretically, the study documents that only implemental mindset significantly contributes to sme internationalization. our results imply that smes can internationalize better with managers/ owners who possess an implemental mindset. from the practical perspective, our results reveal that successful sme internationalization in developing countries and particularly in uganda can be achieved by entrepreneurs who are more inclined towards taking actions needed to exploit the identified international business opportunities. therefore, smes should pursue actions that are related to the mobilization of adequate finances. this can be done by creating working relationships with banks to provide export credit as well as short-term loans. more so, lobbying the government to provide cheaper sources of capital can be pursued by the managers and owners of smes. through financial access, smes will be well-positioned to produce products that meet the expected standards in international markets, will facilitate improvement in production processes, will ensure constant supply as well as lessen product rejection due to poor quality. additionally, smes need to seek the right skills to be able to expand their operations beyond their national borders. the skills could be in line with production, marketing, market information gathering, and analysis as well as product quality management. these skills are critical in ensuring constant production, production of high-quality products as well as keeping pace with the changes in international markets. with such actions, smes will be able to expand to multiple markets, generate substantial returns from export sales, and above all expand faster into foreign markets. for policymakers in uganda, it is evident from our findings that successful internationalization is contingent on implementing actions oriented towards exploiting international opportunities. therefore, there is a need for policymakers to augment the efforts of entrepreneurial smes to extend their operations in foreign markets. particularly the government should acknowledge the role of information in the process of opportunity evaluation and make it easier for entrepreneurs to effortlessly access it. this is particularly so since opportunity exploitation requires information for initial evaluation. thus, deliberate efforts aimed at provid56 g. m. ahimbisibwe, j. m. ntayi, m. ngoma, g. bakunda, j. c. munene, & t. esemu journal of small business strategy / vol. 31, no. 3 (2021) / 47-58 ing relevant export-related information within the relevant government institutions like uganda export promotions board (uepb) should be pursued. this information could be related to market opportunities, competition in the target markets, regulations, as well as the foreign customer values, tastes, and preferences. access to such information by the exporting smes will go a long way in forming a strong basis on which firms can evaluate their abilities on whether to pursue certain foreign opportunities or not. additionally, it should be noted that exploitation of opportunities in international markets requires the installation of the improved production process, conducting foreign market research, and meeting standards which all require a substantial financial investment. the government of uganda can do this by exempting taxes on imported machinery as well as by providing relatively cheap export credit to smoothen international expansion. this is very critical since in most cases opportunity exploitation among smes is dependent upon the finances at hand and the possibility of accessing the additional resources when needed. limitations and future research this study has some limitations that should be addressed in future research. first, we only considered smes that use exporting as their form of internationalization. whereas exporting is the most preferred form of international expansion among smes, it’s important to note that these firms utilize other forms of foreign market entry such as franchising, licensing, joint ventures, and wholly-owned subsidiaries to access international markets. thus, the extent to which the findings of this study can be generalized to other smes that use other modes of foreign expansion is not known. second, the independent variables (deliberative mindset and implemental mindset) predicted 11.8 % of sme internationalization in uganda. this suggests that about 88% of sme internationalization in uganda can be explained by other factors that were not part of this study. future studies may consider other factors that are not part of this study to explain the internationalization of smes in uganda. lastly, a cross-sectional survey was conducted in this study. this constrains our ability to make causal references between the variables used in this study since the views held by individuals may change over the years. thus, future studies might benefit from the use of longitudinal studies to establish if there are causal links between deliberative mindset, implemental mindset, and sme internationalization. references acedo, j. f., & jones, v. m. 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(2005). cognition and international entrepreneurship: implications for research on international opportunity recognition and exploitation. international business review, 14(2), 129–146. strategy publication staff editor dr. joe singer university of missouri kansas city, missouri associate editor gary r. hazeltine professional support services olathe, kansas editorial assistant david k. hensley university of missouri kansas city, missouri editorial advisory board dr. david m. ambrose university of nebraska-omaha dr. chi anyansi-archibong north carolina alkt state university dr. robert brockhaus st. louis university dr. sam j. bruno university of houston-clear lake dr. james j. carroll georgian court college ms. sally a. charles purchasers representative dr. ron cook rider university dr. richard t. dail ey university of montana dr. dale dickson mesa state college dr. gwen fontenot marketing solutions dr. fred l. fry bradley university dr. joseph j. geiger university of idaho dr. 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57799-9006. annual subscriptions may be ordered at $20 each (u.s.dollars only). international subscriptions add $5 annually for postage and handling. back issues may be ordered at $ 12 each. 0 copyright 1996 small business institute directors'ssociation issn 1081-8510 sravxcf table of contents page title/author i is your smag business prepared for a crisis? frederic j. hebert neil humphreys 15 using data from court cases and employee surveys to design sexual harassment policies toni p. lester 31 financing patterns of minority-owned small business howard e. van auken hayward d. horton 45 testing prison inmates for entrepreneurial aptitude matthew c. sonfield robert j. barbato special section 53 an analysis of sub-contracting relationships based on the sub-contractor/customer technology exchange portfolio: some empirical findings corrado lo storto 65 mexico beckons mid-american small business: prospect for university-centered export trade assistance joe singer ray siehndel diversity management in small businesses: an exploratory investigation of attitudes and actions charles r. stoner richard i. hartman bradley university raj arora university of missouri kansas city abstract the key to effective diversity management seems to reside in the extent to which diversity initiatives are embraced throughout the organization as a cultural statement (thomas, 1991). as jackson and alvarez (1992) so aptly note, unless the diversity issue is viewed as a strategic imperative, meaningful changes in traditional management practices are unlikely. indeed.for such strategic movement to occur, leaders must believe in and value the merits of the new workforce and make acrion commitments to support the needs of this workforce. introduction workforce diversity refers to the movement of individuals from differingdemographi: and ethnic backgrounds and value perspectives into the organizational mix. for most businesses, this translates to the inclusion of more women, older and younger employees, disabled, african americans, asians, and hispanics into the workforce. the diversification of our domestic workforce is a clear and unrefutable reality with far-reaching implications (johnston and parker, 1987). with diversification comes new, unique, and powerful sets of worker needs and expectations that must be considered(jamieson and o'mara, 1991 ). further, as the labor force grows more slowly than at any time since the l 930's, the competition for workers who possess the essential education and skill requirements of an increasingly knowledge-based economy will be intense (fernandez, 1991). accordingly, companies that fail to develop and implement strategies for managing a more diverse workforce will experience increased difficulties hiring and retaining the skilled workforce they need (cox, 1992). in many ways, the challengesofrespondingto an increasingly di verse workforce have a potentially more disruptive impact on smaller business than their larger counterparts. many large companies have responded to the human resource concerns of diversity by creating strategic diversity initiatives and heavily investing in the diversity management process (jackson, 1992). while some anecdotal commentary is available, formal study of small business efforts and movement in the diversity management arena is surprisingly limited. 37 although understanding the current diversity context, views, and practices of small business leaders seems essential for prescribing an orchestrated strategy of small business diversity management, the existing small business literature offers little evidence to enhance this understanding. accordingly, the purpose of this research is to address, in part, this research gap by focusing on the diversity attitudes and actions of small business leaders and their respective organizations. literature review despite the recent attention accorded diversity management and the growing importance of diversity issues for both small and large businesses, existing diversity research has a decidedly large company focus. even here, the corporate diversity record appears problematic. while most business leaders understand the implications of growing workforce diversification, commensurate strategies and actions for managing this new workforce have been slow to achieve implementation. for example, in a towers perrin survey of 645 organizations, most respondents possessed an awareness and concern over demographic shifts and implications. yet, initiatives for training, developing, and supporting the new workforce lacked broad-basedsupport(towers perrin, 1990). in a follow-up study of200 companies that had participated in the 1990 survey, towers perrin found that over halfofthese companies had or were planning to implement programs to address workforce diversity (towers perrin, 1992). these results, while encouraging, are not overly impressive given the history of diversity awareness and concern among participating organizations. furthermcre, a field study of large u.s. corporations found that three-fourths of the responding firms had no articulated strategy for addressing the future workforce changes (loveman and gabarro, 1991 ). this moderate level of strategic attention to diversity issues may be due, in part, to the lack of a clear relationship between diversity management and the firm's short-term bottom line. for example, an extensive hay group survey of over 1400 companies revealed that nearly two-thirds of the respondents felt that adapting to workforce diversity was either "important but not a priority" or "not very important" over the next two years (wall street journal, 1992). in a comprehensive survey conducted by the society of human resource management(shrm)and commerce clearing house (cch) of758 national shrm members, diversity management was not considered a high priority when compared to other business issues. further, survey participants reported that their strongest diversity efforts were focused on legal concerns, such as sexual harassment policies and physical access for employees with disabilities(commerceclearing house, 1993). even some of the more progressive companies experienced an inconsistent diversity record. for example, a recent wall street journal study found that some of the companies with the best family-oriented benefits have dismal records for promoting women (sharpe, 1994 ). in one of the few studies that concentrated on smaller firms, elmuti and kathawala ( 1994) found that while small business owners and managers were aware of the growing diversification of the workforce, fewer than one-third of the respondents had modified or adapted their business practices in response to the changing workforce. although these results suggest a diversity pattern similar to that of larger businesses, the limited scope of a single study renders such conclusions premature and reflects the need for further investigation. 38 .. '' ·i .• given the previous research and the paucity of small business diversity data, this study will focus on the following six research questions: i. what is extent of and nature of change in workforce diversification among small businesses in central lllinois? 2. what is the level of satisfaction expressed by small business leaders with the various diverse groups in their respective organizations? 3. what are the policies, procedures, and programs small businesses are using for responding to diversity issues? 4. what is the perception among small business leaders of whether their diversity efforts have been cost beneficial? 5. what is the relationship between changes in workforce diversity and small business responses to assist the workforce? 6. what are the attitudes of small business leaders regarding the positive and negative impacts of workforce diversification? method the decision was made to limit the inclusion of businesses for this investigation to those with at least 15, but fewer than 100 employees. while this selection criteria was arbitrarily determined, these employee parameters were selected to meet the specific research focus of this study. the attempt was to provide a size large enough to exclude extremely small operations where diversity was likely to pose little relevance. thus, the lower limit of 15 employees was selected. further, the attempt was to provide a size that was small enough to limit the inclusionoflarger firms where diversity interests were likely to be relegated to human resource specialists. accordingly, the upper limit of99 employees was selected. the dun and bradstreet data base was utilized to provide a base list of the businesses within a three county area of central lllinois that met the size criteria. all sic title categories were included with the exception of professional services, where doctors and lawyers were excluded. from this comprehensive list, a randomly selected sample of 115 businesses was generated for inclusion in the study. a phone survey was conducted, with respondents being the principal, on-site administratorofthe business(generally, the owner, president, or "general" manager). a phone survey was selected for two basic reasons. first, the interviewers were able to carefully explain and refer to the meaning and perspective of diversity as used in this study. further, as an exploratory effort, interviewers were able to probe and seek diversity actions that were both formal and informal in nature. the survey used a 4-call framework. typically, the initial call resulted in a scheduled call-back appointment. three call-back contacts were made, if necessary. this procedure produced 77 complete survey responses for a usable response rate of 67%. the mean size of participating businesses was 35 employees. however, 78% of the responding businesses indicated employment levels in the 15-40 worker category. there were no apparent differences in business size or sic classification for respondents and nonrespondents. 39 the questionnaire was divided into four sections. the first section looked at the changes that had occurred in the employment of various diverse subgroups and the respondents' perception of satisfaction (or difficulty) with relevant subgroups. the second section probed the responderts' general attitudes toward workforce diversity. here, diversity was defined as the inclusion of more women, older employees, disabled, african americans, asians, hispanics, and younger employees into the workforce. the third section examined programs, policies, or procedures that the organization used to address diversity issues. formal and informal, case-by-case approaches were solicited for 25 diversity actions. while the choice of specific diversity actions is somewhat arbitrary, the list was heavily influenced by the action themes noted by the comprehensiveshrm/cch survey (1993). responderts were encouraged to expand on this list by noting any other steps they felt they had taken to address the workforce diversity issues they faced, and they were asked to evaluate their diversity efforts. the final section of the questionnaire gathered standard demographic information and provided information used to assure the accuracy of business classifications. on average, the questionnaire took 15 minutes to administer. results most of the businesses represented in this study had experienced limited workforce growth over the last few years. the majority (58%) of the businesses reported an average annual workforce growth rate ofless than 5%. over a quarter of the businesses (26%) reported moderate annual workforce growth of 5 10%, while only 16% of the businesses experienced growth in excess of i 0%. given this level of overall workforce change, respondents provided indications of the growth that had occurred among diverse subgroups of their workforce over the past few years. the specific subgroups examined were women, older employees, disabled/handicapped, african americans, asians, hispanics, and younger employees. the businesses in this study experienced limited overall growth among diverse subgroups during the past few years. these changes are detailed in table 1. the subgroups that experienced the greatest growth were women, older employees, and younger employees. interestingly, very little growth occurred among other diverse subgroups. respondents were asked to indicate their satisfaction with the contributions each diverse subgroup was making to their respective organizations. overwhelmingly, respondents were satisfied with the contributions of all subgroups. however, when asked which of the subgroups were the most difficult to manage, 52% of the respondents indicated younger employees. older employees were noted by 5% of the respondents. no other subgroup was mentioned by more than one respondent, and 35% of the respondents felt that no particular group caused management difficulties. next, the business response to diversity issues was examined. here, the effort was to identify policies, procedures, or programs of either a formal or informal type that were being utilized to respond to diversity issues. table 2 provides a summary of these findings. only four specific diversity efforts were currently being used by more than half of the responding businesses. these efforts related to the existence of a formal sexual harassment policy (which 40 ,' 'l . '· '' 66% of the respondents noted), efforts to socialize young people in work habits and values (66%), establishment of flexible work hours to accommodate employees with family responsibilities(61 %), and providing financial support for employees to further their educatim (58%). on the other hand, less than i 0% of the respondents provided day care cash benefits (5%), established gender and ethnic support groups (9%), and made day care referrals (9%). despite this somewhat limited engagement in diversity efforts, those businesses that were currently providing specific diversity responses were overwhelmingly committed to the continuation of these efforts. at least 92% of the respondents indicated that they intended to continue the diversity efforts they were presently using. table i percent workforce change by diversity group amount of change • no less than 5 to over diversity subgroup change 5% 10% 10% women 54.5 18.2 19.5 7.8 handicapped 81.8 15.6 1.3 1.3 african american 81.8 15.6 1.3 1.3 asians 96.1 1.3 1.3 1.3 hispanics 82.9 14.5 1.3 1.3 younger employees (:5 25) 50.0 31.6 14.5 3.9 older employees (> 40) 57.9 23.7 11.8 6.6 • numbers in the table represent percent of respondents indicating change that had occurred within the category over the past few years. however, the results clearly indicate that if a business is not currently utilizing a particular program or approach, there is typically little intention to do so in the near future. the five areas of diversity efforts where respondents indicated the greatest likelihood of· offering or providing diversity actions within the next year were as follows: establishing a formal sexual harassment policy (21 % noting an intention to offer), establishing a policy to hire retirees for temporary assignments (16%), providing sexual harassment training (16%), redesigning jobs to accommodate disabled workers (15%), and redesigning jobs to accommodate older workers (11%). 41 table 2 policies, procedures, or programs provided or planning to provide program fonnal sexual harassment policy percent currently offering or providing 66.2 efforts to socialize young people in work habits and va!ues 66.2 flexible work hours 61.0 financial support for employees to further their education 58.4 policies to hire retirees for temporary assignments 40.3 sexual harassment training 39.0 diversity training for supervisors 37.7 team building training 36.4 steering women and minorities into "pivotal jobs" 36.4 job design to accommodate disabled workers 36.4 inclusion of diversity in mission or philosophy statement 32.5 efforts to change culture to value differences 32.5 job redesign to accommodate older workers 28.6 awareness training to reduce prejudice 24.7 assigning of mentors to minorities and women 22.1 discussion groups to promote understanding of differences 19.5 specific goals to diversify management 18.2 holding managers accountable for increasing diversity in their areas 18.2 work-at-home arrangements 16.9 specific workforce diversity goals 16.9 special recruiting efforts to attract minorities 15.6 minority internships 10.4 day care referrals 9.1 fonnation of gender and ethnic support groups 9.1 day care cash benefits 5.2 42 percent planning to offer in next year 20.8 4.0 0.0 3.2 15.9 15.6 0.0 2.2 4.3 14.6 2.0 0.0 11.3 5.4 0.0 8.5 0.0 0.0 3.2 1.6 0.0 0.0 4.5 3.0 1.4 when respondents were asked to evaluate their diversity efforts from a cost-benefit perspective, 38% of the respondents felt that their diversity efforts had been either moderately or extremely beneficial for their business from a cost-benefit standpoint. however, 39% indicated that their efforts were not at all cost beneficial. the remaining 23% indicated a slight cost benefit effect. lnterestingly,45% of the respondents felt that the diversity efforts of their businesses were better than those of comparable businesses, while 51 % felt their efforts were about the same as similar businesses. although the diversity actions of a business may be prompted by various sources, the presence of workforce growth may serve as an impetus for change and the movement toward more progressive diversity efforts. accordingly, this study examined whether those businesses experiencing higher levels of annual workforce growth were more likely to implement actions to address diversity issues. overwhelmingly, there was no statistically significant relationship between the rate of workforce growth and the inclusion of specific diversity actions. two exceptions were present. those businesses experiencing higher levels of workforce growth were more likely to provide financial support for employees to further their education (x' = 11.56, p < .0 i), and to steer women and minorities into pivotal jobs or key positions to increase their promotability cx' = 9.14, p < .05). in a similar manner, this study examined the relationship between the growth in employment of diverse subgroups and the existence of actions to address diversity issues. comparisons were drawn between those businesses experiencing no change or only a slight increase (<5%) in their employment of diverse subgroups and those businesses experiencing a moderate (5-10%) or significant(> i 0%) increase. few significant effects were noted. the notable exceptions occurred for businesses experiencing high rates of employment growth among women. in fact, those businesses experiencing higher rates of employment growth among women were more likely to provide work at home arrangements (x' = 4.53, p < .05), assign mentors to minorities and women cx'= 4.12, p < .05), and also to guide women and minorities into key jobs/positions to enhance their promotability cx'= 4.42, p < .05). respondent attitudes toward workforce diversity are presented in table 3. from a positive perspective, a majority of respondents felt that workforce diversity improved creativity (53%), helped develop a more tolerant corporate culture (53%), and improved the willingness of members of diverse groups to work together (53%). further, a majority of respondents disagreed that workforce diversity led to higher operating costs (52% disagreed), contributed to higher levels of absenteeism and tardiness (55% disagreed), or led to more customer complaints ( 66% disagreed). however, a majority of the respondents felt that workforce diversity contributed to increased time dealing with special interest and advocacy groups (53%) and contributed to increased training costs (55%). despite recent media attention addressing the benefitsofworkforcediversity, respondents were rather divided in their feelings as to whether diversity improved a firm's ability to serve its customers, led to better decision making, improved productivity, led to an increase in product or service quality, contributed to increased turnover, or led to more employee complaints or grievances. 43 table 3 attitudes toward workforce diversity* workforce diversity ... agree uncertain disagree improves creativity 52.6 27.6 19.7 contributes to higher operating costs 33.3 14.7 52.0 improves a company's ability to serve all its customers 42.l 40.8 17. l helps develop a corporate culture that is more tolerant of different behavior styles 52.6 36.8 10.5 contributes to absenteeism and tardiness 25.0 19.7 55.3 contributes to increased turnover 32.0 20.0 48.0 leads to more customer complaints 7.9 26.3 65.8 contributes to better decision making 31.5 30.3 38.2 contributes to increased time in dealing with special interest/ advocacy groups 52.6 23.7 23.6 improves productivity 30.2 36.8 32.9 improves willingness of members of diverse groups to work together 52.7 38.2 9.2 leads to more employee complaints and grievances 25.0 27.6 47.4 leads to an increase in product/service quality 26.3 36.8 36.8 contributes to increased training costs 55.2 10.5 34.2 discussion a number of findings supported expectations drawn from the available diversity management literature. this was particularly important given the unique small business focus of this study. for example, the limited use of either formal or informal diversity programs or approaches appeared to be a common phenomenon among smaller businesses, particularly when increases in employment levels of diverse subgroups were low or moderate. however, some findings were unexpected and disappointing. despite considerable attention given to the plight of working families and the troublesome conflicts arising from childcare needs, the businesses in this study offered little childcare assistance or support. the notable exception to the lack of family support was flexible work hours, which was one of the more common diversity responses for businesses in this study. interestingly, the use of flexible work hours 44 was done on a more informal, case-by-case basis, rather than through a formally established flexible hours program. in some cases, it appears easier to espouse diversity orientations than it is to implementthem. for example, although 33% of the respondents indicated that diversity was included in their mission or philosophy statements, only 17% had specific workforce diversity targets or goals and only 18% held managers accountable for increasing diversity in their areas of responsibility. these results signal some important concerns that small businesspersons must address. unless goals and accountability are carefully delineated, little diversity action is likely to occur. in fact, examples drawn from large businesses suggest that accountability for diversity actions is essential to meaningful movement (sessa, 1992). given that people basically do what they are rewarded for doing, this comment is not earthshattering. yet, it is an important component of any successful diversity plan and one that is often omitted. small business leaders must bridge the gap between philosophy and accountability if their programs are to derive the best chance of success. this means that small business leaders must see diversity as more than a limited human resource issue and build diversity as a strategic thrust. as the results indicate, businesses that are currently utilizing diversity efforts intend to continue those efforts. presumably, this is evidence of satisfaction with the effectiveness of the diversity effort. however, some may question this interpretation when recognizing that 39% of the respondents felt that their diversity efforts were not at all cost effective. perhaps, this discrepancy may be explained by sensitivity to legal considerations and recognition that the long run best interests of the business can be served by promoting a climate of inclusiveness. indeed, this long-run perspective is an important one to note. since most diversity programs and actions will affect the business culture incrementally over time, diversity efforts should be viewed as a jong-run rather than short-run investment. there does not appear to be any evidence that the businesses in this study intend to significantly expand their current diversity offerings. the reasons for this may be numerous. some activation or prompting may be necessary. for example, a business may not move toward broader diversity efforts unless they experience difficulties attracting, retaining, and effectively utilizing a skilled workforce; they feel more acute legal pressures; or they see significant shifts in the relative representation of diverse subgroups within their workforce. this study does offer some support for this view. most of the areas where respondents noted an intention to expand their diversity efforts were affected by strong legal directives or pressures (for example, approaches relating to sexual harassment, disabled or handicapped workers, and older workers). even a firm that is experiencing little growth in the diversification of its workforce needs to demonstrate sensitivity to the process of assimilating persons with diverse backgrounds into the organization. in fact, this sensitivity may be more important for those businesses with relatively few diverse workers than for those with broader diversity representation. businesses with limited workforce diversity may be wedded to more traditional views of diversity. as noted by loden and rosener (l 992), the management of these businesses may see diversity as effective when members of diverse groups are changed to be more like dominant group members. in this case, the business accepts little responsibility for 45 --------changing to accommodate new and diverse members. such a view is a regressive and potentiallydangerousdiversityperspectivethat may result in employeedissatisfactionand low retention of promising members of diverse groups. small business leaders should recognize that effective assimilation is a two-way street. as thomas notes, it should be a mutual process between individuals and organizations (thomas, 1991). individuals must always adapt, but companies must also adjust. often, this means giving workers more options, more choices, and more discretion rather than a rigid system of rules, policies, and procedures. although a majority of respondents felt that workforce diversity improved creativity and built a more tolerant and cooperative business, the range of diversity programs and actions was rather limited. this appears incongruous. in part, this lack of action probably is groundoo in the respondents' perceptions of the costs and difficulties associated with diversity and their perceived lack of urgency. here, two concerns must be addressed by the small business owner. first, the small businessperson must decide whether it is important to increase diversity representation. typically, the small businessperson answers this question only from a skills perspective. in other words, ifthe businessperson believes that the fundamental skills necessary for success can be attained without workfurce diversification, this is the path that is likely to be followed. this may explain the low percentage of respondents who engaged in special efforts to bring minorities into their businesses. small business educators and consultants must show owners the business value to be derived from a broader diversification of its workforce. several themes should be emphasized. for example, a diverse workforce may more closely parallel and accordingly, provide greater understanding and sensitivity to the firm's customer base. a diverse workforce may offer a range of divergent approaches and challenges that prompt innovation and creativity. promoting the development ofa diverse workforce may facilitate compliance with eeo and related legislative and regulatory directives. for these reasons, the organization may wish to expand its program offerings to attract and retain a more diverse worker ba5e. second, the small businessperson must understand that a culture of diversity cannot exist ifrelevantsupportiveprogramsand actions are missing. such efforts do cost money and accordingly, many small busines5 owners are reluctant to move beyond those actions that are absolutely necessary. the key here is the issue of relevancy. small businesses must choose programs that are relevant for their unique situations. trendy diversity programs and packagoo approaches may be totally inappropriate and lack cost-benefit payoff. this is not just a small business problem. the shrm/cch ( 1993) reported that only one-third of survey respondent> indicated that their diversity programs were successful. this closely parallels the cost-benefit perceptions of the respondents in this study. small businesses must carefully assess their diversity climate and their unique needs and offer only relevant programs. again, consultants and managers togethermustconductobjectivediversity audits and build programs that respond to the issues identified. it is interesting that younger employees were viewed as the most difficult of all diverse subgroups to manage. it is also interesting that it is among the younger employees that the greatest growth in employment has occurred. respondents expressed many views of the complexities and difficulties younger workers bring to the workplace. for example, 46 respondents noted that younger workers were difficultto manage because their social lives and school activities often presented conflicts with work demands. further, some respondents commented that younger workers lacked a "work ethic," contending that today's young adults have "been given everything and have never had to work in order to receive what they want." the results of this study indicate that companies are responding to this challenge by organizifll efforts to socialize young people in work habits and values. in fact, two-thirds of the respondents noted specific efforts in this area. a limitation of this study stems from the fact that the participating businesses experienced little workforce growth among diverse subgroups during the past few years. this was particularly noteworthy for asians, african americans, and hispanics. further, little overall workforce growth was present among firms in the sample. future research may wish to examine businesses experiencing different levels of growth among the above noted categories. 47 references bolick, c. and nestleroth, s.l. ( 1988). opportunity 2000: creating affirmative action strategies for a changing workforce. indianapolis: hudson institute. commerce clearing house, inc. (i 993). "diversity management as a cultural change, not just training". 1993 shrm/cch survey. cox, t. and blake, s. (i 991 ). "managing cultural diversity: implications for organizational competitiveness". academy of management executive, 5(3), 45-56. elmuti, d. and kathawala, y. (1994). "the perceived impact of diversity in the workplace on small business activities". small business and entrepreneurship track proceedings. chicago: midwest business administration association. fernandez, j.p. (1991). managing a diverse workforce: regaining the competitive edge. lexington, massachusetts: lexington books. jackson, s. and alvarez, e.b. ( 1992). "working through diversity as a strategic imperative" in diversity in the workplace. s. jackson and associates (eds.). new york: the guilford press. jackson, s.e. and associates. (i 992). diversity in the workplace. new york: the guilford press, i 992. jamieson, d. and o'mara, j. (i 991 ). managing workforce 2000: gaining the diversity advantage. san francisco: josey-bass. johnston, w.b. and packer, a. (1987). workforce 2000: work and workers for the 21st century. indianapolis: hudson institute, inc. loveman, g.w. and gabarro, j.j. (1991). "the managerial implications of changing workforce demographics: a scoping study". human resource management, spring, 7-29. lynch, j. (i 990). "flood tide in the workplace: are we ready?", remarks delivered at a hearing of the u.s. senate task force on workforce and workplace readiness, july 19. sessa, v.i. (1992). "managing diversity at the xerox corporation: balanced workforce goals and caucus groups" in diversity in the workplace. s. jackson and associates (eds.). new york: the guilford press. sharpe, r. (1994). "women make strides, but men stay firmly in top company jobs". wall street journal, march 29, b-1. stoner, c.r. and russell, l.a. (forthcoming). "creating a culture of diversity management: moving from awareness to action". business forum. thomas jr., r.r. (1991 ). beyond race and gender: unleashing the power of your total work force by managing diversity. new york: amacom. towers perrin. ( 1990). competing in a seller's market: is corporate america prepared. towers perrin. (1992). workforce 2000 today: a bottom-line concern. wall street journal. ( 1992). "diversity stirs little concern, may 22, b-1. 48 microsoft word front cover v20n1.docx   volume 20, number 1 spring/summer 2009  81            selecting a legal structure: revisiting the strategic issues  and views of small and micro business owners    giles t. hertz  university of tampa  ghertz@ut.edu    fred beasley  university of south carolina beaufort  fbeasley@uscb.edu    rebecca j. white  university of tampa  rwhite@ut.edu    abstract    entrepreneurs often make decisions about the legal structure of their new business  without fully considering the effect of the decision on other strategically important  concerns. the question of whether the new venture should be formed as a sole  proprietorship, partnership, corporation, limited liability company or one of several  other legal forms is a complex one. to effectively answer that question requires the  founder to consider the advantages and disadvantages of each, and how the choice will  affect four primary areas of concern: startup costs; the firm’s exposure to legal liability;  tax position; and finance options. this research addresses a gap in the literature and  investigates the decision‐making process of 513 founders of small and micro businesses  in selecting a legal structure and clarifies other related concerns such as the source of  entity structure advice, the factors influencing entity selection and the resultant  confidence and satisfaction with the chosen legal structure. findings suggest that  small business owners who obtain counsel from accountants and/or attorneys are  more likely to consider the full spectrum of implications of legal entity type and are  generally more satisfied that their choice will positively affect firm profitability.    keywords:  legal entity selection, legal structure, business formation, legal liability,  business risk, insurance            strateg y  journal of small business  journal of small business strategy        82  introduction    the study of legal issues and their effect  on the development of new ventures has  received insufficient consideration in the  existing literature (malach et al, 2006).   in their study of legal issues and new  venture formation, malach et al (2006)  found that the number one legal issue  for early stage entrepreneurs is choosing  the legal entity type.  choice of legal  entity as a “strategic” decision for an  entrepreneur is not an entirely new  notion, however. more than two decades  ago, khandekar and young (1985)  argued that strategic planning is  important early in the new venture  creation process.  the authors suggested  these early strategic decisions are often  complex ones that require the ability to  work effectively with outside experts  and, in fact, they suggested that the first  strategic decision the founder of a new  business venture often makes is the  selection of the most appropriate legal  structure for the company. at the same  time, ireland et al (1985) reported  findings on the use of, and satisfaction  with, external legal services by  entrepreneurs in oklahoma as compared  to earlier findings by davies (1979)  among entrepreneurs located in  connecticut.  collectively, these studies  suggested patterns of interactions  between businesses and their legal  advisors and provided interesting  findings for entrepreneurs regarding  how to effectively seek advice and make  strategic decisions about legal entity  choice.  more recently, bagley (2008) argued that  “legal astuteness,” which she defines as  “the ability of a top tmt [top  management team] to communicate  effectively with counsel and to work  together to solve complex problems  (p.378),” is a valuable resource that can  ultimately be translated into increased  profitability and competitiveness for an  individual firm. in her discussion of legal  astuteness, she specifically identifies  choice of legal entity as an example of a  “legal tool” that can be used to increase  value and manage risks of a firm.   while the nomenclature for the concept  of “legal form” may vary (e.g. entity  form, entity type, legal structure or legal  format), the foundation of the inquiry  remains fixed in that the founder must  choose between one of several legal  forms for their business. in recent years  the variety of legal forms of doing  business has increased. some of these  relatively new entity types include  limited liability partnerships, family  limited liability partnerships and,  limited liability limited partnerships.  because many of these new entity types  have not yet been adopted in a majority  of the states, this paper focuses on the  most common, and most utilized, legal  forms of doing business. these include  sole proprietorships, partnerships,  limited liability companies and  corporations, which, due to their distinct  characteristics, include both traditional  c‐corporations and s‐corporations.  this research seeks to build upon  previous studies to understand the  current state of decision making  processes of small business (sb) owners  when choosing a legal form for doing  business. in particular, the paper  examines questions associated with the  impact of professional advice on the  factors considered by sb owners and  their resulting satisfaction in their entity  choice.  volume 20, number 1 spring/summer 2009        83    existing research on legal  entities and small businesses  choice of legal entity as a strategic  decision  the legal form selected has both short  and long term strategic implications in  certain critical areas of a business  (bagley, 2008; hertz, 2006; byrd and  richey, 1998; scholes and wolfson,  1992).  a number of studies have  outlined and analyzed various issues  that should affect the choice of legal  entity.  karl (1999), in a question and  answer format, describes the advantages  and disadvantages of different types of  business entities as they relate to issues  such as legal liability, the business  entity’s purpose, income splitting, and  taxation.  porcaro (2007) categorizes the  important issues in the choice of legal  entity as capitalization, compensation,  profit and loss allocation, and the tax‐ treatment of distributions of property or  cash.  for sumutka (1997), the important  areas affecting the choice of business  entity include: 1) ownership restrictions  (number and type of owners); 2)  management control; 3) limited liability;  4) reliability of business form; 5)  company‐paid fringe benefits; 6)  taxation of profits and losses; and 7)  formation costs.  opiela (2004) speaks of  the need for sb owners to look at their  businesses in the context of their overall  lives and “because there are no easy  answers when it comes to entity  selection, planners advocate a meeting  of the minds with the client’s cpa and  attorney.”  despite the importance of the business  entity decision, many new and existing  business owners fail to appreciate the  impact that this choice will have on their  businesses, and their abilities to  strategically plan for the future  (khandarkar and young, 1985). while  the majority of business owners seek  assistance from such qualified sources as  lawyers and accountants, some seek out  only the advice of friends or self‐help  books to guide them through this early  stage process. unfortunately, an ill‐ informed decision on entity form made  early in the start‐up process may lead to  a host of problems later on. for example,  an owner seeking to change from one  entity type to another to improve an  unfavorable tax position may incur  substantial tax liabilities during the  reorganization process, in addition to  the cost of conversion itself (smith et al,  2007; cash et al, 2005). this unfortunate  result could have been avoided with a  better understanding of the tax  ramifications of each entity type during  the initial decision making process.  legal issues and business ownership  research on the legal issues faced by sb  owners has focused on a wide variety of  legal concerns from pre‐employment  risks and liability (fenton and  lawrimore, 1992) and government  regulations with which they must  comply (ramsey and williams, 1996) to  the misconduct of employees or owners  (e.g. sexual harassment) (robinson et al,  1998).  there have also been studies that  have examined industry specific legal  issues such as those unique to healthcare  (teske, 1995) or technology (mauer,  1993).  finally, research has also  examined legal issues as they relate to  specific business decisions or functions  such as those related to international  trade (pathak, 1994) or buying or selling  a business (bauer, 1993).  journal of small business strategy        84  in spite of these efforts, researchers have  expressed concern that many sb owners  are generally not aware of the potential  legal issues they may face (brown,  colborne and mcmullan, 1988).  in an  attempt to help sb owners better  understand the role of legal issues  affecting small businesses, some  research has attempted to offer a  taxonomy of the legal issues faced by sb  owners (jones, 1997; mellor and lee,  2001).  others have expanded this effort  in an attempt to determine which legal  issues are most frequently encountered  by sb owners (thomas and usry, 1991;  heriot and huneycutt, 2001).  one such  recent study, conducted with 3,000 small  business client cases at a university legal  clinic, examined nine primary legal  issues of concern to early stage sb  owners (malach et al, 2006).  the nine  concerns included: business format  (choice of entity type), intellectual  property, liability, regulation, contracts,  tax, employment, financing and real  property.  an analysis of the cases  revealed that the decision regarding  business format or legal entity type was  the dominant legal issue of concern in  these cases.  nearly 60% of the clients  were facing this legal issue when they  visited the legal clinic.  the costs associated with changing  entity forms at a later date can be quite  high.  thus, it is important for sb  owners to fully weigh their entity  selection options early on and make a  choice that provides them with  maximum flexibility and takes into  account the strategic goals for long term  growth of their businesses. in spite of  the importance of this decision,  researchers have not examined this  decision making process among sb  owners.   hypotheses  the importance of the role of  professional advice in legal decisions  (bagley, 2008; ireland et al, 1985) as well  as the strategic nature of this decision  (khandekar & young, 1985) has been  cited in the literature.  according to  khandekar and young (1985), legal  entity choice is a complex decision that  impacts small businesses with respect to  resources, interactions with their  environment and the firm’s ability to  achieve its goals.   there are at least four  criteria a sb owner should evaluate with  respect to legal structure:  cost and ease  of formation, tax implications, impact on  financing and liability protection (hertz,  2006; scholes and wolfson, 1992).    choice of legal structure is often the first  strategic decision made by a sb owner  (khandekar & young, 1985), and since  many firms must bootstrap finances  during this time, cost and ease of  formation will be the primary, and  perhaps only, factor considered unless  the sb owner seeks professional advice  and thus gains an understanding of the  many facets of this decision. thus, we  expect that sb owners who seek advice  from either an accountant or an attorney  (or both) are less likely to be concerned  about cost and more likely to consider  the full breadth of factors (liability, tax  implications and impact on financing)  than if they do not seek such advice.   moreover, we expect that those who do  not seek the advice of accountants and  attorneys do so because their primary  decision factor in entity choice is cost  and ease of formation.  thus, we suggest  the following hypotheses:    h1a:  sb owners who seek counsel from  either an accountant or an attorney (or  both) when selecting a legal entity for  volume 20, number 1 spring/summer 2009        85    their businesses are more likely to  consider liability protection as a factor  when selecting entity type than sb  owners who do not seek the advice of an  accountant and attorney.    h1b:  sb owners who seek counsel from  either an accountant or an attorney (or  both) when selecting a legal entity for  their businesses are more likely to  consider tax implications as a factor  when selecting entity type than sb  owners who do not seek the advice of an  accountant and attorney.  h1c:  sb owners who seek counsel from  either an accountant or an attorney (or  both) when selecting a legal entity for  their businesses are more likely to  consider financing as a factor when  selecting entity type than sb owners who  do not seek the advice of an accountant  and attorney.  h1d:  sb owners who seek counsel from  either an accountant or an attorney (or  both) when selecting a legal entity for  their businesses are less likely to consider  cost of formation as a factor when  selecting entity type than sb owners who  do not seek the advice of an accountant  and attorney.  ireland et al (1985) examined the degree  of satisfaction with, and trust in, legal  advice among sb owners.  in their study  of sb firms in connecticut and  oklahoma they found a high level of  confidence and trust in lawyers.  in  addition, bagley (2008) argued that  business leaders who recognize the  importance of legal issues to the success  of their business will deal more  “effectively with the uncertainties  inherent” in decisions that require the  exercise of informed judgment.  thus,  we expect that this confidence will be  transferred to the decisions made as a  result of the advice.  therefore, we  suggest that sb owners seeking the  counsel of an attorney or accountant (or  both) when making decisions about  legal structure will be more confident  that their entity decisions will provide  the personal and firm liability protection  that they need.  moreover, we expect sb  owners who seek advice from  accountants and/or attorneys when  selecting an entity type will be more  confident that the entity type selected  will protect their personal assets if the  business is sued, are more satisfied with  their entity choice overall, will be less  likely to change entity form and will be  more satisfied that the entity type they  have chosen will enhance profitability.   thus, we suggest the following  hypotheses:    h2a:  sb owners who seek counsel from  either an accountant or an attorney (or  both) when selecting a legal entity for  their businesses will be more confident  that the form of business they have  selected will protect their personal assets  if they are sued.    h2b:  sb owners who seek counsel from  either an accountant or an attorney (or  both) when selecting a legal entity for  their businesses will be more confident in  their understanding of the liability  protection they have with their entity  type.    h2c:  sb owners who seek counsel from  either an accountant or an attorney (or  both) when selecting a legal entity for  their businesses will be more satisfied  with their business entity choices than  those who do not seek such advice.  journal of small business strategy        86    h2d:  sb owners who seek counsel from  either an accountant or an attorney (or  both) when selecting a legal entity for  their businesses will be less likely to  change business entity type than those  who do not seek such advice.    h2e:  sb owners who seek counsel from  either an accountant or an attorney (or  both) when selecting a legal entity for  their businesses will be more satisfied  that their business entity type has helped  company profitability.    methodology    a written survey was developed and  distributed to founders of small  businesses via students enrolled in an  undergraduate legal environment  (business law) class at a metropolitan,  mid‐western university in 2005 (fall).  each student in the class was required to  contact a minimum of three separate  firms and obtain one survey from each  firm’s founder. they could receive extra  credit for contacting three additional  firms. students were further required to  attach the founder’s business card to a  separate page on the survey instrument  and were warned that submitting a  falsified survey would result in the  student being disciplined in accordance  with the university’s student code of  conduct.  this data collection  methodology has been utilized in other  similar studies (goldsby et al 2005;  mcevoy 1984; hornsby and kuratko  1990; lyles et al. 1993; kuratko, hornsby,  and naffziger 1997).    ten percent (51) of the founders  surveyed were subsequently contacted  by one of the authors via telephone to  verify that the questionnaire had been  completed by them. all 51 founders  contacted verified that they had, in fact,  completed the survey. a total of 513  useable surveys were collected. of the  513 surveys collected, 91 percent were  from firms located in three mid‐western  states (kentucky, ohio and indiana).   prior to its use, the survey instrument  was pre‐tested using students enrolled  in an emerging enterprise law class.  that survey generated 30 responses, also  from the same geographic area. while  open ended questions may have  generated more in‐depth responses, a  structured survey (appendix a) was  utilized to increase reliability and  validity.   findings  tables 1 and 2 provide a description of  the businesses in the sample as well as  the types of businesses by business  format.  as indicated in table 1, nearly  80 percent of the businesses in the  sample were either s‐corporations  (32%), sole proprietorships (28%) or  limited liability companies (19%).  the  legal structure of the remainder included  c‐corporations (14%) and partnerships  (4%).  three percent (3%) listed other  forms of legal structure.    not surprisingly, sole proprietorships  were much more likely to be smaller  organizations, both in terms of the  number of employees (93 percent had  fewer than 10 employees) and the  amount of revenues (89 percent had less  than $500,000 in revenues).  there were  few differences among the types of  business forms in the kinds of business  (e.g. manufacturing, retailing) in which  they are engaged.  sole proprietorships  were more likely than other business  forms to be engaged in professional  volume 20, number 1 spring/summer 2009        87    services (36 percent) and less likely to be  retailers (22 percent).          table 1 ‐ description of the businesses in the sample  business format  s‐corporation        32%  sole proprietorship      28  limited liability corporation     19  c‐corporation         14  general partnership        4  other            3    type of business    professional services      28%  retailing        27  distribution          6  manufacturing          6  healthcare          3  other          30    annual revenues    less than $100,000      22%  $100,001‐$250,000       17  $250,001‐$500,000           17  $500,001‐$750,000        5  $750,001‐$1,000,000        7  more than $1,000,000      32    number of employees    0          10  1‐10                      59  11‐20          11  21‐50          11  51‐100           4  more than 100         4                journal of small business strategy        88        table 2 ‐ description of the types of businesses by business format                   s‐corp      sole proprietorship     llc   c‐corp  type of business  professional services   25%    36%       24%   19%  retailing     28    22       26   36  distribution       6      4         7   10  manufacturing       9      5         3    6  other       32    33       40  29  annual revenues  less than $100,000    9%    49%       18%    6%  $100,001‐$500,000  37    40       39   13  $500,001‐$1,000,000  13      7       17   17  $1,000,000+    41      4       26  64  number of employees  0         1%    23%       16%    2%    1‐10      60    70       57  40  11‐20       15      5       10   18  21‐30        7      1        4   18  30+       17      1       13   12    factors influencing the business  formation decision  the businesses in the sample indicated  that a number of factors influenced the  decision to select a specific business  form.  the most common responses  were tax implications (60 percent of the  respondents), the need for liability  protection (58 percent), the cost of  business formation (33 percent), and  concerns about financing (22 percent).  the vast majority of respondents  obtained some advice before making  their legal structure decision.  the most  common sources of information were  accountants (59 percent), an attorney  (50 percent), and friends or colleagues  (29 percent).  respondents that  eventually decided to form their  businesses as sole proprietorships were  less likely to have sought the advice of  accountants or lawyers.  we divided the  respondents into two groups, those who  had received advice from either an  attorney or an accountant or both  (n=366) and those who had received  advice from neither an accountant nor  an attorney (n=146).  there were significant differences in  some of the responses of those who had  sought the advice of an  accountant/lawyer in their business  formation decisions and those who had  not used these professional services.  as  indicated in table 3, respondents who  had sought the advice of an accountant  or an attorney (or both) were  significantly more likely (p<.01) to say  that tax implications and liability  protection influenced their business  formation decisions.  thus, h1a and h1b  are supported.  however, there were no  differences between the two groups  (those who sought professional services   volume 20, number 1 spring/summer 2009        89          table 3 ‐ factors influencing the business formation decision  (percentage of respondents)                 overall  sought advice from     no advice          accountant/lawyer                 (or both)  tax implications1  60%    69%    38%  liability protection2  58    66    38  cost of formation3  33    30    43    financing concerns4  22    21    24    1 significant at p<.01 (χ2= 41.29, df=1)  2 significant at p<.01 (χ2= 32.28, df=1)  3 significant at p<.01 (χ2= 57.55, df=1)  4 not significant (χ2= .63, df=1)    and those who did not) in their beliefs  that financing concerns influenced their  business formation decisions.  thus, no  support is found for h1c.  respondents  who had sought the advice of an  accountant/attorney were significantly  less likely (p<.01) to say that the cost of  forming a business influenced the type  of business that they formed.  thus, h1d  is supported.    satisfaction with the legal structure  decision  the results in table 4 indicate that the  majority of respondents were satisfied  with their company’s form of business  organization.  also, more than 70  percent of the companies were “not at all  likely” to change their current form of  business.  it was hypothesized that  business owners who had sought advice  from an accountant/attorney would be  more satisfied with their legal entity  choices than business owners who had  not used these professional services.   however, there was found to be no  significant difference between the two  groups in either their degree of  satisfaction with their form of business  (t = .219, df = 508) or their likelihood of  changing their form of business (t = .329,  df = 507).  thus, there is no support for  h2c and h2d.  however, respondents who had sought  the advice of an accountant/attorney  were more confident than their  counterparts who had not sought  professional advice that their forms of  business would protect their personal  assets if they are sued (p < .01, t = 3.96,  df = 505), and were more confident in  their understanding of the liability  protection that they possess (p < .05, t =  2.07, df = 505) significantly more likely  (p<.01, t = 2.44, df = 508).  thus, h2a and  h2b are supported.  also, respondents  who had sought the advice of an  accountant/attorney were more likely to  say that their choices of business entity  had helped their business’s profitability  (p < .02, t = 2.40, df = 508).  thus, h2e is  also supported.     journal of small business strategy        90        table 4 ‐ satisfaction with form of business organization  (percentage of respondents)  extremely satisfied  1    26%  2 31  3 15  4 12  5   7  6   7  not at all satisfied  7      2    discussion  the descriptive findings indicate that sb  owners surveyed in this research are  typical of the population of u.s. small  businesses. the distribution of entity  types reported is similar to the  distribution reported in the national  federation of independent business  (nfib) national small business poll data  (2003) with one exception. our sample  had fewer businesses, on average,  registered as c‐corporations. one  explanation for this difference is in the  size of businesses in this sample.  nearly  70 percent of the small businesses  included in this study had 10 or fewer  employees.  thus, our findings are likely  to be more reflective of, and pertinent  to, very small or micro‐enterprises. on  the other hand, the number of c‐ corporations is declining with new entity  forms available so this sample may be  more reflective of the current sb owner  today.   the authors found mixed support for the  h1 set of hypotheses which focused on  the factors identified as important in  making the decision about legal entity  type.  not surprisingly, when sb owners  do not seek professional advice when  making a decision about legal form, they  are often singularly focused on the ease  and cost of formation associated with  their entity choice (h1d). we expected  sb owners to be more likely to consider  the full spectrum of strategic  implications of legal entity type (liability  protection, tax implications and  financing) when they seek advice from  professionals such as attorneys and  accountants.  however, we found that  while this held true for liability  protection (h1a) and tax implications  (h1b), the sb owners surveyed who  sought professional advice were not  more likely to consider the impact of  choice of entity on options for business  financing (h1c). this may be because  our sample of small firms was skewed  towards very small firms, and the  majority of micro‐firms do not typically  seek equity financing (the financing  form most affected by legal structure).   however, another explanation may be  that some accountants and attorneys  may not be well versed in the nuances of  equity financing and the issues  associated with legal structure and thus,  may not have discussed this issue with  their sb clients.  more research is  needed on this topic.  with respect to satisfaction and  confidence (h2a‐e), we again find mixed  volume 20, number 1 spring/summer 2009        91    support for our hypotheses.  sb owners  who obtained professional advice  regarding entity type were more  confident that their legal form would  protect their personal assets if they were  sued than those who did not seek  professional advice (h2a), and they were  more confident in their understanding  of the liability protection afforded by  their legal structure (h2b).  surprisingly,  sb owners who sought professional  advice were no more satisfied with their  entity choice than those who did not  seek such advice (h2c). moreover, sb  owners who did not seek professional  advice are no more likely to change  entity form than those who did obtain  professional counsel on this decision  (h2d). one explanation for these  findings might be that sb owners who  do not obtain advice simply do not know  what they don’t know. again, this may  be even more prevalent among micro  firms.  the typical micro business may  not have sufficient resources to obtain  on‐going and comprehensive  professional advice and they may lack  the complementary skills of a  management team.  when the respondents were asked  which of the four factors were most  important in influencing their decision,  there were two factors that were cited as  primary reasons.  in all cases except sole  proprietors, the tax implications and  liability protection were the two primary  reasons they chose the entity form that  they did. in contrast, sole proprietors  were more likely to cite cost of startup as  the primary factor in choosing this entity  type for their new business. this is likely  due to the simplicity and low cost of  starting a sole proprietorship compared  to the other forms of business. however,  it is surprising that this group also  identified financing concerns as more  important than those business owners  organized as llcs or as corporations.   follow up research may help clarify this  finding.  most importantly, we found support for  our hypothesis that sb owners who seek  professional advice regarding legal entity  form are more confident that the legal  structure they chose, and its resultant  tax implications, has led to more  profitability for their firm (h2e).  this  finding supports the notion that  professional advice regarding legal  choice is important for a firm in spite of  the fact that this advice is often required  in the very early stages of the business  when finances are most often  bootstrapped and the entrepreneur is  least likely to feel that he/she can afford  such assistance.  implications and future  research  while theory development in  entrepreneurship has grown  exponentially over the past two decades,  academic research on legal issues related  to new venture creation has not kept  pace. new opportunities for  entrepreneurs to gain strategic  advantages from legal decisions  continue to abound as laws related to  business formation are created and  modified on a regular basis. it is  important that we continue to examine  the role of legal matters in new venture  strategy and report those findings to  entrepreneurs and educators.  this study examined strategic  implications of legal entity choice  among sb owners by comparing the  journal of small business strategy        92  factors that influenced their decisions  about entity selection and the resultant  satisfaction and confidence in entity  selection among two primary groups –  sb owners who sought professional  advice of accountants and attorneys and  those that did not.  the findings were  mixed and may have been due to the  concentration of micro businesses  among the firms sampled. future  research may show that micro  enterprises differ from their larger small  business counterparts with respect to  several important issues. for example,  they may lack a top management team  or may lack the resources to obtain  professional advice from accountants  and attorneys.  those respondents who  did seek advice from accountants or  attorneys were more likely to consider  factors other than cost and ease of  formation and were also more confident  that their personal assets were protected  and that their entity selection positively  impacted their profitability. future  research is needed to verify these  findings. this research was based on a  sample of 513 founders collected via  survey. qualitative methods may offer  important richer insights and may clarify  some of the results from this study.   the findings of this study are important  to sb founders, advisors and educators.   despite the mixed findings of this  research, the authors did find evidence  that those sb owners who seek advice  from accountants and attorneys view the  entity selection decision more  strategically than those who do not.  they consider more than one factor  when choosing entity type and are more  confident in the impact of the decision  on their ability to protect their personal  assets and gain profits in their  businesses. thus, based on these  findings, one might advise sb owners  that when selecting their entity type,  they need to consider the long term  strategic implications of their entity  selection process instead of viewing this  as a perfunctory decision that must be  made in order to move on to the more  “important” tasks at hand in the day to  day operation of their business. as one  of the first decisions to be made,  founders are likely to be lacking clear  strategic and financial objectives.  thus,  a founder should be advised to do the  important work of developing strategy  prior to entity selection.  moreover,  saving money by not hiring qualified  professionals to aid with entity selection  can actually result in significant cost to  the company in the long term.  the  value of an attorney and accountant who  are well versed in the startup process  and who understand the long term  implications to the firm of various legal  entity forms cannot be underestimated.   the findings of this research are also  important to legal and financial advisors.   generally, these professionals are  appropriately focused on ensuring they  provide sound legal or financial advice  to their clients. some of those who  frequently work with startups have  learned the importance of also factoring  in the long term goals and strategies of  the founder into this decision. this  process may be as simple as including a  requirement that clients include  strategic goals in their checklist of  information they provide to their  counselor or advisor, or a requirement  that clients seek advice from both an  accountant and a lawyer instead of just  one.  finally, it is important that  entrepreneurship students understand  the strategic nature of choosing an  appropriate legal structure. yet, while  volume 20, number 1 spring/summer 2009        93    most textbooks include a discussion of  the attributes of the most common  entity types, there are very few that  approach this subject from a strategic  perspective. for example, the attributes  of common entity types are often  considered independently and not  holistically.  good educational materials  that can help the entrepreneurship  educator better understand and explain  this subject to future entrepreneurs are  needed.  future research should include more in‐ depth qualitative and/or longitudinal  data that can delve into the finer‐ grained aspects of issues associated with  the impact of entity type on various  business outcomes (e.g. exposure to risk,  tax obligations, and financing  opportunities and challenges). this  research could examine why sb founders  changed entity types and, having done  so, what impact the change had on the  business. additional research could  examine the impact of entity selection  on a wide variety of outcomes such as  profitability, tax positioning and  exit/harvest results.  surveys or  interviews with professional service  providers (accountants and attorneys)  regarding their perceptions of the  preparedness of their sb clients for  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journal of business and  entrepreneurship, 8(1), 53‐69.    robinson, r.l., jackson, w.t., franklin,  g.m. & hensley, d. (1998). u.s.  sexual harassment law: implications  for small business. journal of small  business management, 36 (2), 1‐12.  volume 20, number 1 spring/summer 2009        95    scholes, m. & wolfson, m (1992). taxes  and business strategy: a planning  approach. prentice‐hall, englewood  cliffs, nj.    smith, j., raabe, w. & maloney, d.  (2007) west federal taxation:  taxation of business entities.  thomson south‐western, mason,  oh.    sumutka, a.r. (1997) selecting a form of  business. the cpa journal, 67(4), 24‐ 29, 56‐57.     teske, j. m. (1995). second generation  legal issues in integrated delivery  system. journal of the healthcare  financial management association,  49(1), 54‐59.    thomas, d.s. & usry, m. (1991).  entrepreneurship classes must  include more legal topics. business  forum, 16 (4), 10‐11.    giles t. hertz is an assistant professor  of business law and entrepreneurship at   the university of tampa. his research  interests include entrepreneurship  education, entrepreneurial finance and  legal issues associated with the new  venture creation process.    fred beasley is a professor of marketing  at the university of south carolina at  beaufort.  his research interests are in  marketing research and marketing for  early stage companies.    rebecca j. white is the james w. walter  distinguished chair of entrepreneurship  at the university of tampa.  her primary  research and teaching interests are in  entrepreneurial finance, funding  strategies for startup firms and strategic  leadership in entrepreneurial firms.    appendix    form of business organization questionnaire  anyone that operates a business does so based upon some form of business  organization, whether it is a sole proprietorship, partnership, corporation or some  hybrid form. each one of these forms of business organization has its own distinct  characteristics.    the  purpose  of  this  survey  is  to  answer  the  following  questions:  (1)  why  do  businesspersons  choose  one  form  of  business  organization  over  another,  and  (2)  once  having  selected  a  form  of  business  organization,  how  has  that  selection  impacted the continued operation of the business?    please note: this survey may utilize the phrase “entity type” interchangeably when  referring to the form of business organization concept.    1. current business form:  ___ sole proprietorship  ___ general partnership ___ limited partnership  ___ c‐corporation  ___ s‐corporation  ___ limited liability co.  ___ personal service corp.  ___ other (describe)__________________________  journal of small business strategy        96  2. from which of the following sources did you receive advice or information on  business form selection: (check all that apply)  ___ lawyer  ___ accountant  ___ friend or colleague  ___ self‐help books         ___ none (skip next question)  ___ other(describe)___________________________    3. who or what was the primary source of advice or information on business form  selection: (check only one)  ___ lawyer  ___ accountant  ___ friend or colleague  ___ self‐help books         ___ other (describe)____________________________________    4. the following is a list of factors that may have influenced your decision to choose  one form of business organization over another: (check all that apply)  ___cost of formation  ___liability protection  ___tax implications  ___financing concerns  ___other (describe)___________________________________    5. please rank those factors that you identified in the previous question based upon  their relative importance to your decision‐making: (circle or check appropriate  response)    cost of formation:  ___________________________________________  1  2  3  4  5  6  7  not at all important      very important    liability protection:  ___________________________________________  1  2  3  4  5  6  7  not at all important      very important    tax implications:  ___________________________________________  1  2  3  4  5  6  7  not at all important      very important    financing concerns:  ___________________________________________  1  2  3  4  5  6  7  not at all important      very important    other:  ___________________________________________  1  2  3  4  5  6  7            not at all important      very important        volume 20, number 1 spring/summer 2009        97    6. when you started your business, did you prepare your own formation documents?  (e.g. partnership agreement, articles of incorporation, etc): __yes  ___no  ___n/a    if  you  answered  no  to  question  6,  please  skip  to  question  9  and  continue  the  survey.  if you answered n/a to question 6, please skip to question 11, and continue  the survey.    7.  how  would  you  rate  the  ease  of  preparing  and  filing  your  own  formation  documents? (circle or check appropriate response)    ___________________________________________  1  2  3  4  5  6  7  difficult          easy    8. having previously prepared and filed your own formation documents, would you  do  it  again  if  you  were  to  start  another  business?  (circle  or  check  appropriate  response)  ___________________________________________  1  2  3  4  5  6  7  never do it again      would do it again    9. if you did not prepare your own formation documents when you started your  business, please indicate who prepared the documents on your behalf:  ___ solo practitioner attorney  ___ small law firm (1‐10 attorneys)  ___ medium size law firm (11‐20 attorneys)   ___ large law firm (over 21 attorneys)  ___ other (describe) ______________________________________________________    10. what legal services did your attorney/law firm provide during your company’s  start‐up?  (check all that apply)  ___ advice;   ___ basic formation documents only;   ___ acquired federal tax id number;   ___ by‐laws/operating/partnership  agreements;  ___ served as incorporator (corps. only);  ___ corporate resolutions &  minutes;     ___ other (describe) ____________________________    11.  is  the  same  ___attorney  ___law  firm  that  provided  legal  services  during  the  startup phase of your company currently providing legal services to your company?   ____ yes;  ____ no    12. please estimate the cost of legal services related to the legal formation of your  business entity:___ ≤ $500;  ___$501 ‐ $1,000;  ___$1,001 ‐ $2,000;  ___$2,001 ‐ $3,000;   ___ $3,001 ‐ $4,000;___ $4,001 ‐ $5,000;   ___ $5,001 ‐ $7,500;   ___$7,5001 ‐ $10,000;    ___ > $10,000.        journal of small business strategy        98  13. do you purchase any of the following business insurance? if so, please check all  that apply:  ___ casualty (fire, theft, etc.)  ___ vehicle  ___ product liability    ___ liability  ___ workers’ comp.  ___ errors & omissions  ___ business interruption  ___ directors/officers   ___ other _______________    14. how confident are you that your current insurance coverage is adequate to  safeguard your business operations in the event your business is sued? (circle or  check appropriate response)    ___________________________________________  1  2  3  4  5  6  7  not at all confident      very confident    15.  how  confident  are  you  that  your  form  of  business  will  protect  your  personal  assets in the event your business is sued? (circle or check appropriate response)    ___________________________________________  1  2  3  4  5  6  7  not at all confident      very confident    16. how confident are you in your knowledge and understanding of the liability  protection that your form of business provides for your personal assets? (circle or  check appropriate response)    ___________________________________________  1  2  3  4  5  6  7  not at all confident      very confident    because of recent changes in the tax law (check the box rules), a business may elect  to be taxed as an entity that is not the same as the form of its business (e.g. a  partnership may elect to be taxed as a corporation).    17. indicate how your current business has elected to be taxed: (it may or may not be  the same as your response to question no. 1).  ___ sole proprietorship  ___ general partnership ___ limited partnership  ___ c‐corporation  ___ s‐corporation  ___ limited liability co.  ___ personal service corp.  ___ other (describe)___________________________      18. how satisfied are you with your business’ current tax election: (circle or check  appropriate response)  ___________________________________________  1  2  3  4  5  6  7  extremely satisfied        not at all satisfied    volume 20, number 1 spring/summer 2009        99    19.  has  your  company’s  current  tax  election  hindered  or  helped  your  business’s  profitability? (circle or check appropriate response)    ___________________________________________  1  2  3  4  5  6  7  greatly hindered    neutral     greatly helped                (don’t know)    20. if there were no negative tax implications (i.e. a capital gain) associated with  electing a different tax status other than the one currently in place, how likely would  you be to elect a different tax status? (circle or check appropriate response)    ___________________________________________  1  2  3  4  5  6  7  not at all likely to change  neutral   extremely likely to change                    (don’t know)    21. during the start‐up phase of your business did you seek debt  financing (bank  loans, etc.) for your company? ___yes  ___no.  if you answer no, skip to question  23 and continue.    22. during the start‐up phase of your business, did your company’s form of business  organization hinder or help your ability to attract debt financing? (circle or check  appropriate response)  ___________________________________________  1  2  3  4  5  6  7  greatly hindered  neutral   greatly helped    23. during the start‐up phase of your business did you seek equity financing (sale of  stock, ownership %, etc.) for your company? ___yes  ___no.  if you answer no,  skip to question 25 and continue.    24. during the start‐up phase of your business, did your company’s form of business  organization hinder or help your ability to attract or acquire equity financing? (circle  or check appropriate response)    ___________________________________________  1  2  3  4  5  6  7  greatly hindered  neutral   greatly helped    25. after your company was up and running, did you ever seek debt financing (bank  loans, etc.) for your company? ___yes    ___no.    if  you  answer  no,  skip  to  question 27 and continue.    journal of small business strategy        100  26. after your company was up and running, did your company’s form of business  organization hinder or help your ability to attract or acquire debt financing? (circle  or check appropriate response)    ___________________________________________  1  2  3  4  5  6  7  greatly hindered  neutral   greatly helped    27. after your company was up and running, did you ever seek equity financing (sale  of stock, ownership %, etc.) for your company? ___yes    ___no.  if you answer no,  skip to question 29 and continue.    28. after your company was up and running, did your company’s form of business  organization hinder or help your ability to attract or acquire equity financing? (circle  or check appropriate response)    ___________________________________________  1  2  3  4  5  6  7  greatly hindered  neutral   greatly helped    29. are you currently satisfied with your company’s form of business organization?  (circle or check appropriate response)    ___________________________________________  1  2  3  4  5  6  7  extremely satisfied      not at all satisfied    30.  how  likely  are  you  to  change  your  company’s  current  form  of  business  organization?  (e.g. converting from a partnership to llc) (circle or check appropriate response)    ___________________________________________  1  2  3  4  5  6  7  not at all likely to change    extremely likely to change      31. have you previously changed entity types: ___yes;  ___no; if no, skip to question           33 and continue the survey.      32. initial form of business:   ___ sole proprietorship  ___ general partnership ___ limited partnership  ___ c‐corporation  ___ s‐corporation  ___ limited liability co.  ___ personal service corp.   ___ other (describe) ______________________________      volume 20, number 1 spring/summer 2009        101    company demographics:    33. name of business:  __________________________________________________________    34. state and county of formation: state___________; county____________________    35. year of formation: ____________________________    36. type of business: (check appropriate response)  ___ manufacturing;  ___ distribution;  ___ retail;   ___ professional services;  ___ bio‐tech;  ___ high‐tech;  ___ education    ___ health care  ___ other    37. number of employees:  ___ 0;  ___ 1‐10;  ___ 11‐20;  ___ 21‐30;  ___ 31‐50;  ___ 51‐75;  ___ 76‐100;  ___ >100    38. average annual revenue/sales:  ___ < $100,000.    ___$100,001‐$250,000    ___250,001‐$500,000  ___$500,001‐$750,000  ___$750,001‐$1,000,000    ___ >$1,000,000.      thank  you  for  taking  time  out  of  your  busy  schedule  to  complete  this  survey.  please  indicate  if  you  would  be  willing  to  participate  in  future  research  projects  regarding this topic.  ____ yes  ____ no  reproduced with permission of the copyright owner. further reproduction prohibited without permission. strategy editor's note this summer, 1996 issue of the journal of small business strategy reflects our continuing effort to improve your sbida membershiprewards. publishingthree issues per year will permit the inclusion of a variety of manuscripts, as well as, case studies for the small business management educator. the articles and case study provided in this issue are intended to help keep our readers aware of current smallbusiness concerns in export planning, government relations, and work-life needs. philip olson, newell gough and don bokor examine the critical question of how much formal pre-export planning is enough and how such efforts can be related to actual export perfonnance. their surprising findings suggest that relationship building and positioning, not formal written plans, contribute most to high export performance success. this success and failure research question continues with ron cook's investigation of smaller lirms'ublic policy interactions with government. he discovers that the long-term survival of the firm is clearly determined by state government influence efforts. in a well researched study, sarah jacobson and harriette mccaul demonstrate the significarx strategic importance of providing quality work-life program and environment if small business firms expect to attract and retain well-qualified innovative employees. this issue of employer focus and environmental turbulence is carried further by lon addams, bill baker and brian davis as they illustrate how forbes 200 small business companies utilize mission statements to preserve core values and stimulate progress. preparing financial statements for a number of constituent groups can be both time consuming and costly. in a carefully documented discussion, professors bushong and cornell present a very practical approach to reducing their accounting costs. although as a matter of editorial policy, case studies have been welcomed for many years, drs. park and krishnan are the first to submit to our thorough and repeated review process. their "skyline chili" case will be shown to provide a very real educational example of small business growth management strategy. their willingness to allow the use of the case by small business educators and provide an instructional (i '/~ hour) video is a very encouraging precedent in sharing educational materials in small business management education. finally, with this our first summer issue, i wish to express my appreciation to our review board members for their extra effort and especially gary hazeltine and dave hensley for giving up a good part of their summer vacation. joseph f. singer, ph.d. editor sfixiixcf barter: a small business strategic option in a weak economy matthew c. sonfield hofstra university abstract this anicle probes the currently growing phenomenon of baner as a small business straiegic tool. fust, the concept ofa barter exchangeis explained, and the mechanics of small business membership in such exchanges are described. thisis followed by a review of the liierature, which indicates minimal academic analysis of this phenomenon. the research methodology of this study, involving a two-stage series ofin-depth telephone interviews with owners. managers and small business members of barter exchanges, is then described. the research findi ngs are then presemed and are used to generate a set of specific guidelines for the small business ownerlmanager considering membershipin a barter exchange. these guidelines answer the questions: "will barter be applicable and beneficial for my company?" "flow should i choose a barter exchange?" "how can l fully benefit from barter exchange membership?" introduction humans have always engaged in baner, and the first prehistoric "small businesses" certairdy existed before the invention of money. yet the past few years have seen a significant rise in the use of barter by businesses in dus country and in others. specifically in response to the ctuiently weak economy, many businesses (and primarily small businesses) have implemented the use of barter as a strategic tool. information on the gmw th and extent of barter in our economy varies by source, but the general consensus is that somewhere between 200,000 and 400,000 small business firms have joined about 400 to 500 baner exchanges throughout the united states. while growth of these .exchanges averaged about 8 percent per year in the 1980's, it has increased to about 12 percent per year in 1990-1991. lite total retail value of these barter uansacuons in 1991 was about $6 billion (kleiman, 1992; nordheimer, 1992). simply stated, a small business that belongs to a bauer exchange is able to trade its goods and services with all of the other members of the exchangetypically several hundred businesses. 'ibe exchange acts as a clearinghouse and "bank" of baner debits and credits, and thus obviates the need for one-to-one barter. for example, member a can baner goods to member b and then obtain services from member c at some fwure date, without any obligation to take goods from member b. il the barter exchange typically charges an entry fee to new members, as well as an annual membership fee. also, the exchange collects a commission (typically 5 percent to 10percent) on each transaction, paid by the buyer and/or the seller. in return for these various charges, the barter exchange does more than simply act as a clearinghouse. it will work to develop a broad mix of members with a minimal duplication of specific types of businesses. directories of members are regularly published, as are newsleuers and other publicity maitings to keep members informed of available goods and services and to encourage them to barter. exchanges also monitor members'rices and other practices to assure fair and ethical conduct. many businesses belong to more than one exchange, and most members use their trade credits to buy not only goods and services for their businesses, but also for their persorud and families'se. barter sales are conducted at full retail prices. for tax purposes, a barter sale is a taxable sale. sales tax must be collected if appropriate and the sale must be reported with all other sales. tite primary benefit of barter exchange membership to the member firm is the potential to increase sales volume. this has the direct effect of greater inventory turnover. the other major benefit is the ability to obtain goods and services for the business and the owner without paying cash, and this reduces the pressure on cash fiow. for the typical business with both fixed and variable costs, baner sales reduce fixed costs per unit and can be considered validly profitable to the firm. barter exchanges also contend that barter sales lead to greater awareness of the business, and thus in turn lead to more cash sales. as the currently weak economy has had a negative impact upon many small businesses'ales volumes and cash flows, these benefits oflmrter have increased in their attractiveness, and more small businesses have joined baner exchanges. revkw of the literature many articles have been written about this phenomenon in the past few years, primarily in practitioner-oriented business magazines and in the business sections of newspapers (applegate, 1990;cohn 8c kaufman, 1991;healey, 1991;nash, 1991;selz, 1990;stevens, 1992; sympson, 1992; williams, 1992). these articles are largely similar in content and provide a summary overview of the recent growth ofbarterexchanges and membership and the mechanics of how they work. usually a few highly satisfied businessperson members are probed. however, a search of the literature shows no academic business journal coverage of this topic, and no scholarly empirical research having been conducted. research objective in response to this lack of empirical research and academic-level analysis of barter exchange membership, a research study was conducted. the objective was to develop a listing of specific guidelines for small business owners contemplating membership in barter exchanges (or for those who simply wish to know more about such exchanges). furthermore, these guidelines would be of equal value to consultants who advise small business clients. 12 research methodology a review of the existing literature, as discussed above, was first conducted. it was determined that an inmpth, unstructure4 probing of both owners and members of barter exchanges would best elicit the information needed to achieve the research objective of developing a set of barter guidelines. thus, it was concluded that a telephone survey methodology would be more appropriate than a mail survey. five barter exchanges, spread across the united states, were identified, and their owners and/or managers were interviewed at length by telephone. the objective at this stage was to obtain ideas about guidelines from reexchange's perspective, and also to obtain exchange membership lists. these interviews were then followed by similar telephone interviews with five geographically distributed barter exchange members, ie. small business owners, chosen randomly from the various membership lists. here, too, the objective was to obtain further ideas to help develop guidelines. 'ihese first stage interviews led to a semi-structured interview format for the second stage of the research, which consisted of 15 additional telephone interviews with a random variety of small business owner members of these barter exchanges. specifically, 10 questions were asked (see table i), giving the respondent ample opportunity to elaborate upon his or her answers. interviews lasted from 10 to 20 minutes, and virtually all respondents were very cooperative and very willing to speak openly and fully. furthermore, the respondents'omments, opinions, and attitudes proved to be highly consistent; most of the small business owners interviewed had very similar thoughts about their barter exchange membership and their recommendations to others contemplating such membership. thus, additional interviews seemed unwanunted. table i telephone survey questions (open-ended) l. is your membership in the barter exchange worthwhile? 2. what are the best aspects of membership? 3. what are the worst aspects? 4. are the entry fee and annual fees wonh it? 5. is there a good variety of goods and services available? 6. do you barter for personal use as well as business use? 7. do you barter too much? g. why did you join the exchange? 9. if the economy improves, will barter seem as wonhwhile? 10. what suggestions can you pmvide for small business owners who are considering joining a barter exchange? 13 research findings as the interviews progressed, it became apparent that the responses could be used to generate a valuable set of guidelines for the small business owner. these guidelines can be structmed for tluee stages of advice to the small business owner. will barter be applicable and beneficial for your company how should a barter exchange be chosen? how can you fully benefit from barter exchange membership? these guidelines are summarized in table 2. table 2 guidelines for barter exchange membership will barter be applicable and beneficial for your firm? ~ unsold service time or products must be available. ~ gmss margin percentage should be sufficiently high. ~ firm's products or services should have a broad market. ~ membership is more valuable to firms where cash flow is critical and/or where there is a need for fast invenuuy turnover. how should a barter exchange be chosen? ~ choice may only exist in larger cities. ~ investigate ea:h exchange fully. ~ talk to exchanges'anagers and staff, not just salespeople. ~ talk to a sample of current members. ~ obtain membership directories to determine size and variety of members. ~ determine exchanges'ther services (member assistance, networking, etc.). ~ how long has the exchange existed? ~ does it belong to national exchange organizations? ~ what are the various fees, charges, rules and regulations? how can you fully benefit from barter exchange membership? ~ exercise conservatism and control! ~ start slowly and carefully. ~ don't let barter sales interfere with regular sales. ~ only baiter-sell in-stock items. ~ only barter-sell at full retail prices. ~ keep barter-sales moderate until your baiter-purchase needs level becomes clear. ~ control your urge to barter-purchase. more than you truly need. ~ decide whether to barer-purchase for personal as well as business needs. some small businesses can benefit more from barer exchange membership than can others. a service firm will benelit if there is unsold service time available. extra service time (ie. owner or employee hours) that is not being sold for cash can thus be used to create barter or "trade" credits. for a business selling products rather than services, the criucal issue becomes gross margin. there must be sufficient spread between the cost of the product and the retail price. the 14 greater this spread, the more valuable the trade credits become. of course, there should be no limits or constraints on the availability of service time or of products, since it is not beneficial for barter sales to conflict with or limit cash sales in any way. issues of supply and demand should also be considered. if a company's product or service has very limited or specialized demand (glass eyes or nuclear reactor repair), then exchange membership will have little value. a company's product or service should be useable by a good portion of the exchange's members. ideally, the demand for a company's barter sales should approximately equal the owner's demand for other exchange members'roducts and services. 'the degree of importance of a company's cash flow and inventory turnover are also major issues. barter exchange membership can be more valuable to a company with cash flow problems than to a company without such problems. barter credits may allow a cash-starved firm to obtain needed supplies that it could not otherwise obtain. similarly, barter sales add an extra benefit for the company that needs to turn its inventory more frequenuy (ifits products become dated or stale, etc.). conversely, barter sales are less valuable for a firm with a stable, non-aging product and rising supplier costs. of course, barter can still be of value to an owner whose business has strong cash and inventory positions. once a small business owner determines that barter exchange membership ikpiuii be of benefit, the issue becomes zbjiilexchange to join. in smaller ciues only one exchange may exist, but in most localities a choice can be made. the business owner should investigate the alternative exchanges carefully. the goal is to join an exchange that serves its members well. the business owner should talk to the exchange's managers and staff, and not simply to the person selling exchange membership. a good exchange will provide a sampling of current members who can then be spoken to. one should also obtain current directories to determine the number, variety and geographic location of the members. there should be a good mix of useful goods and services available through the exchange. a good exchange should also provide a wide variety of assistance to members, such as help when looking for speciflc needs. does the exchange send out frequent newsletters and other mailings, does it have membership meetings and acuvities, and are exchange staff members available to help members when they ask? other measures of an exchange's quality are its longevity and its membership in such national organizations as the international reciprocal trade association and the national association of trade exchanges. such membership lends to foster higher ethics and greater services on the part of the exchange. of course, the business owner should also dctcnnine the various fees, charges, rules and regulauons of the exchange being considereil after a small business owner chooses a barter exchange and joins it, the guidelines center on gflnzrygil1ib and ~n. although the exchange will encourage the member to sell and buy (that is how it generates an income), a new member should start slowly and carefully. barter sales should be kept under conuol so that they do not interfere with cash sales nor become too great a percentage of total sales. generally, only in-stock items should be sold and only at full retail prices-never at discount or at sale prices. a new member's trade balance should be kept moderate until the member has a clear feeling for his or her barter purchase needs and expected levels. exchange rules vary, but most exchanges allow members to limit or refuse baner sales when they wish to and this option should be used as needecl 15 similarly, barter purchases should be kept under control. because cash is not being used, it is easy to get carried away (as it is in las vegas using tokens or chips instead of "real" money). the exchange member should set quanutative and qualitative purchase limits and guidelines. should trade credits be used for personal, non-business purchases? would the owner spend gik?jl on this product or service? is it really needed? perhaps a monthly budget woukl be of value. the on-going quesuon is: what was the true cost of the trade credits earned by barter sales and is this barter purchase worth that cost? conclusions barter as a small business strategic tool is a growing and significant phenomenon in our economy, and small business owners should consider this option as part of their total strategy package. such a suategy can serve to offset some of the negauve impact of a weak economyespeciafly the impact on sales volume, inventory turnover, and cash flow. this article has presented a series of guidelines that can assist the small business owner in determining whether his or her firm will benefit from barter exchange membership, in choosing an exchange to join, and in making the most out of exchange membership. references applegate, j. (1990,nov. 5). businesses are trading up to a barter economy. washington post, p. 10. cohn, j. & kaufman s. (1991,july). where money is no object. nation's business, pp. 24-27. healey, n. (1991,spring). a beginner's guide to corporate bauer. illinois business review, pp. 13-15. kleiman, r. (1992, april). the modern-day swap. small business reports, pp. 20-24. nash, c. (1991,sepl). bartering for bargains. black bnrerprise, pp. 37-40. nordheimer, j. (1992, march 14). as economy goes bust, barter is booming. new york times, sec. met, p. l. selz, m. (1990,nov. 26). small firms, short on cash, turn to barter. wall sireei journal, sec. a, p. 21, stevens, m. (1992,jan jpeb.). stretch your company's cash. d&b repans, pp. 62-63. sympson, r. (1992,jan. 20). paying with cash may be going out of style. resrawanr business, p. 36. williams, t. (1992, april 5). barter helps businesses stay afloat in bad times. new york times, sec. ll, p. l. 16 str*ategy special section rethinking the business plan paradigm'ridging the gap between plan and plan execution'ichael d. ames california state university, futtetton abstract a new business planning paradigm is inherent in ihe "iotal quality managemeru" school of thought. this new approach has several advamages. principal among them is thai it helps bridge the gap between plan creation and plan execution. most business planning resources for small business have not yet recognized the new business planning paradigm. this paper compares the troditional business plan paradigm to the new. it describes three shor(comings of the traditional approach and five strengths of the new approach. it explains how the strengths of the new approach can be used to overcome the shortcomings of the iradi ti onal approach and yield stronger business plans. simple examples illustrate how io crease and execuie business plans using new-paradigm business planning. introduction dr. w. edwards deming and other leaders of thc total quality movement challenge our traditional business practices (deming (1986); schonbergcr (1990); tribus (1988); walton (1986)).they encourage americanbusiness leaders to radically redefine thc role of the company in our free enterprise system and adopt a ncw philosophy of quality, innovation and continuous improvement. a new business planning paradigm is inherent to this "total quality management" school of thought (berry (1991);king (1987);schultes (1988)). this ncw approach has several advantages. principal among them is that it helps bridge thc gap between plan creation and plan execution. the new business planning paradigm links thc strategic planning process to day-to-day operations. properly used, it eliminates the creation of business plans that "gather dust on the shelf'hile the business owner is ovcrwhclmed by thc realities of dynamic markets. «this paper was the runner up for ihe distinguished paper award at the l 994 sb/da national conference in san antonio. h was not reviewed by the jsbs editorial advisory board 69 most business planning resources for small business have not yet recognized the new business planning paradigm (e g., meggin son (1994);tate (1992)'i. they still describe traditional business plan formats and follow conventional approaches to strategic and operational planning (gilmore(1971)). it is time to recognize the new paradigm and employ its strengths to cope with the shortcomings of traditional small business planning. the resulting "alloy," or "newparadigm" approach, will yield suonger business plans. this paper compares the traditional business plan paradigm to the new. it describes three shortcomings of the traditional approach and five strengths of the new paradigm. it explains how the strengths of the new paradigm can be used to overcome the shortcomings of the traditional approach and yield stronger business plans. simple examples illustrate how to create and execute business plans using new-paradigm business planning. comparing the traditional new paradigms traditional business planning models suffer from three shortcomings that the newparadigm addresses well. they are: a "functional" approach to business planning, a limited view of the processes that speed investment turnover, and "physical asset myopia." traditional discussions of business planning describe the planning process as a management function, along with organizing, staffing, leading, and controlling. the table of contents of the business plan includes sections that echo the functional deparunents of a business school. typical section tides are: company description (background, mission, compeutive edge), market analysis and markeung plan, technology and research and development (opuonal), organization, and financial analysis. the company is presented as a pyramid-shaped organization chart. this leaves the business owner with a fragmented view of business operations and liule guidance concerning how to link the functional activities to plan a pathway to success. a second shortcoming of the traditional business planning paradigm is that it takes a limited view of the processes required to speed investment turnover. the total cycle of work is not encompassed by traditional plans —vendor selection, materials acquisition, internal operations, logistics, customer service, customer payment, and reinvestmenu instead the traditional paradigm assumes the company will achieve the tight synchronization required for rapid investment turnover. further, the cycle of work is not viewed as an improvement process. product franchises and company infrastructure are seen as depreciating assets. they are not used as springboards for the achievement of breakthroughs —breakthroughs needed to achieve the high rates of investment turnover associated with comparauve advantage. the third shortcoming of tradiuonal business planning is physical asset myopia. the company's infrastructure is seen as physical plant, equipment, and the trucks used for distribution. theuaditional paradigm doesnotconsiderothercoreelements requiredforefficientandeffective operations to be part of the infrastructure: people, teams, work structures, mechanisms for improvement, and leadership. according to the tradiuonal paradigm, these are variable costs, not fixed costs, and do not receive the same consideration as "capital" items. as a result, plans to develop them remain obscure. as budget items they are low priority, underfunded and expendable. the total quality management school of thought views the company as a step-by-step flow of work or "chain of customers." each cycle of work progresses through the entire chain and offers experiences, which create opportuniues for improvement. links in the chain are 70 codependent. to achieve a win-win business relationship, they must work together to maximize beneflts and minimize costs for the present work cycle. there must be ongoing efforts to learn how to achieve greater benefits and lower costs in the next work cycle. if these imperatives are not met, the company will lose out in a highly competitive world. the new-paradigm approach to business planning implied by total quality management is flow-oriented, recognizes the total cycle of work, and acknowledges codependencies. it values strategic alliances, partnering, teamwork, and continuous improvement. further, the newparadigm places high value on infrastructure elements which are undervalued by uuditional paradigms: people, teams, work structures, mechanisms for improvement, and leadership. strategic and operational consideratioris are linked so that continuous improvement and rapid investment turnover become a way of life. strengths of the new paradigm the new-paradigm for business planning offers ways to cope with the three shortcomings of traditional business planning models. these are suengths that improve both strategic and operational plans: 1. the new-paradigm's flow-orientation relates all resources to the flow of work (operations) implied by the company's core strategies. resources that will not contribute are easily identified because the structure of the organization is designed to hasten and improve the flow. redundant resources simply do not "flt in." omissions are also easily recognized. missing resources create gaps or "holes" in the plan which cause visible "leaks" in the flow. 2. 'ibe flow orientation allows strategists (business owners) to remain focused. 'i)te operating system is designed to directly reflect the strategy. it is easier to trace cost overruns and unexpected windfalls to source activities. the lessons offered by experience are more visible. business owners can absorb what is learned to improve the quality level of operauons and refine strategy. 3. the new-paradigm makes clear the codependencies that exist in the synchronized choreography of any successful enterprise. many business owners start their own businesses because they desire independence. they are loath to admit codependencies and do not plan adequately to orchestrate successful business relationships. the new approach to planning makes it clear when planning for codependency is the best way to achieve financial independence. 4. the new-paradigm clarifies that certain "variable" expenditures are actually fixed costs. study of the flow of work makes it clear that the company must "make the payments" on certain assets (people, teams, work structures, mechanisms for improvement, leadership). if it goes into arrears and the assets suffer from negleck work processes will stall and investment turnover will slow. this will cause a flight of financial and human capital from the company. s. finally, the new-paradigm helps potential business owners and investors understand that "easy entry" businesses —those which appear to have low start-up costs —may not be. they may require heavy investments in the "soft" elements of infrasu'ucture to achieve smooth work flows and satisfactory investment turnover. 71 melding the strengths of the new-paradigm into tradiuonal business planning procedures helps small business owners create stronger, new-paradigm business plans. the next section illustrates how to do ibis. creation and execution of "new-paradigm" business plans creation and execution of new-paradigm business plans require a different perspective, not a completely new approach. new-paradigm business planning is an alloy of traditional and new paradigm thinking. existing planning tools and skills take on new meaning under the new-paradigm approach. advocates of the total quality management school of thought have developed new tools for analysis. under the new-paradigm approach, certain of these can be used in combinauon with traditional planning techniques, like swot analysis, to develop stronger business plans —strategic and operational. both traditional planning processes and the new-paradigm approach attempt to translate strategic vision into step-by-step game plans. james ball reminds us of the basic intent of all planning processes, traditional and new-paradigm: you will know your goals are complete and working to your advantage when they possess these elements: goals must be: 1. written 2. visual 3. prioritized 4. specific goals must have: 5. deadlines 6. commiunents 7. plans many individuals see their goals end up on a pile of passing fantasies because they wereinoneormoreofthelistedways. youwillhaveanexcellentchanceofachieving of your goals if they possess these seven basic elements (ball, (1992), pp. gg-89). what ball says applies equally well to uaditional and new-paradigm business planning. the advantages of the new-paradigm come from ihe integration of strategic and operational planning to design a complete, orchestrated flow of work that yields rapid investment turnover. a simple example, created by myron tribus, illustrates how to bridge the gap between plan creation and execution under the new-paradigm (tribus, (19811),p. 170). figure 1 depicts the work necessary to publish a daily newspaper. figure 1 is a "deployment chart" —a newparadigm planning tool. note the differences between this deployment chan and the traditional, pyramid-shaped organization chart usually included in a business plan. figure 1 shows many things not included in an organization chart. the sequence of tasks in the flow of work, and elapsed time, run from top to bouom. the symbols under each position title show the nature of involvement required from each team member. both the deployment chart and the traditional 72 organization chart list the people in the organization. however, the deployment chart deemphasizes the relative authority of the participants and suesses how they must work together to acconiplish the flow of work. everyone knows what they must do, when they must do it, and how what they are doing fits into the general flow of work. figure i is a "mid-level" flow chart. it does not list partners and allies outside the organization —as one might list on a "top-level," strategic deployment chart. it does not go into the detailed steps of each job —as one might show on a "low-level," operational deployment chart. however, the orientation is the same at all levels. deployment charts emphasize the swdy of work flow, synchronizing it, perfecting it, and achieving high rates of investment turnover. ideally, all the charts, at all levels of planning, link with each other to form a tightly choreographed flow of work. figure 1. flow char%r putting out a newspaper (tribus, (p988j, p. l70) dito reporte sale copy layou graphi printe billin custedito editor arts omer detain needoa an aeceive advent a make a iiake input to an accept tãtaft tufoaiaal product t edit foamal paoouct geneaate stoav usts ta ust the coop ccx% t companies ii compute shard costs iallqut pages pasteup appaove flat pant t checkea dispatch 73 table i is a step-by-step illustration of the planning process required to make this ideal a reality —bridging the gap between plan creation and plan execution. the legend at the top of table i briefly describes tools used for new-paradigm business planning. (for more complete discussions of new-paradigm planning tools see king (1987); schultes (1988) and walton (1986)). the ten steps show how these tools are used to improve operations and align day-to-day activities with company strategy. table 1. bridging the gap between plan creation and pion execution: how to sort out what needs to be done to improve a company legend: brainstorming (a group technique for generaung a large number of creative ideas on a subject), affinity chart (a display that groups related ideas), interrelationship digraph (a graphing technique that shows causal relauonships between pairs of ideas, cause snd effect diagram (a graphing technique that shows cause and effect relationships of diverse factors which impact a goal), tree diagrams (a "goes into" chatt that shows components to be assembled into a larger system), pareto analysis (analysis of data to rank problems or their causes), swot analysis (enumeration of strengths, weaknesses, opportunities and threats), quality table (a matrix that compares and scores consumer demands, performance characterisucs, company capabilities, and the capabilities of competitors), top-down flow chart (shows the most basic steps in a process/project, and the major sub steps for each step), deployment chart (shows the flow of a process, which people are involved at each step, and the timeline) (king, (1987); schultes, (1988); walton, (1986)). to develop/improve an operational plan to accomplish your vision for your company, try the following steps: step i: select your most challenging goal what do you want to accomplish? is the goal written, visual, prioritized compared with your other goals, and specitic? have you established deadlines, made the necessary resource commiunents and developed step-by-step operational plans (work flows)? step fu review what has happened to date. brainstorm all i'actors which might affect your ability to accomplish your goals. do this with your key constituents (key staffmembers, partners, investors, allies, suppliers, customers, etc.). step 3: sort the factors. first sort them into related groups using aflinity charts. then sort them into cause-effect sequences using interrelationship digraphs, cause and effect diagrams, and tree diagrams. do this with your key constituents. step 4: do a first cut pareto analysis. study the cause and effect diagram (or the tree diagram). guess which branch is the one that will have the most influence on whether you will reach your goal which twig on the branch will have the most influence on the branch? write down your guesses. 74 table 1. (cont.) bridging the gap between plan creation and plan execution: how to sort out what needs to be done to improve a company step 5: do a quick swot analysis and/or prepare a quality table on the branch/twig identified in step 4. what can your company do to use its strengths and overcome its weaknesses? how can it capitalize on the opportunities it has and overcome the threats it faces? what can it do to provide product and service characteristics that brand the company? (i. e. what do you think should be done about the branch/twig identified as top priority in step 4?) write down your guesses. step 6. what else do you need to know before you act on your initial guesses? write down the list of what you need to know about the top priority branch/twig you have isolated. step 7: review the background, strengths and weaknesses of each person available to you. what can each of you contribute (o strengthening the branch/twig you have isolated? step b: select someone to work on the branch/twig you have isolated. of course, others can help and give guidance. the person selected will have primary responsibility for improvement of the branch. as the first branch is assigned, work with the person taking it on. prepare a down a top-down flow chart covering the major steps of what is to be done. next prepare a deployment chart describing who will do it, and tentative checkpoints and deadlines. compare these charts to your "top level" flow chans to make sure they fit in. leave the detailed work flow analysis (o the person assigned to the bmnch, but make sure it gets done. at this point you will have operationalized the most important element of the most important goal of your strategic plan. step 9: once the first branch is assigned, return to step 4, and pick the most important remaining branch/twig. keep cycling through steps 4 through 8. do this unul all the major aspects of your most important goal are being addressed, or unul everyone appears to have a reasonable workload. if you run out of staff time, figure out how to get more help (training, selection, partners, alliances, consultants, advisors, etc.). nothing is impossible if you can find the right people to help you do it. step 10:once you are on the path to achieving your most important goal, return to step i, pick your next most challenging goal and continue the planning process. conclusion the total quality management movement offers us a new business planning paradigm that can be used by small business owners to integrate strategic planning and operational planning. this new-paradigm approach to business planning aids both plan creation and plan execution. it can be implemented by using simple planning tools. the new-paradigm approach helps keep the planning process focused on strategic goals and makes it more understandable and more effective. most business planning resources for small business have not yet recognized the newparadigm approach. they still describe traditional business plan formats and follow conventional approaches to strategic and operational planning. the traditional approach has shortcomings that the new-paradigm handles well. it is time to rethink our business planning paradigms to include what we have learned over the past fifteen years about total quality management. we must meld traditional approaches with new approaches. we need to update the resources we use to guide small business owners through the planning process. 75 references ball, j. (1992).soar... /f you dare. reston, va: humdinger books. berry, t. (1991)managing the total quality transformarion. new york, ny: mcgraw-hi ii, inc. deming, e. (1986) oul of rhe crisis. cambridge, ma: mit center for advanced engineering study. gilmore, f. (1971,may-june). formulating strategy in smaller companies. harvard business review, p. &0. king, b. (1987).beuer designs in half the time. methuen, ma: goal/@pc. megginson, w., et. al. (\ 994) small business management: an entrepreneurs guide ro success. burr ridge, il: richard d. irwin, inc. schonberger, r. (1990).building a chain of customers. new 'york, ny: the free press. schultes, p. (1988).the team handbook. madison, wl: joiner associates, inc. tate, c., ek al. (1992).small business management dr enrrepreneurshi p. boston: pws-kent publishing company. tribes, m. (1988).quality first national society of professional engineers. walton, m. (1986). the deming management method. new york, ny: putnam publishing company. 76 strategy impact of operational planning on small business retail performance luann rickells gaskill howard e. van auken hye-shin kin iowa state university abstract this study examined operational planning activities (inventory, marketing financial, and personnel) of successful (n=92) and failed (n= 9)) small business apparel and accessory retailers. results suggest ihat inventory, markeiing, and financial planning activities significantly dtgered between groups with successful retailers being more likely tluin failed retailers to engage in such functions. )vo differences were found between groups in personnel planning. study implicotions are discussed for small business practi tioners and academic researchers. introduction the strategic planning process has been touted as a critical activity in gaining a competitive advantage in the small business sector. through long-term strategic planning, businesses create a plan for market differentiauon and positioning (scarborough & zimmerer, 1987) leading to greater levels of success. the impact of strategic planning on small business pcrformancc has been well documented over the past decade (brackcr, keats, & pcarson, 1988; robinson, salem, logan, & pearce, 1986;schwenk gt shrader, 1993;sexton &. van aukcn, 1985)but little research has been directed toward the short-term operational planning aspects of the suategic planning process. recognizing the importance ol'perational planning, robinson, logan, and salem (1986) noted that "operational plans serve a major role in thc implcmcntation of business strategies by translating strategic plans into functional areas" (p. 8). past rcscarch on operational planning in the small business scuing has bccn virtually ignored (bracker, 1982; robinson, salem, et al., 1986; salem, 1984). this research study was undcrtakcn to investigate differcnccs in opcrauonal planning activities between successful and failed small business retailers. small business apparel and accessory retailers in iowa were selected as ihc indusuy for analysis due to strong industry representation (census of retail trade i'or iowa, 1982). using a sample of 91 failed and 92 successful smallbusiness retailers, th is study examined differences in thc use of market, financial, personnel, and inventory planning bctwcen cirms that are successful and those that failed. the implications of these results for thc small business pracutioncr and future research are discussed. this research was funded in part by the iowa small business development center and iowa state university cooperative extension (rural development). 21 planning activities in small business: the literature planning, the process of identifying and defining specific acuviues to reach set goals, can effectively maximize the organization's internal and external environment in a systematic manner (gibb & scott, 1985). 7be role of planning has long been recognized to be an important part of managerial activities. however, problems have been noted in making generalizations about management practices applicable to all situations (robinson, logan, et al., 1986). contingency theory suggests that in practice, different approaches (or the same approach) can be applied in different ways to different situations (filion, 1988). hofer (1975) identified firm size to be a critical contingent variable when designing effecuve strategic planning processes. lindsay and rue (1980)observed that large firms and small firms differed in their use of long range planning activities. studies are emerging in which firm size is taken into consideration when examining planning practices and performance of small businesses (schwenk & shrader, 1993). strategic planning research over the past decade has addressed several issues including sources of information used in the planning process (bracker & pearson, 1985; specht, 1987), planning related to stages of development (robinson, pearce, vozikis, &. mescon, 1984), planning characteristics (jones, 1982),and, to a greater extent, the effects of the strategic planning process on business performance (bracker et al., 1988; orpen, 1985; robinson, salem, et al., 1986; schwenk &. shrader, 1993; sexton & van auken, 1985). the findings of the strategic planning and performance literature has, however, reponed conflicting results (orpen, 1985; schwenk & shrader, 1993). schwenk and shrader (1993) note&1 that: some [researchers] claim that formal strategic planning provides structure for decision making, helping small business managers take a long-term view, and, in general, benefits small firms; others conclude that formal strategic planning has no potential payoff for small firms because it is a heady, high-level, conceptual activity suited solely to large firms and has no effect on the financial perfonnance of small firms (p. 53). ln an attempt to determine if suategic planning significantly and positively affects performance, meta-analysis was applied by schwenk and shrader (1993).researchers concluded from the analysis that strategic planning is a positive and beneficial activity for small businesses. factors associated with planning and positively related to performance include formalized planning, analytical planning, quality of planning, and personal commitment to planning (ackelsberg & arlow, 1985; bracker et al, 1988; gibb & scott, 1985; orpen, 1985; robinson, salem, et al., 1986). the importance of the planning process has also been addressed in the failure litemture. wichmann (1983) and clute (1979) have identified debiciences in planning areas as a factor awibu ted to small business failure. gaski 1 1, van auken, and manning (1993),in a comprehensive study of factors perceived to contribute to small business failure, found failure factors in four areas including deficiencies in managerial and planning functions. evidence was presented suggesting that a positive relationship exists between amount of planning and financial performance. according to gaskill, et al. (1993),"without good planning, the firm's performance deteriorates in many ways. the ability of the firm to successfully compete against compeutors, to target market niches, and to offer salable goods are part of the business planning process" (p. 27). 22 past researchers have identified the importance of both long-range strategic planning and short-range operational planning in small business operations (robinson, salem, et al., 1986; robinson, logan, et al, 1986; salem, 1984), but very little research has been directed toward the short-term operational planning aspects of the strategic planning process. recognizing the importance of operational planning, robinson, logan, et al. (1986) note that "operational plans serve a major role in the implementation of business strategies by translating strategic plans into functional areas" (p. 8). researchers, however, have found a lack of systematic planning in small business. robinson and pearce (1984) auribute the absence of planning to time constraints, limited knowledge of the planning process, lack of specialized expertise, and lack of trust and openness. aram and cowen (1990)noted that businesses tend to avoid planning, thinking such activities are suitable only for big business. scarborough and zimmerer (1987)suggest that, due to the size and characteristics particular to small business, the planning process should be informal and not overly structured. in contrast, ackelsberg and arlow (1985) found small businesses engaged in planning activities by assessing strengths and weaknesses to formalize a wriuen plan inclusive of goals and budgets. ackelsberg and arlow (1985) also found that the small business planning process differed according to the type of the small business. for example, purchase and inventory planning would be of greater relevance to retailers than to service-oriented small businesses. in a study of small independent food retailers, robinson, salem, et al. (1986) found specific operational planning activities in the areas of marketing, personnel, financial, and inventory planning to be highly related to performance. similarly, orpen (1985) found that high and low performance firms differed in the areas or issues that were considered in the planning process. high performing firms considered a wider range of business functions and issues than low performing firms. market planning functions market planning generally concerns issues relating to situauonal analysis, objectives and goals, strategy statements, action programs, and budget and controls (varadarajan, 1985). marketing as a planning function is an area that is observed to be frequently ignored by small business. carson (1985) determined the main constraints on small business marketing to be limited resources, lack of specialized marketing, and perceived limited impact on the market. limited linancial resources have also been found to be a major problem in conducting markeung activities (weinrauch, mann, robinson, & pharr, 1991). in comparison, robinson, salem, et al. (1986) found that key marketing activities frequently practiced and influencing business profitability included analyzing changes in target customers, competitive analysis, and making sales projections. research suggests that marketing plays an important role in the ability of the small business to adapt to its environment and that the tendencies of small business to engage in market planning activities may influence business performance. financial planning functions studies suggested that planning in the financial area is widespread among successful small businesses. a firm's financial position constantly changes as a result of the continuous inflow and outflow of financial resources. robinson, salem, logan, and pearce (1986) found preparing a detailed monthly cash flow projection tobe significantly related to firm performance. ackelsberg and arlow (1985) found that planning-oriented small businesses paid more auention to internal factors such as cash sales, prolitability and costs, and also external factors such as the economy. 23 personnel planning functions small business retailers perceive assistance in the area of employee relations to be unnecessary due to the fact that small businesses employ a relatively small number of employees (peterson, 1984). however, small businesses are usually understaffed leading to heavy work loads for employees (fi1ion, 1988)resulting in productivity problems among small firms (miller, 1982). miller found that productivity rates were lower in small firms compared to large firms. wichmann (1983)noted that entrepreneurs should realize that lack of "well-trained personnel are often considered more critical problems for a small firm than lack of capital" (p. 20). better management of personnel by the owner/manager may improve employee effectiveness and increase the productivity of the business. robinson, salem, et ak (1986) found that 37 percent of small food retailers engaged in a high level of operational personnel planning. moreover, the planning activity of reviewing and setting labor cost standards at least once a year was found to be sign ilicantly related to business performance. research suggests that small business personnel management and specific planning activities are positively related to the economic performance of the small business. inventory planning functions the relevancy of inventory planning differs based on type of business. grablowsky (1984) found the average turnover for small businesses in the retail industry was 5.2, suggesting excessive inventory. in contrast, inventory management was not considered an area in which management assistance was needed by participants whose primary business offering was service (peterson, 1984). however, robinson, salem, et al. (1986) found that reviewing the adequacy of minimum inventory levels significantly related to the performance of independent food retailers. proper management of inventory is criucal to profitability because of the large investment small businesses must make to acquire merchandise (grablowsky, 1984). robinson and pearce (1984) stress the importance of research into the small business planning process in the retail seuing since retail businesses (along with service and construcuon) dominate the small business environment. ackelsberg and arlow (1985)note the lack of research efforts addressing the relationship between business planning and firm performance. armstrong (1991)calls for more research to determine what planning techniques are most useful. gaskill et al. (1993)note that research is needed to determine differences in operational planning activities between successful and failed small business retailers. past researchers have recommended that samples selected for study be as homogenous as possible to reduce complexity and increase clarity. although empirical research related to planning in the small business literature has increased, the extent to which practical conclusions can be drawn are limited (robinson, salem, et al.1986). research hypotheses based on the literature review, four hypotheses were proposed in this study. hl: successful small businesses will report higher levels of market planning compared to failed small businesses. h2: successful small businesses will report higher levels of financial planning compared to failed small businesses. 24 h3: successful small businesses will report higher levels of personnel planning compared to failed small businesses. h4: successful small businesses will report higher levels of inventory planning compared to failed small businesses. methodology the purpose of this study is to investigate differences in operational planning activities (market, financial, personnel, and inventory) between successful and failed small businesses retailers. small business apparel and accessory retailers in iowa were selected as the industry for analysis due to intensive industry representation (census of rerai ( trade for iowa, 1982)! sample the study sample consisted of both successful and failed small business apparel and accessory retailers. small business retailers who experienced business discontinuance between 1987 and 1988 were identified through the iowa department of revenue sales tax permit tapes using standard industrial classification (sic) code numbers to identify retailers with apparel and accessory product lines.'ntensive tracking yielded 110previous business owners. additional small business retailers who experienced discontinuance between 1988 and 1991 wem located through input from 158 of the 181 (87.3 percem) iowa chamber of commerce directors. commerce directors, located through the world chamber of commerce directory (1990), identified an additional 135 past business owners. through these varied sources, 245 businesses were identified. follow-up contacts with the identified businesses indicated that 40 past businesses were ineligible in the study (still in operation, nonclothing/accessory business. etc.). the identified sample of discontinued small business retailers, therefore, consisted of 205 apparel and accessory small business owners who discontinued operauon between 1987 and 1991. successful, currently existing small business retailers were identified through sales tax permit data collected from the iowa department of revenue sales tax permit tapes. apparel and accessory retailers also were identified through the use of sic code numbers. two hundred and thirty retailers were identified using a systematic random selection procedure. for the purpose of this study, failed small business retailers consisted of those individuals who were out of business and had discontinued their business due to financial failure. reasons included avoiding financial loss, to pay off creditors, or a general inability to make a business profit. successful small business retailers consisted of retailers who were currenuy in operation and in existence. no attempt was made to determine level of success based on economic performance. dess and robinson (1984) note that empirical studies addressing business strategies and organizational performance commonly use success or failure as a measure of performance. in accordance with tlu u.s. small business a dmin(strut(on, small business i n retailing was defined as a tauri i store having fewer r hen i00 employees (u.s. small business administration (i990, p. i 0). standard industrial classi/ication codes included in rhis study were sic ¹56ii (men's and boy's clothing and accessory stows), sic ¹562l (women's clothing states), sic ¹5652 (women's accessory and specialty stores), sic ¹56¹i (chadren' and infant' wear clothing stoees). sic ¹565( (family clothing stores), sic ¹566i (shoe stores). and sic 95699 (misc. apparel and accessory stores). 25 instruments data collection instruments included both telephone interviews and mailed questionnaires. telephone interviews were used to identify the subset of past retailers who discontinued business as a result of financial failure. mailed questionnaires containing a subjective operational planning measure were then used to determine operational planning differences between the discontinued failed business retailers and the currenuy exisung successful retailers'. operauonal planning activiues were measured using the robinson, salem, et al. (1986)operauonal planning instrument to determine the extent to which specitic market, financial, inventory, and personnel planning activities were/ are part of regular business practices. the planning measure was originally developed based on small business literature and screened by a panel of retail business experts. respondents were asked to rate the extent to which specified planning activities (e.g., "estimating the store needs of different inventory items for a period of six to twelve months") were part of the stores'egular business practices using a 5-point likert-type scale ranging from i (to a very liule extent) to 5 (to a very great extent). the original instrument consisted of 47 items with an item reliability of .95 (cronbach's alpha). for the purpose of this study, omissions werc made in the personnel planning segment of the instrument to address a small business apparel retail orientation. thirty-seven items rather than the original 47 items were used to measure differences in operadonal planning activities between groups. in addition, data were collected on demographics and the business background of the study participants to aid in profiling the sample. a modified version of dillman's toial design method (1978) was used in administering and collecting the mailed questionnaires. study participants were initially mailed a quesuonnaire, followed two weeks later by a mminder letter to non-respondents. a second questionnaire was mailed to non-respondents two weeks later followed by a second reminder. an executive summary of the results served as the incentive for completion. resvlts of the 205 discontinued small business retailers, 182 (88.8 percent) were located and contacted through telephone interviews. during the telephone interview process, 130 of the 182 retailers (71.4 percent) indicated disconunuance due to financial failure. ninety-one of the possible 130 (70 percent response rate) retailers who indicated financial failure subsequently completed mailed questionnaires. of the 230 successful and currently existing business owners, 92 (40 percent) completed and returned usable questionnaires. participant profile the demographic and business background characteristics between the two groups were surprisingly similar. over 60 percent of retailers were female (successful 67 percent, failed 64.6 percent) and the majority of the retailers were married (successful 85.7 percent, failed 88.4 percent). in terms of education, 70 percent of the successful retailers had completed college. for in a study to determine the usefulness of subjective performance measures when objective performance dcuais not available to tlu researcher, dess and robinson i)984)found that subj ecis'erceptions of performance (related lo return on assets and sales growih) was consistrnt with actual perfonnance. dess and robinson conclude that subjective perceptual measures related io performance are useful when accurtne objective information is unavailable. the sample segment of nonexistent basinesses warranted thc collection of subj ecti ve measures of business planning activities. 26 failed retailers, 61.3percent had a college degree. seventy-eight percent of successful retailers were currently in double income households with over 71 percent earning over $30,000. a smaller percentage of the failed small business owners (56.6 percent) currently were in double income households with 55.3 percent earning over $30,000 annually. the largest percent of the successful and failed small business retailers indicated a sole ownership strategy (56.5 percent and 59.4 percent, respectively). in terms of business start-up, over half of the businesses were started as a new business (successful 50.5 percent, failed 54.3 percent). when possible, data were collected specifically from the small business person (owner, manager, owner/manager) identified to be the primary decision maker. the majority of the respondents of failed small businesses identified themselves as owners/managers (83.1percent), whereas, 44.6percent of the respondents of successful businesses were owners; 40.2 percent were owners/managers. finally, the largest percent of both the successful and failed respondents indicated a downtown area store location (47.8 percent and 70.8 percent, respectively). in summary, the average respondent was female, married, college educated, and in a double income household with earnings over $30,000 annually. the largest percent of respondents were/ are sole owners/managers of their business which tended to be located in a downtown area. operational planning activities reliability of the robinson, salem, et al. (1986) operational planning measure was determined through cronbach's alpha. reliability of themarketplanning items wasarespectable .93;the financial items had an item reliability of.92; personnel items had an item reliability of.90; and the reliability of the inventory items was .93. mean scores for the market planning items are identified in table l. as indicated, successful business owners engaged to a great extent in "developing a plan of action which specifies the combination of promotional techniques such as attractive displays, coupons, samples, customer services, and personal selling needed to support sales goals" (mean = 3.81). this planning activity was also the highest rated market planning function for the failed retailers (mean = 2.98) along with "estimating what sales volume and dollar sales your firm expects to reach in a period of 6-12 months" (mean = 2.98). 27 table 1 operational planning activities of successful and failed small business owners ~1 mean s.d. mean s.d. f jdu4g~ln~ni g 1. forecasting on a regular basis future economic 2.64 1.23 2.35 1.32 2.35 and business conditions in your market area for a period of six to twelve months and assessing their probable impact on the sales. 2. analyzing on a regular basis the possible 2.&4 1.23 2.37 1.28 6.28e changes that will take place within a year or less among your target customers (such as needs, location, size, income, and location). 3. collecting and analyzing data on a regular basis 2.92 1.22 2.39 1.32 8.01vv concerning your major competitors regarding prices, quality, sales, service, and promotions. 4. analyzing major products on a regular basis 3.30 1.18 2.60 1.45 1-.84ev in terms of achieving sales and profit goals. 5. estimating what sales volume and dollar sales 3.41.19 2.98 1.50 6.35vv your firm expects to reach in a period of six to twelve months. 6. setting and monitoring a realistic and numerical 3.32 1.27 2.88 1.54 4.40e sales target you shoot for on a monthly and/or quarterly basis. 7. determining at which sales volume your store 3.49 1.17 2.61 1.48 20.14vvv will brcak even. 8. monitoring and readjusting pricing policy based 3.40 1.24 2.59 1.41 17.03*v'n an analysis of demand, competition and cost considerations. 9. developing a plan of action which specifies the 3.&1 1.20 2.98 1.47 17.43*vv combination of promotional techniques such as attracuve displays, coupons, samples, customer services, and personal selling needed to support your sales goals. 5gtg,. scale: i = to a very liale extent, 2 = to a liale extent; 3 = to some extent; 4 = to a great extent; 5 = to a very great extent. vvup & . 001. vup &. 01 . "p & . 05 . 28 table 1 cont. operational planning activities of successful and failed small business owners ~f ~i ~diff n mean s.d. mean s.d. f 10. determining ahead of time what kind and how 2.98 1.19 2.73 1.43 1.64 much advertising your business needs for a period of six to twelve months and planning an advertising program and budget. 11.conducting an informal assessment on a 3.34 1.21 2.63 1.42 13.33vvv continuous basis of customer satisfaction. 12. reviewing and planning to improve the 3.62 1.06 2.89 1.44 14.95vv* business image on a regular basis. 13. comparing sales results on a regular basis to 3.66 1.26 2.96 1.59 10.99*'v sales quotas and expectations. ~fin ~il pl n~nin 14. preparing a projected income statement for six 2.96 1.20 2.46 1.46 5.89» to twelve months. 15. preparing a cash flow projection (receipts and 2.98 1.25 2.54 1.57 4.29'isbursements)for six to twelve months ahead. 16. formulating an annual financial statement. 3.81 1.32 2.82 1.69 19.74'vv 17. preparing a detailed profit and loss statement 3.63 1.46 2.59 1.72 19.38vvv and compare with expectations. 18. accounts payable(debt) continuously gets 3.70 1.28 2.98 1.60 1 e49vvv proper auention before they are due at least a month ahead 19. preparing a detailed monthly cash flow 2.93 1.32 2.38 1.53 6.84vv projection. 20. analyzing and monitoring operaung, selling, 3.41 1.27 2.76 1.59 9.17vv and overhead expenses to ensure they are in line with expense budget. 21. considering several possible tax alternatives 2.69 1.41 2.60 1.56 .17 and developing a plan to minimize the store's tax obligation on an annual basis. 22. estimating future short range borrowing needs 3.02 1.51 2.39 1.57 7.66*v 23. setting a numerical profit goal for the year. 3.63 1.54 3.18 1.30 6.68vv ~ scale: 1 = to a very liule extent, 2 = to a li ule extent; 3 = to some extent; 4 = to a great extent; 5 = to a very great extent. *vvp & . 001. v*p &. 01 . vp & . 05 . 29 table 1 cont. operational planning activities of successful and failed small rusi ness owners~l euihd ~dif mean s.d. mean s.d. f ~pr gnarl plein 24. annually assessing personnel capabilities. 2.93 1.40 2.75 1.59 .67 25. annually reviewing and setting employee 2.68 1!11 2.38 1.53 1.88 performance productivity standards. 26. determining factors of discontent and a 2.82 1.36 2.39 1.47 4.02» specific annual action plan to improve job satisfaction. 27. analyzing training needs at least annually. 2.44 1.26 2.22 1.44 1.17 28. reviewing personnel practices for compliance 2.64 1.44 2.27 1.42 2.86 with the law at least once a year. ~vttt~t.tannin 29. estimating the store needs of different inventory 3.76 1.26 2.85 1.61 16.20»»'tems for a period of six to twelve months. 30. periodically reviewing the adequacy of the 3.69 1.23 2.84 1.54 17.00»»» minimum inventory level for each major item. 31. monitoring the adequacy of stock level at least 3.92 1.18 3.08 1.65 15.60»»» once a year. 32. reviewing and estimating the time required 3.54 1.42 2.58 1.65 17.61»»» between placing the order and receiving the shipment for each item at least once a year. 33. ordering the proper inventory site on a regular 3.87 1.14 3.05 1.60 15.48»»» basis. 34. reviewing purchasing policies at least once a 3.56 1.35 2.62 1.59 18.45»»» year. 35. analyzing major items turnover on a monthly 3.47 1.30 2.70 1.49 13.95»»» basis. 36. collecting information on the availability of 3.60 1.24 2.83 1.48 14.56»»» new sources of material. 37. analyzing the cost of placing an order, cost of 3.27 1.45 2.38 1.60 15.34'»» purchasing, and cost of keeping inventory at least once a year. ~ scale: 1 = to a very little extent, 2 = to a liule extent; 3 = to some extent; 4 = to a great extent; 5 = to a very greot extent. »»'p& 001»»p& 01 'p& 05 30 an analysis of variance (anova) between groups on the market planning items indicates that successful business owners were significantly more likely to engage in 11 of the 13 market planning activities than were the failed business owners. activities where no significant differences were noted included "forecasting on a regular basis future economic and business conditions in your market area for a period of 6 to 12 months and assessing their probable impact on sales" and "determining ahead of time what kind and how much advertising your business needs for a period of 6 to 12 months and planning an advertising program and budget". in the financial segment of the operational planning measure, the successful business owners'ere significantly more likely than the failed owners to engage in financial planning activities in all but one area. no difference was found between groups in the activity of "considering several possible tax alternatives and developing a plan to minimize the store's tax obligation on an annual basis". the highest rated financial planning activity for the successful retailers was "formulating an annual financial statement" (mean = 3.81); the lowest rated item for this group was "considering several possible tax alternatives and developing a plan to minimize the store's tax obligation on an annual basis" (mean = 2.69). the highest rated item for failed retailers was "accounts payable (debt) continuously gets proper attention before they are due at least a month ahead" (mean = 2.98); the activity receiving the lowest rating (mean = 2.38) was "preparing a detailed monthly cash flow projection". no significant differences emerged in personnel planning with one exception. successful owners were more likely than the failed business owners to "determine factors of discontent and develop a specitic annual action plan to improve job satisfaction" (mean = 2.82 and 2.39, respectively). both successful and failed retailers rated "annually assessing personnel capabilities" the highest (mean = 2.93 and 2.75, respectively). "analyzing training needs at least annually" was rated the lowest by successful retailers (mean = 2.44) and by the failed retailers (mean = 2.22). in the area of inventory planning, all areas were found to differ between groups (see table i). successful small business owners were significantly more likely to engage in inventory planning activities than were the failed business owners. successful retailers indicated they engage in "monitoring the adequacy of stock level at least once a year" to a great extent (mean = 3.92). highest ratings were also given to stock monitoring activities by the failed retailers. the lowest rated items forboth successful and failed small business retailers was "analyzing the cost of placing an order, cost of purchasing, and cost of keeping inventory at least once a year" (mean = 3.27 and 2.38, respectively). in a final analysis of the planning measure, anova was used to determine if significant differences between groups existed on the four planning subscales (i.e., marketing, personnel, financial, inventory). the results indicate that marketing, financial, and inventory planning significantly differed between groups (p &.001). successful small business retailers were signiticantly more likely than the failed business owners to engage in market, financial, and inventory planning. no significant differences were found in personnel planning activities (see table 2). 31 table 2 digerencesbenveensuccessfuland failed smallbusinesseson opera[iona!planning subscales ~fl ~filet) ~diff r n mean s.d. mean s.d. f operational planning subscales marketing 42.7 11.4 34.9 13.8 17.14unu financial 32.2 10.3 26.1 12.7 12 74vvu personnel 13.0 6.0 12.0 6.4 1.37 inventory 32.0 10.1 24.9 11.7 19.27unu evv p &.001. discussion and conclusions the study results demonstrate the value of operational piianning in the small firm. the results support the hypotheses that successful small firms exhibit greater market, financial, and inventory planning than failed firms, while not supporting the hypothesis that successful firms have higher levels of personnel planning than failed firms. the mean scores of all variables in the study were higher for the sample of successful owners than for the sample of failed owners. an implication of this finding is that operational planning may positively impact the likelihood of firm success, which is consistent with robinson and littlejohn (1981)and orpen (1985). the absence of support for the importance of personnel planning may indicate that all firms, successful and failed, recognize the importance of personnel planning. these results suggest that small business owners and their consultants would be well advised to devote sufficient resources to market, financial, and inventory planning. these results provide business owners with a better understanding of the specific types of market, financial, and inventory planning activities in which successful firms are involved. the high failure rate of small business is well known. by improving operational planning activities in these areas, smaller firms may avoid the resulting distress that was likely experienced by the failed firms. for example, the first six market planning variables are related to establishing a market identity and market position relative to the relationship ttetween price and volume. this result, similar to robinson, salem, et al (1986), indicates the importance that business owners should give to matching market niche to product characteristics. liquidity constraints have been shown to be a common problem for smaller firms (carter & van auken, 1990). robinson, salem, et al. (1986),ackelsberg and arlow (1985),and potts (1977)report on the important contribution of financial management to firm performance. poor financial management has been cited as a common factor relate&1 to poor performance (brigham & gapenski, 1991). the greater involvement in all areas of financial planning (except tax planning) by the successful owners confirm the importance of controlling expenses, preparation of financial statements, and cash budgeting, which are the basic.', of the financial management of the firm. 32 inventory planning, which enables smaller firms to offer the right combination of product, price, location, quantity and time, is closely related to market, planning and financial planning (lewison, 1989). inventory planning has implications on multiple aspects of the firm's operations. inappropriate inventory management affects firm performance through, for example, lost market opportunities and customers (brigham gt gapenski, 1991). robinson, salem, et al. (1986) identified the importance of carrying adequate inventory levels, while grablowsky (1984) discussed the impact on profitability of carrying excessive levels of inventory. this study provides evidence that successful small business owners focus less on inventory ordering and more on other aspects of inventory management. in addition to increasing insight into the importance of operational planning in small business performance, this study contributes to the literature by offering a glimpse into select activities of an important segment of small businesses-those businesses that failed. according to the u s.small business administration,63 percent of new businesses will fail within their first six years of operation (scarborough /k zimmerer, 1993). it would appear that research into the profiles and practices of failed small business owners would provide pertinent information on practices to be avoided and would be instrumental in establishing stepping stones for successful small business operations. gaskill et al. (1993)calls for comparative studies between successful and failed small business retailers but notes the difficulties involved in obtaining usable samples of failed businesses. despite difficulties in sample location, more effort should be made by academic researchers to study business failure from those who actually have experienced business failure. there is a wealth of information to be collected and much to be learned from this group of past business owners. this swdy raises a number of issues for further research. an important issue not addressed by this study is the relationship between operational planning, strategic planning, and firm performance. robinson and pearce (1984)and cochran (1981)have emphasized the importance of focusing research studies on single industries within specific regions of the country. future studies could provide greater insight into the role of operational planning within the firm relative to other regions of the u.s., market characteristics (i.e., urban vs. rural), and other industries. insight into the functional roles of small business owners and/or managers has yet to be addressed in the small business literature. the fact that primary decision makers for the failed firms tended to identify themselves as owner/manager, whereas, for successful firms. decision makers tended to identify themselves as either manager or owner leads to an interesting question for further research (i.e., what are the functional distinctions between owners and managers in the small business environment and what impact might these differences have on business operations and performance?). other avenues of study might include the extent of operational planning relative to firm size as well as other demographic characteristics. extending operational planning research to include womenand family-owned small businesses also offers opportunity to extend and better understand the role of planning, and keep abreast of current trends in small business. small business creation and entrepreneurial activity is a significant trend in the u.s. economy. unfortunately, the anticipated rewards of smallbusiness ownership are often replaced with the reality of failure. it is often quoted that if business owners do not know where they are going, then it does not matter which road they take. too often the road selected leads to failure. the contribution of this study is in advancing insight into the value of operational planning and, specifically, in a better understanding of the types of planning that are important to achieve success. appropriate planning can assist the small business owner in identifying the correct road and improving the probability of their business success. 33 despite contributions to the planning literature, study limitations do exist and need to be acknowledged. study results are based on subjective self-reports and past perceptions of planning activities of the small business owners/managers. although self. reports and past perceptions are a recognized and often used method of data collection, recognition must be given to the fact that data collected may not mirror the exact extent to which the planning process was conducted in the actual businesses. therefore, it is recommended that further reseamh incorporate objective measures of operational planning activities as further validation of subjective information. this study is also limited by the fact that there is a 40 percent response iate for successful small business retailers and a 70 percent response rate for failed small business retailers, thus creating the potential for nonresponse bias. finally, data were collected from a specific type of retailer (apparel and accessory retailers) and findings may not be generalizable to the general small business retail population. generalizability has yet to be determined. references ackelsberg, r., & arlow, p. 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(1983). accounting and marketing-key small business problems. american journal of small business, 7(4), 19-26. world chamber of commerce directory. (1990). colorado: world chamber of commerce directory. 35 s7.~very self-actualization: the zenith of entrepreneurship james w. carland, jr. jo ann c. carland james w. (trey) carland, iii western carolina university abstract this paper presents entrepreneurship literature which supports a treatment of entrepreneurial drive as a cominuum. behavioral differences among entrepreneurs are presented and examinedin the light of mas!ow's hierarchy of needs. the two perspectives are linked by a perspective of entrepreneurial activity as a vehicle which can support one' advancement through all levels of the hierarchy. this perspective is examined empirically with a database of 156 entrepreneurs, and the authors conclude that the respondentsin this study who displayed higher entrepreneurial drive did view their businesses as vehicles for achieving self esteem and self arxualization, those respondents displaying lower entrepreneurial drive viewed their firms as vehicles for providing basic financial needs. introduction what makes one person choose entrepreneurship and another person choose the corporate ladder? what makes one entrepreneur content with a neighborhood store while another takes the business public? these are questions which have fascinated researchers for decades. there are no definitive answers. in fact, there is no generally accepted deiiniuon of the words "entrepreneur" or "entrepreneurship." without that basic level of agreement, the earlier questions seem unanswerable. definitional issues the controversy over the definition of entrepreneurship and the identification of entrepreneurs has been played out in the literature (gartner, 1988; carland, hoy and carland, 1988). since mcclelland (1961) much of the controversy has centered on the individual who creates a venture. a plethora of articles focussing on personal characteristics has emerged (i.e., pickle, 1964; homaday & aboud, 1971; timmons, 1978; brockhaus, 1980; dunkelberg & cooper, 1982; brockhaus & horwitz, 1986; carsrud, olm & eddy, 1986; mcclelland, 1987; solomon & winslow, 1988; winslow &. solomon, 1989; carland &. carland, 1991) and several attempts have been made to establish a definition of the term entrepreneur (carland, hoy, boulton & carland, 1984). nevertheless, no consensus definition has emerged (shaver & scott, 1991). researchers have been like the proverbial blind men describing an elephant. some researchers think entrepreneurs are like ropes, others like trees, and still others like snakes. many researchers have approached this absence of a consensus by positing types of emrepreneurs (i.e., smith, 1967; webster, 1977; decarlo & lyons, 1979; vesper, 1980; 63 mescon &. montanari, 1981; mcclelland, 1987; louis, blumenthal, gluck & stoto, 1989; gartner, mitchell & vesper, 1989). other researchers have discussed the limitations inherent in such approaches (wortman, 1987; shaver & scott. 1991) and some have attacked the validity of the approach entirely (gartner, 1988). some researchers seem to have totally abandoned the pursuit of a definition as impossible (mitton, 1989) while others decry the need to shift focus from the individual to the entrepreneurial process (bygrave & hofer, 1991)and still others fear that even should one develop an understanding of the personality of an entrepreneur that would not be valuable since individual behavior is not consistent over ume nor can personality units predict behavior (gartner, 1989). how is it that so many learned people can look at entrepreneurs and the process of venture crcauon and see so many different entities? not only have resuhs been contradictory (i.e., brockhaus, 1982; gasse, 1982) but sometimes it has seemed that the individuals and issues under study were aberrant (i.e., ket de vries, 1985; winslow & solomon, 1987; 1989). some researchers have suggested that the difference in vision occurs because of a difference in mcasurcment inswments (sexton & bowman, 1984; 1985). others have posited that the groups of people under study differed significantly in characteristics and behavior (vanderwerf & brush, 1989). is it importam to pursue this issue of definitional conflict? these authors think that it is and so do many other researchers. the failure to establish definitions has disrupted the evolution of a framework for the enuepreneurship discipline (vanderwerf &. brush, 1989; bygrave & hofer, 1991) and has resulted in efforts to examine the entrepreneurial process from social (reynolds, 1991), anthropological (stewart, 1991), economic (kirchoff, 1991), svategic management (sandberg, 1992) and other approaches. ail of these approaches are valuable and greatly advance the field but the fact remains that entrepreneurship is unique among organizational and economic functions in that it is initiated by an act of human volition (hofer & bygrave, 1992). it is this intentionality that distinguishes the enuepreneur (bird & ielinek, 1988). if one wishes to understand the entrepreneurial process, one must understand the role of the individual in triggering that process (carland, hoy & carland, 1988). consider for a moment the tacit assumptions of the definitional debate. virtually all of the empirical investigations assume that entrepreneurship is a discontinuous function. many authors (i.e., mcclelland, 1961; mancuso, 1975; carland, hoy, boulton & carland, 1984) discuss entrepreneurs contrasted against other groups. others (i.e., webster, 1977; dunkelberg, & cooper, 1982; vesper, 1980; 1990) categorize enuepreneurs as falling in one of several classificauons. the former school incorporates a tacit assumption that one either is, or is not, an entrepreneur: a dichotomous condition. the latter school is based on a tacit perspective that entrepreneurs describe a step function: a discontinuous disuit&ution. what if those axioms are invalid? carland (1982) suggested that entrepreneurship might actually be a continuum. ii't is, then much of the conflict in findings and many of the anomalies could be explained: the people under investigation in all of the studies shared entrepreneurial tendencies but not in the same intensity. carland, carland and hoy (1992) presented an index of entrepreneurial drive which showed precisely that: entrepreneurship is a continuous function. the function is a personality trait or drive which is translated into a need to create or create and grow a business venture. if that perspective is correct, could it lead to answers to the earlier questions? 54 behavioral issues the real differences in entrepreneurs are behavioral in nature. a local hardware store with which the authors are familiar was owned and operated by the same man for 30 years. the store provided a comfortable income for the entrepreneur and his family, but it neither grew nor changed in 15 years. now the second generation management is taking over the store and the new owner is phasing out lumber and changing the focus to lawn and garden care. another business owner with whom we are familiar started with one convenience store 15 years ago. he now has a dozen convenience stores and has branched out into restaurants. these observations are not unique. any student of entrepmneurship can recite a dozen stories about entrepreneurs who have kept their businesses small and under tight control and a dozen more who have pursued growth and expansion, sometimes at high cost. the time and energy which is required to govern a business expansion can take a toll on one's family and health. why is the behavior so different? talk to the entrepreneurs and some will describe the freedom which business ownership provides; freedom to pursue family life or hobbies. others will talk about the challenges which business ownership offers; challenges against which one can measure one's ability. the first school seems to see the business as a means to an end. the second school seems to see the business as an end in itself. that is, some entrepreneurs pursue financial comfort while others pursue something more. combining observations of entrepreneurial behavior with the perspective of entrepreneurial drive as a conunuum leads one to think that business owners at various points along the continuum seem to be motivated by different things. the psychology literature is rich in evidence of behavioral differences among people in different circumstances. in fact, ihat literature may hold the key to the behavioral differences among entrepreneurs. maslow's hierarchy mastow (1943, 1971)posited that individuals were motivated by a hierarchy of needs. at the lowest level are security needs, followed at increasingly higher levels by needs for social acceptance, then for self-esteem, culminating in needs for self-actualization. the hierarchy of needs suggests that individuals advance from basic needs like food, shelter and comfort, to higher levels of needs including social acceptance, self esteem and self actualimdon. this difference in motivation seems to hold promise for explaining behavioral distincuons among enuepreneurs. entrepreneurial behavior is somewhat unique in human society in that it leads to the creation of a business venture. this venture has the potential to provide for ihe basic needs of the individual who establishes or operates the organization. further, the business venture can also satisfy higher level needs of individuals, including the need for selt'-actualization. in fact, entrepreneurial activity seems to be ideally suited to support an individual's advancement through the entire hierarchy of needs. that is, cnvepreneurship can provide the financial means to achieve basic needs, but it can also provide a vehicle by which an individual can obtain social acceptance and self esteem by providing an opportunity to create a lasting and highly visible institution. further, an individual could perceive his or her success in business as the zenith of self actualization. 55 combining this perspective with the postulate of a continuum of entrepreneurial drive, the authors speculate that it may well be that the differences in observed behavior of entrepreneurs and the processes which they pursue in creating, managing and growing their ventures are a function of their vision of the venture and the purpose it serves in their personal pursuit of self actualization. specifically, we hypothesize that entrepreneurs with weaker entrepreneurial drive will be more likely to view their businesses as vehicles for satisfying basic needs. their behavior will be characterized by strategies which keep tight control over the business and translate into keeping it small and manageable. other entrepreneurs, those with strong drive, will exhibit different behavior. they will view their businesses as devices which can provide a sense of self esteem and even self actualization. they will pursue strategies which are aimed at growth and expansion. testing that hypothesis is the purpose of this research. the empirical examination t~ths i the authors prepared a survey which included demographic questions and an instrument which examined the strength of the entrepreneurial drive. the survey contained a second instrument which was designed to measure the hierarchical drives of each respondent in terms of his or her view of the business venture. a copy of this instrument, referred to as the satisfaction index, is displayed in appendix a. the perspective was measured in terms of the maslow hierarchy by examining the role of the business in each individual's pursuit of basic needs, social acceptance, self esteem and self actualization. the carland entrepreneurship index was employed to identify the strength of an individual's entrepreneurial drive. the index consists of 33 paiis of statements in a forced choice format. the instrument requires less than 10 minutes to complete, can be scored by untrained administrators, and results in a sealer score which can be interpreted as a representation of thc strength of onc's enuepreneurial drive. the test-retest correlation for the entrepreneurship index was .80 with a split-half, odd-even reliability of .73. the kuderrichardson test i'or validity was .73 indicating good reliability and validity statistics for the index (carland, carland, sk hoy, 1992). t~ss the survey was convenience based. the authors used students to distribute and collect questionnaires. students approached business owners whom they knew or with whom they had some contact: present or former employers, relatives, friends, etc. students collected information over semester breaks and holidays principally from their hometowns. consequently, the data was collected over a period of three months primarily from people located in the southeastern united states. since the data was collected through personal approaches, there was a high level of participation. fewer than 5% of those approached declined to participate. the result was that data was collected from individuals who might not have responded to a questionnaire by mail. accordingly, nonresponse bias was virtually nonexistem. the resulting database contained 156 usable surveys. the sample of respondents was a convenience sample, however, it was sufficiently large as to eliminate most criticism 56 since the central limit theorem holds that larger samples approach representation of the population mean (mason, 1982). details of the demographics of the respondents are displayed in table i. every respondent was a full time manager of a business in which he or she was a principal owner. every business was independently owned and operated. further, each business was classified small according to the small business administration guidelines. t~ha the first step of the analysis consisted of a factor analysis of the questions in the satisfaction index. the analysis used four principal components because the theoretical composition of the instrument involved questions on each of the four characteristics of maslow's hierarchy. the matrix was rotated using the varimax procedure. the results are displayed in table 2. as the table indicates, the original instrument performed well with the exception of four questions, one of which failed to load at the .4 level, and three of which loaded on more than one factor at the .4 level. those questions were eliminated and the remaining groupings were examined to determine whether the questions were consistent in measuring one of the maslow characteristics. each of the questions remaining in the four groups were consistent in their theoretical orientation. consequently, the questions were formed into four models, displayed in the table, to establish a measure for each of the characteristics. the next phase of the analysis involved preparing a correlation of the entrepreneurship index which measures the strength of the entrepreneurial drive and the four maslow models derived from the factor analysis. the results are displayed in table 3. as the table shows, the basic needs model was inversely correlated with entrepreneurial drive. the social acceptance model was not significantly related to entrepreneurial drive. finally, the self esteem and self actualization models were significantly correlated to the svength of entrepreneurial drive. the highest correlation occurred between the index and self actualization. conclusions the authors conclude that the respondents in this study who displayed higher entrepreneurial drive did view their businesses as vehicles for achieving self esteem and self actualization. those respondents displaying lower entrepreneurial drive viewed their lirms as vehicles for providing basic financial needs. the respondents did not view their businesses as a lens for social acceptance. entrepreneurs are known to display internal locus of control (borland, 1974). for such people social acceptance is less imponant than self esteem. the findings of this study are consistent with that perspective. 57 table i demographic characteristics of the 156 respondents type of business retail 46vo service 319o wholesale 31o construction 89o manufamuring 10rg other 19o annual sales $ 100,000 or less 35'yo $ 100,000 to $250,000 199o $250,000 to $500,000 14'yo $500,000 to $ 1,000,000 129a $ 1,000,000 to $5,000,000 10% $5,000,000 and over 79o number of employees 10 or less 7tyyo 11 to 50 199a 51 to 100 59o 101 or morc 49o business form proprietorship 419o partnership 159o corporation 4tyyo age of the business 5 years or less 44fo 5 to 10 years 249o 10 to 15 years i tyyo more than 15 years 239o scx of respondents male 719o female 299o race of respondents majority 819o minority 189o agc of respondents under 30 years 169o 31 to 40 years 22'yo 41 to 50 years 369o 51 to 60 years 199o over 60 years 69o educauon of 12 years or less 269o respondents 12 to 15 years 219o 16 years 319o more than 16 years 219o 58 table 2 rotated loadings from factor analysis question no, faci'or i facior 2 faci'or 3 faci'or 4 4 .739 .224 .064 .072 5 -.646 .107 .135 .078 3 522 .134 .026 .395 16 -.153 .762 -.141 .176 ll .122 .698 .208 .006 10 .103 .610 .333 -.002 13 .091 566 —.213 .461 14 .347 307 .170 .198 1 .108 .239 .762 -.027 12 .389 —.248 $ 14 .246 6 .418 .097 .040 .703 8 -.073 .078 -.021 .688 7 .385 .164 .083 .650 9 -.255 -.031 .484 .447 15 .479 .171 .158 .330 2 -.283 .208 .385 -.143 percent of variance 14.34a 14.6% 9.69o 13.9% explained modfl drawn from factor analysis basic needs question i + 12 social acceirfance question 3+ 4+ 5+ 15 self esteem question 10 + 11 + 14 + 16 self aci'ualllmllon question 7 + 8 questions which failed to load at the .4 level (quesuon 2) and questions which loaded on more than one factor at the .4 level (questions 6, 9, and 13) were eliminated from the model. remaining questions were grouped by loading factor. factors were linked to the maslow hierarchy by examining grouped questions to determine the appropriate maslow characteristic. 59 table 3 pearson correlation matrix n = 156 index basic social self self needs acffnce esteem actlzton entrepreneurship index 1.000 basic needs -.229 1.000 social acceptance .128 .286 1.000 self esteem .190 .215 .361 1.000 self actualization .327 .177 .324 .244 1.000 bartleti'hi-square statistic: 96.3, df=10, probability = .000 matrix of probabilities index basic social self self needs acptnce esteem aci'lzton entrepreneurship index .000 basic needs .004 .000 social acceffance .112 .000 .000 self esteem .017 .007 .000 .000 self actualization .000 .027 .000 .002 .000 a model of entrepreneurship if one accepts that enaepreneurship is a drive which is stronger in some people and weaker in others, and that strongly driven entrepreneurs view their businesses as lenses for achieving self esteem and self actualirrttion, a model can be developed linking enaepreneurship to individual motivation. consider that in some individuals the entrepreneurial drive is not strong enough to ever trigger thc establishment of a business venture. such people will look to corporate employment or other forms of employment in order to satisfy their basic needs for security. these people may, or may not, see their carccrs as vehicles for ascending the hierarchy of needs. in other people the entrepreneurial drive may be strong enough to trigger involvement in business ownership if, and when, an opportunity presents iuelf; in sull others the drive may be so suong as to make business ownership inevitable. the strength 60 of the drive might dictate how stmng the circumstances surrounding an opportunity would have to be in order to trigger venture creation or entrepreneurial activity. initially, all entrepreneurs may see their ventures as the vehicle for achieving the first level of need: security. the higher the entrepreneurial drive, the less important that need becomes and the more likely individuals are to perceive their ventures as devices for ascending the hierarchy of needs. those individuals with the strongest drive see entrepreneurial activity as the mechanism for achieving self-actualization. this model is depicted in graphic form in appendix b. the model explains that some entrepreneurs will be satisfied with simply providing family income while others will strive to take their ventures public and sull others will be consumed by the effort to achieve industry domination. the personal goals which an individual entrepreneur pursues will be a function of the suength of that individual's entrepreneurial drive. no two entrepreneurs will be alike nor is there any likelihood that they will operate their businesses in a similar fashion. conclusions and implications for future research lf the findings of this study are sustained by future research, they have the potential to lead to the establishment of a model of enuepreneurship which effectively links the role of individual initiative to the process of venture creation, management and growth. the results could end the debate between trait researchers and process researchers by providing a concrete and measurable link between the two. the results could explain the diversity of behavior which is observed among entrepreneurs and provide a vehicle for the more successful support and understanding of entrepreneurship in its various manifestations. this research suggests that entrepreneurs initiate ventures, institute management processes and growth strategies, in direct proportion to the strength of their entrepreneurial drive. this relationship derives its power from the propensity of more highly driven entrepreneurs to view their businesses as vehicles for achieving self esteem and self actualization. entrepreneurs with lower levels of drive are more apt to view life outside their businesses as vehicles for self esteem and self actualization, thereby relegating their businesses to a less important role in their lives. h is this difference in perspective which translates into a dif(ercnce in process and behavior. 61 references bld,b.b.m.i ii h. 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(1987) entrepreneurship: an integrating typology and evaluation of the empirical research in the field, journal of mana ement, 13, 259-279. 64 appendix a satisfaction index for business owners circle cd if you completely disagree with the statement; ca if you completely agree; sd if you strongly disagree: sa if you suongly agree; d if you disagree; a if you agree; or no for no opinion. i. i run this company to support myself and my family............................cd sd d no a sa ca 2. i would sell my company if i could obtain a beuer paying job with another company ....,.....cd sd d no a sa ca 3. i run this company because of the personal satisfaction i gct from my work .................cd sd d no a sa ca 4. i run this company because i think it makes an important contribution to my community .........cd sd d no a sa ca 5. my contributions to my community are not related to my company ...................cd sd d no a sa ca 6. i enjoy what i am doing with my company..........cd sd d no a sa ca 7. owning this company gives me a sense of pride ........................cdsd dnoasaca 8. i would like to see my company grow and become dominam in its industry ...,...,,........cd sd d no a sa ca 9. i would prefer to have complete oversight of the daily operations of my company ............cd sd d no a sa ca 10. my reputation in the community is based on my ownership of this company................cd sd d no a sa ca 11. my accomplishments are defined by my business ......................cd sd d no a sa ca 12. my primary source of satisfaction is my family and/or friends ......cd sd d no a sa ca 13. my primary goal is to achieve higher levels of success with my company ...,,,,........cd sd d no a sa ca 14, ownership of this company gives me feelings of security....................cd sd d no a sa ca 15. i feel that my company is recognized as making a contribution........... cd sd d no a sa ca 16. my business is my life . cd sd d no a sa ca 65 appendix b a model of entrepreneurship inputs goals outcomes strength of goal of approach to entrepreneurial entrepreneurial strategy drive activity development make the venture high self-actualization dominant in its market or industry make the venture self-esteem grow and become highly successful make the venture low security a small and stable income producer 66 strategy table of contents page title/author(s) i pre-export planning and start-up export performance for small electronics manufacturers philip d. olson newel l gough donald w. bokor 17 small and medium-sized firms'irst interaction with government: an exploratory study ronald g. cook 29 addressingthe work-life interface: strategic lmplicationsfor small business sarah w. jacobson harriette s. mccaul 45 an approach to reducing accounting costs for small businesses j. gregory bushong david w. cornell 59 how forbes 200 companies create and use mission statements h. lon addams william h. baker brian davis special section 77 skyline chili: a case for small business growth and management daewoo park hema a. krishnan 91 teaching note: the skyline chili case daewoo park hema a. krishnan strategy small business transformation: the meds approach ravi s. behara david e. gundersen stephen f. austin state university abstract ln today s rap(lily chculglng huslnc'ss cnl'llvnnicnt, .i'nlatl ituslnesses inn st gclln a deeper understandiiig of lhe fillure to develop srrategies tlult will provide them with sustat'nable competitl've cali'ailtage. the traditional approaches tv strategy fvnnulativn are inadequate in an eni'iromnent thur is complex and dynamic. this paper investigates a "new" approach that helps small busi nesses "see the fiaure." ir dismisses an applicativn of rhe multieqliilibrinm dissipative strucrures (mfds) approach lo strategy formulation ii ithin the comert of a small inisiness involved in medical mclilageirlenl softuvlre dei e(opment. the dissipative sysrems approach can be used ro evaluate the critical discrmtinuilies that a small business faces in deahng with us changing enviromnenl. the apprlulch also provides an opportunity fur researchers to further develop theory in strutegr fvrnmllilivn in small bnsinesses, especially those directly 'tnvoli ed in rhe rapidly chonging areas of global operations und technology i i i i i v v ii i i 0 i i s. small business transformation: the meds approach the complexity of thc cunent economic, technical and political environments continues to increase at an accclcratcd pace. this has resulted in a dramatic growth in the number of interactions we must consider when mal ing decisions. ln addition. the predictability of thc future is becoming morc diltlcult as the types ol'hanges taking place continue. to increase. three of these changes that wc face today include increased structural complexity, an increasing global free market, and a focus on mass customization made possible duc to advanced technology. the contemporary business environment is becoming upward integrated by the i'onnation of'strong interacting industry and inter-industry clusters at national and international lcvcls, while it is becoming downward difl'erentiated with an increased locus on autonomous work-teams and individual customers. this is analogous to the structural changes taking place in society. a growing diversification tnggered by ethnic and cultural i'orccs coexists within an environment that is seeing simultaneous convergent integration of existing systems at higher lcvcls of organizations as cxcmplified by regional economic and commonwealth systems. surprisingly, many small busincsscs show very httle evidence of heing adaptable and flexible in an environment that is changing so dramatically. 69 many countries have cntcred or increased their participation in thc i'rcc-market global &rading village during the lirst hall'o&'his decade. the developing nations of'sia and latin america are now recognized as thc growth-engines of the world econlnny. in i'act, exports are ihc largest growth area in &hc unit&xi states. the interconnccicdncss and interd«pcndcncy of major capital markets only strcngthcn this trend. in addition, improvcmcnts in quality and productivity arc heing actively sought in both leading and developing economics ul'hc world. yct many u.s. small businesses continue to believe that globalization of the economy is more rclcvant to large manuf'acturing firms than it is to them. nothing can bc further from business i'cal&t)'. as customer nccds change. processes and organizations need to be reinvmited again. consider thc approach ol'ass custmnization thai some fir&ns have adopted. thcsc firms arc now beginning to focus on providing individual customization ol'ow cost, high quality and high variety products and scrviccs. businesses rcquirc ilexible aml rcsponsivc processes to he able to provide this dynamic variety. small businesses cannot continue to claim that their size provides them with thc unique advantage of'prov&d&ng "personal" attention and value to their custolnc&'s. managing small busincsscs in such a tu&bulent and unpredictable cnvil'onnlcnt rcquu'cs a sigmlicant change in the way wc view and understand them. thc primary &basis of'his paper is that a "new" way of thinking about strategy formulation in small husincsscs can hc achieved through thc development ol' systems pcrspcctivc. current aucntion in thc area ol small business strategy formulation is typically limited to thc synoptic pcrspcctivc as rcprcscntcd by thc swot (strengths, wcaknesscs. opportunities, threats) model. iimcrging noncquilibrium i'orans ol'systems thinking, howcvcr, dn provide alternat&vcs that nccd &o be invcstigatcd. such approaches do not assume equilihrium to hc &he normal state of'a: ysicm, anil arc therefore &nore aligned to the current reality. thcsc thcorics say that while &ulativc stability may bc common, and even desired hy organizatilu&s, equilibrium does no& clmractcrizc the basic nature of'organizations. this paper i&lentil'ics and dcvclops strategy i'ormulation based on such a theory in a small business involved in sof'twarc development. the equii.ibrium perspective strategy b&rmulation has tradiiionally been viewed as a i'onnal planning process that outlines courses ol'action i'or managing an organization. this formal process should result in a written business plan that stimulates critical thinking, enhances communication to internal and cxtcrnal constituents, and provides a control &nechanism i'ur corrcctivc action (baker, addams, k davis, 1993). typically, a firm must establish or sclcct thc directional signals that provide thc understanding ol'n organization's scope and insight into how to conduct its operations. i ormally dcvelopcd and wriucn strategic plans arc prcfcrrcd (baker, addams, &i'z. davis, 1993), however, the formality oi'he process in developing thc strategic plan varies across organizations. as i yles, baird, orris and kuratko (1993) suggest, &hc process of planning is very inguen&ial in determining thc content of the plan. thc strategic planmng process has a direct nfl'cct on dimensions of'strategic decision making such as scanning and setting objectives. more importantly is thc range of considered alternatives that can bc greatly influenced by the process used. it is ihis point that directly supports thc nccd for considering 70 new approaches in strategy formulation. it is understood that this blueprint, or strategic plan, is assumed to be forward looking because ideally, it establishes organizational direction through mission statements, goals and objectives, and a strategy dcvcloping the widest range ol'easible alternatives providing the greatest performance potential is what a new strategy formulation process can deliver. literature abounds showing strategic planning positively correlated to small business success (bracker, keats, & pearson, 1988; kopf & beam. 1992; shrader, mull'ord, & blackburn, 1989; shuman & seager, 1986; robinson & pearce, 1983; ackelsberg & arlow, 1985). despite strong evidence showing links between strategic planning and successful performance, many small firins are at best sporadic in their usc of such processes (sexton & van auken, 1985). small businesses. due to their lack ol'strategic human capital, are often restricted to thc "muddling through" approach. even small businesses with cspccially astute executives feel constrained for intellectual capital that can bc committed to the strategy forinulation process because managers invariably wear more hats. aggravating the situation for some small businesses is the mind-set that strategy formulation is the easy part of strategic manageinent. small businesses with an "implementation mentality" are consequently unable to take advantage of opportunities that may be on the organization's horizon. strategy is a fundamental tool that helps orgamzations manage thc complex interf'acc with their environment. it helps idcntif'y opportunities that promote growth and promote longterm stability, thereby developing a sustained relationship between thc organization and its environment two major aspects of strategy, strategy content and strategy making, need to be considered. the former helps identity successful and unsuccesslul straicgies in a given environment through the development of a typology. miles and snow (1978) and porter (1980) provide the two classic strategy content models. strategy making, however, deals with lonnulation and ultimately the implementation of a successful strategy, thc main focus of this paper. it is strategy making that is the indispensable process that defines the path of orgamzational growth. in today's dynamic cnviromncnt, small business inanagcrs should know how to create ncw and innovativc directions for their firms. mintzberg and waters (1985) identify two different, and nearly contradictory, approaches to strategy formulation, a synoptic perspective and an incrcmcntal strategy-making process. the synoptic perspective is a dclibcrate and planned process represented by acronym oswots (ob)ectivcs, strengths, weaknesses, opportunities, threats, strategy). in this process the strategic objectives ol an organization arc defined from the desired state that the finn wants to achieve. this is i'ollowed by developing a prol'ile of organizational capabilities, making an environmental assessment in terms ol'hreats and opportuni ties, and li nally selecting a strategy that ensures the firm's ob)ecttves are attained while taking advantage of the finn's strengths and environmental opportunitics. the central weakness of this approach is the reliance on a planned strategy that is dependent on the purely rational approach to decision making (stopford &. baden-fuller, 1990). managers have a limited rationality due to limitations in their ability to process information that is especially constrained when dealing with small business. quinn (1980) proposed that firms often develop strategies on an increinental basis. this incremental perspective suggests that managers proceed with full commitment to their strategies from some initial implementations. this approach provides 71 opportunities to make suitable adjustmcnts over titne rather than i'ollowing a predesignate route. while being pragmatic, thc incrcmcntal approach is typically initiated in rcsponsc to current problems and is therclirrc limited in its ability to dcvclop a comprchcnsrve view of thc i'uture. thc synoptic and incrcmcntal approaches to strategy i'ormulation do not eff'ectively address the dynamic nature ol'hc current business environment, nor cf'i'ectively explain thc way in which lirms should adapt to such changes. the concept rrf'ransl'ormation is morc appealing in its ability to explain how organizations change (loyc k eisler, 19g7). transformation is a process that prcscrvcs order, interspersed with periods of'haos, resulting in i'undamental change. such change is made possible bccausc thc organization can sells organize, reconltgure itself'based on an internal refercncc on what thc firm should become. this internal refcrencc is irmtly entrenched bccausc i'ttrsightcd o(ganizations have a prof'ound set of'tf(lecsses (ital i'csult in "i'uturc state visioning" or knowing whcrc the i'irm should hc hy a i'uturc date (stcwan, 1993). such dynamic behavior of'organizations, moving hctwr:r:n chaus and order, can he explained using thc i)issipativc structures i'ramcwrrrk. thc i'ollowing sections ot'hc paper discuss strategy i'onnulation at a small business based on this approach. seeing thf. future thc critical significance ol'strategy formulation is again taking a ncw turn in managcmcnt litcraturc thanks to the work ol'amcl and prahalad (1994). they hclicve that no compuny exists which can gct along without a well-articulated point rrf'iew about tomorrow's threats at«i rrpportunities. thc kcy to success is in crea«ng thc i'uturc, not preserving the past. in a(klition, they i'eel that a well-aniculatcd view hy ttsclf, docs not;illtr)111(i(le'rlly result in sccing thc i'uture. organizations must establish cfl'cctivc i'orcsight which not only sets direction, but hres the potential to transform imlustry boundaries and crcatc ncw competitive spaces. i.inns that scc thc future gct to opponunities bc(ore competitors and have hc«e( chances at securing icadcrship positions in their rcspectivc industries. as hamcl aml i'rahalad (1994) sce it, " .. , thc trick is to see thc future hcl'orc it arrives," and then be preitrrrcd to take advantage ol't. seeing the future rcquircs a deep understanding ol'rcnrls that have thc potential to radically change the compctitivc mlcs of the industry. combining crcativc uses of inf'ormation that trends provide with consistent capability-building qualities of'hc i'irm provides thc p(rtelttrtrl to el'et(le ultsel'll opp(llarlltitics. cftartges rlt technology, dcm((graphics, lil'cstylcs or regulations may oltcr openings that competitors do not sec and thus, are ill-prepared to take advantage of: according to hamcl and prahalad (1994), understanding trends means the organization has affirtnativc answers to; "...understanding how fast thc trend is emerging in diltcrcnt markets around the world, thc technologies propelling it, choices competitors arc making, which companies arc in thc lead, who has the most to gain and lose,... and how this will influence customer dcmamls and needs'?" thc idea ol'seeing thc future goes well beymtd being custnmcr led or cust(nncr driven. in fact, customers arc sorely lacking in i'orcsight and cannot articulate unserved needs. fi mrs th;u choose to hc lcd hy custrmtcrs miss all opportunitics associated with unserved customers and unarticulated ncc(fs. thcsc i'irms cnd up heing relcgatcd to market i'ollowers rathm than 72 market leaders. market leaders with i'orcsight create products that i'ullill needs customers do not know they have and follow that by educating customers about the benefits of'hc products created. market followers rush to create products that i'ulfill aniculated needs of already served customers. in short, followers fall into the trap ol'aking insignificant changes to product offerings already articulated in thc market. while these arguments are intuitively appealing, there is a nccd to develop an appropriate theoretical foundation. thc dissipative structures approach provides a suitable model. ii is briefly described below, and some strategies of healthware. inc. are discussed on this basis. meds: multi-equilibrium dissipative structures traditional methods of explaining ihc working ol'rganizations are built on the premise that stability and equilibrium arc thc "normal'onditions. contemporary systems thinking, on the other hand, suggests that change is thc natural condition of a system, especially in a complex environment thai changes rapidly and in quantum leaps. thc dissipative structures approach is one such non-i:quilibrium theory in contemporary systems thinking. it says that systems continually evolve thri&ugh a scrics i&l'equilibrium levels by relimng their adaptive abilities and improving their chances ol'survival. this results &n a metamorphosis or transformation ol'hc ol'galiization that involves a significant alteration ol'ts structures and processes. the soc&al. political. and cultural aspects ol'he organization arc also af'fectcd. the dissipative structures model considers such regularly occurring chiu&gc as a natural response to internal and cnvi&onmental conditions (shcldon. 1980). such regularly occurring translormation was dcscribcd by thc theory ol dissipativc structures initially in the fields of physics and biochemistry. lier which prigoginc received a nobel prize in 1977 (prigogine a. stengcrs, 1984). the model was then shown to hc applicable to social systems (zeleny. 1980). according to jactsch (1980) there arc three types ol'ssumptions about organizational change. these are the dctenninistic, equilibrium. and the dissipative approaches. from the deterininistic perspcctivc, ihcrc is an underlying order to thc environment. management thcrcl'ore should understand ibis order and design their organizations to cause ever-increasing order. this deter&ninistic "newionian" model then gave way to the equilibriu&n perspective. this approach cmphasizcs order and regularity while recognizing that external orderliness can change. managcmcnt's rulc according to this approach is io continuously find an equilibrium between thc organization anil its cnvironmcnt. the typical strategic management models, such as thc oswots model, adopt this underlying approach to organizational change. these models are dcrivcd from an open systems pcrspcctive with an assumption of adaptation to environmental conditions. thc equilibrium approach does noi describe transl'ormational. discontinuous change in the structural and cultural systems of an organization because of uncontrollable enviromncntal turbulcncc (tichy 8; ulr&ch. 1984). leifer (1989) discusses two basic consequences that arise from the equilibrium approach to explaining organizational change. the first is that the organization is viewed as distinct from its cnvironmcnt. the organizati&m is also considered to often be at odds with its environment, which is also a source of disturbance to hc adapted to. the second consequence is that thc goals of organizations arc, dcterminatcncss and ccnainty. these can be achieved ! only when there exists an cnvirnmncntal order, however complex, which organizat&ons auempt io match. the c&mccpts of dctenninatencss, certainty, and the distinciion hctwccn organization and enviromncnt, may not accurately describe today's world. limits to growth, scarcity, decay, and conflict have crcatcd persistent problems of randomncss, indeterminacy. and ambiguity in the cnvironmcnt (scott, 1987). rifkin (1981)explains this situation using thc concept ol'mropy. entropy in orgamzations is the tendency i'r sell'-destruction. it is thc tcndcncy i'r usable energy in closed systems to become less available as work in thc system continues. this would ultimately lead to the destruction of thc system, unless thcrc is an exchange of'cncrgy i'rom thc cnviromncnt that changes thc structure of the organization. tltc calx&city ol'an organization to adapt depends on its tcchnical and human rcsourccs, atul its ability to le&&ill i lola cxpcllcnccs. howcvcl', ol'guilt z lt in&1 s i'lilch il f1&)litt whet) illtcl 11al or cxtcrnal 11uctuati&ms arc cxtrcmc, resultmg in unstable structuius aml scaicc ics&mrccs. 'i'his critical c&mdition is called a bif'urcation point, and is an opportunity i'oi;in organization to transl'ortn itself, lt is thc point at which thc organization's coping mechanisms are just cxcecded (lcif'er, 1989).according to the dissipative structures model, instability at thc hif'urcation point could lead to entropic behavior m tmnsfortn the organization and result in ncw conf'igurations. that is, beyond ihc hif'urcaiion point the system may cithcr collapse or may reestablish itself'ith a ncw stable i'orm and a morc evolved structure. thc. internal nitioiuilc ol'he organization. and not thc cxtcrnal cnvironmcnt, is considernl the primary governing lector in this change. thc kcy concept of'thc dissipativc structures model is that upon rex&ching thc bil'urcation point, ihc organization needs to opcratc in a manner that rcf1ects a transformation in style and behavior (lcifcr, 1989). a transl'ormcd system is amble until the next bifurcation point is rcachcd, and the transl'ortnation or dcclinc ol'hc system happens. organizati&ins arc thcicforc guided i'rom chaos to order to chaos again. out ol'his 1)uctuation arises an increase&1 ability t&i cope with grcatcr complexity. the organizations whose managcmcnt have superior abilities in understanding thc i'uturc enviromnent and succeed in articulating values and principles t&1 guide actions which lead to thc i'uture will find sustainahle c&unpctitive a&ivan&:igcs (stewart, 1 &793). 'fhc kcy assuinptions of'hc dissipativc structures paradigm ate (i cil'cr, 1989). (a) thc cnvironmcnt is not munificent, docs not pr&nnotc gi&iwth, is not stable. &&lid is iiot &ll'dci'cd. (b) the normal evolution ol'rganizations goes i'rom transl'ormation to tr;lilslorl11ati&)n. (c) order hy fluctuatimi means that an organization's order is transf'ormcd when it cxpcriences i'ar-i'rom-equilibrium conditions. thc small business discussed next faces an increasingly turhulcm healthcarc, software, an&i technological environment. the recent transfonnations that this company undcrwcnt, and those that it i'aces in thc future, are discussed within the framework ol'hc multi-equilibrium dissipative structures model (meds). these illustrations can bc gcncralizcd:u:cording to i eifcr (1989) by idcntil'ying i'our stages of transf'ormation dcrivcd from thc meds approach. they arc: 74 (a) the first stage is to be able to identif'y currratt events or i'uture requirements that arc/will overwhelm the normal capacity of thc finn to adapt ikscll'ffectively, ii required, the linn should dcvclop the skills io "sce the future." another prcrequisitc at this stage is that thc system participants should hc cducatcd io dccommit themselves i'rom existing processes and values so that thc finn can transform itself when requirnl. (b) the second stage involves using radical strategies driven by the finn's need to restructure. the structural changes are made internally to effect thc transfomtation. this helps reframe whai is considered true by reestahlishing the i'irm's sense of'ts i'uture. (c) thc i'inn is involved in establishing thc ncw structure in thc third phase. herc the i'irm has to simultaneously cstahlish its structure and carry on its operations. in doing so, the firm continues to maintain continuous entropy production as it continues to work, hut slit&uld also dissipate the accruing entropy through cxchangc with thc environment in restructuring. the inner non-equilibrium is thus inaintained, and this in-turn maintains the exchange plocess ivith tile cllvironment. a (dissipativc) structure of thc lirm is thercf'orc constantly renewing itself to maintain a transformed and morc cfl'ective way ot'operating. (d) in thc i'ounh phase. thc ncw stmcture is operationally stabilized, and the ncw charactcrisiics ol'i'unctioning are cstablishcd with the understanding that this new structure ol'he i'inn is to he held lightly to enable the next cycle ol'ranslonnaiion.in addition, the firin can mal'c subsequent transfonnatiims more clficient as it learns from past trans('ormation proccsscs. as previously stated, systems undergoing such change gcncratc a high amount of internal activity. and are characterized by a high dcgrcc of cncrgy cxchangc with the cnviromnent to fuel this internal activity (lcifcr. 19g9). such systems are called dissipativc as they auract resource frmn thc cnviromncnt to crcatc ncw inner anangements ol their elcmcnts. olid hy that avoid the potential ol'ecay or disintegration. for healthware (the small business discussed in the case below), stagnating sales and inability to understand thc market lcd to change. a new marketing manager was hired and charged with thc responsibility of'nalyzing market potential. this person brought in new approaches in m;maging and identified critical inf'omtation that helped to cxplaill eulreltt pcrformancc. a hcttcr understanding of'hc, current situation increased thc acccptancc for change and provided opportunity consideraiions that previously would have been considered unthinkable. the kcy to redefining direction is to position thc organization to take ailvantage of the opportunity when it finally appears. not to select opponunities that currently exist. the entropy that has accumulated in the organization is dissipated through this cxchangc with the environmeni, hy that giving this systems perspective its name. company profile hcalthware, inc. is a small software developer that provides products to small oflice health service organizations such as physicians and dentists. thc company has been in business live years and has twenty-thrcc cmployecs. the facility currently used to house all operations 75 is a leased small suite of ol'i'ice( located in a small rural community. thc current oflice space i)f'fcrs no room i'or expansion ihal nmkcs further h&nng difficult. thc mosl rcccnt annual sales icvcl was $ 1,750,000 i'rom an iissct hase ol'$242,000. sales growth was 14% over thc prcvious year and thc company may hc profitable i'r the iirst time. hcalthwarc initially had two products and w(as considering expansion into one or morc additional lines of business. one currcn& sol'&ware product, an oflice practice system, helps olt&cc managers of heal&hcare prof'cssionals opcratc their oiticc systems. typical customers include physicians who run their own small clinics and have few cmployecs. this product provides computcrixcd accounts reccivablc tracking, computcrixed medical claims processing and oftcrs a variety of of'fice practice applications, such as paticm accoum management. which can climinute thc nccd i'iir paper i'iling systems. thc second product linc is a claims management system that clcctronicully tfiulsnlils nlcdical elai&ns i'ro&n physicians to scrvicc bureaus and billing ccnlcrs. thi» service is sold to physicians who pay i'or claims numagcmcnt (m a pcr claim charge basis. consequently, physicians or their off'iccs do nol hi&vc io aclivlfv nl(lniigc collections i'rom patients and third party paycrs such ns insurance carriers. both products arc sold primarily through rcscllcrs who scil multiple product lines to physici;ms and small clinics. tcchnical ilss&s&uocc io cuslolncfs is doflc pf)ill&if&l)'vcf thc lch'phonlx thl'fgilfilxallons t(u'g(',i customer hase is considcrcd nationwide. thc managcmcnt at hcalthwu&e. inc. believed that thcsc p&(xlucts werc unique and that competition was l&mitcd. conscqucntly. they focused «xtcnsively on pnxiucl dcvclopnlcl'n and generally ncglectcd all aspects ol'cnvironmcnml scanning. a "scat of'thc punts" approach was used io assess competition and market potential. thc general i'ccling was that hcalthwarc products werc superior and custimlcrs would purchase superior products. thc kcy to success was hclicvcd to rest with getting enough of a physician's time t(i cxprcss thc hcncl'its of thc pr(xluct that would scil itself'. industry assessment was generally lacking in all aspects of'peratingthc liml and thc tnp-level management team committed most rcsourccs. i&nancial and human. to product dcvclopmcnt. healthwaixfs sales pcrf'onnancc was stagnating u& under $ 1.500,000 annually dcspitc improved product fcaturcs i'or both primary products. i ollowing intcnsc analysis of the firm hy thc ceo of hcalthwarc. a markc&ing manager was hired to lmlp promote &hc linus products. 1'his manager immcdiatcly c(mductcd a ihorough market analysis for hcallhwarc as pl'cscl'ihed hy traditional strategic planning with thc following results: (a) market saturation was approaching 1&0 pc&cent for both the finn's products. (b) many compctiiors existed, most with a primary emphasis on marketing and pn)1&lola)n. (c) prrxluct huyvrs werc price conscious tmd gaining in sophistication about products. (d) less than two perccni of'the physicians in any given year were in thc market to purchase thc iirm's current products. despite limited incrcascs in sales (dollar and unit), thc long tenn outlook for hcalthware was marginal a& hest. having a wealth of'cchnical cxpcnisc and h&gh quality products, inanagcment re;&lixed thnt it nccdcd a ncw view of whcic the company was heading. 76 attempting to reach equilibrium at healthware following an agomzmg process of challenging the current thinking about healthware as a firm, several alternatives werc developed which might ultimately impact the company's direction. all alternatives take advantage ol'he high quality technical capability of the firm. this was based on an application of a synoptic perspective (oswots model) in healthware's strategy formulation, and has resulted in decisions to develop the i'ollowing products and services: phurnuicy claims management option: the company decided to produce a sof'tware system for pharmacies that would provide clcctromc claims transmission for collections from third party payers. an environmental study found that no other company is currently providing this service. thcrclorc. an opportunity was identified. the company's technical strengths and experience in dcvcloping similar products ior medical practitioners provided a sound basis for deciding to t'ollow such a strategy. also, an added strength was that a distribution channel i'or the product was already in place. hrxrpirrtl claims: it was dccidcd that healthware crcute an electronic clearinghouse receiving claims irom hospitals. the process would involve tracking claims, collecting claim data, forwarding claims to third party paycrs (such as insurance companies) and receiving payments for claims for distribution back to hospitals. it can he seen that this concept is an extension ol'he one described above, and is made leasiblc because ol'similar strengths that the company currently possesses. following this strategy is only un extension of providing a claims management service that is already being provided i'or individual medical doctors and dentists. it exploits an opportunity that exists. hut one that is heing pursued by other coirlpctltol s. e(ecrrrutic dommient inrerc(innge (ed)); healthwarc proposes to create and market a software program to upload data from competing medical management systems for usc with any of the claims processing systems available to primary healthcarc providers. this approach is an attempt to seize an opportunity created by the fact that many indcpcndent sol'tware developers have been creating standalone products with little emphasis on system integration from ihe perspective of the customer. while healthware's technical strengths are again the basis, there are a couple of existing threats. these are thc existence of'other established fdi software developers, and the i'act that many other orgamzations arc established in the i'ield of system integration. create wimlows i ersivn ized et(sting prrirluciin healthwarc would like to exploit its technical strengths and focus on enhancing existing products. a current weakness is that their products are based on the dos operating system i'or personal computers. with most users moving their other applications to a windows operating systems environment, new and existing customers want windows based medical sol'tware systems. thc company's technical strength can be channeled toward the development of'such products. if hcalthware can deliver such a product ahead of its competitors, it can gain some competitive advantage. however, a significant threat is the development of'dvanced personal computer operating systems such as microsof't's chicago and thc development of alternate operating systems for the fowerpc 77 microproccssnr that is jointly being developed by ibm. apple, and motorola. such a rapidly changing technological landscape makes it essential lo be able to "sec thc i'uturc," rather than just &uspond to ihc current situations. all thc above strategies i'ocuscd on developing new products and scrviccs based on thc existing tcchnical strengths of thc c&m&pany. such a devclopmcnt effort will place an undue strain on the company's existing technical resources. this is cspccially true because thc proposed products nccd to hc developed and marketed rapidly to sustain any advantage that &hcy may produce. the company is taking advantage of existing opportunities that arc already apparent to industry ob(crvcrs and consequently, major players already in the market will nlso hc pursuing these opponunitics. an additional weakness is thc i;&ct that all these strutegics for dcvcloping ncw products are based &m exploiting the existing cnviromnent. such an approach is inl&cren&ly limited bccausc thc existing cnvironmcn& is also dynamic, and w&ll have changed hy thc time hcalthware implements the above strategies. thcrcl'(uu, while thc above slrutegic initiatives appear "logical," they arc unlil'cly to produce a significant and sustained compel&tive advantage i'r hcalthwarc. a dif'&brunt approach &o strategy formulation should hc pursued. bifurca'i'ion points at heai.thware hamcl and prahalad (l9(94) consider that "today's implcmcntuti&&n i'ailurcs are really ycstcrday's failures of''oresight in disguise." this i'orcsight is based on an organization's insights into the implications of the trends in areas such as technology. rcgulntion, lil'estylc preferences, and demographics. s«nior managcmcnt nccds to hc concerned with distinctive and i &rsightcd views about ihc i'utu&c:&s «pposcd lo heing conventional aml rc;u:tive. firms nccd lo i'ocus on how to gct in i'runt ol'ihc competition rather than on ho(v i&) catch up. to hc able to achieve this, these strategy gurus suggest (&uno&lg olhcl'hings) thc ability to &dentify "discontinuities" and to have prolonged intelligent dchatcs on cun cnt &narkct related &rends and crcativc implementations on how to gain a&ivan&ages. they ala&& say that &hc i'uture is to bc g)und in thc intersecti(m ol'changes at each of the critical discontinuities. those organizations that can develop i'orcsight will lead, while ihc rest can (mly hope &o hc good followers. thc dissipativc structures app&oach can provide a thcorctical basis in strategy i'ormulation that helps &nanagcrs understand discontinuities that occur in their organizations. the unique feature of'hi» process is to see implications of u'(.'luis that may result in oppo&'iunitics il ihe organization is positioned appropriately at tlml iutu&c point in t)mc. figurc i illustrates a i'inn's ability to a(klrcss thc discontinuities c&ca(cd at thc dif'icrcnt hif'u&uation points within thc context ol'anaging global trade oppo&tunities. as previously stated, healthw(&rc is facing stagnating growth and in&cnsivc competition. umler thc traditional oswots process, opportunitics arc primarily gencratcd i'ro&n currcn& strengths where managers limit their scope when generating potential opportunitics. incremental strategy i'om&ulation is also limiting hccausc numagers are hesitant lo dramatically alter direction aml i'cel that an anchoring and adjustment proccdurc reduces risks associated with developing opportunitics. while these approaches to strategy formulation arc not inhcrcntly wrong, the possibility of limiting th&''ange ol'opponunilics does exist. on thc other hand, the dissipalivc structures oricntati&m recognizes &hat organizations reach a point whcrc thc organizati&&n's cof)lng n&cch&uuslns &n'c exceeded (u)d ii'lls &s no&'ir)&d (lcllcf, 19(&9). consequently, n)conge& s 78 need to recognize that these situations oft'cr the chance i'or redefining what the organization can do. therefore, thc need to see options that may become opportunities il'he organization is appropnately positioned comes from an effective understanding of seeing the i'uture (stewart, 1993k figure 1 bifurcation points and strategy stark i t.eaderr i'label zr:ale omnrrnmrrer starker rnlinnerr starker 1 r r rr incr arrng emrmnmemal cb.rnge one cntical dimension of straicgy formulation is thc direction in which global irade agreements, domestic legislation, and demographics are headed. as new opportunities are heing developed, even bcl'ore they become business realities, org;mizations i'acc discominuity. a discontinuity may bc viewed as the bil'urcation point that an or anization has rcachcd along a specific dimension. those fiona that can dcvclop creative protlucts and services from the opportunities that do not ycl exist, have a strong possibihty ol becoming the market icadcrs. those that hcsitatc or are not capable of such innovation lace a second discontinuity or bifurcation point when they have the possibility to effectively follow the leaders. if they fail again, the organizations face a real threat ol'eing marginal ized or removed i'rom their market 79 all thc critical discontinuities that i'ncc a company can be evaluated in this manner using the dissipativc structures approach. hcalthware adopted this approach in developing strategies that would have been difficult to gcncratc under the previous formulation process. in other words, hiring thc ncw manager, more accurate asscssmcnt of'current market potential, and understanding implications ol'external inl'ormation trends not previously considcrcd, allowed healthwarc to cxpan&l thc list ol'lternativesto take advantage of opportunities not yet materialized. thc organization's ceo realized that the technical strengths of current products were not enough to cnsurc success, by that, minimizing resistance to considering new alternatives. hcalthwarc has begun to adopt the meds approach to strategy formulation. it has recognized one bifurcation point and has acted to address thc chal lcngc it i'aces in marketing. other hil'urea&ion points may also he identif'ied when thc finn cim "sce the i'uture." thc possible situations are discussedl below, with initiatives that thc i'irm could take to adapt i[s internal structure and make successful transfonnations. mnrke&ingi this situation has been discussed above but is rcpcatcd for completion. thc cfo has been thc ma&n decision-maker, as is typical in many small businesses. thc increasing complexity ol'hc business environment placed insurmountable constraints on thc effective decision-making capability t&l'his individual, and ensured that thc existing approach to managing &he linn was inelfcctivc. a marketing manager position was crea&cd to provide the company with relevant cxpcrtisc and guidance. this has structurally altered the makeup of'thc l&nn providing ncw adaptive mechanisms [o deal with its business cnviromnent. it has also allowed the firm to behave in a qualitatively dil'fcrcnt mimner as illustrated by thc development and execution ol'cffcctivc marketing strategies. teel&nologylfnnovr&rir&n: the marketing expert cnsurcd that ihe firm devclopcd capabilities in this i'acct of doing business. the iechnological cnvironmen[, to [he contrary, has continued to develop at a radical pace. while thc firm has sof'tware pioduct dcvclopment experts, the ceo was [he primary source for dcvclopmcntal ideas. this was adcquatc in thc i'irst fcw years ol'operating thc business when thc primary i'ocus was dcvcloping application sogwarc for standnlone personal computers. th&s arrangcmcnt hccamc a significant problem, typical of many small busincsscs. today thc i'irm lacks the technic:il cxpcrtisc to cl'i'cciively evaluate the current and i'uturc directions that technnlogy will take. for instance, thc rapidly emerging client-server technology is hound to r ulically change the way in which professionals could use their small olticc computers in thc lu[urc. h could bc cnvisagcd that indcpcndent medical practitioners could bc linked to server machines i'rom which they could run thc required application sol'tware i'or their husiness. this would result in the licensing of software according [o usage, and not necessarily the sale of'individual liccnscs as is currently heing practiced. it would also require healthware or other providcrs to setup servers that provide services to many networked individual med&cal practitioners. such innovations cannot bc gcncrated and carried out without the leadersh&p of individuals with cxpcrtise in the management ol'innovation and technology. healthware faces such a bifurcation point today and will need to restructure themsclvcs accordingly. the hiring ol a technical innovation management cxpcrt would bc appropriate at this juncture. 80 customer service: current methods of customer service arc primarily based on a telephone help-line. this structure is not adequate to service customers in the future, as customers are becoming more educated in technology and morc demanding in quality of service with respect to response time and technical-quality ol'ervice in addition, il the company product-line is enhanced as discussed above, on-line computer-based methods would be required. this will require a significant restructuring of hardware and technical-skills inix of existing customer service personnel. product distribution: current product distnbution is pnmarily through resellers who also deal with competitors'roducts. as the traditional medical software (for independent physicians) market is saturated, such methods will not continue to be effective. also, if the nature of the products (licensing of services on client-server architecture) or the types of customers (other health-care providers such as home-heahh professional) change, the use of different distribution channels may become essential. this would lead to the restructuring ol'roduct distnbution channels such as thc development ol'n-house approaches like direct marketing. new customers: an increase in family practice and home-healthcare could result m the need to dcvclop products for health-care professionals on the go. that is, a variety ol'roducts ihai can be used on lap-top computers, on patients'ome computers, or through other technology medium such as the evolving concept of electronic commerce on the internet. hcalthware should significantly change the technical skill-mix of'ts current software development staff to be able to produce products for this future. other examples of issues under consideration by lhe company in building new structures to develop ncw customers are brieliy discussed below. cfeurirtg house fnr honte heufrb agencies: healthware proposes to crcalc an electronic cleannghouse receiving claims, collecting claim data, forwarding claims to third party paycrs (such as insurance companies) and rccciving payments for claims for distnbution back to providers. this requires thc devclopmcnl of alliances with firms that have thc required hardware configurations. it is an example of'positioning the company to develop a leadership position based on demographic trends and changes in healthcare policy that will lead to a sigmficant growth in home-based healthcare. fuieiviurionuf veurure healthware intends to develop and market accounts receivable sol'lwarc for thc mexican medical market. this alternative would entail working with venture partners familiar with the mexican market. currently hcalthware is working with a major accounting/ctonsuftmg finn in mexico city. this illustrates how a small business can develop a strategy to lake advantage ol'pportunities crcaied by global trade agreements, the north american free trade agreement (nafta) in this instance. nafta represents a bifurcation point in global iradc that healthware is addressing positively, an approach that could lead the fimi to a market leadership position in the field of medical management software in mexico. it could eventually place thc company in an established position to expand into the growing latin american market where no competitors currently exist. ft i these examples ol strategy i'ormulation by healthware illustrate thc signif'icancc of'li'vclopingan ability to "scc the future" and provide real-world applications ol'it'urcation points and the dissipative structures approach to strategy i'ormulation. the primary emphasis is on restructuring the company on a continuous basis to provide it with mechanisms to cope with an ever changing business context. it also de-emphasizes the notion that thc primary objective i'or the company is to reach an cquilibnum with its cnvironmcnt. thc dissipative structures approach provides a i'rimicwork in which a i'irm can continually develop its ability to deal with increased complexity. conci.usions this paper discusses an application of the dissipativc systctns approach to strategy i'onnulation within the context of'a small business involved in medical management software dcvelopmcnt. thc limitations of thc traditional synoptic approach to i'onnulating strategy arc also discussctl. the dissipativc systems approach can be used to evaluate thc cntical discontinuities that a small business i'aces in dealing with its changing environment. this would enable organizations to develop a i'orcsight that will help thc successl'ul i'onnulutions ol strategic iiiiltalivcs. dissipativc structure models take on an increasingly significant role as wc continue to realize that tratlitional coping mechanisms are not serving organizuums i'acing rapid and intense environmental-induced changes. thc difl'iculty in applying such models is that they arc i'oreign to thc way most managers arc trained (leil'cr, 1989). small business managers, however, may be moiv. open to ncw thinking on siratcgic issues because they are less conslruined hy company history and bureaucracy. considerations of systems thinking is also moving i'rom theory to application as illustraled hy applicatiims to rcsistancc to change (goldstein, 1988), organizational scil'-renewal (nonaka, l988), and gcncral management concerns (pctcrs, l987). the approach could bc i'unhcr reseurched as an appropriate framework in which to further dcvclop theory in strategy formulatitms in small businesses, especially in thc rapidly changing areas of global operations and technology innovations. thc purpose of this paper is to illustrate thc applicability of this contemporary model to small husi ncsscs. morc research in applying this model to small business is essential to undcrstaml and improve thc dynamism ol this sector, as it will continue to encounter greater cnvironmcntal lurbulencc as we enter the next century. 82 references a kid r,r.,&ai .p.(1988).8 i(h d pl d pt 1(.~cr ~plannin, ~18 5, 61-67. baker, w.hn addams, h.ln & davis. b. 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(1984). smr forum: the leadership challenge — a call 1'or the transl'onnational leader. sloan mana ament review, fall, 59-68. zcleny m., auto3oicsis dissi ative structures and 6 ontaneous social orders aaas selected s~i«55. tb ir; c i »;6: w . i p%., 19)tl). 84 1 special distinguished commentary doing well by doing better: entrepreneurs and sustainability annalenna parhankangas university of illinois at chicago parhan1@uic.edu abagail mcwilliams university of illinois at chicago abby@uic.edu rodney c. shrader university of illinois at chicago rshrader@uic.edu abstract we examine how entrepreneurial ventures can employ sustainability to do well (create a competitive advantage) by doing better (creating more social good than is created by corporate social responsibility). we compare and constrast csr and sustainability and examine factors influencing the competitive strategies of large, established firms versus entrepreneurial firms. we conclude that established firms are likely to focus on csr while entrepreneurial ventures are more likely to pursue sustainability as a strategy for creating private and social value and durable competitive advantage. established firms will do well by doing good, while entrepreneurial ventures will do well by doing better. keywords: advantages of newness, corporate social responsibility, durable competitive advantage, entrepreneurial strategy, sustainability editor’s note: this manuscript provides insights from a leading entrepreneurship researcher, a prominent social responsibility scholar and a new researcher with a full command of the subject. this important topic has been fundamentally discussed and debated historically from the vantage points of adam smith and karl marx. enjoy this synthesis! s trateg y journal of small business journal of small business strategy vol. 24, no. 2 2 introduction in recent years, scholars have devoted increasing attention to sustainability as a strategy for new ventures (e.g., binder & belz, 2013; hall daneke & lenox, 2010; hockerts & wustenhagen, 2010; shepherd & patzelt, 2011), small businesses (nadim & lussier, 2010), and large corporations (e.g., hockerts & wustenhagen, 2010; kiron, kruschwitz, haanaes, reeves, & goh, 2013; kiron, kurschwitz, reeves & goh, 2013). in their article on sustainable entrepreneurship, shepherd and patzelt (2011) suggested that sustainable development is perhaps the most prominent topic of our time. binder and belz (2013) identified more than 30 articles on sustainable entrepreneurship that were published between 2009 and 2013. however, despite growing interest, the entrepreneurial strategy of creating durable value, both private and social, through sustainability has received little attention compared to the strategy of differentiation through corporate social responsibility (csr) employed by established firms (nadim & lussier, 2010). furthermore, while discussions of sustainability have been grounded in the literatures of environmental management and sustainable development (dean & mcmullen, 2007; mcmullen, 2010; parrish, 2010; patzelt & shepherd, 2011), the closely-related literature on csr has been ignored. therefore, we offer a detailed comparison and contrasting of sustainability and csr and their relative abilities to create social good. by doing so, we help clarify the definition of sustainability and provide strong arguments that entrepreneurs will be more likely to pursue the strategy of sustainability, while managers of established firms will be more likely to continue to pursue the strategy of csr. there is an exhaustive literature on how firms can do well (meaning financial performance) by doing good (meaning furthering some social goal). much of the “good” being done by firms is a result of corporate social responsibility (csr), a concept with a long and rich history (for an excellent review, see carroll, 1999). we argue that entrepreneurial ventures can do well by doing better (providing sustainable solutions), and the “better” will provide more social benefit than csr. to advance our argument we look first to the extensive literature on creating value through csr, and how this continues to be a focus for large, established firms. we then examine the gain, measures, and shortcomings of csr and explain why sustainability has captured increasing attention. finally, we examine the different incentives of established firms and entrepreneurial ventures to show that established firms will, in general, continue to favor csr, leaving vast needs for sustainable solutions to be offered by entrepreneurs. in meeting these needs, entrepreneurs can create social good and durable competitive advantage in new markets. we define social responsibility as a form of ethical self-regulation wherein businesses align their actions (e.g., use of economic and environmental resources) with the interests of their primary stakeholders, which mitchell, agle & wood (1997) define as including investors/owners, customers, workers, suppliers, and their community. calls for responsible business behavior date back thousands of years, and rules were often included in religious texts (such as the discussion of charging interest to poor borrowers in the talmud). writers such as upton sinclair and ida tarbell brought widespread attention to the irresponsible behavior of unfettered business following the industrial revolution, journal of small business strategy vol. 24, no. 2 3 even though the philosophical debate will always range from adam smith to karl marx. legal scholars joined the debate by questioning whether it was appropriate for managers of publically held firms to “administer wisely and fairly in the interest of all” (dodd, 1932:1155). however, it wasn’t until the 1950s that academia began a serious examination of social responsibility (e.g., bowen, 1953) and joined the battle for more responsible business in a serious way. the last quarter of the 20th century saw a rapid growth in the public’s demands for social responsibility on the part of large firms, which increasingly resulted in positive responses, especially when media attention was relentless. the academic literature about social responsibility has been primarily concerned with large, for-profit organizations where managers are increasingly required to both maximize returns for shareholders and demonstrate social responsibility (mcguire et al., 1988; mcwilliams & siegel, 2001; vogel, 2006). while acceptance of this additional responsibility has grown significantly over the past 60 years and is now widespread, managers often feel illequipped to address the demands of multiple stakeholders with divergent, if not contradictory, goals. therefore, the type and level of response to stakeholder’s demands still varies greatly. interest in comparing firms has resulted in numerous attempts, with limited success, to quantify the firm’s social performance (sp). despite the widespread attention to csr, criticism continues, primarily protesting that firms do too little (frankental, 2001; newell, 2005; utting, 2005; valor, 2005). this criticism is easily levied at firms that reject social responsibility as a co rporate responsibility. because most mncs now embrace some elements of social responsibility, this complaint is waning. however, even when csr has positive effects, it has been characterized as public relations that is used to mask the devastating impact of mncs globally (pendleton, 2004) or simply “too little, too late.” the latter can be seen in criticism of corporate “green” programs. for example, in response to calls to be more environmentally responsible, some large firms adopted programs that lowered the net waste they produced. these included such initiatives as recycling, replacing disposable products with reusable ones, and reducing the amount of harmful emissions by installing more efficient scrubbers (orange, 2010). while no one questions these steps or the improvement they bring, they are still seen as only marginal improvements that will not bring about the amount of change that is needed from business (broomhill, 2007). a more recent and more global concern has been on the role of business in global sustainability (see, for example, crane & matten, 2007; dyllick & hockerts, 2002; salzmann et al., 2005). sustainability requires much more than simple improvement in current practices. as defined in the un brundtland report in 1987, sustainability refers to meeting our current needs without compromising the ability of future generations to meet their needs. so, in terms of the environment, sustainability requires minimizing the carbon footprint, not just making marginal improvements. in terms of sustainable business practices, sustainability requires respecting the long run needs of employees and communities, as well as consumers. as a subset of social responsibility, all sustainable practices are socially responsible, but not all socially responsible practices, such as recycling, are sustainable. journal of small business strategy vol. 24, no. 2 4 in table 1 we compare and contrast the characteristics of csr to those of sustainability. table 1: comparing/contrasting csr and sustainability csr sustainability social and ecological good social and ecological good private value private value competitive advantage durable competitive advantage marginal changes revolutionary changes improvements in technology disruptive technologies adapting current practices new business models transparency social contracts and trust regulatory compliance maintaining ecosystems philanthropy developing sustainable livelihood green technology clean technology bop as consumers bop as producers (building native capacity) adapt existing products develop appropriate new products use existing distribution use indigenous distribution channels current stakeholder needs current, distant, and future needs sources: binder & belz (2012), bower & christensen (1995), frankental (2001), hart & london (2005), kiron, kruschwitz, haanaes, reeves, & goh (2013), kiron, kurschwitz, reeves & goh (2013), patzelt & shepherd (2010), prahalad & hart (2002), shepherd & patzelt (2010), vogel (2006), vos (2009) in general, large firms have not yet satisfactorily responded to the call for sustainable business practices. indeed, while there has been widespread—though certainly not universal—acceptance of csr, sustainability has not yet been recognized as a valid responsibility by most large corporations and their acceptance of csr may be a factor impeding that recognition. one reason for this is that csr typically requires only marginal changes in business practices (such as philanthropy, recycling, transparency, etc.) that can be “tacked on” to current processes, while sustainability may require radical changes and development and implementation of new processes, such as distributed generation of power, (ahlstrom, et al., 2009), which may severely discount the value of the installed capital base of large, established firms. therefore, there are significant disincentives for these firms to develop new, sustainable technologies and business models, so instead, they continue to focus on csr. those same disincentives do not exist for entrepreneurs. entrepreneurs have no installed capital base and therefore nothing to lose from developing and employing new technologies and business models. in fact, they have much to gain, because they may have a competitive advantage at “recognizing” the opportunities and organizing the resources that can create sustainable solutions (cohen & winn, 2007; dean & mcmullen, 2007; hockerts & wustenhagen, 2010; parrish, 2010; patzelt & shepherd, 2011). entrepreneurs are not tied to economies of scale that require capital intensity and therefore are free to develop labor-intensive processes, which journal of small business strategy vol. 24, no. 2 5 can create native capacity/sustainable livelihoods in undeveloped areas (acs & audretsch, 1987; chandy & tellis, 2000; katila & shane, 2005). corporate social responsibility there is great pressure for large, established firms to engage in “socially responsible” behavior, including pure philanthropy, compliance with laws and regulation, progressive domestic human resource policies, transparency of off-shore suppliers, going “green,” etc. mcwilliams and siegel (2011) suggested that complying with these demands may be a way to differentiate a firm’s products, enhance its reputation and avoid further regulation, making csr an important strategic variable that is part of a firm’s differentiation strategy. this would allow a firm to create additional private value that is captured in profits, while doing good, that is, creating social value. with the increased interest in socially responsible firms over the last 30 years, sources of information about their social performance have developed as well. firms have added information about social responsibility to their annual reporting, business media now report regularly on social performance, and investment analysts have added social performance to their list of tracked information even to the point of developing indices of corporate social performance, e.g., the kld indices (www.msci.com/products/esg/), which in turn allowed for the development of socially responsible investment (sri) funds (benson & humphrey, 2008; chegut et al., 2011). these funds are attempts to encourage and “reward” firms for creating social value. there can be no doubt that social good has been created by the attention to csr, but the amount of social good that will be generated by continuing to focus on csr is limited. shortcomings of csr there are fundamental shortcomings to csr that limit its contribution to social good, including: • marginal improvements that displace significant change • shallow commitment to the minimum legal and regulatory requirements • response to coercive demands limited to current and local stakeholders • viewing the base of the pyramid (bop) as merely potential customers • managers as agents of shareholders with short term perspectives • sustainable competitive advantage that relies on exploiting regulatory bodies and which causes allocative inefficiency managers may believe they have a social responsibility, but they still must balance the costs and benefits of responding to different stakeholder demands for csr and shareholder value. marginal changes associated with csr, such as increased transparency, may have high returns for shareholders, especially when they are trumpeted by the media. for example, nike relied on increasing its transparency to make tremendous strides in repairing a corporate image that had been severely damaged by reports of poor labor conditions in their asian vendor’s factories. the global media was instrumental in both pointing out the labor conditions and in heralding nike’s move to transparency (locke, 2002). journal of small business strategy vol. 24, no. 2 6 more radical change, such as ensuring fair wages for all production workers, including those of foreign suppliers, is often very costly, but returns are far off and unpredictable. conservative management favors inexpensive marginal change with more certain return for shareholders over expensive radical change with risky return; therefore, nike’s response to unfavorable publicity did not extend to demanding that suppliers pay fare wages. such marginal change creates limited social value. in fact, the international council on human rights policy has found that reliance on social responsibility has often been detrimental to workers and communities (2002). pure philanthropy is perhaps the most obvious example of a marginal change with limited impact. corporate philanthropy is often criticized because it doesn’t result in business models that help people lift themselves out of poverty (guth, 2008). much like foreign aid, philanthropy often just eases current conditions, without providing the incentives to develop sustainable livelihoods (friedman, 1995). it changes nothing about the core business of the firm, but because it benefits the image of the company, it is an easy step to social responsibility that benefits shareholders. being socially responsible through protecting the environment is another area where change began, and often remains, as marginal improvements. these improvements, which are referred to as “green,” may include solutions such as hybrid vehicles, recycling, shunning bottled water, and reducing the use of disposable products such as copy paper and paper cups. these are on the low end of “being green,” but bring the advantage of allowing the firm to tout social responsibility (which may be referred to as greenwashing [vos, 2009]). changes that go much further in reducing the carbon footprint of companies are increasingly referred to as “clean.” “clean” is a subset of “green,” but given a d ifferent designation to highlight the significant improvement over mere “green,” that is, the standard for being “clean” is more stringent than the standard for claiming “green.” unfortunately, the radical changes needed to achieve “clean” solutions often require disruptive technologies that are costly to develop, render current capital worthless, and are inherently risky to boot. for example, had compact fluorescent light bulbs been developed concurrently with incandescent ones, they would not have had to compete with an established technology, and they might have beat out the less efficient incandescents. however, thomas edison invented the incandescent light bulb in the 1890s, almost 90 years before ed hammer, an engineer for general electric, a company built on edison’s incandescent light bulbs, developed the compact fluorescent (cf) bulb in 1976 as a response to the 1973 oil “crisis” that drove up energy costs. according to hammer, ge shelved the innovative product because it would require entirely new manufacturing facilities at a cost of $25 million (kanellos, 2007), which delayed the widespread use of cfs by several more decades. it was also risky to make this change in 1976 because the bulbs, which early on cost several times as much as incandescent bulbs, might not have had a customer base. some scholars include meeting legal and regulatory requirements as csr (husted and de jesus salazar, 2006), but some practices that remain legal are considered to be detrimental to the long term health of the environment, such as strip mining. strip mining, which represents more than a third of u.s. coal mining, can result in toxic ground water, decreased air quality, and a permanently degraded ecosystem. jeh typewritten text journal of small business strategy vol. 24, no. 2 7 government regulations require mining firms to lay topsoil and re-seeding after mines are closed, making a marginal improvement over earlier mining practices, but re-vegetation is difficult and the ecosystems are changed forever (nanjowe, 2010). merely complying with legal and regulatory restrictions may “count” as being socially responsible while falling far short of actual environmental sustainability. managers may commit to csr not because they believe in its merits, but rather because of the coercive demands of local stakeholders (husted & de jesus salazar, 2006). however, responding to local stakeholders may fall far short of achieving improvements in the lives of “distant” stakeholders. for example, csr may require that a firm refrain from polluting local water sources, prompting the firm to move operations to a less developed country whose government is more interested in tax revenues and local economic development than it is in environmental consequences. the firm has, indeed, stopped polluting the (previously) local water source, but it has not stopped polluting water. similarly, local labor demands may drive a company to move production to countries where locals accept deplorable work conditions. current socially responsible production may also deplete resources, harming future generations. for example, tuna can be overfished while using dolphin-safe methods. even when managers have to respond to local consumers’ demands to be socially responsible globally, they may make only marginal changes to improve conditions in offshore supplier plants, rather than make radical changes. for example, consumers complained that foreign factories treated employees poorly, prompting mncs to require suppliers to provide better (i.e., more western) working conditions. it remains unclear how much workers in poorer countries actually benefit from this. recent controversy over mncs’ audits of the electronics vendor foxconn’s plant in longhua, china, makes it clear that the demands of mncs alone may not be sufficient to improve working—and living—conditions in some countries (chan, et al., 2013). in addition to being concerned about workers in the supply chain of mncs, stakeholders have increasingly brought attention to the plight of the base of the economic pyramid (bop), those two to four billion people living on less than $4 per day (prahalad & hart, 2002). a common response of mncs is to provide benefits to these profoundly poor merely as consumers, by making their products more “affordable.” they are being socially responsible by addressing the needs of the very poor, but the changes to their products are only marginal—often limited to packaging— and the risks to the firms are minimal as they treat the bop merely as an underserved consumer market. contributing to economic development—such as local production and distribution—that increases incomes, so that these consumers can afford more and better products and services, would contribute much more social value, but would also be costly and risky for the mncs. it remains eminently appropriate that managers of mncs spend little effort on csr strategies that affect distant stakeholders when their primary concern is maintaining their competitive advantage by serving their current customers and satisfying their shareholders. journal of small business strategy vol. 24, no. 2 8 in limited circumstances a durable competitive advantage 1 based on csr may be possible through exploiting the regulatory environment (mcwilliams, et al., 2002). for example, a firm, or group of firms, may position themselves as being socially responsible because they protect u.s. jobs, that is, they keep production in the u.s. if they can use this csr stance to lobby for subsidies for their product, they can continue to produce in the u.s. but sell at world prices, even though production in the u.s. is much more costly than production in other countries. for example, since the 1930s, the u.s. has protected the cotton industry from foreign competition through subsidies. even though u.s. costs may be double the costs in brazil and some african countries (womach, 2004), u.s. producers continue to be able to compete on the world market. the problem with this is that world production of cotton could be achieved using fewer resources, if prices fairly reflected the cost of the resources, rather than being manipulated by u.s. government subsidies. this is the concept of comparative advantage. in his 1817 book on the principles of political economy and taxation, david ricardo developed the concept of the comparative advantage of nations by demonstrating that world production will be higher, given a fixed amount of resources, if each nation produces what it does best (lowest opportunity cost) and there is free trade between countries. this has been the basis for liberalizing trade for nearly 200 years. when governments intervene, resources are wasted in the sense that the 1 we refrain from the use of the phrase “sustainable competitive advantage” because it is confusing in the context of sustainability. we substitute the phrase “durable competitive advantage” and hope this wording will prevail. resources could be put to better use, yielding more global value. for example, the land used in the u.s. to produce cotton for export might be used instead for a food crop. here is another example of where csr and sustainability diverge. it may be socially responsible to protect local industry, but that may reduce the productive capacity of the world economy, which is not sustainable. these shortcomings with csr persist, at least in part, because of the incentives of large firms to make only marginal changes that do not disrupt their current successful operations, as opposed to changes that require massive infusions of capital to create or adopt new technologies that render their current assets effectively worthless. so, while csr does create positive social value, the amount created is generally marginal. managers feel that they have met demands for social performance and consumers may view them more positively and while this creates private good— increased profits—it garners little social good—sustainable improvements. sustainability as mentioned earlier, sustainability has been defined as achieving current goals, such as production and consumption, without reducing the ability of future generations worldwide to achieve theirs (un brundtland report,1987). this is a broader responsibility than has been associated with csr, which is concerned predominately with meeting the demands of current identified stakeholders (mitchell, agle & wood 1997), i.e. primary stakeholders. csr does not include future or distant stakeholders who are not involved in current production or consumption of the firm’s output and nearly never includes the four billion people at the “bottom of the journal of small business strategy vol. 24, no. 2 9 pyramid.” as opposed to csr, sustainability typically requires more substantial change from the firm. to sustain the planet will require new technology that significantly lowers the use of natural resources and the production of toxic waste in the production of energy and that significantly lowers the cost of use for the bop. such technology is likely to disrupt current industries (kiron, kruschwitz, haanaes, reeves, & goh, 2013; kiron, kurschwitz, reeves & goh, 2013). bower and christensen (1995) used the term “disruptive technology” to describe a new technology that unexpectedly displaces an established technology. with the introduction of a disruptive technology, the firms that are heavily invested in the older technology will see their capital equipment become much less valuable, as will commercial customers also heavily invested in complementary technology. an excellent example of this was when lower cost magnetic disk storage and less expensive computing power made ibm punch cards obsolete in the 1980s. the arrival of this cheaper, more efficient technology was a major blow to ibm for whom the cards represented a major portion of profits for many decades. it was also a blow to ibm customers who had invested in complementary machinery, systems and skills. however, this change in technology was a step in the process that has resulted in connectivity in the poorest countries in the world. sustainable/disruptive technologies developed for the bop may be less reliable and less scalable than current technologies, and therefore not attractive to large established firms. if not scalable, they will not generate acceptable profit margins and if not reliable they will not be accepted by consumers in developed economies. consumers in developed economies are accustomed to affordable consumer goods, cheap food, reliable, cheap energy, and abundant fuel for transportation, and they will not amiably accept alternatives; that is, established firms face what hamel and prahalad (1991) refer to as “the tyranny of the served market.” sustainability and competitive advantage like csr, sustainability can be an important part of a differentiation strategy that leads to competitive advantage. however, in contrast to csr, sustainability, while more difficult to achieve, is harder to imitate, may confer first-mover advantages and is more likely to result in durable competitive advantage because it cannot be based on marginal or cosmetic changes. durable competitive advantage may derive from disruptive technologies and business models, coupled with the reputational effects that come with focusing on sustainability (kiron, kruschwitz, haanaes, reeves, & goh, 2013; kiron, kurschwitz, reeves & goh, 2013). established corporations and constraints on sustainability the fundamental constraint on sustainability is that it is impossible to accurately predict what the needs and expectations of future generations will be. this makes it impossible to determine reasonable trade-offs between current and future consumption. what is possible is reasonable estimation of the degradation and depletion of resources that will occur if current production methods and consumption levels continue. this is what has created an awareness of the need for sustainable solutions with some urgency. the move to sustainability is hampered by the inertia of the current system. the use of current technology constrains the development of disruptive technology; the journal of small business strategy vol. 24, no. 2 10 opportunity to invest in proven firms limits the availability of capital for new ventures; current knowledge and skills constrain the ability and will of workers to adapt to new business models; and current consumption constrains the will of consumers to support new, simpler products. taken together, these represent a powerful impediment to progress toward sustainability, especially among the established corporations. corrupt, unstable governments and lack of legal protections also prevent mncs from developing and deploying sustainable solutions in some areas. hart has suggested that social contracts and trust must replace legal protections at least for the bop (2010). an example of this is the growth of micro financing, which, unlike philanthropy, creates a valuable social network based on trust (unsecured loans) in which the profoundly poor can become both producers and consumers (khandker, 2005). failure to understand the consumer or the distribution channels has also deterred mncs from developing sustainable business models for the bop. when they fail to turn a new technology or product into a profitable business quickly enough to satisfy their internal financing requirements, mncs will turn the project into a donation through a philanthropic/csr arm of the company, as p&g did with its water purification technology designed for the bop (reisch, 2008). this not only kills the mnc’s interest in further development of products for the bop, it also limits the ability of indigenous businesses to develop sustainable livelihoods for the same reasons that pure philanthropy is criticized. perhaps the strongest deterrent to sustainable solutions is the unwillingness of mncs to embrace radical new technologies and business models that disrupt their current business, introduce uncertainty, and decrease the value of their installed capital. the strategies of large, established companies continue to be shaped by legacies of sunk costs, the “tyranny of the current served market,” and institutional inertia (hart, 2010: 233). in many cases, switching to sustainability would require major capital investment in new plants, equipment, and distribution channels, as well as retraining and re-staffing and the development of new markets for which demand is uncertain, which is unappealing to mncs. the inability and unwillingness of established corporations to introduce radically new solutions, such as sustainable technologies, products, and business models, is extensively discussed in the literature on radical innovation (see, for instance, chandy & tellis, 2000; ghemawat, 1991; rosenbloom & christensen, 1994). this stream of literature identifies several reasons for the relative weakness of established corporations when it comes to systematically changing their business models and earning logics. the established corporations derive a significant portion of their revenues from the existing products and business models based on the current technology or incremental improvements in the current technology, thus favoring csr initiatives over sustainable solutions. adopting sustainable solutions would require established corporations to invest in solutions demonstrating weaker short term profit potential. shifting over to sustainable business models requires established corporations not only to cannibalize their current sales, but also to cannibalize their investments in various other assets, such as manufacturing facilities, knowledge stocks, customer and supplier relationships, and organizational routines (chandy & tellis, journal of small business strategy vol. 24, no. 2 11 1998; henderson & clark, 1990). thus, established corporations are likely to perceive smaller incentives to introduce radically new solutions than nonincumbents (almeida & kogut, 1997; chandy & tellis, 2000; conner, 1988; scherer, 1980). second, organizational theorists argue that established corporations possess organizational filters that make them less effective at radical innovation (hannan & freeman, 1977; henderson & clark, 1990; nelson & winter, 1982). organizational filters are cognitive structures that screen out information unrelated to the organization’s major tasks. the organization’s success in its current product category is partly due to the organizational filters that direct managers’ attention to the utility of the current technology to current customers. however, the very same organizational filters may cause established organizations be less effective in identifying, developing, and marketing radically new products and services (henderson, 1993) based on sustainability principles. third, established corporations develop organizational routines that are geared towards efficiently developing incremental improvements based on the current business model (hannan & freeman,1977; henderson & clark, 1990; nelson & winter, 1982). as these routines are known to have contributed to the success of the incumbent in the past, the managers are likely to hesitate abandoning them and developing new organizational routines (staw, 1981) required by sustainable solutions. fourth, large and established organizations exhibit a high degree of bureaucratization, which stultifies the skills and aspirations that make their employees likely to pursue novel solutions (see, for instance, merton, 1968; weber, 1968; whyte, 1956). for instance, rigid and closely monitored tasks combined with high role specialization constrain employee’s discretion to challenge the status quo (dobrev & barnett, 2005; sorensen, 2007; thompson, 1965; kacperczyk, 2012). fifth, managers of mncs are inherently risk averse, because they are agents of shareholders who choose to invest in large corporations because these tend to be less risky than new ventures, and then these shareholders evaluate managers on shortterm performance (rappaport, 2005). these forces pressure managers to be conservative and make only safe, marginal changes in areas like csr that do not affect core competencies. proposition 1: large corporations are more likely to engage in csr activities than to adopt sustainable business models. while it is clear that there are significant disincentives for large firms to make radical changes, those same conditions create incentives for entrepreneurs. sustainability and the role of entrepreneurs the incentives of young firms resemble a mirror image of the disincentives experienced by established corporations when it comes to sustainability. young firms are typically not burdened by the factors that prevent established corporations from adopting sustainable business models, such as sunk costs and inertia. while new ventures may suffer from liabilities of newness (stinchcombe, 1965), they also benefit from advantages of newness facilitating the identification and journal of small business strategy vol. 24, no. 2 12 implementation of sustainable business models. first, entrepreneurs are likely to have more freedom to experiment with sustainable business models than established corporations. the entrepreneurial firms do not have sunk costs in existing markets, products, and technologies or specialized structures and routines (baker, miner & easley, 2003; katila & shane, 2005). thus, they do not need to cannibalize their existing sales and assets to pursue sustainable business models. in addition, the fact that new ventures are often selffunded or obtain capital from private sources, such as family and friends, help entrepreneurs avoid the discipline of the capital markets, allowing for more idiosyncratic goals and conduct (noteboom, 1994). this enables entrepreneurs to transform their personal values more freely to business practices (bird, 1989; kotey, 1995; casson, 1992) and have a powerful impact on the direction and strategy of their business (chapman, 2000). prior research also demonstrates that there exists a significant number of aspiring entrepreneurs interested in sustainability. the study by kuckertz & wagner (2010) indicates that individuals concerned by issues of sustainability exhibit stronger entrepreneurial intentions. young firms are not the focus of media and special interests as they do not control vast resources. thus, entrepreneurs are not burdened with the demands of stakeholders driving them towards more conventional csr initiatives and the constraints of aging technology. in fact, for young firms, being less conservative can be beneficial and may be requisite for securing venture capital. venture capitalists make their money by backing risky ideas; therefore, they prefer disruptive technologies and business models (cochrane, 2005:5), including ideas that focus on sustainability (eurosif, 2007). second, young firms are better equipped to dealing with competitive ambiguity associated with sustainable business models in market niches that are too hard or small for large corporations to tap (bhide, 1992; christensen & bower, 1996; katila & shane, 2005; cooper, et al., 1986; porter, 1980; mcdougall, et al., 2003). the prior entrepreneurship literature also maintains that entrepreneurial firms pursuing a niche strategy are more likely to survive (bhide, 1994; gartner, starr & bhat, 1999 ). therefore, sustainability becomes an opportunity for entrepreneurs to establish a competitive advantage by differentiating their products and achieving lower costs, as well as developing a positive image which may make the competitive advantage durable. the vast size of the market at the base of the pyramid represents a global niche that is waiting to be served through truly innovative solutions—not just smaller packaging of products by global giants such as unilever. as discussed earlier, entrepreneurial firms possess a competitive advantage over large established corporations when it comes to bringing radical innovations to the market (see, for instance, chandy & tellis, 2000; ghemawat, 1991; rosenbloom & christensen, 1994). thus, entrepreneurs play a vital role in market economies, filling consumer needs and desires in new ways, creating jobs, and generating tax revenue by taking on risks that managers may not be willing or able to assume (schumpeter, 1947). in addition to being less constrained by the sunk costs and external pressures, the innovativeness of entrepreneurial firms stem from their organic, less bureaucratic and more clannish structures that are likely to improve flexibility, collaborative journal of small business strategy vol. 24, no. 2 13 competency, and communication. this enables entrepreneurs to better tap into the internal and external sources of knowledge (hausman, 2005; olson, walker & reukert, 1995; sivades & dwyer, 2000), learn from the mistakes of others, imitate the best practices of others, and respond more quickly to change. proposition 2: entrepreneurs are more likely to benefit from adopting sustainable business models than are large corporations. in table 2 we summarize the discussion above and contrast characteristics of large established firms with characteristics of entrepreneurial firms. these characteristics will influence the differences in decision making and lead us to expect entrepreneurs to be a growing force in the drive to sustainability. table 2: characteristics of established vs. entrepreneurial firms large, established firms entrepreneurial ventures installed capital base little or no capital base existing business models new business models incremental innovation disruptive innovation current served market opportunity recognition broad markets niche markets conservative risk neutral shareholders’ interests entrepreneurs’/investors’ values employee owner bop as consumers only bop as co-creators and consumers bureaucratic rigidity organic structure corporate social responsibility sustainability sources: acs & audretsch (1987), baker, et al. (2003), bird (1989), bhide (1992), casson (1992), chandy & tellis (2000), cochrane (2005:5), cohen & winn (2007), cooper et al. (1986), dean & mcmullen (2007), eurosif (2007), henderson (1993), hockerts and wustenhagen (2010), katilia & shane (2005), nelson & winter (1982), noteboom (1994), parrish (2010), patzelt & shepherd (2010), rappaport (2005). summary and conclusions while large firms in wealthy economies have responded to demands for csr, in much of the world this has not resulted in significant improvement in maintaining the environment, protecting natural resources or improving the human condition. the changes from csr, while positive, have been mostly marginal due to the inertia of the established firms and their aversion to disruptive changes. however, these marginal changes are often rewarded so that firms do well by doing good. sustainability requires more fundamental change that will likely involve disruptive technologies, such as distributed generation journal of small business strategy vol. 24, no. 2 14 of power, that are less focused on achieving economies of scale. large firms have little incentive to invest in such innovations or in the adoption of new radical technologies, especially given that consumers in developed economies expect the supply of cheap goods and services to continue, regardless of the fact that they often come from older technologies that deplete nonrenewable resources and that irreversibly degrade the environment. sustainability may also require fundamentally new business models, rather than cosmetic changes to existing practices. entrepreneurs, however, are not constrained by a large installed capital base and have much to gain by developing sustainable business models and creating new ventures based on radical technologies that address social problems. entrepreneurs see the opportunities in disruptive technologies and are willing to bear the risk of organizing resources into a sustainable business. because sustainability is difficult to imitate, it can be a source of durable competitive advantage. consequently, entrepreneurs can, and perhaps should, leapfrog mere csr to instead focus on s ustainability and thereby achieve better long-term results, both private and social, by making sustainability central to their differentiation strategy. entrepreneurs will be rewarded by doing well by doing better. references acs, z. j., & audretsch, d. b. 1987. innovation, market structure, and firm size. the review of economics and statistics, 567-574. ahlstrom, j., macquet, m. & richter, u. 2009. the lack of a critical perspective in environmental management research: distortion in the scientific discourse. business strategy and the environment, 18: 334-346. almeida, p., & kogut, b. 1997. the exploration of technological diversity and the geographic localization of innovation. small business economics, 9: 21-31. baker, t., miner, a., & eesley, d. 2003. improvising firms: bricolage, account giving and improvisational competencies in the founding process. research policy, 32: 255–276. benson, k. l., & humphrey, j. e. 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reproduced with permission of the copyright owner. further reproduction prohibited without permission. http://www.smallbusinessinstitute.biz internationalization propensity in family-controlled public firms in emerging markets: the effects of family ownership, governance, and top management chiung-wen tsao1, miao-ju wang2, chia-mei lu3, shyh-jer chen4, yi-hsien wang5 1national university of tainan, cwtsao@mail.nutn.edu.tw 2national sun yat-sen university, mjwang@cm.nsysu.edu.tw 3tainan university of technology, t80015@mail.tut.edu.tw 4national sun yat-sen university, schen@cm.nsysu.edu.tw 5national sun yat-sen university, feynmanw@gmail.com a b s t r a c t internationalization propensity is a growing issue faced by family firms. this study contributes to the family business literature by developing a conceptual framework that can identify the family and managerial determinants that affect the extensiveness of internationalization. drawing on the socioemotional wealth and upper echelon perspectives, it empirically examines the association among family heterogeneity (i.e., family participation is heterogeneous in terms of ownership and governance oversight), top management team (tmt) heterogeneity (i.e., the tmt’s background is heterogeneous in terms of its overseas education and industry experience), and internationalization propensity in publicly traded enterprises. the analysis of data collected from 105 public firms in taiwan shows that active family participation in ownership and governance oversight and tmt overseas industry experience heterogeneity are significantly and positively associated with internationalization propensity. however, family ownership is found to be significantly but negatively associated with internationalization propensity. we finally discuss the implications of the presented findings for practitioners and organizational theorists. keywords: journal of small business strategy 2018, vol. 28, no. 01, 28-37 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2018 small business institute® apa citation information: tsao, c. w., wang, m. j., lu, c. m., chen, s. j., & wang, y. h. (2018). internationalization propensity in family-controlled public firms in emerging markets: the effects of family ownership, governance, and top management team heterogeneity. journal of small business strategy, 28(1), 28-37. w w w. j s b s . o rg family governance, tmt heterogeneity, internationalization propensity introduction as the decision to internationalize is a strategic choice, the ownership and control of a firm (i.e., whether the firm is a family firm) affect international strategies differently (banalieva & eddleston, 2011; zahra, 2003). despite its im‐ portance, research on the interplay between family-con‐ trolled firms and international dimensions is sparse (pukall & calabrò, 2014), and studies of the effect of family influ‐ ence on a family firm’s internationalization have remained inconclusive (arregle, duran, hitt, & van essen, 2017). al‐ though some characteristics may promote the internation‐ alization of family firms (e.g., carr & bateman, 2009; zahra, 2003), other factors may impede the expansion of their operations into different countries (e.g., banalieva & ed‐ dleston, 2011; fernández & nieto, 2006; graves & thomas, 2006). recent studies have noted that family firms have di‐ verse ownership, management, and governance over‐ sight (liang, wang, & cui, 2014; matzler, veider, hautz, & stadler, 2015), which signifies that the active or passive involvement of family in corporate governance may influ‐ ence the internationalization process and ability of family firms differently. most studies measure family influence as a combination of ownership and management, although some assess the effect of such influence on the interna‐ tionalization of small and medium-sized enterprises (smes) (e.g., fernández & nieto, 2006; graves & thomas, 2006; liang et al., 2014), which typically lack management capa‐ bilities and resources and tend to adopt risk aversion strat‐ egies toward growth and international expansion. although family-controlled and -managed firms play an important role in the global economy (jaskiewicz, combs, & rau, 2015), research suggests that family business be‐ haviors differ between transition and developed econo‐ mies (ratten, dana, & ramadani, 2017; wright, chrisman, chua, & steier, 2014). the economist (2015) indicates that the center of the modern economy is shifting to a different part of the world—most notably asia—where family com‐ panies remain dominant. it also predicts that the share of family firms among large multinationals will increase from 15% to 40% over the next decade, mainly because of the http://www.smallbusinessinstitute.biz http://www.jsbs.org 29 c. w. tsao, m. j. wang, c. m. lu, s. j. chen, & y. h. wang journal of small business strategy / vol. 28, no. 1 (2018) / 28-37 rising number of large family firms in asia. such a state‐ ment means that asian family firms are increasingly ex‐ panding overseas; however, little is known about how fam‐ ilies influence the internationalization propensity of their businesses in emerging markets. moreover, although the main decision-maker for the internationalization process is the business founder/own‐ er, such a decision will benefit from the advice of top exec‐ utives such as the top management team (tmt). the upper echelon (ue) perspective proposes that the tmt acts on the strategic situations it faces and that these personalized understandings are a function of executives’ experienc‐ es, values, and personalities (hambrick, 2007). although a tmt’s power plays a key role in shaping major organi‐ zational outcomes, carpenter, geletkanycz, and sanders (2004) indicate that overseas industry experience, which may affect the industry network and managerial skills of tmts, is less explored, thus providing an opportunity to bridge the gap in the family business literature on interna‐ tionalization issues. in this study, we answer the above questions by exam‐ ining how internationalization propensity (i.e., the numbers of countries in which the sample companies have subsidiar‐ ies overseas) is affected by family heterogeneity (i.e., fam‐ ily participation is heterogeneous in terms of ownership, governance oversight, or a combination of both) and tmt heterogeneity (i.e., tmts’ background is heterogeneous in terms of team members’ overseas education and indus‐ try experience) in publicly traded taiwanese enterprises. publicly listed firms in taiwan, an export-driven economy and one of the major emerging markets in the asia-pacific region, where more than two-thirds of public companies remain close to family direction and scrutiny (tsai, 2013), provide an ideal setting within which to examine whether family-controlled public firms in emerging markets have an internationalization advantage owing to their concentrated ownership. a sample comprising 105 taiwanese publicly traded enterprises is used to test how these dimensions of family and tmt heterogeneity predict internationalization propensity. the analysis shows that active family participation in ownership and governance oversight and tmt overseas industry experience heterogeneity are significantly and positively associated with internationalization propensity. however, in contrast to our expectations, family ownership is found to be significantly but negatively associated with internationalization propensity. this study thus advances our knowledge in the field of family business international‐ ization in three main ways. first, as varying levels of family ownership and control are likely to serve as an important contingency in firms’ strategic decisions (arregle et al., 2017; chrisman, chua, & sharma, 2005; melin & nordqvist, 2007), this study develops a more fine-grained understand‐ ing of family-controlled public firms in an emerging market and internationalization propensity by distinguishing be‐ tween ownership and governance oversight under differ‐ ent contingencies. second, through its application of socio‐ emotional wealth (sew) theory, the study can explain that if family members are actively engaged in ownership, man‐ aging, and supervising, the firm is likely to expand interna‐ tionally. third, through its application of an ue perspective, the study shows that family firms are effective in their in‐ ternational expansion if tmt members are heterogeneous in terms of overseas industry experience. in the following section, we review the literature on family and tmt heterogeneity in international expansion and examine the possible relationships among them. theoretical background and hypotheses family heterogeneity and internationalization propensity recent research on family business issues has at‐ tempted to avoid dichotomous definitions (deephouse & jaskiewicz, 2013) because of the ambiguous distinction between family and non-family firms (chrisman, chua, pearson, & barnett, 2012) and considerable heterogene‐ ity within family businesses (chrisman et al., 2012; chua, chrisman, & sharma, 1999). family heterogeneity thus be‐ comes a crucial cue while analyzing strategic decisions in start-up businesses, cultural contexts, entrepreneurship, organizational theory, and internationalization. family heterogeneity involves ownership, family in‐ volvement, power control, and the governance mechanism of business management, all of which vary to differing ex‐ tents in family firms (pukall & calabrò, 2014; nordqvist, sharma, & chirico, 2014). pukall and calabrò (2014) sug‐ gest four crucial research angles, including family firm het‐ erogeneity and its direct impact on internationalization. with regard to internationalization strategy, the powers and attitudes of the ceo and board are critical. previous research on the internationalization of fam‐ ily firms has provided mixed results (arregle et al., 2017; fernández & nieto, 2006; sciascia, mazzola, astrachan, & pieper, 2012). studies show that family smes have less in‐ tention to diversify (fuentes-lombardo & fernandez-ortiz, 2010; okoroafo, 1999) because of their risk aversion and unwillingness to weaken the control of family ceos (gallo, tapies, & cappuyns, 2004). in other cases, family firms are expected to internationalize more than other firms because of their flexibility, speed in decision-making, long-term ori‐ entation, and stewardship compared with their non-family counterparts (arregle et al., 2017). family ownership and internationalization propensity in public listed firms in an emerging market according to the economist (2015), “the biggest chal‐ lenge for family companies is how to preserve family con‐ trol while competing with public companies.” thus, fam‐ ily-controlled public firms might face major conflicts in growing globally while maintaining their control. the economist (2015) suggests three techniques for family business‐ es to preserve family control while competing with public companies, namely by controlling their stakes, carrying the absolute voting right, and securing their ownership in 30 c. w. tsao, m. j. wang, c. m. lu, s. j. chen, & y. h. wang journal of small business strategy / vol. 28, no. 1 (2018) / 28-37 terms of a trust or foundation. by drawing on the sew perspective, the discussion on family heterogeneity shifts to the issues of ownership, longterm orientation, and family involvement (pukall & calabrò, 2014). with respect to internationalization propensity, pre‐ vious studies of the impact of family ownership on interna‐ tionalization show contrasting empirical outcomes (arregle et al., 2017; fernández & nieto, 2006; sciascia et al., 2012). some firms are found to be willing to risk international ex‐ pansion (calabrò & mussolino, 2013; zahra, 2003, 2005), while others are less prone to do so (fuentes-lombardo & fernandez-ortiz, 2010; gallo et al., 2004; okoroafo, 1999). the recent meta-analytic review by arregle and col‐ leagues (2017) on the impact of family involvement on internationalization finds that family firms’ international‐ ization differs from that by other firms because of the sig‐ nificant presence of family members in ownership and the tmt as well as the risks and challenges in developing the geographic scope of their foreign direct investment (fdi). the authors suggest that the distinctive nature of family firms, including both their specific advantages and disad‐ vantages, influences internationalization approach. there‐ fore, one should not neglect the heterogeneity of family firms compared with non-family firms. risk aversion characterizes most smes, whereas a posi‐ tive attitude to risk is more common in public listed compa‐ nies. public listed companies differ from smes in terms of both the management and the ownership components, es‐ pecially in family-run or -dominant firms. the level of family ownership refers to the percentage share held by the fam‐ ily, affecting the voting power within board decisions. the size of the dominant family and operational power of the ceo, irrespective of whether he/she is a family member, influence strategic decisions such as internationalization. smes from emerging economies are outward into for‐ eign markets vigorously in recent decades (zhu, hitt, & ti‐ hanyi, 2006). in the early 1960s, taiwan entered a period of rapid economic growth and industrialization, creating a stable industrial economy. according to chen, lawler, & bae (2005), firms in taiwan that have been exposed ex‐ tensively to western managerial techniques tend to adopt some western thinking with the intention of expanding their family businesses beyond the domestic market. to compete globally, most public companies in taiwan are at‐ tempting to accept global standards and follow global cor‐ porate governance practices. therefore, we propose the following hypothesis. hypothesis 1a. in public listed firms in emerging markets such as taiwan, family ownership has a positive impact on internationalization propensity. family governance oversight and internationalization propensity in public listed firms in emerging markets ownership in voting control matters only when the ex‐ pansion decision is presented at board meetings. as family firms have diverse ownership, management, and gover‐ nance oversight, depending on the level of the dominant family’s involvement, ownership and management might dominate the business’s decisions differently. banalieva & eddleston (2011) conclude that family leaders tend to have a home region focus, while non-family leaders lean increas‐ ingly toward an international strategy; however, leaders of family-controlled public firms might pursue better perfor‐ mance through international expansion. from the sew perspective, family business leaders are driven by more than simply short-term economic goals, working toward longer-term objectives (miller & le bret‐ on-miller, 2006). specifically, family firms are often distin‐ guished by their socioemotional preferences, and some strive to create an evergreen business to pass onto their relatives (i.e., they are long-term-oriented; gomez-mejia, makri, & kintana, 2010; miller, wright, le breton-miller, & scholes, 2015). hence, although internationalization might be a difficult decision for family businesses owing to its un‐ predictability and resource intensity (ratten et al., 2017), a long-term vision of their business and organizational be‐ havior within their operation could facilitate international‐ ization, since internationalization propensity may enable them to grow and thrive compared with rivals. given that a significant number of taiwanese public firms are managed and controlled by founding families, as long as the family can secure their ownership and control irrespective of the firm’s structure (i.e., foundation or pyra‐ mid), there are advantages to international expansion, and the chance of risk decreases. therefore, family sharehold‐ ers within the dominant family governance mechanism should tend toward international expansion. thus, this study proposes the following hypothesis. hypothesis 1b. in public listed firms in emerging markets such as taiwan, active family participation in governance oversight (i.e., family members hold dominant ownership and have a vital influence on strategic decisions) has a pos‐ itive impact on internationalization propensity. tmt heterogeneity and internationalization propensity an increasing volume of organizational research has studied the link between tmts and international strategies (carpenter et al., 2004; reuber & fischer, 1997; sambharya, 1996; bose, 2016). the main research stream in the litera‐ ture on ue tends to consider tmt demographics as prox‐ ies of tmt dynamics (hambrick, 2007; hambrick & mason, 1984), suggesting that executives’ experience, values, and personalities greatly influence their interpretations of the situations they face and, in turn, their decision-making. hence, organizational outcomes such as strategies and performance are expected to reflect the characteristics of these leaders. further, building on hambrick and mason’s original ue model, carpenter et al. (2004) introduce over‐ seas assignment experience as a new variable that may af‐ fect the managerial skills of tmts. heterogeneous tmts are more likely than homoge‐ neous tmts to be positively associated with managerial https://en.wikipedia.org/wiki/industrialization 31 c. w. tsao, m. j. wang, c. m. lu, s. j. chen, & y. h. wang journal of small business strategy / vol. 28, no. 1 (2018) / 28-37 strategic behavior (i.e., a showing greater propensity for strategic actions; hambrick, cho, & chen, 1996). these provide the skills required to address environmental com‐ plexities, thus enhancing productivity in turbulent environ‐ ments (keck, 1997) and demonstrating a higher degree of internationalization (reuber & fischer, 1997). for example, carpenter and fredrickson (2001) link the educational di‐ versity of tmts with global strategic attitude by reasoning that the former provides an indicator of the diversity of the cognitive processes embedded in a tmt. further, previous research has mostly used overseas assignment/work ex‐ perience to predict firm-level outcomes (e.g., carpenter, 2002; carpenter & fredrickson, 2001; carpenter, sanders, & gregersen, 2001; bose, 2016). reuber and fischer (1997) find that internationally experienced tmts have a greater propensity to develop foreign strategic partners, and industry network, which is associated with higher internationalization. moreover, while carpenter et al. (2001) report that specific tmt work experiences affect the success of multinational firms, they also find that this effect is stronger in firms having a greater global presence. the above discussion leads us to propose the following hypothesis. hypothesis 2a. overseas industry experience heterogene‐ ity within a tmt has a positive impact on internationaliza‐ tion propensity. in addition, tsao, chen, lin, and liao (2013) investigate the effect of tmt overseas education experience hetero‐ geneity on organizational performance. their emperical results indicate that overseas education experience, a pre‐ viously unexplored tmt background characteristic, also affects firm performance. therefore, we propose the fol‐ lowing hypothesis. hypothesis 2b. overseas education experience heteroge‐ neity within a tmt has a positive impact on international‐ ization propensity. method sample we adopted publicly traded companies in taiwan as our research sample to examine the influence of family and tmt heterogeneity on internationalization propensity. we chose taiwan as our sample for four reasons. first, 74% of public listed companies in taiwan are dominated by fam‐ ily ownership and involvement in operations (tsai, 2013). second, taiwan is a small developing economy compared with the united states and european countries (e.g., the average capital of publicly traded companies in taiwan is us$1.49 billion1), which enables us to view the sample as different from public firms in developed economies. third, the economy of taiwan is an indispensable partner in the global value chains of the electronics industry (sturgeon & kawakami, 2010). regarding increasing competition with newly emerging countries, taiwan is facing international‐ ization challenges because of domestic labor shortages, which increase overheads and land prices, and environ‐ mental protection; hence, in the past two decades, tradi‐ tional labor-intensive industries have steadily moved off‐ shore. for example, taiwanese companies have become major foreign investors in china, thailand, indonesia, the philippines, malaysia, and vietnam. finally, detailed com‐ position and demographic information on the boards and tmts of smes is lacking. the study collected stable and ac‐ curate information from publicly traded firms, leading to a reliable research result. data collection we adopted three data sources to both provide thor‐ ough and objective primary and secondary data (cycyota & harrison, 2002) and avoid the effect of common method variance. the first data source is firms’ annual reports of 2014, collected from the firms’ official websites or the mar‐ ket observation post system, the official public database of the taiwan stock exchange that provides basic firm-level information, financial performance report, and governance information on taiwanese publicly traded firms for public use. the second data source is the taiwan economic journal (tej) database, a credible source of financial and gover‐ nance reporting for taiwanese publicly traded firms. family ownership (percentage of stock and shares) for 2014 is col‐ lected from the tej. the third data source is self-adminis‐ tered questionnaires by the ceos of publicly traded com‐ panies. these questionnaires provided data on firm size, firm age, industry categories, subjective family ownership, and governance oversight level. the data collection procedure comprised three steps. first, we downloaded the list of public listed companies from the website of the taiwan stock exchange, and then we sent the ceo questionnaires to 1,353 public listed com‐ panies between october and december 2014. to raise the response rate and simplify the data reporting procedure, we coded the questionnaires by using numbers to avoid pressurizing participants. it is likely that participants would be willing to answer openly if the questionnaire carried no company identification (e.g., company name). we also coded the questionnaire to allow easier matching with our mailing list and the other two data sources. a total of 105 usable questionnaires were included in the analysis. the relatively low response rate (7.76%) might have been because of the difficulty of accessing ceos, as a buffer can keep ceos from various requests for informa‐ tion (cycyota & harrison, 2002). ceos also often have tight schedules and face considerable demand for information from industry analysts and stakeholders (haleblian & fin‐ kelstein, 1987), leading to a low willingness to respond to research questionnaires. second, we collected information on the boards and tmts of the 105 sampled companies from their annual re‐ ports of 2014. to demonstrate the degree of international diversity, we reviewed the information on the number of overseas affiliate countries and the demographic charac‐ http://sdos.ejournal.ascc.net/cgi-bin/sciserv.pl?collection=journals&journal=01492063&issue=v30i0006&article=749_uerraecotmtc&form=fulltext#bib21#bib21 https://en.wikipedia.org/wiki/labor_shortage https://en.wikipedia.org/wiki/environmental_protection https://en.wikipedia.org/wiki/environmental_protection 32 c. w. tsao, m. j. wang, c. m. lu, s. j. chen, & y. h. wang journal of small business strategy / vol. 28, no. 1 (2018) / 28-37 teristics of tmt members including education background and occupational history. we coded these data accordingly and combined them with the data from the questionnaires. the third step involved analyzing the raw data on the sampled tmts’ overseas experiences, including education background and occupational history. we then calculat‐ ed the heterogeneity index suggested by blau (1977); we termed this measure the international diversity of the tmt. measures family heterogeneity. as family heterogeneity signifi‐ cantly affects internationalization propensity (pukall & cal‐ abrò, 2014), we included family ownership and governance oversight. family ownership represents the control of the stock in the company, measured as the percentage of di‐ rect and indirect stock and shares owned by the family in 2014. the data on family ownership were collected from the tej database. on family governance oversight, follow‐ ing miller, lee, chang, and le breton-miller (2009), family firms were defined as “those in which owner-managers’ report that their family owns more shares than any other block holder, and in which strategic decision-making is di‐ rectly influenced by multiple members of the same family” (miller et al., 2009: p.809). hence, family governance over‐ sight was measured by two yes/no questions in the ceo questionnaire: “is the total percentage of stock and shares owned by the company’s dominant family greater than that owned by any other shareholders?” and “do the dominant family members have a vital influence on the strategic de‐ cisions of the company?” if the answer to the question was yes, it was coded as 1 and 0 otherwise. next, we created a four-category dummy variable based on the answers to these questions. (d1: if dominant stock shares amount to 0, the influence on the decision is 1; d2: if the dominant stock shares amount to 1, the influ‐ ence on the decision is 0; and d3: when both answers are positive.) tmt heterogeneity. in this study, the measure of the tmt’s international experience consists of two dimensions: tmt overseas assignment and tmt overseas education. tmt overseas education refers to the highest education of each executive gained overseas, while tmt overseas assignment denotes foreign industry experience. first, we categorize tmt overseas education based on the location of the respondent’s graduate school: (1) taiwan, (2) unit‐ ed states/canada, (3) europe, (4) japan, (5) china, and (6) other. the same procedure is adopted for tmt overseas assignment to code each executive’s past occupational ex‐ perience. for example, if the respondent’s highest degree was from uc berkeley and he or she served as a manager in the singapore branch of the firm for five years, we assigned the codes (2) and (6) for overseas education and overseas assignment experience, respectively. if occupational expe‐ rience spans multiple regions, we assigned the code (6). in the second step, we calculated the heterogeneity of the tmt’s international experience by using the het‐ erogeneity index suggested by blau (1977): heterogeneity (h)=1-σp i ², where p i is the proportion of the population in category i. a tmt size of five indicates that four executives obtained their degrees from taiwan, and one executive from the united states. then, h=1-.68=.32 if all five execu‐ tives obtained their degrees from taiwan, and h=0 other‐ wise. internationalization propensity. in this study, we adopt the concept of multinationalism, since fdi increas‐ es the control that a firm can exercise but also involves a relatively high degree of commitment, risk, and complexity compared with exporting (anderson & gatignon, 1986). in‐ ternationalization propensity was measured as the number of countries in which public listed companies had subsid‐ iaries or strategic business units in 2014. control variables. firm size is correlated with interna‐ tionalization strategy, as larger companies have a better chance of expanding their business overseas (thomas & graves, 2005; zahra, 2003). as firm age rises, businesses might adopt internationalization to expand the market (graves & thomas, 2008; zahra, 2003); on the contrary, firms might take advantage at an earlier age (autio, sapi‐ enza, & almeida, 2000). industry differences such as a dif‐ ferent level of competition might cause different strategies regarding international expansion (yip, 1992; murphy & tocher, 2017). hence, we adopted three control variables: firm age, firm size (log), and an industry dummy (the service indus‐ try serves as the reference group). firm age was calculated based on the year of inception. firm size was measured as the official number of employees (miller & droge, 1986). note that we used the log transformation of firm size in the linear regressions. the industry categories were divid‐ ed into manufacturing, service, high-tech and electronics, and other. results among the 105 samples, average firm age, average control ownership, average firm size (log), and the average number of international expansion nationalities are 28.25 years, 30.21%, 2.46, and 3.66, respectively. regarding the heterogeneity index of tmts, average overseas assignment experience is 0.31, while the maximum is 0.94; whereas average overseas education is 0.33 compared with a max‐ imum of 0.70. table 1 reports the means, standard devia‐ tions, and correlations for all the variables in the model. we use ordinary least squares regression analysis to test our hypotheses. table 2 shows the models and direct variables relating to hypotheses 1a, 1b, 2a, and 2b. regarding family heterogeneity, the main effects model makes a significant contribution to the outcome. h1a (h1b) predicts that family ownership (governance oversight) is positively related to internationalization propensity. the results of h1a show that, unexpectedly, family ownership is significantly but negatively related to internationalization propensity (β=-0.23, p<0.05), indicating that the higher the 33 c. w. tsao, m. j. wang, c. m. lu, s. j. chen, & y. h. wang journal of small business strategy / vol. 28, no. 1 (2018) / 28-37 family ownership level, including direct and indirect stock and shares, the lower the possibility of internationalization propensity is. to understand this contradictory result more in depth, we verified our data and found that compared with the majority of sample companies, some are much larger. thus, although family ownership is relatively low, these have a greater degree of internationalization propen‐ sity. therefore, we conducted an additional test by elim‐ inating eight companies with low family ownership (i.e., less than 8%) and a greater degree of internationalization propensity (i.e., subsidiaries in more than three countries). the ordinary least squares regression with these 97 sample firms shows that family ownership is not associated with internationalization propensity (β=-0.13, p=0.16), confirm‐ ing that the sample companies that actual hold low family ownership but have subsidiaries in more countries are out‐ liers, which caused the significant but negative impact of family ownership on internationalization propensity. active family participation in both ownership and gov‐ ernance oversight is positively related to internationaliza‐ tion propensity (β=0.22, p<0.05), which supports h1b. in other words, the greater the level of family domination in stock and shares and management involved in the gover‐ nance system, the higher is the possibility of a public listed family firm internationalizing. these results indicate the crucial influence of active family participation in ownership and governance oversight on internationalization propen‐ sity. regarding tmt heterogeneity, h2a and h2b predict that international experience and education are positive‐ ly related to internationalization propensity. the results of the main effects in table 2 reveal the positive and signif‐ icant association between having tmts with overseas as‐ signment experience heterogeneity and internationaliza‐ tion propensity (β=.23, p<.001), supporting h2a. however, the findings for h2b differ from our expectations, showing insufficient evidence to claim that having tmts with over‐ seas education heterogeneity affects internationalization propensity. as our relatively small sample might have insufficient explanatory power, we adopted gpower to estimate the overall estimated power (cohen, 1992). the result shows that our study has sufficient statistical power (power=0.99, table 1 descriptive statistics and correlations variables mean s.d. 1 2 3 4 5 6 7 8 9 10 firm size (log) 2.46 0.55 firm age 28.25 13.46 .29** industry (dummy) 1.37 0.86 -0.16 -.25* family ownership 30.21 18.91 -0.06 -0.13 -0.04 family governance oversight_d1 0.06 0.24 0.01 0.03 -0.19 0.02 family governance oversight_d2 0.03 0.18 -0.16 0.19 -0.06 -0.11 -0.05 family governance oversight_d3 0.34 0.48 0.17 .23* -0.05 0.11 -.19* -0.14 tmt overseas assignment 0.31 0.24 0.11 0.06 0.01 -0.03 -0.02 -0.02 -0.01 tmt overseas education 0.33 0.19 -0.17 -0.05 0.02 -0.01 0.00 0.09 -0.03 0.14 internationalization propensity 3.66 3.76 .49** 0.18 0.00 -.25** -0.15 0.04 .21* .29** 0.03 *p<.05, **p<.01 (two-tailed test), n=105 table 2 simple regression analyses predicting the level of internationalization propensity internationalization propensity base model main effects constant -5.62*** -5.54*** control variables firm size (log) .49*** .48*** firm age .06 -.07 industry (dummy) .09 .06 independent variables family ownership -.23* family governance oversight_d1 -0.03 family governance oversight_d2 0.17 family governance oversight_d3 0.22* tmt overseas assignment .23*** tmt overseas education .06 f 11.15*** 7.35*** r2 .25*** .41** *p<.05, **p<.01, ***p<.001, n=105 34 c. w. tsao, m. j. wang, c. m. lu, s. j. chen, & y. h. wang journal of small business strategy / vol. 28, no. 1 (2018) / 28-37 effect size=0.695, α=0.05, sample size=105, number of pre‐ dictors=9). discussion and conclusion the internationalization behaviors of firms vary greatly depending on the degree and type of family influence (ba‐ nalieva & eddleston, 2011) as well as the managerial capa‐ bilities of tmts (carpenter et al., 2004; reuber & fischer, 1997; sambharya, 1996). understanding the organizational drivers of international success and failure thus lies at the heart of international business theorizing and empirical in‐ vestigation (lu & beamish, 2004; peng, 2004). in this study, we examine the determinants of public family firms’ internationalization in an emerging economy, with a focus on two factors that relate to family hetero‐ geneity. in particular, the level of family influence on the control and management of public listed firms in taiwan remains high compared with most western countries; thus, the research context in this study is ideal to establish whether linkages between family and tmt heterogeneity and internationalization propensity exist. in contrast to our expectations, the data analysis of h1a revealed that actual family ownership has a significant but negative influence on internationalization propensity in taiwanese public listed firms; however, our result concurs with sew theory that overseas expansion might be under‐ taken to preserve the welfare of the family and avoid risk (okoroafo, 1999; sanchez-bueno & usero, 2014; pukall & calabrò, 2014). in line with h1b, active family participation in owner‐ ship and governance oversight have a more positive impact on internationalization propensity when family involve‐ ment in ownership and governance oversight are both present. although empirical evidence on the influence of family involvement on internationalization is mixed (pukall & calabrò, 2014), our research supports previous empirical work on family-controlled public firms, which establishes the positive effects of family governance oversight on inter‐ nationalization propensity. in line with h2a, tmt overseas industry experience heterogeneity is significantly and positively associated with internationalization propensity. however, our results did not reveal an association between tmt overseas education heterogeneity and internationalization propensity. contributions and implications this study advances the field of family business inter‐ nationalization in three main ways. first, as varying levels of family ownership and control are likely to affect firms’ strategic decisions (arregle et al., 2017; chrisman et al., 2005; melin & nordqvist, 2007), this study develops a more fine-grained understanding of family-controlled pub‐ lic firms in emerging markets and internationalization pro‐ pensity by distinguishing ownership and governance over‐ sight. second, through its application of sew theory, we examine family heterogeneity effects beyond the agency and stewardship paradigm to explain that if family mem‐ bers are actively engaged in ownership, managing, and su‐ pervising, a firm is likely to expand internationally. third, through its application of an ue perspective, our research highlights the potential positive aspect of tmts’ overseas assignment. the study shows that family firms are effective at international expansion if tmt members are heteroge‐ neous in terms of overseas industry experience, which en‐ hances tmts’ human and social capital and thus serves as a strong predictor of internationalization propensity. on a practical level, our findings have implications for family business owners, non-family executives within listed family firms, and family business advisors. first, this study highlights the important role of family ownership along with governance control, which emphasizes long-term vision and fosters effective decision-making and enhanc‐ es dominant powers and legitimacy through the unity of ownership and governance control; which in turn assists a firm’s ability to organize firm-specific resources to compete in the international marketplace. second, our findings sug‐ gest that the overseas assignment/work experience diver‐ sity of tmts provides as a strong predicator of internation‐ al expansion. business linkages such as industry networks, joint ventures, and subsidiaries play an important role in increasing the probability of international expansion (bose, 2016). therefore, tmt oversea related resources and com‐ petencies play an important role in the decision of inter‐ nationalization, for owners and managers in family firms, invest in building a heterogeneous top executive team in terms of its overseas industry experience will benefit inter‐ national market expansion. limitations and directions of future research the present study, however, also leaves several ques‐ tions unanswered. its first limitation concerns the main effects of tmts’ demographic characteristics. although nu‐ merous scholars have recognized the key role of a tmt’s power in shaping major organizational outcomes, proxies such as its demographic characteristics can be unreliable (denis, lamothe, & langley, 2001; lawrence, 1997; smith, smith, olian, sims jr., o’bannon, & scully,1994). hence, fu‐ ture studies should aim to collect primary data to direct‐ ly examine the tmt’s socio-cognitive concerns. this may compensate for the above limitation and advance the the‐ oretical underpinning of ue theory. the second limitation concerns the study’s focus on the measure of international expansion. firms use a variety of other measures of internationalization. future research could thus focus on the impact of these other measures on firm internationalization. third, concerns might be raised about the small sample size and generalizability of our findings outside the cultural and institutional context in which this research was conducted. future research should therefore examine whether our findings on the influence of family heterogeneity on internationalization are replica‐ ble outside asia, where the impact of family involvement on business operations is likely to be lower. 35 c. w. tsao, m. j. wang, c. m. lu, s. j. chen, & y. h. wang journal of small business strategy / vol. 28, no. 1 (2018) / 28-37 in conclusion, active family participation in governance oversight (i.e., family members hold dominant ownership and have a vital influence on strategic decisions) and tmt overseas assignment are associated with internationaliza‐ tion. as scholars have underscored the need to gain more insights into the contextual conditions under which family firms manage to maintain high levels of internationaliza‐ tion, our empirical findings provide the foundation need‐ ed to uncover these nuances and clarify how internation‐ alization by family firms differs. thus, our work improves the understanding of the specific issues and opportunities involved in internationalization pertaining to family-con‐ trolled public firms, particularly in emerging markets. references anderson, e., & gatignon, h. 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(2006). the international‐ ization of smes in emerging economies: institutional embeddedness and absorptive capacities. journal of small business strategy, 17(2), 1-26. stratxgy using data from court cases and employee surveys to design sexual harassment policies toni p. lestero babson college abstract study afier study shows that sexual harassment is a problem that threatens to undermine many of thei nroads made by working womenin the last three decades. small business managers who fail to adopt policies to prevent harassment risk losing valuable employees, the goodwill of the public, and expensive lawsuits. data from leading federal couri cases and two landmark federal employee surveys can be used ioformulate policies rhat pre vera sexual harassment from occurring. introduction after anita hill accused clarence thomas of sexual harassment during his supreme court nomination hearings in 1991, the equal opportunity commission (eeoc) reported that the number of harassment claims in 1992increased by 50 percent over the number of claims that were filed for a similar period in 1991 (adams, 1992). in 1993, there were 1,500 sexual harassment claims filed with the agency, with claimants winning $25.2 million in damages from employers ("a special report", 1994). in addition to the monetary costs associated with these claims, employers run the risk of losing valuable employees and the public's goodwill. plaintiffs risk having their credibility questioned and their career prospects handicapped. current federal law allows successful harassment claimants to receive back pay and up to $50,000 in combined compensatory (i.e., for such things as emotional pain and suffering) and punitive damages from smalland medium-sized companies who employ 15 to 100 employees. larger companies are subject to higher statutory caps. for example, companies with 100 to 200 employees are at risk for up to $ 100,000, and companies with 200 to 500 employees are at risk for $200,000 (civil rights act, 1992). pto vis or this article isisuended to provide general legs! information and does not cons ti rute the gi ving ofspecific legal advice to individual readers. notes thc aurhor wishes to thonk litt la rocca for her assistance wirh the collection of the research data, my cotteagtws, donna la roti k, lydiiia pot urni k, and ross pe ay for their arsis isnca with the interpretation ofthe research daht, and the babson baard of research for irs suppon. 15 alternatively, harassment victims can sometimes bring their claims under state laws, many of which do not limit damage awards to the same extent that they are limited under federal law. for example, in one california case, a jury awarded a male harassment victim who was harassed by his female supervisor, $82,000 for economic losses, $375,000 for emotional distress, and $550,000 in puniuve damages (gurierrez v. california, 1987). small business managers can avoid many of the above risks by adopting sexual harassment policies that make it clear to their employees that certain types of conduct will not be tolerated. one of the most important sources of information that can be used to help formulate such policies is data from federal courts of appeal cases. courts of appeal are the highest level of courts to review harassment claims, next to the u.s. supreme court. they have a strong impact on how sexual harassment law develops. appeals court cases are particularly informative because they tell us what type of behavior judges consider sufficiently egregious to constitute illegal sexual harassment. companies can use this information to prohibit specific conduct in their own harassment policies. an effective harassment policy, however, will do more than simply comply with the minimum requirements of the law. even when no litigation is involved, the costs to harassment victims in poor physical and mental health and low morale are great. employers can also lose millions of dollars a year because of high job turnover rates, lost productivity, and the sick leave used by employees who try to cope with harassment (u.s. merit systems, 1988). one study indicated that approximately $300 million was lost by the federal government because of sexual harassment (us merit systems, 1988). from a legal, economic and ethical perspective, it is therefore imperative that small business managers formulate sexual harassment policies that accommodate legal developments and thc actual experiences of harassment victims. although both men and women can be harassed, women are by far the most common victims of harassment (u.s. merit systems, 1988; 1981), an extremely valuable source of information about the experiences of women harassment victims are two landmark studies on sexual harassment that were conducted by the u.s. merit systems protection board in 1981 and 1988 ("1981 merit study" and "1988 merit study", respectively). as the discussion below will show, data from thc court of apfieal cases and the two merit studies indicate that companies can reduce their risk of legal liability by adopdng and implementing policies that prohibit sexual harassment perpetrated by coworkers and supervisors that consists of a physical, verbal or visual conduct. this article will analyze the merit study and court case data to explain how this conclusion was reached. first, this article will describe a database that was developed to objectively characterize the types of harassment that have been reviewed by the federal courts in the past few years and explore the extent to which a preliminary study of the database reveals any relationship between particular types of harassment and a company's chances of winning or losing a lawsuit. next, this article will discuss the results of the two merit studies and compare these results with the court cases reviewed to determine the extent to which court-prohibited harassment did or did not reflect the type of harassment reported by the women in the studies. finally, suggestions will be made about what specific types of conduct should be prohibited in harassment policies and the type of language that can be included in policies that scck to describe that conduct. 16 types of sexual harassment prohibited by the federal courts the supreme court and eeoc definitions of sexual harassment the supreme court first recognized that sexual harassment was a legitimate cause of action under thecivilrightsactof1964in1986,inmeriiorv.vinson. commentingontheemployee's claim that she was coerced into having sex with her supervisor for several years, the court said that "a requirement that ...a woman run a gauntlet of sexual abuse in return for the privilege of being allowed to work and make a living can be as demeaning and disconcerting as the harshest of racial epithets" (meriior v. vinson, 1986, p. 67). in rendering its decision, the supreme court relied on the eeoc's guidelines on sexual harassment, which said that harassing conduct included "unwelcome sexual advances, requests for sexual favors, and other verbal or physical conduct of a sexual nature" (code, 1993). the guidelines further state that for the conduct to constitute illegal sexual harassment, one of the following circumstances has to have taken place: (i) the conduct is made either explicitly or implicitly a condition of a person's employment, (2) decisions about the employee's job status are influenced by the extent to which the employee accepted or rejected the harassing conduct, or (3) the conduct either unreasonably interferes with the employee's job performance or creates a hostile, offensive, or intimidating work environment (code, 1993). the first of the above two sets of circumstances are usually characterized as "quid pro quo" harassment (i.e., sexual favors are required in exchange for tangible job benefits). most legal experts believe that supervisors and other people in positions of authority over an employee are capable of engaging in quid pm quo harassmenl the third circumstance is usually called "hostile environment harassment," and can be caused by coworkers or supervisors. after this research project was completed, the supreme court made a ruling in another sexual harassment case, harris v. forklift systems, inc. in the decision, the court realfirmed its condemnation of sexual harassment and concluded that harassment victims need not suffer severe psychological harm in order to pursue their claims in court (harris v. forklifi, 1993). all federal appeals courts are bound to interpret and follow the rules set down in supreme court decisions like vinson and harris. judges in these courts choose cases on appeal from the lower district courts that focus on issues that involve controversial legal questions or that address new and evolving areas of the law. thus, appeals courts play an important role in the way in which harassment law develops. once an appeals court renders its decision, the lower district court must rely on the principles articulated in that decision to decide new cases. this research was undertaken to discover (i) what types of harassment prompted the courts of appeal to decide to review sexual harassment cases on appeal, and (2) if there was any relationship between the type of harassment reviewed on appeal and the employer's chances of winning or losing a sexual harassment lawsuit. creation of the database during the first stage of the project, over 50 federal sexual harassment court of appeals cases that were decided since the supreme court's decision in vinson were reviewed. a content 17 analysis of those cases for the purpose of categorizing types of harassment was then conducted. finally, a database was developed that described as objectively as possible the range of harassing behavior that was covered in those cases and the range of possible decisions that could be rendered with respect to that conduct (i.e., did the judge decide that the behavior did or did not constitute illegal sexual harassment?). a graduate student assistant also analyzed cases to ensure that conduct was categorized consistently. the attempt to classify conduct was influenced by the two merit studies, both of which showed that a wide variety of conduct constituted sexual harassment. approximately 20,000 employees were surveyed in the 1981study and 8,500employees were surveyed in the 1988 study (u.s. merit systems, 1988, 1981). developers of the 1981 merit study said that harassment ranged from uninvited sexual remarks to actual or attempted assauli or rape. while studies like the two merit studies have been used to categorize harassment from the victim's perspective, no similar approach has been used by legal scholars to develop a system for categorizing the types of harassment that are contained in disputes that actually make it to court. since the united states is a common law country that follows the legal principle of stare decisis. this type of information would be extremely useful to legal scholars and practitioners, and business managers. "stare decisis" is a doctrine that requires couns to render decisions by following the rulings of previously decided similar cases (metzger, 1989). lawyers advocate on behalf of their clients by finding past rulings in cases with similar fact scenarios and using those rulings to support their current clients in courl a review of a significant portion of the cases eventually revealed that one or more of the following five categories of harassment were present in each of the court cases reviewed: i) physical harassment: unwelcome physical conduct ranging from lewd gestures to sexual intercourse with the alleged harassment victim, 2) verbal harossmenn unwelcome oral or written comments ranging from requesting dates to threatening the alleged victim with physical harm, 3) visual itarassmeiu: unwelcome visual displays, such as pornographic material on the walls in company common areas, 4) co-worker harassment i any of the first three categories of harassment that could also be attributed to a co-worker of the alleged victim, and 5) supervisor harassmeiui any of the first three categories of h uassment that could also be attributed to someone occupying a hierarchical position over the alleged victim. finally, in addition to auempting to characterize types of conduct, the content analysis revealed that there were two general types of rulings that could be rcn&lcred by the courts: (i) that the facts alleged by the employee amounted to sexual harassment, or (2) that the facts alleged by the employee did not amount to sexual harassment. it should be noted that some companies may escape ultimate liability in sexual harassment cases even when the courts find that the particular conduct under review constitutes sexual harassment. for instance, sometimes courts are reluctant to make a company automatically liable 18 for the wrongful actions of lower level employees, like co-workers, especially when a company had no knowledge of the harasser's actions prior to the commencement of the lawsuit. this research, however, limited itself to determining the extent to which the conduct in question was condemned by the courts and not how the courts addressed this issue of vicarious liability. an initial study of recent federal court of appeal's cases was then conducted to determine if any preliminary inferences could be drawn about the relationship between types of harassment and the final decisions in those cases. description of and problems with the court cases studied of the 50 court cases that were initially reviewed, only 25 of those cases described the harassment under review sufficiently enough to be included in the study. these 25 cases, however, do include at least one case from each of the 11 federal appeals court circuits. thus, the database reflects the broad range of decisions that have been rendered by all the courts of appeal in the country. although the more numerous lower disuict court decisions theoretically might have produced a larger sample, it is difficult to get access to all district court decisions because they are not reported consistently. furthermore, from a legal and practical perspective, district court decisions are not as influential as court of appeal's decisions. usually, district courts only have local impact because they are required to follow decisions rendered by couns of appeal located in their respective circuits. it is common, however, for a court of appeal in one circuit to follow a decision rendered by a court of appeal in another circuit. thus, appeals court decisions have a strong impact on the way in which the law develops around the country. from the very beginning of this research project, it was difficult to derive objective descriptions of harassing conduct from the court reported decisions. court decisions, which can range from 10to 40 pages, are written in narrative form, and the judges who deliver these decisions are not always the most organized or coherent writers. as a result, many cases could not be used because the decisions did not describe the nature of the harassment sufficiently or because the issues being addressed on appeal were not relevant to this siudy. because of the high number of new harassment claims that have been filed with the eeoc, it is likely that over the next few years, many of these new claims will work their way up to the appeals couns. this larger number of appeals cases can then be added to the sample and be the subject of a future study. despite the problems that were encountered with the court cases, the preliminary study did reveal some interesting information about the nature of sexual harassment and its possible relationship to final court decisions. analysis of court of cases of the 25 court cases that were reviewed, 5 were won by the employer and 20 were lost by the employer. all of the cases studied involved female plaintiffs. table i shows the number of all cases lost or won by the employer, by type of harasser. table 2 shows the number of all cases lost or won by the employer, by types of harassing conduct. an analysis of the information in the two tables will be discussed immediately below. 19 table 1 cases won or lost by type of harasser ¹(%) of all ¹ (9o) ¹ (9o) cases reviewed» won lost coworkers 3 (12%) 0 3 (100%) supervisors 13 (529o) 2 (15%) 11 (859») coworkersf supervisors 9 (369o) 3 (33%) 6 (67%) » 25 cases were reviewed table 2 cases won or lost by type of harassment ¹(9o) of all ¹ (9o) ¹ (%) cases reviewed'on lost physical 17 (689b) 2 (129») 15 (88%) verbal 24 (969o) 5 (21') 19 (79%) visual 9 (36%) 2 (229») 7 (78%) » 25 cases were reviewed companies tended to lose lawsuus when the employee was harassed exclusively by a supervisor. in 13 (52 percent) of all the cases in the study, the employee was allegedly harassed by only one type of harasser —a supervisor. this figure is understandable in light of the vinson decision's strong condemnation against supervisor harassment. it suggests that a majority of the courts followed the supreme court's lead and decided that an employee should be entitled to have her day in court if she could produce preliminary evidence that she was harassed by her supervisor, furthermore, of the cases involving supervisor-only harassment, 11 (84 percent) were lost by the employers and two (15 percent) were won by the employers (!lee table 1). the difference between these two figures indicates that supervisor harassment —on its own —strongly influenced the court's final determination that harassment from a supervisor constituted illegal sexual harassmenl 20 companies tended to lose lawsuits when the employee was harassed exclusively by a co-worker. the research on this point indicated that the appeals courts have yet to address the issue of co-worker harassment to any significant degree. only three (12 percent) of all the cases in the sampleinvolvedharassmentfromaco-workerexclusively. this small numberofcasesmayrelate to the fact that the vinson case did not specitically involve co-worker harassment. as a result, lawyers representing clients in post-vinson harassment cases may have been reluctant to file appeals in cases where their clients were subjected only to co-worker harassment. this is because they would have had no supreme court level precedents to rely upon that supported their position. it is interesting to note, however, that three (100 percent) of all of the co-worker-only harassment cases were lost by the employers, notwithstanding the facts in the vinson case. while this figure may suggest that the courts consider co-worker harassment to be sufficiently egregious to constitute illegal sexual harassment, it could also be argued that the number of cases is too small to produce any significant results. the three cases, however, may represent a small but growing trend in the courts to view coworker harassment as a form ofhosule environment harassment. for example, ellison v. brady, one of the three cases in the sample that involved co-worker only harassment, is a landmark 1991 appeals court decision from the influential 9th circuit in california. ellison broke with tradition by declaring that love leuers and verbal overtures (i.e., non-physical conduct) from a co-worker constituted hostile environment sexual harassment (ellison v. brady, 1991). the elli son case received a great deal of media attention when it was decided. it has already influenced decisionsincertainu.s.courtcases(harris v. forklift, 1993;robinson v.jacksonville shipyards, 1991)and has been cited in important international treatises on sexual harassment law as well(int'i labour office, 1992). since the sample contains no similar post-ellison cases, it will be important to examine co-worker harassment in future studies. cases in which a woman was harassed by both a supervisor and a co-worker were also reviewed. table i shows that nine (36 percent) of all the cases in the pilot study involved a combination of co-worker and supervisor harassers. six (67 percent) of those cases were lost by the employers and three(33 percent) were won by them. in view of the fact that there were so few cases involving co-worker-only harassment that made it to court, these figures may indicate that co-worker harassment had to occur in combination with supervisor harassment before a significant number of courts would consider co-worker harassment serious enough to prohibit it. companies tended to lose lawsuits when the employee was physically harassed. the sample results indicated that the appearance of physical harassment was very important to the courts. seventeen (68 percent) of all the cases in the sample involved some kind of alleged physical harassment. this may indicate that the occurrence of physical harassment was the minimum fact scenario required to convince the courts to review a case in the first place. table 2 also shows that 15 (88 percent) of all the cases involving physical harassment were lost by the employers and two (12 percent) were won by the employers. this may suggest that an employee who was physically harassed may have had a good chance of both getting a court to review her case initially and to render a final decision against the employer. 21 companies tended to win lawsuits when the employee was subyected to non-physical harassment fi.e., verbal or visual). (1)verbol harassment. almostall of the courtcascs studied(i e.,24(96 percent)) included some form of alleged verbal harassment. verbal harassment also seemed to have an impact on the final decisions in those cases. for instance, table 2 shows that there was a large difference between the percentage of verbal harassment cases that were lost by companies (i.e., 19 (79 percent)) and the percentage of cases that were won by them (i.e., 5 (20.8 percent)). (2) visual harassment. visual harassment was less prevalent in the case sample than verbal harassment. of all of the court cases examined, only nine (36percent) involved visual harassment. there was a sizable difference, however, between the percentage of all the visual harassment cases that were lost (i.e., 7 (78 percent)) and the percentage of cases that were won by the employers (i.e., 2 (22 percent)) (see table 2). thus, visual harassmem may also have been an important measure of liability for the judges who reviewed the cases in the study. a 1991 federal district court case from florida, robinson v, jacksonville shipyards, may provide some insight into the way in which the courts will view visual harassment in the future. ln this case, the judge determined that the display of pornography in the work place did in fact constitute illegal sexual harassment. the court said that pornography "comm unicates a message about the way [the employer] views women, a view strikingly at odds with the way women wish to be viewed in the workplace" (robinson v. jacksonville shipyards, 1991,p. 1509). while the jacksonville case was only decided by a district court, it reccivcd a great deal of attention in the legal and business communities because thc judge relied on the expert testimony of a psychologist and a management consultant to show how visual harassment negatively affects women at work. as such, this unusual case has the potential to influcncc other courts across the country, despite the fact that it was only decided by a district court. what harassment victims have tc) say about the types of harassment that they are subjected to at work women in the morc recent 1988 merit study made it clear that sexual harassment continues to be a big problem for them at work. forty percent of the women in the 1981 merit study and 42 percent in the 1988 merit study said that they had experienced some form of sexual harassment. a discussion of the extent to which the women surveyed said that they experienced each of the six categories of harassment and a comparison of the survey results with the court cases reviewed will be discussed below. supervisor harassment is very serious and occurs less often than co-worker harassment the survey respondents viewed supervisor harassment as one of the most egregious forms of sexual harassment. for example, 99 percent of the women in the 1988 merit study believed that pressure for sex from a supervisor should be equated with sexual harassment, and 87 percent said that a supervisor's pressure for dates should consutute illegal sexual harassment. 22 the women also said that they were harassed a lot less frequently by their supervisors than the court case data indicated. although 52 percent of all the court cases discussed above involved supervisor-only harassment, only 29 percent of the women in the more recent 198& merit study reported that they had been harassed by an immediate supervisor or someone holding a position higher than that. it should not be inferred, however, that supervisor harassment should not be taken seriously by employers. because of the unequal power relationship that exists between supervisors and their subordinates, supervisors have the capacity to threaten the job prospects of employees who shun their advances. the supreme court acknowledged this in the vinson decision when it made quid pro harassment (i e.,supervisor harassment that either explicitly or implicitly ties itself to an employee's job status) illegal that the courts take this matter seriously is also evidenced by the fact that 84 percent of all the supervisor-only cases reviewed were lost by the employers. co-worker harassment is also serious and it occurs more frequently than supervisor harassment although the respondents seemed to view co-worker harassment as a slightly less serious form of harassment than supervisor harassment, a significant number of women still believed that co-worker-only harassment was an inappropriate form of work place behavior. for instance, in the more recent 1988 merit study, 87 percent of the women said that they believed that supervisor pressure for dates should constitute sexual harassment, while 76 percent said that co-worfrer pressure for dates should constitute sexual harassment. one of the most imponant differences between the court case data and two merit studies is what they have to say about the pervasiveness of co-worker harassment. as was stated earlier, only 12percent of all the couitcases in the sample involved co-worker harassment exclusively. however, 65 percent of the women in the 1981 merit study and 69 percent of the women in the 1988 merit study said that they had been harassed by a co-worker or someone who had no supervisory authority over them. these results may suggest that even though women were generally subjected to co-worker harassment much more often than they were to supervisor harassment, they may have been reluctant to file lawsuits alleging co-worker harassment because they feared that their claims would not be taken seriously by the courts. physical harassment is serious but occurs less frequently than non-physical harassment as was discussed earlier, the court case data indicated that the courts found physical harassment to be particularly abhorrent. eighty-four percent of all the court cases involving some form of physical harassment were lost by the employers. an even greater percentage of women in the 1988 merit study said that they believed that unwanted deliberate touching, pinching, or cornering should be considered a form of sexual harassment. ninety-five percent said this should be the case when the harasser was a supervisor and 92 percent said this should be the case when the harasser was a co-worker. the overall percentage of women in the two merit studies who experienced some form of physical harassment, however, was much lower than it was for the women covered by the court case data. for instance, 68 percent of all the court cases studied involved some form of physical harassment. in contrast, only 26 percent of the women in the 1988 merit study said that they were subjected to physical harassment. furthermore, only 0 8 percent said that they had been the victim of actual or attempted rape or assault. 23 managers should be careful not to infer from this discussion that physical harassment should not be taken seriously, however. while the 0.8 percent figure in the 1988 merit study may appear to be small, if this percentage were applied to the entire work force at that time, this could have amounted to over 6,000 women who had been the victims of some form of actual or attempted assault. physical harassment can have a long lasting and traumatic effect on the life of a harassment vicum. it is also a crime. verbal harassment is serious and occurs more frequently than physical harassment in the 1988 merit s wdy, 72 percent of the respondents believed that unwanted sexual comments should constitute sexual harassment if the harasser were a supervisor, and 64 percent said that this should be true if the harasser were a co-worker. while these numbers are lower than thc percentage of women who equated physical harassment with sexual harassment (i.e., 92 percent and 95 percent for co-worker and supervisor harassment, respectively), they still represent a significant number of women who believed that verbal harassment should bc taken seriously. women in the studies also said that they were exposed to verbal harassment slightly more often than they were to physical harassment. approximately 35 percent of the women in the 1988 merit study said that they were the objects of unwanted sexual remarks, such as teasing, jokes, or questions. verbal harassment may have actually been more pervasive than these figures suggest because the sponsors of the 1988 merit study also asked respondents about other forms of verbal harassment. for instance, the 1988 merit study also asked employees if they received unwanted calls, pressure for dates or pressure for sexual favors. twelve percent of the women said that they had received unwanted letters and calls; 15 percent said that they had received pressure for dates; and 9 percent said that they had received pressure for sex. preliminary results indicate that visual harassment is serious but frequency is not clear as has already been discussed, the court case research suggested that the courts were inclined to decide that visual harassment should be prohibited by law. while the two merit studies did not ask respondents specifically about visual harassmeru, some of the respondents offered personal comments to describe their experiences with visual harassment. for example, the sponsors of the 1981 merit study said that many of the women found "materials of a sexual nature bothersome. one woman dislike[d] the way her male coworkers pass[ed] amund and put up pornographic cartoons in work spaces. when she object[ed], hcr imss [told] her [she was] too sensitive" (us merit systems, 1981,p. 37). however, the responderus were not asked about the pervasiveness of visual harassment what type of harassment should be prohibited in company harassment policies? although the courtcase sample may be too small to produce any hard statisucal conclusions at this time, there are still some preliminary inferences that can be drawn from the study that can serve as a starting point for the formulation of company harassment policies. since employees 24 and employers each share a signiticant portion of the costs associated with harassment even when itdoesn't lead to litigation, an effective policy will cover the range of conduct that women in the surveys said that they were subjected to. examples of how this can be accomplished are shown in table 3 and discussed below. table 3 types of harassment ro be prohibited supervisor hamssment co-worker harassment physical harassment verbal harassment visual harassment supervisor harassment companies should prohibit supervisor harassment because of the vinson decision's strong pronouncements against it, and because the court case research indicates that supervisor harassment negatively affects a company's chances of winning a harassment lawsuit. furthermore, supervisor-only harassment should beprohibited because almost all of the women surveyed said that it was anathema to them. this strong response probably can be attributed to the fact that the respondents recognized that there is an inherent unequal power relationship that exists between supervisors and their subordinates. a sample harassment policy can be found in the appendix, which lists the types of conduct that the jacksonville court ordered the employer to prohibit. co-worker harassment a substantial number of the women in the more recent 1988 merit study (i.e.,70 percent) said that they had been subjected to co-worker only harassment. co-worker harassment thus appears to be a widespread problem. because it has the ability to reduce the emotional well-being and job productivity of targeted employees, managers need to make all employees aware that this type of conduct will not be tolerated. furthermore, co-worker harassment and all other types of non-quid pro quo harassment, are legally prohibited forms of hostile work environment harassment. thus, managers should take proactive steps to eliminate this type of harassment. physical harassment company policies should also prohibit physical harassment, since the court case research clearly indicates that companies have a strong chance of losing cases if it can be proven that physical harassment took place. physical harassment should also be condemned because the women surveyed almost uniformly found it to be offensive and because it can be considered a form of criminal behavior. 25 an example of the type of language that can be used in a policy to prohibit physical harassment, can be found in the jacksonville shipyards case. in this case, the court ordered the company to adopt a sexual harassment policy that prohibited the following: i) rape, sexual battery, molestation, or attempts to commit these assaults; 2) intentional physical conduct that is sexual in nature, such as touching, pinching, patting, grabbing, brushing against another employee's body, or poking another employee's body (robinson v. jacksonville shipyards, 1991,p. 1542). more detailed language can be found in the appendix. verbal harassment verbal harassment also should be covered in harassment policies, since of all the types of harassment discussed in this article, verbal harassment appeared to occur most frequently and to be viewed seriously by the respondents the merit study respondents. for specific language that can be included in a policy to prohibit verbal harassment, managers can look to the jacksonville shipyards case. it prohibits., among other things, "sexuallyoriented gestures, noises, remarks, jokes, or comments about a person's sexuality or sexual experience directed at or made in the presence of any employee who indicates or has indicated in any way that such conduct in his or her presence is unwelcoine" (robinson v. jacksonville shipyards, 1991,p. 1542).(see the appendix for the expanded version of this prohibition). although the jacksonville policy does not refer to written harassment, it also seems logical to conclude that written harassment should be prohibited as well, since both written and verbal harassment involve the unwanted communication of sexually-charged subject matter. visual harassment in light of the 1981 merit study, which showed that many of the women surveyed were offended by visual harassment, and the potential for the jacksonville shipyards case to influence future judicial attitudes about the impropriety of visual harassment, managers should also prohibit visual harassment in their policies. the court in the jacksonville shipyards endorsed a broad condemnation of visual harassment. it ordered the company to draft a policy that prohibited "displaying pictures, posters, calendars, graffiti, objects, promotional materials, reading materials or other materials that are sexually suggestive, sexually demeaning, or pornographic ..." (robinson v. jacksonville shipyards, 1991,p. 1542). (see the appendix for an expanded version of this prohibition.) conclusion in addition to the information contained in this article, managers can consult local legal specialists in employment law to get more individualized advice about sexual harassment law. since sexual harassment hw is constantly evolving, companies should maintain an ongoing relationship with a good attorney who has a sound background in this field. management consultants who specialize in this field can also provide important advice on this topic. 26 written policies that prohibit specific types of harassment, however, are only the first step that companies should take to eliminate sexual harassment. such policies, if not genuinely implemented and endorsed by management, will have no real effect on the problem. by their own behavior, high-level managers should show other employees what appropriate work place behavior looks like. companies also need to offer mandatory training programs to both supervisory and nonsupervisory employees. these programs should educate employees about the range of conduct covered in company policies, the penalties that will be assessed against harassers, and information about company grievance procedures. such programs should be offered to new employees and all employees on a periodic basis. training programs on harassment can be conducted by a company's in house human resources department or duough the use of outside consultants. if the latter is economically prohibitive, small business managers can instead buy videos about harassment that are currently on the market or available in local business college or public libraries. managers also need to respond to complaints about harassment swiftly, by investigating complaints and penalizing harassers if it appears that harassment has occurred. the first time an employee engages in harassment, the harasser should receive a formal warning and be told that, if the harassment continues, the ultimate penalty is firing. of course, more egregious forms of harassment, like physical harassment, should warrant a more serious response, even if it only occurs once. finally, companies should be careful to provide employees with the opportunity to report supervisory harassment to other employees who are outside of the supervisory chain of command. in addition to the positive impact that the adoption of the above measures can have on overall employee morale, they also serve the important function of reducing an employer's future risk of legal liability. generally, if a company has a clearly communicated harassment policy, a training program, and a grievance process that is triggered as soon as the company knows or has reason to know that harassment is taking place, the company has a very good chance of winning a harassment lawsuil it should be noted, however, that there recently has been a trend recently in some judicial circuits for judges to hold companies auroman'cally liable for supervisory harassment, even when those companies had no reason to know that the harassment was taking place (plevan, 1994). in these cases, courts treat harassment claims like workmen's compensation claims and conclude that companies have an absolute duty to keep their workplaces safe and free from harassment. it remains to be seen whether or not this trend will continue. even if the above trend does not continue to grow, some of its underlying premises may be good for managers to heed. companies need to consider the backgrounds of the people that they hire, especially when they are considering hiring people who have a history of harassing others at their previous place of employment. companies may also want to survey their employees confidentially to determine if sexual harassment is a problem in their organizations. such precautions can help eliminate the problem of work place sexual harassment and the risk of potential legal liability as well. 27 implications for further research as was mentioned at the beginning of this ardcle, the 25 courts of appeal cases were reviewed to determine if any preliminary inferences could be drawn about the relationship between types of harassment and final court decisions. the preliminary inferences discussed above indicate that there are several issues that lend themselves to further research and review. first, courts of appeal cases, as they are decided, should be adde&1 to the sample to enrich the research sample. it also might be useful to sub-categorize the five different forms of harassment discussed here to see if the courts treat these subcategories differently. for example, physical harassment could be divided into two separate categories (i.e., lewd gestures vs. unwanted touching) to see which category is taken more seriously by the courts. finally, it would be interesting to compare district court decisions with courts of appeal decisions or to do a study of district court cases exclusively. those considering engaging in such resemch should be forewarned, however. since district court cases are more numerous and more difficult to get access to, such a literature review would be extremely time-consuming and require significant staff and research support to accomplish effectively. even if none of the above suggestions for further research are undertaken, companies still have a wealth of information to draw from the two merit studies. this information, on its own, is enough to justify implementing harassment policies that cover the types of conduct discussed in this article. references adams, marilyn. (july, 1992). sex harassment claims up sharply. boston globe, 3. a special mport on people and their jobs in offices, fields and factories. (april 19, 1994). wall street journal, a 1. civil rights act, 41 u.s. code, sec. 2000e (1992). civil rights act amendments, 42 u.s. code 1981,sec. 1981(a) g& (b) (1992). code of federal regulations, vol. 12 sec. 1604.11(a)(1993). ellison v. brady, 924 f.2d 872 (9th cir. 1991). guii errer v. california acrylic industries, 832 f. 2d 194 (1st cir. 1987). harris v. forklift systems, inc., 1993 u.s. lexis 7155 (nov. 9, 1993). international labour office. (1992). combating sexual harassmeni ai work, 16. interview with james neely, deputy general counsel, u.s., equal opportunities commission, interview (july 21, 1994). lester, toni. (1993).the reasonable woman test in sexual harassment law —will it really make a difference? indiana law review, 26 (2). meritor sav. bank v. vinson,477 u.s. 57 (1986). metzger, michael b.,et al (1989). business law and the regulatory environment, 1547. plevan, bettina b. &k borg, jennifer a. (august 8, 1994). rulings by several courts of appeals may lead to expanded employer liability for supervisor's conduct in hostile work environment sexual harassment cases. national law journal, b5, b8-9. robinson v. jacksonville shipyards, 760 (n.d. fla.) 1486 f. supp. (1991). twomey, davidp. (1993) equal opporiuni&ieslaw. cincinnati, w,chicago: southwestern publishing. u.s. merit systems protection board. (1988). sexual harassment (n the federal government: an update. u.s. merit systems protection board. (1981). sexual harassment in the federal workplace, is ii a problem? 28 appendix sample sexual harassment policy on prohibited conduct the following is taken from the court case, robinson v. jacksonville shipyards, referenced in endnote [14]: statement of policy title vii of the civil rights act of 1964 [(and its 1991amendments)] prohibits employment discrimination on the basis of race, color, sex, age, or national origin. sexual harassment is includedin the prohibitions. sexual harassment, according to the federal equal opportunity commission (eeoc), consists of unwelcome sexual advances, requests for sexual favors or other verbal or physical acts of a sex-based nature where (i) submission to such conduct is made either explicitly or implicitly a term or condition of an individual's employment; (2) an employment decision is based on an individual's acceptance or rejection of such conduct; or (3) such conduct interferes with an individual's work performance or creates an intimidating, hostile or offensive working environment. it is also unlawful to retaliate or take reprisals in any way against anyone who has articulated concern about sexual hamssment or discrimination. examples of conduct that would be considered sexual harassment ...are set forth in the statement of prohibited conduct which follows. these examples are provided to illustrate the kind of conduct proscribed by this policy; the list is not exhaustive. statement of prohibited conduct the management of the company considers the following conduct to represent some of the types of acts that violate the company's sexual harassment policy: a. physical assaults of a sexual nature, such as: i) rape, sexual battery, molestation, or anempts to commit these assaults; and 2) intentional physical conduct that is sexual in nature, such as touching, pinching, patting, grabbing, brushing against another employee's body, or poking another employee's body. 29 sample sexual harassment policy on prohibited conduct b. unwanted sexual advances, propositions, or other sexual comments, such as: 1) sexually-oriented gestures, noises, remarks, jokes, or comments about a person' sexuality or sexual experience directed at or made in the presence of any employee who indicates or has indicated in any way that such conduct in his or her presence is unwelcome; 2) preferenual treatment or promise of preferential treaunent to an employee for submitting to sexual conduct, including soliciting or attempting to solicit any employee to engage in sexual activity for compensation or reward; and 3) subjecting, or threats of subjecting, an employee to unwelcome sexual attention or conduct or intentionally making performance of the employees job more difficult because of that employee's sex. c. sexual or discriminatory displays or publications anywherein ...i(he company'si work place by ...lcompanyl employees, such as: l) displaying pictures, posters, calendars, graffiti, objects, promotional materials, reading materials, or other materials that are sexually suggestive, sexually demeaning, or pornographic. a picture will be presumed to be sexually suggestive if it depicts a person of either sex who isnotfullyclothedorinclothesthatarenotsuitedtoorordinarilyacceptedfortheaccomplishment for routine work in and around the ...[companyl and who imposed for the obvious purpose of displaying drawing attention to private portions of his or her body. 30 reproduced with permission of the copyright owner. further reproduction prohibited without permission. family business ownership and management: a gender comparison sonfield, matthew c;lussier, robert n journal of small business strategy; fall 2004/winter 2005; 15, 2; abi/inform complete pg. 59 family business ownership and management: a gender comparison matthew c. sonfield hofstra university matthew.sonfield@hofstra.edu robert n. lussier springfield college rl ussier@sptldco l. edu abstract whilefami(v.firms account.for an estimated 80 percent of all american businesses, and about one-third of these .fami(v businesses are owned by women, there has been minimal study of gender issues in family business ownership and management. in contrast to early (pre-1980) gender comparisons in management and entrepreneurship, this study .found general similarities and few significant differences in a variety of management activities and styles between.family businesses with at least half the owner-managers being women and those with less than half these.findings add to the limited and currently inconclusive body of knowledge regarding gender issues in family business, entrepreneurship, and management in general. introduction although there is a body of literature dealing with gender comparisons of management practices and another in the field of family business, there have been few research studies that have focused on gender issues in family business. this study compares family businesses which have a significant proportion (50% or greater) of women family members involved in the ownership and management of the firm (n = 58) and family businesses which do not (n = 91). this comparison focused upon a variety of management activities and styles which have been previously identified in the research literature as being especially relevant in family business management. such a comparison adds to the currently limited body of literature dealing with gender issues in family business, which in tum can lead to the development of theory and models that can strengthen our understanding of, and assistance to, various categories of family businesses. the research literature upon which this study is based falls into several categories: fami~v business, gender differences in management and entrepreneurship, and women in family business. background this section presents a comprehensive review of the literature from three areas of research: family business, gender differences in management and entrepreneurship, and women in family business. the next section continues the literature review to provide the bases for ten hypotheses tested in this study. 59 reproduced with permission of the copyright owner. further reproduction prohibited without permission. .jo11mal of'small business strateg1· i 'of. 15. no. 2 f all/u'illfer 2004 family business business ownership and management in the united states tends to run in families (dennis, 2002). within the u.s. economy, family businesses comprise an estimated 80 percent of the total 15 million businesses (carsrud, 1994; kets de vries, 1993). they contribute more than 50 percent of the total gross national product (mccann, leon-guerrero & haley, 1997), 50 percent of employment (morris, williams. allen & avila, 1997), and have higher annual sales than non-family businesses (chaganti & schneer, 1994 ). furthermore, it is estimated that 35 percent of fortune 500 finns are family owned (carsrud, 1994), and one-third of s&p 500 companies have founding families involved in management (weber & lavelle, 2003). certainly an understanding of the various issues and aspects of family business should be of interest to scholars in the fields of small business and entrepreneurship. yet most of the family business literature is conceptual or involves non-quantitative research and, furthermore, relatively few articles in this field have been published in broad-based small business and entrepreneurship journals (dyer & sanchez, 1998; litz, 1997). family business as a field of study has grown from modest beginnings to a substantial conceptual and theoretical body of knowledge at the start of the twenty-first century. prior to 1975, a few theorists, such as christensen (1953), donnelley (1964), and levinson (1971), investigated family firms, yet the field was largely neglected (lansberg, perrow, & rogolsky, 1988). these early studies were generally conceptual rather than empirical, with a focus on the more fundamental issues, such as what makes a business a "family business" or a "family firm" (the terms are used interchangeably), the dynamics of succession, intra-family conflict, and consulting to such firms (handler, 1989; sharma, chrisman, & chua, 1997). in 1988, with the launching of the journal family business review, the first and only scholarly publication devoted specifically to family business, the field reached a level of maturity to foster a significant progression and resulting body of research and findings. still, as discussed and dealt with in this article's "methods" section, a variety of definitions continue to serve as the basis for research in this field. gender differences in management and entrepreneurship comparisons of management and entrepreneurial styles by gender have been investigated for at least two decades (carter, williams, & reynolds, 1997; chaganti & parasuraman, 1996; powell & ansic, 1997). this body of research has expanded in response to the growing proportion of women in the managerial, entrepreneurial and small business workforce, their rate of firm creation, and their proportion of small business ownership (moore & buttner, 1997). still, relative to the study of male-owned small businesses and entrepreneurship, this body of existing research is small, with limited investigation and findings of many aspects of women in management (chaganti & parasuraman, 1996; sonfield, lussier, corman, & mckinney, 2001 ). most research conducted prior to 1980 concluded that gender differences clearly exist in managerial and entrepreneurial strategic behavior (powell & ansic, 1997; sonfield, lussier, corman, & mckinney, 2001). more specifically, the majority of studies determined that women are more cautious, less confident, less aggressive, easier to persuade, and have inferior leadership and problem solving abilities when making decisions under risk (johnson & powell, 1994 ). however, more recent research studies provide mixed conclusions but tend to support gender similarities more than differences (carsrud, gaglio, & olm, 1986; chaganti & parasuraman, i 996; powell & ansic, i 997; watson, 2002). some studies conclude that there are no 60 reproduced with permission of the copyright owner. further reproduction prohibited without permission. .!011rna/ of"sma// business strategy l'ol. i 5. no. 2 f allllt'intcr 2004 significant gender differences in management decision-making values or styles (chaganli. 1986; powell, 1990). other research has determined iha! men and women entrepreneurs possess more similarities than differences in decision-related personality traits (birley, 1989; sexton & bowman-upton, 1990). still other studies conclude that males and females are equally successful in making decisions under conditions of risk (hudgens & fatkin, 1985; johnson & powell, 1994 ), are equally effective in roles of leadership (eagly, karau, & makhajani, 1995; hollander, 1992), and are equally capable of processing and reacting to information (hyde 1990; stinerock, stern, & solomon, 1991 ). some of the most current research has moved beyond issues of management behavior and performance and examines women entrepreneurs in light of various theoretical perspectives (bird & brush, 2002). yet the empirical research regarding women in management and entrepreneurship has not yet provided us with totally conclusive findings and many gaps remain (brush, 1997). women in family business it is estimated that women now own more than 33 percent of all north american family firms (astrachan, 2002). yet there have been few research studies specifically focusing on women in family business, and those studies which were conducted were more often conceptual rather than empirical (bowman-upton & heck, 1996; hisrich & fulop, 1997). most of these studies investigated issues of women's roles in family firms, family relationships, the "glass ceiling" and other aspects of gender bias, and succession planning (barbieri, 1997; cole, 1997; harveston, davis, & lyden, 1997; galiano & vinturella, 1995; gundry & welsch, 1994; lannarelli, 1992; nelton, 1998; rowe, & hong, 2000). other studies have focused on similarities and differences in performance, with mixed conclusions (fasci & valdez, 1998; shim & eastlick, 1998; watson, 2002). with regard to differences between men's and women's management activities and styles in family firms, the few conclusions that have been reached tend to be general. for example, women have been found to be more dependent and have a greater concern for others, while men have been characterized as more independent. thus, women have been described as "peacemakers," "mediators," and "nurturers" in their roles as family business owners and managers (cole, 1997). with further research studies such as the one reported here, a clearer understanding of the role of gender in family businesses may be reached. such an understanding would allow consultants and others who assist family firms to differentiate, if and when appropriate, between those clients which do and do not have a significant number of women ownermanagers. and at a broader level, such an understanding might contribute to an eventual "model" of women's entrepreneurship beyond more general models (carter, williams & reynolds, 1997; fisher, reuber, & dyke, 1993; hisrich, brush, good, & desouza, 1997) and also lead to more effective social policy goals and practices in the fostering and support of women-owned businesses in general. because women have been starting businesses at a rate more than double that of men in the past decade (brush, 1992; center for women's business research, 2003; dollinger, 1999), this research is especially important. research objectives and hypotheses as previously discussed, there have been relatively few prior research studies comparing men and women as owner/managers of family businesses. gender-related family business research that has been conducted has generally studied the roles and performance of women in family businesses, but there has been little investigation of management activities and styles. the objective of this research study was to make this comparison, focusing specifically on ten 61 reproduced with permission of the copyright owner. further reproduction prohibited without permission. .jo11rnal o(s111all business strategr i 'of. 15. no. 2 fall!wi11ter 2004 management activities and styles which have been previously identified in the research literature as being especially relevant in family business management (and which the ten hypotheses denote). these various issues have been investigated in prior family business studies, but minimally or not al all with regard lo possible gender differences. based on the limited prior research regarding gender in family businesses, and on the broader literature regarding gender differences in management and entrepreneurship, the following hypotheses were developed. because this total body of literature is relatively limited and the conclusions reached are mixed and inconclusive, the null hypothesis was used throughout. group decision making a number of researchers have studied leadership style in family businesses (dyer, 1988; mcconoughy & phillips, 1999; schein, 1983). with regard to gender, some studies have found no significant gender differences in management values or styles (chaganti, 1986; powell, 1990); while others have found men and women family business owner-managers equally effective in roles ofleadership (eagly, karau & makhajani, 1995; hollander, 1992). other studies have found that women rely more on social and other networks and less on individual systematic practices in their decision making (brush, 1992; cuba, decenzo & anish, 1983; hisrich & brush, 1987; moore & buttner, 1997); and that women have a lower preference for risk (hudgens & fatkin, 1985; johnson & powell, 1994; levin, snyder & chapman, 1988; sexton & bowman-upton, 1990). studies also indicate that women exhibit a "transformational" leadership style, ie. one which is more collaborative, interactive, and utilizes team-work (bass, 1991; moore & buttner, 1997); and that women are more participative and democratic in their leadership style (eagley & johnson, 1990; grant, 1988; helgeson, 1990; loden, 1985; rosener, 1990). still other research has found that women have more highly developed interpersonal skills (benner, tomkiewicz & schein, 1989; frank, 1988; heilman, block, martell & simon, 1989); and that "relational theory" is the best basis for examining women entrepreneurs (buttner, 2001 ). thus, hj: fami~v businesses which have a sign!ficant proportion of women family members involved in the ownership and management of the firm, and family businesses which do not, are equally likely to engage in group decision making. family member conflict much has been written about conflict in family businesses (beckhard & dyer, 1983; davis & harveston, 1999, 2001 ). many of the findings discussed above with regard to hypothesis 1 involving women's "relational" preferences might also indicate that there would be less conflict in women-controlled family firms (bass, 1991; benner, tomkiewicz, & schein, 1989; brush, 1992; cuba, decenzo, & anish, 1983; buttner, 2001; eagley & johnson, 1990; frank, 1988; grant, 1988; heilman, block, martell, & simon, 1989; helgeson, 1990; hisrich & brush, 1987; loden, 1985; moore & buttner, 1997; rosener, 1990). thus, h2: family businesses which have a significant proportion of women family members involved in the ownership and management of the firm, andjamily businesses which do not, are equally likely to have conflict and disagreement betweenjamily member managers. 62 reproduced with permission of the copyright owner. further reproduction prohibited without permission. .journal o/sma// business stratcgr vol. i 5. no. 2 fall/winter 2004 succession plans another major focus of the literature on family business has been succession. the primary issues here involve the difficulties founders have in "letting go" and passing the reins of control and authority; and thus the need for, and importance of, succession planning (davis, 1983; dyer, 1998; handler, 1994; stavrou, 1998; upton & heck, 1997). nothing in the literature specifically investigates gender issues with regard to successton (astrachan, 2002), but perhaps women's preference for collaborative and interactive management might lead to smoother succession planning. thus, hj: family businesses which have a significant proportion of women fami(v members involved in the ownership and management of the firm, and jami(v businesses which do not, are equally like(v to have formulated spec!fic succession plans. use of outside advisors family business' use of outside advisors (consultants and professional services) has also been a focus of the literature (aronoff, 1998; cole, & wolken, 1995; coleman & carsky, 1999; dyer, 1988; filbeck & lee, 2000; mcconaughy & phillips, 1999; miller, mcleod, & oh, 2001; schein, 1983 ). as discussed above, gender-related research has indicated that women prefer to utilize social and other networks rather than individual systematic practices in their decision making (brush, 1992; cuba, decenzo & anish, 1983; hisrich & brush, 1987; moore & buttner, 1997). also, prior research has indicated that women are less confident in their ability to make decisions (estes & hosseini, 1988; masters, 1989; stinerock, stern, & solomon, 1991; zinkhan & karande, 1991 ); and that women tend to build support networks and access resources (moore & buttner, 1997). these finding might support a prediction that women family firm managers are more likely to use outside advisors. thus, h4: fami(v businesses which have a significant proportion of women family members involved in the ownership and management of the firm, and family husinesses which do not, are equally like(v to use outside consultants, advisors, and professional services. long-term planning the importance of long-term, or "strategic," planning for businesses in general, and specifically for family businesses, has been emphasized frequently in the literature (aronoff, 1998; cole & wolken, 1995; coleman & carsky, 1999; dyer, 1988; fil beck & lee, 2000; mcconaughy & phillips, 1999; miller, mcleod, & oh, 200 i; schein, 1983 ). with regard to gender, women have been found to be equally successful in making decisions under conditions of risk (hudgens & fatkin, 1985; johnson & powell, 1994 ); and equally capable of processing and reacting to information (hyde, 1990; stinerock, stern & solomon, 1991 ). however, other studies have indicated that a "small and stable" business model seems to be more important to women, that they are less interested in business growth, and that they are 63 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal o(smal/ business strategy vol. 15. no. j fall/winter j004 happy with being small (lee-gosselin & grise, 1990). if this is true, then long-range planning might be less important to women owner-managers of family firms. thus, h5: fami(v husinesses which have a significant proportion of" women fami(v members involved in the ownership and management of" thefirm, andfamizv husinesses which do not. are eq11alz1· like(v to engage in long-term or strategic management activities. financial management tools another component of ''professional" management practices espoused in the literature is the use of sophisticated financial management tools (aronoff, 1998; cole & wolken, 1995; coleman & carsky, 1999; dyer, 1988; filbeck & lee, 2000; mcconaughy & phillips, 1999; miller, mcleod, & oh, 2001; schein, 1983). some studies have indicated that women place greater emphasis on non-financial and personal goals (hisrich & brush, 1987; kaplan, 1988). if this is the case, then women family member owner-managers might be less likely to use sophisticated financial management tools. yet other studies reject this finding (fischer, reuber & dyke, 1993). thus, h6: family businesses which have a significant proportion of women family members involved in the ownership and management of the firm, and family businesses which do not, are equally likely to use sophisticated methods of .financial management. founder's influence another issue of interest in the investigation of family business is "generational shadow" (davis & harveston, 1999). in a multi-generation family business a generational shadow, shed by the founder, may be cast over the organization and the critical processes within it. in such a situation, "succession" is considered incomplete, may constrain successors, and may have dysfunctional effects on the performance of the firm. yet this "shadow" may also have positive impact, by providing a clear set of direction and standards for subsequent firm managers. kelly, athanassiou, and crittenden (2000) similarly proposed that a family firm founder's "legacy centrality" will influence the strategic behavior of succeeding generations' family member managers, with both positive and negative impact. davis and harveston ( 1999) also investigated generational shadow, but reached mixed conclusions regarding its impacts. no discussion was found in the literature on this topic relating to gender. thus, h7: fami(v businesses which have a significant proportion of' women family members involved in the ownership and management of' the firm, and family businesses which do not, are equal(v likely to be influenced by the original business objectives and methods of' the founder. going public family businesses need not always be privately owned. as these firms grow and/or as they move into subsequent generational involvement, opportunities and needs for "going public" may arise. the family may not be able, or may not choose, to provide sufficient management or financial resources for growth, and outsider ownership can resolve this situation. and even 64 reproduced with permission of the copyright owner. further reproduction prohibited without permission. .!011mal ofsma11 business strateg1· vol. 15, no. 2 fa11/wintcr 2004 publicly owned companies can continue as "family businesses," if management or financial control is maintained by the family. mcconaughy (1994) found that 20 percent of the business week 1000 firms are family-controlled. here too, no gender-based discussion in the literature regarding "going public" was found. thus, h8: family businesses which have a significant proportion of women famizr members involved in the ownership and management of the firm. andfamizv businesses which do not, are equa11y likely to have considered "going public. " formal versus informal management style in conjunction with the literature's specific investigations of the use of outside advisors and financial management tools, there is a broader discussion of "formal" versus "informal" management styles, with one end of a continuum including formal, objective, and "professional" styles of leadership, and the other end involving informal, subjective, and paternalistic styles (aronoff, 1998; cole & wolken, 1995; coleman & carsky, 1999; dyer, 1988; filbeck & lee, 2000; mcconaughy & phillips, 1999; miller, mcleod, & oh, 2001; schein, 1983 ). with regard to gender, some studies have found no significant differences in management values or styles (chaganti, 1986; powell, 1990), while other research has indicated that women rely more on social and other networks and less on individual systematic practices in their decision making (brush, 1992; cuba et al., 1983; hisrich & brush, 1987; moore & buttner, 1997). thus, h9: family businesses which have a significant proportion of women family members involved in the ownership and management of the firm, and family businesses which do not, are equally likezv to use more formal rather than informal styles of leadership and management. debt versus equity financing the capital structure decision is important for family business and is a frequent focus of the literature (cole & wolken, 1995; coleman & carskym 1999; romano, tanewski & smymiosm 2001 ). some studies have shown that women business owners have less access to debt than do men (hisrich, brush, good & desouzam 1997). yet other research have indicated that while women more frequently borrow from family and friends, in recent years they have gained similar access to institutional loans (haynes & haynes, 1999). one canadian study found that, on the aggregate, women receive credit on less favorable terms than men, but, when all factors are held constant (firm size, age, etc.), the differences were significant only with regard to collateral requirements (riding & swift, 1990). if debt financing is more difficult to obtain for women, then perhaps they would engage in more equity financing than men. thus, hjo: famizv businesses which have a significant proportion of women family members involved in the ownership and management of the firm, and family businesses which do not, are equa11y likely to use equity financing rather than debt.financing. 65 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal o(small business strategy vol. 15, no. 2 fall/wi11ter 2004 methods the research design was self-reported survey research. which is the most commonly used methodology of family business research (bird. welsch. astrachan, & pistrui 2002) and for all small business and entrepreneurship quantitative research (dennis. 2003 ). family business definition and sample a variety of definitions continue to serve as the basis for research in the field of "family business" (birley, 1997; chua, chrisman, & sharma, 1999; litz, 1995; westhead & cowling, 1998). some definitions focus on the degree of family ownership, others focus on the degree of family involvement in the management operations of the firm, and still others emphasize owners' perceptions, ie. a "family firm" is one in which owner/managers perceive their company to be a "family business." most researchers today use a combination of these factors, and "family business" and "family firm" are used interchangeably in the literature. this study combined ownership, involvement in operations, and perception for its definition of "family business," with the latter criterion being the final determinant. survey instruments were mailed or hand-delivered to a variety of new york and massachusetts companies that had been identified as being family-owned-and-operated "family businesses." the majority of the companies were randomly selected from a listing of "family businesses" in a metropolitan new york weekly business newspaper, and the resulting mailing list was supplemented by names of family businesses provided by students at two universities in new york and massachusetts. identifying family firms from various listings is consistent with that of other family business researchers, who have been constrained by the lack of national databases of family firms (chua, et al; teal, upton, & seaman 2003). the survey instrument had been previously and successfully used in an earlier family business study (sonfield & lussier, in press). companies that were family businesses and those that were not were separated by the criterion of perception in the first survey question: do you consider your company to be a /amity business'? (yes or no) a total of 822 surveys were mailed or delivered; of these 272 were no longer at the address or responded that they were not family firms. usable returned surveys numbered 149, providing a return rate of 27.1 percent. this is an acceptable sample size and response rate for family business, as it has been reported that 62 percent of prior family business studies included no sample at all, or a sample with less than i 00 family businesses, and 66 percent of these were convenience samples (bird, et al, 2002). in the top three small business or entrepreneurshiporiented journals (entrepreneurship theory and practice, journal of business venturing, and journal a/small business management) around one-third of the articles had a response rate of less than 25 percent (dennis 2003). variables measured and analysis the independent variable was the percentage of women family members. the respondents were separated into those firms in which 50 percent or more of the family members involved in the ownership and management of the firm were women (n = 58) and those firms in which less than 50 percent were women (n = 9 i). as there are no prior research methodologies comparing percentage of women, it was believed that 50 percent (as a mid-point between totally men and totally women) was a logical methodological dividing point for this research study. within the sample, there was not a simple majority and minority of women in each group. the > 50 percent group had 77 percent women and the < 50 percent group had 16 percent women. a chi-square test found a significant difference in the percentage of men to 66 reproduced with permission of the copyright owner. further reproduction prohibited without permission. jounwl of'small business strategr vol. 15. no. 2 fa/i/ winter 2004 women family members in both groups (.000), thus supporting the hypotheses statements that there was a significant difference in the proportion of women in each group. the interval measured dependent variables to test for differences between percentage of women family members were as follows: (i) group decision making. (2) family member conflict. (3) succession plans, ( 4) use of outside advisors, (5) long-term planning, (6) financial management tools , (7) founder's influence, (8) going public, and (9) fonnal versus informal style were all measured through a liker! scale of "describes our firm" 7 to i "does not describe our firm." h 1-9 were all tested for differences using the i-test. in hypothesis io), debt versus equity is a nominal variable and was tested using a chi-square test. demographic data were also run for descriptive statistics and to test for differences by percentage of women in the business. results demographic descriptive statistics see table l for the descriptive statistics of the sample demographic data. of the sample of 149, the mean number of years the sample family businesses were in business was 42, and the mean number of employees was 205. (for firms with 50 percent or more women owner/managers, the means were 30 years and 62 employees; for firms with less than 50 percent the means were 46 years and 297 employees.) with regard to generation, 29 percent were first-generation family businesses, 38 percent were second-generation and 33 percent were third-generation. the dominant form of ownership (79%) was corporation. more companies in the sample (75%) provided a service rather than produced a product. more firms (62%) had a company founder still active than did not. table 1 descriptive statistics for demographic data (n=l49) (n = 91 <50% & n = 58 =>50%) variable (ratio level) ~an std.dev. median years in business 42 33 35 number of employees 205 682 26 variable (nominal level) proportion o/o generation l si 43 29% 2"d 57 38% 3rd 49 33% form of ownership corporation 117 79% partnership 15 10% sole proprietorship 17 11 % industry sales product 38 25 % service l i 1 75 % founder still active in firm yes 93 62% no 56 37% 67 reproduced with permission of the copyright owner. further reproduction prohibited without permission. .journal of's111all business strategr vol. 15, no. 2 fall/wimer 2004 hypotheses testing there were no significant gender differences in the means for any of the !-tests for hypotheses 1-9. see table 2 for a comparison of means with p-values. recall that h 1-9 are all measured on a liker! scale of "describes our firm" 7 to i "does not describe our finn," and h i 0 is either debt or equity. there was a significant chi-square gender difference in the use of debt or equity. of the total sample, 101 companies or 68 percent use debt financing, and 48 or 32 percent use equity financing. of the businesses with < 50 percent women, 68 or 75 percent use debt financing, and 23 or 25 percent use equity financing. of the businesses with => 50 percent women, 33 or 57 percent use debt, and 25 or 43 percent use equity financing. thus, the businesses with< 50 percent women make significantly greater (p = .023) use of debt financing. table 2 hypotheses tests (n = l49) (n = 91 <50% & n = 58 =>50%) means p-value <50% hypothesis =>50% 1. group decision-making 3.92 .848 4.00 2. family member conflict 2.36 .465 2.59 3. succession plans 3.15 .273 2.72 4. use of outside advi sors 4.3 1 .598 4.10 5. long-term planning 3.23 .981 3.22 6. financial management tools 3.44 .521 3.2 1 7. fo under' s influence 5.07 .706 4.95 8. going public 1.36 .997 1.36 9. forma l vs. informal sty le 3.59 .753 3.50 10. use of debt or eq ui ty 74%/26%* .023 57%/43 % *due to chi square test, rather than t-test as used in hl-9, means are not aooropriate, thus percentages are given. discussion with one exception (the use of debt versus equity financing) no differences were found between family businesses which have a significant proportion of women family members involved in the management of the firm and family businesses which do not. with regard to 68 reproduced with permission of the copyright owner. further reproduction prohibited without permission. .journal of'small business stratcgr vol. 15. no. 2 fafllrvinter 2004 management activities and styles, both groups of family finns were not different with regard to: 1) group decision making 2) family member conflict 3) succession plans 4) use of outside advisors 5) long-term planning 6) financial management tools 7) founder's influence 8) going public 9) formal versus infonnal management style the only significant difference found was that, while both groups used debt financing more than equity financing, family businesses which have a significant proportion of women family members involved in the management of the firm were more likely to use equity financing than were those firms which did not have that proportion of women. as discussed earlier, most research studies in the past two decades found more similarities than differences with regard to management styles and behavior between women and men business managers, entrepreneurs, and family firm owner-managers (birley, 1989; carsrud, gaglio & olm, 1986; eagly, karau & makhajani, 1995; hollander, 1992; hudgens & fatkin, 1985; hyde, 1990; johnson & powell, 1994; sexton & bowman-upton, 1990; stinerock, stern & solomon, 1991; watson, 2002). although these prior studies found some specific gender differences, creating discrepancies in the literature, these disparities were generally with regard to one or a few aspects of management style or behavior, within the larger context of gender similarities. this study's findings thus support most of these more recent studies, but even more strongly support those studies which found virtually no significant gender differences at all (chaganti, 1986; powell, 1990). conversely, this study's findings contrast with the majority ofpre-1980 studies which found major gender differences in entrepreneurial behavior, as discussed by johnson and powell ( 1994), powell and ansic (1997), and sonfield, lussier, corman, and mckinney (2001). with regard to the single gender difference found in this study, there are several possible explanations as to why the family businesses with significant women involvement were more likely to use equity financing rather than debt financing. the current body of research provides mixed conclusions as to whether debt is equally or less accessible to women business owners (haynes & haynes, 1999; riding & swift, 1990). if women have less access to debt financing (hisrich, brush, good & desouza, 1997), then the alternative would be equity financing, often from their own financial resources and from family and friends. but it should also be noted that the firms in this study with significant women involvement tended to be younger and smaller, and such firms in general may find lending institutions less willing to provide debt financing. thus this debt/equity difference may be based more on company age and size than on owner/manager gender. the differing demographic characteristics of the two groups also seem logical in light of the broader trends regarding women in business. since the entry of women into all aspects of the business world has been more recent than for men (moore & buttner, 1997), it would follow that family firms with a significant proportion of women family members involved would be younger, smaller, have fewer employees, and have fewer family generations involved. 69 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal o{small business strategr vol. 15. no. 2 fall/winter 2004 limitations a potential limitation of this study, which cannot be controlled for, is spousal influence on both men and women family business owners. more than 85 percent of family business owners are married, and of the married owners 64 percent are likely to talk to or discuss matters with their spouses before addressing a serious problem or make a critical business decision (dennis, 2002). thus, spouses who are not involved in the management or operations of the family business do influence the decision maker. however, the spousal influence 1s unknown and is an area for further research in family business. another limitation of this study is the lack of a strong and conclusive body of research as the foundation for the hypotheses, but at the same time the results of this study add to this limited body of empirical research in the area of gender and family business, and to the broader body of research regarding gender differences in management. yet the results of both the narrow and the broader bodies of research, while tilting toward the support of gender similarities, continue to lack a strong and conclusive consensus and thus indicate a need for still further research efforts, especially in the context of family business. such further research efforts have been advocated by other researchers (nelton, 1998). conclusions and implications of the study the objective of this study was to compare men and women as owner/managers of family businesses. the findings of this study support a general similarity, with minimal differences, between management styles and behavior in family businesses that do and do not have a significant proportion of women family members involved in the management of the firm. if such a general similarity is eventually deemed valid (by this study, in combination with past and future studies), then it is important with regard to future gender-related research, for social policy and efforts to assist family businesses, and for eventual model-building. if it is eventually supported that there are minimal gender differences in management, entrepreneurship, and family business, then future gender-related research can focus on similarities, differences, and other issues within the population of women-owned businesses, rather than between menand women-owned businesses. similarly, social policy and small business assistance programs can focus on other more important issues and other ways to categorize firms and their managers, rather than target women owner/managers for various forms of management assistance. and if separate models of women's family business, entrepreneurship, and management in general are found to be appropriate and are to be of value, then consensus must be stronger to validate whether any specific gender differences exist and how such differences fit into an apparently larger context of similarities (starr & yudkin, 1996). references aronoff, c. e. 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( 1998). a four factor model: a guide to planning next generation involvement in the family firm. family business review, 11(2), 135-142. stinerock, r., stem, b. & solomon, g. (1991). sex and money: gender differences in the use of surrogate consumers for financial decision making. journal of' professional services marketing, 7(2), 167-182. teal, e., n. upton, and s. seaman (2003). a comparative analysis of strategic marketing practices of high-growth u.s. family and non-family firms," journal of developmental entrepreneurship, 8(2), 177-195. upton, n., & heck, r. ( 1997). the family business dimension of entrepreneurship, in entrepreneurship 2000, d. sexton and r. smilor, ed. chicago: upstart publishing, 243-266. 74 reproduced with permission of the copyright owner. further reproduction prohibited without permission. .jo11mal o(small business strategr l'ol. 15. no. 2 fall/winter 2004 watson, j. (2002). comparing the performance of maleand female-controlled businesses: relating outputs lo inputs. entrepreneurship the01y and practice. 26(3), 91-100. webber, j., & lavelle. l. (2003). family, inc., business week. (november 10). westhead, p., & cowling, m. ( 1998). family finn research: the need for a methodological rethink. entrepreneurship theory and practice, 23( 1 ), 31-56. matthew c. sonfield is the robert f. dall distinguished professor in business at the zarb school of business at hofstra university. he earned an a.b, m.b.a. and ph.d. from cornell, harvard and new york universities. his recent research and publications have focused on entrepreneurship, small business, family business and minority business. robert n. lussier is professor of management at springfield college. he is the author of more than 250 publications including management, leadership, human relations, entrepreneurship, and small business management textbooks. 75 microsoft word front cover v20n1.docx   volume 20, number 1 spring/summer 2009  103          founder influence in family businesses:  analyzing combined data from six diverse countries    robert n. lussier  springfield college  rlussier@spfldcol.edu    matthew c. sonfield  hofstra university  matthew.sonfield@hofstra.edu    with data collection from:  mohsen bagnied, american university of kuwait  mamdouh farid, hofstra university, usa  loïc maherault, ecole de management, france  s. manikutty, indian institute of management, india  sanja pfeifer, univ. of josip juraj strossmayer osijek, croatia  louis verdier, ecole de management, france    abstract    this study analyzed a combined sample of 593 family businesses in the united states,  croatia, egypt, france, india and kuwait to determine how the influence of the  founder(s) relates to certain important family business managerial characteristics.   statistical analyses indicated that founder influence has significant correlations with  the percentage of non‐family managers, the use of a “team‐management” style of  management, the formulation of specific succession plans, time spent in strategic  management activities, consideration of going public, and the use of equity rather than  debt financing.  these findings provide partial support to the few earlier writings and  studies involving founder influence in family firms. the implications of these findings  for family business owner/managers and for consultants to family businesses are  provided, and suggestions for future research are presented.    keywords: founder influence, business founder, family business, family firm    introduction    in almost all countries, families are  central to the ownership and  management of the majority of  businesses (dennis, 2003).  within the  u.s. economy, family businesses  comprise an estimated 80% to 90% of  the total 15 million businesses (carsrud,  1994; kets de vries, 1993; poza, 2007.).  s trateg y  journal of small business  journal of small business strategy        104  they contribute more than 50% of the  total gross national product (mccann,  leon‐guerrero, & haley, 1997), 50% of  employment (morris, williams, allen, &  avila, 1997), and have higher total  annual sales than non‐family businesses  (chaganti & schneer, 1994).  furthermore, it is estimated that about  one‐third of all fortune 500 firms are  family controlled (carsrud, 1994; poza,  2007), one‐third of s&p 500 companies  have founding families involved in  management (weber & lavelle, 2003),  and about 60 percent of all publicly  traded companies remain under family  influence (poza, 2007).    the objective of this study was to  investigate family businesses with regard  to the degree to which the influence of  the founder impacts current and  subsequent management. how does the  influence of the founder (or of multiple  founders) relate to the managerial  characteristics of that firm?  there is  limited prior research to answer this  question, and researchers have found  mixed results (packalen, 2007). this  study expands this area of investigation,  and aids in our understanding of which  important family business managerial  characteristics are and are not  influenced by the founder in family  businesses, both during the founder’s  active role in the firm and in subsequent  years.    furthermore, there has been growing  interest in studying family businesses in  a multinational context (carney, 2007;  graves & thomas, 2008; oviatt &  mcdougall, 2005). in answering the  question, “where should entrepreneurial  research go in the future,” bruton,  ahlstrom, and obloj stated the need for  greater use of multicountry samples and  to research multiple nations (2008, p. 7).  this study contributes to the literature  as it meets these two criteria. this  development of multinational family  business research will help to move this  field toward maturity.     thus, this current study is important in  that it brings new empirical research to  this limited area of research, the issue of  founder influence in family business  management, and that it does so in a  multinational context. furthermore, the  results of this research are not only of  value to small business and  entrepreneurship educators and  researchers, but are also of value to  consultants to family businesses and to  family business owner/managers  themselves, both of whom may gain  insight into the impact of founder  influence in family businesses.    founder influence in family  firms    the impact of founder influence has  been found to be a central component  and major factor in influencing the  behavior of family businesses (davis &  harveston, 1999; kelly, athanassiou &  crittenden, 2000).  the founder’s  influence can strongly impact the family  firm both when he or she is active as an  owner/manager and also after he or she  retires or dies, leaving the management  of the company to other same‐ generation and/or subsequent‐ generation family‐member managers  and/or to non‐family‐member managers.      early research regarding founder  influence reached conclusions that were  mixed, with some researchers arguing  that founders have an imprinting effect  on their firms, setting them on  volume 20, number 1 spring/summer 2009        105    trajectories from which it is difficult to  depart (boeker, 1988), while others  suggest that founders have no enduring  influence on their firms because  organizations are malleable, sensing and  reacting to changes in the environment  (teece, pisano, & shuen, 1997). there  are only a few more current studies, as  discussed below.  these more recent  studies provide the beginning of a  theoretical foundation for the issue of  founder influence.    the founder’s influence on the current  and subsequent management of family  firms has been given different names by  different researchers. davis and  harveston (1999) specifically studied the  founder’s influence on subsequent  managers and they call this influence  “generational shadow.”  in a multi‐ generation family firm a generational  shadow, shed by the founder, may be  cast over the organization and the  critical processes within it.  in such a  situation, “succession” is considered  incomplete, may constrain successors,  and may have dysfunctional effects on  the performance of the firm. yet this  “shadow” may also have positive impact,  by providing a clear set of values,  direction and standards for subsequent  firm managers.  specifically, analyzing  data from a 1994 telephone survey of  family‐owned businesses, davis and  harveston concluded that the strength  of the generational shadow of the  founder correlated positively and  significantly with organizational conflict  in third‐generation family firms.   although a similarly statistically  significant correlation was not found for  second‐generation firms, the authors did  find increases in second‐generation  family firm conflict when the founder  was still involved in the firm’s  management.      kelly, athanassiou and crittenden  (2000), focusing primarily on the  founder’s influence on current managers,  similarly proposed that a family firm  founder’s “legacy centrality” will  influence the strategic behavior of   family‐member managers, with both  positive and negative impact. looking at  three dimensions of “legacy centrality” –  “betweenness centrality” (which involves  the power of the founder), “closeness  centrality” (which is a measure of the  distance between founder and other firm  managers), and “connectivity centrality”  (which measures the connections  between the founder and various  managers) – these researchers  postulated that the founder’s centrality  will impact the strategic management of  a family business, in particular with  regard to strategic vision, strategic goals,  culture, strategy behavior and  inward/outward orientation.  furthermore, family firms with high  legacy centrality may be especially  vulnerable to significant changes in the  economic or competitive environment.  kelly, et al. did not conduct an empirical  study but did conclude that family firm  founder influence has been  underrepresented in the management  literature. they conclude that measures  of founder influence can be very useful  in understanding family businesses and  recommend further empirical research  in this area.    more recent investigations of founder  influence consider this issue in the light  of stewardship theory and  transformational leadership behaviors  (eddleston, 2008; zara et al., 2008).  journal of small business strategy        106  thus, founder influence in family firms,  both on current and subsequent  management, and denoted as  “generational shadow,” “legacy  centrality,” or by another label, is a valid  and important component of the family  business system and deserves further  study.    hypotheses    as discussed earlier, the objective of this  study was to investigate family  businesses with regard to the degree of  founder influence. how does this  influence impact the managerial  characteristics of a family firm?  prior  empirical analyses of founder influence  have not resulted in an accepted   theoretical foundation but have been  largely limited to only a few narrow  focuses, such as the previously‐cited  davis and harveston (1999) focus on  organizational conflict among  subsequent managers, or  kelly,  athanassiou and crittenden’s  (2000)  focus on current managers working with  or under the founder.  thus, to build a  base for a variety of future research  studies, a broad analysis would be of  value at this time. therefore we have  chosen to test a variety of managerial  characteristic variables and hypotheses,  which derive not from specific prior  findings or developed theories regarding  founder influence, but rather from a  broad survey of the family business  literature, wherever a potentially  meaningful family business factor was  identified.  future researchers will  hopefully choose from among these  variables and our research findings for  their more in‐depth and focused  investigations.    specifically, the variables and  hypotheses used for this study are  chosen from variables tested in previous  studies by lussier and sonfield (2004)  and sonfield and lussier (2004), who  investigated a wide variety of family firm  management characteristics, which in  turn derived from findings and  propositions developed by earlier  researchers of family business who  identified especially important factors in  the system of family business. some of  these factors may prove to be related to  founder influence, and other factors may  not.  the results of this study can thus  provide direction for future research  activity into founder influence.      because of the broad family business  literature bases for these hypotheses,  only brief introductions to each  hypothesis are presented here.  a full  discussion of each variable is beyond the  scope of this article.  furthermore, due to  the limited specific prior research and  findings with regard to these various  issues, the null hypothesis is used  throughout.     a central focus of the literature in family  business has been the use of non‐family  members in such firms – the advantages,  disadvantages, challenges, opportunities,  and other issues involved.  thus this is  an important family business factor to  test:    h1:  the strength of the influence of the  founder of a family firm will not have a  significant relationship to the percentage  of non‐family members within top  management.    as in all areas of business research,  recent studies of family businesses have  investigated gender issues in greater  volume 20, number 1 spring/summer 2009        107    depth.  thus the factor of women family‐ member managers is a worthy variable  for investigation:    h2: the strength of the influence of the  founder of a family firm will not have a  significant relationship to the percentage  of women family members involved in the  operations of the firm.    because of the complex family dynamics  involved in family businesses, one  characteristic of family business  management often investigated has been  the nature of managerial decision‐ making – individual versus team‐ oriented.  thus this factor is included in  this study:    h3: the strength of the influence of the  founder of a family firm will not have a  significant relationship to the use of a  “team‐management” style of  management.    also due to the nature of family  dynamics in family businesses, another  frequently‐studied aspect of family firm  management has been the issue of  conflict and disagreement among  family‐member managers.  thus this  variable is investigated:    h4: the strength of the influence of the  founder of a family firm will not have a  significant relationship to the occurrence  of conflict and disagreement among  family members.    perhaps the most frequently studied  issue in family business is that of  succession, from the founder to next‐ generation family members as well as to  subsequent‐generation family‐member  and non‐family‐member managers.   thus this issue is worthy of study:    h5: the strength of the influence of the  founder of a family firm will not have a  significant relationship to the  formulation of specific succession plans.       because family firm management is  often limited primarily to family  members who may not have a broad or  deep range of expertise, family firms  often have a need for outside expertise.   thus:    h6: the strength of the influence of the  founder of a family firm will not have a  significant relationship to the use of  outside consultants, advisors and  professional services.    similarly, if the management of family  firms is largely limited to family  members, then there may be weaknesses  in certain management skills, such as  strategic management or financial  management.  thus:     h7: the strength of the influence of the  founder of a family firm will not have a  significant relationship to time spent  engaged in strategic management  activities.    h8: the strength of the influence of the  founder of a family firm will not have a  significant relationship to the use of  sophisticated methods of financial  management.    by definition, family firms may be  concerned about maintaining family  control and may be wary of spreading  firm ownership, and thus control,  beyond the family.  therefore equity  journal of small business strategy        108  ownership is a focus of family business  research.  thus:    h9: the strength of the influence of the  founder of a family firm will not have a  significant relationship to management’s  consideration of “going public.”    h10: the strength of the influence of the  founder of a family firm will not have a  significant relationship to the use of  equity financing versus debt financing.              methods    date collection and country  characteristics    data was gathered in the united states,  croatia, egypt, france, india and  kuwait. these six countries have  different sized populations, different  cultures, different economic  characteristics and histories, and  different gem rates of total  entrepreneurial activity (tea), thus  providing a broad‐based and diverse  total combined sample of family firms.  the following table 1 provides basic  information (cia, 2008) for each of the  six countries.    table 1 – country characteristics        sample    please note that the objective of this  study was not to compare family firms in  the six countries, but rather to combine  the data to provide a comprehensive and  large sample of family firms that might  in turn lead to more general and  universal findings than a single‐country  sample can generate. thus, the six  countries’ data were combined into one  sample, as bruton, et al., (2008)  suggested. the combined sample was  also used because of the possibility of  obtaining weak and invalid results  whenever a large sample is broken down  into smaller sub‐samples (lussier, 1997).  the sample (n) from each of the six  countries was combined and the  weighted average response rate was  calculated to be 36.80 percent. see table  2 for details.               volume 20, number 1 spring/summer 2009        109      table 2 – response rate    the survey questions were translated  into the language of the country. the  university professor/researcher  collecting the data in each country made  the translation, followed by feedback  and revisions by language faculty  experts. the survey instrument was then  pilot tested with business owners to  ensure understanding of the questions.  because of varying difficulties in  identifying and contacting family  businesses in the various countries, the  survey methodologies were somewhat  different in each country, as discussed  below.      in the united states, survey instruments  were randomly mailed or hand‐delivered  to a variety of new york and  massachusetts companies, which had  been identified as family firms (primarily  in listings of “family businesses” in local  business newspapers). there were 822  surveys mailed or delivered; of these 272  were no longer at the address or  responded that they were not family  firms. a total of 147 usable returned  surveys provided a return rate of 27.1  percent. to increase the sample size and  to test for non‐response bias in the u.s.,  after a few months a follow‐up request  for surveys was made, and 12 more  questionnaires were returned and used  for a total of 159, providing a final return  rate of 28.6 percent.     in egypt, the survey was sent through  the family business network of the  egyptian international trade point  (eitp) and the egyptian ministry of  trade and industry. six hundred (600)  family business received copies of the  survey; 172 businesses responded to the  survey, but 25 were found to be non‐ family businesses or otherwise not  appropriate for sampling. this resulted  in 147 usable survey responses, providing  a response rate of 25.6 percent.     in france and india, large survey  mailings lists that identified family  businesses were obtained. in france a  random sample of 800 was selected to  receive the survey in the mail. the  survey instruments were mailed to the  entire listing in india (312). the net  journal of small business strategy        110  response rate for france was 14.6 percent  (n=116) and it was 13.6 percent (n=40) in  india.     family business listings could not be  found in the much smaller countries of  croatia and kuwait. in both countries,  randomly selected businesses were  contacted and asked if they were family  businesses. in croatia far fewer (70)  family firms were identifiable, but an  intensive contact effort by mail,  telephone, and personal visit resulted in  a response rate of 71.4 percent (n=50). a  similar data collection methodology in  kuwait produced a 100 percent response  rate (n=81).    analyses of some of these countries’ data  were previously published by sonfield  and lussier (2004, 2005a, 2005b).    identifying family firms from various  listings is consistent with that of other  family business research studies, which  have been constrained by the lack of  national databases of family firms (chua,  chrisman, & sharma, 1999; teal, upton,  & seaman, 2003), and most empirical  studies of family businesses have used a  convenience sample (chua, chrisman &  sharma, 2003).  this current study  provides an acceptable sample size and  response rate for family business  research, as it has been reported that 62  percent of prior family business studies  included no sample at all, or a sample  with less than 100 family businesses, and  66 percent of these were convenience  samples (bird, welsch, astrachan, &  pistrui, 2002). in three top‐level small  business or entrepreneurship‐oriented  journals (entrepreneurship theory and  practice, journal of business venturing,  and journal of small business  management) around one‐third of the  articles had a response rate of less than  25 percent (dennis, 2003), which is less  than this study’s 36.7% weighted average  response rate.     the survey instrument    the sonfield and lussier (2004) survey  instrument was obtained. this  questionnaire uses single measures of  each variable. therefore, statistical  testing for reliability and validity is not  appropriate, such as with multiple  measures of the same variable using  factor analysis to ensure that each item  is measuring the intended variable. this  is a limitation, which is addressed later  in the “discussion” section. however,  the questions were measured with wide  scale points (actual number such as  percentage of non‐family managers and  women, and 7‐point likert scales) to  increase reliability when using single  measure versus multiple measures. also,  the four commonly used methods for  enhancing reliability and validity were  used (cooper & schindler, 2008):     • the variables in sonfield and lussier  (2004) were selected from the family  business literature. see their article for  more details. this study also expands  and includes more current family  business research, especially regarding  the influence of the founder. thus,  this study is founded in the family  business literature.     • second, some of the questions were  based on prior research studies. for  this research, a survey instrument  from a prior study was used. the  sonfield and lussier questionnaire was  originally published in a top tier  journal in the field of family business  (family business review, 2004).   volume 20, number 1 spring/summer 2009        111      • also, sonfield and lussier (2004)  developed clear measurable  operational definitions in their study.  for this study, the hypotheses are  clear and measureable and they are  founded in the literature.     • finally, sonfield and lussier (2004)  used a panel of experts when  developing the survey instrument.  and since the questionnaire was  published in family business review  (2004), this indicates that another  outside unbiased panel of experts (that  journal’s reviewers) validated the  survey instrument.    measures and statistical testing    correlations are the appropriate  statistical test to determine the  relationship between one independent  variable and multiple dependent  variables (lussier & sonfield, 2004), as  regression analysis is not appropriate  using multiple dependent variables with  only one independent variable. the  independent variable for all 10  hypotheses tests is the influence of the  original founder, which is correlated  with the 10 dependent variables stated in  each hypothesis and in table 4. the  influence of the original founder and  dependent variables in h1‐9 are interval  and ratio levels of measure. therefore,  pearson correlations were run to test h1‐ 9. h10 with a nominal measure (use of  debt or equity) was correlated using the  non‐parametric kendall’s tau, and the  stronger t‐test was also run to test for  differences.     results    descriptive statistics     the sample has mature businesses with  a mean number of years in business of  38, but there is a large s.d. of 30 years.  the mean number of employees is 601,  with extremely large business outliers  resulting in a standard deviation (s.d.) of  3,543. the distribution of businesses by  size is more meaningful, and the firms  are fairly evenly distributed, when  respondent firms are categorized into  the four european union (eu)  categories (european union, 2004), as  denoted in table 3, which provides  descriptive statistics. note that table 4  also includes descriptive statistics  (means and standard deviations) for  each of the 10 dependent variables  correlated with founder influence.                           journal of small business strategy        112  table 3 ‐ descriptive statistics      hypotheses testing    all 10 correlations were testing the null  hypotheses that there are no  relationships between the founder  influence and the 10 dependent  variables. see table 4 for the results of  the 10 hypotheses tests. to conserve  space in table 4, all hypotheses are  denoted by summary phrases. in the  actual survey instrument, the questions  or statements used to collect the data  were more substantial.                              volume 20, number 1 spring/summer 2009        113          journal of small business strategy        114    four correlations were not significant (p  > .05). therefore h2, h4, h6, and h8 are  accepted.  thus, the degree of founder  influence does not correlate with:    h2: the percentage of women family  members involved in the operations of the  business    h4: the level of conflict and  disagreement among family members    h6: the use of outside consultants,  advisors and professional services    h8: the use of sophisticated methods of  financial management    on the other hand, six hypotheses had  significant correlations (p < .05) and are  rejected because there is a relationship  between the level of founder influence  and the dependent variables. one of the  correlations had a negative correlation:    h1: as founder influence increases, the  percentage of non‐family managers  decreases.     five of the hypotheses had significant  positive correlations:   as the degree of founder influence  increases, there is an increase in:    h3: the use of a “team‐management”  style of management    h5:  the formulation of specific  succession plans    h7:  time spent engaged in strategic  management activities    h9:  management’s consideration of  going public    h10:  the use of equity rather than debt  financing     discussion and implications    this exploratory study, based on a  combined sample of 593 family  businesses in six diverse countries,  indicates that the strength of the  influence of a family business’ founder  or founders has certain significant  impacts upon a variety of management  characteristics of both current and  subsequent management of such firms.  thus, this multinational study provides  partial support to prior studies involving  family firm founder influence. although  davis and harveston (1999) found a  positive relationship between founder  influence and subsequent organizational  conflict, no such relationship was found  in this study. on the other hand,  eddleston (2008) and kelly et al. (2000)  postulated a wide variety of ways in  which family business founder influence  impacts succeeding generations’ family  managers, and this study found some  such effects.    a limitation of this study is the use of  single measure variables. therefore,  future family business researchers can  increase the rigor of this research. the  survey instrument can be further  developed by adding multiple questions  for each variable to additionally validate  the variable measures, which can lead to  deeper, more complex analyses of the  relationships between the variables,  which in turn may lead to the  development of a theory. however, with  volume 20, number 1 spring/summer 2009        115    multiple measures, researchers will need  to use factor analysis to test the validity  of the measures.    the field of family business is still  relatively young. only in recent years  have a significant portion of family  business studies involved the use of  quantitative testing rather than  conceptual and qualitative analysis  (chrisman, steier & chua, 2008; dyer &  sanchéz, 1998), and most empirical  studies have focused upon north  american family firms (oviatt &  mcdougall, 2005).  thus, most of the  conclusions and postulations presented  in the current body of literature are  preliminary in nature and geographically  limited in scope. there is a recognized  need for replication and for further and  geographically broader research in the  field to strengthen the body of literature  and move toward the development of  models and theories (bruton, et al.,  2008). this study adds a significant step  in that direction.      although qualitative analysis may  identify the influence of the founder of a  family firm as an important factor  impacting such firms, considerably more  research is needed before clear  conclusions can be reached. future  research on this topic should replicate  prior studies and selected components  of this current study, focus more  specifically on these and other issues  involved, and use data from a variety of  countries. for example, the possible  impacts of founder influence on  different generational stages and on  different types of businesses are worthy  of study, as such impacts may differ for  various reasons. this study should be  considered a building block in the  construction of a strong body of family  business literature.    this current study is important in that it  brings new empirical research to this  issue of founder influence in family  business management and that it does  so in a multinational context.  because  this study is broad and exploratory, its  results may have the greatest value to  current and future researchers, who can  use this research as a base from which to  further investigate various more specific  aspects of founder influence in family  firms.    this study, and future studies which  take this research focus further and  deeper, may also be of value to  consultants to family businesses and to  family business owner/managers  themselves, both of whom may gain  insight into the impact of founder  influence in family businesses. greater  insight can lead to both better  management practices and to better  consulting assistance.    more specifically, both family firm  owner/managers and consultants to  family businesses, can benefit from  understanding which aspects of  management are more likely to be  affected by strong founder influence.  in  firms where founder influence is  acknowledged to be strong, then  owner/managers and consultants can  watch out for, and deal appropriately  with, such impacts.  for example, if  further studies confirm this current  study’s finding that strong founder  influence reduces the likelihood of hiring  managers from beyond the family, then  owner/managers or consultants can  consciously work to offset this influence  journal of small business strategy        116  if the hiring of non‐family‐member  managers is deemed to have potential  value to the firm.  similarly, if strong  founder influence increases the  likelihood company managers engaging  in strategic management activities, and  in succession planning, and if these  management activities are deemed  desirable for the long‐term performance  of the firm, then both owner/managers  and consultants might cultivate and  support the founder’s influence in this  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dibrell, c. & craig, j. (2008). culture of  family commitment and strategic  flexibility: the moderating effect of  stewardship. entrepreneurship theory  and practice, 32(6), 1035‐1054.    robert n. lussier is professor of  management at springfield college. his  research interests are start‐ups, business  success vs. failure, and family business.    matthew c. sonfield is the robert f. dall  distinguished professor in business at  hofstra university.  he has published  extensively in the fields of  entrepreneurship, small business, family  business, minority business and  automotive business history.        reproduced with permission of the copyright owner. further reproduction prohibited without permission. why small deals don’t get done: evidence from rural entrepreneurs | published in journal of small business strategy loading [contrib]/a11y/accessibility-menu.js jsbs menu articles articles all for authors editorial board about issues ethics statement sponsors search sorry, something went wrong. please try your search again. × articles blog posts rss feed enter the url below into your favorite rss reader. https://jsbs.scholasticahq.com/feed × articles vol. 31, issue 4, 2021 november 16, 2021 cdt why small deals don’t get done: evidence from rural entrepreneurs jeff stambaugh, andy yu, deal failure valuation economic development ccby-4.0 • https://doi.org/10.53703/001c.29482 photo by sincerely media on unsplash jsbs stambaugh, j., & yu, a. (2021). why small deals don’t get done: evidence from rural entrepreneurs. journal of small business strategy, 31(4), 88–99. https://doi.org/10.53703/001c.29482 save article as...▾ pdf xml citation (bibtex) data sets/files (2) download all (2) table 1. summary of screened companies and deal failure reason download table 2. summary of deal failure reasons download sorry, something went wrong. please try again. if this problem reoccurs, please contact scholastica support error message: undefined × view more stats abstract for myriad reasons, rural entrepreneurs may want to harvest by selling their business. while these entrepreneurs may look for inspiration to larger, public deals, there are few relevant insights to glean from these deals. despite the high stakes involved for rural entrepreneurs and potential buyers, researchers have placed little attention on dealmaking at the lower end of the spectrum. we address this lack of research by answering the research question: why do deals involving small companies go unconsummated? because research on why large deals fall through is sparse and of limited applicability, we ground our research using insights from the venture financing arena (venture capitalists and angel investors) about why deals between entrepreneurs and investors do not close successfully. applying a novel dataset from an economic development effort in a small southwestern u.s. city, we analyze the reasons why an investor group investigated 20 potential small deals, but none eventually closed. we found that issues both with the potential buyers and sellers led to the deal failures, with issues involving the valuation and also the selling entrepreneur being the most common deal-breakers. furthermore, through this investigation, we gained insights into the challenges of an investor-driven model for economic development. introduction rural entrepreneurs launch businesses that can allow them to prosper financially beyond their non-entrepreneurial neighbors (l. yu & artz, 2019). but after successfully growing a business or perhaps nearing retirement age, rural entrepreneurs may look to harvest by selling their business. these entrepreneurs can look for inspiration to some big deals involving urban entrepreneurs like john mackey, who eventually sold whole foods to amazon for $13.7 billion, or amnon shashua and the sale of his jerusalem-based startup called mobileye to intel for $15.3 billion. these deals can generate incredible wealth for founders and reshape entire markets and industries. accordingly, academic researchers have thoroughly investigated issues regarding large mergers and acquisitions such as: the economic rationale (e.g., kim & singal, 1993; wang & zajac, 2007), environmental factors (e.g., thornton, 2001); firm characteristics that motivate deals (e.g., baum et al., 2000; graebner & eisenhardt, 2004); and the various performance outcomes (e.g., cannella & hambrick, 1993; p. wright et al., 2002). while these large deals may inspire rural entrepreneurs, there are perhaps few relevant insights to glean from the big deals. rural entrepreneurs’ deals may reshape local economies, but they do not reshape industries. they do not involve investment banks or boards of directors. still, even if the transaction price is meager by corporate standards, the economic stakes may be enormous for rural entrepreneurs and prospective buyers. selling the business may represent the single largest monetary transaction of a lifetime and may cap decades of work. unfortunately, researchers have placed little attention to deals at the lower end of the spectrum. specifically, there are few insights in the literature regarding why smaller firms like those created by rural entrepreneurs do not successfully change hands (ahlers et al., 2016; bruce & picard, 2006; scholes et al., 2007). family business research, which includes both large and small deals, has identified that more should be known about the process and outcomes of divestment efforts (king et al., forthcoming; worek, 2017). we seek to address this lack of research by answering the research question: why do deals (a term we use to signify a transaction involving a change of ownership) involving small companies go unconsummated, which should apply to the rural ecosystem? in contrast to large m&a deals, where most announced deals do close (e.g., chakrabarti & mitchell, 2016), most attempts to close a transaction involving small firms fail (e.g., anderson et al., 2007). given that the vast majority of firms are small and that a failure to successfully find a buyer often results in firm liquidation (leroy et al., 2015), we suggest a study of why potential deals do not get done is particularly important. because research on why large deals fall through is limited (chakrabarti & mitchell, 2016; shen & reuer, 2005) and of limited applicability (wong & o’sullivan, 2001), we ground our research using insights from the startup financing arena (venture capitalists and angel investors) about why deals between entrepreneurs and investors do not close successfully. accordingly, the paper first develops the potential market for small deals and addresses the potential applicability of research into why large deals go unconsummated. the paper then builds on insights from venture and angel capital investments, particularly research into why deals do not occur. applying a novel dataset from an economic development effort in a small southwestern u.s. city, we employ a case-study approach structured by past empirical research to analyze the reasons why an investor group investigated 20 potential small deals, but none eventually closed. we found that issues both with the potential buyers and sellers led to the deal failures and also gained insights into a type of economic development. literature review this lack of insight on why smaller firms do not successfully change hands is not due to a dearth of smaller deals. according to data from the institute for mergers, acquisitions and alliances (imaa), there were almost 16,000 m&as in north america in 2019. only 47 deals worldwide had a transaction value of greater than $1 billion, so most deals are not at the top of the market. furthermore, the imaa data are based on publicly announced deals, so many small business sales probably are not reflected in these numbers. companies with sales below $150 million are labeled as the “lower middle-market” (slee, 2009). in terms of revenue and company size, the vast majority of firms fall into the lower middle market’s very bottom tier. naics association data indicates that only 19 percent of firms with annual revenue of over $1 million have annual revenues of more than $10 million. that suggests that 81 percent of the “million-dollar firms” have annual revenues of less than $10 million. similarly, u.s. census data indicate that, among firms with more than five employees, 71 percent of those firms have 19 employees or less. these numbers suggest that the large majority of potential m&a deals involve companies with annual revenue of less than $10 million and/or fewer than 20 employees. not only is the small business universe large, but it is also filled with businesses that are considering a sale. a 2014 pricewaterhousecooper (pwc) survey indicated that 20 percent of family businesses were contemplating a sale (leibell, 2015). as only 12 percent of family businesses make it to the third generation, there are many sales (or failures) of these businesses in the first and second generation. furthermore, the business owner’s approaching retirement (dawson & barrédy, 2018) and the inability to find a feasible successor within a family (de massis et al., 2008) are triggers for a sale. the aging of the baby boomer generation suggests the opportunity for m&as among small firms is already strong and should stay that way for a while. while the potential may be high, actual dealmaking among these smaller firms is fraught with false starts and failures. in one survey, private equity firms indicated that only 16 percent of the letters of intent (loi) signed with a prospective seller, which stipulated the terms of a possible sale, led to a completed sale (anderson et al., 2007). one director of a middle-market investment banking firm likened the m&a business to hunting: “sometimes you bag big game—but more often than not, the target runs away unharmed” (slee, 2009: 13). actually, the target may run away, but it may not be unharmed. leroy and colleagues (leroy et al., 2015) found that 62 percent of entrepreneurs who attempted to sell their business ended up liquidating the business instead, missing out on the financial and emotional benefits of a successful deal. extant research into why larger deals do not happen is limited (chakrabarti & mitchell, 2016; shen & reuer, 2005; wong & o’sullivan, 2001). in part, this may be because the vast majority of announced deals among larger, public companies do close. for example, wong & o’sullivan (2001) found that 95 percent of friendly takeover bids succeeded, and even around 50 percent of hostile takeover bids succeeded. other research found that three-quarters of domestic and two-thirds of cross-border proposed tie-ups closed (chakrabarti & mitchell, 2016). for the smaller number of deals that did not close, the main reasons included geography (too distant) and deal type (hostile and/or too unrelated) (muehlfeld et al., 2012). even these limited findings may not be too applicable to small deals due to the significantly higher levels of information asymmetry in small versus large deals (anderson et al., 2007; moore jr et al., 1995; wong & o’sullivan, 2001). decision-making processes for small deals: insights from venture financing the decision-making processes used by venture capitalists (vcs) and business angels (bas) to invest in young companies could be informative for decisions surrounding the purchase of more mature companies. private equity (pe) companies, which are primarily known for purchasing larger mature businesses, use the same decision processes as do vcs and bas when they are investing (dawson, 2011), including screening, due diligence, and negotiations. pe investors use heuristics to make decisions, as do bas and vcs (harrison et al., 2015; petty & gruber, 2011; sinyard et al., 2020). the deal closure rates for vcs, bas and pes are also similar. investing in startups and mature companies entails screening many possible candidates, with potential investors eliminating approximately 70 percent of the candidates at the first stage. the promising survivors of the first screen then undergo a more in-depth investigation, with only a small percentage of successful deals emerging from the process (anderson et al., 2007; mason et al., 2017; m. wright et al., 2009). the ba population, who are primarily successful business owners, are also the same people who might consider purchasing an existing business (or investing in another individual trying to enter the ranks of the business owner). although purchasing an existing business removes some of the risk associated with startups, there is still considerable risk involved as purchasers often plan to expand and innovate in the current business, significantly growing profitability in the process (dawson & barrédy, 2018; scholes et al., 2007). accordingly, buyers and investors are evaluating the venture’s growth and profitability potential in both startups and mature businesses. researchers have studied vc and ba decision-making for four decades (see petty & gruber, 2011 for a summary of vc research and maxwell et al., 2011 for bas). a recent shift in focus from why deals do close to why deals do not successfully close is particularly helpful for investigating business sales by rural entrepreneurs. maxwell and colleagues (2011) found that bas use an “elimination-by-aspects” approach to deal evaluation, particularly when initially screening deals. this means potential investors search for reasons to say no rather than reasons to say yes. petty & gruber (2011) used this same elimination-by-aspects approach to study vc decision-making. using an initial framework of four categories for reasons to say no (product, market, team, and financial), the study used a qualitative approach to derive a grid of categories and sub-categories for why vcs did not consummate a deal with the entrepreneurs. carpentier & suret (2015) used petty and gruber’s (2011) grid as a starting point to investigate why bas reject deals. we employ those findings to ground this study of why prospective deals are not consummated for small businesses. furthermore, we go beyond petty & gruber (2011) and carpentier & suret (2015), who assumed that, when investigating deals, evaluators’ decisions were homogeneous. instead, by analyzing the decision heterogeneity of the evaluators, which may contribute to deal-breakers, we may offer a more fine-grained analysis. vcs and bas use multiple stages in the decision-making process. the first stage, most commonly called the pre-screening stage, eliminates 60-70 percent of the proposed deals (e.g croce et al., 2017; mason et al., 2017; petty & gruber, 2011). in ba groups, it is common for a hired staff member to conduct the pre-screening evaluations. some ba groups use as many as five discrete stages after the initial screening (carpentier & suret, 2015), while others suggest there are only one (mason & botelho, 2016) or two additional stages (croce et al., 2017). in general, the process is that bas and vcs seek further information on the deals that pass pre-screening and ultimately focus on negotiating deals with fewer than 10 percent of the originally proposed deals. why do vcs and bas reject deals while there is consensus about the percentages of how many prospects make it through the various stages, there is less consensus about the reasons why bas and vcs reject potential deals. petty & gruber (2011) suggested that investors use heuristics mainly in the early stages of deal screening, while others found evidence, particularly among highly experienced investors, of heuristics usage later in the detailed evaluation of potential deals. these more experienced investors also focus on different criteria when evaluating prospects than less experienced investors (harrison et al., 2015). some found the rejection reasons change as the prospects move through the stages (croce et al., 2017), while others found little variation in why investors rejected deals at the various stages (carpentier & suret, 2015). a longitudinal study found investors reject prospects based more on investor fit as they gain experience petty & gruber (2011). indeed, several studies indicated a lack of investor fit, which considers factors such as investment size, compatibility with the existing portfolio, and the investor’s personal experience, is the leading reason (~30%) why investors reject certain deals (croce et al., 2017; harrison et al., 2015; petty & gruber, 2011). there has been less agreement about the importance of the entrepreneur(s) leading the venture. petty & gruber (2011) found vcs reject only two percent of the prospects for the people involved, whereas mason and colleagues (2017) found bas cited the people involved as a reason to reject a prospect 69 percent of the time. other studies pegged people as the reason for rejection about ten percent of the time (croce et al., 2017; harrison et al., 2015). recent systematic reviews of the extant literature on the criteria investors use when evaluating deals (ferrati & muffatto, 2021; granz et al., 2020) indicate a rough balance in the importance of the entrepreneur(s) and the other aspects of the venture. granz and colleagues (2020) found vcs tilted slightly more toward the financial aspects of the venture while bas focused a bit more on the entrepreneur(s). methodology sample this project’s data arose from a novel economic development effort in a small southwestern city in the united states (msa population of 150,000). the city had a long-standing, conventional business recruitment effort run by the local chamber of commerce to persuade larger companies to establish business operations in the city. a group of local business leaders formed an entity called the “growth fund” (g.f.) to purchase small manufacturing businesses, relocating some or all company operations to the g.f.'s home city as part of an economic development strategy. thirty-five investors joined the g.f. and provided sufficient seed capital to fund operations for one year. over that year, the g.f. screened dozens of businesses and gave serious attention to 20 small businesses (all but one of the businesses had less than 30 employees) as a potential acquisition. however, none of those potential deals came to fruition, which led to the group suspending operations after the first year. as we discuss later in the paper, several of the g.f. members retrospectively acknowledged they wished the g.f had continued beyond a year. the g.f. operated as a hybrid between a traditional pe group focused on the lower middle market and a traditional angel group. as in most angel groups, each g.f. member made their own investment decisions. the g.f. did not have a pool of pre-raised capital to deploy. about half of the g.f.‘s members also belonged to a local angel investment group, which used this same principle of having every investor responsible for their own decisions. much as the managing partners do in a pe group, the g.f. hired a full-time executive director (e.d.) to source and screen potential deals. the e.d. was uniquely qualified, having fifteen years’ experience as a ceo and business group leader for a pe company. during that tenure in pe, the e.d. participated in seven acquisitions, so he was well versed in the pe acquisition model. the g.f.'s focus was on small, product-oriented manufacturing companies. like many pe groups, the g.f. desired companies with significant ownership and management stability, anticipating that such companies were ripe for cost reductions, managerial enhancements, and product innovations that would allow substantial profit growth after changing ownership (dawson & barrédy, 2018). the g.f. had a six-member executive committee (e.c.), whose role was to work with the e.d. to vet potential deals before bringing them to the membership as a proposed acquisition. the e.c. had veterans of the banking, oil and gas, medical supply, restaurant, and real estate industries. the e.c. brought only one potential deal to the membership, and it did not receive sufficient interest to go forward. as we develop later, this lack of success had to do with both the potential buyers and the sellers of the twenty screened deals, nine involved rural businesses, six businesses were located in small cities (populations less than 200,000 and well separate from larger cities), and five were located in large cities or their suburbs. while the metropolitan businesses might have had access to greater resources, the companies were similar to the others in terms of size, sole or family ownership, and a desire to exit the business. as seen later, the reasons the deals did not succeed were also similar to the other companies. table 1 has more details about the 20 companies. data collection and analysis the 20 companies represented mini-cases that allowed the authors to access the qualitative insights from each deal. using mini-cases as data sources is well-established in the entrepreneurship literature and have been used to examine issues such as entrepreneurial failure (e.g., singh et al., 2015), venture strategy-making (ott & eisenhardt, 2020), crowdfunding (murray et al., 2020), and even how entrepreneurs name their ventures (engel et al., 2020). given the challenges of accessing decision-makers for these types of deals, it is common to rely on data from one group (mason et al., 2019). the authors were able to incorporate taxonomies from earlier research into why vc and ba deals did not close, which provided a helpful start to code the interviews. the e.d provided the authors with materials he had collected about each business. these materials provided limited background information about the companies but had no information about the e.c.'s decision-making processes or outcomes about the companies. one of the paper’s authors attended the group session where the g.f. membership reviewed the only deal recommended by the e.c.. that gave the author significant insights into why the membership rejected that one company. to gather detailed insights into why the e.c. rejected the other nineteen companies, the authors interviewed the group’s e.d. and three members of the e.c.. these interviews offered “rich, empirical data, especially when the phenomenon of interest is highly episodic and infrequent” (eisenhardt & graebner, 2007: 28). this contrasts with petty and gruber’s (2011) and carpentier and suret’s (2015) studies, which used archival information. given the inductive nature of the research, the interview method seemed well suited to analyzing the twenty cases. to minimize concerns about bias, we followed eisenhardt and graebner’s (2007) advice and used multiple, knowledgeable informants rather than relying on a single informant’s recollection. the interview approach also represented a form of engaged scholarship (bansal et al., 2018), as one of the authors assisted in establishing the g.f., infrequently consulted on g.f. matters, and routinely interacted with the e.d. and e.c. members about non-g.f. matters. the interviews took place two years after the g.f. ended. as would be expected, the e.d. had detailed recollections of each deal; the e.c. members had less detailed recollections. they were quick to acknowledge these gaps, which reduces concern about impression management biases (eisenhardt & graebner, 2007). the authors used the grid of rejection categories and sub-categories (table 2) initially developed by petty and gruber (2011) and then refined by carpentier & suret (2015) to code the interviews independently. with a modified delphi approach (a. yu et al., 2012), we employed three steps to generate our data for further analyses. the first step was to create a master data matrix for the next stage of data recording. one of the authors listened to the four interviewees’ recollections and decided the main themes (e.g., company name, founded year, location, asking price, etc.). second, the researchers independently listened to the four interviews to jot down the key points of these 20 possible deals. at the end of this second step, we did not find any additional themes for this matrix. that is, we were able to include all of the details we needed using the original set of main themes we derived. the third step was that we independently used the grid (table 2) to record our judgments about the reasons the deal did not close. after comparing our codes, we found we had 99% of agreement on the coded categories; we then reconciled the very few remaining areas of disagreement. the reconciliation was simple because there was a remarkable agreement between the e.d. and e.c. members’ views of why the deals did not close. we listened to the interviews and discussed the differences to reach a consensus. in some cases, the interviews suggested there were multiple reasons why the deal failed. in those cases, the authors determined which issue was the primary reason versus the secondary reason for the failure. results issues associated with the g.f.'s specific needs and expectations caused the group to walk away from 35 percent (seven of the twenty) of the deals. in one case, the g.f. was not interested in the product category, but in four cases, the firm could not easily relocate to the g.f.'s small city. the e.c. deemed another business as too small to be interesting. the g.f. rejected the last deal principally because the e.c. had decided the g.f. would not succeed and did not seriously consider the deal. table 1.summary of screened companies and deal failure reason company pseudonym location company summary primary reason deal failed secondary reason deal failed ranch 1 small city almost failed two years previous to g.f. interest, but currently stable. owners just wanted to exit without losing more money. few competitors in the niche industry. 340 125 ranch 2 rural asking price 7x multiple of reported cash flow. no marketing but well-known and regarded business among its customers. leader in a small niche. 340 tank 1 rural founder owned and led with very little documentation, financial or otherwise. an industry leader in a niche market but tied to a major national, cyclical market. 340 555 machine 1 small city repaired / fabricated parts with a single industry focus. owner / key employee personal relationships with customers key to business’s consistent revenue. 440 514 fab 1 metro sales were declining due to the poor health of several key family members / workers. the owner was loyal to the workforce and reluctant to see the business relocated. 121 514 machine 2 metro strong financial performer with founder looking to exit while still young. major multinational corporation accounted for 90% of revenue. relocation was problematic. 514 110 fab 2 rural produced about 10 dies per year for average selling price of $150,000. significant investments in land and facilities made relocation financially difficult. 514 transpo 1 rural owner had already sold the business once but repurchased it after the previous buyer almost caused the business to fail. the business was still off the previous peak. 513 320 fab 3 metro current owner’s relationships with relatively small clientele would be hard to replicate. produced highly customized solutions for specific industries. 440 machine 3 small city one multinational corporation accounted for 50% of revenue. the seller wanted a signed loi before opening books and a fast-track due diligence process. 340 service 1 small city the startup business was willing to locate in the desired location to secure funding. referred to g.f. from area angel investor group. 460 320 machine 4 small city company in slow decline. co-owners not communicating well and had disparate objectives. 340 600 machine 5 small city the company was a supplier to companies owned by g.f. members. the owner received a competing offer. 552 430 transpo 2 metro the company had significant intellectual property and had once ceased production due to manufacturing issues. essentially a startup. 121 222 transpo 3 metro the company had a large, international customer base selling aftermarket products that complement a well-known brand. manufacturing 100% out-sourced. 511 ranch 3 rural nationwide customer base, to include utility companies. aging founder looking for an exit but opposed to relocation. 514 tank 2 rural the company didn’t have a single computer in the work location. no previous marketing; ample markets for expansion. 450 service 2 small city a thriving company with the owner looking for new investors more so than new owners. local operations would merely be a satellite of main operations elsewhere in the state. 514 340 tank 3 rural the owner maintained he had rebuffed interest from private equity firms. claiming $3m in annual revenue with ample growth prospects. 460 340 waste 1 rural the deal emerged late in g.f.’s timeline and probably would have gotten much more interest had it been vetted earlier. 525 340 companies are listed in the order of g.f. consideration. ranch signifies the company’s products served the ranching industry. tank signifies the company’s products are primarily large tanks. machine signifies the company is a general machine shop with some specialty products. fab signifies the company’s products were mainly a b2b fabrication business. transpo signifies the company’s products served the transportation market. service signifies the company provided a specialized service. waste signifies the company’s products were in the waste management businesses. table 2.summary of deal failure reasons     primary reason deal failed secondary reason deal failed category code       product and model 110 strategy/model   1   121 no usp/competitive differentiation 2     122 not convincing/compelling       123 need proof of concept       124 single product       125 too basic   1   126 complexity       130 ip related     market 210 existence/clarity       221 too small or niche       222 too crowded/competitive   1   223 too fragmented       224 too large/mature       230 acceptance/potential       240 regulations     financial 310 exit       320 revenue/return potential   2   330 use of proceeds       340 valuation 5 3 team 410 experience 420 reputation 430 lack of confidence 1 440 key man issue 2 450 no/incomplete management 1 460 integrity/ethics 2 470 asymmetry/distance investor specific 511 out of investor focus (oif)--product 1     512 oif—stage       513 oif—size 1     514 oif—geography 4 2   515 just not a g.f. deal       521 competes with existing portfolio       522 not appropriate for portfolio at this time       523 too early for fund       524 no funds for region       525 no time due to fund related activities 1     530 external source did not endorse   541 need lead investor 542 oversubscribed 543 existing investor interest 544 lack of other investors 551 no response 552 deal closed by other investors 1 553 not invited to participate 554 terms rejected 555 decided not to sell at all 1 other 600 conflict between entrepreneurs 1 twenty-five percent of the potential deals (five cases) failed because of disagreements over the firms’ valuation. in two of the cases, these breakdowns occurred after substantial negotiations. in the other three cases, the gap between the entrepreneur’s asking price and the e.c.'s estimate of an acceptable price was so large that the e.c. quickly decided the deal was not worth pursuing. the valuation was the secondary reason for three other deals. in one case, although the deal did not meet the g.f.'s criteria of relocating to its city, some investors in the g.f. might have done the deal anyway had the valuation been right. yet another 25 percent of the potential deals (five cases) failed to close because of concerns about the entrepreneur. the group walked away because it did not believe the entrepreneur(s) were trustworthy in two cases. in one case, the entrepreneurs (it was a team of two) were highly disorganized; the g.f. was not confident it could successfully fill in the gaps of procedures and knowledge post-purchase. finally, in two cases, the g.f. felt the entrepreneur’s knowledge and relationships with customers were so central to its success that the firms’ performance would suffer without the entrepreneur. the other three deals failed for a variety of reasons. in one case, another buyer bought the firm before the g.f. could act. in two cases, the g.f. judged the product had little hope of future success due to a lack of competitive differentiation. our data also found that the “conflict between entrepreneurs” could also be the reason for a business to sell. we thus added this item to the grid modified from prior studies (carpentier & suret, 2015; petty & gruber, 2011). table 2 has a summary of the deal failure reasons. the table also reveals that valuation (8 counts, 40% of the 20 cases) and out of investor focus—geography (6 counts, 30% of the 20 cases) were the two main reasons why the small deals did not close in our study. the third reason had two counts for no usp (unique selling proposition)/competitive differentiation, key man issue, and integrity/ethics concerns. discussion these results have at least five practical implications for rural entrepreneurs who aspire to sell their businesses. first, firm valuation is the most common deal breaker in our investigation of these small deals. forty percent of the deals failed, at least partly, due to the sellers and potential buyers being too far apart on an agreed price or deal structure. for example, one family manufacturing firm founded by two brothers was the leading company in its niche market but wanted a very high price (i.e., seven times reported cash flow). the e.d. and e.c. thought this business had great potential and was a good fit for the g.f. unfortunately, the deal did not close despite extensive g.f. efforts due to the big valuation difference between the g.f. and the family business owners. astrachan & jaskiewicz (2008) proposed that family business owners usually factor emotional value into their business valuation on top of the financial value. hence, in the family business owner’s mind, the firm’s total value is the sum of financial value plus emotional value. from this perspective, both the buyer and seller may consider the role emotional value plays in the negotiation process. while this value discrepancy is probably unsurprising, it is a useful reminder to rural entrepreneurs who consider a business sale that they will likely have to accept a lower price than desired. likewise, the buyer may also consider the small business owners’ emotional value to reach an agreeable price. second, based on these results, rural entrepreneurs looking to exit should anticipate that it will be more challenging to find a buyer than it is for more urban entrepreneurs. while the g.f.'s criteria of finding re-locatable businesses may seem idiosyncratic, rural entrepreneurs may find a relatively smaller population of interested buyers unless the business can be relocated. prospective rural entrepreneurs are often specific in location desires. it’s not that they simply wish for a rural lifestyle; they wish to live in the community where they grew up and have family (l. yu & artz, 2019). hence, only prospective entrepreneurs in the business’s immediate area may be interested in purchasing the company. alternatively, the rural entrepreneur may have to confront the difficult decision to sell to a buyer who intends to relocate the business to their preferred area. some potential sellers may refuse such opportunities out of allegiance to workers (one case for g.f.), allegiance to the community (one case for g.f.), or a strong desire to include real estate in the deal (one case for g.f.). even if the rural entrepreneur is willing to allow relocation, the customer base or specific location advantages may preclude a relocation (two cases for g.f.). a third practical implication is that there are many reasons why deals do not happen. just as there are myriad reasons why bas and vcs chose not to invest in startups (e.g. croce et al., 2017; harrison et al., 2015; petty & gruber, 2011), there are myriad reasons beyond deal valuation and location why a rural entrepreneur’s business does not sell easily. perhaps most surprising to us is the number of deals derailed due to ethics concerns about the potential seller. but issues such as product category or the lack of a unique selling proposition also resulted in deal failures. the fourth practical implication is that successful entrepreneurs with small businesses—rural and otherwise—have a paradox that the very elements of their competitive advantage may reduce their business value when it comes time to sell. in two cases, the g.f. concluded the business would suffer without the entrepreneur’s detailed tacit knowledge of the business and extensive relationships with stakeholders. these entrepreneurs effectively differentiated their companies from their competitors and enjoyed a sustainable competitive advantage (davidsson & honig, 2003). however, because one cannot easily transfer those elements of differentiation, much of the business value is not truly “for sale.” hence, to avoid selling their business at a steep discount, rural entrepreneurs have to build a supportive team that intentionally diminishes their personal contributions to the business before attempting to sell the business. the final practical implication is about the socioemotional wealth (sew) concerns of family businesses (gómez-mejía et al., 2007). sew is a family firm’s affective endowment, indicating the family’s attachment to and non-financial expectations for its business. because family businesses are composed of family and business systems, each system has its goals, making family business a more complex organizational form (a. yu et al., 2012). in the 20 cases, six cases (30%) were family firms, but they did not prioritize a succession plan over selling the business. the e.d. considered family businesses an ideal target to acquire since family firms are more long-term oriented (lumpkin et al., 2010) and more likely to fit the criteria of the g.f. a possible reason behind such an impression is that a family’s name is on the business, so the family has to protect its reputation and identity to preserve sew. among these six family firms, four had challenges allowing a relocation, demonstrating that family entrepreneurs are very community-oriented. for example, one of the family owners was very loyal to employees and viewed them as family. such a family mindset helps a family firm create trust, stewardship, and competitive advantages but makes it harder to sell the business. deal and group epilogue the authors are aware of subsequent events in a few of the deals. the g.f. missed one deal because another buyer purchased the business before the g.f. could act. that proved to be fortuitous, as that machining business failed during a deep industry downturn. one of the deals the g.f. pursued most aggressively but ultimately could not close due to disagreements over valuation eventually sold several years later. the authors, unfortunately, do not have any information about the sales price. finally, the g.f. rejected one deal as being too small. after the g.f. ceased operations, the e.d. bought that business with the blessing of the e.c. instead of relocating the business, he chose to relocate to the business’s rural location. the e.d. has improved marketing, implemented product enhancements, and streamlined processes such that annual revenue and profit have soared without growing the workforce. it can be argued that it was precisely the type of business the g.f. wanted. this idea of local investors banding together to support economic development seems logical yet did not work satisfactorily in this situation. through the interviews, we gained insights into the challenges associated with this version of economic development. from the beginning, the g.f. struggled with the twin priorities of investor return and economic development. while the priorities are not mutually exclusive, some deals appeared more promising for economic development, and other deals appeared to offer greater investor returns. in two cases, the g.f. continued due diligence on deals that could not relocate to the host city (and thus would not offer economic development benefits) because the e.c. thought the deals might offer strong investor returns. had the investors proceeded with those deals, it would have reduced the capital available for economic development deals. in retrospect, the interviewees wished the group had exercised more patience, judging that one year was too optimistic to expect a solid first deal. finding that solid first deal is important for an economic strategy because an excellent first acquisition can serve as the parent company for subsequent deals. one interviewee wished the g.f. had completed one of the machine shop deals, even if that deal was not particularly appealing, so it could have served as a parent for some smaller deals. several interviewees commented that the distributed nature of the decision-making meant no one emerged as a “champion” for any deals. they wished someone would have gotten behind one or a few deals and pushed harder. in this aspect, the group perhaps needed to operate more like a traditional pe group and less like an angel group. the g.f. experience did set the stage for subsequent major investment. about a year after the g.f. ceased operations, several members became aware of the opportunity—working with a small pe group not located in the region—to purchase a 250-employee manufacturing company and relocate some or all its operations to the host city. this deal did go forward, with former g.f. members investing several million dollars to make the purchase. unfortunately, the deal became a case study about the risks of turning around a distressed business. after an aborted attempt at a partial relocation and significant cash infusions to cover continuing losses, the local investors took a total loss on the deal after a bankruptcy sale. we add to the literature in several ways. first, our study is one of the first to explore small deal acquisitions to our knowledge. we respond to carpentier & suret's (2015: 819) call to pay attention to small deals. our cases provide some initial evidence showing why small deals are difficult to close and reveal the reasons behind the scene. second, emerging from our data, “conflict between entrepreneurs” is another possible reason to sell a small business. we added this item to the grid developed by petty & gruber (2011) and carpentier & suret (2015). future research may modify our grid to conduct similar studies in economic development or small deals. third, over the coding process, we found the e.d. and the other three members of the e.c. were the primary decision-makers to decide if a deal should be moved forward. notably, we suggest the heterogeneity of the deal evaluators may be an important factor in dealmaking. in both petty and gruber’s (2011) and carpentier and suret’s (2015) data analyses, they consistently assumed the homogeneity of deal decisions. we consider the relationship between the deal evaluation/evaluators and deal closing as an interesting research opportunity worthy of further probing. finally, we provide insights into a novel economic development effort, particularly the inherent tension between investor and economic development goals. our research may provide some thoughts for those businesses, institutions, or policymakers to make plans and provide incentives or grants. inevitably, our research entails several important limitations. first, our data are not longitudinal. although we had some more information after the cessation of g.f. on a few cases, we did not have enough information to pursue a more long-term study. it would be helpful to see, for example, if the g.f.‘s evaluation of those firms’ valuation was reasonable. in doing so, buyers and sellers may learn a better approach to developing reasonable offers. second, as with petty & gruber (2011) and carpentier and suret (2015), our research is qualitative. we thus do not have enough sample size to test the relationship between two or three variables. future research may build on our findings by deploying our updated grid to a larger number of respondents via a survey. questions future researchers might ask include: how does the heterogeneity of investment evaluators’ background affect the decision-making process and results? what are those essential factors contributing to the difference in firm valuation between a buyer and seller? compared to nonfamily businesses, do family firms expect a higher price? if yes/no, why? third, although we used a grid developed from prior studies, the coding ultimately involves some subjectivity. fortunately, we used a modified delphi approach and two independent coders to code the data in our data coding process. we found a high degree of similarity in our results. future research may add a hold-out group to code the data again and compare the results. thus, this additional step will further lower the subjective bias. last, interview data may contain recall bias (eisenhardt & graebner, 2007). to deal with this issue, we asked all of the deal evaluators (one e.d. and three members of e.c.) to provide their thoughts on each deal. we then cross-validated the interviews to reduce the recall bias and caught complementary information a single informant could miss. conclusion overall, we agree with petty & gruber's (2011: 185) insights “that many of the deals categorized as dead were the result of action by the company rather than rejection by the vc should provide evidence that the world of vc is both a buyer’s and a seller’s market.” based on our study, the reasons small deals are not done have to do with both the buyer and the seller. those businesses rejected by g.f. may have had the right valuation and great potential, but the g.f. simply was not the correct buyer. that should encourage rural entrepreneurs not to obsess over failed deals. alternatively, the seller may have had unrealistic financial expectations or behaved in a manner that became odious to the prospective buyer. these are deal-killers under the 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(2019). does rural entrepreneurship pay? small business economics, 53(3), 647–668. https://doi.org/10.1007/s11187-018-0073-x google scholar powered by scholastica, the modern academic journal management system sr''r'7-'ny preparing small business for workforce 2000: a pilot study'homas clark arthur shriberg stephen r. wester xavier university abstract this study examines the results of research designed to examine rhe relationship benveen the growing diversiry of the american workforce and the personnel practices of small business. this paper accomplishes four goals: lt l) highlighrs the implications of the~wrcccfimr j rrh r r 'p ip r:rl p «h methodology and results of telephone and in-depth face-to face interviews to determine if current small business human resource pracrices in a mid-sized, midwestern american ciry are responsive ro changes in the workforce; 3) clarifies the strategy and ractics small business managers should implemenr to adapr their personnel programs ro rhe changing workforce ent'ronmenr; and 4) serves as a pilor study for future research. results indicate rhar while small business owners are aware of the changing demographics of rhe american workforce and have, in fact, begun ro reflect these changes by hiring more older workers and more females. despite this, few have active programs to find, recruit, retain, and promote nontradirional workers. introduction the hudson institute's report, workforce 2000 (johnston gr packer, 1987), as well as more recent research (tower-perrin, 1991; jamieson & o'mars, 1991), predicts fundamemal changes in the demographics of the american workforce, including many more older, female, non-white, immigrant, disabled, and inadequately educated workers (denton, 1992; sussman, 1993; kifor, 1990; kanin-lovers, 1990). future workers will also increasingly participate in a variety of non-traditional lifestyles, such as extended family, single parent, dual career, and same sex living arrangements (johnston & packer, 1987; dunn, 1991). peter drucker (1980) predicted that "population structures will be the least stable and most drastically changing element in economics, society, and world politics." more recently, jamieson and o'mara (1991)asserted, "we have moved from an era in which large portions of the workforce were assumed to be similar...to an era where the workforce is composed of many different individuals." the changes required to respond to these population dynamics "will stand on their head some of the most cherished beliefs and habits of business and government, of employers trade unions, and employees" (drucker, 1980). this conclusion is echoed by researchers such as jamieson and o'mars in ~mana in workforce 2000. their analysis supports the thesis of johnston and packer (1987) that the best way for businesses to react to these changes is prepare for them now. 1 the aulhors acknowledge lhc assislance of sandy euslis, thana hamann, and man cimino in preparing lhis mmuscnpc 1 so far, no empirical research examined the effects of ~wrkf rce 2009 predicuons on the practices and policies of small businesses, defined here as companies with under 100 employees. to fill this gap, this study has four purposes: i) to highlight the implications of the workforce 2000 findings for small business managers'ersonnel practices; 2) to report the methodology and results of telephone and in-depth face-to-face interviews to determine if current small business human resource practices in a mid-sized, midwestern american city are responsive to changes in the workforce; 3) to clarify the strategy and tactics small business managers should implement to adapt their personnel programs to the changing workforce environment; and 4) to serve as a pilot study for future research. while no research has been reported on diversity in small business, one study, tower-perrin's w rkforce 2 a rv re ort on res nses to dem hi and labor force trends (1990) is suggestive. it reports on the perceptions and personnel practices of mid-size and larger businesses. it found a relationship between company size and actions to promote diversity in the workforce in that larger businesses are much more ilk ly 2 fly fl 4' iw~kf 2tlm 2 i i gl 'l personnel programs than are smaller businesses. our pilot study specifically investigates small business managers'ttitudes and practices toward diversity in the workforce. implications of workforce 200 projections for small business human resources practices. wwkfw 2nio i dl ilk i g ilk g i iy a'fy their personnel practices to meet the needs of a changing workforce. each of the major implications are described below. the 1990's will confront american small business with significant shortages of young workers. the workforce will grow at its slowest rate since the 1930's (johnston & packer, 1987; jamieson & o'mara, 1991). john naisbett (1982) pointed out that there will be 4 million fewer entry level applicants in the 1990's than there were in the 1980's, simply because there will be more people leaving the workforce than will be entering it. he asserted that young people will be especially scarce, with two million fewer people aged 16-24, or an 8 percent drop, in this segment during the 1990's. recent census bureau statistics confirm naisbitt's prediction that the united states is experiencing a reduction in the number of available entry level skilled workers (brown, 1990). some of these changes are due to the impact of the "baby boom" of the mid-1940's to mid-1950's; and the "baby bust" that began in the late 1960's and continues into the 1990's (johnston & packer, 1987; dunn, 1991; jamieson & o'mara, 1991). in addition, "a whopping 75 percent of men and more than 80 percent of women now opt to collect their social security before they reach the age of 65" (dentzer, 1993). drucker (1980) reports that these phenomena will affect small companies in two ways. first, those which offer uaditional jobs in manufacturing will have difliculty finding young workers to fill these jobs. 2 second, those in dynamic knowledge-based industries will have to work to recruit and retain highly educated professional and managerial workers. woodward's (1992) research confirms this trend. however, major layoffs by large american companies have been identified as an offsetting influence by placing older, more skilled workers back into the labor pool (jost, 1993). small service businesses will create virtually all of the new jobs, most of which will require higher levels of skill and education than ever before. continuing the trend of the 1970's and 1980's, virtually all new jobs will be created by small business. over half the new jobs will be in service occupations, administrative support, and marketing and sales (johnston & packer, 1987; woodward, 1992; jamieson & o'mara, 1991). most of these jobs require above average scores in reading, math, and language. in fact, of all new jobs that will be created over the 1984-2000 period, more than half will require some education beyond high school. almost a third will be filled by college graduates, indicating the higher level of skills needed to compete (johnston & packer, 1987; behar, 1991; warren, 1990). in 1987 only 22 percent of all occupations required a college degree (johnston & packer, 1987). today 30 percem of new jobs will require a college degree (tower-perrin, 1990), this cigure probably underestimates the uend, given that many jobs (such as technical sales representatives and managerial accountants) currently held by high school graduates will be filled in the future by college graduates. in fack "jobs that are currently in the middle of the skill distribution will be the least-skilled occupations of the future, and there will be very few net new jobs for the unskilled" (johnston & packer, 1987; towerpcrrin, 1990). this idea is disturbing, since the results of a 1993 study compiled by the national center for educational statistics concluding that o90 million u.s. adults, 47 percent of the nation's adult population, possess only rudimentary literacy skills" (associated press, 1993). this data indicates that there may be, both now and for the future, a shortage of individuals with educational skills enabling them to fill the jobs our economy will be creating'. labor market demographics will shia dramatically. labor market demographics will shift dramadcally. the workforce will be increasingly female, mature, unmarried, non-white, and foreign born (johnston & packer, 1987; jamieson & o'mare, 1991). thc us depr of educauon condumwt ~ study, circd in lohnnon dt parker (19577 wluch sho cd that among 21-25 year olds, large numbers of workers la* basic skins. the srudy rcrcalcd the following: 40% of wlutcs, 60% of hispanics, and 75% of blacks could na locate information in ~ newspaper or almanac. 25% of wlutes, 7% of hispanics, and 3% of blacks could dccffdtm a btn schedule. 44% of wlutcs, 20% of hispanics, and 8% of blacks could roneetly dmemunc thc change they wete due for the purchase of ~ 2.ltwll restaurant tllcal. 3 ~mf the biggest impact, according to johnston and packer, will be the "feminization of the workforce." sixty-two percent of the new entrants will be women (johnston & packer, 1987). this is significant because studies show women have special employment and management needs. for example, over half the women joining the workforce have children at home. largely as a result of child care concerns, women, as a class, have higher rates of absenteeism (johnston & packer, 1987; jamieson & o'mara, 1991). schwartz (1989) reports that most women want part-time employment, llexible hours, and/or stay-at-home jobs. johnston & packer (1987), supported by schwanz (1989) concluded, "if employers fail to provide sufficient jobs with flexible working arrangements, more mothers may choose to leave the labor i'orce during their child-rearing years, further reducing the numbers of new workers entering the workforce." on the other hand, many women will also want to work full time and will expect the same opportunities as men. there will also be more dual career couples, indicating businesses will have to reconsider promotion policies if they wish to stay current and competitive (schwanz, 1989). in addition, deborah tannen (1991)demonstrated that men and women communicate very dil'fercmly, which can create significant difciculues if not addressed. with an increasingly female workforce, companies must be aware of these needs and be prepared to address them. more mature workforce 2000 predicted that the american workforce will be "middle aging" in thc years ahead, with the average age climbing from 36 to 39 by the year 2000 (johnston & packer, 1987). furthermore, with dramatically improved life expectancies, "older people have become the largest growing segment of the adult population," with the segment between lorty-five and sixty-five years of age growing by over forty percent (jamieson & o'mara, 1991). drucker (1980) and kiechall (1990) both pointed out that one source of new labor will be workers who have retired from one job and are looking for a "second career." the expectations and training needs of the older worker who has had significant life and work experience will be quite different from those of younger workers. for example, older workers typically are less likely to leave their jobs, will generate higher wage and benefit costs, and demonstrate higher loyalty and higher job satisfaction (johnston &. packer, 1987; kiechall, 1990; hacket, 1990; jamieson & o'mara, 1991). more unmarried there will also be more unmarried employees, employees who tend to exhibit more absenteeism, more turnover, and less job satisfaction (johnston & packer, 1987; augstrum, baldwin, & macy, 1988). the divorce rate remains high irnd individuals, particularly females, are exhibiting higher indices ol'ndividual choice and remaining single (faludi, 1991). 4 more non-white and forei born nonwhite americans will make up 20 percent of all new workers. white males will make up only 15 percent of all new labor entrants in the next 10 years. this has significant implications, given that research indicates that black employees have a 40 percent higher turnover rate than white employees (jamieson & o'mara, 1991). other non-white populations also have higher turnover rates than white workers (jamieson &. o'mara, 1991). apparently, many blacks leave jobs because of their perception that they will not enjoy opportunities for advancement due to a "glass ceiling" (jackson, 1986; hornblower & zintl, 1988; dominquez, 1991-1992), immigrants will constitute 22 percent of all new workers. in fact, two-thirds of the world's global migration will be to the united states. "america can expect large-scale migration from mexico, a very poor country with one of the largest labor surpluses and one of the highest unemployment rates" (drucker, 1980). this is supported by johnston and packer (1987) who assert that early in the twemy-first century, people of hispanic origin will make up 20 percent of the total us population; and cities such as san francisco will have asians as a majority of their citizens (drucker, 1980; johnston &. packer, 1987; towerperrin, 1990). studies support the argument that immigrants are "self selected" strivers .. . people who have the courage to pull up roots and start over in a new life." they will fill a skills gap as "machinists and engineers, nurses and sushi chefs" (roberts & andrews, 1993). fthnic minorities are exercising increasing market power. blacks and hispanics make up a $425 billion annual consumer market, one that will grow to $650 billion by 2000. this is a market larger by far than the u.s.'s combined total expons to japan and canada, two of the united states largest international consumers (johnston & packer, 1987; jamieson & o'mara, 1991). these demographic trends indicate that businesses that wish to tap into this market will need to examine their practices and restructure them in a manner that allows them to attract the buyers from these populations. summary of implications of workforce 2000. the labor force's projected growth of female, mature, non-white, hispanic, and asian populations suggest that small business managers will need to educate themselves on how to adjust their business practices to manage and motivate culturally distinct employees. otherwise, these non-traditional workers may leave for work environments more responsive to their needs. findings suggest that small businesses will be recruiting not only women and a variety of ethnic minorities, but also individuals who differ significantly in age, appearance, physical ability, experience, and lifestyle. 5 1 the greater cincinnati study this research was designed to answer questions about the response of small business managers to the changing workforce. the following types of questions were asked to examine this phenomenon. 1) do small business managers perceive that demographic changes are occurring in the workforce? 2) are the management practices implied by demographic projections being implemented by small business managers? 3) are small business experiences and practices in addressing the changing workforce consistent with those ol'arger companies? research methodology procedures a two-uered methodology was used in this research. quantitative data was gathered using an extensive telephone survey and qualitative data was gathered through in-depth personal interviews with business owners. different populations were interviewed for each pan of the study. based on the logic of thomas and tymon (1982), mccall and lombardo (1978), and mitroff and pondy (1974) concerning the use of qualitative as well as quamimtive measures in organizational research, both the results of the telephone interviews and the face-to-face interviews are discussed here. mccall anti lombardo (1978) asserted that, by themselves, "well-structured methodologies do not work for the dilemmas of the real world." using both qualitative and quantitative methods "leads to improved descriptive relevance with both internal and external validity ...with improved applicability to practical concerns" (mccall and lombardo, 1978). mitroff and pondy (cited in mccall and lombardo, 1978) added that researchers need to collect "qualitative unstructured data and structured quantified data" because "neither of these has much meaning ... except in relationship to each other." qualitative information gives the researcher a clearer sense of the values and the emotional depth ol'eaction of respondents. vaill (cited in mccall & lombardo, 1978) concluded that one can only draw valid insights when using both methods, which allow for the understanding of both facts and values. the qualitative data was not transl'ormed quantitatively, and is simply summarized where appropriate. ~sam le the sample population for this research was drawn from the cincinnati institute of small business directory (1992), published by the greater cincinnati chamber of commerce. one of the criteria to be listed in this directory is to have less than 100 employees. they indicate that over 80 percent of the businesses in cincinnati meeting their criteria are listed in their directory (cincinnati institute of small business, 1992). names, addresses, and the type of business are also listed. drawing from this list produced representative samples of thc cincinnati area, which may represent a microcosm of the nation inasmuch 6 as the labor market will change dramatically in the next five to ten years due to the rapidly changing demographics of the labor force (ludlow, 1989). auempts were made to contact each business from every other column on every fifth page of the directory. two attempts were made to contact each business. a total of 24g companies completed the survey (91 percent return rate), and only owners (90 percent) or managers (10 percent) were interviewed. the 20 face-to-face interviews mentioned earlier were conducted with the owners/managers of small businesses selected by a random numbers table from the cincinnati institute of small business directory, and meeting the same criteria as the telephone interviews. t~lh s a telephone survey was designed to interview small business owners/managers. the businesses were drawn randomly from a list of companies belonging to cincinnati institute of small business, a group affiliated with the greater cincinnati chamber of commerce. as stated earlier, a total of 248 companies completed the survey. each of the respondents was asked to evaluate five statements about the nature of the american workforce and two statements about their awareness of and response to the changing demographics of the worklorce. the statements each tested a major assumption of the tower-perrin workforce 2000 report (tower-perrin, 1990). small business owners/managers were asked to choose from the following responses: "strongly agree, agree, don't know, disagree, strongly disagree" for the following statements; i) there are fewer enu'y level workers today; 2) the u.s. is in a national labor shortage; 3) the workforce has more older workers today; 4) there are more women in the workforce today; 5) we have a more culturally diverse workforce today; 6) most business owners i know are aware of and concerned about the changing demographics of the workforce; 7) many business owners i know are formulating new approaches to recruiting ethnic minorities, women, and older workers. face-to-face interviews a survey guide was used to conduct 20 half-hour face-to-face interviews with a group of cincinnati area small business owners, including females and blacks as well as white males. the sample consisted of 20 businesses that fulfilled our requirements of fewer than 100 employees, being listed in the directory, and agreeing to speak with us. the objective of this phase of the research was to receive in-depth reactions to the increasingly diverse workforce, including auitudes toward government efforts to encourage diversity in the workplace. service, construction, and manufacturing businesses were included in the sample. limitations to the stud the most obvious limitation to this study is that we only used greater cincinnati small businesses. although the cincinnati institute of small business (1992) discusses the 7 fact that cincinnati is a representative city, clearly, this study only reflects the population of one city. the study did not distinguish among the sizes of various companies except to exclude companies with more than 100 employees. no auempt was made to control for industry, sales volume, age of the company or any other variable. results from the greater cincinnati study sss 0 question ¹1: there are fewer entry level workers in the workforce today. finding: small business owners have not experienced increased difllculty in locating young workers. as shown in table 1, 62.9 percent of small business managers interviewed by telephone do not believe there are fewer entry level workers in the workforce today. the face-to-face interview data support this conclusion, indicating that most small business owners are not experiencing a problem in finding qualified young applicants for positions 0 f p k . th f m 0 0 ph pwi fw~kf 20000 competition for hiring young workers would intensify because the number of people retiring from jobs will outnumber the number of new entrants (johnston & packer, 1987; naisbitt, 1982). in fact, a number of the survey participants not only reported they had found good entry level employees in ample supply, many also reported that they were employing bauer qualified and experienced people than they had historically recniited. almost all attributed this fact to the impact of "total quality" programs, which they believe led to large scale layol'fs of highly qualified employees by large companies (jost, 1993). table 1 res nses to "there are fewer en workers in the workforce toda response number percent strongly agree 37 14.9 agree somewhat 46 18.5 don't know 9 3.6 disagree somewhat 63 25.4 strongly disagree 93 37.5 note: n = 248 8 question ¹2: there is a national labor shortage today. finding: small business owners have not yet experienced a labor shortage. related to the above conclusion, and as seen in table 2, only 33.4 percent of the telephone interview respondents agreed that there was a national labor shortage. in fact, only 15.7 percent agreed strongly with this statement, while 62.5 percent disagreed. this data contradicts a key premise of previous studies, that a shortage of qualified workers would encourage owners to create more welcoming environments (or the increasingly multicultural workforce (jamieson &. o'mars, 1991; cox, 1993). table 2 res nses to "there is a national labor shorts e toda " response number percent strongly agree 39 15.7 agree somewhat 44 17.7 don't know 10 4.0 disagree somewhat 68 27.4 strongly disagree 87 35.1 note: n = 248 question ¹3: there are more older workers in the workforce today. finding: virtually all small business owners have recognirad the aging of the workforce. as shown in table 3, this was the most strongly affirmed finding of the study with 71.8 percent of telephone respondents "strongly agreeing" that there are more older workers today. table 3 res nses to "there are more older workers in the workforce toda " response number percent strongly agree 178 71.8 agree somewhat 56 2.6 don't know 4 1.6 disagree somewhai 7 2.8 strongly disagree 3 1.2 note: n = 248 9 furthermore, a number of participants indicated they were, in fact, hiring an older workforce, confirming a trend identified in the workforce 2000 report. during the face-toface interviews, one manager of a service organization claimed there was an unstated rule that managers they hire not be under 40. this to assure maturiiy both in appearance and in action. another claimed he hired older women "because they don't get pregnant." a third hired older workers because hc believed younger people "do not understand the work ethic." onc exception to this result was a construction manager who preferred hiring men in their 20's, largely because the work requires strength and agility. these results, while positive in some respects, also indicate some small businesses continue to hold stereotypical views of the relationship of age and work behavior. question g4: there are more women in the workforce today. finding: many small business owners have recognized the feminization of the workforce. eighty-three percent of telephone interview respondents agreed that the workforce comains more women today. about 31.0 percent of respondents "strongly agreed" and over half (52.4 percent) "somewhat agreed" with this statement. this shows that small businesses in cincinnati have directly cxperienced the growing "feminization of the workforce," a major assumption of the hudson report (tower-perrin, 1990). table 4 res nses to "ther e more women in the workforce toda " response number percent strongly agree 77 31.0 agree somewhat 130 52.4 don't know 7 2.g disagree somewhat 30 12.i suongly disagree 4 1.6 note: n = 248 in fact, during the face-to-face interviews, a number of businesses reported hiring morc women in recent years. a company that conducts market research hires a large number of women because most of the respondents to their surveys are women. as a manager pointed out, they could "easily do business with an all white female staff," but not with a black male staff, because only the former would have sufficient empathy with those cusiomers the business surveys. another said recruiting women was not an issue because their stafl'lready employed several "aggressive" women. one interviewee reflected what appears to be unconscious sexism when he pointed out that he had hired a number of "gals" to be bookkeepers. 10 question ¹5: we have a more culturally diverse workforce today. finding: small business owners have reacted in a variety of ways to the growth of the workforce population of black, hispanic, and asian employees. sixty-one percent of telephone respondents agreed that the workforce is more culturally diverse today, as shown in table 5, while 32.6 percent disagreed with this analysis. only 21.8 percent agreed with this statement strongly. this confirms the results of the faceto-(ace interviews, that suggest that small businesses are experiencing the impact of the growth ol'thnic minority populations differently. significantly, the tower-perrin report (1990) indicated that only businesses which showed a strong awareness of, and interest in, the changing ethnic mix of the workforce were likely to take steps to respond to this workforce trend. most survey participants reported that they had not hired more ethnic minorities, and none of the businesses had the kind of recruiting, training, development, and promotion policies advocated by management experts. for example, one manager of a service firm asserted that "the quality of our workforce would suffer if we had to hire minorities." another manager in construction pointed out that "no blacks or women had ever applied to work in our company because it [was located) in a relatively rural area where few blacks lived and because no area women appeared to be table 5 res nses to "we h ve a more ulturall diverse workforce toda " response number percent strongly agree 54 21.8 agree somewhat 97 39.1 don't know 16 6.5 disagrcc somewhat 67 27.0 strongly disagree 14 5.6 note: n = 248 interested in heavy construction work." a third manager pointed out that the highly affluent, almost all white, neighborhood in which his retail store was located required that he hire similar people to work in his store. a fourth claimed he did not see any business advantage to hiring minorities. this view was not unanimous. a beverage distributor pointed out he hired a significant number of blacks, claiming "we want a mix of color because we sell a lot to the black community." he also hired a female wine sales representative so his sales force would beuer mirror the consumers of this product. a software company manager pointed out that she has hired blacks in every area, but ihat it was not something her company set out to do. another that had not yet hired any minorities planned to when the business grew larger in 11 order to get a wider number of perspectives on his customers and suppliers. one respondent indicated her company employed a disproportionally high number of asian engineers because the supply of them was so abundant. question jt6: most business owners 1 know are aware of, and concerned about, the changing demographics of the workforce. finding: small business managers are aware of changing workforce demographics. as seen in table 6, 73.0 percent of the telephone interview respondents are aware of the changing demographics of the workforce. this high level of awareness indicates that some information on the changing demographics of the workforce has already reached small business managers. this could suggest that some small business owners are at least likely to be scanning their environments to see if their experiences match those predicted by experts. table 6 res nses to "most business owners i know are awtu'e of and concerned about the chan in demo ra hics of the workforccv response number percent strongly agree 70 28.2 agree somewhat 111 44.8 don't know 9 3.6 disagree somewhat 49 19.8 strongly disagree 9 3.6 note: n = 248 question tt7: many business owners i know are formulating new approaches to recruiting ethnic minorities, women, older employees, and handicapped workers. finding: small businesses are beginning to adapt to the changing demographics of the workforce by formulating new approaches in recruiting. as shown in table 7, 58.9 percent of the telephone interview respondents agreed they knew business owners who were formulating new approaches to recruiting employees, cspccially older workers and women. twenty percent agreed strongly and 28.6 percent disagreed. this shows that many small business owners are beginning to respond to the new workforcc, although a substantial number are not. table 7 12 res nses to "man business owners i know are formulatin new a roachestorecruitin ethnic minorities women olderem lo ees and handica workers" response number percent strongly agree 50 20.2 agree somewhat 96 38.7 don't know 20 8.1 disagree somewhat 71 28.6 suongly disagree 11 4.4 note: n = 248 face-to-face interview findin s as stated earlier, the in-depth face-to-face interviews allowed respondents to address quesuons about diversity in more depth than did the telephone interviews. each question addressed what priority diversity has to small business. finding: adapting workplace practices to the more diverse workforce is not a high priority of small business. when asked in the face-to-face interviews what key issues faced their companies, none of the business managers menuoned diversity. the largest number of the in-depth interview respondents identified the state of the economy and the quality of their products or services as their most pressing issues. none volunteered diversity. when asked to rank diversity on a scale of i to 10, with 10 being the highest score, only one ranked it higher than a 5, and the rest lower. finding: few of the managers were in favor of quotas or affirmative action programs. during the face-to-face interviews, one respondent pointed out she was "playing for survival, not social welfare." another said "diversity is bullshit," and another that "i'l hire certain people when the government guarantees that i won't lose money. otherwise they shouldn't tell me who to hire." a fourth said she discriminates on the basis of intelligence, and not race or gender. the common view was expressed best by a computer manager who said that an empty seat was preferable to hiring the wrong person. two interviewees did assen that affirmative acuon is required to eliminate the inherent racism of society. finding: none of the companies reported active programs for recruiting, training, and developing a diverse workforce. 13 most of those interviewed face-to-face used networking and newspaper advertisements as tools for recruiunent. none offered any type of training in diversity. most reported they limited employee education to on-the-job training. others offered additional job-specific training by purchasing video tapes or sending employees to meetings and conferences. only one company had an active development program. it agreed to pay for part of the cost of an employee pursuing a college degree. this same respondent reported the experience was not entirely positive because a number of employees left the company after receiving their degrees. virtually all the companies used higher salaries and benefits as a means of retention. none had programs specifically aimed at retaining ethnic minorities however, a software company owned by a woman developed specilic benelit programs to retain female employees, including i)ex-time scheduling, work-at-home programs, and pregnancy leaves. these results indicate many small business managers are doing little to address diversity issues, as they have yet to recognize "the handwriting on the wall." furthermore, they will find infoimauon on diversity to be more credible if they see it as coming from a non-govcrnmcnt source (e.g. friends), or if they see it as posiuvely impacting their "bottom ime." program for small business diversity education the new population dynamics represent a major shift in the business environment. small business managers recognize that there are now a variety of labor forces, "each with different expectations, difl'erent needs, and different characteristics.... it can only cause trouble to treat them as a homogeneous entity" as drucker described the situation in 1980. furthermore, "today's workforce is characterized by a mix of values ...persons with di(fcring values frequemly work side by side; managers (owners) must be careful not to make assumpuons about employees'alues that may be incorrect." (.iamieson k o'mars, 1991). given the tentauve steps small business owners have taken in response to the growing diversity of the workforce, small business educators need to take the lead in i) inl'orming small business managers of the realities of the new workforce, and 2) explaining ihe rauonale for promoting workforce diversity and the steps to take in implementing a diversity program. ex lainin the rationale for diversit as thc in-depth intcrvicws revealed, small business owners will not be persuaded by arguments to prepare i'or the new workforce if they perceive it as an additional affirmative action or quota program (e.g. "iip-service"). instead, educaiors should demonstrate that promoting diversity is a business necessity-a solid business decision-with a positive rationale behind it (thomas, jr., 1990). as rosabeth kantor (1983) demonstrates, companies with progressive human resource policies have higher long-term prot itability and financial growth than their non-aggressive counterparts. done well, a diversity program can result in improved profitability because of three factors: i) improved ability to deal with customers; 2) better management of all workers; and 14 3) better ability to recruit the best of all talent available. each of these factors is discussed below. 1) a diversity program improves an organization's ability to meet the needs of customers. business success in large pan is a reflection of a superior understanding of consumers and their needs. to sustain this superior understanding of consumers, small businesses must develop a workforce that reflects the demographics of its customers. who better knows the needs of women, blacks, hispanics, asians, the handicapped, the dual career family, and the single parent family than women, blacks, hispanics, asians, the handicapped, dual career couples, and single parents? promoting diversity can also help on the international frank an area of major opportunity for american small business (schwanz, 1989). markets both at home and abroad arc becoming more compcutive and demanding. therefore, it is critical that organizations develop workforces that are efl'ective in dealing with a diversity of cultures, not only within their own organizations, but also in terms of the workforces of their national and international suppliers, distributors, and customers. companies that train their own employees to be more sensitive to those of other cultures as well as hire employees who have suong cultural ties to the international areas in which business is being conducted, will be at a clear competiuve advantage to those who do not. 2) a diversity program will help develop better management of all company talent. participants from all levels of organizations have commented that diversity training has broadened their horizons and expanded their enjoyment of different people. they find that they appreciate others more and that their co-workers appreciate them more now that they bcucr understand each other (nelton, 1988; copeland, 1988). diversity training also prepares managers for the new roles the future will force them to adapt as teachers, mentors, and nurturers of highly specialized professionals, knowledgeable workers who often will have more detailed knowledge of job-relevant subjects than they do. thus, it is important to have a program to develop and reward managers who can effectively manage people in what peter drucker (1980) calls "turbulent times." as he points out, increasingly, managers and/or owners must act as assistants, resources, and teachers. the new elements in the labor force whether they are physically handicapped, working part-time, single parents, or minorities with various ethnic backgrounds require different leadership than supervisors have traditionally been uained to give (drucker, 1980). as jamieson and 1 tmara (1991) put it: "flexibility is the password to managing the changing workforce," and this is the key to success. 3) a diversity program also improves the ability to recruit, develop, and retain the best of all available talent. workers will be attracted to companies in which they know they can succeed on merit and in which their ideas will be listened to and respected, regardless of race, gender, 15 handicap, or ethnic origin (cope)and, 1988; denton, 1992; jamieson jft (ymara, 1991). therefore, a framework is provided to assist small businesses in developing practices that allow them to accomplish this. lm lementin a diversit pro ram some steps small businesses can take to implement successful diversity programs include the following: l. make the development of a multicultural work environment a priority. the tower-pcmn survey (1990) shows that top management support is crucial for success. "among organizations where concern about labor shortages is reflected in strategic plans, 42 percem recruit nontraditional workers, such as thc handicapped or elderly, and 51 percent apply a markcung approach to hiring." by conuast, among those that have not yet translated concerns about diversity into specific plans, just 16 percent recruit from non-traditional sources and only 35 percent market to prospemive candidates. their surveys also revealed large businesses were far more likely to fall into the former group, and small businesses in the latter group. an initial step for top management in developing a diversity program is to inform its employees of its strong commitment to diversity. thc key to success here is demonstrating that diversity is not simply an equal opportunity commitment or an affirmative action plan. rather, it is a business decision that effectively prcparcs vie organization i'or the future and builds a substantial competitive advantage. 2. build a diverse organization through elyective recruiting, an area where many small businesses need to improve. small businesses, in general, are far behind their larger counterparts in this area, as clearly evidenced by thc data collected during this research. this study confirms the towerpcrrin (1990) report that companies that recruit less than 75 enny level workers annually are only half as likely as companies that hire 300 or more entry level workers annually to have articulated diversity programs (e.g. small businesses vs. big businesses). to recruit a diverse workforce, small business managers should invesugate making more intensive use ol'small business appropriate" recruiting tools, such as placement offlice imcrviews at local colleges and uade schools, co-op programs, intemships, presentations on college and high school campuses, and community involvement. successful recruiting also requires a commitmem to meeting numerical targets. while not the "quota programs" of old, experience indicates that if an organization does not have a given minority goal, it will not develop a method i'or finding qualified minority workers. as a result, the business will find it does not have minority workers on its workforce. recruiting is only an initial step. 3. small businesses should also provide growth and development opportunities for all. 16 the key to the success of a diversity program goes beyond meeting statistical targets to creating an environment in which people focus on sharing ideas freely for the good of the individual as well as the company. thus, quality training and development opportunities must be made available to each individual. yet, a great majority of small businesses are lacking in this area. the tower-perrin (1990) survey indicated that over two-thirds of large companies, and more in the small business sector, spend less than $2,000 per year on any kind of uaining. diversity training with visible top management/owner supportoften is effective in gaining support for diversity programs among middle management as well as administrative and technical workers. low cost, "small business appropriate" training, including videotapes and workshops in education seuings (copeland, 1988) are increasingly available to small business owners (e.g. jamieson jk o'mara, 1991) and have shown to be effective (cox, 1993). for example, mainiero and tromley (1994) repom "a study of seventy-five canadian consultants found that people exposed to even the most rudimentary form of training on cultural diversity are significantly more likely to recognize the impact of cultural diversity on work behavior, and to idcntil'y the potential advantage of cultural hetcrogencity in organizations." small business owners may even have to offer remedial educauon to poorly trained employees and to those who speak english as a second language. in light of the facts about ihe growing skills gap between what abilities new jobs will require and the inadequate preparation in language and mathematical skills of many young adults, investing in training has become a necessity, not an option. alternatively, they may also need to "de-skill" jobs so less literate workers can fill them (behar, 1991), 4. realigning policies and practices to adhere to diversity policies. additionally, small businesses should not expect their new employees to do all the adjusting. they should work to achieve mutual adjustments, where employees work together to benefit from their differences, rather than argue about them. company-wide social events, new member orientations, and informal mentoring programs have all been effectively employed to encourage diversity acceptance (cox, 1993; malone, 1993). this environment leads to a more harmonious existence and greater productivity (jamieson & o'mara, 1991), which in the long run boosts the "bottom line." conversely, "(strained) cultural differences can and do increase cost through higher turnover rates, interpersonal conflict. and communication problems." (cox, 1993). organizational adjustments should include taking into accoum the family circumstances, ethnic cultures, and disabilities of employees. small businesses should consider a variety of techniques to adjust to changing lifestyles, including flextime, job sharing, "mommie tracks," sick leave care for children and elderly parents, pregnancy leaves, and pan-time work (johnston &. packer, 1987; schwanz, 1989). pan ol'he adjustmem includes making sure promotions and salary increases are based on contribution, with no one disqualified because of gender, race, political views, ethnic origin, religious creed, or physical handicap. the knowledge, maturity, and experience of the new workforce needs to be reflected in personnel practices. for example, older workers who had significant prior work experience, including mature women who had been "chief 17 execuuvc officers" in their own homes while raising children, need very different uaining than employees fresh out of high school or college. small business owners also need to abandon limiting stereotypes, such as assuming that some positions can only be filled by men and others by women (jamieson &. o'mara, 1991; drucker, 1980). summary workforcc 2000 (johnston & packer, 1987) indicated that in the future, the american workforcc will bc older, as well as morc heavily female, black, hispanic, and asian. lifcstylc changes, such as the growth of single parent and dual career families will also affect small business personnel practices. in addition, higher levels of education and training will bc required to prepare many new labor entrants for the skills needed for tomorrow's jobs (jamieson & o'mara, 1991). consequently, to adapt to these changes, recruitment, uaining, retention, and promotion practices in small businesses must change. as thc results ol'hc two surveys discussed here indicate, most small business owners in a mid-size city such as cincinnati have experienced some ol'he cfl'ects of a changing workforcc, especially in employing older workers and women, and to a lesser extent, ethnic minorities. while many arc aware ol'rojections that the workl'orce is changing, a number cominue to hold stercotypcs of many potential workers, which limits their opinions as to the possible conuibuiions of these workers. funhermore, only a few have begun taking initial steps to adapt their businesses to the changing workforce. the data also indicate that most small business owners in cincinnati do not hold diversity as a high priority; have not had trouble recruiting employees; and are not strongly behind government efforts to promote a more diverse workforce through laws. this indicates many small business owners are likely to move slowly and reluctantly to adapt to changing demographics. in response to this situation, business educators need to dcvclop programs to educate small business managers to the facts and implications of the new diverse workforce, including thc rationale i'or a diversity program and suggestions for implementing new personnel procedures to adapt to the new workforce realities. conclusion this study is only ihe beginning of the process. research must be done on a national scale to see if the results of this study generalize beyond the boundaries of the grcatcr cincinnati area. also, thc next phase should group the companies by industry and begin to delve into cost/benefit issues related to diversity activiiies. 18 references associated press (1993, september 9). 90 million u.s. adults illiterate. cincinnati post, p. 2a. augstrum, p.r., baldwin, t., & macy, g. 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(repon. no. ed350765). washington, d.cz cosmos corporation. 20 http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2019, vol. 29, no. 01, 99-114 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2019 small business institute® w w w. j s b s . o rg why do some business owners profess greater personal commitment to their businesses than others? similarly, why do other owners indicate greater reluctance to sell or close their businesses than others? and, finally, why do some owners work harder in their businesses than others? answering these questions would help scholars better comprehend the complex relationship between owner persistence intentions, owner exit decisions, and business failure (detienne & cardon, 2012). however, while business failure and owner exit decisions have been extensively examined in the literature, relatively little research has been conducted on owner persistence intentions (holland & shepherd, 2013). failure research finds that businesses terminate primarily due to a lack of adequate planning or poor operating skills on the part of the firm’s owner (chen, 2015). specifically, little business planning, inadequate financial resources, and limited market knowledge or inadequate response to issues such as competition, rapid growth, financial management, and acute problems cause business failure (tocher & rutherford, 2009; wennberg, wiklund, detienne, & cardon, 2010). further, the literature contends that most of this failure could be avoided if owners were simply better prepared and more knowledgeable (aldrich & martinez, 2001; williams jr., manley, aaron, & daniel, 2018). failure research thus implies that business owners often simply lack the skillset needed to launch and operate successful firms (holland & garrett, 2015), leading to as many as 90% of all businesses failing (kessler, 2014). conversely, research on business ownership exit finds that failure rates are not as high as previously thought because many businesses that are simply closed, sold, combined with other businesses, and restructured into different ownership forms are often misclassified as “failed” businesses (small business facts, 2012; wagner, 2013). supporting the above notion, scholarly research finds that individuals make exit decisions for myriad reasons not related to planning or operations (e.g. hsu, wiklund, anderson, & coffey, 2016). for example, many owners exit smoothly operating and profitable businesses for reasons such as introduction greg murphy1, neil tocher2, tyler burch3 1idaho state university, usa, murpgreg@isu.edu 2idaho state university, usa, tochneil@isu.edu 3idaho state university, usa, burctyle@isu.edu small business owner persistence: do personal characteristics matter? persistence intentions, owner characteristics, business failure, exit, opportunity recognition recent research suggests that (1) business failure rates are lower than previously thought and (2) business owners exit businesses for myriad reasons besides performance. despite these findings, relatively little is known about whether personal characteristics (i.e. expectations, competencies, education) of small firm owners influence their likelihood to persist with business ownership. given this gap, the present study investigates the relationship between owner characteristics and persistence intentions. framed by threshold theory, we theorize and test whether owner growth expectations, satisfaction, education, competencies, and financial investment influence their persistence intentions. results indicate that owner future growth expectations for the business, their opportunity recognition abilities, and their satisfaction with the business significantly impact persistence intentions. implications of study findings are discussed. apa citation information: murphy, g., tocher, n., & burch, t. (2019). small business owner persistence: do personal characteristics matter? journal of small business strategy, 29(1), 99-114. http://www.smallbusinessinstitute.biz http://www.jsbs.org 100 g. murphy, n. tocher, t. burch journal of small business strategy / vol. 29, no. 1 (2019) / 99-114 work-life balance, pursuit of better or different opportunities, retirement, cashing out, and risk avoidance (e.g. justo, detienne, & sieger, 2015). further, owners vary greatly in their level of persistence, causing some owners to persist when others would exit (detienne, 2010). given this, it appears that owner discretionary behavior has a great deal to do with whether or not a business should be counted as a failure and this discretionary behavior is often not related to the owner’s planning and operational proficiencies (burke, fitzroy, & nolan, 2008). additionally, it seems that the exit literature suggests that while owners’ persistence levels vary, many business exit decisions are misclassified as failures which should instead be classified as discretionary exits by owners considering many factors such as opportunity cost and life stage (wagner, 2013). that said, understanding the owner characteristics andpersistence intentions relationship would help scholars determine what types of owners are more likely to fail due to planning and operational weaknesses and what owners are likely to exit for opportunity cost and lifestyle reasons (detienne & cardon, 2012; holland & garrett, 2015). unfortunately however, this discretionary persistence behavior is not well understood in the scholarly literature. given this perplexing gap, we empirically examine the relationship between small firm owner characteristics and persistence intentions. framed by threshold theory and using a sample of 380 small manufacturing businesses, we theorize and test the notion that owner growth expectations, satisfaction, education, competencies, and personal financial investment will be positively associated with persistence intentions. our study contributes to the literature by being one of the first studies of the owner characteristics/persistence intentions relationship. as such, study findings will start to shed light on what types of business owners are likely to fail, persist, and voluntarily exit. theoretical framework threshold theory threshold theory asserts that owners have a cognitive performance threshold which they constantly compare to their firm’s actual financial performance, using this comparison to make decisions about the firm’s future (gimeno, folta, cooper, & woo, 1997). the theory thus asserts that all owners have different performance thresholds and they will often use the performance threshold/actual performance comparison to make the persist/exit decision (detienne & chirico, 2013). as such, owners will likely persist if performance is above the threshold and are likely to exit if performance is below the threshold (zellweger, nason, nordqvist, & brush, 2013). importantly however, legitimacy research suggests that the performance threshold and the owner persist/exit decisions arising from it are highly dependent upon whether the owner feels key stakeholders have granted the owner’s firm legitimacy (nagy, rutherford, truong, & pollack, 2017). research suggests that small firms must first be granted legitimacy by critical stakeholders before they will gain consistent access to resources needed to survive and grow (rutherford, buller, & stebbins, 2009). as such, owners who do not feel they have been granted legitimacy by critical stakeholders they deem necessary for future survival and growth may be more likely to exit regardless of current or potential financial performance (mitteness, baucus, & norton, 2013). since stakeholders have many options regarding which firms to legitimize and not legitimize, key stakeholders (i.e. large investors, significant customers) often control specific market segments because legitimized firms will expect to survive and non-legitimized firms will expect to fail (peake & d’souza, 2015). hence, owner performance thresholds and associated persistence/exit decisions may be as dependent upon whether critical stakeholders have deemed the firm legitimate as they are on pure financial performance (mitteness et al., 2013; nagy et al., 2017). such a perspective provides an alternative explanation for the prevailing belief in the literature that owners exit firms due primarily to the firm’s financial performance and therefore helps explain why owners with high performing firms may exit and owners with low performing firms may persist (brauer, 2006; peake & d’souza, 2015). notably, an owner’s performance threshold is built up over time through a combination of a variety of personal characteristics (i.e. growth expectations, satisfaction, and education) which change and adapt (detienne & cardon, 2012). therefore, threshold theory provides a foundation for the notion that owner characteristics influence performance intentions because such characteristics combine to create the performance threshold which guides the persist/exit decision (detienne & chirico, 2013). importantly, several owner characteristics combine to form the acceptable performance threshold in an owner’s mind (detienne, 2010). as such, an owner with high growth expectations that is operating a firm which is profitable, but no longer growing, is likely to exit while a different owner operating a similarly profitable firm with less growth expectations will be much less likely to voluntarily exit (gimeno et al., 1997). however, if the owner with high growth ex101 g. murphy, n. tocher, t. burch journal of small business strategy / vol. 29, no. 1 (2019) / 99-114 pectations operating the profitable low growth firm is also highly satisfied with the firm for several other reasons (i.e. legitimization by key stakeholders, lifestyle, freedom, business location, effort required) that owner may be moderately persistent (nagy et al., 2017; peake & d’souza, 2015). hence, owner characteristics are the building blocks of performance thresholds that influence persistence intentions (zellweger et al., 2013). thus, an examination of owner characteristics and persistence intentions is needed to articulate what characteristics may be critical pieces of owner performance thresholds and what characteristics may not be as influential on such thresholds (detienne & chirico, 2013). given this, we next define persistence, compare it with exit, and outline several important owner characteristics that previous literature suggests are persistence indicators. persistence persistence has been defined as the continuation of effortful action despite failures, impediments, or threats, either real or imagined (gimeno et al., 1997). as such, the decision to continue may be affected by the evaluation of positive alternatives and thus owner persistence may be considered as the decision to continue with a venture given different motivational forces (holland & shepherd, 2013). owner persistence is logically related to owner exit, defined as “the process by which the founders of privately held firms leave the firm they helped create; thereby removing themselves, in varying degree, from the primary ownership and decision-making structure of the firm” (detienne, 2010, p. 203). while owners may exit their businesses for myriad reasons, differences in persistence levels of owners should impact business exit (holland & garrett, 2015). although scholars generally agree that business owners are, on average, very persistent in pursuing the interests of their firms (digan, kerrick, cumberland, & garrett, 2017), there is considerable variance in the level of persistence demonstrated by individual owners (justo et al., 2015). some owners dedicate their whole lives to the pursuit of ensuring the success of their businesses, involving themselves so intensely in their firms that their evaluations of self-worth become very closely tied to their businesses performance (oswald, muse, & rutherford, 2009). conversely, other owners may be considerably less committed to their firms for reasons such as other career alternatives (e.g. burke et al., 2008), work life balance issues (e.g. justo et al., 2015), and changing market dynamics (e.g. hsu et al., 2016). further, some owners may be more concerned with outcomes associated with business ownership such as financial rewards, respect, or lifestyle instead of owning a specific business (holland & garrett, 2015), making such owners more likely to jump to another business when a more attractive alternative is discovered (wennberg et al., 2010). still other owners may view business ownership as a temporary state, preferring to return to a corporate existence as soon as the opportunity presents itself (detienne, 2010). the level of adversity faced by owners also has an impact on the persistence decision with persistence being more likely during periods of less adversity and less likely during periods of high adversity (gibson, 2010; pett & wolff, 2016). despite high level interest in the topic, previous research has rarely assessed persistence in terms of effort and commitment of small business owners. rather, seminal research by gimeno et al. (1997) assessed persistence as the simple percentage of businesses discontinued during a given time period, which implicitly assumes each firm which discontinued did so due to a lack of owner persistence (baum & locke, 2004). other studies (e.g. detienne, shepherd, & de castro, 2008; holland & garrett, 2015) have used conjoint experiments which present owners with scenarios and asks them to indicate their persistence intentions given a contrived situation. while such studies are very interesting and informative, they are only relevant to the point that the contrived scenarios actually happen to the studied owners (cardon & kirk, 2015). importantly however, research also suggests owner commitment and effort are significant persistence indicators (baum & locke, 2004; digan et al., 2017; pett & wolff, 2016). supporting this perspective, small business research finds that owners who take jobs outside the firms they own (suggesting less effort and commitment to their firms) are significantly more likely to exit their firms (wennberg et al., 2010). further, research indicates that organizational commitment is negatively related to turnover (e.g. cannon & herda, 2016). notably, the negative relationship between commitment and turnover is likely even more applicable to small business owners given the financial constraints they typically face (rutherford, tocher, pollack, & coombes, 2016). finally, research indicates that owners who carefully integrate goal setting, strategic planning, and financial analysis are more committed to business outcomes than owners who fail to integrate such activities (williams jr. et al., 2018). given the above, we assess persistence via owner commitment and effort. as such, we next outline characteristics which previous literature suggests are positively associated with owner persistence prior to testing the owner characteristics 102 g. murphy, n. tocher, t. burch journal of small business strategy / vol. 29, no. 1 (2019) / 99-114 persistence intentions relationship. future expectations and persistence research indicates a significant relationship between owner expectations and persistence intentions (dutta & thornhill, 2014; rita, priyanto, andadari, & haryanto, 2018). specifically, it has been argued that the decision to persist “is primarily determined by assessing the desirability of the potential outcomes of the opportunity and the probability of achieving those outcomes” (holland & shepherd, 2013, p. 334). empirical research provides support for the above assertion as studies find that expected financial success leads to both business owner effort and continued business ownership (e.g., renko, kroeck, & bullough, 2012). similarly, owners who have positive perceptions of the operating environment are more likely to persist with firm operation (detienne et al., 2008). finally, a series of studies comparing entrepreneurial aspirations against expected financial and non-financial rewards found a consistent relationship between expected outcomes and persistence intentions (holland & garrett, 2015). given these results, it appears that owners will be more likely to persist if they expect their efforts to lead to desired outcomes and will be less motivated to persist in business ownership as such expectations weaken. as such, we posit that owner future expectations of rewards will enhance persistence intentions and thus advance the following: hypothesis 1. owner future expectations will enhance persistence intentions such that the more rewards the owner expects to receive, the more likely the owner will be to persist with business ownership. satisfaction and persistence several lines of research indicate a positive association between owner satisfaction and persistence intentions. first, organizational behavior research has found that satisfied employees have much lower turnover intentions (rubenstein, eberly, lee, & mitchell, 2015) and higher organizational commitment (harrison, newman, & roth, 2006). by extension, it is likely that satisfied owners will be more committed to their firms and less likely to sell or close their businesses. similarly, research finds strong evidence that satisfaction reduces employee absenteeism (schaumberg & flynn, 2017) suggesting that satisfied owners will work more and thus have higher persistence intentions. further, family business research finds that owner satisfaction resulting from meeting expectations and reaching profitability goals enhances persistence intentions (oswald et al., 2009). finally, social capital research indicates that business owners who are satisfied with their networking groups are more committed to their firms (pollack, coy, green, & davis, 2015), acquire more resources (davidsson & honig, 2003), and are better able to adapt their firms for long term success (stam & elfring, 2008). given the above findings, we posit that owner satisfaction is positively associated with persistence intentions and thus advance the following: hypothesis 2. owner satisfaction will enhance persistence intentions such that the more satisfied the owner, the more likely the owner will be to persist with business ownership. education and persistence research suggests a strong positive association between education and owner persistence intentions. for example, educated owners tend to choose more effective business strategies, often gravitating towards a combination of high innovation and low risk (sonfield & lussier, 2014). additionally, owner education has been found to enhance human capital, which in turn leads to increased likelihood of starting and operating a high performing new venture (detienne & cardon, 2012). similarly, studies find that educated business owners are more likely to possess enhanced critical thinking skills, which help them better navigate the challenges associated with operating a business in an increasingly complex environment (tocher & rutherford, 2009). further, educated business owners are better able to develop social capital (e.g. davidsson & honig, 2003) and acquire tangible resources (greve, 2009), which should make them more likely than less educated owners to persist with business ownership (e.g. lechner, dowling, & welpe, 2006). supporting the above notion, better educated owners were found to be much less likely to close their businesses than less educated owners (coleman, cotei, & farhat, 2013). finally, seminal research suggests that education likely enhances owner persistence intentions as studies found that owner formal education enhanced firm performance, decreased owner exit, and increased owner commitment (cooper, folta, gimeno-gascon, & woo, 1992; gimeno et al., 1997). the above suggests that educated owners will be more likely to persist with business ownership and thus we advance the following: hypothesis 3. owner education will enhance persistence intentions such that the more educated the owner, the more likely the owner will be to persist with business ownership. 103 g. murphy, n. tocher, t. burch journal of small business strategy / vol. 29, no. 1 (2019) / 99-114 competencies and persistence owner competencies (i.e. self-efficacy, opportunity recognition ability, managerial skill) are defined here as high order proficiencies which afford owners the chance to successfully operate their businesses (man, lau, & chan, 2002). these competencies can be classified as personal or general in nature (baum, locke, & smith, 2001), meaning that they relate more to the competencies of the owner than to the business and can thus be applied to different settings as opposed to being limited to a specific business (frey & rupert, 2013). research suggests that owner competencies will enhance persistence intentions. for example, studies find that owner self-efficacy is positively associated with persistence intentions and perceived success (cardon & kirk, 2015; gibson, 2010) while seminal research found that competencies such as managerial skill, political savvy, and opportunity recognition ability enhance owners chances to operate high performing firms (chandler & jansen, 1992). such competencies are also positively associated with owner satisfaction (shane, locke, & collins, 2003) and owners’ chances to establish innovative firms (mohsin, halim, ahmad, & farhana, 2017). given these findings along with the logical argument that competent owners are more likely to operate successful firms that are more desirable to own, we posit that owner competencies will enhance persistence intentions. as such, the following is advanced: hypothesis 4. owner competencies will enhance persistence intentions such that the more competencies the owner possesses, the more likely the owner will be to persist with business ownership. owner personal investment and persistence owner personal investment in the business is also expected to enhance persistence intentions. specifically, research finds that a high level of personal investment is positively associated with persistence intentions, particularly for underperforming firms (detienne et al., 2008). this somewhat counter intuitive finding is actually consistent with self-justification theory in that attitudes may be biased to justify past behavior, leading owners to feel that their reputations depend on the success or failure of their business (de clercq & voronov, 2009). persisting in operating an underperforming firm is also aligned with the escalation of commitment phenomena (staw, 1981), in that owners may find themselves in a situation where the more they invest in a business, the less willing they are to give up on a business (stam & elfring, 2008). conversely, research also finds that firms with high owner equity percentages experienced fewer financial difficulties during their early years (tost, 2011) suggesting that owners will persist because a firm with fewer financial difficulties is more desirable to continue owning (oswald et al., 2009). finally, large owner investment also likely enhances owner persistence intentions because a high personal financial stake in the business likely motivates an owner to work harder for a longer time period to justify the investment (cardon & kirk, 2015). since research indicates that large owner financial investments enhance persistence regardless of firm performance, we advance the following: hypothesis 5. owner personal investment will enhance persistence intentions such that the higher the owner’s personal investment, the more likely the owner will be to persist with business ownership. method data was gathered from a sample of small manufacturing businesses in harris county, texas. all of the firms sampled were listed in either the dun & bradstreet regional directory-houston, the directory of texas manufacturers, or the state of texas sales tax files. firms were eligible for sample inclusion from each of the sources if they were located in harris county, were privately and independently owned, and had fewer than 500 employees. this process resulted in a total of 1,891 firms being selected for sample inclusion. the survey was sent out twice and then followed up by a reminder to all potential participants. of the 1,891 firms that were sent a survey, 109 were returned as undeliverable and could not be contacted by telephone, 34 of the businesses indicated they had an established policy of not participating in studies, 23 of the businesses were later found to be located outside harris county, 16 of the businesses were no longer in operation, 10 businesses were discovered to be branches of larger corporations, and one firm failed to meet the pre-established criterion of having less than 500 employees. of the 1,698 firms eligible to respond, potentially usable responses (i.e., responses with at least some potentially usable data) were returned by 369 of the businesses, resulting in a 21.73%response rate. of these 369 potentially useable responses, the number of responses containing a complete set of variables necessary for current analyses ranged from 280 to 283 depending on the dependent variable being analyzed. 104 g. murphy, n. tocher, t. burch journal of small business strategy / vol. 29, no. 1 (2019) / 99-114 persistence intentions owner commitment, owner willingness to sell or close the business, and owner effort were each measured as proxies of persistence intentions. these three measures are acceptable metrics of the construct and should serve as strong indicators of persistence intentions (holland & garrett, 2015). commitment was assessed by 6 items similar to those used by kanning & hill (2013). cronbach’s alpha for the items used was .75, which is considered acceptable by conventional standards (cohen, cohen, west, & aiken, 2003). to measure owner willingness to sell or close a business, the respondents were asked to indicate whether they would sell or close their business if annual sales were changing at 8 different rates ranging from decreasing 75% annually, decreasing 50% annually, decreasing 25% annually, decreasing 10% annually, increasing 10% annually, increasing 25% annually, increasing 50% annually, and increasing 75% annually. the highest level of change in sales at which the respondent indicated they would be willing to voluntarily sell or close their business (i.e. sales increasing 50% annually) was used as a proxy for willingness to sell/ close. effort level was measured as the average hours per week worked on the business by the owner. the respondent was asked to provide the average hours per week worked on the business over the past year to help control for the effects of seasonal demand. owner characteristics the five owner characteristics of future expectations, satisfaction, education level, competency, and personal investment were assessed in this study. future expectation was measured as the percentage change between expected future annual sales and current annual sales. satisfaction was measured by asking respondents to assess their satisfaction with the profitability, growth, and productivity of the business by indicating their feelings on a five point likert-type scale ranging from very satisfied to very dissatisfied. the three satisfaction measures were combined to form one overall measure of satisfaction. the cronbach’s alpha for the three satisfaction measures was .71, which is considered acceptable by conventional standards (cohen et al., 2003). education level was measured as the highest degree earned by the respondent ranging from high school or ged to doctorate. opportunity recognition (cronbach’s alpha = .71), political savvy (cronbach’s alpha = .59), and managerial skills (cronbach’s alpha = .75) competencies were assessed via items similar to measures used by mitchelmore & rowley (2013). personal financial investment was measured as the owner’s total equity in the business. further details on specific items used for each measure are contained in the appendix. control variables firm size, firm age, owner gender, owner minority status, and owner annual compensation from the business were all controlled for in the study. firm size was measured as the composite of the standardized scores for the number of full-time equivalent employees of the business and the total assets of the business. firm age was measured as the number of years since the business had its first sale. gender was dummy coded with 1 = male and 2 = female. minority status was also dummy coded with 1 = minority owner and 0 = non-minority owner. total annual owner’s compensation was measured in categories with 1 = less than $10,000, 2 = between $10,000 and $24,999, 3 = between $25,000 and $49,999, 4 = between 50,000 and $74,999, 5 = between $75,000 and $124,999, 6 = between $125,000 and $249,999, 7 = between $250,000 and $999,999, and 8 = more than $1,000,000. results the means, standard deviations, and correlation coefficients of the variables used in this study are presented in table 1. the criteria used to select firms for inclusion into the sample provided considerable diversity within the total sample on key characteristic variables. notably, firm size was a composite measure of full time equivalent employees (mean = 23.65) and total assets (mean = $1,502,548). to test the hypotheses, multiple regression analysis was used. the results of the analysis are presented in table 2. the model tested had a significant overall effect, as measured by the f test, on commitment (p < .001) and on effort (p < .01). the model also had a marginally significant effect on the entrepreneur’s willingness to sell or close the business (p < .10). owner compensation was positively related to owner effort (p < .10), suggesting that higher compensated owners worked more in their businesses than less compensated owners. mixed support was found for the hypotheses. hypothesis 1, which predicted that owner expectations would be positively associated with persistence intentions was supported. the hypothesis was tested by regressing growth expectations on owner commitment, effort, and willingness to sell/close the firm. positive associations between expectations/commitment and 105 g. murphy, n. tocher, t. burch journal of small business strategy / vol. 29, no. 1 (2019) / 99-114 table 1 means, standard deviations, and correlation coefficients mean sd 1 2 3 4 5 6 7 8 9 10 11 12 13 14 1. firm sizea .00 2.56 2. firm age 17.88 15.25 .18*** 3. gender 1.09 .32 -0.11* .01 4. min. status .14 .35 -.01 -.16** -.02 5. commitment 4.31 1.75 .40*** .21*** -.20*** -.14** 6. commitment 24.43 4.24 .13* .05 .02 .02 .21*** 7. sell or close -43.82 55.67 -.03 .10† .07 -.04 -.03 -.16** 8. effort 44.91 19.61 .04 .00 .01 .06 .06 .00 -.04 9. growth expect .76 3.56 -.05 -.09† .03 .12* -.19*** -.06 -.10† .16** 10. satisfaction 9.93 2.73 .07 -.01 .01 -.10† .33*** .40*** -.17*** .01 -.03 11. education 2.51 1.21 .18*** -.05 -.14** .09† .04 -.08 .05 .06 .11* -.14** 12. manage. skill 15.37 2.57 .04 .08 .04 .02 .08 .13* -.04 -.06 .00 .30*** .01 13. political savvy 7.48 1.53 .06 .11* -.05 -.06 .16** .13* .00 .01 -.06 .27*** -.06 .49*** 14. oppor. recog. 11.70 2.29 .04 .02 -.04 .11* .02 .14** -.04 .16** .01 .19*** .03 .29*** .32*** 15. personal invest 577111 1428623 .61*** .15** -.11* -.03 .38*** .11* .04 -.07 -.05 .10† .07 .01 .06 .09† afirm size is a composite measure of standardized scores of full time equivalent employees (mean = 23.65) and total assets (mean = $1,502,548). correlations were performed using listwise deletion; n = 280 † significant at .10 * significant at .05 ** significant at .01 *** significant at .001 106 g. murphy, n. tocher, t. burch journal of small business strategy / vol. 29, no. 1 (2019) / 99-114 expectations/effort, along with a negative association between expectations/willingness to sell or close indicate support for hypothesis 1. results find marginal support for the expectations/commitment relationship (p < .10), marginal support for the expectations/willingness to close/sell relationship (p < .10), and support for the growth expectations/effort relationship (p < .05). such results do indeed suggest that the higher future growth expectations, the more likely owners are to persist with business ownership. in particular, the finding that future growth expectations is strongly associated with effort indicates that either owners adjust their effort levels to match their expectations of future growth or that future expectations are adjusted to match the effort of the owner. hypothesis 2, which predicted that owner satisfaction would be positively associated with persistence intentions was partially supported. the hypothesis was tested by regressing satisfaction on owner commitment, effort, and willingness to sell/close the firm. positive associations between satisfaction/commitment and satisfaction/effort, along with a negative association between satisfaction/willingness to sell or close provide support for hypothesis 2. results table 2 regression of control and independent variables on proxies for persistence intentions (i.e., commitment, willingness to sell or close the business, and effort) proxies of persistence intentions commitment sell or close effort n = 283 n = 282 n = 280 commitment sell or close effort n = 283 n = 282 n = 280 firm size .09 -.12 .03 firm age .07 .07 -.01 gender .01 .08 .05 minority status .07 -.05 .06 owner’s compensation .06 .04 .11† growth expectations .09† -.11† .14* satisfaction .34*** -.21** -.01 education level -.05 .05 .09 managerial skill .01 -.05 -.18** political savvy .03 .07 .01 opportunity recognition ability .06 .03 .22*** personal investment -.01 .10 -.13† f 5.08*** 1.70† 2.41** r2 .18 .07 .10 standardized estimates reported † significant at .10 * significant at .05 ** significant at .01 *** significant at .001 107 g. murphy, n. tocher, t. burch journal of small business strategy / vol. 29, no. 1 (2019) / 99-114 demonstrate strong support for the satisfaction/commitment relationship (p < .001), strong support for the satisfaction/willingness to sell or close relationship (p <.01), and no support for the satisfaction/effort relationship (p > .10). these results provide partial support for the notion that satisfied owners will be more likely to persist with business ownership. interestingly, similar to employees, satisfied owners appear to be more committed and less likely to turn over (e.g. rubenstein et al., 2015). that said, the lack of any significant relationship between owner satisfaction and effort level also suggests that like employees, owners’ satisfaction seems to have little influence on effort (e.g. harrison et al., 2006). hence, owners may be highly satisfied with owning a firm for many reasons, but this satisfaction may not indicate any willingness on owners’ parts to expend more effort on a firm which they are already satisfied to own. hypothesis 3, which predicted that owner education level would be positively associated with persistence intentions was not supported. the hypothesis was tested by regressing education level on owner commitment, effort, and willingness to sell/close the firm. positive associations were proposed between education/commitment and education/effort, along with a negative association between education/willingness to sell or close. interestingly, results find no support for any of the proposed relationships (p > .10). while previous research suggests a positive association between education and persistence, that relationship may not have emerged here due to factors such as opportunity cost differences between more educated and less educated owners, performance threshold differences between less educated and more educated owners, and business valuation differences between less educated and more educated owners. in addition, perhaps the relationship between education and persistence is weaker than previous studies suggest. hypothesis 4, which predicted that the owner competencies of managerial skill, political savvy, and opportunity recognition ability would be positively associated with persistence intentions was partially supported. the hypothesis was tested by regressing the three competencies on owner commitment, effort, and willingness to sell/close the firm. while no support was found for the competency/commitment and competency/willingness to sell relationships, support was found for the competency/effort relationship as opportunity recognition ability was positively associated with effort (p < .001). this observation is however complicated by the fact that political savvy and effort were not significantly related and managerial competency and effort were significantly negatively related (p < .01). in other words, owners with high opportunity recognition abilities appear to work more while owners who are highly skilled managers appear to work less. a possible explanation for these contradictory findings may be that it takes more effort to identify opportunities, but owners that are highly skilled managers can use that ability to work less hours. specifically, it may be that owners who work more hours in their businesses are better at identifying opportunities as a result of their increased contact with suppliers, employees, and customers. similarly, owners who work more hours in their businesses may also be more attuned to environmental and industrial conditions, giving them another advantage in recognizing opportunities. however, owners who possess greater managerial competence may make more efficient use of their time through proper delegation, allowing them to work fewer hours, perhaps explaining the negative relationship between managerial skill and effort. hypothesis 5, which predicted that owner personal investment would be positively associated with persistence intentions was largely not supported. the hypothesis was tested by regressing personal investment on owner commitment, effort, and willingness to sell/close the firm. our results find no support for the personal investment/commitment or the personal investment/willingness to sell or close relationships and only marginal support for the personal investment/ effort relationship (p < .10). in summary, results suggest that owners with higher future expectations, satisfaction levels, and who are skilled at recognizing opportunities will be likely to persist with business ownership. conversely, investment and education of owners likely has little association with persistence. such results suggest that optimistic, satisfied, and alert individuals may be more willing to operate businesses for longer time periods, indicating that research may want to investigate how to convince such individuals to undertake small business ownership. discussion research suggests that a complex relationship exists between owner persistence intentions, owner exit decisions, and business failure (detienne & cardon, 2012). while failure research suggests that business termination primarily results from a lack of planning and operating skills on the part of owners (e.g. chen, 2015), exit research suggests that owners often voluntarily exit successful businesses for myriad reasons such as work life balance, cashing out, and pursuit of other opportunities (e.g. justo et al., 2015). notably 108 g. murphy, n. tocher, t. burch journal of small business strategy / vol. 29, no. 1 (2019) / 99-114 however, such research has focused little attention on owner persistence intentions, leaving scholars to ponder whether certain individuals are more likely than others to persist with business ownership. given this gap, the present paper provides one of the first examinations of the relationship between owner characteristics and persistence intentions. using a sample of 380 small manufacturing firms, we find future expectations, satisfaction, and opportunity recognition abilities to be positively associated with owner persistence intentions, suggesting that optimistic, alert, and satisfied individuals may be more likely to persist with business ownership than comparable others who are less optimistic, alert, and satisfied. as such, study findings have several important implications. perhaps the key implication of our study is that personal characteristics of the business owner are an important factor that influences the discretionary persist/exit decision. our study suggests that owners who expect their firms to do well, are satisfied with operating their firms and who have a strong ability to recognize opportunities are more likely to persist with operating a business which could either be exited or kept in operation. importantly, exit research inditable 3 summary of hypotheses and findings hypothesis findings hypothesis 1. owner future expectations will enhance persistence intentions such that the more rewards the owner expects to receive, the more likely the owner will be to persist with business ownership. • marginal support for the expectations/commitment relationship (p < .10) • marginal support for the expectations/willingness to sell or close relationship (p < .10) • support for the growth expectations/effort relationship (p < .05) hypothesis 2. owner satisfaction will enhance persistence intentions such that the more satisfied the owner, the more likely the owner will be to persist with business ownership. • support for the satisfaction/commitment relationship (p < .001) • support for the satisfaction/willingness to sell or close relationship (p <.01) • no support for the satisfaction/effort relationship (p > .10) hypothesis 3. owner education will enhance persistence intentions such that the more educated the owner, the more likely the owner will be to persist with business ownership. • no support for any of the proposed relationships (p > .10) hypothesis 4. owner competencies will enhance persistence intentions such that the more competencies the owner possesses, the more likely the owner will be to persist with business ownership. • no support for the competency/commitment relationship (p > .10) • no support for the competency/willingness to sell or close relationships (p > .10) • support for the competency/effort relationship as opportunity recognition ability was positively associated with effort (p < .001) hypothesis 5. owner personal investment will enhance persistence intentions such that the higher the owner’s personal investment, the more likely the owner will be to persist with business ownership. • no support for the personal investment/commitment (p > .10) • no support for the personal investment/willingness to sell or close relationship (p > .10) • marginal support for the personal investment/effort relationship (p < .10) 109 g. murphy, n. tocher, t. burch journal of small business strategy / vol. 29, no. 1 (2019) / 99-114 cates that many owners make a discretionary decision to either continue operating or stop operating firms which are viable entities (e.g. hsu et al., 2016). our paper complements the exit literature by suggesting that the decision to persist, as well as the decision to exit, is often likely based on factors other than owner planning and operational proficiencies (e.g. holland & garrett, 2015; nagy et al., 2017). as such, our findings suggest that research on the owner characteristics persistence intentions relationship should continue. while our study suggests that optimistic, alert, and satisfied owners may be more likely to persist with business operations, it also raises many interesting new research questions. for example, what additional personal characteristics influence owner persistence? do past experiences, functional background, personality, and particular orientations influence that decision too? similarly, do persistent owners operate more profitable firms than firms owned by less persistent owners? and, does the owner characteristics/persistence intentions remain consistent over time or is it more intense during startup, legitimacy attainment, or growth? future research will help answer these questions and further enhance scholarly understanding of the owner characteristics/persistence intentions relationship. next, study findings suggest that failure research must acknowledge the role of owner characteristics in the discretionary exit decision and clearly define the definition of business failure. notably, failure research often classifies firms that are closed, sold, combined with other businesses, and restructured into different ownership forms as failed businesses (wagner, 2013). additionally, failure research implicitly counts voluntarily discontinued firms as failed firms (holland & shepherd, 2013). these common practices lead to the press, business advisory agencies, politicians, and society citing exaggerated failure rates (hsu et al., 2016). if such entities subscribe to a grossly exaggerated business failure rate percentage, it will in turn almost certainly discourage individuals (particularly persistent individuals with viable market offerings) from starting businesses (gibson, 2010), costing society the economic impact of viable firms which are never launched (tocher, oswald, & hall, 2015). given this, future research needs to properly define business failure as firms which are forced out of the market by economic forces and recalculate the business failure percentage based on that definition (justo et al., 2015). notably, media reports have cited the business failure percentage as high as 90%, despite any substantial evidence to back up that claim (kessler, 2014). other more reputable studies find that over 60% of businesses fail within their first six years of operations (small business facts, 2012). while we do not dispute that business failure rates are high, we simply assert that a more accurate failure percentage is needed and that research should acknowledge the possibility that owner characteristics likely influence the discretionary exit/ persist decision (pett & wolff, 2016; rita et al., 2018). identifying an accurate failure rate and acknowledging that owner characteristics influence that rate will help scholars (1) identify owners which will be more likely to exit viable firms and (2) reduce the likelihood that potential business owners with viable market offerings will be discouraged from starting firms. third, our study implies that discretionary business exit could be decreased by simply getting optimistic, satisfied, and alert individuals to take on business ownership and discouraging others from undertaking the daunting process. given study findings that optimistic, satisfied, and alert individuals are more likely to continue operating businesses, it follows that if such individuals were encouraged to start businesses and others were discouraged, discretionary exit could potentially be decreased (williams jr. et al., 2018). we certainly acknowledge that market forces, business acumen, and access to critical resources determine which business owners will eventually be successful (stam & elfring, 2008). that said, research findings that experienced business owners are more likely to persist with business ownership (schenkel, d’souza, cornwall, & matthews, 2015) as well as findings suggesting that it takes businesses an average of 8 years to reach consistent profitability and 12 years to be fully legitimized (rutherford et al., 2016) suggest that owner persistence is critically important to business survival and success. and, given our study findings that optimistic, satisfied, and alert owners are more persistent, it seems that encouraging such individuals to undertake business ownership in the first place would enhance persistence and in turn decrease discretionary exit. however, our study also begs the question of is it advisable to encourage persistent individuals to undertake business ownership? while an increased number of persistent owners may decrease discretionary exit, it is not clear if owner persistence influences firm profitability. thus it is not clear if encouraging persistent individuals to undertake ownership will help the economy. on one hand, it seems reasonable that persistent business owners would gain valuable experience, helping their firms achieve high performance levels. on the other hand, it is possible that owner persistence simply helps firms remain operational and has no aggregate influence on firm performance. hence, future 110 g. murphy, n. tocher, t. burch journal of small business strategy / vol. 29, no. 1 (2019) / 99-114 research should examine the owner persistence/firm performance relationship. similarly, our research leads one to wonder if business support entities such as the sbdc should attempt to rescue viable businesses by finding more persistent owners to operate them. exit research suggests that many owners make discretionary decisions to stop operating profitable enterprises for a variety of reasons (e.g. justo et al., 2015). further, failure research suggests that getting a business through its first years of operations is highly critical to its survival (e.g. wagner, 2013). given this, perhaps business support agencies such as small business development centers should work to connect highly persistent individuals with existing businesses to operate instead of helping them start new ones. regardless of the accuracy of the statistics, all research indicates that business startup is a highly risky proposition (hsu et al., 2016), yet local, state, federal, and foreign governments pour tons of resources into helping individuals start new firms (small business facts, 2012). perhaps a much better use of some of those resources would be to identify optimistic, satisfied, and alert individuals and link them up with businesses to operate that would otherwise be closed by other less persistent owners. while future research is needed to investigate the above quandary, it is at least worth considering if whether business support entities should consider using some resources to match persistent individuals up with viable businesses to operate. future research the present study highlights many interesting areas for research. first and foremost, our study’s finding that a positive association exists between personal characteristics and owner persistence suggests that such research should continue. both validation studies of our findings and examinations of the relationship between additional personal characteristics (i.e. functional background, past experience, personality) and persistence intentions are needed. next, as discussed extensively above, research needs to be conducted to identify a more accurate business failure rate. current research suggests that over 60% of businesses fail within 6 years (small business facts, 2012), but such estimates categorize business formation transitions (i.e. proprietorship to an llc) as a failed business and a new startup business instead of an existing business making a legal transition. such studies also implicitly count discretionary owner exit decisions as failures instead of discretionary exits (hsu et al., 2016), exaggerating the failure rates and potentially discouraging potential new venture founders (tocher et al., 2015). hence, it is critical to both scholars and the economy that research identify a more accurate business failure rate. further, while the finding that owner characteristics are positively associated with persistence intentions discovered here is interesting and informative, future research is needed to determine if persistent owners operate profitable ventures. opportunity recognition research suggesting that experienced entrepreneurs are more likely to persist with venture formation supports the notion that a persistent owner would gain valuable experience through his/her years of ownership persistence, increasing his/her firm’s performance levels (schenkel et al., 2015), but again, future studies are needed to validate such a proposition. finally, future research should consider examining the owner characteristics persistence/intentions relationship with time series data. while this study examined and found evidence for a positive association between owner characteristics and persistence intentions, future studies that examined a continuous set of firms in varying industries over several years could answer some very intriguing questions. for instance, do owners’ persistence intentions remain constant or do they tend to vary throughout stages of firm ownership? do owner characteristics have varying influence on persistence intentions in different industries? while we studied the owner characteristics/persistence intentions relationship in the manufacturing industry, it may be far easier to persist in industries like the service industry and more difficult to persist in others such as the biomedical industry. similarly, there may be a critical persistence threshold whereby if an owner persists for a certain number of years or a certain point in profitability their chances of persisting for many more years increases dramatically (rutherford et al., 2016; schenkel et al., 2015). while the present study’s findings are interesting and informative, answering the above questions in future studies would greatly clarify scholarly understanding of the owner characteristics/persistence intentions relationship. limitations like all studies, this one has limitations. a first study limitation is that owner persistence intentions was measured at a single point in time. as noted above, time series data would have helped determine a causal relationship between owner characteristics and per111 g. murphy, n. tocher, t. burch journal of small business strategy / vol. 29, no. 1 (2019) / 99-114 sistence intentions. studying small firm owners in the manufacturing industry represents another limitation. hence, we are not able to say if our findings can be generalized to a more broad population of firms. given that manufacturing is a difficult industry in which to survive, it follows that if the owner characteristics/ persistence intentions relationship exists in manufacturing, it likely exists in many other industries such as service and retail that are far easier in which to maintain operations. however, future studies of the owner characteristics/persistence intentions relationship in a multiple industry sample are desirable. another limitation of the study is that persistence intentions were not directly measured in this study. rather, three proxy measures of persistence intentions (commitment, willingness to sell or close, and effort) were used. while persistence may be able to be measured more directly and other proxies of persistence may exist, we decided not to combine the three proxies of persistence intentions into a single measure because each captures a somewhat distinct aspect of persistence intentions. for example, while an owner may feel a great deal of commitment to a business, she may also realize that she may have to sell or close the business due to financial performance issues. similarly, an owner may be very committed to continue business ownership, but through experience may have found ways to decrease his/her effort. data collection using self-report survey responses from owners is also a study limitation. objective metrics are preferable in any study. while it is a notable limitation, self-report data has been found to be reliable when gathered from firm owners (nayyar, 1992; tan & litschert, 1994). further, data collection on the two main study variables of owner characteristics and owner persistence intentions are typically collected via self-report surveys, as few other methods exist to gather such information (e.g. detienne, 2010). that said, since single source data gathering introduces the chance of common method variance (cmv), we conducted lindell and whitney’s (2001) marker test to check that cmv did not influence study findings. this test requires identification of a marker variable that in theory should not be related to the variables of interest and then partialling out the correlation of the marker and the variables of interest. if the interest variables are still correlated after accounting for the marker variable, it can be concluded that cmv did not account for study results (lindell & whitney, 2001). we conducted this test by partialling out the influence of gender and then testing that owner characteristic and persistence intentions were still significantly correlated. gender was chosen because there does not appear to be any reason why it would be theoretically related to either the personal characteristics examined or an individual’s persistence intentions (e.g. batchelor, 2015). results indicated that the significant correlations between owner characteristics and persistence intentions (i.e. future expectations, opportunity recognition ability, and satisfaction on persistence intentions) were still significantly correlated after partialling out gender. hence, while self-report data remains a limitation, we did not find evidence that cmv effected study results (lindell & whitney, 2001). despite these limitations, we assert that since our study is one of the first examinations of the owner characteristics persistence intentions relationship, its findings are noteworthy and thus future research should continue to examine the topic. conclusion the main finding of the present study is that personal characteristics are a key factor that influence owner persistence intentions. the positive association between owner characteristics discovered in this paper in conjunction with the complementary nature of such findings to the exit literature’s findings that myriad personal factors influence owners’ decisions to continue operating their firms provide significant evidence of such an assertion. given this, it appears that researchers should continue examining the owner 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(2013). why do family firms strive for nonfinancial goals? an organizational identity perspective. entrepreneurship theory and practice, 37(2), 229–248. fall journal organizational life cycle and innovation among entrepreneurial enterprises donald l. lester middle tennessee state university dlester@mtsu.edu john a. parnell university of north carolina at pembroke john_parnell@uncp.edu michael l. menefee purdue university menefeem@purdue.edu abstract organizational  life  cycle  has  been  studied  for  several  decades  by  management  researchers. most efforts, however, have  focused on relationships between a  specific life  cycle  stage  and  another construct,  such  as  organizational  effectiveness, management  priorities,  organizational behavior, or competitive  strategy.  this  study  categorizes  107  organizations located in six contiguous counties in the southeastern united states into  life  cycle  stages. respondents  were  also  asked to identify the  importance of innovation  and  change  in their industries, their perceived satisfaction with performance, and their  perceived  level of threats from the environment. support was  found for four of  the five  proposed  life  cycle  stages,  with  none  of  the  respondents  indicating  that  their  organizations were in the decline stage. firms in stage 1 (existence) and stage 4 (renewal)  reported high scores for innovation  and  change  in  their industries  and  a  high level  of  satisfaction with performance. stage 1 firms also reported the highest amount of perceived  threat from the  environment, in contrast to firms in stage 3 (success) who reported the  lowest.  keywords: life cycle, stages, growth, decline, innovation introduction the  organizational  life  cycle  is  an  intuitively appealing construct, proposing  that  organizations  progress  through  a  sequence  of  stages  throughout  its  life,  much  like  the  model  proposed  by  the  biological  sciences  (adizes,  1979;  chandler,  1962;  penrose,  1952;  quinn  &  cameron,  1983).  past  studies  of  the  life  cycle construct have attempted to identify  certain  distinctive  characteristics  of  organizations  that  differ  over  time  and  stages  of  the  life  cycle.  this  research  is  designed  to  assist  managers  in  understanding that the life cycle need not  be  a deterministic certainty  but rather a  means  of  taking  stock  of  a  firm  and  making  changes  where  necessary  to  invigorate and regenerate the firm’s life. volume 19, number 2 fall/winter 2008/2009  37 strategyjournal of small business the present study examines the life cycle  stages  of 107 organizations  located in six  contiguous  counties  of  rural  north  carolina.  following  a  review  of  the  literature  and  a  discussion  of  the  organizational  life  cycle  construct,  complete  results  from  an  online  survey  are presented and discussed. review of the literature borrowing  from  the  biological  sciences,  organizational researchers  have  proposed  several  models  of  an  organizational  life  cycle  (adizes,  1979;  churchill  &  lewis,  1983; downs,  1967;  greiner, 1972;  hanks,  1990;  kimberly  &  miles,  1980;  miller  &  friesen,  1984).  although  the  number  of  identifiable stages and their corresponding  characteristics  vary,  most  authors  agree  that organizations are at some point born  (tichy,  1980),  have  the  opportunity  to  grow and develop (mintzberg, 1984), and  later die or renew themselves (kimberly &  miles, 1980). the organizational  life cycle  can be defined as a “unique configuration  of  variables  related  to  organizational  context,  strategy,  and  structure,”  a  definition put forth by hanks (1990, p. 27)  based  on  the  prior  work  of  chandler  (1962),  miller  and  friesen  (1984),  and  others. the  life  cycle  literature  is  replete  with  different models,  many  utilizing  various  types  of  organizations  as  samples.  the  basic three‐stage model was put forth by  downs (1967), lippitt and schmidt (1967),  and scott (1967). those advocating a four‐ stage  model  include  lyden  (1975)  and  quinn  and  cameron  (1983),  while  five‐ stage plans  were  presented  by churchill  and  lewis  (1983),  greiner  (1972),  and  lester, parnell, and carraher (2003). the  highest  number  of  stages  proposed  is  perhaps  the  ten‐stage  model  of  adizes  (1979).  downs  (1967) described the life cycles of  government  bureaus  in  a  three‐stage  model. lippitt and schmidt 1967) focused  on  critical  managerial  concerns  such  as  survival  and  stability  in  a  simple  birth,  youth,  and maturity format. scott (1967)  developed a three‐stage framework based  on  the  strategy‐structure  relationship.  greiner’s (1972) five‐stage model used the  need  to  solve  the  particular  problems  inherently found during each stage as the  starting  point for subsequent changes in  the organization, an  approach similar to  that of lyden (1975) and smith, mitchell,  and summer (1985). torbert (1974) based  his  model  on  the  mentalities  of  organizational  members, resulting  in  an  eight‐stage  configuration.  adizes  (1979)  presented  an  elaborate  model  of  ten  stages,  with  the  primary  focus  of  each  stage  being  the  production  of  results,  entrepreneurial  action,  formal  rules  administration,  and  the  integration  of  individuals into the organization. chandler  (1962)  made  it  clear  that  as  organizations  advanced  through  the  stages  of their life cycle, changes in their  strategy and structure followed. this work  was supported by milliman, von glinow,  and  nathan  (1991),  who  noted  that  life  cycles  can  predict  organizational  behavior. after  three decades  of  debate,  two models have become widely accepted  as  thorough  demonstrations  of  the  organizational life cycle, to be used by all  firms.  quinn  and  cameron  (1983)  developed a four‐stage model and miller  and friesen (1984) presented a five‐stage  corporate  model  that  includes  birth,  growth,  maturity,  renewal,  and  decline.  the  decline  stage  has  been  a  source  of  debate among scholars. while there has  been some empirical support for decline  (lester, parnell,  & carraher, 2003), most  organizational  managers  and  employees  surveyed do not tend to see their firms in  that light. in fact, drazin and kazanjian  (1990),  utilizing  miller  and  friesen’s  (1984) data, only found support for a four‐ stage model.  journal of small business strategy    38 the results of miller and friesen’s (1984)  study contributed greatly to the life cycle  debate, but three of their contributions in  particular  stand  out:  (1)  their  study  was  longitudinal; (2) they established the four  components  of  life  cycle  determination,  which  include  strategy,  structure,  situation, and decision‐making methods;  and  (3),  their  study  confirmed  that  organizations do not necessarily progress  naturally from one stage to the next in the  same sequence as  the  next organization.  longitudinal  research  is  critical  in  establishing  the validity  of  the life  cycle  construct,  and  the  lack  of  identical  sequencing of  movement through stages  lends support to the usefulness of the life  cycle  model  for  practicing  managers.  if  there  is  a  strategic  choice  (child,  1972)  involved  in  moving  organizations  from  one  stage  to  another by  altering  one  or  more  of  the  four  keys  (kazanjian,  1988;  lester  &  parnell,  1999)  that  define  each  stage,  top‐level  management  teams  can  proactively employ the life cycle construct  to  stay  competitive  in  the  face  of  threatening environments. organizational  life  cycle  determination  begins  with the situation. situation refers  to  an  organization’s  overall  make‐up,  including size, age, dilution of ownership,  locations, the number of markets served,  and  heterogeneity  (miller  &  friesen).  decision-making methods  are  the heart of  the  administrative  personality  of  an  organization,  varying  according  to  the  amount of  participation  and  number  of  decision makers. organizational structure  tends to progress from simple to complex,  from the one‐manager firm to the multi‐ layered multinational firm.  of  particular  importance to structure are the factors of  information  processing  procedures,  decentralization  of  authority,  and  departmental  differentiation  (lester,  parnell,  &  carraher,  2003).  research  indicates that each become more complex  through  the  first  four  stages  of  the  life  cycle. strategy  is top management’s plan  to  accomplish  the  goals  and  mission  of  the organization. based on the work of churchill and lewis  (1983),  miller  and  friesen  (1984),  and  others,  a  previously  empirically  tested  five‐stage  life  cycle  model  for  organizations to follow (lester, parnell, &  carraher, 2003) was utilized in this study.  a  brief  description  is  provided  for  each  stage, beginning with stage one, existence  (churchill & lewis, 1983). also  known as  the  entrepreneurial  stage  (quinn  &  cameron, 1983) or birth stage (lippitt &  schmidt, 1967), existence is characterized  by  a  firm’s  struggle  to  achieve  viability.  decision‐making is in the hands of one or  a  few  members,  while  ownership  is  concentrated. organizational structure is  simple, as  most firms are  quite  small in  terms  of  revenues  and  number  of  employees.  in  this  stage,  management’s  top concern is finding enough customers  and cash flow (dodge & robbins, 1992) to  prove the business is viable. stage two  is survival (churchill  & lewis,  1983).  growth  (adizes,  1979;  downs,  (1967) is the primary goal for many firms  in  this  stage.  the  simple  structure  is  gradually  replaced  with  one  that  emphasizes  the  role  of  managers  and  promotes a division of labor. fast‐growing  firms  strive  to  become  large  enough  to  achieve  some  economies  of  scale.  however,  churchill  and  lewis    (1983)  indicated that  some  organizations  never  move beyond the beginnings of this stage,  either choosing to stay relatively small for  control purposes  (sometimes  referred to  as  the  founder  or  family  trap  [hanks,  1990]), or finding  that growth  cannot be  sustained.  many  firms  in  the  latter  instance simply go out of business, while  others  revert  to  the  existence  stage.  however,  most  survival  firms  have  achieved a level of revenue secure enough  to feel comfortable investing in expansion                                                                                    volume 19, number 2 fall/winter 2008/2009   39 and  growth,  a  finding  consistent  with  hrebiniak  and  joyce  (1985),  who  found  t h a t  g r o w t h  f i r m s  v i e w  t h e i r  environments  as  neither threatening nor  constraining. stage  three  is  success (lester,  parnell, &  carraher, 2003; churchill & lewis, 1983).  in  keeping  with  the  biological  underpinnings  of  life  cycle  theory,  it  is  referred to  as maturity (miller & friesen,  1984; scott & bruce, 1987; smith, mitchell,  &  summer,  1985)  by  many  researchers.  firms  in the  success stage develop more  formal organizational structures with job  descriptions,  hierarchical  reporting  relationships, and policies and procedures  that  remove  much  of  the  flexibility  enjoyed  in  earlier  stages.  the  success  stage is characterized by large firms  that  experience  flat  or  relatively  low‐growth  revenues  (jawahar  &  mclaughlin,  2001)  and  operate  bureaucratically,  with  information  processing  procedures  emphasizing  formal  controls  (miller  &  friesen,  1984).  due  to  an  emphasis  on  operational  efficiency  (miller  &  friesen,  1984),  many  organizations  in  this  stage  generate excess  cash and  do  not find  it  difficult to raise capital (dodge, fullerton,  & robbins, 1994).  stage four is  renewal. some organizations  attempt  to  regenerate  themselves  as  a  reaction  to  the  bureaucracy  and  lack  of  innovation that govern operations during  the success stage. the goal is to return the  firm to a leaner (quinn & cameron, 1983),  more  innovative  era  (miller  &  friesen,  1984),  while  striving  to  jump‐start  revenues  through  expansion  without  losing  the  large  market  share  already  amassed.  one  way  this  goal  is  accomplished is through the utilization of  project  teams,  task  forces,  or  cross‐ functional teams that are a key element of  the  matrix  organizational  structure.  additionally,  the  centralized  decision  making  of  the  success  stage  is  replaced  w i t h  a  m o r e  c u s t o m e r ‐ c e n t r i c  decentralized  decision‐making  process  that  is  facilitated  by  a  sophisticated  information  processing  system  (lester,  parnell, & carraher, 2003). stage five is decline. as miller and friesen  (1984)  concluded, firms  in  decline  failed  to  confront  external  challenges  while  engaged  in  a  different  life  cycle.  this  failure  results  in  the  loss  of  profit  and  market  share,  many  times  emanating  from a lack of innovation. this  situation  leads  to  a  focus  on  internal  power  struggles  and  consequently,  a  lack  of  focus on the customer (mintzberg, 1984),  with  decision‐making  becoming  very  centralized.  the  struggle  for  power  is  related to a desire for personal rewards on  the  part of  top  management.  while  the  decline  stage  of  an  organizational  life  does  not  spell  certain  death,  it  does  require a turnaround (mintzberg, 1989) or  revolutionary  change  in  strategy,  structure,  decision‐making  style,  and  situation for a successful return to a more  stable or growth stage.  theory and hypotheses some organizational life cycle stages  are  characterized by growth while others are  characterized  by  stability  or  decline.  miller  and  friesen  (1984)  used  a  15  %  annual increase in revenue for a growth  measure.  organizations  in  stages  two  and  four  (survival  and  renewal)  were  defined as growing by greater than 15%,  and  those  in  stages  three  and  five  (success  and  decline)  were  defined  as  growing  by  less  than  15%.  once  an  organization’s  life  cycle  stage  has  been  identified,  the  question  becomes  “are  there other factors that help or hinder an  organization’s  ability  to  grow, and  what  relationship does its life cycle stage have  with  relation  to  perceived  satisfaction  with performance?” journal of small business strategy    40 if  the  organizational  life  cycle  is  to  be  a  useful  tool  for  top  management,  more  empirical research into the construct must  be  conducted.  whether  managers  are  making  decisions  based  on  external  pressures  or  choice  (hrebiniak  &  joyce,  1985),  altering  one  or  more  of  the  four  components that define the organizational  life  cycle  can  transition a  firm  from one  stage  to  another  (lester & parnell, 1999),  sometimes,  very  quickly.  miller  and  friesen’s  (1984)  work  made  it  clear  that  while  most  firms  generally  follow  the  prescribed  life  cycle,  many  do  not,  somewhat  debunking  the  deterministic  depiction  of  the  life  cycle.  examples  of  firms that jumped back and forth from one  stage  to  another include sears, waltham,  macy’s, unilever, yellow freight, and ayer  (miller & friesen, 1984, p. 1183).  strong  evidence  exists  to  support  the  important role of innovation and change  in the two defined growth stages, survival  and renewal (hanks, 1990; lester, parnell,  & carraher, 2003; miller & friesen, 1984)  and  in  stage  one,  existence.  mccann  (1991)  noted  that  organizational  change  can  fall  into  the  category  of  four  types,  including:  products  and  services,  structure  and  systems,  people,  or  technology.  these  are  the  types  of  changes  normally  found  in  growing  organizations.  while  technology  has  become  a  primary  driver  of  change  in  many  organizations  (kazanjian, 1988),  it  is  also  an  integral  part of  change  itself.  sophistication  of  information  processing  has  led  the  way  in  improving  customer  service,  logistics,  operations,  and  just  about  every  other  aspect  of  the  firm.  however,  innovations,  major  ones  in  particular, are  most  often  recognized  as  product‐ or service‐oriented. this leads to  the first hypothesis. h1:   firms in the growth stages of the  organizational life cycle (stages one,  two, and four) perceive their  organizations to be more innovative  than firms in the no‐ or low‐growth  stages (stages three and five).  the second issue of concern is the role of  the  external  environment,  such  as  the  choice  versus  determinism  issue.  while  child  (1972)  invoked  the  concept  of  strategic  choice,  hrebiniak  and  joyce  (1985)  demonstrated  that  choice  is  constrained.  however,  regardless  of  the  constraints, some top management teams  continue  to  outperform  those  of  other  organizations,  often  due  to  the  free  will  and creative activity of their firms and their  decision‐making  (bourgeois,  1984;  hurst,  rush  &  white,  1989).  regardless,  one  should  not  discount  the  relevance  of  environmental factors to decision making,  since top managers must make some sense  out  of  their  task  environment  (daft  &  weick,  1984;  dess  &  beard,  1984),  particularly  when  it  appears  to  be  threatening and changing (emery & trist,  1965), as it does to many start‐up managers  and  to  those of  organizations  in  decline.  this role of external environmental threats  leads to the second hypothesis. h2:   firms in existence and decline (stage  one and five) of the organizational  life cycle perceive the external  environment to be more threatening  than those in the survival, success  and renewal (stages two, three, and  four) stages. the final issue of concern in this study is  perceived  satisfaction  with  performance.  specifically,  the  question  becomes,  “are  firms that are growing more satisfied with  their  performance  than  firms  that  are  experiencing  low‐  or  no‐growth?”  an  earlier study (lester, parnell, crandall, &  menefee, 2008)  found respondents  from  growing firms with first‐ or second‐mover  strategies in the survival and renewal life  cycle  stages  more  satisfied  with  their  firm’s  performance  than  respondents                                                                                    volume 19, number 2 fall/winter 2008/2009   41 from  firms  in  success  or  decline.  this  leads to the third hypothesis. h3:   firms in survival and renewal  (stages two and four) are more  satisfied with their performance  than firms in existence, success, and  decline (stages one, two, and five). methods members  of  several  chambers  of  commerce in  the  southeastern region of  the  united  states  were  invited  to  participate  in  an  online  survey.  specifically, the largest chambers in each  of  six  north  carolina  counties—bladen,  columbus,  cumberland,  moore,  richmond, and robeson—assisted in the  survey  by  inviting  their  members  to  participate  in  the  study.  collectively,  these counties  represent a region of  the  united states marked by considerable job  losses in recent years due to outsourcing  and offshoring. some of the lost jobs have  been replaced by new  ones  in moderate  and high technology areas, but economic  development  remains  a  concern  in  the  southeastern region. a  total  of  107  usable  responses  were  obtained  from  members,  including  24  whose  businesses  were  self‐identified  as  high technology; 57, moderate technology;  and 24, low technology. the mean firm age  was 32.4 years, with a range spreading one  to 139 years. organizations of various sizes  were  represented,  with  20.6%  of  the  respondents reporting annual sales of less  than  $500,000,  12.1%  of  the  respondents  reporting sales in excess of $25 million, and  the remainder reporting sales  in between  the  two  extremes.  in  addition,  33.6%  reported fewer than  10  employees, 24.3%  reported  more  than  100  employees,  and  the remainder reported numbers falling in  between  the  two  extremes.  thus,  by  common  standards,  most  firms  represented would be considered small‐ or  medium‐sized enterprises (smes). organizational life cycle stages were self‐ reported, and respondents were asked to  place  their  organizations  in  one  of  five  categories.  as  depicted in  table  1,  there  were  37, 34, 23, and 10  respondents  who  placed  their  firms  in  existence,  growth,  survival, and renewal stages, respectively.  no  respondent placed his  or  her firm in  the decline stage. performance  satisfaction  was  measured  based on the results  of  a four‐item scale  that  examined  satisfaction  with  current  profitability, growth, goal attainment, and  overall  financial  performance  relative  to  others in  the  industry.  these  four  items  were  factor‐analyzed  and  produced  loadings of .845 for current profitability; . 878, growth; .801, goal attainment; and . 896, overall financial performance, with a  coefficient alpha for the scale of .874. industry  innovation  and  change  was  measured by a three‐item scale developed  specifically  for  this  study.  respondents  were  asked  the  extent  to  which  innovation is very common in his or her  firm’s  industry,  the  extent  to  which  products  and  processes  change  frequently,  and  the  degree  to  which  changes  in  technology  are  a  key  factor.  these  three  items  were  factor‐analyzed  and  produced  loadings  of  .893  with  respect  to  the  extent  innovation  is  common in his or her industry; .904, the  extent  to  which  products  and  processes  change frequently; and .816, the degree to  which  changes  in  technology  are  a  key  factor,  with  a  coefficient  alpha  for  the  scale of .837. competitive  intensity  was  measured  on  the  basis  of  a  three‐item  scale  that  assessed  whether  the  business  environment,  tough  price  competition,  and the quality or novelty of competitors’  products were seen as threatening to the  firm. the scale was based on pelham and  wilson’s (1996) scale, which was adopted  journal of small business strategy    42                                                                                   volume 19, number 2 fall/winter 2008/2009   43 t ab le  1:  o rg an iz at io n al  l if e  c yc le  c at eg o ri es li fe c yc le   o rg t ec h (1 ‐h ig h,  2 ‐ m od , 3 ‐ lo w ) r ev en ue s  (5   ca te go ri es ) em pl oy ee s  (5   ca te go ri es ) fi rm a ge si ze : s m al l i f  r ev en ue s +e m pl oy ee s= 1,2 ,3 ; m ed iu m  is   4, 5, 6, 7,  l ar ge  if   8, 9, 10 fa ct or  s co re  fo r  3  in no va ti on  &   c ha ng e  it em s fa ct or  s co re  fo r  4  pe rf or m an ce   sa ti sf ac ti on   it em s fa ct or  s co re   fo r  3  en vi ro nm en ta l  t hr ea t  it em s e xi st en ce m ea n 2. 32 2. 00 1.7 5 20 .6 2 1.5 6 0. 48 03 48 3 0. 39 13 60 4 0. 33 55 29 3 e xi st en ce n 37 37 36 37 36 37 37 37 e xi st en ce st d.  d ev ia tio n 0. 66 9 1.0 00 1.2 51 20 .5 34 0. 69 5 1.1 07 94 93 2 0. 77 66 37 26 0. 90 50 97 28 su rv iv al m ea n 1.8 8 3. 33 2. 74 34 .3 5 2. 09 ‐0 .2 43 10 62 ‐0 .2 76 52 42 ‐0 .0 91 48 56 su rv iv al n 34 33 34 34 33 34 34 34 su rv iv al st d.  d ev ia tio n 0. 64 0 1.1 90 1.3 55 31 .14 2 0. 63 1 0. 78 18 65 10 1.0 69 01 13 5 0. 93 21 77 71 su cc es s m ea n 1.6 1 3. 17 3. 13 40 .6 1 2. 22 ‐0 .5 67 76 81 ‐0 .3 55 87 29 ‐0 .4 30 86 98 su cc es s n 23 23 23 23 23 23 23 23 su cc es s st d.  d ev ia tio n 0. 58 3 1.1 54 1.6 87 25 .3 84 0. 85 0 0. 86 01 80 73 1.1 02 17 35 4 1.0 93 48 02 8 r en ew al m ea n 2. 10 3. 90 4. 20 49 .7 0 2. 60 0. 21 95 41 9 0. 34 73 62 6 ‐0 .0 37 86 98 r en ew al n 10 10 10 10 10 10 10 10 r en ew al st d.  d ev ia tio n 0. 56 8 1.4 49 1.6 87 25 .3 73 0. 84 3 0. 58 45 44 90 0. 76 93 99 19 1.0 44 77 92 1 t ot al m ea n 2. 00 2. 87 2. 62 32 .3 3 1.9 8 ‐0 .0 13 03 82 0. 00 35 29 4 ‐0 .0 09 46 76 t ot al n 10 4 10 3 10 3 10 4 10 2 10 4 10 4 10 4 t ot al st d.  d ev ia tio n 0. 68 3 1.3 19 1.6 03 27 .3 34 0. 79 6 0. 99 58 34 36 1.0 04 18 52 7 1.0 00 10 28 1 journal of small business strategy    44 table 2 anova: comparisons across life cycle stages  variables    f sig. org. tech * life cycle between groups (combined) 6.651 0.000   within groupswithin groups       totaltotal     revenues * life cycle between groups (combined) 12.183 0.000   within groupswithin groups       totaltotal     employees * life cycle between groups (combined) 9.508 0.000   within groupswithin groups       totaltotal     firm age * life cycle between groups (combined) 4.867 0.003   within groupswithin groups       totaltotal     size: small if revenues +employees=1,2,3; medium  is 4,5,6,7, large if 8,9,10 *  lifecycle between groups (combined) 7.569 0.000   within groupswithin groups       totaltotal     factor score for 3  innovation & change  items * lifecycle between groups (combined) 7.336 0.000   within groupswithin groups       totaltotal     factor score for 4  performance satisfaction  items * lifecycle between groups (combined) 4.513 0.005   within groupswithin groups       totaltotal     factor score for 3  environmental threat  items * lifecycle between groups (combined) 3.084 0.031   within groupswithin groups       totaltotal     from  khandwalla’s  (1977)  study.  these  three  items  were  factor‐analyzed  and  produced  loadings  of  .820  for  business  environment;  .880,  tough  price  competition; and .625, quality or novelty  of  competitors’  products,  with  a  coefficient alpha for the scale of .677. factor  scores  (regression  method)  were  computed to serve as composite measures  of  performance  satisfaction,  industry  innovation  and  change,  and  perceived  competitive threat.  findings table 2  summarizes comparisons  among  organizations in the four life cycle stages.  respondents  were  asked  to  place  their  organizations  in  categories  for  revenues  (less  than  $500,000, $500,000‐$1  million,  $1‐5 million,  $5‐25  million,  and over  $25  million) and number of employees (fewer  than  10,  10‐24,  25‐49,  50‐99,  and  100  or  more  employees).  respondents  also  reported founding  years. revenues, total  employees, and firm age served as validity  checks  for  the  life  cycle  categories.  as  expected,  existence  firms  were  the  youngest and reported the lowest revenue  and employee levels.  the  analysis  of  variance  (anova)  technique  was  applied  to  test  for  significant  differences  among  the  four  groups  in  terms  of  revenues,  total  employees,  and firm  age,  as  well  as  the  factors  of  interest  in  this  study:  performance satisfaction, innovation and  change,  and  competitive  intensity.  all  differences  were  significant  at  the  95%  confidence interval. table  3  summarizes  anova  results  as  they pertain to the three hypotheses. the  first five rows provide mean factor scores  for each of  the three constructs  assessed  for firms in the first four life cycle stages.  the anova f statistics demonstrate that  significant  differences  were  found  when  life  cycle  groups  were  compared  along  each  of  the  constructs.  results  for  the  hypothesis  test assess the significance of  these  differences  in  the  directions  previously suggested.                                                                                   volume 19, number 2 fall/winter 2008/2009   45 table 3 anova: tests of hypotheses lifecycle factor score for 3  innovation &  change items factor score for 3  environmental  threat items factor score for 4  performance  satisfaction items existence (n=37) 0.4803 0.3355 0.3913 survival (n=34) ‐0.2431 ‐0.0914 ‐0.2765 success (n=23) ‐0.5677 ‐0.4308 ‐0.3558 renewal (n=10) 0.2195 ‐0.0378 0.3473 total (n=104) ‐0.0130 ‐0.0094 0.0035 anova f statistic 7.336 3.084 4.513 anova significance 0.000 0.031 0.005 linear relationship yes yes no non‐linear relationship yes no yes hypothesis test result (h1) f stat.=10.347  significance=.002 (h2) f stat.=1.549  significance=.216 (h3) f stat.=7.895  significance=.006 hypothesis supported yes yes no discussion and implications the  first  hypothesis  concerned  firms  in  existence,  survival,  and  renewal  (stages  one, two, and four), predicting innovation  and  change  would  be  higher  for  them  than  for  firms  in  success  and  decline  (stages two and five). this hypothesis was  supported.  this  study’s  finding—that  existence  and  renewal  firms  have  high  factor scores for innovation and change— supports  earlier  contentions  in  the  literature (hanks, 1990; lester, parnell, &  carraher,  2003;  miller  &  friesen,  1984).  existence  firms  tend  to  be  more  innovative than those in any other stage,  as they try to  enact or create their  own  competitive environments (bedeian, 1990;  daft & weick, 1984). renewal firms, tired  of  being  mired  in  excessive bureaucracy  and  of  experiencing  low‐  or  no‐growth  revenues,  seek  lost  innovation  and  corporate entrepreneurship to jump‐start  their  organizations. while some achieve  this renewal through acquisition of other  firms, innovative activity is usually a key  factor. survival or stage two firms did not  score high in this study on innovation and  change. this  result supports the findings  by miller and friesen (1984) that growth  or  second  stage  firms  practice  incremental  improvement  in  products  and  services,  rather  than  dramatic  or  major innovative changes.  the  second  hypothesis  related  that  existence  and  decline  firms  (stages  one  and five) would perceive the environment  to  be  more  threatening  than  survival,  success,  or  renewal  firms  (stages  two,  three, and four). this hypothesis was also  supported.  while  organizations  in  the  decline stage could not be assessed, those  in  the  existence  stage  clearly  perceived  the  highest  amount  of  environmental  threat.  existence  firms  have  limited  resources  with  which  to  confront  competition,  as  they  attempt  to  prove  viability  (lester,  2004)  in  the  market  niche  they  have  chosen. being  relatively  new,  having  few  employees,  and  experiencing low revenues contribute to a  tenuous state where one bad mistake by  management  could  put  the  firm  out of  business. firms  in  survival, success,  and  renewal,  however,  generally  have  established  business  models,  strong  customer bases, and more resources, all of  which  will  lessen  the  impact  of  environmental threats. the  third  hypothesis  indicated  that  survival  and  renewal  firms  (stages  two  and  four)  are  more  satisfied  with  their  performances than those organizations in  existence, success, or decline (stages one,  three, and five). the third hypothesis was  not supported. the somewhat surprising  finding  was  that  existence  and  renewal  firms  were  most  satisfied  with  their  performance, while  survival  and  success  firms  were  much  less  satisfied.  this  finding corresponds to the innovation and  change finding, as existence and renewal  firms scored highest on both factors. one  possibility  for  this  finding  could be  that  existence and renewal firms invest heavily  in  innovative  activities  to  secure  higher  sales  and  new  markets,  creating  a  corporate  culture  of  change  (quinn  &  cameron,  1983)  and  sometimes,  excitement.  whether  this  innovative  activity  is  beginning  to  pay  off  or  not,  there is a sense that something positive is  happening  within  the  organization.  survival  firms  did  not  score  high  on  performance  satisfaction,  possibly  since  there is a strong tendency for some firms  in  this  stage  to  go  through  spurts  of  growth by choice, limiting the number of  resources  that  are  committed  so  that  profits  may  be  taken.  success  firms  are  also  somewhat  more  bureaucratic  and  hierarchical  (miller  &  friesen,  1984),  making change challenging, which could  be a contributing factor to a perception of  poorer  performance.  as  for  those  firms  that  are  growing  quickly,  this  growth  journal of small business strategy    46 requires  regular  investment  to  be  sustained, often dimming the perception  that performance is truly outstanding.  future directions the present study examines the life cycle  stages  of  107  organizations  in  six  contiguous  north  carolina  counties.  respondents identified the importance of  innovation and change in their industries,  their  perceived  satisfaction  with  performance, and their perceived level of  environmental  threats.  support  was  found  for  four  of  the  five  proposed  life  cycle stages, with none of the respondents  indicating that their organizations were in  the  decline  stage.  firms  in  stage  one  (existence)  and  stage  four  (renewal)  reported high  scores  for  innovation  and  change  in  their  industries,  along  with  a  high  level  of  satisfaction  with  performance. stage one (existence) firms  also  reported  the  highest  amount  of  perceived  threat  from  the  environment,  while  firms  in  stage  three  (success)  reported the lowest.  the findings of  this  study are a starting  point  for  further  inquiry  regarding  the  relationship  between  the  organizational  life  cycle  and  innovation.  specifically,  firms  in  the  existence  or  renewal  stage  need to be examined closely for patterns  of  organizational  culture,  decision  making,  structure,  or  strategic  direction  that  encourage  innovative  activity.  findings  from  such  research  would  be  instrumental  in  helping  large  and  small  organizations  avoid  common  pitfalls,  such  as  complacency  in  the  case  of  success  firms  and  environmental  threat  for  existence  firms.  innovation  is  being  hailed  by  researchers  and  practitioners  alike as the key to  earning above average  returns in the competitive climate found  in  most business  arenas,  and this  study  demonstrates  that existence and renewal  firms  are  leading  the  way  in  innovative  activity and organizational change. while  traditional  organizational  life  cycle  research sought to provide managers with  a  framework  or  blueprint  for  decision  making, such as  when to  add managers,  change strategy, or alter structure (hanks,  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science, 24(1), 27–43. penrose, e. (1952). biological analogies of  the firm. american economic review, 42(5), 804–819. quinn, r., & cameron, k. (1983).  organizational life cycles and  shifting criteria of effectiveness:  some preliminary evidence.  management science, 29(1), 33–41. scott, b. (1971). stages of corporate development-part 1. case no.  9‐371‐294. boston intercollegiate  cases clearing house. scott, b., & bruce, r. (1987). five stages of  growth in small business. long range planning, 20(3), 45–52. smith, k., mitchell, t., & summer, c.  (1985). top level management  priorities in different stages of the  organizational life cycle. academy of management journal, 28(4), 799–820. tichy, n. (1980). problem cycles in  organizations and the management  of change. in, kimberly, j., & miles,  r. (eds.), the organizational life cycle (pp. 164–183). san francisco,  ca: jossey‐bass publishers. donald  l.  lester  is  an  associate  professor  of  management  at  middle  tennessee  state  university. his research  interests  include  strategic  management,  organizational theory, and small business  management.  john  a.  parnell  is  the  william  henry  belk  professor  of  management  at  the  university  of  north  carolina  at  pembroke.  michael  l.  menefee  is  the  peterson  professor  of entrepreneurship  at purdue  university.  his  research  interests  are  in  the  areas  of  strategic  management,  entrepreneurship,  and  human  resource  management.                                                                                   volume 19, number 2 fall/winter 2008/2009   49 reproduced with permission of the copyright owner. further reproduction prohibited without permission. microsoft word front cover v20n1.docx   volume 20, number 1 spring/summer 2009  1              a revised conceptual model of the firm‐level  entrepreneurial process    patrick m. kreiser  ohio university  kreiser@ohio.edu    justin davis  ohio university  davisj6@ohio.edu      abstract    research suggests that existing conceptualizations of firm‐level entrepreneurship may  not be sufficient in fully explaining the construct (brown, davidsson, & wiklund, 2001;  brush, manolova, & edelman, 2008).  in particular, there is little consensus regarding  the organizational attributes that underlie the entrepreneurial act.  this study  integrates and extends existing conceptualizations to form a new theoretical  framework for studying the firm‐level entrepreneurial process.  it is argued that three  attributes: innovativeness, proactiveness, and strategic renewal, are necessary  preconditions for firms to be considered truly “entrepreneurial.”  the role that these  three firm‐level attributes play in generating important entrepreneurial outcomes is  also considered.    keywords:  firm‐level entrepreneurship, innovativeness, proactiveness, strategic  renewal    introduction    firm‐level entrepreneurship is  recognized as offering various strategic  benefits to organizations, including  increased financial performance (keh,  nguyen, & ng, 2007; wiklund &  shepherd, 2005; zahra & covin, 1995;  zahra & garvis, 2000), heightened levels  of organizational learning (dess, ireland,  zahra, floyd, janney, & lane, 2003;  wang, 2008; zahra, nielsen, & bogner,  1999), and the development of a  competitive advantage (covin & miles,  1999).  reflecting this fact, numerous  conceptualizations and  operationalizations of firm‐level  entrepreneurship have been offered in  the entrepreneurship literature  (burgelman, 1983; covin & slevin, 1989;  guth & ginsberg, 1990; lumpkin & dess,  1996; miller, 1983).  while these theories  and measures have advanced the nature  of research on this topic, there are still  numerous issues that need to be  addressed to enable future research on  firm‐level entrepreneurship to reach its  strateg y  journal of small business  journal of small business strategy      2  true potential (brown, davidsson, &  wiklund, 2001; brush, manolova, &  edelman, 2008; davidsson, low, &  wright, 2001; zahra, jennings, &  kuratko, 1999).  specifically, greater  research attention is needed in  determining the attributes underlying  firm‐level entrepreneurship that allow  firms to develop a competitive  advantage for their organization (covin  & miles, 1999).    consistent with the assumptions  underlying the resource‐based theory of  the firm (rbt), entrepreneurial  organizations utilize key resources and  strategic activities in order to develop a  competitive advantage (alvarez &  busenitz, 2001).  extending the work of  covin and miles (1999), there are four  important outcomes that organizations  generate through firm‐level  entrepreneurship.  first, they can  develop new products in order to  capitalize on market trends, or they can  enter existing markets that offer  abundant opportunities.  second, they  can develop new processes in order to  better integrate their strategy within the  organization’s value chain (dess et al.,  2003).  third, they can utilize first‐ mover advantages to proactively create  new markets that have not yet been  realized or tapped by their competition.   fourth, firms can redefine their key  strategies, ideas, and structures in an  effort to take advantage of opportunities  present in the external environment.      however, it is still unclear as to which  organizational attributes are necessary  components in enabling firms to achieve  these four types of firm‐level  entrepreneurial outcomes.  while these  outcomes may be extensions of  organizations having adopted an  entrepreneurial mindset, it is still  necessary to determine the key  attributes that must be present within  an organization for it to actually be  considered entrepreneurial.  while  researchers have elaborated on the  potential attributes underlying firm‐ level entrepreneurship (i.e., brown et al.,  2001; covin, green, & slevin, 2006;  lumpkin & dess, 1996), there has been  less agreement regarding the attributes  that are fundamentally necessary in  order for firm‐level entrepreneurship to  occur (covin & miles, 1999).  that is,  more clarity is needed regarding the  fundamental and prerequisite attributes  that allow firms to develop new products  and processes, create new markets, and  redefine their strategies and structures.      in order for future research on the topic  of firm‐level entrepreneurship to reach  its true potential, a theoretically‐ grounded conceptualization of the key  elements of this process is necessary. in  this article, we adopt a mechanisms  perspective to examine the relationship  between the key attributes of firm‐level  entrepreneurship and four key  entrepreneurial outcomes.  mechanisms  help to explain how and why two sets of  variables are linked with one another  (anderson et al., 2006).  we argue that  three attributes (i.e., innovativeness,  proactiveness, and strategic renewal) are  necessary components in allowing firms  to consistently develop new products  and processes, create new markets, and  redefine their strategies and structures.   as such, this study represents one of the  first efforts aimed at establishing the  link that exists between the necessary  attributes of firm‐level entrepreneurship  and primary entrepreneurial outcomes.   by integrating and extending existing  theories of firm‐level entrepreneurship,  this study will provide a conceptual  volume 20, number 1 spring/summer 2009      3    framework that can be utilized in future  research on the topic.      theoretical development    problems with existing  conceptualizations     two major impediments have plagued  previous research efforts attempting to  shed light on the firm‐level  entrepreneurial process.  the first  impediment has been the lack of a clear  consensus regarding the essential  attributes of the entrepreneurial process.   this is particularly salient in that a  general consensus regarding the  necessary components of the  entrepreneurial act has yet to emerge  (davidsson et al., 2001; kuratko,  hornsby, & goldsby, 2004; tan, 2007).   symbolic of this ambiguity, several  prominent scholars have argued for an  expanded conceptualization of firm‐level  entrepreneurship (lumpkin & dess,  1996), while other researchers have  argued for a more parsimonious  framework to describe the construct  (covin & miles, 1999).  a second  problem that needs to be addressed is  the lack of integration of various key  conceptualizations of firm‐level  entrepreneurship.  while numerous  conceptualizations and  operationalizations of firm‐level  entrepreneurship are available in the  literature, there has been less effort put  forth toward tying together the salient  arguments from these various  viewpoints in order to arrive at an  integrated framework (sharma &  chrisman, 1999; zahra, jennings et al.,  1999).  in order to address these two  impediments to existing  conceptualizations, it is necessary to  define the concept of firm‐level  entrepreneurship and to review the  competing views of firm‐level  entrepreneurship that currently exist in  the organizational literature.      a definition of firm‐level  entrepreneurship    the role that opportunities play in the  entrepreneurial process is a key  component of several existing  conceptualizations of corporate  entrepreneurship (lumpkin & dess,  1996; stevenson & jarillo, 1990).  shane  and venkataraman (2000) offered the  most widely cited definition of  entrepreneurship as opportunity‐based  behavior, arguing that the  entrepreneurial act centered primarily  around “how, by whom, and with what  effects opportunities to create future  goods and services are discovered,  evaluated, and exploited” (shane &  venkataraman, 2000: 218).  applying this  reasoning to the firm level of analysis,  firm‐level entrepreneurship can be  conceptualized as concerning how and  with what effects organizations discover,  evaluate, and exploit opportunities to  create future goods and services.    this focus on opportunities is consistent  with the resource‐based theory of the  firm.  rbt postulates that organizations  utilize key assets and resources in such a  way as to build and maintain a  competitive advantage for their firm  (barney, 1991; hatch & dyer, 2004;  wernerfelt, 1984).  consistent with rbt,  one of the potential benefits of the  entrepreneurial act is that it allows firms  to utilize available resources to create  and exploit opportunities to develop a  competitive advantage (ireland, hitt, &  sirmon, 2003).  as such, resources play a  critical role in the creation and  journal of small business strategy      4  exploitation of opportunities that occur  as part of the firm‐level entrepreneurial  process (alvarez & busenitz, 2001).   specifically, rbt helps to explain the  firm’s “unique awareness of  opportunities, the ability to acquire the  resources needed to exploit the  opportunity, and the organizational  ability to recombine homogeneous  inputs into heterogeneous outputs”  (alvarez & busenitz, 2001: 771).      competing views of firm‐level  entrepreneurship    having defined firm‐level  entrepreneurship, it is also necessary to  review the key conceptualizations of  firm‐level entrepreneurship that  currently exist in the organizational  literature.  extant views of firm‐level  entrepreneurship can be grouped into  three main categories: 1) entrepreneurial  orientation, 2) entrepreneurial  management, and 3) venturing and  strategic renewal.      entrepreneurial orientation     miller (1983) argued that entrepreneurial  firms exhibited three main attributes:  innovativeness, risk‐taking, and  proactiveness.  he theorized that “an  entrepreneurial firm is one that engages  in product‐market innovation,  undertakes somewhat risky ventures,  and is first to come up with ‘proactive’  innovations” (miller, 1983: 771).  miller  also argued that the level of  entrepreneurship exhibited by a firm  was the aggregate total of these three  dimensions.  according to miller, a firm  that was truly “entrepreneurial” would  exhibit high scores on all three of these  dimensions.     covin and slevin (1991) further clarified  these three dimensions of  entrepreneurial orientation as consisting  of risk taking in the face of uncertainty,  extensive and frequent product  innovation, and a propensity to  aggressively and proactively compete  with rivals.  lumpkin and dess (1996)  expanded on the conceptualization of  entrepreneurial orientation developed  by covin and slevin (1988).  lumpkin  and dess (1996) argued that proactive  firm behaviors and competitive  aggressiveness represented distinct  elements of entrepreneurial orientation.      entrepreneurial management     a second view of firm‐level  entrepreneurship, known as  entrepreneurial management, was  developed by stevenson and jarillo  (1990).  similar to shane and  venkataraman’s (2000) more recent  definition of entrepreneurship,  stevenson and jarillo (1990) argued that  the pursuit of opportunities was the  central focus of the entrepreneurial act.   as such, they defined firm‐level  entrepreneurship as the behaviors that  occur when an organization “pursues  opportunity, regardless of resources  currently controlled” (stevenson &  jarillo, 1990: 23).  while recognizing the  role that internal venturing played in the  entrepreneurial act, stevenson and  jarillo (1990) argued that an  opportunity‐based conception of  entrepreneurial behavior was necessary  to form a comprehensive view of firm‐ level entrepreneurship.      brown et al. (2001) empirically tested the  opportunity‐based conceptualization  developed by stevenson and jarillo  (1990), as well as the entrepreneurial  orientation scale developed by miller  volume 20, number 1 spring/summer 2009      5    (1983).  their findings indicated that,  while the two measures partially  overlapped, each addressed unique  elements of the entrepreneurial act.   this suggested that “in order to get a  complete assessment researchers should  use both instruments” when measuring  firm‐level entrepreneurship (brown et  al., 2001: 965).  a key component of the  stevenson and jarillo (1990) framework  was the extent to which firms  proactively recognized and exploited  opportunities (brown et al., 2001).      venturing and strategic renewal     a third conceptualization of firm‐level  entrepreneurship was offered by guth  and ginsberg (1990).  they argued that  the entrepreneurial act consisted of two  main components: venturing and  strategic renewal.  venturing was “the  birth of new businesses within existing  organizations” and strategic renewal led  to the “transformation of organizations  through renewal of the key ideas on  which they are built” (guth & ginsberg,  1990: 5).  as such, this conceptualization  of firm‐level entrepreneurship captured  a very dynamic element at the heart of  the entrepreneurial act: the fact that  organizations engaged in  entrepreneurship were constantly  enacting strategies aimed at finding  successful new combinations of their  existing resources (guth & ginsberg,  1990; ireland, kuratko, & covin, 2003).    zahra (1993) utilized a similar  conceptualization of firm‐level  entrepreneurship in arguing that  entrepreneurship embodied both  venturing and strategic renewal.  zahra  (1993) argued that a firm’s venturing  activities were evidenced mainly  through the creation of new businesses  or product, process, and technological  innovations.  alternately, an  organization’s renewal primarily  involved “the redefinition of a firm’s  mission through the creative  redeployment of resources, leading to  new combinations of products and  technologies” (zahra, 1993: 321).   drawing on the work of schumpeter  (1934), both guth and ginsberg (1990)  and zahra (1993) argued that one of the  primary facets of the entrepreneurial act  involved the utilization of new  combinations of organizational  resources and strategies in order to  enhance firm performance.    integrating the key  conceptualizations of firm‐level  entrepreneurship      each of these three conceptualizations  contributes a unique perspective to the  study of firm‐level entrepreneurship.  if  one looks at entrepreneurship from an  opportunity‐based perspective such as  that posited by shane and  venkataraman (2000), then firm‐level  entrepreneurship research should  primarily be concerned with the manner  in which organizations create and  exploit environmental opportunities.   these three perspectives  (entrepreneurial orientation,  entrepreneurial management, and  venturing/strategic renewal) highlight  the roles that innovativeness,  proactiveness, and strategic renewal play  in allowing firms to create and exploit  opportunities.      innovativeness has been a key  component of almost every previous  framework attempting to capture the  entrepreneurial act (miller, 1983,  schollhammer, 1982; tan, 2001; woolley  journal of small business strategy      6  & rottner, 2008) and continues to be an  area of interest in entrepreneurship  research (shih & chang, 2008).  covin  and miles (1999: 47) claimed that “of the  various dimensions of firm‐level  entrepreneurial orientation identified in  the literature…innovation, broadly  defined, is the single common theme  underlying all forms of corporate  entrepreneurship.”  schumpeter (1934)  argued that innovation was the  fundamental undertaking of the  entrepreneurial organization.  such  innovation is carried out through the  creation and development of new  products and processes.  however,  innovativeness itself is simply the  proclivity of an organization to embrace  novelty, to foster creativity, to tolerate  new ideas, and to maintain an open  outlook in regards to change.      the proactive pursuit of favorable  opportunities has also played a key role  in many conceptualizations of firm‐level  entrepreneurship (lumpkin & dess,  1996; stevenson & jarillo, 1990).    stevenson and jarillo (1990) argued that  entrepreneurial firms would pursue  business opportunities that were  deemed by the firm to be positive or  favorable.  this view is consistent with a  definition offered by lumpkin and dess  (2001), in which proactiveness is viewed  as an “opportunity‐seeking, forward‐ looking perspective” (lumpkin & dess,  2001: 431).  as such, proactiveness  represents an opportunity‐seeking  outlook whereby an organization places  a high value on maintaining a leadership  position in the industry.      finally, strategic renewal has also been  recognized as a key component of firm‐ level entrepreneurship (guth &  ginsberg, 1990; sharma & chrisman,  1999; zahra, 1993).  guth and ginsberg  (1990) noted that the renewal of “key  ideas on which organizations are  built…reflects the process of corporate  entrepreneurship; renewal of key ideas  requires the ability to manage  transformation and discontinuous  change” (guth & ginsberg, 1990: 5).   strategic renewal leads to the  transformation of key organizational  ideas and structures, which allows an  entrepreneurial organization to alter its  relationship with the external  environment and to exploit  environmental opportunities (sharma &  chrisman, 1999; verbeke, chrisman, &  yuan, 2007).  however, strategic renewal  itself represents the willingness of a firm  to examine its internal strategies and  structures and an openness to modify  these strategies and structures if  necessary.    firm‐level entrepreneurial  outcomes    while the preceding discussion  illustrates the various strategic attributes  that may be associated with firm‐level  entrepreneurship, it is also important to  consider the outcomes that these  attributes allow entrepreneurial firms to  achieve.  that is, the presence of  entrepreneurship at the firm‐level may  be reflected by four strategic outcomes:  1) sustained regeneration, 2)  organizational rejuvenation, 3) domain  redefinition, and 4) strategic  transformation (covin & miles, 1999;  dess et al., 2003).    sustained regeneration      sustained regeneration involves the  cultures, processes, and structures that  firms utilize in order to continuously  introduce new products and services and  enter into new markets (covin & miles,  volume 20, number 1 spring/summer 2009      7    1999; dess et al., 2003).  as such, it  accentuates the “ongoing stream of new  products and services or new market  introductions intended to capitalize on  latent or under‐exploited market  opportunities using the firm’s valued  innovation‐producing competencies”  (covin & miles, 1999: 51).  by developing  new products and entering new markets,  organizations are able to exploit  opportunities before their competitors.   therefore, the primary manifestation of  sustained regeneration in  entrepreneurial organizations is  evidenced through the introduction and  utilization of new product innovations,  as well as the entrance into new product  markets (schollhammer, 1982).     organizational rejuvenation      organizational rejuvenation is  concerned with the organizational  development of new processes or the  altering of existing processes in order to  capture or create valuable market  opportunities (covin & miles, 1999).   instead of being focused on new product  innovations (as was the case with  sustained regeneration), the focus of  organizational rejuvenation is on process  innovations.  through the  demonstration of “process and  administrative innovations rather than  product innovations, organizational  rejuvenation shows that firms can  become more entrepreneurial through  processes and structures as well as by  introducing new products and/or  entering new markets with existing  products” (dess et al., 2003: 355).   therefore, the primary manifestation of  organizational rejuvenation in  entrepreneurial organizations is  evidenced through the introduction of  new process innovations as a means of  creating and exploiting opportunities  (stopford & baden‐fuller, 1990).    domain redefinition      domain redefinition is the proactive  creation of a new product‐market that  competing firms have not yet recognized  or exploited (covin & miles, 1999; dess  et al., 2003).  in essence, domain  redefinition involves the process  whereby an “organization proactively  creates a new‐product market arena that  others have not recognized or actively  sought to exploit.  by engaging in  domain redefinition the firm, in effect,  takes the competition to a new arena  where its first or early mover status is  hoped to create some bases for  competitive advantage” (covin & miles,  1999: 54).  instead of solely looking to  exploit external opportunities, firms that  partake in domain redefinition are  actively seeking to create new  opportunities for themselves.  therefore,  the primary manifestation of domain  redefinition in entrepreneurial  organizations is evidenced through the  creation of a new product‐market in  order to create a market opportunity  that previously did not exist (lumpkin &  dess, 2001).    strategic transformation      strategic transformation involves the  redefinition and transformation of key  ideas and structures within an  organization.  the emphasis of strategic  transformation is on allowing  organizations to redefine themselves in  such a way as to take advantage of  opportunities present in the external  environment.  the process of strategic  transformation thus creates a process  where the “nature of rivalry with  journal of small business strategy      8  competitors is altered as the firm  concentrates on renewing the strategies  it uses to successfully align itself with  the external environment” (dess et al.,  2003: 355).  by changing their strategies,  firms engaged in strategic  transformation are essentially able to  change the way that they compete in a  particular industry or environment  (covin & miles, 1999).  therefore, the  primary manifestation of strategic  transformation in entrepreneurial  organizations is evidenced through the  transformation of organizational  strategies and ideas in an effort to  exploit environmental opportunities  (sharma & chrisman, 1999).      integrating the outcomes of firm‐ level entrepreneurship      these four outcomes (sustained  regeneration, organizational  rejuvenation, domain redefinition, and  strategic transformation) are consistent  with shane and venkataraman’s (2000)  opportunity‐based definition of  entrepreneurship.  through the  incidence of sustained regeneration,  organizational rejuvenation, domain  redefinition, and strategic  transformation, entrepreneurial firms  are able to create and exploit  environmental opportunities.   specifically, the development of new  products and the entrance into new  markets (sustained regeneration), the  introduction of new process innovations  (organizational rejuvenation), the  creation of new product‐markets  (domain redefinition), and the  transformation of key organizational  strategies and ideas (strategic  transformation) allow entrepreneurial  organizations to create new  environmental opportunities, as well as  to exploit existing opportunities for their  firms.      the firm‐level  entrepreneurial process    a new framework    a sufficient framework for delineating  firm‐level entrepreneurship should take  into account both the strategic  attributes and entrepreneurial outcomes  that are associated with the creation and  exploitation of opportunities.   fortunately, instead of being  contradictory in nature, the key  attributes of firm‐level entrepreneurship  posited in the extant literature, as well as  the key firm‐level entrepreneurial  outcomes theorized in more recent  research, are quite consistent with one  another.  as discussed in the section on  existing views of entrepreneurship, the  three main attributes that cut across  previous conceptualizations are  innovativeness, proactiveness, and  strategic renewal.  these three strategic  attributes form a perfect match with the  four outcomes often associated with  firm‐level entrepreneurship.    specifically, the presence of  innovativeness is a necessary component  in enabling firms to benefit from  sustained regeneration and  organizational rejuvenation.   sustained  regeneration creates value for firms  through new product development and  entrance into new product markets.   however, it is the presence of  innovativeness that allows firms to  effectively match customer needs and to  determine suitable product markets for  firms to enter (miller, 1983).  as  previously discussed, innovativeness  represents an organizational willingness  to embrace change and to be open to  volume 20, number 1 spring/summer 2009      9    new ideas.  firms are not likely to  effectively utilize sustained regeneration  activities if they have not first developed  a proclivity towards innovativeness.   likewise, organizations that embrace  innovativeness will be more likely to  benefit from the practice of  organizational rejuvenation.  firms  displaying organizational rejuvenation  capture valuable market opportunities  by developing new processes and  altering existing processes (covin &  miles, 1999).  innovativeness serves as  the primary vehicle through which firms  are open to capturing these market  opportunities, thus enabling  entrepreneurial organizations to  experience strategic benefits through the  process of organizational rejuvenation.   as such, an orientation towards  innovativeness is a primary factor in  enabling the organizational  development of new products (sustained  regeneration) and new processes  (organizational rejuvenation).    proposition 1: innovativeness is the  primary organizational attribute that  enables the outcome of sustained  regeneration.    proposition 2: innovativeness is the  primary organizational attribute that  enables the outcome of organizational  rejuvenation.    the presence of a proactive orientation  is a necessary component in allowing  firms to effectively engage in domain  redefinition.  firms are able to create a  competitive advantage through domain  redefinition by exploiting markets that  have not yet been recognized by other  organizations.  the process of  recognizing new market opportunities  and then capturing those opportunities  is essential to the ability of the firm to  continuously create a new product‐ market.  as previously discussed,  proactiveness represents an opportunity‐ seeking posture whereby organizations  adhere to a philosophy of market  leadership.  firms that are not proactive  in orientation  are unlikely to be first  movers into new markets, thus limiting  their ability to exploit available  opportunities before their competitors  (lumpkin & dess, 2001).  this suggests  that the willingness of firms to recognize  opportunity and capitalize on available  opportunities in the market before  competition is essential for domain  redefinition to occur.  following this  logic, proactiveness is an orientation  towards seeking out and recognizing  emerging opportunities and domain  redefinition is the actual ability of the  organization to capture new product  markets before the competition. thus,      proposition 3:  proactiveness is the  primary organizational attribute that  enables the outcome of domain  redefinition.    the presence of strategic renewal is a  necessary component in allowing firms  to achieve meaningful strategic  transformation.  as discussed above,  strategic renewal is the willingness of a  firm to examine its internal strategies  and structures.  dess et al. (2003) argued  that firms achieve strategic  transformation by redefining their  strategies and structures in order to  align themselves with their external  environment.  by realizing this strategic  fit with the external environment,  organizations better position themselves  to exploit environmental opportunities.   the willingness of an organization to  alter itself enables it to achieve a fit with  journal of small business strategy      10  its environment through strategic  transformation.  however, firms that do  not possess an orientation towards  strategic renewal will not be willing to  adapt or to align themselves with a  dynamic and changing environment  (covin & miles, 1999).  thus,  organizations possessing an inclination  towards strategic renewal will foster  strategic change and the altering of  strategic objectives.  strategic renewal  thus acts as a catalyst in encouraging  organizations to strategically transform  themselves to fit their external  environment.  proposition 4: strategic renewal is  the primary organizational attribute  that enables the outcome of strategic  transformation.    while entrepreneurial firms utilize  sustained regeneration, organizational  rejuvenation, domain redefinition, and  strategic transformation in order to  create a competitive advantage for the  organization (covin & miles, 1999), it is  unlikely that these outcomes will  actually culminate in a competitive  advantage if the organization has not  first developed its attributes of  innovativeness, proactiveness, and/or  strategic renewal.  the primary  antecedent of effective sustained  regeneration and organizational  rejuvenation is innovativeness, the  primary antecedent of effective domain  redefinition is proactiveness, and the  primary antecedent of effective strategic  transformation is strategic renewal.   building on these arguments, a new  theoretical conceptualization of firm‐ level entrepreneurship should consist of  three attributes: innovativeness,  proactiveness, and strategic renewal.   figure 1 displays the relationship  between these three strategic attributes  and the four primary entrepreneurial  outcomes.    figure 1: relationship between firm‐level entrepreneurial attributes and key  entrepreneurial outcomes                                          sustained regeneration  • the introduction of new  products and/or entrance into  new product markets.  organizational rejuvenation  • the development of new  processes and/or the alteration  of existing processes.  domain redefinition  • the creation of new product‐ markets to create a previously  untapped market opportunity.  strategic transformation  • the transformation of  strategies and structures to  align with the external  environment.  p1  p2  p3  p4  firm‐level  entrepreneurship              innovativeness  proactiveness  strategic renewal  *** numbers included (p1, p2, p3, and p4) correspond with propositions in the text.  volume 20, number 1 spring/summer 2009      11       elements not included in this  conceptualization      several attributes that were present in  earlier conceptualizations of firm‐level  entrepreneurship were not included in  this framework.  first, risk‐taking is not  included as a necessary component of  firm‐level entrepreneurship.  the  concept of risk‐taking has received an  increasing amount of scrutiny in recent  entrepreneurship research (alvarez,  2007; alvarez & barney, 2005).  this  scrutiny is the result of theoretical and  empirical ambiguity surrounding the  inclusion of risk‐taking as a component  of the firm‐level entrepreneurship  construct. the theoretical  underpinnings of these arguments were  initially suggested by knight (1921) and  more recently renewed by alvarez  (2007). these authors emphasize the  difference between risk and uncertainty,  pointing out that risk is decision‐making  when the probability of an outcome is  known, whereas uncertainty is decision‐ making when this probability is  unknown.  as such, uncertainty deals  with a lack of perfect information, while  risk deals with the probability of failure.   a higher degree of risk thus connotes a  higher known likelihood of failure.  as  the probability of success resulting from  a particular strategic move goes up, the  degree of risk associated with that  strategy is decreased. following these  definitions, entrepreneurial decision‐ making normally takes place under  conditions of uncertainty rather than  conditions of risk.  in fact, alvarez  (2007) points out the “growing  agreement that one of the most  important differences between non‐ entrepreneurial and entrepreneurial  decision‐making is that the former takes  place under conditions of risk, while the  latter takes place under conditions of  uncertainty” (alvarez, 2007: 429). this is  a significant distinction given that  entrepreneurs tend to be more  optimistic about the business situations  that they pursue than non‐ entrepreneurs and “may not think of  themselves as being any more likely to  take risks than non‐entrepreneurs”  (palich & bagby, 1995: 426).  so it  appears that entrepreneurial firms may  in fact be more willing to tolerate  ambiguous and uncertain situations  than non‐entrepreneurial firms, but may  not necessarily be any more willing to  take risks.    second, competitive aggressiveness was  not included as a dimension of firm‐level  entrepreneurship in this framework.   although lumpkin and dess (1996) have  convincingly argued that competitive  aggressiveness and proactiveness are  separate constructs, it is less clear why  competitive aggressiveness is a necessary  part of a framework of firm‐level  entrepreneurship.  such as with risk‐ taking, it may be true that  entrepreneurial firms are more willing  than other types of firms to engage in  competitive behaviors.  however, if  shane and venkataraman’s (2000)  definition of entrepreneurship as the  creation, discovery, and exploitation of  market opportunities is correct, then  competitive aggressiveness may be a  potential, but not necessary, component  of the entrepreneurial act.  these  theoretical concerns are exemplified by  recent studies that have not included  competitive aggressiveness as a distinct  element of firm‐level entrepreneurship  (covin et al., 2006; green, covin, &  slevin, 2008).  in summary, it is argued  journal of small business strategy      12  here that aggressive competition with  rival firms and risk‐taking behaviors  should not be considered as  prerequisites when determining and  evaluating the presence of firm‐level  entrepreneurship.  rather, these  variables should be considered as  optional behaviors utilized to enhance  entrepreneurial behavior.     measuring the new framework      previous research on the topic of firm‐ level entrepreneurship has not made a  clear distinction between the strategic  attributes underlying firm‐level  entrepreneurship and the outcomes that  entrepreneurial firms typically achieve.   in other words, if we assume that firm‐ level entrepreneurship consists of the  organizational creation and exploitation  of opportunities, research is still needed  to assess the fundamental attributes that  allow firms to create and exploit those  opportunities.  to simply say that a firm  that was profitable last year “made more  money than it lost” does not underscore  the process of how that firm was actually  able to achieve profitability.  likewise, to  simply say that an entrepreneurial firm  creates and exploits opportunities does  not offer much insight into the  attributes that preceded these  entrepreneurial outcomes.  therefore,  this framework is not as concerned with  offering a new definition of firm‐level  entrepreneurship as it is with defining  how the process underlying firm‐level  entrepreneurship actually occurs within  organizations.  if firm‐level  entrepreneurship is focused on the  creation and exploitation of  opportunities, then the process of firm‐ level entrepreneurship consists of the  attributes and outcomes associated with  the creation and exploitation of  opportunities.      these arguments suggest several issues  that should be considered in future  research intended to capture the  entrepreneurial process that occurs  within organizations.  first, it has been  argued that firm‐level entrepreneurship  should be viewed as consisting of three  attributes: innovativeness, proactiveness,  and strategic renewal.  second, it has  been argued that these three attributes  enhance the ability of firms to generate  four entrepreneurial outcomes:  sustained regeneration, organizational  rejuvenation, domain redefinition, and  strategic transformation.  this  distinction underscores previous  concerns that have been raised by  researchers regarding whether firm‐level  entrepreneurship should be measured as  a disposition or a behavior (zahra,  jennings et al., 1999).  our arguments  would lend support to modeling the  three main attributes of firm‐level  entrepreneurship as primarily  dispositional in nature and the four  main outcomes of firm‐level  entrepreneurship as primarily behavioral  in nature.  since the primary focus of  this conceptualization of firm‐level  entrepreneurship is to capture the true  essence of the entrepreneurial act, future  research on the topic should be focused  on both the organizational dispositions  and the strategic behaviors that  distinguish entrepreneurial firms from  non‐entrepreneurial firms.    a variety of methodological perspectives  can be fruitfully employed in future  research efforts on the topic of firm‐level  entrepreneurship.  qualitative, survey,  and archival methods can all be  effectively utilized to study the firm‐ level entrepreneurial process.   interviews, case studies, and other  qualitative techniques can be utilized to  volume 20, number 1 spring/summer 2009      13    assess the manner in which  entrepreneurship unfolds within  organizations.  for example, interviews  with the key decision‐makers within  different firms might provide very  important insights into the strategic  goals and objectives of entrepreneurial  organizations, as well as the manner in  which these firms attempt to achieve  these goals and objectives.  survey data  can be utilized to measure both  dispositions towards firm‐level  entrepreneurship (i.e., innovativeness,  proactiveness, and strategic renewal)  and outcomes associated with  entrepreneurship.  archival data can be  utilized to examine the incidence of the  four primary entrepreneurial outcomes  explored in this study.  for example, the  number of patents can be utilized as an  archival indicator of sustained  regeneration activities (i.e, product  innovation).  utilizing all three of these  techniques (qualitative, survey, and  archival) would help to provide a more  comprehensive and richer  understanding of the firm‐level  entrepreneurial process.    contributions and  limitations    the framework for studying the firm‐ level entrepreneurial process developed  in this study offers several important  contributions to the organizational  literature.  first, this framework has  integrated the key elements of several  commonly utilized conceptualizations of  firm‐level entrepreneurship.   specifically, the primary attributes of  three key conceptualizations of firm‐ level entrepreneurship were combined  with more recent theoretical arguments  espousing four key outcomes related to  the entrepreneurial act.  the distinction  between firm‐level entrepreneurial  outcomes, and the necessary attributes  that underlie these outcomes, was also  discussed.  as such, this framework has  provided an integrated view into the  manner that the entrepreneurial process  exhibits itself within the organizational  setting.  second, the ability of this  framework to integrate existing views  has made it more comprehensive in  nature, while the framework is still  parsimonious enough to be easily  measured.  third, this conceptualization  is focused on both dispositions  (attributes) and behaviors (outcomes), a  fact that addresses concerns related to  previous frameworks that were not  consistent in what they claimed to  measure.  fourth, the major components  of this framework can be easily assessed  in future research efforts, and this study  has offered several suggestions regarding  how such studies could be conducted.     the role that innovativeness,  proactiveness, and strategic renewal play  in the firm‐level entrepreneurial process  has important ramifications for  managers.  it has been argued that firm‐ level entrepreneurship helps  organizations to develop a competitive  advantage (covin & miles, 1999) and  produces other important strategic  benefits for firms (dess et al., 2003).   this manuscript combines numerous  studies examining the components of  entrepreneurship at an organizational  level into a single model.  this model  suggests organizations should take great  care in developing their proclivity  towards innovativeness, proactiveness,  and strategic renewal.  by so doing, they  will be able to more effectively utilize  sustained regeneration, organizational  rejuvenation, domain redefinition, and  strategic transformation as a means of  journal of small business strategy      14  developing a competitive advantage in  relation to rival firms.      this framework also has important  research implications. while sustained  regeneration, organizational  rejuvenation, domain redefinition, and  strategic transformation are important  outcomes in helping firms develop a  competitive advantage, there are certain  strategic attributes that encourage firms  to display these four outcomes.  it has  been argued that innovativeness,  proactiveness, and strategic renewal  should be considered fundamental  attributes in considering firms to be  entrepreneurial in nature.  as such,  future research studies on the topic of  firm‐level entrepreneurship should be  set up to include these three attributes.   the suggestions offered in this study  regarding appropriate methodological  techniques when studying these three  attributes provide a first step in aiding  such research efforts and support the  use of triangulation in order to more  comprehensively model the construct of  firm‐level entrepreneurship.    there were several potential limitations  of this framework.  first, the  conceptualization of the firm‐level  entrepreneurial process developed in  this study still needs to be empirically  tested.  future research aimed at  developing appropriate measurement  tools would help provide support for the  theoretical arguments contained in this  study.  this study suggested several  measurement issues that a new  operationalization of the firm‐level  entrepreneurial process should address,  such as the key strategic attributes that  should be included in a new  conceptualization and ideas regarding  how these attributes can most effectively  be measured.  second, although this  conceptualization of firm‐level  entrepreneurship has integrated several  previous frameworks, it is still necessary  to empirically test the discriminant and  convergent validity of this framework in  relation to other important  conceptualizations and measures, such  as those offered by miller (1983), guth  and ginsberg (1990), and stevenson and  jarillo (1990).      in conclusion, this study has offered  important insights into the  entrepreneurial process that occurs  within organizations.  consistent with  shane and venkataraman’s (2000)  definition of entrepreneurship as the  creation and exploitation of  environmental opportunities, it has been  argued that innovativeness,  proactiveness, and strategic renewal  serve as the underlying factors in  supporting such outcomes.  therefore,  any future conceptualization of the firm‐ level entrepreneurial process should take  into account the role that  innovativeness, proactiveness, and  strategic renewal play in the  entrepreneurial process.  further, this  study has offered several suggestions  regarding how such a conceptualization  of the firm‐level entrepreneurial process  could be assessed.  the study of firm‐ level entrepreneurship has played a  prominent role in the organizational  literature during the past several  decades, and in order to promote future  meaningful research on the topic, it is  necessary for accurate and parsimonious  conceptualizations and  operationalizations of the  entrepreneurial process to be available  to researchers.  further, given the  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entrepreneurship: the state of the  field. entrepreneurship theory and  practice, 24(2): 45‐65.    zahra, s.a., nielsen, a.p., & bogner,  w.c. (1999). corporate  entrepreneurship, knowledge, and  competence development.  entrepreneurship theory and  practice, 23(3): 169‐189.  patrick m. kreiser is an assistant  professor of management systems at  ohio university.  his primary research  interests are strategic management,  entrepreneurship, and international  business.  justin l. davis is an assistant professor  of management systems at ohio  university.  his primary research  interests are strategic management and  entrepreneurship.                      reproduced with permission of the copyright owner. further reproduction prohibited without permission. http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2021, vol. 31, no. 03, 72-87 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2021 small business institute® w w w. j s b s . o rg introduction 1purdue university, department of agricultural economics, 403 w. state street, kran 606, west lafayette, in 47907, usa, torres2@purdue. edu 2purdue university, department of agricultural economics, 403 w. state street, kran 617, west lafayette, in 47907, usa, delgado2@purdue.edu 3purdue university, department of agricultural economics, 403 w. state street, kran 778, west lafayette, in 47907, usa, mimarsha@ purdue.edu the economic implications of clustering on hispanic entrepreneurship in the us hispanic entrepreneurship, endogeneity, generalized propensity score, intergenerational mobility apa citation information: torres, a., delgado, m. s., & marshall, m. i.. (2021). the economic implications of clustering on hispanic entrepreneurship in the us. journal of small business strategy, 31(3), 72-87. the hispanic labor force is on track to increase by 77% over the 2000-2020 period (suro & passel, 2003), maintaining its status as the largest us minority (liu, 2012). a growing hispanic population is likely to contribute to an increase in the number of hispanic-owned businesses, which are already outpacing the growth of non-hispanic businesses, according to data from census bureau’s survey of business owners. by 2015, over 4 million hispanic businesses reported $661 billion in sales (ushcc, 2015); most of these businesses are located in hispanic clusters, where the access to ethnic clientele, low-cost labor, and key suppliers is crucial for their success. it is unclear if the benefits of living in clusters motivates or deter hispanics to start a business. on the one hand, there is evidence that hispanic self-employment is highly influenced by the community (fairlie, 2004; fisher & lewin, 2018). in close proximity or in clusters, hispanics are more likely to know each other and develop socioeconomic ties (kim & aldrich, 2005). other researchers have found the relationship between hispanic clustering is either not correlated or negatively correlated with hispanic self-employment (liu, 2012; yuengert, 1995). here, we address this open question by investigating the impact of hispanic clustering on hispanics’ choice to become entrepreneurs. our secondary goal is to address the role of heterogeneity on hispanic entrepreneurship. this article advances the literature by incorporating hispanic heterogeneity and derives insight on the labor choices for different generations of hispanics. while hispanic heterogeneity is, to a large extent, related to the place of birth (dávila & mora, 2013), we show that generational differences are also important factors contributing to hispanic diversity. generations are measured via categorical variables that combine place of birth and the length of time the individual has been in the us. we expect differences in economic behavior across foreignand us-born hispanics, and across different generations (e.g. first, 1.5, second, and third generation). we develop an identification strategy that allows us to address several potential sources of endogeneity. specifically, we use a series of robust econometric techniques to control for macroeconomic, individual, and unobserved peer influences that may affect hispanic self-employment; these are issues that have not yet been addressed in the curthis article assesses the effect of hispanic clustering on hispanic self-employment in the us and the extent to which endogenous social factors within a cluster may encourage hispanics to start a business. we address key identification issues in the clustering literature by applying a series of robust econometric techniques to us census data. the study provides empirical evidence on the role of hispanic clustering on hispanic entrepreneurship. this article also tackles the constructs of hispanic entrepreneurial heterogeneity and suggests the clustering of second-generation hispanics as a potential indicator of the hispanic entrepreneurial environment. the study derives insight on the economic implications of hispanic clustering and its benefits and suggests policy recommendations to promote success among hispanic entrepreneurs. we propose that generational differences across hispanics is not merely an ethnic control variable, but rather an important factor for the design of strategies and incentives at the federal, state, and local level. ariana torres1, michael s. delgado2, maria i. marshall3 http://www.smallbusinessinstitute.biz http://www.jsbs.org 73 a. torres, m. s. delgado, & m. i. marshall journal of small business strategy / vol. 31, no. 3 (2021) / 72-87 rent hispanic entrepreneurship literature. we used an extensive list of covariates at the individual and community level control for numerous factors. we then use instrumental variables to control for unobserved macroeconomic factors leading hispanics to sort into different regions (i.e. public use microdata areas (pumas)) that may also be correlated with the decision to be an entrepreneur. lastly, we use a generalized propensity score (gps) approach to adjust for non-randomness in the effect of hispanic clustering on hispanic self-employment. we contribute to the literature in three ways. first, we develop robust econometric models on the effect of hispanic clustering on hispanic entrepreneurship, allowing us to push past empirical hurdles such as self-selection into clusters and the presence of unobservable factors. second, we provide empirical evidence that the probability of hispanic entrepreneurship responds to specific levels of hispanic clustering. lastly, we tackle the constructs of hispanic heterogeneity and find potential indicators for the hispanic entrepreneurial environment. policymakers, scholars, and stakeholders can use our findings to fuel future generations of hispanic entrepreneurs. if clustering is relevant for hispanic entrepreneurship, public and private programs are more likely to effectively increase the success of hispanic entrepreneurs if targeted through community linkages. lastly, one-size-fits-all policies disregarding the heterogeneity among hispanics will likely have contrasting implications for certain groups. literature review hispanic self-employment the us census bureau defines self-employed individuals to be those who “operate their own business, professional practice, farm, or who in any other way regularly work independently to earn a living.” historically, self-employment is an important means through which immigrants obtain economic mobility in the us (fairlie & meyer, 1996), especially for those facing labor market barriers (shinnar & young, 2008). major drivers of self-employment are regional factors, age, marital status, human capital, and other individual, family, business, and community characteristics (liu, 2012; robinson & sexton, 1994). the literature has reported hispanics are more likely to start a business than non-hispanics, especially in retail, services, and construction industries (liu, 2012). however, hispanic-owned businesses tend to have lower returns than non-hispanic entrepreneurs, enter industries with lower barriers, and report additional sources of income other than self-employment (evans & leighton, 1989). there is evidence that immigrant self-employment is highly influenced by the socioeconomic environment. factors influencing the likelihood of self-employment are the characteristics of hispanic communities; for instance, the level of educational attainment in the community, type of predominant industries, housing prices, population diversity and density, and urban or metro status (parker, 2004). according to fairlie (2004b), the decision to be an entrepreneur is positively correlated with the agglomeration of hispanics. while wang (2010) suggests that hispanics are more likely to be self-employed in areas with a high proportion of hispanics because of community resources and opportunities, liu (2012) does not find that hispanic-concentrated areas are correlated with higher rates of hispanic self-employment. yuengert (1995) reports no correlation. hispanic clustering hispanics are likely to cluster in areas where other hispanics live and work (stark, 1991). in clusters, successful hispanics are observed and copied by others in their pursuit of achieving economic mobility (danes et al., 2008). individuals sharing similar characteristics, such as ethnicity, are more likely to know each other and link their socioeconomic activities (kim & aldrich, 2005). the fact that clusters tend to remain stable over time encourage the creation of entrepreneurial ecosystems (amit & muller, 1995; fisher & lewin, 2018). the push and pull theory of entrepreneurship (amit & muller, 1995) helps us understand that the choice to start a business is a function of the individual’s motivational factors. the framework is useful to accommodate the assumption that not one all-encompassing model can explain labor choices of immigrants (clark & drinkwater, 2000). factors such as the demographic context, personal characteristics, and living and working environment shape labor choices (shapero & sokol, 1982). this overarching framework incorporates the opposing pushing and pulling mechanisms driving the choice of self-employment among hispanics (cromie, 1987; fisher & lewin, 2018). hispanic clusters can act as a pull factor by motivating hispanics to start a business. clusters can provide entrepreneurs with access to ethnic clientele, low-cost labor, and key suppliers. hispanic clustering can also be a push factor by forcing hispanics into self-employment (reimers, 1983). economically depressed communities with high unemployment can push hispanics to start a business as the only way to achieve economic mobility (kramer mills et al., 2018). this is especially true among those facing labor discrimination and a lack of educational credentials. few scholars have studied the mechanisms affecting 74 a. torres, m. s. delgado, & m. i. marshall journal of small business strategy / vol. 31, no. 3 (2021) / 72-87 the correlation between hispanic clustering and the creation of hispanic-owned businesses. we posit that inconsistencies in the literature on the relationship between clustering and entrepreneurship may be due to the lumping of hispanics into a homogenous group, which fails to account for the heterogeneity among hispanics from different generations (bradley, 2004). generational heterogeneity is a key trait likely to affect the economic behavior of hispanics (portes & rumbaut, 2003). while most of the current entrepreneurship studies have focused on foreign-born hispanic entrepreneurs (yuengert, 1995), the one-size-fits-all findings tend to overlook hispanic heterogeneity and may lack generality in the results. method data and sample data comes from the 2010 us census, which is the latest count of every person living in the us this study takes advantage of the large sample size documented by the census to provide a representative sample of hispanics who are self-employed. we use the person weights in the census database to make the sample representative of the national population. the sample contains 307,698 hispanics living in 2,043 public use microdata areas (pumas) across the us. the choice of puma as the spatial scale is motivated by data availability, as pumas are the smallest geographic unit available in the census. although pumas can include large areas with a low population, such as in rural areas, urban areas may contain one or more pumas. thus, pumas are large geographic areas, but they are also small enough to capture the environment in which individuals interact. the sample contains hispanics between 18 and 70 years old, which were categorized by generation such as first, 1.5, second, and third generation. first generation hispanics are individuals born in latin america that arrived in the us at any age greater than 16 years. generation 1.5 consists of hispanics born in latin america that arrived in the us at a maximum age of 16 years0f. the countries of origin for 1st and 1.5 generation hispanics include puerto rico, cuba, mexico, caribe (the dominican republic, haiti, jamaica and the west indies), central america (belize, costa rica, el salvador, guatemala, honduras, nicaragua and panama), and south america (argentina, bolivia, brazil, chile, colombia, ecuador, french guiana, guyana, paraguay, peru, suriname, uruguay and venezuela). second-generation hispanics include individuals born in the us with either parent born in latin america. lastly, third-generation hispanics include individuals born in the us, but report hispanic ethnicity or ancestry. in our sample, 38% are first generation, and the 1.5, second, and third generations make up 14, 7, and 41% of the sample, respectively. a probit model of the decision to be an entrepreneur to understand how living in hispanic clusters influences the decision for a hispanic individual to become an entrepreneur, we use a probit regression model pr(yi = 1│xi ) = φ(β0 + x1i β1 + x2i β2 ), i = 1,2,…,n (1) where the dependent variable if individual self-reported as being employed in his/her own. the hispanic clustering variables we are interested in are: the share of the population living in individual ’s puma that is hispanic, representing the degree of hispanic clustering within the puma; the share of the population (of any race or ethnicity) in the puma that is self-employed; and the share of the hispanic population in the puma that is self-employed. the vector is a set of individual-level and puma-level control variables. the parameter vector is to be estimated, and is the standard normal probability distribution function. this empirical model fits into the scope of models in the neighborhood effects literature (e.g., durlauf, 2004; graham, 2016), of which the central question pertains to the extent to which estimation of the regression model can be plausibly interpreted as causal. the first hispanic clustering variable, the share of hispanics living in the puma, captures the clustering of all hispanics. the last two clustering variables, the percent of self-employed individuals in the puma and the percent of all hispanics in the puma that are self-employed, measure the extent to which there are endogenous clustering factors within the puma that encourage hispanic individuals to be self-employed. we anticipate that any increase in self-employment within the puma will lead to a significant increase in the probability that a hispanic individual becomes self-employed, with a particularly strong effect coming from the share of other hispanics in the puma that are self-employed. in additional specifications of the model, we interact these clustering variables with generational indicators, to understand the extent to which these clustering effects might be heterogeneous across hispanic generations. similarly, lazear (1999) calculates immigrant clustering by the proportion of individuals in a geographic area. identification of the social effects comes from several sources. first, we control for an extensive set of individual-specific and puma-specific factors that affect both the decision to become an entrepreneur and the shares of the population within each puma that are hispanic and/or are 75 a. torres, m. s. delgado, & m. i. marshall journal of small business strategy / vol. 31, no. 3 (2021) / 72-87 entrepreneurs (i.e., the variables in ). our data include an extensive list of covariates measured at the individual and puma levels, which allows us to control for numerous factors that might otherwise confound identification. at the individual level, we observe many individual, household, and family background demographic variables, which include gender, age, household income, marital status, the number of children, english and spanish language proficiency, education, access to mortgage, industry, metropolitan status, the education level and employment status of the individual’s parents and spouse, and the ethnicity of the individual’s spouse. at higher levels of spatial aggregation, we control for broad geographic differences via eight us territory division indicators from the bureau of economic analysis (bea): new england, mideast, great lakes, plains, southeast, southwest, rocky mountain, and far west.1f alaska and hawaii are excluded as the subsample does not report hispanics within the age group living in these states. see the supplemental appendix for more details. at the puma level, we control for the share of the population in the puma that is white or black (i.e., us-born, non-hispanic), as well as the violent crime rate and the proportion of the population that is college-educated, unemployed, and self-employed. in total, these variables control for numerous individual-level and puma-level attributes that might drive self-selection into becoming an entrepreneur or the sorting of individuals into different neighborhoods (i.e., pumas). table 1 presents a complete list of control variables included in our analysis. these variables control for the contextual socioeconomic status of each puma. including other ethnic and racial groups permits us to control for potential labor segregation (charles, 2003) since it is likely that other race and ethnic clusters affect the creation of hispanic-owned businesses. further, a high negative correlation between percent hispanic and percent white (-0.73) validates our decision to include the share of other races and ethnicities in the list of explanatory variables. the second source of identification comes from the nonlinearity inherent in the probit specification (brock & durlauf, 2001; 2007). according to manski (1993), there are three types of variables that drive economic activity or, in our case, the decision by a hispanic individual to become an entrepreneur. one set of variables is the endogenous social effects – the probability of self-employment in response to hispanic clustering, self-employment, and hispanic self-employment in the group. the other two sets of variables are the exogenous group effects – the probability of self-employment varies with the socioeconomic composition of the puma and the exogenous individual effects – the probability of self-employment varies according to individual attributes, such as language proficiency or education. brock and durlauf (2001; 2007) show that nonlinearities – which are inherent to the probit specification – are a critical source of identification of endogenous social effects from contextual group characteristics. in other words, the non-identification result in manski (1993) depends critically on the assumed linearity of the regression function (among other assumptions; see for instance durlauf, 2004). hence, while the interplay between these types of variables are complex, the probit structural form aids us in separating these effects from one another. to the extent that our set of controls is not sufficient for eliminating bias caused by omitted variables, we deploy an instrumental variables probit and generalized propensity score approach as auxiliary models. while our set of control variables is extensive, it is possible that unobservable macroeconomic factors lead to systemic sorting of hispanics into different pumas that would render the share of hispanics in the puma to be endogenous. to guard against this possibility, we deploy the two-stage instrumental variable approach of card (2009). the advantage of the generalized propensity score model is that the flexible functional form may be more robust if the single-index form of the probit is overly restrictive; in other words, the generalized propensity score approach is a flexible way of adjusting for observable differences that might be a source of self-selection of hispanics into entrepreneurship. we use two instrumental variables designed to extract the exogenous variation in hispanic clustering (card 2009). the first instrument is the supply-push component of immigration inflows, capturing the tendency of immigrants to move to pre-existing clusters and controlling for macroeconomic shocks that increase the attractiveness of a city and leading to immigrant inflows. specifically, the instrument measures the expected number of hispanics going to a puma, which is the multiple fraction of all arriving hispanics who choose to live in a puma (e.g. the share of immigrants in a puma in an initial period 2000) (λs =ms/ mus) and the total number of new hispanics to the us in 2010 relative to 2000 (δmus). the instrument is multiplied by the fixed multiple of the fraction of immigrants in the puma. in other words, the instrument captures how current hispanic clustering is a product of historical settlement patterns of hispanics and newly arriving hispanics in a puma. additional instruments for hispanic clustering are based on weather (coates & gindling, 2010; miguel et al., 2004). we use heating (and cooling) degree days as measures of climatic comfort; these data were collected from the national ocean and atmospheric administration (noaa) for each county. heating degree-days express the frequency in which the temperature falls low enough that heating is 76 a. torres, m. s. delgado, & m. i. marshall journal of small business strategy / vol. 31, no. 3 (2021) / 72-87 table 1 list of dependent and explanatory variables variable description selfempa 1= if individual is self-employed, 0 otherwise. reported that is employed (empstat=1) and works for own enterprise (classwkr=1) platino average percentage share of hispanic at the puma level lincome log of average household income age age in years agetwo square of age in years crime violent crime rate per 100,000 at the state level nchild average number of children in hispanic household marrieda 1= if individual is married with either present or absent spouse speakenglisha 1= if individual speaks english well, very well, or only english spanisha 1= if individual speaks spanish in household, 0 otherwise femalea 1= if individual is female collegea 1= if individual has 1 year of college or more metroareaa 1= if individual lives in a metro area accessmorta 1= if individual reports to have a mortgage or contract to purchase collparenta 1= if either mother or father have some college education or graduate studies selfemppara 1= if either mother or father is self-employed, 0 otherwise employspa 1= if spouse is employed sphispanica 1= if spouse is hispanic collspousea 1= if spouse has some college education or graduate studies newenglanda percentage of hispanics living in pumas located in connecticut, maine, massachusetts, new hampshire, rhode island, vermont mideasta percentage of hispanics living in pumas located in delaware, district of columbia, maryland, new jersey, new york, pennsylvania greatlakesa percentage of hispanics living in pumas located in illinois, indiana, michigan, ohio, wisconsin plainsa percentage of hispanics living in pumas located in iowa, kansas, minnesota, missouri, nebraska, north dakota, south dakota southeasta percentage of hispanics living in pumas located in alabama, arkansas, florida, georgia, kentucky, louisiana, mississippi, north carolina, south carolina, tennessee, virginia, west virginia southwesta percentage of hispanics living in pumas located in arizona, new mexico, oklahoma, texas. reference group rockyma percentage of hispanics living in pumas located in colorado, idaho, montana, utah, wyoming farwesta percentage of hispanics living in pumas located in california, nevada, oregon, washington agmina percentage of hispanics working in agriculture or mining 77 a. torres, m. s. delgado, & m. i. marshall journal of small business strategy / vol. 31, no. 3 (2021) / 72-87 variable description construca percentage of hispanics working in construction manufa percentage of hispanics working in manufacturing tradea percentage of hispanics working in trade transporta percentage of hispanics working in transportation informa percentage of hispanics working in information financea percentage of hispanics working in finance profserva percentage of hispanics working in professional services otherserva percentage of hispanics working in other services. reference group pwhite share of us born whites at the puma level pblack share of us born african-americans at the puma level pminorit share of other us-born minorities at the puma level pimmigrant share of other immigrants at the puma level pselfemp share of self-employed individuals at the puma level punemployed share of unemployed individuals at the puma level pcollege share of individuals with college or higher education at the puma level athe mean value for dummy variables represents the percentage of individuals showing that characteristic. 78 a. torres, m. s. delgado, & m. i. marshall journal of small business strategy / vol. 31, no. 3 (2021) / 72-87 required in buildings, and cooling degree-days measure the frequency in which the temperature is high enough that air conditioning is needed in the buildings. in addition to being a flexible way of adjusting for non-randomness in the effect of hispanic clustering on hispanic self-employment, the generalized propensity score approach also provides us with a continuously varying treatment response: a dose-response function. this allows us to assess the extent to which the impact of hispanic clustering on hispanic self-employment is nonlinear. results descriptive statistics approximately 8.5% of hispanics in our sample are self-employed, compared to 11.1% of white us-born non-hispanics, 12.6% of non-hispanic immigrants, and 4.6% of black us-born non-hispanics. among hispanics, first-generation hispanics are the most entrepreneurial with 11.6% owning a business, followed by the 1.5 generation (8.3%), the third generation (6.7%), and the second-generation (2.8%). the share of hispanics living in a puma ranges from 0.2% to 96.8% with a mean of 13.5%. the average age for hispanics in the 2010 census is 39 years old. as expected, first generation hispanics are the oldest group with an average age of 43 years, followed by the third generation (39 years old), the 1.5 generation (36 years old), and the second-generation (25 years old). on average, 52% of hispanics are married and have 1 child. while 13% of hispanics have a college education or higher, educational attainment varies across hispanic generations. the third generation has the highest proportion of college-educated hispanics (17%), which is significantly higher than first-generation hispanics . on the other hand, only a minority of the respondents’ parents have a college education (2%) or have been self-employed (2%). approximately, 32% of their spouses are employed, 17% have at least a college education, and 39% are hispanic. over 80% of hispanics are english-proficient and a similar proportion speak spanish at home. when looking at the group of entrepreneurs, our sample suggests that the proportion of spanish-speakers (84%) is higher than english-proficient (69%) hispanics. as expected, first-generation hispanics are significantly more spanish-fluent than other generations . conversely, first-generation hispanics are significantly less english-proficient than other generations . similar to parker (2004), over 91% of hispanics live in metro areas, and this is true for all generations. the proportion of hispanics with mortgages is similar across generations, but the second, third, and 1.5 generation are significantly different than first-generation hispanics . there is a higher proportion of hispanics that live in the southwest (38%), far west (28%), and southeast regions (13%). the vast presence of hispanics in the south may be explained by the variety of policies and characteristics of these states that motivate hispanics to live in well-established hispanic communities (kochhar et al., 2005). regression results this section answers two main questions: how does the probability of self-employment of any hispanic change as hispanic clustering increases, and how does hispanic heterogeneity influence the probability of hispanic self-employment. the first question is answered by looking at the parameter platino in table 2 and the dose-response function in figure 1. the relationship between hispanic heterogeneity and hispanic entrepreneurship is answered through tables 3, 4, and 5 and in figure 2 and 3. the probability to start a business for each generation of hispanics as hispanic clustering increases is shown by the coefficient of the interaction terms in table 2 and the graph of the marginal effects in figure 2. table 3 shows the probability of self-employment for each generation, regardless of platino, and table 4 shows how the clustering of each generation affects hispanic entrepreneurship. how does the probability of self-employment of any hispanic change as hispanic clustering increases? table 2 reports the coefficients and marginal effects from the standard probit and the instrumental variables probit. the left panel of figure 1 shows the dose-response function from the gps model, displaying how the average probability of self-employment varies depending on the (continuous) level of hispanic clustering. the right panel of figure 1 shows the treatment effect function, which is the derivative of the dose-response function with respect to the level of hispanic clustering. we find that usual standard errors and robust standard errors are similar, which suggests that heteroskedasticity is not an issue. the results together provide robust empirical evidence that, on average, the probability of self-employment for hispanics decreases as the share of hispanics increases at the puma level, but this relationship is not necessarily linear. the standard probit suggests that the average hispanic is significantly less likely to start a business as the share of all hispanics clustering in a puma increases. contrary to borjas (1986) and wang (2010), this article provides empirical evidence that the clustering of hispanics discourages 79 a. torres, m. s. delgado, & m. i. marshall journal of small business strategy / vol. 31, no. 3 (2021) / 72-87 the entrepreneurial motivation of hispanics. one explanation is that hispanic-dominated neighborhoods may suffer from limited resources possibly due to residential segregation. it is likely that hispanic-dominated pumas may concentrate limited consumer demand, which can constrain the creation of hispanic businesses. further analysis indicates that employment, household income, and educational attainment proportionally decreases as the share of hispanics increases. by concentrating hispanics geographically, the decrease of hispanic household income appears to deteriorate the entrepreneurial environment. it is likely that in pumas in which household income is below-average, there will be limited demand and an unfavorable business atmosphere. this finding supports the theory that hispanic clustering can act as a mobility trap and harm hispanic entrepreneurship (borjas, 1983; fischer & massey, 2000; reimers, 1983). the standard probit regression further shows that other factors are detrimental to hispanic entrepreneurship, including financial factors, household characteristics, industry, and gender. study results illustrate that hispanics are less likely to be an entrepreneur as household income increases . in our sample, higher household income may be associated with broader labor market prospects among hispanics. thus, hispanics with higher household income are less likely to be self-employed. further factors deterring the probability that hispanics enter self-employment are access to a mortgage and hispanic ethnicity of the spouse . hispanics working in agriculture, manufacturing, trade, information, or service industries are less likely to be self-employed. pumas with a high concentration of white usborn and non-hispanic immigrants are environments that are detrimental to hispanic entrepreneurial endeavors. results provide evidence of a potential residential segregation and its negative effect on hispanic entrepreneurial activity. lastly, hispanic women are less likely to be self-employed than men . this finding is supported by the literature that describes women’s lower entrepreneurial activity due to lower human capital accumulation, motherhood penalty, and lower work-force participation rates (fairchild, 2010; marshall & flaig, 2014). the more human capital at the entrepreneur’s disposal, the greater the odds of self-employment among hispanics. hispanics are more likely to be self-employed as the number of children increases, his/ her parents are self-employed, and the spouse is employed or has attended college. this may be due to the fact that age is associated with higher levels of human capital and access to financial capital that can improve the odds to start a business (fairchild, 2010). hispanics living in metro areas, the southeast, or in pumas with a high concentration of self-employed individuals are more likely to start their own business. well-established hispanic communities in the south of the us may bring adequate resources, such as clientele, that motivate hispanic entrepreneurship. consistent with the literature, areas with vibrant entrepreneurial ecosystems can offer the clientele and resources that motivate hispanics into self-employment (liu, 2012; wang, 2010). the instrumental variable probit uses the card (2009) and coates and gindling (2010) instruments to control for endogeneity from macroeconomic shocks that may induce hispanic agglomeration. a key finding is that in the instrumental variable probit, the parameter is not statistically significant . the parameter represents the correlation between the errors in the standard probit and the reduced-form equation for the endogenous regressor. a that is not statistically significant is equivalent to saying that platino is unlikely to be endogenous. in other words, endogeneity is unlikely, and the results from the standard probit can be used to disentangle the effects of hispanic clustering on the probability of self-employment. a reason why endogeneity is not an issue may be the extensive list of covariates included in the righthand side in the standard probit. the results from the instrumental variables probit are consistent with the standard probit, though the parameter estimates in the instrumental variables probit are somewhat larger in magnitude. the gps estimates of the dose-response function are shown in figure 1; generally, we find that hispanic entrepreneurial activity decreases as the share of hispanics in a puma increases. thus, the gps method confirms the findings from the probit model. an important contribution from the dose-response and treatment effect functions is how hispanic self-employment responds to a specific level of hispanic clustering. figure 1 points to three regions where the direction of the response of hispanic entrepreneurship changes with respect to hispanic clustering. in region 1 (< 20% share of hispanics) and region 3 (>80% share of hispanics), hispanic clustering has a positive or zero effect on the entrepreneurial activity of any hispanic. a low and high concentration of hispanics in the puma increases the probability of self-employment. alternatively, hispanics are less likely to start a business if living in pumas where the share of hispanics is between 20% and 80% (region 2). further analysis shows that hispanic-dominated pumas are mainly composed of foreign-born hispanics with lower household income and educational credentials. for instance, hispanic households living in low-concentrated pumas made on average $69,283 while medium-concentrated and hispanic-dominated pumas made $54,346 and $54,754 in 2010, respectively. moreover, the higher the hispanic clustering, the bigger the income gap between foreign-born and us-born generations. hispanic-dominat80 a. torres, m. s. delgado, & m. i. marshall journal of small business strategy / vol. 31, no. 3 (2021) / 72-87 table 2 standard probit and iv probit results on the probability of hispanic self-employment probit iv probit coeff. marginal eff.a coeff. marginal eff. platino -0.006 ** -0.074 ** -0.014 * -1.353 * lincome -0.185 *** -2.450 *** -0.185 *** -18.497 *** age 0.063 *** 0.837 *** 0.063 *** 6.340 *** agetwo -0.001 *** b -0.001 *** b crime -0.001 -0.001 0.000 -0.009 nchild 0.046 *** 0.609 *** 0.046 *** 4.593 *** married 0.053 ** 0.699 ** 0.052 ** 5.241 ** speakenglish -0.057 ** -0.754 ** -0.057 ** -5.736 ** spanish 0.054 *** 0.717 *** 0.056 *** 5.631 *** female -0.206 *** -2.726 *** -0.207 *** -20.657 *** college 0.033 0.442 0.034 3.378 metroarea 0.131 *** 1.733 *** 0.143 *** 14.295 *** accessmort -0.037 ** -0.493 ** -0.038 ** -3.774 ** collparent -0.011 -0.146 -0.011 -1.132 selfemppar 0.487 *** 6.430 *** 0.488 *** 48.783 *** employsp 0.060 *** 0.796 ** 0.060 ** 5.997 ** sphispanic -0.068 *** -0.900 *** -0.067 *** -6.686 *** collspouse 0.085 *** 1.125 *** 0.085 *** 8.490 *** newengland -0.023 -0.298 -0.009 -0.869 mideast 0.015 0.204 0.032 3.205 greatlakes -0.054 -0.717 -0.042 -4.233 plains -0.038 -0.507 -0.033 -3.260 southeast 0.103 *** 1.355 *** 0.112 *** 11.170 *** rockym -0.064 -0.847 -0.059 -5.940 farwest 0.101 *** 1.334 *** 0.087 ** 8.711 *** agmin -0.419 *** -5.535 *** -0.420 *** -42.033 *** construc 0.383 *** 5.058 *** 0.382 *** 38.241 *** manuf -0.811 *** -10.707 *** -0.811 *** -81.051 *** trade -0.170 *** -2.246 *** -0.170 *** -16.977 *** transport 0.001 0.019 0.002 0.184 inform -0.435 *** -5.740 *** -0.434 *** -43.399 *** finance -0.018 -0.239 -0.017 -1.746 profserv -0.046 ** -0.605 ** -0.045 ** -4.546 ** pamerican -0.006 ** -0.084 ** -0.014 ** -1.441 ** pblack -0.002 -0.027 -0.010 * -0.990 * pminority -0.004 -0.049 -0.011 -1.124 pimmigrant -0.007 ** -0.099 ** -0.017 ** -1.742 ** pselfemp 0.039 *** 0.521 *** 0.041 *** 4.107 *** 81 a. torres, m. s. delgado, & m. i. marshall journal of small business strategy / vol. 31, no. 3 (2021) / 72-87 punemployed -0.006 -0.081 -0.006 -0.614 pcollege 0.003 ** 0.043 ** 0.003 ** 0.281 ** constant -0.898 *** -0.127 prob>f 0.00 0.000 athrho 0.022 lnsigma 0.860 *** n. obs. 111,132 111,132 amarginal effects are expressed in percentage points b the marginal effects on variables that are not linear, that is interaction or quadratic variables, are omitted due to the lack of a parameter expressing the flexibility in the relationship between the variables. note: asterisk (*), double asterisk (**), and triple asterisk (***) denote variables significant at 10%, 5%, and 1% respectively. figure 1. dose-response function on the effects of hispanic clustering on the entrepreneurial activity of an average hispanic ed pumas have below-average levels of self-employment and individuals with college education. how does heterogeneity among hispanics influence the probability of hispanic self-employment? one of the main goals of the article is to understand the role of hispanic heterogeneity on entrepreneurship. first, we investigate whether the probability of self-employment varies across generations. second, we investigate how the share of different generations of hispanics within the puma influences the probability that hispanics become self-employed. table 2 displays the coefficients for interaction between platino and first, second, and third-generation hispanics. the interaction coefficients in table 2 measure the extent to which the probability to start a business varies across generations as the clustering of hispanics increases. the coefficient estimates indicate that first-generation hispanics are significantly more likely to start a business if they live in hispanic-dominated pumas relative to 1.5 generation hispanics. an explanation is that hispanic-dominated pumas may encourage first-generation hispanics to start a business by providing access to hispanic clustering resources. on the other hand, second and third generation hispanics are less likely to start a business as the clustering of hispanics increases. hispanic-dominated areas may be pushing us-born hispanics out of self-employment and 82 a. torres, m. s. delgado, & m. i. marshall journal of small business strategy / vol. 31, no. 3 (2021) / 72-87 into wage-salary sectors due to the prospect of lower-revenue and lower-growth hispanic-owned businesses. figure 2 illustrates the marginal effects of the interactions terms in table 2 over the entire range of hispanic clustering. using equation (1), figure 2 a, b, and c show how the probability of self-employment for first, second, and third-generation hispanics, respectively, changes as the value of platino increases. in other words, this figure shows the relationship between self-employment and hispanic clustering for first (a), second (b), and third (c) generation hispanics over the range of hispanic clustering. the figure also illustrates the marginal effects with 95% confidence intervals. similar to the coefficients in table 2, figure 2 illustrates that the probability of self-employment for first-generation hispanics is positive, and it increases as the clustering of hispanics increases . while the probability to start a business increases also for second and third-generation hispanics , the probability of self-employment is negative at all levels of hispanic clustering. in other words, the marginal effects indicate the true effect of hispanic clustering on the probability of self-employment for first, second, and third-generation hispanics. figure 2. marginal effects on the probability of self-employment for first (a), second (b), and third (c) generation hispanics as hispanic clustering increases. table 3 demonstrates the probability of entrepreneurship for each generation, regardless of the clustering effect. using equation (1), table 3 replaces the interaction terms with dummy variables if the respondent is first, second, and third-generation relative to the 1.5 generation. table 3 shows the estimates and marginal effects of the probability of self-employment across generations of hispanics. similar to model 1, the instrumental variables probit shows that endogeneity is not an issue, and the standard probit regression is interpreted below. a key finding is that first-generation hispanics are more likely to start a business relative to the 1.5 generation . one explanation is that first-generation hispanics may face larger labor market constraints to enter the wage-salary sector than the 1.5 generation due to lower human capital. georgarakos and tatsiramos (2009) explain that many first-generation hispanics enter self-employment from unemployment or underemployment. it is likely that first-generation hispanics start their own business pushed by labor barriers and make use of clustering resources as a way out of poverty. on the other hand, second and third-generation hispanics are less likely to be self-employed relative to the 1.5 generation . we also investigate if there is a specific generation that drives the decrease in the probability to start a business for all hispanics. table 4 displays the probability that any his83 a. torres, m. s. delgado, & m. i. marshall journal of small business strategy / vol. 31, no. 3 (2021) / 72-87 table 3 standard probit results on the probability of self-employment across generations of hispanics probit coeff. marginal eff.a platino -0.006 ** -0.073 ** first 0.075 *** 0.979 *** second -0.359 *** -4.672 *** third -0.136 *** -1.777 *** lincome -0.173 *** -2.259 *** age 0.055 *** 0.712 *** agetwo 0.000 *** b crime 0.000 -0.001 nchild 0.042 *** 0.543 *** married 0.036 0.471 speakenglish 0.027 0.357 spanish -0.012 -0.157 female -0.203 *** -2.644 *** college 0.035 0.450 metroarea 0.121 *** 1.580 *** accessmort -0.047 *** -0.615 *** collparent 0.006 0.084 selfemppar 0.549 *** 7.159 *** employsp 0.068 *** 0.881 *** sphispanic -0.087 *** -1.139 *** collspouse 0.094 *** 1.220 *** newengland -0.052 -0.679 mideast -0.010 -0.133 greatlakes -0.069 -0.894 plains -0.070 -0.909 southeast 0.064 ** 0.831 ** rockym -0.080 -1.039 farwest 0.088 *** 1.145 *** agmin -0.421 *** -5.482 *** construc 0.374 *** 4.875 *** manuf -0.815 *** -10.614 *** trade -0.165 *** -2.152 *** transport 0.010 0.134 inform -0.413 *** -5.384 *** finance -0.006 -0.076 profserv -0.037 * -0.482 * pwhite -0.007 ** -0.087 ** pblack -0.003 -0.035 84 a. torres, m. s. delgado, & m. i. marshall journal of small business strategy / vol. 31, no. 3 (2021) / 72-87 pminority -0.003 -0.033 pimmigrant -0.008 ** -0.108 ** pselfemp 0.040 *** 0.518 *** punemployed -0.007 -0.091 pcollege 0.003 ** 0.036 ** constant -0.718 ** prob>f 0.00 n. obs. 111,132 data source: 2010 census. a the marginal effects are expressed in percentage points. b marginal effects on quadratic variables are omitted due to the lack of a parameter expressing the flexibility in the relationship between the variables. note: asterisk (*), double asterisk (**), and triple asterisk (***) denote variables significant at 10%, 5%, and 1% respectively. panic becomes self-employed as the share of first, 1.5, second, or third-generation hispanics increases. for the sake of simplicity, table 4 only illustrates the key explanatory variables and excludes the set of covariates . table 4 illustrates the key variables of four probit regressions. each regression replaces platino with the share of each generation pfirst, ponehalf, psecond, and pthird, respectively. the instrumental variables probit shows that endogeneity is not an issue, and we use the results from the standard probit regression. this suggests an intergenerational hispanic clustering effect for hispanic self-employment. an indicator of the hispanic entrepreneurial environment. an explanation for the negative effect of second-generation clustering is that their socioeconomic behavior is probably the most divergent due to assimilation and economic mobility, compared to first-generation hispanics. thus, increasing the proportion of second-generation hispanics may be causing co-ethnic segregation. intergenerational segregation will likely decrease the social and economic interaction between foreign-born and us-born hispanics. reduced intergenerational interaction in us-born-dominated pumas is likely to shrink the entrepreneurial atmosphere for foreign-born hispanics. this assumption is echoed in fairchild (2010): the clustering environment and intergenerational interaction significantly influence ethnic entrepreneurship. these results suggest that clustering resources, market conditions, and social norms that can encourage hispanic entrepreneurship are minimal in neighborhoods dominated by second-generation hispanics. conclusions and implications the us census bureau projects that by 2060, one out of three americans will be hispanic. if hispanics are twice as likely to start a business as native-born americans, it is likely that hispanics will help define the us entrepreneurial landscape in the coming years. however, different studies define hispanics differently: some articles define hispanics as those that migrate from latin america, and others consider hispanics to be any foreignor us-born individuals of hispanic descent. before designing policies, decision-makers should first recognize the heterogeneity among hispanics and how policies may affect different groups of hispanics differently. it is also unclear what motivates hispanics to become entrepreneurs. table 4 standard probit results the probability that the share of each generation of hispanics influences the decision to self-employment. probit coeff. marginal eff.a pfirst 0.001 0.011 ponehalf -0.003 -0.036 psecond -0.005 ** -0.071 ** pthird -0.001 -0.012 a marginal effects are expressed in percentage points. note: asterisk (*), double asterisk (**), and triple asterisk (***) denote variables significant at 10%, 5%, and 1% respectively. our results, consistent with a growing body of literature (fairchild, 2010), show that generational clustering has an effect on hispanic self-employment. the results provide evidence that the clustering of second-generation hispanics drives the decline of entrepreneurial activity among all hispanics. thus, second-generation clustering can be used as 85 a. torres, m. s. delgado, & m. i. marshall journal of small business strategy / vol. 31, no. 3 (2021) / 72-87 one major contribution of this article is the empirical evidence related to hispanic heterogeneity. while most studies lump hispanics together in a homogeneous group, we advance the literature by focusing on hispanic heterogeneity. using census data, we derive insight on the labor choices for different generations of hispanics. this article proposes that generational differences across immigrants is not merely an ethnic control factor, but rather an important factor for the design of strategies and incentives at the federal, state, and local level. effective policies should focus on these generational differences to accurately promote success among hispanic entrepreneurs. the american dream is the story of immigrants arriving to the us to find better opportunities. many hispanics are able to achieve economic mobility, but we find that different generations of hispanics make different labor choices. while first-generation hispanics are the most entrepreneurial group of hispanics, they have on average lower income, education, and english proficiency than us-born hispanics. kramer mills et al. (2018) reports hispanic entrepreneurs to be the second-most dominant group among low-income entrepreneurs. we expect that policies that support low-income entrepreneurs will likely assist first-generation hispanics more profoundly than other generations. most foreign-born hispanic businesses are related to manual low-skilled sectors, especially construction and manufacturing. it seems that entrepreneurship is the way out of poverty for many hispanics but can also be a source of employment for many low-wage workers. hispanic-owned businesses, which tend to be located in low-income inner-city communities, may be helping reduce unemployment and poverty at the community level. our results are consistent with kramer mills et al. (2018), who reported that many new hispanic business ventures tend to be concentrated in economically depressed areas. while entrepreneurship can be the ladder out of poverty for foreign-born hispanics and their communities, they are likely to experience different obstacles to success than us-born entrepreneurs. lack of access to capital and training, work regulations, and a high failure rate are among the most common barriers to hispanic entrepreneurs (kramer mills et al., 2018). targeted policies and incentives that provide training, education, and information to low-income immigrant entrepreneurs may be one way of helping immigrant entrepreneurs to succeed while shrinking poverty and expanding prosperity in economically-depressed communities. policies that assist immigrant entrepreneurs through the strengthening of ethnic communities, access to resources, and bilingual information could improve the socioeconomic status of hispanics and their communities. the communities where immigrants live matter. results show that hispanic entrepreneurship significantly depends on the clustering of hispanics. a low and high degree of clustering in hispanic communities encourage hispanics to start their own businesses. these communities may be bringing social resources or offering niche markets that encourage hispanics to create businesses. our results suggest the existence of a potential indicator for the hispanic entrepreneurial environment. the agglomeration of second-generation hispanics seems to be driving the decline of hispanic entrepreneurship at the puma level. a major policy implication is that policymakers should consider policies that encourage social and economic interaction between foreignand us-born immigrants. increasing intergenerational bonds and social resources is likely to improve the entrepreneurial atmosphere for hispanic entrepreneurs. we also directly address identification issues in the ethnic clustering literature by applying a series of robust econometric techniques to census data. we develop econometric procedures to address the potential endogeneity between social interactions and individual economic behavior. our identification strategy addresses several sources of potential endogeneity such as macro, individual, and peer unobserved characteristics that may affect the probability of self-employment and hispanic clustering. this econometric procedure yields consistent results and allows us to draw causal conclusions on the main drivers of hispanic entrepreneurship. researchers and policymakers can use our findings to increase the availability and efficiency of community-based programs to encourage immigrant entrepreneurship. further research should investigate other sources of heterogeneity such as nationality and its interaction with generational differences. we expect that hispanics from mexico and central america are likely to make different economic decisions than those from south america and the caribbean. future research should also focus on the role of government-sponsored and community-based organizations to offset the barriers to entrepreneurship and support credit access for hispanic entrepreneurs. many strategies can emerge from the interaction of local organizations and immigrants to provide the resources needed to start a business. while we do not focus on the legal barriers to immigrant entrepreneurship, this article can be helpful for understanding hispanic entrepreneurship. researchers and policymakers can use this article to advocate for ideas at the local, state, and federal level that aim to capture the economic gains from immigrant entrepreneurship. 86 a. torres, m. s. delgado, & m. i. marshall journal of small business strategy / vol. 31, no. 3 (2021) / 72-87 references amit, r., & muller, e. 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(1995). testing hypotheses of immigrant self-employment. journal of human resources, 30(1), 194-204. https://ssrn.com/abstract=1497759 http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2021, vol. 31, no. 01, 10-19 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2021 small business institute® w w w. j s b s . o rg introduction 1escuela técnica superior de ingenieros industriales, universidad politécnica de madrid, josé gutiérrez abascal, 2, 28006, madrid, spain, victor.gomez.frias@upm.es 2escuela técnica superior de ingenieros industriales, universidad politécnica de madrid, josé gutiérrez abascal, 2, 28006, madrid, spain, teresa.sanchez@upm.es 3escuela técnica superior de ingenieros industriales, universidad politécnica de madrid, josé gutiérrez abascal, 2, 28006, madrid, spain, daniel.maeso.alvarez@alumnos.upm.es 4escuela técnica superior de ingenieros industriales, universidad politécnica de madrid, josé gutiérrez abascal, 2, 28006, madrid, spain, jesus.salgado@upm.es universal basic income in the spanish construction sector: engaging businesses in a public-policy debate apa citation information: gómez-frías, v., sánchez-chaparro, t., maeso-álvarez, d., & salgado-criado, j. (2021). universal basic income in the spanish construction sector: engaging businesses in a public-policy debate. journal of small business strategy, 31(1), 10-19. universal basic income (ubi) is defined as “a regular transfer in cash to every individual irrespective of income from other sources and with no obligations” (van parijs, 2015). ubi’s ethical roots are grounded in the 16th century (thomas more); and it was systematised as a public policy at the middle of the 19th century, particularly by joseph charlier (1848), and by j.s. mill (1904) within a wider debate on political economy. in recent years, ubi has become established as a relevant topic in social policy debates, although it has not yet been adopted by any country. the reason for the increasing attention it receives can be explained by different contextual factors, mainly related to concerns over growing inequality, the stigmatization and insufficient coverage of conditional aid for development programmes (banerjee, 2016), rising unemployment rates due to increasing work automation (robins, 1985), and paid labour no longer being a guarantee of poverty alleviation (robins, 1985). basic income has been presented as a disruptive option which could at the same time abolish poverty and empower individuals, allowing them to escape the “poverty trap” (haushofer & shapiro, 2016). people affected by a “poverty trap” avoid working (or do it informally) because they fear to lose conditional social assistance. notwithstanding, academics and policy-makers have repeatedly expressed important concerns about ubi feasibility, mainly due to high implementation costs (calnitsky, 2017), but also about its desirability and uncertain effects at the individual and the universal basic income (ubi) is receiving increasing attention as a policy alternative, both from academia and the general public, because its implementation would open the window for a systemic questioning of our current “social contract”. however, the body of evidence for or against ubi is still insufficiently developed, especially when concerning changes at the system level – a scale at which it has never been implemented anywhere in the world. at this scale, labour market dynamics and the behaviour of different economic agents, such as businesses, take on particular relevance.our main research objective is to investigate shared beliefs and opinions among business managers about ubi, about its impact at the system level, and, more specifically on labour market supply and demand. in order to achieve this objective, we conducted a focus group session involving managers from the construction sector in spain, a country whose demographics, unemployment rate, productivity and public expenditure make this policy plausible.the target group showed little understanding of ubi, as well as other welfare policies, and demonstrated a dominant position against such a proposal. our main findings show that most companies “live day-to-day” and do not undertake a structured analysis of such radical horizons but rather concentrate on incremental adaptations, even if they are worried about the need to increase productivity as a condition for survival – of both companies and the welfare system. we suggest that, in order to address this stakeholder group, communication around ubi should stress its potential to simplify bureaucracy and lead to significant savings. the results of this study can be used to inform policy design processes around ubi. víctor gómez-frías1, teresa sánchez-chaparro2, daniel maeso-álvarez3, jesús salgado-criado4 universal basic income, construction sector, spain, experimentation http://www.smallbusinessinstitute.biz http://www.jsbs.org 11 v. gómez-frías, t. sánchez-chaparro, d. maeso-álvarez, & j. salgado-criado journal of small business strategy / vol. 31, no. 1 (2021) / 10-19 system level, particularly upon the labour market equilibrium (murray, 2016). in the spanish context, casado and sebastián (2019) and oyarzábal et al. (2019) provide a good example of confronting views regarding the feasibility and desirability of ubi’s implementation in spain. this debate is part of a more general revision of our “social contract”, of which navarro (2020) offers a systematic review analysing the reality and roots of inequality. in particular, the “future of work” is studied not only from the perspective of digitalization but also in terms of its capacity to reduce social and financial inequalities. pucci et al. (2019) shed light on the increasing limitations of employment to reinforce cohesion. when employment is no longer much of a solution against inequality or even poverty, ubi might appear to be “the worst solution… that is, until all other options are considered” (pérez, 2015, p. 196). ubi has never been adopted anywhere in the world at the system level. a number of limited experiments have been conducted in different geographical regions of the world in order to provide evidence of the effects of ubi upon individuals’ behaviour. however, as ubi has never been implemented at a whole system’s level, there is no empirical evidence regarding the effects of this policy at the system level, and particularly, regarding its effects upon labour demand strategies. experimentation on ubi faces structural difficulties because providing basic income to just a portion of the population does not allow one to observe changes at the system level – and particularly those affecting job market dynamics and the behaviour of different economic agents, such as businesses. as suggested by prominent authors in the field (van parijs & vanderborght, 2017), it would seem that – as was the case with the implementation of retirement allocations during bismarck’s time – the decision to implement ubi should be a matter of principle and require a “leap of faith”, rather than waiting for it to be a logical consequence of an evidence-based decision-making process. in this paper, we summarize the limitations for experimenting with ubi and provide inputs which could assist public-policy makers and other stakeholders interested in promoting ubi. theoretical framework renaissance humanist more did not encourage the implementation of ubi as a statesman in england, but in his famous fiction utopia (more, 1978) he depicted a society that recognised such a right. his friend juan luis vives wrote about social assistance in flemish cities in de subventionen pauperum (vives, 2010), pioneering the idea that civil institutions (instead of the individual or ecclesial charity) should guarantee sufficient revenues for all, although he argued that this aid should be in exchange of some obligations to the community. with the emergence of modern capitalism, many authors, such as paine (1974), had reflected about the right to distribute equally among all people the revenue of the land. since humans could originally find in nature – their common property – what they needed to survive, a society that assigned those resources to private hands should compensate other individuals. while communism was raised as a political alternative, other voices preferred to suggest “corrections” to capitalism based on solidarity. the solution of the social problem by charlier (1848), published the same year as marx and engels’ (2018) communist manifesto, was the first to justify an economic transfer that would be both universal and unconditional (ubi as we have defined it). also from the same year, mill’s (1904) influential principles of political economy supported propositions (with some degrees of conditionality) that were similar to those posited by charles fourier, which were widely discussed at the time. charlier (1848) already paid attention not only to the eradication of poverty but also to the provision of economic incentives to overcome undesirable jobs – or at least to compensate them with better wages. when basic income started to be more systematically evaluated as a potential public policy, authors such as jordan (2018), cook (1980) or ashby (1984) dealt intensively with both the philosophical and economic implications for the role of work in society of ubi as compared to a policy of guaranteed employment. ubi has now become a serious public policy option, and despite never yet having been fully implemented in any country, it is receiving increasing attention in academia and in social debates. the reasons for this popularity might be linked to the disruptive impact it could represent on the “social contract”, and to the counter-intuitive nature of some of its economic incentives, which provoke intense discussions among supporters and opponents, both in scientific and political spheres. among the most explored arguments in public debates is the convenience of ubi as an answer to job scarcity resulting from increasing automatization, or the possible effects upon individual behaviour, while its impacts on innovation, entrepreneurship and productivity are less discussed (gómez-frías & sánchez-chaparro, 2020). with the emergence of the covid-19 pandemic, ubi has increasingly emerged in public debates as an emergency solution. researchers from the world bank and unicef (gentilini et al., 2020) made a worldwide review of social-protection measures, identifying 937 measures enforced in 190 countries as of may 2020. none of these constituted a ubi (that is to say, an aid unconditionally attributed to the entire population of a country), not even 12 v. gómez-frías, t. sánchez-chaparro, d. maeso-álvarez, & j. salgado-criado journal of small business strategy / vol. 31, no. 1 (2021) / 10-19 a temporary one. however, one can observe a significant trend in governments increasingly allocating monetary transfers to a large proportion of the population, with light conditions or bureaucratic burdens. although this fact is relevant to the debate over ubi’s feasibility or desirability, it would certainly not be conclusive, for the study reports only temporary measures and the possible impact of these policies would be strongly biased by the dramatic social and economic context of the pandemic. if the progress of the academic discussion on ubi should then rely in actual real-scale experimentations, serious limitations would emerge due to two major reasons: (1) its important costs (for instance 10,000 € paid annually to 10,000 beneficiaries would mean an expenditure of 100 m€/ year plus certain management costs); (2) the impossibility of observing system-level effects due to the limited extension of the experiments conducted. indeed, governments from countries such as finland, usa, canada, kenya or india, among others; ngos; and even private donors have tried basic income experiments, but the broadest involved only 6,000 people in a developing country (givedirectly project in kenyafaye & niehaus, 2016) or 2,000 in a developed country (finlandkangas & pulkka 2016) each of these two examples implied an important cost of about 30 m€, but they touched only 0.03% and 0.11% of the country’s active population, respectively. these experiments, involving a few thousand people receiving a basic income during a sufficient period of time, were enough to assess the impact on labour supply (willingness to work, salary expectations) compared to a control group. for instance, the finnish experiment showed that “basic income did not create more work hours or higher incomes” although results were biased by a “new activation policy [that] contaminated the control group” (hiilamo, 2019). however, all the experiments that have taken place only represent a very marginal effect in the aggregated labour market demand, as the relative figures are, for example, far lower than other important factors that impact the job market, such as the number of people than migrate every year or those who inherit. in other words, a few thousand people receiving a basic income, within a context typically comprised of several million job positions in a national economy, is not relevant enough for companies to consider adapting their labour demand strategies. van parijs and vanderborght (2017) justify the impossibility to conduct real basic income experiments that can affect not only the beneficiaries’ behaviour but also the strategies on companies operating in a given market. there are solid econometric models – for instance, jongen et al. (2014) conducted a simulation for the netherlands central planning bureau – which observed elasticities that link levels of employment with household income and calculate an expected variation of macroeconomic figures, taxes and public budget expenditure. but if basic income were permanently implemented, it would probably also impact perceptions about the balance between work and leisure, and lead to generalised debates on the acceptable levels of inequality, all of which would probably fundamentally alter the foundations of workers and recruiters’ behaviour. in current societies in developed countries, public expenditure is now at levels around 40% which means that new structural policies such as ubi would probably need a reconfiguration of other instruments. an incremental transformation is therefore more plausible than a “big bang” (van parijs & vanderborght, 2017). some social activists and academics defending ubi suggest discussing first steps towards universality of basic income, such as initially providing it to children (bradshaw, 2016; ferrarini et al., 2013; ortiz, 2015; van mechelen & bradshaw 2013), to the young (bidadanure, 2014), the elderly (abrahamson & wehner, 2013; st. john & wilmore, 2001), or to women (fraser, 1997; miller, 1998); or else to begin with a low amount (van parijs & vanderborght, 2017). van parijs and vanderborght (2017) recall that when retirement pensions were created by german chancellor von bismarck in 1889, no prior experimentation was conducted on the matter. that is to say, the policy was not tested over a number of years in a few villages before its implementation. it was based on principle, as well as having some practical implications. it constituted a strong political decision, meant to counter revolutionary winds and to show that the state understood its obligation to take care of workers and guarantee a minimum standard of living above what the market could assure for all. in practical terms, the cost of this policy was not high, since the retirement age was initially set at 70 years when life expectancy was only 40, but symbolically it was effective, and it is still considered the birth of the contemporary welfare state. van parijs and vanderborght’s (2017) bet, not simply as academics but also as active defenders of ubi, is that this public policy could also be introduced by allocating a small amount, which would then be progressively raised if public opinion were satisfied with the results. research approach and objective as previously explained, there are contrasting opinions among experts regarding the desirability and feasibility of ubi, and current experimentation on the matter does not provide a sound empirical base to inform these opinions, because experiments are limited in scope and do not allow to observe possible systemic effects. we acknowledge the claim of van parijs and vanderborght (2017) regarding the 13 v. gómez-frías, t. sánchez-chaparro, d. maeso-álvarez, & j. salgado-criado journal of small business strategy / vol. 31, no. 1 (2021) / 10-19 impossibility of conducting ubi experiments at a sufficient scale to be conclusive, as it would be necessary to actually change the welfare-state model of a particular country. as researchers, we intend to be neutral about the political desirability of ubi, but we are interested in providing inputs for policy makers that could be attracted by ubi but are set back by the insufficient experimental results. if the decision on ubi’s implementation should primarily rely on political will (as has been the case with the introduction of retirement pensions or the granting of marriage rights to people of the same gender, for instance), policy design might still have an importance in the decision-making process if it manages to have an impact on the narrative of the different stakeholders. this logic fits into the model of “organised anarchy” or “garbage can theory” (introduced by cohen et al., 1972). due to the limited rationality of actors, complex decisions do not consist of an organised argumentation from a problem to a solution, but rather on a quite random set of connections among problems, possible solutions, and stakeholders (the garbage can). “windows of opportunity” (such as those provided by crises) accelerate this chaotic process, intensifying debates and decision-making processes. civil society is then fundamental in giving popularity to an “idea” (a possible solution) so that it has greater chances of sooner or later being dragged out from the garbage can. as we have seen, ubi has been mostly an issue discussed from the perspective of the impact on workers and not employers, which are also an influential part of society. our main research objective is to investigate shared beliefs and opinions among business managers about ubi, about its impact at the system level, and, more specifically on labour market supply and demand. our approach has been to confront company executives with the thought experiment and ask them about the implications of a ubi being adopted in their sector. their reactions can be useful to ubi proponents (activists or politicians) and can also be considered as a preparatory phase for experimentation with real transfers of money. in the “further research” section we argue that our results could also be used in designing a ubi prototype limited to an economic sector, which could be a promising alternative for gaining broader knowledge on ubi’s impact on labour demand. method this study used focus group discussions. focus groups are a form of group interview that, rather than relying on an alternation between a researcher’s questions and the research participants’ responses, capitalizes on the interaction within the group in order to generate data (kitzinger, 1995; morgan, 1996). focus groups were originally used within communication studies to explore the effects of films and television programmes during the second world war and became popular in social research in the 1980s (krueger, 2014; morgan & spanish, 1984). they are currently extensively applied in many different disciplines, including health studies (kitzinger, 1995), education (field, 2000), and economic and management sciences (stewart & shamdasani, 2014). the method is particularly useful for exploring people’s knowledge, experience and opinions, and can be used to examine not only what people think, but how they think and why they think that way. focus groups are useful for studying dominant cultural values and exposing dominant narratives within a group (kitzinger, 1995). focus groups are particularly appropriate for exploratory research, when the theoretical categories need yet to be constructed or refined. when group dynamics work well, the participants work alongside the researcher, taking the research in new and often unexpected directions (stewart & shamdasani, 2014). focus groups need to be carefully planned in order to respond to the research aims and adapt to the particular research context (morgan & spanish, 1984). in this particular case, consistent with the pursued goals, a focus group was put together, composed of 15 middle and top managers belonging to different companies in the construction sector in spain. a variety of profiles were included to allow for the exploration of different perspectives within the group. in effect, the sample included managers from public and private companies, with different seniority levels and belonging to companies in different positions within the construction value chain. specifically, the average age in the panel was 45 years old, ranging from 27 to 65; the average salary was 66,000€/year, ranging from 35,000 to 150,000 €/year. regarding gender balance, only one of the participants was a woman. although a more balanced composition would have been desirable in this regard, this ratio nevertheless reflects the gender unbalance found within the construction sector in spain. participants were selected according to their profile and availability among a list of members of the spanish order of construction engineers. the focus group convened at the facilities of said institution. although the number of people included can be considered high regarding the 6 to 10 “rule of thumb” generally applied when composing focus groups, a larger number was considered in this case to be more suitable to the research aims, as it allowed to incorporate a richer sample. following morgan’s (1996) recommendations for running large 14 v. gómez-frías, t. sánchez-chaparro, d. maeso-álvarez, & j. salgado-criado journal of small business strategy / vol. 31, no. 1 (2021) / 10-19 focus groups, an experienced moderator was used to guide the discussion and was able to effectively manage the group (morgan, 1996). the moderator was assisted by a junior researcher, who recorded the session and took notes during the meeting. a duration of 3 hours was allocated to allow for the effective participation of all participants. regarding the structure of the discussion, a funnel approach was adopted, starting with open questions, but moving towards a more structured discussion further on to avoid digression. a particular difficulty was posed by participants confusing ubi with conditional social aids such as the minimum income (mi), a misconception that is frequent among the general public and even in the media (gómez-frías & sánchez-chaparro, 2020). to help focus the discussion, after a first round of presentation and open questions around the individual positions and knowledge of the participants concerning ubi and the welfare state, a 5-minute video was shown to the panel. it presented a summary of the coverage done by the spanish public television of a 2-hour evening conference for the general public about universal basic income organised by the “basic income research group” at universidad politécnica de madrid in october 2019. the event was organized around two round-tables with 10 experts from different disciplines (economy, law, business administration, sociology, philosophy) discussing the desirability and feasibility of a basic income in spain, and presented contrasting views and opinions on the matter. the group of experts discussed the implementation of a particular basic income scenario in spain. this scenario, which proposed roughly 5,000€ for each individual (426€/month) while suppressing part of the existing monetary transfers but respecting all welfare in-kind services such as health or education, is extensively described in gómez-frías and sánchez-chaparro (2020). the 5-minute video, which provided the panel with a good summary of the general debate around universal basic income and a particular scenario to reflect upon, was released in january 2020 and is available on the spanish public television website (rtve, 2020). we consider that incepting a message about basic income through a 5-minute professional tv programme freely edited by journalist is the closest we could get to a means of bringing about a large-scale social debate. however, we identified a very relevant aspect that was not adequately covered by the tv programme and that would certainly constitute an important part of a real political debate on basic income – namely, its financing. the reaction of some interviewees to this aspect was a skeptic refusal of ubi because they feared the negative impacts of a very high increase in taxes, while others feared cuts in education or healthcare. our plan for future research is to incorporate succinct material that presents interviewees with a public budget model that explains that a ubi would substitute other cash transfers but not public services, as well as some estimations of the budget increase (e.g. 2% for spain in the 5,000€/year scenario used in our exercise). following the video, participants were asked to reconsider their position regarding the desirability of ubi in the spanish context. next, they were asked to give their opinion on how ubi would affect labour demand in the construction sector, taking into account job profiles, wages, the number of job positions, automatization levels, and profit levels. participants were asked to express their individual opinions regarding each question posed by answering a slido survey. the survey was followed by a collective discussion around the topic. the focus group was closed with a final wrap-up round. the recorded material from the session was fully transcribed. both the notes taken and the transcription were coded by two independent researchers. discrepancies regarding the codes applied were solved through several iterative rounds. the analysis of the coded material was jointly conducted through various meetings between the authors of the paper. results and discussion prior knowledge on ubi and awareness about the role of the welfare state participants showed a limited knowledge regarding ubi as well as limited interest and awareness regarding the role of the welfare state. 27% of participants did not know the difference between ubi and minimum income (mi, which consists of completing revenues up to a threshold) at the beginning of the group session. this rate went down to 8% after the 5-minutes video was shown. throughout the focus group session, confusion between ubi and mi was still evident among certain participants who continued to refer to ubi as if it were a conditional allocation addressed at the “poor”. significantly, 33% declared not having an opinion regarding what the welfare state should provide to all citizens, and showed limited awareness and concern regarding rising levels of inequality in spain. although spain can be considered a prosperous country in terms of income per capita, occupying eighth place among the world’s significantly populated nations (imf, 2019), in terms of inequality, 60 countries present better results on the gini scale (world bank, 2020). interestingly as well, participants did not seem to be aware of the existence in spain of several minimum income policies at the regional level. only 9% of participants proposed alternatives to the policies under discussion (see table 1). 15 v. gómez-frías, t. sánchez-chaparro, d. maeso-álvarez, & j. salgado-criado journal of small business strategy / vol. 31, no. 1 (2021) / 10-19 beliefs regarding consequences on individual behaviour the focus group enabled the clear identification of a number of dominant narratives shared among the members of the group. particularly, most participants felt that the application of ubi would increase absenteeism and lower productivity, as workers “would not be afraid of being fired and would become less engaged with their work”. some participants even stated that ubi would increase the rate of unemployment. participants also feared that ubi could encourage young people to drop out of school and thus lead to a lack of commitment to life-long learning and training. nevertheless, a few voices in the group showed a certain level of disagreement and provided a more nuanced view as they distinguished between “people who want to thrive and people who are conformist in nature”, suggesting that different behavioural segments could be established. some people in the panel stated that disincentives were more likely to occur “at low salary levels”. a topic upon which the group showed no consensus was the possible effect of ubi upon entrepreneurship. on the one hand, an unconditional income could favour risk taking. on the other hand, others stated their opinion that people could become “conformist” if they benefited from ubi. certain people expressed their view that people engage in business creation “not because they have less risk or more need but because they have that inner strength”. beliefs regarding consequences at the system level the focus group also discussed possible effects at the system level. a strong belief shared by the participants was that ubi would generate inflation. significantly, this statement has no sound economic grounds since ubi would not have an impact upon the monetary mass, and thus the general level of prices would hardly be modified (gómez-frías & sánchez-chaparro, 2020, among the many authors that deal with this recurrent “urban legend”). participants showed a consensus regarding the impact of ubi on automatization. ubi would increase salary costs and, consequently, would be bound to increase automatization levels. participants also expressed their belief that ubi would favour the submerged economy, which challenges the views of experts in the field who make an association between ubi and a possible reduction of informal economy thanks to the possibility of escaping the “poverty trap” (van parijs & vanderborght, 2017). the possible benefits in terms of bureaucracy and cost reduction associated with the application of ubi as opposed to mi were not mentioned during the discussion. most participants were of the opinion that companies could pay lower wages if ubi were implemented. however, there were certain dissenting voices that suggested that “the interest in working could decline, decreasing labour supply and raising salaries”. towards the end of the focus group session, an important and unintended discussion arose concerning the potential benefits for innovation and productivity, the idea being that financing a basic income mainly through direct taxes could provide an opportunity to diminish social contributions, which in spain constitute a significant part of labour costs. additional topics and concerns after the group discussion, only 8% of the panel members declared to be clearly in favour of the implementation of ubi in spain (see table 2). for many of these participants, their negative opinion on ubi seemed to reflect values against unconditionality and universality. as one participant stated, “when i have children, how do i want to educate them? rewarding them for good behaviour or giving them money even when they don’t behave well?” table 1 welfare state opinion what do you believe the welfare state should provide to all citizens? minimum guaranteed income (universal) basic income one or the other without preference i do not understand the difference i do not have an opinion other (free text) before the video 27% 9% 0% 27% 27% 9% (combine several policies) after the video 33% 17% 0% 8% 33% 9% (combine several policies) 16 v. gómez-frías, t. sánchez-chaparro, d. maeso-álvarez, & j. salgado-criado journal of small business strategy / vol. 31, no. 1 (2021) / 10-19 in many instances during the conversation, ubi was referred to as an “unfair” policy. an expressed concern was the feeling that it would be unfair for people that have not been active in the workforce to benefit from a retirement allocation comparable to that received by someone who has worked for years. participants agreed nonetheless that basic goods and services such as healthcare, food and shelter should be provided to all and are key to providing equal opportunities, but they were reluctant to provide unconditional cash transfers as it would be impossible to know “what people were going to spend it on”. there was also a great deal of concern regarding ubi being a threat to universal healthcare or to the public education system. indeed, the implementation of ubi would represent a structural reform and many other aspects of the welfare and economic system could be affected by it. interestingly, participants were reluctant to accept evidence from experiments conducted in other countries, such as finland or norway, for they did not consider them applicable to spain due to supposed cultural differences in the south. conclusion as an exploratory study, our conclusions should be considered a preliminary iteration with the aim of better preparing the methodology in order to conduct a broader programme of focus groups and questionnaires involving more countries and economic sectors. the conclusions here presents concern, shared beliefs and opinions of business managers in the spanish construction sector in relation to ubi and its impact at the system level, as set out in the research objective of this paper. our main findings show that most companies “live day-to-day” and do not undertake a structured analysis of such radical horizons but rather concentrate on incremental adaptations, even if they are worried about the need to increase productivity as a condition for survival – of both companies and the welfare system. the specific conclusions drawn from this study are broken down into five points. the first four points indicate that this stakeholder group was rather negative about adopting ubi. only the fifth point presents arguments in the opposite sense. conclusion 1. there is little knowledge about the reality (figures, causes) of inequality in spain, with a tendency to explain it almost exclusively through meritocratic (rather than structural) terms. the welfare state system is also widely unknown among managers. conclusion 2. there is significant confusion between ubi and minimum income (mi). in particular, it is widely unknown that an mi has already been in existence for many years in spain and that it has significant problems due to the bureaucracy it involves. as an example, the government announced the introduction of an mi as representing a novelty and a “big leap forward”, whereas in reality the mi already existed (only a certain harmonisation among regions was introduced), and yet the same bureaucratic troubles remain unresolved. promoting ubi would thus require an effective campaign to explain how it is different from mi, with the participation of stakeholders other than the government communicating on the issue. as an additional consideration, the term “universal basic income” could benefit from being exchanged for a proxy name if it were to be implemented, due to the negative connotation already associated with it. conclusion 3. managers in the sector shared strong views against ubi, based on arguments such as the impact on absenteeism, productivity and disincentives to work in general, which could fit in the classical “theory x” of human resources stated by mcgregor (1960). there is no evidence supporting such arguments. as a matter of fact, the results on a recent ubi’s experiment in finland report positive effects in terms of creation of employment (kangas et al, 2019); the covid-19 pandemic might provide a relevant counterexample showing there is much more than remuneration-related motivation to work. conclusion 4. even when talking in terms of “social justice”, participants expressed negative opinions about ubi, contradicting evidence of unconditional aids being more effective in terms of coverage than conditional ones. a narrative presenting ubi as a vector for efficiency was hardly understood by participants, despite it being one of the main arguments presented by its proponents. participants continued to think about ubi exclusively as a social protection table 2 positon on basic income do you think that companies in your sector should take a position concerning an eventual adoption of this basic income? in favour against they should not have any position i do not have an opinion 8% 33% 33% 25% 17 v. gómez-frías, t. sánchez-chaparro, d. maeso-álvarez, & j. salgado-criado journal of small business strategy / vol. 31, no. 1 (2021) / 10-19 tool, which would significantly increase social expenditure. this suggests that communication around ubi should stress its potential to simplify bureaucracy and lead to significant savings. conclusion 5. some beliefs held among participants could be used as levers for promoting ubi. the main one being that companies could pay lower wages and furthermore diminish the total cost of labour. ubi would indeed fit into a reorganisation of the welfare state, whereby employment would be disconnected from social coverage – which would be financed by general taxation (direct or indirect). in any case, we have to be cautious about these conclusions for they might be very dependent not only on the country and sector but also on the specific ubi stipend considered in the proposed scenario for the exercise. we consider that policy makers and ubi proponents could use these conclusions as an initial step within a larger campaign of understanding the positions of different stakeholders regarding this policy. subsequent focus groups and questionnaires could be fine-tuned to delve deeper into the identified discourses or to study opinions regarding other issues such as innovation, digitalization or gender impact. as for practitioners in companies, the conclusions could guide them to build their lobby arguments (against ubi, if this focus group was in effect representative) or to prepare their business-model adaptations if ubi were to be adopted. future research this research can provide valuable input for a wider study regarding the shared beliefs and opinions among the business sector about ubi. our research suggests that ubi is not an issue in the agenda of this stakeholder group; given the potential benefits in terms of efficiency and innovation associated to this policy, business or trade associations could consider developing a more informed position on the matter. from an academic point of view, as has been seen, it is not possible to consider a full-scale ubi experiment due to the high cost involved (several percentage points of gdp even if other public expenditures and taxation are adapted (see oyarzábal et al., 2019)) and due to the irreversibility of its effect. but, based on the study presented in this paper, a limited test could be designed in a particular sector that could be reasonably “isolated” from the rest of the economy. such intended isolation would in practice be difficult to ensure in an open economy: the labour supply (employees plus existing and potential job seekers) could not be formally forbidden from applying to other sectors, and neither could companies be prevented from demanding labour from other sectors. notwithstanding, to illustrate the advantage of a sectorial approach, compare the provision of a ubi to all people belonging to the construction sector with the provision of a ubi to the same number of people but without focusing on a specific sector. in the first case, it would be possible to obtain results that are closer to reality because an entire sector is being influenced by the basic income, something that cannot go unnoticed by the companies in the sector. this would affect the need to work or the salary expectations of employees in the construction sector, which could lead to consequences closer to reality, such as the need to create attractive jobs so as to motivate workers to choose to work. in the second case, not focused on a particular sector, the bargaining power that workers could exercise due to the lack of a need to work would be blurred, making it harder to draw conclusive results. an experiment that has not been considered in literature or policy reviews, as far as we know, would be to establish a basic income for a specific profession or sector with very limited mobility due to regulatory or training reasons. this hypothetical case would however face important difficulties due to possible substitute professions to which companies could turn to, and also due to ethical or legal limitations to justify this inequality for experimental reasons. the construction sector in spain is an interesting choice for the pilot of this experiment for several reasons (gómez-frías & sánchez-chaparro, 2020). on the one hand, spain is a country with 8% of gdp less public expenditure than the european union average, and there is public debate over diminishing this gap via new social policies. on the other hand, the construction sector has qualification and salary levels that represent a more defined perimeter as compared to other sectors in which greater inter-sectorial mobility is observed. in 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(original work published 1526) world bank (2020). gini index estimate, world bank data. https://datacatalog.worldbank.org/gini-index-world-bank-estimate-2 https://www.rtve.es/alacarta/videos/para-todos-la-2/renta-basica-universal-posible-reportaje-varios-expertos-economistas/5479485/ https://www.rtve.es/alacarta/videos/para-todos-la-2/renta-basica-universal-posible-reportaje-varios-expertos-economistas/5479485/ https://www.rtve.es/alacarta/videos/para-todos-la-2/renta-basica-universal-posible-reportaje-varios-expertos-economistas/5479485/ https://www.rtve.es/alacarta/videos/para-todos-la-2/renta-basica-universal-posible-reportaje-varios-expertos-economistas/5479485/ strategy an analysis of sub-contracting relationships based on the sub-contractor/customer technology exchange portfolio: some empirical findings* corrado lo storto oddisseo-university of naples and dimeg-university of padua abstract in the last decade, subcontracn'ng relationships have assumed a particular weight in the strategy ofmanagers searching for ~iciency flexi bi li ty, and quali ty. subcon traciing is not a new industrial practice. reasons and waysfirms'ecourse toit have changed. exchange relationships have become highly complex in their nature. in order to manage complexity, multiple channels for the coordinanon of the acnvities are developed, and an intensive exchange of technology is established. tlus paper reports some findi ngs of an empirical exploratory study aimed at investigating the nature of technology flow in the customer firmlsubcoturactor interaction. a sample of italian small and medium subcontractors was considered. introduction in the last few years, collaborative agreements between entrepreneurial firms and large companies have become increasingly common, subcontracting is a frequent form of cooperation in which a smallor medium-sized firm produces parts for a large final manufacturer or performs operations for that producer as a wage work (lazerson, 1990). these relationships exist in almost every industrial sector. they are common in industries characterized by complex products, some of which involve thousands of components (i.e., automobile, aircraft and tool machine manufacturing). by using a pool of external suppliers a greater flexibility can be combined with a constant high productivity. sharing production among firms determines a division of technological areas of specialization, and the subcontracting system becomes a distribution channel for technical knowledge, routines and procedures transfer, and organizational learning for small firms. v this paper received ihc distinguished paper award ca the i994 sbida national confcvcncein san antonio. it nws noi vc va wed by thc isbs editorial advisory beard. tlu author wishes io achnowlcdgc ihc financial suppon gi van by the cnr funds of psog coo strategic o "tvosfcrimcnlo dcllc iccnologw dci psogeai finalesati", research unit of naples, that made u possible io collect the data. ftothcrly, hc is indebted io prof maria raga and pr% giuseppe zollo for their helpful suggestions during ihe preparation of this paper. nccdlcss to say, he u very grateful for thc precious commems and suggestions made by an anonymous reviewer. 53 considering the foregoing discussion, an interesting research question arises. that is, "what kind of relationship exists between the nature of thc technological flow of the customer firm or subcontractor business exchange, and product and subcontractor's characteristics?" an operational concept of technology a flirm's technology is the set of technologies that it utilizes to carry on its activities. this set of technological competencies and capabilities continuously modifies as the result of efforts of internal or external development. technology can be embedded in the individuals, in the structure and culture of organizations, in its records and rouunes, or in its equipment (hayes & wheelwright, 1984). diverse modes of organizational learning convert individual expertise and knowledge into organizauonal technologies. according to nelson and winter (1982), firms develop routines that reflect the organization's ability to adapt to changing circumstances and establish distinctive capabilities and skills. unfortunately, technology sometimes remains an ambiguous concept, difficult to opcrationalize. a way to overcome this difficulty is to break it down to its basic components. in this paper, a definiuon of technology adapted from that proposed by the technology atlas team (1987) is used. four basic components of technology are identified: hardware (hw), objectembodied technology; human skill (hs), people-embodied technology, which is the know how of carrying out tasks; information (in), document-embodied technology; rules and procedures (rp), institution embodied technology. this latter establishes the nature and sequence of the information flows, machines to be used, and skills required. table i reports the classification used. this taxonomy allows the analysis of how technology flows among firms and the ways a subcontractor can internalize new technology. table i the four components of technology technology hardware-embodied (hw) it is in form of equipment, machines, tools. technology document-embodied (in) it is in form of manuals, designs, schemes. it describes how to use a single object. it is always codified. technology people-embodied (hs) lt is in foun of judgements, opinions, suggestions, impressions, .;kills. it is not codifiable and transferable only through people. technology rule-procedure embodied (rp) it is in form of scheduling plans, procedures, organizational rule«. it establishes what kind of relations exist among hw, in, hs for task execution. it can be formalized and codifiable with a different degree. 54 technology transfer& adaptation& and coordination mechanisms subcontractors and customers often establish lasting collaborative relationships, and when the business exchange accounts for a relevant share of subcontractor sales or customer's needs, a significant adaptation process occurs (hallen, johanson, /k seyed-mohamed, 1991). this adaptation develops both as a process of organizational fit and as a process of day-by-day coordination. the process of fit between customer and subcontractor is necessary to establish a common language to make effective communication between the two parties. it allows an increase in the technological capability of one of the parties involved, and to make it homogeneous and compatible with that of the other. this adaptation usually requires a substantial modification for the organizations involved, and considerable invesunents, so to increase dependence between the parties. the subcontractor can adapt its manufacturing process to that of its customer by purchasing equipment which can use part programs for numerically controlled (nc)'achines created by the customer, by introducing logistic systems, common scheduling and planning procedures, and routines for quality control. ti&e other form of adaptation almost occurs on a dayby-day base, with the coordination of the subcontractor's operations with those of its customer. coordination is necessary to cope with the uncertainty, ambiguity, and inter-dependence of the system, arising from the absence of information or the presence of conllicting interpretations of a situation, and the organization of producuve system (galbraith, 1973; thompson, 1967, /k weick, 1979). in order to reduce uncertainty and ambiguity and cope with the system interdependence, organizations have to transfer and process information (daft k. lengel, 1986). the adaptauon and coordination mechanisms represent effective means for the transfer of technology across fums. empirical research aimed at studying the interaction between small and large firms identified 11 channels frequently used by firms to transfer technology (esposito rk raffa, 1991): raw materials, sub-components and pre-machined parts, machinery and equipment, training, advice on specific issues, in-progress check, advice for the adoption of quality rouunes, quality management procedures, meetings, documents, and different forms of collaboration at the start of the transaction. these channels transfer technology under the four forms described. methodology data were collected through face-to-face interviews with entrepreneurs, technicians, and plant managers i'rom the end of 1990to 1991. according to the author's experience, a structured face-to-face interview approach can yield more reliable data. it allows the interviewer to elaborate on those questions that might cause difficulty, and to gain a visual impression of the object of the survey. each respondent was interviewed by means of a questionnaire seeking data on economic and other firm characteristics, such as location, sales, employment, technical/manufacturing capability, and interaction modes with the main customers. a sample of 59 subcontracting firms was studied in depth. all firms investigated are located in italy. they subcontract to customers selling in the aerospace/electronics, automotive, and medium-low technology industries (electrotechnology, tool machine building, texule-machine). nc is a sysrem fa'iu.'uromarion of sorio hie «ork phases on mar or working maehi ru'roots. 55 the average size of a sample's firm is 82.1 employees (sd = 112.7),sales per year 13.234billions of lira (sd = 29.37). every subconuacting uansaction is characterized by a certain combination of the four technology components. this combination determines the technological portfolio of the customer/subcontractor exchange. the model of the technology transfer channels proposed by esposito and raffa (1991)is used here to study the nature of technology transfer from a customer to its subcontractor, and identify the technological portfolio. each respondent was asked to judge the importance and utility of each channel to uansfer technology into his factory on a value scale from i to 9. according to saaty (1980), this scale captures fairly well the preferences of an individual. every channel vehicles technology in the form of hardware, skills, information, and organizational rules and procedures at a different rate. in order to measure how each channel affects every component, a major assumption was introduced —that the influence of thc flow of technology along the channel on each technology component was given by the following relation: tci = is (wlj cj + wllj cj+..i/vmaxi j= i,...,ll where tci is the generic technology component cj is the utility-value given to channel j by the respondent vmaxi is the maximum possible value for the channels influencing that component wj is a weight measuring the magnitude of the effect of that channel on the component i wlj measures 1st order effects, wllj measures 2nd order e(fccts, and so on. some discussion with business consultants, entrepreneurs, and firms managers made it possible to build a matrix of weights accounting for the contribution of the channels of technology transfer to each component of technology. a "pairwise comparisons" approach common in the analytic hierarchy process (ahp) technique was used to determine weights.' second assumption was done, that all the effects were of the first order. consequently, only wlj values were considered. the mapping of the relational system for the evaluation of the technological portfolio is reported in the appendix. cluster analysis was used to group firms, using as the clustering variables the four components of technology. the k-means algorithm proposed 1&y macqueen was used as clustering technique. because the algorithm required to specify in advance the number of clusters (k), the software program was made rerun for various choices of k in order to obtain k not repetitive combinations of technology component measuremcnts having the highest f-values. for every subcontractor, its first and second customers were considered. on average the sales for the first two customers account for more than 65 percent of total sales. in order to take into account the volume of the business exchange, the flow of technology from the customers was weighed with the percentage of sales. analysis of variance (anova) was used to test the difference between the four clusters. lthp is o tcchniquc devidoped to find priori ties of dilfer cut alter noti vas r chai ve to an oh/ cct reducing a scq nenes of prioruy prohu mein to a scquc net ofpairwisc comparisons according to certain cri teria (l062 ln this case tlw criteria werc thc foiu technology cornponcnis, thc el ternati ves the i i channels of techno!ogy transfer. 56 research findings table 2 shows the correlation matrix among the values of technology components for the main two customers. a compensation effect between some components of technology emerges. particularly, an increase of hw determines a decrease of in and, with a lower intensity, a decrease of hs. generally, the more technology is transferred lending specific equipment and specialized machinery to the subcontractor, or providing it with the raw materials, the less it is necessary to transfer a rich written technical documentation. as an illustration, let us think of a firm that receives a die and the raw material to make plastic moldings flom the customer. this firm will need only some indications about how to blend the plastic powders, the value of temperature, and thenumberofpiecestoproduce. thesameisfor people-embodiedtechnology. thestrongeris the weight of the physical component of technology, the less relevant is the weight of people. in the same way, an increase in the value of hs determines a decrease in rp (and vice versa). this is particularly true when organizational rules and procedures are easy to be codified, and after being transferred into a firm, they become routines. that is the case of the procedures a fum must implement to manage quality control. this compensation effect among the components of technology remains considering the relationship with each customer separately. the outcomes from cluster analysis confirm this compensauon effect. table 2 correlation matrix of the technology components —first and second customer hw in hs rp hw 1.000 (0.000) in -0.734 1.000 (0.000) (0.000) hs 0.542 0.148 1.000 (0.000) (0.263) (0.000) rp -0.313 0.1&4 -0.522 1.000 (0.016) (0.162) (0.000) (0.000) source: database odisseo note: probabilities are in brackets banlett-chi square statistic: 621.018 prob= 0.000 table 3 illustrates what happens to the four technology components passing from the first to the second customer. the variables considered in the correlation were obtained as the difference between the values of each technology component for the first two customers, then normalized by dividing it for the maximum value of the technology component. technology components tend to vary in the same direction. an increase in the flow of technology in one of the four forms determines an increase in the flow in the other three forms. 57 table 3 correlation matrix ofthe difference of values of technology components between the fi rst and second customer dhw12 din12 dhs12 drp12 dhw12 1.000 (0.000) din12 0.357 1.000 (0.033) (0.000) dhs12 0.393 0.940 1.000 (0.013) (0.000) (0.000) drp12 0.339 0.947 0.888 1.000 (0.051) (0.000) (0.000) (0.000) source: database odisseo bartlett-chi square statistic: 255.834 prob= 0.000 note: probabilities are in brackets firms'haracteristics, product and market strategies by means of cluster analysis i'our kinds of subcontracting relationships were identified, depending on the feasible combination of the f'our technology comfionents. summary statistics for thc four clusters are shown in table 4. table 4 summary statistics for the four clusters of firms variable df df f-ratio prob hardware 3 55 108.61 0.000 written information 3 55 15.22 0.000 human skill 3 55 61.85 0.000 rules and procedures ' 55 25.31 0.000 source: database odisseo 58 the four clusters show four diverse combinations of the components of technology which indicate four types of technological portfolios (table 5). table 5 technological ponfolfo and firms'haracierisacs cluster i cluster 2 cluster 3 cluster 4 anova totaloffums=59 n=31 n=15 n=7 n=6 p hw =.03 hw =.22 hw =.05 hw =.35 in=.35 in=.28 in=.38 in=.25 hs =.29 hs =.19 hs =.07 hs =.07 rp = .33 rp = .30 rp = .51 rp = .33 age (years) 31.00 19.40 27.33 17.33 0.013 size (employees) 255.42 43.5 23.0 29.3 0.489 sales (fbiliion) 24.5& 3.67 2.68 2.187 0.065 ins ales (%) 0.16 0.21 0.17 0.36 0.185 salemp 0.128 0.080 0.104 0.072 0.001 %pr i 0.63 0.67 0.79 0.5 0.008 %pr 123 0.92 0.97 0.92 0.89 0.413 regmark 0.53 0.75 0.74 0.87 0.006 itamark 0.87 0.96 0.96 0.88 0.243 %cu12 0.69 0.76 0.57 0.83 0.034 ftechi 1.712 2.408 1.134 1.522 0.001 ftech2 1.270 1.805 0.652 1.061 0.041 dftech12 1.571 2.278 1.044 1.412 0.002 dcomp12 0.142 0.096 0.98 0.019 0.05 dcomp1234 0.370 0.480 0.222 0.648 0.135 sowcei database odisseo in the first cluster, hardware embodied technology is not relevant. on the contrary, technology embodied as information and rules and procedures has a higher weight and technology tmnsferred thmugh people is much more important than in the other clusters. most firms belonging to this cluster are main contractors in the automotive industry. these firms are involved in the development of a new model from the early stage in co-design with the customer. in this stage there are still problems that must be solved and uncertainty is high. consequently, establishing an intense communication between customer and subcontractor design teams becomes a strong imperative for an effective development process. three firms subcontract to the electronic industry. the second cluster presents a more balanced exchange technological portfolio, even though the rules/procedures component has a slightly higher weight relative to the others. some primary firms subcontractors to the aerospac'e/defense industry are in this cluster. two firms are secondtier subcontractors for the aerospace industry. one is a second tier subcontractor to the automotive industry. 59 the third cluster contains firms having an unbalanced exchange technological portfolio in which information and rules/procedures prevail. generally, firms lx:longing to this cluster are subconuactors to traditional low-medium technology industrial sectors (elecuotechnology, texule-machinery building). these firms do not establish stable and constant relationships with their customers. consequently, when they begin to collaborate with a new customer there are no incentives for this to transfer a relevant amount of technology to the subcontractor factory, such as practices for quality management, costs evaluation methods, and scheduling plans. common standards and routines cannot be established and a large amount of codified technology must be transferred in every transaction. that explains the relative high value for information and rules. the last cluster is comprised of small firms subcontracting almost exclusively to the aerospace and defense industry, technology embodied in raw material and specific equipment is relevant in this cluster. these fums receive pre-machined parts to manufacture fixtures, jigs, and gauges from the customer. a high level of standardization supports the transaction making it effective. firms belonging to the first cluster are, on average, older and larger. thirty-one years is the average age (age) for these firms. on average, their size (size) is 255 employees and 24.58 billion of lire as sales per year (sales) (no statistical evidence supfiorts this). as an indicator of success, the average firm's growth in sales over the last three years was chosen gnsales). the values of this variable show that the small firms of the fourth cluster in 1990-91 were faster growing than the other firms. the positive demand uend of the aerospace industry in that period probably produced a "driving effect" on them. the investigated firms primarily serve italian markets (itamark), which represent almost the exclusive markets for firms in the second and third clusters (96 percent). firms of the fourth cluster have plants that are localized close to their customers. thus, their regional market (regmark) coincides with the italian market. at the same time, they have international customers as firms of the first cluster. the internationalization process of the fums belonging to these two clusters has a different origin. the belonging to international groups favored the entrance into foreign markets of the automotive component subcontractors of the first cluster, which established collaborauve relationships with the competitors of their main italian customer. firms of the fourth cluster entered foreign markets primarily thanks to the international collaborative agreements engaged by their italian customers. in lxith cases, this process of internationalization supported a circulation of technology in thc subeonuacting chains. a relatively high dependence on a few major customers and a certain product specialization characterize these firms. firms of the third cluster present a lower dependence on the first customer (oui) than other firms. they derive less than 40 percent of their sales from their first customer and less than 60 percent from their first two customers (%cu12). these firms had shortterm contractual agreements with their customers. these results support that a high importance given to procedures during the transaction is a consequence of a low dependence on the customer and a scarce iniual fit also, an idea that emerged from the analysis of the exchange technological portfolio. on the contrary, these firms follow a strategy of product specialization. the 79 percent of the total sales is derived from only one line of products (%pri). there are no substantial differences bctwecn firms of the first and second clusters as regards dependence on the customer. firms of the fourth cluster are highly dependent on the first two customers, which sell in the same industry, but on the conuary, are less product specialized. these firms are small family-owned machine shops. indeed, 29 employees and 2,187 billions of lire represent the average size. the low ratio of sales to employees (salemp) can be explained by the fact that 60 these firms receive from the customer the raw materials, or pre-machined parts, the cost of which is not included in the sales evaluation. these firms largely invested in numerically controlled equipment (usuafly, single nc machines or centers) in the last three years. the flexibility of the new technology made it possible for these firms to diversify production gaining efficiency. during the interview, respondents were asked to rate the technological sophistication of the product manufactured for the first three main customers on a 1-9 scale. to assess product technological sophistication, the following dimensions were considered: the level of conformity to quality specs requested by the customer for that product; the level of difficulty in realizing it; and the time required to leam how to do that product with the required degree of quality. to limit the effects of the subjectivity of judgments, the analysis was done considering the difference between the values of technological sophistication of products manufactured for the two main customers. this value was normalized by dividing it for the maximum score rate given by the respondent (dcomp12). from the analysis, it emerges that there is no signiticant difference between the technological sophistication of the product realized for the first two customers in the case of firms belonging to the first, second, and fourth clusters. differences become higher passing from the product realized for the first two customers to products realized for the other customers. that is particularly the case of firms in the fourth cluster. these firms have the first two customers in the aerospace indusuy, while the others are in low technology industries. some strategies of technological diversitication can be thus identified. firms in the second and fourth clusters pursue almost the same strategy. indeed, most of the firms of the second cluster are subcontractors of the aerospace industry while all the firms of the fourth cluster subcontract to the aerospace industry. technology flow largely increases with product sophistication as shown in table 6. it appears that manufacturing more sophisticated products requires a deeper integration with the customer. table 6 relationbetweentechnologyflowandproducttechnologicalsophistication: firstandsecond customer. dependent variable: dftech12 n = 56 squared r = 0.443; no constant ~v' ~ffi i n ~rr r rdgtahiili (2 tail) dcomp12 2.637 0.670 0.004 sowcet database odisseo note: in the sample 56 firms have more than one customer. 61 in the four clusters, the technological flow from the first customer (ftechi) is considered more important than the flow from the second customer (ffech2) in the acquisition of technological capabilities. the calculated values for the difference (dftech12) confirm this tendency. it is interesting to note how the values for both the flows are lower in the case of firms belonging to the third cluster. conclusions this study is exploratory. further invesugation is required m assess the validity of the considerations done. several caveats should be identified before dmwing any conclusion. first, findings rely on subjecuve judgments and key variables are built from these judgments. a major ef fort should be undertaken to use a more objective scale to measure variables and more effective and objective methods to assign auribute weights. second, a more stratified and larger sample should be chosen. the number of firms subcontracting to the aerospace and automotive industry is high relauve to the firms subcontracting to other industrial sectors. additionally, cross-cultural studies are necessary to determine if the results can be generalized to other countries. finally, a more reliable and sophisticated statistical analysis should be conducted. cluster analysis remains an exploratory tool. nevertheless, the study provides the basis for more refined research that can enable researchers to provide useful guidelines for subcontracting and customer firm's technicians and managers to better model their collaborative relationships. to summarize, findings presented in this paper suggest these main conclusions. the customer firm, in different ways, enables its subconuactors to achieve a higher technological capability. the constant request of better manufacturing performances and more sophisticated parts supplied, together with an intense technological flow, contribute to the upgrading of the subcontract's technological asset. the need to be more integrated with the customers, to increase efficiency, and particularly to increase product reliability and quality forced these firms to largely implement new production technology and to focus on new manufacturing methods. the deeper is the integration between the customer and the subcontractor, the more intense is the technological flow between the parties. this finding seems to confirm what emerged in other studies. a higher involvem& nt in the process of product development and manufacturing determines, but at the same ume needs, a more intense and articulated flow of technology between the parties. in some industries, customer/subcontractor uunsactions assume particular characterisucs and the technological content of the arrangement depends on the characteristics of the subcontracting firms. 62 references allen, tj. (1977).managing the flow of technology (1986).cambridge, ma: the mit press. daft, r.l.&. lengel, r.h. (1986).organizational information requirements, media richness and structural design. management science, 32(5), 1383-1403. esposito e., and raffa, m.(1991, june), supply in hi-tech industry: the role of the small businesses. proceedings of the 36th icsb world conference, vienna. galbraith, j.r. (1973).designing complex organizations. reading, ma: addison wesley. halldn l., johanson, j., gi seyed-mohamed, n. (1991,april). interfirm adaptation in business relauonshi ps. journal of marketing, 55, (29-37. harker p.t. & vargas, l.g. (1987). the theory of ratio scale estimation: saaty's analytic hierarchy process. management science, 33(11),554-571. hayes, r h. & wheelwright, s.c.(1984). restoring our compeii ii ve edge: competing through manufacturing. new york: wiley. lazerson, m. (1990). subcontracting as an alternative organ isational form to vertical-integrated production. depanment of sociology, state university of new york. nelson, r.r. & winter, s.g.(1982).an evolutionary theory of economic change. cambridge, ma: harvard university press. saaty, t.l. (1980). the analytic hierachy process. new york: mcgraw hill. saget, e (1988). partnership between small and large firms: the case of japan. partnership between small and large firms. london: grahm&trotman. starbuck, w.h. (1992). learning by knowledge intensive firms. journal of management studies, 29(6), 713-740. the technology atlas team (1987), components of technology for resources transformation. technological forecasting and socioi change, 32(1). thompson j. (1967). organizationsin action. new york: mcgraw hill. weick k.e. (1979). the social psychology of organizing. reading, ma: addison wesley. 63 appendix channels to technology components contribution map raw material hw pre-machined parts equipment training advice on specific issues in collaboration at the launch of lhe order written documents hs meetings in-progress check support for the rp adoption of qc procedures qc procedures scale used to assess contribution weights: 1: no contribution at all 100: highest contribution 64 sfã~ix'r y establishing the value of a business: how the practitioners do it fess green radford university joel k. worley northwestern state university a. edward corley nashville songwriter's association abstract the value of a business can be determined in several diferent ways. the question posed in this study is whether or not the background ofa business evaluator tends to influenc the method of valuation. business practitioners of varying backgrounds were surveyed as to methodologies generally employed. lt was discovered that accounting and financial consultants tend to prefer present value techniques using discounted cash flows or multi ples. business and real estate agents and brokers look toward appraisal ofphysical assers or nei womb. small business owners and managers are also likely to apply asset based methodologies. the strategic implication of these findings suggests that care should be taken when selecting professionals to perform valuation services since varying approaches ofien yield diferent results. introduction various models have been developed for placing a value on a business, yet the process continuestoeluderesearchersseekingtoidentifyacommonmcthodology. asmanyas30ormore model variations have been identified as methods in use ranging from simple rules of thumb to complex cash flow discounting and trend analysis (waldron & hubbard, 1991;burns & walker, 1991; martin, 1990).'he rationale for the selection of one method over another depends on whether a business is being evaluated for liquidation, inheritance, taxation, bank loans, for sale as a going concern, or for acquisition purposes. for the smallbusiness seller, this implies that too high a value might bc placed on a business that had relatively extensive assets, but low cash flow, especially if the value were placed by the owner or a realtor. long time association with a business may cause focus on the visible assets, and neglect of the somewhat intangible future discounted to the present. alternatively, for the buyer of a business, if the value depends mainly on discounted value of future earnings, then knowledge of the discount rate and the rauonale for determining that rate become critical. a low rate implies low risk and maybe an excessively high value. also, physical asset values help limit the downside risk associated with a business. in the event of liquidation, physical assets may cover the debt. the valuation reference monuat by thomas l. m arisen 11990) tists and deserts as 28 methods of valuation. additional methods have been descrited by other authors. 37 selecting a method of valuation, however, is often left to the discretion of advisors and consultants hired to assist in whatever transactions are pending. practitioners employed for this purpose may include accountants, bankers, financial advisors, commercial lawyers, business brokers, small business center consultants, and the owners and managers of small business concerns. these practitioners have widely varying backgrounds, experience levels, professional credentials, and business perspectives. the question posed in this study is whether or not the background of a business evaluator tends to influence the method of evaluation. stated as a hypothesis, the valuation model utilized is related to the type of practitioner employed in the process. evidence supports this notion. implications of such a finding are also discussed. background business valuation preferences among practitioners may depend on their position in the profession. richards (1986) states that during the valuation process, conflicting information developed by outside consultants frequently differs from the direct experience of managers. dethomas (1985) points out that the firm's managers or outsiide analysts are faced with the unpleasant choice of attempting judgmental extrapolations or using conceptually unsubstantiated rules-of-thumb when developing a value estimate of the firm's worth. owens (1989) notes that appraisers with similar areas of expertise tend to use similar methods of appraisal. studies conducted by block (1985) and waldron and hubbard (1991)appear to support this hypothesis. speyer (1987)feels that persons who sell their business neat the kind of third-party advice and guidance offered by professional middlemen to offset the advantages possessed by more experienced corporate buyers. clugston (1987) stresses the value of employing the services of business brokers and other outside professionals when arranging for the sale of a business. lammers (1991)illustrates the unique perspective that a consultant can bring to the valuation process. recent evidence suggests that when outside advice is desired, the preferred groups of business professionals selected for conducting valuations are certified public accountants (cpas) and business brokers (see table i). thus, practitioners most likely to be involved in the valuation process may be categorized reasonably as one of three types: (i) accounting and financial consultants, (2) business and real estate agents or brokers, and (3) small business owners or managers. these three categories of practitioners have sufficient differences in business orientation, background, education, or professional preparation to justify their selection as sub sets of a population for the purposes of inquiry. table 1 business professionals preferred by owner or manager placing a value on small business business professional number of respondents certified public accountant. 7 (41%) business broker 4 (23%) financial advisor 2 (12%) other (lawyer, small business center, etc.) 2 (12%) prefer to do own evaluation 2 (12%) n= 17» vthe above responses are based on the question: ln choosing someone to place a value on your business, which one of the following would you be most likely to select? 38 business valuation techniques carland and white (1980)and waldron and hubbard (1991)suggest that business valuation techniques can be divided into three categories. while mardn (1990)'nd others list a variety of methods applied in different situations, they generally constitute a mix or variation of the major categories described below and as noted in table 2. the survey referred to earlier revealed the following regarding each of the primary methods of valuation. table 2 major categories of business valuation techniquesv l. appraisal of physical assets or net worth: this category has been referred to as the net asset approach and includes methods involving theappraisalandlistingofassetsandliabilitiesastheprimedeterminantsofvalue. variations include book value, market value, replacement value, and liquidation value. n fb 'n v iex ~n(ilst;nn fair market value (92%) replacement cost (42%) book value (21%) i v in independent audit or appraisal (&2%) sight count of physical inventory (52%) financial reports (42%) 2. multiples of expected profit or revenue: this category has been referred to as the income multiplier or earnings multiple approach. typically, a factor determined by indusuy standards is used as a multiple of gross income, net income, profit, or revenue to arrive at value. this approach is based on the idea that the value of a firm can be estimated as some number of years of earnings. f i (profit or revenue) ~x~n fair market value (38qo) weighted average (29%) technique developed in-house (33%) ' i applied to profit (75%) applied to revenue (25%) (multiples are normally based on industry averages and range from 2 to 10 when applied to profit, or i to 6 when applied to revenue.) n entrepreneurship theory and practice (1991,fall), 44-47. oe some percentages total more than 100% due to multiple responses and are based on representative samples from i ndustry practitioners. the methods described in martin' vatuation reference manual (t 990) are fixed price, tangible book value, ad1 usted tangi hie book value, marti pie of earnings, discounted future earnings, tiqui dation value, and reptacement value. 39 table 2 cont. major categories of business valuation techniques'. present value of future earnings or discounted cash flow: this category has been referred to as the discounted cash flow or discounted future earnings method. this method and its variations are based on the premise that future earnings can be estimated and discounted to the present value using an appropriate discount rate, or in some cases, a required rate of return. (future cash flows) ruqlttaqisa" prior years modified by expected future conditions (50%) prior years adjusted for inllation and growth (389o) prior years projected without adjustment (129o) gu)lzuzzmiggtjalts two years into the future (7%) three years into the future (339o) four to six years into the future (609o) o entrepreneurship theory and practice (1991,foll), 44-47. oo some percentages total more than 100% due to multiple responses and are based on representative samplesfromindustry practitioners. appraisal of physical assets or net worth a profile of the degree of importance of various assets emerges from respondents using physical assets or net worth as the primary valuation method. this category is preferred by brokers, agents, and small business owners. the panicular assets viewed as most important are physical assets, location, and customer base, with tradename, key personnel, and goodwill regarded as less imponant. multiples of expected profit or revenue while a smaller number of respondents prefer multiples of expected profit or revenue to place value on businesses, those that do are primarily accounting and financial consultants. according to the survey, they generally require three to six years of past business performance figures, and apply something other than a simple average to determine expected annual profit or revenue. present value of future earnings using discounted cash flow the number of respondents in this study using present value or discounted cash flow techniques is about the same as the number using multiples of expected earnings. as with muluples, this appears to be a preference among accounting and iinancial consultants. in this category, three to six years of past business performance figures are generally required. the speciflc techniques applied by these practitioners include required rate of return applied to future annual earnings, and discount rate applied to future annual earnings. a lesser number used a simple tally or sum of anticipated annual earnings. 40 prior studies two studies deserve special mention for providing strong evidence that valuation methodologies may be influenced by the business orientation of professionals in the field. block (1985) conducted a survey of 39 small business owners and managers of which 10 used outside consultants to determine business value. most of the owners and managers performing their own internal valuations preferred asset-based methods (16out of 29) or simple m u1ti pie s (9 out of 29). yet, the consultants favored the present value approach, or a related method known as capitalization of earnings. waldron and hubbard(1991) found similar differences inapproach when they selected two groups to evaluate an actual business. one group consisted of investors made up of entrepreneurs, venture capitalists, and investment bankers. a second group consisted of consultants and included business appraisers, cpas, and valuation specialists. of the 18 participants, 8 were regarded as investors and 10 were regarded as consultants. all but one of those in the investor category applied an earnings multiple approach to the valuation of the business, while the majority of those in the consultant category used a discounted cash flow method. from these studies it appears that accounting and financial consultants may be more likely to adopt techniques focusing on financial reports and projections of earnings, while business brokers and real estate agents may be more likely to adopt asset valuation techniques emphasizing net worth. small business owners, on the other hand, may be less focused on specific techniques and prefer simple multiples of profit or revenue to obtain "rutewf-thumb" notions of business value that can be applied often without extensive analysis. buying and selling strategies are likely tobe affected if alternate valuation methodologies can be associated with business practitioners of varying backgrounds. methodology a survey of small business practitioners was conducted to determine how professionals in different fields approach the vexing problem of business valuation. a questionnaire was developed and pre-tested with the assistance of local practitioners. information from the small business adminisnation and other sources was used, and a mailing list was compiled to include practitioners most likely to be involved in the evaluation of small businesses. it consisted of approximately equal numbers of accountants, financial consultants, business brokers, real estate agents, small business managers and owners. the list of small business owners is a random sample from ward's direcrory, and consists of businesses with less than $ 10 million in sales. the survey included all major regions of the country with names selected at random to assme even disvibution. ultimately, a total of 600 recipients was selected to receive the questionnaire. initially, 59 questionnaires were rewmed (10percent response rate). a follow-up mailing to a randomized sample of non-respondents brought the response rate up to 12.5 percent. much of the mailing occurred during the tax season and may have affected response rate. respondents having no experience with business valuation were excluded, so that the number of acceptable questionnaires was 64. 41 findings the sample included 25 accounting or financial consultants, 22 business and real estate agents or brokers, and 17 small business owners or managers. the valuation process consututes less than 50 percent of the respondents'usiness activity. seventy-seven of those surveyed have more than 10 years experience. table 3 lists the types of business:s valued in order of percentage response. these professionals are involved in a variety of property and business valuation activities applied primarily to service, retail, and manufacturing firms. table 3 types of businesses valued by procti ti oners in survey type of business valued number of respondents service firms 44 (69%)»'etail firms 43 (679o) manufacturing firms 41 (64%) commercial structures 21 (339o) land 19 (309o) residences 12 (19%) farms 8 (13%) other 10 (16%) n= 64» »the above responses are based on the question: on which of the following types of properties or businesses are you involved in placing a value? »» percentages total more than 1009» due to multiple responses. of the three primary methods of business valuation, professionals who perform these services are divided as to which they prefer. a cross-tabulation of practitioner category and preferred business valuation technique is presented in table 4. business valuation techniques appear to be related to practiuoner categories in specialized business services. table 4 cross tabtdation of business service practitioners with preferred methods of business valuation by number responding present value of appraisal of multiples of future earnings practitioner physical assets expected profit using discounted category or net worth or revenue cash flows total accounting &. financial consultants 3 10 12 25 business &. real estate agents &. brokers 14 5 3 22 small business owners & managers 1q 4 1z total 27 18 19 64 notes: chi square = 8.67 df= 4 p = .07 (some cells contain less than five values, thus limiting the significance of a chi-square test.) 42 summary and discussion this study, applied to a sample of 64 business practitioners, lends further support to the suggestion that different practitioners use different methods when valuing small firms. accounting and financial practitioners responding to the survey tend to prefer profit and present value techniques, while business brokers, owners, and managers tend to prefer appraisal of assets over other methods. although these results are limited to the respondents in this study, biases toward a particular valuation approach appear to be a function of familiarity and background. if true, this may be explained by the fact that accountants and financial consultants work regularly with financial records and reports. their experience may lead them to rely on these documents as indicators of value. alternatively, real estate agents and brokers, as wellas small business owners, focus daily on what they can see. this experience may lead them to prefer physical assets as a major indicator of business value. these findings are consistent with observations made by waldron and hubbard (1991) where investors and financial consuhants indicated a strong preference for discounted cash flow and multiple of earnings techniques. by contrast, the majority of participants in the block (1985) study were owners or managers performing their own internal valuations, and most of them used asset-based approaches. it may be that specific variations within the major categories of valuation can also be ascribed to different types of users or the types of businesses they value. but this study by itself is not sufficient to conclude that the background or experience of a business evaluator tends to influence the method of valuation. further research will be needed for these results to be verified. references bank of america, nt 8i sa. (1982). how to buy or sell a business. small business reporter, 6-7. block, s. b. (1985). buy-sell agreements for privately held corporations. journal of accountancy, 160, 110-124. burns, r., 8c walker, j. (1991). simultaneity of value and non-cash expenses in small business valuation. journal of small business management, 29(1), 10-14. carland, j.w.,jr., & white, l. r. (1980,october). valuing the small business. journal ofsmall business management, 40-48. clugston, m. (1987). packaging a sale: how to get the best price. canadi an business, 60(3), 2324. dethomas, a. r. (1985). valuing the ownership interest in the privately held firm. american journal of small business, 9(3), 50-59. lamers, t. (1991). business valuations: know your worth. inc., 13(8),90-91. martin, t. j. (1990). valuation reference manual. hicksville, ny: thomas publications. owens, t. (1989). assetappraisals. small businessreporis, 14(1),83-886. reinardy, d., & stover, c. (1991).i want to sell my business: where do i begin? small business forum, 9(2). 5-28. richards, f. f., jr. (1986). preparing a small company for the best sale price. mergers and acquisitions, 21(5), 62-65. speyer, r. j. (1987). how to sell your equipment rental business for the most profit. rental product news, 9(10), 18. waldron, d., & hubbard, c. m. (1991). valuation methods and estimates in relationship to investing versus consulting. entrepreneurship: theory and practice, 16(1),43-52. worley, j. k., 8i green, f. b. (1989). determinants of risk adjustment for small business valuation in a growth indusuy. journal of small business management, 27(4), 26-33. 43 fall journal entrepreneurship journal rankings across the discipline shawn m. carraher cameron university scarraher@cameron.edu terrence j. paridon cameron university tparidon@cameron.edu abstract in this paper we report on the results of a survey of 230 members of the small business  institute® and the u.s. association for small business and entrepreneurship on journal  rankings. the top four entrepreneurship journals were entrepreneurship: theory &  practice, the journal of business venturing, the journal of small business strategy,  and the journal of small business management. suggestions for improving the status  of specialized entrepreneurship journals are provided. keywords:   journal rankings, small business institute®, u.s. association of small      business and entrepreneurship introduction why  do  entrepreneurship  faculty  members engage in scholarly activity and  publishing? why should we be interested  in  journal  rankings  of  entrepreneurship  journals?  this  paper  addresses  these  questions  while  presenting  information  about the perceptions of journal rankings  by entrepreneurship faculty members.  at  the  core  of  scholarly  research  and  activities (e.g., chen, gupta, & hoshower,  2006) is the recognition that an assessment  of  such  efforts  should  include  an  evaluation of the contribution to  the field  of  study  by  that  scholarly  activity.  the  need  to  recognize  the  contribution  revolves around personnel decisions in the  areas  of  hiring,  promotion,  tenure,  and  salary  increases  (chrisman,  chua,  kellermans,  matherne,  &  debicki,  2008;  park  &  gordon,  1996)  as  well  as  instructional currency  (singh, haddad, &  chow,  2007).  in  support  of  these needs,  academics  may  access  numerous  conceptual definitions of scholarship (e.g.,  gomez‐mejia & balkin, 1992; katz, 2003),  and  may  peruse  studies  that  have  addressed  numerous  methodologies  in  attempts to measure the contributions that  institutions  and  individuals  make  to  the  specific  disciplines  (e.g.,  johnson  &  podsakoff, 1994; kirkpatrick & locke, 1992;  shane, 1997). the variability in conceptual  definitions of what constitutes scholarship  and  the  numerous  methodologies  of  assessing scholarly effort notwithstanding,  journal  publications  continue  to  be  the  most  frequently  cited  component  of  scholarly output, and as a result, interest in  volume 19, number 2 fall/winter 2008/2009  89 strategyjournal of small business the  area  of  journal  rankings  continues  unabated (katz, 2003).  since entrepreneurship is an emerging or  developing  field  (busenitz  et  al.,  2003;  wiseman & skilton, 1999), one particular  emphasis  in  the  study  of  field  specific  journal rankings has been the attempt to  identify  journals  that  make  up  an  acceptable  forum  for  the  exchange  of  entrepreneurial  thought.  in  a  series  of  early  studies  (macmillan  1989;  1991;  1993),  experts  in  entrepreneurship  ranked related scholarly journals  on the  basis  of  appropriateness  and  record  of  contribution.  while  there  were  some  positive  and  some  negative  changes  in  rankings from the initial research to  the  first  follow‐up  study,  most  outlets  had  either  recovered  or  increased  their  overall  ranking  score during  the  course  of macmillan’s studies.  in  the macmillan studies,  journals  that  were  considered  to  be  outstanding  included  the  academy  of  management  journal,  administrative  science  quarterly,  academy  of  management  review,  strategic  management  journal,  and  journal  of  business  venturing. the  next tier included management science,  american journal of sociology, american  sociological  review,  harvard  business  review, california  management  review,  and  organization  science.  third‐tier  journals  were  sloan  management  review,  entrepreneurship:  theory  and  practice,  journal  of  management,  journal  of  management  studies,  ieee  transactions,  organization  dynamics,  journal of high technology management  research,  journal  of  small  business  economics,  and  organization  studies.  four journals were ranked in the lowest  tier:  journal  of  technology  transfer,  journal of  small business  management,  international  small  business  journal,  and  entrepreneurship  and  regional  development.  more  recent  studies  have  confirmed  these early findings. for example, using  citation  counts,  singh,  haddad,  and  chow (2007) reported top‐tier rankings  for  academy  of  management  review,  administrative  science  quarterly,  academy  of  management  journal,  and  strategic  management  journal.  they  also  report  significant  citation  activity  for  entrepreneurship:  theory  and  practice  and  the  journal  of  business  venturing.  chrisman  et  al.  (2008)  reported similar results for the top tier  journals  as  well  as  “near  top  tier”  rankings  for  entrepreneurship:  theory  and practice and the journal of business  venturing.    given  the  emergence  of  the  possible  top‐tier  status  of  entrepreneurship:  theory  and  practice  and  the  journal  of  business  venturing,  one  may  question  the relative position of other journals in  the  field  of  entrepreneurship.  accordingly, this  study was  designed to  address that question as well as whether  the  ranking  of  the  aforementioned  premiers  had  solidified.  in  the  present  study  we  seek  to  examine  the  relative  ranking  of  entrepreneurship  journals  across  a wide range of entrepreneurship  researchers. methods in  order  to  examine  perceptions  of  journals  in  the  field  of  management  relevant for  entrepreneurship,  we began  by  creating  a  list  of  management  and  entrepreneurship  journals.  katz’s  article  on  the  history  of  entrepreneurship  education  (2003)  and  gomez‐mejia  and  balkin’s article on the impact that journal  rankings  in management have on faculty  pay  (1992)  were  used  as  the  primary  sources  for  journals  to  include.  a  questionnaire was then developed which  listed the journals and asked respondents  if  their  departments  considered  the  journal of small business strategy    90 journals to be “top tier” or not “top tier.”  this  was  the  strategy  used  by  gomez‐ mejia  and  balkin  (1992).  however,  in  order  to  allow  greater  variability  in  responses, a 9‐point scale was used with 1  being “certainly not top tier” and 9 being  “top tier” as opposed to a five‐point scale  of top tier or not top tier. in  order  to  maximize  the  possible  response rate and survey as wide a range  of  entrepreneurship  researchers  as  possible,  a  non‐random  sampling  procedure  was  utilized.  the  survey  was  passed out to all individuals attending a  luncheon at the 2007 u.s. association for  small  business  and  entrepreneurship  (usasbe)  and small business  institute®  (sbi) meeting. this is a commonly used  survey  technique  when  seeking  to  examine  results  for  a  finite  population,  rather than the general population (getz,  2007).  this  type  of  survey  method  has  been previously used in medical (spence,  2007),  health  care  management  (carraher, parnell, carraher, carraher, &  sullivan,  2006),  marketing  (prendergast  &  wah,  2005),  education  (carraher  &  buckley, 1996; krieg, simpson, stanley, &  snider, 2002), psychology (sawyer, 1991),  entrepreneurship  (carraher,  2005),  small‐  and  medium‐sized  enterprise  management (carraher & carraher, 2005;  carraher  & buckley, 2005), and  human  resource management (carraher, gibson,  & buckley, 2006) fields of study. surveys were distributed to an estimated  500  attendees.  of  the  500  surveys  distributed,  230  were  collected  with  usable information  on journal rankings.  in  addition  to  the  journal  rankings,  information  about  faculty  rank,  associational  membership,  and  demographic information  was  collected.  the majority  of  respondents  were  male  (75.5%);  58.5%  were  professors  in  management and  entrepreneurship  and  95.2% had earned a doctorate degree. on  average  they  were  54‐years‐old,  had  published  .77  books  and  24.2  articles,  and had been a professor for 22.5 years.  of  those  responding,  63  identified  themselves  as  usasbe  members,  62  as  both  usasbe  and sbi  members, and 21  as  members  only  of  sbi.  eighty‐four  respondents  chose  to  not  identify  their  association membership. analysis the  statistical  data  for  the  50  general  management  and  entrepreneurship  journals  are  provided  in  table  1.  the  top‐ranked  specialty  journal  in  entrepreneurship was  entrepreneurship:  theory  &  practice  (etp),  followed  by  the  journal  of  business  venturing,  journal of  small business  strategy, and  journal of small business management.  for the sub‐sample of 146  who identified  their associational memberships in table  2  we  have compared  the results  for  the  top  four  entrepreneurship  specialty  journals  based  upon  associational  membership—whether respondents  were  (1) usasbe  members,  (2)  both usasbe  and sbi members, or (3) sbi members in  order to see if results were influenced by  organizational  affiliation.  there  are  significant  differences  in  terms  of  the  responses of usasbe, joint membership,  or  sbi  membership on three of the four  journals. in all journals, the usasbe‐only  members  were  the  most  conservative  while the sbi‐only members provided the  highest  ratings,  although  the  difference  for etp was not statistically significant at  traditional levels (t = 1.198, p  = .235). for  the journal of business venturing and the  journal of small business strategy, the sbi  and  joint usasbe/sbi  members did not  provide  significantly  different  ratings  from  one  another  at  the  .05  level  of  significance,  but  their  ratings  were  significantly  higher  than  those  provided  by  usasbe members. for the journal of                                                                                    volume 19, number 2 fall/winter 2008/2009   91 journal of small business strategy    92 table 1 ranking of entrepreneurship & management journals n mean std.  dev. academy of management journal 1 8.72 0.695 journal of applied psychology 2 8.64 0.840 academy of management review 3 8.55 0.926 strategic management journal 4 8.10 0.991 journal of international business studies 5 7.67 1.453 harvard business review 6 7.06 2.092 journal of management 7 7.06 0.819 personnel psychology 8 6.88 1.988 administrative science quarterly 9 6.71 2.391 entrepreneurship: theory & practice 10 6.65 1.583 journal of business venturing 11 6.41 2.082 journal of small business strategy 12 6.22 1.759 journal of small business management 13 6.02 2.081 journal of applied management & entrepreneurship  14 6.01 1.323 international journal of entrepreneurial behaviour &  research 15 6.00 1.542 entrepreneurship and regional development 16 5.93 1.378 case research journal 17 5.88 1.505 global business and finance review 18 5.83 1.316 international journal of family business 19 5.71 2.416 journal of business strategies 20 5.51 1.971 academy of entrepreneurship journal 21 5.24 1.969 journal of developmental entrepreneurship 22 5.19 1.606 journal of entrepreneurship 23 5.04 2.116 international journal of sustainable strategic management 24 5.00 1.398 journal of international entrepreneurship 25 4.86 1.920 family business review 26 4.73 1.795 journal of international business and entrepreneurship 27 4.52 1.889 international journal of entrepreneurship 28 4.50 1.365 small business economics 29 4.46 1.782 international journal of technological innovation and  entrepreneurship 30 4.42 1.257 organizational dynamics 31 4.40 2.201 small enterprise research: the journal of seaanz 32 4.30 2.149                                                                                   volume 19, number 2 fall/winter 2008/2009   93 table 1 ranking of entrepreneurship & management journals continued n mean std.  dev. venture capital 33 4.26 2.317 journal of business & entrepreneurship 34 4.17 2.062 journal of entrepreneurship education 35 4.09 1.901 entrepreneurship innovation and change 36 4.08 1.926 journal of international business and enterprise  development 37 4.01 1.222 the entrepreneurial executive 38 3.73 1.241 international journal of entrepreneurship development,  education & training 39 3.69 1.480 journal of asia entrepreneurship and sustainability 40 3.59 1.287 enterprise & innovation management studies 41 3.55 1.151 new england journal of entrepreneurship 42 3.44 1.547 small business and enterprise development 43 3.42 1.278 international indigenous journal of entrepreneurship  advancement, strategy, & education 44 3.40 1.780 journal of technology transfer 45 3.35 1.259 entrepreneurship development review 46 3.26 1.361 journal of enterprising culture 47 3.25 1.708 asian journal of business & entrepreneurship 48 3.23 1.287 journal of private enterprise 49 3.18 1.252 business journal for entrepreneurs quarterly 50 2.80 0.907 n = 230 journal of small business strategy    94 table 2 comparison of scores based upon usasbe, joint, or sbi membership sig.  differences mean std. deviation std. error entrepreneurship: theory  & practice 1 none 6.32 2.205 0.292entrepreneurship: theory  & practice 2 none 6.82 0.892 0.115 entrepreneurship: theory  & practice 3 none 6.90 0.700 0.153 entrepreneurship: theory  & practice total 6.62 1.572 0.134 journal of business  venturing 1 23 5.74 2.934 0.399journal of business  venturing 2 1 6.80 0.855 0.116 journal of business  venturing 3 1 7.15 0.489 0.109 journal of business  venturing total 6.41 2.068 0.183 journal of small business  management 1 23 4.86 2.004 0.261journal of small business  management 2 13 6.14 1.686 0.220 journal of small business  management 3 23 8.10 0.301 0.066 journal of small business  management total 5.89 2.028 0.172 journal of small business  strategy 1 23 4.78 1.762 0.229journal of small business  strategy 2 1 7.07 0.835 0.110 journal of small business  strategy 3 1 7.33 0.730 0.159 journal of small business  strategy total 6.13 1.750 0.149 n = 146 1= usasbe member 2 = usasbe and sbi member 3 = sbi member only table 3 t‐test results articles t‐test sig. mean std. deviation std. error  mean journal of business  venturing > 16 2.349 6.87 1.171 0.158journal of business  venturing < 16 0.020 6.00 2.556 0.301 entrepreneurship:  theory & practice > 16 0.850 6.73 1.473 0.187entrepreneurship:  theory & practice < 16 0.391 6.49 1.688 0.195 journal of small business  management > 16 1.117 6.06 1.934 0.242journal of small business  management < 16 0.266 5.68 2.133 0.248 journal of small  business strategy > 16 3.129 6.62 1.800 0.230journal of small  business strategy < 16 0.002 5.70 1.617 0.185 small  business  management  (jsbs),  all  three  sets  of  ratings  were  significantly  different.  because  jsbs  is  published  for  sbi (whereas jsbm and etp are affiliated  with  usasbe),  these  results  were  not  expected. a comparison of the usasbe‐ only  and  sbi‐only  members  did  not  provide  any  clear  guidance  as  to  why  these  results  were  found  or  why  the  usasbe‐only  members  were  more  conservative in their ratings.  the  results  of  the  t‐tests  performed  on  journal  rankings based  upon  publication  levels  and  a median split (taken from 16  journal  articles) are provided in table 3.  of  those  surveyed,  those  who  received  more  publications  were  also  more  conservative in their rankings than those  who  received  fewer  publications  (difference = .6025). the average rating of  the  top  four  journals  for  the  higher  publishing group was 5.97; for the lower  publishing group, it was 6.57. those who  received  fewer publications rated jbv as  the top entrepreneurship journal followed  by  etp,  jsbs,  and  jsbm;  those  who  received  more publications  rated etp as  the  top  entrepreneurship  journal,  followed by jbv, jsbs, and jsbm.  discussion and conclusions  since  2003  there  has  been  an  ongoing  debate about entrepreneurship education  and  research  (katz,  2008).  as  an  emerging  discipline,  entrepreneurship  departments are still uncommon at most  universities.  fewer  than  10%  of  the  respondents  worked  in  an  independent  entrepreneurship  department,  with  a  majority of the respondents  located  in a  department of  management. as  seen in  table  1,  the  top  general  management  journals still rate higher than journals that  specialize  in  entrepreneurship,  although  entrepreneurship  journals  are  making  headway. as  entrepreneurship continues  to  develop  as  a  discipline  the  journals  should continue to increase in stature and  be more accepted as a‐level publications  within  schools  of  business  across  the  country. in 2003, katz argued that the discipline of  entrepreneurship education was a mature  field  but  one  that  still  trailed  other  business  disciplines  with  regards  to  its  legitimacy.  kuratko, on  the  other  hand,  has suggested that entrepreneurship as a  field of  study  is  legitimate,  but that the  field is  not fully  mature (2005).  in  2005,  there  were  over  “2,200  courses  at  over  1,600 schools; 277 endowed positions; 44  refereed  academic  journals,  mainstream  management  journals  devoting  more  issues  (some  special  issues)  to  entrepreneurship; and over 100 established  and  funded  centers”  (kuratko,  2005,  p.  583).  the  accumulated  wealth  of  the  positions  and the  centers  exceeded $440  million  (katz,  2003;  kuratko,  2005).  however,  kuratko  argued  that  entrepreneurship researchers still need to  continue  to  fight  for  “respectability  and  leadership”  (p.  587).  he  asked  four  key  questions  about  the  legitimacy  of  entrepreneurship:  (1)  how  many  departments of entrepreneurship exist? (2)  how  many  faculty  members  gain  tenure  based upon  their  teaching  and research   exclusively in  entrepreneurship?  (3)  how  many  entrepreneurship  faculty  rise  to  become  deans?  and  (4)  how  many  business  schools  rank  entrepreneurship  specialty journals  as being  top  tier?  the  implied answers  are  that  few  schools  of  business  include  entrepreneurship  journals on their lists of top tier journals,  few  deans  come  from  entrepreneurship,  few  faculty  members  gain  tenure  from  entrepreneurship research, and few stand‐ alone entrepreneurship departments exist  (kuratko, 2005). the results of the current  survey research lend credibility to this, as  fewer than 10%  of  the respondents came  from  an  entrepreneurship  department  and  general  management  journals                                                                                    volume 19, number 2 fall/winter 2008/2009   95 ranked  higher  than  even  premier  entrepreneurship  journals  such  as  etp,  jbv, jsbs, and jsbm. kuratko  writes  that  real  “maturity  and  complete  academic  legitimacy  of  the  entrepreneurship  field  has  yet  to  be  experienced” (2005, p. 587). katz quoted  these  same  questions  and  then  wrote,  “the attainment of  legitimacy is the area  in  which  entrepreneurship  faces  its  greatest challenges in academia” (2008, p.  551). he argued that this was due to  the  noted  instability  in  the  market  for  entrepreneurship  chairs,  where  faculty  members  with  little  or  no  interest  in  entrepreneurship  are  used  to  fill  positions,  and  where  the  recent  dissolution  of  the  entrepreneurship  division by a top 25 business school went  unchallenged (katz, 2008). katz contends  that  the  field  of  entrepreneurship  is  mature  but  not  stagnant,  moderately  legitimate but  with  a  long  way  to  go  to  gain  full  academic  legitimacy,  and  is  increasingly central to the entrepreneurial  passion  found  on  campuses  around  the  world  (2008).  katz  concludes  that  the  legitimacy  of  entrepreneurship  as  an  academic  field  of  study  “is  stronger  the  farther  one  gets  away  from  its  home in  business  schools”  (katz,  2008,  p.  553).  kuratko maintains that entrepreneurship  educators  need  to  be  leaders  in  their  respective schools  of  business,  and  take  an active role in moving entrepreneurship  into  a  leadership  position  in  terms  of  curriculum  development,  research,  faculty,  and  fundraising  (2005).  entrepreneurship  researchers  should  continue to study the ranking of journals  within  our  discipline  as  well  as  across  multiple  disciplines  and  over  time.  we  believe that within the next several years  etp, jbv, jsbs, and jsbm should become  more  widely  accepted  as  top‐tier  publications,  not  just  within  the  entrepreneurship  discipline  but  also  across all business disciplines. to examine  changes in the status of entrepreneurship  journals  over  time,  we  propose  that  surveys examining journal quality should  be  performed at regular intervals as  was  previously done by macmillan (1989, 1991,  1993).  future  research  should  also  examine in greater detail how factors such  as  job  tenure,  publication  levels,  and  experiences  with  particular  journals  might  influence  faculty  members  rankings  of  particular  journals.  it  is  our  expectation  that the greater  the positive  experience a faculty member has had with  a  particular  journal  the  more  positive  their  perceptions  would  be  of  that  journal, which could then lead to higher  rankings for that journal.  building  on  the  suggestions  of  katz  (2003, 2008) to  continue  to increase the  positive  perceptions  of  entrepreneurship  journals,  we  recommend  that  more  entrepreneurship  journals  seek  to  be  indexed with the social  science citation  index, be included in googlescholar.com,  and offer full text access in ebsco, lexis‐ nexis,  info‐trac,  and  proquest.  these  actions should increase the availability of  cutting‐edge  entrepreneurship  research  while  at  the  same  time  increasing  the  visibility  of  the  journals.  as  the  field  continues  to  develop and  mature, more  departments  of  entrepreneurship should  continue  to  develop,  additional  entrepreneurship  centers  should  be  funded,  and  young  entrepreneurship  faculty members should be  able  to  gain  tenure  and  promotion  with  research  published  primarily, or  even  exclusively,  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and productivity across  management subfields. journal of  management inquiry, 8(3), 299–320. shawn  m. carraher  is the  brewczynski  endowed chair, professor of management  and global entrepreneurship, and director  of  the  small  business  institute®  in  the  school of business at cameron university.  his research interests focus largely on the  examination  of  cross‐cultural  differences  in  compensation  and  selection  practices  within entrepreneurial organizations that  focus on healthcare and tourist industries.  at the time of the data collection he was  program  chair  of  the  entrepreneurship  education division of the u.s. association  for  small  business  &  entrepreneurship  and  the  president of  the  small  business  institute®. terrence j. paridon is associate professor  of marketing  in the school of business at  cameron university in lawton, oklahoma.  his  research  interests  are in  the  areas  of  shopping motives, patronage behavior, and  word‐of‐mouth  communication.  his  research has  appeared in the   journal of  retailing  and  consumer  services,  marketing  management  journal,  and  the  journal  of  applied  management  and  entrepreneurship. he holds the position of  vice  president, quality  assurance,  for  the  small business institute®. journal of small business strategy    98 reproduced with permission of the copyright owner. further reproduction prohibited without permission. http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2019, vol. 29, no. 01, 71-84 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2019 small business institute® w w w. j s b s . o rg innovation through new products, processes, and services is arguably the chief potential means for small and medium size enterprises (smes) to confront and overcome significant capital barriers and wage gaps. traditionally, smes operate with flatter structures, broader and sometimes more amorphous roles, less bureaucracy, and less routinization (perrow, 1967) than larger firms. such qualities enable smes to develop the potential for financial performance and achieving competitive advantage in relation to larger counterparts (rosenbusch, brinckmann, & bausch, 2011). but what compels individuals in smes to engage in innovative activity? an emerging body of scholarly work turns attention to the concept of passion as one potentially unique individual characteristic for understanding and providing insight into the question of what drives innovative activity in smes. passion is argued to be at the very heart of entrepreneurship (cardon, gregoire, stevens, & patel, 2013) because it foster the recognition of new information patterns that lead to the discovery of new and promising opportunity (baron, 2008) and the propensity to exploit it (klaukien, shepherd, & patzelt, 2013). passion among founders and leaders acts as a source of emotional contagion (cardon, wincent, singh, & drnovsek, 2009) and shared vision (strese, keller, flatten, & brettel, 2018) for activities that underpin and fosters enthusiasm, effort, and persistence in smes. yet we still know relatively little about how employees’ own passions for “being entrepreneurial” affect their innovative efforts in an sme. such insight is crucial for two reasons. first, the inevitability of founding leadership transitions can have a profound impact on enduring operations and venture outcomes (schenkel, yoo, & kim, 2016). family businesses scholars, for instance, observe that value creation and improved introduction mark t. schenkel1, steven farmer2, john m. maslyn3 1 belmont university, usa, mark.schenkel@belmont.edu 2wichita state university, usa, steven.farmer@wichita.edu 3belmont university, usa, john.maslyn@belmont.edu process improvement in smes: the impact of harmonious passion for entrepreneurship, employee creative self-efficacy, and time spent innovating harmonious passion, creative self-efficacy, innovation, sme harmonious passion, creative self-efficacy, and time spent innovating are examined as antecedents to innovative process improvement suggestions in a field study of 213 employees in an sme. results show that time spent innovating, or thinking about and experimenting with new ideas, predicts the number of process improvement suggestions. time spent innovating is, itself, influenced by the employee’s level of harmonious passion for entrepreneurship, moderated by creative self-efficacy. counter to expectations, the moderation was negative; such that the positive relationship between harmonious passion and time spent innovating became weaker as creative self-efficacy became stronger. the results provide insight into the complex relationships between passion, competency, and entrepreneurial behavior and suggest the need for additional focus on the processes employees follow to engage in workplace innovation. in doing so, this study makes three specific contributions. first, it provides a fundamental step toward understanding the role harmonious passion plays in innovation in an sme context. second, it begins to explain the relationship between individuals’ thoughts, behaviors, and outcomes in the nascent stages of innovation in smes. finally, it provides insight into the heretofore unexplored link between passion and creative self-efficacy in fostering innovative behavior. apa citation information: schenkel, m. t., farmer, s., & maslyn, j. m. (2019). process improvement in smes: the impact of harmonious passion for entrepreneurship, employee creative self-efficacy, and time spent innovating. journal of small business strategy, 29(1), 71-84. http://www.smallbusinessinstitute.biz http://www.jsbs.org 72 m. t. schenkel, s. farmer. j. m. maslyn journal of small business strategy / vol. 29, no. 1 (2019) / 71-84 performance depend on the extent to which founding leadership imbues beliefs, values, and attitudes toward entrepreneurship that foster the permeation of a combination of optimism, hope, resilience and perseverance throughout the firm over time (hoy & sharma, 2010). given this, the extent to which employee passion matters as smes transition toward professionalization likely goes beyond perceptions of their founding leaders’ passion (breugst, domurath, patzelt, & klaukien, 2012). this makes employee passion important to understand in its own right. second, it is axiomatic that before there can be innovation there must be the potential for innovation, and such potential requires willing and able individuals (krueger jr. & brazeal, 1994). our objective in this study is to extend this emerging body of work by examining the influence of harmonious passion, an agent-based construct shown to be related to innovative activity in larger organizational settings (liu, chen, & yao, 2011), yet largely unconsidered in smes. we draw on self-determination theory (deci & ryan, 2011) to investigate the role harmonious passion for being entrepreneurial plays as a driver of an employee’s time spent innovating, along with the mediating role of time spent innovating on making new and innovative process suggestions. further, while passion represents a desire to engage in an activity, the unstructured and often counter-normative nature of innovative activities also requires persistence in the face of these challenges (tierney & farmer, 2002). thus, we also investigate the interplay between harmonious passion (representing “want to”) and creative self-efficacy (representing “can do”) (tierney & farmer, 2002) on each of these outcomes. we reason that harmonious passion, particularly in the presence of creative self-efficacy, is likely to lead individuals to spend time personally thinking about and experimenting with innovative ideas. doing so allows them to develop knowledge depth and breadth independently, avoiding issues like the ideas being subjected to the emotional embeddedness of others’ professional envy (biniari, 2012). it also helps avoid challenges of others applying progressively subjective (e.g., feelings, tastes) and excessively pragmatic criteria in the early stages of knowledge creation (floyd & wooldridge, 1999), along with centrality effects associated with existing information and decision-making networks (ho & pollack, 2014). collectively, then, harmonious passion facilitates the time and space needed to formulate to one’s own conclusions with respect to the economic value each reflects before choosing to overtly suggest what are believed to be innovative ideas. this study makes three key contributions to the literature. first, it provides an important step toward understanding the role passion plays in innovation in an sme context. second, by examining time spent innovating as a mediator of the passion-innovation relationships this investigation starts to explore the relationship between the individuals’ thoughts, behaviors, and outcomes involved in the nascent stages of innovation in smes. third, while creative self-efficacy has been consistently linked to innovative efforts (farmer & tierney, 2017), its role in combination with entrepreneurial passion is surprisingly uninvestigated. thus, we examine the interaction between individuals’ harmonious passion and creative self-efficacy while acknowledging and controlling for other facets previously considered like autonomy (hornsby, kuratko, & montagno, 1999) and supervisory relations (graen & uhl-bien, 1995). theory and hypotheses vallerand et al. (2003) note that a passion for something can be considered as a strong emotion with inherent behavioral tendencies. this is particularly true in an entrepreneurial organization where people can be inspired and steadfast toward creating or inventing new products and services based on ideas for which they have strong feelings toward (cardon et al., 2013). passion alone, however, and particularly in the absence of reason, is rarely sufficient to bring innovative new ideas to the marketplace (vallerand et al., 2003) since ideas rarely come to individuals in a form that can be considered fully developed in a commercial sense (casson, 2005). further, passion, when obsessive in nature or extent, can be counterproductive or even destructive nature (vallerand, paquet, philippe, & charest, 2010). when ideas are generated inside existing organizations they inherently collide with existing systems and structures (fiol, 1995), often contradicting current organizational norms and controls (de jong, 2013). in smes, where the organizations may be characterized as particularly prominent reflections of their leaders, what ultimately turned out to be good innovative ideas may arguably be rejected prematurely based on being perceived as inconsistent, or even incongruent, with leaders’ passions (strese et al., 2018). those passionate about such ideas then confront a choice between giving up on them or pursuing them independently until such time they might be able to assess, shape, articulate and work with others to demonstrate alignment more clearly, or why and how such ideas are in the interest of the organization’s long term health and performance despite immediate perceptions of misalignment with leaders’ passions. harmonious passion’s effects on innovative activity 73 m. t. schenkel, s. farmer. j. m. maslyn journal of small business strategy / vol. 29, no. 1 (2019) / 71-84 in a sme setting are particularly relevant for two reasons. first, passion-focused innovative activity is rooted in a long-standing psychological perspective in which at its core reflects the need for “a person, in whose mind all of the possibilities come together, who believes that innovation is possible, and who has the motivation to persist until the job is done” (shaver & scott, 1991, p. 39). it is consistent with the idea that innovation begins with the actions of individuals (casson, 2005; krueger jr. & brazeal, 1994; rutherford & holt, 2007). second, innovative activity driven by harmonious passion reflects a distinct interest in a self-defining activity individuals value, enjoy, and in which they invest time and energy (vallerand et al., 2003). the fact that such actions emanate from intrinsic and integrative tendencies of the self that are internalized (deci & ryan, 2000) engenders a willing and enduring (but not excessively rigid or inflexible) motivational force in the pursuit of such activity (vallerand, 2010). coupled with observations noting the disproportionately greater relative impact of individuals’ efforts and contributions on firm outcomes in smes than in larger organizational contexts, the importance of understanding and weighing the potential of individuals’ passion as a driver of internal innovation against externally-based alternatives is underscored (maes & sels, 2014; prajogo & mcdermott, 2014). figure 1 illustrates the conceptualized framework guiding this investigation. it focuses on extending prior insights into how passion acts to influence innovative activity within the broader sme context. we begin the discussion of our proposed model by concentrating on the direct effects of harmonious passion as the primary and initial stimulus for entrepreneurial activity. harmonious passion: direct effects passion, defined as consciously accessible intense positive feelings experienced through engaging in activities of particular interest (cardon et al., 2009), is considered a source of intrinsic motivation (vallerand et al., 2003). more specifically, the harmonious form of passion is defined as “a motivational force that leads the person to engage in the activity willingly and engenders a sense of volition and personal endorsement about pursuing the activity” (vallerand & houlfort, 2003, p. 178). as such, it can be considered as originating from an autonomous internalization of a given activity into one’s identity and expected to generally lead to adaptive outcomes. it is important to note that harmonious passion is often contrasted with obsessive passion, a form of passion which is associated with an uncontrollable need to excessively or compulsively engage in an activity and is ultimately expected to lead to less adaptive, or even maladaptive, outcomes (vallerand, 2010). harmonious passion extends beyond simple interest and affect, becoming attached to the very core identity of the person (cardon et al., 2013; vallerand et al., 2003; vallerand & miquelon, 2007). when individuals freely accept the focal activity (e.g., being entrepreneurial) as significant, and without contingency, it fosters a “harmonious” or unforced sense of free choice focused on engaging in the activity consistent with one’s full, internalized sense of identity (vallerand, 2010). as such, it comes as no surprise harmonious passion has been linked to innovative activity engagement (liu et al., 2011). the construct reflects the identification of individuals with the task itself, and is experienced as interest, involvement, curiosity, satisfaction, and positive challenge (amabile, 1996). we base our theorizing in large part on self-determination theory (sdt). sdt focuses on the degree to which individuals’ behavior is self-motivated, or the nature of choices people make without external influence or interference (ryan & deci, 2000). it distinguishes activities that are inherently enjoyable (intrinsically motivating) from activifigure 1. conceptual model time spent innovating harmonious passion number of process suggestions creative selfefficacy 74 m. t. schenkel, s. farmer. j. m. maslyn journal of small business strategy / vol. 29, no. 1 (2019) / 71-84 ties that are undertaken because of an externalized reason (norms, rewards, etc.). passion for the former reflects a harmonious type in which individuals can readily integrate that activity with other life activities and disengage when necessary. passion for the latter activities is considered obsessive (reflecting emotional dependence on the activity; vallerand, 2003), it can psychologically or behaviorally crowd out other activities and may be very difficult to quit. the key difference between the two is a sense of choice. while research suggests that the two types of passion tend to be positively correlated (curran, hill, appleton, vallerand, & standage, 2015; vallerand, 2015), it also indicates convergent and divergent validity for the two constructs (marsh et al., 2013). given our interest in creativity and innovation we focused exclusively on harmonious passion. drawing on this prior research, we postulate that harmonious passion will predict the initiation of personal time spent on innovative activity because it leads individuals to seek out opportunities for self-determination and choice (ryan & deci, 2000). in other words, time spent thinking about and experimenting with innovative ideas enables the pursuit of pleasurable affect experienced through the act of creating in a value-centric way (fisher & amabile, 2009). this line of reasoning is consistent with the level of persistence observed in prior work (deci & ryan, 2000), particularly where focused on independent new venture creation (cardon & kirk, 2013). based on this evidence and reasoning, we suggest the following hypothesis: hypothesis 1. harmonious passion for being entrepreneurial will positively predict time spent innovating. harmonious passion: mediated effects ardichvili, cardozo, and ray (2003) argue that an “opportunity” may first appear as a chance to fulfill what is otherwise an imprecisely-defined market need, or to create and deliver something new that represents value by putting to work what otherwise were unor under-utilized or employed resources. yet they conclude opportunity is best conceptualized as something being “developed” over time versus being “identified” at a discrete point in time. this distinction is consistent with the notion that the recognition of entrepreneurial opportunity involves a two-phase process that begins with individual preparation, incubation, and insight, followed by a formation stage in which prospective entrepreneurs elaborate and evaluate the quality of their ideas by sharing them with others (lumpkin, hills, & shrader, 2001). we theorize that time spent innovating enables individuals to prepare, incubate, and gain insight into their innovative ideas in a self-determinant way (ryan & deci, 2000). research in cognitive neuroscience has found this sort of incubation to be a necessary precondition for the sort of sudden comprehension we call “insight” (kounios & beeman, 2009). as noted above, time spent innovating facilitates generating ideas in a way that is not only a personally value-centric way at the outset (fisher & amabile, 2009) but also at a time in the innovation process in which they largely have autonomy over their own efforts (holt, rutherford, & clohessy, 2007; kuratko, montagno, & hornsby, 1990). as a result, individuals will feel a strong sense of personal control over immediate outcomes of their efforts (de jong, 2013). as individuals incubate their ideas, they likely begin to informally share pieces of information with others and receive feedback with the goal of developing knowledge and competence depth (zahra, nielsen, & bogner, 1998). from such informal interactions, they are likely to become familiar with the emotional tensions that their ideas are likely to raise as they are exposed to the subjective judgments of others and socio-political structures embedded in the organization (biniari, 2012). yet because these efforts are likely informal, and uniquely magnified given the characteristics of the sme context (perrow, 1967), the prospective entrepreneurial individual still largely enjoys the freedom to think about how their respective idea(s) can be shaped within the organization’s broader strategies and structures (zahra et al., 1998). in this way, they are able to manage the tension between the internal exploration and exploitation of innovative ideas. stated differently, time spent innovating helps to foster deeper processing and conceptual learning that might otherwise be short-circuited prematurely (gagné & deci, 2005). this line of reasoning is consistent with research findings that creative process engagement (i.e., employee involvement in creativity-relevant methods or processes) predicts innovative outcomes (zhang & bartol, 2010). for these reasons, we hypothesize: hypothesis 2. time spent innovating mediates the positive relationship between harmonious passion for being entrepreneurial and the number of process innovations suggested. harmonious passion & creative self-efficacy: moderated effects self-determination theory suggests that people need 75 m. t. schenkel, s. farmer. j. m. maslyn journal of small business strategy / vol. 29, no. 1 (2019) / 71-84 to feel competent in their abilities to make important decisions without interference or external influences (gagné & deci, 2005). consistent with this reasoning, tierney and farmer (2002, p. 1140) argue that creative endeavors are such that “some internal, sustaining force [is needed] that propels individuals to persevere in the face of challenges”. for example, “being creative” not only requires an ability to challenge existing mental schema sets but also a comfort level with one’s abilities to handle the corresponding challenges and ambiguities that can arise (amabile, 1988). in organizations, it also requires the confidence to champion ideas that can challenge existing problems in novel ways (kanter, 1983), which can mean being willing to visibly act as a nonconformist (amabile, 1988). tierney and farmer (2002) point to the resistance of employee engagement in creative behavior to underscore the relevance of these motivational underpinnings. in smes, the relative impact of any one individual’s impact across others is likely to magnify such conditions. given these observations, we posit that creative self-efficacy, defined as “the belief one has the ability to produce creative outcomes” (tierney & farmer, 2002, p. 1138), will have an amplifying effect on the relationship between harmonious passion and innovative activity. specifically, we theorize that creative self-efficacy in the presence of harmonious passion should intensify the likelihood individuals will initiate efforts to spend time on innovative activity for two reasons. first, the ability to challenge existing mental schema should complement efforts to seek out opportunities for self-determination and choice. it does so by creating additional cognitive variability during the preparation and incubation stages, both of which are associated with opportunity recognition in turn. in other words, because it is informed by task knowledge (tierney & farmer, 2002), it should make efforts driven by affect and identity more efficient, thereby increasing the probability of generating potentially effective ideas. second, it should instill a sense of confidence for the subsequent management and overcoming of nonconformity pressures that could result if the time is spent. we believe this line of reasoning is consistent with the idea that identity management involves a sense of hierarchical ordering whereby the likelihood of engagement increases with a closer alignment of self and behavior (cardon et al., 2013). hypothesis 3. creative self-efficacy positively moderates the relationship between harmonious passion for being entrepreneurial and time spent innovating, such that the greater the sense of creative self-efficacy, the stronger the relationship. method research context our ideas are based on the noted challenges that can be faced in innovating in sme environments in competing with larger organizations (rosenbusch et al., 2011). thus, we chose to conduct this study in the insurance claims processing industry, an industry generally dominated by large organizations. the particular firm sampled qualified as a “small business” based on the small business administration’s size standards. these standards focus employee and revenue number comparisons of a given firm against others in the same industry. departments in this organization included accounts receivable, business development, customer contact, product development, it support, client services, training and quality improvement, human resources, administrative services, claims processing, third-party liability, and payments. until a year before our study, this firm had been founder-controlled and at the time of the study was working to transition toward professionalization. the nature of the work environment was generally bureaucratic, reflecting, at least in part, the regulated nature of this service industry, but organizational leadership indicated an explicit interest in improving innovation throughout the organization. the challenge of innovating reflected in this balance is particularly acute for many smes as competitive pressures continue to increase (parida, westerberg, & frishammar, 2012). procedure we used survey sampling to collect data. an on-line survey was conducted through organizational email, with surveys distributed to all employees (both managerial and non-managerial; all were full-time). employees were notified in advance of the upcoming survey and survey process, and managers were asked to allow employees time during work hours to complete the survey. the survey asked questions regarding personal practices concerning being innovative at work, personality characteristics, manager-subordinate relationship quality, and demographic characteristics. of two hundred thirteen employees, 80% completed surveys. seventy-eight percent of the sample was female, with an average 13.8 years of full-time work experience. forty-five percent reported their level of education as high school diploma or some college and 55% reported earning a 76 m. t. schenkel, s. farmer. j. m. maslyn journal of small business strategy / vol. 29, no. 1 (2019) / 71-84 college degree or above. responses regarding participant’s age were grouped approximately by decade with a modal age of 31-40 years (mean age was 2.16 on a 5-point scale with a range from 18 to greater than 61 years). measures participant responses were provided on a 5-point likert format for measures of harmonious passion for entrepreneurship, creative self-efficacy, job autonomy, and leader-member exchange. assessment of time spent innovating and the number of process suggestions were each open-ended and filled in by participants. harmonious passion. the vallerand et al. (2003) harmonious passion scale was adapted to reflect a passion for activities associated with being entrepreneurial. consistent with our reasoning, connecting passion and innovative actions such as process improvement suggestions, the harmonious, as opposed to obsessive type of passion has been shown in a meta-analysis to be positively related to positive affect, intrinsic motivation, mastery approach goals, and flow, while obsessive passion is not significantly related to any of these (curran et al., 2015). the vallerand et al. (2003) harmonious passion subscale has construct validity and is empirically distinguishable from obsessive passion (marsh et al., 2013). survey directions defined being entrepreneurial as pursuing innovative ideas for new work process(es), product(s), or service(s), or improvement(s) to an existing work process(es), product(s), or service(s). because vallerand et al. (2003) scale development work utilized item wording to represent passion for activities, generally we chose those items with the best conceptual fit with the focus in this investigation (being entrepreneurial in one’s job). in total, five of the seven items were used (alpha = .93). sample items include “being entrepreneurial in my job reflects the qualities i like about myself,” “the new things i discover by being entrepreneurial in my job allow me to appreciate innovation even more,” and “i am enthusiastic about being entrepreneurial in my job.” creative self-efficacy. we used the three-item likert scale from tierney and farmer (2002) to assess creative self-efficacy (alpha = .84). a sample item is “i have confidence in my ability to solve problems creatively.” time spent innovating. drawing broadly on research suggesting the significance of internal strategic focus on firm performance (harris, gibson, & mcdowell, 2014) and more specifically from a group of studies focused on assessing the impact of various innovation-related constructs (brazeal, schenkel, & kumar, 2014; murnieks, mosakowski, & cardon, 2014; vallerand et al., 2003), participants were asked to report the number of hours in a typical week they spent, both inside and outside of the workplace, thinking about, planning, or experimenting with new ideas or improvements for work processes. the hours were added together and the resulting reported range of time varied from zero to 60 hours per week. process improvement suggestions. given the service basis of the industry, participants were asked how many specific job-related innovative ideas, defined as any new work process or an improvement to an existing work process, they have suggested to their organization through their supervisor, suggestion program, or other means over the course of the past year. this measure is consistent with observations that process improvements are an important source of sme growth and profitability (wolff & pett, 2006) as a means of compensating for the lack of resource endowments. being agile, flexible, and hence innovative, are important in confronting the unpredictability, instability, or general unfavorableness often reflected sme’s respective competitive operating environments. the reported range was from zero to 100 suggestions per year. control variables. with our main focus on how the basic self-determination need for competence factors into the passion-innovativeness relationship, we control for self-determination needs for autonomy and relatedness (gagné & deci, 2005) to better isolate the unexplored effect of creativity self-efficacy as a form of competence. three items from hornsby, holt, and kuratko (2008) were used to assess autonomy on the job. sample items include “it is basically my own responsibility to decide how my job gets done” and “i have much autonomy on my job and am left on my own to do my own work” (alpha = .73). we used a measure of leader-member exchange (lmx) to tap relatedness. lmx was assessed with the 12-item lmx-mdm (liden & maslyn, 1998). this measure is designed to assess follower perceptions of manager-follower relationship quality and reflects the lmx dimensions of loyalty, professional respect, contribution, and affect (alpha = .94). gender (coded 1 = male, 2 = female) has also been found to predict entry into nascent entrepreneurial activity (davidsson & honig, 2003) and has been correlated with perceptions of entrepreneurial passion (breugst et al., 2012). accordingly, we controlled for its influence. additionally, we controlled for educational level 77 m. t. schenkel, s. farmer. j. m. maslyn journal of small business strategy / vol. 29, no. 1 (2019) / 71-84 as it has been shown to be related to creative engagement as well as creative self-efficacy (tierney & farmer, 2002). this variable was coded as 1 = high school or below to 5 = graduate degree. finally, years of full-time work experience was included as a control, with the consideration that domain-relevant knowledge is an important predictor of innovative activity (amabile, 1996). results descriptive statistics and correlations are shown in table 1. prior to hypothesis testing, we assessed factor structure, discriminant and convergent validity of the multi-item self-rated scales (harmonious passion, creative self-efficacy, lmx, and job autonomy) with confirmatory factor analysis. to maintain a favorable estimator to sample size ratio, for lmx we used scores on each of the four subscales as indicators. because the assumption of multivariate normality was violated per the normalized mardia coefficient, we reported results using statistics designed to adjust for non-normality (satorra & bentler, 1994): a scaled chi-square statistic for overall model fit, robust versions of the comparative fit index (cfi) and the root mean square error of approximation (rmsea), and robust estimates of standard error. the proposed four-factor model had adequate fit to the observed covariance matrix, χ2 = 152.70, df = 71, p < .001, comparative fit index (cfi) = .94, root-mean-square error of approximation (rmsea) = .07, with all standardized loadings significant. this model was compared to a model collapsing harmonious passion and creative self-efficacy together, with that model showing poor fit (χ2 = 224.62, df = 72, p < .001, cfi = .87, rmsea = .10; scaled χ2 difference with hypothesized model = 221.15, df = 1, p < .01). the hypothesized model was also compared to a two-factor model collapsing job autonomy and lmx, with that model showing poor fit (χ2 = 195.28, df = 72, p < .001, cfi = .91, rmsea = .09; scaled χ2 difference with hypothesized model = 43.14, df = 1, p < .01). a single factor model was assessed (χ2 = 268.08, df = 77, p < .001, cfi = .86, rmsea = .11). this model also fit significantly worse than the hypothesized model (scaled χ2 difference with hypothesized model = 136.424, df = 5, p < .001). these results suggest adequate measurement characteristics for the multi-item scales. because the time spent innovating and number of process suggestions dependent variables had the distributional form of event counts, regression equations testing hypotheses were modeled with the spss genlin procedure, a procedure which allows unbiased maximum likelihood estimation of regression models with response variables from any member of an exponential family of distributions. the distributions for these variables were over-dispersed (that is, the variance was greater than the mean), so a negative binomial distribution was used to model the regression equations (gardner, mulvey, & shaw, 1995). negative binomial regression analyses are shown in table 2. choice of hierarchical entry steps tracked the model in figure 1. model fit was assessed by changes in model deviance, changes which are distributed as chi-squares and indicate the extent of improvement over the previous model. we also utilized the mcfadden pseudo r-squared to estimate model fit (hilbe, 2011). the pseudo r-squared statistic measures the improvement of the given model over one with only a constant term in terms of model log likelihood, and thus is appropriate for this functional form. mcfadden (1978, p. 307) notes that pseudo r-squared values “tend to be considered lower than those of the r2 index and should not be judged by the standards for a ‘good fit’ in ordinary regression analysis”. for the time spent innovating dependent variable, controls of gender (-.42, p < .05) and educational level (-.18, p < .05) were significant predictors in the first step. at the next step, higher levels of autonomy (.47, p < .01) and creative self-efficacy (.66, p < .01) were associated with more time spent innovating. at the third step, the inclusion of harmonious passion as a significant predictor (.64, p < .01) resulted in additional model fit improvement. thus, hypothesis 1 was supported. finally, the last step included the harmonious passion by creative self-efficacy product term, which was significant (-.37, p < .01) and resulted in an incremental improvement in model fit, significant per the reduction in deviance. the graph of this interaction is plotted in figure 2. the plot shows little effect of creative self-efficacy on the harmonious passion—time spent innovating relationship at low levels of efficacy, but a more pronounced effect at higher levels of creative self-efficacy. hypothesis 3 predicted that creative self-efficacy would strengthen the relationship but the graph shows that the reverse was true; at higher levels of harmonious passion, creative self-efficacy resulted in less time spent innovating. thus, hypothesis 3 was not supported. this result, however, is quite interesting in that it tracks recent conceptual arguments that high levels of efficacy can actually result in reduced levels of resources allocated toward accepted goals (vancouver, more, & yoder, 2008; yeo & neal, 2013). this finding will be discussed at greater length later. for the number of process suggestions, the results for control variables in step 1 showed only gender (-.82, p < 78 m. t. schenkel, s. farmer. j. r. maslyn journal of small business strategy / vol. 29, no. 1 (2019) / 71-84 table 1 means, standard deviations, and intercorrelations variable m sd 1 2 3 4 5 6 7 8 1. gender (1 = male, 2 = female) 1.76 0.43 2. educational level 2.76 1.12 -.21** 3. work experience (years) 13.82 9.62 .13 .02 4. job autonomy 3.43 0.86 -.27** .05 .10 (.73) 5. leader-member exchange 3.94 0.76 -.11 .09 -.09 .09 (.94) 6. harmonious passion 3.43 0.78 -.16* .06 .08 .22** .40** (.93) 7. creative self-efficacy 3.88 0.63 -.16* .07 -.03 .09 .09 .40** (.84) 8. time spent innovating 6.57 11.52 -.17* -.06 .04 .21* .09 .28** .15* 9. number of process suggestions 5.14 12.14 -.18* .00 -.02 .08 .00 .15* .18* .26** notes: n = 172 after list wise deletion; reliabilities in parentheses on diagonal; * p < .05 ** p < .01 table 2 negative binomial regression analyses for time spent on ideas and number of process suggestions time spent innovating number of process suggestions independent variable step 1 step 2 step 3 step 4 step 1 step 2 step 3 step 4 gender -.42* -.54** -.61** -.61** -.82** -.85** -.83** -.56* educational level -.18* -.23* -.20* -.20* -.09 -.09 -.11 -.02 work experience (years) .01 .01 .01 .01 .00 .00 .01 .01 job autonomy .49** .47** .37** .36** .12 -.06 -.06 -.10 lmx .08 .06 -.07 -.04 -.08 -.07 -.10 -.04 creative self-efficacy .66** .33* .28 .34* .65** .64** harmonious passion .64** .74** .46** .23 harmonious passion by creative self-efficacy -.37* -.41* -.27 time spent innovating .05** pseudo r2 .05 .07 .09 .10 .03 .06 .07 .10 δ pseudo r2 .05 .02 .02 .01 .03 .03 .01 .03 deviance 298.06 278.44 258.04 254.00 321.40 291.99 282.77 255.81 (166df) (165df) (164df) (163df) (166df) (165df) (163df) (162df) deviance change as x2 difference vs. prior model 42.62** 19.62** 20.40** 4.04* 23.68** 29.41** 3.18* 26.96** notes. n = 172 after list wise deletion. pseudo r2 is based on 1 – (log likelihood of model / log likelihood intercept only model) (hilbe, 2011). deviance change x2 for step 1 model is based on a comparison with a null model (intercept only). unstandardized regression coefficients are at each step. * p < .05 ** p < .01 79 m. t. schenkel, s. farmer. j. m. maslyn journal of small business strategy / vol. 29, no. 1 (2019) / 71-84 .01) as a significant predictor (pseudo r-squared = .03, deviance change from the null model significant at p < .05). at the second step, creative self-efficacy was associated with process suggestions (.34, p < .01), accounting for an additional improvement in model fit per pseudo r-square, deviance change p < .05. harmonious passion and its interaction with creative self-efficacy were entered in the next step, with the product term being significant (-.41, p < .05), adding another model fit improvement based on significant reduction in the deviance parameter. in the fourth step, time spent innovating (.05, p < .01) accounted for incrementally significant deviance reduction at p < .01, and additional model fit improvement. this suggests possible mediation in line with hypothesis 2. as noted above, hypothesis 2 positioned time spent innovating as mediating the effects of harmonious passion on the number of process innovations suggested. this prediction, along with the possibility that the indirect effect is conditional on the first stage interaction of harmonious passion and creative self-efficacy, was tested using bootstrap procedures from preacher and hayes (2008). analysis indicated that the overall indirect effect of harmonious passion on process suggestions via time spent innovating was significant (indirect effect = 1.08, se = .51, p < .05), supporting hypothesis 2. this effect, however, was not significant when creative self-efficacy was low (-1 sd, indirect effect = 1.18, se = .66, p > .05) but was significant only when creative self-efficacy was high (+1 sd, indirect effect = .96, se = .46, p < .05). discussion this study makes a number of contributions to the theoretical literature. first, it extends prior studies suggesting passion may play a key role as an impetus for innovative activity, independent of other influences in smes. specifically, our findings show that variation in the harmonious passion of individuals for being entrepreneurial significantly and positively predicts innovative activity and outcomes, irrespective of other predictors extant theory suggests. harmonious passion is a stronger predictor of time spent innovating than other main effects of job autonomy and leader-member relations, factors which prior research has shown to be associated with leader communication and promotion of strategic vision for innovative activity (rutherford & holt, 2007). this finding is particularly interesting because it suggests harmonious passion may be more closely aligned to the employee’s personal affect (breugst et al., 2012) and, in turn, the potentially greater explanatory power for innovative outcomes reflecting a bias (vallerand et al., 2003) and intent (biraglia & kadile, 2017) toward engaging intrinsically valued activity such as being entrepreneurial. as such, and coupled with hoy and sharma’s (2010) observation of the centrality of beliefs, values, and attitudes toward entrepreneurship beyond founding leadership control, it suggests employee harmonious passion may be an essential focal point in future research toward understanding what enables smes to persist and move toward professionalization. figure 2. interaction of harmonious passion and creative self-efficacy for time spent innovating 0 5 10 15 20 25 30 35 low harmonious passion high harmonious passion t im e sp en t i nn ov at in g (h r.s /w ee k) low creative selfefficacy high creative selfefficacy 80 m. t. schenkel, s. farmer. j. m. maslyn journal of small business strategy / vol. 29, no. 1 (2019) / 71-84 a second core contribution is found in the mediation insights. specifically, by theoretically incorporating the concept of time spent thinking, planning, or experimenting with new ideas or improvements, this study starts to reveal the relationship between the individuals’ thoughts, behaviors, and outcomes involved in the nascent stages of innovation in smes. prior theorizing focuses on ceo passion as an important driver of innovative outcomes in smes (strese et al., 2018) noting its potential as a contagious quality (cardon, 2008). yet such an explanation is insufficient in that it fails to consider, and hence provide, a bottom up basis for understanding the origins of why and how such contagiousness may also occur. equally important, the mediational effect observed suggests the transition from thoughtful consideration of one’s ideas to committed overt action is dependent upon the expenditure of such time. for scholars, this suggests that a fruitful area for future research is teasing out the influence of harmonious passion on the identification of viable business opportunities (casson, 2005), particularly with respect to how it may or may not take on a more contagious quality among other sme stakeholders (cardon, 2008). for example, studies focusing on smes transitioning from family founding-control (e.g., randøy & goel, 2003), one interesting area where further insight is needed is in understanding how choices in (and changing) structural relationships like family involvement and outside governance mechanisms might influence the extent to which employees perceive distance between founding and future management objectives, and in turn, if and how such distance impacts willingness to spend time on ideas that might lead to new opportunity identification. a third and closely related contribution is found in the moderation findings. the main effect findings lend support to the idea that competency with creative activity (tierney & farmer, 2002, 2004) is an important motivation-based complement to developing a sense of self-determination (deci & ryan, 2000; gagné & deci, 2005) leading to innovative activity engagement in smes. interestingly, however, the moderating influence we find is in contrast with the augmenting influence hypothesized. specifically, we find that when creative self-efficacy is low, it bears little effect on the harmonious passion—time spent innovating relationship. by contrast, higher levels of creative self-efficacy have a more pronounced effect but in an adverse way – that is, creative self-efficacy results in less time spent innovating. this raises the possibility that creative self-efficacy could serve to lessen the otherwise positive influence of harmonious passion, particularly in an sme context involving innovation of some sort. for example, drawing on a combination of socio-cognitive and resource allocation theory, yeo and neal (2013) summarize a stream of research that finds that people act to conserve resources, particularly in situations in which people have competing demands and limited resources (smes, for instance). in such cases, high self-efficacy can have a negative, not positive relationship with some outcomes, as individuals (sometimes mistakenly) believe such efforts are not necessary for success. thus, one interesting question for future sme research revolves around the extent to which choices in important factors like leadership (e.g., schenkel et al., 2016) and structure (e.g., randøy & goel, 2003) influence the self-regulatory nature of purposive innovative behavior (bandura, 1991) as smes professionalize beyond founding leadership. one potentially fruitful approach could be the design of studies intended to examine dynamic within-person differences in harmonious passion and creative self-efficacy, both independently and in combination, and the influence of these factors on innovation engagement (yeo & neal, 2013) in sme settings. practical implications our results also have at least three important practical implications for sme leaders. first, the positive relation observed between harmonious passion and entrepreneurial behavior here is strikingly consistent with findings in studies of independent entrepreneurs (murnieks et al., 2014). the message for sme managers here is fostering innovation involves more than relying on basic skills proficiency (franklin, 2015) or external factors such as tangible rewards and deadlines (gagné & deci, 2005). these approaches may be insufficient or even undermine the intent to spur innovation. a more robust approach also involves understanding employees’ passion with innovative activity in order to gain insight into how to leverage intrinsic sources of motivation. such an approach may serve as a means for smes to better compete against larger, more resource-endowed firms. second, for managers, our mediation results suggest caution must be exercised to avoid creating systems, structures, and processes that promote employees prematurely confounding the incubation and formation stages of opportunity identification. such caution is particularly important in cases where a novel idea might feasibly be developed despite perceived uncertainty and risk that may otherwise inhibit an employee from suggesting it (ardichvili et al., 2003; fisher & amabile, 2009; prajogo & mcdermott, 2014; sarasvathy, 2001). third, the present results suggest the importance of managers proactively seeking to understand and differentiate when innovative ideas may be driven by an appropriate 81 m. t. schenkel, s. farmer. j. m. maslyn journal of small business strategy / vol. 29, no. 1 (2019) / 71-84 sense of confidence versus a potentially false sense of overconfidence. one way this may be achieved is through questioning focused on drawing out assumptions, particularly in cases where those suggesting innovative ideas appear both passionate in their ideas and confident in creative capability. limitations our study is limited in several important ways. first, our results should be treated cautiously because they are based on a single organization. although our sample is similar in nature to those including service-based firms in past research (hornsby, kuratko, & zahra, 2002), it is possible that our results were systematically influenced by unspecified firm-level characteristics. it has become increasingly clear that entrepreneurial and innovative activities are heterogeneous within and across firms and that more knowledge about such variation is needed (phan, wright, ucbasaran, & tan, 2009). therefore, it is important for future research to validate and extend the present results. a second potential limitation rests in our measure of the number of process suggestions. specifically, this measure was based on a time frame “in the past year.” the approach of using number per week is consistent with prior research (brazeal et al., 2014; murnieks et al., 2014; vallerand et al., 2003) and with the idea that the extent to which innovative activities are central and meaningful to an individual’s self-identity differentiates individuals from one another (tierney & farmer, 2002; vallerand et al., 2003). yet it is possible that the variability in process suggestions could be systematically influenced by participants that have less than a year of tenure in the organization (tierney & farmer, 2002). we do not have an assessment of organizational tenure to use as a control variable to account for this possibility. however, we believe such a possibility is likely to attenuate the average number of ideas for participants, resulting in an overly conservative test of our model. third, we measured harmonious passion but not obsessive passion, so we cannot fully discount its potential effects. however, strong evidence exists that indicates discriminant validity between the two constructs (marsh et al., 2013), and a meta-analysis of 94 studies indicates the two types of passion show very different patterns of relationships with well-being, motivational, cognitive, and performance factors (curran et al., 2015). additionally, we relied on a cross-sectional design to test our ideas, raising concerns about causal sequencing. for instance, spending more time thinking of and generating innovative ideas could result in autonomous internalization of this activity into identity, thereby enhancing harmonious passion. we do not discount this ordering but remind that such identity-based sequencing is likely to be reciprocal, such that as a passion for innovative activity increases, so will passion-relevant efforts such as spending more time thinking about new ideas. the limitation here is not so much that the sequence we propose is wrong, but that it is incomplete and so future research ought to examine reciprocal causation longitudinally. a closely related final concern is the use of self-report data. self-reporting of harmonious passion and the three self-determination variables (creative self-efficacy, job autonomy, and lmx), as well as time spent innovating, was appropriate as these are only internally accessible to individuals. it would have been preferable to have independent reports of suggested process innovations in order to mitigate possible common method bias. however the organization had no formal system in place for this and, as a result, we used self-report measurements. self-reports of suggestions have been used before, though, with substantive validation with independent reports (axtell, holman, & wall, 2006). also, because “interaction effects cannot be artifacts of cmv” [common method variance] (siemsen, roth, & oliveira, 2010, p. 456; evans, 1985), this possibility is mitigated for our moderation and conditional indirect relationship findings. conclusion notwithstanding the noted limitations, this study constitutes and informative investigation of how harmonious passion factors into the nascent stages of innovation in smes. the study reveals harmonious passion reflects 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(2010). linking empowering leadership and employee creativity: the influence of psychological empowerment, intrinsic motivation, and creative process engagement. academy of management journal, 53(1), 107-128. %kuxcy trade show planning: a model and tooi.s for maximizing effectiveness mary s. spann leah johnson mel adams dawn bendall university of alabama in huntsville abstract the "shallow pockets" of the typical small business manager require that marketing strategies be designed andimplemented on a shoestri ng budget. trade shows offer very tutracti ve invesnnent-payoff ratios for scarce markenng dollars. to reap these atnactive, cost-effective beneftts, however, requues that the small business manager plans egecnvely for trade shows. ttu's paper discusses how to set selli ng and non-sel li ng goals, how to select the ri gto trade shows, how to prepare for the show itself, how to panicipate well and wisely, how to follow-up on the trade show, and how to assess the impact of trade show participation. introduction since most small bushtesms have limited resources to dedicate to gmwth, the small business owner or manager needs marketing opportunities that have very favorable cost-benefit trade-offs. the "shallow pockets" of most small businesses means that marketing strategies must be designed on a shoestring budget (weinrauch, 1987). every dollar has to count. trade shows provide the small business owner a chance to reach a pre-screened customer base quickly and efliciently. members of trade show audiences often come prepared to make buying decisions and to buy. data from the trade show bureau indicate that most trade show auendees have buying influence, and 90 percent'generally buy within the 12-month period after the show (lorimer, 1991;trade show bureau, 1986). the cost per trade show contact has remained less than half the cost of a personal sales call (bonoma, 1983; chapman, 1987). time-ctmstrained small business owners, though, often participate in trade shows more as an aftenhought than as part of an ovemll business development strategy. as a result, small usinessm often consider trade shows an expense rather than an investment in market development. further, as many managers discover, favorable payoff-investment ratios for exhibiting at the authors appreciate the usefut comments of three anonymous reviewers and the contributionr ofjeff leuc in preparusg dus arriere. 17 trade shows do not happen by incident. without good planning, managers often fall victim to any or all of the following ctxnmon trade show problems: high participation costs, unknown effectiveness, efficiency that cannot be measured, and the feeling that the shows are a waste of time, a perk for managers or customers, or an expense required to maintain the company image (bonoma, 1983). choosing the right trade show with the right audience and returning from the show with both leads and sales takes detailed planning. this paper provides the small business manager a detailed, but simplified planning model and methodology that can enhance the probability of trade show success, a worksheet for developing sales goals, atypical small business tnule show budget fora short, local show, and a suggested schedule for planning participation in a trade show. using these tools can help the small business manager improve the return on his or her firm's investment in trade shows. trade show planning small business financial and market performance is positively related to strategic management and long range planning (schwenk & shrader, 1993). for many small businesses, trade shows may present more new qualified sales contacts than any other single event, or perhaps more even than salespeople would see during an entire year. thus, trade shows are a key element in the overa0 marketing strategy that can help the fum reach its total sales, growth and market share objectives. because trade show activity must be integrated with the overall marketing plan, effecuve use of trade shows depends on good management before, during and after the show. to make the most of their trade show invesunent, managers need to use an integrated strategic apprtxmh to plan all tluee phases of trade show activity. as shown in figure 1, managers must know how to set selling and non-selling goals (bonoma, 1983; browning & adams, 1988; chapman, 1987; lorimer, 1991;levinson, 1984; miller, 1992;o'conner, 1987),select the right nude shows (bonoma, 1983; browning & adams, 1988; chapman, 1987; faria & dickinson, 1984; levinson, 1984; swandby, cox & sequeria,1990; young, 1986),prepare for the show itself (alexander, 1989;browning & adams, 1988; chapman, 1987;cossman, 1984; grimmer, 1990; letwin, 1981;levinson, 1984; mcgreevy, 1989;miller, 1992;swandby, et al, 1990),participate effectively (aisle view, 1990; browning & adams, 1988; chapman, 1987; everett, 1989; grimmer, 1990;levinson, 1984; miller, 1992;o'conner, 1987),assess the impact of trade show participation (aisle view, 1990) and conduct post-show follow-up activities (grimmer, 1990; lorimer, 1991;miller, 1992). setting goals and objectives a manager's first task is to define broad goals for trade show participation, then specify measurable (quantified) objectives for each goal (bonoma, 1983;chapman, 1987; miller, 1992; o'conner, 1987). generally, trade show planning should include both selling and non-selling goals. to maximize trade show cost-benefit payoffs, the small business owner should emphasize selling goals and make selling the firm's products and services the most important goal (lorimer, 1991;levinson, 1984). other selling goals should include identifying key prospects within the firm's target market, gaining access to decision makers, disseminaung information, introducing new products and servicing current accounts. non-selling goals often focus on enhancing the firm's image, collecting competitor data and evaluating new products (browning & adams, 1988). clearly, the goals for trade show activities must reinforce the firm's overall strategic goals. 18 figure 1. a general model for trade show planning, participation and follow-ttp small business strategic plan performance + sales + leads + image + intelligence markei'ing plan show planning at the show show follow-up ~ set objectives ~ set-up ~ measure results ~ select shows ~ confirm objectives ~ categorize leads ~ budgets ~ training ~ follow-up calls ~ research ~ prospecting ~ mailings ~ invitations ~ qualify leads ~ publish papers ~ publicity ~ collect data ~ track results ~ exhibit ~ presentations ~ booth materials ~ calculate prc ~ staffing ~ competitor data ~ follow-up materials translating the broad, openhanded goals into specific, measurable and focused objectives to be achieved within a specified time frame is essential in any planning process. these quantitied, period-specibic objectives provide the standards by which to judge the show's initial potential and its ultimate effectiveness (chapman, 1987; miller, 1992). it is difficult to provide typical targets since each objective is highly dependent on a firm's average order size, price per unit, purchase frequency, selling efficiency, etc. however, the objectives for a trade show must reinforce the firm's mission and long-term strategic plan. some examples of quantified selling objectives include: ~ sales dollars per exhibit hour, ~ the number of leads generated per exhibit hour, ~ dollar volume of sales in the 12 months following the show. table i illustrates how small business managers can use a worksheet to develop sales goals as described by chapman (1987). by using some trade show industry ratios, this worksheet enables a manager to estimate the expected firm sales that result from the trade show from only two key independent variables, the firm's average sale amount and the projected trade show attendance. 19 table i developing a sales objectives an example and worhsheer total number of auendees (a) 6000 total interested attendees (b) 960 decision makers (c) 480 total contacts (d) 640 contacts converted to leads (e) 128 leads converted to sales (f) 64 average sale: (g) $ 1.000 sales objective ($ 13)00average sale multiplied by 64) (h) $ 6,400 5', table developed from an example by tim deaton, third wave technologies, inc. huntsville, al worhsheer for developing sales goals projected number of total attendees (a) interested attendees (b) (total attendees from line (a) x .16) decision makers (c) gnterested attendees from line (b) x .50) total contacts (add i/3 for waste from unsuccessful contacts) gine (c)/3) + line(c) (d) totalleads (e) (total contacts (d) x .20 contact-to-lead ratio) total number of sales i (total leads from line (e) x .50 lead-to-sales ratio) average sale: (g) $ (average sate amount on line (g) x total sales from line (i) (h) $ to begin the estimation process, managers must first obtain the projected attendance from the unde show organizer, and enter this pmjected anendance on line (a) of the worksheel next, to estimate the portion of trade show attendees who will have an interest in a particular product (on line (b)), multiply the total number of attendees (line a) by the average level of interest (16%) for the trade show industry. in the next step, only about half of the interested attendees will have buying inliuence, so multiply the number interested on line (b) by 0.5. to determine the total number of contacts on line (d), managers must account for a waste factor in the total number of contacts at the booth by using another industry rule of thumb. of every 3 conversations with 20 prospects, one will not be useful; therefore, on line (d) managers should add one-third of line (c) to the total interested prospects shown on line (c) to take care of this waste factor. to reduce the total number of contacts to the number of sales leads on line (e), managers should multiply line (d) by the average contact-to-lead ratio of 20%. on line (i), the number of leads that will actually buy can be calculated by estimating that 50% of the leads will place an order. finally, to obtain a dollar objective for sales on line (h), multiply the estimated number of sales by the average sale amount for the small business. some may find it necessary to consider more than one average sale dollar amount. in this situation, high dollar sales, which may occur infrequently, should be added to smaller sales, which may constitute the majority of the firm's revenues. note that the ratios cited are exhibition industry averages; a given small business may need to use its own historical ratios or the more relevant and specific ratios from the industry in which it operates. to quantify the number of contacts necessary per hour to reach the stated objectives, managers should estimate the actual selling time that will be available during the show. the total available hours minus any time lost during slow periods, lunch, and special events should approximate the actual net selling time in hours. by dividing the sales objective by the net selling hours,managerscanprojectdaily leads and salesobjectives. (these should bereviewedaftereach show day and adjusted accordingly (chapman, 1987)). once show-level goals and objectives are set for sales and other outcomes, managers should select those trade shows where these goals and objectives are attainable. selecting the right trade show opportunity is a function of choosing the right type of trade show, analyzing the quality of the audience, and estimating the cost of exhibiting at the show. selecting the trade show small business managers must select a trade show that will maximize company exposure and gain access to prospective customers in the firm's target market segment. prior to the show, it is helpful to have knowledge of who will be attending the show, the type of show (industrial or consumer), how attendees will be invited, the type and amount of advenising prior to the show, the pmfile of other exhibitors and the position of the firm's booth in relation to traffic attracuons, competitors and distractions. the abundance of trade shows and conventions gives the small business owner a wide choice in selecting the best shows to attend. the annual tradeskow week darabook, published by tradeskow week, lists shows by name, geographic location, size, industrial classigication, number of attendees from the previous year, number of exhibits and square footage. new shows are listed separately. industry trade magazines and newsletters also list trade show opportunities. to narrow the number of shows to be considered, managers should understand the categories of shows. audience and exhibitor characteristics help segment the industry into two basic types: vertical and horizontal shows. vertical shows showcase exhibitors specializing in products or services for an individual market, job function or industry. horizontal shows have broader appeal in terms of both exhibitors and target audience. as shown in figure 2, further distinctions can be made on the basis of a matrix defined by target audience and range of exhibitors. the examples are drawn fmm the market for eiectmnic image processing. 21 figure 2. examples of each type of trade show target audience vertical horizontal vertical publishing association american newspaper electronic imaging (anpa) exhibitors special interest comdex group for graphics regional ieee shows (siggraph) horizontal iiuljgtmgtlhttnululgl shows appeal to sellers and buyers fmm dispamte industries, functions and markets such as a broad business interest show for a particular city (chapman, 1987). the annual comdex show is the largest consumer etectmnics show in the world, so it attracts the widest possible audience, range of exhibitors, and media coverage of any show. at the other extreme, ygrt~ii3382icgl shows attract attendees who are just as specialized as the sellers. for example, the annual american newspaper publishing association (anpa) show attracts publishing or printing supply specialists, and a rather narrow slice of the publishing market, the large daily and weekly newspapers and periodicals. pmducts exhibited are mature, pmven technologies that are production oriented. y~ilhhn~nl shows present specialized products to groups fiom diverse job functions or industries. the electronic imaging east show (eis) showcases hardware and software vendors who specialize in high-level, numerical processing for graphics. these vendors use this opportunity to reach a wide variety of market segments like geographic information systems, military applications, medical imaging and high quality printing and publishing. eis products are generally state-of-the-art based on emerging technologies for innovative customers who do not need a proven product for their application. enrlzttutglvv;~i shows present diverse pmducts to an individual market, job function or industry. siggraph attracts vendors in all types of computer graphics and customers from many industries, but the target customers all use the product for the same narrow job function, display, and output of graphics. these graphics specialists are attracted to the wide variety of products at siggraph. after determining the preferred type of show, managers must assess audience quality, which is consistently ranked as the most important criterion for selecting a trade show (browning k. adams, 1988:faria & dickinson, 1984; swandby, et al, 1990).definitions of audience quality differ, but the proportion of decision makers at the show is very im ponant (bonoma, 1983)as are other buying or demographic characteristics of the projected audience (young, 1986). managers can determine the quality of the audience by using indicators such as: 22 ~ audience interest factor (aif) the percentage of attendees expressing an interest in buying; ~ net buying influence (nbi) the percentage of attendees with final say in purchasing; ~ total buying plans intention to purchase one or more displayed products within 12 months; and ~ average traffic density the number of visitors per 100 square feet of exhibit space. densities of three or more are indicative of an active show (swandby, et al, 1990). beyond these quantitative measures of audience quality, the small business owner can, with a little homework, make a qualitative assessment of the quality of the target show's audience. prior show attendance and talks with past exhibitors can also provide a sense of audience quality. 'ibe show management company can usually provide useful qualitative and quantitative information regarding the previous year's attendees. reviewing the job titles and functions of the show visitors and the number of attendees also provides some information on audience quality. before deciding to attend a trade show, managers should also know the characteristics of the firm's target market, both current and potential customers. managers should determine and understand the similarities in customers'eeds, buying behavior or usage situation that place them in the target market. given an understanding of what customers want and why they buy, managers must then demogmphicafly describe the typical customer in the segment. for instance, for industrial buyers, what job titles or functions represent the typical buyer? having assessed the quality of the uade show audience and defined the firm's target market, managers must determine the fit between the trade show and the firm's strategy. each potential trade show can be classitied according to the objectives the small business considers most important. the analysis should match the opportunities presented at the show with the firm's selling and non-selling goals. do the auendees match the profile of the firm's target customer? having identified the target, managers should also do enough research to understand the potential decision-maker's buying behavior. does the target firm have a single decision-maker or use gmup buying? an awareness of how and when budgets are developed in the customer' business is also key to qualifying potential attendees as good prospects. the cost of exhibiting is another importantcriteria in choosing a trade show. ifan exhibiting finn does not earn significant revenue over the next year attributable to attendance, no reason exists to participate in the show again. booth costs typically represent only about 20 percent of the total outlay for the show (chapman, 1987). the trade show budget should include most, if not all, of the following items: space rental, display booth, transportation/set-up/tear-down, display maintenance, marketing materials, hospitality and personnel. table 2 illustrates a typical trade show budget. the small business owner may be able to share a booth (levinson, 1984) as well as personnel with another vendor of similar products to cut costs and permit more frequent auendance at trade shows and more extensive geographical coverage. 23 table 2 typica/ expense badger for a two-day, local trade show expense cost exhibit space $ 475.00 booth furnishings 75.00 adverusing 225.00 hhuketing language 300.00 giveaways 30.00 signage 100.00 staffing 250.00 miscellaneous 10.00 total $ 1,465.00 iiglg. table developed from an example by tim deaton, third wave technologies, inc. huntsville, al show preparation show preparation should begin three to five months before the show date. this insures that pre-show tasks, such as creating marketing materials, sending customer invitations, and finalizing arrangements with the promoter will be completed on time. a firm's pre-show schedule depends on the arrival of the exhibitor's kit from the show management and the number of employees that can be devoted to the preparation effort. incorporating publicity in pre-show activiues helps generate interest among the potential audience. according to the trade show bureau,45 percent of attendees are drawn to a company's exhibit because of its personal invitations, trade journal publicity, and advertising (miger, 1992). direct nmil pieces sent a few months in advance are typical vehicles for announcing attendance, promoting new product introductions or mentioning guest speaker or panelist participation (chapman, 1987; grimmer, 1990; mcgreevy, 1989). managers should help employees become familiar with the key media contacts who are expected to attend the exhibition. publishing an article in a trade magazine close to the show date can help increase name recognition at the show (mcgreevy, 1989). sending a news release to the local newspaper in the show city a few weeks beforehand may also prompt more prospects to stop at the booth (cossman, 1984; mcgreevy, 1989). a good method for encouraging clients and prospects to stop at the booth is to extend invitations with free tickets (provided by the show promoter). pre-show preparation includes physical exhibit considerations. the actual exhibit is in reality a three-dimensional advertisement; therefore, booth design is a direct reliection of the company (alexander, 1989). every exhibitor must develop an attractive, yet cost-ellicient, 24 design. the promoter usually provides some tables, chairs, and dmpery; but the exhibit staff m ust customize the booth to create a unique exhibit that will anract auention and communicate the company image (alexander, 1989;bmwning 8-. adams, 1988;grimmer, 1990;levinson, 1984; miller, 1992; swandby, et al.,1990). the directory of exhibit systems, published by exhibitor magazine, and the national tradeshow services directory, produced by tradeshow weekly list exhibit booth dealers and designers. most big-city yellow page directories also list "display designers and producers." creativity can often draw attention and lower cost by using the company's own materials and resources. a key to demonstrating creativity is the effective use of color to set the booth apart while minforcing the desired image. the 'header'anner should quickly convey the benefit to the customer of purchming the product (chapman, 1987;letwin, 1981). an ideal height for this message is above six feet to assure clear, long-distance visibility (aisle view, 1990). if demonstrations are planned, the space should be arranged to facilitate viewing by as many prospects as possible while avoiding traffic problems. initial planning for the first trade show may take as long as three months. table 3 presents a sample schedule using a three month time frame which can be adapted for longer or shorter schedules. the amount of follow-up work generated at the show is clearly dependent on the amount and quality of the work done before the show. table 3 sample trade show planning schedule and checklist three months before ~ set objectives ~ analyze audience ~ prepare budget ~ meet with key personnel to assign tasks ~ begin creation of marketing materials two months before ~ send in show program listing ~ make hotel and travel anangements ~ reserve hospitality suite ~ check on display and graphics ~ finalize direct mailing, invitations one month before ~ send customer invitations ~ mail orders for show service ~ forward press releases ~ ship booth to show ~ gather pertinent show documents, promotional materials pre-show operations ~ confum work orders ~ watch set-up ~ communicate goals to show staff iftttn. adapted from chapman, 1987, pp. 130-33 25 show participation after seuing up the exhibit, one of the first steps at the show is to confirm the selling and non-selling goals/objectives with the booth staff. since a small business generally uses company employees, gaining comm iunent to these goals is achievable. although not recommended, some firms use temporary employees for more routine show tasks such as assembly and dismantling of the booth (grimmer, 1990; o'conner, 1987). assessing goals and progress toward goal attn'nment on a nightly basis after the close of the day's show wifl make correcting a relatively simple problem, such as traffic flow, more manageable (evereu, 1989). tbe main purpose of most exhibitors at a trade show is to sell the finn's products. this means that materials and forms to take orders need to be at the exhibit, and that the booth staff must be dedicated to selling (levinson, 1984). since the average trade show encounter lasts only 13 minutes, the sales staff must be trained to take advantage of each opportunity (miller, 1992). success at a trade show hinges on the performance of the booth personnel clearly, good prospecting techniques are essential to posiuve trade show outcomes. rather than using unuained, inexperienced smiling faces to generate the largest number of contacts possible, managers should insist on generating qualitied leads. this will make the follow-up work after the show more efficient and effective. qualification of leads is feasible at the show since most small business owners help staff the exhibit. asking open-ended questions and recording as many requests and responses as possible helps qualify leads quickly and are essential prospecting techniques (browning dt adams, 1988; chapman, 1987). trained personnel are critically important for innovative products and for uninformed or unfamiliar contacts. the booth manager must also devise a cueing system among booth personnel that provides signals to facilitate visitor flow for maximum efficiency (evereu, 1989). correct body language, such as smiling, unfolded arms, standing at the perimeter, and erect posture help present an inviung image; while eating, drinking, and smoking in the booth should never be allowed (chapman, 1987; grimmer, 1990). calculating the cost per minute of exhibit time may help the staff realize how valuable time is and make it easier to rid the booth of the "waste" factor. a vendor should also use ancillary activiues at each trade show to maximize the value of the firm's attendance. presenting a speech or a paper, acting as a panelist, or offering short high-impact seminars are ways to increase the benefits of auending (ais/e view, 1990;o'conner, 1987)and to gain extra visibility for the firm by leveraging the available time. vendor personnel should also take advantage of every opportunity to gather competitor data, build possible partnerships with other vendors, find sales representatives, and solidify relationships with current customers. assessing impact to improve booth effectiveness, the small business manager should specify a method of assessing the impact of the booth and a control mechanism to modify the exhibition strategy. the "personal reach count" (prc) is a measurement process that can immediately appraise the impact of the booth if evaluated against daily objectives. this process starts by counting the number of people in the booth for one minute each hour for several hours and averaging. this figure is multiplied by 60 (minutes per hour) to approximate the average attendance per hour. similarly, the average length of stay (contact) can be determined by timing three prospects and calculating the average time spent in the booth. the prc is the product of the average contact 26 time per visitor and the average number of visitors per hour. if this number is lower than expected, more aggressive sales efforts may be the answer. other measures of impact include the overall number of people carrying the firm's giveaway and the number of visitors indicating they were referred to the booth by a press write-up or other pre-show promotions (aisle view, 1990). assemng impact several months after the show is also importanl how many orders could be attributed to participation in the show? how many leads were pursued? did the sales generated from the show justify the costs of the show? should the firm attend a panicular show again? what can be done better at the next show to increase the payoffs lrom show attendance? post-show activities for most small companies, the primary goal of attending an exhibition is generating sales, but results should be measured over the long-term against all objectives to get a clear picture of the success of the show. quick follow-up on leads is essential to maintain the momentum of the show. small businesses nearly always close more sales after the show through follow-up than at the show. ibe cost of closing a qualified lead from a trade show is about 70 percent less than closing atypical field sales encounter (lorimer, 1991).yet, according to the trade show bureau, as many as 83 percent of trade show exhibitors never follow up after a show closes. if no one contacts the leads generated at the show, then the firm should consider using the financial esources devoted to the trade show for other purposes. to begin the follow-up process, immediately after the show the smail business manager and sales staff must classify and prioritize all the leads according to goals and deadlines (grimmer, 1990). computerized lead tmcking is an option if the firm generates large numbers of leads and if the sales staff accepts the method. manual and automated systems rely on the lead card, a form used at the show to obtain pertinent personal information from prospects and categorize inquiries. one prioritization system places prospects in "a","b",and "c"categories to help sales staff focus their efforts on high return opportunities. "a"leads demand immediate attention while "b"leads are surveyed within two weeks to assess buying plans. "c"leads are called within a month to determine interest (ofstie, no date). courteous telephone calling by qualified sales personnel is probably the most effective and cost-efficient follow up possible. follow-up activities increase the company's chance of success and help it stand out from the other exhibitors. managers should create and implement their follow-up plan before the show even opens. non-selling post-show activities, such as general thank-you leuers and literature packets, can be prepmed before the show and sent out immediately after the show closes (miller, 1992). experts suggest that a personal thank-you leuer be sent to all visitors. since the show will create expectations in the qualitied lead's mind for quick response by the exhibitor, the small business owner must be prepared to respond quickly. in the best case, if the show was unusually successful, the fum may have to hire more sales or operaung personnel delaying the response to level the effect of the new business is not usually sound strategy, especially in seasonal markets like swimming pool construction. in the worst case, the small business owner, fearful of rapid gmwth and over extension, refuses to hire general labor and cannot keep up with the demand created by the follow-up selling effort and so loses the opportunities. 27 conclusions trade show auendance continued to grow during the 1980s and is projected to grow at an annual rate of three to four percent during the 1990s (wall street journal. 1991). as markets fragment and the exhibition industry matures, trade show participation is shifting away from the large annual national shows. second-tier cities and private exposition space for consumer shows are projected to be the fastest growing segment of the industry. the smaller, regional and industryfocused or market-speciec trade shows give small firms an opportunity to parade their products and thus focus their marketing statements on a more receptive audience (browning & adams, 1988;keenan, 1989).smag businesses may discover that regional shows provide a better vehicle for exhibiting their products and services, although the exposure gained from participation in national shows should not be overlooked. these trends may prove especially advantageous to the small business anxious to develop more cost effective delivery of key media contacts, new sales opportunities, and networking capabilities. trade shows can pay off handsomely for the small finn if a firm sets goals, plans appropriately, promotes creatively and pursues leads expediently. as part of the overall marketing strategy. a small business's trade show activity must be focused on clearly defined target markets; cerned out by knowledgeable, professional staff; and supponed by the other business pocesses and functions in order to efficiently capture new business. references aisle view. (1990,october 6). where marketing dollars go. alexander, j. (1989). don't just exhibit —do something! business marketing, 74(5), 76. bonoma, t. v. (1983). get more out of your trade shows. harvard business review, 6j(1), 75-83. browning, j.m.,& adams, r.j.(1988).trade shows: an effective promotional tool for the small industrial business. jourmd of small business management, 26(4), 31-37. chapman, e. a., jr. (1987). exhibit marketing: a survival guide for managers. new york: mcgraw-hill. cossman, e.j.(1984). how j made sj,000,000 in mail order. new york: simon &. schuster. evereu, m. (1989).fast on its feet: a small exhibitor steals the show. sales and marketing management, 141(7),88-91. feria, aj. & dickinson, j. r. (1984). trade show selection crueria (research report no. 23). trade show bureau. grimmer, g. (1990).busy booths. association management, april, 84-89. keenan, w., jr. (1989).to grab the spotlight, stage your own show. sales and marketing management, 141(2), 76. letwin, r. (1981).20 ways ro turn a so-so showinto a bonanza. trade show bureau publications. lorimer, j. (1991).trade shows focus on sales and an increasingly global field. business markenng, 76(8), 28. levinson, j. c. (1984). guerilla marketing: secrets for making big projitz from your small business. boston: houghton mifflin. mcgreevy, r. w.(1989).maximizing trade show exposure. public relarions journal, 45(8), 29-30. miller, s. (1992).on with the show. small business reports, 17(6), 46-49. o'onnor, b.(1987). trade shows: tips for success. administrative management, 48(7), 13. 28 ofstie, c. (no date). trade show lead systems: a fast trach to sales. trade show bureau publication. schwenk, c. r. & shrader, c. b. (1993).effects of formal suategic planning on financial performance of small firms: a meta-analysis. entrepreneurshi p theory dt practice, 17(3), 5344. swandby, r. k., cox, j. m. gt sequeria, j. k.(1990).trade shows poised for 1990s growth. busi ness marheting, 75(5), 46-52. trade show bureau. (1986). how trade shows continue to influence sales. (research report ¹28). wall street journal. (1991,february 28). a special backgmund report on uends in industry and finance, p. a l weinrauch, j. d. (1987).an exploratory look at low cost entrepreneurial marketing strategies: research challenges and opportunities, in g. b.roberts, h.j. lasher, & e. malicke, (eds.), proceedings of the united states associ anon of small business and entrepreneurshi p (pp. 130-137). marietta, ga: kennesaw state college. young, g. (1986). exhibit management practices. (research report no. 2010) trade show bureau. 29 si'zi tz'ay uganda entrepreneurs: why are they in business edward d. bewayo montclair state university abstract the role of entrepreneurship in economic development is well recognized in most western countries. the recognition of this role is increasingly becoming international as many east european and third world countries replace state capitalism withpee enterprise economic systems. this paper repons on a survey study done about the development and future prospects of entrepreneurship in uganda. based upon responses from 208 small business owners, the paper discusses what motivates uganda entrepreneurs, their risk taking willingness, and rhe involvement offamily members in the family business. the majority of uganda entrepreneurs cited monetary considerations as the main reason for going into business, which could be a reflection of uganda's current economic conditions. however, most of them would not exchange business ownership forjobs even ifjobs became available and paid as well as their businesses. this was due to the independence uganda entrepreneurs enjoy as business owners. uganda entrepreneurs become entrepreneurs for monetary reasons but remain entrepreneurs for the freedom entrepreneurship accords them. introduction the entrepreneurship spirit is catching on internationally as market-oriented economies replace planned economies, as individual/corporate capitalism replaces state capitalism, and as democracy replaces dictatorship. in countries such as the united states, small business and entrepreneurship make significant contributions to the economy. small businesses (businesses with up to one hundred employees) employ close to 50% of the american workforce and produce over 40% of the gross national product (gnp). and since they create most of the new jobs, they are a key tool for getting the economy out of rcccssions. in a real sense, small busmess and entrepreneurship make up the centerpiece of the amctican free enterprise economic system. many policymakers in developing countries, especially with the collapse of central planning ideologies and increasingly at the urging of international bodies such as the international monetary fund (via the sometimes controversial structural adjustment policies), are adopting free enterprise mechanisms. one of these mechanisms, small business/entrepreneurship, is looked at with panicular enthusiasm and it is frequently thought or taken for granted that entrepreneurships "will lead the way to new economic development (giamartino, 1991). malcolm harper has summarized the reasons why entrepreneurship is expected to play an even bigger role in developing countries than it plays in developed countries (harper, 1991). the following are some of the reasons that harper suggests. first, during colonial times (and many countries, especially in africa, became independent as recendy as the 1980s) government was responsible for all economic activities. this colonial legacy must be broken and emrepreneurship is the way to do it. second, another legacy of 67 colonialism are state enterprises, a good example of which are the ubiquitous marketing boards. these state enterprises are failing badly. they leave major gaps in goods, services, and jobs. entrepreneurs are ncedcd to continue the operations. third, colonial governments and the multinational corporations originating from colonial mother countries tended to favor capital intensive technologies amidst a shortage of capital and an abundance of labor. what is needed are local entrepreneurs to start new enterprises using labor intensive technologies. fourth. some sections of the population in developing countries were deprived and, in some instances, continue to be deprived of access to resources. such deprivation prevents these populations from participation in national (political and economic) developmenn starting their own businesses is the only opuon available to them. this nation-building role of cnuepreneurship, probably a secondary one in most developed countries, is a primary one in most new countries where entire tribal or religious groups do not have as yet a good sense of belonging to "their" country. another factor that makes entreprcneurship critical, especially in countries such as uganda, the focus of this paper, are the civil wars that have devastated the economies left behind by the colonial regimes. in the case of uganda, the wars all but destroyed the state enterprises. they did the same to peasant farming, thus,'orcing a population influx into urban areas. nearly unique to uganda, the civil wars also forced an exodus of the asian community from uganda. they had been. since early in the colonial period, the backbone of uganda's trading sector. when peace finally or temporarily returns, the gaps left behind must be filled. new entrepreneurs must set up enterprises to replace those destroyed by the wars and those that were abandoned by the asians. this paper investigates the form entrepreneurship in uganda is taking and its prospects in the future. because entrepreneurship develops within its surrounding environment (peterson, 1988), we should expect certain unique features in relation to uganda's entrepreneurship. methods between the summer of 1990 and the spring of 1991 a questionnaire was distributed to about 700 ugandan entrepreneurs in and around kampala, the capital, and masaka, a town 80 miles southwest of kampala. the sample may be described as a convenience sample, noi selected randomly at all. business owners had to be approached in person at their places of business/work and requested to volunteer to complete the quesuonnaire. the completed qucstionnaircs also had to be picked up in person by the author or his assistants. many of thc cnucpreneurs who had volunteered to complete the questionnaire did not do so. however, by june 1992, 208 usable, completed questionnaires had been received, a response rate of 30%. the questions on the questionnaire fell into the categories of demographic, motivation, risk-taking, family involvement, ownership, financing, location/facilities, and sales growth strategies. in this paper, the discussion is restricted to demographic factors, motivauon, risk-taking, and family involvement. table i provides information about the sample entrepreneurs and their businesses. 68 table 1 demographic features of the surveyed ugandan entrepreneurs and their businesses a. types of respondents'. period in existence businesses t~s ~n. ~9'ears no. retail 64 31 under 3 45 22 wholesale 20 10 over 3 to 5 37 18 wholesale and over 5 to 7 40 19 retail 25 12 over 7 to 9 24 12 construction 13 6 over 9 to ll 22 11 manufacturing 40 19 over 11 to 16 23 11 tfanspoftauon 8 4 over 16 to 21 6 3 others 38 18 over 21 9 4 not given 2 1 total 208 100 total 208 101* c. age of sample entrepreneurs d. education of sample entrepreneurs years no. level no. 9o under 30 35 17 p7 (7 yrs.) 13 6 30-40 68 33 s2 (9 yrs.) 12 6 40-50 51 25 s4 (11 yrs.) 72 35 50-60 29 14 s6 (13 yrs.) 43 21 over 60 7 3 some university 1 &1 not given 18 9 university degree 48 23 not given** 19 9 total 208 101 total 208 100 may not be equal to 100 due to rounding in this and other tables. probably 0 to 6 years of education. 69 findings what kind of people go into business and why? it is assumed that unless we know the motives of those people who venture into small business, it will be difficult to promote entrepreneurship (carland, hoy and carland, 1988). several questions on the questionnaire solicited reasons why the respondents were operating their own businesses. all questions were open-ended because there can be a large number of reasons why people go into business for themselves (cooper, 1990). the responses had to be content-analyzed for categorization. as can be seen in table 2a, a substantial majority (59%) of the uganda entrepreneurs who were surveyed were in business for making a living more than for anything else. this message was expressed clearly, although in a variety of ways. some of the responses on these lines were: "to make money," to cain money," "to supplement my ofbce income," "that's only where i can get enough income for my development," "there is good money in business," "to earn a living," and "to become wealthy." fourteen of the 208 respondents (7%) indicated to be their own boss (independent) as the reason why they were in business for themselves. this was a significantly smaller percentage than is commonly found by researchers in other places (shapero, 1985). it could be a reflection of uganda's current circumstances as we point out later. however, those who pui down "to be my own boss" as the reason why they were in business for themselves expressed this idea in the following ways, among others: "because i want to be independent," "self-reliant," and "i don't want to be an employee of anybody." table 2 the motivation of uganda entrepreneurs a. why are you in business b. why don't you work i'or for yoursell? . government or somebody else? reasons no. reasons no. independence 14 7 no freedom 32 15 make a livmg 123 59 low pay 44 21 others 60 29 others 107 51 no answer 11 5 no answer 25 12 total 208 100 total 208 99 sixty (29%) of the respondents gave a large assortment of reasons why they were in business for themselves which could not be categorized into any broad, concrete ideas. the following are a sampling of such reasons: "to exploit my skill," "to save my family's face," "to serve 70 humanity," "love of architecture," "i didn't go to school," and "because my father was in business." in another question where respondents were asked why they did not work for government or someone else, monetary concerns (pay was too low) were cited 21% of the time, while lack of freedom was cited 15% of the time. but there were 107 (51%) responses that were so varied that they could not be categorized clearly. and 25 (12%) did not respond to this question. it appears that there are many more reasons why uganda entrepreneurs aren', working for government or someone else than why they are in business for themselves. however, monetary concerns seemed to be more dominant than self-control concerns. interestingly, the common belief that autonomy, freedom, and independence are available more for the entrepreneur than for the employee was very widely held. when asked about the ways in which owning one's business was better than working for someone else (see table 3a), an entire 61% (127 respondents) cited independence. better pay was cited by only 20%, less than half of the number that cited independence. this might mean that uganda entrepreneurs are more sure about the self-control in the entrepreneurial sector than about its superior pay. nevertheless, it is financial rewards (making a living) that get emphasized when uganda entrepreneurs are asked why they are working for themselves. it is as if they are saying that while independence is available more in the self-employment arena than in being employed by someone else, making a living (economic survival) is more important and for now, at least, given uganda's circumstances, self-employment provides a firmer assurance for survival. table 3 why uganda entrepreneurs remain entrepreneurs a. in which ways is owning a b. would you consider a job business better than being which pays the same as your an employee? current business? reasons no. no. independence 127 61 yes 48 23 beuer pay 42 20 no 145 70 others 37 18 no answer 15 7 no answer 2 i total 208 100 total 208 100 what will happen if uganda's circumstances (economic and political) continue to improve, if government and corporate jobs become plentiful? how will entrepreneurship be affected? to explore this area respondents were asked, "would you consider a job which 71 pays the same as your currcm business?" as shown in table 3b, only 48 (23%) respondents would consider a job of similar monetary rewards as their current business. an entire 70% (145 respondems) would not consider such a job. the reluctance to consider a job may have to do with the extras entrepreneurship gives besides income. as we just stated, one such extra well known to the uganda entrepreneur is independence of action. they may even feel, correctly or incorrecdy, that enuepreneurship offers more job security. probably a secure government or corporate job in current uganda is something that is extremely unimaginable. probably uganda's current enu epreneurs will not and cannot be expected to abandon their businesses and seek jobs even when they exist and their remuneration is reasonable. but what about tomorrow's would-be entrepreneur? if monetary rewards continue to be emphasized (and there is no reason to feel that this will be the case), then jobs which pay well will lure would-be entrepreneurs away from entrepreneurship. however, tomorrow's would-be entrepreneurs are today's children, especially the children of uganda's current enu'eprencurs. the involvement of children in the family business has a lot to do with whether the children take up entrepreneurship when they grow up. in another section we present the findings related to family involvement. risk taking going into business for oneself is always a risky decision because one can never totally eliminate thc possibility of failure. several questions on the questionnaire centered around failure. table 4 summarizes respondents'pinions about failure. although only 53 (26%) respondents had ever experienced own business failure (table 4a), a much larger number of them, 157 (76%), knew somebody whose business had failed in the past (table 4b). so, business failure is not exactly a strange, vague idea, but a real possibility for those who venture out on their own in the business world in ugan&la and anywhere. table 4 awareness of risk of failure a. have you ever had a b. do you know anybody whose business which failed? business failed? ~n. ~%%u ~n. yes 53 26 yes 157 76 no 145 70 no 36 17 no answer 10 5 no answer 15 7 total 208 101 total 208 100 respondents were, therefore, asked what they would do if their businesses failed. as seen in table sa "try again" was the response of the majority (51%). this is consistent with 72 the findings we have already stated. only 38 (18%) respondents indicated that they would look for jobs if their businesses failed. the bias for trying again after a business failure was revealed again in responses to two other more focused questions. the question, "if your business failed, would you look for a job?" resulted in more negative responses (47%) than positive responses (41%). on the other hand, the question, "if your business failed, would you try again?" resulted in an overwhelming affirmation (78%), with only 12% answering negatively (table sb and c). table 5 response to risk of failure a. what would you do if your business failed? no. look for job 38 18 try again 105 51 cultivate (peasant farming) 22 11 other possibilities 24 12 no answer 19 9 total 208 101 b. if your business failed, c. if your business failed, would you look for a job? would you try again? no. no. yes 85 41 yes 163 78 no 98 47 no 25 12 no answer 25 12 no answer 20 10 total 208 100 total 208 100 cross tabulations showed that those who had ever failed were much more (71%) prepared to try again than those who had never failed (50%). it was also found, through cross tabulations, that 80% of those who would prefer to look for jobs if their businesses failed were still open to trying another business again. on the other hand, only 34% of those who would prefer trying again if their current businesses failed were still open to looking for a job. these findings are very consistent with those of other researchers. albert shapero, for example, basing himself on many studies on entrepreneurs in many countries, developed and underdeveloped, states: "when entrepreneurs are asked what they would do if they lost their companies, they almost always answer, start another company'" (shapero, 1985). 73 family involvement "entrepreneurs beget entrepreneurs" is probably as good a saying as anyone can find in social phenomena. that entrepreneurs tend to come from families with entrepreneurial parents has been validated in study after study (hisrich, 1989). in this study, several respondents gave "growing up around a family business" as the reason why they are in business i'or themselves. growing up around a family business implies that family members involve themselves in the affairs of the family business. this is how a family business promotes entrepreneurship. several questions on the questionnaire solicited information about the involvement of family members in the family business. table 6 shows the responses to the questions. as can bc scen in table 6a, 104 (50%) of the surveyed entrepreneurs came from families with cnu'cprencurial parens. if wc include respondents who had other relatives (other than parents) who owned businesses, then thc number of respondents with entrepreneurial family backgrounds rises to 123 (59%), the number of respondents with entrepreneurial backgrounds is very high given the very low percentage of people who own businesses in the total population of uganda. such a number can only be explained by the tendency of entrepreneurs bcgcuing entrepreneurs. twenty-four of the surveyed cnucprcneurs got their businesses from their parents (table 6b). another 16 respondents got their businesses from other relatives (table 7b). thus, 40 (19%) respondents got their businesses from parents and other relatives. they are still operating the businesses. these numbers arc much higher than they would be in the united states where many parents sell their businesses when they retire and where offsprings who inherit businesses mostly prefer to sell them. all this is possible in thc united states because there is an active market for existing small businesses. there does not appear to bc a market for existing small businesses in uganda. none of the respondents had bought his/hcr business from anybody. if indeed there is no market for existing businesses in uganda, and it needs to be invcstigatcd, it is not a good sign i'or the advancement of cnucprcncurship. for one thing, thc "buying existing business" route to entrepreneurship remains unavailable. in the u.s., 2g% of business owners bought their businesses (cooper, 1986). second, a parent who doesn't want to give/gift his/her business to a relative will probably still have to, unless thc option of abandoning thc business is considered preferable. morcovcr, realizing his/hcr dilemma, he/shc may turn the business into a cash cow to be milked until abandoned. 74 table 6 family involvement in parents'usiness a. was your father or mother b. did you get your business engaged in business? from your parent(s)? no. no. yes 104 50 yes 24 12 no 96 46 no 150 72 no answer 8 4 no answer 34 16 total 208 100 total 208 100 c. did you work in your parents'usiness? no. yes 59 28 no 72 35 no answer 77 37 total 208 100 table 7 family involvement in other relatives'usiness a. did your other relatives b. did you get your business (not parents) own a from other relatives? business? no. no. 9b yes 156 75 yes 16 8 no 44 22 no 141 68 no answer 8 4 no answer 51 25 total 208 101 total 208 101 c. did you work in other relatives'usiness? no. yes 40 19 no 123 59 no answer 45 22 total 208 100 75 working in the family business is a major way to prepare oneself to take over the family business or to get into some other kind of business (gundry, 1993). as can be seen from table 6c, 59 respondents (28%) worked in their parents'usinesses. another 40 respondents (19%) worked in other relatives'usinesses (table 7c). cross tabulations showed that respondents who had worked in their parents'usinesses were not only likely to go into business themselves, but were also more likely to go into similar lines of business as their parents. twenty-nine percent (29%) of the 104 respondents whose parents had businesses went into the same lines of business as their parents. however, if the respondents had worked in their parents'usinesses, the number of the respondents who went into similar lines of business as their parents rose to 46%. summary and conclusions when asked why they are in business for themselves and why they are not working for government or somebody else, most uganda small business owners emphasized "making a living." they are beuer able to make a living as entrepreneurs than as employees. while making a decent living is an important goal for entrepreneurs all over the world, independence of action accorded by being one's own boss has been routinely found to be the leading motivation for most entrepreneurs. the uganda entrepreneurs'mphasis on monetary concerns may be merely a reflection of uganda's current economic situation. after 20 years of civil wars, paid employment is not only scarce, but it also doesn't pay enough to just survive. an unascertainable number ol'he surveyed, entrepreneurs were also doubling as government civil servants. entrepreneurship was intended to supplement their low paying jobs. probably the vast majority of uganda small business owners are not in business to become millionaires (very wealthy), but just to make a living. however, while making a living as entrepreneurs, they also like the independence owning a business allows them. the vast majority of the surveyed uganda enuepreneurs are very much aware that employees do not gcnerafly have this kind of independence. indeed, when asked whether they would cxchangc their businesses for jobs that pay similarly as their businesses, the vast majority of them answered with a resounding no. as elsewhere, small businesses in uganda fail in vast numbers. twenty-six percent (26%) of the surveyed entreprcncurs had ever experienced a failed business. and 76% knew of a person whose business had failed. however, as true entrepreneurs, they aren't daunted by this great potential for failure. if their businesses failed, the majority of the surveyed entrepreneurs will more readily try another business than seek jobs. one hundred and four (50%) of the 208 surveyed uganda small business owners came from families where parents owned businesses. the tendency that entrepreneurs come from entrepreneurial family backgrounds is, therefore, valid for uganda too. twenty-four (23%) of the 104 business owners whose parents had businesses actually got their businesses from their parems. this relatively high percenmge reflects two possibilities. firsh it may rcflcct parents who encourage their children to be involved in the family business, thus, making thc children learn the "ropes." second, it may also reflect parents who pass their 76 businesses to their children partly because they cannot sell the businesses and children who run the businesses they inherit partly because they cannot sell those businesses. the first possibility mentioned above is an unqualified positive sign for the future of entrepreneurship in uganda. the second possibility is potentially adverse to entrepreneurship. without selling businesses, potential entrepreneurs cannot buy them. buying existing businesses is one of the popular routes people take to become entrepreneurs. without selling and buying businesses, some people may never become entrepreneurs. also, without the possibility of selling your business, it may not be attractive enough to make long-term investments in that business since you may never be around to recoup the financial outlays. a worthwhile research topic on uganda entrepreneurship is to assess the existence of the market for small businesses. if indeed no market exists, what are the reasons for this? it may turn out that many of these reasons have to do with culture. accordingly, uganda's model of entrepreneurship and its development may contain unique features, not selling family businesses being one of them. in passing, the limitations of this study should be pointed out. the sample used in the study was biased in two major ways. first, it was biased towards business owners who were prepared to be open to a nosy outsider, even though his assistants were always local people. there is no way of telling whether the business owners who volunteered to complete the questionnaire were those who ran their businesses more efficiently and/or those who considered it to be politically safe to be open. in many areas access to business owners was through the rcs (resistance councils), a pseudo local government system. some rcs were adamantly against the study, others reluctantly agreed to it, and still others gave it their support. another bias in the study is that it concentrates on urban areas and even here, on only two urban centers-kampala and masaka. it is inevitable that the picture painted in this paper about uganda envepreneurship is far brighter than what it could possibly be for the entire country. for example, the long list of obstacles to entrepreneurship in uganda, which salvatore olwoc, the uganda small business researcher and consultant, listed in his book "how to start a small business in uganda" (olwoc, circa 1988), does not squarely and entirely apply to entrepreneurship in kampala and possibly masaka. 77 references carland, james, hoy, frank and carland, joann. (1988). ewho is an entrepreneur? is a question worth asking." american journal of small business, 12, 4, 33-39. cooper, arnold. (1986). "entrepreneurship and paths to business ownership." ~strate ic mmm i 11. 7 (i .-9 5). 55-65. cooper, arnold. (1990). "new businesses in america." nfib foundation. giamartino, gary. (1991). "will small business be the answer for developing economies?" journal of small business mana ement (jsbm), 29, i, 91. also see carland, james and carland, joann. (1993). "entrepreneurship: an economic phoenix." pro e din s of e 8th annual national confen nce of usasbe, 24-31. gundry, lisa and harold welsch. (1993). "differences in familial influence among women-owned busincsscs." proceedin s f 8th annual national conferenc of usasbe, 103-110. ee .ml i . (1991). "e m d ip ' ll «." ~h.hi ~)h 6p 1*.15,4,7-11. hisrich, robert. (1989). entre reneurshi startin dcvelo in and mana in a new entcrn)rise. homewood, il: irwin, pp. 54-57. olwoc, salvatore y. (n.d.). "how to start a small business in uganda." the semadec group, management training and advisory center, kampala, uganda. pctcrson, rein. (1988). "understanding and encouraging entrepreneurship internationally." jsbm, 26, 2, 1-7. shapcro, alben. (1985). "why entrepreneurship? a worldwiide perspective." jsbm, 23, 3, 1-5. ibid., p. 3. 78 influencing government: what do small firms do? dr. ronald g. cook rider university abstract this study examined the political strategies of successful small firms. the research revealed that first, these small firms follow prerequisite steps to enhance the receptivityof theomessages by policymakers. the firms then utilize, with varying degrees of frequency, the following eight political strategies: feller writing, hiring consultants, making personal contact with government officials (testimony at public hearings, and meetings/phone calls with policy makers), participation in an association or chamber.forming a coalition, conductingpub/icity events (press conferences or media interviews), and being personally involved in the elective/electoral process (either running for office or playing a significant role in another person's campaign). the advantages/disadvantages of each strategy are discussed, and suggestions for future research are offered. introduction it is well recognized that small business is the most prevalent form of business organization in society today. data from the us commerce department, the us small business administration and private studies all indicate that small firms constitute over 95 percent of the total number of companies(us department of commerce, 1990; dennis, 1993; executive office of the president, 1993). however, what may not be as apparent is the fact that these companies also employ almost 54 percent of the workforce, and represent over 53 percent of total us sales (executive office of the president, 1993). overall, small firms are a vital part of a dynamic economy because these firms are often credited with being more flexible, agile, and innovative than larger companies. given the small firms' prevalence, government's impact on small business can have substantial effects. this occurs because many laws and regulations, particularly in areas like taxation or workplace safety, apply equally to all firms, regardless of size. therefore, even though the magnitude of government's impact on an individual small company can be limited, collectively, it is not (thompson, wartick, & smith, 1991). however, despite the fact that small firms represent a large segment of the economy and are affected by government, the political activities of these companies are relatively unknown (thompson et al., 1991 ). there are several reasons for this, including: 1. a lack of adequate information about these firms, partly because many of them are privately owned and, therefore, their records are not available to the public; 49 2. access to these firms is often more difficult than their larger counterparts, as there are fewer people to approach for research entree; and, 3. the idea that small firms' public policy activities are merely the result of obeying the law, avoiding irresponsible acts, and adjusting to market forces (spencer& heinze, 1973; van auken & ireland, 1982; blumberg, 1975). with the growth of government's role in the economy, and government regulating areas that were once under the realm of managerial autonomy (yoffie & bergenstein, 1985), companies have looked for assistance in adapting to a new environment. firms increasingly found that they needed to become involved in the public policy process if they were to gain influence with policymakers whose decisions affected their firms. as irving shapiro, former ceo of dupont and former chairman of the business roundtable, put it, " ... you have zero chance of scoring points unless you get into the game," (1980, p. 30). researchers have examined how business has joined in "the game," often by suggesting a framework that firms could use for strategically managing public policy issues (buchholz, 1988), describing a life cycle model that allowed a firm to obtain the maximum benefit possible from political strategies(ullman, 1985), or defining business exposure and top management philosophy as keys to managing a corporate social environment (miles, 1987). because these and many of the other models of government and business interactions have generally been developed from large firms, they often have requirements that are beyond the resources of the small company. even in a study that suggests when small firms should become involved in the public policy process, and allowed for resource limitations (cook & barry, 1993), it was unclear as to what these firms do once they have made an involvement decision therefore, this research examined how small firms responded to rules/regulations, or to public policy issues, and its purpose was to determine what these firms did. in the subsequent sections, the methods, the findings, and suggestions for future research are described. methods because much of the phenomenon under study, small firm political strategy, has not been explored, this study utilized a qualitative, grounded theory approach (glaser & strauss, 1967). this approach was important to the research design because of the complexity of the relations hip between the small firm and government, and because of its ability to uncover valuable insights into the processes and strategies used by small firms in their public policy decisions. as the field is in an exploratory stage (thompson et al., 1991 ), formal hypotheses were not developed. it has been suggested by wolcott(l 992, p. i 9) that there are only three data-gatherirg techniques in qualitative study: watching, asking, and reviewing. in this study, all three techniques were used as information was collected through indepth interviews, participant observation, and innovative methods (taylor & bogdan, 1984). lndepth interviews utilized an interview guide approach (patton, i 990) because it provided consistency regarding the questions without the rigidity of a stand~rdized interview. innovative methods included 50 historical data from a variety of sources, including public records, internal documents, and correspondence. until now, the term "small business" has been used as though a commonly shared definition existed. in actuality, multiple definitions exist, requiring a more detailed explanation of how the term was used. for example, the us small business administration defines a small business as "independently owned and operated and not dominant in its field of operations" (hodgetts & kuratko, 1995, p. 6). other authors argue that different criteria, like relative size within the industry or the firm's scope of operations, offer a better definition of a small business (anderson & dunkel berg, 1993). because the intent of this research was to examine a broad array of small business types (given its exploratory nature), the numerically based guideline used by the us department of commerce was adopted, which defines a small firm as having up to 500 employees. this definition was then modified so a firm must have at least 15 employees to be included in the study. the 15 employee floor was chosen to reflect a size that would help ensure an internal division of authority had occurred-ifthe ceo no longer made all internal managerial decisions, she or he would be more likely to find the time necessary to be involved in public policy interactions. further, in each firm, the ceo was the only person who handled these interactions. the initial bounding of the territory (miles & huberman, 1994) focused on small firms in the central new york area who were active in the public policy process. sampling of firms was purposeful and intensive ratherthan random (miles & huberman, 1994, p. 27), and firms were chosen with the assistanceoflocal trade associations. the trade associations helped identify "information rich cases" (patton, 1990, p. 169) -small business ce o's who had dealt with a variety of public policy issues over time. at the end of each interview, respondents were asked to suggest additional companies which were small, active in the public policy process, and which might offer a complementary perspective on involvement. later, the shift was to "deviant case" and "maximum variation" sampling (patton, 1990, pp. 170-72), where an emphasis was placed on finding firms that had utilized different methods. or experienced striking successes or failures in their attempts to influence public policy. firm selections were also made on the basis of the evolving theoretical framework, using grounded theory sampling logic (glaser& strauss, 1967), and continued until theoretical saturation was reached (glaser & strauss, 1967, pp. 61-62, 111-12); i.e., new interviews failed to appreciably alter the findings. specifically, 31 indepth interviews were conducted. five were with chamber and association presidents while 26 were with 23 firms. all interviewees were the ceo of their company and the interviews lasted between one and two hours. table one describes the firms headed by the interviewed ceos: ten participant observations involving over 50 different executives were also held, in which some executives were observed multiple times. these observations collaborated the interviews and occurred at two trade associaticns' government affairs meetings. by attending these meetings, it was possible to observe business executives' interactions. with politicians, who were often invited to appear before the committees and, in general, to observe the 51 dynamics of joint public policy decision-making among small firms. observation sessions lasted approximately 90 minutes, including pre and post activities. the examinationofover200 public documents, position papers, internal memos and newspaper clippings completed the data collection. the data collection process ceased when it became apparent that no additional insights were being uncovered. the period of data collection ran from 1991 through 1993. table 1 firm characteristics number of number of industry number of firms employees interviews printing 2 47/34 4 machinery mfg 2 21/55 2 equipment mfg 2 18/95 2 conglomerate 1 440 2 banking i 80 food processing 2 380/37 2 fiber optics 25 decorative mfg 1 105 i fastener/tools mfg 2 63150 2 plastic mfg 225 construction 2 44/78 2 rubber i 56 retail 2 260/83 2 restaurant 2 21/34 2 steel i 185 data analysis to help simplify the analytical process, detailed abstracts of each transcript were made. the transcripts included headings to summarize each topic and heading codes to tag themes and interesting findings. as the transcripts were reduced and coded, the focus was on identifying specific strategies that were pursued by small firms. this led to several related questions, including: "which level of government is most important to the small firm?'', "which strategies are pursued most often?", "what are the strengths and weaknesses of your choices?" and "how do you improve your chance(s) of success?" two broad levels of codes were developed: received and emergent. received codes (strauss & corbin, 1990, p. 50) were derived from the review of the literature and 52 categorization schemes used by interviewees. they were primarily descriptive (miles & huberman, 1994, p. 57), and could be considered start codes. they tended to have a structural character, and included characteristics like the level of government being influenced, age of the issue being addressed, firm demographics, issue results, etc .. the initial pattern codes emerging from the data (see figure i) were provided by the informants (miles & huberman, 1994, p. 57; van maanen, 1979, p. 540). these informantbased, "in vivo" codes (strauss & corbin, 1990, p. 69) reflected the frequency of thought provoking phenomena in the data. repetitive occurrences of informant codes resulted in them being assimilated into analyticalcodes developed by the researcher (gioia, thomas, clark, & chittipeddi., 1994). these were then tested against other transcripts for their ability to meaningfully group data. the coded data was assimilated into second order concepts (van maanen, 1979), i.e., the specific strategies described below. these factors were then grouped into the overarching dimensions (gioia et al., 1994) of strategy utilization. it has been noted that all research faces bias from inevitable human judgments about research design and interpretation (meyer & tucker, 1993). in qualitative research, a key consideration is how to ensure that any bias will not overly influence a study's conclusion. one method utilized in this study was discounting the data (deutscher, 1973). this technique involves examining any data with skepticism until corroborating evidence is found. interview and observation transcripts were compared to each other, and to memos and official records, to enhance data accuracy. triangulation (i.e., using multiple methods to develop data regarding the same phenomenon; jick, 1979) among the data collection techniques helped ensure reasonable confidence in the results. in addition, three faculty colleagues, all having extensivequalitativeresearchexperience,examined the fieldnotes to provide cross checks on potential themes and coding schemes. there were no appreciable differences in data pattern identification between the researcher and these colleagues. the exploratory nature of the study revealed a comprehensive list of political strategie's. firms depicted their interactions with government regarding rules/regulations or public policy issues and did so over a lengthy time span (firms were not restricted to a specific interaction window). the overarching dimensions (see figure i) reflected the utilization of these strategies and emerged from the data as an organizing tool to group the strategies, which ranged from the relatively routine to the rarely pursued. findings from the first interview to the last, it was apparent that small business ceos considered the public policy arena confusing and frustrating. firms were attempting to make sense of a situation where they had little guidance and often answered queries with a simple "i don't know." probing helped elicit more information about how small firms dealt with government. ceos would first choose an issue to become involved with because the issue was perceived by the ceos as strategio-a process depicted as examining the impact, timing, and role of the players (cook & barry, 1993). this perception was influenced by the ceo's values and cognitive base (hambrick & mason, 1984 ). the strategic nature of an issue, or its urgency (dutton & duncan, 1987), captured the importance of an issue to a ceo and, therefore, "the 53 greaterthe urgency ofa strategic issue, the greaterthe perceived need to change ... " (dutton & duncan, 1987, p. 283). once the decision had been reached to pursue involvement, ceos decided what actions to take, i.e., the political strategies. however, in determining this process, political involvement went beyond strategic choices and into improving the receptivity of the messages. regardless of the strategies chosen or the particular order in which they were pursued, small firms were adamant about first framing an issue utilizing two guiding principles. these principles, called prerequisitesto political strategies, encompassed a number of activities which were classified into the following: i) political involvement must be a high priority for ceos; and, 2) the issue must be presented in current perspectives. prerequisites to political strategies political involvement must be a high priorilv for ceos because of the size of the firms studied, the ceo was the only person who conducted political activities for the firm. if the ceo does not consider political action a high priority, when compared to other activities that might occupy the ce o's time, then the effectiveness of the political involvement will be lessened. one of the reasons cited by ceos for placing a low priority on political activity was the time needed to be even routinely active. small firms often do not have time for activities that do not bring immediate, tangible results (thoryn, 1982). the interviewees suggested that a successful outcome required political involvement to be a high priority for ceos, because ceo involvement is recognized as one measure of a firm's seriousness and commitment to an issue (weinberg, 1988): groups should be forcing their members to become involved. the job description of the ceo should include a high level of political involvement. because i don't think that the severity of politics has reached the stage wh~re it gathers that share of attention of the ceo. he or she has other things on their agenda, on the platterand they are saying, "politics, uh, okay, i want to get involved so i am going to send so and so to do this." yoffie ( 1988) offered a similar conclusion when he researched the semiconductor industry. yoffie found that visible, persuasive, and accessible ceos were a key to that industry's success in its political activities. the issue must be presented in current perspectives firms must package their concerns within current perspectives and trends and, therefore, the firm needs to recognize the parameters of policymakers' interests. what are the emerging issues in society? does the small firm's position reflect those concerns? for example, when economic times are slow, firms can argue that legislation might cost jobs or make them less competitive. when other trends emerge, like concerns over environment or 54 family, a company needs to link its message to those trends. two interviewees described this process as: business has done a terrible job of presenting itself in a politically smart way. and when we tum that around, present our positions in a better way, we win. for example, when the business community shows govemmentthat mandated benefits are going to rule out flex benefits and rule out part time employment, which are extremely beneficial to senior citizens and moms, ... they win. it should come from the leadership, business leaders, associations, chambers ... you have to frame the issues correctly, assess the trends and package your message,just like you would hire an ad agency to market your product. firms need to understand and adjust to the politician's concerns in order to operate effectively in the political environment. as weinberg (1988) noted, "the rhetoric style and context of the story are critical to the effectiveness of your argument" (p. 80). these framing activities helped small firms when they pursued a political strategy by attempting to make their audience more receptive to their ideas. by doing so, ceos believed that the strategies pursued would have a greater impact due to a firm's careful preparation. political strategies of small firms when small firm ceos decide to become involved in a public policy issue, what do they do? specifically, the ceos must choose political strategies that they believe will help influence the legislative or regulatory process. as these strategies emerged from the data (see figure i), one might expect that larger firms would have a different perspective based on the amount of resources that they can devote to an issue (the interviewed firms ranged from 18 to 440 employees, with 6 firms having more than i 00 employees). however, that was not the case. there was no appreciable differences in strategic choices between the larger and smaller firms in this sample. overall, the political strategies identified by the interviewees included: letter writing, participation in an association or chamber, making personal contact with government officials (testimony at public hearings, and meetings/phone calls with policymakers), forming a coalition, conducting publicity events (press conferences or media interviews), hiring consultants, and being personally involved in the electoral process (either running for office or supporting another executive within the firm to do the same). the classification scheme that emerged as an overarching dimension (gioia et al., 1994) was utilization. time and time again, executives described the strategies as "routinely done," "occasionally tried," or "rarely pursued." the thought processes of the executives are reflected in the groupings of most, moderate, and least utilized. the most utilized political strategies were letter writing and chamber/association involvement. these strategies were 55 pursued by the executives in almost every public policy interaction. the next level, called moderately utilized political strategies, included personal contact, coalition building, and publicity strategies. the regularity that the executives employed these strategies was approximately one-halfofthe most utilized ones. the least utilized political strategies were hiring consultants and personal involvement strategies. they were identified as an option but were rarely pursued. the interviews also revealed that ceos often pursued more than one strategy concurrently. when two or more strategies were linked together, one was typically a most utilized political strategy, either letter writing or association/chamberinvolvement. these two commonly cited strategies were easy to initiate and, therefore, were often conducted first to set the stage for other political strategies. a description of each strategy follows: letter writing the first of the most utilized political strategies was letter writing. it was used in almost all circumstances,regardlessofthe particular issue in question. its common usage can be attributed to the ease in which it can be accomplished and that it was considered affordable by most firms. in addition, letter writing was often the first step before pursuing other political strategies. a typical strategic choice to write a letter was described by these interviewees: i would normally send letters out to legislators and send copies to the association or any group that was lobbying or putting together an opinion. in additirn to writing a letter to a legislator, i could and would send a copy to the chamber and associations. as demonstrated by the respondents, often initiating other political strategies begins with a letter writing strategy. chamber/association participation the other most utilized political strategy was participation in a chamber or association. to qualify as participation, the firm had to be active in the organization's meetings, functions, and events relating to public policy issues, and not simply belong to the group. participation in a chamber or association was an important strategy for firms who believed that collectively, they would have more of an impact on public policy issues. in addition, chamber or association activity was often important when ceos decided to pursue a media strategy. for example, a firm might hold a press conference and use its influence with a chamber or association to entice it to join in the conference, thereby broadening the firm's base of support and strengthening its message. chambers and associations offered an opportunity to find other companies with a similar philosophy because the member firms usually suffered from similar problems, as this ceo noted: 56 usually it is done by developing a consensus, working with groups ... and i am not so original thatthe problem is unique to me. you go to any meetings, you will see the same issues. there will be a whole group of people in tune with the same problems that you have. the importance of working with groups and developing consensus was emphasized over and over again by the ceos. a typical comment from a small firm when utilizing this strategy was: because in most cases, if it concerns me it concerns others. if we are going to do anything to change direction, i'm not going to do it by myself. linkages and groups are important. once a firm had written a letter or participated in an association, they often continued their efforts with one or more of the moderately utilized political strategies: personal contact, coalition building, or publicity. personal contact this activity included testimony by the ceo at public hearings, face-to-face meetings between the ceo and policymakers,or phone conversationsamong the aforementioned parties. this activity required more participation and planning by the ceo because it was interactive and the ceo had to be able to respond immediately. the most common of the personal contact strategies was the phone call. it was generally a follow up to a jetter or fax about an issue and it was the easiest of the personal contact strategies to arrange. a typical use of a phone call was: talking about it whenever you get a chance is important to do .... i think it's important to call them [legislators] and try to get a broader awareness. face-to-face meetings were less common than phone calls and were often the result of chamber/associationinvolvement, particularly when legislators were invited to participate at a chamber or association function. typical reactions from small companies regarding faceto-face meetings were: well, i go to a lot of political meetings. i go to washington and albany to meet the various government people .... i look to see the way the legislation is going and if personal contacts would be helpful in shoring up a senator or assembly person who is wavering. testimony at hearings was less common than the other two personal contact strategies for several reasons. first, the opportunity to testify occurred less often. this happened because these hearings were formally arranged affuirs (thereby requiring more planning), and because the topic may not be of concern to the firm. second, testimony becomes part of the public record and ceos were often more reluctant to comment publicly about their positions. they 57 believed, in some circumstances, that their viewpoint would come across as callous and, therefore, were afraid of receiving bad publicity. finally, cynicism was fairly strong here. firms were wary that these public hearings were just for show. as one firm stated it: well generally,. .. i put very little credence to testimony in front oflegislative bodies. that is just a public show for them. they don't hear what you are saying. coalition building earlier research described coalition building as involving efforts by a organization to find other groups of voters who may share common political interests on a particular legislative issue (keim & zeithaml, 1986). coalitions were generally formed when a firm had a problem common to an industry or industries, and when it did not want to be alone in the limelight supporting or opposing a particular public policy issue. for that reason, coalitions are often spearheaded by associations or chambers rather than by one firm. they were often discussed during the participant observation sessions. typically, the discussion would center on a particular issue and how to involve other groups. for example. when discussing the dismal condition of the local economy, ceos would suggest that, "we try to coordinate with other chambers about how many jobs are being lost." coalitions were viewed as an important weapon in the public policy arsenal despite the substantial work necessary behind the scenes to gain the support of other companies or organizations. two executives explained their views on coalition involvement as: we bring other affected parties together who have concerns and put resources into the coalition to keep it going. then, as an issue comes up, it is addressed by a group of companies rather than just one. particularly, when we are trying to do it on a regional basis, we get people from rochester getting their legislators, the same thing with buffalo, binghamton. it's helpful that way in getting a broader awareness of the impact on a business. because of the effort necessary to create and maintain a coalition, it was employed only moderately often as a political strategy. publicity publicity includes holding a press conference to explain a position on an issue or conducting media interviews. because there was reluctance to "stand out" publicly on some issues, particularly controversial ones, publicity was more often pursued through coalitions, associations, or chambers rather than a single firm. in these circumstances, a group of firms would be taking a particular position, and not just one company. however, despite the risks 58 to a firm's image when facing reporters, there is a growing tendency to utilize the power of the press to convey the small business position to legislators and the public. publicity was often discussed during the participant observation sessions. at the committee meetings, small firms often conferred about the need for media coverage of an issue and suggested editorial board meetings to help the public understand what the business community was facing. small firm ceos also participated in press conferences that were held by the chamber, both as active speakers and as members of the audience. although a publicity strategy involves substantial time and coordination, and poses a risk to a firm's image, its ability to reach a wide audience made publicity more popular than the resource intensive, least utilized political strategies-hiring consultants and personal involvement in campaigns. hiring consultants the first least utilized strategy, which executives labeled "getting hired guns," involves hiring lawyers,accountants,etc., who are knowledgeable about a firm's problem area, and who serve as lobbyists for the small firm. once retained, the consultant generally works independentlyto resolve the issue, while periodically reporting back to the ceo. this strategy was viewed as less appealing primarily because of the cost involved. hiring a professional as a lobbyist also meant that the issue was very important to the firm and fairly specialized. consequent! y, the ceo would not feel comfortable about attempting to resolve it without assistance. this strategy does not include circumstances where a ceo might simply consult with an attorney or other professional about how a bill or proposal would affect the firm. one firm describes its hiring of a lobbying firm to work on a technical area as: we have had a couple of tax issues and we called in a lobbying firm to get technical corrections done. we will hire outside help whenever we need it, and look for people who have the right contacts in congress. primarily because of the cost involved, this strategy was rarely pursued. personal involvement in campaigns this is the last least utilized strategy and is defined as having the ceo run for public office or supporting another executive in the company to do the same. running for office directly, or supporting a key executive to do the same, was a rarely used strategy because of the time commitment and lack of organizatiornl slack common to small firms. the resources necessary to execute this strategy are generally not available in small companies, especially when compared to what might be found in larger organizations. it is difficult for the ceo of a small firm to run the business and campaign directly, or have to spend more time at the firm with additional responsibilities if another key executive were to run for office. ceos also mentioned that it was difficult to convince.business people to run for office, despite the need expressed by many firms to elect business people to government. part of that reluctance was the stigma generally attached to politicians. the ceos' viewpoints regarding personal involvement were as follows: 59 if we had been able to get a qualified candidate then we could begin to make a difference .... running for government, running for office, is a situation that if more people would be willing to do it, it would be helpful, getting more qualified people. it would be desirable (putting business people in office] but i doubt it will happen. most people won't do it, they don't want to associate with those characters (politicians]. ... the following chart summarizes the basic political strategies that small firms pursue once an involvement decision has been made and the advantages and disadvantages of each one, as identified by the informants. table 2 political strategies strategy most utilized: letter writing chamber/association participation moderately utilized: personal contact coalition building publicity least utilized: advantages affordable, easy to do, often done to set stage for other strategies increase clout by joining with others, affordable interactive responses with policymakers, affordable issue is shared, effectiveness is increased reach a broad audience, affordable 60 disadvantages may not be read by policymaker group may not work on firm's issue, time commitment fewer occasions for interaction, more planning needed more effort and cost to create and maintain preparation time increased, risk to firm's image hiring consultants personal involvement in campaigns have knowledgeable people for issues, saves the ceo time change policymakers, place business people in office costly, often limited to issues of narrow scope costly, time intensive for the ceo conclusion and implications for future research the nature of this exploratory study uncovered almost as many questions as answers. one of these involved the common usage of association/chamber involvement. in the logic of collective action, olson ( 1965) demonstrated that because the benefits of political activity were commonized(became a public good) while the costs of political activity were privatized (borne only by those in the group), rational, self-interested individuals will not always act to achieve their common interests. olson's argument was that since the benefits of political activity were not exclusionary, individual finms could obtain the benefits without paying the costs, thereby becoming free riders. further, association involvement can mask substantial differences among the finms, thereby causing different positions in what might seem to be a united front. conventional wisdom that an industry would vigorously oppose any action that interferes with its managerial autonomy does not always hold when individual finms might gain an advantage, long or short tenm, from governmental intervention. for example, harris ( 1985), in a discussion of industry response to coal mining regulation, noted that finms should have opposed the regulation because it would have significantly increased fixed costs. in reality, some firms did not because they could afford the cost of compliance while some of their competitors could not. bauer, pool and dexter ( 1963) reached a similar conclusion when they found significant variations across finms in tenms of preferences regarding tariff policy. therefore, an interesting dichotomy emerged as a result of joint efforts by small companies. on the one hand, they needed to link together for increased political clout and often used associatkins/chambers for this purpose. however, because collective action can produce the stresses noted by olson ( 1965) and can potentially result in weakened, watered-down positions (bauer, pool, & dexter, 1963), finms often had their own agendas regarding involvement and cooperation with other finms. how associations police their ranks would seem to have a direct bearing on how effective the finms were in communicating their message to policymakers. another question concerns effectiveness. although the objective of this study was to learn what small firms did regarding their public policy interactions, firms were also asked which strategies were the most effective. however, ceos cited two major problems that prevented them from offering a definitive answer to that query. first, ceos were often unsure as to which strategies worked, usually citing the complexity of the process and the large number of variables relating to specific issues that influenced the outcome of an interaction. second, ceos had difficulty recalling specific instances of successful interactions, often lamenting that "small firms never win." with these limitations in mind, one strategy, publicity, did emerge as potentially being the most effective. however, additional research specifically 61 aimed towards the now identified strategies, and linked to specific issues and stances, would be warranted before any conclusions should be drawn. this study did uncover differences between small and large firms regarding government interactions. one of these differences relates to the strategies chosen. other authors have identified political strategies that larger firms typically pursue as constituency building, creating political action committees (pacs), advocacy advertising, and coalition building (keim & zeithaml, 1986). jn this study, while coalitions were mentioned by small firms, quite often other strategies were pursued by these companies, in part because of the resource intensive nature of the large firms' choices. therefore, consistent with these resource limitations, small firms generally believed it necessary to join with other small firms in order to influence government, as increased size was equated with increased political clout. in contrast, larger firms often have the resources to operate alone if they choose (epstein, 1969). this finding is consistent with harris's (1985) conclusion that a larger size helps when attempting to influence government. anotherdifferencebetween large and small firms relates to the small firm's perceptirn about its ability to accomplish its political objective(s). the ceos described this ability as a sense of power and control. in a small firm, this sense of power rests individually with the ceo. it is a personal attribute and ceos of small firms often accomplished political objectives based on who they were and the personal relationships they had developed, rather than on the position that they occupy. for example, one interviewee described his clout, when compared to larger firms. in this manner: obviously, they [large firms] have more clout than i do. for years, they can pick up the phone and call and it is "yes sir, no sir," and they get a response. due to age and time spent on various committees, on a personal level, i have been able to acquire a lot of the same clout.... therefore, the ceos' public policy experience, which over time alters their cognitive base (hambrick & mason, i 984 ), allowed them to feel more in control of the situation. when that perception exists, they believed that they could be more effective in their attempts to influence policymakers. this experience could only be garnered ifthe ceo makes political involvemert a key priority; hence its emphasis by the small firms as a prerequisite to pursuing political strategies. overall, the findings offer benefits to both practitioners and researchers. this information can help guide small firm ceos when they become involved in the public policy process, by allowing them to consider the range of alternatives and the respective strengths/weaknesses of each approach. because the findings also help improve the understanding of how small firms and government interact, researchers will have a clearer picture of these interactions, and guidance into other areas tliat would be worthy of investigation. specifically, research in the following areas should prove to be particularly useful: 62 • • • • • • • identify which political strategy, or combination of strategies, is the most effective . particular emphasis should be placed on publicity as this study suggests it might offer the most potential. ' · .. '· · · · determine which political strategy, if any, is best suited for different types of issues . determine how the "free rider" philosophy, as expressed by olson (1965), is overcome when small firms pursue activities like chamber/association involvement. determine if the small firm's objective(s) regarding an issue influences its political strategy selection. identify if political strategy selection changes based on ceo experience . replicate the study in a less regulated region. many of our interviewees believed that new york was the most regulated state in the country, and this may have influenced their political strategy choices. determine if industry type influences political strategy selection . given the increasing impact that government has on business, it is essential to enhance the ability of small firms to influence the public policy process. by having these firms' viewpoints considered by policymakers when they make decisions that impact the small company, it should enable these companies to better direct and shape their external environment. and, since the small firm's role in the economy is substantial, what is good for the small firm would ultimately benefit the economy as well. 63 figure i sample emergent codes overarching !nfonnant code analytical code 2nd order concepts dimensions "jet other firms know" i i ''draft off a response" i -letter to finns i "i'll crank it out now" i -letter to officials letter \vriting i "lay the groundwork" >-quickest > i "they count responses" i -easiest i i "fa.x is faster" i i i "i do one a \vcek" i i i >most "others must be hit" i i utilized "met with the senator i -coordinate with finns i i at chamber" i at chamber i i "sit down and iron i -meet officials at chamber i i out differences" > -use chamber for >chamber/association i ''used for information" information i participation i "hang together or all i -share the pain i i hang separately" i -ongoing relationships i i ''looking to divide" i i "called him up" i "another _hearing" i "face-to-face if needed" i -interactive responses i i "can't get a meeting >-phone call to official i personal contact i quick enough" i -attend meeting with > i "met \vith him to i official i i straighten this out" i -testified at hearing i i "take a stand" i i i i "marriage of convenience" i i "experienced at lobbying" i -strategic alliances i i "politics make strange i -temporary arrangement i i bedfellows" > -very broad base > coalition i moderately "pro-active" i -knowledgeable about building >utilized "goes beyond firms 11 i processes i "multiple players" i i i i "gotta go public" i i "get the word out" i -media interviews i "call up the media and >-press conferences > publicity i tell our story" i -reach large numbers i "po\\·er of the press" i i "don't preach to the choir" i i 64 (figure 1 cont.) i "need experts" i i "can't do it without help" i -expert advice i i "too complex" > -access to officials > hire consultants i "no time" i -time constraints i i "better contacts" i -translate language i i i i i i least >utilized "change the players" i i i "get on the inside" i -running for office i i "really gain access" i -supporting other i i "enonnous commitment" > executives > personal involvement i "lousy values" i -rarely done i in campaigns i "no slack" i -resource intensive i i i i 65 a references anderson, r. l., & dunkelberg,j. s. 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(1985). corporate political entrepreneurship. california management review. 27, 124-139. 67 41 doing good by telling stories: emotion in social entrepreneurship communication philip t. roundy university of tennessee at chattanooga philip-roundy@utc.edu abstract despite growing academic interest in social entrepreneurship, a critical challenge facing social ventures has yet to receive attention: how do social entrepreneurs communicate with their diverse groups of stakeholders? this topic is examined using an exploratory, partially inductive study consisting of semi-structured interviews, ethnographic observation, and a critical review of the practitioner literature. the result is a framework explaining the role played by narratives and emotion in social entrepreneurship communication. the findings contribute to work on organizational narrative theory, new venture communication strategies, stakeholder evaluations of firms, and the marketing and entrepreneurship interface. moreover, the study produces several practical implications for social entrepreneurs. keywords: communication strategy, emotion, narrative, social entrepreneurship, stakeholder evaluations introduction “numbers numb, jargon jars and nobody ever marched on washington because of a pie chart. if you want to connect with your audience, tell them a story.” andy goodman, communications consultant “let's not forget … emotions are the great captains of our lives and we obey them without realizing it.” vincent van gogh social entrepreneurship – the creation of organizations to address social problems through business methods – is a phenomenon of increasing prevalence and cultural significance (e.g. short, moss, & lumpkin, 2009). in the past decade there has been an explosion in the number of new social ventures in both developed and developing countries (bornstein & davis, 2010). for instance, in 2009 early-stage social ventures represented an estimated 4% of the u.s. adult working population, which is equivalent to more than six million individuals (bosma & levie, 2010). in s trateg y journal of small business journal of small business strategy vol. 24, no. 2 42 contrast, early-stage traditional ventures represented 8% of the workforce (or 12 million workers). thus social entrepreneurs, operating in virtually all industries, now account for as much as 30% of new u.s. business activity, a percentage that is shared by other western countries and is even greater in several emerging economies (bosma & levie, 2010; leahy & villeneuve-smith, 2010). growth in the social entrepreneurship sector has generated recent attention from scholars (galera & borzaga, 2009). studies have focused on foundational issues such as attempting to establish a clear and agreed upon definition of the phenomenon (e.g. mair & marti, 2006), understanding how the activities of social ventures differ from seemingly related phenomena, such as corporate social responsibility (e.g. baron, 2007), and identifying the individual-level characteristics of the founders of such organizations (e.g. light, 2009). despite growing academic interest, much remains to be explored. one critical topic that has yet to receive attention from scholars is how social entrepreneurs communicate with their stakeholders. communication represents an important challenge for social entrepreneurs because they must construct and deliver a complex message, incorporating both forprofit and nonprofit themes, to a diverse array of external stakeholder groups, such as customers, investors, employees, volunteers, the media, and beneficiaries (morris, coombes, schindehutte, & allen, 2007; mason, kirkbride, and bryde, 2007). having a strategy for crafting persuasive communication is critical because these stakeholders provide important tangible and intangible resources including attention, legitimacy, commitment, and financial investment – resources vital for launching and growing new organizations (miller & wesley, 2010; liao, welsch, & moutray, 2008). there is considerable discussion among social entrepreneurship practitioners about what strategies are most effective in communication with stakeholders. in particular, although it has received virtually no attention in the academic literature, one of the most contentious debates concerns how entrepreneurs use narratives, such as stories describing the venture’s social impact, to communicate with and influence stakeholders (e.g. pekar, 2011; richardson, 2011). for the purposes of this study, narratives are defined as a collection of events arranged in a temporal sequence and containing a causal explanation, or plot (onega & landa, 1999). several leading practitioner-focused journals (e.g. stanford social innovation review) and media outlets have published articles hinting at the power of narratives in social entrepreneurship. what remains unclear is the specific role they play in social venture communication. most studies of narrative-use in traditional ventures have focused on how narratives can influence audiences through cognitive mechanisms, in processes such as sensemaking (sonenshein, 2010), learning (garud, dunbar, & bartel, 2011), legitimacy (humphreys & brown, 2002), and categorization (martens, jennings, & jennings, 2007). yet findings from this study suggest that narratives may operate in a somewhat different role. specifically, evidence suggests that social entrepreneurs often deploy narratives in order to generate emotional responses in stakeholders. indeed, social ventures seem to differ from traditional ventures in the powerful, emotion-laden stories which their founders and managers can communicate about the journal of small business strategy vol. 24, no. 2 43 social problems they address and, in particular, about the beneficiaries who receive the social value they create. the possibility that social entrepreneurs use narratives to create emotional reactions in stakeholders is intriguing because, despite the fact that narrative’s ability to generate an emotional response in audiences is one of the defining features of the narrative form (miall, 1988; hogan, 2003), the vast management literature examining narratives has largely neglected emotion. thus, the following general research question guides this study: how do social entrepreneurs use narratives to influence the emotional reactions of their stakeholders? in examining this question, the study addresses four related questions: (1) are narratives influential in social entrepreneurship communication? (2) if so, what types of narratives are most influential? (3) why are such narratives influential? (4) what are the boundary conditions of narratives’ influence? given the lack of prior theory on the topic of social venture communication, this study utilized an exploratory, partially inductive design aimed at building empirically grounded theoretical insights. specifically, an inductive study of social venture narratives was conducted consisting of semi-structured interviews, observation, and a review of the social entrepreneurship practitioner literature. findings from this study are used to create a preliminary framework to explain how the narratives constructed and deployed by social entrepreneurs can influence their stakeholders. literature review what is social entrepreneurship? there is no universally accepted definition of “social entrepreneurship” (martin & osberg, 2007). there are, however, several widely agreed upon characteristics of such organizations (brouard & larivet, 2011). for the purposes of this study, a definition that incorporates these commonly agreed upon characteristics is used. specifically, an organization is classified as a “social venture” if it targets a social problem using business (i.e. market-based) methods. both of these characteristics are examined in more detail. identification of social problems. there is growing evidence that traditional economic, social, and political institutions are unable to serve the needs of the world population (e.g. sachs, 2009; mair, 2010). these needs are the result of social problems – or “social-market failures” (weisbrod, 1977) – that have not, or cannot, be fully addressed by conventional organizations in the commercial, nonprofit, and governmental sectors. there is not a universal definition of what constitutes a “social problem” (mooney, knox, & schacht, 2000: 2-3); instead, such problems are defined by objective, subjective, and normative criteria. the objective element refers to the existence of a social condition, while the subjective and normative elements are the beliefs that the social condition is harmful to a segment of society and should be changed. social problems include homelessness, illiteracy, and lack of access to food, clean water, and healthcare. the primary activity of social entrepreneurs is creating organizations that attempt to solve these social problems (fayolle & matlay, 2010; alvord, brown, & letts, 2004). in fact, the journal of small business strategy vol. 24, no. 2 44 amelioration of a particular social problem is so fundamental to the mission of a social venture that it is said to be “baked in” to the organization’s business model (boyd, henning, reyna, wang, welch, 2009). utilizing business methods. social entrepreneurs address social problems through business methods. that is, rather than sustaining the organization through the solicitation of donations, they fund operations through the sale of products and services. thus the key difference between social ventures, which can be structured as for-profit, non-profit, or a combination of the two (i.e. hybrid), and many “traditional” non-profit organizations (e.g. united way or red cross), is that the latter target social problems but fund their activities primarily through donations and grants. an example. fasthelp, an organization participating in the main phase of the study, provides a clear example of the social venture organizational form.1 fasthelp was founded to address a specific social problem: the inefficiencies that exist in the delivery of social services at the local, state, and federal levels. to address this problem the founder created a website that aggregates information about all social service programs in one location. moreover, the site allows individuals in need (e.g. the poor, victims of domestic abuse) to quickly search through the programs, determine their eligibility, and apply for aid. fasthelp’s business model is based on selling an extension of their search software to social service agencies that purchase it because it allows them to significantly increase their application-processing efficiency. 1 the names of all organizations and individuals are pseudonyms. social entrepreneurship, communication, and resource acquisition the relationship between social entrepreneurship and conventional (i.e. commercial) entrepreneurship is not dichotomous. rather, the two activities can be viewed as existing on a continuum ranging from new ventures with predominantly social motives (e.g. a traditional charity) to predominantly economic motives (e.g. a venture capital fund; sundin & tillmar, 2010). on this continuum, social entrepreneurship can be seen as ending where profits and commercial activities take priority over social mission (hervieux & turcotte, 2010). communicating with investors and potential partners is an important process for entrepreneurs of all types (e.g. becherer & helms, 2009; allred & addams, 2006). however, a key difference between social and conventional entrepreneurs lies in their need to communicate to and acquire resources from a particularly diverse array of stakeholders. in addition to traditional resource providers such as angels and venture capitalists, social entrepreneurs can also pursue investment from private philanthropists, charities, philanthropic foundations, fellowship organizations, volunteers, and so-called “impact” investors (nicholls, 2010). each of these groups can possess very different motives, criteria, and investment rules than traditional investors (zahra, gedajlovic, neubaum, & shulman, 2009; miller & wesley, 2010), which suggests that social entrepreneurs may have to communicate with these groups in unique ways. despite the potential differences between social and conventional venture communication, to date, work examining social entrepreneurship communication is nonexistent. journal of small business strategy vol. 24, no. 2 45 social entrepreneurship narratives. in spite of the dearth of research on social entrepreneurship communication, studies have hinted at the importance of narrative communication in the establishment, funding, and actions of social ventures. for instance, in a recent review of the social enterprise literature, dacin, dacin, and tracy (2011: 1205) remark that the “individuals identified as social entrepreneurs provide the material for rich and powerful narratives.” (1205). in general, they claim that narratives (along with rituals) are of “central importance” in social entrepreneurship because of their role in the “conveyance of social meaning” and their ability to “carry cultural messages that support the creation of social value” (1208). however, these authors do not examine if and how narratives are used by social entrepreneurs. to date, only one study of social entrepreneurship has placed narratives at the center of the analysis. in a case study (with a single informant) of a social entrepreneur who founded a refugee support center in australia, jones, latham, and betta (2008) examined how the social entrepreneur created his identity. in agreement with work outside of the entrepreneurial context (e.g. mcadams, josselson, & lieblich, 2006), they found that the entrepreneur constructed his personal identity by crafting narratives. although the role of narratives in social entrepreneurship is under-researched, a growing number of studies have examined the role of stories in communication between traditional organizations and their stakeholders. for instance, martens, jennings, and jennings (2007) used a mixed-methods study to examine the role of stories in the resource acquisition attempts of entrepreneurs in high-tech firms. their results suggest that particularly influential narratives construct unambiguous identities for entrepreneurial firms, clearly elaborate how the venture’s proposed means of exploitation will attenuate risk, and invoke familiar elements to contextually ground those that are less familiar. martens et al. (2007) and others (e.g. porac, mishina, & pollock, 2002; downing, 2005) make strides in increasing our understanding of the role of narratives in new venture communication. however, these works share an implicit commonality: they all emphasize narrative’s ability to influence stakeholders through cognitionfocused constructs, such as legitimacy, categorization, and sensemaking, rather than the role of stories in shaping stakeholders’ emotional responses to firms. but both the comprehension of narratives and the impact they have on audiences is not purely cognitive (e.g. coplan, 2004). the lack of attention to emotion is puzzling because narrative’s ability to generate an emotional response in audiences is one of the defining features of the narrative form (miall, 1988; hogan, 2003; keen, 2006). moreover, research in non-organizational contexts has found that one of the fundamental means by which stories influence audiences is through their ability to generate affective (i.e. emotional) responses (dunlop, wakefield, & koshima, 2008; escalas & stern, 2003). however, management and entrepreneurship scholars have yet to explore the effects of emotional narratives. there are, thus, a number of important research opportunities surrounding how entrepreneurs, and particularly social entrepreneurs, use narrative communication to influence the emotional responses and actions of stakeholders. journal of small business strategy vol. 24, no. 2 46 methods research design the lack of prior studies examining the role of narratives and emotion in social entrepreneurship communication suggests that an inductive methodology is appropriate (offstein & childers, 2008). in addition, since the focus of the study is informants’ discourse, perceptions, and interpretations, qualitative data are wellsuited to be the primary source of evidence (graebner, martin, & roundy, 2012). interviews. i interviewed 62 individuals in the social entrepreneurship sector, including social entrepreneurs, investors, consultants, media members, attorneys, and marketing professionals. interviews took place inperson or over the phone and lasted 45 to 90 minutes. table 1 contains a description of the 50 social entrepreneurs interviewed, grouped by industry. table 1: summary of social venture informants informant position organizational form industry focus social enterprise_1 founder/ceo for-profit apparel / jewelry social enterprise_5 founder/ceo for-profit apparel / jewelry social enterprise_16 founder / ceo1 for-profit apparel / jewelry social enterprise_16 ceo 2 for-profit apparel / jewelry social enterprise_10 director for-profit (subsidiary) apparel / jewelry social enterprise_19 co-founder / cfo for-profit apparel / jewelry social enterprise_44 founder / director nonprofit apparel / jewelry social enterprise_2 founder/ceo for-profit apparel social enterprise_3 founder/ceo for-profit apparel social enterprise_4 founder/ceo for-profit apparel social enterprise_46 founder / executive director nonprofit / for-profit food / beverage social enterprise_47 president nonprofit / for-profit food / beverage social enterprise_48 tmt member nonprofit / for-profit food / beverage social enterprise_15 tmt member for-profit food social enterprise_6 tmt member for-profit advertising social enterprise_20 founder / ceo for-profit advertising / marketing social enterprise_7 founder for-profit web design social enterprise_8 co-founder for-profit youth outreach social enterprise_28 founder / executive director nonprofit youth outreach social enterprise_12 founder/ceo for-profit firearms social enterprise_13 co-founder/ceo for-profit consulting social enterprise_14 co-founder/ cmo for-profit consulting social enterprise_18 co-founder/ceo for-profit consumer software social enterprise_21 founder / ceo for-profit online giving journal of small business strategy vol. 24, no. 2 47 observation and review of practitioner literature. in addition to the formal interviews, which were the study’s primary data source, two additional types of data were collected. first, i engaged in ethnographic observation by attending practitioner conferences, social entrepreneurship expos and tradeshows, a “social” investment fund’s board meetings, pitches and pitch events, and the meetings of a social venture founding team. i also engaged in direct, participant observation of social enterprise_34 founder/ceo for-profit online volunteering social enterprise_23 founder nonprofit job training social enterprise_24 founder/ president nonprofit job training social enterprise_27 co-founder nonprofit job training social enterprise_32 founder nonprofit job training social enterprise_35 co-director nonprofit job training / enrichment social enterprise_36 co-director nonprofit job training / enrichment social enterprise_43 tmt member for-profit job training / employment social enterprise_25 tmt member (cfo) nonprofit economic development social enterprise_11 founder / ceo nonprofit economic development social enterprise_45 founder / executive director nonprofit economic development social enterprise_49 founder / ceo for-profit economic development social enterprise_17 co-founder nonprofit economic development social enterprise_30 founder for-profit financial services social enterprise_41 founder / executive director nonprofit microfinance social enterprise_26 founder / ceo for-profit nonprofit fundraising social enterprise_33 founder/ceo for-profit nonprofit fundraising social enterprise_50 founder/ceo for-profit nonprofit fundraising social enterprise_39 tmt member nonprofit discount consumer goods social enterprise_29 director of social enterprises nonprofit faith-based philanthropy social enterprise_31 director for-profit (subsidiary) b2b services social enterprise_22 founder / ceo for-profit social services social enterprise_37 director of social enterprise nonprofit social services social enterprise_38 director for-profit (subsidiary) social-services social enterprise_40 director of social enterprise nonprofit social services social enterprise_42 tmt member nonprofit social services journal of small business strategy vol. 24, no. 2 48 a pitch by a social entrepreneur to a large corporate donor. the goal of observations was to witness social entrepreneurs communicating with their stakeholders. in order to assess consistency between observers, on at least one occasion a colleague (also an entrepreneurship researcher) joined me in observation. second, i conducted a review of the practitioner literature by targeting the most prominent social entrepreneurship media outlets and doing a general search of articles available using media databases such as lexisnexis. i searched for any articles discussing social venture communication or narratives. the primary purpose of consulting this literature was to deepen my understanding of the terminology used by informants in discussions of these topics. data collection prospective informants were identified through “snowball” sampling (pratt, 2009). informants were then selected based on theoretical and pragmatic considerations (yin, 1984). to be included in the study, informants had to satisfy several criteria. first, they had to be involved in the social enterprise sector in some capacity. more specifically, entrepreneurs and members of founding teams had to be from organizations that satisfied the general definition of “social venture” described above (i.e. a venture addressing a social problem through business methods). in addition, informants were selected to get perspectives from both for-profit and nonprofit social enterprises and from external stakeholders that would be the target of entrepreneurs’ communication, such as investors and media members. finally, to increase the generalizability of findings, informants were chosen from a diverse range of industries. interviews were semi-structured and included a combination of closedand open-ended questions. informants were first asked to provide background information. social entrepreneurs were asked to describe the founding of their organization. they were then asked about their communication with stakeholders. in contrast, informants from other stakeholder groups (e.g. investors) were asked to recount their recent interactions with social ventures. interviews took place in-person and over the phone. a review of transcripts from both types of interviews did not reveal any systematic difference in the specific content of the interview information. however, the phone interviews were, on average, of shorter duration than the in-person interviews. related to this difference, inperson interviews seemed to include richer and more detailed conversations. this is consistent with findings from prior studies of qualitative methods (e.g. shuy, 2003). at the outset of each interview informants were offered confidentiality and the option for pseudonyms to be used to ensure their anonymity and the anonymity of their venture. i also advised participants that the information they provided would not be communicated between interviews to other informants. all interviews were recorded using a digital recorder and then transcribed. in total, they produced approximately 1,550 double-spaced pages of transcripts. data analysis i used atlas.ti, a qualitative data analysis program, to facilitate coding of the data. the program increases the ease with which codes can be assigned, organized, changed, and searched. it also aids in visualizing the relationships between codes and in extracting all of the quotations for a journal of small business strategy vol. 24, no. 2 49 particular code across the transcripts. after preliminary coding, data were analyzed using established procedures for inductive research (miles & huberman, 1994). as i documented patterns in the data, i constructed tentative theoretical explanations and used the data from each interview to challenge the working theory (e.g. strauss & corbin, 1998; baker & nelson, 2005). i conducted withinand across-informant analyses. the goal of within-informant analysis was to understand events experienced by focal social entrepreneurs and to develop generalized codes, themes, and theoretical constructs that emerged as being important. in contrast, i used acrossinformant analysis to “triangulate and substantiate” emerging constructs (ravasi & phillips, 2011). i examined if emerging constructs were present across multiple informants and if similar themes emerged in multiple settings (miles & huberman, 1994). i refined emerging constructs and relationships using a replication logic (yin, 1984), revisiting interview transcripts to determine if each demonstrated the same pattern or theme. the ultimate goal of the analysis phase was to create a preliminary framework that addresses the guiding research question and explains the relationships observed. findings to preview the findings, evidence indicates that narratives play a p articularly important role in social entrepreneurs’ communication with their stakeholders, such as customers, investors, employees, and the media. one of the most prevalent types of narratives communicated are stories about the beneficiaries of a venture. the potent influence of these narratives lies in their ability to transmit emotion and produce an emotional response in audiences. specifically, evidence suggests that emotion influences audiences through three mechanisms: capturing attention, forming connections, and inspiring action. evidence supporting these findings is described in the following sections. are narratives influential in social venture communication? social entrepreneurs claim that stories play a critical role in communication with stakeholders. indeed, informants of all types (entrepreneurs, investors, consultants) emphasized the importance of narratives. for instance, the co-founder of a social venture in the financial services sector expressed her assessment of the effect of narratives on stakeholders providing financial resources. i’ve just observed: you don’t close deals [solely] with irr, you close deals with stories. and you close deals with human connection. no one is going to give you 5 million dollars because of a mathematical calculation. (founder; se_30) an associate partner at a large venture capital fund echoes the founder. in some of the most interesting social enterprises – the most successful ones – i think one of the reasons that they’re so successful is there’s a story behind it [ …] if you’re fundraising for a social enterprise, you have to tell stories. if you don’t have a good story you’re not going to get the results you want. (investor_6) both of these informants focus on the influence of narratives on investors; however, the use of stories is not limited to journal of small business strategy vol. 24, no. 2 50 audiences providing financial resources. entrepreneurs also claim to use narratives in their communication with other stakeholders. for instance, the manager of a for-profit social venture in the consumer goods space explains that when communicating with customers he emphasizes selling “a story and a superior product” (tmt member; se_46). similarly, a founder expounds on his experience using stories to attract the media’s attention. i can tell an entire story just about the brand, the social initiative, the needs that are really prevailing in latin america and then my life story that leads up to it. […] the media has definitely been welcoming to our story. (founder; se_3) a second founder claims that the “media is craving for [the] good stories” (founder; se_22) that social ventures can provide. informants also suggest that stories are important in communication with a venture’s internal stakeholders. the director of the for-profit subsidiary of a nonprofit social venture explains: what i use [stories] for personally […] is to motivate my staff. i have a collection of impact stories. if i hear one, i jot it down both to share with our leadership, but also to talk about in my team meetings to really talk about the difference that we’re making and the impact that we’re having and to motivate them. (top manager; se_10) thus, social entrepreneurs claim that narratives matter in communication with multiple stakeholder groups. but what form do these stories take? there are many types of narratives that can be communicated (e.g. stories about the creation of the venture or about the founding entrepreneur); however, evidence indicates that the most salient stories are often narratives about the social problem addressed and, specifically, about the beneficiaries of the social venture. what types of narratives are influential? social ventures differ from traditional firms in that they must interact with customers, who purchase their products and services, and beneficiaries, who are the recipients of the social good, or “social value” (santos, 2012), that is produced. for instance, in the toms shoes “buy-one-give-one” model, where for every pair of shoes purchased a pair is given to a child in the developing world, the beneficiaries are the children receiving free pairs of shoes. social ventures can have multiple beneficiary groups. as an example, urban garden is a social venture that runs a development program teaching at-risk urban children life skills by exposing them to sustainable agriculture. the venture sells a portion of the food grown by the youth to the public and donates the rest to food kitchens serving the homeless. the venture has two beneficiary groups (at-risk youth and the homeless) and one customer group (consumers purchasing food). uncertainty exists among social entrepreneurs about whether it is more effective to craft general narratives about the social problem addressed (e.g. homelessness, child slavery) or to construct specific stories about their beneficiaries. some managers craft narratives that focus generically on the problem they address. for instance, the founder of a social venture focusing on the high recidivism rates in atrisk populations explains this problem using the following narrative: journal of small business strategy vol. 24, no. 2 51 we understand that the people that we work with aren’t popular and our people that we work with are defenseless against what’s going on. but texas is the number one mass incarceration state in our country. there are 10 u.s. states that make up 60 percent of all incarceration in our country. those ten states have more incarceration than all of russia – almost as much incarceration as the entire republic of china. once you are in the system, forget it, and they start you at the youngest age. this social crisis is at the root of homelessness and poverty and foster care and this is such a huge problem and no one is doing anything about it. (founder; se_37) general descriptions of social problems are contrasted with more granular narratives that contain greater specificity. an example is found in the communication of a social venture that provides a market in western countries for jewelry produced by women in africa with hiv/aids. one of the stories that will always stick with me is that of [amelia], because it gives me so much hope. when she and her husband found out that they were hiv positive, they moved to entoto mountain in hopes of finding healing. but all they found was poverty. [amelia] began begging […] once she started working with our jewelry program, her life changed. she was able to help provide for her family, and just this past year they were able to move off of the mountain where hiv is so prevalent, and assimilate back into life in the city. amleset’s story is one of true transformation that is so inspiring to me. (founder; se_1) evidence indicates that, over time, entrepreneurs realize that the most powerful narratives are constructed around the stories of specific individuals that have benefited from the activities of the venture. however, this realization is often the result of a learning process. one founder explains his journey to this conclusion. we’ve played with a lot of different ways to tell the story of the company. we’ve talked about “fair trade,” we’ve talked about “organic,” we’ve talked about the consumers themselves. is the consumer the story? is the consumer and the choices that they’re making the story that we’re trying to tell? but we found that the story that resonates the absolute most is when you’re connecting them [i.e. customers] back to the folks who have either farmed the cotton or made the garment. “fair trade” ends up being a bit too nebulous. talking about ‘ethical systems of economy,’ and then the consumer feels like they’re one drop in the bucket. but they don’t want to be a drop in the bucket. they want to change the life of a person. […] so in trying to talk about that, we’re really focusing on the story of a young boy [narin] that i met in india, who’s the son of a farmer and now goes to school at a school that was built by his father and other farmers because they receive fair trade price for their cotton. they took that money and built a school for their children. so now narin gets to go to school. (founder; se_4) journal of small business strategy vol. 24, no. 2 52 the entrepreneur suggests that there were multiple ways to frame the story of the social good his venture produces (e.g. using the general narratives surrounding the “fair trade” and “organic” movements); however, he eventually realized that consumers were most impacted by stories about individual beneficiaries. in some cases, entrepreneurs received aid in identifying their most persuasive narrative from external consultants. for instance, the founder of a social venture that provides a market for goods produced by disadvantaged populations in the developing world described hiring a marketing consultant to develop the story that best captured his organization and its objectives. we worked with a marketing company to help us find our pr message. their conclusion was basically that “fair trade” is boring […] and not something that would sell at the price points we were trying to sell our product. so she said rather than marketing ourselves as “fair trade wholesalers,” we ought to focus more on the story of the women with the product that’s purchased. (founder/ceo; se_16) in addition, informants explained that an important downside of focusing on g eneral descriptions of the social problem addressed is that it often does not convey emotion. one founder explains: there’s zero emotional attachment. and it’s data; it’s not human storytelling. and so, we have to tell human stories, to say, like, “narin gets to go to school, and his dad doesn’t have to borrow money at usurious rates, and they get to have the life they wouldn’t have had before because we support them; because they were able to grow the cotton that made these t-shirts. (founder; se_4) entrepreneurs used a v ariety of methods to communicate beneficiary stories to stakeholders. they featured narratives on their websites, in company documents and promotional materials, and in media interviews. the founder of a social venture that provides employment and language skills to refugees that have recently moved to the u.s. described her strategy for sharing stories. [the stories] are on our website. we have an artisan page and each of the artisans has a picture and a story […] again those are the ones that are comfortable doing that. […] we also do a lot of guest posts [on blogs] and share the stories with like-minded people. that’s gone well for us, i think the stories are one of the things that really drives sales, that makes people feel connected to our artisans. (founder; se_31) another entrepreneur, with a similar social venture, described his venture’s method for communicating beneficiary stories to customers. we have tags for each item […] that have a story about the artisan. and then our [salespersons] are also charged with knowing those things, so they can talk about it. and then, there is a section on the website that talks about the different countries and the artisans. (founder; se_19) to summarize, evidence suggests that social entrepreneurs focused their communication to stakeholders on the journal of small business strategy vol. 24, no. 2 53 stories of their beneficiaries. these narratives often featured specific beneficiaries (by name or pseudonym), highlighted the social problem affecting these individuals, and demonstrated how the organization’s solution to the problem had improved their situation. however, entrepreneurs often could not explain why these narratives should be given priority and, more importantly, why the stories are persuasive with stakeholders. further evidence suggests that the mechanism driving narrative’s influence is emotion. why are narratives influential? the role of emotion research examining narratives in traditional ventures has focused on their ability to influence stakeholders through cognitive mechanisms, such as legitimation and categorization (e.g. martens et al., 2007). however, the narratives used by social entrepreneurs seem to operate by transmitting emotion and triggering emotional reactions in stakeholders. the founder of a social venture that creates websites for nonprofits hints at the important role played by emotion in social entrepreneurship. a lot of it is about emotional connection because they’re [social entrepreneurs] trying to save the world. they’re trying to make the world a better place. and so, a lot of times, they don’t necessarily communicate their story in that way. but they should because that’s one of their strongest assets. (cofounder; se_33) more specifically, evidence from informants suggests that the emotion conveyed in narratives has three specific influences on stakeholders: it captures attention, creates connections, and inspires action. capturing attention. before stakeholders can be asked to take action (e.g. to make an investment, purchase a product, or volunteer time), social ventures must first capture their attention. evidence suggests that the emotion communicated in narratives can “grab” stakeholder attention. for instance, one founder describes the influence of emotion on investors. [investors] have seen tons of [business] plans. what captures people, what gets people to pull out the checkbook, or authorize the wire transfer, is the emotional connection and that comes from stories. (founder; social enterprise_30) similarly, the director of a business incubator explains that he advised the founder of a s ocial venture at the incubator not to drop an emotional story from his pitch because “it’s an intricate part of the [organization’s] story – it’s what gets your attention […]” (director; incubator_1). finally, the founder of a social venture that has received two rounds of angel investment further describes this linkage between narratives and stakeholder attention. specifically, she focuses on the pitch she delivers to prospective investors. i have to build a story. i have to build a compelling story. but i think everybody does. i mean i’ve watched a million pitches for other people at this point. a good storyteller’s gonna go a lot further than somebody with a lot of numbers. yes, you need your numbers [i.e. strong financials]. but it [the story] gets them to listen. […] the other thing to remember is journal of small business strategy vol. 24, no. 2 54 investors see hundreds of pitches. (founder; se_34) thus it is argued that communication containing an emotional narrative will cause a social venture to stand out amongst other organizations. this suggests the following proposition: proposition 1. social ventures communicating emotional narratives are more likely to capture the attention of stakeholders than other ventures. forming connections. after securing stakeholders’ attention, evidence suggests that the emotion transmitted by narratives helps to form a connection between stakeholders and a social venture. for instance, one founder describes the reaction of customers to the emotional beneficiary narratives featured on the firm’s website. [customers] will literally send me emails, or now we have a web form that they can fill out in the hopes of streamlining it a little bit, but they will just bare their soul. they'll talk about how they cried reading the website. it really connects with them […] and it's amazing how many inquiries we get. (co-founder; se_19) he goes on to explain that customers form a strong connection with the beneficiaries featured in their stories and that “...our whole company is story-oriented and we think that’s a big part of what people [customers] are wanting – that personal connection.” founders were not alone in stressing the linkage between emotion and stakeholder connections. a media consultant who works with traditional nonprofits and social ventures also noted this influence of beneficiary narratives. [often] a board member will say, “we need a v ideo [demonstrating the social impact of the venture],” […] they’ll see that telling the story through video is a good way to connect with people and tug on the heartstrings and create an emotional connection. (media consultant_1) in addition, using lance armstrong’s story as an illustration, a social venture investor described how a powerful narrative can connect stakeholders to an organization2. look at lance armstrong. […] here’s a great cyclist, who’s won all of these championships, but without that whole story of him beating cancer, his foundation gets nowhere – it’s like any other celebrity foundation. but that story created this brand, that now is literally world-wide and worth a billion dollars...i think the reason that [story] resonates with a bunch of other people is because they’re like ‘wow, i wish i could do that, i want to do that, i want to be a part of that whether it’s by paying a little bit of money. i want to express my support for that whatever i can do, but i want to be a part of that. i want to feel connected to that […] i want to 2 the interview took place before lance armstrong was banned from cycling for doping offenses. interestingly, this highlights that although the personal narrative of a f ounder can be a p ersuasive transmitter of emotion, if an organization’s narrative is too tied to its founder’s narrative, and the founder is involved in a scandal, then this can result in a strong, negative reaction by stakeholders. journal of small business strategy vol. 24, no. 2 55 wear that wristband that lance did. (investor_6) creating an emotional connection with stakeholders is critical; however it can be difficult because social ventures often serve beneficiaries that live thousands of miles from the customers purchasing the product or service. as the founder of a social venture that works with artisans in guatemala but sells products in the u.s. describes, “sometimes it’s hard to get the community in which you live to really feel passionate about something that’s so far away from them” (founder; se_16). by providing concrete stories, social venture narratives seem to be able to help bridge the geographical distance that can exist between customers and beneficiaries. however, constructing overly complex narratives does not seem to be the way to foster such a connection, as a founder who has struggled with this issue describes. a lot of people don’t understand [the problem the venture addresses] – “empowerment” people don’t understand. but people understand supporting women. people will understand they are helping them out of poverty. so how do we make our message much simpler, so people can really understand and support us? so that connection is missing right now. we tend to go too deep in that – so it’s simplify, so we can connect. (founder; se_2) the emotion conveyed in narratives can, thus, serve as a means of forming a connection between a social venture and its stakeholders that amounts to more than simple “attention-grabbing.” this suggests: proposition 2. social ventures communicating emotional narratives are more likely to form connections with stakeholders than other ventures. inspiring action. after capturing attention and fostering a connection, the emotion transmitted through narratives can spur stakeholders to take action on behalf of a social venture. one founder describes this relationship in a straightforward manner. storytelling inspires action. [through stories] we can get people to change their behavior and it can really compel your movement forward. […] if you have a story, you [can] draw them [stakeholders] in and really guide the persons in terms of what actions you want them to take. (founder; se_33) one of the primary actions that narratives inspire is for stakeholders to communicate a social venture’s narrative to others. this is important because it can expand the organization’s audience thus increasing the stakeholders available to provide resources. one investor explains that an emotional story can leave stakeholders feeling as though “there’s a vision that [they] get, that they share, because ‘now i can tell that story, i can be part of the whole movement’” (investor_6). the founder of a social venture described this dynamic in his investors. […] in the end you've got to remember investors they want to tell a story. it’s just like everybody else. it’s all about storytelling, and the more engagement, the more opportunity you have to tell that story and to drive the direction where it’s going. (founder; se_50) in fact, there is evidence that the actions emotional narratives inspire can actually journal of small business strategy vol. 24, no. 2 56 compensate for a social venture not being “resource rich.” for instance, one founder claims that stories allow his organization, a small start-up, to “get around not having a lot of money” to spend on advertising and marketing (founder; se_4). this suggests that stories operate as a type of resource, which can be used to influence stakeholders to take actions to provide other resources. proposition 3. social ventures communicating emotional narratives are more likely to inspire stakeholder action than other ventures. what are the boundary conditions of narrative’s influence? despite the powerful influence emotional narratives can have on stakeholders, informants suggest there are boundary conditions that temper the use of such narratives. specifically, two important questions surfaced, “what social ventures are best suited to capitalize on such narratives?” and, “to what extent should social entrepreneurs rely on emotional narratives in their communication with stakeholders?” direct vs. indirect benefit business models. evidence suggests it is easier for some types of social entrepreneurs to construct emotional stories about the social problems they address. in particular, social ventures with direct-benefit business models, which sell a product or service that can be linked directly to a single beneficiary, seem to have more opportunities to construct compelling narratives. as a derector at a social enterprise accelerator explains, social ventures can: […] affect the individual more if [they] can relate it on that one-toone level of having a face of one person that you are helping versus, “this problem is so vast” and maybe not feeling like you’re [i.e. the customer or donor] making a difference, because it’s so huge. […] some [individuals] will only respond to a personal connection, a touchy-feely story, that brings the impact down to the one-on-one level of, “here’s who i’m helping, this one person.” (director; incubator_2) as described above, many social entrepreneurs recognize this potential for a “one-to-one” connection between stakeholders and beneficiaries and are very deliberate in providing opportunities for these connections to be formed. one entrepreneur described the process she has created by which customers can experience beneficiary stories. if you go on the website and if you clicked on the product, then it would take you to a description that would tell you where it’s made, what it’s made out of, what kind of materials, and who it empowers. and then it also says to read how it’s made and gives you links as you go down the page underneath the artist. so on each product, you can know more in depth. and we have tags on it [the product]. […] and then artist cards that have a picture of the [artisan] on the one side and on the other side is [their] story. (founder; se_5) indirect-benefit social ventures, which sell a product or service not directly tied to their beneficiary groups (i.e. ventures that do not involve beneficiaries in their supply chain) do not have the narrative “material” to as easily construct emotional beneficiary stories. journal of small business strategy vol. 24, no. 2 57 proposition 4. social ventures with directbenefit business models are more able to construct emotional narratives than ventures with indirect-benefit models. communicating a compelling business model. individuals in the social enterprise sector are quick to caution that, although emotional narratives about a social problem are persuasive with stakeholders, it is not wise for social entrepreneurs to rely exclusively on such narratives. specifically, informants argue that it is critical for social ventures to develop and communicate a compelling business model. that is, informants claim that successful social entrepreneurs communicate that they deliver a top-quality product with a clear value proposition for customers. moreover, such entrepreneurs do not view the construction of emotional stories as a “license” to deliver a substandard product. one founder describes the relationship between the stories about the social problem she addresses and her business model (based on selling scarves made by refugees). we make sure it’s a product that […] people would want to buy, and then, “oh, by the way, guess who made it?” and that [the emotional story] is like the tipping point as to why somebody would purchase our products. […] ‘ cause at the end of the day, it’s a scarf. nobody truly needs a scarf. right? s o what sets us apart from all the other scarves out there is the message behind it and who made it. […] if you have a boutique, and if you see it [the product] lying on the shelf, unless there’s a sales associate right there next to you to tell you, “oh, by the way, hey, this product is [made by refugees], this is who made it,” you’re not going to know that. so, in that sense, the product needs to speak for itself when it’s on the retail floor. (founder; se_10) a social entrepreneur with a comparable business model (i.e. importing and selling goods from disadvantaged groups in the developing world), expressed a similar idea. [the product] has to be welldesigned. we don’t want anything that’s just a charity idea. it has to be able to sell. so you [the customer] have to look at this and tell me that you love it not even knowing the story behind it. (founder; se_9) indeed, although informants claim that it is critical for social ventures to devote time to developing emotional narratives, which can make their communication with stakeholders more persuasive, they caution against focusing solely on such narratives to the exclusion of developing a solid business. one entrepreneur expounds on this point. just because you’re a [ social venture] doesn’t mean you should get special attention […] i should be held to the fire just as anyone else should be. because if we use it [emotional narratives] as a crutch this will become a f ad. what i want social entrepreneurship to become is a staple and an institutionalized way of thinking. (founder; se_20) related to this point, the director of a social enterprise incubator points out why so many social entrepreneurs struggle to communicate successfully with stakeholders. he states, “the social ventures that struggle are the ones that pitch ‘here’s how we’re changing the world … we’ll journal of small business strategy vol. 24, no. 2 58 figure out how to monetize later.’ you can’t do that, this isn’t google. that ship has sailed.” (director2; incubator_1). one founder describes this ineffective practice in more detail. a lot of people love the idea of being a social enterprise, but they sometimes lose sight of the enterprise side of things. they really like the social but they forget, wait a second, this thing has to be profitable and sustainable in order to really have an impact. [social] impact is tied to profit regardless of what people want to believe. (founder; social enterprise_50) finally, the founder of a venture-backed social enterprise summarizes her belief in the importance of communicating an emotional narrative with her recommendation that entrepreneurs “tell [their] story and make a compelling business case … show how [they are] going to be profitable and sustainable and reproducible” (founder; se_34). proposition 5. communicating a compelling business model increases the impact of emotional narratives on stakeholders. figure 1: the role of emotional narratives in social venture communication discussion and implications this study explores how social entrepreneurs communicate with their stakeholders. as discussed, although practitioner writings suggest that narratives may play a key role in social venture communication, prior research has not devoted significant attention to this topic. to address this omission, this study focused journal of small business strategy vol. 24, no. 2 59 on the stories social entrepreneurs communicate. findings indicate that narratives are indeed influential in social venture communication. stories about the social problem addressed and, specifically, stories featuring a social venture’s beneficiaries (i.e. the group receiving the social value created), the problems they face, and how the organization has helped to improve their situation, are particularly potent. these types of narratives are influential because their content generates an emotional response in stakeholders by operating through three mechanisms: capturing attention, forming connections, and inspiring action. direct-benefit social ventures that derive their revenue from products and services produced directly by beneficiary groups are well-positioned to construct such narratives. however, findings suggest that despite narrative’s influence, social entrepreneurs cannot rely solely on emotional stories at the expense of developing and communicating a strong business model. implications for theory in addition to its contributions to the social entrepreneurship literature, this study also contributes to four other streams of research: organizational narrative theory, new venture communication, stakeholder evaluations of firms, and the marketing and entrepreneurship interface. organizational narrative theory. organizational narrative theory has focused almost exclusively on narrative’s role in cognition. however, by not examining the relationship between emotion and narratives, prior work has underemphasized one of the two ways that individuals process narratives. dual-process models suggest that people make sense of reality in two fundamentally different ways (kahneman & frederick, 2002; slovic, finucane, peters, & macgregor, 2002). when individuals are faced with a narrative they often respond cognitively by invoking preexisting schemas or scripts (oatley, 1999). but when these mental structures are inadequate or in conflict it creates uncertainty. individuals cope with this uncertainty by relying on emotional responses and by allowing emotion to shape their understanding. since social ventures are a relatively new organizational form (e.g. lindsay & hems, 2004), individuals are unlikely to possess detailed schemas to aid in understanding the narratives communicated by such organizations (e.g. hsu & hannan, 2005)3. for instance, stakeholders that are accustomed to dealing with traditional organizations (i.e. corporations or conventional nonprofits) will have a difficult time understanding a social venture narrative about using profit-oriented activities to create social good. however, evidence from this study suggests that an important way that stakeholders respond to new and unfamiliar organizational narratives is by allowing emotion to guide the processing of such communication. new venture communication. although general models of persuasion, such as the elaboration likelihood model (petty & cacioppo, 1986) and the heuristicsystematic model (chen & chaiken, 1999), describe factors that can cause 3 there are some who argue that “social ventures” or “social enterprises” are not an entirely new phenomenon (e.g. fayolle & matlay, 2010). cooperative movements, mutual benefit associations, and cooperative enterprises from the 19th century are often cited as the “original” forms of this type of organizing (rispal & boncler, 2010). journal of small business strategy vol. 24, no. 2 60 communication to be persuasive, narrative’s influence is not addressed by these models (appel & richter, 2010). in general, humanities-oriented scholars have focused on the link between narratives and emotion, but have shown little concern for how this link influences the persuasiveness of communication and its ability to get audiences to take action. in contrast, social sciences studies, and particularly psychology-based work, have focused on the relationship between emotion and persuasion, but have not tried to understand the role of narratives in the process. this study examines the three topics in consort. in doing so, it reveals that there is a complex interplay between narratives, emotion, and persuasion. in particular, for some types of ventures the emotion conveyed through stories is a primary means of persuading stakeholders by attracting their attention, creating connections, and inspiring action. however, as the study also suggests, although emotional narratives can be persuasive, it may not be in an entrepreneur’s best interest to focus on the development of such narratives to the exclusion of other messages. emotion in stakeholder evaluations. in general, the lack of attention in prior research to narrative’s ability to influence stakeholders through emotion is representative of a more general omission in management research: an absence of studies considering the role of emotion in firm evaluations (tetlock, saar-tsechansky, & macskassy, 2008; for an exception, see pfarrer, pollock, & rindova, 2010). indeed, while most research emphasizes how stakeholders evaluate organizations using predominantly analytical, “businessfocused” criteria, this study’s findings suggest that stakeholder evaluations can be more complex and that emotion’s influence can have important implications. for instance, the media, which represent a significant source of firm evaluations, seem to give preference to social entrepreneurs’ stories because of their “feel-good” nature. this suggests that by being able to construct emotional narratives social ventures are in a unique position to capture media resources. moreover, other groups, such as investors, suggested that their decisions regarding a social enterprise were swayed, at least to some extent, by the degree to which the narratives appealed to their emotions. by examining the interplay between emotion, a firm’s communication, and its stakeholders this study begins to explore a largely ignored aspect of organizational research. the marketing and entrepreneurship interface. although marketing and entrepreneurship research have traditionally been treated as separate endeavors, a growing body of work is devoted to examining the intersection of the two disciplines (e.g. hills & laforge, 1992; stokes, 2000; webb, ireland, hitt, kistruck, &tihanyi, 2011). this research has focused on an array of topics, such as how entrepreneurs create customer demand for “new to the world” products and the extent to which marketing decisions can be critical in small and medium-sized enterprises (smes) that often face severe resource constraints, limited market image, brand loyalty, and market share, and more imperfect information than larger firms (hills, 1999: 5-6). however, research has yet to examine the interface between marketing and social entrepreneurship or to determine if marketing is “viewed differently and performed differently” (hills, hultman, & miles, 2008: 102) in social ventures. thus, it is unclear if the social entrepreneurship-marketing interface journal of small business strategy vol. 24, no. 2 61 requires separate examination from work on traditional entrepreneurship and marketing. the findings of this study suggest that, at minimum, being a social venture adds a layer of complexity to entrepreneurially marketing and to how social entrepreneurs construct and communicate their “marketing narratives” (mcferran, dahl, gorn, & honea, 2009). as described, social ventures differ from traditional ventures in that they must communicate to two, demand-side stakeholders: customers and beneficiaries. marketing research examining traditional for-profit corporations and smes has focused on how such ventures market their products and services to customers. at the same time, because nonprofit organizations often do not have customers in the traditional sense, research at the intersection of marketing and non-profit management has examined non-customer focused marketing activities (e.g. the use of marketing techniques to attract volunteers; bennett & sargeant, 2005). but what is not clear from these literatures is how social ventures navigate having to simultaneously market their products (and their organizations) to two very different stakeholder groups. the findings of this study suggest that the use of narratives, which balance emotional elements associated with the social problem addressed and descriptions of the strength of the venture’s business model, may be key to constructing communication that is persuasive with both customers and beneficiaries. although these findings are preliminary, they suggest that more work is needed to understand the unique characteristics and challenges of entrepreneurial marketing in social ventures. implications for social entrepreneurs this study has several implications for practicing social entrepreneurs. first, the findings suggest that social entrepreneurs should pay special attention to the narratives they construct and communicate to stakeholders. these narratives can play an important role in entrepreneurs’ relationships with key stakeholder groups such as customers, volunteers, and investors. in short, social entrepreneurs can benefit from acknowledging that storytelling “matters.” narratives’ ability to influence stakeholders in subtle but important ways suggests that entrepreneurs should make deliberate attempts to solicit and collect stories from their beneficiaries to incorporate into their organizational communication. as described, stories describing how a social venture’s beneficiaries are influenced by a social problem can be used to illustrate the problem in a way that grabs stakeholders’ attention, helps them to connect to the social problem being addressed, and inspires them to take actions on behalf of the organization and its beneficiaries. in addition to collecting stories purposively rather than haphazardly, entrepreneurs should also not focus solely on collecting objective data (e.g. recording only the number of homeless fed, or the number of refugees provided employment). instead, they should also encourage the beneficiaries of their venture to provide them with openended, subjective accounts of their experiences and of the impact the venture has had on their lives. metrics (financial and social) do matter, but the findings suggest that when social entrepreneurs collect data to use in communication with stakeholders they should not focus solely on quantifiable measures of their impact as this is unlikely to produce emotional narratives. notwithstanding the importance of emotional narratives, one of the study’s clearest takeaways is that it is critical for journal of small business strategy vol. 24, no. 2 62 social entrepreneurs to also communicate that they possess a viable and compelling business model. without such communication, which may focus on the venture’s economic value proposition, it is difficult to communicate persuasively to stakeholders – regardless of the emotion contained in the venture’s narratives. unfortunately, the ability to communicate the “business case” for one’s venture is a competency that is underemphasized in popular accounts of social entrepreneurship. limitations and directions for future research findings from this study suggest several other avenues for future research. first, as is often the case with inductive studies, an important next step is exploring if the findings presented are supported using deductive logic and with a larger sample of social entrepreneurs. such a study could utilize a large sample of social venture business plans. computer-automated text analysis (cata) techniques could be used to measure the level of emotion in the plans. these measures could then be used to predict the plans’ ability to, for example, grab investor attention or inspire them to commit resources to the firm. this type of study would be valuable because it could confirm (or disconfirm) the external validity of the findings derived from the relatively small sample of entrepreneurs in this study. second, although the sample of social venture participants is diverse with respect to occupation, industry, and organizational structure (i.e. for-profit or nonprofit), all of the participants are located in the developed world. the beneficiaries described are often from emerging countries, but the social ventures operate in developed markets. this is an important distinction because there is evidence to suggest that social entrepreneurship, and presumably social entrepreneur communication, may operate very differently in emerging economies. for instance, social entrepreneurs and investors recounted that developing world social ventures often have more access to “social-impact” stakeholders and particularly “impact investors” (e.g. bugglevine & goldstein, 2009) – i.e. angels or vcs who place a much higher premium than traditional investors on a venture’s social mission. informants suggest that this investor class has a different preferenceordering in the criteria they use to evaluate social ventures and, in fact, may be more swayed by emotional narratives about a venture’s social problem. however, does this mean that entrepreneurs pursuing this type of investment should simply place greater emphasis on constructing emotional narratives? or do these entrepreneurs’ communication strategies need to be more nuanced? since social venture founding rates in emerging countries are in many cases higher than in developed countries, and since “impact investors” seem to be an increasingly important investor class, gaining a better understanding of social entrepreneurship communication in these settings is an important next step. third, the goal of this study was to construct a framework to explain how social entrepreneurs communicate with stakeholder groups and, specifically, how the narratives they craft influence such groups. thus, the focus was constructing a process-oriented model. however, there are several interesting variance-focused questions. for instance, are differences in entrepreneurs’ narrative construction and deployment associated with differences in their ability to acquire resources from stakeholders? similarly, are entrepreneurs that construct narratives that attempt to appeal to stakeholders’ emotions more successful in getting resources than those journal of small business strategy vol. 24, no. 2 63 attempting to influence stakeholders through cognitive mechanisms, such as legitimation? pursuing these and other important questions may prove fruitful for future studies. finally, despite the study’s theoretical and normative implications, it represents only a “first cut” at understanding the phenomena described. however, the study is a step in the direction of developing a better understanding of how social entrepreneurs communicate with their stakeholders. moreover, it suggests that narratives can influence stakeholders in subtle but powerful ways. thus, it is important for both social entrepreneurship 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(2009), “a typology of social entrepreneurs: motives, search processes and ethical challenges”, journal of business venturing, vol. 24 no. 5, pp. 519-532. philip t. roundy is an assistant professor of entrepreneurship in the marketing and entrepreneurship department at the university of tennessee at chattanooga. in his primary stream of research he examines how social entrepreneurs acquire the resources needed to found and grow their ventures. his other research focuses on the role of narratives in stakeholder evaluations and strategic decision making. his work has been published in journals such as strategic organization, academy of management perspectives, and the journal of behavioral and applied management. he holds a doctorate degree from the university of texas at austin. reproduced with permission of the copyright owner. further reproduction prohibited without permission. st~zzoy the americans with disabilities act: what it means to small business owners kathleen c. brannen terrence m. begley creighton university abstract small business owners with as few as 15 employees come under the provisions of the americans with disabilities act on july 26, 1994. a small business not affected in the employment area may need to provide the disabled customer access to the business. successful small business strategies for the future should systematically incorporate not only the philosophy of accommodation for the disabled, but realistic auention to derails of compliance and competitiveness. this paper reviews terms and conditions thar will aid the business compliance owner in planning for compliance with the ada. additional sources of help are also provided. introduction the americans with disabilities act of 1990—a major new civil rights law-makes it illegal to discriminate against individuals with disabilities in employment, public accommodation, public services, transportation, and telecommunications. this legislation, known as the ada, extended coverage to businesses with as few as 15 employees on july 26, 1994. the purpose of this article is to inform the small business owner (sbo) or consultant of the ada concepts that are relevant to the small business, the problems areas that require awareness and comingency planning, and some sources of additional expertise. the need for ada legislation was reconfirmed in a recent survey by the national organiuation on disability which indicated that two-thirds of disabled americans between ages 16 and 64 are unemployed, a proponion that has not changed since 1986 ("smaller firms", 1994). the spirit of this legislation is conveyed by former attorney general richard thornburgh (pp. 803-804): do not let this bright moment in modem american history escape you....the passage of ada is truly another emancipation, not only for the 43 million americans with disabilities who will directly benefit but even more so for the rest of us, now free to benefit from the contributions that these americans will make to our economy, our communities, and our individual well-being. the sbo can create an ada plan as a component of a competitive strategy to employ the disabled and to improve the accessibility of disabled people as employees and as consumers. the ada affects small businesses panicularly in the areas of public access and employmcnt. this article will help the small business owner who does not have ready 79 access to the more sophisticated and expensive expertise of human resource consultants, attorneys, and architects, but who still must comply with the requirements of the legislation. although small firms will be protected from "undue hardship," a successful business strategy for the competitive 1990's should give realistic attention to the details of compliance and competitiveness. this article is divided into uuee main sections and two appendices. the first section discusses how to comply with public access requirements by making your premises more accessible to disabled customers and employees. in the second section we discuss issues concerning disabled employees such as when an employer has to be in compliance, what constitutes a disability, and how to clarify job descriptions and specifications. the third section provides guidelines for incorporating ada planning into small business strategy. the appendices list sources of help for hiring and providing public access to the disabled. thc business owner should consider two categories of changes for complying with thc ada: (i) hiring disabled employees, and (2) serving disabled customers. providing public access decini ion-public accommodauon public accommodations and services operated by private entities is covered by title iii of thc ada. section 302 states that no individual shall be discriminated against on the basis of disability in the full and equal enjoyment of the goods, services, facilities, pnvileges, advantages, or accommodations of any place of public accommodation by any person who owns, lcascs, leases to, or operates a place of public accommodation. lt is not yet clear what level of accommodation will be required. however, kelly and albcns (1990, p. 680) emphasize that: unlike title i, which prescribes a minimum number of employees, there is no such limitation in tiuc ill. consequently, cvcn a very small retail establishment is covered by the ada and will have to conform to the pertinent public accommodations provisions. large organizations will comply with title iii by using the services of an architect. thc small business owner may also need an architect, but may be able to achieve ada compliance with a simpler strategy. when making building changes, specify that the conuactor is responsible for meeting ada specifications or other compliance requirements. renegotiate leases to put the burden of building compliance on the owner. existing comracts of all kinds need to be reviewed by an attorney to determine whether they are impacted by the ada (barbe', cheek, and lacho, 1992). when thc small business owner evaluates the structural changes needed to provide public access to customers, he or she should also consider whether specific groups of 80 disabled consumers should become a target market. at the same time, employing disabled individuals could become part of a suategy to best serve some groups of consumers. common barriers faced b the disabled small business owners need to understand barriers faced by the disabled. here are some examples: 'arking-spaces too narrow, spaces not level, a curb or step located between the space and the walk, reserved parking signs not visible. 'approach-stree( between parking and entrance has no curb-cut or traffic signals, there are steps between sidewalk and entrance level. entrance-doors too narrow to admit wheelchair, revolving doors next to locked swing doors, distance between paired doors too short for wheelchairs, excessive prcssure needed to open the door. 'tairs-steps with open railings or projected nosings to trip users on crutches, handrails too high or too low, or handrails too difficult to grasp. 'levatorsi entrance too narrow for wheelchairs, cab size too small for wheelchairs, door level not aligned with lioor level, controls out of reach, controls not marked with braille indicators, no audible signal for upward or downward travel. 'floors-coverings made of a slippery material or deep-pile carpeting, or different levels connected by steps only. restrooms-located on another floor not connected by elevator, twin doors situated too close together for wheelchair access, inadequate wheelchair space. 'ater fountains-spout and controls out of reach, placed in alcove too narrow for wheelchair access. 'oin-operated telephones-booth is too narrow, controls are too high, and amplification is not provided. 'controls-controls for windows, draperies, heat and light, and fire alarms are out of reach of wheelchair occupants. 'hazards-doors to unauthorized areas not identifiable by touch alone, uncovered floor panels, low ceilings and fixtures. 'larms-fire alarms that produce audio warnings only, or exit signs not readily identifiable. gl 'other typical barriers-storage cabinets or work surfaces too high or too low, clearance for whee!chairs under work surface or dining tables. ways to rcmove barriers and provide reasonable accommodation are making their way into thc literature, especially the trade journals. some examples follow: 'eposition shelves or telephones. shelf and telephone heights should be at most 48 inches from the finished lloor. 'widen doors. minimum clearance width of 32 inches when the door is open 90 degrees is the standard, with enough room for the wheelchair to maneuver through the door. doors should open in, not out, for wheelchair access. 'djust aisles. aisles must be 36 inches wide, and self-service areas (such as buffets and salad bars) must be no higher than 54 inches. 'pgrade emergency alarms. alarms should provide both audible and visual warnings. 'position grab bars in toilet stalls. grab bars should be 36 inches above the floor and should ideally be placed on all four walls securely around the toilet. 'nsulate pipes under sinks hot water and drain pipes should be insulated to eliminate direct contact with them. 'nstall adjustable keyboard pads. this allows workers to adjust thc keyboard to their correct iyping hcighu 'use ergonomically adjustable chairs. non-wheelchair workers may need to adjust their seating height. 'install adjustable lighting. workers may need to adjust light in the workplace. 'onsider disability-specific hardware and so(iware. users may control a compuicr by winks or nods. software can magnify screen images, translation technology can convert screen images into spoken words, or voice-input devices may accommodate specific disabilities. 'install ramps or provide cups. the disabled can be helped to reach the water cooler. 'purchase a tty (teletypewriter) device. the deaf can communicate over the tclcphone system. many firms have made their tty lines toll-free to encourage their usc. 82 'provide personal service. when barrier removal is not readily achievable, the sbo may be able to accommodate the disabled person by providing personal auention to a disabled customer by such means as reading a menu or a price tag to a blind customer or bringing merchandise to a person in a wheelchair. public accommodations should install tty devices in airports, for example, vibratmg alarm clocks in hotels, and strobe lights for smoke alarms in restaurants. all facilities should retrofit door knobs to lever-handle locks. in addition, some consulting firms that can help with special problems are listed in appendix a. basic ada concepts for employing the disabled every sbo should consider the human resources needed to implement an ada compliance strategy. the following descriptions will aid in selecting the implementation suategies that benefit the birm and comply with the ada. ada covera e for em lo ers the provisions of title i govern employment, and the eeoc has published a technical assistance manual for employers and persons with disabilities. since this legislation extends io the millions of smaller firms with as few as fifteen employees, it is important that these firms understand how to comply with the law. definition-an em lo er for the first two years the act covered firms with 25 employees; after july 26, 1994: (a) in general--the term employer means a person engaged in an industry affecting commerce who has 15 or more employees for each working day in each of 20 or more calendar weeks in the current or preceding calendar year, and any agent of such person, employmem agencies, labor organizations and joint labormanagcmem committees. a special provision is included allowing employers to give religious-based preferences and requires that applicants and employees conform to their religious tenets (29cfr part 1630.16(a)). ~of -d bi the definition of disability was borrowed from the rehabilitation act of 1973 which covers federal contractors. a disabled person has: (a) a physical or mental impairment that substantially limits one or more of the major life activities of such individual; (8) a record of such an impairment; or 83 (c) being regarded as having such an impairment. wwht wob i below are some practical examples of what does and does not constitute a disability under the ada. disability not a disability obesity a temporary condition cerebral palsy transvestism epilepsy voyeurism muscular dysuophy transsexualism multiple sclerosis pedophilia diabetes bisexuality learning disabilities homosexuality hearing aid use exhibitionism manic depression compulsive gambler mastectomy victims pyromania&:s recovered alcoholic current alcoholic rccovercd drug addict current drug addict rccovcrcd nervous breakdown kleptomania current and rccovercd cancer gender identification h i v-positive disorder definitionuglified individual with a disabilit the term qtdttlified individudtl with a disability means an individual with a disability who, with or without reasonable accommodation, can perform the essential functions of the employment position that such individual holds or desires. for the purposes of this title, consideration shall be given to the employer's judgment as to what functions of a job are esscnual, and if an employer has prepared a wriuen description before advertising or interviewing applicants for the job, this description shall be considered evidence of the essenual functions of the job. this is onc of the most imponant secuons of the ada for the small business owner. ln order for the sbo to know if a disabled person can handle a particular job, the job requirements must be known. sbo's seldom have written job descriptions and job specifications, but now is the ume to add this professionalism to the small firm. there are two reference books, available at any comprehensive library, to assist in this task. they are d ~off~kit i dd 0 ~ io 0 dk k.t 0 published by thc u.s. department of labor. 84 j~bx job analysis is the process of breaking down a particular job into its various pans. it is used to separate the essential job functions from the nonessential job functions of a particular position. job analysis should be used for all jobs but is particularly useful when considering the job in relation to disabled applicants. the sbo should ask these questions when preparing a job analysis (loudon, 1991) 'ow is this msk performed? what methods, tools, or icchniqucs are used? 'ow often is the task performed? are those tasks performed less frequently as important to success as those tasks done more frequently? 'ow much time is allowed to perform the task? 'hy is the task performed? 'here is the task performed? 'ow is the suiiccss o( the msk measured? 'hat happens if the task is performed wrong? 'hat aptitudes are necessary for the task? 'hat knowledge is necessary for the task? 'hai skills are necessary i'or the task? how much physical exertion is required for the task? a need for job descri tions. an employer's ability both to define "the essential functions" of a particular job and to establish that a qualified disabled individual cannot perform these functions will be critical m defending against a charge of discrimination under the ada. this provision represents an important legislative concession to employers. in theory, employers can control their own destinies by determining in advance the physical and mental qualification requirements for panicular jobs. whenever possible, employers need to assess carefully the essential and noncsscntial aspects of each job. for some jobs, the best approach may be to itemize and prioritize all the duties of each position so that a written job description is clear, concise, and accurate (creasman gt butler, 1991). job descriptions are considered evidence of essential funcuons of a job, and should be prepared before advertising the position or interviewing applicams (loudon, 1991). definition-reasonable accommodation thc ada requires thc employer to make reasonable accommodation for an otherwise qualified individual with a disability. reasonable accommodation may include the following (creasman dk butler, 1991): making exisung i'acilities accessible to and usable by thc disabled, including removing existing barriers; restructuring jobs, work schcdulcs, and assignments; 'acquiring and modifying equipmcnt; 85 'djusting or modifying examinations, training mateiials, or policies; 'adopting new procedures; 'roviding qualified readers or interpreters; and making other similar accommodations definition-undue hardshi employers are noi required to make an accommodation that would cause an undue hardship. the term undue hardship means an activity that is unduly costly, extensive, disruptive, or that will fundamentally alter the nature of a business operation. sbo's are protected because of their size and financial resources from undue hardship when it involves "significant difficulty or expense". these factors include (i) the nature and cost of the accommodation; (2) the size, type, and financial resources of the specific facility where the accommodation would have to be made; and (3) the size, type, and financial resources of the covered employer. what should the sbo understand about the previous sections? first, the essential ~bf ' k i i' i i hd p ld p ' dl blllly idp f d jbf . a~bd i ~ i id iljbf a~bd ' ' i 'f 'jb'yl i pl d. if ih i q llfld individual with a disability applies i'or a position, the ada requires the employer to make reasonable accommodation, if the accommodation would not cause an undue hardship. incorporating ada planning into small business strategy changes in thc business to comply with the requirements of the ada should be incorporated imo the overall business strategy. implementation of the following ideas and procedures will noi only protect the small firm from possible litigation but also aid in the professional management of the firm and the achievement of successful long-term goals. ada implemcmation checklist for the small business owner: 'he term is disabled. the sbo should become accustomed to using the term disabled instead of handicapped. lindsay (1989-90, p. 334) quotes the senate labor commiuee rcport: the use of the term disability instead of handicap represents an effort by the committee to make use of up-to-date, currently accepted terminology...to many individuals with disabilities the terminology applied to them is a very significant and sensitive issue. 'avoid preconceived ideas. most discrimination against the disabled is based on assumptions about work and the portrayal of disabled persons as helpless. 86 'ost the proper notices g (s.105). every employer must post notices in an accessible format to applicants and employees which describe the applicable provisions of the ada. the format is the same as prescribed by sec. 711 of the civil rights act of 1964 (42 u.s.c. 20003-10). 'nderstand essential job functions. an employer must know the essential functions of a job in order to determine whether or not a disabled person can perform the job. a clear understanding of these functions is related not only to the ada, but also to the overall division of labor in the firm. analysis for the ada may provide insight into new divisions of labor that will also accommodate firm growth. be open to reasonable accommodation. disabled people know what types of accommodations are efl'ective. according to cch (1990, p. 101): "stereotypes about disability can resuh in stereotypes about the need for accommodations, which may exceed what is actually required. consuhations between employers and the persons with disabilities will result in an accurate assessment of what is required in order to perform the job duties." use this five-step process for job accommodations: 1. determine that the individual is minimally qualified; 2. obtain job and task information by listing each step of a job and the requirements for performing each step; 3. determine the job modification needs by examining the requirements of the job and the capabilities of the potential worker; 4. explore alternatives with the worker; 5. select the most effective modilications. 'use appropriate testing. employers will have to (i) review and revise tests, the way tests are administcrcd, other selection criteria, and practices to make sure they do not discriminate against disabled individuals, (2) use tests or selection criteria that are job-related, (3) use employment entrance exams only if they are given to all employees, regardless of disability. 'ollow guidelines for those with diseases. employees with infectious and communicable diseases can be transfcrrcd from food handling jobs only if the diseases are on the list of infectious and communicable diseases published by the secretary ol'ealth and human service and if risk of harm cannot be eliminated by reasonable accommodation. practices dealing with aids employees must follow the cdc (centers for disease control and prevention) guidelines. consider drug testing. the ada legislation does not take a position on drug tesung, and drug testing is not considered a medical examination for ada purposes. consequently, employers can require employees to conform with drug-free workplace act requirements. 87 'know that other legislation supports ada. the ada does not invalidate or limit other federal, state, or local laws that give individuals with disabilities greater or equal protecuon. 'e a can-do manager. remember that entrepreneurial managers are concerned with solving problems, not with inventing reasons why something can't be done. passage of the ada requires a change in the thinking of americans that has been a long time in coming: over fony years ago, the department of labor conducted a study and found that there were no significam differences in producuvity, injuries on the job, absenteeism, or voluntary resignation between disabled and non-disabled workers" (marlow dt marlow, 1990, p. 97). the disabled i'ace massive discrimination according to the congressional task force on the rights and empowerment of americans with disabilities, and the disabled are being thwarted as much by obsolete attitudes as by inaccessible environments (pati and stubblcficld, 1990). in addition, excluding from the workforce the 10 million employable disabled citizens out of thc population of 43 million disabled costs society $300 billion annually (pati and stubblcfield, 1990), at a cost to the federal government of $ 1 billion annually (loudon, 1990). although the ada became effective on july 26, 1990, it was only on july 26, 1994, that the ada was cxtcndcd to thc estimated one half million businesses employing 15 to 24 workers. auorney general janet reno, at a ceremony designed to educate the newly covered employccs, told disability advocates that "too many have taken a wait-and-see uuitudc to determine whether the justice department is serious about forcing compliance. i have just one answer: wc are serious" ("disabilities act," 1994). the need to comply with thc ada provides an opportunity to rethink our approaches to "the way we have always done it." thc regulations and their interpretations are confusing and voluminous. but the law will not go away, and the sbo can begin by using this article to incorporate ada thinking into your business strmcgy. what the ada means to the small business owner is another way to bc more compcutive in both thc dclivcry of goods and services and in the creation of a motivating work cnvironmem for employees. as attorney general reno remarked, "lt's not hard to comply with thc ada...because the ada isn't just the way things should be. now it's thc law" ("disabilities act," 1994). gg references ahon, r. j. (1992, october). americans with disabilities act impacts building design and construction. national real estate investor, 123-124. ballengcr, joc, franklin, geralyn mcclure & robinson, robert k. (1992). accommodating thc disabled customer: perceptions of small business owners and managers toward the law. journal of business and entre reneurshi, 4(1), 43-51. barbc', dcborah cox, cheek, ronald g., & lacho, kenneth j. (1992). what's a small business owner to do? a framework and guidelines for complying with title iemploymcnt of the americans with disabilities act of 1990. journal of business ~66 61, 4(1), 33-63. breuer, n. l. (1993). resources can relieve ada fears. personnel journal, 72, 134. cch ediiorial staff. (1990). cch's ex lanation of the americans with disabilities act of 1990. chicago. creasman, r. l. jr., & butler, p. g. (1991). will the americans with disabilities act disable employers? labor law journal, 42, 52-55. disabilities act umbrella covers more small businesses. (1994, july 26). omaha worldherald, 12. jacobs, r. b. (1990) the americans with disabilities act: what should employers do now? (special repon on the ada). commerce clearing house, inc. kelly, e. p. & alberts, r. j. (1990). americans with disabilities act: undue hardship for private sector employers. labor law journal, 41, 675-684. lindsay, r. a. (1989-90). discrimination against the disabled: the impact of the new federal legislation. em lo ee relations law journal, 15, 333-345. marlow, e. k. & marlow, n. d. (1990). employment of the physically handicapped and thc ada. journal of business su'ate ies, 7, 96-104. mcisingcr, s. r. (1990, winter). the americans with disabilities act of 1990; a new challcngc for human resource managers. hr, 1-16. mcllo, j. a. (1993). employing and accommodating workers with disabilities: mandates and guidelines for labor relations. labor law journal, 44, 162-170. pati, g. c. & stubblcfield, g. (1990). the disabled are able to work, personnel journal, 69, 30-34. smaller firms in target zone of disability act, (1994, july 10). omaha world-herald, gl. snyder, d. a. (1993). qualified individuals with disabilities: defining the ada's protected class. labor law journal, 44, 101-109. thornburgh, r. (1990). the americans with disabiliues act: what it means to all americans. labor law journal, 41, 803-807. a 3 131 1 ada, (1993, f 6 ~). ~mr 1,33-33. 89 appendix a sources of help for hiring the disabled 'elp through industry retraining and employment (hire) will pay for the cost of training a disabled worker up to 50% of the new worker's hourly wage for up to six months. 'atabanks and hot lines abledata is a databank that lists reasonableaccommodation equipmcnt for disabling conditions and is available online at (916) 654-8121. job accommodation network is a clearinghouse of jobs and accommodations ncedcd by thc disabled to perform those jobs is available at (800) 526-7234 (breuer, 1993). 'software: crosswalk and descripuons write now! are examples of software packages used to del'ine essential job functions in creating job descriptions (breuer, 1993). pro ram and su rt services program and support services are designed to help the disabled person enter and become cstablishcd in the workplace. employee support services are set up by rehabilitation agencies and busincsscs. 'he federal job accommodation network (jan), offers free advice to employers (800) 526-7234. a database provides practical solutions for adapting jobs for disabled applicants and employccs. information includes job modifications, technological devices, and various work place adoptions. (marlow & marlow, 1990). 'state commissions. programs which instruct business on ada implications are being conducted by rehabilitation commissions of each state and by state commissions 1'or the blind (ballenger, franklin, and robinson, 1992). 'nusual equipment needs can be met. a disabled individual who requires supponing cquipmcnt typically will bring it to the workplace. sources of equipment include state funding or insurance funding. rehabilitation programs may provide the person with all the equipment necessary to be productive in the job (jacobs, 1990). 'echnical assistance is available. federal agencies with responsibility for implementing thc ada must provide technical assistance manuals for each title of this act. the equal employment opportunity commission (eeoc) publishes a 90 technical assistance manual for employers and disabled persons who have employment questions. 'ublic law 101-336-july 26, 1990. the text of the ada is available from the superintendent of documents, government printing office, washington, dc 20402 for 51.50. 'ommerce clearing house publication. cch's ex lanation of the americans with disabilities act of 1990 can be ordered from commerce clearing house, inc., 4025 west peterson ave., chicago, il 60646 for a nominal fee. see also the ada special report by jacobs (1990). 'iterature sources. a sample of the literature by topical area is presented below. national real estate investor-advice and resources for those involved in building design and construction (alton, 1992). 'liill i i—aoa i i g d gl y ic & butler, 1991; kelly k. alberts, 1990; thomburgh, 1990; mello, 1993; snyder, 1993). mmm g i — y g di "at ikg i aita'1993). 'le al and human resource ex erts —(jacobs, 1990; lindsay, 1989-90; marlow & marlow, 1990; pati k stubblelield, 1990; meisinger, 1990) 91 1 appendix b financial incentives to provide public access there are several sources of iinancial aid to help the small business owner provide public access to the disabled: the targeted jobs tax credit program targets newly disabled workers. in the first year a company can claim 50 percent of the first $6,000 paid in wages as a tax credit. twenty-five percent of the $6,000 paid in the second year is deductible. thc credit is limited to 90 percent of the company's tax liability, 'he internal revenue code as amended in 1990 allows a deduction of up to $ 15,000 pcr year for the removal of qualified architectural and transportation hangers. 'elp for small business is provided by the irs for cenain costs of compliance with the ada. an eligible small business is one whose gross receipts do not exceed $ 1,000,000 or whose workforcc docs not consist ol'ore than 30 full-time workers. qualifying businesses may claim a credit of up to 50 percent of eligible access expenditures thut cxcccd $250 but do not exceed $ 10,250. examples of eligible access expenses mcludc thc necessary and reasonable costs of removing architectural, physical, communications, and uansponation barriers; providing readers, imerpreters, and other auxiliary aids; and acquiring or modifying equipment or devices (ada handbook, appendix hk10). 92 sruti rz'oy there are few differences between successful and failed small businesses robert lxt. lussier springfield college joel corman suffolk university abstract literature supports the idea that the difference between a successful and a failed small business is dependent upon the firm having ior using with more effiiciency) greater access to variables such as (capital...management skills). with a sample of 2)6 matched pairs this srudy used bi variate statistics to test the hypothesis that successful businesses have significamiy better results for ail i5 literature variables (p&05). the test results reveal that successful firms made significantl greater use of only two variables: professional advisors and their parems owned a business. at variance with the literature and expecrations, the failed business owners had a higher level of education and experienced fewer staffing difficulties. it can be concluded that there may not be a valid and reliable set of variables rhat can distinguish success from failure, and that a diferent methodological research approach may be necessary. it can be implied that success comes pom examining and understanding ihese variables and applying them for the specific situation ai hand. introduction the important role of small business suggests that an understanding of why firms fail and succeed is crucial to the stability and health of thc economy (gaskill, van auken, & manning, 1993).of major concern to any would-be entrepreneur is the chance of success for the proposed business. success versus failure prediction research benet'its entrepreneurs; those who assist, train and advise them; those who provide capital for their ventures; suppliers, and public policy makers (altman, 1983; ballantin, cleveland, & koeller 1992; cameron, kim, &. wheuen, 1987; d'aveni, 1989; dugan & zavgren, 1989; koh & killough, 1990; pech &. alistair, 1993; storey, keasey, watson, &. wynarczyk, 1987). there are many studies that analyze business success versus failure. however, as gaskill, van auken, and manning (1993)stated: there are many questions still to be resolved and warram additional exploration... previous studies do not provide a comprehensive or unilied explanation for small firm failure... comparisons are needed between successful and failed small business owners. prior empirical studies of failure have concentrated almost exclusively on financiai ratio data, though other studies of failure usually cite managerial variables as being critical 21 (scherr, 1989). the usefulness of ratio-based business failure prediction models have been questioned (e.g., alves, 1978; corman & lussier, 1991; gilbert, menon, & schwartz, 1990; shelton, 1986; stockton, 1989; sommers & koc, 1987). for example, ei-zayaty (1986) found ratio models to be poor predictors of bankruptcy: of 132 businesses predicted to'ail, only 5 were discontinued over a five-year period. these models had about a 97 percent type ii error rate. storey et al. (1987) indicated that qualitative data can provide at least as good predictions as traditional financial ratios. this study is not based not rinancial ratios, but on quantitative and qualitative managerial factors contributing to success or failure. to date, no other success versus failure studies have been found that compare the resources of successful and failed businesses: to determine bivariate statistical differences through surveying failed businessesusing matched pairs. other studies (cooper et al., 1990 &. 1991; reynolds, 1987 & 1989) have suweyed firms conducting business; then after a year or longer, some of the firms failed. at that time, they compared the responses of the failed i'irms and the surviving firms to analyze the differences without ever questioning the failures to ask them why they failed. this matched pairs design avoids comparing larger businesses to smaller ones, retailers to manufacturers or construction companies, older to younger firms, and businesses from different locations by controlling for these variables. variables distinguishing business success from failure: the literature there is no generally accepted list of variables distinguishing business success from i'ailure. however, prior research has created discrepancies within the literature by citing di(fcrcm variables as contributing factors to success or i'ailure. the two most commonly stated distinguishing variables are capital and management experience. in 20 journal articles only 14 (70%) specifically state that these two variables contribute to success versus failure; however other studies claim they do not. the list of success versus failure variables in this study was developed by including the fil'teen major variables, identified in 20 journal articles, as contributing to success versus failure. see table i for an explanation of the 15 variables, and table 2 for a comparison of the 20 studies that support, do not support, or do not mention each variable. the literature variables s/f = f (capital, record keeping and financial convol, industry experience, management experience, planning, professional advisors, education, staffing, product/sewice timing, economic tiining, age of owner, partners, parents owned a business, minority, marketing skills) 22 table i explanation of success versus failure variables capital (capt). businesses that start undercapitalized have a greater chance of failure than firms that start with adequate capital. record keeping and financial control (rkfc). businesses that do not keep updated and accurate records and do not use adequate financial controls have a greater chance of failure than firms that do. industry experience (inex). businesses managed by people without prior industry experience have a greater chance of failure than firms managed by people with prior industry experience. management experience (maex). businesses managed by people without prior management experience have a greater chance of failure than firms that are managed by people with prior management experience. planning (plan). businesses that do not develop specific business plans have a greater chance of failure than firms that do. professional advisors (prad). businesses that do not use professional advisors have a greater chance of failure than firms using professional advisors. education (educ). people without any college education who start a business have a greater chance of failure than people with one or more years of college education. sta(bng (staffl. businesses that cannot attract and retain quality employees have a greater chance of'ailure than firms that can. product/service timing (psti). businesses that select products/services that are too new or ioo old have a greater chance of failure than firms that select products/services that are in the growth stage. economic timing (acti). businesses that start during a recession have a greater chance of failure than firms that start during expansion periods. age (age). younger people who start a business have a greater chance of failure than older people starting a business. partners (part). a business started by one person has a greater chance of failure than a firm started by more than one person. parents (pent). business owners whose parents did not own a business have a greater chance of failure than owners whose parents did own a business. minority (mior). minorities have a greater chance of failure than nonminorities. marketing (mrkt). business owners without marketing skills have a greater chance of failure than owners with marketing skills. 23 tablf. 2 a comparison of variables identified in the literature as factors connibuiing io business success versus failure senior independent. variables aur.hot ca t rkfc inex maex lan rad educ sraf sti acti a e art ent mlor mrkt barsle f f f f f bruno f' f f f f f f coo er 90 f n n f f n — f f f f — f coo er 91 f f n f f n n n n f f crauford f f f n n de 8 st f f f f f vlahuin f f f v f f daskrll 93 n f f f f f n n — — — f loan v n n f f kenned f f f f la u z o n f f f f f nc uorn f f f f 8 no 1 de 8'1 f f f n f n hn no!de 89 f f f n n f n f sa i' f f summers f f f them son n f f f f — f vrui .' v f f f n f f f f f — f w i lit v 1' f wood 89 f f f f f ".'otal f 14 10 10 14 11 9 6 5 6 5 1 3 1 2 5 n 2 0 1 3 2 0 3 2 1 3 3 1 0 0 1 total — 4 1d 9 3 7 11 11 13 13 12 16 16 19 18 14 f supports variable as a contributing factor n docs not suppon variable 8 contributing factor docs not mention variable as a contributing factor rcs ar h uestion and h esis do successful and failed businesses have equal resources? according to the literature review, although there are discrepancies, thc successful businesses should have the more lavorable resources for all 15 variables. this study will support or not support each of the major 15 variables in the literature through bivariate testing. 1( the successful firms do have significantly greater resources (p & .05) than this study supports prior research. however, if the successful firms do not have greater resources, than researchers should reconsider the methodological approach to dctcrmine success versus failure. 24 hypothesis: successful small businesses have significantly greater resources (p&.05) than failed businesses for all 15 variables. methodology this study adopts dun ik bradstreet's (1993; i) definitions of failure and discontinuance. business failures are firms involved in court proceedings or voluntary actions involving losses to creditors. chapter 7 and chapter 11 companies are both considered to have failed due to loss io creditors: chapter 7 companies liquidate their assets whereas chapter 11 companies restructure their debt and stay in business. firms going out of businesses without loss to creditors are not considered business failures: they are discontinued businesses. to be considered a success the business must make at least industry average profits, s~am le the sample was limited to the six new england states-connecticut, maine, massachuseus, new hampshire, rhode island, and vermont. the population of failed businesses includes chapter 7 and 11 companies. due to difficulties in locating liquidated business owners, the sample frame was chapter 11 companies. the failure sample was generated from the bankruptcy court records. the questionnaire was first mailed to each owner/ceo filing chapter 11 during the most recent year. the questionnaire was then mailed to each failed respondent's successful company match. matching was selectively based on size (number of employees), age (all firms are ten years old or less), location (same state and city, or city close by), and industry (same dun ik bradstreet classification) to ensure relevam comparisons. the combined percentage of failure and successful company matched response rate is 39 percem. a total of 216 usable questionnaires equally divided bctwccn failed and successful firms were returned and analyzed. measurement to increase reliability, the questionnaire was carefully developed through four pretests with each of the variables debned on the questionnaire. one of the major concerns was response rate. because the questionnaire's length was limited in order to increase the response rate. a trade-off was made; rather than having several repeat questions, the questionnaire used one open-ended question to check reliability. there was only one nonrcliable response (.005%); therefore, reliability is inferred. the questionnaire had 15 questions designed to measure the successful and failed businesses'esources i'or each of the 15 variables identified in the literature. in the variables column, in (parentheses) of table 3, the measurement of each variable is given. columns two through five provide the failed and successful mean and standard deviation, or frequency. in addition to the descriptive data in table 3, the sample of small businesses included approximately 20 percent from connecticut, 5% maine, 44% massachuseus, 19% new 25 hampshire, 9% rhode island, and 6% vermont. the mean age of the failed and successful firms was 5.5 and 5.8 years. the mean, median, and mode of the number of employees for the (ailed and successful firms were: 25.33, 15.00, 5.00; 22.22, 8.00, 2.00 respectively. indusuy represcnunion (as classified by dun + bradstreet) includes approximately: 2 percent agriculture, 14% construction, 17% finance, 10% manufacturing, 22% retailing, 3% wholesale, 6% uansportation and communication, and 25% services. the failed and successful descriptive statistical measures for each of the 15 variables were compared using the appropriate bivariate test for the measurement scale. the variables measured on thc ratio scale compare the successful mean to the (ailed mean using the paired t-test. the variables measured on the seven point likert scale are ordinal data comparing mean ranks using thc wilcoxon matched pairs signed ranks test; however, the means rather than mean ranks are given in table 3 for easier comparison, the variables measured on the nominal scale compare frequency distributions using the mcnemar paired chi-square test. see table 3 column six i'or the t, z, and x'alues of bivariate testing. at the bottom of the table is a listing of which test was used with each variable. the significant dif(erences are idcnti(ied with asterisks, bivariate statistical results h othcsis test of dil'ferences between successful and failed businesses according to the hypothesis which was based on the literature the successful small busincsscs should have significamly greater resources (p & .05) than failed businesses for all 15 variables. however, this was not thc case. the successful businesses had significantly grcatcr rcsourccs i'or only 2 of the 15 variables (13%). successful businesses did make grcatcr usc ol'rol'essional advisors, and more of them had parents who owned a business. howcvcr, counter-intuitive to the literature, the i'ailed business had significantly greater resources for two variables. failed busmess owners had a higher icvcl of education and an casicr iime staffing. rel'er back ui table 3 i'or a comparison of all variables and a listing of thc iypc ol'csi used (or each variable. discussion thc results of this study contradict prior literature and common expectations. part of thc discrepancy between this study and the literature may be due to the fact that of the 20 articles only 5 are based on good empirical research (cooper et al., 1990 gt 1991; gakill ci al., 1993; reynolds, 1987 &. 1989). the other anicles are based primarily on secondary source and opinions. 26 table 3 descriptive and bivaeiate statistical results failed fail success succ bfvariate test mean/ stand dev mean/ stand dev vanables ~fr uenc ~uenc 1. capital 4.75 1.61 4.60 1.54 z 0.753 (i adequate 7 mad) 2. record keeping and financial control 4.69 1.72 4.77 1.54 z 0.392 (i poor 7 good) 3. industry experience 10.00 8.34 8.39 7.99 t 1.53 (number of years) 4. management experience 9 29 7.74 7.63 8.21 t 1.51 (number of years) 5. planning 4.09 1.71 3.84 1.52 z 1.171 (i specific 7 no plan) 6. profesnonal advice 3.96 1.72 3.03 1.39 z 2.679vv (i used 7 not used) 7 fztucation 15.32 2.98 14.53 2.59 t 2.30* (number of years) 8. staffing 5,05 1.59 4.29 1.72 z 3.469vvv (i difficult 7 easy) 9. product/service timing 3.94 1.45 3.95 1.31 z 0.204 (i intro. 7 decline) 10. econonuc uming 4.19 1.85 4.20 1.76 z 0.209 (i recession ~ 7 expan.) i l. age of owner 37.17 8.81 35.89 8.84 t 0.89 (number of years) 12. panners 62 70 x'1.45 (number utth panners) 13. parents 33 45 x'4.46v (4 who owned a business) 14. minority 8 6 x'0.31 (it of mmonty owners) 15. marketing 4.46 1.77 3.94 1.76 z 1.749 (i unslnlled 7 skilled) a. age of burmese 5.49 2.80 5.82 2.78 t 0.877 (number of years) b. size 25.33 37 79 22.23 42.33 t 0.567 (number of employees) n = ai e, an matc e success u irms a + b are leuers because they are not success versus failure variables bivariate test to determine significant differences: paired t-testvariables 3,4,7,11,a,b 27 wilcoxon matched-pairs signed ranks testvariables 1,2,5,6,8,9,10,15 mcnemar (a paired chi-square test)variables 12,13,14 significance level ~ p & .05 p &.ol p &.001 thc u end towards requiring empirical research as a criteria for publication should continue. should resuhs that contradict prior literature and common expectations be published? such i'indings can in fact serve (o add to our insights. however, contradictions should only bc published il'hey are based on meticulously developed and executed empirical research designs. again, this study has a large sample size of 216 with a response rate of 39 percent which is large i'or studies actually surveying failed businesses. the matched pairs design controls for firm size, industry, regional context, and age of the firm. all four are considered to have a statistically significant impact on firm survival (cooper et al., 1990 & 1991; reynolds, 1987 gt 1989). criucal to survey research is the sample. in addition to the sample metho&lology presented, bivariate testing was used to determine the validity of the sample, and to address nonrcsponse bias. results are presented in the next three sub-sections. validit of the cha ter 11 com an sam le chapier 11 firms are early representaiives of closed businesses. wood (1990) reported less than 5 percent of chapter 11 companies survive whereas flynn (1989) reported a 10 to 12 percent survival rate. in this study 14 percent of the respondents were in chapter 7 proceedings. the responses of the chapter 7 companies were compared to the chapter 11 companies to dctcrmine dil'ferences. of the questions testing the model, none were signilicantly different (p & .05). therefore, t-testing infcrs that thc dominamly chapter 11 sample is a valid represcnuuion of failures. sam i rc rcscntation to ensure that the sample represents the population, a comparison was made of the sample failure frequency distributions to the failure population by state and industry. the population figures include chapter 7 and chapter 11 failures (dun + bradstreet 1993).using thc chi-square test, there is no significant difference (p&.05). in other words, businesses in all six states, and all types ol'usinesses, are represented by about the same percentage in thc sample as the population which they represent. percentage representation of the sample was listed above. nnn,ill nonrcsponsc bias was minimized in this study by including initial nonrespondents in the sample, and by comparing staustically the initial nonrespondents'ata to that of the initial rcspondcnts to ensure that there is no significam difference. approximately 10 percent of the sample includes initial nonrespondents. of the questions testing the model, no responses are signilicantly different (p&.05). the t-test and chi-square test results infer that the sample is not problematic due to nonresponse bias. 28 implications and conclusions there are discrepancies in the literature about which variables do in fact distinguish business success from failure (table 2), and between the literature and the findings of this study. in other words, there is no valid and reliable list of variables to date. does this mean that practiuoners and researchers cannot benefit from this research? certainly not. they should realize that there are few significant differences between successful and failed small business owners, that there are exceptions to the rule, and that there may not be a valid and reliable set of variables that can distinguish business success from failure. for example, this study found only four out of 15 signilicant differences (and two were the reverse of expectations) between successful and failed businesses, and all have exceptions. each is presented separately: i, signilicamly more successful business owners had parents that owned their own businesses than owners of failed businesses. however, more successful owners did not have parents thai owned a business than those that did (63 vs. 45). 2. successful businesses make significandy greater use of professional advisors than failed businesses. however, a couple ol'he owners stated the reason for their failure was poor professional advice. 3. failed business owners had a significantly higher level of education than successful business owners. however, some o( the successful business owners had master and doctorate degrees. 4. failed businesses had less dif1'iculty staffing than successful businesses. however, some of the successl'ul firms reported no difficulty. does thc observation that failed business owners how have a higher level of education and less difficulty staffing imply that education and staffing are not important? bio. signilicant does not always mean important. when examining the educational difference, it is only about two-thirds of a year. the failed business owners'ean level of education is about 3 i/3 years of college whereas successful owners is 2 i/2. having more education does not cause i'ailure, nor success. the level ol'ifliculty staffing is a self-reported perception. the difl'erence could be due to perception, or the fact that the owners of failed businesses were not as selective in recruiting, selecting, and retaining "good" employees. one cannot conclude that if a business does not have difficulty staffing it will fail. in addition, one cannot conclude that it is necessary to have parents who owned a business since this is beyond the control of the entrepreneur. similarly one cannot conclude that a business owner must use professional advice to bc successf'ul. these i'actors are helpful, but not necessary. im lications for practitioners a major implication i'or would-be entrepreneurs is that they should not seek to compare themselves to a lisi o( variables and think: if i meet all/most of these criteria variables i will be a successful business owner, nor, if i do not meet all/most of these criteria i will not be 29 successful. in addition, some of the variables are beyond the, entrepreneur's control. one cannot influence their parents owning a business or being a minority. the would-be entrepreneur can benefit from prior research by considering these variables when making the decision to start a business, but realize that there are exceptions and limitations to their use. and that resources such as experience and skill can be attained before and during business ownership. this same implication applies to those who assist, train and advise entrepreneurs, those who provide capital for their ventures, suppliers, and public policy makers. those who assist, uain and advise enuepreneurs should make them aware that variables do help to distinguish business success or failure, but there are many exceptions to the rule. those who provide capital and supplies to new ventures should consider the variables, but be aware of their limitations for predicting success or failure. public policy makers should continue to support small business with an understanding of these variables. im lications for researchers a major implication for researchers is the reality that a valid and reliable list of variables, a model, that can disunguish business success from failure does not exist. there may bc a more effective approach to the study of business success versus failure. perhaps wc can leam from leadership research. in the early 1900s, using leadership trait theory, researchers tried to identify a set of characteristics, that distinguished leaders from followers. by the late 1940s, theorist focused on what the leader did, behavioral leadership, in order to find the one best leadership style in all situations. by the late 1960s, contingency leadership theory focused on determining the appropriate leadership for a given situation,. this study supports the emphasis of robinson and pearcc (1984) and cochran (1981) on the imponance of focusing research studies on single industries within specific regions of the country. the size o( the business may also be a factor. this research approach more closely resembles contingency theory, and could be called contingency theory ol'usiness success versus failure. researchers must realize, however, that there may not be a valid and rcliablc list of variables even within specific industry segments. a major contribution of this study is the use of chapter 11 companies and the matched pairs design. gaskitl ct ak (1993 & 1994) calls for comparative studies between successful and failed small businesses but notes the difficulties involved in obtaining usable samples of failed businesses. as shown in this study, chapter 11 companies are a representative sample of failed businesses. hence using chapter 11 companies overcomes most of the difficulties involved in obtaining failed samples. the matchecl pairs design can be used to help control i'or industry, size, location, age, etc. in addition, it would be helpful to have a universally accepted operational definition of business failure. this study supports the use of dun bt bradstreet's definition which distinguishes failed business from discontinued businesses. there is also a need for empirical research rather than reporting secondary sources or giving opinions on why businesses succccd or fail. researchers should report discrepancies in the literature and between the 30 literature and their studies. the use and limitations of any list of variables or models that predict success versus failure should be clearly stated, and over-generalizations of findings should not be made. as with any study, this research has limitations. eight of the fifteen variables (capital, record keeping and financial control, planning, professional advice, staffing, product/service timing, economic timing, and marketing) are the subjective self-reported perceptions of business owners (see table 3). although sell'-reported perceptions are a recognized and frequently used method of dam collecuon, recognition must be given to the fact that the data collected may not mirror the exact extent of thc business owners'esources. therefore, it is recommended that further research incorporate more objective measures for these variables. and because the sample was taken from eight industries in new england, results may be dif1'ercnt for single industry studies or i'or studies based in other pans of the usa, or counuies. 31 references alunan, e. 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(1989). why new businesses fail and how to avoid disaster. cori&orate cashflow (august), 26-27. wood, d.l. (1990).credit technique: who gets hurt by bankruptcy?" business credit 92, 44. 33 strategy financing patterns of minority-owned small business howard e. van auken hayward horton iowa state university abstract this study examines the initial, seasonal, and refinancing characterisucs of 67 minority business owners. the results are compared io the financial characterisncs of women-owned and mixed ownership small jirms. minority-owned firnu are found to rely primarily on equity tofinance initial operations. minority business owners'nitial debt was commonly obtained through small business administration (sba)guaranteed loans and government grants. a very large percent ofthe minority business owners who acquired debt were required to provide numerous supporting documents. the resultsindictue that minority firms that experienced digicultyin obtaining iniu'al capital conti nue to experience financial problems relating to operations. inroduction small firms make an important contribution to the u.s. economy. the dynamic nature of small firms has been an important factor contributing to employment growth, product innovation, export growth, and regional economic development. while their contribution remains significant, the risk of starting a small firm is very large. dodge and robbins (1992) report that 55 percent of small firms fail within five years of starting and 81 percent fail within ten years. reasons for the high failure rate among small firms include poor managerial skills, inadequate planning, and inappropriate financial resources. the nature of a firm's capital structure has long been recognized as impacting the riskiness of the firm. beginning with modigliani and miller (1958),the theory of a firm's capital structure has focused on the risk-return trade-off between the use of debt versus equity. in general, the higher the level of debt, the greater the risk of the firm. brennan and schwartz (1978) show that large levels of debt in the capital structure increase the likelihood of firm failure. the development of finance theory has, however, relied on assumptions of perfect capital markets (brigham & gapenski, 1993). the economic environment in which small firms operate is not consistent with these perfect market assumptions. carter and van auken (1991)express that small firms have limited access to both equity and debt capital markets. as a result, small firms are more reliant on debt financing —especially from financial institutions and accounts payable. recent research on the financing of small firms is increasing our understanding of the specific sources of capital used to fund initial operations. van auken and carter (1989)report a heavy reliance on personal equity and borrowing from financial institutions and friends or relatives to finance initial operations. 31 van auken, gaskill, and kao (forthcoming) examine the financing patterns among womenowned small firms. that research shows that women entrepreneurs use a much greater percentage of equity to finance their initial operations than was found by van auken and carter (1989). in addiuon, the small women-owned firms generally relied more heavily on personal equity and friends or relatives and less on borrowing from lending institutions than small firms in general. in an early study of the financial characteristics of minority-owned firms, scott (1983) examined several financial characteristics of minority versus non-minority firms and found little difference in the relative levels of debt between the two categories of firms. bates (1991)found that commercial banks extend smallloans to black business owners than to white business owners. the great importance of lending institutions in linancing small firms, coupled with the finding by bates of commercial banks'eluctance to extend loans to black owners, results in bhck-owned fums being at a competitive disadvantage in the marketplace. they remain undercapitalized and are less able to gain on market opportunities. a recent study by feldman, koberg and dean (1991) examined the background and path to ownership and sources of capital used to finance small minority-owned firms. they found that personal savings was ranked l&y the vast majority of firms as the most important source of capital. lending institutions and friends or relatives were also commonly used and important sources of capital. capital was infrequendy obtained from other potenual sources, such as third party investors, venture capital, government, and other sources. the purpose of this paper is to present the results of a survey that examined the characteristics of initial financing and subsequently acquired capital of 67 minority-owned firms. while previous studies examined several aspects of the financing of minority-owned firms, this study identifies specific sources of capital, the relative percentage used of each source of capital, and financing mix. in addition, loan requirements from lending institutions and the use of seasonal financing are examined. correlation analysis is used to determine the relauonship between the difficulty of obtaining initial capital and the i) financing mix, 2) lending requirements, and 3) lack of capital for operations. such a study provides greater insight into how minority firms are financed. comparisons of these results with oth&:r similar studies can reveal financial constraints experienced by minority-owned firms and how minority owners adapt to financial market constraints. due to the differences in geographical scope and ume-frames, statisucal test of significance that compared the capitalization differences between minorityowned ctrms in this study with previous studies were not made. such statistical tests would not be valid. addiuonally, the purpose of the paper is to report on the capitalization experiences of minority-owned firms. in such a study, hypotheses were not appropriate and, thus, not developed. sampling methodology an attempt was made to identify as many minority-owned firms in iowa as possible. as such, the sample was obtained from several sources. one source was a list of minority-owned firms from the iowa department of economic development, office of minority affairs. in addiuon, the chambers of commerce in the ten cities in iowa having the largest minority populations were asked to provide a list of minority-owned firms operating in their community. these sources were supplemented by membership lists from minority business associations. the final sample contained 194 firms located throughout the state of iowa. a questionnaire was developed and pretested in july and august, 1992. the construction of the questionnaire used previous studies of small firms'apitalizarion. by using similar questions, comparisons between minority-owned firm's acquisition of capital and other owner32 ship categories could be made. the questionnaire contained sections requesting information on the characteristics of minority-owned firms and sources of capital (both initial, refinancing, and seasonal capital). the questionnaire also asked several questions concerning the difficulty of obtaining capital and the degree to which lack of capital has affected operations. all mailings occurred during september and october, 1992. a total of 67 usable questionnaires were returned, providing a 35 percent response rate. results business characteristics approximately 29.9percent of the responding firms were service businesses, 26.9 percent were construction, and 14.9percent were retail businesses. the remaining 28.3 percent were in other business categories, such as professional, wholesale, and manufacturing. the survey of minority-owned business enterprises(u.s. bureau of census, 1990) reported 55 percent of the minority-owned firms in iowa were service firms and 20 percent were retail firms. approximately 52 percent of the minority-owned firms were operated as soleproprietorships, 40 percent as corporations, and 8 percent as pannerships. approximately 50.7 percent identified their target market as being local, 31.3percent idenufied a regional market, 11.9percent served a national market, and 6.0 percent reported serving an international market. almost one-half (49.3percent) were located in cities larger than 100,000. the large percent located in larger cities is not surprising since most minorities in iowa reside in larger communities. approximately 60 percent of the minority-owned firms had an initial capitalization of less than $20,000. about 28 percent had an initial capitalization between $20,001-$100,000, and the remaining 22 percent had an initial capitalization greater than $ 100,000. these results are consistent with the reported small initial capitalization of other small firms in iowa (van auken dt carter, 1989). bates (1991)also reponed minority firms as being quite small. acquisition of initial capital the average initial financing mix among the m inority business owners was approximately 65 percent equity and 35 percent debt. this compares with an average initial financing mix among women business owners of 76 percent equity and 24 percent debt (van auken, gaskill, dt kao, forthcoming). the average initial financing structure for a mixed ownership sample of small businesses was 45 percent equity and 55 percent debt (van auken & carter, 1989). the heavy reliance on equity by minority small business owners to finance initial operations has been reported by bates (1991).according to bates, only low risk and financially secure minority firms am able to acquire debt financing. the difficulty of obtaining loans from lending institutions has resulted in the minority small business owners'se of greater levels of equity. thus, the low level of debt in the initial capital structure is not surprising. the distribution of equity versus debt in the capital structure indicated that 16.7percent of the minority firms were financed using no equity (100percent debt financed) and 55 percent were financed using no debt (100 percent equity financed). the financing mix of the remaining firms varied from equity levels of 2 to 67 percent of total capital. approximately 71 percent of these remaining firms used less than 35 percent equity in their initial capital structure, and 29 percent used 36 to 67 percent equity in their capital structure. the disuibution of equity versus debt 33 among the minority business owners is similar to that found among women business owners by van auken, gaskill, and kao (forthcoming). about 68 percent of the women business owners were 100 percent equity financed, while about 30 percent were 100 percent debt financed. van auken and carter (1989)found a bipolar financing mix among small firms in that about 30 percent were 100 percent equity financed and 30 percent were 100 percent debt financed. table i shows the sources and composition of initial capital. the information in the table covering equity capital includes only those firms using equity capital in their initial financing structure. a similar criteria was used for initial debt capital. table i demonstrates the importance of personal savings to finance the equity portion of iniual operations. approximately 73 4 percent of the respondents used personal savings as start-up capital and most relied on personal savings to fund the great majority of equity. other sources of equity capital, in order of imponance, include the use of home equity (14.3percent), other sources (10.2percent), third party investment (8.1 percent), sale of personal asset (8.0 percent), life insurance (4.0 percent), and limited parmership (4.0 percent). table 1 sources of initial equity and debt capital percent of responses by category source of equity percent of equity funds (n = 49) 1-50 51-100 total personal savings 20.4 53.0 73.4 life insurance 0.0 4.0 4.0 home equity 8.2 6.1 14.3 issuance of stock 0.0 0.0 0.0 limited partnership 2.0 2.0 4.0 sale of personal asset 4.0 4.0 8.0 third party investment 4.1 4.1 8.1 other 6.1 4.1 10.2 source of debt percent of debt capital (n = 27) 1-50 51-100 total friend/relative 0.0 11.1 11.1 lending institution 4.8 29.6 34.4 sba guaranteed 18.5 29.6 48.1 issuance of bond 0.0 0.0 0.0 finance company 3.7 7.4 11.1 government grant 3.7 11.1 14.8 other 0.0 7.4 7.4 the relative importance of personal savings to finance initial operations was reported by feldman, koberg, and dean (1991). however, relative use of personal savings to finance initial operauons among minority small business owners is much higher than for small firms as reported by van auken and carter (1989),but is much lower than reported by van auken, gaskill, and kao (forthcoming) among women small business owners. an addiuonal difference is that minority small business owners placed a much greater reliance on the usc of home equity loans than either small firms in general or women-owned small firms. 34 the distribution of debt is also shown in table 1. sba guaranteed loans (48.1 percent), loans from lending institutions (34.4 percent), and government grants (14.8 percent) were the most important sources of initial debt capital. other sources included friends or relatives (11.1percent), finance companies (11.1percent), and other debt sources (7.4 percent). the importance of loans from lending institutions (including sba guaranteed loans) is evident in that 82.5 percent of the firms obtained funds from these sources. the table also shows that loans from friends or relatives and "other" somces were used only when debt comprised the majority of initial capital. difficulties associated with mising a high percent of debt relative to total initial capital may necessitate packaging borrowed capital from a variety of sources. similar situations were also found for both small businexses in general (van auken & carter, 1989) and for womenowned small firms (van auken, gaskill, ec kao, forthcoming) as debt became a relatively more important source of borrowing. table 2 compares the percent of minority-owned, women-owned, and mixed-ownership firms using each source of capital. a larger percent of the minority-owned firms placed a greater reliance on personal savings than did the mixed ownership sample of small firms. however, a greater percent of women-owned firms used personal savings than did minority-owned firms. in addition, more of the minority-owned firms used home equity loans to finance initial operations than either the women-owned firms or the more general sample of small firms. table 2 percenr of firms using various sources of initial capital source minority women mixed owned owned ownership (%) (qo)'9o)'quity personal savings 73.4 85.2 54.8 life insurance 4.0 3.0 8.4 home equity 14.3 7.0 4.8 stock 0.0 2.0 8.4 limited partnership 4.0 2.0 1.2 sale of personal asset 8.0 9.0 7.2 third party investment 8.1 5.0 10.8 other 10.2 7.0 4.8 debt friend/relative 10.1 47.2 16.9 lending institution 34.4 55.6 63.9 sba guaranteed 48.1 5.6 7.8 bond 0.0 0.0 2.6 finance company 11.1 0.0 2.6 government grant 14.8 0.0 0.0 other debt 7.4 11.2 6.5 van auken, h., gaskill, l, k. kao, s. (in press). acquisition of capital by women entrepreneunn patterns of initial and refinancing capitalizanon. jowrml of small business end enr eprenewship. van auken, h., %carter r. (19s9).acquisition of capital by small business. jownel ofsmall business hfenegemset, 29, 1-9. a small percent of the minority-owned firms relied on loans from friends and lending institutions than did women-owned or the mixed ownership sample of small firms. in contrast, a much greater percent of the minority-owned small business owners used sba guaranteed loans, 35 borrowing from finance companies and government grants than reported for the other categories of small firms in table 2. women-owned and mixed-ownership small firms reported very little use of these types of initial debt financing. bates (1991)suggested that the difficulty of obtaining loans from commercial banks has resulted in small use of debt in the capital structure of black small business owners. the results in table 2 suggest that the commercial banks rely on the sba guarantee to cover the "discriminatory risk" noted by bates. this is especially evident in that no source of borrowing is a high percent of total initial debt funds. the minority small business owners apparently must rely on various sources of debt financing, perhaps even "piecing together" a debt linancing package to complement personal savings. such a composition of capital structure was not evident in previous studies of small firm financing. approximately 55.6 percent of the firms using debt to finance iniual operations were "other" firms, 25.9 percent were service firms, and 18.5percent were retail firms. table 3 shows the lending requirements (collateral, business plan, financial projection, market study, professional advice, co-signer, other) associated with this debt relative to iype of firm, only the firms using debt to finance their initial operations are included in the table results. the chi-squared statistic, which tests for significant differences by type of firm, shows no differences in borrowing requirements by type of firm. approximately 61 percent of the minority-owned firms had collateral requirements of 0-50 percent and about 39 percent had collateral requirements in excess of 50 percent of the loan value. van auken and carter (1989) reported a hrger percent of firms with less collateral requirements and a greater percent of firms with more collateral requirements. in contrast, women business owners had a much less collateral requirement in all categories (van auken, gaskill, et kao, forthcoming). table 3 type of business by debt and debt requirements percent of respondents by cotegory type of business variable n retail service other chi squared'ollateral 0-50% 10 25.0 12.5 62.5 (qo of debt) &509o 16 10.0 40.0 50.0 2.903 business yes 20 25.0 25.0 50.0 plan no 4 0.0 0.0 10.0 1.750 financial yes 20 23.5 23.5 53.0 projections no 8 16.7 16.7 66.7 1.400 market yes 16 25.0 25.0 50.0 study no 12 25.0 25.0 50.0 0.000 professional yes 14 35.0 8.3 66.7 advice no 14 18.2 36.4 45.5 4.857 co-signer yes 5 0.0 20.0 80.0 no 23 27.8 27.8 44.4 2.678 other yes 4 0.0 0.0 0.0 no 24 25.0 25.0 50.0 1.750 adjusted for small sample size. 36 'ihe majority of the minority business owners were required to pmvi de business plans (85.7 percent) and financial projections (71.4percent). a market study was required by 57.1 percent, and one-half of the firms were required to obtain professional advice. only a small percentage of the firms were required to have a co-signer (17.9 percent) or meet other (14.3 percent) requuements. table 4 compares the lending requirements of the minority-owned firms with those reported for women-owned and mixed-ownership firms. the table shows that a greater percentage of minority-owned firms (except the co-signer and "other" category) reported collateral and other lending requirements than for either of the other categories of firms. the differences in the percentage of minority-owned firms versus women-owned and mixedownership who were required to provide financial projections, market study and professional advice are dramatic. these differences are supportive of the findings by bates (1991) that minority-owned firms experience discrimination when borrowing capital. however, these results may also be a result of stringent sba lending requirements. table 4 borrowing requirements: percent of firms by ownership category borrowing requirement minority women mixed owned owned'wnership* collateral 65.4 44.4 60.0 business plan 87.0 38.9 49.2 financial projections 73.9 36.1 45.2 market study 60.9 5.6 12.7 professional advice 52.1 13.9 20.6 co-signer 21.7 25.0 3/4 other 13.0 30.6 25.4 van auken, h., gaskiu, l, dt kao, s. (in press). acquisiuon of capital by women entrepreneurs: pauems of iniual and refinancing capitalization. journal of small business ond erurepreaeurship. van auken h., a carter r. (1989).acquisition ot capital by small business. fournot ofsmolt business hfonog smear, 29, 1-9. table 5 shows the lending requirements as compared to the percent of debt in the firms'nitial capital structure and the relative chi-square statistic. the chi-squared statistic indicated that there was no statistical difference in the percentage of firms that were required to provide the lending requirements relative to the percentage of debt in the initial capital structure. the results indicated that the majority of the firms were required to have collateral levels of more than 50 percent of their borrowed capital. in addition, a large majority of the firms were required to submit business plans, financial projections, and market studies. a lower percentage of the firms were required to obtain professional advice, while a minority of the firms were required to obtain a co-signer or other requirement. 37 traditional finance theory emphasizes that the firm's financial;risk increases as the percent of their debt relative to total capital increases (brigham gc gapenski, 1993). as a consequence of this increasing financial risk, firms would be expected to meet more requirements prior to receiving a loan. the results in table 5 confirm ibis expectation. as the level of debt relative to initial capital increases, a larger percentage of firms were required to meet all of the specific lending requirements. similar results were found for women small business owners and mixed ownership small firms. table 5 debt requirements by percent lmiial debt percent of respondents by category and chi-squared statistic requirements n percent initial chi debt squared'-50 51-100 collateral 0-50 6 50.0 '0.0 51-100 20 65.0 35.0 0.439 business yes 20 30.0 70.0 plan no 3 0.0 100.0 1.218 financial yes 17 23.5 76.5 projections no 6 33.3 66.7 0.221 market yes 14 28.6 71.4 study no 9 22.2 77.8 0.115 professional yes 12 33.3 66.7 advice no 11 18.2 81.8 0.683 co-signer yes 5 0.0 100.0 no 18 33.3 66.7 2.255 other yes 3 0.0 100.0 no 20 30.0 70.0 1.218 adjusted for small sample size. a comparison of these lending requirements relative to initial debt levels (as a percentage of total initial capital) for minority-owned and mixed-ownership categories of small firms is shown in table 6. a greater percentage of minority firms is shown to have larger collateral requirements than for women and mixed ownership groups; however the differences in collateral requirements become small at higher debt levels. 38 table 6 also shows that the percentage of minority-owned firms having business plan, financial projection, and market study requirements is much higher than for women-owned and mixed ownership firms regardless of the amount of debt in the initial capital structure. however, a lower percentage of the minority-owned firms had co-signer and other requirements than either the women-owned or mixed-ownership groups. table 6 debt requirements by percent /ni tiai debt comparison by type of ownership requirements minority women mixed owned owned ownemhip ('ko) (qo)'9o)'-50 51-100 1-50 51-100 1-50 51-100 collateral 0 3.8 30.8 13.9 41.7 11.3 29.0 1-100 7.7 34.6 13.9 11.1 11.3 48.4 )100 165 115 27 167 .8 .8 business plan 26.1 61.9 16.7 22.2 9.5 40.0 financial projections 17.4 78.3 13.9 19.4 8.1 37.1 market study 17.4 43.4 0.0 5.6 1.6 6.3 professional advice 17.4 34.8 5.6 8.3 6.3 14.3 co-signer 0.0 21.7 2.7 22.2 3/4 3/4 other 0.0 13.0 8.3 22.2 6.3 19.0 van aukcn, h., craskitt, l, a kao, s. (in press). acquisition of capital by women entrepreneurs: panama oriniual and refinancing capitalization. journal of small business ond eatrsprensursta)r. van auken,ll.,ttcsner r.(1989).acquisiuonofcapitalbysmallbusiness. journato/smallbnsinersmanogsmsnr, 29, )-9. firms using debt as part of their start-up capital were divided into those launched before 1987 (n = 14) and 1987 to present (n = 12). this date was chosen since approximately one-half of the firms were in each age category. table 7 shows the percentage of firms in each age category that were required to meet each lending requirement prior to receiving a loan and the respective chi-square statistic. the results showed that a significantly greater percentage of firms 1987 to present were required to provide business plans, financial projections, and market studies relative to firms launched before 1987. no significant difference was found between the percentages of firms that were required to have a co-signer, professional opinion, or other requirements. the results in table 7 may be supportive of the increasing reluctance of lending institutions to extend loans to minorities that has been cited by bates (1991). however, these results may also be reflective of greater caution and/or sophistication of lending institutions in the screening of loan applications to all applicants. 39 table 7 comparison oflendingrequirementsbettveen firmslaunchedbefore1987and firmslaunched 1987 to presetu percent of fi rms and chi-square test of significance borrowing n launched launched chi requitement before 1987 1987-present squared'usiness yes 20 40.0 60.0 3.760aa plan no 3 100.0 0.0 financial yes 17 29.4 70.6 8.856a projec non s no 6 100.0 0.0 market yes 14 21.4 78.6 9.991a study no 9 88.9 1 1.6 co-signer yes 5 20.0 80.0 1.982 no 18 55.6 44.4 professional yes 12 50.0 50.0 0.048 opinion no 11 45.5 54.5 other yes 3 33.3 66.7 0.2980 no 20 50.0 50.0 adjnstcd for small sample size. s significant at 1%. as significant at 5%. sources of additional financing new financing may be acquired to meet either short-term, sereuinal, or expansionary needs. growing firms who are unable to fund capital requirements using internal sources must rely on external financing. firms that have been relatively low risk may become high risk due to greater financial obligations and a higher breakeven point as a result of obtaining the external capital. approximately 32.8 percent of the minority business owners acquired additional long-term capital after their first year in operation. the average financing mix. of this newly acquired longterm capital was 54.3percent equity and 46 7 percent debt. the majority of the equity capital (61.6 percent) was obtained from personal savings. lending institutions provided 72.8 percent and friends or relatives provided 27.2 percent of the new debt capital. these results are similar to both women-owned and mixed ownership small firms. the survey also collected information concerning the use of seasonal financing by the minority business owner. seasonal financing is an important source of capital for firms whose sales are cyclical during the year. approximately 35.8 percent of the respondents acquired seasonal financing. of those using seasonal financing, 76.4 percent repaid the seasonal loan at maturity. of those who refinanced their seasonal loans, only 10.4percent refinanced the original note plus additional operating capital. these results are similar to the seasonal financing patterns for women-owned and mixed ownership small firms. 40 difficulty of obtaining initial capital the questionnaire asked the minority business owners to rank how difficult it was to acquue the capital needed to begin operations. respondents were given a likert-type scale to rank the difficulty of obtaining start-up capital, with 1 = very difficult and 5 = not difficult. 'ibe a'vemge ranking of2.7 indicated that the respondents believed it was somewhat difficult to raise their startup capital. the degree of difficulty in nusing start-up capital is likely related to characteristics of the firm and its financing characteristics. the minority small business owners'ankings for the difficulty of raising capital were correlated with the type of firm, market served, and type of ownership. no significant relationships were found. the rankings were also correlated with the amount of total capital required to start the business, the level of debt relative to total capital, and composition of start-up capital. no significant relationships were found. the lack of significant relationships between the difficulty of obtaining initial capital and both firm and financial characteristics indicates that these factors may not be important constraints to the minority business owners obtaining the required start-up capital these results may be misleading, however. those minority business owners who experienced great difficulty in obtaining their start-up capital may not have initiated operations. in addition, the sample is necessarily limited to fums still in operation. firms experiencing difficulty in obtaining initial capital may have staned operations undercapitatized and, resultingly, experienced financial distress leading to discontinuance. these types of firms would not have been included in the sample. the respondents were also asked to rank (1 = to a large extent, and 5 = not a factor) the extent that the lack of capital has affected the operation of their business. the average ranking was 2.0. these rankings were correlated with the rankings on the difficulty of obtaining initial capital. the correlation coefficient of 0.466 between the two rankings was significant at the one percent level. this significant and positive correlation coeflicient suggests that those firms experiencing difficulty in obtaining initial capital have experienced continuing financial difficulties in their operations. summary and implications this study examined the stan-up financing characteristics of minority-owned small firms. as with other categories of small firms, minority small businesses were found to depend on a variety of sources to finance initial operations. the results showed that the minority small business owners placed a relatively high reliance on equity to finance initial operations. the primary source of start-up equity was personal savings, although other equity sources also played an important role. sba guaranteed loans and loans from lending instituuons were the primary source of initial debt financing. government grants and loans from friends or relatives were also important. previous studies have found that the financial characteristics are important factors affecting the success of small firms (gilbert, krishnagopal, t'z sch wanz, 1990; laitinen, 1991:thomas & evanson, 1987). lack and inappropriate composition of initial capital often leads to financial distress and failure or discontinuance. the limited access of small firms to the financial markets 41 contributes to their difliculty of obtaining start-up capital. the problem associated with small firms being undercapitalized and using an inappropriate composition of start-up capital is a consequence of the difficulty of raising their initial capital. a better understanding of the alternative sources and associated difficulties can enable small firms to develop better strategies to raise sufficient levels and appropriate combinations of their initial capital. the results have important implications for minority small business owners seeking initial capital. minority business owners must assemble a package of alternative sources of capital to fund initial operations. equity capital, especially personal savings, is the most important component of initial capital. lending institutions, through direct and sba guaranteed loans, and loans from friends or relatives are an important source of debt capital. in addition, minority small business owners have shown success in obtaining government grants. the results also demonstrate that minority business owners should be prepared to provide more documentation than other types of business owners to obtain initial debt. supporting documentation requirements have increased for the firms launched more recently. planning and organizing the financial arrangements is a critical step in the successful acquisition of initial capital. the discrimination experienced by minority small business borrowers as discussed by bates (1991),coupled with the necessity of assembling a package of initial capital and more numerous borrowing requirements, underscores the importance of prior planning and organizing. interpretation of the results may be limited by the geographical scope of the study. the results can likely be generalized to experiences of other minorities in the midwest. minority small business owners in other geographical areas within the united states may have different experiences. while the specific results may differ by geographical area, the general results, such as heavy reliance of personal savings, lending institutions, sba guaranteed loans, numerous borrowing requirements, etc., is most likely experienced by minority business owners in numerous locations throughout the united states. these limitations provide the opportunity for greater research into the fmancing of minority-owned firms. a national study that identified the financial composition, sources and constraints of minority business owners in raising initial capital would provide a much better understanding of the capitalization of minority-owned firms. a bener understanding of these issues would enable potenual minority small business owners to develop strategies in raising start-up capital and consultants to be better prepared in assisting prospective and current minority small business owners. a better understanding of the limitations and constraints in raising initial capital would enable government policy makers to develop better programs to assist minority small business. 42 references bates t.(1991).commercial bank financing of whiteand black owned small business start ups. quanerly review of economics and business, 31, 64-80. brigham, e.,& gapenski, l. (1993). intermediate financial management (4th ed.). new york: dryden press. brennan, m., & schwartz, e. (1978). corporate issue taxes, valuations, and the problem of optimal capital structure. journal of business, 51, 103-113. carter, r., & van auken, h. (1991). a comparison between small business and large corporations: interrelations among position statement accounts. journal of biui ness and enirepreneurshi p, 2, 73-80. dodge, h., & robbins, j. (1992). an empirical investigation of the organizauonal life cycle model for small business development and survival. journol of small business management, 29, 27-36. feldman, h., koberg, c., & dean, t. (1991). minority small business owners and their paths to ownership. journal of small business management, 29, 12-27. gilbert, l.,krishnagopal, m., & schwartz, k. (1990).predicung bankruptcy for firms in financial distress. journal of business finance and accounting, 14, 595-606. laitinen, e. (1991).financial ratios and different failure processes. journal ofbusiness finance and accounting, 18, 649-673. modigliani, f., & miller, m. (1958). the cost of capital, corporate finance, and the theory of investment. american economic review, 261-97. scot, w. (1983). financial performance of minority versus non-minority-owned businesses. journal of small business management, 21, 42-48. thomas, j., & evanson, r. (1987). an empirical investigauon of association between financial ratio use and small business success. journal ofbusiness finance and accouniing, 14, 555571. van auken, h., gi carter, r. (1989). acquisition of capital by small business. journal of small business management, 29, 1-9. van auken, h., gaskill, l., & kao, s.(in press). acquisition of capital by women entrepreneurs: pauerns of initial and refinancing capitalization. journal of small business and enrrepreneurshi p. 43 strategy strategic implications of current small business waste reduction programs masoud hemmasi lee a. graf kelly c. strong michael w. winchel1 illinois state university abstract the strategic importance of environmental awareness has received a great deal of recognition recently, but auenti on has centered primarily on residential or municipal recycling and waste reduction efforts. the small amount of research done on commercial waste reduction policies has focused on the auitudes and programs of large corporatioru. as governmental agencies impose waste reduction mandates on communities and corporations, many small businesses will beforced to adopt waste reduction programsin the future. in addition, a growing body of evidence suggests that environmental programs are associated wiih profitability, indicating the need for a more stra iegi c approach to ihe management of environmental issues in order to effectively administer required programs. this study presents results of survey research indicating thai small businesses are willing to comnu't to strategi c waste reducri on programs, but are concerned primarily with the convenience of such programs. although convenience is frequently related to operating cost in small businesses, issues regarding the expense of waste reduction programs are of secondary concern to small business executi ves. the implications of these results are discussed, along with recommendations for small business executives, consultants, and policy makers. environmental regulations and corporate recycling in a recent survey of 12,000 managers throughout the world, kamer (1991)found that the condition of the environment was the second most important social issue in the world today, slightly trailing work force education. surprisingly, over 90 percent of the managers surveyed believed businesses should take primary responsibility, or at least an active role, in solving these the aurhors gratefully acknowledge the assistance of rick jones, dave mitstead, and vince andersonin collecting and coding ihc data usedin this study in addition, the commenis of the reviewers and edi tors were valuable in the preparation of this article. 45 environmental problems. attitudes such as those described in the kantcr study have given rise to the concept of economic sustainabi lily or sustai nable growih (r ei1ly, 1990). while sustainable growth is in reality a paradigm more than a theory, it does suggest that lirms will be concerned with resource conservation and waste management 01initch k. schaltegger, 1993). within the context of economic sustainabi1ity, businesses are re-examining the cost of their waste su earns and instituting waste reduction programs such as recycling. simultaneously, governments are becoming more active in mandating waste reduction (sbar fman gt el ling ton, 1993).for instance, california has passed initiatives requiring cities and counties to reduce land-filled waste by 50 percent in the next decade (edwards et al, 1991). likewise, many state legislatures and other governmental agencies are considering laws to regulate waste gcnerauon (geiser, 1991).if bends in europe are any indication of the future of environmental regulation, businesses may have'to rethink their entire packaging and distribution technologies in response to environmental regulations. for instance, in an effort to substantially reduce waste generation, germany has recently enacted the toughest environmental laws in history (strong 8t strong, 1993). while business managers are concerned enough to consi&ler self-administered programs (kanter, 1991)and governmental insututions are enacting legislation to regulate waste reduction, the public is exerting social and market pressures on businesses as well. sixty percent of americans blame businesses for the state of the environment(schwanz & miller, 1991),and with this concern, "green marketing" has emerged as a source of competitive advantage. russo and fouts (1993)found that markets generally react favorably to environmentally sensitive corporate policies and programs, resulting in increased profits for firms perceived as "green". this market trend shows no sign of reversal in the near future. all factors indicate that some form of waste reduciion policy will be forced on businesses, either through governmental, industrial, or market pressures (carson 8t moulden, 1991). small business owners and managers may not bc completely aware of the competitive necessity or strategic importance of waste reduction and resource preservation policies. a recent study indicated that small business owners/managers did not view the use of non-renewable resources as a pressing social concern even though their overall social responsibility concerns were similar to the managers of large corporations (peterson, 1991). in fack less than ten percent of small businesses include environmental management issues in their business planning (nafziger /k kuratko, 1991). these findings suggest that small business owners and managers may be ill-prepared for impending waste reduction regulations and their impact on business operations. furthermore, it appears that small business executives are not maximizing their opportunities with customer segments seeking to patronize businesses that manage their waste in an cnvironmcntally sensitive manner. in summary, small businesses need to become much more aware of the strategic importance of waste reducuon and waste management programs. in light of the bends discussed above, the present study was designed to i) advance our understanding of small business executives'wareness of waste reduction/resource conservation issues, 2) examine their perceptions of the strategic importance of these issues, and 3) identify the primary concerns of small business executives regarding the implementation of waste reduction programs in their firms. after describing the methodology employed in this study, results and their implications for small businesses are discussed in detail. 46 purpose and method purpose given the likelihood of future waste reduction requirements, 'it is important for small business owners and managers to develop green strategies and environmental auditing techniques (carson gt moulden, 1991). the purpose of this study is to ascenain current small business practices regarding recycling programs and to identify primary areas of concern in their implementation. it is hoped that such information will assist small business in developing: i. proactive, cost effective suategic plans for managing the impact of waste reduction regulations, 2. better environmental education and awareness programs to aid in the implementation of waste reduction programs, 3. cognizance among government officials regarding the dominant concerns of small business managers so as achieve cooperative and fair policies and regulatroy programs, and 4. knowledge among small businesses of market opportunities associated with recycling and other waste reduction iniuatives. to achieve these purposes, a survey questionnaire was developed and administered to small business managers. the methodology utilized in this study is described in the following section. methodology data for this study were collected through a mail survey of business organizations located in one county of an industrialized midwestern state. this state mandates that by 1996, 25 percent of each county's waste stream be recycled. systemauc random sampling was used to select 500 small businesses from approximately 2,500 listed in the area's phone directory. of the 500 questionnaires mailed, 144 were returned. the response rate of approximately 30 percent was achievedthroughadministering thesurveyundertheauspicesofthecountyofficeof solidwaste management. of the 144 pardcipating firms, 137(over 95 percent) had fewer than 100 employees and, of these,126 (92 percent) had fewer than 50 employees. of the 7 with 100 or more employees, 2 were involved in retailing, 2 were office operations, 2 were restaurant and lodging businesses, and i was a delivery service. of the businesses parucipating in the study, 22 percent classified themselves as retail establishments, 29 percent as offices, 9 percent as manufacturing, 4 percent utilities/transportation, 4 percent restaurants/hotels, and 32 percent as other (e.g., lawn care, electrical repair, beauticians, wholesale, delivery service, medical laboratory). eighty-five percent of these small businesses were privately owned. the survey instrument included a wide variety of questions related to such issues as the extent of the organization's current involvement in recyc ling, structum of the recyc ling program, type of materials recycled, logistics of recycling, and reasons for engaging in/refraining from recycling. data regarding these issues were analyzed primarily through chi-square tests of independence, as well as t-tests. 47 results table 1 profiles the participating smallbusinesses with respict to their recycling activities. based upon the results presented in the table, 64 percent of all participating businesses did engage in some type of recycling activity. however, this proporuion varied by type of business. manufacturers (92.3 percent led all other industries, followed by utilities/transportation (80 percent), and retailers (71.9percent). on the other hand, only one-third of all restaurants and lodging organizations included in the survey appeared to recycle. of the 92 businesses that did recycle, over one-third had formal recycling programs, approximately 41 percent had stated policies regarding recycling, and approximately one-half had a designated recyc ling coordinator who reportedly spent less than five hours per week managing recycling activities. compared to non-recyclers, recyclers also were significantly more commiued to the purchase of recycled materials. while recyclers were almost twice as likely to actively seek products made from recycled materials, they were more than three times as likely to have stated policies regarding the purchase of such goods. table 1 recycling profiles of surveyed small businesses recyclers non-recyclers chi-square n = 92 n= 52 (649o) (36%) type of business: office (n = 42) 52.4% 47.69o 11.9»» retail (n = 32) 71.99o 28.19o manufacturing (n = 13) 92.3% 7.79o restaurants/lodging (n = 6) 33.39o 66.79o utiliues/fransportation (n = 5) 80.09o 20.0% others (n = 46) 63.09o 37.09o have formal recycling program 35.6% 0,09o 23 5»»» have stated recycling policy 41.19o 0.0% 28.9»»» have policy regarding purchase of 18.99o 5.99o 4 5»» recycled materials actively seek products made from 32.69o 16.79o 4 0»» recycled materials » p & =0.10 »» p & =0.05 »»» p & = 0 01 48 table 2 presents the results regarding the type of waste materials produced and recycled by various types of businesses. table g. type of waste material produced and recycled type of business: office retail mfg rest/lodg utilffrans other (n=42) (n=32) (n=13) (n=6) (n=5) (n=46) mean ranking of amount of waste material produced (1 = most, 6 = least) paper (1.8) 1.2 2.1 3.2 2.0 2.6 1.5 cardboard (2.4) 2.9 1.6 2.9 1.8 2.4 2.5 metals (3.5) 3.1 3.7 2.8 5.2 3.3 3.6 plastics (3.6) 4.0 3.0 3.6 4.0 3.4 3.6 glass (4.4) 4.3 4.4 4.7 4.0 5.0 4.5 other (3.7) 4.8 3.7 3.0 1.5 1.0 3.6 percent of businesses that recycle various waste materials paper 38.1 40.6 38.5 0.0 50.0 32.6 cardboard 9.5 50.0 38.5 33.3 60.0 26.1 metals 45.2 37.5 76.9 0.0 20.0 47.8 plastic 19.0 9.4 23.1 0.0 0.0 21.7 glass 21.4 6.3 15.4 33.3 0.0 19.6 other 2.4 15.6 38.5 0.0 40.0 15.2 across all types of businesses surveyed, paper was the most produced waste product, followed by cardboard, metals, plastics, and glass, respectively. as might be expected, paper was reported to be the leading waste material produced by offices, while cardboard led all waste materials produced by retailers. manufacturers, on the other hand, reported metals as their leading waste product. finally, other types of waste (e.g., foodstuffs, chemicals, airborne particles) seemed to be the dominant waste produced in restaurants/lodging establishments and utilities/ transportation firms. it is also interesting to note that cardboard is either the first or second ranked waste item reported by every type of business included in the study. businesses are also different with regard to the type of materials that they recycle. fortyfive percent of all offices recycle metals (mostly aluminum cans), and 38.1 percent recycle paper. one-half of all retailers recycle cardboard, and more than 40 percent recycle paper. 49 approximately three-quarters of the manufacturers surveyed recycle metals, while less than 40 percent recycle paper and/or cardboard. one-third of all restaurant/lodging, businesses in the study reponed recycling cardboard or glass. finally, cardboard and/or paper were reportedly recycled by at least one-half of surveyed utility/transportation fiims. table 3 summarizes the logistics involved in dealing with recyclables. thc proportion of businesses that have waste paper picked up by a waste management contractor or community recycling organization is almost twice that of firms which deliver this type of waste to drop off points (17.5percent versus 9.5 percent). the inverse of this relationship is true for plastics, but the overall percentages are smaller (3.2percent versus 6.3percent). for cardboard, the percentage of firms utilizing each of these collection approaches is the same (11 percent). the ratio of delivery to pick-up, however, is almost 4 to i for metals and 3 to i for glass. overall, 2 i/2 times more businesses deliver their recyclables than those that have them picked up. also, the survey results indicated that 28 percent of businesses that recycle are charged for material pick-up, and 27 percent sell their recyclables. table 3 logistics of dealing with recyclables percent of businesses that had their recyclable materials type of material picked-up by delivered to recyclers recyclers paper 17.5 9.5 cardboard 11.1 11.1 metals 7.9 30.2 plastics 3.2 6.3 glass 1.6 4.8 other 9.5 4.8 all materials 19.0 50.8 when respondents were asked to evaluate the importance of various reasons for engaging in or refraining from recycling, some interesting results emerged (see table 4). the most compellingfactors in favor of recycling, in the view of both recyclers and non-recyclers, appeared to be concern over the environment, and convenience related issues (e.g. pick-up, container availability, etc.). in fact, convenience seemed to be even more important to non-recyclers than recyclers. the greatest obstacles deterri ng small businesses from recycling, as perceived by both groups, were cost and space consuaints. interestingly, these facmrs were considered to be more of an obstacle by non-recyclers than by their recycling counteiixtrts. these findings were generally reaffirmed when respondents were asked, in open-ended questions, to outline the three most important reasons for recycling and for not recycling. however, the imponance of cost diminished in relation to other factors (e.g., convenience). the most compelling reasons stated for recycling included environmental concerns (60 percent), followed by cost savings (23 percent), and legal requirements/mandates (2 percent). those indicating legal mandates were all involved in businesses generating chemical waste (e.g., air conditioning refrigerants and petrochemical waste). the most important deterrents to recycling that were mentioned included 50 required time commitment(37 percent), storage space limitations (27 percent), costs involved (19 percent), small volume of business (15 percent), lack of information regarding recycling (8 percent), and the absence of pick-up services (6 percent). table 4 reasons for engaging in/refraining from recycling mean importance'std. dev.) recyclers non-recyclers t-test htgtrgjnrggy~lin concern for environment 4.6 4.3 2.10e (0.8) (1.0) convenience of pick-up 4.1 4.4 1.42 (1.2) (1.0) waste containers provided 3.7 4.2 2.27» (1.4) (1.1) reimbursement for recyclables 2.7 2.7 0.05 (i 5) (1.6) other financial advantages 2.8 2.8 0.25 (i 5) (1.6) pick-up costs 3.6 4.1 2 55e» (1.2) (1.1) storage space required 3.5 3.9 1.93v (1.2) (i 3) time required 3.3 3.7 1.88 (i 3) (i 4) cost of handling/separating 3.2 4.0 2.91ve (1.4) (1.4) lack of employee commitment 2.7 2.7 0.03 (i 3) (i 5) 'i = not imponant, 5 = very important n p&0.05 n' &001 "n p & 0.001 perceptions of small businesses regarding other issues that are likely to impact behavior also were examined. these results are shown in table 5. it was found that a significantly larger proportion of recyclers, when compared to non-recyclers, had the strong support of employees coupled with commitment from management for recycling. also, a signigicantly larger portion of recyclers viewed recycling as being important to their customers, as well as a potential source of competitive advantage. furthermore, almost half of all small businesses surveyed (both recyclers and non-recyclers) also indicated that recycling does/would result in a reduction of waste disposal costs. finally, an overwhelming majority of recyclers and more than one-half of non-recyclcrs reported that, given ihe opportunity, they would be interested in participating in a waste exchange arrangement with other businesses in the community. 51 1 table 5 other perceptions of small businesses regarding recycling recyclers non-recyclers chi-square proportion that reported (n = 92) (n = 52) employees are committed to recycling 81.2 28.3 35.70»»» management is committed to recycling 83.9 38.8 29 17»»» recycling is important to customers 47.4 23.8 6.40*» recycling is a competitive advantage 21.8 6.1 5.71» recycling reduces cost of waste disposal 52.3 45.8 0.52 an interest in a waste exchange program 81.0 57.9 7.04»» 's 0.05 »» psooi »»» p5 0.001 implications it is imponant to note that less than one-quaner of respondents specified cost reduction as a reason for starting a recycling program and only two percent cited legal responsibilities. the majority of businesses appear to be recycling out of concern for the environment, rather than for strategic reasons. enacung a waste reduction program out of concern for the environment is indeed a noble undertaking. however, as more and more states/counties/municipalities enact waste reduction legislauon, as more consumers demand business accountability for waste minimization, and as compeutors successfully differentiate themselves on environmental issues, companies failing to treat waste reduction as a strategic issue will soon find it harder and harder to corn pete. asreviewedabove,only 16percent(21.8percentofrecyclers; 6.1percentof non-recyclers) of the small businesses surveyed viewed recycling as a strategic opportunity to achieve competitive advantage. this result is consistent with prior research indicating that small businesses are very uninformed of the impending impact of waste reduction initiatives and are likely to be forced into reacuve postures when developing policies to deal with waste reduction (winsemius & guntram, 1992). conversely, most large businesses arc already incorporating environmental issues, including waste reduction, into their strategic plans ("environment is first...," 1991; geiser, 1991). because of the pervasiveness of impending environmental regulation, smallbusinesses will have to follow suit or face a noncompetiuve position in the future (hutchinson, 1992). small businesses must begin to consider waste reduction suategies, such as corporate recycling programs, as competitive weapons for ensuring continued profitability and/ or viability, one of the purposes of this study was to gather information that could be used to inform governmental agencies, environmental action groups and small business counselors (e.g., sbi directors) of the primary concerns among small business execuuves regarding recycling, comparisons between recycling and non-recycling companies indicated that monetary issues are not as important to either group as are convenience issues. it is important to note that convenience and operating cost are not unrelated, especially for small businesses. however, for the purposes 52 of the current study, cost factors were described as the presence or absence of financial incentive and/or reimbursement for recycling. there arc obviously other costs associated with recycling, panicularly administrative expenses, but it appears that out-of-pocket expense factors did not greatly influence the decision of companies to start a recycling program. similarly, cost factors areonlyofmoderateconcem tothosecompaniescurrently not recycling. itappears thateconomic issues are not the driving force behind the decision to either iniuate or not initiate recycling pfogfaitis. lack of employee commiunent and time requirements were not mentioned as compelling reasons for not instituting a recycling program. the results of the survey suggest that small businesses and their employees will provide the necessary time, space, and labor to make recycling work if recycling can be made convenient. the most significant factor differentiating recyclers from non-recyclers was the issue of convenience. convenience encompasses such items as whether recycled materials need to be separated at the site, how much labor is involved in such separation, whether recycled materials will be picked up or will have to be delivered, and whether collection bins will be provided by the community/commercial recycler or whether the firm will have to provide the bins and the storage space. this is clearly the most important area of concern for small business owners and managers. local governments, environmental groups, recycling and solid waste management companies, and small business consulting groups should develop joint programs and build alliances to improve the convenience of recycling programs. it seems that small businesses are willing to engage in waste reduction activities such as recycling, but will refrain from doing so if the process ofrecycl ing is inconvenient. municipalities and solid waste management firms attempting to convince community businesses to implement waste reduction and recycling programs should concentrate their resources on convenience enhancement, perhaps even if it means raising the cost of such programs (within reason, of course). some suggestions for improving the convenience of waste reduction may be feasible at the governmental level. however, social responsibility-based strategies is an area where small businesses appear to be able to differentiate themselves (file, moriya, & judd, 1991). that is, social concerns about resource conservation and waste reduction may create business opportunities for many small businesses, particularly those already in the waste management field. in addition, property managers (e.g., industrial park developers, shopping mall managers, etc.) and small business consultants can offer specialized services aimed at increasing the convenience of waste management programs for small businesses. solid waste management firms, property managers, small businesses, small business consultants, and government agencies should work at developing alliances and cooperative programs aimed at improving the convenience of rccycling. such cooperative approaches will result in waste minimization programs which are cost effective yet mutually acceptable to small businesses and their stakeholders, including local governments. 'ibis may include such business ventures as total on-sight waste reduction contracting, wherein an outside contractor will sort and transport recycled materials from a group of businesses (e g., stores in a shopping mall) for a fee. such an arrangement is currently in use at the mall of the americas in minneapolis-st. paul. another option is to establish community-based central processing and sorting plants in industrial/commercial districts utilizing a coordinated pick-up and disu ibution system. recently, concerns have been expressed that government and environmental action groups have expended a majority of their efforts on getting companies (and individuals) to recycle without recognizing the need to create and sustain markets for recycled products (hutchinson, 1992; schwanz & miller, 1991). this is particularly true for paper and paper products, such as 53 cardboard and newsprint, of which there is a great supply. however, little demand exists for these recycled waste products owing to the limited number of post-recycling uses. while much attention in the press concentrates on wastes such as styrofoam, disposable diapers, and fast-food hamburger packaging, these types of waste actually represent a very small portion of overall landfilled waste compared to paper, which comprises almost 35 percentof all land-filled waste(rathje & murphy, 1991). small businesses and small business consultants could specialize in developing such post-recycling product markets through research and development cooperatives or waste exchange programs. it is conceivable that one company's waste may very well provide another company's energy source or raw material, if only some agent were present to bring them together. business opportunities abound for small businesses ui become those agents. as part of a follow-up analysis to the study reported here, it was found that small business owners and managers who do not recycle may not be aware of exisung recycling services in the community. managers of companies with recyc ling programs in place were almost six times more likely to recognize the names of recycling and solid waste management companies in the community as compared to managers of non-recycling companies. it would appear that environmental agencies, recycling organizauons, and local governments must do a better job of informing small businesses of the recycling opportunities available in the community. once convenience issues have been addressed, public/private cooperation in presentations at employee meetings and other joint educational efforts may be used to foster commitment to and awareness of recycling and waste exchange programs. it is apparent that small businesses are not likely to escafc approaching waste reduction regulation. as such, small business executives will have to rethink how strategies and policies ate developed within their companies to emphasize the growing strategic importance of environmental issues. such change need not be viewed as a threat, however. if small business executives me proactive and creative, the new emphasis on waste reduction can provide firms with a new dimension for differentiation, expanded product markets, opportunities for service contracting, and untapped areas for cost reduction. references carson, p., & moulden, j. (1991).green is gold. scranton, pas harper business. edwards, t c., harrington, m j.,okuda, s m., oskamp, s., sherwood, d l.,& swanson, d c. (1991).factors influencing household recycling behavior. environment and behavior, 23, 494-517. environment is first on corporate agenda. (1991,january). risk management, p.10. file, k.m., moriya, f.l.,&. judd, b.b. (1991).social responsibility in the smaller enterprise: steps towards scale development. journal of business & entrepreneurshl p, 3, 23-32. geiser, k. (1991).the greening of industry. technology review, august-september, 64-72. hutch inson, c. (1992).corporate strategy and the environment. long range planning, 25, 9-21. ilinitch, a.y., & schaltegger, s.c.(1993).eco-integrated portfolio analysis: strategic tools for managing sustainably. paper presented at the 53rd annual meetings of the academy of management. atlanta, ga. kanter, r.m. (1991).transcending business boundaries: 12,000 world managers view change. harvard business review. may-june, 151-164. nafziger, dw. & kuratko, df. (1991).an investigation into the prevalence of planning in small business. journal of business & entrepreneurshl p, 3, 99-109. 54 peterson, r t. (1991).attitudes of small business managers regarding the importance of various social responsibility themes. journal of business & enirepreneurshi p, 3, 1-8. rathje, w., & murphy, c. (1991). rubbish! the archaeology of garbage. scranton, pa: harpercollins publishers. reilly, w.k. (1990).the green thumb of capitalism: the environmental benefits of sustainable growth. policy review, fall, 16-21. russo, m.v., & fouts, p.a. (1993).the green carrot: do markets reward corporate environmentalism? paper presented at the 53rd annual meetings of the academy of management. atlanta, ga. schwartz, j.,& miller, t.(1991).the earth's best friend. american demographics. february,2635. sharfman, m., & ellington, r.t.(1993).management for total environmental quality: antecedents and organizational implications. paper presented at the 53rd annual meetings of rhe academy of management. atlanta, ga. strong, k.c., & strong, k. (1993).circulation economies and ecology management: the need for new business paradigms in education, practice, and research. proceedings of the 4th annual meeting of the international association for business and society, 4, 442447. winsemius, p., & guntram, u. (1992). responding to the environmental challenge. business horizons. march-april, 12-20. 55 http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2021, vol. 31, no. 03, 122-147 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2021 small business institute® w w w. j s b s . o rg introduction 1college of business and economics, california state university, los angeles, ca 90032, usa, ylee16@calstatela.edu 2ivy college of business, iowa state university, ames, ia 50011, usa, pol@iastate.edu entrepreneurial passion: a systematic review and research opportunities entrepreneurial passion, passion for work, dualistic model of passion, perceived passion, systematic review apa citation information: lee, y., & herrmann, p. (2021). entrepreneurial passion: a systematic review and research opportunities. journal of small business strategy, 31(3), 122-147. passion is associated with feelings of love (reis & aron, 2008; sternberg, 1986). passionate people have specific domains they fall in love with as in romantic relationships or even work activities. schumpeter (1951) articulated passion as “an important factor of success and social ascent in every walk of life” (p. 177), and bird (1989) argued that entrepreneurs are “passionate, full of emotional energy, drive, and spirit” (pp. 7-8). moving beyond general passion, the concept of entrepreneurial passion has received scholarly attention during the past decade and a diverse theoretical framework on entrepreneurial passion has been established, which includes: passion for work (baum et al., 2001), the dualistic model of passion (vallerand et al., 2003), entrepreneurial passion (cardon et al., 2009), and perceived passion (chen et al., 2009). in this paper, we aim to synthesize those frameworks by conducting a systematic review on the topic of entrepreneurial passion. we used ‘entrepreneurial passion’ as the overarching term because it has been continuously utilized to refer diverse domains of passion in the entrepreneurship literature (e.g., cardon, glauser, & murnieks, 2017a). moreover, we tracked the seminal papers on four major frameworks of passion and used their originally suggested terminologies for each domain. despite the increasing attention on the topic, the literature is fragmented, and scholars have utilized frameworks of passion in entrepreneurship research in different directions. also, there have been few discussions on prior attempts to synthesize the entrepreneurial passion literature. our paper aims to provide a comprehensive review to understand the current status of studies on entrepreneurial passion according to four main frameworks of passion. first, we review the literature and summarize the main findings on the different conceptualizations of passion. specifically, we articulate academic definitions and review theoretical and empirical works based on each framework of passion. moreover, we compare the similarities and differences between the dualistic model of passion (vallerand et al., 2003) and entrepreneurial passion (cardon et al., 2009). second, we identify what has been done, what we need to know, and what we do not know yet about entrepreneurial passion. specifically, we found and analyzed 63 published papers in the entrepreneurial passion literature and detected potential in this paper, we conduct a systematic review on the topic of entrepreneurial passion. we summarize the empirical findings of studies based on the four major conceptualizations of passion: passion for work, the dualistic model of passion, entrepreneurial passion, and perceived passion. moreover, we analyze 63 published papers in the literature and identify potential research opportunities in this area. first, research on the relationship between entrepreneurial passion and firm performance needs further examination; we need comprehensive and more nuanced studies on this relationship, focusing on diverse types of passion. second, distinctive mechanisms based on different types of passion would enhance our understanding of how passion influences firm performance and other outcomes. third, it is essential that future studies carefully match theoretical arguments and measurements, based on the frameworks of passion. fourth, scholars should conduct empirical research on entrepreneurial passion in various cultural contexts. fifth, theoretical justifications and contextual appropriateness for each framework of passion are critical to advance the literature. lastly, scholars need to utilize unified terminologies of passion. younggeun lee1, pol herrmann2 http://www.smallbusinessinstitute.biz http://www.jsbs.org 123 y. lee, & p. herrmann journal of small business strategy / vol. 31, no. 3 (2021) / 122-147 areas that could be further investigated. first, current studies on the relationship between entrepreneurial passion and firm performance are limited to certain types of entrepreneurial passion. moreover, there are contradictory empirical findings between the dualistic model of passion and firm performance (e.g., ho & pollack, 2014; patel et al., 2015; sirén et al., 2016). therefore, we need comprehensive and more nuanced studies on the relationship between entrepreneurial passion and firm performance. second, distinctive mechanisms that explain the connection between each type of passion and firm performance need further examination. third, scholars need to carefully match the theoretical arguments and measurements based on the frameworks of entrepreneurial passion. fourth, empirical research of entrepreneurial passion should be applied in various cultural contexts. fifth, different theoretical arguments and contexts need to be considered for each framework of passion to advance the literature. lastly, scholars should utilize exact terms of passion, as established in the seminal papers. literature review entrepreneurial passion has been studied from different theoretical perspectives: passion for work (baum et al., 2001), the dualistic model of passion (vallerand et al., 2003), entrepreneurial passion (cardon et al., 2009), and perceived passion (chen et al., 2009). we analyze the literature following the idea that the decision between frameworks should be determined by research questions and by the different conceptualizations of passion (collewaert et al., 2016; ho & pollack, 2014; murnieks et al., 2014). we further explain specific definitions, theoretical arguments, and empirical findings of entrepreneurial passion based on each theoretical framework. passion for work early research examined passion for work in the entrepreneurship context (baum & locke, 2004; baum et al., 2001). baum and his colleagues defined passion as “love of one’s work” (baum & locke, 2004, p. 588) or “selfish love of the work” (shane et al., 2003, p. 268) and assumed passion as a stable trait that sustains over time. based on the depictions of entrepreneurs by locke (1993), baum and locke (2004) established five survey items on passion for work. baum et al. (2001) empirically studied that entrepreneur-ceos’ passion for work indirectly leads to sales, employment, and profit growth through general competencies (i.e., organization and opportunity skill), specific competencies (i.e., industry and technical skill), motivation (i.e., vision, goals, and self-efficacy), and competitive strategies (i.e., differentiation through innovation and quality/ service). baum and locke (2004) extended this work and found that entrepreneur-ceos’ passion for work is indirectly related to venture growth through communicated vision, goals, and self-efficacy. both studies examined the impact of passionate entrepreneurs who love their work and found that passion for work indirectly leads to sales and employment growth through different mediators. de clercq et al. (2013) utilized this framework and found that passion for work is positively associated with entrepreneurial intentions. they empirically found that passion for work strengthens the perceived ability-entrepreneurial intentions and the perceived attractiveness-entrepreneurial intentions relationships. baum and his colleagues advanced the entrepreneurship literature by adopting passion into the entrepreneurship domain, by developing theoretical arguments of passion as a trait-based approach, by providing empirical evidence of the positive relationship between passion and firm growth, and by establishing the survey items of passion for work. figure 1 presents the outcome variables utilized in prior empirical research on passion for work. figure 1. outcome variables of passion for work dualistic model of passion – harmonious and obsessive passion vallerand et al. (2003) proposed the framework of 124 y. lee, & p. herrmann journal of small business strategy / vol. 31, no. 3 (2021) / 122-147 the dualistic model of passion. they defined passion as “a strong inclination toward an activity that people like, that they find important, and in which they invest time and energy” (p. 757) and suggested two types of passion – harmonious and obsessive. harmonious passion is “an autonomous internalization that leads individuals to choose to engage in the activity that they like” and obsessive passion is “a controlled internalization of an activity in one’s identity that creates an internal pressure to engage in the activity that the person likes” (vallerand et al., 2003, p. 756). vallerand et al. (2003) also established 12 survey items to measure the dualistic model of passion, which has been utilized in different fields and validated across age, gender, language, and activities (marsh et al., 2013; vallerand, 2015). researchers have applied the dualistic model of passion in the entrepreneurship literature. we summarize below the main empirical findings of this model. ho and pollack (2014) found that harmonious entrepreneurial passion indirectly impacts referral and total business income through increased out-degree centrality (i.e., searching for others). additionally, obsessive entrepreneurial passion negatively influences referral and total business income through decreased levels of in-degree centrality (i.e., less approachable by others). murnieks et al. (2014) found that harmonious passion is positively associated with entrepreneurial behavior and self-efficacy. thorgren and wincent (2015) examined the relationship between entrepreneurs’ passion and habitual entrepreneurship and found that obsessive passion is related to both serial (i.e., “engaged in a previous start-up”) and portfolio entrepreneurship (i.e., “started another business while running at least one other company”, p. 219). however, harmonious passion only impacts portfolio entrepreneurship among habitual entrepreneurship types (thorgren & wincent, 2015). dalborg and wincent (2015) examined that entrepreneurs who are “being pulled toward opportunities to start a business” indirectly nurture harmonious passion through self-efficacy (p. 974). stroe et al. (2018) found that entrepreneurs with harmonious passion make effectual decision-making when they have high self-efficacy or perceive high risk in the environment, and entrepreneurs with obsessive passion make causal decision-making when they perceive low risk in the environment. in other words, entrepreneurs implement different entrepreneurial decision-making logics depending on their types of passion, under certain conditions. moreover, stroe et al. (2018) found that role overload develops nascent entrepreneurs’ obsessive passion. fisher et al. (2018) argued that entrepreneurs’ obsessive passion leads to sustained commitment, and harmonious passion influences entrepreneurs to perceive themselves as successful through resilience. de mol et al. (2018) found that entrepreneurs’ job fit leads to higher burnout through obsessive passion, but harmonious passion is negatively associated with burnout. schenkel et al. (2019) found that employees’ harmonious passion for being entrepreneurial positively influences them to spend more time thinking about new ideas, which then leads them to suggest an increased number of job-related innovative ideas. obschonka et al. (2019) found that researchers’ harmonious entrepreneurial passion is positively associated with entrepreneurial behavior. murnieks et al. (2020) studied the antecedents of the dualistic model of passion. specifically, entrepreneurial identity centrality is related to harmonious entrepreneurial passion and affective interpersonal commitment drives obsessive entrepreneurial passion (murnieks et al., 2020). moreover, the authors examined the gender of entrepreneurs as the moderator of both relationships and found that male entrepreneurs positively strengthen both relationships. stroe et al. (2020) examined different moderating roles of harmonious and obsessive passion on the relationship between fear of failure and negative effect. entrepreneurs’ fear of failure manifests negative effect and harmonious passion reduces this influence; however, obsessive passion shows both positive and negative moderating effects on this relationship in two different studies (stroe et al., 2020). figure 2 and 3 display the antecedent and outcome variables found in prior empirical research on the dualistic model of passion. entrepreneurial passion – inventing, developing, and founding passion cardon et al. (2009) introduced a framework of entrepreneurial passion based on certain roles of entrepreneurs. entrepreneurial passion is defined as “consciously accessible, intense positive feelings experienced by engagement in entrepreneurial activities associated with roles that are meaningful and salient to the self-identity of the entrepreneur” (cardon et al., 2009, p. 517). based on the categorization of entrepreneurial activities (gartner et al., 1999), cardon et al. (2009) suggested three distinct entrepreneurial role identities: inventing, developing, and founding passion. specifically, inventing passion is associated with “identifying, inventing, and exploring new opportunities”; developing passion is related to “nurturing, growing, and expanding the venture”; founding passion involves “establishing a venture for commercializing and exploiting opportunities” (cardon et al., 2009, p. 516). cardon and colleagues’ (2009) framework of entrepreneurial passion has been spread widely in the entrepreneurship field and their establishment of survey items of inventing, developing, and founding passion ignited the empirical research on entrepreneurial passion. specifically, cardon 125 y. lee, & p. herrmann journal of small business strategy / vol. 31, no. 3 (2021) / 122-147 figure 2. antecedent and outcome variables of harmonious passion figure 3. antecedent and outcome variables of obsessive passion 126 y. lee, & p. herrmann journal of small business strategy / vol. 31, no. 3 (2021) / 122-147 et al. (2013) established 13 survey items of entrepreneurial passion, which include five items for inventing passion, four items for developing passion, and four items for founding passion. following cardon and colleagues’ (2009) conceptualization, authors divided each passion into two dimensions: intensive positive feelings and identity centrality. to operationalize each passion, cardon et al. (2013) recommend using formative measurement. in other words, items for intensive positive feelings need to be averaged and multiplied with one identity centrality item to calculate each passion. they also suggest not to combine all three domains as one entrepreneurial passion construct. cardon et al. (2013) not only developed the survey items of entrepreneurial passion, but also empirically found that entrepreneurial passion for founding is associated with creativity and persistence. moreover, entrepreneurial passion for developing is positively linked to absorption (cardon et al., 2013). cardon and kirk (2015) empirically found that entrepreneurial self-efficacy indirectly increases persistence through inventing and founding passion. stenholm and renko (2016) researched that entrepreneurial passion for inventing and developing indirectly leads to new venture survival through bricolage. kang et al. (2016) investigated an antecedent (i.e., organizational innovative climate) and an outcome (i.e., employees’ innovative behavior) of entrepreneurial passion for inventing. they found that proactive climate positively moderates the relationship between innovative climate and inventing passion, and risk-taking climate increases the influence of inventing passion on innovative behavior. huyghe et al. (2016) found that inventing passion increases spin-off and start-up intentions. drnovsek et al. (2016) empirically examined founder ceos’ passion for developing impact on sales and employee growth. moreover, goal commitment mediates developing passion-venture growth relationships (drnovsek et al., 2016). collewaert et al. (2016) found that entrepreneurial passion for founding diminishes over time. specifically, intensive positive feelings decrease over time and identity centrality remains stable (collewaert et al., 2016). biraglia and kadile (2017) studied that founding passion positively leads to entrepreneurial intentions and that entrepreneurial self-efficacy acts as a partial mediation in this link. mueller et al. (2017) found that entrepreneurs’ passion for developing indirectly increases firm performance through self-regulatory mode and grit. campos (2017) also found that developing passion is positively related to entrepreneurial orientation and that entrepreneurial alertness mediates this relationship. strese et al. (2018) examined that ceos’ passion for inventing positively increases radical innovation in small and medium-sized enterprises. costa et al. (2018) showed that intensive positive feelings toward developing, inventing, and founding role identities positively moderate the impact of cognitive entrepreneurial training on the accuracy of the business opportunity recognition. karimi (2020) studied that university students’ inventing passion positively increases entrepreneurial intentions through either attitudes toward entrepreneurship or perceived behavioral control. xiao et al. (2020) examined that employees’ skill variety positively impacts them to form a team and this influence is strengthened by employees’ developing passion. cardon, post et al. (2017) proposed the concept of team entrepreneurial passion (tep; i.e., “the level of shared intense positive feelings for a collective and central team identity for new venture teams”, p. 283). they theoretically explained that team passion diversity would positively influence the formation of team entrepreneurial passion. moreover, team entrepreneurial passion impacts diverse individualand team-level outcomes like new venture team performance, quality of new venture team processes, and individual entrepreneurial passion (cardon. post et al., 2017). santos and cardon (2019) empirically found that tep for inventing and developing is positively associated with performance of new venture team (nvt). the relationship between tep for inventing and team performance is moderated by “mono-focal (nvts with a higher score in one of the domains compared to the others); incomplete poly-focal (nvts showing higher scores in two of the three domains of tep); and complete poly-focal (nvts showing no differences between the scores of the three domains)” (santos & cardon, 2019, p. 10). boone et al. (2020) studied new venture teams in different stages and found that, in the commercialization stage, poly-focal team entrepreneurial passion (both high on inventing and founding) is better at achieving high team performance through reduced relationship conflict than mono-focal team entrepreneurial passion (either inventing or founding). de mol et al. (2020) found that average team passion is not associated with performance. moreover, entrepreneurial passion diversity (i.e., intensity separation) negatively influences the quality of the business idea, and entrepreneurial passion diversity (i.e., focus variety) negatively impacts the amount of funding that teams will receive (de mol et al., 2020). figure 4, 5, and 6 summarize the antecedent and outcome variables examined in prior empirical research on entrepreneurial passion. vallerand et al. (2003) dualistic model of passion and cardon et al. (2009) entrepreneurial passion are similar in the sense that both include affection and identification as core components of passion. both frameworks argue that entrepreneurial passion is a strong affection for entrepreneurial 127 y. lee, & p. herrmann journal of small business strategy / vol. 31, no. 3 (2021) / 122-147 activities that are meaningful to their identities. however, the two frameworks differ in their approach toward entrepreneurship and internalization (collewaert et al., 2016; ho & pollack, 2014). first, vallerand et al. (2003) have a general approach toward entrepreneurial passion. specifically, scholars who want to examine an entrepreneur’s overall passion for entrepreneurship activities should adopt the dualistic model of passion (ho & pollack, 2014). cardon et al. (2009) take a specific approach toward entrepreneurial passion. to elaborate, they assume that entrepreneurs have three specific roles and different levels of affection toward those entrepreneurial roles. therefore, cardon et al. (2009) approach is domain-specific, rather than an overall understanding of passion. second, vallerand et al. (2003) further elaborate on how entrepreneurial activities are internalized and differentiate harmonious and obsessive passion in terms of autonomous and controlled internalization toward one’s identity. figure 4. antecedent and outcome variables of inventing passion figure 5. antecedent and outcome variables of founding passion 128 y. lee, & p. herrmann journal of small business strategy / vol. 31, no. 3 (2021) / 122-147 figure 6. outcome variables of developing passion perceived passion entrepreneurial finance scholars proposed the concept of perceived passion (chen et al., 2009). in this area, scholars argue that entrepreneurs’ passion is a critical indicator that helps persuade investors to make investment decisions (e.g., davis et al., 2017; mitteness et al., 2012). chen et al. (2009) defined entrepreneurial passion as an “intense affective state accompanied by cognitive and behavioral manifestations of high personal value” (p. 201) and found that entrepreneurs’ preparedness in presentations (i.e., perceived cognitive passion) promotes funding from venture capitalists. also, chen et al. (2009) established 11 survey items to capture perceived passion. specifically, six items are about affective passion, which are questions on the body movements, language, gestures, and expressions of presenters. the other five items are about cognitive passion (i.e., preparedness), which are questions on logic, fact, and presentation content. scholars have advanced the understanding of perceived passion by examining how diverse investors’ (e.g., venture capitalists and angel investors) perceptions of entrepreneurial passion relate to investment, funding, or crowdfunding performance. empirical findings in this research stream have made significant contributions to our understanding of entrepreneurial passion. mitteness et al. (2012) utilized 3,502 evaluations of 241 presentations examined by 64 angel investors and found that passion perceived by angel investors positively influences funding potentials. moreover, angel investors’ characteristics like older age, higher intuition, openness, and motivation toward mentor strengthen the perceived passion-funding potential relationship; however, angels who are extraverted and promotion-focused negatively impact the relationship (mitteness et al., 2012). davis et al. (2017) observed that entrepreneurial passion perceived by funders positively moderates the relationship between product creativity and positive affective reactions. authors found a negative influence of perceived entrepreneurial passion on funders’ investment decisions and predicted success (davis et al., 2017). li et al. (2017) conducted three studies utilizing surveys and archival data from indiegogo and kickstarter and an experiment on 120 mba students and found that entrepreneurs’ displayed passion on crowdfunding video expands the enthusiasm of viewers, which in turn increases funding amount and social media exposure. they also examined the moderating impact of project innovativeness as perceived by viewers, which invigorates both the displayed passion-funding amount and the displayed passion-social media exposure associations (li et al., 2017). cardon, mitteness et al. (2017) used 1,995 129 y. lee, & p. herrmann journal of small business strategy / vol. 31, no. 3 (2021) / 122-147 evaluations of 133 presentations completed by 72 angel investors and discovered that evaluations of funding decisions by angel investors are positively associated with entrepreneurs’ level of preparedness. when entrepreneurs commit personal money to their idea, prepared entrepreneurs’ chance of obtaining positive evaluations on funding has increased (cardon, mitteness et al., 2017). in other words, angel investors favor prepared entrepreneurs with personal financial commitment in their idea. warnick et al. (2018) employed 992 decisions on 16 hypothetical investment opportunities evaluated by 31 venture capitalists and 31 angel investors and found that angel investors and venture capitalists perceive both entrepreneurial passion and passion for the product as critical factors for investment decisions. entrepreneurs’ openness to feedback positively moderates both types of passion toward funding potential (warnick et al., 2018). interestingly, the authors found a three-way interaction among investing experience of investors, openness to feedback, and entrepreneurial passion toward funding potential. passion for the product also demonstrates a three-way interaction with entrepreneurial experience of investors and openness to feedback toward funding potential; however, a combination of entrepreneurial passion and passion for the product does not predict funding potential (warnick et al., 2018). oo et al. (2019) researched that user entrepreneurship leads to crowdfunding performance through perceived passion. using functional magnetic resonance imaging (fmri), shane et al. (2020) empirically found the causal relationship between entrepreneurs’ displayed passion and informal investors’ interest by analyzing 147 neural responses of 15 informal investors to 20 entrepreneurs’ pitches. figure 7 elucidates the antecedent and outcome variables investigated in prior empirical research on perceived passion. systematic review to thoroughly understand the current status of studies on entrepreneurial passion, we conducted a systematic review of the journal publications that examined entrepreneurial passion. specifically, we followed the procedure of previous systematic reviews (e.g., stephan, 2018; shepherd et al., 2019; tranfield et al., 2003). first, we searched an online database (i.e., web of science) to find journal publications on entrepreneurial passion between 2001 and january 2020. we aimed for articles that mentioned the term, ‘entrepreneurial passion’ in the title, abstract, or keywords at peer-reviewed journals including entrepreneurship (e.g., entrepreneurship theory and practice, journal of business venturing, and strategic entrepreneurship journal) and management (e.g., academy of management journal, academy of management review, and journal of management). the search yielded 323 papers. second, we read the abstract of each paper to decide on the inclusion and exclusion of papers in the review. we deleted conference proceedings, duplicated papers, case studies, and articles that studied passion for non-entrepreneurship domains. as a result, we excluded 260 papers and included 63 journal publications. table 1 shows the number of publications based on each type of entrepreneurial passion, and table 2 indicates the number of publications based on each journal. third, we reviewed each paper thoroughly and coded authors, year of publication, published journal, type of research, type of passion, measurement of passion, variables (i.e., independent, dependent, mediator, and moderator), nature of the sample, country of data collection, theoretical perspectives, and core findings of each paper. we attach the summarized version of coding in the appendix. figure 7. outcome variables of perceived and displayed passion table 1 number of publications by types of entrepreneurial passion types of passion publications entrepreneurial passion 27 dualistic model of passion 16 perceived passion 8 passion for work 3 note. we also found 10 papers that did not focus on specific types of entrepreneurial passion, but studied passion for overall entrepreneurship. 130 y. lee, & p. herrmann journal of small business strategy / vol. 31, no. 3 (2021) / 122-147 the attention on the topic of entrepreneurial passion is increasing as shown by the number of publications (figure 8). in recent reviews, murnieks et al. (2014) explained that “to our knowledge, only three published articles have examined passion among entrepreneurs empirically” (p. 1588), and cardon, glauser et al. (2017) reviewed journal publications on the topic of entrepreneurial passion and found 29 published papers. moreover, murnieks et al. (2020) marked that “our review indicates … 14 empirical articles which have examined entrepreneurial passion to date” (p. 5). in our systematic review, we found a total of 63 journal publications, of which 9 papers are conceptual and 54 are empirical. 0 2 4 6 8 10 12 202020192018201720162015201420132012200920082006200520042001 number of publications figure 8. increasing scholarship on entrepreneurial passion future research opportunities based on the results of our systematic review on entrepreneurial passion, we discuss areas that could be further advanced according to each framework. passion for work although scholars have continuously applied work passion in diverse areas (pollack et al., 2020), there is still a lack of studies of work passion in the context of entrepreneurship. as we explained, seminal studies of this framework have motivated researchers to examine entrepreneurs’ general work passion (baum & locke, 2004); however, we were only able to find three papers that used the concept in the entrepreneurship literature. entrepreneurs invest a large amount of time in work, and it is common to find ceos or investors who love working for their start-ups. as such, scholars could utilize the framework of work passion and study the phenomenon of entrepreneurship to further extend the literature. dualistic model of passion to advance the literature on the dualistic model of passion, we need to understand distinctive antecedents and outcomes of harmonious and obsessive passion. most studies in the literature examined directional differences of harmonious and obsessive passion on the same outcome. for instance, de mol et al. (2018) found a positive relationship between obsessive passion and burnout and a negative relationship between harmonious passion and burnout. we believe that extending recent studies that found unique antecedents or outcomes corresponding with harmonious and obsessive passion (curran et al., 2015; murnieks et al., 2020; pollack et al., 2020) and investigating the distinct 131 y. lee, & p. herrmann journal of small business strategy / vol. 31, no. 3 (2021) / 122-147 table 2 number of publications by journals journal publications journal of business venturing 17 journal of small business management 7 entrepreneurship theory and practice 5 academy of management journal 3 international small business journal 3 journal of business research 3 academy of management review 2 frontiers in psychology 2 international journal of entrepreneurial behavior and research 2 journal of applied psychology 2 journal of management studies 2 applied economics 1 applied psychology 1 entrepreneurship and regional development 1 entrepreneurship research journal 1 human resource management review 1 journal of business venturing insights 1 journal of entrepreneurship 1 journal of management 1 journal of small business and enterprise development 1 journal of small business strategy 1 leadership quarterly 1 management research review 1 strategic entrepreneurship journal 1 technology analysis and strategic management 1 venture capital 1 linkages of each type of passion could help accumulate our knowledge in the entrepreneurial passion literature. for instance, harmoniously passionate people are creative and persistently seek feedback from others (liu et al., 2011; sirén et al., 2016), which could be linked to outcomes like bricolage (baker & nelson, 2005), strategic entrepreneurial behavior (anderson et al., 2019), or entrepreneurial imagination (kier & mcmullen, 2018). these entrepreneurship concepts are related to creativity and innovativeness, and we suggest scholars research such relationships. moreover, obsessively passionate people make an effective commitment toward their organizations (huyghe et al., 2016) and are defensive about their identity (philippe et al., 2010), which could be linked to outcomes like identity fusion (swann, gόmez et al., 2009), risk-taking (covin & slevin, 1989), or competitive aggressiveness (lumpkin & dess, 1996). entrepreneurial passion scholars who apply cardon et al.’s (2009) framework of entrepreneurial passion need to investigate diverse contexts and not assume that entrepreneurial passion is a concept only applicable to entrepreneurs of small firms. we need to look beyond this prejudice on entrepreneurial passion and utilize the concept in various contexts, which would bring fruitful directions for the literature. similar to the five-factor model of personality (mccrae & costa, 132 y. lee, & p. herrmann journal of small business strategy / vol. 31, no. 3 (2021) / 122-147 1987), which was applied to diverse agents with different characteristics such as ceos (e.g., herrmann & nadkarni, 2014) and entrepreneurs (e.g., zhao & seibert, 2006), entrepreneurial passion is not a characteristic unique to entrepreneurs of small firms, but one that is likely to exist among non-entrepreneurs (e.g., ceos, employees, professors, students, or politicians) of diverse types of organizations (e.g., large, non-profit, government agencies, universities, or political parties). for instance, professors who expand their research and teaching roles in their affiliated universities could have high developing passion, employees who always enjoy finding completely new tasks would be high on inventing passion, and politicians who establish or join new political parties could be linked to founding passion. perceived passion in this area, it is important to clearly distinguish between similar concepts of passion: perceived, displayed, and felt. perceived passion is observed passion of entrepreneurs that is captured by others like employees, stakeholders, or investors; displayed passion is personal meanings and feelings of passion that are expressed by entrepreneurs (mitteness et al., 2012). felt passion refers to entrepreneurs’ experienced passion (shane et al., 2020, p. 8); in other words, it is emotions of passion that entrepreneurs feel themselves. to be clear, “the emotion an entrepreneur displays may not be perceived by the investor” (mitteness et al., 2012, p. 594). accordingly, perceived passion is the most appropriate type of passion when examining external observer’s perceptions on entrepreneurs’ passion (mitteness et al., 2012) and displayed passion is suitable to study entrepreneurs’ self-assessment on their apparent passion (shane et al., 2020). moving beyond each framework, we also identified areas that could potentially advance the overall entrepreneurial passion literature: 1) conducting in-depth and more nuanced studies on the entrepreneurial passion and firm performance relationships, based on various frameworks of passion, 2) examining specific mechanisms that link each type of passion and performance, 3) solving the issue of mismatch between theoretical frameworks and measurement of entrepreneurial passion, 4) applying entrepreneurial passion in different cultural settings, 5) concentrating on the theoretical justifications for each framework of passion, and 6) utilizing unified terminologies of passion. first, the relationship between entrepreneurial passion and firm performance needs both theoretical and empirical advancement. firm performance has been a focus of broad management research (dess & robinson, 1984). in the entrepreneurship literature, diverse publications on meta-analysis confirm the importance of performance: entrepreneurial orientation-firm performance (rauch et al., 2009), personality-entrepreneurial performance (zhao et al., 2010), innovation-firm performance (rosenbusch et al., 2011), human capital-entrepreneurial success (unger et al., 2011), and internationalization-firm performance (schwens et al., 2018). however, we still lack understanding of the relationship between passion and performance. as such, scholars should give more attention to the performance outcomes of entrepreneurial passion in diverse contexts, using different performance measures, and applying different entrepreneurial passion frameworks to further advance the literature. we need to answer research questions like: what are the financial or organizational benefits of entrepreneurs’ passion? what are the mechanisms and contingencies on the relationship between entrepreneurial passion and firm performance? based on the analysis of the research stream on the relationship between entrepreneurial passion and firm performance, one main conclusion is that we have much to learn about the financial outcomes of diverse types of passion. specifically, we found that most studies focused on certain types of passion (e.g., developing; drnovsek et al., 2016; mueller et al., 2017), and this one-sided utilization restricted our understanding of how inventing, founding, harmonious, or obsessive passion relate to firm performance. in this context, mueller et al. (2017) called for an investigation on the impact of other types of entrepreneurial passion on firm performance. moreover, the findings in the literature are contradictory. on the one hand, ho and pollack (2014) found a positive influence of harmonious passion on total business income. they also found that obsessive passion is negatively related to total business income. even though both relationships were indirect, it is noteworthy that they asserted and found different performance outcomes of the two types of passion. on the other hand, the regression results of sirén et al. (2016) show that both harmonious and obsessive passion have insignificant relationships with sales and profit growth. although sirén et al. (2016) did not hypothesize these direct relationships, the contradictory findings between ho and pollack (2014) and sirén et al. (2016) provide important implications for future research. the difference between these two studies might have emerged from their different natures of data collection. ho and pollack (2014) utilized self-reported subjective performance data from the united states of america (usa) and sirén et al. (2016) collected secondary data of sales and profit growth from finland. the different empirical results between ho and pollack (2014) and sirén et al. (2016) suggest scholars should clarify the relationships between the dualistic models of passion and 133 y. lee, & p. herrmann journal of small business strategy / vol. 31, no. 3 (2021) / 122-147 firm performance. to advance our understanding of the entrepreneurial passion-firm performance relationship and clarify the contradictory findings of the dualistic models of passion-firm performance relationship, future scholars should examine different types of passion, apply diverse boundary conditions, and develop more nuanced theoretical arguments. second, based on the arguments that each type of passion is linked to idiosyncratic outcomes (cardon et al., 2009; vallerand et al., 2003), we suggest studying specific mediators that associate different types of passion and firm performance. drnovsek et al. (2016) explained that “looking at specific types of entrepreneurial passion is important because different roles and activities entrepreneurs engage in may elicit different types of passion that are uniquely associated with outcomes of interest” (p. 206). moreover, strese et al. (2018) emphasized that we need to understand how various forms of passion are linked to respective outcomes. accordingly, it is important to identify mechanisms between passion and firm performance. in meta-analyses, scholars have found that different outcomes corresponded with different types of passion (curran et al., 2015; pollack et al., 2020). these different outcomes could be utilized as mediators to understand the unique antecedent roles of passion on performance. for instance, one possible future research opportunity could be examining the founding passion of entrepreneurs in the pre-launch or early-stage firms. founding passion indicates one’s central identity and positive emotion toward “establishing a venture for commercializing and exploiting opportunities” (cardon et al., 2009, p. 516) and has been related to creativity, persistence (cardon et al., 2013), and entrepreneurial intentions (biraglia & kadile, 2017). based on our systematic review, founding passion did not receive much attention from scholars compared to other forms of passion. as in the case of other types of passion, there may be other important factors that influence the founding passion-firm performance relationship. hence, it would be of great importance to investigate specific mediators behind the relationship between founding passion and firm performance. scholars need to posit that passion alone is not enough to predict firm performance and requires an appropriate examination of boundary conditions and mechanisms. even for passionate entrepreneurs, managing a firm can create pressures on time and resources, increases uncertainty, and be detrimental to personal well-being (cardon et al., 2012). accordingly, potential research opportunities in this area would be examining boundary conditions that could alleviate those barriers of entrepreneurs and ignite the passion-performance relationship. for instance, entrepreneurs in collectivistic cultures may receive strong psychological support from family and attain a safety net from their network (lee et al., 2019), which might magnify the effects of passion on firm performance. third, we could increase our understanding of entrepreneurial passion by closely matching the arguments with the measurement of passion. scholars have utilized the logic from overall entrepreneurial passion, citing several frameworks and used measurements of specific passion to empirically test their models. to enable the advancement of the literature, we should match the measures we use with established theory. for example, scholars using cardon et al.’s (2009) framework of entrepreneurial passion to develop hypotheses should employ cardon et al.’s (2013) survey items to test their theoretical models. scholars have theorized using the term ‘entrepreneurial passion’ in their hypotheses but measured the passion differently. some have built theoretical arguments based on overall entrepreneurial passion and utilized specific measures to operationalize entrepreneurial passion: harmonious passion (murnieks et al., 2014), inventing passion (huyghe et al., 2016), founding passion (biraglia & kadile, 2017), developing passion (mueller et al., 2017) and inventing, founding passion (gielnik et al., 2015). the above-mentioned papers provided justifications of the utilization of specific measures and explained their limitations within discussion parts. for instance, gielnik et al. (2015) justified the use of inventing and founding passion survey items to capture overall entrepreneurial passion, arguing that their sample of entrepreneurs are in the prelaunch stage, and mueller et al. (2017) explained the use of developing passion to measure entrepreneurial passion because the entrepreneurs in their sample are “operating established firms, rather than working through the startup or founding process” (p. 268). although these scholarly works have created an important body of knowledge, we could benefit by fitting the overall arguments and measurements to accelerate the progression of the field. a careful approach of matching the theoretical arguments and measurements would highly promote the advancement of entrepreneurial passion literature. fourth, the application of entrepreneurial passion in diverse cultural settings is needed. from 63 journal publications that we reviewed, 9 articles are conceptual and 54 are empirical. from those empirical papers, we listed countries where data on entrepreneurial passion have been collected and counted the number of times those countries have been chosen (table 3): usa (23 times), germany (11 times), finland (4 times), sweden (3 times), australia (3 times), china (3 times), belgium (2 times), italy (2 times), and other countries were utilized once (canada, mexico, brazil, slovenia, switzerland, netherlands, spain, portugal, russia, hungary, israel, iran, and singapore). essen134 y. lee, & p. herrmann journal of small business strategy / vol. 31, no. 3 (2021) / 122-147 tially, many scholars have called for employing entrepreneurial passion in various cultural contexts (e.g., murnieks et al., 2020; stenholm & renko, 2016; strese et al., 2018). applying diverse types of entrepreneurial passion in less studied countries and cultural settings would push the literature further. moreover, we believe contextualized studies that establish countryor cultural-specific hypotheses and empirical examination within those settings would promote a fine-grained understanding of the entrepreneurship phenomenon (lee et al., 2019; miller, 2011). fifth, scholars should choose the type of passion (e.g., entrepreneurial passion, dualistic model of passion, work passion, and perceived passion) based on theoretical justifications and contextual appropriateness. because passion is a domain-specific concept (cardon et al., 2009; vallerand et al., 2003), understanding ‘passion for what’ is a fundamental conclusion in the literature (cardon, glauser et al., 2017; murnieks et al., 2014; strese et al., 2018). accordingly, focusing on the domain and research questions would help in having an appropriate application of the suitable frameworks for passion. it is critical to mention that frameworks should be integrated in research studies with suitable theoretical justifications. although the dualistic model of passion (vallerand et al., 2003) and entrepreneurial passion (cardon et al., 2009) share similarities like affection and identification as the core components of passion, they are different in their approach toward entrepreneurship and internalization (collewaert et al., 2016; ho & pollack, 2014). first, the dualistic model of passion takes a broad approach toward entrepreneurship. most scholars study entrepreneurs’ overall passion for entrepreneurial activities (e.g., ho & pollack, 2014), and entrepreneurial passion focuses on specific roles of entrepreneurs such as inventing, developing, and founding (cardon et al., 2009). second, the dualistic model of passion considers how entrepreneurial activities are internalized in one’s identity (vallerand et al., 2003), and entrepreneurial passion is related to salient identity toward the roles of entrepreneurs (cardon et al., 2009). researchers should consider these differences and integrate frameworks of passion and empirical models with the appropriate theoretical rationale. we also emphasize that even different types of passion from the same frameworks should be carefully distinguished based on theory and the research question being studied before their inclusion in theoretical models. while vallerand et al. (2003) introduced the dualistic model of passion and suggested two types of passion (i.e., harmonious and obsessive passion), these two are different types of passion that do not necessarily have to be examined in the same model. harmonious and obsessive passion are theoretically different in terms of internalization and behavioral persistence toward a particular domain (vallerand et al., 2003). although they are rooted in the same framework, these two types are two independent variables, and scholars should probe whether they are continuum or orthogonal table 3 summary of entrepreneurial passion research by country cluster country study america usa 23 canada 1 mexico 1 brazil 1 europe germany 11 finland 4 sweden 3 belgium 2 italy 2 slovenia 1 switzerland 1 netherlands 1 spain 1 portugal 1 russia 1 hungary 1 asia china 3 israel 1 iran 1 singapore 1 oceania australia 3 constructs. they share theoretical similarities; both types attain strong inclinations toward a domain that people love. most of the empirical correlations in previous studies were moderately high (r = .48: murnieks et al., 2020; r = .44: stroe et al., 2020). scholars propose that the dualistic model of passion is not a unidimensional continuum construct but one that includes two disparate types of passion (philippe et al., 2019). second, because the dualistic model of passion is a domain-specific concept, harmonious and obsessive passion are not orthogonal constructs where both could score high on the same domain. in other words, when studying passion for one specific domain, an individual cannot have high levels of both harmonious and obsessive passion. therefore, we emphasize that the decision between types of passion should be based on theoretical arguments and 135 y. lee, & p. herrmann journal of small business strategy / vol. 31, no. 3 (2021) / 122-147 research questions. although most passion studies employ one framework of passion to answer their research questions, huyghe et al. (2016) applied two different frameworks (e.g., obsessive passion and inventing passion) to introduce the concept of passion orchestra. passion orchestra refers to “the intraindividual coexistence and interplay of entrepreneurial passion and passions for other non-entrepreneurial roles” (huyghe et al., 2016, p. 345). while it is interesting and important, this approach should be taken carefully because it can be a baffling concept for readers to grasp that there can be simultaneous existence of multiple forms of passion. for instance, huyghe et al. (2016) justified matching two different types of passion by providing a context of academia where researchers could have both obsessive passion for scientific research and entrepreneurial passion for inventing roles. likewise, a contextual rationalization is critical for considering which types of passion would be appropriate to apply when studying passion orchestra. also, scholars who plan to examine this stream of research could utilize polynomial regression and response surface methodology to advance our understanding of the fit between multiple types of passion. lastly, the terminologies of passion need to be clarified in future entrepreneurship research. as we attempted to synthesize the findings of entrepreneurial passion studies, multiple terminologies have been used for similar concepts, which might have brought confusion to the readers. for instance, scholars have used the term ‘entrepreneurial passion’ to refer to different domains of passion: ‘harmonious entrepreneurial passion’ (murnieks et al., 2020) and ‘perceived entrepreneurial passion’ (davis et al., 2017). it is important to use a unified terminology when referring to the same construct. in order to clarify the confusion, we suggest that scholars use exact terms established in the seminal papers of passion to advance the entrepreneurial passion literature. conclusion in this paper, we attempted to compile what has been studied in the entrepreneurial passion literature and capture the main research opportunities in this area. our systematic review advances the entrepreneurial passion literature by thoroughly synopsizing published works on different frameworks of passion in the entrepreneurship field. we summarized the findings based on four main conceptualizations of passion: passion for work, the dualistic model of passion, entrepreneurial passion, and perceived passion. moreover, we suggested detailed research opportunities for each framework and the entrepreneurial passion literature in general. specifically, we reviewed 63 journal publications between 2001 and 2020 and detected six essential research gaps in the literature. first, the research stream on the relationship between entrepreneurial passion and firm performance needs further advancement, primarily focusing on various frameworks of passion. second, idiosyncratic mediators that link each type of passion and performance need to be examined. third, theoretical frameworks and measurements of passion need to be thoroughly matched to advance the literature. fourth, empirical studies of entrepreneurial passion should be conducted in diverse cultural settings. fifth, each framework of passion should be studied based on theoretical and contextual justifications. lastly, using exact terminologies suggested in seminal papers is of critical importance for establishing consensus among researchers and the advancement of theories. references anderson, b. s., eshima, y., & hornsby, j. s. 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(2010). the relationship of personality to entrepreneurial intentions and performance: a meta-analytic review. journal of management, 36(2), 381-404. https://doi.org/10.1016/j.jbusvent.2019.105948 140 y. lee, & p. herrmann journal of small business strategy / vol. 31, no. 3 (2021 / 122-147 appendix literature review of entrepreneurial passion authors year journal type of research type of passion findings newman et al.1 2021 ap conceptual all types authors review the literature on entrepreneurial passion and summarize the antecedents and outcomes of different types of entrepreneurial passion. boone et al. 2020 jbv empirical entrepreneurial passion in the commercialization stage, poly-focal team entrepreneurial passion is better at achieving high team performance through reduced relationship conflict than mono-focal team entrepreneurial passion for either inventing or founding. de mol et al. 2020 jbv empirical entrepreneurial passion new venture teams’ average passion is not associated with performance. entrepreneurial passion diversity (i.e., intensity separation) negatively influences the quality of the business idea and entrepreneurial passion diversity (i.e., focus variety) negatively impacts the amount of funding that teams will receive. hubner et al. 2020 etp empirical entrepreneurial passion authors empirically studied the contagion effect of entrepreneurial passion. specifically, they found that entrepreneurs’ passion experience (i.e., merging all passion domains) positively impacts employee affective commitment through employee passion response. when they examined the types of passion separately, only developing passion would lead to employee affective commitment through employee passion response. karimi 2020 ae empirical entrepreneurial passion based on the theory of planned behavior, the authors found that university students’ passion for inventing positively increases entrepreneurial intentions through either attitudes toward entrepreneurship or perceived behavioral control. kiani et al. 2020 tasm empirical entrepreneurial passion authors examined the indirect influence of entrepreneurial passion on radical innovation through exploratory learning. murnieks et al. 2020 jbv empirical dualistic model of passion authors studied the antecedents of entrepreneurial passion. specifically, entrepreneurial identity centrality leads to harmonious entrepreneurial passion and affective interpersonal commitment drives obsessive entrepreneurial passion. moreover, the authors examined the gender of entrepreneurs as the moderator of both relationships. as a result, male entrepreneurs positively strengthened both relationships. shane et al. 2020 jbv empirical perceived passion using fmri, authors empirically found the causal relationship between entrepreneurs’ displayed passion and informal investors’ interest. 141 y. lee, & p. herrmann journal of small business strategy / vol. 31, no. 3 (2021 / 122-147 stroe et al. 2020 jbv empirical dualistic model of passion entrepreneurs’ fear of failure manifests negative affect and harmonious passion reduces this influence. however, obsessive passion showed both positive and negative moderating effects in two different studies. türk et al. 2020 jsbm empirical entrepreneurial passion university students’ prior entrepreneurial experience (i.e., role model and entrepreneurial experience) positively influences them to nurture entrepreneurial passion and learning orientation strengthens these relationships. xiao et al. 2020 jsbm empirical entrepreneurial passion employees’ skill variety positively impacts them to form a team and this influence is strengthened by employees’ developing passion. hou et al. 2019 fp empirical entrepreneurial passion university students’ entrepreneurial passion leads to high levels of entrepreneurial intentions through entrepreneurial self-efficacy. iyortsuun et al. 2019 mrb conceptual entrepreneurial passion authors theoretically explain the direct and indirect influence of entrepreneurial passion on performance through diverse mediators. obschonka et al. 2019 fp empirical dualistic model of passion researchers’ harmonious entrepreneurial passion is positively associated with entrepreneurial behavior. oo et al. 2019 jbv empirical perceived passion user entrepreneurship leads to crowdfunding performance through perceived passion. santos & cardon 2019 etp empirical entrepreneurial passion team entrepreneurial passion (tep) for inventing and developing increase performance of new venture team (nvt). the relationship between tep for inventing and team performance is moderated by “mono-focal (nvts with a higher score in one of the domains compared to the others); incomplete poly-focal (nvts showing higher scores in two of the three domains of tep); and complete poly-focal (nvts showing no differences between the scores of the three domains)” (p. 10). tep for founding is not empirically related to team performance. schenkel et al. 2019 jsbs empirical dualistic model of passion employees’ harmonious passion for being entrepreneurial positively influences them to spend more time thinking about new ideas, which then leads them to suggest increased number of job-related innovative ideas. moreover, employees’ creative self-efficacy negatively moderates the relationship between harmonious passion and time spent on innovating. schulte-holthaus 2019 joe conceptual all types author proposes a framework to understand passion in entrepreneurial contexts. stenholm & nielsen 2019 ijebr empirical entrepreneurial passion entrepreneurs’ perceived emotional support is positively related to entrepreneurial passion and this relationship is strengthened by entrepreneurial experience. 142 y. lee, & p. herrmann journal of small business strategy / vol. 31, no. 3 (2021 / 122-147 costa et al. 2018 jsbm empirical entrepreneurial passion intensive positive feelings toward developing, inventing, and founding role identities positively moderate the impact of cognitive entrepreneurial training on the accuracy of the business opportunity recognition. de mol et al. 2018 jsbm empirical dualistic model of passion entrepreneurs’ job fit leads to higher burnout through obsessive passion. destiny beliefs about work strengthen the impact of job fit on obsessive passion. harmonious passion is negatively associated with burnout. fisher et al. 2018 ijebr empirical dualistic model of passion entrepreneurs’ obsessive passion leads to sustained commitment and harmonious passion influences entrepreneurs to perceive themselves as successful through resilience. milanesi 2018 jbr empirical all types author suggests a hobby-related entrepreneurial process that explains the manifestation of entrepreneurial passion. entrepreneurs enjoy domain passion (e.g., hobby) and accumulate knowledge and skills related to the domain. with increased exposure and interactions with people in the domain, entrepreneurs find opportunities and nurture entrepreneurial passion to start a company and commercialize the product. strese et al. 2018 jsbm empirical entrepreneurial passion ceos’ passion for inventing positively increases radical innovation in smes and shared vision moderates this relationship. stroe, parida, & wincent 2018 jbr empirical dualistic model of passion entrepreneurs with harmonious passion make effectual decision making when they have high self-efficacy or perceive high risk in the environment. entrepreneurs with obsessive passion make causal decision making when they have low risk perception of the environment. in other words, entrepreneurs implement different entrepreneurial decision-making logic depending on their types of passion under certain conditions. stroe, wincent, & parida 2018 jbr empirical dualistic model of passion role overload develops nascent entrepreneurs’ obsessive passion. goal challenge and achieved progress strengthen the impact of role overload on obsessive passion. warnick et al. 2018 jbv empirical perceived passion angel investors and venture capitalists perceive both entrepreneurial passion and passion for product as critical factors for investment decisions. entrepreneurs’ openness to feedback positively moderates both types of passion toward funding potential. interestingly, there is a three-way interaction among investing experience of investors, openness to feedback, and entrepreneurial passion toward funding potential. passion for product also demonstrates a three-way interaction with entrepreneurial experience of investors and openness to feedback toward funding potential. however, combination of entrepreneurial passion and passion for product does not predict funding potential. 143 y. lee, & p. herrmann journal of small business strategy / vol. 31, no. 3 (2021 / 122-147 biraglia & kadile 2017 jsbm empirical entrepreneurial passion entrepreneurial passion positively leads to entrepreneurial intentions and entrepreneurial self-efficacy acts as a partial mediation in this link. campos 2017 jsbed empirical entrepreneurial passion entrepreneurial developing passion is positively related to entrepreneurial orientation and entrepreneurial alertness mediates this relationship. cardon, glauser et al. 2017 jbvi conceptual all types authors review papers on entrepreneurial passion published in major journals (i.e., 29 papers) and suggest scholars focus on specific domains of entrepreneurial passion, rather than overall entrepreneurial activity. based on the analysis of 80 interviews, they propose major sources of entrepreneurial passion (i.e., growth, people, product/ service, inventing, competition, and social cause). cardon, mitteness et al. 2017 etp empirical perceived passion evaluations of funding decisions by angel investors are positively associated with entrepreneurs’ level of preparedness. when entrepreneurs commit personal money to their idea, prepared entrepreneurs’ chance of obtaining positive evaluations on funding has increased. in other words, angel investors favor prepared entrepreneurs with personal financial commitment in their idea. cardon,post et al. 2017 amr conceptual entrepreneurial passion team passion diversity would positively influence the formation of team entrepreneurial passion (i.e., “the level of shared intense positive feelings for a collective team identity that is high in identity centrality for the nvt”, p. 286). moreover, team entrepreneurial passion impacts diverse individualand team-level outcomes like new venture team performance, quality of new venture team processes, and individual entrepreneurial passion. davis et al. 2017 jbv empirical perceived passion entrepreneurial passion perceived by funders positively moderates the relationship between product creativity and positive affective reactions. authors empirically find a negative influence of perceived entrepreneurial passion on funders’ investment decisions and predicted success. li et al. 2017 jap empirical perceived passion entrepreneurs’ displayed passion on crowdfunding video expands the enthusiasm of viewers, which in turn increases funding amount and social media exposure. project innovativeness perceived by viewers also invigorates the displayed passion-funding amount and displayed passion-social media exposure relationships. mueller et al. 2017 jbv empirical entrepreneurial passion entrepreneurs’ passion for developing indirectly increases firm performance through 1) self-regulatory mode (locomotion and assessment) and 2) grit. 144 y. lee, & p. herrmann journal of small business strategy / vol. 31, no. 3 (2021 / 122-147 collewaert et al. 2016 jms empirical entrepreneurial passion entrepreneurial passion for founding diminishes in the course of time. specifically, intensive positive feelings decrease over time and identity centrality remains stable. drnovsek et al. 2016 sej empirical entrepreneurial passion founder ceos’ passion for developing directly impacts sales and employee growth. moreover, goal commitment mediates the relationship between developing passion and venture growth. huyghe et al. 2016 jbv empirical entrepreneurial passion & dualistic model of passion inventing passion increases spin-off and start-up intentions. entrepreneurial self-efficacy indirectly influences inventing passion-intentions relationship. moreover, obsessive passion positively influences spin-off intentions and affective organizational commitment mediates this influence. as the core findings of the paper, inventing and obsessive passions ‘orchestrate’ together to impact spin-off intentions. kang et al. 2016 jbv empirical entrepreneurial passion authors find an antecedent (i.e., organizational innovative climate) and an outcome (i.e., employees’ innovative behavior) of entrepreneurial passion for inventing. proactive climate positively moderates the relationship between innovative climate and inventing passion and risk-taking climate increases the influence of inventing passion toward innovative behavior. murnieks et al. 2016 jbv empirical dualistic model of passion perceived obsessive passion and tenacity of entrepreneurs positively influence the funding potential from angel investors. moreover, a three-way interaction among entrepreneurial experience of angel investors, perceived obsessive passion, and tenacity of entrepreneurs positively predicts funding potential from angel investors. ruskin et al. 2016 jsbm empirical all types entrepreneurial passion act as an emotional antecedent of self-oriented motives (i.e., achievement, autonomy, relatedness, and influence) of social entrepreneurs. sirén et al. 2016 lq empirical dualistic model of passion harmonious passion positively moderates the relationship between ceos’ change-oriented leadership and firm performance. authors empirically find that both harmonious and obsessive passions are not related to sales and profit growth. stenholm & renko 2016 jbv empirical entrepreneurial passion inventing and developing passion indirectly influence new venture survival through bricolage. however, passion for founding neither fosters bricolage nor new venture survival. yitshaki & kropp 2016 erd empirical all types high-tech entrepreneurs’ passion encompasses “a strong challenge to lead a meaningful activity” and social entrepreneurs’ passion embodies “a desire to make a mark” (p. 206). 145 y. lee, & p. herrmann journal of small business strategy / vol. 31, no. 3 (2021 / 122-147 cardon & kirk 2015 etp empirical entrepreneurial passion authors theorize and empirically find that entrepreneurial self-efficacy indirectly increases persistence through inventing and founding passion. dalborg & wincent 2015 isbj empirical dualistic model of passion entrepreneurs who are “being pulled toward opportunities to start a business” indirectly nurture entrepreneurial passion through self-efficacy (p. 974). gielnik et al. 2015 amj empirical entrepreneurial passion entrepreneurial effort (“intensity of work” toward entrepreneurship-related works) positively manifests entrepreneurial passion. authors also argue the mediation effect of new venture progress that effort leads to progress of new venture and also eventually forms entrepreneurial passion. moreover, free choice of entrepreneurs moderates the effort-progress-passion relationship. thorgren & wincent 2015 isbj empirical dualistic model of passion obsessive entrepreneurial passion is positively related to habitual entrepreneurship (i.e., “exposed to multiple venture engagements”). specifically, obsessive passion is related to both serial (i.e., “engaged in a previous start-up”) and portfolio entrepreneurship (i.e., “started another business while running at least one other company”, p. 219). however, harmonious passion only impacts portfolio entrepreneurship among habitual entrepreneurship types. ho & pollack 2014 jms empirical dualistic model of passion on the one hand, harmonious entrepreneurial passion indirectly impacts referral and total business income through increased out-degree centrality (i.e., searching for others). on the other hand, obsessive entrepreneurial passion negatively influences referral and total business income through decreased in-degree centrality (i.e., unsociable). hsu et al. 2014 vc empirical all types passion is a significant factor that predicts funding potentials. specifically, angel investors put more importance on affective passion of entrepreneurs than venture capitalists when making investment decisions. murnieks et al. 2014 jom empirical dualistic model of passion harmonious passion leads to both entrepreneurial behavior and self-efficacy. cardon et al. 2013 jbv empirical entrepreneurial passion authors developed the survey instruments for entrepreneurial passion. moreover, they empirically found that entrepreneurial passion for founding is associated with creativity and persistence. entrepreneurial passion for developing is positively linked to absorption. de clercq et al. 2013 isbj empirical passion for work passion for work is positively associated with entrepreneurial intentions. passion for work also strengthens the perceived ability-entrepreneurial intentions and perceived attractiveness-entrepreneurial intentions relationships. 146 y. lee, & p. herrmann journal of small business strategy / vol. 31, no. 3 (2021 / 122-147 fisher et al. 2013 erj empirical dualistic model of passion based on the clinical literature, the authors propose a new framework of entrepreneurial obsession. they explain that entrepreneurs experience high levels of obsession with their firms. moreover, they argue that obsessive entrepreneurs achieve aimed performance but might attain anxiety issues. breugst et al. 2012 etp empirical entrepreneurial passion perceived inventing and developing passion indirectly form employees’ affective commitment through positive affect. goal clarity mediates the relationship between developing passion and affective commitment. perceived founding passion negatively impacts affective commitment through low positive affect. mitteness et al. 2012 jbv empirical perceived passion passion perceived by angel investors positively influences funding potentials. moreover, angel investors’ characteristics like older age, higher intuition, openness, and motivation toward mentors strengthen the perceived passion-funding potential relationship. however, angels who are extraverted and promotion-focused negatively impact the relationship. cardon et al. 2009 amr conceptual entrepreneurial passion authors propose the theory of entrepreneurial passion and conceptualize three different role identities of entrepreneurial passion (i.e., founder, inventor, and developer). they also provide theoretical arguments of the direct impact of entrepreneurial passion on opportunity recognition, venture creation, and growth and the mediation influence of creative problem solving, persistence, and absorption in identity-specific activities. chen et al. 2009 amj empirical perceived passion preparedness in presentations promotes funding potentials from venture capitalists as a perceived cognitive passion. however, perceived affective passion does not impact funding potentials. cardon 2008 hrmr conceptual all types explain the contagion effect of entrepreneurial passion on employee passion through transformational leadership. ma & tan 2006 jbv conceptual all types authors theoretically argue that passion is one of the main components of entrepreneurship that leads to firm performance. cardon et al. 2005 jbv conceptual all types entrepreneurial passion is related to both positive and negative results. for instance, entrepreneurial passion is positively associated with high levels of persistence and confidence during difficult times. however, it is also related to negative outcomes like relationship issues with spouse or parents due to the increased commitment toward their venture. baum & locke 2004 jap empirical passion for work entrepreneur-ceos’ passion for work is indirectly related to venture growth through communicated vision, goals, and self-efficacy. the direct impact of passion on venture growth is not supported. 147 y. lee, & p. herrmann journal of small business strategy / vol. 31, no. 3 (2021 / 122-147 baum et al. 2001 amj empirical passion for work ceos’ passion for work indirectly leads to sales, employment, and profit growth through general competencies (i.e., organization and opportunity skill), specific competencies (i.e., industry and technical skill), motivation (i.e., vision, goals, and self-efficacy), and competitive strategies (i.e., differentiation through innovation and quality/service). note. ae = applied economics, amj = academy of management journal, amr = academy of management review, ap = applied psychology, erd = entrepreneurship and regional development, erj = entrepreneurship research journal, etp = entrepreneurship theory and practice, fp = frontiers in psychology, hrmr = human resource management review, ijebr = international journal of entrepreneurial behavior and research, isbj = international small business journal, jap = journal of applied psychology, jbr = journal of business research, jbv = journal of business venturing, jvbi = journal of business venturing insights, jms = journal of management studies, joe = journal of entrepreneurship, jom = journal of management, jsbed = journal of small business and enterprise development, jsbm = journal of small business management, jsbs = journal of small business strategy, lq = leadership quarterly, mrr = management research review, sej = strategic entrepreneurship journal, tasm = technology analysis and strategic management, vc = venture capital. 1. newman et al. (2021) was in press since 2019. http://www.smallbusinessinstitute.biz sustainability reporting and its implications for family firms jeffrey f. shields1, dianne h. b. welsh2, joyce m. shelleman3 1university of north carolina at asheville, jshields@unca.edu 2university of north carolina at greensboro, dhwelsh@uncg.edu 3university of maryland university college, joyce.shelleman@faculty.umuc.edu a b s t r a c t this paper examines sustainability reporting as a global performance metric for the family business concerned with environmental sustainability. examples of reporting requirements and widely employed reporting frameworks are provided, including consideration of how these can advance sustainability goals. implications for family firms to integrate sustainability goals in order to better compete worldwide are identified. these include issues of family firm commitment to sustainability and sustainability reporting, selecting an appropriate reporting framework, and developing an organization that enables both reporting and innovation to achieve sustainability. keywords: journal of small business strategy 2018, vol. 28, no. 01, 66-71 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2018 small business institute® apa citation information: shields, j. f., welsh, d. h. b., & shelleman, j. m. (2018). sustainability reporting and its implications for family firms. journal of small business strategy, 28(1), 66-71. w w w. j s b s . o rg sustainability, sustainability reporting, family firms introduction the gravity of achieving sustainable organizational operations has been amplifying over the past two decades worldwide. this conceptualization of sustainability means to meet current needs while not compromising the ability to meet human needs in the future (world commission on environment and development, 1987). the world commission impetus for success is to measure today’s progress in light of tomorrow’s outcomes, a long-term perspective instead of a short-term perspective. an emerging and growing trend is the reporting of companies’ sustainability performance, both voluntary and mandated. nearly three fourths of the largest companies across 34 nations now participate in some form of sustainability reporting (kpmg, 2015). the global economy is impacted by family firms that play a significant role in terms of growth and stability (chrisman, sharma, & taggar, 2007). family firms and the factors that shape their dynamics are important. if family firms continue their predominance in leading edge technology, they are likely to play a major role in sustainability efforts and reporting (chrisman, chua, & sharma, 2005). understanding the dimensions of the issue can be a first step in taking on this effort. in this paper, we outline the current state of sustainability and sustainability reporting as a performance metric for the family business concerned with environmental sustainability. common reporting frameworks and how these may advance sustainability goals are considered. the paper concludes with implications for family firms to integrate sustainability goals in order to better compete worldwide. sustainability reporting a now classic conceptualization of sustainability was offered by the world commission on environment and development (1987) when it was defined as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” for business organizations, sustainability is the process of meeting current stakeholders’ needs, while not conceding or diminishing the capability to address their future needs (hubbard, 2009). these definitions imply that organizations that focus only on short-term profits and current market demands need to change. they must also consider and take account of future impacts of current processes and outputs, as a system. referred to as the 3 ps of people, planet, and profits, the triple bottom line is a sustainability concept that reframes sustainable organizational performance from a solely economic-focused entity to one that must also consider social and environmental dimensions (elkington, http://www.smallbusinessinstitute.biz http://www.jsbs.org 67 j. f. shields, d. h. b. welsh, & j. m. shelleman journal of small business strategy / vol. 28, no. 1 (2018) / 66-71 1994; savitz, 2006). it builds on premises long embedded in organization policy and corporate social responsibility. its focus on comprehensive results of organization activity renders triple bottom line reporting as an important mechanism to support sustainability goals (slaper & hall, 2011). reporting and frameworks for sustainability have been developing over several decades. although fewer than 100 companies issued reports two decades ago, more than 6000 firms did so by 2013 (ioannou & serafeim, 2014). global public pressure and the involvement of large companies has accelerated the scope for reporting and its importance. in some cases, reporting is voluntary and in other cases it is now mandated. in the united states, bodies such as the securities and exchange commission (sec) and the sustainability accounting standards board have developed requirements and set standards for integrated and economic sector reporting (romero, lin, jeffers, & degaetano, 2014; schooley & english, 2015). research conducted by the accounting firm kpmg reveals that sustainability reporting is now practiced by roughly three out of every four of the biggest companies (73% of the n100, 34 nations). in the fortune global 500, 92% participate (kpmg, 2015). companies offer rationales such as branding, cost savings, reputation, and risk management, among others, for voluntary reporting on environmental and social performance (bonini & bové, 2014; chen & kelly, 2015; ernst & young, 2014; kpmg, 2011; mckinsey & company, 2010). the global reporting initiative (gri) is the most widely known and likely the most well formulated framework for sustainability reports (kpmg, 2015). for the largest firms, its rate of use is high at around 74% (kpmg, 2015). the gri framework has companies reporting on each leg of the triple bottom line of their economic, environmental, and social performance. each of these is divided into aspects such as materials, energy, water, waste, and so forth. within these aspects, there are specific indicators. for example, frequently reported environmental measures include energy use, water use, and greenhouse gas emissions (gri, 2014). the gri 4.0 framework is a structured process in which organizations engage with their stakeholders to identify their material impacts with their economic, environmental and social framework. this process identifies the issues that are germane to the organization’s situation through stakeholder engagement. the organization must report on at least one measure for each material aspect within its economic, environmental, and social impacts. in addition to measures, the gri report contains a section called disclosures on management approach. companies must report on how they will manage the identified material aspects of their economic, environmental, and social impacts. new in the 4.0 gri reporting framework is an additional reporting requirement addressing the supply chain (gri, 2015b). reporting organizations are required to examine their supply chains in terms of economic, environmental, and social impacts (gri, 2015b). another important and widely used framework is the cdp (formerly known as the carbon disclosure project). by 2017, over 5,600 organizations participated in programs to report information on their climate change, water, forest, and supply chain practices (carbon disclosure project, 2017). for each of these practices, there are specific measures to report. for example, when reporting greenhouse gas (ghg) emissions, there is specific measurement protocol for scope 1, 2, and 3 emissions. scope one emissions are direct emissions from organizations controlled by the reporting entity. scope two emissions are indirect emissions caused by the reporting entity’s consumption of electricity, heat, cooling or steam. scope three emissions are indirect emissions other than scope two, and are caused by the reporting entities’ activities (e.g., outbound logistics, product use) (carbon disclosure project, 2015). similar to the growth in participation in the leading framework for sustainability reporting among large companies (i.e., the gri), the privately owned certified b corporation framework is expanding its participation among small to medium enterprises (smes). participation has increased from 370 smes in 2010 to over 1600 in 2016 (b corp, 2015; stubbs, 2016). a certified b corporation is a company that has taken the b impact assessment and scored sufficient points on its environmental and social impacts (as scored by b corp) to achieve the status of certification (honeyman, 2014). the b impact assessment presents a series of questions for an organization to answer about its impacts on community, environment, governance, and workers (honeyman, 2014). this assessment gives an sme an overview of the company’s sustainability impact. this is hoped to stimulate it to take the next steps toward creating new performance measures to improve the sustainability score (shields & shelleman, 2017). the united nations economic commission for europe (unece) has made the long-term perspective a focus of meetings to address the worldwide implications of sustainability, public-private partnerships, and innovation. the unece in 2015 passed sustainable development goals and a 2030 agenda (unece, 2017). one environmental convention that was passed includes developing models of public-private partnerships (ppps) for mobilizing resources for financing in areas such as infrastructure, health, and energy. clearly, environmental sustainability reporting is a global phenomenon. the european energy efficiency directive (also called oath), passed in 2012, establishes a commitment by europe to reduce energy consumption by 20% primarily through decreasing greenhouse gas emissions along 68 j. f. shields, d. h. b. welsh, & j. m. shelleman journal of small business strategy / vol. 28, no. 1 (2018) / 66-71 with other pollutants, reducing energy bills, and reducing the dependence on imported fossil fuels (jenny, 2016). a major action of this directive is to enact mandatory energy audits for all businesses. large businesses are required to submit an extensive energy report, while smes also are required to report but to a lesser extent (jenny, 2016). examples of sustainability reporting efforts in european countries are many. the netherlands has taken the lead to recognize the green globe certification for sustainable tourism and its auditing procedures (green globe, 2017). a number of countries (e.g., denmark, france) mandate company sustainability reports (gri, 2015a; schooley & english, 2015). for example, france has mandatory sustainability reporting of its carbon emissions for financial institutions, including pension funds, insurance companies; and, likewise, institutional investors in france must disclose environmental, social, and governance (esg) issues (matthews, 2015). france is setting itself apart as a leader in climate initiatives, including national emission reductions and reducing food waste. the united kingdom (uk) already requires companies to disclose their climate change risks and mitigation efforts. it is predicted that sweden will soon follow, as well as other countries. yet, much reporting is still voluntary in most countries. sustainability certification of buildings is a separate category of regulations that is garnering much international attention to reduce the use of energy for climate comfort within buildings (sanchini, 2013). the most widespread certification system for buildings is leed (leadership in energy and environmental design), which originated in the united states by the green buildings council (usgbc) in 1993 and has more than 110 countries as members (sanchini, 2013). leed is a voluntary system that provides standards for new buildings, existing buildings, and new houses separately while maintaining an overall consistent approach among the standards (sanchini, 2013). italy’s friuli venezia giulia region has mandatory reporting although the rest of italy does not. dubai made its green building regulations required for government buildings and voluntary for privately-owned buildings in 2011 but made it mandatory for all new buildings in dubai in 2014 (dubai municipality, 2016). as of march 2014, a total of 44 government buildings that met the green building requirements had been built (dubai municipality, 2016). denmark now requires its central government departments to buy sustainable timber for buildings, furniture and paper products. this new procedure is overseen by the danish ministry of environment and compliance is required for central government institutions but is still voluntary for regions and municipalities (pefc, 2013). other european union countries have similar legislation, such as the uk, the netherlands, germany, and belgium (pefc, 2013). the sustainability reporting process stimulates innovation consistent with many of the traditional sources of innovation, such as dealing with the unexpected and incongruity with past operations, needs for different processes, changes in perceptions, and new knowledge (drucker, 1985). companies that report sustainable performance measures seek to anticipate the effects of the information and modify operations to improve future reports. organizational commitment to innovation is higher in this case because innovation is perceived as necessary (adams, bessant, & phelps, 2006) to build on prior disclosures of the company’s sustainability performance. what’s more, the prior formal and often voluntary company commitment made to reporting creates a context for continuing commitment necessitating ongoing innovation and implementation through entrepreneurship. a result of environmental sustainability reporting is establishing baseline measures for ghg emissions (scope 1, 2, and 3), energy use, water use, and waste that will necessitate the establishment of initiatives to improve on the disclosed levels of performance. this reporting process sets up the conditions in which product and process innovations can take place. in going through the reporting process and disclosing information, firms begin to look at their processes and products in a new way, asking new questions, such as “how can we reduce our use of water or our use of energy?” this search for clarity is the spark for innovation. implementing these changes often leads to entrepreneurial ventures as products and services are created to handle the innovation change. it also can lead to changes in an organization’s models, organizational design, financial structures, or production/supply chain (day & schoemaker, 2011). implications for family firms this review of some examples of sustainability reporting requirements and initiatives presents family firms concerned with environmental sustainability with opportunities to enhance the sustainability of their businesses. this can improve their long-term environmental impact as well as help them reap corresponding economic benefits. family firms have a stake in sustainability reporting and the global sustainability movement. from a global perspective, the predominance of family firms is well established. physical and emotional support from family members in addition to entrepreneurial characteristics, such as gender, education, age, managerial skills, are important factors that influence business success (kallerberg & leicht, 1991; masuo, fong, yanagida, & cabal, 2001; rowe, haynes, & bentley, 1993). this is in addition to business characteristics that affect success, such as age, size, and location of 69 j. f. shields, d. h. b. welsh, & j. m. shelleman journal of small business strategy / vol. 28, no. 1 (2018) / 66-71 the business (kallerberg & leicht, 1991; kraut & grambsch, 1987). transgenerational survival and success for the continuity of the firm throughout generations relies on high levels of dependence on family and non-family firm players (barnett & kellermanns; 2006; pearson & marler, 2010). from a sustainability perspective, sustainability goals and reporting efforts can translate into what is believed to be the collective commitment to family-centered goals (kotlar & de massis, 2013). family firm members may have certain wishes or desires, and these can take the shape of sustainability goals for environmental well-being, especially for the incoming generations of family members, who may have diverse goals. they can turn the goal diversity into collective commitment to family-centered goals through sustainability reporting and collective actions to preserve the environment through a cohesive effort to get behind sustainability reporting (kotlar & de massis, 2013). family firms that focus on economic aims may approach sustainability differently than do those that focus more on family socio-emotional priorities (miller, le breton-miller, & scholes, 2015). family firms will need to decide on their level of collective commitment to sustainability. although differences among family and nonfamily firms are well known and documented (chrisman et al., 2005; de massis, frattini, pizzurno, & cassia, 2015; mcguire, dow, & ibrahim, 2012; pearson, carr, & shaw, 2008), recent findings also point to the existence of significant differences within the family firms themselves (chrisman & patel, 2012; chrisman, sharma, steier, & chua, 2013; howorth, rose, & hamilton, 2010; kim & gao, 2013). a number of factors may determine a family firm’s commitment to social responsibility and sustainability, such as enlightened self interest (peake, davis, & cox, 2015), family values, governance, and business environment (le breton-miller & miller, 2016). these differences mean that there is no one size fits all approach to environmental sustainability and that each family firm must decide how sustainability efforts can best be integrated into its business model. this is a common challenge among all firms (kiron, kruschwitz, rubel, reeves, & fuisz-kehrbach, 2013). in countries where sustainability reports are mandated, the path is clear. however, for family firms located in places such as the united states, the choice of a sustainability reporting framework can be a significant decision just as it often is for non-family firms. for example, the gri is the major framework for global reporting for businesses of all sizes. in contrast, the u.s. based b impact assessment is tailored more specifically to smes (shields & shelleman, 2017). the family firm’s supply chain partners’ preferences along with their own values, sustainability goals, and internal administrative capabilities are variables at play in this decision. finally, it will be important for the family firm to organize itself to address sustainability reporting and environmental sustainability initiatives. firm size and bureaucracy may stand in the way by making the connection to the community more impersonal (le breton-miller & miller, 2016). thus, larger and more formalized family firms will want to make deliberate efforts to connect with the environmental sustainability preferences of their stakeholders. internally, reporting requires staffing and management control and performance measurement systems dedicated to collecting the required data on company performance and compiling annual reports. beyond reporting, sustainability efforts may require more organic forms of organization design in order to foster innovation (kanter, 2006) of services, products, and processes. a stewardship culture within family firms, a prerequisite for innovation capability (miller, le breton-miller, amore, minichilli, & corbetta, 2015), is associated with higher employee motivation and involvement (bammens, notelaers, & van gils, 2015) to support eco-friendliness (craig & dibrell, 2006). in turn, family firm innovation is positively affected by higher levels of employee commitment and more family member employees (ahluwalia, mahto, & walsh, 2017). such engagement and collaboration is facilitated by a flexible organization design. in conclusion, family firms have an important role to play in global sustainability. in this paper, we have reviewed sustainability reporting, with a focus on environmental issues. we also posit implications for family firms with respect to commitment, reporting framework, and organizing for sustainability. references adams, r., bessant, j., & phelps, r. 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(1987). our common future. oxford, uk: oxford university press. https://www.kpmg.com/global/en/issuesandinsights/articlespublications/corporate-responsibility/pages/2011-survey.aspx https://www.kpmg.com/global/en/issuesandinsights/articlespublications/corporate-responsibility/pages/2011-survey.aspx https://www.kpmg.com/global/en/issuesandinsights/articlespublications/corporate-responsibility/pages/2011-survey.aspx http://www.mckinsey.com/insights/sustainability/how_companies_manage_sustainability_mckinsey_global_survey_results http://www.mckinsey.com/insights/sustainability/how_companies_manage_sustainability_mckinsey_global_survey_results http://www.mckinsey.com/insights/sustainability/how_companies_manage_sustainability_mckinsey_global_survey_results http://blog.mountee.eu/2013/03/20/sustainability-certifications-of-buildings-international-overview-of http://blog.mountee.eu/2013/03/20/sustainability-certifications-of-buildings-international-overview-of http://blog.mountee.eu/2013/03/20/sustainability-certifications-of-buildings-international-overview-of http://blog.mountee.eu/2013/03/20/sustainability-certifications-of-buildings-international-overview-of reproduced with permission of the copyright owner. further reproduction prohibited without permission. small business manager scanning emphases and the dominant logic of the business-level strategy walters, bruce a;priem, richard l;shook, christopher l journal of small business strategy; fall 2004/winter 2005; 15, 2; abi/inform complete pg. 19 small business manager scanning emphases and the dominant logic of the business-level strategy bruce a. walters louisiana tech university bwalters@cab.latech.edu richard l. priem the university of wisconsin-milwaukee priem@uwm.edu christopher l. shook auburn university shookcl@auburn.edu abstract normative prescription dictates that the pursuit of" a business-level strategy can be best achieved when strategic decision makers focus their attention on thosejimctions and activities most relevant to that particular strategy (porter, 1980; 1985). we examine two elemental research questions for strategic management: 1) what is the connection, if any, between business-level strategies and the sectors managers scan most in their external environments; and 2) are business-level strategies associated with specific internal firm characteristics and capabilities managers attend to most? we evaluate these questions using a field survey in which small business managers identffy differences in the external environmental sectors and internalfirm attributes they scan most when pursuing different strategies. results demonstrate some connections between the strategy being pursued and external and internal scanning emphases. important~v. we conclude that this "scanning connection" should not be taken for granted and we offer suggestions for how managers should be deliberate about their scanning behavior. introduction effective environmental scanning has long been recognized as important for small businesses (pearce, chapman and david, 1982). early research showed that one key distinction between the information scanning of small and large firms is that in smaller firms, the information gathering tends to be the responsibility of one or two individuals rather than the specialization of scanning activities among members of the top management group (hambrick, 1981 ). other early research on environmental scanning demonstrated that small business managers tend to scan a wide variety of information sources (junh & lacho, 1975), but have lower levels of resources available for information gathering (golde, 1964 ). thus, because effective environmental scanning is an important strategic decision process for small businesses with limited resources, the study of managerial scanning at the individual level may reveal new insights into strategy making in these settings. 19 reproduced with permission of the copyright owner. further reproduction prohibited without permission. .jo11r11al of'small business strategr i 'of. 15, no. j m 'inter 1005 environmental scanning is an initial step in the progression of activities that may lead to effective organizational adaptation (daft, sormunen, & parks, 1988). data are abundant, however, and their interpretation is complex. the environment contains "an infinite number of situations and events, each of which could provide some material for environmental scanning. somehow, the tidal wave of environmental data must be funneled down to a small pipeline of information" (smircich & stubbart, 1985: 725). because managers' time is limited, attention must focus on key subsets of the available data, while some potentially important data sources are ignored (hambrick, 1981 ). moreover, the blend of data subsets attended to or ignored likely affects subsequent action (peteraf & berger. 2003). thus, this "scanning information selection" task, wherein managers decide which and /urn· much data to gather, may profoundly influence organization design and outcomes. yet scanning does not take place in a vacuum. we argue that a small business' strategy will influence which data draw the majority of manager attention. our study addresses the link between strategy and small business managers' environmental scanning behaviors by building on previous research in two important ways. first, scanning research has focused on which sectors of the external environment should be scanned most often, based on the levels of uncertainty associated with the various sectors (e.g., daft et al., 1988). we take a different approach by using the concept of "dominant logic" (prahalad & bettis, 1986) to predict which sectors are likely to garner more scanning attention than others, based on the data content of each sector. thus, we predict relationships between businesslevel strategy and the specific data items that can be obtained from each sector. this approach may provide a start toward greater specificity in scanning theory and prescription. second, whereas the bulk of previous scanning research has concentrated exclusively on executive scanning of the firm's external environment (e.g., aguilar, 1967; daft et al., 1988; el sawy, 1985; elenkov, 1997), we also examine scanning of the firm's internal "environment." aggressive monitoring of only the external environment would be sufficient if the internal characteristics of the firm seldom change or are easily known. internal characteristics also may change, however, either in response to executive action, or unintentionally such as when key employees leave the firm. indeed, the internal characteristics of a firm are similar to its external environment in several important ways, first, they change over time. second, they must be understood prior to effective adaptation. and third, they also compete for the manager's limited time and attention. these arguments suggest that executives must scan both the external environment and the internal characteristics of their firms. in summary, we investigate the individual scanning behaviors of small business managers for both external and internal domains. we postulate that particular scanning patterns will emerge as a result of the dominant logic inherent in the firm's strategy. in the following sections, we first present a brief review of the scanning literature and develop our hypotheses. then, details of the study are presented, along with results. finally, we discuss the implications of our findings for researchers and practitioners. theoretical background research on environmental scanning in small businesses has been relatively scarce. indeed, it has generally been limited to the response of small businesses to specific issues such as perceptions of opportunities and threats. for example, lang, calantone, and gudmundson (1997) found that when faced with a perceived threat or an opportunity, small business managers increased their search for information. pineda, lerner, miller, and phillips ( 1998) 20 reproduced with permission of the copyright owner. further reproduction prohibited without permission. jouma/ olsnw// business strateg_r i 'of. 15. no. 2 winter 2005 found that when confronted with important problems, small business managers increased the intensity of infonnation search and made greater use of external sources. because of the relative dearth of small business scanning research, we reviewed general scanning research for insights applicable to small business managers. the general scanning literature encompasses both content and process studies. scanning content studies have generally examined which sectors of the external environment capture the attention of managers (e.g., aguilar, 1967; daft et al., 1988; hambrick, 1981, 1982; kefalas & schoderbek, 1973 ). scanning process studies have investigated either the time spent scanning the external environment or scanning system sophistication. time issues have included the total time spent scanning (e.g., aguilar, 1967; kefalas & schoderbek, 1973), the distribution of time spent among environmental sectors (e.g., hambrick, 1981; 1982), and the frequency of scanning efforts (e.g., daft et al., 1988; hambrick, 1981; 1982). sophistication studies have involved the scope (i.e., rigor or continuity) of organizational or individual scanning efforts (e.g., el sawy, 1985; fahey, king, & narayanan, 1981; jain, 1984; subramanian, fernandes, & harper, 1993). relatively few studies have examined the links between strategy and executive scanning. hambrick ( 1981; 1982) found little support for a contingency theory that stated different strategic types (miles & snow, 1978) focus on scanning different sectors of the external environment. subramanian, fernandes, and harper (1993), on the other hand, found that miles and snow's ( 1978) strategic types did differ in their scanning system sophistication. based on jain's ( 1984) typology-proactive, reactive, ad hoc, and primitive-the strategic types in decreasing order of scanning sophistication were prospectors, analyzers, and defenders. yasai-ardekani and nystrom ( 1996) surveyed strategic planners in diversified firms and found that low cost emphasis was related to design characteristics of the firms' scanning systems. overall, the results to date concerning a strategy-scanning link are equivocal. these equivocal findings may be due to two omissions in previous research. first, much environmental scanning theory is built upon the assumptions of limited managerial resources such as managers' time and attention. managers are likely to be selective in their scanning efforts, actively scanning some sources while ignoring others. the general argument has been that those sources viewed as highly uncertain will receive the greatest scanning effort (daft et al., 1988). yet, executives have been identified as "sophisticated information seekers" (boyd & fulk, 1996: 2) who, nevertheless, are constrained by bounded rationality (cyert & march, 1963). this sophistication suggests that executive scanning selectivity may emanate from other, previously omitted factors. the dominant logic inherent in the pursuit of a particular strategy, for example, might also contribute to which sectors executives believe are most important to scan. this "sector content" approach is absent from previous scanning research. second, the failure to include internal elements may contribute to the equivocal findings concerning strategy-scanning links. although effective external scanning allows a small business manager to develop a "profound understanding of the external environment" (grant, 1995: 8), such understanding is a necessary, but not sufficient, condition for understanding a firm's competitive situation. internal scanning is also required. as noted by yasai-ardekani and nystrom, for example, "a scanning system can be considered effective if it generates awareness of environmental conditions, knowledge about the organization's strengths and weaknesses, and an awareness of existing or impending problems" (1996: 187, italics added). as argued in the early strategy literature, the executive decision maker's job entails adjusting the internal aspects of the organization to best match the demands of the external environment (e.g., ansoff, 1965; learned, christensen, andrews, & guth, 1965; miller, 1988; vickers, 1965). 21 reproduced with permission of the copyright owner. further reproduction prohibited without permission. .jo11ma! of'sma!! business stratcg\' vol. 15. no. 2 wimer 2005 hypotheses prahalad and bettis ( 1986: 490) define dominant logic as "the way in which managers conceptualize the business and make critical resource allocation decisions." they also discuss the role of organizational schemas in an organization's dominant logic, noting that "these systems represent beliefs, theories, and propositions that have developed over time based on the manager's personal experiences .... an organizational schema is primarily a product of managers' interpretations of experiences while operating within certain firms and industries" (prahalad & bettis, 1986: 489). they argue further that the selection of elements to be scanned is likely affected by a manager's schema. one might similarly expect that those sectors of a firm's external environment and those internal capabilities that are most closely associated with the firm's distinctive competencies would have highest salience for the manager. these sectors and capabilities would receive more scanning attention than would less salient sectors. thus, strategic decision-makers will attend most to those internal capabilities and external environmental elements perceived as most connected with their firms' dominant logic. the extension of prahalad and bettis' ( 1986) logic to small business managers is straightforward. small business managers pursuing different business-level strategies are likely to have different business conceptualizations and different data requirements, and thus are likely to pay the most attention to differing sets of external and internal data. this expectation is strengthened by the fact that data are so abundant that they cannot all be processed; data less relevant to competitive strategy are largely ignored (bettis & prahalad, 1995). in the next section, we tum our attention to specifying further how the dominant logics associated with different business-level strategies will likely affect small business manager's scanning behavior. generic strategies and relative focus of attention the strategy literature provides guidance concerning which external environmental sectors and which internal firm characteristics likely command the most executive attention in different strategic contexts, as well as which sectors and characteristics require less attention. porter ( 1980; 1985), for example, has asserted that firms pursuing different approaches to competitive advantage allocate attention to different dimensions of the value chain. different generic strategies require different resources and skills. they "also imply differing organizational arrangements, control procedures, and incentive systems. as a result, some commitment to one of the strategies as the primary target is usually necessary ... " (porter, 1980: 40). firms that do not focus on specific dimensions are likely to have no coherent strategy. 'the firm stuck in the middle also probably suffers from a blurred corporate culture and a conflicting set of organizational arrangements and motivation systems" (porter, 1980: 42). internal scanning for cost leaders and differentiators porter (1980; 1985; 2001) asserts that, when following coherent strategies, management assigns the value chain activities that occur inside the firm to categories that best represent their contribution to strategy. following porter's suggestions, and for sake of parsimony, six internal firm (i.e., value chain) characteristics are included in our discussion: market research, product research and development, basic engineering, financial management, cost controls, and operational efficiency. brief descriptions of each internal characteristic are shown in table l. 22 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal o/'sma// business strat11gr vol. 15. no. 2 winter 2005 table l the external and internal environment external sectors examples market environment customer trends in the indu stry; tastes and preferences ; changes in industry sa les techno logica l environment new breakthroughs in products and processes; information technology's impact on business practices; automa ti on political/legal environment actions of legal officials; legislation potentially affecting the firm; government funding sources/subsid ies economic environment interest rates ; inflation; savings rates ; currency fluctuations; exchange rates internal sectors examples market research the firm 's customer database; segmentation; customer tracking; use of marketing consultants product r&d the firm's research related to new products and features; patent activity; qualifications of researchers and scientists basic engineering discoveries that may not have an immediate market; basic knowledge collection and management efforts financial management information about financial efficiency; capital management; use of excess cash; investment structure cost controls information about cost containment efforts in all possible areas ; reduction of overhead; cost sav ings incentives operational efficiency information about sca le economies; reduced waste; production; defect rates; cycle time the cost leadership strategy is dependent on the devotion of attention to the financial management, cost controls, and operational efficiency internal characteristics. porter reinforces the importance of attention to these internal elements in bis discussion of the learning curve: "leaming does not occur automatically but results from the effort and attention of management and employees. attention should not be confined to labor costs but also to the cost of constructing facilities, the cost of scrap, and other significant value activities" ( 1985: 101 ). porter (1985) also notes that management must establish targets and demand learning improvements in these areas. "improving relative cost position may not require a major shift in strategy so much as greater management attention" (porter, 1985: 115). similarly, "cost declines with cumulative volume are by no means automatic, nor is reaping all available economies of scale achievable without significant management attention" (porter, 1980: 45). continual attention to these areas is paramount, as they can change over time and affect the cost position of the firm. on the other hand, cost leadership "generally calls for minimal expenditures on r&d, marketing, and overhead" (de kluyver, 2000: 63). these areas are likely to require less attention by top management. miller ( 1987; 1988) asserts that cost leaders attempt to reduce innovation and marketing expenses. "market scanning and analysis are less necessary when relatively unvarying and standard products are designed to appeal mainly due to low price" (miller, 1987: 61 ). 23 reproduced with permission of the copyright owner. further reproduction prohibited without permission. .journal of'small business strategr vol. 15. no. 2 wi11tc'l' 2005 together, these arguments suggest that the dominant logic of a manager whose firm is pursuing a cost leadership strategy will likely result in a pattern of internal information search in which attention is most allocated to capabilities-such as financial management, cost controls, and internal efficiency-that emphasize fonnal profit and budget controls. given their need to be selective in scanning efforts, these managers likely devote relatively less attention to product r&d, market research, and basic engineering. thus, hi a: managers of firms pursuing a cost leadership strategy will emphasize financial management, cost controls. and operational efficiency in their internal scanning. attention to particular internal elements of a finn' s value chain is also likely when pursuing a differentiation strategy. differentiation "requires a thorough understanding of what customers value, what relative importance they attach to the satisfaction of different needs and wants, and what they are willing lo pay extra for" (de kluyver, 2000: 65). according to miller (1987; 1988), differentiation requires allocating attention to market research data to discern customer requirements, an aggressive marketing effort, and key roles played by engineering and r&d personnel. thus, market research, basic engineering, and product r&d are high in perceived importance and salience. although financial management, cost controls, and internal efficiency cannot be completely ignored, they likely receive relatively less attention from managers of differentiators than they do from those of cost leaders. "differentiation is usually costly. a firm must often incur costs to be unique because uniqueness requires that it perform value activities better than competitors" (porter, 1985: 127). moreover, although porter ( 1985) recommends attempts at cost parity in areas less beneficial to differentiation, top executives' cognitive limits and the "time scarcity" problem warrant that the majority of attention be focused on areas related to differentiation's potential advantages. these arguments suggest that the dominant logic of a small business manager whose firm is pursuing a differentiation strategy will focus on customer and product research. executives' patterns of internal information search are therefore expected to give the most attention to the related capabilities of product r&d, market research, and basic engineering. thus, h 1 b: managers offirms pursuing a differentiation strategy will emphasize product r&d, market research, and basic engineering sectors in their internal scanning. external scanning for cost leaders and differentiators external environmental sectors that are important to top executives have emerged from numerous studies (e.g., bourgeois, 1980; daft et al., 1988; dill, 1958). these sectors include the market environment, the technological environment, the political/legal environment, and the economic environment. descriptions and brief examples of each sector are shown in table 1. cost leadership strategies may be especially sensitive to government regulation arising from the political-legal environment. porter ( 1985) has noted that "institutional factors"-such as government regulation, tax holidays and other financial incentives, unionization, tariffs and levies, and local content rules-merit special attention by cost leaders. and, cost leaders are particularly vulnerable to regulatory changes because they often must make long-term commitments to processes and to plant and equipment. the economic environment includes key indicators such as interest rates and inflation rates. these factors may be particularly salient for cost leaders because they frequently make major expenditures for plant expansion and equipment purchases in order to achieve scale and learning economies. "in an 24 reproduced with permission of the copyright owner. further reproduction prohibited without permission. .journal of'sma// business strategy vol. i 5. no. 2 winter 2005 increasingly global economy, cost leadership is particularly vulnerable to new entrants from other parts of the world that can take advantage of lower factor costs. and until recently, inflation threatened to reduce the price differential cost leaders could maintain vis-a-vis competitors using differentiation strategies" (de kluyver, 2000: 65). these arguments suggest that managers of cost-leader firms are likely to direct external scanning toward the economic and political/legal sectors of their environment. thus, h2a: managers of' .firms pursuing a cost leadership strategy will emphasi::.e the economic and political/legal sectors in their external scanning. the competitive advantage of a firm pursuing a differentiation strategy is often a result of management decisions regarding the development of new products and services, product design, product features, brand image, superior service, technology, distribution, etc. implementation of this strategy requires that executives devote attention to the customer and technology sectors of the external environment. attending to the customer sector entails paying close attention to changing customer tastes and preferences and to behaviors in the firm's distribution channels. porter (1985) demonstrates the importance of the customer sector by pointing out that uniqueness does not lead to differentiation unless it is valuable to the buyer. the buyer's value chain is the starting point for understanding what is valuable to the buyer, and a firm can justify a premium by lowering buyer cost or raising buyer performance. "the ultimate basis for differentiation is a firm and its product's role in the buyer's value chain which determines buyer needs" (porter, 1985: 34). often the analysis includes identifying purchase criteria and understanding how the package of benefits compares to those of present and potential competitors. the technology sector also can have important implications for every aspect of differentiators' value chains. differentiators' competitive advantage may derive from adapting new technology to product features, new products, and service conveniences. product development is often undertaken in order to enhance product quality, features, deliverability, or switching costs. quality control, reliable scheduling, and fast response time for custom orders may rely heavily on advanced technology (porter, 1985). referring again to internal characteristics required for differentiation, the external technology sector may hold important new information for r&d and engineering. also, integrating the latest advances in information technology can enhance a firm's customer database and information system. finally, the increasing possibilities of integrating operations within the value chains of customers brought about by e-commerce represent tremendous opportunities to increase switching costs. the foregoing arguments indicate that top executives pursuing differentiation likely attend particularly to the market and technology sectors of the external environment. thus, h2b: managers of .firms pursuing a d!fferentiation strategy will emphasize the market and technology sectors in their external scanning. method the highest ranking manager of each manufacturing finn that appeared in a large southwestern state's directory of manufacturers was identified as a possible sample subject if the firm met the criteria that the firm ( 1) was an independent business rather than a subsidiary, a division of another firm, or a unit of a conglomerate; (2) was in a single business (rumelt, 1974), indicated by operation in only one four-digit sic code; and (3) had from 50-99 employees. the first two criteria helped to ensure that managers' scanning would not be influenced by parent firm preferences or by the differing business-level strategies of multiple 25 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of'sma// business strategr 1 ·01. i 5. no. 2 j1li11ter 2005 divisions. criterion 3 facilitated hypothesis testing with smaller firms. where managers are likely to operate al both the strategic and operational levels and where individual managers do much of the organization· s scanning. we developed a questionnaire to identify the managers' scanning practices and their finns' business-level strategies. all scales used multiple items. the scales for business-level strategy were from miller ( 1988) and have been used frequently in subsequent research. the portions of the questionnaire that concerned scanning behaviors were adapted from the external environmental sectors used by daft et al. (1988) and aguilar (1967), and from the internal capabilities of the value chain believed to be critical to the pursuit of business-level strategies (porter, 1980). specifically, the participants were asked to rate the importance of six sectors of the internal environment and four sectors of the external environment (see table i) when gathering information useful for making strategic decisions, on a 1 (very important) to 7 (not at all important) scale. these values were transposed in our tables 2 and 3 so larger numbers would represent greater importance. packets were sent to the managers of 385 firms. responses were received from 116 firms, representing a 30 percent response rate. two responses were eliminated because they had experienced rapid growth subsequent to their reports to the state directory of manufacturers and no longer met the definition of a small business (i.e., less than 500 employees united states small business administration, 2004 ). the mean size of the firms was 84 employees (s.d.= 53, range= 10 to 500). the firms manufactured a variety of products, including metal cans, automotive accessories, draperies and blinds, laboratory instruments, and living room furniture. the average manager had spent 11.6 years (s.d.= 9.8) as the highest ranking manager and was 49.9 years old (s.d.= 10.4). the average length of time at the firm was 16.2 years (s.d.= 11.1), and average length of time in the industry was 21.7 years (s.d.= 12.7). no differences in firm sales or number of employees were found for responding versus nonresponding firms. thus, no evidence of response bias was found. means, standard deviations, and correlations for the firm-level data gathered via the questionnaires are presented in table 2. examination of the correlation table hints at support for some of the expected relationships. more specifically, strong correlations are evident among marketing and product innovation differentiation and market and technological external sector importance and the market research internal sector. hypothesis tests hypothesis testing required grouping respondents by the business-level strategies actually pursued by their firms. cost leaders and differentiators were classified by examining the standardized means of the cost leadership, marketing differentiation, and innovative differentiation scales (miller, 1988) based on a priori criteria. specifically, when a firm was reported to be above the mean of all sample firms on innovative and/or marketing differentiation, and below the mean on cost leadership, it was classified as a differentiator. when a firm was below the mean on innovative and marketing differentiation and above the mean on cost leadership, it was classified as a cost leader. we believed that the dominant logic inherent as a result of the pursuit of a coherent strategy would manifest itself in particular scanning patterns. in order to assure a "clean" comparison between cost leaders and differentiators, firms with ill-defined strategic types (i.e., stuck-in-the-middle, or high or low on all three) were excluded. this analytical process resulted in fifty differentiators, thirty-six cost leaders, and twenty-eight firms that were stuck-in-the-middle. chi-square analyses were conducted to ensure that the strategies reported were not artifacts of the managers' previous functional-level experiences. no significant association was found between managers' early 26 r e p ro d u ce d w ith p e rm issio n o f th e co p yrig h t o w n e r. f u rth e r re p ro d u ctio n p ro h ib ite d w ith o u t p e rm issio n . n -....) table 2 descriptive statistics and pearson correlations n= l 16 mean sd 1 2 3 4 5 6 7 8 9 10 11 12 13 14 i 1) log size 4.3 0.47 !strategy: i 2) cost leadership 4.0 0.99 .00 i differentiation (.50, .42) i 3) marketing 3.4 1.33 -.13 .09 (.64, .64) 14) product innovation 3.9 1.14 -.10 -.14 .49 !external sector importance (.64, .73) i 5) market 5.6 1.38 .11 -.06 .25 .3 5 i 6) technological 4.8 1.61 -0. l -.08 .32 .29 .45 i 7) political/legal 3.9 1.70 -. 11 .13 .20 .04 .1 3 .28 i 8) economic 4.3 1.68 .13 -.06 . 14 -.01 .16 .20 .38 lrnternal sector importance i 9) market research 4.8 1.60 -0.4 -.14 .38 .40 .58 .46 .32 .28 i 10) product r&d 4.1 1.70 .06 -.12 .30 .3 4 .46 .46 .19 .13 .51 i 11) basic engineering 4.1 1.82 -.04 -.2 5 .22 .33 .20 .39 .14 .14 . 17 .45 i 12) financial management 5. 1 1.63 .04 -.02 .24 .30 .44 .39 .27 .26 .51 .36 .27 i 13)costcontrols 5.9 1.25 .04 .01 -.11 -. 15 .28 .17 .12 .21 .17 .02 -.04 .45 i 14) operational efficiency 6.0 1.32 .03 -.10 -.05 -.06 .35 .11 .06 .23 .24 .02 -.04 .39 .81 !correlations of .18 are significant at p<.05 , and .23 at p<.o i. higher numbers indicate greater importance. lcronbach alpha scale reliabilities and interrater reliabilities, where appropriate, are presented in parentheses on the diagonal. i from thirty-five companies we also received questionnaires completed by other top managers in addition to the highest lranking managers . we used these surveys to assess the reliability of the strategy measures . rr. ...., ai· § ~ r.; 31 §"· (") :::: ~ ::. c: 0[jj c: r.r, r.; 0 ;.;~-cq 0 o· c: :::: g_ 0cf. ~ c: :::: :::: (!) c.. ~ ~ rj; (!) :; ::;· ~ ~ :1i ~ 3 c:: 'j', .. g_ n c: c (jq ::::: (!) (!) s; ~ rj; g ~ c -..., (!) (]) (jq ·~ > c.. §;. c" :::: ~ '?" i <p ~ [jj (il < (]) c: ('£"" 0. :::: 0 ~ :::: 2... .:::: [ s::i g. " "' "' ~ ~ " :,,~ .,... :::: :.._ ;..-. ~ t'-' :::;:: ~': ~ t'-' ;::::, ;::::, 'j> reproduced with permission of the copyright owner. further reproduction prohibited without permission. .jo11mal of'small business strategy vol. 15, no. 2 winter 2005 hi a and hi b were tested using the managers· internal sector importance ratings as the dependent variable . the ov erall ma nov a model was significant (f=8.44, p<. 00 i) . hi a received weak support from the individual importance anoy as shown in table 3. managers of cost leaders placed more importance on cost controls than did managers of differentiators (f=3.99, p< .. 05), but financial management and operational efficiency showed no differences across the two groups. hi b received strong support. differentiators rated the importance of product research and development (f=4.43, p<.05), market research (f= 17.36, p<. 00 i), and basic engineering (f= 16.66, p<.00 i) more highly than did managers of cost leaders. table 3 manov a res ults for manager importance ratings of internal capabilities & external sectors differentiator cost leader n=50 n=36 internal sectors mean (sd) mean (sd) financial mgnt 5.36 ( 1.53) 4.97 (l.74) cost controls 6.19 ( .95) 5.62 ( 1.52) opera ti on al 5.96 (1.62) 6.11 ( .91) effic productr&d 4.58 (1.79) 3.80 ( 1.53) market 5.46 ( 1.31) 4 .17 ( 1.56) research basic 4.64 ( 1.5 5) 3.14 ( 1.82) engineering external sectors mean (sd) mean (sd) economic eny 4.50 (1.69) 4.02 (1.70) poli/legal env 3.90 ( 1. 78) 4. 11 ( 1.62) marketenv 6.06 ( 1.25) 5.27 ( 1.60) techenv 5. 10 (1.68) 4.55 ( 1.61 ) + p<.l higher numbers indicate greater importance. * p<.05 *** p<. 001 f 1.1 9 3.99* 0.48 4.43* 17.36*** 16.66*** f 1. 53 0.32 6.48* 2.27 h2a and h2b also were tested via a manova model, this time using the managers' external sector importance ratings as the dependent variable. although the overall model was significant (f=2.54, p<0.05), the individual anoyas (table 3) did not support h2a. hypothesis 2b was partially supported; the perceived importance of the market environment was significantly greater for differentiators than for cost leaders (f=6.48, p<.05). discussion our study is limited by one of the typical limitations associated with cross-sectional, survey research; we cannot draw causal conclusions. nonetheless, some of our findings demonstrated hypothesized links between strategy and small business manager scanning, but some of these linkages were not apparent. regarding internal scanning, managers of differentiators perceived more importance in scanning market research, product r&d, and basic engineering than did managers of cost leaders. cost leaders' managers placed more importance on scanning cost controls than did managers of differentiators. for external scanning, managers 28 reproduced with permission of the copyright owner. further reproduction prohibited without permission. .jo11rnal of'small b11sim!ss stratcgr i 'of. 15. no. 2 wi11tl'!' 2005 of differentiators perceived the market environment as more important than did cost leaders' managers. our results are interesting in light of previous studies on selective perception, such as dearborn and simon (1958), walsh (1988), and beyer et al. (1997). those studies dealt with managers' functional experience as it relates to information attended to or problems identified. at a more aggregated level, our study examined the possible linkages between managers' prior strategy experience and scanning patterns. interestingly, just as beyer et al. ( 1997) found some evidence of selective imperception, our hypotheses were only partially supported. it may be the case that our sample of top executives of differentiators and cost leaders did not necessarily attend to those areas believed important for particular business-level strategies. in some cases they appeared to "see" things, and thus scanned, in accordance with the normative prescriptions regarding porter's ( 1980) strategies-but not always. this is an important point: given a firm's pursuit of a specific strategy, it does not automatically follow that top management will attend most to those areas prescribed by normative theory. our study was intended to identify the espoused scanning behaviors of managers whose firms were following specific strategies. implications for research whereas most prior empirical research on scanning has focused on the external environment, our study also emphasizes the importance of internal scanning. as weick ( 1979: 178-179) argues, "social systems commonly use two types of selection criteria: criteria relevant to the internal functioning of the system, and criteria relevant to the external functioning of the system with its environment. it is rare for equal attention to be given to both sets of criteria, even though both are instrumental to survival." we found that small business managers divide their attention among external and internal domains, supporting weick' s ( 1979) arguments. porter's ( 1980) ideas regarding a link between business-level strategy and internal value-chain components received some support in our study. for researchers, our study supports the suggestion that work on scanning can potentially inform contingency and configuration theories to the degree that firms may exhibit a match between business-level strategy and certain scanning behaviors. our findings were stronger for differentiators than they were for the cost leaders; perhaps our measures were not specific enough. future work should try to link more specific internal capabilities and external environmental sectors with the cost leadership strategy, and furthermore should examine the links among business-level strategy, scanning focus, and firm performance. in addition, our study was cross-sectional in terms of industries, and we believe much greater specificity in measures of our constructs would result from single-industry studies in which the language could be tailored to specific industry characteristics and nuances sufficient for common understanding among industry participants. our study focused on certain external environmental sectors and internal sectors related to a firm's value chain. however, these sectors are likely not a complete list of possible sectors to scan. one notable omission is that of competitors. indeed, our results seem to hint that a small business should not limit its scanning to competitors using the same strategy, but instead should scan competitors using different strategies. future research should examine the relationships between a small firm's strategy and the scope of competitive intelligence. although we did not try to measure the dominant logic of each small business manager, the fact that we found support for some of our hypotheses would seem to indicate that the 29 reproduced with permission of the copyright owner. further reproduction prohibited without permission. jo11r11a/ o/'s111a// business strategy vol. i 5. no. 2 winter 2005 business-level strategies do affect the mental schemas of the managers. future research could explicitly measure dominant logic and relate it not only to the managers' scanning, but also to the decision making of small business managers. finally, this study examined and found evidence of the fit between scanning emphases and small business strategy. our examination focused on the practices of small business managers. presumably, the actions of small business managers are consistent with enhancing perfonnance. however, the performance implications of obtaining such a fit were not tested. future research aimed in this direction could explore the performance implications of obtaining fit among external scanning, internal scanning, and business-level strategy. implications for small business owners/managers our results provide some indication that top managers of small manufacturing firms may, to some degree, employ a contingent approach to their external and internal information search when gathering information for making strategic decisions. these managers appeared to match their emphases on certain types of available information with their strategic focus at the business level. these findings suggest that the most complete and realistic prescriptions for small business executives will emerge from theories of executive information search that include not only links between the strategy and the external environment, but also the array of internal organizational elements important for strategic decisions. in retrospect, our conceptualization of the necessary information requirements connected with business-level strategies may have over-simplified the complexity inherent in the job of a small business manager operating at both the strategic and operational levels. for instance, although differentiators are posited to devote attention to those functions involved in enhancing the image of a firm's product and service, porter (1985) also states that differentiators cannot afford to ignore costs. although cost leaders' primary concerns may revolve around costs and efficiencies, perhaps differentiators have a somewhat more challenging balancing act to perform. not only must the differentiators produce a product with an eye toward changing consumer desires, but they also must manage the costs of doing so. if differentiators fail to manage costs, the cost of differentiation may translate into excessive prices. likewise, porter would also maintain that a cost leader must achieve some parity regarding at least minimal quality attributes. moreover, cost leaders often employ technology to increase efficiency in various stages of the value chain. in general, then, a firm pursuing one form of competitive advantage cannot completely ignore issues related to the other forms. this means that in terms of information gathering, an appropriate scanning process should address a wide range of available internal and external information. on the other hand, research has demonstrated that, because of information proliferation and bounded rationality, managers are likely to process a subset of salient data when making strategic choices. these tensions highlight the dynamic nature of the scanning task, especially for small business managers; that is, perhaps initial information search is necessarily broad in scope, and at some point managerial judgment and distilled experience dictate where attention should be particularly focused given the situational context. smaller businesses continue to be a strong force even as industrial and global changes escalate. thus, the strategic decision processes of small business owners and managers will increasingly be a topic worthy of study. 30 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of"small business strategr vol. 15. no. 2 winter 2005 references aguilar, f j. 1967. scanning the business environment. new york: macmillan. ansoff, ih. 1965. corporate strategy. new york: mcgraw-hill. bettis, ra., & prahalad, ck. 1995. the dominant logic: retrospective and extension. strategic management journal 16, 5-14. beyer, jm, chattopadhyay, p, george, e, glick, wh., ogilvie, dt, & pugliese, d. 1997. the selective perception of managers revisited. academy a/management journal 40, 716-737. bourgeois, lj. 1980. strategy and environment: a conceptual integration. academy of management review 5, 25-39. boyd, kb., & fulk, j. 1996. executive scanning and perceived uncertainty: a multidimensional model. journal o_f"management 22, 1-21. cyert, rm., & march, jg. 1963. a behavioral theory o.lthe firm. englewood cliffs, nj: prentice-hall. daft, rl, sormunen, j, & parks, d. 1988. chief executive scanning, environmental characteristics, and company performance: an empirical study. strategic management journal 9, 123-139. de kluyver, ca. 2000. strategic thinking: an executive perspective. upper saddle river, nj: prentice-hall. dearborn, dc. & simon, ha. 1958. selective perception: a note on the departmental identifications of executives. sociometry 21, 140-144. dill, wr. 1958. environment as an influence on managerial autonomy. administrative science quarterly 3, 409-443. el sawy, oa. 1985. personal information systems for strategic scanning in turbulent environments: can the ceo go on-line? mis quarter(v 9( i), 53-60. elenkov, ds. 1997. strategic uncertainty and environmental scanning: the case for institutional influences on scanning behavior. strategic management journal 18, 287-302. fahey, l, king, wr, & narayanan, vk. 1981. environmental scanning and forecasting in strategic planning--the state of the art. long range planning, 14: 32-39. golde, ra. 1964. practical planning for small business. harvard business review 42(3), 147161. grant, rm. 1995. contemporary strategy ana(vsis: concepts, techniques, applications. malden, ma: blackwell. hambrick, dc. 1981. specialization of environmental scanning activities among upper level executives. journal a/management studies 18, 299-320. hambrick, dc. 1982. environmental scanning and organizational strategy. strategic management journal 3, 159-174. jain, sc. 1984. environmental scanning in u.s. corporations. long range planning 17, 117128. juhn, ds, & lacho, kj. 1975. information seeking behavior o_fsmall businessmen in the new orleans area. proceedings of the seventh annual meeting of the american institute for decision sciences, atlanta, ga, 25-27. kefalas, a., & schoderbek, pp. 1973. scanning the business environment. decision sciences 4,63-74. lang, jr, calantone, rj, & gudmundson, d. 1997. small firm information seeking as response to environmental threats and opportunities. journal of small business management 35( i), 11-23 learned, ep, christensen, cr, andrews, kr, & guth, wp. 1965. business policy: text and cases. homewood, il: irwin. 31 reproduced with permission of the copyright owner. further reproduction prohibited without permission. .journal of'small business stratcgi· vol. i 5. no. 2 fvinter 2005 miles, r, & snow, c. 1978.0rganizational strategy, structure and process. new york. mcgraw-hill. miller, d. 1987. the structural and environmental correlates of business strategy. strategic management .journal 8, 55-76. miller, d. 1988. relating porter's business strategies to environment and structure: analysis and performance implications. academy of' management .journal 31, 280-308. pearce, ja, chapman, bl & david, fr. 1982. environmental scanning for small and growing 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of management review l 0, 724736. subramanian, r, fernandes, n, & harper, e. 1993. an empirical examination of the relationship between strategy and scanning. mid-atlantic journal of business 29, 315-330. united states small business administration. 2004. the small business economy: a report to the president. washington, dc: united states government printing office. vickers, g. 1965. the art of judgment: a study of polily making. new york: basic books. walsh, jp. 1988. selectivity and selective perception: an investigation of managers' belief structures and information processing. academy of management .journal 31, 873896. weick, ke. 1979. the social psychology of organizing. reading, ma: addison-wesley. yasai-ardekani, m. & nystrom, pc. 1996. designs for environmental scanning systems: tests of a contingency theory. management science 42, 187-204. bruce a. walters is an assistant professor of management at louisiana tech university. he received his ph.d. from the university of texas at arlington. his current research interests include competitive advantage in dynamic environments, top executive characteristics, corporate governance, strategic decision processes, and business ethics. richard l. priem is the robert l. and sally s. manegold professor of management and strategic planning at the university of wisconsin-milwaukee school of business administration. he earned his ph.d. in strategic management at the university of texas at arlington. his research interests include the strategy making process and chief executive decision-making. christopher l. shook is an assistant professor of management at auburn university. he received his ph.d. from louisiana state university. his research interests include strategic decision making, venture creation, entrepreneurship and small business, international strategic management, and methodological issues in strategic management. 32 http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2018, vol. 28, no. 03, 69-79 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2018 small business institute® w w w. j s b s . o rg this paper advances previous research on entrepreneurial marketing (em) by empirically exploring various em-related decisions made by nascent entrepreneurs in high-tech, small businesses. entrepreneurial marketing is an entrepreneurial characteristic shaped and generated by entrepreneurial mind and thought (hills & hultman, 2005). on the other hand, decision-making is an important part of entrepreneurship process by influencing the fate of entrepreneurial ventures. because of their specific cognitive characteristics as well as the unique characteristics of their business environment, entrepreneurial decisions are distinctive (baron, 1998). furthermore, various scholars have studied em and summarized key em characteristics like entrepreneurial orientation (hill & wright, 2000), proactiveness and risk-taking (kraus, harms, & fink, 2009), opportunity-orientation (morrish, miles, & deacon, 2010) as well as innovativeness, creativity, networking and flexibility (hills, hultman, kraus, & schulte, 2010). but, though em comes from entrepreneurial thinking and decision-making (hills & hultman, 2005), there are few studies exploring various aspects of decision-making in entrepreneurial marketing (nouri, imanipour, talebi, & zali, 2018). the role of entrepreneurial personality in decision-making is more emphasized in the context of nascent entrepreneurship as well as small businesses. in small businesses, decisions are made under the influence of resource scarcity. also, entrepreneurs running small businesses face decision complexity as well as decision uncertainty because of not having either needed expertise or necessary resources to gather information and evaluate it so as to make business-related decisions (busenitz & barney, 1997). moreover, nascent entrepreneurs’ decisions are informal (carson, cromie, mcgowan, & hill, 1995) and made under the influence of intuition and emotions (baron & shane, 2007). because of not having experience, information processing of nascent introduction pouria nouri1, abdollah ahmady2 1university of tehran, iran, pourianouri62@gmail.com 2universisty of tehran, iran, ahmady84@gmail.com a taxonomy of nascent entrepreneurs’ marketing decisions in high-tech small businesses entrepreneurial marketing, decision making, nascent entrepreneurs, small businesses, taxonomy entrepreneurial marketing is a useful entrepreneurial strategy to achieve certain goals. this is mostly true for nascent entrepreneurs running small businesses for two main reasons. on the one hand, these entrepreneurs encounter various kinds of resource scarcity. on the other hand, nascent entrepreneurs, especially the ones without having any previous start-up experience, face decision complexity and decision uncertainty in their decisions, including marketing decisions. given the fact that entrepreneurial marketing emanates from entrepreneurial thinking and decision-making, there should be a direct link between entrepreneurial marketing and entrepreneurial decision-making. coming to the conclusion that there are few, if any, studies regarding entrepreneurial decisions in entrepreneurial marketing, we conducted a qualitative content analysis to present a taxonomy of main entrepreneurial marketing decisions. according to our findings based on the data gathered by conducting semi-structured interviews with nascent iranian high-tech entrepreneurs active in biotechnology and nanotechnology industries and analyzed by open coding, marketing mix decisions, core marketing decisions, market entry decisions, opportunity-related decisions, innovation decisions as well as growth decisions are the main decisions made by nascent entrepreneurs, respectively. apa citation information: nouri, p., & ahmady, a. (2018). a taxonomy of nascent entrepreneurs’ marketing decisions in high-tech small businesses journal of small business strategy, 28(3), 69-79. 70 p. nouri, & a. ahmady journal of small business strategy / vol. 28, no. 3 (2018) / 69--79 entrepreneurs is fundamentally different from experienced entrepreneurs (ucbasaran, 2004). thus, one would surmise that the decision-making context for nascent entrepreneurs is probably more tumultuous. we argue that there is a serious gap in literature regarding em decisions made by nascent entrepreneurs. therefore, based on a qualitative content analysis we offer a taxonomy of entrepreneurial marketing decisions. so our study adds two important contributions to the studies of entrepreneurship. first, we contribute to the em literature by being a pioneer in connecting two important fields of em and decision-making. second, we study nascent entrepreneurs, whose decision-making has rarely been studied. this paper proceeds as follows: we review the related literature and then we elaborate our research method, findings, discussion and implications, respectively. literature review entrepreneurial marketing marketing has been defined as the process of creating value for customers as well as building strong customer relationship so as to capture value in return (kotler & armstrong, 2010). marketing and entrepreneurship are two fundamental elements of success in market creation (darroch & miles, 2011). entrepreneurial marketing is a decisive instrument of entrepreneurial firms to achieve success by doing marketing in unconventional ways (stokes, 2000). there are numerous definitions of entrepreneurial marketing in the literature. em is the process of passionately pursuing opportunities and creating customer value by taking an innovative approach by emphasizing networking, market immersion as well as flexibility (bjerke & hultman, 2004). em is also a strategy to address dynamic business environment (morrish, 2011), and a different way of doing marketing by emphasizing a proactive orientation to identify and create opportunities and exploiting them before competitors in order to gain the upper hand in the market (miles, gilmore, harrigan, lewis, & sethna, 2015). although em firms engage in all the core marketing activities of traditional marketing like selling and value propositions (morrish, miles, & deacon, 2010), contrary to the traditional marketing that regards customers as the focal point of marketing activities, em acknowledges the equally important function of the entrepreneur in the firm’s marketing activities (morrish, 2011). various factors influence the genesis of em. according to carson (1993), em is mostly under the influence of experience, knowledge, behavior and judgment of the owner-manager. also, entrepreneurial mind and decision-making are distinguished components of em (hills & hultman, 2005). table 1 shows a summary of key findings on entrepreneurial marketing. reviewing these findings divulges the lack of studies on the role of entrepreneurial decision-making in em. table 1 summary of key findings on entrepreneurial marketing researchers key findings carson (1993) experience, knowledge and judgment of entrepreneur are emphasized in em. carson et al. (1995) em in smes is an informal and haphazard approach to marketing activities. stokes (2000) em is doing marketing in unconventional ways. bjerke & hultman (2004) em is marketing of small firms growing through entrepreneurship. gruber (2004) newness, uncertainty and turbulence affect em in small firms. hills & hultman (2005) em behavior comes from entrepreneurial mind and thought. kraus et al. (2009) innovativeness, proactiveness, an entrepreneurial mindset.as well as risk-taking are necessary components of em. morrish et al. (2010) em is an opportunity-driven way of marketing. hills et al. (2010) innovativeness, creativity, networking and flexibility are emphasized in em. gilmore (2011) entrepreneur/owner/manager is the focal point of em. morris (2011) em is a strategy to address dynamic business environment. morrish (2011) entrepreneur and customers play equally important roles in em. uslay & erdogan (2014) entrepreneurial mindfulness is emphasized in em. miles et al. (2015) proactive orientation as well as innovative behavior define em. kilenthong hultman, & hills, (2016) firm’s age influences em behavior. 71 p. nouri, & a. ahmady journal of small business strategy / vol. 28, no. 3 (2018) / 69--79 entrepreneurial decision-making that entrepreneurial decision-making has the potential of becoming a scientific paradigm (schade & burmeister-lamp, 2009), indicates its importance in the field of entrepreneurship. decision-making is so important in the field of entrepreneurship that entrepreneurs have been defined as decision makers who identify opportunities through approaches emphasizing innovations, profitable venture identification as well as effectiveness (sarasvathy & berglund, 2010). decision-making in an entrepreneurial context is more emphasized, given that entrepreneurs encounter situations such as information overload, high time pressure, and uncertainty profusely (baron, 1998; shepherd, 2010; van auken, 1999). compared to non-entrepreneurs, entrepreneurs possess more versatile decision-making styles, including linear as well as non-linear thinking and decision-making capabilities (groves, vance, & choi, 2011; shepherd, williams & patzelt, 2015). entrepreneurial decisions vary from non-entrepreneurs (shepherd et al., 2015). entrepreneurs tend to assess business situation more optimistically, overestimate one’s ability to make sound business predictions, focus more on their own competencies while neglecting their competitors, overgeneralize from available information, and expand their firms despite negative market feedbacks (shepherd & patzelt, 2017). though prior studies have created a strong body of knowledge on entrepreneurial decision-making, these studies have only paved the ground for more work on the subject and the existing body of knowledge is far from fully capturing the complexity and dynamics of entrepreneurial decisions (shepherd & patzelt, 2017). table 2 summarizes key findings of entrepreneurial decision-making. this table clearly shows the lack of research on em decision-making. nascent entrepreneurs’ marketing decisions in small businesses nascent entrepreneurs are individuals in the process of establishing a business venture (reynolds & white, 1997). being important components of today’s business environments (delmar & davidsson, 2000), nascent entrepreneurs possess unique decision-making styles and evaluation methods (dimov, 2010). furthermore, nascent entrepreneurs in new ventures lack established marketing relationships as well as adequate experience in marketing issues resulting in errors in their marketing planning and execution (gruber, 2004). this is indeed emphasized for nascent entrepreneurs running small businesses. marketing in smaller firms appears to be different from that practiced by larger organizations (coviello, brodie, & munro, 2000). also, decision-making in small firms has distinctive characteristics, which makes it different from decision-making in large organizations, including the level of decision uncertainty and decision complexity entrepreneurs in small businesses encounter (busenitz & barney, 1997). given that small businesses deal with various shortages of necessary resources and lack of specialized knowltable 2 key research on entrepreneurial decision-making researchers key findings palich & bagby (1995) entrepreneurs view some situations as “opportunities,” even though others perceive them to have little potential. baron (1998) entrepreneurs face situations that tend to overload their information-processing capacity and are characterized by high levels of uncertainty, novelty, emotion, and time pressure. busenitz (1999) entrepreneurs use biases and heuristics more, which is likely to lead them to perceive less risk in a given decision situation. shepherd (2010) entrepreneurial tasks are often extreme—rife with high levels of uncertainty, time pressure, stress, and emotions. this severely impacts entrepreneurial decisions. sarasvathy & berglund (2010) entrepreneurs are decision makers who identify and capitalize on opportunities through approaches that emphasize innovation, profitable venture identification, effectiveness. shepherd et al. (2015) for entrepreneurs, the entrepreneurial environment is characterized by high levels of uncertainty about the markets they enter or create, the outcomes of the technological developments they pursue, and their competencies to successfully run a venture. 72 p. nouri, & a. ahmady journal of small business strategy / vol. 28, no. 3 (2018) / 69--79 edge (franco, de fátima santos, ramalho, & nunes, 2014), marketing activities in these firms tend to be informal and decision-making is intuitive rather than theoretical (coviello et al., 2000). moreover, in small businesses, a sole entrepreneur makes major decisions. by contrast, in larger enterprises, main decisions, including marketing ones, are formally made and formalized into marketing plans and marketing strategies (bjerke & hultman, 2004). given their lack of resources, small firms face great levels of uncertainty in their decisions (cacciolatti & lee, 2015). in short, one could easily conclude the exceptional importance of entrepreneurial marketing decision-making in small businesses run by nascent entrepreneurs. method the current research is descriptive in purpose with an anti-positivist stance by focusing on generating subjective knowledge based on entrepreneurial narratives about entrepreneurial marketing decisions, instead of commencing the study from a given theory and applying quantitative measures. thus, in order to gain a detailed understanding of nascent entrepreneurs’ main marketing decisions, we conducted a qualitative content analysis study by interviewing nascent iranian high-tech entrepreneurs active in different sectors of biotechnology and nanotechnology, who have introduced at least one product to the market in the last 42 months. out of high-tech industries, we selected nanotechnology as well as biotechnology. we concentrated on nanotechnology because of its importance as a sector of high-tech industry (woolley & rottner, 2008) as well as its importance in iran’s economy. as of late 2016, more than 150 iranian firms were active in nanotechnology (based on the latest statistics published by the iranian council of nanotechnology development), indicating its importance in the iranian economy as a whole. moreover, we chose biotechnology for two main reasons. in general, biotechnology environment is rife with uncertainty as well as rapid change (carsrud, brännback, & renko, 2008), thus, the importance of entrepreneurial judgmental decisions could be more emphasized. in particular, biotechnology is a very thriving and important high-tech sector in iran. according to the latest statistics published by the iranian center of biotechnology development, as of late 2016 more than a quarter of all domestic iranian high-tech firms were active in the biotechnology sector (biotechnology council, 2016), indicating the vitality of this industry for the iranian economy. we adopted a purposive sample approach by selecting the initial list of prospective entrepreneurs from the updated list made available by the council of iranian nanotechnology as well as the iranian institution of biotechnology development. we followed the kvale (1996) rule regarding the number in our sample which regards a number of (10 ± 15) interviews in qualitative studies as adequate. in the process of selecting the interviewees, we made sure that the selected entrepreneurs were either the sole or main decision maker in their firms. also, the interviewees were considered relatively educated (with at least a bachelor’s degree). on the other hand, all firms were considered small businesses regarding their resources and the number of staff personnel. in the process of data analysis, our early involvement with the interview data helped us move back and forth between the developed concepts and the collected data, thus enabling us to direct subsequent data collection toward sources that were considered more useful for addressing the main research question (miles & huberman, 1994). furthermore, we strived for a balance between description and interpretation of the gathered data, given that description gives the readers background and context and thus needs to be rich and thick (denzin, 1989). however because qualitative research is fundamentally interpretive, and interpretation represents the researcher’s personal and theoretical understanding of the phenomenon under study (patton, 2002), we tried to provide sufficient description to allow the reader to understand the basis for our interpretations in this study. this study’s saturation point was achieved after analyzing the gathered data of 22 interviews. nevertheless, in order to make sure of our results, we conducted three more interviews which corroborated our initial results. in general, we interviewed 13 nanotechnology entrepreneurs and 12 biotechnology ones. all the interviews were recorded after getting the consent of the interviewees. each interview lasted at least 40 minutes. in each interview, we asked the interviewee to recount and elaborate their most important marketing-related decisions, up to five decisions, in order of precedence. table 3 elaborates the demographic characteristics of this sample. findings in the process of interviewing, our main effort was to identify nascent entrepreneurs’ main marketing decisions in order of precedence. we extracted these decisions from entrepreneurs’ own experiences and narratives instead of resorting to the literature. we tried to grasp a better understanding of marketing decisions. in order to analyze the interviews, we used open coding. this was done by three coders, including 73 p. nouri, & a. ahmady journal of small business strategy / vol. 28, no. 3 (2018) / 69--79 a marketing expert. some of the identified decisions were routine and some of them were non-routine. also, some of the decisions were in form of choosing among various alternatives. after analyzing and reviewing the gathered data, we concluded that entrepreneurial marketing decisions could be categorized into six distinctive categories, in order of precedence, as follows: • marketing mix decisions (decisions regarding product, place, promotion, price). • core marketing decisions (decisions about marketing strategy, targeting, market segmentation) • market entry decisions (decisions about resources, barriers, competition, exporting) • opportunity-related decisions (decisions about opportunity identification, evaluation, exploitation) • innovation decisions. • growth decisions (market penetration, market development, product expansion, diversification, segmentation). table 4 shows the frequency of each of these categories based on the interviewed data. table 3 demographic characteristics of the entrepreneurs no. percentage gender male 19 76.0 female 6 24.0 age <=30 4 16.0 30-40 13 52.0 40-60 8 32.0 level of education bachelor’s degree 8 32.0 master’s degree 9 36.0 phd 8 32.0 industry nano-biotechnology 4 16.0 semiconductors 4 16.0 dna nanotechnology 3 12.0 molecular engineering 2 8.0 gene therapy 3 12.0 genetic engineering 2 8.0 agriculture 4 16.0 food production 3 12.0 firm age (years) <=2 9 36.0 2-3.5 16 64.0 number of employees 1-10 7 28.0 11-20 12 48.0 21<= 6 24.0 table 4 identified categories of em decisions categories of decisions frequency of related statements marketing mix decisions 37 core marketing decisions 32 market entry decisions 25 opportunity-related decisions 16 innovation decisions 9 growth decisions 6 category one: marketing mix decisions marketing mix decisions, from product to place, pricing as well as promotion were the main decision-making category identified in our study. though these decisions were similar to traditional marketing decisions, the lack of resources and also inexperience in nascent entrepreneurs running small businesses made these decisions more crucial for the interviewees. most of the interviewees mentioned their difficulties in making marketing mix decisions. in retrospect, a lot of the interviewees recounted their decisions on marketing mix issues under the influence of their scarce resources. other interviewee’s comments indicated the importance of marketing mix decisions and the burden of various shortages, including inexperience, the entrepreneurs felt while making these decisions. table 5 shows two related comments made by entrepreneurs regarding their marketing mix decisions. category two: core marketing decisions many of the interviewees listed core marketing decisions as part of their marketing decisions. these decisions 74 p. nouri, & a. ahmady journal of small business strategy / vol. 28, no. 3 (2018) / 69--79 table 5 entrepreneurs’ comments regarding marketing mix decisions industry entrepreneur’s code entrepreneur’s statement nanotechnology (c) “i had designed an anti-pollutant to alleviate the fatal effects of air pollution in tehran’s winter. this could be used at homes as well as in offices. pilot test were satisfactory, even beyond my expectations. i noticed that it could be used in tehran in at least one season of winter, or, alternatively, it could be sent to ahvaz, considering its pollution for at least three full seasons of the year. so i needed to make the vital decision of the place i want to offer my product.” biotechnology (s) “i had to make some important decisions about promotional strategies according to financial resources we had at our disposal. our area of expertise was a kind of pesticide for farmers. we concentrated on iran’s north, but we were novice regarding promotions at the time.” especially consisted of marketing strategy, segmentations, targeting as well as positioning. though these decisions are typical marketing decisions similar to traditional marketing decisions in various firms and organizations, given the nascent nature of our sample, some of these decisions proved to be vital for their survival. for example, some entrepreneurs recounted their difficulty in defining the most relevant target market, as is obvious in the comments made by an entrepreneurs shown in table 6. some knew practically nothing regarding marketing concepts like segmentation or strategy. they had to trust their own intuition to make decisions in the short span of time. table 6 shows two related comments made by entrepreneurs regarding their core marketing decisions. category three: market entry decisions various aspects of entry decisions, including barriers, competitors, resources, and for some entrepreneurs even exporting included another category of entrepreneurial marketing decisions in our study. some entrepreneurs faced severe monopoly in their industry, which made competition all but impossible. some others had to make the crucial decision of gathering and preparing vital resources. for others, the decision regarding the time of entry, was a crucial decision. some faced the dilemma of when to enter. if entered immediately, they would possibly face severe hurdles and impediments. if they postponed their entry, they would lose time and possible opportunities. also, some entrepreneurs had entered the domestic market successfully and were about to expand their markets to neighboring countries like iraq and turkey. on the other hand, some interviewees were even uncertain regarding their positions in domestic markets, given the severity of entry barriers and competition. table 7 shows two related comments made by entrepreneurs regarding their marketing entry decisions. category four: opportunity-related decisions decisions regarding different aspects of identifying, evaluating, as well as exploiting marketing opportunities, were other important categories of entrepreneurial marketing decisions. a few interviewees even mentioned their exploitation decisions, the time of exploitation, and its various aspects, as their most important marketing decisions by far. given their scarce resources as well as market turbulence at the time, these entrepreneurs needed to decide whether or not to exploit a given opportunity. also, the bulk of resources they needed to allocate for this exploitation was another important decision. table 8 shows two related comments made by entrepreneurs regarding their opportunity-related decisions. category five: innovation decisions innovation-related decisions were another identified category of decisions emphasized by our interviewees. some had built their venture on the concept of an innovative idea. some were pursuing innovation after launching their businesses in order to achieve competitive advantages. some even mentioned innovation as their resort to achieve profit and gain considerable market shares. for some interviewees, innovative ideas came from their own mind, because they did not possess necessary financial resources to invest in research and development. also, some important decisions were made regarding intellectual property issues, given the lax regulation that exists in iran’s business environment. but more specifically, these entrepreneurs feared that, given their lack of resources on the one hand and complex intellectual property rights in business environment, their innovative ideas may have been exposed to their more powerful rivals in the market. table 9 shows two related comments made by entrepreneurs regarding their innova75 p. nouri, & a. ahmady journal of small business strategy / vol. 28, no. 3 (2018) / 69--79 table 7 entrepreneurs’ comments regarding marketing entry decisions industry entrepreneur’s code entrepreneur’s statement nanotechnology (h) “i had conducted some pilot tests and based on their results was about to make the decision of when to enter. i was facing a dilemma. if i entered the market immediately, i would face severe competition not only by governmental spin-offs but also by seasoned entrepreneurs already in the semi-conductor market. on the other hand, if i postponed my entry, i would probably lose the available windows of opportunities. anyway, i chose to enter the market limitedly.” biotechnology (p) “genetic engineering is a young industry in iran. i had invested in this industry dearly and i was hesitant to enter the market or postpone my entry till conducting satisfactory market tests and analyzing the situation. though postponement would cost me pioneering advantages.” table 6 entrepreneurs’ comments regarding core marketing decisions industry entrepreneur’s code entrepreneur’s statement nanotechnology (d) “i had an engineering background and based my venture on an engineering-related idea. i did not have reliable marketing expertise, i had just attended some courses of marketing. one of my main decisions at the inception of my venture was made regarding our best target market. on the one hand we could have concentrated on governmental firms, quite the contrary, we could select totally private sector to deliver our product. the differences were substantial. i had to make this decision in the first couple of months of my activities.” biotechnology (a) “i entered the market without any sophisticated preparations or planning. thus, the first couple of months were tumultuous, because i had difficulty about choosing target markets or segmenting. concepts like strategy or segmentation were unfamiliar to me and i learnt(sic) them mostly by doing trial and error in the market.” table 8 entrepreneurs’ comments regarding opportunity-related decisions industry entrepreneur’s code entrepreneur’s statement nanotechnology (b) “i entered nano-biotechnology market two years ago. i was a consultant in a bio-related firm and based on my experiences as well as education, i founded my own firm. my main product is a kind of plastic bag. in the meantime, i identified a lucrative opportunity, the exploitation of which needed my firm to make some changes in its priorities. because i was experiencing serious shortages at the time, i either had to let go of the new opportunity and focus on my ongoing project, or sidestep the ongoing project by prioritizing the new identified opportunity. it was a very difficult decision needed to be made in a couple of weeks.” biotechnology (o) “bio food is a burgeoning industry in iran. because of the various governmental as well as nongovernmental advertisements, people are getting familiar with bio products. i identified a lucrative opportunity to produce bio-yoghurt designed for sensitive people and built my venture upon it. it has been my most important business decision to this day.” 76 p. nouri, & a. ahmady journal of small business strategy / vol. 28, no. 3 (2018) / 69--79 table 9 entrepreneurs’ comments regarding innovation decisions industry entrepreneur’s code entrepreneur’s statement nanotechnology (f) “semiconductor market, in which i am active, is a turbulent market. this means a high rate of change. if i want to survive and compete in this market, especially with my limited resources, i need to be innovative. this has been my business doctrine in the last couple of years. coming to the conclusion that in order to not only gain a good market share but also to survive, innovation is a necessity, i have been nurturing and developing innovative ideas. for example, i have produced some kind of semiconductors with the same capabilities as the current products in the market, but with half the price.” biotechnology (l) “unfortunately, especially in recent years, immoral marketing behavior in food industry has led to lots of maladies for domestic consumers. for example, lots of artificial foods and even fruits have been produced and fed to iranian people, without their knowledge. i decided to produce a natural bio product whose function is to reveal artificial ingredients in fruits.” tion-related decisions. category six: growth decisions growth decisions included all the decisions regarding market penetration, market development, product expansion, diversification and segmentation. despite their nascent nature and even some of them being considered novice entrepreneurs, some interviewees mentioned growth decisions as their main decisions after stabilizing their situations. table 10 shows two related comments made by entrepreneurs regarding their growth decisions. discussion entrepreneurial marketing is an important characteristic of entrepreneurs, especially entrepreneurs founding and managing small businesses, given the resource scarcity these entrepreneurs encounter. also, entrepreneurial decision-making is an inseparable part of entrepreneurship. natable 10 entrepreneurs’ comments regarding growth decisions industry entrepreneur’s code entrepreneur’s statement nanotechnology (k) “after concluding that my current situation is reliable, i turned my attention to growth. i prepared some plans to expand my market. firstly, i entered domestic market in vicinity. after that, i decided to export to iraq.” biotechnology (n) “as soon as i stabilized my market in qazvin province, i decided to develop my market to iran’s north, which proved to be a very lucrative market for our product (manure). that was in the second year of my activity in this firm. so i fully concentrated on market expansion.” scent entrepreneurs’ decision-making is of substantial importance because nascent entrepreneurs may lack necessary decision-making experience and expertise and make their business decisions mostly based on their emotions and intuition. thus, one could conclude that nascent entrepreneurs’ marketing decisions are of exceptional importance. though emphasized in the literature, there are very few studies regarding entrepreneurial decisions in em. the current study focused on gaining a better understanding of both em and entrepreneurial decision-making. the main objective of this paper was to offer a taxonomy of entrepreneurial marketing decisions. this goal was pursued by conducting semi-structured interviews with nascent iranian high-tech entrepreneurs active in biotechnology and nanotechnology industries. according to our findings, all em decisions could be categorized into six categories of marketing mix decisions (decisions regarding product, place, promotion, price), core marketing decisions (decisions about marketing strategy, targeting, market segmentation), market entry decisions (decisions about resources, barriers, competition, 77 p. nouri, & a. ahmady journal of small business strategy / vol. 28, no. 3 (2018) / 69--79 exporting), opportunity-related decisions (decisions about opportunity identification, evaluation, exploitation), innovation decisions and growth decisions (market penetration, market development, product expansion, diversification, segmentation). most of our results corroborate the main principles set forth by the literature regarding important aspects of em. opportunity orientation (morrish et al., 2010), growth (bjerke & hultman, 2004), innovation (miles et al., 2015) and innovativeness (kraus et al., 2009) that have been emphasized in the literature as the main components of em were corroborated in our study as we found out main em decisions regarding these issues. also, given that according to our findings, some important em decisions are made regarding core marketing activities and marketing mix decisions, we conclude that em decisions are rooted in traditional marketing decisions, but with the influence of the entrepreneur, as we made sure that in our sample the decision-making is mostly the task of a sole, novice entrepreneur. this is in line with the proposition set forth by morrish et al. (2010) that em is actually traditional marketing with an entrepreneurial spirit. also, according to morrish et al. (2010), decision-making in high growth smes is often focused on exploiting opportunities to create radical innovations that disrupt markets and competitive relationships. this statement was partly and implicitly corroborated as our interviewees emphasized the importance of opportunity exploitations decisions. that new ventures face lots of uncertainty in their business environment because of various resource scarcities (gruber, 2004) was also corroborated in our study as a lot of interviewees mentioned the burden of resource scarcity on their marketing decisions. on the other hand, we found evidence of some entrepreneurs’ hesitations in their marketing decisions, which were apparent in their recounts of their marketing decisions, especially initial decisions. this could be due to the fact that they were nascent and novice in their decision-making. also, that growth-related decisions were the least frequent category of decisions identified here could be due to the fact that our sample consisted of nascent entrepreneurs. indicating that their main goal in the initial months and even years of their ventures were mere survival, not growth. also, gilmore, carson, and grant (2001) argue that networking is an inherent aspect of entrepreneurs’ decisions in small businesses. this was not corroborated in our study as none of the interviewees mentioned networking decisions as one of their main em-related decisions. implications our results are of grave importance for high-tech entrepreneurs as well as the entrepreneurs running small businesses. given that resource scarcity in small businesses in their marketing activities encounter has been emphasized in the literature and reiterated in our study, and this impacts em decisions, policy makers should consider finding ways to reduce the negative effects of resource scarcity on em decisions in small firms. we have also four important implications for future prospective researchers. we emphasize the fact that this study was conducted in iran, a country in which government plays substantial roles in economy as a whole. also, at the time of this study, iran’s economy was still plagued by various sanctions. thus, we call on future researchers to pay attention to contextual matters and conduct a similar study in other countries with different contexts. on the other hand, according to the literature, entrepreneurs in small businesses are prone to heuristics and biases (busenitz & barney, 1997). these heuristics and biases influence lots of entrepreneurial decisions and have important outcomes for entrepreneurs (shepherd et al., 2015). do heuristics and biases influence em decisions, too? this is a very important research topic, given the important practical implications of heuristics and biases for entrepreneurs. also, we targeted two important high-tech industries as our sample. for our findings to be applicable for high-tech industries as a whole, future studies should better select and study other parts of high-tech industries. last, but not least, our sample consisted of nascent entrepreneurs. because nascent entrepreneurs’ decisions are different from those decisions made by experienced entrepreneurs, we call on prospective researchers to study the differences between em decisions made by nascent and experienced entrepreneurs. references baron, r. a. 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(2008). innovation policy and nanotechnology entrepreneurship entrepreneurship theory and practice, 32(5), 791-811. appendix 1 interview protocol section approximate duration description introduction 5 minutes • introducing ourselves • elaborating the purpose of the interview • ensuring confidential aspects and interviewee’s consent • gathering the interviewee’s demographic information part 1 10 minutes questioning about marketing process decisions part 2 10 minutes questioning about marketing strategy decisions part 3 10 minutes questioning about marketing mix decisions conclusion 5 minutes • appreciating the interviewee • member checks ' .. ' . ·~ estimating the long-term contributions of small business marketing expenditures robert e. wright john c. palmer university of illinois at springfield abstract while small business owners and managers typically recognize the long-term benefits of many types of capital expenditures. the potential long-term benefits of marketing expenditures are frequently overlooked. this situation is true even though expenditures on marketingfrequentlyyield sales revenue to firms over several periods. this paper introduces and examines three relatively low-cost approaches that small business owners may use as aids in estimating the aggregate value of marketing expenditures. introduction small business owners are faced with the general task of determining how organizational resources can best be utilized. this crucial task includes making decisions related to the types and levels of resources that are allocated to marketing functions. by serving as the vital communication link between businesses and their customers, marketing is a crucial source of competitive advantage for small firms, contributing directly to the success and long-term viability of operations (e.g., steinhoff and burgess, 1993). but, despite the critical role that marketing serves in most businesses, techniques are rarely used by owners and managers to evaluate the long-term contribution of marketing expenditures. for example, slywotzky and shapiro (1993) indicated that, for many firms, "sales and marketing expenditures may represent 15-20% of each revenue dollar. from that same dollar, 4 to 10% is devoted to capital budgeting projects. while capital budgeting expenditures are carefully examined and analyzed and treated as investments the much larger marketing piece is treated as an annual expense" (p. 98). thus, the larger amount that firms frequently allocate to marketing undergoes a less rigorous cost justification process than the smaller amount allocated to capital investments. the problem of evaluating long-term contributions of marketing expenditures is magnified in small businesses. due to a lower level of resources and the necessity of concentrating efforts on day to day business activities, small business owners are less likely than their counterparts in larger organizations to utilize techniques that estimate long-term contributionsof current expenditures(mcmahon & holmes, 1991 ). in addition, small busine,;s owners frequently feel that they have very limited funds available to allocate to marketing functions (weinrauch et al., 1991). this situation may lead to a general reluctance of individuals to invest in marketing programs whose benefits may accrue, to a substantial extent, over future periods. 69 a key problem associated with small business owners treating marketing expenditures as annual expenses rather than longer-term investments is that the overall value of marketing endeavors may be substantially underestimated; thus leading to inefficient resource allocation decisions. moreover, because businesses frequently do not estimate the aggregate value of marketing activities, proposed expenditures on marketing cannot be compared directly with alternative investments that may be under consideration (e.g., rayburn, 1986). there appears to be little conceptual basis for business owners to treat marketing expenditures any differently than other types of capital expenditures, unless all benefits accruing from these activities are realized in the short-term (e.g., wilson, 1986). lflonger-term benefits are also realized, owners will be in a better position to make high quality investment decisions if some type of procedure is utilized that allows them to estimate the overall contributions of marketing expenditures. the purpose of this paper is to introduce three relatively inexpensive approaches that small business owners may use to assist them in estimating the aggregate value of marketing expenditures. settings in which the use of each approach may be applicable and advantages and disadvantages associated with their use are also discussed. potential long-term influences of marketing expenditures while potential long-tenn contributions of current marketing expenditures have not been empirically examined in small business settings, several studies have examined these influences in large business contexts. for example, slywotzky and shapiro ( 1993) provided empirical evidence that, in many cases, current market shares of firms were directly related to expenditures on marketing that were made several years prior to their study period. the authors cited the enduring brand image of marlboro cigarettes as an example. phillip morris inc. created a rugged, western image for the brand by airing "marlboro man" television advertisements throughout the 1960s. slywotzky and shapiro indicated that, even though cigarette advertising on television was banned long ago, the rugged image of marlboro continues to persist today in large part due to previous investments in advertising by the company. currently, marlboro's share of the market for young, male smokers is 60-70% of the total market (p. i 00). likewise, in an examinationofthe effects of corrective advertising, wilkie, mcneill, and mazis ( 1984) provided evidence that original consumer attitudes that were formed about products via promotional efforts persisted even after companies were forced to undertake corrective advertising providing information that contradicted these attitudes. in their study, wilkie et al. found that 57% of users of a popular mouthwash continued to believe that the product was effective as a cold and sore throat treatment (as claimed in previous advertising campaigns) even though the manufacturer was forced to run subsequent ads explaining that cold and sore throat relief effectiveness was not an attribute of the product. boulding, lee, and stael in (1994) also reported that undertaking unique promotion, advertising, and sales force activities allowed some businesses to effectively shield themselves 70 .... :. ,. from price competition in subsequent periods. they noted that these activities led to enduring images of product differentiation that reduced levels of brand switching by customers. based on these findings, the authors argued that businesses should utilize longer time horizons when evaluating the influences of many types of marketing activities (p. 171 ). alba and hasher ( 1983) indicated that various pricing strategies may also have longterm influences on consumer perceptions of products. for instance, they noted that an initial low price on an item may convey an image of good value in the minds of some consumers and that this image may persist across subsequent periods, even if product quality and/or prices fluctuate. thus, an image of good value may persist for goods or services, even though original price and/or quality advantages have diminished. treating marketing expenditures as long-term investments: general problems based on the above evidence, the long-term benefits of certain promotional and pricing strategies generated by short-term expenditures seem apparent. what, then, would be the reasons why small business owners treat these items as current expenses in spite of the potential long-term nature of their consequences? one reason is current tax law. treating marketing expenditures as expenses for tax purposes decreases the tax liability of businesses in a current year. furthermore, small business owners may not be accustomed to continuallyevaluatirg the effectiveness of marketing promotional expenditures. thus, rather than undergo the task of tracking the results ofadvertisingexpenditures, they may maintain advertising expenditure allocations based on past practice (e.g., van auken, doran, and rittenburg, 1992) or perceived effectiveness of various types of advertising. for example, van aucken, rittenburg, doran, and hsieh ( 1994) indicated that women business owners differ in their perception of the effectiveness of different advertising methods from men. this provides evidence that either small business owners may lack sophisticated methods of actually measuring advertising effectiveness, or that advertising effectiveness differs widely for different small businesses. in either case, these findings indicate the need to accurately evaluate the effectiveness of promotional efforts. in addition, small businesses frequently operate under very tight financial constraints, where small miscalculations in the short-term could lead to major financial difficulties (weinracuh, 1991 ). due to the importance of making correct decisions for the short-term, small business owners and managers frequently base key marketing decisions on potential outcomes in a current period. an emphasis on evaluating the longer-term benefits of various marketing expenditures would require many practitioners to go about making strategic marketing decisions in a manner inconsistent with current practice. perhaps the most complex issue for small business owners and managers is the problem of how to estimate the aggregate contributions of current marketing efforts. for example, how much additional sales revenue will a small automobile repair shop generate by advertising on a local television station? how will an extended warranty program offered by 71 an appliance dealer affect future sales? how will an apparel store's sales be affected if relatively large sums of money are spent to train salespeople? there are obvious problems associated with practitioners attempting to answer these types of questions, particularly those individuals who own or manage smaller firms that frequently lack elaborate marketing intelligence systems. however, there are several relatively inexpensive approaches that are available that may enable small business owners to more accurately estimate the aggregate value of marketing expenditures. three of these approaches are described in the following section. since levels of expertise and access to financial resources vary widely across small firms (e.g., dyke, fischer, and reuber, 1992), these approaches may be more feasible to implement and utilize in some small business settings than in others. procedures for estimating the long-term contributions of marketing expenditures owners and managers of small businesses may attempt to estimate long-term contributionsof marketing expenditures through experimental methods (e.g., ray bum, 1986). for example, a small business owner who wishes to determine the value of a particular promotional effort could examine differences in sales volume between two market segments in which similar promotional efforts were undertaken in the past. the promotional effort would then be undertaken in one market segment, but not in the other. subsequently.other marketing activities would remain constant in both segments over a specified period of time and outcomes (i.e., sales volume) in the two segments compared over several periods. in this manner, the aggregate value of the promotional effort can be estimated based on outcome variations between segments. this technique has been used successfully by small firms. for example, an entrepreneur who started a mail order firm in the basement of his home assessed the effectiveness of sending personalized letters to customers, in lieu of only sending them a catalog. he sent an experimental group personalized letters with their catalogs, but no letters to a control group. the entrepreneur was able to determinethat customers were more likely to purchase goods when they received personalized letters (rapp & collins, 1990). this method is particularly appropriate for small business owners who operate similar businesses in different markets. for example, a franchisee who owns fast food outlets in several media markets could undertake a promotion, such as purchasing advertising spots on a local radio station for a specified period of time in one market, but not in the others. the owner could then compare sales over several periods to determine if increased customer traffic during the promotional period resulted in new, loyal customers, as compared to the control market where the promotion was not run. any increased revenues generated from the promotion could then be compared to its cost, to determine whether the promotion generated profits, both in the current period as well as in subsequent periods. if extraneous variables can be carefully controlled for, experimental methods allow small business owners to pinpoint the effects of specific marketing efforts and to assess the benefits of both major and minor adaptations to their marketing mix. 72 despite their usefulness, experimental methods are subject to difficulties in usage and interpretation. notable problems include the inability of small business personnel to identify two or more market segments similar enough to make direct comparisons, naturally occurring events (i.e., factors not attributable to the marketing intervention) that result in outcome variations between two segments over time, and consumer preferences, buying patterns, and competitive structures that change at differential rates between segments (i.e, selection by maturation bias). the experimental method would be most useful to small business owners with similar outlets in several different markets, who have had some advanced training in the experimental method, or have access to free or low cost consulting (i.e., from local universities). a second estimation technique is multiple regression (e.g., lilien, kotler, & moorthy, 1992). multiple regression allows individuals to estimate how much variation in performance outcomes can be attributed to particular marketing efforts. allaway, mason, and moore ( 1988) illustrated this technique in examining the effects of certain marketing interventions on sales revenue in small business settings. this technique allows practitioners to assess relationships between marketing efforts undertaken in one period and performance outcomes in later periods by examining time-lagged relationships. if significant relationships exist between marketing efforts in one period and outcomes in subsequent periods, practitioners can continue to examine time-lagged relationships until they are no longer significant in regression equations. in this manner, the overall value and depreciable life of marketing expenditures can be estimated. for example, a small brokerage firm might assess the past effects of inflation rates, interest rates, stock market indices, and other relevant factors on mutual fund purchases in a particular market. the variable indicating a promotional effort or certain expenditure level on a promotion by the firm could then be included to determine the aggregate effects of the intervention across periods. in this manner, the firm's owner might be able to determine the probable short and long-term effects of future promotional efforts. since it helps us analyze historical data, regression does not require the manipulation of marketing efforts in different periods. thus, it uses information that is often already available in many small businesses, and it also statistically controls for the influences of those factors that are extraneous to the marketing intervention itself. moreover, it allows small business owners and managers to assess time-lagged relationships between marketing interventions and sales revenues across several periods. thus, estimates of the contribution of marketing expenditures can be made for several periods. unfortunately, results of multiple regression can be difficult to interpret. however, this difficulty can often be overcome by asking a consultant for assistance. another disadvantage of regression analysis is that it may require the inclusion of other factors in the analysis. unless such factors are included, regression equations may misstate the influence of marketing expenditures on performance. 73 regression techniques are most appropriate larger firms operating in stable environments. such firms often have management information systems that contain the necessary data as well as specially trained employees to assign to such projects (chen, 1995). in addition, for small firms in stable environments, predictors based on historical data tend to be more accurate. a third alternative available is to establish customer tracking systems to determine sales revenue across periods that can be attributed to specific marketing efforts undertaken in a particular period. pc technology makes customer tracking more feasible to develop and maintain (dejong, 1995). for example, the owner of a small carry-out pizza restaurant developed a system that allows him to track the purchases ofindividual customers. this allows him to identify and provide special promotions to customers who have not made recent purchases from him (business week, 1995). customer tracking systems are most appropriate for small businesses that can track purchases of specific customers, such as accounting firms, automotive repair shops, law firms, dental clinics, and other firms that provide individualized, personalized service. such businesses typically maintain up to date records of customer transactions. for example, the owner of a custom picture framing shop who wants to determine the impact of mailing promotional literature to prospective customers could identify new customers who visited the establishment on the basis of the promotion. he or she could do this by including a discount coupon good for i 0% off new customer purchases. when a customer uses the discount coupon, this would be noted on their customer record (either in a computerized database, or on a copy of the invoice kept in the store's customer files). subsequently, the owner could track purchases .;ade by these individuals, not only in the current period, but in future periods that they made purchases as well. the owner could also identify any additional revenue that might be generated by referrals made by these individuals. new customers could also be asked how they heard of the business. if they indicated that a present customer had recommended the business to them, this could be noted both on the customer record of the person referring, and the person having been referred. thus, each customer's record wpuld indicate his or her initial reason for engaging in a transaction with the business, and for subsequenttransactions. the small business owner could thus track the long term effects of a particular promotion through customer records. to illustrate this situation, suppose that it initially cost $5,000 to send the promotional material to 5,000 potential customers. if, as a result, 6 percent of these recipients visit his store (300 new customers) and spend an average of$25 each, the promotion will initially generate $7,500 in revenue. if the owner's profit margin is 40% of total revenue, $3,000, or 60% of the initial cash outlay, will be recovered in the first period. assuming that 50% of these individuals continue to frequentthe establishment in the second period, and that they spend an average of$25 annually, this will generate $3,750 in revenue and offset an additional $1,500 of the promotional cost. assuming that 60% of these individuals remain customers in the third period and that they once again spend an average of $25 per year, this will generate an additional $2,250 in revenue and $900 in profit. 74 .. ~ ' .• -;.·' ... > ! ' i' subsequently, assuming the same customer retention rate and the same average expenditure level, the promotion will contribute $540 and $320 to profit in periods 5 and 6, for a total contributionof$6260. if i 0% of the customers who initially responded to the promotion made a referral to a friend or relative, and patterns of retention and per period expenditures at the establishment for referral customers were similar to other customers, an additional $620 in profit from referrals can be attributed to the promotion over six periods, for a combined contributionof$6880 for the promotion. given the initial cost of$5,000 and the fact that most of this cost was recovered in the first two periods, this promotion would appear to be profitable. without a customer tracking system, the owner might overlook the long-term effects of the promotion and deem it unlikely to be profitable. obviously, the higher a business' customer satisfaction and retention rates are and the higher. its customer referral rate is, the more profitable its promotion will be. conversely, businesses with low customer satisfaction and retention and few customer referrals will profit less from such promotions. thus, customer tracking systems enable businesses to evaluate specific promotions, the effectiveness of which may very widely among small businesses. such systems can also enable business owners to track effects of investments in training of service personnel. increased customer retention and referral rates can dramatically increase long term profits. however, investments in training of service personnel to increase customer satisfaction, and thus increase levels of retention and referrals, may be overlooked due to relatively high costs in the current period, with benefits accruing largely in future periods, by small business owners who only evaluate promotional expenses on a short term basis. customertrackingsystemsare relatively simple to understand and use and are likely to be inexpensive for small businesses to implement. in fact, many small businesses already have some form of customer tracking system. thus, attempting to estimate the aggregate value of marketing expenditures may merely be a matter of resorting to historical data in an effort to determine what marketing efforts have been successful (or unsuccessful) in the past and estimating the contribution of these efforts to performance over time. disadvantages of customer tracking systems are that they must be maintained continumsly to accurately predict aggregate values of marketing expenditures and they may be extremely difficult to use for employees of small businesses who interact regularly with individual customers in frequent transaction settings, such as service stations, convenience stores, or restaurants. another disadvantage is that self reports of consumers must frequently be relied upon. these individuals may not always be entirely conscious of what prompted them to visit a particular establishment to begin with, purchase certain goods or services from that establishment, or to continue to do business with a particular establishment over time. conclusion efficient resource allocation decisions are a key factor in ensuring the survival and long-term viability of enterprises that exist in competitive settings. managerial decisions involving resource allocations are likely to be most critical for smaller firms lacking large resource bases. thus, use of techniques that allow owners of small firms to directly compare 75 aggregate values of marketing expenditures with expected values of other investment alternatives may be a crucial source of competitive advantage. relative to their competitors, firms that use these techniques are likely to allocate marketing dollars in a more efficient manner, as well as have a better understanding of how certain promotional efforts impact short and long-term purchase behavior of customers. this paper has described three techniques that can be used by small businesses with limited resources to estimate aggregate values of marketing expenditures. use of these techniques can enable small business owners and managers to more efficiently allocate resources. thus, this practice may provide those businesses with a competitive advantage over other businesses that do not predict long-term effects of marketing expenditures. while each estimation technique has advantages, each also has disadvantages that should be considered by practitioners both prior to their use and when interpreting results based on their use. major advantages, disadvantages, and the applicability of each approach are summarized in tables 1 through 3. experimental methods are likely to most appropriate for use by small businesses with outlets in different markets and for businesses with two or more market segments similar enough to make direct comparisons between them. regression analysis is likely to be most appropriate for use in small businesses with abundant resource bases that operate in stable environments. the customer tracking system would typically be most useful for small businesses that can maintain detailed customer records and that frequently use promotions that are easy to track, such as coupons. all three estimation methods make use of data which may already be collected in many small businesses. thus, utilization of these techniques may not require large resource outlays. the potential benefits associated with estimating the long-term contributions of marketing expenditures could be substantial for many businesses. for example, owners and managers might avoid excessive spending on marketing interventions that result in only shortterm benefits and instead focus on marketing efforts that have positive returns in both the short and long-term. either individually or in some combination, use of the estimation techniques by small business owners, combined with their own intuition and com1non sense, may significantly improve the quality of resource allocation decisions involving expenditures on marketing. because of the critical nature of these decisions in small businesses, use of one or more of the techniques could serve as a major source of competitive advantage. 76 table i advantages. disadvantages. and applicability of experimental methods advantages if extraneous variables are carefully controlled for, either statistically or through experimental design, the technique allows small business owners and managers to pinpointthe contributionsofmarketingexpenditureswith a fairly high degree of accuracy. technique is applicable for assessing the contributions of anything from minor adaptations to the marketing mix to major adaptations. given the appropriate setting, the technique is relatively easy for more highly educated personnel to understand and use. disadvantages this technique requires knowledge of experimental design techniques by small business owners, managers, or employees, or access to people having such knowledge. the ability to control for variables extraneous to the marketing intervention may be limited. small business owners and managers may not be able to identify two or more market segments similar enough to one another to make direct comparisons between a segment or segments in which a marketing intervention was made and a segment or segments that act as controls (i.e., did not receive the intervention). as a general rule, the technique does not make use of historical data. thus, the longer-term contributions of particular marketing expenditures cannot be determined until several periods have elapsed following the experiment. apolicability this technique is particularly useful for small businesses with similar market segments in different geographical locations. 77 table 2 advantages. disadyantages. and anplicabilitv of regression analysis advantages businesses may be able to resort to historical infonnation to analyze the effects of past marketing efforts to serve as the basis for estimating the aggregate benefits of proposed marketing expenditures. the techniquestatisticallycontrols for the influences of those factors included in the analysis that are extraneous to the marketing intervention itself. the technique allows small business owners and managers to assess time-lagged relationships between the marketing intervention and perfonnance outcomes across all periods included in the analysis. disadvantages for many small business owners and managers, the technique may be fairly difficult to use. results may be difficult to interpret. key changes in a finn's competitive environment may render historical trends inappropriate in predicting the contributions offuture marketing expenditures. in order to accurately assess the effects of marketing expenditures, all variables that have a major influence on outcomes(i.e., sales revenue) must be included in the analysis. applicability this technique is particularly useful in those businesses with relatively stable competitiveenvironmentsand businesses with highly skilled personnel who are capable of understanding and using the technique, or businesses which have access to low cost consultants with such expertise. 78 table 3 advantages. disadvantages. and applicabilitv of customer tracking systems advantages technique is relatively easy for many small businesses to implement. in fact, a large number of small businesses are likely to already possess this type of infonnation in some form. the technique is relatively easy for most employees to understand and use. by utilizing the technique, the long-term influences of particular marketing expenditures may be relatively easy to pinpoint. disadvantages information necessary to use the technique may be difficultto acquire in frequent transaction settings. when asked, customers may not be entirely conscious of what prompted them to conduct business with a particular establishment. in these situations, the contribution of a particular marketing expenditure may be difficult or even impossible to determine. up to date information on individual customer transactions is necessary in order to use the technique. applicabilitv this technique is useful to those small businesses that are able to maintain detailed records of individual customer transactions. 79 references alba, joseph, & hasher, l. 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(1994). an empirical analysis of advertising by women entrepreneurs. journal of small business management. 32 (3), i 0-28. weinrauch, j., mann, 0., robinson, p., & pharr, j. (1991). dealing with limited financial resources: a marketing challenge for small business. journal of small business management. 29 (4), 44-54. wilkie, w., mcneill, d., & mazis, m. (1984). marketing's scarlet letter: the theory and practice of corrective advertising. journal of marketing. 48. 11-31. wilson, r. ( 1986). accounting for marketing assets. european journal of marketing. 20. 5174. 80     65              what attracts directors to boards of smalland mid-sized companies? m. alix valenti university of houston clear lake valenti@uhcl.edu clifton o. mayfield university of houston clear lake mayfield@uhcl.edu rebecca a. luce xavier university lucer@xavier.edu abstract this paper explores the reasons why outside corporate directors choose to serve on the boards of smallto mid-sized companies. resource dependence theory explains the importance of outside directors on corporate boards, especially for smalland mid-sized companies. attracting qualified board members is both an important and sometimes difficult task for such companies. using a sample of 102 nasdaq companies, we find that firm performance, financial incentives, and time constraints influence the decision of an outsider to accept a board seat. keywords: board of directors, corporate governance, resource dependency theory introduction the role of the board of directors, especially outside members, in smallto mid-sized companies (sme) is important for several reasons. often, sme business owners do not have access to information and resources needed to effectively run s trategy   journal of small business  mailto:valenti@uhcl.edu mailto:mayfield@uhcl.edu mailto:lucer@xavier.edu journal of small business strategy                                   vol.21, no.1 spring/summer 2010        66    the business. as huse (1990) notes, business owners are often so busy, they do not recognize their need for management assistance. thus, the service and strategic roles of the board (zahra & pierce, 1989) become particularly relevant for smes, with outside directors instilling formal processes which make managers more aware of the importance of planning and decision-making (johannisson & huse, 2000). in addition, while large firms with dispersed ownership may have several governance mechanisms in place for monitoring management, smes are generally owned and managed by a small, close-knit group of individuals, often family members. outside directors, therefore, provide an added resource of discipline and management control. while the benefits of direction from strong outside board members are apparent, whether the sme can attract qualified outsiders is uncertain. the question of what prompts a director to accept a position as a board member in a small family business was explored by johannisson and huse (2000). they surmised that seeking status, extending networks, the opportunity to use their competence to influence, and the ability to learn or gain other benefits are possible explanations. they also noted that whatever the reason for accepting the position, board members will seek to minimize risk and will select firms with both “solid management and a sound economy” (p. 355). the process of selecting outside directors to serve on the board of sme companies involves what johannisson and huse (2000) describe as both a demand and a supply side. the demand side represents the firm’s need for certain qualities, and has been extensively studied using agency, resource dependence, and other frameworks. although the supply side has not been researched as extensively, given that directors are concerned with their reputations (fama & jensen, 1983), prestige and social status have been identified as the main reasons why an individual would agree to serve as an outside director (johannisson & huse, 2000; lester, 2008). missing from the research, however, is what attracts an individual to a particular firm, especially when the company is not a large, wellrecognized corporation. this study, therefore, explores the question, “what attributes of smallto mid-sized firms attract outsiders to serve on their boards?” the present study contributes to extant research in a sme business context by viewing the director recruitment process from the perspective of the outsider. it is also relevant for smes wishing to enhance their ability to attract qualified directors from their business communities. resource dependence and the need for qualified directors pfeffer and salancik (1978) developed resource dependence theory based on the open systems perspective which posits that environment plays an important role in organizational effectiveness. pfeffer (1972) further suggested that in order to manage the potential uncertainties journal of small business strategy                                   vol.21, no.1 spring/summer 2010        67    created by their task environments, organizations should strive to reduce their external dependencies through absorption, such as long-term contracts, mergers, or cooptation of relevant resources. the appointment of outside directors who are representatives of important external organizations is a means of cooptation of resources (pfeffer & salancik, 1978, p. 167). further, outsiders bring benefits to organizations in the form of advice and counsel, access to information and resources, and legitimacy (pfeffer & salancik, 1978). outside directors often are able to provide valuable resources that would be otherwise unavailable to the firm (daily & dalton, 1993). such resources include knowledge, skills, and access to key constituents (hillman, cannella & paetzold, 2000). effective boards fulfill a firm’s resource needs by acting as resource acquisition agents (bazerman & schoorman, 1983; boeker & goodstein, 1991) as well as by enhancing the reputation and credibility of the organization (hambrick & d’aveni, 1992). in general, if management is concerned with organizationalenvironmental linkages, they will seek to establish a more diverse board in terms of background and experience; accordingly, the size of the board will tend to be larger when the board is used to connect the organization with the environment (beekun, stedham, & young, 1998). a recent review of the application of resource dependence theory to boards of directors reaffirms the assertion that outside directors reflect external needs and can assist in managing environmental dependencies for the firm (hillman, withers, & collins, 2009). these resource-based arguments for the importance of outside directors become even more relevant for small firms, which face greater environmental uncertainty than larger firms, based on their “liability of smallness” (bruderl & schussler, 1990). relationships through board membership not only provide outside resources not otherwise available to smes, but often complement the company’s internal resources (gnyawali & madhavan, 2001). in the case of sme firms, this may include technical knowledge, specific industry experience or an understanding of how to effectively manage a business. gabrielsson and huse (2002) note that smes are often managed by entrepreneurs who have little management experience and need to rely on their experienced outside board members for such support. thus, huse (2000) concludes that smes need a special set of skills and characteristics and must establish a strategy to attract directors with such abilities to their boards if they wish to maximize their opportunities for success. the factors that attract outside directors to small and mid-sized firms in examining the attributes of smalland mid-sized firms that would draw an outsider to serve on its board, we rely on the lorsch and maciver (1989) study which, through questionnaires and interviews, examined the reasons why a director chooses to join a board. at the journal of small business strategy                                   vol.21, no.1 spring/summer 2010        68    outset, they note that the majority of directors in u.s. corporations are senior level executives, lawyers, government officials, and academics; thus, the most pressing issue in deciding whether or not to join a board is the nature of the opportunity compared to other available options (1989, p. 23). when competing with larger, more prestigious firms, it becomes critical for smes to identify the qualities of their firms that would be attractive to outside directors. firm quality and prestige in their research on corporate directors, lorsch and maciver (1989) found that the quality of a company was the most important reason for joining a board. as noted by fama and jensen (1983), board directors are concerned with protecting their reputations as expert decisionmakers and thus would avoid serving on boards of low quality firms (certo, daily, & dalton, 2001). pearce and zahra’s (1992) data showed that past poor performance is positively associated with smaller boards, and gilson (1990) reported that only 46 percent of outside directors remained on the board of firms following a bankruptcy or debt restructuring. these results are similar to those of d’aveni (1990) who found that prestigious managers will leave a firm shortly before bankruptcy in order to avoid damaging their careers. while the prestige of the firm was listed as the fourth most important reason in lorsch and maciver’s survey (1989), smes are generally not able to offer the same prestige of board service as larger firms. thus, sme firms must rely on their reputations as quality organizations in order to attract outside board members. we suggest that quality is best measured by firm performance and propose the following hypothesis: h1: outside membership on boards of smallto mid-sized firms will be positively related to firm performance. board power corporate directors also report that the challenge of serving as a director is an important reason for joining a board (lorsch & maciver, 1989). becoming involved in strategic decision-making is an important objective of board membership; yet, opportunities in this area are often thwarted by opportunistic ceos who prefer a more complacent board (lorsch & maciver, 1989; mace, 1986). when the ceo also holds the board chair position, researchers generally agree that the power of the board as a strategic decision-maker is weakened (zahra, neubaum, & huse, 2000). by serving as both ceo and chair, the ceo has greater control over the board and its oversight process (daily & dalton, 1993), thereby reducing the board’s power to challenge the ceo. lorsch and maciver (1989, p. 170-171) point out that the “most obvious impediment to outside directors exercising their power” is a ceo whose power is greater by virtue of his or her chair position and who thus wields the power to control the agenda, meeting processes, and flow of information. in their study of the balance of power between the board and the ceo, zajac journal of small business strategy                                   vol.21, no.1 spring/summer 2010        69    and westphal (1996) proposed that the source of power would predict the selection of individual board members based on their prior experience and thus shape the composition and effectiveness of the board. they hypothesized that powerful boards (those with less ceo power) will seek to maintain their control by favoring new directors with a reputation for more active management and avoid appointing directors with experience on passive boards. lower levels of board power were observed with members’ participation on a board in a company with a decreased ratio of outsiders, ceo/chair duality, increased diversification, increased total ceo compensation, and decreased contingent compensation. in addition to ceo duality, the power of the ceo can also be measured by the ceo’s tenure. ceo tenure is predictive of power because the ceo’s influence over firm operations increases as his years of tenure increase and the ceo becomes better able to control governance decisions due to his leadership position (hambrick & fukutomi, 1991; wright, kroll, & elenkov, 2002). as noted by ocasio (1994), longer tenure leads to increased legitimacy of the ceo’s authority and ability to maintain power. since ceo tenure is correlated with the number of board members appointed by the ceo and directors who are appointed by the ceo are likely to feel an obligation to the ceo (boeker, 1992; wade, o’reilly, & chandratat, 1990), thereby enhancing the ceo’s power, we posit that ceo tenure is positively associated with increased ceo power. recognizing the outside director’s desire for challenging opportunities as a board member, a potential nominee will be more apt to seek out those appointments where the board has a greater amount of power vis-à-vis the ceo. in the case of smallto mid-size companies, we propose: h2a: outside membership on boards of smallto mid-sized firms will be negatively related to ceo/chair duality. h2b: outside membership on boards of smallto mid-sized firms will be negatively related to ceo tenure. financial constraints while compensation and stock ownership were the least important reasons for joining a board, according to the lorsch and maciver (1989) study, they were nevertheless included in the list. however, as reported earlier by lorsch and maciver (1989) and reiterated by numerous governance experts (e.g., linck, netter, & yang, 2009; mcgee, 2005), it has become increasingly difficult to attract qualified independent directors, largely because of time constraints and, more recently, liability concerns. accordingly, compensation is a “lure” (mcgee, 2005, p. 36), especially for smes who traditionally do not offer the six-figure annual retainers paid by large corporations. journal of small business strategy                                   vol.21, no.1 spring/summer 2010        70    in addition to cash compensation, there has been a trend toward increasing the equity-based compensation paid to directors, either in the form of stock options or outright stock ownership (meyer, 1998; zong, 2004). from an agency theory perspective, stock ownership will align the board members’ interests with those of the shareholders, thus making the board a more vigilant monitor of management (shen, 2005). in addition, some evidence suggests that equity ownership can empower the board, making it more likely to question management decisions (finkelstein, 1992), a behavior that is more often associated with directors recruited from outside of the firm. thus, we hypothesize: h3: outside membership on boards of smallto mid-sized firms will be positively related to the annual retainer and the equity-based compensation paid to non-executive directors. time constraints lorch and maciver (1989) identified that a key concern of outsiders considering a board nomination is whether they will have sufficient time to devote to fulfilling their roles as board members. recent research points to the additional responsibilities imposed by corporate regulators, especially on members of audit and compensation committees, concluding that directors are accepting fewer board appointments in light of the increased workload (linck, netter, & yang, 2009). one study estimated that outside directors spend over 170 hours annually on board duties, which include preparing for and attending meetings, travel, and discussions (king, 2001). in a study of 52 director resignations occurring between 1990-2003, half of the directors left their board positions due to reasons associated with being “too busy,” such as time constraints, other professional commitments, and family business requirements (dewally & peck, 2010). accordingly, we hypothesize that outside prospective board members will be less likely to join boards with a higher level of time commitment, as compared with other firms. h4: outside membership on boards of smallto mid-sized firms will be negatively related to the number of board meetings. methods and results sample using a random number generator (ocasio, 1994), a random sample of 120 companies listed on the nasdaq was selected for this analysis. while there are some fairly large companies listed on this exchange, companies traded on the nasdaq primarily represent much smaller firms, based on sales, than those of the fortune 1000. after eliminating three of the largest firms in the sample, the average annual sales for our sample population were less than $500 million, which is much lower than the revenue for the smallest firm in the fortune 1000. further, the mean market capitalization of the companies included in the sample was $800 million, which falls within the range of the s&p small cap profile. journal of small business strategy                                   vol.21, no.1 spring/summer 2010        71    thus, while the definition of sme on the basis of a specific criterion is not uniform (ayyagari, beck, & demirguckunt, 2007), it appeared that our sample represented a reasonable cross section of smallto mid-sized firms. after eliminating several firms for missing or incomplete data, our study examined 102 companies. variables all board data were obtained from the proxy statements filed with the sec and contained in the edgar system. firm performance data were obtained using compustat. because the sample included firms across several industries, we used the change in the performance variables as the predictor. regardless of industry, a director may judge the quality of the firm according to whether its performance has improved or declined over the past few years. therefore, we examined whether the mean change (determined using a difference score) in these measures from one three-year period (2000-2002) to the following (2003-2005) three-year period had the predicted effect on board composition and structure. dependent variable. the number of outsiders was measured by the number of non-employee or former employee directors. outsiders did not include members of venture capital firms, as venture capitalists are active investors who seek to become members of the board in order to monitor their investments (macmillian, kulow, & khoylian, 1989). predictors. to test hypothesis 1, we used improvement or decline in firm performance as the main predictor variable. when selecting appropriate performance variables, we note that many measurements of performance have been used in the governance literature and it is generally recognized that no single measure is universally ideal (cameron, 1986; venkatraman & ramanujam, 1986). we follow a traditional approach by using the accounting measures return on assets (roa) and return on equity (roe), and market return (allen & panian, 1982; harrison, torres, & kukalis, 1988). hypothesis 2 was tested using two variables: a dichotomous variable representing whether or not the ceo was also the chair and the ceo’s years of tenure with the company. hypothesis 3 was tested using three variables: the annual retainer paid to outside directors, the amount of stock options awarded to outside directors, and the number of shares issued to outside directors each year.to test hypothesis 4, the number of board meetings was the number of meetings required of board members in 2005. controls. control variables were included to account for institutional ownership, firm size, and average performance for the period between 2003 and 2005. the percentage of shares owned by institutional or large blocks of shareholders was added as a control variable as external owners apply pressure on ceos to appoint independent board members (huse, 2000). firm size, journal of small business strategy                                   vol.21, no.1 spring/summer 2010        72    operationalized as the log of sales in thousands of dollars, was also added as a control variable as board structure is often related to firm size (gabrielsson & huse, 2002). as our predictor variable for performance captured the change in performance of each company, we did not make an industry adjustment; however, we included the average baseline performance (2003-2005) as a control variable. results the means, standard deviations, and correlations for the variables of interest are shown in table 1. our hypotheses were tested by examining the zero-order correlations and by performing additional regression analyses while controlling for baseline performance. hypothesis 1 stated that there would be a positive relationship between firm performance and the number of outside members present on its board of directors. examination of the correlations in table 1 showed a significant positive relationship between the change in outside directors and change in return on assets (r = .20, p < .05). the correlation with change in market return (.19) approached significance (p = .06). to further test these relationships, we performed a hierarchical regression in which we controlled for baseline firm performance in the first step and added the change in firm performance variables in the second step. (the change in price-to-earnings ratio was eliminated from this analysis due to its high multicollinearity [r = .82] with the baseline ratio.) the results of the hierarchical regression are presented in table 2. after controlling for baseline performance, a change in performance explained an additional 11% of the variance in outside board members, with a total variance of 21% (p < .05). as seen in step 2, the performance indicators that predicted an increase in outsiders were a positive change in market return (β = .33, p < .01) and baseline sales (β = .32, p < .05). in other words, improvements in a firm’s market return or baseline sales were related to an increase in the number of outside members present on the board of directors. thus, hypothesis 1 was partially supported.   table 1-means, standard deviations and correlations 7 3     jo u rn a l o f s m a ll b u sin ess s tra teg y                        v o l. 2 1, n o . 1 s p rin g /s u m m er 2 0 10   mean s.d. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. δ return on assets 7.94 51.14 δ market return -.52 433.74 .06 δ pe ratio -2.42 65.18 .03 -.05 δ return on equity 15.90 137.26 .37*** .04 .02 ceo and chair separation .51 .50 .08 -.13 -.05 .02 ceo tenure 11.68 9.52 -.08 .05 .08 -.12 -.19 annual retainer 22260 16614 -.10 -.10 -.11 -.04 .02 -.11 num. of stock options granted 6640 10636 -.16 .06 -.20 .18 -.10 -.07 .21 value of shares 12401 51813 .00 .04 .02 -.04 .11 -.17 .12 -.15 num. of required meetings 6.14 4.05 -.20 -.11 -.12 -.08 .11 -.01 .59*** .04 .02 δ number of outside dirs. .74 1.93 .20* .19 .06 .06 .05 -.08 -.18 .21 .12 -.36* * p < .05; ** p < .01; *** p < .001; n=104.      jo u rn a l o f s m a ll b u sin ess s tra teg y                        v o l. 2 1, n o . 1 s p rin g /s u m m er 2 0 10   7 4   table 2-results of hierarchical regressions on change in number of outside directorsa firm performance ceo duality and ceo tenure number of board meetings hypotheses step 1 step 2 step 1 step 2 step 1 step 2 control variables log sales .21* .32* .25 .25 .30 .47* return on assets -.12 -.25 -.39* -.38 -.06 -.13 market return -.02 -.05 .09 .09 -.34 -.46* pe ratio -.05 -.03 -.06 -.05 return on equity .22 .27 .39* .38* institutional ownership -.12 -.14 .03 .02 firm performance δ return on assets .13 .39 .36 δ market return .33** .37 .40* δ return on equity -.09 ceo variables ceo duality .06 ceo tenure -.03 num. of board meetings -.52** f 1.39 2.10* 1.50 1.20 1.44 3.34* r2 .10 .21* .11 .11 .21 .44* adjusted r2 .03 .11* .04 .02 .07 .31* δ r2 .11* .01 .23** an = 82. table contains standardized regression coefficients. * p < .05; ** p < .01   journal of small business strategy                                  vol. 21, no. 1 spring/summer 2010      75    hypotheses 2a and 2b stated that outside membership on boards would be negatively related to ceo/chair duality and ceo tenure, respectively. as shown in table 1, the number of outside board members was neither related to the separation of ceo/chair responsibility (r = .05), nor the tenure of the ceo (r = .08). as indicated by the nonsignificant r2 and β values in table 2, testing these relationships while controlling for baseline performance did not alter the results. therefore, hypotheses 2a and 2b were not supported. hypothesis 3 stated that outside membership on smes’ boards would be positively related to the size of the annual retainer and the extent of equitybased compensation paid to board members. surprisingly, outside membership was related neither to the annual retainer (r = -.18), nor the amount of stock options (r = .21) nor shares issued to directors (r = .12). upon further examination of the data, we found that a large percentage of organizations provided no director compensation; therefore, the large zero base-rate attenuated the correlations. table 3-results of director compensation on board composition change in number of outside directors statistical tests mean std. error t statistic p-value annual retainer > 0 (n = 92) .86 .19 none (n = 10) -.40 .73 1.99 .049 stock options awarded > 0 (n = 67) .87 .22 none (n = 35) .49 .37 .95 .346 restricted shares awarded > 0 (n = 27) .74 .34 none (n = 75) .73 .23   .02 .986 to account for the base-rate problem, we performed a t-test, comparing companies that provided any director compensation with those that did not. as shown in table 3, there was a significant difference in the change in outside directors when comparing companies that paid an annual retainer with those paying no retainer (t[100] = 1.99, p < .05). companies that paid an annual retainer displayed an increase in the number of outside directors from 2003 to 2005 ( = .86, se = .19), compared with a decrease in outside directors in journal of small business strategy                                  vol. 21, no. 1 spring/summer 2010        76    companies that paid no retainer ( = -.40, se = .73). the mean difference in the number of outside directors for the other forms of director compensation (i.e., stock options, restricted shares) was not significant. thus, partial support was found for hypothesis 3. hypothesis 4 stated that the number of meetings board members were required to attend would be inversely related to the number of outsiders present on the board. as shown in table 1, there was a significant negative correlation between the number of meetings that board members were required to attend annually and the number of outside board members (r = -.36, p < .05). we tested to see if this relationship persisted after controlling for the firm performance variables that our prior analyses identified as being predictive of board membership. the regression results are shown in table 2. as indicated by the significant change in r2, the number of required board meetings (β = -.52, p < .01) explained 23% of the variance in outside board membership above and beyond the performance measures. thus, hypothesis 4 was supported. discussion our goal in this study was to identify those features of a sme that would attract outsiders to serve on its board. our findings demonstrated that certain performance measures – both market return and sales – as well as the ability to pay an annual retainer are positively related to outside board membership. we also found that the time commitment expected of directors, as measured by number of director meetings, was negatively related to outside board membership. with respect to financial performance, we were concerned with determining the direction of causation: does good performance predict attraction to the firm’s board or does the presence of outsiders on the board predict good performance? in using a time-lagged approach by measuring firm performance in a period of years prior to measuring the number of outsiders on the board, we felt that this problem was addressed. this does not necessarily mean that having outsiders on the board will not improve performance. in fact, resource dependence theory suggests that having a diverse group of outside directors may provide a company with strategic advantage. however, prior research suggests that if performance declines, outside directors are likely to resign in order to preserve their reputations (gilson, 1990). our findings support this phenomenon, leading to the conclusion that performance influences the processes of both attracting and retaining qualified outside directors. whether or not a company pays its outside directors an annual retainer affects the decision of a potential nonexecutive director to serve on a board. offering some monetary compensation to outside members thus encourages their consideration of director service for smes. if a sme wishes to attract qualified outside members to its board, it must compensate those directors for their service and time. on the other hand, journal of small business strategy                                  vol. 21, no. 1 spring/summer 2010        77    while there is some evidence that larger companies are using stock grants as opposed to stock options in compensation packages for their nonexecutive board members, smes continue to award both stock grants and stock options to their outside members (archer, 2005). we expected, in light of our hypothesis that improvements in share price would predict outsider presence on boards (a hypothesis that was supported by our results), that the use of equity-based compensation in director remuneration would be an attractive incentive to join a board. however, this was not demonstrated. our finding that the expected amount of hours of service, measured by the number of board meetings, was negatively related to outside membership indicates that directors take into account the time investment associated with board membership in deciding whether to accept a nomination. time constraint issues become particularly pertinent given current economic conditions, with more firms struggling for survival and looking to directors to provide advice and counsel. our findings were consistent with those of lorch and maciver (1989) who found that lack of time was the primary reason potential directors declined to serve on the boards of mid-sized companies. this study extends those results insofar as it examines the issues with respect to smes as measured by revenues and data collected more than 20 years later. we also note that the lorch and maciver study examined companies in the s&p 400, which includes mid-range companies based on market capitalization, while our study focused primarily on small companies. we found no support for ceo power as a negative influence on the decision to accept a board nomination. one plausible explanation is that in the case of smaller companies, directors are not as concerned with the power of the ceo. as surmised by boyd (1995), firms facing financial or environmental uncertainty are better off with a powerful ceo in command, evidenced by the combined ceo and chair positions. smes and newly formed companies are presented with greater uncertainties than larger, more well-established firms (bruderl & schussler, 1990). thus, having a powerful leader with a keen sense of direction for the company may be seen as a positive characteristic and a harbinger of future success, rather than a deterrent to board service. our study and the resource dependence perspective in general suggest some direction for smes in recruitment of outside directors to their boards. based on our results showing a negative relationship between number of meetings and outside director representation, smes may be at an advantage relative to larger companies in recruiting outside directors due to the likelihood that larger companies have more committees and more meetings. moreover, smaller companies might want to consider reducing the number of meetings expected of directors, allowing attendance via electronic communications, and providing concise journal of small business strategy                                  vol. 21, no. 1 spring/summer 2010        78    summaries of meeting agenda items, in order to attract such talent. implementing an orientation process for newly appointed directors may also help in their understanding of the company, which may reduce the number of hours needed to prepare for each meeting (long, 2006). resource dependence theory suggests that directors play a vital role in meeting the resource needs of firms when their internal assets are insufficient to address environmental uncertainties that may inhibit firm success (hillman et al., 2000; pfeffer, 1973; pfeffer & salancik, 1978). as we pointed out earlier, smes may suffer from the “liability of smallness” identified by bruderl and schussler (1990) that could limit their power vis-à-vis their external environments. outside directors should, according to resource dependence theory, be selected based on their individual abilities to address firm needs. when recruiting an outside director candidate to serve on its board, a sme may want to emphasize the fit between the role the director will play in governing the firm and helping to fulfill its resource needs, thereby providing the director with a clearer understanding of his/her ability to contribute to the firm’s success. such information may make the position more attractive to the potential director who wants to make the most productive use of his/her time while serving on a corporate board. limitations and future research we note that the lack of findings for some of our hypotheses may be due to the relatively small size of our sample. a larger sample affording more power for analyses may yield greater insight into the predictors of outside director representation on the boards of smes. nicholson and kiel (2007), in their study comparing the explanatory power of the three primary theories of governance, agency theory, stewardship theory, and resource dependence theory, found that no one theory adequately predicted firm performance differences among the cases they studied. in their discussion, they noted that “it is likely that any board effect on firm performance will be highly dependent on context-specific situations such as stage of organizational life cycle (johnson, 1997)” (nicholson & kiel, 2007, p. 602). we agree with their observation and note that mace (1986), in his research related to small firm governance practices, found that the most important role directors served was in providing resource support to the companies’ management teams. we thus rely principally upon resource dependence theory in our study of smes to explain the potential value of outside directors to such firms. in so doing, we did not examine the potential of either agency theory or stewardship theory to explain the value of outside directors serving on sme boards. this area may prove to be fruitful in future research for scholars who are interested in other roles journal of small business strategy                                  vol. 21, no. 1 spring/summer 2010        79    that outside directors may play in governing smes. another area of potential further investigation of the predictors of outside director participation on the boards of smes would be to determine what board and management processes may serve as attractants or deterrents to outside director recruitment. hambrick (2007) points out that the use of demographic characteristics to predict organizational outcomes ignores the “black box” of psychological and social processes that are the actual drivers of executive behavior (lawrence, 1997). nicholson and kiel (2007) also note that what happens within firms is often more explanatory of phenomena than the more readily measured attributes of directors so often relied upon in governance research. designing research studies that assess how board or executive dynamics impact outside director membership on the boards of smes may well 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(2004). emerging trends in board compensation. compensation & benefits review, 36(2), 45-53. alix valenti is an associate professor of management and legal studies in the school of business at the university of houston – clear lake. dr. valenti holds a ph.d. in management from the university of texas at dallas, a j.d. from st. john’s university school of law, and a masters in law from new york university school of law. dr. valenti’s primary areas of teaching are organizational behavior, employment and business law, and compensation and employee benefits. prior to becoming an assistant professor at the university, dr. valenti was a senior consultant with a global human resource consulting firm, specializing in employee benefits and executive compensation. clifton o. mayfield received his ph.d. from the state university of new york at albany, and his mba and bsba from the university of arizona. he is currently an assistant professor at the university of houston – clear lake and has taught courses in organizational behavior, organizational theory, leadership, and human resource management. he has over 10 years of corporate management experience. his current research interests are in the area of identity, work ethic, and organizational citizenship behavior. rebecca a. luce is an assistant professor of management and entrepreneurship at xavier university. she obtained her ph.d. in strategic management at michigan state university. prior to her career in academia, she was a business executive in various organizations in the fields of human resources and strategic planning. her research interests are in the areas of corporate governance, social performance, and bottom of the pyramid issues. she has previously published articles in strategic management journal and business and society. reproduced with permission of the copyright owner. further reproduction prohibited without permission. strategy the sbi program and student outcomes: a study of business policy classes larry r. watts william t. jackson stephen f. ausun state university abstract this study represents a preliminary inquiry to determine the value of combining sbi and policy into a singular curriculum. a comparison of this combined format was made with the traditional policy course. a slightly modified job diagnostic survey (hackman & oldham, 1975) and a ski llslusefulness scale (hoffman, fontenot & viswanathan, 1990) was administered to assess the difference between the two groups. results suggested that the combined format met or exceeded the outcomes of the traditional policy course. introduction changing demands in the workplace require more than just technical competence from our business school graduates. fontenot, haarhues and hoffman (1991)reported that employers are also demanding "...skills in leadership, problem solving, oral and written communication, along with attributes of motivation and assertiveness" (p. 66). their study comparing the effectiveness of small business institute (sbi) courses and business policy courses in developing desired student skills indicated that policy courses were more effective in developing analytical skills and that sbi courses were more effective in developing interpersonal and operauonal skills. while the comparative design of the fontenot, et al. study did document the singular value of sbi projects, it is imponant to extend this stream of research and assess the possible synergies from business policy courses that imegrate sbi projects into their course curricula. furthermore, since the business policy course and sbi project are configured to maximize student related outcomes, it is also important to assess the task design characteristics of the learning experience. therefore, the purpose of this study is not to replicate earlier studies thai demonstrated effective skill development in separate sbi or policy courses, but rather to compare the student related outcomes and task design characteristics of business policy classes that imegrate sbi projects into the course curricula and business policy classes that do not. a secondary purpose will be to provide confirmatory evidence for the study conducted by viswanathan, fontenot and hoffman (1992) that the sbi program provides valuable uaining for business students enrolled in the program. before specifically examining the study conducted to accomplish these objectives, background information providing the foundation of the study is in order. this will be done by providing a brief discussion ol'he business policy course, the sbi program, and jobs characteristic theory. 93 background ~b. pi business policy is the designated capstone course for the bachelor of business administration degree. the in(ended objective of the course is to integrate students'nowledge in various functional areas of business into a comprehensive view of the firm as it interacts with the competitive environment (waus & hudnall, 1991). a combination of related activities is typically used to achieve this objective. lectures present concepts associated with strategic management, while direct participation in a business simulation and case analyses requires students to apply these concepts to actual organizational situations. small business institute the sbi program was inuoduced in 1972 to provide free consultation to small busincsscs using advanced business school students. initially, this interaction was intended primarily for the purpose of preventing further small business administration (sba) loan losses. it was envisioned that the program would, however, evolve to specifically address all small business problems (burr & solomon, 1977). even though the worth of the program to small businesses was often questiined (jackson, vozikis & babakus, 1992), the value to students was not (burr & solomon, l.'77; longnccker, 1977; hicks, 1977; judd, 1979). where these early studies tended to support the benefits derived by students from a conceptual point ol view, recent research has suggcstcd a need to empirically evaluate the sbi's contribution to the educational process (fontenot, et al., 1991). at the university under study, sbi student projects are an integral part of the curricula in two sections of business policy. the professor in charge of these sections is responsible for developing the small business client, forming student consulting teams, assigning a faculty advisor to the team, assigning the team to a client, assessing the progress of consulting teams, monitoring small business administration (sba) documentation, and assuring the quality ol'complctcd student reports. in addition, the course is structured around the sbi projects to ensure that the integrity of both requirements (policy curriculum and sbi case quality) is upheld. s~kll 0 project-oriented courses help develop student skills by requiring a practical application o( theoretical concepts learned in the classroom (ater & coulter, 1980). the process ol'ntegrating theory and practice under "real world" conditions appears to enhance students'echnical and interpersonal skills (lawrence, 1990). to assess the effectiveness of sbi programs in developing desirable workplace skills hoffman, fontenot and viswanathan (1990) constructed a skills/usefulness scale to measure student perceptions of skills and knowledge acquired in the sbi class for quantitative versus non-quantitative student majors. a modified version of this instrument was later used by fontenot, haarhues and holtman 94 (1991) to compare the skills and knowledge acquired in sbi courses and business policy courses. in absolute terms, both courses were perceived as useful in developing analytical skills, interpersonal skills, operational skills, and career usefulness. in relative terms, sbi courses were perceived as being more useful in developing interpersonal and operauonal skills, while business policy courses were perceived as being more useful in developing analytical skills and career usefulness. ~tk d the challenge faced by the business policy professor is how to best configure course activities to maximize student related outcomes. conceptually, configuring course activities is similar to designing jobs for enhanced performance. research suggests that job analysis and design techniques developed for work environments can be used successfully in an educational setting (watts & hudnall, 1991; watts, 1992). the job characteristics theory is a comprehensive framework of task design processes developed by hackman and oldham (1976; 1980). at the center of the theory are three critical psychological states. these states are seen as primary determinants of personal and work outcomes. that is, to the extent there is experienced meaningfulness, experienced responsibility for work outcomes, and knowledge of results, there should be high internal work motivation, high quality work performance, high job satisfaction, low absenteeism and low turnover. the rise of these critical psychological states is, in turn, predicated on the presence of five core job characteristics. the theory further recognizes the moderating role of individual dil'ferences by including individua! growth need strength. the job diagnostic survey (jds) translates the job characteiisucs model into a practical tool i'or diagnosing jobs before re-design and then evaluating the effects of the redesign cf1'ort. the jds (hackman & oldham, 1975) measures perceptions of core job characterisucs, critical psychological states, growth need strength, internal work motivation and job satisl'acuon. the jds is a refinement of the earlier yale job inventory (hackman &. lawler, 1971), and was designed specifically to measure each of the variables in the job characteristics model. method ~sub'ects the subjects for this study were 178 senior level undergraduate business students at a state supported university. the studcms were enrolled in the five sections of business policy taught during the fall semester ol'992. the live sections were taught by two professors, one of whom taught the two sections with sbi projects. for statistical comparison each professor's classes were combined into one group. sixty-nine (69) students in the combined sbi/policy classes and 109 students in the traditional policy classes were administered the survey. a reasonably comparable sample, in terms of academic background and sex, was obtained, and no adjustments were required. 95 in addition, the policy curriculum administrator insists upon relative uniformity between all policy sections. so, the only difference between sbi/policy and the traditional policy sections is that in lieu of a major text book case the sbi project is accomplished. each section covers the same text book, administers the same number of exams, and conducts a computer simulation project. naturally, each professor's approach to classroom activities is unique to that i'acuity member. mcasurcs the jds was used to collect perceptions of core job characteristics, critical psychological states, growth need strength, internal work motivation and job satisfaction. only minor changes in the wording of the jds were made to adapt the instrument to the classroom seuing. the skills/usefulness insuumcnt used by fontcnot, et al. (1991) was administered to collect perceptions of skills and knowledge acquired in thc classes. minor changes in the wording of the questionnaire were made to adapt the instrumcm to the rcscarch setting, and a seven point scale was used to maintain consistency with the jds. procedure to capture thc influences of course related activities, thc instrument was administcrcd late in the scmestcr. participation was voluntary with no rewards or induccmcnts oltcrcd. on a predetermined date, both professors announced in class that they had bccn asked to panicipate in an important study and administered the questionnaire. r~h although fontenoh et a!. (1991)had laid the foundation for conunucd research imo the usefulness of the sbi program for participating students, no studies exist that actually address thc value of the sbi program conducted in business policy classes. in light of this fact, this study was viewed as a preliminary inquiry into the area. thcrcforc, several gcncral hypotheses were devclopcd. h i: core job characteristic skill development will be greater in those classes that include the policy curriculum as well as sbi comparexi to those classes that only include the policy curriculum. h2: critical psychological states development will be greater in those classes that include the policy curriculum as well as sbi comparcxl to those classes that only include the policy curriculum. h3: a(fcctivc outcomes will be greater in those classes that include the policy curriculum as well as sbi compared to those classes that only include the policy curriculum. h4: individual growth needs will be enhanced in those classes that include the policy curriculum as well as sbi compared to those classes that only include the policy curriculum. 96 in addition to testing the above research questions, a comparison of the results will be made against management norms as established by job characteristic theory (oldham, hackman & stepina, 1979). this is importam to ensure that both course designs are meeting their academic obligation. analysis of results results from both class groups were compared using simple t-tests to determine if the groups were similar. this was accomplished for each section of the survey instrument: job characteristics: psychological states: affective outcomes; and, job growth needs. table i provides a breakdown of the answers received in each group, and table 2 provides the actual statistical significance results of this comparison. when examining those variables concerning basic job characteristics, three specific areas showed statistical significance between groups. it is not surprising that students felt that greater skills were necessary in the combined course than in the policy class alone. the students enrolled in the courses were in their last semester of undergraduate work and had been subjected to an almost exclusive focus of major corporations as opposed to the small business community throughout their four year academic career. two other variables showed even greater significance within the job characteristic variables. task signilicance (was the outcome imponant?) and autonomy (can one student make a difl'erence?) were justifiably imponant in the combined class. students had been placed in an environment where not only were they expected to leam a concept, but also to directly help an individual or individual business. most students readily accepted this added challenge from a group perspective as well as from an individual perspective. two variables, not showing signilicance, deserve some discussion. the two groups did not differ on task identity (closure) and a highly related issue, feedback. the nature of the sbi project as well as the regular policy curriculum, usually affords a high degree of ambiguity up to the last few days of class. the survey was administered before either class had all their graded measurements rctumed. this would naturally effect a student's perception of closure and feedback from the task. figure i graphically demonstrates the relationship of these variables discussed above. in addition, except for the area of autonomy, the combined sbi/policy course out performed thc standards established for a traditional business seuing. the el'fcct the combined course had on thc experience of psychological states was also interesting. the sbi students experienced more work meaningfulness as well as a feeling of responsibility associated with their projects. once again, the issue of concern over grades may well have affected the third psychological state, knowledge of results. in addition, as is the case with many sbi projects, the team is unable to witness many of their recommendation implementations. 97 table 1 overall results by class policy class (number = 109) variable min max mfan sd. skill 2.0 7.0 5.86 1.04 identy 1.0 7.0 4.83 1.30 tsk sig 1.0 7.0 5.44 1.55 autonmy 2.0 7.0 4.50 1.19 feedbk 1.0 7.0 4.47 1.28 fd8 kag 1.0 7.0 4.95 1.43 meaning 1.0 7.0 5.01 1.30 respnsib 2.0 7.0 5.11 0.94 knowledg 1.0 7.0 4.15 1.56 gen sat 1.0 7.0 4.78 1.24 work mot 2.0 7.0 5.81 0.90 growth n 1.0 7.0 5.38 1.20 mps 7.0 295.8 112.98 58.30 anal skl 2.0 7.0 5.80 0.96 intr skl 1.0 7.0 4.35 1.29 oper skl 1.0 7.0 4.49 1.27 career u 1.0 7.0 5.06 1.35 age 21.0 35.0 23.07 2.05 gpa 2.0 4.0 2.72 0.38 sbi/policy class (number = 69) variable min max mfmn s.d. skill 4.0 7.0 6.19 0.84 i denty 2.0 7.0 4.78 1.37 tsk sig 1.0 7.0 6.10 1.37 autonmy 2.0 7.0 5.07 1.17 feedbk 1.0 7.0 4 43 1.31 fdbkag 2.0 7.0 4.96 1.15 meaning 1.0 7.0 5.46 1.30 respnsib 4.0 7.0 5.66 0.75 knowledg 1.0 7.0 4.30 1.52 gen sat 3.0 7.0 5.73 0.89 work mot 1.0 7.0 5.86 0.88 growth n 2.0 7.0 5.58 0.98 m ps 6.3 295.8 131.64 58.22 anal skl 4.0 7.0 6.06 0.74 intr skl 3.0 7.0 5.70 1.11 oper skl 1.0 7.0 4.62 1.52 career u 2.0 7.0 5.57 1.16 age 21.0 41.0 23.36 3.07 gpa 2.1 3.4 2.67 0.34 98 table 2 t-test results variable g~id p value core job characteristics skill variety greater skills needed .0239» task identity task closure allowed .7910 task significance outcomes important .0039» autonomy freedom, independence .0024» feedback feedback from work .8509 experienced psychological states meaningfulness work is meaningful .0293'esponsibilityresponsible for outcomes .0001'nowledgeof results final outcomes known .5253 affective outcomes general satisfaction independent thought used .0001» internal work motivation work stimulating/challenging .7159 motivating potential composite score** .0405» skills/usefulness analytical skills use and growth of anal. skills .0409» interpersonal skills use of interpersonal skills .0001» operational skills use of entrepreneurial skills .5642 career usefulness prepares for future career .0101» demographics age .4923 grade point average .3464 indicates a significance difference between groups. score was computed using the following formula: mps =((sk. var, + task id. + task sign.)/3)(autonomy)(job feedback) 99 i core job charaeterletlcs 7 8''' ipolley @sin/ponelf omanigorld norm as can be gleaned from examining figure 2, both the sbi/policy and policy courses may bc considered as academic exercises when compared to the managcmcnt norms of a traditional organization. while a legitimate attempt may be made to make the course as realistic as possible, it is still a classroom experience. under affecuve outcomes, it was obvious that the sbi students had a higher level ol'encml satisfaction. this is easily related to the opportunity to accomplish a "real world" project as opposed to another text book exercise. the variable of work motivation showed no statistical difference even though there was a slight increase in students'cores. once again, both the sbi/policy course as well as the traditional policy course fared beuer than management norms. this can be seen in figure 3. there was only one variable that did not show significance in the categories involving growth opponunitics. the work was motivating, increased analytical and interpersonal skills, and was seen as useful for future employmem. it did not. however, incrcasc operational (enuepreneurial) skills. a possible explanation for this could be that many of the students recognized the difficulty involved in running a small business, and this increased their apprehension to do so. 100 critical psychological states 42'. 2 el poller l8 sbi$polley marmswlal nona affective outcomes 8 4'' ' oenmal saseawson weth nosvaaon 8 palmed eh ssllpollor 0 ssamseraa bmm 101 discussion/implications/limitations as stated in the opening paragraphs, the main purpose of this research was to assess the appropriateness of combining sbi requirements into the policy course curriculum. the statistical results obtained from analysis provided generally favorable support of this combination. in all cases of comparison included in core job characteristics, psychological states, and affective outcomes, the combined class performed as well if not beuer than the traditional policy curriculum. in addition, as was suggested from the fontenot, et al (1991) study, job growth needs were adequately met by this combined format. management norms for an organizational seuing were also generally equaled or surpassed. there are several areas of concern, however, that should not be dismissed simply from the results of this study. the sbi course, regardless of the instructional format, is an academic challenge and should only be taught by someone with the experience to convey the difl'erence between major corporations and the small business community. in addition, not every faculty member is willing to commit to the extra time and energy necessary to combine the two approaches to learning. further, it should be pointed out that this preliminary inquiry into the usefulness of a combined course is just thah a preliminary inquiry. others that use this format at keir institution should be encouraged to further this vein of research. the findings in this study may also suggest that major curricula changes should be considered above what is the case with a combined sbi/policy course. as is the case with this university, a new course has been designed that amount. to a six hour course-three hours for the traditional policy curricula and a three hour course for the sbi case project. lt would be beneficial for any school experimenting with course re-design for the sbi program to collect data and report those for other universities to consider. 102 references ater, e. c. &. coul(er, k. l. (1980). consumer internships: encouraging consumer/business dialogue. journal f business communications, 17(2), 33-39. burr, p. l. &. solomon, g. t. (1977). the sbi program four years down the academic road. journal of small business mana ement, 15(2), 1-8. fontenot, g., haarhues, m. & hoffman, l.(1991). the benefits of the sbi program: perceptions of former students. journal of small business strate, 2(1), 56-71. hackman, j. r. & lawler, e. e. (1971). employee reactions to job characteristics. journal ~of a lied ps cholo mono ra h. 55, 259-286. hackman, j. r. & oldham, g. r. (1975). development of the job diagnostics survey. i i f ~ai m p h i . 60. 159-170. hackman, j. r. & oldham, g. r. (1976). motivation through the design of work: test of a theory. or anizational behavior and human perl'ormance, 16, 250-279. 0 k .j r &gldh,g r (1960). ~wkr d i . r 4 g ma add( -w i y. hicks, c. (1977). deriving the maximum benefit from your sbi student counselor. journal of small business mana ement. 15(2), 12-17. hoffman, l., fontenot, g. & viswanathan, r. (1990). an exploratory evaluation of the effectiveness of thc sbi program as perceived by quantitative and non-quantitative . ~ps f 0 1990 sbiga 0 i c f, 611-65. jackson, w. t., vozikis, g. s. &. babakus, e.(1992). sbi imervemion: an old problcm— a new perspective. journal o( small business suate, 3(2), 15-30. judd, r. j. (1979). techniques i'or evaluation ol'sbi casework. jouma! f small busin ss m'm , 17(l), 7-14. lawrence, e. (1990). learning portfolio management by experience: university student invesunent funds. the financial review, 25, 165+. longnecker, j. g. (1977). the sbi program — view from the side-lines. journal of small 0 i ~m. 15(2), 9-11. oldham, g. r., hackman, j. r. & stepina, l. p. (1979). norms for the job diagnostic survey. jsas catnip of selected documents in psvcholo, 9, 14. viswanathan, r., fontenot, g &. hof1'man, l. (1992). skill developmem through small business insutute consultations: an exploratory empirical investigation. journal of b . i . & 0~hi . 4(2), 1-9. wats, l. r. & hudnall, j. (1991). applying job characterisucs theory to course design. ~wmi fd m i pi'i m g c f . d.g.j 9 (colorado state university, co). waus, l. r. (1992). course design and student evaluation of instruction: a study of business policy classes. ~proceed in of the mountain plains management conference. ed. rita campbell (u.s. air force academy, co). 103 sffz*;iix"cy testing prison inmates for entrepreneurial aptitude matthew c. sonfield hofstra university robert j. barbato rochester institute of technology abstract a pilot study of prison inmates was conducted to measure their entrepreneurial apti tude, wi th the obj ecti ve ofdetermining whether self employment training for such inmates would be of value. staristicalanafysisofthecoffectedaptitudedata, measuredby minersentencecompletion scale-form t tesn'ng of task motivation, indicates that these inmates have such a propensiry, at a level comparable to or higher than samples ofcurrently practicing entrepreneurs. since a major cause of inmate recidivism is the inability of ex-convicts to obtain employment, then if prison inmates have significant entrepreneurial propensity, it follows that self employment should be considered a valid alternative path for ex-convicts. selfemployment training would facilitate inmates'ovement along this path. further, and more probing, research is suggested. introduction recent experiences of small business specialists have indicated that prison inmates may possess high levels of entrepreneurial aptitude (sonfield, 1992). concerned about the lack of employment opportunities for inmates when they are released from incarceration, in the past few years, prisons have invited professionals from the u.s. small business administration, universities, and other organizauons to speak to inmates in prisons about the pro's and con's of selfemployment upon release. according to one group of these professionals, the inmate response to their presentation was "absolutely amazing" and "gratifying and enlightening." the inmates'uestions were very intelligent, and indicated an understanding of the nuances of the world of small business. specific questions about possible types of businesses seemed well thought out. the inmates appeared to understand the prime imponance of sufficient sian-up financing and the difficulues they would encounter in obtaining such financing. the general impression of these experts was that these inmates were "street smart" and that this might be an indication of entrepreneurial aptitude or propensity. thus, these inmates might have as much potential to succeed in a small business start-up as any auendees at previous self-employment workshops conducted by these professionals. furthermore, word of these prison sessions has spread through the inmate grapevine to other prisons, resulting in an increase in requests from prisions for such self-employment workshops (small business score, 1992; ibid., 1993). current statistics on crime and prison clearly indicate that a crisis exists. almost two percent of the adult population of the united states is in prison, on parole, or on probation (ticer, 1989). the 1992 prison inmate population was 883,593 (new sday, 1993). a major contribution 45 factor is recidivism, thc return of an ex-convict to crime. justice d&:partment data indicate that 70 percent of young convicts who are paroled find their way back iinto prison within six years (seligman, 1989). since most studies of recidivism rely on convictions rather than crimes committed, this figure is probably low (grossman, 1985). looking at this situation from another angle, 6 percent of criminals commit 70 percent of all violent crimes (kramer, 1994). all of this data support society's concern about what a released prisoner does upon returning to free life. any programs that successfully direct a released prisoner toward a producdve life should be cost effective in light of the alternatives chosen by most of his or her peers. thus, it is certainly in society's best interests for ex-convicts to find employment. however, it is extremely difficult for ex-convicts to find meaningful employment after leaving prison. most businesses are very hesitant to employ such individuals (even when the oconomy is strong and general unemploymcnt is low). yet, unemployed ex-convicts are three to five times more likely to commit another crime than are those who do find employment (jackson, 1990). thus, selfemploymenr as opposed to employment by others offers a possible alternative for ex-convicts and a possible means to reduce recidivism. if it can be shown that some or all prison inmates do indeed have an aputude for entrepreneurship, then arguments can be made for the funding and implementation of self-employment unining programs in prisons for inmates who are soon to be released. although the subjective impressions of small business specialists who have worked with prison inmates is revealing, more objective measurement of inmates'ntrepreneurial aptitude is required. this anicle reports on a formal testing of entrepreneurial propensity among a sample of prison inmates. it provides a statistical comparison of these inmates'cores with the scores of several groups of praciicing entrepreneurs and a more limited comparison with the scores of a sample of laid-off workers. various computer database searches of the literature indicate that such an empirical testing of prison inmates has not been previously performed, nor has there been any significant non-empirical discussion of self-employment as an option for ex-convicts. methodology the miner sentence completion scale-form t (mscs-t) is an instrument that measures five aspects of task motivation: a need for self-achievement, a preference for avoiding unnecessary risks, a desire for feedback on the results of one's efforts, an aspiration for personal innovation, and a want to think and plan for the future. prior research studies have indicated a correlation between such task motivation and positive entrepreneurial performance (bellu, 19&8; bellu,1990; bellu,1992; smith,1985; smith,1987). thus,themscs-tean beconsidereda valid test for entrepreneurial aptitude or propensity. the testing instrument requires the respondent to complete 40 stems, 8 of which measure each of these attitude traits. five subscale scores and a total envcpreneurial task motivauon score can be calculated from each completed instrument. subscale scores can vary from +8 to -8 and total scores can range from +40 to 40, although actual scores tend to be much more narrowly distributed. miner (1986) provides normative test score data for 135 entrepreneurs spread throughout the united states. in addition, test score data for two groups of entrepreneurs, one from fastgrowth firms and another from slow-growth firms, have been reported by smith (1985). thus, good test score data exists for a comparison with test scores of prison inmates. 46 since one objecdve of this current research study is to determine the potential value of possible self employment training programs for inmates and/or ex-convicts, it is also worthwhile to compare inmate scores with scores of a group that is currently the target of such training programs —laid-off (or "displaced" ) workers. mscs-t score data for a sample of displaced workers has been reported by sonfield (1990) and can also be compared to inmate data. there are significant obstacles to testing prison inmates for entrepreneurial propensity using the mscs-t. first, most prisons are very reluctant to allow researchers entry and access to inmates. any input or intrusion from outside is considered a potential risk to internal stability and control. several attempts with both state and federal prisons were made by the authors before one acceptance was obtained at a prison in downstate new york. a second obstacle to successful te sung is the reluctance of prison inmates to cooperate, as such cooperation must come solely on a voluntary basis. in this study, about half of the inmates asked to volunteer did so (certainly a beuer response rate than most mail surveys). the inmates asked were a convenience sample of the total prison population. 'ihe request for volunteers was presented to the inmates in a neutral manner to minimize the possibility that the resulting sample would be self-selective in any way. still, a third obstacle in this specific situation is the na(um of the research instrument itself. the mscs-t requires the respondent to develop a complete sentence from 40 short sentence beginnings or "stems" (such as "inventing something new ..."or "working with a partner ..."). a large portion of prison inmates have limited writing skills and have difficulty in completing the sentences su fficiendy for valid scoring to be done. about 25 percent of the respondents'est forms were therefore not usable, either because the responses were too minimal or because too many items were left blank. twenty-nine mscs-t instruments were completed in a manner that allowed full and valid testing. tltis was a sufficient sample size for the statistical analysis methods used. to increase validity in scoring, two independent scorings were performed by separate scorers. the means of the two scores for each of the 40 items were used for analytical purposes. the inmates tested were all convicted felons (i.e.,convicted of more serious crimes). the respondents were evenly divided between first-time and repeat offenders. a variety of crimes were involved. 47 results mean mscs-t total scores and subscale scores for the prison inmate sample, along with scores for the normative entrepreneurial sample, the fast-growth entrepreneurs, the slow-growth entrepreneurs, and the displaced workers are presented in table l. a statistical comparison of these means is presented in table 2. table i mean mscs-f t scores i ii iii iv v prison normative entrepreneurs entrepreneurs dislocated inmates data for fast-growth slow-growth workers entrepreneurs firms firms (n=29) (n=135) (n=50) (n=47) (n=36) total score 8.59 6.81 11.32 0.32 0.69 self-achievement 2.35 1.91 3.32 0.34 -0.31 avoiding risks 1.85 0.94 1.44 -0.28 -0.14 feedback of results 1.55 -0.20 0.50 -1.68 -0.06 personal innovation 2.94 2.99 4.06 1.64 1.42 planning for the future -0.07 1.17 2.10 0.30 -0.17 sources: prison inmates: current study normative data: miner (1986) entrepreneurs, fast growth and slow growth: smith (1985) displaced workers: sonfield (1990) table 2 significance levels i vs. ii i vs. iii i vs. iv inmates vs. inmates vs. inmates vs. normative fast-growth slow-growth entrepreneurs entrepreneurs entrepreneurs i p i p i p totalscore 1.487 ns 2.001 &.025 6.126 &.005 self-achievement 1.103 ns 2.095 &.025 4.194 &.005 avoiding risks 1.933 &.05 0.755 ns 3.793 &.005 feedback of results 4.556 &.005 2.381 &.01 7.281 &.005 personal innovation 0.126 ns 2.536 &.01 2.662 &.005 planning for the future 2.772 &.005 3.938 &.005 0.651 ns note: statistical hypothesis test techniques for two normally distributed populations using independent samples with unequal standard deviations; one-tailed test critical values. 48 looking at the total score data, it appears that the subjecuve conclusions of the small business experts are supported by this more objective empirical testing effort. the mscs-t total score mean for the inmate sample is much higher than the mean score of the entrepreneurs from slow-growth firms. the mean score of the dislocated workers is somewhat higher than the large sample normative entrepreneurial mean score and somewhat lower than the score of entrepreneurs from fast-growth firms. thus, the data support the conclusion that these prison inmates have a high entrepreneurial aptitude. in fact, when these prison inmates are compared to the entrepreneurs in miner's normative sample of 135 entrepreneurs, there is no significant difference in total entrepreneurial score. furthermore, these prison inmates, though lower in total entrepreneurial motivation than entrepreneurs of fast-growing firms, scored considerably higher than the entrepreneurs of slowgrowing firms. because standard deviations or other data on the distribution of the dislocated workers'cores were not available, a statistical comparison using these means was not possible. however, it should be noted that the dislocated workers'aw scores were similar to those of the slow-growth entrepreneurs, who scored statistically well below the inmates. the subscale data pmvides much additional information. the inmates scored significantly higher than the slow-growth entrepreneurs and the dislocated workers with regard to most of the entrepreneurial factors. they scored either higher or similarly to all but one of the normative scores. the fastgrowth entrepreneurs scored either higher or similarly to the inmates on most of the subscale factors, but these results are more mixed. several individual subscale comparisons are especially interesting. in comparison to the other groups, the prison inmates are especially low in their inclination to plan for the future. this is not surprising, given the nature of their cunent incarcerated situation. perhaps, if we had tested only inmates close to release, we would have obtained a significantly higher score for this subscale (and thus a higher total score as well). the inmates also stand out fmm all of the other groups in their high need for feedback of results. this is the one subscale where the inmates scored higher than all other groups, including the fast-growth entrepreneurs. this inmate characteristic may also be the result of their incarcerated status. this may result from their for peer acceptance and/or the requirement for the permission of the guards for many of their everyday actions and decisions. conclusions empirical analysis of the entrepreneurial aptitude of this sample of prison inmates, measured by miner sentence completion scale-form t testing of task motivation, indicates that these inmates have an entrepreneurial aptitude, comparable to or higher than samples of currenuy practicing entrepreneurs. since a major cause of inmate recidivism is the inability of ex-convicts to obtain employment, and if indeed some or all prison inmates have significant entrepreneurial propensity, then self employment may be a valid alternative path to employment for ex-convicts. the data generated in this study may support further consideration of programs to assist soonto-be-released and/or recently released prison inmates in implemenung self-employment and entrepreneurial activities. such programs would be similar to current federallyand state-funded 49 programs aimed at laid-off workers. however, since these laid-off workers have tended to score poorly in entrepreneurial aptitude in earlier studies, it is possible that self-employment programs for certain prison inmates would be morc cffcctive than such programs for displaced workers. the design of such programs would be critical to their potential for effectiveness and success. especially crucial would be inmate selection for such profpums, which might involve such factors as the proximity to the end of the inmate's term of incarceration, his or her entrepreneurial aptitude score, pre-prison work experience, conduct in confinement, writing skills, etc. prior research indicates that some measure of inmate commitment to the program would also help predict the potential benefits of the program to the inmate (morris, 1987). program scheduling and content would also require much consideration. also, the serious problems that an ex-convict would face in obtaining financing, credit, contracts, etc. would have to be addressed. while a lengthy discussion of these issues is beyond the scope of this article, a full analysis of program design issues is presented by sonfield (1992). clearly, this initial research effort was limited in scope. further research is necessary before strong conclusions can be reached. while this study does not enable us to categorically conclude that some or all prison inmates have high entrepreneurial propensity, and that therefore selfemployment programs for prison inmates will definitely reduce the rate of recidivism, this research does provide us with some preliminary conclusions concerning the inmates tested. it also substantiates the value of further research. ideally, such further research would involve larger sample sizes, randomly selected at several prison sites. a larger sample of prison inmates might allow us to differentiate between the mscs-t scores of various groups of inmates (perhaps firsttime versus repeat offenders, by type of criminal conviction, by type, of pre-prison employment, or by proximity to prison release date), and thus further identify those inmates with the best potential for self-employment success and most likely to benefit from entrepreneurial training. yet, as discussed previously, much effort will be required to obtain more "ideal" samples. in the meanume, this study and its results provide a preliminary indication of prison inmate entrepreneurial aptitude, the potential value of self-employment training for certain inmates, and the need for further and expanded research. 50 references bellu, r. (1988).entrepreneurs and managers: are they different? frontiers of enirepreneuriol research, wellesley, ma: babson college, 16-30. bellu, r., davidsson, p. & goldfarb, c. (1990).towards a theory of entrepreneurial behavior. empirical evidence from israel, italy and sweden. entrepreneurial and regional development, 2, 195-209. bellu, r. (1992). towards a theory of entrepreneurial motivation: evidence from female entrepreneurs. proceedings of the 37th annual world conference of the iscb, 195-213. 883,593 inmates a record high. (may 10, 1993).newsday, p. 10. grossman, l.s.(1985).research directions in the evaluation and tieaunent of sex offenders: an analysis. behavioral sciences and ihe law, 421-440. jackson, s. (1990,june). when theft is worse than murder. director (uk), pp. 88-91. kramer, m. (1994, feb. 7). tough, but smart. time, p. 29. miner, j. (1986). scoring guide for the a(incr sentence completion scole form t. atlanta: organizational measurement systems press. morris, n. &. miller, m. (1987). predictions of dangerousness in the criminal law (dgpo8701 71081.washington, d.c.:u.s. department of justice. seligman, d. (1989,jan. 16).jailbird odds. fortune, p. 136. score offers inmates a second chance for success. (february-march, 1993). the small business score, p. 3. score spends time beyond bars. (october-november, 1992). the small business score, p. 2. smith, n. 8'i miner, j.(1985).motivational considerations in the success of technically innovative entrepreneurs: extended sample findings. frontiers ofentrepreneurial research. we gas icy, ma: babson college. smith, n., bracker, j. & miner, j. (1987). correlates of firm and entrepreneur success in technically innovative companies. frontiers of enir epreneuri al research. wel le sley, ma: babson college. sonfield, m., barbato, r. & bracker, j. (1990).worker dislocation and potential entrepreneurship. journal of business and enirepreneurshi p, 2(2). 51-57. son field, m. (1992).from inmate to entrepreneur a preliminary analysis. proceedings, national conference of the small business institute directors association, washington, d.c., 39m. ticer, s. (1989, may 8). the search for ways to break out of the prison crisis. business week (industrial technology edition), pp. 80-81. van stelle, k., mauser, i. & moberg, d. (1994, april). recidivism to the criminal justice system of substance-abusing offenders diverted into treatment. crime and delinquency, pp. 175-196. 51 str'ategy special section* e papers in rhis seerion are nos revievved by rhe jsbsedi roric advisory board, 52 http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2019, vol. 29, no. 01, 85-98 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2019 small business institute® w w w. j s b s . o rg although the economic landscape is strongly shaped by small-and-medium-sized enterprises (smes), it is large corporations that receive virtually undivided attention. this situation is encouraged by the elevated individual economic importance of larger corporations compared to smes. while smes play a vital role in every economy, their (financial) performance happens to be inherently more volatile than that of larger enterprises (dannreuther & kessler, 2008). due to resource constraints in terms of size and scope, smes are considered riskier, and they also have a higher propensity to fail (carter & van auken, 2006; keasey & watson, 1993). the overwhelming majority of firms that go bankrupt are smes, and smes’ chances of survival are marginal (camacho-miñano, segovia-vargas, & pascual-ezama, 2015; laitinen, 2013). according to robbins and pearce (1993), strong economic pressure is a clear threat to the existence of small businesses. in addition to economic difficulties, smes are confronted with an increasingly complex and dynamic environment, where not every entity is capable of success (mayr & mitter, 2014). companies that are unable to adapt their organization to meet market requirements face a high probability of eventual financial crisis and are ultimately threatened by bankruptcy. a financial crisis, however, does not necessarily lead to business failure; it can also be perceived as a chance to alter a potentially outdated business model (timmons & spinelli, 2007). the restructuring process can take place through a formalized and court-supervised procedure, or by means of a barely predetermined out-of-court restructuring process (gilson, 1991; nigam & boughanmi, 2017). in this paper, we take an extensive look at the latter, which is normally attempted before an in-court procedure. this paper is especially relevant because few research studies so far have performed analyses of the resources and determinants involved in (un)successful restructurings in smes (collett, pandit, & saarikko, 2014; kraus, moog, schlepphorst, & raich, 2013). especially for out-of-court restructuring in small, unlisted companies there is almost no empirical evidence (franks & sussman, 2005), since collecting comprehensive information in the context of reorganization is introduction stefan mayr1, david lixl2 1 johannes kepler university of linz, austria, stefan.mayr@jku.at 2 johannes kepler university of linz, austria, david.lixl@hotmail.com restructuring in smes – a multiple case study analysis informal restructuring, reorganization, sme, multiple case study, resource-based view smes represent an important pillar in every economy, but in terms of financial performance they are inherently more exposed to financial volatility than large enterprises. constrained access to resources and the liability of smallness lead to a higher propensity to failure and corporate crisis. a financial crisis is endangering the continued existence of the business, however it can also be perceived as change to reassess and reassemble resources to meet future market requirements. this either takes place through a court-supervised reorganization or through an informal restructuring without the involvement of courts. this paper focuses on the latter and employs a multiple case study including 10 successfully restructured firms and 5 failed renegotiations in austria. through use of the resource-based view (rbv) we analyzed what caused crises in smes and which strategies and measures are necessary to overcome crisis. in conclusion, it can be stated that crises are predominantly caused internally in smes, and successful restructuring frequently requires the engagement of both, banks and entrepreneurs. while innovation capacity is a factor that facilitates restructuring, complex and insufficiently settled family dynamics tend to hinder restructuring. apa citation information: mayr, g. & lixl, d., (2019). restructuring in smes-a multiple case study analysis. journal of small business strategy, 29(1), 85-98. http://www.smallbusinessinstitute.biz http://www.jsbs.org 86 s. mayr, & d. lixl journal of small business strategy / vol. 29, no. 1 (2019) / 85-98 problematic, especially for smes, where the reliability of data is often impaired. well known studies (e.g., bedendo, cathcart, el-jahel, 2016; blazy, martel, & nigam, 2014; franks & sussman, 2005; gilson, 1989 & 1990; jacobs jr, karagozoglu, & layish, 2012) focus on quantitative data, whereas qualitative research is scarce, probably reflecting the difficulty of such research (rogoff, lee, & suh, 2004). qualitative research can reveal additional insights into reorganization, for example the impact of the failure event on the entrepreneur or the useful self-reflection (byrne & shepherd, 2013). the purpose of this paper is twofold. first, we analyze the main drivers of crisis situations in smes. this seems crucial to the coordination and implementation of adequate strategies and measures to overcome economic, entrepreneurial and managerial shortcomings (slatter, 1984). second, by evaluating the influencing factors and resources required to restructure a business and reach an out-of-court restructuring agreement, we want to contribute to a more holistic understanding of restructuring in small businesses. in particular, we highlight the role of entrepreneurs and financing banks in the restructuring process. thereby entrepreneurial traits such as education and experience are important variables to predict business success or failure for small enterprises (lussier & corman, 1996). rogoff et al., (2004) found that individual characteristics (e.g., knowledge, dedication) as well as management issues (e.g. effective organization, management skills) are contributing factors to small business success. the remainder of the article is structured as follows. this introductory section is followed by a brief description and categorization of the austrian bankruptcy regime and the options through which smes can overcome a financial crisis. section three discusses the resource-based view as the theoretical framework of the paper. then, in section four, we present the applied methodology for the case studies. a brief description of the data is provided in section five, and the discussion of the results is the focus of section six. the paper closes with a discussion of the results, shows limitations of the study, and presents avenues for further research. restructuring in smes financial crisis can be defined as a situation in which a company can no longer meet its financial obligations (gilson, 2012), which constitutes a major entrepreneurial challenge. compared to larger firms, smes tend to be more prone to financial distress and bankruptcy due to their liability of smallness (aldrich & auster, 1986). crises are particularly threatening for smes, whose access to resources is constrained, resulting in lower resilience (couwenberg & de jong, 2006). next to financial resources there are especially human, social, organizational and physical resources of great importance for smes (greene, brush, & brown, 1997). in this paper, smes are defined in accordance with the definition recommended by the european commission (2003). as equity and alternative funding sources represent a bottleneck in financing, small businesses are highly dependent on banks to support their strategic decisions and enable investments (berger & udell, 1998). thus, banks’ approaches to engaging with smes are characterized by an attitude of rejection; this is based on the inherently higher risk posed by smes, such as opaque organizational structures and less or low-quality collateral (blazy et al., 2014). franks and sussman (2005) postulate that the degree of concentration of debt and liquidation rights induces a tradeoff for banks. according to giammarino (1989) and mooradian (1994), there may be a preference for costly court-supervised bankruptcy if information asymmetries between creditors and management are high. furthermore, the configuration of bankruptcy regimes is a strong moderator and can explain banks’ behaviors and decisions. whether the judicature favors the position of the creditor or debtor influences not only business decisions but also the incentives of both parties to restructure inor out-of-court (blazy et al., 2014; couwenberg & de jong, 2006 blazy et al., 2014). a creditor-friendly environment (see, e. g., uk, germany, austria; blazy et al., 2008) increases both the propensity to liquidate the business and the pressure to reach an informal agreement to avoid wealth-dissipation (couwenberg & de jong, 2006). the attempt to informally renegotiate outstanding debt normally represents the starting point of the restructuring process (blazy et al., 2014). in cases where an informal agreement is reached, the affected parties are in general not bound by legal restrictions. if negotiation fails, the company can still try to seek protection from immediate creditor claims under formal, in-court restructuring (blazy et al., 2014; couwenberg & de jong, 2006; gilson, 1989). according to blazy et al. (2008), bankruptcy systems can be roughly categorized into two groups: (i) reorganization systems and (ii) liquidative systems. austria’s legal regime, which falls into the latter category, is further described as a “pro secured creditor model” that serves secured creditor claims first but lets the debtor remain in possession of the firm`s administration (blazy et al., 2008). it can be stated, however, that although the possibili87 s. mayr, & d. lixl journal of small business strategy / vol. 29, no. 1 (2019) / 85-98 ty of retaining the administration of the firm is granted to austria’s debtors in court-supervised reorganizations (as illustrated in figure 1), it is linked to extensive requirements in terms of higher recovery rates, detailed liquidity plans and increased formal documentation compared to the process in which management is replaced. the bankruptcy regime intends to efficiently separate financially distressed but economically viable firms from those that are not viable (franks & torous, 1992). while the former undergo legally defined restructuring processes (formal bankruptcy) to overcome financial distress, the assets of the latter are liquidated and reallocated in the interest of the stakeholders. however, companies also have the option to bilaterally or collectively renegotiate their outstanding debts with their claimants out-of-court and restructure their business (informal restructuring). the success of informal restructurings is defined in accordance with the literature (see, e. g., blazy et al., 2014; gilson, 1990; jacobs et al., 2012) as formal ratification of the restructuring agreement by the affected stakeholders. this is referred to as short-term success of out-of-court restructurings. given the conflicting interests of the affected stakeholders in reorganization processes, there are different perceptions of how wealth and burden should be distributed among shareholders, creditors and managers. the majority of affected stakeholders, for example employees, banks, and suppliers, benefits from successful out-of-court restructuring compared to liquidation in a bankruptcy scenario (cook, pandit, & milman, 2012). theoretical framework – resource-based view in the field of smes and entrepreneurship, a sound resource-base is considered to be an important driver of survival, performance and strategy (terziovski, 2010). according to the resource-based view (barney, 1991), firms generally strive for sustainable competitive advantages through the establishment and preservation of specific resources and competencies. unlike the market-oriented-view, which strongly emphasizes external opportunities and threats (see e. g. porter, 2008), the resource-based view analyzes a company from its inside and aims to harness hidden resources and potentials (barney, 1991). development, use of these resources, and competencies are based on learning processes (zollo & winter, 2002) and represent a core element of corporate management’s ability to establish competitive advantages (barney, 1991). the resource-based view, as a theory of strategic management, is not bound to a specific firm type or size. in terms of size, however, there are substantial differences and particularities to consider. smes seem to have a more flexible and entrepreneurial shape than large corporations. this is conditioned by their less-formalized organizational structures and the direct operational influence of entrepreneurs in adapting to a changfigure 1. financial crisis resolution process in austria (according to jacobs et al., 2012) 88 s. mayr, & d. lixl journal of small business strategy / vol. 29, no. 1 (2019) / 85-98 ing environment (burns, 2010). this increased flexibility is also necessary because smaller and younger companies fail more frequently than larger and older firms (aldrich & auster, 1986; carter & van auken, 2006; dannreuther & kessler, 2008; reynolds, 1987; shane, 1996). headd (2003) found that a firm’s resources are substantial determinants of its success or failure and lussier and corman (1996) found that various resources like entrepreneurial, social or financial resources help to predict a firm’s success or failure. research on firm-specific resources corroborates this and reveals that a firm’s access to capital, as well as its quality of accounting, finance, planning and marketing and use of professional advisors, are critical factors in small-firm bankruptcies (see, e. g. carter & van auken, 2006; laitinen, 2013; lussier & halabi, 2010; lussier & pfeifer, 2001; mayr, mitter, & aichmayr, 2017; perry, 2001; van gelder, de vries, frese, & goutbeek, 2007). the process of reorganization is closely related to the recovery and extension of financial and non-financial resources and capabilities (thornhill & amit, 2003). the reactions to the crisis range from retirement (liquidation), to retrenchment, replication, and renewal of resources (helfat & peteraf, 2003). as part of this renewal, new resources and skills must be developed which meet current as well as future customer needs, thereby generating income and positive cash flows. regarding financial resources, managers can, for instance, take out new loans (renewal), reduce costs, sell unneeded assets (retrenchment) or renegotiate payment terms with suppliers (renewal). the key drivers behind the reorganization strategies are decisions that require a highly entrepreneurial orientation and mindset (mayr & mitter, 2014). method collecting comprehensive information in the context of out-of-court settlements is problematic, especially for smes, where the reliability of data is often impaired. in this paper, we conduct a cross-sectional multiple case study as proposed by yin (2014). using a case study design gives us the opportunity to address the complexity of sme restructuring and to give structure to the causes of crises, restructuring actions and organizational behavior (gummesson, 2006). to increase the validity and objectivity of the derived findings, data source and analyst triangulation were employed (gummesson, 2006; patton, 2002). detailed interviews, as well as analysis of annual reports and restructuring plans for each case, were carried out. interviews are commonly used in case study research (yin, 2014). the interviews were semi-structured to obtain the most relevant results and avoid an interviewer bias. each interview lasted between 45 minutes and one hour. information from annual reports was predominantly used to verify findings derived from the interviews. in addition, annual report information contributed to a better understanding of contextual factors and measures taken during the crises. if applicable also the restructuring plans were included in the analysis. a restructuring plan is defined as a formal plan consisting of a bundle of harmonized and complementary restructuring strategies and measures (gilson, 1990). it functions as a communication device and reduces information asymmetries between stakeholders (d’aveni & macmillan, 1990). smes often serve local and regional niches and maintain intense contact with key stakeholders such as loyal business partners. the chosen setting is supported by yin (2014), stating that a case study is useful and adequate if the study objects are complex and difficult to isolate from contextual factors. though design of the case study and interviews were semi-structured, we use an adapted classification proposed by collet et al. (2014) to give the cases a frame. the 13 causes of crises identified were divided into (i) more controllable internal causes (poor management, poor financial management, poor marketing management, poor human resource management, high gearing, high short-term indebtedness, significant bad debt, large project failure and problems with a major contract); (ii) less controllable external causes (decline in demand, increased competition and adverse macroeconomic conditions); and (iii) sheer bad luck without a definite main cause (internal or external), (collet el al., 2014). after a pretest of two cases, we added another cause of crisis: problems in the personal sphere of the entrepreneur. furthermore, collet et al. (2014) present 10 recovery actions, which we adapted slightly for smes. we divided recovery measures into (i) financial measures (contribution from the entrepreneur, debt waiver, new debt lines, contributions from non-bank stakeholders, conversion of debt, entrance of new investors and asset sale) and (ii) operational measures (retrenchment, strategy reformulation, increased marketing efforts, introduction of a management information system, change of organizational structures and management change). for a more holistic and precise understanding, contextual factors (couwenberg & de jong, 2006) such as industry conditions, family influence, innovative power, membership in a network and location of the business were added. 89 s. mayr, & d. lixl journal of small business strategy / vol. 29, no. 1 (2019) / 85-98 data the sample firms met the following criteria: the company employs fewer than 250 persons, does not exceed a turnover, or total assets of 50 million eur, or 43 million eur, respectively, and is neither jointly nor solely linked (upstream relationship) by capital or voting rights to another enterprise by more than 25% (european commission, 2003). altogether, fifteen successful and failed informal restructuring attempts, handled by two turn-around professionals, have been reviewed. we choose to consult the restructuring experts instead of the managers/entrepreneurs for two reasons: (i) we expect more reliable and objective information from a neutral informant (european commission, 2007) and (ii) the measures taken during the crises are strongly founded on the advice of the professionals. beside the criteria to suit the aforementioned sme-definition the interviewed experts were asked to provide cases that are unique enough to be worth analyzing but still comparable to similar restructuring attempts in the same industry and economic environment. the industry of the selected cases is dominated by construction and building, which show the highest number of bankruptcies in austria. additionally, troubled firms in these industries tend to have complex structures and apply processes where reorganization attempts can be analyzed in depth. the interviews followed a semi-structed form and covered three major areas: (i) causes of decline, (ii) restructuring measures and (iii) demography of the company and information about the economic surrounding. the former two are based on the meta-study of collet et al. (2014) which analyzed 10 papers and condensed them to 13 cause of decline and 10 recovery actions. the later refers to the exposedness to market forces, industry margin, legal form, rural or urban location, networking activities etc. data collection took place from october to december 2015. for analysis and abstraction of the interviews, the software maxqda is used. table 1 summarizes and describes selected information on the sample firms. with regard to the industry, a high concentration in the construction sector can be observed. the year of each company’s founding ranges between 1859 (c1) and 2008 (c5). concerning the number of employees, a maximum of 146 (c10), a minimum of 0 (c11) and an average of 39 were observed. annual sales of the firms varied from 105.000 eur (c11) to 39.9 million € (c3) with an average of 6.5 million eur. a total of 8 out table 1 summary and selected description of the cases case industry foundation employees sales (k eur) successful/ failed family firm* legal form** c1 building 1859 39 5.391 s y ltd. c2 building 1963 11 926 f y sp c3 building 1991 122 39.954 s y ltd. c4 building 2005 62 12.630 s n ltd. c5 building 2008 12 1.563 s n ltd. c6 catering 2006 10 4.448 s n ltd. c7 commerce 1960 11 853 f y ltd. ps c8 commerce 1967 18 1.531 s n ltd. ps c9 commerce 1991 2 342 s y sp c10 construction 1950 146 16.601 f y ltd. c11 construction 1990 0 105 s n sp c12 construction 1995 117 7.871 f y ltd. c13 engineering 2006 25 2.040 s y ltd. ps c14 transport/logistic 1984 8 3.313 s n ltd. c15 waste 2005 3 447 f n ltd. * y = yes; n = no ** ltd. = limited company; ltd. ps = limited partnership; sp = sole proprietorship 90 s. mayr, & d. lixl journal of small business strategy / vol. 29, no. 1 (2019) / 85-98 of the 15 companies are considered family firms, and 7 are non-family firms. limited liability companies (9) represent the preferred legal form, followed by limited liability partnerships (3) and sole proprietorships (3). results causes of the crisis a distinctive characteristic of company crises is the fact that a clear cause, location or beginning of the crisis is often difficult to identify (slatter, 1984). this is referred to as multi-causality, multi-stage and multi-location. case 6 exemplifies this multi-causality and multi-location character: “causes of the crisis were errors in distribution and sales as well as mismanagement. because of a disease of an entrepreneur, the company [catering ltd.] also had to deal with an unplanned one-time event. price declines and increasing competition in the market, and the fact that the company was no longer the sole supplier on the market, led to earnings problems, and finally bankruptcy threatened” (c6/s) s = successful restructuring; f = failed restructuring. various issues enable us to differentiate among causes of the crisis, symptoms caused by the crisis and actions that are necessary to overcome the aforementioned aspects of the crisis (kraus et al., 2013). for the purpose of this study, we delineate the causes and symptoms of the crisis based on ex ante defined criteria, as well as the detailed explanations and experiences of the turnaround experts. a predominant internal cause of crisis in this case study is mismanagement at the top level, which can be found in two-thirds of the cases. this case study shows that entrepreneurs excessively focused on operational activities and devoted less time on strategic decisions. “starting points for the crisis situation of construction ltd. were errors in strategic management and planning, since operations were focused on less profitable business areas and too-fast growth was promoted.” (c10/f) “commerce sp’s adverse economic development was driven by the opening of a second location, which could not be managed profitably. the opening of a shopping center in close proximity to the location was anticipated, but the project was ultimately not realized.” (c9/s) in this respect, one of the consulted turnaround professionals argues that there seems to be a general issue regarding the understanding of business strategy, especially when working with smes. the problem becomes even worse when there is limited business knowledge and insufficient previous experience at the top-management level. ‘problems in the personal sphere of the entrepreneur’ were frequent triggers of crisis situations in our sample. problems in the personal sphere include e. g. disputes with or among family members with a negative impact on business, illnesses and disease of top-level executives and inflate withdrawals to serve private needs. “one of the two entrepreneurs at the company [building ltd.] fell short for a longer period due to a disease. this circumstance can clearly be identified as cause of the crisis. in this phase, the entrepreneur also had relatively high liabilities to the company, which are attributable to sustainably high private withdrawals. the consequence of this procedure was a liquidity gap.” (c5/s) “conditioned by an inappropriate communication policy of an entrepreneur in dealing with a bank adviser, a due loan was not prolonged by the main bank.” (c12/f) family dynamics and financing requirements in the private sphere seem to play an underestimated role in causing life-threatening crises for smes. some crises, however, seem to be the result of unintended actions that took place years before the first symptoms were perceived. based on previous experience, one of the interviewed turnaround professionals stated that many company crises in the small (family) business sector are homemade, especially in the context of company handovers. poor strategic management and problems in the personal sphere of the entrepreneur were discovered to be two substantial internal causes of corporate decline. moving to (less controllable) external causes of corporate crises, reduced demand and increasing competition were identified as two of the main reasons for corporate decline. “the imminent downturn in demand was alleged to be compensated by an aggressive pricing policy.” (c12/f) “price declines and increasing competition in the market, as well as the fact that this company was no longer the sole supplier on the market, led to profit problems.” (c4/s) our cases further show that, compared to firms that undergo successful out-of-court restructurings, unsuccessfully restructured firms are operating in more challenging industries in terms of competition intensity, profitability and market growth. restructuring strategies and measures the aim of this section is to present the strategies and measures taken by firms to restructure the business and avert bankruptcy. we divided the restructuring measures into two subcategories: 91 s. mayr, & d. lixl journal of small business strategy / vol. 29, no. 1 (2019) / 85-98 (i) financial strategies and measures and (ii) business strategy and operational measures (couwenberg & de jong, 2006). we describe the former as efforts to gain, regain or maintain a sound capital and liquidity foundation, which enables the entity to fulfill its financial obligations and provide financial resources for its restart. the latter refer to efforts to gain, regain or maintain organizational structures and processes able to serve the claims of stakeholders in a balanced, efficient and effective way and ensure future profits. financial strategies and measures. financial restructuring strategies are primarily employed to put the company in a situation where bankruptcy can be avoided and where financing stakeholders can be held accountable for contributing to a positive restructuring outcome. they provide the base for sustainable organizational and strategic changes. the most frequent and dominant financial measure was identified as the financial contributions of entrepreneurs. this includes collateral pledged to new or existing debt lines, “fresh money” (equity), (accettella, 2016), and reduction or suspension of entrepreneurs’ salaries. this measure was applied in eleven cases, however, no substantial difference between successful and failed firms was observed. ”[…] the entrepreneur remaining in the company has made a capital contribution for short-term liquidity stabilization.” (c6/s) “[…] both a managing director and one of the main banks [against the granting of collateral] declared themselves willing to provide the company with additional financial resources.” (c7/f) whether the entrepreneur contributes to the restructuring depends on two conditions which need to be fulfilled cumulatively. first, the capability to contribute financial resources (from inor outside the business) is required and second, a declaration of intent to use these resources for the purpose of the restructuring is necessary. an important financial measure applied in debt restructurings represents the debt waiver of banks. at first glance, and contrary to expectations (gilson, 1991), the forgiveness of claims turned out to be only of subordinate relevance and was applied in four of fifteen cases. thus, what attracted our attention was that in none of the unsuccessful cases, but in four of the successful restructurings, a debt waiver was exercised. consequently, there seems to be at least weak evidence that successful debt waivers have a positive influence on informal restructurings. “in the course of the elaboration of the restructuring measures, a debt waiver of the main bank was achieved and both partners provided additional funding to the company.” (c13/s) “[…] a consolidation loan with a specialized institution succeeded in addition to a new loan from the remaining main bank. an interest reduction of the existing loan was also achieved.” (c9/s). this statement is a prime example of how the resource-based view, as a framework, contributes to a better understanding of small firm restructuring. not only do tangible assets, such as technical equipment or machines, determine success or failure in informal restructuring procedures, the prolonged and sustainable support of stakeholders can also be considered as an extremely valuable resource. if the support of the main stakeholders is rejected or not given at all, the company is confronted with a resource deficit, which is difficult to resolve with “traditional” restructuring measures. a proactive and transparent communication policy with stakeholders (especially banks) is clearly preferable to a concealed one, even if the content of the information endangers the companies going concern. it can be observed that the willingness of banks to support troubled firms is not only determined by their evaluation of the firms’ capability to meet future market requirements but even more by the willingness of the entrepreneur to personally contribute to the restructuring. in most of the cases (9 out of 11) where banks financially supported the struggling firms, their engagement also depended on the entrepreneurs’ effort to overcome financial obstacles. in the event of a disturbed trust relationship or a negative assessment of viability by the bank, a conversion of the bank debt must be achieved. this implies a replacement of the former bank with a new creditor that is convinced that a rehabilitation of the business is possible and probable. the conversion of debt from one bank to another is often accompanied by a debt waiver. “the main bank actually agreed to a standstill agreement, since the loans were not set due and a period for restructuring measures was granted. however, the disturbed relationship between the entrepreneur and the main bank leads to a change of banks, in which some parts of the claims against the company were waived.” (c1/s) our analysis shows that other financial measures, such as the entry of new investors or a large-scale sale of company assets are rarely applied in the out-of-court restructuring of smes, neither for successful nor for failed firms. sme normally do not have substantial assets that can be sold and are not required for production. business strategy and operational measures. while financial restructuring strategies aim to reestablish the com92 s. mayr, & d. lixl journal of small business strategy / vol. 29, no. 1 (2019) / 85-98 pany’s ability to meet its financial obligations, business strategy and operational restructuring measures ensure that potentials and resources within the firm are reconsidered and reassembled to provide future profits. retrenchment activities, such as the reduction of personnel, reduction of assets and the closing of business sites, are typical operational measures in the restructuring process (sudarsanam & lai, 2001; couwenberg & de jong, 2006). “in the course of the restructuring agreement the closure of the second site was decided and the main site was reorganized. the entrepreneur reengaged in operative tasks, which reduced expenses for personnel.” (c9/s) “[…] loss-making and risky business areas were successively reduced and efforts in the more profitable business areas intensified. at the same time, the introduction of an accompanying construction site cost-control-system was implemented.” (c7/f) though necessary, stand-alone retrenchment measures are normally insufficient to stabilize a struggling firm. according to our case study, there was no case (failed or successful) in which retrenchment was the only operational restructuring measure and no further supporting actions took place. strategic retrenchment is often applied in combination with adaptation in the company structure and processes (5 out of 7 cases). “[…] a restructuring agreement could be reached, which included the reduction of personnel expenses and the hiring of a new cto.” (c2/f) “[…] a reporting system was introduced and departments were combined. by introducing an electronic payroll, 15% of the [personnel] expenses could have been saved.” (c8/s) a remarkable difference between successful and failed restructuring is that half of the successfully restructured firms altered their company structures to use resources more efficiently. in failed restructurings, only in one of five cases (c10) a serious change in the organizational structure took place. our analysis of the causes of crises identified strategic management failure as the dominant internal cause of financial crisis. however, only in a third of the cases there were visible changes in terms of strategy formulation; in successful cases more frequent than in failed ones. a commonly applied operational measure in large corporations is management change. due to the often-present concentration of management and ownership in smes, management change as a restructuring action is rarely feasible or desired. management changes in the presented sample are mainly attributable to illness and personal problems of the entrepreneur rather than to pressure by external stakeholders. contextual factors. in addition to analyzing both the causes of crises and restructuring measures, we collected information about contextual factors that might have a relevant influence on the restructuring outcome. the majority of companies operate in industries where market growth is low to medium, but competition in these industries seems to be medium to high. however, a striking difference between successfully restructured and failed businesses could not be identified. family firms, on the other hand, tend to fail more frequently than companies without a family influence. crises in the present study are regularly caused by problems in the personal sphere of the entrepreneur, and these problems often relate to family matters. financial and operational restructuring measures are normally inadequate to overcome disharmonies in the family system. the study found evidence that the degree of professionalism of the management executives and their industry experience tend to facilitate a positive restructuring outcome. in crisis situations, especially banks put trust in more experienced, reliable and predicable manager/entrepreneurs. further, the innovative capacity of the companies is analyzed. for this purpose, innovative capacity is defined as strong market appearance, clearly positioned products, products that serve special market needs, professional websites, etc. failed firms appear to be less innovative (one out of five) than restructured firms (six out of ten). innovative power, regardless of whether it was present before or established during the crisis, can therefore be considered an important moderator in differentiating successful from failed restructurings. company size, as measured by turnover and employees, as well as age of the firms, is only marginally different between failed and successful cases. regarding membership in a network, no substantial difference in the restructuring outcome could have been identified, a finding that contradicted our expectations. whether the company is located in an urban or rural area seems to be of negligible importance during the restructuring process. the observed firms, on average, maintain contact with two banks (up to a maximum of five), and one of them normally can be regarded as the main bank. due to the rather concentrated banking relations of smes, the number of banks involved in the restructuring process does not appear to be a major driver of success or failure. according to public awareness of informal restructuring, no qualified statement regarding the determinants of success and failure is possible, as only two restructuring cases (one successful, one failed) were known to the public. what can be stated, however, is the fact that 93 s. mayr, & d. lixl journal of small business strategy / vol. 29, no. 1 (2019) / 85-98 smes chiefly exclude the public when renegotiating their outstanding claims (thirteen out of fifteen). table 2 illustrates which cases are assigned to the most relevant causes of crises, applied restructuring measures and crucial contextual factors. internal causes, mismanagement in connection with personal problems seem to most relevant ones. regarding the restructuring measures the contribution from the entrepreneur is of outstanding importance. innovatable 2 case assignment to causes of crises, restructuring measures and contextual information causes of the crisis internal causes strategic mismanagement problems in the personal sphere c2/f; c3/s; c6/s; c7/f; c8/s; c9/s; c10/f; c12/f; c13/s c1/s; c3/s; c5/s; c6/s; c12/f; c13/s external causes increased competition reduced demand c11/s; c12/f; c14/s c1/s; c3/s; c4/s; c9/s; c14/s restructuring measures financial strategies and measures contribution from entrepreneur debt waiver from bank c1/s; c2/f; c3/s; c4/s; c5/s; c6/s; c7/f; c8/s; c10/f; c12/f; c14/s c4/s; c8/s; c9/s; c11/s business strategies and operational measures retrenchment activities changing corporate structure c3/s; c4/s; c5/s; c7/f; c9/s; c14/s c3/s; c4/s; c8/s; c10/f; c11/s; c14/s contextual factors innovation capacity network membership public awareness c1/s; c3/s; c4/s c5/s; c7/f; c8/s c13/s c5/s; c6/s; c7/f c14/s; c15/f c1/s; c10/f tion capacity and network memberships support successful reorganizations. discussion academic research in the field of small, unlisted firms restructuring is limited (franks & sussman, 2005). because the resources of small firms are scarce and corporate crises represent an incessant threat (mayr et al., 2017), the aim of this study was to identify the influencing factors and resource requirements that enable smes to restructure their business out of court. crises in this case study were caused by four major elements, two of which were internal and two of which were external. the most severe and intensive impacts resulted from (i) mistakes in strategic management and (ii) problems in the personal sphere of the entrepreneur. less frequent but still threatening were (iii) reduced demand and (iv) increased competition, both of which function as external causes. with reference to the internal causes of crises, mayr and mitter (2014) emphasized the role of a dynamic and strategically thinking entrepreneur. if entrepreneurs focus too strongly on operative tasks and are not willing to delegate some authority to their senior managers, insufficient resources in terms of time and attention are devoted to strategic management. in line with previous studies (see, e.g., lussier & halabi, 2010; perry, 2001), we conclude that industry knowledge and previous managerial experience are inversely related to corporate failure and that they facilitate turnaround. consistent with the limited literature available (carter & van auken, 2006; collet et al., 2014; slatter, 1984) that compares successful with failed turnarounds, poor and insufficient (strategic) management are negatively related to turnaround success. in contrast to previous studies (pandit, 2000; slatter, 1984), we found that firms facing primarily external causes of decline are not less likely to restructure their business. however, in none of our unsuccessful sample firms were 94 s. mayr, & d. lixl journal of small business strategy / vol. 29, no. 1 (2019) / 85-98 external motives the undisputed dominant cause of decline and ultimate failure. this is particularly interesting because external causes, which normally lie outside the operational control of entrepreneurs, are hardly repairable. smes seem especially vulnerable to these external factors because they have to adapt to market changes and to structural factors they cannot influence (madrid-guijarro, garcia-perez-de-lema, & van auken, 2011; storey & sykes, 1996). doubtlessly, banks play a key role in the restructuring of small businesses. this seems to be common pattern in austria and europe in general, where the house bank relationship is very close. this argument is in line with the results of blazy et al. (2014). settling on an agreement is highly dependent on the whim of the affected creditors, especially the financing banks. in this respect, the resource-based view seems to be useful and adequate to explain the success or failure of an agreement. restructuring is only possible if a healthy resource core is available and used as a basis for renewal (mayr & mitter, 2014). the decision of banks regarding whether to support or reject a reorganization plan is based on their assessment of the sustainable viability of the firm’s resource core. banks contribute to restructurings in different ways: (i) offering of new debt, (ii) debt waiver, and (iii) postponement of claims. the order of the aforementioned elements is determined by the intensity of the bank’s support. new debt lines represent an additional resource in-flow, debt waives the elimination of resource burden and postponement of claims as the weakest form of positive bank contribution represents a delay of resource burden. a well-argued restructuring plan helps to communicate the turnaround strategy to the banks and facilitates they support. however, in the studied sample it seems to be the case that banks are rather interested in figures than in vision and mission statements. they focus heavily on the financial side, placing only minor emphasis on operational restructuring and strategy redesign. this is remarkable because errors in strategic management were a primary cause of crisis in the case study. even if the firm’s viability is sufficiently justified for the bank, the engagement of the entrepreneur is necessary in the restructuring process. in a burden-sharing approach, both banks and entrepreneurs contribute to the restructuring (e. g., new capital, debt waiver, stand-still). other stakeholders, such as suppliers or states, seem to play only a subordinate role in restructuring, as only one of the case companies (c6/s) received direct and visible support from a non-bank stakeholder. regarding the financial part of the restructuring, banks intend to share the risk of restructuring failure with the entrepreneur by requiring a financial and/or personal commitment. this takes place in a two-step approach. first, the capability of the entrepreneur to contribute financially to the restructuring is analyzed. if the capability can be ensured by the entrepreneur, the willingness to engage financially in the restructuring process is also required. these findings are in line with couwenberg and de jong (2006), who state that successful firms contribute to the restructuring (in the form of additional collateral) significantly more frequently than failed firms. though the presented approach can be considered the normal case, banks occasionally support companies that are not able to provide financial contributions. financial restructuring actions represent the foundation for further operational measures. without the firm’s ability to meet due payment obligations, discussions about operationtable 3 results from perspective of the resource-based view resource based view causes of the crisis restructuring measures outcome internal external financial measures operational measures successful unsuccessful lack of resource separation (inside/ outside the business) resources bundling is not suitable to meet market requirements provision of new resources reassembling existing resources prolonged resource flow among company and stakeholders essential resources cannot be retained in the company reassessment of existing resources acquisition of new resources lack of resource allocation (operational/ strategic) resources not sufficiently unique to gain competitive advantages elimination or delay of resource burden 95 s. mayr, & d. lixl journal of small business strategy / vol. 29, no. 1 (2019) / 85-98 al restructuring measures are obsolete. to convince the financiers of the restructuring actions/plan, a sufficient and coordinated mix of financial and operational measures is necessary. the restructuring plan/mix of restructuring measures ultimately influences the outcome of the restructuring process. if renegotiation fails formal bankruptcy is evoked. table 3 aims to illustrate to what extent the resource-based view can be used to explain the study’s results from a more general perspective. with regards to the causes of the crisis we differentiate between internally and externally caused crises. internal crisis motives are often the result of a lack of resource separation and resource allocation. a lack of resource separation is referred to as insufficient or absent demarcation of what resources are needed inside the business and what resources can be withdrawn and used for non-business purposes. problems in the personal sphere of the entrepreneur represent a prime cause of crises attributed to insufficient resource separation. troubles in the family system and absence of the entrepreneur due to sickness can withdraw available (personnel) resources from the company leading to less residual capacity for strategy development and operational management. consequently, the probability of mismanagement rises. while resource separation determines the portion of financial and managerial resources available inside the company, resource allocation is referred to as the balancing of resources among operational and strategic agendas. therefore, a lack of resource allocation is considered as an imbalance of operational and strategic management at expense of the latter. although the focus in restructurings is first on financial measures, second on operational activities and finally on revitalizing strategy, in the ordinary course of business the order is inverse. a holistic and revolving strategy development process should be able to detect changes and breaks endangering the applied business model. external causes are less controllable by the management. in our sample this is the case when market expectations and competition are so high that the company is not able to maintain a competitive advantage. restructuring measures, especially financial measures, serve the maintenance of solvency and are the foundation for further operational measures. financial measures can either be used to deliver new resources to the company (e.g., capital contribution), reassess existing resources through new ones (e.g., debt restructuring), or to eliminate or postpone resources that are a burden for the firms (e.g., debt waiver or extension of payment). operational restructuring measures include the reassembling of existing resources and structures to meet the expectations of stakeholders, but also the acquisition of new resources (e. g., new management, new process-knowledge). the outcome of the restructuring (measured by whether an agreement could be ratified or not) is therefore highly dependent of the nature of the resource flow between the company and its environment, regarding funding, knowledge, reputation and sales. if this resource flow is sustainable and prolonged on a basis that sufficiently satisfies stakeholders, the restructuring is successful. in case the company, however, is unable to retain essential (financial) resources the restructuring will fail. conclusion crises in the present study are primarily caused by internal factors, and the findings highlight the role of the entrepreneur in restructuring (ayotte, 2006). insufficiencies in strategy formulation and problems in the personal sphere of the entrepreneur turn out to be the dominant reasons for corporate crises. replacement of top management is a proven measure for large enterprises (gilson, 1990; collett et al., 2014) and seems to be a plausible way to overcome the aforementioned issues. however, “a small business isn’t a little big business” (welsh & white, 1981, p. 18), as ownership and management in smes, and especially in family firms, are heavily intertwined. the family firms in this study face additional challenges due to complex family dynamics and the resulting adverse side effects on business. the resolution of personal and managerial problems and the concentration of interests among stakeholders (internal and external) can be considered crucial elements of successful out-of-court restructuring attempts in smes. important restructuring measures include financial contributions from the owner/entrepreneur, debt restructuring, new credit lines and debt waiver. entrepreneurs are further required to show personal and financial commitment to the restructuring project to obtain prolonged support from their financiers. at an operational level, retrenchment, strategy reformulation and adaptations in the company structure are frequently applied measures. consequently, a balanced and harmonized mix of financial and operational measures is required to establish a resource base that enables a restructuring agreement with the affected stakeholder; in smes, this is especially true with regard to the main banks (sudarsanam & lai, 2001; couwenberg & de jong, 2006). innovative power tends to facilitate restructuring agreements, while strong family influence impedes informal restructurings. innovative power can be regarded as an intangible resource that allows smes to serve future market needs in an efficient way (ahluwalia, mahto, & walsh, 96 s. mayr, & d. lixl journal of small business strategy / vol. 29, no. 1 (2019) / 85-98 2017). family matters instead demand time, attention and often capital and therefore drain resources from the company. blazy et al. (2014) state that, although informal arrangements hide the potential for cost savings, they are not always possible due to common pool problems, the nature of banking relationships, the design of debt contracts and country-specific bankruptcy configurations (wessels & madaus, 2018). our findings provide evidence that the number of actions taken does not generally ensure a positive outcome of restructuring. thus, a more holistic view is imperative to balance and coordinate “more of the right” measures (couwenberg & de jong, 2006); this view is conditioned by a precise and clear understanding of the causes of the crises. practical implications our findings have multiple important implications for business owners and consultants. the main one is to react in a timely manner to the crisis, and keep key-stakeholders not only informed, but encourage a proactive and transparent communication policy. a break in the trust relation with key-stakeholders during the restructuring makes an out-ofcourt settlement almost impossible. business owners need to be aware of the fact, that family dynamics and problems in the personal sphere can lead to financial crises and endanger the continued existence of the business. therefore, consultants of smes have to focus on awareness raising and risk management. the findings of the paper are specifically relevant for banks, which can be considered as key enabler and supporter of sme restructurings. although, banks primarily focus on the financial aspect of restructurings, a bundle of operational measures, (e.g. a sound redesign of the business model, management change, cost cutting) is necessary to retain the support. it is often the groundbreaking decisions based on strategic considerations that allow a company to succeed in the long term and to create the framework for innovative products and services. in a scientific context the analysis of the interaction process between entrepreneur and bank holds the potential for substantial findings and represent an avenue for further research. therefore, we recommend a longitudinal study design, which can also document the impact of the restructuring measures and their impact on the long-term success of the restructuring. moreover, the views of banks and the entrepreneur, in addition to the expertise of professionals, potentially disclose different perceptions that can help to establish a broader understanding of how to overcome financial crisis. limitations due to the case study design, it is not possible to generalize the derived findings. the findings, however, do offer an in-depth perspective on which factors drive small business crises and what is necessary to overcome such crises and restructure the business. furthermore, we only covered cases supported by turnaround professionals, and we strongly rely on their judgment and experience. in cases where the support of experts is not provided, the results are potentially different. despite the defined selection-criteria a selection bias of the turnaround professionals cannot be excluded. moreover, we evaluated only the short-term success of out-of-court settlements, with an analysis of what is necessary to ratify an agreement. the long-term success of the restructuring process has to be evaluated with the help of additional longitudinal studies. ultimately, due to the case study design and sample, we cannot claim that the results are representative for the entire austrian sme population. references accettella, f. 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(2002). deliberate learning and the evolution of dynamic capabilities. organization science, 13(3), 339-351. http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2021, vol. 31, no. 01, 89-104 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2021 small business institute® w w w. j s b s . o rg introduction esic business & marketing school, avenida valdenigrales, s/n, 28223 pozuelo de alarcón | madrid, spain, tanguy.jacopin@esic.edu understanding the failure of the replication of the chinese economic reforms in india through the study of gujarat ris and karnataka ree regional innovation systems (ris), regional entrepreneurial ecosystems (ree), india, china, special economic zones (sezs), foreign direct investment (fdi), knowledge spillover, technology transfer apa citation information: jacopin, t.. (2021). understanding the failure of the replication of the chinese economic reforms in india through the study of gujarat ris and karnataka ree. journal of small business strategy, 31(1), 89-104. whereas china and india had similar gdp per capita in 1973, chinese gdp per capita is currently more than four times higher than india’s (8,500 usd vs. 2,000 usd on average). despite having one of the highest gdp growths in the world, india struggles to develop its industry. indeed, its merchandise exports represent less than 10% of that of china with a productive specialization more focused on services than on industry. the indian government is aware of this challenge and, hence has created a specific plan for industry called plan 2025, designed to boost the merchandise exports from india scheme (meis) and special economic zones (sez) (press information bureau government of india, ministry of commerce and industry, 2018). however, plan 2025 fails to match chinese performance with regard to 1) attracting and generating innovation in india and 2) triggering local-scale knowledge spillover (aggarwal, 2011, 2012; ctier, 2018; sharma et al., 2012; tandri, 2012). one of the focal points of the deepening growth in india under pm modi’s second mandate is to strengthen the pace of innovation “by implementing effective technology transfer and strengthening the distributive power of the economic system as a whole” (fu, 2015, p. 2). another focal point is to achieve a duality in the indian economy where cutting-edge practices in it and services coincide with traditional and informal indian grassroots innovation systems and jugaad innovation; jugaad being a hindi term referring to frugal innovation. (gupta, 1997; prahalad & mashelkar, 2010; radjou et al., 2011). to face this challenge as a federal country, india needs scholarly/academic work to be carried out at state level. nevertheless, most of the studies were undertaken at the national level until the 2010s. this paper is a contribution to fill the gap where more and more studies enter this category (alkon, 2018; jenkins et al., 2013; panagariya et al, 2014; panagariya & rao, 2015), regardless of the discipline. therefore, it is logical to have chosen a methodology, india has failed to develop merchandise exports as china has. the indian government is aware of this challenge and hence has created a specific plan for the industry called plan 2025 to benchmark chinese reforms. however, plan 2025 fails to enhance the industry at this stage. this paper examines how some successful economic reforms in china did not have the desired impact in india. this paper shows that some key success factors of the chinese experience have deliberately not been included in india ( absence of agglomeration effect with emerging neighbours, rent capture behaviour at a political level, same focus on it & service instead of manufacturing from the sezs, absence of upgrade to the current chinese reforms). still more significantly, there were policy mistakes. the indian willingness to focus on knowledge generation for the manufacturing sector (as it has always done for it & services) instead of on knowledge exploitation as china did, prevented india from using the backwardness advantage to obtain technology transfer and spillover to the rest of the economy. therefore, this paper makes some recommendations for indian policy-makers on how to improve the current flaws detected in the application of some chinese economic reforms. as there is a need for state level analysis, the methodology consisted in comparing the past economic history and trajectories of two indian states (gujarat & karnataka) with two chinese deltas (yangtze river and pearl river) using the approaches of the regional innovation systems (ris) and the regional entrepreneurial ecosystems (ree). tanguy jacopin http://www.smallbusinessinstitute.biz http://www.jsbs.org 90 t. jacopin journal of small business strategy / vol. 31, no. 1 (2021) / 89-104 which focused on indian states. more precisely, it consisted in comparing the past economic history and trajectories of two indian states (gujarat & karnataka) with two chinese deltas (yangtze river and pearl river) using the approaches of the regional innovation systems (ris) and the regional entrepreneurial ecosystems (ree). a regional innovation system approach (ris) as originally defined by cooke (2001), asheim and isaksen, (2002) has been chosen to illustrate situations where the “ris emphasize the role of the region as locus for interactive learning and knowledge exchange, stressing the importance of (geographical) proximity for innovation” (martin et al, 2017, p. 3). nevertheless, entrepreneurship is not considered like this within the ris approach unlike the recent evolution concerning the literature about the regional entrepreneurial ecosystem (hannah & eisenhardt, 2018; jacobides et al., 2018). as such, the methodology chosen in this article was to contrast ceteris paribus the past tracks of china and india, each through one ris and one ree. in order to provide some insights into the failed replications of chinese reforms in india, the comparison will be based on the chinese experience (here called the “chinese prism”). we will first examine the development of the pearl river delta (prd) with a strong focus on electronics and entrepreneurship (and considered therefore as a ree) and then on the yangtze river delta (yrd), known for its manufacturing exports as the backyard of shanghai (and considered therefore as a ris). next we will examine, two of the best performing indian states, more specifically karnataka, host of the indian silicon valley based in bangalore, and gujarat, former state where modi used to be the chief minister and famous for its friendly policy of welcoming foreign direct investments (fdis). we will check the impact of the chinese prsim, which have been scrutinized in sectors such as automotive, infrastructure and chemicals. specific attention has been paid to the dynamic ability of institutions to overcome dilemmas (heidenrich, 2004) and investigate institutional bottlenecks, whether due to a lack of performance, alignment, quality or scarcity (adner, 2012; baldwin, 2015; zukauskaite, 2018). the results of this paper shows that some key success factors of the chinese experience have deliberately been excluded in india. it is impossible to obtain support from the higher economic culture of emerging neighbors and rent capture behavior at a political level. state owned development corporations prevent a change of focus of the sezs from it & service to manufacturing and there is a lack of upgrade to the current economic landscape to avoid bottlenecks in the ris and ree. even more importantly, there were policy mistakes as well. the indian willingness to focus on knowledge generation for the manufacturing sector (as it has always done for it & services) instead of the knowledge exploitation in the chinese approach, prevents the south asian giant from using the backwardness advantage to obtain technology transfer and spillover to the rest of the economy based on the agglomeration effects linked with spatial distribution. therefore, this paper makes some recommendations for indian policy-makers on how to improve the current flaws detected in the application of some economic reforms stemming from china as an alternative to reforms put in place in silicon valley. indeed, within an innovation based economy, it provides a complementary focus to the one focusing on silicon valley (ciesinski, 2016; gauthier, 2018, 2019; o´mara, 2019), as well as studies focusing on emerging markets going to the silicon valley to launch successful ecosystems with incubators and accelerators using silicon valley (bartlett & mrockowski, 2019). finally, this paper delivers insights concerning the set up of entrepreneurial ecosystems in emerging markets (lyortsuun, 2017; mrkajic, 2017; rogova, 2014; world economic forum, 2014). the paper is structured as follows: first, the literature review concerning the ris and the ree. second, the methodology concerning the theoretical framework is explained in detail, paving the way to the hypotheses. third, the results of the framework are explained and this leads to a discussion in a fourth section. some limitations concerning the paper are discussed in a fifth section before the conclusions of the paper are presented in the final section. literature review regional innovation system (ris) the first reference to the national innovation system (nis) was made by freeman (1987), lundvall (1988, 1992), nelson and rosenberg (1993), niosi (1993) and patell and pavitt, (1994). as lundvall (2009) defined it, it refers to “an evolving and complex system that encompasses relationships within and between organizations, institutions and socio-economic structures which determine the rate and direction of innovation and competence building emanating from the process of science based and experience learning” (p.6).this concept was used initially in the small scandinavian countries and japan. however, the ability to provide some satisfying results on a country-continent scale such as india was more complex as the science-technology-innovation system, defined according to the national innovation system (nis), varies too much within national geographic borders. therefore, there is a need to adopt a smaller geographic unit as a new point of reference. the “role of the 91 t. jacopin journal of small business strategy / vol. 31, no. 1 (2021) / 89-104 region as locus for interactive learning and knowledge exchange, stressing the importance of (geographical) proximity for innovation” (martin et al, 2017, p. 3) appears as the most appropriate as it was stressed initially by asheim & isaksen (2002), braczyk et al. (1998), cooke et al. (1997), and cooke (2001). three levels of analysis were considered: actors, networks and institutions. indeed, ris are of special interest as they “explain differences in sectoral patterns of innovation mainly in terms of ability to exploit technological trajectories, by technology transfer, intramural r&d, spillovers, networking, articulation of demand factors” (ranga, 2009, p. 11). it should be noted that despite the many studies concerning the ris, the adoption of empirical studies presented a set of advantages and drawbacks. the main advantage was linked to the adoption of the main variables of the local reality and the main drawback was a direct aftermath of its main advantage. as the level of definition concerning regions and innovation systems was extremely accurate, the validation of such a theory has encountered some difficulties to grasp the key success factors, as doloreux and parto, 2005 summarized. additionally, it may lead to incomplete representations of the field analyzed (bettis & prahalad, 1986) and cause confusion between the description of the field with the relevant prescription the field should obtain (casillas & acedo, 2007). lastly, krishna (2007) noted the lack of articulation and coordination 1) between the regional innovation systems (ris) among others and 2) between each of the ris with its national innovation system (nis), something which was a notable obstacle for policymakers in federal countries when articulating policies among different states, regions or provinces. despite the fact that these issues were not fully solved, it has to be noted that the concept has received new interest in recent years. indeed, ris are of special interest as they can “explain differences in sectoral patterns of innovation mainly in terms of ability to exploit technological trajectories, by technology transfer, intramural r&d, spillovers, networking, articulation of demand factors” (ranga, 2009, p. 11). moreover, the approach provided by zukauskaite (2018) concerning three types of institutional bottlenecks (absence or poorly developed, institutions, inappropriate institutions and poorly aligned institutions) can help to provide a better understanding of why successful reforms in china did not provide the expected impact in india. as the ris is a theory based on empirical studies (doloreux & porto gomez, 2017) and on the variety of contexts (cooke, 2001), comparing china and india is relevant with this tool. this issue offers even more current perspectives as there are always more contributions in this regard considering the global flow of knowledge (martin et al., 2017). more specifically, there is a willingness to generate a “new regional industrial path development” (isaksen, 2015, p. 585; isaksen & trippl, 2016, p. 66) in indian states based on the lessons obtained from the success of chinese economic reforms. regional entrepreneurial ecosystems (ree) turning our attention to ree, it is important to indicate that “the importance of actors such as entrepreneurs, in universities and firms, for innovation performance are much less considered” in ris as isaksen et al. (2018, p. 2) pointed out. thus, the notions of ris and ree are complementary for the purposes of this study. whereas initially the literature on entrepreneurship centered on individual behavior and on the firms themselves (shane, 2003; shane & venkataraman, 2000). the number of papers published around regional entrepreneurial performance has been growing constantly (acs et al, 2014; audresch & belitski, 2017). theoretical framework & method the focus of the paper is to understand that although some economic reforms were successful in china, their replication in india did not generate the same positive impact on its industry. the authors explain that some key success factors of the reforms in china were not implemented in india. in order to understand that these factors were not locally and properly adopted in india, the two main economic geographies in india were scrutinized without considering the capitals, that is to say: 1) karnataka or the indian silicon valley around bangalore and 2) gujarat or the indian state that decided to copy china in terms of attraction of foreign direct investment (fdi) the comparison took into consideration the specialization of the two indian states with two chinese deltas. the pearl river delta specializes in information and communication technology (ict) and entrepreneurship as did karnataka and the yangtze river delta initiated its economic take off thanks to manufacturing exports (even though its range of specialization is much higher now) as in gujarat to understand the failure of the reforms in india, the past economic history and the trajectories of the states and deltas are critical. in that sense, the choice of the regional innovation system (ris) theory is the best possible choice as it enables us to consider the different stakeholders over time as explained below. the comparison between gujarat 92 t. jacopin journal of small business strategy / vol. 31, no. 1 (2021) / 89-104 and the yangtze river delta entered this category. however, in karnataka and in the pearl river delta, the role of entrepreneurship is much bigger. therefore, it should be taken into consideration. as isaksen et al. (2018, p. 2) admits, the “importance of actors such as entrepreneurs (…) for innovation performance are much less considered” in the ris. the regional entrepreneurial ecosystems (ree) favors this approach. therefore, the comparison concerning karnataka and the pearl river delta was centered on the idea of ree. as such, table 1 summarizes the elements of comparison between the indian states that are scrutinized in relation with the chinese prism taking into consideration either a regional innovation system (ris) for the comparison between gujarat and the yangtze river delta or the regional entrepreneurial ecosystem (ree) for the comparison between karnataka and the pearl river delta. dian and chinese ris and ree and will be correlated to the hypotheses. table 2 sheds light on what will be considered as the critical factors and hypotheses to explain the failure of the replication of chinese reforms in india taking into consideration the regional differences in terms of innovation systems and entrepreneurial ecosystems. these elements indicate the advantage of taking into consideration different states as it shed light on different behaviors (the hypotheses) despite the appearance of some recurrent pattern. hypotheses before describing the extent of the reforms in india, we will explain in detail the economic reforms as they took place in china, more specifically in the pearl river delta and in the yangtze river delta. defining the “chinese prism” before differentiating between the yrd and the pearl river delta (prd), it seems relevant to provide some insights concerning the chinese economic model. indeed, xu (2011) referred to china as a “regional decentralized authoritarian” (p, 1078) system, which implies: 1) central government that controls personnel, land and wages on the one hand and 2) subnational governments incentivized economic reforms on the other hand. as such, some margins of manoeuver exist at state level for economic reforms as will be explained through the differences between the yangtze river delta (yrd) and prd. when deng launched the “four modernizations”, innovation was characterized locally by 1) scarcity of the resources for innovation, 2) weak regional innovation systems, 3) forced reliance on external sources for innovation, 4) unstable institutional system and 5) informality through guanxi networks (fu, 2015). a set of elements appears to be the same throughout chinese clusters. indeed, zeng (2012) insisted on the willingness to attract fdi to later develop a low cost manufacturing export-led growth regime that will progressively upgrade its technology. china was aware that the content of innovation had to be incremental rather than abrupt (fu, 2015) to fully use the advantage of the backwardness (nolan & lenski, 1985). indeed, for latecomers, knowledge exploitation is more important than knowledge generation when 1) technology transfer happens and 2) access to knowledge widens. the ability of china to upgrade its innovation framework was based on the exploitation by firms of both the external knowledge (via the foreign direct investment) and the local interdependency for enhancing the competitivetable 1 methodology: elements of comparison between india & china indian states scrutinized chinese prism comparison of ris gujarat yangtze river delta comparison of ree karnataka pearl river delta source: own elaboration before defining the “chinese prism”, the paper will insist on the failure of indian reforms to replicate chinese reforms due to 2 types of factor (f1 and f2): factor 1. some key chinese success factors were deliberately not implemented in india (lack of willingness to explore complex relationship conflicts with neighbors as china did, and no change of the political rents existing at the state level and no change in the special economic zone focus in favor of manufacturing). factor 2. india made some policy mistakes. india wanted to promote knowledge generation instead of knowledge exploitation, which happened in china. this prevented indian companies from using the backwardness advantage for technology transfer and spillover to the rest of the economy and prevented the indian economy from upgrading its ris and ree. both factors will appear in the comparison between in93 t. jacopin journal of small business strategy / vol. 31, no. 1 (2021) / 89-104 ness (asheim & isaksen, 2002). even more importantly, the dynamic ability of institutions to overcome dilemmas and meet the challenge of market change and organizational restructuring (heidenrich, 2004) has played a key role in obtaining technology transfer and local scale spillover of knowledge thanks to agglomeration effects (matthews, 2010). if both prd and yrd focused on knowledge exploitation, fdi and manufacturing to enable massive economic (manufacturing and exports) (liu & li, 2015). the approach in the prd initially prioritized special economic zones (sezs) to later embrace entrepreneurship using shenzhen as a driving force. the policy makers in the yrd decided to carry out different reforms where zhejiang province was characterized by the motto “one village producing one product, one town building one industry”. jiangsu was attracting fdi to “development zones” and “industrial districts” and shanghai was becoming the economic, financial and trade center of china (wei et al. 2015). moreover, at the national scale within china, the evolution of state owned enterprises (soes) has been similar in both deltas, which has been less favorable of private companies. the role of entrepreneurship has been more relevant within the prd than in the yrd to leverage entrepreneurships. the differentiation between the prd and yrd will be examined through a historical approach with secondary data, including the chinese statistical yearbooks and existing literature. in order to be able to later identify some major differences between the deltas and their indian counterparts and establish some hypotheses concerning the supposed lack of success of indian reforms inspired by the chinese prism. these hypotheses will be centered on historical choices made by each country, which are difficult to modify with success and constant upgrades of the chinese model, which always makes it more difficult to copy (and benchmarked properly). beijing and its silicon valley, zhongguancun, were not chosen for a comparison with delhi and ncr as both are country capitals, something that implies different dynamics that can hardly be replicated in other ecosystems within the same country. pearl river delta (prd) the pearl river delta refers to the guangdong, honkkong and macao greater bay area, with a population of 120 million people. the pearl delta river experienced a spectacular level of development in china following the creation of the special economic zones (sez), and more specifically shenzhen becoming home to the headquarters of tencent, huawei and build your dreams (byd). even more striking, 90% of global electronics firms are located in guangdong province, manufacturing 50% of the world´s desktop computers and 40% of personal computer (pc) components (guangdong provincial bureau of statistics, 2016). historically, the use of the coastal sezs has been paradigmatic of chinese strategy in that delta. even though special economic zones (sezs) were launched first in india in kandla gujarat) in 1965 and only 14 years later in china with deng in the prd, it has to be said that the chinese success has never been fully copied despite many attempts (aggarwal, 2011). table 2 critical factors and hypotheses to explain the failure of the replication of the chinese economic reforms in india comparison between ree in karnataka & pearl river delta comparison between ris in gujarat & yangtze river delta factor 1: choice not to replicate chinese policy hypothesis 2. lack of willingness to give up some political rents and an existing specialization in the ict sector despite insufficient results in manufacturing hypothesis 3. lack of willingness to obtain the the support of neighboring countries has limited the learning curve potential of the agglomeration effects. therefore, the model is necessarily bound to fdi. factor 2: policy mistake hypothesis 1. initial mistake to focus on knowledge generation in ict instead of knowledge exploitation as it prevented the use of backwardness advantage and spillover to the rest of the economy hypothesis 4. the lack of understanding that agglomeration effects are bound to spatial level is a policy mistake source: own formulation 94 t. jacopin journal of small business strategy / vol. 31, no. 1 (2021) / 89-104 by 1980, the first three sezs had been launched in shenzhen, zhuhai and shantou in guangdong. province, followed two months later by xiamen in fujian province, and later still by hainan sez (yeung et al., 2009). it has to be said that the sezs had a common background with strong ties with the rest of the world and connections with hong kong, macao and taiwan (zeng, 2012). in 1981, the sezs represented 60% of the fdi, principally located in shenzhen. in 1987, their share of fdi went down to 20% but it was still relevant (wong, 1987). as the importance of copying becomes less and less relevant as the economy reaches the technological frontier (acemoglu, 2006), the importance of an innovation-based strategy linked with entrepreneurs becomes more relevant. in that sense the silo specialization in ict explains the expansion of entrepreneurship around shenzhen. this led to the elaboration of an entrepreneurial ecosystem first in shenzhen and then in dongguan, albeit to a lesser degree (fu, 2015). globally, the prd was extremely successful as china constantly upgraded its sezs with the inclusion of hightech industrial development zones (hidzs), free trade zones (ftzs) and export processing zones (epzs) in different provinces and for different sectors. the process was not fully linear as many investments came from the real estate sector initially and there were some local issues with the land as well (aggarwal, 2011). nevertheless, the overall benefits of a policy based in sez linked with hong kong, macao and taiwan was the upgrading of the knowledge exploitation system. the knowledge links that were created locally paved the way to some knowledge generation processes and to the creation of an entrepreneurship ecosystem in the prd. yangtze river delta (yrd) the yrd represents shanghai, zhejiang and jiangsu provinces which is one percent of the total land area of china, 5.8% of its population and 20% of its gdp. as xie & du (2008) explained, the development of the yrd is designed to make shanghai the leading city in the fields of trade, business, finance & shipping, acting as a dual platform between the 15 major cities of these two provinces, including nanjing, suzhou, wuxi, hangzhou and ningbo and the rest of the world. the development of linkage effects and spillover was managed following the zhang & zhou (2004) model through five stages: 1) technology introduction, 2) technology learning, 3) technology integration, 4) independent innovation and 5) radical innovation. in this model, it is clear that the whole process depends on the ability to have access to knowledge exploitation and consequently, to insights from other countries. in this case, unlike the prd, where the focus was mainly on ict, specialization took place in various sectors such as it, chemical textile, automotive industry, machine, medicine and metallurgy. the prd managed to create some agglomeration effects and knowledge upgrade thanks to an increasingly effective spatial distribution with hong kong, macao and taiwan. the yrd created the same process internally, as wei et al (2015) demonstrated using global moran´s i index. indeed, this tool serves to measure the degree of concentration or dispersion of activity in a specific region first, and second, across neighboring regions. in that sense, the yrd region created a set of mechanisms where – beyond geographical borders of counties or cities or provinces – the clusters could expand successfully without geographical proximity. for instance, in the textile sector, there are positive spatial correlations between wuxi, suzhou, jiaxing, hangzhou and shaoxing. in that sense, it is clear that krugman (2000) was right when he referred to the fact that the initial growth in asia was linked to resource mobilization rather than efficiency. the lack of an increase in productivity and the amount of resources available in the yrd illustrate this trend. the concern in the last decade within the yangtze river delta has been to figure out a way of upgrading to become a global innovation center managing the “two firsts” based on a well-off society and economy modernization (china state council, 2010). the development of eastern china around shanghai has favored a newer specialization of these clusters in more valuable manufacturing sectors leaving to western china the specialization in low cost exports (liu & li, 2015). even though the process of moving towards becoming a global innovation center is not yet fully achieved and although some risks remain in terms of market fluctuations, low barriers to entry, “lemons problems” (where bad clusters can harm good ones), and low positions in the global value chain (wei et al., 2015). the homogenization of the spatial distribution within eastern china through an agglomeration effect ensures an extremely positive dynamic that should be benchmarked in many countries. in the case of the yrd, success came from the convergence of infrastructure around shanghai from jiangsu and zhejiang. similarly, as in the prd, the agglomeration effects around several clusters enabled massive manufacturing fdi to be set up in this delta, progressively extending the quality of all clusters and the subsequent strategic alliances among local companies. 95 t. jacopin journal of small business strategy / vol. 31, no. 1 (2021) / 89-104 the indian case from independence in 1947 until the 1991 bailout, india focused on protectionism as a major axis of its economic policy with the raj license system; this did not facilitate innovations. the issue, here, is not to discuss whether the cause of these failures could be attributed to inclusive policies and extractive economics (acemoglu & robinson, 2012), to high level of inequalities (sen, 2006) or to historic legacy (das, 2002; parthasarathi, 2011; roy, 2012). these facts are assumed. nevertheless, the magnitude of the past failures have prevented analysts from making a fair analysis of some policy reforms that were set up in india in recent decades and that started to generate some results in terms of innovations. in that sense, the development of the national innovation system in india presents some paradoxes. for instance, the study of the science-technology-innovation (sti) system offers a well-organized structure that paved the way to extremely valid and recognized institutions such as the indian institutes of technology (iits) and indian institute of management (iims). however, shan et al. (2018) and ctier (2018) have perceived some major flaws in terms of innovation within the sti system that were not corrected over time, such as decreasing r&d and the lack of commitment of indian companies and institutions in this field. at policy level, the lack of alignment between the central government and the states and union territories (jaffrelot, 2014; saint mézard, 2015) also generates an under-optimization of fdi throughout the country. however, despite recent reforms reflected in the world bank (2017) ease of doing business report, such as the goods & services tax (gst) at a fiscal level, have favored the increase of fdi in india. informality occurs through jugaad in india and guanxi in china. indeed, this hindi term refers to bottom up and frugal innovation informality, mainly for smes. a handful of smes may have managed to become successful through these types of innovation most of the time. successful indian companies such as tata, reliance or birla are family businesses with private shareholders, whereas china managed its growth from the 1980s thanks to soes. the focus on knowledge generation in ict, services and financial offshoring in india does not seem to match the focus on knowledge exploitation that china had been pursuing historically in manufacturing. in that sense, this initial situation does not seem to be the most appropriate to initiate a comparison with china. however, india under pm modi has become increasingly dirigisme in terms of policy and therefore the differences between the largest democracy in the world and china are less patent. moreover, as china provides its provinces with some margins for manoeuver in terms of economic policy, the comparison with a federal country such as india makes more sense. finally, and most importantly, the comparison makes sense as india has decided to copy chinese policy to boost manufacturing exports, but without success. two of the crucial questions are 1) which chinese reforms have been copied by the indian government? moreover, 2) were they copied properly? indeed, through the study of the yrd and the prd, it was possible to understand the existence of several chinese models. moreover, the upgrade at different speeds of these chinese models makes it even more complex to benchmark and replicate the manufacturing models within india. therefore, the study of two indian states, karnataka & gujarat, where some policies are similar respectively to prd in terms of entrepreneurship and special economic zones (sezs) and yrd in terms of agglomeration effects through clusters, should provide some insights to indian policy makers as to why the indian policy has failed to replicate reforms inspired by chinese policy makers. karnataka ree karnataka, a state in the heart of india to the south of maharashtra is a success story, which can be explained by several factors (government of karnataka, 2006; paul, 2000). apart from the strong legacy in education this state had in the xix century, nehru decided to focus on the need for modern technology and thinking in india, in the same way as deng with its 4 modernizations for china (vogel, 2013). many factors could have generated the definitive economic upgrade in india, but none of the following did. nehru promoted the creation of the indian institutes of technology (iit) and indian institutes of management (iim), the second iim was created in bangalore, capital of karnataka, in 1962, following the one in ahmedabad, gujarat in 1961. the creation of special economic zones (sezs) happened in india before it did in china. two sezs were created one in mumbai and one in ncr delhi. nevertheless, the creation of the sez in indian did not happen as the regional innovation system was not sufficiently solid (tandri, 2012). the decision to empower national champions through the creation of tata consultancy services (tcs) at the end of the 1960s took time to generate the desired outcome. even though bangalore benefitted from the presence of a defense sector and local indian blue chips as in silicon valley and unlike ahmedabad, this was still not yet enough to achieve the take-off of the it offshoring in india. as aiyar (2013) explained, the building up of the soft96 t. jacopin journal of small business strategy / vol. 31, no. 1 (2021) / 89-104 ware export cluster was linked to “computers, telecommunications and a reasonably liberal foreign exchange regime. (…but). every element that the sector required was shackled” (p. 233). change happens only when some variables are taken into consideration. in that sense, amable, barré and boyer (1997) remind us that: “each innovation system depends on a dual dynamics” (p, 6). one is linked to the national innovative path and the second to the internationalization of the r&d. in the case of bangalore and karnataka, the decision of texas instruments (ti) to locate to bangalore in 1984 was critical to reach a level of cutting-edge technology in terms of connectivity and r&d. moreover, the 1991 bankruptcy of the indian state favored the need to have a more liberal foreign regime that was finally implemented by the regulator (aiyar, 2013). the y2k bug in 2000 definitely enabled bangalore to become the indian silicon valley (messner, 2010) with an increase of 12 times the revenues of the indian it industry between 2000 and 2008, representing at this period total revenues of more than 48 billion usd. therefore, hypothesis 1 can be summarized as follows: hypothesis 1. the karnataka situation implied a policy mistake and thus a factor 2 situation. the karnataka innovation system was initially focused on knowledge generation with local firms. only the successful arrival of ti promoted the change to empower ict through knowledge exploitation, and fdi generated a vibrant ecosystem. at this stage, the take-off of this sector did happen progressively around bangalore and with the support of two other clusters, defense and pharma. at this stage, it is clear that no efforts were made to encourage manufacturing into this state. nevertheless, as ctier (2018) pointed out, the focus of the innovation policy, as set up in karnataka from 2001 did not bring any major support for manufacturing export and relied even more strikingly on defense, pharma and business process outsourcing bpo. the major insights concerning the evolution of the innovation policy in karnataka are commented in table 3. the only relevant change took place with the saturation of bangalore to develop some new technological hubs in hyderabad in telangana and in coimbatore and chennai in tamil nadu. in that sense, the copying the prd has been relevant as it has enabled an increase in the possible strategic alliances among local firms. these strategic alliances were more enhanced in the service sector than in the manufacturing sector. additionally, the increase of the activity in the manufacturing sector could have taken place as in the prd with the implementation of the sezs. three factors explain the failure of this policy. first, the lack of aptitude of the different local governments to create a framework comparable to the prd to generate a success story has to be noted. indeed, some states began a process of creating many sezs in india following the 2005 special economic zone (sez) act that gave some directives at national level complementary to the state special economic zone decrees that were voted for in the different states in india. as such, the number of sez in india increased exponentially to more than 4700 sezs (factsheet sez india, 2018). although initially these laws favored and increased the exports, later it has provoked an internal fiscal war among the states in india to attract fdi as it did in brazil in the automotive sector at the beginning of the 2000s when all brazilian states were offering fiscal packages to the carmakers (jacopin, 2002). the second reason for this lack of impact concerning the sezs was the turmoil that had occurred in almost all states in union territories throughout india (jenkins et al, 2014, alkon, 2018). their implementation in india was extremely complex due to the existence of rent seeking behaviors adopted by regional politicians and real estate sectors at the expense of citizens with low income. indeed, the compulsory acquisition of the land for sezs implied a transfer from low-income communities to the private sector and profit-making entities with the support of the government in terms of infrastructure. this reform was then considered as a wrong and perverse incarnation of redistributive land reforms (jenkins, 2014). in that sense the opportunity to use sezs had been missed at a global scale within india. however, the few conflicts that had arisen in karnataka, two related to sez located in mangalore and suzlon could have paved the way to a new narrative (mody, 2014). in any case, the local legislation, karnataka´s 2009 sez policy, did not force the state to resettle and rehabilitate displaced populatable 3 set up of innovation policy per sector from 2001 – current in karnataka year policies were set up sector in which the policies were launched 2009 renewable energy policy 2011 it policy ict 2013 aerospace & defense 2014 industrial policy 2015 start-up policy 2017 biotech source: own formulation from ctier (2018). 97 t. jacopin journal of small business strategy / vol. 31, no. 1 (2021) / 89-104 tion. the opposition was then justified to a certain extent if the government did not protect its citizens. the last reason is even more striking considering the willingness to compete in the manufacturing sector and the state of this support. indeed, as of mid-2012, “karnataka-based sez proposals had received formal approval from the board of approval (boa) in delhi. 48 were in the it sector. of the remaining 13, five were in manufacturing” (mody, 2014). karnataka is the state with highest number of sezs in all of india. even though the size of the sezs may vary considerably, the ratio 1-10 in favor of ict vs. manufacturing clearly indicates that the productive specialization of karnataka has not switched to another pattern despite the approval of the plan 2025. nevertheless, a lower number of sezs could have a bigger impact, as was the case in the prd. indeed, this strategy would force indian states to define clear targets in favor of manufacturing instead of pollinating all sectors. this leads us to the second hypothesis: hypothesis 2. the karnataka situation implies a choice (factor 1) not to give up some political rents and an existing specialization in the ict sector despite the poor results in manufacturing. a proper analysis of the prd sez reforms would have enabled india to select few states to be the driver for launching sezs in the manufacturing sector. the lack of capacity of the indian federal government to proceed in that context and the karnataka state government’s own lack of willingness has prevented the karnataka state from diversifying its economy to develop an alternative to its current specialization in the ict sector, making this state more vulnerable to external shocks. their entrepreneurial ecosystems do not yet manage to generate many unicorns (cb insights, 2020). the internal linkage effect in terms of knowledge is still too dependent on fdi, unlike the prd, which has generated a much more solid ecosystem through economics of agglomeration. gujarat ris gujarat is an indian state located in the north west on the pakistan border, with an internal geographical border with maharashtra whose capital is mumbai. this is the state where modi used to be the chief minister before becoming the prime minister of india. it is a state with a strong tradition of merchants and smes specializing in textile and relevant harbors. if entrepreneurship was a sufficient condition for success in terms of regional innovation systems, then gujarat would be the home of the indian silicon valley. however, the quality of the regional innovation system relies on the bottom-up innovation that smes may generate at a micro level. historically, gujarat has been a state with a higher standard of living than the rest of india and focused on entrepreneurship and textile. however, the decline of the textile sector at the beginning of the 2000s forced modi, then chief minister of gujarat, to use the rule of law to ensure investments by indian blue chips in heavy sectors such as infrastructure, and the pharmaceutical and automotive sector (hensmann, 2014; hirway & mahadevia, 2004). the best known example in favor of attracting multi-national corporations mncs was the re-location of the tata motors plant in gujarat after the difficulties this firm had with the launch of its facilities for the nano car that were supposed to be located in west bengal. modi’s policy in gujarat between 2001 and 2014 was not the most effective over time from the point of view of state domestic product growth (shah, 2014), but he managed an inflexion to change the state dynamics focusing on clusters with laws favoring the entry of foreign capital to palliate the weakness of the current regional innovation system in gujarat. therefore hypothesis 3 can be elaborated as follows: hypothesis 3. the choice (factor 1) not to manage the support of neighboring countries has limited the learning curve potential of the agglomeration effects. therefore, the model is necessarily bound to fdi. similarly to the yrd region, and unlike the prd, gujarat cannot obtain the support of neighboring regions due to the existing conflict with pakistan. only historical trade with the arabic peninsula and trading can help this region to grow from an international perspective. the domestic perspectives are not so relevant either as the mumbai-pune cluster specializes respectively in finance and automotive. consequently, the willingness to copy the chinese model for the infrastructure and the mnc fdis was generated under-optimized knowledge exploitation. the only way to empower agglomeration effects is therefore to stop confrontation and to deliver messages not only in terms of gdp growth but as a statesman on stability. the race for innovation started in gujarat in 2014 when modi was no longer the chief minister of gujarat. the bharatiya janata party (bjp), modi´s party, was still leading the state but was eager to be a knowledge generator instead of a knowledge exploiter. interestingly, similarly to what happened for the sezs in india, the race to attract fdis within the same sectors occurred among the different indian states. all wanted to focus on renewable energies, biotech, start-ups and aerospace 98 t. jacopin journal of small business strategy / vol. 31, no. 1 (2021) / 89-104 and defense without having (as they did in the prd) a policy centered on agglomeration effects with a high level of specialization within two adjacent clusters or states. in that sense, the innovation policy in gujarat reflects this trend to concentrate on the same sectors, independently of the previous productive specialization and the r&d centers. table 4 sheds light on the industrial policy that were backed by the state since 2001. from a negative legacy such as gujarat and karnataka. table 6 summarizes these findings. in that sense, both karnataka & gujarat combine inadequate choices for their policy mix on top of mistakes. the next session summarizes the main mistakes that were made at the policy level and the unfortunate choices that prevented india from benefiting from the success of chinese reforms. discussion & implications throughout this paper, a clear distinction appears between indian and chinese experiences. in china, as the prd and the yrd cases have shown, the specificities of each delta are taken into consideration to create a multiplier effect based on the spillover generated by the knowledge transfer from the knowledge exploitation. in india, be it in karnataka or in gujarat, the indian state policy-makers propose all of them a set of reforms according to “policy-fads”. historically, some measures included sezs and more recently sectors such as biotech, start-ups or aerospace and defense retained all the attention of these policy makers. therefore, the states propose mechanisms to attract fdi with the aim to generate knowledge. however, as the states have not yet maximized their potential in terms of the backwardness advantage, this implies fiscal wars at the expense of the development of powerful regional innovation systems that could compete at worldwide level. in that sense, the absence of agglomeration effects at a spatial level prevents indian ris and ree from taking off. it is clear that while the indian states are far from being at the cutting-edge technologically, a focus on knowledge exploitation and backwardness advantage should be prioritized at the outset. if, on the contrary, some indian table 4 set up of innovation policy per sector from 2001–current in gujarat year policies were set up sector in which the policies were launched 2015 industrial policy renewable energy policy 2016 biotech it policy msme policy start-up policy aerospace & defense source: own formulation from ctier (2018). comparative data across these two states from 2016 corroborate the analysis in terms of fdi (2244 million indian rupees (inr) in gujarat vs. 4121 million inr in karnataka). funding for start-ups (irrelevant in gujarat vs. 1.9 billion usd in karnataka) and r&d centers (254 in gujarat vs. 289 in karnataka) (ctier (2018), dipp, (2017), that the innovation policy was far better designed in karnataka than in gujarat. this issue questions the reasoning according to which modi could be the author of the indian economic miracle. this point is even more relevant when the evolution of some other states such as tamil nadu, maharashtra, delhi (nct) and haryana shows these states to be the best in class with regard to fdi, start-up funding and r&d center as it appears in table 5. the legacy could become negative in that sense for karnataka and gujarat. this led us to the elaboration of the fourth hypothesis: hypothesis 4. the lack of understanding that agglomeration effects are bound to a spatial level is a policy mistake (factor 2). a change in terms of policy from knowledge exploitation to generation can only be successful as the yrd example indicates when successful agglomeration effects take place at the spatial level; which is not the case either for gujarat or for karnataka. therefore, it is not surprising that indian states with more dynamism disrupt states suffering table 5 fdi, start-up funding and r&d centers within the best performing indian states state fdi start-up funding r& d centers gujarat 2244 irrelevant 254 karnataka 4121 1.9 289 tamil nadu 4528 0.4 253 maharashtra 9511 7.6 667 delhi (nct) 12743 2.0 28 haryana 4.2 165 source: own formulation from (ctier, (2018), dipp, (2017)) 99 t. jacopin journal of small business strategy / vol. 31, no. 1 (2021) /89-104 table 6 summary of the findings summary/ variable pearl river delta ree karnataka ree yangtze river delta ris gujarat ris agglomeration effect based on sezs and proximity with hong kong, macao & taiwan in manufacturing and ict not possible to have initially but extended later to hyderabad & coimbatore in ict. based on strengthening shanghai platform from jiangsu & zhejiang in the first place and fdi on a set of sectors bound with finance, trade, economics & shipping poor. no option to work with pakistan. no relation with financial center of mumbai. indirect ties with arabic peninsula as traders. focus of the economy from manufacturing to ict from ict knowledge generation to ict knowledge exploitation it, shipping, finance, auto, textile, manufacturing, metallurgy pharma, auto, infrastructure, textile. from knowledge exploitation to generation innovation (incremental vs. radical) incremental then disruptive radical to incremental incremental incremental knowledge (exploitation vs. generation) exploitation then generation generation then exploitation exploitation exploitation knowledge linkages (external vs. internal) external through sezs (fdi from 1980s) external (forced to open 1991 but focus 2000s) external (fdi) internal with little external initial inputs interactive learning process guanxi. informal but strong networks through society imperfect mobility due to cast system guanxi. informal but strong networks through society imperfect mobility due to caste system technology transfer major aim & constantly upgraded secondary aim (develop it cluster ww) major aim & constantly upgraded secondary aim. primary is to improve infrastructure and ensure legal security for fdi use of backwardness advantage systematically used to become the world fabric. nevertheless less relevant over time systematically in itc as offshoring centre systematically used to become the world fabric but less relevant over time systematically for auto (last decade) & pharma (generics) but not for manufacturing major actors (sharma, 2018) soes but private companies with growth now, even start-ups that are unicorns foreign + start-ups but few unicorns foreign + mncs + private companies in many sectors foreign + few mncs apart from auto and pharma + private companies governance infrastructure + strong and no more brain drain at education level improving but deficient best in india but deficient and strong education brain drain saturated & quite deficient and relative brain drain to us ability ris to overcome dilemmas (heidenrich, 2004) alignment of institutions even if central political gvt and decentralized economic power strong interstate misalignments with central gvt diversified and with support of president xi from zhejiang. improving interactions as bjp in state & fed. gvt unstable institutions institutional uncertainties provoke short term focus on innovations. strong commitment over time however for more than 30 years. instability in terms of relations between state and gvt + start-ups want more protection for expansion institutional uncertainties provoke short term focus on innovations. strong commitment over time however for more than 30 years. stability at head of state but instalibity in key sectors such as agriculture, textile & pharma and measures taken with head of state that arises tension with pakistan source: own formulation as a summary of findings. 100 t. jacopin journal of small business strategy / vol. 31, no. 1 (2021) / 89-104 ris or ree reach the technological frontier at worldwide level, then the switch towards knowledge generation and entrepreneurship becomes increasingly relevant. managing and understanding how the technology transfer should take place becomes then fundamental to move from knowledge exploitation to knowledge generation. the difficulties perceived in the ree of karnataka and in the ris of gujarat in relation to the ree of the pearl river delta and the ris of the yangtze river delta demonstrated that the indian position in the global value chain is far from being secure. indeed, it is not even secure within india as the surge of the states of maharashtra and delhi/ haryana indicates. the constant upgrade of the chinese deltas, both the prd and the yrd, whether at a domestic level or increasingly at an international level through the belt and road initiative (bri) in surrounding india, asian and african countries, should force the indian states to investigate these innovation models in the future. limitations while there is a rising interest in comparing india to china in terms of research, some critical elements have to be mentioned to ensure the quality of these works. first, even though india has a long tradition of statistics, far more data are available in china, and this has a series of consequences. first, without metrics, india cannot create a state of the art in some specific fields unlike china, which uses the same parameters in all its statistics (e.g. china statistical yearbook, 2018 & 2019). it is imperative then that india generates more statistics to be able to emulate chinese economic performance. second, initial legacies with countries/states or deltas without a common background may prevent comparisons from being fully effective. benchmarking and replication are extremely complex to manage. third, the choice of the methodology implies the restrictions already stated concerning the ris with regard to case studies and description vs. prescription as was mentioned in the literature review. fourth, the existence of data concerning incubators and accelerators and their role in the making of the karnataka and prd rees has not been discussed in this paper and conclusions cannot be highlighted yet in this dimension. nevertheless, the impact of business incubators and accelerators on the survival of firms/businesses should be assessed and compared (más-verdú et al., 2015) conclusions contrasting and comparing different ris and ree in china and india is complex due to the lack of exact recording of statistics between both countries. assuming this difficulty, a historical approach has seemed the most appropriate to shed light on the reason why the impact of chinese reforms in india is lower than expected. the results of this paper show that some key success factors of the “chinese prism” have deliberately been unincorporated, such as a correct implementation of the sezs with regard to emerging neighbours and the subsequent consequence that india has to improve its geopolitical relationships with its neighbours to generate a profit multiplier in terms of fdi agglomeration effect through trading. moreover, despite an officially stated policy to strengthen manufacturing exports, india has not fully given up its existing productive specialization based on ict and services. on the contrary, existing indian firms in this sector, lobby to defend their market share in their market. the role of indian soes should be re-evaluated under this prism. apart from these two elements, it seems that the impact of the reforms is lower than expected due to policy mistakes: 1) cannibalization among indian states to launch the most successful fiscal campaigns to attract some fdi instead of having a federal catalyst that determines the resource assignation as in china 2) too many similar focuses throughout india drastically lowering the number of sezs, and a policy in favour of some clusters 3) properly boost the switch from knowledge exploitation to knowledge generation as chinese prd and yrd did, or on the contrary, continue to use the backwardness advantage 4) the constant upgrade of the chinese models be it the yrd or the prd, as mentioned here, makes it more difficult to assess the replicability of a priori similar reforms in india globally, indian policymakers have to seriously review the analysis that led to their decision making in terms of replications of chinese reforms. many mistakes need to be addressed as well as choices that represent strong lobbies in india in favour of all indians. future research this paper opens opportunities in terms of a research agenda: • the evolution of indian specialization from knowl101 t. jacopin journal of small business strategy / vol. 31, no. 1 (2021) / 89-104 edge generation to knowledge exploitation in the manufacturing sector and specific states. • the reorganization of an indian 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(2009). china’s special economic zones. eurasian geography and economics 50(2), 222-240. zeng, d. z. (2012). china´s special economic zones and industrial clusters: the engines for growth. journal of international commerce, economics and policy, 3(03), 1250016. zukauskaite, e. (2018). variety of regional innovation systems and their institutional characteristics. in a. isaksen, r. martin, & m. trippl (eds.). new avenues for regional innovation systems theoretical advances, empirical cases and policy lessons (pp.41-60). springer. https://www.researchgate.net/journal/journal-of-economic-literature-0022-0515 https://www.researchgate.net/journal/journal-of-economic-literature-0022-0515 https://www.researchgate.net/journal/eurasian-geography-and-economics-1538-7216 https://www.researchgate.net/journal/eurasian-geography-and-economics-1538-7216 http://www.smallbusinessinstitute.biz antecedents of successful internationalization in family and non-family firms: how knowledge resources and collaboration intensity shape international performance philipp stieg1, beate cesinger2, gerhard apfelthaler3, sascha kraus4, cheng-feng cheng5 1university of liechtenstein, liechtenstein, philipp.stieg@uni.li 2new design university, st. pölten, austria, beate.cesinger@ndu.ac.at 3california lutheran university, united states of america, apfeltha@callutheran.edu 4esce international business school, paris, france, sascha.kraus@esce.fr 5asia university, taiwan, cheng-cf@asia.edu.tw a b s t r a c t the internationalization of family firms has increasingly been recognized as an important field of inquiry for international business scholars. and yet, there is a noticeable paucity of original research on key issues, including the differences in antecedents of international performance between family and non-family firms. by drawing on the revised uppsala model of internationalization from 2009 and the concept of socio-emotional wealth, the present study applies fuzzy set qualitative comparative analysis as a methodological approach to identify different configurational sets of antecedents for international performance. our results suggest that differences in causal configurations of certain antecedents (education, international market knowledge, international business experience, and collaboration intensity) between family and non-family firms exist. furthermore, we found that the specific characteristics of family firms explain these differences. keywords: journal of small business strategy 2018, vol. 28, no. 01, 14-27 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2018 small business institute® apa citation information: stieg, p., cesinger, b., apfelthaler, g., kraus, s., & cheng, c. f. (2018). antecedents of successful internationalization in family and non-family firms: how knowledge resources and collaboration intensity shape international performance. journal of small business strategy, 28(1), 14-27. w w w. j s b s . o rg family firm internationalization, socio-emotional wealth, uppsala model of internationalization, fuzzy set qualitative comparative analysis, fsqca ervation of non-financial or affective utilities, commonly known as socio-emotional wealth (sew) (debicki, van de graaff, & sobczak, 2017; de massis, kotlar, chua, & chrisman, 2014). extant literature acknowledges that family firms increasingly break the boundaries of domestic markets and engage in activities directed toward foreign markets (e.g., kraus, mensching, calabrò, cheng, & filser, 2016; lin, 2012; pukall & calabro, 2014; sciascia, mazzola, astrachan, & pieper, 2012). recent literature reviews (arregle, duran, hitt, & essen, 2017; pukall & calabrò, 2014) further show that internationalization is an important strategic element in the pursuit of growth for family firms, yet the majority of studies describe family firm internationalization as following the uppsala model of internationalization (johanson & vahlne, 1977). the stepwise approach supports the long-term orientation of family firms with regard to both business and the family (brigham, lumpkin, payne, & zachary, 2014; mitter, duller, feldbauer-durstmüller, & kraus, 2014). international performance results of family businesses compared with non-family businesses however are mixed (o’boyle, pollack, & rutherford, 2012; wagner, block, miller, schwens, & xi, 2015). several studies have reported no differences (e.g., crick, bradshaw, & chaudhry, 2006; introduction the importance of family firms for national economies has long been recognized and their idiosyncrasies have been widely discussed in the literature (e.g., ahluwalia, mahto, & walsh, 2017; chrisman & holt, 2016; gedajlovic, carney, chrisman, & kellermanns, 2012; schulze & gedajlovic, 2010). family businesses are commonly defined as businesses “governed and/or managed with the intention to shape and pursue the vision of the business held by a dominant coalition controlled by members of the same family or a small number of families in a manner that is potentially sustainable across generations of the family or families” (chua, chrisman, & sharma, 1999, p. 28). control and sustainability of financial and non-monetary wealth are therefore defining characteristics of family firms (berrone, cruz, & gómez-mejía, 2012). further, the impacts family ownership and family management have on structures, behavior, and goal-setting differentiate family from non-family firms (kraus, fink, & harms, 2011; xi, kraus, kellermanns, & filser, 2015). extant literature attributes the unique strategic behavior of family firms to the preshttp://www.smallbusinessinstitute.biz http://www.jsbs.org 15 p. stieg, b. cesinger, g. apfelthaler, s. kraus, & c. f. cheng journal of small business strategy / vol. 28, no. 1 (2018) / 14-27 muñoz-bullón & sánchez-bueno, 2012), while others have found higher (graves & shan, 2014; tsao & lien, 2013) or lower levels of international performance for family firms (thomas & graves, 2005; zahra 2003). traditionally, international business research has discussed a variety of antecedents that are positively associated with international performance, such as education, international experience, commitment, risk propensity, perceived benefits, or market knowledge (see game & apfelthaler, 2016 or leonidou, katsikeas, & piercy, 1998 for overviews). these, however, were identified without controlling for ownership and therefore do not provide specific insights into family firms. of the few studies that are specific to family firms, several have identified family ownership and involvement (e.g., cerrato & piva, 2012; sciascia et al., 2012), the role and influence of networks (e.g., arregle, naldi, nordqvist, & hitt, 2012; cesinger, hughes, mensching, bouncken, fredrich, & kraus, 2016; kontinen & ojala, 2011a), and international market knowledge (basly, 2007) as relevant antecedents for international performance differences between family businesses and non-family businesses. a clear picture of which antecedents are more or less important for family firms compared with non-family firms is missing. family firms rarely possess sufficient international market knowledge, and particularly not in the pre-internationalization phase (e.g., cesinger et al., 2016; chirico & salvato, 2008; graves & thomas, 2008). they accumulate knowledge incrementally and slowly (e.g., casillas & acedo, 2005; claver, rienda, & quer, 2007; graves & thomas, 2008), which may be due to the fact that family firms are reluctant to enter new networks and to form new relationships (gómez-mejía, haynes, núñez-nickel, jacobson, & moyano-fuentes, 2007). their preference for intimate and familiar sources of foreign market information makes them rely on well-established, lasting, and identity-based network ties (kontinen & ojala, 2011a; 2011b; musteen, francis, & datta, 2010). furthermore, family firms do not exhibit great collaboration intensity (cesinger et al., 2016), defined as the strength and frequency of any formal and informal relational interaction via personal meetings, the cultivation of close relationships, or informal communication (lin & germain, 1998). in addition, there is evidence that international performance in family firms is associated with the owner’s or the succeeding generation’s level of education (davis & harveston, 2000; fernandez & nieto, 2005). what is therefore missing is a coherent approach that explains antecedents critical for family businesses compared with non-family businesses when achieving high levels of international performance. we posit that the reasons lie in the fact that international business theory does not explicitly take the dominant position of the family and the need to protect family control (berrone et al., 2012; pukall & calabrò, 2014) into account. consequently, from a conceptual point of view, we supplement johanson and vahlne’s work with the concept of sew. in line with the revised uppsala model (johanson & vahlne, 2009), we suggest that each antecedent alone will have an influence on internationalization success for family firms and non-family firms, but due to the idiosyncrasies of family firms we propose that combinations of various antecedents will differ between both groups. widely applied quantitative methods (e.g., regression or structural equation modelling) predict the effects of one or more independent variables on one or more dependent variables, but fall short in describing the complex interaction of multiple factors that affect the results, particularly in emerging fields of interest (e.g., cesinger et al., 2016; vis, 2012). we therefore apply fuzzy set qualitative comparative analysis (fsqca) as an alternative to investigate the complexity of differences in antecedents of family firms’ and non-family firms’ international performance. the results of our study offer two primary contributions to the existing literature: we provide a rich, comparative view of antecedents of international performance for family and non-family firms by supplementing traditional international business theory with the perspective of sew. from the sew perspective, our results highlight that family firms either rely on collaboration intensity or individual-level knowledge resources to preserve control and alleviate the fear of losing sew. our present contribution is structured as follows: after a brief overview on the current state of research concerning differences in the international performances of family firms and non-family firms, we theoretically ground our research. next, we will discuss independent variables, followed by a description of our research model, the characteristics of our sample, descriptive statistics, and the fsqca method, before we describe our results. our article will close with a discussion of our findings, possible directions for future research, and limitations of our research. theory socio-emotional wealth and international performance in family firms and non-family firms sew has become a proven and commonly accepted construct that explains the distinct behavior of family firms (e.g., berrone, cruz, gómez-mejía, & larraza-kintana, 2010) by emphasizing that potential gains or losses of sew constitute the primary frame of reference in their strategy formulation and strategic decision-making (berrone et al., 2012; gómez-mejía et al., 2007; kraus et al., 2016; vandekerkhof, steijvers, hendriks, & voordeckers, 2015). a family firm’s sew is described by the extent of the family’s control and influence on the firm (zellweger, kellermanns, chrisman, & chua, 2012) and can be characterized as the non-financial and affective value of the family firm, which is achieved using the family’s dominant position (berrone et al., 2012; gómez-mejía et al., 2007). the preservation and the increase in sew frequently is top priority in strategic choices, decisions, and actions of the family (berrone et al., 2010; gómez-mejía et al., 2007). family firms thus often demonstrate behavior that is not purely driven by economic rationale, in particular when the family’s sew is threat16 p. stieg, b. cesinger, g. apfelthaler, s. kraus, & c. f. cheng journal of small business strategy / vol. 28, no. 1 (2018) / 14-27 ened (berrone et al., 2012; detienne & chirico, 2013). sew therefore may affect the likeliness for and speed of internationalization, the number of countries entered, or the entry modes selected (kontinen & ojala, 2010). out of fear of loss of sew, internationalization may be perceived as risky and therefore be approached with more caution, at a slower pace, or completely avoided. the uppsala model characterizes internationalization as an incremental process, where the extent of internationalization increases over time (johanson & vahlne, 1977). the model thus views successful internationalization as a function of gradually intensifying commitments to markets, along with increasing experiential knowledge. each phase produces certain outcomes or levels of international performance. in 2009, johanson and vahlne added the concept of insidership to the model, assuming that being inside a network is a necessary condition for successful foreign market entry. empirical evidence indeed suggests that family firms follow the establishment chain proposed by johanson and vahlne (1977) – they progress incrementally along a continuum from low-commitment modes to high-commitment modes (child, ng, & wong, 2002; claver et al., 2007; game & apfelthaler, 2016; graves & thomas, 2008; janjuha-jivraj, martin, & danko, 2012), each of which produces distinct outcomes and different levels of international performance (claver et al., 2007; puig & pérez, 2009). international performance is commonly understood as a set of quantitative or attitudinal measures, such as the percentage of international revenues as a part of total revenue, growth of international revenue, growth of international profits, growth of international market share, or growth of employees in international markets (sousa, 2004). much scholarly attention has recently been given to the investigation of performance differentials between family firms and non-family firms, and it can be assumed that international diversification has a positive impact on a family firm’s performance (carney, van essen, gedajlovic, & heugens, 2013). when considering the defining features of family firms, such as control or family ownership, empirical evidence on international performance of family firms is equivocal (pukall & calabrò, 2014) and results are mixed when comparing the international performance of family firms and non-family firms (o’boyle et al., 2012; wagner, block, miller, schwens, & xi, 2015). for example, crick, bradshaw, and chaudhry (2006) and muñoz-bullón and sánchez-bueno (2012) have not reported any significant differences in international performance among family firms and non-family firms. graves and shan (2014), as well as tsao and lien (2013), have even demonstrated that family firms exhibit stronger international performance than non-family firms. roida and sunarjanto (2012) have shown that family firms and non-family firms do not differ in their export intensity, whereas the studies by thomas and graves (2005) and zahra (2003) have revealed that international performance is lower in family firms compared with non-family businesses. despite the empirical evidence shown using the uppsala model’s value for family firms, neither the original model from 1977 nor its revised version from 2009 take into account the family firms’ tendency to prioritize sew, which may explain the varying outcomes observed when the model is applied to family firms’ internationalization behavior. antecedents of international performance in familyand non-family businesses at the core of the internationalization model by johanson and vahlne from 1977 and 2009 is the concept of international market knowledge as the primary and most critical enabler of internationalization and international performance. international market knowledge refers to knowledge about international markets and knowledge about the process of internationalization (eriksson, johanson, majkgård, & sharma, 1997). and, indeed, the empirical literature on the antecedents of internationalization and performance confirms the importance of knowledge-based factors. previous research shows that international market knowledge (e.g., calof & beamish, 1995; canabal & white, 2008) or the knowledge of culture (e.g., game & apfelthaler, 2016; brouthers & brouthers, 2000) enhances internationalization and performance. extant internationalization literature suggests that the level of education of a firm’s management (e.g., katsikeas, 1996) and the amount of international experience (e.g., bloodgood, sapienza, & almeida, 1996) augment a firm’s internal stock of knowledge, which then correlates positively with a firm’s international performance. under the primacy of sew and in line with the theoretical assumptions of the uppsala model (johanson & vahlne, 1977; 2009), we suggest that family firms and non-family firms alike achieve international performance if they hold sufficient levels of education, international business experience, and international market knowledge. yet, the particularities of family firms and their desire to safeguard sew may position them differently. education is one aspect of individual human capital and is positively related to knowledge, skills, and problem-solving ability (cooper, gimeno-gascon, & woo, 1994). a higher level of education can accelerate the firms level of innovation (sonfield & lussier, 2016) and, moreover, can be useful when making internationalization decisions because they facilitate analysis of the international environment (cerrato & piva, 2012) and they enhance understanding of foreign markets and cultures (fernandez-ortiz & lombardo, 2009; kyvik, saris, bonet, & felício, 2013). the international business literature has thus acknowledged it as a managerial characteristic of importance for international performance (beamish, craig, & mclellan, 1993; katsikeas, 1996; zou & stan, 1998). the sew perspective implies that family relationships dominate in family firms (i.e., there is a long history of shared knowledge and experiences, which shape current strategy) (berrone et al., 2012). the maintenance of family ties and knowledge sharing among family members may substitute for formal education or depreciate the need for human capital development (granovetter, 1985), although this limits access to novel information and 17 p. stieg, b. cesinger, g. apfelthaler, s. kraus, & c. f. cheng journal of small business strategy / vol. 28, no. 1 (2018) / 14-27 innovative business approaches, as well as new ways of doing things (coleman, 1988). the level of education – due to sew in family firms – may therefore have a different effect in family firms compared with non-family firms. existing research on family firms’ internationalization has indeed found that lower levels of human capital result in a lower degree of internationalization (casillas & acedo, 2005; cerrato & piva, 2012) or that the level of foreign sales is strongly associated with the owner’s level of education (casillas & acedo, 2005; davis & harveston, 2000; sundaramurthy & dean, 2008). international business experience is an important antecedent in the context of international performance (cavusgil & zou, 1994; gray & mcnaughton, 2010; madsen, 1988; miesenböck, 1988; nielsen & nielsen, 2010; rocha, cotta de mello, pacheco, & farias, 2012). individuals with international experience have the ability to systematize and generalize their knowledge of the internationalization process and transfer their experience to other cases and environments (blomstermo, eriksson, lindstrand, & sharma, 2004). this reduces the level of uncertainty and risk related to foreign market decision-making (armario, ruiz, & armario, 2008). overall, family firms are equipped with less advanced management skills than non-family firms (graves & thomas, 2008) and typically have lower levels of international business experience than non-family firms (e.g., banalieva & eddleston, 2011; george, wiklund, & zahra, 2005; kuo, kao, chang, & chiu, 2012). according to boellis, mariotti, minichilli, and piscitello (2016), this may be the result of a lower and less diversified shareholder and managerial base that makes a family firm per se less informed compared with non-family firms. gallo and pont (1996) have suggested that family firms also tend to hire managers without international experience. gómez-mejía, makri, and larraza kintana (2010) have demonstrated that family firms are less internationally diversified than non-family firms, and assume that this is a result of the family leaders’ lack of international experience. from the sew perspective, the family’s desire to maintain control of the firm and avoid risk leads family firms not to hire internationally experienced non-family managers, resulting in lower levels of international performance (banalieva & eddleston, 2011). firms must possess sufficient stocks of idiosyncratic, rare, and valuable knowledge to achieve international performance (grant, jammine, & thomas, 1988; kogut & zander, 1993). in the same vein, international market knowledge, i.e., international business knowledge specific to a market or culture, is crucial for successful internationalization (fletcher & harris, 2012) and serves as the basis for international competitiveness (lu & beamish, 2006). although it has been shown that international market knowledge has a positive impact on the degree of internationalization of family firms (basly, 2007; calabrò & mussolino, 2013), family firms typically have lower levels of international market knowledge than non-family firms due to less developed managerial skills (e.g., banalieva & eddleston, 2011; chirico & salvato, 2008; claver, rienda, & quer, 2009; gómez-mejía et al., 2010; kuo et al., 2012). results from extant family literature also suggest that family firms struggle to develop internal capabilities based on knowledge resources (dyer & singh, 1998; hoy & verser, 1994). instead, family members have deep levels of firm-specific tacit knowledge (chirico & salvato, 2008; zahra, neubaum, & larrañeta, 2007) and family firms integrate family members’ individual specialized knowledge (arregle, hitt, sirmon, & very, 2007). lower levels of education, international experience, and international market knowledge necessitate more external human resources to mitigate family firms’ deficiencies in international market knowledge (e.g., graves & thomas, 2006). the appointment of non-family ceos and managers (arregle et al., 2012), however, may sacrifice the family’s sew and minimize the possibility to exercise authority and maintain influence over business activity (chang & shim, 2015; banalieva & eddleston, 2011; gómez-mejía et al., 2007). as a result, family firms tend to accumulate international market knowledge within the firm and among family members, safeguarding sew, and preserving family control and ownership (pukall & calabrò, 2014). large and small firms increasingly engage in collaboration to successfully compete in global markets (etemad, wright, & dana, 2001). whereas the original uppsala model (johanson & vahlne, 1977) predicts that knowledge is internally developed as an outcome of experiential learning, the extension of the model (johanson & vahlne, 2009), as well as the extensive literature on international entrepreneurship (e.g., ratten, dana, han, & welpe, 2007; young, dimitratos, & dana, 2003; wright & dana, 2003) argues that firms may access and generate international market knowledge through exchange and collaboration with network partners. specifically, intensive inter-firm collaborations increase a firm’s understanding of both prospects and constraints of going international (e.g., chetty & holm, 2000; musteen et al., 2010). further, in highly dynamic and fast changing international environments, being involved in networks can also shorten the time span to market (zhu, hitt, & tihanyi, 2006) collaboration intensity then mitigates a firm’s liability of outsidership – the disadvantage stemming from the lack of specific international market knowledge (schweizer, 2013). these theoretical foundations also apply to family firms. network relationships held by family firms allow them to develop and accumulate international market knowledge from domestic and international collaborations with customers, business partners, governmental institutions, and others. such collaborations provide family firms with access to foreign markets (zahra, 2005), to international market knowledge, and to other resources of their network partners (bhaumik, driffield, & pal, 2010). this triggers internationalization, helps the firm to gain competitive advantage, and to achieve international performance. while this theoretical prediction holds in principle, empirical research has shown that family firms are reluctant to enter new networks (basly, 2007; gómez-mejía et al., 2007) and overall to cooperate less than non-family firms (donckels & fröhlich, 1991; graves & thomas, 2004). com18 p. stieg, b. cesinger, g. apfelthaler, s. kraus, & c. f. cheng journal of small business strategy / vol. 28, no. 1 (2018) / 14-27 pared with non-family firms, family firms prioritize deep internal relations (arregle et al., 2007). they often show low collaboration intensity (lin & germain, 1998), which creates barriers to external networks (e.g., bubolz, 2001). the empirical literature on family firm internationalization also demonstrates their tendency to preferably connect with other family firms, instead of just any business enterprise, because they prefer to develop strong ties that cater to their aspiration for personal information safeguarding of sew (basly, 2007; eddleston, chrisman, steier, & chua, 2010; kontinen & ojala, 2012; 2011a; 2011b; musteen et al., 2010; pukall & calabrò, 2014; swinth & vinton, 1993). family firms may only then overcome the fear of losing sew by relying on intensive collaborations; i.e., the cultivation of close relationships is coherent with the affective value the family places on its business because collaboration intensity does not threaten sew. rather, intense collaborations can enable family firms to overcome the fear of losing sew and, in turn enhance international performance. method the goal of our research is to identify combinations of antecedents that enhance international performance in family and non-family firms. conventional multivariate methods such as regressions have limitations in this regard, and we therefore utilize fsqca. as outlined by ragin (2008a), fsqca is a comparative research technique that uses the concept of boolean algebra for systematic crosscase analysis (gonzalez, rodriguez, & sossa, 2017; rihoux & ragin, 2009). rather than investigating linear relationships, fsqca tries to understand asymmetric set relationships (covin, eggers, kraus, cheng, & chang, 2016) in a combinatorial way. it is based on set theory, in which causal claims are developed by means of supersets and subsets. the basic approach of fsqca is to count all types of cases that occur. types of cases are defined by their own unique combination of values for independent and dependent variables. for example, if there were four variables of interest, with the first two being dichotomous, the third having three values, and the fourth having five, the result would be a total of 60 possible and unique combinations or types of observations. each one of those 60 paths is relevant in a distinct way as it leads to the same or similar outcomes. therefore, rather than testing an assumed path relationship, fsqca allows for the detection of multiple causal paths. by counting the number of observations for each unique combination of variables, fsqca determines which descriptive inferences or implications are empirically supported by the dataset. fsqca is particularly suited when evaluating both the number and the complexity of alternative paths that lead to a desired outcome (felicio, rodrigues, samagaio, 2016; fiss, 2011; greckhamer, misangyi, elms, & lacey, 2008; ragin, 2008a). marx, rihoux, and ragin (2013) and ragin (2008a) have argued that the logic of the comparative study is configurational, whereby firms are considered to be the combination of causal conditions and an outcome. fuzzy sets allow researchers to account for the varying degrees of membership of cases in a set by using the anchor 0.95 to designate full membership in a particular set and 0.05 for non-membership. as most firms will not meet those ideal types, 0.5 is the crossover point that defines the anchor for being neither in nor out of a particular set. for this, the original values of the 95th percentile, the 50th percentile, and the 5th percentile from the ordinary data corresponding to full membership (fuzzy score = 0.95), cross-over anchors (fuzzy score = 0.5), and full non-membership (fuzzy score = 0.05) are set to transform ordinary data into fuzzy sets (misangyi & acharya, 2014; ragin, 2008a). following chang and cheng (2014), fiss (2011), and ragin (2008b), a data matrix, known as a truth table with 16 rows with four causal conditions, is then constructed. in addition, ragin (2008a) strictly suggested that the configurations selected should have at least 75% to 80% of the cases included in the analysis. accordingly, this study captures and recognizes configurations that are sufficient to the outcome from those that are not sufficient by specifying the consistent cut off value as 0.80. ragin (2008a) further suggested that complex solutions are based on a different treatment of the remainder combinations (i.e., there is no logical remainder used in complex solutions, but all logical remainders may be used in parsimonious solutions without any evaluation of their plausibility). therefore, in line with ragin (2008a), this study explores the configurations of antecedents of international performance by comparing family and non-family firms based on an intermediate solution (only the logical remainders that make sense given the researcher’s substantive and theoretical knowledge are incorporated into the solution) and uses a minimum acceptable overall solution consistency of 0.80. operationalization of predictor conditions based on our review of the existing literature, we investigate four antecedents of international performance for family firms and non-family firms: education, international business experience, international market knowledge, and collaboration intensity. in this study, we define a firm as a family firm if the majority (>50%) of all assets or control are in the hands of one or two families. in alignment with previous studies (e.g., calof & beamish, 1995; sommer, 2010), we measure education in the form of the highest educational attainment of respondents on an 8-point scale, ranging from no diploma, compulsory education, secondary school, university-entrance diploma, master craftsman’s diploma, university of applied sciences, and university diploma to phd. as a measure for international business experience, we use the number of years a respondent has worked in international operations (sommer, 2012). as proposed by zhou (2007), we operationalize international market knowledge as international institutional knowledge (knowledge of (1) foreign laws, norms, and standards and (2) host government agencies), international business knowledge (knowledge of (1) the needs of foreign 19 p. stieg, b. cesinger, g. apfelthaler, s. kraus, & c. f. cheng journal of small business strategy / vol. 28, no. 1 (2018) / 14-27 clients/customers; (2) foreign distribution channels; (3) effective marketing in foreign markets; (4) foreign competitors; and (5) foreign languages), and internationalization knowledge (knowledge about (1) determining foreign business opportunities; (2) dealing with foreign business contacts; and (3) managing international operations) on a 5-point likert-type scale. collaboration intensity represents the magnitude of ongoing interactions between network partners (lin & germain, 1998). in our research, we measure collaboration intensity in line with paulraj (2011), chen, tzeng, ou, and chang (2007), or kotabe, martin, and domoto (2003) by using three items: (1) before internationalizing, i had frequent exchange with my network partners; (2) before internationalizing, i maintained close relationships with my network partners; and (3) informal discussion between my network partners and me existed before internationalizing. we measure these by using a 5-point likert scale. measuring organizational performance using objective data is inherently difficult in privately held firms. various authors have therefore suggested perceptual measures as an alternative (dess & robinson, 1984; glaister & buckley, 1998). davis and harveston (2000) have proposed using growth related performance measurements because family firms focus more on long-term growth than on achieving high profits in the short term. following this assumption, chen et al. (2007) have provided a set of measurements for international performance, including growth of international revenue and profit, as well as a growth of international employees and market share. in line with these suggestions, international performance in our research is measured as a subjective, perceptual, and composite index, with the following four components: (1) compared with our direct and indirect competitors, we realized higher growth of international revenue; (2) higher growth of international profit; (3) higher growth of international employees; and (4) higher growth of international market share. all were measured on a 5-point likert scale. sample we collected our data via an online survey. first, we randomly selected a cross-sectional sample of 10,000 firms from germany and three other predominantly german-speaking countries: austria, switzerland, and liechtenstein. responses from companies without international business activities were not recorded, which resulted in a total of 501 valid questionnaires from germany and 561 completed questionnaires from the other three countries. respondents were ceos, founders, owners, or top-level managers responsible for internationalization. these key informants (lechner, dowling, & welpe, 2006) are commonly used in family business research (e.g., kraus et al., 2016). the resulting response rate of 5.3% is comparable to other online surveys (e.g., rigtering, kraus, eggers, & jensen, 2014). out of our total of 1,062 firms, 792 are family firms (74.6%) and 270 are non-family firms (25.4%). the majority of firms in our sample are smalland medium-sized companies with less than 250 employees (96.3% in family firms and 93.4% in non-family firms). family firms in our sample are on average 41.3 years old and non-family firms are 32.9 years old. the average firm’s internationalization experience is 14.8 years in family firms compared with 11.3 years in non-family firms. the majority of the respondents in the firms have a degree from a tertiary institution (31.8% in family firms and 38.1% in non-family firms). results table 1 provides a summary of our results in the form of combinatorial causal configurations of different paths for firms in our dataset. as consistency scores should be as close to 1.0 as possible, we only included those configurations that have values exceeding 0.7, overall solution consistency values above 0.68, and overall solution coverage values above 0.74. these configurations offer the best explanations for how international performance is achieved. the results of fsqca reveal five such causal configurations for family firms and four causal configurations for non-family firms. table 1 casual configurations for international performance path collaboration intensity international market knowledge education international business experience raw coverage unique coverage consistency solution coverage solution consistency family firms (n=792) 1a ● ○ 0.46 0.02 0.76 0.81 0.68 2a ● ○ 0.52 0.08 0.75 3a ○ ● 0.45 0.06 0.73 4a ○ ● 0.37 0.04 0.75 5a ● ○ 0.44 0.01 0.77 nonfamily firms (n=270) 1b ● ● 0.54 0.05 0.74 0.74 0.73 2b ● ● 0.51 0.04 0.81 3b ● ● 0.51 0.05 0.78 4b ○ ● ● 0.34 0.05 0.81 20 p. stieg, b. cesinger, g. apfelthaler, s. kraus, & c. f. cheng journal of small business strategy / vol. 28, no. 1 (2018) / 14-27 table 1 shows that five causal configurations exist which lead to a high level of international performance in family firms. black circles in table 1 indicate the presence of a necessary condition, white circles indicate the absence of a condition in the solution path, and empty cells indicate “don’t care/doesn’t matter” conditions (ragin, 2008a). the latter may be present, but do not show a significant impact on international performance. according to ragin’s guide of fsqca (ragin, 2008b), presence and absence are major states in boolean algebra. the typical boolean-based comparative analysis addresses the presence/absence conditions under which a certain outcome can be accomplished. presence indicates that the outcome is achieved when the causal condition is existent and the absence of a condition means that the outcome can be obtained without this condition (chang & cheng, 2014; fiss, 2011; kraus et al., 2016). for family firms, path 1a shows a configuration under which collaboration intensity is a single antecedent to international performance; international market knowledge or international business experience may be of importance, whereas education is of no relevance in this configuration. in other words, this configuration (i.e., a logical statement is “collaboration intensity*~education”) shows that when ceos, founders, owners, or top-level managers responsible for internationalization do not have high levels of education, they can still produce high levels of international performance for their firms by means of a high level of ongoing interactions between network partners (i.e., collaboration intensity). path 2a demonstrates a similar configuration with international market knowledge being the necessary condition, collaboration intensity and education being sufficient, and international business experience being of no importance. with the highest unique coverage among all paths, path 2a offers the best explanation of international performance in family firms. path 3a shows education as a necessary and collaboration intensity as an absent condition. path 4a demonstrates that international business experience is a necessary antecedent, with education and collaboration intensity being potential contributors to international performance. path 5a shows international market knowledge as a necessary condition, international business experience and collaboration intensity as sufficient conditions, and education as absent. what we can therefore conclude is that over all paths for family firms, single antecedents can be the source of international performance or, in other words, that family firms rely on a single source of international performance. figure 1 summarizes these configurations for family firms. figure 1. causal configurations for international performance in family firms. 21 p. stieg, b. cesinger, g. apfelthaler, s. kraus, & c. f. cheng journal of small business strategy / vol. 28, no. 1 (2018) / 14-27 the results for non-family firms are quite different. in non-family firms, four causal configurations exist that produce high levels of international performance. for all paths (1b–4b), two conditions for high international performance are present: collaboration intensity and international market knowledge in path 1b, international market knowledge and education in path 2b, international market knowledge and international business experience in 3b, and education and international business experience in 4b. the presence of international market knowledge in paths 1b, 2b, and 3b indicates that it is a critical condition for non-family firms to achieve superior international performance. figure 2 summarizes these configurations for non-family firms. our data therefore suggest a fundamental difference in the paths to international performance between family firms and non-family firms. where all combinatorial solution sets for family firms identify one single source for international performance, international performance in non-family firms is generally created from a combination of different antecedents. figure 2. causal configurations for international performance in non-family firms. discussion and conclusion our study explores four relevant antecedents – collaboration intensity, international market knowledge, education, and international business experience – with the purpose of revealing different causal configurations for achieving international performance in family firms vs. non-family firms. based on the results of our fsqca, we found the existence of five different paths to international performance for family firms and four different paths for non-family firms. our data and analysis not only show that there is more than just one single path to international performance, but we were also able to identify clear differences in those paths between family and non-family firms. family firms can achieve international performance with the presence of only one of the four investigated antecedents. one possible explanation of this result is that family firms are typically characterized by lower resource endowments compared with non-family firms. this forces family firms to rely on a limited set of resources and capabilities in driving performance. investing in other antecedents would also minimize their ability to maintain authority and control over the business and therefore threaten their sew. furthermore, the expansion across national borders is a committing and demanding step that is associated with risk that may endanger the family firm’s sew. therefore, family firms often try to reduce risk by reducing complexity via their reliance on antecedents that can be controlled internally. international market knowledge, education, and international business experience are all capabilities, which family firms can develop without external assistance. the focus on risk-minimizing antecedents combined with family firms’ lower resource endowments result in a reliance on one factor that appears most promising and – most importantly – safeguards sew while preserving family control and ownership. this also aligns with the original uppsala model (johanson & vahlne, 1977), which sees knowledge as being internally developed. 22 p. stieg, b. cesinger, g. apfelthaler, s. kraus, & c. f. cheng journal of small business strategy / vol. 28, no. 1 (2018) / 14-27 the extension of the uppsala model (johanson & vahlne, 2009) argues that firms may access and generate internationalization knowledge through exchange and collaboration with partners within their business networks. family firms, however, only rely on such networks in the presence of two internal capabilities: international market knowledge and international business experience. under the primacy of sew, we suggest that internally developed capabilities may enable family firms to better judge the value and risk of collaborations. this will then also safeguard sew. these results add further evidence to the predictive ability of the original uppsala model (johanson & vahlne, 1977) and to the extended uppsala school of thought (johanson & vahlne, 2009) for family firms. family firms either rely only on internal capabilities as suggested by the original model or on networks and internal capabilities. the fact that family firms can achieve international performance by relying only on single antecedents is important with regards to another area of difference between family and non-family firms that we found in the identified causal configurations. by applying fsqca, we were able to identify conditions that must be present and conditions that are distinctly absent. our comparison of family and non-family firms shows that each configuration for family firms contains both a present and an absent condition. in contrast, only one path exists with an absent condition for non-family firms. for example, path 4a indicates that international market knowledge is absent, which is in accordance with the results of previous research demonstrating that family firms typically have lower levels of international market knowledge (e.g., banalieva & eddleston, 2011; gómez-mejía et al., 2010; kuo et al., 2012). similarly, our results show the absence of international business experience in family firms’ paths toward international performance. overall, family firms are equipped with fewer specialized management skills than non-family firms (graves & thomas, 2008) and therefore typically have lower levels of international business experience compared with non-family firms (e.g., banalieva & eddleston, 2011; kuo et al., 2012). in contrast, non-family firms do not exclusively rely on one condition but combine more than one antecedent to achieve international performance. their comparatively better resource base and distinct capabilities enable them to rely on a combination of factors, thus only showing an absent condition (that of collaboration intensity) in one solution set (i.e., 4b). the paths for non-family firms seem more homogenous compared with the family firm paths. each set contains two present conditions for achieving sufficient international performance. one explanation may be that non-family firms recruit their (top-)management based on the current required skills and under the rationale that international business is an active part of the firms’ strategies; non-family firms tend to employ c-level managers that are experienced in international business and/or have international education or international market knowledge, whereas for family firms, being a family member is the primary determinant. this also confirms previous research emphasizing the importance of education (cerrato & piva, 2012; fernandez-ortiz & lombardo, 2009; kyvik et al., 2013), international business experience (cavusgil & zou, 1994; gray & mcnaughton, 2010; madsen, 1988; miesenböck, 1988; nielsen & nielsen, 2010; rocha et al., 2012), and international market knowledge (basly, 2007) in the internationalization process of a firm. overall, when looking at the configurational sets for both family firms and non-family firms, it is evident that international market knowledge is the most important antecedent for international performance. it appears in two family firm sets (2a, 5a) and three non-family firm sets (1b, 2b, 3b). this confirms the original uppsala model and importance of international market knowledge widely acknowledged in research. we add further evidence to this with our results. limitations and future research this study presents an attempt to add a more nuanced understanding of differences in antecedents of international performances between family firms and non-family firms. addressing this, our research drew on the uppsala model and the concept of sew, and it utilized fsqca as a method. compared with the traditional case study approach, fsqca is highly appropriate for the study of complex causal relationships able to identify holistic causal recipes with a much higher level of formalization and rigor (fiss, 2011). however, fsqca has limitations. it can identify various combinations of conditions for a respective outcome, whereas multivariate analysis techniques predict a certain outcome by isolating single factors. therefore, fsqca findings may not be generalizable (fiss, 2011). furthermore, the number of antecedents we tested was limited to only four, with obvious factors such as the firms level of entrepreneurial orientation (campbell, line, runyan, & swinney, 2010) risk propensity, international commitment, or risk perception (game & apfelthaler, 2016) having been omitted. an additional limitation lies in the use of subjective measures for international performance only. also, the relatively small size of companies in our sample may present an additional limitation; the larger companies are (both family and non-family businesses), the more they become alike. this, however, could also be a promising starting point for future research. as our study draws on the uppsala school, we intentionally did not approach our research question from the more recent and somehow opposing perspective of international entrepreneurship (see the work of acs & yeung, 1999; etemad & wright, 1999; 2000; 2003; mcdougall & oviatt, 2000). building on the groundwork of the mcgill school (e.g., etemad, 2004; young et al., 2003; wright & dana, 2003; dana, etemad, & wright, 1999) on the entrepreneurial dimension of internationalization, future research may address family firm internationalization from this perspective. finally, our research was limited to german-speaking countries in europe only and therefore 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(1998). the determinants of export performance: a review of empirical literature between 1987 and 1997. international marketing review, 15(5), 333-356. http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2021, vol. 31, no. 01, 20-38 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2021 small business institute® w w w. j s b s . o rg introduction 1centrum pucp graduate business school pontificia universidad católica del perú, los álamos de monterrico, daniel alomía robles 125, santiago de surco, lima, perú, iaguilarr@pucp.edu.pe 2escuela de negocios universidad de las américas, sede udlapark, redondel del ciclista, antigua vía a nayón, quito, ecuador, iliana. aguilar@udla.edu.ec 3centrum pucp graduate business school pontificia universidad católica del perú, los álamos de monterrico, daniel alomía robles 125, santiago de surco, lima, perú, lariasb@pucp.pe the relationship of consumer ethnocentrism, purchase intention, and lifestyle in first-generation bicultural ethnic groups acculturation/biculturalism, lifestyle, country of origin, host country, consumer ethnocentrism, purchase intentions apa citation information: aguilar-rodríguez, i. e., & arias-bolzmann, l. g. (2021). the relationship of consumer ethnocentrism, purchase intention, and lifestyle in first-generation bicultural ethnic groups. journal of small business strategy, 31(1), 20-38. the beliefs about the convenience and morality of buying goods and services made abroad are what shimp and sharma (1987) called “consumer ethnocentrism.” thus, more ethnocentric consumers tend to prefer local products due to their immorality to purchase foreign products. however, there is no clear vision of ethnocentric trends in bicultural consumers; that is, those who integrate two cultures into their behaviors, values, and identities (berry, 1997). research has shown that bicultural ethnic consumers have a high degree of ethnocentrism with their country of ethnic affiliation, but they may experience dual or divided loyalties to their country of origin and their host country (cleveland et al., 2009, 2011; el banna et al., 2018; zolfagharian et al., 2017; zolfagharian & sun, 2010). other studies, however, have shown that consumers have mixed identities and use these when evaluating different products (zeugner-roth et al., 2015; zolfagharian et al., 2013). when consumers identify with more than one country, they tend to favor local and host country products over most foreign products. in this sense, assuming that all consumers have a monocultural disposition, it may be a mistake, since bicultural consumers can identify with the cultural groups of the country of origin and the host country (benet-martínez & haritatos, 2005). therefore, existing theories may not fully predict or explain the behavior of these consumers. studies have shown that bilingualism in young latinos is fundamental to their identity (booth et al., 2020). thus, although ethnocentrism applies to all countries, there may be essential differences for countries of origin and host countries, raising interest in understanding ethnocentric orientations that imply further exploration of purchase intentions. understanding the country of origin’s effects on cultural consumers is of paramount importance, given the increasing ethnic diversification of consumer markets (shoham et al., 2017). to survive dynamic and competitive environments, companies have found it necessary to deepen their knowlthe study analyzed consumer ethnocentrism’s relationship in the first generation colombian-canadian bicultural ethnic consumer with purchase intention and lifestyle. one hundred and fifty-eight personal surveys were conducted in toronto, canada. it found that ethnocentrism positively influenced the perceptions of canadian products compared to colombian products. however, lifestyle was not significantly related to purchase intention. these findings motivate companies to identify their bicultural consumers who may favor products of the host country over most foreign products. it is possible that individuals who incorporate dual ethnic identities can move away from one value system and adopt another; thus, more empirical evidence on the behavior of this type of consumer must be provided, mainly when multinationals compete among one another rather than with their national rivals, with the concept of country of origin being highlighted. consequently, organizations should know how affiliation with the host country may positively affect on purchase intentions concerning the country of origin. iliana e. aguilar-rodríguez1,2, leopoldo g. arias-bolzmann3 http://www.smallbusinessinstitute.biz http://www.jsbs.org 21 i. e. aguilar-rodríguez, & l. g. arias-bolzmann journal of small business strategy / vol. 31, no. 1 (2021) / 20-38 edge of consumers’ purchase intentions regarding which products they purchase and which ones they prefer, especially when they have a bicultural ethnicity that generates more potent effects of ethnocentrism (el banna et al., 2018). an important question has arisen about the psychographic characteristics that affect purchase intentions that have not been treated extensively in the literature. researches provided support for the usefulness of segmenting markets based on consumer’s ethnocentrism and lifestyles, either by having different ethnocentrism levels that are reflected in their purchasing tendencies or to differentiate consumer perceptions of foreign products. however, these studies have focused on consumer attitudes rather than purchase intention, which is what this research aims to discover. this study has two purposes: (a) to find differences between the ethnocentrism of first-generation colombian-canadian bicultural ethnic consumers concerning the country of origin and the host country, and (b) to analyze the relationship of consumer ethnocentrism with purchase intention and lifestyle. canada is one of the countries with the highest number of immigrants (united nations statistics division, 2016). it represents a significant market segment, traditionally multicultural, in which there is a large group of first-generation colombian immigrants. thus, for this type of consumer, it is expected that purchase intentions may depend on their lifestyle. this research is important because it is one of the first studies that discuss the effect of ethnocentrism on bicultural consumers, making a significant contribution to consumer acculturation research. besides, it determines to what extent consumers’ sense of belonging and their ethnic origins influence their intentions to purchase domestic products because migration produces multicultural societies where lifestyles significantly change product demands. the following section presents a review of the literature and the justification of the study’s hypotheses. subsequently, it will address the methodology, including the type of research, the form of data collection, the population under analysis, and the measurement model being applied. finally, the results that correspond to compliance with the hypotheses are presented, and the implications for future research are discussed. literature review and conceptual framework this section presents the theoretical links extracted from the literature that justifies the proposed model in figure 1. figure 1. proposed research model acculturation according to redfield et al. (1936), “acculturation comprehends those phenomena which result when groups of individuals having different cultures come into continuous first-hand contact with subsequent changes in the original culture patterns of either or both groups” (p. 149). thus, pires & stanton (2000), is the degree to which values are replaced or increased by those of the host country that are inherent in each ethnic group. although this is not always the case since berry (1997) identified dominant and non-dominant cultural orientations. the first ones are related to the principal or host culture (zhang & moradi, 2013), while others implied having an identity with the ethnic minority (inguglia et al., 2020). the fusion of these cultural orientations leads to four possible acculturation strategies: (a) integration (biculturalism), (b) assimilation (dominant culture), (c) separation (heritage culture), and (d) marginalization (none of culture) (benet-martínez & haritatos, 2005; nguyen & benet-martínez, 2013). in this research, the first strategy will address aiming to expand a frame of reference in its link with consumer ethnocentrism, and understand its relationship between lifestyles and purchase intentions. integration the strategy is also known as biculturalism, proposes that groups are composed of their behaviors, values, and identities belonging to two cultures (berry, 1997). other ethnocentrism of the bicultural ethnic consumer purchase intention lifestyle country of origin host country h1 h3 h4 h2 h5 22 i. e. aguilar-rodríguez, & l. g. arias-bolzmann journal of small business strategy / vol. 31, no. 1 (2021) / 20-38 contributions mention that in this integration, individuals do not belong to homogeneous groups, and may differ in their ways of negotiating their cultural orientations and combining their two cultures (benet-martínez & haritatos, 2005; nguyen & benet-martínez, 2013). benet-martínez and haritatos (2005) used the term bicultural identity integration (bii), as an extension to biculturalism and the identity theory. it refers to the individual differences to connect two identities successfully. those people who have a high bii, see their two cultures as compatible with their identity, being able to change their cultural schemes. on the contrary, individuals with low bii see their heritage and cultural currents as incompatible and keep them separate. therefore, individual differences in bicultural identity affect cultural knowledge in interpreting social events (schwartz et al., 2015). however, when this occurs, it is essential to understand how it is linked to consumer’s ethnocentrism, considering a country of origin and a host country, especially regarding their purchase intentions and lifestyles. consumer ethnocentrism, country of origin and host country the term ethnocentrism was introduced by ludwig gumplowicz in the 1880s, as cited in bizumic (2014), but it was not until graham-sumner (1907) that it gained greater popularity. shimp and sharma (1987) refined the concept to have a consumer orientation (initially american), defining it as the tendency to see the group itself as the center of everything, but with an orientation to the sense of identity, feeling of belonging, and what purchasing behavior is acceptable. in addition to referring to nations, they saw it applying to family pride, religious prejudice, racial discrimination, and patriotism. thus, purchasing imported products is seen as being an attack on the domestic economy, antipatriotic, and generating unemployment. shankarmahesh (2006) justified it as the distinction that consumers make between the products of the internal and external groups, between the country of origin and the host country, avoiding the purchase of foreign products for nationalistic reasons. however, it is worth delving into how this distinction is when the biculturalism explained above occurs since the connection of two identities could generate cultural compatibility or not, depending on the degree of consumer’s ethnocentrism towards the two cultures, or towards one of them. the country of origin, where an individual is born, is a sign of the product, which refers to the country’s image. verlegh and steenkamp (1999) identified that the effects it generates on consumers in terms of behavioral intentions are granted for reasons: (a) cognitive, (b) emotional, and (c) regulatory. whereas, the host country, also referred to as a foreign country or residence country, is the one that protects immigrants. all of this allows identifying an assessment of the purchasing behavior of consumers. although the literature does not address much about the host country, since its impact between ethnic identity and ethnocentrism has not yet been empirically observed, for el banna et al. (2018), double ethnocentrism is a potentially influential factor in the purchasing behavior of ethnic consumers in host markets. thus, ethnocentric consumers’ optimistic view generates an overestimation of the product qualities and an underestimation of foreign products. for example, authors such as luedicke (2011), park and yoon (2017), and phinney and goossens (1996) agreed that consumers with a high level of ethnocentrism describe other members of the group as inferior. they see foreign brands as an economic and cultural threat to their country, tending to accept similar things and reject those that are culturally different. the model of verlegh (2007) demonstrated under the theory of the social identity of tajfel (1982) that consumers have a positive bias towards products from the country of origin. chryssochoidis et al. (2007) concluded that ethnocentrism affects not only consumers’ beliefs, but also how they evaluate the perceived quality of products (the effect of the country of origin). it is confirmed by further studies that have shown that the country of origin is one of the essential attributes in the choice of products (motsi & park, 2020; schnettler et al., 2017). both consumer ethnocentrism and national identification are positively related to the perceived quality of domestic and foreign products (shimp & sharma, 1987; verlegh, 2007; zeugner-roth et al., 2015). on the other hand, the theory of optimal distinction of brewer (1979, 1991, 1999) observed in the study by zolfagharian et al. (2013), (2014), that immigrant consumers, being able to experience mixed identities, identify not only with the country of origin but also with the host country, leading them to have dual or divided loyalties (el banna et al., 2018). zolfagharian et al. (2017) also explained that consumers whose ethnic identity is in a developing country consider brands of developed countries to be superior to national ones. other studies have concluded that consumers from developed countries tend to perceive domestic products as higher quality than imported products (balabanis & siamagka, 2017; kandogan, 2020). in this way, ethnocentric preferences could be directed towards the country of origin. however, as bicultural consumers, these preferences could be different, especially if they have a low or high bii level. thus, the hypothesis suggested the following: h1. ethnocentrism of the bicultural ethnic consumer is dif23 i. e. aguilar-rodríguez, & l. g. arias-bolzmann journal of small business strategy / vol. 31, no. 1 (2021) / 20-38 ferent in the country of origin than in the host country. consumer ethnocentrism and lifestyle william lazer introduced the concept of lifestyle patterns in 1963, quoted by plummer (1974), “... it embodies the patterns that develop and emerge from the dynamics of living in a society” (p. 33). since they are formed by the daily choices that individuals make and represent a set of ideas quite different from that of personality (kucukemiroglu, 1999). for this, weber (1958) established these choices are influenced by external factors such as consumption and the pursuit of professional recognition. according to wells and tigert (1971), based on the aio model (activities, interests, and opinions), considered that lifestyles as the combination of the internal and external characteristics of people. later, mitchell (1983) established that lifestyles depend on consumption habits, and they relate to the economic level of people. thus, it could say that lifestyles are determinants of consumer behavior. they, therefore, become patterns of behavior, based on the motivations about the goods and services that people acquire. meanwhile, marketing effectiveness is part of the correct selection of the market segment. segmentation with demographic variables is important to detect priority segments in companies. still, the psychographic segmentation responds to demographic limitations on behavior prediction, for which aio to be the most commonly used approach to lifestyle measurements. studies that measured consumer ethnocentrism using demographic variables such as gender and age have shown that women tend to be more ethnocentric than men and that adults are more ethnocentric than young people (eren, 2013; purwanto, 2014; zeugner-roth et al., 2015). kucukemiroglu (1999) demonstrated a significant relationship between specific dimensions of lifestyle and consumer ethnocentrism. ahn (2012) found in a sample of chinese consumers that ethnocentrism retained differences according to lifestyles (classified as conspicuous and fashion-seeking, rational and personality-seeking, traditional and conservatism-seeking). ahmed and d’astous (2007) put forth that wealthy and educated thai consumers place more value on products manufactured in highly industrialized countries. some dimensions of the lifestyle, for example, influenced ethnocentric trends of turkish consumers (family/ children and community orientation, health consciousness, independence, and adventurism) (kaynak & kara, 2002). another study of azeri and kyrgyz consumers, kaynak and kara (2015) found that the level of consumer ethnocentrism mitigated the effect of the country of origin on the perceived quality of the product. middleand high-income consumers, regardless of their nationality and host country, have the same behavior and purchasing patterns, but they are distinct from the highly ethnocentric low-income consumers. consequently, in biculturalism, preserving the country of origin could also maintain lifestyles, despite acculturation with the host country. in their study about asian american consumers, wang et al. (2011) found that the retention of the language of the country of origin helped to avoid health problems (overweight/obesity) compared to acculturation without language retention. or, what booth et al. (2020) identified as the fundamental role of bilingualism in the experience of acculturation in young latinos when they live in an emerging latino community. on the other hand, acikdilli et al. (2018) found that turkish consumers are rational buyers and do not discriminate against imported products, but prefer local products of the same quality as imported ones because buying them helps the economy and employment in the nation. among the characteristics that identified as most relevant are: (a) self-reliance and leadership, (b) nutrition and family orientation, (c) health and optimism, (d) orientation to households and industries, and (e) competitive and adventurous. however, more empirical evidence is needed on the relationship between ethnocentrism and lifestyles, since ethnocentric consumers have different lifestyle patterns than non-ethnocentric consumers (acikdilli et al., 2018; kavak & gumusluoglu, 2007; kaynak & kara, 2002, 2015). therefore, the following is considered: h2. ethnocentrism of the bicultural ethnic consumer has a positive relationship with lifestyle. consumer ethnocentrism and purchase intention according to the theory of reasoned action and planned behavior (ajzen, 1985, 1991, 2019; ajzen & fishbein, 1977; fishbein & ajzen, 2011), people have attitudes that predict their behavior. subjective attitudes and norms affect behavioral intentions, which in turn affect the final behavior. consumer ethnocentrism, according to othman et al. (2008), plays a vital role in purchasing behavior by influencing its predictive capacity, significantly when it varies between one country and another. the globalization of markets has caused consumers to have various alternatives for foreign and local goods and services, generating differences in purchasing behavior and consumer preferences. the reasons range from beliefs about the quality of imported products to a negative perception towards foreign goods (agbonifoh & elimimian, 1999; gaur et al., 2015; martinelli et al., 2012; parts & vida, 2013). thus, the impact of ethnocentrism on the purchase intention of a product is moderate 24 i. e. aguilar-rodríguez, & l. g. arias-bolzmann journal of small business strategy / vol. 31, no. 1 (2021) / 20-38 when it is considered being necessary, and it also depends on the level of development of the consumers (javalgi et al., 2005). the convergence between a product and its origin reinforces the country’s impact on the consumer’s intention to purchase products, even if consumers do not perceive domestic products to be of higher quality than imported ones when the latter have positioned themselves as status symbols (martinelli et al., 2012). moreover, the need for the product is vital between ethnocentrism and the attitude towards importing foreign products (javalgi et al., 2005). also, for cosmopolitan consumers, there have been direct effects with the purchase behavior towards foreign products instead of domestic ones, measured through the ethnocentrism of the consumer, product’s quality, and the purchase intentions (parts & vida, 2013). on the other hand, purwanto (2014) identified that the ethnocentrism of the consumer is positive in the perception of the quality of domestic products and their purchase intentions. recent contributions, such as that of charton-vachet et al. (2020), established that the perceived value of regional products and consumer preference for these products mediated the relationship between consumer attitudes towards a region and their purchase intention. likewise, fernández-ferrín et al. (2018) identified that consumers value local, regional and traditional products, that they buy them in high proportions, and that their levels of ethnocentrism are not always related to the purchase of these products. however, xin and seo (2019) found a negative relationship between consumer ethnocentrism and purchase attitude, even if the product image, health awareness, and subjective knowledge positively affected purchase attitudes. in addition, in bicultural ethnic groups, there could also be an influence between the ethnocentrism of the consumer and the purchase intention. studies about halal meat consumption among chinese muslims have shown that acculturation is a predictive factor of purchase intentions (ahmed et al., 2014; ali et al., 2017, 2018; sherwani et al., 2018). on the other hand, tang et al. (2020) found that the attitude of acculturation affected consumer behavior in young rural migrants, associated with attitudes and attachment to the urban host society and the rural origin. das and jebarajakirthy (2020) identified that the acculturation of young people within western culture is a driving source of fashion and leads towards the purchase of luxury goods, and ethnocentrism moderated certain elements such as social interaction with western culture and openness to emulate it. the diversity of findings identified is a motivation to further studies on ethnic consumers, which better evidence the relationship between ethnocentrism and purchase intentions. thus, the following is proposed: h3. ethnocentrism of the bicultural ethnic consumer has a positive relationship with purchase intention. lifestyle and purchase intention as mentioned above, lifestyles are driven by consumer habits that predict behavior, mainly based on the aio approach. also, the theory of reasoned action and planned behavior has played an important role in predicting purchase intentions. tang et al. (2020) identified that certain chinese consumers tend to change their rural identity to urban by developing new preferences and consumption habits. others maintain their rural identity, customs, and values. consumption patterns not only showed socio-economic background and subjective intentions but also showed effects on their acculturation and life prospects in urban society. likewise, danziger et al. (2014) argued that internal migrants (within the host country) tend to have a higher social status as a means to demonstrate their achievements to other migrants. on the other hand, in their research on the food of convenience, contini et al. (2018, 2020) found that healthy products could respond to the needs of new lifestyles and food choices. also, villegas et al. (2018) explained that the change of lifestyles affects healthy eating habits in hispanic immigrant families. for chinese-australian consumers, with different acculturation levels, weber et al. (2014, 2017) identified significant differences in their purchase intentions that would affect their behavior, regardless of the level of acculturation, as well as ahn (2012), recognized that lifestyles are negatively related to attitudes towards foreign products. all of these findings confirmed that depending on the lifestyle of the consumer, and their purchase intention would be guided by the category of products (agbonifoh & elimimian, 1999), since brands carry benefits, emotions, and qualities. the more options for a product they have, the more complex and dissimilar the selection process becomes (el banna et al., 2018). when people face a choice, they reflect on the feeling that motivates them to opt for that alternative, which causes a temporary change in attitude, making individuals change their minds about which option is best. it explains the unconscious behavior of the consumer. the longer the time between measuring the intentions and the behavior, the more difficult it is to predict behavior (kavak & gumusluoglu, 2007). therefore, the following is determined: h4. lifestyle has a positive relationship with purchase intention. 25 i. e. aguilar-rodríguez, & l. g. arias-bolzmann journal of small business strategy / vol. 31, no. 1 (2021) / 20-38 consumer ethnocentrism, purchase intention, and lifestyle wells and tigert (1971) emphasized that to divide consumers into subgroups, one must consider factors other than demography. kavak and gumusluoglu (2007) asserted that lifestyle is an important variable for understanding consumers, especially when organizations intend to enter global markets. therefore, ethnocentrism and lifestyle, being among the main influences on purchasing behavior, are crucial elements when differentiating consumers’ perceptions of foreign goods (acikdilli et al., 2018; kaynak & kara, 2002, 2015). kucukemiroglu (1999) discovered that turkish consumers, based in istanbul, who are more fashion-conscious and leadership-oriented, are less ethnocentric than those with more family and community orientation, a finding that was confirmed by kaynak and kara (2002). thus, consumers in azerbaijan and the kyrgyz republic, the most dominant lifestyle dimensions, were family and community orientation factors (kaynak & kara, 2015). kavak and gumusluoglu (2007), in addition to identifying that ethnocentrism significantly influence purchase intentions. they found that health-conscious, artisan and cost-conscious consumers had intentions of purchasing domestic food, while fashion-conscious consumers preferred ethnic cuisine; they also found that men preferred domestic products and women preferred foreign products. particularly, in the study by acikdilli et al. (2018) resolved that family has a strong influence on the turkish lifestyle and are consumers who spend significant time online to make purchase decisions. el banna et al. (2018) also explained that it is likely that the ethnicity of consumers influences their ethnocentric criteria and affects their purchasing behavior. consumers have adopted cosmopolitan features seen in certain favored cases and others spoiled by the local environment (cleveland et al., 2009, 2011; gaur et al., 2015; motsi & park, 2020; parts & vida, 2013). thus, global consumer culture is a factor that impacts on ethnocentrism, while cosmopolitanism and social interaction reduce it (carpenter et al., 2013). for example, ahn (2012) found that consumer ethnocentrism is different according to lifestyles, but that it could have a negative relationship on attitudes towards foreign products. gaur et al. (2015) identified that consumer ethnocentrism negatively influences the selection of american brands among latin american consumers and that conspicuous consumption moderated purchase intentions. nonetheless, maichum et al. (2016) demonstrated, in a sample of thai consumers, that attitude, subjective norm, and control of perceived behavior have significant positive influences on the intent to purchase organic products. research reveals that analyzing the consumer’s lifestyle and ethnocentrism enables a more comprehensive segmentation for entering into global markets, because many purchasing behaviors stem from long-term studies that combine consumer ethnocentrism, lifestyles, and purchase intentions in terms of biculturalism have not been addressed yet. although the research of kavak and gumusluoglu (2007) analyzed these variables in a sample of turkish consumers, considering the aio approach, which measures lifestyles, they assumed that the purchase intentions were assessed based on the cetscale. likewise, kaynak and kara (2015) also used aio, they measured the perceptions of azeri and kyrgyz consumers about product attributes and characteristics, and no study did it under the theory of reasoned action and planned behavior (ajzen, 1985; fishbein & ajzen, 1975), which were proposed for this research. on the other hand, other contributions did not link lifestyles to the aio approach (ahn, 2012; danziger et al., 2014; tang et al., 2020), and others, which have addressed the theory of reasoned action and planned behavior, have only covered healthy awareness in lifestyle dimensions (contini et al., 2018, 2020; villegas et al., 2018), or about other types of consumption (gaur et al., 2015), or influenced by the acculturation/biculturalism, but not directly to lifestyle in the aio approach (ahmed et al., 2014; ali et al., 2017, 2018; weber et al., 2014, 2017). while el banna et al. (2018), in their research about egyptian-canadians, they used scales on the probability of purchasing, leaving a significant knowledge gap to be addressed in this study. as a result, lifestyle can be seen as a mediating effect between ethnocentrism and consumers’ purchase intention. thus, the following is proposed: h5. lifestyle mediates the relationship between the ethnocentrism of the bicultural ethnic consumer and purchase intention. method this research followed a perspective of non-experimental cross-cultural and correlational design, which involved a single selection of the sample. data collected through personal surveys. through the data processing in spss (ibm, 2019), the kolmogorov-smirnov and mann-whitney u tests were applied to verify the first hypothesis and through the amos structural equation model (sem) for the others, following the recommendations of iacobucci (2009, 2010), in which these models are suitable for studies of consumer behavior. 26 i. e. aguilar-rodríguez, & l. g. arias-bolzmann journal of small business strategy / vol. 31, no. 1 (2021) / 20-38 instrumentation for the elaboration of the main constructs of interest: (a) ethnocentrism, (b) lifestyle, and (c) purchase intention, scales were used that were widely accepted, developed, and tested in prior research. the instrument is divided into three sections. the first section included general questions, such as (a) demographic questions (gender, marital status, age, education, and employment status); and (b) psychographic issues (income). the second section referred to questions related to their lifestyle and purchase intention. and the third section examined questions about consumer ethnocentrism. these were designed from fiveand seven-point likert-type scales (totally disagree = 1, totally agree = 5/7). for lifestyle, the attitudes, interests, and opinions (aio) scale of wells and tigert (1971) was used because it evaluates people’s activities in terms of: (a) how they spend their time, (b) important things in their immediate environment, (c) the view of themselves and the world around them, and (d) their stage in the life cycle, income, education, and residence (plummer, 1974), was used, considering the items of acikdilli et al. (2018): (a) self-reliance and leadership, (b) nurturing and family orientation, (c) health and optimism, (d) household oriented and industrious, (e) competitive and adventurous. regarding purchase intention, the scale developed by ajzen (1985, 2019), fishbein and ajzen (1975), and hill et al. (1977), adapted by maichum et al. (2016): (a) attitude, (b) subjective norm, (c) perceived behavior control, and (d) purchase intention. according to the theory of planned behavior, attitudes and subjective norms come together to produce an intention, which is influenced by actual control of the perceived behavior, thus determining the intention of purchase behavior (ajzen, 2012). therefore, it is a valid scale for understanding the behavioral intention of bicultural ethnocentric consumers. finally, to measure consumer ethnocentrism, the consumer ethnocentrism tendencies scale (cetscale) developed by shimp and sharma (1987), consisting of 17 elements. this scale has been tested in consumer behavior studies and is a useful tool to correlate studies along with demographic and psychographic measures. the subsets proposed by chryssochoidis et al. (2007) were used, which classifies ethnocentrism as hard and soft. population the population of the study was the colombiancanadian-first-generation bicultural ethnic group (born outside the host country), who are residents in canada, because they represent an important segment of the traditionally multicultural market and because increasing immigration is rapidly changing canada’s demographic characteristics. besides, as people migrate, they carry their values and beliefs, so their cultural orientation will be more or less overlap with the culture of the host country (phinney et al., 2001). this mainly occurs with first-generation immigrants, due to the pressure and challenges of the acculturation process that are part of the adaptation to life in the new environment. canada was selected as a host country because more than one-fifth of its population is foreign-born. according to the united nations statistics division (2016), the population size of immigrants is 8,219,555. organization for economic cooperation and development (2016) has established that canada not only has the highest number of migrations by skilled labor but that it also has 60% of a high level of education. its express entry system has managed concerning other countries, to improve the selection of people entering canada, as well as its infrastructure, innovation and timely policies in the face of emerging challenges. colombia was determined as a country of origin because it is one of the countries with the most migratory representativeness in canada. only from south america, there are 346,600 residents, of whom 74,600 are colombian (united nations statistics division, 2016). the availability of this bicultural ethnic group increases the importance of conducting research studies on consumer ethnocentrism because it is a diverse market environment. findings concerning this population included that: (a) bicultural consumers are less ethnocentric than monocultural consumers (zolfagharian & sun, 2010), (b) first-generation immigrants have high rates of ethnocentrism towards countries of origin and host countries (zolfagharian, et al., 2013, 2014), (c) bicultural consumers who are from an underdeveloped country of origin and an industrialized host country prefer the products of the host country (zolfagharian et al., 2017), (d) bicultural consumers have possible effects of ethnic identity and ethnocentrism on purchasing predispositions (el banna et al., 2018). sample the sample of the analysis was 158 citizens / permanent residents of the cities of mississauga, milton, oakville, london, waterloo, hamilton, burlington, and kitchener, for being the most representative cities in terms of concentration of bicultural ethnic groups, particularly colombo-canadians. also, because a snowball sampling technique was applied, which consists of the selection of individuals by referrals, when they are hard-to-reach populations (malhotra et al., 2013). 27 i. e. aguilar-rodríguez, & l. g. arias-bolzmann journal of small business strategy / vol. 31, no. 1 (2021) / 20-38 data collection all participants received the informed consent, which detailed the parameters and purpose of the research. to ensure the answers’ truthfulness and because a bicultural ethnic group was being analyzed, the surveys were conducted in-person during the weekends at the participants’ homes, from august to november 2019. although the instrument determined in its instructions that the survey would take 10 minutes to answer, each participant took between 30 and 60 minutes because the investigator visited them at their home. they felt more confident to talk and emphasized the memories of their country of origin, but especially the biculturalism, which was when they highlighted the importance of their identities, tradition, morality, and points of view about being colombian-canadian. it helped to adequately generate a snowball sampling, identifying other people that belong to the target population, and significantly increasing the probability of locating the desired characteristics in it. thus, it was possible to ensure the absence of lost data, with 158 surveys carried out. finally, as encouragement and appreciation for their participation in the survey, they were given a gift card for purchase at the supermarket. results it was necessary to establish acronyms for data tabulation and variable identification. to classify lifestyles, lfsty was used, which was divided into srl to refer to self-reliance and leadership; nfo, for nurturing and family orientation; hop, for health and optimism; hoi, for household oriented and industrious; and cad, for competitive and adventurous. for the purchase intention, the acronym puint was used. for this, it required to make a country-by-country encoding, combining words with the endings in co = colombia, and ca = canada. apco and apca were used to describe attitude. snco and snca were used to identify the subjective norm. pbco and pbca were used for perceived behavior control. pico and pica were used for purchase intention. in ethnocentrism, ethnc was applied under the same parameters mentioned above for the country of origin and host country. het encoding was required for hard ethnocentrism and set for soft ethnocentrism. the resulting acronyms were the following: hetco, hetca, setco, and setca, to refer to hard ethnocentrism and soft ethnocentrism in colombia and canada. an exploratory analysis of the data was conducted from the simple frequencies. no missing or atypical values were identified. also, through descriptive statistics analysis, it was possible to determine that, as the most representative data of the studied sample, 58.2% were women, 65.2% hold a bachelor’s degree, 82.3% were married, 41.1% were between 41 and 50 years old, 36.1% had average incomes between $61,000 $90,000 and 93%, full-time job. with this, it emphasized that the sample complied with first-generation characteristics. in table 1, the absolute frequencies and percentages on this data are shown: for the verification of h1, the contributions of chryssochoidis et al. (2007), who categorized ethnocentrism as soft or hard, were used. for this, the normality test established, as shown in table 2, that only soft ethnocentrism concerning the host country presented normal scores. for the other categories, the non-parametric mann-whitney u test in figure 2 was applied, which found significant differences between the country of origin and the host country. soft ethnocentrism showed more significant values than hard ethnocentrism (p = 0.00, p = 0.083). it was also found that the average ranges were higher for the host country (181.52 and 169.16) than for the country of origin (135.48 and 147.84). table 1 summary of descriptive statistics and sample demographic and socio-economic characteristics gender a.f % employent status a.f % education a.f % marital status a.f % age a.f % income a.f % male 66 41.8 housewife 4 2.5 bachelor’s degree 103 65.2 single 16 10.1 20-30 13 8.2 less 30,000 22 13.9 female 92 58.2 full-time job 147 93.0 high school 26 16.5 married 130 82.3 31-40 51 32.9 31-60,000 50 31.6 part-time job 7 4.4 master’s degree 27 17.1 divorced 9 5.7 41-50 65 41.1 61-90,000 57 36.1 doctoral degree 2 1.3 widowed 3 1.9 51-60 21 13.3 91-120,000 24 15.2 over 61 7 4.4 more than 120,000 5 3.2 28 i. e. aguilar-rodríguez, & l. g. arias-bolzmann journal of small business strategy / vol. 31, no. 1 (2021) / 20-38 for the confirmation of h2, h3, and h4, a sem was performed. it was necessary to start with an exploratory factor analysis, using the method of extraction of main axes and promax rotation. the items with insignificant loadings were eliminated, achieving a kaiser-meyer-olkin (kmo) measure of 0.731 (> 0.70), with 11 factors that explained 72.03% of the variance. a confirmatory factor analysis was used to validate the scales’assumptions, using the unweighted least squares (uls) estimates procedure. it was found that all standardized factor loadings met the assumption of being smaller than unity. table 2 normality test for soft and hard ethnocentrism country kolmogorov-smirnova statistic gl as soft ethnocentrism colombia 0.101 158 0.000 canada 0.062 158 0.200* hard ethnocentrism colombia 0.145 158 0.000 canada 0.132 158 0.000 reject h0 total n 316 total n mann-whitney u 16118,5 mann-whitney u asymptotic meaning 0,000 asymptotic meaning h0: the distribution of hard ethnocentrism is the same among the country's categories reject h0 316 14.166,000 0,038 h0: the distribution of soft ethnocentrism is the same among the country's categories middle range = 147, 84 middle range = 169, 16 figure 2. mann-whitney u test for independent samples the resulting factors were: (a) ethnocentrism in the country of origin (ethn_co), (b) ethnocentrism in the host country (ethn_ca), (c) self-reliance and leadership (srl), (d) nurturing and family orientation (nfo), (e) household oriented and industrious (hoi), (f) attitude towards purchasing and controlling behavior perceived for products from the country of origin (appb_co), and (g) attitude towards purchasing and controlling behavior perceived for products from the host country (appb_ca). it found the correlation between the factors did not exceed the square root of the average variance extracted (ave > 0.50); thus, the discriminant validity was met. the composite reliability (fc > 0.90) also guaranteed that the measurement model was adequate, as shown in table 3. table 3 validity and reliability measures of the complete model fc ave ethn_co appb_co ethn_ca srl nfo appb_ca hoi ethn_co 0.837 0.512 0.716 appb_co 0.906 0.621 0.313 ** 0.788 ethn_ca 0.913 0.780 0.164 ** -0.518 ** 0.883 srl 0.882 0.602 -0.143 ** -0.079 ** 0.051 ** 0.776 nfo 0.973 0.877 0.034 ** 0.131 ** -0.155 ** -0.120 ** 0.936 appb_ca 0.877 0.551 -0.386 ** -0.246 ** 0.164 ** -0.054 ** 0.055 ** 0.742 hoi 0.928 0.811 0.135 ** -0.104 ** 0.209 ** -0.245 ** 0.084 ** 0.036 ** 0.900 29 i. e. aguilar-rodríguez, & l. g. arias-bolzmann journal of small business strategy / vol. 31, no. 1 (2021) / 20-38 from these results, we built a new reflective model with three second-order factors: (a) ethnc, (b) lfsty, and (c) puint, each with their respective dimensions. ethnc consisted of (a) ethn_co, and (b) ethn_ca. lfsty, of (a) srl, (b) nfo, and (c) hoi. puint yielded two subfactors related to the attitude towards purchasing and perceived behavioral control, both for the country of origin and for the host country: (a) appb_co and (b) appb_ca. the relationships formed were based on what was previously defined in the research hypotheses in section 2. in addition to executing the uls procedure, the maximum likelihood (ml) method was applied, which detected convergence difficulties, that is, values with high collinearity. the model was thus re-specified, as shown in figure 3. it is useful to mention that the modification of indices suggested correlating some measurement errors, for example, e30 and e31, revealing that these formulations belonged to the same factor. something similar was done with other errors. table 4 presents the standardized coefficients, in which some values below 0.5 were maintained in order to achieve a better convergence in the model. figure 3. path chart of the final re-specified uls sem table 4 standardized coefficients of the factors relations estimate relations estimate relations estimate hetco6 <--ethn_co 0.647 setca4 <--ethn_ca 0.96 nfo4 <--nfo 0.969 hetco8 <--ethn_co 0.881 hetca7 <--ethn_ca 0.926 nfo5 <--nfo 0.855 setco9 <--ethn_co 0.758 setca9 <--ethn_ca 0.738 apca1 <--appb_ca 0.936 hetco15 <--ethn_co 0.556 srl2 <--srl 0.925 apca2 <--appb_ca 0.724 setco16 <--ethn_co 0.626 srl3 <--srl 0.922 pbca1 <--appb_ca 0.494 apco3 <--appb_co 0.639 srl4 <--srl 0.821 hoi1 <--hoi 0.922 pbco1 <--appb_co 0.763 srl6 <--srl 0.566 hoi2 <--hoi 0.964 pbco4 <--appb_co 0.911 srl7 <--srl 0.57 hoi3 <--hoi 0.819 pico1 <--appb_co 0.593 nfo1 <--nfo 0.971 pbca2 <--appb_ca 0.579 pico2 <--appb_co 0.853 nfo2 <--nfo 0.956 pico3 <--appb_co 0.825 nfo3 <--nfo 0.915 30 i. e. aguilar-rodríguez, & l. g. arias-bolzmann journal of small business strategy / vol. 31, no. 1 (2021) / 20-38 finally, the sem showed good adjustment indicators, which are summarized in table 5. subsequently, the coefficient of determination (r2) of the endogenous variable (puint) generated a value of 0.852, indicating that the purchase intention is explained in 85.20% by the variables srl, nfo, hoi, ethn_co and ethn_ca. table 5 measures of goodness of fit of the sem model uls procedure goodness of fit measure acceptable levels of adjustment obtained decision agfi: adjusted goodness of fit index rmr: root mean square residual > 0.90 < 0.08 0.923 0.088 suitable acceptable nfi: normed fit index > 0.90 0.900 acceptable rfi: relative fit index > 0.90 0.888 acceptable pgfi: parsimony goodness of fit index > 0.5 0.783 suitable table 6 shows the non-standardized regression estimators, their standard error (se), and the critical region (cr). it found that ethn_co and ethn_ca were not statistically significant relationships at 95% (p > 0.05) for nfo. however, ethn_ca was so at the 90% level, since its p value was less than 0.10 (0.095). regarding hoi, there was a difference by country, since ethn_ca was significant at a value p = 0.011, while ethn_co was not significant. another difference found by the country is identified in ethn_co concerning srl, where the country of origin showed no impact (p = 0.530), and the host country was influential at the 90% level (p = 0.098). it is also important to highlight what was found in ethnocentrism in colombia and canada, which were statistically significant in puint. besides, at a significance level of 5%, it is accepted that ethn_ca positively influenced hoi and ethnn_co in puint. negative influences were observed of 10% between ethn_ca and nfo and srl, and between hoi and srl. it was useful to identify whether the factors representing lifestyle mediate between ethnocentrism and purchase intention, permitting a check on h5. for this, it was necessary to calculate the indirect effects. through the boostraping option in amos, 2000 samples were constructed, thus calculating the confidence intervals and the p values. according to the approach of baron and kenny (1986), there are three types of mediation: (a) partial¸ (b) complete, and (c) indirect. however, recent literature suggests that mediation is present if there is a significant indirect effect (zhao et al., 2010). table 6 non-standardized coefficients and their ml statistical significance relations estimate se cr p decision nfo <--ethn_co 0.071 0.083 0.849 0.396 unacceptable nfo <--ethn_ca -0.104 0.062 -1.669 0.095 10% negative influence hoi <--ethn_ca 0.174 0.069 2.529 0.011 acceptable hoi <--ethn_co 0.09 0.09 0.991 0.322 unacceptable srl <--ethn_co -0.051 0.081 -0.628 0.53 unacceptable srl <--ethn_ca -0.103 0.062 -1.656 0.098 10% negative influence srl <--nfo -0.116 0.079 -1.474 0.14 unacceptable srl <--hoi -0.331 0.077 -4.31 *** 10% negative influence puint <--srl 0.013 0.065 0.207 0.836 unacceptable puint <--nfo 0.039 0.057 0.673 0.501 unacceptable puint <--hoi -0.066 0.059 -1.123 0.262 unacceptable puint <--ethn_co 0.375 0.075 5.007 *** acceptable puint <--ethn_ca -0.336 0.057 -5.879 *** 10% negative influence 31 i. e. aguilar-rodríguez, & l. g. arias-bolzmann journal of small business strategy / vol. 31, no. 1 (2021) / 20-38 the composite variables were calculated, estimating the latent variables in the amos program. the model displayed in figure 4 was constructed, in which the srl, nfo, and hoi factors that measure aspects of lifestyle could mediate between ethnocentrism and purchase intention. figure 4. indirect effects: model composed for purchase intention there were three indirect effects for ethnocentrism in the country of origin and three for the host country, one for each mediating variable, as presented in table 7. the indirect effects for the host country were statistically significant, considering lifestyle as the mediating variable (p values = 0.001, 0.023, and 0.001), which did not happen for the country of origin. countries align themselves economically, politically, and culturally to the host country, especially when it is a developed country. those people who share the same or similar ethnic origin maintain similar purchasing behaviors (el banna et al., 2018; luedicke, 2011; phinney & goossens, 1996). besides, they have assimilation within the larger group while looking for ways to exhibit individual and distinctive qualities to explain how consumers negotiate their unique positions in societies with multi-layered cultures. consumers who share a similar ethnic origin have similar purchasing behaviors that seek foreign products for symbolic or personal reasons to emulate the global culture. for this reason, colombian immigrants have adopted behaviors based on canadian culture, with a strong level of acculturation. simultaneously, by having high averages of ethnocentrism compared to the host country, the study reveals that colombo-canadian consumers have a high bii, generating compatibility between the colombian and canadian culture, which in turn allows a greater acceptance to certain products of the host country. for example, the acquisition of branded clothing in canada is better than doing so in colombia because prices are more accessible in the host country. however, the study also confirms a high level of ethnocentrism with the country of origin, supporting the theory of optimal distinction of brewer (1979), which suggests that consumers may experience dual allegiances between the country of origin and the host country. by showing soft ethnocentrism was more significant than hard ethnocentrism, it table 7 confidence intervals and p values for indirect effects parameter estimate lower upper p etnocentrismo_casrl -0.002 -0.004 -0.001 0.001 etnocentrismo_canfo -0.004 -0.008 -0.001 0.023 etnocentrismo_cahoi -0.012 -0.017 -0.008 0.001 etnocentrismo_cosrl -0.001 -0.004 0 0.131 etnocentrismo_confo 0.003 -0.003 0.008 0.447 etnocentrismo_cohoi -0.007 -0.017 0.002 0.239 discussion the ethnocentric tendencies of bicultural consumers, categorized as hard or soft, are more relevant concerning the host country, confirming what is stated in the theory of the social identity of tajfel (1982), stating that consumers have more significant biases with the country with which they identify. it is because the ethnic identities given to those in developing countries see more quality in the brands of developed countries. people who immigrate to foreign 32 i. e. aguilar-rodríguez, & l. g. arias-bolzmann journal of small business strategy / vol. 31, no. 1 (2021) / 20-38 is determined that colombo-canadian consumers, despite the strong acculturation and cultural integration with the host country, continue to identify with their ethnic minority. besides, ethnocentrism for the country of origin positively influenced the purchase intention of colombian-canadian consumers, implying that they are receptive and rational buyers towards colombian products. men prefer to go to colombian restaurants even though they are sometimes more expensive than canadian restaurants. at the same time, women focus on buying consumer goods, such as food, probably thinking about their family. both men and women would buy more frequently mass consumption products of colombian origin if they existed in the supermarkets. on the other hand, the study showed that consumer ethnocentrism influences lifestyle as long as it is oriented to the host country, but not to the country of origin. this influence was positive in the category of “household oriented and industrious” and negative in “nurturing and family orientation” and “self-reliance and leadership”. colombian-canadian consumers have a high level of ethnocentrism, and so they believe that canada, as one of the strongest economies in the world, mainly in the manufacturing sector, is a highly industrial country. their relationship is inverse; however, in terms of lifestyles that depend on family orientation and leadership, that is, consumer ethnocentrism has a negative influence on these traits. simultaneously, although one sees a high level of ethnocentrism towards the host country, this generates a negative relationship to purchase intentions, since different lifestyles can reflect various types of future consumer behavior. this is because it is possible for individuals who incorporate dual ethnic identities to move away from one value system and adopt another. in that sense, the negative relationship with the purchase intentions towards the host country may also be because colombian-canadian consumers’ behavior would be subject to an increasing number of recent immigrants and acculturating generations. however, canada has one of the best immigration systems, compared to other countries by leading to a more skilled and high-education workforce (oecd, 2016). it is relevant that industries look at first-generation colombo-canadians as a significant group of consumers, who need to meet needs based on their cultural integration. for example, if there were colombo-canadian products in canadian supermarkets, these would be among their main consumer preferences because they would highlight their biculturalism. for this reason, organizations should consider the offer of products that focus on biculturalism as a value proposition, thereby protecting their acculturation and reducing possible adverse effects on host culture. several examples have been given in terms of fashion, music, or food, which establish that there are increasingly cultural mixes that integrate the local with the global: chinese takeaway food, the indian film industry, jazz music, etc. (bhattacharjee, 2017). as kowalik et al. (2020) noted, traditional marketing tools are not universal, and consequently, the findings of this study encourage the increased subjective knowledge of the products offered. thus, the industries will have to provide a mixture of promotion focused on giving information about the ethnic/bicultural origin and mentioning the positive effects on the lifestyles in the host country. it is also established that the canadian market may require localized approaches. large corporations have been charged with positioning brands under the assumption of being international without analyzing their products’ importance for bicultural segments or niche markets based on their cultural identity preferences. a global brand may be significant, but those that relate to the country of origin, when migration rates are high, enjoy the loyalty of the bicultural consumer. thus, organizations must develop a balance between the brands of the country of origin and the host country, which contributes to the sense of being a part of the nation and minimizes the resistance of those consumers with a high level of ethnocentrism. the negative influence between “self-reliance and leadership” and “nurturing and family orientation” with the host country shows that bicultural consumers’ lifestyle, in terms of the family is not the same as when a lifestyle is adopted that is based on personal criteria such as self-confidence, independence, and personal ability. these results reveal certain basic characteristics of the sample based on their cultural values since industrialized countries are more individualistic than asian and latin american countries (kramer et al., 2007). similarly, consumers with a higher level of education appreciate products manufactured in industrialized countries (ahmed & d’astous, 2007; balabanis & siamagka, 2017; kandogan, 2020). also, for example, in these countries, as in the case of china, sales of certain products continue to grow in comparison with other products on the market (busch, 2016; zheng, 2017). lifemono insurance company in canada is the fastest-growing brand; crown royal ranks first with a aaa brand rating, a&w is also on the rise, unlike tim hortons, which is a new source of canadian pride in the fast-food restaurant market (brand finance, 2020). although the study showed that lifestyles were not significant with the purchase intention, it also showed that the categories of “household oriented and industrious,” “self-reliance and leadership” and “nurturing and family orientation” did not mediate the intention to purchase based on ethnocentrism with the country of origin, but with the host country. this confirms that lifestyles could be determi33 i. e. aguilar-rodríguez, & l. g. arias-bolzmann journal of small business strategy / vol. 31, no. 1 (2021) / 20-38 nants of colombian-canadian consumer behavior regarding the products they purchase in the host country, which contributes with empirical evidence for the segmentation of markets by lifestyles while extending a framework of reference on the bicultural acculturation strategy in global markets. the findings indicate that lifestyles are not always key elements in determining purchase intentions, at least, as seen from activities, interests, and opinions (aio). additional empirical evidence must be provided on the behavior of bicultural consumers in competitive countries with free-market characteristics. multinationals compete with one another rather than with their national rivals, highlighting the concept of country of origin. this study motivates organizations to know their bicultural consumers because, despite their preferring products from the host country based on certain features of their lifestyle, their purchase intentions may be different concerning the country of origin. companies that enter into international markets to be sustainable over time must include competitive advantages in their strategic management that generate more value in the client than simple exportation. as spender (1996) explained, the knowledge of a company and its ability to generate knowledge constitutes the core of the organization. grant (1996), on the other hand, indicated that knowledge is a company’s most critical competitive asset and, especially, that external knowledge flows exert a stronger influence than internal knowledge flows. the study’s findings contribute to the theory that ethnocentric consumers are increasingly inclined to prefer products from the host country due to stronger cultural belongingness. it also supports the need for international marketing strategies to adjust to new market trends and justify customer retention objectives. this research provides organizations with a better understanding of the market position and the economic viability of their future earnings, by generating a positive impact on brand loyalty, improving the image of the company, and increasing the efficiency of the organization. conclusions this study on a bicultural ethnic group of first-generation colombians-canadians shows ethnocentric tendencies towards the host country. although the lifestyles were not significant with the purchase intention, certain dimensions mediated the relationship between the consumer’s ethnocentrism and their purchase intentions with the host country, with a negative influence on the purchase intentions. however, the study also revealed the acceptance of the country of origin. while the dimensions of the lifestyle did not mediate the relationship between ethnocentrism and purchase intentions, there was a positive influence on purchase intention. this confirms practical implications for marketing decision-makers who seek to minimize the resistance of consumers who prefer products from the country of origin or the host country. admitting that all consumers have a monocultural disposition is misleading, so the existing theories would indeed not be explaining the attitudes and behaviors of bicultural consumers. this requires marketing strategies at the cultural level, focused on satisfying the needs of these consumers, highlighting the ethnic origin of the brands, and incorporating innovative products that combine ethnic identities and ethnicity with products of cultural integration. finally, consumer ethnocentrism proposes that nationalistic emotions affect attitudes about products and their purchasing intentions; furthermore, the attitudes of bicultural consumers may not always be consistent with the actual purchase decision. since purchase intentions are more predictive of behaviors, segmenting markets and using purchase intentions may be more appropriate. therefore, this study also proposes an important framework for market segmentation by lifestyles and expands the bicultural acculturation strategy for global markets. future research further research should be conducted that considers methodologies from longitudinal studies that support the findings found in this research and incorporate others. empirical evidence is still lacking in studies of consumer behavior that include the analysis of other bicultural ethnicities that have characteristics similar to those of colombian-canadians and studies of second-generation immigrants for whom ethnic identity is stronger with the host country. it is suggested that lifestyle be included as a segmentation variable, but purchase intention and purchase decision processes are evaluated in families with diverse demographic characteristics. it is also possible that lifestyle measurements can include the vals model and not only the aio applied in this study, contributing to the knowledge of consumer behavior in their purchase intentions from the theory of reasoned action and planned behavior. another relevant factor to consider is the inclusion of bicultural ethnicities with similarities between the country of origin and the host country, which could be emerging markets of a political, economic, or social since consumer behavior is not the same in industrialized and developing countries. analyzing biculturalism in these markets would provide new findings on consumer ethnocentrism, lifestyles, 34 i. e. aguilar-rodríguez, & l. g. arias-bolzmann journal of small business strategy / vol. 31, no. 1 (2021) / 20-38 and purchase intentions. in addition, it will be important that future research may include analysis of other acculturation strategies because ethnocentric feelings may vary, depending on the type of acculturation that consumers have. limitations although these findings are a first approach to the study of bicultural consumers, incorporating the variables of ethnocentrism, lifestyle, and purchase intention, and generates an essential contribution to cultural integration strategy, the study has certain limitations, so its results must be interpreted carefully. first, despite having collected data in eight cities in canada, the sample was small due to the difficulty of finding first-generation bicultural ethnic consumers. secondly, the questionnaire did not identify a product category or brand, limiting the evaluation of the difference between the country of origin and the host country. nonetheless, the respondents related the items to colombian and canadian mass consumption products. this may be due to the personal interaction between the respondent and the interviewer. and third, the survey was conducted at a specific time, meaning that the results may be affected by previous events or those of that moment. references acikdilli, g., ziemnowicz, c., & bahhouth, v. 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(2013). immigrant consumers, ethnocentrism, and country of origin. in a. rindfleisch & j. burroughts (eds.), 2013 ama winter educators’ conference challenging the bounds of marketing thought (pp. 503-504). american marketing association. https://www.ama.org/ wp-content/uploads/2019/02/2013-ama-winter-proceedings.pdf http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2020, vol. 30, no. 02, 106-114 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2020 small business institute® w w w. j s b s . o rg introduction 1university of north carolina, asheville, carmichael hall, 400 theatre lane, asheville, north carolina, 28804, usa, jshields@unca.edu 2university of maryland global campus, 3501 university blvd. east, adelphi, md 20783, usa, joyce.shelleman@faculty.umgc.edu sme sustainability dashboards: an aid to manage and report performance smes, sustainability, dashboards, sustainability reporting, sustainability management, sustainability dashboards apa citation information: shields, j. f., & shelleman j. m. (2020). sme sustainability dashboards: an aid to manage and report performance. journal of small business strategy, 30(2), 106-114. small to medium enterprises (smes) have large economic, environmental, and social impacts. a significant portion of the u.s. economy, they represent 99.9% of all u.s. businesses and employ almost half (47.5 %) of workers (u. s. small business administration office of advocacy, 2018). concomitant with their prominence in the global economy, smes have substantial consequences for the natural environment. for example, in europe it’s been estimated that smes generate two-thirds (64%) of industrial pollution (danish technological institute, 2010). thus, sustainability is a growing concern for smes as global consumers, governments, and businesses awaken and commit to its importance. the concept of sustainability centers around the need for organizations to operate in a fashion that does not diminish the opportunity for future generations and stakeholders to have their needs met (hubbard, 2009; world commission on environment and development, 1987). this concept requires a long-term perspective and must, by necessity, encompass economic, environmental, and social factors (comprising the triple bottom line). not only do smes tend to be more values driven (sloan et al., 2013), but they currently are facing increasing demands for sustainability actions in the face of rapidly escalating consciousness and acceptance of the importance of sustainability. there are rising expectations for public disclosure of economic, environmental, and social impacts. this is occurring simultaneously with large corporations’ scrutiny of their sme supply chain partners’ sustainability performance. driven by a variety of forces, larger smes have even joined in the movement to audit their own supply chain partners (see intel, 2019). investors and communities increasingly join in the demands for sustainability performance reporting by smes (caldera et al., 2019; eccles & kilmenko, 2019; jackson-moore et al., 2019; mathiyazhagan et al., 2013). however, despite pressure to adopt sustainability practices and to incorporate them into their business practices, smes vary in their levels of commitment (jansson et al., 2017) and in their integration of sustainability into their business models (broccardo & zicari, 2020). a variety of factors have been identified as barriers to implementation of sustainability management, including a lack of awareness of environmental and social impacts and issues and a lack of resources to facilitate implementation (johnson & this applied paper introduces the concept and potential application of sustainability dashboards by smes as an aid to meet growing demands for sustainability management and reporting. it suggests how dashboards can be integrated into the planning and control systems of smes to facilitate data visualization for the purpose of sustainability decision making. the paper highlights benefits including low cost and discusses practical implications, such as use of dashboards beyond sustainability management and the need for policymakers to provide better access to training and software for smes. jeffrey f. shields1, joyce m. shelleman2 http://www.smallbusinessinstitute.biz http://www.jsbs.org 107 j. f. shields., & j. m. shelleman journal of small business strategy / vol. 30, no. 2 (2020) / 106-114 schaltegger, 2016). systems for planning and control to provide feedback on the results of their business can enable smes to correct and adapt to changes in their internal and external environment to facilitate meeting sustainability goals (braun & tietz, 2018; datar & rajan, 2018). one such system, not yet fully explored in the literature, could be the use of “sustainability dashboard” technology. a dashboard is a visual display that fits on a computer screen that allows managers to focus on key metrics of performance. just as it is used to portray other measures of performance (e.g., sales), this technology has been deployed to address sustainability goals in some larger organizations; however, its use in smes appears to be largely untapped. as a management aid or tool to facilitate sustainability in smes, a dashboard is a relatively low-cost way to incorporate sustainability into management decisions and reporting, potentially transcending resource constraints. this applied paper offers an introduction to the concept and potential application of sustainability dashboards by smes for sustainability management and reporting. it highlights some possible benefits and includes a discussion of practical and policy implications. in this way, it raises awareness of this tool and may provide impetus for its application in smes. sme sustainability reporting requirements smes are experiencing growing demand for disclosures of their economic, environmental and social impacts. nearly all (93%) of the largest corporations by revenue generate corporate responsibility reports. fully three quarters (75%) of the 100 largest corporations in 34 countries provide corporate responsibility reports (kpmg, 2017). making public reports on the business’s economic, environmental, and social effects is known as the process of sustainability reporting (global reporting initiative, 2017). a number of different sustainability reporting agencies and frameworks exist. nearly four hundred (383) sustainability reporting instruments existed globally by 2016 (kpmg, 2016). we mention only a few here that are most well known in the united states. the securities and exchange commission (sec) requires the disclosure of material climate-related risk in public traded companies’ annual legal filing with the sec. consistent with this, the sustainability accounting standards board (sasb) provides standards for financial disclosure of material economic impacts related to environmental and social issues (romero et al., 2014; schooley & english, 2015). the sasb has been researching the financially-related material issues facing 11 sectors of the economy which comprise 77 industries (sustainability accounting standards board, 2017). the product of this research is a set of standards for sustainability reporting from the sasb (sustainability accounting standards board, 2018a). the sasb materiality map provides an overview of the standards (sustainability accounting standards board, 2018b). the materiality map illustrates that 24% of these 77 industries face financially-related material issues with respect to their supply chains. this adds to the growing demand for supply chain audits by larger entities, which, like the other reporting frameworks for large firms, can directly impact smes as sustainability expectations are transmitted downward. perhaps the best known and articulated reporting framework is the global reporting initiative (gri) methodology for sustainability reporting. the gri’s g4 reporting framework calls for supplier environmental assessments. in response to these forces, large corporations are increasing their number of supply chain audits with respect to their suppliers’ environmental and social impacts (i.e. sustainability performance) (e.g., intel, 2019; samsung, 2019). these corporations are working their way down supplier tiers by examining dollar purchases per supplier. some are requiring suppliers to publish their own sustainability reports (see, for example, intel, 2019). the financial stability board, associated with g20, has released a report with recommendations for climate-related financial disclosures (financial stability board, 2017). this report mentions the risks that companies are exposed to in their supply chains. these risks increase large corporations’ propensity to audit their supply chains. for a decade, the carbon disclosure project, now known as cdp, has been sending out requests to suppliers to respond and fill out a lengthy online questionnaire to report on their environmental impacts. the supplier project started with 19 requesting organizations and has grown to 119 requesting organizations with purchasing of $3.3 trillion. ten years ago, the cdp supply chain project had 634 suppliers respond to requests to report. in 2017, 5,500 suppliers responded to request for reporting, 2000+ of which were smes (cdp, 2019). on a voluntary basis, smes may choose to attain b corp® status as a way of demonstrating their ongoing commitment to sustainability. to become a certified b corporation, the sme must complete the b impact assessment and earn enough points on its environmental and social impacts to become a certified b corporation as determined by the privately owned b lab organization (honeyman, 2014). this sustainability reporting framework is designed explicitly for small businesses and social entrepreneurial startups. as of september, 2019, there were 3,038 business108 j. f. shields., & j. m. shelleman journal of small business strategy / vol. 30, no. 2 (2020) / 106-114 es that were certified b corporations within 64 countries, representing 150 industries (b lab, 2019). while a growing number, these are just a small fraction of the total number of smes, estimated at roughly 30 million in the united states alone (u. s. small business administration office of advocacy, 2018). increasingly, external reporting organizations that provide frameworks are incorporating a requirement for supply chain audits. many smes in supply chains therefore are now facing requests to report on their sustainability performance. while smes are not required to adhere to standards set by the larger sustainability reporting frameworks (e.g., sasb), the larger firms that must adhere to them communicate their expectations to their sme supply chain partners. these large firms often are the smaller smes’ biggest customers and, as such, create an external incentive for smes to adopt related sustainability performance measures (johnson & schaltegger, 2016). the large companies’ requirements are translated into key performance metrics for smes; the sme itself does not have to deal directly with the larger frameworks’ reporting standards. in addition to supply chain requirements, smes are driven by competitive pressures, compliance, company ethos, and personal motivation (oelze & habisch, 2018) to engage in sustainability practices. different motivators function to drive implementation of sustainability actions such as green practices (rekik & bergeron, 2017). likewise, communities, customers outside an sme’s supply chain, and investors are placing demands on smes for increased sustainability reporting (caldera et al., 2019; eccles & kilmenko, 2019; jackson-moore et al., 2019; mathiyazhagan et al., 2013). as a benefit, smes that are transparent in their environmental, social, and governance reporting incur a lower cost of debt (dunne & mcbrayer, 2019). smes with a sustainability orientation may also experience an increase in the market performance of their new products (obal et al., 2020). this empirical evidence is consistent with the business case for smes to adopt sustainability business practices (braun & tietz, 2018; kpmg, 2017). all of the above factors (i.e., supply chain demands, competitive pressures, and benefits, etc.) are incentives and provide a rationale for smes to do more than the minimum and to develop their focus and capabilities. there are a variety of well-known constraints characteristic of small businesses such as a lack of abundant financial and human resources (nicholas et al., 2011). smes typically face time limitations, limited staffing, limited expertise, and limited financial resources and, at the same time, can lack the management and organizational structure needed to develop processes to address sustainability (schulz et al., 2011). some evidence suggests that, perhaps due to these constraints, some smes adhere to the most basic, simplest form of reporting for their needed certifications (corazza, 2017). given the constraining forces, technology that can facilitate sustainability performance management and reporting can be beneficial. there are a number of criteria that sustainability management tools must meet to be viable for use in smes. these include simplicity, cost effectiveness, flexibility, and the ability to be adapted to the company (johnson & schaltegger, 2016). these correspond to the resource limitations that smes face and the nature of small businesses as opposed to larger, more highly formalized organizations. sustainability dashboards are a tool that meets these criteria. sustainability dashboards smes need systems for planning and control to provide feedback on the results of their business which can be used to correct and adapt to changes in their internal and external environments (braun & tietz, 2018; datar & rajan 2018). sustainability reporting and performance management relies on the planning and control functions in an organization. planning includes selecting objectives, strategies, programs, and actions to achieve the objectives as well as formulating and implementing budgets (braun & tietz, 2018; datar & rajan, 2018). control involves monitoring results and comparing actual to planned results to intervene and to provide feedback to the next round of planning (braun & tietz, 2018; datar & rajan, 2018). currently, these planning and control systems in small smes are facilitated by the use of low cost and easy to use accounting software technology (e.g., quickbooks). the proven value of such accounting software for an sme is in the ability to readily generate information and reports to monitor variables like sales, accounts receivable, accounts payable, customer revenues, inventory, and bank balance. these same systems can be used for sustainability-related performance. from an accounting perspective, sustainability-related accounts and performance measures (i.e., metrics) can be added within the accounting software to augment existing accounting and operational information (braun & tietz, 2018; venturelli & pisili, 2005). another use of technology that is becoming common is data visualization. consistent with the adage, “a picture is worth a thousand words”, the ability to see a graphical presentation of information can help in understanding and recall. as cited by ertug et al. (2018), there is longstanding evidence that people understand (carney & levin, 2002) and more effectively recall information when it is presented visually via imagery than when it is provided in written text 109 j. f. shields., & j. m. shelleman journal of small business strategy / vol. 30, no. 2 (2020) / 106-114 (shepard, 1967). modern data visualization technology has emerged from the evolution of the field of data analytics over the past decade or more to facilitate this. one form of data visualization is a dashboard (few, 2013). dashboards are the visual display of the most important information needed to achieve objectives (one or more) that fits on a single computer screen (few, 2006; 2013). this allows the information to be monitored at a glance (few, 2006, 2013). dashboards can display a variety of performance-related management information (e.g., total sales, sales by product or location, etc.). dashboards address the lack of structure that businesses can face in their attempts to incorporate sustainability factors into their business decision making (kiron et al., 2013). given the demands on smes for reporting their environmental and social impacts (i.e., sustainability), there is a great potential for the use of dashboards in the management of sustainability performance. for example, dashboards could be used to increase monitoring and adaptation to feedback. they could give visible feedback (i.e., monitoring and control) on sustainability-related performance goals. this encompasses performance measures related to sustainability goals such as recycling of outputs, use of recycled materials as inputs, energy usage, waste, volunteer hours, donations to community organizations, percent of purchases from local sources, and so forth. table 1 suggests some of the most common performance measures for sustainability reporting (shields & shelleman, 2017, 2019) that can be relevant to smes’ dashboards. these will vary by type of business, industry, size of the business, etc. the maturity of an sme’s sustainability reporting also will determine which of these are relevant. in practice, sustainability dashboards should be used by smes in their planning and control systems to actively manage their sustainability performance. during planning, smes will need to establish goals addressing reduction in their potentially negative environmental and social impacts. these goals are typically long term in nature. for example, large companies such as dell, intel, samsung, and ups all use a ten-year time horizon for their environmental goals (dell, 2019; intel, 2019; samsung, 2019; ups, 2017). the goals established during planning by an sme should include goals that address their largest and thus most significant negative environmental and social impacts. for an sme embedded in a supply chain, it must anticipate being a participant in a large customer’s supply chain audit to assess its suppliers’ environmental and social impacts. this has been rapidly evolving over the past few years (i.e., report cycles). these supply chain audits now are major sections within the sustainability reports of many large corporations (e.g., dell, 2019; intel, 2019; samsung, 2019; ups, 2017). supply chain audits include information on and discussions of a variety of sustainability performance measures like suppliers’ energy use, greenhouse gas (ghg) emissions, recycling, waste, and water use. once the goals for these kinds of sustainability-related performance measures are established in the planning process, a reporting structure for the goals and their related programs will have to be developed. new accounts will have to be added to an smes’ chart of accounts associated with the expenditures for sustainability-related programs (venturelli & pisili, 2005). likewise, a set of performance measures will have to be developed to access the outcomes of these programs (e.g., percent of waste bypassing the landfill, percent of raw materials consisting of recycled content, percent of purchasing dollars spent on local sources). depending on the industry, such environmental sustainability metrics are applicable to businesses of any size, not just large corporations. from a control perspective, dashboards can play an important role in the monitoring and control of these sustainability programs and their associated goals. for dashboards to function, they need to be attached to smes’ data. by selecting performance data from smes’ sustainability programs, dashboards can facilitate the control function. a well-designed sustainability dashboard can provide on a single screen the important performance measures for a particular program. this can make salient to a dashboard user anything which needs their attention by way of intervention table 1 examples of important sme sustainability performance measures for dashboards community engagement & contributions diversity policies & practices employee development, satisfaction, health, & safety energy sources & usage fair compensation ratio & pay equity fair trade & labor practices greenhouse gas emissions landfill diversion local sourcing sustainability-related performance measures product & packaging resource efficiency recycled inputs reuse & recycling of waste sharing & collaboration supplier audits water usage 110 j. f. shields., & j. m. shelleman journal of small business strategy / vol. 30, no. 2 (2020) / 106-114 (few, 2013; rikhardsson & yigitbasioglu, 2018). examples gleaned from large organizations include dell’s use of dashboards in its 2019 sustainability report to illustrate its progress on meeting sustainability-related goals (see exhibit 1). similarly, harvard university uses sustainability dashboards to help manage its sustainability performance, (see exhibit 2). in an example from a privately owned and operated exhibit 1. dell 2019 sustainability report dashboards note: images reproduced from https://corporate.delltechnologies.com/en-us/social-impact/reporting/fy19-csr-report. htm#scroll=off) exhibit 2. harvard university sustainability dashboards note: images reproduced from harvard (2018) https://public.tableau.com/profile/greenharvard#!/ (with at least one sustainability-related program) company, the family firm huon aquaculture presents its sustainability dashboard on its website: https://dashboard. huonaqua.com.au/. the interactive dashboard opens to underlying data and highlights key metrics in three areas: our fish (its main product), environment, and people & safety. under people & safety, for example, it provides data on employee composition and training, research and development, community relationships, and lost time injuries. the use of dashboards in the planning and control systems of smes should help them manage and improve their sustainability performance. this in turn can help them to meet demands by their customers to provide evidence of and to improve on their sustainability performance as an sme. moreover, the use of dashboards by smes can be facilitated by low cost and relatively easy to use software (e.g., microsoft bi). such software can link to a variety of other programs such as excel and quickbooks (microsoft, 2019; o’connor, 2019). there are some specific factors that would assist smes and some that would have to be overcome to use dashboards to aid with sustainability planning and control. these are discussed in the following section of the paper. implications for practice smes can take advantage of several facilitators to implementing data visualization in the form of dashboards. lower cost data analytics software (e.g., microsoft bi) that about:blank about:blank 111 j. f. shields., & j. m. shelleman journal of small business strategy / vol. 30, no. 2 (2020) / 106-114 a user of excel can readily learn (noonpakdee et al., 2018) is available to facilitate the use of dashboards. the use of dashboards itself can save time during the processes of decision-making, monitoring of operations, and identifying goal achievement. this “at a glance” feature of dashboards is a benefit. in addition, dashboards are relatively simple to build, flexible, and can be tailored to individual issues and company-specific considerations, meeting many of the key criteria to facilitate sme adoption and use (johnson & schaltegger, 2016). dashboard technology is relatively inexpensive or even free in some cases, a major benefit that may facilitate its use by even the smallest sme. thus, it provides a means to overcome the cost barrier faced by many smes when they seek to integrate a sustainability tool into their business model (johnson & schaltegger, 2016). there are a range of dashboard technologies and plans available, ranging from use by just one or two users to licenses for large companies. for example, google data studio is offered in a free version that provides data visualization and an interactive dashboard (getapp, 2020). among other features, it includes: an ability to connect to different data sources; templates; interactive reporting features; drag-and-drop editing to create charts, tables, and graphs; and collaboration capability. other comparable software provides similar features free or at affordable rates (e.g., $25/month). smes face several barriers to implementing data visualization in the form of dashboards that are consistent with the typical constraints faced by smes. there is a general lack of knowledge about data analytics (iqbal et al., 2018). further, the employees and owners in smes may tend to lack expertise at data visualization (noonpakdee et al., 2018). these barriers can be overcome with the greater awareness and learning opportunities presented by organized programs that we recommend be provided by policymakers and small business development agencies, discussed further below. in addition, low cost online courses are available to teach sme managers the basics of developing and maintaining dashboards and data visualization technologies. an advantage of implementing sustainability dashboards is that similar dashboards also can be used for monitoring nonsustainability-related variables including key performance indicators such as sales-to-date or sales by product or by customers, receivables, payables, order backlog, order cycle time, or other financial data (see exhibit 3) (few, 2013; noonpakdee et al., 2018). data mining and data visualization also can be useful to identify opportunities in sales and marketing (llave, 2017) and to minimize mis-targeting customers (trieu, 2016). policymakers and agencies need to establish programs tiered to begin to address the integration of data visualization and dashboards in smes. the vast majority of programs today are focused on basics of how to start a business and manage its growth. the use of big data, data visualization, and data dashboards as management tools currently is underdeveloped in such programs. similarly, there appears to be little emphasis on the sustainable performance of an sme. because sme managers not subject to supply chain pressure often can see little economic benefit to sustainability practices, they may view tools such as dashboards as costs with no concomitant benefit (johnson & schaltegger, 2016). individual smes can be quite small businesses, so the owner/managers may fail to grasp smes’ collective impacts as a whole with respect to sustainability issues (brammer et al., 2012), as do many observers (morsing & perrini, 2009). there is an enormous role for policymakers to provide external incentives to apply management aids that support sustainability practice. the first step is to educate and raise owners’ and managers’ awareness about the environmental and social impacts of smes overall and the importance of sustainability practices to their business. alongside this, the exhibit 3. financial accounting information dashboard note: image reproduced from few, 2013. 112 j. f. shields., & j. m. shelleman journal of small business strategy / vol. 30, no. 2 (2020) / 106-114 implication for policymakers is that, like the small business development centers’ push for the use of accounting software technology in the form of quickbooks in the years around the mid-2000s, a new impetus to deploy data visualization and dashboards within smes seems imperative. analogous access to training and software should be a priority. linking it to sustainability would help smes deal with managing their sustainability practices and the burgeoning sustainability reporting incentives they face. conclusion smes stand to gain many benefits by adopting and using sustainability dashboards. by adding dashboards to their planning and control systems, we believe they can better manage their sustainability performance. by doing this, they can be positioned to meet the growing demand by customers, communities, and investors for disclosure of, reporting on, and improving on sustainability performance over time. dashboards facilitate both decision making and monitoring by making a small set of performance data available at a glance. moreover, they do it in a way that is flexible to the needs of the business and low cost. finally, policymakers’ embrace of advances in technology and dashboards is long overdue to facilitate the management of smes, specifically with respect to the need for smes to fully embrace the sustainability impacts of their businesses today. references b lab. 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(1987). our common future. oxford university press. about:blank about:blank about:blank about:blank about:blank about:blank about:blank about:blank about:blank editors-in-chief the journal of small business strategy is an applied research journal. manuscripts should be written with the small business/entrepreneurship educator, small business consultant in mind. both conceptual and empirically-based papers are encouraged, but they must have an applied focus. all papers must have a significant literature review, be properly documented, with citations from research-based works rather than popular press or web sites. since jsbs is an applied research journal, each article should include a substantial “discussion and implications” section that details how the research findings are relevant for the journal’s readers. authors are discouraged from submitting manuscripts with extremely complex statistical analyses and/or a purely theoretical orientation. case studies are acceptable if they contribute substantial to the understanding of small business strategy and include a significantly to the understanding of small business strategy and include a significant literature review that underscores the issues in the case. we do not accept teaching or pedagogical cases. articles that have a significant strategy orientation are of particular interest. however, we do also publish articles that may address functional or operational issues. articles related to exporting or other international issues are acceptable. we have less interest in articles focusing on how small business compete in specific countries unless authors show that their results can be generalized to all small businesses. articles that have a public policy focus are generally not appropriate for the journal of small business strategy. editorial review board associate editor senior editors william c. mcdowell bradley university, united states michael l. harris east carolina university, united states domingo ribeiro universitat de valència, spain dianne h. b. welsh university of north carolina greensboro, united states joshua r. aaron middle tennessee state university, united states j. augusto felício universidade de lisboa, portugal raj v. mahto the university of new mexico, united states whitney o. peake western kentucky university, united states juan piñeiro santiago de compostela university, spain joe r. bell university of arkansas at little rock dolores botella universidad católica de valencia shawn carraher university of texas at dallas phillip e. davis texas state university joseph geiger university of idaho michael goldsby ball state university david lyn hoffman metropolitan state college of denver jeffrey hornsby university of missouri kansas city jerry kudlats jacksonville university cathleen (folker) leitch wilfrid laurier university robert lussier springfield college journal of small business strategy 2018, vol. 28 no. 02 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2018 small business institute® http://www.smallbusinessinstitute.biz www.jsbs.org josé manuel guaita martínez valencian international university matthew r. marvel ball state university brian mckenzie california state university, east bay abbas nadim university of new haven john e. prescott university of pittsburgh neal pruchansky keene state college jeff shields university of north carolina at asheville leo simpson seattle university matthew c. sonfield hofstra university harriet stephenson seattle university jude valdez university of texas at san antonio section editors steven t. walsh the university of new mexico, united states editorial assistant misti l. mcdowell journal of small business strategy http://www.smallbusinessinstitute.biz strsttttegy resolving small business disputes through mediation mare lampe seth r. ellis university of san diego abstract a revoiiuion ts takmg place in the way americans resolve their disputer. the so-called alternative methods of dispute resiiiunoti such as meiiiarioa ami arbitrarioa are iiicreasingiy becoming a primary choice for sea(trig corifitct. a groiving number of large american compames /iave begun ro enibrace mediation as an attertiative to iiugouon. the article describes rhe mediation process in the small bnsiness cotttext. the advantages and disadvantages of mediation versits the j udiciaf process are ctotsidered. recommendations concernmg the appropriate circumsrances in iviu'ch small bitsiness should use mediiition to resolve cotiflict are provided. also reported are rhe results of a survey of small business erecutives that meastired their attitudes toivard atediatiiin aad other forms of dispure resoiuti oo. the resuirs sttggest tiiat most executives preferred mediation to oiher forms of dispute resolution. they beheve mediation to be a cost-effective aud efficient method of resolving conflicts with customers, etupioyees, arid siippiiers. introduction a revolution is taking place in the way american businesses resolve their disputes. thc so-called "alternative" methods of dispute resolution arc increasingly becoming a primary choice for settling conllict. often alternative dispute resolution (adr) removes the case entirely from the traditional coun-based system for resolving disputes. some courts have even incorporated adr as a voluntary or mandatory part of their procedure. these changes are forthcommg because of weaknesses in the judicial system; supreme court chief justice william rehnquist. a strong supporter o( mediation and adr generally, believes that the judicial system "particularly ill-serves... sinall businessmen who have contract disputes" (rehnquist, 1989, p. 3). although there are circumstances where the court system is the superior method, mediation is particularly well-suited for thc needs and problems of small business. matz has characterized mediation as providing "a llcxiblc, informal and relatively quick partyempowering way to get disputes out of the traditional judicial or administrative systems" (matz, 1987, p. 4). the mediation process offers special advantages for the resolution ol'nternal workplace disputes between an employer and employee (conti, 1985), or to settle conflicts among shareholders of a closely held corporation (soloman and soloman, 1987). meanwhile, litigation is usually criticized on the grounds of expense, time, uncertainty, and 1unpleasantness (soloman and soloman, 1987). cost conscious corporate executives and inhouse counsel hclievc that litigaiion. "whatever thc outcome, often proves counterprnductivc to business objectives" (mccoy. i992. p. 22). in ibis paper wc describe thc primary fortus ol allernative dispute iusolution, with a focus on mediation in thc context of'hc small hus&ness environment. next, wc prcscnt &hc results i&i':i survey investigating &hc attitudes ol'mall business cxccu&ivcs with rcspcct to dispute resolution. then wc explore in some depth thc advant:titus illlil disa&lvantages ol'cdiatimt. i inally, wc describe those instances where. litigation may actually hc prclbrablc to mediation. alternative methods of dispute resolution several dilfercnt mechanisms for dispute resolution arc ci&nsidcrc&l to he i'nrtns of'dr. thc basic methods are mediation and arbitration with variations aml hybrid» ol'hese approaches. mediation dilfcrs i'rom both the judicial process and arhitratii&n hccausc ol'ts inl'ormali&y and non-,'ulversarial nature. in mediation thc parti«s must vi&luntarily and coopcrativcly resolve thc case with thc assistance ol' neutral thi&&l-party. arhitrutii&n is an ;ulvcisarial process that resembles litigation hut is less i'ormal, and thcrcl'orc gcncrally ci&nsidered to bc less costly and i'aster than litigation. in arbitration the parties tii a dispute ill&all&pi to inllucncc thc arbitrat(&r to rulc in their i'avor through a structured prcscntation of'vidence.arbitration may he voluntary or mandatory, binding or nim-himling. a popular hybrid adr technique is &he mini&rial: a i'ormal process that includes a limited discovery period i'ollowcd hy a structured hut abbrev&a&cd prcscn&ation i&i the, case. typically the case is prcscnted to a panel, including rcprcscn&ativcs i'or c;u:h iuirty with tluthof&ty to sl:&&le thi: et&six t&ltil t& ltcutlul third-party advisor who c(&nducts illa proccc(lll&g. tile advisor may act as an arbitrator hy rendering a non-biding opinir&n i&n thc case, and as a mediator hy assisting thc parties to negotiate u act&lament. et&el& i&tcthod ol'adr has i&s own sct ol'dvantagr:s and disailvantagcs in coinpariso&1 to thc court system and each other. a thorough discuss&on and comparison i&l'all the dispute rcsolutiim pro&:cases is hcyoml thc scope of this article. our locus hc&c i» im mcditttion. the mediation process meiliation is, in csscnce, a i'acilitated negotiation. the parties to a tlispute mcct with an impartial third party, acceptable to all disputants, who docs not have dccisiimmaking power regarding their conllict. thc mediator assists th«parties in voluntarily retu:hing their own mutually acceptable seulcment ol'hc issues in d&sputc. currently &h«re arc m& licensing rcquiimncnts i'or mediators who have various backgrounds such as psyclu&logy, business and luw. iiulividuals and companies ol'fering mediation and other adr services have prolifcratcd in rcccnt years and may hc located through the vello&v pi&gas under "mediation scrviccs." the largest and ol(lcsi provider of such services is the non-prolit american arbitration association foundc&l in 1926, other markc& leaders include the for-prolit companies judicial arhitru&ion and mediation scrvicc aml judicatc (pollock, 1993). when sclcc&ing a mcdiuti&r one should 86 consider an individual's training, experience, relevant spccialtzations and neutrality. services are gcncrally billed at an hourly rate with an additional 11at i'ee charged by some providers. direct negotiation between disputants (or their auorncys) can of('er some of the potential advantages of mediation. however, when such negotiations are unsuccess('ul they tend to increase hostihty bctwcen the parties and may increase the time required to resolve thc dispute. mccoy (1992) bclicves that negotiation commonly leads to the adoption ol'gaming techniques that work against an accommodative solution" (p. 22). legal cases arc commonly seulcd through negotiation prtor to trial, sometimes on the courthouse steps, and often af'ter needless tune and expense (mccoy, 1992). alternatively, an experienced mediator helps the disputing parties channel their anger and emotions constructively through a proven process to arrive at an immediate solution. unhkc thc lixed procedures in a civil or criminal coutx case, mediation proccsscs vary depending upon the service provider. there is no accepted model or special method for mediating a business dispute. the seven stage mediation process described by folberg and taylor (1986) provides a good generic model that cncompasscs most mediation formats: l. introduction — creating trust and structure, 2. fuel finding and isolation ol'ssues, 3. creation of'options and alteinativcs, 4. negotiation and decision making, 5. clarification and wrtting a plan, 6. legal review and processing, and 7. implementation, rcvicw and revision. in a typical mediation, thc mediator sets thc tone by explaining the process and ground rules that will apply the parties are given an oppnrtunity to express their own perspective on the i'acts, infortrtation is shared and pertinent issues identil'icd. mediation provides the parties with a forum to discuss the sources and issues of their conflict face to i'acc. mediation also provides a unique opportumty to express feelings and anger to thc other party. a skilled mediator assures that such exchanges will ultimately have a constructive impact on ihe resolution of the dispute. the mediation process is designed to move thc disputing parties to an understanding of each other's perspective. it is also designed to surface thc underlying sources of conllict as well as any hidden agendas. following the discussion ol'hc facts and issues, the parties, with active assistance from the. mediator, explore aliernative solutions and negotiate a resolution to their conllict. thc aim is to construct a creative, "win-wm" resolution. if an agrccment is reached, it becomes a wriuen plan. in business related disputes this plan will usually become a contract, signed by both parties, and legally enforceable. thcrcfore it may be advisable i'or a businessperson to have the agreemcnt reviewed by counsel. normally, thc (mal agreement is the primary goal of mediation. this accord typically solves the present dispute by providing that the parties take certain actions in the future (for cxamplc, one party must pay a sum of'oney to thc other party by a certain date). other goals 87 ol mediation are to rcducc the ncgativc cllccts ol conllict and improve thc ability of thc panies to communicate and negotiate (pa&ticularly with each other) in the future (folbcrg;md taylor. 1986). mediation works well i'or many reasons. it is a simple, ea&y to grasp process. thc process leads to respect and understanding between thc parties. mediators are role-&nodcls with positive attitudes toward conllict and collaboration. collaboration encourages creative problem solving by the disputants (davis, 1989).the mediation process allows parties to express their feelings including the opportunity to "ventilate" strong emotions. research in humun psychology and animal behavior reveals a need for reconciliation (davis, 198&)). an&i mediation offers a me:minglul way lor thc conliicting parties to meet this need. i.inally, mediation gives disputants considerable control over the rcsolu&ion of'heir own dispute (lampc, 1992). perceptions and use of mediation by small busini'.ss previous research comparing mediation and judicial proces.; on such i'acto&s as c&&st, spccd, and thc satisf'action level ol'involved parties is limited, especially i'or business cases. in i'act, we werc unable to locate any rcscarch done specil&cally i'or small business. the national assoc&ation ol'anuf'acturers (nam) cstimatcs a sh&ui& growth in business expenditures i'or legal services from $ 19.8 billion in 1982 to $57 billion in 19&32 (riegcl, 1993). an increasing number of large american companies have begun to embrace mediation while small businesses gcncrally have not (lovenhcim, 1989). more thun 600 large co&ix&rations have entered an agreement through the center for public resources in ncw york, a nonprol&t linn that pro&notes altcmative dispute resolution, to first try adr in disputes with other companies that have signed thc pledge (jacobs, 1992). even law fir&ns have turned to mediation to resolve partnership disputes (harlan, 1988). method a study was pcrfor&ncd to detenninc thc perceptions, auitudes and opinions ol'small business owners toward mediation as a method ol'ispute resolution. two thousand small business owners in a southwestern metropolitan area were randomly sclcctc&l i'or a mail survey. thc response rate of usable returns was about 9% (175 responses). although this is a rclutivcly low response, tests of dif'ferences between early rcspondcnts versus late respondents werc not signil&cantly different, cvidcncc that there was not non-response bias. also. recent marketing research literature (e.g., dillon, madden and firtle, 1994 ) suggests that rcsponsc rates i'or mail surveys without incentives or without a particular interest on the part of the respondent may easily drop to the range ol'ive to tcn pcrcen&. of course, thc obvious explanation is due to the trc&nendous volume of'nsolicited direct mail that thc typical individual or business now rccc&vcs. in this research 69% of the rcsponscs were from busincsscs with ten or i'ewer employees, 25% were from businesses with elcvcn to lifty cmployeern 5% were from busincsscs with fifty-one to one hundred employees, and 1% were from firms with i 0 i to 300 employees. almost 60% of the responses originated in the service sector, 12% from 88 construction, 10% from retail distribution, 5% from wholcsalc distribution, with the remaining 13% from manuf'acturing and other industries the kinds of dis utes ex erienced b small business owner~ most of thc respondents (76%) have been involved in disputes during the last five years. almost 8% have experienced six to ten disputes, and 7% reported being involved in ten or morc disputes dunng the last five years. table i reports thc kinds ol'isputes experienced by those small business owners who reponed being involved in at least onc dispute during the last live years. mediation users followed the general response pattern i'or the mitire sample with two notable exceptions. they reported more personnel disputes (25.9% compared to 14,5%, respectively) and almost four times as many disputes with other prol'cssionals (25.9% compared to 7 5% rcspcctivcly). an immediate cxplanatirm i'r this is not i'orthcoming except thai it may bc an artifact ol'he relatively small sample of mediation users (n=27). attitudes toward mediation b small business owners most ol'he respondents (83%) knew that mediation existed as an alternative to litigation and other adversarial approaches to dispute resolution. however, only 20% of'he respondents involved in disputes actually utilized mediation ms a means ol'esolving it. a similar number ol'espondents (18%) rcportcd using arbitration while three times as many (61%) reported using court procccdings as a method ol'dispute resolution table 1 types rif disputes during the lrtst five yeut s involved in mediation disputes uscl's client disputes 43.4% 48.1% personnel disputes 14 5% 25.9% supplier disputes 13 3% 14.8% disputes with other professionals 7.5% 25.9% disputes with competitors 2.9% 3 7% note. respondents could report multiple dispute types. based on their experiences resolving disputes, respondents werc asked to provide their general attitude toward inediation, arbitration and court proceedings, on a five-point likert scale. a 5 on the scale represented a highly positive attitude. anti a i on the scale represented a highly negative attitude. table 2 indicates the gcncral attitudes towards these three forms ol'9 dispute resolution as a function of thc number of disputes thnt have been expcricnccd in the last five years. table 2 attitude» ton ord dispute resolutitnt by ntttnlrer of pnst disptttes number ol'ast disputes dispute resolution 10 or method overall 0 1-5 6-10 morc mediation m 3.h'.5'.6" 3.4 4.3 n 6(( 45 5 7 arbitration m 3.5'.7 3.4 3.0 4.3 11 69 ii 47 5 6 court proccedtngs m o4'o o5 31 30 n 104 t) 76 10 t3 note. attitude judgments werc made on 5-point scale (i = highly negative. 5 = highly positive). '-tests ol'combinations ol'he, overall means concluded signil'icantly di( 1'erent means at p = .05. 'ignilicamly different means using the 1)nnferroni test at p = .0'i. as we scc in table 2, overall, mediation was viewed as thc most positive method with a mean score of'dh comparctl to a mean of'.5 i'or arbitration and a mean ol 2.4 i'r court proceedings. intcrcstingly, those fcw respondents who have not been involved in disputes in thc last five years had a signil'icantly morc positive attitude than those who had been in i'rom onc to i'ive disputes (mean value of 4.5 compared with 3.6). onc explanation i'or this may be that there is n popular conception that mediation is a panacea i'r dispute rcsolutton, hut this perception may he altcrcd when the reality ol''acing a dispute with any method of'tsputc resolution occurs. also ol'nterest in table 2 is the marked but not statistically signil'icant positive increase in thc auitudes towards both mcdtation and arbitration by those who had been involved in tcn or morc disputes. the small number ol'espontlents in thcsc suhgroups prcventctl the observed means i'rom being statistically significant (at the p = .05 level), hut thc evidence suggests that attitudes hccomc morc positive as experience with thcsc two methods incteases. a similar trend was not seen to hc thc case for court proceedings. 90 mediation was also viewed as a cost cf'fective method by the gteatest pcrccntagc of respondents. of those involved in disputes, 93% believe mediation is cost el'factive, while 79% believe arbitration is cost effective. in contrast, only 14% believe that the use of thc courts is a cost effective dispute resolution technique. seventy-six percent ol the survey respondents indicated that they believe that mediation saves time and money, and 50% ol'll the respondents indicated an interest in learning inore about mediation as a resolution technique. attitudes towards mediation b users of'mediation services those small business owners who had actually used mediation as a method of'dispute resolution were overwhelmingly in favor of it over arbitration or the judicial process. more than 95% of those who have used mediation cited it as a cost effective technique, while only 12.5% of this group cited thc use ol'hc court system as a cost clyective technique. the mean auitude toward mediation was 4.2 (on a scale of i to 5, where 5 is thc most positive rating). this was higher than the rating given to both arbitration and th«usc of'court proceedings (mean values of 3.8 and 2.6, respectively). assessing mediation for small business dispute resoi.ution in comparison to judicial process. mediation generally oft'ers many advantages although it does harbor a few disadvantages as well. thc positive perception ol'ediation held by small business executives surveyed (particularly those who had used the process), relative to the adversarial methods of dispute resolution. is warranted in most situations. the lollowing discussion elaborates on thc benefits and drawbacks ot'sing mediation rather than judicial pl'occss. advanta eso(mediation much of the best data currently available with respect to mediation in comparison to judicial process comes from leading studies in thc liclds ol'divorce, child custody. and small claims court disputes. as we mentioned earlier, there is a dearth ol'tudies concerning thc use of mediation in small business disputes. however, divorce and child custody cases arc notoriously among the most dil'ficult to solve because of the high level of emotion evoked in such cases. we therefore believe these studies. in the sense that they may rcprcsent extreme examples. have relevance because they provide conservative guidelines i'or other contexts including small business. in addition, the small claims court research described below is relevant to sinall business because small busincsscs were panics in many ol'hc cases rcllccted in thc data for that research. savin time and mone . the most appealing advantages ol'ediation for small business. compared to)udicial process, are its lower cost and greater speed in bringing about conllict resolution. pearson and thocnnes (1985) completed two separate studies of divorce cases. including contested child custody and visitation cases, and they found that successful 91 mediation saved disputants time and money in comparison to judicial process. thc center i'or puhlic rcsourccs tracked 406 companies that used alternatives to thc judicial process (mediation, arbitration, ctc.) hctwecn 1990 and 1993.they found a savings of'orc than $ 150 million in legal i'ccs and expert-witness costs over litigation (pollock, 1993). by diverting a case to mediation earlier in thc d&sputc even grcatcr savings can he rcalixcd (pea&son, 19g2). the hcncl'its ol'ediation arc, of'course. thc grcatcst if &hc mediation is succcssl'ul. onc advantage oi'court proceedings is that there is always a i'inal resolution. since thc parties to a mediation must voluntarily consent to an agrccmcnt, not tdl nlcdiations &esult &n act&ling thc dispute. howcvcr, rcpu&ahlc mediation programs do rcport a high pcrccntagc ol'uccess i or cxamplc, thc american arbitration association (aaa) lms a sc« lc&ncnt rate greater than &i0% 1&ii'he« 'o&la&&cfc&al aml constructum irulustry mediation program (ante& iota& a& by&& alton associati&m. 1992), aml aaa's leading mediation program in i os angeles has;& 9&)% success rate for all types ol cases (arhitration times, 1993) . in 1993, this prog«;m scttlcxl 55 in)ury clai&ns i'&o&n a &wo-hus accident in just 6g hours of'mediation with an csti&n;&ted nct savings of $ 1x0,000 in icgul costs (a&l&itr&t&on times, 1993). additionally, some community dispute resolution ccntcrs (cdrc's) provide i'ree or iow taps& scrviccs and handle a vancty of'isputes including m;my cases involving small husincss as a party. ol'hc 742 cases that &vere mediated at onc inctropoli &an ci)rc during a one year period ending in 1990, 555 (74%) rcsultcd in an ag&ccmcnt. many of'he cases resulted in an agrcc&ncnt cvcn prior to formal mediation (or adjudication) simply as thc result ol'imc&vemionhycdrc pcrsonncl (lampc. 1991).mcewcn and maiman (19g i) found that almost 70% of cases divcrtcd to mediation from thc maine small claims court rcsultcd in an agreemcnt, thc most successl'ul mcdiations in thc maine study werc cases that involved husiness plaintilys suing individual def'endants (94%). pcarson an&1 'i'hocnnes (19g4) fourul that ahout &&0% ol tl'&osc cxposcd to a&cd&a&&&on &n eh&id cost&wig d&sputcs p&'oduccd thc&f 0'lvn t&grcetncnt during or al'tcr the mediation process, while only 60% of non-mediating parties reached an agrecmcnt without a court hcanng a mediator ol'aw i'inn ix&rtncrship disputes reported that ol'hc ten dissolutions he mediated, only two wcm into litigation (harlan, 19&&&&). rcsoluti&m ol'e&nploycc gricv mccs through media&i&m also has hecn vc&y succ«ssf'ul (sigler, 19g7). it should hc nottxl th« t il' case hrought to mediation is not resolved through that process thc unsuccess&'ul mediation will incrc &sc thc cost aml m;&y delay settlcmcnt of thc nlt&ttc& (solon&on turd solonuu&, 19g7). ~m:»:» p: . md: i p»d.: p&u . ppu»»y privacy than docs thc judicial process. this can he important i'or a small husincss &rying to guard its trade sccrcts or reputation. since thc courts arc a puhlic lorum. privacy is limited. during litigation valuahlc information ahout a husincss may hc given puhlic exposure. thc panics may hc vicwcd by thc puhlic in a distoncd light hccausc ol'publicity surrounding their c&mbict (solovc. 19gf&). pa&&les to a mediation typically agrcc a& thc outset &o kccp inl'ormation disclosed during thc process. and &he i'inal agrccmcnt, confidential. notwithstanding, the advantage of privacy such confidentiality may raise ethical issues whcrc thc puhlic would hc served hy disclosure. an example could bc a case involving injury caused hy a defcctivc product. 92 providin a sense of control. mediation offers psychological advantages that can lead to tangible benefits. these benefits are unlikely to accrue through judicial process. the mediation process is easy to undersiand, and it provides disputants with a sense of empowertnent and control. because of the inherent simplicity of mediation, the need for a lawyer is diminished. the parties arc normally voluntary participants in the process, they may jointly select the mediator, they eral't a resolution, and they voluntarily agrcc to i'ollow that resolution. mediation is a cooperative process that requires the parties to work together to find a resolution. there is virtually unlimited flexibility in finding a mutually «grceablc solution. research demonstrates that satisfaction with both thc process and the outcome are higher with mediation than the judicial process. fri&m data gathcrcd in two separate studies on custody and divorce mediation cases, pearson and thocnnes concluded "that individuals who mediate arc cxtrcmely pleased with the process whether or not they reach an agreement." (pearson and thoennes 1985, p. 463). in contrast, their research rcvcalcd fewer favorable evaluations of thc legal system. for small claims court cases mcewen and maiman (1981)also i'ound somewhat grcatcr satisf'action with the overall expcrtcncc and i'airness of'utcome among parties whose conflict was mediated as opposed to ad)udicatcd. the increased enthusiasm for mediation by the small business cxccutives in our sample who had used mediation also supports these i'indings. salva 'in ke stakeholder relationshi s as wc previously discussed, inherent to mediation are the attributes of empowcnnent and control, simplicity, required cooperation. and flexibility. these characteristics may result in scvcral tangible benet'its i'or parties who mediate their conflict. mediation provides a strong opportun»y to salvage an on ning relationship between dtsputing parties. research by pcarson and thoennes (1985) on divorce and custody cases indicates that whtni mediation is succcssl'ul it is more likely to result in a better (or less strained) relationship between ex-spouses than the judicial process. mcewcn and maiman (1981) i'ound that parties with a continuing relationship had a particularly high satisfaction rate (80%) with mediation. according to sander (1985), mediation is very cf'fcctive at resolving cases involvin long-term relationships that will continue in the i'uturc. because ol'ts nonadvcrsarial nature, mediation of employee-mnployer disputes contributes to thc overall health ol a business organization (conti, 1985). shareholders in a close cotporation can use it to mitigate tensions, rebuild relationships. and sol'ten future disputes (solomon and solomon. 1987). in our study, 43% ol'hc disputes expenenced by the sample group in the last i'ive years were with clients or customers. the next most i'requcnt categortes were personnel disputes (14.5%)and supplier disputes (13%), a smull business's relationship with a valuable customer, employcc, or supplier is morc likely to be salvaged when mediation is used to resolve a dispute. at the least, animosity can bc decreased through mediation, so the other party will be less likely to make negative statements that could hurt the business's reputation. fulfillin the a recmcnt. research indicates that it is less likely that a party will renege on a mediation agreement than ihil to comply with a court judgtnent (mcewen and maiman, 1981, pcarson. 1982). mediation also provides a grcatcr opportunity to fashion 93 crcativc solutinns and meet special needs than does court proceedings. in civil couri proceedings the usual remedy is money da&t&ages lo hc paid hy a specil'ic daic. this i'caturc ol''icxihilityis an additional reason i'or thc greater likelihood of'o&npliance, with a mediation agrecmcnt than a cnurt judg&neat (mcfwcn and maiman, l981). advanta cs of judicial process althou h we hclicvc that mediation is gcncrally superior to the. judicial process, thcrc a&c circumstances where litigation may hc prcl'errcd. as previously discussed, thc certainty that a resolution will he rcachcd is onc ol'he most important advent:&gcs ol'hc court sysicm. sevl.l"ii olh&'i''et&soils lo usc judicial process rather than mediation a&c discussed hchiw. lar c monctar awards. since mediation normally &equi&es eo&1&pn&11&lsc il is &lot likely to result in onc party rccciving a maximum award. when a plaintil'i'has a strong case the court is likely to award a grcatcr amount than thc amount that would hc a&rived at through mediated settlemcnt. mcewcn &md maiman (19f(1) i'ound that in nca&ly half'hc cases adjudicated iiy the maine small claims court the plaintiff was awarded all, or nearly all of thc el&&i&11, wllilc this occurred in only l7% of'he mediated cases. however, legal and procedural costs ilol'ii&idly deere;&s&'lie 1&ct &111&oui&t icccivcd in a canc that has been litigated. compensation f'rom an agrccmcm mcdiatcd carly in thc dispute may compme i'avorahly to thc nct amount rcccivcd i'rom a coun award, even with a large vc&d&ct. ex osurc in thc public record aml press thc court: ystcm also provides an oppo&xunity for puhlicity amf puhlic exposure that is lypically not avnilahlc through mediation. ii'his cxposurc is dcsirahlc then the dispute should he taken lo court. the possihilil of'a leal and makin new law funhermorc, a mediated agreement is final us well as legally himling. it cunnol hc successfully appealed. cxccpt in very unusual circumstances. (normally parties lo a mediation would not have a reruson i&i appeal an agrecn&ent they voluntarily cntcrcd into.) also, mediation i» not a vchiclc to make or change law. this can only hc done ll»ough a cou&t case that is appealed. rccommcndations i'or i unhcr rcscarch. th&s aiticlc prcscnts thc hest data currcmly availahlc with rcspcct to media&in&i tllld si&1&ill husincss. additional empirical rcscurch should specifically address thc imps:is of'if'i'crcnt methods of'ispute resolution on am&ill husincss. ln pa&xicult&r, studies can he designed to compare small hus&ness d&sputcs that werc mcdiatcd with th&xsc arhitratcd or adjudicated with rcspcct to factors such as cost, speed, outcome, salisfaclion, impact on thc relationship, and compliance. i)ccausc ol'ihc potcnlially devastating nfl'cct a lawsuit may have on a new venture or small husiness, such specialized research would provide invaluahlc inl'ormatir&n. another arcs for future research is thc relative lack ol'enctrat&on achtcvcd hy mediation as an altcrnativc n& court procccdings. althnugh g3% of'he respondents knew of mediation, only 20% had actuully utilized it. the motivating links hctween awareness and use warrant exploration. &94 summary and conclusion small business executives arc increasingly becommg i'amiliar with mediation as an alternat&ve to the judicial process i'or resolving disputes. thcsc cxccutivcs, and others who have used mediat&on, tend to have a high icvcl of'atisf'action with this method oi'coul)ict resolution. wc have prov&ded information regarding thc advantages and disadvantages of'cd&at&on, and when it is best utilized by a small business. managers can hc proactive and practice prcvcntivc law by drafting contracts w&th a clause requinng the parties to i'irst submit any dispute to mediation. should a controversy arise w&th an employee, supplier. customer. or any other pany, the ohligat&on to anempt to settle the dispute, through mediation will prc-ex&st and not require a new agrecmcnt at that juncture. when mediation is undertaken it is generally most beneficial soon af'ter the dispute has ansen. whtmc a controversy involves a complex matter. or a substantial amount of money, a business person should first seek the advice of an attorney. we do recommend, however, that the attorney be suppo&tive ol'mcd&ation and have expenence with the process. law schools are increasing their emphasis on adr and the number o(attorneys knowledgeable about mediation is growing. we recommend that business school classes in management and law cover adr w&th an emphasis on negotiation skills and the mediation concept. as i'uturc cntrcprcneurs and managers, students should be aware of thc pros and cons ol'ctliation and other modes of cont'lie& rcsolutton. when faced with incvi&able disputes ihcy w&ll be hetter prepared u& clfectivcly manage sulu&&ons. weckstein f1988) concludes that the search lor truth in a dispuic is aided by process values such as party participation, saiisf'act&on, human d&gnity and protect&on of important relationships. as wc discussed in this aixiclc, mediation is a unique opt&on because it embodies thcsc values and through therm provides many advantages to small business. ln a 1985 speech foimcr supreme court ch&el'ust&ce court warren burger quoted a distinguished lawyer, abraham lincoln, in urging american's to refrain from court adjudication: "d&scourage litigation. persuade your neighbors to comprom&se whenever you can. po&nt out to them how the nominal w&nner is often a real loser in fees. expenses and waste of tune. as a peacemaker the lawyer has a superior opponunity of heing a good man... never stir up litigation. a worse man can scarcely bc i'ound than onc who docs this" (burger, l985, p. 4). 95 references au»i i a hi i a.. 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(1988).the pu&3&uses o(dispute resolution: comparative concepis of'justice. american business law journal 26 605-624. 96 http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2021, vol. 31, no. 01, 51-65 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2021 small business institute® w w w. j s b s . o rg introduction 1cámarabilbao university business school licenciado poza, 17, 48011 bilbao, bizkaia, spain, jokin.cearra@camarabilbaoubs.com 2university of the basque country (upv/ehu) lehendakari aguirre, 83, 48015, bilbao, bizkaia, spain, maría.saiz@ehu.eus experimenting a methodology to improve the entrepreneurial ecosystem through collaboration and digitalization entrepreneurial ecosystem, collaborative network, social network analysis, network effectiveness, icts apa citation information: cearra, j., & saiz, m. (2021). experimenting a methodology to improve the entrepreneurial ecosystem through collaboration and digitalization. journal of small business strategy, 31(1), 51-65. the creation of new companies is one of the many ways an economy grows and generates employment, but, nowadays, it is more important because it constitutes one of the main sources of innovation, and, therefore, is one of the key elements to be competitive in a globalised market. the global entrepreneurship monitor (gem) model (kelley et al., 2012) highlights the importance of the environment to foster entrepreneurial activities, thus contributing to economic development. for this to happen, apart from creating a favourable institutional framework, it is important to ensure that there is an interrelation and collaboration between entrepreneurs, organisations and the different agents of the environment. these relationships shape what mason and brown (2014) called an entrepreneurial ecosystem. there is no exact formula to create an entrepreneurial economy but only road maps to refer to as stated by isenberg (2010). the system of support of entrepreneurship is part of such an ecosystem and there is a general agreement that it is one of its crucial factors. spigel (2017) examined its components and pointed out how the state has a major role in supporting them. policy makers in basque country have been working for years to build a successful entrepreneurship ecosystem. as a result, we see a multitude of entrepreneurial programmes (public and private) promoting entrepreneurship. the gem report of the basque country (saiz et al., 2018) analyses the basque entrepreneurial environment, and concludes that public policies are seen both as the main driver of entrepreneurship in the environment and as one of its main brakes. on the one hand, it is recognised as the main support both by the effort in the form of support and promotion of the entrepreneurial activity and by the recognition to its effectiveness. on the other hand, they pointed out it to be an obstacle or brake due to the complexity of the bureaucratic processes, the low efficiency of the unique windows and the demand for greater institutional coordination. the atomization of the structure of agents and entities one of the weaknesses detected in the support system of entrepreneurial activity in several locations is its atomization. thus, to solve it and gain efficiency, the agents, agencies and institutions related to this subject in biscay started a joint project of strategic reflection in the beginning of 2018. consequently, a collaborative public network, supported by a digital platform was formally created in june 2018. this paper aims to assess the development process of this public network. based on the theory about social network analysis and network effectiveness, we developed a set of indicators and used the obtained data from the technological platform used by the network. currently, the network is still in its initial stage, but we have verified that it is working and the interaction among the agents has increased; thus, we can conclude that it is fulfilling the set cornerstones in its development. our research is a longitudinal study, and our final target is to create a tool to monitor the development and measure its impact on the entrepreneurial ecosystem in biscay. the network’s goal is to improve the support service for entrepreneurs in the province, enhancing the entrepreneurial conditions and having a positive impact on the entrepreneurial ecosystem. because atomization is a common problem in several locations, the experience might be extended to other places with similar casuistic. we consider it as an original approach because it applies information technologies and social networks to public administration as well. jokin cearra1, maría saiz2 http://www.smallbusinessinstitute.biz http://www.jsbs.org 52 j. cearra, & m. saiz journal of small business strategy / vol. 31, no. 1 (2021) / 51-65 that support entrepreneurial activity is a general problem in the spanish ecosystem and provokes inefficacy in the use of public resources invested. the issue lies in the large number of existing programs and organisations as well as the overlapping and discoordination of their actions, which means potential entrepreneurs are often unclear about where to go. this produces great inefficiency of the system as a whole and the perception that the institutions are not doing enough to support the creation of new companies. it is an extremely extended problem according to the gem’s special report about organisms and measures to support the entrepreneurs in spain (rubio & sánchez, 2016). the report states that the solution to this problem involves clarifying the existing organisms and measures, their scope and their nature. the clarification would make it easier to guide the entrepreneurs along the long journey from the very beginning of the process of developing an idea to transform it into a consolidated business. the report further suggests the creation of a real network to support entrepreneurship, which integrates all the interventions oriented to the creation of companies, avoiding overlaps and achieving synergies and improvements in the service offered to the entrepreneurs. in the public sector, resources are often scarce, clients have multiple problems, service professionals are trained in narrow functional areas and agencies maintain services that fit narrowly specified funding categories. under these conditions, various networks of providers offer a way to dispense services effectively while still maintaining acceptable levels of organisational and professional autonomy (provan & milward, 2001). with the challenge of improving the functioning and coordination of the agents, a project based on the collaboration of all the components of the ecosystem of the province was planned and implemented during the first quarter of 2018, which formally led to the creation of a network called sarekin. the main distinctive characteristic in sarekin’s design is that it uses a digital platform as the basis for its activity and interaction among its members. this online platform met all the conditions to serve as a gateway to the ecosystem to all the people who could be potential users, and as a tool to energise and connect the agents themselves. our research question is to assess the impact of information and communication technologies (icts) on the network in order to validate the methodology employed to address the problem of atomization. the purpose of this paper is to verify the usefulness of an ict-based tool to strengthen a recently created formal network. we start by reviewing the literature, and then set the methodology and indicators to measure its evolution and finish with conclusions at the current stage of development of the process and finalising next steps in our research along with suggesting some recommendations based on our research experience. theoretical background in recent decades, it has been very common to use networks to respond to the needs of society in a wide range of areas, and, consequently, there has been a variety of research related to these networks. in the field of public administration, networks are defined ‘either as interorganisational collaboration arrangements or as new governance structures designed to achieve a common goal that cannot be achieved (or that cannot be achieved effectively) by one single organisation’ (agranoff & mcguire, 2001; o’toole, 1997). developing further, provan and lemaire (2012) used the term ‘whole’ goal-directed network to remark that the key point is a common goal that would typically be addressing some major public problem or task, mainly through provision of service. the task normally is publicly funded at large, even though the participants may be from any sector. there is a huge variety of possibilities, the network may be organised informally or initiated by the government. in addition, while membership in or affiliation with a network is often formalised, making it clear who is ‘in’ and who is ‘out’, which is not always the case, sometimes creating fuzzy boundaries. the support system is only run by and funded publicly. according to spigel (2017), it is one of the core components of an entrepreneurial ecosystem. mack and mayer (2016) showed that it is interesting to analyse the interdependence of the elements of the ecosystem and its evolutionary dynamics by taking into account the institutional framework and the socio-political context in which it has evolved over time and the role of the regional policy acquiring missing elements and facilitating interaction between the elements. they distinguished four stages of ecosystem development starting from its birth, followed by growth, sustainment and ending with decline; each of the stages were characterised with a different mix of entrepreneurial ecosystem domains (isenberg, 2011). stam and spigel (2016) stated that the focus should be on the quality of entrepreneurship rather than the quantity, so that the policy will not be about maximising a certain indicator of entrepreneurship but about creating a context or system in which productive entrepreneurship can flourish. camarinha-matos and afsarmanesh (2005) discussed virtual organisations and stated that ‘a collaborative network is constituted by a variety of entities (e.g., organisations and people) that are largely autonomous, geographically distributed, and heterogeneous in terms of their: operating environment, culture, social capital, and goals’. nevertheless, these entities collaborate and share skills, competencies and 53 j. cearra, & m. saiz journal of small business strategy / vol. 31, no. 1 (2021) / 51-65 resources to achieve better common or compatible goals, and a computer network supports their interactions. unlike other networks, in collaborative networks, participation is an intentional property that derives from the shared belief that together the network members can achieve goals that would not be possible or would have a higher cost if attempted by them individually. a key component of virtual organisations according to kasper-fuehrera and ashkanasy (2001) is that they are ict-enabled and based on computer-mediated communication. it is a powerful tool to overcome time and distance barriers, but it suffers from the limitation that nonverbal communication, an important component in trust building, is difficult to achieve. massaro et al. (2019) explored the important role played by trust and control mechanisms regarding knowledge transfer in networks of smalland medium-sized firms, which is important to support firm competitiveness fostering a firm’s competitive advantage. provan and lemaire (2012) also remarked that the push for greater collaboration among organisations by the government leads to the question—whether networks should be mandated or emergent. they said it is an important question for the study and practice of public networks, where government agencies often play a much more significant role in initiating the formation of networks (and sometimes sustaining them) than is typically the case in the private sector. this birthed our research object and was pushed by the effort of a public government agency initially. although very little research has been conducted on this issue, especially research that actually compares mandated versus emergent networks, both costs and benefits are likely to be associated with each approach. while a top-down mandate to form and/or be involved in a network, typically through control of funding, can procure a powerful incentive for organisations to attempt to work together, this approach might be best suited for situations where coordinated work is essential and such effort might only evolve slowly, if at all, without the force of a key government agency or funder. some examples for the same include networks addressing a major public health issue or a disaster response. at some point, however, if the network is to be truly effective, as envisioned by those government funders, regulators or policy officers who mandated the network in the first place, it must be able to operate through the cooperative and collaborative struggle of the organisations that make up the network, allowing time for building trust and commitment (moynihan, 2009). thus, although rarely studied empirically in the public network literature, a major reason why multi-organisational whole networks may not operate as intended, especially those formed through mandate, may be because of a lack of consideration of how emergent relationships typically form, are strengthened, and ultimately sustained. these factors as homophily, friendship, trust or the need to acquire legitimacy or power are the basis of successful relationships and cannot simply be discounted by the network planners. according to previous research on the impact of digitalisation on entrepreneurial initiatives (rosin et al., 2020), one of the effects of digitalisation is that it supports better collaboration among team members since they can use a digital tool to support communication and engage in an active exchange of information and documents (hull et al., 2007). another advantage of using a digital platform as the basis for the network functioning is that it allows to maintain asynchronous relationships, such as discussion forums, shared projects, messages freeing time-synchronicity and place sharing constraints (hair et al., 2012), so its use might lead to reach greater audience as it avoids the constraints of time and location. overall, its use will allow a unified entrance door to the whole entrepreneurship support system. potentially the impact of the whole system could be improved because more people could be engaged and an integrated service might be provided. ultimately, the mission of almost all the members of the network is to provide services to the community. therefore, our hypothesis is that the technological support through a digital platform contributes to strengthen the cohesion of a collaborative public network enhancing interactions and reinforcing relationships. turrini et al. (2010) reviewed the literature and found that there was no one-stop theory about the effectiveness of the network or its determinants. in addition, they verified a lack of empirical studies about research on network outcomes, such kind of work has been scarce and problematic mainly due to the difficulty of determining relevant goals, ways to accurately measure public sector outcomes and the lack of a control group. in literature, we found two types of analysis that might be applied: 1. social network analysis (sna) and 2. network effectiveness. social network analysis nodes and ties form a social network. nodes, or actors, within a network can represent individuals, groups, organisations, communities and nations that make up the networks. the relationships between nodes or actors are linked through ties. these ties can indicate communication between nodes, information exchange, formal contractual relations, or friendship ties between nodes. the relationships between nodes or actors can be either formal (legal/ contractual) or informal (based on trust and understanding or interpersonal relationships) (provan, 2007; scott & carrington, 2011). kapucu et al. (2017) based on a literature review 54 j. cearra, & m. saiz journal of small business strategy / vol. 31, no. 1 (2021) / 51-65 checked out how sna as a method has been used for analysing the structural and relational aspects of networks in public administration. based on the study conducted by scott and carrington (2011), sna approach is useful for studying social processes, social structures and interaction patterns within social structures. sna presents a set of qualitative and quantitative as well as descriptive and inferential approaches for analysing relational data. motoyama and knowlton (2017) applied social network approach to examine how the entrepreneurial ecosystem of st. louis is structured by analysing the connection among the entrepreneurs and support organisations at multiple layers. although the units of analysis are largely organisations, the levels of analysis can vary from individual nodes (ego), to ties between two nodes (dyadic) or three nodes (triadic), to substructures and even to complete systems at the whole-network level of analysis (borgatti et al., 2018). regarding the data required for sna, it might be collected using both primary data collection methods (e.g., field surveys, online survey questionnaires and face-to-face structured and semi-structured interviews) and secondary data (e.g., archival data from newspapers, news reports, situation reports, online company profiles and databases). these methods are not mutually exclusive. however, the challenge of getting information concerning the complete network datasets is difficult. hence, kapucu et al. (2017) suggested that future research should consider integrating quantitative approaches with qualitative approaches. another challenge in the field is to study the sustainability, maturation and evolution of networks as systematic longitudinal designs and analysis remain largely missing. these findings lend support to previous research studies that identified the need to integrate quantitative and qualitative designs in network research and to conduct more longitudinal analysis of network change and evolution (provan et al., 2007; provan & lemaire, 2012). network effectiveness network effectiveness refers to the effects, outcome, impacts and benefits that are produced by the network as a whole and that can attend to more than just the single-member organisations in terms of increasing efficiency, client satisfaction, increased legitimacy, resource acquisitions and reduced costs (oliver, 1990). if a network approach is judged to be the best strategy given the demands of the task, success is still far from assured. building an effective network depends on many factors, all of which must be considered in the design and implementation of a network. thus, as provan and lemaire (2012) remarked, it is important to understand what the research has demonstrated regarding how a network might be constructed and maintained to be effective and hence minimise the likelihood that the challenges mentioned here might lead to its failure. it is difficult to assess if the public-sector networks really work, the difficulties to assess network effectiveness are closely related to those evaluating organisations but they are even more complex. provan and milward (2001) used an approach consistent with multiple-stakeholder perspective; they suggested evaluating network effectiveness at three level of analysis: the community, the proper network and network’s organisational participants. each level with principals, those who run and fund the activities, agents, those who work, and clients, those who receive the services. to distribute the participants across the levels, agency theory (fama & jensen, 1983) is used and a principal in one level might be an agent in another. thus, the different levels of analysis are: community level this is a typical level to measure network effectiveness, since the final way to evaluate networks at the community level is by their contribution to build social capital (putnam, 1993), a term that broadly refers to the valuable resources derived from interpersonal relations in social networks (portes, 1998). feldman (2001) who referred to it as an intangible resource that is difficult to quantify but relevant to improve the entrepreneurial environment discusses this concept applied to entrepreneurship. as per fountain (1998), it is an important outcome of collaboration among agencies and firms. working together, they learn to understand and trust one another as well as learn whom not to trust. this can be very important not only to deliver the current service but also to develop relationships and work better in the future, for the community’s benefit. however, as weiler and hinz (2019) pointed out that there is not a single or clear method to measure it. network level a network must become a viable interorganisational entity to survive, as it is not just one more community provider organisation, but a collection of programs and services provided by a broad range of cooperating but legally autonomous organisations. thus, it needs the commitment and participation of its members, but it is essential that it has an adequate system of organisation and governance. in this sense, it is different when it comes to a network that has been founded by mandate than when it has emerged informally. in the latter case, the members themselves are willing to take on and share the costs and efforts required by those 55 j. cearra, & m. saiz journal of small business strategy / vol. 31, no. 1 (2021) / 51-65 functions, whereas, in those created by mandate, it is usually the driving entity that assumes them. lawless and moore (1989) and mandell (1984) labelled this entity as a network broker, though provan and milward (2001) used the term network administrative organisation (nao). they pointed out that in the agency theory context, the nao is an agent at the community level and a principal at the network level. the effectiveness of a network and its nao can be assessed in different ways, many of which depend on the relative maturity and development of the network. the simplest way is controlling the number of organisations that compound the network; there is neither a maximum nor a minimum number of organisations for a network to work properly, but, especially at the beginning, it needs to attract and retain members if it intends to survive as a viable form of social organisation. once it is established, it is not a matter of attracting more and more members because although being bigger might have political advantages, but it might not mean delivering service effectively. networks could just have a stable number of agents with peripheral organisations being attracted informally and it is important, at this point, to have a core group of key organisations that provide critical services. as the network becomes bigger, the coordination costs also rise, so the role of nao is critical. furthermore, to assess the effectiveness, at this stage, rather than the number organisations, it is better to measure the number of programs and services provided by the network. one key advantage of working in a network is that it can provide a broader range of services than acting as a single-member organisation, but they might not be accurately provided. another way of evaluating effectiveness at this level, similar to the sna, is by assessing the quality and strength of the relationships between and among the network members. at the beginning, ties will be tentative and calculated because the network is new and organisations that have been working independently now are supposed to share resources, information and clients. in the public sector, this is considered to be easier because organisations probably have been working together informally. nonetheless, all organisations are likely to experience a period of transitional commitment as they move from informal, casual and easily broken ties to relationships that are either formalised or ones that are less formal but based on trust and commitment built on a history of interactions (ring & van de ven, 1994). one network concept that is particularly salient in this regard is multiplexity, which refers to the strength of ties between network agencies (scott, 1991). two organisations are said to have multiplex ties if they are connected in more than one way. such a tie is stronger than a single link because the relationship is maintained even if one of the two links is broken. for evaluating network effectiveness, multiplexity can be a particularly useful measure. during the early development of network relationships, ties among most members tend to be relatively weak, or loosely coupled, as agencies test each other’s commitment and reliability. as the network matures, some of these links will completely dissolve as agencies discover the relationships that work and the ones that do not. other relationships may be maintained at a low level, based on the need for only limited contact and involvement among network members providing certain types of services. however, if a network is working well and is to be sustained over time, the ties among many network agencies will gradually strengthen, particularly among those with complementary services. effective, mature networks might have a majority of agencies connected through two or three different types of programs or client services as well as through general information sharing and friendship. multiplexity, and, hence the strength of the network, will be high, reflecting commitments among network agencies to one another through multiple activities. a final way of assessing network-level effectiveness is by evaluating its administrative structure. while the existence of a distinct nao is not critical to network success, it generally indicates whether a network is viable and if resources have been committed to developing the network or not. while small networks can survive and prosper in the absence of a nao, such an absence means that network governance is left to network participants. in this case, the community has no designated agent to guide, coordinate and legitimise network activities or to monitor service provision. such a structure is highly unusual in larger networks and is likely to produce weak network outcomes. non-nao networks require a high level of commitment to network goals and to interorganisational cooperation by member agencies that is difficult to sustain. for instance, the study conducted by provan and milward (1995) on mental health networks demonstrated that, in tucson, arizona, the absence of a strong nao resulted in largely informal cooperation and coordination among the many providers. although there were many links across the network resulting in high overall integration among provider agencies, actual services were not well coordinated and client outcomes were not favourable. an important way of assessing network effectiveness through the nao is to evaluate the extent to which the nao acquires and then distributes resources for and to the network. organisation/participant level although network and community level outcomes are valid ways of evaluating networks, it is important to remark 56 j. cearra, & m. saiz journal of small business strategy / vol. 31, no. 1 (2021) / 51-65 that individual agencies and their managers are still motivated partly by self-interest. for organisations considering becoming part of a network, the relevant question is, how can network involvement benefit my agency? despite the broader value that may accrue to clients and the community at large as a result of the integrated delivery of services through a network, network members still strive to ensure the survival of their own agency. networks can contribute significantly to organisation-level outcomes. conversely, the success of network members is critical to the overall network effectiveness, although sometimes network success can be enhanced through the failure of individual members, resulting in some interesting evaluation problems. the importance of network involvement for individual agencies can be evaluated on four primary criteria: client outcomes, legitimacy, resource acquisition and cost. while the benefits of network membership are most apparent to smaller agencies that have low legitimacy and modest capacities to attract resources on their own, these agencies are also likely to experience the greatest costs. in general, agencies will join a network if the agency management believes their specific clients can be better served through integrated services provided by network members and if the agency’s services can be offered more efficiently and effectively. integration across levels of analysis network effectiveness is likely based on interactions across all three levels of analysis. although each stakeholder group will be most concerned with effectiveness at one particular level of network analysis, it is only by minimally satisfying the needs of each group; principals, agents and clients that network effectiveness can be fully realised. outcomes at each level of analysis have a direct effect on outcomes at another level. in addition, while each of the broadly defined stakeholder groups is unique conceptually, in practice, they overlap so that outcomes that satisfy one group can at least partially satisfy another group. for instance, while principals, like the general public and funders, may be most concerned with network effectiveness at the community level, effectiveness at this level can only be achieved if most (although not all) individual clients are served reasonably well by network providers. similarly, participant organisations can often enhance their survival and resource acquisition by responding to the expectations of a nao, broker or core agency. at the same time, however, network effectiveness at one level does not ensure effectiveness at the other two levels. for example, one important caveat regarding organisation/participant-level outcomes is that it is not the role of network administrative entities to enhance the well-being of individual network members. these naos work to satisfy their principals by enhancing community-level outcomes. network-level effectiveness is also emphasised as the nao strives to ensure its own survival through network growth and diversity of services. thus, the network is considered successful if the community in general, and an integrated network of providers in particular, better serves clients. there is an inherent tension in community service networks between the needs and expectations of community-level, network-level and organisation/participant-level stakeholders and the effectiveness measures valued by each group. the resolution of this problem is not easy. it does mean, however, that while community networks that are successful are likely to be effective at all the three levels of analysis, stakeholders’ needs and expectations are not necessarily consistent across the levels. for instance, the community may be best served by a network that first focuses on the full range of needs of a particular client group, and then attempts to coordinate and integrate the delivery of required services through specific agencies. this may mean shifting resources from those agencies whose services do not fit network-determined needs or that duplicate the mix of services already provided. thus, an individual agency may be doing a good job on its own, but the particular services the agency provides may be deemed either nonessential or too costly by the network administrative organisation. this network-level assessment may then force the agency to close down or shift its service focus. in this case, the nao acts as the agent of its relevant community constituency, representing a particular set of community level interests that are not necessarily consistent with those of some network members. provan and milward (2001) stated that public networks can and should be evaluated at community, network and organisation/participant levels of analysis. the different views of effectiveness at each level need to be considered and resolved, especially in a system that only works effectively through cooperation. public networks are different from for-profit ones; in the latter, the financial outcome of the members might constitute an indicator of the network effectiveness (saxton, 1997), while, in the former, the rationale is not in the members level but in the community one. public-sector networks are most effective when they enhance the capacity of organisations to solve problems and serve their clients. for a network to work effectively, the needs and interests of the people who work for and support these programs and organisations must be satisfied, while building a cooperative network of interorganisational relationships that collectively provides services more effectively and efficiently than a system based on fragmented funding and services. a fundamental problem with any effort to evaluate 57 j. cearra, & m. saiz journal of small business strategy / vol. 31, no. 1 (2021) / 51-65 public networks is that external stakeholder groups tend to judge network effectiveness depending on what specific service providers either do or do not do rather than how well services are provided because of network activities. stakeholders tend to evaluate, reward or punish individual agencies, regardless of the network’s role in enhancing or limiting client outcomes. individual organisations have constituency groups while the networks do not, and some organisations are powerful enough to resist pressure from community and network levels. in the case of networks, this might happen when there is a constituency group formed by a coalition of agents active at the network level. despite these problems, networks funded by the public sector can and should be evaluated. the task for network organisers is to minimally satisfy the needs and interests of stakeholders at network and organisation levels, while emphasising the broader needs of the community and the clients that the network must serve. community value may be created by providing clients with better access to services, enhanced utilisation, reduction in unneeded services, lower overall costs, enhanced client satisfaction and improved outcomes. these, in turn, will make the community a more productive and viable place to live. the advantage of public-sector networks is that many of the individuals who are employed by network organisations are professionals, with values and commitment to clients and the public good that often outweigh their commitment to specific programs or organisations. thus, organisationand network-level effectiveness criteria can be essentially satisfied by focusing on community-level goals. public networks must be built and maintained at organisation and network levels, but community-level stakeholders will ultimately judge overall network effectiveness. thus, provan and lemaire (2012) suggested using process indicators of network effectiveness and identified five broad characteristics of effective networks: involvement at multiple levels, network design, appropriate governance, building and maintaining legitimacy and stability. methodology research object sarekin network was formally created in mid-june 2018 following the design thinking-based (brown, 2008) work dynamics that sought to engage all actors in the ecosystem. it was a result of a collaborative and co-creative process described and detailed by balderas et al. (2020). the task was led by a regional development agency, which has also been the coordinator and promoter of the initiative from its implementation. following the completion of the design and planning phase, the action plan was presented at the institutional level with the intention of giving immediate way to the implementation phase. research setting provan and milward (2001) proposed a framework for network evaluation, and their model focuses on evaluation of networks at three broad levels of analysis: community, network and organisation/participant levels. three of them must be considered but not necessarily equally: 1. community level: a) social capital as defined by feldman (2001) b) providing clients with better access to services, enhanced utilisation, reduction in unneeded services, lower overall costs, enhanced client satisfaction and improved outcomes 2. network level: a) administrative structure b) nao: how it acts and manages the funds across the network c) number of organisation members (evolution) d) number of services and programs uploaded to the platform (evolution) e) quality of relationships between and among the members f) number of ties – multiplexity 3. organisation level: a) importance of network involvement b) client outcomes c) legitimacy d) resource acquisition e) cost 4. integration (interaction) across levels of analysis: a) expectations we are conducting a longitudinal study using quantitative information with a qualitative approach to fill the gaps and understand in depth the evolution of the network and its impact on the entrepreneurial environment. at this moment of the investigation, we are focused on the network level to verify whether methodology and technology are working. additionally, in the future, the five broad characteristics of effective networks suggested by provan and lemaire (2012) -involvement at multiple levels, network design, appropriate governance, building and maintaining legitimacy, and stabilitywill be assessed. 58 j. cearra, & m. saiz journal of small business strategy / vol. 31, no. 1 (2021) / 51-65 data collection the aim is to test a methodology to solve the atomization of the support complex to entrepreneurial activity at the province based on developing a collaborative network with technological support. in order to do so, we are dividing the assessment process in three phases corresponding to each level of analysis as shown in figure 1. at the current stage, the network is still working mainly in the back-office because it is not working as a whole offering services to the market yet. therefore, we are going to centre the analysis at the network level, obtaining data from direct observation and through the bizkaia.network online platform used by the network. the bizkaia.network online platform was created by the urbegi foundation as a part of its lisfab bizkaia project. it is a project designed by urbegi foundation in collaboration with the bbk foundation (factory of local, innovative, international, sustainable and solidarity projects). according to the principle of optimizing efforts and resources, it was considered that bizkaia. network level •test the validity of the tool and methodology to reduce atomization •network development measurements community level •test the impact in the entrepreneurial ecosystem •social capital organization level •analyse the involvement in the long term •cost-benefit figure 1. stages of development of the project network was adapted to the requirements of the network and within it a space was created for sarekin. this online platform met all the conditions to serve as a gateway to the ecosystem to all the people who could be potential users in the territory. we have taken three significant cornerstones after the formal creation of the network, in october 2018, was held the first course to learn how to use the platform and members were encouraged to upload or update their profiles and content. in december 2018, the first plenary meeting with all the members invited was held. in october 2019, the next year of planning, in which the network is supposed to start working in front of the public, was being prepared. results and discussion administrative structure the action plan determined the mechanisms of coordination and control of the actions of the network. in figure 2, initially, sarekin was divided into six working branches corresponding to stages of an entrepreneurial project, each of them with a team of three to five members who are responsible for the coordination and operation of their group. in turn, each area has appointed a representative of the group to the general coordination team. each group is organised and works autonomously, with each having its own casuistic and objectives according to the typology of their respective functions. the general coordination group shares the different initiatives and comments on the common interest of the entire network. throughout the first year, the coordination team met four times and in june 2019 agreed the plan with the actions to be undertaken in order to definitively launch the network to the public. the entity that ultimately decides the allocation of funds, since it has a budget for this purpose, is the regional development agency that pushed the initiative. it is expected that from the interaction on the platform itself will emerge new projects and initiatives as sarekin is intended to be a live network. moreover, it has been launched, but it is unknown how it will develop in the future, as this will depend on its users. preparing the outing to the public, one of the concrete 59 j. cearra, & m. saiz journal of small business strategy / vol. 31, no. 1 (2021) / 51-65 actions was the creation of the resource map of the entrepreneurial ecosystem within the bizkaia.network platform. once the different agents have internalised the use of the platform in their work processes, the maintenance and constant updating of the same will avoid the obsolescence of the resource map, as it will always be updated and available to everybody in the public area of the online platform. on the other hand, the thematic working groups, previously referred to, began to form on the same day as the institutional presentation, with the first plenary meeting convened in december 2018 to put them into operation. thus, at this first plenary meeting, attended by seventy-one representatives of organisations, the members and representatives of each group were defined, and they started working on actions that could be performed on the field of action of each for 2019. in 2019, the focus was in developing the network internally, while, in 2020, it will be in starting to present externally the support system as a network. nao: how it acts and manages the funds across the network the network is a result of a previous collaborative engagement among all the representatives of the entrepreneurial ecosystem in the province, which was launched by one of the public agencies dependant on the deputy of biscay that is acting as the supporting team for the whole network. it has representatives in the six groups that summarises and organises all the information. it also has a budget assigned to this project and decides the ways to distribute it among the different activities and projects after debating the issues with the coordination team. number of organisations members of sarekin the number of organisational members of the network has almost doubled in one year, while the personal profiles registered and uploaded to the digital platform has also shown increase in numbers but at a lower level as we presented in table 1. represented in the following figures in the network, are all the different typologies of the organisation that provides support to the entrepreneurial activity as shown in the distribution of the 103 members in october 2019. first, in figure 3, we distinguish organisation members by type of activity they developed. aggregately distinguishing by character, there are 41 public and 62 private institutions as shown in figure 4. every personal member is assigned to one of the six groups depending on the activity they develop and the type of service its organisation provides. in figure 5, we see the distribution by groups, being 35 profiles pendant of being appointed to a group. figure 2. network structure source: action plan of sarekin table 1 evolution of the membership october 2018 december 2018 october 2019 organisations 56 86 103 persons 144 150 181 60 j. cearra, & m. saiz journal of small business strategy / vol. 31, no. 1 (2021) / 51-65 8 1 23 7 1 1 0 0 20 4 0 0 9 5 6 18 0 5 10 15 20 25 30 vocational training centers universities and business schools local development agencies supralocal agencies service provider organizations financial institutions and investors foundations associations public private figure 3. distribution of organisational members by type of activity number of services and programs uploaded to bizkaia. network figure 4. distribution of organisational members by character 41 62 public private 61 j. cearra, & m. saiz journal of small business strategy / vol. 31, no. 1 (2021) / 51-65 28 25 11 33 16 33 0 5 10 15 20 25 30 35 entrepreneurial culture entrepreneurial projects financing creation and start-up consolidation prescribers figure 5. distribution of personal members by branch of activity table 2 shows the number of services uploaded to the platform almost quadrupled after courses and tutorials about how to manage it were offered. table 2 evolution of the services offered october 2018 december 2018 october 2019 services 17 32 120 quality of relationships between and among members each group has autonomy to manage its meetings and activities, with the coordination team acting as an organiser establishing priorities and distributing funds among other suggested actions. the coordinators met four times in 2019. one finding in the design phase was that it was the need to have physical meetings, so one plenary meeting where all members were invited is planned every year, and two have already been held in the month of december in 2018 and 2019. we can look at the digital relationship evolution through bizkaia.network and as we see in table 3, it has almost tripled in one year. in the figure 6, we can see the map of relationships in the network between considering just connection among organisations taken from the platform in october 2019. table 3 evolution of the connections in the platform october 2018 december 2018 october 2019 relations 1642 2608 4180 figure 7 shows all the relationships adding all the content available including personal profiles, services offered, news, events, resources, challenges and others. number of ties – multiplexity as mentioned above, if more than one person corresponding to each member is involved with the network, it means that the ties among them are stronger. the membership is opened to all organisations interested in joining with the only requirement that they have to fit and have something useful to offer related to any of the six areas in which the network is divided. after the application approval, any personal member of those organisations is welcomed and assigned preferably to different group according to the personal profile. table 4 shows the distribution of agents with more than one person involved. it is still too early to make a definitive assessment of the validity of the solution presented for the atomization problem, but we have verified that the hypothesis raised is met and that the use of the ict-based online platform 62 j. cearra, & m. saiz journal of small business strategy / vol. 31, no. 1 (2021) / 51-65 figure 6. relationships among organisational members of sarekin figure 7. whole relationships in sarekin promotes cohesion and collaboration among the members of the network. like any new technology adopted, its use by unaccustomed users and unmotivated to use takes time. still, as we have seen the metrics of its use have been rising with time. in addition, realize that we are still in the planning phase for its launch to the public soon. it is when the network itself begins to provide the service to the users for which it was conceived and with the platform itself, becomes the unified gateway for potential entrepreneurs to the entrepreneurship support system in the province. the research undertaken by motoyama and knowlton (2017) in st. louis using a social network approach was 63 j. cearra, & m. saiz journal of small business strategy / vol. 31, no. 1 (2021) / 51-65 based on interviews with the key actors in the local ecosystem, using an ict-based platform has the advantage that all the interactions conducted through that mean are traceable. it has to be taken into account that the use of the platform is not completely generalised, so there are still some communications that are through email or other means. conclusion we conclude assuming that the methodology based on collaboration and technology is contributing to alleviate the problem of atomization in the support system of entrepreneurial activities. we verified that the network is fulfilling the settled objectives during its development process and the interaction among its members has increased and strengthened. the use of new technological means like the online digital platform is another challenge and will take time to be a part of its daily use, but as it has been exposed, its online activity is also increasing. the future is always uncertain; however, the network is expected to be a dynamic organism. in other words, as with many living things, the implementation had to be helped and supported in the beginning. the regional development agency being the entity that has assumed the task and responsibility of leading and coordinating the initiative in the first stage, with an assumption that the network itself will be able to self-manage in the near future. as stated atomization of the system of agencies supporting entrepreneurship is a common problem in almost all the spanish regional entrepreneurial ecosystems, thus the experience might be extended and tested in other environments. it might be useful not only for ecosystems where the public sector is overrepresented but also in sectors where there are mainly private agents. probably in those cases, governments should be the ones to push or to set incentives in this direction in order to favour the flourishment of new ideas and innovation that should be the focus. this project has practical and policy implications by the impact of the experience to the particular case of the region. from the academic point of view, our investigation contributes to alleviate the scarceness of research on the impact of support programs on the development of the entrepreneurial ecosystem (spigel, 2016), and it has further implications by the testing of the use of ict to reinforce a table 4 number of members from key organisations distributed in groups culture projects financing creation consolidation prescribers total provincial support agent (nao) 1 1 1 1 1 1 6 local support agent (biggest one) 1 1 1 2 1 6 provincial government 1 2 1 4 university 1 1 1 1 1 4 chamber of commerce 1 1 1 2 5 local support agent 2 1 1 2 local support agent 3 1 1 2 local support agent 4 1 1 2 university 2 1 1 2 vocational training 1 1 1 2 vocational training 2 1 1 2 university 3 1 1 2 association 1 1 1 2 association 2 1 1 2 association 3 1 1 2 service organisation 1 1 2 foundation 1 1 1 2 foundation 2 1 1 2 foundation 3 1 1 2 64 j. cearra, & m. saiz journal of small business strategy / vol. 31, no. 1 (2021) / 51-65 public network. limitations and future research the first limitation comes from the focus on a single experience. as atomization is both a complex and extended problem, a qualitative method like the multiple case study (yin, 2014) might be useful to reveal new insights on this topic. therefore, future 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(2014). case study research: design and methods (5th ed.). sage publications. https://doi.org/10.1515/erj-2016-0011 https://doi.org/10.1093/jopart/mun033 https://doi.org/10.5465/amr.1990.4308156 https://doi.org/10.5465/amr.1990.4308156 https://doi.org/10.2307/976691 https://doi.org/10.1146/annurev.soc.24.1.1 https://doi.org/10.1177/0149206307302554 https://doi.org/10.1111/j.1540-6210.2012.02595.x https://doi.org/10.2307/2393698 https://doi.org/10.1111/0033-3352.00045 https://doi.org/10.5465/amr.1994.9410122009 https://doi.org/10.1146/annurev.so.17.080191.001145 https://doi.org/10.1504/ijird.2016.077889 https://doi.org/10.1111/etap.12167 https://doi.org/10.1111/j.1467-9299.2009.01791.x https://doi.org/10.1007/s11846-018-0280-5 reproduced with permission of the copyright owner. further reproduction prohibited without permission. minority and women entrepreneurs contracting with the federal government mick, todd d;greene, patricia g journal of small business strategy; spring/summer 2004; 15, 1; abi/inform complete pg. 33 journal of small business strategv vol. 15, no. 1 spring/summer 2004 minority and women entrepreneurs contracting with the federal government todd d. mick missouri western state college mick@mwsc.edu patricia g. greene babson college greene@babson.edu abstract this article uses learning network theory as a .foundation upon which the assistance and barriers minority and women entrepreneurs face when attempting to contract with the federal government may be studied. the public policy programs analyzed for this study were the sba 's 8(a) program and the department of defense's procurement technical assistance program (ptac). the methodology utilized was an in-depth anazvsis of government contracting experiences in two states, missouri and kansas. in the greater kansas city area via formalized interviews and government data. research results revealed strong responses to the 8(a) program and its overall effectiveness. racial issues were of a particular concern, as well as the perceived lack of strength behind 8(a) contracting incentives. the ptac program was revealed to be reaching a significantzv increasing percentage of woman owned businesses, and to a lesser extent, minority-owned businesses while providing a more effective learning strategy for gaining government contracts. introduction as the largest market place in the world, the u.s. federal government is an obvious context for studying business and public policy relationships. in addition, the" various laws and regulations encompassing doing business with the federal government creates a singular market unlike any other. the result is a meeting point of entrepreneurs and public policy providing an opportunity to study their interaction. this article studies government contracts and the public policies created to assist minority and women entrepreneurs in gaining government business. the study examines a group of historically disadvantaged entrepreneurs and their attempts to gain government contracts either by themselves or with outside professional assistance. this examination is founded upon learning network theory. learning network theory provides a basis for developing an understanding of external actors while developing options for organization learning (poell et al. 2000). 33 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy vol. 15. no. 1 spring/summer 2004 federal business relationships the 8(a) program the 8(a) program, administered by the u.s. small business administration, was created to increase disadvantaged small business contracting with the federal government and educate disadvantaged small firms for future success. the federal government's support of the 8(a) program and increasing disadvantaged small business contracting levels was evidenced by the gray amendment, passed in the late 1980s, that mandated fixed percentages of federal contracts to be set aside for 8(a) firms (stough et al. 1998). as part of its program, 8(a) educates disadvantaged small business owners on the federal procurement process and supports their introduction into the public marketplace. the 8(a) program was created and supported to educate these owners to compete in an environment where the chances for success (i.e. winning contracts) would be increased (brown 1994). brown's (1994) research found, however, that the educational needs of the 8(a) population were not being met in this area, as the firms were forced to learn on their own or potentially fail without further learning assistance. one criticism of the 8(a) program, voiced by those advocating for disadvantaged business concerns, has been the lack of competent technical assistance in contracting with the federal government (lick 1993). as brown (1994) found, significant numbers of small disadvantaged business owners were not aware of how to pursue federal contracting opportunities. as a result, government contracting education and marketing were major needs for 8(a) firms. government marketing needs are both a serious issue and a major shortfall; sba does not have the resources, the personnel, or the time to fully educate 8{a) firms on marketing to the government (brown 1994). the procurement technical assistance program in 1984, in order to increase competitiveness and broaden the reach of federal buying activity, procurement technical assistance centers (pt a cs) were created by an act of congress to be administered by the department of defense. however, it was not until the early 1990s that pt ac funding and grants were solicited and awarded on a national scale. grants were made available and awarded to institutions able and willing to service target populations of small and minorityand/or women-owned businesses within specific service boundaries (hudson 2000). the basis for the focus on small business was the prevalence of small business in the u.s. economy and also a lack of real competitiveness in the government marketplace. recognizing the potential cost savings and the seeming lack of effective procurement support elsewhere, the dod supported broadening the base of government product and service providers (hudson 2000). procurement, minority-owned, and woman-owned businesses recently, the u.s. general accounting office (gao) completed a report to congress regarding procurement and woman-owned small businesses. the report was generated over concern that woman-owned small businesses were receiving only 2.2 percent of government business procurements when the federal mandate is five percent. the department of defense (dod) is vital to the federal government reaching the five percent goal, since dod accounts for 64 percent of federal business procurement as of 1999. since dod's level of contracting with woman-owned small businesses was less than 2.5 percent, the overall federal goal of five percent is only possible if all remaining agencies substantially exceed the five percent goal (u.s. gao 2001). 34 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal olsmall business strategy vol. 15, no. i spring/summer 2004 the gao report (2001) believed that the development of training programs and seminars for woman-owned small businesses would increase their participation in the federal procurement process. the end result of such outreach programs would be a broader base of qualified woman-owned small businesses willing and able to compete and win government contracts. the first recommendation made by the gao in 200 i was the consolidation of such outreach efforts for greater efficiency and effectiveness. research goal the research goal of this paper is to assess the impact and improve the performance of minority-owned and/or woman-owned firms seeking to contract with the federal government via two competing federal programs using the analytical tool of learning network theory (van der krogt 1998). public policy and entrepreneurship literature review the purpose of this section is to detail the research linking public policy and procurement with woman and minority-owned entrepreneurs. entrepreneurship can be created as a response to the environment, and the government is a prime influence. public policy, introduced in support of entrepreneurship, can affect the environment either directly or indirectly by supporting or suppressing entrepreneurship (dana 1987). women, who own 38 percent of businesses in the u.s., are not even receiving two percent of federal contracts. this is in spite of a goal set by congress of five percent of federal contracting dollars to be awarded to woman-owned businesses (nelton 1998a). during this last decade, legislators, public administrators, and even the women's movement have failed to fully address the needs and barriers facing women and minority women entrepreneurs. ironically, the result of this failure has increasingly pushed women entrepreneurship to the top of the agenda for public policy and advocacy by the very bodies responsible (glenn 1992). the link between public policy and entrepreneurship created government action in many parts of the world (goodman et al. 1992). the evidence supports the idea that government can have a significant impact on altering business environments via regulation or deregulation and legislative authority (goodman et al. 1992). one of the two problems most often cited by minority entrepreneurs was a lack of business training (hisrich and bruch 1986 ). auster ( 1988) also used lack of business training as an approach but expanded the coverage to three urban areas, concluding with a public policy suggestion and its ensuing implications; increased funding and business training to minority entrepreneurs has the potential to improve the profitability of their business and ultimately answering, at least partially, the underlying problems of the urban core. however, empirical research is lacking, and without such research detailing government's role impacting new ventures, informed policy adjustments are difficult. compounding the problem, long term nationwide business assistance and resource programs in the u.s. have rarely been studied. the norm has been one-on-one contact with specific businesses, not a regional or national research program (goodman et al. 1992). yet, those who create and implement policy must have the necessary knowledge regarding sources of entrepreneurial assistance so that policy initiatives will have the needed impact on the populations for which public action is aimed (greene 1996 ). public policy is more productive for entrepreneurs if the policy is focused on a specific geographical region or population. the end result is a need to uncover the needs of a given 35 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy vol. i 5, no. i spring/summer 2004 territory or population and then create public policies to answer these needs (dubini 1989). research focusing on entrepreneurial formation and the environmental factors impacting this formation in urbanized areas discovered that one predictor was the presence of a university. a call was made to investigate this finding further ( pennings 1982, friedman 1995 ). unfortunately, the call for further research has not been answered. one result of this increased awareness was the report issued by the national women's business council (nwbc) (nelton l 986a). nwbc, headquartered in washington d.c., was created by an act of congress in 1994 to serve as an independent advisory organization for the president, congress, and the lnteragency committee on women's business enterprise. in 1998, the nwbc called for a small business master plan, supported by the federal government and administered by the small business administration. the goal would be linking federal, state, and private resources in support of female entrepreneurship (nelton l 998a). historical cross-cultural studies discovered that the laws and regulations governing entrepreneurship have changed, sometimes dramatically, over time. the end result is the behavior of entrepreneurs also adjusts dramatically to fit these same rules and regulations. thus, the distribution of entrepreneurship between productive and unproductive behavior will influence the creativity and adaptability of the underlying economy. the end result is the pace of technological advancement of society; the greater the support or productivity of entrepreneurship, the greater a culture's innovation and creativity. a society does not have to wait for the inevitable gradual changes of time, but through conscious decisions and policy, move to support and encourage entrepreneurship in a positive manner that benefits the society as a whole (baumol 1990). while the amount and quality of research on female entrepreneurs is increasing, discovering why women may need special programs is sorely lacking. future research is thus called to determine what types of support and advocacy are effective (or not effective as the case may be) in assisting women with exposure and experience (fischer et al. 1993). research has also been conducted on minority entrepreneurship and public policy. over ten percent of all minority businesses sell to at least one level of government federal, state, or local, and research has examined the impact. the finding was that minority businesses relying heavily (more than 25% of revenue) on government sales were more likely to go out of business. government contracting has the potential to negatively impact a minority business (bates and williams 1996). two explanations can be offered for this phenomenon based upon the fact that 39 percent of the businesses studied that failed had been in business two years or less. first, these firms may be too inexperienced to handle large contracts and simply get in over their heads. second, these firms could be front businesses for large and/or non-minority firms wishing to do business with the government (bates and williams 1996). finally, entrepreneurs, their businesses, and their respective sociological and economic impact are regarded as vital to economic growth, positive social impact, and revitalization. public policy makers must always be on the search for policy improvements or new ways of supporting entrepreneurship as long as these goals exist (taub and gaglio 1995). what has made research relevance unique is the continued focus on multiple stakeholders. research responds to the needs of entrepreneurs and academia as well as to public policy makers and their needs in creating and implementing policy (hoy 1997). public policy makers have traditionally turned to universities for accurate and objective research studies to assist in the 36 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of'sma/i business strategy vol. 15, no. 1 spring/summer 2004 formulation of legislation, regulation, and general policy. examples could be cited from medicine, science, agriculture, engineering, and other fields. the most influential business field to date has been economics. entrepreneurship scholars have the potential of having a major impact on government actions (hoy 1997, 363). the most eye-catching area for entrepreneurship research in attracting public policy maker attention is in the area of economic development. entrepreneurship research must continue to promote results, theory and implications as tools for the public policy maker given the economic role entrepreneurship plays in the economy (hoy 1989). public policy is thus challenged to create and implement entrepreneurial assistance that is cost effective while attracting entrepreneurs who are reluctant to use external assistance (taub and gaglio 1995). public policy can thus be created and supported that encourages minority efforts (parnell 1998). if, indeed, the pt a cs are effective at increasing minority exposure in the government marketplace, the pt a cs may be fostering a decrease in discrimination and increasing minority involvement in the local and national economy (parnell 1998). learning network theory leaming network theory conceptualizes the environment and all its actors as a network (see figure 1 ). actors include individuals, groups, and other organizations that interact with the organization. included in the actor category are government agencies and assistance programs. the relationships created by the interactions of the actors create an organization's learning network. leaming networks are not static, but are dynamic structures serving to guide actor behavior while, at the same time, being influenced by actor behavior (yan der krogt 1998). figure l the learning network of an organization leaming processes leaming structures • development of learning policies • content structure • development of learning programs • organizational structure • execution of learning programs • leaming climate 1 leaming network actors with action theories from the above model, three main components are present: the learning actors, the learning processes that the actors organize, and the learning structures the actors create (poell et al. 2000). i. leaming actors. leaming actors lie at the center of the learning network; however, the actor can be internal or external to the organization. external actors may include public policy or government personnel. leaming occurs when any of these actors acquire knowledge and then create action theories (poell et al. 2000). action theories entail the norms, ideas, and rules serving to structure and legitimize actor behavior (argyris and schon 1978, yan der krogt 1998, poe!! et al. 2000). actors may not be able to fully act as their particular action theory dictates each and every time, so actors are free to deploy a range of action theories according to the situation presented (poell et al. 2000). 37 reproduced with permission of the copyright owner. further reproduction prohibited without permission. .journal of'small business strategy vol. 15. no. 1 spring/summer 2004 2. learning processes. when interacting with each other. the learning actors work to create three learning processes: learning policies, programs and execution. developing learning processes is selling the agenda for the learning network what people should learn and in what way they should learn it (poell et al. 2000, 33). learning programs entail creating organization behavior within which other actors may learn, and execution encompasses the actual learning. while all actors participate in all three processes, their level of involvement and influence can vary dramatically (poell et al. 2000). 3. learning structures. as the learning network operates within the organization, patterns will emerge that will be maintained over time. content structure is learning program structure and the range of options available to organization members. organization structure delineates learning tasks and responsibilities to a range of actors. leaming climate reflects the norms and values of the organization (van der krogt 1998, poell et al. 2000). the viewpoint taken in this study agrees with the culture of learning; learning organizations have instilled learning into their very structure to become almost routine. testing whether or not an organization is a learning organization and examining the effectiveness of the organization's learning can be done by researching the culture of learning within an organization and the end results of such a culture, the organization's performance (popper and lipshitz 2000). this research is an expansion of learning network theory that has not been done before on such a scale. until this research, learning network theory had limited exposure in the u.s. and even less research utility. methodology until this study, the ptacs were an excellent example of a nation-wide business assistance and resource center that had not been studied other than in conceptual format using anecdotal information. for a study of this type, the metropolitan area frames a more appropriate sample than other geographic divisions (boyd 1991 ). reynolds ( 1992) justifies selecting the greater kansas city metropolitan area by refuting state boundaries as natural study boundaries, preferring socioeconomic regions, i.e. metropolitan areas. kansas city is unique in being the only major metropolitan area divided equally between two states; missouri and kansas. the authors worked with the u.s. small business administration in kansas city to compile a listing of all 8(a) certified firms since january i, 1996, the year the missouri and kansas ptacs began full operation. using 8(a) firms in the greater kansas city metropolitan area, a data set of forty-three firms was created, with thirty-five participating; eighteen in kansas and seventeen in missouri for a participation rate of 81.4 percent. each participant was the business owner, with each owner asked a standardized interview questionnaire. results were then entered into a qualitative analysis software package, qsr's nudist. the interview script questions are summarized by category in the results section with the full interview script available from the authors. pt ac annual report data was requested from all eighty pt ac centers across the u.s. for the previous three years, 1997-1999. results the national pt ac environment seventy-nine annual reports were received for a participation rate of 98.8 percent. pt ac funding has remained constant at $18.5 million for each studied year, 1997 through 1999. in 38 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategy vol. 15, no. i spring/summer 2004 1999, the pt ac program assisted small businesses with $4.3 billion worth of department of defense (dod) prime contracts, $1.0 billion non-defense or other federal agency prime contracts, $900 million state or local prime contracts, $400 million dod sub-contracts, $200 million non-defense or other federal agency sub-contracts, and $100 million state or local subcontracts. overall, in 1999, the pt ac program assisted with $6.6 billion in contracts with a cost ratio of just of 0.3 percent. the interviews 8(a) and government contracting the first interview section dealt with historical information, 8(a) contracting experiences, government bidding, training, and disadvantaged status. regarding their 8(a) training, there were positive responses from thirteen part1c1pants compared with twenty-two negatives. some responses, while positive, were not specific regarding training components even though the entrepreneurs felt positively about the 8(a) and sba training. other responses simply stated they had nothing negative to say while not offering any positive experiences either. comments regarding general education overview were the most common pos1t1ve theme. three participants mentioned developing a business plan, the only positive aspect of their training mentioned more than once. other positive reflections were quite specific, overall, regarding the components of their 8(a) training that the participant found educational. these included such aspects as personal contact, conferences and educational opportunities. respondents reported that the training, while informative, was basic and not the information needed to take the firm to the next level of government contracting. "the initial training was positive in that, when we knew so little, any information was positive. rt was all new. it was positive because you are hungry for information at the very beginning. that, however, passed quickly. once we had the basics, i did not want to hear the basics again. and it seems like there is a lot of basic information out there. how do you get involved? how do you contract with the government? how do you do this, how do you do that? but it is the same regurgitated stuff over and over again." one response attempted to straddle the line between positive and negative without naming any negative components; yet the firm had no take-away from their 8(a) training to improve their organization. unable to name any new behaviors or knowledge brought to the organization, the participant still felt the experience worthwhile. the negative responses were specific in refuting the idea of 8(a) training. "no training" or "i have not found anything as far as being a positive; we did not get any real training in 8(a)" were typical responses. many of the entrepreneurs did continue that if they received any kind of training contact, the training was not appropriate and was too broad and general for any applicability with the end result being the responsibility for educating their firm on government contracting fell back to the entrepreneur. "i do not know if i have had any 8(a) training. all the training i get, i get it myself. 8(a) has not given me any training," exemplified the typical response. others, while negative, did suggest that they may not have taken advantage of the training available or were not aware of the scope or type of training available; "there was no training. i did not even know there was training available. still unaware of it. we were briefed about it at sba, but that was the outline of the program, but that was all of an hour." this was not 39 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of"small business strategv vol. i 5, no. i spring/summer 2004 due to a lack of needing or wanting trammg. often, the entrepreneur simply found it elsewhere including other networking opportunities such as local business groups and the small business development centers. summing up the negatives and the challenges facing the 8(a) program is the following: "we have had no 8(a) training. i do not even know what 8(a) training is. we filled out a lot of paperwork, we sent it in, we got it approved. we attended different seminars in various states that talked about some minority business or minority contracting things, but as far as 8(a) training, there has never been anything that we have received specifically from 8(a) or through 8(a) training that would have done anything for us, one way or the other." the training discussion continued with the next interview question series reviewing 8(a) firms and government contracting. the first questions brought up the issue of training again when participants were asked what infonnation they gained from their 8(a) training specific to government contracting. those finns stating they had received no or little training that was relevant continued their negative stance. other firms, with positive experiences, were not pleased with the government contracting aspects of their training, and only one firm voiced pleasure all around with their 8(a) experience by learning how to better understand government contracting. examining the other positive responses, three mentioned learning the basics of government contracting, giving them a new knowledge base via the training sba provided and new access to government contracting information and contacts. for these firms, such knowledge was new and original. three firms mentioned being registered on pro-net, the web site maintained by the sba to promote small businesses. pro-net has proven to be a powerful marketing tool for small businesses both to government buyers and prime contract holders seeking sub-contract bidders. however, the most popular training aspect reviewed in positive terms was receiving a listing of government buyers in the product or service line in which the 8(a) firm sold. six different firms mentioned the relevancy of having names and numbers to market their firm directly and how best to market their firms. however, the number of negative comments exceeded the number of positive or negative comments regarding training. 'there is really not a lot to talk about" said one owner. while many firms acknowledged training within the 8(a) program, far fewer believed this was a positive or needed experience in regard to government contracting. "if i am going to get an 8(a) contract, it is going to be on me. they are not going to do it for you," was the general tone, continuing with "as far as training goes, i do not feel there is any training there." training, if it existed, did not then follow through on government contracting training for a significant majority of firms. given the nature of the 8(a) program, the studied firms have all had access and have been, supposedly, well trained in how to bid competitively and be awarded government contracts. yet, the firms tell a different story; one finn had a single government sale in seven years for only $30,000, while another bid on fifty contracts, was awarded one for only $19,000, and nearly went out of business pursuing 8(a) government contracting that never materialized. notably, the latter firm does a majority of its business with the government, but outside the 8(a) program. a common complaint was the amount of time, resources and energy spent researching and bidding on government contracts only to be continually rejected. the number of government bids prepared and submitted always outnumbered awards received, sometimes as high as eight 40 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal olsmall business strategy vol. 15. no. 1 spring/summer 2004 or ten to one. all the firms interviewed had at least considered bidding on projects, with most firms submitting bids. another entrepreneur said, "part of what is negative with the government contracting is that we will go out and bid a particular product, because when they make the request they will ask for equal to or same-as. we will have the equal to and we will send it out. they will like it, they will love it, and they will tell us that that was exactly what they were looking for. the price will be, in many cases, considerably less. the product will last longer, but the next level up from them does not want to go through and change the paperwork to adjust the original spec to take this same-as product. and so they will throw out our bid and accept a bid that costs more because our bid was the same-as, even though it matches their description word-for-word." yet, only two firms presented themselves as having mastered government marketing and contracting using the 8(a) program, when after several years of 8(a) status their business began to increase. "we found that there was a marketing effort that was required earlier on and that marketing effort has taken about a year to materialize and start to boost contracts for us, but now it is doing it. it is doing it in a big way, and it is doing it to the point that we are going to ease off on our marketing for a while. we are just... we are just overwhelmed with work at this point. it is a good problem to have, but it is also a worrisome problem." the other firm added that they were primarily engaged in 8(a) contracting, but had only been certified 8(a) for two years. the result of such experiences should be rich learning opportunities, both pro and con, for the organizations. for the majority of firms, government contracting had been a learning experience but a frustrating and trying one. for several firms, discrimination is a very real and current concern. some concern lies with minimal 8(a) contracting requirements and the lack of consequences when these requirements are not met. making government buyers accountable for their contracting decisions was discussed in length by several entrepreneurs. two clients relayed lengthy discussions on current discrimination, one based on race and the other based on gender. firms were asked about the impact their disadvantaged status had on their firm and their government contracting efforts. for many firms, without their disadvantaged status, they firmly believe they would not have won any government contracts. disadvantaged status was also viewed in a positive light by most firms, although sba size standards did arise several times. currently, a business is considered small if it employs less than 500 people. for a number of the study subjects, a firm this size or one with several hundred employees is large no matter what the sba may believe. even within the majority of firms believing in the positive aspects of their disadvantaged status, it was simply viewed more as an icebreaker or a means of opening the door to government contracting opportunities; however, disadvantaged status was not viewed as a means of winning a contract. for these firms, being disadvantaged may open the door, but walking through was up to them. however, a small, but vocal. number of firms felt their disadvantaged status was a negative or not a means of gaining a contract. in their view, a competitive bid is all that matters and competition for the low bid is colorblind. one firm split the difference with their disadvantaged status, using it with the public sector, completely dropping it for the private sector. in their view, carrying a disadvantaged approved label from the federal government was more a liability than an asset. however, upon dealing with prime government contractors when the disadvantaged firm was seeking sub-contracting opportunities, the firm broadcast their disadvantaged status in hopes of assisting the prime with sub-contracting goals. only one firm had a clearly negative view on their disadvantaged status, which had more to do with the 8(a) program in general than their individual disadvantaged status experiences. 41 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal o{small business strategv vol. 15, no. 1 spring/summer 2004 procurement technical assistance centers (pt a cs) the second interview section covered pt ac awareness and usage. a comparison was made between pt ac assistance and 8(a) training. was ptac data complementary to their 8(a) training or a new body of knowledge, and then how did the two knowledge bases compare? concerning complementary knowledge or a new body of knowledge, there was no comparison. only one firm considered ptac data supplemental to their 8(a) training. all other entrepreneurs viewed the ptac knowledge base as an additional body of knowledge. comparing the 8(a) and ptac training endeavors was not as clear-cut. fully half of the respondents simply replied that without any 8(a) training, a comparison was moot. the other responses included pt ac training providing more of a resource base and means of contact than 8(a), the entrepreneurs liked the greater personalization ptac interaction offered, or 8(a) and pt ac training were regarded as two sides of the same coin. however, one entrepreneur believed pt ac training is a different kind of assistance, comparable in some ways, but not a comparison of similar programs. two firms found 8(a) data superior to pt ac data. the participation rate of 8(a) firms in the pt ac program after a referral was 100% and none of the entrepreneurs offered any negative comments regarding their pt ac experience. positive changes focused upon adapting their organization to handle incoming data from their pt ac and this often required minor organization change and restructuring. all the firms who underwent this change referred to it as positive. several attributed pt ac assistance to opening doors, furthering opportunities, and winning contracts. what recommendation would the study participant firms then have for other disadvantaged firms in using their local pt ac? given that all the firms asked this question had utilized pt ac services, constructive feedback for improving their local ptac was expected. on the contrary. the entrepreneurs all pushed for any firm to take advantage of pt ac services and "really work it." and reinforcing the aim of pt ac services, their local pt ac was also regarded as a launching point for exploring government contracting in greater depth. recommendations for other firms to use pt a cs brought about the strongest string of positive comments elicited from the entrepreneurs. the entrepreneurs spoke of no downside, and rated pt ac services as only positive and highly recommended. other entrepreneurs reflected that they had continued to promote the pt ac program to others and felt they had acted as advocates on the ptac program's behalf. discussion national pt ac program the conclusion most readily apparent after examining the quantitative data based upon program cost and program impact is cost effectiveness. one surprising factor is that the pt ac program has continued to be effective, even extending their outreach over the threeyear period, without any increase in funding or outside assistance. given an effective learning organization, the learning actor of pt ac assistance offers a learning process that will enhance the government contracting learning structure of minorityand woman-owned small businesses. 42 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of small business strategv vol. 15, no. i spring/summer 2004 on a national level, the share of dod's business contracting budget being awarded to pt ac clients has increased significantly over the studied three years, 43 percent. this compares to incremental dod contracting growth for women and decreased contracting growth with disadvantaged businesses. given the significant increase in pt ac contracting growth relative to the dod business contracting budget, the learning action theory presented by the pt ac program appears to be increasingly effective. pt ac effectiveness is based upon the incremental growth of dod contracting outreach to minority-owned and woman-owned small businesses versus the growth of pt ac contracting outreach. the theoretical model would posit that of the learning actors dod has utilized for contract outreach, the pt a cs as learning actors offer an effective means for disadvantaged woman-owned small businesses to compete effectively. 8(a) program leaming network theory provides a means of critically exammmg an outside assistance program by the impact the assistance has on the entrepreneurial organization's learning processes. the 8(a) program was designed to be an entrepreneurial resource for disadvantaged firms, allowing external actors the opportunity to develop learning interventions in support of disadvantaged firms and federal contracting. the 8(a) program has problems, problems that can be addressed and solved. but issues that need to be dealt with if the program hopes to be continued and to serve the disadvantaged business community. using the conclusions of this study, learning network theory validates that those organizations 8(a) has supported in learning have succeeded beyond those organizations that 8(a) has not been able or willing to assist with organization learning. organization learning can propel an organization to places it has never been before and facilitate how best to survive the unknown (kuwada 1998). leaming network theory also provides a framework within which learning organizations can be fostered and developed. the 8(a) program was not validated as accomplishing training that fosters and develops organizations. the 8(a) action theory is not supporting or encouraging effective long term learning process changes in the studied organizations. training was a main focus of the interviews, since the assumption was made that these disadvantaged entrepreneurs, because of their 8(a) status, were the most highly trained disadvantaged entrepreneurs sba could offer. however, according to this research, the highest level of training needs to be improved. data supports the contention that there is a lack of learning process change from the learning action theory deployed by 8(a), echoing other strong statements from clients that were obviously expecting more, wanting more, and needing more. a perception of service not meeting expectations, when shared repeatedly by many sources, will doom a program. one challenge facing sba's 8(a) program is that government marketing is difficult and challenging with so many agencies and even more buying contacts within all of these different agencies. finding the right contact person is nearly impossible without some outside assistance for the entrepreneur. the proper action theory creating an effective learning process would support government contracting. since the sba 8(a) program is geared for organizations seeking government business, 8(a) employees should be well trained and aware of government contracting regulations and personnel. granted, these are myriad and the personnel diverse, but the pt ac program successfully assists small businesses. leaming network theory supports strong learning actors, however, this should be paired with an effective learning theory. 43 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of' small business strategy vol. 15, no. i spring/summer 2004 regarding their disadvantaged status, the bottom line for those firms not utilizing their disadvantaged status seems to be that they market product or service, not ethnic status and not disadvantaged status. we do not live in a colorblind society, as several entrepreneurs discussed, and to ignore this fact may cost you business. as unfortunate as this may be, the government has proven with past policy that a strong affirmative action program can be effective in supporting minority growth and development. for many firms, affirmative action was an effective action theory; however, the entrepreneurs also called for the government as actor in the procurement process. while the action theory of affirmative action has fulfilled two out of three learning processes, development of learning policies and development of learning programs, the entrepreneurs regarded the execution of the affirmative action learning program to be lacking. in their view, the government has not done enough to execute the legal components and the social benefits of affirmative action as a learning process. for those firms winning government contracts, while increasing sales can be assumed to have changed the organization, the entrepreneurs did not mention this explicitly. by increasing their ability to compete, organizational change could also be assumed, much like increasing sales. if this approach is taken, all the positive organizational changes the entrepreneurs attribute to their government contracting efforts and training can be related to how their respective organizations were impacted and adapted to the public marketplace. leaming network theory supports organizations entering environments where the organization has not been before and succeeding if given the proper learning assistance (kuwada 1998). thus, firms creating new ways of communicating regarding government certifications or registrations, hiring new personnel, learning government expectations and standards, and so on can all be predicated on learning network theory. organization supports created at the ptac level or within the 8(a) program or some other public policy source to encourage organizational learning can be better understood when considered in the context of learning assistance theory. procurement technical assistance centers the strongest applicability and validation of the predictive utility of learning network theory was achieved when studying the pt ac program in detail via the kansas and missouri programs. while the impact of the pt ac program was presented on a national scale, the interviews informed as to how pt a cs are effective with learning organizations in support of learning network theory. based upon this research, the pt ac program is far more effective at working with small businesses regarding government contracting than the sba. as discovered in the interviews, pt ac assistance is a more proactive approach than the entrepreneurs had been receiving. the reviews of the pt ac program were nearly unanimous in their positive and supportive tone. no other sba program was given such a positive review by the entrepreneurs. if public policy were to follow the learning assistance program that is viewed as most effective based upon current clients, the pt ac program would be doing government procurement assistance with disadvantaged firms. the action theory ptac employs is fulfilling poe!! et al's (2000) and van der krogt's (1998) model of an external actor deploying an effective action theory. a primary component of the learning network theory model is the influence the learning actor has on the dynamic learning system of an organization. dynamic being pivotal, since the majority of studied entrepreneurs were exposed to both the 8(a) and ptac program, but were more successful developing the learning processes deployed by the pt ac program. for the future, more effective assistance to learning organizations needs to be created to aid entrepreneurial organizations in working with the increasingly virtual world of government contracting. while this study has supported the current value of learning network theory 44 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal olsmall business strategy vol. 15. no. 1 spring/summer 2004 when applied to government contracting, the public marketplace is not a static environment. leaming network theory also needs to lend a predictive component in support of future public policy initiatives. the assistance needed to maintain long-term competitive advantage will not be the same assistance needed today. leaming action theories, as poell et al. (2000) and van der krogt ( 1998) believed, will not be able to remain static, but must create dynamic learning processes that are continually refined by the learning network. public policy 8(a) is not viewed, for the most part, as affirmative action by the very firms who have so much invested in 8(a) contracting when asked what public policy has assisted them. 8(a), for all its trouble, is not regarded as an entitlement program nor one with the affirmative action label attached. however, racism is a factor for disadvantaged finns when contracting with the federal government, and entrepreneurs have definite opinions and stories to relate. only one firm brought up the subject of front companies, and that was based upon gender. since there are no quick solutions to racism, stricter enforcement and in-depth investigation using existing policy regulations is the most immediate solution. however, even when discussing discrimination towards their race, entrepreneurs saw advantages to being a different minority, which was quite interesting. furthermore, nobody discussed wanting to be white or viewed majority owned businesses as a threat; the threat came from other minority groups that were either not deserving of affirmative action or received too much attention over other minority groups. the clash was at the disadvantaged level, not society at large. here, sba can take a more proactive approach; present clearly the definitions of disadvantaged, what preferences are given for any type of minority, and how these preferences compare. given the current information age, the inability for citizens to have federal regulations defined and accessible is not excusable. based upon the learning network model, the potential for influence carried by the sba is great, i.e. a potent learning actor. the failure would be in not exploiting their learning action theory through the three stages of learning process: development of learning policies, development of learning programs, and execution of learning programs. herein lies the dilemma facing sba when paired with the pt ac program. pt acs are more effective at exploiting the learning process of minority-owned and woman-owned entrepreneurial organizations regarding government procurement; sba should be more influential promoting social and public policy regarding contracting with minority-owned and woman-owned businesses. pt a cs exist for a well-defined purpose and have developed a range of ideas and mies guiding behavior, i.e. their learning action theory, accordingly. sba, by virtue of being a federal agency, has the implicit authority to establish well-defined definitions and policies regarding contracting levels, screening procedures, and enforcement of contracting. yet it has failed to develop the needed behavior nonns the required learning action theory. as expressed by the participants, disadvantaged firms are not looking for contracts without competition, but they are seeking a level playing field where the government is an active participant a participant with teeth, as one person stated. currently, that is not the case as much as it was years ago. contracting requirements have become contracting recommendations for both prime contract holders and government agencies. while many buyers and contractors work to maintain or even exceed their requirements, the consequences for not doing so and oversight in how contracts are awarded is sorely lacking. as learning network theory hypothesized, the more powerful the actor, the greater their influence on the 45 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal o/small business strategv vol. 15. no. 1 spring/summer 2004 learning network. public policy can be a very powerful actor, and to a lesser degree, so can 8(a) and the pt ac program. public policy implications overall, current public policy is viewed as being in place to assist the disadvantaged entrepreneur; however, government agencies are not implementing public policy in support of disadvantaged firms. racism is regarded as a reality for these firms, with a strong belief that the federal government is still needed to pursue those who still practice racial and gender discrimination with government contracting. while believing such action is necessary may be difficult for some, for these entrepreneurs, discrimination is real. using a pt ac has substantial impact. on minority-owned and woman-owned small businesses. none of the firms related negative experiences regarding their pt ac experience; in addition, a significant majority regarded pt ac learning as an additional body of knowledge over their 8(a) training and strongly encouraged other 8(a) firms to utilize their local pt ac. using a pt ac was strongly inferred by the respondents to be connected with winning government contracts, and the research supports this belief. the downside to this aspect is the lack of coordination between the sba and local pt a cs. this returns to the other point made previously regarding conflicting learning actors and action theories. public policy is not a major player with learning organizations. public entities should be there to provide knowledge and training, but the entrepreneurs saw organization learning as their· responsibility. however, that does not mean that public entities are doing a good job on educating their client base. sba and 8(a) in particular were exemplified as public policy entities needing to improve their education and training delivery. the fact that the majority of firms denied ever having even received the basics of government contracting training upon their acceptance into the 8(a) program should encourage improvement in service delivery. business performance and public policy were examined and how disadvantaged entrepreneurs assess both. not surprising given their previous responses, money is important; service is more important. making business performance a matter of public policy was not an option for most of the entrepreneurs. their level of entrepreneurial success is not a public policy issue except when issues that should be public concerns racism, for example are not dealt with in the manner society previously decided. in other words, this study found strong support for affirmative action programs and putting the teeth back into preference programs with clear disadvantaged contracting goals that are enforced. none of the entrepreneurs stated any opposition to enforcing existing affirmative action policy; rather, they would prefer such policy be more actively enforced and publicized over new policy. the same held true when assessing the public policy factors that have supported or hindered entrepreneurial success. lack of affirmative action policy enforcement was most frequently cited as the greatest hindrance. the implications for public policy are two fold from this research. first, disadvantaged firms need assistance in the contracting world by strongly enforcing current disadvantaged business contracting goals and policy. the call here is not for new policy; rather, educating firms and government buyers on government disadvantaged policy. using learning network theory, we are beginning to establish a more identifiable cause and effect relationship between educational efforts, successful entrepreneurship, and effective government contracting by revealing effective learning action theories. second, one means of relatively quickly establishing these efforts is to coordinate government contracting training between sba and pt ac, two on-going organizations with existing clients, many of whom are anxious to 46 reproduced with permission of the copyright owner. further reproduction prohibited without permission. journal of'small business strategv vol. 15. no. i spring/summer 2004 improve their government contracting program. in particular, using learning network theory and this research, the pt ac program comes the closest to showing how best to assist entrepreneurs towards successfully winning government contracts by creating a quality relationship with the entrepreneur (sapienza 1992, van der krog! 1998, poell at al 2000). such a relationship is key to predicting effective learning organizations using learning network theory. conclusion this research is an extension in understanding how best to assist disadvantaged small business owners' learning organizations with government contracting. the pt ac program, little known outside the government contracting world, is having a dramatic impact on small businesses in the united states, while more well-known programs have seen their impact and reputation drop precipitously. ptac training, reinforcing learning network theory and learning assistance, is impacting entrepreneurial views on public policy, organizational change, and referral and utilization of other assistance programs. both quantitatively and qualitatively, in line with learning network theory, this study reinforces the utility of outside assistance programs creating a strong relationship between the entrepreneur, their learning network, and external assistance. the u.s. small business administration has a worthy public policy program, 8(a), which is not living up to its original intent when assisting small disadvantaged businesses with government contracting. using the pt acs in a broader context, mandating how best to support disadvantaged entrepreneurs with enforceable procurement guidelines may be a more effective public policy initiative. references argyris, c. and d. schon ( 1978). organizational learning: a themy of' action perspective. reading, ma: addison-wesley. auster, e. r. 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(1992). the government as entrepreneur: industrial development and the creation of new ventures. the state o/the art o/entrepreneurship. d. sexton and j. kasada. boston, ma, pws-kent: 68-85. greene, p. ( 1996). a call for conceptual clarity. national journal of"sociology 10(2): 49-55. hisrich, r. d. and c. brush ( 1986). characteristics of the minority entrepreneur. journal ol small business management 24: 1-8. hoy, f. (1997). relevance in entrepreneurship research. entrepreneurship 2000. d. sexton and r. smilor. chicago, upstart. hudson, m., missouri state program manager, (2000). interview by author, 23 february 2000. kuwada, k. ( 1998). strategic learning: the continuous side of discontinuous strategic change. organization science 9(6): 719-36. lick, d. 1993. general accounting office criticized 8(a) program management. set-aside alert 1(14): 8-9. nelton, s. (1998). women owners and uncle sam. nations business 86(4): 53-4. nelton, s. (1998). women's firms thrive. nations business 86(8): 38-40. parnell, j. ( 1998). race and gender revisited: assessing the perceptions of tomorrow's managers. international journal ol commerce and management 8(2): 50-74. pennings, j. (1982). organizational birth frequencies: an empirical investigation. administrative science quarter~v 27: 120-44. poell, r., g. chivers, f. van der krogt, and d. wildemeersch (2000). leaming network theory. management learning 31(1): 24-49. popper, m and r. lipshitz (2000). organizational learning: mechanisms, culture, and feasibility. management learning 31(2): 181-96. reynolds, p. ( 1992). predicting new-firm births: interactions of organization and human populations. in state o/the art of entrepreneurship, ed. d. sexton and j. kasada: 26897. boston, ma: pws-kent. sapienza, h. ( 1992). when do venture capitalists add value? journal o/business venturing 7: 9-27. stough, r., k. haynes, and h. campbell ( 1998). small business entrepreneurship in the high technology services sector: an assessment for the edge cities of the u.s. national capital region. small business economics 10: 6174. taub, r. and gaglio, c. ( 1995). entrepreneurship and public policy: beyond solving the credit crunch. in 151" annual entrepreneurship research conference, ed. w. bygrave, b. bird, s. birley, n. churchill, m. hay, r. keeley and w. wetzel, 437-44. babson park, ma: babson college. u.s. general accounting office (2001) federal procurement: trends and challenges in contracting with women-owned small businesses. washington, d.c.: u.s. general accounting office. van der krogt, f. (1998). leaming network theory: the tension between learning systems and work systems in organizations. human resource development quarter~y 9(2): 15777. todd d. mick is assistant professor of small business and entrepreneurship at missouri western state college. his research interests are public policies in support of minority and women entrepreneurs and writing case studies. todd is currently seeking to expand public partnerships in support of entrepreneurship in northwest missouri. for interview script, additional study data or questions, please contact him at mick@mwsc.edu. patricia g. greene is dean of the undergraduate school at babson. her research focuses on the identification, acquisition, and combination of entrepreneurial resources, particularly by women and minority entrepreneurs. 48 http://www.smallbusinessinstitute.biz a b s t r a c t keywords: journal of small business strategy 2021, vol. 31, no. 03, 59-71 issn: 1081-8510 (print) 2380-1751 (online) ©copyright 2021 small business institute® w w w. j s b s . o rg introduction 1tallinn university of technology, department of business administration, ehitajate tee 5, 19086 tallinn, estonia, susanne.durst@taltech.ee 2durham university, department of management and marketing, mill hill lane, durham dh1 3lb, united kingdom, farzana.chowdhury@ durham.ac.uk 3esce international business school, leadership, mangement & skills development department, 10 rue sextius michel, 75016 paris, france, andres.davila@esce.fr 4free university of bozen-bolzano, faculty of economics & management, piazza università 1, 39100 bolzano, italy, sascha.kraus@zfke.de 5national taichung university of science and technology, department of business management, no.129, sec. 3, sanmin rd., north dist., taichung city 40401, taiwan, chengcf@nutc.edu.tw employees’ psychological characteristics and sustainable leadership in firms with high and low entrepreneurial orientation entrepreneurial orientation, sustainable leadership, psychological characteristics, integrity, empowerment apa citation information: durst, s., chowdhury, f., davila, a., kraus, s., & cheng, c. f. (2021). employees’ psychological characteristics and sustainable leadership in firms with high and low entrepreneurial orientation. journal of small business strategy, 31(3), 59-71. entrepreneurial orientation (eo) is essential for entrepreneurial activity in organizations as it contributes positively to organizational performance (semrau et al., 2016). eo is associated with innovativeness, risk-taking, and proactiveness (covin & slevin, 1989), and existing research suggests that leadership behavior influences the eo in organizations (carraher, 2014; engelen et al., 2015) by developing the organizational culture (kunze et al., 2016) and allocating resources (hambrick & mason, 1984). while previous research has examined how leadership behavior influences entrepreneurial activity (e.g., covin et al., 2020; covin & slevin, 1989; engelen et al., 2015; muchiri & mcmurray, 2015; wales et al., 2020), a critical gap remains in how employees’ individual psychological characteristics influence sustainable leadership behavior in entrepreneurially oriented organizations (adomako et al., 2021; kraus, burtscher et al., 2018), as suggested by wales et al. (2020), “…only a small number of studies examining the antecedents of eo” (p. 12). additionally, research related to responsible and sustainable businesses are still emerging (e.g., chavez et al., 2020; marcus & roy, 2019). to address this gap, we address the following questions: how do employees’ psychological characteristics such as empowerment, integrity, humility, and cognition influence sustainable leadership behavior in organizations? how do they differ in different contexts, i.e., high versus low eo firms? by addressing these questions, we aim at gaining insight into how organizations’ human resources can promote activities conducive to eo. we view sustainable leadership as behavior that “… creates and preserves continuous learning, secures success over time, sustains the leadership of others, addresses issues of social justice, develops rather than depletes human and material resources, develops environmental diversity and capacity, and is actively engaged in the environment” (di fabio & peirό, 2018, p. 1). leaders and employees can have a bidirectional relationship. a leader may influence individual employees’ behavior in the organization through organizational culture (rigtering et al., 2017) while employees’ actions can reflect leader behavior. these interactions influence individuals’ characteristics and changes within themselves (khedhaouria et al., 2015; maran et al., 2019; semmer & schallberger, 1996). by examining the relationship between employees’ inin this article, we examine how individual-level psychological characteristics such as empowerment, integrity, humility, and need for cognition influence sustainable leadership behavior in firms with levels of high and low entrepreneurial orientation (eo). for this, we utilized fuzzy set qualitative comparative analysis (fsqca) using data from 2,117 employees working in firms located and operating in different countries and diverse industries. our results show that specific psychological characteristics possessed by the members of the organizations can be beneficial for engaging in entrepreneurial activity in both high and low eo firms. our results e.g. show that need for cognition has a differential impact on sustainable leadership behavior in high and low eo firms. however, integrity is essential for a high level of sustainable leadership behavior in both high as well as low eo firms. susanne durst1, farzana chowdhury2, andrés davila3, sascha kraus4, cheng-feng cheng5 http://www.smallbusinessinstitute.biz http://www.jsbs.org 60 s. durst, f. chowdhury, a. davila, s. kraus, & c. f. cheng journal of small business strategy / vol. 31, no. 3 (2021) / 59-71 dividual psychological characteristics, i.e., empowerment, integrity, humility, cognition, and sustainable leadership behavior in eo firms, we contribute to extant research focusing on the intersection of leadership and entrepreneurship in high and low eo firms (engelen et al., 2015; wales et al., 2020). to test the assumptions of this paper, we surveyed 2,117 employees across firms in different industries, suggesting that an organization’s members’ psychological characteristics can be essential resources for eo firms. our results furthermore demonstrate the vital interrelation between individuals’ psychological traits and entrepreneurial activity. we found that integrity and cognition are essential in high and low eo firms alike, but on different levels. these traits not only influence the selection strategies of hr to develop human capital for realizing the desired outcome, but also contribute to sustainable leadership behavior aimed at supporting entrepreneurial activity. second, we contribute to the organizational culture literature by demonstrating the vital role of leadership behavior in motivating employees in low and high eo firms. using a configurational approach (e.g., beynon et al., 2016; kraus, ribeiro-soriano et al., 2018; rigtering et al., 2017) allows us to specify interrelations between a set of interrelated characteristics and better understand the role of psychological traits that influence sustainable leadership behavior. theoretical framework social exchanges and sustainable leadership behavior social exchange theory suggests that social exchanges involve interactions among individuals that lead to obligations (emerson, 1976). these interactions tend to be interdependent and often contingent on another person acting (blau, 1964). the relationship between an organization (employees) and its leaders involves reciprocity and commitment. for leaders to sustain their leadership behavior that helps generate entrepreneurial activities (kraus, berchtold et al., 2018; maran et al., 2019), employees need to be committed to performing their jobs and trust that their efforts will be rewarded (reichers, 1985). if a supervisor treats his/her subordinates positively, such as providing organizational support or empowering them, then the reciprocating response can lead to commitment (riggle et al., 2009) and increased employee satisfaction (suriyankietkaew & avery, 2014). servant leadership theory suggests that individuals with servant leadership style place others’ interests ahead of their own (van dierendonck, 2011). they create a culture within an organization where employees/followers can grow (luthans & avolio, 2003). this person-oriented attitude leads to positive exchange relationships among members at different management levels, and this positive social exchange motivates employees to behave or engage in activities such as entrepreneurial activities (bammens, 2016). sustainable leadership behavior and eo firms leaders play an essential role in setting an organization’s strategic and day-to-day decisions, creating organizational culture, establishing goals (fernandez, 2008), allocating resources to achieve these goals (hambrick & mason, 1984), setting perceptions regarding organizational climate (kunze et al., 2016), and empowering the members of the organization to realize the vision and goals (westley & mintzberg, 1989). compared to traditional leadership behavior, sustainable leadership behavior is a relatively new concept (avery 2005; gerard et al., 2017; mccann & sweet 2014). sustainable leaders are concerned with “… creating current and future profits for an organization while improving the lives of all concerned” (mccann & holt, 2012, p. 209). suriyankietkaew and avery (2014) suggested that sustainable leaders lead by combining stakeholders’ values such as personal integrity, ethical behavior, trust, and management practices such as knowledge management and organizational culture to build capacity and skills. eo firms often reflect strategic leadership behavior and entrepreneurial organization culture (miller, 1983; wales et al., 2020). despite the importance of eo on firm performance, organizations exhibit different eo levels (adler et al., 1999; lomberg et al., 2017). sustained entrepreneurial leadership behavior is a necessary condition for organizations with an entrepreneurial posture, “which are those in which particular behavioral patterns are recurring” (covin & slevin, 1991, p. 8). individual-level perspective on sustainable leadership behavior employees and leaders have an interlocking two-way relationship since an organization is any social structure or system consisting of two or more interdependent persons that work together in a coordinated manner to attain common goals (baron, 1987, p. 10). in an eo organization, employees’ entrepreneurial behavior is crucial (ayuso & navarrete‐báez, 2018) since they help leaders sustain leadership behavior that is important for entrepreneurial activity. therefore, empowerment, humility, integrity, and employees’ cognitive components can help leaders develop an entrepreneurial culture. 61 s. durst, f. chowdhury, a. davila, s. kraus, & c. f. cheng journal of small business strategy / vol. 31, no. 3 (2021) / 59-71 empowerment and sustainable leadership behavior empowerment of employees entails transferring decision-making power to them (kanter, 1977; lawler et al., 2001) to give them autonomy to execute their work (seibert et al., 2004). in this paper, empowerment entails the autonomy, power, and accountability employees perceive about their work environment. by transferring decision-making power and autonomy to employees, leaders signal a trusting relationship. trust between leaders and employees and trust among employees is essential (dirks & ferrin, 2001; schoorman et al., 2007). in a high eo organization, trust among the members can lead to social capital that maintains sustainable leadership behavior that helps with risk-taking and innovative behavior. on the other hand, a lack of trust can lead to a self-protection mentality, which can negatively affect eo (colquitt et al., 2011). empowerment also means sharing important information and knowledge with employees by giving them access to sensitive information (bowen & lawler, 1995). for a leader to sustain his/her leadership behavior, information and knowledge enable employees to exercise their decision-making power (robbins et al., 2002). an organization’s empowerment culture allows members to share information and knowledge to establish shared mental models among employees (combs et al., 2006). this shared mental model promotes similar attitudes and beliefs regarding the importance of entrepreneurial behavior and the steps necessary to accomplish tasks for entrepreneurship (cannon-bowers & salas, 2001). empowerment enhances employees’ human capital by allowing opportunities to take advantage of their knowledge resources and gain knowledge from leaders and followers (jiang et al., 2012). empowerment also allows employees to engage in autonomous action (robbins et al., 2002). entrepreneurship-related activities in organizations require individuals to engage in idea generation, and other activities require risk-taking without fear of reprimand (somech & drach-zahavy, 2013). empowerment enhances employees’ motivation, organizational commitment, and social exchange relationships (maynard et al., 2012). proposition 1. empowerment is more strongly related to sustained leadership behavior in high eo firms than in low eo firms. linking integrity and sustainable leadership behavior the latin word integritas means “wholeness,” “completeness,” “honesty,” but also “decency” and “modesty.” according to furrow (2005), integrity can be defined as seeing it as “the extent to which our various commitments form a harmonious, intact whole” (p. 136). two essential criteria need to be fulfilled: consistency and coherence (mcfall, 1987). an individual might be characterized as a person or a whole if she has well-developed ideas and is consistent in pursuing them. it means that individuals make decisions based on the same principles and similarly resolve them in similar situations. integrity is established early in life and influenced by the family and the immediate environment (tasoulis et al., 2019). research has shown that integrity is crucial not only for leadership but also for a firm’s general approach to ethics and governance (wei et al., 2020). integrity helps with having healthy, sustainable organizations that operate in favor of all stakeholders. leadership sets the entire company’s tone and expectations (tasoulis et al., 2019). furthermore, mccann and sweet (2014) claim that “if leaders lack integrity and sustainable leadership behaviors, they may be unable to achieve the strategic goals of the organization and may place their organizations in challenging situations that result in compliance issues, poor decision making, morale problems, and communication issues” (p. 381). existing research shows that integrity has a bidirectional relationship between employees and leaders’ behavior (simons et al., 2007; vogelgesang et al., 2013). often, in an organization, leadership behavior related to integrity can become the organization (leroy et al., 2012a ; simons, 2002). if the leadership behavior does not reflect integrity, it reflects poorly on the organization, and this lack of integrity spills over to the employees (simons et al., 2007; vogelgesang et al., 2013). empirical studies suggest a positive relationship between employees’ integrity and sustainable leadership behavior through organizational commitment (leroy et al., 2012a, b). if a leader is perceived as having high levels of integrity by the employees, then trust between leaders can be built, which in turn can increase work engagement, improved commitment, and job satisfaction (avolio & gardner, 2005; tasoulis et al., 2019), displaying the power of this trait. individuals with high levels of integrity focus on developing and maintaining caring relationships (dunn, 2009). employees’ lack of integrity has negative consequences for an organization’s entrepreneurship-related activity through employees’ lack of commitment to an organization. entrepreneurial activity tends to flourish in an organization where leaders support these activities (vecchio, 2003) at a good time and at a time of crisis. leaders show support for entrepreneurial activities through their behavior. if employees do not have integrity and do not trust that their leaders have integrity, they may scale back their entrepreneurial activity (greenberg, 1990; meyer et al., 2017). for instance, 62 s. durst, f. chowdhury, a. davila, s. kraus, & c. f. cheng journal of small business strategy / vol. 31, no. 3 (2021) / 59-71 if employees believe that they will not be treated fairly by their leaders for undertaking the entrepreneurial activity, they may not be committed to their activity. greenberg’s (1990) study shows that employees’ commitment to the organization is affected by their belief that their efforts will be rewarded; they believe that leaders have integrity. therefore, having a workforce with integrity can be crucial for entrepreneurial-oriented organizations. proposition 2. integrity is more strongly related to sustained leadership behavior in high eo firms than in low eo firms. relationship between humility and sustainable leadership behavior humility is viewed as a stable personality trait (sun, 2013). a person possessing this attribute “is able to put aside, or even abandon altogether, his or her position, accomplishment, and talents, in order to utilize the talents of others” (sun, 2013, p. 548). marcus and roy (2019) found that the existence of the honesty-humility trait appears to be a safeguard against unethical and harmful behaviors in organizations. humility can be an essential character for both employees and leaders to sustain the leadership behavior conducive to an organization’s entrepreneurial activity. entrepreneurial activity often entails team members working together to bring a project to fusion. employees’ and leaders’ humility can influence their emotions, influencing their cognition, decision-making, and behavior (isen, 1993; baron, 2008). employees with humility can understand their strengths and weaknesses and appreciate team members’ strengths. sustainable leadership behavior in entrepreneurial firms entails learning from others. both the leaders’ and members’ humility enable them to learn from each other (wang et al., 2017). in high eo firms, a learning environment can influence the firms’ entrepreneurship-related activity. humble leaders can set an example of having an open-mind by showing they understand their limitations and are willing to learn from others. humble leaders can also reduce the faultlines – fractures within teams in an organization; faultlines influence team performance through conflicts in teams, reduced collaboration, and less willingness to share task-related information (antino et al., 2019). entrepreneurial activity within organizations requires team involvement and productive team performance. team members often have a diverse background, an experience that influences their cognition and contribution to the team (van knippenberg et al., 2004). while diverse experience can positively impact team performance, managing diversity can be an essential component for sustainable entrepreneurial activity in an organization (joshi & roh, 2009); it also is a hindrance to entrepreneurial activity (thatcher & patel, 2012). humble leaders can influence employees’ attitudes and behavior through social cues such as listening to different views and understanding different viewpoints. (griffin, 1983; owens & hekman, 2012). humility in organizations can also promote creativity in an organization. creativity is an essential component of high entrepreneurship-oriented organizations. existing research suggests that leaders’ humility influences employees’ creativity (wang et al., 2017) by appealing to their achievement needs. mcclelland (1961) suggests that entrepreneurial individuals have a strong need for achievement. humble leaders can appeal to their needs by communicating that mistakes are tolerated, and learning from failure is welcome, both of which are important for entrepreneurial-oriented organizations (owens et al., 2013; shepherd, 2003). this social cue can influence attitudes toward entrepreneurial activity (hon et al., 2013; zhang & bartol, 2010). proposition 3. humility is more strongly related to sustained leadership behavior in high eo firms than in low eo firms. linkage between need for cognition and sustainable leadership behavior in this paper, we align our view of the need for cognition with cacioppo et al. (1984). the study refers to the need for cognition (nc henceforth) as an “individual’s tendency to engage in and enjoy effortful cognitive endeavors” (p. 306). thus, people high in nc thinking get enjoyment and satisfaction from complex problems, while people low in nc thinking view complex problems as a burdensome obligation and only engage in them when some incentive and (or) reason is present (petty et al., 2009). in a high eo organization, the psychological trait, need for cognition, is needed since situations might arise when employees and leaders need to “rethink current strategic actions, organization structure, communication systems, corporate culture, asset deployment, investment strategies, in short, every aspect of an organization’s operation and long-term health” (hitt et al., 1998, p. 26). therefore, both sustainable leadership and employees require nc. cognition requires knowledge and information and an individual’s capacity to work with this knowledge/information. in this context, general intelligence is one critical aspect, yet domain-specific cognitive skills (i.e., skills that emerge through experience and active practice) may be 63 s. durst, f. chowdhury, a. davila, s. kraus, & c. f. cheng journal of small business strategy / vol. 31, no. 3 (2021) / 59-71 more critical when considering a person’s emergence and performance, such as leaders (mumford et al., 2015). previous research has found that people high in nc are not only engaged in more thinking about all kinds of information, they are also more aware of their thinking, which schraw and dennison (1994) call metacognition. metacognition allows an individual to understand their ability, control information processing, and reflect on their learning. tam and ho (2005), who studied the effects of web specialization in the context of persuasion, found that people low in nc have little motivation to exert cognitive effort to evaluate the merits of alternative information and processing. they tend to rely on recommendations provided by personalized agents. in high eo firms, low nc tends to be less productive than high nc individuals, as wu et al. (2014) study suggested. the study found a positive association between nc and innovative behavior. in eo firms, leaders need to motivate employees to engage in entrepreneurial activity, and while engaged in these activities, unexpected situations may arise. to sustain entrepreneurial activity in organizations, leaders also need to maintain their behavior to sustain entrepreneurial activity. existing research shows that leaders’ cognition is essential for resource accessibility, providing support when there is a lack of social/structural support (mumford et al., 2007). leaders’ cognition is also crucial for framing a problem, gaining support for their projects, identifying alternatives for solutions (gröschl et al., 2019; partlow et al., 2015). studies also suggest that sustainable leadership behavior is crucial for organizations to outperform during crises (mccann & sweet, 2014; varma, 2020). proposition 4. need for cognition is more strongly related to sustained leadership behavior in high eo firms than in low eo firms. method data description and sample the data used in this article was collected by the private research company praditus, www.praditus.com, which is recognized by the french ministry of research and education. the company provides a web and mobile application on which companies offer their employees from across the globe behavioral measures scientifically validated and aligned with their company’s values and leadership models. employees with different roles within the organization can freely use the platform as part of their development journey during their tenure with the company. in exchange, employees receive feedback on their profile and opportunities for development. in the present study, the sample consists of 2,117 employees, of which 39.1% are female, and 48.5% are male; 12.4% did not provide any information. this sample was selected randomly from a data set containing more than 70 million (1 item = one answer) answers for various scales. we selected all employees who responded to all the dimensions relevant for the present study. the firms involved are representing different countries (e.g., france, germany, italy, spain, the uk etc.) and operating in diverse industries (i.e., aeronautics; banking; car rentals; energy and construction; executive education; transportation; pharmaceutics; retail; services; and telecommunications). members of the firms were invited to participate anonymously via email and linked to an established online survey system. all the constructs and scales were implemented in this platform in 2019 as part of leadership development programs. unlike most other academic research, the way praditus is collecting its data is neither cross-sectional nor longitudinal, but rather potentially never-ending. (although for this work here, of course, data has been extracted at one single point of time.) outcome variable to measure sustainable leadership behavior, we adapted the measures from di fabio and peirό (2018), consisting of the following items: 1) i create sustainable learning conditions that i take care to preserve, 2) i develop, rather than exhaust, the human resources that work with me, 3) i support my collaborators in their personal/career growth, 4) i leave out the superfluous by focusing resources on the crucial aspects of work. for both the outcome variable as well as for the explanatory factors, respondents were asked to select their choice on the 5-point likert scale from 1 = totally disagree to 5 = totally agree. explanatory factors (conditions) we adapted our measures for empowerment from spreitzer (1995). respondents were asked the following questions: 1) the work i do is very important to me; 2) my job activities are personally meaningful to me; 3) the work i do is meaningful to me; 4) i am confident about my ability to do my job; 5) i am self-assured about my capabilities to perform my work activities; 6) i have mastered the skill necessary to perform my job; 7) i have significant autonomy in determining how i do my job; 8) i can decide on my own to go about doing my work; 9) i have considerable opportunity for independence and freedom in how i do my job; 10) my impact on what happens in my department is 64 s. durst, f. chowdhury, a. davila, s. kraus, & c. f. cheng journal of small business strategy / vol. 31, no. 3 (2021) / 59-71 large; 11) i have a great deal of control over what happens in my department; 12) i have significant influence over what happens in my department. integrity was measured by the following questions developed by black and reynolds (2016): 1) i try hard to act honestly in most things i do; 2) not hurting other people is one of the rules i live by; 3) it is important for me to treat other people fairly; 4) i want other people to know they can rely on me; 5) i always act in ways that do the most good and least harm to other people; 6) if doing something will hurt another person, i try to avoid it even if no one would know; 7) one of the most important things in life to do what you know is right; 9) i always keep my promises; 10) i am true to my own values; 11) once i’ve made up my mind about what is the right thing to do i make sure i do it. humility was measured based on the following questions adapted from de vries (2013): 1) i find it difficult to lie; 2) i would like to know how to make lots of money in a dishonest manner; 3) i want to be famous; 4) i am entitled to special treatment. for the last three items, the scale was reversed. for need for cognition, we used measures developed by cacioppo and petty (1982) and tam and ho (2005): 1) i prefer to do something that challenges my thinking abilities rather than something that requires little thought; 2) i prefer complex problems to simple problems; 3) i don’t like to have to do a lot of thinking; 4) i try to avoid situations that require thinking in-depth about something; 5) thinking hard and for a long time about something gives me little satisfaction. entrepreneurial orientation was assessed with its separate dimensions of innovativeness (three items), proactiveness (three items), and risk-taking (six items), using items based on covin et al. (2020). item-to-total correlations and cronbach’s α are measures of internal consistency that range from 0 to 1. values of item-to-total correlations indicate the correlations of the item to the summated scale score, and cronbach’s α indicates how closely related a set of items are as a group. most values of item-to-total correlations exceed or were close to 0.5, while the values of cronbach’s α exceed or were close to 0.6. in addition to the values of cronbach’s α, table 1 displays also the kaiser-meyer-olkin (kmo) values for the items. table 2 shows the description of individuals (e.g., gender, education, position). analysis data were analyzed using the fuzzy-set qualitative comparative analysis (fsqca) technique. compared to the standard regression techniques based on correlations and assumed symmetry, fsqca does not have the symmetry restrictions (beynon et al., 2016; kraus, ribeiro-soriano et al., 2018). moreover, in comparison with variable-based approaches, fsqca uses a set-theoretic approach or asymmetric thinking in data analysis and focuses on configurations for testing social science theories or assumptions table 1 values of kmo and cronbach’s alpha n of items kmo cronbach’s alpha sustainable leadership behavior 4 0.663 0.604 empowerment 12 0.815 0.852 integrity 8 0.758 0.734 humility 4 0.605 0.431 cognition 5 0.774 0.771 table 2 description of individual respondents variable frequency percent business responsibility director 575 27.20 employee 866 40.90 manager 592 28.00 n. a. 84 4.00 gender of respondents female 827 39.10 male 1026 48.50 n. a. 264 12.50 years of experience less than 1 year 33 1.60 1-5 years 166 7.80 5-10 years 227 10.70 more than 10 years 1591 75.20 n. a. 100 4.70 degree bachelors 299 14.10 engineer 397 18.80 high school diploma 75 3.50 masters 943 44.50 phd 67 3.20 technical degree 207 9.80 other diplomas 6 0.30 no degree 22 1.00 n. a. 101 4.80 65 s. durst, f. chowdhury, a. davila, s. kraus, & c. f. cheng journal of small business strategy / vol. 31, no. 3 (2021) / 59-71 rather than having a net effect estimation approach. in other words, fsqca can further produce causal conditions that are sufficient for the outcome based on boolean algebra. fsqca is consistent with set-theory and formal logic. a fsqca allows translation of the causal principle of qca – a binary representation of the presence of some conditions for a given (also binary) outcome – to continuous variables by introducing fuzzy sets that represent the magnitude of membership (e.g., 0.05 for non-membership, 0.95 for full membership, 0.5 for crossover membership). according to the user’s guide to fsqca from ragin (2017), this study set original values of 1.0, 5.0, and 3.0 from a 5-point likerttype scale into a fuzzy set to correspond to these memberships. in the second step, this study contributed to combine relevant antecedents (i.e., empowerment, integrity, humility, and need for cognition) into various configurations to identify sufficient conditions for achieving high sustainable leadership behavior in high and low entrepreneurial oriented firms. therefore, there were 16 (i.e., 24) logically possible combinations of values on the causal conditions in the truth table. this study recognized configurations by specifying the consistent cutoff value as .75 and the number-of-cases threshold as one and then used standard analysis to generate the solution. ragin (2017) indicated that standard analysis could provide complex, parsimonious, and intermediate solutions, and partial logical remainders are incorporated into the intermediate solution. accordingly, this study employed intermediate solutions of standard analysis to explore sufficient conditions for achieving high sustainable leadership behavior. following similar studies using fsqca in an entrepreneurship context (e.g., palmer et al., 2019), the sample was split into two groups; a group high on entrepreneurial orientation and a group low on entrepreneurial orientation. these two groups were developed based on the mean (i.e., 2.8858) of the summated scale (i.e., eo, entrepreneurial orientation) of risk-taking, proactiveness, and innovativeness. results table 3 highlights all configurations. the solid black circles represent the presence of a variable (condition), white circles represent the absence (negation) of a variable, and black cells represent the irrelevance/do not care condition for sustainable leadership behavior (ragin, 2008). these six combinations are relevant for organizations high and low on entrepreneurial orientation. as there is more than one configuration, one can assume several alternative paths to sustainable leadership behavior. table 3 results of fsqca explaining sustainable leadership behavior combination to sustainable leadership behavior high eo firms (n = 1129) low eo firms (n = 988) condition a1 a2 a3 b1 b2 b3 empowerment ● ● integrity ● ● ● ● humility ● ● cognition ● ● ○ ● consistency 0.99 0.97 0.99 0.97 0.96 0.97 raw coverage 0.95 0.93 0.95 0.96 0.96 0.97 unique coverage 0 0.02 0 0 0.02 0.01 solution consistency 0.97 0.99 solution coverage 0.98 0.95 table 3 also presents all-important consistency and coverage statistics for all configurations. all consistency and coverage values shown in the table comply with the required levels. the solution consistency values are also at least 0.74, indicating that the configurations are sufficient conditions leading to sustainable leadership behavior (ragin, 2008). for example, this means that in terms of consistency (a2), 97% of the firms are characterized by sustainable leadership behavior when they possess the presented combination of antecedent and characteristics. coverages represent information about the proportion of cases that explain the outcome; our smallest coverage is 0.93 66 s. durst, f. chowdhury, a. davila, s. kraus, & c. f. cheng journal of small business strategy / vol. 31, no. 3 (2021) / 59-71 (a2), suggesting that a significant proportion of cases are being explained. all three paths for the high entrepreneurial firms explain that 98% of sustainable leadership behavior, while three paths for the low entrepreneurial firms explain 95%. causal configurations for organizations high on entrepreneurial orientation three paths can explain sustainable business behavior by organizations high on entrepreneurial orientation. all paths fulfill the minimum requirements for consistency (> 0.75). additionally, all conditions assumed to influence sustainable leadership behavior are relevant in at least one of the three paths. path a1 indicates that the presence of integrity in combination with cognition contributes to sustainable leadership behavior. in this path, empowerment and humility are absent. path a2 shows that organizations high on entrepreneurial orientation can have sustainable leadership behavior when integrity and humility are present. path a3, on the other hand, suggests that sustainable leadership behavior can be reached through empowerment and cognition. causal configurations for organizations low on entrepreneurial orientation three paths can also explain sustainable leadership behavior by organizations low on entrepreneurial orientation. path b1 indicates that the presence of integrity contributes to sustainable leadership behavior when cognition is absent. paths b2 and b3 are the same as paths a2 and a3. discussion and conclusion existing literature has examined the influence of top management style and other organizational configurations and their influence on eo. there are limited studies that have examined how an important resource, employees characteristics, fits in this model. by employing a configurational fsqca, in this paper, we examined the relationship between employees’ psychological characteristics and sustainable leadership behavior in eo firms. interestingly, results show that combinations of psychological traits (empowerment, integrity, humility, and need for cognition) and their influence on sustainable leadership behavior are consistent across the study’s organizations. rather, the eo of an organization dictates the benefit of the psychological characteristics. in proposition 1, we assumed that empowerment would positively influence sustainable leadership behavior in high eo firms. our results indicate that empowerment is not a significant component for sustainable leadership in either high or low eo firms. in proposition 2, we assumed that integrity would have a positive influence on sustainable leadership behavior. our findings indicate integrity to be important in two out of three combinations for high and low eo firms. in propositions 3 and 4, we assumed humility and cognition would be positively associated with sustainable leadership behavior. the findings suggest that there is more robust support for proposition 4 than for proposition 3. in other words, the configurations for high and low eo are similar but not necessarily identical. one difference found is for path a1 (organizations high on eo) and b1 (organizations low on eo). in a high eo organization, both integrity and cognition can promote sustainable leadership behavior, while in a low eo organization, the presence of integrity and absence of cognition can contribute to sustainable leadership behavior. this difference is likely to be explained by the fact that in organizations high on eo, more employees want to actively drive innovation or entrepreneurial activities than the employees in organizations low on eo. entrepreneurship literature has long viewed resources such as human capital, knowledge, and entrepreneurial mindset as necessary resources for organizations’ entrepreneurial activity (davidsson & honig, 2003; mcgrath & macmillan, 2000). ireland et al. (2003) suggested that cognition is vital for decision-making in a dynamic environment where goals are changing, and this change brings in new opportunities. our study results indicate that the need for cognition that allows members of an organization to adapt to the changing environment is also associated with integrity. a combination of both the need for cognition and integrity are essential resources for an organization’s members. people generally firmly hold on to their moral identity since they want to maintain self-consistency (blasi, 2004) that often motivates their actions. therefore, the integrity of a group/member of the organization can be an essential resource in an entrepreneurial firm since they often have to attain resources from external sources. in eo firms, the leaders can help develop or strengthen the integrity of the organizations. this finding is fascinating and relevant for the eo literature as it adds to the understanding of the link between eo and sustainable leadership behavior that influence firm performance, thus contributing to recent debates (adomako et al., 2021; wales et al., 2020). as regards the latter, it underlines, in particular, the need for leaders to have an in-depth understanding of the people and their characteristics. additionally, suggesting the organizational context is vital to consider for leadership. our findings have practical implications too. first, for practitioners, such as managers, it is crucial to understand 67 s. durst, f. chowdhury, a. davila, s. kraus, & c. f. cheng journal of small business strategy / vol. 31, no. 3 (2021) / 59-71 that there is more than just one way to see sustainable leadership behavior in eo firms. this study already provides six paths that lead to sustainable leadership behavior. the study further implies that firms should also understand the importance of employees’ psychological characteristics to lead sustainably. moreover, being low (high) on eo does not necessarily have to result in underdeveloped sustainable leadership behavior. the findings should be interesting for organizations’ hr departments, too, as they provide useful information for training and further education towards sustainable business practices in entrepreneurial firms. limitations as with every research, our study has some limitations. first, even though fsqca helps us identify causal configurations, this approach only allows one outcome variable (kent & argouslidis, 2005). furthermore, there could be other psychological traits for sustainable leadership behavior to consider. future research could address these limitations and further develop the study results by exploring different paths for different types of organizations to improve sustainable leadership behavior in more depth. scholars should also examine approaches to sustainable leadership behavior among organizations low on eo and organizations high on eo operating in distinct business contexts. institutional and socio-cultural structures may influence the desirability of sustainable leadership behavior. references adler, n. j. 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